Introduction
Income from business and profession is one of the significant
heads of income under the Income Tax Act, 1961.
This category encompasses profits and gains earned through
any business activity or professional services conducted by the
taxpayer during the financial year.
It forms a crucial part of taxable income and is subject to
various provisions and rules outlined in the Income Tax Act.
Under-S-28 following ingredients or chargeability of profits
or gains of business or profession:-
1) should be a business or profession.
2) Business and profession should be carried on either
assessee.
3) Business or profession should be carried on or sometime
during the previous year.
4) The charge is in respect of profits and gains of the previous
year of business or profession, and
5) The charge extend to any pro business or profession carried
on.
1. Business:-
o Business is defined in Section-2(13) of Income tax Act,
1961 to include any trade, commerce, or manufacture or
adventure. or concern in the nature of trade, Commerce,
or manufacture.
o Refers to any trade, commerce, manufacturing, or
adventure undertaken with the objective of earning
profits.
o Examples include retail shops, factories, and online
businesses.
CASE:- CIT VS. Dharma Reddy (A) 1969 SC
The definition of business being an inclusive and not been
exhaustive, is indicative of extention and expension and
not restriction.
2. Profession:
o Profession is defined in 5-2(36) This section does not
state what profession mean. It only states that profession
will include Vocation.
o The word profession implies professed attainment in
special knowledge as distinguish from mere skill. A
profession involves labour, skills, education and special
knowledge and implies vocation requiring higher
education and learning, Intellectual skill as distinguish
from one that used an occupation
o Encompasses occupations requiring specialized
knowledge, intellectual skill, or talent.
o Examples include doctors, lawyers, architects, and
accountants.
Case- CIT VS Manmohan Das. 1966, SC
Profession involves occupation requiring purely
intellectual manual skill.
A vocation, as normally understood, is a Calling in which a
person passes his life.
Chargeability
1. Scope:
o Income from business and profession is taxable if it arises
during the previous financial year.
o It includes profits or gains earned through business
ventures, professional services, or ancillary activities.
2. Key Inclusions:
o Compensation for termination of contracts.
o Export incentives, subsidies, or grants related to business.
o Income from renting commercial property used for
business.
3. Tax Rates:
o Income is taxed as per the applicable slab rates for
individual taxpayers and at prescribed rates for firms or
companies.
Allowable Deductions
Deduction:- S-30 to 37 covers expenses which are specially
allow as deduction, while computing business income.
Under the Income Tax Act, certain expenses incurred wholly
and exclusively for the purpose of business or profession are
deductible from taxable income. These include:
1. Rent and Utilities (Section 30):
o Rent, taxes, repairs, and insurance of premises used for
business purposes.
2. Repairs and Maintenance (Section 31):
o Expenses for repairs to plant, machinery, or furniture.
3. Depreciation (Section 32):
o Depreciation on tangible and intangible assets used in the
business.
o Following Conditions should be satisfied for depreciation:-
>>> Asset must be owned by the assessee.
>>> It must be business of used for the purpose of
profession.
>>> It Should be used during the relevant previous year.
>>> Depreciation is available on tangible & intangible
assets.
Computation of Normal Depreciation in
Written down value of the block of assets on the last day
of PY, X (multiply) rate of depreciation.
Block of Assets → 5-2(11):-
A group of assets falling within a class of assets :-
(1) Tangible assets --being building, machinery, Plant and
furniture.
(2) Intangible Assets -- No, how patents, Copyrights.
trademarks, licenses, franchise or any other business of
commercial rights of Similar nature (Not being a goodwill
of a business or profession).
In respect of which the same = percentage of depreciation
is presented.
Assets eligible for depreciation have been classified into
5 classes:-
1) Building 3 blocks -5%, 10%, 100%.
2) Furniture - 1 Block - electrical furnace -10%.
3) Plant & Machinery - Blocks - 7 15%, 30%, 45%, 50%,
60%, 80%, 100% (on or after 1st April 2017 the rate
of depreciation-15%, 30%, 40%).
4) Ships - I Block -> 20%.
5) Intangible assets -1 Block -> 25%.
4. Development Rebate (New Machinery) (Section-33)
o Development Rebate of New ship for new machinery -
o New ship 40% of actual cost there of to the assessee
o New Machinery 25% 850%
5. Conditions for depreciation allowance and development
rebate. ( section-34)
6. Expenditure on Scientific research (Section-35).
7. Salaries and Wages:
o Payments made to employees and staff, including bonuses
and commissions.
8. Following expenses are deductible u/s 36 (Section-36)
a) Insurance, Premium in respect of insurance against risk of
damage or destruction of stocks.
b) Premium for insurance on health of employees.
c) Bonus or Commission of Employees
d) Interest on come of borrowed Capital.
e) Discount on zero couban bonds.
f) continuation towards approved gratuity funds.
g) Employees contribution to recognized provident fund
approved super invasion fund and Notified Pension
Scheme.
h) Employees contribution to stop welfare scheme.
i) Bad debts, etc.
9. Other Expenses (Section 37):
o Expenses not specifically covered but incurred wholly for
business, such as advertising, professional fees, and legal
expenses.
# General Deduction S-37(1):-
S-37(1) is residuary section to avail deduction, the following
condition should be fulfilled:-
1) The expenditure should not be of the nature described u/s 30
to 36.
2) It should not be in the nature of capital expenditure.
3) It should not be personal expenditure of the assessee.
4) It should have been expended wholly and exclusively for the
purpose of such business-
5) It should have been incurred in Py.
6) It should be in respect of business carried on by the assessee.
7) It should not been incensed for any purpose when Is an offence
in prohibited by any law
Expenditure disallowance 4/5-378
1) Fees paid to registrar of the companies for changing companies
memorandum and Article of Association & increasing
authorized Capital of a company.
2) Expenditure incurred by an assessee for getting possession of
the land the owes.
3) Bank gurantee commission pay for securing a loan for acquiring.
a fixed assets.
4) Payment made for obtaining tenency sights over a Property
5) Penalty paid for violating any law or regulaton.
6) Expenditure incurred by company for shifti its registered office
from one place to another.
7) Interest paid for delayed payment non-payment, less payment
etc.
Disallowed Expenses
The following expenses cannot be claimed as deductions under the
Income Tax Act:
1. Personal Expenses:
o Any expenses incurred for personal purposes, not
connected to business or profession, are disallowed.
2. Expenses Not Related to Business or Profession:
o Costs that do not directly contribute to or benefit the
business or professional activity cannot be deducted.
3. Cash Payments Exceeding ₹10,000:
o Payments made in cash exceeding ₹10,000 in a single
transaction are not deductible, except under specific
circumstances as provided by the Act.
4. Excessive Payments to Relatives:
o Payments to relatives that are considered excessive or
unreasonable in relation to the market value of services
provided.
5. Reserves and Provisions:
o Reserves or provisions created for future expenses, unless
specifically permitted under the Act.
Specific disallowance uls - 40, 40(A), 43(B)
Disallowances U/S-40-
i. Interest, Royalty. fees for technical service Payable outside India
or payable to non- resident.
ii. Payment to a resident
iii. Default attaining to non-deduction/ non-deposit of equilisation
levy.
iv. Income tax (including CESS & surcharge). dividend tax, wealth
tax or any other tax in company.
v. Royalty, license, fee, service fee, privilege fee, etc.
vi. salary payable to non-resident or payable outline India.
vii. Tax on perquisit paid by employee.
viii. Salary & interest by its members. BOI & to its member.
Disallowance U/S 40(A) :-
Amounts paid or payable to a relative to a interest related Concern.
Expenditure exceeding Rs.10,000 paid by a mode other than
account payee cheque, Draft or electronic mode.
Contribution towards unapproved gratuity funds, employees
contribution towards non-Statutory fund.
No deduction shall be allowed in respect to market loss respect
other unexpected loss expect as allowable U/S - 36 (1) (xviii).
Amound not deductible in respect of certain. umpaid liabilities uls -
43(B):~
i. Any tax, Common duties, Cess, fees, under any law.
ii. Any contribution to common fund gratuity fund, super
invation fund.
iii. Bonus to commission paid to employees which would not
have been payable as profit or dividend.
iv. Interest on loan or borrowing from financial financial
institution or state financial institution, etc.
v. Interest on loan or advance from back.
vi. Payment of leave encashment
vii. Sum payable to the Indians railways or use of railways assets,
etc.
Presumptive Taxation
The Income Tax Act provides a simplified scheme of taxation for small
businesses and professionals, under which profits are calculated on a
presumptive basis instead of maintaining detailed accounts. This is
particularly helpful for taxpayers with lower turnovers or receipts.
1. Eligibility:
o Applicable to individuals, HUFs, and partnership firms
(excluding LLPs).
2. Section 44AD:
o Applicable to businesses with an annual turnover of up to
₹2 crore.
o Profits are presumed to be 8% of turnover (6% for digital
receipts).
3. Section 44ADA:
o Designed for professionals with annual gross receipts up
to ₹50 lakh.
o Income is presumed to be 50% of gross receipts.
4. Section 44AE:
o Tailored for transporters owning up to 10 goods vehicles.
o Income is presumed on a per-vehicle-per-month basis.
o Tailored for transporters owning up to 10 goods vehicles
o Income is presumed on a per-vehicle-per-month basis.
5. Features:
o Taxpayers are not required to maintain detailed books of
accounts.
o Advance tax is payable in one installment by 15th March.
o No further expenses or deductions can be claimed.
CASES:-
Income From Business
Lakshmi Narayan Ram Gopal Vs Government of
Hyderabad ([Link])
The Supreme court pointed out that the activities which constitute
carrying on of business need not necessarily consist of activities by
way of trade commerce, or manufacture or activities in the exercise
of profession or Vocation.
They may even consist of rendering services, to others of varigated
characterd.
Barendra Prasad Ray Vs ITO (1981, SC)
The expression "Business" does not necessarily mean trade or
profession only.
Income From Profession
Rama Swami Gounder (K.) VS CIT (1987, Madaras HC)
It may even be stated to be a way of living or a sphere of activity for
which one has a special fitness, though it is not necessarily that the
activities should be indulged in for purpose of livelihood.
Krishna Menon (P.) VS CIT (1959, SC)
In order that an activity may be called a vocation it need not shown
that it is an organized activity and that it is indulged in with a profit
motive.
Conclusion
Income from business and profession plays a crucial role in the
taxation framework of India. It not only governs the earnings of
business entities and professionals but also ensures fairness and
compliance through provisions like deductions, disallowed expenses,
and presumptive taxation. Understanding the intricacies under this
head is essential for accurate filing of taxes and planning financial
activities efficiently.
The structured approach provided under the Income Tax Act aids
taxpayers in maintaining transparency while contributing to the
nation's revenue system
BIBLIOGRAPHY
1. The following sources were referred to in the preparation of
this assignment:
Statutes and Government Sources
Income Tax Act, 1961
Income Tax Rules, 1962
[Link]
2. Books and Study Material
Singhania, V.K. & Singhania, Monica - Students' Guide to
Income Tax
Dr., Vinod K. Agarwal-Income Tax Law and Practice
ICAI Study Material - Direct Tax Modules
CA clubindia Articles and Updates
3. CAANKITSHARMA CA. (n.d.). Unit 3: Profits and Gains of
Business or Profession. Retrieved from
[Link]
Business_and_Profession_1688042033.pdf .
4.
5. CWM India. (2021). Chapter 6: Income from Business and
Profession. Retrieved from [Link]
content/uploads/2021/04/Chapter-6-Income-from-Business-
[Link] .