Income From Profits and Gains of Business and Profession (PGBP) – Taxable Earnings | Deductions | Disallowed Expenses

Table of Contents

1. Sections Summary
2. Meaning of Business and Profession
3. Incomes chargeable as PGBP
4. Income not taxable under
5. Expenditures allowed as deduction
6. Specific Deductions
7. Disallowed Expenses

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1. Sections Summary

2. Meaning of Business and Profession

Business [2(13)]
Business includes any trade, commerce or manufacture; or any adventure or concern in the nature of trade, commerce or manufacture.

Profession [2(36)]
Profession includes vocation. Profession requires purely intellectual skill or manual skill on the basis of some special learning and qualification gathered through past training or experience e.g. chartered accountant, doctor, lawyer etc.

3. Incomes chargeable as PGBP

Sec. 28 enlists the incomes, which are taxable under the head ‘Profits & gains of business or profession’:

1. Any income from business or profession including income from speculative transaction shall be taxable under this head.

2. Any compensation/other payment due to or received

(i) Any person managing the affairs of an Indian company/company in India or in relation of his business for termination or modification of terms and conditions his appointment.

(ii) Vesting in government, or government controlled/owned corporation

3. Income derived by a trade, professional or similar association from rendering specific services to its members shall be taxable under this head.

4. An export incentive in form of –

(i) Profit on sale of import license or duty entitlement pass book. [Sec. 28(iiia)/(iiid)/(iiie)]

(ii) Cash assistance received/receivable by an exporter under a scheme of the Government of India [Sec. 28(iiib)]

(iii) Duty draw back (received/receivable) for export e.g. duty drawback, etc. [Sec. 28(iiic)]

5. The value of any benefit or perquisite, whether convertible into money or not, arising from business or profession shall be taxable under this head.

6. Any interest salary, bonus, commission or remuneration received by a partner from the firm or LLP shall be taxable as business income in the hands of the partner to the extent allowed in hands of firm u/s 40(b).

7. Any sum, whether received or receivable in cash or in kind, under an agreement for

(i) not carrying out any activity in relation to any business or profession; or

(ii) not sharing any know-how, patent, copyright, trade mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provisions for services.

8. Any sum received under a Keyman Insurance Policy including bonus on such policy. As per sec. 10(10D) Keyman insurance policy is a life insurance policy taken by a person on the life of another person who is or was

(i) an employee of the first mentioned person; or

(ii) in any manner whatsoever connected with the business of the first mentioned person. and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.

9. The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset.

10. Any sum received or receivable (in cash or kind) on account of any capital asset (other than land or good will or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction u/s 35AD.

4. Income not taxable under

Following incomes are though in the nature of profits and gains of business or profession, shall not be taxable under this head:

1. Rent from house property is taxable u/s 22 under ‘Income from house property’ even though –

(a) the assessee is engaged in the business of letting out properties on rent; or

(b) such property is held as stock in trade.

2. Dividend on shares is taxable u/s 562)(i) under the head ‘Income from other sources’ even though the assessee deals in shares and such shares are held as stock in trade. The provision is not applicable in case of interest on securities held as stock in trade.

3. Winning from lotteries, races etc. are taxable under the head ‘Income from other sources’ even if such income is derived through regular business activity. However dealing in lottery tickets and incidental winning on sold tickets will be taxable as PGBP.

4. Exempted income by virtue of sec. 10, 11 or 13A.

5. Sum taxable under the head ‘Capital gains’ for the purpose of sec. 28 (va) shall not be taxable under this head. E.g. profit on sale of route permit.

5. Expenditures allowed as deduction

1. Capital expenditures are not allowed as deduction, unless & until expressly allowed whereas revenue expenditures are allowed as deduction until & unless expressly disallowed under the Income tax Act.
2. Any expenditure of a non-assessable business is not allowed as deduction. E.g. Agricultural income u/s 10(1).
3. Expenditure must have been incurred by the assessee for its business.
4. Subject to certain exceptions, no deductions are allowed for anticipated losses. E.g. provision for bad & doubtful debts.
5. No one can earn income from himself/herself. E.g. Rent, salary to sole proprieter from his own firm.

6. Specific Deductions

As per sec. 29, income under this head will be computed considering the provisions of sec. 30 to 43DB, which decides the admissibility of expenditures for computing income under this head.

1. U/s 30- Rent, rates, taxes, repairs & insurance for premises used for the purpose of business or profession shall be allowed under this section. Points to be noted in this regard:

(a) The building is to be used for the purpose of business or profession.

(b) Rent paid by firm to its partner for using his premises is an allowed expenditure.

(c) Only current repairs are allowed as deduction. Capital repairs are not disallowed.

(d) Rates & taxes (for e.g. land revenue, municipal tax, etc.) are deductible on cash basis [Sec. 30 read with sec. 43B]

2. U/s 31- Repairs & insurance of plant, machinery & furniture are allowed as deduction. Points to be noted in this regard:

(a) The asset must be used for the purpose of business or profession.

(b) Only current repairs are allowed as deduction.

(c) Only repairs & insurance of machinery, plant & furniture is covered under this section. Rent paid for use of such assets is deductible u/s 37(1).

3. U/s 32- Depreciation on tangible assets like building, machinery, plant, furniture and intangible assets like know how, copyright, trade mark, patent, license, franchise, or any other business or commercial right of the similar nature acquired on or after 1/4/1998. However, it does not include goodwill.

Conditions:

(a) Asset must be owned by the assessee. In case of hire purchase, the buyer can claim depreciation even though he does not get legal title of the asset till he pays the last instalment. Lessee of a property is entitled to depreciation in respect of capital expenditure incurred on property. Possessor of an immovable property u/s 53A of Transfer of Property Act can claim depreciation.

(b) Asset must be used for the purpose of business or profession during the previous year. As per sec. 38, if an asset is partly used for business or profession and partly used for personal purpose, then proportionate depreciation (as determined by the Assessing Officer) shall be allowed.

4. U/s 32(1)(iia) – Additional depreciation is applicable on all asses- see engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power.

5. An undertaking engaged in the business of generation or generation and distribution of power may charge depreciation (in respect of asset acquired after 31/3/1997) at its choice under:

(a) Written-down value method as followed by all other assessee (usual); or

(b) Straight-line method at the prescribed rate in ‘Appendix IA’ of the Income Tax Rules on actual cost of asset (not the block value of asset)

However, such option shall be exercised before the due date of furnishing return of income. Further, it may be noted that once the option is exercised, it shall be applicable for all subsequent assessment year

(6) U/s35- Scientific research means any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries [Sec. 43(4)] Such research can be categorized either as –

(a) In-House research- Research done by the assessee himself (in connection with his business)

(b) Research through outside institutions- Any sum paid to outside agencies, engaged in scientific research, to be used for scientific research.

(7) U/s35CCA, Where an assessee incurs any expenditure by way of payment of any sum—

(a) to an association or institution, which has as its object the undertaking of any program of rural development, to be used for carrying out any program of rural development approved by the prescribed authority and the assessee furnishes a certificate from such association or institution.

(b) to an association or institution, which has as its object the training of persons for implementing programs of rural development and the assessee furnishes a certificate from such association or institution; or,

(c) the National fund for rural development; or,

(d) to the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf, the assessee shall, be allowed a deduction of the amount of such expenditure incurred during the previous year.

(8) U/s 35CCC, Where an assessee incurs any expenditure on notified agricultural extension project, such expenditure is fully

(9) U/s 35CCD, Where an assessee incurs any expenditure on notified agricultural extension project, such expenditure is fully

(10) U/s 35 D & Rule 6AB, Preliminary Expenses are expenses incurred before starting an establishment for business, or extending a running business, or starting up a new unit.

They are considered as capital expenditure and allowed as deduction during 5 years equally to an Indian company or any other resident as per Income-tax Act.

List of Preliminary Expenses Allowed as deduction by Income Tax Act, 1961

11. U/s 35DDA, Amortization of expenditure incurred under VRS al- lowed to all assessee who have incurred any expenditure, by way of compensation to employees in connection with their voluntary retirement. 1/5th of expenditure so paid for a period of 5 years commencing from the year in which such expenditure was paid.

12. U/s 35DD, Expenses on Amalgamation or Demerger- If an Indian Company incurred any expenditure on scheme of Amalgamation or Demerger with other company (can be foreign as well as Indian), then such expenditure shall be allowed for 5 years equally divided.

13. Donation U/s 35, to Approved Research Association is fully allowed as deduction.

14. Donation U/s 35CCA, by business entity to National funds for Rural development or Urban poverty eradication is fully allowed as deduction.

15. U/s 32AD, Additional Investment Allowance- Whenever a manufacturer, establishes a new factory in notified backward area of 4 states of Andhra Pradesh, Bihar, West Bengal and Telangana, during 2015-20, then 15% of such actual Cost is Deductible.

Note: There is a lock-in period of 5 year

16. U/s 36(1)

(a) Stock Insurance (any mode of payment)

(b) Employee’s Health Insurance (any bank mode)

(c) Bonus and Commission to employee

(d) Interest on Loan (taken for Business/Profession)

(e) Discount on zero Coupon Bond

(f) Employer’s Contribution to RPF, SAF, (Approved), NPS, Gratuity Fund (Approved)

(g) Employee’s Contribution to PF, SAF, NPS, or other staff welfare fund.

(h) Expense of acquisition of animal used in Business/Profession

(i) Bad Debts u/s 36(1)(vii)

(j) Expenses on family planning promotion

(k) Securities Transaction Tax, Commodity Transaction Tax

7. Disallowed Expenses

Following Expenses are not allowed while computing PGBP Income.

1. U/s 40(a) TDS Default, not deducted or deducted but not deposited on:

(a) Interest, royalty, fees for technical services payable to a non-resident or outside India [Sec. 40(a)(i)].

(b) Any sum payable to a resident on which TDS provision is applicable [Sec. 40(a)(ia)]

(c) Income tax, Interest under Income tax.

(d) Penalty levied by under any law by Government/Local Authority.

(e) Any obligation of employee met by employer is disallowed for employer but exempted u/s 10 (10CC) for employee.

2. U/s 38(2), Proportionate amount of expenses incurred for personal purpose in respect to asset used in Business/Profession as well as personal.

3. U/s 40A(2), Revenue expense paid to specified person (relative), in excess of Market Value of Goods or Services received are disallowed.

4. U/s 40A(3), Cash Payment made for revenue expenditure greater than ` 10,000 to a single person for a single bill, in a single day is fully disallowed as deduction. Otherwise than, any payment made through a/c payee cheque or draft, ECS, Prescribed banking mode (Rule 6ABBA) including debit/credit card, net/mobile banking are a allowed even on exceeding ` 10,000.

5. U/s 40A(3A), If cash received, “in respect any outstanding revenue expense which was previously claimed as expenditure in earlier years”, greater than 10,000 then it will be treated as income.

6. U/s 40A(7), Employer’s contribution to Unapproved gratuity fund.

7. U/s 40A(9), Employer’s contribution to NPS in excess of 10% of Salary. In this case, only excess amount is disallowed.