“profits and gains of business or profession”
The decision most relied on for profits and gains of business or profession is CIT v. Excel Industries Ltd. (358 ITR 295), cited in 935 judgments on BharatTax.
Leading authorities on profits and gains of business or profession
When an income or expenditure is revenue neutral across different assessment years, where any benefit derived is offset by a corresponding liability or reversal, no additional tax liability arises, particularly concerning income recognition under the mercantile system of accounting.
The case concerns the allowability of deductions for provisions made under Section 36 of the Income Tax Act, 1961, especially those related to bad and doubtful debts. It distinguishes such deductions from the recognition of interest income on non-performing assets (NPAs).
Section 40A(3) is not absolute, and its application considers business expediency, practical difficulties, and other relevant factors, while keeping in mind its objective to curb the practice of ploughing unaccounted money into the system.
The income derived from letting out assets, such as coal mining leases, constitutes "profits and gains of business or profession" if the primary object and activity of the assessee company are to acquire, develop, and sub-lease such assets. This classification holds even if the income arises from letting, provided the letting itself constitutes the assessee's business.
Expenditure is revenue if incurred for operating a business to earn profit, even if an incidental enduring advantage results; it is capital if it creates an asset or an enduring advantage for the entire business structure.
Section 40A(3) disallowances are not absolute; genuine and bonafide cash payments, where the payee's identity is established and business expediency is proven, fall outside its scope, as the section's purpose is to curb unaccounted money, not disallow genuine expenditure.
Profits of a business are computed under the head 'Profits and Gains of Business or Profession' and then reduced by specific receipts mentioned in Explanation (baa) to Section 80HHC. This means that for the purposes of Section 80HHC, only profits computed under the business head are considered, with subsequent adjustments for specified receipts.
If an assessee company's main business object is to acquire and rent out properties, the rental income derived is taxable as 'Profits and gains of business or profession', rather than 'Income from house property', as the nature of the activity constitutes a business.
