Income from

Business
Solved Problems

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 Method
1st Method :-
Pick-N-Choose method/ Direct method (Cash book, Bank book, Receipt & Payment A/C, Pointwise, Paragraph Wise )

Income Chargeable XX
Less : Allowable Expenses (XX)
Income From Profession XX

2nd Method :-
Reverse method/ Indirect method (P&L A/C, Income & Expenditure A/C)

Net profit as per P&L A/C (Question) XX

Add : Disallowable Expenses (P&L A/C – Dr.) XX
XX
Less : Allowable Expenses (Adjustment) (XX)
XX
Add : Income Chargeable (Adjustment) XX
XX
Less : Income not Chargeable (P&L A/C – Cr.) (XX)
Income From Business XX

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 Allowable Expenses
1. Rent, Rates, Repairs, Insurance & Taxes of Building u/s 30
2. Repairs and Insurance of Plant, Machinery & Furniture u/s 31
3. Depreciation u/s 32
4. Insurance premium on stock in trade u/s 36(1)(i)
5. Insurance premium paid by Federal milk co-op society on the lives of cattle u/s
36(1)(ia) [Livestock]
6. Premium paid by employer for medical insurance on the health of his
employees u/s 36(1)(ib) { if paid by cheque }
7. Bonus & commission to employees u/s 36(1)(ii) { on actual payment basis }
8. Interest on borrowed capital (i.e, loan) u/s 36(1)(iii) { paid or payable }
9. Employers contribution to recognised provident fund or approved
superannuation Fund u/s 36(1)(iv) { on actual payment basis }
10. Contribution to approved gratuity fund u/s 36(1)(v) {on actual payment basis }

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 Allowable Expenses
11. Employees contribution to provident fund u/s 36(1)(va) [Once deducted then by
default added to net profit, claim for deduction if deposited before due date]
12. Write off allowance for animals u/s 36(1)(vi) [Loss on sale of Livestock]
13. Bad Debts u/s 36(1)(vii)
14. Family planning expenditure u/s 36(1)(ix)
15. General Deduction u/s 37(1)
a. Such expenditure should not be specifically covered u/s 30 to 36 (ie. Point no -1 to
14 of allowable expenses)
b. It should be incurred for the purpose of business or profession
c. It should be revenue exp. & not capital exp.
d. It should not be personal exp.
e. It should not be in the nature of penalties for breaking any laws.
f. Such business or profession should be continued in current year.
g. Expense incurred by the assessee in the previous year.

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 Disallowable Expenses
1. Advertisement expenses in relation to a political party u/s 37(2B)
2. Building, plant & machinery or furniture not used for business u/s 38
3. Taxes & TDS u/s 40(a)
4. Any remuneration, salary, bonus, commission paid to partner by his partnership
firm u/s 40(b)
5. Excessive payment made to specified person u/s 40A(2)
{Relative or Person having substantial interest i.e, holding at least 20% voting
power}
6. Expenses paid in cash in excess of Rs. 20,000 u/s 40A(3) {100% Disallowed}
7. Provision for unapproved gratuity fund u/s 40A(7)
8. Contribution to URPF & Superannuation fund u/s 40A(9,10,11)
9. Deduction on Actual payment basis u/s 43B

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 Nakul and Sahadev are partners of M/s Bharat Sales and Service. Following information has been provided:

Dr. Trading & Profit and Loss A/c for the year ended 31st March, 2016 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 75,000 By Sales 20,00,000

To Purchase 15,00,000 By Closing Stock 85,000
To Gross Profit 5,10,000 ________
________ 20,85,000
20,85,000 By Gross Profit 5,10,000
To Salaries 2,50,000 By Bad debts recovery 15,000
To Commission 40,000
To Sales Tax 35,000
To General Exp 5,000
To Advance Income Tax 54,000
To Interest on Capital 42,000
To Depreciation on Furniture 4,000
To Advertisement 16,000
To Free distribution of samples 3,000
To Insurance premium on life
of partners 8,500
To Printing & Stationery 3,500 _______
To Net Profit 46,000 5,25,000
5,25,000

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Following additional information has been provided:
1. Salaries include Rs.40,000 paid to partners, as per partnership deed and well within the limit u/s 40(b).
2. General expenses are incurred for the purpose of pleasure tour of partners with their family members to
Goa.
3. Income Tax paid includes Rs.14,000 paid as tax on behalf of partners.
4. Bad debts recovered were earlier allowed as a deduction.
5. Interest on capital to partners is in excess of limits specified u/s 40(b) by Rs.1,500 but as per partnership
deed.
On the basis of the information given above compute the taxable income of the firm for the assessment year
2016-17.

Solution:

Name of Assessee : M/s Bharat Sales & Services

Assessment Year : 2016-17
Previous Year : 2015-16
Status : Firm
Residential Status : R & OR
PAN No : ___________

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 Computation of Income from Business
Particular Rs Rs
Indirect Method:
Net profit as per P & L A/c 46,000
Add: Disallowable Expenses
1. General Expenses 5,000
2. Income Tax (Advance) 54,000
3. Interest on Capital 1,500
4. Insurance premium on life of partners 8,500 69,000__
1,15,000
Less: Allowable Expenses NIL____
1,15,000
Add: Income Chargeable NIL____
1,15,000
Less: Income Not Chargeable NIL____
Income From Business 1,15,000_

Note:
Any payments of Salary, Bonus, Commission or Remuneration paid to a working partner, if authorised by the partnership
deed and such amounts are within the limits as specified u/s 40(b) shall be allowed as deduction in the computation of
Income of firm.

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 Following is the Profit & Loss A/c of Mr. Ranjith for the year ending 31.03.2016:

Dr. Profit and Loss A/c for the year ended 31st March, 2016 Cr.
Particulars Rs. Particulars Rs.

To Salaries 1,65,000 By Gross Profit 2,50,000

To Office Expenses 18,000 By Bad Debts recovered 10,000
To Depreciation 14,000 By Dividend 3,000
To Sales Tax 9,000 By Rent from House Property 9,000
To Legal Expenses 8,000 By Commission 10,000
To Income Tax 7,000 By Brokerage 10,000
To Patents Purchase 12,000 By Sundry Receipts 5,000
To Repairs 6,000 By Share of Income from HUF 3,000
To Donation 2,000
To Provision for Bad Debts 3,000
To General Expenses 12,000
To Net Profit 44,000 _______
3,00,000 3,00,000

Additional Information:
1. Salaries include Rs.6,000 paid to workers employed at home.
2. Legal Expenses include Rs.1,000 paid to the advocate in connection with personal case.
3. General Expenses include Rs.4,000 as contribution to Staff Welfare Fund.
4. Out of the Bad Debts recovered only Rs.4,000 were allowed as deduction earlier.

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 Computation of Income from Business
Particular Rs Rs
Indirect Method:
Net profit as per P & L A/c 44,000
Add: Disallowable Expenses
1. Salaries 6,000
2. Legal Expenses 1,000
3. Income Tax 7,000
4. Patents Purchased 12,000
5. Donation 2,000
6. Provision for Bad Debts 3,000 31,000
75,000
Less: Allowable Expenses NIL
75,000
Add: Income Chargeable NIL
75,000
Less: Income Not Chargeable
1. Bad Debts recovered 6,000
2. Dividend 3,000
3. Rent from House Property 9,000
4. Share of Income from HUF 3,000 21,000
Income from Business 54,000

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 Following is the Account of receipt and payment of Dr. Doshi of Manas Clinic

Dr. Receipt & Payment A/c for the year ended 31st March, 2016 Cr.
Receipts Rs. Payments Rs.

To Balance b/d: By Salaries 44,000

Cash in hand 1,500 By Bonus to staff 4,400
Cash at bank 3,000 4,500 By P & Stationery 13,600
To Consulting fees 1,85,000 By Rent of Clinic 12,000
To Visit fees 44,500 (Paid to Wife)
To Gift from patients 6,000 By Electricity 11,150
To Winning from By Car Expenses 30,000
horse races 10,000 By Drawings 48,000
By Donations 18,000
By Purchase of
Equipment 12,000
By Misc. Expenses 12,000
By Balance c/d
Cash in hand 2,600
Cash at bank 42,250 44,850
________ ________
2,50,000 2,50,000
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Adjustment:

1.Rs.6,000 is considered as a reasonable rent of the clinic.

2.Misc. expenses are incurred for personal purposes.
3.Donation are eligible for deduction u/s 80G
4.Half of the car expenses are for personal use.
5.Depreciation allowable according to Income tax Act is Rs.4,000

Compute the Income from Profession of Dr. Doshi for the Assessment Year 2016-17

Solution:

Name of the Assessee : Dr. Doshi

Assessment Year : 2016-17
Previous Year : 2015-16
Status : Individual
Residential Status : R & OR
PAN No : ________

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 Computation of Income from Business
Particular Rs Rs
Direct Method:
Income Chargeable:
1. Consulting fees 1,85,000
2. Visit fees 44,500
3. Gifts from patients 6,000 _

2,35,500
Less: Allowable Expenses:
1. Salaries 44,000
2. Bonus to staff 4,400
3. Printing & Stationery 13,600
4. Rent of Clinic 6,000
5. Electricity 11,150
6. Car Expenses (Rs.30,000 X ½) 15,000
7. Depreciation 4,000 (98,150)
Income From Profession 1,37,350
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Note:

1. Only reasonable rent is allowed as business expenditure.

2. Personal expenses are not allowed.

3. Donations are not the expenses of business. However, necessary deduction will
be allowed u/s 80G from Gross Total Income.

4. Purchase of equipments being capital expenditure not allowed as deduction.

5. Winning from Horse Races will be considered under the head, Income from Other
Sources.

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Thank You!

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