PROFITS AND GAINS OF BUSINESS AND PROFESSION

As per section 28, income from any Business / Profession shall be taxable under the head Business / Profession.

Business – “Business” includes any Trade, Commerce or manufacture or any adventure or concern in the nature
of trade, commerce or manufacture
Profession – “Profession” includes Vocation

Income chargeable under the head PGBP (Sec 28)

 Profits and gains of any business or profession
 Compensation received for termination or modification of contract by
 A person in respect of service to manage an Indian Company
 Any person in respect of agency
 Any person in respect of service to Government.
 Profit on sale of Import Entitlement Licence
 Cash Compensatory Support and Duty Drawback
 Sum received under a key man insurance policy.
 Value of any benefit or perquisite arising from any business or profession
 Fair Market value on the date of its conversion into capital asset
 Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a
partner of a firm from such firm to the extent allowed.
 Income derived by a trade professional or similar association from specific services performed for its
members.
 Any profit on the transfer of the Duty Entitlement Pass Book Scheme.
 Income from speculation business shall be taxable under head Business / Profession.

Speculative Business
Meaning: A Speculative transaction is defined under Section 43(5) to mean a transaction in which a contract
for purchase or sale of a commodity including stocks or shares is periodically or ultimately settled otherwise
than by actual delivery or transfer of the commodity or scrip.

The following shall not be treated as speculative transaction (Exceptions):

A contract in respect of Raw material or merchandise entered in the normal course of business to guard against
loss due to price fluctuations.
A contract in respect of stocks and shares entered into by a dealer or investor to guard against loss through price
fluctuations.
A contract entered into by a member of forward market or a stock exchange in the course of jobbing or arbitrage
to guard against loss in the ordinary case.

Computation of Income under the head ‘Profits & Gains of Business or Profession’
Profit for income tax purpose is different from profit as per books of account. The profit as per books of account
needs to be converted into profit for the purpose of income tax. The conversion can be made in two methods:

Direct Method: Computation of New Profit and Loss statement considering the provisions of Income tax Act.

Particulars Amount Amount

Income as per sec 28
Consultation Fees *****
Audit Fees *****
 Other Revenue income ***** ******
Less: Expenditure allowed u/s 30 to 43D
Office Rent *****
Repairs of plant and machinery *****
Depreciation as per IT act *****
Sundry Expenditure ***** (*****)
Profits or Gains of Business or Profession ******

The above format is illustrative and not exhaustive.

Indirect Method: Computation of Profit or Loss as per Income tax act after adjusting the profit or loss as per
books of account.

Particulars Amount Amount

Net Profit/(Loss) as per books of Account *****
Add: Expenditure specifically disallowed but debited to
P/L Account
Advertisement in Political party *****
Depreciation as per books of account *****
Provision for Bad Debts *****
Penalty paid *****
Donations ***** *****
Less: Income not taxable but credited to P/L Account
Dividend from Indian Company ***** *****
Less: Income not taxable under this head but credited to
P/L Account
Bank Interest (Taxable under IFOS) *****
Profit on Sale of Machinery (Taxable under CG) ***** *****
Less: Expenditure allowed but not debited to P/L Account
Depreciation as per IT Act *****
+/- Adjustment for change in valuation of stock ***** *****
Profits and Gains of Business or Profession *****

Specific Deductions (Sec 30 to 43DB)

Rent, Repairs, Taxes and Insurance for:

Building (Sec 30) – Allowed as deduction if the Building is used for the purpose of Business or Profession and
the area not used for Business no deduction to be allowed. Rent paid to proprietor is disallowed but rent paid by
firm to its partner for using his premises is an allowed expenditure.

Plant and Machinery (Sec 31) – Allowed as deduction.

Depreciation (Sec 32)

Depreciation under Income Tax Act is allowed on the basis of W.D.V. only (SLM is not applicable)

Computation of Depreciation
Purchased and “Put to use” for less than 180 days: Depreciation shall be allowed at half the normal rate.

Purchased and “Put to use” for more than 180 days: Depreciation shall be allowed at full rate.
Purchased and is not “Put to use” at all: No depreciation is allowed and if the asset is put to use in the
subsequent year full depreciation shall be allowed without calculation of days.

Example: Mr. X has purchased one asset on 1-4-2007 and has put to use on 31-3-2009 in that case, no
depreciation shall be allowed in the P.Y. 07-08, however in the P.Y. 08-09 full depreciation is allowed even it is
used for a single day.

Asset sold During the year: No depreciation is allowed on such particular asset.

NOTE: “Put to use” do not mean actual use rather it means making an asset ready for use.

Block of Asset
Depreciation under Income Tax Act is not allowed on the basis of individual asset rather depreciation is allowed
on the basis of block of assets which means a group of similar type of assets having same rate of depreciation.

Depreciation on the basis of block of assets shall be computed in the manner given below:
Take opening W.D.V. of the block.

Add purchases during the same year of that particular block.

Deduct Sale price / Insurance Claim / Scrap Value of all the assets sold during the year relating to the same
block.

Depreciation shall be charged on the balance at the end of the year.

Example: ABC Ltd. has Plant P1, P2, P3, and P4 as on 1/4/2007 and the combined W.D.V. is. Rs.70 Lac. The
company has purchased Plant P5 on 1/7/2007 and it was put to use on the same date & it was purchased for Rs.
20lac & the company has sold Plant P1 on 1/1/2008 for Rs. 15 Lac.
W.D.V. as on 1/4/2007 70 Lac Add: P5 20 Lac
Less: P1 (15 Lac) 75 Lac
Less: Depreciation @ 15% (11.25 Lac)
Closing W.D.V. as on 31/3/2008 63.75 Lac

If any asset was purchased during the year and was put to use for less than 180 days, in that case depreciation
shall be allowed at half the normal rate for that particular asset.
If any asset was put to use for less than 180 days & the balance left at the end of the year is less than the value
of such asset, in that case, depreciation shall be charged at half the normal rate on such balance.

If all the asset have been sold but still there is some balance (i.e. No physical existence of asset) It will be called
as Short Term Loss under Section 50 & no depreciation is allowed.
If there is Negative Balance, it will be Short Term Gain under Section 50 and no depreciation is allowed

Additional Depreciation (Sec 32(1)(iia))

Additional Depreciation is allowed @ 20% to all assesses & further it is allowed if all the given conditions are
satisfied:
 It should be Plant and Machinery which has been acquired and installed after the 31.03.2005.
 Such Plant and Machinery should be used for the purpose of manufacturing.
 It will be allowed only once.
 Additional Depreciation is not allowed in the following cases:
 Second Hand Plant and Machinery.
 Plant and Machinery used in office building or residential building.
 When plant and machinery is sold in the year of acquisition
 Any Machinery or Plant, the whole of the actual cost of which is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the income chargeable under the head Business / Profession of any
one previous year.
 If the Plant and Machinery is being put to use for less than 180 days than additional depreciation shall be
allowed @ 10%, and the remaining 10% shall be allowed in the subsequent year.

Note: Additional Depreciation shall be allowed even if the block has nil or negative value

Scientific Research [Sec 35]

If any assessee has incurred expenditure in connection with scientific research, such expenditure is allow to be
debited to the P&L A/c provided the research is related to the Business / Profession of the assessee and further
even capital expenditure can be debited to P&L Account but expenditure on land is not allowed.

If any assessee has given any donation or contribution to any approved scientific research, university, college,
Indian Company etc, deduction is allowed equal to 1.25 times of the donation or contribution & further there is
no condition that the research should be related to the Business / Profession of the assessee.

Capital expenditure (after commencement of business) in connection with scientific research is allowed to be
debited only to the extent income is available under the head Business / Profession & unadjusted expenditure
shall be allowed to be set off & carry forward just like unabsorbed depreciation.

If any assessee has incurred any expenditure before commencement of business in connection with scientific
research, but within 3 years before the commencement, such expenditure shall be allowed in the year in which
the business has commenced. However, revenue expenditure shall be allowed only to the extent it has been
permitted by the prescribed authority.

If any perquisite has been allowed to the employees before commencement of business, it will not be allowed.

Amortization of Preliminary Expenses [Sec 35D]

Expenses incurred before commencement of business shall be allowed to be debited in 5 annual equal
installments starting the year in which the business has been commenced & further expenditure is allowed only
to the resident assesses and to Indian Companies.

Total eligible expenditure in case of Indian Company shall not exceed 5% of the “Cost of project” or “capital
employed” [at the option of such company] whereas in case of non-corporate assessee it shall not exceed 5% of
the “cost of project”.

The expenses which are allowed under Section 35D are as given below:
Expenditure in connection with project report, feasibility report, engineering services, conducting market survey
provided the work has been taken up by the assessee himself or by any organization approved by the board.

Expenses incurred in connection with legal agreements relating to the business or profession.
Expenses being incorporation fee of the company.
Expenses on drafting & printing of memorandum & articles of association.

Expenses on issue of share capital & debentures including expenses on drafting and printing of prospectus and
also expenses being commission paid to the underwriters.
Any other expense prescribed for this purpose.
EXPENDITURE IN CONNECTION WITH AMALGAMATION/DE MERGER SECTION 35DD
Expenditure is allowed only to Indian Company and allowed for the expenditure incurred in connection with
amalgamation / de merger & expenditure is allowed in 5 annual equal installments.

EXPENDITURE IN CONNECTION WITH VOLUNTARY RETIREMENT SECTION 35DDA

Deduction shall be allowed to all the assesses with regard to the expenditure incurred in connection with
Voluntary Retirement & expenditure shall be allowed in 5 annual equal installments.
[In case of amalgamation / de merger, remaining installments shall be allowed to the amalgamating or the
resulting company]

PREMIUM FOR INSURANCE OF STOCKS SECTION 36(1)(i)

If any assessee has paid premium for the insurance of Raw Material, Finished Goods etc, premium paid is
allowed.

PREMIUM FOR INSURANCE OF CATTLE SECTION 36(1)(ia)

If any Cooperative Society has paid premium for insurance of cattle owned by the members of society, such
premium shall be allowed to be debited.

PREMIUM FOR MEDICLAIM POLICY SECTION 36(1)(ib)

If any assessee has paid premium in connection with Mediclaim Policy taken in the name of employees,
premium shall be allowed to be debited. However payment should be made in cash.

PAYMENT OF BONUS / COMMISSION TO EMPLOYEES SECTION 36(1)(ii)

Bonus / Commission to the employees is allowed but subject to the provision of Section 43B. Such Bonus /
Commission should not have been payable to the employees otherwise as share out of profits.

INTEREST ON LOAN TAKEN FOR BUSINESS / PROFESSION SECTION 36(1)(iii)

If any assessee has taken a loan for the purpose of Business / Profession, in such case interest is allowed without
any restriction.

[No interest is allowed to the proprietor on his capital]

If the loan has been taken for the purpose of capital asset, interest up to the date of putting the asset to use shall
be capitalized & depreciation shall be allowed on capitalized amount & interest for the subsequent period shall
be debited to the P&L Account as per Section 43(1).

Bad Debts [Sec 36(1)(vii)]

Any debt or part thereof, which becomes bad shall be allowed as deduction
Provision for Bad Debt is not allowed as deduction.

Recovery of Bad Debts [Sec 41(4)]

If any amount was allowed as bad debt and subsequently it was recovered in the subsequent years, in such cases
the amount so recovered shall be considered to be income under the head Business / Profession of the year in
which the amount has been recovered.

Taxable Bad Debt Recovery: Amount Recovered less (Bad Debt Claimed – Bad Debt Allowed as Deduction)

Note: Such recovery shall be taxable irrespective of the fact whether the business is continued or not.

Certain Expenditure Allowed Only On Actual Payment Basis [Sec 43B]

Write a short note on method of accounting as per Section 145

As per Section 145 every assessee has the option to maintain the books of accounts either on the basis of
mercantile system of accounting or on the cash basis. If the books are maintained on the basis of mercantile
basis of accounting, all the expenses are allowed on due basis and all incomes are taxable on accrual basis. If
the books are maintained on cash basis, all expenditures are allowed on actual payment basis & all incomes are
taxable on actual receipt basis.

Any system of accounting once adopted has to be followed consistently & it can be changed with the
permission of assessing officer. If any assessee has violated the provisions of Section 145, in such cases
assessing officer may complete assessment in the manner given under Section 144.

If any assessee is maintaining books of accounts on the basis of mercantile system of accounting, all
expenditures are allowed on due basis, however expenses listed below shall be allowed only on actual payment
basis: -
 Sales tax, Custom Duty, Excise Duty, Service Tax, Municipal tax or License Fee Etc.
 Employer’s Contribution to RPF, approved superannuation fund, statutory provident fund, approved gratuity
fund or any other approved fund for employee’s welfare.
 Bonus or Commission to the employees.
 Leave salary to the employees.
 Interest on loan taken from Public Financial Institutions, State Financial Corporations, State Industrial
Investment Corporation.
 Interest on loan or advance from Banks.
The expenses listed above shall be allowed only on actual payment basis. However, payment can be made till
the last date of filing of return of income, otherwise expenditure shall be allowed in the year in which the
payment has been made.

Books Of Accounts [Sec 44AA Rule 6F]

In case of Specified Profession

Any person having specified profession has to maintain any books of accounts which may help the assessing
officer in computing his income but if the gross receipt has exceeded ₹ 1,50,000 during all the 3 years
immediately preceding the relevant P.Y., in such cases assessee should maintain prescribed books of accounts.

“Prescribed Books of Accounts” shall include Cash Book, Journal, Ledger, Bills Received, Copies of Bills
issued etc.

If any person is required to maintain prescribed books of accounts, such person must retain such books of
accounts for a period of at least 6 years from the end of the relevant A.Y.

“Specified profession” shall include:

 Medical Profession
 Architectural Profession
 Legal Profession
 Profession of Accountancy
 Interior Decoration
 Technical Consultancy
 Authorized representative
 Film artist.

If any person has started specified profession during the year, he must maintain prescribed books of accounts if
the gross receipts are likely to exceed ₹1,50,000
In case of Business or Non-Specified Profession.

If any assessee has Business or Non-Specified Profession, in such cases no books of accounts are required.
However, if the gross receipt is exceeding ₹10 Lac or the income is exceeding ₹1,20,000 in any of the 3 years
immediately preceding the relevant P.Y., in such cases the assessee should maintain any books of accounts
which may help the assessing officer in computing his income. (Prescribed Books are required only if the Books
are required to be Audited).

If the Business or the Non-Specified Profession has been setup during the year, in that case assessee should
maintain any books of accounts if the Gross Receipt is likely to exceed ₹ 10 Lac or the income is likely to
exceed ₹1,20,000.

If income of any person is to be computed on presumptive basis under Section 44AD, 44AE and 44AF and such
person has rejected presumptive income, in that case, such person should maintain any books of accounts which
may help the assessing officer in computing his income.

If any assessee has violated the provisions of Section 44AA, penalties may be imposed amounting to ₹25,000.

Tax Audit/ Compulsory Audit [Sec 44AB]

If any person is engaged in a business and his turnover during the year has exceeded ₹100 Lac, in such cases
such person must get his accounts audited in that particular year.

If any person is engaged in specified or non-specified profession and his gross receipt during the year has
exceeded ₹50 Lac, in such cases, such person must get his accounts audited in that particular year.

If income of any person is to be computed on presumptive basis under Section 44AD, 44AE and 44AF but such
person has rejected the presumptive income, in such cases such person shall be required to get his accounts
audited.

If any person is required to get his accounts audited, such person must submit the audit report maximum up to
the last date of filing of return of income.

If any assessee has violated the provision of Section 44AB, in that case penalties shall be imposed equal to 0.5%
of the turnover but subject to a maximum of ₹ 1.50,000.
Summarized Points to be remembered while solving Illustrations:
 Expenditures to be disallowed
 Expenses not in respect of business or profession. (i.e. Personal Expenses)
 Payment of LIC premium.
 Depreciation as per books of account
 Income tax paid by proprietor
 Any Capital expenditure. (i.e. Car purchased)
 Any anticipated loss is not allowed as deduction
 Charity and donation. (Donation eligible for deduction u/s 80G)
 Goods withdrawn for personal purpose. (Cost of Goods)
 Penalty and Fines.
 Bad Debt disallowed. (Ex: Bad Debt of ₹ 5000 debited in P/L Account and 60% of Bad Debt allowable as
per IT Act. Thus, Bad Debt Disallowed will be ₹5000*40% = ₹2000)
 Interest on Capital is disallowed (in excess of 12%)
 Any expenditure incurred in cash in excess of ₹ 10,000 shall be disallowed.

INCOMES DISALLOWED
Income not taxable under any head Income not taxable under this head
Dividend from Indian Company Bank Interest (Taxable under IFOS)
Bad Debt Recovery Dividend from foreign company (under IFOS)
Sales to himself (Sales Price) Profit on Sales of Fixed Assets (under Capital
Gain)
Coaching Fees (under IFOS)
Interest on Late refund from IT Department

Illustration1:
From the following profit and loss account of Mr. X for the year ending 31 st March, 2020. Compute his Gross
Total Income for the Assessment Year 2020 – 21:

Particulars ₹ particulars ₹
To opening stock 400000 By sales 4000000
To purchases 3000000 By closing stock 480000
By income from house
To salaries 800000 property 80000
By dividend from an Indian
To rent , rates and taxes 120000 co. 9000
To legal charges 40000
To miscellaneous expenses 20000
To provision for bad debts 30000
To provision for income tax 40000
To salary to Mrs. X 36000
To depreciation 40000
To Net Profit 43000
4569000 4569000

Purchase includes ₹100000 paid in cash to a cultivator for purchase of agriculture produce.

Purchase also includes ₹100000 paid by way of compensation to the supplier as the assessee was unable to take
delivery of goods due to lack of storage, space and finance.

Opening stock was overvalued by 25% and closing stock was undervalued by 25%.
Salary includes ₹15000 paid as bonus on the occasion of Diwali over and above the bonus payable under the
payment of bonus Act 1965.

Rent, rates and taxes include ₹ 10000 on account of disputed sales tax demand, ₹3000 on account of municipal
taxes for let out property. It also includes ₹ 5000 as custom penalty paid during the year.

An amount of ₹ 20000 due from customer was written off from the provision for bad debts.
Mrs. X is a law graduate and is actively working in the assessee’s firm.

Solution:

Computation of total income of X for the A.Y 2020 – 21

Particulars Notes Details Amount Amount
Income from house property
Gross annual value (actual rent ) 80000
Less : municipal tax 3000
Net annual value 77000
Less : deduction u/s
24(a)standard deduction @30% of NAV 23100 53900

Profit and gains from business and profession

Net profit as per books of account 43000
Add: expenditure disallowed but debited in P/L a/c
Provision for bad debts 1 30000
Provision for income tax 2 40000
Municipal tax paid on property 3 3000
Penalty 4 5000 78000
121000

Less: expenditure allowed but not debited to p/l a/c

Bad debts written off 5 20000
Less: income not taxable wrongly credited to p/l a/c
Dividend from UTI 6 9000
Less: income taxable under other head credited to p/l
a/c
Income from house property 80000 109000
12000
Adjustment for valuation of stock
Add: undervaluation of closing stock 7 160000
Add: overvaluation of opening stock 8 80000 240000 252000
305900

Notes:
 Any anticipated loss is not allowed as deduction
 Income tax is specifically disallowed u/s 40[a]
 Municipal tax paid on let out property shall be deducted income from house property
 Any payment for infringement of law is not allowed as deduction
 Bad debt written off is allowed u/s 36[1][vii]
 Dividend is exempted u/s10[34]
 Under valuation of closing stock [₹480000/75%] = ₹640000 [25% of ₹640000] = 160000
 Over valuation of opening stock [₹400000/125%] = ₹320000 [25% of ₹ 320000] = ₹80000

As Mrs. X is actively engage in business, it is assumed that salary paid to her is not in excess
Cash payment to cultivator is covered under rule 6DD, thus such payment does not hit by provision of sec.
40A[3]

Illustration 2:
From the following profit and loss account and other relevant information, compute total income of shri rattan
for the assessment year 2020 – 21.
Particulars ₹ Particulars ₹
To opening stock 110000 By sales 520000
To purchases 250000 By closing stock 66000
To salaries 50000 By bad debt recovery 35000
To income tax 8500 By dividend from a foreign co. 4000
To legal charges 7500 By bank interest on FDR 15000
To donation 10000
To provision for bad debts 8000
To fines paid to GST dept. 12000
To GST 17000
To depreciation 27000
To travelling expenses 5000
To advertisement 15000
To Net Profit 120000
640000 640000

ADDITIONAL INFORMATION:
 Both opening and closing stock have been valued at 10% above cost
 Depreciation as per income tax rule is ₹22000
 Donations comprise ₹8000 donated to PM’s Drought Relief Fund and ₹ 2000 to National Children Fund
 GST amounting to ₹ 12000 were paid on July 14, 2020
 Purchases include a payment of ₹40000 made in cash
 Salaries paid include ₹24000 paid to Shri Ratan
 Purchase of scientific research asset worth ₹70000 included in purchases

Particulars Notes Details Amount Amount

Profit and gains from
business and profession
Net profit as per books of
account 120000
Add: expenditure disallowed
but debited in p/l a/c
Income tax 1 8500
Fines paid to gst dept. 2 12000
Provision for bad debt 3 8000
Excess depreciation charged 4 5000
Donations 5 10000
Unpaid gst 6 5000
 Cash purchase 7 40000
Own salary 8 24000 112500
232500
Less: income not taxable
wrongly credited to p/l a/c
Bad debt recovery(earlier not
allowed) 9 35000
Less: income taxable under
other head credited to p/l a/c
Bank interest on FD 15000
Dividend from foreign
company 4000 54000
178500
Adjustment for valuation of
stock
Less: undervaluation of
closing stock 11 6000
Add: overvaluation of
opening stock 10 10000 4000 182500

Income from other sources

Bank interest on FD 15000
Dividend from foreign
company 4000 19000
Gross total income 201500
Less: deduction u/s
80g(donation)[50%of
₹10000] 5000
196500
SOLUTION:
Computation of total income of shri rattan for the a.y.2020 – 21

NOTES
 Income tax is specifically disallowed u/s 40.
 Any payment for infringement of law is not allowed as deduction.
 Any reserve or provision are not allowed as deduction.
 Depreciation is allowed as per IT act not as per books.
 Donation is not allowed as it is not related to business. However, donation shall be allowed u/s 80G
 As per sec. 43B, GST paid within due date of furnishing return shall be allowed. It is assumed that ₹ 5000 is
still unpaid.
 Any expenditure incurred in cash in excess of ₹ 10000 shall be disallowed u/s40A[3]
 Salary to proprietor is not allowed as no can earn from himself.
 Bad debt recovery is taxable only if it is earlier allowed.
 Over valuation of opening stock[₹110000/110 % =100000] [10% of 100000] = 10000
 Over valuation of closing stock [₹66000/110 % = 60000][10% of 60000] = 6000

Illustration 3:
Discuss the allowbility or otherwise of the following expenditure in computing income from the business of an
assessee for the assessment year 2020 -21.
 Interest on funds borrowed for income tax
 Legal charges were paid for the registration of trademark
 Legal expenses including lawyer’s fee for raising loan from financial institution.
 Lump sum paid to an employee in lieu of regular pension
 Ex- gratia paid to the dependents of an employee who died in accident while coming to the factory
 ₹700 was considered as bad debts. The debtors were declared insolvent having no asset. The amount was
however not written off as irrecoverable in the accounts of the assessee.
 A compensation of ₹10000 paid to the party for non - delivery of goods as per terms of the contract

SOLUTION:
Interest on fund borrowed for income tax is disallowable expenditure.
Legal charges paid for the registration of trademark is an allowed expenditure u/s 37[1]

Legal expenses including lawyer’s fee for raising loan from financial institution is an allowed expenditure u/s
37[1]

Lump sum paid to an employee in lieu of regular pension is an allowed expenditure u/s 37[1]

Ex – gratia is an allowed expenditure u/s 37[1]

As debt has not been written off, such amount shall not be allowed
Compensation for non – delivery of goods is an allowed expenditure u/s 37[1]

Illustration 4:
Mr. Rupam Goswami (45 years) is a medical practitioner of kochi. His income and expenditure account for the
year ending 31st March,2020 is as under:

Particulars ₹ Particulars ₹
Medicine consumed 672000 Consultation fee 800000
Staff salary 340000 Medical charges 880000
Dividend from indian
Clinic consumables 124000 companies 34800
Rent paid 96000 Winning from lottery 28000
Administrative expenses 200000 Rent from property let out 43200
Payment to IIT delhi for Approved scientific
research 80000
Depreciation on clinical equipment’s 40000
To net profit 234000
1786000 1786000

Other information:
Clinic equipments are – April1,2019 , opening WDV : ₹360000. New acquisition on October 1,2019: ₹80000
Rent paid includes ₹28800 paid by cheque towards rent for his residence
Rent received relates to property let out at kochi. The municipal tax of ₹7200 paid in January 2020 has been
included in “administrative expenses”.
Rate of depreciation on clinic equipment is 15%
Compute income from profession of Mr. goswami for the A.Y.2020 – 21.
Solution:
Computation of profit & gains of business or profession of Mr. Rupam Goswami for the A.Y.2020 – 21

NOTES:
Rental income from house property is taxable under the head ‘income from house property’
Winning from lottery is taxable under the head’ income from other sources’
Dividend from Indian companies is exempt u/s 10[34]

Illustration 5:
Mr. Pinka Mukherjee submits the following profit and loss account of his business for the year ended
31.03.2020
Particulars ₹ particulars ₹
To opening stock 45000 By sales 490000
To purchases 350000 By closing stock 50000
To salaries 21000 By bad debt recovered 3000
To depreciation 22000 [disallowed in earlier year]
By bank interest on fixed
To advertisement 30000 deposit 10000
To provision for income tax 10000
To life insurance premium 5000
To GST 6000
To provision for bad debt 1000
To bad debt 5000
To interest on capital 2000
To legal expenses 6000
To Net Profit 50000
553000 553000

Other information:
Depreciation as per income tax rule ₹25000
Salary include ₹6000 paid to Mr. Mukherjee
Closing stock overvalued by ₹5000
Sales include ₹ 20000 being the value of goods withdrawn by the proprietor, cost of which is ₹18000
Legal charges include ₹ 2000 paid as penalty for infringement of GST laws.
Compute income from business for the assessment year 2020 -21.

Solution:

Computation of profits and gains of business or profession for the A.Y.2020 – 21

Particulars Notes Details Amount
Profit and gains from business and profession
Net loss as per books of account 50000
Add: expenditure disallowed but debited in p/l
a/c
Provision for income tax 1 10000
Life insurance premium 2 5000
Provision for bad debt 3 1000
 Interest on capital 4 2000
Depreciation 5 22000
Salary to himself 4 6000
Goods withdrawn for personal use 4 18000
Penalty 6 2000 66000
116000

Less: expenditure allowed but not debited in p/l a/c

Depreciation as per it rules 5 25000
Less: income not taxable but credited to p/l a/c
Bad debt recovered 3000
Overvaluation of stock 5000
Sales to himself 4 20000
Less: income taxable under other heads of income
Interest on fixed deposit 10000 63000
Profit and gains of business or profession 53000

Notes:
Income is specifically disallowed u/s 40[a]
Personal expenditure is not allowed as deduction
Any anticipated loss is not allowed as deduction
Sales, salary to himself and interest on capital to proprietor is not allowed as no one can earn from himself
Depreciation as per IT shall be followed
Fines paid in contravention of law is disallowed.