Income Tax Tutorials

Under the Income Tax Act, 'Profits and Gains from Business or Profession' are taxable.

 

First let’s see what each of these terms means, under the IT Act.

 

Frequently Asked Questions
(Click on the question to go to the answer)

 

1. What is ‘Business’?
    
2. What is ‘Profession’?
    
3. What are the ‘profits and gains’?
    
4. What are the general principles governing the computation of taxable income under the head "profits and gains of business or profession?
    
5. What books of account have been prescribed to be maintained by a person carrying on business under the Income tax Act?
    
6. Are professionals required to maintain any books of account under the Income tax Act?
    
7. I am a small time trader. Do I need to maintain any accounts?
    
8. Where should the books of account of my business be kept and for how long?
    
9. Do I have to keep an accountant to maintain my account?
    
10. What is meant by audit of the books of account?
     
11. In my business it is impossible to issue bills for every transaction. How can I be expected to maintain proper accounts?
     
12. I am a medical practitioner. Do I need to maintain any accounts?
     
13. How do I take full advantage of all my business related expenses?
     
14. Can I save tax by distributing my business income?

 

1. What is ‘Business’?
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   The term "business" includes:
    
   1. trade,
   2. commerce,
   3. manufacture, or
   4. any adventure or concern in the nature of trade, commerce or manufacture.



 
2. What is ‘Profession’?
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   The term "profession" implies professed attainments in special knowledge as distinguished from mere skill; "special knowledge" which is "to be acquired only after patient study and application". Profession basically refers to the exploitation or utilization of one’s skills and knowledge independently. Profession includes vocation. Some examples are legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, artists, writers, and so on.



 
3. What are the ‘profits and gains’?
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   The words 'profits and gains' are defined as the surplus by which the receipt from the business or profession exceeds the expenditure necessary for the purpose of earning those receipts.



 
4. What are the general principles governing the computation of taxable income under the head "profits and gains of business or profession?
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   There are certain basic rules that apply when you are assessing your taxable income from either of these 2 heads, these are as follows:
    
   • Business or profession should be carried on by you i.e. the assessee. It is not the ownership of business which is important, but it is the person carrying on a business or profession, who is chargeable to tax. For example, you may be drawing a salary from the business, even if you are not the owner of the business. This would count as income from business, and would become taxable.
   
   
   • Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at any time during the previous year. This income is taxable during the following assessment year.
   
   
   • Profits and gains of different business or profession carried on by the assessee are not separately chargeable to tax i.e. tax incidence arises on aggregate income from all businesses or professions carried on by the assessee. But, profits and loss of a speculative business are kept separately.
   
   
   • It is not only the legal ownership but also the beneficial ownership that has to be considered.
   
   
   • Profits made by an assessee in winding up of a business or profession are not taxable, as no business is carried on in that case. However, such profits may be taxable as capital gains or as business income, if the process of winding up is such as to involve the carrying on of a trade.
   
   
   • Taxable profit is the profit accrued or arising in the accounting year. Anticipated or potential profits or losses, which may occur in future, are not considered for arriving at taxable income. Also, the profits, which are taxable, are the real profits and not notional profits. Real profits from the commercial point of view mean a gain to the person carrying on the business and not profits from narrow, technical or legalistic point of view.
   
   
   • The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business.
   
   
   • The Income tax act is not concerned with the legality or illegality of business or profession. Hence, income of illegal business or profession is not exempt from tax.



 
5. What books of account have been prescribed to be maintained by a person carrying on business under the Income tax Act?
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   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. For companies the books of account are prescribed under the Companies Act.



 
6. Are professionals required to maintain any books of account under the Income tax Act?
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   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.



 
7. I am a small time trader. Do I need to maintain any accounts?
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   Any business or profession that has an annual turnover/gross receipts exceeding rupees ten lakh and net profit of rupees one lakh twenty thousand, must maintain such books of account and documents from which its income can be reasonably ascertained by the income tax department.



 
8. Where should the books of account of my business be kept and for how long?
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   All the books of account and related documents should be kept at the main place of business i.e. where the business or profession is generally carried on. These should be preserved for a minimum of six years.



 
9. Do I have to keep an accountant to maintain my account?
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   This depends upon your ability and need. You may even prefer to use the accounting software available in the market. However, you should remember that in case of turnover exceeding Rs. 60 lakh per annum in a business and gross receipts exceeding Rs. 15 lakh per annum in a profession, a professional charted accountant must audit your accounts.



 
10. What is meant by audit of the books of account?
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    Auditing means checking the correctness and genuineness of your accounts and verifying whether accounting principles and standards have been properly followed in conduct of your business and preparation of accounts. Under Income Tax Act, this verification will have to be carried out by an independent Chartered Accountant.



 
11. In my business it is impossible to issue bills for every transaction. How can I be expected to maintain proper accounts?
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    There can be no excuse for not maintaining the bill books. However, if you are a smalltime retail trader with your annual turnover of less than Rs. 60 lakh, then you are permitted to declare your income on presumption at 8% of your actual sales. In that event no books of account need be maintained.



 
12. I am a medical practitioner. Do I need to maintain any accounts?
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    Yes. All the books and document prescribed for professional need to be maintained. Additionally, a daily case register in prescribed form no.3C and an inventory of drugs, consumables and other stocks also need to be maintained.



 
13. How do I take full advantage of all my business related expenses?
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    All your work/business related expenses can be claimed as business expenses. Vouchers/bills would be required to support expenses and hence book keeping is important for this category. A variety of expenses including rent or home office expense, travel costs, communication costs (telephone, internet), business meetings, supplies and utilities can be claimed as expenses. For being deductible, expenses must be both ordinary (common and accepted) and necessary (appropriate and helpful) in your work/business. If such expenses are incurred partly for work purposes and partly for personal purposes, you can deduct only the work related portion. One can also claim depreciation on work related assets like laptops/computers, furniture, UPS and vehicles. Hence bills of capital expenditures should also be maintained.



 
14. Can I save tax by distributing my business income?
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    If you have family members who can help in various aspects of your business, it makes sense to employ them (legitimately) and offer an appropriate remuneration. By hiring a family member to work, you will effectively shift a part of your income to your relative. Accordingly, your business can take a deduction for reasonable compensation paid to an employee (relative), which in turn reduces the amount of taxable business income that flows through to you.
    
    One can also form a Hindu Undivided Family (HUF) as a separate entity, which helps further distribute income to this entity as well.

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Comments
johnf583@aol.com Aug 03, 2012 Hello! gceedad interesting gceedad site! I'm really like it! Very, very gceedad good!
krdholakiya@hotmail.com Jul 09, 2019 I am by profession a plumber. i am doing work since last 5 years. I have income & as wel as some expenses too. Now i wish to file my I.T. RETURN my question is that in which head my income fall ? Income from business & Profession OR Income other sources ? Lets me reply THANKING YOU..
krdholakiya@hotmail.com Jul 09, 2019 I am by profession a plumber. i am doing work since last 5 years. I have income & as wel as some expenses too. Now i wish to file my I.T. RETURN my question is that in which head my income fall ? Income from business & Profession OR Income other sources ? Lets me reply THANKING YOU..

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