Dibrugarh University B. Com 6th Semester Direct Tax-II Notes Unit-1 - myedu365

Unit – 1

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.