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Important Points : Computation of Business or Profession Income

 

While computing income under the head ‘Profits and Gains of Business or Profession’ the following important guiding points should be kept in mind. A good part of Indian Income-tax Act is based upon court judgements and these principles were the basis of so many court pronouncements which are always kept in mind while computing income under this head. So some of the principles based on the leading cases are as follows :

(i) Business carried on by the assessee. Under section 28, the person who carried on the business is always changed. It is immaterial whether the assessee is doing the business or work himself or through some of his employees, agent, manager etc. The important point to be kept in mind is that the business should have been carried on by the assessee at any time during the previous year and not necessarily throughout the year or even in the assessment year. The assessee should have the right to carry on the business. In case a person is deprived of the right to carry on-’ the business, the same person cannot be chargeable to tax under this head since he cannot be regarded as ‘carrying on’ the business.’ Guardians for minors or receivers or trustees may be assessed under this section in respect of profit of the business carried on by them.

(ii) Tax is levied on aggregated income from all business-professions carri&I on by the assessee during the previous year. The net result of each business or profession carried on by the assessee is calculated separately but when tax is to be imposed, the result of all the businesses is aggregated and then whatever income comes, tax is imposed on that income. It means the loss from one business is set off against the profit of another business in this aggregation.

(iii) Speculation business. The speculation business of the assessee is kept separate. If there is profit—it will be taxed along with other business income. But if there is speculation loss—it can be set off against profits of speculation business only and not against profits of any other business.

(iv) Profit on sale of assets on the winding up of a business. The profit arising from some of the assets after winding up a business is not taxable but the profit on the sate of stock-in-trade is taxable. If the entire business is sold in one lot for a single unapportioned consideration and the assets include stock-in-trade, the profit in the sale of stock-in-trade is not separable; in such case the entire profit on sale of the business will not be taxable under this head.

(v) Tax on Real owner. It is not only the legal ownership but also thern beneficial ownership that has to be considered under section 28. The income is taxable in the hands of a person to whom it actually accrues. No tax can be levied on benamidar in whose name the business transactions are effected and who is not really entitled to the profits. –

(vi) Tax is levied only on the real earned profits of the previous year. When there is expectation of profit, it cannot be taxed in anticipation. So the profit is taxed only when it has actually arisen. Further the profit must be really a gain to the person carrying on the business. Income or gain to be taxed must relate to the previous year. Each year is a self contained accounting period.

(vii) Business/Profession may be legal or illegal. The income from legal business or profession as well as income from illegal business/profession is taxable under this head. However, income -from illegal business/profession, assessee may have to face legal action, etc. under other Acts also.

(viii) Business/Profession income to be computed for each previous year. Income or gain to be taxed must relate to the previous year in question.

(ix) Negative income from Business/Profession. - Negative income signifies loss from Business or Profession and can be set-off against other incomes as per prescribed rules.
 
More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
 

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