INCOME TAX II

PROFITS AND GAINS FROM BUSINESS AND PROFESSION

PROF. KARTHIK P
BUSINESS (SECTION 2(13))

According to sec 2(13) of the income tax act, the term business means any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or manufacture

PROFESSION (SECTION 2(36))

According to sec 2(36), profession refers to an occupation where intellectual skill and technical
expertise in a specified field is required for earning a livelihood. Lawyer, Doctor, Auditor,
Professor are some examples of profession.

VOCATION

Vocation means an activity upon which a person spends the major portion of time and out of
which they make living. Music, dancing, writing books etc

FORMAT:

Particulars Amount Amount

Net profit as per P & L a/c XXX
Add: 1) Non-business / inadmissible expenses debited to P & L a/c XX
2) Business income not credited to P & L a/c XX
3) Overvaluation of opening stock XX
4) Undervaluation of closing stock XX XXX
XXX
Less: 1) Admissible expenses not debited to P & L a/c XX
2) Tax free incomes credited to P & L a/c XX
3) Non-business income credited to P & L a/c XX
4) Undervaluation of opening stock XX
5) Overvaluation of closing stock XX XXX
Taxable Income from Business XXX
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
NON-BUSINESS / INADMISSIBLE EXPENSES

 Family planning expenses  Income tax

 Fines and penalties  Charities and donations
 Interest on capital  Capital expenditure like purchase of
 Illegal expenses machinery, extension of building
 GST, Customs Duty  Patents, copyrights, technical know-
 Expenses paid in cash exceeding how purchased
10000, 100% of such amount is  Personal expenses
inadmissible  Preliminary expenses
 Speculation losses  Provision for bad and doubtful debts
 Excess depreciation  Contribution to staff welfare fund

BUSINESS INCOMES

 Rent received from employees  Bad debts recovered but allowed

 Interest from debtors for delayed earlier
payments  Cash assistance received
 Sales, commission, discount received
ADMISSIBLE EXPENSES

 Advertisement expenses laboratory 150%, approved research

 Audit fees association and approved institutions
 Bank commission 150%, in house approved R & D

 Bad debts 150%)

 Depreciation allowable  Travelling expenses, welfare

 Establishment expenses expenses

 Entertainment expenses  Postage and telegram, printing and

 Expenditure on scientific research stationary

(Statistical research 100%, national  Salaries and wages

 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P

TAX FREE INCOMES

 Dividend from an Indian company /  Gift from relatives

UTI  Agricultural income
 Refund from LIC  Bad debts recovered but disallowed
 Interest on POSB a/c earlier
 Income tax refund

NON-BUSINESS INCOME

 House property income

 Winnings from lotteries
 Interest received on compensation

DEPRECIATION RATES:

 General plant and machinery 15%

 Motor car 15%
 Books 40%
 Computer including software 40%
 Intangible assets 25%
 Type writer, surgical equipments 15%
 Residential buildings 5%
 Non-residential buildings 10%
 Furniture 10%, Neon Sign Boards 10%
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
PROBLEMS:

1. The following is the profit and loss a/c of Citizen for the year ending 31.03.2021
Particulars Amount Particulars Amount
To salaries 165000 By Gross Profit 250000
To office expenses 18000 By Bad debts recovered 10000
To depreciation 14000 By Dividend 3000
To GST 9000 By Commission 10000
To Legal expenses 8000 By rent from house property 9000
To income tax 7000 By brokerage 10000
th
To patents purchased (1/8 ) 12000 By sundry receipts 5000
To repairs 6000 By Share of income from HUF 3000
To donation 2000
To provision for bad debts 3000
To general expenses 12000
To net profit 44000

300000 300000

Additional Information:

 Salary includes 6000 paid to workers employed at home

 Legal expenses includes 1000 paid to the advocate in connection with personal use
 General expenses includes 4000 as contribution to staff welfare fund
 Out the bad debts recovered only 4000 were allowed as deduction earlier
Compute the taxable income from business for the AY 2021-22

Assessee: Citizen Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net profit as per P & L a/c 44000
Add: i) Non-business & Inadmissible expenses debited to p/l a/c:
Salary paid to a worker employed at home 6000
Legal Expenses (Personal use) 1000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Income Tax 7000
Patents purchased 12000 35000
Donation 2000
Provision for bad debts 3000
General expenses (Contribution to Staff Welfare Fund) 4000
79000
ii) Business Income not credited to p/l a/c -
iii) Overvaluation of opening stock -
iv) Undervaluation of closing stock -
79000
Less: i) Admissible expenses not debited to P/L a/c
Depreciation on Patents purchased (12000 x 8 /1 = 96000 x 25%) 24000
55000
ii) Tax Free Incomes Credited to P /La/c:
Bad debts recovered but disallowed earlier (10000 – 4000) 6000 9000
Dividend 3000
46000
iii) Non-Business income credited to p/l a/c:
Rent from house property 9000 12000
Share of income from HUF 3000
34000
iv) Overvaluation of closing stock -
v) Undervaluation of opening stock -
TAXABLE INCOME FROM BUSINESS 34000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
2. Mr. KMS is the owner of a business. The profit & loss a/c for the year ending 31.03.2021
is as follows. Compute his taxable income from business.
Dr Profit and Loss a/c Cr

Particulars Amount Particulars Amount

To Rent 60000 By Gross Profit 550000

To Establishment charges 50000 By Interest on Govt Securities 25000

To General charges 20000 By Rent from House Property 25000

To Household expenses 6500

To Commission 1500

To Reserve for Bad Debts 5000

To Advertisement 10000

To Repairs (House Property) 15000

To Income Tax 20000

To Depreciation 10000

To Net Profit 402000

600000 600000

Adjustments:

1. Actual Bad debts amount to ₹. 2000

2. Depreciation for the year amounted to ₹. 6000

Assessee: Mr. KMS Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Net profit as per P & L A/c 402000
Add: Inadmissible expenses debited to P & L a/c
Household expenses 6500
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Repairs to HP 15000
Reserve for Bad debts 5000
Depreciation (10000 – 6000) 4000
Income Tax 20000 50500
452500
Business income not credited to P & L a/c -
Overvaluation of opening stock -
Undervaluation of closing stock -
452500
Less: Admissible expenses not debited to P & L a/c
Bad debts 2000
450500
Tax free incomes credited to P & L a/c -
Non-business income credited to P & L a/c
Interest on Govt Securities 25000
Rent from House property 25000 50000
4) Undervaluation of opening stock -
5) Overvaluation of closing stock -
Taxable income from Business 400500

3. From the following P & L a/c of Mr. Sachin, compute his income from business for the
AY 2021-22
Particulars Amount Particulars Amount
To Salaries 6000 By Gross Profit 100000
To purchase of machinery for
11000 By Interest on Debentures 2000
research
To Life Insurance Premium 6000 By Dividend from UTI 2000
To Bonus to staff 12000 By Discount received 6000
To Printing and Stationery 4000 By Horse race gains (Gross) 32000
To house hold expenses 15000 By refund of IT 7500
To Misc Expenses 5000 By Cash assistance from Govt. 6000
To Advertisement paid in cash 22000 By Bad debts recovered 22000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
To Property tax on HP 4000
To car expenses:
Petrol 12000 18000
Driver’s salary 6000
To medical expenses of his
3000
wife
To provision for GST 10000
To Depreciation 10000
To Gifts and Presents 2000
To Net Profit 49500
177500 177500

Adjustments:
a. ½ of the car expenses are for personal use
b. Depreciation on all the assets is 7200
c. Research conducted by Mr. Sachin is related to his business
d. 40% of bad debts recovered were disallowed earlier

Assessee: Mr. Sachin Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net Profit as per profit & loss a/c 49500
Add: i) Non-Business & Inadmissible expenses debited P & L a/c:
Life Insurance Premium 6000
House hold expenses 15000
Advertisement expenses paid in cash 22000
Car Expenses:
Petrol (12000 x ½) 6000
Driver’s salary (6000 x ½) 3000
Property tax on house property 4000
Medical expenses of his wife 3000
Provision for GST 10000
Excess Depreciation (10000 – 7200) 2800
Gifts and Presents 2000 73800
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
123300
ii) Business income not credited to P/L a/c -
iii) Overvaluation of Opening Stock -
iv) Undervaluation of Closing Stock -
123300
Less: i) Admissible expenses not debited to P/L a/c: -
ii) Tax free income credited to P /L a/c
Dividend from UTI 2000
Refund of Income Tax 7500
Bad debts recovered disallowed earlier (22000x 40%) 8800 18300
105000
iii) Non-Business income credited to p/l a/c:
Interest on debentures 2000
Horse race gains (Gross) 32000 34000
iv) Overvaluation of closing stock -
v) Undervaluation of opening stock -
Taxable Income from Business 71000

4. From the P & L a/c of Mr. Ramesh for the year ended 31.03.2021, compute the income
from business for the AY 2021-22
Particulars Amount Particulars Amount
To Office expenses 40000 By Gross Profit b/d 640000
To General expenses 16000 By Interest on Govt. Securities 11200
To interest on bank loan 4000 By Discounts received 16000
By Bad debts recovered
To audit fees 4000 800
(Not written off earlier year)
To interest on capital 12000 By Sundry receipts 16000
To rent 20000 By Dividend 16000
To provision for income tax 16000
To charity 8000
To Legal expenses 4000
To compensation to retrenched
20000
employees
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
To Extension of building 36000
To GST 8000
To Net Profit 512000
700000 700000
Additional information:

a. General charges included 8000 towards purchase of computer

b. Legal expenses include 1600 penalty by customs authority
c. Rent includes 8000 paid as rent of the house in which the assessee lives
d. Depreciation allowed 12000 as per income tax rules. (excluding depreciation on
computer purchased)
e. Income tax provision is excessive to the extent of 5000

Assessee: Mr. Ramesh Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net Profit as per P & L a/c 512000
Add: i) Non-business expenses & Inadmissible expenses debited
to P & L a/c
General expenses (Purchase of Computer) 8000
Interest on capital 12000
Rent of residential house 8000 89600
Provision for income tax 16000
Charity 8000
Legal Expenses (Penalty) 1600
Extension of Building 36000
601600
ii) Business income not credited to P & L a/c -
601600
Less: i) Admissible expenses not debited to P & L:
Depreciation allowed as per IT rules 12000
Depreciation on Computer (8000 x 40%) 3200
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Depreciation on extension of building (36000 x 10%) 3600 18800
582800
ii) Non-business income credited to P & L a/c:
Interest on Govt. Securities 11200
571600
iii) Tax free income credited to P & L a/c:
Bad debts recovered but disallowed earlier
800 16800
Dividend
16000
Taxable income from Business 554800

NOTE:

 Expenses incurred towards filing of income tax return and legal charges of income tax
appeal are admissible expenses.
 Income tax penalty is disallowed

5. A sole trading concern of Mr. Hassan furnishes the following information trading, profit
and loss a/c and other information for the year ending 31.03.2021. Compute his taxable
income from business for the AY 2021-22
Particulars Amount Particulars Amount
To Opening stock 46000 By Sales 505000
To purchases 250000 By Closing stock 86000
To Carriages 12000 By Rent from House Property 24000
To railway demurrage 12000 By refund of customs duty 10000
To advertisement 12000 By refund from income tax 15000
To salary to staff 18000 By bad debts recovered 15000
By capital gains on sale of short
To repairs to house property 2000 20000
term investments
To Fire Insurance:
House Property 1800 By Profits on sale of a car used
25000
Office and Godown 2000 in the business
Goods 5000
To LIC Premium:
On life of proprietor 3000
On Employees life 2000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
To Depreciation:
House property 6000
Business assets (excluding 14000
patents)
To wealth tax
6000
To Income tax 12000
To Patent rights purchased 35000
To Interest on capital
borrowed:
For business 7000
For reconstruction of HP 5000
To Family planning expenses
4000
among employees
To Bad debts 9000
To Provision for bad debts 3000
To provision for GST 22000
To Net Profit 211200
700000 700000

Additional information:
a) Opening stock is valued at cost minus 12% however closing stock is valued at cost
plus 8% basis
b) Bad debts recovered include 5000 disallowed earlier
c) Income tax includes 4000 for preparation and filing of income tax returns and 1000
income tax penalty on earlier assessment and 2000 legal charges on income tax
appeal
d) Rent from HP includes 6000 rent received from the employees of the concern
e) 75% of house property expenses are personal use

Assessee: Mr. Hassan Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net profit as per P & L a/c 211200
Add: i) Non-Business & Inadmissible expenses debited to P/L a/c:
Repairs to house property (2000 x 75%) 1500
Fire insurance on House Property (1800 x 75%) 1350
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
LIC Premium on the life of proprietor 3000
Depreciation on House Property (6000 x 75%) 4500
Wealth Tax 6000
Income Tax (12000 – 4000 – 2000) 6000
Purchase of patent rights 35000
Interest on capital on house property (5000 x 75%) 3750
Family planning expenses 4000
Provision for bad debts 3000
Provision for GST 22000 90100
301300
ii) Business income not credited to P / L a/c: Nil
iii) Overvaluation of Opening Stock Nil
iv) Undervaluation of Closing Stock Nil
301300
Less: i) Admissible expenses not debited to P/L a/c
Depreciation on patent rights (35000 x 25%) 8750
292550
ii) Tax free incomes credited to P/L a/c:
Refund of customs duty 10000
Refund of income tax 15000 30000
Bad debts recovered disallowed earlier 5000
262550
iii) Non-Business income credited P/L a/c:
Rent from House property (24000 – 6000) 18000
Capital gains on sale of investment 20000 63000
Profit on sale of a car 25000
199550
iv) Undervaluation of opening stock (46000 x 12 / 100 – 12) 6273
v) Overvaluation of closing stock (86000 x 8 / 100 + 8) 6370
TAXABLE INCOME FROM BUSINESS 186907
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
6. Mr. Prasad has prepared the following profit and loss a/c for the year ending 31.03.2021.
Particulars Amount Particulars Amount
Salary to employees 8000 Gross Profit 137300
Advertisement expenses 4000 Dividends from an Indian Co 4000
Sundry expenses 4500 Rent from HP 16500
Interest on securities (Non-
Interest on capital 2000 92000
Trade)
Fire insurance premium
3000 Lottery winning (TDS 3000) 15000
(1000 relates to HP)
Income tax 7000
House hold expenses 2500
Bad debts 1000
Provision for bad debts 500
Repairs of HP 1000
Municipal tax of HP 3600
Life insurance premium 6000
Donation to Congress Party 2000
Depreciation (allowable) 3700
Net Profit 216000
264800 264800
Mr. Prasad owns a HP which is used as follows:
a) 25% of carpet area for his own business
b) 25% of carpet area for his own residence
c) 50% of carpet area is let out
d) Advertising expenses includes expenditure of 3000 on Neon Sign boards.
Compute his taxable income from business for the AY 2021-22
Assessee: Mr. Prasad Previous year: 2020-21
Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net Profit as per P & L a/c 216000
Add: i) Non-Business and Inadmissible expenses debited to P/L a/c:
Advertisement expenses (Capital expenditure on purchase of Neon 3000
Sign Boards)
Interest on Capital 2000
Fire insurance premium (House Property) (1000 x 75%) 750
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Income tax 7000
House hold expenses 2500
Provision for bad debts 500 27200
Repairs to house property (1000 x 75%) 750
Municipal tax of house property (3600 x 75%) 2700
LIC Premium 6000
Donation to Congress Party 2000
243200
ii) Business income not credited to P/L a/c Nil
243200
Less: i) Admissible expenses not debited to P/L a/c:
Depreciation on Neon Sign Boards (3000 x 10%) 300
242900
ii) Tax-Free income credited to P/L a/c:
Dividend from an Indian Company 4000
238900
iii) Non-Business income credited to P/L a/c:
Rent from house property 16500
Interest on securities 92000 123500
Lottery winning 15000
TAXABLE INCOME FROM BUSINESS 115400

7. Mr. Dravid presents you the following trading, P & L a/c for the previous year ended
31.03.2021 and requires you to compute income from business for the AY 2021-22:
Particulars Amount Particulars Amount
To opening stock 85000 By Sales 394000
To purchases 240000 By Closing stock 110000
To wages 35000
To carriage inwards 12000
To gross profit 132000
504000 504000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
To staff salary 18750 By Gross Profit 132000
To Bank cash transaction tax 12000 By interest on debentures (net) 17800
By bad debts recovered
To audit fees 5500 5200
(Previously allowed)
To Income tax 32000 By sundry income 2650
To car expenses 15000 BY rent from house let out 90000
To Y2K expenses 40000
To Donation 2500
To General expenses 18650
To GST Provision 16000
To Technical know-how
30000
purchased
To interest on capital 16000
To depreciation on car 18000
To provision for bad debts 6500
To Net Profit 16750
247650 247650
Additional Information:

a) Opening stock is undervalued by 15%

b) Closing stock is over-valued by 10%
c) Purchases includes a cash payment of 30000 towards raw materials
d) 20% of the car expenses are attributable to the use of car for personal purpose
e) Out of the income tax and GST provision, income tax of 6250 and GST of 1250 were
paid before filing the return of income
f) Donation of 5000 to Delhi University for carrying on research in social science.

Assessee: Mr. Dravid Previous year: 2020-21

Status: Resident Assessment Year: 2021-22
Particulars Amount Amount
Net Profit as per P & L a/c 16750
Add: i) Non-Business and Inadmissible expenses debited to P/L a/c:
Purchases (Purchase of raw material for cash) 30000
Income tax 32000
Car expenses (Personal) (15000 x 20%) 3000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Donation 2500 138350
GST Provision (16000 – 1250) 14750
Technical know-how purchased (Capital Expenditure) 30000
Interest on Capital 16000
Depreciation on Car (Personal) (18000 x 20%) 3600
Provision for bad debts 6500
155100
ii) Business income not credited to P/L a/c Nil
155100
iii) Overvaluation of Opening Stock Nil
iv) Undervaluation of Closing Stock Nil
155100
Less: i) Admissible expenses not debited to P/L a/c:
Donation to Delhi University for research in social sciences (5000 x 100%) 5000
150100
ii) Tax-Free Income credited to P/L Nil
150100
iii) Non-business income credited to P/L a/c
Interest on debentures 17800
Rent from House let out 90000 107800
42300
iv) Undervaluation of opening stock (85000 x 15 / 85) 15000
v) Overvaluation of closing stock (110000 x 10 / 110) 10000
TAXABLE INCOME FROM BUSINESS 17300

8. Following is the trading, profit and loss a/c of Manjunath enterprises for the year ended
31.03.2021
Particulars Amount Particulars Amount
To opening stock 124000 By Sales 3330000
To purchases 728000 By Closing stock 136000
 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
To wages 52000
To carriage 78800
To Manufacturing expenses 63000
To Gross profit 2420200
3466000 3466000
To Salaries 228000 By Gross Profit 2420200
To interest on capital 172000 By rent from house property 44000
By Dividend from Tata
To Drawings 110000 10600
Chemicals
To rent and taxes 154000 By bad debts recovered 15000
By interest on debentures of
To donation 25000 18000
M & M Ltd
To repairs 61000 By Misc. income 8000
To depreciation 73000 By gifts from relatives 70400
To General expenses 24000
To legal charges 6000
To IT appeal expenses 10000
To audit fees 5000
To LIC premium 46900
To fire insurance premium for
23300
goods
To daughter’s college fees 30000
To travelling expenses 18000
To Net Profit 1600000
2586200 2586200

Additional Information:

a) Stocks are valued 10% below cost

b) Depreciation allowable as per IT rules 54000
c) Legal charges are in connection with purchase of land
d) Repairs include 6000 related to house property
e) Salaries include 4600 paid to domestic servant
f) 40% of bad debts recovered were disallowed earlier

Compute taxable income from business for the AY 2021-22

 INCOME TAX II
PROFITS AND GAINS FROM BUSINESS AND PROFESSION
PROF. KARTHIK P
Assessee: Mr. Manjunath Previous year: 2020-21
Status: Resident Assessment Year: 2021-22
Particulars Amount Amount