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CHAPTER – 9 PROFITS & GAINS OF BUSINESS OR
PROFESSION
Format to compute business income of an assessee:
Net Profit as per profit and loss account xxx
Add: Disallowances (if debited) xxx
Less: Incomes considered separately (if credited) xxx
Less: Depreciation as per Income tax rules xxx
INCOME FROM BUSINESS xxx
Few items of disallowances while computing business income:
All provisions and reserves (e.g. provision for bad and doubtful debts)
Income tax including advance tax
Notional items debited to profit and loss account such as:
Salary drawn by the proprietor;
Interest charged by the proprietor on his own capital
All capital expenditure (purchase of an asset) and capital losses (loss on sale of an asset)
Charities and donations
All personal expenses (household expenses) of the assessee including drawings
Fine or Penalty paid for violation or contravention of any law
Expenditure on CSR activities
Failure to deduct tax at source on payments made to residents shall be disallowed to the
extent of 30% of such expenditure
Any payment exceeding Rs.10,000 by way of cash or bearer cheque (limit is Rs.35,000 in
case of payment to a transport operator plying trucks)
Any payment made to a relative which is found to be excessive or unreasonable
Few items of Allowances:
Repairs, fire insurance premium paid on the assets used for business
Bad debts
Advertisement expenditure (except advertisement in the souvenir of a political party)
Printing, postage and stationery, telephone expenses, travelling expenses
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Interest on capital borrowed for the purpose of investment in business
Audit fees
Loss of stock-in-trade
Employer’s contribution to recognized provident fund and other approved funds
Contribution to Research Institutions for the purpose of approved research
Any tax payable to the Government (e.g. GST, customs duty, municipal tax); bonus or
gratuity to employees; interest on loan borrowed from banks; shall be allowed only on
“payment” basis. Payment should be made before the “due date” of filing return of income.
Section 37(1): General deduction:
An expenditure shall be allowed under section 37(1), provided:
It is not in the nature of expenditure described under section 30 to 36;
It is not in the nature of capital expenditure;
It is not a personal expenditure of the assesse;
It should have been spent wholly and exclusively for the purpose of business / profession;
It should not be incurred for any purpose which is an offence or is prohibited by any law
It is not an expenditure incurred by the assesse on CSR activities
Depreciation on tangible assets and intangible assets:
i. Asset acquired during the previous year and put to use for less than 180 days:
50% of the normal depreciation is allowed.
ii. Asset acquired during the previous year and put to use for more than 180 days:
Full depreciation is allowed.
Important: Where an asset is purchased by way of cash payment exceeding Rs.10,000;
depreciation shall NOT be allowed.
Important: An assesse engaged in PGBP is required to deduct tax at source on payments made
only if his turnover/sales during the immediately preceding financial year (2023-24) has
exceeded Rs.1 crore in case of business (or) gross receipts has exceeded Rs.50 lakhs in case of
profession.
Important: “Business income” is computed as per the method of accounting followed by the
assessee. (Mercantile system or Cash system). Under ‘Mercantile’ system, expenditure is
allowed on ‘due’ basis. However, certain expenses covered by section 43B shall be allowed as
deduction only on ‘payment’ basis even though assessee follows ‘Mercantile’ system for
accounting the expenditure.
