Income From Business Or Profession.pdf

Income from Business & Profession

Dr. P. Ravichandran M.Com., M.B.A., M.A (Astrology)., M.Phil., Ph.D., D.C.P., D.L.L & A.L., P.G.D.C.A., P.G.D.P.M & I.R., S.B.K. College, Aruppukottai – 626101.

 9443424090 & 9080030090  e-mail id.- [email protected]

A business (also known as an enterprise, a company (or) a firm) is an organizational entity involved in the provision of goods and services to consumers. The word ‘business’ can refer to a particular organization (or) to an entire market sector (for example: “the financial sector”) (or) to the sum of all economic activity (“the business sector”).

Essential features of business Regularity of transactions (or) continuity of activities; Objective of earning profits (profit motive); Application of labour and skill; Business rendering services to others; Business cannot be carried on with oneself.

U/S 2(13), ‘Business’ includes any –  (a) trade,  (b) commerce,  (c) manufacture, (or) (d) any adventure (or) concern in the nature of trade, commerce (or) manufacture.

Trade  It means purchase and sale of goods carried on with profit motive.

Commerce  It means trade carried on a large scale.  i.e., trade and all other activities that are associated with the trade.

Manufacture  Making of new and different article out of input material by physical (or) mechanical labour.

Profession [Sec.2(36)] Profession means an occupation requiring specialized Knowledge and Skill. These type of persons also have a separate and specialized course to attain professional knowledge. Ex: Doctors, Engineers, Lawyers and Auditors.

Vocation Vocation is an activity in which an assessee has specialized skill for earning Income. It implies natural ability of a person for some particular work. It may (or) may not be profit. There is no need for systematic and organized activity. Ex: Tax experts, Journalists, Architects, Cost and Management accountants etc.,

Income from Business & Profession - Key Points      

Must be carried on by Assessee. Must be carried on during the previous year. Only profit of the previous year are to be taxed. Income includes negative income i.e. Loss. Relevance of method of accounting [Cash (or) Mercantile] A Person cannot do business with one self. Hence, notional profit is not taxable. If a proprietor withdraws goods costing ₹ 50,000 for personal use at an agreed value of ₹ 60,000 then profit of ₹ 10,000 shall not be taxable.  There is no difference between legal & illegal business for taxation purpose. Even income from illegal business shall be taxable.

Maintenance of accounts Cash & Mercantile system Choice exists with a assessee to adopt a method only in case of “Profits and gains of business and profession” and “Income from other sources”. In other heads the method is not relevant in computing taxable income.

Mercantile system Income and expenses recorded at the time of occurrence during previous year. Profit calculated is actually earned though not realized. Gives an idea of how the business is doing. Does not allow for blatant manipulation.

Cash system Receipts and expenses (payments) recorded only if received and paid during the year. Excess of receipts over disbursements. A Cruder system. Shows cash flow of the business. Allows for manipulation.

Choice of method of accounting lies with assessee, but once a particular method is adopted he must follow it consistently. Accounting practice cannot override any provisions of the Act.

Depreciation (u/s 32) • Following conditions are to be fulfilled. • a) Assessee must be owner of the Asset.

• b) Asset must be used for the purpose of business or Profession. • c) Such use must be in the relevant previous year.

Depreciation • • • • • • •

Deprecation is allowed in respect of a) Building b) Plant & Machinery c) Furniture d) Motor Vehicles e) Computers f) Intangibles

Depreciation • Depreciation is allowed on the Written Down Value of Block of Assets • Opening WDV XX • Add : Purchases during the year XX • Less : Sales during the year XX • Closing WDV XX • Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.

Additional Depreciation • Additional Deprecation @ 20 % of Actual Cost of Machinery acquired after 31.03.2002 for • a) New Industrial Undertaking • b) Existing Industrial Undertaking Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.

DEDUCTION ONLY ON ACTUAL PAYMENT EVEN AFTER 31ST MARCH BUT BEFORE THE DUE DATE OF FILING THE RETURN (SEC 43B) • TAXES, DUTY, CESS OR FEE • CONTRIBUTION TO PROVIDENT FUND, GRATUITY FUND, ETC. • PAYMENT OF BONUS, COMMISSION ETC. TO EMPLOYEES

Computation of Income from Business Amt Amt Particulars Net profit as per P&L account

xxx

ADD: 1. Inadmissible Expenses: (Not allowed but Debited to P&L a/c)

xx

2. Admissible Incomes: (Allowed but not Credited to P&L a/c)

xx

3. Admissible Incomes: (Allowed but not Credited to P&L a/c)

xx

4. Over Valuation of opening Stock

xx

5. Under valuation of closing Stock

xx

xxx

xxxx LESS: 1. Admissible Expenses: (Allowed but not Debited to P&L a/c)

xx

2. Inadmissible Incomes: (Not allowed but Credited to P&L a/c)

xx

3. Admissible Incomes: (Allowed but not Credited to P&L a/c)

xx

4. Under Valuation of opening Stock

xx

5. Over valuation of closing Stock

xx

Income from Business

xxx XXXX