PROFITS AND GAINS OF

BUSINESS AND
PROFESSION
 Definitions
Profits
It is the income derived from regular business activity. It is the excess
income over expenditure.
Gains
It is any incidental revenue from business. It is irregular in nature.
Business
According to Section 2(13) of the Income Tax Act, 1961
Business is defined as any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture It
also includes services.
Definitions
Profession
According to Section 2(36) of The IT Act
Profession is defined as an occupation where intellectual skill and technical expertise
in a specified field is required for earning a livelihood .
Example : Doctors, Lawyers, Chartered Accountants etc,.
Vocation
Vocation refers to an activity where a person spends major portion of his time and out
of which he makes his living.
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.
Note :
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.
 FORMAT ON COMPUTATION OF PROFITS AND GAINS OF
BUSINESS
Particulars Amount (₹)
NET PROFIT AS PER P&L account XXXX
ADD: Inadmissible expenses/ losses(Expenses not allowed but debited to P&L a/c) xx
ADD: Admissible incomes (Incomes allowed but not credited or considered to P&L a/c) xx
ADD: Overvaluation of Opening Stock xx
ADD: Undervaluation of Closing Stock xx
ADD: Notional Loss xx

LESS: Inadmissible incomes (Incomes from other head which is not allowed but credited to P&L a/c) (xx)
LESS: Admissible expenses /losses (Expenses allowed but not debited to P&L a/c) (xx)
LESS: Overvaluation of Closing Stock (xx)
LESS: Undervaluation of Opening Stock (xx)
LESS: Notional Profit (xx)
TAXABLE INCOME FROM BUSINESS XXXXX
 Admissible
Admissible Income Expenditure / Losses
Included in P&L or Net Included in P&L or Net Profit
Profit – IGNORE – IGNORE
NOT included in P&L or NOT included in P&L or Net
Net Profit – ADD Profit – Deduct

Dpn as per P&L –

ADD
Dpn as per IT-
LESS
Inadmissible Inadmissible
Income Expenditure / Losses
Included in P&L or Net Included in P&L or Net
Profit – DEDUCT Profit – ADD
NOT included in P&L or NOT included in P&L or
Net Profit – IGNORE Net Profit – IGNORE
Examples of Inadmissible Income/ Income
not allowed under PGBP as per IT Act
Tax free incomes such as :
• Agricultural Income
• Gift from a relative on /occasion of marriage/ on will / inheritance
• LIC Refund
• Income Tax refund etc..
Incomes not related to business such as:
• Rental income from dealer in property
• Casual income such as winning in horse race, car games, lottery etc.
• Income from sale of private property
• Income from other heads etc..
Examples of Admissible Income/ Income
allowed under PGBP as per IT Act
• Revenue earned from sales
• Commission received
• Discount received
• Interest on delayed payment by debtors
• Cash subsidy received by Government for export programme
• Profit on sale of import license
• Rent received from employees
• Bad debts recovered etc..
Examples of Inadmissible Expense/
Expense not allowed under PGBP as per
IT Act
• Payment to proprietor – salary/ bonus/ Interest on capital
• Payment to proprietor for personal expenses- household expense/
LIC/ Medical expense
• Payment of wealth tax/ municipal tax
• Provisions and reserves – Depreciation/ Doubtful debts
• Payment of fines and penalties due to infringement of law
• Contribution to political party
• Capital expenses/ capital losses.
Examples of Inadmissible Expense/
Expense not allowed under PGBP as per
IT Act
• Speculation losses
• Personal household expenses
• Provision for Income Tax/ Sales Tax/ Bad debts
• Charities and donations
• Excess depreciation
• Unreasonable payment to relative
• Family planning expenses etc..
Examples of Admissible Expenses/ Expenses
allowed under PGBP as per IT Act
• Audit fee
• Bank charges/ Commission
• Bad debts
• Discount paid
• Demurrage/ Freight charges
• Establishment expenses
• Entertainment expenses etc..
• Expenses incurred in the purchase, manufacture and sale of goods.
• Expenses incurred on day to day running of the business.
• Expenses incurred on breach of contract.
• Amount of Value Added Tax / GST, excise duty, professional tax.
• Compensation paid for retrenchment of undesirable employee.
Examples of Admissible Expenses/
Expenses allowed under PGBP as per IT
Act
• Contribution made to provident fund.
• Commission paid for securing orders.
• Compensation paid to employees due to accident on duty.
• Royalties paid for mines.
• Insurance premium paid for policy of its employees for compensation during work.
• Compulsory subscription to an association.
• 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.
• Annual listing fee paid to stock exchange.
• Expenditure on inauguration ceremony.
Losses in PGBP
• Trading loss of business is deductible in computing the profit earned by the
business even though there is no specific provision in the Act.
Such trading losses can be claimed as a deduction provided the following
conditions are satisfied:
It should be real loss and not notional or fictitious.
It should be a loss on revenue account and not on capital account
It must have actually arisen and been incurred, not merely anticipated as
certain to occur in future.
It must be incidental to business operations
There should be no prohibition in the Act, express or implied, against the
deductibility thereof.
Examples of Admissible Losses/ Losses
allowed under PGBP as per IT Act
• Loss on account of embezzlement by an employee is allowed as deduction in the previous year
in which such embezzlement is discovered.
• Loss of stock-in-trade by fire and other natural calamities or due to negligence of employees.
• Loss caused on account of fluctuations in exchange rate at the time of remitting the money for
purchase of raw material.
• Loss caused by non-recovery of advances made in course of business provided it is trading loss.
• Loss caused due to breach of contract for delivery of goods by either party
• Loss of raw material, finished goods in transit
• Loss by forfeiture of security deposits given at the time of submission of tenders for supply of
goods
• Loss by the failure of bank in which the money is deposited.
• Loss of stock in trade due to enemy action.
Examples of Inadmissible Losses/ Losses
NOT allowed under PGBP as per IT Act
• Loss sustained before the business is commenced (e.g. the pre-incorporation
losses of the business taken over by a company cannot be claimed by the
company)
• Losses incurred in the closing down of the business
• Losses incurred due to damage, destruction etc. of the capital assets
• Loss due to sale of securities held as investments as it will be capital loss and not
the business loss
• Loss caused by forfeiture of advance given for purchase of capital assets
• Trading loss due to loss of goods in transit in normal course of business
• Violation of law is not a normal incident of trade and an expense by way of
penalty for infraction of laws is not deductible as business loss.
SPECIFIC DEDUCTIONS UNDER THE
ACT
A. Rent, rates, taxes, repairs and insurance for building (Sec 30)
B. Repairs and insurance of machinery, plant and furniture (Sec 31)
C. Depreciation allowance u/s 32
D. Expenditure on Scientific Research (Sec 35)
E. Amortisation of Preliminary Expenses (Sec 35 D)
Rent, rates, taxes, repairs and insurance for building (Sec .
30)
U/S 30 , the following deductions are allowed in respect of rent, rates,
taxes , repairs and insurance premises used for the purpose of business
and profession:
a)As a tenant -The rent of premises, the amount of current repairs paid by
him (not being capital expenditure) , if he has undertaken to bear the cost
of repairs
b)Otherwise than as Tenant / Owner – The amount of current repairs
paid by him (not being capital expenditure)
c)Whether as owner or tenant – Any sum on account of land revenue,
local rates and municipal tax.
d)Whether as owner or tenant – Any amount paid towards any premium
in respect of insurance against risk of damage or destruction of premises.
Rent, rates, taxes, repairs and insurance for building
(Sec . 30)
Points to remember u/s 30:
Current Repairs
• Current repairs means expenditure on buildings, machinery, plant or
furniture which is not for the purpose of renewal or restoration but
which is only for the purpose of preserving or maintaining an
already existing asset and which does not bring a new asset into
existence or does not give to the assessee a new or different
advantage.
• Painting the outside of a house is a repair.
Rent, rates, taxes, repairs and insurance for building
(Sec . 30)
Application of Section 43B – Land revenue, local taxes or municipal taxes
• Section 43 B is allowed to assessees following Mercantile System of Accounting on
‘due’ basis if payment is made on or before the due date of filing the return.
• Certain deductions to be allowed ONLY on actual payment.
• However, if the assessee follows mercantile system of accounting, the payments
specified u/s 43B can be claimed on ‘due’ basis as well, provided the aforesaid
payment is made on or before the due date of income tax filing or either during PY.
• If payment is made after due date deduction can be claimed in the year of payment.
• Any sum paid (whether as owner or tenant) on account of land revenue, local rates or
municipal taxes are deductible subject to conditions as specified by Section 43B.
• In case a deduction has been claimed on accrual basis in any earlier previous year, it
will not be allowed again in the year in which it is actually paid.
Section 43 B – Deduction Allowed on payment Basis only

Nature of expenses/ Expenses covered u/s 43 B

 Any sum payable by the Sum payable by way of tax, duty, cess or fee.
 Sum payable by employer towards contribution to Provident Fund of superannuation fund or gratuity
fund.
 Sum payable to an employee as bonus or commission.
 Any sum payable by the assessee as interest on any loan or borrowing from any financial institution.
 Any sum payable as interest on any loan or advance from a schedule bank or a co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural development
bank.
 assessee as interest on any loan or borrowing from a deposit-taking NBFCs and systematically important
non deposit taking NBFCs in accordance with the terms and conditions of the agreement governing such
loan or borrowing.
 Sum payable by an employer in lieu of any leave at the credit of his employee.
 Any sum payable by the assessee to the Indian Railways for the use of Railway Assets.
Repairs and insurance of machinery, plant
and furniture (Sec 31)
In respect of machinery, plant or furniture used for the purpose of
business, the following deductions are allowable:
a) Amount paid on current repairs
b) Any insurance premium paid in respect of insurance against risk of
damage or destruction
Depreciation Allowance u/s 32
Depreciation shall be determined according to the provisions of Sec 32
In order to avail depreciation, one should satisfy the following conditions:
i) Asset must be owned by the assessee
ii) It must be used for the purpose of business or profession
iii) It should be used during the relevant previous year
 Even if the asset is used for production, depreciation can be claimed.
 Any forced idleness of the machinery cannot disentitle / restrict the assessee from getting the benefit of
depreciation.
 If it is used partly for business purpose and partly for other purpose, proportionate depreciation can be
claimed.
 If the asset is used for more than 180 days – Full Depreciation is given
 If the asset is used for less than 180 days – HALF year depn. is available in the first year in which the
asset is acquired.
iv) Depreciation is available on tangible as well as intangible assets
 Tangible assets – Building, machinery , plant or furniture
 Intangible assets acquired after March 31, 1998 – Know- how, patents , copyrights, trademarks, licenses,
franchises or any other business or commercial rights of similar nature.
Depreciation Allowance u/s 32
General Principles regarding Depreciation under Income –Tax Act :
i) Depreciation is allowed on –
a) buildings, machinery, plant and furniture , being tangible assets ;
b) know-how, patents, copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature being intangible assets.
 The expression building does not include land because the land does not
depreciate.
The partition work and false ceiling in the building comes under the expression
of furniture and fittings and not under building for the purpose of depreciation.
 Plant includes ships, vehicles, books, scientific apparatus and surgical
equipments used for the purpose of business or profession but does not
include tea bushes, livestocks, buildings or furniture and fittings.
Plant is an inclusive definition but not exhaustive definition. Therefore, plant
can include any other asset as well.
Depreciation Allowance u/s 32
ii) Allowed to the owner of the asset
iii) It is allowed even if the asset is wholly or partly owned by the
assessee.
iv) Allowed only when the asset is used for the purpose of business or
profession.
• Building given to employees for their residence are considered to have been
used wholly for the purpose of the employer’s business.
• Similarly fans, refrigerators, ACs and furniture etc. provided by the employer at
the residence of the employees shall be considered to have been wholly for the
employer’s business.
v) Allowed on the basis of the actual cost to the owner.
vi) Allowed on the system of Block of assets; but not in case of electricity
undertakings.
Depreciation Allowance u/s 32
vi) Allowed on the basis of Written Down Value method.
In case of assets of an undertaking engaged in generation and
distribution of power – Depreciation may be claimed on Straight Line
Method.
vii) Computed on the WDV of the asset as on the last day of the
previous year.
In case of assets of an undertaking engaged in generation and distribution of
power – Depn may be claimed at certain percentage of actual cost.
Depreciation Allowance u/s 32
BLOCK OF ASSETS ( Sec 2(11))
Block of assets is a group of assets falling within a class of assets
comprising of:
• Tangible assets, being building, machinery, plant or furniture,
• Intangible assets, being know how, patents, copyrights, trade-marks,
licenses, franchises or any other business or commercial rights of
similar nature
• The block of assets is classified further depending on the similar use,
life of the asset and nature of the asset.
 Depreciation Allowance u/s 32
ASSET CLASSES

Sl. no Asset Class Rate of Depn

1) Buildings 5% , 10% and 40%
2) Furniture and Fittings 10%
3) Plant and Machinery 15%, 20%, 30%, 40% ,45%
4) Intangible assets 25%
Depreciation Allowance u/s 32
Asset Class Asset Type Rate of
Depreciation

BUILDINGS
Block 1 Building Residential buildings except boarding houses and 5%
hotels.
Block 2 Building Office, Factory, Godowns ,Boarding houses and hotels, 10%
buildings not used for residential purposes

Block 3 Building • Purely temporary constructions like wooden 40%

structures.
• Buildings acquired on or after September 1, 2002
for installing machinery and plant forming part of
water supply project or water treatment system.

FURNITURE
Block 1 Furniture Any fittings / furniture including electrical fittings 10%
Depreciation Allowance u/s 32
Asset Class Asset Type Rate of
Depreciation

PLANT AND MACHINERY

Block 1 Plant and
machinery
Motor cars , other than those used in business of running
them on hire , surgical equipments 15%
Any type of Plant and Machinery not covered under any
of the blocks

Block 2 Plant and

machinery
Ocean – going ships, vessels ordinarily operating on inland
water including speed boats 20%
Block 3 Plant and
machinery
• Motor cars excluding those used in a business of
running them on hire purchased on or after 23 August 30%
2019 but before 1 April 2020 and is put to use before 1
April 2020.
• Moulds used in rubber and plastic goods factories
• Lorries/taxis/motor buses used in a business of running
them on hire
• Machinery and plant used in semi-conductor industry
Depreciation Allowance u/s 32
Asset Class Asset Type Rate of
Depreciation

PLANT AND MACHINERY

Block 4 Plant and
machinery
•
•
Aeroplanes- aero engines
Containers ,made of glass or plastic used as refills
40%
• Computers including computer software
• Gas cylinders including valves and regulators
• Cinematograph films – bulbs of studio lights etc
• Books (other than annual publication) used by
professional

Block 5 Plant and

machinery
Lorries/taxis/motor buses used in a business of running
them on hire purchased on or after 23 August 2019 but
45%
before the 1 April 2020 and is put to use before 1 April
2020
Depreciation Allowance u/s 32
Asset Class Asset Type Rate of Depreciation
INTANGIBLE ASSETS
Block 1 Intangible assets Franchise, trademark,
patents, license, 25%
copyright, know-how or
other commercial or
business rights of similar
nature
Additional Depreciation (Section 32(1)(iia)
Additional Depreciation on new plant and machinery (Available in
addition to Normal Depn)
• Additional depn at 20% is allowed on New Plant and Machinery acquired or
installed after March 31 2005 to assessee engaged in the business of manufacture
or production or in the business of generation, transmission and distribution of
power.
• Only for NEW Plant and Machinery.
• Not applicable for second hand machinery.
• Additional depn is available only when the eligible Plant and Machinery is put into
use.
If the asset is used for more than 180 days – Full Depreciation is given
If the asset is used for less than 180 days – HALF year depn. is available in the first
year in which the asset is acquired.
Additional Depreciation (Section 32(1)(iia)
Assets for which additional depreciation is not allowed:
• Ships and aircraft
• Second-hand machinery
• Any plant or machinery installed in any office premises or any
residential accommodation. Including accommodation in the nature
of a guest house.
• Any office appliances or road transport vehicles
Expenditure on Scientific Research (Sec 35)
INHOUSE RESEARCH
1) Revenue Expenditure 1) Revenue expenditure on inhouse research is allowed for such
expenditure only if such research relates to the business.
100 % is
2)Pre-commencement period expenses : Revenue expenses (other allowed
than expenditure on providing perquisites to employees) incurred
before commencement of the business (but within 3 yrs
immediately before the commencement of the business) on
scientific research related to business are deductible in the Previous
year in which the business is commenced. However, the deduction
is limited to the extent it is certified by the prescribed authority.
2) Capital Expenditure If assessee incurs any expenditure of capital in nature , whole of 100% is
such expenditure incurred in PY is allowed as deduction. allowed
It is NOT allowable in respect of acquisition of land.
No deduction by way of depreciation is admissible in respect of an
asset used in scientific research.
Expenditure on Scientific Research (Sec
35)
CONTRIBUTIONS TO RESEARCH CARRIED OUT BY OUTSIDERS
1) Approved Research Contribution to Approved Research Association undertaking 100 % of
Association undertaking Scientific Research related or unrelated to the business of an actual
Scientific Research assessee expenditure
is allowed
2) Approved University, Contribution to Approved University, College or Other 100 % of
College or Other Institution Institution undertaking Scientific Research related or unrelated actual
undertaking Scientific to the business of an assessee expenditure
Research

3) Social science or Statistical Contribution to Approved Research Association, Approved 100 % of

science research University, College or Other Institution undertaking Social actual
Science or Statistical Science Research related or unrelated to expenditure
the business of an assessee

4) National Laboratory , IIT, Contribution to National Laboratory , IIT, or specified person 100% of
or specified person approved approved by prescribed authority actual
by prescribed authority expenditure
Amortisation of Preliminary Expenses (Sec 35
D)
• Amortization of preliminary expenses incurred prior to the commencement of business,
extending an existing business, setting up a new unit etc. are eligible to be amortized under
section 35D of the Income Tax Act, 1961.
• Who is an eligible assessee for the purpose of this section?
An eligible assessee for the purpose of section 35D includes Indian Companies or a person
other than a company who is a resident of India.
• What is the purpose for which preliminary expenses should be incurred?
• As discussed above, preliminary expenses should be incurred for the purpose of:
• Commencing a new business
• Extending an existing business- setting up a new undertaking
Amortisation of Preliminary Expenses (Sec 35
D)
• What are the preliminary expenses that are eligible to be amortized?
Expenditure that is incurred in connection with the following:
• Preparation of feasibility reports, project reports, market survey reports, engineering
service reports
• Legal charges for drafting necessary agreements for the purpose of carrying out business
• Legal charges for drafting Memorandum of Association and Articles of Association
• Charges for printing the above documents
• Charges incurred for registering the company with the ROC
• Underwriting commission, brokerage, and charges paid in connection with the issue of
shares and debentures or issue of the prospectus
• Any other expenses as may be prescribed and not deductible under any other section
Amortisation of Preliminary Expenses (Sec 35
D)
What is the extent of deduction allowed?
The deduction allowed shall be lower of actual expense incurred :
• 5% of the cost of a project (cost of project= cost of fixed assets as on the last
day of the previous year)
OR
• 5% of capital employed- applicable to a company (capital employed= paid up
capital+debentures+long term borrowings as on the last day of the
previous year)
• The amount so calculated above shall be allowed as a deduction equally
over a period of 5 years.
Other Deductions (Sec 36)
Deductions which are specified u/s 36 include the following:
1) Insurance– This includes insurance premium paid on the following:
• Stock– this can be claimed as a deduction for businessmen for whom
stock-in-trade is of high value and the risk related to stock is high. For
example, traders, jewellers etc.
• Cattle– this insurance premium is paid by a federal milk society on the
life of cattle.
• Health of employees– labour forms a significant part of business and
many employees take insurance on the health of their employees.
This is allowed as a deduction if it is paid in any mode other than
cash. The premium paid can be claimed as a deduction if it is paid to
General Insurance Company or any other insurer approved by IRDA
Other Deductions (Sec 36)
2)Bonus and commission paid to employees
• This sum is allowed as a deduction if it would not have been paid as
dividend or profits.
• This bonus need not be within the statutory limits specified under
Payment of Bonus Acts.
• It is sufficient if it paid within the time limits. Incentives paid to
employees are not covered in this section.
• It may be noted that this deduction is allowable only on payment basis.
• However , it can be claimed on accrual basis also subject to provisions of
Section 43B.
Other Deductions (Sec 36)
3) Interest on borrowed Capital
• The amount of interest paid in respect of any moneys borrowed for
the purposes of business or profession is allowed as deduction
The basic requirements to be fulfilled are:
 The money i.e, capital must have been borrowed by the assessee
It must have been borrowed by the assessee for his business,
profession or vocation; and
The assessee must have paid interest on the amount and claimed it
as an allowance.
Paid means actually paid or due, depending upon the method of
accounting employed by the assessee.
Interest on borrowing for acquisition of an asset shall not be allowed
as revenue expenditure.
Other Deductions (Sec 36)
4) Discount on Zero Coupon Bonds (ZCB)
Where the discount will be amortized over the life of the ZCB
5) Employer’s contribution towards provident fund is allowable as
deduction subject to the following conditions:
First condition is that, provident fund should be recognized. Thus, the
employer will not get deduction in respect of contribution towards
unrecognized provident fund.
Further, the deduction is subject to the conditions laid down under Section
43B.
Other Deductions (Sec 36)
6) Employer’s contribution to pension fund
Specified u/s 80CCD on behalf of his employees
This amount shall be available as a deduction to the extent of 10% of
the salary of the employees.
Salary includes Dearness Allowance but excludes other perquisites
and allowances.
Section 43 B – Deduction Allowed on
payment Basis only
• Section 43 B is allowed to assessees following Mercantile System of
Accounting on ‘due’ basis if payment is made on or before the due
date of filing the return.
• Certain deductions to be allowed on actual payment.
• However, if the assessee follows mercantile system of accounting,
the payments specified u/s 43B can be claimed on ‘due’ basis as
well, provided the aforesaid payment is made on or before the due
date of income tax filing or either during PY.
• If payment is made after due date deduction can be claimed in the
year of payment.
Undisclosed income and investments taxed as deemed income

Where the assessee offers no explanation about the nature and source of income,
investment., such income and investment may be charged to Income Tax.
a) Cash credits
b) Unexplained investments
c) Unexplained money, bullion, jewellery or other valuable article
d) Investments, not fully disclosed in books of account
e) In case of a company any sum credited consists of share application money,
share capital, share premium:
i) taxable @ 30%
ii) without allowing deduction of any expenditure
Deemed profits chargeable to tax
a) Recovery against any allowance, or deduction allowed earlier in respect of:
i) Loss, ii) Expenditure, or iii) Trading liability incurred by the assessee.
Also taxable if recovery is by the successor in business or profession of any:
i) Loss, ii) Expenditure, or iii) Trading liability incurred by the predecessor.
b) Balancing charge on assets of an undertaking engaged in generation and
distribution of power.
c) Sale of capital assets used for scientific research
d) Recovery of Bad debts allowed as deduction
e) Amount withdrawn from special reserve credited and maintained by certain
financial institution.
f) Deemed income in the hands of recipient in case of discontinued business or
profession
Section 40A(2)
Sec 40A(2) -Any payment in relation to expenditure made to relative,
associate concern, person having substantial interest shall be
disallowed to the extent it is unreasonable/ excessive.
While considering whether such payment is excessive or not
Assessing Officer shall have due regard to Fair Market Value of
goods/services.
Section 40A(3) – Disallowance of 100% of expenditure if payment is NOT
MADE by Account Payee cheque or bank draft clearing system through bank
account or electronic or such other electronic mode as may be prescribed

• All payments other than payment made by Account Payee cheque or bank draft clearing
system through bank account or electronic or such other electronic mode as may be
prescribed.
• Deduction is not allowed/ Payment is considered as Inadmissible Expenditure under the
following conditions:
i) Payment is made towards expenditure
ii) The payment is made to a person in a day
iii) The amount of payment or aggregate of the payment in a day
exceeds ₹10,000
iv) Payment otherwise than by Account Payee cheque or bank draft clearing system through
bank account or electronic or such other electronic mode as may be prescribed
• If payment is made for plying, hiring or leasing goods carriages, transporter the limit is ₹35000
instead of ₹10,000