Income from ‘Profits and Gains of Business or Profession’

Summary: This section of the Income Tax Act, 1961, defines and clarifies income from “Profits and Gains of Business or Profession.” It distinguishes between business, profession, vocation, and occupation, outlining criteria for each. Business encompasses trade, commerce, and manufacturing, emphasizing profit-seeking through continuous activity. Profession involves intellectual or manual skills, like those of lawyers or doctors. Vocation is a broader term, suggesting regular employment, while occupation is the most comprehensive, including all aspects of one’s work. Section 28 details taxable incomes, including profits from ongoing businesses, compensation for contract terminations, and perquisites. Speculative business, characterized by contract settlements without actual delivery, is also covered, with exceptions for hedging and jobbing. Section 41 addresses deemed income, such as recovered losses and gains from asset sales. Deductions, crucial for calculating taxable income, follow general rules and specific provisions, with trading losses deductible if incidental to the business and non-capital in nature. Section 29 outlines the computation of income, allowing deductions per Sections 30 to 43-D, and emphasizing the necessity of considering all losses to determine true profits.

Meaning of business, profession, vocation and occupation

The term business:-

Business. “The word “Business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.” [S. 2(13)]. The definition is inclusive and not exhaustive 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. It indicates the continuous and systematic exercise of an occupation or profession with the object of making income or profit. Thus, it indicates some real, substantial and systematic or organised course of activity or conduct with a set purpose. In short, the word “business” denotes an activity capable of producing a profit which may be taxed.

In order to ascertain whether a particular activity should be treated as business, the following tests have been suggested to be applied in the case of Pari Mangaldas Girdhardas v. C.LT.

(1) The first test which is to be applied is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item in question or with a view to finding an investment. The inquiry is: “Is the article acquired for the purpose of trade?” The object, intention and expectation which are the inspiration of the transaction are relevant in judging essential nature of a transaction. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it has been treated as furnishing a valuable guideline.

(2) The second test that is often applied is as to why and how and for what purpose the sale was affected subsequently. If the object and purpose of the sale is quite inconsistent with the motive which should animate those who direct the fortunes of a trading company when they are affecting sales of that company’s stock-in-trade, then such conduct might, in certain cases along with other circumstances, show that the whole transaction of purchase and sale was not in the course of a trading enterprise. The circumstances in which the sale transaction is entered upon, the reasons motivating it, the presence or absence of commercial instinct in undertaking it are all factors which are relevant.

(3) The fourth test to be applied is as to how the assessee himself has returned the income from such a source or as to how the Department has dealt with it in the course of the immediately preceding or succeeding assessments, the evidence on this point, though not conclusive, is held to be good and cogent evidence to judge the nature of the transaction in the assessment year in question and it has been found to be a circumstance which the taxing authorities are entitled to take into consideration in the absence of any satisfactory explanation.

(4) In the case of partnership firms of companies, sometimes another test is applied whether the partnership deed or the memorandum authorised the firm or company to purchase and/or sell the commodity in question.

It is to be noted that the above is not an exhaustive list of all the relevant subsidiary tests. Overall view of the matter and collective effect of all the circumstances should be taken into account in determining the question whether or not a particular activity can be regarded as business.

The term profession:-

Profession. The word “Profession” involves the idea of an occupation requiring either purely intellectual skill or of any manual skill, skill controlled by the intellectual skill of the operator as distinguished from an occupation which is substantially the production or arrangements for the production or sale of commodities. For example, services rendered by lawyers, engineers, doctors and accounts require intellectual skill while services rendered in painting, sculpture, etc. require manual skill. It is to be noted that the word “business” is a word of wider import than the word “profession” and therefore what may not amount to business may amount to “profession”. All professions are business but all businesses are not professions.

The term Profession:-

Section2(36) the word “Profession” involves the idea of an occupation requiring either purely intellectual skill or of any manual skill, skill controlled by the intellectual skill of the operator as distinguished from an occupation which is substantially the production or arrangements for the production or sale of commodities. For example, services rendered by lawyers, engineers, doctors and accounts require intellectual skill while services rendered in painting, sculpture, etc. require manual skill. It is to be noted that the word “business” is a word of wider import than the word “profession” and therefore what may not amount to business may amount to “profession”.

The Term Vocation:-

Vocation. The word “profession” includes vocation also. However, the word “vocation” is a word of wider connotation than “business”. It may be understood as “the work in which a person is regularly employed usually for pay, line of work. Thus, some sort of regularity is required to constitute a “vocation. The word “vocation” is “analogous to calling, a word of wide signification, meaning, the way in which a man passes his life. Motive for making a profit is not an essential requisite of a vocation.

The Term Occupation:-

Occupation. “It is described as a generic and very comprehensive term which includes every species of the germs, and compasses, the incidental, as well as the main requirements of one’s vocation, calling or business. The word ‘occupation’ is variously defined as meaning the principal business of one’s life, the principal or usual business in which a man engages; that which principally takes one’s time, thought and energies; that which occupies or enjoys the time and attention that activity in which a person is engaged with the element of “degree of permanency” attached the term “occupation” expresses the idea of continuity; a continuous series of transactions and implies regularity in a specific line of endeavour As generally understood, the term does not include an isolated or semi-occasional and temporary adventure in another line of endeavour and does not extend to acts and duties which are simply incidents connected with the daily life.” Thus, the word, “occupation” is a word of wider import than “vocation” or “profession”.”

Profits and gains of business or profession [S. 28]

The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”-

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

(ii) any compensation or other payment due to or received by-

(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;

(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(c) any person, by whatever name called, 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 the terms and conditions relating thereto;

(d) 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;

(e) any person, by whatever name called, at or in connectan with the termination or the modification of the terms and conditions, of any contract relating to his business; ) income derived by a trade, professional or similar

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of S. 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted;

Perquisites of business

The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall also be chargeable to income-tax under the head “Profits and gains of business or profession”. For example, voluntary payment made by persons who are under no obligation to pay will be treated as income of the recipient if those payments are received by him in course of business or in the exercise of profession.

4a. Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports (Control) Act, 1947 shall be chargeable to income-tax under the head “Profits and gains of business or profession

4b. Cash assistance received or receivable by any person against exports under any scheme of the Government of India shall be chargeable to income-tax under the head “Profits and gains of business or profession.”

4c. Any duty of Customs or Excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 shall be chargeable to income-tax under the head “Profits and gains of business or profession.”

4d. Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under S. 5 of the Foreign Trade (Development and Regulation) Act, 1992.

4e. Any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated.

4f. The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to income-tax under the head “Profits and gains of business or profession.”

Speculative business

The profits derived from speculative business are also tax the head “Profits and gains of business or profession.” Speculative business may be understood as “transaction in which a contract for purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip.” Thus, the ingredients of speculative transactions are:

(i) the contract must be periodically or ultimately settled; and

(ii) the settlement should be otherwise than by the actual delivery or transfer of commodity or scrips.

Thus, unless the transaction is settled by actual delivery or transfer of the commodity, the transaction will be regarded as speculative transaction. Thus, a transaction will be treated as a speculative transaction if it is a transaction in which a contract for purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The words “a contract settled” should be taken to mean a contract determined or disposed of. It is to be noted that if actual delivery or transfer of the commodity or scrips takes place, the transaction cannot be treated as a speculative transaction, howsoever highly speculative in its nature the transaction may be. It is to be noted that to constitute a speculative business, there should be more than one speculative transaction carried by an assessee so as to constitute a business. It is only then that busines will be regarded as a speculative business. An isolated speculative transaction, thus, will not constitute speculative business.

However, the following transactions are not deemed to be speculative  transactions:

• A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising business to guard against loss in his holdings of stocks and shares through price fluctuations.
• A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holding of stocks and shares through price fluctuations.
• A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member.

Section 41 of the act

Under S. 41, certain receipts are deemed to be income under the head “business or profession.” According to this section, in the following conditions, the money or other benefit received will be deemed to be benefit of business or profession and will be chargeable to income-tax under the head, “Profits and gains of business or profession”:

S.41 (1): Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year-

(a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession and accordingly or some benefit in respect of any such trading liability by way of remission or cessation thereof the remission or by or the successor in businest under clause (b) of that sub-section by way of writing off such liability in the accounts.

“Successor in business”, for this purpose, means

(i) where there has been an amalgamation of a company with another company, the amalgamated company:

(ii) where the first mentioned person is succeeded by any other person in that business or profession, the other person; and

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm.

(iv) Where there has been a demerger, the resulting company.

Where the levy of excise duty was held illegal and the excise duty paid by the assessee was refunded to him, the Court held that the refunded amount would form part of deemed income and would be liable to the taxed under S. 41(1).¹

A.41(2). After sub-section (1), a new sub-section (2) has been inserted w.e.f. 1-4-98. This sub­section provides that where any building, machinery, plant or furniture-

(a) which is owned by the assessee;

(b) in respect of which depreciation is claimed under clause (i) of S. 32(1); and

(c) which was or has been used for the purpose of business, is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess and does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

S.41(3). Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of of sub-section (1), or clause (c) of sub-section (2B), of S. 35, read with clause (4) of S. 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (1) as the case may be the amount of the deduction under clause (s) of sub-section (2), or clause (c) of sub-section (2B), of S. 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions to made, whichever is the less, shall be chargeable to income-tax as income o the business or profession of the previous year in which the sale took place

Deductions

General rules regarding deductions:

(1) The list of allowances enumerated in Ss. 30 to 43-D is not exhaustive.

(2) Claiming under wrong section does not disentitle him from getting relief under the proper section.

(3) A deduction in respect of loss or expenditure of a business is allowed only if that business was in existence during the accounting year. Besides, deduction is allowed only in respect of the losses and expenses incurred during the relevant accounting year and consequently the losses or expenses incurred before the commencement of the accounting year will not be allowed.

(4) When a new business is started by a company, the accounting year of such business commences on the date when the business is set up or established and therefore expenditure incurred by the company before the setting up of business cannot be deducted from the profits of that business.”

(5) Expenditure or losses relating to one business cannot be deducted from the profits of another business. For example, losses or expenditure incurred on a business which was discontinued before the commencement of the accounting year cannot be deducted from the profits of another business.

(6) Expenditure is allowed as a deduction only if it has been incurred in respect of the assessee’s own business. For example, a holding company cannot claim deduction in respect of expenditure incurred by its subsidiary company.

(7) Deduction is allowed in the year of expenditure or loss. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant. Thus, deduction in respect of expenses and losses should be claimed only in respect of the year in which they are incurred.

(8) Fines and penalties for breach of law cannot be allowed as a deduction.

(9) When an assessee claims a deduction, he is required to prove that such deduction is permissible.

Deduction of Trading Losses

Sometimes an assessee has to bear losses in carrying out the operation of the business. Extent of the deduction of such losses is an issue difficult to be settled. Ss. 30 to 43-A of the Income Tax Act expressly provide for the items deductible in computing the income earned by the assessee from business or profession. Any expenditure or loss, therefore, falling under any one of these sections can be allowed as a deduction in the computation of profits and gains from business or profession. But the problem is whether a trading loss may be taken to have been covered by the provisions of the aforesaid sections. Unfortunately, none of these sections provides for the deduction of a trading loss. The attempt to prove the trading loss within the ambit of S. 37 is not tenable. S. 37 is a residuary clause. It includes the allowance of business expenditure not covered by Ss. 30 to 36. Only expenditure can be allowed to be deducted under S. 37. Business expenditure is different from a trading loss. Business expenditure may be understood as “something or other which the trader pays out some sort of volition is indicated. He chooses to pay out some disbursement, it is an expense; it is something which comes out of his pocket. A loss is something different. That is a thing which, so to speak, comes upon him as extra. Thus, business expenditure comes out of the pocket of the assessee and thereby indicates volition on the part of the assessee while a trading loss comes upon the assessee from outside in spite of his attempts to avoid it (Ss.30 to 43-D). This view has been approved by the Supreme Court. Consequently, a trading loss cannot be allowable deduction under S. 37. The list of allowances enumerated in Ss. 30 to 43-D is not exhaustive and therefore an item of loss or expenditure incidental to business may be allowed to be deducted in computation of the profits and gains from business or profession even if it does not fall within any of these sections. Thus, it appears to be correct to say that a trading loss incidental to business cannot be allowed under any of the express provisions contained in Ss. 30 to 43-D, but it may be allowed if it is deductible on ordinary principle of commercial section .

Computation income from profit and gains from business or profession Section  29:-

S.29 provides the manner in which the income from profit and gains from business or profession is to be computed. It provides that income from the profits and gains of business or profession shall be computed in accordance with the provisions contained in Sa. 30 to 43-D. As has been stated earlier, sections 30 to 43-D provide for deductions to be allowed in the computation of business income. The object of the S. 29 is not to limit the allowable deductions to those items of loss or expenditure which expressly fall within the ambit of the aforesaid sections. It is implicit in the provisions contained in S. 29 that in addition to the deductions expressly allowed in Ss. 30 to 43-D, the other deductions which can and should be made on ordinary principles of commercial accounting may also be allowed in the computation of income.

It is the not profit which is taxable under the head “Profits and gains of business or profession.” In order to compute net profit the trading losses incidental to the business should be deducted. “What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amounts of the profits and gains of a year, account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. This view has been approved by the Supreme Court. Consequently, it is now settled that a trading loss may be allowed in order to arrive at the true figures of the assessee’s business income in the commercial sense. However, every trading loss is not allowed on the basis of ordinary principle of commercial accounting. A trading loss will be deductible only when the following conditions are fulfilled:

(1) The loss is not merely connected with the trade or business but is really incidental to the trade or business. In other words, there must be a direct and proximate nexus between the business operation and the loss or the loss must be incidental to the business operation. The reason appears to be this that without deducting losses incidental to the business, the net profit chargeable to income-tax cannot be computed. Thus, it is the method of accounting which requires the losses incidental to the business to be deducted. However, it is to be remembered that this condition will be taken to have been fulfilled only when the loss springs directly from the carrying on of the business and is really incidental to it and loss cannot be allowed merely because it has some connection with the assessee’s business. Whether or not loss is really incidental to the operation of a business or springs directly from the carrying on of the business is an issue which is not well settled.

According to one view, a loss should be treated as loss incidental to the business only when the act in pursuance of which the loss has been incurred to the assessee is absolutely necessary for the purposes of his business. In the case of C.LT. v. Chakka Narayana, the assessee was a dealer in cloth and government securities. He encashed Government securities worth about Rs. 20,000. He went to the Railway Station for taking the case to his place of business but lost the money on account of theft committed. The A.P. High Court held that “It could not be posited that it was absolutely necessary for the assessee to cash the cheque issued and to carry the money on his person It is only when it could be posited that it was part of his business to take money with him that it could be said that the loss was incidental to his pressed by the A.P. High Court is business.” It is submitted that the view expressed narrow and cannot be taken as the correct exposition of the law. Fortunately, the Supreme Court has considered the view of the A.P. High Court and outright rejected it in the case of Ramchandar Shivanarayan v. money for the Purchasing Government securities. The money was broughtted the by its employee and handed over to the cashier. A stranger committed the theft of the money while the cashier was busy in taking out certain account books On reference the A.P. High Court held that the loss was not incidental to the carrying on of the assessee’s business. The Supreme Court rejected the opinion of the High Court and held that the loss was directly connected with the business operation and was incidental to the carrying on of the business of Government securities to earn profit.

In the case of Motipur Sugar Factory Ltd. v. C.I.T., an employee who was entrusted with funds for the purpose of distribution among sugarcane growers in accordance with statutory rules, was robbed of them on the way. The High Court held the loss deductible on the ground that the loss as one arising out of the business of the assessee and sprang from the statutory necessity of sending money to various purchasing centres for distribution. The word “statutory necessity” gives opportunity to the followers of the narrow view to argue that the loss to be deductible should have sprung from or should have been incidental to the act done by or on behalf of the assessee under statutory necessity. Fortunately, the argument of the Patna High Court that the sending of money to various purchasing centres sprang from the statutory necessity and, therefore, the money so robbed of should be allowed as a deduction, has not been emphasised much by the Courts. The correct view appears to be this that “the direct and proximate connection and nexus must be between the business operation and the loss. It goes without saying that a businessman has to keep money either when he gets it as a sale proceeds of the stock-in-trade or for disbursement to meet the business expenses or for providing stock-in-trade and if he loses such money in the ordinary course of business, the loss is deductible as trading loss. It is immaterial whether the money is a part of the stock-in-trade, such as of a banking a banking company or money-lender, or is directly connected with the other business operation.

(2) The loss must be of a non-capital nature. In other words, a trading loss can be deducted only when it is not a capital loss. Thus, a revenue loss may be deductible but a capital loss cannot be allowed. The distinction between capital loss and revenue loss is not an easy task. A loss which is not a revenue loss is regarded as a capital loss. There is no precise definition of a loss, however revenue loss may be understood as a loss which is not merely connected with the trade or business but also incidental to it. This view has been approved by the Supreme Court in Badridas Daga v. C.LT A loss of stock-in-trade or a loss incurred in the course of the business and incidental to it is a revenue loss. For example, where stock-in-trade is lost in transit or by negligence or fraud of the employees or is destroyed by fire, it is a revenue loss. As regards the loss of cash, the general rule appears to be this that if the loss occurs in the ordinary course of business and by the fraud of the employee, it will be treated as a revenue loss. Sometimes, the loss incurred to the assessee on account of the theft committed by the employee after office hours is not treated as a revenue loss, but this approach cannot be welcomed. Fortunately, the present trend of the Courts is to treat the loss on account of theft, fraud or embezzlement by the employees as revenue loss, whether such theft, fraud or embezzlement has been committed by the employee during or after office hours. In fact, there is no fixed test which may be applied in distinguishing revenue loss from a capital loss. Whether or not a loss should be treated as revenue loss is a question to be decided having regard to the facts of the case as well as the intention of the assessee. Thus, the nature of a loss is to be determined on the facts of each case.

(3) The loss must have been incurred by the assessee in the character of a trader and has fallen on him in that character.

(4) The deduction of the loss is not expressly or by necessary implication prohibited by the Act. A trading loss is allowed to be deducted on the strength of the ordinary principle of commercial accounting that is employed. Consequently, if the deduction of the trading loss is expressly or by necessary implication prohibited by the Act, it cannot be allowed.

Conclusion:-

The Income Tax Act, 1961, provide a crucial framework for the taxation of income from business and profession, ensuring clarity and compliance for taxpayers in India. Section 28 delineates the various types of incomes that are chargeable to tax, including profits from core business operations, professional services, trading activities, manufacturing, and the sale of capital assets. This comprehensive definition promotes transparency and fairness in the taxation process, enabling businesses and professionals to engage in effective tax planning while fulfilling their legal obligations. Together, these sections enhance understanding of tax liabilities and contribute to economic integrity by ensuring that all income streams are accounted for and taxed appropriately.

References:-

https://cleartax.in/s/section-28-of-income-tax-act

https://www.shahucollegelatur.org.in/Department/Studymaterial/comm/bcom2yr/1%20Income% 20from%20PGBP.pdf

https://www.incometax.gov.in/iec/foportal/help/individual-business-profession

https://learn.quicko.com/income-from-business-and-profession

https://www.indiafilings.com/learn/profits-gains-business-profession-income-tax/