CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

TEST 6: PROFIT & GAINS OF BUSINESS OR PROFESSION

Illustration 1
X submits the following particulars:
Previous years
2021 – 2022 2022 – 2023
Rs. Rs.
Business profits (before depreciation) 4,00,000 9,30,000
Current depreciation 6,00,000 8,90,000
Income from property (computed) 86,000 10,000
Income from salary (after standard deduction) 10,00,000 12,00,000
Determine the net income of X for the assessment years 2022 – 2023 and 2023 – 2024.

Solution
Assessment year 2022 – 2023 (previous year 2021 – 2022)
Rs. Rs.
Business profits 4,00,000
Less: Depreciation 6,00,000
Depreciation not deductible against business profits 2,00,000
Income from salary 10,00,000
Income from house property 86,000
Less: Depreciation 86,000 Nil
Net income 10,00,000
Note: Unabsorbed depreciation of Rs.1,14,000 will be carried forward.
Assessment year 2022 – 2023 (previous year 2021 – 2022)
Profits and gains of business or profession:
Rs. Rs.
Business profits 9,30,000
Less: Depreciation (i.e., current depreciation: Rs.8,90,000 9,30,000 Nil
+ unabsorbed depreciation of the previous year 2021 –
2022 Rs.1,14,000)
Depreciation not deductible against business income 74,000
Income from salary 12,00,000
Income from house property 10,000
Less: Depreciation 10,000 Nil
Net income 12,00,000

www.vipulshah.org 75591 73787 6.1

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Illustration 2
X submits the following particulars:
Previous years
2020 – 2021 2021 – 2022
Business profits (before depreciation) (-) 95,000 2,07,000
Current depreciation 35,000 32,000
Income from other sources 36,000 41,000
Determine the net income of X for the assessment years 2022 – 2023 and 2022 and 2023.

Solution
Rs. Rs.
Income from other sources 36,000
Less: Business loss 36,000
Net income Nil
Amount to be carried forward:
Business loss 59,000
Unabsorbed depreciation 35,000
Assessment year 2022 – 2023 (previous year 2021 – 2022)
Profits and gains of business or profession:
Business profits 2,07,000
Less: Current depreciation 32,000
Profit after depreciation 1,75,000
Less: Brought forward business loss of the earlier 59,000 Nil
previous year
Business income 1,16,000
Less: Brought forward depreciation 35,000 81,000
Income from other sources: 41,000
Net income 1,22,000

Illustration 3
X (age 69 years) furnishes the following information relevant for the assessment year 2022 –
2023:
Profit and Loss Account for the year ending March 31, 2022
Rs. Rs.
Household expenses 23,000 Gross profit of agency business 32,65,150
Bad debts 1,000 Commission 18,000
Provision for bad debts 400 Sundry receipts 2,000
Fire insurance 6,000 Interest on investment 14,000

www.vipulshah.org 75591 73787 6.2

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Salary to: Bad debts recovered (earlier 9,750

allowed as deduction)
Staff 9,00,000 Interest on securities (gross) 11,000
X 12,000
Contribution towards 72,000
unrecognized provident
fund
Interest on:
Overdraft taken for 8,000
payment of sales tax
Capital of X 42,000
Loan given by X’s brother 9,000
Depreciation on building 11,500
and furniture
Advertisement
Revenue expenditure 7,000
Capital expenditure on a 20,000
sign board
General expenses 8,000
Net profit 22,00,000
33,19,900 33,19,900
Other information:
1. General expenses include medical expenditure of X Rs.500.
2. Income of Rs.35,000, accrued during the previous year ending March 31, 2022, is not
recorded in the Profit and Loss Account.
3. X contributes Rs.1,10,000 towards public provident fund.
4. Depreciation on building, furniture and sign board comes to Rs.8,000 according to the tax
provision.
Determine the taxable income and tax liability of X for the assessment year 2022 – 2023.

Solution
Rs.
Net profit as per profit and loss account 22,00,000
Adjustments:
Add: House hold expenses 23,000
Add: Provision for bad debts 400
Add: Salary to X 12,000
Add: Contribution to unrecognized provident fund 72,000

www.vipulshah.org 75591 73787 6.3

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Add: Interest to X 42,000

Add: Depreciation 11,500
Add: Capital expenditure on signboard 20,000
Less: Interest on investment (-) 14,000
Less: Interest on securities (-) 11,000
Add: Medical expenditure (being personal expenditure) 500
Add: Income not recorded in books 35,000
Less: Depreciation under section 32 (-) 8,000
Business income 23,83,400
Income from other sources (Rs.14,000 + Rs.11,000) 25,000
Gross total income 24,08,400
Less: Deduction under section 80C 1,10,000
Net income 22,98,400
Tax on net income Rs.
Income tax 4,99,520
Add: Health and education cess 19,981
Tax liability (rounded off) 5,19,500

Illustration 4
Mrs. X (age 55 years), a resident individual, furnishes the following particulars for the
assessment year 2022 – 2023:
Profit and Loss Account for the year ending March 31, 2021
Rs. Rs.
Office expenses 82,000 Gross profit 26,66,600
Audit fees 11,000 Sundry receipts 20,000
Legal expenses 500 Customs duties recovered from 12,000
the Government
Cost of extension to building 40,000 (earlier not allowed as
deduction)
Depreciation on machinery on 31,000 Bad debts recovered (earlier 1,000
extension of building allowed as deduction)
Salary to staff 1,81,000 Gift from a friend 60,000
Bonus to staff 45,000
Contribution to an approved 30,000
gratuity fund
Outstanding liability in respect 38,000
of interest payable to IDBI
General expenses 71,000

www.vipulshah.org 75591 73787 6.4

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Net profit 22,30,100

27,59,600 27,59,600
Other relevant particulars:
1. Bonus is outstanding on March 31, 2022 Rs.40,000 is, however, paid on September 30, 2022
(being the due date of furnishing return of income).
2. Depreciation on machinery and extension of building shown in the Profit and Loss Account is
calculated according to the income tax provisions.
3. General expenses include payment of Rs.10,000 to an approved institute for the purpose of
carrying on a scientific research in natural science. The research is however, not related to
the business of the assesse.
4. During the previous year 2021 – 2022, Mrs. X also makes a capital expenditure of Rs.11,000
for the purpose of carrying on a scientific research related to her business. This
expenditure is, however, not recorded in the Profit and Loss Account.
5. Outstanding interest payable to IDBI is paid as follows: Rs.600 on April 10, 2021, Rs.4,000
on May 10, 2021, Rs.6,000 on June 30, 2021 and Rs.1,500 on September 10, 2021. The
remaining amount is still outstanding.
6. Salary to staff includes Rs. 40,000 being compensation paid for termination to an employee.
Determine the net income and tax liability of Mrs. X for the assessment year 2022 – 2023,
assuming that she annually deposits Rs.1,25,000 in the public provident fund.

Solution
Rs.
Net profit as per profit and loss account 22,30,100
Adjustments:
Add: Cost of extension to building (being capital expenditure) 40,000
Less: Custom duty refund (earlier not allowed as deduction) (-) 12,000
Less: Gift from a friend (taxable under section 56) (-) 60,000
Add: Bonus outstanding on September 30, 2021 5,000
Less: Weighted deduction in respect of contribution to an approved institute (-) 5,000
for conducting scientific research (50% of Rs.10,000)
Less: Capital expenditure for conducting scientific research (not recorded in (-) 11,000
profit and loss account)
Add: Outstanding interest payable to IDBI (Rs.38,000 – Rs.600 – Rs.4,000 – 25,900
Rs.6,000 – Rs.1,500)
Business income 22,13,00
Income from other sources (gift received from a friend, chargeable to tax as it 60,000
is more than Rs.50,000)
Gross total income 22,73,000
Less: Deduction under section 80C 1,25,000

www.vipulshah.org 75591 73787 6.5

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Net income 21,48,000

Tax on net income
Income tax 4,56,900
Add: Health and education cess 18,276
Tax liability (rounded off) 4,75,180

Illustration 5
XYZ Ltd., an Indian company, submits the following particulars relevant for the assessment year
2022 – 2023:
Profit and Loss Account for the year ending March 31, 2022
Rs. Rs.
Salary to staff 16,40,000 Gross profit 63,37,450
Income tax 30,000
Expenses on issue of shares for 18,000
setting up a new show room at
Delhi
Expenses on raising a long term 12,000
loan for setting up a new show room
at Bombay
Interest on public deposits 82,000
Capital expenditure for promotion 32,000
of family planning among employees
Legal expenses for filing income 10,000
tax appeals before the Delhi High
Court
Reserve for losses 50,000
Reserve for payment of fines and 20,000
penalty
Reserve for bad and doubtful 10,000
debts
Maintenance expenses of car 56,000
Bad debts written off 3,450
Depreciation of:
Plant and Machinery 81,000
Car 25,000
Office expenses 1,02,000
Rent and repairs 42,000
Sundry expenses 86,000

www.vipulshah.org 75591 73787 6.6

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Net profit 40,38,000

63,37,450 63,37,450

Other information:
1. Car is partly used for official purposes and partly for personal purposes of a relative of
director. In past, 10 per cent of car expenditure is disallowed.
2. Sundry expenses include payment of an advertisement bill to a person who has substantial
interest in the company. The payment is excessive to the extent of Rs.20,000.
3. Office expenses include an expenditure of Rs.10,100 which is paid in cash.
4. Sundry expenses include an expenditure of Rs.10,000 which is paid by bearer cheque.
5. Depreciation on machinery as per tax provisions is Rs.86,000.
6. On Marc 10, 2021, the company pays Rs.2,00,000 to a National Laboratory for carrying an
approved scientific research programme in natural science. The payment is not recorded in
the above P & L A/c.
7. Sundry expenses include royalty payment of Rs.30,000 to a resident on which tax is
deducted at source on February 10, 2022 and paid to the Government on December 5, 2022.
Determine the taxable income tax and tax liability of the company for the assessment year 2022
– 2023.

Solution
Rs.
Net profit as per profit and loss account 40,38,000
Adjustments:
Add: Income tax 30,000
Add: Expenses on issue of shares (amount deductible is 1/5 of Rs.18,000) 14,400
Add: Capital expenditure on family planning (amount deductible is 20% of 25,600
Rs.32,000)
Add: Reserve for losses 50,000
Add: Reserve for fines 20,000
Add: Reserve for bad debts (bad debts are deductible but reserve for bad 10,000
debts is not deductible)
Add: Car expenses (10% of Rs.56,000) 5,600
Add: Car depreciation (10% of Rs.25,000) 2,500
Add: Excessive payment of advertisement 20,000
Add: Office expenses (the expenditure is above Rs.10,000 and it is paid in cash) 10,100
Less: Depreciation (Rs.86,000 – Rs.81,000) (-) 5,000
Less: Weighted deducted in respect of contribution to a national lab (150% of (-)
Rs.2,00,000) 3,00,000

www.vipulshah.org 75591 73787 6.7

CMA VIPUL SHAH CA INTERMEDIATE FOR MAY/ NOV 22 PGBP

Add: Royalty payment (tax is deducted during the current year but not 9,000
deposited up October 31, 2022; consequently, 30% of royalty is disallowed)
Business income 39,30,200
Add: Any other income Nil
Gross total income 39,30,200
Less: Deductions under section 80C to 80U Nil
Net income 39,30,200
SSS Tax on net income
Income tax 11,79,060
Add: Surcharge (surcharge is applicable only when net income exceeds Rs.1 Nil
crore)
Total 11,79,060
Add: Health and education cess 47,162
Tax liability (rounded off) 12,26,220
Note: If tax is deducted at source from royalty payable to a resident during the current
financial year and tax is not deposited with the Government till the due date of submission of
return of income, then 30% of such royalty is not deductible.

www.vipulshah.org 75591 73787 6.8