Meaning of Business and Profession

Introduction

Income-tax Act provides an inclusive definition of business under Section 2(20) that “Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.” However, the term business does not necessarily mean trade or manufacture only.

As per Section 2(86) of the Income-tax Act “profession” includes vocation. The expression profession involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.

1. Essential Elements

1.1. Business

The word ‘business’ has a very broad meaning and may be used in many different connotations. The following are the key features of any business:-

(a) Systematic and Organized activity

The word ‘business’ is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an income

In taxing statutes, it is used in the sense of an occupation or profession, which occupies time, attention and labour of a person, normally with the object of making a profit

(b) Profits motive not essential

Though the element of profit is generally present in ‘business’ but the motive of making profit or actual earning of profit is not an essential ingredient of business.

(c) Business includes trade, commerce and manufacture

Trade implies buying goods and selling them to make profit. If such transactions are done on a large scale, it is called commerce.

Manufacture involves the bringing into existence of a new product, which may have a different physical or chemical composition and is understood differently in common and commercial parlance

(d) Business includes Adventure in Nature of Trade

Main article: Adventure in Nature of Trade

Even a single and isolated transaction may fall within the definition of business as being an adventure in the nature of trade, provided the transaction bears clear indication of trade.

1.2. Profession

A profession is an occupation requiring either purely an intellectual skill or manual skill, controlled by the intellectual skill of the operator. The term ‘profession’ has been explained by various Courts. The following are the key features of any profession:

(a) Personal Qualification

All professions are businesses, but not all businesses are professions. Only those businesses are professions the profits of which are dependent mainly upon the personal qualifications and in which no capital expenditure is required or only capital expenditure of a comparatively small amount is required

(b) Profession includes Vocation

A vocation, as normally understood, is a calling in which a person passes his life. It may even be stated to be a way of living or a sphere of activity for which one has a special fitness, though it is not necessary that the activity should be indulged in for the purposes of livelihood

(c) Distinction between business and profession is of no importance

Distinction between business, profession and vocation is of no importance in the computation of taxable income. What does not amount to ‘profession’ may amount to ‘business’, and what does not amount to ‘business’ may amount to vocation. The Act treats them on an equal footing and the charging provisions for computing taxable income are the same for all of them.

However, for the purpose of computation of presumptive income, profession is treated differently than a business. Presumptive income for a business and profession is computed as per the provisions of Section 58.

Similarly, the provisions for maintenance of books of accounts and getting them audited are different for business and profession.

References

Barandra Prashad Ray v. ITD (1981) 129 ITR 295 (SC)

State of Andhra Pradesh v. H. Abdul Bakshi and Bros. (1964) 15 STC 644 (SC)

CIT v. Best Chem and Limestone Industries Pvt. Ltd. (1994) 210 ITR 883 (Raj.)

CIT v. PVG Raju (1975) 101 ITR 465(SC)

K. Ramaswami Gounder v. CIT (1987) 163 ITR 94 (Mad.)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.