Income or Loss From A Business
The Word business includes a profession, calling, trade, manufacture or undertaking of any
kind whatever…an adventure or concern in the nature of trade but does not include an
office or employment.
It is necessary to distinguish between:
• business income and employment income
• business income and property income
• business income and Capital Gains
The reason is that in arriving at the business income, business income incurred can be
deducted while it is not so while arriving at the employment income and there are few
restrictions in arriving at property income.
Capital gains are only taxed at 50% and the capital loss can be only deducted against
How to identify whether a particular income is business income or from capital gain.
Following are the factors to be considered:
• Intent and the course of the conduct.
• Number and frequency of the transactions
• Relationship to the taxpayer’s business
• Supplemental work on the property
• Nature of Assets
• Objectives defined in the Articles of Association
Business Income is computed based on the accounting income and adjusted for the tax
Business income is computed based on the GAAP(Generally Accepted Accounting
Modifications are carried out in respect of CCA, permanent differences, unreasonable
Amounts received or receivable.
Reserves created during the year is allowed as a deduction. However, the reserve created
during the year has to be added back as the income next year. Reserves can only be created for the following three reasons allowed by the Act.
• Reserve for doubtful debts
• Reserve for undelivered goods and services
• Reserve for Unpaid Amounts
Restrictions on Deductions form the business and property income:
• Deduction for the expense can be made only when incurred for the purpose of the
• No capital Expenditure is allowed except provided by the act
• No expenses allowed for producing the exempt income
• Fines and penalties are not allowed
• Illegal payments allowed as expense against the illegal incomes
• Personal and living expenses are not allowed
• Amount incurred for maintaining recreational facili