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Income from Business or Profession

Income from Business or Profession

Income from business, profession or vocation is taxed under this head. It includes the following:-

  • Profits or gains of a business;
  • Any compensation or such payment due/received by any person in connection with modification/termination of his management; etc.
  • Income derived by a trade, professional association from specific services for its members;
  • Export incentives;
  • Value of any benefit arising during carrying out of business;
  • Any interest, salary, bonus, commission or remuneration due / received by a partner from the firm in which he is partner;
  • Any sum received under Keyman insurance Policy;
  • Income from speculation business, etc.

How is income from Business or Profession computed ?

Income chargeable to tax is computed after deducting the following:-

  1. Expenditure incurred during the previous year wholly and exclusively for the purpose of the business;
  2. After deducting allowances and deductions provided in Sections 30 to 43D of the I.T. Act. 1961;
  3. The following expenses are not allowable:-
    • Expenditure relating to a discontinued business;
    • Expenditure incurred before setting up of a business;
    • Provisions, anticipated losses, reserves or contingent liabilities, bad debts etc. which have not arisen during the previous year.
What does ‘Profession’ mean?
Profession means exploitation of one’s skills and knowledge independently. Profession includes vocation. Some examples are legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, artists, writers, etc.
I have a large piece of land which I sold by dividing into smaller plots. However I am not in the real estate business. Would this one time activity still be considered as business activity?
Yes. Under the income tax Act even a solitary activity of this nature will be considered as an adventure in the nature of trade and taxed as business income.
What books of account have been prescribed to be maintained by a person carrying on business under the Income tax Act?
The Act does not prescribe any specific books of account for business. However you are expected to maintain your accounts in such a fashion that the net profit of the business can reasonably and easily be arrived at by the department. For companies the books of account are prescribed under the Companies Act. Further the Institute of Charted Accountants has prescribed certain accounting standards for business that are required to be audited by them. The Income Tax department accepts the books of account maintained under these standards.
Are professionals required to maintain any books of account under the Income tax Act?
Yes. The following books and documents are to be maintained mandatory:

  1. Cash book
  2. Journal in case of mercantile system of accounting
  3. Ledger
  4. Carbon copies or counter foils of all bills issued, being serially numbered
  5. Original copies of all expenditure bills. Signed vouchers where bills not available for less than Rs.50.

Income from Business or Profession

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