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Profits and Gains from Business or Profession - Section 28 to 44D


PROFITS AND GAINS FROM BUSINESS OR PROFESSION

Contents -
  1. Introduction and Meaning of Business and Profession.
  2. Income Charged to Income Tax : Section 28.
  3. Computation of Income Tax : Section 29.
  4. Example/Problem with Solution of Profit and Gains from Business or Profession.
Questions :
• Write short note on "Income Chargeable under the head Business".
• There are certain expenditures which are specially disallowed while computing business income.Discuss.
• What are those expenses which are expressly disallowed while computing business income ?


  • Introduction -
"Profits and Gains of Business or Profession" involves the study of numerous provisions 
The provision regarding the computation of income from the head Profits and Gains of Business or Profession are contained in Section 28 to 44D of The Income Tax Act, 1961.

  • Meaning of Business and Profession -
      Under Section 2(13) of the Income Tax Act, 1961 define Business include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
      To make the profit the person himself or through other person carried on by devoting time attention with motive to certain activities for production. Here, the product should have separate identity distinct from the raw material. In other words, it means an activity carried on continuously and systematically by the person by the application of his labour and skill with a view to earning income. There must be a course of dealing either actually continued with a profit motive and not for sport or pleasure.
A business with a person has learnt or carries on for procuring subsistence or profit, occupation or employment.
      Trade in its meaning is the exchanging of goods for money in its secondary meaning it is a repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile as distinguished from the liberal art or learned professions.

Example : A person purchased a land and constructed the building which sold after two years of purchase of land, it was held that the transaction was in the nature of trade and assemble as business income.

      Under Section 2(63) of the Income Tax Act, 1961 Profession means those activities for earning livelihood which require intellectual skill or manual skill. For example : work of lawyer, doctor auditor, engineer are in the nature of profession. Occupation is slightly different from profession as occupation is something which occupies one's time or attention for a limited time for example consultancy. Profession involves the idea of an occupation requiring either purely intellectual skill or if any manual skill as in painting or sculpture or surgery, skill controlled by the intellectual skills of the operator as distinguished from an occupation which is substantially the production or sale or agreement for the production or sale of commodities.
      It is of the essence of profession that the profit should be depended mainly and primarily upon the personal qualification of the person by whom it is carried on and in which the capital expenditure is required or if at all only capital expenditure of a comparatively small account. Vocation means activities which are performed in order to earn livelihood. Vocation refers to only a way of living and not necessarily a course of organised activity indulged in with a motive of earning one's livelihood or making any income. For example, brokerage, music, dancing, insurance agency etc.
      It is important to note that income from illegal business such as smuggling is also taxable under the Income Tax Act, 1961 i.e. taxability of income has no connection whether the income is legal or illegal.
  • Income Charged to Tax -
Under section 28 , the following incomes are chargeable under the Head "Profit and Gain from Business or Profession" :

1. Profit and gains of any business or profession.

2. The value of any benefit or perquisite, whether convertible in to money or not, arising from business or the exercise of a profession.

3. Income derived by a trade, professional or similar association from specific services performed for its members.

4. Any compensation or other payment due to or received by any managing agent or agents on termination or modification of the terms of managing agency or by any person on the vesting of the management or property in the Government or any corporation owned or controlled by the Government.

5. Income from speculative transaction constituting business.

6. Any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.

7. Any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy.

8. Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.

9. Profits on sale of license granted under the imports (control) order 1955, made under the Imports and Exports (control) Act, 1947.

10. Any interest, bonus, salary, commission or remuneration due to or received by a partner from firm.

  • Income from Profit and Gain of Business or Profession : Section 29 -
The income referred to in section 28 shall be computed in accordance with the provision contained in Section 30 to 43D, When the income under section 28 is determined then the following deduction as provided in the related sections are available :

Section Referred

Nature Of Expenses

Section 30

Expenses in respect building owned by the assessee (Rent, Taxes, Repairs and Insurance)

Section 31

Repairs and Insurance of machinery, plant and furniture etc. other than building

Section 32

Depreciation on the capital asset owned by the tax payers

Section 32A

Investment allowance

Section 32AB

Investment deposit account

Section 32AC

Investment allowance :

Deduction for Investment Allowance regarding Investment of New Plant and Machinery

1) Where an assessee being a company engaged in the business of manufacture or production of any article or things acquires and install new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual cost of such new asset exceeds 100 crore rupees then there shall be allowed a deduction,

a) for the assessment year commencing on 1st day of April, 2014 of a sum equal to 15% of the actual cost of new assets acquired and installed after 31st day of March, 2013 but before the 1st day of April, 2014 if the aggregate amount of actual cost of such new assets exceeds 100 crore rupees, and

b) for the assessment year commencing on the 1st day of April, 2015 of a sum equal to 15% of the actual cost of new asset acquired and installed after the 31st day of March, 2013 but before the 1st day of April, 2015 as reduced by the amount of deduction allowed, if any under clause (a).

Section 33AB

Tea development account, Coffee development account, and Rubber development account - Deduction at 40%

Section 33ABA

Deduction in respect of prospecting for, or extraction or production of Petroleum or Natural Gas both in India

Section 33AC

Reserves for shipping business

Section 33B

Rehabilitation allowance

Section 35

Expenditure on scientific research

Section 35A

Expenditure on acquisition of patent rights or copyrights

Section 35AB

Expenditure on know - how

Section 35ABB

Expenditure to obtain license to operate telecommunication services

Section 35AC

Expenses on eligible project or schemes

Section 35C

Agricultural Development allowance

Section 35CC

Rural development allowance

Section 35CCA

Expenditure by way of payment to rural development fund

Section 35CCB

Expenditure for conservation of natural resources

Section 35CCC

Expenditure on agricultural extension project

Section 35CCD

Expenditure on skill development project

Section 35D

Amortisation of certain preliminary expenses

Section 35DD

Expenditure for amalgamation or demerge of an undertakings

Section 35DDA

Expenditure on voluntary retirement

Section 35E

Expenditure on prospecting etc. for certain minerals

Section 36

Other expenditure as per Section 36(1)(i) to Section 36(1)(xiii)

Section 37

Residuary deductions


Section 35AD -
All Capital Expenditure incurred (except of land, goodwill and financial instruments) in specified business will be allowed as deduction in computing PGBP in the year of acquisition itself.

Category Of Business

Deduction For Capital Expenditure

Most vital business

100% : If business is started before 1st April, 2012

150% : If business is started on or after 1st April, 2012

Other important business

100%


Most Vital Business (Category A of Specified Business)

 1.

Setting up and Operating a Cold Chain Facility

 2.

Setting up and Operating a Warehousing Facility for storage of Agricultural produce

 3.

Building and operating anywhere in India, a hospital with at least 100 beds for patients

 4.

Developing and building a Housing Project under a scheme for affordable housing framed and notified by the Central Government or State Government

 5.

Production of fertilizers in India


Most Vital Business (category A of specified business)

1. Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution including storage facilities being an integral part of such network.

2. Building and operating anywhere in India, a hotel of 2 star or above category as classified by the central government.

3. Developing and building a housing project under a scheme for slum redevelopment for rehabilitation framed and notified by the central government or state government.

4. Setting of and operating an Inland container Depot or a container foreign station notified or approved under the Custom Act, 1962.

5. Bee-Keeping and production of honey and beeswax.

6. Setting up an Operating a warehousing facility for storage of sugar.

7. Laying and operating a slurry pipeline for transportation of iron ore.

8. Setting up and operating a semi-conductor wafer fabrication manufacturing unit, notified by the board in accordance with such guidelines as may be prescribed.

Problem : Income from Business or Profession
Following is the Profit and Loss Account of a Merchant

 Expenditure

 Amt.

 Income

 Amt.

 Rent

 6000

 Gross   profit

 52,300

 Rates

 600

 Interest   from   debtors

 2800

 Salary

 5400

 Rent from   property

 2400

 Diwali pooja

 200

 Sundry   income

 1600

 Interest on   loan

 12,500

 Commission

 3700

 Sundry   expenses

 5500

 

 

 Bad debts

 600

 

 

 Charity

 100

 

 

 R.D.D.

 200

 

 

 Entertainment

 850

 

 

 Loss by theft

 1400

 

 

 Net profit

 29,450

 

 

 

 62,800

 

 62,800


1. Sundry expenses include Rs.900/- for trip to Haridwar.
2. Loss by theft Rs.600/- has taken place in the shop whereas Rs.800/- were stolen from is home.
3. He earned Rs.4000/- in gold smuggling not shown in books.
4. Rates include Rs.400/- for the property given on rent.
5. Charity Rs.100/- is a donation to Prime Minister National Relief Fund.
Compute his taxable income for Assessment Year 2018-19

Solution :
Assessment Year 2018-19
Accounting Year 2017-18

 Calculation of Business   Income

 Rs.

 Rs.

Income under the business (Net Profit)

 

 29,450

Rent from property, considered u/s 22, separately

 2400

 

Add : commission i.e. business income

 

 2800

 

 

 32,250

Rent allowed u/s 30(b) Rs.6000/-

 

 

Rates Rs.600/- includes Rs.400/- related to property hence Rs.400/- to be included in total income

 400

 

Trip to Haridwar Rs.900/- not deductible

 900

 

Charity considered separately

 100

 

R.D.D. is not allowed u/s 37(1), it is only reserve

 200

 

Business loss Rs.800/- is admissible

 

 

Personal loss is not admissible hence to be added in total income

 800

 2400

 Total Business Income

 

 34,650


 

 

Calculation of Income from House Property


 

Rent received

 2400

 

Less : municipal taxes (under section 23(1))

 400

 

Adjusted annual value

 2000

 

Deduction at 30% on Rs.2000/-

 600


Total calculated income from house property

 1400

 1400

 

 

 

 Summary of Income

 

 

Income from business

 

 34,650

Income from house property

 

 1400

Income from other sources (Smuggled Gold to be shown as income)

 

 4000

 Total Income

 

 40,050


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