PROFITS AND GAINS OF BUSINESS OR PROFESSION

PROFITS OF BUSINESS CARRIED ON BY ASSESSEE IN P.Y.

The charge under this head depends on the following conditions.

1. There should be a business or profession.

2. It should be carried on by the asseessee;
3. “It should be carried on during the previous year.
Once the above conditions are satisfied, the ‘profits and gains’ of such business are
charged to tax under this head. Let us study all these conditions in detail.

PROFESSION OR VOCATION
Profession means an occupation involving intellectual work requiring special
knowledge and personal qualifications such as that of a lawyer, chartered accountant,
doctor, engineer, architect and so on. Vocation means an occupation involving manual
or technical work such as tailoring, hair cutting, typing, photocopying, repair work of
any nature; or a work using one’s natural abilities e.g. giving spiritual talks, painting,
preaching sermons, acting as an arbitrator, acting as a promoter of new companies etc.
However, the rules for computation of income are the same for a business, a
profession or vocation.

COMPUTATION
S.29 Provides that the income referred to in S.28 above shall be computed in
accordance with the provisions contained in Section 30 to 43D.
Thus, the profits have to be separately worked out as provided in the Income.
tax Act: the net profit shown by the profit and loss account of the assessee is not the
amount of taxable income. The book profit is just the starting point for computing the
taxable income. For computing the taxable income, the accounting profits must be
adjusted in the following manner.

RENT, REPAIRS, TAXES AND INSURANCE OF BUILDING [S.30]

The deduction allowed under S.30 pertains to-
1) The rent and cost of repairs undertaken to be borne in respect of premises occupied
as a tenant,
2) Current repairs of premises occupied by the assessee otherwise than as a tenant,
3) Land revenue, local rates, or municipal taxes,
4) Insurance premium against risk of damage or destruction of premises.
If the rented premises are used partly for business and partly for residence, only the
proportionate amount of such expenses pertaining to the portion used for business can
be deducted [S.38].

However, Capital expenditure on repairs will not be allowed as deduction under

section 30. The same will not be allowed as deduction under any other provisions.
Thus, such expenditure, being capital expenditure, is not deductable under section
37(1). It will not be added to the written down value of the block of asset under
section 43(6) as no “asset” is acquired. Consequently, depreciation will not be
available.

REPAIRS & INSURANCE OF MACHINERY & FURNITURE [S.31]

The deduction allowed under S.31 pertains to-
1) Current repairs to machinery, plant or furniture used for the purpose of business, or
2) Insurance premium against risk of their risk of their damage or destruction.
If the assesee uses the machinery or furniture partly for business and partly for his
personal purpose, only the proportionate amount of repairs and insurance in respect of
the business use can be deducted [S.38].

DEPRECIATION

PROVISION:
According to S.32 depreciation is allowed in respect of-
1) A specified asset i.e. (i) tangible assets such as buildings, machinery, plant or
furniture, (ii) intangible assets such as know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar nature,
acquired on or after 1-04-1998,
2) Owned, wholly or partly, by the assessee,
3) Used for the purpose of his business of profession,
4) At the prescribed rate,
5) On the written down value,
6) Of the block of assets.
Thus, whether depreciation can be claimed depends on three conditions; (1) whether
the assets a specified asset (2) whether the assets is owned by the assessee, and (3)
whether the asset is used for his business or profession in the previous year. How
much depreciation can be claimed depends on three factors: a) the prescribed rate (b)
The written down value (3) of the block of asset.

COMPUTATION:

Block of Assets
1. Meaning: Block of assets means “a group of assets in respect of which the same
percentage of depreciation has been prescribed”

SPECIAL CASES:
50% Depreciation for Assets Used for Less than 180 Days:
a) If any asset us used for less than 180 days in the year of acquisition, the
depreciation rate will be only 50% of the normal rate.
b) The restriction is applicable only during the year of acquisition and not to
subsequent years.

Additional Depreciation on New Plant and Machinery: Additional depreciation

[AD] can be claimed during the assessment year 2025-26 if the following conditions
are fulfilled-
A) Who can claim AD – An assessee engaged in the business of
manufacture/production of any article or thing, or generation, transmission or
distribution of power can claim additional depreciation.

B) Which Asset qualifies for AD – Any plant and machinery, acquired or installed
after March 31, 2011, by an assessee qualifies for additional depreciation

C) What is the Rate of AD – Additional depreciation can be claimed @20% of the

actual cost. If, however, the asset is put to use for less than 180 days in the year in
which it is acquired, the rate of additional depreciation will be 10%.

SPECIFIC DEDUCTIONS [S.36]

INSURANCE PREMIUM ON STOCKS [S.36(1)(I)]
The amount of any premium paid in respect of insurance against risk of damage or
destruction of stocks or stores used for the purpose of business or profession can be
deducted.

INSURANCE ON HEALTH OF EMPLOYEES [S.36(1)(ib)]

An employer can claim deduction in respect of premium paid by him by
cheque for insurance on the health of his employees in accordance with the scheme
framed by General Insurance Corporation and approved by Central Government or a
scheme of any other insurer approved by the Insurance Regulatory and Development
Authority.

BONUS OR COMMISSION TO EMPLOYEES [S.36(1)(ii)]

An employer can claim deduction for any bonus or commission paid to an employee,
for services rendered, where such sum would not have been otherwise payable to him
as profits or dividend. This is, however, subject to the provisions of S.43B.

INTEREST ON CAPITAL BORROWED [S.36(1)(iii)]

The amount of interest paid in respect of the capital borrowed for the purpose of the
business or the profession can be deducted. Thus, interest on loans from bank, interest
for late payment to creditors etc. can be deducted. The conditions for allowing this
deduction are explained below.

EMPLOYERS’S CONTRIBUTION TO RPF/SAF/PENSION [S.36 (1) (IV) &

(IV)]
An employer can claim deduction of payment of contribution by him towards a
Recognized Provident Fund (RPF) or an approved Superannuation Fund (SAF)
subject to the prescribed conditions and the provisions of S.43B.
An employer can claim deduction of an amount paid by way of contribution towards a
pension scheme, as referred to in section 80CCD, on account of an employee to the
extent it does not exceed ten percent of the salary of the employee in the previous
year. For the purpose of this clause, “salary” includes dearness allowance, if the terms
of employment so provide, but excludes all other allowances and perquisites.

CONTRIBUTION TO GRATUITY FUND [S.36(1)(v)]

An employer can claim deduction of any sum paid by way of contribution towards an
approved gratuity fund created by him for the exclusive benefit of his employees
under an irrevocable trust. This is, however, subject to the provision of S.40A (7)

EMPLOYEE’S CONTRIBUTION TO P.F. PAID IN TIME [S.36(1) (va)

S.2 which defines “Income” states that the amounts deducted by the employer from
salary i.e. contributions from employees towards provident fund, superannuation fund,
employees state insurance etc are to be included in the income of the employer. The
employer, in turn, is allowed deduction only in respect of such sums actually credited
to the employee’s accounts before the due date. Thus in effect, finally the employer is
taxed on such amounts not paid or credited to employee’s accounts.

BAD DEBTS WRITTEN OFF [.36(1)(vii)]

The amount of any debt or part thereof is allowed to be deducted subject to the
following conditions-
1) The amount should be written off as irrecoverable in the income of the assessee for
the previous year, and
2) The debt has been taken into account in computing the income of the assessee in
that or any earlier previous year or.

GENERAL EXPENDITURE [S.37 (1)]

CONDITIONS
S.37 Is a residuary provision. It applies to expenditure not covered by any of the
deductions discussed above. The expenditure must satisfy the following conditions in
order to claim a deduction under this provision:
1) The expenditure should not be of the nature described in sections 30 to 36.
2) It should not be in the nature of capital expenditure.
3) It should not be in the nature of personal of the assessee.
4) It must be wholly and exclusively for the purposes of the business or profession.
5) It should not be for a purpose which is an offence or which Is prohibited by law
(e.g. bribes paid).

EXAMPLES OF EXPENDITURE NOT ALLOWABLE U/S 37.

Following expenses are not allowable under section 37 (as per decisions of
courts/CBDT):
1) Penalty, fines and damages for breach of law.
2) Contribution to a political party not related to business.

EXPENSES EXPRESSLY DISALLOWED

The following expenses are expressly disallowed while computing business income.
Thus, if these expenses are debited to the Profit and Loss Account, they should be
added back to the net profit to arrive at the taxable income.

ADVERTISEMENT IN POLITICAL SOUVENIR [S.37(2B)]

Expenses on advertisement in any souvenir, brochure, tract, pamphlet or like
published by a political party are to be entirely disallowed.

SUMS PAYABLE OUTSIDE INDIA ETC. [S.40(a)]

The following payments are disallowed:
1) Payments without TDS: The disallowance under section 40(a)(i) is applicable if
the following conditions are satisfied:
1) It applies to any interest, royalty, fees for technical services, salaries or other
sum chargeable to tax under the Income –tax Act in the hand of the recipient.
2) Such amount is payable
a) Outside India (to any person resident or non-resident);
b) In India to a foreign company or a non-resident non-corporate assessee.
3) Tax has not been deducted on such payment or tax has been deducted on such
payment but the same has not been paid to the Government during the previous
year; or in a subsequent year before expiry of time given u/s 200(1).
4) However, the deductor shall be allowed to claim deduction for payments made
to non-residents in the previous year of payment, if tax is deducted during the
previous year and the same is paid on or before the due date specified for filing
of return under section 137(1)
5) Further, if tax has been deducted in the subsequent year in respect of such
remittances to non-residents, or if tax has been deducted in the previous year
but paid after the due date ofr filing return of income under section 139(1),
deduction in respect of such remittances would be allowed in previous year in
which such tax has been actually paid.
2) Rate or tax levied on the profits of any business of profession or assessed at a
proportion of or based on such profits.
3) Wealth-Tax.
4) Payments to provident fund or other employee benefit fund taxable as salaries,
unless effective arrangements have been made by the assessee to ensure that tax
shall be deducted at source from such payments.
5) Tax on perquisites of employee actually paid by an employer referred to in S.10
(10CC).

PAYMENTS TO RESIDENTS WITHOUT TDS [S.40(a)(ia)]

Any expenditure e.g. interest, commission or brokerage, rent, royalty, fees for
professional serives or fees for technical services payable to a resident, or amounts
payable to a contractor or sub contractor, being resident, for carrying out any work
deductible at source under Ch.XVII-B of the Act, would be disallowed, if tax has not
been deducted or, after deduction, has not been paid on or before the due date for
filing return of income specified u/s 139(1).
However, if tax has been deducted in any subsequent year, or has been deducted
during the previous year but paid after the return filing date, the expenditure shall be
allowed as a deduction in such subsequent previous year in which such tax has been
paid. Further, where an assessee fails to deduct the tax on any such sum but the
resident payee has paid the tax, then it shall be deemed that the assessee has deducted
and paid the tax on such sum on the date furnishing of return of income by the resident
payee.
Further, the disallowance for non-deduction of tax or non-remittance of TDS on
payments made to residents on or before the specified due date is restricted to 30% of
the sum payable to a resident.

EXCESSIVE PAYMENTS OF RELATIVES ETC. S.40A(2)]

1) Where the assessee incurs any expenditure in respect of which payment
is made to any specified person and
2) The Assessing Officer is of the opinion that such expenditure is excessive
or unreasonable having regard to the (a) fair market value of the goods,
services or facilities for which the payments are made or (b) the legitimate
needs of the business or profession of the assessee or © the benefit
derived by or accruing to the assessee there from.
3) so much of the expenditure as is considered to be excessive or
unreasonable shall not be allowed as a deduction.
4) “Specified person” means-
 a) where the assessee is an individual, his relative; where the assessee is a
company, its director or directors relatives where the assessee is is a Firm its
partner’s relative and where the assessee is HUF or AOP, its member or
member’s relative; and

EXPENSES EXCEEDING Rs. 10000 PAID IN CASH [S.40A(3)]

If the assessee incurs any expenditure in respect of which the payments made to a
person in a day otherwise than by an account payee cheque or account payee bank
draft, exceeds Rs. 10000, no deduction shall be allowed in respect of such
expenditure.
If an expenditure was allowed on accrual basis for any year and subsequently during
any previous year the assessee makes payment in respect thereof, otherwise than by an
account payee cheque or account payee bank draft, the payment so made shall be
deemed to be business income of the subsequent year if the payments made to a
person in a day exceeds Rs.10000. For payment of freight, the limit is Rs.35000.
Thus 100% of expenses paid for in cash or by bearer cheques are disallowed. This
provision applies only to deductible revenue expenses including purchase of goods.
Rule 6DD, however, prescribes the circumstances when even such cash payments
would be allowable in full.

UNPAID STATUTORY LIABILITY [S.43B]

1) Deduction only on Payment: Certain expenses can be deducted only if paid
within the prescribed period as shown in the following worksheet. Deduction is
allowed only on “payment” basis and not on due basis even if books of accounts are
maintained on the basis of mercantile system of accounting.
WORKSHEE 3: DEDUCTION ON PEYMENT BASIS
No. When payment should be made Expenses
A. During the relevant previous 1.1 Tax, duty, cess or fee under any law
B.. year; 1.2 Bonus or commission to employees
On or before the due date for 1.3 Interest on loan from any public
filing return of income under financial institution or a state financial
S.139(1) corporation or a state industrial
investment corporation.
1.4 Interest on any loan or advance form a
scheduled bank
1.5 Sum due to employee in lieu of leave
balance.
1.6 Contribution payable by an employer
to
provident/superannuation/gratuity/empl
oyee welfare fund.