Unit6:INCOMEFROMBUSINESS/PROFESSION

Business is an activity of purchase and sell of goods with the intention of making profit.
Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation is an
activity,whichrequiresaspecialskill,whichisusedtoearnincome.e.g.Painter,Singeretc.For
income tax purpose there is no difference between business income, profession income and
vocationincome.

Section2(13):Business

Businessincludesanytrade,commerceormanufactureoranyadventureorconcernin
thenatureoftrade,commerceormanufacture.
Explanation:

Thusbusinessisanyactivitycarriedoutwiththeintentiontoearnprofit,whethersuch
anactivityiscontinuousortemporaryisimmaterial.

Indeterminingwhetheraparticulartransactionisanadventureinthenatureoftradeor
not,totalimpressionandeffectofallrelevantfactsandcircumstancesofthetransactionhave
to be seen. To bring a transaction within the term business, the transaction must be a
trade or in the nature of trade. Hence everything depends upon the facts and
circumstances of the case. E.g. A person making investment of surplus funds in shares or
debentures cannot be deemed to be carrying on the business of trading in shares although
occasionallyhemaybesellingsomesharesordebenturesandmakinggainsthereon.

METHODSOFCOMPUTINGTAXABLEINCOME

1. GrossSalesorGrossfeesasthecasemaybearetobetakenasthebaseifReceiptand
PaymentA/corcashBookisgiven.FromthisGrossincomeexpenseswhicharespecifically
allowedbytheincometaxactaredeductedtoarriveattaxableincome.

2. Ifprofit&lossa/corincome&expenditurea/cisgivenNetProfitor(Surplus)istakenas
thebaseandthenfollowingadjustmentsaremade:
1) Expenses,whicharedebited,toprofit&lossa/c,butdisallowedbytheIncomeTaxAct
andeitherfullyorpartiallyareaddedback.
2) Expenses, which are not debited, to profit & loss a/c but which are allowed by the
IncomeTaxActarededucted.
3) Incomethatiscreditedtoprofit&lossa/cbutnottaxableatallortaxableundersome
differentheadistobededucted.
4) Income that is not credited to profit & loss a/c, but which is chargeable to tax as
businessincomeistobeadded.

43

BASISOFCHARGE:SECTION28

UnderSection28followingaretheincomechargeabletotaxundertheheadProfitsorGains
fromBusinessorprofession:
1) ProfitsandGainsofanybusinessorprofessionthatiscarriedonbytheassesseeatanytime
duringthepreviousyear.
2) Anycompensationorotherpaymentduetoorreceivedbyanassesseeforlossofagency
duetoterminationormodificationofterms.
3) Income derived by a trade, professional or a similar association for specific services
performedforitsmembers.
4) Any profit on sale of a license granted under Imports (controls) Order 1955 made under
Imports&Exports(control)Actof1947.
5) Anycashassistance(bywhatevernamecalled)receivedorreceivableagainstexportsunder
anyschemeofGovernmentofIndia.
6) Any duty of customs or excise repaid or repayable as drawback to any person against
exportsundertheCustomsandCentralExciseDutysDrawbackRules1971.
7) AnyprofitonthetransferoftheDutyentitlementpassbookschemeunderexportimport
policy.
8) Any profit on the transfer of the Duty free replenishmentcertificate under export import
policy.
9) Thevalueofanybenefitorperquisitewhetherconvertibleintomoneyornotarisingfrom
businessorexerciseofaprofessione.g.Agiftreceivedbythelawyerfromhisclient.
10) Anyinterest,salary,bonus,commissionorremunerationduetoorreceivedbypartnerofa
firmfromsuchfirm.
11) Sumreceivedorreceivableincashorinkindunderanagreementfornotcarryingoutany
activity in relation to any business or not sharing any know how, patent, copyright, trade
mark, license franchise or any other business or commercial right of similar nature or
information or technique likely to assist the manufacture or processing of goods or
provisionofservices.
12) AnysumreceivedincludingbonusunderKeymanInsurancePolicy.
13) Anysumreceived(orreceivable)incashorkind,onaccountofanycapitalasset(otherthan
land or goodwill or financial instrument) being demolished, destroyed, discarded or
transferred, if the whole of the expenditure on such capital asset has been allowed as a
deductionundersection35AD.
14) Incomefromaspeculativebusiness.

DEDUCTIONSFOREXPENSESSPECIFICALLYALLOWEDSECTION30TOSECTION43D

1. Rent,rates,taxes,repairsandinsuranceofbuilding(Section30):
1) If assessee has occupied the premises as a tenant, rent of the premises and if he has
agreed to bearcost of repairs, such cost is allowed as deduction, provided it is not of
capitalnature.

44

2) If assessee has occupied premises as the owner; repairs, land revenue, local taxes,
insurancepremiumetc.areallowedasdeduction.However,noexpenditureinformof
capitalexpenditureisallowed.

2. Repairs&Insuranceofmachinery,Plant&Furniture(Sec.31):Amountpaidonaccountof
repairs and insurance premium against risk of damage in respect of machinery, plant &
furnitureareallowedasdeductionprovidedtheyarenotofcapitalnature.

3. Depreciationu/s32:UnderSection32depreciationonassetsisallowedasdeductionwhile
computingincomefrombusinessorprofession.Toclaimthisdeductionfollowingconditions
shouldbesatisfied:
1) Assesseeshouldbeowneroftheasset.
2) Assetmustbeusedforthebusiness.
3) Suchusemustbeinthepreviousyear.
Depreciation is allowed not on individual asset items, but on block of assets under
followingcategories:
1) Buildings
2) Plant&Machinery
3) Furniture
4) Intangible Assets acquired after March 31, 1998 such as know how, Patents,
Trademarks, licenses, franchises or any other business or commercial rights of similar
nature.
The term plant includes ships, vehicles, books, scientific apparatus and surgical
equipmentsusedforthebusinessbutexcludesteabushesorlivestock.
Ifanyassetfallinginblockofassetsisacquiredduringtheyearandputtouseduring
the previous year for less than 180 days depreciation on such asset shall be restricted to
50%ofthenormaldepreciation.
No depreciation is allowed on motor car which is manufactured outside India and
acquiredonorafter1stMarch1975butbefore1stApril2001.However,thisrestrictiondoes
notapplyif:
1) Assesseecarriesonabusinessofrunningthecaronthehirefortourist,or
2) IfassesseeisusingthecaroutsideIndiaforhisbusinessinanothercountry.

Ifbusinessiscarriedoninabuildingnotownedbytheassesseebutacquiredonleaseor
anyotheroccupancyrightandanycapitalexpenditureisincurredbyhiminrespectofthis
building,suchexpenditurewillbeconsideredascostofassetasifheistheownerofsuch
property.

A.METHODOFCALCULATINGDEPRECIATION
1. ConsidertotalW.D.V.ofassetsfallinginaparticularblockofassetsatthebeginningofthe
year.
2. Addcostofassetspurchasedduringthepreviousyear.
3. DeductSalePrice(orScrapvalue)ofassetsold,discarded,demolishedordestroyedduring
theyear.
45

4. Onthebalanceamounti.e.1+23,calculatedepreciationatthegivenrate.IfWDVbecomes
negative, no depreciation is allowed. If all assets in the block are sold depreciation is not
allowedevenifblockhasanybalanceWDV.

B.Inthefirstyearifassetacquiredisusedforlessthan180daysdepreciationisrestrictedto
50%ofnormaldepreciation.

C. W.e.f. A.Y. 199899 an undertaking engaged in generation / distribution of power has an

optiontoclaimdepreciationonStraightLineMethod.Onceoptionisexerciseditwillapplyto
all subsequentyears.

Additionaldepreciation
Itcanbeclaimedonnewplant&machineryacquiredafter31stMarch2005byanassesseein
thepreviousyearinwhichitbeginsmanufacturingorproducing.

Rateofadditionaldepreciation:20%ofactualcost.

UNABSORBEDDEPRECIATIONSECTION32(2)

If profit for the year is not sufficient to absorb depreciation either fully or partially,
unabsorbed depreciation can be deducted from any other head of income. If it still remains
unabsorbeditcanbecarriedforwardtosubsequentassessmentyearstobeadjustedagainst
futuretaxableincome.Itcanbecarriedforwardforunlimitedperiod.

PROBLEMS

1. FindoutWDVonblockofassetsfordepreciationpurposeunderIncomeTaxActfor
assessmentyear201415.Alsofindoutamountofdepreciation
i)
1)WDVon1stApril2013`35,000

2)Purchaseofassetsduringtheyear
a. On5thApril,2013`13,000
b. On30thSept.2013`10,000
3) On7thMarch2014,oneassetWDVofwhichatthebeginningoftheyearwas
`7,000wassoldfor`5,000.
4) Rateofdepreciation:10%

ii) 1)BlockofassetPlant&Machinery.
2) W.D.V.on1stApril2013`8,000.
3) Purchasesofanewmachineon1stSeptember2013`6,000.
4) OnemachineW.D.V.ofwhichatthebeginningwas`7,000wassoldfor`16,000.
5) Rateofdepreciation15%.

46

iii)

iv)

1)BlockofassetPlant&Machinery
2)W.D.V.on1stApril2013`50,000.
3)Machinespurchasedduringtheyear
(a)On15thMay2013`20,000
(b)On18thOct2013`4,000
4)Rateofdepreciation10%
1)W.D.V.ason1stApril2013`60,000
2)Purchaseson30thMarch2014`10,000
3)SalesW.D.V.`8,000,SellingPrice`5,000.
4)Rateofdepreciation15%.
5)BlockofAssets:Furniture

v)Ifsellingpriceis`62,000incase(iv)findtheamountofdepreciation.

vi) WDVon1.4.2013`16,000

Allassetssoldfor`4,000

Rateofdepreciation10%

vii)Followingassetswereacquiredforanewbusiness.Formblockofassets&calculate
depreciation:

Particulars
RateofDepreciation
Cost(`)
1.Building
5%
60,00,000
2.Machinery
20%
2,00,000
3.Machinery
40%
3,00,000
4.Machinery
50%
1,00,000

InvestmentAllowanceforinvestmentinnewplantandmachinery[U/s32AC]
This deduction is allowed for A.Y. 201415 & 201516 only to a Company engaged in
manufactureandinvestsmorethan`100croresinnewplantandmachineryduringtheperiod
between1stApril2013&31stMarch2015.Thisdeductionisallowedinadditiontonormaland
additionaldepreciation.
ActualDeduction:a.InA.Y.20141515%ofactualcostofnewassetsacquiredandinstalledin
thepreviousyear201314
b.InA.Y.20141515%ofactualcostofnewassetsacquiredfrom1stApril2013to31stMarch
2015asreducedbydeductionallowedinA.Y.201415.

If asset on which this deduction is claimed is transferred within 5 years from the date of
installationthentheamountthatwasallowedasdeductionshallbetreatedasbusinessincome
intheyearinwhichitistransferred.

47

ExpenditureonScientificResearch[U/S35]
ScientificResearchmeansanyactivitiesfortheexpansionofknowledgeinthefields
of natural or applied science including agriculture, animal husbandry or fisheries. The
followingexpenditureonscientificresearchisallowedasdeduction:
a) Revenueexpenditureincurredforscientificresearchrelatedtoassesseesbusinesswillbe
fully allowed. This may be the payment of any salary to the persons engaged in scientific
researchorpurchaseofmaterialsforuseinsuchscientificresearch.
b) Capital expenditure incurred on scientific research related to assessees business, will be
allowedinfull,howeverpurchaseoflandisnotallowed.Nodepreciationisallowedu/s32
inrespectofsuchassetduringthepreviousyearandsubsequentyear.
c) Contribution made to approved scientific research association or college or university or
other approved institutions for scientific research and to approved university, college or
institutionforfortheuseofscientificresearchisallowed.Abovemayormaynotberelated
toassesseesbusiness&aweighteddeductionof1.75timesofamountspaidisallowedasa
deduction.
d) Contribution made to approved university, college or institution for research in social
science or statistical research is allowed. Above may or may not be related to assessees
business&aweighteddeductionof1.25timesofamountspaidisallowedasadeduction.
e) Any sum paid to a National laboratory or I.I.T. or a university or a specified person
approved by prescribed authority, to be used for scientific research under an approved
program,willbealloweddeductionof2timesoftheamountsopaid[Sec.35(2AA)].
f) Incaseofacompanyengagedinmanufactureorproductionofanydrugspharmaceuticals,
electronic equipments, computers, telecommunication equipments, chemicals or any
other article or thing notified by the board, incurs any expenditure on scientific research
(excludingthecostoflandandbuilding)orinhouseresearchanddevelopmentfacilityas
approvedbytheprescribeauthority,aweighteddeductionof2timesofsuchexpenditure
shallbeallowed.Theweighteddeductionwhichwasallowedinrespectofsuchexpenditure
u/s35(AB)willnotbeconsideredforanydeductionunderanyotherprovisionofthisAct.
This weighted deduction is allowed subject to the condition that the research and
developmentfacilityisapprovedbytheprescribedauthorityandthecompanyhasentered
into an agreement of cooperation and for audit of the accounts maintained for this
purpose.Theprescribedauthorityshallsubmitthereportoftheapprovalofthesaidfacility
tothedirectorGeneralinsuchformandwithinsuchtimeasmaybeprescribed.Thissub
sectionisamendedtoallowthesaiddeductioninrespectofexpenditureincurredupto31st
DayofMarch2012.

4.Deductionu/s.36&37:

1. Insurance: Section 36(1) (i) Premium paid to cover the risk of damage or destruction of
stocks,stores,cattleandonhealthofemployeesundertheapprovedscheme.

2. InsurancePremiumpaidbyFederalmilkcoop.societyonthelivesofcattleownedbythe
membersofaPrimaryMilkCoop,Societyaffiliatedtoit.Section36(1)(ia)

48

3. PremiaforinsuranceonhealthofemployeesinaccordancewithschemeframedbyGIC&
approved by Central Government or any other insurer & approved by the Insurance
Regulatory&DevelopmentAuthority(onlyifpaidbycheque)Section36(1)(ib).

4. BonusorcommissionpaidtoEmployees:Section36(1)(ii):Itisallowedasdeductionsofar
astheyarenotpaidasprofitordividend.

5. Interest on borrowed capital: Section 36(1) (iii): It is allowed as deduction. However,

interestpaidbyfirmtoitspartnersisallowedsubjecttoprovisionsofSections40(b).

6. Discount on zero coupon bonds is deductible by issuing Company on pro rata Basis
Sec.36(1)(iiia)

7. ContributiontorecognisedProvidentfundoranapprovedsuperannuationfund:Section
36(1)(iv).Any sum paid by the assessee as an employer by way of contribution towards
pensionscheme.
8. Contribution to Pension Scheme: Sectlon 36(1)(iv a) Any contribution by an employer by
wayofcontributiontowardsapensionschemeforanemployeeupto10%ofsalaryshallbe
allowedasdeduction.

9. ContributiontoapprovedGratuityFundSection36(1)(v):Amountcontributedtothefund
whichisfortheexclusivebenefitoftheemployeeswillbeallowedasdeduction.

10. Contributions received from employees (when deposited) Section 36(1)(va): Any
contributionreceivedfromemployeestowardsanyfundsforthewelfareoftheemployees
e.g.P.F.willbeallowedasdeductionwhensuchcontributioniscreditedtoemployeesa/c
onorbeforetheduedate.Itisallowedasdeductionnotbecauseitisanexpenditureofthe
assessee. In fact, it is not at all an expenditure of the assessee. But when this amount is
deducted from salary of employees, it is treated as an income under section 2(24)(x).
Therefore,deductionisallowedwhenpaymentismadebytheduedate.

11. Animalsusedforthebusiness:Section36(1)(vi):Deductionisallowedwhenanimalshave
diedorhavebecomepermanentlyuseless.Amountofdeductionwillbedifferencebetween
actualcostoftheanimalsandamountrealisedifanyinrespectofcarcassesoftheanimals.
Deductionisallowedonlyifanimalsareusedforthepurposeofbusinessbutnotasstockin
trade.

12. Bad debts: Section 36(1)(vii) and Section 36(2): Deduction is allowed on this account if
debts have arisen out of business transaction. It is the responsibility of the assessee to
provetothesatisfactionofincometaxofficerthatsuchdebtsareirrecoverable.

13. Expenditureforpromotingfamilyplanning:Section36(1)(ix):Onlyacompanycanclaim
thisdeduction.Anyexpenditureincurredbyacompanytopromotefamilyplanningamong
itsemployeesisallowedasdeductionfully,provideditisrevenueexpenditure.Anycapital
49

expenditureonthisaccountisallowedasdeductionin5equalinstalments.Ifprofitisnot
sufficient to absorb this expenditure it can be carried forward to be set off in future. No
depreciationcanbeclaimedundersection32oncapitalassetsusedforpromotingfamily
planningandallowedasdeductionundersection36(1)(ix).

14. Anyamountofbankingcashtransactiontaxpaidduringtheyear.36(1)(xiii)

14. General Expenditure for the purpose of business or profession Section 37: Any other
expenditurenotcoveredbysection30to36whichisofrevenuenaturewillbeallowedas
deductionprovideditisincurredexclusivelyforthepurposeofbusinessorprofession.e.g
1. Embezzlementofcash.
2. ExpensesonlocalfestivalsuchasDiwali,Muhurtaetc.
3. Cashshortagefoundinthebusinessattheendoftheday.
4. EntertainmentExpenses
5. AdvertisementExpenses
6. TravellingExpenses
7. GuestHouseExpenses.
8. Lawfulexpensesrelatedtoillegalbusiness.
9. Premiumonredemptionofdebentures
10. Discountonissueofdebentures(onproratabasis)

ExpensesNotDeductibleUnderSection37
1. Donations
2. Charities
3. Giftstorelatives
4. Incometax
5. Wealthtax
6. Advanceincometax
7. Finesandpenaltiesforbreachofanylaws.
8. PersonalDrawings
9. Salarytoowner
10. Interestonproprietorscapital
11. Capitalexpenditure
12. Purchaseofanassets
13. Extensionofbuilding
14. Personalexpenditure
15. Householdexpenses.
16. Drawings
17. Educationexpensesofchildren
18. Residentialtelephonebill
19. Residentialelectricitybill
20. Residentialmaintenance
21. Amounttransferredtoreserve
22. PersonalHotelexpenses
50

R.D.D.Butdeductionisallowedforactualbaddebts
Personalmotorexpenses
L.I.C.onownlife.
AnyInvestments
Anyexpensesrelatedtoletouthouseproperty.
ExpenditureonAdvertisement(Section37(2B):Itisallowedasdeduction.However,as
perSection37(2B),anyexpenditureincurredbyanassesseeontheadvertisementin
any souvenir, brochure, pamphlet etc. published by a political party will not be
allowedasdeduction.
29. IncaseofallassesseeSection40(a):Interest,royalty,feesfortechnicalservicesorany
othersumchargeabletotaxpayableoutsideIndiawithoutdeductingtaxatsource&
wherethereisnopersontobetreatedasanagentofpersonreceivingthisamount.
30. SalarypaidoutsideIndiawithoutdeductingtaxatsource
31. AnycontributiontoPForanyotherFund,ifthereisnoarrangementforTDSfromany
paymenttobemadefromsuchFundifitistaxableundertheheadSalaries.

23.
24.
25.
26.
27.
28.

5.Deductionsundersection40:

Deductiontofirm/AOPoncertainappropriations:
1. IncaseofpartnershipfirmSection40(b):Paymentofsalary,bonus,commissionor
remunerationtopartnerofthefirm,bythefirmisallowedasdeductiononlytothe
followingextent:

1.Lossorprofitupto`3,00,000
`1,50,000or90%ofbookprofitwhichever
ismore
2.Onthebalance

60%ofbookprofit

2. IncaseofA.O.P.Section40(ba):AnypaymentofInterest,Salary,bonus,commissionor
remunerationmadebyA.O.P.orB.O.I.tothememberthereofshallnotbeallowedas
deduction.

3. InteresttopartnersInterestoncapitalofpartnersisallowedasdeductionprovideditis
authorizedbythepartnershipdeed&rateofinterestdoesnotexceed12%p.a.

EXPENSESORPAYMENTSNOTDEDUCTIBLEINCERTAINCASESUNDERSECTION40A

1. Payments to certain persons which are unreasonable or excessive under Section 40A(2).
Paymentsmadebyassesseetofollowingpersons:
(a) Whoisrelativeofassessee,ifassesseeisanindividuali.e.spouse,brother,sisterorany
linealascendant&descendant
(b) Whoisdirector,partner,memberortheirrelatives,ifassesseeisacompanyorafirmor
AOPorHUF
(c) Anypersonwhoishavingsubstantialinterestinbusinessorprofessionoftheassessee.i.e.
apersonwhoisbeneficialownerofatleast20%ofequitycapitalorentitledto20%profit.
51

Ifanypaymentismadebyassesseeonanyaccounttoabovementionedpersons&if
intheopinionofassessingofficersuchpaymentisexcessiveorunreasonablethentothe
extentitisunreasonablewillbedisallowed.

2. Paymentsexceeding`20,000madeotherwisethanbyacrossedchequeoradraft Section
40A(3)&40A(4):Ifassesseeincursanyexpenditureexceeding `20,000otherwisethanby
acrossedchequeoradraftitshallbedisallowedtotheextentof100%.

Wheretheassesseeincursanyexpenditureinrespectofwhichapaymentoraggregateof
paymentsmadetoapersoninaday,otherwisethanbyanaccountpayeechequedrawnon
abankoraccountpayeebankdraft,exceedstwentythousandrupees,nodeductionshallbe
allowedinrespectofsuchexpenditure.

If expenses are incurred in earlier years and remained outstanding in that year but
deductionwasallowedonaccrualbasisandifactualpayment(exceeding`20,000)ismade
inthenextyearincashitwillbeconsideredasifexpenditureallowedearlierasdeduction
waswrong&necessaryamountwillbeaddedtoincomeofyearinwhichitispaid.
However, Rule 6DD provides for exceptional or unavoidable circumstances where
paymentsexceeding`20,000aretobemadeincash.Takingintoconsiderationgenuineness
ofsuchtransactiontheywillbeallowedasdeduction.

WitheffectfromOctober1,2009,themonetarylimitof `20,000undersection40A(3)has
been raised to ` 35,000 in the case of payment made for plying, hiring or leasing goods
carriages.Forotherpayments,thelimitof`20,000willcontinue.

ForthepurposeofthisSectionevenpaymentforpurchaseofgoodsisconsideredas
expenses.

3. Provisionmadeforpaymentofgratuityundersection40A(7)
a) Subjecttotheprovisionsofclauses(b),nodeductionshallbeallowedinrespectofany
provision(whethercalledassuchorbyanyothername)madebytheassesseeforthe
payment of gratuity to his employees on their retirement or on termination of their
employmentforanyreason.
b) Nothinginclause(a)shallapplyinrelationtoanyprovisionmadebytheassesseefor
the purpose of payment of a sum by way of any contribution towards an approved
gratuityfund,orforthepurposeofpaymentofanygratuity,thathasbecomepayable
duringthepreviousyear.

4. Contributionsmadebyemployertononstatutoryfundsundersection40A(9)&40A(10):
Anycontributionmentionedaboveshallnotbeallowedasdeduction.Thisprovisiondoes
notapplytocontributionstorecognisedPF,approvedgratuity&superannuationfundetc.

52

6.Deductionundersection43:

Disallowance of unpaid statutory liability (Section 43B): This section is applicable only if
books are maintainedon accrual basis. In the following cases, deduction otherwise allowable
undertheIncometaxActwillnotbeallowedunlesstheamountsareactuallypaidbythedue
dateforfilingreturnofincome.Iftheseliabilitiesaredisallowedundersection43Bintheyear
ofprovision,theywillbeallowedinsucceedingyearoryearswhenactuallypaid:
1) Tax,duty,cessorfees,underanylaw(e.g.Salestax,Exciseduty,etc.)
2) Employerscontributiontoprovidentfundorsuperannuationfundorgratuityfundorany
otherfundforthewelfareoftheemployees.
3) Bonusorcommissionforservicesrenderedpayabletoemployeesreferredtoinsection(1)
(ii)&sumdueinlieuofleavebalance.
4) InterestonanyloanorborrowingfromanypublicfinancialinstitutionsoraStateFinancial
CorporationoraStateIndustrialInvestmentCorporation,inaccordancewiththetermsand
conditionsofloan/borrowingagreement.
5) Interest on any term loan from a scheduled bank in accordance with the terms and
conditionsoftheagreementgoverningsuchloan.
Itshouldbenotedthatthesepaymentswillnotbeallowedasdeductiononaccrualbasisifnot
paidbytheduedateoffilingreturnofincomeevenifbooksarekeptonmercantilebasis.

PROBLEMS

1. Dr.VijayamedicalpractitionerprovidesyoutheIncome&Expenditureaccountfortheyear
ended31stMarch2014
`
`
Expenditure
Income
ToSalariestoStaff
54,000 ByConsultationFees
2,60,000
ToRent
36,000 ByVisitingfees
30,000
ToPurchaseofMedicines
28,000 ByWinningfromhorseraces
10,000
ToTelephoneExpenses
12,000 BySaleofmedicines
30,000
ToPrinting&Stationery
11,500
ToDonations
2,500
ToBooks&Periodicals
11,800
ToL.I.C.Premium
1,200
ToIncomeTax
3,000
ToPaidtoL.I.C.Jeevandhara
20,000
ToSurplusfortheyear
1,50,000

3,30,000
3,30,000
Followingadditionalinformationhasbeenprovided:
(a) Visitfeesinclude`10,000/receivedasagiftfromfather.
(b) Entirestockofmedicineshasbeenutilised.
(c) Halfoftherentisattributabletowardsresidence.
(d) `2,300printingchargesareincurredforprintingweddingcardsofhisdaughter.
53

ComputeonthebasisoftheaboveinformationDr.Vijaystaxableincomefromprofession
forassessmentyear20142015

2. Mr.JagdishistheownerofJagdishIndustriesparticularsofwhichfortheyearended31st
March,2014aregivenbelow:
`
`

ToSalarytoStaff
3,60,000 ByGrossProfit
12,00,000
ToRent
60,000 ByIncometaxrefund
20,000
ToCommissiontoDealers
1,00,000 (includinginterest3,000)
ToReserveforBadDebts
80,000 ByL.I.C.(amountreceived
4,80,000
ToDepreciationon
1,25,000 underKeymanInsurance)
Machinery

ToEntertainmentExpenses
1,75,000
ToAdvertisement
47,500
ToBonustoStaff
22,500
ToExpensesforapproved

ScientificProgramme:

PaymenttoIIT1,00,000

Land20,000

Building50,000

Salary15,000

Material5,000

OtherExp.10,000
2,00,000
ToL.I.C.Premiumon

Ownlife
30,000

Staff(accident)30,000
60,000
ToVehicleRunningExps.
70,000
ToNetProfit
4,00,000

17,00,000
15,00,000
Followingadditionalinformationhasbeenprovided:
(a) Commission to dealers include ` 15,000 paid for medical expenses incurred by the
proprietorforhimself.
(b) DepreciationallowableonmachineryasperIncomeTaxRulesis`1,50,000/
(c) ` 15,000 included in advertisement has been incurred for advertisement in souvenir
publishedbyapoliticalparty.
(d) EntertainmentExpensesamounting`30,000/wasnotrelatedtobusiness.
(e) Telephoneexpenses`24,500;Electricityexpenses`32,500werenotrecorded.
(f) Salaryof`14,000hasbeenpaidtoMr.Jagdish&includedinsalary.
He was also the only working partner in a partnership firm trading in a chemical & drew
salaryfromthefirmat`20,000p.mFirmreportedlossof`90,000.
Computehisincomefrombusinessfortheassessmentyear20142015.

54

3. Mr.SanjivistheownerofAllTimeHits,awellknowndepartmentalstoreofThane.His
profitasdisclosedbythebooksofaccountsis`53,000forthepreviousyearended31st
March,2014.Detailedscrutinyoftheaccountsrevealedthefollowingfacts:
(a) `4,500receivedasacontributiontowardsprovidentfundfromemployees.However,
suchsumhasnotbeenpaidtotheP.F.accounteventhoughtheduedatewasover.
(b) AdvertisementexpensesdebitedtoProfitandLossa/care`33,000thebenefitofwhich
willaccruefortheperiodofthreeyears.
(c) Depreciation charged to Profit and Loss Account is ` 37,000 while depreciation
allowableforincometaxpurposeis`33,000.
(d) Salarypaidtosontotheextentof`12,000isconsideredunreasonable.
(e) ` 1,64,500 received from LIC on Keyman Insurance Policy of Mr. Sanjay, the general
managerofAllTimesHitsstoreswascreditedtothecapitalaccountofMr.Sanjivfor
theassessmentyear20142015.
(f) GuestHouseExpensesamountingto`17,500havebeendebitedtoProfit&Lossa/c.

4. FollowingistheProfitandLossAccountfortheyearended31stMarch2014ofM/sMohan
ownedbyMr.Mahesh.Computehistaxableincomefrombusiness.
`
`

ToOpeningStock
2,90,000 BySales
18,00,000
ToPurchases
8,45,000 ByInterestongovernment
ToSalaries
1,45,000 Securities
20,000
ToBonustoStaff
28,000 ByClosingStock
1,80,000
ToContributiontoRecognised

ProvidentFund
12,000
ToBaddebtswrittenoff
23,000
ToAdvertisement
30,000
ToProvisionforBadDebts
11,500
ToPersonalDrawings
60,000
ToLifeInsurancePremium(own)
10,000
ToInsurance(shop)
14,500
ToEntertainment
21,000
ToDiwaliPoojaExpenses
2,750
ToTelephoneexpenses
21,250
ToIntereston

Capital
24,000

Loan 12,000
36,000
ToL.I.C.JeevandharaPremium
4,750
ToEmbezzlmentofcash
800
ToNetProfit
4,44,450

20,00,000
20,00,000
Outof`12,000ascontributiontoRecognizedprovidentfund,`855waspaidbycheque
afterduedate.

55

5. Mr.Krunsaliquorshop.Hisgrossreceiptsfromsaleofliquoris`1,50,000.Hehasincurred
followingexpensesduringtheyear:
`

Expensesforpreparationofwine
70,000
Salarytostaff
15,000
Donationtoschool
10,000
Donationtomosque(Renownedthroughoutthe
10,000
state)
LifeInsurancePremium
8,000
Otherincidentalexpenses
12,000
Hiscontentionisthathisbusinesshasbeenconsideredillegalandhence,heisnotliableto
tax.However,theIncomeTaxOfficerdidnotacceptthiscontention.Explainwhetherheis
liabletotax.Ifyes,computehistaxableincome,ifnotgivereasonsupportingyouranswer.

6. GivenbelowistheProfitandLossAccountofMr.Pyarelalfortheyearended3132014.
`
`

OpeningStock
5,00,000 Sales
81,00,000
Purchaseofcotton
55,00,000 Rentofstaffquarters
37,000
Railwayfreight
6,00,000 SubsidiesandCashAssistance
Salariesandwages
14,50,000 fromGovernment
20,000
Auditfees
10,000 ExportAwardReceivedfrom
Legalexpenses
40,000 Government
20,000
WealthTax
10,000 DividendfromIndianCos.
60,000
Repairstobuilding
14,000 ClosingStock
7,00,000
Repairstomachinery
10,000
Staffwelfareexpenses
10,000
Generalcharges
28,000
InterestpaidonbankO/D
2,00,000
Commissionforloanonstaff

Quarters
10,000
Reserveforbaddebts
5,000
Baddebtswrittenoff
40,000
Depreciation
10,000
Interest
27,000
Contributiontostaffwelfarefund
16,000
OfficeExpenses
1,25,000
Provisionforincometax
50,000
Generalreserve
1,00,000
Netprofit
1,82,000

89,37,000
89,37,000
YouarerequiredtocomputeincomeofMr.Pyarelalfrombusinessandincomefromhouse
property for the assessment year 20142015 after taking into account the following
information:
56

1. Generalchargesinclude(a)`7,000beingemergencyinsuranceriskpremium

(b) `1,000 being donation to flood relief fund, (c) ` 2,000 being family planning
expenditureamongstemployees(d)`4,000municipalTaxonstaffquarters.
2. Staff welfare expenses include ` 1,500 being cost of uniform provided to the workers
onceintwoyears.
3. Legalexpensesincludes `10,500paidtoacharteredaccountantforconductingincome
tax appeal and ` 2,000 in connection with prosecution of an employee for smuggling
goods from Pakistan. Profit of ` 20,000 was made on these smuggled goods which
wasntbroughttobusinessofPyarelal.
4. Repairstobuildinginclude`10,000beingcostofrepairsofstaffquarters.
5. Depreciated value of plant and machinery on April 1,2013 is.` 1,20,000 (rate of
depreciation25%).OnDecember1,2013thecompanyacquiredaplant,whichiseligible
fordepreciation@25%,for `10,000.OnJanuary1,2014thecompanysoldaplantfor
`28,000(depreciatedvalueoftheplantonApril,1,2013`13,750)
6. Theannualvalueofthestaffquartersis`40,000.
7. Out of the total purchases of cotton ` 75,000 was paid in cash on one occasion to a
supplier.
8. Contributiontostaffwelfarefundwerenotpaidbyduedate.
9. Interestincludes`5,000onborrowedfundsforconstructionofstaffquarters.
10. Office expenses include ` 40,000 paid to National Laboratory for approved Scientific
ResearchProgramme.

7. Mr.Vikasishavingdifferentagencies.HisReceiptsandPaymentsAccountisgivenasunder:
`
`
Payments
Receipts
ToBalanceb/d
5,000 BySalaries
ToCommissionfromL.I.C.
1,45,000
Staff 24,000
ToCommissionfromPost

Own 60,000
84,000
Office
7,500 ByConveyance&Travelling
13,350
ToCommissionfromU.T.I.
22,500 ByAdvertising
12,000
ToGiftfromfather
10,000 ByRentofOffice
12,000
ToWinningfromlotteries
5,000 ByHouseholdExpenses
19,000
ToWinningfromhorseraces
5,000 ByEntertainmentExpenses
12,000
ToLIConmaturityofpolicy
ByPurchaseofFurniturefor
onownlife
30,000 office
10,500

ByTelephoneExpenses
12,500

ByL.I.P.forself
4,000

ByMedicalTreatmentofself
11,500

ByNewspapers,Journalsetc.
2,000

ByHouseRent
6,000

ByAdvanceTax&TDS
24,650

ByBalancec/d
6,500

2,30,000
2,30,000
Followingfurtherinformationhasbeenprovided:
(a) DepreciationallowableasperIncometaxActonfurnitureis`3,500.
57

(b) Purchase of old typewriter for ` 6,500 has been wrongly included in household
expenses.Providedepreciation@10%
FurtherMr.VikasisapartnerinfirmM/sArchanaEnterprises.Duringtheyear20132014
hedidnotreceiveanyinterestorremunerationfromthefirm.However,hiscapitalaccount
was credited with the sum of ` 56,789/ being his share in the total income of the firm.
Computehisgrosstotalincomefortheassessmentyear20142015.

8. Dr. Suresh is a renowned medical practitioner who maintains books of account on cash
basis,furnisheshisReceiptsandPaymentsAccountforthefinancialyear20132014.
`
`

ToBalanceb/d
14,000 ByRentofClinic:
ToConsultationfees:
201112
600
201112
3000 201213
4,800
201213
15,000 201314
600
201314
2,000 ByElectricity&WaterBills
2,000
ToVisitingFees
30,000 ByFees&Subscription
4,000
ToLoanfromBank
25,000 ByHouseholdExpenses
7,800
ToSaleofMedicines
60,000 ByCollectionchargeson
ToGiftandPresents
5,000 DividendIncome
100
ToRemunerationfromArticles
ByMotorCarPurchased
30,000
PublishedinProfessional
BySurgicalEquipments
4,800
Journals
6,000 ByIncometax
10,000
ToDividendfromIndianCo.
10,000 BySalarytoStaff
15,000
ToInterestonPostOffice
ByLifeIns.Premium
15,000
SavingBanka/c
7,000 ByGifttoWife
5,000

ByInterestonLoan
2,000

ByCarExpenses
15,000

ByPurchaseofmedicines
40,000

ByBalancec/d
20,000

1,77,000
1,77,000
ComputehistaxableProfessionalIncomefortheassessmentyear201415aftertakinginto
accountthefollowingadditionalinformation:
(a) 1/3oftheuseofcarrelatestohispersonaluse.
(b) DepreciationonMotorCarAllowableis20%andsurgicalequipmentis25%,
(c) Giftsandpresentsinclude`3,000frompatientsinappreciationofhismedicalservice
and`2,000receivedaBirthdayGifts.
(d) Closingstockofmedicinesamountedto`5,500.

58