INCOME FROM BUSINESS

General principles governing business income

1.
2.
3.
4.

Business / profession must be carried on by the assessee

Business / profession must be carried on by the assessee
during the previous year
Taxable profit is the profit which accrues / arises during the
year.
Any amount recovered during the year which was claimed
as a deduction during the year is chargeable as income.

Deductions allowed in computing business income

Basic principles governing admissibility of expenses
1.
2.
3.
4.
5.
6.

Expenses should be revenue in nature

Expense should relate to the business
Expenses should relate to the taxable income
It should have been incurred during the previous year
It should not have been incurred for any purpose which is an
offence or prohibited by law.
No allowance in respect of anticipated losses

In a nutshell, any revenue expenditure actually incurred for

earning business income is allowed as a deduction.

Deductions expressly allowed

1.
Rent, rates, taxes, repairs and insurance of building
2.
Repairs and insurance of machinery, plant & furniture
3.
Depreciation
4.
Expenditure on scientific research
5.
Expenditure on acquisition of patents
6.
Expenditure on knowhow
7.
Amortization of telecom license fees
8.
Payment to the association and institution carrying out rural development
9.
Amortisation of preliminary expenses
10. Amortisation of expenditure under voluntary retirement scheme
11. Insurance premium on health of employees
12. Bonus / commission to employees
13. Interest on borrowed capital
14. Employers contribution to Recognised PF/ Superannuation fund / Gratuity
fund
15. Bad debts
16. Advertisement ( except in a political partys newspaper/pamphlet etc.)

Deductibility of certain expenses

Expenditure on scientific research
a) Amt paid to National lab/ IIT / University 200%
b) Amt spent on in house research by specified business like
bio technology 200%
c) Amt spent on research by other companies 100%
d) Amt paid to research association for scientific research
175%
e) Amt paid to a company for scientific research / amt paid
for social or statistical research 125%
Note: Expenses incurred for acquisition of land is not allowed.
1.

2. Expenditure on obtaining license for operating telecom

services over the period of license

3. Preliminary expenses over a period of 5 yrs

4. Expenses on amalgamation / merger - over a period of 5
yrs
5. Expenses on VRS - over a period of 5 yrs
6.Expenses on prospecting minerals - over a period of 10 yrs
7. Capital expenditure on promoting family planning - over
a period of 5 yrs

Expenses expressly disallowed

. Any

payment by way of interest, royalty, fees for technical

services payable outside India subject to TDS will be disallowed
if TDS is not deposited before the due date of filing the return.
. Any salary payable outside India will be disallowed if TDS has
not been paid.
. Any amount paid to residents on which no TDS has been
deducted or paid before the due date of filing the return will be
disallowed to the extent of 30% of such amount.
. Income tax, wealth tax, interest on delayed payments of income
tax
. Excessive or unreasonable payments made to related persons.
. Payments exceeding Rs.20000 paid otherwise than by a/c
payee cheques / bank drafts subject to rule 6D.

The following expenses are allowed only they are

actually paid at least before the due date of filing
the return.
1.
2.
3.
4.
5.

Sales tax, excise duty, service tax etc.

Contribution to RPF/ SA fund/ Gratuity fund etc
Bonus / commission to employees
Interest on loans taken from financial institutions /
scheduled banks
Leave salary to employees.

The following expenditure will not be allowed :

1.
2.

Expenditure incurred for any purpose which is offence /

prohibited by law.
Expenditure on CSR

Computation of Income from business

Net profit as per Profit & Loss A/c

xxx

Add: Expenses disallowed

Less : Incomes considered under other heads of income
Less : Exempt incomes
Less : Expenses allowed not claimed as deduction

xxx
xxx

Income from business

xxx
xxx