How does a business differ from a profession?
A business, in the Income-tax Act, is any trade, commerce, or manufacture, or an adventure in the nature of trade, commerce, or manufacture. A profession includes a vocation: an occupation that applies skill and knowledge, often for a fee.
How does the Act define each?
Section 2(13) defines business. Section 2(36) defines profession to include vocation. Selling goods, a shop, and a factory are business. A chartered accountant, a company secretary, a doctor, a lawyer, or an architect in practice is in a profession. The reward in a business is profit. The reward in a profession is a fee. The Act does not say one of them is free of risk, and it does not say a professional practice can never be transferred. A regulator may restrict how that practice is carried on or sold.
Which tax limits differ?
| Point | Business | Profession |
|---|---|---|
| Tax audit, section 44AB | Turnover above ₹1 crore, or ₹10 crore if cash receipts and cash payments are each within 5 percent | Gross receipts above ₹50 lakh |
| Presumptive income | Section 44AD, for an eligible business, up to ₹2 crore, or ₹3 crore if cash receipts are within 5 percent | Section 44ADA, for a specified profession, up to ₹50 lakh, or ₹75 lakh if cash receipts are within 5 percent |
| Return | ITR-3 where books are kept, or ITR-4 where the presumptive section is used | The same two forms, using section 44ADA where it applies |
A company does not use section 44AD. These sections are for a resident individual, a Hindu undivided family, or a firm that is not a limited liability partnership, and only where the other conditions of the section are met.
Which structure can carry it on?
A business can be a proprietorship, a partnership, a limited liability partnership, or a company. A profession can be carried on by an individual or, where the regulator allows it, by a firm. Some regulated professions cannot be practised by a company. The choice of structure does not change the income-tax meaning of business and profession.
Where does employment fit?
Employment is a third category. Salary is taxed under the head salaries. It is not business income and it is not professional receipts. A person can have more than one of the three in the same year, and each head is computed on its own rules.
Frequently asked questions
Four questions cover risk, the audit limit, section 44AD, and a qualification.
Is a profession always safer than a business?
No. The Act does not rank them by risk. It uses different audit limits and different presumptive sections.
Is the tax-audit limit the same?
No. A business is audited when turnover exceeds ₹1 crore, or ₹10 crore when cash receipts and cash payments are each within 5 percent. A profession is audited when gross receipts exceed ₹50 lakh.
Can a profession use section 44AD?
No. Section 44AD is for an eligible business. A specified profession uses section 44ADA, up to ₹50 lakh of gross receipts, or ₹75 lakh when cash receipts are within 5 percent.
Must every profession have a degree?
The Income-tax Act defines a profession as including a vocation. A regulator, such as a bar council or an institute, may still require its own qualification before a person practises that regulated profession.
Sources
Business is section 2(13) of the Income-tax Act. Profession is section 2(36). The audit limits are section 44AB. The presumptive sections are 44AD and 44ADA.