Profit & Gains of Business or Profession

PROFIT & GAINS OF BUSINESS OR PROFESSION

Problem 1

Computation of admissible depreciation for the A.Y 2011-12:

Particulars	Plant & Machinery	Building
Rate of depreciation	15%	10%
W.D.V. as on 1/4/2010	250000	1000000
Add : Purchase during the year	300000	Nil
	550000	1000000
Less : Sale during the year	(600000)	(200000)
	(50000)	800000
Less : Depreciation	Nil	80000
W.D.V. as on 31/3/2011	Nil	720000
Short term capital gain	50000	Nil
Assume the building block is alive i.e. it has other buildings too which have not been sold.

Problem 2

Computation of depreciation u/s 32

Particulars	Factory building	Machinery	Computer	Furniture & fixture	Motor car
Rate of depreciation	10%	30%	60%	10%	15%
WDV on 1.4.20010	500000	800000	--	100000	60000
Add: Purchased during the year	--	200000	60000	--	--
	500000	1000000	60000	100000	60000
Less: Sale during the year	--	600000	--	--	--
	500000	400000	60000	100000	60000
Depreciation	50000	105000 1	18000 2	10000	9000
WDV on 31.3.2011	450000	295000	42000	90000	51000
Total depreciation	192000

1. (300000 * 30%) + (100000 * 30% * 50%) =105000
2. 60000 * 60% * 50% = 18000

Problem 3

Statement showing eligibility and computation of additional depreciation for the A.Y. 2011-12

Assets	Rate	Cost	Additional depreciation
Assets	Rate	Cost	Remarks	Amount
Plant A	20%	300000		60000
Plant B	NA	200000	As asset is 100% depreciable	-
Plant C (2 nd hand)	NA	300000	As plant is not a new asset	-
Plant D	10%	500000	As asset was put to use for less than 180 days	50000
Furniture	NA	100000	As additional depreciation is applicable only on plant & machinery	-
AC used in factory (Machinery)	10%	200000	As asset was put to use for less than 180 days	20000
Machinery used in office	NA	200000	As additional depreciation is not applicable on office appliances	-

Problem 4

Computation of depreciation for Machinery (15%)

Particulars	Amount
W.D.V. as on 1/4/2010	475000
Add : Purchase on 14/4/10	50000
	525000
Less : Sale value	Nil
	525000
Depreciation	78750
Depreciation allowed to Firm [from 1/4/10 to 17/9/10 (Rs.78750 * 170/365)]	36678
Depreciation allowed to Company [from 18/9/10 to 31/3/11 (Rs.78750 * 195/365)]	42072

Problem 5

Computation of written down value as on 31-3-2011

Particulars	Amount
Block 1: Plants @ 15%
W.D.V. as on 1/4/2010	460000
Add : Addition during the year being plant earlier used for scientific research	Nil
Less: Sale made during the year	Nil
Less: Depreciation allowed u/s 32 @ 15%	69000
W.D.V. as on 31.3.2011	391000

Problem 6

Tax consequence u/s 35ABB in several previous years up to 2011-12

Particulars	Amount
Deduction u/s 35ABB(1) in previous year:
- 2007-08	20000
- 2008-09	42222
- 2009-10	67222
- 2010-11	67222

Workings

Since payment has been made in installments, hence, deduction u/s 35ABB(1) shall be available as under:

Particulars	1 st Installment	2 nd Installment	3 rd Installment	Total
Amount of installment	200000	200000	200000
Remaining life (in years)	10	9	8
Deduction available in the previous year:
2007-08	20000	-	-	20000
2008-09	20000	22222	-	42222
2009-10 & onwards	20000	22222	25000	67222

Problem 7

For the P.Y. 2009-10, Jay writes-off Rs.72000 as bad debts. Hence, Rs.72000 is deductible in the A.Y. 2010-11.

Computation of taxable amount u/s 41(4) for the A.Y. 2011-12

Particulars	Working	Case 1	Case 2	Case 3
Balance of debt as on 1/4/2010	Working	70000	70000	70000
Amount received as final payment		40000	70000	85000
Bad debt u/s 36(1)(vii)		30000	-	-
Bad debt recovery u/s 41(4)		-	-	15000

Working: Calculation of balance of debt as on 1/4/2010

Opening balance as on 1/4/2009	50000
Add : Sale during the year 2009-10	100000
Less : Bad debts written off at the end of the year 2009-10	(72000)
Less : Collection during the year 2009-10	(8000)
Closing balance on 31/3/10	70000

Problem 8

Computation of Profits and gains of business or profession of Mr. Mahesh for the A.Y. 2011-12

Particulars	Note	Details	Amount
Net Surplus as per books of account			91000
Add: Expenditure disallowed but debited in books
Car expenses for personal purpose	1	1000
Domestic servant salary		1000
Personal expenses		17000
Donation to N.D.F.	2	500
Income tax	3	13300	32800
			123800
Less: Expenditure allowed but not debited in books
Depreciation	4	10500
Less: Income not taxable but credited in books
Gift from father-in-law		5050
Dividend [Exempted u/s 10(34)]		8000
Less: Income taxable under other heads but credited in books
Profit on sale of investments		6450	30000
Profits & gains of business or profession			93800

Notes

As 50% of car is used for official purpose, hence as per sec. 38, expenditure is apportioned.
Donation to National Defence Fund is allowed u/s 80G.
Income tax is specifically disallowed u/s 40(a).
Computation of depreciation:

Particular	Furniture (10%)	Building (10%)
W.D.V. as on 1.4.2010	25000	80000
Add/(Less) : Purchase/(Sale) during the year	--	--
Depreciation	2500	8000

Problem 9

Computation of taxable income under the head "Profits & gains of business or profession"

Alternative 1) Direct estimation of income u/s 44AE

As per sec. 44AE, estimated income shall be calculated -

even for a part of the month;
even if asset is acquired under hire-purchase or installment purchase system; and
from the month when the asset is acquired (irrespective of date of put to use)

Direct estimation of income u/s 44AE

Vehicle	No. of vehicle	Acquired on	Details	Amount
Heavy	3	17/7/2006	Rs.5000 * 3 vehicles * 12 months	180000
Medium	2	15/5/2007	Rs.4500 * 2 vehicles * 12 months	108000
Heavy	1	17/7/2010	Rs.5000 * 1 vehicle * 9 months	45000
Medium	2	03/5/2010	Rs.4500 * 2 vehicles * 11 months	99000
Heavy	1	11/2/2011	Rs.5000 * 1 vehicle * 2 months	10000
Light	1	23/5/2010	Rs.4500 * 1 vehicle * 11 months	49500
Profits & gains of business or profession				491500

Alternative 2) Computation of income as per the provision of sec. 28 to 38

Particulars	Amount
Gross Receipts of the business	700000
Less : Expenditure related to such business	(480000)
Profits & gains of business or profession	220000

Though the assessee has lower taxable income in option 2 but to claim his income lower than the estimated income as per provision of this section, he will have to -

Maintain books of account as required u/s 44AA; and
Get his accounts audited irrespective of turnover.

Since he does not maintain proper books of accounts u/s 44AA, he will have to estimate income u/s 44AE.

Conclusion : Income under the head "Profits & gains of business or profession" is Rs.491500.

Problem 10

Computation of profit and gains of business or profession of Mr. X for the A.Y. 2011-12

Particulars	Note	Details	Amount
Net profit as per books of accounts			167000
Add: Expenditure disallowed but debited in P/L A/C
Penalty	1	3000
Advertisement	2	35000
Non business expenditure		10000	48000
			215000
Less : Income not taxable under this head but shown in P/L A/c	3		25000
Profits & gains of business or profession			190000

Notes

Any sum paid on account of penalty shall be disallowed.
Any amount payable to a contractor or sub-contractor, being resident, for carrying out any work on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted is disallowed u/s Sec. 40(a)(ia).
Dividend is exempt u/s 10(34)

Problem 11

Computation of Profits and Gains of Business or Profession of for the A.Y.2011-12

Particulars	Note	Details	Amount
Net profit as per books of account			(69000)
Add: Expenditure disallowed but debited in P/L A/c
Income Tax	1	20000
Wealth Tax	2	40000
Patent	3	40000
Interest to proprietor	4	30000
Agricultural Expenses	5	40000
Life Insurance Premium	6	30000
Wages (Delayed deposit of employee's contribution to provident fund)	7	12000
Employee's contribution to provident fund	7	20000
Advertisement Expenses	8	10000
Depreciation (treated separately)	9	30000
Rent to proprietor	4	10000
Interest on loan taken for payment of income tax	10	6000
Bonus	11	5000
Excess payment made to relative	12	15000	308000
			239000
Less: Expenditure allowed but not debited in P/L A/c
Depreciation as per Income tax Act (on tangible asset)		60000
Depreciation as per Income tax Act (on Patent)		10000
Weighted deduction for payment to National Laboratory	13	15000
Capital expenses for scientific research	14	50000
Less: Income not taxable but credited to P/L A/c
Dividend		60000
Agro Income		100000	285000
			(46000)
Adjustment of stock
Add: Under valuation of closing stock	15	26667
Add: Over valuation of opening stock	16	16667	43334
Profits & Gains of Business or Profession			(12666)

Notes

Income tax is disallowed u/s 40(a)
Wealth tax is disallowed u/s 40(a)
Patent acquired on or after 01-04-1998 is eligible for depreciation @ 25%.
Interest and rent paid to proprietor is disallowed.
Expenses relating to exempted income are not allowable.
Payment of Life insurance premium is eligible for deduction u/s 80C
Any sum received by an employer from his employees as contribution towards Provident Fund is treated as an income of the employer. Subsequently, when such sum is credited by the employer to the employee's account in the relevant fund on or before the due date of crediting such contribution prescribed under the relevant Act, then deduction is allowed.
Advertisement in souvenir of political party is disallowed u/s 37(2B)
Depreciation as per Income-tax Act shall be allowed.
Interest on loan taken for payment of income tax is not allowed.
As per sec.43B, bonus is allowed only if the same is paid within due date of furnishing return.
Excess payment made to relative is disallowed u/s 40A(2)
Donation to National Laboratory is eligible for weighted deduction @ 175%
Capital expenditure other then cost of land incurred during the previous year for scientific research is allowed u/s 35.
Overvaluation of opening stock by 20%
Stock at overvalued figure (i.e. at 120%) = 100000
Stock at cost (i.e. at 100%) = Rs.83333 (i.e. Rs.100000/120%)
Overvaluation of stock = Rs.16667 (i.e. Rs.100000 - Rs.83333)
Under valuation of closing stock by 25%
Stock at undervalued figure (i.e. at 75%) = 80000
Stock at cost (i.e. at 100%) = Rs.106667 (i.e. Rs.80000/75%)
Undervaluation of stock = Rs.26667 (i.e. Rs.106667 - Rs.80000)

Problem 12

Computation of Profits and Gains of Business or Profession of Shri Ranjan for the A.Y.2011-12

Particulars	Note	Details	Amount
Net profit as per books of account			160000
Add: Expenditure disallowed but debited in P/L A/c
Provision for bad debt	1	3000
Income Tax	2	5000
Fines paid to Customs Authority	3	2000
Interest to proprietor	4	2500
Life Insurance Premium	5	4000
Donation	6	17000
Depreciation (treated separately)	7	23000
Salary to proprietor	4	5000
Cost of goods sold to proprietor	4	1000	62500
			222500
Less: Expenditure allowed but not debited in P/L A/c
Depreciation as per Income tax Act	7	3000
Sale made to proprietor	4	1000
Less: Receipt not taxable or not considered as income but credited to P/L A/c
Refund of Income tax	8	1700
Dividend from UTI	9	4300
Recovery of bad debt		1000	11000
			211500
Adjustment of stock
Add: Over valuation of opening stock	10		2000
Profits & Gains of Business or Profession			213500

Notes

Anticipated or notional expenses are disallowed.
Income tax is disallowed u/s 40(a)
Any payment made for violation of law is not allowed u/s 37(1)
Payment made to proprietor is disallowed. Further, cost of goods (being taken by proprietor) is not deductible.
Payment of Life insurance premium is eligible for deduction u/s 80C
Donation made to Janata Dal is eligible for deduction u/s 80 GGC however, donation given in kind to municipality for family planning is disallowed.
Computation of depreciation

Particulars	Amount
Opening Written Down Value	150000
Add : Asset acquired during the year	50000
	200000
Less : Sale proceeds of assets	160000
	40000
Depreciation [Rs.40000 * 15% * ]	3000

Refund of income tax is not an income
Dividend from UTI is exempt u/s 10(35)
Overvaluation of opening stock by 10%
Stock at overvalued figure (i.e. at 110%) = 22000
Stock at cost (i.e. at 100%) = Rs.20000 (i.e. Rs.22000/110%)
Overvaluation of stock = Rs.2000 (i.e. Rs.22000 - Rs.20000)