Section 28 of Income Tax Act-Income Chargeable Under PGBP

Section 28 of the Income Tax Act of 1961 is concerned with the taxation of income that is derived from business or professional activities. This section is important to understand the PGBP full form in income tax, which stands for “Profits and Gains of Business or Profession.”

It outlines the various types of income that are chargeable under this provision, thereby ensuring proper classification and taxation.

-Under Section 28, income from PGBP is inclusive of the following:

-Profits earned from the sale of goods or services: Revenue that is generated through professions such as trading, manufacturing or service provision.

-Remuneration offered to partners in a partnership firm: This includes salaries, commissions or bonuses received by partners, which also fall under the tax ambit under this section.

-Interest earned on capital: Interest that has been derived from investments or capital used in business operations falls within the scope of this provision.

-Compensation or termination benefits: Amounts received as compensation for ending business or professional engagements are deemed taxable.

-Insurance claims: Proceeds received for stock-related loss or profit are included for taxation purposes.

To fully understand income from PGBP, clarification of the terms “business” and “profession” are crucial. Section 2(13) of the Income Tax Act classifies “business” as any trade, commerce or manufacturing activity. Similarly, Section 2(36) describes “profession” as activities that require intellectual or specialised skills.

In addition to the above, Section 28 identifies certain incidental receipts as taxable, such as insurance recoveries and compensations. The PGBP format established under this provision ensures consistency in calculating taxable income, thereby ensuring accurate income assessments.

In essence, this section highlights the importance of disclosing all earnings that are associated with business or professional activities in the spirit of transparency and compliance within the Indian taxation framework.

The provisions outlined under Section 28 of the Income Tax Act play a prominent role in ensuring accurate categorisation and taxation of income derived from business or professional activities. The objective of this tax policy is to bring all forms of revenue that have been generated under the scope of profit and gains of business or profession, thereby highlighting transparency and compliance in the taxation process.

The key objective of this section is to define the taxable income base for business and profession income tax. It ensures that all earnings whether they are direct or incidental, and whether they are generated from business operations or professional engagements are subject to taxation. This is inclusive of profits from the sale of goods or services, salary payments to partners in a firm and compensation for the termination of business or professional activities.

Moreover, Section 28 is closely associated with other PGBP sections to offer a structured approach to calculating taxable income. By classifying income under this provision, the Act ensures transparency with regard to which revenues should be taxed and facilitates a consistent assessment process.

In other words, Section 28 is designed such that it ensures compliance with tax obligations while also clearly understanding what these obligations entail. With the standardisation of the rules for profit and gains of business or profession, supports a fair and equitable taxation system across diverse professional and business entities, fostering accountability in the Indian tax system.

Understanding income from business and profession under Section 28 of the Income Tax Act needs diving into two key definitions provided under the act—Section 2(13) and Section 2(36). These sections provide clarity on the terms “business” and “profession,” creating the foundation for understanding taxable income under Section 28.

According to Section 2(13), the term “business” consists of any trade, commerce, manufacturing, or associated activities that are carried out for the purpose of profit. This broad definition covers activities ranging from large-scale trading enterprises to small manufacturing setups. It is also inclusive of ancillary activities that are incidental to these operations.

On the other hand, Section 2(36) defines a “profession” as any vocation that needs specific skills or intellectual expertise. For instance, this would include professions such as doctors, lawyers, architects, and accountants where income is obtained through the application of specialised knowledge.

Section 28 combines these definitions into the broader framework of PGBP sections, which clarify that each income stream derived from these varied activities is subject to taxation. This is inclusive of direct revenue from trade or services and incidental earnings such as compensation or insurance claims that are associated with professional or business pursuits.

By specifying these meanings, the Act makes sure that taxpayers precisely classify and report their income from business and profession, ensuring compliance and clarity with taxation laws.

Under Section 28 of the Income Tax Act, of 1961, the comprehensive framework for taxing various forms of income from businesses and professional activities has been defined. This provision promises a consistent PGBP format, ensuring that all the relevant streams of incomes under the purview of “Profits and Gains of Business or Profession” are included under its ambit. Below is the list of key income types that are covered under this provision:

-Profits from Business or Profession:

Any income that is earned from the previous year while conducting a business or profession is taxable under Section 28 of the Income Tax Act. This is inclusive of the profits that are derived from the sale of goods or services, professional fees, as well as freelance work.

To illustrate with an example, if an architect is earning fees for designing a building or a trader is profiting from selling merchandise, the compensation earned from these professions would fall under income from business and profession.

-Salary, Commission, Bonus, etc.:

Section 28 includes income that is earned in connection with a business or a profession including salaries, commissions and bonuses. This is also applicable to remuneration that is earned by partners in a partnership firm, such as salaries or commissions paid for their contributions to the firm’s operations.

-Compensation Payments:

• Under Section 28 of the Income Tax Act, some compensations also are taxable. These include:

• Payments that are made at the time of contract or employment termination.

• Compensations earned for modifying or ceasing agency agreements. This also applies to those that are concerned with managing Indian companies.

The aforementioned payments ensure that all gains that are associated with business or other vocational activities, even indirectly, are taxed appropriately.

-Income from Specific Activities:

Revenue that is generated from certain activities such as import-export businesses falls under the purview of taxable income. Income that is earned by partners from their firms (for example interest on capital, bonuses or salaries) is also covered. This ensures that every revenue source that is tied to vocational or business activities is accounted for in the PGBP sections.

-Receipts Under Agreements:

• Any payment that is received under agreements to:

• Refrain from engaging in competitive business activities.

• Not transfer or disclose intellectual property (IP) such as patents, copyrights or trademarks.

• The above-mentioned payments are considered to be taxable business incomes to prevent loopholes in taxation related to trade secrets or competition.

-Fair Market Value of Inventory as Capital Assets:

When inventory transitions into capital assets, its fair market value at the time of conversion is taxable as business and profession income tax. For example, if raw materials are converted into equipment for long-term use, the valuation is treated as taxable income.

-Keyman Insurance Policy Receipts:

Any amount that an employer receives under the Keyman Insurance policy is taxable. This also comprises sums that are allocated as bonuses. This ensures all financial benefits arising from such policies are taxed under business income.

-Export Incentives:

• Incentives like:

• Profits earned from the sale of import licenses

• Cash assistance under government schemes

• Duty drawbacks on excise or customs

Are also taxable under Section 28 of the Income Tax Act, of 1961 to ensure equitable treatment of taxes for all business-related earnings.

The following examples illustrate the taxation of income from business and profession under the PGBP sections and will further help understand the applicability of Section 28 of the ITA:

-Example 1

Consider that Ms. Arvi owns a bakery selling cakes and pastries to customers. In this case:

-Revenue from Sales: Ms Arvi’s primary source of income is the revenue that is generated from the sale of her baked items. This income would be classified as “profits from business” and would be taxed under Section 28 of the ITA as income from business and profession.

-Compensation for Supplier Termination: In the event that Ms. Arvi receives compensation for terminating a long-term contract with her flour supplier, then this compensation is considered a part of her business profit and is therefore taxable u/s 28 of the ITA.

-Example 2

DEF Solutions is an IT consultancy firm owned by Ms. Vibha. The firm offers software solutions to various clients.

-Consulting Fees: The income that is generated from offering consultation services is considered as “profits from business or profession” and is therefore taxable under Section 28 as income from business and profession.

-Keyman Insurance Policy: DEF Solutions has invested in a keyman insurance policy for their Chief Technical Officer (CTO). The premiums payable towards this policy are considered business expenses and are deductible under the PGBP sections. However, any payout that is received by DEF Solutions in the event of the CTO’s untimely demise or disability is treated as taxable income under Section 28.

The aforementioned examples reveal how Section 28 ensures comprehensive taxation for several business-related income streams within the framework of PGBP sections, fostering transparency and fairness in the taxation policy.

Compliance with section 28 of the ITA is an important element of adhering to regulations concerning business and profession income tax. This section needs individuals and entities that are engaged in business or professional activities to maintain accurate and up-to-date records of their financial dealings. Not only does proper record-keeping ensure compliance but also makes the process of calculating taxable profits under the PGBP format simple.

Accurate records are important to capture all income sources, expenses and deductions. With these records, taxpayers can determine what their actual taxable income is, and therefore, only claim eligible deductions. So, businesses, for example, are expected to document all sales, services rendered, expenses incurred and payments received to ensure efficient compliance with Section 28.

At the time of audits and assessments, tax authorities may request detailed records. If the taxpayer fails to present accurate documentation, they will incur penalties, disallowance of deductions or other legal consequences. Therefore, maintaining comprehensive records such as receipts, invoices, contracts and expense reports, is exceedingly important for showcasing compliance with the rules for business and profession income tax.

In addition to this, maintaining proper records has benefits beyond taxation. It offers a clear picture of the financial standing while helping businesses in decision-making and enhancing operational efficiency. For professionals, it ensures transparency and helps prevent disputes over income or expenses.

Following the PGBP format also involves regular updates to financial systems and employing tools such as accounting software to track transactions. In addition to ensuring compliance this also positions businesses and professionals in a way where they can manage their finances proactively and efficiently.

Section 28 of the ITA, which is concerned with business and profession income tax, interacts closely with other sections to offer a holistic framework for taxing profits. For instance, although Section 28 outlines the scope of taxable income under the PGBP format, Section 29 reveals the methods for the computation of these profits. Together, they ensure consistency in calculating income.

Similarly, deductions that are permissible under Sections 30 to 37, such as those for rent, repairs or depreciation, are essential in reducing taxable profits under Section 28. Sections such as 44AA and 44AB, have made it mandatory for maintaining accounting and auditing books to support Section 28 by ensuring transparency and compliance.

Section 56, which covers “Income from Other Sources,” is in contrast with Section 28 as it is applicable for income that is not concerned with business or profession. This interrelation avoids overlaps and ensures clear categorisation of income, fostering equitable taxation.

• Section 28 ensures a fair taxation policy by covering various sources of income, including compensation, insurance payouts and export incentives.

• The provision applies equally to individuals, partnerships and corporations that are engaged in business or professional endeavours.

• Maintaining proper records under Section 28 can streamline audits and prevent penalties highlighting the importance of detailed documentation for all financial transactions.

• Income derived from non-compete agreements and intellectual property licensing also falls under its umbrella, revealing the broad scope of this provision.

• Understanding how Section 28 interacts with associated provisions such as Sections 29 and 30-37 can optimise tax planning and compliance strategies.

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