Profit and Gains from Business & Profession - MEANING AND INCOME CHARGEABLE UNDER THIS HEAD

The tax payable by an assessee on his income under this head is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year.

Business - 

The term “business” has been defined in section 2(13) to “include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”.

Profession -

The term “profession” has not been defined in the Act. It means an occupation requiring some degree of learning.

• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and even an astrologer are persons who can be said to be carrying on a profession but not business.

• However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or ‘vocation’ since for purposes of assessment, profits from all these sources are treated and taxed alike.

• Business necessarily means a continuous exercise of an activity; nevertheless, profit from a single venture in the nature of trade may also be treated as business.

Meaning of ‘Profits’

(1) Profits in cash or in kind: Profits may be realised in money or in money’s worth, i.e., in cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of the receipt on the date of receipt must be taken as the value of the income received in kind.

(2) Capital receipts: Capital receipts are not generally to be taken into account while computing profits under this head.

(3) Voluntary Receipts: Payment voluntarily made by persons who were under no obligation to pay anything at all would be income in the hands of the recipient, if they were received in the course of a business or by the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a person who was not a client, but who has been benefited by the lawyer’s professional service to another would be assessable as the lawyer’s income.

(4) Application of the gains of trade is immaterial: Gains made even for the benefit of the community by a public body would be liable to tax. To attract the provisions of section 28, it is necessary that the business, profession or vocation should be carried on at least for some time during the accounting year but not necessarily throughout that year and not necessarily by the assessee-owner personally, but it should be under his direction and control.

 

(5) Legality of income: The illegality of a business, profession or vocation does not exempt its profits from tax: the revenue is not concerned with the taint of illegality in the income or its source.

(6) Income from distinct businesses: The profits of each distinct business must be computed separately but the tax chargeable under this section is not on the separate income of every distinct business but on the aggregate profits of all the business carried on by the assessee.

(7) Computation of profits: Profits should be computed after deducting the losses and expenses incurred for earning the income in the regular course of the business, profession, or vocation unless the loss or expenses is expressly or by necessary implication, disallowed by the Act. The charge is not on the gross receipts but on the profits and gains.

INCOME CHARGEABLE UNDER THIS HEAD [SECTION 28]

The various items of income chargeable to tax as income under the head ‘profits and gains of business or profession’ are:

(1) Income from business, profession or vocation: Income arising to any person by way of profits and gains from the business or profession carried on by him at any time during the previous year.

(2) Any compensation or other payment due to or received by:

(i) Any person, by whatever name called, managing the whole or substantially the whole of -

       (a) the affairs of an Indian company or

       (b) the affairs in India of any other company

at or in connection with the termination of his management or office or the modification of any of the terms and conditions relating thereto;

(ii) any person  holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of any of the terms and conditions relating thereto;

(iii) any person, for or in connection with the vesting in the Government or in any corporation owned or controlled by the Government under any law for the time being in force, of the management of any property or business;

(iv) any person, by whatever name called, at or in connection with the termination or modification of the terms and conditions, of any contract relating to his business.

(3) Income from specific services performed for its members by a trade, professional or business: Income derived by any trade, professional or similar associations from specific services rendered by them to their members. It may be noted that this forms an exception to the general principle of mutuality governing the assessment of income of mutual associations such as chambers of commerce, stock brokers’ associations etc.

As a result, a trade, professional or similar association performing specific services for its members is to be deemed as carrying on business in respect of these services and on that assumption the income arising therefrom is to be subjected to tax. For this purpose, it is not necessary that the income received by the association should definitely or directly be related to these services.

 

(4) Incentives received or receivable by assessee carrying on export business:

(i) Profit on sale of import entitlements: Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports and Exports (Control) Act, 1947.

(ii) Cash assistance against exports under any scheme of GOI: Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.

(iii) Customs duty or excise duty re-paid or repayable as drawback: Any Customs duty or Excise duty drawback repaid or repayable to any person against export under the Customs and Central Excise Duties Drawback Rules, 1971.

(iv) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty Free Replenishment Certificate: Any profit on the transfer of the Duty Entitlement Pass Book Scheme or Duty Free Replenishment Certificate, being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992.

(5) Value of any benefit or perquisite: The value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of any profession.

(6) Sum due to, or received by, a partner of a firm: Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm will be deemed to be income from business. However, where any interest, salary, bonus, commission or remuneration by whatever name called, or any part thereof has not been allowed to be deducted under section 40(b), in the computation of the income of the firm the income to be taxed shall be adjusted to the extent of the amount disallowed.

(7) Any sum whether received or receivable, in cash or kind, under an agreement

(i) for not carrying out any activity in relation to any business or profession; or

 

(ii) for not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.

Meaning of certain terms

Term Aggrement

(A) whether or not such arrangement, understanding or action is formal or in writing; or

(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

Term Service

Service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

(8) Any sum received under a Keyman insurance policy: Any sum received by the assessee, as an employer, under a Keyman insurance policy including the sum allocated by way of bonus on such policy will be taxable as income from business.

(9) Fair market value of inventory on its conversion as capital asset: Fair market value of inventory on the date of its conversion or treatment as capital asset, determined in the prescribed manner, would be chargeable to tax as business income.

(10) Sum received on account of capital asset referred under section 35AD: Any sum received or receivable, in cash or kind, on account of any capital asset (in respect of which whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD) being demolished, destroyed, discarded or transferred.

Where a specified person, being a partner of a firm or member of other AOP/BoI receives during the

P.Y. any, inter alia, stock in trade from a specified entity, being a firm or other AOP/BoI in connection with the dissolution or reconstitution of such specified entity, then the specified entity would be deemed to have transferred such stock in trade to the specified person in the year in which it is received by the specified person. Profit and gains arising from such deemed transfer would be deemed to be the income of such specified entity in the same year of receipt by specified person and chargeable to income-tax under the “Profit and gains of business or profession”