2.  Under section 28 to 44 of the Income-Tax Act 1961, Profits & Gains of business or profession form part of total income of an assessee. This head is the most important source of tax collection for the Government. The computation of income under this head is a very complex &difficult method but before going into calculation of income under this head, it is necessary to understand the meaning of terms used in this head.

3.  Section 2(13) has defined the term as “any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce & manufacture”. In this connection it is not necessary that there should be a series of transactions in a business & also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary. As already defined under section 2(13), the income derived from any adventure in the nature of trade is also treated as business income.

4.  Profits arising from an isolated transaction are taxable as business profits, if it is treated as an adventure in the nature of trade, commerce or manufacture. To decide whether a particular case is an adventure in the nature of trade or not depends upon the fact & circumstances of each case. The Supreme court has summed us following principles to decide such case(35 I.T.R.609).  was the purchaser a trader & was the purchase of the commodity & its resale allied to his usual trade or business or incidental to it.

5.  What is the nature of the commodity purchased & resold &in what quantity was it purchased & resold. If the commodity purchased is generally the subject matter of trade & it is purchased in very large quantity, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment.  Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased & thereby made it more readily saleable.  What were the incidents associated with the purchase & resale. Were these similar to the operations usually associated with the trade or business.  Are the transactions of purchase & sale repeated.  In regard to the purchaser of the commodity & its subsequent possession by the purchaser, does the element of pride of possession come into the picture. If the answer to this question is ‘yes’ then it will not be a transaction which will make it an adventure in the nature of trade.  Was the purchase made with the intention to resale it at a profit. The intention of the purchase is very important at the time of purchase. If there is change of intention after sometime, that will not make transaction as an adventure in nature of trade.

6.  So these are the important factors which are borne in mind to decide whether a particular transaction is an adventure in the nature of trade or not.  Onus to prove:- The Supreme Court (38 I. T.R.242) held that where a transaction is not in the line of the business of the assessee but is an isolated or single instance of a transaction the onus is on the Income-Tax Department to prove that the transaction was an adventure in the nature of trade.

7.  A profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, e.g.., lawyer, accountant, engineer, surgeon, author etc. so profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 2(36) profession includes vocation.  A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged & he earns his livelihood from such activity. The practice of a religion may also amount to vocation. Writing of articles in the magazines is also a vocation.

8.  The following are the incomes which are chargeable to Income – Tax under the head ‘Profits &Gains of business or Profession’.  Business or Professional income [section 28(i)]  The profits & gains of any business or profession which was carried on by the assessee at any time during the previous year under this head. The business or profession should be carried on in the previous year & it is not necessary that it should continue throughout the year. The owner of the business is to be charged under this section, whether he may carry business personally or through a manager, agent or servant. Business outside India & business in India stand on the same footing for the purpose of this section. Illegality of the business or profession does not exempt its income from tax.

9. Any compensation or other payment due to or receive by the following persons is assessable as business income: Any person, by whatever name called, managing the whole of the affairs of an Indian company, at or in connection with the termination of this management or the modification of the terms & conditions relating thereto. Any person, by whatever name called, managing the whole of the affairs of a company in India or any other company, at or in connection with the termination of the office or the modification of the terms & conditions relating thereto. Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms & conditions thereto. Any person for or in connection with vesting in the government or in any corporation owned or controlled by the government under any law for the time being in force, of the management of any property or business.

10. A trade association is a non – profit voluntary organization of business competitors operating in the same line of business for the promotion of their common economic interest. Income derived by a trade, professional or similar association from specific service performed for its members only is considered to be business income & taxed accordingly. Section 28(iii) further says that income arising from specific purpose is outside the purview of this clause, e.g., entrance fees or members periodical subscription etc. are not taxable. This provision does not apply to social clubs.

11. o Profit on sale of License [section 28(iii)(a)]. Granted under the Imports (control) order 1955 made under the Imports & Exports(control) Act 1947. o Cash assistance [section 28(iii)(b)].(by whatever name called) received or receivable by any other person against exports under any scheme of the government of India. It has been inserted retrospectively from 1-4-67. o Any duty of customs or excise [section 28(iii)(c)].

12. o Repaid or repayable as drawback to any person against exports under the Customs &Central Excise Duties drawbacks Rules 1971. It has been retrospectively from 1-4-72. o Profit on transfer of duty entitlement pass book. It has inserted that any profit on transfer of the Duty Entitlement Pass Book Scheme being Duty Remission Scheme under the export import policy formulated &announced under section 5 of the Foreign Trade Development & Regulation Act. o Profit from duty free Replenishment Scheme. it has inserted with retrospective effect from 1-4- 2001 that any profit from Duty Free Replenishment Scheme being Duty Remission Scheme under the export import policy formulated & announced under section 5 of the Foreign Trade Development & Regulation Act.

13.  The value of any benefit or perquisite, whether convertible into money or not arising from business or the exercise of a profession, is chargeable under the head ‘Profits &Gains of Business or Profession’. As the benefit & perquisites received by an employee fall & are taxed under the head ‘Salaries’, similarly benefits & perquisites arising from business or exercise of profession are taxed under the head ‘Profits & Gains of Business or Profession’.

14.  With effect from assessment year 1993-94 any salary,interest, bonus,commission or remuneration received by a partner of a firm from firm assessed as firm u/s 184 under Income Tax Act 1961,is to be treated as business income in the hands of partner. In case such payments are subjected to restrictions u/s 40(b) the income under this section shall be up to the amount allowed as deduction to firm while calculating business income.

15. any sum whether received or receivable in cash or in kind under an agreement for: (a) Not carrying out any activity in relation to any business; or (b) Not sharing any know- how, patent, copyright, trade mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision of services.

16.  EXCEPTIONS. The following receipts shall not be chargeable to tax as business income under section 28(va): (1) Any sum whether received or receivable in cash or in kind on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business which is chargeable under the head ‘Income from capital gains’ or (2) Any sum received as compensation from the multilateral fund of the Montreal Protocol on substances that deplete the Ozone Layer under the United Nations Environment programme in accordance with the terms of agreement entered into with the Government of India.

17. Explanation no.2 of section 28 says that where speculative transactions carried on by an assessee are of such nature as to constitute a business, such business shall be deemed to be distinct & separate from any other business. Section 43 (5) has explained a speculative transaction as “a transaction in which a contract for the purchase or sale of any commodity, including stocks & shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

18. The income earned from any business –whether legal or illegal- is taxable. Income – tax law does not make any distinction between a legal or illegal business. Thus income earned from smuggling business was held to be taxable income. Expenses incurred to earn illegal income[explanation u/s 37(1)] “for the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose, which is an offence, or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession & no deduction or allowance shall be made in respect of such expenditure.” It means that any expenditure incurred to earn an income from a source which is an offence or is prohibited by law shall not be allowed to be deducted from any income.

19. any sum whether received or receivable, in cash or kind on account of any capital asset(other than land or goodwill or financial instrument) being destroyed, demolished, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction u/s 35AD. Meaning of “ key man Insurance Policy”. Key man insurance policy means a life insurance policy taken by a person on the life of another person who is or was - The employee of the first mentioned person, or - Connected in any manner whatsoever with the business of the first mentioned person.

20. Any sum received or receivable, in cash or in bind, on account of any capital asset(other than land, goodwill or financial instrument) being demolished, destroyed, discarded or transferred shall be chargeable to tax under the head “ Income from business if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD. Certain incomes relating to business but not taxable under the head ‘Profits & Gains of business or profession (1) Income from the business of letting out of house property (section 22). (2) Dividend income on shares held as stock in –trade (section 56(2)(i)]. (3) Any profit/ loss on sale of business assets. (4) Income from the activity of owning & maintaining race horses. (5) Casual income [section 56(2) (ib)].