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PGBP Income

Income from Business and Profession: A Business Guide

Jun 10, 2022

Income from Business and Profession

Business is famously and commonly defined as any type of economic activity which is carried out to earn profit. Where the term “economic activity” means any trade, manufacturing, commerce, or any activity which is related to it. According to the provisions of the Income Tax Act, 1961, Income from Business or Profession or Income from PGBP is one of the heads of income that is aggregated with other heads of income to arrive at the net profit.

The term business income is further categorized as Speculative and Non- Speculative. The former is the income that is earned during a day, such as intraday trading. Here, the amount may change from one day to another. Whereas, Non- Speculative income is the one where the income is fixed for a period of time.

Also, it is not necessary to have permanent transactions in a business. Whereas in the case of Profession, it is a means of earning income where more refined skills are required, such as Doctors, Engineers, CPA, etc. Both intellectual and non-intellectual power is required in this where one declares one’s specific skill.

Income Earned

Income actually refers to the amount which one gets after reducing all the taxes. The income also includes both positive (profit) and negative incomes (loss). In other words, ‘profit and gains’ represent plus income while ‘loss’ represents minus income. So, both legal and illegal business incomes are taxable in nature. One should spend time and accurately file his Income from Business or Profession in their income tax return. 

 

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Charges 

Some of the points related to charges with respect to Income from Business or Profession are like:

  • The profit or gain that one gain during a particular year are to be declared exactly in the coming round of tax filing
  • Compensation/ payment/changes in the terms & conditions in the organization should be mentioned and informed which subsequently leads to changes in the calculation.
  • Income from Business or Profession or similar association 
  • The perquisite value or benefit from business/ professional where the one is convertible into liquid form (that is, money) or not
  • Interest/ Commission/Salary/ Remuneration/ bonus which is received a partner of a firm from a firm
  • Amount received under Keyman insurance policy
  • Income which is received from any speculative transactions
  • Profit made from the transfer of Duty Entitlement Pass Book Scheme or Duty-Free Replenishment Certificate or from the same of license which is granted under the Imports (Control) order 1955 made under the Imports and Exports (Control) Act, 1947 (18 of 1947)

Some of the non-taxable income which comes under other heads but is earned under Income from Business or Profession are:

  • From rent of house property
  • Deemed Dividends on share
  • Wining in lotteries, races, and much more similar to it

If in case if the taxpayer is not able to identify the type of income, then according to Section 28 clause should be referred and charges should be done accordingly- 

  1. There should be a business or profession.
  2. The business or profession should have been carried on by the assessee.
  3. The business or profession should be carried on for some time during the financial year.
  4. The charge is in respect of the profits and gains of the financial year of the business or profession.
  5. The charge extends to any business or profession carried on by the assessee whether under the taxpayer’s own name or otherwise.

Certain exceptions have to be classified under Profit and Gain of business irrespective of the point that the business was not carried by the assessee during the previous years, like:

  • Recovery against any loss, expenditure, or trading liability earlier allowed as a deduction.
  • Balancing charge in case of electricity companies.
  • Sale of a capital asset that was used for scientific research.
  • Recovery against bad debts.
  • Any amount which is withdrawn from a Special Reserve.
  • Receipt of discontinued business in the case of assessees who are making use of a cash system of accounting.

 

Tax Returns under Income from Business or Profession

Like any other tax return, Business Tax Returns is a document that states the income and expenditure of a business. The return contains details about the assets and liabilities which is held.

The return filing depends upon the type of business structure one has. Like in the case of LLP, firms, and companies one has to file income tax returns irrespective of the profit or loss. They are generally taxed at a rate of 30%. If one income before the tax deduction is more than Rs. 2.5 lakh then one needs to file a business tax return. And finally in the case of sole proprietor, one has to declare business income as well as income from other sources. 

As to reduce the amount under taxation firms, HUF and individuals can opt for a presumptive tax scheme

 

What are the due dates for filing returns?

For the Individuals not liable for a tax audit, the last date for the filing of the return is 31st August after the end of the financial year (Belated return can be filed up to 31st March subject to penalty) For individuals liable for tax audit and all other assesses like company, LLP or partnership firm, the due date is 30th September after the end of the financial year. For the FY 2017-18, this due date has been extended from 30 September 2018 to 31 October 2018.

The penalty for non-filing of returns- Any loss incurred during the year cannot be carried forward if the return is filed after the due date of filing an income tax return.

Also a fine of Rs. 5000 under section 271F can be levied on the assessee.

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Depreciation under Income from Business or Profession

It is a shrinking of the value of assets caused due to normal wear and tear with time. For calculating depreciation there are two methods used, straight-line and written down value. Between the two methods, written down value is most used except for the cases generation and distribution of power. The higher the depreciation tax liabilities will be reduced proportionately.

With respect to the written down method block of assets is used. Block of assets are categorized into two parts-

  1. Tangible Assets
  2. Intangible Assets

Before calculating the depreciation, there are certain points that have to be taken care of.  Some of them are:

  • Assets are wholly or partially owned
  • The assets for which tax deduction has been claimed must be used for the business purpose only
  • Co-owners can claim the deduction if the assets are shared by them
  • Depreciation on the cost of land is not considered
  • Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.

The depreciation rates differ according to assets under tangible and non-tangible categories and further in these categories rates differ. To get to know further details and calculation of Income from Business and Profession, get in touch with HA. Our experts here can help you to get going fast with the concept and application too.

Minimum Alternate Tax

In short Minimum Alternate Tax is called MAT. It comes under direct tax to limit the tax exemption which is taken up by the companies as they can mandatory pay a minimum amount of tax.

According to Section 115 JB all companies mandatory need to pay corporate tax. This tax liability is imposed on all companies including foreign companies too. It is mandatory for companies to pay tax

  • Normal provision of the income tax
  • MAT provision

*Whichever is higher

MAT is calculated as 15% of the Book of profits (+ Surcharge and cess). Whereas Books of profits refers to the net profit for a year.

 

Additions to the Net Profit (If debited to the Profit and Loss Account)

1. Income Tax paid or payable if any calculated as per normal provisions of the income tax act.

2. Transfer made to any reserve

3.  Dividend proposed or paid

4. Provision for loss of subsidiary companies

5. Depreciation including depreciation on account of revaluation of assets

6. Amount/provision of deferred tax

7. Provision for unascertained liabilities e.g. provision for bad debts

8. Amount of expense relating to exempt income under sections 10,11,12 (except sec 10AA and 10(38)  This means income under section 10AA & long term capital gain exemption under section 10(38) are subject to MAT. Provision made for diminution in the value of any asset

Profits and Gains from business or Profession

Deletions to the Net Profit (If credited to the Profit and Loss Account)

1. Amount withdrawn from any reserves or provisions

2. The amount of income to which any of the provisions of sections 10, 11 & 12 except 10AA & 10(38) applies.

3. Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of the asset.

4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include the depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted.)

5. Amount of Deferred Tax, is any such amount is credited in the profit & loss account

6. Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets)

 

Books of Accounts under Income from Business or Profession

There are different laws that have to be considered while keeping and maintaining Books of Account. Statutory laws such as the Companies Act, Income Tax Act, and GST Act has to be mandatory keep in mind as all these have different compulsion requirement and retention period.

For any organization, if the sales or income is greater than Rs. 25,00,000 and Rs. 2,50,000 respectively for the 3 preceding years then Books of accounts is mandatory to maintain. Professions such as Medical, Engineering, Film Artist, Legal, Company Secretary, Interior Decorators, Accountancy are mandatory to proceed to abide the legality.

The Books of Accounts, which includes Sales/ Purchase record, cash flow statement, cost of items, assets/ liabilities records, and other documents such as deeds/ vouchers/ writing should be maintained at least for 8 years either in physical or electronic mode. Whereas in case GST records such as stock of goods, inward and outward supply of goods, manufacture or production of goods, input tax credit availed, and other documents related to GST. For meeting up GST compliances the records should be maintained for 6 years (right from the last date of filing of the annual return).

 

Alternative Minimum Tax

As to encourage investment in various industries Government has introduced various profits linked deductions. The individual taxpayers who are eligible to avail of this tax are saving deductions would become zero tax companies or end up paying marginal tax although they are capable to pay normal tax.

Seeing the other side, the Government also gets regular revenue through the inflow of the tax which indeed is invested in the carrying out welfare development of the country. This tax scheme was initially introduced with the name of Minimum Alternative Tax (MAT), especially for the companies which are claiming profit-linked deductions. However there are many similarities between MAT and AMT but the manner of computation, exemptions considered, are entirely different. The rate at which AMT is charged is 18.5% (+ surcharge and cess). This provision is applicable to-

  • Non-corporate taxpayer
  • And taxpayer who has claimed deduction under Chapter VI-A, Section 10AA, and Section 35AD

One should keep in mind that AMT provisions are applicable only in conditions when normal tax payable is lower than AMT in a financial year.

AMT cannot be availed by an artificial juridical person, individual, Hindu Undivided Family, Association of Persons, and Body of Individual where the adjusted income is not exceeding Rs. 20, 00,000.

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