Computation of Taxable Profit Where Profit and Loss Account is Available
The debit side of the profit and loss account consists of the expenses which have fallen due during the accounting year whether paid or not. The expenses may be of capital nature or revenue nature. The credit side consists of income which are due during the accounting year whether received or not. The taxable profits are computed in the following manner:
Net Profit as per Profit and Loss Account
1. Inadmissible Expenses
Expenses which are inadmissible in computing taxable profit of business or profession but have been charged to profit and loss account, should be added as such expenses have reduced the taxable profit. If an expenditure, charged to profit and loss account, is partly admissible and partly inadmissible, only the inadmissible part should be added back.
2. Expenses not Relating to Business or Profession
Expenses which are not related to business or profession but charged to
the profit and loss account are to be added back as such expenses have
reduced the taxable profits. For example, if expenses relating to house
property or securities, etc. are found debited to the profit and loss account,
such expenses should be added back
3. Income Relating to Business or Profession
If any income relating to business or profession has not been credited to the profit and loss account, such income should be added because its exclusion had reduced the taxable profits. For example, if any recovery is made against a debt allowed as bad debts in earlier years, the amount so recovered is taxable income of the business or profession
LESS
1. Expenses Relating to Business or Profession
Expenses which are related to business or profession and which are also admissible as deductions but not charged to profit and loss account, should be
deducted because such expenses will reduce the taxable profit.
2. Income not Relating to Business or Profession
Any income which does not relate to business or profession but credited to the profit and loss account, should be deducted. For example, if investment on securities, rent from house property or dividend, etc. are found credited to profit and loss account, such income should be deducted.
3. Allowable Depreciation as per Income Tax Rules
If the taxable income exceeds the total of deductions, Dfa Ho it is taxable profit. If total deductions exceed the total income, it is loss. The above rules will be reversed if the profit and loss account discloses net loss instead of net profit.
