Chargeability & Scope of Income Under “Profits and Gains of Business or Profession” (Section 28) – Direct and Indirect Taxes with Tax Ready Reckoner

Section 28 of the Income Tax Act, 1961 defines the incomes chargeable under the head “Profits and Gains of Business or Profession” (PGBP). It covers both legal and illegal business/professional incomes, with specific inclusions.

Table of Contents

1. Incomes Specifically Taxable Under Section 28

CLAUSE	INCOME TYPE	DESCRIPTION	EXAMPLES
28(i)	Profits from Business/Profession	Net earnings after expenses	Shop profits, consultancy fees
28(ii)	Compensation for Termination	Payments for ending business contracts	Early contract cancellation fee
28(iii)	Export Incentives	Duty drawbacks, government subsidies	DEPB, MEIS rewards
28(iiia)	Benefits from Business	Perks like free samples, discounts	Free stock received by a dealer
28(iv)	Value of Benefits	Non-cash benefits from business	Free hotel stay for a travel agent
28(v)	Partner’s Income	Salary/interest from a partnership firm	Partner’s monthly remuneration
28(va)	Non-Compete Fees	Payment for not competing	Exclusivity agreement payout
28(vi)	Keyman Insurance Policy	Sum received under such policies	Payout on key employee’s policy
28(vii)	Unexplained Credits	Cash credits in books [Sec 68]	Unaccounted business deposits
28(ix)	Illegal Businesses	Income from unlawful activities	Gambling, smuggling profits

2. Key Principles of Chargeability

(A) Business vs. Profession vs. Vocation

Business= Trade, commerce, manufacturing (profit-driven).
Profession= Skilled services (CA, doctors, lawyers).
Vocation= Artistic/occupational skills (writers, artists).

(B) Tax Treatment

Normal Computation:

Gross Receipts – Allowable Expenses = Taxable Income

Presumptive Taxation (Simplified):
- Sec 44AD (Business):6-8% of turnover.
- Sec 44ADA (Professionals):50% of receipts.

(C) Exclusions

❌ Capital Gains (taxed separately).

❌ Salary Income (taxed under “Salaries”).

❌ House Property Rent (taxed under “House Property”).

3. Special Cases & Judicial Interpretations

(A) Illegal Income is Taxable

Even smuggling, betting, or black-market earningsare taxed (CIT vs. Piara Singh, SC 1980).

(B) Single Transaction as Business

A one-time sale(e.g., land/flat purchase for resale) may be taxed as business income if profit motive exists (Venkataswami Naidu vs. CIT, SC 1959).

(C) Hobby vs. Business

Hobby income(e.g., painting occasionally) is not taxed unless it becomes a regular profession.

4. Practical Example

Case: A trader’s income includes:

Sales:₹50 lakh
Export Incentive:₹2 lakh
Compensation for Contract Loss:₹5 lakh
Disallowed Cash Payments:₹1 lakh

Taxable Income Calculation:

PARTICULARS	AMOUNT (₹)
Sales Profit	50,00,000
Export Incentive [28(iii)]	2,00,000
Contract Compensation [28(ii)]	5,00,000
Gross Business Income	57,00,000
Less: Allowable Expenses	(40,00,000)
Add: Disallowed Cash [40A(3)]	1,00,000
Taxable PGBP Income	18,00,000