Last updated: February 5th, 2020 5:10 PM

Profits and Gains from Business and Profession

To file the income tax return for a company, partnership firm, LLP or a proprietorship concern, profits and gains from business and profession must be calculated and reported as a constituent head. Under this head of income, the profit and gains from any business or profession carried on by the assessee at any time during the financial year should be reported. In this article, we look at the various types of incomes that must be added to calculate profit and gains from any business or profession.

Calculating Profits and Gains from Business and Profession

To calculate profits and gains from business and profession, the following types of incomes must be added:

1. Profit and gains from any business or profession carried on by the assessee
2. Any compensation or other payment due to or received by any specified person
3. Income derived by a trade, professional or similar association from specific services performed for its members
4. Profit on sale of a license granted under the Imports (Control) Order 1955, made under the Import-Export Control Act, 1947
5. Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of Government of India
6. Any duty of Customs or Excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.
7. Profit on transfer of Duty Entitlement Pass Book Scheme, under Section 5 of Foreign Trade (Development and Regulation) Act, 1992
8. Profit on transfer of Duty Free Replenishment Certificate, under Section 5 of Foreign Trade (Development and Regulation) Act 1992
9. Value of any benefits or perquisites arising from a business or the exercise of a profession.
10. Interest, salary, bonus, commission or remuneration due to or received by a partner from partnership firm
11. Any sum received or receivable for not carrying out any activity in relation to any business or profession; or
12. Any sum received or receivable for not sharing any know-how, patent, copyright, trademark, licence, franchise, or any other business or commercial right or information or technique likely to assist in the manufacture of goods or provision of services.
13. Any sum received under a Key man Insurance policy including the sum of bonus on such policy
14. Any sum received ( or receivable) in cash or in-kind, on account of any capital assets (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital assets has been allowed as a deduction under section 35AD
15. Income from speculative transactions. However, it shall be deemed to be distinct and separate from any other business.
16. Remission or cessation of liability in respect of any loss, expenditure or trading liability incurred by the taxpayers
17. Recovery of trading liability by successor which was allowed to the predecessor shall be chargeable to tax in the hands of successor. Succession could be due to amalgamation or demerger or succession of a firm succeeded by another firm or company, etc.
18. Any liability which is unilaterally written off by the taxpayer from the books of accounts shall be deemed as remission or cessation of such liability and shall be chargeable to tax.
19. Depreciable asset in case of power generating units, is sold, discarded, demolished or destroyed, the amount by which sale consideration and/ or insurance compensation together with scrap value exceeds its WDV shall be chargeable to tax.
20. Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds together with the amount of deduction allowed under section 35 exceed the amount of the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place.
21. Where bad debts have been allowed as deduction under Section 36(1)(vii) in earlier years, any recovery of same shall be chargeable to tax.
22. Amount withdrawn from special reserves created and maintained under Section 36(1)(viii) shall be chargeable as income in the previous year in which the amount is withdrawn.
23. Loss of a discontinued business or profession could be adjusted from the deemed business income as referred to in section 41(1), 41(3), (4) or (4A) without any time limit.
24. Where the consideration for transfer of land or building or both as stock-in-trade is less than the stamp duty value, the value so adopted shall be deemed to be the full value of consideration for the purpose of computing income under this head.
25. As per RBI Guidelines, Interest on bad and doubtful debts of Public Financial Institution or Scheduled Bank or [a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank] or State Financial Corporation or State Industrial Investment Corporation, shall be chargeable to tax in the year in which it is credited to Profit and Loss A/c or year in which it is actually received, whichever happens earlier.
26. Similarly, as per NHB Guidelines, Interest on bad and doubtful debts of housing finance company, shall be chargeable to tax, in the year it is credited to Profit and Loss Account in relation to the year in which it is actually received by them, whichever is earlier.
27. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Govt. or State Govt. or any authority or body or agency to the assessee would be included in definition of income as referred to in Section 2(24). However, in the following cases subsidy or grant shall not be treated as income:
28. The subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of Section 43;
29. The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be.

Once the above items, as applicable are added to the income head, deductions can be claimed. The list of all deductions from profits and gains from business and profession should be considered before arriving at the final amount of income reported under this head in the return of income. To know about the concept of Advance Tax in Income Tax law, click here.