Profits and Gains from Business and Profession: formula sheet

Key formulas

Business income (basic scheme)

Business income = Receipts chargeable − Allowable expenses and depreciation + Amounts disallowed or deemed as income

This is the logic, not a section formula. Always show the adjustments one by one.

Tax year

Tax year = 12 months starting 1 April

A business set up during the year is taxed from its start date to 31 March. Income is charged for the tax year in which it is received or accrues, as per the method regularly followed.

Basis of accounting

Cash basis: receipts and payments. Mercantile basis: accrual and incurrence

The method must be regularly followed. Companies and others required by law to keep accrual accounts cannot use the cash basis. Some deductions are allowed only on payment, whichever method you use.

Site restoration fund deduction (Schedule X, para 1)

Deduction = lower of (a) amount deposited in the specified account and (b) 20% of business profits before this deduction

Allowed before set off of brought-forward loss. Interest credited to the account is deemed to be a deposit.

Deemed profit on closure of specified account (Schedule X, para 3(3))

A = B − C

A = deemed business profit of that tax year, B = amount withdrawn on closure, C = amount payable to the Central Government as profit or production share under the agreement.

Premises, plant and furniture costs (Section 28(1))

Allowed: insurance premium + land revenue, local rates, municipal taxes + rent (as tenant) + current repairs

Repairs must not be capital in nature. Where the occupier is a tenant, repairs are allowed only if he has undertaken to bear their cost.

Partial business use (Section 28(2))

Allowed = Section 28(1) amount × fair business-use proportion

Applies where the asset is partly used or not wholly and exclusively used for business. The proportion is determined by the Assessing Officer.

Bad debt write-off (Section 31(2))

Deduction in the year of write-off in accounts, if already taken into income (or banking/money-lending loan)

A provision for bad and doubtful debts is not a written-off bad debt (Section 31(3)(a)).

Recovery shortfall (Section 31(2)(b))

If recovery < (debt − amount deducted), the deficiency is deductible in the year of ultimate recovery

This is the Act's condition for later recoveries of written-off debts.

Provision limit: scheduled and non-scheduled banks, co-operative banks (Section 31(1))

Up to 8.5% of total income before this deduction and Chapter VIII + up to 10% of aggregate average advances of rural branches

Excludes foreign banks, and primary agricultural credit societies and primary co-operative agricultural and rural development banks. Rural-branch advances are computed as prescribed.

Provision limit: foreign banks, public financial institutions, State Financial/Industrial Investment Corporations, NBFCs (Section 31(1))

Up to 5% of total income before this deduction and Chapter VIII

Total income is taken before the provision deduction and before Chapter VIII deductions.

Non-resident head office expenditure (Section 60)

Limit = 5% of adjusted total income (or 5% of average adjusted total income if adjusted total income is a loss)

Applies to head office expenditure incurred outside India that is attributable to the business in India.

Interest on bad or doubtful debts of specified financial institutions (Section 56)

Taxable in the year credited to profit and loss account or actually received, whichever is earlier

This is a charging rule, not a deduction.

WDV of block of assets

WDV = [(A – D) + B – C] – E

A = WDV of the block at the end of the preceding tax year; B = actual cost of assets acquired in the tax year; C = money payable plus scrap value of assets sold, transferred, demolished, destroyed or discarded in the year (C cannot exceed (A – D) + B); D = depreciation actually allowed for the preceding tax year; E = slump sale adjustment. Section 41(1)(c).

Depreciation on block

Depreciation = Prescribed rate % × WDV of block

Section 33(3)(a). Rates are prescribed, so use the rate given in the question.

Half-year rule

Depreciation = 50% of prescribed rate, if asset acquired in the year and used for less than 180 days

Section 33(4). Applies to assets acquired and put to use in the same tax year. Check the days of use carefully.

Additional depreciation

20% of actual cost of new machinery or plant (10% if used for less than 180 days, and a further 10% in the next tax year)

Section 33(8) and (9). Only for manufacturers/producers and power generation, transmission or distribution businesses, and only for eligible new machinery or plant.

Deduction on sale of a power-undertaking asset

Deduction = WDV – (money payable + scrap value), if money payable plus scrap value is less than the WDV and the shortfall is written off in the books

Section 33(10). It applies to a tangible asset on which depreciation was claimed and allowed under section 33(2), that is, an asset of an undertaking engaged in generation or generation and distribution of power. Three conditions must all be met: (a) the asset is sold, discarded, demolished or destroyed in a tax year other than the year it was first put to use; (b) the money payable plus scrap value is less than its WDV; (c) the deficiency is actually written off in the books of account.

Restriction to profits

If profit before depreciation is less than the depreciation, allow only up to the profit; carry forward the rest

Section 33(11). If there is a loss before depreciation, none is allowed that year and the whole amount is carried forward and added to depreciation of the next year.

Mixed use

Allowable depreciation = fair proportionate part for business use

Section 33(3)(b). The Assessing Officer decides the proportion where the asset is not wholly and exclusively used for business.

Excessive payment to specified person (section 36(2))

Disallowance = amount the Assessing Officer considers excessive or unreasonable

Judged against fair market value, legitimate business needs and benefit derived. Only the excess is disallowed, not the whole payment.

Specified person for a company (section 36(3))

Company: any director or his relative; also a person with substantial interest, or a business in which such persons have substantial interest

For an individual it is a relative; for a firm, a partner or his relative; for an AOP, a member or his relative; for an HUF, a member or his relative.

Substantial interest (section 36(3)(b))

Company: beneficial owner of shares carrying ≥ 20% voting power at any time in the tax year. Other cases: beneficially entitled to ≥ 20% of profits

Shares with a fixed rate of dividend do not count. The test is at any time during the tax year.

Cash payment limit (section 36(4))

Payment or aggregate of payments in a day to one person > ₹10,000 and not by specified banking or online mode → expenditure disallowed

The whole expenditure paid this way is disallowed, not just the excess. The test is per person per day.

Limit for goods carriages (section 36(6))

₹10,000 is read as ₹35,000 for plying, hiring or leasing of goods carriages

Applies to sub-sections (4) and (5).

Later cash payment of earlier deducted liability (section 36(5))

Payment in a later year > ₹10,000 in a day, not by specified mode → deemed income of that later year

Applies where the liability was deducted in an earlier tax year. The amount is taxed as business income when paid.

Marked to market or expected loss (section 36(9))

No deduction, except as allowable under section 32(1)(h)

Covers expected losses. Only actual losses are generally deductible.

Head office expenditure of non-resident (section 60)

Limit = 5% of adjusted total income; if adjusted total income is a loss, 5% of average adjusted total income

Average is the mean over the three preceding tax years in which the assessee was assessable; two years if only two, one year if only one. Allowed only for expenditure attributable to the Indian business.

Income from other sources (section 94)

Not deductible: personal expenses; interest or salary payable outside India without tax paid or deducted; all expenses against winnings from lotteries, games and gambling

Owners of horses kept for racing are excepted for their horse owning and maintenance activity.

General business (section 58, Sl. 1): eligibility and limit

Turnover ≤ ₹2 crore; or ≤ ₹3 crore if cash receipts ≤ 5% of turnover

Assessee must be an eligible assessee. Not available for specified professions, commission or brokerage income, or agency business.

General business: presumptive profit

6% × turnover received by specified banking or online mode (by the section 263(1) due date) + 8% × remaining turnover; or actual profit if higher

The higher of the two figures is deemed to be profit. The 6% applies to receipts by specified banking or online mode during the tax year or before the due date.

Goods carriage (section 58, Sl. 2)

Heavy goods vehicle: ₹1,000 per ton × months (or part) owned; Other vehicle: ₹7,500 per vehicle × months (or part) owned

Assessee must own not more than ten goods carriages at any time in the year. Heavy means gross vehicle weight above 12,000 kg. For a heavy vehicle, the ton rate applies to gross vehicle weight or unladen weight, as the case may be. Actual profit applies if higher.

Specified profession (section 58, Sl. 3)

Gross receipts ≤ ₹50 lakh; or ≤ ₹75 lakh if cash receipts ≤ 5% of gross receipts. Profit = 50% of gross receipts or actual profit, whichever is higher

Specified assessee is a resident individual or firm other than an LLP.

Lock-in (section 58(7))

Profit declared under Sl. 1 for a year, then profit not declared as per section 58 in any of the next 5 tax years → not eligible for the scheme for 5 tax years after the year of that default

Applies to Sl. 1 businesses. Under section 58(8), if total income then exceeds the basic exemption limit, the assessee must keep books under section 62 and get an audit under section 63.

Non-resident presumptive rates (section 61)

Ships 7.5% of (A+B); cruise ships 20% of (A+B); aircraft 5% of (A+B); mineral oil services 10% of (A+B); electronics services or technology in India to a resident company 25% of (A+B); turnkey power project 10% of amount paid or payable

Cruise ships are subject to prescribed conditions. Turnkey power project: foreign company and project approved by the Central Government. Electronics (Sl. 6): the services or technology must be provided in India to a resident company that is establishing or operating an electronics manufacturing facility under a scheme notified by the Central Government in the Ministry of Electronics and Information Technology, and that meets the prescribed conditions. Sl. 4 and 5 assessees may claim lower actual profit with books and audit.

Quantum of deduction

Deduction = lower of (a) amount deposited in the specified account, and (b) 20% of profits of the business before any deduction under this paragraph

Profits mean those computed under the head Profits and gains of business or profession. Interest credited to the specified account is deemed to be a deposit.

Order of deduction

Deduction under Schedule X is allowed before set off of brought forward loss under section 112

So the 20% cap is applied to profits before the brought forward loss is set off.

Tax on withdrawal at closure

A = B − C

A is deemed business profit of that tax year. B is the amount withdrawn on closure. C is the amount, if any, payable to the Central Government as profit or production share under the agreement.

Asset sold within eight years

Part of cost of asset relatable to the deduction allowed = deemed business profit of the year of sale or transfer

It applies if the sale is before eight years from the end of the tax year of acquisition. It does not apply to a sale to Government, a local authority, a statutory corporation or a Government company.

Double deduction barred

Deduction allowed once for an amount; expenditure met from the account is not deductible

If a deduction is allowed in one tax year, no deduction is allowed for that amount in any other tax year.

Books: specified profession

Specified profession (section 62(4)) → books of account always required

No monetary limit applies to these professions.

Books: other business or profession (general)

Income > ₹1,20,000 or turnover/gross receipts > ₹10,00,000 in any one of the three preceding tax years

For a newly set up business, the test is whether income or turnover is likely to exceed these limits in the tax year.

Books: individual or HUF

Income > ₹2,50,000 and turnover/gross receipts > ₹25,00,000 (as modified by section 62(2)(d))

Read the text of clause (d) carefully. It modifies clauses (a) and (b) for individuals and HUFs, and it uses 'and' between the two limits.

Books: presumptive claim of lower profit

Claimed profit < deemed profit under section 58(2) or 61(2) → books required

This is section 62(2)(c).

Audit: business

Turnover/gross receipts > ₹1 crore → audit

Section 63(1), Table Sl. No. 1(a).

Audit: business with low cash

Limit becomes ₹10 crore if cash receipts ≤ 5% of total receipts AND cash payments ≤ 5% of total payments

Both conditions must be met. A cheque or draft that is not account payee counts as cash.

Audit: profession

Gross receipts > ₹50 lakh → audit

The ₹10 crore relaxation is stated for business only, not for profession.

Audit: presumptive claim of lower profit

Profit claimed < deemed profit under section 58(2) or 61(2) → audit

Section 63(1), Table Sl. No. 2. Section 63(2) exempts those who declare profit as per section 58(2) or 61(2).

Specified date

Specified date = due date for return under section 263(1) − one month

Audit report must be furnished by this date.

Quick revision

• Business income is computed in a fixed order: book profit, add-backs, allowed deductions, depreciation, deemed profits.
• Learn allowable deductions and disallowances as a pair; many questions test both together.
• Depreciation is a deduction that follows its own rules, so do not copy the book depreciation figure blindly.
• Check conditions and exceptions for every disallowance before applying it.
• Schedule X applies to a business of prospecting for, or extracting or producing, petroleum or natural gas, or both, in India under an agreement with the Central Government.
• Schedule X deduction is the lower of the amount deposited and 20% of business profit before this deduction.
• Schedule X deduction is allowed before set-off of brought forward losses.
• Schedule X requires an audit of the business accounts by an accountant and filing of the report by the specified date.
• Interest credited to the specified account is treated as a deposit.
• Amounts withdrawn on closure, unused withdrawals, and assets sold within eight years of the end of the acquisition tax year can become taxable under Schedule X.
• Tax audit and books of account rules depend on conditions; state the applicable condition in your answer.
• Always end a written answer with a clear conclusion and cite the section.

Common mistakes

• Taxing turnover instead of profit. Fix: Always end with receipts less allowed expenses. Show the profit line clearly.
• Ignoring the basis of accounting and mixing cash and mercantile items. Fix: Write the basis at the top and classify every item against it before adding.
• Allowing a provision for doubtful debts as a bad debt for a trader Fix: Allow only debts actually written off as irrecoverable in the accounts. Under Section 31(3)(a) a write-off does not include a provision.
• Allowing capital repairs or improvements under Section 28 Fix: Section 28 allows only current repairs not in the nature of capital expenditure. Reject extensions, renovations that add value or improve the asset.
• Computing depreciation asset by asset instead of on the block. Fix: For tax, add all assets of the block and compute one figure on the block's WDV. Track assets separately only for the 180-day test.
• Showing a capital gain or loss when one asset in a block is sold. Fix: Simply deduct the sale price from the block's WDV. A gain or loss does not arise merely because one asset of the block is sold, unless the specific rules apply.
• Disallowing only the excess over ₹10,000 for a cash payment. Fix: Under section 36(4) the whole expenditure paid in that way is disallowed once the daily limit is crossed.
• Testing the cash limit per payment instead of per person per day. Fix: Add all payments to the same person in a day. The law speaks of payment or aggregate of payments made in a day to a person.
• Applying 8% to the entire turnover Fix: Split turnover. Use 6% for amounts received by specified banking or online mode within the time allowed, and 8% for the balance.
• Allowing the ₹3 crore limit without checking cash receipts Fix: The ₹3 crore limit works only if cash receipts do not exceed 5% of turnover. For professions, ₹75 lakh needs cash up to 5% of gross receipts.

Exam tips

• Open every answer with the provision: business or profession carried on during the tax year is charged under this head. Then apply facts and conclude.
• State your assumption on the accounting basis when the question is silent. Examiners reward a clear assumption.
• For Schedule X, write the three tests: eligible business, deposit in the specified account before year end, and audit report filed. Then compute the lower of deposit and 20%.
• Show each adjustment on a separate line in numericals so you earn step marks even if one figure is wrong.
• Do not cite section numbers unless you are sure of them. Naming the provision in words is safer than a wrong number.
• Cite the section next to each item: Section 28 for premises costs, Section 31 for bad debts, Section 60 for non-resident head office expenditure.
• In bad debt questions, always state the two tests: written off in accounts and already taken into income (or banking or money-lending loan).
• For provision limits, identify the type of assessee first. The 8.5% and 5% rates come from the table in Section 31(1).