The essential steps required in computing taxable profits are :
1. Where the Profit and Loss Account is Available:
(a) Take the Profit as shown in the Profit & Loss A/c at the starting point.
(b) Go through the debit side of P & L a/c and find out expenses which have been shown therein but which under the provisions of the Income-tax Act, are not to be allowed.
(c) Also go through the notes and other supplementary information available and see whether there are any amounts included on the debit side of P & L a/c which should not be allowed under the provisions.
(d) The aggregate of all the disallowed expenses [(as per (b) and (c) above] is to be added to the profit available from the P & L a/c under the head “Add: Disallowed expenses.”
(e) Have a look on the credit side of the P & L a/c and at limes you may find amounts that are not chargeable under this head but under heads like ‘income from other sources1 or ‘incomes from house property’ etc. These incomes should be separated by deducting them from the profit remaining as per (d) above under the heading “Less: Incomes to be shown under other heads.”
(f) From the notes supplied at the end of the question or the information supplied by the assessee you may gather certain amounts falling in the category of income but not taken into account in the preparation of P & L account. These amounts, if there are any, should be added to the profits as arrived at under (e) above.
(g) The resultant amount represents the taxable profit from business.
2. Where the summary of cash transactions is available :
When we have to assess persons engaged in some profession like Doctors, Solicitors, Tax Consultants etc., it is not the profit and loss account that is made available but a summary of their cash transactions of the year. The debit side of this summary consists of all receipts-capital and revenue both and payment side represents all disbursements made during the year. The surplus of receipts over payments at the end is the balance of cash balance at the end of the year while the first entry on the receipts side is the balance of cash on the opening day of the year.
• In order to compute taxable gains of profession from the summary of cash transactions, the following steps are necessary—
(a) Go through the debit side and sort out the amounts pertaining to the profession and of revenue nature. The aggregate of these amounts is the gross income from the profession. Omit capital receipts, e.g., sale proceeds of old furniture.
(b) Turn to credit side that consists of all sorts of expenses. We are to pick up all those expenses that are incurred in ordinary course of one’s profession? Ignore all capital disbursements, e.g., typewriter purchased.
(c) From the notes given, find out the amount of private and domestic expenses found mixed on the credit side of the summary. These amounts should be separated and left out,
(d) Deduct the aggregate of all expenses, as per (b) and (c) above, from the total amount of professional earnings as arrived at and left out.
(e) Have a second look on the debit side and pick up other incomes to be shown under other heads, e.g., income from other sources, etc.
(f) Expenses belonging to the various incomes sorted out in (e) above should be deducted from respective income and the net taxable amount to be found out.
(g) Now you can compute the total income of the assessee since you know the amount of taxable income under different heads.