Taxation & Profit Motive - The Co-relation

December 12,2015
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P.V. Srinivasan (Corporate Advisor)

The issue dated September 24, 2015 of Livemint carried a head line “E-commerce hype masks heavy losses”. Similar news reports have been appearing frequently. The inference is not that profit motive is absent in e-commerce enterprises.  But the question that crossed my mind is whether profit motive is an essential ingredient in a business?  As a corollary, can a business be run with an objective of incurring only losses? 

profit_400Profit motive may be best expressed as the intention to achieve monetary gains in a transaction. “Profit motive” can also be explained as the differentiating factor between a business and a hobby, since the latter is rather driven by pleasure motive and is pursued solely for self-satisfaction.  Profit motive in a business venture is assumed unless the surrounding circumstances are eloquent enough for its negation.

The Madras High Court in the case of CIT vs. K.S. Venkatasubbiah Reddiar (1996) [221 ITR 16 / TS-23-HC-1996(MAD)] held that for an activity to be considered as “business”, it must be a continuous course of activity and it must be carried on with a profit motive.  However, the expression "profit motive" does not postulate or intend that profit must, in fact, be earned.  In the State of Gujarat v. Raipur Mfg. Co.: [1967] 19 STC 1, it was observed that business is normally conducted with the object of making profit.  To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with profit motive and not for sport or pleasure. It was further observed that in actual practice, profit motive may be easily discernible in some transactions while in others it would have to be inferred from a review of the circumstances attendant upon the transaction.The

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