Guide to .. Tax Management ,Tax Planning and Tax Saving

 

 

Incomes Chargeable to Income-Tax under "Profits and Gains of Business or Profession" [Section 28]

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.

 

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)] 

 

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