Guide: Income from Business and Profession

Author
By Hiral Vakil on March 8, 2019

Income from Business & Profession

Let us first understand what is Business and Profession.

  • Business, in simple words, means an occupation carried on by a person with a view to earn profit.
  • Business includes any…
    • Trade
    • Commerce
    • Manufacturing
    • Even rendering services to others is considered as business.
    • For eg. owning a shop, running a hotel, transportation, travel agency, share broking etc.
  • Business does not include income from Profession or partnership firm.
  • “Profession” may be defined as a vocation, or a job requiring some thought, skill and special knowledge.
  • So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill like,
    • Legal
    • Medical
    • Engineering
    • Chartered Accountant
    • Architectural etc.

Any income generated from the above mentioned activities will be taxed under the head “Income from Business and Profession”.

What is Speculative Business Income?

First of all, we have to understand what is speculative transaction in order to understand the Speculative Business income.

When a contract for purchase or sale of any commodities (including stocks and shares) is periodically or ultimately settled without the actual delivery or transfer of the commodities, it is called a speculative transaction and if your business is to earn income out of such transaction, then that will be your income from Speculative Business.

One of the example of Speculative Business is stock broking, where the broker earns money by way of buying and selling the commodities without taking delivery of the same.

Incomes from normal business and speculative business are to be calculated and maintained separately since they are treated differently while e-filing the Income Tax Return.

Incomes chargeable under Business/ Profession:

Here are a few examples of incomes which are chargeable under this head:

  • Normal profit from general activities as per profit and loss account of Business/Profession.
  • Although profits from the speculative business (eg. Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return.
  • Any profits from activities other than normal business activities should be shown as casual income and will be shown under Income from Other Sources.
  • The value of any benefits whether convertible into money or not from business/profession activity.
  • Any income by way of interest, commission, salary, remuneration, profits etc. received by the partner of the firm will be treated as income from business/profession under the hands of the partner. However, the share of profit from the partnership firm will be exempt under the hands of the partner.
  • Amount recovered on account of bad debts which were adjusted against the profits of the earlier years, etc..

Expenses allowable from Business/ Profession Income:

All the expenses which are incurred wholly and exclusively in relation to the business and profession shall be allowed against the income from such business and profession. Here are some of the expenditures which are allowed:

  • Rent and insurance of building.
  • Payments for Legal and Professional services.
  • Salary, Bonus, Commission etc. to employees.
  • Salary, interest and remuneration to working partners subject to certain conditions.
  • Traveling and conveyance expenses.
  • Membership fees.
  • Payment for know-how, patents, copyrights, trademark, licenses.
  • Depreciation on fixed assets.
  • Expenditures on scientific research for business purposes.
  • Preliminary expenses in case of a company.
  • Communication expenses
  • Discount allowed to customers.
  • Advertisement expenses in respect of promotion of business products.
  • Financial Charges (eg. Interest on loans).
  • Bank Charges/Bank Commission expenses.
  • Entertainment/Business Promotion expenses.
  • Staff Welfare expenses.
  • Printing and stationery expenses.
  • Postage expenses.
  • All other expenses relating to business/profession.

All these expenses are allowed on the basis of actual payments as well as on the accrual basis on the date of finalisation of the accounts. For eg. employee’s salary for the month of March 2015 will be paid in the month of April 2015. However, since the salary is related to the Financial Year 2014-15 (which ends on 31st March 2015), it can be claimed against the income from business/profession income of the Financial Year 2014-15.

However, certain expenses are allowed only on the payment basis. Here are some of the examples of such expenses:

  • Any taxes, duty, cess or fees by whatever name called.
  • Expenses towards contribution to Provident fund, Employees’ state insurance premium, Gratuity fund or other funds for welfare of the employees.
  • Bonus, commission or leave encashment payable to employees.
  • Interest on loan from public financial institutions, state financial corporations or scheduled banks.

Now let’s have a look at some of the expenses which are not allowed to be deducted from the business/profession income at all:

  • Expenditure on any type of advertisement for political parties.
  • Any interest, royalty or fees for technical services or any other sums which are payable outside India or in India to a non resident or a foreign company on which tax has not been deducted or after deduction, not deposited before the prescribed time.
  • Any interest, commission, rent, royalty, professional or technical fees paid or payable to any person in india on which tax has not been deducted and if deducted then not deposited before the due date of e-filing the return.
  • Any tax calculated on the basis of the profit of the business/profession.
  • Any remuneration paid to non working partner.
  • Any interest to partners if not specified in the agreement and not more than 12%.
  • Any payment in cash exceeding Rs. 20,000 (Rs. 35,000 in case of payments for plying, hiring or leasing goods carriages) subject to certain exceptions as per rule 6DD of the Indian Income Tax Act.
  • Any provision for the payment of gratuity to the employees.
  • Personal expenditure.

Frequently Asked Questions

1. Which ITR to file for business income?

In case of proprietor having business income, he can file either ITR-4 or ITR-4S. If regular books of accounts are maintained then ITR-4 can be filed or else ITR-4S. Firms carrying business need to file ITR-5 and companies have to file ITR-6.