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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:
- 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.
- 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.
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