Section 28-44: Business and Profession

Charging Section :

Section 28 provides that Profits and gains of any business carried on by the assessee shall be
charged to tax under the head ‘Income from Business & Profession’

Essential factors-

 Business 2 (13) must exist.

 The term 'business' includes any trade, commerce or manufacture or any adventure
or concern in the nature of trade, commerce or manufacture. It must be carried on at any
time during the year.
 Economic activity carried on for earning profit in the year
 Sec 2(13) – An inclusive definition
 Systematic & organized course of activity with a purpose of earning profit
 Connotes some real, substantial or systematic course of activity for making profit.
 Profit motive must
 May even consist of rendering services to others.
 Single transaction may give rise to business income.
 Trade
 Exchange of goods for money or goods
 Activity of buying & selling.
 Commerce
 Trade on a large scale
 Manufacture
 Producing articles commercially different from basic components, by manual or
mechanical process
 The identity of the goods changes completely
 Adventure in the nature of trade
 Normally an isolated transaction
 A commercial enterprise having a considerable risk of loss as well as a fair chance of
gain.
  Characterised by some essential features that make up trade or business but may not
be trade or business by itself.
 Onus of proof: - On the Assessing Officer
 Profession : intellectual skill
 Sec. 2(36) – Profession includes vocation,
 Activity requiring intellectual skill and knowledge
 Composite activity possible
 A doctor having a hospital
 Consultation fee – Income from profession
 Income from hospital – Income from business
 Vocation : a way of living for which one has special fitness
 Earning by natural ability for particular work like carpenter, mechanic, etc.
 Govindalji Ramachandji v. CIT (practice of religion)
 C.Rajagopalachriar v. CIT (Writing of articles)
1. Commencement of business : 28(i)

 The profits and gains of any business or profession which was carried on by the assessee
at any time during the previous year shall be chargeable to income-tax under the head
"Profits and gains of business or profession”
 Trader : With the first purchase of stock-in-trade.
 Manufacturer: When the first of the several activities required for manufacturing is
undertaken
 Illegal Business: Income arising from illegal activity which is in the nature of business,
is taxable as business income.
 Expenditure for any purpose which is an offence or is prohibited by law shall not be
allowed as deduction [Expln. To sec. 37(1)]
 Business loss: Allowable as deduction if it arises out of and is incidental to the business
of the assessee. The loss should take place in the ordinary course of conducting of the
business.

2. Compensation of specified nature : 28(ii) a, b, c

  However compensation for termination of or modification in the terms & conditions
of-
 Management of company (Indian company or any other company)
 Agency, relating to business of any person
 Section 28(ii) (d) : Compensation for acquisition of property is usually a capital
receipt but compensation received for vesting the management of property or
business in the government or any government owned corporation shall be treated as
business income.
3. Income of Trade/Professional associations: [Section 28(iii)]
 Income from specific service rendered by Trade/Professional associations, for
members is business income.
 What are specific services?
 Conditions-
 Specific services to be rendered by the association
 Remuneration was paid by the members for such services.
 Exception to the concept of mutuality
4. Export benefits [Section 28(iiia), (iiib), (iiic)]
 Following export benefits are taxable as business income
 Profit on sale of import license,
 Cash assistance in any form
 Duty drawback
5. Value of any benefit or perquisite arising from business or profession is income
from business or profession - Section 28 (iv)
 Valuation of perquisites may be done in accordance with Rule 3
 (CIT vs. Sir Padampat Singhania [2000] 111 Taxman 223 (All))
6. Salary, interest, etc., received by partner: [Section 28 (v) ]
 Only to the extent allowed as deduction in the hands of the firm u/s 40(b)
7. Amount received in cash or kind for (Section 28 (va) )
 For not carrying on any activity in relation to any business.
 Not sharing know how, patent, copyright, etc.
 Is income from business
 Exceptions - (Otherwise taxable as Capital gains)

8. Key man insurance policy :Section 28 (vi)

9. Speculative business:

 Transactions in the nature of speculation but constituting a business activity.

 Speculative transaction [Sec. 43 (5)]
 Contract for purchase or sale is settled, periodically or ultimately, without
delivery of goods.
Section 32: Depreciation

 Not defined in the Act

 Depreciation is the decrease in the value of an asset due to its wear and tear and
passage of time.
 It is the process of allocating the cost of a long term asset to the time period in which it
is used in a systematic manner.
 Treated as a business expenditure and debited to Profit & Loss A/C of the Assessee
 Main object :
 To arrive at the real business profits by charging the monetary value of
decrease in efficiency of any asset which is used for the business.
 To determine the book value of asset at any given time so as to assess the net
worth of the business.
 To know the real position about the asset to arrange for its replacement or
renewal by setting aside a specified sum out of each year’s profit.
 Depreciation can be divided into three parts:
 Normal Depreciation
 Depreciation is allowed only on capital asset
 Assets which are used during the year
 Asset must be owned by the assessee
 Asset actually used for the business in the previous year
 No depreciation in the year of sale of asset
  Full particulars of the assets on which the depreciation is to be charged
must be furnished to the assessing officer
 Claim of depreciation is not optional (mandatory)
 Method of depreciation
 Additional Depreciation
 20% of the actual cost of Plant & Machinery
 Asset on which this AD is claimed is engaged in the business of
manufacture or production of any article or thing
 It is allowed in addition to the Normal Depreciation and shall be take
into the consideration for calculating the written down value
 It should be used for 180 days during Previous year, if it is less than 180
days then one can only claim 10% in that previous year and rest of the
10% can be claimed in the PY
 Plant & Machinery should be new. Should not have been used before in
India or outside India
 Not eligible to be written off @ 100% of its actual cost in any PY
 Not in the nature of a road transport or a office appliances
 Where Additional Depreciation cannot be claimed (exception):
i. Ships and Aircrafts
ii. Old Plants or Machinery
iii. Any Plant or Machinery installed in office premises, residential
accommodation or guest houses
iv. Office appliances or road transport vehicles
 Unabsorbed Depreciation 32(2)
 Depreciation allowance is deductible from the profits and gains of the
business for that assessment year
 It any portion of depreciation remains unadjusted it will be set off from
any other income except salary
 Section 32(2) provides for carry forward of unabsorbed depreciation.
Where, in any previous year the profits or gains chargeable are not
sufficient to give full effect to the depreciation, it shall be added to the
 depreciation allowance for the following previous year and shall be
deemed to be part of that allowance. It becomes the depreciation
allowance of the following previous year.
 Calculation of Depreciation = Written down value of the block asset x Rate