Profit and Gains from Business and Profession as Per Income Tax Law

Profit and gains from business and profession is taxable as per income tax law 1961. But way of calculating net profit in IT law is different from accounting. As per income tax law, all expenses are not allowed as deduction in profit and loss account. Following are main expenses and losses which are allowed and will be debited in profit and loss account for calculating profit and gains from business and profession.

Profit and Loss Account As per Income Tax Law

Expenses As per Income Tax Law  Incomes as Per Income Tax Laws
Net Profit
  Incomes  XXXX

Expenses As per Income Tax Law

1. Depreciation ( Section 32 ) 

As per section 32 of Income tax law, depreciation will be debited with the rates which are allowed in the law and updated ever year in finance bill. There are also other rules which an assessee should remember:

(a) Rates of Depreciation 

For assessment year 2011-2012, following are the depreciation rates. With these rates, you have to calculate depreciation and you can deduct same amount for calculating net profit taxable as per income tax law.

Fixed Assets Rate of Depreciation
 (A) Tangible Assets
1. Furniture 10%
2. Computer 60%
3. Building
 Residential Building 5%
Non-Residential Building 10%
4. Motor Vehicle 15%
5. Machinery 10%
Fan Same
Inverter Same
Water Pump Machine Same
Air Boiler Same
Other Machines Same
6. Books 60%
7. Annual Publication 100%
(B) Intangible Assets 25%
Know-how, trade-mark, copyright, patents, goodwill etc.

(b) Method of Depreciation

As per income tax law, we have to apply written down value method for calculating depreciation instead of fixed installment method.

(c) Time 

 If we have used assets for 180 days or more, full year depreciation will be allowed, otherwise 1/2 year depreciation will be allowed.

(d) Not Allowable Depreciation

Depreciation is not allowed on land and after sale of any fixed asset.

2. Rent

If you are doing business or profession  on rented building, its actual rent is allowed. If some part of building, you are using for personal use, its rent will not be allowed.

3. Salaries of Employees 

All your employees' actual salary is allowed as expense of your business.

4. Repair of Business Assets 

If you pay for repair of different business assets, its cost will be allowed as expenses

5.  Sales Promotion and Advertising Expenses 

If you pay for sales promotion and advertising of your business's products, its cost will be allowed as expenses.

6. General Office and Administration Expenses 

All general office and administration expenses are allowed for deduction as expenses under income tax law. In this, we can include Internet bill, telephone and mobile bill, petrol bill, stationery and printing expenses etc.

7. Other Business expenses 

All revenue nature business expenses except capital expenses, personal expenses, legal expenses for getting property or long term fixed assets, penalties, unrecognized donations and advance paid of income tax.

{Important Note : After calculating net profit from one business or profession, we will calculate our other businesses and professions net profits. Suppose, we have 10 businesses. If we have suffered net loss in any business, it will be adjusted from other businesses' net profits before calculating taxable net profits. For example, you have gained Rs. 20,00,000 in 9 business but in 10th business, you have suffered loss of Rs. 40,00,000. At that time, your net loss will as Rs. 20,00,000 for income tax return purpose}


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Accounting Education: Profit and Gains from Business and Profession as Per Income Tax Law
Profit and Gains from Business and Profession as Per Income Tax Law
Accounting Education
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