The Income Tax Act of 1961 is an important legislation that vests power in the Central Government to levy, administer and collect income tax in India. However, the multitude of sections and provisions makes it difficult to understand, especially to the untrained eye.
Sec 28 to Sec 44 of the Income Tax Act of 1961 outlines the taxation on profits and gains made by businesses and professions. Section 28 of the Income Tax Act, in particular, lays down the basic principles of computing taxable income for businesses and professions.
But what are the nuances of these sections, and how do they affect you? Read on to know how the profits and gains from businesses and professions are computed under Section 28 of the act.
To understand Section 28 of the Income Tax Act, you must be aware of how this Act defines ‘businesses and ‘professions’.
Section 2(13) of the Income Tax Act states that the term business is applicable to any trade, commerce, or manufacturing activity. In addition, any isolated venture or transaction carrying trade, commerce, or manufacture as its components are also considered a business.
The only condition is that the intent behind the transaction has to be profit-making.
Section 2(36) of the Act, on the other hand, defines a profession as an occupation that requires any intellectual or manual skills. In simple words, a profession involves the broad concept of vocation.
Section 28 of the Income Tax Act of 1961 outlines the taxability of profits and gains under the heads of businesses and professions.
This section provides that you have to report your income that has the potential to be considered business income under the Act. This provision is applicable even for those incomes that are generally not classified as business income.
Under Section 28 of this Act, the following incomes under the heads of profits and gains of businesses and professions that are considered taxable:
1. Any income generated by the business or profession carried out by an individual in the previous financial year
2. Any sort of compensation received against:
An individual managing an Indian company in its entirety or almost its entire operation. This is in connection to termination or modification in terms and conditions of their management
An individual handling an Indian-based company where its management has been terminated or terms and conditions have been modified
An individual associated with a business where the business contract has been terminated or its terms and conditions have been modified
A government-owned or controlled corporation
3. Any earning that is generated through trade, professional, or any sort of similar association
4. Income generated by carrying out imports or exports under:
Profits made on selling a licence
Cash assistance received under any Government of India scheme
Any customs or excise duty repaid as drawback
Profits made by handing over the Duty Entitlement Pass Book Scheme
Profits made by transferring Duty-Free Replenishment Certificate
5. Any benefit received in cash or not from a business or profession
6. Any interest, salary, bonus, commission, or remuneration received from a partner firm. Such an income shall not be allowed to be deducted under an agreement for:
Not taking part in a competitive business or profession
Not sharing any intellectual property rights (IPR), like know-how, patent, copyright, trademark, or licence, that made rendering the services or manufacturing easier
The above clause will not be applicable to the following:
Any amount considered as capital gains by transferring the right the manufacture, produce, or process
The compensation received from the Montreal Protocol on Substances fund that Depletes the Ozone layer under the UNEP
7. Any amount received under the Keyman Insurance Policy
8. The inventory’s fair market value on a conventional date
9. An amount received from the transfer of capital asset
In conclusion, Section 28 is a provision that defines the rules to calculate the taxable income from profits and gains of business and profession.
So, it is important for you to be aware of these provisions if you are carrying out any business or profession. These are defined in Section 2(13) and Section 2(36) of the Act, respectively.
This would help you comply with the rules when you are filing your Income Tax Return (ITR) for the previous financial year.
Section 28 of the Income Tax Act of 1961 outlines the taxability of the income generated from a business or profession. So, profits and gains are used to refer to the earnings you make by operating a business or profession.
On the other hand, Section 2(13) and Section 2(36) define what is considered a business and a profession.
Any expenses that you carry out to operate a business or a profession can be claimed as deductions under Section 28. Here are some deductions you can claim under Section 28 of the Income Tax Act, with examples: rent, wages, marketing expenditure, maintenance cost, etc.
The tax rate for profits and gains of business and profession is the same as income from other sources. So, the rate of taxation will depend on the tax slab under which you fall.
No, only income generated from business and profession is calculated under Sec 28 of the Income Tax Act of 1961. So, income earned through agriculture does not fall under this section.