Complete Module IV – Profits and Gains from Business or Profession
INTRODUCTION
Profits and Gains from Business or Profession is one of the five heads of income
under the Income Tax Act, 1961.
Income earned from trade, commerce, manufacture, profession or vocation is taxed
under this head.
Business income is an important source of revenue and includes profits earned from
commercial activities and professional services.
UNIT 13 – DEFINITION OF BUSINESS AND PROFESSION, PROCEDURE FOR
COMPUTATION OF BUSINESS INCOME
Meaning of Business
Business means any trade, commerce or manufacture carried on with profit motive.
Examples:
• Shop business
• Trading business
• Manufacturing business
• Transport business
Features of Business
1. Regular activity
2. Profit motive
3. Repetition of transactions
4. Economic activity
Meaning of Profession
Profession means occupation requiring special education, knowledge or skill.
Examples:
• Doctor
• Lawyer
• Chartered Accountant
• Architect
• Engineer
Difference Between Business and Profession
Business:
• Mainly involves trading or commercial activities.
• Profit earned through buying and selling.
Profession:
• Requires specialized education and skill.
• Income earned by professional knowledge.
Meaning of Vocation
Vocation means activity carried on for livelihood without specialized qualification.
Examples:
• Artist
• Musician
• Sports person
Basis of Charge
Income from business or profession is taxable under Section 28.
The following incomes are taxable:
• Business profits
• Professional income
• Compensation received
• Export incentives
• Recovery of bad debts
Procedure for Computation of Business Income
Step 1 – Calculate gross receipts.
Step 2 – Deduct allowable expenses.
Step 3 – Add inadmissible expenses if debited.
Step 4 – Adjust depreciation.
Step 5 – Calculate taxable business income.
Books of Accounts
Business persons and professionals are required to maintain proper books of
accounts.
Examples:
• Cash book
• Ledger
• Journal
• Purchase book
• Sales book
Audit of Accounts
Certain businesses and professions must get accounts audited according to Income
Tax Act.
Objectives of Taxation of Business Income
1. Revenue collection
2. Fair taxation
3. Prevention of tax evasion
4. Encouragement of proper accounting
UNIT 14 – REVENUE AND CAPITAL NATURE OF INCOME AND EXPENSES
Meaning of Revenue Receipts
Revenue receipts are receipts arising during normal business operations.
Examples:
• Sales revenue
• Commission
• Fees
• Interest from business
Features of Revenue Receipts
1. Recurring in nature
2. Related to day-to-day business
3. Taxable as business income
Meaning of Capital Receipts
Capital receipts are receipts not arising from normal business operations.
Examples:
• Sale of fixed assets
• Capital contribution
• Loan received
Features of Capital Receipts
1. Non-recurring
2. Affect capital structure
3. Usually not taxable unless specifically taxed
Difference Between Capital and Revenue Receipts
Revenue Receipts:
• Recurring
• Related to business operations
• Taxable normally
Capital Receipts:
• Non-recurring
• Related to fixed assets or capital
• Usually not taxable
Revenue Expenditure
Expenses incurred for daily business operations.
Examples:
• Salary
• Rent
• Electricity
• Repairs
• Advertising
Features:
1. Short-term benefit
2. Recurring nature
3. Fully deductible
Capital Expenditure
Expenses incurred to acquire fixed assets or long-term benefits.
Examples:
• Purchase of machinery
• Building construction
• Furniture purchase
Features:
1. Long-term benefit
2. Non-recurring
3. Not fully deductible immediately
Difference Between Capital and Revenue Expenditure
Revenue Expenditure:
• Short-term benefit
• Recurring
• Deductible fully
Capital Expenditure:
• Long-term benefit
• Non-recurring
• Capitalized
Deferred Revenue Expenditure
Heavy expenditure giving benefit for several years.
Example:
• Large advertisement campaign
Importance of Distinction
1. Correct profit calculation
2. Proper tax treatment
3. Accurate financial statements
4. Avoidance of tax disputes
UNIT 15 – ALLOWABLE EXPENSES, DISALLOWED EXPENSES AND DEEMED
PROFITS
Allowable Expenses under Sections 30 to 37
Expenses wholly and exclusively incurred for business are deductible.
Examples of Allowable Expenses
1. Rent of business premises
2. Insurance premium
3. Salary to employees
4. Bonus to employees
5. Repairs and maintenance
6. Interest on business loan
7. Advertising expenses
8. Legal expenses
9. Depreciation
10. Bad debts
Conditions for Allowability
1. Expense must relate to business.
2. Expense must not be personal.
3. Expense must not be capital expenditure.
4. Expense must be incurred during previous year.
Depreciation
Depreciation means reduction in value of fixed asset due to wear and tear.
Depreciation allowed on:
• Building
• Machinery
• Furniture
• Plant
• Computers
Methods of Depreciation
1. Written Down Value Method
2. Straight Line Method
Bad Debts
Amounts which cannot be recovered from customers.
Allowed as deduction subject to conditions.
Disallowed Expenses
Certain expenses are not allowed as deduction.
Examples:
1. Personal expenses
2. Income tax paid
3. Penalty for illegal acts
4. Capital expenditure
5. Charity not related to business
Deemed Profits
Certain amounts treated as business profits under Income Tax Act.
Examples:
• Recovery of bad debts
• Sale of import license
• Cash assistance
Importance of Allowable Deductions
1. Reduces tax burden
2. Encourages business growth
3. Ensures fair taxation
4. Promotes investment
UNIT 16 – PRESUMPTIVE TAXATION UNDER SECTIONS 44AD, 44ADA AND 44AE
Meaning of Presumptive Taxation
Presumptive taxation is simplified method of taxation for small taxpayers.
Under this scheme, income is estimated at prescribed percentage.
Objectives of Presumptive Taxation
1. Simplify tax procedure
2. Reduce compliance burden
3. Encourage small businesses
4. Increase tax compliance
Section 44AD
Applicable to small businesses.
Income presumed at prescribed percentage of turnover.
Benefits:
• No detailed books required.
• Simplified return filing.
Eligible Businesses
• Retail shops
• Traders
• Small manufacturers
Section 44ADA
Applicable to professionals.
Examples:
• Doctors
• Lawyers
• Architects
• Accountants
Income presumed at prescribed percentage of gross receipts.
Section 44AE
Applicable to transport business owning goods vehicles.
Income calculated on presumptive basis per vehicle.
Advantages of Presumptive Taxation
1. Simple procedure
2. Less paperwork
3. Saves time
4. Reduces compliance cost
Disadvantages
1. Limited deductions
2. Not suitable for all businesses
3. Income estimated irrespective of actual profit
CURRENT TAX SYSTEM
India currently provides:
1. Old Tax Regime
2. New Tax Regime
Business taxpayers may choose suitable regime according to deductions and tax
rates.
IMPORTANCE OF STUDYING BUSINESS INCOME
1. Important for businessmen.
2. Useful for professionals.
3. Helps proper tax planning.
4. Essential for return filing.
5. Important for commerce students.
CONCLUSION
Profits and Gains from Business or Profession is an important head of income under
the Income Tax Act.
Correct understanding of business income, allowable deductions, depreciation and
presumptive taxation helps taxpayers calculate income properly and comply with
tax laws.
IMPORTANT EXAM QUESTIONS
1. Define business and profession.
2. Explain computation of business income.
3. Distinguish between capital and revenue expenditure.
4. Explain allowable and disallowed expenses.
5. Explain depreciation.
6. What are bad debts?
7. Explain presumptive taxation under Section 44AD.
8. Explain Sections 44ADA and 44AE.
9. Explain capital and revenue receipts.
10. Discuss deemed profits.
QUICK REVISION POINTS
• Business income taxable under Section 28.
• Revenue expenses fully deductible.
• Capital expenditure gives long-term benefit.
• Depreciation allowed on fixed assets.
• Personal expenses not deductible.
• Presumptive taxation simplifies tax procedure.
• Section 44AD for small businesses.
• Section 44ADA for professionals.
• Section 44AE for transport business.