Computation of Business Income
Direct Taxation · Profits & Gains of Business or Profession
Computation of Business Income
Working chart: P&L balance → taxable business income under the Income-tax Act.
The Profit and Loss Account is the starting point. Debit items may be fully or partly disallowed; credit items may be exempt or taxable under another head. Use the chart below from the P&L balance.
Balance as per P&L A/c (Net Profit or Loss)
Add: Expenses claimed but not allowed+ A
Deduct: Allowable spend not in P&L− B
Deduct: Exempt / other-head income− C
Add: Income from any other business= Taxable Business Income
I. Add: Expenses claimed but not allowed
| Item | Amt |
|---|---|
| Provisions and reserves (bad debts / depreciation / income tax etc.) except financial-corporation reserve u/s 36 | — |
| Taxes (income tax, advance tax, wealth tax etc.) except sales tax, excise, local tax on business premises | — |
| Rent paid to self | — |
| Capital expenses except scientific research | — |
| Capital losses | — |
| Charities and donations | — |
| Expenses of other heads (e.g. taxes on house property) | — |
| Cultivation expenses | — |
| Interest on capital unless borrowed | — |
| Personal expenses (drawings) | — |
| Depreciation wrongly debited | — |
| Gifts and presents (non-advertisement) | — |
| Fine or penalty | — |
| Partner salary/interest/bonus/commission/remuneration above limits (firms) | — |
| Salary or interest payable outside India without TDS / tax paid | — |
| Past losses | — |
| Expenditure not as per the Act | — |
| Salary to self or family for casual help | — |
| Personal life insurance premiums | — |
| Savings (NSS, NSC, PPF etc.) | — |
| Rent for residential portion | — |
| Speculation loss | — |
| Bad debt still recoverable | — |
| Legal expenses: criminal / personal case of 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 contribution to unrecognised PF | — |
| Difference in trial balance | — |
| Difference due to under-crediting of stock | — |
| Cost of patent rights (capital) | — |
| Cost of technical know-how (capital) | — |
| Preliminary expenses (capital) | — |
| Total added to profit / adjusted against loss | (A) |
II. Deduct: Allowable expenditure not in P&L
From (A), deduct allowable items not debited to P&L:
| Item | Amt |
|---|---|
| Actual bad debts (not charged in P&L) | — |
| Depreciation (not charged in P&L) | — |
| Other expenditure allowed by the Act | — |
| Difference due to under-debiting of stock | — |
| Total deducted from (A) | (B) |
III. Deduct: Exempt or taxed under another head
From (B), deduct income exempt or not taxable under “Profits and Gains of Business or Profession”:
(a) Exempt from tax
| Item | Amt |
|---|---|
| Post office savings bank interest | — |
| Agricultural receipts | — |
| Gifts from relatives | — |
| Income-tax refund | — |
| Bad debt recovered (disallowed earlier) | — |
| Life insurance maturity | — |
| Capital receipt | — |
| Withdrawal from PPF | — |
(b) Taxable under other heads
| Item | Amt |
|---|---|
| Part-time salary | — |
| Interest on securities | — |
| Rent from house property let out | — |
| Capital gains | — |
| Dividend, bank interest, lottery / race winnings etc. | — |
| Total deducted from (B) = taxable business profit |
Finally: Add income from any other business (legal or illegal) for income under Profits and Gains of Business or Profession.
Computation of Business Income · Direct Taxation SeriesPGBP
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