Under sections 28 to 44 of the Income-tax Act 1961, Profits & Gains of business or profession form part of total income of an assessee. This head is the most important source of tax collection for the Government. The computation of income under this head is a very complex and difficult method but before going into calculation of income under this head, it is necessary to understand the meaning of terms used in this head.
Business [Section 2(13)]
Business simply means any economic activity carried on for earning profits. Section 2(13) has defined the term as “any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce and manufacture”. In the words of Justice SR. Dass, “The word ‘business’ connotes some real, substantive and systematic or organised course, activity or conduct with a set purpose”.
In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary. As already defined under section 2(13), the income derived from any adventure in the nature of trade is also treated as business income. So a brief explanation of this term is necessary
Adventure in the Nature of Trade
Profits arising from an isolated transaction are taxable as business profits, if it is treated as an adventure in the nature of trade, commerce or manufacture. To decide whether a particular case is an adventure in the nature of trade or not depends upon the fact and circumstances of each case. The Supreme Court has summed us following principles to decide such case .
(i) Was the purchaser a trader and was the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ?
(ii) What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade and it is purchased in very large quantity, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment?
(iii) Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily saleable?
(iv) What were the incidents associated with the purchase and resale? Were these similar to the operations usually associated with trade or business?
(v) Are the transactions of purchase and sale repeated?
(vi) In regard to the purchaser of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? If the answer to this question is ‘yes’ then it will not be a transaction which will make it an adventure in the nature of trade.
(vii) Was the purchase made with the intention to resale it at a profit? The intention of the purchase is very important at the time of purchase. If there is change of intention after some time, that will not make transaction as an adventure in nature of trade.
So, these are the important factors which are borne in mind to decide whether a particular transaction is an adventure in the nature of trade or not.
Onus to Prove. The Supreme Court (38 I.T.R. 242) held that where a transaction is not in the line of the business of the assessee but is an isolated or single instance of a transaction the onus is on the Income-tax Department to prove that the transaction was an adventure in the nature of trade.
Profession [Section 2(36)]
A profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, e.g., lawyer, accountant, engineer, surgeon, author etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 2(36) profession includes vocation.
Vocation simply means a way of living for which one has special fitness. A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. The practice of a religion may also amount to vocation.1 Any gain or receipt arising out of vocation is certainly taxable under this head of income. Writing of articles in the magazines is also a vocation.2
Business or Professional Income [Section 28(i)]
The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year are assessed under this head. The business or profession should be carried on in the previous year and it is not necessary that it should continue throughout the year. The owner of the business is to be charged under this section, whether he may carry business personally or through a manager, agent or servant.
Business outside India and Business in India stand on the same footing for the purposes of this section.
All revenue profits arising from business or profession are chargeable even if they are of a casual and non-recurring nature.
Illegality of the business or profession does not exempt its income from tax.