Income Tax computation for Business, Professional Taxable Income, and Deduction under Section 37 for profession & Business

Introduction

The Income Tax Act charges tax on income after allowing deductions for costs incurred solely for the purpose of earning the income. Profit and Gains from Business or Profession is a primary income head for determining the income tax payable by a business, Limited Liability Partnership (LLP), partnership, or proprietorship. In this article information on Income Tax computation for Business, deduction under Section 37 for profession & Business, and information on Professional Taxable Income is mentioned.

Income Tax Computation for Business and Profession

• Any expense made for the sake of commercial expediency and in accordance with the principles of ordinary commercial trading is deductible.
• Commercial expediency simply refers to a prudent man’s expenditure for the purpose of his business, in the best interests of his business, or any other expenditure incurred only for the sake of the business.
• Any extra expense incurred in the course of doing business or practicing a profession that is incidental to that business or practice.
• Only those expenses are permitted that are not expressly or implicitly banned.
• In the event of a new business, the accounting year begins on the day it is established. Expenses incurred before the start-up of the business are not allowable since they occur outside of the accounting year. As a result, only those expenses incurred within the relevant accounting year are deducted. Each accounting year is independent and separate.
• The expenses must be deducted from the business for which they were incurred. In the event of many businesses, the expenses of one cannot be deducted from the expenses of the others.
• The expenses of a firm that was shut-down before the start of the accounting year cannot be deducted from the current business. In such instances, a typical rule is that the expenses of a defunct business become a capital loss.
• For a single transaction, all expenses, whether incurred in that accounting year or earlier, are allowed.
• A partner is entitled to a deduction from his share of the firm’s profit for any expenses he may have incurred in generating the partnership profit.
• Only expenses are allowed to be deducted, but losses of any kind are not permitted regardless of their nature.
• Capital expenditures are prohibited.
• An expense that is deductible for income tax purposes is one that is made to meet a liability that exists at the time, but setting money aside to be spent if an event occurs is not an expense.
• Only those expenses incurred for the assesses own business will be eligible for a deduction.

Tax Audit for Business

Tax audits are required for enterprises with gross receipts of more than Rs one crore in a financial year. The tax audit report must be filed by September 30th of the assessment year. Form 3CD must be used to submit the tax audit report electronically. The deadline for filing a return of income for taxpayers who are subject to a tax audit is also 30 September of the assessment year. A tax audit report cannot be revised under usual circumstances. It is possible to update the tax audit report in circumstances where the accounts have been revised.

Information on Professional Taxable Income

If you work in a profession that is not listed above, you will need to keep books of accounts that will allow an assessing officer to compute your taxable income according to ITR regulations. However, if you are a person, this requirement will only apply if your income exceeds Rs. 2.5 lakhs or your gross receipts exceed Rs. 25 lakhs in any of the previous three years.

Calculation of Taxable Earnings from Profession

By deducting all of his profession-related expenses from his gross earnings out of the business, a professional might easily arrive at his taxable Income under the title Profits and Gains from Business or Profession. Professional expenses include salary (if you have employed someone), rent for the location where you practice your profession, internet expenses, phone expenses, official travel, lunch expenses (if you met in person), and so on.

Professional Tax Filing and Its Applicability 

ITR 3 is the form that applies to you as a professional. Unless you are subject to an audit under the Income-tax Act, you must file your return on or before July 31 of the Assessment Year.

If your gross revenue from your profession exceeds Rs 25 lakhs in any given financial year, you maybe subject to a tax audit. Failure to have your books inspected may result in a penalty of up to 0.5 percent of your gross revenue, or Rs 1.5 lakhs, whichever is lower.

Income Tax treatment for Business and Profession

• TDS (Tax Deducted at Source) Income Tax Computation for Business

Persons in charge of payments must deduct tax before making a payment. Instead than waiting for you (the recipient) to make the tax payment yourself, the tax department wants payers to deduct tax and deposit it ahead of time. The income receiver receives the net amount (after deduction of tax at source). The recipient’s income is increased by the gross amount. TDS (Tax Deducted at Source) is subtracted from the final tax due because it is tax that has already been deposited on the recipient’s behalf.

• Form 26AS of Income Tax 

Your PAN’s tax information is contained in Form 26AS. It displays how much tax the government has received against your PAN (Permanent Account Number). TDS, tax directly deposited by you, reimbursements made to you, and so on are all included.

Expenses that are deductible and those that are not

• Individual or shared office space can be rented.
• Expenses for meals and travel related to work.
• Expenses for advertising, marketing, and printing.
• Asset depreciation, such as laptops or computers.
• Expenses associated with professional travel Conveyance costs.

Deduction under Section 37 for profession and Business

• Taxes, duties, cess, or fees – This Section allows an assessee to deduct taxes, duties, Cess, or fees paid under any legislation for carrying on his business or profession. However, such a deduction is only allowable in the year that they are received. Sales tax, import duty, export duty, motor vehicle tax, property tax, municipal taxes, license fee, Cess, and professional tax are examples of taxes, duties, and fees that are permitted.
• Penalties and fines – Fines and penalties paid in the ordinary course of business or profession are permissible.
• Corporate Social Responsibility (CSR) – Expenditure on CSR activities as defined in the Companies Act, 2013 is not considered to be incurred for the purposes of business or profession, therefore no deductions are allowed under Section 37.
• Damages – If the damages relate to a contract entered into in the ordinary course of business, the claim for deduction is admissible unless it can be proven that the damages were caused by the assesses dishonesty or damages caused by a violation of the law or an unlawful act.

Conclusion

Any expenditure not allowed under Sections 30 to 36 and not of a capital or personal nature that is expended wholly for the purposes of the business or profession can be deducted from the income from business or profession under Section 37 of the Income Tax Act of 1961.