What is business: In brief, Business includes any trade, commerce and manufacturing of goods with a purpose of making profit within the permissible laws of country.

What is a Profession: It includes services provided by the professionally qualified or technically qualified person according to their qualification.

Income from Business/Profession: means any income which is shown in profit and loss account after considering all allowed expenditures.

INCOME CHARGEABLE UNDER BUSINESS/PROFESSION

The following are few examples of incomes which are chargeable under this head:-

  1. Normal Profit from general activities as per profit and loss account of business entity.
  2. Profit from speculation business should be kept separate from business income and shown separately.
  3. Any profit other than regular activities of a business should be shown as casual income and will be shown under “income from other sources” head.
  4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty drawback of custom or excise.
  5. The value of any benefits whether convertible into money or no from business/profession activities.
  6.  Any interest, salary, commission etc. received by the partner of a firm will be treated as business/professional income in hand of partner. However, the share of profit from partnership firm is exempt in hand of partner.
  7. Amount recovered on account of bad debts which were already adjusted in profit in earlier years etc.

EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION

All the expenses relating to business and profession are allowed against income. Following are few examples of expenditures which are allowed against income:-

  • Rent rates and insurance of building.
  • Payment for know-how, patents, copy rights, trade mark, licenses.
  • Depreciation on fixed assets.
  • Payment for professional services.
  • Expenditures on scientific research for business purposes.
  • Preliminary Expenses in case of Limited companies.
  • Salary, bonus, commission to employees.
  • Salary, interest and remuneration to working partners subject to certain conditions.
  • Communication expenses.
  • Traveling and conveyance expenses.
  • Membership fees etc.
  • Advertisement expenses in respect of promotion of business products.
  • Discount allowed to customers.
  • Interest on loans (Whether Private of Institutional).
  • Bank Charges/Bank Commission expenses.
  • Entertainment/Business Promotion expenses
  • Staff Welfare expenses.
  • Festival Expenses.
  • Printing and stationery expenses
  • Postage expenses.
  • All other expenses relating to business/profession

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual basis at the date of finalization accounts.

EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY

Following expenses will be allowed if these expenses have been paid before or on due date or before filing of income tax return:-

  1. Any tax, duty, cess or fees by whatever name called.
  2. Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of employees.
  3. Bonus or commission or leave encashment payable to employees.
  4. Interest on loan from public financial institutions, state financial corporation or from scheduled bank.

EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME

  1. Expenditure on any type of advertisement of political party.
  2.  Any interest, royalty, fees for technical services or other sums chargeable under this act, which is payable out side India or in India to non-resident or a foreign company on which tax has not been deducted or after deduction, not deposited in prescribed time.
  3. Any interest, commission, rent, royalty, professional or technical fees paid or payable to any resident of India or payment to contractor or sub-contractor on which TDS is not  deducted, or if deducted then not deposited before the due date of filing the return.
  4. Any tax calculated on the basis of profit of business.
  5. Any amount of Wealth Tax paid.
  6. Any payment of salaries payable outside India or to a non-resident on which tax is not deducted.
  7. Any tax actually paid by an employer on any income by way of perquisites, on behalf of the employee.
  8. Any remuneration paid to non working partner.
  9. Any remuneration paid to working partner other than specified in agreement or as per the specified limits by income tax act.
  10. Any interest to partner if not specified in agreement and not more than 12%.
  11. Any payment in cash exceeding Rs.20000/= till financial year 2016-17 and with effect from 01.04.17, the limit of cash payments will be Rs.10000/= and  (Rs.35000/= in case of payment made for plying, hiring or leasing goods carriages) except when payments are made under circumstance specified in Rule 6DD of Indian income tax act.
  12. Where a deduction has been claimed on accrual basis during an assessment year and the payment is made in a subsequent year, and the payment or aggregate of payments made to a person in a day otherwise than by way of an account payee cheque/DD, exceeds Rs.20000/= (Rs.35000/= in case of goods carriages), such payments shall be deemed as profit of the assessee for the year in which the payment is made.
  13. Any provision for the payment of gratuity to the employees.
  14. Any personal expenditures.
  15. Expenses on defending in any proceedings for breach of any law relating to sales tax etc.
  16. With effect from 01.04.17, any payment for a capital expenditure made otherwise than by an account payee cheque/draft/RTGS/ECS debit card or credit card, exceeding Rs.10000/= shall neither be deductible nor eligible for depreciation under section 32.

Notes:

  • Restriction on acceptance of loans or accept a deposits of Rs.20000/= or more from any other person except by an account payee cheque/draft. This restriction shall not apply if the loan or deposit is taken or accepted from government, bank, post office, co-operative bank, government undertaking etc. With effect from 01.04.17, cash should no be accepted as loan more than Rs.10000/= in a single day from a single person.
  • Restriction on repayment of loans or deposits: No person can repay loan along with interest except by way of account payee cheque/draft if the amount is Rs.20000/= or more. With effect from 01.04.17, cash should no be paid more than Rs.10000/= in a single day to a single person to repay the loan amount.

RESTRICTION ON RECEIPT OF CASH IN EXCESS OF RS.2 LAKH BY ANY PERSON

Any person who receives Rs. two lakh or more in cash from a person in a day or in respect of a single transaction or in respect of transaction relating to one event, will attract a penalty equal to the amount accepted. For example, Mr. A receives Rs.250000/= in cash from Mr. B in respect of sale of his car. In this case, Mr. A has to pay penalty for Rs.250000/= i.e equal to the amount he received in cash.

DECLARATION OF CASH DEPOSITED DURING 09.11.16 TO 30.12.16

Any person who has deposited cash in to banks total amounting Rs. 2 lakh or more during the period of 09.11.16 to 30.12.16, has to give the appropriate report to income tax department in income tax return.

COMPULSORY AUDIT OF ACCOUNTS

From Financial Year 2016-17 (assessment year 2017-18) onward, audit of accounts is compulsory in following cases :-

  • If the gross turnover or gross receipts of business exceeds Rs. One Crore. However, assessee engaged in a business and declaring income under presumptive tax scheme under section 44AD whose total sales, turnover or gross receipts, does not exceed Rs.2 crore, are not liable to get their accounts audited under section 44AB.
  • Assessees engaged in profession, if gross of a profession exceed Rs. 50 lakh.
  • A business assessee who having declared his income under section 44AD for any year, declares his income in any of the five succeeding years not as per the provisions of section 44AD and becomes disentitled to claim benefit of section 44 AD for five years as per section 44AD(4), and whose income exceeds the basic exemption limit for the relevant previous year.
  • A professional assessee covered under section 44ADA, declaring his income at an amount less than 50% of his gross receipts and whose income exceeds the basic exemption limit for the relevant previous year.
  • Truck operators and persons engaged in specified businesses declaring their income at an amount less than the amount computed under section 44AE, 44BB or 44BBB, as the case may be.

The audit report by a Chartered Accountant, alongwith a statement of particulars, should be furnished in the prescribed form as under:

Category

Form for Audit Report Form for Statement of Particulars
Where accounts have been audited under any other law 3CA 3CD
Where accounts have been audited under Income Tax Act 3CB 3CD

Note:

  1. Failure to get the accounts audited or to furnish audit report, in time attracts penalty u/s 271B up to ½% of turnover or gross receipts or Rs.1,50,000/= which ever is less.
  2. From Assessment Year 2007-08  (Financial Year 2006-07), with the introduction of  annexureless  return forms, the audit report is neither required to be attached with the return nor furnished separately before or after the due date and no penalty  u/s 271B shall be imposed for this. However, an audit report must be obtained by the assessee before the due date of furnishing the return and the relevant columns in the return should be filled in based on such report.
  3. with effect from 01.04.17, income under estimated income scheme under section 44AD, to be computed 6% of turnover received by account payee cheque/bank draft/ECS or RTGS etc. provided that such payment is received during the year or before the due date of furnishing return under section 139(1). Therefore, the assessee coming under this catagory has to maintain separate record of sales through bank and cash.
  4. With effect from 01.04.17, professional assessees declaring income under estimated scheme under section 44ADA to deposit entire advance tax by 15th March.

MAINTENANCE OF BOOKS OF ACCOUNTS

By Professionals:- Every person  who is in the following profession, must maintain the books of accounts compulsorily if his total gross receipts from such profession exceeds Rs.150000/= in any of the three years immediately preceding the previous year or is likely to exceed Rs.150000/= during the previous year:-

  • Profession of Law
  • Profession of Medicine
  • Profession of Engineering
  • Profession of Architecture
  • Profession of Accountance
  • Profession of Technical Consultancy
  • Profession of Interior Decoration
  • Film Artists:- includes actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer.
  • Company Secretary
  • Profession of Information and Technology

Following records must be maintained by the above professional:-

  1. Cash Book
  2. Journal if the accounts are maintained as per mercantile system
  3. Ledger
  4. Carbon copy of bills or receipts where sum exceeds Rs.25/=. All receipts of bills must be serial numbered.
  5. All bills and receipts and vouchers in respect of payment of expenditure etc.
  6. The above books of accounts and document should be kept at least for six years from the end of relevant assessment year.

Note:- In case of a professional assessee cover under section 44ADA (i.e. estimated income scheme for small professionals), it shall be compulsory to maintain the above mentioned books of accounts if he declares his income for any previous year at a percentage lower than specified under section 44ADA and his total income exceeds the basic exemption limit for the relevant previous year.

By Businessmen and other Professionals (not mentioned above):- Any person other than above mentioned persons whose income exceeds or is likely to exceed Rs.1,20,000/= or the total sales or gross receipts exceeds or likely to exceed Rs.10 lakh, in any one of three immediately preceding years or during the previous year, as the case may be, are compulsorily required to maintain accounts books. With effect from 01.04.17, all individuals and HUF whose total income exceeds Rs.250000/= or gross sales, gross receipts or gross turnover exceed Rs.25 lakh are supposed to maintain proper books of account.

Following records must be maintained by the above businessmen and other professional:-

  1. Cash Book
  2. Journal if the accounts are maintained as per mercantile system
  3. Ledger
  4. Carbon copy of bills or receipts where sum exceeds Rs.25/=. All receipts of bills must be serial numbered.
  5. All bills and receipts and vouchers in respect of payment of expenditure etc.
  6. The above books of accounts and document should be kept at least for six years from the end of relevant assessment year.

Note:- Where the assessee covered under section 44AD (i.e. estimated income scheme for any business except plying, hiring or leasing goods carriages), it shall be compulsory for the assessee to maintain the aforesaid books of account in case the assessee having declared his income under section 44AD for any year, declares his income in the succeeding year not as per the provisions of section 44AD and becomes dis-entitled to claim benifit of section 44AD for 5 years as per section 44AD(4) and his income exceeds the basic exemption limit for the relevant previous year.

By Other Person:-  Persons not covered under above mentioned categories, are advised to maintain at least a cash book and ledger in order to avoid arbitrary estimate of the income by the Assessing Officer under section 144.

Illustration:

As per Profit & Loss Account of M/s XYZ Limited as on 31.03.17, the amount of net profit  is Rs.5,50,560/=. Following information also available with profit and loss account:-

  1. Rs. 20000/= paid as Advance Income Tax had been debited to profit and loss account.
  2. Rs.10000/= spent for printing of brochures of a political party were also shown in profit and loss account.
  3. Amount or provident fund for Rs.55000/= did not deposit till the date of filing of return.

Compute the taxable income of M/s XYZ Limited.

Solution

COMPUTATION OF TOTAL INCOME

PARTICULARS

AMOUNT

(IN RUPEES)

Net Profit as per Profit and Loss Account

550560

Add: Amount of Advance Income Tax

20000

Add: Expenses Incurred for Political Parties

10000

Add: Provident Fund not deposited till filing of return

55000

NET TAXABLE INCOME

635560

Clarification:

  1. Payment of advance tax is not expenditure.
  2. Expenses for political parties are not allowed as business expenditure.
  3. Provident fund must be deposited before filing of income tax returns otherwise it will not be allowed as business expenditure.

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