PROFITS AND GAINS OF BUSINESS OR PROFESSION (Section 28 – Income Tax Act, 1961)

---

🌿 Meaning of Business or Profession

Under the Income Tax Act, the term “Business” means any trade, commerce, or manufacture carried on with the motive of earning profit.

The term “Profession” means activities that require intellectual or specialized skills, such as those of a doctor, lawyer, engineer, or chartered accountant.

So, income earned through carrying on any business or profession is taxed under the head:
👉 “Profits and Gains of Business or Profession (PGBP)”

---

🧾 Section 28 – Basis of Charge

Section 28 lists out what types of incomes are chargeable under the head “Profits and Gains of Business or Profession.”
Let’s understand them one by one in simple language 👇

---

🏢 1. Profits from Any Business or Profession (Sec. 28(i))

The profits earned from carrying on any business or profession during the previous year are taxable.

✅ Example:
Mr. A runs a textile shop and earns ₹5,00,000 as profit.
This amount will be taxed as business income under Section 28(i).

📘 Note: The business may be lawful or unlawful — even illegal business income is taxable (e.g., smuggling or black-market profit).

---

⚖️ Case Law: CIT v. Piara Singh (1980 SC)

Facts: The assessee was caught smuggling currency notes, and the police confiscated the cash.
Held: The Supreme Court said that income from illegal business is still taxable.
🧠 Principle: Lawful or unlawful — income is taxable if it arises from business activity.

---

🧾 2. Compensation for Termination or Modification of Business Contract (Sec. 28(ii)(a))

If a person receives compensation or payment for the termination or modification of a business contract, it is taxable as business income.

✅ Example:
If a company cancels a dealership agreement and pays ₹10 lakh to the dealer as compensation,
that ₹10 lakh will be taxed as business income.

---

⚖️ Case Law: Gillanders Arbuthnot & Co. v. CIT (1964 SC)

Facts: The assessee received compensation after termination of an agency contract.
Held: The compensation was taxable because it was a normal part of business activity.
🧠 Principle: Compensation for loss of business contract is taxable under Section 28.

---

🧍 3. Income of a Partner from Firm (Sec. 28(v))

Any salary, bonus, commission, or interest received by a partner from a partnership firm is taxable in the hands of the partner as business income.

✅ Example:
Mr. B is a partner in M/s ABC Firm. He receives ₹1 lakh as salary and ₹50,000 as interest on capital.
→ Both are taxable as business income under Section 28(v).

---

⚖️ Case Law: Munjal Sales Corporation v. CIT (2008 SC)

Held: The interest received by a partner from the firm is taxable under Section 28(v) and deductible for the firm if conditions under Section 40(b) are met.

🧠 Principle: Partner’s income from firm = Business income.

---

💼 4. Value of Perquisites or Benefits (Sec. 28(iv))

If a person receives any benefit, gift, or perquisite (other than cash) arising from business or profession,
it is taxable as business income.

✅ Example:
If a supplier gives a businessman a free car for promoting his product,
the market value of the car is taxable as business income.

---

⚖️ Case Law: CIT v. Ram Kripal Tripathi (1989)

Held: Non-monetary benefits or gifts received during business are taxable under Section 28(iv).
🧠 Principle: Any non-cash advantage from business is income.

---

🏦 5. Income from Export Incentives or Government Subsidy (Sec. 28(iiia–iiie))

Profits such as:

• Cash assistance from the government,
• Duty drawback,
• Export incentives, are taxable as business income.

✅ Example:
A textile exporter gets ₹2 lakh as a government export incentive — taxable under Section 28(iiib).

---

⚖️ Case Law: Sahney Steel & Press Works Ltd. v. CIT (1997 SC)

Held: Subsidy given by the government to help the business earn profit is taxable;
but subsidy for starting or setting up industry is capital in nature.
🧠 Principle: Revenue subsidy → taxable; Capital subsidy → not taxable.

---

🧾 6. Profit on Sale of Business Assets (Sec. 28(ii))

If the asset (like goodwill, tenancy rights, or stock-in-trade) is sold and profit arises, it will be taxed as business income, not capital gain, if the asset was used in business.

✅ Example:
Sale of business license, export quota, or right to operate = business profit.

---

⚖️ Case Law: CIT v. Artex Manufacturing Co. (1997 SC)

Held: Profit from transfer of business as a going concern is taxable as business income if it involves transfer of assets with profit motive.

---

🏗️ 7. Speculative and Adventure Income

Even if an activity is not a regular business but is an adventure in the nature of trade,
the profit from it will still be taxed under business income.

✅ Example:
If someone buys land just to sell it at profit, it’s an adventure in trade → taxable as business income.

---

⚖️ Case Law: G. Venkataswami Naidu & Co. v. CIT (1959 SC)

Held: An isolated transaction can still be treated as business if it was done with a profit-making motive.
🧠 Principle: Profit motive is the key to determine business income.

---

💰 8. Interest, Rent, or Compensation Received from Business Assets

If any asset used in business (like machinery or property) is temporarily let out,
the rent or interest received is taxable as business income.

✅ Example:
Letting out factory machinery for a few months → income taxable as business income.

---

Computation of Business Income (Brief Idea)

Gross Receipts or Turnover
– Business Expenses (allowed under Sections 30–37)
= Net Profits (Taxable under Section 28)

Expenses like rent, salary, interest, repairs, and depreciation are allowed only if incurred wholly and exclusively for business.

---

⚖️ Other Important Case Laws

1. Badridas Daga v. CIT (1958 SC)
   → Loss caused by employee’s embezzlement during business is deductible.
   🧠 Principle: Business loss connected with operations is allowable.

2. CIT v. Lakshmiji Sugar Mills (1971 SC)
   → Payment made for improving business efficiency (like road or facility used by factory) is revenue expenditure, not capital.

3. Kedarnath Jute Manufacturing Co. v. CIT (1971 SC)
   → Statutory liabilities (like sales tax payable) are deductible, even if not paid during the year, if the liability is certain.

---

✨ Conclusion

Section 28 covers all types of business and professional income, whether from:

• Regular business,
• One-time adventure,
• Compensation,
• Partner’s remuneration, or
• Government subsidies.

The aim is to tax all profits arising from business or profession, regardless of legality or form, as long as there is a profit motive.

---

Key Section	Nature of Income	Example
28(i)	Profits from business	Shop profit
28(ii)(a)	Compensation for business termination	Dealership cancelled
28(iv)	Perquisites or benefits	Free car/gifts
28(v)	Partner’s income from firm	Salary/interest
28(iiia–e)	Export incentives	Duty drawback
28(ii)	Sale of business rights	License sale

---

✅ Exam Tip (for 14 Marks):

1. Start with the meaning of “business or profession.”
2. Explain Section 28 clauses (i to v) with examples.
3. Add 5 key case laws:
   • CIT v. Piara Singh (1980)
   • Gillanders Arbuthnot (1964)
   • Sahney Steel (1997)
   • G. Venkataswami Naidu (1959)
   • Badridas Daga (1958)
4. Conclude with the objective — to tax true business profits.