Section 28 of the Income-tax Act,1961 is regarded as one of the most significant provisions in the Indian tax law pertaining to “Profits and Gains of Business & Profession’’(PGBP). The section outlines the opportunity for income from a business/profession and its taxability. Let’s go through the meaning, purpose, types of income covered, and other key details of section 28 of the Income Tax Act.
What is section 28 of the Income Tax Act?
Section 28 of the Income Tax Act,1961 outlines the taxation rules regarding income generated from professional activities or business operations. It defines the scope of income classified under "Profits and Gains of Business & Profession".
This section encompasses various sources of income arising from professional engagements or business endeavours. These include revenue from the sale of goods or services, interest earned on capital, and remuneration such as salaries, commissions, or bonuses received by partners of a partnership firm.
Additionally, it encompasses other receipts deemed to be profits and gains from business or profession, such as insurance claims for stock-related profit or loss and compensation for the cessation of employment duties.
Purpose of Section 28
- This particular section of the Income Tax Act sets out various sources of income and dealings falling within the ambit of “Profits and gains of business or profession”. It makes sure that all kinds of incomes derived from a business or a professional activity are subject to taxes.
- Section 28 defines the taxable income base, paving the way for calculating the amount of tax an individual or business entity owes based on income from business or professional activities.
Types of incomes covered under section 28
Section 28 of the IT Act 1961 covers the following types of income.
1. Profits from Business or Profession: Any income generated during the previous year through the conduct of a business or profession is taxable under Section 28. This includes profits from sales of goods or services, fees earned by professionals, and income from freelance work.
2. Salary, Commission, Bonus etc.: The income mentioned in section 28 encompasses salaries, commissions, bonuses and other incomes that come as reward for effort exerted in connection with trade/profession employed by individuals as well as partners in a firm.
3. Compensation Payments: Certain compensation payments received under specific circumstances are also taxable under Section 28. These include payments made upon termination of employment, modification of contracts, or termination/modification of agency agreements related to managing an Indian company.
4. Income from Specific Activities: Section 28 extends to income generated from specific business or professional-like activities. This can include income earned through import/export businesses or income received by a partner from a firm (including salary, interest, bonus, etc.).
5. Receipts under Agreements: It also covers the amounts received in terms of any agreement where the person carrying out the activity is paid off for refraining from performing any action concerning their trade or profession or nor sharing their know-how, patent right, copyright, trade mark, license, franchise or other commercial rights like those capable of being used by it in manufacturing processing goods for sale or providing services.
6. Any sum received under the Keyman Insurance policy: Any sum received by an assessee as an employer under a Keyman Insurance policy will be taxable as income from the business.
7. Fair market value of inventory on its conversion/treatment as a capital asset: Fair market value of inventory on the date of its conversion or treatment as a capital asset would be chargeable to tax as business income.
Example for understanding Section 28
Let’s try to better understand Section 28 of the Income Tax Act with examples.
Example 1: Mr. Khan operates a company that manufactures furniture.
Sale of furniture: The primary source of income is “profits from business” which includes sales revenue from furniture and is fully taxable under Section 28.
Compensation for Contract Termination: Compensation received by Mr. Khan when he ends any “agreement” with a supplier, is subject to tax under section 28.
Example 2: ABC Industries Pvt. Ltd. purchases a keyman insurance policy for its managing director, Mr. John. The policy safeguards the company's financial interests in case of Mr John's untimely demise or disability, as he plays a crucial role in the company's operations and decision-making.
Under Section 28, the premiums paid by ABC Industries Pvt. Ltd. for the keyman insurance policy would be considered as business expenditure. However, any payouts received by the company from the policy due to the death or disability of Mr John would be treated as taxable income under Section 28.
Compliance with Section 28 and Record-Keeping
- When it comes to financial administration for corporations, it is vital to consider compliance with section 28 of the Income Tax Act. To ensure compliance, correct record-keeping is vital. Tax assessment simplifies the proper maintenance of financial records. The approach also helps organisations deal with commercial enterprise operations.
- Accurate record-keeping and compliance with section 28 allow professionals and companies to adjust expenses, income, and deductions, allowing them to easily calculate taxable profits under this act.
- Tax authorities may need individuals and businesses to provide record-keeping data to simplify the calculation of their earnings and deductions. If individuals and companies can’t provide accurate information, it can result in audits and legal outcomes. So, it is important to maintain record-keeping to comply with the Income Tax Act rules.
- To maintain record-keeping, the individuals need to provide documentation that includes receipts, invoices, contracts, fees, deductions, and other financial statistics.
Conclusion
Section 28 of the Income Tax Act 1961 helps you to easily determine your taxable income from your profits or gains within a financial year. If your income is qualified for taxation as per Section 28, you must be familiar with all the related aspects. The section shapes the financial landscape for businesses and professionals.