Hello friends, how are you all? I am Shreya Gupta, your
friend, your companion, your sympathizer, your companion in
this tax class.
Friends, we were discussing about a head of income whose
name was Profit and Gain from Business and Profession.
We were discussing about this in the beginning and I had
discussed a few things with you.
The first thing we discussed was that the income tax which
is imposed on this head of income will be imposed on my net
profit.
So we decided that it will be imposed on net profit because
net profit is ultimately my income which I take home.
Sales is not my income because I have to remove a lot of
expenses from it.
Sir, we had come to the next point. We had said that one is
Accounting Profit.
In our accounting books, we put all the expenses, all the
income and all the expenses.
Because when an accountant enters, he passes the entries
according to the bills and vouchers that he receives.
At that time, he does not classify which income will go to
which head.
So he puts all the income on one side and all the expenses
on the other side.
So what is the reason for this confusion? The reason for
this confusion is that the income of the 5th head goes to
your Profit and Loss account.
And why do we make Profit and Loss account? For business.
So that my business profit is not known.
So what do the people do?
What do the income tax officers do? They simply say, remove
your other head of income.
In this head of income, in the head of business and
profession, we will put the tax on the profits of the
business.
So your income, for example, in Gross Profit, let's say
that the accountant puts the speculative income, the income
of your other source, like the interest of FD, or the
income of your capital gains, like if you sell a plot of
land, you get a profit from that.
The accountant has put all the entries here.
But you are an income tax officer, so you will have to
remove all this.
Remove all these things from here and only come to business.
These three things will be removed from here.
Now how will they be removed? It's a simple thing.
Your net profit that has come out, we do reverse
calculation here.
Income tax officers are a bit stupid. They do reverse
calculation.
They will not hold the ear like this. They will hold it by
twisting it.
So what do they do? They go with the net profit.
And it is obvious that if you add these three things in
Gross Profit, if you add income from here and there in your
business profit, then your profit will increase.
I have to reduce that profit.
I have to come to business profit.
So what will I do?
I will remove those three incomes.
So the net profit that is coming, these three incomes are
also included in this net profit.
So I will minus those three incomes from my net profit of
Rs.11,000.
This is my net profit of Rs.11,000.
I will remove these three incomes from this net profit of
Rs.3,000.
I will remove the income from the other source, the other
head etc.
What will I get for Rs.8,000? This is my business profit.
This is the profit of business. And my income tax will be
added to this head.
How much will it be added to? Rs.8,000.
Rest, I don't have to do anything for Rs.3,000.
Why not?
You have income. If you have income, you have to do
something.
But don't do it in the business head.
If you have capital gain, do it in the capital gain head.
If you have income from the other source, do it in that
head.
No adjustment in this head. I mean, no treatment in this
head.
Remove it from here.
The simple thing is, if you have income, remove it. Minus
it.
And if there is any expense, add that expense back.
Because that expense will reduce your profit.
So I will add that expense back.
Accounting profit. I came to business profit by making
adjustments in that.
In adjustments, some things have to be added and some
things have to be minused.
Okay, sir? That's it.
Then we came to which expenses are allowed to you and which
expenses are disallowed.
Why did we talk about allow and disallow?
It was because of this.
Because what did people usually do?
They made a profit and loss account.
And let's say, my profit of Rs.10 crores came out.
So the businessman, the Lala,
Lala term is generally used.
If you are in North India, then mostly businessmen are
called Lala.
Irrespective of how fat he is or how thin he is.
He may be thin, but still he is called Lala.
So the Lala, his net profit of Rs.10 crores came out.
Now, either he pays 30% tax on Rs.10 crores.
Or he pays his personal expenses of Rs.10 crores.
These are just expenses.
Let me pay my personal expenses.
What will happen with that?
Here, the profit of Rs.10 crores is coming.
Here, the expenses of Rs.10 crores are being paid.
So how much profit is left?
Rs.0.
So how much will the income tax be charged?
Rs.0.
Nothing will be charged.
So the government, the income tax officials, they said, no,
this doesn't happen.
You cannot pay personal expenses.
If you have paid, then what will I do with that expense?
I will add it back.
That expense will be disallowed.
You will not be allowed.
What does allow mean?
You will not be allowed to minus out of your income.
What am I saying?
You will not be allowed to minus out of your income.
So you will have to add it back.
You will have to increase your profit again.
You will have to bring it to Rs.10 crores.
And now the income tax that you will pay, you will pay
above Rs.10 crores.
Here and there, the head's income is there.
You will minus it from your net profit.
But if you have added expenses here and there, personal
expenses, because of which your profit has decreased, then
you will add it back again.
Why? Because it has been disallowed.
Why is it disallowed?
What does disallow mean?
It means that you cannot minus it from your income.
After that, we talked about some expenses, which expenses
were allowed.
So I told you a simple mantra that you should think from
the angle of a businessman.
What all expenses can you get there?
Will you get rent?
Did you rent a shop?
If that shop was not there, would you be able to do
business?
No, you wouldn't.
Then I told you to take the expense of repairs.
Yesterday night, I had a doubt about a kid.
Sir, why do you take the expense of repairs?
I said, son, I will answer this in the class.
So I answer the kid in the class.
Son, assume that there is a tap in your shop and the tap is
not working.
Water is flowing from it.
I am a businessman.
I have kept my stock there.
Assume that I work in clothes.
I have kept my shirts there.
From here to here, there are only shirts.
Only shirts.
So if I don't repair it, if I don't repair that tap,
because you are saying that I won't get its expense.
I won't be able to take the expense of repairs.
So what will I do?
I know that I won't be able to take the expense of my
income.
My income will keep increasing.
So there is no use of spending.
The government is not giving me the permission to spend.
It is saying that we are not giving.
So what will I do?
The tap is working.
So let it work.
If the stock is not working, let it work.
There is no problem.
I should do this.
I should spoil all my stock.
In that case, what will I do?
Think practically.
Should I leave the tap open?
There will be a flood in the city.
Why? There will be a flood in the city.
Is there any problem?
When I am not getting the deduction of expenses, why should
I spend?
In that case, the government is saying that there will be a
flood in the city.
Don't do this.
We have to understand that these are the expenses of
running a genuine business.
These are day-to-day expenses.
You have to give tea and water to your staff.
These are also day-to-day expenses.
These are the expenses of electricity.
These are day-to-day expenses.
So you get the deduction of these expenses.
Basically, when you make your Profit and Loss account, your
P&L is made.
You have put Gross Profit here.
You will also get Rent here.
You will minus the expenses of Rent.
You will minus the expenses of Repairs.
We are discussing this.
In the coming lectures, we will discuss which expenses can
I put here as per the income tax people.
Which expenses can I put here?
Because the more expenses I put, the less my Gross Profit
will be.
I will reduce my Profit by staying within the law.
I am not going beyond the law.
The law has said, the law has given permission in Sections
30 and 31 that I can take the expenses of Rent and Repairs.
I can minus these expenses.
I am doing it.
Insurance is also in this.
The government has said, the genuine reason is, you get
your stock insured.
Suppose, I am going from one city to another.
Suppose, there is an accident on the road.
Someone has stolen my stock.
I will get it insured.
These expenses are directly or indirectly related to my
business.
You can see, the expenses should be related to business.
They should be related to business.
When you are doing business, will you need these expenses?
you genuinely need those expenses? If yes, then you can
show it as an expense from your
Profit and Loss account.
And this is giving you the Act Permission of Income Tax.
Expenses should be genuine.
Expenses should be of revenue nature, not of capital nature.
For example, if you build a building, you have created an
asset.
For the asset, we will take depreciation.
What happens is, we will spend on the next asset.
You have created an asset, you will take its expense as
depreciation.
The point was clear till here.
You will get this Rent
Repair Insurance for the property that you have rented.
If you have taken any Plant and
Machinery or any Furniture, you will get it in that case
also.
Let's come to the next topic.