Page 260 - DCOM301_INCOME_TAX_LAWS_I

Unit 9: Income under the Head Business and Profession

2. Only those expenses and losses are allowed as deductions which were incurred or sustained Notes
during the relevant previous year and related to business.
3. These losses and expenses should be incidental to the operation of the business.

Example: Embezzlement by an employee during the course of business is a loss incidental
to the business. Similarly, loss from dacoity in a bank is also a loss incidental to the business of
a bank.
4. If a business has been discontinued before the commencement of the previous year, its
expenses cannot be allowed as deduction against the income of any other running business
of the assessee.

5. There are some essential expenses, though neither expressly allowed nor disallowed, but
are deductible while computing the profits of business or profession on the basis of
general commercial principles provided that these are not expenses or losses of a capital
nature or personal nature.
6. Any expenditure incurred in consideration of commercial expediency is allowed as
deduction.
7. Deduction can be made from the income of that business only for which the expenses were
incurred. The expenses of one business cannot be charged against the income of any other
business.

9.4.1 Rules for Adjustment of Profit and Loss Account Prepared by the
Assessee

The Profit and Loss Account prepared by the assessee is not correct from the income tax point of
view as (i) several such expenses are charged to it which are wholly or partly inadmissible under
the Income-tax Act, (ii) some admissible expenses are omitted from it, (iii) some taxable incomes
are not credited to it, and (iv) some such incomes are credited which are either not taxable from
taxable point of view, so that the profit taxable under the head ‘Business or Profession’ is
determined correctly. The following are the rules for adjustment of the Profit and Loss Account:
1. Those expenses or losses which are charged to Profit and Loss Account but are not allowed
under the Income Tax Act should be added to the profit, as shown by the Profit and Loss
Account prepared by the assessee. If any expense is partly disallowed, only the disallowed
part of it shall be added to the profit.
2. If any admissible expenses are omitted from Profit and Loss Account, they should be
deducted from the above profit.

3. If some taxable incomes are omitted from the Profit and Loss Account they should be
added to the above profit.
4. If some such incomes have been credited to the Profit and Loss Account which are either
not taxable under the head ‘Business or Profession’ or are not taxable at all, they should be
deducted from the above profits.

Notes If instead of profit there is loss as per the Profit and Loss Account, the above rules
shall be reversed, i.e. items to be added shall be deducted and those to be deducted shall be
added. If after making some adjustments the profit is converted into loss, the above rules
shall be reversed for subsequent adjustments.

LOVELY PROFESSIONAL UNIVERSITY 255