Profits and Gains of Business or Profession (PGBP) is the third head of income under S.14. It covers profits from any trade, commerce, manufacture, adventure in the nature of trade, or any profession or vocation. The computation follows a statutory framework: start with gross receipts, then deduct only those expenses expressly allowed or not expressly disallowed by S.30-44.
Legal Framework
| Provision | Content |
|---|---|
| S.28 | Charging section: income chargeable under PGBP |
| S.29 | Income computed in accordance with S.30-43D |
| S.30 | Rent, rates, taxes, repairs (for business premises) |
| S.31 | Repairs and insurance of machinery/plant/furniture |
| S.32 | Depreciation |
| S.36 | Other deductions (insurance, interest on borrowed capital, bad debts, etc.) |
| S.37(1) | General deduction: expenditure wholly and exclusively for business |
| S.40 | Amounts not deductible (payments without TDS, etc.) |
| S.40A | Expenses disallowed (cash payments > Rs.10,000, etc.) |
| S.43B | Certain deductions only on actual payment (taxes, employer PF/ESI) |
| S.44AD-44AE | Presumptive taxation schemes |
Charging Section (S.28)
Income chargeable under PGBP includes:
| Item | Sub-clause |
|---|---|
| Profits and gains from any business or profession | S.28(i) |
| Compensation for loss of agency/management | S.28(ii) |
| Income from trade/professional associations from specific services | S.28(iii) |
| Export incentives (duty drawback, MEIS, etc.) | S.28(iiia)-(iiie) |
| Value of benefits/perquisites arising from business | S.28(iv) |
| Interest, salary, bonus from firm to partner (in firm's hands) | S.28(v) |
| Keyman insurance proceeds received by business | S.28(vi) |
Why: The charging section uses "profits and gains" not "income," indicating that net profit (revenue minus expenses) is the taxable quantum, not gross receipts.
Key Deductions Allowed
| Section | Deduction | Condition |
|---|---|---|
| S.30 | Rent, rates, taxes for business premises | Premises used for business |
| S.31 | Repairs and insurance of plant/machinery | Current repairs only, not capital |
| S.32 | Depreciation (WDV method) | Asset owned and used for business |
| S.36(1)(i) | Insurance premium for stock/stores | Against risk of damage/destruction |
| S.36(1)(ii) | Health insurance premium for employees | Paid by employer |
| S.36(1)(iii) | Interest on borrowed capital | Capital used for business purposes |
| S.36(1)(vii) | Bad debts written off | Previously offered as income |
| S.37(1) | Any other expenditure | Wholly and exclusively for business; not capital; not personal |
Expenses Disallowed
| Section | Disallowance |
|---|---|
| S.37(1) proviso | Expenditure for purpose of offence/penalty prohibited by law |
| S.40(a)(i)-(ia) | Payments to NR/resident without TDS deduction |
| S.40(a)(ii) | Income tax, wealth tax paid |
| S.40A(2) | Excessive/unreasonable payments to related persons |
| S.40A(3) | Cash payments exceeding Rs.10,000 to single person in a day |
| S.43B | Statutory dues (PF, ESI, tax) not paid before return filing date |
Depreciation (S.32)
| Element | Rule |
|---|---|
| Method | Written Down Value (WDV) for blocks of assets |
| Condition | Asset must be owned by assessee AND used for business |
| Additional depreciation | 20% for new plant/machinery in manufacturing (S.32(1)(iia)) |
| Block of assets | Grouped by rates (15%, 40%, etc.) |
| Half-rate rule | If asset used for less than 180 days in year of purchase, 50% of normal rate |
| Unabsorbed depreciation | Carry forward indefinitely; set off against any head |
Recall Check
- What is the general deduction provision for business expenses (section and conditions)?
- What are the conditions for claiming depreciation under S.32?
- Why are cash payments above Rs.10,000 disallowed under S.40A(3)?
Key Cases
CIT v. Calcutta Co Ltd (1959) CIT-v-Calcutta-Co-Ltd-1959 Issue: Whether a single transaction of purchase and sale of land constitutes "business" for PGBP purposes. Rule: "Adventure in the nature of trade" falls within the meaning of "business" under S.2(13); intention at the time of purchase is determinative. Held: Even a single transaction can be an adventure in the nature of trade if the intention at the time of purchase was to resell at profit. The profit is taxable under PGBP, not as capital gains.
Badridas Daga v. CIT (1958) Badridas-Daga-v-CIT-1958 Issue: Whether expenditure incurred to recover a debt due to a business (legal expenses) is deductible under S.37(1). Rule: S.37(1): any expenditure laid out wholly and exclusively for the purpose of business is deductible, provided it is not capital expenditure and not personal. Held: Legal expenses incurred to recover business debts are deductible as they are laid out wholly and exclusively for business purposes. The nexus between expenditure and business is the test.
Distinctions
| Feature | Revenue Expenditure | Capital Expenditure |
|---|---|---|
| Nature | Recurring, consumed in the year | One-time, creates enduring benefit |
| Deductibility | Deductible u/s 30-37 | Not deductible (only depreciation u/s 32) |
| Effect | Maintains existing profit-earning apparatus | Creates/enhances profit-earning apparatus |
| Examples | Repairs, salaries, rent, raw materials | Purchase of machinery, factory building, goodwill |
| Test | Does not create a new asset or advantage of enduring nature | Brings into existence an asset or advantage of lasting benefit |
Flashcards
Q: What is the charging section for PGBP? A: Section 28 of the Income Tax Act, 1961.
Q: What is the general deduction section for business expenses? A: Section 37(1): any expenditure (not capital, not personal) laid out wholly and exclusively for the purpose of business.
Q: What method is used for computing depreciation under S.32? A: Written Down Value (WDV) method, applied to blocks of assets.
Q: What is the cash payment disallowance limit under S.40A(3)? A: Payments exceeding Rs.10,000 to a single person in a single day are disallowed (must be by account payee cheque/draft/ECS).
Q: Can a single transaction be taxed as business income? A: Yes. An "adventure in the nature of trade" (single transaction with profit motive) is taxable under PGBP (CIT v. Calcutta Co Ltd).
Q: What happens to unabsorbed depreciation? A: It is carried forward indefinitely (no time limit) and can be set off against income under any head (S.32(2)).
Exam Scenario
M/s Zenith Ltd purchases a piece of land for Rs.1 crore with the documented intention of developing and selling plots. After 8 months, they sell the entire land undeveloped for Rs.1.5 crore. The company claims this is a capital gain (LTCG). The AO assesses it as business income. Advise.
Approach: Apply CIT v. Calcutta Co Ltd. The intention at time of purchase was to develop and sell (profit motive). Even though sold undeveloped and within a short period, this is an "adventure in the nature of trade" constituting business. The profit of Rs.50 lakh is taxable under S.28 as PGBP, not as capital gains under S.45. The nature of transaction (frequency, intention, surrounding circumstances) determines the head of income.