PROFITS AND GAINS

OF BUSINESS OR
PROFESSION
BY:
KARTIK VATS(3922)
JEMIN GOHIL(3952)
KSHITIZ AGARWAL(3789)
KUNAL AGGARWAL(3901)
KUNAL GOEL(3924)
PRASHANT DANGI(4001)

THIS IS THE LARGEST HEAD OF INCOME

It includes every body from a small shopkeeper

having a shop at the roadside to as high as the
biggest businessman.
This head of income covers the largest number of
persons who could be taxed under the act. This
includes profits and gains that are earned in
practically every business activity.

BASIS OF CHARGE (SECTION

28)
Following Incomes shall be charged to tax under this head
Profit and Gains of any business or Profession carried on by
the assessee
Any Compensation or other payments due or received by
assessee, for loss of agency, due to termination or modification
in terms and conditions of such agency
Income derived by a trade, professional or similar association,
for specific services performed; for its members.
Export Incentives received by Exporter such as Sale of
licenses, Cash Assistance, Duty Drawback

BASIS OF CHARGE (CONTD.)

Value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession
Interest, Salary, Bonus, Commission or remuneration due to or
received by, a partner of a firm from such firm.
Sum Received or receivable in cash or kind for
a) not carrying out any activity
b) not sharing any knowhow's, patent etc.
Sum Received under Keyman Insurance Policy
Income from Speculative Business.

BUSINESS & PROFESSION

Business
includes any Trade, Commerce or Manufacture or any
adventure in the nature of Trade, Commerce or Manufacture.
Adventure in the nature of trade and commerce:
It means even a single activity can be also called as a
business. So for business definition it is not necessary that
the activity should be carried out regularly and continuously.
Even if there is an isolated transaction then also it is liable to
be called for business.

Profession:
means an occupation requiring specialised Knowledge
and Skill.
Vocation:
is an activity in which an assessee has specialised
skill for earning Income.
Business cannot be carried out with own self. It
means that there has to be some bilateral relations
between two or more persons and business done with
self does not make sense and it therefore not

METHOD OF ACCOUNTING
Two methods of accounting:
Cash system : Income and expenses recorded on
receipt/payment basis
and mercantile system: Income and expenses are
recorded on accrual basis
Income under this head should be calculated on the
basis of method regularly employed by the assesses.
Hence the method of accounting followed is important.

DEDUCTION ALLOWABLE
Rent, Rates, Taxes and Insurance of Building ( u/s 30)
Deduction is allowed in respect of these expenditures if incurred for the
purpose of business or profession
Rent of building is not deductible if the building is owned by the assessee
Capital expenditure on repair is not deducitble.

Repairs and Insurance of Machinery, Plant and Furniture (u/s 31):

Allowable expenditure includes expenditure on current repairs and not capital
expenditure and Insurance on P&M and Furniture used for business purpose.

DEPRECIATION (U/S 32)

Following conditions are to be fulfilled.
a) Assessee must be owner of the Asset.
b) Asset must be used for the purpose of
business or Profession.
c) Such use must be in the relevant previous
year.
d) It is available on Tangible as well as Intangible
assets

DEPRECIATION
Deprecation is allowed in respect of
a) Building
b) Plant & Machinery
c) Furniture
d) Motor Vehicles
e) Computers
f) Intangibles

DEPRECIATION
Depreciation is allowed on the Written Down
Value of Block of Assets
Opening WDV

XX

Add : Purchases during the year

XX

Less : Sales during the year

XX

Closing WDV

XX

Note : If the Asset is put to use for less than 180

Days in the year, depreciation will be allowed at
50 % of the eligible rate.

DEPRECIATION RATES
Particulars

Rate of
Depreciatio
n

Residential Building

5%

Office, Factory, Godowns or Buildings not used for residential purpose

10%

Purely temporary construction e.g. Water supply project building,

wooden structures

100%

Furniture (including Electrical fittings)

10%

Plant and Machinery not covered under following blocks and motor
cars other than used for running them on hire
15%
P&M : Ocean going ships, vessels operating on inland water including
speed boats
20%
P&M : Buses, Lorry and Taxis used in the business of running them on 30%
hire
P&M : Aeroplanes, commercial vehicles and life saving medical
equipments

40%

P&M: Containers made up of glass or plastic used as refills, new

commercial vehicle

50%

DEPRECIATION RATES
P&M : Computers including softwares

60%

P&M : Energy saving devices., Rollers in flour mill, sugar work and steel
industry

80%

Intangible assets Knowhow, patents, copyrights, trademark, license

25%

P&M : Air pollution control equipment, water pollution control equipment,

solid waste control equipment

100%

DEPRECIATION(CONTD..)
Exceptions:
No Depreciation is admissible when WDV has been
reduced to Nil though Block of Assets does not cease to
exist on the last day of the Previous year.
If Block of Assets cease to exist or all Assets of the Block
have
been transferred and
block is empty, No
Depreciation is admissible.
If the Asset is put to use for less than 180 Days in the
year, depreciation will be allowed at 50 % of the eligible
rate.
In case of transfer of Assets due to succession,
amalgamation, business reorganization or demerger,
Depreciation is first calculated as if there is no transfer and
the amount of Depreciation shall be apportioned between
predecessor and successor in the ratio of no. of days of
holding the asset.

ADDITIONAL DEPRECIATION
Additional Deprecation @ 20 % of Actual Cost of
Machinery acquired and installed after 31.03.2005 for
a) New Industrial Undertaking
b) Existing Industrial Undertaking
Conditions to be fulfilled for Additional Depreciation:
The assessee must be engaged in manufacturing,
production of any article.
New P&M should be acquired and installed after 31 st
March, 2005
It should be an eligible P&M.

ADDITIONAL DEPRECIATION
(CONTD..)
Additional depreciation is not available in the case of
ships, aircrafts, second hand assets, assets installed in
office, residence, guesthouse, office appliances, road
transport vehicles, and those assets which are qualified
by 100% deduction in the first year
Note : If 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%

UNABSORBED DEPRECIATION

Depreciation allowance is first deductible from the

income.
If it is not fully deductible, under the head Profits and
Gains from Business and Profession because of
absence or inadequacy of the profits; it is deductible
from Income chargeable under other Heads (except
Income under the head Salaries) for the same
assessment year
If depreciation allowance is still unabsorbed, it can be
carried forward to the subsequent assessment years
by the same assessee. No time limit is fixed for the
purpose of carrying forward of unabsorbed
depreciation

EXPENDITURE OF SCIENTIFIC
RESEARCH U/S 35
Revenue expenditure on scientific research is
deductible in the year in which it is incurred, if it
relates to the business.
Any capital expenditure (other than Cost of Land)
expended on scientific research related to the
business is deductible. Depreciation in such a
case is not deductible
Contribution to
i) Approved research association, approved
university, college, other institutions is deductible
at the rate of 175% of actual expenditure
ii) Approved research association, university,
college for the purpose of research in social
sciences or statistical research
eligible for 125 % Deduction

iv) Contribution to an approved national lab, university,

IIT is deductible @ 200% of the contribution.
v) In House Research in specified industries eligible for
200 % Deduction

EXPENDITURE FOR OBTAINING LICENSE

TO OPERATE TELECOMMUNICATION
SERVICES U/S 35ABB
Deduction under this section is available if following
conditions are satisfied:
1. Expenditure is capital in nature
2. It is incurred for acquiring any right to operate
telecommunication services.
3. Expenditure is incurred either before commencement
of business or thereafter.
4. Payment for the work has been actually made to
obtain license.
Amount of deduction:
Allowed as Deduction equally over the number of years of
Validity of Licenses starting from the year of payment
and upto the year in which license comes to an
end(Irrespective of the year in which the liability is
incurred)

PROFIT/LOSS ON SALE OF
TELECOM LICENSE:
Any profit/Loss is taken as business income and taxed
accordingly. Rules are as under:
Different Situations
Entire telecom licencse is
transferred

Tax Treatment

When sale consideration is

less than WDV

WDV minus sale consideration

is allowed as deduction in the
year of sale

When sale consideration is

more than WDV

Excess of sale consideration

over WDV is taxable as
business income in the year of
sale

When a part of telecom

license is transferred
When sale consideration is WDV minus sale consideraion
less than WDV
will be allowed as deduction
over the unexpired period
When sale consideration is Excess of sale consideration
more than WDV
over WDV is taxable as
business income in the year of
sale

 WDV means the expenditure incurred remaining unallowed.

In situations when sale consideration is more than WDV,
amount taxable as business income cannot exceed the
deduction allowed u/s. 35ABB in earlier years.
In case of amalgamation/demerger when a license is
transferred, deduction will not be available to the
amalgamating co. or demerged company but will be
available to the amalgamated or resulting company
If deduction is allowed under this section , no deduction for
depreciation u/s.32 will be allowed for the same
expenditure in the said previous year or subsequent years

OTHER EXPENDITURES
35AC : Expenditure on Eligible Projects:
Where an assessee incurs any expenditure by way
of payment to a public sector company or a local
authority or to an institution approved by national
committee for carrying out any eligible project or
scheme, the assessee shall be allowed a deduction
of such expenditure

35AD : INVESTMENT LINKED

TAX INCENTIVE:
The tax payer should be in the business specified as per
the section
The business specified includes setting up and operating
a cold chain facility , warehousing faciltiy for storage of
agricultural products, laying and operating a cross
country natural gas or crude or pertoleum oil pipeline
network , building and operating a new hotel of 2 star or
above category, hospital with at least 100 beds,
developing and maintaining housing project, production of
fertilizer in India , beekeeping, warehouisng for sugar.

 Specified business should be new

business:
It should not be formed by splitting up or reconstruction of a business already in
existence
It should not be set up by transfer of old plant and machinery
However, 20% old machinery is permitted
Second hand imported machinery is treated as new subject to the following conditions;
i.

Such a machinery was not at any time previous to the date of the installation by the
assessee used in India

ii.

Such machinery or plant is imported into India from any country outside India

iii.

No deduction on account of depreciation on such assets has been allowed previously

 Books of accounts of the assessee should be audited

Amount of Deduction:
The expenditure(other than land and building, goodwill or financial
instrument) is deductible 100% in the year in which it is incurred
Preliminary expenditure will be allowed in the year of
commencement of business
Consequences of claiming deduction :
No deduction u/s. 80 for the same year
No deduction of the same expenditure for any other sections

 Any sum received/receivable on account of any capital

asset in respect of which deduction has been allowed
under this section , being demolished, destroyed,
discarded or transferred shall be treated as income and
chargeable to tax under PGBP
Any loss shall not be set off except against profits and
gains if any of any other specified business . If the loss
remains unabsorbed it will be carried forward

AMORTISATION OF
Preliminary Expenses ( Section 35D):
Deduction available to Indian company or a resident non
corporate assessee
One fifth of the qualifying amount is available as deduction in 5
Years beginning with the year in which business commences
Amortisation of Amalgamation or Demerger expenses
(Section 35DD):
The expenditure allowable in 5 Years in 5 equal installments
starting from the year in which amalgamation or demerger
takes place
No deduction is available under any other provisions of the Act

Amortisation of VRS Expenses (section 35DDA):

The expenditure allowable in 5 Years in 5 equal installments

OTHER DEDUCTION U/S 36

Insurance premium paid to cover the risk of damage or destruction of
Stock.
ii. Insurance Premium of health of employees
iii. Bonus or Commission paid to Employees
iv. Interest on Capital borrowed for the purpose of business
v. Employers Contribution to Recognised Provident Fund and Approved
Superannuation Fund
vi. Contribution to Approved Gratuity Fund
vii. Employees contribution to staff welfare scheme.
viii. Bad Debts
ix.
Expenditure on promotion of Family Planning among employees
(Revenue exp Fully; Capital exp 1/5)
x. Discount on Zero coupon Bonds.
i.

GENERAL EXPENSES U/S 37

Conditions to be fulfilled
1. Expenditure should not be in the nature prescribed u/s 30
to 36
2. Not a Capital Expenditure
3. Not Personal Expenditure
4. Should have been incurred in the previous year
5. For the purpose of Business
6. Should not have been incurred for any purpose which is an
offence or is prohibited by any law

ADVERTISEMENT EXPENSES
( SECTION 37(2B)
Deduction is not allowed in respect of expenditure
incurred by an assessee on advertisement in any
souvenir, brochure, tract, pamphlet or like published
by a political party.

TEA, COFFEE, RUBBER

DEVELOPMENT ACCOUNT U/S.33AB
The assessee must satisfy the following conditions:
1. The assessee must be engaged in the business of tea,
coffee or rubber plantation which includes growing and
manufacturing tea or coffee or rubber in India
2. It must make a deposit in special account [with NABARD
or in accordance with the scheme approved by Tea Board
or Coffee Board]
Or to be deposited in an account opened by the assessee in
accordance with the scheme framed by Board with the
approval of Central Government

SEC 33AB CONTD..

3 The deposit should be made within specified time limit [six
months from the end of the previous year or before the due
date of furnishing of the return of income, whichever is earlier]
4 The accounts of the assessee should be audited

Amount of Deduction:
Amount deposited in special account
OR 40% of the profit of such business before making any
deduction u/s. 33AB and before adjusting any brought forward
business loss u/s. 72

SEC 33AB CONTD..

If deduction is claimed as per this section, no further deductions shall
be allowed in in any other previous year
If deduction allowed to AOP,BOI, no deduction to any of their members
Any excess amount in special account is not treated as deposit made
in the next year/s
After allowing the deduction under this section, as per rule 8, 40% of
the balance taxable amount will be treated as non agricultural income
and liable to tax and balance 60% is treated as agricultural income and
hence exempt.

SEC 33AB CONTD..

Amount can be withdrawn for the purpose of scheme
The amount at the credit of the special account may be
withdrawn only for the purpose specified in the scheme.
If the amount is not utilised for the purpose the amount will be
treated as taxable profit
The amount cannot be utilised for the purpose of purchase of
any plant or machinery to be installed in office
premises/residential accomodation including guest houses,
The amount cannot be utilized for purchasing any office
appliances other than computers

CONSEQUENCES IF THE NEW ASSET

IS TRANSFERRED WITHIN 8 YEARS
The deduciton allowed will be withdrawn if the asset
acquired out of the money withdrawn is sold or otherwise
Transferred
Transfer
transferred. To whom it is
transferred

within 8 yrs

after 8yrs

To Central /State
Government, local
authority, statutory
corp. or a Govt co.

Deduction
will not be
withdrawn

Deduction
will not be
withdrawn

Transfer in scheme of
succession of a firm
by company

Deduction
will not be
withdrawn

Deduction
will not be
withdrawn

Transfer in any other

case

Deduction
will be
withdrawn

Deduction
will not be
withdrawn

TAXABILITY IF AMOUNT IS
WITHDRAWN
Amount withdrawn on account of following will be treated as
taxable profit:
Closure of business
Dissolution of firm
Amount withdrawn on account of following not treated as income:
Death of a taxpayer
Partition of HUF
Liquidation of company

DISALLOWANCE US/S 40 A
Payment to Non-Resident without deducting TDSu/s.40(a)(i):
If following conditions are satisfied, the assessee is required to deduct TDS :
The amount paid is :
Interest
Royalty
Fees for technical services or any other sum
The amount is chargeable to tax in the hands of recipient
It is paid/payable outside India to any person or in India to a non resident
If these conditions are satisfied , the assessee is supposed to deduct
TDS

DISALLOWANCE U/S 40 A
If tax is deductible but it is not deducted, the
expenditure is not allowable as deduction.
If tax is deducted and it is deposited with Government
in same Financial year, it is deductible.
However, if the same is deposited in next year, it will
be disallowed for current year and deduction will be
allowed in the year in which tax is deposited.

Payment to Resident without deducting TDS u/s.40(a)(ia):

Tax is deductible under different section in respect of payment of
interest, commission/brokerage, rent, fees for
technical/professional services, royalty to a resident contractors/
sub-contractors.
Case 1 - If tax is deductible but not actually deducted, the
payment will be disallowed in the current Previous year.
Case 2 - If tax is deducted but not deposited before the
submission of return of income it will be disallowed.

 The amount which is disallowed in Case 1 or Case 2 during the

current year, will be allowed as deduction in the year in which
tax is deposited.
From A.Y. 2013-14 : A relief is given in Case 1, if the payer is
not deemed to be an assessee-in-default u/s 201(1).
The payer is not deemed to be an assessee-in-default if

a. the resident recipient has furnished return u/s 139.

b. the resident recipient has taken into account the above
income in such return of income
(contd)

c. the resident recipient has paid tax due on

the income, and
d. the payer furnishes a certificate to this effect
from a C.A. in prescribed form.
If the above conditions are satisfied, then it
shall be deemed that the payer has deducted
and paid the tax on such amount on the date of
furnishing the return of income.

 Fringe Benefit Tax, Income-tax and Wealth-Tax : are not

deductible (including any fine, penalty, interest etc.
thereof)
Salary payable to Non-resident or payable outside India :
Not deductible if TDS is not deducted and is not paid to
Government.
Tax on perquisites paid by emloyer : Not deductible for
the employer.

 Salary and Interest to Partners : Deductible, subject to

following.
a) Payment should be permitted by Partnership Deed.
b) Rate of interest should not be more than 12%
(excess interest will be disallowed).
c) Salary and Remuneration cannot exceed specified
percentage of book profit, if the aggregate payment
exceeds Rs. 1,50,000/- (excess payments shall be
disallowed.)

 Maximum remuneration to partners which is

deductible is as under
On first Rs. 3 lakhs of book profit (or loss) : Rs.
1,50,000 or 90% of book profit, whichever is more.
On the balance of book profit : 60% of book profit.
Salary and Interest by an AOP/BOI to its members :
Not deductible

DISALLOWANCE U/S 40A

Payment to a relative/interconnected concern:

Any expenditure by an assessee in respect of which

payment has been made to relatives, inter-connected
concerns is liable to be disallowed , to the extent such
expenditure is excessive or unreasonable (having
regard to fair market value of goods/services).

From A.Y. 2013-14, this disallowance shall not be made if

the aggregate value of such transactions is more than
Rs. 5 crore and these transactions are at arms length
price, as defined u/s 92F(ii)

DISALLOWANCE U/S 40A(3)

Expenditure exceeding Rs. 20,000 paid by a mode other than Account
Payee cheque/Draft:
If the following conditions are satisfied, expenditure is not deductible
1. The amount of expenditure exceeds Rs. 20,000.
2. A payment (or aggregate payments made to a person in a day) in respect
to above expenditure exceeds Rs. 20,000.
3.The payment is made otherwise than by Account Payee cheque or Demand
Draft.
If the above conditions are satisfied, 100% of such payment will be disallowed.
The limit has been increased to Rs. 35,000/- in the case of payment made for
plying, hiring or leasing goods carriage

 Contribution to unapproved gratuity fund : Not

deductible
Employers contribution to non-statutory
funds/Unrecognized Provident Fund : Not deductible

SECTION 43 B : DEDUCTION ON
PAYMENT BASIS (WHERE BOOKS
ARE MAINTAINED ON MERCANTILE
BASIS)
Following will be allowed as Deduction on actual paid basis.
Outstanding amount has to be paid before Due Date of Filing of Return of
Income.
i) Any Tax, Duty paid to government
ii) Employers Contribution to PF
iii) Bonus or Commission
iv) Interest on Loans from financial
institution
V) Interest on Loans from Scheduled Bank
Vi) Leave Salary to Employees
The above expenses are deductible in the year in which payment is actually
made. There is one exception,
Exception- The above payments are deductible on accrual basis if the
payment is actually made on or before the due date of submission of Return of
Income

RECOVERY AGAINST ANY

DEDUCTION SECTION 41(1)
In any of the earlier years a deduction was allowed for
revenue or capital expenditure or a trading liability
During the current P.Y. the taxpayera)

has obtained a refund of such expenditure/liability.

b)

Has obtained some benefit in respect of such liability

by way of remission or cessation.

If above two conditions are satisfied, the amount obtained

shall be deemed to be profits and chargeable to tax

COMPULSORY AUDIT OF BOOKS

OF ACCOUNTS [SECTION 44AB]
Different
Taxpayers

When they are covered by the

provisions of compulsory audit under
section 44AB

A person carrying
on business

If the total sales, turnover or gross receipt in

business for the p.y. exceeds Rs. 60 laksh
(Rs. 1 crore from A.Y. 2013-14)

A person carrying
on profession

If the gross receipt in profession for the p.y.

exceeds Rs. 15 lakhs (Rs. 25 lakhs from A.Y.
2013-14)

A person covered
u/s 44AD, 44AE,
44AF

If such person claims that the Profits and

gains from the business are lower than the
profits and gains computed under these
sections

COMPUTING BUSINESS PROFITS

ON PRESUMPTIVE BASIS[44AD]
Following conditions must be satisfied:
1 Eligible assessee:
The assessee must be an eligible assessee i.e. He is a resident
individual,resident HUF, or a resident partnership firm and not a
LLP
2 Assessee has not claimed deduction under sections 10A,
10AA,10B , 80HH to 80RRB in the relevant assessment year
3 Eligible business:
The assessee should be involved in the business retail trading or
wholesale trading or civil construction or any other business.

Following are not eligible

A person carrying on profession as referred to in section
44AA(1)
Person earning income in the nature of commission or
brokerage
Person carrying on any agency business or
Person who i sin the business of plying, hiring, or leasing goods
carriages
4 Turnover:
Total turnover should not exceed Rs. 60 Lakh

CONSEQUENCES IF THE ABOVE

CONDITIONS ARE SATISFIED
If the conditions are satisfied, income is estimated at 8% of the gross
receipt or turnover.
Further points:
Assessee can decalre a higher income
No further deductions (Deductions u/s. 30 to 38 including depreciation and
unabsorbed depreciation) are allowed under this section
In case of firm, deduction in respect of salary and interest to partners u/s.
40(b) shall be allowed
An assessee under this section is exempted for paying any advance tax
and maintaining books of accounts as required u/s. 44AA

 An assessee can declare lower income than the deemed

profits and gains as above. Following consequences will be
applicable:
Taxpayer needs to maintain books of accounts irrespective of
the turnover if his total income exceeds the exemption limit
To get the books of accounts audited u/s. 44AB irrespective of
the turnover, if his total income exceeds the exemption limit.

TRANSPORT OPERATORS U/S.

44AE
The section is applicable if the following conditions are
satisfied:
The tax payer must be an individual, HUF, AOP, BOI,
firm, company, co-operative society, or any other
person. He/It may be a resident/non resident
Taxpayer is engaged in the business of plying, hiring, or
leasing goods carriages
The tax payer owns not more than 10 goods carriages
at any time

CONSEQUENCES IF SECTION
44AE IS APPLICABLE:
Types of goods carriage

Estimated income

Heavy goods vehicle

Rs. 5000 for every month (or

part of month) during which the
goods carriage is owned

Other than heavy goods vehicle Rs. 4500 or every month (or
part of month) during which the
goods carriage is owned

 A taxpayer can claim his income from the said business higher than
specified in this section
No further deductions (Deductions u/s. 30 to 38 including depreciation
and unabsorbed depreciation) are allowed under this section
In case of firm, deduction in respect of salary and interest to partners
u/s. 40(b) shall be allowed
An assessee under this section is exempted for paying any advance
tax and maintaining books of accounts as required u/s. 44AA

 An assessee can declare lower income than the deemed

profits and gains as above. Following consequences will be
applicable:
Taxpayer needs to maintain books of accounts irrespective of
the turnover if his total income exceeds the exemption limit
To get the books of accounts audited u/s. 44AB irrespective of
the turnover, if his total income exceeds the exemption limit.

THANK YOU