Chargeability of Income from Business and Profession
We come in contact with the words Business & Profession and other allied words in our day to day life. These words are given a very deep and logical meaning in the Income Tax Act, so that it becomes easy to calculate the income under the head “Business & Profession”. It makes the calculation of tax very easy. The term business is defined in section 2(13) of the Income Tax Act as under:
2(13) “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture.
Here the word Profession nowhere exists in the definition but it has the meaning of any occupation that requires some degree of learning. Examples of the same can be a doctor, lawyer, etc. And section 2(36) states that:
2(36) “profession” includes vocation.
Vocation is an occupation which is carried out by personal skills of a person. Example of vocation are cobbler, carpenter etc. Income from all such occupations is taxed under the same head. They are chargeable under section 28 of the Income Tax Act as follows:
v Mainly there are three conditions derived to from the above section, for income to be considered as income from business and profession are as follows:
· Business or profession should exist.
· It should be carried out by the assessee in whose hand such income is chargeable to tax.
· Business or profession should have been carried out during the previous year by the assessee, if it is carried out for a single day also than the income from the same is considered as the Income from business & Profession.
v Income will be derived as per the manner provided in the provisions of sections 30 to 37 of the Income Tax Act along with other specific disallowances, special provisions and presumptive income as provided in sections 40 to 44AE.
v Many a times there arises confusion about interest income. Whether it is to be treated as business income or to be treated as Income from other source. So the prime solution is that, if such interest is received as a part of income which is described in the objective of the business, or such interest arises out of basic business of the entity than such interest is to be treated as Income from Business and Profession. But if such interest is earned from other allied activities than it is to be treated as Income from Other Sources.
v Like interest the other income is also doubted that is income from house property. In general when a person lets out a house property or if he / she own more than one house property than the one that is not used for residential purpose will be deemed to be let out that the income so derived is chargeable under the head “Income from House Property”. But confusion arises when the house property is a part of stock in trade of an assesse’s business. The answer is such income will be taxable under the head “Income from House Property” and not under the head “Income from Business and Profession”. In case the business of the assessee is letting out the property, income from such business is also taxable under the head “Income from House Property”.
Other income as above that may lead to confusion is winning from lotteries, racing horses, etc. Such income is not chargeable under the head “Income from Business and Profession” even if such it is the business of assessee. It will be taxable under the head “Income from Other Sources”.
v In case where an assessee is carrying out more than one business and / or profession, than the income from all such businesses will be taxable under the head “Income from Business and Profession” except the income earned from speculative business.
v The other point to be considered while computing the income of an assessee is that, even if the person is not an owner of the business even though he runs the business to earn the income than such income is taxable in the hands of a person who is carrying out the business. Thus in short it can be said that when the actual business is carried out by the person other than the legal owner of the business, than the person carrying out such business is known as the beneficial owner of the business and income from such business and profession is taxable in the hands of beneficial owner under the head “Income from Business and Profession”.
v Even if the assessee carries out any business that is illegal in nature as per the country’s or state’s rules and regulations than also such income is chargeable to tax under the head “Income from Business & Profession”. Example can be, if any assessee is carrying out the business of trading wine in Gujarat (Which is prohibited by State rules) than income from such business and profession is chargeable to tax under the head “Income from Business and Profession”.
v While calculating the income chargeable to tax under the head “Income from Business and Profession”, potential losses such as Bad Debt Reserve are allowable as a deduction but potential profits are not to be considered. But the accrued profits are to be considered while deriving the income taxable under the head “Income from Business and Profession”.
v When some loss of income is recovered by the assessee in previous year than the same is considered as income and is chargeable to tax under the head “Income from Business and Profession”. Also when any expense was first claimed as deduction and the same is recovered, the same is also chargeable to tax under the head “Income from Business and Profession”.
v Profit or loss of the business of an assessee is not derived as per the books maintained by the assessee but the same is derived as per the manner described in the Income Tax Act. So even if the books of accounts are manipulated by book entry, the same will have any effect on the tax structure of an assessee.
v In case of winding up of business, the income / profits so arise will be taxable in two manners. The profits earned from the business activities carried out while winding up will be taxable under the head “Income from Business and Profession” and the part of profit that arises out of other winding up procedure will be taxable under the head “Income from Capital Gains”.