Income under the Head “Profits and Gains of Business or Profession”(PGBP)
Meaning of ‘Business’ and ‘Profession’
The tax payable by an assessee on his income under this head is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year.
|The term “business” has been 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”||The term “profession” has not been defined in the Act. It means an occupation requiring some degree of learning. The term ‘profession’ includes vocation as well [Section 2(36)]|
- Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and even an astrologer are persons who can be said to be carrying on a profession but not business.
- However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or ‘vocation’ since for purposes of assessment, profits from all these sources are treated and taxed alike.
- Business necessarily means a continuous exercise of an activity; nevertheless, profit from a single venture in the nature of trade may also be treated as business.
Meaning of ‘Profits’
- Profits in cash or in kind: Profits may be realized in money or in money’s worth, i.e., in cash or in kind. Where profit is realized in any form other than cash, the cash equivalent of the receipt on the date of receipt must be taken as the value of the income received in kind.
- Capital receipts: Capital receipts are not generally to be taken into account while computing profits under this head.
- Voluntary Receipts: Payment voluntarily made by persons who were under no obligation to pay anything at all would be income in the hands of the recipient, if they were received in the course of a business or by the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a person who was not a client, but who has been benefited by the lawyer’s professional service to another would be assessable as the lawyer’s income.
- Application of the gains of trade is immaterial: Gains made even for the benefit of the community by a public body would be liable to tax. To attract the provisions of section 28, it is necessary that the business, profession or vocation should be carried on at least for some time during the accounting year but not necessarily throughout that year and not necessarily by the assessee-owner personally, but it should be under his direction and control.
- Legality of income: The illegality of a business, profession or vocation does not exempt its profits from tax. The revenue is not concerned with the taint of illegality in the income or its source.
- Income from distinct businesses: The profits of each distinct business must be computed separately but the tax chargeable under this section is not on the separate income of every distinct business but on the aggregate profits of all the business carried on by the assessee.
- Computation of profits: Profits should be computed after deducting the losses and expenses incurred for earning the income in the regular course of the business, profession, or vocation unless the loss or expenses is expressly or by necessary implication, disallowed by the Act. The charge is not on the gross receipts but on the profits and gains.
Method of Accounting [Section 145]
Income chargeable under this head shall be computed in accordance with the method of accounting regularly and consistently employed by the assessee either cash or mercantile basis.
Income chargeable under this Head [Section 28]
- The profits and gains of any business or profession carried on by the assessee at any time during the previous year.
- Any compensation or other payment due to or received by a person, at or in connection with –
- Termination of his management or modification of the terms and conditions relating thereto, in case the person is managing the whole or substantially the whole of the affairs of an Indian company.
- Termination of his office or modification of the terms and conditions relating thereto, in case the person is managing the whole or substantially the whole of the affairs in India of any other company.
- Termination of agency or modification of the terms and conditions relating thereto, in case the person is holding an agency in India for any part of the activities relating to the business of any other person.
- Vesting in the Government or in any corporation owned and controlled by the Government, under any law for the time being in force, of the management of any property or business.
- Termination or the modification of the terms and conditions, of any contract relating to his business
- Income derived by a trade, professional or similar association from specific services performed for its members.
- In the case of an assessee carrying on export business, the following incentives –
- Profit on sale of import entitlements;
- Cash assistance against exports under any scheme of GOI;
- Customs duty or excise re-paid or repayable as drawback;
- Profit on transfer of Duty-Free Replenishment Certificate.
- Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of profession.
- Any interest, salary, bonus, commission or remuneration due to, or received by, a partner of a firm from such firm (to the extent allowed as deduction in the hands of the firm).
- Any sum, received or receivable, in cash or kind under an agreement for –
- not carrying out any activity in relation to any business or profession; or
- not sharing any know-how, patent, copyright, trademark, licence, franchise or any other business of commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision of services.
- Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
- Fair market value of inventory as on date on which it is converted into or treated as a capital asset.
- Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, in respect of which the whole of the expenditure had been allowed as deduction under section 35AD.
Computation of income under the head “Profits and gains of business or profession”
As per section 29, the income referred to in section 28 has to be computed in accordance with the provisions contained in sections 30 to 43D.
|Rent, Rates, Taxes, Repairs and insurance for buildings (Section 30)||
Amount paid on account of rent, rates, taxes, repairs (not including expenditure in the nature of capital expenditure) and insurance for buildings used for the purpose of business or profession.
In case the premises are occupied by the assessee as a tenant, the amount of repairs would be allowed as deduction only if he has undertaken to bear the cost of repairs to the premises.
|Repairs and insurance of machinery, plant and furniture (Section 31)||
Amount paid on account for current repairs and insurance of machinery, plant and furniture used for the purpose of business or profession.
|Depreciation (Section 32)||
Depreciation is mandatorily allowable as deduction.
Conditions for claiming depreciation
As per section 2(11), block of assets means a group of assets falling within a class of assets comprising:
Written Down Value of Assets (W.D.V.) [Section 43(6)]
Note – If the actual cost includes cost of asset put to use for less than 180 days in the relevant P.Y. of acquisition, then, depreciation on such cost would be 50% of the prescribed rate.
|Additional depreciation (Section Section 32(1)(iia))||
Additional depreciation at the rate of 20% of actual cost of plant or machinery acquired and installed after 31.03.2005 by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power, shall be allowed.
If plant and machinery is acquired and put to use for the purpose of business or profession for less than 180 days during the previous year in which it is acquired, additional depreciation will get restricted to 10% of actual cost (i.e., 50% of 20%). The balance additional depreciation@10% of actual costwill be allowed in the immediately succeeding previous year.
However, additional depreciation will not be allowed on the following plant or machinery:
|Expenditure on Scientific Research (Section 35)||Expenditure incurred by assessee
Contributions to Outsiders
Contributions made by any assessee to certain specified/ approved institutions shall be entitled to deduction of 100% of contribution made to:
|Investment-linked tax deduction (Section 35AD)||
This section provides for investment-linked tax deduction in respect of the following specified businesses commencing operations on or after the dates specified thereto –
Quantum of deduction – 100% of the capital expenditure (other than expenditure on acquisition of any land, goodwill or financial instrument) incurred during the previous year, wholly and exclusively for the above specified businesses would be allowed as deduction from the business income o f an assessee, if he has opted for the provisions of section 35AD.
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to commencement of operation would be allowed as deduction during the previous year in which the assessee commences operation of his specified business, provided the amount incurred prior to commencement has been capitalized in the books of account of the assessee on the date of commencement of its operations.
Payment exceeding Rs.10,000 to be made through prescribed electronic modes to qualify for deduction u/s 35AD – Any expenditure in respect of which payment or aggregate of payment made to a person of an amount exceeding Rs.10,000 in a day otherwise than by account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through such other prescribed electronic modes would not be eligible for deduction.
Non-eligibility for deduction u/s 10AA or Chapter VI-A – An assessee availing investment-linked tax deduction u/s35AD in respect of any specified business in any assessment year, is not eligible for claiming profit-linked deduction under Chapter VI-A or section 10AA for the same or any other A.Y. in respect of such specified business if the assessee has claimed or opted for section 35AD and deduction thereunder has been allowed to him.
Asset to be used only for specified business for 8 years – Any asset in respect of which a deduction is claimed and allowed under section 35AD shall be used only for the specified business, for a period of 8 years beginning with the previous year in which such asset is acquired or constructed. If such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed u/s 35AD in any previous year in respect of such asset, as reduced by the depreciation allowable under section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be the business income of the assessee of the previous year in which the asset is so used.
|Preliminary expenditure (Section 35D)||Preliminary expenditure incurred by Indian companies and other resident non-corporate assessees shall be allowed as deduction over a period of 5 years beginning with the previous year in which business commences or in which extension of the undertaking is completed or the new unit commences operation or productions.
Examples of Preliminary expenses – expenses on preparation of project report, feasibility report, market survey, engineering services, legal charges for drafting agreement.
In case of a Company, preliminary expenses would include, in addition to the above, legal charges for drafting MOA, AOA, printing of MOA and AOA, fee for registration of Co., expenditure in connection with issue of shares or debentures of Co. (i.e. underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus)
Qualifying amount – Maximum aggregate amount of the qualifying expenses that can be amortized is 5% of the cost of project (i.e., actual cost of fixed assets in the books of account on the last day of the P.Y.).
In case of an Indian company, 5% of the cost of project or at its option, 5% of the capital employed by the company (aggregate of issued share capital, debentures, long-term borrowings as on the last day of the P.Y.), whichever is higher.
|Payment in connection with his voluntary retirement (Section 35DDA)
One-fifth of the expenditure incurred by an assessee-employer in any previous year in the form of payment to any employee in connection with his voluntary retirement in accordance with a scheme of voluntary retirement, shall be allowed as deduction in that previous year and the balance in four equal installments in the immediately four succeeding previous years.
|Interest paid in respect of capital borrowed (Section 36(1)(iii))||
Interest paid in respect of capital borrowed for the purposes of business or profession.
However, any interest paid for acquisition of an asset (whether capitalized in the books of account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.
|Contribution towards a recognized provident fund or approved superannuation fund (Section 36(1)(iv))||
Any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or approved superannuation fund, subject to prescribed limits.
|Contribution towards a pension scheme referred to in section 80CCD (Section 36(1)(iva))||
Any sum paid by the assessee as an employer by way of contribution towards a pension scheme referred to in section 80CCD, to the extent of 10% of salary of any employee. Salary includes dearness allowance, if the terms of employment so provide. Correspondingly, section 40A(9) disallows the sum paid in excess of 10% of the salary of any employee.
|Bad debts written off (Section 36(1)(vii))||
Any bad debts written off as irrecoverable in the accounts of the assessee for the previous year, provided the debt has been taken into account in computing the income of the previous year or any earlier previous year.
Amount of debt taken into account in computing the income of the assessee on the basis of notified ICDSs to be allowed as deduction in the previous year in which such debt or part thereof becomes irrecoverable. If a debt, which has not been recognized in the books of account as per the requirement of the accounting standards but has been taken into account in the computation of income as per the notified ICDSs, has become irrecoverable, it can still be claimed as bad debts under section 36(1)(vii) since it shall be deemed that the debt has been written off as irrecoverable in the books of account by virtue of the second proviso to section 36(1)(vii). This is because some ICDSs require recognition of income at an earlier point of time (prior to the point of time such income is recognised in the books of account). Consequently, if the whole or part of such income recognised at an earlier point of time for tax purposes becomes irrecoverable, it can be claimed as bad debts on account of the second proviso to section 36(1)(vii).
|Expenditure incurred by a company for the purpose of promoting family planning amongst its employees. (Section 36(1)(ix))||
Any bona fide expenditure incurred by a company for the purpose of promoting family planning amongst its employees.
In case the expenditure or part thereof is of capital nature, one fifth of such expenditure shall be deducted for the previous year in which it was incurred; and the balance in four equal installments in four succeeding previous years.
Family planning expenses, whether revenue or capital, is not allowable as deduction for non-corporate assesses, like individuals, HUFs, firms, LLPs.
|Securities Transaction Tax (STT) (Section 36(1)(xv))||
An amount equal to the securities transaction tax (STT) paid by the assessee in respect of taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head “Profits and gains of business or profession”.
|Commodities Transaction Tax (CTT) (Section 36(1)(xvi))||
An amount equal to commodities transaction tax (CTT) paid in respect of taxable commodities transactions entered into the course of business during the previous year, if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.
|General (Section 37(1))||
An expenditure shall be allowed under section 37, provided:
|Advertisement in any souvenir, brochure, tract, pamphlet etc. published by a political party (Section 37(2B))||
Any expenditure incurred for advertisement in any souvenir, brochure, tract, pamphlet etc. published by a political party is not allowable as deduction.
Amounts not deductible
Any interest, royalty, fees for technical services or other sum chargeable under the Act, which is payable outside India or in India to a non-corporate non-resident or to a foreign company, on which tax deductible at source has not been deducted or after deduction has not been paid on or before the due date specified under section 139(1).
However, if such tax has been deducted in any subsequent year or has been deducted in the previous year but paid in the subsequent year after the due date specified under section 139(1), such sum shall be allowed as deduction in computing the income of the previous year in which such tax is paid.
30% of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date for filing of return of income under section 139(1).
However, if such tax has been deducted in any subsequent year or has been deducted in the previous year but paid in the subsequent year after the due date specified under section 139(1), 30% of such sum shall be allowed as deduction in computing the income of the previous year in which such tax is paid.
Any sum paid on account of income-tax
Any payment chargeable under the head “Salaries”, if it is payable outside India or to a non-resident, if tax has not been paid thereon nor deducted therefrom.
Tax paid by the employer on non-monetary perquisites provided to its employees, which is exempt under section 10(10CC) in the hands of the employee.
Meaning of Book profit:
Book profit means the net profit as shown in the P&L A/c for the relevant previous year computed in accordance with the provisions for computing income from profits and gains.
The above amount should be increased by the remuneration paid or payable to all partners of the firm if the same has been deducted while computing net profit.
Expenses or payments not deductible in certain circumstances
|Expenditure incurred in respect of which a payment is made to a related person or entity (Section 40A(2))||
Any expenditure incurred in respect of which a payment is made to a related person or entity, to the extent it is excessive or unreasonable by the Assessing Officer.
Few examples of related persons are as under:
|Expenditure in Cash (Section 40A(3))||
Any expenditure, in respect of which a payment or aggregate of payments made to a person in a single day otherwise than by account payee cheque or account payee bank draft or ECS through bank account or through such other prescribed electronic modes exceeds Rs. 10,000.
In case of payments made to transport operator for plying, hiring or leasing goods carriages, an enhanced limit of Rs. 35,000 shall apply.
If the payment/payments exceed this limit, the entire expenditure would be disallowed.
However, disallowance would not be attracted if the cases and circumstances in which payment is made otherwise than by way of an account payee cheque or bank draft are covered in Rule 6DD.
Few Examples of exceptions covered in Rule 6DD:
|Expenditure allowed in Previous Years (Section 40A(3A))||
Where an expenditure has been allowed as deduction on accrual basis in any previous year, and payment is made in a subsequent previous year otherwise than by account payee cheque or account payee bank draft or ECS through bank account or through such other prescribed electronic modes and such payment (or aggregate of payments made to a person in a day is made in a subsequent previous year) is in excess of the limits of Rs. 10,000/ Rs. 35,000 specified above, the payment/aggregate of payments so made shall be deemed as profits and gains of the business or profession and charged to tax as income of the subsequent previous year.
However, the deeming provision will not apply in the cases and circumstances covered in Rule 6DD.
|Payment of gratuity (Section 40A(7))||
Provision for payment of gratuity to employees.
However, disallowance would not be attracted if provision is made for contribution to approved gratuity fund or for payment of gratuity that has become payable during the year.
Profits chargeable to tax [Section 41]
Where deduction was allowed in respect of loss, expenditure or trading liability for any year and subsequently, during any previous year, the assessee or successor of the business has obtained 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 or the value of benefit accrued shall be deemed to be income of the P.Y. in which such benefit was obtained.
Amount realized on transfer of an asset used for scientific research without being used for other purposes is taxable as business income in the year of sale to the extent of lower of –
Any amount recovered by the assessee against bad debt earlier allowed as deduction shall be taxed as income in the year in which it is received.
Certain Deductions to be allowed only on Actual Payment [Section 43B]
In respect of the following sums payable by an assessee during the P.Y., deduction is allowable only if the sum is actually paid on or before the due date of filing of return under section 139(1) for the said P.Y. Otherwise, the same would be allowed only in the year in which the sum is actually paid.
- Tax, duty, cess or fee, under any law for the time being in force; or
- Contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees; or
- Bonus or commission for services rendered by employees, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; or
- Interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing; or
- Interest on any loan or borrowing from a deposit taking NBFC or systemically important non-deposit taking NBFC (i.e., whose total assets as per the last audited Balance Sheet is Rs. 500 crore or more), in accordance with the terms and conditions of the agreement governing such loan or borrowing
- Interest on any loan or advance from a scheduled bank or cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances; or
- Payment in lieu of any leave at the credit of his employee.
- Any sum payable to the Indian Railways for use of Railway assets.
Stamp Duty Value as Deemed Consideration (Section 43CA)
Where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable (i.e., the stamp duty value) shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business or profession”.
However, if the stamp duty value does not exceed 110% of the consideration received or accruing then, such consideration shall be deemed to be the full value of consideration for the purpose of computing profits and gains from transfer of such asset.
Further, where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer instead of on the date of registration for such transfer, provided at least a part of the consideration has been received by way of an account payee cheque/ account payee bank draft or use of ECS through a bank account or through such other prescribed electronic modes on or before the date of the agreement.
Mandatory audit of accounts of certain persons (Section 44AB)
|44AB||Category of person||Condition for applicability of section 44AB|
|(a)||In case of a person carrying on business||
If his total sales, turnover or gross receipts in business > Rs. 1 crore in the relevant PY
Note – The requirement of audit u/s 44AB does not apply to a person who declares profits and gains on presumptive basis u/s 44AD and his total sales, turnover, or gross receipts does not exceed Rs. 2 crore.
If in case of such person carrying on business –
|If his total sales, turnover or gross receipts in business > Rs. 5 crore in the relevant PY|
|(b)||In case of a person carrying on profession||If his gross receipts in profession > Rs. 50 lakh in the relevant PY|
|(c)||In case of an assessee covered u/s 44AE i.e., an assessee engaged in the business of plying, hiring or leasing goods carriages who owns not more than 10 goods carriages at any time during the P.Y.||If such assessee claims that the profits and gains from business in the relevant P.Y. are lower than the profits and gains computed on a presumptive basis u/s 44AE [i.e.,Rs. 1000 per ton of gross vehicle weight or unladen weight in case of each heavy goods vehicle and Rs. 7,500 for each vehicle, other than heavy goods vehicle, for every month or part of the month for which the vehicle is owned by the assessee].|
|(d)||In case of an assessee carrying on a notified profession under section 44AA(1) i.e., legal medical, engineering, accountancy, architecture, interior decoration, technical consultancy, whose gross receipts ≤Rs. 50 lakhs||If such resident assessee claims that the profits and gains from such profession in the relevant PY are lower than the profits and gains computed on a presumptive basis u/s 44ADA (50% of gross receipts) and his income exceeds the basic exemption limit in that PY.|
||In case of an eligible assessee carrying on business, whose total turnover, sales, gross receipts ≤Rs. 200 lakhs, and who has opted for section 44AD in any earlier PY (say, P.Y.2019-20)||If he declares profit for any of the five successive PYs (say, P.Y.2020-21) not in accordance with section 44AD (i.e., he declares profits lower than 8% or 6% of total turnover, sales or gross receipts, as the case may be, in that year), then he cannot opt for section 44AD for five successive PYs after the year of such default (i.e., from P.Y.2021-22 to P.Y.2025-26). For the year of default (i.e., P.Y.2020-21) and five successive previous years (i.e., P.Y.2021-22 to P.Y.2025-26), he has to maintain books of account u/s 44AA and get them audited u/s 44AB, if his income exceeds the basic exemption limit.|
Presumptive taxation provisions
|Particulars||Deemed profits and gains|
|Section 44AD||Any individual, HUF or firm who is a resident (other than LLP) who has not claimed deduction under section 10AA or Chapter VI-A under the heading “C –Deductions in respect of certain incomes” engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in section 44AE) and whose total turnover or gross receipts in the previous year does not exceed Rs. 2 crore.
Non-applicability of section 44AD
This section will not apply to –
8% of gross receipts or total turnover
However, the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is received
during the previous year or before the due date of filing of return under section 139(1) in respect of that previous year.
An assessee, being a resident in India, who is engaged –
in any profession referred to in section 44AA(1) such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette; and whose total gross receipts does not exceed Rs 50 lakhs in a previous year.
50% of the gross receipts.
Any assessee who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring and leasing goods carriages.
For each heavy goods vehicle,
For each vehicle, other than heavy goods vehicle,
Taxability in case of composite income
In cases where income is derived from the sale of rubber manufactured or processed from rubber plants grown by the seller in India, coffee grown and cured/grown, cured, roasted and grounded by the seller in India, or tea grown and manufactured by the seller in India, the income shall be computed as if it were income derived from business, and a specified percentage of such income, as given in the table below, shall be deemed to be income liable to tax –
|Rule||Nature of composite income||Business income (Taxable)||Agricultural Income (Exempt)|
|7A||Income from sale of rubber products derived from rubber plants grown by the seller in India||35%||65%|
Income from sale of coffee
|8||Income from sale of tea grown and manufactured by the seller in India||40%||60%|