Sunday, May 4, 2014

INCOME TAX SHORT NOTES: “PROFITS AND GAINS FROM BUSINESS AND PROFESSION"



Brief History of Income Tax in India
In India, Income tax was introduced for the first time in 1860, The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India including Jammu and Kashmir.
All income shall be classified under the following heads for the purpose of computation of taxable amount subject to certain Exemptions’ and deductions.
THE FIVE HEADS OF INCOME ARE:
  1. Income under the head salaries (Section 15 – 17)
  2. Income from house property (Section 22 – 27)
  3. Profits and gains from business or profession (Section 28 – 44)
  4. Capital gains (Section 45 – 55)
  5. Income from other sources (Section 56 – 59) 

PROFITS AND GAINS FROM  BUSINESS AND PROFESSION"

NATURE OF INCOME
Business,Vocation and Profession carried on by the assessee of whatsoever nature.

METHOD OF ACCOUNTING:
As Regularly Employed can be “Cash” Basis or “Accrual” Basis Subject to Provisions of Section 43B.

RENT, RATES, TAXES, INSURANCE FOR BUILDING ( Sec. 30): -
Any rent, rates, taxes, insurance premium paid by the assessee during the previous year in respect of the place for business purpose would be allowed as a deduction.

REPAIRS AND INSURANCE OF PLANT, MACHINARY, FURNITURE (Sec. 31): -
Any amount spent on repairs, insurance or hire charges, etc. On Plant, machinery, furniture by a business organisation is allowed as a deduction.

DEPRECIATION (Sec. 32):
Depreciation can be classified into 3 parts to deal in the subject of income tax
  • Normal Depreciation
  • Additional Depreciation
  • Depreciation on SLM basis in case of electricity companies
Normal depreciation is provided on block of assets method on WDV of the block as on every 31 March.

Block of assets means group of assets having same rate of depreciation and falling under a specific class of assets. These assets are grouped together and depreciation is provided on the block as illustrated in the coming points.

Computation of WDV of the block:-
WDV at the beginning of year:XXXX       
Add:-Actual cost incurred on assets (Acquired during the year):XXXXX       
Less:-Money Payable during the year( Which is sold):xxxxx       
Depreciation  at the prescribed %:XXXXX                   
Closing WDV:XXX       

Depreciation is provided for whole year except when, Asset is Acquired and put to use during the year for less than 180 days during the year , in this case the depreciation is limited to 50% of total depreciation, but if same asset acquired during earlier years but put to use this year and usage period less than 180 days during current year then depreciation for whole year.

When all the assets of block are sold, in such a case no depreciation is allowed and short term capital/gain or loss would be attracted as per provisions of section 50 discussed in capital gains.

PART OF BLOCK SOLD BUT MONEY PAYABLE EXCEEDS WDV:- In such a case no depreciation is allowed and also short term capital gain provision as per section 50 is attracted.

ADDITIONAL DEPRECIATION: -
Additional depreciation is only to manufacturing concerns. Additional depreciation on certain assets: 20% or 10% (for <180days). Only factory machinery and equipments .

Assets on which additional depreciation is not allowed:-
  • Not second hand machinery
  • Not on ships, aircrafts and road transport vehicles 
  • Not allowed on equipments installed in office
In case an enterprise is engaged in electricity business it has option to charge depreciation on SLM basis but such an option is available once only and can’t be changed

UNABSORBED DEPRECIATION: -
There cannot be loss under business head due to depreciation.If such depreciation could not be set off under business head then it can be set off from any other head except salary in the same year, and if still it could not be set off it can be carried forward indefinitely to succeeding years for set off in the similar manner.

License to operate telecommunication services:
Deduction in equal installments over Remaining useful life of licence on paid basis. If licence is sold, WDV of licence is reduced by the amount of money recovered and remaining WDV is allowed as deduction in equal instalments over remaining life of asset.

If sold for price exceeding WDV, no deduction is allowed in remaining years instead capital gain is charged as per capital gain provisions.

AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES  SEC 35D
Company assessee: 5% of cost of project or 5% of cost of capital whichever is beneficial to the assessee.
Others: 5% of cost of project

Before commencement of business: -For setting up any Business
After setting up of business: - Extension or setting up of new undertaking.

List of specified expenditure including documents like feasibility report, project report, market survey, engineering services, legal charges , Drafting and printing of MOA and AOA, registration fees, issue of shares and debentures, underwriting commission, expenditure on prospectus have to be submitted.

Deduction for amalgamation/ demerger and VRS
Quantum: -1/5 of expenditure in each successive year but it is to be noted that VRS is allowed only when amount is actually paid which is not a case Amalgamation demerger.

OTHER DEDUCTIONS (section 36)
  • Insurance premium on stocks
  • Bonus or commission to employees: deduction subject to section 43B
  • Insurance on health of employees by any mode other than cash
  • Interest on borrowed capital, if for use of business
  • Discount on issue of zero coupon bonds to be allowed as deduction on pro-rata basis.
  • Employer’s contribution to recognized provident fund or approved superannuation fund subject to section 43B
  • Employer’s contribution to approved gratuity fund subject to section 43B
Bad debts subject to conditions:
  • Income from sale recognized. If any amount has been subsequently recovered in respect of above then it shall be taxable under business head even if business is discontinued.
  • Provision for bad and doubtful debts: NO deduction in general but deduction available to Scheduled or non-scheduled cooperative banks Foreign banks or State Finance Corporation
  • STT paid : Deduction if income earned included in PGBP

GENERAL DEDUCTIONS UNDER SECTION 37(1) BASIC CONDITIONS FOR DEDUCTION:
  • Not of personal nature
  • Not of capital nature
  • Incurred during PY .
Wholly or exclusively for business or profession:
  • Remuneration to Employees
  • Payment of penalty/ damages of compensatory nature. Penalties paid to custom, sales tax authorities, excise authorities, Income tax authorities not allowed.
EXPENSES NOT DEDUCTIBLE
Section 40A (2): - AO may disallow payment made to relative if in his opinion it is excess of the market value.
Section 40A (3): - Any payment exceeding Rs. 20000 or Rs.35000( in case of payment to a transporter engaged in plying, hiring, transporting etc.) in a day by a assessee will be allowed as a deduction only when payment is made by a account payee cheque.

EXCEPTONS: - This section is not applicable when
  • Payment is made to bank or financial institution,
  • Govt. Under required law
  • Payment on a Banking Holiday
  • Payment to employees not exceeding Rs.50,000 - Payment in a village not served by a bank
  • Book Adjustment
  • Payment for purchase of agriculture produce, Poultry farm produce, Dairy items, cottage industry(working without aid of power.
SALARY AND INTEREST ON CAPITAL TO PARTNERS (SECTION 40(b):
Interest, salary: Deduction as per provisions in partnership deed.
Interest on capital: - Rate specified in partnership deed or 12% whichever is lower.
Salary: - Allowed only to working partners.

It should be lower of amount specified in partnership deed or following amount:-

On First Rs.300,000 Of Book - 90% of book profits or Rs.150,000 Profits whichever is more
On Balance Of Book Profits - 60% of book profits

DEDUCTION UNDER SECTION 43B:-
Section  43  B  mentions  some  cases  where  deduction  will  be  allowed  only  when amount is actually paid by the assessee before due date of filing return.In all these cases deduction of the expense is allowed on “paid” basis.

However when expenditure is disallowed in one year, it will be allowed as a deduction in the previous year in which such expenses are actually paid.
  1. Any sum payable by way of tax, cess, duty or fee under any law and by whatever name called.
  2. Any sum payable by employer by way of contribution to provident fund or superannuation fund or any other employee benefit fund.
  3. Any sum payable as bonus, commission to employees for services rendered.
  4. Any sum payable as interest on loan borrowed from public financial institution or state financial institution.
  5. Any sum payable as interest on loan taken from scheduled bank including co-operative societies.
  6. Any sum payable by employer in lieu of leave salary to employee.

MAINTENANCE OF BOOKS OF ACCOUNTS BY PERSONS CARRYING ON
BUSINESS OR PROFESSION (SECTION 44AA AND RULE 6F): -


Assessee carrying on Business or profession other than the profession notified under the rule 6F

Income ExceedsRs. 120000 In Any Of 3 Preceding Previous Years or Likely to exceed Limit In Case Of Newly Set Up Business Or Profession

Or

If the turnover or sales or Gross Exceeds Rs.10 Lakhs .In Any Of 3 Preceding Previous Years Or Likely To Exceed Limit In Case Of Newly Set Up Business Or Profession

RULE 6F
In the case of Assessee carrying on profession of law, Company Secretary, Accountancy, medicine, architecture etc

Gross Recipts Exceeds Rs.150,000 In All 3 Preceding Previous Years Or Likely To Exceed Limit In Case Of Newly Set Up Business

Specified Books: - Cash Book, Journal (If Accounts On Accrual Basis), Ledger Carbon Copy Of Receipts Exceeding Rs. 25 And Original Copy Of Expenditure Exceeding Rs.50

If The Assessee Falling Under Section 44ad, 44ae, 44bb, 44bbb Or Any Other Section Of Presumptive Income, Declares His Income Lower Than Specified In These Sections, He Is Required To Maintain Such Books As May Enable A.O. To Compute His Income.

Sec.271A
Failing to keep, maintain or retain books of accounts u/s 44AA read with rule 6F,will be levied a penalty of RS.250,000/-

COMPULSARY AUDIT OF ACCOUNTS UNDER SECTION 44AB
Business: - In Case Gross Turnover Or Total Sales Exceeds Rs.1core
Profession: - In Case Gross Receipts Exceeds Rs. 25 Lakhs.

A Person Falling Under Section 44 AD Declaring a Lower Income

Filing of Report of Audit:
An audit report duly verified by a CA on or before 30.09.yyyy of the relevant year has to be submitted.

Sec.271B
Failing to get accounts audited or furnish audit report required u/s44ABF, will be levied a penalty of RS.150, 000/- or Equal to HALF  OF  TOTAL  SALES   which ever IS  LESS

PRESUMPTIVE INCOME UNDER SECTION 44AD
(Business other than that of goods carriage): -

This scheme is applicable to residents Individuals, HUF, Firm other than LLP. Carrying on any business whose gross receipt from such business does not exceed Rs.1 Crore A sum equal to 8% of gross receipt paid or payable to the assessee or such higher
sum as declared by the assessee in the return of income shall be deemed to be the income from such business.
However for sum lower than this income, accounts have to be maintained and get audited.

All deductions under section 30 to 38 along with unabsorbed depreciation would be deemed to have been allowed.

However salary and interest to partners to the limit specified in section 40(b) have to be allowed17

PRESUMPTIVE INCOME UNDER SECTION 44AE (Business of goods carriage): -
Scheme is applicable to only those assesses who do not own more than 10 goods carriage at any time during the previous year.
Profits and gains from such business would be deemed to be as under:-
For heavy goods vehicle : - Rs. 5000 For every month or part of month for which such vehicle is owned by assessee
For other vehicles: - Rs. 4500 For every month or part of month for which such vehicle is owned by assessee

Assessee can declare income higher than this specified limit.
However for sum lower than this income, accounts have to be maintained and get audited.
All deductions under section 30 to 38 along with unabsorbed depreciation would be deemed to have been allowed.
However salary and interest to partners to the limit specified in section 40(b) have to be allowed.

PRESUMPTIVE INCOME UNDER SECTION 44BBA
(Non-resident’s Business of operating aircraft): -

In this presume income to be 5% of the Fare and freight: -
Whether paid or payable in India or outside India for transportation of goods, passenger, livestock, mail, etc. from any place in India

AND

Amount received or deemed to be received in India for transportation of goods, passenger, livestock, mail, etc. from any place outside India.
Maintain books of accounts as necessary for A.O. to compute his income. Get his Accounts audited under section 44AB

1 comments:

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