Profit and Gains of Business or Profession, Including Provisions relating to specific business

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Definition of Business and Profession

  • Business Definition:
    • Scope: Includes trade, commerce, manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture.
    • Commercial Transactions: Involves activities conducted for the primary purpose of earning profit through transactions involving goods or services.
    • Indefinite Import: The term "business" is broadly defined and encompasses any activity that engages one's attention and labor with the intention of making a profit.
  • Profession Definition:
    • Legal Definition: Includes vocations or occupations that require specialized knowledge and skills.
    • Taxable Nature: Profits and gains from professions are also taxed under the head of "Profits and gains of business or profession."

Taxable Incomes under Section 28

Under Section 28 of the Income Tax Act, the following incomes are chargeable to tax under the head "Profits and gains of business or profession":

  • Profits and Gains: Income generated from the regular operations of a business or profession.
  • Compensation and Payments: Any compensation or payments received by specified persons.
  • Association Income: Income derived by trade, professional, or similar associations from services provided to its members.
  • Benefits or Perquisites: Value of any benefits or perquisites arising from business or exercise of a profession.
  • Specific Schemes: Profits from schemes like Duty Entitlement Pass Book Scheme, duty-free replenishment certificate, and export incentives.
  • Partner's Income: Interest, salary, bonus, commission, or remuneration received by a partner from a firm.
  • Non-compete Fees: Payments received for not carrying out certain activities related to business or profession.
  • Inventory Valuation: Fair market value of inventory converted into or treated as a capital asset.
  • Keyman Insurance: Amounts received under a Keyman insurance policy, including bonuses.
  • Demolition or Transfer: Income from the demolition, destruction, or transfer of capital assets (excluding land or goodwill) where the entire expenditure was earlier allowed as a deduction.
  • Speculative Transactions: Income from speculative transactions.

Non-Taxable Incomes under Section 28

Certain incomes derived from business activities are not taxable under the head "Profits and gains of business or profession":

  • Rental Income for Property Dealers: Rental income is taxed under "Income from house property" even if the property is held as stock-in-trade or rented out as part of the business.
  • Dividends on Shares for Share Dealers: Dividends from shares are taxed under "Income from other sources," except for certain exemptions.
  • Winnings from Lotteries, etc.: Income from lotteries, races, etc., is taxed under "Income from other sources."
  • Interest on Enhanced Compensation: Interest received on enhanced compensation is taxed under "Income from other sources."

Principles for Computing Taxable Income

  • Business Operation: The business or profession must be carried out during the previous year (assessment year).
  • Assessment Year: Tax on income is levied in the following assessment year.
  • Aggregate Income: Total profits and losses from all businesses or professions are aggregated.
  • Legal and Beneficial Ownership: Both legal and beneficial ownership are considered for tax purposes.
  • Real vs. Notional Profit: Only actual, realized profits are taxable; anticipated or notional profits are not considered.
  • Recovery of Deductions: Any recovered deductible amount is taxable in the year of recovery.
  • Book-keeping Irrelevance: Taxation is based on the substance of transactions, not the accounting treatment.
  • Legality: Income from illegal businesses or professions is not exempt from taxation.

Additional Considerations

  • Speculative Transactions: Profits and losses from speculative transactions are treated separately.
  • Interest on Enhanced Compensation: Taxable under "Income from other sources" when received.
  • Subsidies and Grants: Taxable in the year of receipt under specific conditions, if not taxed earlier.

Understanding these details is crucial for businesses and professionals to comply with Indian tax laws and accurately compute their taxable income under the head "Profits and gains of business or profession."