Bailabel Type : non-bailable

Description

Section 28 of the Income Tax Act, 1961, deals with the profits and gains arising from business or profession, which are subject to taxation under the head "Profits and Gains of Business or Profession." This section defines the income that is taxable for an individual or entity running a business or professional activity. It provides a framework for determining which incomes are to be taxed as business income.

Purpose of Section 28:

• The primary objective of Section 28 is to define the incomes that are taxable under the head "Profits and Gains of Business or Profession".
• It ensures that business profits are appropriately taxed, considering all relevant sources of income that arise during the course of running a business or profession.

Key Provisions of Section 28:

1. Incomes Taxable Under the Head "Profits and Gains of Business or Profession":

Section 28 specifically includes the following categories of income as taxable under "Profits and Gains of Business or Profession":

• Profits from Business or Profession:

  • Income derived from any business or profession carried on by the taxpayer, whether carried on regularly or intermittently, is taxable under this section.
  • This includes profits made from the sale of goods, provision of services, or any other activity that is considered to be business or professional in nature.

• Profits on Transfer of Capital Asset:

  • Profits or gains from the transfer of a capital asset or stock-in-trade, which are associated with the business, are taxable under this head.
  • Example: If a business sells a fixed asset (e.g., machinery, property) and earns profit, that profit will be taxed under the head "Profits and Gains of Business or Profession".

• Income from Sale of Goods:

  • When an individual or entity sells goods in the normal course of business, the profits earned from the sale will be taxable.
  • Example: A retail store earning profits from the sale of products will include these profits under this head.

• Income from Services Rendered:

  • Professionals, such as doctors, lawyers, consultants, etc., who provide services, will include the fees they earn as income under this section.
  • Example: A lawyer charging clients for legal services would include the income earned from providing such services under this head.

2. Specific Incomes Included Under Section 28:

Section 28 specifically includes the following types of income:

• Income from Trade or Business: Any income that arises from the carrying on of business, including income from selling products, providing services, or any other business-related activity.

  • Example: A manufacturer’s income from selling goods.

• Capital Gains on Stock-in-Trade: If a person trades in shares or securities and makes a profit, that profit will be considered as business income and not as capital gains.

  • Example: A person who buys and sells shares regularly as part of their business operations will treat the gains from the sale of shares as business income.

• Income from Profession: Professionals such as doctors, lawyers, chartered accountants, engineers, architects, etc., will include fees earned from their profession under Profits and Gains of Business or Profession.

  • Example: Fees earned by a doctor for consultation or by an architect for project designs.

• Voluntary Contributions and Donations: Any income received from donations or voluntary contributions for the purposes of carrying on a business or profession is included under Section 28.

  • Example: A charitable organization that operates a business for social welfare may include donations received for running the business as part of its income.

3. Incomes from Business or Profession Taxable Under Section 28:

The following incomes are specifically deemed to be part of business or professional income under this section:

• Compensation or Insurance for Loss of Stock: Any compensation received from an insurance company or any other person for the loss of stock in trade or business will be considered business income.

  • Example: If a store’s inventory is damaged in a fire and the business receives compensation for the loss, the amount of compensation will be treated as income under this head.

• Income from Sale of Goods, Services, or Assets: Profits from the sale of goods or assets like machinery, and even the sale of services, will fall under this section.

  • Example: A business selling its machinery after using it in the business for several years would consider the profit as income under this head.

• Income from Subsidy or Grant for Business Purpose: Any income received by a business as a subsidy or grant to support the business activity is taxable under this head.

  • Example: If a government provides a subsidy to a business for promoting a specific business activity, this subsidy will be included as income.

• Income from Specific Trade Activities: Incomes arising from activities such as gambling or lottery winnings related to business activities will be considered business profits.

  • Example: A person running a lottery or gambling business will include the income derived from such operations under this section.

4. Exclusions from Section 28:

• Income from Agricultural Activities: Income derived from agricultural activities is not included under this section. Instead, it is considered under a separate head known as “Income from Agriculture”.
• Capital Gains: Profits from the sale of a capital asset that does not form part of the business or profession are not included under Section 28 but are subject to Capital Gains Tax under a separate section (Section 45 of the Income Tax Act).

Deductions Allowed Under Section 28:

• After determining the gross profits from business or profession, certain expenses are allowed as deductions under Section 30 to Section 37 of the Income Tax Act. These deductions include:
  • Business Expenses: Salaries paid to employees, rent for business premises, utilities, etc.
  • Interest on Business Loans: Interest paid on loans taken for business purposes.
  • Depreciation on Business Assets: Depreciation on machinery, buildings, vehicles, etc., used for business purposes.
  • Insurance Premiums: Premiums paid for insuring business property.

Punishment

Penalty for Underreporting Business Income: If a taxpayer underreports their business or professional income, they may be subject to penalties under Section 270A for underreporting or misreporting income.

Interest on Tax Due: Interest under Section 234A, 234B, and 234C may be levied if taxes are delayed or underpaid.

Tax Evasion: Willful tax evasion by understating business profits may result in prosecution under Section 276C and can lead to fines or imprisonment.