Who is Covered under Profits and Gains of Business or Profession (PGBP)

 

The head Profits and Gains of Business or Profession (PGBP) is one of the most comprehensive and technically rich components of the Indian Income Tax Act. Defined primarily under Section 28, this head covers all income arising from any business, professional activity, trade, or speculative transaction carried out with the intention of earning profit.

Unlike salary or capital gains, PGBP encompasses a broad scope of incomes that result from active economic endeavors. This article provides a detailed and analytical exploration of who exactly falls under this head, which sections of the Act govern them, and what constitutes taxable income under PGBP.

 

Legal Basis and Key Sections

The foundation of PGBP taxation lies in the following provisions:

• Section 28 – Chargeability of income under PGBP
• Sections 30 to 37 – Allowable expenses and deductions
• Section 29 – Computation of income as per Sections 30–43D
• Section 44AA – Maintenance of books of accounts
• Section 44AB – Tax audit requirements
• Section 44AD/44ADA/44AE – Presumptive taxation schemes

Section 28: Scope of Charge

As per Section 28, the following types of income are specifically taxed under PGBP:

1. Income earned from the business or profession carried out by the taxpayer.
2. Compensation due to termination or modification of contracts related to business.
3. Profit on sale of business licenses or import-export quotas.
4. Income derived from speculative transactions.
5. Any sum received for not carrying out a business activity (non-compete fees).
6. Value of benefits or perquisites arising from business (e.g., company car used personally).
7. Interest, salary, bonus or commission earned by a partner from the firm (since the partner is not an employee but part of the business).

Who Exactly is Covered?

Let us identify the entities and individuals who fall under this head.

1. Owners of Business Enterprises

Any individual, HUF, firm, LLP or company engaged in the systematic and continuous activity of production, sale, or distribution of goods or services with the prime objective of earning profits is taxed under PGBP.

Examples include:

• Traders (wholesale or retail)
• Manufacturers
• Transport operators
• Shop owners
• Online sellers (e-commerce through Amazon, Flipkart, own websites)
• Startups and commercial ventures

2. Professionals

A profession, as recognized under income tax, is a vocation requiring specialized skill or intellectual labor. Professionals are also covered under PGBP. Section 44AA specifies that professionals of certain categories must maintain books of accounts.

This category includes:

• Chartered Accountants, Company Secretaries, Cost Accountants
• Doctors, medical practitioners, dentists
• Lawyers and legal consultants
• Architects, engineers, technical consultants
• Interior designers, management consultants, IT consultants
• Freelancers like content writers, photographers, trainers

The Income Tax Act clearly distinguishes profession under income tax from business based on the personal skill component. The services are rendered based on individual expertise rather than capital-driven operations.

3. Partners in Partnership Firms

If an individual is a partner in a partnership firm or LLP and receives salary, interest or commission from the firm, the amount is taxable in the hands of the partner under PGBP (Section 28(v)) even though the firm itself pays tax separately.

4. Speculative and Derivative Traders

Income from speculative business (e.g., intraday stock trading without delivery) is treated as PGBP. Even futures and options (F&O) trading falls under non-speculative business income but still within PGBP. This includes:

• Intraday equity traders
• Derivatives traders in stock/commodities
• Forex speculative traders

5. Income from Other Commercial or Industrial Ventures

Section 28 covers income from any venture executed with profit motive, including:

• Commission or brokerage agents
• Franchise owners
• Network marketing agents (MLM)
• Commission agents in insurance, real estate, stock broking

Key Distinction: Business vs Profession

Understanding "Business vs Profession" is essential for interpreting the scope of Section 28.

Basis of Comparison	Business	Profession
Skill Dependency	Not necessarily	Highly skilled/personal
Capital Requirement	Can be substantial	Usually moderate
Regulation	Not always regulated	Often regulated by statutory body
Examples	Trading, manufacturing, retail	CA practice, medical practice

While both fall under PGBP, the taxation rules (e.g., for presumptive income) vary slightly. Section 44AD applies to business, whereas 44ADA applies only to professionals.

What is Computed as Income Under PGBP?

Income under PGBP is calculated based on 'net profit' from the Profit and Loss Account of the business, adjusted as per the Income Tax Act.

Specifically, computation is governed by Section 29 read with Sections 30 to 43D. A summarized format:

Commercial Profit

• Disallowed expenses under IT Act
• Inadmissible personal expenses
• Unrecorded business receipts
  – Allowed deductions under Sections 30–37

                 Income chargeable under PGBP

Allowable Deductions (Sections 30–37)

The Act allows several deductions from business income, such as:

• Rent, rates, taxes and insurance (Section 30)
• Repairs and depreciation on buildings, plant and machinery (Sections 31 & 32)
• Interest on borrowed capital (Section 36(i)(iii))
• Employee remuneration (salary, bonus, commission – Section 37)
• Bad debts actually written off
• Revenue expenditure wholly and exclusively for business

Section 37 is a residual section allowing any legitimate business expense that is not personal or capital in nature.

Expenses Not Allowed

The following are expressly disallowed:

• Personal expenses of proprietor/partners
• Income tax paid, interest or penalty on taxes
• Penalties/fines for violation of law
• Capital expenditure (though depreciation is allowed)
• Drawings or withdrawals for personal use

 

Compliance Requirements: Books, Audit, Advance Tax

Maintenance of Books – Section 44AA

Certain specified professionals and businesses must maintain books of accounts if income exceeds ₹2.5 lakh or turnover exceeds ₹25 lakh in any of the preceding three years.

Tax Audit – Section 44AB

Tax audit is mandatory if:

• Business turnover exceeds ₹1 crore (₹10 crore if cash transactions are <5%)
• Professional receipts exceed ₹50 lakh

Advance Tax

PGBP assessees must pay advance tax in four installments if their total tax liability exceeds ₹10,000 in a year.

Presumptive Income Schemes Explained

To reduce compliance burden, the Act provides simplified presumptive schemes:

Section	Applicable To	Presumption Rate
44AD	Small business (turnover ≤ ₹2 crore, 3 crore conditions apply)	8% or 6% (digital) of turnover
44ADA	Professionals (gross receipts ≤ ₹75 lakh)	50% of gross receipts
44AE	Transporters owning ≤ 10 vehicles	Fixed amount per vehicle/month

These schemes allow taxpayers to avoid detailed bookkeeping and audits if they opt for presumptive taxation.

Special Cases Under PGBP

There are a few specific inclusions worth mentioning:

• Compensation for cancellation of business contracts
• Income from export incentives, duty drawbacks
• Value of perks or benefits received in kind (e.g., car, laptop used personally but owned by business)
• Recovery of previously written-off bad debts (deemed business income)
• Profit on sale of depreciable assets (section 50 – treated as short-term capital gains but part of business block of assets)

Comparison with Other Heads of Income

To avoid confusion, let’s clarify what PGBP does not cover:

• Salary income (employer-employee relationship)
• Income from house property (rent from residential/commercial property)
• Capital gains from sale of shares/land (unless held as stock-in-trade)
• Income from lottery, interest (covered under ‘Other Sources’)

This differentiation ensures each head has a clear scope.

Final Analysis: Who Is Actually Covered?

Summarizing the coverage of PGBP under Section 28:

✅ Business income – trading, manufacturing, agriculture processing, transport, any commercial venture

✅ Professional income – services rendered using specialized knowledge or expertise

✅ Speculative income – intra-day stock trading, derivatives

✅ Compensation and benefits arising from business decisions

✅ Income derived from partnership (like interest and salary received by partner)

✅ Presumptive income under Sections 44AD/ADA/AE

If a person or entity earns money through any systematic activity involving skill, labor, capital, or commercial intent, they will fall under the ambit of PGBP.

Conclusion

Understanding the scope of Profits and Gains of Business or Profession (PGBP) is essential because it encapsulates a wide variety of incomes beyond regular salaried employment. Whether one runs a shop, operates a startup, practices medicine, offers freelance services, or earns commission, the income falls squarely under this head and must be taxed accordingly.

Sections 28 to 44AE collectively lay down the framework for computation, deductions, presumptive taxation, record-keeping and audit obligations. While the head seems broad, its logic is clear: any income arising from active economic activity must be assessed under PGBP.

From a compliance perspective, taxpayers must ensure proper bookkeeping, timely filing, and correct application of deductions to optimize tax liability within legal boundaries. The Income Tax Act offers numerous legitimate deductions and presumptive schemes, which, if used properly, can simplify compliance and reduce tax burden.

In essence, if you earn through enterprise, skill, or commerce-not merely from employment or investments-you are covered under PGBP. It's not just a tax category-it’s the legal backbone of how business and professional income is recognized and taxed in India.