Section 28: Profits and Gains of Business and Profession (PGBP)

Section 28: Profits and Gains of Business and Profession (PGBP)

Section 28 of the Income Tax Act, 1961 is an important component of India’s huge pyramid of taxes, which is helpful for business owners, professionals, as well as the salary earners involved in business transactions. The following section 28 provides the legal basis for taxing the ‘Profits and Gains of Business or Profession’ (PGBP), which falls under the five categories of income mentioned under the Act. Here is an outline of what this blog will cover, Section 28 on PGBP, the types of income that fit under the section, the inclusion and exclusion in the law, case laws related to Section 28 and why it is important to you as a taxpayer, business entities, freelancer, professional, and an entrepreneur.

What Is Section 28?

Section 28 refers to the incomes that are assessable under the head ‘Profits and gains of business or profession’. In simple terms, any income that a person earns through carrying on some business or practice of any profession is charged under this head.

It consists of income that results from business, employment, and from self-employment activity such as business and commerce, manufacturing, freelancing, professional jobs like lawyers, accountants, doctors, architects, and so on. It also applies to firms, LLPS, companies, and sole traders.

Who Should Be Concerned?

Section 28 is relevant for:

• Small and large business owners
• Freelancers and consultants
• Professionals like doctors, lawyers, and CAs
• The intended audience can include: partners in partnership firms or LLPS
• Companies engaged in commercial activities
• Sellers, commissions, and independent contractors

Incomes Covered Under Section 28

Section 28 gives details of incomes that are assessable under PGBP. Below are the main categories:

1. Profits from Business or Profession

It relates to any form of income that one may earn from business, whether through buying and selling of goods and services, or from the production of goods or through offering services or as a professional practice. For instance, the doctor’s clinic income, the Certified Accountant’s consulting charges or the business proprietor’s business income.

2. Profits from the sale of a business asset 

Refer to the gains that are made when a business person sells an asset belonging to a business entity. Any business that disposes of an asset used for business but not a capital asset under section 1231, the profit of such business is taxed under this section.

3. Income of Trade Associations

This revenue generated by ‘trade/professional associations’ through certain activities, like the advertisement in the journal,s is included.

4. Compensation Received

Any consideration, be it remunerative or otherwise, for:

• Termination/modification of business contracts.
• Surrender of management powers and authorities.
• Non-compete agreements.

5. Export Incentives

That benefit which an exporter may earn from incentives like Duty Drawback, DEPB (Duty Entitlement Pass Book) or some other incentive released by the government related to the promotion of exports.

6. Profit on transfer of duty entitlements or licenses 

It is that portion of the amount earned from selling duty entitlements or receiving compensated licenses granted in exchange for imported and exported goods, which is left after all costs have been deducted. Gains realised from the sale of export licenses or of duty-free import permits.

7. Interest, salary, bonus, or commission received by partners 

during the previous fiscal year and earned income for the completed fiscal year. From the fiscal year ended, where a partner is paid any amount by the firm, then this is considered as income under Section 28 of the Income Tax.

8. Income from Speculative Transactions

This type of income can encompass profits gained from stock trading, which in some cases is considered speculative, as well as gains resulting from trade in commodity futures.

Key Exclusions

Although it is generally imperative to pay income tax under section 28, certain types of income, even if associated with business, may not be taxed under the Section.

• Capital Gains: The taxes levied on any business on capital assets such as land, building or shares (deemed to be used for investment purposes) are categorised under the “Capital Gains” Tax.

• Rental Income: Income received from the rental of commercial property is categorised under ‘Income from House Property’ unless it falls into the business activity.

• Dividend Income: Categorised under “Income from Other Sources” for anyone who is not engaged in investment business.

Allowable Deductions under PGBP (Linked with Section 28)

While section 28 explains what is taxable, sections 30- 43D define all those deductions that may be made from the gross business income. These include:

• Expenses on rent of business property, maintenance and repairs, and the cost of wear and tear of business property (Sec 30–32).
• Employee compensation in terms of wages or salaries paid to employees.
• We are including the cost of raw materials, power, and fuel among the important factors that influence our prices because these three costs are constantly variable.
• Interest on business loans (Sec 36)
• Preliminary expenses (Sec 35D)
• Under Section 37(2) of the Tax Act, expenses that are wholly and exclusively for the business shall be allowed as deductions for tax computation.

Therefore, according to Section 28 of the Income Tax Act, net taxable income is arrived at by subtracting allowable deductions from gross income as stated below.

Losses from Presumptive Taxation for Small Taxpayers (Linked Concept)

For those businessmen or professionals who do not want to keep proper accounting records for every business transaction, there is the Presumptive Taxation Scheme available:

• Section 44AD for small businesses with an annual turnover of up to ₹ 2 crore
• SEE: section 44ADA professionals (up to one crore gross receipts)
• Section 44AE for transporters

In such circumstances, a certain percentage of the income is deemed profit, and taxes are amortised, but it is again a part of PGBP.

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Section 28 forms the basis for taxing business and professional income in India. As an entrepreneur, layman, freelancer, SME, and corporate sector, it is essential to know what will come under the section to manage expectations set forth by the tax legislation and avail the right deductions. Reach out to professionals to make the complex rules easier and simplify them.