Income tax on Individual

INCOME FROM BUSINESS OR PROFESSION

Business means the purchase and sale of manufacture of a commodity with a

view to make profits. It includes any trade, commerce, adventure, or any
concern in nature of trade, commerce or manufacture.
It is not necessary that there should be a series of transactions in a business and
it should be carried on permanently. Profit is an isolated transaction is also
taxable under this head.
Profession means the activities for earning livelihood which requires
intellectual skill or manual skill for e.g., the work of a lawyer, doctor, auditor,
engineer, and so on. Profession also includes vocation.
Vocation means activities which are performed in order to earn livelihood e.g.,
brokerage, insurance agency, music, dancing etc. as the rules for the assessment
of business, profession and vocation are same, and there is no importance of
making any distinction between them for income tax purpose.

Computation of profits of business or profession:

The profits and gains of business or profession are computed as under,
1) Those expenses or losses which are charged to the P/L A/C but are
allowed under IT Act should be added to the profit, as shown by the P/L
A/C prepared by the assessee. If any expenses are partly disallowed, only
disallowed part of it shall be added to the profit.
2) If any admissible expenses are omitted from P/L A/C, they should be
deducted from the above profit.
3) If some taxable incomes are omitted from P/L A/C they should be added
to the above profits.
4) If some such incomes have been credited to P/L A/c, which are either not
taxable under ‘Business or Profession’ or not taxable at all, they should
be deducted from the above profits.

The above rules can be well illustrated with the help of following
statement:
Profits as per P/L A/C ……………………………………………XXX
Add: Expenses or losses disallowed but charged to
P/L A/C……………………………………..XXX
Incomes taxable as business income but not
Credited to P/L A/C……………………………..XXX

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Expenses in excess of the allowed amount
Charged in P/L A/c………………………………XXX
Under valuation of closing stock over valuation
Of opening stock ………………………………..XXX
Notional loss XXX
XXX
XXX
Less: Expenses or losses allowed but not debited to
P/L A/C……………………………………….…XXX
Incomes not taxable as business income but
Credited to the P/L A/C………………………….XXX
Incomes exempt from tax but credited to P/L A/C..XXX
Over valuation of closing stock and undervaluation
Of opening stock …………………………………..XXX XXX
Taxable income from business XXX

Second method for computing taxable profits of business or profession as

follows:
In this method a fresh P/L A/C or income and expenditure account is
prepared to determine the profit or loss. The format of this matter is as
under:
1) Add together all taxable incomes under this head for PY …. XXX
2) A) Deduct all admissible expenses under this head …XXX
B) Deduct admissible business losses………………. XXX XXX
Taxable profits or losses of business or profession XXX.
Second method is generally used in case of profession.

Deprecation:
It refers to a gradual, permanent, continue fall in the book value of the fixed
asset due to constant use of asset. Deprecation can be claimed as expenditure,
only if the following conditions are satisfied:
1. Assets should be owned by assessee.
2. Assets should be used for business or profession.
3. Assets should be used in previous year.

Note: Only WDV method of deprecation is allowed for the computation of

business or profession income as per tax rule.

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Selected provisions of IT Act to deprecation:
1) If any asset is bought and sold during the PY. No depreciation is allowed
on such asset.
2) If any asset is bought during the PY and used for less than 180 days, 50%
of normal deprecation on it is allowed.
3) On book purchased for professional purposes:
a) For annual publications at rate of 40%.
b) For other publications at rate of 40%.
4) On patent right 25%, computers 40%.
5) On surgical equipment’s 15%.
6) Furniture and fittings 10%. (including Neon sign board)
7) Plant and machinery 15%, intangible assets 25%.
8) Motor car, Lorries, buses for business purpose 30%.
9) Residential buildings 5%.
10) Non residential buildings like office, factory or godown 10%.
11) Building acquired for installing machinery or for providing infrastructure
facilities 80IA – 40%.
12) Computers & its software- 40%.

Additional deprecation in existing tax regime:

Plant and machinery:

1) If new p&m purchased and installed after 31st march, 2005, additional
deprecation shall be available @20% of actual cost of new p&m.
2) If new p&m is put to use for less than180 days in the year in which it is
purchased, rate of deprecation will be 10%.
3) If new p&m is purchased for setting up new enterprise in a notified
backward area after 1st April 2015, additional deprecation shall be
available at 35% of actual cost.
4) If p&m is put to use for less than180 day in the year in which it is
purchased, rate of additional deprecation will be 17.5%.

Block of assets:
The term block of assets means a group of assets falling within a class of assets
(tangible & intangible) in respect of which depreciation is allowed at the same
rate.

The following method can be used for calculating WDV of asset

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
WDV of the block of assets at the beginning of the PY XXX
Add: purchase of the asset during the PY XXX
Less: sale of asset during the year
Total depreciable value of the block XXX
Less: Deprecation (at prescribed rate) XXX
WDV OF THE BLOCK AT THE END OF THE PY XXXX

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.

 Personal expenses like marriage expenses, drawing, LIP, medical

insurance premium, owner salary, rent paid for own building, savings
made in NSC, PF, etc., household expenses like electricity, telephone
used for residence.
 Any payment made in excess of Rs 10,000 either in cash or in bearer
cheque, the entire amount in inadmissible.
 Income tax, Wealth tax, advance tax paid.
 Interest on loan taken for personal use.
 Provision for bad debts, doubtful debts, reserve for future losses.
 Bonus and Commission paid to employees not allowed if it is paid after
due date of filing the return. (In case of individual 31st July 2018)
 Sales tax, customs duty, excises duty, if it is not paid before due date of
filing of return.
 Any losses related to capital in nature like loss on sale of assets.
 Donations and charities
 Any purchase of capital assets, renovation and extension of buildings.
 Cost of sign board fixed on office premises.
 Contribution to staff welfare fund and political party.
 Difference in trial balance.
 Speculation losses.
 Preliminary expenses 4/5th is disallowed e.g. Market survey, Discount on
issue of shares.
 Interest on capital.
 Employer’s contribution to URPF is not allowed.
 Any gratuity not approved or given on adhoc basis is not allowed.
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
 Expenses related to other heads of income.
 Over and excess depreciation other than the allowed limit by Income tax
Act.
 Theft at assessee residence.
 Family planning expenses of the employer’s is allowed limit by Income
Tax Act.
 Personal gifts and presents.
 Penalties and fines on excise and customs duty.
 Any amount paid outside India without making TDS. (30% of such
payment is disallowed).
 Salary paid to family members who are not professionally qualified.
 Legal expenses incurred to defend criminal proceedings will not be
allowed.
 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: while computing the taxable income from business,

besides the direct business incomes the following incomes are also treated
as business income

 Bad debts recovered allowed earlier.

 Sundry income/ sales/ commission received/ discount received/
brokerage.
 Miscellaneous income.
 Interest from debtors.
 Refund of custom duty.
 Profit on sale of import license.
 Sales tax refund.
 Smuggling income.
 Export incentive.

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 are
allowed to be deducted from business income.

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
 Repairs and renewals of business premises.
 Rent/ taxes/ rates related to business.
 Bad debts.
 Fire insurance paid for buildings and goods used for business.
 Expenditure for scientific research.
 Any contribu8tion to approved scientific research institution, colleges,
universities 125% of the amount contributed is allowed as deduction.
 Group insurance premium paid for employees.
 Bonus commission paid before the due date.
 Sales tax paid before the due date.
 Theft in office premises.
 Pooja expenses at office.
 Employer contribution to RPF.
 Revenue advertisements expenses will be allowed in full but capital
advertisements expenses will not be allowed.
 Demurrage paid to railways.
 Establishment expenses.
 Audit fees/ salaries to employees/ office expenses.
 Staff welfare expenses.
 Interest on loan, if loan is taken for business purpose.
 Compensation on retrenched employees in the interest of the business.
 Salary to staff.
 Discount allowed.
 Guest house and holiday home expenses.
 Electricity/ telephone bill, water bill related to business premises.
 Printing and stationary.
 Travelling expenses relating to business purpose.
 Loss of goods or cash embezzled y an employee.
 Depreciation.
 Legal expenses incurred to avid business liability and to defend the
assesses title of business.
 Legal expenses for filing Income Tax appeal.
 Deposits made under Tatkal Telephone Scheme or Scheme own your
telephone.

Non business income: The following incomes though credited to p/ l a/c,

they are not a part of the business income. Hence these incomes are to be

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
excluded from business income. They have to be taxed under other heads of
income.

 Interest on securities.
 Agricultural income.
 Rent received or IFHP.
 Bad debts recovered but not allowed earlier.
 Profit on sale of fixed assets and investments.
 Dividend income.
 Interest on deposit, dividend on UTI and Mutual funds.
 Life insurance policy amount received.
 Gifts received from relatives.
 Income tax refund.
 Share of incomes from HUF.
 Winnings from lottery/ cross word puzzles/ horse races.

Professional receipts and expenses related to a Chartered Accountant

Professional receipt Professional expenses

Audit fees Office expenses/ rent/ salaries
Financial consultancy service Printing and stationery
Income from accounting work Depreciation on professional books
Gifts and presents from clients Depreciation on furniture/ motor car/
office equipment’s
Income from Appeal Tribunal Expenses of motor car for professional
Appearance use
Tax consultation fees, examiner’s fees Allowances to clerk
Tuition fees Membership fees
Fees from income tax appeal OYT expenses (own your telephone)
Remuneration from articles published in Stipends to trainees
professional journals
Subscription to CA Institute.

Professional receipts and expenses related to a Lawyer

Professional receipt Professional expenses

Legal incomes/ fees Office rent/ expenses/ salaries
Special commission Law journals
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Cash gifts and presents from clients Telephone expenses
Consultation fees Magazines subscription
Remuneration from articles published in Motor car expenses for professional
professional journals purpose
Arbitration fees Depreciation on motor car/ furniture/
office equipment’s
Depreciation on professional books
Printing and stationery
Electricity charges
Miscellaneous/ general/ office
expenses.

Professional receipts and expenses related to a Doctor

Professional receipt Professional expenses

Sale of medicine Cost of medicine purchased
Consultation and visiting fees Depreciation on surgical equipment’s
Gifts and presents from patients Salaries paid to staff
Remuneration from articles published in Rent of clinic/ dispensary
professional journals
Retainer fees Depreciation on professional books
Examiner fees Telephone charges
Printing and stationery
Motor car expenses
Depreciation on motor car, office
used fixed assets

Note:
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 should be taken as a cost of
medicine. If mercantile system of accounting is followed, then cost of goods
has to be taken as the cost of medicine and to be deducted as professional
expenses.
In simple:
1) If accounts are maintained on cash basis no need to calculate stock, and
can take purchase of medicine as professional expense.
2) If accounts are not maintained on cash basis then stock valuation is made
as under:
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Opening stock+ Purchases- closing stock.

Illustrations on computation of income from business or profession:

1) Shri Pandith, the proprietor of a flour mill, has prepared the following P/L
A/C for the year ended 31 March, 2024. You are required to compute his
income from business and gross total income for the PY 2023-24.

2,35,90
Trade expenses 450 Gross profit 0
Dividends from a co-
Establishment charges 2,200 operative
Rent rates and taxes 1,400 Society 2,600
Discount and Rent from house
allowances 200 property 500
Income taxes 700 Bad debts recovered 2,000
Advertisement (Allowed as deduction
expenses 1,450 in an
Postage and telegraph 100 earlier year) 2,000
Gifts and presents for
publicity 125
Fire insurance
premium 250
Charities 375
Donations 400
Repairs and renewals 250
Audit fees 250
N/P transferred to 2,32,85
capital A/C 0
2,41,00 2,41,00
0 0

2) Mr . Om is a cloth merchant. From the following P/L A/C for the year
ended 31 March, 2019. Compute his income from business and his GTI for the
AY 2024-25.
Salaries and wages 15,000 Gross profit 2,70,000
Dividend on shares
Rent and taxes 4,000 (gross) 4,000
Domestic expenses 2,500 Rent from building let out 10,000
Income tax 1,200
Postal charges 1,500
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Donation 2,500
Life insurance
premium 2,000
Audit fees 1,500
Bad debts reserve 1,800
Bad debts 2,500
Deprecation 5,000
Net profit 2,44,500
2,84,000 2,84,000

Other information:
1) Rent and taxes include Rs 2,000 paid as municipal tax on building let out.
2) Value of life insurance policy is Rs 18,000.
3) Donation was given to an approved institution.
4) Permissible deprecation was Rs 4,000.

3) The following is the P/L A/C of Mr. X for the year ended 31 March, 2024.
Compute his taxable income from business for that year.
Opening stock 15,000 Sales 2,80,000
Purchases 1,40,000 Closing stock 20,000
Wages 20,000 Gift from father 10,000
Rent 46,000 Sale of car 17,000
Income tax
Repairs of car 3,000 refund 3,000
Medical
expenses 3,000
General
expenses 10,000
Deprecation of
car 4,000
Profit for the
year 89,000
3,30,000 3,30,000

Following further information are available:

a) Mr. X carries on his business from rented premises half of which is used
as his residence.
b) Mr.X bought a car during the year for Rs 20,000. He charged deprecation
at 20% on the value of car. The car was sold during the year Rs 17,000.
The use of car was 3/4th for the business and 1/4th for personal use.
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
c) Medical expenses were incurred during the sickness of Mr. X for his
treatment.
d) Wages include Rs 250 per month on account Mr. X driver for 10 months.

4) Dr.Satish is a medical practitioner. He gives the following summary of cash

book for the year ending 31.03.2024.

Balance b/d 10,000 Rent of clinic 18,000

Purchase of
Consultation fee 60,000 medicine 38,000
Visiting fee 45,000 Staff salaries 24,000
Surgical
Gifts and present 8,000 equipments 40,000
motar car
Sale of medicine 42,000 expenses 8,000
Dividend from Motar car
UTI 6,000 purchased 1,40,000
Life insurance Household
maturity 1,00,000 expenses 7,000
Interest from
National Closing balance 2,000
defence bonds 6,000
2,77,000 2,77,000

Other information:
1) 50% of the motor car expenses incurred in connection with profession.
Car was purchased in Dec 2017.
2) Household expenses include Rs 6,800 for life insurance premium.
3) Gifts and present include Rs 3,000 from relations.
4) Closing stock of medicine Rs 12,000 and on 1.04.2023 opening stock was
Rs 4,000.
Compute his professional gain for AY 2024-25.

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual

1) III B. COM, Nov/ Dec- 2016, 10 Marks

Dr. Sharath is a registered medical practitioner who maintains books of

accounts on cash basis furnishes the following receipts and payment account for
the year ending 31st March, 2024:

Particulars Amount Particulars Amount

To Balance B/D 14,000 Rent of clinic 6,000
To consultation 20,000 Electricity and 2,000
fee water bill
To visiting fee 30,000 Professional 4,000
books(annual pub)
Loan from bank 25,000 Household 7,800
for professional expenses
use
Sale of medicine 60,000 Collection charges 100
on dividend
Gifts and presents 5,000 Motor car 30,000
purchased
Remuneration 6,000 Surgical 4,800
from articles in equipments
journals
Dividend 10,000 Income tax 10,000
Interest on SB A/c 7,000 Salary to staff 15,000
LIP 15,000
Gift to wife 5,000
Interest on loan 2,000
Car expenses 15,000
Medicines 40,000
purchased
Balance c/d 20,300
1,77,000 1,77,000
Compute his taxable professional income for the AY 2024-25, taking into
consideration:

1) 1/3d of the car expenses relates to personal use.

2) Depreciate, motor car by 15% and surgical equipments by 15%.
birthday gifts from relatives.
4) Opening stock and closing stock of medicine amounted to Rs 3,000 and Rs
5,500 respectively.
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual

2) III BBM- 2016, 10 Marks.

Following are the receipts and payments account of Dr. Sumanth for the year
ended 31-03-2024 is under:
Particulars Amount Particulars Amount
Balance b/d 1,22,000 Cost of medicine 10,000
Loan from bank 3,000 Surgical 8,000
for private equipments
purposes
Sales of 25,250 Motor car 1,20,000
medicines
Consultation fees 1,55,000 Car expenses 6,000
Visiting fee 24,000 Salaries 4,600
Visiting fees 24,000 Rent of 1,600
dispensary
Interest on Govt. 4,500 General expenses 300
Securities
Rent from 3,600 Personal expenses 1,11,800
property( not
subjected to local
taxes)
LIP 3,000
Interest on loan 300
from bank
Insurance of 200
property
Balance c/d 71,550
3,37,350 3,37,350
Compute his income from profession and house property for the AY 2024-25
taking into account;
1) On 1/3d of motor car expenses are in respect of his personal use.
2) Depreciate allowable on car and surgical equipment is @ 15%.

3) III BBM, 2015- 10 marks

Dr. Murgaraj is a medical practitioner. He gives you the following summary of
cash book for the year ending 31st March, 2024. He maintains the books on cash
basis.
Particulars Amount Particulars Amount
To balance b/d 20,000 By rent of clinic 36,000

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Consultation fee 1,20,000 Purchase of 76,000
medicine
Visiting fee 90,000 Staff salary 48,000
Gifts 16,000 Surgical
equipments 80,000
Sale of medicine 84,000 Motor car 16,000
expenses
Dividend from 12,000 Purchase of car 2,80,000
UTI
LIC maturity 2,00,000 Household exp. 14,000
Interest from 12,000 Bal c/d 4,000
NDB
5,54,000 5,54,000
Other information:
1) 50% of the car expenses relates to professional use. Motor car was purchased
in DEC 2016. Dep. On car at 12% and surgical equipments at 15%.
2) Gifts include Rs 6,000 from relative.
3) Closing stock of medicine Rs 24,000 and opening stock Rs 8,000.
Compute his professional income for the AY 2024-25.

4) III BBM, Nov/ Dec, 10 mark.

Following is the receipt and payment account of Dr. Harish for the year ended
31-03-2024
Particulars Amount Particulars Amount
To balance b/d 1,10,000 By clinic rent 15,000
Visiting fee 1,65,000 Staff salaries 80,000
Consultation fee 1,65,000 Electricity and 9,000
water
Sale of medicine 25,000 Purchase of 4,000
medical
books(annual
publication)
Operation theatre 1,15,000 Purchase of 30,000
rent surgical
equipments
Interest 20,000 Car expenses 15,000
Medical 5,000
association
membership fee
Audit fee 25,000
Diwali expenses 3,000
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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692
 Income tax on Individual
Entertainment 10,000
expenses

Medicine 30,000
purchased
Balance c/d 3,74,000
6,00,000 6,00,000
Additional information:
1) A cash payment of Rs 5,000 was given to him by a patient in appreciation of
his medical services but was not included in the books of accounts.
2) 1/3d of car expenses relate to private use. Depreciation on car for
professional use was Rs 6,000.
3) Rate of depreciation on surgical equipments is 15%.
Compute his income from profession for the AY 2024-25.

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Notes By: Mallikarjuna. S. G (M. S. G), MOB- 9538330622/ 9880402692