1. Income under the head Business & Profession
This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have a bearing
on the computation of taxable income.
Basis of charge (sec 28):
The following income is chargeable to tax under the head “Profit and gai ns from business and
profession”:
1. Profit and gain of any business and profession
2. any compensation or other payment due or received by any person specified in sec 28(ii)
 any compensation received on termination of a managing agency of a foreign
company
 any compensation received on termination of a managing agency of a Indian
company
 Any compensation received on termination of any agency or modification of terms of
agency.
 Any compensation received from government or a corporation on taking over of
management of property or business.
3. Income derived by a trade, professional or similar association from specific services
performed for its members.
4. The value of any benefit or perquisites, whether convertible into any money or not, arising
from the business or the exercise of any profession.
5. Profit on sale of license (export/ import license)
6. Cash assistance (subsidy received by any person against exports under any scheme of
government
7. Any drawback of any duty of customs or excise.
8. Any interest, salary, bonus, commission or remuneration received by a partner from firm.
9. Any sum received for not carrying out any activity in relation to any business or not to share
any know-how, patents, copyrights, trademarks etc.
10. income from a speculative transaction
11. Profits from an illegal business.
Meaning of term business:
The term business refers to any economic activity carried out with a view to earn profit. As per section
2(13) term business is defined as “any trade, commerce, manufacture or any adventure in the nature
of trade, commerce or manufacture”. The defi nition c overs every facet of an occupation carried on by
a person with a view to earn profit. The term business is a word of wide import and in terms of fiscal
statue it must be construed in a broad rather than in a restricted sense.
Thus Production of goods from raw material, buying and selling of goods to make profits and
providing services to others are different form of business.
Profession and Vocation:
As per sec 2(36) profession includes vocation. The term profession is an occupation of requiring
purely intellectual skill or manual skill attained in special knowledge. While the term vocation implies
natural ability of a person for some work. The distinction between the term business, profession or
vocation is not important for the purpose of income tax.

2. Basic Principles for arriving at business Income:
One has to keep in mind the following general principles for arriving at business income:
1. Business or profession should be carried on by assessee.
2. Business or profession should be carried on during the previous year.
3. Income of the previous year is taxable during the following assessment year.
4. Tax incidence arises in respect of all business or profession.
5. Legal ownership v/s beneficial ownership.
6. Real profit v/s anticipated profit
7. Recovery of sum already allowed as deduction.
8. Mode of book entries not relevant.
Loses incidental to business:
General commercial principles have to be kept in view while determining the real and true profits of a
business and profession. Capital receipts are not taxable. Profits can only arise out of the trading
receipts and only the profit element of such receipt can be made taxable.
Business losses can be allowed as deduction if the following conditions are satisfied:
1. Losses are revenue in nature.
2. Losses should be incurred during the previous year.
3. Losses should be incidental to the business and profession carried on by assessee.
4. It should not be notional or fictitious
5. It should have been actually incurred and not merely anticipated to incur in future.
6. There should not be any direct or indirect restriction under the act against the deductibility of
such loss.
Specific deductions under the Act :
Section 30 to 37 cover expenses which are expressly allowed as deduction while computing business
income, section 40, 40A and 43B cover expenses which are not deductible.
Rent, rates taxes repairs and insurance for building (Sec 30):
Under this section following deductions are allowed for premises used for business or profession:
1. The rent of premises, the amount of repair (not being capital expenditure), if he has
undertaken to bear the cost of repair.
2. Any sum on account of land revenue, local rates or municipal taxes. **
3. Amount of any premium in respect of insurance against risk of damage or destruction of the
premises.
** The amount is deductible as per the provision of sec 43B.
Repairs and insurance of machinery, plant and furniture (sec31):
The expenditure incurred on current repai r (not being capital expenditure) and insurance in respect of
plant, machinery and furniture used for business purpose is allowed as deduction u/s 31.
Depreciation Allowance (Sec 32)
In order to avail depreciation u/s 32, the following conditions need to be satisfied:

3. 1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession
3. It should be used for the relevant previous year
4. Depreciation is available on tangible as well as intangible asset.
Use of the asset in the previous year:
The asset in respect of which depreciation is claimed must have been used for the purpose of the
business. Normal depreciation (i.e. full year depreciation) is available if an asset is used is put to use
at least for sometime during the previous year.
Depreciation allowance is limited to 50% of normal depreciation, if the following two conditions are
satisfied:
 Where an asset is acquired during the previous year
 It is used for the purpose of business or profession for less than 180 days during that previous
year.
If the above conditions are satisfied, the assessee would be entitled to 50% of normal depreciation,
even if the asset is used for a single day.
Depreciation Available:
Under the Indian Income Tax, one can claim depreciation on the following assets:
Tangible Asset Building, Plant, machinery or furniture
Intangible Assets acquired after March
31, 1998
Know-how, patents, copyrights, trade marks,
licenses, franchise, or any other business or
commercial rights of similar nature.
Block of Assets sec 2(11):
The term block of assets means a group of assets falling within a class of assets comprising of:
 Tangible assets, being building, machinery, plant or furniture
 Intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchise, or
any other business or commercial rights of similar nature
In respect of which the same percentage of depreciation is prescribed.
Written down Value sec 43(6):
Written down value for the year is determined as under:
1. Find out the depreciated value at the beginning of the year as on 1st of April.
2. To this value add actual cost of the asset acquired during the year.
3. From the resultant year, deduct money received/ receivable (together with scrap value) in
respect of that asset which is sold, discarded, demolished or destroyed during that year.
4. The resulting amount is the written down value of the block for that year.
5. The amount of reduction under step 3 cannot exceed the value of asset computed under step
1 and step 2.

4. Computation of depreciation
Depreciation is calculated at the prescribed rate on the written down value. However the following
exceptions are there for the aforesaid:
Exception 1: When the written down value of a block of assets is reduced to zero.
No depreciation is admissible where written down value has been reduced to zero, though the block
of assets does not cease to exist on the last day.
Exception 2: If the block of asset ceases to exist
If a block of assets ceases to exist or i f all assets of the block have been transferred and the block of
assets is empty on the last day of the previous year, no depreciation is admissible in such case.
Expenditure on Scientific Research (Sec 35):
Scientific research means any activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries.
Under this section amount deductible in respect of scientific research may be classified as under:
Expenditure on research carried on by
assessee
Contribution to outsiders
1. Revenue expenditure
2. Capital expenditure
3. Expenditure on an approved in-house
research
1. Contribution to an approved scientific
research association.
2. Payment to National Laboratory
Revenue expenditure incurred by assessee:
Revenue expenditure incurred by assessee himsel f on scientific research, a deduction is allowed only
if the research is related to the business.
Pre-commencement period expense:
Any pre-commencement expenditure being revenue in nature (other than expenditure providing
perquisites to employee) incurred before the commencement of business on scientific research
related to the business are deductible in the previous year in which the business is commenced.
Capital expenditure incurred by assessee himself:
Where the assessee incurs any expenditure of a capital nature on scientific research related to his
business, the whole of such expenditure incurred in any previous year is allowable as deduction for
that year. The deduction is available even if the relevant asset is not put to use for research and
development in that particular year.
The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of
any land. And no depreciation is allowable on such capital asset.
Expenditure on approved in-house research:
A weighted deduction is allowed in respect of expenditure on in -house research and development
expense incurred by the assessee. However the following points need to be kept in view:

5. 1. The taxpayer is a company
2. It is engaged in the business of bio-technology or in the business of manufacture or
production of articles or things notified by the board.
3. The research and development facility is approved by the prescribed authority and sufficient
provision for audit is done for the accounts maintained by the facility.
Amount of deduction
A sum equal to one-one half times of expenditure so incurred shall be allowed as deduction.
Carry forward and set off deficiency shall be done in the same manner as for the unabsorbed
depreciation.
Contribution made to outsiders:
Where the assessee does not himself carry on scientific research but makes contributions to other
institutions for this purpose, a weighted deduction is allowed.
The amount of deduction is equal to one and one fourth times of any sum paid to a scienti fic research
association or to a university, college or other institution or to a national laboratory.
Scientific research carried on above may or may not be related to the business of the assessee.
Amortization of telecom license fees (sec 35ABB):
Deduction under this section is available if the following conditions are satisfied:
1. The expenditure is capital in nature.
2. It is incurred for acquiring any right to operate telecommunication services.
3. The expenditure is incurred either before the commencement of business or thereafter at any
time during any previous year.
4. The payment for the above has been actually made to obtain license.
The payment will be allowed as deduction in equal installment over the period for which the
license is valid. Any profit or loss on sale of telecom license is to be taken into consideration while
computing business income.
Expenditure on eligible product or scheme Sec. 35AC:
Deduction is available under this section for promoting social and economic welfare.
Any taxpayer can claim deduction by making a payment of any sum to a public sector company or
a local authority or to an association or institution approved by a national committee for carrying
out eligible project or scheme.
A company can also directly incur expenditure in respect of eligible project and claim the same as
deduction.
Payment to associations and institutions for carrying out rural development programmes:
This section provides deduction of sums paid by assessee to:
1. Any association or institution which has its object for carrying out any program of rural
development approved.
2. Any association or institution which has its object the training of persons for
implementation of a rural development program.
3. The national fund for rural development set up by the government.

6. 4. The national Urban Poverty Eradication Fund set up and notified by the government.
Amortization of preliminary expenses (Sec35D):
Those expenses which are incurred before commencement of business for setting up any undertaking
or business are termed as preliminary expenditure.
Deduction under this section is available to an Indian company or a resident non corporate assessee.
Amortization of expenditure in the case of amalgamation / demerger (Sec 35DD)
The provisions of the section are as under:
1. The taxpayer is an Indian company.
2. The expenditure is incurred for the purpose of amalgamation or demerger.
3. The expenditure is allowed as deduction in five successive years in five equal installments.
4. The first installment is deductible in the year in which amalgamation or demerger takes place.
Amortization of expenditure under voluntary retirement scheme (Sec 35 DDA)
1. Expenditure is incurred in any previous year by way of payment of any sum to an employee in
connection with his voluntary retirement.
2. Such expenditure is allowed as deduction in five equal installments beginning with the year in
which the expenditure was incurred.
Where the undertaking of an Indian company entitled to deduction for amortization of voluntary
retirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation or
demerger, the deduction for the remaining period shall be available to the resulting company.
Similar provisions are applicable in the case of succession of firm or proprietary concern.
However, in the year of transfer and subsequent years, no deduction will be available to the
amalgamating company, demerged company, firm or proprietary concern.
Amortisation of Expenditure on prospecting etc for certain minerals (Sec35E):
This section provides for the amortisation of expenditure incurred wholly and exclusively on any
operation relating to prospecting for the minerals or group of associated minerals or on the
development of a mine or other natural deposit of any such minerals or gr oup of associated minerals
as specified in the seventh schedule.
The expenditure which is incurred during the 4 years prior to the commercial production is allowed as
deduction in 10 equal installments over a period of 10 years.
In case where the installment of amortized expenditure relating to a given year cannot be wholly
absorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount is to
be carried forward to the subsequent year. Such carry forward is permitted till the tenth year from the
commercial production after which it will lapse.
Other deductions (Sec 36):
The following deductions are provided under this section:
1. Insurance premium:

7. The amount of any premium paid in respect of insurance of stock or stores used for the
purpose of business or profession is allowed as deduction.
2. Insurance premium by federal milk cooperative society:
Insurance on the life of cattle owned by the members are allowed as deduction.
3. Premium on the health of employee
Insurance premium paid on the health of employee is allowable as deduction.
4. Bonus or commission to employee
Any bonus or commission paid to employee is allowable as deduction on payment basis and
the amount given should not be otherwise payable as profit or dividend.
5. Interest on borrowed capital
If the money is borrowed for the purpose of business or profession then the interest thereon is
allowed as deduction.
6. Discount on zero coupon bonds
Discount on zero coupon bonds (being the di fference between the amount received and
amount payable on the redemption/ maturity of bonds) is allowed as deduction on pro-rata
basis over the life of bond.
These are issued by any infrastructure capital company or a public sector company on or
after June 1, 2005.
7. Employer contribution to Provident Fund and Superannuation fund:
The deduction is allowed as per the limits laid down for the same.
8. Contribution towards approved gratuity fund.
9. Employees contribution towards staff welfare scheme
Any sum received from employee towards contribution for Provident fund or staff wel fare
scheme is allowed as deduction provided it is paid on or before date.
10. Write off allowance for animals
Provided the animals are used for business or profession then loss on sale. Theft or death is
allowed as deduction.
11. Bad Debt.
A bad debt is allowable as deduction subject to the following conditions:
 There must be a debt
 Debt must be incidental to the business or profession of the assessee.
 It must have been taken into account in computing assessable income.
 Debt must have been written off in the books of account of the assessee.
 Transfer to provision for bad and doubtful debts shall not be taken into account.
12. Transfer to Special reserve:
Under this section deduction is available to a financial corporation including a public and
government company which is engaged in providing the long term finance for industrial or
agriculture development.
Amount of Deduction:
 The amount transferred during the previous year to the special reserve account.
 40% of the profits derived from the business activities.
 200% of (paid up share capital and general reserve as on the last day of the previous
year) minus the balance of the special reserve account.
Whichever is lower of the above.

8. 13. Family Planning Expenditure:
Any bona fide expenditure incurred by a company for the purpose of promoting family
planning among its employees, is allowable as deduction.
If the expenditure is of capital nature, one-fi fth of such expenditure is allowable as deduction
for the previous year in which it was incurred and the balance in four equal installments.
Any expenditure which could not be allowed as deduction due to inadequate profit shall be set
off and carried forward as unabsorbed depreciation.
14. Any amount paid by employer as premium under keyman’s insurance scheme is ful ly allowed.
Advertising Expense
Deduction is not available in respect of expenditure incurred by an assessee on advertising in any
souvenir, brochure, tract, pamphlet or the like published by political party.
General Deduction (Sec37)
This is a residuary section in order to claim deduction under this section; the following conditions need
to be satisfied:
1. The expenditure should not be in the nature prescribed by section 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should have been incurred with respect to the business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of business.
7. It should not have been incurred for any purpose which is an offence or prohibited by law.
Specific disallowances under the Act:
The following expenses given by sections 40,40A and 43B are expressly disallowed under the act.
Amount not deductible under sec 40
The following amounts are not deductible from the income as per this section:
1. Any sum paid for which TDS was deductible but was not deducted or was deducted but paid
to the government within the previous year or in subsequent year within the prescribed time.
However if the tax is paid subsequently then the deduction is allowed in the year in which it is
paid.
2. Securities transaction tax
3. Fringe Benefit Tax
4. Income tax
5. Wealth Tax
6. Tax on non monetary perquisites paid by the employer.
Amount not deductible under sec 40A
1. Any payment made by an assessee to a relative or a person having substantial interest in the
company is disallowed to the extent it is excessive or unreasonable.

9. Hence if the expenditure is excessive or unreasonable having regard to the fai r market value
of the goods, services, facilities etc, then the excessive portion shall be disallowed.
2. Amounts not deductible in respect of the expenditure exceeding Rs.20,000/ -
If an assessee makes any payment in respect of any expenditure for an amount exceedi ng
Rs. 20,000/ - by way of cash or by a bearer cheque then 20% of the said payment will be
disallowed as deduction.
However, in some cases payment in excess of Rs. 20,000/ - is allowed as deduction like when
the payment is to government or bank, or in a place where no banking facility exist, payment
made for agriculture produce, horticulture or animal husbandry etc.
3. Amount not deductible in respect of contributions to non-statuary funds.
Amount not deductible under (sec 43B)
The following expenses are allowed as deduction only on payment basis:
1. any sum payable by way of tax, cess, duty or fees
2. Any sum payable by an employer by way of contribution to provident fund or superannuation
fund or any other fund for the welfare of employee.
3. Any sum payable as bonus or commission to employee for service rendered.
4. Any sum payable as interest on any loan or borrowing from a public financial institution or a
state financial corporation or a state industrial investment corporation.
5. Interest on any loan or advance taken from a scheduled bank including co-operative bank.
6. Any sum payable by an employer in lieu of leave at the credit of his employee.
The above expenses are deductible in the year in which the payment is made. However i f payment is
made before the due date of filing of return then the deduction will be allowed in the year in which the
expense is incurred.
Section 44 A
For the purpose of this section specified profession means a profession of medicine, engineering,
architecture, film artiest, accountancy, authorized representative, company secretaries.
In the case of specified profession if the gross receipt from profession do not exceed Rs 1,50,000 no
specified books have been prescribed and the assessee has to maintain such books to enable the
assessing officer to assess the income of the assessee.
In case of speci fied profession i f the gross receipt from profession exceeds Rs 1,50,000 prescribed
books like
a. Cash Book
b. Journal if accrual System of accounting is followed
c. Ledger
d. Serially numbered receipt for any receipt exceeding Rs 25
e. Original bill and receipt for any payment exceeding Rs 50 to be maintained
In the case of non specified profession or business where the gross income do not exceed Rs
1,20,000 or gross receipt do not exceed Rs 10,00,000 no requi rement for maintaining any books of
accounts

10. In the case of non speci fied profession or business where the income exceeds Rs 1,20,000 or gross
receipt exceeds Rs 10,00,000 such books which may enable the assessing offices to compute the
income should be maintained
Section 44 AB
Following person are required to get their accounts Audited
Different Tax payers When they are covered by the provisions of compulsory audit
under section 44AB.
A person carrying on
business
A person carrying on
profession
If the total sales, turnover or gross receipt in business for the
previous year(s) relevant to the assessment year exceed or
exceeds Rs 40 Lakhs.
If his gross receipt in profession for the previous year(s) relevant
to the assessment year exceeds Rs 10 Lakhs.
A person covered
under section 44AD, 44
AE, 44AF, 44BB or
44BBB
If such person claims that the profits and gains from the business
are lower than the profits and gains computed under this section
(irrespective of his turnover).
Special Provisions for computing income on estimated basis
Taxpayers engaged in the business of civil construction (Sec44AD)
1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co -operative Society or
any other person who is engaged in the business of civil construction or supply of labor for civil
construction work is covered under the section.
2. Any person whose gross receipt from Business does not exceed Rs 40 Lac.
3. Income from above mentioned business is estimated at 8% of the gross receipt and all
deduction under section 32 to 38 including depreciation is deemed to have been already
allowed and no further deduction is allowed.
4. If he so assessed than he is not requi red to maintain books of accounts as per section 44 AA
and is also not required to get his books of accounts audited under section 44 AB.
5. A tax payer can declare his income to be lower than the deemed profit but than he has to
maintain books of accounts as per section 44 AA and is also required to get his books of
accounts audited under section 44 AB.
Taxpayer engaged in the business of plying, leasing or hiring trucks (Sec 44AE)
1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co -operative Society or
any other person who is engaged in the business of plying, hiring or leasing goods carriages.
The taxpayer owns not more than 10 goods carriage at any time during the previous year.
2. Income from above mentioned business is calculated as below:
Type of goods Carriage Estimated Income
Heavy goods Vehicle Rs 3500 for every month (or part of a month) during which the
goods carriage is owned by the tax payer.

11. Other than heavy goods
Vehicle
Rs 3250 for every month (or part of a month) during which the
goods carriage is owned by the tax payer.
3. All deduction under section 32 to 38 including depreciation is deemed to have been already
allowed and no further deduction is allowed.
4. If he so assessed than he is not requi red to maintain books of accounts as per section 44 AA
and is also not required to get his books of accounts audited under section 44 AB.
5. A tax payer can declare his income to be lower than the deemed profit but than he has to
maintain books of accounts as per section 44 AA and is also required to get his books of
accounts audited under section 44 AB.
Taxpayers engaged in the business of retail traders (Sec44AF)
1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co -operative Society or any
other person who is engaged in the business of retail trade of any goods or merchandise is
covered under the section.
2. Any person whose gross receipt from Business does not exceed Rs 40 Lac.
3. Income from above mentioned business is estimated at 5% of the gross receipt and all deduction
under section 32 to 38 including depreciation is deemed to have been already allowed and no
further deduction is allowed.
4. If he so assessed than he is not requi red to maintain books of accounts as per section 44 AA and
is also not required to get his books of accounts audited under section 44 AB.
5. A tax payer can declare his income to be lower than the deemed profit but than he has to maintain
books of accounts as per section 44 AA and is also requi red to get his books of accounts audited
under section 44 AB.