Computation of Income from Business – Problems
The Profit & Loss Account prepared by an accountant follows Accounting Standards. For Tax, we need to adjust it to follow the Income Tax Act. The "Add Back" and "Deduct" method is the key!
The Formula for Computation
Instead of preparing a new P&L, we start with the Net Profit as per P&L A/c and make adjustments.
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Problem 1: General Business
Mr. X gives the following P&L for FY 2024-25:
| Debit Side | Amount | Credit Side | Amount |
|---|---|---|---|
| Salaries | 3,00,000 | Gross Profit | 8,00,000 |
| Rent | 50,000 | Rent from House | 1,20,000 |
| Income Tax | 20,000 | Bad Debts Recovered (Allowed earlier) | 30,000 |
| Charity | 5,000 | ||
| Life Insurance (Self) | 10,000 | ||
| Depreciation (Books) | 40,000 | ||
| Net Profit | 5,25,000 | Total | 9,50,000 |
Additional Information:
- Depreciation allowable as per IT Act is ₹35,000.
- Salary includes ₹20,000 paid to domestic servant.
- Bad Debts recovered were allowed in 2021.
Solution:
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Notes:
- Bad Debts Recovered (Allowed earlier) is Business Income (Section 41(1)), so it remains part of profit (no adjustment needed).
- Book Depreciation is added back fully; Tax Depreciation is deducted.
Problem 2: Partnership Firm (Salary/Interest to Partners)
M/s ABC & Co. (Partnership Firm) P&L:
- Net Profit: ₹2,00,000
- Debited:
- Interest to Partners @ 20%: ₹40,000
- Salary to Partners: ₹3,00,000
- Donation to Political Party: ₹10,000
Solution:
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Problem 3: Cash Payments and 43B Dues
Mr. Raj P&L Net Profit: ₹8,00,000 Adjustments required:
- Purchase of goods ₹25,000 paid in Cash.
- GST Liability ₹40,000 unpaid till due date of filing return.
- Audit Fees ₹10,000 unpaid (but allowed on accrual generally).
- Opening Stock Overvalued by 10% (Amount ₹1,10,000).
Solution:
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Summary of Common Adjustments
| Item in P&L | Treatment | Reason |
|---|---|---|
| Rent to House Property | Deduct | Taxed under HP head |
| Dividend Income | Deduct | Taxed under Other Sources |
| Income Tax / Wealth Tax | Add Back | Personal nature disallowed |
| GST / Customs Duty | Add Back if Unpaid | Section 43B (Payment basis) |
| Provision for Bad Debts | Add Back | Disallowed (only actual write-off allowed) |
| Donations / Charity | Add Back | Application of income, not expense |
| Capital Expenditure | Add Back | Claim Depreciation instead |
Quiz Time! 🎯
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