PROFITS AND GAINS OF BUSINESS OR PROFESSION

BUSINESS

As per section 2(13) of the Act, “Business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

PROFESSION

As per section 2(36) of the Act, “Profession” includes vocation.

PROFITS AND GAINS OF BUSINESS OR PROFESSION

Sections 28 to 44DB deals with computation of income under the head “Profits and gains of business or profession”. The sections may be classified into:

Sections 28 to 44DB deals with computation of income under

the head “Profits and gains of business or profession”. The sections may be classified into:

1. Chargeability – Section 28

2. Computation – Section 29

3. Specific deductions – Sections 30 to 36, section 38

4. General deduction not specifically covered – Section 37

5. Amount not deductible – Section 40

6. Expenses or payments not deductible in certain circumstances - Section 40A

7. Deductions only on actual payment – Section 43B

8. Special cases of profits chargeable to tax – Section 41

9. Special provisions for computing income/cost of acquisition/ deduction – Sections 42, 43A, 43AA, 43C, 43CA, 43CB, 43D, 44A, 44C, 44DB

10. Special provision for computing income by way of royalty or fees for technical services connected with permanent establishment in case of non-resident – Section 44DA

11. Insurance business – Section 44

12. Presumptive taxation – Sections 44AD, 44ADA, 44AE, 44B, 44BB, 44BBA, 44BBB

13. Definition – Section 43

14. Maintenance of account – Section 44AA
15. Audit of accounts – Section 44AB

BASIS OF CHARGE: [SECTION 28]

Section 28 of the Act provides that the following income shall be chargeable under the head “Profits and gains of business or profession”:

1. the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
2. Compensation or other payment due or received for: (i) modification in, or termination of, management of affairs of Indian company/office for managing the affairs in India of other company/agency, (ii) nationalization of business or property; and (iii) modification in, or termination of, terms and conditions of any contract relating to business
3. income derived by a trade, professional or similar association from specific services performed for its members ;
4. profits on sale of Import Entitlement licence granted to exporter;
5. cash assistance received or receivable by exporter;
6. any duty of customs or excise re-paid or re-payable as drawback to exporter;
7. any profit on the transfer of the Duty Entitlement Pass Book Scheme;
8. any profit on the transfer of the Duty Free Replenishment Certificate;
9. the value of any benefit or perquisite arising from business or the exercise of a profession;
10. any interest, salary, bonus, commission or remuneration due to, or received by, a partner of a firm from such firm (Subject to proviso);
11. any sum, whether received or receivable under an agreement for— (i) not carrying out any activity in relation to any business or profession; or (ii) not sharing any know- how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services (Subject to proviso);
12. any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy;
13. fair market value of the inventory (which has been converted into capital asset) as on the date of conversion. The method for determining the fair market value is determined in the manner prescribed in rule 11 UAB.
14. any sum, whether received or receivable, 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.

It is explained that where speculative transactions, which constitute a business are carried out by assessee, the business shall be deemed to be distinct and separate from any other business.

COMPUTATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION [SECTION 29]

Income shall be computed in accordance with the provisions contained in section 30 to 43D.

SECTIONS 30 to 44DB

Purpose	Section	Particulars
Specific deduction	30	Rent, rates, taxes, repairs and insurance for buildings
	31	Repairs and insurance of machinery, plant and furniture
	32	Depreciation
	32A	Investment allowance in respect of ship, aircraft, machinery or plant
	32AC	Investment in new plant or machinery
	32AD	Investment in new plant and machinery in notified backward areas in certain states
	33AB	Deposit in tea development, coffee development and rubber development accounts
	33ABA	Deposit in site restoration fund
	35	Expenditure on scientific research
	35ABA	Expenditure for obtaining right to use spectrum for telecommunication services
	35ABB	Expenditure on obtaining licence to operate telecommunication services
	35AC	Expenditure on eligible projects or schemes
	35AD	Deduction in respect of expenditure on specified business
	35CCA	Expenditure by way of payment to associations and institutions for carrying out rural development programmes
	35CCC	Expenditure on agricultural extension project
	35CCD	Expenditure on skill development project
	35D	Amortization of certain preliminary expenses
	35DD	Amortization of expenditure in case of amalgamation or demerger
	35DDA	Amortization of expenditure incurred under voluntary retirement scheme
	35E	Deduction for expenditure on certain minerals
	36	Other deductions
	38	Deductions in case of building, etc. partly used for business
General Deduction	37	General – Not covered in specific deductions, not being in the nature of capital expenditure or personal expenses, laid out or expended wholly and exclusively for the purpose of business or profession. [Amendment vide Finance Act, 2022 w.e.f. 1 April 2022:- Explanation inserted clarifying that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” to include and shall be deemed to have always included expenditure incurred by an assessee: - For the purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or To provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or To compound an offence under any law for the time being in force, in India or outside India. This amendment may affect the benefits or perquisites provides by pharmaceutical companies to medical professionals. This amendment is applicable w.e.f. 1 April 2022 from AY 2022-23.
Amounts not deductible	40	Amounts expressly disallowed under the Act [Amendment vide Finance Act, 2022 w.e.f. 1 April 2005:- Explanation inserted clarifying that the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.
Disallowance of Expenditure in relation to exempt income	14A	No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income. The above provisions shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the exempt income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.
Disallowance of Donation	35(1A)	The deduction in respect of any sum paid to the research association, university, college or other institution referred to in clause (ii) or clause (iii), or the company referred to in clause (iia) of sub-section (1), shall not be allowed], unless such research association, university, college or other institution or company— prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the said prescribed income-tax authority or the person authorized by such authority such statement in such form, verified in such manner, setting forth such particulars and within such time, as may be prescribed: Provided that such research association, university, college or other institution or the company may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed; furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed.] Section 35(1A) is amended to provide that the Donor shall not be allowed deduction in respect of the donation to research association university, college, or other institution or the company as the case may be (collectively referred to as Donee), unless the Donee files the statement of donation before specified authorities. This amendment is applicable from AY 2021-22.
Disallowance on conversion of Interest to Loan	43B	Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall be allowed in previous year in which such sum is actually paid. Now amendment to explanation to 3C, 3CA & 3CD to section 43B provided that any interest payable which has been converted into debentures or any other instrument by which the liability to pay is deferred to a future date shall not be deemed to have been actually paid and hence disallowed u/s 43B. This amendment is applicable from AY 2022-23.
Transfer of Goodwill	50	The provisions of sections 48 and 49 shall be subject to the following modifications :— where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :— expenditure incurred wholly and exclusively in connection with such transfer or transfers; the written down value of the block of assets at the beginning of the previous year; and the actual cost of any asset falling within the block of assets acquired during theprevious year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets: For the purposes of this section, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer. This amendment shall be applicable w.e.f 1-4-2021 i.e retrospectively from AY 2021-22.
Deduction on actual payment	43B	Deduction of certain expenditure on actual payment basis [Amendment vide Finance Act, 2022 w.e.f. 1 April 2022:- Explanations amended to provide that conversion of interest payable to specified financial institution/NBFC/schedule bank or co-operative bank into debenture or any other instrument by which liability to pay is deferred to a future date shall not be deemed to have been actually paid.
Special cases of profits chargeable to tax	41	Profits chargeable to tax (allowance or deduction claimed in relation to which benefit derived subsequently by way of remission or cessation or recovery)
Special provisions for computing income/ cost of acquisition/ deduction	42	Special provision for deductions in case of business of prospecting etc. for mineral oil
	43A	Special provisions consequential to changes in rate of exchange of currency
	43AA	Taxation of foreign exchange fluctuation
	43C	Special provision for computation of cost of acquisition of certain assets
	43CA	Special provision for full value of consideration for transfer of assets other than capital assets in certain cases
	43CB	Computation of income from construction and service contracts
	43D	Special provision for income of Public financial institutions, public companies, etc.
	44A	Special provision for deduction in the case of trade, professional or similar association
	44C	Deduction of head office expenditure in the case of non-residents
	44DB	Special provision for computing deductions in the case of business reorganization of co- operative banks
Special provision for computing income	44DA	Special provision for computing income by way of royalty or fees for technical services connected with permanent establishment in case of non-resident
Specific business	44	Insurance business
Presumptive taxation	44AD	Special provision for computing profits and gains of business on presumptive basis
	44ADA	Special provision for computing profits and gains of profession on presumptive basis
	44AE	Special provision for computing profits and gains of business of plying, hiring or leasing of goods carriages
	44B	Special provision for computing profits and gains of shipping business in the case of non- Residents
	44BB	Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils
	44BBA	Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents
	44BBB	Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects
Definition	43	Definition of certain terms relevant to income from profits and gains of business or profession
Maintenance of accounts	44AA	Maintenance of accounts by certain persons carrying on profession or business
Audit of accounts	44AB	Audit of accounts of certain persons carrying on profession or business
Expenditure