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Income from profits

and gains of business
and profession
In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of

trade, commerce or manufacture. It covers every
facet of an occupation carried on by a person
with a view to earning profit.

The word “business” is one of large and

indefinite import and connotes
something which occupies attention
and labour of a person for the purpose
of profit.
Business arises out of commercial
transactions between two or more
persons. One cannot enter into a
business transaction with oneself.

As per section 2(36), profession includes

vocation. As profits and gains of a business,
profession or vocation are chargeable to tax
under the head “Profits and gains of business or
profession”, distinction between “business”,
“profession” and “vocation” does not have any
material significance while computing taxable
income. What does not amount to “profession”
may amount to “business” and what does not
amount to “business” may amount to
“vocation”.

1. Business Incomes Taxable

under the head of ‘Profit
and Gains of Business or
Profession’ (Section 28).
Under section 28, the following income is
chargeable to tax under the head “Profits and
gains of business or profession”:

Profits and gains of any business or

profession;
Any compensation or other payments
due to or received by any person
specified in section 28(ii);
Income derived by a trade, professional
or similar association from specific
services performed for its members;
The value of any benefit or perquisite,
whether convertible into money or not,
arising from business or the exercise of
a profession;
Any profit on transfer of the Duty
Entitlement Pass Book Scheme;
Any profit on the transfer of the duty
free replenishment certificate;
Export incentive available to exporters;
Any interest, salary, bonus,
commission or remuneration received
by a partner from firm;
Any sum received for not carrying out
any activity in relation to any business
or profession or not to share any know-
how, patent, copyright, trademark,
etc.;
fair market value of inventory as on the
date on which it is converted into, or
treated as, a capital asset determined
in the prescribed manner;
Any sum received under a Keyman
insurance policy including bonus;
any sum received (or receivable) in cash
or kind, on account of any capital asset
(other than land or goodwill or financial
instrument) being demolished,
destroyed, discarded or transferred, if
the whole of the expenditure on such
capital asset has been allowed as a
deduction under section 35AD;
Income from speculative transaction.

2. Business Income Not

Taxable under the head
‘Profit and Gains of
Business or Profession’
In the following cases, income from trading or
business is not taxable under section 28, under
the head “Profits and gains of business or
profession”:

Rental income in the case of Dealer in

Property:

Rent of house property is taxable under section

22 under the head “Income from house
property”, even if property constitutes stock-
in-trade of recipient of rent or the recipient of
rent is engaged in the business of letting
properties on rent.

Dividend on Shares in the case of a Dealer-in-

Shares:

Dividends on shares are taxable under section

56(2)(i), under the head “Income from case of a
dealer-in-shares other sources”, even if they
are derived from shares held as stock-in-trade
or the recipient of dividends is a dealer-in-
shares. Dividend received from an Indian
company is not chargeable to tax in the hands of
shareholders (this rule is subject to a few
exceptions).

Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable

under the head “Income from other sources”
etc. (even if derived as a regular business
activity).

Interest received on Compensation or

Enhanced Compensation:

Such interest is always taxable in the year of

receipt under the head “Income from other
sources” (even if it pertains to a regular business
activity). A deduction of 50 % is allowed and
e#ectively only 50 % of such interest is taxable
under the head “Income from other sources”.

Profits derived from the aforesaid business

activities are not taxable under section 28,
under the head “Profits and gains of business or
profession”. Profits and gains of any other
business are taxable under section 28, unless
such profits are exempt under sections 10 to 13A.

3. Mode of Taxation on
Certain Incomes (Section
145B)
Section 145B has been inserted by the Finance
Act, 2018. It is applicable from the assessment
year 2017-18 onwards. It provides mode of
taxation of the following incomes:

1. Interest received by an assessee on

compensation or on enhanced
compensation, shall be deemed to be
the income of the year in which it is
received (however, it is taxable under
section 56 under the head “Income
from other sources”).
2. The claim for escalation of price in a
contract or export incentives shall be
deemed to be the income of the
previous year in which reasonable
certainty of its realization is achieved.
3. Assistance in the form of subsidy (or
grant or cash incentive or duty
drawback or waiver or concession or
reimbursement) as referred to in
section 2(24)(xviii) shall be deemed to
be the income of the previous year in
which it is received, if not charged to
income tax for any earlier previous
year.

4. Basic Principles for

computing income Taxable
under the head ‘Profit and
Gains of Business or
Profession’

1. Business or profession carried on by

the assessee:

Business or profession should be carried on by

the assessee.

2. Business or profession should be

carried on during the previous year:

Income from business or profession is

chargeable to tax under this head only if the
business or profession is carried on by the
assessee at any time during the previous year
(not necessarily throughout the previous year).
There are a few exceptions to this rule.

3. Income of previous year is taxable

during the following assessment
year:

Income of business or profession carried on by

the assessee during the previous year is
chargeable to tax in the next following
assessment year. There are, however, certain
exceptions to this rule.

4. Tax incidence arises in respect of all

businesses or professions:

Profits and gains of di#erent businesses or

professions carried on by the assessee are not
separately chargeable to tax. Tax incidence
arises on aggregate income from all businesses
or professions carried on by the assessee. If,
therefore, an assessee earns profit in one
business and sustains loss in another business,
income chargeable to tax is the net balance after
setting o# loss against income. However, profits
and losses of a speculative business are kept
separately.

5. Legal ownership vs. beneficial

ownership:

Under section 28, it is not only the legal

ownership but also the beneficial ownership
that has to be considered. The courts can go into
the question of beneficial ownership and decide
who should be held liable for the tax after taking
into account the question as to who is, in fact, in
receipt of the income which is going to be taxed.

6. Real profit vs. anticipated profit:

Anticipated or potential profits or losses, which

may occur in future, are not considered for
arriving at taxable income of a previous year.
This rule is, however, subject to one exception:
stock-in-trade may be valued on the basis of
cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are

the real profits and not notional profits. For
instance, no person can make profit by trading
with himself in another capacity.

8. Recovery of sum already allowed as

deduction:

Any sum recovered by the assessee during the

previous year in respect of an amount or
expenditure which was earlier allowed as
deduction, is taxable as business income of the
year in which it is recovered.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot

override the substantial character of a
transaction.

10. illegal business:

The income-tax law is not concerned with the

legality or illegality of a business or profession. It
can, therefore, be said that income of illegal
business or profession is not exempt from tax.

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Guru Gobind Singh Dr. APJ Abdul Kalam

Indraprastha Technical University
University (MBA) MBA Notes (KMBN,
Notes KMB & RMB Series
Read MBA Syllabus Notes)
wise notes of Read MBA Syllabus
GGSIPU,New Delhi wise notes of
20 Dec 2018 AKTU,LUCKNOW
In "GGSIPU MBA 8 Dec 2018
NOTES" In "AKTU MBA NOTES"

Maharshi Dayanand
University (MDU) BBA
Notes
Read BBA Syllabus
wise notes of
MDU,HARYANA
6 Apr 2019
In "MDU BBA NOTES"

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