Income Tax - Tax upon Income from business or professions

What conditions must be satisfied for an income to fall under the head of income from profits and gains of business?

For charging the income under the head "Profits and Gains of business," the following conditions should be satisfied:

• There should be a business or profession.
• The business or profession should be carried on by the assessee.
• The business or profession should have been carried on by the assessee at any time during the previous year.

What income will be chargeable to income tax under the head 'Profits and gains of business or profession'?

The following income would be chargeable under the head "Profits and gains of business or profession":

• The profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year;
• Any compensation or other payment, due or received by the following:-
  • Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
  • Any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
  • Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of any agency or the modification of the terms and conditions relating thereto;
  • Any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;
• Income, derived by a trade, professional or similar association from specific services performed for its members;
• Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947;
• Cash assistance (by whatever name called), received or receivable by any person against exports under any scheme of the Government of India;
• Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
• The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
• Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm.

However, it is provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under Clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.

Would the interest income be assessed as ''business income'' or as ''income from other sources''?

Interest Income is either assessed as ''Business Income'' or as ''Income from other sources'' depending upon the activities carried on by the assessee. If the investment yielding interest were part of the business of the assessee, the same would be assessable as ''business income'' but where the earning of the interest income is incidental to and not the direct outcome of the business carried on by the assessee, the same is assessable as ''Income from other sources''. Business implies some real, substantial and systematic or organized course of activity with a profit motive. Interest generated from such an activity is considered Business Income. Otherwise, it would be interest from other sources.

What deductions are allowed in computing income from profits and gains of business or profession?

A number of other deductions under Section 36 of the Income-Tax Act are allowed while computing income from profits and gains of business or profession:

• S36 (i): The amount of any premium, paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of the business or profession;
• (ia) The amount of any premium, paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk, raised by the members of such federal milk co-operative society;
• (ib) The amount of any premium, paid by cheque by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme, framed in this behalf by the General Insurance Corporation of India, formed under section 9 of the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) and approved by the Central Government;
• (ii) Any sum, paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
• (iii) The amount of the interest paid in respect of capital borrowed for acquisition of the asset from the date it is put to use for the purposes of the business or profession;
• (iv) Any sum, paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved Superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the Superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions, fixed on some definite basis by reference to the income chargeable under the head "Salaries" or to the contributions or to the number of members of the fund;
• (v) Any sum, paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
• (va) Any sum, received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.
• (vi) In respect of animals which have been used for the purposes of the business or profession, otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realized in respect of the carcasses or animals;
• (vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year;
• (viia) in respect of any provision for bad and doubtful debts made by the following:
  • A scheduled bank or non -- scheduled bank, an amount not exceeding five per cent of the total income and an amount not exceeding ten per cent of the aggregate average advance made by the rural branches of such bank computed in the prescribed manner;
  • A bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income;
  • public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income.
• (viii) In respect of any special reserve created by a financial corporation which is engaged in providing long term finance for industrial or agricultural development in India or, by a public company formed and registered in India with the main object of carrying on the business or providing long - term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the total income can be carried to the reserve account;
• (ix) Any bona fide expenditure incurred by a company for the purpose of promoting family planning amongst its employees;
• (x) Any sum, paid by a public financial institution by way of contribution towards any Exchange Risk Administration Fund, set up by public financial institutions, either jointly or separately.
• (xi) Any expenditure, incurred by the assessee on or after the 1st day of April 1999 but before the 1st day of April 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant.
• (xii) Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act, under which such corporation or body corporate was constituted or established.

It is important to note that deductions are subject to certain conditions being satisfied.

What deductions are allowable in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession?

S 30: The deductions that are allowed while computing income from 'profits and gains from business or profession' in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession while computing income from 'profits and gains from business or profession' are as follows:

• Where the premises are occupied by the assessee:
  1. As a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; excluding expenditure in the nature of capital expenditure.
  2. Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises; excluding expenditure in the nature of capital expenditure.
• Any sums, paid on account of land revenue, local rates or municipal taxes;
• The amount of any premium, paid in respect of insurance against risk of damage or destruction of the premises.

What deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture?

S 31: The following deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture:

• The amount paid on account of current repairs thereto; excluding expenditure in the nature of capital expenditure.
• The amount of any premium, paid in respect of insurance against damage or destruction thereof.