Section 28 of Income Tax Act (2023 Updated)

Under Section 28 of income tax act, one of the main factors determining whether income is classified as profit and gains from a business or profession is whether the assessee carried on business during the financial year. But, it does not have to be in business throughout the fiscal year or by the end of the fiscal year.

What is Section 28 of the Income Tax Act?

Section 28 of income tax act applies to income that falls under the category of profit or gains from business or profession. The provisions referred to in this section state that all individuals must report income that is not normally recognized as business income but may be treated as business income under income tax law. 

What do you understand by the terms business and profession as used u/s 28 of the Income Tax Act?

The term business [section 2(13)] of the Income Tax Act includes trade, commerce, manufacture, or any venture or concern like trade, commerce, or manufacture.

The term occupation [Section 2(36)] of the Act includes all occupations. Regarding the profession, the definition given in the law is very poor. It does not clearly define which activities constitute a profession and which do not.

What are the charging provisions U/S 28 under the head profits and gains of business or profession?

The following income is chargeable under the heading Profits and gains of business or profession:

• Profits and gains from a business or profession brought in by an assessee at any time during the previous year.

• A reward received or to be received from a person:

1. For the administration of the business of an Indian company or any other company or in connection with the termination of this Agreement or modification of the relevant terms and conditions.
2. To retain an agency in India for any part of its activities relating to another person’s business or relating to the termination of the agency or change of terms in connection therewith.
3. For or in connection with the delegation of control of property or business to any government or government-owned or controlled entity.
4. Compensation received or received by an individual in connection with the termination or modification of the terms of use, whether revenue or capital under any contract relating to the business.

• Income earned by industry, professionals, or similar organizations from specific services rendered to members. This is an exception to the general principal of mutuality that no one can profit from themselves. 

• Surpluses from mutual bodies such as chambers of commerce, etc. by providing certain services to their members are income from the exercise of commercial activities related to those services and are taxable accordingly.

• Proceeds from the sale of import entitlement licenses granted under the Import (Control) Order.

• Cash settlement support at the time of export, refund of customs duties, and central excise tax.

• Profit from the transfer of the compulsory bookkeeping system. It is advantageous to hand over tax exemption replenishment slips.

• Value of benefit or advantage. Whether it is convertible into money or not derived from a business or profession. For example. the value of rent-free accommodation secured by an assessee in exchange for professional services to a company can be assessed by the assessee.

• To the extent permitted by Section 40(b), all interest, salaries, bonuses, commissions, or remuneration payable to or received by Associates of the Company. For example, A company pays interest to partners at a simple rate of 18% per annum. The permissible interest rate is 12% per annum, and no payments over 6% will go into the company’s hands. Excess interest was taxable at the hands of the company and not at the hands of the partners. Interest taxed by shareholders is only 12%.

• Amounts received or to be received under a contract or in cash or in kind:

1. Business and profession-related activities are not permissible unless taxable as capital gains. For example, Non-Competition Clause.

2.  Not sharing your know-how. Patents, copyrights, trademarks, licenses, franchises, etc.

• Amount received under Keyman’s insurance policy. It also includes the amount allocated as a bonus on that policy.

• The fair value of inventories at the date the inventories are convertible or treated as capital assets are determined.

• Amounts derived from the transfer or disposal of investments (other than land, goodwill, or financial instruments) that qualify as deductions under Section 35AD.

Which business income is not taxable under the head ‘Profit and Gains of Business or Profession’?

Following incomes from business or profession is not taxable under the head ‘Profits and gains of business or profession’.

Rental income of a property dealer:

Rents for house property is taxable under the head income from house property. Even if the property constitutes goods owned by the recipient or if the recipient is engaged in the letting of property for rent.

Dividend on Shares for shares dealers:

Dividends on shares are taxable under the head income from other sources. Even if they arise from shares held as trading shares or where the dividend recipient is a shareholder.  Dividends received from Indian companies are not taxable in the hands of shareholders (there are some exceptions to this rule).

Winnings from Lotteries, etc:

Winnings from lotteries, races, etc. are taxable under a heading such as income from other sources (even if they are from normal business activities).

Interest received on rewards or enhanced rewards:

This interest is always taxable in the receivable year (even if it relates to normal business activities) under IFOS. A 50% deduction is allowable. And in practice, only 50% of this interest is taxable under the heading income from other sources.

Profits from the above business activities are not taxable under Section 28, profits and gains from business or profession. Profits and profits from other businesses are taxable under Section 28 unless such profits are exempt under Sections 10 through 13A.

What is section 50AA of income tax act?

A new Section 50AA is introduced by the finance minister in the 2023 Budget for the 2023-2024 fiscal year.

Special provisions for calculating capital gains on market-linked bonds.

Notwithstanding Section 42A or Section 48 of Section 2, if the capital asset is a market-linked debt, the full consideration received or accrued as a result of the transfer or redemption or maturity of such debt shall be: shall be reduced as

• The cost of purchasing dentures; and 
• Expenditures incurred wholly and solely in connection with any such transfer, redemption or maturity shall be treated as capital gains or short-term capital assets upon transfer.

However, no deduction is allowed when calculating taxable income for capital gains on amounts paid under securities transaction tax under the provisions of Chapter VI of the Finance Act.

Market Linked Debentures means any security that has an underlying capital element in the form of a bond and contains the return of another underlying security or index and is regulated by SEBI as Market Linked Debentures.

Frequently Asked Questions (FAQ)

What is business income tax applicable to?

Business income taxes apply to partnerships, corporations, the self-employed, and small businesses.

What is Duty Entitlement Pass Book?

 Duty Entitlement Pass Book or DEPB stands for Export Incentive Program offered by the government to exporters. The aim is to offset the impact of tariffs on imported parts on exported products.

Wrapping Up

That’s all the information you need to know about Section 28 of the Income Tax Act.

 Refer to the above points to find out more about the applicability of section 28, the formal definition of the profession, and the income considered in the points above. 

If you have income that may be taxable under Section 28, it’s important to know all the relevant aspects.

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