INCOME FROM BUSINESS/PROFESSION
Business is an activity of purchase and sell of goods with the intention of making profit.
Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation is
an activity, which requires a special skill, which is used to earn income. e.g. Painter, Singer
etc. For income tax purpose there is no difference between business income, profession
income and vocation income.
Section 2 ( 13 ) :
BUSINESS
“ Business includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture.”
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.
ESSENTIAL FEATURES OF PROFITS FROM BUSINESS AND PROFESSION
1. Business or Profession carried on by assessee:
It is must that business or profession must be carried out by assessee himself during the
previous year.
2. Business or profession should have been carried on the previous year.
3. Aggregate income of different businesses is assessed to tax
4. Profits from speculation business are also taxed under the head income from business.
5. Income from previous year should be taxed for the current assessment year
6. The real profit i.e. the profit received or receivable during the previous year are taxed
BUSINESS EXPENSES NOT TAXABLE UNDER THE HEAD “PROFITS AND
GAINS OF BUSINESS :
1. Advertisement expenses incurred by an assessee on advertisement in any souvenir,
magazine, pamphlet published by political party.
2. Interest, royalty, fees paid outside india without TDS shall be disallowed
3. Any amount of income tax, Arrears of income Tax or Advance income tax paid is
disallowed
4. Wealth tax paid on the wealth of an assessee
5. Payment of provident fund paid outside India without TDS
6. Payment to a relative by way of salary, provident fund, or Interest
7. Any Expenditure paid in cash or through bearer cheque exceeding Rs. 20,000 will be
disallowed
8. Capital expenditures
9. All types of provisions, reserves and fund
10. Drawing of proprietor
11. Personal expenses of proprietor
12. Fines and penalties
13. Past losses and provisions for lossess
14. Charity and Donation
15. Registration expenses of business assets
16. Legal expenses related to capital assets
17. Life insurance premium on the life of proprietor
18. Expenditures on raising capital
19. Expendture on shifting registered office
20. Gifts made on personal consideration
BUSINESS INCOME NOT TAXABLE UNDER THE HEAD “PROFITS AND GAINS
OF BUSINESS OR PROFESSION” :
In the following cases, income from trading or business is not taxable under Sec. 28, under the
head “Profits and Gains of Business or Professions” :
Nature of Income Head under which it is chargeable to Tax
Rental income in the case of dealer in Rent of house property is taxable under Sec. 22 under
property the head “ Income from House Property” even if
property constitutes Stock-in-trade of recipient of rent
or the recipient of rent is engaged in the business of
letting properties on rent.
Dividend on shares in the case of a Dividend on shares are taxable under section 56(2)(i),
dealer-in-shares. under the head “Income from other sources” , even if
they are derived from shares held as stock in trade or
the recipient of dividends is a dealer-in-shares.
However, dividend received from an Indian company
is not chargeable to tax in the hands of shareholders.
Winning from Lotteries etc. Winning form Lotteries, races, etc. are taxable under
the head “Income from Other Sources” ( even if
derived as a regular business activity)
BASIS OF CHARGE: SECTION 28
Under Section 28 following are the income chargeable to tax under the head Profits or Gains
from Business or profession: ‐
1) Profits and Gains of any business or profession that is carried on by the assessee at any
time during the previous year.
2) Any compensation or other payment due to or received by an assessee for loss of agency
due to termination or modification of terms.
3) Income derived by a trade, professional or a similar association for specific services
performed for its members.
4) Any profit on sale of a license granted under Imports (controls) Order 1955 made under
Imports & Exports (control) Act of 1947.
5) Any cash assistance (by whatever name called) received or receivable against exports
under any scheme of Government of India.
6) Any duty of customs or excise repaid or repayable as drawback to any person against
exports under the Customs and Central Excise Duty’s Drawback Rules 1971.
7) Any profit on the transfer of the Duty entitlement pass book scheme under export import
policy. 8) Any profit on the transfer of the Duty free replenishment certificate under export
import policy.
9) The value of any benefit or perquisite whether convertible into money or not arising from
business or exercise of a profession e.g. A gift received by the lawyer from his client.
10) Any interest, salary, bonus, commission or remuneration due to or received by partner of
a firm from such firm.
11) Sum received or receivable in cash or in kind under an agreement for not carrying out any
activity in relation to any business or not sharing any know how, patent, copyright, trade
mark, license franchise or any other business or commercial right of similar nature or
information or technique likely to assist the manufacture or processing of goods or provision
of services.
12) Any sum received including bonus under Keyman Insurance Policy.
13) Any sum received (or receivable) in cash or kind, on account of any capital asset (other
than land or goodwill or financial instrument) 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. 14) Income from a speculative business.
DEDUCTIONS FOR EXPENSES SPECIFICALLY ALLOWED SECTION 30 TO
SECTION 43D
1. Rent, rates, taxes, repairs and insurance of building (Section 30):
• If assessee has occupied the premises as a tenant, rent of the premises and if he has
agreed to bear cost of repairs, such cost is allowed as deduction, provided it is not of
capital nature.
• If assessee has occupied premises as the owner; repairs, land revenue, local taxes,
insurance premium etc. are allowed as deduction. However, no expenditure in form of
capital expenditure is allowed.
2. Repairs & Insurance of machinery, Plant & Furniture (Sec.31):
Amount paid on account of repairs and insurance premium against risk of damage in respect
of machinery, plant & furniture are allowed as deduction provided they are not of capital
nature.
3. Depreciation u/s 32:
Under Section 32 depreciation on assets is allowed as deduction while computing income
from business or profession. To claim this deduction following conditions should be satisfied:
1) Assessee should be owner of the asset.
2) Asset must be used for the business.
3) Such use must be in the previous year.
Depreciation is allowed not on individual asset items, but on block of assets under following
categories: ‐
1) Buildings
2) Plant & Machinery
3) Furniture
4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents,
Trademarks, licenses, franchises or any other business or commercial rights of similar nature.
The term plant includes ships, vehicles, books, scientific apparatus and surgical equipments
used for the business but excludes tea bushes or live stock.
If any asset falling in block of assets is acquired during the year and put to use during the
previous year for less than 180 days depreciation on such asset shall be restricted to 50% of
the normal depreciation.
No depreciation is allowed on motor car which is manufactured outside India and acquired on
or after 1st March 1975 but before 1st April 2001. However, this restriction does not apply
if:
1) Assessee carries on a business of running the car on the hire for tourist, or
2) If assessee is using the car outside India for his business in another country. If business is
carried on in a building not owned by the assessee but acquired on lease or any other
occupancy right and any capital expenditure is incurred by him in respect of this building,
such expenditure will be considered as cost of asset as if he is the owner of such property
Capital gain
Profit or gains on account of transfer of capital assets is known as capital gain. For income
tax purpose the capital gains are classified into 2 types
➢ Long term capital gain
➢ Short term capital gain
Depreciation [Sec. 32]
Depreciation is the diminution in the value of an asset due to normal wear and tear or due to
obsolescence. In order to allow depreciation as notional expenses in computing profits and gains of
Business or Profession,
The following conditions are to be fulfilled;
(i) It is allowed only on Capital assets : It may be classified into two types.
(a) Tangible assets : Buildings, machinery, plant or furniture
(b) Intangible assets : Know-how, patents, copy rights, trademarks, licences, franchise or any
other business or commercial right of similar nature acquired on or after 1st April, 1998.
(ii) Such asset should be owned, wholly or partly, by the assessee : Ownership does not necessarily
mean legal ownership. Assessee will be treated as owner if he is capable of enjoying the right of the
owner in respect of asset in his own right and not on behalf of the owner in whom title vests even
though a formal deed of title has not been executed and registered (Mysore Minerals Ltd. vs. CIT[(1999)
239 ITR 775(SC)].
In case of a building in which Business or Profession is carried on is not owned by the assessee but he
holds a lease or other right of occupancy though he is not entitled to depreciation on the building,
depreciation is allowed on the capital expenditure incurred for the purposes of Business or Profession
on construction of any structure or renovation etc.
(iii) Such asset should be used for purposes of Business or Profession.
(iv) It should be used during the relevant Previous Years.
Depreciation Mandatory Explanation 5 to Sec. 32 inserted by the Finance Act, 2001 w.e.f.
1.4.2002,
it is clarified that the depreciation provisions shall apply, whether or not the assessee has claimed the
deduction in respect of depreciation in computing his total income.
Block of Assets [Sec. 2(11) and Explanation 3 to Section 32]:
It means a group of assets falling within a class of assets comprising,
(i) Tangible assets : Buildings, machinery, plant or furniture;
(ii) Intangible assets : Know-how, patents, copyright, trademarks, licences, franchises or any other
business or commercial rights of similar nature in respect of which same percentage of
depreciation has been prescribed.
Aligning the definition of ‘Block of Asset” [Explanation 3 to Section 32(1)] [W.e.f. A.Y. 2010-11]
The term “Block of Assets” has been defined in section 2(11) and in Explanation3 to section 32(1) of the
Income-Tax Act. However, these definitions are not identical and therefore they are subject to misuse.
Accordingly, Explanation of section 32(1) has been amended so as to delete the definition of “Block of
Assets” provided therein. Consequently, “Block of Assets” will derive its meaning only from section
2(11) and Explanation 3 shall contain the meaning of assets which shall be applicable for electricity
undertaking only.
Written Down Value [Sec. 43(6)]
(i) In case of assets acquired in the Previous Year, Written Down Value is the actual cost to the
assessee.
(ii) In case of assets acquired before the Previous Year :- Written Down Value is the actual cost of
the asset to the assessee as reduced by depreciation actually allowed to him in respect of such
asset under this Act.
(iii) In case of any block of assets :
Written Down Value of the block of asset is computed as per the following mechanism.
Written Down Value at the beginning of the year Xxx
Add: Actual cost of the assets purchased Xxx
Less: Assets Sold/ Scraped/ Demolished/Destroyed during the previous Xxx
year
Written down Value at the End xxx
Note : Written down value cannot be negative i.e. it shall be reduced to ‘nil’
Meaning of Actual Cost
Actual cost to the Assessee XXX
• Less: Subsidy/ Grant Received
• Add: Cost paid for acquiring the assets
• Cost of installation
• Insurance
• Freight
• Loading and unloading
• Repairs
• Commission
• Brokerage etc..
Rate of Depreciation for different 'Block of Asset':
Section 2(11) provides that it is not necessary that assets should be used for purpose of
business during the year under consideration. The use of the asset is important for the purpose
of actual alllowability of depreciation, but not for determining whether the asset falls within the
block of assets or not.
A taxpayer may have different block of assets as given below
Block Block of Assets Rate of
Depreciation
Block 1 Building- Residential building other than hotels and 5%
boarding houses
Block 2 Building- Office, factory, godowns or buildings which are 10%
not mainly used for residential purpose (it cover hotels
and boarding houses except cover under Block 3)
Block 3 Buildings- The followings buildings: i. building acquired 100
on or after September 1, 2002 for installing machinery
and plant forming part of water supply project or water
treatment system and which is put to use for the purpose
of business of providing infrastructure facilities under
section 80IA(4)(i). ii. temporary erection such as wooden
structures
Block 4 Any furniture/ fitting including electrical fittings 10
Block 5 Any plant & machinery (except covered by Block 6, 7,8, 9, 10, 15%
11 or 12) and
motor cars (other than those used in a business of running
them on hire)
acquired or put to use on or after April 1, 1990
Block 6 Ocean-going ships, vessels ordinarily operating on inland 20%
waters including
speed boats
Block 7 Buses, lorries and taxies used in the business of running them 30%
on hire,
machinery used in Semi-conductor industry, moulds used in
rubber and
plastic goods factories.
Block 8 Aero planes- besides, it includes commercial vehicle which is 40%
acquired
after September 30, 1998 but before April 1, 1999 and it is put
to use for any
period prior to April 1, 1999; life saving medical equipment
Block 9 Containers made of glass or plastic used as refills and plant and 50%
machinery
which satisfy conditions of rule 5(2) and the followingi.
new commercial vehicle acquired during 2001-02 and put to
use
before March 31, 2002 for the purpose of business or
profession;
ii. machinery/plant used in weaving, processing and garment
sector of
textile industry which is purchase under Technology
Upgradation Fund
Scheme during April 1, 2001 and March 31, 2004 and put to use
up to
March 31, 2004; and
iii. new commercial vehicle which is acquired during January 1,
2009 and
September 30, 2009 and put to use before October 1, 2009 for
the
purpose of business or profession.
Block 10 Computers including computer software. Besides, it includes 60%
new
commercial vehicles acquired in replacement of condemned
vehicle of
15 years of age and put to use before April 1, 1999 or put to
use before April
1, 2000. It also includes books owned by a professional. It also
includes gas
cylinders; plant used in field operation by mineral oil concerns;
direct fire
glass melting furnaces
Block 11 Energy saving device; renewal energy devices; rollers in flour 80%
mills, sugar
works & steel industry.
Block 12 Air pollution control equipments; water pollution control 100%
equipments;
solid water control equipments; recycling and resource
recovery systems;
machinery acquired and installed on or after September 1,
2002 in a water
supply project or water treatment system or for the purpose of
providing
infrastructure facilities; wooden parts used in artificial silk
manufacturing
machinery; cinematograph films, bulbs of studio lights;
wooden match
frames; some plants used in mines, quarries and salt works:
and books
carrying on business in running lending libraries
Block 13 Intangible assets- Know-how, patents, copyrights, trademarks, 25%
Licences,
Franchises and any other business or commercial rights of
similar nature
Rate of Depreciation
1. 1st year of Acquisition
Assets used 180 days or more---Full Rate of depreciation
Assets used less than 180 days-----Half of the normal rate of depreciation
2. Subsequent Year------ Full Rate of Depreciation
Additional Depreciation :
Applicable
For assesses engaged in the business of manufacture or production of any article
or thing or engaged in the business of generation or generation and distribution
of power
Assets eligible for additional depreciation
Any new plant or machinery acquired and installed after 31.3.2005
Rate of Additional Depreciation
20% of the Actual Cost of Plant or Machinery
Note: If the newly acquired asset is “put to use” for a period of less than 180 days during
the Previous Year, in which it is acquired, the rate of additional depreciation
shall be provided at 50% of the normal rate = 50% × 20% = 10%
UNABSORBED DEPRECIATION [SEC. 32(2)]
When on account of insufficient profits of business or profession the full or a part of depreciation allowance can
not be deducted, the balance of such allowance not so deducted is known as unabsorbed Depreciation
Unabsorbed depreciation shall be treated as part of the current year depreciation such unabsorbed
depreciation can be set off not only against income under “Profits and Gains of Business or Profession” but also
against income under any other head. Unabsorbed depreciation can be carried forward indefinitely and the
business need not be continued in order to get the benefit of carry forward of unabsorbed
depreciation.
Unabsorbed depreciation is adjusted as under
1. Un- absorbed depreciation can be set-off from the profits of other business or profession during the same
year.
2. The profits of any other business or profession are unable to absorb the amount of depreciation, the
same may be adjusted against the income under any other head of that year.
3. The balance if any can be forward to be set- off against the assessable incomes of subsequent years.
The following is the treatment of unabsorbed depreciation
Business Profits of the current year XXX
Less: Current year Depreciation xx
Less : B/F Business Loss
Less : B/F Unabsorbed Depreciation XXX
XXX
