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CS Executive · Tax Laws and Practice

Profits and Gains from Business and Profession: CS Executive Guide

Profits and gains from business and profession is the head under which business and professional income is taxed. You start with the profit shown in the books, add back disallowed items, deduct allowed items and depreciation, then apply deemed-profit and audit rules. Solve each question in that fixed order and cite the section.

What this chapter covers

This chapter covers how income from a business or profession is computed under the Income-tax Act, 2025. It begins with what is chargeable and on what basis, then moves through allowable deductions, depreciation, expenses that are not deductible, deemed profits and special provisions, the site restoration fund deduction in Schedule X, and finally books of account and tax audit.

The chapter is the core of Part I (Direct Tax) of Paper 7. Most computation questions on firms, companies and professionals start here. The business income you work out feeds into gross total income, then set-off and carry forward of losses, deductions from gross total income, and finally tax liability. If your business income is wrong, every later step is wrong.

The paper is written, so you must show the provision, the working and a clear conclusion. Expect a mix of short theory answers and computation problems. Paper 7 examines the Income-tax Act, 2025 as amended by the Finance Act, 2026 (tax year 2026-27) from the June 2027 session onwards, so use only that Act and not the 1961 Act.

Business income is where the most rules meet the most numbers. A single computation can test allowable deductions, disallowances, depreciation and audit in one question, so a student who knows this chapter well can pick up marks across several parts. Theory questions on narrow provisions such as Schedule X are also predictable, because each has a fixed set of conditions that you can learn once and write in a structured way. Weak preparation here also hurts you in later chapters that depend on business income.

Profits and Gains from Business and Profession: topics in the order to study them

  1. 1Chargeability and Basis of Business IncomeStart here to learn what counts as business income and the accounting basis, since every later rule builds on this.
  2. 2Allowable Deductions in Computing Business IncomeNext learn what you may deduct, so you can build the basic profit computation.
  3. 3Depreciation on Business AssetsDepreciation is a major deduction with its own rules and calculations, best learned once the basic deductions are clear.
  4. 4Expenses and Payments Not DeductibleNow learn the disallowances, which act as the counterpart to allowable deductions and are heavily tested.
  5. 5Deemed Profits and Special Business ProvisionsThese provisions add or modify income beyond ordinary profit, so they make sense after the core computation.
  6. 6Site Restoration Fund Deduction (Schedule X)This is a narrow, condition-based deduction for petroleum and natural gas businesses, easy to learn once the general rules are known.
  7. 7Maintenance of Books and Tax AuditFinish with compliance, which ties together the records and audit requirements that several earlier deductions depend on.

How to prepare Profits and Gains from Business and Profession

Treat this chapter as one computation method plus a set of rules that change the numbers. Learn the method first, then the rules, then practise mixed questions.

  1. Learn the standard format: profit as per books, add disallowed items, deduct allowed items and depreciation, then adjust for deemed profits.
  2. Read each topic in the study order and write a one-page summary of its conditions and exceptions in your own words.
  3. For Schedule X, memorise the structure: who qualifies, the deduction limit (the lower of the amount deposited and 20% of business profit before this deduction), the audit condition, and when withdrawals or asset sales become taxable.
  4. Solve at least one full computation per topic, then mixed questions that combine deductions, disallowances and depreciation.
  5. Practise writing theory answers in the ICSI pattern: the provision, the facts or analysis, then the conclusion with the section cited.
  6. Check that you are using the Income-tax Act, 2025 as amended by the Finance Act, 2026, and revise the amendments separately.
  7. Revise through short notes and re-attempt the questions you got wrong after a gap of a few days.

Common mistakes in Profits and Gains from Business and Profession

  • Starting the computation from the wrong figure or skipping the add-back and deduction steps

    Fix: Always lay out the computation in the same order and show each adjustment on its own line.

  • Using the Income-tax Act, 1961 provisions or section numbers

    Fix: Use only the Income-tax Act, 2025 as amended by the Finance Act, 2026 for the June 2027 session, and mention the 1961 Act only if a question asks for a contrast.

  • Copying book depreciation as the tax deduction

    Fix: Add back book depreciation and then deduct depreciation as per the tax rules.

  • Applying a disallowance without checking its conditions and exceptions

    Fix: For each disallowance note the condition, the exception and the time limit, then test the facts against them.

  • Getting the Schedule X limit or timing wrong

    Fix: Compute both the deposit and 20% of profit before the deduction, take the lower, and apply it before loss set-off.

  • Writing theory answers without a conclusion or section reference

    Fix: Structure each answer as provision, analysis and conclusion, and cite the Act and section where it matters.

Last-day revision: Profits and Gains from Business and Profession

  • 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.

Profits and Gains from Business and Profession practice questions

Profits and Gains from Business and Profession in other exams

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

Profits and Gains from Business and Profession: frequently asked questions

Which Act applies to this chapter for the June 2027 session?

The Income-tax Act, 2025 as amended by the Finance Act, 2026 applies, for tax year 2026-27. The December 2026 session uses the Income-tax Act, 1961 as amended by the Finance Act, 2025, so do not mix the two.

How is this chapter examined in CS Executive?

Paper 7 is a written paper, so you will need to explain provisions and solve computations. Business income sits in Part I (Direct Tax). Answer in ICSI style with the provision, your analysis and a conclusion.

What is the Schedule X deduction in simple terms?

It is a deduction for money deposited in a site restoration or special account by a petroleum or natural gas business in India that has an agreement with the Central Government. The deduction is the lower of the amount deposited and 20% of business profit before this deduction. Audit of the accounts is a condition.

Can a partner claim the Schedule X deduction separately?

No. If the assessee is a firm, association of persons or body of individuals, the deduction is not allowed in computing the income of any partner or member.

Where should I begin if I find this chapter large?

Begin with the basis of business income and the standard computation format. Then add allowable deductions, depreciation and disallowances in that order, and leave the narrow provisions such as Schedule X for later.