PROFITS AND GAINS FROM BUSINESS AND PROFESSION DR. N. K. GUPTA

DEFINITIONS BUSINESS: SEC.2 (13) ANY TRADE, COMMERCE OR MANUFACTURE OR ADVENTURE OR CONCERN IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE. PROFESSION : ALL SUCH HUMAN ACTIVITIES, WHICH REQUIRE INTELLECTUAL SKILL AND TECHNICAL EXPERTISE. VOCATION: IT INCLUDES BOTH BUSINESS AND PROFESSION AND ANY SUCH ACTIVITY UPON WHICH A PERSON SPENDS MAJOR PART OF HIS TIME IN ORDER TO EARN FOR HIS LIVING.

CHARGEABILITY (SEC 28) INCOME FROM BUSINESS AND PROFESSION COMPENSATION DUE OR RECEIVED INCOME OF TRADE OR PROFESSIONAL ASSOCIATIONS PROFIT ON SALE OF LICENCE CASH ASSISTANCE REFUND OF DUTY VALUE OF ANY BENEFIT IN LIEU OF SERVICES BY A PROFESSIONAL LIKE GIFTS FOR A DOCTOR BY HIS PATIENTS

INCOME FROM SPECULATION INTEREST, SALARY ETC. RECEIVED BY A PARTNER FROM THE FIRM ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY ANY OTHER INCOME INCIDENTAL TO BUSINESS OR PROFESSION BY WHATEVER NAME CALLED

COMPUTATION OF INCOME FROM BUSINESS NET PROFIT AS PER PROFIT AND LOSS ACCOUNT ADD: INADMISSIBLE EXPENSES (MEANS EXPENSES AND LOSSES DEBITED TO PROFIT AND LOSS ACCOUNT BUT NOT ALLOWED AS DEDUCTION) ADD: INCOMES CHARGEABLE UNDER THIS HEAD BUT NOT CREDITED TO PROFIT AND LOSS ACCOOUNT LESS:EXPENSES ALLOWED BUT NOT DEBITED TO PROFIT AND LOSS ACCOUNT LESS: INCOMES FROM OTHER SOURCES BUT CREDITED TO PROFIT AND LOSS ACCOUNT

INCOME FROM PROFESSION ALL TAXABLE INCOMES LESS : ALL DEDUCTIBLE EXPENSES AND LOSSES

GENERAL PRINCIPLES TO COMPUTE INCOME FROM BUSINESS AND PROFESSION EXPENSES ARE RELATED TO THE PREVIOUS YEAR EXPENSES ARE RELATED TO BUSINESS OR PROFESSION PRINCIPLE OF COMMERCIAL EXPEDIENCY BUSINESS OR PROFESSION MUST BE CARRIED DURING THE PREVIOUS YEAR NO ANTICIPATED LOSSES INCLUDES ILLEGAL BUSINESS ALSO NO DEDUCTION FOR PENALTIES FOR BREACH OF LAW DEDUCTION RELATED TO TAXABLE PROFITS ONLY

DEDUCTIONS ALLOWED RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS (SEC. 30) RENT, REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE (SEC. 31) DEPRECIATION (SEC. 32) DEPRECIATION IS ALLOWED ON TANGIBLE AND INTANGIBLE ASSETS BOTH. ASSETS ARE DIVIDED ON THE BASIS OF BLOCK OF ASSETS (BUILDINGS, FURNITURE, PLANT AND MACHINERY AND INTANGIBLE ASSETS)

STEPS FOR COMPUTING DEPRECIATION FIND THE OPENING WRITTEN DOWN VALUE OF EACH BLOCK AT THE BEGINNING OF THE YEAR ADD COST OF ACQUISITION OF ASSETS ACQUIRED DURING THE YEAR IN THE RESPECTIVE BLOCKS TO WHICH THE NEW ASSETS BELONG DEDUCT THE MONEY RECEIVED/RECEIVABLE ALONG WITH ITS SCRAP VALUE, IF ANY, IN RESPECT OF THE ASSETS OF THE SAME BLOCK, WHICH ARE SOLD, DISCARDED OR DESTROYED DURING THE YEAR THE BALANCING FIGURE IS THE VALUE ON WHICH DEPRECIATION IS TO BE CHARGED.

CONTD… FULL DEPRECIATION WILL BE CHARGED IF THE ASSET IS PUT TO USE FOR ATLEAST 180 DAYS OTHERWISE 50% OF THE NORMAL DEPRECIATION WILL BE CHARGED. IT IS MANDATORY TO CLAIM DEPRECIATION IF AN ASSET IS OWNED BY AN UNDERTAKING ENGAGED IN GENERATION OR DISTRIBUTION OF POWER ON OR AFTER 1.4.1997, THEN DEPRECIATION WILL BE CHARGED ON THE ACTUAL COST OF THE ASSET.

CONTD… ADDITIONAL DEPRECIATION SHALL BE ALLOWED @ 20% OF THE ACTUAL COST OF ELIGIBLE ASSET TO AN INDUSTRIAL UNDERTAKING ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OTHER THAN SHIPS OR AIRCRAFTS, MACHINERY, PLANT INSTALLED IN OFFICE OR RESIDENTIAL ACCOMODATION, ROAD TRANSPORT VEHICLES ETC. IF ASSETS ARE INSTALLED AFTER 31.3.2005.

RATES OF DEPRECIATION BUILDINGS BLOCK 1: USED FOR RESIDENTIAL PURPOSE - 5% BLOCK 2: FOR OTHER PURPOSES - 10% BLOCK 3: TEMPORARY ERECTIONS - 100% FURNITURE & FITTINGS INCLUDING ELECTRICAL FITTINGS - 10% INTANGIBLE ASSETS INCLUDE KNOW HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES ETC. - 25%

PLANT & MACHINERY BLOCK 1: MOTOR CARS - 15% BLOCK 2: SHIPS, VESSELS, TUGS, BARGES ETC - 20% BLOCK 3: TAXIS, MOTOR BUSES, MOULDS ETC - 30% BLOCK 4: AEROPLANES & SPECIFIED LIFE SAVING MEDICAL EQUIPMENTS - 40% BLOCK 5: CONTAINERS MADE OF GLASS, PLASTIC ETC - 50% BLOCK 6: COMPUTERS INCLUDING SOFTWARE, BOOKS OTHER THAN ANNUAL PUBLICATIONS OR USED BY LIBRARIES - 60%

BLOCK 7: ROLLERS, ENERGY SAVING DEVICES, GAS CYLINDERS ETC - 80% BLOCK 8: WATER TREATMENT SYSTEM, CINEMATOGRAPH FILMS, MATCH FACTORIES, SALT WORKS, BOOKS BEING ANNUAL PUBLICATIONS OR USED IN THE LIBRARY, POLLUTION CONTROL EQUIPMENTS - 100%

QUESTION: X IS ENGAGED IN THE BUSINESS OF TRANSPORTATION OF GOODS. ON 1-4-09, THE WDV OF HIS VARIOUS ASSETS WAS AS GIVEN BELOW: OFFICE BUILDING (RATE OF DEPRECIATION 10%) 9,20,000 COMERCIAL VEHICLES (DEPRECIATION @ 30%) 30,90,000 CAR (DEPRECIATION @ 15%) 2,10,000 DURING THE YEAR, HE SOLD ONE OF THE COMMERCIAL VEHICLES WHICH WAS OVER THE AGE OF 15 YEARS FOR RS. 60,000. IT WAS REPLACED BY ANOTHER VEHICLE AT THE COST OF Rs 9,00,000 ON 1-11-09. A NEW VEHICLE WAS PURCHASED ON 1-1-10 FOR RS. 15,00,000. CALCULATE DEPRECIATION ADMISSIBLE FOR THE PREVIOUS YEAR 2009- 10.

CALCULATION OF DEPRECIATION FOR THE PREVIOUS SOLUTION : CALCULATION OF DEPRECIATION FOR THE PREVIOUS YEAR 2009-10 ASSET WDV DEPRECIATION BUILDING 10% BLOCK W.D.V. ON 1-4-09 9,20,000 DEPRECIATION @ 10% 92,000 92,000 W.D.V. AS ON 1-4-10 8,28,000 B. CAR 15% BLOCK W.D.V. ON 1-4-09 2,10,000 DEPRECIATION @ 15% 31,500 31,500 W.D.V. ON 1-4-10 1,78,500

SOLUTION CONTD…. C. COMMERCIAL VEHICLE-30% BLOCK W.D.V. ON 1-4-09 30,90,000 ADD: ACTUAL COST OF NEW ASSETS 15,00,000 9,00,000 24,00,000 54,90,000 LESS: MONEY REALISED 60,000 54,30,000 DEP. @ 30% ON Rs. 30,30,000 9,09,000 & @ 15% ON Rs 24,00,000 3,60,000 12,69,000 W.D.V. ON 1-4-10 41,61,000 TOTAL DEPRECIATION = 92,000+ 31,500+ 12,69,000 = 13,92,500

QUESTION: FROM THE PARTICULARS GIVEN BELOW CALCULATE THE AMOUNT OF DEPRECIATION ADMISSIBLE DURING THE YEAR ENDING 31-3-10. FIXED ASSETS W.D.V ON ADDITIONS RATE 1-4-09 DURING THE OF ACCOUNTING DEP YEAR (RS.) (RS.) BUILDING (NON- RESIDENTIAL) 15,60,000 NIL 10% BUILDING (RESIDENTIAL) 3,75,000 NIL 5% PLANT & MACHINERY 31,50,000 5,60,000 15% MOTOR CARS 74,000 - 15% FURNITURE 17,600 NIL 10%

THE NEW PLANT AND MACHINERY WERE INSTALLED ON 1-10-2009. PART OF THE RESIDENTIAL BUILDINGS WHOSE WRITTEN DOWN VALUE ON 1-4-2009 WAS RS. 2,20,000 WAS COMPLETELY DESTROYED BY FIRE ON 5-6-2009 AND RS. 1,80,000 WAS RECEIVED FROM INSURANCE COMPANY IN RESPECT THEREOF. THE NEW PLANT AND MACHINERY WERE INSTALLED ON 1-10-2009.

A. BUILDING BLOCK 10% SOLUTION CALCULATION OF DEPRECIATION ASSETS W.D.V. RATE RS. A. BUILDING BLOCK 10% (i) BUILDING (NON- RESIDENTIAL) 15,60,000 10% 1,56,000 (ii) BUILDING (RESIDENTIAL) 3,75,000 LESS: MONEY REALISED 1,80,000 1,95,000 5% 9,750

B. PLANT & MACHINERY: BLOCK 15% (OLD) 31,50,000 ADD: NEW ADDITION 5,60,000 37,10,000 15% 5,56,500 C. MOTOR CARS 74,000 15% 11,100 D. FURNITURE BLOCK FURNITURE 17,600 10% 1,760 TOTAL DEPRECIATION 7,35,110

TEA, COFFEE & RUBBER DEVELOPMENT ACCOUNT (SEC 33AB) QUANTUM OF DEDUCTION WILL BE THE AMOUNT DEPOSITED WITH NABARD IN A SCHEME APPROVED BY TEA, COFFEE RUBBER BOARD OR 40% OF THE PROFIT OF SUCH BUSINESS WHICHEVER IS LESS. SITE RESTORATION FUND (SEC 33ABA) QUANTUM OF DEDUCTION WILL BE THE AMOUNT DEPOSITED WITH SBI IN A SPECIAL ACCOUNT OR SITE RESTORATION ACCOUNT OF THE MINISTRY OR 20% OF PROFIT OF SUCH BUSINESS WHICHEVER IS LESS.

EXPENDITURE ON SCIENTIFIC RESEARCH (SEC 35) QUANTUM OF DEDUCTION IS 100% OF THE EXPENDITURE IN GENERAL INCLUDING CAPITAL EXPENDITURE DONATION TO SCIENTIFIC RESEARCH ASSOCIATIONS, NATIONAL LABORATORY, UNIVERSITY OR AN IIT ETC - 125% IN HOUSE RESEARCH IN THE AREA OF BIO TECHNOLOGY, DRUGS, PHARMACEUTICALS, COMPUTERS ETC - 150%

QUESTION BUSINESS INCOME OF X LTD. BEFORE ALLOWING EXPENDITURE ON SCIENTIFIC RESEARCH FOR THE PREVIOUS YEAR 2009-10 IS RS. 2,50,000. THE COMPANY HAS INCURRED THE FOLLOWING EXPENDITURE ON SCIENTIFIC RESEARCH DURING THE PREVIOUS YEAR 2009-10. REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH 2,60,000 CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH 5,00,000 COMPUTE THE DEDUCTION AVAILABLE ON ACCOUNT OF SCIENTIFIC RESEARCH ASSUMING THE COMPANY DOES NOT HAVE ANY OTHER INCOME.

SOLUTION BUSINESS INCOME BEFORE CLAIMING EXPENDITURE ON SCIENTIFIC RESEARCH 2,50,000 LESS: (i) REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH 2,60,000 (ii) CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH RS. 5,00,000 (NOT ALLOWED IN THIS YEAR AS THERE ARE NO PROFITS) NIL BUSINESS LOSS 10,000

SOLUTION CONTD… THE ENTIRE CAPITAL EXPENDITURE OF RS. 5,00,000 ON SCIENTIFIC RESEARCH SHALL BE CARRIED FORWARD AS UNABSORBED CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH IN THE SAME MANNER AS UNABSORBED DEPRECIATION IS CARRIED FORWARD.

EXPENDITURE FOR OBTAINING LICENCE TO OPERATE TELECOMMUNICATION SERVICES (SEC 35ABB) QUANTUM OF DEDUCTION WILL BE ALLOWED IN EQUAL INSTALMENTS OVER THE PERIOD FOR WHICH THE LICENCE REMAIN IN FORCE SUBJECT TO THE MAXIMUM OF AMOUNT ACTUALLY PAID. EXPENDITURE ON ELIGIBLE PROJECTS OR SCHEMES (SEC 35AC) QUANTUM OF DEDUCTION WILL BE THE AMOUNT SPENT ON APPROVED PROJECTS OR PAID TO AN APPROVED ASSOCIATION DURING THE PREVIOUS YEAR

EXPENDITURE BY WAY OF PAYMENTS TO ASSOCIATIONS & INSTITUTIONS CARRYING OUT RURAL DEVELOPMENT PROGRAMME OR POVERTY ERADICATION PROGRAMME SET UP BY CENTRAL GOVERNMENT (SEC 35CCA) AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES (SEC 35D & RULE 6AB) QUANTUM OF DEDUCTION WILL BE 1/5TH OF EXPENDITURE EVERY YEAR FOR 5 YEARS TO THE MAXIMUM OF 5% OF THE COST OF THE PROJECT.

AMORTIZATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER (SEC 35DD) IF ANY INDIAN COMPANY INCURS ANY EXPENDITURE ON OR AFTER 1.4.1999 WHOLLY OR EXCLUSIVELY FOR THE ABOVE MENTIONED PURPOSE QUANTUM OF DEDUCTION WILL BE 1/5TH OF SUCH EXPENDITURE FOR 5 YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE AMALGAMATION OR DEMERGER TAKES PLACE.

AMORTIZATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENT SCHEME (SEC 35DDA) QUANTUM OF DEDUCTION WILL BE 1/5TH OF SUCH EXPENDITURE FOR 5 YEARS AMORTIZATION OF EXPENDITURE ON PROSPECTING ETC. FOR DEVELOPMENT OF CERTAIN MINERALS (SEC 35E) QUANTUM OF DEDUCTION WILL BE 1/10TH OF SUCH EXPENDITURE FOR FIRST 10 YEARS

OTHER DEDUCTIONS (SEC 36) INSURANCE PREMIUM OF STOCKS INSURANCE PREMIUM OF CATTLE INSURANCE ON HEALTH OF EMPLOYEES BONUS OR COMMISSION TO EMPLOYEES INTEREST ON BORROWED CAPITAL DISCOUNT ON ISSUE OF ZERO COUPON BONDS TO BE ALLOWED AS DEDUCTION ON PRO RATA BASIS EMPLOYERS CONTRIBUTION TO RECOGNIZED/ APPROVED PROVIDENT FUND.

EMPLOYER’S CONTRIBUTION TO AN APPROVED GRATUITY FUND SUMS RECEIVED FROM EMPLOYEES TOWARDS CERTAIN WELFARE SCHEMES IF CREDITED TO THEIR ACCOUNTS BEFORE THE DUE DATE LOSS ON ACCOUNT OF DEAD OR USELESS ANIMALS ACTUAL BAD DEBTS REVENUE EXPENDITURE ON PROMOTING FAMILY PLANNING AMONGST THE EMPLOYEES BY A COMPANY

CAPITAL EXPENDITURE ON PROMOTING FAMILY PLANNING AMONGST THE EMPLOYEES (QUANTUM OF DEDUCTION WILL BE 1/5TH OF SUCH EXPENDITURE FOR 5 YEARS) BANKING CASH TRANSACTION TAX PAID

GENERAL DEDUCTIONS (SEC 37) REMUNERATION TO EMPLOYEES PENALTY, DAMAGES ETC. DURING THE COURSE OF BUSINESS LEGAL EXPENSES EXPENDITURE ON RAISING LOANS EXPENDITURE ON ADVERTISEMENTS DIWALI AND MAHURAT EXPENDITURE PAYMENT FOR TELEPHONE CONNECTION PREMIUM PAID ON LOSS OR PROFIT POLICIES CONTRIBUTION TO TRADE ASSOCIATIONS PAYMENT TO REGISTRAR OF COMPANIES EXPENSES ON TRAINING OF STAFF CIVIL DEFENCE EXPENSES INDIRECT TAXES

EXPENSES NOT ALLOWED AS DEDUCTIONS (SEC 37) EXPENSES IN CONNECTION WITH ISSUE OF DEBENTURES OR SHARES ANY CAPITAL EXPENDITURE BANK GUARANTEE COMMISSION PUGREE OR PREMIUM PAID TO OBTAIN TENANCY RIGHT EXPENDITURE ON SHIFTING OF OFFICE AMOUNT PAID TO WARD OFF COMPETITION IN BUSINESS TO A RIVAL ADVERTISEMENT TO POLITICAL PARTIES

DEDUCTION FROM COMMISSION EARNED BY LIC, UTI, POST OFFICE & MUTUAL FUNDS AGENTS WHERE COMMISSION EARNED IS LESS THAN RS 60,000 LIC AGENTS - FIRST YEAR COMMISSION 50% OF THE COMMISSION, SUBSEQUENT YEAR- 15% OF THE COMMISSION, IF DIFFICULT TO SEPARATE THE TWO COMMISSIONS THEN 33.33% OF THE COMMISSION (TO THE MAXMIMUM OF RS 20,000) OTHER AGENTS - 50% OF THE COMMISSION WHERE COMMISSION EARNED IS MORE THAN RS 60,000 THEN ASSESSEE SHOULD MAINTAIN THE NECESSARY RECORDS AND CAN CLAIM DEDUCTION FROM SEC 30-37

EXPENSES NON DEDUCTIBLE (SEC 40) ANY INTEREST, ROYALTY, FEES ETC PAID OUTSIDE INDIA WITHOUT DEDUCTION OF TAX AT SOURCE INTEREST ON CAPITAL / LOAN TO PARTNERS IN EXCESS OF 12% P.A UNREASONABLE EXPENSES TO RELATIVES IF THE ASSESSEE IS HAVING SUBSTANTIAL INTEREST ANY EXPENDITURE EXCEEDING RS. 20,000 OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE

SECURITY TRANSACTION TAX FRINGE BENEFIT TAX DIRECT TAXES TAX ON PERQUISITES PAID BY THE EMPLOYER CONTRIBUTION TOWARDS NON RECOGNIZED PROVIDENT FUNDS

DEDUCTION ONLY ON ACTUAL PAYMENT EVEN AFTER 31ST MARCH BUT BEFORE THE DUE DATE OF FILING THE RETURN (SEC 43B) TAXES, DUTY, CESS OR FEE CONTRIBUTION TO PROVIDENT FUND, GRATUITY FUND, ETC. PAYMENT OF BONUS, COMMISSION ETC. TO EMPLOYEES

QUESTION THE FOLLOWING EXPENSES ARE DUE BUT OUTSTANDING ON 31ST MARCH, 2010: SALES TAX RS. 60,000; RS. 25,000 PAID ON 1ST JULY 2008 AND RS. 35,000 ON 12TH DECEMBER 2010. BONUS TO EMPLOYEE RS. 1,00,000; RS. 30,000 PAID ON 10TH JUNE 2010 AND RS. 70,000 ON 1ST DECEMBER 2010. INTEREST TO INDUSTRIAL FINANCE CORPORATION OF INDIA RS. 80,000; RS. 30,000 PAID ON 30 JUNE 2010 AND THE BALANCE ON 28TH DECEMBER 2010. INTEREST TO P&S BANK ON LOAN RS. 90,000; RS. 40,000 PAID ON 10TH SEPTEMBER 2010 AND RS. 50,000 ON 15TH JANUARY 2011.

DUE DATE OF FILING RETURN IS 30TH SEPTEMBER 2010 DUE DATE OF FILING RETURN IS 30TH SEPTEMBER 2010. FIND OUT THE PREVIOUS YEARS IN WHICH THE AFORESAID PAYMENTS ARE DEDUCTIBLE. THE COMPANY MAINTAINS THE BOOKS OF ACCOUNTS ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING.

SOLUTION DEDUCTION AS TO SALES TAX PAYMENT OF RS. 25,000 WILL BE ALLOWED IN PREVIOUS YEAR 2009-10 AS THE SAME HAS BEEN PAID BEFORE THE DUE DATE OF FURNISHING RETURN. HOWEVER, RS. 35,000 SHALL BE DEDUCTIBLE DURING THE PREVIOUS YEAR 2010-11 AS IT HAS BEEN PAID AFTER THE DUE DATE OF FURNISHING RETURN. DEDUCTION AS TO BONUS PAYMENT OF RS. 30,000 ON 10TH JUNE 2010 WILL BE ALLOWED IN P.Y. 2009-10, AND RS. 70,000 PAID AFTER THE DUE DATE OF FURNISHING RETURN, SHALL BE DEDUCTIBLE DURING P.Y. 2010-11.

INTEREST TO I.F.C.I. RS. 30,000 PAID ON 30TH JUNE 2010, DEDUCTIBLE DURING THE P.Y. 2009-10 WHEREAS RS. 50,000 PAID ON 28TH DECEMBER 2010 SHALL BE DEDUCTIBLE DURING THE P.Y. 2010-11. INTEREST PAYMENT ON LOAN TO A SCHEDULED BANK PAID ON 10.9.2010 IS DEDUCTIBLE FOR THE PREVIOUS YEAR 2009-10 WHEREAS RS. 50,000 PAID ON 15.1.2011 SHALL BE DEDUCTIBLE DURING P.Y. 2010-11.

DEEMED PROFIT (SEC 41) RECOVERY AGAINST ANY ALLOWANCE OR DEDUCTION ALLOWED EARLIER SALE OF CAPITAL ASSETS USED FOR SCIENTIFIC RESEARCH RECOVERY OF BAD DEBT

MAINTAINENCE OF ACCOUNTS (SEC 44AA) A PERSON CARRYING ON SPECIFIED PROFESSION SHALL BE REQUIRED TO MAINTAIN ACCOUNTS IF HIS GROSS RECEIPTS IN THREE PRECEDING YEARS EXCEEDS RS 1,50,000 OR IN CASE OF NEW BUSINESS IT IS LIKELY TO EXCEED RS. 1,50,000 IN THAT PREVIOUS YEAR FOR OTHER PERSONS WHERE THE TOTAL INCOME EXCEEDS RS 1,20,000 OR SALE EXCEEDS RS 10,00,000 IN ANY OF THE PRECEDING 3 YEARS OR IN CASE OF NEW BUSINESS LIKELY TO EXCEED THE SAME DURING THE CURRENT PREVIOUS YEAR

COMPULSORY AUDIT OF ACCOUNTS (SEC 44AB) IN CASE OF BUSINESS TOTAL SALES OR GROSS RECEIPTS EXCEEDS RS 40 LAKHS IN ANY PREVIOUS YEAR OR IN CASE OF PROFESSION EXCEEDS RS 10 LAKHS IN ANY PREVIOUS YEAR

PRESUMTIVE SYSTEM OF TAX (NO ACCOUNTS ARE PREPARED) PROFITS AND GAINS OF BUSINESS OF CIVIL CONSTRUCTION (SEC 44AD) – DEEMED PROFIT= 8% OF GROSS RECEIPTS IF THE RECEIPTS DO NOT EXCEED RS 40 LAKHS DURING ANY PREVIOUS YEAR

QUESTION XY & CO., A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION HAS A GROSS RECEIPT OF RS. 32,00,000 FROM SUCH BUSINESS. THE PARTNERSHIP DEED PROVIDES FOR PAYMENT OF SALARY OF RS. 3,000 P.M. TO EACH OF THE PARTNERS I.E. X AND Y. THE FIRM USES MACHINERY FOR THE PURPOSE OF ITS BUSINESS AND THE WDV OF THE MACHINERY AS ON 1-4-2007 IS RS. 2,00,000. THE MACHINERY IS ELIGIBLE FOR DEPRECIATION @ 15%. COMPUTE THE PROFITS FROM THE BUSINESS, IF THE FIRM OPTS FOR THE SCHEME UNDER SECTION 44AD. (b) WHAT WILL BE THE PROFIT FROM BUSINESS, IF EACH PARTNER IS PAID RS. 7,000 P.M. AS SALARY INSTEAD OF RS. 3,000 P.M.

SOLUTION AS PER SECTION 44AD, THE PROFITS WILL BE COMPUTED AS UNDER: 8% OF GROSS RECEIPTS i.e. RS. 32,00,000 = RS. 2,56,000 – RS. 72,000 [AS THE SALARY TO WORKING PARTNERS IS WITHIN THE LIMITS OF SECTION 40(b)] = 1,84,000 NO DEDUCTION WILL BE ALLOWED ON ACCOUNT OF DEPRECIATION. THE WDV OF THE MACHINERY FOR THE NEXT YEAR SHALL BE TAKEN AS RS. 1,70,000 (2,00,000 – 15% OF RS. 2,00,000) ASSUMING AS IF DEPRECIATION HAS BEEN ALLOWED.

(b) SALARY AS PER PARTNERSHIP DEED 7,000 X 12 = 84,000 X 2 = 1,68,000 SALARY ALLOWABLE AS PER SEC. 40(b) ON FIRST 75,000 OF PROFITS, 90% i.e. 67,500 ON NEXT 75,000 OF PROFITS, 60% i.e. 45,000 ON BALANCE PROFITS OF RS. 1,06,000 - 40% 42,400 TOTAL SALARY ALLOWED 1,54,900 THEREFORE, PROFITS FROM BUSINESS: RS. 2,56,000 – 1,54,900 = RS. 1,01,100.

PROFITS AND GAINS OF PLYING, HIRING OR LEASING GOODS CARRIAGES (SEC 44AE) – IF ASSESSEE OWNS NOT MORE THAN 10 GOODS CARRIAGES DURING THE PREVIOUS YEAR THEN DEEMED PROFIT WILL BE RS 3,500 EACH VEHICLE FOR EVERY MONTH OR PART OF A MONTH IN CASE OF HEAVY VEHICLES AND RS 3,150 EACH VEHICLE FOR EVERY MONTH OR PART OF A MONTH IN CASE OF LIGHT VEHICLES

QUESTION ‘A’ OWNS THE FOLLOWING COMMERCIAL VEHICLES: 2 LIGHT COMMERCIAL VEHICLES – ONE FOR 9 MONTHS AND TWO DAYS AND THE OTHER FOR 12 MONTHS 1 HEAVY GOODS VEHICLE – FOR 6 MONTHS AND 25 DAYS. 2 MEDIUM GOODS VEHICLES – ONE FOR 6 MONTHS AND THE OTHER FOR 8 MONTHS AND 15 DAYS. (a) COMPUTE THE INCOME FROM BUSINESS IF ‘A’ OPTS FOR THE SCHEME U/S 44AE. ALSO, COMPUTE HIS TAX LIABILTY FOR THE ASSESSMENT YEAR 2008-09, IF HE DEPOSITS RS. 20,000 IN PPF ACCOUNT DURING THE PREVIOUS YEAR.

(b) WHAT WILL BE THE INCOME IF THE TRUCKS WERE NOT USED BUSINESS FOR TWO MONTHS DURING THE YEAR DUE TO STRIKE? SOLUTION THE INCOME U/S 44AE SHALL BE COMPUTED AS UNDER: 10 X 3150 + 12 X 3150 69,300 7 X 3500 24,500 6 X 3150 + 9 X 3150 47,250 INCOME FROM BUSINESS 1,41,050 LESS: DEDUCTION U/S 80C 20,000 TOTAL INCOME 1,21,050

TAX ON RS. 1,21,050 1,105 ADD: EDUCATION CESS @ 2% 22 1,127 TAX ROUNDED OFF 1,130 (b) INCOME FROM VEHICLES IS TO BE COMPUTED FOR EVERY MONTH OR PART OF THE MONTH DURING WHICH THESE WERE OWNED BY THE ASSESSEE EVEN THOUGH THESE ARE NOT ACTUALLY USED FOR BUSINESS. THEREFORE, THERE WILL BE NO CHANGE IN THE ANSWER.

PROFITS AND GAINS OF RETAIL BUSINESS (SEC 44AF)- DEEMED INCOME WILL BE 5% OF THE TOTAL TURNOVER IF TURNOVER DOES NOT EXCEED RS 40 LAKH DURING THE FINANCIAL YEAR PROFITS AND GAINS OF SHIPPING BUSINESS IN CASE OF NON RESIDENTS (SEC 44B) - DEEMED INCOME WILL BE 7.5% OF THE FREIGHT PROFITS AND GAINS OF BUSINESS OF OPERATION OF AIRCRAFT IN CASE OF NON RESIDENT (SEC 44BBA) - DEEMED INCOME WILL BE 5% OF THE AMOUNT RECEIVED/ RECEIVABLE

QUESTION A IS THE OWNER OF TWO BUILDINGS WHICH ARE USED BY HIM FOR HIS OWN BUSINESS. THE WDV OF THESE BUILDINGS IS RS 5,00,000 ON 1.4.2009 & THE RATE OF DEPRECIATION ALLOWABLE ON THIS BLOCK IS 10%. HE PURCHASED ANOTHER BUILDING ON 1.12.2009 FOR RS 2,50,000 & SOLD ONE OF THE TWO OLD BUILDINGS ON 1.3.2010 FOR RS 8,50,000. TRANSFER EXPENSES AMOUNTED TO RS 20,000 COMPUTE THE ALLOWABLE DEPRECIATION/ TAXABLE CAPITAL GAIN FOR THE ASSESSMENT YEAR 2010-11. WHAT WOULD HAVE BEEN THE DIFFERENCE HAD THE BUILDING BEEN SOLD FOR RS 3,50,000?

(i) SALES CONSIDERATION 8,50,000 LESS: OPENING WDV OF BLOCK 5,00,000 COST OF ASSET ACQUIRED DURING THE YEAR 2,50,000 EXPENSES ON TRANSFER 20,000 7,70,000 SHORT TERM CAPITAL GAIN 80,000 (ii) IF THE BUILDING HAD BEEN SOLD FOR RS 3,50,000 OPENING W.D.V OF THE BUILDING BLOCK ADD: COST OF ASSET ACQUIRED 3,50,000 CLOSING W.D.V OF BUILDING 4,00,000 ALLOWABLE DEPRECIATION (ACQUIRED FOR LESS THAN 180 DAYS) 5% ON RS. 2,50,000 12,500 10% ON RS. 1,50,000 15,000 27,500

QUESTION: CALCULATE THE TAXABLE PROFIT OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2010-11 FROM THE PARTICULARS GIVEN BELOW: PROFIT FOR THE PREVIOUS YEAR 2009-10 13,70,000 (BEFORE ALLOWING THE FOLLOWING AMOUNTS) AMOUNT GIVEN TO APPROVED & NOTIFIED SCIENTIFIC RESEARCH INSTITUTE ( RESEARCH NOT RELATED TO THE BUSINESS OF THE ASSESSEE) 80,000 (ii) COST OF LAND ACQUIRED FOR CONSTRUCTING RESEARCH LABORATORY 2,00,000 (iii) COST OF BUILDING AND PLANT & MACHINERY REQUIRED FOR RESEARCH 12,00,000

CONTD.. (iv) AMOUNT GIVEN AS SALARY TO STAFF ENGAGED IN RESEARCH (RELATING TO A FIELD RELATED TO ASSESSEES OWN BUSINESS DURING 2008-09 (BUSINESS STARTED ON 1-4-2009).THE AMOUNT IS CERTIFIED BY THE PRESCRIBED AUTHORITY 90,000 (v) SALARY GIVEN TO STAFF ENGAGED IN RESEARCH WITHIN THE PREMISES DURING 2009-10 1,20,000

SOLUTION: COMPUTATION OF BUSINESS INCOME NET PROFIT AS PER P & L A/C 13,70,000 LESS: REVENUE EXPENSES (i) AMOUNT GIVEN TO APPROVED SCIENTIFIC RESEARCH INSTITUTE [80,000 * 125%] 1,00,000 (ii) SALARY GIVEN TO STAFF ENGAGED IN SCIENTIFIC RESEARCH RELATED TO ASSESSEES FIELD (RESEARCH BEFORE COMMENCEMENT) 90,000 (iii) SALARY GIVEN TO STAFF ENGAGED IN RESEARCH DURING 2009-10 1,20,000 3,10,000 10,60,000

SOLUTION CONTD. LESS: CAPITAL EXPENSES (i) COST OF LAND NOT ALLOWED (ii) COST OF BUILDING AND PLANT & MACHINERY 12,00,000 12,00,000 UNABSORBED CAPITAL EXPENDITURE ON RESEARCH CARRIED FORWARD 1,40,000

QUESTION X GIVES YOU THE FOLLOWING PARTICULARS FOR THE YEAR ENDED 31-3-2010 NET PROFIT AS PER P&L A/C (WITHOUT ALLOWING THE FOLLOWING ITEMS) 5,20,000 CAPITAL EXPENDITURE ON FAMILY PLANNING 70,000 LUMP SUM CONSIDERATION FOR PURCHASE OF TECHNICAL KNOW – HOW DEVELOPED IN GOVERNMENT LABORATORY 1,20,000 ENTERTAINMENT EXPENDITURE 40,000 EXPENDITURE ON ACQUISITION OF PATENT RIGHTS 80,000 EXPENDITURE ON ADVERTISEMENT PAID IN CASH 25,000 PROVISION FOR EXCISE DUTY 60,000

CONTD.. HE PAID Rs 30,000 ON 27-6-2010, & Rs. 12,000 ON 1-11-2010 DUE DATE OF FILING RETURN IS 31-7-2010 AMOUNT PAID TO DELHI UNIVERSITY A NOTIFIED INSTITUTION FOR AN APPROVED RESEARCH PROGRAMME IN THE FIELD OF SOCIAL SCIENCES NOT CONNECTED WITH HIS BUSINESS 60,000 COMPUTE HIS BUSINESS INCOME FOR THE ASSESSMENT YEAR 2010-11?

SOLUTION: COMPUTATION OF BUSINESS INCOME (FOR THE ASSESSMENT YEAR 2010-11) NET PROFIT AS PER P&L A/C 5,20,000 LESS: ALLOWED EXPENSES CAPITAL EXPENDITURE ON FAMILY PLANNING (ALLOWED ONLY TO COMPANIES) NIL PURCHASE OF TECHNICAL KNOW- HOW: DEPRECIATION @ 25% 30,000 ENTERTAINMENT EXPENDITURE 40,000 ADVERTISEMENT EXPENDITURE IN CASH: DISALLOWED @ 100% NIL ACQUISITION OF PATENT RIGHT: DEPRECIATION @ 25% 20,000 AMOUNT PAID TO DELHI UNIVERSITY FOR SCIENTIFIC RESEARCH 60,000*125% 75,000 PAYMENT OF EXCISE DUTY BEFORE DUE DATE OF FILING RETURN 30,000 1,95,000 TAXABLE BUSINESS PROFIT 3,25,000

QUESTION: THE FOLLOWING IS THE P&L A/C OF A FOR THE YEAR ENDED 31-3-2010.COMPUTE HIS TAXABLE INCOME FROM BUSINESS FOR THAT YEAR: OPENING STOCK 15,000 PURCHASES 40,000 WAGES 20,000 RENT 6,000 REPAIRS OF CAR 3,000 WEALTH-TAX PAID 2,000 MEDICAL EXPENSES 3,000 GENERAL EXPENSES 11,000 DEPRECIATION OF CAR 3,000 ADVANCE INCOME TAX 1,000 PROFIT FOR THE YEAR 26,000 1,30,000 SALES 80,000 CLOSING STOCK 20,000 GIFTS FROM FATHER 10,000 SALE OF CAR 17,000 INCOME TAX REFUND 3,000 1,30,000

FOLLOWING FURTHER INFORMATION IS GIVEN: (i) A CARRIES ON HIS BUSINESS FROM RENTED PREMISES HALF OF WHICH IS USED FOR HIS RESIDENCE. (ii) A BOUGHT A CAR DURING THE YEAR FOR RS 20,000. HE CHARGED 15% DEPRECIATION ON THE VALUE OF CAR. THE CAR WAS SOLD DURING THE YEAR FOR RS 17,000. THE USE OF THE CAR WAS 3/4TH FOR BUSINESS & 1/4TH FOR PERSONAL PURPOSES. (iii) MEDICAL EXPENSES WERE INCURRED DURING SICKNESS OF A FOR HIS TREATMENT. (iv) WAGES INCLUDE Rs. 2,500 ON ACCOUNT OF A’S DRIVER.

TAXABLE INCOME FROM BUSINESS PROFIT FOR THE YEAR 26,000 ADD: AMOUNT NOT DEDUCTIBLE WEALTH TAX PAID 2,000 ADVANCE INCOME TAX 1,000 RENT 3,000 MEDICAL EXPENSES 3,000 DRIVER’S SALARY 625 REPAIRS OF CAR 750 DEPRECIATION ON CAR 3,000 13,375 39,375 LESS: AMOUNT CONSIDERED SEPARATELY GIFT FROM FATHER 10,000 SALE OF CAR 17,000 INCOME TAX REFUND 3,000 30,000 INCOME FROM BUSINESS 9,735

NOTE: SHORT TERM CAPITAL LOSS OF RS. 3000 ON TRANSFER OF CAR WILL BE CARRIED FORWARD.

QUESTION: X IS CHARTERED ACCOUNTANT & HAS PREPARED THE FOLLOWING INCOME & EXPENDITURE A/C FOR THE YEAR ENDING 31-3-2010 OFFICE EXPENSES 10,000 EMPLOYEE’S SALARY 5,000 MAGAZINES 600 PERSONNEL EXPENSES 17,000 DONATION TO N.D.F 500 INTEREST 700 INCOME TAX 13,300 CAR EXPENSES 2,000 BANKING CASH TRANSACTION TAX 1,000 NET SURPLUS 90,000 1,40,000 AUDIT FEES 70,500 GIFT FROM FATHER- IN- LAW 5,050 DIVIDEND 8,000 PROFIT ON SALE OF INVESTMENT 6,450 TAX CONSULTANCY FEES 50,000 1,40,000

YOU ARE REQUIRED TO COMPUTE HIS PROFESSIONAL INCOME FOR THE ASSESSMENT YEAR 2010-11 CONSIDERING THE FOLLOWING POINTS: Rs 1,000 DOMESTIC SERVANT’S SALARY IS INCLUDED IN EMPLOYEE’S SALARY. (b) X IS OWNER OF A BUILDING. ITS WRITTEN DOWN VALUE IS RS 80,000 ON 1-4-2009. THE BUILDING IS USED FOR THE OFFICE. BESIDES THIS, FURNITURE COSTING RS. 30,000, WHOSE W.D.V ON 1-4-2009 IS RS 25,000 IS USED FOR PROFESSION. ALLOWED DEPRECIATION @ 10% UNDER INCOME TAX ACT.

SOLUTION: INCOME FROM PROFESSION NET SURPLUS AS PER INCOME & EXP. A/C 90,000 ADD: EXPENSES NOT ADMISSIBLE DOMESTIC SERVANT SALARY 1,000 PERSONAL EXPENSES 17,000 DONATION TO N.D.F 500 INCOME TAX 13,300 31,800 1,21,800 LESS: ITEMS CONSIDERED SEPARATELY GIFT FROM FATHER IN LAW 5,050 DIVIDEND 8,000 PROFIT ON SALE OF INVESTMENT 6,450 LESS:DEPRECIATION ON BUILDING 8,000 DEPRECIATION ON FURNITURE 2,500 30,000 INCOME FROM PROFESSION 91,800 NOTE: BCTT IS ALLOWED AS DEDUCTION U/S 36(1)(xiii)

QUESTION COMPUTE THE TAXABLE INCOME OF A LTD. FOR THE PREVIOUS YEAR 2009-010 FROM THE FOLLOWING P&L A/C AND ADDITIONAL INFORMATION: SALARIES & GROSS BONUS 1,00,000 PROFIT 5,00,000 OFFICE RENT 10,000 INTEREST ON WAR RISK GOVT. SECURITIES 10,000 INSURANCE 10,000 PROFIT ON SALE POSTAGE AND OF LISTED SHARES STATIONERY 10,000 BOUGHT ON 1-6 GENERAL -2006 AND SOLD IN CHARGES 20,000 MAY, 2007 15,000

RESERVE FOR DEPRECIATION 25,000 INCOME TAX 2008-09 50,000 PROVISION FOR 2009-10 2,00,000 NET PROFIT 1,00,000 5,25,000 5,25,000 ADDITIONAL INFORMATION: (i) THE GENERAL CHARGES INCLUDE RS. 5,000 FOR ADVERTISING, RS. 1,000 FOR CHARITABLE

DONATIONS, RS. 3,000 PAID TO A MOTOR CAR COMPANY FOR EXCHANGE OF THE OLD CAR FOR NEW ONE, RS. 1,000 FOR CHARITY AND RS. 5,000 FOR MISCELLANEOUS REPAIRS. (ii) THE AMOUNT OF DEPRECIATION ADMISSIBLE UNDER THE INCOME TAX ACT IS RS. 15,000 ONLY. (iii) THE COMPANY ALSO DEALS IN SHARES.

SOLUTION TAXABLE INCOME OF A LTD. FOR THE P.Y. 2009-10 NET PROFIT AS PER P&L A/C 1,00,000 LESS: INTEREST ON GOVT. SECURITIES 10,000 PROFIT ON SALE OF SHARES 15,000 25,000 75,000 ADD: EXPENSES NOT ALLOWABLE RESERVE FOR DEP. 25,000 INCOME TAX 08-09 50,000 PROVISION FOR INCOME TAX 09-10 2,00,000

SOLUTION CONTD. CHARITABLE DONATIONS 1,000 CHARITY 1,000 AMOUNT PAID TO EXCHANGE MOTOR CAR 3,000 2,80,000 3,55,000 LESS: DEPRECIATION ALLOWABLE AS PER INCOME TAX 15,000 BUSINESS INCOME 3,40,000 INCOME FROM SPECULATION BUSINESS (SALE OF SHARES)* 15,000 INCOME FROM OTHER SOURCES INTEREST ON GOVT. SECURITIES 10,000 GROSS TOTAL INCOME 3,65,000

LESS: DEDUCTION U/S 80G CHARITABLE DONATION (50% OF RS. 1,000) 500 SOLUTION CONTD. GROSS TOTAL INCOME 3,65,000 LESS: DEDUCTION U/S 80G CHARITABLE DONATION (50% OF RS. 1,000) 500 TOTAL TAXABLE INCOME 3,64,500 NOTE: THE CHARITABLE DONATION IS ASUMED TO BE A TRUST/INSITUTION WHIH IS COVERED U/S 80G. * AS PER EXPLANATION TO SEC. 73, WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN INVESTMENT, BANKING COMPANY, ETC. CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS.

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