Computation of Business Income
Direct Taxation • Profits & Gains of Business or Profession
Computation of Business Income
A complete working chart for converting the Profit & Loss Account balance into taxable business income under the Income-tax Act — every adjustment, add-back, and deduction laid out step by step.
From the Profit & Loss Account balance to taxable business income: add back disallowed items, deduct allowable items and exempt income
For computation of business profits, the Profit and Loss Account serves as the basis. The P & L Account shows certain expenses and losses which are either fully or partly disallowed under the provisions of the Income-tax Act. On the credit side there are certain incomes which are either tax-free or not taxable under this head. The chart below helps compute the business income of an assessee, starting from the balance as per the P & L Account.
I. Add: Expenses Claimed but Not Allowed Under the Act
| Item | Amount |
|---|---|
| All provisions and reserves (Reserve for bad debts / Depreciation / Income Tax etc.) except creation of reserve by financial corporations u/s 36 | — |
| All taxes (i.e., Income Tax, Advance Income Tax, Wealth Tax etc.) except Sales Tax, Excise duty and Local taxes of premises used for business | — |
| Rent paid to self | — |
| All capital expenses except on scientific research | — |
| All capital losses | — |
| All charities and donations | — |
| All expenses relating to other heads of income (e.g., Taxes on house property etc.) | — |
| Cultivation expenses | — |
| Any interest on capital unless the amount is borrowed | — |
| All personal expenses (Drawings etc.) | — |
| Any depreciation if wrongly debited | — |
| Gifts and presents (Non-advertisement) | — |
| Any type of fine or penalty | — |
| Any payment to a partner (in case of firms only, by way of salary, interest, bonus, commission or remuneration in excess over prescribed limits) | — |
| Any salary or interest payable outside India unless tax is deducted at source or is paid according to the law | — |
| Past losses (i.e., loss of the past years) | — |
| Any other expenditure which is not incurred according to the provisions of law | — |
| Salary paid to self or any other member of family for casual help | — |
| Personal life insurance premiums | — |
| Any amount invested in savings such as NSS, NSC, PPF etc. | — |
| Rent for residential portion | — |
| Speculation loss | — |
| Bad debt still recoverable | — |
| Legal expenses on a criminal case, or a personal case of an employee | — |
| Legal expenses on acquiring an asset | — |
| Legal expenses on curing title of an asset | — |
| Loss by theft from residence | — |
| Expenses on illegal business | — |
| Employer's contribution to an unrecognised provident fund | — |
| Difference in trial balance | — |
| Difference due to under-crediting of stock | — |
| Cost of patent rights being capital expenditure | — |
| Cost of technical know-how being capital expenditure | — |
| Preliminary expenses being capital expenses | — |
| Total of these items is added to the profit, or adjusted out of the loss | (A) |
II. Deduct: Allowable Expenditure Not Debited to the P & L A/c
Out of the amount arrived at (A) above, deduct any expenditure which is allowable under the Act but has not been debited to the P & L A/c:
| Item | Amount |
|---|---|
| Actual bad debts (not charged in the P & L A/c) | — |
| Depreciation (not charged in the P & L A/c) | — |
| Any other expenditure incurred according to the provisions of law | — |
| Difference due to under-debiting of stock | — |
| Total of these is deducted from (A) above, and we get | (B) |
III. Deduct: Income Exempt or Not Taxable Under This Head
Out of the amount arrived at (B) above, deduct any income which is either exempt or not taxable under the head "Profits and Gains of Business or Profession":
(a) Incomes Exempted from Tax
| Item | Amount |
|---|---|
| Post office savings bank interest | — |
| Agricultural receipts | — |
| Gifts from relatives | — |
| Income-tax refund | — |
| Bad debt recovered — disallowed earlier | — |
| Life Insurance maturity amount | — |
| Any capital receipt | — |
| Withdrawal from PPF | — |
(b) Incomes Taxable Under Other Heads
| Item | Amount |
|---|---|
| Part-time salary | — |
| Interest on securities | — |
| Rent from house property let out | — |
| Capital gains | — |
| Dividend, bank interest, winnings from lotteries, race course etc. | — |
| Total of these is deducted from (B) above, and we get taxable profit from the business |
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