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Profit & Gains from Business and Profession (PGBP), Profits or gains earned from a business, profession or vocation by an assessee are chargeable to, income tax under this head., Business – ‘Business' includes any trade, commerce or manufacture., Profession - Profession refers to all such activities which necessitates intellectual skill or physical, ability e.g. the activities of a Doctor, Advocate, Accountant, Engineer, Surgeon, Income Tax Advisor, etc., Vocation - Vocation includes all such activities which are performed for earning livelihood e.g., brokering, music, dancing etc., , Taxable Incomes under the head 'Income from Business or Profession', 1. The profits and gains of any business or profession which was carried on by the assessee at any, time during the previous year., 2. Amount received as compensation for termination of or modification in terms & condition of –, a. Right to manage affairs of a company., b. Agency (in India)., c. Any contract relating to business., 3. Profits on sale of a licence granted to an exporter., 4. Cash assistance received or receivable by any person against exports under any scheme of the, Government of India., 5. Any duty of customs or excise repaid or re-payable to any person against exports., 6. Any profit arising to an exporter on the transfer of the Duty Entitlement Pass Book Scheme., 7. Any profit arising to an exporter on the transfer of the Duty Free Replenishment Certificate., 8. value of any benefit or perquisite arising from business or exercise of a profession., 9. Any interest, salary, bonus or commission or remuneration due to or received by a partner, of a firm from such firm., Note: Share of partner in the profits of the firm is exempt., 10. Any amount received or receivable under following agreement –, a. for not carrying out any activity in relation to any business or profession; or, b. for not sharing any know-how, patent, copyright, trade-mark, licence, information or, technique likely to assist in the manufacture or processing of goods or provision for services., Note: these sums are taxable for the recipient but it is not deductible for the person making, such payment., 11. Where an assessee uses his house property for such business or profession, the annual value, of such house property is chargeable to tax under the head 'Income from business or profession., a. If any part of the house is let to an employee whose residence thereon is beneficial for the, smooth conduct of the business, the rent received from such employee shall be deemed to be, the income of the business or profession., COMPILED BY: VAIBHAV JAIN, , 20

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b. If any part of the house, for the purpose of carrying on the business efficiently and smoothly, is provided to the Government for establishing a branch of Nationalised Bank, Post Office,, Police Station, Central Excise Office or Railway staff quarters, the income of such house, property shall be taxable as income from business or profession., 12. No income can be exempted from tax on account of its illegality. Therefore profits of smuggling, business or profits on sale of prohibited wine or on sale of goods received as a result of theft , are, taxable under this head., 13. Any sum received under a Keyman Insurance Policy including bonus., 14. The fair market value of inventory as on the date on which it is converted or treated as, a capital, asset., 15. Profits from speculation business., Note: speculative business shall be deemed to be distinct and separate from any other business., , General principles for charging tax on the Profits of Business or profession, 1. Tax is assessed on that person who is carrying the business, whether he may be the owner or, not., 2. If the beneficial owner of the business (actual receiver of profits) is different from its legal, owner, the beneficial owner shall be charged to tax on the profits of the business., 3. it is necessary that business is carried on at any time during the previous year. It is not, necessary to carry on business throughout the year., 4. If an assessee carries on several businesses, first taxable income of each of the business is, computed separately and then tax is charged on the aggregate income of all these businesses, and professions taken together., 5. The profits and gains of speculation business are kept separate from the profits of other, business., 6. Profits arising on the sale of assets (except stock) are not charged to tax under this head., 7. Only the profits actually derived in the previous year are charged to tax., , System of Accounting, 1. Cash system –, i. In this system only cash transactions are accounted for., ii. All those incomes, actually received in the previous year are accounted for whether they, may pertain to preceding or succeeding previous year., iii. Similarly, all expenses paid in cash are accounted for whether they pertain to any previous, year., iv. This system is generally followed by professionals e.g. Doctor, Advocate and non-business, organisations e.g. club etc., v. At the end of the year Receipts and Payments Account is prepared., vi. No consideration is given to accrued incomes or unpaid expenses in this system., COMPILED BY: VAIBHAV JAIN, , 21

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2. Mercantile system –, i. All the incomes are accounted for in the profit and loss account whether they have been, actually received or not in the previous year., ii. Similarly, all the expenses are accounted for whether they have been actually paid or not, in the previous year., iii. Adjustments of advance receipt of income and pre-paid expenses are also made., , Computation of Taxable Profits, Under Income Tax expenses and payments of any business or profession can be classified in the, following 4 categories:, 1. Expenses expressly allowed, 2. Expenses allowable on the basis of general commercial principles., 3. Expenses expressly disallowed., 4. Expenses disallowed under certain circumstances, , Expenses Expressly Allowed, 1. Rent, Rates & Municipal Tax, Current repairs and Insurance premium in respect of building., 2. Rent, Current repairs and Insurance premium in respect of Furniture & Fittings and Plant &, Machinery., 3. Depreciation in respect of Building, Furniture & Fittings, Plant & Machinery and Intangible, assets., Note: if an asset is used partly for business purpose and partially for personal purpose than, expensed mentioned in points 1,2 & 3 shall be allowed in the same proportion in which asset is, used for business purpose., 4. Expenditure on scientific research, i. scientific research work carried on by assessee himself (in-house), relating to his, business, Expenses incurred w/i 3, years prior to the date of, commencement of business, , Revenue Expense, , Capital Expense, Land – Not Allowed, Other expenses, 100% Deduction, , Expenses incurred after, commencement of business, , –, , Salary (excluding perquisites), and Material – 100%, Deduction, , Capital Expense, , Revenue Expense, , Land – Not Allowed, Other expenses, 100% Deduction, , 100% Deduction, , –, , Other expenses – Not allowed, COMPILED BY: VAIBHAV JAIN, , 22

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ii. Donation is given to outside institution for scientific research – 100% deduction, i. Approved research institution, college, university., ii. IIT, National laboratory, iii. Approved Indian company, company engaged in R&D, 5. Expenditure for obtaining right to use spectrum for tele-communication services – in equal, instalments over the life of spectrum, i. If amount paid before commencement of business – from the year of commencement of, business., ii., If amount paid after commencement of business – from the year of payment., 6. Expenditure for obtaining license to operate tele-communication services – in equal instalments, over the life of license, i. If amount paid before commencement of business – from the year of commencement of, business., ii. If amount paid after commencement of business – from the year of payment., 7. Expenditure (except land and building) on notified agriculture extension project – 100%, deduction., 8. Expenditure incurred by companies on notified skill development project – 100% deduction., 9. Preliminary expenses incurred by resident assessee – total amount shall be allowed in 5 equal, instalments., 10. Expenditure on voluntary retirement scheme - total amount shall be allowed in 5 equal, instalments., 11. Expenditure incurred on prospecting for or extraction or production of any mineral or on, development of a mine - total amount shall be allowed in 10 equal instalments starting from the, p/y in which commercial production begins., 12. Insurance premium for stock and stores., 13. Insurance premium for health of employees., 14. Interest paid on borrowed capital – if loan is taken for purchasing asset, interest for the period, from the date of taking loan till the date asset put to use shall be added to cost of such asset., 15. Bonus or commission paid to employees., 16. Employer’s contribution for the welfare of employees (paid) –, i. Statutory provident fund, ii. Recognised provident fund, iii. Approved super annuation fund, iv. Approved gratuity fund, 17. Employer’s contribution towards pension scheme u/s 80CCD (paid) – deduction shall be lower, of, i. Actual contribution, or, ii. 10% of salary [basic + DA (if)], 18. Employee’s contribution towards welfare fund – first shall be added to business income of, employer and then deduction shall be allowed if such amount is deposited in respective fund upto, due date of ITR., 19. Animal used in business (other than stock in trade) –, COMPILED BY: VAIBHAV JAIN, , 23

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i., , Deduction shall be allowed in the p/y in which animal dies or become permanently, useless., ii. Deduction = cost – scrap value., 20. Bad debt (relating to sales) debited to P&L A/c (written off) – even debtor is relating to earlier, years., 21. Expenses on promotion of family planning (by company) among employees –, i. Revenue expense – 100% deduction, ii. Capital expense – in 5 equal instalments, 22. Security transaction tax / Commodity transaction tax – allowable only if assessee is in the, business of purchase and sale of shares / commodities., , Expenses allowable on the basis of General Commercial Principles, Allowable, Expenses incurred wholly and exclusively for, the purpose of business or profession., E.g., cost of goods, salary to employee,, electricity charges,, , Disallowable, Owner’s personal expenses, E.g., LIC premium, Income Tax, Wealth Tax, Expenses not incurred wholly and exclusively, for the purpose of business or profession., E.g., Gift, Donation, Charity, Expense, revenue, in, nature. Expenses, capital, in, nature., E.g., carriage inward, sales commission, E.g., Goods used in manufacturing of capital, asset, asset written off, loss of asset by fire etc., Legal expenses, Illegal expenses., E.g., Legal expense to avoid penalty in case of E.g., Bribes, legal expense to fight case to, breach of contract,, avoid penalty imposed for breach of Law, (smuggling), , COMPILED BY: VAIBHAV JAIN, , 24