Profits and Gains from Business or Profession: Updated Framework for Business Entities

Income from business or professional activities in India is governed by the head “Profits and Gains of Business or Profession (PGBP)” as laid down in the Income Tax Act 1961, as amended up to the Finance Act 2026. This head of income covers a wide spectrum of commercial, trading, manufacturing and professional operations and prescribes distinct rules for computation of income, admissible deductions and specific disallowances.

This article provides a restructured and fully rephrased reference guide for assessees engaged in business or profession, with a focus on:

  • Scope of income chargeable to tax under PGBP
  • Key inclusions such as export incentives, subsidies, compensation, speculative income, foreign exchange differences, and deemed business income
  • Allowable deductions under Sections 30 to 37
  • Expenses that are mandatorily disallowed under Sections 40, 40A and 43B
  • Special treatment for non-residents and foreign companies
  • Books of account and tax audit requirements
  • Presumptive taxation schemes under Sections 44AD, 44ADA, 44AE and other special sections
  • Broad outline of important incentive provisions and allowances

All statutory references, section numbers, rule numbers and case-law extracts, where mentioned, are reproduced exactly as in law. The explanation and structure, however, are entirely rewritten.

1. Basic Scheme of Taxation under PGBP

1.1 Head of income and method of accounting

Where an assessee is engaged in any business or profession, the income generated from such activities is computed and taxed under the head “Profits and Gains of Business or Profession”.

  • The computation is based on the method of accounting consistently followed by the assessee.
  • Two broad systems are recognized:
    • Mercantile system of accounting (accrual basis)
    • Cash system of accounting (receipt basis)

Once a method is regularly adopted, any change requires appropriate justification and will have tax implications as per the Act and judicial principles.

1.2 Place in overall scheme of the Act

The Income Tax Act 1961 classifies income into five heads. Provisions dealing with computation of business and professional income are contained in Part D of Chapter IV, commonly known as the PGBP provisions.

2. Income Chargeable under the Head PGBP

Section 28 and related provisions define what is to be regarded as business or professional income. The following are some important inclusions:

2.1 Core business and professional receipts

  1. Income from any business or profession actually carried on by the assessee at any time during the previous year is taxable under Section 28(i).

  2. Section 28(ii) covers specified compensation or other payments due to or received by certain persons in connection with their business or employment-like situations.

  3. Section 28(iii) includes income earned by trade, professional or similar associations from specific services rendered to their own members.

The following export-linked and trade-related benefits are specifically treated as business income:

  • Section 28(iiia): Profits arising on sale of a licence granted under the Imports (Control) Order 1955 issued under the Import Export Control Act, 1947.
  • Section 28(iiib): Any form of cash assistance received or receivable against exports under a Government of India scheme.
  • Section 28(iiic): Customs or excise duty drawback repaid or repayable in respect of exports under the Customs and Central Excise Duties Drawback Rules, 1971.
  • Section 28(iiid): Profits from transfer of Duty Entitlement Pass Book Scheme under Section 5 of Foreign Trade (Development and Regulation) Act, 1992.
  • Section 28(iiie): Profits on transfer of Duty-Free Replenishment Certificates issued under the same Act.

2.3 Benefits, perquisites, partner’s income and restrictive covenants

Among other important inclusions:

  • Section 28(iv): The value of any benefit or perquisite (whether convertible into money or not) arising from the conduct of business or exercise of profession.
  • Section 28(v): Interest, salary, bonus, commission or other remuneration due to or received by a partner from a partnership firm.
  • Section 28(va): Amounts received for:
    1. Agreeing not to carry out any business or professional activity; or
    2. Agreeing not to share know-how, patent, trademark, copyright, licence, franchise or other commercial rights or information helpful for manufacturing goods or providing services.
  • Section 28(vi): Sums received under a Keyman Insurance Policy, including any bonuses on such policies.
  • Section 28(via): Profits or gains that arise when inventory is converted into a capital asset.
  • Section 28(vii): Sums received (in cash or kind) on demolition, destruction, discarding or transfer of certain capital assets (other than land, goodwill or financial instruments) where the entire cost of such assets has been allowed earlier as deduction under Section 35AD.

2.4 Speculative income and income from house property

  • Speculative transactions are specifically treated as business income under Explanation 2 to Section 28, but must be treated as a separate and distinct business for loss set-off and other purposes.
  • Letting out of a residential house is clarified via Explanation 3 to Section 28 to be taxable under “Income from house property”, not as PGBP income.

A number of deeming provisions convert earlier deductions or events into taxable business income:

  1. Section 41(1):

    • Where any trading liability, loss or expenditure for which deduction was allowed in the past is remitted or ceases, the amount is taxable.
    • When a successor recovers a trading liability already allowed in the hands of the predecessor, it is taxed in the hands of the successor (including cases of amalgamation, demerger or succession of a firm by another entity).
    • A unilateral write-off of a liability in the books is deemed to be remission or cessation and is taxed accordingly.

  2. Section 41(2):

    • For power generating units, if a depreciable asset is sold, demolished or destroyed, the excess of sale consideration (plus insurance and scrap) over the written down value is taxed as business income.

  3. Section 41(3):

    • Capital assets used for scientific research, when sold without any other use, can give rise to taxable business income where sale proceeds plus deductions exceed the capital expenditure allowed earlier.

  4. Section 41(4):

    • Recovery of bad debts previously allowed as deduction under Section 36(1)(vii) is taxed as business income.

  5. Section 41(4A):

    • Amounts withdrawn from special reserves created under Section 36(1)(viii) are taxed in the year of withdrawal.

  6. Section 41(5):

    • Losses of a discontinued business can be adjusted against deemed business income taxed under Section 41(1), 41(3), 41(4) or 41(4A) without any time limitation.

2.6 Foreign exchange adjustment and real estate transactions

  • Section 43AA: Foreign exchange gain or loss on specified foreign currency transactions is treated as income or loss and computed in line with notified ICDS, subject to Section 43A.
  • Section 43CA: Where land or building (or both) held as stock-in-trade is sold for a consideration lower than the stamp duty value, the stamp duty value is generally deemed to be the full consideration, except where the variation is within the permitted safe harbour:
    • Standard tolerance: 110% of actual sale consideration.
    • Special safe harbour of 20% for certain residential property transfers between 12-11-2020 to 30-06-2021, involving first-time allotment and consideration not exceeding **Rs.