UNIT - 1 )

Profits & Gains from

Business or Profession
(Sec.28 to 44)
Introduction
The profit/gains from business or profession carried on by the assessee at any time during the P.Y.
are assessed to tàx under the head income from business or profession. Further, the profits or gains
shall be computed according to the methodof accounting regularly employed by the assessee. Further,
if the Profit &loss acCOunt prepared by the assessee is not computed as per IT law, such account has to
he adjusted from income tax point of view,in orderto ascertainthecorrect taxable profits or gains from
business or profession.
Before knowing the tax provisions of Sections 28 to 44, it is important to understand the meaning
of the terms BusinesS, Profession, Vocation and format for computing taxable income from business or
profession.
Business (Section 2(13)]
According to Section 2(13) of the Income Tax Act, the term Business means any trade, commerce
or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
Profession (Section 2(36)]
According to Section 2(36) Profession refers to an occupation, where intellectual skill and
technical expertise in a specified field is acquired for earning a livelihood. Lawyer, Doctor, Auditor are
the some of theexamples of Profession.Further, Profession includes Vocation.
Vocation means an activity upon which a person spends the major portion of his time and out of
which he makes his living. Music, Dancing, Writing books and contribution of articles to Journals
constitute the vocation of an assessee.
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Tax Treatment

Inadmissible Expenses
ssDie expenses are those expenses, which are not
brt9tof goib Act. If suchexpenses
allowed under the
edebited to Profit & Loss account by the assessee, thev should be added back to the net profit.
Following are some of the examples of inadmissible expenses:
1.
2. amiy planning expenses.aiht bots wiolseto anoielverq x6i srttg o o
Fines and penalties
3. Fringe benefit taxX.
4 Interest on capital.
5
Illegal expenses.
6. Legal expenses to acquire a title or to cure a defect in the assessee's title of assets.
Loss from discontinued business. to audsr stirhiaao69iutnsvbEns104ufosnsn
8. Gifts andpresents (non publicity).
9. GST, cUstom duty, localtaxes of the premises used for business not paidon or before the due date.
10. Any business expense paid in cash exceeding 10,000, 100%o of such payment shall be
disallowed. (The monetary limit of 10,000 has been rasied to 35,000 in the case of payment
made for plying, hiring or leasing goods carriages.)tu
11. Salary or interest on loan payable outside India without TDS.GU tlvo ns eisamnotso
12. Speculation losses.
13. Bad debts still recoverable. s22522Gnstoneio0etuno
Betterment charges paid to corporation under Town Planning Act.
15. Employer's contribution to the provident fund not paid on or before the due date of filing returns.
16. Expenses relating to other heads of income like municipal taxes of house property let out.
17. Excess depreciation.
18. Expenses incurred to earn tax-free incomes like cultivation expenses.
19. Excessive and unreasonable payments made to the relatives.
20. Direct taxes like income tax, advance income tax, wealth tax, interest on loan taken for the
payment of income tax etc.
21. Difference in trial balance. 3VAJ807boirba10onsnolesnia8S
22. Capital losses like losson sale machinery, loss on sale of car etc. unicagatonioitsuly.e
23. Charities and donations.
24. fixed
Capitalonexpenses like purchase of machinery, extension of bulding, Cost of permanent sign board
office premises.
25. Contribution to staff welfarefund.
26. Unapproved or unrecognized fund contribution.o1 bfidsbjenansqxeiiatabAts
27. Patents/ copy rights/Technical know-how purchased:ofbotibar 2mosni-st
Assessee can claim depreciation U/S 32 @ 25% for Patents / copy rights/Technical know-how
purchased during the previous year.
Profits and Gains from Business or Profession
28. Personal expenses or losses ike Life / medical insurance premium paid on own life or any
member of assessee's family, Amount invested in NSS, NSC, PPF, Proprietor'ssalary, Proprietor
bonus, Drawings, theft from residence, rent paid for self, casual help, house hold expenses,
expenses for arrangìng personal party etc.
29. Preliminary expenses:
Preliminary expenses (1.e., expenses relating to the preparation of feasibility report, project
report, conducting market survey or any other survey relating to assessee's
cost of the project, which ever less, is deductible in equal installments over the business) or 5% of
commencing from the previous year in which such expenses were incurred. period of five years
30. Provisions and reserves like Reserve for future losses, Provision for bad and
doubtfuldebts etc.
Business Incomes
IfBusiness incomes are not credited to P/Laccount, such
get income taxable under the head income from
incomes should be added to net profit, to
business. Following are some of the examples of
business incomes:
1. Rent received from employees.
2. Interest from debtors for delayed payments.
3. Profit on sale of import license.
4. Sales/ Commission/sundry receipts/ Discount received,aoitsf
5 Speculation incomes.
6 Cash assistance received by the assessee against exports
Government of India or export incentives. under any scheme of
7 Custom/excise duties recovered but earlier allowed as deduction.
Amountof liability foregone by the creditor.
9 Bad debts recovered but allowed earlier.

Admissible Expenses
Admissible expenses are those expenses, which are allowed under the Act. If such
they should be deducted from the net profit. expenses
not debited to P/L account by the assessee, are
Some of theexamples of admissible expenses: Following are
1.
Advertisements expenses. (Advertisement given in magazines or souvenir of a political
party is inadmissible).
2. Audit fees.
3. Bank commission.6 0,bsb 6(Xs noT s7gn9x9 s16 eotE
4. Bad debts.
5 Bank cash transaction tax.
6. Contribution towards rural development program and
7. Cost of khacha well, bore well (but Cost of pucca well is conservation of natural resources.
8. Commodity transaction tax. inadmissible).
9. Demurrage paid to railways.
10 Discount and allowances as per IT Act.
11. Depreciation allowable.
9olwaibe
12. Establishment expenses.
13. Expenditure on guest house or holiday home facility, 0126330 noc
14. Electricity bill/land
used for business. revenue/repairs/Fire insurance premium/rent of the premises, which is
15. Entertainment expenses.
16. Expenditure on campaign against
17. Expenditure on scientific nationalization.
research.
() Revenue expenditure on research
carried on by
research relates to the assessee's business. the assessee is fully deductible, if such
() Capital expenditure on research
carried on by the assessee isfully deductible, if such
research relates to the assessee's business. Deduction is available even if the asset is
not put into use for research by the
assessee during the previous year.
10
Tncome 'Tax
(iii) Contribution to an approved university, college or other institutions for the purpOse o
research in social science or statistical research is deductible at the rate of
actual contribution.
(M) Contr1bution to natlonal labratory is deductible at the rate of 150% of actual contribution.
100% o
(v) Contributlon to approved research association, approved university/college/othe.
Institutions is deductible at the 150 per cent of actualcontribution.
(v) Expenditure on approved in-house research and development facilities of a compan,
is qualified for deduction at the rate of 150per cent of theexpenditure.
18. Festival expenses.
19, General expenses.
20. Gifts and presents not made in personal capacity.
21. Income tax expenses.(IT proceeding expenses,expenses on fling IT returns)
22. Loss of stock due to theft by an employee.
23. Legal exper ses for filing income tax appeal.
24. Legal expenses to defend an existing title to a capital assets.
25. Municipal taxes of quarters let out to employees and other expenses incurred according to
the provisions of law.
26. Postage and telegrams.
27. Printing and stationary. etolaslae
28. Professional tax paid.
29. Railway freight and octroi expenses.
30. Services charges.
31. Subscription toatrade or professionalassociation. ioteu
32. Salaries/wages/perquisites/allowances to employees.990 vlidsil 0tuomA
33. Staff welfare expenses.
34. Security transaction tax.
35. Tournament expenses.
36. Telephone installation charges under OYT scheme.
37. Travelingexpenses related to business.
38. Training expenses.
39. Welfare expenses.

Tax Free Incomes (sldieeibsa.yed

If incomes, which are exempted from tax, are credited to P/L account, such incomes should be
deducted from net profit, to get income taxable under the head income from business. Followingare
Some of the examples of tax free incomes:
1. Dividend from an Indian company/UTI.
2. Dharmada, mandir and gaushala receipts (CIT Vs. Channoo Lal Das, (1978), 113 ITR 579
(Allahabad).
3 Refund from LIC.
Withdrawlfrom PPF.
Interest from POsavings bankaccount.
Income tax refund. sldswoli6notsosgsQ
7. Giftfrom father/on occasion of
8. grihapravesam/relatives.ruo
Custom duty/excise duty recovered noguabesx
but disallowed earlier.brselhlid vdootoet
9. Agricultural Income.
10. Bad debts recovered but disallowed earlier.
Business income not taxable under the head Profits and Gains of business or profession:
1. Rental income in the case of dealer in property.
2. Dividend on shares in the case of a dealer in shares.
3. Winings from lotteries etc.
4. Interest received on compensation or enhanced compensation.
Speculative Transaction [Section 34 (5)]
Speculative transaction is one where profit is earned by fluctuations in prices of securities or
Commodities.