Income from Business and profession as a head of income.

Sec. 2(13) Business :

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 (Doing
activity for the first time without knowing the outcome) or concern in the nature of trade,
commerce and manufacture.
To judge a transaction as business transaction, following points should be considered -
1. Nature of commodity
2. Nature of transaction (Whether incidental to a business or not)
3. Intention of the related party
4. Duration of transaction
5. Effort applied in transaction.
Sec. 2(36) Profession:
Profession means the activities for earning livelihood which require intellectual skill or
manual skill, e.g. the work of a lawyer, doctor, auditor, engineer and so on are in the nature of
profession. Profession includes vocation.
Vocation : Vocation implies natural ability of a person to do some particular work e.g. singing,
dancing, etc. Here, no training or no qualification is required but having natural ability.
Profits : Excess income over expenditure.
Gains : Any incidental revenue from business.
As the rules for the assessment of business, profession or vocation are the same, there
is no importance of making any distinction between them for income tax purposes.
Sec. 28 : Basis of Charge :
The following incomes are chargeable to income tax under the head ‘PGBP’:
i) Revenue Profits from Business or Profession : The profits and gains of any business
or profession which was carried on by the assessee at any time during the previous year;

In the course Deductio

Revenu of n
e
Business U/s 28
Loss Chargable
Transfe under
r
Capital 'Capital Gain'

No No
transfer deduction
ii) Any Compensation due to or received by an agent : Any compensation or other
payment due to or received by an agent, managing the whole or substantially the whole of
the affairs of any person, at the termination his management or modification of the terms
and conditions relating thereto.
iii) Income of trade association, etc : Income derived by a trade, professional or similar
association from specific services performed for its members.
iv) Receipts in connection with foreign trade :
a) Profit on sale of import license.
b) Duty Draw back / Duty remission (decrease) scheme / Duty free replenishment
(refill) certificate.
c) Cash Assistance.
d) Profit on sale of Duty Entitlement Passbook.
e) Repayment of any customs or excise duty to any person against exports.
v) Value of any benefit or Perquisite from business or profession : The value of any
benefit or perquisite whether convertible into money or not, arising from business or the
exercise of profession.
vi) Remuneration to partner from the firm : Any interest, salary, bonus, commission or
remuneration due to or received by a partner of a firm from the firm provided that it has
been allowed as deduction in computing the taxable profits of such firm.
vii) Amount received or receivable for certain agreement :
a) Not carrying out any activity in relation to any business or
b) Not sharing any know-how, patent, copyright, trade mark, license, franchise or
any other business or commercial right of similar nature or information or
technique.
viii) Keyman Insurance Policy : Any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such policy.
ix) Interest on securities : Interest on securities, if the business of the assessee is to invest in
securities, otherwise interest on securities shall be chargeable to income tax under the
head Income from other sources’.
x) Recovery against certain capital assets covered u/s 35AD : Any sum received on
account of any capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on such
capital asset has been allowed as deduction u/s 35AD.
xi) Income from speculative transaction.
 Sec. 43(5) Speculative Transaction : Speculative transaction means a transaction in which a
contract for the purchase or sale of any commodity, including stocks and shares, is periodically
or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip.
Sec. 29 : Computation of Income from Business or Profession :
According to Section 29, the profits and gains of any business or profession are to be
computed in accordance with the provisions contained in Section 30 to 43D.

Sec. 29 :Computation of Income from Business or

Profession

Admissible Expenses or Profit Other

Inadmissisab
Deduction le payments Chargab Provision
(Sec. 30 to Deduction not le to Tax
37) (Sec. 40) deductable (Sec. 41)
in certain
circumstanc

Deductions Expressly Allowed (Sec. 30 to 37)

Sec. 30 : Expenses in respect of business premises : Revenue expenses for use of premises
for business or profession is allowed.
a) Premises are occupied as tenant : Rent, Repair, Insurance and Tax.
b) Premises are occupied as owner : Repair, Insurance and Tax.
Note :
1. If the business premise belongs to the assessee no deduction in respect of rent will be
allowed.
2. If the assessee is a partnership firm and the business premises belongs to a partner of the
firm, the rent payable to the partner will be an allowable deduction.
Sec. 31 : Revenue Expenditure on Plant and Machinery / Furniture and Fixture :
Revenue expenditure incurred on current repairs and insurance premium incurred on plant and
machinery / furniture and fixture is allowed. [Rent and taxes are allowed u/s 37]
Note : Capital expenditure shall not included in repairs.

Sec. 32 : Depreciation Under Section 32 depreciation on assets is allowed as deduction while

computing income from business or profession. To claim this deduction following conditions
should be satisfied:

1) Assessee should be owner of the asset.

2) Asset must be used for the business.

3) Such use must be in the previous year.

Depreciation is allowed not on individual asset items, but on block of assets under following categories:
‐

1) Buildings

2) Plant & Machinery

3) Furniture

4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents, Trademarks,
licenses, franchises or any other business or commercial rights of similar nature.

The term plant includes ships, vehicles, books, scientific apparatus and surgical equipments used for
the business but excludes tea bushes or live stock.

If any asset falling in block of assets is acquired during the year and put to use during the previous
year for less than 180 days depreciation on such asset shall be restricted to 50% of the normal
depreciation.

No depreciation is allowed on motor car which is manufactured outside India and acquired on or
after 1st March 1975 but before 1st April 2001. However, this restriction does not apply
if:

1) Assessee carries on a business of running the car on the hire for tourist, or

2) If assessee is using the car outside India for his business in another country. If business is
carried on in a building not owned by the assessee but acquired on lease or any other occupancy
right and any capital expenditure is incurred by him in respect of this building, such expenditure
will be considered as cost of asset as if he is the owner of such property
Rates of depreciation prescribed under IT Act :
1)
Building

Residentia Business Installing Plant and Machiner /

l Purpose Temporary Building
Purpose (10%) (40%)
(5%)

2) Furnture and Fittings

(10%)

3) Plant and Machinery

Genera Motor Car Motor Car Remaining Assets

l used on used for own (40%)
(15%) hire
business (30%) [Books, Computers /etc]
(15%)

4) Ships

(20%)
 5) Intangible Assets

(25%)

Sec. 33AB : Tea, Coffee and Rubber Development Account

a) The assessee should deposit in special account with the National Bank for Agricultural
and rural Development.
b) The deposit should be made within a period of six months from the end of the PY
or before furnishing the return of his income, whichever is earlier.
c) Limit : Sum equal to deposited or 40% of profits of such business (before making
deduction under this section and before setting off brought forward business losses),
whichever is less.
d) Utilization of funds : Must be used in the same previous year in which it is withdrawn.
Sec 33ABA : Site Restoration Fund :
Deduction will be allowed in respect of prospecting, extraction or production of
petroleum or natural gas in India. It is necessary that, agreement with central government.
a) The assessee should deposit in special account with the State Bank of India.
b) The deposit should be before the end of the previous year.
c) Limit : Sum equal to deposited or 20% of profits of such business (before making
deduction under this section and before setting off brought forward business losses),
whichever is less.
Sec. 37 : General Deduction (Residuary section) :
Conditions should be fulfilled –
a) Expenses not covered under section 30 to 36.
b) Revenue nature expenditure.
c) Not of capital nature
d) Not of personal nature
e) Expenses incurred for running of business / profession.
f) Expenditure shall be made during the previous year.
Explanation 1 : Expenditure incurred on protection money, hafta, bribes, etc. will not be allowed.
Explanation 2 : Expenditure incurred on CSR activities will not be allowed.
Examples of expenses allowed :
1. Expenses incurred in the purchase, manufacture and sale of goods.
2. Expenses incurred on day to day running of the business.
3. Expenses incurred on breach of contract.
4. Amount of Value Added Tax / GST, excise duty, professional tax.
5. Compensation paid for retrenchment of undesirable employee.
 6. Contribution made to provident fund.
7. Commission paid for securing orders.
8. Compensation paid to employees due to accident on duty.
9. Royalties paid for mines.
10. Insurance premium paid for policy of its employees for compensation during work.
11. Compulsory subscription to an association.
12. Legal expenses for – normal course of business, to avoid business liability, defend for
title of his assets, terminate a disadvantageous trading relationship, and resist a winding-
up petition by some shareholders.
13. Annual listing fee paid to stock exchange.
14. Expenditure on inauguration ceremony.
Sec 34 : Conditions for depreciation allowance and development rebate [Omitted w.e.f.
1.4.1988].

Section 35 : Expenditure on Scientific Research :

a) Scientific Research : It means activities for the extension of knowledge in the fields of
natural or applied science including agriculture, animal husbandry or fisheries.
b) Scientific Research Expenditure : It means expenditure incurred on scientific research
would include all expenditure incurred for the prosecution or the provision of facilities
for the prosecution of scientific research but does not include any expenditure incurred
in the acquisition of right in or arising out of scientific research.

A summary of weighted deduction u/s 35

Section Expenditure incurred / contribution made Deduction (As a % of

contribution made)

35(1)(i) Revenue Exp. Incurred on scientific research related to 100%

the assessee’s business

35(1)(ii) Research Association for scientific research 150%

35(1)(iia) Company for scientific research 100%

35(1)(iii) Research Association for research in social science or 100%

statistical
research

35(1)(iv) Capital expenditure (Other than expenditure on land) 100%

35(2AB) Expenditure on in-house research (Except land and building 150%

In-house Research : A deduction of an amount equal to 150% of expenditure (excluding land

Scientifi
c
Researc
or building) shall be allowed.
Sec. 35D : Amortization (paying off) of Preliminary Expenses :
Preliminary expenses includes –
1. Preparation of feasibility report,
2. Preparation of project report
3. Conducting market survey.
4. Legal charges for drafting any agreement.
5. Printing charges for the Memorandum and Articles of Association.
6. Fees paid for registering the company.
7. Expenses regarding issue of shares or debentures e.g. underwriting commission,
brokerage, typing, printing, advertisement of prospectus etc.

Deduction : Deduction is allowed is 1/5 of such expenditure for each of the five
successive previous year beginning with the previous year in which the business is
commences.

Preleminary expenses (Max.

Indian Other than Indian

Company

5% of 'Cost of Project' 5% of 'Cost of

or

Option of the
assessee

Sec. 35DD : Expenditure for amalgamation or demerger of an undertaking :

Allowed deduction of 20% of such expenditure for each of five successive previous
years beginning with the year in which amalgamation or demerger takes place.
Section 35DDA : Expenditure on voluntary retirement :
Allowed deduction of 20% of such expenditure for each of five successive previous
years beginning with the year in which the expenditure was incurred.
Sec. 35 AD : Expenditure on Specified Business :
- 100% expenditure of capital nature is allowed [Excluding land, goodwill,
financial instrument]
- Deduction is allowed in the year in which business is commenced –
a) Expenditure incurred prior to commencement of its operations.
b) The amount is capitalised in the books of accounts on the date of commencement
of its operations.
- Payment of Rs. 10,000 in a day should not be made in cash.
 Businesses :-
1. Setting up and operating of cold chain facility.
Cold chain facility means a chain of facilities for storage or transportation of:
a) Agriculture and forest produce,
b) Meat and meat products,
c) Poultry
d) Marine and dairy products
e) Products of horticulture, floriculture and apiculture
f) Processed food items.
2. Warehousing facility – for storage of agricultural produce.
3. Laying and operating of petroleum oil pipeline.
4. At least one hundred beds hospital.
5. Building for slum redevelopment or rehabilitation framed by Central or State Government.
6. Housing project under a scheme for affordable housing framed by Central or State
Government.
7. Two-star or above category hotel.
8. Production of fertilizer in India.
9. Inland container depot / container freight station.
10. Bee-keeping and production of honey and beeswax.
11. Warehousing facility for storage of sugar.
12. Infrastructure facility – toll road, bridge, water supply, water treatment, irrigation
project, sanitation, port, airport, etc.
13. Semiconductor wafer fabrication manufacturing unit.

Sec. 36 : Other deduction :

1. Insurance premium paid for stock which is used for purpose of business / profession.
2. Insurance premium for cattle, Paid by federal milk co-operative society.
3. Insurance premium paid (any mode other than cash) for the health of employees.
4. Bonus or commission to employee. (On actual payment basis)
5. Interest paid on borrowed capital for purpose of business / profession (On actual
payment basis). No deduction of ‘interest paid’ for acquisition of asset from the date of
borrowing till the date of ‘put to use’. (It would be added to cost of asset).
6. Discount on Zero Coupon Bond allowed as deduction on pro-rata basis.
7. Bad debts – The debt should be incidental to the business.
8. Loss regarding animals (Not for stock in trade) – allowed as deduction. [Cost of
animal – carcasses of animals]
9. Employers contribution to provident Fund – only Recognized provident fund or
approved superannuation fund. [Subject to Sec. 43B]
10. Employees contribution to provident fund or superannuation fund etc. [Subject to Sec.
 43B].
11. Approved gratuity fund. [Subject to Sec. 43B].
12. Expenditure on family planning (Only when assessee is company) : Capital expenditure =
5 equal installments; Revenue expenditure – in the same previous year.
13. Entertainment expenses, advertisement expenses (Except section 37(2B) i.e.
advertisement in political party).
14. Security Transaction Tax (STT).
Sec. 40(a) : Expenses not allowed in any circumstances :
1. Expenditure on advertisement in any souvenir, etc. published by a political party.
2. Payments outside India, in India to a non resident or a foreign company on which
TDS is not deducted and has not paid on or before the due date specified.
3. Payment to residents – on which TDS has not been deducted or before the due date of
filing the return of income – 30% of such sum shall not allowed as deduction.
4. Wealth tax : Wealth tax chargeable under the Wealth Tax Act shall not be allowed as
deduction.
5. Tax on Profits and Gains : Any sum paid on account of any tax levied on the profits
and gains of any business or profession shall not be allowed as a deduction.

6. Contribution to unrecognized provident fund.

Sec. 40A : Expenses not deductible in certain circumstances :
1. Excessive payment to relatives.
2. Payment in Cash : Payment made to a person in a day is made exceeding Rs. 10,000
other than account payee cheque, bank draft or use of electric clearing system, it will be
disallowed. Entire amount will be disallowed.

Exception : Where payment is made for plying, hiring or leasing goods carriages, the
limit of disallowance shall be exceeding Rs. 35,000.
Sec. 43B : Deductions allowable only on actual payment :
1. Any sum payable by the assessee by way of tax, duty, cess or fee.
2. Any sum payable by him as an employer by way of contribution to any
provident fund, superannuation fund or gratuity fund or any other fund for the welfare of
employees.
Certain Allowable Losses
Losses which are directly incidental to the business or profession of the assessee are
allowable.
Following are some examples of such losses.
1) Robbery or Dacoity : Loss caused by robbery or dacoity is not deductible. But, if it is
incidental to business it will be allowed as a deduction and this depends upon the specific
 circumstances and conditions. For example, if cash is sent for disbursement at different centers
by a sugar factory in rural area, it is incidental to business and is, therefore, allowed. Any loss
due to robbery in a bank will be allowed as the bank is under an obligation to maintain some cash
outside the strong room for payments.
2) Embezzlement (Misappropriation), Theft, etc. : The loss of money due to
embezzlement by an employee handling the funds of the business while discharging his official
duties is allowed as deduction. When an employee goes to bank to deposit the cash and he takes
away the money for his own use, even then, the loss is allowable. Theft by a cashier, who is in
charge of cash, is also an allowable loss. A theft committed either by an employee or by
someone else by breaking open into the business premises after office hours, is also allowable.
3) Loss due to Non-recovery of Advances : If it is the practice in a business to give
advance money to the suppliers and if the supplier neither supplies the order nor refunds the
advance money, the loss sustained by the assessee is incidental to business and is, therefore,
allowable.
4) Penalty paid for infraction of law is not allowed.
Illustration 1 :
Mr. Amitabh prepared the following profit and loss account of his cloth shop for the year

ended 31st March, 2019. Find out his income from business for the AY 2019-20.
Profit and Loss Account
(For the year ended 31st March, 2019)

Particulars Rs. Particulars Rs.

Salaries and wages 33,000 Gross Profit 3,34,725
Postage
Rent, etc.expenses 600
1,600 Gifts received from 275
Gifts to relatives 900 relatives
Household expenses 82,000
Fire Insurance 400
Income Tax
Premium 900
Life
Advertisement Insurance 2,100
800
Premium
Bad Debts Reserve 800
Audit Fees 400
Net profit 2,11,500
Total 3,35,000 Total 3,35,000

Solution :
Computation of Income from PGBP
A.Y. : 2019-
20
Particulars Rs. Rs.
Profit as per P & L A/c 2,11,500
Add : Household expenses 82,000
Income Tax 900
Gifts to relatives 900
Life Insurance Premium 2,100
Bad Debts Reserve 800 86,700
2,98,200
Less Gifts received from relatives 275 275
Taxable income from Business 2,97,925