Presentation on Busi. & Prof

8/11/2019 Presentation on Busi. & Prof.

1/47

Income

fromBusiness and Profession

Submitted by:Mannet Pal Singh

Varun Gupta

Corporate Taxation


2/47

Meaning of Business -Section 2 (13):

Business includes any (a) Trade , (b) Commerce ,(c) Manufacture , or (d) any adventure or concernin the nature of trade, commerce or

manufacture.The definition of the term is not exhaustive . Itcovers every facet of an occupation carried on by

a person with a view to earn profits. Whether asingle transaction or a series of transaction.Two crucial tests are Control and Profit Motive .


3/47

Meaning of Profession & Vocation

Section 2 (36): Profession includes vocation. The word impliesprofessional attainments in special knowledge ,which is acquired after patient study and

application , e.g.: Tax Experts, Financial and CostAccountants, Lawyers, Engineers, Doctors, etc.In Income tax no distinction is made betweenBusiness, Profession and Vocation.

The income under these is chargeable to taxunder one head i.e. Profits & Gains of Business orProfession.


4/47

Meaning of Profession & Vocation Section 2 (36):

Following types of income are chargeable under this head:

Profits & Gains of any business or profession Any compensation or other payments due or received by any person. Income of trade professional or similar association from specific services

performed for its members. Profit on sale of import entitlement licenses, incentives, cash

compensatory support and duty drawback. The value of any benefit or perquisite in cash or kind arising from

business or profession. Any interest, salary, bonus, commission or remuneration received by

partner from such firm. Any sum received or receivable for not carrying out any activity in

relation to business, know-how, patent, copy right, etc. Any sum received under key-man insurance policy (including bonus). Income from speculative business.


5/47

General Principles governingAssessment of Business Income:

Business or profession should be carried on by the assessee . Theemphasis is not on ownership but on the fact of carrying on ofbusiness by the assessee. The assessee should have a right to carryon the business and the business may be carried on by the assesseehimself or his agent/servant.

The business or profession should be carried on during the previous year. It is not essential that the business should be carried outthroughout the year. It could be during any part of the year.Exception to the above principle are:

Recovery/Excess Recovery against deduction already availed . Sale of Asset used for scientific research .Recovery/excess recovery against bad debts already availed .Withdrawal from special reserve Sums received after discontinuance of business or profession.


6/47

General Principles governingAssessment of Business Income:

Incidence of tax arises in respect of all business andprofession carried on by the assessee, which isaggregated and taxed as one item. However, profit andloss of speculative business is kept separately . The lossof a speculative nature can be set off against income from

speculative business only . Losses can be set off to themaximum of 8 years except from capital gains.Anticipated and potential profits or losses are notconsidered for arriving taxable income. This is subject tothe exception of valuation of inventory , which is done onthe basis of cost or market price, whichever is lower.Legality or illegality of business is not recognized byIncome Tax. All income whether legal or illegal will besubject to tax.Trading / Revenue Loss only is allowed


7/47

HEADS OF INCOME

As per Sec 14 the incomes earned by an assesseeare broadly classified as :-

Income from Salaries (Sec 15 17) Income from House Property (Sec 22 27) Profits and Gains of Business or Profession (Sec 28

44DB)

Capital Gains (Sec 45 55A) Income from Other Sources (Sec 56 59)


8/47

Basic Principles for Admissibility ofDeductions u/s 30 to 44D:

Onus to prove is of the assessee . Allowances are cumulative and not alternativeExpenditure should relate to previous year.Business should have been carried on duringprevious year .Expenditure to be incurred in connection withassessees own business .

No allowance is allowed on wasting assets .


9/47

Basic Principles for Admissibility ofDeductions u/s 30 to 44D:

No allowance is allowed in respect of non-assessable business . No allowance is allowed in respect ofexpenditure tainted with illegality (penalty,fines).No allowance is admissible in respect of

contingent or non-existent liability.No allowance in respect of expenditure onitems of capital nature is allowed.


10/47

Deductions Expressly allowed in respectof Expenses/Allowance u/s 30 to37:Rent, rates, taxes, repairs and insurance of building(Section 30).

In respect of premises taken on rent , actual rent paid byassessee and cost of repairs not being of capital nature, ifundertaken and borne by him.

In respect of premises owned by the assessee no deductionon account of rent is allowable.

Amount spent on current repairs not being of capital nature

is allowed. Amount paid for land revenue, local taxes, insurance for risk

of damage or destruction is allowed.


11/47

Repairs & Insurance of machinery,plant and furniture (Section 31):

Deduction of expenditure incurred towardscurrent repairs(not being of capital nature )and insurance premium paid against risk ofdamage and destruction of machinery, plantand furniture is allowed only if the asset isused for the purposes of assessees own

business or profession during the previousyear , the profits of which are subject to tax .


12/47

Depreciation: Sec.32

Depreciation meansloss or decline in value of useful life of physicalasset due to wear and tear , etc.

which cannot be restored by current repairs andmaintenance .Sec 32 Depreciation

32(1)(i) Straight Line Method

32(1)(ii) WDV32(1)(iia) Additional Depreciation32(1)(iii) Terminal Depreciation32(2) Carry forward of unabsorbed loss / allowance -

can be carried forward for any number of years


13/47

Assets, which qualify for Depreciation: Tangible Asset: Building, Machinery,

Plant or Furniture

Intangible Asset Know-how, Patents,acquired after 31-3-1998: copyrights, and

trademarks Licences, etc.

Building does not include land . It represents superstructure only and includes roads, bridges, culverts, wellsand tube wells.

The plant is defined to include ships, vehicles, books,scientific apparatus and surgical equipment but does notinclude tea bushes, livestock or building, furniture andfittings.


14/47

Conditions for claiming DepreciationAllowance:

Asset must be owned by the assessee.Asset must be used for the purposes of business or professionandIt should be used during the relevant previous year. From the assessment year 2002-03, depreciation is allowable

whether the assessee has claimed it in his return or notThe concept of ownership would mean power of enjoyment anddisposal as he likes and right to exclude others, power toalienate, power to make will, etc.In the case of property taken on lease normally lessor is entitled

to depreciation. However, in the case of building with effect from1st April 1970 the lessee who holds right of occupancy of abuilding is entitled for depreciation in respect of capitalexpenditure incurred by him for improvement, renovation orextension


15/47

Conditions for claiming DepreciationAllowance:

In respect of contract of hire purchase , theeconomic ownership rests with the purchaser.Accordingly, he will be entitled to depreciationnotwithstanding the fact that under civil law theownership passes only after the last installment

of hire purchase is paid.The term use will embrace passive as well asactive use . The machine kept ready for usewould be deemed as used although in fact themachine may not have worked at all during theyear, e.g. standby engines, etc.For assets partly used for business or profession,the deduction shall be restricted to a fairproportionate part only


16/47

Depreciation on Additions during theyear:

From the assessment year 1992-93, when theasset is acquired and put to use for less than180 days during the previous year in which itis acquired , the depreciation thereon shall beallowed at 50% of the rate prescribed inrespect of block of assets.


17/47

Block Asset Section 2 (11): The term block asset means group of assets falling within a

class comprising of - Tangible assets Building, Machinery, Plant or Furniture; Intangible assets Know-how, patents, copyrights, trademarks,

licence, etc. Depreciation is allowed on written down value method under

Income tax for all business and professions except in the case ofgeneration and distribution of power.

For generation and distribution of power, depreciation is allowedon straight-line method .

The term actual cost is defined u/s 43(1) & WDV u/s 43 (6).


18/47

Rate of Depreciation


19/47

Rate of Depreciation


20/47

Illustrattion

When Written Down Value of the block assets isreduced to zero, no depreciation is admissible. Forinstance: -On 1st April 2005 depreciated value of block of assets(rate of depreciation 15%) is Rs.80,000/-. It consists ofPlant-A and B. The Assessee purchases Plant-C (rate ofdepreciation 15%) during the previous year, 2005-06for Rs.30,000/- and sells Plant-A on 3rd May 2005 forRs.1,80,000/-.In this case, on 31st March 2006, the Assessee hasPlant-B and C in the block of assets though the WDV ofthe block is zero. No depreciation is admissible for theprevious year 2005-06(A.Y 2006-07) as will be from thefollowing computation:


21/47

SolutionRupees

Written Down Value of the Block consistingof Plant-A & B as on 1st April 2005 80,000Add: Cost of Plant-C purchased

30,0001,10,000

Less: Sale consideration for Plant-A(Though plant is sold for Rs.180000, the amount ofdeduction cannot exceed Rs.110000/-. The difference ofRs.70, 000/- of sale consideration is short-term capitalGain)

110,000Written Down Value of Plant-B & C on 31.3.2006 NilLess: Depreciation for P.Y. 2005-06 NilWDV of the block consisting of Plant-B & Cas on 1st April 2006

Nil


22/47

Illustration

If the block of assets ceases to exist If all the assets ofthe block are transferred and the block of assets isempty on the last day of the previous year, nodepreciation is admissible in such a case, e.g.:X Ltd. owns two Plants i.e. Plant A & Plant B on 1stApril 2005 (rate of depreciation 15%, WDVRs.2,37,000/-). The company purchases Plant C on 31stMay 2005 for Rs.20,000/- and sells Plant A on 10th

April 2005 and Plant B on 12th December 2005 andPlant C on 1st March 2006 for Rs.10,000/-, Rs.15,000/-and 24,000/- respectively.


23/47

SolutionThe WDV of the block of assets will be determined as under:

RupeesWDV of Plant A & B as on 1.4.2005

2,37,000Add: cost of Plant C

20,000

2,57,000Less: Sale proceeds of Plant A, B & C- 49,000Written down Value of the Block ( which is empty ) asOn 31st March 2006

2,08,000In the aforesaid case, no depreciation is admissible as the block ceases to

exist on the last day of the previous year. Rs.2,08,000/- will be treated asthe short-term capital loss on sale of Plant A, B & C. Depreciated value ofthe block on the 1st day of the next previous year, i.e. 1st April 2006 willbe taken as Nil.


24/47

Illustration

When the asset is put to use for less than 180 days in theyear of acquisition If any asset falling within a block isacquired by the assessee during the previous year and isput to use for a period less than 180 days in that previousyear, the deduction in respect of such asset shall berestricted to 50% of the amount calculated at percentageprescribed for such block of assets. For instance:-

X Ltd. owns two buildings A & B on 1st April 2005 (rate ofdepreciation 10%, WDV Rs.14, 15,700/-). He purchases on1st December 2005 Building C for Rs. 3,10,000/- (Rate ofdepreciation 10%) and sells building A during the previousyear 2005-06 (say January 10,2006) for Rs.8,70,000/-. Thedepreciation claim for the previous year 2005-06 shall becomputed as under:


25/47

Solution

RupeesWDV of the block (A and B) on 1st April 2005 14,15,700Add: cost of Building C purchased in December

2005 3,10,000

17,25,700Less: Sale proceeds of Building A 8,70,000WDV of the block as at the end of the year 8,55,700Depreciation:Building C Rs.3,10,000 @ 5% 15,500Building B Rs.5,45,700 @ 10% 54,570

70,070Depreciated value as on 1st April 2006 7,85,630


26/47

Additional Depreciation:To claim additional depreciation following conditions should be satisfied:

Manufacture/ Production of any article. New plant and machinery acquired and installed after 31st March, 2005. No additional depreciation is available in respect of building, furniture or old plant

and machinery.

Eligibility An assessee engaged in business of manufacture / production of anyarticle or thing.Qualifying Assets Any Plant & Machinery acquired or installed after 31st March2005 but does not include:

Ships and aircrafts. Power Generating Units Plant & Machinery already used either in India or outside India by any other person. Plant & Machinery installed in office, residential accommodation including

guesthouse. Buildings, Furniture, Office appliances and road transport vehicles. Any Plant & Machinery where whole of the actual cost is allowed as deduction

under income tax act.


27/47

Additional Depreciation:

Rate - @ 20% of the actual cost of the newmachinery acquired and installed after 31stMarch, 2005. However, if the asset is put touse less than 180 days then 10%. Additionaldepreciation is available only in the year inwhich the asset is first put to use.


28/47

Expenditure on Scientific Research(Section-35):

Capital (Other than On Land) and Revenue expenditureincurred by assessee for carrying scientific research is allowedif it relates to his business.Further, expenditure incurred within 3 years immediatelypreceding the commencement of the business is also allowedin the previous year when business is commenced, providedthe same is certified by the prescribed authority.

If the asset is sold without being used for the said purposes, thesurplus or deduction allowed whichever is less is chargeable totax in the previous year of sale of asset.

Deduction is admissible in respect of asset either in the yearwhen the capital expenditure is incurred or subsequent year.


29/47


Contribution to outsiders : Where the Assessee does not himself carry on

scientific research but makes contribution to otherinstitutions for this purpose a weighted deduction is

allowed on one and one fourth times of payment if Payment is made to an approved scientific researchassociation which has object of undertaking scientificresearch related to or not related to assesses business.

Payment to approved university, college, institution forscientific research.

Payment to an approved university, college, or institution forthe use of research in social science or statistical research.

Payment to National Laboratory, University, IIT, or specifiedperson as approved by prescribed authority


30/47


Expenses on In-House R&D . The tax payer is a company. Engaged in business of biotechnology or manufacture of

production of any drugs, pharmaceuticals, electronicequipments, computers, telecommunication equipments,

chemicals or any article or thing notified by board. Incurs R&D expenditure of capital or revenue nature (other

than on any land and building) upto 31st March 2012. The facility is approved DSIR-Govt. of India. The accounts are maintained and audited by the prescribed

authority. Amount of Deduction :-

A sum equal to one and one half times of the expenditureincurred shall be allowed


31/47

Expenditure on acquisition of PatentRights & Copyrights (Sec. 35A):

Capital expenditure incurred before 1.4.1998and used for Business or Profession isallowable in equal installments for a periodof 14 years commencing from the year ofacquisition.The profit or loss on sale of patent rights isadjusted in the year of sale.

In respect of capital expenditure incurred onor after 1st April 1998 , depreciation isallowable under section 32.


32/47

Other Deductions

Amortization of Telecom Licence Fees (Section 35ABB) The expenditure is of capital nature Incurred for acquiring any right to operate

Telecommunication services Incurred before or after commencement of business Payment has been actually made to obtain a licence

Amount of deduction :-The payment will be allowed inequal installments over the period starting from the year inwhich payment is made and ending in the year in which

licence comes to an endProfit or loss on sale of licence is taken in to account whilecomputing business in the year of sale


33/47

Other Deductions

Expenditure on Eligible Projects or Schemes(Section 35AC)

for promoting social and economic welfare or

uplift of public. Who can claim:

Company or a person other than a company. Expenditure to be incurred by Assessee or public

sector company or local authority or institutionapproved for carrying out the project


34/47

Other Deductions

Amortization of Preliminary Expenses(Section 35D)

Preliminary expenses incurred after 31 st March 1970 by an Indiancompany or a resident non-corporate before commencement of

business or after commencement of business in connection withextension of business or setting of new industrial undertaking etcwill qualify for amortization

Amount of Deduction: The aggregate amount cannotexceed 5%on cost of project to all assessees and for Indian

companies up to 5% of capital employed 1/5 of qualifying amount allowed as deduction in each 5

consequtive years in which business commences business


35/47

Other Deductions

Expenditure on amalgamation / de-merger ( Sec 35 DD) - Deduction is 1/5 th of such expenses (only forcompanies)Amortization of Expenditure on Voluntary Retirement(Sec. 35DDA)- Deduction is 1/5 th of such expenditureAny sum incurred by an assessee by way of payment toan employee in connection VRS,1/5 of the amount sopaid shall be allowed as deduction in computing theincome from business and the balance in fourimmediately succeeding years


36/47

General Deductions - Section 37(1):

This is a residuary section to enable assessee to claimdeduction in respect of expenditure not specifically dealtwith. Following conditions should be satisfied for claimingdeduction under this section:

The expenditure is not covered under section 30 to 36 . It is not capital expenditure . It is not personal expenditure of assessee. It is incurred in the previous year . The expenditure is wholly and exclusively and necessarily

incurred for the purposes of business or profession. It is incurred for purpose, which is not an offence or prohibited

in law. Sec 37(2B) Any advertisement in a journal, pamphlet, tract,souvenir, belonging to a political party shall not be allowed.


37/47

Specific Deductions (Sec 36)

36(1)(i) Insurance premium paid on stock of goods.36(1)(ia) Insurance premium on the cattle belonging tothe members of federal milk co operative society paid bythe society (Deduction to society)

36(1)(ib) Health insurance premium paid by employer, byway of A/c Payee cheque, on health of employees.36(1)(ii) Bonus or commission payable to employeessubject to Sec 43B.36(1)(iii) Interest on borrowed capital

Sec 36(2) Conditions for claiming bad debts. Treatment ofbad debts recovered Sec 41(4) It should be treated asbusiness income to the extent allowed earlier.


38/47

Amount Not Deductible (Sec 40(a))

(i)Any interest, royalty, technical fees etc(ia) Any interest, rent, commission, brokerage,

technical fees, professional fees, contract amountetc.

(ib) Security transaction tax. (AY 2009-10 allowed(ic) FBT(ii) Any amount of income tax or any other sum

charged under this Act..(iia) Wealth Tax(iii) Salary payable


39/47

Expenses disallowed in certaincircumstances (Sec 40A )

Sec 40A(2) Payment to relatives Unreasonableamount is disallowed.Sec 40A(3) Payment made in excess ofRs.20,000 otherwise than by account payeecheque or Demand Draft 100% of suchexpenditure is disallowed.Sec 40A(7) Provision for gratuity is disallowed.Following be allowed:

Gratuity actually paid during the year.Provision that has become payable during currentfinancial year.


40/47

Expenses allowed only on paymentbasis (Sec 43B)

Any tax, duty, cess, fees by whatever name calledpayable to Govt.Employers contribution to PF, ESI, SuperAnnuation Fund, Gratuity Fund or any otheremployee welfare fund.Bonus or commission as referred in Sec 36(1)(ii).Any interest on loan or borrowings from PublicFinancial Institution, SFC, State IndustrialInvestment Corporation.Any amount payable by employer towardsearned leave.


41/47

Deduction in case of partnership firm

Partnership firm can be assessed as:- PFAS (Sec 184)(Partnership Firm Assessed as Such)

PFAS If the following conditions are satisfied then firm is assessed asPFAS

1. certified true copy of partnership deed has to be filed along with the

first year of return of income or every subsequent year of changes interms of deed.2. deed should be in writing3. individual shares of partners are specified in deed Deduction of interest, salary etc allowed u/s 40(b). Share of profit is

exempt in the hands of partner u/s 10(2A)

PFAOP (Partnership firms assessed as association of persons) PFAOP If any of the condition prescribed in sec 184 are not satisfied.

Sec 40(ba) no deduction is allowed towards interest, salary etc paidto partner of PFAOP. Further, share of profit received by a partner of

PFAOP is not exempt u/s 10(2A).


42/47

Deduction towards interest & salary tothe partners of PFAS (Sec 40(b))

Interest : it should be mentioned in the deed interest allowed is interest as per deed or 12% p.a., WEL. this interest is applicable on any amount given by the

partner (capital or loan).Remuneration to partners It should be mentioned in the deed. It is allowed only to the working partners. Working partner

means a partner who is actively engaged in the affairs ofthe firm.

Remuneration allowed is amount prescribed in deed oramount prescribed in Sec 40(b) whichever is less.


43/47

Amount prescribed in Sec 40(b)

Non-Professional Firm Book Profit upto 1 st Rs.75,000 Remuneration

allowed is 90% of book profit or Rs.50,000

whichever is higher. On next Rs.75,000 60% of book profit On balance of book profit 40% of book profit.

Professional Firm Substitute Rs.1,00,000 in place of Rs.75,000 in the

above format


44/47

Tax Audit (Sec 44AB)

Business Turnover / Gross receipts in the current previousyear exceed Rs.40 lacsProfession Gross receipts exceed Rs.10 lac in currentprevious year.

Presumptive Tax - 44AD, 44AE, 44AF, 44BB, 44BBB andclaiming lower income than prescribed.In all the 3 cases, assessees have to get their accountsaudited by a CA and submit the report within the specifieddate i.e. 31st October of AY.

If there is a default under this section the penalty is 0.5% ofturnover or Rs.1lac which ever is less.Audit report has to submitted in Form No. 3CA or 3CBalong with statement of particulars in Form No. 3CD.


45/47

Presumptive Taxation Sec 44AD, Sec44AE and Sec 44AF.

Sec 44AD Profits and gains from civil construction including workscontract

Income = Turnover or Gross receipts x 8% 44AD is applicable if and only if turnover does not exceed Rs.40 lacs.

Sec 44AE Profits and gains from goods carriage vehicles For heavy goods vehicle Rs.3,500 per month or part of the month. Othervehicles Rs.3,150 per month or part of the month Assessee should not own more than 10 vehicles at any time during the

previous year. Asset taken on hire purchase or installment are deemed to be owned.

Gross receipts may be over Rs.40 lakhsSec 44AF Profits and gains of retail business

Minimum income = Turnover x 5%. Turnover should not exceed Rs.40 lacs. It should be pure retail business.


46/47

ExampleX Ltd engaged in the business of growing and manufacturing tea in India has derived a total income from growing andmanufacturing tea of Rs.200 lakhs for PY 31.3.2011. The said income is computed before allowing deductions u/s 33AB. The

company has deposited Rs.60 lakhs with NABARD on 25.5.2011 for claiming deductions under section 33AB. The company hasalso bought forward business losses of Rs.12 lakhs.

Answer

The total income of an assesse in the business of growing and manufacturing tea in India shall be calculated after allowing alldeductions under the PGBD, Thereafter, 40% of such income shall be taxable.

Total income before deduction under section 33AB 200 Lakhs

Less: Deduction u/s 33AB

Lower of the following:

(i) 40% of Rs.200 Lakhs 80 lakhs(ii) Amount deposited with NABARD 60 lakhs

TOTAL INCOME 140 lakhs

As per Income Tax Rules, 40% of Rs.140 lakh is taxable i.e. (40% of 140) 56 lakhs

Less: Bought forward Business Losses 12 lakhs

TAXABLE INCOME 44 Lakhs


47/47

Documents

Presentation on Busi. & Prof