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Manuals Income Tax
What is the impact of ICDS X containing transitional provisions.
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Transitional provisions for ICDS X ensure recognition of provisions and contingent items to prevent double taxation or omission.
Transitional recognition under ICDS X requires that provisions, contingent liabilities and contingent assets and related income be recognised for previous years commencing on or after 1 April 2016 in accordance with this standard, after taking into account any amount recognised for the same items for previous years ending on or before 31 March 2016; the rule aims to prevent double taxation or omission of income.
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Set-off of provisions: expenditures may be set off only against the original provision, not provisions for different purposes.
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Employee post retirement benefit provisioning excluded from ICDS X, governed by specific statutory provisions for income computation.
Provisioning for employee post retirement benefits covered by AS 15 shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS X; ICDS X does not apply to liabilities otherwise falling within AS 15.
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Borrowing costs capitalization requires capitalizing interest for qualifying assets; inventory only when production is prolonged.
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Capitalization of borrowing costs: general borrowing must be allocated to qualifying assets and capitalized on an asset-by-asset basis.
General borrowing costs computed under the ICDS-IX formula must be apportioned among qualifying assets and capitalized on an asset-by-asset basis, so that each qualifying asset's capitalized borrowing cost reflects its proportionate share of general borrowing under the standard.
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Exchange differences excluded from borrowing costs under ICDS IX; foreign exchange effects governed by ICDS VI.
Exchange differences from foreign currency borrowings that are treated as adjustments to interest are excluded from borrowing costs under ICDS IX; the effects of changes in foreign exchange rates, including those relating to interest, are governed by ICDS VI.
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Borrowing cost: bill discounting and similar charges treated as borrowing cost, except when not tied to borrowed funds.
The definition of borrowing cost is inclusive and generally covers bill discounting charges and similar charges as borrowing cost for income computation and disclosure; however, discounting charges that do not arise from borrowing funds are excluded from that definition.
Manuals Income Tax
Which are the borrowing costs covered by ICDS IX.
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Borrowing costs include interest and related charges such as commitment charges, amortised discount and finance lease charges.
Borrowing costs under ICDS IX comprise interest and other costs incurred in connection with borrowing funds, including commitment charges, amortised discount or premium, amortised ancillary costs in arranging borrowings, and finance charges for assets taken on finance lease.
Manuals Income Tax
What is the manner in which securities held as stock-in-trade are required to be valued.
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Valuation of securities as stock-in-trade: mandatorily at lower of actual cost and net realizable value.
Securities held as stock-in-trade must be valued at the lower of actual cost initially recognized and net realizable value at year-end. Unlisted or unquoted securities held as stock-in-trade are to be measured at actual cost as initially recognized, under the income computation and disclosure standards framework.
Manuals Income Tax
Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be valued at actu...
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Valuation of securities: aggregate category wise cost compared with net realisable value, lower amount taken as carrying value.
For subsequent measurement under ICDS VIII, securities held as stock in trade are aggregated category wise; for each category the aggregate cost and aggregate net realisable value are compared, and the lower of the two is taken as the carrying value.
Manuals Income Tax
Which ICDS would govern derivative instruments.
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Derivatives accounting: ICDS VI governs typical derivatives, ICDS I applies residually, capital-asset derivatives are excluded.
ICDS VI supplies guidance for derivative contracts such as forward contracts; derivatives outside ICDS VI's scope fall under ICDS I. Derivative instruments that qualify as capital assets are excluded from ICDS and thus not governed by those standards.
Manuals Income Tax
For subsidy received prior to 1st day of April 2016 but not recognised in the books pending satisfac...
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Recognition of government grants: pre-existing grants deemed recognised on receipt while later grants follow ICDS recognition criteria.
Grants actually received before the ICDS effective date are deemed recognised on receipt under Para 4(2) of ICDS VII and remain governed by pre-ICDS law; grants received on or after the effective date must be recognised only when the ICDS VII recognition criteria in Paras 5-9 are satisfied, with recognition then following ICDS VII.
Manuals Income Tax
How to deal with a situation where compensation is payable for the purposes of giving ‘immediate f...
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Government grant for immediate financial support must be recognised when receivable, irrespective of actual receipt.
Government grants given as immediate financial support and not tied to specific expenditure must be recognised when the grantee is entitled and sums become receivable; actual receipt is immaterial. If the grant is confined to an individual enterprise and grant-related conditions are met, recognition occurs in the period of receivability, governing timing of income inclusion and disclosure under the income computation framework.
Manuals Income Tax
Whether a grant which is not directly relatable to non-depreciable assets should be concluded as an ...
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Government grants treatment: grants not directly relatable to nondepreciable assets treated as taxable income rather than reduction in asset cost.
Grants not directly relatable to nondepreciable assets are to be recognised as taxable income under the Act rather than deducted from asset cost; the ICDS preamble confirms the Act prevails over ICDS, and paragraph 7 of ICDS VII applies solely to depreciable assets where reduction of asset cost is appropriate.
Manuals Income Tax
Where the grants are received for assets which are outside the block of assets, then what is the tre...
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Recognition of government grants: generally recognized as income on receipt unless reasonable certainty permits spreading with related costs.
Grants for assets outside the block of depreciable assets are to be recognized as income; statutory tax provisions control and preclude spreading recognition beyond the year of receipt, except where there is reasonable certainty of receipt permitting deferral and matching with costs incurred for obligations related to the non-depreciable assets.
Manuals Income Tax
Whether grants should be recognised even in cases where there is no certainty that the conditions at...
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Recognition of government grants: must occur on receipt; potential reversals are applied against unamortized deferred credit balances.
ICDS VII requires government grants to be recognised on the date of receipt and prohibits deferral beyond receipt; where grants become refundable because attached conditions are unmet, reversal of initial recognition must first be applied to the unamortized deferred credit arising from the grant, so income recognition must reflect both receipt and the certainty of meeting conditions.
Manuals Income Tax
How are Government grants to be recognized.
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Recognition of government grants requires reasonable certainty of compliance and receipt; disclose in income computation accordingly.
Under ICDS VII, government grants are to be recognized when there is reasonable certainty that the related conditions will be complied with and that the grants will be received; such grants should not be postponed beyond the actual receipt date for income computation and disclosure purposes.

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Income Tax

Comparison of Section 26 "Income under head Profits and gains of business or profession" between the Income-Tax Act, 2025 (as passed) and the Income-Tax Bill, 2025 (as originally introduced)

20 August, 2025

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Section 26 Income under head "Profits and gains of business or profession".

Income-tax Act, 2025 [As Passed]

At a Glance

These documents present the enacted Section 26 of the Income-tax Act, 2025 ["As Passed"] (Document 1) and an earlier draft of Clause 26 in the Income Tax Bill, 2025 - Old Version (Document 2). Both provisions charge income under the head "Profits and gains of business or profession" and set out an inclusive list of items treated as business/professional income. The changes between the two texts are largely phrasing and cross-reference adjustments, with a few substantive drafting shifts that may affect the scope of recapture and the cross-referenced deduction regime. Affected parties include taxpayers carrying on business or profession, partners and firms, and the tax department; effective date or commencement is Not stated in the document.

Background & Scope

Statutory hooks: both texts are presented as Clause/Section 26 under the Income Tax Bill/Act, 2025 and fall under the Part D heading "Profits and gains of business or profession". The clause(s) seek to define income chargeable under that head and provide an inclusive list of items to be regarded as such income. The texts contain internal cross-references to other provisions - e.g., section 35(e), section 35AD of the Income-tax Act, 1961, section 46 and in the older draft a reference to "Chapter IV-D". Definitions beyond the inclusive list are Not stated in the document. The documents do not state commencement/notification details.

Statutory Provision Mode

Text & Scope

Both versions establish that income from any business or profession carried on during the tax year is chargeable under the head "Profits and gains of business or profession". Each provides an inclusive list (sub-section (2)) covering: profits/gains of business or profession; compensation/payments on termination/modification of management/agency/contract; compensation for vesting management in Government; income of trade/professional associations for services to members; profits on sale of licences or export incentives; value of benefits/perquisites from business/profession; partner remuneration/amounts from firm; sums for not carrying out business activity or for not sharing know-how/intangible rights; Keyman insurance proceeds; fair market value of inventory when converted/treated as capital asset; and specific recapture where a capital asset (other than land/goodwill/financial instrument) is demolished/destroyed/discarded/transferred and its whole expenditure was allowed as a deduction under specified provisions.

Interpretation

The texts adopt an inclusive definition approach: items listed are expressly brought into business/professional income. The language used (e.g., "shall include") indicates a non-exhaustive list as typical in tax charging provisions. The enacted text shifts certain cross-references and expands the recapture reference to other statutory provisions (see below). Legislative intent as an overarching aim is to capture receipts related to business/professional activity and to provide recapture rules where capital allowances/deductions have been previously claimed - explicit legislative intent beyond the text is Not stated in the document.

Exceptions/Provisos

The provision contains specific carve-outs in sub-clause (h)(i)(A) and (B) excluding (A) sums received on transfer of rights chargeable under the head "Capital gains" and (B) compensation from the Montreal Protocol multilateral fund under terms agreed with Government of India. Sub-section (4) excludes rental income from letting of residential house by the owner from this head and directs that such income be charged under "Income from house property". Other general exceptions or thresholds are Not stated in the document.

Illustrations

  • Example 1: A partner receives salary/commission from the firm. The payment is included under clause (g) and is to be treated in accordance with the extent allowed under the deduction cross-reference (Document 1: "section 35(e)"; Document 2: "Chapter IV-D").
  • Example 2: A company sells an import licence and realises a profit on sale; this profit is included under clause (e) as business income.
  • Example 3: Machinery (a capital asset other than land/goodwill/financial instrument) on which the whole expenditure was allowed under the cited deduction provision is demolished and some sum is received; clause (k) brings the receipt into business income (but the governing deduction reference differs between the texts).

Interplay

Both variants cross-refer to other provisions for deductions and for recapture. The enacted text explicitly references section 35(e) and u/s 35AD of the Income-tax Act, 1961 alongside section 46 of the 2025 Act for recapture scenarios; the earlier draft references "Chapter IV-D" for partner remuneration and refers only to section 46 for recapture. Any interplay with Rules, Notifications or Circulars is Not stated in the document.

Differences Between Documents and Practical Impact

  • Opening paragraph/sub-section (1) wording: Old draft states "The income from any business or profession carried on by the assessee at any time during the tax year shall be chargeable...". Enacted version states "The incomes referred to in sub-section (2) shall be chargeable...".
    • Practical impact: drafting shift narrows the immediate charging phrase to the items enumerated in sub-section (2), while the prior draft framed the charge as broader "income from any business or profession". The practical interpretive difference is limited because both texts ultimately list the items; the enacted wording may emphasise the inclusive list as the operative charge. The precise legal effect is contingent on interpretive practice and is Not stated in the document.
  • Clause (e): Old text uses "input licence"; enacted text uses "import licence".
    • Practical impact: this is a material textual difference. If "input licence" in the old draft was unintended or a drafting error, the enacted text clarifies that profits on sale of import licences are included. The documents do not state whether "input licence" was an error or intended; therefore, the practical effect is that the enacted text clearly captures profits on sale of import licences and similar export incentives. Any consequences for licences termed "input licence" are Not stated in the document.
  • Clause (g) - cross-reference for partner payments: Old draft refers to deduction "under Chapter IV-D" as a deduction in computing the firm's income; enacted text refers to "section 35(e) as a deduction in computing the income of the firm".
    • Practical impact: this is a substantive cross-reference change which may alter how partner payments are assessed against firm deductions. Whether section 35(e) reproduces, narrows or expands the former Chapter IV-D rules is Not stated in the document; stakeholders must compare the referenced provisions to determine precise tax treatment and availment of deductions.
  • Clause (h)(ii) - scope of excluded consideration verbiage: Old draft ends with "information or technical know-how likely to assist..." whereas enacted text reads "information or technique likely to assist...".
    • Practical impact: marginal wording change; potential interpretive nuance between "technical know-how" and "information or technique" may slightly broaden or shift the class of protected items, but the documents provide no legislative clarification on intent.
  • Clause (j) - manner of valuation: Old draft uses "determined in the manner, as prescribed"; enacted text uses "determined in the manner, as may be prescribed".
    • Practical impact: enacted wording explicitly contemplates rule-making power ("may be prescribed"), but both formulations are typically used to enable subordinate legislation; the practical change is minimal and procedural - specific rules are Not stated in the document.
  • Clause (k)(ii) - recapture reference: Old draft brought sums into business income where whole of the expenditure had been allowed as a deduction "u/s 46". Enacted text broadens the reference to "u/s 35AD of the Income-tax Act, 1961 or section 46 of this Act."
    • Practical impact: the enacted version expressly captures cases where capital asset expenditure was allowed u/s 35AD (1961 Act) in addition to section 46 of the 2025 Act, thereby broadening recapture to assets benefiting from section 35AD allowances. This is a substantive expansion of recapture scope; however, the precise operation depends on the text of section 35AD and section 46, which are Not stated in the document.
  • General drafting and punctuation differences: There are minor editorial and structural differences (e.g., "by whatever name called" vs "by whatever named called", placement of commas and hyphens).
    • Practical impact: mostly stylistic, though consistent drafting reduces interpretive ambiguity.

Practical Implications

  • Compliance and risk areas: Taxpayers should note the broadened recapture reference (inclusion of u/s 35AD of the Income-tax Act, 1961) - assets whose costs were wholly allowed under such provisions may generate business income upon demolition/destruction/discard/transfer. Firms and partners must review the applicable deduction cross-reference (section 35(e) in enacted text) when accounting for partner remuneration and when determining firm taxable income. The documents do not provide procedural guidance or transitional rules; transitional treatment is Not stated in the document.
  • Record-keeping/evidence: Where receipts arise from termination/modification of management/agency/contract, sale of licences, non-competition agreements, or Keyman insurance proceeds, taxpayers should retain contracts, calculation workings, valuations (for fair market value of inventory converted to capital asset), details of allowances claimed u/s 35AD or section 46, and firm resolution/partnership deeds evidencing partner payments - the document does not prescribe specific records but the inclusive list implies evidentiary needs relevant to these items.

Key Takeaways

  • Both texts adopt an inclusive list of items treated as income from business or profession; enacted text rephrases the charging language to focus on the items enumerated in sub-section (2).
  • Enacted text clarifies "import licence" (instead of "input licence" in draft), which clarifies inclusion of profits on sale of import licences/export incentives.
  • Cross-reference for partner remuneration shifted from "Chapter IV-D" (draft) to "section 35(e)" (enacted), which may affect deduction mechanics - compare the referenced provisions to determine impact.
  • Recapture scope expanded in the enacted text to include cases where whole expenditure was allowed u/s 35AD of the Income-tax Act, 1961, in addition to section 46 - potentially broader taxability on demolition/destruction/discard/transfer of certain capital assets.
  • Several wording and drafting adjustments are editorial in nature; where substantive differences exist, the documents do not supply the surrounding provision texts or legislative history to resolve interpretive issues.

Full Text:

Section 26 Income under head "Profits and gains of business or profession".

Topics

Acts Income Tax
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