Section 28 of the Income Tax Act is an important provision that deals with the taxability of income from the profits and gains of a business or profession. This provision lays down the rules for calculating income under the head of ‘profits and gains of business or profession’ and provides guidance on what can be included in or excluded from such income.
The provision applies to all taxpayers who have income from a business or profession, whether it is a sole proprietorship, partnership, or company. The income from a business or profession is calculated after deducting all expenses that are incurred wholly and exclusively for the purpose of carrying on the business or profession.
Section 28 provides an inclusive definition of what constitutes income from a business or profession. It includes:
- Profits and gains of any business or profession that is carried on by the taxpayer during the previous year.
- Any compensation or other payment that is due to the taxpayer from the business or profession.
- Any profits and gains that arise from the transfer of a capital asset used for the purpose of the business or profession.
- Any interest, salary, bonus, commission, or remuneration earned by a partner of a firm from the firm.
- Any sum received by the taxpayer in connection with the termination of any agreement relating to the business or profession.
- Any sum received under a keyman insurance policy, unless it is exempt from tax.
- Any amount received by the taxpayer in the course of carrying on a business or profession that is not specifically covered under any other provision of the Income Tax Act.
However, there are certain items that are specifically excluded from the definition of income under Section 28. For example, any capital gains arising from the sale of a capital asset that is not used for the purpose of the business or profession are not included in the income from the business or profession.
Similarly, any income from agricultural activities is not included in the income from business or profession and is instead taxed under a separate head of income.
One of the key aspects of this provision is that it allows for the deduction of all expenses that are incurred wholly and exclusively for the purpose of carrying on a business or profession. This means that if an expense is incurred for any other purpose, it cannot be claimed as a deduction against the income from a business or profession.
Some examples of expenses that may be allowed as deductions under Section 28 include rent, salaries, wages, advertising expenses, repairs and maintenance, and interest on business loans. It is important to note that certain expenses may be subject to specific restrictions or conditions, such as the deduction of depreciation on assets used for business purposes.
In addition to the above, Section 28 also includes specific provisions related to the taxation of partnerships and limited liability partnerships. For example, the provision allows for the taxation of a partner’s share of the profits and gains of the partnership, as well as any interest, salary, bonus, commission, or remuneration earned by a partner from the partnership.
Another important aspect of Section 28 is that it allows for the taxation of income earned by a taxpayer from a profession. This includes income earned by doctors, lawyers, accountants, and other professionals who are engaged in a profession. Such income is taxed under the head of ‘profits and gains of the profession’, which is treated in the same manner as income from the business.
It is also worth noting that the provisions of Section 28 are subject to other provisions of the Income Tax Act, such as those related to deductions, exemptions, and tax rates. Taxpayers are therefore advised to consult a qualified tax professional to ensure that they are correctly interpreting and complying with the provisions of the law.
In conclusion
Section 28 of the Income Tax Act is an important provision that lays down the rules for calculating income from the profits and gains of a business or profession. It allows for the deduction of expenses incurred wholly and exclusively for the purpose of carrying on a business or profession and also includes specific provisions related to partnerships and limited liability partnerships. Taxpayers should be aware of the provisions of Section 28 while filing their tax returns to ensure that they are complying with the relevant provisions of the law.
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Frequently Asked Questions (FAQs)
Q: What is the meaning of ‘profits and gains of business or profession’ under Section 28 of the Income Tax Act?
A: ‘Profits and gains of business or profession’ refers to the income earned by a taxpayer from their business or profession, after deducting all expenses that are incurred wholly and exclusively for the purpose of carrying on the business or profession.
Q: What are the expenses that can be claimed as a deduction under Section 28?
A: Expenses that are incurred wholly and exclusively for the purpose of carrying on a business or profession can be claimed as a deduction under Section 28. Some examples of such expenses include rent, salaries, wages, advertising expenses, repairs and maintenance, and interest on business loans.
Q: Are there any specific restrictions or conditions on the deduction of certain expenses under Section 28?
A: Yes, certain expenses may be subject to specific restrictions or conditions, such as the deduction of depreciation on assets used for business purposes. Taxpayers are advised to consult a qualified tax professional to ensure that they are correctly interpreting and complying with the provisions of the law.
Q: What is the tax rate on income from profits and gains of business or profession under Section 28?
A: The tax rate on income from profits and gains of business or profession under Section 28 is the same as the tax rate on income from other sources, as per the prevailing income tax slabs.
Q: Are there any specific provisions related to the taxation of partnerships and limited liability partnerships under Section 28?
A: Yes, Section 28 includes specific provisions related to the taxation of partnerships and limited liability partnerships. For example, the provision allows for the taxation of a partner’s share of the profits and gains of the partnership, as well as any interest, salary, bonus, commission, or remuneration earned by a partner from the partnership.
Q: Is income from agricultural activities included in the income from profits and gains of a business or profession under Section 28?
A: No, income from agricultural activities is not included in the income from profits and gains of business or profession under Section 28 and is instead taxed under a separate head of income.
