Module – 1

TAX – II

INCOME FROM BUSINESS AND PROFESSION

Introduction
Income from Business or Profession is the third head of income, maximum number of assesses
pertain to this head. Section 22 to 44 of the Income Tax Act 1961 deals with the taxability of
income either from business or profession.

Objectives
1. Understand the meaning of ‘Business’ and ‘Profession’ and the scope of income
chargeable to tax under this head.
2. Identify the expenses, payments that are admissible as deduction and the conditions to
avail the same.
3. Identify the expenditures which are not admissible as deduction.
4. Compute the capital gains from transfer of capital assets in the manner prescribed
5. Compute cost of acquisition and indexed cost of acquisition
6. Identify the income which are chargeable to tax under ‘Income from other sources’
7. Compute the tax on casual income

Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s 28 under the head-profit and Gains of
Business:

 Profits and gains of any business.

 Any compensation due or received by a person in connection with termination
or modification of terms and conditions relating to this head.
 Income derived by a trade, profession or similar association from specific
services performed for its members.
 Profit on sale of import licenses, incentives by way of cash compensatory support
and draw-back of duty.
 The value of any benefit or perquisite convertible into money or not arising from
business or the exercise of a profession.
 Any interest, salary, bonus, commission or remuneration received by a partner of a firm
assessed as such.
 Any some whether received or receivable in cash or in kind under an agreement for
not carrying out any activity in relation to any business or profession.
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  Income from speculation business.
 Any amount (including bonus) received under a key man insurance policy.
 Interest on securities where such securities are held as stock in trade.

Business u/s 2(13)

Business includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture. In simple terms Business means buying, selling and
manufacturing of goods to earn profit.
It is not necessary that there should be a series of transactions in a business, neither repetition
nor continuity of similar transactions is necessary.

Profession u/s 2(36)

Profession means those activities for earning livelihood which requires, intellectual skill and
specialized knowledge e.g. Doctors, Lawyers, Engineers, Chartered Account profession also
include vocation.
Vocation refers to any activity which a person practices to earn his livelihood e.g. practice of
religion, painting etc.

Under section 2(36) profession includes vocation.

Vocation means any type of activity in which a person is engaged and earns his livelihood from
such activity. The practice of religion and writing of articles in a magazine is also vocation.
In other words, Vocation is the inbuilt talent/skill which is not acquired or possessed by a
systematic study.

Speculative Business
It means any business in which a contract for the purchase and sale of any commodity including
stock and shares are periodically or ultimately settled otherwise than by the actual delivery or
transfer of the commodity.

Format of Computation of Taxable Income from Business for the AY 2023-24

Particulars Amount Amount
Net profit as per Profit and Loss A/c XXX
Add:
1) Inadmissible, Non-Business Expenses, Excess XXX
expenses debited to P/L A/c. (Expenses debited
to P&L A/c but not allowable as per IT act)
2) Business Incomes not credited to P&L A/c XXX
3) Over Valuation of opening Stock XXX
4) Under Valuation of Closing Stock XXX XXX
XXX
Less:
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 1) Allowed, Admissible Expenses not debited to P/L XXX
A/c (Expenses not debited to P/L A/c and
allowed as per IT act) XXX
2) Non-Business income credited to P/L A/c XXX
3) Undervaluation of Opening Stock XXX XXX
4) Overvaluation of Closing stock XXX
Taxable Income from Business

Disallowed or Inadmissible Expenses

All expenses incurred either directly or indirectly related to business are allowed as business
expenses. However, the following expenses, are disallowed and hence to be added back to the
net profit.
1) Personal expense like marriage expense, drawing, premium on life and medical insurance,
proprietor salary, rent paid for own building, saving made in NSC, PF, etc. household
expenses like electricity, telephone uses for residence.
2) Any payment made in excess of 10,000 either in cash or bearer cheque, the entire amount is
inadmissible.
3) Income tax, Wealth Tax or Advance Income Tax paid.
4) Interest on loan, taken for personal purpose.
5) Provision for bad debts, doubtful debts, reserve for future losses.
6) Bonus and commission paid to employees not allowed it is paid after the due date of filing
the returns, (in case of individual 31st July 2023).
7) Sales tax, Customs Duty, Excises Duty, if it is not paid before the due date of filing the
returns.
8) Any losses related to Capital in nature like loss on sale of assets.
9) Donation and Charities.
10) Any purchase of Capital Assets, renovation and extension of buildings.
11) Cost of sign board fixed on office premises.
12) Contribution to Staff Welfare Fund and political party.
13) Difference in trial balance.
14) Speculation losses
15) Preliminary expenses 4/5 are disallowed. E.g. Market survey, Discount on issue of shares
16) Interest on capital.
17) Employer’s contribution to URPF is not allowed.
18) Any gratuity not approved or given on ad-hoc basis is not allowed.
19) Expenses related to other heads of income
20) Theft at assesee residence
21) Family planning expenses of the employer is allowed only if the assesse is a company.
22) Personal gifts and presents.
23) Penalties and fines on excise and customs duty.
24) Any amount paid outside India without making TDS (30% of such payment is
disallowed)

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25) Salary paid to family members who are not professionally qualified.
26) Legal expenses incurred to defend criminal proceeding will not be allowed.
27) Any payment made to non-residents after deducting TDS, and if that TDS amount is not
paid on or before the due date of filing return (30% of such payment is disallowed).

Business Income
1) Bad debts recovered allowed earlier. 6) Profit on sale of import license.
2) Sundry income/sales/commission 7) Sales tax refund (allowed earlier).
received/discount received/brokerage. 8) Smuggling income.
3) Miscellaneous incomes. 9) Export incentive.
4) Interest from debtors.
5) Refund of customs duty.

Allowed Expenses
Expenses incurred for earning the business income are called as allowed expenses. Besides the
regular and common expenses, the following expenses are also treated as business expenses and
they allowed to be deducted from business incomes.
1) Repairs and renewals of business 17) Staff welfare expenses.
premises. 18) Interest on loan, if loan is taken for
2) Rent/taxes/rates related to business. business purpose.
3) Bad debts. 19) Compensation to retrenched
4) Fire insurance paid for buildings and employees in the interest of the business.
goods used for business. 20) Salary to staff.
5) Expenditure on scientific research. 21) Discount allowed.
6) Any contribution to approved scientific 22) Guest house and holiday homes
research institution, colleges, universities expenses.
150% of the amount contributed is 23) Electricity/telephone bill/water bill
allowed as deduction. related to business premises.
7) Group insurance premium paid before 24) Printing/stationary.
the due date. 25) Travelling expenses relating to
8) Bonus commission paid before the due business purpose.
date. 26) Loss of goods or cash embezzled by
9) Sales tax paid before the due date. an employee.
10) Theft in office premises. 27) Depreciation.
11) Pooja expenses at office. 28) Legal expenses incurred to avoid
12) Employer contribution to RPF business liability and to defend the
13) Revenue advertisement expenses will assesses title of business.
be allowed in full. 29) Legal expenses for filing Income Tax
14) Demurrage paid to railways. appeal.
15) Establishment expenses. 30) Deposits made under Tatkal
16) Audit fees/salaries to Telephone Scheme or Scheme own your
employees/office expenses. telephone

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Non-Business Incomes
1) Interest on securities.
2) Agriculture income.
3) Rent received or income from house property.
4) Bad debts recovered but not allowed earlier.
5) Profit on sale of fixed assets and investments.
6) Dividend received.
7) Interest on Deposit, Dividend on UTI and Mutual Funds.
8) Life Insurance Policy amount received.
9) Gifts received from relatives.
10) Income tax refund.
11) Share of Incomes from HUF.
12) Winnings from lottery/cross word puzzles/horse race.

Depreciation
It is a continuous, gradual and permanent fall in the value of an asset due to
wear and tear, passage of time and obsolescence of technology and change of
ownership etc.
Depreciation under income tax is to be claimed on the block of assets & not on
individual asset.

Rate of depreciations prescribed according to Income Tax Act 1961

Particulars Rate % p.a.

I. Buildings

Buildings which are used mainly for residential purposes 5%

except for hotels and Boarding House

Non-residential building like offices, factory, godown. 10%

Books owned by assessees carrying on business in 40%

running lending libraries

II. Furniture and fittings

Any Furniture and Fittings 10%

III. Plant and Machinery

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 Plant and machinery 15%

Motor cars, other than those used in a business of running 15%

them on hire

Motor buses, Motor lorries, and Motor used in a business

of running them on hire
30%

Motor buses, Motor lorries, and Motor used in a business 45%

of running them on hire acquired on or after 23rd August
2019 but before 1st April 2021 and is put to use before 1st
April 2021

Water pollution control equipment 40%

Lifesaving Medical equipment 40%

Computers 40%

Books (Annual publication or other than annual 40%

publication) owned by assessees carrying on a profession

Books owned by assessees carrying on business in 40%

running lending libraries

IV. Ships 20%

V. Intangible assets

Intangible assets: Patents, copyrights, technical know-

how, trademarks, licenses, franchises. Etc.
25%

Methods of depreciation

Only WDV Method of charging depreciation is recognized under the Act.

However, Power Generation units have option to claim depreciation on SLM.

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1) If assets are newly purchased in the previous year and put to use for less
than 180 days then 50% of rate of depreciation will be given.
2) If the block of assets ceases to exist on the last date of the previous year then
depreciation is inadmissible.

3) Additional depreciation
 In case any new plant & machinery is acquire and installed on or after
01-04-2005, it shall qualify for additional depreciation.

 Rate of additional depreciation: 20% of actual cost.

 Undertakings set up in any backward area in State of Telangana/West

Bengal/Andhra Pradesh/Bihar during 1 April 2015 to 1 April 2021 : 35%
of Actual Cost of New P&M

Eligibility: The Assessee must be engaged in the business of – (a)

Manufacturing or production of any article or thing, or (b) Generation,
transmission or Distribution of Power

Essential Features of Profits and Gains of Business.

1. Business carried on by the Assessee: It is a must that the business

should have been carried on by the assessee himself during the previous
year. It does not mean that an assessee should physically carry on a
business. What is more important is that he must have right to carry on
the business and the business must have been carried on in the exercise of
that right by the assessee either personally or through his agent or
servant. A business may be carried on in India or outside India. It is the
residential status of an assessee which determines the incidence of tax.

2. Business is carried on during the previous year: The business should

have been carried on during the previous year. The business may be
carried on by the assessee at any time during the previous year. Thus, it is
not necessary that the business should be carried on throughout the year.
Sometimes some of the receipts are taxable as income from business
even if no business is carried on by the assessee in the year of receipt.
Following are some of the examples:
 Recovery against any excess payment.
 Sale of an asset used for scientific research.
 Bad debts recovered (allowed as expenditure in the earlier years).
 Any amount withdrawn from special reserve.
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  Amounts received relating to a discontinued business.

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 3. Aggregate income of different businesses is assessed to tax: If an assessee
has different businesses, the profits of all of them will be aggregated and
put to tax.
4. Speculation Profits: Profits from speculation business are taxed under the
head – Profits and Gains of Business. However, speculation loss cannot
be set-off against the legal business profits.
5. Income of previous year is put to tax in the following assessment year.
6. Any gain arising on the transfer of a capital asset used in the business
cannot be treated as business income. It can, however, be treated to tax
under the head-Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed under this
head.
8. Anticipated or future profits are not taxable in the current year. But, the
real profits i.e. the profits received or receivable during the year are taxed in
the relevant assessment year.
9. Profits on winding up are not taxable as business income but are liable to
tax under the head-Capital Gains.
Computation of Profits and Gains {Section 29}

The profits and gains of a business or profession are to be computed in

accordance with the provisions of sections 30 to 43 D (sec 29). The list of
provisions/allowances is not exhaustive. We should apply ordinary
commercial principles while determining real and true profits of a business
or profession. Sometimes there may be an expenditure or loss which may not
be covered under the above sections 30 to 43 D. Yet such losses would have
to be allowed in order to determine true profits. Some of the usually
occurring types of trading losses are given below:

1. Loss of Stock in trade: Loss of stock- in- trade because of energy

action, freezing of stocks, leakages, by ravages of white ants, fire or
negligence etc. are allowed as deduction. However, any amount
recovered shall be treated as revenue receipt.
2. Loss through embezzlement by employee or agent is allowed as
deduction in computing business income.
3. Loss by theft: If robbery or theft takes place during the normal
working hours of the business, it is allowed as expenditure. Any loss
by theft should be incidental to the operations of the business e.g. theft
by a pretended customer, or loss of cash before being deposited in the
bank etc.

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 4. Loss incurred for standing as surety: Where a trader stands surety for
the debts of another and such guarantee is for the purpose of the trade,
any payment made as a result of such guarantee can be deducted as a
business loss.
5. Loss incurred on account of insolvency of banker with which current
account is maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee for properly
carrying out of contract for supply of commodities.
7. Loss incurred due to devaluation of rupee in foreign country which is
being utilized in the course of business.
8. Loss due to exchange rate fluctuation of foreign currency held on
revenue account.
General Principles Governing Admissibility of Deductions

Following are the general principles which should be taken into

consideration while allowing deduction in respect of allowances, expenses or
losses. As has already been explained, these are not exhaustive by nature but
simply lay some guidelines which may help us arriving at a decision while
allowing or disallowing a particular deduction.

1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon the
method of accounting. Under mercantile system of accounting
expenditure is allowed only when it is related to the previous year.
However, under cash system of accounting, amount actually paid during
the year is allowed. There are certain exceptions with regard to sales tax,
excise duty and bonus etc.
4. Expenditure should be in relation to one’s own business.
5. Expenditure incurred should be in the commercial expediency. An
expenditure sometimes need not be for direct and immediate benefit of
the business.
6. Expenditure once incurred may give extended benefit to the business, i.e.
benefit of expenditure may be extended beyond the year of expenditure
viz. deferred revenue expenditure.
7. No deduction of expenditure incurred before setting up of a business,
except in the case of preliminary expenses u/s 35 D.
8. Expenditure must have relationship with taxable profits.
9. Estimated losses are not allowed as deduction.
10.Expenditure incurred on wasting assets is not allowed.

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 11.Expenditure in relation to non-existing liability is not allowed.
12.Expenditure incurred in defending against the breach of law is not
allowed e.g. fines and penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are allowed
over a period of time.
Deduction expressly allowed

Section 30 to 37 contains a list of certain expenses/ deductions which are

allowed in computing the income under this head. While considering these
deductions, the word ’paid’ means actually paid or incurred depending upon
the method of accounting. Under cash system, the word ’paid’ means
‘actually paid’, under mercantile system the word ’paid’ means ‘actually
incurred’.

The following deductions are expressly allowed:

1. Rent, rates, taxes, repairs and insurance of building used for the
business (Sec 30): The building may be own building or rented
one. As a tenant, any amount paid towards the current repairs is also
deductible. However, any premium paid towards rented house is not
allowed.
2. Repairs and insurance expenses paid in relation to plant and
machinery and furniture are allowed (sec.32): Any expenditure
incurred to replace petrol engine by diesel engine in a jeep to augment
the profit is allowed.
3. Depreciation u/s 32: Under Section 32 depreciation on assets is
allowed as deduction while computing income from business or
profession. To claim this deduction following conditions should be
satisfied: 1) Assessee should be owner of the asset. 2) Asset must be
used for the business. 3) Such use must be in the previous year.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of
prospecting for or extraction or production of petroleum or natural gas
or both in India and abroad is allowed. Amount of deduction is-
Amount deposited or amount deposited or 20% of profits, whichever
is lesser.
5. Expenditure on Scientific research (sec. 35): Scientific research
means any activity for the extension of knowledge in the fields of
natural or applied science including for the extension of knowledge in
the fields of natural applied science including agriculture, animal
husbandry or
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 fisheries. The following deductions are allowed in respect of
expenditure on scientific research:
a Revenue expenditure on in-house scientific research related to
business [Sec.35 (1) (i)]: Any expenditure of revenue nature
incurred on scientific research related to business is allowed in
full. Any expenditure incurred for the payment of salaries, material
within three years immediately preceding the commencement of
business is also allowed.
b Contribution of outsiders [Sec 35 (1)(ii)]: Any amount paid to
 scientific research association which has object of undertaking
scientific research or
 To a university, college, or other institution to be used for
scientific research is deductible at 150% of the sum paid. The
research programme may be related to business or not related to
business.
From financial year 2022-22 the rate will be 100%.
 Payment of research in social science to any approved
institution, university or college is deductible at 100% of the
sum paid u/s 35 (1) (ii) & 35(1) (iii).
 Capital expenditure incurred by an assessee who carries on
scientific research himself is fully deductible u/s 35 (2) in that
every year in which it is incurred. Unabsorbed part of such
expenditure will be carried forward and set off as unabsorbed
depreciation.
If the asset is sold without having been used for other purposes,
the sale proceeds or deduction allowed whichever is less is
treated as business income if the previous year in which the sale
took place. The excess of sale proceeds over deduction allowed
however is taxed as capital gain.

 Contribution of National Laboratory [Sec.35 (2AA)]: Any

amount paid to any national laboratory will get a deduction at
150% of actual amount given. National Laboratory means a
scientific laboratory functioning at national level under the
aegis of the Indian Council of Agricultural Research, Indian
Council of Medical Research or Council of Industrial and
Scientific Research, the Defense Research and Development
Organization, the Department of Electronics, the Department of

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 Bio-Technology, or the Department of Atomic Energy and
which is approved by the prescribed authority for this purpose.
From financial year 2022-22 the rate will be 100%.
 Any amount of expenditure incurred up to 31-3-2012 on
scientific research by a company engaged in the business of bio-
technology, drugs; pharmaceutical, electronic equipment’s,
computers, telecommunications etc. will get a weighted
deduction of 200% (sec. 35 2AA). (vii) Contribution to research
& Development: Sec. 35 2 AB provides for weighted deduction
at the rate of 125% in respect of contribution made to IIT,
approved university college etc., towards research activities.
This weighted deduction is in addition to the special benefit
available to a person for in house research. In case of
Biotechnology, Drugs Pharmaceutical companies a weighted
deduction of 200% is allowed.

6. Expenditure incurred on acquisition of patent rights or copy

rights (sec. 35A): Where capital expenditure is incurred by the
assessee (after 1966 but before 1-4-1998) on the acquisition of patent
rights, copying for the purpose of business, the whole amount is
deductible in 14 equal instalments. Where the right became effective
in any year prior to the previous year in which expenditure is incurred,
the number of completed years which have elapsed since
commencement of the patent shall be reduced from 14 years and the
deduction is allowed in remaining years. In the case of patent rights
acquired on or after 1-4-1998, the expenditure incurred on the
acquisition of such rights shall be capitalized and depreciation u/s 32
is allowed.

7. Expenditure incurred on Technical know-how (Sec.35 AB) : Any

sum paid before 1-4-1998 on the acquisition of technical know-how
for use for the purpose of his business will be allowed as deduction by
spreading it equally over six years, namely, the year in which the
lump-sum consideration is paid and the five immediately succeeding
years. Where the knowhow is developed in a government laboratory,
or a laboratory owned by a public sector company or university, the
consideration will be spread over 3 years. But the know-how acquired
after 1-4-1998 will be treated as capital expenditure and will be
depreciated u/s 32.

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 8. Capital expenditure to obtain license to operate
telecommunication services (Sec. 35 ABB) :Any capital expenditure

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 incurred and actually paid by an assessee on the acquisition of any
right to operate telecommunication services by obtaining license will
be allowed as deduction in equal instalments over the period starting
from the year in which such payment has been made and ending in the
year in which the license comes to an end.

9. Expenditure on eligible project or scheme (Sec. 35 AC): No

deduction will be allowed from business income in respect of
expenditure incurred for an eligible projector scheme on or after 01-
04-2018. Eligible project or scheme means such project or scheme
which is meant for promoting social and economic welfare or uplift of
the public as may be certified by the Government of India on the
recommendation of National Committee Constituted by Central
Government consisting of persons of eminence in public life.

10.Payment of Rural Development Fund (Sec.35 CCA) : Any sum

paid to Rural Development Fund set up and notified by the central
Government is fully deductible. This section applies to the National
Poverty Eradication Fund also. But once this deduction is claimed and
allowed u/s 35 CCA, the same is not allowed as a deduction under any
other provision of this Act.

11.Amortization of preliminary expense (Sec .35 AD) : Where any

Indian Company or resident non-corporate assessee incurs after 31st
March 1998 any preliminary expenditure, the assessee shall be
allowed a deduction of an amount equal to one-fifth of such
expenditure of each of the five successive previous years beginning
with the previous year in which the business commences. Expenses
incurred before 1-4-1998 are to be spread over 10 years preliminary
expenses include: expenditure in connection with the preparation of
feasibility report, project report conducting marketing survey,
engineering services, legal charges for drafting agreements,
Memorandum of Association, Printing of Memorandum of
Association and registration expenses. The maximum amount eligible
for deduction under this section shall not exceed 5% of the cost of the
project. But in the case of Indian companies, it is at the option of the
company, whether 5% of cost of the project or 5% of the capital
employed in the business of the company.

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 12.Expenditure for amalgamation or demerger of an undertaking
(sec. 35 DD): Where an Indian Company incurred expenditure after
31-3- 1999. Wholly and exclusively for the purpose of amalgamation
of demerger of an undertaking 20% of such expenditure for each of

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 the five successive years beginning with the year in which
amalgamation of demerger takes place shall be allowed as deduction.

13.Expenditure on voluntary retirement (Sec. 35 DDA): The amount

received by an assessee in consequence of an employee’s voluntary
retirement, the assessee shall be allowed a deduction of 20% of such
expenditure for each of the five successive previous years beginning
with the year in which such payment was made.

14.Expenditure on prospecting etc. for development of certain

minerals (Sec. 35E) : Any expenditure incurred by an Indian
Company or Indian Resident non-Corporate assessee wholly and
exclusively on the prospecting of any mineral or on the development
of mines or other natural deposit of any such minerals the assessee
shall be allowed a deduction of an amount equal to 1/10th of he such
expenditure for each of the ten successive previous years beginning
with the year of commercial production.
Other Deductions (Section 36). While computing profits and gains
business or profession the following other deduction are allowed:

1. The amount of any insurance premium paid in respect of insurance

against risk of damages or a destruction of stocks or stores used for
the business is fully deductible [Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-operative society
is fully deductible [Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)]: Any premium
paid under a scheme framed in this behalf by the general Insurance
Corporation of India and approved by the Central Government,
shall be fully deductible.
4. Bonus or commission paid to an employee [Sec.36 (1) (ii): Any
bonus or Commission paid to an employee for services rendered
shall be deductible. But such sum should not, in any way, be paid
as profit or dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii): Any interest paid
in respect of capital borrowed for the purpose of
business/profession is fully deductible. Interest on own capital is
not deductible.
6. Employer’s contribution Provident Fund [Sec.36 (1) (iv) (v)]:
Any amount paid by an assessee as an employer by way of
contribution towards Recognized Provident Fund, or an approved
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 superannuation Fund or approved Gratuity Fund shall qualify for
deduction .

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 7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of animals
which have been used for the purpose of business (not as stock in
trade) and have died or become useless for such for such purpose,
deduction is allowed to the extent of the amount equal to the
difference between the actual cost to the assessee and the amount,
if any, realized in respect of the carcasses of animals. If sale
proceeds are Nil then the entire cost will be allowed as loss.

8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad debts of
part thereof, which is written off as irrecoverable in the accounts of
the assessee for the previous year is allowed as deduction subject to
the following conditions:
a The debt has been taken into account in computing the
income of the assessee of the previous year in which the
amount is written off or of an earlier previous year; or
b It represents money lent in the ordinary course of business of
money lending which is carried on by the assessee.
c There must be a debt.
d Debt must be incidental to the business.
e Debt must have been taken into account while computing
business income.
f Debt must have been written off in the books of account of
the assessee.
Notes:

 If the amount of any part thereof of bad debts is recovered at a

later date, the same will be treated as business income of the
previous year during which such recovery takes place.
 Bad debts of a discontinued business or to a successor of the
business are not deductible.

9. Provision for bad debts [Sec .36 (1) (iii a)]: Normally any
provision for bad and doubtful debts is not allowed as deduction.
But the same may be allowed in the case of rural branches of
commercial banks.

10.Transfer to special reserve [Sec. 36 (1) (viii)] : The amount

transferred to a special reserve account and maintained by a
financial corporation which is engaged in providing long term
finance for industrial or agricultural or infrastructure development,
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 in India or by a public company formed and registered in India

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 with the main object of carrying on the business of providing long
term finance for construction or purchase of houses in India for
residential purposes is allowed to the extent of 20% of its profits.

11.Family Planning Expenditure [Sec. 36 (1) (ix)]: Any bona fide

expenditure incurred by a company for the purpose of promoting
family planning amongst its employees is allowed as deduction. If
such expenditure is of a capital nature. It shall be allowed as a
deduction in five equal annual instalments commencing from the
previous year in which the expenditure is incurred.

12.Contribution of |Exchange Risk Administration Fund [Sec. 36

(1)(x)]: The contribution made by the public financial institutions
to the Exchange Risk Administration Fund will be allowed as
business deduction while computing their income.

TERMINAL QUESTIONS

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Section B and Section C
Problems of Income from Business

1) Mr. Dhoni is the owner of a business. His profit and loss account for
the year ending 31-03-2023 was as follows:
Particulars Amount Particulars Amount

To salaries 5,000 By Gross profit 55,000

To Rent rates and taxes 2,900 By Interest on 5,000
To Printing and stationery 750 Investments 6,000
To personal expenses 3,000 By Rent received 10,000
To Commission 2,000 By Winning from
To Discount on allowance 450 lottery
To Provision for bad debts 1,200
To Postage and telegram 270
To law charge 450
To Advertisement 1,550
To Gifts and presents 150
To Fire insurance premium on 500
stock 1,250
To Sales tax 480
To Repairs and renewal(not
for business) 1,800
To loss on sale of machinery
(used for private purpose) 1,700
To Life insurance premium 740
To Wealth tax 730
To Interest on capital 300
To Audit fee 1,380
To Interest on bank loan 2,500
To Provision for depreciation 3,900
To Provision for income tax 43,000
To Net Profit 76,000 76,000

Additional Information:
1. Actual bad debts were ₹. 500.
2. Actual amount of income tax paid during the year ₹. 4,000.
3. Allowable depreciation as per IT. Rules ₹. 1,500

FOR PRIVATE CIRCULATION ONLY 23

 4. Advertisement expenses include ₹. 450 spent on special advertisement
campaign to open a new shop.
5. He carried out the business in a rented house, 40%(IA) of which is used for
his residence.
6. Rent, rates and taxes include ₹, 2,400 paid as rent of the property during the
year.
Compute taxable his income from business for the A. Y. 2023-24

2) Shri Govind (age 55 years), a Resident of Mumbai submits the following

Profit and Loss A/c for the year ending 31st March 2023.

Particulars Amount Particulars Amount

To opening Stock 1,10,000 By Sales 36,00,000

To Purchases 14,00,000 By Closing Stock 2,20,000
To Wages 3,00,000
To Gross profit 20,10,000
38,20,000 38,20,000

To Advertisement 2,00,000 By Gross Profit 20,10,000

To Salary to staff 6,60,000 By rent 2,40,000
To Govind ‘s salary 1,20,000 By Commission 1,50,000
To Audit fees 60,000 By Bad debts recovered
To Bad debts 40,000 (earlier disallowed) 70,000
To Reserve for bad debts 50,000 By Dividend on SRM Ltd.
To General expenses 2,50,000 Shares (Gross) 30,000
To Municipal tax 24,000
To Fire insurance Premium on
goods 26,000
To Depreciation 78,000
To Patents rights 1,60,000
To Staff welfare fund 40,000
To Employees R.P.F 50,000
To Sales tax 1,90,000
To Donation to NDF 1,00,000
To premium on Govind’s Life 36,000
Insurance
To Net profit 4,16,000
25,00,000 25,00,000

FOR PRIVATE CIRCULATION ONLY 24

Additional Information:
1. Opening stock and closing stock were overvalued by 10%.
2. Advertisement includes ₹. 1,00,000 being cost of permanent sign board.
3. Business income of ₹. 70,000 was not recorded in the P&L A/c.
4. General expenses include ₹. 50,000 paid for securing business orders and
₹. 60,000 spent on Govind’s birthday
5. Depreciation allowable on all assets including permanent sign board but
excluding patent rights as per IT rules was ₹. 90,000.
6. Patents rights were acquired on 11.10.2021 on which depreciation allowable
at 25
7. Purchases include a cash payment of ₹. 30,000 towards purchase of
raw materials. Compute taxable his income from business for the A. Y.
2023-24.

DEPRECIATION – 100 %
1. SIGN BOARD
2. PATENTS

3) Following is the P & L A/c of Mr. Shivaji, a Merchant, for the year ending
31st March 2023.
Particulars Amount Particulars Amount

To Rent 60,000 By Gross Profit 5,23,000

To Rates 6,00 By Interest from Debtors 28,000
To Salary to Staff 54,000 By Rent from Property 24,000
To Diwali Pooja By Sundry Income 16,000
Expenses 2,000 By Commission 37,000
To Interest on Loan 1,25,000 By Bad debts recovered
To Sundry Expenses 55,000 (LESS) 10,000
To Bad debts 6,000 (Disallowed earlier)
To charity 1,000
To Reserve for Bad debts 2,000
To Entertainment 8,500
To Loss by theft 14,000
To Sales tax penalty 10,000
To Net profit 2,94,500
6,38,000 6,38,000

Additional Information:
1. Salary to Staff includes Salary of ₹. 24,000of a son, who is a B. Com

FOR PRIVATE CIRCULATION ONLY 25

 student and who casually helps and proprietor salary ₹. 1,000 p.m
2. Rent includes ₹. 12,000 of a shop belonging to assessee himself

FOR PRIVATE CIRCULATION ONLY 26

3. A Loan of ₹, 60,000 at 15% p.a. is taken from his wife out of funds
advanced by him and interest is included in Interest on Loan.
4. Sundry Expenses include ₹, 9,000 being expenses incurred on Pilgrimage to
Haridwar
5. Entertainment includes ₹. 1,500 spent on tea of some guest of a local MLA
6. He earned ₹. 40,000 in gold smuggling and not shown in the books
7. Rates include ₹. 4,000 for property Let out
8. Loss by theft took place when somebody pretending to be a customer stolen
a necklace worth ₹. 6,000 in his shop, ₹. 8,000 was stolen from his house.
9. Sales tax paid and depreciation not taken to P/L(LESS) A/c ₹. 8,000 and
₹. 5,000 respectively.
Compute taxable his income from business for the A. Y. 2023-24.

4) From the P &L A/c of Mr. Ramesh for the year ending 31/3/2022. Compute
the Income from business for the A.Y. 2023-24.
Particulars Amount Particulars Amount

To Office Expenses 40,000 By Gross Profit B/d 6,40,000

To General Expenses 16,000 By Interest on Govt. 11,200
To Interest on Bank Loan 4,000 Securities 16,000
To Audit Fees 4,000 By Discount received 800
To Interest on Capital 12,000 By Bad debts recovered (
To Rent 20,000 not 16,000
To Income Tax 16,000 Written of earlier year) 16,000
To Charity 8,000 By Sundry receipts
To Legal Expenses 4,000 By Dividends
ToCompensation to 20,000
Retrenched
Employee 36,000
To Extension of Building 8,000
To Sales Tax 5,12,000
To Net Profit 7,00,000 7,00,000

Additional Information:
1. General Expenses included ₹. 8,000 towards purchase of Computer.
2. Legal Expenses include ₹. 1,600 penalty by Customs Authority.
3. Rent includes ₹. 8,000 paid as rent of House in which assessee lives.
4. Depreciation allowed ₹. 12,000 as per Income Tax Rules (excluding
depreciation on Computer purchased).
5. Income tax in excessive to the extent of ₹. 5,000.

FOR PRIVATE CIRCULATION ONLY 27

 6. Sales tax includes ₹. 1,000 paid as penalty.

5) From the below given P & L a/c and Additional information of Mr. David.
Compute his taxable business income for A.Y. 2023-24.
Particulars Amount Particulars Amount

To opening Stock 40,000 By Sales 5,00,000

To Purchases 2,20,000 By Closing Stock 50,000
To Wages 15,000
To Freight 10,000
To Gross profit 2,65,000
5,50,000 5,50,000
To Establishment
By Gross Profit 2,65,000
Expenses 15,000 By Dividend on Shares 6,000
To Salaries 25,000 (Gross)
To Rent and Taxes 12,000 By Rent from House 15,000
To Income Tax 10,000 Property
To Household Expenses 14,000 By Refund of Income 2,000
To reserve for Bad debts 5,000 Tax
To Advertisement 15,000 By Interest on Govt. 1,000
To Donation 6,000 Securities
To Sales Tax 20,000 By Bad Debts recovered 5,000
To Provision for Income 8,000 (allowed earlier)
Tax 11,000 By Profit of sale of
To Carriage outward machinery 3,000
To Drawings 4,000 By Miscellaneous
To General Expenses 16,000 income 9,000
To Interest on Capital 9,000
To Bad Debts 7,000
To Repairs 8,000
To Taxes and Insurances 2,500
To Car Expenses 11,000
To Audit Fees 12,000
To Depreciation 20,500
75,000
To Net Profit 3,06,000 3,06,000
Additional Information:
1. Salaries include payment to a relative employee, which is considered to be
FOR PRIVATE CIRCULATION ONLY 28
 unreasonable up to Rs. 6,000.

FOR PRIVATE CIRCULATION ONLY 29

2. Purchases include two payments of ₹. 30,000 and ₹. 10,000 paid in cash to
a supplier.
3. Opening stock is valued at 10% above the cost.
4. Allowable depreciation is ₹. 22,500.
5. 60% of car expenses are for business purposes.
6. General expenses include ₹. 10,000 given to notified research institute for
carrying on scientific research.

6) From P &L A/c of Mr. X, a manufacture. Calculate the Taxable income

from business for year ending 31/03/2023.
Particulars Amount Particulars Amount

To Salary to Employees 95,000 By Gross profit 3,00,000

To Advertisement expenses in 24,000 By Interest on securities 14,000
cash 16,000 By Income from HP 25,000
To General Expenses 22,000 By Bad Debts recovered 12,000
To Entertainment expenses 1,500 (allowed earlier)
To Bad Debts 24,000 By Profit on sale of Import 80,000
To Drawings by proprietor 6,000 License
To Sale Tax (due and paid on
01/07/203) 7,000
To Interest on Proprietor’s 2,500
Capital 21,000
To repairs 5,000
To Rent 15,000
To Legal Expenses 6,000
To Depreciation 4,000
To Bonus (due) 72,000
To Bonus to Proprietor 12,000
To Motor Car purchases 2,000
To Expenses on car during the 6,000
year 90,000
To Donations 4,31,000 4,31,000
To Provision for Bad debts
To Net profit
He gives you the additional information:
1. ₹. 3,000 was spent on the purchase of land and is include in legal expenses.
2. Half of repair expenses bear on let -out building.
3. Depreciation allowable on all assets including Motor Car is ₹. 14,400.
4. Bonus was paid to employees on 30/06/2023.

FOR PRIVATE CIRCULATION ONLY 30

 7) Following is the P & L A/c of Mr. Akash for year ending 31/3/2023.
Compute taxable income from business.
Particulars Amount Particulars Amount

To Salaries 30,000 By Gross Profit 2,35000

To Depreciation 25,000 By Sundry profits 66,200
To Office expenses 18,000
To Travelling expenses 10,000
To Expenses on festival 3,000
To Embezzlement of cash 10,000
by
Employee 10,000
To Interest 18,000
To Legal expenses 8,000
To Education expenses to 16,500
his son
To Sundry expenses 1,52,700
To Net profit 3,01,200 3,01,200

Adjustment:
1. Salary includes a payment of ₹. 8,000 given to an employee outside
India and no tax has been deducted at source.
2. Written down value of plant and machine ₹. 80,000 as on 1-4-2023 new
plant costing Rs. 80,000 has been installed during the month Nov. 2020.
Provide depreciation at 15%
3. Festival expenses include a gift of ₹. 2,000 give to relative at the time of
his marriage.
4. Sundry expenses include ₹. 5,000 on the maintenance of a guest house.
5. Legal expenses include a payment of ₹. 12,000 given to a tax consultant
in connection with an income tax appeal.
6. Furniture was sold for ₹. 600 and then WDV is ₹. 900.
7. Sundry profits include ₹. 10,000 withdrawn from his PPF.

8) Mr. Krishna runs cement plant. His Profit and Loss A/c for the year ending
31/03/2023 is as follows:
Particulars Amount Particulars Amount

To Opening stock 40,000 By Sale of cement 12,00,00

To purchase of 2,40,000 By Car sold 0
materials 40,000 By Dividend 75,000
FOR PRIVATE CIRCULATION ONLY 31
 To Preliminary received 82,000
expenses 20,000 By Refund of excise 12,000
To Wages 35,000 duty
To Royalty 30,000
To Excise duty 40,000
To Manager’s salary 20,000
To Interest on loan 25,000
To Depreciation 22,000
To Income Tax 80,000
To General Expenses 35,000
To Sales tax 80,000
To Salaries and wages 30,000
To Patent purchased 17,000
To Entertainment
expenses 615000
To Net profit 1369000 1369000
Adjustments:
1. Wages include ₹. 5,000 paid to domestic servant.
2. General expenses include ₹. 2,000 for clearing (Selling) machine.
3. Mr. Krishna is the manager of this business.
4. During the previous year he purchased a car for ₹. 1,20,000 which was sold
for ₹. 75,000.
5. General expenses include the
following:
a) Donation to public hospital ₹. 2,500.
b) Special advertising campaign undertaken in respect of product place in
the market ₹. 30,000.
c) Subscription to cement syndicate ₹. 1,000.
d) Employee’s family planning expenses ₹. 9,000.
6. Guest house expenses ₹. 12,000 included in entertainment expenses.
7. Closing stock of finished cement ₹. 90,000 not included in profit and loss
a/c.

Income from Profession

Format for computation of Profession Income

Particulars Amount

Professional receipt XXX

Less: Professional expenses XXX

FOR PRIVATE CIRCULATION ONLY 32

FOR PRIVATE CIRCULATION ONLY 33
Taxable Income from XXX
Profession

Chartered Account/Auditor
Professional Receipt Professional Expense

1. Audit fees 1) Office expenses/rent/salaries

2. Financial consultancy service 2) Printing and Stationery
3. Income from Accountancy work 3) Depreciation on Professional
4. Gifts and presents from clients books
5. Income from Appellate Tribunal 4) Depreciation on furniture/motor
Appearance car/
6. Tax consultation fees, Examiner’s office equipment
fees 5) Expenses of motor car.
7. Tuition fees 6) Allowance to clerk
8. Fees from income tax appeal, 7) Membership fees
Remuneration from Articles 8) OYT expenses (own your
published in professional journals Telephone)
9) Stipends to trainees
10) Subscription to CA Institute

Lawyer
Professional Receipt Professional Expense

1) Legal Income/fees 1) Office rent/expenses/salaries

2) Special commission 2) Law journals
3) Cash gifts and presents from clients 3) Telephone expenses
4) Consultation fees 4) Magazines subscription
5) Remuneration from articles 5) Motor car expenses
published in 6) Depreciation on motor car/
Professional journals furniture/
6) Arbitration fees Office equipment
7) Purchase of professional books
8) Printing and stationery
9) Electricity charges
10) Miscellaneous /general/ office
expenses

Doctor
Professional Receipt Professional Expense
1) Sale of medicines 1) Cost of medicines purchased

FOR PRIVATE CIRCULATION ONLY 34

 2) Consultation and visiting fees 2) Depreciation on surgical expenses
3) Gifts and presents from patients 3) Salaries paid to staff
4) Remuneration from articles 4) Rent of clinic/dispensary
published in 5) Purchase of professional books
Professional journal 6) Telephone charges
5) Retainer fees 7) Printing and stationery
6) Examiner fees 8) Motor car expenses
9) Depreciation on motor car/office
equipment/furniture.

Treatment of Cost of Medicine

In case of calculation of cost of medicine, if the cash system of accounting is
followed, then the actual cost of purchases has to be taken as the cost of
medicine. If mercantile system of accounting is followed, then the cost of goods
sold has to be taken as the cost of medicine and to be deducted as professional
expenses. (Cost of goods sold = Opening stock + Purchases – Closing stock)

Problems of Doctors

1) Dr. Rekha is a registered medical practitioner, she provides her Receipts and
payments A/c for the year ended 31st March 2023.
Particulars Amount Particulars Amount

To Balance b/d 1,30,000 By Salaries 66,000

To Visiting fees 1,40,000 By Clinic rent 96,000
To Consultation fees 4,76,000 By Motor car expenses 70,000
To Special Medical camp By Driver’s salary 60,000
Remuneration 50,000 By Medical books 30,000
To Rent from H.P 1,20,000 By Motor car 5,00,000
To Gifts 60,000 purchased 92,000
To Dividend from Sun By Household 29,000
Pharma Ltd. 11,600 expenses. 20,000
To Interest on debentures of By Telephone 33,000
Tata Power Ltd. 18,800 By Travelling 10,400
By Surgical equipment
10,06,400 10,06,400
By Balance c/d
Additional Information:
1. Remuneration received for special medical camp was donated to an
orphanage.
2. 30% of motor car usage, 20% of travelling expenses and 25% of telephone
bills relate to personal use.

FOR PRIVATE CIRCULATION ONLY 35

3. Allow depreciation as per IT rules.
4. 50% of gifts are from patients.
5. Medical books include annual publication worth ₹. 10,000 remaining are
general medical books.
Compute taxable professional income for the A.Y. 2023-24.

2) Following is the Receipts and Payments of Doctor Hariprasad for the year
ending 31-3-2023
Particulars Amount Particulars Amou
nt

To Balance b/d 1,20,000 By Clinic rent 25,000

To Consultation fees 65,000 By Staff salary 80,000
To Visiting fees 80,000 By Rent and taxes 25,000
To Sale of medicine 45,000 By Electricity and water 14,00
To Operation theater rent 25,000 charge
To Dividend 25,000 By purchase of Medical 14,000
books 40,000
(annual publication) 10,000
By Purchase of surgical 5,000
equipments 20,000
By Motor car expenses 12,000
By Medical association 6,000
members fees 12,000
By Audit fees 30,000
By staff welfare expenses 67,000

3,60,000 By Diwali expenses 3,60,00

By Entertainment expenses 0
By Medicine purchase
By Balance c/d

Additional Information:
1. Gift form patient ₹. 4,000 was given to him by a patient not included in
the account.
2. ¼ of motor car expenses relate to personal use.
3. The rate of depreciation on surgical equipment is 40%.
4. Interest received on bank deposits.
5. Audit fee include income tax appeal expenses of ₹. 10,000.
Compute his taxable income from profession for the A.Y. 2023-24.

FOR PRIVATE CIRCULATION ONLY 36

 3) Dr. Usharani (age 46), a physician and resident of Mumbai submit the
following receipts and payments account for the year ending 31st March 2023
Particulars Amount Particulars Amount

To Balance b/d 1,40,000 By Balance c/d

To Consultation fees By Rent of Clinic
2017-18 2018-19
25,000 36,000 1,80,000
2018-19 5,80,000 2019-20 1,00,000
5,25,000 1,60,000 1,44,000 50,000
2019-20 1,00,000 By Surgical equipments 40,000
30,000 By Computer 18,000
To Visiting fees 60,000 By Interest on loan (for 12,000
To Winning from lottery 80,000 Profession)
(gross) 50,000 By Electricity and water 30,000
To Interest on post office 2,40,000 By newspaper and magazines 1,00,000
savings 3,00,000 By Professional books 25,000
Bank a/c (Annual publication) 25,000
To gifts from patients By Purchase of medicines 36,000
To Share from HUF By Household expenses 24,000
To Sale of medicines By Income tax 20,000
10,000
To Loan from bank By Life insurance premium
60,000
By Gift to mother
30,000
By Subscription to AIMA
50,000
By Subscription to professional
2,40,000
journal
6,60,000
By Car expenses
17,10,000 By Telephone expenses 17,10,000
By Lottery tickets
By Staff salary
By Balance c/d
Additional Information:
1. Written down value of car on 31-03-2022 was ₹. 2,00,000 on which 15%
depreciation to be charged. Car is used 60% for profession and 40% for
private purpose.
2. Visiting fee due but not received for 2018-19 ₹. 36,000.
3. Closing stock due but not received for 2019-20 ₹. 36,000.

FOR PRIVATE CIRCULATION ONLY 37

4. Closing stock of medicines Rs. 30,000.
5. Surgical equipment and computers were bought and put to use on 10-09-
2021.
Determine taxable income from profession of Dr. Usha rani for the Assessment
year 2023-24.

4) Dr. Sharma is a renowned medical practitioner. He furnishes his Receipts

and payment account for the financial year 2022-23.
Particulars Amoun Particulars Amount
t
To Balance b/d 35,000 By Rent of clinic
To Consultation fees 2017-18 1,600
2017-18 50,000 2018-19 14,800
2018-19 70,000 2019-20 16,600
2019-20 12,000 By Electricity and water 12,000
To Visiting fees 30,000 By purchase of Professional 18,000
To Loan from bank for Books 17,800
professional 1,75,00 By Household expenses 2,000
Purposes 0 By Municipal taxes paid on 2,800
To Sale of medicines 70,000 property 1,45,000
To Sale tax on medicine 3,000 By Sales tax on medicine 2,000
To Gift from patient 50,000 By Purchase of motor car 47,400
To Remuneration from articles By Fire insurance on 13,000
Published in professional property 12,000
16,000 6,000
Magazine By Surgical equipment
11,000 94,500
To Rent from house property By Advance income tax
7,000 15,000
To Interest on post office By salary to nurse
15,000
By Entertainment expenses
5,000
By Purchase X-ray machine
2,000
By Expenses of IT
15,000
proceedings
500
By Life Insurance premium 15,000
By Gift to wife 35,000
By Interest on loan 21,000
By loan a/c – installment
5,29,00 paid 5,29,000
0 By Donation to political

FOR PRIVATE CIRCULATION ONLY 38

 party
By car expenses
By purchases of medicines
By balance c/d
Compute Dr. Sharma professional income for the A.Y. 2023-24 with the help of
following
1. 1/3 of car expense is for personal use.
2. Surgical equipment were purchased and put to use on 10-09-2022.
3. Depreciation on motor car is at 15%, opening stock of medicine is valued
₹. 8,000.

5) From the following Income and Expenditure A/c and additional information
of Dr. Patel. Who maintains books of accounts under mercantile system of
accounting, compute taxable income from profession for the A.Y 2023-24
Particulars Amount Particulars Amount

To Rent of clinic By Consultation fees

2017-18 1,000 2017-18 5,500
2018-19 20,000 2018-19 85,000
2019-20 2,000 2019-20 10,000
To electricity and water 2,200 By Visiting fees 65,000
To Household expenses 15,000 By Loan from bank (for
To Municipal taxes on HP 3,000 profession) 1,25,000
To Purchase of motor car 1,20,000 By Loan from bank (for
To Laptop purchased 30,000 personal) 50,000
To Income tax 12,000 By Gift from patients 20,000
To Salary to Compounder 24,000 By Remuneration for articles
To Purchase of books 6,000 Published in professional 8,000
To Expenses on IT proceedings 8,000 journal
To Life Insurance premium 15,000 By Sale of medicines 60,000
To Gift to wife 10,000 By Operation theatre rent 15,000
To Interest on loan (profession) 10,000 By Rent from house property 12,000
To Interest on loan (personal) 4,000 By Interest on Post Office
To Loan Installment paid NSC 2,000
(profession) 25,000 By Income from Horse Race 30,000
To Donation to a notified
temple 10,000
To Car expenses 20,000
30,000
To Purchase of Surgical 35,000
FOR PRIVATE CIRCULATION ONLY 39
FOR PRIVATE CIRCULATION ONLY 40
Equipment
To Purchase of Medicines 85,300
To Excess of Income over 4,87,500 4,87,500
Expenditure

Additional Information:
1. 40% of car expenses are for personal use.
2. Depreciation on car and surgical equipment is at 40% and on laptop and a
book is at 40%.
3. Income tax includes ₹. 2,000 profession tax paid to state government.
4. Gift from patients include ₹. 8,000 received on the occasion of
marriage from friends.
5. Closing stock of the medicine is ₹. 7,500.

6) Mr. Natarajis a registered Medical Practitioner, he keeps his books on cash

basis and summarized cash a/c for the year ending 31/03/2023 is as follows:
Particulars Amou Particulars Amount
nt
To Balance b/d 5,850 By Cost of medicines 12,000
To Loan from bank 10,000 By General expenses 450
To Sale of medicines 26,500 By Motor car expenses 6,000
To Consultation fees 16,000 By Salaries 1,200
To visiting fees 3,000 By Rent of dispensary 2,400
To Interest in govt. 3,600 By Telephone expenses 500
securities 8,000 By Life insurance premium 1,600
To Rent from HP 5,000 By Interest on loan from 2,500
To Gift from father-in- 2,000 bank 200
law By Insurance premium:
To Gift and presents Car 1,200
700 800
House property 1,000
500 100
By Local taxes 50,000

79,950 By Travel expenses 79,950

(personal)
By charity
By Balance c/d

Adjustments:

FOR PRIVATE CIRCULATION ONLY 41

 1. Half of the motor car expenses are in respect of his personal use.
2. Consultation fees include a receipt of ₹. 6,000 as advance for attending a
medical camp in April 2023.
3. The written down value of motor car on 01/04/2022 was Rs. 12,720 rate of
depreciation 15%.
4. Loan from Bank at 2%.
5. Gifts and presents include ₹. 700 from patients and Rs. 300 received
as birthday gifts from relatives.
6. Closing stock of medicines amounted to ₹. 50,000 but its current
market price is ₹. 10,000.

Problems on Chartered Accountants/Auditor

7) The following is the Receipts and Payments a/c of AB practicing Chartered

Accountant for the year ended 31/03/2023.
Particulars Amount Particulars Amount

To Audit fees 20,000 By Office expenses 10,000

To Consultation fees 10,000 By Office rent 15,000
To Appellate tribunal 20,000 By Salaries and wages 12,000
appearance 12,000 By Printing and stationery 2,000
To Miscellaneous income 12,000 By Subscription to CA Institute 3,600
To Interest on govt. securities 9,000 By Purchase of professional 2,000
To rent received 10,000 books
To Presents from clients (Annual publication) 6,000
By Travelling expenses 12,000
By Interest on bank loan 15,000
By Donation to National Defense 18,400

96,000 Fund 96,000

By Stipend to trainers
Adjustment:
1. Loan from banks was taken for construction of house in which he lives. The
municipal value of the house is ₹. 8,400 and local taxes ₹. 800.
2. ¼ of travelling expenses is not allowed.
Calculate income from profession for the AY 2023-24

8) The following is the Receipts and Payment A/c of Mr. Ramki a Chartered
Accountant for the P.Y ended on 31-03-2023.

FOR PRIVATE CIRCULATION ONLY 42

 Particulars Amount Particulars Amount

To Balance b/d 1,50,000 By Staff salary 3,00,000

To Audit fee 2,00,000 By Stipend to Audit clerks 1,00,000
To Tax consultancy fee 2,50,000 By Office rent 90,000
To Project report fee 2,50,000 By Software development 10,000
To Accounting software 50,000 expenses 1,25,000
charge 25,000 By Office expenses
To Guest lectures in CA 25,000 By Books 30,000
institute 20,000  Annual 30,000
To Bank interest  Non - Annual 65,000
To Remuneration as member By Car expenses 5,000
tax By CA institute membership fees 50,000
Reform commission By Contribution to PPF 1,65,000
By Balance c/d
9,70,000 9,70,000

Other information:
1. ¼ car usage is personal.
2. Depreciation on car ₹. 10,000.
3. Depreciation on office furniture ₹. 7,000.
Calculate income from profession for the AY 2023-24

9) Sri Krishna is a CA. He gives you the following Income and Expenditure
A/cc for the year ending 31-03-2023
Income and Expenditure A/c
Expenditure Amount Income Amount

To Office expenses 15,000 By Audit fees 3,21,000

To Office rent 5,000 By Gift from father in law 10,100
To Books (other than 10,000 By Financial consultancy 16,000
annual service 12,900
Publication) 10,000 By Profit on sale on 55,000
To Employees salary 2,01,000 investments 2,000
To Personal expenses 4,000 By Accountancy works 3,000
To Donation 1,000 By Dividend on units of UTI 20,000
To Gifts to relatives 5,000 By Interest on deposit in a
To Subscription for 20,000 bank

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 Journal 1,400 By Legal fees
To Drawings 20,000
To Interest 4,000
To Income tax 1,600
To Car expenses 10,000
To Household 5,000
expenses 20,000
To NSCs purchased 1,07,000
To Purchase of 4,40,000 4,40,000
typewriter
To Purchase of
furniture
To Surplus/Net Income

Adjustments:
1. The car is used equally for professional and personal purpose.
2. Allowable depreciation on car for official purpose Rs. 10,000.
3. Depreciate typewriter @ 15% and furniture @ 10%
4. Staff salaries include Rs. 4,000 paid to domestic servant.
5. Loan was taken for personal use.
6. Allowed depreciation on professional books @ 40%.
7. Office rent Rs. 3,000 though paid is not recorded.

Problems on Lawyers

10) Mr. Anand, an advocate residing in Delhi submits his receipts and
payment account for the previous year 2022-23.
Receipts Amount Payments Amount

To balance b/d 5,000 By Staff salary 28,000

To sitting fees 1,20,000 By Professional books 9,000
To Legal counseling fees 15,000 By Subscription to journals 1,000
To Loan from bank 12,500 By Refreshment charges 2,000
To Rent from property 22,500 By Rent of office 7,500
To Interest on bank F D 10,500 By Telephone charges 9,000
To Dividend from ABC Ltd. 4,000 By Printing charges 1,500
To Share of income from 50,000 By Electric charges 3,000
HUF By Purchase of car 1,25,000
By Computer purchased 25,000

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 By Car expenses 3,500
By Contribution to PPF 5,000
By NSC purchased 7,000
By B.A.R association fees 1,000
By Balance c/d 12,000

2,39,500 2,39,500

Receipts and Payments A/c

Additional Information:
1. ½ of the car expenses pertain to personal use.
2. Depreciation rates – car 45%, computer 40%, books 40%.
3. 25% of telephone expenses pertain to personal use.
4. Half of the electric charges are for house property.
5. Gifts from clients Rs. 5,000 not included in above account.
6. Loan from bank is for personal use.
Compute his total income from profession for the A. Y. 2023-24.

11) Mr. Kishore lives in Bangalore. He is a lawyer; he gives you the

following receipts and payment account for the year ending 31-03-2023.
Receipts Amou Payments Amount
nt
To opening balance 2,000 By Books purchased
To Arbitration fee 1,00,00 (annual 1,000
To Salary as part time 0 Publication) 1,200
lecturer 4,000 By Repairs of house 1,800
To Fee received 1,05,00 By Car expenses 1,200
To Interest on bank deposit 0 By Local taxes 3,000
To Exam remuneration 1,500 By Office expenses 11,000
from 2,500 By Personal expenses 1,000
University By Purchase of plant for 20,000
To Cash received on car 20,000 office 6,000
sold 10,000 By Car purchased 1,100
To Shares sold 1,500 By Life insurance premium 500
To Dividend received 5,000 By Donations 3,000
To Consultation fee 15,000 By Gifts to daughter 300
To Special commission 5,000 By Income tax paid 12,000
To Presents from clients 6,000 By Income tax appeal 3,000
To Remuneration from expenses 1,87,400
article By Bank deposit

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FOR PRIVATE CIRCULATION ONLY 46
 Published in 2,000 By PPF deposit
professional 2,66,50 By Balance carried forward 2,66,500
Journal 0
To Income from betting
Adjustments:
1. 1/3rd of the building is used for profession and 2/3rd for self-residence.
2. The car is used for professional and personal work equally.
3. Books purchased for teaching Rs. 300 and remaining for profession.

Calculate income from profession for the AY 2023-24

12) Mr. Ranganath is a leading tax consultant who maintains his books of
account on cash basis furnish the following receipts and payments account
for the previous year 2022-23. Compute his professional income.
Receipts Amou Payments Amount
nt
To Balance b/d 22,000 By books
To fees from clients purchases ( 12,000
For 2018-19 1,50,00 annual 30,000
For 2019-20 0 Publication) 18,000
To gifts and presents 33,000 By Computer 40,000
To Interest free loan from a 25,000 purchased By Car
Client purchase of car expenses 32,000
To Winning from lottery 2,40,00 By Office 8,000
(Gross) 0 expenses By 3,00,000
To Share from HUF 46,000 Salary to staff 5,000
To Bonus and commission 70,000 For 2018-19 3,000
from For 2019-20 2,000
the partnership firm 14,000 By Car 1,50,000

6,00,00 purchased By 6,00,000

0 Income tax
By Professional
tax By Medical
insurance
premium
By Balance c/d
Adjustments:
1. Car is partly used for official purposes (40%) and partly for personal
purpose (60%).
2. Gifts and presents include Rs. 5,000 received from a client.
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3. Office expenses include Rs. 5,000 paid as salary to his wife who casually
helps him in the office.
4. Depreciate car is 45%.

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13) Income & Expenditure A/c of Lawyers & Co. for the year ending March
31, 2023
Particulars Amount Particulars Amount

To Expenses 1,50,000 By professional receipts 3,80,000

To Depreciation 20,000 By other fees 90,000
To Remuneration to 1,50,000
partners
Interest on Capital to partners @ 20,000
20 per cent
To Net Profit 1,30,000
4,70,000 4,70,000

Other Information:
1. Expenses include ₹. 18,000 and ₹. 12,000 paid in cash as brokerage to a
single party on a single day.
2. Depreciation calculated as per section 32 is ₹. 40,000
Compute the total income of the firm.

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