Business: It referred to any economic activity carried for earning profits. Economic activity refers to any trade, Commerce, Manufacturing Activity, Trading Activity or any other concern in nature of all.
It is not compulsory for continuation of similar transaction or a series of transaction or carried the business permanently.
Profession: It refer that a person provides services against their skill & knowledge like that of CA, Doctor, Engineer, etc. In Profession a person can earn their livelihood through their intellectual or manual skills.
Basis of Charge of Income Under Business/Profession:
There are some of the income which are taxable under the head “Profit & gains of Business or Profession”
If a person not carrying out any activity in relation to any business.
If a person is not sharing any Know-how,patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature
Method of Accounting
Under Sec.145, income under Business & Profession shall be computed in accordance with the method of accounting regularly followed by the assesses. The two recognized methods are Cash system and Mercantile system of accounting.
Cash System: In this system,all expenses & income are booked when they receive.
Mercantile System of Accounting : All Income & expenses are booked on accrual basis.
Speculative Business: Speculative business is one which carries speculative transaction. It is consider to be a separate business.
Speculative Transaction: These are those transaction which in which their is a contract for sale/purchase of shares,stock.
Computation of Income:
Deductions not Admissible:
1. Losses due to illegal trade practices.
2. Expenses not related to the business.
3. Expenses related to Capital Assets
4. Loss on sale of shares.
5. Future Anticipated Losses
6. Advance paid for commencement of new business which is not established
Computation of Business Profits:
Business Profit should be calculated through profit & Loss Account.In Profit & Loss Account there are some expenses which are partly allowed or disallowed under Income Tax Act. On the Credit side of Profit & Loss A/c there are some Income which are tax free or not taxable under the head Business/Profession.
Balance as per P & L A/c (+) Profit
(-) Loss Amount
Add Expenses claimed but not allowed under the Act
1. All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)
2. All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise
3. Duty,& Local Taxes of premises used for business.
4. All Charities & Donations
5. All personal Expenses
6. Any type of Fine / Penalty
7. Speculative Losses
8. All Capital Losses
9. Any Difference in Profit & Loss Account
10. Previous year Expenses
11. Rent paid to self
12. All expenses related to other head of Income
13. Payments made to the partner (in terms of salary,commission or any other way.)
14. All capital expenses except scientific research
15. Loss by theft
16. Expenses on Illegal Business
17. Rent for Residential portion
18. Interest on Income tax, TDS etc
Total of these Items is added to the profit or adjusted from loss
While calculating the Profit/Loss of Professional all receipt are recorded as their Income & irrespective of that all the expenses paid in providing the services,office expenses are deducted from the Income.
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