“Profits and Gains of Business or Profession” is among the five heads of income under the Income Tax Act. It refers to the revenue received by a person or entity from operations that entail manufacturing, trade, commerce, or professional services. This category is important for calculating taxable income and showcases the profits derived through self-employment or normal business activities.
This category of income embraces profits from the sale of goods and services, commissions, professional charges, and any other incidental business income. Its ambit covers both large companies and small owners, as well as professionals such as architects, lawyers, medical practitioners, and consultants.
Understanding this head of revenue is essential for tax compliance, proper financial recording, and profitability and business growth decision-making. This article will walk you through what it is, what it includes, and why it is important.
Profits and Gains of Business or Profession (Section 28)
Section 28 comprises the charging section of profits and gains of business or profession. The items of income which are leviable to tax under the head “Profits and Gains of Business or Profession” include those specified as enumerated in the Table:
| Nature of Income | Explanation |
| Profits and gains | Any profits and gains emanating from any business or profession undertaken by the assessee during the previous year. |
| Income derived by trade or similar association | Any income earned by a trade, professional or similar association for some exclusive services performed for the members. |
| Perquisites or benefits from business or profession | Value of perquisites or benefits arising from profession or business, whether such perquisites are transformable into money or not. |
| Commission, bonus, salary, interest or remuneration obtained by a partner | Any interest, commission, salary, bonus or remuneration received by or due to a partner from a firm is taxable in his hands to the extent it can be asserted as a deduction in the hands of the company under Section 40(b). |
| Sum received on capital asset being demolished or discarded | Any sum, whether receivable or received, in connection with a capital asset being demolished, transferred, discarded or destroyed, for which the entire expenditure has been permitted as a deduction under Section 35AD. |
| Sum obtained under an agreement for not performing an activity | Any sum, whether receivable or received, in lieu of a deal for not conducting any activity connected to a profession or business, or for not exchanging any know-how, patent, copyright, commercial right, etc. |
| Compensation due to or obtained in association with specified cases under Section 28(ii) | Any compensatory payment received by or due to a person in connection with the modification/termination of his management in the affairs of an Indian firm, modification/termination of his office in the activities of an Indian company, modification/termination of conditions of any contract connected to his business, etc. |
| Export incentives | Export incentives obtained by an assessee conducting an export business, such as profit on sale of import entitlements, excise or customs duty repayable as a drawback, cash aid against exports, and profit on transmission of duty-free replenishment certificate. |
| Sum received under the Keyman Insurance Policy | Any sum obtained under the Keyman Insurance Policy, including sums assigned by way of bonus. |
| FMV of inventory | The fair market value of inventory as on the date on which it is converted into or treated as a capital asset |
Speculation Business Category
Suppose the assessee undertakes speculative transactions that constitute a business. In that case, such business has to be regarded as a separate and distinct business for the objective of computation of income under the head ‘Profits and Gains of Business or Profession’. Here, a speculative transaction implies a transaction under which a contract for the purchase or sale of commodities, including stocks and shares, is regularly and ultimately decided through modes other than actual delivery or transfer of such shares or commodities.
Further, in instances where the assessee performs both speculative and non-speculative transactions on a composite basis, it is essential to ascertain the income or loss from such speculative business and non-speculative business distinctly and separately.
Computation of income from business or profession
The following are the general principles to be observed while computing the income of a business or profession.
- Only expenses accrued in relation to the business or profession of the assessee will be permitted.
- Profit and losses of a speculation business should be kept separate.
- Profit should be calculated as per an accepted method of accounting regularly used by the assessee. E.g. mercantile system or cash system
- If any sum is permitted as a deduction in any earlier year and subsequently recovered, it will be taxable in the earlier year in which it is received.
- Losses, if any, should be incidental to the operation of the business
- Any amount permitted as expenses in the previous years, if recovered during the current year.
Expenses expressly permitted
- Rent, taxes, rates, repairs and insurance for buildings [Sec 30]
- Insurance and repairs of machinery, plant and furniture [Sec 31]
- Depreciation [Sec 32]
- Tea development account [Sec 33AB]
- Expenditure on scientific research [Sec 35]
- Expenditure on know-how [Sec 35AB]
- Amortization of certain preliminary expenses [Sec 350]
- General Deduction [Sec 37]
The specific general deductions are permitted from business or professional income;
- Excise duty, customs duty and sales tax paid
- Day-to-day expenses to conduct the business
- Workers compensation fund
- Legal expenses
- Sales tax appeal expenses
- Gift to employees
Computation of Income From Profits and Gains of Business or Profession (Section 29)
While calculating income under the head “Profits and Gains of Business or Profession’, certain essential principles should be borne in mind, which are:
Business undertaken by the assessee: According to Section 28, the person in charge of operating the company is always liable. Therefore, it is immaterial whether the assessee conducts the business personally or through one or more of his agents, employees, or managers.
The crucial point is that the assessee should have conducted the business at any time during the earlier year, but not necessarily throughout the year or in the assessment year. The assessee must possess the right to conduct the business.
Tax is charged on aggregate income from all professions/businesses undertaken by the assessee during the previous year. The net result of any profession or business undertaken by an assessee is computed separately. However, when tax is levied, the outcomes of all enterprises are combined, and tax is charged on that income.
Incurrence of expenditure: For claiming deductions under this section, expenditure should have been incurred during the previous year and incurred for the objective of profession or business. Contingent expenses and expenses which are incurred before setting up the company are not permitted as deductions unless specifically recommended under the Act.
Tax on actual earned profits: Tax is levied only on the earlier year’s real earned profits. If there is an anticipation of profit, tax cannot be charged only on an assumption or a notional basis. So, profit can be taxed only if it really occurs.
Negative income from profession/business: According to the recommended rules, a loss or negative income from a profession/business can be set off against other incomes. According to Section 29, the profits and gains of a profession or business are calculated as per the provisions included in Sections 30 to 43D. Besides specific deductions and allowances mentioned in Sections 30 to 36, the Act also allows the allowance of items of expenses under residuary Section 37(1) (which extends the allowance to items of business expenditure not encompassed by Sections 30 to 36).
Tax on real owner: Under Section 28, the lawful ownership needs to be regarded as beneficial ownership. The income is taxable to an individual to whom it really accrues.
Business/professional income to be calculated for each earlier year: The profits and gains must be taxed in relation to the previous year.
Profession/business may be legal or illegal: The income from legal and illegal business is taxable under this section.
Wrapping Up
Profits and gains of a profession or business form a vital category of income under the Income Tax Act, 1961 (India), and are essential in knowing the overall tax liability of an assessee. This category covers income earned from any trade, manufacturing activity, commerce, or professional services. The primary aim is to see that all income arising out of the regular and repeated process of making profits is taxed in the proper manner.
The computation of income under this head is governed by definite provisions that allow deduction of legal business expenses, depreciation, and other allowances, such that only the net profit is taxed. It also has special provisions for presumptive taxation to facilitate compliance by small businesses and professionals.
In short, the earnings and profits of enterprises and professions are not merely a major source of income for the government but also an indication of the economic activities of entities and persons. A complete comprehension of its guidelines and statutes is crucial for compliance, effective tax planning, and encouraging transparency in financial reporting.
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