According to Income Tax Law, Income from Business or Profession is chargeable to tax in assessment year only when such business or profession is carried on by the assessee in the previous year. Income from business and profession majorly includes the profits or gains earned by a business or professional in a financial year. All these income shall be taxed under the head Profits & Gains of Business or Profession.
What is Business?
Section 2(13) of the IT Act, 1961 defines ‘Business’ according to which – ” business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;
In general, Business is an occupation either of manufacturing, purchase, sale, trade, commerce or any other kind of economic activity carried on person with the intention earn profits.
Business activities may include:
- Running a hotel
- Owning a Garments shop
- Travel Agency and many more
What is Profession?
Section 2(36) of the IT Act, 1961 defines ‘Profession’ according to which – ” profession” includes vocation;
Vocation refers refers to the natural abilities and skills of a person to do certain work such as Signing, Dancing as they do not require particular qualification or training and thus these are pure natural abilities.
In general, Profession is a disciplined group of individuals who adhere to ethical standards. This group positions itself as possessing special knowledge and skills in a widely recognized body of learning derived from research, education and training at a high level, and is recognized by the public as such.
Professional activities may include:
- Chartered Accountants
- Lawyers and many more
Basis of Charge
Section 28 of the IT Act, defines in detail regarding profits and gains of business or profession.Major Income taxable under the head “Profits & Gains of Business or Profession” are discussed as under:
1. Profits & Gains
All the profits and gains generated by the assessee from any business or profession in the financial year are chargeable under this head.
2. Compensation received by agent or manager
This head includes any compensation or payment due to or received by an agent or any person managing either the whole or substantial affairs on behalf of a person upon his termination of management work or modification of terms & conditions relating thereto.
3. Income earned by trade or association
Any income earned by rendering certain specified services for its members by trade or professional or other similar association.
4. Income from Foreign Trade
Any income generated by undertaking foreign trade in chargeable under this head. It includes Profits earned by sale of import license or by cash assistance or by sale of duty entitlement passbook etc.
5. Receipts of perquisites from business or profession
Next, Income from business & profession also includes the value of all the benefits and perquisites received by any person arising from the business or profession. It is immaterial that whether such perquisites or benefits are convertible to money or not.
6. Remuneration or commission to partner
If a partner receives any payment in the form of interest, bonus, remuneration or commission from the firm in which he is a partner then such income shall be taxed under the head profit & gain of business or profession.
Provided that such income is allowed as deduction while calculating the total taxable income of the firm.
7. Income received or receivable for agreement
Any income received or is receivable against certain agreement under following conditions then it shall be taxed under this head only.
- Agreement for not undertaking any activity in relation to business
- Agreement for not disclosing any information or technique
8. Amount Received under Key man Insurance Policy
Any amount received under the keyman insurance policy along with any bonus received on such policy in chargeable under this head.
9. Income received on Speculative Transactions
Method of Accounting for Income under Business & Profession
According to Section 145 of the Income Tax Act, 1961, an assesses shall compute his total income under the head Profits or Gains of Business & Profession by following that method of accounting, which he follows regularly in his business or profession.
There are majorly two methods of accounting as follows –
- Cash Basis – It states that all the incomes and expenditures shall be recorded in the book of accounts when they are received whether the income or expenditure has been accrued or not.
- Mercantile Basis – It states that all the income and expenditures shall be recorded in the book of accounts when such income and expenditures have accrued irrespective of the fact that whether such income or expenditure has been received or not.
Conclusively, if an assesses follows the cash basis method of recording business or profession transactions then he shall observe this method only while computing the income under business & Profession or vice-versa.
How to compute Taxable Income from Business or Profession?
As per Income Tax Act, an assesses has to first add all the Income earned related to business transactions during a financial year and then he shall deduct all the expenses related to the business to get the total net profits.
Total Net Profit = Income – Expenses
Total Net profit is the total income taxable under the head Profits & Gains of Business or Profession.
Total taxable income can easily be calculated through profit & loss account maintained for the business or profession.
Which ITR Form is applicable on Income from Business & Profession?
According to Income Tax Act, any individual, HUF and Partnership Firms (other than LLPs) who are resident of India and have income from business or profession& has opted for the Presumptive taxation scheme under Section 44AD, 44ADA and section 44AE of the Income Tax Act, 1961. In this case assesses is required to file Income Tax Return Form 4 (also known as Sugam).
However, in any other cases he has to file ITR Form 3.