INCOME UNDER THE HEAD “Profits or Gains from Business or Profession”

1. Introduction :

What is Business ?

The word “Business” is defined in Section 2(13) to include any trade, Commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. 

What is adventures ?

Even an isolated transaction outside the business of an assessee may constitute an adventure in the nature of trade and business. Repeation and continuity of the transaction is not necessary to constitute an adventure in the nature of trade or commerce.

For example : X deals in rice only. But during May, 2004 he purchase 100 quintals of wheat @ 400 per quintal and sells entire wheat @ 600 per quintal in December, 2004. This single adventure can be called “business”.

What is profession ?

Sec. 2(36) defines “Profession” to include vocation. In fact, neither profession nor vocation has been seperately defined in the Income tax act. As per the dictionary meaning “Profession” means rendering expert and specialised services acquired by undergoing a professional course.

For example : Legal, medical, engineering or architectural profession or interior decoration.

What is vocation ?

Vocation means an “activity” which has been adopted by a person as a means of earning his lively hood

For example : A person staging magic show, a juggler, and astrologer or a religious preacher. Similarly contributing articles to periodicals and magazines are vocations. Regularity and profit motive are not necessary for an activity to be called a vocation.

Important Rules :

(1)     Business or Professioncarried on by the asessee : Tax is chargeable from the person who carries the business or profession. It is necessary that he should be entitled to carry on the business. It is not necessary that assessee shall be the owner of the business Gurdian for minors or trustees are assessed.

(2)      Profit and Losses of speculative business are kept Seperate : Profit and losses of speculative busienss are kept seperate because loss in a sepculation business can be set-off only against profit of speculation business and not against profit of any other business.

 (3)    The business or profession is carried on by an assessee for any time during the previous year : Whether for full year or for a part of previous year only.

(4)     Profit on sale of assets on the winding up of a business is taxable as capital gain except stock-   in-trade.

(5)     National Profit : No person can make profit by trading with himself. profit must be earned from an outsider. For example sale of an assets by the business to its proprietor at a higher price results only book profit as it is not actually earned from an outsider. Hence such profit is not taxable.

(6)     “Dharmada” collected from customer is not trading receipts and hence not liable to tax.

(7)     “Awards” for sportsmen : If a person, who is a professional sportsman, receives some award, it is his professional income and is liable to tax. If the sportsman is not professional, the award received by him is a gift hence not taxable (circular No. 447/22.1.86)

(8)     Income of illegal business or profession : Tax is payable on the income whether business is legal or illegal. The expenses incurred to earn income from illegal business which are incidental to such business are to be allowed as a deduction out of the income earned from illegal business. However, penalties levied for contravention of law and expenses incurred in defence of criminal proceedings are not allowed under the Act.

(9)     Book entries are not final and conclusive evidence in determining the taxability of a particular item of expenditure or income. In case of CIT v/s Hazarimal Milapchand Surana (2003), 262 ITR. Where assets are revalued and the appreciated amount is credited to Profit and Loss account, there is no generataion of income by such book entry. Taxability arises only when assets are transferred.

(10)    Method of Accounting : According to Sec. 145 the income chargeable under the head “Profit and Gains of Business or Profession shall be computed on the basis of either mercantile (due basis), method of according or cash method of accounting, Earlier upto assessment year 1996-97, an assessee could also follow hybrid system of accounting. But afer amendments now this method of accounting is not recognised.

2. Section 28 — Chargeability :

Scope of Income under this head

The following income shall be chargeable to Income – Tax under the head “Profit and Gains of Business or Profession”.

i)       The profits & 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 in connection with termination /modification of his agreement for managing the whole or substantially the whole of the affairs of an Indian company or any other company;

b)   Any person 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 or modification of the term of agency.

c)   Any person or in connection with the vesting in the Govt., or in any corporation management of any property or business.f

Example : Ramesh was the distributor of a company for entire Rajasthan state during 2004-05 the company has modified the contract of agency and in future Ramesh will be distributor only for Jaipur city. In lieu of such modification the company compensates Ramesh with Rs. 4,00,000. Such amount of Rs. 4,00,000 received by Ramesh although capital receipt but shall be taxable as business income.

iii)      Income derived by a trade, professional or similar association from specific services performed for its member. This is an exception to the general principle that a surplus arising to mutual association cannot be regarded as income chargeable to tax. Specific service is a service which will not be available even to a member unless they pay for the same.

iv)      Export incentives which include :

a)   Profit on sale of import license, granted on account of exports;

b)   Cash assistance by whatever name called received or receivable against exports.

c)   Duty drawback of custom and central excise.

v)      The value of any benefit or perquisite, whether convertible into money or not, arising during the course of the carrying on of any business/profession.

Example : Value of the residential accomodation secured by engineer from their client consideration of his profession services will be assessable in the hand of the assessee as his income under the head “Profits &

         Gains of Business or Profession ”.

vi)      Any Interest, Salary, Bonus, Commission or remuneration due to or received by a partner of a firm from the firm in which he is a partner. Where any such interest, salary, commission etc. has been disallowed u/s 40(b) in the case of the firm, the same shall not be taxed in the hand of partner. This provision is inserted to avoid double taxation. A firm pays interest to a partner @18% p.a. The allowable rate of interest is 12% p.a. Hence the excess 6% paid will be disallowed in the hands of the firm since excess interest is taxed in the hands of the firm, the same shall not be taxed in the hands of the partner.

vii)     Any sum received or receivable in cash or kind under agreement for :

a)   Not carrying out any activity in relation to any business or

b)   Not sharing any knowhow, patent, copyright, trademark, licenses, franchise or technique to assist in manufacture, processing, provision of services.

viii)    Any sum received under a “Key man Insurance Policy” including the sum allocated by way of bonus on such policy. “Keyman insurance policy” means a life insurance policy taken by assessee on the life of present /past employee or any person who is/was connected with his business in any manner.

ix)      Income from Speculative transactions   

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