Profits and Gains of Business or Profession: Section 26

Business income is the largest and most litigated head. Sections 26 to 66 of the Income-tax Act, 2025, which replace sections 28 to 44DB of the 1961 Act, set out what is charged, how profit is computed, which deductions are allowed and which are barred, and the presumptive and audit regimes. This note covers the framework, the general deduction and the leading cases on deductibility.

1. The Provisions Mapped

Figure 1: Key provisions, 2025 Act and 1961 Act

• Charge, s.26. Profits and gains of any business or profession carried on during the tax year, and specified receipts such as compensation for termination of agencies, export incentives and the value of benefits arising from business.
• Computation, s.27. Profits are computed after the deductions in ss.28 to 37, subject to the disallowances.
• Specific deductions. Rent, rates, taxes, repairs and insurance (s.28); staff welfare (s.29); bad debts (s.31); depreciation on blocks of assets (s.33); and others.

2. The General Deduction: Section 34

Figure 2: Conditions for the general deduction

• Conditions. Expenditure not covered by a specific provision is deductible if it is not capital, not personal, and laid out wholly and exclusively for the business or profession.
• Capital or revenue. In Empire Jute Co. v CIT (1980), the Supreme Court held that the enduring benefit test is not conclusive; expenditure that only makes the business run more efficiently, leaving the fixed capital untouched, is revenue even if its advantage lasts.
• Illegal expenditure. Expenditure on any purpose that is an offence or prohibited by law is not deductible. In Apex Laboratories v DCIT (2022), freebies given to doctors, which the medical regulations prohibit doctors from accepting, were held not deductible.

3. Disallowances

• Section 35 (old s.40). Amounts not deductible, such as income tax itself and certain payments on which tax was required to be deducted at source but was not.
• Section 36 (old s.40A). Excessive payments to related persons, and expenditure paid otherwise than by permitted banking modes beyond the cash limit.
• Section 37 (old s.43B). Certain items, such as taxes, employer contributions to welfare funds and bonus, are deductible only in the year of actual payment, subject to payment by the return due date.

4. Presumptive Taxation, Books and Audit

Figure 3: Section 58 (old ss.44AD, 44ADA, 44AE)

• Presumptive income, s.58. Eligible small businesses, specified professionals and owners of goods carriages may declare income at a prescribed percentage of turnover or receipts, or a fixed amount per vehicle, without maintaining detailed books.
• Books of account, s.62. Specified professionals and businesses above prescribed limits must keep books of account.
• Tax audit, s.63. Accounts must be audited by an accountant where turnover or receipts exceed prescribed limits, or where a presumptive scheme is opted out of with lower income.

5. Frequently Asked Questions

Can a pharmaceutical company deduct the cost of gifts to doctors?

No. In Apex Laboratories v DCIT (2022), the Supreme Court held that freebies to doctors, which the medical council regulations prohibit doctors from accepting, are expenditure prohibited by law and cannot be deducted.

Is expenditure with an enduring benefit always capital?

No. Empire Jute (1980) held that enduring benefit is a guide, not a conclusive test. Expenditure that facilitates the running of the business without adding to its fixed capital is revenue.

6. Related Topics

• Topic 14: Income from House Property. Rent as business income.
• Topic 16: Capital Gains. Capital assets and stock in trade.
• Topic 23: TDS, TCS and Advance Tax. Disallowance for failure to deduct.