Profit and gains of business and profession

Profit + Inadmissible expenses – admissible expenses + admissible Income – Inadmissible Incomes.

How to calculate Taxable income

 

Particular amount
Net profit as per P&L account 0000
(-) Inadmissible incomes (credited but not taxable business incomes) 0000
(+) Inadmissible expense (debited but not deductive) 0000
(-) Admissible expense (deductive but not debited) 0000
(+) Admissible incomes (Taxable but not credited) 0000
= Taxable business income 0000

Expenses deductible while calculating taxable business or profession income (sec 30 to 37)

Section 30

Rent, repairs, taxes and insurance premium paid for the building used for the purpose of business or profession.

 

Section 31

Rent, repairs, taxes and insurance premium paid for the plant and machinery or furniture used for the purpose of profession or business.

 

Section 32 – Depreciation of assets used for the purpose of business or profession.

As per income tax act, depreciation is available for block of assets. Block of assets means a group of assets falling within the same class, for which some rate of depreciation is prescribed.

 

Calculation of WDV of block of assets on 31st March 2017.

Particular Amount
WDV of block of assets on 1st April 2016 0000
 (+) Cost of acquisition of asset, falling within the same block purchase during the year. 0000
 (-) Sale consideration on sale of asset falling in the same block 0000
 (=) WDV of block of asset on 31st March 2017 0000

 

Amount of depreciation = (WDV of block of assets on 31st March 2017) X (Rate of depreciation)

Note: If the year in which asset is acquired in that year, if it is put to use for less than 180 days,  then half of the normal depreciation is available. In subsequent years always full depreciation is available even if asset is used only for a few days.

 

Rate of Depreciation on various assets as per income tax act

Office building, factory building and godown building 10%
Furniture and electrical fittings 10%
Plant and machinery and motor car (in general) 15%
Computer 60%
Intangible assets like goodwill, patent, trademarks, etc. 25%

Section 36

  1. Insurance premium paid for stock or stores
  2. Health insurance premium of employee paid by mode other than cash
  3. Bonus or commission to employee
  4. Interest on borrowed capital.
  5. Employee’s contribution to Pf and superannuation fund.
  6. Discount on O coupon bonds
  7. Employer’s contribution to approved gratuity funds
  8. Employer’s contribution to notified pension scheme (subject to limit prescribed for contribution)
  9. Bad debts – Debt must have been written from books of accounts – Debt must have been considered in accessible business income.
  10. Advertisement expense for business or profession is deductive. However, if expense is incurred for giving advertisement in pamphlet or brochure of political party then it is not deductible.

Conditions:

  • Capital must have been borrowed by assessee
  • Borrowed capital must have been utilized for business or profession
  • Interest must have been paid or payable on such borrowings.

Section 37:

If any other revenue nature expense incurred by assessee wholly for purpose of business or profession during previous year, it is called as deductions as per section 37. Provided it should not be illegal expense or expense prohibited under law or the one which is not deductible as per other sections of IT act.

Ad-hoc (fixed) deduction for expenses available to LIC, UTI agents of post office and government securities and mutual fund agents.

If total commission earned by these agents during the year does not exceed RS.60, 000 then they may not maintain detailed books of account for expense and they are eligible to claim ad-hoc deduction at prescribed rates.

Particular Rate of Ad-hoc deduction
  • LIC agents (total Ad-hoc deducted from a LIC agent must not exceed RS.20, 000.
F.Y commission 50%
Renewal commission 15%
F.Y and renewal (if separate figures aren’t available) 33.33%
Bonus commission nil
  • UTI / Post Office /Mutual Fund agents
50% (always)

If total commission earned by agent exceeds RS. 60,000 per annum, he has to maintain detailed books of accounts of expense incurred for earning commission income and he has to evaluate his taxable business income by following all provisions of IT act, just like other normal business.

Expenses not deductible [sec 40 – A (3)]

Amount not deductible in case of TDS default [40(A)]

  1. In case interest, royalty, fees for technical services or any other sum of money is payable to out stationed Indian or to NRI, then assessee is liable to deduct TDS and deposit it with government if: (a) Tax hasn’t been deducted during the previous year or (b) After deducting tax it hasn’t been deposited with government on or before due date of filing of IT return. Then, 100% of such expense will is not being deductible, while calculating taxable income of previous year.
  2. In case salary, interest, commission, rent, royalty, fees paid for technical services, etc. paid to RI then, assessee is liable to deduct TDS and to deposit it with government. If (a) tax hasn’t been deducted during previous year or (b) After deducting tax it hasn’t been deposited with government or before due date of filing. If return…. Then, 30% of such expense will not be deducted while calculating income of previous year. However in both cases, if …. Then is deducted in subsequent year and is deposited with government. Then, the amount which was not deductible earlier will be deductible in year in which tax is paid to government.

Amount not deductible in case of excess or unreasonable payments to relatives [sec 40 A (2)]

  • If assessee incurs any expense for which payment is made to relatives or to person in whose business he is having substantial interest then to the extent payment is excess or reasonable, having regard to fair market value of goods, services or facilities, received; that amount will be deductible.
  • Amount not deductible if payment, exceeding RS. 20,000 is made by mode other than A/C payee cheque or A/C payee demand draft [sec 40 A(3)]
  • If aggregate payment made to a single person in a day for any expense exceeds RS.20,000 which is paid by mode other than A/C payee cheque or A/C payee demand draft then 100% of such payment (expense) won’t be deductible.

Exceptions to this rule

In following exceptional cases, above provisions won’t be applicable. Payment of any amount can be made by and mode and will be deductible

  1. Payment made to government
  2. Payment made to bank
  3. Payment made through banking system (by debit or credit card) online transfer, etc.
  4. Payment made by book adjustment
  5. Payment made for purchase of agricultural or forest products, products of animal husbandry, fish and fish products, etc. to a cultivator/producer of such products.
  6. Payment made for terminal benefits, gratuity, retrenchment compensation, not exceeding RS.50, 000.
  7. Payment made to a person who lives and carries on business in a village not served by any bank branch.
  8. Payment required to be made on a day which is bank holiday or banks are on strike.
  9. Payment made by money changer or authorized dealer of foreign exchange for converting foreign currency in his normal course of business.

Note: Any kind of provision or transfer to N&S is not deductible except contribution or provision for approval gratuity fund.

Section 43 B

Amount not deductible in case of certain unpaid liability.

This section is applicable only if assessee follows mercantile system of accounting. Following expenses are deductible on payment basis, even if assessee follows mercantile system of accounting.

Any

  • Tax, duty or cess.
  • Employer’s contribution to PF, superannuation fund or any other fund for welfare of employees.
  • Bonus or commission to employees.
  • Interest on capital borrowed from any bank or Financial institution
  • Leave salary.

Above expenses are deductible in the year in which payment is made on payment basis.

Amount paid before due date of filling IT return will be deductible.

Exceptions

When deductible on accrued basis?

  • If above expenses are not paid during previous year but at least if they are paid on or before due date of filing IT return, then it is deductible on accrued basis in previous year to which it relates.
  • If above expenses are not paid till due date of filing IT return, then it will be deductible in year, in which it is actually paid on payment basis.
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