UNIT IV

Income from Business and Profession

4.1 Income from Business and Profession

What is Business and Profession?

Income from a business or occupation can only be taxed if the business or occupation is carried by the taxpayer at any time during the previous year. Let's first understand what business is.:

Business, in simple words, means a profession carried by a person with a view to profit. Business does not include profits from the profession or affiliated companies. In this business、 –

• Trade,
• Commerce,
• Manufacturing,

Think of things as rendering services and other businesses

For example: owning a store, running a hotel, transportation, travel agency, share broking, etc. a profession may be defined as a profession, or a job that requires thought, skill and special knowledge. Thus, the profession refers to those activities whose livelihood is obtained by persons through their intellectual or manual skills such as:

• Legal
• Medical
• Engineer
• Certified Public Accountant
• Architecture, etc.

Income arising from the above activities is taxed under the heading “income from business and profession".

Managing accounts

In the case of business

1. A business that meets one of the following criteria must maintain accounting books in accordance with the income tax law:

• Income over 1, 20,000 Indian rupees or,
• Total sales, sales or receipts have exceeded INR10, 00, 000 in any of the previous years

In addition, this condition is relaxed when individuals and HUF are bound by the obligation to maintain the books:

• Income INR2. 5 lakh or higher,
• Total sales, sales or gross receipts are greater than INR 25 Lakh in any of the last 3 years.

In the case of occupation

Taxpayers who carry out any of the above occupations are required to maintain an accounting book in accordance with rule 6F of the income tax rules. These specialists are required to maintain accounting books if the gross receipts exceed 1.5 INR3Lakhs in any of the previous years.                                      

Income imposed under business and profession

The income earned by the taxpayer with the intention of earning a profit is covered under the head of the business and profession. There are 3 types that are defined for businesses and occupations under the Income Tax Act:

1. Non-speculative business/profession: includes profit/loss from all normal business carried by taxpayers. Any salary, remuneration, fees, etc. received by the partner from the Partnership Company are also considered to be the business and professional income of the partner. But the same is exempt from taxes in the hands of partners.
2. Speculative business: as the name implies, it is a profit/loss by doing a speculative transaction i.e. without taking the actual delivery of the goods, i.e. profit from a speculative business (for example. Stock transactions) are paid under this head and they should be maintained and displayed separately while e-filing income tax returns
3. Specific business: includes profit/loss from business as defined in Article 35 of the Income Tax Act. These businesses include affordable housing planning, Water Manufacturing Units, etc.

However, the following are income that is not charged as income from business or occupation:

• Profits from activities other than the above mentioned businesses will appear as casual income and will appear under income from other sources
• Income from salaries, remuneration, bonuses, etc., received by the directors of the company, is treated as salary income, and not as business and professional income.

Allowable expenses from business and occupational income

All expenses incurred in full and exclusively with respect to business and profession shall be allowed for income from such business and profession. Here's some of the spending:

• Building rent and insurance.
• Payment for legal and professional services.
• Salaries, bonuses, commissions, etc. to employees.
• Salary, interest and compensation for partners who work under certain conditions.
• Cost of travel and transmission.
• Admission fee and annual membership fee
• Payment of know-how, patents, copyrights, trademarks and licenses.
• Depreciation of fixed assets.
• Expenditure on scientific research for business purposes.
• Preliminary expenses in the case of the company.
• Communication costs
• Discounts are allowed to customers.
• Advertising costs for the promotion of business products.
• Financial expenses (eg. Interest on the loan).
• Bank fees/bank fees.
• Entertainment/business promotion costs.
• Staff benefits costs.
• Cost of printing and stationery.
• Cost of shipping cost.
• All other expenses related to business/occupation.

All these costs are allowed on the basis of actual payments and on the basis of accrual on the last day of the account. For example: an employee will receive a salary for the month of May 2020 in April 2020. However, since the salary is related to the 2019-20 financial year (ending on 31st March 2020), it is not necessary to charge for income from business/professional income for the 2019-20 financial year.

Costs allowed only on a payment basis

Certain illustrations to help explain it are given below:

• Any taxes, duties, cess or fees by whatever name is called.
• Expenses directed at contributions to the provident fund, the employee's state insurance premium, the chip fund, or other funds for the welfare of the employee.
• Leave a bonus, commission or encashment to be paid to employees.
• Interest on loans from public financial institutions, state financial corporations or planned banks.

Calculation of taxable income from business and profession

Taxable income from business and occupation is profit after deducting costs associated with business activities. Taxpayers can find profits from the books maintained during the year. Income obtained from business and occupation is taxable at the slab rate that applies to taxpayers. Slab charges applicable in 2019-20 / 2020-21 are as follows:

An additional 4% Health and Educational Cess will be applicable to the tax amount calculated.

Set of losses from business and profession and carryover

• Non-speculative business losses can be set off against any income other than salary in the current year. Taxpayers can carry forward the remaining losses for 8 years and set off against business income in future years.
• Speculative business losses can be offset against speculative business income only. The taxpayer can carry forward the remaining loss for 4 years and offset it only for future speculative business income.
• Specify the business loss can be set against any income other than salary in the current year. Taxpayers can carry forward the remaining losses for 9 years and set off against business income in future years.

TDs / advance tax on income from business and occupation

The taxpayer is required to pay taxes on the income obtained from business or professional activities. Direct tax on income can be paid in 2 ways:

• TDS (withholding tax): TDS to pay while you earn the concept is deducted on payments made to taxpayers for goods and services sold. Hence business owners need to keep in mind the TDS that are deducted by their customers. You can claim deductible TDs while submitting an ITR for a business or occupation. And if there is any loss from B&P it will become your refund, and if you get any profit from B&P it will reduce your tax liability.
• Advance tax: if the tax liability is expected to exceed Rs. 10,000, the taxpayer must calculate and pay the advance tax. This is to avoid interest under sections 234B and 234C:

Taxes for freelancers

Freelancers are people who are self-employed. They have the freedom to choose their own projects and assignments. They do not earn salary income. The nature of their income is more professional income. Therefore, it is covered under the head" income from business and occupation "under the Income Tax Act.

The sum of all receipts received from different projects will be income. And all costs associated with freelancers will be deducted. Below are the taxable incomes of freelancers:

Net taxable income=gross receipts–freelance expenses

What is speculative business income filing your tax return?

First of all, to understand speculative business income, you need to understand what speculative trading is.

When a contract for the purchase and sale of goods (including stocks and shares) is regularly or eventually settled without the actual delivery or transfer of the goods, it is called a speculative transaction, and if it is to receive income from such transactions, it will be income from speculative transactions.

One example of a speculative business is a stock brokerage, where a broker earns money by buying and selling goods without taking delivery of the same. Income from ordinary business and speculative business is calculated and maintained separately.                                                                                             

Estimated taxation scheme

Estimated taxation schemes have been introduced to give relief to small taxpayers from the tedious work from keeping a book of accounts and getting audited accounts. Estimated taxation schemes can be selected by Indian individuals, Huf, and partnership companies.

Experts with total income up to INR50Lakhs can opt for an estimated taxation scheme in which they can provide 50% of the total income as taxable income and pay taxes according to the slab rate applied to such income. When taxpayers opt for this scheme, they cannot claim any of the occupational-related costs as deductions.                                                                                                   Applicability of tax audit

Companies with total sales of INR1Cr or higher. It is responsible for the tax audit during the fiscal year. Taxpayers are required to electronically submit Form 3CD for the tax audit report. In addition, Finance Minister Nirmala Sitharaman announced that the due date for the tax audit for the current fiscal year has been extended to October31, 2020, from September30, 2020

In the case of a profession, the taxpayer is responsible for conducting a tax audit if the total receipt under this income head exceeds INR50Lakhs during any fiscal year. If the taxpayer did not audit the accounting books, he is responsible for paying fines of up to 0.5 lakh of 1.5% of the total income or lower.   

ITR forms and document checklist

The ITR3 form is for individuals or HUF with income from a business or profession, from a Partnership Company/LLP. Simply put, ITR3 should be submitted when income is obtained under the head" profit or profit of a business or profession". It is also submitted if a tax audit is applied. However, experts can choose an estimated taxation scheme and declare 50% of total income as income by submitting ITR 4AY from 2017-18.

GST applicability and return application

If the turnover from the business exceeds Rs, then the GST (goods and services tax) is also applied Rs. 40 lakhs in a particular fiscal year. For the profession, if your receipt exceeds Rs, then GST will apply. 20 LAX one must take the registration of the GST and file the return of the GST as well. The types of GST registration are:

• Mandatory registration,
• Optional registration,
• Complex scheme registration.

Basis of income charges under business and profession under Section 28

The income imposed under" profit and profit of a business or profession" is as follows:

• Profits and profits from any business/profession carried by the assessor at any time during the previous year
• Any compensation/other payment received by or by,—any person, by any name, to cover the whole or significant whole of the affairs of the Indian company.
• Profit from the acquisition of trade from the Association of certain services performed by its members
• Value of any perk/profit from business or profession, whether it is converted into money
• Interest, fees, salaries, rewards, or bonuses received by or from company partners
• All sums received under the key man insurance policy, including the sum given as a bonus
• Income from any speculative transactions
• Any sum, whether received/Accounts Receivable, Cash/for type:

1. To not perform any acts related to any business, or
2. To not share know-how, patents, copyrights, trademarks, licenses, franchises or other business/commercial rights

• Profit incurred by transfer of Duty-Free replenishment certificate
• Any profits made by the transfer of Duty qualified passbook scheme
• Profits made from the sale of licenses made under the import (control) instruction, 1955, import and Export (Control) Act, 1947 (18 of 1947))
• Tax-free income under business and occupation

Well, let us look at tax-free income under the head "interests and interests of business and profession”:

Rent of home property: it is taxable under the head "income from home property", even if the property constitutes a share transaction of the recipient of the lease, or he has a business to let the property into the lease.

This is taxable under the head "income from other sources": equity dividends considered. However, dividends received from the Indian company cannot be taxed in the hands of shareholders. Even, if we consider it a regular business activity.

From business or occupation--additional amortization

It can be claimed in new plant & machine acquired after 31st march2005 by assessors

• The year before it starts manufacturing or production.
• Additional depreciation rate: 20% of the actual cost. 

Non-absorption amortization Section 32 (2)

• If the profit for the year is not enough to fully or partially absorb depreciation,
• Depreciation, which is not absorbed, can be deducted from the head of other income. If it still remains
• It can be carried over to a year of subsequent assessment to be regulated against which it is not absorbed.

Key takeaways:

• Business is the activity of buying and selling goods aimed at making a profit.
• A profession is a profession that requires intellectual skills. For example, doctors, lawyers, etc. A profession is an activity, which requires special skills that are used to earn income
• For example, painters, singers, etc. For income tax purposes, there is no difference between business income, occupational income and occupational income.
• Below under Section 28 are the taxable income to be taxed under the head profit or profit
• Sec. Under 145, income under business & profession must be calculated according to the method of accounting, followed by periodic valuation.
• Two methods that are recognized are the accounting of the cash system and the commercial system. In there are some expenses that are partially allowed or prohibited under the Income Tax Act.
• Profits and losses there are some income tax-free on the credit side of a/c or not taxed under the head business/profession.
• Future taxable income. It can be carried forward for an unlimited period.                         
• Under the head there is a part of the taxable income "profit & profit of business and profession" method of accounting

4.2 Income from Other Sources

Income that cannot be taxed under the head of other income and should not be excluded from gross income must be taxed as residual income under the head of "income from other sources".

All types of income not covered by the above head are covered under this head and are paid. Income from other sources is provided for in Section 56 of the act. Some of these are:

• Dividends in Section 2 (22));
• Win from lotteries, horse racing, crossword puzzles, and other games;
• Contributions received by the employer as evaluator from his work towards staff welfare schemes;
• Interest on corporate bonds, government bonds/bonds;
• If the assessor leaves to the contract apparatus, plants or furniture belonging to him and further buildings, then the payment from this can be assessed as a salary from other sources, if it is not taxable under the head of “interests and interests of business or profession”;
• Total received under the key man insurance policy, including compensation;
• Salary from hardware, factory or furniture belonging to the assessor.

Gift that cannot be charged:

• Gifts received from relatives
• Gifts received during marriage
• Gifts are given by local authorities
• Gifts received in the form of inheritance
• Gifts received from any funds, institutions, hospitals, etc.

Deduction [Section 57]]: The following expenditures are allowed as deductions from taxable income under the top of “other sources income:

Expenses not deductible [Section 58]:

Key takeaways:

• According to Section 14 of the Income Tax Act 1961, there can be several modes of income for individuals.
• The calculation of income tax is an important part, which must be calculated according to the income of a person.
• For hassle-free calculations, income must be properly classified so that there is zero confusion about the same thing.
• The five main heads of income by Section 14 above for the calculation of income tax in India are:

      Income from salary

      Income from home property

      Income from business or profession profits and profits

      Capital gains income

      Income from other sources

4.3 Taxation of Individuals and Firms

A company is an association of two or more people who have come together to do business and share their interests. Section 4 of the Partnership Act, 1932, defines a partnership as “the benefit of the business carried by either of them acting for all or for all."”

Those who have agreed to do business together are personally called "partners" and collectively called “companies". They are complying with an act called a “partnership certificate." A Partnership Act is a trust for a company that has the same articles of association as a trust agreement.

From 1993-94, partnership companies were classified as;

1. Recognized as a partnership company (PFAS)
2. Partnership companies rated as association of corporate taxation persons (PFAOP) scheme:
3. The company is taxed as a separate entity i.e. separate from its partners. Whether the company is registered or not.
4. The definition of a company includes a limited liability partnership, and LLP is treated the same as a company.
5. The share of the partner in the company's income is exempt, and calculating the personal income of the company or the share of the partner is exempt with his hands
6. Any salary, bonus, commission or reward (whatever the name is) paid to the partner is allowed as a deduction to the company, and the same is taxable in the hands of the partner. These expenses can be deducted as subject to certain restrictions under the Income Tax Act of 1961.
7. Interest on partners paid by the company will be deducted subject to the maximum rate of interest@12% pa. The amount is taxable in the hands of the partner.
8. . The company will be taxed on a surcharge at 30% flat plus 4% cess plus 12% of taxable income if net profit exceeds 1 crore. However, surcharges are subject to marginal relief (if the income exceeds one crore rupees the total amount paid as income tax and surcharges shall not exceed the total amount paid as income tax on the total income of one crore rupees than the amount of income above one crore rupees .

Conditions (PFAS) to be met by companies that are evaluated as such:

1. Section 184; of the Income Tax Act 1961 governs the taxation and valuation of companies. Companies must meet these conditions in order to be evaluated as a company;
2. Section 184 (1) (I): the company should be certified by an instrument called a “partnership certificate”:

   It should be in writing;

   It should not be act or verbal;

   The Act includes: the name of the company, the location of the business, the nature of the business, the start date of the business, the term of the partnership (if any), the capital clause, the profit sharing rate, the remuneration paid to the partner, the interest paid to the partner, the arbitration clause (if any), the drawing, the authority to operate the bank account, the method of calculating profits and the storage of accounting books, the management of the business, the obligations of the partner, the evaluation of goodwill, the increase in the partner's capital this agreement may include, but is not limited to, the removal or inclusion of partners and some other provisions agreed between partners.

Note: the individual share of the partner must be specified in the partnership certificate; the loss will be shared by the partner according to the profit sharing ratio. However, in the case of minors, how the loss of the company will be shared between the main partners should be clearly specified in the deed.

A certified true copy of the partnership certificate is submitted on the first return of the company. The act can be done by all partners (major ones). The certificate may be submitted by an authorized representative with an authorization letter.

If there are changes in the composition of the company or the profit sharing rate, payment of compensation and interest to partners, etc., a revised copy of the certificate must be submitted together with the return.

Claim a deduction for compensation paid to a partner:

Section 40 (B); claims of compensation deductions to partners;

1. Remuneration should be paid to working partners;
2. Rewards are not always recognized as equal partnership certificates;
3. Remuneration should not relate to the period before the Partnership Act.
4. The reward must not exceed the allowable limit

Note: the above conditions also apply in all cases the compensation paid in the representative capacity.

Section 40 (B) the description is defined as follows;

      Individuals who are partners of the company;

      Such individuals are actively engaged in carrying out the work of the company's business/profession.

Note: to claim the deduction of compensation, it should be authorized, authorized or directed by the Partnership Act or Partnership Act is not a work partner.

Circular No.739, dated march25, 1996, CBDT lay down two conditions;

1. Specify the amount to be paid to the partner or
2. The method of quantifying remuneration must be specified in the partnership certificate.

Sood Brij & Associates V CIT[2011]203taxman188delhi;The quantum of reward or the method of calculating the quantum of reward should be stated in the partnership certificate and must be determined or determined on an undetermined, undetermined, or future date.

The maximum amount allowed by Section 40 (B); the amount that can actually be deducted is;

1. Amount of compensation permitted under Section 40 (B) or (B)
2. The amount of compensation paid to or paid to partners debited into the profit and loss account, whichever is lower.

Book profit-how to calculate:

1. First, you need to calculate the net profit or take the net profit from the profit and loss account;

2. Adjustments provided for in articles 28-44 (those necessary to convert the net profit of the profit and loss account into taxable business income shall be applied.）

3. Add the compensation paid to the partner if it is debited to the profit and loss account.

Note:

1. Billable income under capital gains, income from the property of the house, and income from other sources should not be part of the book profit.

2. Depreciation that is not absorbed is deducted, but losses that are not absorbed are not deducted.

3. While calculating the profit of the book, the permissible deductions provided under Sections 80C to 80U must be ignored.

Claim deductions for interest paid/paid to partners:

Interest on partners is deducted after compliance with the provisions of Articles 184 and 40 (b), 1961 of the Income Tax Act.

Section 40 (B); the following conditions must be observed;

1. Certified equal partnership certificate payable of interest;
2. In terms of interest payments, after the period of cooperation.
3. The rate of interest should not exceed@12pa.

Note: if the interest rate exceeds@12pa, the excess amount paid@12% is not deductible. The above provisions do not apply if interest is paid to a person who acts beyond the competence of the representative.

Cancellation of carryover and loss in the event of a change in the company Constitution:

Article 78 contains provisions on the cancellation of carryover and loss in the change of the Constitution of the partner company due to the death or retirement of the partner (that is, when the partner leaves the company due to retirement or death). In this case, the percentage of losses attributable to the business partner cannot be carried forward by the company.

Calculation of taxes:

1. First, find income under various heads;

2. In accordance with the provisions of Section 70-78 of the Income Tax Act, 1961, the current losses as well as adjustments for previous years. We find the total income;

3. From gross income to deduct the deductions specified under via chapter, we find net income;

4. Net income application @ 30%

5. Added: surcharges@10% if net profit increases Rs. 1.0 crore;

6. Additional: education cess and special education cess;

7. Deduct rebates if under sections 86, 90,90A and 91;

8. Additional: if there is interest expense;

9. Deductible: deductible if there are taxes/TDs paid in advance;

10. The balance will be the amount of tax to be paid

Admissibility of compensation and interest on estimated taxation:

Compensation and interest are calculated at a predetermined rate u/S.44AD, shall not be allowed as a deduction from the estimated income calculated in 44ADA. However, for Section 44AE, compensation and interest to partners shall be allowed to be deductible under sec40 (b).

Key takeaways:

• Partnership as “the benefit of the business carried by either of them acting for all or for all.”
• Conditions (PFAS) to be met by companies that are evaluated.
• A certified true copy of the partnership certificate is submitted on the first return of the company.
• Section 40 (B); claims of compensation deductions to partners
• The maximum amount allowed by Section 40 (B); the amount that can actually be deducted.
• Interest on partners is deducted after compliance with the provisions of Articles 184 and 40 (b), 1961 of the Income Tax Act.
• Article 78 contains provisions on the cancellation of carryover and loss in the change of the Constitution of the partner company due to the death or retirement of the partner (that is, when the partner leaves the company due to retirement or death

Books:

VI-A deduction – under Section 80C, 80CCC & 80CCD

Section 44AB – Tax Audit under ITA

ITR filing procedure