SECTION 28 OF INCOME TAX ACT: PROFITS & GAINS OF BUSINESS OR PROFESSION
Table of Contents
In order to ascertain the tax liability of any taxpayer, the taxable income of the taxpayer is divided into five income categories i.e. ‘Income from salary’, ‘Income from house property’, ‘Income from profits and gains of business or profession’, ‘Income from capital gains’ and ‘Income from other sources’.
Provisions of section 28 of the Income Tax Act, 1961 specify the income chargeable to income tax under the taxable head ‘Profits and gains of business or profession’.
Importantly, other than normal income from business and profession, certain other specified incomes are also taxable under the head ‘Profits and gains of business or profession’.
The present article briefly covers and explains the provisions prescribed under section 28 of the Income Tax Act, 1961.
Provisions of section 28 of Income Tax Act, 1961
Section 28 of the Income Tax Act, 1961 applies to incomes that is classified/ classifiable under the head profits or gains from business or profession.
We usually take the definition of the terms business and profession as per common trade parlance. However, both the terms ‘business’ and ‘profession’ are defined under the Income Tax Act and the same is explained hereunder –
Section 2(13) of the Income Tax Act defines the term ‘business’ as any trade, commerce or manufacture or any adventure/ concern in the nature of trade, commerce or manufacture.
Section 2(36) of the Income Tax Act defines the term ‘profession’. Accordingly, it is simply stated that the profession includes vocation.
Income from the business or profession is taxable under the taxing head ‘Profits and gains of business or profession’. Provisions of section 28 specifically cover the list of incomes which are to be taxed under the taxing head ‘Profits and gains of business or profession’. The same is explained hereunder.
List of incomes chargeable to income tax under section 28 of Income Tax Act, 1961
Following incomes are chargeable to income tax under the taxable head ‘Profits and gains of business or profession’ (i.e. under section 28) –
Profits and gains of any business or profession carried out at any time during the previous year (it covers all the business or profession undertaken by the assessee during the respective previous year).
Compensation or other payments due to/ received by any person under the following circumstances –
Compensation received by
Any person managing wholly or substantially the whole of the affairs of an Indian Company
On termination of his management/ modification of t conditions relating thereto
Any person managing wholly or substantially the whole of the affairs in India of any other company
On termination of his office/ modification of the term conditions relating thereto
In connection with vesting in the Government/ Corpo (owned or controlled by the Government) of manage business or property
On termination or modification of the terms & condit contract relating to his business
Any person holding an agency in India
In connection with the termination/ modification of th conditions relating to the agency
Income received via a trade or professional or similar association from specific services performed for its
(For example – if an association provides any service to its members and in turn charges money for the same from its members. Then, such money received will be chargeable under the taxable head ‘Profits and gains of business or profession).
Following export incentives –
Profit on sale of a licence which is granted under the Imports (Control) Order, 1955 [made under the Imports and Exports (Control) Act, 1947];
Any duty of customs/ excise which is re-paid or re-payable as ‘drawback’ to any person against exports undertaken under the Customs and Central Excise Duties Drawback Rules, 1971;
Cash assistance received/ receivable by any person against exports under any Government scheme; Profits earned on the transfer of the Duty Entitlement Pass Book (DEPB);
Profits earned on the transfer of the Duty Free Replenishment Certificate (DFRC).
Value of any benefit or perquisite (whether monetary or non-monetary) arising from business or profession.
Amount (like interest/ salary/ commission/ bonus/ remuneration etc.) received by a partner of a firm from such firm. However, any such amount which is disallowed under section 40 clause (b), the same will not be taxable in the hands of the partner.
Receipt of non-compete fees for –
Not undertaking any activity in relation to any business or profession; or
Not sharing any Intellectual Property Rights (i.e. patent/ know-how/ trade-mark/ copyright/ franchise/ licence/ any other business or commercial rights of similar technic or nature or information) that are likely to assist in the manufacturing or processing of goods or rendering of services.
Non-compete fees receipt does not include –
The amount that is received on transfer of right to manufacture/ produce/ process any article or thing or right to carry on any business/ profession. Notably, the same is taxable under the head ‘Capital Gains’, Compensation that is received from the multilateral fund of Montreal Protocol on Substances that Deplete Ozone layer (under the United Nations Environment Programme which is in accordance with the terms of agreements entered with the Government of India).
The amount received (including the amount received by way of bonus) under a Keyman Insurance Policy.
The fair market value of an inventory as on the date of conversion of inventory into capital assets.
The amount received on capital assets sold/ discarded/ demolished, when the whole of the expenditure of the capital assets was allowed as a deduction under section 35AD of the Income Tax Act.
Frequently Asked Questions (FAQs) on Section 28 of Income Tax Act: Profits & gains of business or profession
Some of the Frequently Asked Questions with regard to the provisions of section 28 of the Income Tax Act are highlighted hereunder –
i. What is section 28 of Income Tax?
Section 28 of the Income Tax Act deals with the incomes that is taxable under the head ‘Profits and gains from business or profession’.
ii. What is Sec 28 to Sec 44 of Income Tax?
Section 28 to Section 44 covers the provisions relating to the computation of income under the taxable head ‘Profits and gains of business or profession’.
iii. What are amendments to Section 28?
Amendment to section 28 is proposed vide Finance Bill 2023. Accordingly, clause (vi) to section 28 is amended which clarify that the clause applies to cases, wherein, benefit/ perquisite is in cash or in kind or partly in cash/
partly in kind. Notably, the amendment will be effective from 1st April 2024.
iv. Is winning from lottery taxable under section 28 of the Income Tax Act?
No, winning from the lottery is not taxable under the provisions of section 28 of the Income Tax Act.
v. What is the basis of charge section 28 under the head business profession?
As per charge section 28, any profit or gain from business or profession, including the specified ones, will be taxable under the taxing head ‘Profits and gains from business or profession’.