Income under the Head “Profits and

Gains of Business or Profession”

Neeraj Sharma
Assistant Professor
School of Law
Business
 The word ‘Business’ is defined in section
2(13) to include any trade, commerce
or manufacture or any adventure or
concern in the nature of trade,
commerce or manufacture.
 The activities included above may even
consist of rendering services to others.
 The definition of business is an inclusive
one and not exhaustive
 Business includes any trade, commerce or
manufacture.
 If a person purchases goods with a view
to selling them at a profit, it is trade.
 If such transactions are repeated on a
large scale , it is ‘commerce’
 ‘Manufacture’ is the making of an
article/material by physical labour or
applied power.
 Business also includes any adventure or
concern in the nature of trade, commerce
or manufacture.

 In order to be an adventure in the

nature of trade, etc. the transaction in
question need not possess all the
elements of trade or business but some
of them must be present.
CIT v. Sutlej Cotton Mills Supply
Agency Ltd. (1975) 100 ITR 706
(SC)
 An adventure in the nature of trade, etc.
need not be business itself but it should
be akin to business.

 Thus a single transaction of purchase

outside the assessee’s line of business may
constitute an adventure in the nature of
trade
Indramani Bai v. CIT (1993) 200 ITR
594(SC)
 The wives of 2 brothers, who were partners
in a firm which dealt in bullion, purchased
land out of money allegedly raised by selling
their silver.
 The assessee then carved out the land into
plots and sold them individually within few
months.
 Held that in such circumstances shortness of
the time gap between the two was indicative
of the transaction being an adventure in the
nature of trade and not investment
Profession: Sec 2(36)
 The term ‘profession’ under section 2(36)
includes vocation.

 A profession implies an occupation which

may involve intellectual or manual skill or
both viz. medicine, engineering , law , painting,
etc.

 Profession involves the idea of an occupation

requiring purely intellectual skill or manual
skill on the basis of some special learning.
Vocation
 It means the work in which a person is
more or less regularly employed usually,
but not necessarily, for earning livelihood
and which requires some special fitness
or sense of duty.
 It refers to any activity on which a person
spends a major part of his time in order
to earn his livelihood
 E.g Writing books, articles etc.
 The distinction between business,
profession or vocation is however not
material because the income from all
these activities is taxable under the same
head i.e. ‘Profits and gains from business
or profession’
Chargeability/Scope of income
under the head PGBP-Section 28
1.Profits and gains of business or
profession- section 28(i)

Business may be legal or illegal

A business is not required to be carried

on by the assessee with the motive to
earn profit
2. Any compensation or other payment due
to or received

Eg B was the distributor of a company for

entire Northern India.
During 2016-17, the company has modified
the contract of agency and in future B will
be the distributor only for Delhi
 In lieu of such modification, the company
compensates B with Rs. 5 lacs. Such
amount of Rs. 5 lacs received by B, shall
be taxable as business income
3. Income derived by a trade, professional
or similar association from specific
services performed for its members

This is an exception to the general

principle that a surplus arising to
mutual association cannot be
regarded as income chargeable to
tax.
4. Export incentives which includes:
- Duty drawbacks of customs and central
excise duties
5. Value of any benefit or perquisite,
whether convertible into money or not ,
arising from business/profession(sec
28(iv))

For e.g gift to a doctor by a patient in

addition to the doctor’s fees for curing
the patient is taxable as a revenue receipt
in the doctor’s hands
E.G.

Value of rent free residential

Accommodation secured by an assessee
from a company in consideration of the
professional services as a lawyer rendered
by him to that company , will be
assessable in the hands of the assessee as
his income under the head “Profits and
gains of Business or Profession”
6. Any interest, salary, bonus, commission or
remuneration, received by or due to a
partner of a firm from the firm(sec 28(v))
 7. Any sum whether received or receivable
in cash or in kind under an agreement
for:-
a) Not carrying out activity in relation to
any business or profession; or
b) Not sharing any know-how, patent,
copyright, trademark etc.
8. Any sum received under a keyman
insurance policy
Necessary ingredients of PGBP
Sec 28(i) is the main clause dealing with the charge of
profits and gains of a business in general. On an
analysis 5 ingredients are found to emerge:

 There should be business or profession

 The business or profession should be carried on by
the assessee
 The business or profession should be carried on for
some time during the previous year
 The charge is in respect of the profits and gains of the
previous year of the business or profession; and
 The charge extends to any business or profession
carried on
Business loss
 It is obvious that business profit cannot
be computed without allowing a business
loss.

 A trading loss of business is deductible in

computing the profit earned by the
business even though there is no specific
provision in the Act for allowance thereof
Conditions when trading losses can
be claimed as a deduction
 It should be a real loss and not notional
 It must have actually arisen
 It should be one that is incidental to the
carrying on of the business
 There should not be express or implied
prohibition against deduction
Legal v. Illegal business
 Profits from an illegal business are subject
to tax just as from a legal business
How to compute income from
business and profession
 Section 29 states that the profits and
gains of business or profession, chargeable
to income tax u/s 28, shall be computed
in accordance with provisions in sections
30 to 43D
Section 30 to 43 D(deductions)
 Sections 30 to 43 D provides for
deductions to be allowed in the
computations of business income.
 It may be noted that the list of allowances
enumerated in sections 30 to 43D is not
exhaustive
 Sections 30 to 37 contain the deductions
which are expressly allowed
Rent, rates, taxes, repairs and
insurance for building- section 30
 In respect of rent, rates, taxes, repairs and
insurance for premises, used for the
purpose of the business or profession,
following deductions shall be allowed:
 A) Where the premises are occupied by
the assessee:
i) As a tenant- rent paid for such premises;
ii) Otherwise than as a tenant- the amount
paid by him on account of current
repairs to the premises
 B) any sum paid (whether owner or
tenant) on account of land revenue, local
rates or municipal taxes.

 C) any insurance premium paid (whether

as owner or tenant) in respect of
insurance against risk of damage or
destruction of the premises
Repairs and insurance of machinery,
plant and furniture[section 31]
 In respect of machinery, plant or furniture
used for the purposes of business, the
following deductions are allowable:

 Amount paid on account of current

repairs
 Any insurance premium paid in respect of
insurance against risk of damage or
destruction of the plant and machinery or
furniture.
General (Residuary) deductions :
Sec. 37(1)
 Section 37(1) is the residuary head of
allowance.
 It provides for the allowance of any
expenditure other than expenditure of
the nature described in sections 30 to 36
as a deduction in the computation of the
profits under the head “PGBP” if the
following conditions are satisfied:
 The expenditure is not of a capital
nature , and must have been incurred in
the previous year,
 It is also not an expenditure in the nature
of personal expenses of the assessee,
 It is laid out or expended wholly and
exclusively for the purposes of business
or profession
Expenditure wholly and exclusively
for business purpose
 To be deductible under section 37(1), the
expenditure must have been laid out or
expended wholly and exclusively for the
purposes of the business or profession
 The expression “business purposes”
includes
 day to day running of the business
 Rationalization of business administration
and modernization of machinery of
business
 Payment of statutory dues and taxes
imposed as precondition for
commencement or carrying on of
business
 The expression “for the purposes of the
business” is wider in scope than the
expression “for the purposes of earning
profits”
 The expression “wholly and exclusively”
used in section 37 does not mean
necessarily

 It is for the assessee to decide whether

any expenditure should be incurred in the
course of his business
Sassoon J. David V. CIT (1979) 118
ITR 261(SC)
 Such expenditure may be incurred
voluntarily and without any necessity

 If it is incurred for promoting the business

and to earn profits , the assessee can
claim deduction under section 37 even
though there was no compelling necessity
to incur such expenditure
CIT v. S. Krishna Rao (1970) 76 ITR
664 (AP)
 The true test is to find out whether the
businessman, when he expended the
money, was acting reasonably in the
interest of his own business uninfluenced
by any irrelevant or extraneous
consideration
Haji Aziz Abdul Shakoor Bros. v. CIT
(1961) 41 ITR 350 (SC)
 An expenditure which was paid by way of
penalty for a breach of law cannot be said to
be an amount wholly and exclusively laid out
for the business purposes
 Thus where an assessee imported goods
contrary to law and custom Authorities
threatened to confiscate the goods unless
some fine was paid .
 The fine paid was disallowed as a deductible
expenditure
 Perhaps , the largest number of references
on income tax matters handled by the
courts in india have been concerned with
the question whether a particular item of
expenditure could be claimed as
deduction under section 37(1).
 This is mainly because of the controversy
whether an item of expenditure should
be considered as ‘Capital expenditure’ or
‘Revenue expenditure’
Distinction between Capital and
Revenue Expenditure
 In computing the taxable income of the
assessee the revenue expenditure is
deducted there from but capital
expenditure is not deducted.

 On account of it, the difference between

capital and revenue expenditure is of
utmost importance.
 The income tax act, 1961 has not defined
the expressions “capital expenditure” and
“revenue expenditure”

 The line that divides revenue expenditure

from capital expenditure is often times
very thin
 The following tests may be applied in
determining the character of an
expenditure as capital or revenue:-
1. Test of fixed or circulating capital
2. Test of enduring Benefit
3. Test of capital or recurring liability
1. Test of fixed or circulating capital
 Expenditure which acquires a capital asset is
capital expenditure, if it acquires stock-in-
trade, then it is revenue expenditure.

 For e.g. the expenditure on construction of a

factory or fitting machinery has been treated
as a capital expenditure
 while
 the expenditure incurred by a book-seller
on the purchase of books for re-sale is a
revenue expenditure.
 Expenditure incurred by the assessee on
the purchase of goodwill of a business is a
capital expenditure ,
 Whereas
 Commission paid to agents to procure
business or to find out customers (use of
good will of a business) is a revenue
expenditure
 An expenditure incurred by the assessee
for acquisition of a ‘source of income’ is a
capital expenditure,
 Whereas
 An expenditure incurred for the purchase
of ‘earning an income’ is treated as a
revenue expenditure.
L.B Sugar Factory & Oil Mills Ltd v.
CIT(1980) 125 ITR 293 (SC)
 The expenditure on the creation of a
capital asset is capital expenditure only
when the capital asset belongs to the
assessee.

 If the capital asset is acquired by the third

party, it may be revenue expenditure in
the hands of the assessee
2. Test of enduring benefit
 In Artherton v. British Insulated and helby
cables
 Following test was laid :
 When an expenditure is made , not only
“once and for all”, but with a view to
bringing into existence an asset or advantage
for the enduring benefit of a trade, there is
very good reason for treating such
expenditure as properly attributable not to
revenue but to capital
 It may be noted that the word ‘enduring’
is not synonymous with the word
‘everlasting’
Alembic Chemical works co. ltd v.
CIT
(1989) 177 ITR 377(SC)
 The assessee company , manufacturer of
penicllin, with a view to increase its
production entered into an agreement
with a japanese company which in
consideration of the “once for all”
payment of $ 50,000 US agreed to supply
to the assessee the “sub-cultures of
company’s most suitable penicillin
producing strains”, technical information,
know-how etc.
 It was also stipulated that the technical
know-how supplied was to be kept
confidential and secret by the assessee
which was prohibited from parting with it
in favour of others or to seek any patent
for the process
Issue involved
 The question was whether the amount
paid by the assessee to the japanese
company was a revenue expenditure or
capital expenditure
Tribunal’s view
 The tribunal held that the outlay must be
regarded as one incurred for a new
venture on a new process on a new type .
 The payment was “once for all” payment
and was made for the acquisition of a
capital asset.
High court decision
 HC upheld the conclusion of the tribunal
SC observation and decision
 SC held that the payment made by the
assessee to the foreign partner was in the
nature of revenue expenditure and as
such deductible under sec. 37

 The financial outlay under the

agreement was for better conduct
and improvement of the existing
business
 The improvisation in the process and
technology in some areas of the
enterprise was supplemental to the
existing business.

 What was stipulated was an

improvement in the operations of
the existing business and its
efficiency
 The rapid strides in science and
technology should make the court slow
and circumspect in too readily attributing
a degree of endurability and permanence
to the technical know-how at any
particular stage in this fast changing area
of medical science
 The “once for all” payment test is
inconclusive.

 What is relevant is the purpose of the outlay

and its intended object and effect.

 What is capital expenditure and what

is revenue are not eternal varieties but
must need be “flexible” so as to
respond to the changing economic
realities of business
L.B. Sugar Factory & Oil Mills Ltd v.
CIT
(1980) 125 ITR 293 (SC)
 Facts:
 A company carrying on the business of
manufacture and sale of sugar contributed
Rs. 50,000 to the state government
towards meeting a ‘sugar development
scheme’ promoted by the state
government.
 Under it, the expenses on constructing
the roads were to be shared equally by
the central govt., state govt., and the
sugarcane growers and sugar factory
owners
Issue involved
 Whether the contribution made by the
assessee company may be treated as
revenue expenditure or capital
expenditure
Observation and Decision
 The court held that the construction of
roads was clearly connected with the
business activity of the assessee and
advantageous to him because of the
facilities for transportation of sugarcane.
 But , by such expenditure, the assessee
did not acquire any asset of an
enduring nature

 The expenditure on the creation of a

capital asset is capital expenditure only
when the capital asset belongs to the
assessee
 If the capital assets (roads, in the present
case) are acquired by a third
party(government) , it may be revenue
expenditure in the hands of the assessee.
Final decision
 Thus the expenditure of the sum of Rs.
50,000 was in the nature of revenue laid
out exclusively for the purpose of the
business of the assessee and was
therefore allowable as deduction under
section 37(1) , I.T. Act
3. Test of capital or recurring liability
 An expenditure incurred by the assessee
to free himself from a capital liability is
treated as a capital expenditure,
 While
 An expenditure incurred by a assessee to
free himself from recurring liability is
treated as a revenue expenditure
 For e.g:
 The amount of compensation paid to a
contractor for the termination of the
construction of building is a capital
expenditure
 While
 The compensation paid by the assessee to
his employee on account of the
termination of his service is a revenue
expenditure
Godrej & co. v. CIT(AIR 1959 SC
352)
 Compensation paid to a managing agent
of the company , in lieu of reduction in
the remuneration of agent,
 Thus releasing the company from the
onerous terms as to remuneration(which
originally was extraordinarily excessive),
was held to be a capital expenditure
Depreciation- section 32
 Depreciation is the diminution in the
value of an asset due to normal wear and
tear and due to obsolescence

 There are different methods for

calculation of depreciation under financial
accounting. The methods commonly used
are:
a) Straight line method
b) Written down value method
 Note –
 In case of block of assets systems, normal
depreciation is allowed on the basis of
written down value method, whereas
 In case of power generating , depreciation
is allowed on the basis of straight line
method on each and every asset
separately
Types of depreciation allowance
under Income-tax Act
Following are the 3 kinds of depreciation
allowance which are allowed under the
income tax Act:
- Normal depreciation for block of
assets[section 32(1)(ii)]
- Additional depreciation
- Normal asset wise depreciation for an
undertaking engaged in generation or
generation and distribution of powers
[section 32(1)(i)]
Following conditions must be
satisfied in order to claim
depreciation:
 The asset must be owned by the assessee
, wholly or partly;
 The asset must be used for the purposes
of the business or profession;
 The asset must be used during the
previous year
Note : If any of the above conditions is not
satisfied , depreciation shall not be
allowed
What is Block of assets[section
2(11)]
 “Block of assets” means a group of assets
falling within class of assets comprising –
a) Tangible assets , being buildings,
machinery, plant or furniture;
b) Intangible assets , being know-how,
patents, copyrights , trademarks, etc.
Classes of assets
 Assets eligible for depreciation have been
classified into four classes-
a) Building
b) Plant and machinery
c) Furniture
d) Intangible assets
Note: Each class of assets other than intangible
assets may have different blocks or group
on which separate rates of depreciation are
prescribed and for each such rate, separate
block will be formed
Block under assets with rate
 Buildings- 3 blocks(5%, 10% and 100%)
 Furniture & fittings – 1 block(10%)
 Plant and machinery -8
blocks(15,20,30,40,50,60,80,100)
 Intangible assets- 1 block(25%)
Written down value for charging
depreciation [section 43(6)]
 It means
 In the case of assets acquired before the
P.Y, the actual cost to the assessee of all
the assets falling within the block less all
depreciation actually allowed to him
 In the case of assets acquired in the P.Y ,
the actual cost to the assessee
Asset WDV Rates of depreciation
Building A 2,40,000 10%
B 3,60,000 10%
C 1,20,000 5
D 5,20,000 10
Machinery A 40,000 15
B 1,00,000 15
C 1,60,000 30
D 80,000 15
Car X 2,20,000 15
Furniture and fixture 2,40,000 10
Furniture and fixture 3,00,000 10
used in meeting hall
 Block for buildings
 First block (10%)
 Building A 2,40,000
B 3,60,000
D 5,20,000
11,20,000
Second block(5%)
Building C 1,20,000
 Blocks for Plant and machinery
 First Block(15%)
 Machinery A 40,000
B 1,00,000
D 80,000
 Car 2,20,000
4,40,000
Second Block (30%) Machinery C 1,60,000
 Block for furnitures and fittings
 First Block
 Furniture and fixture 2,40,000
 Furniture and fixture used in meeting hall
3,00,000

5,40,000
Actual cost [section 43(1)]
Computation of depreciation
 Depreciation is computed on various
assets according to the system of
classifying the assets into various blocks
of assets.
 The value of each block is computed
separately and then depreciation is
calculated on the written down value of
each block at the end of the year at the
rates prescribed for each block
Asset put to use for less than 180
days
 Depreciation in respect of such asset shall
be restricted to 50% of the normal
depreciation if the following conditions
are satisfied:
 The asset is acquired in the previous year
 It is put to use during the previous year
and
 It has been used for a period of less than
180 days during the previous year