Income from Business vs Income from Profession – Definitions
Are you a businessman or professional? Tax treatment differs! A doctor earning ₹10 lakh is different from shopkeeper earning ₹10 lakh (for tax purposes). Let's understand why.
Section 28: Profits & Gains of Business or Profession (PGBP)
Third income head: Business or Profession
Two sub-categories:
- Business
- Profession
Same sections apply (28-44) but some differences in treatment
What is Business?
Definition: Any trade, commerce, or manufacture carried on with profit motive
Section 2(13): "Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture"
Key characteristics:
- Profit motive: Primary purpose is earning
- Regular activity: Continuous/repeated transactions
- Organization: Some level of structure
- Risk: Uncertainty in returns
Examples:
- Retail shop (grocery, clothes)
- Manufacturing (factory, production)
- Wholesale trading
- E-commerce (Amazon seller)
- Restaurant
- Construction
- Import/Export
What is Profession?
Definition: Activity requiring specialized knowledge and skill, involving personal efforts
Section 2(36): "Profession includes vocation"
Characteristics:
- Qualification required: Degree, certification
- Expertise: Specialized knowledge
- Personal service: Cannot be easily delegated
- Professional ethics: Code of conduct
- Professional body: CA, Doctor, Lawyer associations
Examples:
- Medical: Doctor, Dentist, Surgeon
- Legal: Advocate, Lawyer
- Accounting: Chartered Accountant, Cost Accountant
- Architecture: Architect
- Engineering: Consulting Engineer
- Technical: Film Artist, Author, Sportsperson
Detailed Comparison
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Key Differences
| Aspect | Business | Profession |
|---|---|---|
| Nature | Trade, commerce, manufacture | Intellectual/skilled service |
| Qualification | Not mandatory | Required (MBBS, CA, LLB) |
| Transfer | Can be sold/transferred | Cannot transfer (personal) |
| Income | Profit from trading | Professional fees |
| Presumptive tax | Section 44AD (8% presumption) | Section 44ADA (50% presumption) |
| Audit limit | ₹1 crore turnover | ₹50 lakh gross receipts |
| Books | Can maintain simplified | Must maintain proper books |
Practical Examples
Example 1: Clear Business
Rajesh runs a grocery shop:
- Buys from wholesaler
- Sells to customers
- Profit motive: Buy at ₹90, sell at ₹100
- Business income
Example 2: Clear Profession
Dr. Sharma:
- MBBS degree
- Treats patients
- Charges consultation fees
- Professional income
Example 3: Business or Profession?
Software Developer:
- As employee: Salary (not business/profession)
- Freelancer (B.Tech degree): Profession (technical consultant)
- Runs software company: Business
IT Consultant (no formal degree, self-taught):
- Provides services
- Borderline: Could be business (no mandatory qualification for IT consulting)
Presumptive Taxation Difference
Section 44AD - Business (Specified)
For small businesses (turnover < ₹2 crore):
- Presumed profit: 8% of turnover (digital), 6% (cash)
- No need to maintain books
- Simplified tax filing
Example:
Shopkeeper turnover: ₹50 lakh
- Presumed income: ₹50L × 8% = ₹4 lakh
- Tax on ₹4L (no actual expense calculation needed!)
Section 44ADA - Profession (Specified)
For professionals (gross receipts < ₹50 lakh):
- Presumed income: 50% of gross receipts
- No books required
Example:
Doctor fees: ₹30 lakh
- Presumed income: ₹30L × 50% = ₹15 lakh
- Tax on ₹15L
Why 50% for profession?: Professionals have lower expenses (no inventory, raw materials)
Tax Audit Limits
Section 44AB: Compulsory tax audit if:
Business:
- Turnover > ₹1 crore (in FY 2023-24, increased from ₹1 cr in certain cases)
- OR voluntary opted out of presumptive (44AD) and income > ₹25L
Profession:
- Gross receipts > ₹50 lakh
- OR opted out of 44ADA and income > ₹25L
Audit: CA must certify accounts
Specified Professions (Section 44AA)
Must maintain books (no simplification):
- Legal
- Medical
- Engineering
- Architectural
- Accountancy
- Technical Consultancy
- Interior Decoration
- Authorized Representative (CA, CS, CMA)
- Film Artist
- Company Secretary
Other professions: Can use presumptive scheme
Mixed Activity
Both business and profession:
Example: CA firm
- Profession: Audit, tax consulting
- Business: Selling accounting software
Treatment: Calculate separately, combine for total PGBP income
Vocation
Section 2(36): Profession includes vocation
Vocation: Occupation not requiring formal qualification but skill/expertise
Examples:
- Plumber (skilled, but no degree)
- Carpenter
- Electrician
Usually treated as: Business (for tax purposes, unless fall under specified)
"Adventure in the nature of trade"
One-time dealing with profit motive
Example:
- Bought land to resell (not for use) → Business income, not capital gain!
- Bought shares for quick profit (4-5 transactions/month) → Business income, not capital gain
Test: Intention at purchase - if intention was profit from resale → Business
Why Classification Matters?
Different treatment:
- Presumptive taxation: Business 8%, Profession 50%
- Audit limit: Business ₹1cr, Profession ₹50L
- Book-keeping: Profession stricter for specified
- TDS: Different sections may apply
- Expenses: Profession may have limited allowable expenses in some cases
Summary
- Business: Trade, commerce, manufacture with profit motive - Shop, factory, trading (no qualification needed)
- Profession: Specialized knowledge/skill requiring qualification - Doctor (MBBS), CA, Lawyer (degree mandatory)
- Presumptive tax: Business 8% (Section 44AD), Profession 50% (Section 44ADA)
- Audit limit: Business ₹1 crore turnover, Profession ₹50 lakh receipts
- Key difference: Business can be transferred, profession is personal
- Both taxed: Under same head (PGBP, Sections 28-44)
- Classification matters: For presumptive tax, audit requirements, compliance
Quiz Time! 🎯
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Next Chapter: Procedure for Computing Business Income – Step-by-Step! 📊