Taxation · Profits and Gains of Business or Profession

Chargeability and Computation of Business Income for CA Inter

Updated 5 October 2026 · Fact-checked

Business income is profit from any trade, commerce, manufacture or profession carried on during the tax year, plus specific receipts the Act treats as business income. To compute it, start with net profit as per the profit and loss account, add back inadmissible items, remove income of other heads, and deduct allowable items not yet debited.

Understand Chargeability and Computation of Business Income

The head Profits and Gains of Business or Profession taxes income earned from carrying on a business or profession. It is the head that applies when you earn money by regular activity, not from salary, house property or investments.

Business includes any trade, commerce or manufacture, and any adventure or concern in the nature of trade, commerce or manufacture. A single transaction can be business if it has the character of trade. Profession means an occupation needing intellectual skill, or manual skill controlled by intellectual skill. Examples are a chartered accountant, a lawyer, a doctor and an architect. A vocation is an occupation or calling, usually based on personal skill or talent, that is not strictly a business or a profession. It is also treated under this head.

The Act also lists specific receipts that are chargeable as business income even though they are not ordinary trading profit. Examples: compensation received on termination or modification of a contract or agency; export incentives such as duty drawback and cash assistance, which are taxable as business income; the value of any benefit or perquisite, whether convertible into money or not, arising from business or profession; and sums received under a keyman insurance policy, including any bonus, which are taxed as business income. This rule applies to the proceeds of a keyman policy specifically, not to life insurance receipts in general. Remission or cessation of a trading liability, where you earlier claimed a deduction for it, is also taxed as business income.

Separately, salary, interest, bonus or commission received by a partner from a partnership firm is taxed as the partner's business income, but only to the extent it is allowed as a deduction to the firm.

Profit from speculative transactions is not a specific receipt. It is ordinary business income, but it is treated as a separate speculative business and computed separately from your other business income.

Income is taxed for the tax year, which is the 12-month period starting 1 April. Under the Income-tax Act, 2025 you work with the tax year directly. Business income of a tax year is taxed in that same tax year. If a business is newly set up (or a new source of income arises) during the year, the tax year runs from the date of setting up to the following 31 March, and income is computed only for that period. Profit is computed under the method of accounting you regularly follow (cash or mercantile), subject to the notified income computation and disclosure standards.

The computation starts with the books but does not end there. Net profit in the books is an accounting figure. The tax law needs its own figure, so you adjust for items the Act disallows, items that belong to other heads, and allowances the Act gives in its own way, such as tax depreciation.

Key rules to remember

Business income from books: Business income = Net profit as per P&L account + Inadmissible expenses debited + Expenses of other heads debited + Book depreciation − Incomes of other heads credited − Allowable items not debited (tax depreciation, etc.); Always add back book depreciation and then deduct depreciation as per the Act. Show both lines.
Chargeability test: Taxable under this head if: (a) business or profession is carried on at any time in the tax year, and (b) the income is not taxable under another head; The specific receipts listed in the Act are also chargeable under this head.
Partner's income from firm: Taxable = Salary, interest, bonus, commission received from the firm, to the extent allowed as deduction to the firm; share of profit is exempt; Remuneration or interest above the amounts allowed in the firm's computation is not taxed again in the partner's hands.
Tax year: Tax year = 12 months from 1 April; for a new business, the tax year begins on the date of setting up and ends on 31 March.; Tax year is the term used in the Income-tax Act, 2025. Do not use assessment year.

How to solve Chargeability and Computation of Business Income questions

Use this method for any question on chargeability or on computing business income from a P&L account or from a given list of items.

1Decide whether the activity is a business or profession and identify the tax year for which income is asked.
2Check whether any listed receipt (compensation, export incentive, perquisite, partner remuneration, keyman receipt) is taxable under this head.
3Start with the net profit or loss as per the profit and loss account. Write the starting figure clearly.
4Add back every debit that is not allowable: book depreciation, inadmissible expenses, income-tax, penalties for law violation, and personal or other-head expenses.
5Deduct every credit that is not business income, such as rent, capital gains, interest on securities and dividend. Tax these under their own heads.
6Deduct allowable items not yet debited, mainly depreciation as per the Act and any specific deduction given in the question.
7State the final figure as Profits and Gains of Business or Profession, and mention any assumption you made.

Quickest way: Two-column adjustment grid

When to use it: Use it when the question gives a net profit with many debits and credits, which is typical for a 5-8 mark written question.

Draw two columns: Add and Less. Put every item in one of the two columns.
For each debit ask: is it allowable? If not, it goes to Add. For each credit ask: is it business income? If not, it goes to Less.
Put book depreciation in Add and Act depreciation in Less, as two separate lines.
For MCQs, first remove options that tax a non-business credit under this head. Then remove options that fail to add back book depreciation or fail to deduct depreciation allowable under the Act.
In written answers, give a short note for each adjustment. Step marks are given for each correct treatment, even when the final total is wrong.

Common mistakes in Chargeability and Computation of Business Income

Taking net profit as business income without adjustment
Students assume the books follow the tax law.
Fix: Always run the grid. Net profit is only the starting point.
Leaving book depreciation in the profit and not adding it back
Depreciation looks like a normal expense.
Fix: Add back book depreciation first, then deduct depreciation allowed under the Act. Do both every time.
Taxing rent, interest and capital gains credited in the P&L as business income
These are credited in the same account, so they feel like business profit.
Fix: Remove them from business income and mention they are taxed under their own heads.
Taxing a partner's share of firm profit
Students confuse share of profit with remuneration.
Fix: Share of profit is exempt in the partner's hands. Only allowed salary, interest, bonus and commission are business income.
Using assessment year or old section numbers
Older books and notes use the Income-tax Act, 1961.
Fix: Use tax year and the terms of the Income-tax Act, 2025. If you are unsure of a section number, state the rule without it.
Treating the first tax year of a new business as a full 12 months of income
Students ignore the date of setting up.
Fix: For a new business, the tax year begins on the date of setting up and ends on 31 March, so income is computed only for that period. Check the date in the question.

Worked examples

Example 1

Mr. Arun runs a trading business. His net profit as per the P&L account for the tax year 2026-27 is ₹8,40,000 after debiting: depreciation as per books ₹1,20,000; penalty for violation of law ₹25,000; income-tax ₹60,000; advertisement ₹40,000. It also includes credits of interest on fixed deposit ₹30,000, dividend ₹15,000 and profit on sale of land (a capital asset) ₹2,00,000. Capital gains on the land are computed separately under their own head and are not asked here. Depreciation allowable under the Act is ₹1,50,000. Compute income under the head Profits and Gains of Business or Profession.

Show the solution

Start with net profit as per P&L: ₹8,40,000.
Add back inadmissible debits: book depreciation ₹1,20,000 + penalty ₹25,000 + income-tax ₹60,000 = ₹2,05,000. Advertisement ₹40,000 is allowable, so it is not added back.
Total after additions = ₹8,40,000 + ₹2,05,000 = ₹10,45,000.
Deduct credits that are not business income: interest ₹30,000 + dividend ₹15,000 + profit on sale of land ₹2,00,000 = ₹2,45,000. The land profit credited in the P&L is simply removed from business income. The capital gain is computed separately under Capital Gains and does not depend on this credit.
Balance = ₹10,45,000 − ₹2,45,000 = ₹8,00,000.
Deduct depreciation allowable under the Act: ₹1,50,000. Income = ₹8,00,000 − ₹1,50,000 = ₹6,50,000.

Answer: Income from Profits and Gains of Business or Profession = ₹6,50,000. Interest and dividend are taxed under Other Sources, and the sale of land is taxed under Capital Gains, which is computed separately.

Example 2

Ms. Rita is a partner in a firm. For the tax year 2026-27 she receives salary ₹4,00,000, interest on capital ₹90,000 and share of profit ₹2,00,000. In the firm's computation, salary allowed is ₹3,50,000 and interest allowed is ₹80,000. Compute her income from the firm under the head Profits and Gains of Business or Profession.

Show the solution

Salary and interest from the firm are business income in the partner's hands, but only to the extent allowed as a deduction in the firm's computation.
Salary taxable = ₹3,50,000 (the excess ₹50,000 was not allowed to the firm, so it is not taxed again in her hands).
Interest taxable = ₹80,000 (the excess ₹10,000 is not taxed).
Share of profit ₹2,00,000 is exempt, since the firm has already paid tax on its profit.
Total business income = ₹3,50,000 + ₹80,000 = ₹4,30,000.

Answer: Income from the firm under this head = ₹4,30,000. The ₹2,00,000 share of profit is exempt.

Exam tips

Write the full adjustment grid even for small questions. Examiners award marks for each correct treatment.
Treat every credit in the P&L with suspicion. If it is rent, interest on securities, dividend or capital gain, it moves to another head.
Use tax year and the Income-tax Act, 2025 terminology throughout. Give a section number only if you are sure of it.
In theory questions on chargeability, list the specific receipts the Act taxes as business income and give one line of explanation for each.
In MCQs, check the head first. Many wrong options differ only in which head the item falls under.

Practice questions from Profits and Gains of Business or Profession

Chargeability and Computation of Business Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Chargeability and Computation of Business Income: frequently asked questions

What is business income under the Income-tax Act, 2025?

It is income from any trade, commerce, manufacture or profession, plus specific receipts the Act names, such as export incentives and partner remuneration. It is taxed under the head Profits and Gains of Business or Profession for the tax year.

What is the difference between business and profession?

Business covers trade, commerce, manufacture and adventures in the nature of trade. Profession needs intellectual skill, or manual skill controlled by intellectual skill. Both are taxed under the same head and computed in the same way.

Can I start computation from net profit as per the P&L account?

Yes, this is the usual exam approach. But you must adjust it: add back inadmissible expenses and book depreciation, remove incomes of other heads, and deduct depreciation and other deductions allowed by the Act.

Is a partner's share of profit taxable?

No. It is exempt in the partner's hands. Only salary, interest, bonus and commission allowed to the firm are taxed as the partner's business income.