INCOME FROM BUSINESS OR PROFESSION

Business means the purchase and sale of manufacture of a commodity with a

view to make profits. It includes any trade, commerce, adventure, or any
concern in nature of trade, commerce or manufacture.
Sec. 2(13) Business :
Business means the purchase and sale or manufacture of a commodity with a
view to make profit. It includes any trade, commerce or manufacture or any
adventure (Doing activity for the first time without knowing the outcome) or
concern in the nature of trade, commerce and manufacture.
It is not necessary that there should be a series of transactions in a business and
it should be carried on permanently. Profit is an isolated transaction is also
taxable under this head.
Profession means the activities for earning livelihood which requires intellectual
skill or manual skill for e.g., the work of a lawyer, doctor, auditor, engineer, and
so on. Profession also includes vocation.
Vocation means activities which are performed in order to earn livelihood e.g.,
brokerage, insurance agency, music, dancing etc. as the rules for the assessment
of business, profession and vocation are same, and there is no importance of
making any distinction between them for income tax purpose.

Proforma for computation of Income under the head PGBP

Particulars Rs. Rs.
Profit as per P & L A/c xxx
Add : i) Expenses or losses disallowed but charged in P & L A/c xxx
ii) Incomes taxable as business income but not credited to the P & L xxx
A/c
iii) Expenses in excess of the allowed amount charged to P & L A/c xxx
iv) Under valuation of closing stock or over valuation of opening xxx xxx
stock
Deduct i) Expenses or losses allowed but not debited to P & L A/c xxx
ii) Incomes not taxable as business income but credited to the P & L xxx
A/c
iii) Income exempt from tax but credited in P & L A/c xxx
iv) Over valuation of closing stock and under valuation of opening xxx xxx
stock
Taxable income from Business xxx

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 Business Expenses Not Taxable Under The Head
“Profits And Gains Of Business :

1. Advertisement expenses incurred by an assessee on advertisement in any souvenir,

magazine, pamphlet published by political party.
2. Interest, royalty, fees paid outside india without TDS shall be disallowed
3. Any amount of income tax, Arrears of income Tax or Advance income tax paid
is disallowed
4. Wealth tax paid on the wealth of an assessee
5. Payment of provident fund paid outside India without TDS
6. Payment to a relative by way of salary, provident fund, or Interest
7. Any Expenditure paid in cash or through bearer cheque exceeding Rs. 20,000 will be
disallowed
8. Capital expenditures
9. All types of provisions, reserves and fund
10. Drawing of proprietor
11. Personal expenses of proprietor
12. Fines and penalties
13. Past losses and provisions for lossess
14. Charity and Donation
15. Registration expenses of business assets
16. Legal expenses related to capital assets
17. Life insurance premium on the life of proprietor
18. Expenditures on raising capital
19. Expendture on shifting registered office
20. Gifts made on personal consideration

Computation of profits of business or profession:

The profits and gains of business or profession are computed as under,
1) Those expenses or losses which are charged to the P/L A/C but are allowed under IT
Act should be added to the profit, as shown by the P/L A/C prepared by the assesse. If
any expenses are partly disallowed, only disallowed part of it shall be added to the
profit.
2) If any admissible expenses are omitted from P/L A/C, they should be deducted from
the above profit.
3) If some taxable incomes are omitted from P/L A/C they should be added to the above
profits.
4) If some such incomes have been credited to P/L A/c, which are either not taxable
under ‘Business or Profession’ or not taxable at all, they should be deducted from the
above profits.
The above rules can be well illustrated with the help of following statement:
Profits as per P/L A/C ……………………………………………XXX
Add: Expenses or losses disallowed but charged to
P/L A/C……………………………………..XXX

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 Incomes taxable as business income but not
Credited to P/L A/C……………………………..XXX

Expenses in excess of the allowed amount

Charged in P/L A/c………………………………XXX
Under valuation of closing stock over valuation
Of opening stock ………………………………..XXX XXX

Less: Expenses or losses allowed but not debited to

P/L A/C……………………………………….…XXX
Incomes not taxable as business income but
Credited to the P/L A/C………………………….XXX
Incomes exempt from tax but credited to P/L A/C..XXX
Over valuation of closing stock and undervaluation
Of opening stock …………………………………..XXX XXX
Taxable income from business XXX

Second method for computing taxable profits of business or profession as follows:

In this method a fresh P/L A/C or income and expenditure account is prepared to
determine the profit or loss. The format of this matter is as under:
1) Add together all taxable incomes under this head for PY …. XXX
2) A) Deduct all admissible expenses under this head …XXX
B) Deduct admissible business losses………………. XXX XXX
Taxable profits or losses of business or profession XXX.
Second method is generally used in case of profession.

Selected provisions of IT Act to deprecation:

1) If any asset is bought and sold during the PY. No depreciation is allowed on such
asset.
2) If any asset is bought during the PY and used for less than 180 days, 50% of normal
deprecation on it is allowed.
3) On book purchased for professional purposes:
a) For annual publications at rate of 40%.
b) For other publications at rate of 40%.
4) On patent right 25%.
5) On surgical equipment’s, motor cars and plant and machinery 15%.
6) Furniture and fittings 10%.
7) All intangible assets 25%
8) Computers 40%

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 Illustrations on computation of income from Business
1. Shri Pandith, the proprietor of a flour mill, has prepared the following P/L A/C for the
year ended 31 March, 2024. You are required to compute his income from business
and gross total income for the AY 2024-25
To Opening stock 90,000 Sales 18,00,000
“ Purchases 9,00,000 Rent of property 48,000
Dividend from an Indian
“ wages 1,00,000 6,000
co
Audit fees 8,000 Closing stock 1,26,000
Repairs (House property) 10,000
General expenses 7,500
Commission for raising loan 3,000
Bad debts reserve 2,500
Bad debts 12,000
Interest on capital 13,000
Household expenses 22,500
Provision for income tax 10,500
Depreciation on business assets 2,500
Donation to HPS COLLEGE 5,000
Life insurance premium paid 23,000
Interest on bank loan 18,000
Net profit 7,52,000
19,80,000 19,80,000

2. Mr . Om is a cloth merchant. From the following P/L A/C for the year ended
31 March, 2024. Compute his income from business and his GTI for the AY 2024-25

Salaries and wages 15,000 Gross profit 2,70,000

Rent and taxes 4,000 Dividend on shares (gross) 4,000
Domestic expenses 2,500 Rent from building let out 10,000
Income tax 1,200
Postal charges 1,500
Donation 2,500
Life insurance premium 2,000
Audit fees 1,500
Bad debts reserve 1,800
Bad debts 2,500
Deprecation 5,000
Net profit 2,44,500
2,84,000 2,84,000

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Other information:
1) Rent and taxes include Rs 2,000 paid as municipal tax on building let out.
2) Value of life insurance policy is Rs 18,000.
3) Donation was given to an approved institution.
4) Permissible deprecation was Rs 4,000.

3. The following is the P/L A/C of Mr. X for the year ended 31 March, 2024. Compute
his taxable income from business for that year.
Salaries and wages 25,000 Gross profit 90,000
Rent 6,000 Commission 3,000
Bad debts recovered
Interest on capital 3,000 (previously allowed) 1,500
General expenses 10,000 Interest on debentures 3,500
Advance income tax 1,000 Interest on PO SB A/C 1,000
Drawings 4,000 Discount 1,000
Bad debts 2,000
Loss by embezzlement 1,500
Depreciation 2,500
Municipal tax paid 2,000
Provision for bad debts 3,000
Net profit 40,000
1,00,000 1,00,000
Further information are available:
a) The amount of depreciation allowable is Rs 1,000
b) Municipal tax is in relation to his residence house
c) General expenses include Rs 3,000 paid as fine for adulteration

4. From the P/L account for the relevant AY, compute income from business of Mr.
Babu
Salaries 88,000 gross profit 3,80,000
Rent 42,000 sundry receipts 20,000
General expenses 20,000 dividends 40,000
advertisement expenses 25,000 commission 30,000
legal expenses 15,000 Bad debts recovered 10,000
sales tax 10,000 (earlier allowed)
wealth tax 20,000 rent of building let out 44,000
telephone expenses 12,000
gratuity paid 30,000
provision for bad debts 10,000
advance income tax 20,000
depreciation 38,000

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 office expenses 12,000
municipal taxes of
property
let out 10,000
contribution to employees
PF 6,000
Net profit 1,66,000
5,24,000 5,24,000

Other information: 1. Legal expenses were found to have been incurred for the registration of
a business asset.
2. 50% of the business premises were used for residential purposes
3. Gen. exp. Include a donation of Rs 10,000 CM’S Relief fund
4. Allowable depreciation as per IT rules Rs 46,000

5. From the following details compute income from business of Mr. Keshava for the AY
2024-25
Profit and Loss account for the year ended 31.03.2024
To Rent 58,000 By Gross profit 10,16,800
" personal expenses 34,600 " interest on securities 1,00,000
" discount 9,000 " dividend 8,000
" office expenses 96,000 " rent from H.P 1,08,000
" general expenses 15,000
" Commission 30,000
" bad debts reserve 24,000
" postage 5,400
" legal charges 9,000
" advertisement 31,000
" gift to employees 3,000
" fire insurance 7,200
" G.S.T paid 29,000
" repairs (house property) 9,600
" loss on sale of car 36,000
" LIC premium 35,800
" wealth tax 14,800
" interest on capital 7,000
" excise duty 6,000
" interest on bank loan 27,600
" depreciation provision 50,000
" income tax paid 78,000
Net profit 6,16,800
12,32,800 12,32,800
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Other information:
1. Actual bad debts written off Rs. 10,000
2. Depreciation as per IT rules Rs 34,000
3. Legal charges are for protection of trade mark
4. He carries his business from rented premises half of which is used as his residence.

6. Sri Ratanlal is a cloth merchant from the following Trading P & L account for the
year ending 31.03.2024. Compute his income from business.

Particulars Amount Particulars Amount

To opening stock 1,10,000 By sales 6,74,000
" purchases 2,05,000 " Closing stock 1,50,000
" wages 20,000
" Gross profit C/D 4,89,000
8,24,000 8,24,000
To office salaries 34,000 By Gross profit c/d 4,89,000
" proprietor’s salary 50,000 " dividend on shares 17,000
" interest on capital 28,000 " profit on sale of car 35,000
" general expenses 47,000 " Bad debts recovered
" office stationery 12,000 (allowed earlier) 5,000
" advertisement 61,000 " interest on securities 3,500
" depreciation 20,000 " income from house
" provision for bad debts 9,000 property (let out) 25,000
" income tax 17,000
" audit fees 12,000
" donation to school 7,000
" car expenses 26,000
" LIC premium (self) 50,000
" Bad debts 5,000
" office electricity 3,000
" discount allowed 1,000
" Net profit 1,92,500
5,74,500 5,74,500

Additional information:
1. General expenses include:
a. Rs 12,500 as compensation paid to an accountant who had been removed from
service in the interest of business.
b. Rs 25,000 spent for laying electric cable for generator (disallowable)
2. Depreciation allowable under the rules is Rs 23,000
3. Car expenses includes Rs 12,000 for personal purpose
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 4. Office salary includes:
i. Travelling expenses for personal purpose Rs 14,000
ii. Gift to daughter on her birthday Rs 5,000.

7. Following is the profit and loss account of Sri Prakash during the previous year 2023-
24.
Profit and Loss account
To salaries 1,20,000 By Gross profit c/d 4,00,000
" trade expenses 40,000 " income from agency business 50,000
" rent 60,000 " Bad debts recovered
" house hold expenses 50,000 (previously not allowed) 6,000
" interest on loan 30,000 " rent form property 84,000
" dividend from Indian
" advertisement 20,000 company 10,000
" interest on capital 16,000 " lottery prize (gross) 20,000
" sales tax paid 30,000 " profit on sale of security
" income tax paid 24,000 (short term) 30,000
" audit fees 10,000
" donation to NDF 20,000
" LIC premium 20,000
" medical insurance
premium 10,000
" depreciation 8,000
" municipal tax 6,000
" Net profit 1,36,000
6,00,000 6,00,000

Additional information:
1. Bank loan was taken to construct let out house and municipal tax paid relate to this
house property.
2. Depreciation as per IT rules Rs 5,000.

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 Problems on Profession

1. Dr.Satish is a medical practitioner. He gives the following summary of cash book for
the year ending 31.03.2024.
Balance b/d 10,000 Rent of clinic 18,000
Consultation fee 60,000 Purchase of medicine 38,000
Visiting fee 45,000 Staff salaries 24,000
Gifts and present 8,000 Surgical equipment 40,000
Sale of medicine 42,000 motor car expenses 8,000
Dividend from UTI 6,000 Motor car purchased 1,40,000
Life insurance maturity 1,00,000 Household expenses 7,000
Interest from National Closing balance 2,000
defence bonds 6,000
2,77,000 2,77,000

Other information:
1) 50% of the motor car expenses incurred in connection with profession. Car was
purchased in Dec 2023.
2) Household expenses include Rs 6,800 for life insurance premium.
3) Gifts and present include Rs 3,000 from relations.
4) Closing stock of medicine Rs 12,000 and on 1.04.2023 opening stock was Rs 4,000.
Compute his professional gain for AY 2024-25.

2. Mr. Gangadhar is a chartered account in bengaluru. He has submitted the following

Income and expenditure account for the previous year 2023-24
To office rent 50,000 By Audit fees 2,00,000
" salary to staff 85,000 " dividend from UTI 20,000
" income from other accounting
" car purchased 50,000 work 15,000
" car expenses 18,000 " tax consultancy fees 50,000
" subscription to journals 14,000 " rent from house property 20,000
" telephone expenses 15,000
" drawings 10,000
" CA institute membership
fees 5,000
" LIP of Gangadhar 8,000
" Net profit (surplus) 50,000
3,05,000 3,05,000
Other information:
1. 1/3 of car expenses are in respect of his personal use
2. Depreciation allowable on car is @ 15%
3. Telephone charges include Rs 5,000 relating to his residential house.
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 3. Sri Virendra is a chartered accountant. He also runs a private accountancy coaching
centre at Chitrdurga. His summarised cash account for the PY ended on 31st March
2024.
To Balance b/d 13,000 By office expenses 31,000
" income from accounting " membership fees to CA
work 1,25,400 institute 3,000
" audit fees 2,14,700 " motor car purchased 1,80,000
" coaching institute fees 10,700 " LIC premium 21,000
" withdrawal from PPF 50,000 " car expenses 9,600
" interest on investments 18,000 " income tax 23,340
" agricultural income 10,000 " Miscellaneous expenses 43,500
" rent from let out house 48,000 " Balance b/d 1,78,360
4,89,800 4,89,800

Compute his income from profession for the AY 2024-25 after considering the following;
a. One – third of motor car expenses are in respect of his professional practice.
b. Depreciation @ 15% for motor car is Rs 27,000
c. Miscellaneous expenses include Rs 6,000 paid as stipend to trainees and balances are
his personal expenses.
d. He purchased a computer on 30.11.2023 for Rs 54,000 and for this he took a loan of
Rs 50,000 @ 15% p.a. the computer is subjected to depreciation @ 60%.

4. The following is the Receipts and Payments account of Dr. Kiran for the year ended
31.03.2024.

To balance b/d 1,10,000 By rent of clinic 15,000

" visiting fees 1,65,000 " staff salary 80,000
" consultation fees 1,65,000 " electricity and water 9,000
" sale of medicines 25,000 " purchase of medical books 4,000
" operation theatre rent 1,15,000 (annual publications)
" interest 20,000 " purchase of surgical equipments 30,000
" motor car expenses 15,000
" medical association membership
fees 5,000
" audit fees 25,000
" deepavali expenses 3,000
" entertainment expenses 10,000
" medicines purchased 30,000
" balance c/d 3,74,000
6,00,000 6,00,000

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Other information:
i. A cash payment of Rs 5,000 was given to him by a patient in appreciation of his
medical services but was not included in the books of accounts.
ii. One – third of car expenses related to private use. Depreciation on car for
professional use was Rs 6,000.
iii. Rate of depreciation on surgical equipments is 15%. The WDV of the equipments
brought forward from earlier year was Rs 23,000. He sold equipments for Rs 8,000
during the current year.
iv. Interest income includes income from mutual funds Rs 11,000 (gross)
v. His taxable income from House property was Rs 5,00,000.
Compute his Income from profession and Gross total income for the AY 2024-25

5. Smt Saroja is a registered medical practitioner. She keeps her books on cash basis and
her summarized cash account for the year ended 31st March 2024 is as under

balance b/d 1,22,000 cost of medicine 2,00,000

loan from bank for
private surgical equipment 40,000
purposes 3,00,000 motor car purchased 5,20,000
sale of medicines 2,52,250 car expenses 60,000
consultation fees 2,00,000 salaries 40,000
visiting fee 3,50,000 rent of dispensery 16,000
interest on government general expenses 3,000
securities 45,000 personal expenses 1,18,000
rent from HP 75,000 LIC premium 60,000
interest on bank loan 24,000
insurance of H.P 2,000
balance c/d 2,61,250
13,44,250 13,44,250

Compute her income from profession for the AY 2024-25 after considering the following
information.
a. 1/3rd motor car expenses are in respect of personal use
b. Depreciation allowable car is 20% and on surgical equipment is 25%

6. Following are the details of Mr. Jayanaik who is a civil engineer of the previous year
ending 31.03.2019.
Receipts and Payments accounts for the year ending 31.03.2024.

To cash in hand 10,000 By cost of new telephone 2,000

" building plan and blue 2,20,000 " office rent 12,000
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 printing charges
" office expense 20,000
" building valuation fee 30,000 " purchase of computer 40,000
" site visiting fees 16,000 " installed an engineering
" interest on bank deposits 14,000 software 10,000
" winning from lottery 50,000 " salary 30,000
" gifts 10,000 " car expenses 14,000
" donations 12,000
" municipal tax on house
property (SOP) 2,000
" marriage expenses 10,000
" cash in hand 1,98,000
3,50,000 3,50,000

Additional Information:
a. Depreciation on car Rs 18,000 and on computer Rs 5,000
b. Half of the car expenses related to personal use.
c. Donations are paid to approve charitable institutions.
d. Gifts include Rs 4,000 from clients and Rs 6,000 from relatives on the occasion of
Gruha pravesh.
Compute his income from profession for the AY 2024-25

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