While computing income under the head ‘Profits and Gains of Business or Profession’ the following important guiding points should be kept in mind. A good part of Indian Income-tax Act is based upon court judgements and these principles were the basis of so many court pronouncements which are always kept in mind while computing income under this head. So some of the principles based on the leading cases are as follows :
(i) Business carried on by the assessee. Under section 28, the person who carried on the business is always changed. It is immaterial whether the assessee is doing the business or work himself or through some of his employees, agent, manager etc. The important point to be kept in mind is that the business should have been carried on by the assessee at any time during the previous year and not necessarily throughout the year or even in the assessment year. The assessee should have the right to carry on the business. In case a person is deprived of the right to carry on-’ the business, the same person cannot be chargeable to tax under this head since he cannot be regarded as ‘carrying on’ the business.’ Guardians for minors or receivers or trustees may be assessed under this section in respect of profit of the business carried on by them.
(ii) Tax is levied on aggregated income from all business-professions carri&I on by the assessee during the previous year. The net result of each business or profession carried on by the assessee is calculated separately but when tax is to be imposed, the result of all the businesses is aggregated and then whatever income comes, tax is imposed on that income. It means the loss from one business is set off against the profit of another business in this aggregation.
(iii) Speculation business. The speculation business of the assessee is kept separate. If there is profit—it will be taxed along with other business income. But if there is speculation loss—it can be set off against profits of speculation business only and not against profits of any other business.
(iv) Profit on sale of assets on the winding up of a business. The profit arising from some of the assets after winding up a business is not taxable but the profit on the sate of stock-in-trade is taxable. If the entire business is sold in one lot for a single unapportioned consideration and the assets include stock-in-trade, the profit in the sale of stock-in-trade is not separable; in such case the entire profit on sale of the business will not be taxable under this head.
(v) Tax on Real owner. It is not only the legal ownership but also thern beneficial ownership that has to be considered under section 28. The income is taxable in the hands of a person to whom it actually accrues. No tax can be levied on benamidar in whose name the business transactions are effected and who is not really entitled to the profits. –
(vi) Tax is levied only on the real earned profits of the previous year. When there is expectation of profit, it cannot be taxed in anticipation. So the profit is taxed only when it has actually arisen. Further the profit must be really a gain to the person carrying on the business. Income or gain to be taxed must relate to the previous year. Each year is a self contained accounting period.
(vii) Business/Profession may be legal or illegal. The income from legal business or profession as well as income from illegal business/profession is taxable under this head. However, income -from illegal business/profession, assessee may have to face legal action, etc. under other Acts also.
(viii) Business/Profession income to be computed for each previous year. Income or gain to be taxed must relate to the previous year in question.
(ix) Negative income from Business/Profession. - Negative income signifies loss from Business or Profession and can be set-off against other incomes as per prescribed rules.