Business income refers to the profits and gains arising from any business or profession carried on by an assessee, chargeable to tax under the head "Profits and Gains of Business or Profession" (PGBP) under the Income Tax Act, 1961. Under Indian law, Sections 28 to 44 of the Income Tax Act govern the computation of business income, covering the charging provision (Section 28), allowable deductions (Sections 30-37), depreciation (Section 32), disallowed expenses (Sections 40-40A), and presumptive taxation schemes for small businesses (Sections 44AD, 44ADA, 44AE).
Legal definition
Section 28 of the Income Tax Act, 1961 is the charging section:
Section 28: The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession" — (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year...
Key deductions under Sections 30-37:
| Section | Deduction |
|---|---|
| 30 | Rent, rates, taxes, repairs, and insurance for premises |
| 31 | Repairs and insurance of machinery, plant, and furniture |
| 32 | Depreciation on tangible and intangible assets (block-wise at prescribed rates) |
| 35 | Scientific research expenditure (100%-200% deduction) |
| 36 | Insurance premiums, bonus/commission, bad debts, employer PF/ESI contributions |
| 37(1) | Any expenditure laid out wholly and exclusively for the purposes of business (residuary deduction) |
Disallowances (Sections 40-44):
- Section 40(a)(ia): TDS non-compliance — 30% disallowance of expense if TDS not deducted/deposited
- Section 40A(2): Excessive payments to related parties
- Section 40A(3): Payments exceeding Rs 10,000 in cash — disallowed
- Section 43B: Certain deductions (statutory dues, bonus, leave encashment) allowed only on actual payment basis
Presumptive taxation schemes:
| Section | Applicable to | Deemed income |
|---|---|---|
| 44AD | Businesses with turnover ≤ Rs 3 crore (if cash receipts ≤ 5%) | 6% of turnover (digital) / 8% (cash) |
| 44ADA | Professionals with gross receipts ≤ Rs 75 lakh | 50% of gross receipts |
| 44AE | Goods carriage owners (up to 10 vehicles) | Rs 1,000/ton per month (heavy) / Rs 7,500 per month (other) |
How courts have interpreted this term
CIT v. Calcutta Co. Ltd. [(1959) 37 ITR 1 (SC)]
The Supreme Court established the foundational principle that for income to be taxable as business income, there must be a "business" — which requires an activity carried on continuously with the objective of earning profit. The Court held that even anticipated or expected profits from a business transaction can constitute business income if they accrue during the relevant accounting year. The real question is whether the transaction has the character of a business activity or is merely a capital transaction.
CIT v. Woodward Governor India Pvt. Ltd. [(2009) 312 ITR 254 (SC)]
The Supreme Court held that foreign exchange fluctuation loss on outstanding liabilities in revenue account is an allowable deduction as business expenditure under Section 37(1). The loss arising from restatement of foreign currency liabilities at year-end exchange rates is an ascertained liability and not a contingent one, and therefore deductible in computing business income in the year the loss is marked to market.
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [(1997) 227 ITR 172 (SC)]
The Supreme Court held that interest earned on surplus funds deposited in short-term bank deposits by a business entity is assessable as "Income from Other Sources" and not as business income — unless there is a direct nexus between the deposit and the business activity. This decision established the principle that the mere fact that funds arise from business does not make all income generated from those funds business income.
Why this matters
Business income is the most complex head of income under the Income Tax Act, given the extensive framework of deductions, disallowances, depreciation rules, and presumptive schemes. For the millions of small businesses and self-employed individuals in India, the presumptive taxation scheme under Section 44AD is a significant simplification — it allows businesses with turnover up to Rs 3 crore (where cash receipts are 5% or less) to declare income at 6-8% of turnover without maintaining books of account or getting a tax audit.
For larger businesses, the interplay between allowable deductions (Sections 30-37), disallowances (Sections 40-40A), and the timing rules (Section 43B for statutory dues, Section 145 for method of accounting) creates significant compliance complexity. The tax audit under Section 44AB becomes mandatory for businesses with turnover exceeding Rs 1 crore (Rs 10 crore if cash receipts and payments are 5% or less of total).
Practitioners should note the critical distinction between capital expenditure (not deductible as revenue expense but eligible for depreciation under Section 32) and revenue expenditure (fully deductible in the year incurred under Sections 30-37). This distinction is the most frequently litigated issue in business income taxation, with the Supreme Court examining it in hundreds of cases over the decades.
Related terms
Parent concept:
Related income heads:
Related compliance:
Frequently asked questions
What is the presumptive taxation scheme under Section 44AD?
Section 44AD allows eligible businesses (resident individuals, HUFs, and partnership firms excluding LLPs) with turnover up to Rs 3 crore (if cash receipts are 5% or less of total turnover) to declare income at 8% of turnover for cash receipts and 6% for digital receipts, without maintaining books of account. If income is declared at or above the presumptive rate, no tax audit is required. Opting out of presumptive taxation triggers the obligation to maintain books and get audited for 5 subsequent years.
When is a tax audit mandatory for business income?
A tax audit under Section 44AB is mandatory if: (a) business turnover exceeds Rs 1 crore (raised to Rs 10 crore if cash receipts and payments are each 5% or less of total); (b) income from profession exceeds Rs 50 lakh; or (c) the assessee claims income below the presumptive rate under Section 44AD/44ADA. The audit must be conducted by a chartered accountant and the report filed before the due date.
Can business losses be carried forward?
Yes. Business losses (other than speculation losses) can be carried forward for 8 assessment years and set off against business income in subsequent years under Section 72. Speculation losses can be carried forward for 4 years and set off only against speculation income. Unabsorbed depreciation under Section 32(2) can be carried forward indefinitely until fully absorbed.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.