Profits and Gains of Business or Profession (PGBP) is one of the most important heads of income under the Income Tax Act, 1961. It governs taxation of earnings arising from business activities, professional services, speculative transactions, and various incidental incomes. This head is crucial because it often involves complex computations, extensive deductions, and detailed compliance obligations. For law students, PGBP forms the backbone of taxation law, particularly due to its interpretative nature and vast judicial development.
PGBP covers income earned through systematic commercial activities, occupations involving specialized skills, and even certain casual business transactions. The Supreme Court in CIT v. Lahore Electric Supply Co. explained that “business” includes not only trade and commerce but also any activity carried out with an intention to earn profit. Similarly, in Barendra Prasad Ray v. ITO, the Court held that “profession” implies intellectual or manual skill based on training or qualification, such as law, medicine, accountancy, or consultancy.
Tip: “Remember: PGBP covers all activities done with profit motive, whether continuous or even occasional.”
PGBP is governed mainly by Sections 28 to 44DB of the Income Tax Act, setting out the scope of taxable income, allowed deductions, disallowed expenses, and specific provisions for specialized businesses.
Scope of Income Taxable Under PGBP (Section 28)
Section 28 specifies incomes chargeable under this head. These include:
Section 28(i): Profits and Gains of Any Business or Profession
The most common category, it includes income from all commercial or professional activities. For example, a lawyer’s fees, a doctor’s consultation charges, or a shopkeeper’s daily sales.
In CIT v. Calcutta National Bank Ltd., the Supreme Court held that even incidental receipts—like recovery from loans—will be treated as business income if they arise from business operations.
Compensation Due to Termination of Business Contracts
Under Section 28(ii), compensation received for termination or modification of a business contract is also taxable. The ruling in CIT v. Best & Co. (P.) Ltd. is significant, where compensation for loss of agency was treated as taxable business income.
Income from Speculative Business
Speculative transactions involve contracts for purchase or sale of commodities or stocks settled otherwise than by actual delivery. Such income is also taxable under PGBP, subject to special rules. In Dilip Kumar Roy v. CIT, the Court emphasized strict interpretation of speculative provisions.
Export Incentives, Duty Drawbacks, and Government Subsidies
Under Section 28(iiia–iiie), various export incentives, duty drawbacks, and cash compensatory support received by businesses are treated as taxable.
Tip: “Incentives and compensations tied to business operations almost always fall under PGBP.”
Business vs. Profession: Judicial Interpretation
Business
“Business” under Section 2(13) includes trade, commerce, manufacture, or any adventure in the nature of trade. The Court in Sole Trustee, Loka Shikshana Trust v. CIT held that regularity is not essential; even a single adventure with profit motive qualifies.
Profession
“Profession” under Section 2(36) involves intellectual or manual skill. The leading case Barendra Prasad Ray v. ITO clarified that professions require specialized educational qualifications or expertise.
Tip: “Business = commercial motive; Profession = skill-based expertise.”
Allowable Deductions Under Sections 30–37
Deductions play a crucial role in computing taxable income under PGBP. These deductions ensure that only net income—after legitimate business expenses—is taxed.
Section 30: Rent, Repairs, and Insurance of Business Premises
If a business operates from rented property, rent and repair expenses are deductible. Insurance premiums for stock-in-trade are also allowed.
Section 31: Repairs and Insurance of Machinery
Both current repairs and machinery insurance are deductible. In CIT v. Saravana Spinning Mills, the Supreme Court differentiated between “current repairs” (deductible) and “enduring improvements” (capital expenditure).
Section 32: Depreciation
One of the most significant deductions, depreciation is allowed on:
- Tangible assets such as buildings, machinery, vehicles
- Intangible assets such as patents, copyrights, trademarks
The classic ruling CIT v. Alps Theatre emphasized that depreciation is allowable only when the assessee owns the asset and uses it for business.
Section 35: Scientific Research
Expenditure on in-house R&D related to the business is deductible. The law promotes innovation by allowing weighted deductions in certain cases.
Section 36: Specific Deductions
These include:
- Premium for employer’s contribution to PF
- Insurance against risk of damage to stocks
- Bad debts written off (recognized in T.R.F. Ltd. v. CIT)
- Banking business deductions
Section 37: General Business Expenditure
This is the “residual deduction clause” allowing all expenses not covered by other sections, provided:
- They are not capital in nature
- They are not personal expenses
- They are incurred wholly and exclusively for business
The Supreme Court in McDowell & Co. Ltd. v. CTO held that fraudulent or illegal expenses cannot be claimed.
Tip: “‘Wholly and exclusively’ is the golden test for PGBP deductions.”
Disallowed Expenses (Section 40 & 40A)
Not all business expenses are deductible. Certain expenses are expressly disallowed to prevent tax evasion.
Payments to Non-Residents Without TDS
Failure to deduct TDS results in disallowance of the entire expense under Section 40(a)(i).
Cash Expenditure Above ₹10,000
Section 40A(3) disallows excessive cash payments, encouraging transparency.
Personal Expenses and Capital Expenditure
These are naturally excluded from PGBP calculations.
Maintenance of Books of Accounts
Certain professionals (lawyers, doctors, architects, accountants) and businesses must maintain prescribed books under Section 44AA.
Non-compliance attracts penalties under Section 271A.
Presumptive Taxation Under PGBP
Presumptive taxation simplifies compliance for small businesses and professionals.
Section 44AD
For businesses with turnover ≤ ₹2 crore, income is presumed at 8%/6%.
Section 44ADA
For certain professionals earning ≤ ₹50 lakh annually, income is presumed at 50%.
Section 44AE
For transporters owning up to 10 vehicles.
Tip: “Presumptive schemes reduce record-keeping and simplify taxation.”
Important Case Laws Shaping PGBP
- McDowell & Co. Ltd. v. CTO – Tax planning permissible; tax evasion not.
- CIT v. T.R.F. Ltd. – Bad debts need only be written off, not proved.
- Barendra Prasad Ray v. ITO – Definition of profession.
- CIT v. Best & Co. – Termination compensation is business income.
- Saravana Spinning Mills Case – Distinction between repairs and capital expenditure.
Conclusion
Profits and Gains of Business or Profession (PGBP) forms a complex yet essential part of the Income Tax Act, 1961. It not only governs how business and professional income is taxed but also outlines an extensive set of deductions and compliance rules. With constant judicial interpretation and legislative amendments, PGBP continues to evolve, making it a central topic for law students and tax practitioners.
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