Profits & gains of Business or profession (u/s 28-44D)  Charging Section S. 28 under section 28 the following income is chargeable to tax under the head business or profession:  Profits and gains of any business or profession;  Any compensation or other payment due to or received by any person specified in section 28(ii)  Income derived by trade, profession or similar association from specific services performed for its members;  The value of any benefit or perquisite whether convertible into money or not arising from the business or the exercise of a profession

 Any profit on transfer of duty Entitlement Pass Book Scheme;  Any profit on the transfer of any duty free replenishment certificate  Export incentives available to exporters  Any interest, salary,bnus, commission or remuneration received by a partner from firm  Any sum received for not carrying out any activity in relation to business or not to share any know how, patent, copy right, trade mark, etc.,

 Any sum received under a Keyman insurance policy including bonus;  Any sum received in cash or in kind or on account of any capital asset(other than the land or Goodwill or financial instrument ) being demolished, destroyed or discarded or transferred if the whole of the expenditure on such capital asset has been allowed as deduction under section 35D  Profits and gains of managing agency; and  Income from speculative transaction

Business Sec. 2(13)  Business includes any trade, commerce, manufacture, or any adventure or concern in the nature of trade, commerce or manufacture.  This definition covers every facet of an occupation carried on by a person with a view to earning profit. Production of goods from raw-material, buying and selling of business and selling of goods to make profits and providing services to others are different forms of business. Activity for making profit Activity for making profit Activities of rendering services to others falls under business Activities of rendering services to others falls under business

Business income not taxable under this head  Rental income in the case of a dealer of a property  even if property constitutes stock-in-trade of recipient of rent the recipient of rent engaged in business of letting properties on rent  Dividend on shares are taxable under the head income from other source even if they are derived from shares held as stock-in-trade or recipient of dividend is dealer in shares  Winning from lotteries, races etc., are taxable under “income from other source” even if it is received from regular business activities

Basic principles for arriving at Business income Basic principles for arriving at Business income Business or profession carried on by the assessee Business or profession carried on by the assessee It is not the ownership of the business but the business must be carried on by the assessee. If he has the right to carry on the business, even though he is not physically carry on a business It is not the ownership of the business but the business must be carried on by the assessee. If he has the right to carry on the business, even though he is not physically carry on a business Business or profession must be carried on during the previous year Business or profession must be carried on during the previous year It is not essential that the business to be conducted throughout the previous year or up to the end of the previous year It is not essential that the business to be conducted throughout the previous year or up to the end of the previous year

Tax is chargeable to all business or profession Tax is chargeable to all business or profession Tax incidence is on the aggregate of all business income and not separately chargeable to tax. If an assessee earns income from one business and loss from other business, income chargeable to tax is the net income that is after setting off loss against income Tax incidence is on the aggregate of all business income and not separately chargeable to tax. If an assessee earns income from one business and loss from other business, income chargeable to tax is the net income that is after setting off loss against income Profits and losses from speculative business is treated separately Profits and losses from speculative business is treated separately

 Legal ownership and beneficial ownership.  Legal ownership and beneficial ownership is to be considered for taxation. Whoever really receive the income will be held liable for the tax  Real Profit & Anticipated profit  Taxable profit is the profit accrued or arising in the accounting year. Anticipated profit or potential profit or losses which may arise in future is not considered for arriving at the taxable income of a previous year

 Recovery of sum already allowed as deduction  Any sum recovered from a deduction already allowed as deduction is taxable as business income  Mode of book entries not relevant  The mode of transaction is irrelevant for taxation. For example a trading receipt even though it was not recorded in the accounts does not prevent the assessing officer to treat it as a trading receipt  Illegal business  Income tax is not considered whether the income is from a legal or illegal business. Income is taxable  Commercial principles for computing business income  Profit arising from trading receipts only is taxable not the capital receipt

 Trading losses of revenue nature are allowed to be deductible if they are incidental to the operation. The business losses can be allowed as deduction if only the following conditions are satisfied :  Losses should be of revenue nature  Losses shoul d be incurred during the previous year  Losses should be incidental to the business or profession carried on by the assessee Trading losses

 It should not be notional or fictitious  it should have been actually incured and not merely anticipated to incur in future  it should not be an item restricted under the act  Loss which is not incidental to trade or profession, carried on by the assessee is not allowed as deduction  Losses of advances made for setting up of new business which ultimately couldnot be started

 Rent, rates, taxes repairs and insurance for building used for business purpose(sec 30)  Not being capital expenditure  repairs only if there is an agreement to bear the repair expenses, if the assessee is a tenant  any sum on account of rent, land revenue, municipal taxes  if the assessee pays rent of the previous tenant cannot e deductible Specific deductions

Repairs and insurance of machinery plant and furniture Sec 31  Expenditure incurred on current repairs other than the capital expenditure and insurance premium in respect of plant, machinery and furniture used for business purpose is allowed as deduction under section 31

Depreciation Sec. 32  Conditions for claiming depreciation deductions  Assets must be owned by the assessee  it must be used for the purpose of business or profession  It must be used during the previous year  Deprecation is available on Specified tangible as well as intangible assets  Tangible assets  Buildings – includes roads, bridges, wells and tubewells etc  Machinery – includes any mechanical appliances  Plant –includes ships, vehicles, books, scientific apparatus etc.,  furniture –includes articles of convenience or decorations used to furnish a place of business 

 Intangible assets:  Know-how –means industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well etc.,  Patents – means exclusive right granted by the government to the first inventor of a new product for making and selling such product  copyright – is the exclusive right given under law for a certain number of years to an author, composer, etc, to print, publish and sell copies of his original work 

 Intangible assets:  Trademark – is a mark, secured by legal registration, used by a businessman to distinguish his goods from the goods of other business concerns  License – a legal permission for any business operation eg., license for digging n oil well  Franchise – is a license from the owner of trade –mark permitting another to use that trade –mark for business

 Block of Assets  Means a group of assets in respect of which the same percentage of depreciation has been prescribed  Different rates of depreciation are prescribed for different items even falling within the same class. For eg., Building having 5% depreciation is one block and depreciation having 10% is another block, furniture having 10% depreciation is one block and furniture having 20 % depreciation is another group Computation of Depreciation

Computation of written down value  Opening WDVxxx  Add cost of Assets purchased form the same block during the previous year xxx  Less sale proceeds of assets sold from the Blockxxx Closing Written Down Valuexxx

 Cost of Asset includes expenses to acquire the asset(purchase price; interest on loan taken for purchase of assets)  Expenses to bring the asset to the site  Expenses to bring the asset to working condition  depreciation is charged at the prescribed rates on the written down value but if an asset is used for less than 180 days in the year of acquisition, the depreciation rate will be only 50% of the normal rate  this is applicable only for the year of acquisition

Question  Find out the depreciation for the following information for the assessment year After April 1,2012, the company purchases the following assets Block of Assets Rate of depreciation WDV on 1/4/2012 Plant A,B & C 15 10,40,000 Plant D and E402,60,000 Plant F5070,000 Building A, B, C, and D1010,90,000 Building E, F, and G57,10,200 Building H,I,J and K10016,90,000 Assets Date of purchase Rate of depreciation Cost of Purchase Plant G April, 6, Plant HMay 11, FurnitureJune 6, CarJuly 7, ,56,000 Building LSept 26,201257,28,700 ComputerSep 27, ,000 CopyrightSep 30, ,50,000

 The following assets are transferred AssetDate of SaleSale Consideration Plant BDec 20, ,10,900 Plant DJanuary 31,201312,000 Building LMarch 6, 20136,00,000

Answer  Block -1 plant & Machinery (dep 15%)  Opening wdv10,40,000  Add purchases(car + plant H) 2,74,000 13,14,000 LessSale proceeds (plant B)13,14,000 Nil Sale proceed of plant B is Rs. 25,10,900 that is more than Rs. 13,14000 therefore wdV is taken as Zero

Answer  Block -2 plant & Machinery (dep 40%)  Opening wdv2,60,000  Add purchasesNil 2,60,000  LessSale proceeds 12,000 2,48000

Answer  Block -3 plant & Machinery (dep 50%)  Opening wdv70,000  Add purchases Plant G) 6,000 76,000  LessSale proceeds NIL 76,000

Answer  Block -4 Building A,B,C (dep. 10%)  Opening wdv10,90,000  Add purchases NIL 10,90,000  LessSale proceeds NIL 10,90,000

Answer  Block -5 Building E,F,G(dep. 5%)  Opening wdv7,10,200  Add purchases Buil L7,28,700 14,38,900  LessSale proceeds Buil F 6,00,000  Closing WDV8,38,900

Answer  Block -6 Building H,I,J,K(dep. 100%)  Opening wdv16,90,000  Add purchases Nil 16,90,000  LessSale proceeds Nil  Closing WDV16,90,000

Answer  Block -7 Furniture (dep. 10%)  Opening wdvNil  Add purchases 56,000 56,000  LessSale proceeds Nil  Closing WDV56,000

Answer  Block -8 Computer (dep. 60%)  Opening wdvNil  Add purchases 90,000 90,000  LessSale proceeds Nil  Closing WDV90,000

Answer  Block -9 Pcopyright (dep. 25%)  Opening wdvNil  Add purchases 17,50,000 17,50,000  LessSale proceeds Nil  Closing WDV17,50,000

Weighted Deduction Weighted Deduction Any sum paid to an approved research association which undertake research for a university, college or other institution deductible amount is one and three-fourth of the amount paid Any sum paid to an approved research association which undertake research for a university, college or other institution deductible amount is one and three-fourth of the amount paid Sum paid to a company registered in India, or has the main object of the development of scientific research, or approved by the prescribed authority, or which fulfills such conditions prescribed Sum paid to a company registered in India, or has the main object of the development of scientific research, or approved by the prescribed authority, or which fulfills such conditions prescribed – one and one-fourth of the amount paid – one and one-fourth of the amount paid Sum paid to a research association for social science or statistical research Sum paid to a research association for social science or statistical research - one and one-fourth of the amount paid - one and one-fourth of the amount paid National Laboratory or a university or IIT or specific person National Laboratory or a university or IIT or specific person % of the amount so donated % of the amount so donated In-house research and development (other than land & Building In-house research and development (other than land & Building

Deductions allowable under section 35: Expenditure on Scientific research Expenditure on Scientific research Any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Deduction Deduction Any expenditure incurred on scientific research related to the assessee’s business-any salary, purchase on materials such scientific research during the period of three years immediately preceding the commencement of the business will be deemed to have pent in the year of commencement of the business Any expenditure incurred on scientific research related to the assessee’s business-any salary, purchase on materials such scientific research during the period of three years immediately preceding the commencement of the business will be deemed to have pent in the year of commencement of the business Any expenditure of capital nature except the purchase of Land Any expenditure of capital nature except the purchase of Land

Deductions allowable under section 35: Expenditure on Scientific research Expenditure on Scientific research Any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Deduction Deduction Any expenditure incurred on scientific research related to the assessee’s business-any salary, purchase on materials such scientific research during the period of three years immediately preceding the commencement of the business will be deemed to have spent in the year of commencement of the business Any expenditure incurred on scientific research related to the assessee’s business-any salary, purchase on materials such scientific research during the period of three years immediately preceding the commencement of the business will be deemed to have spent in the year of commencement of the business Any expenditure of capital nature except the purchase of Land Any expenditure of capital nature except the purchase of Land

Deductions allowable under section 35D: Amortisation of preliminary expenses Amortisation of preliminary expenses An Indian co or a resdent non-corporate assessee can claim deduction u/s 35 D in respect of preliminary exp such exp may be incurred before the commencement of the business or in connection with extension of an undertaking or connection with setting up of a new unit. An Indian co or a resdent non-corporate assessee can claim deduction u/s 35 D in respect of preliminary exp such exp may be incurred before the commencement of the business or in connection with extension of an undertaking or connection with setting up of a new unit. The aggregate expenditure cannot exceed the following The aggregate expenditure cannot exceed the following 5% of the cost of project or 5% of the cost of project or

Deductions allowable under section 35D: 2.5% of capital employed 2.5% of capital employed Deduction allowable is the actual expenses or restricted amount which ever is less Deduction allowable is the actual expenses or restricted amount which ever is less Deduction is allowed in 10 equal amount up tp and there after in 5 equal instalment from the year in which the business is commenced Deduction is allowed in 10 equal amount up tp and there after in 5 equal instalment from the year in which the business is commenced

Deductions allowable under section 35D:

Deductions allowable under section 36: Insurance expenses [section 36(1)(i) Insurance expenses [section 36(1)(i) Insurance premium on health of employees [section 36(1)(ib) Insurance premium on health of employees [section 36(1)(ib) Bonus or commission to employees [section 36(1)(ii) Bonus or commission to employees [section 36(1)(ii) Interest on borrowed capital [section 36(1)(iii) Interest on borrowed capital [section 36(1)(iii)

Deductions allowable under section 36: Contributions towards approved provident fund, superannuation fund and gratuity fund [section 36(1)(iv) and 36(1)(v) Contributions towards approved provident fund, superannuation fund and gratuity fund [section 36(1)(iv) and 36(1)(v) Bad debts in respect of income considered in previous years can be written off and allowable as deduction [section 36(1)(viii) Bad debts in respect of income considered in previous years can be written off and allowable as deduction [section 36(1)(viii) Banking cash transaction tax [section 36(1)(xiii) Banking cash transaction tax [section 36(1)(xiii)

Deductions allowable under section 36: Advertisement expenditure is fully allowed as deduction. However, expenditure incurred on advertisement in any souvenir, brochure, pamphlet etc. of a political party is not allowed as a deduction [section 37(2B) Advertisement expenditure is fully allowed as deduction. However, expenditure incurred on advertisement in any souvenir, brochure, pamphlet etc. of a political party is not allowed as a deduction [section 37(2B) Expenditure in maintenance of guest house is permissible as deduction [section 36(1)(i) Expenditure in maintenance of guest house is permissible as deduction [section 36(1)(i)

Deduction allowable under section 37: Any other expenditure which is not of capital nature or personal expenses of the assessee is allowed if it is expended wholly and exclusively for the purposes of business or profession. However, it should not have been for purpose which is an offence or is prohibited by any law Any other expenditure which is not of capital nature or personal expenses of the assessee is allowed if it is expended wholly and exclusively for the purposes of business or profession. However, it should not have been for purpose which is an offence or is prohibited by any law

Deduction allowable under section 37: Conditions to be satisfied: It should not be in the nature of capital expenditure It should not be in the nature of capital expenditure It should not be personal expenditure of the assessee It should not be personal expenditure of the assessee It should be expanded wholly and exclusively for the purposes of business or profession It should be expanded wholly and exclusively for the purposes of business or profession It should not have been incurred for any purpose, which is an offence or is prohibited by any law It should not have been incurred for any purpose, which is an offence or is prohibited by any law

Totally disallow Expenditure (s 40(a) Interest, royalty, fees for technical services payable to non-resident if TDS is deductible but has not been deducted or deducted but not properly deposited with the Government (S 40(b) Interest, royalty, fees for technical services payable to non-resident if TDS is deductible but has not been deducted or deducted but not properly deposited with the Government (S 40(b) In case of residents, any expenditure where: In case of residents, any expenditure where: Tax is deductible but has not been deducted Tax is deductible but has not been deducted Tax has been deducted but after deduction it has not been paid to the Government Tax has been deducted but after deduction it has not been paid to the Government

totally disallow Expenditure Securities Transaction Tax paid by the assessee Securities Transaction Tax paid by the assessee Fringe Benefit Tax paid by the assessee Fringe Benefit Tax paid by the assessee Any Income Tax paid by the assessee Any Income Tax paid by the assessee Wealth Tax paid by the assessee Wealth Tax paid by the assessee Salary payable outside India without deduction of TDS Salary payable outside India without deduction of TDS Provident Fund payment without tax deduction at source Provident Fund payment without tax deduction at source Tax on perquisites paid by the employer Tax on perquisites paid by the employer

totally disallow Expenditure Any amount paid to the relatives of the assessee to the extent such expenditure is considered to be excessive or unreasonable (S40A(3) Any amount paid to the relatives of the assessee to the extent such expenditure is considered to be excessive or unreasonable (S40A(3) Employer’s contribution to non-statutory fund (unrecognized provident fund etc.) (S 40A(9) Employer’s contribution to non-statutory fund (unrecognized provident fund etc.) (S 40A(9) Provision for Gratuity on retirement (S 40A(7) Provision for Gratuity on retirement (S 40A(7)

totally disallow Expenditure 100% of the amount of expenses exceeding Rs (S 40A(3)) if the following conditions are satisfied: 100% of the amount of expenses exceeding Rs (S 40A(3)) if the following conditions are satisfied: The amount of expenditure exceeds Rs The amount of expenditure exceeds Rs A payment in respect of the above expenditure (or part thereof) exceeds Rs A payment in respect of the above expenditure (or part thereof) exceeds Rs The payment mentioned above has been made otherwise than by a crossed bank cheque or bank draft. The payment mentioned above has been made otherwise than by a crossed bank cheque or bank draft.

totally disallow Expenditure Payment over Rs 20,000 should be made by cheque or demand draft. This restriction is not applicable in case of payments to RBI, other banks and financial institutions, LIC Government payments, payment by book adjustment, railway freight, Payment for agricultural produce, poultry, fish etc. to the cultivator, grower or producer (i.e. Payments to middlemen are not excluded from this provision) [rule 6DD Payment over Rs 20,000 should be made by cheque or demand draft. This restriction is not applicable in case of payments to RBI, other banks and financial institutions, LIC Government payments, payment by book adjustment, railway freight, Payment for agricultural produce, poultry, fish etc. to the cultivator, grower or producer (i.e. Payments to middlemen are not excluded from this provision) [rule 6DD

Computation of Profit/gain or Loss  Net Profitxxx  Add Disallowed expensesxxx  Add incomes taxable but not credited xxxxxx  Less expenses not debited in profit & loss a/c but are allowedxxx Incomes credited in Profit & Loss Incomes credited in Profit & Loss Account but not taxblexxx xxx Taxable Profit & gain XXX

Ded. Only on payment(s43B) The following expenses are allowed only if it is paid within the prescribed period, i.e., during the relevant previous year or on or before the due date for filing return of income under se 139(1) The following expenses are allowed only if it is paid within the prescribed period, i.e., during the relevant previous year or on or before the due date for filing return of income under se 139(1) Tax, duty, cess or fee under any law Tax, duty, cess or fee under any law bonus or commission paid to employees bonus or commission paid to employees Interest on loan to any public financial institution or a state financial corporation Interest on loan to any public financial institution or a state financial corporation Interest on any loan or advance from a schedule bank Interest on any loan or advance from a schedule bank sum due to employee in lieu of leave balance sum due to employee in lieu of leave balance contribution payable by an employer to a provident/superanuation contribution payable by an employer to a provident/superanuation