Taxation of Business Income: Calculating Income Tax on Profit from Business and Profession

As per section 41 of the Income Tax Act,1961 referred above if any expense was allowed as deduction in any earlier year under Business and Profession head” and now any benefit is received from such amount then such benefit amount is taxable under “Business and Profession head” in the previous year of receipt.

Treatment in case of Asset on which depreciation is claimed

As per section referred above if any asset which is depreciable on a straight line method is sold and a balancing charge arises from such a disposal then such benefit amount is taxable under “Business and Profession head” will be lower of below two options:

Balancing charge=

  • Selling price- opening WDV
  • Accumulated depreciation

Treatment in case of Asset on purchased for scientific use

If a scientific capital asset is sold directly without using it in business then the income which is taxable under Business and Profession head” will be lower of below two options

  • Sale price of the asset
  • Earlier deduction taken under section 35(which may be 100%/200% )

Treatment of Bad debt recovered related to previous year

If any amount of bad debt is recovered in any previous year then such recovered amount is taxable in the previous year of recovery

Taxable amount

  • Actual amount recovered
  • Less: earlier disallowed amount of bad debt (because already taxed , so now exempt)

Treatment of amount withdrawn from special reserve

If amount withdrawn from special reserve account which is transferred to special reserve account under section 36 (1) (viii), then it is a taxable income under Business and Profession head” in the previous year of withdrawn

Taxable amount

  • Actual withdrawn amount
  • Less: earlier disallowed amount

Reference: Section 41 of the Income Tax Act, 1961: Other Information

Profits chargeable to tax

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

 (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

 (b) the successor in business has obtained whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

[Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.]

[Explanation 2].—For the purposes of this sub-section, “successor in business” means,—

  (i)  Where there has been an amalgamation of a company with another company, the amalgamated company;

 (ii)  Where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) Where a firm carrying on a business or profession is succeeded by another firm, the other firm;]

[(iv) Where there has been a demerger, the resulting company.]

(2) Where any building, machinery, plant or furniture,—

 (a) which is owned by the assessee;

 (b) in respect of which depreciation is claimed under clause (i) of sub-section (1) of section
32
; and

 (c) which was or has been used for the purposes of business,

is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

Explanation.—Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year.]

(3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35, read with clause (4) of section 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (i) [or, as the case may be, the amount of the deduction under clause (ia)] of sub-section (2), or clause (c) of sub-section (2B), of section 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

Explanation.—Where the moneys payable in respect of any asset referred to in this sub-section become due in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

(4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not.

[Explanation.—For the purposes of sub-section (3),—

 (1) “moneys payable” in respect of any building, machinery, plant or furniture includes—

 (a) any insurance, salvage or compensation moneys payable in respect thereof;

 (b) where the building, machinery, plant or furniture is sold, the price for which it is sold,

so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;

(2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company.

[(4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn.

Explanation.—where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence; the provisions of this sub-section shall apply as if the business is in existence in that previous year.]

(5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), sub-section (3) [, sub-section (4) or sub-section (4A)] in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid.

[(6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.

 

How to Compute Tax Liability for Individual Assessee

An Individual is responsible to pay tax in respect of his own income. Individual Income exempted under section 10, 10A, OR 10B OR 10BA and deduction under section 80C, 80CCC, 80CCD, 80CCF, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80QQB, 80RRB AND 80U

Special provision relating to non-residents [Section 115C to 115I]-

‘Non- resident Indians’ can take the benefit of special provision under section 115C to 115-I:

Who can claim the benefit of special provisions

The benefit of special provisions can be claimed by non-resident Indian. The following are “non-resident Indian” for this purpose:

  1. Citizen of India who is non-resident; or
  2. A person of Indian origin who is a non-resident.

A person shall be deemed to be Indian origin if he, or either of his parents or any of his grandparents, was born in individual India.

Income which are qualified for special treatment –

The provision under section 115C to 115-I are applicable only in respect of the following income derived by a non-resident Indian under section 115C to 115-I:

  • long term capital gain from sale and transfer of “foreign exchange assets”;
  • Investment income derived from a “foreign exchange assets”.

“Foreign exchange assets” means “specified assets”

The following are “Special assets” for this purpose:

  1. Debentures issued by an Indian company (which is not a private company) ;
  2. Shares in an Indian company (public or private) ;    
  3. Deposits with an Indian company( not a private company) ;
  4. Any security of the central government.
  5. Such other assets as the Central government may specify in this behalf by notification in the official Gazette [no notification has been issued so far]

How to calculate investment income:

In computing the investment income of a non-resident Indian, no deduction in respect of any expenditure or allowance shall be allowed under any provision of this act. Moreover, no deduction under section 80C to 80U shall be allowed in respect of investment income of non resident.

Overview of the Taxation of Partnership Firm and Limited Liability Partnership Firm

Scheme of Taxation of firms:

The salient features of the scheme are as under:

  • A firm is taxed as a separate entity. There is no deduction between registered and unregistered firms.
  • The share of the partners in the income of the firm is not to be included in computing in his total income.
  • Any salary bonus, commission or remuneration by whatever name called, which is due to or received by partner is allowed as a deduction subject to certain restrictions.

Book Profit

Amount deductible in respect of remuneration to partners under section 40(b) with effect from the assessment year 2010-11

  • If the book profit is negative

Rs. 1,50,000

  • In case book profit is positive-

    On first Rs. 3 Lakhs of book profit

    On the balance of the book profit

 

Rs. 1,50,000 or 90% of book profit, whichever is more

60% of book profit

Partner’s share is not to be included in computing his total income.    

In the case of firm, its right to claim deduction in respect of expenditure, a special deduction in respect of remuneration and interest but it also need to satisfied sections 184 and 40(b).

  1. These are otherwise deductible under sections 36 and 37;
  2. Sec.184 and 40(b).

    These are four conditions which a firm has to fulfil-

    1. A firm must be evidenced in the form of instrument [Section 184(1)(i)] instrument means a legal document it does not mean any other formal document, letter would constitute” instrument” for the purpose of sec. 184(1) (i).
    2. The individual shares of partners in total profit must specify in the instrument of partnership.
    3. The copy of instrument shall be certified by all partners who are partners in the firm or before the dissolution.
    4. If there is any change in the constitution of firm/profit sharing ratio, a certified copy of the revised instrument of partnership along with return of income of the relevant year should be submitted [section 40(b)].

If section 40(b) and 184 is satisfied then partner’s remuneration is allowed for deduction, section 40(b) conditions are given bellow:-

  1. A partner who is not working in firm is not allowable to obtain any kind of deduction like salary, bonus, commission or remuneration.
  2. Any payment of salary, Bonus, commission, or remuneration must be authorised in partnership deed or accordance with the deed.
  3. If remuneration is made from a date prior to the date of deed, it would not be allowed as deduction.
  4. During the previous year any payment or remuneration to all the partners should not exceeds the limits are as follows –

Interest payable to partners:

  • After The fulfilment of conditions of section 184 and 40(b) is allowed to obtain deduction. The specific conditions in section 40(b), the payment of interest should be authorised and pertain to the period after the partnership deed and should not exceeds 12%
  • Interest paid to partners is disallowed under section 40A (2).
  • A firm pays Interest on drawings [sec-40(b)].

How to Calculate the Income Tax Liability of a Partnership Firm or Limited Liability Firm

How to calculate taxable Income of Partnership Firm / LLP.  Income of partnership firm is taxable @30.90% i.e. Income tax slab rate for partnership firm is 30.90% (30%+3%(cess)).

Steps to Calculate Taxable Income of Partnership Firm or Limited Liability Partnership: – Read Income Tax Slab Rate for 2013-14 and 2014-15

  1. Find out income under the different heads of income, avoid exempted income under sections 10 to 13A;
  2. Adjust disallowances and brought forward losses. The total income under the aforesaid heads is gross total income.
  3. Then from the “gross total income” make deduction under different sections (80G, 80GGA, 80GGC, 80-IA, 80-IB, 80-IC, 80JJA and 80-O.

Taxable Income: Download Income Tax Return for AY 2013-14


  1. Partner’s share in the total income of the firm shall be exempt from tax [section 10 (2A)]    
  2. Any remuneration by whatever name called which is due to or received by a partner of firm, the firm is taxable in partners hands under the head “Profit and gain of business and profession” it is not taxable under the head “Salaries” (sec 15).
  3. If a Partner borrows money to make his capital contribution to the firm with money and he is paid interest for this which is taxable under the head “Profit and Gains of Business and Profession”.
  4. And other is, if any remuneration /interest are not deductible under the section 40(b) it shall not be taxable in the hands of partners.

How to Compute Income Tax Income or Tax Liability of AOP/BOI

  1. Any salary, bonus, commission or remuneration paid by the AOP/BOI to his partners is not deductible by virtue of section 40(ba).
  2. Similarly, AOP/BOI paid any interest to his members (on loan, capital) is not deductible (section 40(ba)).
  3. Total Income of AOP/BOI is taxable at the normal rates applicable to Individual or maximum marginal rates or higher rate than maximum marginal rate.

Computation of taxable income

These are following steps: –

  1. First find out income under the different heads, ignoring exempted income under sections 10 to 13A.
  2. Make adjustments on accounts of brought forward losses / allowances.    
  3. And then make deductions under different sections like 80G, 80GGA, 80GGC, 80-I, 80-IA, 80IB, 80IC and 80JJA.

The total income is taxable income.

Determination of taxable income of members of AOP/BOI

  1. From the total income of the AOP/BOI any salary, bonus, commission or remuneration is to be deducted.
  2. The balance is to be apportioned among the members in the proportions in which they are entitled to share the income of AOP/BOI
  3. Where the amount apportioned above is profit, any interest, salary, bonus, commission or remuneration paid by the AOP/BOI in respect of previous year is to be added and the resultant amount is to be treated as members share.
  4. Where the amount apportioned above is a loss, any interest, salary, bonus, commission or remuneration paid by the AOP/BOI in respect of previous year will be adjusted against such apportioned loss the resultant sum is to be treated as members share.
  5. For the purpose of assessment, the share of a member in the income or loss of the AOP/BOI is to be apportioned under various heads of income

Computation of tax of members

The share of a member in the income or the AOP/BOI is treated in three ways, depending upon whether the AOP/BOI is chargeable to tax at the maximum marginal rates or at the normal rates or is not chargeable to tax. These are:

  1. Where the AOP/BOI is chargeable to tax at the maximum marginal rates or at a rate higher than the maximum marginal rates, the share of the members shall not be included in his total income at all.
  2. Where the AOP/BOI is chargeable to tax at the normal rate the share of a member shall be included in his total income, but a rebate shall be given on the same u/s 86.
  3. Where no income tax is chargeable on the total income of AOP/BOI, the shares of the members shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an AOP/BOI is chargeable to tax at the normal rate, but has income below taxable limit so that no tax is chargeable on the total income of AOP/BOP, member in such AOP/BOI shall be fully taxable in his own assessment without any tax rebate.