Taxation Exam > Taxation Notes > Income Tax for assessment (Inter Level) > Computation of Profit from Business - Taxation
Computation of Profit from Business - Taxation | Income Tax for assessment (Inter Level) PDF Download
Computation of Profit from Business - Taxation
Fees from Clients | 7,90,000 |
Professional Gift | 7,000 |
Income earned from Charitable Institution | 6.000 |
Total | 8,03,000 |
Less : Expenses allowed as deduction |
|
(-) Salary to staff | (3,20,000) |
(-) ER’s contribution towards RPF | (60,000) |
(-) Interest on overdraft facility | (4,000) |
Profit from Business | 4.19.000 |
Computation of Total Income
Profit from Business | 4,19,000 | ||
Income from Other Sources | Interest on fixed deposits | 23,500 |
|
Fees from publishing articles | 17,200 | 40,700 | |
Gross Total Income | 4,59,700 | ||
Less : Deduction u/s 80C | (15,000) |
Less : Deduction u/s 80G (50% of 6,000) | (3,000) |
Total Income | 4,41,700 |
Deductions Expressly Allowed
Section 30. Deduction relating to building which is used for the purpose of business or profession
In respect of premises, used for the purposes of the business or profession, the following deductions shall be allowed:
(a) Any sum on account of land revenue, local taxes or municipal taxes subject to section 43B is allowed as deduction.
(b) Where the premises is taken on lease, rent of the premises is allowed as deduction.
- Notional rent paid by proprietor to himself is not allowed as deduction.
- Rent paid by firm to its partner for using his premises is allowed as deduction.
- Where the premises is owned by the assessee, it can claim depreciation u/s 32(1).
(c) Insurance charges against the risk of damage or destruction of building.
(d) Current repairs if the assessee bears the cost of repairs.
- Capital repairs incurred by the assessee are not as allowed as deduction whether premises is occupied as a tenant or as a owner. However the assessee can claim depreciation on capital repairs.
Meaning of Current Repairs and Capital Repairs
a. Expenditure incurred for replacing the part of the asset is current repairs.
b. Expenditure incurred for replacing the whole of the asset is capital repairs.
c. Expenditure incurred for addition of the asset is a capital expenditure.
d. Renovation of assets which effects the sales is current repairs.
Section 31. Deduction relating to plant, machinery & furniture
(a) Amount paid on account of current repairs to the plant, machinery and furniture is allowed as deduction.
Note 1: However capital repairs incurred by the assessee are never allowed as deduction whether plant is leased or is purchased. But depreciation can be claimed u/s 32.
(b) Insurance premium paid for insurance against the risk of damage or destruction of plant, machinery or furniture is allowed as deduction.
Note 2: Rent of P & M & furniture is covered u/s 37 and not in section 31.
Deductions u/s 36
1. Section 36(1)(i). Insurance of stocks:
The amount of insurance premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purpose of the business is allowed as deduction. Purchase of stock is allowed as deduction u/s 37.
2. Section 36(1)(ib). Insurance premium on health of employees
a. The employer takes group health insurance of all its employees.
b. Premium is paid under a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central Government or any other insurer and approved by IRDA.
c. The premium is paid through cheque (account payee cheque / bearer cheque) or demand draft.
Note 1 : Where premium is paid in cash deduction is not allowed.
Note 2 : Life insurance premium or accident insurance premium paid by employer for employee is allowed as deduction u/s 37.
3. Section 36(1)(ii). Bonus or commission paid to employees
Any sum paid to an employee as bonus or commission for services rendered, is allowed as deduction subject to section 43B.
Note 1 : Bonus by whatever name called like Diwali bonus, Production bonus shall be covered under this section only.
Note 2 : Where such bonus or commission represents profits or dividend then not allowed as deduction. In other words distributing dividend as bonus is not allowed as deduction.
Note 3 : Salary or allowances or perquisites is allowed as deduction in the hands of employer u/s 37.
4. Section 36(1)(iii). Interest paid on money borrowed for the purpose of business or profession
The amount of interest paid in respect of capital borrowed for the purposes of the business or profession shall be allowed as deduction. If loan is borrowed from banks / FI then allowability of interest is subject to section 43B.
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Therefore capitalised this interest as per explanation 8 to S 43(1). Depreciation can be claimed.
Note : Interest paid after the asset is put to use is allowed as deduction.
Other points
a. The sum of money should be borrowed from another assessee. The loan may be borrowed from any Bank, financial institution, Govt. public, friends or relatives. Loan may be in the form of debentures or deposits etc. Interest on capital or loan to proprietor is not allowed as deduction since the loan is not borrowed from another person.
b. Where the amount of loan is used for personal purpose it is not allowed as deduction.
c. Income tax department cannot question the need of borrowing and the rate of interest.
d. Interest other than interest on borrowing can be claimed as deduction under section 37.E.g. Interest on late payment of sales tax, Interest on overdraft facility etc.
e. Interest before commencement of business (Trial Run) is not allowed as deduction. Business shall be treated commenced from the date of completion of trial run.
5. Section 36(1)(iv). Employer’s contribution towards Recognised provident fund or an approved superannuation fund
Employer’s contribution paid towards recognised provident fund or an approved superannuation fund is allowed as deduction subjected to section 43B.
Note 1: As per section 40A(9) contribution towards any Non-Statutory fund or unapproved fund is not allowed as deduction.
Note 2: Where contribution is made towards any other fund or for welfare of employees in any form without specific requirement of law then such contribution is not allowed as deduction.
6. Section 36(1)(iva). Employer’s contribution towards pension scheme referred in section 80CCD
W.e.f. AY 12-13 it provides that an assessee shall get a deduction in respect of contribution towards a new pension scheme referred in section 80CCD on account of an employee to the extent it does not exceed 10% of the salary of the employee in the previous year subject to section 43B.
For this purpose, ‘salary’ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
Note 1: The limit of 10% has to be observed for each employee. E.g. an employer has two employees (X & Y) drawing ₹ 4,00,000 each and he contributes to the fund ₹ 44,000 (11%) for employee X and ₹ 36,000 (9%) for employee Y, he will face disallowance of ₹ 4,000 (₹ 44,000 less ₹ 40,000, being 10%) for employee X.
7. Section 36(1)(v). Employer’s contribution paid towards an approved gratuity fund
Employer’s contribution towards an approved gratuity fund created by the employer exclusively for the benefit of his employees under an irrevocable trust is allowed as deduction subject to section 43B.
Note 1: As per section 40A(7) contribution towards unapproved gratuity fund is not allowed as deduction.
Note 2: Where employee retires during the year gratuity is payable to such employees during the year is allowed as deduction if no deduction was claimed earlier.
The document Computation of Profit from Business - Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).
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FAQs on Computation of Profit from Business - Taxation - Income Tax for assessment (Inter Level)
| 1. How is profit from business computed for taxation purposes? |  |
Ans. Profit from business is computed for taxation purposes by subtracting all allowable business expenses from the gross revenue generated by the business. This includes deductions for expenses such as salaries, rent, utilities, advertising, and other costs directly related to the operation of the business. The resulting amount is the taxable profit that is subject to income tax.
| 2. What are some examples of allowable business expenses that can be deducted from the gross revenue? | |
Ans. Allowable business expenses that can be deducted from the gross revenue include salaries and wages paid to employees, office rent and utilities, business insurance premiums, advertising and marketing costs, travel and entertainment expenses directly related to business activities, professional fees paid to consultants or lawyers, depreciation of business assets, and interest paid on business loans or credit cards.
| 3. Are there any expenses that cannot be deducted from the gross revenue when computing profit for taxation? | |
Ans. Yes, there are certain expenses that cannot be deducted from the gross revenue when computing profit for taxation. These include personal expenses that are not directly related to the operation of the business, fines or penalties imposed by government authorities, political contributions, and expenses that are considered lavish or extravagant. It is important to consult with a tax professional or refer to the tax regulations specific to your jurisdiction for a complete list of non-deductible expenses.
| 4. How does taxation on profit from business work for sole proprietorships compared to corporations? | |
Ans. Taxation on profit from business differs for sole proprietorships and corporations. In a sole proprietorship, the profit is considered personal income of the owner and is subject to individual income tax rates. The owner reports the profit and pays taxes on their personal income tax return. In contrast, corporations are separate legal entities, and the profit is subject to corporate income tax rates. The corporation files its own tax return and pays taxes on the profit. If the corporation distributes dividends to shareholders, those dividends may also be subject to individual income tax for the shareholders.
| 5. Are there any tax incentives or deductions available for businesses to reduce their taxable profit? | |
Ans. Yes, there are various tax incentives and deductions available for businesses to reduce their taxable profit. These can include deductions for research and development expenses, investment in certain qualified property or equipment, hiring certain categories of employees, and contributing to retirement plans or employee benefit programs. Additionally, some jurisdictions offer tax credits for specific industries or activities, such as renewable energy projects or historic preservation. It is important for businesses to consult with tax professionals or refer to the specific tax laws applicable to their jurisdiction to take advantage of these incentives and deductions.
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