INTRODUCTION

“Profit and gains of business or profession” is one of the heads of income under Income Tax.
While filing income tax return, the taxpayer must declare the amount of profits and gains of
business or profession. To file the income tax return for a company or partnership firm or
LLP or proprietorship firm, profits and gains from business and profession must be calculated
and reported as a major head. Under this head of income, the profit and gains from any
business or profession carried on by the assessee at any time during the previous year is
reported.

MEANING OF “BUSINESS” & “PROFESSION”

Business :

“Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has
defined the term as “any trade, commerce, manufacturing activity or any adventure or
concern in the nature of trade, commerce and manufacture”. In this connection it is not
necessary that there should be a series of transactions in a business and also it should be
carried on permanently. Neither repetition nor continuity of similar transactions is necessary.

Profession :

“Profession” may be defined as a vacation, or a job requiring some thought, skill and special
knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to
those activities where the livelihood is earned by the persons through their intellectual or
manual skill.

INCOMES CHARGEABLE TO PROFITS AND GAINS OF BUSINESS

OR PROFESSION [SECTION 28]

The following incomes will be chargeable to income tax under the head “Profits and gains of
business or profession”:

1. Profits and gains of any business which was carried on by the assessee at any time
during the previous year/
2. Any compensation or other payment due to or received by:
 Any person in connection with termination/modification of his/her agreement for
managing the whole or substantially the whole of affairs of an Indian company or any
other company.

Any person holding an agency in India for any part of the activities relating to the
business of any other person at or in connection with the termination or modification
of the terms of the agency.

Any person for or in connection with the vesting in the Government, or in any
corporation owned by or controlled by the Government, under any law for the time
being imposed, of the management of any property or business.

3. Income derived by trade, professional or similar association from specific services

performed for its members. This is an exception to the general principle that a surplus
arising to mutual association cannot be regarded as income chargeable to tax.
4. Export incentives which include:

Profits on sales of import licenses granted under Imports (Control) Order on account
of exports.

Cash assistance, by whatever name called, received or receivable against export.

Duty drawbacks of Customs and Central Excise duties.

Any profit on the transfer of the Duty Entitlement Pass Book Scheme.

Any profit on the transfer of the Duty Free Replenishment Certificate.

5. Value of any benefit or perquisite, whether convertible into money or not, arising
during the course of the carrying on of any business/profession.
6. Any interest, salary, bonus, commission or remuneration due to or received by a
Partner of a Firm from the firm in which he is a partner.
7. Any sum received or receivable in cash or in kind under an agreement for:

Not carrying out activity in relation to any business or profession.

Not sharing any know-how, patent, copyright, trademark, license, franchise or any
other business or commercial right of similar nature or information or technique likely
to assist in the manufacture or processing of goods or services.
 8. Any sum received under a Keyman Insurance Policy including the sum allocated by
way of bonus on such policy.
9. Any sum whether received or receivable, in cash or kind, on account of any capital
asset being demolished, destroyed, discarded or transferred, if the whole of the
expenditure on such capital asset has been allowed as a deduction under Section
35AD

COMPUTATION OF INCOME FROM PROFITS AND GAIN OF

BUSINESS OR PROFESSION [SECTION 29]

The income referred to in section 28 shall be computed in accordance with the provisions
contained in sections 30 to 43D.

It must however be noted that the allowances and deduction are not exhaustively listed.
admissibility of deduction will depend upon the method of accounting followed by assessee,
subject to deeming provision of the act.

SPECIFIC DEDUCTIONS [SECTION 30 TO 37]

1. Rent, rates, taxes, repairs and insurance for buildings. [section 30]

2. Repairs and insurance of machinery, plant and furniture.31

3. Depreciation.32.

4. Investment allowance.32A.

5. Investment deposit account.32AB.

6. Investment in new plant or machinery. 32AC.

7. Investment in new plant or machinery in notified backward areas in certain

States.32AD.

8. Development rebate.33
9. Development allowance.33A.
10. Tea development account, coffee development account and rubber development
account.33AB.
11. Site Restoration Fund.33ABA.

12. Reserves for shipping business.33AC.

13. Rehabilitation allowance.33B.

 14. Conditions for depreciation allowance and development rebate. 34.

15. Restriction on unabsorbed depreciation and unabsorbed investment allowance for

limited period in case of certain domestic companies.34A.

16. Expenditure on scientific research.35.

17. Expenditure on acquisition of patent rights or copyrights. 35A.

18. Expenditure on know-how.35AB.

19. Expenditure for obtaining right to use spectrum for telecommunication services.
35ABA.

20. Expenditure for obtaining licence to operate telecommunication services. 35ABB.

21. Expenditure on eligible projects or schemes 35AC

22. Deduction in respect of expenditure on specified business 35AD
23. Expenditure by way of payment to associations and institutions for carrying out rural
development programmes 35CCA
24. Expenditure by way of payment to associations and institutions for carrying out
programmes of conservation of natural resources 35CCB
25. Amortisation of certain preliminary expenses 35D
26. Amortisation of expenditure in case of amalgamation or demerger 35DD
27. Amortisation of expenditure incurred under voluntary retirement scheme 35DDA
28. Deduction for expenditure on prospecting, etc., for certain minerals 35E

DEDUCTION UNDER SECTION 36

The deductions provided for in section 36 shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28.

(i) the amount of any premium paid in respect of insurance against risk of damage or
destruction of stocks or stores used for the purposes of the business or profession;

(ia) the amount of any premium paid by a federal milk co-operative society to effect or to
keep in force an insurance on the life of the cattle owned by a member of a co-operative
society, being a primary society engaged in supplying milk raised by its members to such
federal milk co-operative society;
(ib) the amount of any premium paid by any mode of payment other than cash by the assessee
as an employer to effect or to keep in force an insurance on the health of his employees under
a scheme framed in this behalf by—

(A) the General Insurance Corporation of India formed under section 9 of the General
Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central
Government; or

(B) any other insurer and approved by the Insurance Regulatory and Development Authority
established under sub-section (1) of section 3 of the Insurance Regulatory and Development
Authority Act, 1999 (41 of 1999);

(ii) any sum paid to an employee as bonus or commission for services rendered, where such
sum would not have been payable to him as profits or dividend if it had not been paid as
bonus or commission;

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the
business or profession :

(iiia) the pro rata amount of discount on a zero coupon bond having regard to the period of
life of such bond calculated in the manner as may be prescribed.

The following clause (iva) shall be inserted after clause (iv) of sub-section (1) of section 36
by the Finance Act, 2011, w.e.f. 1-4-2012 :

(iva) any sum paid by the assessee as an employer by way of contribution towards a pension
scheme, as referred to in section 80CCD, on account of an employee to the extent it does not
exceed ten per cent of the salary of the employee in the previous year.

(v) any sum paid by the assessee as an employer by way of contribution towards an approved
gratuity fund created by him for the exclusive benefit of his employees under an irrevocable
trust;
(va) any sum received by the assessee from any of his employees to which the provisions of
sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the
employee’s account in the relevant fund or funds on or before the due date.

(vi) in respect of animals which have been used for the purposes of the business or profession
otherwise than as stock-in-trade and have died or become permanently useless for such
purposes, the difference between the actual cost to the assessee of the animals and the
amount, if any, realised in respect of the carcasses or animals;

(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof
which is written off as irrecoverable in the accounts of the assessee for the

(viia) in respect of any provision for bad and doubtful debts made by—

(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside
India or a non- scheduled bank or a co-operative bank other than a primary agricultural credit
society or a primary co-operative agricultural and rural development bank, an amount not
exceeding seven and one-half per cent of the total income (computed before making any
deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of
the aggregate average advances made by the rural branches of such bank computed in the
prescribed

(b) a bank, being a bank incorporated by or under the laws of a country outside India, an
amount not exceeding five per cent of the total income (computed before making any
deduction under this clause and Chapter VIA);

(c) a public financial institution or a State financial corporation or a State industrial

investment corporation, an amount not exceeding five per cent of the total income (computed
before making any deduction under this clause and Chapter VI-A) :

(xi) any expenditure incurred by the assessee, on or after the 1st day of April, 1999 but before
the 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant
computer system, owned by the assessee and used for the purposes of his business or
profession, so as to make such computer system Y2K compliant computer system :

(xiii) any amount of banking cash transaction tax paid by the assessee during the previous
year on the taxable banking transactions entered into by him.

(xiv) any sum paid by a public financial institution by way of contribution to such credit
guarantee fund trust for small industries as the Central Government may, by notification in
the Official Gazette , specify in this behalf.

(xv) an amount equal to the securities transaction tax paid by the assessee in respect of the
taxable securities transactions entered into in the course of his business during the previous
year, if the income arising from such taxable securities transactions is included in the income
computed under the head “Profits and gains of business or profession”.

(2) In making any deduction for a bad debt or part thereof, the following provisions shall
apply—

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into
account in computing the income of the assessee of the previous year in which the amount of
such debt or part thereof is written off or of an earlier previous year, or represents money lent
in the ordinary course of the business of banking or money-lending which is carried on by the
assessee;

(ii) if the amount ultimately recovered on any such debt or part of debt is less than the
difference between the debt or part and the amount so deducted, the deficiency shall be
deductible in the previous year in which the ultimate recovery is made;

(iii) any such debt or part of debt may be deducted if it has already been written off as
irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the
assessment year commencing on the 1st day of April, 1988, or any earlier assessment year),
but the Assessing Officer had not allowed it to be deducted on the ground that it had not been
established to have become a bad debt in that year;
(iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the
previous year (being a previous year relevant to the assessment year commencing on the 1st
day of April, 1988, or any earlier assessment year) and the Assessing Officer is satisfied that
such debt or part became a bad debt in any earlier previous year not falling beyond a period
of four previous years immediately preceding the previous year in which such debt or part is
written off, the provisions of sub-section (6) of section 155 shall apply;

(v) where such debt or part of debt relates to advances made by an assessee to which clause
(viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has
debited the amount of such debt or part of debt in that previous year to the provision for bad
and doubtful debts account made under that clause.

DEPRECIATION : KEY POINTS

Depreciation is available whether or not the assessee has claimed deduction in books of
account. If a part of the assets is used for business purpose and part is used for personal
purpose ( e.g. Resi-cum-office ) ,depreciation should be allowed only for the portion for
which the asset is used for business purpose. Usage during the previous year is important : a)
if asset was acquired during any Preceding Previous Years (PPY) and put to use in current
P.Y. ( even for 1 day ), it is eligible for full depreciation. b) Further, asset acquired during the
PY ( Current year) and usage : i) No usage - No Depreciation. ii) Used for more than 180
days – full normal depreciation. iii) Used for less than 180 days – 50% of normal
depreciation. Block is formed for Common Asset with common rate of depreciation. And
accordingly, depreciation is calculated based on Block Concept and not on individual asset.
Any expenditure incurred till date , asset is put to use is to be capitalised i.e. Added to the
Cost of Assets. Depreciation is calculated only as per WDV method. SLM method is not
allowed. ( except in case of Power Units ,where prescribed rate on actual cost of asset, and
NOT block value of assets ) In case of Company Assessee, depreciation is recorded as per
Company Law, in such case, depreciation as per Books is added back while depreciation as
per Income Tax Act is allowed, while computing the income of such company. Whether asset
is eligible for depreciation or not, it depends on nature of asset and purpose of holding asset.
Land is never to be depreciated.
CONCLUSION

Computation of business income begins with reporting your gross receipts or sales. If your
business makes or buys goods to sell and maintains an inventory, you're entitled to deduct the
cost of goods sold from your revenues in computing your gross profit from your business.
Valuation of inventory and identification of inventory items is important to accurately
determine your income. Any income you receive that is connected with your business is
considered "business income" that should be reported on your business tax return. Income is
"connected with your business" if it's clear that the payment would not have been made if you
did not have the business. The starting point for computing your income tax is your gross
business receipts or sales. From this amount, you must subtract your cost of goods sold (if
any) to arrive at your gross profit.