PROFITS AND GAINS FROM BUSINESS OR PROFESSION (Sec.

28 to 44D)

What is Business?

Sec.2(13) Business means the purchase and sale or manufacture of a commodity with a view to
make profit. It includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture.

What is Profession?

Sec.2 (36) Profession means the activities for earning livelihood which requires intellectual skill
or manual skill eg., work of a lawyer, doctor, auditor, engineer and so on.

What is vocation?

Vocation means activities which are performed in order to earn livelihood eg., brokerage,
insurance agency etc.,

What is a Speculative transaction?

Speculative transaction means transactions in which a contract for the purchase or sale of any
commodity including stocks and shares is settled otherwise than by the actual delivery of transfer
of the commodity or scripts.

What is Depreciation?

Depreciation means a decrease in the value of assets by wear and tear caused by their use in the
business over a period of time. Its cost is spread over its anticipated life by charging
depreciation every year against the profits of the business or profession.

What do you mean by Block of Assets?

Block of assets means group of assets falling with in a class of assets for which a single rate of
depreciation is applicable, For example Tangible assets like plant and machinery, type writer,
surgical equipments etc., Intangible assets like Know-how, patents, copy rights, trade mark etc.,

IMPORTANT RULES REGARDING ASSESSMENT OF PROFITS AND GAINS OF

BUSIESS OR PROFESSION:

 Tax is chargeable from the person who carries on the business or profession.
 Tax is chargeable on the aggregate income from all businesses or professions carried on
by an assessee.
 Profits and Losses of speculation business are kept separate.
 The business or profession is carried on by an assessee for any time during the previous
year.
 Profits on sale of assets on the winding up of a business are not taxable as business profit
but as capital gain.
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 Only the legal ownership is considered.
 No tax is payable on anticipated or notional profits.
 Tax is payable on the income of every business or profession whether legal or illegal.
 Expenses incurred before setting up a business are not admissible.
 Business losses which are incidental to the business carried on are allowed as deductions.
 Sums previously allowed as deductions are taxable if recovered during the previous year.
 General commercial principles are to be kept in view while determining the accurate
profits of business.

EXPRESSLY ALLOWABLE BUSINESS EXPENSES Sec.30 TO 37:

1. Expenses in respect of Business premises – Rent, Rates, taxes, repairs and maintenance,
insurance premium

2. Expenses in respect of repairs of plant and machinery and furniture

3. Depreciation on tangible and intangible assets----

Note: Depreciation on building(10%), Plant and Machinery, Surgical equipment, Type

writer, Motor car (15%), Furniture and fittings (10%), Computer(60%), Books annual
publications(100%), Books other than annual publications (60%),

Patents, Trademark, Copy right, Cost of know how (25%) after 31st March 1998.

1. Amortization of Preliminary Expenses- One fifth of such expenditure for each of the 5
successive previous years is allowed.
2. Deductions Sec.36
 Insurance premium on stock-in-trade.
 Insurance premium for the Health of Employees.
 Bonus or commission.
 Interest on borrowed capital.
 Contribution to Provident Fund paid by employer as assessee.
 Approved Gratuity fund contribution paid by employer as assessee.
 Bad debts.
 Expenditure on Family Planning.
3. General deductions Sec.37(1)
 Expenses incurred in connection with any proceedings before the income tax authorities
 Entertainment, Advertising, Travelling expenses.
 Expenses incurred in the purchase, manufacture and sale of goods.
 Expenses incurred in defending a case for damages for breach of trading contract.
 Sales tax paid
 Compensation paid to at the time of retrenchment of employee.
 Commission paid.
 Reasonable expenses incurred on the occasion of Diwali and regular pooja expenses.
 Legal expenses incurred.

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  Welfare expenditure incurred.
 Payment of exercise duty.
 Deposit under Tatkal telephone deposit scheme or Own Your Telephone scheme.
4. Certain allowable losses
 Robbery or Dacoity.
 Embezzlement or Theft.
 Loss due to Non-recovery of Advances.

EXPENSES EXPRESSLY DISALLOWED Sec.40

1. Payment in cash- any expenditure in respect of which payment is made exceeding Rs.20,
000 otherwise than by a crossed cheque/draft will be disallowed completely.
2. Proprietor’s salary, interest on own capital, rent for his own accommodation, bonus, life
insurance premium, house hold expenses, any personal expenses etc., are disallowed.
3. Payment of taxes such as income tax, wealth tax, advance income tax, fringe benefit tax,
local tax for property etc. are disallowed.
4. Provisions and reserves- provision for depreciation, provision for bad debts, provision for
sales tax, provision for future losses and provision for Gratuity are disallowed.
5. Capital Expenditure incurred for acquisition of assets.
6. Any charity or Donation
7. Past Losses
8. Excessive Payment
9. Fine or penalty
10. Contribution to political party
11. Payment made outside India
12. Gift to relatives

RULES FOR ADJUSTMENT OF PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE

Profit as per P/L A/C xxxx

ADD xxxx
1. Expenses or Losses disallowed but charged in P/L A/C xxxx
2. Incomes taxable as business income but not credited to P/L A/C xxxx
3. Expenses in excess of the allowed amount charged in P/L A/C xxxx
4. Under valuation of closing stock OR Overvaluation of opening stock
LESS
1. Expenses or Losses allowed but not debited to P/L A/C xxxx
2. Incomes not taxable as business income but credited to the P/L A/C xxxx
3. Incomes exempt from tax but credited in P/L A/C xxxx
4. Over valuation of closing stock OR Under valuation of opening stock xxxx
Taxable Income from Business xxxx

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 PROBLEMS ON INCOME FROM BUSINESS

1) Profit & Loss account of M/S. Raju & Co. for the previous year 2015-16.

Particulars Rs. Particulars Rs.

To General Expenses 5,000 By Gross Profit 1,40,000
To Fire Insurance Premium 4,000 By Bad Debts Recovered (disallowed
To Bad Debts 1,000 earlier) 4,000
To Salaries 65,000 By Interest on Government Securities
To Advertisement (in cash) 22,250 By Rent Received from Employees 4,000
To Proprietor’s Salary 12,500 By Interest from Debtors for Delayed
To Interest on Capital 2,000 Payments 12,000
To Income Tax 1,000
To Depreciation 2,000 6,000
To Sales Tax (due) 5,000
To Advance Income Tax paid 1,000
To Donations 500
To Motor Car Expenses 750
To Municipal Tax of quarters Let to
Employees 5,000
To Net Profit 39,000
1,66,000 1,66,000
The following other information is available

a) General expenses include Rs. 2,800 was paid as compensation to an old employee whose
services were terminated in the interest of business and Rs. 2,200 by way of help to a
poor university student.
b) Depreciation calculated according to rates of income tax comes to Rs. 2,900.
c) Sales tax was paid on 1-5-15. Due Date for filing of return is 31.07.2015.
d) 50% of motorcar expenses are for proprietor’s personal use.
Compute his business income for the assessment year 2016-17.

2) From the following Profit & loss Account of M/S Suryanarayana, calculate the income under
the head profits and Gains of Business or Profession for the assessment year 2016-17

Particulars Rs. Particulars Rs.

To Salaries 95,000 By Gross Profit 3,80,000
To Advertisement (in cash) 24,000 By Interest on Securities 14,000
To General Expenses 16,000 By Income from House Property 25,000
By Bad Debts Recovered (allowed
To Entertainment Expenses 22,000 earlier) 12,000

To Bad Debts 1,500

To Drawings by Proprietor 24,000
To Sales Tax (Due & Paid on 1-7-15)
To Interest on Capital 6,000
To Repairs 7,000
To Rent 2,500
To Legal Expenses 21,000
To Depreciation 5,000

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To Bonus (Due) 15,000
To Bonus to Proprietor 6,000
To Car Purchases 4,000
To Expenses on Car 72,000
To Donations 12,000
To Provision for Bad Debts 2,000
To Net Profit 6,000
90,000
4,31,000 4,31,000
From the examination of books of accounts the following other information are available.

a) Advertisement expenses were incurred on News Paper Advertisement.

b) Rs. 3,000 was spent on purchase of land and is included in legal expenses.
c) Half of repair expenses were on let-out building.
d) Depreciation allowable on all assets including car is Rs. 14,400.
e) Bonus was paid to all employees on 30th June 2015 and due date of filing of returns in
31st July 2015.

3) Mr. Balu submits the following details for the year ended 31st March 2016. Compute his total
income for the assessment year 2016-17

Particulars Rs. Particulars Rs.

To Salaries 34,000 By Gross Profit b/d 1,85,000
To General Expenses 48,000 By Commission and Discount 2,17,200
To Bad Debts 15,000 By Sundry Receipts 43,000
To Reserve for Bad Debts 2,000 By Rent on Let-out House 36,000
To Fire Insurance Premium 4,200 By Dividend Received 4,000
To Advertisement 4,000 By Short-term capital gain on Sale of
To interest on Capital 3,500 Investment 32,000
To Interest on Bank Loan 14,500
To Patent Right Purchased 17,000
To Cost of Know-How acquired 60,000
To Depreciation 28,000
To Provisions for Sales Tax and Excise
Duty 13,000
To Life Insurance Premium 6,000
To Medical Insurance Premium Paid 10,000
To Donation to Bangalore University 10,000
To Net Profit 2,48,000
5,17,200 5,17,200
Additional Information:

a) Depreciation according to Income Tax provision comes to Rs. 29,700 other than patent
rights and technical Know-How.
b) Interest on bank loan includes Rs. 4,500 in respect of House Property.
c) Salary to staff includes Rs. 8,000 to a relative of which Rs. 3,000 is unreasonable.
d) Sales tax and Excise duty paid Rs. 8,000 on 1st May 2015.. The last date for filing the
return is 31st July 2015.

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4) From the P/L account and additional information of Mr. David compute his taxable income
for the Assessment year 2016-17.

Particulars Rs. Particulars Rs.

To Opening Stock 40,000 By Sales 5,00,000
To Purchase 2,20,000 By Closing Stock 50,000
To Wages 15,000
To Freight 10,000
To Gross Profit c/d 2,65,000

5,50,000 5,50,000
To Establishment Expenses 15,000
To Salaries 25,000 By Gross Profit b/d 2,65,000
To Rent & Taxes 12,000 By Dividend on shares 6,000
To Income Tax 10,000 By Rent from House Property 15,000
To House Hold Expenses 14,000 By Refund of Income Tax 2,000
To Reserve for Doubtful Debts 5,000 By Interest on Govt. Security 1,000
To Advertisement 15,000 By Bad Debts Recovered 5,000
To Donation 6,000 By Profit on Sale of Machinery 3,000
To Sales Tax 20,000 By Miscellaneous Income 9,000
To Provision for Income Tax 8,000
To Carriage Outward 11,000
To Drawings 4,000
To General Expenses 16,000
To Interest on Capital 9,000
To Bad Debts 7,000
To Repairs 7,500
To Insurance Tax 2,500
To Car Expenses 11,000
To Audit Fees 12,500
To Depreciation 20,500
To Net Profit 75,000
3,06,000 3,06,000

a) Salaries include payment to relative, which is considered to be unreasonable to the

extent of Rs. 6,000.
b) Purchases include two payments of Rs. 30,000 and Rs. 10,000 paid in cash to a supplier.
c) Opening stock is valued at 10% above the cost.
d) Allowable depreciation is Rs. 22,500.
e) 60% of car expenses are for business purposes.

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5) Mr. Sairam a Trader furnishes the following information of profit and loss account for the
year ending 31st March 2016.

Particulars Rs. Particulars Rs.

To General Expenses 4,80,000 By Gross Profit 22,00,000
To Salary to Staff 2,40,000 By Commission 40,000
To Salary to Sairam 1,20,000 To Bad Debts Recovered (Earlier
To Interest on Capital 60,000 Allowed) 60,000
To Interest on Overdraft 40,000 To Interest on Listed Debentures 1,00,000
To Extension to Building 1,50,000
To Interest on Loan 40,000
To Deprecation 1,20,000
To Traveling Expenses 80,000
To Audit Fees 72,000
To Fire Insurance 78,000
To Bonus to Staff 1,00,000
To Contribution to RPF 1,22,000
To Advertisement 2,00,000
To Reserve for Bad Debts 60,000
To Bad Debts Written Off 90,000
To Net Profit 3,48,000
24,00,000 24,00,000
Additional Information:

a) Depreciation allowable as per Income Tax rules Rs. 1,40,000.

b) Advertisement includes Rs. 50,000 being cost of permanent sign board.
c) Income of Rs. 60,000 accrued during the previous year not entered in P & L A/c.
d) Rs. 40,000 paid as damages for failure to fulfill a contract in time is included in General
expenses.

6) From the following Profit & Loss account of a merchant for the year ended 31st March 2016.
Ascertain his taxable income from business for the assessment year 2016-17.

Particulars Rs. Particulars Rs.

To Salaries 15,000 By Gross Profit 50,000
To General Expenses 4,000 By Bad Debts Recovered 2,000
To Advertisement 4,000 By Share of Income in the Firm 20,000
To Interest on Capital 2,000 By Rent Received 5,000
To Interest on Bank Loan 500 By Dividend on Indian Company
To Reserve for Bad Debts 2,000 Shares 3,104
To Fire Insurance Premium (Let-out By Dividend from Co-operative
House) 100 Societies 2,000
To Depreciation 4,000 By Interest on Post Office SB
To Reserve for Sales Tax 11,000 Account 896
To loss through embezzlement 3,000 By Agricultural Income 10,000
To Donation to Political Party 16,000 By Interest on Government Securities 6,000
To Local Taxes on Let-out House 500 By Interest on Fixed Deposits in a

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To Motor Car Expenses 1,000 Bank 3,000
To Wealth Tax 3,500
To Net Profit 35,400
1,02,000 1,02,000
The following information is available.

a) Salary includes Rs. 500 per month drawn by Proprietor as Salary.

b) Advertisement includes Rs. 1,500 being the cost of Neon Sign Board.
c) General Expenses include Rs. 1,200 being the fees paid to the Chartered Accountant in
connection with income tax appeal.
d) 1/4th of Car expenses relate of personal use.
e) Depreciation is found to excess by Rs. 1,500.
f) Actual bad debts amounted to Rs. 1,000.
g) Out of reserve for sales tax, Rs. 3,000 is paid on 10th July 2015. Balance is not paid as yet.
Due date of filing return of income is 31st July 2015.

7) Following is the Profit & Loss account of Mr. Chandan for the year ending 31st March 2016.

Particulars Rs. Particulars Rs.

To Salaries 3,30,000 By Gross Profit b/d 5,50,000
To Office Expenses 38,000 By Bad Debts Recovered 20,000
To Depreciation 28,000 By Dividend received 12,000
To Sales Tax 18,000 By Rent from House Property 18,000
To Legal Expenses 16,000
To Income Tax 14,000
To Patent Rights 24,000
To Donations 4,000
To Repairs 12,000
To Provision for Bad Debts 6,000
To General Expenses 24,000
To Net Profit 88,000
6,00,000 6,00,000
Additional Information:

a) Salaries include Rs. 12,000 paid to the workers employed at home.

b) Depreciation includes Rs. 6,000 being unabsorbed depreciation of earlier years.
c) Legal expenses include Rs. 2,000 paid to the Lawyer in connection with personal case.
d) General Expenses include Rs. 8,000 as contribution to Staff Welfare Fund.
e) Out of bad debts recovered only Rs. 8,000 was allowed as deduction earlier.
Calculate the income of Mr. Chandan from the business for the assessment year 2016-17.

8) Following is the Profit & Loss A/c of Mr. Ajay a Jewellery Merchant for the year ending 31st march
2016.

Particulars Rs. Particulars Rs.

To Rent 60,000 By Gross Profit b/d 5,23,000
To Rates 6,000 By Interest from debtors 28,000
To Salary to Staff 54,000 By Rent from House Property 34,000

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To Diwali Expenses 2,000 By Sundry Business Income 16,000
To Interest on Loans 1,25,000 By Commission 37,000
To Sundry Expenses 55,000
To Bad Debts 6,000
To Charity 1,000
To Reserve for Doubtful Debts 2,000
To Entertainment expenses 8,500
To Loss by Theft 14,,000
To Net Profit 2,94,500
6,28,000 6,28,000
Additional Information:

a) Rent Paid includes Rs. 12,000 relating to shop belonging to the assessee himself.
b) Salary includes Rs. 24,000 to him son who is a B.Com student and who casually helps him in the
business.
c) A loan of Rs. 60,000 at 15% p.a. is taken from his wife out of funds advanced by him and interest
is included in interest on loans.
d) Sundry expenses include Rs. 9,000 incurred on pilgrimage to Haridwar.
e) Rates include land revenue on house property let-out Rs. 4,000.
f) He earned Rs. 40,000 in Gold Smuggling not shown in the books.
Compute the taxable income from business for the assessment year 2016-17.

9) The following is the P/L account of Mr. Gopi for the year – ended 31.3.16. Compute his taxable
income from business for the year 2016-17.

Particulars Rs. Particulars Rs.

To Opening stock 15,000 By Sales 1,80,000
To purchases 40,000 By Closing stock 20,000
To Wages 20,000 By Gift from Father 10,000
To Rent 46,000 By Sale of Car 17,000
To Repair of Car 3,000 By IT Refund 3,000
To Medical Expenses 3,000
To General Expenses 10,000
To Depreciation of Car 4,000
To Net Profit 89,000
2,30,000 2,30,000

Following further information is given:-

a) Mr. Gopi carries on his business from a rented premise half of which is used as his
residence.
b) Mr. Gopi bought a car during the year for Rs. 20,000 he charged 20% depreciation on the
value of car. The car was sold during the year for Rs. 17,000. The use of car was 3/4th for
the business and ¼ for personal use.
c) Medical Expenses incurred during the sickness of Mr. Gopi for his treatment.
d) Wages include Rs. 250 p.m. on account of Mr. Gopi’s driver for 10 months.

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10) From the following compute the business income of Mr. Vinod, for the assessment year
2016-17.

Particulars Rs. Particulars Rs.

To Bad Debts 7,000 By Gross Profit 2,66,100
To Bad Debts provision 1,500 By Interest from debtors 3,000
To Audit Fees 3,500 By Discount from cars 2,500
To Employee is Welfare expenses 4,200 By Interest on loan to Ashoka 5,000
To Entertainment of customer 3,400 By Bad Debts recovered 3,000
To Social welfare 3,000 By Enhanced compensation 25,000
To Exercise duty 20,000
To Income Tax 14,000
To Establishment 50,000
To Depreciation 38,000
To Interest paid to bank 13,000
To Car expenses 72,000
To Net Profit 80,000
3,09,600 3,09,600
Additional Information:

a) Rs. 50,000 was given as loan to Ashoka. During the year Rs. 5,000 Interest was received
b) Bad Debts recovered were earlier disallowed.
c) Enhanced compensation was related to acquisition of land.
d) Bad Debts include Rs. 4,000 to his brother.
e) Excise duty was paid on 24.11.15 (last date of filing of return is 31.07.15)
f) Establishment includes Rs. 10,000 paid for personal servant of Sri. Vinod.
g) Car is used for 1/3 business and 2/3 for Sri. Vinod.
h) Depreciation permissible as per income tax act Rs. 41,500.

11) Mr. Dravid presents you the Trading and Profit & Loss Account for the previous year ended
31st March 2016 and requires you to compute income from Business for the assessment year
2016-17.

Trading and profit & Loss Account for the year ended 31.03.2016.

Particulars Rs. Particulars Rs.

To Opening Stock 85,000 By Sales 3,94,000
To Purchases 2,40,000 By Closing Stock 1,10,000
To Wages 35,000
To Carriage Inward 12,000
To Gross Profit c/d 1,32,000
5,04,000
5,04,000
18,750
To Staff Salary 12,000 By Gross Profit b/d 1,32,000
To Office Rent 18,000 By Interest on Debentures (net) 17,800
To Depreciation on car 5,500 By Bad Debts Recovered (Previously 5,200
To Audit Fee Allowed)

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To Income Tax provision 32,000 By Sundry Income 2,650
To Car Expenses 15,000 By Rent from House Let-out 90,000
To Patent Right Acquired 40,000
To Donation 2,500
To General Expenses 18,650
To Sales Tax Provision 16,000
To Technical Know-How Purchased
during the year 30,000
To Interest on Capital 16,000
To Provision for Bad Debts 6,500
To Net Profit 16,750
2,47,650 2,47,650
Additional Information

a) Opening stock is under –valued by 15%.

b) Closing stock is over-valued by 10%
c) Purchases include a cash payment of Rs. 30,000 towards purchase of raw materials.
d) 20%of car expenses are attributable to the use of car for personal purposes.
e) Out of Income Tax Provision and Sales Tax Provision, Income Tax of Rs. 6,250 and Sales
Tax of Rs. 1,250 were paid before filing the return of Income.

12) From the P/L Account of Ramanathan for the year ending 31-03-2016.Compute his Business
Income for the Assessment year 2016-17.

Particulars Rs. Particulars Rs.

To General Expenses 53,400 By Gross Profit 2,55,500
To Bad Debts 22,000 By Commission 18,600
To Provision for Doubtful Debts 21,000 By Brokerage 27,000
To Insurance (House) 600 By Salary Receipts 22,500
To Salary to Staff 36,000 By Bad Debts Recovered (disallowed
To Salary To Ramanathan 22,000 earlier) 1,000
To Interest on Bank overdraft 62,000 By Interest on Deposits with a Trust 15,000
To Interest on Loan taken from Mrs. By Interest on Units of UTI 13,000
Ramanathan 4,000 Bu House Property Income 12,000
To Interest on Capital 13,000
To Depreciation on Building 18,000
To Advertisement Expenditure 8,000
To Contribution to RPF 12,000
To Net Profit 50,600
3,74,600 3,74,600
Additional Information

a) Amount of depreciation allowable on building is Rs. 40,200 as per IT rules.

b) Advertisement expenditure includes Rs. 5,000 being cost of advertisement in News
Paper.
c) Income of Rs. 10,000 accrued during the year is not included in P/L A/c.
d) General expenses include Rs. 4,500 given to Mrs. Ramanathan for arranging a party in
favor of her friends.

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 e) Contribution to RPF for last two months at Rs. 1,000 pet month has not been paid to
appropriate authority within due date.

13) Discuss with reasons, the admissibility of the following expenses while computing profits
and gains of business.

a) Income tax paid Rs. 30,000/-

b) Out standing sales tax of previous years paid during the year Rs. 20,000/-
c) Interest paid on loan taken for daughter’s marriage Rs. 8,000/-
d) Loss due to Robbery Rs. 50,000/-
e) Legal expenses Rs. 10,000/- to defend the assessee’s title to his assets.

COMPUTATION OF TAXABLE INCOME FROM MEDICAL (DOCTOR) PROFESSION

ADD all professional income:

Consultation fees
Visiting fees
Sale of medicines
Gift from patients
Operation theatre rent
Remuneration from articles published in professional journals

LESS all professional expenses:

Rent of clinic/dispensary
Cost of medicines
General expenses
Salaries to staff
Telephone expenses
Electricity and water bill
Depreciation on professional books
Depreciation on medical equipments
Depreciation on furniture

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Depreciation on fixed assets
Interest on loan taken for professional purpose
Expenses on income tax proceedings
Entertainment expenses
Car expenses relating to professional use
Membership for Medical council of India fee
Subscription for professional journals
Audit fees
Diwali expenses
Staff welfare expenses
Professional tax
TAXABLE INCOME FROM PROFESSION

******

1) Smt. Jyothi is a registered medical practitioner. She keeps her books on cash basis
and for the year ended 31st March, 2016 her summarized cash account is as
under:
Particulars Rs. Particulars Rs.
To Opening balance 2,700 By Cost of medicine 20,000
To Bank Loan 6,000 By Surgical equipment 6,000
To Sale of medicines 30,500 By Motor car 12,000
To Consultation fees 10,000 By Car expenses 1,800
To Visiting fees 8,000 By Salary 1,200
To Interest on investments 9,000 By Rent of dispensary 1,200
To Rent from property 7,200 By General expenses 600
To Sale of building 15,000 By Personal expenses 3,600
To Sale of furniture 5,000 By Life insurance premium 2,000
By Interest on Bank loan 360
By Property insurance 400
By Fixed Deposit in bank 30,000
By closing balance 14,240
93,400 93,400

Keeping in view the following additional information, compute her income from profession for
the previous year 2015-16.

a) 1/3rd car expenses are for personal use.

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 b) Written down value of the house property on 1st April, 2015 was Rs. 20,000 and that of
furniture was Rs. 4,000. There were no other assets in these blocks.
c) Rate of depreciation on car and surgical equipments in 15%.

2) Dr. Surendra is a renowned medical practitioner who maintains book of account on

cashbook, furnishes his receipts and payments account for the financial year 2015-16.

Particulars Rs. Particulars Rs.

To Balance b/d 74,000
To Consultation fees By Rent of clinic
2014-15 3,000 2014-15 600
2015-16 15,000 2015-16 4,800
2016-17 2,000 2016-17 600
By Electricity & water bills 2,000
To Visiting fees 30,000 By Professional books (Annual 4,000
Publications)
To Loan from bank for professional 25,000 By House hold expenses 7,800
purpose
To Sale of medicine 60,000 By Collection charges on dividend 100
income
To Gift and presents 5,000 By Motor car purchased 30,000
To Remuneration from articles 6,000 By Surgical equipments 4,800
Published in professional and journal
To Dividend 10,000 By Income tax 10,000
To Interest on post office saving bank 7,000 By Salary of staff 15,000
A/C
By Life insurance premium 15,000
By Gift to wife 5,000
By Interest on loan 2,000
By Car expenses 15,000
By Purchase of medicine 40,000
By Balance c/d 20,300
Total 1,77,000 Total 1,77,000

Compute his professional income for the assessment year 2016-17, after taking into account the
following additional information:

a) 1/3rd of the use of car relates to his personal use.

b) Depreciation on motorcar allowable in 15% on books it is @ 100% and on surgical
equipment it is 15%
c) Gifts and present include Rs. 3,000 from patients in appreciation of his medical service
and Rs. 2,000 received as Birthday gifts from relatives.
d) Closing stock of medicines amounted to Rs. 5,500.

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3) The following is the receipts and payments account of Dr. Rajkumar a medical practitioner
for the year ending 31st March 2016.

Particulars Rs. Particulars Rs.

To Balance B/d 1,10,000 By Clinic Rent 24,000
To Visiting Fees 80,000 By Staff Salaries 1,00,000
To Consultation fees 1,00,000 By Rent & Taxes 10,000
To Sale of Medicines 65,000 By electricity & Water 10,000
To Operation Theatre Rent 35,000 By Purchase of Medical Books 20,000
To Interest 20,000 By Purchase of Surgical Equipment
To Dividends 10,000 1.6.2010 50,000
By Motor Car Expenses 30,000
By Medical association Fees 10,000
By Audit Fees 20,000
By Staff Welfare Expenses 3,000
By Diwali Expenses 5,000
By Entertainment Expenses 2,000
By Medicines Purchases 30,000
By Balance C/d 1,06,000
4,20,000 4,20,000
Additional Information:-

I. A cash payment of Rs. 5,000 was given to him by a patient in appreciation of his medical
services, but was not accounted for in the books of accounts.
II. One third of motor car expenses relate to his persons use, depreciation on
III. Motor car allowable under the IT Act is Rs. 6,000 for professional use.
IV. The rate of depreciation on surgical equipment is 15%
V. Interest includes:
a) Interest on bank deposit Rs. 4,000.
b) Income from mutual funds Rs. 14,000. (Gross)
c) Interest on POSB account Rs. 5,000.

4) Shri. Ram Manohar is registered medical practitioner he keeps his books on cash basis and
his summarized cash account for the year ended 31st March 2016 as under.

Particulars Rs. Particulars Rs.

To Balance b/d 5,850 By Cost of Medicines 12,000
To Loan from Bank for professional By General Expenses 450
purpose 10,000 By Motor car Expenses 6,000
To Sale of medicines 26,500 By Salaries 1,200
To Consultation fees 16,000 By Rent of Dispensary 2,400
To Visiting fees 3,000 By Telephone Expenses 500
To Interest on Govt. Securities 3,600 By Personal Expenses 1,600
To Rent from House property 8,000 By Life Insurance Premium 2,500
To Gift from father-in-law 5,000 By Interest on loan from Bank 200
To Gifts from Patients 2,000 By Insurance Premium:
Car 700
House Property 500

15
 By Local Taxes 800
By Traveling Expenses (personal) 1,000
By charity 100
By Balance C/d 50,000
79,950 79,950
Compute his income from profession and house property for the assessment year 2016-17
taking into account the following further information:

a) One half-motorcar expense is in respect of his personal use.

b) The following expense was unpaid on 31st March 2016.
i) Rent of dispensary for 4 months Rs. 1,200

ii) Telephone bills : Rs. 200

c) Consultation fee include a receipt of Rs. 6,000 for attending a medical camp in April,

2016.

d) The written down value of motorcar on 1-4-2015.was Rs. 12,720 rate of Depreciation 15%

5) Dr. Krishna is a renowned medical practitioner he furnishes his receipts and payments
account for the financial year 2015-16

Receipts and Payments Account

Particulars Rs. Particulars Rs.

To Balance b/d 35,000 By Rent of Clinic
To Consultation fee 2014-15 600
2014-15 5,000 2015-16 4,800
2015-16 70,000 2016-17 600
2016-17 12,000 By electricity & water 2,000
By Purchase of Professional Book 8,000
To visiting fees 30,000 By Household Expenses 7,800
To loan from Bank for professional By Municipality Taxes paid on
Purpose 1,25,000 property 2,000
To sale of medicines 73,000 Bt purchase of Motor car 45,000
By fine Insurance on Property 200
To gift from Patient 5,000 By Surgical equipment 47,000
By Advance Income Tax 13,000
To Remuneration from articles By Salary to nurse 12,000
published in Professional Magazine 6,000 By Entertainment Expenses 6,000
To Rent from house property 11,000 By purchase X-ray Machine 94,500
To interest on post office National By Expenses of income tax proceedings 15,000
Savings Certificate 7,000 By Life Insurance premium 15,000
By Gift to wife 5,000
By Interest on loan 2,000
By Loan installment paid 5,000
By Donation to political party 500

16
 By Car Expenses 15,000
By Purchase of medicines 35,000
By Balance C/d 85,300
3,79,000 3,79,000

Compute Dr. Krishna’s professional income for the assessment year 2016-17 with the help of the
following additional information.

a) One third of car expenses is for personal use.

b) Depreciation on motor care is at 15%, on professional books at 60%.
c) Closing stock of medicine is Rs. 8,000 but its current market price is Rs. 12,000.

6) Shri. Ramprasad is a registered medical practitioner he has prepared the following Income
and Expenditure account for the year ending 31st March 2016. You are required to prepare a
statement showing his income from profession.

Income and Expenditure Account

Particulars Rs. Particulars Rs.

To Household Expenses 1,20,000 By Consultation fees 11,000
To Car purchased 1,30,000 By Visiting fees 1,20,000
To Traveling Exp (Personal) 4,000 By Gain on Race (Gross) 10,000
To Charity & Donations 1,000 By Share in sale proceeds of an
To Income Tax 2,000 ancestral house 34,000
To Salaries 8,000 By Capital gains 6,000
To Gifts to Daughter 7,000 By Dividend on shares (Gross) 5,000
To Establishment Expenses 1,000 By Interest from P.O. savings Bank 600
To Surgical Equipments 4,000 By Gifts from father-in-law 2,000
To Books (Annual Publications) 1,200 By Bad Debt recovered (not allowed
To Life Insurance premium 2,000 in earlier year) 2,000
To Wealth Fees 1,000 By Interest on fixed Deposit (Gross) 1,300
To Interest on capital 1,000
To Surplus 8,700
2,90,900 2,90,900
Rate of depreciation allowable on Car and Surgical equipments is @ 15% and on books 100%
solution.

7) From the following statement compute the income from profession of Dr. Kapoor for the
Assessment year 2016-17.

Expenditure Rs. Expenditure Rs.

To Salaries 30,000 By Visiting fees 55,000
To Income Tax 6,000 By Dividends 5,000
To Donation 5,000 By Consultation fees 1,35,000
To Dispensary rent 40,000 By Sale of medicines 82,000

17
To Electricity charges 8,000
To Telephone expenses 7,000
To Depreciation 9,000
To Purchase of medicines 40,000
To Motor car expenses 11,000
To Depreciation on car 6,000
To Net income 1,15,000
2,77,000 2,77,000
Additional Information:

a) Electricity charges include Rs. 2,000 used for domestic purpose.

b) Telephone expenses include 50% for personal use.
c) Half of motorcar is used for professional use
d) Opening stock of medicine was Rs. 5,000 and closing stock was Rs. 6,000.

8) Following is the Income and expenditure account of Dr. Ashwini for the year ended 31 st
March 2016.

Expenditure Rs. Expenditure Rs.

To Interest on capital 1,500 By Consultation fees 20,000
To Life Insurance premium 1,700 By Visiting fees 32,000
To Wealth tax 1,800 By Gains on sale (Gross) 12,000
To Books purchased 1,400 By Profit on sale of ancestral
To Household Expenses 23,000 property 38,000
To Car purchases 35,000 By Interest on securities 9,000
To Charity 5,000 By Dividends (Company) 5,600
To Income tax 3,000 By Gifts from father 3,000
To Salaries 11,000 By Bad debts recovered (Not allowed
To Gift to daughter 6,000 earlier) 3,000
To Surgical equipment 8,000 By Interest on Fixed Deposits (Gross) 1,800
To Profits 27,000
1,24,400 1,24,400
Depreciation allowable:

I. Car – 15%
II. Surgical equipment – 15%
III. Book – 100%
Compute the professional income of Ashwini for the Assessment year 2016-17.

18
COMPUTATION OF TAXABLE INCOME FROM LEGAL (LAWYER) PROFESSION

ADD all professional income:

Legal fees

Arbitration fees

Consultation fees

Special commission appointment fees

Gift from clients

Remuneration from articles published in professional journals

LESS all professional expenses:

Office Rent

General expenses

Salaries to staff

Telephone expenses

Electricity and water bill

Depreciation on professional books

Refreshment charges

Depreciation on computer

Depreciation on furniture

Depreciation on fixed assets

Interest on loan taken for professional purpose

Expenses on income tax proceedings

Entertainment expenses

19
Car expenses relating to professional use

Membership for Bar Association fees

Subscription for professional journals

Audit fees

Diwali expenses

Staff welfare expenses

Professional tax

TAXABLE INCOME FROM PROFESSION

******
1) Sri Chandra is a reputed lawyer of Bangalore. He has prepared the following income and
expenditure account for the year ended 31.03.2016.

Expenditure Rs. Income Rs.

To household expenses. 12,000 By legal fees. 1,26,000

To office expenses. 7,000 By special commission 1,400

appointment fees.
To charity. 500
By cash gifts received from clients
To telephone expenses. 500 2,000
By House rent
To income tax. 900 15,000
By Interest on Government
To rent. 4,000 3,000
Securities.
To gift to daughter. 2,000 6,000
By Salary as part-time lecturer-in-
To electricity charges. 1,000 law

To donations to NDF. 1,000

To contribution to PPF. 2,400

To law journals. 8,000

To salaries. 15,000

20
To purchase of motorcar. 60,000

To purchase of furniture. 2,000

To life insurance premium. 5,000

To motorcar expenses. 6,000

To purchase of typewriter. 6,000

To surplus. 25,100

1,.53,400 1,.53,400

Following other particulars was received.

a) He lives in one-half of the house and the other half is used for office. Rent and electricity
charges are in respect of this house.
b) One-half of car expenses are for personal use.
c) Depreciate motorcar at 15%, typewriter at 15%, Law journals at 60%, and furniture at
10%.
Compute taxable income from profession for the assessment year 2016-17.

2) Shri. Santosh is a leading lawyer of Chennai. He deposits in the Bank, all the receipts and
always pays all the expenses by cheque. The analysis of his Bank account for the year ending
31st March 2016 is as under.

Expenditure Rs. Payments Rs.

To Balance b/d. 58,340 By salaries. 14,000

To Professional fees. 3,90,000 By rent of chamber. 9,500

To dividend. 7,160 By telephone expenses. 1,000

To Home rent. 22,500 By magazine subscription 3,000

To Dividend (Gross Amount Rs. 10,000 By motorcar expenses. 28,000

15,000)
By miscellaneous office
To share of income from Hindu expenses.
Undivided Family 7,110 5,500
By purchase of motorcar.
2,00,000
By advance payment of income
tax. 40,000

By donation to University
Madras.
10,000

21
 By personal expenses. 1,45,000

By house property expenses

Taxes.

Repairs 5000

Insurance 2500

Collection charges 2500

10,000
--------

By balance c/d.
28,610

4,95,110 4,95,110

Computation gross total income after taking into account the following information.

a) ¼ of the motorcar expenses relate to personal use.

b) Rate of depreciation on motorcar is 15%.
c) Shri. Somnath stays in the house, the gross annual value of which is the Rs. 9,800.
The following are the expenses, which have been included in the above account in respect of
this house.

Insurance premium Rs. 500, municipal taxes Rs. 2,400.

3) From the following receipts and payments account of Sri. Ananth, a leading lawyer of
Bangalore, compute his income from profession for the assessment year 2016-17.

Receipts and payments account.

Expenditure Rs. Payments Rs.

To balance b/d 10,000 By staff salaries. 56,000

To arbitration fees 2,40,000 By professional books. 18,000

To legal fees 36,000 By subscription to journals. 2,000

To loan from bank 25,000 By entertainment expenses 4,000

To rent from property 45,000 By office rent. 15,000

To interest on Bank Fixed Deposit 21,000 By telephone charges. 18,000

22
To dividend received. 8,000 By printing charges. 3,000

To share of income from HUF. 1,00,000 By electricity charges. 6,000

By purchase of car. 2,50,000

By purchase of computer. 50,000

By car expenses. 7,000

By contribution to PPF 10,000

By NSC purchased. 14,000

By BAR association fees 2,000

By balance c/d. 30,000

4,85,000 4,85,000

Additional Information:

a) Half of the car expenses pertaining to personal use.

b) Provide depreciation on car at 15% on computer at 60%, and on books at 100%.
c) 25% of telephone expenses pertaining to personal use.
d) Half of electric charges are for house property.
e) Gifts received from clients Rs. 10,000 not included in the above account.
f) Loan from bank is for personal use.
Compute his income from professional for the assessment year 2016-17.

4) Mr. Balaji lives in Bangalore. He is a lawyer and his receipts and payments account is as
follows:

Expenditure Rs. Payments Rs.

To opening balance b/d 18,920 By books (annual publication) 8,000

To legal fees. 2,40,000 By repairs of house 12,000

To special commission. 60,000 By local taxes. 6,000

To presents from clients. 1,00,000 By car expenses. 20,000

To salary as a part-time lecturer 36,000 By office expenses. 40,000

To examination remuneration. 12,000 By personal expenses. 2,00,000

To interest o bank deposit. 23,000 By plant purchased for office. 7,000

23
To sale of car. 1,80,000 By car purchased. 2,50,000

To sale of shares. 1,60,000 By life insurance. 50,000

To dividend received. 15,400 By donations 12,000

By gift to daughter. 4,000

By income tax 35,000

By audit fees 2,000

By bank deposit 1,30,000

By contribution to PPF 40,000

By balance c/d 29,320

8,45,320 8,45,320

Additional Information:

a) 1/3 of building is used for profession and 2/3 for self residence.
b) The car is used in profession and personal work equally.
c) Books purchased for teaching Rs. 2,000 and remaining for profession.
Compute Mr. Balaji’s income from profession for the assessment year 2016-17.

COMPUTATION OF TAXABLE INCOME FROM CHARTERED ACCOUNTANT PROFESSION

ADD all professional income:

Audit fees
Financial consultancy service
Accountancy works fees
Consultation fees
Appellate tribunal appearance
Gift from clients
Remuneration from articles published in professional journals
Examiner fees from university

24
LESS all professional expenses:
Office Rent
General expenses
Salaries to staff/audit clerk
Telephone expenses
Electricity and water bill
Depreciation on professional books
Refreshment charges
Depreciation on computer
Depreciation on furniture
Depreciation on fixed assets
Interest on loan taken for professional purpose
Expenses on income tax proceedings
Entertainment expenses
Car expenses relating to professional use
Subscription to CA institute
Subscription for professional journals
Audit fees
Diwali expenses
Staff welfare expenses
Professional tax
TAXABLE INCOME FROM PROFESSION

25
1) Mr. Ganesh is a Chartered Accountant in Kolar. He has prepared his income and expenditure
account for the year ended 31st March 2016.

Expenditure Rs. Expenditure Rs.

To office expenses. 10,000 By audit fees. 1,70,500

To staff salaries. 5,000 By financial consultancy service. 8,000

To books (other than annual By gift from father-in-law. 5,050

publication).
5,500 By profit on sale of investments. 6,450
To personal expenses.
1,02,000 By accountancy works. 30,000
To Donation to NDF.
500
To interest.
700
To income tax.
13,300
To car expenses.
2,000
To surplus.
81,000

2,20,000 2,20,000

Additional Information:

a) The car is used equally for professional and personal purposes.

b) Allowable depreciation on car for professional purpose Rs. 5,000/-
c) Staff salaries include Rs. 2,000 paid to domestic servant.
d) Loan was taken for personal use.
e) Allowable depreciation on professional books at 60%.

2) Mr. Anand is a practicing Chartered Accountant who provides his receipts and payments
account for the year ended 31st March 2016. Compute his taxable income from profession.

Receipts Rs. Receipts Rs.

To balance b/d. 1,000 By household expenses. 20,000

To audit fees. 25,000 By office rent and electricity

charges.
To consultation fees. 20,000 20,000

26
To appellate tribunal appearance. 30,000 By salaries and wages. 40,000

To miscellaneous. 40,000 By printing and stationary. 30,000

To interest on bank deposit. 20,000 By subscription to CA institute 10,000

To rent received 12,000 By purchase of professional

books.
To presents and gifts from clients. 20,000 7,500
By interest on bank loan.
20,000
By donation.
5,000
By balance c/d
24,500

1,77,000 1,77,000

Additional Information:

a) Loan from bank was taken to construct the let out property.
b) Office rent and electricity to the extent of 30% relates to personal use.
c) Depreciation on professional books at 100%.
d) Donations were made to a charitable trust.

3) The following particulars relate to Mr. Narayana a Chartered Accountant for the year ended
31st March 2016.

Receipts Rs. Receipts Rs.

To balance b/d. 12,000 By salaries. 30,000

To professional fees. By office rent. 25,000

2014-2015 30,000 By telephone expenses. 6,000

2015-2016 66,000 By subscription to journals. 5,000

To dividends. 2,100 By motorcar expenses. 10,000

To rent received. 8,000 By miscellaneous office expenses. 10,000

To interest on debentures. 12,000 By purchase of motorcar. 80,000

To lottery income. 50,000 By donation to Bangalore

University.
5,000

27
 By balance c/d 9,100

1,80,100 1,80,100

Additional Information:

a) Depreciate motorcar at 15%

b) Half of the motorcar is used for personal purposes.
c) Rent of office was paid for the own building belongs to the assessee himself.

4) Harish is practicing Chartered Accountant. He maintains his accounts on cash basis.

Following is the Receipts and Payments A/c for the year ended 31st March 2016.

Receipts Rs. Receipts Rs.

To balance b/d. 9,300 By office rent. 2,400

To audit fees. 64,700 By salary of audit clerk. 24,800

To income from other accounting By allowance of articled clerk. 1,800

works.
56,800 By salaries. 32,400
To fees for conducting income tax
8,100 By municipal tax. 400
appeal.
600 By personal expenses. 53,500
To examiner fees from university.
7,840 By membership fees. 1,100
To dividend.
4,000 By life insurance premium. 1,500
To rent from property.
By income tax. 2,500

By motorcar purchases. 9,000

By expenses of motorcar 600

By insurance of home property. 300

By balance c/d. 21,040

1,51,340 1,51,340

28
Having regards to the fact that one third of motorcar expenses is in respect of his professional
practice. Compute Professional income of Dr. Harish, assuming the rate of depreciation on car is
@ 15%.

5) Shri. R.S.Jain is a Chartered Accountant. He has prepared the following income and
expenditure account for the year ending 31st March 2016.

Income and expenditure account.

Expenditure Rs. Income Rs.

To office expenses. 10,000 By audit fees. 70,500

To employees salary. 5,000 By gift from father-in-law 5,050

To books (other than annual By dividend. 8,000

publication).
500 By profit on sale of an asset. 6,450
To personal expenses.
17,000 By tax consultation fees 50,000
To donation to NDF.
500
To interest.
700
To income tax.
13,300
To car expenses.
2,000
To net surplus.
91,000

1,40,000 1,40,000

You are requested to complete his professional income for the assessment year 2016-17
considering the following points.

a) The car is used equally in official and personal purposes and the depreciation allowed
for the official work is Rs. 500/-.
b) Rs. 1,000/- domestic servant salary in included in employees salary.
c) Loan has been taken to purchase office building.
d) Mr. Jain is an owner of a building. Its W.D.V. is Rs. 80,000/- on 1st April 2015. The
building is used for Mr. Jain’s office. Besides this furniture cost is Rs. 30,000/-. Its W.D.V
on 1st April 2015. is Rs. 20,000/-. Allowed depreciation @ 10% on building and @ 10% on
furniture under Income Tax Act.

29
6) Mr. Chandru is a Chartered Accountant in Bangalore. He has submitted the following income
and expenditure account for the year ended 31st March 2016. Compute his income from
profession.

Expenditure Rs. Income Rs.

To drawings. 48,000 By audit fees. 2,24,000

To office rent. 42,000 By financial consultancy service 98,000

To O.Y.T. expenses. 15,000 By dividend received. 6,000

To electricity bill. 4,200 By dividend on units of UTI. 4,000

To staff salaries. 66,000 By Accountancy works. 24,000

To charities. 1,200

To gifts given to relatives. 9,600

To car expenses. 21,000

To subscription to journals. 2,500

To institute fee 1,200

To stipends to trainees 12,000

To surplus. 1,33,300

3,56,000 3,56,000

Additional Information:

a) Depreciation on car during the year Rs. 5,000/-

b) 30% of the car is used for personal purposes.

7) From the following information of Rajkumar, a Chartered Accountant, compute taxable

income from profession for the Assessment Year 2016-17.

Receipts: Consultation fees Rs. 50,000, Gifts from clients Rs. 20,000, Gifts from father-in-law Rs.
30,000, Appellate Tribunal Appearance Rs. 12,000 and fees for drafting Memorandum of
Association Rs. 10,000.

30
Payments: Office Rent Rs. 25,000, Stipend to Articled Clerks Rs. 20,000, Professional books (not
annual publications) purchased Rs. 12,000, Charitable Donations Rs. 4,000 and professional tax
Rs. 2,000.

31