Section 28 of income tax act


Income Tax Act which was passed in 1961 provides a framework of regulation in the process and administration of levying, recovering and collecting the Income-tax. The income tax regularly follows five main categories of income as per its rules and regulations; namely Salary Income, House Property Income, Profits and Gains (Income) from Business or Profession, Capital Gain Income and finally other income which includes windfall incomes. The Income Tax Acts has attributed Section 28 to Section 44 to “profits and gains of business or profession“. This article will focus on Section 28 of the Income Tax Act. It will throw light on the types of income taxed under as profits and gains.

Definition of “Business” and “Profession”

Section 2(13) of Income Tax Act defines business as any trade, commerce or manufacturing activity as well as any isolated venture or transaction that includes an element of trade, commerce or manufacture. The motive of your transaction has to be profit-making.

Section 2(36) defines a profession which also includes the concept of vocation. It means earning any income through knowledge, skill or talent.  This will include knowledge or skill acquired through university education (professional income). It will also include skill developed through an inborn talent or vocational education (vocational income).

The category of  “profits and gains of business or profession” makes all these nature of activities taxable.

Sub Section 1

In the first subsection of Section 28, the Act refers to the profits and gains of any business or profession made by the assessee. An assessee is any person who is liable to pay taxes to the Government of India under the Income Tax Act. The assessee can carry out the business at any time during the previous year. This business activity can also be a single isolated transaction given that there is an element of trade as well as there is a motive of making profits. The business may or may not be operating throughout the year for it to be charged under the Act.

This clause charges the owner of the business against any income or loss in an assessment year. It charges the owner even if the owner carries the business through a manager, an agent or a servant.  The clause includes businesses within as well as outside India. This section does not exclude business income that arises out of illegal business practices.

Sub Section 2

This subsection defines any compensation or other payment received as business income which makes it taxable under section 28.  It classifies four types of compensation under this category wherein any person:

  • handling the whole or substantially the whole of the affairs of an Indian Company receives compensation on termination or modification of his respective duties;
  • handling the affairs of a foreign Company in India receives compensation on termination or modification of his respective duties;
  • holding an agency in India conducting activities on behalf of any other business receives compensation on the termination of his agency or any modifications;
  • receiving compensation on the transfer of control to the Government or any Corporation controlled by the Government under any law in favor.

Sub Section 3

The Third subsection under Section 28 lays down rules regarding taxing income derived by trade or a professional association. If an association provides “specific services” to its members in return for charging money from its members then the amount received will be taxable under Section 28(iii) of the Income Tax Act. For instance, if a professional body provides its own CA students with specific services in return of certain fees. It will also be taxable if an institution makes money through trade with its own members.

The government provides certain incentives to exporters because of mutual profit-making interests. All these benefits are chargeable under Section 28(iv) of the Income Tax Act.  These incentives include:

  • profits derived by Sale of Import Licenses granted on account of export. This only includes importing products for the purpose of re-exporting it.
  • cash assistance either received or receivable by a person against exports under any scheme of the Government.
  • any duty of customs or excise that has to be repaid as a drawback to any person against exports. One is liable to pay import duty while importing goods to India. However, if the same import is re-exported in the same form or in a modified form then the import duty will be repaid. This repaid duty is taxable under the said clause.
  • any profit on the transfer of the Duty Entitlement Pass Book Scheme. The DEPB scheme was also an incentive on exports that neutralized the customs duty on the import content of the export product. However, this scheme was abolished w.e.f 1.10.2011.
  • any profit on the transfer of the Duty-Free Replenishment Certificate. This certificate is issued to manufacture exporters for the import of specific inputs used in manufacturing goods.  The profit on the transfer of this certificate is taxable under Section 28.

Sub Section 4

The fourth subsection makes the value of any benefit or perquisite arising from a business activity or the exercise of a profession taxable. The benefit may or may not be convertible into money to be taxed under this clause of section 28 in the Income Tax Act. The said benefit must arise because of business activity or profession. The said person receiving the benefit should not have an employee-employer relationship with the company or place of a profession.

For instance, this section will tax any free transportation, housing facilities or any other article provided for achieving a sales target. A company providing Rent Free Accommodation for a lawyer’s services will also come under this section.

Sub Section 5

The fifth subsection includes any interest, salary, bonus, remuneration, or compensation received or due to be received by the partner of a firm.  A partner may take more salary from its firm in the context of more performance and better results. This extra salary becomes income according to this provision. This is because there is no defining employee-employer relationship in this scenario. Therefore, it cannot be seen as salary and hence is taxable under Section 28 (v) of the Income Tax Act,1961.

Section 28 of Income Tax Act


This provision also lays down the framework for taxing payment for not competing in any business or profession. It makes any sum, receivable or received in cash or kind as taxable if the payment is received under an agreement for;

  • not carrying out any activity related to any business or profession. It usually includes deals with competing firms or companies to restrict the other’s business. It depends on the market and the leverage that a company can have over the other either by paying a certain amount in cash or by giving some other kind of benefit in kind. Often, many lawyers while making partners in their firm or other business professionals have to sign a non-compete clause to make sure they do not open a rival firm or business if they so choose to leave their company/firm. In return of signing this clause, they might get a huge bonus or raise in their income. This income will be taxable under Section 28(v[a])
  • not sharing any know-how like copyright, patent, trademark, franchise or any other commercial rights, technique or information that will most likely help in the manufacturing or replicating of any goods or services.


Section 28(v[a]) will not apply to the following items under the head “profits and gains of business or profession“:

  • any sum whether received in cash or kind on account of the transfer of the right to manufacture, produce or process any article as well as the right to carry on a business. This sum will be taxed under Capital gains and not under profits and gains from business income.
  • any sum received as compensation on substances that deplete the Ozone layer under the UN Environment Programme.  The multilateral fund of the Montreal Protocol in accordance with the agreement with the Government of India provides the said compensation. Under this agreement, the government has to supervise the manufacturing of harmful gases like CFC. In turn, the CFC manufacturers receive compensation. This compensation is not taxable under any head of the Income Tax Act.

    Read Also – All About Section 188 of Indian Penal Code

Sub Section 6

Subsection 28(vi) under Income Tax Act covers the term “Keyman Insurance Policy”. It is an insurance policy made for key managerial personnel of companies. In this provision, if the insured person dies then the Company is liable to receive the sum of the insurance. This insured amount is taxable under Section 28(vi) of the Income Tax Act, 1961.

Sub Section 7

The seventh and final clause under Section 28 says that any sum received or receivable in cash or kind on account of a capital asset being destroyed, demolished or transferred is taxable under section 28 if the expenditure has been allowed as a deduction under section 35AD.

Amendment of Section 28

On the 1st April of 2019, section 28 of the Income Tax Act will have new additions to its provisions. These are the following amendments:

  • There will be an addition to Section 28(ii).  It covers the clause of compensation received by any person for termination or modification of their duties or contract. It will be read as section 28(2[e]) wherein compensation received by any person at the time or in connection to the termination or modification of any contract relating to the business. The subclause (e) widens the scope of the clause to include many kinds of compensations.
  • There will be an addition to Section 28(vi). The fair market value of the inventory, If a person converts the inventory of their business into a capital asset, will be taxable in accordance of the date in which it was converted into a capital asset. This fair market value will be treated as the actual cost of the capital asset.

Section 28 of the Income Tax Act is important to understand the scope of the head “profits and gains of business or profession“. It remains one of the most important heads in the calculation of income tax.

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