29.  Income Tax @ Professional Income

One of the five main heads of income under the Income-tax Act, 1961 is “Profits & Gains of Business or Profession”. Thus, any net income a tax payer derives from the carrying on of any business or profession, is computed in accordance with the provisions contained in the Income Tax Act.

However, there is a distinction between business and profession, though both are governed under the same head as per Sections 28 to 44DB of the Income Tax Act. Some of the important differences as regards the computation and assessment of income from business or income from a profession relate to certain deductions which are specifically allowed, or disallowed, in the computation of such income, maintenance of accounts, different provisions for deduction of salary to partners of a professional firm as compared to a business firm, requirement of compulsory tax audit, etc. All these aspects should be clearly understood by anyone carrying on a profession which may normally be an individual or. a partnership firm. In very rare cases professional work is done by companies which work on corporate level. In this tip we have discussed the salient aspects of Income Tax Law relating to professional income.

Important Deductions against Professional Income

Some of the deductions which are allowed to a person carrying on a profession are:

1.       Rent, rates, taxes, repairs and insurance for buildings — Section 30.

2.       Repair and insurance of machineries, plant and furniture used for the purposes of the profession, like motor cars, air conditioners, furniture, etc. — Section 31.

3.       Depreciation of buildings, machinery, plant or furniture or intangible assets owned wholly or partly by the assessee and used for the purposes of the business at prescribed rates — Section 32.
For example, the rate of deduction of depreciation in respect of furniture is 10% whereas the general rate for plant and machinery, air conditioners, motor cars, etc. used for the purposes of a profession is 15% on the written down value of the asset.

4.       Insurance premium. against risk of damage or destruction or stocks of stores used for the purpose of the profession, health insurance premium to keep in force insurance on the health of the employee under the scheme of the GIC or any other insurer, bonus or commission paid to employees, interest in respect of capital borrowed for the purposes of the profession, employer’s contribution towards a provident fund, bad debt, written off as irrecoverable, etc. — Section36

5.       Any expenditure laid out or extended wholly and exclusively for the purposes of the profession, like salary to employees and other normal expenses like printing & stationery, audit fee and other expenditure normally required to be spent for carrying on the profession — Section 37

Non-deductible Expenditure

There are certain expenses which are expressly not allowed to be deducted as per Section 40A of the Income Tax Act, such as interest, royalty and fee for technical services payable outside India or to a nonresident on which tax is not deducted at source or having been so deducted is not paid as per the provisions of the IT Act. Similarly, any sum paid on account of securities transactions tax is not allowed deduction. In certain circumstances under the provisions of Section 40A undue remuneration paid by the assessee to a relative can also be disallowed by the Assessing Officer. However, reasonable remuneration so paid for the services rendered by the relative would be admissible. Any illegal expenses incurred by a professional person are not allowed as deduction.

Deduction of Salary and Interest Regarding a Professional Firm

Under the provisions of Section 40(b) any salary or other remuneration or interest paid by a professional firm to a partner in excess of certain limits laid down in that section is not allowed as deduction. Thus, in the case of a professional firm any payment of remuneration to any partner is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed would be allowed as deduction in computing the taxable income of the professional firm for the financial year 2011-2012 as per the following rates as per Section 40(b) (v) of the Income Tax Act:

(a)     On the first ` 3 lakh of book profit and in the case of loss —
` 1,50,000, or 90% of the book profit, whichever is more;

(b)     On the balance amount of the book profit @ 60%.

Besides, interest paid by a professional firm to a partner is allowed upto a maximum extent of 12% simple interest per annum if the payment of the interest to any partner is authorized by the partnership deed.

Compulsory Maintenance of Accounts

As per Section 44AA of the Income Tax Act it is provided that every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or a technical consultancy or interior decoration or certain notified professions would be required to keep and maintain such books of accounts and other documents as would enable the Assessing Officer to compute the total income under the Income Tax Act. Other professional persons have to compulsorily keep books of account if the income from the profession exceeds ` 1.20 lakh, or the gross receipt from the profession exceeds ` 10 iakh in any one of the 3 years immediately preceding the previous year. Where the profession is newly set up in any previous year and the income from the profession is likely to exceed ` 1.20 lakh, or the gross receipts from the profession exceed ` 10 lakh in any one of the 3 years immediately preceding the previous year.

It is also required that the books of account and other documents would be kept and maintained for a period of 6 years from the end of the relevant assessment year.

Compulsory Tax Audit