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Profits and Gains of Business or Profession (Sections 28–44DB) under the Income Tax Law

by | May 29, 2026 | Income Tax

 

Introduction

The head “Profits and Gains of Business or Profession” (PGBP) constitutes one of the most significant heads of income under the Income-tax Act, 1961. Sections 28 to 44DB comprehensively govern the taxation of income arising from business activities, professional services, trade, commerce, manufacture, vocation, and related commercial operations.

These provisions lay down the framework for:

  • Chargeability of business income,
  • Allowable and disallowable deductions,
  • Valuation of inventory,
  • Depreciation,
  • Scientific research expenditure,
  • Preliminary expenses,
  • Presumptive taxation schemes,
  • Special provisions for non-residents and specified industries.

The legislative objective behind these sections is to ensure accurate computation of taxable business profits while simultaneously encouraging industrial growth, scientific research, infrastructure development, and compliance-based taxation.

 

Section 28: The Chargeability of Business and Professional Income

Section 28 acts as the gateway to the PGBP head. It defines what specific inflows constitute income from a business or profession.

Key items chargeable under this section include:

  • Core Profits: Revenue derived from any business or profession carried on by the assessee at any time during the previous year.
  • Compensations: Any compensation received in connection with the termination or modification of a business contract or agency.
  • Export Incentives: Duty Drawback, Profit on the sale of Import Licenses, and Cash Assistance received against exports.
  • Perquisites: The value of any benefit or perquisite, whether convertible into money or not, arising from a business or profession.
  • Non-Compete Fees: Sums received for not carrying out any activity in relation to any business/profession or for not sharing know-how, patents, or copyrights.

Sections 29 to 31: Method of Computation and Basic Deductions

Section 29 mandates that the income referred to in Section 28 must be computed in accordance with the provisions contained in Sections 30 to 43D.

Sections 30 and 31 outline the foundational deductions allowable for the premises and machinery used in the business:

  • Section 30 (Rent, Rates, Taxes, Repairs, and Insurance for Buildings): Allows deduction for rent paid by a tenant, cost of current repairs (excluding capital expenditure), and land revenue or insurance premiums paid for the business premises.
  • Section 31 (Repairs and Insurance of Machinery, Plant, and Furniture): Covers the cost of current repairs and insurance premiums paid to safeguard tangible business assets.

Section 32: Depreciation – The Core Business Allowance

Depreciation is one of the most critical deductions for reducing taxable business profits. Under the Income Tax Act, depreciation is calculated using the Block of Assets method rather than on individual assets.

Key Aspects of Section 32:

  • Mandatory Claim: Claiming depreciation is compulsory; an assessee cannot choose to waive it to alter their tax liability.
  • Condition of Use: The asset must be owned (wholly or partly) by the assessee and used for the purpose of the business or profession. If an asset is acquired and put to use for less than 180 days in a financial year, the depreciation rate is restricted to 50% of the normal rate.
  • Additional Depreciation: Manufacturing entities and those engaged in the generation or distribution of power are eligible for an additional depreciation allowance (typically 20%) on new plant and machinery, subject to specific statutory conditions.

Sections 35 to 36: Special Incentives and Other Deductions

To encourage innovation and support specific business costs, the Act provides targeted deductions:

  • Section 35 (Scientific Research): Incurred expenditure (both revenue and capital, excluding land) on scientific research related to the business is allowed as a deduction.
  • Section 36 (Other Deductions): This section comprises a specific list of allowable expenses, including:
    • Insurance premium paid on the health of employees or stock.
    • Bonus or commission paid to employees.
    • Interest paid on borrowed capital (provided the capital is used for business purposes).
    • Bad Debts: Written off as irrecoverable in the accounts.

Section 37: The General Deduction (The Catch-All Clause)

Any expenditure that is not specifically covered under Sections 30 to 36, but is incurred for business purposes, falls under the residual Section 37(1).

To qualify for a deduction under Section 37, the expenditure must meet the following strict criteria:

  1. It must not be an expenditure of the type described in Sections 30 to 36.
  2. It must not be in the nature of capital expenditure.
  3. It must not be a personal expense of the assessee.
  4. It must be incurred wholly and exclusively for the purpose of the business or profession.
  5. It must not have been incurred for an objective that is an offense or prohibited by law (e.g., bribes or protection money are strictly disallowed).

Sections 40, 40A, and 43B: Statutory Disallowances

Even if an expense is genuine and qualifies under Section 37, it can be entirely or partially disallowed if it violates the provisions of Sections 40, 40A, or 43B. These sections act as anti-evasion checkpoints.

Section Nature of Provision / Disallowance
Section 40(a)(i) & (ia) TDS Default: Disallowance of 30% of payments made to residents (and 100% for non-residents) if Tax Deducted at Source (TDS) is not deducted or not deposited within the due date.
Section 40A(3) Cash Payments: If any payment exceeding ₹10,000 is made to a person in a single day otherwise than by an account payee check/draft or electronic clearing system, the entire expenditure is disallowed.
Section 40A(2) Unreasonable Payments to Relatives: Excessive or unreasonable payments made to related parties can be disallowed at the discretion of the Assessing Officer.
Section 43B Payment on Actual Basis: Certain expenses (like statutory taxes, duties, cess, provident fund contributions, and interest to banks) are only allowed as a deduction if they are actually paid on or before the due date for filing the tax return.

Section 44AA and 44AB: Maintenance of Books and Tax Audit

To maintain transparency and ensure correct tax reporting, the Act mandates strict accounting and audit thresholds:

  • Section 44AA (Maintenance of Books of Accounts): Specified professionals (such as legal, medical, engineering, architectural, and accountancy professionals) and businesses crossing prescribed gross receipts or income thresholds must mandatorily maintain books of accounts.
  • Section 44AB (Audit of Accounts): A mandatory tax audit by a Chartered Accountant is required if:
    • A Business’s total turnover or gross receipts exceeds ₹1 crore (this threshold increases to ₹10 crores if cash transactions do not exceed 5% of total receipts and payments).
    • A Profession’s gross receipts exceed ₹50 lakhs.

Sections 44AD, 44ADA, and 44AE: Presumptive Taxation Schemes

To relieve small taxpayers from the administrative burden of maintaining detailed books of accounts and undergoing audits, the Act introduces presumptive taxation schemes. Under these schemes, income is estimated at a flat percentage of turnover or gross receipts.

  1. Section 44AD: Small Businesses
  • Eligibility: Individual, HUF, or Partnership firms (excluding LLPs) with a turnover under ₹2 crores (or up to ₹3 crores if cash receipts are within 5%).
  • Presumptive Income: Deemed at 8% of total turnover, which is reduced to 6% for the portion of turnover received through digital/banking channels.
  1. Section 44ADA: Professionals
  • Eligibility: Specified professionals whose total gross receipts do not exceed ₹50 lakhs (or up to ₹75 lakhs if cash receipts are restricted to 5%).
  • Presumptive Income: Deemed to be 50% of the total gross receipts.
  1. Section 44AE: Goods Carriages
  • Eligibility: Assessees engaged in the business of plying, hiring, or leasing goods carriages who do not own more than 10 goods vehicles at any time during the year.
  • Presumptive Income: Calculated per vehicle per month (varying for heavy goods vehicles vs. other vehicles).

Sections 44B to 44DB: Special Provisions for Non-Residents and Restructuring

The concluding sections of this chapter deal with specialized scenarios:

  • Sections 44B to 44BBB: These sections establish presumptive, profitable tax frameworks for non-residents engaged in specific businesses, such as shipping (44B), exploration of mineral oils (44BB), operation of aircraft (44BBA), or turnkey power projects (44BBB).
  • Section 44DA: Governs income received by a non-resident by way of royalties or fees for technical services through a Permanent Establishment (PE) in India.
  • Section 44DB: Regulates the computation of deductions and the treatment of assets in cases of business reorganization, specifically looking at the demerger or amalgamation of cooperative banks.

Conclusion

Navigating the rules of Profits and Gains of Business or Profession requires balancing business incentives with statutory restrictions. While Sections 30 to 37 open doors for deductions that reduce taxable income, Sections 40, 40A, and 43B demand meticulous compliance to avoid harsh disallowances. Finally, for eligible small businesses and professionals, the presumptive tax frameworks under Sections 44AD and 44ADA offer a streamlined compliance pathway.