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    Profits and Gains of Business or Profession

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    Vicky D
    1) The document discusses key aspects of profits and gains from business or profession under the Income Tax Act, including the meaning of business, profession, and various methods of accounting. 2) It also summarizes a Supreme Court case related to whether goodwill can be treated as an intangible asset eligible for depreciation. The Supreme Court held that goodwill would fall under the category of "any other business or commercial right of a similar nature" and can be eligible for depreciation. 3) Key topics like computation of profits, mandatory book keeping requirements, and eligibility of pre-incorporation profits for tax are covered concisely.

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    Profits and Gains of Business or Profession

    Uploaded by

    Vicky D
    34 views24 pages
    1) The document discusses key aspects of profits and gains from business or profession under the Income Tax Act, including the meaning of business, profession, and various methods of accounting. 2) It also summarizes a Supreme Court case related to whether goodwill can be treated as an intangible asset eligible for depreciation. The Supreme Court held that goodwill would fall under the category of "any other business or commercial right of a similar nature" and can be eligible for depreciation. 3) Key topics like computation of profits, mandatory book keeping requirements, and eligibility of pre-incorporation profits for tax are covered concisely.

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    1) The document discusses key aspects of profits and gains from business or profession under the Income Tax Act, including the meaning of business, profession, and various methods of accounting. 2) It also summarizes a Supreme Court case related to whether goodwill can be treated as an intangible asset eligible for depreciation. The Supreme Court held that goodwill would fall under the category of "any other business or commercial right of a similar nature" and can be eligible for depreciation. 3) Key topics like computation of profits, mandatory book keeping requirements, and eligibility of pre-incorporation profits for tax are covered concisely.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    34 views24 pages

    Profits and Gains of Business or Profession

    Uploaded by

    Vicky D
    1) The document discusses key aspects of profits and gains from business or profession under the Income Tax Act, including the meaning of business, profession, and various methods of accounting. 2) It also summarizes a Supreme Court case related to whether goodwill can be treated as an intangible asset eligible for depreciation. The Supreme Court held that goodwill would fall under the category of "any other business or commercial right of a similar nature" and can be eligible for depreciation. 3) Key topics like computation of profits, mandatory book keeping requirements, and eligibility of pre-incorporation profits for tax are covered concisely.

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    of 24

    Profits and Gains of Business or

    Profession
    Meaning of Business[Sec.2(13)]
    • Business includes any trade, commerce, or
    manufacture or any adventure or concern in
    the nature of trade or commerce.
    Meaning of Profession[sec.2(36)]
    • Profession means the activities for earning
    livelihood which require intellectual skill or
    manual skill e.g. The work of a lawyer, doctor,
    auditor.
    • Profession includes vocation. Vocation means
    activities which performed to earn livelihood
    e.g. Brokerage, insurance agent, music
    dancing etc.
    • N.K. Unnikrishnan Panicker v. CIT(2014) 361
    ITR 187 Ker.
    N.K. Unnikrishnan Panicker v. CIT(2014) 361 ITR 187 Ker.
    • Assessee an astrologer, received certain sum
    of money on account of predictions made by
    him in election victory of certain candidates as
    mark of admiration, which was claimed as gift
    being not taxable under the provisions of
    Income Tax Act.
    • Court held that since the amount was
    received by him because of predictions made
    and same is the profession of the Assessee,
    said sum should be treated as income from
    business and profession.
    • [sec.145] Method of Accounting- Cash basis or
    Mercantile basis
    • Maintenance of accounts [Sec. 44 AA]
    (1)Specified Professions- Legal, Medical
    Engineering, Architectural Accountancy,
    Technical Consultancy, Interior Decoration,
    such other profession as may be notified by
    CBDT
    - Required to maintain prescribed books if their
    gross receipt exceed 1,50,000.
    • Prescribed books
    (i)Cash Book
    (ii)Journal (if accounts are maintained on the
    basis of the mercantile system)
    (iii)A ledger
    (iv)Carbon copies of bills issued exceeding Rs.25
    (v)Original bills; and
    (vi)Receipts regarding expenses exceeding Rs.
    50
    (2) Non-specified profession or business

    Compulsory Audit of Accounts (sec. 44 AB)


    Business- Sales, turnover, gross receipt exceed
    Rs. 1 crore
    Profession- Gross receipt exceed Rs. 50 lakhs
    T.B.
    Debit Credit

    Profit
    Profit as per book record ---
    Add: Expenditure not related to the business --
    Less: Income not related to the Business ---
    Adjusted Profit = ---
    Q. Are the pre incorporation profits taxable in the
    hands of the company or promotors?
    CIT v. City Mills Distributors P.Ltd(1996) 219 ITR
    1 SC.
    Supreme Court held that who carried on the
    business and received income when it accrued
    liable to bear the burden of tax, but pre
    incorporation profits earned by the promotors
    will be taxable in the hands of company, if the
    company after incorporation accepts what
    had been done on its behalf by the promotors.
    Cirular No. 447 dated 22.1.1996
    In the case of sportsman who is a professional,
    the award received by him will be in the nature of
    benefit in the exercise of his profession and
    therefore will be liable to tax under the provisions
    of the Income tax. However in the case of a non-
    professional the award received by him will be in
    the nature of gift and will not be liable to tax in
    his hand as it would not be in the nature of
    income.
    Depreciation
    Assets eligible for depreciation: [Sec. 32(1)]
    • Tangible Assets – Building, Plant and
    Machinery etc.
    • Intangible Assets: Know-how, Patents,
    Copyrights, Trademarks, Licences, Franchises,
    and any other business or commercial rights
    of similar nature.
    • Methods of Depreciation:
    (i) In case of assets of an undertaking engaged in
    generation or generation and distribution of
    power- Depreciation on the basis of Straight
    Line Method
    (ii) In any other case- Written-down value
    method.
    Depreciation on goodwill has been matter of
    considerable debate. The term goodwill have
    not been mentioned under section 32(1)(ii).
    Whether goodwill are in the nature of business
    and commercial rights of a similar nature under
    section 32(1)(ii)?
    High Court and the benches of the Tribunal
    having conflicting decision over the matter.
    • Kotak Forex Bokerage Ltd. v. ACIT(2009) 33 SOT
    237(Mum) Mumbai tribunal held that “goodwill”
    is nothing but a positive reputation built by a
    person or company business house over a period
    of time. Thus, goodwill is also business or
    commercial rights of similar nature and hence,
    eligible for depreciation under section 32 of the
    Act.
    • R.G. Keswani v. ACIT(2009) 308 ITR
    271(Mum),Mumbai tribunal held that goodwill is
    not an intangible asset and is not eligible for
    depreciation under section 32.
    • B. Raveendran Pillai v. CIT(2010) 194
    Taxmann(Ker)
    Kerala High Court held that goodwill paid for
    acquiring a hospital with land building,
    equipment, staff, name, trademarks etc. is
    certainly for acquiring of business and
    commercial rights and was certainly
    comparable with trade mark, franchise,
    copyright etc. Thus depreciation will be
    allowed on such goodwill which is similar to
    business or commercial rights.
    CIT v. Smifs Securities Ltd.(2012)24 Taxmann.com, 222 SC, Civil
    Appeal No. 5961 dated August 22, 2012
    Facts of the Case -Pursuant to a scheme of amalgamation, YSN Shares
    and Securities Private Limited (amalgamating company) was
    amalgamated into Smifs Securities Ltd.(amalgamated company),
    assessee Company. Thus the assets and liabilities of YSN Shares and
    Securities Private Limited were transferred to and vested in the
    assessee company. The excess consideration paid by the assessee
    company over the value of net assets acquired of YSN Shares and
    Securities Private Limited was considered as “goodwill” arising on
    amalgamation. The assessee company claimed that the extra
    consideration was paid towards the reputation which the amalgamating
    company was enjoying in order to retain its existing clientele.
    Accordingly, the assessee company claimed deduction of Rs. 54,85,430
    as depreciation on such goodwill. The assessing officer held that
    “goodwill” was not an asset falling under explanation 3 to section 32(1)
    of the Income Tax Act, 1961(the Act) and that no amount was actually
    paid on account of goodwill.
    • On appeal, both the Commissioner of Income tax
    (Appeal) and the ITAT ruled in favour of the
    assessee. On further appeal, the High Court held
    no question of law arose in appeal and dismissed
    the same. The revenue department appeal to the
    Supreme Court against the decision of High Court.
    • Issues before the Supreme Court
    • Whether goodwill is an asset within the meaning
    of Section 32 of the Act?
    • Whether depreciation on goodwill is allowable
    under the above mentioned section?
    • Contentions of the revenue authority
    No amount was actually paid on account of
    goodwill and goodwill is not an asset falling
    under Explanation 3 to Section 32(1) of the
    Act.
    • Contention of the assessee
    Excess payment made to the transferor, i.e the
    amalgamating company should be taken as
    goodwill as it is the excess price paid over the
    value of net assets of the company for its
    reputation in front of the clientele.
    • Supreme Court held that –
    • Explanation 3 to s. 32 states that the expression “asset”
    shall mean an intangible asset, being know-how,
    patents, copyrights, trademarks, licences, franchises or
    any other business or commercial rights of similar
    nature. The words “any other business or commercial
    rights of similar nature” in clause (b) of Explanation 3
    indicates that goodwill would fall under the expression
    “any other business or commercial right of a similar
    nature“. The principle of ejusdem generis would strictly
    apply while interpreting the said expression which finds
    place in Explanation 3(b).
    • Court further held that though the AO held
    that the assessee had not “paid” anything for
    the goodwill, this cannot be accepted because
    (a) the CIT (A) & Tribunal (correctly) held that
    that the difference between the cost of an
    asset and the amount paid in the process of
    amalgamation constituted “goodwill” and (b)
    this aspect was not challenged by the
    department before the High Court.

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