Income from Profits & gains of business or profession
Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to taxation. The
term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d) any adventure or concern in the
nature of trade, commerce or manufacture. The term "profession" implies professed attainments in special
knowledge as distinguished from mere skill; "special knowledge" which is "to be acquired only after patient
study and application". The words 'profits and gains' are defined as the surplus by which the receipts from the
business or profession exceeds the expenditure necessary for the purpose of earning those receipts. These words
should be understood to include losses also, so that in one sense 'profit and gains' represent plus income
while 'losses' represent minus income.
The following types of income are chargeable to tax under the heads 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 of the Act
Income derived by a trade, profession or similar association from specific services
performed for its members
Profit on sale of import entitlement licences, incentives by way of cash
compensatory support and drawback of duty
The value of any benefit or perquisite, whether converted into money or not, arising
from business
Any interest, salary, bonus, commission, or remuneration received by a partner of a
firm, from such a firm
Any sum whether received or receivable in cash or kind, under an agreement for not
carrying out any activity in relation to any business or not to share any know-how, patent, copyright,
franchise, or any other business or commercial right of similar nature or technique likely to assist in the
manufacture or processing of good
Any sum received under a keyman insurance policy
Income from speculative transactions.
In the following cases, income from trading or business is not taxable under the head "profits and gains of
business or profession" :
Rent of house property is taxable under the head "Income from house property". Even
if the property constitutes stock in trade of recipient of rent or the recipient of rent is engaged in the
business of letting properties on rent.
Deemed dividends on shares are taxable under the head "Income from other sources".
Winnings from lotteries, races etc. are taxable under the head "Income from other
sources".
Profits and gains of any other business are taxable, unless such profits are subjected to exemption.
General principals governing the computation of taxable income under the head "profits and gains of business or
profession" :
Business or profession should be carried on by the assessee. It is not the ownership
of business which is important, but it is the person carrying on a business or profession, who is
chargeable to tax.
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. This income is
taxable during the following assessment year.
Profits and gains of different business or profession carried on by the assessee are
not separately chargeable to tax i.e. tax incidence arises on aggregate income from all businesses or
professions carried on by the assessee. But, profits and loss of a speculative business are kept
separately.
It is not only the legal ownership but also the beneficial ownership that has to be
considered.
Profits made by an assessee in winding up of a business or profession are not
taxable, as no business is carried on in that case. However, such profits may be taxable as capital gains
or as business income, if the process of winding up is such as to involve the carrying on of a trade.
Taxable profit is the profit accrued or arising in the accounting year. Anticipated
or potential profits or losses, which may occur in future, are not considered for arriving at taxable
income. Also, the profits, which are taxable, are the real profits and not notional profits. Real profits
from the commercial point of view, mean a gain to the person carrying on the business and not profits from
narrow, technical or legalistic point of view.
The yield of income by a commercial asset is the profit of the business irrespective
of the manner in which that asset is exploited by the owner of the business.
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.
Modes of book entries are generally not determinative of the question whether the
assessee has earned any profit or loss.
The Income tax act is not concerned with the legality or illegality of business or
profession. Hence, income of illegal business or profession is not exempt from tax.
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