PROFITS AND GAINS OF BUSINESS OR PROFESSION

DEFINITION OF HEAD Profits and gains of business or profession are covered under sections 28 to 44 of Income Tax Act This head is the most important source of tax collection for the government The computation of income under this head is a very complex and difficult process

BUSINESS Section 2(13) defines business as “ any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce and manufacture”

ADVENTURE IN THE NATURE OF TRADE Profits arising from an isolated transaction are taxable as business profits, if it is treated as an adventure in the nature of trade, commerce or manufacture. To decide whether a transaction is in the nature of trade or not depends upon the fact and circumstances of each case

PROFESSION A profession is an occupation requiring purely intellectual skills or manual skills controlled by the intellectual skills of the operator e.g. lawyer, accountant, engineer, surgeon etc. so profession includes those activities where the livelihood is earned by the persons through their intellectual or manual skill. Profession includes vocation.

VOCATION Vocation simply means a way of living for which one has special fitness. A vocation does not involve any organised or systematic activity like business Vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. Examples are: writing of articles in magazines or news papers, a priest in a religious place etc

CHARGING PROVISIONS UNDER SEC 28 BUSINESS OR PROFESSIONAL INCOME: The business or profession should be carried on in the relevant previous year It is not necessary that it should carry on throughout the year Only the owner of the business is charged under this head Business in India or outside India are treated on the same footing for the purposes of this section All revenue profits arising from business or profession are chargeable even if they are of a casual and non recurring nature Illegality of the business or profession does not exempt its income from tax.

COMPENSATION: INCOME OF A TRADE OR PROFESSIONAL ASSOCIATION Any compensation or payment due under the following situations is taxed as business income: Termination or modifications in the terms of agency Termination or modification in the terms of management of affairs of a business Compulsory Acquisition of the property or business by the government INCOME OF A TRADE OR PROFESSIONAL ASSOCIATION PROFIT ON SALE OF EXPORT LICENSE CASH ASSISTANCE REPAYMENT OF ANY CUSTOMS OR EXCISE DUTY CONTD

PROFIT ON TRANSFER OF DUTY ENTITLEMENT PASS BOOK DUTY FROM DUTY FREE REPLENISHMENT SCHEME VALUE OF PERKS OR BENEFITS FROM BUSINESS OR PROFESSION SALARY, INTEREST, COMMISSION OR REMUNERATION RECEIVED BY A PARTNER FROM A FIRM PROFIT EARNED FROM AN ILLEGAL BUSINESS ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF INSURANCE ON SUCH POLICY

COMPUTATION OF INCOME---GENERAL IMPORTANT POINTS Business should be carried on by the assessee himself or through somebody Tax is levied on aggregate income from all taxable income from all businesses or professions carried on by the assessee The speculation business is kept separate Profit on sale of assets on the winding up of business is taxed as business income Its not only the legal ownership but the beneficial ownership that is considered under this head Tax is levied on the real earned profits of the previous year Income may be legal or illegal Business/profession income is to be computed fro each previous year Negative income signifies loss from business or profession

Computation of taxable income from business or profession Profit as per Profit & Loss a/c ADD: i) expenses or losses disallowed but charged to P&La/c ii) incomes taxable as business incomes but not credited to P&L a/c iii) expenses in excess of the allowed amount charged to P&L a/c iv) undervaluation of closing stock and overvaluation of opening stock DEDUCT: i) expenses or losses allowed but not debited to P&L a/c ii) incomes not taxable as business incomes but credited to P&La/c iii) incomes exempted from tax but credited to P&La/c iv) overvaluation of closing stock and undervaluation of opening stock