Income Tax II Income from Business & Profession Unit I Mohammed Umair, Department of Commerce, St. Joseph’s Evening College

Whether an activity is an adventure or concern in the nature of trade, commerce or manufacture is to be decided on the basis of cumulative effect of the facts and circumstances of each case. According to Section 2(13), ‘Business’ includes any – (a) trade, (b)commerce, (c)manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture. 1 1 Making of new and different article out of input material by physical or mechanical labour. Manufacture It means purchase and sale of goods carried on with profit motive Commerce It means trade carried on a large scale. trade Any adventure or concern in the nature of trade, commerce or manufacture 44 A single isolated transaction outside the assessee’s line of business may constitute adventure in nature of trade and commerce. 1 1 Regularity of transactions or continuity of activities Objective of earning profits 33 Application of labour and skill 2 Essential features of a business Income from Business & Profession Unit I

Profits and gains of any business or profession, on by assessee at any time during previous year. Any sum (including bonus) received under Keyman Insurance Policy Profit on sale of import entitlement licences, incentives by way of cash compensatory support and drawback of duty. Any interest, salary, bonus, commission, or remuneration received by a partner of a firm, from such a firm Income derived by trade, professional or other similar association from specific services rendered to its members. Value of any benefit or perquisite, whether convertible into money or not arising from exercise of business or profession. Any sum received or receivable, in cash or in kind, under an agreement, for Non- competition and Exclusivity. [Section 28] INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” Income from Business & Profession Unit I Income from Speculative Business- settled other than actual delivery 88

When there was a temporary suspension of business with the object of tiding over the crisis condition and during such period the machinery, there to used in the business, is leased out then the rental income there from is to be identified as ? Under section 28 Case Laws : BASIS OF CHARGE Answer: Business income'. CIT vs. Vikram Cotton Mills Ltd 169 ITR 597 (SC) and CEPT vs. Shri Lakshmi Silk Mills Ltd., 20 ITR 451 (SC). Lease of factory after assessee stopped business with no intention of reviving the business will amount to earning lease rental ? Answer: It is not in the nature of business income. In such a case the income is assessable head ' income from other sources ' Universal Plast Ltd. vs. CIT, 237 ITR 454 (SC). Income from Business & Profession Unit I

Case Laws : BASIS OF CHARGE Under section 28 I have purchased 500 shares of reliance on in the stock exchange and sold the same on Whether the transaction would come under speculative business? As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income there from would be either speculation gains or speculation losses. Income from Business & Profession Unit I

Case Laws : BASIS OF CHARGE Under section 28 An assessee purchases a plot of land and builds a complex on it and divides it into office spaces and sells each of these, thereby making a profit from the entire activity. Section 2(13), A single isolated transaction outside the assessee’s line of business may constitute adventure in nature of trade and commerce. Any adventure or concern in the nature of trade, commerce or manufacture. Income from Business & Profession Unit I

There are two main methods of accounting METHOD OF ACCOUNTING Accrual or Mercantile Basis Accounting Under accrual or mercantile basis accounting, revenues are recognized and earned when they are realized or realizable irrespective of when the cash is received. Accrual or Mercantile Basis Accounting Under cash basis accounting revenues are recognized and earned only when cash is received irrespective of when and how the services were performed or goods delivered. Cash Basis Accounting Is it compulsory to maintain books of accounts? 1.If the income of the person from the business is more than 1.20 lacs or his total sales receipts are more than 10 lacs. in any of the last three years. 2.In case of newly started business if the expected income or receipts are expected to exceed the above limits. 3.Information Technology i.e. people carrying on the business of software and hardware service. Income from Business & Profession Unit I

The Act does not prescribe any specific books of account for business. However you are expected to maintain your accounts in such a fashion that the net profit of the business can reasonably and easily be arrived at by the department. What books of account have been prescribed to be maintained by a person carrying on business under the Income tax Act? Is it compulsory to get the books audited? Do a small time trader need to maintain any accounts? Any business or profession that has an annual turnover/gross receipts exceeding rupees 10 lakh and net profit of rupees one lakh twenty thousand, must maintain such books of account and documents from which its income can be reasonably ascertained by the department. (i) Every person carrying on business shall get his accounts audited if the total sales, turnover or gross receipts in business exceed Rs 60 lakhs in the previous year. (Now Rs. 1 Crore) (ii) Every person carrying on profession shall get his accounts audited if his gross receipts exceed Rs 15 lakhs in the previous year. (Now Rs. 15 Lakhs) Income from Business & Profession Unit I

ParticularsAmtParticularsAmt To Salaries By bad debts recovered Advertising By dividend Carriage outwards By commission Rent By rent from house property Depreciation By commission Taxes paid By export incentives Interest on capital By share of income from HUF Auditing fee By bad debts recovered Loss on sale of assets Reserve for doubtful debts Commission outstanding Provision for staff bonus Renovation of building Donation Drawings To Net profit Profit and Loss account

ParticularsAmtParticularsAmt To Opening stock By sales To Purchases Return Inwards To Return outwards Closing Stock To Carriage inwards TO Direct expenses By Gross Profit Trading account 1.Over Valuation of opening Stock 2.Under valuation of closing Stock 1.Under Valuation of opening Stock 2.Over valuation of closing Stock Increases Gross profit Decreases Gross profit Valuation of Stock: Cost or market price, whichever is less

Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. SCHEME OF BUSINESS DEDUCTIONS 1.Provision and Reserves (Provision can be claimed to the extent used) 2. Direct taxes (Income tax, wealth tax, gift tax etc.) 3. Rent, Salary paid to self and other personal drawings 4.Interest on proprietor's capital and interest paid on loan borrowed from family members 5.All capital expenditure (e.g. Purchase and renovation of assets) 6.Loss on sale of assets 7.Fine and penalty paid 8.Personal insurance premiums 9.Contribution in NSS, NSC, PPF, URPF, unapproved gratuity and Staff welfare fund 10.Rent paid of residence 11.Loss by theft at home 12.Expenses on illegal business 13.Difference in trail balance 14.Legal expenses incurred of personal cases 15.Preliminary expenses 16.Expenses incurred in acquisition of assets Inadmissible Expenses: Not allowed but debited to Profit and Loss account 1 1 Income from Business & Profession Unit I

Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. SCHEME OF BUSINESS DEDUCTIONS 17.Excess depreciation 18.Payments made by way of cash (Exceeding Rs. 20,000) 19.Any amount not paid with in stipulated date 20.Outstanding expenses 21.Expenses prior to incorporation 22.Municipal tax, Revenue and other local taxes 23.Ads given in political souvenirs 24.Overvaluation of Opening stock 25.Under valuation of closing Stock Inadmissible Expenses: Not allowed but debited to Profit and Loss account 1 1 Income from Business & Profession Unit I Contd….

Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. SCHEME OF BUSINESS DEDUCTIONS 1.Part time salary 2.Bank interest 3.Interest from various investments (e.g. securities, saving schemes and deposits) 4.Dividend on shares 5.Sale of assets and profit on sale of assets 6.Income from house property 7.Bad debts recovered (Disallowed earlier) 8.Winning from lottery, horse race, gambling and betting 9.Under valuation of opening stock 10.Over valuation of closing stock. Inadmissible Incomes: Not allowed but credited to Profit and Loss account 2 2 Income from Business & Profession Unit I

22 To charged in 5 equal annual installment. (i.e. one fifth of preliminary expense is allowed as deduction). Example of preliminary expenses are market survey, Expenses for raising initial share capital etc. Preliminary expenses Any expenditure incurred on scientific research or any contribution made to approved scientific research is admissible to the extent of 150% of contribution made. In house research (200%) Expenditure on scientific research 1 44 Diwali pooja and lakshmi pooja and muhurat expenses are allowed Pooja expenses Depreciation should charged as per the rates prescribed by income tax act on the basis of WDV method. If an asset has been purchased during the previous year and put to use for less than 180days the only half amount should be charged. Depreciation 3 Important provision related to business and professional income 55 Expense on income tax appeal is allowed 66 Payment made to relatives is admissible provided it should not be in excess of market rates. Preliminary expenses

1.Asset should be wholly or partly owned by assesse 2.Used for the purpose of business or profession 3.Block of assets: Means a group of assets falling in same class Depreciation U/S 32 Furniture and Fittings Building Machinery & PlantIntangible assets Motar car 15% Furniture and fittings 10% Building 10% Palnt & Machinery 15% Books and publications 100% Computer & Software 60% Intangible assets 25%

Computation of Income from Business ParticularsAmt Net profit as per P&L accountXXX ADD: 1. Inadmissible Expenses: (Not allowed but Debited to Profit and Loss account) 2. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 4. Over Valuation of opening Stock 5. Under valuation of closing Stock Total LESS: 1. Admissible Expenses: (Allowed but not Debited to Profit and Loss account) 2. Inadmissible Incomes: (Not allowed but Credited to Profit and Loss account) 3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 4. Under Valuation of opening Stock 5. Over valuation of closing Stock Total Income from BusinessXXX

Expenditure should have been incurred in connection with assessee’s own Business. BASIC PRINCIPLES GOVERNING ALLOWANCE OF DEDUCTION UNDER SECTIONS 30 TO 44DA: Expenditure should relate to the previous year in which business has been carried on. Onus to prove the admissibility of expenditure lies on the assessee. No allowance in respect of expenditure incurred before date of setting-up of business: