Trading profits represent profits as per the Profit and Loss Account which are drawn as per the provisions of the Indian Companies Act, which is further adjusted considering the admissible/ inadmissible expenses as per the provisions of the ITA (see Profits subject to tax).
According to the ITA, for the purpose of calculating profits, all incomes accrued/earned during the fiscal year should be considered. Capital receipts are not considered while calculating trading profits. However, what constitutes a capital receipt is a matter of considerable litigation.
As explained earlier, capital expenses are not deductible. However, the ITA has prescribed certain capital expenses that can be allowed as deductions, but over a period of time. For example:
Furthermore, according to the ITA, certain capital expenditures are allowed in the year that they are incurred. For example:
Similarly, a company is eligible to claim depreciation on fixed assets according to the rate prescribed in the Income Tax Rules. A company is also eligible to claim bad debts, provided the sales in respect thereof have been offered to tax either in the current financial year or in the previous financial year. Besides allowing the claim for expenditure, the ITA also allows claims for business losses provided they are in the revenue field and discovered in the year under consideration. Examples of business losses are a loss on account of obsolete stock, loss on account of fire/ theft/burglary/fraud, etc.
The ITA also restricts the allowance of certain revenue expenses if certain requirements are not met:
Certain expenses are expressly not allowed while computing taxable income. For example:
|Particulars||Amount (INR)||Amount (INR)|
|A. Net Profit as per Profit and Loss Account||XXX|
|B. Inadmissible expenses debited to Profit and Loss Account|
|• Disallowable expenses/claims||XXX|
|• Depreciation as per the Companies Act||XXX|
|• Deemed income not credited to Profit and Loss Account||XXX||XXX|
|C. Total = (A + B)||XXX|
|D. Admissible deduction allowable claims/deductions||XXX|
|• Depreciation as per the Income Tax Act||XXX|
|• Incomes chargeable under other heads credited to Profit and Loss Account/Exempt Income||XXX||XXX|
|E. Profits and Gains of Business or Profession (C – D)||XXX|