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Income from Business or Profession

Income from business, profession or vocation is taxed under this head. It includes the following:-

How is income from Business or Profession computed ?

Income chargeable to tax is computed after deducting the following:-

  1. Expenditure incurred during the previous year wholly and exclusively for the purpose of the business;
  2. After deducting allowances and deductions provided in Sections 30 to 43D of the I.T. Act. 1961;
  3. The following expenses are not allowable:-
    • Expenditure relating to a discontinued business;
    • Expenditure incurred before setting up of a business;
    • Provisions, anticipated losses, reserves or contingent liabilities, bad debts etc. which have not arisen during the previous year.

Frequently Asked Questions

Profession means exploitation of one's skills and knowledge independently. Profession includes vocation. Some examples are legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, artists, writers, etc.
Yes. Under the income tax Act even a solitary activity of this nature will be considered as an adventure in the nature of trade and taxed as business income.
The Act does not prescribe any specific books of account for business. However you are expected to maintain your accounts in such a fashion that the net profit of the business can reasonably and easily be arrived at by the department. For companies the books of account are prescribed under the Companies Act. Further the Institute of Charted Accountants has prescribed certain accounting standards for business that are required to be audited by them. The Income Tax department accepts the books of account maintained under these standards.
Yes. The following books and documents are to be maintained mandatory:
  1. Cash book
  2. Journal in case of mercantile system of accounting
  3. Ledger
  4. Carbon copies or counter foils of all bills issued, being serially numbered
  5. Original copies of all expenditure bills. Signed vouchers where bills not available for less than Rs.50.
Any business or profession that has an annual turnover/gross receipts exceeding rupees ten lakh and net profit of rupees one lakh twenty thousand, must maintain such books of account and documents from which its income can be reasonably ascertained by the Income Tax department.
All the books of account and related documents should be kept at the main place of business i.e. where the business or profession is generally carried on. These should be preserved for a minimum of six years.
This depends upon your ability and need. You may even prefer to use the accounting software available in the market. However, you should remember that in case of turnover exceeding rupees forty lakh per annum in a business and gross receipts exceeding rupees ten lakh per annum in a profession, a professional charted accountant must audit your accounts. {Section 44AB]
Auditing means checking the correctness and genuineness of your accounts and verifying whether accounting principles and standards have been properly followed in conduct of your business and preparation of accounts. Under Income Tax Act, this verification will have to be carried out by an independent Chartered Accountant.
There can be no excuse for not maintaining the bill books. However, if you are a smalltime retail trader with your annual turnover less than Rs.40 lakh, then you are permitted to declare your income on presumption at 5% of your actual sales. {U/s 44AF]. In that event no books of account need be maintained. Similarly, the benefit of non-maintenance of books of account is available for civil contractors {u/s 44AD] in case 8% of the turnover is disclosed as profits. Transporters owning less than 10 goods carriage can also avail the benefit of presumptive income scheme without maintenance of books of account. However, if you declare your income below the minimum level/percentage provided under the scheme, you will necessarily have to maintain the books and get them audited.
Yes. All the books and document prescribed for professional need to be maintained. Additionally, a daily case register in prescribed form no.3C and an inventory of drugs, consumables and other stocks also need to be maintained.
No. These provisions are specifically for civil contractors.
No. The scheme is applicable to owners of goods carriages.
Only those revenue expenses that are directly related to the earning of your business receipt can be claimed as business expenditure. Personal expenses are not allowed to be deducted.
Revenue expenditures are those that are routine, recurring, and periodical with no enduring value beyond the financial year in which they are incurred. On the contrary capital expenditures are those that are spent on assets from which income is generated. These are normally enduring in nature.
The Income tax Act allows you to claim depreciation on your movable tangible and intangible assets. The rates of depreciation are different for different assets.
Yes, auditing of accounts is compulsory where gross receipt of a person exceeds Rs.40 lakh.
If your commission earning is more than rupees sixty thousand a year, then you will have to maintain books of account and proof of expenditure. No claim for the premia payment will be allowed if the customer has claimed the same as his own expenditure.

Disclaimer : This site does not make any claim that the information provided on its pages is correct and up-to-date. The contents of this site cannot be treated or interpreted as a statement of law. In case, any loss or damage is caused to any person due to his/her treating or interpreting the contents of this site or any part thereof as correct, complete and up-to-date statement of law out of ignorance or otherwise, this site will not be liable in any manner whatsoever for such loss or damage.
In case of any doubt / clarification, please visit the official website of Income Tax Department.

Updated : Jan 24, 2019
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