Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Incomes Chargeable to Tax under Profits and Gains of Business or Profession

Incomes Chargeable to Tax under Profits and Gains of Business or Profession
Incomes Chargeable to Tax under Profits and Gains of Business or Profession

1.   [Section 28]- List of Incomes Chargeable to Income-Tax

The following incomes shall be chargeable to income-tax under the head “Profits and gains of business or profession”:

(i)            the profits and gains of any business which was carried on by the assessee at any time during the previous year;

(ii)           any compensation or other payment due to or received by, —

(a)           any person in connection with termination/modification of his agreement for managing the whole or substantially the whole of the affairs of an Indian company or any other company;

(b)          any person holding an agency in India for any part of the activities relating to the business of any other person at or in connection with the termination or modification of the terms of the agency.

e.g., B was the distributor of a company for entire Northern India. During 2019-20, the company has modified the contract of agency and in future B will be the distributor only for Delhi. In lieu of such modification, the company compensates B with ₹5,00,000. Such amount of ₹5,00,000 received by B, although capital receipt but shall be taxable as business income; 

(c)           any person for or in connection with the vesting in the Government, or in any corporation owned by or controlled by the Government, under any law for the time being imposed, of the management of any property or business;

(d)          any compensation received or receivable by any person, by whatever name called, at or in connection with—

— the termination or

— the modification of the terms and conditions of any contract relating to his business shall be taxable as business income.

In other words, compensation received or receivable by any person, whether revenue or capital, in connection with the above, shall be taxable as business income.

(iii)          income derived by a trade, professional or similar association from specific services performed for its members. This is an exception to the general principle that a surplus arising to mutual association cannot be regarded as income chargeable to tax;

(iv)          Export Incentives which include:

(a)           profits on sales of import licences granted under Imports (Control) Order on account of exports,

(b)          cash assistance, by whatever name called, received or receivable against export,

(c)           duty drawbacks of Customs and Central Excise duties,

(d)          any profit on the transfer of the Duty Entitlement Pass Book Scheme,

(e)          any profit on the transfer of the Duty-Free Replenishment Certificate;

(v)           the value of any benefit or perquisite, whether convertible into money or not, arising during the course of the carrying on of any business/profession.

See also  Capital Gains under Income Tax Act. 1961 - LTCG & STCG

e.g., the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his income under the head “Profits and Gains of Business or Profession”. 

Further, the assessee may receive a car, air conditioner, motor cycle or any other article on achieving a sales target; the value of this article constitutes perquisite taxable as profits or gains from business or profession.

Similarly Free Air tickets received by the assessee for achieving a target shall be perquisites

(vi)          any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from the firm in which he is a partner.

However, where any interest, salary, bonus, commission or remuneration by whatever name called, or any part thereof has not been allowed to be deducted under section 40(b), in the computation of the income of the firm, the income to be taxed shall be adjusted to the extent of the amount disallowed.

In other words, suppose a firm pays interest to a partner at 18% simple interest p.a. amount to ₹2,70,000. The allowable rate of interest is 12% p.a. Hence the excess 6% paid will be disallowed in the hands of the firm. Since the excess interest has been taxed in the hands of the firm, the same will not be taxed in the hands of the partner. The amount of interest taxable in the hands of the partner shall be ₹1,80,000 (Calculated @ 12% p.a.) instead of ₹2,70,000; 

(vii)        any sum whether received or receivable in cash or in kind under an agreement for: —

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

(b)          not sharing any know-how, patent, copyright, trade-mark, licence, 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 provision for services.

However, the above clause (a) shall not apply where any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head “Capital gains”; 

(viii)       any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy;

(ix)          the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner [Clause (via) inserted w.e.f. A.Y.  2019-20].

(x)           any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill 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 under section 35AD. [Section 28(vii)]

2.   [Section 28(via)] – Incomes in case of Treatment on conversion of inventory into Capital Asset

The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner shall be chargeable to tax as business income.

Actual cost:

Where a capital asset referred to in clause (via) of section 28 is used for the purposes of business or profession, the actual cost of such asset to the Assessee shall be the fair market value which has been taken into account for the purposes of the said clause. [Explanation 1A in section 43]

See also  [Section 23(1)]- Computation of Annual Value’ of a Property – for computing House Property Income

Further, section 49(9) provides that where the capital gain arises from the transfer of a capital asset referred to in section 28(via), the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.

Period of holding:

Explanation 1 to section 2(42A) (ba) provides that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment of such inventory into capital asset.

3.   [Section 29]- Income from business or profession — how to be computed

Section 29 states that profits and gains of business or profession, chargeable to income tax u/s 28, shall be computed in accordance with the provisions contained in sections 30 to 43D. It may be added here that the provisions of sections 44 to 44D have also to be taken into account in this context as they make certain special provisions regarding the computation of profits and deduction of expenditure in certain cases.

4.   Method of Accounting of Business or Profession [Section 145] (1)

(1)   Income to be computed either on the basis of cash or mercantile system of accounting [Section 145(1)]

Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of section 145(2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the Assessee.

(2) Central Government empowered to notify income computation and disclosure standards [Section 145(2)]

The Central Government may notify, in the Official Gazette from time to time, income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income.  The Central Government vide Notification No. 87/2016, dated 29.9.2016 has notified certain Income Computation and Disclosure Standards to be followed by all assesses.

(3) Assessing Officer empowered to make assessment in the manner provided under section 144 in certain cases [Section 145(3)]

(i)            Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the Assessee, or

(ii)           Where the method of accounting provided in section 145(1) has not been regularly followed by the Assessee, or

(iii)          Where income has not been computed in accordance with the standards notified under section 145(2),

the Assessing Officer may make an assessment in the manner provided in section 144.

(4)   Method of accounting in certain cases [New section 145A]

For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”, —

(i)            the valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in income computation and disclosure standards notified under section 145(2).

(ii)           the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the Assessee to bring the goods or services to the place of its location and condition as on the date of valuation.

See also  Needs with Benefit of Goods and Service Tax (GST)

(iii)          inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in income computation and disclosure standards notified under section 145(2).

(iv)          inventory being listed securities, shall be valued at lower of actual cost or net realisable value in the manner provided in income computation and disclosure standards notified under section 145(2).

Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:  Provided further, that the comparison of actual cost and net realisable value of securities shall be done category-wise.

(5)   Taxability of certain income [Section 145B]

(1)          Notwithstanding anything to the contrary contained in section 145, interest received by an Assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received.

(2)          the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.

(3)          income referred to section 2(24)(xviii) (relating to subsidy or grant or cash incentive, etc.  from Government) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

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