ITLA (UNIT 4)

Income from profits and gains of

business and profession
 MDUTHEINTACTONE8 APR 2019 4 COMMENTS
In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of trade, commerce or manufacture. It covers

every facet of an occupation carried on by a person with a view to earning profit.

 The word “business” is one of large and indefinite import and connotes something which
occupies attention and labour of a person for the purpose of profit.
 Business arises out of commercial transactions between two or more persons. One cannot
enter into a business transaction with oneself.

As per section 2(36), profession includes vocation. As profits and gains of a business,
profession or vocation are chargeable to tax under the head “Profits and gains of business or
profession”, distinction between “business”, “profession” and “vocation” does not have any
material significance while computing taxable income. What does not amount to “profession”
may amount to “business” and what does not amount to “business” may amount to
“vocation”.

1. Business Incomes Taxable under the head of ‘Profit and Gains of Business or
Profession’ (Section 28).
Under section 28, the following income is chargeable to tax under the head “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(ii);
 Income derived by a trade, professional or similar association from specific services
performed for its members;
 The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession;
 Any profit on transfer of the Duty Entitlement Pass Book Scheme;
 Any profit on the transfer of the duty free replenishment certificate;
 Export incentive available to exporters;
 Any interest, salary, bonus, commission or remuneration received by a partner from firm;
 Any sum received for not carrying out any activity in relation to any business or profession or
not to share any know-how, patent, copyright, trademark, etc.;
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 fair market value of inventory as on the date on which it is converted into, or treated as, a
capital asset determined in the prescribed manner;
 Any sum received under a Keyman insurance policy including bonus;
 any sum 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, if the whole of the expenditure on such capital asset has been allowed as a
deduction under section 35AD;
 Income from speculative transaction.

2. Business Income Not Taxable under the head ‘Profit and Gains of Business or
Profession’
In the following cases, income from trading or business is not taxable under section 28, under
the head “Profits and gains of business or profession”:

Rental income in the case of Dealer in Property:

Rent of house property is taxable under section 22 under the head “Income from house
property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of
rent is engaged in the business of letting properties on rent.

Dividend on Shares in the case of a Dealer-in-Shares:

Dividends on shares are taxable under section 56(2)(i), under the head “Income from case of
a dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade
or the recipient of dividends is a dealer-in-shares. Dividend received from an Indian company
is not chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions).

Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable under the head “Income from other sources”
etc. (even if derived as a regular business activity).

Interest received on Compensation or Enhanced Compensation:

Such interest is always taxable in the year of receipt under the head “Income from other
sources” (even if it pertains to a regular business activity). A deduction of 50 % is allowed
and effectively only 50 % of such interest is taxable under the head “Income from other
sources”.

Profits derived from the aforesaid business activities are not taxable under section 28, under
the head “Profits and gains of business or profession”. Profits and gains of any other business
are taxable under section 28, unless such profits are exempt under sections 10 to 13A.

3. Mode of Taxation on Certain Incomes (Section 145B)

Section 145B has been inserted by the Finance Act, 2018. It is applicable from the
assessment year 2017-18 onwards. It provides mode of taxation of the following incomes:
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1. Interest received by an assessee on compensation or on enhanced compensation, shall be

deemed to be the income of the year in which it is received (however, it is taxable under
section 56 under the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or
concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed to be the
income of the previous year in which it is received, if not charged to income tax for any
earlier previous year.

4. Basic Principles for computing income Taxable under the head ‘Profit and
Gains of Business or Profession’

1. Business or profession carried on by the assessee:

Business or profession should be carried on by the assessee.

2. Business or profession should be carried on during the previous year:

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 (not
necessarily throughout the previous year). There are a few exceptions to this rule.

3. Income of previous year is taxable during the following assessment year:

Income of business or profession carried on by the assessee during the previous year is
chargeable to tax in the next following assessment year. There are, however, certain
exceptions to this rule.

4. Tax incidence arises in respect of all businesses or professions:

Profits and gains of different businesses or professions carried on by the assessee are not
separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or
professions carried on by the assessee. If, therefore, an assessee earns profit in one business
and sustains loss in another business, income chargeable to tax is the net balance after setting
off loss against income. However, profits and losses of a speculative business are kept
separately.

5. Legal ownership vs. beneficial ownership:

Under section 28, it is not only the legal ownership but also the beneficial ownership that has
to be considered. The courts can go into the question of beneficial ownership and decide who
should be held liable for the tax after taking into account the question as to who is, in fact, in
receipt of the income which is going to be taxed.

6. Real profit vs. anticipated profit:

 ITLA (UNIT 4)

Anticipated or potential profits or losses, which may occur in future, are not considered for
arriving at taxable income of a previous year. This rule is, however, subject to one exception:
stock-in-trade may be valued on the basis of cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are the real profits and not notional profits. For
instance, no person can make profit by trading with himself in another capacity.

8. Recovery of sum already allowed as deduction:

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.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot override the substantial character of a

transaction.

10. illegal business:

The income-tax law is not concerned with the legality or illegality of a business or profession.
It can, therefore, be said that income of illegal business or profession is not exempt from tax.

Income from Capital Gains

 MDUTHEINTACTONE9 APR 2019 4 COMMENTS
Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain.
This gain or profit is considered as income and hence charged to tax in the year in which the
transfer of the capital asset takes place. This is called capital gains tax, which can be short-
term or long-term. Capital gains are not applicable when an asset is inherited because there is
no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital
gains tax will be applicable. The Income Tax Act has specifically exempted assets received
as gifts by way of an inheritance or will.

Here are some examples of capital assets: land, building, house property, vehicles, patents,
trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in
relation to an Indian company. It also includes rights of management or control or any other
legal right. The following are not considered capital asset:

1. Any stock, consumables or raw material, held for the purpose of business or profession
2. Personal goods such as clothes and furniture held for personal use
3. Agricultural land in rural India
4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980)
issued by the central government
5. Special bearer bonds (1991)
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6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued
under the Gold Monetisation Scheme, 2015

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a
rural area. Also, it should not fall within a distance (to be measured aerially) given below –
(population is as per the last census).

Distance Population

2 kms from local limit of

If the population of the municipality/cantonment board is
municipality or cantonment
more than 10,000 but not more than 1 lakh
board
6 kms from local limit of
If the population of the municipality/cantonment board is
municipality or cantonment
more than 1 lakh but not more than 10 lakh
board
8 kms from local limit of
If the population of the municipality/cantonment board is
municipality or cantonment
more than 10 lakh
board
Types of Capital Assets
Short-term capital asset An asset which is held for a period of 36 months or less is a short-
term capital asset. The criteria of 36 months have been reduced to 24 months in the case of
immovable property being land, building, and house property, from FY 2017-18.

For instance, if you sell house property after holding it for a period of 24 months, any income
arising will be treated as long-term capital gain provided that property is sold after 31st
March 2017.

Long-term capital asset An asset that is held for more than 36 months is a long-term capital
asset. The reduced period of the aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-
term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or
less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what
the date of purchase is). The assets are:

1. Equity or preference shares in a company listed on a recognized stock exchange in India

2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange
in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are
considered as long-term capital asset. In case an asset is acquired by gift, will, succession
ITLA (UNIT 4)

or inheritance, the period for which the asset was held by the previous owner is also
included when determining whether it’s a short term or a long-term capital asset. In the case
of bonus shares or rights shares, the period of holding is counted from the date of allotment of
bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.

Tax on short-term capital gain when securities transaction tax is not applicable: If
securities transaction tax is not applicable, the short-term capital gain is added to your income
tax return and the taxpayer is taxed according to his income tax slab.

Tax on short-term capital gain if securities transaction tax is applicable: If securities

transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Funds that
invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity
fund.

Effective 11 July 2014 On or before 10 July 2014

Fund
s Short-
Short-Term Long-Term
Term Long-Term Gains
Gains Gains
Gains

At tax slab At tax slab 10% without indexation or

Debt At 20% with
rates of the rates of the 20% with indexation
Funds indexation
individual individual whichever is lower

Equity
15% Nil 15% Nil
Funds

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital
asset. It means that investors would have to remain invested in these funds for at least three
years to take the benefit of long-term capital gains tax. If redeemed within three years, the
capital gains will be added to one’s income and will be taxed as per one’s income tax slab.

Calculating Capital Gains

 ITLA (UNIT 4)

Capital gains are calculated differently for assets held for a longer period and for those held
over a shorter period.

Full value consideration The consideration received or to be received by the seller as a

result of transfer of his capital assets. Capital gains are chargeable to tax in the year of
transfer, even if no consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the seller.

Cost of improvement Expenses of a capital nature incurred in making any additions or

alterations to the capital asset by the seller. Note that improvements made before April 1,
2001, is never taken into consideration.

How to Calculate Short-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Cost of acquisition
o Cost of improvement
3. This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for
such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such transfer
o Indexed cost of acquisition
o Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and
54B
4. This amount is a long-term capital gain

Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement Less:expenses that can be deducted from full value for
consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale
or transfer of the capital asset are allowed to be deducted. These are the expenses which are
necessary for the transfer to take place.)
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As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity
oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per
annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity
oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property, these expenses are deductible from the total sale
price:

1. Brokerage or commission paid for securing a purchaser

2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the transfer
has been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures
associated with the will and inheritance, obtaining succession certificate, costs of the
executor, may also be allowed in some cases.

In the case of sale of shares, you may be allowed to deduct these expenses:

1. Broker’s commission related to the shares sold

2. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost
of these services can be deducted. Note that expenses deducted from the sale price of assets
for calculating capital gains are not allowed as a deduction under any other head of the
income tax return, and these can be claimed only once.

Income from other sources

 MDUTHEINTACTONE9 APR 2019 4 COMMENTS
Income from other sources is a residual category used to classify income that is not
classified taxed under any other head of income. Income from other sources must be
calculated by the taxpayer based on the mercantile system used by the taxpayer, i.e cash basis
or accrual basis. In this article, we look at income from other sources in detail along with list
of allowed deductions.

Items Classified as Income from Other Sources

Apart from income that cannot be classified under any other heads, there are certain types of
incomes which are always taxed under income from other sources. Such incomes are as
under:

 Dividends are always taxed under income from other sources. However, dividends from
domestic company are normally exempt from tax, as the company declaring dividend pays
dividend distribution tax.
 Winnings from lotteries, crossword puzzles, races including horse races, card game and other
game of any sort, gambling or betting of any form is classified as income from other sources.
 Interest received on compensation or on enhanced compensation is taxed under the head
“Income from other sources”.
 ITLA (UNIT 4)

 Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this
head.

The following types of income can be classified as Income from Other Sources, if it
is not taxed under the head “Profits and gains of business or profession”:

 Any contribution to a fund for welfare of employees received by the employer.

 Income received by way of interest on securities.
 Income from letting out or hiring of plant, machinery or furniture.
 Income from letting out of plant, machinery or furniture along with building; both the lettings
are inseparable.
 Money received under a Keyman Insurance Policy including bonus.

Tax Deduction Allowed for Income from Other Sources

The following deductions can be claimed while computing income from other sources:

 Commission or remuneration for realizing dividends or interest on securities.

 Any sum received by an employer from employees as contribution towards any welfare fund
of such employees is first included as income of the employee, and if the employer credits
such sum to the employee’s account under the relevant fund on or before the due date (of
such fund), then such amount (i.e., employee’s contribution) is deductible from the income of
the employer.
 Current (not capital) repairs, insurance premium and depreciation in respect of plant,
machinery, furniture and buildings are deductible from rent income earned by letting out of
plant, machinery, furniture and building, which are chargeable to tax.
 A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available in case of income
in the nature of family pension (i.e., regular monthly amount payable by the employer to the
family members of the deceased employee).
 Deduction is available in respect of any other expenditure (not being in the nature of capital
expenditure) laid out or expended wholly and exclusively for the purpose of making or
earning such income during the relevant previous year.

Tax Deduction NOT Allowed

The following deductions cannot be claimed while computing income from other sources:

 Personal expenditure
 Interest chargeable and payable outside India on which tax has not been paid or deducted at
source.
 Amount paid which is taxable under the head “Salaries” and payable outside India on which
tax has not been paid or deducted at source.
 Sum paid on account of wealth-tax that is not deductible.
 Amount specified under section 40A is not deductible.