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Profits and gains of business or profession

Law of Taxation · Unit II · Topic 9 of 20 · 6 min read

What is chargeable under section 26 of the Income-tax Act, 2025, the specific deductions and depreciation, the general deduction for expenditure wholly and exclusively for business, the disallowances, deemed profits, presumptive taxation, books of account and audit.

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  1. 1. Business and profession
  2. 2. Income chargeable: section 26 [section 28]
  3. 3. Specific deductions
  4. 4. General deduction: section 34 [section 37(1)]
  5. 5. Disallowances
  6. 6. Deemed profits: section 38 [section 41]
  7. 7. Presumptive taxation: section 58 [sections 44AD, 44ADA, 44AE]
  8. 8. Books of account and audit
  9. 9. Losses from business
  10. How this is examined
Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. Three questions decide most answers: what income falls under this head (section 26), what may be deducted (sections 28 to 34, with the general deduction in section 34), and what may not (sections 35 to 37). Add the capital / revenue distinction, because it decides whether an expense is deductible at once or only through depreciation.

1. Business and profession

Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture (section 2(20) of the Income-tax Act, 2025 [section 2(13)]). A single isolated transaction can be an adventure in the nature of trade if it bears the marks of trade (intention to resell at a profit, nature of the commodity, frequency, steps taken to improve marketability). Profession includes vocation (section 2(86) [section 2(36)]): a profession needs special learning and skill (law, medicine, accountancy); a vocation is a calling (a broker, a singer). Even an illegal business is taxed on its profits; the illegality does not make the income exempt.

2. Income chargeable: section 26 [section 28]

Section 26(2) brings under this head, among others:

Income is computed under sections 28 to 60 (section 27). Rent of business premises occupied for the assessee’s own business is not separately taxed as house property (section 20(2)).

3. Specific deductions

4. General deduction: section 34 [section 37(1)]

Any expenditure, not covered by the specific sections, not capital in nature and not a personal expense, laid out or expended wholly and exclusively for the purposes of the business or profession is allowed. Four conditions therefore:

Section 34(2) and (3) exclude expenditure for any purpose that is an offence or prohibited by law (in India or outside), perquisites provided in breach of the recipient’s conduct rules (for example gifts to doctors in breach of medical ethics regulations), CSR expenditure under section 135 of the Companies Act, 2013, and advertisements in political-party souvenirs.

Capital or revenue. In Empire Jute Co. Ltd. v. Commissioner of Income-tax, 1980 INSC 126, (1980) 124 ITR 1, a jute mill paid to buy loom-hours from other mills under a working-time agreement. The Court held the payment was revenue expenditure. The “enduring benefit” test is not conclusive: an advantage of an enduring nature in the capital field is capital, but if the advantage only facilitates the trading operations or makes the business more profitable, leaving the fixed capital untouched, the expenditure is revenue even if the benefit lasts some time.

5. Disallowances

6. Deemed profits: section 38 [section 41]

If a loss, expenditure or trading liability was allowed in an earlier year and the assessee later obtains any amount for it, or the liability ceases or is remitted (including a unilateral write-back), the benefit is taxed as business income of the year in which it is obtained, even if the business no longer exists. Recovery of a bad debt earlier allowed, and the balancing charge on sale of certain assets, follow the same idea.

7. Presumptive taxation: section 58 [sections 44AD, 44ADA, 44AE]

Small businesses may declare a deemed profit instead of maintaining full accounts. For an eligible business with turnover up to two crore rupees (three crore where cash receipts do not exceed 5%), profit is deemed at 6% of receipts through banking or digital channels and 8% of other receipts, or the actual profit if higher. Similar schemes apply to specified professions (a percentage of gross receipts) and to goods carriages (a fixed amount per vehicle per month). No further deductions are allowed once the presumptive figure is adopted.

8. Books of account and audit

9. Losses from business

A business loss may be set off against any other head except salaries (section 109(1)(a) [section 71(2A)]), and the balance is carried forward for eight tax years against business profits (section 112 [section 72]). A speculation loss can be set off only against speculation profits and carried forward for four years (section 113 [section 73]).

How this is examined

February 2025 Q. 2(a): explain the income assessable as income from business or profession. The usual short notes are on deemed profits, the general deduction, disallowances under section 40 / 40A / 43B of the old Act, and presumptive taxation.

For the essay, follow sections 1 to 6 of this note. Cite the section of the 2025 Act with the 1961 section in brackets at each step, and use Empire Jute whenever the question touches the capital / revenue line.

Now try the real questions: Law of Taxation past question papers.