taxation of a property dealer
PARVEZ RAFIQUE SHEKHANI
(Querist) 13 February 2010
This query is : Resolved
Sir, i wanted to know, 1]how a property dealer is taxed under income tax act; 2]what are the expenses allowable and 3]how his income is computed under the head "income from business & profession"
A V Vishal
(Expert) 13 February 2010
Mr Parvez
You have not stated the constitution of your business viz. is it a proprietary or a partnership or a company. Further, you have not stated what is the main business as a property dealer viz. do you buy, develop & sell properties or are you a commission agent.
Income from business or profession is computed in accordance with the provisions of sections 28 to 44D of the Act. The expression 'business or profession' includes any trade commerce or manufacture or vocation. Apart from income from any of these activities the income chargeable under this head includes the following receipts as well:-
Compensation received for the termination or for modifications in terms and conditions of any managing agency agreement.
Income of trade, professional and similar associations from specific services performed for its members.
Value of any benefit or perquisite arising from any business or profession.
Profit on sale of a replenishment license, cash assistance or refund of duty drawback granted to the exporters.
Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such firm.
Any sum received under a keyman insurance policy including bonus on such policy.
Primarily the business or professional income is computed as per the accepted business and accounting norms and in accordance with the method of accounting regularly employed by the tax payer. Thus, whatever constitutes a legitimate outgoing of revenue nature of a business is allowed as a deduction in computing the business income. However, certain deductions are allowed in the Act as per the specific provisions made with regard to those deductions and certain deductions, though business related, are not allowed because of specific bar on their allowance under the Act.
Some of the specific provisions made in law for permissible deductions in computation of business or professional income relate to the following items of expenditure and outgoings:-
rent, rates, taxes, repairs and insurance of premises used for the purpose of business or profession;
repairs and insurance of machinery, plant and furniture used for the purpose of business of profession;
depreciation of tangible assets viz., building, machinery, plant and furniture and intangible assets viz., know how, patents copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature owned by the tax payer and used for the purpose of business or profession;
Expenditure in respect of scientific research:-
On in-house research related to the business of the assessee.
Capital expenditure (except expenditure on land) in relation to the research related to the business.
Contribution to an approved University, college, association or institution for scientific research including research in social science or statistical research.
For payment to a National Laboratory or a University or an Indian Institute of Technology for scientific research under an approved programme, a weighted deduction equal to one and one-fourth time the sum paid is allowable.
premium in respect of insurance against risk of damage or destruction of stock and stores used for business or profession;
premium in respect of health insurance of the employees;
bonus and commission to employees;
interest on capital borrowed for the business or profession;
contribution to a recognised provident fund, an approved superannuation fund or an approved gratuity fund;
bad debts; and payments to notified Rural Development Fund or to National Urban Poverty Eradication Fund or to apÂproved organisation/institutions enaged in activities of conservation of natural resources or afforestation or for carrying out eligible projects or schemes approved by the National Committee.
In addition, there is a residuary provision under which the tax payer can claim deduction in respect of any expenditure incurred wholly and exclusively for the purpose of the business or profession.
This omnibus clause is not available for claiming any expenditure for which a specific provision is made or for expenses of capital or personal nature or expenditure for any purpose which is an offence or which is prohibited by law.
Expenses, even though business-related, which are not allowed as deduction are
expenditure on advertisement in any souvenir etc. of a political party;
any interest, salary, royalty, fees for technical services or other sum payable outside India from which due tax has not been deducted at source;
any tax calculated on the basis of profits or gains of the business or profession
e.g. income tax;
Wealth tax.
Apart from these; the tax authorities may disallow, or restrict the deduction to a reasonable level, where the payments are made to any close relative or a business associate. Claims are also to be disallowed to the extent of 20% where payments in excess of Rs. 10,000/- are not made by a crossed cheque or a crossed bank draft.
The above stated principles of computation of business income apply uniformly to all forms of business activities. However, there exist certain special provisions under the Act which deal exclusively with taxation of business income from certain specific activities. These provisions make departure from the normal manner of computing income as explained above and prescribe for working out the taxable income on presumptive
basis as per the norms laid down. These are:-
(i) Business of civil construction or supply of labour for civil construction where the total receipts do not exceed 40 lakh rupees (Sec.44AD) Profit as declared in the return or the sum equal to 8% of the gross receipts of the previous year, whichever is higher.
In case of a partnership firm deduction for certain payments made to its partners like interest and remuneration is subject to ceiling laid down in sec. 40 (b) introduced by Finance Act 1992.
