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Unit 9: Income under the Head Business and Profession

9.2.1 Method of Accounting Notes

Income under the heads “Profits and gains of business or profession” and “Income from other
sources” shall be computed in accordance with method of accounting regularly employed by
the assessee.
1. There are two main methods of accounting—mercantile system and cash system.
2. In the case of mercantile system, net profit or loss is calculated after taking into consideration
all income and expenditure of a particular accounting year irrespective of the fact whether
income is not received or expenditure is not actually paid during the accounting period.
Therefore, if books of account are kept by an assessee on the basis of mercantile system,
income of a business or profession, accrued during the previous year, is taxable whether
it is received during the previous year or in a year preceding or following the previous
year. Similarly, expenditure of business or profession, relating to the previous year, is
deductible even if it is not paid during the previous year.
3. In the case of cash system of accounting, on the other hand, a record is kept of actual
receipts and actual payments of a particular year. If books of account are kept by an
assessee on the basis of cash system of accounting, income collected during the previous
year is taxable whether it relates to the previous year or a year preceding or following the
previous year. Similarly, expenditure actually paid during the previous year is deductible
irrespective of the fact whether it relates to the previous year or some other year(s).

Self Assessment

State whether the following statements are true or false:

5. Trade association means an association of businessmen for the protection and advancement
of their common interest like a Chamber of Commerce.
6. Life Insurance Policy is taken by a person on the life of another person who is or was the
employee of the first mentioned person or is or was connected in any manner whatsoever
with the business of the first mentioned person.

7. In the case of mercantile system of accounting, on the other hand, a record is kept of actual
receipts and actual payments of a particular year.
8. In the case of cash system of accounting, expenditure actually paid during the previous
year is deductible irrespective of the fact whether it relates to the previous year or some
other year(s).

9.3 Profits and Losses of Speculation Business

The term ‘speculation’ has not been exhaustively defined in the income-tax Act, but it normally
denotes the meaning commonly assigned to it in commercial practice. However, Section 43(5)
defines the expression “speculative transaction” as “a transaction in which a contract for the
purchase or sale of any commodity including stocks and shares is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the commodity or scrips”.

Where a company (other than banking or financial company) deals in shares of other companies,
the income from such business is treated as income from speculative business. However, the
following four forms of transactions have been specifically excluded from the scope of speculative
transactions:
1. A contract in respect of raw-materials or merchandise entered into by a person in the
course of his manufacturing or merchanting business to guard against loss through future

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