Income from business/Profession

1. By Prof. Augustin Amaladas M.Com., AICWA.,PGDFM., B.Ed. Income from business/Profession

2. INCOME FROM HOUSE PROPERTY • House property for this purpose means : Any building which has the characteristic features of a building. E.g.: residential building, cinema theatres etc.

3. INCOME FROM HOUSE PROPERTY Taxed on “Notional Basis”

4. Conditions for taxing income under the head house property. • There should be a building or a land appurtenant there to . AND • The property should be owned by the assessee. AND • Such building should not be used for own business or profession.

5. Section 22(Charing Section) • “ The Annual Value of building or land appurtenant thereto is chargeable to tax in the hands of the owner provided the same is not used for own business or profession”. • E.g.: CASE 1: Mr. X lets out a HP to Mr. Y, who intends to carry on his private business. – Income from HP.

6. CASE 2: Mr. X uses his property to carry on his own private business. – No income from HP.

7. Exceptions to the rule – that the rental income is taxable under HP. • Income from sub letting – Income from OTHER SOURCES since the assessee is not the owner. • Composite rent – When a building has been let out along with the furniture , then such letting out is called composite letting. As per sec 56(2) , when the rent is inseparable – income from other sources.

8. As per CIT vs. SHAMBHU INVESTMENTS PVT. LTD., (2003) (s.c) such inseparable composite rent is taxable under the head HP. At present Supreme Court decision has to be followed.

9. Section 23( Annual Value) • Sec 23(1)(a) – AV = Rent at which the HP is reasonably expected to be let out.

10. Sec 23( Annual Value) • Sec 23(1)(b) – If the house property is actually let out and if rent received or receivable is higher than the reasonable rent as per sec 23(1)(a), then such rent received or receivable is taken as the ANNUAL VALUE.

11. Sec 23( Annual Value) • Sec 23(1)(c) – If the property is actually let out and was vacant during the year and rent received or receivable is lesser due to vacancy then such lower rent shall be the annual value.

12. Section 23( Annual Value) • Sec 23(2) – If a HP is self occupied . OR If a HP couldn't be occupied for reasons of employment / profession elsewhere. In such cases the AV= NIL.

13. Sec 23( Annual Value) • Sec 23(3) – Conditions for sec 23(2)- Such HP shouldn't be let out during any part of the year. AND No other income is derived from such property.

14. Section 23( Annual Value) • Sec 23(4) – If the assessee owns more than one Sec 23(2) property then: AV of one HP at the option of the assessee is NIL. AND All the other HP’s are Deemed Let Out Property [DLOP] and annual value thereof is decided as per sec 23.

15. Section 24 Deductions. • SEC 24(a)-Standard deductions @30% of NAV – only for let out property and deemed let out property. • SEC 24(b)- interest on capital or loan borrowed for ACR3 (acquisition ,construction, renewal ,repairs and reconstruction) in respect of 1. LOP/DLOP – any amount is allowed 2. SOP – Deductions is as follows:

16. - Normal deductions up to Rs 30000/- - Special deduction up to Rs 150000/- SOP Deductions

17. IMPORTANT NOTES • Interest deduction up to Rs 150000/-.It is available only for acquisition and construction. Provided: (a) The loan taken on / after 01-04-1999. & construction completed within 3 years from the end of the financial year in which loan is borrowed. (b) For claiming deduction’s interest certificate & details of principal outstanding, interest amount etc. Along with return ofincome.

18. Pre- Construction Period Interest • Allowed in five equal installments commencing from the year of completion. • PCP means period commencing from the date of loan or immediately preceding the March 31st ofthe year of completion which ever is earlier.

19. Section 25( amounts not deductible) • Interest paid outside India without TDS or Without having an arrangement for TDS in India is disallowed.

20. Section 25A( Unrealized rent recovered) • UR recovered is taxed in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt . No deduction is allowed against this income.

21. Section 25B( Arrears of rent received) • It is taxable in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt. • Deduction = 30%

22. Section 26( Property owned by Co- Owners) • Share of co-owners definite, ascertainable respective share is taxable in the hands of the co owner. • Share of co-owners not definite, ascertainable entire income is taxed as the income of AOP.

23. Important Points Annual value of partly SO & partly vacant Period based (i.e. 9 months – SOP & 3 months – vacant) = ANNUAL VALUE = NIL Usage based (i.e. 75% used as – SOP & 25% as – vacant) = ANNUAL VALUE = 25% .

24. Important Points • Annual value of partly SO & partly LO Period based (i.e. 9 months – SOP & 3 months – LOP) Usage based (i.e. 75% used as – SOP & 25% as – LOP) Treated as DLOP for entire period. AV of LOP to be taken at 25%. AV of SOP NIL.

25. Presented by : • Anirudh Prasad-05A078. • Amrut .V.Katwa-05A077.

26. Charging Section[Sec.28] • Profits and gains of any profession/profession • Any compensation received related business • Income received from members of similar profession • Any benefit or perquisites from business /profession • Export incentives from government

27. Charging -Continue • Any interest, salary, bonus, commission or remuneration received by a partner from firm. • Sum received(compensation) from other company not to carry on any business for know how, patent, copy right, trademark. • Profits and gains of managing agency

28. Meaning of business • Profit motive • Business and rendering services to others • Business cannot be carried on with oneself

29. Export incentives • Duty drawback import entitilement licences • Are taxable u/s 28-Business/profession

30. Business income not taxable u/s 28 • 1. Rental income in case of dealer in property taxable under the head income from house property[u/s22]. • 2. Dividend on shares in case of a dealer in shares- taxed under income from other sources [u/s 56]. • 3. winning from lotteries (lottery business) taxed u/s 56-income from other sources.

31. Losses deductible from business income • Loss due to natural calamity • Loss due to non acceptance of goods • Reduction in value of foreign currency which is meant for purchase of stock. • Loss of cash/goods due to embezzelment, burglary, forfeiture of deposits. • Loss of forgoing advance given by sugar industries to formers due to monsoon failure

32. Loss due to destruction of Capital asset. Loss on sale of investments held as investment. Loss of advance to set up a business but business could not be started. Depreciation in value of foreign currency for capital purpose Anticipated future losses. Loss of discontinued business Loss from illegal business[T.A.Qureshiv.CIT(2006)SC] Loss not deductible from business

33. Computation of assessable profits/loss for tax • Net profit as per P/L Account • Add: Amount debited to P/L A/c in respect of the following • Loss of earlier years • Capital losses • Personal expenses (such as drawings) • Income tax, surtax, wealth tax, gift tax, estate duty[Direct taxes], tax penalty, penal interest, fine.

34. Continues • Add: Charity and donation • Gifts and presents to others • All reserves/provisions such as tax provision, Reserve for dividend, provision for bad debts except provision for depreciation • All expenses related to other heads of income

35. Continues • Add: Expenses not deductible u/s 40 and 40A • Expenses debited to P/L A/C not admissible u/s 30 to 40A • Add: Amount not credited to P/L A/c • Deemed income • Deduct :Income credited to P/L A/c but not chargeable under other heads

36. Continues • Less: • Salary income( income from salary(u/s 15) • Rental incomeIncome from House property(u/s22) • Capital gain(u/s 45) • Dividend[ Income from other sources(56)] • Direct taxes refund such as Income tax, Wealth tax, estate duty, surtax refunds • Bad debts, excise duty recovered not allowed as expenditure preceding previous years • Deduct: • Expenses not debited to P/L A/c but allowed u/s 30 to 40A • Depreciation u/s 32 • Income chargeable under income from business/profession.

37. Specific deductions expressly allowed u/s 30 to 37 • 1.Rent (Sec.30) • Repairs(including painting of a house ) • Land revenue, local taxes and municipal taxes • Insurance against risk of damage or destruction • Not allowed: a) arrears of rent b) share of profit instead of rent c.

38. Repairs and insurance of machinery, plant and furniture(sec.31) • Revenue repair-allowed • Capital expenditure – not allowed • Quantum of expenditure is not important

39. Depreciation Allowances(sec.32) • Conditions: • Asset must be owned by the assessee(Registration is not important),full control over asset,right to retain the possession and defend are characteristics of ownership. • Used or ready to use for business purpose • Used in the previous year • Both tangible and intangible assets • Right on occupancy on Lease property is entitled for depreciation • If hirer purchaser has right over asset and hire seller will loose all rights- Depreciation is allowed.

40. Depreciation-Continues • Insurance premium, repairs and other expenditure incurred on leased business asset are deductible in the hands of lessor. • If any asset is fully controlled such as lease the capital expenditure incurred by lessee can provide depreciation[32(1)(ii).

41. Lease property • Registered ownership is not necessary Sec. 53A of the transfer of property Act. • If the assessee can be the co-owner to claim depreciation • Any capital expenditure incurred by the person who takes building can provide depreciation on capital expenditure. • Rules of Accounting Standard (AS19) not applicable for depreciation as per IT Act.

42. Hire purchase • Conditions: • Hire purchaser can provide depreciation if hire purchaser has uninterrupted right over the asset. • The seller looses his right • Who can provide depreciation? • Hire purchaser.

43. Residential quarters If used by the assessee’s employees –depreciation is allowed.

44. 50% of rate of depreciation • If an asset acquired during the previous year. • Put into use or ready to use for less than 180 days. • Exceptions:1. Put into use for less than 180 days butready to use for more than 180 days –full rate of depreciation • If asset purchased in the preceding year to current previous year but put into use for less than 180 days during the current previous year what is the rate of depreciation rate? • If an asset is not used at all-No depreciation not only for first year but also for subsequent period

45. Full rate of depreciation. • Can depreciation be provided on intangible assets such as know- how, patent rights, copy right, trade mark, licences, franchises etc. depreciation?

46. Meaning of Building and Plant • Building means: Super structure only. It does not include site. • Plant : Includes ships, vehicle, books, technical know-how report, scientific apparatus and surgical equipment. • It does not include tea bushes or livestock or building or furniture and fittings. • If assessee does not claim depreciation whether is depreciation available?

47. Method of depreciation • Yes. • Block asset method. • What is block asset method? • Similar nature of asset having the same rate of depreciation are clubbed together.

48. 100% depreciation? • 1. Building acquired on or after September 1, 2002 forming part of water supply project • 2. Pollution control equipments • 3. waste control equipment • 4.wooden parts used in artificial silk manufacturing machine • 5.cinimatograph films • 6. Books

49. Commercial vehicle • If acquired and used before 31,March 2002. -Rate of depreciation is 50% .

50. calculation of depreciation • Block value in the beginning • Add:- Purchase of asset of the same block • Less:- Net sale value of the consideration received/receivable in cash /cheque/draft if any of the block of assets sold during the year