Income from Business or Profession Meaning of Business S.2(13) Business includes (a) Any trade, commerce or manufacture
or (b) any adventure or concern in the nature of any trade, commerce or manufacture. Definition inclusive. Following factors relevant-
(a) Profit Motive Narain Swadeshi Weaving Mills v. CEPT 26 ITR
765 (SC) (b) Control and Profit Motive- Crucial Tests. ( c) Risk, Uncertainty, Foresightedness to Visualise Imponderables. (d) Services Rendered also Covered. (e) Business cannot be carried on with oneself.
Adventure in the Nature of Trade, Commerce or
Manufacture(a) Initial intention a relevant factor, but not conclusive. Subsequent events and ‘A’’s conduct also relevant in cases of isolated transactions. (b) A stray activity of a non businessman would not be business- CIT v. Prabhu Dayal 82 ITR 804 (SC). ( c) Dealer in Land- Converting land into building sitesan adventure, Seling to arrange funds not an adventure, Sale after a long period not an adventure. (d) Dealer in Shares- Motive, frequency of transactions, borrowal of money may indicate profit motive.
Onus to prove It is for the revenue to establish that profit
earned in a transaction is within the taxing provision and is taxable as income. Janki Ram Bahadur Ram v. CIT 57 ITR 21 (SC). Meaning of Profession S.2(36)Profession includes vocation. Profession implies professed attainments in special knowledge as distinguished from mere skill, special knowledge to be acquired only after patient study and application.
Income chargeable under this head S.28 (i) Profits and gains of any business or
profession; (ii) Compensation due to or received by (a) a managing agent of an Indian company, (b) a managing agent of any other company, ( c) a person holding agency in India for any activity (iii) Income of a trade ,professional or similar association from specific services performed for its members,
(iv) Export Incentives- Cash Compensatory
Support-S.28(iiia), Duty Drawback-S.28(iiib), Profit on sale of Import Entitlement LicenceS.28(iiic); (v) Value of any benefit or perquisite arising from business or exercise of a profession S.28(iv); Value of use of residential premises, car and telephone by a partner is taxable as perquisite in the hands of the partner u/s. 28(iv) V.P. Warrier v. CIT 181 ITR 303 (MP)
Foreign trips granted by a company whose
product is being sold by the ‘A’ and his family in appreciation of business done by the ‘A’,constitutes benefit u/s. 28(iv). R. Imbavalli v. ITO 83 TTJ 352(Chen.) (vii) any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such firm to the extent allowed as deduction to the firm S.28(v), or
(viii) any sum received in cash or kind under an
agreement for not carrying out any activity in relation to any business or not to share any knowhow, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in manufacture or processing of goods or provision of service S.28(va),
(viii) any sum received on maturity of keyman insurance
policy including bonus S.28(vii),
(ix) profits and gains of managing agency S.28(viii),
(x) Speculation Business-Expln. 2 to S.28 If an ‘A’ carries on speculative transactions of
such a nature as to constitute business, such business should be deemed distinct and separate from any other business.
Meaning of Speculative Business-S. 43(5) It means a transaction in which a contract for
purchase or sale of any commodity including stocks and shares is settled without actual delivery or transfer of commodity or scrips.
Exceptions 1. Hedging contracts 2. Arbitrage 3. Derivative Transactions w.e.f.
A.Y.2006-07. A derivative transaction carried out on a recognised stock exchange notified by the Central Government.
Some Decisions 1. Compensation received for loss of earning was held to
be business income. CIT v. Manna Ramji & co. 86 ITR 29(SC)
2. Any gain on account of fluctuation in currency on
account of trade is taxable as business income. M. Shamsuddin & co. v. CIT 90 ITR 323(Ker)
3. Gain on forfeiture of margin money by bank is taxable
as business income in the hands of bank. CIT v. Laxmi Vilas Bank ;td. 220 ITR 305(SC)
Where the ‘A’ does not carry on business at all, S. 28
cannot apply. Income that he receives cannot bear the character of profits of business. New Savan Sugar & Gur Refining Co. Ltd. V. CIT 74 ITR 7 (S.C.) Where there is inter connection, inter lacing, inter
dependence, any unity embracing the ventures and different ventures are so interlaced and so dovetailed into each other as to make them into the same business, the different activities would be regarded as the same business. L.M.Chhabda & Sons v. CIT 65 ITR 638 (SC)
Income from letting/exploiting commercial assets shall be
taxable as business income. CIT v. Shree Laxmi Silk Mills Ltd. 20 ITR 451 (SC)
Where all assets are let out, the period for which they are let out
is a relevant factor to find out whether the intention of the ‘A’ is to go out of business. If a few business assets are let out temporarily while others are used by the ‘A’ for his business, then it is commercial exploitation of assets. If business never started or has been ceased with no intention to revive, the assets cease to be business assets. Universal Plast Ltd. V. CIT 237 ITR 454 (SC).
Loss of cash by theft or embazlement is
allowable as trading loss. Badridas Daga v. CIT 34 ITR 10 (SC) CIT v.Nainital Bank Ltd. 55 ITR 707 (SC) An agent of a non resident who paid tax on behalf of the non resident and who could not recover it from the Non Res. cannot claim it as deduction. CIT v. Abdullabhai Abdulkar 41 ITR 545 (SC).
Rent, Rates, Repairs & Insurance of Building S.30 a. Where premises are occupied by the ‘A’ (i) as a tenant, the rent paid for such premises and cost
of repairs borne by the ‘A’ as tenant, (ii) otherwise than as tenant, the amount of current repairs, b. land revenue, local rates or municipal taxes, c. premium paid in respect of insurance against risk of damage or destruction of the premises, Shall be allowed as deduction. Expln.- Amount of repairs in ‘a’. above shall not include expenditure of capital nature.
Current Repairs New Shorrock Spg. & Mfg. Co. Ltd. V. CIT 30
ITR 338 (Bom) Repairs and Insurance of Machinery, Plant & Furniture S.31 Current repairs and insurance premium against risk of damage or destruction of the asset allowed as deduction. Expln.- Current repair shall not include expenditure of capital nature.
Depreciation – S. 32 Conditions to be satisfied before
claiming depreciation (1) Assessee should be the owner /coowner of the asset. Exception- Capital Expenditure on leasehold premises- Expln. 1 to S. 32.
DEPRECIATION – S. 32 (CONTD.) (2) The asset must be used for the purpose of business or profession during the Previous Year. In case of partial use for personal purposes, depreciation should be proportionately disallowed. S. 38(2) (3) Asset may be tangible or intangible.
No dpreciation shall be allowed (a) in respect of motor car manufactured
outside India is acquired by the ‘A’ between 1-31975 & 31-3-2001 unless it is used (i) in the bus. of running it on hire for tourists, or (ii) outside India in his bus. or prof. in another country. (b) any mach. or plant if the actual cost, thereof, is allowed as deduction in one or more years under agreement with tne Cent. Govt. u/s. 42.
Where any asset is acquired during yhe P.Y. and is put to
use for bus. or prof. for less than 180 daysin that p.Y., depreciation shall be restricted to 50% of the rate prescribed for the asset. In case of succession u/s. 47(xiii), 47(xiv) or 170 or amalgamation or demerger, depreciation shall be computed as if no succession, amalgamation or demerger had taken place and the deduction shall be apportioned between the predecessor & successor or amalgamating &amalgamated co. or demerged & resulting co. in the ratio of the no. of days for which the asset was used by them.
In the case of a new mach. or plant acquired on
or after 31-3-2005 by an ‘A’ engaged in manufacture or production of any article or thing, additional depreciation shall be allowed at 20% of actual cost of such mach. or plant. No additional depr. on mach or plant previously used by any person before the ’A’ or which is instaled in office, residence or guest house or any office appliance or road transport vehicle or actual cost of which is allowed as deduction in one P.Y..
Ownership of the asset – Some Important Judgements
Registered Owner v. Beneficial Owner. In the case of an immovable property, transfer in part performance of contract is sufficient. Registration not necessary. Mysore Minerals Ltd. v. C.I.T. 106 Taxman 166 (S.C.) C.I.T. v. Poddar Cement Pvt. Ltd. 92 Taxmann 541 (S.C.)
Transfer in part performance of contract – S. 53A of the Transfer of Property Act.
There should be a contract for transfer of immovable property in writing. The contract should be signed by the transferor. The transferee should have taken possession of the property or a part of it. The transferee should have performed fully or partly his part of the contract.
(2) If the assessee is entitled to the income from the property and he can exercise the rights of the owner not on behalf of the owner, but in his own right, e. g. premises in a co-operative society in which the assessee is a member, he is entitled to claim depreciation on the asset. R. B. Jodha Mal Kuthiala v. C.I.T. 82 ITR 570 (S.C.)
(3) In case of leased assets, the lessor is entitled to depreciation as he owns the asset and not the lessee. Cir. No. 2 dated 9th Feb., 2001. Shaan Finance Pvt. Ltd. v. C.I.T. 231 ITR 304 (S.C.) Castle Rock Fisheries v. C.I.T. 231 ITR 308 (S.C.)
(4) Assets of Partnership Firm – A firm is entitled to depreciation on the assets (immovable properties) brought in by the partners of the firm as their capital which are not registered in the name of the firm. C.I.T. v. Amber Corporation 207 ITR 435 (Raj.)
(5) Assets acquired on hire purchase The hirer would be entitled to claim depreciation right from the date on which the asset is acquired. The Departments contention that until the last instalment is paid, the ownership vests in the seller and not in the hirer was not accepted. C.I.T. v. General Industries Corpn. 155 IT 430 (Del.). C.I.T. v. Nagpur Golden Transport Co. 223 ITR 389 (Del.).
User of the asset for Business or Profession (1) Active V. Passive Use – An asset kept ready for use is said to be in use. C.I.T. v. Geo Tech Construction Corpn. 244 ITR 52 (Ker.)
User of the asset for Business or Profession (Contd.)
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(2) Where assets of the assessee are used partly for a business which brings taxable income and partly for a business which brings exempt income to the assessee, total depreciation is allowable to the assessee. . Waterfall Estates Ltd. v. C.I.T. 131 ITR 223 (Mad.) Whether situation will change after the introduction of S. 14A.
User of the asset for Business or Profession (Contd.) (3) When residential quarters are occupied by the assessee’s employees for residence, depreciation is allowable on residential quarters. C.I.T. v. Delhi Cloth & General Mills Co. Ltd. 59 ITR 152 (Pun.)
User of the asset for Business or Profession (Contd.) (4) Trial run of a machinery would fall within the ambit of ‘use’ for the purpose of business. C.I.T. v. Ashima Symax Ltd. 251 ITR 133 (Guj.) Aurofood Ltd. v. C.I.T. 4 SOT 346 (Chennai)
Assets qualified for depreciationTangible Assets
– Building, Machinery, Plant, Furniture
Assets qualified for depreciation(Contd.) Intangible Assets – (Acquired on or after 01.04.98) - Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.
Plant S.43(3) Plant includes ships, vehicles, books, scientific
apparatus and surgical equipments, but does not include tea bushes and live stock or buildings and furniture and fitting. Functional TestBuilding(1) Drive ways and compound walls in petrol pumps regarded as building. CIT v. Indo Burma Petroleum Co. Ltd. 112 ITR 755 (Cal).
(2) Building does not include land
although attached to land. CIT v. Alps Theatre 65ITR 377 (SC). Premium paid for the land is not includible in the cost of the super structure constructed thereon. CIT v. Indian Oil Corpn. Ltd. 218 ITR 511(Bom), Herdillia Chemical Ltd. v. CIT 218 ITR 598 (Bom).
Depreciation on straight line basis in case of
power sector units S.32(1)(iii) From A.Y.1998-99, ‘A’ engaged in generation or generation & distribution of power can claim depreciation on assets acquired after 31-3-1997 according to one of the following methods. S.L.M.- Can be claimed at the percentage specified in Appendix 1A. Aggregate depreciation not to exceed actual cost.
W.D.V.- By W.D.V., on block of assets. Option to be exercised before due date for
furnishing return of income. Option once exercised shall be final and shall apply to all subsequent years. Terminal Depreciation to power units When asset on which depreciation was claimed on S.L.M. basis is sold, discarded, demolished or destroyed, terminal depreciation equal to difference between money payable including scrap value and W.D.V. shall be allowed.
Terminal depreciation not allowable in the P.Y.
in which asset is first put to use. Loss treated as S.T.C.G.. Terminal Depreciation not allowable, if asset was not used at all during the P.Y. of sale. Balancing Charge Where money payable for asset sold, demolished,discarded or destroyed with its scrap value > W.D.V., the excess to the extent of difference between actual cost and W.D.V. taxable as business income u/s. 41(2) as Balancing Charge in the P.Y. in which money becomes due.
Written Down Value S. 43(6) In case of asset acquired during P.Y.,
actual cost. In case of asset acquired before the P.Y., actual cost less depreciation allowed. In case of Block of Assets-
W.D.V. at the beginning of the P.Y. xxx Add: Actual cost of assets falling Within the block acquired during the P.Y. xxx xxx Less: Money received/receivable in respect of assets sold,demolished, discarded, destroyed during P.Y. xxx xxx Less: Depreciation for P.Y. xxx Closing W.D.V. xxx