PROFITS AND GAINS FROM BUSINESS OR PROFESSION
1) Anticipated hedging loss under a contract to purchase raw material.
2) Non-recovery of a bill due to negligence of an employee.
3) Initial expenditure incurred on installation of fluorescent tube lights.
4) Non-recovery of advance allowed to 100% subsidiary company engaged in the business of financing
subsidiary companies.
5) Consultation fees paid to tax advisor.
6) Lump sum payment made to acquire a licence regarding technical information to reduce the production cost.
7) Payment made to catering agency for providing food/beverages to employees, working in overtime @ Rs 75
per employee for 20 days.
8) Subsidy received from the government to compensate the loss suffered in exports under government
sponsored scheme, has been directly credited to Capital Reserve A/c. The assessee claims it as exempt.
9) Compensation paid to an employee under voluntary retirement scheme which does not conform to the guide
lines under Sec. 10(10C).
10) Commission accrued during the year but not credited in books as it has been held back due to breach of
certain conditions, which may create liability to pay damages.
11) Rent of quarters, located near factory, let out to the employees of the factory, was treated as income from
house property.
12) Fees of Rs 30,000 were paid by the company to a lawyer to defend the company in a court case. Lawyer is the
brother of the director of the company. The fees have been paid by a bearer cheque and it is found excessive
to the extent of Rs 20,000.
13) Employees contribution to the recognised provident fund, Rs 60,000 has been charged to the profit and loss
account but only Rs 25,000 was credited to their accounts on due date and the balance was credited to their
account on the due date fixed for furnishing return of income for the relevant previous year.
14) Bonus/commission to employees was paid: (a) during the previous year; or (b) after the previous year but
on or before the due date of return of income for that year, or (c) after the due date the return of income for
that previous year.
15) Salary has been paid to a resident employee outside
been paid thereon or deducted therefrom.
16) Advertisement expanses incurred outside
17) Municipal taxes and land revenue in respect of staff quarters were paid after due date of furnishing return of
income for the relevant previous year.
18) Foreign tour expanses of the managing director for 10 days. However, 2 days were devoted to personal work.
19) Advertisement in a journal published by political party.
20) 600 VIP brief cases, costing Rs.1,500 each, presented to customers.
21) Voluntary payment of gratuity paid an account of commercial expediency to an employee who died on
business tour.
22) Traveling expenses to explore the feasibility of new line of business.
23) Annual payments in installments over a period of 10 years to seek assistance in technical know-how for
improving quality of product.
24) Expenses incurred for registration of trademarks.
25) Employees were issued shares at par to protect business interest. Difference of market price and par value
was charged as revenue expenditure.
26) Expenditure incurred on neon-sign board for the business premises.
27) Theft of stock-in-trade assuming (a) it is insured (b) it was uninsured
28) Expenditure incurred for new telephone connection.
29) Purchase of sanitary and pipeline for factory
30) Legal charges incurred for framing the scheme of amalgamation of C company with the assessee company.
31) Compensation paid to cancel the purchase order of a machine due to abnormal rise in its price. The assessee
claims it as trading loss, or capital loss.
32) Confiscation of goods, imported without a valid import licence. The assessee was also fined by custom
authorities. The assessee claims deduction for both of them under general deductions Sec. 37(1).
33) The assessee claims the set-off unabsorbed depreciation of a discontinued business against the profits of
another business.
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Solution:
1) Anticipated hedging loss under a forward contract is not allowed to be deducted.
2) Loss caused due to negligence of employee is allowed to be deducted.
3) Initial expenditure on installation of fluorescent tube lights is a capital expenditure, not deductible [Sec.
37(1)].
4) As the business of 100% subsidiary is to finance subsidiary company, loss on account of non-recovery of such
advances relates carrying on business. Such loss is an allowable deduction.
5) Consultation fee paid to tax-advisor is allowed under Sec. 37(1).
6) Payment made to acquire licence regarding technical information is a capital expenditure. Depreciation is allowed
under Sec. 32 on such cost.
7) Payment made to catering agency to provide food/beverages to employees is allowed under Sec. 37(1). However
, the employer becomes liable to pay Fringe Benefit Tax.
8) Subsidy granted by government against loss suffered by exporters under government-sponsored scheme, is a
trading receipt. Recovery of loss is taxable under Sec. 41(1).
9) Compensation paid under voluntary retirement scheme is allowed to be deducted in five equal annual
instalments [Sec. 35DDA]. Scheme of voluntary retirement need not be in accordance with the guidelines of
Sec. 10(10C).
10) Commission accrued during the year is taxable under mercantile system. Liability to pay damages for breach
of certain conditions is a contingent liability. No deduction can be allowed for such provision.
11) Rent from quarters, let out to employees, is a business income provided the letting is subservient and
incidental to the main business.
12) Payment made by a company to the brother of the director of the company, is covered under Sec. 40A(2).
Therefore, excessive fees of Rs 20,000 have to be disallowed. Provisions of Sec. 40A(3) apply to the balance
payment since it has been made by bearer cheque. Accordingly, the balance of Rs.20,000 shall have to be
disallowed in computing taxable business profits, w.e.f. A.Y.2008-09.
13) Deduction is allowed for employees' contribution credited to their account on the due date under provident
fund rules. No deduction is allowed for such contribution credited to their account thereafter. Employees'
contribution, deducted from their salaries, is first treated as business income. If the same has not been
credited to their account, the same has to be treated business income first.
14) Bonus/commission paid to the employees during the previous year or paid after the previous year but before
the due date fixed for furnishing return of income for the previous year is allowed to be deducted in the same
previous year in which the liability to pay such bonus/commission arose. Any bonus/commission, paid to
employees after such due date, is allowed to be deducted in the previous year in which the date of payment
falls.
15) Salary paid to any person outside India (resident or non-resident) or salary paid to a non-resident in India is
not allowed to be deducted if tax has not been paid thereon nor deducted therefrom [Sec. 40(a)(iii)]. Thus, no
deduction is allowed in the instant case. It is operative from the assessment year 2004-2005.
16) Advertisement expenditure incurred in India or outside India is allowed to be deduction under Sec. 37(1) provided
it is not of capital nature and it is incurred wholly and exclusively for the purposes of business.
Permission of RBI is not relevant.
17) Deduction of municipal taxes and land revenue in respect of staff quarters, will be deducted in the previous
year in which the date of payment falls (Sec. 43B).
18) Proportionate foreign tour expenses of the director relating to personal work are not to be allowed; such
expenditure has not been incurred wholly and exclusively for the purposes of business. However, air fare
(both ways) will be fully allowed.
19) No deduction can be allowed for advertisement in the journals published by a political party [Sec. 37(2B)].
20) Presentation of VIP bags to customers is allowed as expenditure on advertisement under Sec. 37(1). There is
no ceiling limit for gift articles.
21) Voluntary payment of gratuity on account of commercial expediency is allowable deduction under Sec. 37(1).
22) Travelling expenditure for exploring new line of business is a capital expenditure. It is not allowed under Sec.
37(1). It may be capitalised for the purposes of Sec. 35D.
23) Annual instalment paid for technical know-how is a revenue expenditure. It is allowed under Sec. 37(1).
24) Expenses incurred for registration of trademark is a revenue expenditure. It is, therefore, allowed under Sec.
37(1).
25) Waiver of premium while issuing shares to employees, is not a trading transaction. It is not deductible.
26) Expenditure incurred on neon-sign board is a capital expenditure. It is not allowed in computing business income
[(Sec. 37(1)]. However, depreciation can be claimed on it @ 15%.
27) Loss of stock-in-trade due to theft is allowed under Sec. 29 as incidental to business. However, if it is insured
insurance compensation will be a trading receipt.
28) Expenditure on new telephone lines is allowed under Sec. 37(1). It is a revenue expenditure incurred for the
purposes of business.
29) Purchase of sanitary pipe-line is a capital expenditure, not allowable under Sec. 37(1). However, depreciation
is allowed under Sec. 32 @ 15%.
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30) Amalgamation expenses are allowed to be deducted in computing taxable profits under Sec. 35DD in five
equal annual instalments.
31) Compensation paid to cancel the purchase order of a machine, is a capital expenditure. It avoids futile investment
in machine. It cannot be deducted under Sec. 37(1). As there is no "transfer" of a capital asset,
compensation paid cannot be claimed is a capital loss also.
32) Explanation to Sec. 37(1) does not allow any illegal expense in computing taxable profit of business.
Therefore, fine imposed for illegal import cannot be allowed [Explanation to Sec. 37(1)]. However, loss by
way of the confiscation of goods can be allowed as incidental to business under Sec. 29.
33) Unabsorbed depreciation of a discontinued business now can be set-off against the profits of any other
business and thereafter against the income of any other head. It is operative from the assessment year 2001-
2002.
PROBLEMS
1. Mr Sudhir Sharma, resident in India, for the year ending on 31 March 2008. Compute his income from business and
his gross total income for the assessment year 2008-2009.
Profit & Loss Account for the year ended 31.3.08
Expenditure Rs Receipts Rs
To purchases
To salaries and wages
To trade expenses
To purchase of trademarks
To registration of trademarks
To rent, rates and taxes
To discount allowed
To household expenses
To advertisement bill paid in cash
To income tax
To sales tax paid
To purchased technical know-how
To expenses incurred on income tax and
sales tax proceedings
To contribution paid to a trust for staff
welfare
To staff welfare expenses incurred
To OYT deposit
To postage and telegrams
To donation to National Defence Fund
To life insurance premium on the life of the
assessee
To interest on capital
To interest on loan taken to pay income tax
To wealth tax
To audit fee
To entertainment expenditure
To gifts and present to five customers,
costing Rs 3,000 each
To expenses on apprentice training
To emergency risk insurance
To fire insurance premium for stock
To provision for bad and doubtful debts
To reserve for pecuniary losses
To net profit
Total
1,90,000
1,40,000
1,000
50,000
2,000
5,000
1,500
6,000
30,000
10,000
3,000
12,000
15,100
1,000
700
5,000
1300
2,500
2,000
5,000
500
500
1,000
30,000
15,000
4,000
200
200
3,000
5,000
76,000
6,18,700
By sales less returns
By bad debts recovered, allowed
in earlier
years by the Assessing Officer
By interest on securities (gross)
By dharmada, mandir and
gaushala receipts
By refund on income tax
By proceeds of life insurance
policy on maturity
5,69,300
2,000
892
2,000
1,008
43,500
6,18,700
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Computation of Gross Total Income for the Assessment Year 2008-2009
Particulars Rs Rs
Income from Business
Net profit as per profit and loss account
Add: Expenses inadmissible in computing profits and gains from
business or profession:
Purchase of trademarks
Household expenses [Sec. 37(1)]
Advertisement bills paid in cash [Sec. 37(1) r.w. Sec. 40A(3)]
Income tax [Sec. 40(a)(ii)]
Purchase of technical know-how
Contribution to a Trust for staff welfare fund [Sec. 40A(9)]
Donation for National Fund [Sec. 37(1)]
Life Insurance premium [Sec. 37(1)]
Interest on capital [Sec. 36(1)(iii)]
Interest on loan to pay income tax [Sec. 37(1) r.w. 40{a)(ii)]
Wealth tax [Sec. 40(a)(iii)]
Provision for bad and doubtful debts [Sec. 37(1) r.w. 36(1)(vii)(2)]
Reserve for pecuniary losses [Sec. 37(1)]
Less:
(a) Income not relating to business or profession: [Sec. 28(i)]
Interest on government securities
(b) Dharada, mandir and gaushala receipts
(c) Refund of income tax
(d) Proceeds of L.I.P.: It is not a business receipt and exempt [Sec.
10(100}]
(e) Depreciation on trademarks; 25% of Rs 50,000
(f) Depreciation on know-how: 25% of 12,000
Income from business
Statement of Gross Total Income for the Assessment Year 2008-2009
1. Income from business
2. Income from other sources— Interest on securities
Gross total income
50,000
2,500
30,000
10,000
12,000
1,000
2,500
2,000
5,000
500
500
2,000
6,000
1,24,000
892
2,000
1,008
43,500
12,500
3,000
76,000
1,24,000
2,00,000
59,400
1,40,600
1,40,600
892
1,41,492
Note :
1) Bad debts deducted in earlier years and now recovered, has been rightly included in the profit and loss
account as business income [Sec. 41(4)].
2) Since payment of income tax is not deductible, its refund cannot be taxed as deemed profits [Sec. 41(1)].
3) OYT (own your telephone) deposit is an allowable deduction in the year in which it is paid.
4) "Dharmada", "mandir" and "gaushala" receipts are customarily levies by trader for charitable purposes.
Amount received under these heads are not trading receipts. The fact that the amount collected under these
heads are spent for other purposes would amount to breach of trust but it would not affect the initial nature
and
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character of the receipt. Such receipts are not taxable
5) The assessee is entitled to the deduction in respect of donation to National Defence Fund under Sec. 80G.
6) Life insurance paid by assessee on his life is allowed to be deducted in imputing total income under Sec. 80C.
7) Any payment on advertisement exceeding Rs. 20,000 should be made by on account payee cheque or account
payee bank draft. Since the payment has been made in cash, 20% of advertisement has been disallowed
[Sec. 37(1) r.w. Sec. 40A(3)]. 'Crossed cheque' requirement has been amended by 'account payee' cheque. It
is operative from 13-07-2006.
8) From the assessment year 1999-2000, intangible assets also fall within the scheme of depreciation. Hence,
depreciation has been allowed on trademarks and know-how.
9) Registration expense of trademarks is revenue expenditure, allowed under Sec. 37(1).
2. Dr L.Kochagaway is a renowned medical practitioner. He furnishes his receipts and payments account for the
financial year 2007-2008:
Receipts Rs. Expenditure Rs.
To balance b/d
To consultation fees:
2005-2006 25,000
2006-2007 1,80,000
2007-2008 2,62,000
To visiting fees
To loan from bank for
professional purposes
To sale of medicines
To gift/presents from patients
To remuneration from articles
published in professional
magazines
To rent from house property
To interest on Post Office
National Savings Certificates
35,000
4,67,000
1,30,000
2,25,000
1,73,000
15,000
26,000
96,000
17,000
By rent of clinics:
2004-2005 13,600
2005-2006 44,800
2006-2007 26,600
By electricity and water
By purchase of professional
books
By household expenses
By municipal taxes paid in
respect of property
By purchase of motor car
By Telephone Charges
By fire insurance in respect of
property
By surgical equipment
By advance income tax
By salary and perquisite to
compounder
By entertainment expenses
By purchase of X-ray machine
By expenses of income-tax
proceedings
By life insurance premium
By gifts to wife
By interest on loan
By loan a/c—instalment paid
By donation to Political Party
By car expenses
By purchase of medicines
By balance c/d
85,000
12,000
18,000
97,800
12,000
2,45,000
10,000
3,200
44,700
43,000
72,000
16,000
2,00,000
15,000
25,000
25,000
12,000
25,000
2,500
36,000
1,05,000
79,800
11,84,000 11,84,000
Compute his income from profession and gross total income for the assessment year 2008-2009 after
taking into account the following additional information:
1. One-third of the car expenses are in connection with personal use.
2. Depreciation on motor car is allowed at the rate of 15%.
3. The construction of the house property was completed in March 2004. It was let out for residential purposes.
4. Expenses on income tax proceeding include Rs 1,000 paid for the preparation of return of income.
5. Receipts outstanding from patients for 2007-2008, amount to Rs 8,000.
6. Closing stock of medicines is Rs 8,000 but its current market price is Rs 12,000.
7. Books purchased include annual publications of Rs 12,000, purchased in December 2007.
Solution (a) Computation of income from profession for the assessment year 2008-2009:
Particulars Rs Rs
(a) Receipt from profession:
1.Consultation fees: [Sec. 28(i)]: (Rs 25,000 + Rs 1,80,000 + Rs 2,62,000)
2.Visiting fees [Sec. 28(i)]
3.Sale of medicines [Sec. 28(i)]
4,67,000
1,30,000
1,73,000
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4.Gifts and presents from patients [Sec. 28(iv)]
5.Remuneration from articles published in professional magazines
[Sec, 28(i)]
(b) Closing stock of medicines
Total receipts and closing stock
Less: Expenses allowable:
1) Rent of clinic [Sec. 30]
2) Electricity and water [Sec. 37(1)]
3) Salary of compounder [Sec. 37(1)]
4) Entertainment expenses [Sec. 37(1)]
5) Expenses on income-tax proceedings [Sec. 37(1)]
6) Interest on loan [Sec. 37(1)(iii)]
7) Purchase of medicines [Sec. 37(1)]
8) Car expenses [Sec. 37(1)] (2/3 x Rs 36,000 )
9) Depreciation on professional books:
• Annual publications: 12,000 x 100% x 50%
• Other books: 6,000 x 60%
10) Depreciation on car [Sec. 32 r.w. Sec. 38]: 15% of 2,45,000 x 2/3
11) Depreciation on plant and machinery:
(i) X-ray machine 2,00,000
(ii) Surgical equipment 44,700
Depreciation @ 15% of 2,44,700
12) Telephone Charges
Taxable profits from profession
(b) Computation of income
from house property:
Gross annual value on the basis of rental valuation
Less: Full municipal taxes paid by the owner
Net annual value
Less: Statutory deduction: 30% of net annual value
Income from house property
Gross total income
Less: Deduction u/s 80C (LIC premium paid)
Less: Deduction u/s 80GGC
Actual amount of donation to political party
Total Income
Total Income rounded off u/s 288A
15,000
26,000
8,11,000
85,000
12,000
72,000
16,000
15,000
12,000
1,05,000
12,000
6,000
3,600
24,500
36,705
10,000
96,000
12,000
84,000
25,200
58,800
8,11,000
8,000
8,19,000
4,09,805
4,09,195
58,800
4,67,995
25,000
2,500
4,40,495
4,40,490
Notes:
1. Purchase of motor car is capital expenditure. Hence, it is not deductible. Depreciation has been allowed on
motor car.
2. Plant includes books and surgical equipment. Depreciation on professional books is allowed @ 60% but
annual publications are written off @ 100%. However, as annual publications have been put to use for less than
180 days during the year, depreciation has been allowed @ 50%. The assessee can claim depreciation on surgical
equipment at general rate.
3. Contribution of articles to periodicals and magazines constitutes income from vocation of the assessee.
4. Expenses in income-tax proceedings are wholly deductible [Sec. 37(1)].
5. One-third of car expenses and proportionate deprecation in respect of motor car have been disallowed as
they are in connection with the personal use of the assessee.
6. Interest on Post Office National Saving Certificates is exempt from income tax [Sec. 10(15)].
7. Profits and gains of the business or profession are computed according to the method of the accounting regularly
followed by the assessee (Sec. 145). Since the assessee has adopted cash system of accounting. "Income" is
taxable on receipt basis and "expenditure" is allowed to be deducted on payment basis, irrespective of the previous
year to which the receipt of payment belongs. Receipts outstanding for the previous year 2007-2008 will not be
taken into consideration.
8. Profits and gains of business profession is required to be computed according to the system of accounting
regularly followed by the assessee but if the income cannot be properly deduced therefrom, the Assessing Officer
may compute the income on such basis and in such manner as he may deem fit [Proviso to Sec. 145(1)].
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7
In view of this, the Assessing Officer may take into account the value of closing stock while determining profits even
under cash system of accounting
9. Donation to Political Party is allowed to be deducted from gross total income under Sec. 80GGC.
3. The Profit and Loss Account of RAI & Co. for the previous year 2007-2008 is given as follows:
Particulars Rs Particulars Rs
Purchases of goods 10,00,000 Sale of goods 26,00,000
Salaries, bonus and commission 8,00,000 Closing stock 50,000
Rent, rates and taxes 60,000 Interest on drawings 7,000
Depreciation @ 16% on WDV 20,000 Interest on securities 20,000
Travelling expenses 1,50,000
Interest on capital 25,000
Advertisement 1,20,000
Entertainment expenses 60,000
Expenditure on neon-sign board 50,000
New telephone deposit under OYT
scheme
5,000
Compensation for cancelling purchase
order of an outdated machine
10,000
Expenses for promoting family planning
among employees 20,000
Net profit 3,57,000
26,77,000 26,77,000
Additional Information:
(i) Salaries, bonus and commission include: Rs
(a) Salary to the proprietor 1,50,000
(b) Bonus paid to employees on 31-10-2008 75,000
(c) Salary of Rs 1,20,000 was paid in
at source nor paid thereon. However, B is a PAN holder and has cleared his tax liability.
(d) Advertisement includes:
(i) a hoarding bill paid in cash , Rs.20,050
(ii) advertisement published in souvenir, published by a political party Rs.10,000
(e) Depreciation has been charged on plants and machinery and furniture and fittings in proportion of 3:2.
Depreciation @ 15% on plant and @10% on furniture.
(f) Purchases include goods of Rs.1,00,000, imported without a licence and confiscated by the customs authorities.
(g) Travelling expenses include a sum of Rs.1,00,000 on foreign travel to purchase a machine. Negotiations
have not been finalized.
(h) Annual stock taking revealed a theft of goods, costing Rs.30,000.
(i) This year stock valuation was deviated from the market price to cost price which is 20% less than its market price.
Compute taxable business profits for the Assessment year 2008-09.
Computation of Taxable Business Profits for the Assessment Year 2008-2009
Particulars Rs Rs
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Income from Business
Net profit as per profit and loss account
Add: Inadmissible Expenses
(a) Salary paid to Proprietor
(b) Bonus paid to employees: Deduction will be allowed in Previous
Year 2008-09 (Sec.43B, being disallowance of unpaid liability)
(c) Salary paid to non-resident employee, without deducting or
paying TDS[Sec.40(a)(iii)]
(d) Advertisement bills paid in cash [Sec. 37(1) r.w. Sec. 40A(3)]
(e) Advertisement in sourvenir published by political party
[Sec.37(2B)]
(f) Depreciation to be treated separately
(g) Expenses on family planning: allowable only to a company
assessee [Sec.36(1)(ix)]
(h) Foreign travel to acquire a new machine, ( being capital in
nature, deal not yet finalized. It may be added to the cost of the
asset when such asset is actually procured)
(i) Interest on capital [Sec. 36(1)(iii)] [There is no borrowings]
(j) Expenditure on neon sign board, being a capital expenditure on
advertisement, hence disallowed.
(k) Compensation paid to cancel a capital liability, capital in nature,
hence disallowed u/s 37(1)
(l) Under valuation of closing stock:[50,000/80% - 50,000]
Less: Expenses allowed:
Interest on Drawings
Depreciation u/s 32:
(a) Plant and machinery:
WDV on 01.04.4007 : 20,000 x 4/5 x 100/16 1,00,000
Add: Cost of neon-sign board 50,000
1,50,000
Less: Depreciation @15% 22,500
WDV as on 31.3.08 1,27,500
(b) Furniture and Fittings:
WDV on 01/04/07: 20,000 x 1/5x100/16 25,000
Less: Depreciation @10% 2,500
WDV on 31.3.2008 22,500
Less: Incomes credited to Profit and Loss A/c to be treated under
separate Head of Income
Interest on Government Securities
Taxable Business Profits
1,50,000
75,000
1,20,000
20,050
10,000
20,000
20,000
1,00,000
25,000
50,000
10,000
12,500
7,000
22,500
2,500
20,000
3,57,000
6,12,550
9,69,550
52,000
9,17,550
Note:
(1) Loss due to theft of stock-in-trade is allowable in computing business profits u/s 29. Such loss is incidental to
business operation. Since purchase of goods have already been debited to profit and loss account, no separate
adjustment is required.
(2) Loss in illegal business may be allowed u/s 29. Explanation to Sec.37(1) does not apply to Sec.29.
(3) Deposit for new telephone connection is allowable u/s 37(1). Hence, no adjustment is required.
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4. The Profit & Loss Account of Mr.Dipak Sinha for the previous year 2007-2008 is given below:
Particulars Rs Particulars Rs.
Cost of goods sold 16,00,000 Sales 34,70,000
Salaries wages 9,00,000 Rent of staff quarters 3,00,000
Rent of business premises, owned by 2,50,000
the assessee -2008 5,00,000
Repairs and renewals 1,40,000
Income tax paid 60,000
Excise duty paid 1,00,000
Sales tax payable 2,00,000
Legal expenses 3,00,000
Municipal taxes payable for staff quarters 10,000
Provision for bad debts 60,000
Contingency reserve 1,00,000
Employees contribution to recognised fund 50,000
Net profit 5,00,000
42,70,000 42,70,000
Additional Information:
(i) Salaries include:
(a)Rs 1,20,000 was paid outside
tax has been paid thereon,
(b)Rs 90,000 was paid in
paid thereon.
(ii) Excise duty of Rs 50,000 for the assessment year 2007-2008 was paid on 1 January 2008 but it was not
included in the profit and loss a/c.
(iii) Sales tax amounting Rs 1,30,000 was paid on 31 July 2008 and the balance was paid on 1 August 2008, the
due date of furnishing return of income is 31 July 2008.
(iv) Repairs/renewals include remodelling and renovation costing Rs.80,000.
(v) Legal expenses include:
(a) Lawyer fee of Rs 50,000 paid by bearer cheque to K, nephew of the proprietor. The Assessing Officer
disallowed a sum of Rs.10,000, being found in excess of the desired qualifications;
(b)Gift of Rs 1,20,000, made to wife, a tax-advisor, but disallowed by the A.O.
(vi) Employees contribution include:
(a)Rs 30,000 credited to their account on due date under Provident Fund rules,
(b)Rs 20,000 credited to their account in November 2008.
(vii) Commission receipts of Rs 2,00,000 have not been credited to the profit and loss account as their
recovery seems to be doubtful.
(viii) WDV of machinery on 01-04-2007 was Rs 6,50,000.
(ix) WDV of business premises and staff quarters as on 01-04-2007: Rs 10,00,000 and Rs 30,00,000, respectively.
Depreciation @ 10% on Business Premises and @ 5% on staff quarters.
Compute taxable profits for the previous year 2007-2008.
Computation of Business Profits for the Assessment Year 2008-09
Particulars Rs Rs
Net profit as per profits and loss a/c 5,00,000
Add: Inadmissible Expenses:
(i) Rent of business premises owned by the assessee (Sec. 30) 2,50,000
(ii) Remodelling and renovation, being repairs of capital nature 60,000
(iii) Income tax paid [Sec. 40(a)(ii)l 60,000
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(iv) Sales tax remaining unpaid up to due date of furnishing return of income 70,000
(v) Legal expense includes:
(a) Gift made to wife, Sec. 37(1) 1,00,000
(b) Fees paid to lawyer (being a relative) Sec. 40A(2) 10,000
(vi) Salaries paid outside
(vii) Salaries paid in
(viii) Municipal tax payable for staff quarters [Sec. 43B] 10,000
(ix) Provision for bad debts [Sec. 36] 60,000
(x) Contingency reserve [Sec. 37(1)] 1,00,000
(xi) Employees' contribution credited to their account after due date 20,000
(xii) Commission receipts which have accrued during the year but recovery
1,00,000
seems doubtful
(xiii) Employees' contribution not credited to--profit and loss a/c 50,000 10,30,000
15,30,000
Less: Inadmissible receipts/ admissible claims:
(i) Excise duty (Sec. 43B) 50,000
(iii)
(iv) Depreciation: (a) Staff quarters: 5% of 30,00,000
1,50,000
(b) Business Premises: 10% of 10,00,000 1,00,000 8,00,000
Taxable business profits 7,30,000
Note:
6,50,000 -Rs 1,00,000) under Sec. 50.
No capital loss, whether short-term or long term, can be set- off against any income. It is to be carried forward for
next 8 assessment years.
5. The firm of M/s Amal & Associates is engaged in the business of growing and manufacturing tea. The Profit &
Loss Account for the year, 2007-2008 is given as follows:
Particulars Rs Particulars Rs
Cost of growing and manufacturing tea 40,00,000 Sales 95,00,000
Salaries and wages 15,00,000 Stock 13,50,000
Advertising 5,00,000
Entertainment expenses 1,00,000
Travelling expenses 3,00,000
Fine and penalties 50,000
Cost of patent rights 6,00,000
Expenses on scientific research 6,00,000
General and sundry expenses 2,00,000
Net profit 30,00,000
1,08,50,000 1,08,50,000
You are further informed:
(i) Advertising includes payment of Rs 2,00,000 made to a political party for insertion of advertisement in
party's journal. The payment has been made by bearer cheque,
(ii) Travelling expenses include a visit of the director to UK for 10 days (including 2 days for travelling). Five
days were utilized for business purpose. Permission for foreign exchange was granted for Rs 50,000. Total
expenditure on the visit is Rs 1,00,000 (including air fare of Rs 40,000).
(iii) Expenses on scientific research include:
(a) Purchase of land Rs.1,50,000
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(b)Contribution to Agricultural Research Institute, New Delhi which is a
National Laboratory Rs.20,000.
(c)Contribution to Bhaba Atomic Research Centre (an approved research association)for
statistical research, which is not related to business Rs.30,000.
(iv) Refund of custom duty, deducted in the previous year, 2005-2006, amounting to Rs 50,000, has not been
credited to the profit and loss account.
(v) Sundry expenses include a contribution of Rs 60,000 to Kolkata Municipal Corporation for
undertaking a Drinking Water Project for slum-dwellers. The Project has been approved by
National Committee but KMC has not issued any certificate indicating the progress of the project.
(vi) A deposit of Rs 12,00,000 was made in instalments with National Bank for Agriculture and Rural
Development (a) Rs 4,00,000 in September 2007, (b) Rs 6,00,000 in July 2008 and (c) Rs 2,00,000
in December 2008. It has not been included in the profit and loss account. Date of submitting
return of income 30/09/2008.
(vii) (a) W.D.V. of machinery on 01-04-2007 (Rate of depreciation 15%) Rs.15,00,000
(b) Machinery purchased in December 2007 for scientific research Rs.5,00,000
(c) Purchase of five small drier machine, each costing Rs.10,000
(d) Sale price of an old machinery (Rate of depreciation 15%) Rs.6,00,000
(viii) Lump sum payment of Rs 5,00,000 was made to acquire a licence regarding technical information
to improve tea-flavour. It has not been charged to P/L a/c.
Compute the taxable business profits for the assessment year 2008-2009.
Computation of Business Profits for the Assessment Year 2008-2009
Particulars Rs Rs
Net profit
Add: Inadmissible Expenses:
1. Advertisement payment to a political party [Sec. 37(2B)]
2. Travelling outside India [Sec. 37(1)]. Proportionate expenses of
foreign travel, (excluding air fare) not relating to business: 60,000 x3/8
3. Fine and penalties
4. Cost of patent rights
5. Expenditure on scientific research (Sec. 35): Purchase of land
6. Contribution to Bombay Municipal Committee (Sec. 35 AC): Since the
Certificate indicating progress in the prescribed form has not been
issued, no deduction is allowed.
Add: Deemed profit: Refund of Customs Duty, deducted in earlier
years, not credited in the profit and loss a/c [Sec.41(1)]
Less: Admissible expenses:
Capital expenditure on scientific research [Sec.35(1)(iv)(2)]
Depreciation on Patent rights @ 25% of Rs.6,00,000
Depreciation on know-how: @ 25% of Rs.5,00,000
2,00,000
22,500
50,000
6,00,000
1,50,000
60,000
4,00,000
1,50,000
1,25,000
30,00,000
10,82,500
40,82,500
50,000
41,32,500
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Depreciation on Machinery:
WDV as on 01/04/2007: 15,00,000
Add: Purchase of driers 50,000
15,50,000
Less: Sale of Old Machinery 5,00,000
WDV as on 31/3/2008 10,50,000
Depreciation @ 15% on Rs.10,50,000
Weighted Deduction for scientific research:
(i) National Laboratory: @ 125% of Rs.20,000= Rs.25,000 –
Rs.20,000= Rs.5,000
(ii) Bhaba Atomic Research Laboratory: @ 125% of Rs.30,000=
Rs.37,500 – Rs.30,000 = Rs.7,500
Therefore, total deduction Rs.(5,000 + 7,500)
Composite Profits before making deduction u/s 33AB
Less: Deposit with NABARD (Sec.33AB)
Least of the followings:
(i) Deposit of Rs.10,00,000 (within the due date of submission
of return)
(ii) 40% of Business Profits: 40% of Rs.32,87,500 =
Rs.13.15,000
Composite Profits after deduction u/s 33AB
Apportionment of profits into agricultural income and business
income (As per Rule 8)[ since the assessee is engaged in the
business of growing and manufacturing tea:
40% of Rs.22,87,500
1,57,500
12,500
8,45,000
32,87,500
10,00,000
22,87,500
9,15,000
6. State whether the provisions or Sec. 41(1) of the Act can be applied to a case, where refund of excise duty
has been obtained by the assessee on the basis of a decision of the CEGAT and where the matter has been
taken up in further appeal to the Court by the Central Excise Department.
Solution This question has been answered by the Apex Court in Polyflex (India) Pvt. Ltd. v. CIT [2002] 257
ITR 343. (SC)
The refund of excise duty pursuant to the decision of the CEGAT would be subject to tax by virtue of Sec.
41(1) and it is not necessary that the revenue should await the verdict of a higher court.
7. In the course of an assessment proceeding, the Assessing Officer enhanced the value of the closing stock
and added the difference to the total income.
In the assessment year subsequent to this, the assessee wants the Assessing Officer to enhance, by the
same amount, the value of the opening stock of the year.
Discuss the validity of the claim.
Solution The value of the closing stock of the preceding year must be the value of the opening stock of the
succeeding year. Hence, if the value of closing stock at the end of a year is enhanced, the enhanced value
should be taken as the value of the opening stock of the next year for the purpose of income tax .
The claim of the assessee in this case is, therefore, valid.
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8. What would be your advice regarding admissibility of the following items of expenditure in computing
the business income:
(a) A donation of Rs 1 lakh made to a University for starting a laboratory for scientific research (i) relating to
the assessee's business, (ii) not relating to the assessee's business.
(b) Travelling expenses include a sum of Rs 15,000 incurred by a director in travelling abroad for negotiating
purchase of plant and purchase of plant and machinery.
(c) Amount payable as damages to Government on account of shortfall in export target.
(d) Overdraft from bank for payment of income tax: interest charged by the bank is Rs 20,000.
(e) Payment of interest of Rs 40,000 on monies borrowed from bank for payment of dividends to
shareholders.
(f) Rs 12,000 paid for shifting of business from the original site to the present place which is more
advantageously located.
(g) Retrenchment compensation of Rs 4 lakh paid to the workmen on the closure of one of the units.
(h) Fees paid to the Registrar of Companies for bringing about a change in the Memorandum and Articles
of Association in regard to issue of Equity.
Answers:
(a)The donation has been made to University to be used for scientific research for starting a laboratory. If the
University is approved for the purpose of Sec. 35(l)(ii), then irrespective of the consideration whether the scientific
research is related to assessee's business or not, deduction could beclaimed@125%ofamountpaid.Ifitisnot
approved, donation could not be claimed as a deduction underSec.35inthecomputationofbusinessincome.
However, the assessee could claim deduction from Gross Total Income under Sec. 80G, if the same is eligible.
(b)Travelling expenses incurred by the director for negotiating the purchase of plant and machinery is a capital
expenditure and hence to be disallowed.
(c )The payment is not for any infraction of law but for failure to reach a target undertaken by the company
being payment made wholly in the course of business, it is deductible.
(d)Interest on overdraft taken to pay income tax is not allowable under Sec. 36(1)(iii). Interest on
borrowings
(e)utilised for payment of dividend is allowable under Sec. 36(1)(iii).
(f)Shifting expenses of business premises resulting in an expenditure of enduring benefit is a capital expenditure
and is not allowable.
(g)Retrenchment compensation payable to workmen on the total closure of a business cannot be allowed as deduction
as the expenses are not incurred for the purpose of carrying on of its business. When, however, the tax-payer
closes one of its units and continues to carry on the same business as before, the compensation will be admissible
under Sec. 37(1).
(h)Fee paid to Registrar of Companies for bringing about change in memorandum and articles of association is a
capital expenditure, where it relates to issue of equity shares. Where alterations are warranted by the changes
made in the Companies Act, the expenses are allowable
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9. A company engaged in the manufacturing of fertilizer products, commenced its business on 01.04.2007.
During the financial years 2004-2005 to 2006-2007 it had incurred Rs 4.00 lakh annually as expenditure on
salaries and purchase of raw material for the purpose of research connected with its business. During the
previous year 2007-2008 incurred on scientific research, revenue expenditure of Rs 3.00 lakh and a capital
expenditure of Rs 4.50 lakh on purchase of plant and machinery. Since the result of the research was
unsuccessful, the company sold it its plant and machinery on 31.12.2007 for Rs 8.00 lakh and closed its
research activity. Compute the admissible deduction under Sec. 35 for the assessment year 2008-2009.
Computation of deduction u/s 35 for Expenditure on scientific research:
Particulars Rs. Rs.
Expenditure incurred during the earlier 3 years on
salaries and purchase of raw material for the purpose of
research connected with the business— fully allowed in
the year of commencement of business by virtue of
Explanation to Sec. 35(1)(i): [Rs 4,00,000 x 3]
Revenue expenditure on scientific research incurred during
the previous year 2007-2008
Capital expenditure on scientific research incurred during
the previous year 2007-2008
Total Weighted deduction © 150% on Rs 7.50 lakh u/s
35(2AB)
Admissible deduction u/s 35 for the AY 2008-2009
3,00,000
4,50,000
7,50,000
12,00,000
11,25,000
23,25,000
10. A company engaged in pharmaceuticals manufacturing, debited to its profit and loss account a sum of
Rs 50,000, being the interest on loan of Rs 5,00,000 taken for financing its expansion scheme. The plant and
machinery purchased for the project with the loan were not received during the year and those were still in
transit at the end of the year. A sum of Rs 4,000 was paid to a broker who arranged the loan. Discuss the
admissibility of the interest.
Answer: Interest paid in respect of capital borrowed for the purposes of business or profession is
admissible u/s 36(1)(iii) As per the Proviso to Sec. 36(1)(iii) inserted by the Finance Act, 2003, from
assessment year 2004-2005, interest paid in respect of capital borrowed for acquiring 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 is borrowed for acquisition of the asset till the date on which
such asset is first put to use cannot be allowed as deduction. In this case, the asset has not been put to use
till the end of the previous year. Therefore, interest of Rs 50,000 is not be allowed as deduction. However,
the cost of the asset is to be increased by the amount of interest and depreciation is admissible on
enhanced cost [Proviso to Sec. 36(1)(iii)].The deduction brokerage of Rs 4,000 paid to a broker for
arranging the loan there is a bit controversial
One view is that definition of the term "interest" u/s 2(28A) includes service fee or other charges in respect
of monies borrowed, "brokerage" can be considered to fall under the scope of the term "other charges"
and is therefore included under the definition of interest. Hence, brokerage of Rs 4,000 for arranging the
loan should be treated in the same way as interest. As per the other view, where brokerage or commission
paid to an agent for arranging a loan for the purpose of business is not allowable as deduction u/s
36(1)(iii), but is allowable under Sec. 37(1). As per this view, Rs 4,000 paid to a broker for arranging a loan
is allowable as a deduction under Sec. 37(1).
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