Unit – 1
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Syllabus Computation of Income under the head Profits and gains of
Business and profession – Meaning of Business, Profession and Profits,
Chargeability. Computation of income from Business. Admissible deduction,
inadmissible deduction u/s 40, payment not deductible under certain
circumstances u/s 40A, Treatment of depreciation under income tax Act. |
Meaning of Business and
Profession
The
tax payable by an assessee on his income under the head “Profits and Gains of
Business and Profession” carried on by him or on his behalf during the previous
year.
Business:
The term ‘Business’ has been defined in section 2(13) to “include any trade,
commerce or manufacturer or any adventure or concern in the nature of trade,
commerce or manufacture”.
Profession:
The term “Profession” has not been defined in the Act. It means an occupation
requiring some degree of learning. The term ‘profession’ includes vocation as
well. [Section 2(36)]
Chargeability of income
under the head Profits and Gains of Business and Profession [section 28]
The
various items of income chargeable to tax as income under the head Profits and
Gains of Business and Profession are as under:
i.
The profits and gains of any business which was carried on by the assessee at
any time during the previous year;
ii.
Any compensation or other payment due to or received by –
(a)
Any person, by whatever name called, managing the whole or substantially the
whole of –
(i) the affairs of an Indian
company; or
(ii) the affairs in India of any
other company at or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;
(b)
Any person, by whatever name called, 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 of the agency or the modification of any of the terms and
conditions relating thereto;
(c)
Any person, for or in connection with the vesting in the Government or any
corporation owned or controlled by the Government under any law for the time
being in force, of the management of any property or business.
iii.
Income derived by a 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;
iv.
Incentives received or receivable by assessee carrying on export business:
(a)
Profits on sales of import licenses granted under Imports (control) order on
account of exports,
(b)
Cash assistances, by whatever name called, received or receivable against
export,
(c)
Duty drawbacks of Customs and Central Excise duties,
(d)
Any profit on the transfer of the Duty Entitlement Pass Book Scheme,
(e)
Any profit on the transfer of the Duty Free Replenishment certificate;
v. The value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of any profession.
vi. Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm will be deemed to be income from business. However, where any interest, salary, bonus, commission or remuneration by whatever name called, or any part thereof has not been allowed to be deducted under section 40(b), in the computation of the income of the firm the income to be taxed shall be adjusted to the extent of the amount disallowed.
vii.
Any sum whether received or receivable in cash or in kind under an agreement
for:-
(a)
not carrying out activity in relation to any business; or
(b)
not sharing any know-how, patent, copyright, trade-mark, licence, 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
provision for services.
viii.
Any sum received under a key man Insurance Policy including the sum allocated
by way of bonus on such policy;
ix. Any sum, whether received or receivable, in cash or in 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.
Depreciation [section 32]
Depreciation
on business assets is fully allowed under Income tax Act.
Depreciation
is decrease in the value of on asset due to its wear and tear caused by its use
and passage of time. It is debited to profits and loss account. It is
calculated on block of assets basis.
Block
of assets [section 2(11)] : Block of assets means a group of assets falling
within a class of assets comprising Tangible assets being building, machinery,
plants etc. Intangible assets being know-how, patents, copyrights, trademarks,
licenses, franchisees or any other business or commercial rights of similar
nature.
The
word know-how means any industrial information or technique likely to assist in
the manufacture or processing of goods or in the working of mines, oil well or
other sources of mineral deposits (including searching for discovery or testing
of deposits for winning access thereto. [section 32 (1)].
Rules /
Conditions regarding the claim of deduction of depreciation:
1.
Depreciation is allowed on all tangible and intangible assets except land,
animals and goodwill.
2.
Assets must be owned by the assessee. No depreciation on any hired assets but
if any capital expenditure is incurred on a hired building then depreciation
can be claimed on such capital expenditure.
3.
Depreciation is calculated on the last day of accounting year and only on those
assets which are in use on that day.
4.
It is calculated at prescribed rate.
5.
Depreciation is calculated on diminishing value method i.e. (WDV basis) but in
case of assets used in an undertaking engaged in generation or generation and
distribution of power, the assessee may opt to choose the actual cost basis
(straight line method).
6.
Total depreciation in the life of an asset cannot exceed its actual cost.
7.
Assets must be used in assessee business or profession.
8.
In case of stand by asset like generator, depreciation will be allowed even if
it is not used during the year.
9.
In case of newly acquired asset during the relevant previous year, full years
depreciation is allowed if asset is installed and used for 180 or more than 180
day’s and half year’s depreciation is allowed if installed and used for less
than 180 day’s, If asset was acquired in any earlier previous year but is put
to use during the relevant previous year, the condition of 180 days shall not
be applicable.
10.
No depreciation is allowed in the year in which the asset is sold, demolished,
discarded or destroyed.
11.
No depreciation is allowed on cars manufactured outside India and acquired
after 1.3.1975 but before 1.4.2001. But now depreciation is allowed in same
manner as for Indian cars.
12.
The word plant includes in itself Plant and Machinery, Air conditioners, office
equipment, surgical equipment, electrical fittings and utensils of a hotel etc.
The plant shall not include tae bushes, livestock or furniture and fittings.
13. The term “Commercial vehicle” includes heavy passenger motor vehicle, light motor vehicle, medium goods vehicle, medium passenger motor vehicle but does not include maxi cab, motor cab, tractor and road roller. These vehicles shall same meaning as is assigned to them in section 2 of Motor Vehicle Act 1998.
