Business income final.. (1)
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Transcript of Business income final.. (1)
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8/7/2019 Business income final.. (1)
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Any income that is realized as a result of business
activity. Business income is a type of earned income,
and is classified as ordinary income for tax purposes.
Business may be defined as any trade, commerce or
manufacturing activity.
Profession may be defined as a vocation, or a job
requiring some thought, skill and special knowledgelike that of C.A., Lawyer, Doctor, Engineer, Architect
etc.
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Under Section 28, the following incomes are chargeable to tax asincome from business and profession:
Profits and gains from business and profession
Any compensation or other payments due to or received by anyperson specified in Section 28(ii)
Income derived by a trade, professional or similar association from
specific services performed for its members
The value of any benefit or perquisite, whether convertible intomoney or not, arising from business or exercise of a profession
Export incentives available to exporters
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Any interest, salary, bonus, commission or remunerationreceived by a partner from a firm
Any sum received for not carrying out any activity in relationto any business or not to share any know-how, patent,copyright, trademark, etc.
Any sum received under Keyman Insurance Policy includingbonus
Profits and gains from managing agency
Income from speculative transaction
Basis of Charge
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To understand taxability of business income, we have tounderstand types of expenditure that are incurred inconnection with the business, such as:
Capital expenditure
Revenue expenditure
Personal expenditure
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Capital expenditure is that expenditure which results inacquisition of an asset, tangible or intangible, which canbe later sold or converted into cash or which increasesthe earning capacity of a business or which affords other
advantages to the firm.
However, following should be kept in mind:
Normally, capital expenditures are not allowed to bededucted from income from business out-rightly.
They are allowed to be deducted in proportion to thelife of the asset or as per other schemes of the IncomeTax Act.
For Example
Procurement of license Acquiring goodwill
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An item of expenditure whose benefit expires within one
year or expenditure which merely seeks to maintain the
business or keep the asset in good working condition is a
revenue expenditure
However, following should be kept in mind:
Normally, revenue expenditures are allowed to be
deducted from income from business out-rightly
They are allowed to be deducted if they are expanded for
the purpose of the business.
Few Example
Renovation of office
Construction of school for employees
Annual sum paid for use of goodwill
Royalty paid for obtaining stock in trade
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Personal expenditure refers to all expenses which areincurred for the personal benefit of the assesses.
However, the following should be kept in mind:
Personal expenditure charged to business income isnot allowed to be deducted from income frombusiness.
However, if personal expenditures qualify fordeduction under various provisions of the Income TaxAct, they are deductible while computing tax liabilityand not while computing income from business.
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Rent, rates, taxes, repairs and insurance for buildings [Section
30]
Repairs and Insurance of Machinery, Plant and Furniture
[Section 31]
Depreciation [Section 32]
Bonus, commission to employees for service rendered [Section36(1)(i)]
Interest on Borrowed Capital [Section 36(1)(iii)]
General Deduction [Section 37(1)]
Expenditure when any building, machinery, plant or furnitureis not exclusivel used for the ur oses of business Section
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If the assesses uses a premises for his business purposestaken on rent, then:
The rent of premises, the amount of repairs if he has
undertaken to bear the cost of repairs
The amount of current repairs (not being capitalexpenditure)
Any sum on account of land revenue, local rates or
municipal taxes
Amount of any premium in respect to insurance againstrisk of damage or destruction of the premises
Are allowed as deduction while calculating businessincome.
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The expenditure incurred on
current repairs (not being capital
expenditure) and insurance inrespect to plant, machinery and
furniture used for business
purposes is allowable asdeduction.
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Depreciation is the diminution in the value of assets dueto wear and tear or due to just passage of time.
The following are the pre-requisites for allow ability of
depreciation:
The asset must be owned wholly or partially by theassesses
The asset must be used for the purpose of businessand profession
The asset must be used during the previous year
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The following are the conditions for allow ability of bonus andcommission to employees for services rendered:
o It should not have been payable to employees as profits ordividend if not paid as bonus or commission
o It is allowed on payment basis i.e., in the year in which it isactually paid
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The following are the conditions for allow ability of interest on
borrowed capital:
The money (capital) must have been borrowed by theassesses.
It must have been borrowed for the purpose of business.
The assesses must have paid interest or interest is
payable on such loan.
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Any expenditure other than specifically allowed under the act shallbe allowed as deduction provided the following conditions aresatisfied:
It should not be in the nature of capital expenditure
It should not be personal expenditure of the assessee
It should be expanded wholly and exclusively for thepurposes of business or profession
It should not have been incurred for any purpose, which isan offence or is prohibited by any law
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In such cases, the deduction for
Rent paid for such premises
Repairs, if he has undertaken to bear the cost of repairs
Land revenue, local rates or municipal taxes
Shall be such sum as the assessing officer maydetermine having regards to the part so used for thepurpose of business or profession
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Interest, royalty, fees for technical services payable tonon resident if TDS is deductible but has not beendeducted or deducted but not properly deposited with
the Government
Wealth Tax paid by the assessee
Salary payable outside India without deductionof TDS
Provident Fund payment without taxdeduction at source
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Any amount paid to the relatives of the assesses to the extent suchexpenditure is considered to be excessive or unreasonable
20% of the amount of expenses exceeding Rs.20000 if the following
conditions are satisfied:
The amount of expenditure exceeds Rs.20000
A payment in respect of the above expenditure (or part thereof)
exceeds Rs.20000
The payment mentioned above has been made otherwise than bya crossed bank cheque or bank draft.
Employers contribution to unrecognized provident fund.
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Any sum payable by way of tax, duty or cess (by whatevername called under any law for the time being in force)
Any sum payable by employer to any fund for the welfare ofemployees
Any sum payable as bonus or commission to employees forservices rendered
Any sum payable as interest on any loan from any institution
Any sum payable by an employer in lieu of leave at the creditof his employee
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The exception is available when two conditions aresatisfied:
Payment in respect of aforesaid expenditure is made on orbefore the due date of submission of return
The evidence of such payment is submitted along with thereturn of income
Then the expenditure is allowed on accrual basis in the yearin which the liability is incurred.
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Net Profit as per Profit and LossAccount XXX
Add : Inadmissible Expenses debitedto Profit and Loss Account XXX
Deemed Incomes not credited toProfit and Loss Account XXX
XXX
Less: Deductible Expenses not debitedto Profit and Loss Account XXX
Incomes chargeable under otherheads credited to Profit & Loss A/c XXX
XXX
Profits and Gains of Business orProfession
XXX
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PRESENTED BY
DINSHAH ANKLESVARIA(22)
FAZALABBAS MUNI(24)
GEETA NAIK(26)
GOLDY AMBWANI(28)
HEMEN DOSHI(30)