Introduction
Taxation is a key part of a country’s economic system. It helps provide the revenue needed for governance and development. In India, the Income-tax Act of 1961 regulates the taxation of individuals, businesses, and other entities. Out of its five heads of income, “Profits and Gains of Business or Profession” (PGBP) is particularly important. It directly relates to entrepreneurial and professional activities.
This blog looks at the scope, provisions, and practical aspects of income from business and profession in Indian taxation law, including judicial interpretations and statutory provisions.
Scope of Income from Business and Profession
Section 28 of the Income-tax Act specifies the income subject to taxation under this head. In general, income earned through:
1. Carrying on business
2. Carrying on profession
3. Any income related to these activities is taxable under PGBP.
Meaning of Business: The Act defines “business” in Section 2(13) as trade, commerce, manufacture, or any adventure in that direction. Courts have expanded this definition to include any ongoing activity done with the aim of making a profit (CIT v. Manmohan Das [1966] 59 ITR 699 (SC)).
Meaning of Profession: Section 2(36) defines “profession” as a vocation requiring specialized skills or knowledge. This includes fields like law, medicine, accountancy, engineering, architecture, and consultancy. The Supreme Court, in CIT v. Manmohan Das, clarified that a profession involves intellectual skill rather than just physical labor.
Income Chargeable under PGBP (Section 28)
The following are examples of income taxable under this head:
– Profits from any business or profession conducted during the previous year.
– Compensation received for ending or changing business contracts.
– Income earned by trade associations from specific services to their members.
– Export incentives like Duty Drawback.
– The value of any benefit or perk from business (as shown in CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All.)).
– Profits from speculative transactions.
– Income from partnership firms received by partners (excluding exempt shares of profits).
Deductions Allowed under Sections 30 to 37
Taxable income under PGBP is calculated by subtracting allowable expenses from gross receipts. Key deductions include:
1. Rent, Rates, Taxes, Repairs (Section 30)
2. Repairs and Insurance (Section 31)
3. Depreciation (Section 32)
4. Scientific Research Expenses (Section 35)
5. General Expenses (Section 37)
Judicial rulings have helped clarify the scope of these deductions. For example, in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), it was ruled that business expenses must be incurred based on commercial necessity and in relation to business needs.
Disallowances under the Act
Certain expenses are not allowed for tax calculations, even if incurred:
– Personal expenses of the taxpayer.
– Expenses for illegal activities or those prohibited by law (Explanation to Section 37(1)).
– Cash payments over ₹10,000 (Section 40A(3)).
– Excessive or unreasonable payments to relatives (Section 40A(2)).
Presumptive Taxation Schemes
To make compliance easier for small taxpayers, the Act offers presumptive taxation under Sections 44AD, 44ADA, and 44AE:
– Section 44AD: For small businesses with a turnover of up to ₹2 crore; income is presumed at 8% (or 6% for digital payments).
– Section 44ADA: For professionals with gross receipts of up to ₹50 lakhs; 50% of receipts are treated as income.
– Section 44AE: For transporters with up to 10 goods vehicles; a fixed income per vehicle per month is considered profit.
These schemes reduce the burden of record-keeping while ensuring tax collection.
Maintenance of Books of Accounts
Section 44AA requires certain professionals and businesses that exceed specified limits to keep prescribed books of accounts. Rule 6F outlines necessary records, such as cashbooks, ledgers, and bills, to ensure transparency in taxation.
Failing to maintain accounts can lead to penalties under Section 271A.
Audit Requirements
Section 44AB calls for a tax audit for:
– Businesses with a turnover above ₹1 crore (or ₹10 crore if cash transactions are less than 5% of total).
– Professionals with receipts exceeding ₹50 lakhs.
A tax audit ensures precision in the calculation and reporting of business income.
Important Case Laws on Income from Business and Profession
CIT v. Badridas Daga (1958)
The case of Badridas Daga v. Commissioner Of Income Tax (1958 INSC 51) is a landmark judgment by the Supreme Court of India that delves into the admissibility of losses incurred due to the embezzlement of an employee or agent under the Indian Income-tax Act, 1922.
CIT v. Dr. P. Vadamalayan (1969)
The case of Dr. P. Vadamalayan v. The Commissioner Of Income Tax, Madras adjudicated by the Madras High Court on February 21, 1969, serves as a pivotal reference in interpreting the intersection of professional practice and commercial activities under the Indian Income Tax framework.
Tuticorin Alkali Chemicals v. CIT (1997)
In Tuticorin Alkali Chemicals v. CIT (1997) 227 ITR 172 (SC), the Supreme Court of India held that interest earned on funds deposited in a bank, even by a company prior to commencing its business, was a capital receipt and should be adjusted against pre-operative expenses, not treated as taxable income from other sources. The Court’s reasoning was that the funds were raised for a specific capital purpose, and the interest earned from these funds, in the period before business began, was intrinsically tied to the capital nature of the transaction.
Practical Challenges and Judicial Interpretation
1.Classification of Income – Disputes often arise about whether a receipt is business income or a capital gain (G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC)).
2. Treatment of Illegal Income – Indian courts have determined that illegal income is also taxable under PGBP (CIT v. Piara Singh [1980] 124 ITR 40 (SC)).
3. Start-up Ecosystem – As the start-up sector grows, issues around valuation, angel tax, and deductions for ESOPs have added complexity to this income category.
Recent Developments
– Faceless assessments have been introduced to promote transparency in scrutinizing business income.
– Digital payment incentives: A lower presumptive rate for digital transactions under Section 44AD supports a cashless economy.
– Start-up India Benefits: Eligible start-ups receive tax holidays under Section 80-IAC, which affect calculations for this income.
Conclusion
The taxation of income from business and profession under the Indian Income-tax Act is an ever-evolving area of law. It determines how entrepreneurs and professionals meet their tax responsibilities and reflects the government’s policy on economic growth, digitalization, and compliance.
For students of tax law, grasping this income category is essential. It combines the principles of revenue law with the practical realities of business. Future reforms may further ease compliance while ensuring that India’s expanding entrepreneurial sector effectively contributes to national revenue.
References
1.Income-tax Act, 1961.
2. CIT v. Manmohan Das [1966] 59 ITR 699 (SC).
3. Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC).
4. G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC).
5. CIT v. Piara Singh [1980] 124 ITR 40 (SC).
6. Income Tax Department, Government of India (https://www.incometaxindia.gov.in).
7. ClearTax, “Income from Business and Profession – Guide” (2024).
Author Bio
Please add me as a subscriber 🙏