What Is Income from Profits and Gains in Business and Profession?

Income from Profits and Gains in Business and Profession:  Profits and Gains of Business or Profession" is one of the five categories of income defined under the Income Tax Act. It includes income earned from business or professional activities and is the third head of income, after salaries and house property income.

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Meaning of Business, Profession, or Vocation

Types of Income Taxed Under "Profits and Gains of Business or Profession

• Payments for termination or modification of an agreement to manage the affairs of an Indian or other company.
• Payments to agents in India for termination or changes in agency agreements related to business activities.
• Compensation received for transferring management of property or business to the government or a government-controlled entity.

• Profits from selling import licenses granted for export activities.
• Cash assistance received as support for exports.
• Refunds or duty drawbacks from Customs or Central Excise duties.
• Profits from transferring benefits under the Duty Entitlement Pass Book (DEPB) Scheme.
• I ncome from transferring Duty-Free Replenishment Certificates.

• Payments received for agreeing not to engage in specific business or professional activities.
• Payments for not sharing trade secrets, patents, copyrights, trademarks, or business techniques that could aid in the production of goods or services.

Cases Where Income from Business Is Not Taxable Under "Profits and Gains of Business or Profession"

• Rent from residential properties owned by a business is taxed under "Income from House Property."
• Rent from properties let out to employees for business purposes is taxed as business income.

Computation of Income from Business or Profession

• Accounting Methods : Taxpayers can adopt the cash basis or accrual basis for recording income and expenses. However, the method should be consistent.

• Revenue vs. Capital : Only revenue expenditures are deductible. Expenditures of a capital nature, like purchasing machinery, are not deductible directly but are eligible for depreciation.
• Wholly and Exclusively for Business : Deductible expenses must be incurred entirely for the purpose of the business or profession.

Deductions under Profits and Gains of Business or Profession

• Interest on loans taken for business purposes.
• Contributions to employee welfare funds.
• Insurance premiums for business risk mitigation.

Special Provisions for Depreciation (Section 32)

• Block of Assets : Assets with similar depreciation rates are grouped together, simplifying the computation process.
• Additional Depreciation : Manufacturing businesses can claim extra depreciation for new machinery to encourage capital investment.
• Depreciation for Short-use Assets : If assets are used for less than 180 days in a financial year, only 50% of the allowable depreciation is permitted.

Treatment of Losses

• Losses Deductible from Business Income : Examples include theft, fraud, or stock damage directly related to the business.
• Non-Deductible Losses : Losses arising from personal negligence, anticipated losses, or capital asset destruction are not deductible.
• Carry Forward and Set-Off : Unabsorbed losses can be carried forward for up to eight years and set off against future business income.

Income from Profits and Gains in Business and Profession Illustration

• Total receipts: ₹50,00,000
• Allowable expenses: ₹30,00,000
• Depreciation: ₹5,00,000