Income from business/profession simplified

CA Pallav Singhania (❤ Work Hard Party Harder ❤)   (32532 Points)

22 October 2013  

Income from Business/Profession: means any income which is shown in profit and loss account after considering all allowed expenditures.

 

INCOME CHARGEABLE UNDER BUSINESS/PROFESSION

The following are few examples of incomes which are chargeable under this head:-

  1. Normal Profit from general activities as per profit and loss account of business entity.
  2. Profit from speculation business should be kept separate from business income and shown separately.
  3. Any profit other than regular activities of a business should be shown as casual income and will be shown under “income from other sources” head.
  4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty drawback of custom or excise.
  5. The value of any benefits whether convertible into money or no from business/profession activities.
  6.  Any interest, salary, commission etc. received by the partner of a firm will be treated as business/professional income in hand of partner. However, the share of profit from partnership firm is exempt in hand of partner.
  7. Amount recovered on account of bad debts which were already adjusted in profit in earlier years etc.

 

EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION

 

All the expenses relating to business and profession are allowed against income. Following are few examples of expenditures which are allowed against income:-

  1. Rent rates and insurance of building.
  2. Payment for know-how, patents, copy rights, trade mark, licenses.
  3. Depreciation on fixed assets.
  4. Payment for professional services.
  5. Expenditures on scientific research for business purposes.
  6. Preliminary Expenses in case of Limited companies.
  7. Salary, bonus, commission to employees.
  8. Salary, interest and remuneration to working partners subject to certain conditions.
  9. Communication expenses.
  10. Traveling and conveyance expenses.
  11. Membership fees etc.
  12. Advertisement expenses in respect of promotion of business products.
  13. Discount allowed to customers.
  14. Interest on loans (Whether Private of Institutional).
  15. Bank Charges/Bank Commission expenses.
  16. Entertainment/Business Promotion expenses
  17. Staff Welfare expenses.
  18. Festival Expenses.
  19. Printing and stationery expenses
  20. Postage expenses.
  21. All other expenses relating to business/profession

 

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual basis at the date of finalization accounts.

 

EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY

Following expenses will be allowed if these expenses have been paid before or on due date or before filing of income tax return:-

  1. Any tax, duty, cess or fees by whatever name called
  2. Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of employees.
  3. Bonus or commission or leave encashment payable to employees.
  4. Interest on loan from public financial institutions, state financial corporation or from scheduled bank.

 

 

EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME

  1. Expenditure on any type of advertisement of political party.
  2.  Any interest, royalty, fees for technical services or other sums chargeable under this act, which is payable out side India or in India to non-resident or a foreign company on which tax has not been deducted or after deduction, not deposited in prescribed time.
  3. Any interest, commission, rent, royalty, professional or technical fees paid or payable to any resident of India or payment to contractor or sub-contractor on which TDS is not  deducted, or if deducted then not deposited before the due date of filing the return.
  4. Any tax calculated on the basis of profit of business.
  5. Any amount of Wealth Tax paid.
  6. Any payment of salaries payable outside India or to a non-resident on which tax is not deducted.
  7. Any tax actually paid by an employer on any income by way of perquisites, on behalf of the employee.
  8. Any remuneration paid to non working partner.
  9. Any remuneration paid to working partner other than specified in agreement or as per the specified limits by income tax act.
  10. Any interest to partner if not specified in agreement and not more than 12%.
  11. Any payment in cash exceeding Rs.20000/=. (Rs.35000/= in case of payment made for plying, hiring or leasing goods carriages) except when payments are made under circumstance specified in Rule 6DD of Indian income tax act.
  12. Where a deduction has been claimed on accrual basis during an assessment year and the payment is made in a subsequent year, and the payment or aggregate of payments made to a person in a day otherwise than by way of an account payee cheque/DD, exceeds Rs.20000/= (Rs.35000/= in case of goods carriages), such payments shall be deemed as profit of the assessee for the year in which the payment is made.
  13. Any provision for the payment of gratuity to the employees.
  14. Any personal expenditures.
  15. Expenses on defending in any proceedings for breach of any law relating to sales tax etc.

 

Notes:

  • Restriction on acceptance of loans or accept a deposits of Rs.20000/= or more from any other person except by an account payee cheque/draft. This restriction shall not apply if the loan or deposit is taken or accepted from government, bank, post office, co-operative bank, government undertaking etc.
  • Restriction on repayment of loans or deposits: No person can repay loan alongwith interest except by way of account payee cheque/draft if the amount is Rs.20000/= or more.

 

 

COMPULSORY AUDIT OF ACCOUNTS

During Finance Year 2012-13 (Assessment Year 2013-14) if the gross turnover of business exceeds Rs. One Crore or receipts of a profession exceeds Rs.25 lacs then audit of accounts is compulsory under section 44AB of Indian income tax act.

 

In Financial Year 2011-12 (Assessment Year 2012-13 , this limit was  Rs.60 lacs in case of business and 15 lacs in case of profession.

The audit report by a chartered accountant, alongwith a statement of particulars, should be furnished in the prescribed form as under:

Category

Form for Audit Report

Form for Statement of Particulars

Where accounts have been audited under any other law

3CA

3CD

Where accounts have bee audited underIncome Tax Act

 

3CB

3CD

 

Note:

  1. Failure to get the accounts audited or to furnish audit report, in time attracts penalty u/s 271B up to ½% of turnover or gross receipts or Rs.1,50,000/= which ever is less.
  2. From Assessment Year 2007-08  (Financial Year 2006-07), with the introduction of  annexureless  return forms, the audit report is neither required to be attached with the return nor furnished separately before or after the due date and no penalty  u/s 271B shall be imposed for this. However, an audit report must be obtained by the assessee before the due date of furnishing the return and the relevant columns in the return should be filled in based on such report.

 

Illustration:

As per Profit & Loss Account of M/s XYZ Limited as on 31.03.13, the amount of net profit  is Rs.5,50,560/=. Following information also available with profit and loss account:-

  1. Rs. 20000/= paid as Advance Income Tax had been debited to profit and loss account.
  2. Rs.10000/= spent for printing of brochures of a political party were also shown in profit and loss account.
  3. Amount or provident fund for Rs.55000/= did not deposit till the date of filing of return.

Compute the taxable income of M/s XYZ Limited.

Solution

COMPUTATION OF TOTAL INCOME

PARTICULARS

AMOUNT

(IN RUPEES)

Net Profit as per Profit and Loss Account

550560

Add: Amount of Advance Income Tax

20000

Add: Expenses Incurred for Political Parties

10000

Add: Provident Fund not deposited till filing of return

55000

NET TAXABLE INCOME

635560

 

Note:

  1. Payment of advance tax is not expenditure.
  2. Expenses for political parties are not allowed as business expenditure.
  3. Provident fund must be deposited before filing of income tax returns otherwise it will not be allowed as business expenditure.

 

Courtesy: ICAI,ICWAI Mat, Journals, Internet

Aryan Singhania