Profits and Gains of Business or Profession
This domain tests computation of business and professional income under the mercantile or cash system, admissibility of expenses, statutory disallowances and presumptive schemes.
Core rules
- Income is computed from accounts maintained under the chosen method. Business income includes profits, gains, compensation, export incentives and speculative business income, which is kept separate.
- Deductions are allowed for expenses incurred wholly and exclusively for business, subject to specific provisions. Capital expenditure, personal expenditure and expenses prohibited by law are not deductible.
- Key disallowances include cash payments above ₹10,000 in a day to a person under section 40A(3); specified statutory dues unpaid by the due date under section 43B; and payments to residents without required TDS under section 40(a).
- Depreciation is allowed on the written-down value of a block of assets. Depreciation is mandatory, and additional depreciation has specific conditions.
- Presumptive schemes simplify compliance: section 44AD for eligible business, section 44ADA for professionals and section 44AE for goods vehicles. Turnover and cash-receipt conditions must be checked.
Worked example
Book profit is ₹5,00,000, but it includes a cash purchase of ₹15,000 paid to one party on one day. Section 40A(3) disallows 100% of the cash payment. Taxable business income is ₹5,00,000 + ₹15,000 = ₹5,15,000. If the expense were paid by bank transfer and wholly for business, no add-back would arise.
Traps
Do not add back capital or personal expenses twice; apply the cash-payment limit per person per day; check TDS and statutory-dues conditions; do not claim depreciation on a block that is not owned; verify presumptive eligibility and cash-receipt percentages.