Tax on Profits and Gains from Business and Profession

INTRODUCTION

Business Income is the profit that is earned from the business. It is nothing but Total Revenue/Total turnover minus Total Expense. The profit from the business is the taxable income/business income.

Total Revenue – Total expense = Profit/ Taxable Income from business.

SECTION 28 – CHARGING SECTION

As per Section 28 of the Income Tax Act, 1961:

1. Any profit from any business/profession comes under income from PGBP (Profit & Gains from business & profession)

2. Any perquisite/benefit arising from a business comes under income from PGBP (Profit & Gains from business & profession)

3. Interest/Salary/Remuneration/Commission/Bonus received by Partner of a firm comes under income from PGBP (Profit & Gains from business & profession)

4. Sums received under an agreement for forbearance, i.e., agreement for not doing something (eg: Non- Compete Agreement), comes under income from PGBP (Profit & Gains from business & profession)

5. Sums received under Keyman Insurance Policy comes under income from PGBP (Profit & Gains from business & profession)

INCOME FROM HOUSE RENT

In the case of Chennai Properties & Investment Ltd., it was laid out that the rental income from the properties of a company whose main object is of letting out properties, shall be taxable under comes under income from PGBP (Profit & Gains from business & profession) and not income from HP (House Property)

SECTION 29 – COMPUTATION SECTION

As per Section 29 of the Income Tax Act, 1961, all the incomes which have been refereed to in Section 28 of the said act, shall be charged in accordance with the provisions laid out from  Section 30 to 43D of the Act.

SECTION 30 & 31 – ALLOWABLE DEDUCTIONS

As per Section 30 of the Income Tax act, 1961, the assessee is eligible for the following deductions:

• The rent and cost of repairs for the premises, he/she occupies as a tenant for the purposes of Business or Profession.
• Any kind of payment in respect of land Revenue, Local Rates or Municipal Taxes for the purposes of Business or Profession.
• Any premium paid for insuring the premises for the purposes of Business or Profession, against damage or destruction.

As per Section 31 of the Income Tax act, 1961, the assessee is eligible for the following deductions:

• Any payment for the repair of machinery, plant and furniture used for the purposes of Business or Profession.
• Any premium paid for insuring the machinery, plant and furniture used for the purposes of Business or Profession against damage or destruction.

EXPENSES NOT ELIGIBLE FOR DEDUCTION

While calculating the income under PGBP, there are some expenses which are not eligible for deductions under the Provisions of Income Tax. This includes:

• Any cash payment above Rs 10,000/- per day against single invoice to a single person.
• Any kind of personal Expenses (including Life Insurance Policy, Credit Card Expenses, Personal use, etc.)
• Any kind of Bad debts which are not written in the books.
• Capital Expenditures (since they are considered to be more of an asset).
• Payments which have made because of non-compliance or breaking a law.
• Expenses which have been incurred in order to gain an illegal income.
• Expenses which have been prohibited by law.

SECTION 32 – DEPRECIATION SECTION

Section 32 of the Income Tax Act, 1961, talks about Depreciation. Depreciation means a fall that takes place in the value of an asset. This fall may be because of various reasons including:

1. Usage, or

2. With Time, or

3. Some accident, or

4. because of being outdated

HOW CAN CLAIM DEPRECIATION?

An assessee can claim depreciation on an asset only if that asset is put into use and that assessee has the beneficial ownership. For example, in the Mysore Minerals Ltd. Case, it was laid out that, an assessee can claim depreciation even for those buildings which were not registered in his name but he was using them for his business. In this case, the assessee was in possession of the building and was putting it to use, hence he was the beneficial owner, therefore could claim depreciation.

An assesse can claim depreciation on the acquired asset only if he puts it into use. As it was laid out in the case of Dinesh Gulabchand Agarwal, that depreciation cannot be claimed on an asset which was ready for use but was not put into use. However, in case where the assesse wants to put the asset into use but is unable to because of any extraneous situation, then in such cases he can claim the depreciation. For example, as was laid out in the case of Chennai Petroleum Corporation Limited, it was laid out that the assesse could claim depreciation on the gas plant which was built in the Previous Year but was not put into use in that previous year because of unavailability of Raw Materials. Since in this case, the asset was ready to be used but couldnot be put into use because of the extraneous situation of unavailability of Raw Materials, Depreciation was allowed.

DEPRECIATION AS PER INCOME TAX ACT, 1961 ON FIXED ASSETS

If the asset is put to use for more than 180 days in a Financial Year, then the depreciation is claimed at the full rate. But if the asset is put to use for less than 180 days (even if 1 day less than 180 days) in a Financial Year, then the depreciation is claimed at the half rate.

RATE OF DEPRECIATION AS PER THE INCOME TAX ACT,1961