Income from Profits and Gains of Business or Profession means any income which is shown in profit & loss account after considering all allowed expenditures. ‘Profits & Gains of Business or Profession’ are also subjected to taxation under Income Tax Act. Business includes any trade, commerce or manufacturing or concern in the nature of trade, commerce or manufacture. Simply, Business means any activity that is carried on with the intention to earn profits. Profession includes services provided by the technically qualified or professionally qualified person according to their qualification. Simply, Profession includes self-employment.
Income from Profits and Gains of Business or Profession
Under the head ‘Income from Profits and Gains of Business or Profession’, the following incomes are chargeable to tax,
- Any profits and gains of business or profession carried on by the taxpayer at any time during the previous year.
- Income derived by a profession or similar association from specific services performed for its members.
- Any other payment or compensation due to or received by:
- any person for termination or modification of terms of agency.
- any person on takeover of assets of the business by the Govt.
- Cash assistance received by any person against exports under Government scheme.
- Value of any benefits arising from a business.
- Profits on sale of import licenses.
- Any sum received under Keyman insurance Policy.
- Salary, interest, bonus, remuneration or commission due to / received by a partner of a firm from such firm, etc.
Expenses allowed as Deductions:
- Rent, rates, taxes, repairs and insurance for a building.
- Repairs and insurance of machinery, plant & furniture.
Depreciation is an allowable deduction from Business/Profession Income as per Income Tax law.
Conditions: Conditions for claiming depreciation are as follows.
- Eligible assets
- Tangible Assets: Building, Plant, Machinery, Furniture.
- Intangible Assets: Know-how, copyrights, patents, franchisee, trademarks, licences.
- The actual user of the asset should also be the owner of that asset.
- Asset should be used for the purpose of business/profession during previous year.
- If any asset acquired by assessee during previous year and put to use for the purpose of business/profession for a period less than 180 days in the previous year, the deduction in respect of such asset will be restricted to 50% of amount calculated.
- Unabsorbed Depreciation:
- Depreciation of previous year is 1st deductible from income of “Profits & Gains of Business or Profession”.
- If depreciation is not fully deductible because of absence of profit or inadequacy of profits, is decuctable from income under other heads of income for the same assessment year (other than income under head salary).
- If depreciation is still unabsorbed, it may be carried forward to subsequent assessment years.
Section 32 AC:
Investment allowance for investment in new plant & machinery.
- Assessee (taxpayer) is a company.
- It is engaged in business of manufacture or production of article or thing.
- It has acquired & installed a new asset (plant & machinery).
- Amount of investment allowance: If the aggregate amount of actual cost of new asset exceeds 100 crores, the amount of allowance is 15% of actual cost of new asset.
- Withdrawal of Investment allowance: The new asset is sold or transferred within 5 years from the date of installation, the amount of investment allowance allowed to assessee shall be deemed to be the income of the assessee of previous year in which such asset is transfered or sold.
Section 33 AB: (Tea or Coffee or Rubber development account)
An assessee can claim deduction under Section 33 AB if the following conditions are satisfied
- Must be engaged in business of growing & manufacturing tea in India (Coffee/Rubber).
- Must make the following deposit
- Deposit with national bank for agriculture & rural development (NABARD).
- Deposit any amount in deposit account as specified by tea board / coffee / rubber board with previous approval of CG.
- The amount of deposit shall be deposited within 6 months from the end of previous year or before the due date of furnishing return of Income, which ever is earlier.
Amount of deduction: Amount of deposit or 40% of profit of such business before making any deduction under section 32 AB, whichever is less.
Section 36: Other Dedcutions
- Insurance Premium [Section 36(1) (i)]: Amount of any premium paid in respect of insurance against risk of damage or destruction of stock, used for the purpose of the business is allowed as deduction.
- Insurance premium on health of employee [Section 36 (1) (ib)]: Under Section 36(1) (ib) deduction can be claimed by a tax payer if the following conditions are satisfied.
- He pays premium for insurance on health of employees.
- Premium paid by check.
- Bonus or commission to employees [Section 36 (1) (ii)]: Bonus or commission to an employee is allowed as dedcution.
- Interest on borrowed capital [Section 36 (1) (iii)]: Interest paid on borrowed capital for the purpose of business is allowed as deduction.
- Employer contribution to recognized provident fund [Section 36 (1) (iv)]: Employer contribution towards recognized PF is allowed as deduction.
- Bad debts [Section 36 (1) (vii)]: Amount of any debt or part thereof is allowed as deduction provided the following conditions are satisfied.
- Debt has been taken into account in calculating income of assessee of that previous year.
- It has been written off as irrecoverable in the accounts of assessee for the previous year.
- Family planning expenditure [Section 36 (1) (ix)]: Any bonafied expenditure incurred for the purpose of promoting family planning by company among its employees is allowed as deduction.
Section 37: General Deductions
Any expenditure not specifically covered by section 30 – 36 is deductible under this section 37 provided the following conditions are satisfied.
- It should be in respect of business carried on by assessee.
- It should have been expended wholly & exclusively for the purpose of business.
- It must have been incurred during previous year.
- It should not be in nature of capital expenditure or personal expenditure of assessee.
- The expenditure should not have been incurred for any purpose which is an offense or prohibited by law.
Section 37 (2B): Advertisement expenditure
No allowance is available in respect of expenditure incurred by assessee on advertisement relating to political part. Other remaining expenses on advertisement are deductible.
Section 40: Amount not Deductible
- Interest/Royalty/Fees For Technical Services Paid Outside India.
- Income Tax.
- Wealth Tax.
- Salaries Paid.
- R.P.F. Contribution.
- Payment To Residents Without TDS.
Expenditure or Payments not deductible in certain circumstances: Section 40 A
Section A(2): Amounts not deductible inrespect of payment to relatives
Any expenditure sustained by assesse inrespect of which payment has been made to persons covered by Section 40 A(2) is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable.
Section 40 A(3): Amounts not deductible inrespect of expenditure more than 20,000/-.
If a taxpayer incurs any expenditure in respect of which payment more than 20,000/- is made otherwise than by an account payee check or not account payee bank draft, such expenditure will not be allowed as tax.
Rule 6DD: It prescribes following circumstances which no disallowance will be made of expenditure even if payment exceeding 20,000/- is made otherwise than by a/c payee check or a/c payee bank draft.
- Payment made to banking & other credit institution.
- Payment made to Government.
- Payment through banking system.
- Payment made by book adjustment by an assessee for any goods supply or services rendered by him to payee.
- Payment to cultivator, grower or producer in respect of purchase of agriculture produce or product of animal husbandary.