Income Tax LLB PDF

NAGENDRA SOLANKI INCOME TAX
Income – Tax Act, 1961
Every person shall be charged to TAX if his Total Income of the Previous Year exceeds the maximum amount which is
not charged to Tax.
Total Income [Section 2(45)]

Total income means the Total Amount of Income referred to in Section 5, computed in the manner laid down in the
Income Tax Act.
Total Income is computed under five heads of income, income computed under each head is thereafter
aggregated and the aggregate amount and after CLUBBING Provision and Set Off and Carry Forward of Losses is
known as Gross Total Income [Section 80B(5)].
From Gross Total Income certain deductions are allowed u/s 80C to 80U (OR Chapter VI A) and the balance income
after deductions is known as Total Income [Section 2(45)].
First of all determine the Residential Status of the assessee and find out which income to be included in the
computation of his Total Income.
Computation of Total Income of Mr. A

1. Income under head salary (Section 15 to 17)
Basic salary xxx
Allowance xxx
Less: Exempt xxx xxx
Perquisites xxx
Retirement Benefits xxx
Less: Exempt xxx xxx
Gross salary xxx
Less Deduction u/s 16
(i) Profession tax xxx
(ii) Entertainment Allowance xxx xxx
Income under head salary xxx
2. Income under head House property (Section 22 to 27)

Gross Annual value xxx
Less: Municipal Taxes Paid xxx
Net Annual value xxx
Less: deduction u/s 24
(i) Standard deduction 30% of NAV xxx
(ii) Interest on borrowed Capital xxx xxx
xxx
Add: Recovery u/s 25AA, 25B xxx
Income under head HP xxx
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3. Income under head PGBP (Section 28 to 44DA)

Profit as per profit and loss A/C xxx
Add: Income not credited in P & L A/C
but chargeable under this head xxx
Less: Income credited to P&L A/C
but not chargeable under this head xxx
Add: Expenditure debited to P&L A/c
but not allowed under Income Tax Act xxx
Less: Expenditure allowed under income tax Act
But not debited to P&L A/C xxx xxx
Income under head PGBP xxx
4. Income under head capital gains (Section 45 to 55A)

Long term capital gain
Sale consideration xxx
Less: Index COA xxx
Index COI xxx
Expenditure on transfer xxx xxx
LTCG xxx
Short Term capital Gain
Non- Depreciable Asset
Sale Consideration xxx
Less: COA xxx
COI xxx
STCG xxx
Depreciable Assets
Sale Consideration xxx
Less: value of block xxx
Less: Exemption xxx
STCG xxx
5. Income from other sources (Section 56 to 59)

Wining from lottery etc. xxx
Other income xxx
Less: Deduction xxx xxx
Add: Clubbed income under the relevant head xxx
Less: Set off and carry forward as allowed from the relevant income xxx xxx
Gross total income XXX
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Less:
1. LTCG xxx
2. STCG on listed securities u/s 111A xxx
3. Wining from lottery etc. xxx xxx
Income other than on LTCG and STCG on listed shares and wining form lotteries etc. xxx
Less: deduction under chapter VI – A OR Section 80C to 80U xxx

Total income (rounded off to the nearest ` 10) xxx
Note:
1. Compute tax on the above computed Total Income at the prescribed rates.
2. Add Education Cess and SHEC @ 2% and 1% respectively.
3. Allow relief u/s 89, if any.
4. Deduct the TDS and Advance Tax paid for the relevant Assessment Year. The balance is the Net Tax Payable
which must be round off to the nearest ` 10. This tax has to be paid as self – assessment tax before
submitting the Return of Income.
Rates of Income Tax for A/Y 2015 – 2016

1. For an Individual (man or woman), resident in India who is of the age of 60 years or more but less than 80
years at any time during the P/Y. [Senior Citizen]
Income Rate of Tax
Upto ` 3,00,000 Nil
` 3,00,010 to ` 5,00,000 10%
` 5,00,010 to ` 10,00,000 20%
Above ` 10,00,000 30%
2. For individual (man or woman), resident in India who is of the age of 80 years OR MORE at any time during
the p/ y [Very Senior Citizen]
Income Rate of Tax
Upto ` 5,00,000 Nil
` 5,00,010 to ` 10,00,000 20%
Above ` 10,00,000 30%
3. Individuals (both man and woman), [other than those mentioned in (1) AND (2) above] and HUF or AOP / BOI
(other than co-operative society) whether incorporated or not or every Artificial Judicial Person.
Income Rate of Tax
Upto ` 2,50,000 Nil
` 2,50,010 to ` 5,00,000 10%
` 5,00,010 to ` 10,00,000 20%
Above ` 10,00,000 30%
Note: In case of Non – Resident (SENIOR CITIZEN AND VERY SENIOR CITIZEN) the normal slab of ` 2,50,000 is
applicable. Special rate of senior citizen and very senior citizen are applicable only for Resident in India.
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Add: Surcharge @ 10%

(If Total Income exceeds ` 1 Crore)
(But in case of Domestic Company Surcharge shall be 5% if Total Income is
exceed ` 1 Crore but does not exceed ` 10 Crore but if Total Income exceeds
` 10 Crore surcharge rate shall be 10%) xxx
Add: Education Cess @ 2% (2004) + 1% (2007) SHEC xxx
Total tax payable xxx
Less: TDS / Advance tax xxx
Net tax payable xxx
But in case of Foreign Company Surcharge shall be 2% if Total Income is exceeds ` 1 Crore but does not exceed `
10 Crore but if Total Income exceeds ` 10 Crore surcharge rate shall be 5%.
Marginal Relief: The total amount payable as income – tax and surcharge on total income exceeding ` 1 Crore shall
not exceed the total amount payable as income – tax on total income of ` 1 Crore by more than the amount of
income that exceeds ` 1 Crore.
1. In case of Domestic Companies, Partnership firms (including Limited Liability Partnership Firm) and Local
Authority the tax rate will be flat 30%. Tax rate for foreign company shall be 40%.
2. The rate of tax for Co – operative Society is as under

Upto ` 10,000 10%
` 10,010 to ` 20,000 20%
Above ` 20,000 30%
Surcharge @ 10% If Total Income exceeds ` 1 Crore
3. CBDT (Central Board of Direct Taxes) and CBEC (Central Board of Excise and Custom), the two boards were
constituted under the Central Board of Revenue Act, 1963.
4. No Marginal Relief is available in case of Education Cess and SHEC.
Table for surcharge

If Total Income If TI is in the range If TI is above
is upto of ` 1 Crore – ` 10 Crore
` 1 Crore ` 10 Crore
Surcharge (as a percentage of Income Tax)
Individual / HUF / AOP / BOI / Artificial Juridical Person Nil 10% 10%
Firm Nil 10% 10%
Co – operative Society Nil 10% 10%
Local Authority Nil 10% 10%
Domestic Company Nil 5% 10%
Foreign Company Nil 2% 5%
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Residential Status and Tax Incidence

"Know which of the incomes are taxable in India"
Income earned / received in India is taxable for all people whether staying in India or outside India.
While income earned outside India is taxable only for residents in India.
SECTION CONTENTS
5 Incidence of Tax for ROR, RNOR, NR
6 How to determine residential Status
9 Various incomes deemed to accrue or arise in India.
Residential status
Section 6
A. Individual, Section 6(1)
(i) Resident in India: An individual is resident in India if he satisfies any one of the basic
condition.
Basic conditions Individual is in India

(a) for 182 DAYS OR MORE during the previous year
OR
(b) for 60 DAYS OR MORE during the previous year AND for 365 DAYS OR MORE during 4 years
immediately preceding the previous year
But only condition (a) is applicable [(b) not checked] if

(i) Indian citizen leaves India during the previous year for employment outside India OR as a member of
crew (staff) of an Indian ship (as per shipping Act);
(ii) Indian citizen or person of Indian origin visits India during the p/y.
[Explanation to section 115C(e)] OR
Note: A person merely undertaking tours abroad in connection with his employment in India would not be
eligible for the relaxation.
Basic Conditions
(a)   X X
(b)  X  X
Status
Notes:
 Person of Indian origin is a person who himself or any of his parents or any of his grand - parents was
born in undivided India.
 Indian citizenship can be obtained if any person is born in India or spouse is an Indian citizen or other
conditions of Citizenship Act are satisfied.
 A Employment also includes self – employment.
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Q. Calculate the status of Mr. J for P/Y 14 – 15 with the following information:-
P/Y Stay
14 - 15 181
13 - 14 100
12 - 13 150
11 - 12 70
10 - 11 80
Q. What will be your answer if his stay in India during P/Y 14 – 15 was of 55 days?
Notes:-
1. Residential status is determined for every year separately.
2. There is no condition that individual should stay regularly or at one place in India.
3. India includes territorial waters* of India; therefore stay in territorial waters shall be included.
[*The coastal waters with the sea-bed below & the air above that a country claims]
4. Period of 24 hours is taken to be one day.
5. If exact time of arrival or departure is not known then the day of arrival and day of departure shall be
taken as complete days.
6. The residence of an individual for Income – Tax purpose has nothing to do with citizenship or place of
birth, an individual can, therefore be resident in more than one country although he can have only one
citizenship.
7. If a person resident in India in a previous year relevant to an assessment year in respect of any source of
income, than he shall be deemed to be resident in India in the previous year relevant to the assessment
year in respect of each of his other source of income. [Section 6(5)]
8. It is the duty of the assessee to place all material facts before the AO to enable him to determine his
correct residential status.
9. Place and purpose of stay in India is immaterial.
(1) Resident and ordinarily resident (ROR) - If he satisfies one of the basic conditions
and both the additional conditions.
(2) Resident but not ordinarily resident (RNOR) - If he satisfies one of the basic conditions but
not both the additional conditions.
Additional conditions:-
(i) He has been resident in India in at least 2 out of 10 previous years immediately preceding the
relevant P/Y. AND
[i.e. In any 2 out of 10 years he should satisfy any of the basic conditions.]
(ii) He has been in India for 730 days or more during 7 years immediately preceding the relevant
P/Y.
(II) Non – Resident – If satisfies none of the basic conditions.
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B. HUF, Section 6(2)

(1) Resident in India –
If control and management of the affairs is wholly or partly situated In India during relevant previous year.
Control and management is situated at that place where decisions relating to the affairs of the HUF are
taken.
(i) Resident and Ordinarily resident in India
If manager (KARTA) of resident HUF satisfy both the additional conditions.
[Therefore manager should be resident in at least 2 out of 10 years and should be in India for at
least 730 days in preceding 7 years.]
(ii) Resident But not Ordinarily Resident in India

If manager (KARTA) of resident HUF does not satisfy any one of the additional conditions.
(2) Non – Resident in India – If control and management of its affairs is wholly situated outside India
during relevant previous year.
Q. The Head Office of AB, a Hindu undivided family, is situated in Hong Kong. The family is managed by A
(Since 1981) who is resident in India in 3 out of 10 years immediately preceding the previous year 2014 – 15
and who is present in India for more than 730 days during last 7 years.
Determine the status of the family for the A/Y 2015 – 16 if affairs of family business are:
(i) Wholly controlled from Hong Kong.

(ii) Partly controlled from India.
C. Firm and every other person, Section 6(4)

(1) Resident in India –
If control and management of affairs is wholly or partly situated in India during relevant P/Y.
(2) Non – resident in India –

If control and management of affairs is wholly situated outside India.
Note: For the purpose of determining the residential status of the FIRM or a HUF, the residential status of partner of
the firm or the members of the HUF is immaterial except in cases where the residence of the partners or the
members of the family affects its control and management.
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D. Company, Section 6(3)

(i) Indian Company - It is always resident in India
(ii) Foreign Company

(a) It is resident in India if control and management of its affairs is situated wholly in India during
relevant previous year.
(b) It is non – resident in India if control and management of its affairs is situated wholly or
partly outside India.
Control and management of company's affairs are generally said to be situated at that place where
meetings of its board of directors are held.
Note: If an individual or HUF are the resident then they are further checked to be ordinary or not ordinary
residents. All other persons can only be resident or non - resident, they are not further checked.
Incidence of Tax
Section 5
1. For Resident and ordinarily resident assessee (ROR):-
He is assessable* to tax in respect of income which [*liable to pay]
(i) is received or deemed to be received in India by him or on his behalf during the relevant P/Y;
(ii) accrues or arises or deemed to accrue or arise to him in India during the relevant P/Y;
[*to come into existence]
(iii) accrues or arises to him outside India during the relevant P/Y.
2. For Resident but not ordinarily resident assessee (RNOR):-

He is assessable to tax in respect of income which
(i) accrues or arises to him or received outside India from a B & P controlled from India.
3. For non – resident assessee (NR):-

He is assessable to tax in respect of income which
ROR RNOR NR
Income received in India Same Same
Income Earned in India Same Same
Income Earned outside India  Earned outside India Not Taxable
 From A Business
 Controlled from India
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Notes:-
1. To be treated as received in India the income should be first received in India. If an income is received first
outside India then sent (repatriated / remitted) to India then it shall be treated as received outside India.
2. Agriculture income in India and Dividend from Indian company are exempt u/s 10 in all cases.
3. Global income is taxable in case of resident in India, but where an assessee has paid tax in foreign country
on income which is accrues or arise in India, then the assessee shall get a relief of tax paid by him in the
foreign country while computing his tax payable on such income in India. This is known as double taxation
relief.
4. Income should pertain to the previous year.
5. Income shall be taxable whether it is received in cash or in kind. Where income is received in kind, its value
should be determined as per the provision of Income – Tax Act for purpose of inclusion in the Taxable
Income.
6. Any past untaxed profits shall not be considered to be the income of the current year in any status i.e. ROR,
RNOR, NR.
Income should pertain to the P/Y: The income to be taxed in a particular A/Y is the income which is earned
or which arises during the relevant P/Y. Therefore, if an income which was earned during any earlier year
but which could not be taxed in India due to any reason, may be because of the fact that the assessee was
a non – resident in that year, will not become taxable merely because it has been remitted to India during
the previous year. For example, if Mr. A earned an income of ` 5,00,000 during the P/Y 2013 – 14 outside
India and kept it outside India during that year but remitted this amount to India during the P/Y 2014 – 15,
it shall not be taxed as the income of the P/Y 2014 – 15.
Income deemed to accrue or arise in India

Section 9
1. Any income from salary if it is payable for services rendered in India. It may be paid in India or outside
India.
2. Salary payable by the Govt. to an Indian citizen for services rendered outside India.
However, all allowances and perquisites received by Citizen of India rendering services outside
India, who is a govt. employee are fully exempt u/s 10(7).
3. Income from any property whether movable and immovable and whether tangible or intangible,
asset or source of income situated in India.
4. Income from the transfer of any asset situated in India.
5. Dividend paid by an Indian company outside India. [Exempt u/s 10(34)]
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6. Interest
(i) If interest is payable by CG / SG (i.e. Loan given to Govt.) then it shall be deemed to be earned in
India by the Receiver of the interest. OR
(ii) If interest is payable by Resident in India (i.e. Loan given to resident) then it shall be deemed
to be earned in India by the receiver of the interest
if money is used by the borrower for business or profession or earning any income
from any source in India. OR
(iii) If interest is payable by Non – Resident in India (i.e. Loan given to non – resident) then it shall
be deemed to be earned in India by the receiver of the interes t
if money is used by the borrower for business or profession or earning any income
from any source in India.
7. Royalty
(i) If Royalty is payable by CG / SG (i.e. copyright etc. given to Govt.) then it shall be deemed to be
earned in India by the Receiver of the Royalty. OR
(ii) If Royalty is payable by Resident in India (i.e. copyright etc. given to resident) then it shall be
deemed to be earned in India by the receiver of the Royalty
if right / information is used for a business or profession or earning any income from
any source in India. OR
(iii) If Royalty is payable by Non – Resident in India (i.e. copyright etc. given to non – resident) then
it shall be deemed to be earned in India by the receiver of the Royalty
if right / information is used for a business or profession or earning any income from
any source in India.
 But royalty paid for computer software
 supplied by a non – resident manufacturer along with computer
 shall not be taxable.
8. Fees for technical services

(i) If Fees is payable by CG / SG (i.e. Services given to Govt.) then it shall be deemed to be earned in
India by the Receiver of the Fees. OR
(ii) If Fees is payable by Resident in India (i.e. Services given to resident) then it shall be deemed
to be earned in India by the receiver of the Fees
if services are used for a business or profession or earning any income from any source
in India. OR
(iii) If Fees is payable by Non - Resident in India (i.e. services given to non - resident) then it shall be
deemed to be earned in India by the receiver of the fees
if services is used for a business or profession or earning any income from any source
in India.
Fees for technical services means any consideration for the rendering of any managerial, technical or consultancy
services.
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Explanation:- The income of a non – resident shall be deemed to accrue or arise in India under 6, 7, 8 and
shall be included in the total income, even if non – resident is not having any residence or place of
business in India.
Section 9
Following explanation have been amended-
1. Explanation to Section 9:-
The transfer of all rights includes transfer of computer software irrespective of the medium through which such
right is transferred. (Applicable w.r.e.f June 1, 1976)
Amendments after the judgment

Explanation in Section 9:- (Income deemed to accrue or arise in India)
An asset or a capital asset being any share or interest in a company registered outside India shall be deemed to be
situated in India, if the share or interest derives its value substantially from the assets located in India.
(Applicable w.r.e.f April 1, 1961)
9. Income from a business connection in India

A business connection means any activity in India in relation to business. In any business many activities
are taken to earn profit.
If any of those activities are undertaken in India then it will be treated as business connection in India.
And tax to be paid on the profit earned due to that activity which is carried out in India.
Some examples of non – resident having business connection in India are

(a) branch or agent for entering into contracts, maintaining stocks etc. or
(b) subsidiary in India or
(c) factory in India.
Apportionment of profit
If all business operations are not carried out in India, the income of the business deemed to accrue or
arise in India shall be only such part of income as is reasonably attributable* to the operations carried
out in India. [*Belonging to]
The apportionment of profits should be on a rational* basis and should not be arbitrary*.
[* Based on reason, reasonable]
For example if in India only negotiation was done in relation to trading while the contract was performed
entirely outside India, it was held that only 10% of profits shall be deemed to accrue or arise in India.
However in case of Non – resident the following operations shall not be treated as business connection in India
and therefore shall not be taxable:
(i) Purchase of goods in India for purpose of exports.
(ii) Collection of news and views for transmission outside Ind ia by Non – resident who is
engaged in the business of running news agency or of publishing newspapers, magazines or
journals.
(iii) Shooting of films in India if
(a) an individual – he is not a citizen of India;
(b) firm – no partner is citizen or resident of India;
(c) company – no shareholder is citizen or resident of India.
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Income under the head Salary

"Doing job, Compute your income here"
In a job, employee receives salary in various forms; in cash, few benefits in kind like house and certain
benefits after retirement such as pension. Government does not charge tax on whole cash and retirement
benefits, some exemptions are given. In case of benefits in kind, certain principles are provided for
determining their value. (Sections we cover under this chapter from 15 to 17)
SECTION CONTENTS
7 Income deemed to be received

10(5)/ Rule 2B Leave Travel Concession
10 (10AA) Leave Salary
10 (10) Gratuity
10 (10A) Pension
10 (10B) Retrenchment compensation
10 (10C)/ Rule 2BA Compensation on voluntary retirement
10 (13A)/ Rule 2A House rent allowance
10 (14) Specified allowance – travelling, daily, conveyance, helper, academic, uniform, children
education, hostel expenditure, transport, tribal area, underground, hill/border/remote,
15 transport employees
Basis of charge
16 Deductions - Professional Tax, Entertainment Allowance
17 Salary, perquisite, and profits in lieu of Salary
17(2)(iii) Specified employee
89(1)/Rule 21A, 21AA Relief when salary is paid in arrears or in advance
Relationship of the receiver with payer

Income under head salary is taxable only if there is employer – employee relationship between payer and
payee. And this relation is said to exist only if there is control over the method of doing the work of other
person.
Control is said to exist if the payer can direct what has to be done, when and how it has to be done,
who has to do it and the receiver is bound to follow all his instructions. This relationship is also called master-
servant or principal agent relationship.
While if there is no control over the work of another person then the relationship is said to be on principal
to principal basis. The remuneration, in such case, shall be taxable under head other sources or PGBP. This
relationship is also called at an arm's length relationship.
Few common examples when there is NO CONTROL OF PAYER OVER PAYEE are
 partner of a firm,
 director who is not employee,
 members of parliament,
 guest lecturers in a school or college etc.
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In all the above cases income of the receiver is not taxable under head salary.
A Member of Parliament or state legislature is not a Government Employee and therefore, remuneration received
by him is not taxable as salary income, but as income from ‘other sources’. However salary received by the Minister
in the Government is taxable under the head salary.
Charging Section
Section 15
Salary is taxable on receipt or due whichever is earlier.
 However arrears of salary, not charged to tax in an earlier previous year, are taxable in the previous year
in which it is paid.
 If any salary paid in advance is included in the total income of any previous year, it shall not be
included again in the total income when the salary becomes due.
 Any salary, bonus etc. by whatever name called received by a partner from the firm shall not be
regarded as salary.
Surrender of salary: Any salary surrendered by the employee to the CG, under the Voluntary Surrender of
Salaries (Exemption from Taxation) Act, 1961, will not be included while computing his taxable income, whether
he is a private sector / public sector or Government Employee.
Place of accrual: The Golden rule is that salary will deemed to accrue at a place where services are rendered.
However, there is an exception to the above rule. In case a citizen of India who is a Government employee and
render any service outside India, salary received by him would be treated as income accrues or arise in India.
Forgoing of salary: Once salary has been earned by the employee, it becomes taxable in his hands though he
may subsequently waive the right to receive the same from the employer. The waiver of salary by the employee
would be treated as application of the income and salary though waived would be taxable in his hands.
GRADING SYSTEM (To be discuss in class)

Wages: Conceptually there is no difference between salary and wages. Therefore, wages shall be deemed as
salary and shall be taxable on the same basis as salary is taxable.
If annuity received from the employer including preceding employer shall be taxable under head “Salary”. But if
annuity is received from other person than it shall be taxable under “Income from Other Sources”.
Bonus is taxable on receipt basis.
Notice Period Salary shall be taxable in that previous year in which it is received.
The expression paid includes every receipts by the employee from the employer whether it was due to him or not.
The expression allowed is of wider means and any credit to the employee’s account is covered, thereby and it should
imply that right is conferred on the employee in respect of the same. CIT v. Russel (1964) (SC)
Bonus is taxable on receipt basis. Therefore, it will be included in the Gross Salary only in the year in which the
Bonus is received. If Bonus is received in arrears, the assessee can claim relief u/s 89.
Overtime Payments: Taxable under head Salary.
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Retirement Benefits
Pension Section 10(10A)
I. Uncommuted pension - It is taxable in the hands all employees whether Government or Non –
Government as salary.
II. Commuted* pension - It is taxable as under [*To exchange or change]

As per Government rules full pension cannot be commuted.
A. Received by Government employee like employee of CG, SG, LA and SC wholly exempt.
Judges of SC and HC entitled to exemption of the commuted portion of pension.
Government employee absorbed in a PSU is entitled to exemption in respect of lump sum received on
commutation of pension. [CK. Karunakaran v. Union of India (1980)(Del.)]
B. Received by Non – Government employees following is exempt

(i) if received gratuity also - commuted value of 1/3rd of the pension which he is
normally entitled to receive i.e. Total Pension.
(ii) in any other case - commuted value of 1/2 of the pension which he is
normally entitled to receive i.e. Total Pension.
If pension is received by employee it shall be taxable under head “Salary” but if pension is received by family after the
death of employee it shall be taxable under head “Other Sources”.
Pension received from UNO by the employee or his family members is not chargeable to tax.
Q. Determine the amount of pension taxable for the Assessment Year 2015 – 16 in the following cases on the
assumption that it becomes due on the last day of each month:
1. X receives ` 825 per month as pension from the CG during the P/Y 2014 – 15. Ans. ` 9,900
2. X receives ` 1,063 p.m. as pension from the Government of Punjab during the P/Y 2014 – 15.
Ans. ` 12,756
3. X receives ` 800 per month as pension from ABC Ltd., a public limited company in the private sector
during the previous year P/Y 2014 – 15. Ans. ` 9,600
4. X retires from the CG Service on May 31, 2014. He gets pension of ` 900 per month up to November 30,
2014 (i.e. ` 900 x 6). With effect from December 1, 2014, he gets one – third of his pension commuted for `
46,000. Assume that he is not received gratuity. Ans. ` 7,800
5. X retires from ABC Co. on June 30, 2014. He gets pension of ` 2,000 per month up to January 31, 2015.
With effect from February 1, 2015, he gets 60 percent of pension commuted for ` 40,800.
Ans. ` 22,400
Does it make any difference if he also gets gratuity of ` 4,000 at the time of retirement?
Ans. ` 33,733.
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Gratuity
Section 10(10)
Gratuity is a payment made by the employer to his employee in appreciation of the services rendered by employee
to his employer.
If gratuity is received by employee then it shall be taxable under head “Salary” but if gratuity is received by family
after the death of employee than it shall be taxable under head “Other Sources”. However in both the cases
Gratuity is exempt upto a certain limit.
As per section 4(1) of Payment of Gratuity Act, 1972 gratuity shall be payable to an employee if he render service to
the employer for not less than 5 years except in case of death or disablement.
1. For Government and Local Authorities (Not Statutory Corporation) employee’s gratuity is Fully Exempt.
2. For other than Government employee following shall be the provisions:
(i) Employees covered by the Payment of Gratuity Act, 1972:

Exemption is least of
(a) Amount received
(b) ` 10,00,000
(c) 15/26 day’s salary for every completed year of service or part thereof in excess of 6 months
Meaning of salary: Last drawn basic and DA only.
(ii) Employees not covered by Gratuity Act:

(a) Amount received
(b) ` 10,00,000
(c) 15/30 day’s salary for every completed year of service (INGNORING FRACTION)
Meaning of salary: Basic + DA (if under terms of employment) + Fixed % of commission on turnover.
Average salary of last 10 months preceding the month of retirement.
In case of piece – rated employees salary would be computed on the basis of average of 3 months immediately
preceding the date of termination of employment, but wages paid for overtime work shall not be included.
However in case of seasonal establishment and is not so employed throughout the year, the exemption shall be
given for 7 days wages for each season in a year. In that case one has to see the number of seasons in each
completed year of service of the workman. [Aspinwall and Co. v Lalitha Padugady (1996) (SC)]
And it will be multiplied by number of seasons (instead of number of completed years).
If gratuity or leave salary received from previous employer WAS EXEMPTED, exempted amount shall be deducted
from ` 10,00,000 / ` 3,00,000.
Exemption for gratuity shall be given to an employee if there is a relation of employee and employer, but if there is no
such relation then exemption shall not be given, e.g. gratuity payable by the LIC of India to its insurance agents does
not qualify for exemption as agents are not employee of the Corporation.
9899555900 Page 15
For the purpose of computing the completed year of service, services provided to the previous employer shall also be
taken in to account if previous employer not paid the gratuity.
During the service any gratuity received by the employee shall be fully taxable under head salary because gratuity is
exempt only on retirement or on his becoming incapacitated or on termination of his employment or on death of the
employee.
Q. X Ltd. Gave Mr. Z gratuity of ` 16,00,000/- because he was under the gratuity Act. X rendered 38 years of service
and his salary on retirement was ` 5,500 PM. Compute the taxable Gratuity. Ans. ` 14,79,423
Q. What will be your answer if his salary per month was ` 55,000 PM?
Q. Mr. X Paid gratuity of ` 7,00,000 to his employee although he was not under the compulsion to pay gratuity
under the gratuity act. His salary during the last 10 months of retirement was
 for 6 months ` 25,000 PM
 for last 4 months ` 28,000 PM
He had worked for 30 years. Compute the taxable amount. Ans. ` 3,07,000
Q. what will be your answer if he worked for 30 years and 10 months?
Leave Salary
Section 10(10AA)
All most all employers provide leave to its employees every year, like Earned leave, Casual leave and Medical leave
etc., but if the employee does not avail such leaves fully then employer gives its employees an option to en – cash
such leaves. Such concept is called leave salary OR leave encashment.
1. During continuity of employment taxable in all cases i.e. whether Government employee or non Govt.
employee.
2. At the time of retirement OR leaving job

(i) For Government employees – Wholly exempt. (only CG and SG employees)
(ii) For Non – Government – Least of following shall be exempt

(a) Amount received
(b) Amount specified by the Government i.e. ` 3,00,000
(c) Salary for a period of 10 months average
(d) cash equivalent of un – availed leave salary @ 30 days for every year of service (fractions ignored)
Following step shall be followed for the limit of (d) point

Step 1:- Leaves actually allowed or 30 days per year whichever is less for total completed year of service
Step 2:- Leaves actually taken for total completed year of service
Step 3:- (Step 1 - step 2) X Average Monthly Salary
30
9899555900 Page 16
Q. Mr. P was entitled to 40 days leaves every year. His average monthly salary was ` 6,000. He worked for 20 years.
Calculate the value of step (d) if
(i) Leaves utilized 22 days or Ans. ` 32,000
(ii) Leaves standing to his credit for every year were 15 days. Ans. ` 20,000
 Meaning of salary i.e. Basic + DA (includible in retirement benefits) + Commission based on turnover.
 Average salary of last 10 months preceding the date of retirement.
 Leave salary received by the family of a Government servant, is not taxable in the hands of recipient. (Cir. No.
309 dated 03.07.1981)
 Leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the
credit of such employee at the time of his / her death is not taxable as salary.
(Cir. Letter No. F. 35/1/65 dated 5th Nov. 1965)
Q. Mr. Y was allowed every year 50 days of leave without deduction of any salary. But he used only 35 leaves every
year. After working for 40 years and 11.5 months he retired and received ` 2,00,000 as leave salary. He earned as ` e
` 6,000 as salary on an average in the preceding 10 months from the date of his retirement. Compute the taxable
amount. Ans. ` 2,00,000
Compensation on voluntary retirement (Golden hand shake scheme)

Section 10(10C)
Least of the following amount is exempt:
(i) Amount received or receivable or
(ii) ` 5,00,000
(iii)
(a) Three months salary for each completed years of service or
(b) Salary of the balance months of service left before his normal retirement
Whichever is less
Meaning of salary i.e. Basic + DA (includible in retirement benefits) + Fixed percentage of commission on turnover,
and such salary shall be last drawn.
Note:
(1) If exemption is claimed in one Accounting Year then exemption shall not be allowed in another
Accounting Year.
(2) Exemption shall be allowed only to employees of Central / State govt., public sector undertakings, any
company, statutory Corporation, local authority, university, IIT or notified institute of management.
Q. P is employed in a public company and is paid a sum of ` 7,00,000 on Voluntary retirement form service. The normal
age of retirement in the company is 60 years and P who was 46 years at the time of retirement had completed 22 years of service.
His monthly salary at the time of retirement was as under. Calculate the taxable amount.
Basic ` 10,000
DA (40% includible for pension) ` 7,000
Conveyance Allowance ` 1,000
HRA ` 4,000
Ans. ` 2,00,000
9899555900 Page 17
Retrenchment* compensation
Section 10(10B)
Least of the following amount is exempt [*to reduce]
(a) 15/26 day’s salary, for every completed year of service or any part thereof in excess of 6 months;
(as calculated in accordance with Industrial Disputes Act, 1947 or under any other Act, Rules, Order,
Notification, Standing order, Award, Contract of Service or otherwise)
(b) Amount notified by Government; (presently amount notified is ` 5,00,000)
(c) Amount received;
Other points are as under:

 Salary includes all but does not include bonus and employer’s PF contribution.
 Average salary for preceding 3 months preceding the date of retrenchment is taken.
 If amount received by a workman from under a scheme made by the CG extending special protection to
the workman than such ENTIRE amount shall be exempt.
9899555900 Page 18
Provident Fund
During Job On retirement

Type of PF Employee’s Employer’s Interest Payments from the fund
contribution contribution
SPF
(Setup by
Provident
Fund Act,
1925)
URPF Employee’s cont.-

(Provident
Fund and Interest thereon-
Miscellane
ous Employer’s cont.-
Provisions
Act, 1952) Interest thereon-
RPF Taxable in Taxable in Nothing shall be taxable if :-

excess of excess of (i) Employee left the job after at least 5
12% of salary years of service OR
(Sec. 7) 9.5% p.a. (ii) Due to ill health, discontinuance of
(Sec. 7) employer’s business or reasons beyond his
control OR
(iii) The balance is transferred to RPF with new
employer. In such case for computing
the period of 5 years under the new
employer, the period of service rendered
under the previous employer shall be
included.
If none of the above conditions is satisfied

then the amount not taxed previously
shall become taxable (i.e. upto 12% of salary
and upto 9.5% interest), in the same manner as
is done in URPF.
Meaning of salary i.e. Basic + DA (includible in retirement benefits) + Fixed percentage of commission on turnover.
Deduction u/s 80C is available in relation to Employee’s contribution for SPF and RPF, but no deduction u/s 80C is
available for employee’s contribution made towards URPF.
9899555900 Page 19
Q. Mr. Z is working with A Ltd. with a salary of ` 44,000 p.m. after deduction of ` 6,000 p.m. as employee’s PF
contribution. Decide how much salary shall be taxable for the PY in case of
I. SPF
II. URPF
III. RPF
Q. Mr. P is employed with X Ltd. on a salary of ` 5,00,000 p.m. He and his employer both contribute 10% of salary
to PF. Discuss the Tax treatment in case of
A. SPF
B. URPF
C. RPF
Ans.
Particulars SPF URPF RPF
Basic Salary 60,00,000 60,00,000 60,00,000
(5,00,000 X 12)
Employee’s Contribution 6,00,000 6,00,000 6,00,000
(Fully taxable)
Employer’s contribution Not taxable Not taxable Not taxable
Deduction u/c VI – A 1,50,000 Nil 1,50,000
(Maximum limit = 1,50,000)
Employer’s Contribution No deduction No deduction No deduction
Taxable amount 64,50,000 66,00,000 64,50,000
Q. Mr. R retired after 30 years of service. He received the following amount form PF:-
(a) His own contribution 5,00,000
(b) Employer’s contribution 4,00,000
(c) Interest on own contribution 80,000
(d) Interest on employer’s contribution 80,000
Discuss the tax treatment in case of (i) SPF (ii) URPF (iii) RPF
Ans.
Particulars SPF URPF RPF
Own contribution Not taxable at the time of receipts
Employer’s contribution 4,00,000 Nothing shall be taxable
Interest on own contribution Fully Exempt 80,000 Taxable u/h as Mr. R left after 5 years
other sources
Interest on Employer’s contribution 80,000 u/h Salary
9899555900 Page 20
Income deemed to be received

Section 7
1. The annual accretion* of interest [*An increase]
 to the balance of an employee
 in Recognised PF
 in excess of 9.5% p.a.
2. Contribution of the employer to Recognised PF (RPF) in excess of 12% of the salary of employee.
3. Transferred balance in a RPF from URPF

 It will be assumed that unrecognized provident fund was recognised provident fund right from the
beginning when it was created.
 And therefore employer's contribution in excess of specified limit and interest credited in excess of
specified limit upto the date of conversion shall be aggregated and this aggregate will be included
in the gross salary in the previous year in which the conversion took place.
4. The contribution made, by the CG or any other employer in the previous year, to the account of an
employee under a pension scheme referred to in section 80CCD.
Allowances
Allowance is fixed amount paid in cash by the employer to the employee for meeting some particular expenses,
whether for official or personal purpose. These allowances are generally taxable unless exemption (fully or partly)
has been provided in respect of any such allowance. The detail provisions in respect of allowances are as under:
Specified allowances
Section 10(14)
(I) Following allowances (by whatever name called) are exempt to the extent of amount received or
amount spent whichever is less:
1. Travelling allowance : Granted to meet the cost of travel on tour or on transfer;
2. Daily allowance : Granted on tour or on transfer to meet the ordinary daily charges for
rendering services at a place other than his normal place of duty.
3. Conveyance allowance : Granted to meet the expenditure incurred on conveyance official duties.
4. Helper allowance : Granted to meet the expenditure on a helper for official duties.
5. Academic allowance : Granted for encouraging academic, research and training pursuits*.
6. Uniform allowance : Granted to meet expenditure on purchase or maintenance of uniform.

[*An occupation, pastime]
9899555900 Page 21
(II) Following allowances are exempt to the extent of amount received or the limit specified
whichever is less:
1. Children education allowance: Exempt upto actual amount received per child or ` 100 p.m.
per child upto a maximum of 2 children, whichever is less.
2. Hostel expenditure allowance. Exempt upto actual amount received per child or ` 300 p.m.
per child upto a maximum of two children whichever is less.
3. Transport allowance: For purpose of commuting between residence and the place
of his duty, exempt to the extent of ` 800 per month. ` 1,600
p.m. for blind /handicapped employee.
4. Allowances allowed to transport Given to the employee working in any transport system, to
employees meet his personal expenditure during the course of running
of such transport from one place to another. The amount of
exemption shall be
(a) 70% of such allowance or
(b) ` 10,000 p.m. whichever is less.
For claiming this exemption assessee is not receiving daily allowance.
Q. Mr. X a truck driver received an allowance for personal exp. Calculate his exemption if he received
(i) 25,000 ` p.m.(ii) 8,000 ` p.m. and his actual expenditure is ` 4,000 only.
5. Tribal area allowance: Exempt upto actual amount received or ` 200 per month
whichever is less (MP, UP, WB, Bihar, Orissa, TN, Assam etc.)
6. Underground allowance: Granted to employees working in uncongenial*, unnatural

climate in underground coal mines shall be exempt upto
` 800 p.m.
7. Hill Area allowance: varying from ` 300 to ` 7,000 p.m. [*unsuited, not agreeable]
(the amount depends on the area of posting)
8. Border/ Remote/ Disturbed area allowance varying from ` 200 to ` 1,300 p.m.
9. Compensatory field area allowance Exempt to the extent of ` 2,600 p.m.
10. Compensatory modified field area allowance Exempt to the extent of ` 1,000 p.m.
11. Counter insurgency allowance to Exempt to the extent of ` 3,900 p.m.

members of armed forces
12. High altitude (uncongenial climate) Given to members of armed forces for altitude
allowance of 9000 ft. to 15000 ft. ` 1,060 p.m. and for the
altitude above 15000 ft. ` 1,600 p.m.
9899555900 Page 22
13. Special compensatory highly active field area allowance to members of armed forces
Exempt to the extent of ` 4,200 p.m.
14. Island (duty) allowance to members of armed forces in the Andaman &
Nicobar and Lakhyadweep Ground of Island exempt to the
extent of ` 3,250 p.m.
Notes: If assessee claim exemption for (9), (10) and (11) then he is not entitled to claim exemption for (8).
House Rent Allowance*

Section 10(13A) and Rule 2A
(ALSO REFER TO SECTION 80GG)
(*Given to employees for taking the house on rent)
Least of following shall be exempt:-
(i) Allowance actually received
(ii) Rent paid MINUS 10% of salary
(iii) 50% of salary – If house taken on rent in Kolkata, Chennai, Delhi and Mumbai
40% of salary – for other cities.
 Meaning of salary: BASIC + DA (IF INCLUDED FOR RETIREMENT BENEFITS) + FIXED % OF COMMISSION
ON TURNOVER
 Exemption is given only for that period for which house is taken on rent.
 So that, HRA and salary are taken only for that period for which house is taken on rent.
 Calculation for that period can be made collectively during which all following items are same,
i.e. if there is no change in the following items
(i) Actual HRA,
(ii) Rent paid,
(iii) Salary,
(iv) Location of the house taken on rent.
Exemption u/s 10(13A) is not available if an employee resides in his own house OR if the employee does not incur
any expenditure on payment of rent.
Exemption is available even if the house is owned by a close relative (may be wife or husband or father or mother)
and for which rent is regularly paid (there is no lagal requirement but in such cases rent should be paid through bank
transfer entry). Bajrang Prasad Ramdharani v. CIT (2013)(Ahd. HC)
To avail exemption u/s 10(13A), there is no requirement that the employee should not own a house. If an employee
resides in a rented property, he can claim exemption u/s 10(13A) even if he owns a house (in the same city or in a
different city).
Q. Mr. A, who resides in Ghaziabad, receives ` 40,000 per annum as basic pay during the previous year 2014 – 15.
He stays in his father's house up to November, 2014 for which he does not pay any rent and thereafter he takes an
accommodation on rent of ` 3,000 pm. The employer, however, pays ` 800 per month as house rent allowance
throughout the previous year. Compute taxable HRA. Ans. Taxable Amount ` 6,400
9899555900 Page 23
Q. Ajay, who resides in Delhi, gets the following salary during the P/Y 2014 – 15
For 9 months - Basic salary ` 3,000 per month, Dearness allowance 10% of basic salary (forming part of basic
salary) and HRA ` 1,000 per month.
For 3 months - Basic salary ` 4,500 per month, HRA ` 2,500 per month and ` 20,200 commission on the
basis of fixed percentage of turnover for 3 months. He pays ` 2,500 PM as house rent throughout the p/y.
determine the HRA chargeable to tax. Ans. Taxable Amount ` 3,370
Q. Mr. P, received HRA of ` 6,000 pm from her employer. His basic salary was ` 35,000 pm. He paid rent ` 3,000
pm. Calculate the taxable HRA.
Q. What will be change if he paid rent of ` 15,000 pm.
ALLOWANCES
Fully Taxable Partly Taxable Fully Exempt
(i) Entertainment Allowance (i) House Rent Allowances (i) Allowance granted to
(ii) Dearness allowance (ii) Special Allowances Government Employees
(iii) Overtime Allowance outside India [Section 10(7)]
(iv) Fixed Medical Allowance (ii) Sumptuary (Entertainment
(v) City Compensatory Allowance) Allowance
Allowance Granted to High Court or
(vi) Interim Allowance (to meet Supreme Court Judges
increased cost of living in (iii) Allowance received by
cities) employee of UNO from his
(vii) Servant Allowance employer.
(viii) Project allowance (iv) Allowance to HC Judges u/s
(ix) Family allowance of the HC Judges (Conditions
(x) Tiffin / Lunch / Dinner of Service) Act, 1954.
Allowance
(xi) Any Other Cash Allowance
(xii) Warden Allowance
(xiii) Non – Practicing Allowance
9899555900 Page 24
Perquisites
Perquisite has a known normal meaning, namely personal advantage. In simple words perquisites are the
benefits in addition to normal salary to which the employee has a right by virtue of his employment.
The essential feature of perquisites is that an employee should have a right to the same and that it should
not be a mere voluntary or contingent payment.
(I) If following perquisites are provided in kind then they shall be taxable only for employees specified
u/s 17(2)(iii). (IF THEY ARE REIMBURSED THEN THEY SHALL BE TAXABLE FOR ALL EMPLOYEES)
(A) Attendants (B) Water, Electricity, Gas

(C) Motor Car (if provided by employer) (D) Education
(E) Personal or Private Journey provided free or at a concessional rate.
(F) The value of any other benefit or amenity, service right or privilege
(II) Any other benefits in kind shall be taxable for specified and non – specified employees.
(III) LTC and Medical perquisite in any form shall be exempt upto specified limit for specified and non –
specified employees.
NOTE: In respect of all the perquisite whenever any concession is given or any amount is recovered from the
employee, the value of the perquisite shall be calculated as follows:-
Step 1:- determine value of the perquisite as if nothing has been recovered from the employee
Step 2:- determine the amount recovered from the employee.
Step 3:- Step 1 – Step 2 shall be taxable value of the perquisite.
9899555900 Page 25
(1) VALUATION OF RENT FREE ACCOMMODATION

GOVT. OTHERS ACCOMMODATION IN HOTEL
As per (i) Owned by Employer (a) 24% of salary
Government Population of city in which Taxable (b) Actual Charges
Rules. house provided as per 2001 Amount Whichever is less
(License census [Whether Government OR others]
fees) Upto 10 Lakhs 7.5% of Salary
More than 10 lakhs but upto 25 10% of Salary However nothing shall be taxable if
lakhs accommodation is
More than 25 Lakhs 15% of Salary
(i) provided for not more than 15 days
(ii) Not owned by Employer and
(a) Actual Rent
(b) 15% of Salary (ii) on transfer of employee from one
Whichever is less place to another
1. Rent free official residence provided to a Judge of HC and SC is exempt from tax.
2. Similarly RFA given to an Official of Parliament, A Union Minister and a Leader of Opposition in Parliament is
exempt from tax and serving Chairman / Members of UPSC.
3. Accommodation includes house, flat, farm house (or part thereof), or accommodation in a hotel, motel, service
apartment, guest house, caravan, mobile home, ship or other floating structure.
Notes:
(i) Furnished House :-
If furniture is also provided then 10% p.a. of cost of furniture or actual hire charges if taken on rent, shall be added
in the value calculated above.
Any maintenance charges or repairs of the building incurred by the employer shall be ignored.
(ii) Meaning of salary

 Basic Salary + DA (if under terms of employment) + Bonus + Commission + Fees + Taxable portion of all
allowances + monetary payment from one or more employers
Monetary payments which are in the nature of perquisites shall not be included.
does not include Employer’s PF contribution, allowance exempt from tax, any lump sum payment like
Gratuity, Leave encashment, Commuted pension etc., total interest of PF and perquisites u/s 17(2) in
kind and reimbursement both.
 Salary from all employers is taken even if house is provided only by one employer,
 And salary (ON DUE BASIS) is taken only for that period for which house is provided by employer.
Therefore only current year’s bonus, current years leave salary shall be included. While past year's bonus, leave
salary of past years shall not be included.
9899555900 Page 26
(iii) RFA not taxable

Nothing shall be taxable if:-
(i) House is located in a remote area (i.e. an area located at least 40 kilometers away from a town having a
population not exceeding 20,000) provided to an employee working at a mining site or an onshore oil
exploration site or a project execution site or a dam site or power generation site or an offshore site.
(ii) Moreover, the perquisite in respect of accommodation of temporary nature (and having plinth area of 800 sq. ft.
or less) which is located at least 8 km. away from the local limits of a municipality or cantonment board provided
to an employee working at a mining site or an onshore oil exploration site, or a project execution site or a dam
site or power generation site or an offshore site, is not chargeable to tax.
(iv) Concessional House

If any amount is recovered from the employee, then such amount shall be reduced from the value
determined for such house.
(v) Two houses on transfer

In the case of transfer from one place to another, if employee is provided house at the new place and also allowed
to retain house at the old place,
(a) For first 90 days from the transfer the value of one house with lower value will be taxable
(b) After 90 days value of both houses will be taxed, only for the days which were in excess of 90 days.
Q. Mr. X was provided a house in Delhi owned by employer. His salary was ` 40,000 p.m. He was transferred to
Faridabad on 1-9-2014. There also he was provided a house. But in respect of such house employer paid rent of
` 3,000 p.m. Calculate the value of rent free houses for the p/y 14 – 15 on the assumption that he retained both
the houses for the entire previous year. Ans. ` 75,000
Q. Mr. P has been given a free house by employer. Salary of Mr. P is ` 30,000 pm. Population of city is
(i) More than 15 Lacs but less than 25 Lacs (ii) Population of city is 8 Lacs.
Calculate the value of Rent Free Accommodation of house.
9899555900 Page 27
Perquisites taxable in the hands of ALL employees

(i) Value of travelling, touring, accommodation and any other expense on holiday Actual expenditure
incurred by employer shall be taxable. Rule 3(7)(ii)
However
(a) If the facilities are maintained by the employer and not available to all employees uniformly
the value at which such facilities are offered by other agencies to public shall be taxable. But if such facility is
available to all employees uniformly than amount actually incurred by the employer shall be taxable.
(b) If the official tour is extended as a vacation the value shall be taken only for the extended period if
expenses for such extended period met by employer.
(c) If any member of household accompanies the employee on official tour the value shall be
expenditure incurred on such member of household of the total tour.
Note: The above provisions are not applicable to LTC. Therefore LTC shall remain exempted.
If any amount is recovered from the employee than such amount shall be reduced from the above amount.
(ii) Gift, voucher or token Rule 3(7)(iv)

 The amount of such gift shall be taxable as perquisite.
 However nothing shall be taxable if value of such gift, voucher or token in aggregate (TOTAL) during
the previous year is up to ` 5,000.
CBDT (CENTRAL BOARD OF DIRECT TAXES) has clarified that:

 The amount only in excess of ` 5,000 shall be taxable.
 If gift is by way of cash or by way of cheque / voucher convertible in to cash, then entire
amount shall be taxable WITHOUT ANY EXEMPTION.
(iii) Free Meals Rule 3(7)(iii)

Actual expenditure incurred by employer shall be taxable.
However nothing shall be taxable in the following cases

(a) Tea or snacks provided during Working hours. WORKING HOUR INCLUDE EXTENDED OFFICE HOUR.
The board has clarified that tea includes coffee, soft drink and other non-alcoholic beverages.
(b) Free Meals – during office hours
 at the office premises or
 through paid voucher’s which are not transferable and usable only at eating joints
(The value in both the above cases should not exceed ` 50 per meal. The amount only in
excess of ` 50 shall be taxable.)
 In a remote area or offshore installation (no limit i.e. WHOLLY EXEMPT)
It may be noted that as per Circular no. 15/2001, dated 12.11.2001 relating to TDS on salary not only tea
but similar non – alcoholic beverages and snacks in the form of light refreshment during working hours
are not charged as perquisites.
9899555900 Page 28
(iv) & (v) Credit card or Club Expenditure Rule 3(7)(v) / (vi)
(a) If expenditure is wholly and exclusively for official purpose – Nothing is taxable, if
(i) Complete details of such expenditure including the date, nature and necessity of the
expenditure, is maintained.
(ii) Employer certifies that such expenditure was exclusively for official purposes
(b) In other cases – the actual expenditure incurred by the employer shall be taxable.
Important Notes:
(a) If the employer has obtained corporate membership of the club, the fees paid for acquiring such
membership shall not be taxable for employees.
(b) Expenditure on use of health club, sport facilities provided to all classes of employees uniformly, by
the employer at employer’s premises shall not be taxable.
(vi) Value of interest Free Loan Rule 3(7)(i)

Loan is provided to employee or any member of his household by the employer or on his behalf during the P/Y.
Any type of loan Rate charged by SBI on 1st day of relevant p/y for similar loan
Interest shall be calculated on the maximum outstanding balance for each loan as on the last day of each
month. Interest shall be calculated on the last day’s balance for complete one month irrespective of date of loan.
Any interest is paid by the employee or his household to the employer shall be reduced.
However nothing shall be taxable if

(a) Loans in aggregate do not exceed ` 20,000 or
[If ORIGINAL loan is in excess of ` 20,000 then interest on total loan shall be taxable.]
(b) Loan is provided for the treatment of specified diseases in Rule 3A. But if such loan has been reimbursed
under any medical insurance scheme and it is not repaid to employer, it shall be taxable.
[Specified disease e.g. TB, Cancer, Mental disorder, AIDS etc.]
[Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain
installments, the loan amount cannot be brought to tax as salary of the employee. Only any concession in the
interest given by the employer to employee shall be taxable under head salary, in the hands of employee.]
Household means Spouse(s), Children and their spouses, Parents, Servants and Dependents.
Q. Mrs. X took an interest free loan of ` 2,00,000 from his employer for construction of house on 10.04.2014.
She was expecting some help from her husband who did not support, therefore she borrowed another `
5,00,000 from the employer on 20.05.2014. Later on her husband gave her some amount, after that she repaid `
2,00,000 to the employer on 30.11.2014. Calculate the taxable amount if interest charged by SBI for similar loan
on 01.01.2014 was 10% while on 01.04.2014 it was 12%. Ans. ` 69,000
9899555900 Page 29
Rate of Interest of SBI as on 01.04.2014

Housing loan 10.15% p.a. and 10.30% p.a. for HL above ` 75 Lakhs, 0.05% concession to woman borrowers.
Car loan for new car 10.95% p.a. Tow wheeler loan 18.25% p.a.
Education loan, loan amount up to ` 4 lakhs 13.50% p.a.; Loan amount above ` 4 lakhs 13.75% p.a.
Loan above ` 7.50 Lakhs 11.75% p.a. 0.50% concession for girl student.
Loan for study at IIMs, ISB, MDI 10.25% p.a. Study at other institutions 10.25% – 11.75% p.a.
Personal loan 18.50%. ALL THE ABOVE RATES ARE FLOATING INTEREST RATE.
(vii) Use of Movable Assets Rule 3(7)(vii)

(a) Laptops and computers, Nil value is taxable
(b) Other assets (Car is not cover here) 10% p.a. of the actual cost OR actual hire charges
AS THE CASE MAY BE
If any amount is recovered from the employee then such amount shall be reduced.
Q. Mr. X was provided furniture for his use on 01.08.2014 by his employer. Employer had purchased the
furniture on 20.08.1975 for ` 20,000. WDV in the books of employer on 01.08.2014 was ` 1,000 while fair market
value on that date was ` 250 only. Calculate the taxable amount in the hands of Mr. X.
NOTE: If a closely – held company gives a loan to an employee who holds at least 10% voting power, such loan is
deemed as dividend u/s 2(22)(e), if a few conditions are satisfied. Even in such a case, the perquisite value of
interest – free loan is chargeable to tax.
(viii) Transfer of Movable Assets Rule 3(7)(viii)

The value of the benefit shall be Actual cost to the employer as reduced by the following % for each completed
year during which the asset was put to use by the employer (Ignoring Fraction)
(a) Computers and electronic items 50% on the basis of WDV
(b) Motor Cars 20% on the basis of WDV
(c) Any other assets 10% on the basis of SLM
If any amount is recovered from the employee then such amount shall be reduced.
Electronic Item
- Means data storage and handling device for e.g. – computer, digital diary, printer etc.
- Does not include household appliance for e.g. – washing machine, microwave oven etc.
Q. Find out the taxable value of the perquisite in the following cases for the A/Y 2015 – 16.
1. X is given a laptop by the employer company for using it for office and private purpose (ownership
is not transferred). Cost of the laptop to the employer is ` 96,000.
2. On October 15, 2014, the company gives its music system to Y for domestic use. Ownership is not
transferred. Cost of music system (in 2001) to the employer is ` 15,000.
(ix) Misc. Benefits Rule 3(7)(ix)

The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the
basis of cost to the employer under an Arm’s Length Transaction as reduced by the employee’s contribution, if any.
However, nothing contained in this item shall apply to the expense on telephone including mobile phone actually
incurred on behalf of the employee by the employer.
9899555900 Page 30
PERQUISITES TAXABLE IN THE HANDS OF SPECIFIED EMPLOYEES

(i) Sweeper, Gardener, Watchman or Personal Attendant Rule 3(3)
Actual cost – to the employer shall be taxable value in the hands of employee.
If above person(s) is engaged by the employer then its value shall be taxable in the hands of Specified
Employees only.
If employer provides a RFA (owned by employer) to his employee, expenses (inclusive of salary of gardener)
incurred by the employer on maintenance of garden and ground attached to the house, is not taxable
separately.
Domestic servant allowance given to an employee is always chargeable to tax. It is taxable even if the
allowance is used for engaging a domestic servant.
(ii) Gas, electricity or water for household consumption Rule 3(4)

If from own sources – Manufacturing cost per unit incurred by the employer shall be
taxable value.
In any other cases – Amount paid by the employer to outside agency, shall be the
taxable value.
If the Gas, Electricity or water connection are in the name of the employees and the expense of the supplies are met by
the employer, it is an obligation of the employee being discharged by the employer and therefore this perquisite is
taxable in the hands of all employees.
(iii) Children education (Free or Concessional) Rule 3(5)

(a) Education facility is owned by the employer or
(b) Free education is provided in any other educational institution by reason of employee being
in employment of that employer.
 The value shall be fees charged by a similar school in a similar locality.
 However nothing shall be taxable in the above two cases if value per child does not exceed `
1,000 PM (no restriction on no. of children)
 Where such amount exceeds ` 1,000 p.m. per child than only amount in Excess of ` 1,000 p.m. per child
shall be chargeable to tax.
A literal reading of Rule 3(5) indicates that if the cost of education per child exceeds ` 1,000 p.m., the entire cost
will be the value of perquisite. However, keeping in view the Departmental instructions in respect of FREE MEAL
and GIFT vide Circular No. 8/2013, dated October 10, 2013, where the similar language is used, only the sum in
excess of ` 1,000 p.m. per child alone should be treated as perquisite.
The same view is taken by the Delhi Tribunal in the case of ITO v. Bal Bharti Public School (2007).
But in the case of CIT v. Director, Delhi Public School, P&H HC has taken a contrary view i.e. nothing is taxable only
if cost of education in a similar institute after excluding amount recovered from the employee is equal to or less
than ` 1,000 p.m. per child. In case, it exceeds ` 1,000 p.m. per child, the entire amount is chargeable to tax.
It is respectfully submitted that the decision of Delhi Public School requires consideration.
(c) In any other case – actual expenditure incurred by the employer shall be its value. In such case no
exemption shall be allowed.
9899555900 Page 31
Notes:
(1) Amount incurred by the employer for providing free education facility or training to an employee is not
taxable.
(2) Scholarship granted to meet the cost of education are exempt. Section 10(16)
Amount of Scholarship given by the employer company to children of its employee solely its discretion
without reference to terms of employment is not assessable as perquisites in the hands of employee.
CIT v. M.N. Nadkarni (Bom. HC) (1986) and CIT v. B L Garg (2006) (All. HC)
(3) Where education facility is provided to a member of household then in that case exemption of ` 1,000
shall not be available, so the Total Value of perquisites shall be taxable even such value is less than `
1,000.
Q. Find out the value of taxable perquisite in the hands of Mr. X, for the A/Y 2015 – 16 in the following cases:
1. Education of X's daughter is provided in a school run by employer. Cost of education in a similar school
is ` 13,000 p.a.
2. X's son is a student of DPS, Noida. ` 15,000 p.a. being tuition fees of his son is paid by X's employer. There is
agreement between X's employer and DPS, Noida.
3. Employer reimbursed ` 16,000 as Tution fees of college of employees daughter.
4. X's employer provided education to X's dependent brother in his own school costing ` 15,000 p.a.
5. X attends a seminar the fee of which was paid by the employer. The fee for the seminar was ` 3,500.
Example: Handsome Public School, Ghaziabad is owned and maintained by P Ltd. Books of account of the school
and P Ltd. are maintained separately. A is an employee of P Ltd. The following family members of A are students in
Handsome Public School –
Cost of education in a similar institution Amount charged from A
B, daughter of A ` 5,500 per month ` 800 per month
D, dependent brother of A ` 6,000 per month ` 1,600 per month
Ans.
School is maintained by employer. Amount taxable in the hands of A will be as follows:
B (Daughter of A) [12 X (` 5,500 – ` 1,000 – ` 800)] ` 44,400
D (Brother of A) [12 X (` 6,000 – ` 1,600)] ` 52,800
Total Taxable Value ` 97,200
Suppose, Handsome Public School is not owned / maintained by P Ltd. As per arrangement of P Ltd. with the
school, family members of employees of P Ltd. can have educational facility in the school. 100 seats are reserved
for this purpose for which the company annually pays ` 40 lacs to the school (no separate billing by the school to
the employee of P Ltd.). Family members of A are students of the school. Cost of education in a similar institute and
amount charged from A by P Ltd. are given in the above table.
Ans.
The taxable amount will be the same as above calculated.
9899555900 Page 32
(iv) Leave Travel Concession

Section 10(5)
Any concession received by employee for himself or his family for travelling to any place IN INDIA after
retirement or after termination of his service is exempt, to the extent AMOUNT SPENT, subject to the
following conditions:
(i) Exemption can be claimed for two journeys in a block of 4 years i.e. 01.01.2010 to 31.12.2013 current
block is 01.01.2014 to 31.12.2017. The period of four years has to be taken as per period fix under the Act.
The date of joining with the employer is not relevant.
 Out of two journeys, exemption for one journey can be claimed in the calendar year
succeeding the end of the block.
 Exemption is available only for two children. But exemption will be available for all the children
born before October 1, 1998. In addition, the exemption will be admissible to only two surviving children
born on or after October 1, 1998. In reckoning this limit of two children, children born out of multiple
birth after the first child will be treated as “One Child” only.
(ii) Amount of exemption:

If journey is performed
(a) by Air then air economy fair of the National Carrier by the shortest route shall be exempt.
(b) Where journey is performed by Rail then First AC Rail fair of the by the shortest route shall
be exempt.
(c) by any mode other than air and
 destination is connected by rail then first AC rail fare by the shortest route shall be
exempt,
 destination is not connected by rail then
- 1st Class or Deluxe Class fare, if recognised public transport system exists, shall be
exempt, e.g. buses, boats etc.
- First AC rail fare shall be exempt, if recognised public transport system does not
exist, assuming that destination is connected by rail.
Where journey is performed from the place of origin to different places, the exemption will be limited to
what is admissible for the journey from the place of origin to the fastest point reached, by the shortest
route possible.
The quantum of exemption is limited to the actual expenses incurred on the journey. In other words,
without performing any journey and incurring expenses thereon, no exemption can be claimed.
Q. Mr. P was given LTC by his employer. He was given business class ticket of ` 20,000 whereas economy class
ticket was of ` 12,000. Calculate the taxable amount in the hands of Mr. P.
9899555900 Page 33
Q. Mr. X was given LTC by his employer. He was given second AC rail ticket of ` 9,000 whereas first AC ticket was of
` 12,000. Calculate the taxable amount in the hands of Mr. A.
Note:
1. Concession is available even if the employee retires or he terminates the job.
2. Exemption in no case exceeds the actual expenditure incurred on the performance of journey.
3. The exemption is allowed only in respect of fare. Expenses incurred on porterage (Wages of a carrier
driver), conveyance from residence to railway station, airport, bus stands and back and boarding and
lodging or expenses during the journey will not qualify for exemption.
4. If any fixed allowance is given by the employer to the employee like Leave Travel Allowance on the basis
of self declaration made by the employee would not be exempt u/s 10(5).
Dr. Ready Laboratories Ltd. V. ITO (Hyderabad HC)
5. Exemption shall not be available if the family members are travelling separately without the employee
who is not on leave. Circular No. 8 / 2012 dated October 5, 2012.
9899555900 Page 34
(v) Medical Facility [Proviso to section 17(2)]

(A) In India
(1) Expenditure incurred or reimbursed on any medical treatment provided to an employee or any
member of his family is fully exempt without limit, for treatment in any hospital, dispensary etc.
(a) Maintained by the Employer;
(b) Maintained by the Government;
(c) Maintained by any Local Authority or
(d) Approved by Government for treatment of Government employees or
(e) Approved (By Principal Chief Commissioner OR Chief Commissioner of Income tax) for a specified disease
only for treatment of specified disease, but in this case a certificate from the hospital has to be obtain and
receipt for the amount paid to the hospital to be attached along with ROI.
(2) Health insurance premium incurred OR reimbursed for insurance approved by the CG or IRDA on the
health of employee or any member of his family is fully exempt without limit.
(3) Any Reimbursement by the employer of any amount actually spent by the employee for
obtaining his or his family member's treatment in any hospital, nursing home or a clinic [in addition to 1
above] upto maximum of ` 15,000 P.A.
(B) Outside India:

(a) Such Medical Expenses shall be tax free to the extent permitted by RBI for employee or any member of his
family.
(b) Expenses on stay abroad of the employee or any member of his family for medical treatment with one
attendant who accompanies the patient in connection with such treatment, to the extent permitted by
RBI.
(c) Travel expenses of patient (employee or his family member) and one attendant who accompanies the
patient in connection with such treatment shall be exempt, if gross total income (excluding such travel
expenses but after including taxable medical and boarding) does not exceed ` 2,00,000.
If GTI Exceeds ` 2,00,000 then total amount of travelling expenses incurred by the employer shall be taxable i.e.
included in the salary.
Amount payable by an employer, directly or indirectly, to effect an assurance on the life of the assessee other
than payment made to RPF, Approved Superannuation fund, deposit – linked insurance fund under the Coal Mines
Provident Fund Act, or Employee’s Provident Fund Act is taxable in the hands of all employees.
However insurance premium paid by the employer under certain schemes such as, Group Insurance Scheme,
Employee’s State Insurance Schemes and Fidelity Guarantee Scheme is not regarded as perquisite,
Family for valuation of medical facilities & LTC means:

(i) Spouse and children of the employee, whether dependent or not, whether married or unmarried.
(ii) Parents, Brothers and Sisters of the employee who are wholly or mainly dependent on employee.
9899555900 Page 35
(vi) Free or Concessional Journey given to the transport employees and their family members Rule 3(6)
Particulars Value of Perquisites
Provision of transport to the employee or to a member of
his household by the employer who is engaged in the
carriage of passengers or goods –
(a) In the case of employee of an Airline or the Railways Nil
(b) In the case of any other employee: Value at which such benefit or amenity is
(i) If provided free of cost offered by such employer to the public.
Reduce from the above value, the amount
(ii) If provided at concessional rate paid by or recovered from the employee for
such benefit or amenity.
Specified employee Section 17(2)(iii)

1. Director of the company at any time during the Previous Year OR
2. Employee having 20% or more voting power in the employer company NOT BEING PREFERENCE SHARE. EVEN
THE SHARES ARE NOT REGISTERED IN HIS NAME THE SHAREHOLDER IS COVERED BY THIS DEFINITION OR
3. Employee having salary more than ` 50,000 P.A.

The following are excluded or deducted:
(a) All non – monetary benefits;
(b) Monetary benefits which are not taxable u/s 10 [for instance, HRA to the extent exempt u/s 10(13A) is
excluded]; and
(c) Deduction on account of entertainment allowance and deduction on account of Professional Tax.
Where salary is received from more than one employer, the aggregate salary from these employers will have to
be taken in to account for the purpose of determining the aforesaid monetary ceiling.
Salary means all taxable monetary payments, after deduction u/s 16.
9899555900 Page 36
Valuation of motor car (Taxable in the hands of Specified Employees)
Case 1: Owned or hired by employer and used
Partly official and Partly

Exclusively for Exclusively for Private
personal
Official purpose purpose
Nil taxable if Runn. & main – Actual Runn. & main. expenses born by
Specified Documents Chauffeur – Actual (Actual exp. is irrelevant)
Maintained Wear & Tear 10% p.a. of
Cost Or Hire charges Employer Employee
Upto 1.6 ltrs Upto 1.6 ltrs

Cubic capacity Cubic capacity
` 1,800 p.m. ` 600 p.m.
Shall be taxable Shall be taxable
Exceeding 1.6 ltrs Exceeding 1.6 ltrs

` 2,400 p.m. ` 900 p.m.
Shall be taxable Shall be taxable
Add ` 900 p.m. if chauffeur is also provided.
Case 2: Owned by employee and used
Exclusively for Partly official and partly personal Fully for private
Official purpose Private purpose use
Nil if Specified Total Actual exp. for office and personal Actual exp. Incurred
Documents Less: ` 1,800 / ` 2,400 pm by employer shall be
Maintained Less: ` 900 For Chauffeur (if any) taxable.
BALANCE WILL BE TAXABLE

However if actual expenditure
For official purpose is more than
The limits than actual expenditure
Can be deducted by maintaining specified documents
(i) Specified documents
1. The employer has maintained complete details of journey undertaken for official purpose which may include date of
journey, destination, mileage and the amount of expenditure incurred thereon.
2. The employer gives a certificate that expenditure was incurred wholly and exclusively for official purposes.
(ii) If employee has been provided with more than one car, which are not used exclusively for official purposes then
(a) Value of one car shall be ` 1,800 or ` 2,400 + ` 900 p.m. for driver (if any) as the case may be and
(b) The value of other cars shall be as if they are used exclusively for personal purposes.
Note: Vehicle provided by the employer for commuting from residence to office and back shall not be treated as private use of
the employee. Conveyance facility provided to the High Court and Supreme Courts Judges is not taxable.
9899555900 Page 37
Deductions
Section 16
1. Standard deduction:-
Deleted by Finance Act 2005
2. Professional Tax:-
Any amount paid by the employee shall be allowed as deduction in the year of payment.
[As per Article 276 of the Constitution State Govt. and Local Authorities can impose tax on professionals,
employments. But for one year professional tax cannot be charged more than ` 2500]
Deduction is allowed in the year of actual payment whether it is related to current, past OR future years.
Note:- If professional tax of employee is paid by employer then first it shall be included in the gross salary of all
employees and then deduction shall be allowed u/s 16
3. Entertainment allowance:-
For Government employees – the deduction is least of the following:
(a) actual amount received during the year
(b) 20% of salary
(c) ` 5,000
Meaning of salary: Only basic salary
9899555900 Page 38
Income from House Property
Tax under this head not on actual rent rather it is on the rent which can be earned from the building. But tax
is not charged for the period it remains vacant. Also no tax is charged for only one building self-occupied for
residence. Certain deductions are provided from the rent on account of expenditure incurred for earning rent.
SECTION CONTENTS
22 Basis of charge
23 Annual value
24 Deductions - Standard Deduction, Interest on borrowed capital
25 Interest on borrowed capital Payable outside India
25 AA Recovery of unrealized rent
25B Special provisions for arrears of rent received
26 Co – ownership
27 Deemed Owner
Computation of income under head house (Refer basics of income tax)
Basis of charge
Section 22
 Annual value of building and land appurtenant* thereto
 of which the assessee is the owner (Including Deemed Owner)
 other than such portion of such property as he may occupy for the purpose of any business or
profession carried on by him the profit of which is chargeable to income – tax.
 Shall be chargeable to income – tax under the head of “Income From House Property”.
Notes:
1. Even if letting out is the business of the assessee, still rental income of building is taxable
under the head house property only. Rental income from vacate land or plot is taxable under
head “Other Sources”.
2. If assessee is not the owner of the building then rent shall be taxable under head other sources.
3. However in following cases rental income of building is not taxable under this head:-
(a) If the building is let out to carry on the business more efficiently like given building on rent to
a Bank and excise office etc., then it shall be taxable under head PGBP e.g. residential quarters
let out to employee by his employer.
(b) In case of composite rent, if it is inseparable.
4. If along with building any service like gas, water, electricity, guard, air conditioning etc. is also
provided then total rent shall be bifurcated and rent related to building shall only be taxable
under head “House Property” and the rent related to servic es shall be chargeable under head
“Profit or gains from Business & Profession” Or “Other Sources”.
9899555900 Page 39
Chelmford Club v. CIT (SC) (2000) A club owns a house property and it provides recreational and
refreshment facilities exclusively to its members and their g uests. Its facilities are not available to
non – members. The club is run on ‘no profit no loss’ basis in that the members pay for all their
expenses and not entitled to any share in the profit. Surplus if any is used for maintenance and
development of the club. The business of the club is governed by principle of mutuality. It is not only
the surplus from the activities of the business of the club that is excluded from the levy of the income
– tax, even the annual value of the club house as contemplated in the section 22 will be outside the
preview of levy of income – tax.
Note: If building is occupied by assessee for his own business or profession then nothing shall be
taxable. But if it is occupied for his own residence then it may be taxable .
Example: Mr. X let out his house on a rent of ` 4,000 PM. FRV of the house is ` 9,000 PM and MV is ` 7,000 PM.
Municipal taxes paid were ` 2,500. Interest on loan was ` 3,000, repair ` 1,500, insurance Premium ` 2,000. He
provided following facility to the tenant in addition to rent.
Furniture ` 800 PM; Electricity and water ` 400 PM; Gardner & Watchman ` 500 PM
Calculate Income under head HP. Ans: ` 70,850.
Deemed Owner
Section 27
(1) In the case of transfer (Gift) to spouse or minor child (not being a minor married daughter),
transferor shall be deemed as owner. This provision shall not cover those cases where a property is
transferred to a spouse in connection with an agreement to live apart.
Where the individual give cash to his or her spouse or minor child and the transferee purchase a
house property out of such cash, the cash transferor shall not be treated as deemed owner of such
house property. [Section 27(i)]
(2) Holder of Impartible estate is deemed as owner. Impartible estate means the property which is not
legally divisible. [Section 27(ii)]
(3) In the case of allotment or lease under a House Building Scheme of society, company or other
association, the person to whom building has been allotted shall be deemed as owner.
[Section 27(iii)]
(4) The person who acquired house without registration in part performance of a contract u/s 53A
of Transfer of Property Act, 1882 is deemed as owner.
[For transferring property, consideration has to be paid or promised to be paid, possession has to be
transferred but sale deed has not been executed in favour of the buyer although certain other
documents like power of attorney/ agreement to sale / will have been executed] Also see sec 2(47)
of Capital Gain. [Section 27(iiia)]
(5) The lessee of a building in case building is leased out for not less than 12 years is deemed as owner.
However this case in not cover those cases in which a lease is acquired from month to month basis or
for a period not exceeding one year. [Section 27(iiib)]
Disputed ownership -If the title of ownership is disputed in a court of law, the income shall be taxable in
the hands of recipient*. OWNERSHIP includes both free hold and leasehold rights.
9899555900 Page 40
Method of computation income under head House Property

Gross Annual Value xxx
Less : Municipal Taxes paid by owner * xxx (*Including Service Tax if any)
Annual Value (Net Annual value) xxx
Less: Deductions u/s 24
(i) Standard Deduction 30% of NAV xxx
(ii) Interest on borrowed fund for house xxx xxx
Income from House Property xxx
Annual Value
Section 23
Gross Annual Value: which will be higher of Municipal Value and Fair Rental Value, But it cannot exceeds the
Standard Rent. However if the actual rent received or receivable exceeds such amount then the actual rent so
received / receivable shall be GAV.
Step 1: Find out reasonable expected rent of the property

MV and FRV whichever is higher, but it cannot exceeds Standard Rent
Step 2: Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due
to vacancy
Rent of the previous year (or that part of the previous year) for which the property is
available for letting out XXX
Less: Unrealised rent if a few conditions are satisfied XXX
Rent received / receivable XXX
Note: Loss due to vacancy shall not be deducted from the aforesaid computation. It shall be deducted
under Step 4.
Note: For calculation of actual rent, if any obligation of tenant met by owner then such amount shall be reduced
from the rent charge, if such amount is included in the rent, because we only taxed here the rental income. But if
any charge of the owner is met by tenant then such charges shall be added to the actual rent charge by the owner.
It may however be observed that the Municipal taxes of the House Property are to be borne by the occupier who in
the case of let – out property is the tenant. Therefore, if such municipal taxes are borne by the tenant the rent
received or receivable should not be increased to calculate de facto rent. In other words, tenant’s share of
municipal tax realised from the tenant cannot be added to actual rent received / receivable as it is the occupier’s
duty to pay Municipal Tax. CIT v. Gillanders Arbuthnot & Company Ltd. (1983) (Cal.)
If cost of repair is borne by the tenant, the rent received / receivable should not be increased to calculate de facto
rent. CIT v. Parbutty Churn Law (1965) (Cal.)
No addition can be made to rent received or receivable with respect to any notional interest on deposit made by a
tenant with landlord. CIT v. Satya Co. Ltd. (1994) (Cal.)
9899555900 Page 41
Step 3: Find out which one is higher: Amount computed in Step 1 and 2
Step 4: Find out loss due to vacancy
Step 5: Step 3 MINUS Step 4 is Gross Annual Value
Note: Reasonable expected rent cannot exceed the amount of Standard Rent. Reasonable expected rent can,
however, be lower than standard rent. Balbir Singh V. MCD (1985)(SC).
In other words, SR is the maximum amount of reasonable expected rent.
The Annual value of any property shall be deemed to be

(1) Rent for which the House property let out throughout the previous year
(a) the sum for which the property might reasonably be expected to let from year to year OR
[Expected Rent = Municipal value or FRV whichever is higher. But it cannot exceed Standard Rent.
Shiela Kaushik v CIT (SC) (1981)]. Although the expected rent as per section 23(1)(a) cannot exceed the standard
rent but it can be lower than Standard Rent.
[Expected rent is always computed for 12 months except when construction is completed or house is purchased is
for less than 12 months]
(b) if the actual rent received or receivable is in excess of the sum referred to in clause (a) the amount so received
or receivable, SHALL BE GROSS ANNUAL VALUE OR
(c) where the property is let and was vacant during the whole or any part of the previous year and owing to such
vacancy the actual rent received or receivable is less than the sum referred to in clause (a) the amount so
received or receivable, SHALL BE GROSS ANNUAL VALUE.
Explanation to section 23(1)

For the purpose of clause of (b) or clause (c) of this sub – section, subject to the following condition, actual rent
received or receivable shall not include the rent which the owner cannot realize if the following conditions are
satisfied:
(i) Defaulting tenant has vacated property or steps have been taken to compel him to vacate the property and
(ii) The defaulting tenant is not in occupation of any other property of the assessee and
(iii) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of unpaid rent or
satisfies the AO that legal proceedings would be useless
9899555900 Page 42
Example:
I Ii iii iv v
Municipal value 1,05,000 1,05,000 1,05,000 1,05,000 1,05,000
Fair Rental Value 1,07,000 1,07,000 1,07,000 1,07,000 1,07,000
Standard Rent NA 88,000 88,000 1,35,000 1,35,000
Actual Rent 1,03,000 1,12,000 86,000 1,14,000 97,000
Unrealized rent (conditions of Explanation to 1,000 2,000 1,000 2,000 1,000
section 23(1) are satisfied)
Period of the previous year (in months) 12 12 12 12 12
Period during which property remains vacant Nil Nil Nil Nil Nil
Find out the Gross Annual Value for Assessment Year 2015 – 16.
Computation of Gross Annual Value
i ii iii iv v
Step 1: Expected rent of the property (MV or FR, 1,07,000 88,000 88,000 1,07,000 1,07,000
Whichever is higher, but subject to maximum of SR)
Step 2: Rent received / receivable after deducting 1,02,000 1,10,000 85,000 1,12,000 96,000
unrealized rent but before adjusting loss due to
vacancy
Step 3: Amount computed in Step 1 or Step 2, 1,07,000 1,10,000 88,000 1,12,000 1,07,000
whichever is higher
Step 4: Loss due to vacancy Nil Nil Nil Nil Nil
Step 5: Gross Annual Value is step 3 minus Step 4 1,07,000 1,10,000 88,000 1,12,000 1,07,000
Example: X owns a house property (Municipal Valuation: ` 1,45,000, Fair Rent ` 1,36,000, Standard Rent: `
1,24,000). It is let out throughout the previous year (rent being ` 8,000 per month upto November15, 2014 and
14,000 per month thereafter). X transfer the property to Y on January 31, 2015. Find out the Gross Annual Value of
the Property in the hands of Mr. X for the Assessment Year 2015 – 16.
Computation of GAV
`
Municipal Value from April 1, 2014 to January 31, 2015 (` 1,45,000 / 12 X 10) (MV) 1,20,833
Fair Rent from April 1, 2014 to January 31, 2015 (` 1,36,000 / 12 X 10) (FR) 1,13,333
Standard Rent April 1, 2014 to January 31, 2015 (` 1,24,000 / 12 X 10) (SR) 1,03,333
Step 1: Expected rent of the property (MV or FR, Whichever is higher,

but subject to maximum of SR) 1,03,333
Step 2: Rent received / receivable after deducting unrealized rent but before
adjusting loss due to vacancy (8,000 X 7.5 + 14,000 X 2.5) 95,000
Step 3: Amount computed in Step 1 or Step 2, whichever is higher 1,03,000

Step 4: Loss due to vacancy NIL
Step 5: Gross Annual Value is step 3 minus Step 4 1,03,333
9899555900 Page 43
Example:
I Ii Iii iv V Vi
Municipal value 50,000 75,000 76,000 78,000 84,000 48,000
Fair Rental Value 74,000 75,000 82,000 85,000 80,000 50,000
Standard Rent NA 75,000 90,000 NA 75,000 NA
Actual Rent 48,000 80,000 85,000 96,000 70,000 54,000
Gross Annual Value
Note: In case no. (iii) Standard rent will not be considered because it is more than the maximum of other two
factors.
Q. Mr. Z is let out his house for ` 5,000 PM. It could not let out for 5 months and remained vacant.
Compute the income under head HP in the following cases:-
FRV (i) ` 3,500 PM (ii) ` 5,000 PM
Q. Mr. P let out his house for ` 5,000 PM. But the tenant did not pay rent for 6 months. FRV of the house is also
` 4,000 PM. Calculate GAV. Ans: ` 30,000.
9899555900 Page 44
Q. whether unrealized rent should be deducted from GAV or Actual Rent?

Ans. As per study material of ICAI it shall be deducted from actual rent.
But as per income tax return format it should be deducted from GAV. It should be clarified as under:
Q. Municipal Value ` 2,00,000

FRV ` 2,40,000
Actual rent (per month) ` 21,000
Municipal taxes paid ` 20,000
The tenant vacated the property on 31.10.2014 and thereafter the property was let out for ` 25,000 p.m.
Assessee could not realize the rent for the month of September and October due to death of the tenant.
(a) Compute the annual value of the property for the A / Y 2015 – 16.
(b) What will be your answer if the unrealized rent for one month instead of 2 months.
Ans:
Computation of annual rent
Approach to ICAI
Solution to Q (a) ` `
Expected rent will be 2,40,000
Actual rent (21,000 x 7 +25,000 x 5) 2,72,000
Less: unrealized rent 42,000 2,30,000
GAV 2,40,000
Less: Municipal Taxes paid 20,000
NAV 2,20,000
Solution to Q (b) ` `
Actual rent (21,000 x 7 +25,000 x 5) 2,72,000
Less: unrealized rent 21,000 2,51,000
GAV 2,51,000
NAV 2,31,000
Approach to ITR
Solution to Q (a) `
Actual rent (21,000 x 7 +25,000 x 5) 2,72,000
`
GAV 2,72,000
Less: Unrealized rent 42,000
NAV 2,10,000
9899555900 Page 45
Solution to Q (b) `
Actual rent (21,000 x 7 +25,000 x 5) 2,72,000
`
GAV 2,72,000
Less: Unrealized rent 21,000
NAV 2,31,000
It is therefore, recommended that, unrealized rent shall be deducted after computation of Gross Annual Value as
provided in the Income Tax Return Forms.
Computation of Annual Value of one – self occupied Property

Section 23(2) where the house or part of a house
(a) Is in the occupation of the owner for his own residence; or
(b) Cannot actually be occupied by the owner by reason of his employment, business or profession carried on at
any other place, he has to reside that other place in a building not belonging to him,
The annual value of such house or part of the house shall be taken to be NIL.
(3) The annual value shall not be nil if the house or part of the house is actually let during any part of the P/Y.
(4) Where assessee has more than one self occupied house –
a) The annual value shall be nil only in respect of one house, the assessee may at his option specify;
b) The annual value of the house or other house shall be determined under sub – section (1) as if such house or
houses had been let.
Important Note:
(1) However, if an assessee has a house property which consists of two or more residential units and all such units
are self occupied, the annual value of the entire house property shall be taken as nil as there is only one house
property though it has more than one residential units.
If the assessee let out his house to his employer, which in turn allots the same to him, as rent free accommodation,
such house will not be treated as self occupied for the above purpose, because he is not occupying his own house in
the capacity of owner. [D.R. Sunderraj v CIT (AP) (1980)]
Provided that the taxes levied by any local authority in respect of the property shall be deducted in determining
the annual value of the property, of that P/Y in which such taxes are actually paid by him (irrespective of the P/Y in
which the liability to pay such taxes was incurred).
(NAV [Net Annual Value] can be negative if, municipal taxes actually paid during the year is more than GAV. Any
municipal taxes paid outside India is also allowed as deduction)
9899555900 Page 46
The aforesaid rules are applicable only in the case of natural persons. In other words, Companies, Firms,
Associations and clubs cannot be claim the benefit of steps mentioned above as they cannot occupy a house for
residential purposes. The Karta of HUF (being a natural person) is, however, entitled to the aforesaid benefit.
When owner occupies a house in some other capacity: The aforesaid provisions cannot be applied to cases where
the owner of the house is not occupying his own house in his capacity as “owner” for residential purposes. If the
assessee let out his house to his employer – company which, in turn, allots the same to him as rent – free quarter,
the assessee is not entitled to the aforesaid benefits, as he occupies the house not as owner but only in his capacity
as sub – tenant of the employer – company. D R Sunder Raj v. CIT (1979)(Andhra Pradesh HC).
Maximum Interest for Self Occupied House

 Where the property is acquired or constructed with capital borrowed on or after 01.04.1999 and
 Such acquisition or construction is completed within three years of the end of the financial year in which
the capital was borrowed,
 Then the maximum deduction of interest in relation to such property shall be ` 2,00,000 subject to a
certificate has been obtain from the person to whom such interest is payable specifying the amount of
interest is payable by the assessee for the purpose of acquisition and construction of the property.
There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the
residential unit could have commenced before 1 April, 1999 but, if the aforesaid three conditions are satisfied, the
higher deduction of ` 2,00,000 would be available.
Deductions
Section 24
Even where the property situated outside the country, taxes levied by local authority in that country are deductible
in deciding the Annual Value the property. [CIT v. R. Venugopala Reddiar (1965) (Mad. HC)
Income under head HP can be calculated after allowing the following deductions:
Standard Deduction:-
(i) 30% of the net annual value shall be allowed as deduction from net annual value. If NAV is negative then
standard deduction shall be nil.
(ii) Interest on borrowed capital: The loan may be taken for purchase, construction, repair, renewal or
reconstruction of the building.
Deduction of Interest is allowed even if it is not actually paid i.e. on accrual basis even if books of account are
kept on cash basis.
Provided also that no deduction shall be made under the second proviso unless the assessee furnish a certificate
from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable.
9899555900 Page 47
Notes:
1. No deduction is allowed for any brokerage OR commission for arranging loan (Cir. no. 28 Dated 20.08.1969).
2. Interest on fresh loan taken to repay the original loan is allowed as deduction if ITO is satisfied (Cir. no. 28
Dated 20.08.1969).
3. Interest on unpaid interest is not deductible [Shew Kissen Bhatter v CIT (SC) (1973)].
4. Interest on principal amount shall be allowed deduction even if unpaid.
5. Any interest chargeable under the Act, in the hands of recipient and payable out of India, on which tax has
not been paid or deducted at source, and in respect of which there is no person who may be treated as an
agent, is not deductible, by virtue of section 25, in computing income chargeable under the head ‘Income
From House Property’.
6. Where an assessee uses his property for carrying out his business or profession, no income is chargeable to
tax under the head ‘Income From House Property’. The assessee, in such a case, is not entitled to claim any
deduction on account of rent in respect of such House Property in computing taxable profits of the business
or profession.
Notes:
Interest of Pre – construction period
 If loan is taken prior to completion of construction or purchase of house
 total interest for the period prior to the previous year in which the property has been acquired or
construction is completed
 is deductible in 5 equal installment
The deduction shall be given 1/5 of total interest in the first year in which property is a cquired or construction
is completed and balance in future 4 years.
Interest will be aggregated from the date of borrowing till the end of the previous year prior to the previous year
in which the house is completed and not till the date of completion of construction OR acquisition of the house.
Pre – construction period means the period commencing on the date of borrowing and ending on 31 st March
immediately prior to the date of completion of construction / date of acquisition OR date of repayment of loan,
WHICHEVER IS EARLIER.
► Q. Mr. P took a loan of ` 5,00,000 @ 12% p.a. on 01.02.12. He took additional loan of ` 4,00,000 on 01.04.12 @
12% p.a. He repaid ` 3,00,000 on 01.09.2012. Construction of the house is completed on 01.06.2014. Compute
deduction of interest for P/Y 13 – 14, and in P/Y 14 – 15.
Ans. Interest for pre – construction period = ` 1,69,000, Deduction for P/Y 2013 – 14 = Nil,
For 2014 – 15 = ` 33,800 + ` 72,000 = ` 1,05,800
►Q. Mrs. R took a loan on 01.03.13 of ` 5,00,000 @ 12% p.a. for construction of a house. She repaid the entire
loan on 31.03.14. Construction is completed on 01.01.2015. Compute the deduction of interest.
Section 25 Interest on borrowed capital, payable outside India shall be allowed deduction if
(i) Tax on the same has been paid and deducted at source. OR
(ii) In respect of such income any person in India may be treated as agent of non – resident.
9899555900 Page 48
Q. Mr. X has two houses which have been self occupied by him throughout the previous year for his own residence.
Determine that which house should be treated by him to be self – occupied?
House I House II
FRV 20,000 PM 15,000 PM
Municipal Value 18,000 PM 20,000 PM
Interest on loan for repair ` 8,000 ` 20,000
Ans. Step 1. Both the houses are let out:

Particulars House I House II
GAV 2,40,000 2,40,000
Less: Municipal Taxes Paid Nil Nil
NAV 2,40,000 2,40,000
Less Standard Deduction @ 30% of NAV 72,000 72,000
Less: interest on loan 8,000 20,000
Income under HP 1,60,000 1,48,000
Step 2. Both houses are self occupied:

GAV Nil Nil
Less: Municipal Taxes Nil Nil
NAV Nil Nil
Less Standard Deduction @ 30% of NAV Nil Nil
Income under HP (8,000) (20,000)
Step 3.
Q. What will be your answer if in case of house I interest on loan is ` 1,00,000 instead of ` 8,000?
Ans. Step 1. Both the houses are Let out occupied:
GAV 2,40,000 2,40,000
NAV 2,40,000 2,40,000
Less Standard Deduction @ 30% of NAV 72,000 72,000
Less: interest on loan 1,00,000 20,000
Income under HP 68,000 1,48,000
9899555900 Page 49
Step 2. Both houses are self occupied:

GAV Nil Nil
NAV Nil Nil
Less Standard Deduction @ 30% of NAV Nil Nil
Income under HP (30,000) (20,000)
Step III:
Option 1: House 1 is self occupied and house 2 is let out
= (30,000) + 1,48,000 = 1,18,000
Option 2: House 2 is self occupied and house 1 is let out
= (20,000) + 68,000 = 48,000
Therefore, Mr. A should opt for option 2, where house 2 is treated as SO.
(2) House property which is part of the year let and part of the year occupied for own residence.
Annual property of such shall be determined as per the provision of section 23(1) relating to let out property. In
this case, the period of occupation of property for own residence shall be irrelevant and annual value of such
house property shall be determined as if it is let for part of the year. Hence, the expected rent as per section
23(1)(a) shall be taken for full year but the actual rent received or receivable shall be taken only for the period
let and the Gross Annual Value shall be higher of these two.
Q. Mr. X has let out his house for 7 months for ` 5,000 PM. For the remaining period it was self occupied. FRV of the
house is ` 3,000 PM, compute his income.
Ans:
Particulars `
Expected Rent 36,000
Actual Rent 35,000
GAV 36,000
Less: Municipal Taxes Paid Nil
NAV 36,000
Less: Standard deduction @ 30% of NAV 10,800
Less: Interest Nil
Income Under Head House Property 25,200
9899555900 Page 50
Q. Mr. X is the owner of a house. This was let out for 4 months at ` 5,000 PM. For the remaining 8 months it was self
occupied. Determine his income.
Ans:
Particulars `
Expected Rent 60,000
Actual Rent 20,000
GAV 60,000
Less: Municipal Taxes Nil
NAV 60,000
Less: Standard deduction @ 30% of NAV 18,000
Less: Interest Nil
Income Under Head House Property 42,000
Summary
if loan taken on or after 01.04.99 IF LOAN TAKEN

+
for purchase / construction
+
Other
Construction completed in 3 years
Upto ` 2,00,000/- Up ` 30,000/-
Total deduction for all loans cannot exceed ` 2,00,000

► Q. Compute the deduction of interest for self occupied property in the following cases:-
(i) (ii) (iii) (iv) (v)
Interest on Loan for repair 2,30,000 Nil 30,000 20,000 50,000
Interest on Loan for purchase Nil 2,30,000 2,50,000 2,30,000 1,50,000
Deduction allowed
SUMMARY
LO SO DLO PLO/ PSO Vacant
GAV (a) ER or Nil ER Same as LO AR
(b) AR whichever is higher ER for 12 months,
AR for actually let out
Deduction Actual 30,000 / Actual Actual Actual

of Interest 2,00,000
9899555900 Page 51
Recovery of unrealised rent (P/Y 2001 – 02 or subsequent year)

Section 25AA
 Where the assessee cannot realise rent from a property let to a tenant and
 subsequently the assessee has realised any amount in respect of such rent,
 amount so realised shall be deemed to be income chargeable under this head and accordingly charged
to income tax as the income of that previous year in which such rent is realized
 whether or not the assessee is the owner of that property in that previous year.
Q. Whether deduction of 30% shall be allowed from such recovery or not?

Ans. No, deduction of 30% shall not be allowed from such recovery.
Special provisions for arrears of rent received

Section 25B
 If any assessee has let out any building and land appurtenant thereto and
 has received any amount, by way of arrears of rent from such property, not charged to income tax for any
previous year
 shall be deemed to be income of the previous year in which such rent is received
 after deducting 30% of such amount
 whether assessee is owner of that property or not.
Q. Income under head house property is taxable only if assessee is owner of any building during the p/y. Are there
any exception?
Ans: Yes there are two exceptions:

(a) Recovery of unrealized rent. (Sec. 25AA)
(b) Arrears of Rent Received. (Sec. 25B)
Co – ownership
Section 26
 If property is co-owned by two or more persons and
 the share of co-owner are definite
 then the share of each such person shall be included in his income.
Explanation:
 If the property is self occupied by co-owner,
 then annual value of such property for co-owner shall be taken to be nil and
 each of the co-owner shall be entitled to the deduction of ` 30,000 / 2,00,000.
Q. Mr. X and Y are equal co – owner of a building which is self-occupied by them. They had taken a loan for
purchase of the property before 01.04.99. Total interest on such loan accrued during current previous year was `
75,000. Decide how much deduction shall be allowed to them?
Actual Rent: There could be circumstances where the owner agrees to bear certain obligations of the tenant e.g.
the water and electricity bills of the tenant may be payable by the owner.
9899555900 Page 52
Profits and gains from business or profession
Charging Section
Section 28
Meaning of Business: The word business has a wider content than the word Trade, Commerce or Manufacture. The
definition of business being an inclusive definition and not being exhaustive is indicative of extension and expansion
and not restriction. They may even consist of rendering of services to others.
Vocation refers to any activity on which a person spends a major part of his time in order to earn his livelihood.
Following incomes are chargeable under the head 'Profits and Gains of business or profession': -
1. Profits (including loss) of any business or profession, which was carried on by assessee at any time
during the p/y.
Income earned from the exercise of any PROFESSION or VOCATION which involves the Idea of
occupation requiring either purely intellectual skill or any manual skill, is taxable under this head.
However there are certain exceptions to this principle. Therefore in the following cases even
business is not carried on during the previous year even the income shall be taxable under head
PGBP
(a) Recovery against any loss, expenditure or trading liability earlier allowed as deduction,
(b) Balancing charge in case of electricity companies,
(c) Sale of capital asset used for scientific research,
(d) Recovery against bad debts,
(e) Amount withdrawn from special reserve,
(f) Receipt of discontinued business under Cash System of Accounting.
2. Value of any benefit or perquisite (whether convertible in to money or not) arising during the course
of carrying on of any business or profession.
3. Interest, salary, bonus, commission and remuneration due to or received by a partner of a firm in
which he is a partner.
However where any interest etc. or any part thereof has not been allowed to be deducted u/s
40(b), in the computation of the income of the firm, the income to be taxed shall be adjusted to
the extent of amount disallowed.
e.g. interest paid by the firm to the partner @ 15% p.a. ` 45,000.
Payment received by a partner in realization of his share in net value of assets upon his retirement from a
firm does not fall under this point. Prashant S. Joshi v. ITO (2010) (Bom. HC)
9899555900 Page 53
4. Export incentives i.e.

 Profit on sale of import license, granted under (Control) order on account of export;
 Cash assistance by whatever name called, received or receivable against export;
 Duty Drawback under Customs and Refund under Central Excise.
 Any profit on the transfer of the DEPB*.
 Any profit on the transfer of the Duty Free Replenishment Certificate**.
* DEPB is an export incentive scheme of Indian Government provided to Exporters in India. Duty Entitlement Pass
Book Scheme in short DEPB is an export incentive scheme. Notified on 1/4/1997, the DEPB Scheme consisted of
Post – export DEPB and Pre – export DEPB.
** Merchant Exporter or Manufacturer Exporter eligible for the import of inputs utilized in the manufacture of
export products without payment of basic customs duty. However, payment of additional customs duty equal to
the excise duty at the time of import if payable.
5. Compensation
 For termination or modification of terms of any agency or Agreement of an Indian company
or any other company.
 For transferring of management of any business in government under any law for the time
being in force.
 Any person holding an agency in India for any part of the activities relating to the business of
any other person at or in connection with the termination or modification of the terms of
agency.
Q. Mr. X has the distributorship of X ltd. for 5 years. After 3 years the company terminated the contract and gave
him compensation. Discuss the tax treatment.
6. Restrictive covenants* :- Any sum under an agreement for — [*An agreement creating an obligation]
 not carrying out any activity in relation to any business; or
 not sharing any know – how, patent, copyright, trade-mark, licence, franchise or any other
business or commercial right of similar nature or information or technique likely to assist in the
manufacturing or processing of goods or provision of services etc.
But any sum on account of transfer of such rights, shall be chargeable under the head "Capital
gains".
BUT nothing shall be taxable for,
 compensation from the multilateral fund
 of the Montreal Protocol* [*Plan of a scientific experiment or treatment]
 on Substances that Deplete* the Ozone Layer [* To reduce]
 under the United Nations Environment Programme.
7. Any sum received under Keyman Insurance Policy including bonus on such policy.
9899555900 Page 54
8. Any sum, whether received or receivable –

 in cash or kind, on account of any capital asset (other than Land or Goodwill or Financial
Instruments)
 being demolished, destroyed, discarded or transferred,
 if the whole of the expenditure on such has been allowed as a deduction u/s 35AD.
9. Rent from staff quarters (let out to employees) or rent from guest house for customer or supplier, i.e. when
building is let out to carry business more efficiently.
10. Income derived by a trade, professional or similar association from specific service performed for its members.
This is an exception to the general principle that a surplus arising to mutual association cannot be regarded
as income chargeable to tax.
Q. State whether following incomes shall be included in the total income or not for A/Y 2015 – 2016
`
1. Profit earned from shoes business 3,00,000
2. Gift Received by companies Auditor 30,000
3. Salary received from a Firm (in which the individual is a partner) 45,000
4. Profit on sale of import license 10,00,000
5. Rent from land 4,50,000
6. Government give cash because of export of goods 90,000
7. Amount received by the businessman under KIP (Excluding Bonus) 6,000
Method of computing profit under Head PGBP

(1) if profit & loss account is given
Profit as per Profit and Loss A/c xxx
Step 1: Add: Income not credit to P&L A/c and taxable under this head xxx
Step 2: Less: Income credited to P&L A/c but not chargeable under this head xxx
Step 3: Add: Expenditure debited to P&L A/c but not allowed under this head xxx
Step 4: Less: Expenditure allowed under this head but not debited to P&L A/c xxx
Balance Amount is Income under head PGBP xxx
Q. with the help of given P & L A/c compute the income under head PGBP:-
P & L A/c
Purchase 35,000 Sales 90,000
Reserves 8,000 Rent from house property 8,000
Depreciation 8,000
Net Profit 47,000
Additional Information:
1. Assessee was allowed duty drawback of ` 9,000 during the p/y which is not credited to P & L A/c.
2. Depreciation as per Income Tax Act is ` 12,000.
9899555900 Page 55
(2) When receipts & payments a/c is given

Cash receipts of business chargeable to tax u/h PGBP XXX
Less: All cash Expenses allowed deduction u/h PGBP XXX
Income under head PGBP XXX
(3) When only transactions are given

Income chargeable to Tax under head PGBP XXX
Less: All expenses allowed as deduction u/h PGBP XXX
Income u/h PGBP XXX
Rent, Rates, Taxes, Repairs and Insurance for Building

Section 30
In respect of premises taken on rent, the actual rent paid by the assessee and, if he has undertaken to bear cost
of repairs, the expenditure on repair are permissible deductions. In respect of premises owned by the assessee,
no deduction is allowable on account of notional rent; amount spent on current repairs is, however allowed as
deduction. Besides, the amount paid on account of land revenue, local rates and insurance premium against the
risk of damage or destruction of the business premises are also allowable as business deduction under this
section.
Repairs and insurance of machinery, plant and furniture

Section 31
The expenditure incurred on current repair on machinery, plant and furniture used for business is allowed as
deduction under this section. Similarly premium paid in respect of insurance against risk of damage or
destruction of such assets is an allowable deduction.
The amount paid on account of current repairs shall not include any expenditure in the nature of capital
expenditure.
GENERAL DEDUCTIONS
Section 37
1. It should have been incurred wholly and exclusively for Business or Profession carried out by the
assessee,
2. It should not be of Capital in Nature and Personal in Nature,
3. It should be incurred during the previous year,
4. The expenditure should not have been incurred for any purpose which is an offence or is prohibited by
any law.
5. It shall not be covered by Section 30 to 36.
9899555900 Page 56
Few examples of such expenditure are:

1. Salary of Employees, not being the salary of the proprietor;
2. Legal expenses;
3. Expenditure incurred for protection and preservation of assets;
4. Expenditure on raising loan;
5. Expenditure on advertisement;
Expenditure allowable under specific instruction of CBDT:
6. Diwali andmahurat expenses;
7. Payment of telephone expenses;
8. Payment to registrar of the companies;
9. Annual listing expenses;
10. Professional tax paid;
11. Expenses incurred for the trainingfor the apprentices;

12. Trading loss of whatsoever nature;
13. Expenses on travelling including boarding and lodging;
14. Expenditure in connection to entertainment of employees;
15. Security under telephone scheme;
16. Damages paid to workers in connection with termination of the job.
17. Damages for the failure to complete a contract in time;
18. Replacement of worn out parts of machines;
19. Expenditure on issue of bonus share.
20. Payment of penalty / damages other than under the provision of any Act or law.
Interest for delayed payments for acquisition of Goods and Provision of any service from Micro, Small and
Medium enterprises shall not be allowed as deduction.
Instruction no. 12 / 2006 dated December 14, 2006.
Corporate Social Responsibility Expenditure (Explanation 2 to section 37(1)

Any expenditure incurred by an assessee on the activities relating to Corporate Social Responsibility (CSR) referred
to section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business
and hence shall not be allowed as deduction u/s 37. However, the CSR expenditure which is of the nature
described in section 30 to 36 or section 80G shall be allowed deduction under those sections subject to fulfillment
of conditions, if any, specified therein.
Under the Companies Act, 2013, certain companies (Which have net worth of ` 500 Crore or more, OR Turnover
of ` 1,000 Crore or more OR a Net Profit of ` 5 Crore or more during any financial year) are required to spend
certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR).
9899555900 Page 57
Rent, rates, taxes, repairs and insurance for building (Section 30)
In respect of rent etc. for building, used for the purpose of the business or profession, the following deductions
shall be allowed:
(a) Where the premises are occupied by the assessee
(i) As tenant: Rent and Cost of Repair (not being capital nature) if repair cost is bear by the assessee,
(ii) Otherwise as a tenant: Only current repairs (not being capital nature) shall be allowed to the
assessee.
(b) Any sum on account of land revenue, local rates and municipal taxes. However these are allowable
subject to provision of section 43B.
(c) Any insurance premium paid in respect of insurance against risk of damage or destruction of the
premises.
Amount paid on repairs shall not include repairs of capital nature. Explanation to section 30.
Section 38
 If any building, machinery, plant or furniture (or other expenditure)
 is not exclusively used for business or profession,
 the deductions shall be restricted to such proportion as determined by assessing officer which is used by
the assessee for the purpose of business or profession. Expenses like current repairs of building, plant &
machinery and furniture and insurance premium thereof.
If the assessee establishes that the expenditure was incurred for the purpose of the business, the AO cannot disallow
the same on the ground that there was no necessity.
Revenue v. capital expenditure

The terms revenue expenditure or capital expenditure have not been defined in the Act. Sometimes it becomes
difficult to decide that whether any expenditure is revenue or capital. The distinction depends on facts of
each case. Following points are generally kept in mind while deciding that whether it is revenue or capital:-
Expenses Allowed
Deduction u/s 36(1)
1. Insurance premium paid by assessee by any mode other than cash on the health of employees under the
scheme framed by GICI, or any other insurer approved by IRDA, and approved by the GOI is allowed as
deduction. There is no monetary ceiling for this deduction. [Sec. 36(1)(ib)]
2. The amount of any insurance premium paid against the risk of damage or destruction of stocks or stores used
for the purpose of business or profession is allowed as deduction. Paid as per method of accounting. [Sec.
36(1)(i)]
3. The amount of any premium paid by a federal milk cooperative society for the life of cattle owned by the
member of such society. Provided such society engaged in supplying milk raised by it members to such
society. [Sec. 36(1)(ia)]
9899555900 Page 58
4. Bonus or commission to employees shall be allowed deduction only if it is not paid in place of Profits or
dividend. This deduction is allowed only on payment basis. However it may be claimed on accrual basis
also subject to provisions of section 43B discussed later. [Sec. 36(1)(ii)]
Q. A Pvt. Ltd. has two shareholders A and B who are equal shareholder. A is an employee of the company also. The
company paid dividend of ` 15,000 to A and ` 20,000 to B. But to compensate to A the co. paid ` 5,000 bonus to
A. Decide that whether the Company can claim deduction of bonus of ` 5,000 or not?
5. Interest paid on capital borrowed for business or profession. But Interest on proprietor’s own capital shall
not be allowed deduction. This deduction is subject to provision of section 43B.
[Sec. 36(1)(iii)]
Note: Interest on Loan taken for acquisition of assets for extension of business shall not be allowed as revenue
expenditure.
6. Employer's contribution to a Provident Fund is allowed deduction only if the fund is recognized, approved
superannuation fund or any other approved welfare scheme of employees is allowed as deduction subjects
to such limits as may be prescribed for the purpose of recognizing or approving the fund. This deduction is
subject to provision of section 43B. [Sec. 36(1)(iv)]
7. Employer’s contribution towards PENSION SCHEME UPTO 10% OF SALARY OF EMPLOYEE. Only basic
salary and DA (if under terms of employment) shall be taken in to account. [Sec. 36(1)(iva)]
8. Employer’s contribution to an Approved Gratuity Fund created by him, for the exclusive benefit of his
employees under an irrevocable trust, shall be allowed as deduction subject to the provision of section
43B. [Sec. 36(1)(v)]
9. Discount on issue of Zero Coupon Bonds to be allowed as deduction on pro rata basis. Here discount
means difference between amount payable on maturity and amount received on issue of ZCB.
Zero Coupon Bond can be issued by a Schedule Bank, Public Sector Bank, Infrastructural Capital Company or
Infrastructural Capital fund. [Sec. 36(1)(iiia)]
10. Any sum received from employees as contribution to recognised PF / ESI.

 if such sum is credited to the employee's account in the fund,
 on or before due date under the any Act, Rule, Order or Notification issued thereunder or under
any standing order, award, contract of service or otherwise. [Sec. 36(1)(va)]
Note: The above amount is first treated as income of the employer u/s 2(24) and if it is deposited on or
before due date then deductions allowed u/s 36. So that if the above amount is not deposited to the fund
upto the due date, then it shall be added to the employer’s income.
11. Actual cost less amount Realised from carcasses* or the animals on the death or permanently useless of
animals not used as Stock in Trade. [Sec. 36(1)(vi)]
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12. Bad Debts [Sec. 36(1)(vi)]

Such debtors must have been included in the income of any P/Y and
Debtors (Party) a/c Dr
To Sales a/c
On becoming bad debts entry shall be passed
Bad debts a/c Dr
To Debtors (Party) a/c
Such bad debts shall be transferred to P/L a/c
P/L a/c Dr
To Bad debts a/c
It shall not include Reserve, provision for bad and doubtful debts made in the accounts.
Reserve for Bad Debts and doubtful debts are allowed as deduction only in case of Rural Branches of Banks.
In case of money lending business if interest is not realisable it will be allowed as deduction because it has been
treated as income. In such case the principal amount which cannot be realized shall also be allowed as deduction,
even such principal shall not be treated as income.
Recovery of bad debts Section 41(4)

 If any amount allowed as bad debt
 is recovered subsequently,
 then it shall be treated as the income of the previous year in which it is recovered,
 even if BUSINESS IS NOT IN EXISTENCE.
Q. Goods sold on credit for the p/y 08 – 09 for ` 25,000. Not paid by debtor ` 15,000. Deduction allowed ` 10,000.
Determine the amount taxable u/s 41(4) if he recovered the following amount as under
(i) ` 3,000 in 12 – 13 and ` 12,000 in 13 – 14
(ii) ` 8,000 in 13 – 14 (iii) ` 15,000 in 13 – 14
If there is any advance given for purchase of raw material and it is forfeited by the supplier. It will not be treated as
bad debts because it has never been treated as income. It will however, be allowed as a loss u/s 28.
Recovery of any deduction Section 41(1):

 If any deduction has been allowed in respect of any expenditure for any year and
 subsequently the assessee or successor of the business has recovered any amount in respect of
such expenditure,
 the amount refunded shall be deemed to be income of the previous year in which it is
refunded
 EVEN IF BUSINESS IS NOT IN EXISTENCE.
Successor means amalgamated/resulting co. or succession by another person/firm.
Q. Mr. X deposited security of ` 4,000 for telephone connection on 1-6-12. He claimed deduction of ` 4,000 during
P/Y 12-13. But on 1.8.13 he surrendered the connection and got the refund of ` 4,000. What shall be its tax
treatment if A has closed down the business on 31-3-13?
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13. Any type of Family planning expenditure for employees by a company. No deduction of family
planning (whether capital or revenue) shall be allowed to any other person other than company.
 However if such expenditure is of capital in nature then deduction shall be allowed to the
company in five equal installments.
 If any family planning expenditure cannot be allowed deduction because profits are
insufficient, then it shall be set off and carry forward as if it is unabsorbed depreciation
 If any asset purchased for family planning is sold then it shall be taxable in the same manner as
done in case of sale of scientific research (section 35).
Scientific Research Expenditure

Section 35
1. Deduction of 100% of any REVENUE EXPENDITURE incurred, for research related to business, shall
be allowed.
Expenditure before commencement-

 However salary to research staff (excluding perquisites) and materials used in research
 relating to 3 years
 immediately preceding the date of commencement of business
 shall be allowed in the year in which business is commenced
 to the extent certified by prescribed authority.
2. Deduction of 100% of any CAPITAL EXPENDITURE incurred, for research related to business, shall
be allowed.
But no deduction shall be allowed for Land, whether such land is acquired as such OR as Part of the
property.
Expenditure before commencement-
Expenditure relating to 3 years immediately preceding the date of commencement of business
shall be allowed in the year of commencement. Expenses may be for P&M, Building and Vehicle for
SR.
Note: SR may be carried on by assessee himself OR outside agency in scientific research work.
Weighted deduction for contribution to a National Laboratory or a University or an IIT

Section 35(2AA)
 Where an assessee pays any sum to a
 National Laboratory, University or an IIT or a specified person
 With a specific direction that the said sum shall be used for scientific research undertaken under a
programme approved by the prescribed authority
 Then he shall be allowed a deduction of 200% of the sum so paid,
BUT IF the scientific research is not undertaken under a programme approved by the prescribed authority, the
deduction shall be allowed 175% provided it is conducted by approved and notified institution.
9899555900 Page 61
Deduction for donation to political party or on Electoral Trust

From Gross Total Income
Electoral trusts are the trusts of political parties and it is approved by CBDT. Any voluntary contribution made to
electoral trusts is income of the trusts and exempted from income tax.
Section 80GGB u/c VI – A:-

 in computing the total income of a Indian Company
 deduction shall be allowed of contribution made in the previous year to a political party or an electoral
trust.
 W.E.F. A/Y 2014 – 15, no deduction shall be allowed under this section in respect of any sum
contributed by way of cash.
Section 80GGC u/c VI – A:-

 in computing the total income of any person except Local Authority or an Artificial Judicial Person
wholly or partly funded by the Government,
 deduction shall be allowed of contribution made in the previous year to a political party or an electoral
trust.
 W.E.F. A/Y 2014 – 15, no deduction shall be allowed under this section in respect of any sum
contributed by way of cash.
Preliminary Expenses
Section 35D and Rule 6AB
1. Type of assessee – The deduction is available to Indian company or non corporate resident assessee.
2. Eligible expenditure:-
 Incurred before the commencement of business or
 Incurred after the commencement for
(a) extension of existing undertaking or
(b) for setting up new unit
Such expenditure may be for

(i) Feasibility* report [*Able to be done, possible],
(ii) Project report,
(iii) Conducting Market Survey,
(iv) Engineering services relating to the business of the assessee.
The above work can be carried out by the assessee himself or by the outside agency or consultancy concern
which is approved by the board in this behalf for the time being.
(v) Legal Charges for drafting of agreement between the assessee and any other person,
(vi) Expenditure of M/A, A/A, including the fees of registration as per the provision of the
Company Act, 2013 or issue of shares or debentures or typing or printing or drafting and
advertising of the prospectus,
(vii) Such other expenditures as may be prescribed.
9899555900 Page 62
In addition to the expenses claimable by all eligible assesses, Indian companies are entitled to claim amortization in
respect of expenditure mentioned above (v) to (vii).
3. Maximum Deduction –
(i) For Non corporate assessee, it cannot exceed 5% of cost of project.
(ii) For a company it cannot exceed
5% of (a) Cost of project or (b) Capital employed whichever is higher.
4. Quantum of deduction –
Deduction is allowed in 5 equal installments.
Notes:-
1. Cost of project: means actual cost of fixed assets (being Land, buildings, leaseholds, plant,
machinery, furniture, fittings, and railway siding including expenditure on development of land
and buildings) on the last day of P/Y in which
 the business is commenced
OR
 extension is completed
OR
 new unit commences operations, as the case may be.
2. Capital Employed: Means issued share capital + debentures + long term borrowings (any money
borrowed by the company from the Government or the IFCI or the ICICI or any other financial institution
OR any money borrowed or debt incurred by it in a foreign country in respect of the purchase outside
India of capital plant and machinery, where the terms under which such moneys are borrowed or
debt is incurred provide for the repayment thereof during a period of not less than SEVEN YEARS,
on the last day of the same P/Y as referred above.
3. Amount must be audited by CA and report should be furnished along with return in FORM 3B duly
signed by such Chartered Accountant.
Q . Compute the deduction u/s 35D for S Ltd. with the following detail:
Cost of project ` 6,00,000/-
Capital employed (i) ` 5,00,000/- (ii) ` 8,00,000/-
Actual Preliminary Expenses ` 36,000/-
Q . What will be your answer if the assessee is an individual?
Amortization of expenditure in case of Amalgamation or Demerger

Section 35DD
 Where an assessee, being an Indian company
 Incurs expenditure wholly and exclusively for the above mention purpose,
 Such company shall be allowed deduction equal to 1/5th of such expenditure,
 For the five years, starting from the year in which such amalgamation or demerger takes place,
9899555900 Page 63
Expenditure incurred under Voluntary Retirement Scheme

Section 35DDA
 Expenditure on payment to employee IN CONNECTION WITH HIS retirement,
 as per with voluntary retirement scheme,
 shall be allowed deduction in five equal installments for five years
 starting from the year of payment.
 If payment is made by the employer in more than one year, then deduction shall be allowed in five
installments for payment made in each previous year.
 No deduction shall be allowed of such expenditure under any other provision.
Expenses NOT DEDUCTIBLE

Section 40(a)
Notwithstanding anything contained in section 30 to 38, the following amounts shall not be deducted in computing the
income chargeable under the head “PGBP”.
(i) Any Interest, Royalty or Fees for Technical Services or other sum chargeable under Income Tax Act, which is
payable
 Outside India or to a non – resident in India
 Not being a Company or Foreign Company
on which TDS has not been deducted before the end of the previous year or, after deduction, has not been
paid before the due date specified u/s 139 (1)
However, where in respect of such sum,

(a) A tax has been deducted in any subsequent previous year, OR
(b) Has been deducted during previous year but paid after the due date specified u/s 139 (1),
Then such sum shall be allowed as deduction in computing the income of the previous year in which such
tax has been paid
Chargeable under income tax act, means that receipt of such income must be taxable in India.
(ii) 30% of any sum payable to a Resident on which tax is deductible at source u/s 192 to 194 LA shall not be
allowed as deduction in the previous year in which the expense is incurred, while computing the income
chargeable under the head ‘PGBP’ if in respect of such expense:
(a) Tax has not been deducted during the previous year; or
(b) After deduction has not been paid on or before the due date mentioned u/s 139 (1).
However, where in respect of any such sum,

(c) A tax has been deducted in any subsequent previous year, OR
(d) Has been deducted during previous year but paid after the due date specified u/s 139 (1),
30% of such sum shall be allowed as deduction in computing the income of the previous year in which such
tax has been paid.
9899555900 Page 64
Where an assessee makes the payment of an expense mentioned in clause (b) above to a resident payee without
deduction of tax and is not deemed to be an assessee in default u/s 201 (1) because the payee and payer have
satisfied the conditions mentioned therein then it shall be deemed that the assessee has deducted and paid the tax
on such sum on the date of furnishing of Return of Income by the resident payee.
Conditions to be satisfied by the resident payee:

(a) He has furnished his return of income u/s 139;
(b) He has taken in to account such sum for computing income in such return of income; and
(c) He has paid the tax due on the income declared by him in such return of income.
Condition to be satisfied by the payer (i.e. assessee)

The payer furnishes a certificate to this effect for a Chartered Accountant in such form as may be prescribed.
(iii) Any sum paid on account of any rate or Income Tax paid in India. Further, any sum paid
outside India which is eligible for relief u/s 90 (Double Taxation Relief) or deduction u/s 91
(unilateral relief), is not allowable as a deduction.
(iv) Any sum paid on account of Wealth Tax in India or in any Country Outside India.
(v)
Any amount
(a) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any
other fee or charge, by whatever named called, which is levied exclusively on, or
(b) Any amount appropriated, directly or indirectly from
A State Government undertaking by the SG is not allowed as deduction from AY
2014 – 15.
(vi) Any payment which is chargeable under the head ‘Salaries’, if it is payable:
(a) Outside India, or
(b) To a Non – Resident
And if the tax has not been paid thereon nor deducted therefrom under chapter XVII
– B.
(vii) Any payment to PF or other fund which is for the benefit of employees, unless assessee made the
effective arrangements to secure that the TDS shall be deducted from any payments made from the
funds which are chargeable to tax under head salary.
(viii) Any tax actually paid by any employer on the perquisites not provided by way of monetary payment
shall not be eligible for deduction while computing the business income of the employer.
Notes:
1. Any provision for income tax or wealth tax or any other tax is not allowed as deduction.
2. Any interest paid under income tax or wealth tax Act is also not allowed as deduction.
But interest paid under any other law is allowed as deduction.
9899555900 Page 65
3. Explanation to section 37 – Any expenditure which is an offence or which is prohibited under any
law shall not be allowed as deduction.
 Therefore penalty paid under any Act shall not be allowed deduction.
 But penalty for breach of contract shall be allowed deduction because that is not imposed
under any Act.
4. However, any payment in connection with legal proceedings of income tax or wealth tax or any
other LAW is allowed as deduction.
5. Income Tax, wealth tax, interest under income tax and wealth tax, penalty under any act are not allowed
deduction.
 Therefore if they are refunded to assessee they shall not be taxable.
 But any interest given by Government on REFUND OF Income tax, Wealth tax shall be taxable under
head “other sources”.
Any other tax or interest on other taxes, which are allowed deduction u / h PGBP shall become taxable u / h PGBP if
they are refunded.
Payment to specified persons (Relatives)

Section 40A(2)
 If payment of expenditure has been made or is to be made to specified persons,
 and AO is of the opinion that such expenditure is excessive or unreasonable
 having regard to the fair market value of the goods, services or facilities OR
 the legitimate business needs of the assessee’s business or profession OR
 the benefit derived by or accruing to the assessee from the payment,
then expenditure considered by him to be excessive or unreasonable, shall be disallowed.
However no disallowance, on account of expenditure being excessive or unreasonable having regard to the
Fair Market Value, shall be made in respect of a specified domestic transaction referred to in se ction 92B, if
such transaction is at Arm’s Length Price as defined in section 92F(ii).
Note – Specified person means relative (spouse, brother, sister, any lineal ascendant or descendant),
partner, director or person having substantial interest (20% or more equity paid up capital) or relative of any of
such persons.
9899555900 Page 66
Payment in cash
Section 40 A(3)(a)
 If assessee incurs any expenditure of which a payment or aggregate of payments made by a person in a day is in
excess of ` 20,000.
 not by an account payee cheque or bank draft
 then no deduction of such expenses will be allowed.
Payment to transport operator (plying, hiring, leasing goods carriage) is allowed upto ` 35,000.
If any expense is allowed as deduction on due basis and after that any payment is made on account of such
expense by way of cash and if such payment is in excess of the specified amount, then such payment shall be
treated as income of that p/y in which such payment is made.
Exceptions to the above section under Rule 6DD

(therefore in the following cases deduction shall be allowed even if payment exceeds ` 20,000 IN CASH) –
Payments:
(a) to RBI, banks, LIC, & financial institutions like IDBI, UTI etc.
(b) to Government e.g. sales tax, custom duty etc.
(c) to any primary agriculture credit society or to any primary credit society
(d) for LC, mail, telegraphic transfer, Bill of exchange, debit card and credit cards;
(e) made in a town or village not served by any bank;
(f) of gratuity, retrenchment compensation to an employee or his legal heirs if his salary does not exceeds `
50,000 for the year of retirement, death etc. or for the preceding previous year;
(g) on a date on which the banks were closed on account of holiday or strike;
(h) to the cultivator or producer of agricultural, forest, animal husbandry (including livestock, meat, hides
and skins) dairy or poultry farms or other products.
(i) for purchase of products manufactured without aid power in a cottage industry;
(j) Made as salary to any employee after deducting TDS in accordance with the provision of section 192 if
(a) such employee is posted for a continuous period of 15 days or more in a place other than his normal
place of duty or on a ship, and
(b) Does not maintain any account at such place or ship.
(k) Made to his agent who is required to make payment in cash for goods or services on behalf of such
person.
(l) Made to an authorized money changer against purchase of foreign currency or travelers cheque in the
normal course of his business.
As per Circular of CBDT this section is not applicable for purchase of Capital Assets.
Also this section is applicable only for payment of PGBP and not for any other chapter.
 If assessee makes payment of one expenditure at different days and no one payment exceeds ` 20,000
(although expenditure exceeds ` 20,000) then nothing shall be disallowed.
 Similarly if assessee makes payment of different expenditures at the same time and no
expenditure exceed ` 20,000 then also nothing shall be disallowed.
9899555900 Page 67
Q. Mr. X purchased goods on credit on 1.7.2014 for ` 50,000. He makes the payment of the bill as follows:
On 4.7.2014 ` 20,000, On 6.7.2014 ` 18,000 On 8.7.2014 ` 12,000
How much expenditure shall be disallowed u/s 40A(3)?
Q. Mr. Z purchased goods on following dates:

01.08.2014 for ` 17,000.
02.08.2014 for ` 20,000
05.08.2014 for ` 18,000
He makes the payment of all the bills on 4.9.2014 ` 55,000. How much expenditure shall be disallowed u/s 40A(3)?
Provision for gratuity

Section 40A(7)
 In respect of gratuity,
 employer shall be allowed deduction of contribution to
 Approved / Recognised gratuity fund.
If assessee is not having approved gratuity fund then deduction of gratuity shall be allowed when it becomes
actually payable to employee during the P/Y i.e. when employee left the job / retires, and not in that P/Y in which
the liability to pay such sum was incurred even if the assessee following the MERCANTILE SYSTEM of accounting.
Note: Even the provision for gratuity to an approved gratuity fund is allowed as deduction, but it will be subject to
provision of section 43B.
Disallowance in respect of contributions to non – statutory funds

Section 40A(9)
No deduction shall be allowed in respect of any sum paid towards setting up or formation of any fund, trust, society
etc. for any other purpose which is not Approved and Recognised.
Deduction on payment basis

Section 43B
Following sums (EXPENSES) are allowed as deduction in the previous year in which they are actually paid:
1. Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force.
2. Employer's contribution to provident fund or gratuity fund or any other staff welfare fund.
3. Any sum payable to an employee as bonus or commission for services rendered.
4. Interest on loan from public financial institution, SFC, IDBI etc or from any schedule bank.
5. Interest on loan from any public financial institution or state financial corporation.
6. Payment of leave encashment to employee.
 But if the payment is made on or before the due date of return of income u/s 139(1)
 of the previous year in which the liability to pay such sum was incurred
 then deduction shall be allowed in that previous year itself in which the expenditure was incurred.
Therefore if payment is made after due date of ROI, then deduction shall be allowed in the year payment only.
If interest is converted into a loan, borrowing or advance is not paid, interest so converted shall not be treated as
having been actually paid, and accordingly, will not be allowed as deduction form business income.
9899555900 Page 68
DEDUCTION OF PF CONTRIBUTION
Employee contribution Employer’s contribution
Section 36 43B
Due date Of the relevant fund Of the return of income
Payment after due date Deduction Never Allowed Deduction allowed in the year of payment
Q. Mrs. X took a loan from schedule Bank. Interest of ` 12,000 accrued during P/Y 14 – 15. Decide that in which
year deduction of interest shall be allowed in the following cases (due date of ROI 31.07.2015):
Date of payment Year of deduction
(i) 31.03.15
(ii) 31.07.15
(iii) 31.12.15
(iv) 31.07.16
Deferment of Expenses
S. Section Expenditure Years of Deferment
No.
1. 24 Interest of Pre – construction period u/h House Property 5
2. 36 Family Planning Capital Expenditure 5
3. 35D Preliminary Expenses 5
4. 35DDA Voluntary Retirement Scheme 5
5. 35E Expenditure on prospecting of Minerals 10
6. 35ABB Capital Expenditure for telecom licence Period of licence
Deduction for partnership firm

Section 40(b)
 Any Interest to partner on capital / loan shall be authorized by partnership deed, is allowed upto 12% P.A.
i.e. amount mention in the partnership deed OR 12% p.a. whichever is less.
 As per section 10(2A), in the case of partner of a firm, his share in the total income of the firm shall be
exempt.
 Therefore any profit of the firm shall not be included in the income of partner.
 No salary, bonus, commission or other remuneration is allowed to a non – working partner.
 Salary etc. to working partner, authorized by partnership deed, is allowed on following basis.
Limits of Firm Maximum Remuneration

On first ` 3,00,000 of the BOOK PROFIT or In ` 1,50,000 OR
CASE OF LOSS At the rate of 90% of BOOK PROFIT,
WHICH EVER IS MORE
On the balance BOOK PROFIT At the rate of 60%
Book Profit: means income under head PGBP after adding back aggregate remuneration payable to all partners if
such amount has been deducted while computing profit.
9899555900 Page 69
Computation of income on estimation basis
In case of All business (except 44AE) of In case of business of

Section 44AD plying*, leasing, hiring of trucks [* running]
Section 44AE
8% of total turnover or gross receipts or In case of every carriage:
receivable to assessee (a) ` 7,500 p.m. or part of a month during which the vehicle is
owned by the assessee, or
The scheme is not applicable to a person
earning income as commission or (b) Amount claimed to have been actually earned by the vehicle,
brokerage and carry any agency business. Whichever is higher.
OVERRIDE SECTION 28 TO 43C.
The provision of this section shall not apply to: OVERRIDE SECTION 28 TO 43C.
(a) Person carrying specified profession;
(b) Person earning income in the nature of
commission or brokerage;3
(c) Person carrying on any agency business.
Common provision in case of all the above two scheme

1. Section 44AD are applicable to resident individual / HUF and partnership Firm (EXCEPT LLP, COMPANY, AOP /
BOI) whose gross receipts / turnover from the above business is not more than ` One Crore.
While section 44AE is applicable to assessee owned (whether on hire purchase or installments system) not
more than 10 trucks at any time during the PY.
2. From this estimated income no deduction or disallowance from section 30 to 38 shall be made, i.e. it shall be
deemed that all deductions u/h PGBP is allowed.
But in case of a firm normal deduction of salary and interest to partners U/S 40 (b) shall be allowed.
Therefore no depreciation of current year or past years (unabsorbed depreciation) shall be allowed.
Because depreciation of current as well as past years is covered by section 32.
But any losses can be set off from such income because losses are covered by section 70 to 80.
3. The above income will be aggregated with the other income of the assessee and then all the
deduction U/S 80C to 80U will be allowed.
4. The assessee is neither required to maintain any books of Account U/S 44 AA (2) nor he is required to get
his accounts audited U/S 44AB.
5. If any assessee claims that his income is lower than the estimated income, then he will have to
maintain books of accounts and get his accounts audited.
6. An assessee who opting the above scheme shall be exempted from payment of ADVANCE TAX related to
such business under the current provision of the Income Tax Act.
9899555900 Page 70
Q. Partnership firm engaged a trading business has a total turnover ` 58 Lakhs from such business. The deed provides
` 8,000 pm to each partner i.e. P and Q as salary. The WDV of the machinery as on 01.04.14 is ` 1,50,000 which is
eligible for a depreciation @ 15%. Compute the profit of the business if firms opt for the scheme u/s 44AD.
Note: The provisions of section 44AA and 44AB shall not apply in so far as they relate to this business and in
computing the monetary limits u/s 44AA and 44AB for other business, the gross receipts or, as the case may be, the
income from the said business shall be excluded.
Maintenance of accounts Section 44AA

1. Person carrying on specified profession:
If gross receipts of the profession
 exceed ` 1,50,000
 in all the 3 years preceding the P/Y or
 if profession is newly set up in the P/Y, if gross receipts for that year exceeded the said amount
 then person is required to maintain prescribed books.
If the specified amounts are not exceeded then person is required to maintain such books of accounts
and other documents as may enable AO to compute taxable income.
2. Person carrying on non specified profession or any business:-

 If total income exceeds ` 1,20,000 or total sales / receipts exceeds ` 10,00,000
 in any one of three years immediately preceding the P/Y or
 if it is newly set up in the P/Y, the specified amounts exceeded for that year
then person is required to maintain such books of accounts and other documents as may enable AO to
compute income.
If the specified amounts are not exceeded then not required to maintain any books.
9899555900 Page 71
Section 44AA
Books of account
Specified Profession Others
Gross Receipts > ` 1,50,000 Total income > ` 1,20,000 or

Sales / Receipts > ` 10,00,000
Yes No Yes No
Prescribed Any Books Any Books No Books
books
Specified Profession
Specified profession u/s 44AA (1) are Legal, Medical, Engineering or architectural profession, a profession of
accountancy or interior decoration or any other profession as is notified by the Board in the Official Gazette.
Authorized representatives, film artist, company secretaries and profession of Information Technology have been since
notified for this purpose.
Prescribed books
(i) Cash books (ii) Journal if accrual method adopted
(i) Ledger (iv) Carbon copies of bills exceeding ` 25.
In case of medical profession additional books

(i) Daily case register; (ii) Stock register.
These books are required to be kept and maintained for 6 years from end of relevant A/Y.
If assessee not maintain the books as per the prescribed procedure OR not kept the books for prescribed period
than the assessee is required to pay a fixed penalty of ` 25,000. Section 271A.
9899555900 Page 72
Compulsory audit of accounts

Section 44AB
1. In case of business: If Total Sales or Gross Receipts of business exceed ` 1 Crore.
2. In case of profession: If gross receipts are more than ` 25 Lakhs
3. U/s 44 AD / AE / 44BB / 44BBB If assessee claims that his income is lower than the estimated income and
his income exceed the maximum amount not chargeable to income tax during such p/y.
 The assessee has to furnish audit report of CA by 30th September of the relevant assessment year along
with return.
 But where the assessee carrying out the international transaction (section 92B or specified domestic
transaction u/s 92BA) the due date of furnishing the Audit report by CA is 30 th November of the RAY.
 If accounts are required to be audited under any other law, then audit under other law will be
sufficient, there is no need for audit under this section. Assessee has to furnish an audit report
under such other law and a further report under this section.
 If the audit report is not submitted along with return then assessing officer may treat the return as
defective return.
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Depreciation
Section 32
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence. There are
different methods for calculating of depreciation like Straight Line method and Written Down Value method.
Types of depreciation allowance under Income Tax Act

The following are three kinds of depreciation allowance which are allowed under the Income Tax Act:
(a) Normal depreciation for Block of Assets [Section 32(1)(ii)].
(b) Normal Assets wise depreciation for an undertaking engaged in generation OR generation and distribution of
Power [Section 32(1)(i)].
(c) Additional / Extra depreciation in case of any eligible new machinery or plant (other than Ship and Aircraft) which
has been acquired and installed after 31.03.2005 by an assessee engaged in business of manufacture OR
production of any article or things or an assessee who is in the business of generation OR generation and
distribution of Power [Section 32(1)(iia)].
 In respect of BUILDING, PLANT & MACHINERY, FURNITURE AND INTANGIBLE ASSETS like know-how,
patents, copyright,
 owned wholly or partly by assessee,
 used for business / profession,
 depreciation is allowed on the WDV basis,
 of the block of assets,
 at prescribed percentage.
PRESCRIBED PERCENTAGE OF DEPRECIATION

BUILDING
(1) Residential 5%
Non – residential (Office, Factory, Godowns, Hotels and Boarding houses etc.) 10%
(2) Furniture including electrical fitting 15%
(3) Plant and Machinery (Plant includes ships, vehicles, books etc. but does not include 15%
building or furniture)
(4) Intangible assets, like patent, copyright, trademark, goodwill, franchises etc. 25%
9899555900 Page 74
Telecom License
Section 35 ABB
 If any Capital Expenditure has actually been paid either before commencement of business or thereafter
any time during any previous year,
 for acquiring licence to operate Telecommunication Services,
 it is allowed deduction in remaining period of licence in equal installments.
If fees is paid before commencement of business then the deduction shall be allowed from that previous year in
which the business in commenced. However if the fees is paid for acquiring such rights after the
commencement of such business the deduction shall be allowed from the previous year beginning with the
previous year in which the licence fees is actually paid.
If licence is sold and

(i) if Sale Price is less than WDV i.e. SP < WDV
A deduction equal to WDV minus SALE PRICE, shall be allowed.
(ii) If the Sale Price exceeds the WDV i.e. SP > WDV:-
(a) such excess i.e. sale price minus WDV or

(b) deduction allowed
Whichever is less shall be taxable in the year of transfer, UNDER THE HEAD PGBP.
If sale price is more than actual cost, then such excess shall be taxable u/h capital gain which can be short
term or long term.
Actual Cost
1. It means actual cost of asset to the assessee, reduced by cost met directly or indirectly by any other person or
authority. Sec. 43(1)
2. Any interest for the period starting from the date of loan till the date on which such asset is first put to use
shall not be allowed deduction u/s 36. Challapalli Sugars Ltd. v CIT (1975) (SC)
Interest for acquisition of an asset after such asset is first put to use shall not be included in actual cost of
the asset. [explanation 8 to section 43(1)]
3. If an asset is acquired by way of gift, will etc. the actual cost to the assessee shall be the actual cost to the
previous owner as reduced by depreciation allowed assuming that it was the only assets in the block.
4. If an asset is used in business after it ceases to be used for Scientific Research, the actual cost shall be reduced
by deduction u/s 35. THEREFORE THE ACTUAL COST OF THAT ASSET SHALL BE NIL.
5. The actual cost of any capital assets on which deduction has been allowed or it is allowable to the assessee u/s
35AD shall be treated as NIL.
6. Interest received on surplus of funds before commencement of business would not reduce cost but such
interest shall be taxable under head Income From Other Sources.
9899555900 Page 75
7. Receipts of directly connected or incidental to the work of construction before the commencement of
business would reduce the cost.
8. Actual cost of Cenvatable or Vatable assets shall be actual cost of the assets LESS Cenvat Credit Claimed or VAT
Credit Claimed.
Proportionate Depreciation
Fifth proviso to Section 32
Where in any previous year, there is:
(a) Succession of a Proprietary concern by a company u/s 47(xiii);
(b) Succession of a Partnership Firm by a company u/s 47(xxi);
(c) Conversion of a Private Company OR Unlisted Public Company to a Limited Liability Partnership as per
section 47(xxii);
(d) Succession of any business e.g. transfer by HUF to member;
(e) Amalgamation / Demerger.
the deduction shall be apportioned between successor and predecessor in the ratio of the number of days for
which asset were used by them.
Step 1: Calculate depreciation as if no conversion took place.

Step 2: Divide the Total depreciation Between Successor or Predecessor in the ratio of no. of days
used by each such unit.
Set off and carry forward of unabsorbed depreciation

Section 32 (2)
1. The current year depreciation shall be set off
Against the profits of any business carried on during the year.
The balance, if any, can be SET OFF against income under any source under any other heads of income
(except from salary) in the same previous year.
IN case there is still a balance left over, it is to be treated as UNABSORBED DEPRECIATION and is to be
taken to the next succeeding year and added to the Current depreciation of that year. If, however there is
no current deprecation for such succeeding year, the unabsorbed deprecation becomes the depreciation
allowance for such succeeding year.
2. The unabsorbed depreciation can be carried forward for any number of assessment years and set off
against income under any other head (except from salary).
3. The business / profession for which Depreciation was originally computed need not be carried on in the
year of set off.
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Additional Depreciation
Section 32(1) (iia)
With a view to give a boost to the manufacturing sector, an additional depreciation shall be allowed to an Industrial
Undertaking subject to the provisions given below. Such additional depreciation shall be in addition to the normal
deprecation which is being allowed to all assessees.
(a) In the case of any new machinery or plant (other than ships and aircraft),
(b) which has been Acquired and Installed AFTER 31.03.2005
(c) by an assessee engaged in the business of manufacture or production of any article,
(d) and to an assessee engaged in the business of generation OR generation and distribution of power,
(e) a further sum equal to 20% of the actual cost of such machinery or plant,
HOWEVER, IF SUCH ASSET IS ACQUIRED AND PUT TO USE FOR LESS THAN 180 DAYS IN THE PREVIOUS
YEAR, THEN, THE RATE OF DEPRECATION SHALL BE 50% OF 20% i.e. 10%.
(f) shall be allowed as deduction in the First Year in which the assets is acquire and installed.
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Capital Gain
"Sold any asset, calculate the profit as per these provisions."
Profit is divided in two categories, Long term and short term. Less tax is charged on long term capital gain by
increasing actual cost through indexation. Special provisions are made for determining cost and sale price in
specific transactions like admission / retirement of partner in case of Partnership firm, liquidation of Co.,
demat shares etc. Certain transfers are not taxable such as gift, in case amalgamation etc. and
certain exemptions are also provided to encourage reinvestment in particular sectors.
Basis of charge
Section 45(1)
 Any PROFITS OR GAINS arising from the transfer,
 of a CAPITAL ASSET,
 shall be chargeable to income tax under the head 'capital gains and
 shall be deemed to be the income of P/Y in which TRANSFER TOOK PLACE,
 unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB.
In case of profit or gains from insurance claim, due to damage or destruction of property, there will be Capital Gain,
although no asset has been transferred in such case.
Capital Asset
Section 2(14)
(a) It means property of ANY KIND, held by assessee, whether or not connected with his business or
profession.
(b) Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with
the regulation made under the Securities and Exchange Board of India Act, 1992. (w.e.f. A/Y 2015 – 16)
However it does not include:

(i) Stock – in – trade, [other than the securities referred to in sub – clause (b)], Consumable stores, or Raw
Materials held for purpose of his business or profession;
(ii) Personal effects i.e.

 MOVABLE property (including wearing apparel and furniture),
 held for personal use,
 by assessee or any member of his family dependent on him.
But personal effect EXCLUDES the following:

a. Jewellery,
b. Archaeological collections*, [*monument of ancient times]
c. Paintings, Drawings, Sculptures,
d. Any work of art.
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Explanation to Section 2(14)

‘Property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company,
including rights of management or control or any other rights whatsoever.
After the amendment, transfer of shares (at any level) which result in transfer of controlling interest of an Indian
Company could give rise to a taxable event in India.
(iii) Agricultural land in India which is not situated in urban area.

In other words it must be rural agriculture land, Rural agriculture land means
(a) Situated in any area which is under any municipality, municipal corporation, notified area committee,
town committee or by any other name and the population of which should be less than 10000 as per the
last published census; OR
(b) If situated the outside the limit of municipality etc. it should be situated at a distance, Measured Aerially
(Shortest aerial distance) –
(i) Being more than 2 kilometers from the local limits from the place mention in (a) above and
which has a population of more than 10,000 but not exceeding 1,00,000 OR
(ii) Being more than 6 kilometers from the local limits from the place mention in (a) above and
which has a population of more than 1,00,000 but not exceeding 10,00,000 OR
(iii) Being more than 8 kilometers from the local limits from the place mention in (a) above and
which has a population of more than 10,00,000.
For the above purpose, “population” means the population according to the last preceding census of which the
relevant figures have been published before the first day of the Previous Year.
(c) Urban agricultural land is although a capital asset but any capital gain arising from the compulsory
acquisition of such land shall be exempt as per section 10(37) if certain conditions mentioned in that
section are satisfied.
(iv) Gold Deposit Bonds issued under Gold Deposit Scheme 1999.
(v) Special Bearer Bonds, 1991; and
(vi) 6.5% Gold Bonds, 1977 OR 7% Gold Bonds, 1980 OR National Defence Gold Bonds, 1980 issued by the CG.
Therefore, now we can say that assets which is used purely for personal purpose and which are movable in
nature like household utensils, appliances, furniture, carpets, TV, refrigerators, musical instruments and vehicle
like Car, Scooter and Motor Cycle only for personal use are not to be treated as Capital Assets as these will be
covered under personal effects.
However, if the Car is used for business or profession purpose, it will not be treated as personal effects and
therefore on the sale of same there will be Capital Gain.
The property transferred must be a capital asset on the date of transfer as per the provision of section 2(14).
9899555900 Page 79
Types of Capital Asset

Long Term Capital Asset [Section 2(29A)]
A capital asset which is not a short term capital asset
Short Term Capital Asset [Section 2(42A)]

A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is
known is short term capital asset.
However in the following cases if the period of holding is not more than 12 months immediately preceding the
date of transfer, then it shall be treated as short term capital asset.
Transfer
Section 2(47)
"Transfer", in relation to a capital asset, includes,—
(i) Sale, exchange or relinquishment* of the asset; or [*To give up, surrender]
(ii) Extinguishment* of any rights therein; or [*To bring to an end]
(iii) Compulsory acquisition thereof under any law; or
(iv) In a case where the asset is converted into stock – in – trade of a business, such conversion or
treatment; or
(v) The maturity or redemption of a zero coupon bonds.
(vi) Allowing the possession of any immovable property in part performance of a contract referred in
section 53A of the Transfer of Property Act, 1882; or (Refer Sec. 27)
(vii) Allotment or lease under a house building scheme of society, company or other association, whether
by becoming a owner or acquiring shares in a co-operative society. (Refer Sec. 27)
Transactions not regarded as transfer

Section 46 and 47
No capital Gain arise on the following transactions because these are not treated transfer:
1. Where the assets of a company are distributed to its shareholders on liquidation of a company, such
distribution shall not be regarded as transfer in the hands of the company. Section 46(1).
2. Transfer under gift, will, irrevocable trust. Section 47(iii).
3. Distribution of capital assets on the total or partial partition of HUF. Section 47(i).
4. & 5. Transfer by holding co. to its 100% subsidiary co. Section 47(iv) OR 100% subsidiary co. to its holding
co. Section 47(v) if
(a) Holding co. holds the entire share capital of subsidiary co. and
(b) Transferee co. is an Indian Co.
In the hands of amalgamating co.

6. Transfer under amalgamation by amalgamating company to the amalgamated company if amalgamated
company is an Indian Co. than it shall not be regarded as transfer in the hands of amalgamating
company. Section 47(vi).
9899555900 Page 80
In the hands of shareholders of amalgamating co.

7. Transfer of shares held by a shareholder under amalgamation if
(a) Amalgamated co. is an Indian Co.
(b) Only shares of the amalgamated company are received in consideration of shares of amalgamating
company, except where the shareholder itself is the amalgamating company. Section 47 (vii).
If the consideration includes anything in addition to shares, say Bond and Debentures then it will be treated as
transfer and there will be a capital gain. [CIT v. Gautam Sarabhi Trust (1988)(Guj. HC)].
Notes:
(a) COA of shares in amalgamated co. shall be cost of the shares of the amalgamating co.
(b) While computing POH, the period for which the shares were held in the amalgamating co. shall also be
included for the purpose when shares in amalgamated company are sold.
8. Transfer of capital asset or intangible assets on conversion of a firm in to a company as a result of
succession of the firm by a company in the business carried on by the firm if
(a) all assets / liabilities of the firm relating to the business immediately before the succession of firm
become the assets / liabilities of company, and
(b) all partners of firm become shareholder in the ratio of their capital account stood in the books of the
firm on the date of succession, and
(c) partners receive only shares as consideration in the company, and
(d) partners have at least 50% voting power for at least 5 years from the date of succession.
Section 47(xiii).
9. Transfer of capital asset on conversion of a sole proprietary concern in a company if (a), (c) & (d) in 8 above
are satisfied. [Section 47(xiv)]
Income not to be included in Total Income

Section 10
A new clause 43 has been inserted to provide that any loan amount received whether in lump sum or in
instalments under Reverse Mortgage Scheme, shall not be included in the Total Income.
Method of computation of Capital Gains

Section 48
Sale consideration received / accrued on transfer xxx
Less: Cost of acquisition xxx
Less: Cost of improvement xxx
Less: Expenditure incurred wholly and exclusively in connection with such transfer xxx
STCG xxx
Less: Exemption if available, u/s 54B / 54D / 54G / 54GA xxx
Taxable Short Term Capital Gain xxx
No deduction shall be allowed in respect of any sum paid on account of Securities Transaction Tax.
Expenses on transfer includes advertisement, brokerage, stamp duty, registration fees, legal expenses etc.
9899555900 Page 81
Cost of Acquisition
1. It means the amount which the assessee has paid or incurred for acquisition of the assets. Expenses
incurred for completing the title of ownership, are part of the cost of acquisition.
(Any expense paid on purchasing the asset has to be added in the COA)
Interest on money borrowed for acquiring capital assets will form part of cost of assets other than house property.
CIT v Mithlesh Kumari (1975) (Del.)
2. In the following cases the cost of acquisition of the asset in the hands of the assessee shall be cost to the
previous owner and IT SHALL BE DEEMED COST OF ACQUISITION referred to section 47.
(i) Under a gift or will;
(ii) on the distribution of the assets on total or partial partition of HUF;
(iii) on any distribution of assets on the liquidation of the company;
(iv) by succession, inheritance, or devolution;
(v) on transfer to a revocable or irrevocable trust;
Note - In such cases, for computing period of holding, the period for which the asset was held by the previous
owner shall also be considered.
PO means the person who acquire the asset, by paying the price for the same.
3. Indexation* - Computation of Long Term Capital Gains

(A tool of economic regulation used to reduce the effect of inflation)
If the capital gain arises from the transfer of a Long Term Capital Asset, then for the purposes of
computing capital gains:
(i) 'Indexed Cost of Acquisition' is taken instead of 'Cost of Acquisition' and
(ii) 'Indexed Cost of Improvement' is taken instead of 'Cost of Improvement'
The costs are indexed on the basis of certain percentage of the Consumer Price Index, which is determined
keeping in view the rise in prices due to inflation.
Indexed ‘COA' means:-
COA x CII for the year in which asset is transferred
CII for the first year in which asset was held by Assessee OR
for the year beginning on 1 – 4 – 1981 whichever is later
Indexed ‘COI' means:-

COI x CII for the year in which asset is transferred
CII for the year in which the improvement took place
Note:
A. COI is always indexed in case of Long Term Capital Asset irrespective of year in which such improvement
was incurred.
B. However, benefit of indexation shall not be available in the case of bonds and debentures. But
Government can issue bond in which cost can be indexed called Capital Indexed Bonds.
9899555900 Page 82
Debenture / Bonds
Government Non – Government

Cost not indexed
Capital Indexed Bond Others

(Cost Indexed) Cost not indexed
Q. Whether indexed COI = COI?
Q. Compute capital gains with the following information:-

Date `
01.04.81 COA 10,000
01.04.81 FMV 50,000
01.09.05 COI 20,000
31.08.07 COI 10,000
10.10.14 Sale Price 5,00,000
Cost Inflation Index as notified by CG is as under

Financial Year Cost Inflation Index Financial Year Cost Inflation Index
1981 - 82 100 1994 - 95 259
1982 - 83 109 1995 - 96 281
1983 - 84 116 1996 – 97 305
1984 - 85 125 1997 – 98 331
1985 - 86 133 1998 – 99 351
1986 - 87 140 1999 – 00 389
1987 - 88 150 2000 – 01 406
1988 - 89 161 2001 – 02 426
1989 - 90 172 2002 – 03 447
1990 - 91 182 2003 – 04 463
1991 - 92 199 2004 – 05 480
1992 - 93 223 2005 – 06 497
1993 - 94 244 2006 – 07 519
2007 - 08 551 2008 – 09 582
2009 - 10 632 2010 – 11 711
2011 – 12 785 2012 – 13 852
2013 – 14 939 2014 – 15 1024
9899555900 Page 83
4. Cost of acquisition of assets acquired BEFORE 01.04.1981

 if an asset has been acquired
 by the assessee himself or by previous owner
 before 01.04.81
 then assessee has the option to take
(i) either actual cost of acquisition to him / previous owner or
(ii) the fair market value of the asset on 01.04.81, As COA for computing capital gains.
1. This option is not available for the depreciable assets.

2. The option is not available in case of a goodwill of a business, brand or trade mark associated
with the business, brand or trademark, tenancy right, loom hours, route permit and right to
manufacture any article or things WHETHER SELF GENERATED OR PURCHASED.
5. In relation to goodwill of a BUSINESS, tenancy rights, route permits, loom hours*, right to carry on
business, patents, copyright or trademark, it means: [*hours granted by Government to weave yarn]
(i) The amount of purchase price – if such asset is purchased by assessee from its owner;
(ii) If it is acquired from the PO under any clause (i) to (iv) of section 49(1) than its cost will be the cost
to the PO but if it is self generated by PO than COA shall be NIL.
(iii) In any other case – nil (self generated).
Cost of Improvement
Section 55(1)(b)
All expenditure of capital nature incurred on improvement of asset (other than goodwill of a business, right
to manufacture or produce of any article or thing or right to carry on any business) by Previous Owner and
the assessee on or after 01-04-1981 shall be treated as cost of improvement.
It will make no difference whether goodwill or such right was self generated or acquired for a price.
 Cost of improvement incurred before 01.04.1981 shall be ignored, in all cases, whether incurred by PO or by
the assessee, whether the assessee opts out for market value or not.
Note: As bonus shares are not covered by the above assets therefore FMV can be taken as Cost of Acquisition in
relation to bonus shares acquired before 01.04.81.
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Advance Money Forfeited

Section 51
(1) If any advance money is forfeited* by Assessee [*to loose the right due to some error]
(2) then the amount so forfeited shall be deducted from
 the cost for which the asset was acquired or
 the fair market value or
 written down value, as the case may be
for computing cost of acquisition.
Analysis of Sec. 51
1. If advance money forfeited is more than the cost of acquisition, then cost shall become Nil and excess
amount received over and above of actual cost of acquisition shall not be taxable under this head or under
any other head. [(Travancore Rubber & Tea Company Ltd. v CIT (2000) (SC)].
2. Advance money forfeited by the previous owner shall not be taxed in the hands of any person.
3. In case of LTCA, First advance money forfeited is deducted from COA and then the balance of COA shall be
indexed.
Exemption of LTCG from listed equity shares

Section 10(38)
Assessee may be Individual, HUF, Firm, Company or any other person
Long Term Capital Gain from transfer of equity shares or units of equity – oriented mutual fund OR “UNITS OF
A BUSINESS TRUST” w.e.f. 1 st October, 2014.
Where funds are invested in equity shares in domestic company more than 65% of total proceeds of fund and
which has been set up under a scheme of a mutual fund u/s 10(23D) (the percentage of equity share holding of
the fund shall be computed with reference to the annual averages of the monthly averages of the opening and
closing figures) shall be exempt if:
(1) They are sold through recognised stock exchange or equity oriented mutual fund may either be sold
through the Recognised Stock Exchange or may be sold to mutual fund.
(2) Security transaction tax is chargeable on such transaction.
Any loss from exempt income can’t be set off from other income. Therefore, loss on sale of long term equity shares
or equity oriented fund can’t be set off / carried forward.
Tax on STCG from listed equity shares

Section 111A
Short Term Capital Gain from transfer of equity shares or units of equity – oriented mutual fund (where
funds are invested in equity shares in domestic company more than 65% of total proceeds of fund and which
has been set up under a scheme of a mutual fund) shall be taxable @ 15% if:-
(1) Such transaction of share or unit is entered on or after 01.10.2004,
(2) They are sold through recognised stock exchange,
(3) Security transaction tax is chargeable on such transaction.
No Deduction under chapter VI – A shall be allowed from such income.

9899555900 Page 85
Computation of capital gains in slump sale

Section 50B
 Slump sale means sale of undertaking for a lump sum consideration without determining the values of
the individual assets and liabilities.
 Any profits from slump sale shall be chargeable AS LTCG in the year of transfer of under taking, if
such undertaking is OWNED AND HELD BY THE ASSESSEE FOR MORE THAN 36 MONTHS immediately
preceding the date of transfer.
 However benefit of indexation is not available in this case.
 Otherwise it shall be STCG.
Insurance Claim on destruction

Section 45(1A)
In Vania Silk Mills (P) Ltd. v CIT (1991) Supreme Court held that insurance claim received on account of destruction
of asset is not chargeable to tax as “DESTRUCTION” does not amount to transfer. The effect of the Judgment has
been nullified to some extent by inserting sub – section (1A) in section 45 with effect from the A/Y 2000 – 01.
If any person receives any money or other assets under an insurance FROM AN INSURER
 On account of “damage to” or “destruction of” any capital asset as a result of,
 flood, typhoon, hurricane, cyclone, earthquake, or other convulsion of nature, or
 riot or civil disturbance, or
 accidental fire or explosion; or
 action by an enemy or action taken in combating an enemy (whether with or without declaration of
war)
 then any profit from receipt of such money shall be chargeable under head Capital Gain and
 shall be deemed to be the income of such person of the previous year in which such money or asset was
RECEIVED and
 MONEY RECEIVED OR FMV of the asset received, shall be deemed to be full consideration.
Transfer of a capital asset by a partner / member of AOP / BOI as Capital contribution

Section 45(3)
 The capital gain from the transfer of a capital asset by a partner / member of a Firm, AOP or BOI (Not being
company or co-operative society) etc., in which
(a) He is a partner OR
(b) Becomes a partner or member,
 by way of capital contribution or otherwise,
 shall be chargeable to tax in the previous year in which such transfer takes place.
 The AMOUNT RECORDED IN THE BOOKS OF FIRM, AOP OR BOI as value of capital asset, shall be
deemed to be sale consideration.
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Compulsorily acquisition of a Capital Asset

Section 45(5)
Where a capital asset (other than urban agriculture land) is compulsorily acquired under any law then it will be
regarded as transfer of the PY in which the asset is compulsory acquired.
Original Compensation:-
1. Capital gain for original compensation shall be taxable in the year in which SUCH COMPENSATION OR
PART THEREOF is first received by the assessee AND NOT IN THE YEAR OF COMPULSORY ACQUISITION /
DETERMINATION OF CONSIDERATION BY CG OR BY RBI.
Enhanced Compensation:
2. Any increased compensation is taxable in the year in which such increased amount is received,
[Only the amount received shall be taxable and not the entire increased compensation]
 Nature of increased compensation shall be same as the nature of original compensation
 For increased compensation COA and COI shall be nil.
 Any expenses incurred on realization of increased compensation may be deducted as expenses on
transfer.
3. If such compensation is reduced by any court then capital gain shall be recomputed by taking into
consideration such reduced compensation.
4. It is possible that the transferor may die before the received the enhanced compensation. In that case,
the enhanced compensation or consideration will be chargeable to tax in the hands of the person who
received the same UNDER HEAD OTHER SOURCES.
Similarly if there is a transfer of capital assets other than urban agriculture land the consideration for which was
determined or approved by CG or RBI, it will be treated as transfer of the PY in which the consideration is determined
but capital gain will be taxable in the PY in which the such consideration is received.
AMENDMENT MADE BY FINANCE ACT, 2014

Year of taxability of capital gains when compensation is received in pursuance of an interim order of any Court,
Tribunal or other Authority [Proviso to section 45(5)(b) w.e.f. A/Y 2015 – 16]
There is an uncertainty about the year in which the amount of compensation received in pursuance of an interim
order of the Court is to be charged to tax, due to Court orders.
Accordingly, a proviso has been inserted u/s 45(5)(b) to provide that the amount of compensation received in
pursuance of an interim order of the Court, Tribunal or other authority shall be deemed to be the income chargeable
under the head ‘Capital Gains’ in the previous year in which order of such Court, Tribunal or other authority is
made.
9899555900 Page 87
Exemption on compulsory acquisition of agricultural land situated in specified urban limits

Section 10(37)
In the case of individual or HUF, any income from the transfer of urban agricultural land shall be exempt if
–
1. Such urban land should belong to an Individual or HUF and
2. such land, was being used for agricultural purposes by such HUF or individual or his parents,
DURING TWO YEARS immediately preceding the date of transfer i.e. compulsory acquisition
and
3. transfer is by way of compulsory acquisition under any law.
4. The compensation is received on or after 01.04.2004.
Therefore it can be said that if the urban land is compulsory acquired before 01.04.2004 and the compensation
received after 31.03.2004, it shall be exempt.
But part of original compensation in the above case has already been received before 01.04.2004, then exemption
shall not be available even though balance of original compensation is received after 31.03.2004.
However, enhanced compensation received on or after 01.04.2004 against agriculture land compulsory acquired
before 01.04.2004 shall be exempt.
Liquidation of a company
Section 46
(1) In the hands of company:-
Where the assets of a company are distributed to its shareholders on its liquidation, such
distribution shall not be regarded as a transfer in the hands of the company. Therefore there is no
capital gain in the hands of the company.
(2) In the hands of shareholders:-

 Where a shareholder on the liquidation of a company receives ANY MONEY OR OTHER ASSET
from the company, he shall be chargeable to income tax under this head for such receipt of
money or other asset under head capital gain in consideration of Shares held in the liquidated
company and
 Sale consideration of shares shall be FMV of assets (if received in lieu of shares) on the date of
distribution less deemed dividend u/s 2(22)(c).
While computing the period of holding of such shares the period after the date of liquidation of the
company shall not be taken in consideration for determining the nature of the assets.
9899555900 Page 88
Basis of Charge
Section 56(1)
 A source of income
 which does not specifically fall under any one of the other four heads of income
 is to be computed under the head "Income from other sources", provided such income shall not be
exempt under any section.
Specific incomes
Section 56(2)
Specific incomes included under "Income from other sources"
1. Dividends, other than dividend referred to in section 115 – O;
2. Winnings from lotteries, crossword puzzles, races including horse races, card games or any other game of
any sort, or from gambling or betting of any form or nature whatsoever;
3. Any sum received by the assessee (EMPLOYER) form his employees as contribution to any PF or any
other welfare fund, provided such contribution shall not taxable under head PGBP.
4. Income from letting of machinery, plant or furniture along with building and only machinery, plant or
furniture other than PGBP;
5. Interest on securities other than PGBP;
6. Interest received on compensation or enhanced compensation to be taxed in that PY in which such interest
is received;
7. Sum received under a Keyman Insurance Policy including bonus on such policy if such income is not
taxable u/h “Salary” or “PGBP”
8. where any sum of money, the aggregate value of which exceeds ` 50,000 without consideration or any kind
of movable or immovable property is received without consideration or movable property is received for an
inadequate consideration by an Individual and HUF, if the amount of such gift or inadequate consideration
exceeds ` 50,000
Provided that nothing shall be taxable in case gift received—

(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance*; or [*to receive from ancestors by genetic transmission]
(d) in contemplation* of death of the payer or doner.
[*apprehension of death arising from some presently existing sickenss or physical condition or from some danger]
(e) from any local authority, trust or university etc. referred to section 10(23C).
(f) from any trust or institution registered u/s 12AA.
9899555900 Page 89
Explanation—For the purposes of this clause, "relative" means—

(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).".
The following three kinds of the gift received by Individual or HUF from an unrelated person shall be taxable u/s
56(2)(vii)
(a) gift of money if aggregate value of which exceeds ` 50,000 during the PY, then the whole of such some shall
be treated as income;
(b) gift of immovable property received by Individual or HUF from any person, the stamp duty value of which
exceeds ` 50,000, the stamp duty value of such property shall be taxable in the hands of recipient;
(c) gift of any property other than immovable property whether received without consideration or acquired for
inadequate consideration,
but in case of inadequate consideration only that amount is taxable which is exceeds the inadequate
consideration upto FMV provided such difference is more than ` 50,000.
Further, where the date of agreement fixing the amount of consideration for the transfer of the immovable
property and the date of registration are not the same, the stamp duty value may be taken as on the date of
the agreement, instead of that on the date of registration.
Important Note:
(1) If any loan is taken on the security of FD, then any such interest on FD shall not be reduced by the interest amount
on the loan. [CIT v Dr. V Gopinathan (SC)].
(2) Refund of income tax is not an income as no deduction is allowed under income tax for payment of income tax,
but interest received on refund shall be taxable under head OS.
(3) Where perquisites are provided to a director, who is not the employee of the company, the valuation of such
perquisites should also be done as per rules relating to valuation of perquisites.
[CIT v Sir Padampat Singhania].
Method of accounting
Section 145
Income chargeable under this head is to be computed in accordance with method of accounting
regularly employed by the assessee.
9899555900 Page 90
Deemed Dividend
Section 2(22)
Includes - to the extent of accumulated* profits whether capitalized or not – [*gathered]
(a) Any distribution by a company, if such distribution reduces company's assets.
If assets are distributed as dividend, the amount of dividend is taken to the FMV of the assets on the date
of distribution. [CIT v Central India Industries Ltd. (SC)].
Mere capitalization of accumulated profits by issuing of Bonus shares to equity shareholders does not
entail the release of assets of the company and hence shall not be deemed to be dividend.
(b) Distribution of debenture / Deposit Certificates to shareholders and bonus shares to preference
shareholders.
(c) Any distribution made to the shareholders of a company on its liquidation, to the extent to which the
distribution is attributable to the accumulated profits of the company immediately before its liquidation.
(d) Distribution of accumulated profits on reduction of share capit al except to preference

shareholders.
(e) any advance / loan by a PRIVATE company to

i. equity shareholders holding not less than 10% voting power or
ii. any concern in which such member (holding 10% voting power in the company) is having not less
than 20% profit sharing.
Example: Q Pvt. Ltd. Gives a loan of ` 3,00,000 to G who is not a shareholder. G gives this amount as loan to S who
is shareholder in Q Pvt. Ltd., holding 13% shares. In this case ` 3,00,000 shall be deemed as dividend in the hands of
S because the loan has given by the company to G for the benefit of S.
Section 10(34) Any income received by way of dividend from an Indian company shall be exempt in the hands of
shareholder. But dividend u/s 2(22)(e) is taxable in the hands of shareholder.
Corporate Dividend Tax

1. Every domestic company, in addition to income tax, is liable to pay tax on dividend whether interim
or final.
2. Such tax on dividend is payable even if income tax is not payable by the company.
3. No deduction of dividend or tax thereon shall be allowed to the company or the shareholder.
4. However such dividend shall be exempt in the hands of shareholder u/s 10(34).
[But presently dividend by Indian Company is exempt because of Corporate Dividend Tax i.e. CDT]
CDT Rate is 15% + 10% + 3% = 16.995% if dividend is distributed upto September 30, 2014 OR
17.64706% + 10% + 3% = 19.99412% if dividend is distributed on or after October 1, 2014.
Section 115 – O(1)
9899555900 Page 91
Notes:
1. Only a Domestic Company (not a foreign company) is liable for above tax.
“Domestic Company” means an Indian Company or any other company which, in respect of its income
liable to tax under the Act, has made prescribed arrangements for the declaration and payment of
dividends within India in accordance with section 194.
2. Any amount declared, distributed or paid by a domestic company by way of dividend shall be
charged to additional tax.
3. It is applicable whether such dividend is paid out of current profit or accumulated profit.
Exemption of income from units

Section 10(35)
Section 10(35) provides that any income receives in respect of
(a) Units from the Administrator of the specified undertaking; OR
(b) The specified company; OR
(c) A mutual fund specified u/s 10(23D)
Shall be exempt.
Q. When is dividend not exempt for shareholders and included in their total income?
Ans. In the following cases dividend is not exempt in the hands of shareholders:-
(i) Dividend u/s 2(22)(e);
(ii) If dividend is received from the foreign company;
(iii) If dividend is received from a co – operative society.
Deductible expenses
Section 57
1. In respect of interest any expenditure incurred by way of commission or remuneration for
realisation of such income is deductible.
2. In respect of family pension 33.33% of the pension or ` 15,000 whichever is less is allowed
deduction.
3. In respect of income from letting, deduction of repair, insurance and depreciation is allowed.
4. Any other expenditure expanded* wholly and exclusively for earning such income. [*incurred]
The following expenses can be claimed as deduction from gross dividend income other than the dividend referred
to in section 115 – O [i.e. dividend covered u/s 2(22)(a), (b), (c), (d)]
(a) Collection charges by way of commission or remuneration to a banker or any other person.
(b) Interest on money borrowed for purchasing the share. It is immaterial that whether income is earned or
not (SC).
Q. Mrs. P is received pension after the death of her husband. Decide how much amount shall be included in her
income in the following cases:
(1) 20,000 (2) 50,000
Ans.
(1) Amount of exemption 20,000 X 33.33% = 6,666 OR ` 15,000
Whichever is less
So that, amount to be included in her income is ` 20,000 – ` 6,666 = ` 13,334
9899555900 Page 92
Expenses not allowed deduction

Section 58
1. Personal expenses.
2. Interest paid outside India on which tax has not been deducted at source.
3. Restrictions of section 40A e.g. u/s 40A (2) [payment to specified persons], 40A (3) [payment in
excess of ` 20,000] are also applicable to expenditure under this head.
4. Income Tax or wealth tax.
5. Any expenditure/ allowance in connection with winning of lottery, crossword puzzles etc.
However, expenditure incurred for activity of owning and maintaining race horses shall be allowed as deduction.
Interest paid on amount borrowed for meeting tax liabilities is not deductible, since the liability to pay income tax
and wealth tax is a personal liability. [Padmavati Jaikrishna v Addl CIT (SC)]
Q. Mr. X purchased lottery tickets of Jharkhand Government for ` 50,000 but lost. He purchased another tickets of
Haryana Government for ` 15,000 and won amount of ` 40,000. Determine his taxable Income.
Q. Mr. P purchased lottery ticket of ` 10,000 but did not win any amount. He has income of ` 3,50,000 from
business. Decide that on what amount he is liable to pay to tax.
Winning from lotteries etc.

Winning from lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any
sort.
Lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other
manner under any scheme by whatever name called and includes any game show, entertainment programme on
TV or electronic mode in which people compete to win prizes or any other similar game.
No deduction of any expenditure or exemption is allowed from such income. Also no deductions under
Chapter VI-A shall be allowed and the basic exemption of ` 2,00,000 is also not allowed as deduction.
Computation of tax
Section 115BB
Tax rate shall be @ 30% + 3% education cess.
The payer of lottery shall deduct TDS at the rate mentioned above only if the amount of lottery exceeds ` 10,000 (`
5,000 for horse races).
9899555900 Page 93
Interest exempt from tax

Section 10(15)
Interest on following notified bonds / certificates is exempt;-
1. National defence gold bonds;
2. National plan saving scheme (NSS);
3. Special bearer bonds;
4. P.O. saving bank account in case of individual account ` 3,500 and in case of joint account ` 7,000 shall
be;
5. Interest on notified relief bond;
6. Interest on securities issued by CG or SG.
7. Capital investment bonds;
8. Interest on notified bonds /debentures of public sector company or local authority;
9. Interest on Public Provident Fund (PPF) is also exempt Sec. 10(11).
Grossing – up of interest
In case of Government securities other than 8% saving (Taxable) bonds, grossing up is not required as there is no
tax deduction as source.
TDS rate is as under:

(a) In case of 8% saving bond 10%
(b) Non – Government Securities whether or not listed on RSE 10%
No deduction
Section 14A
 For computing the total income under the five heads,
 no deduction shall be allowed
 in respect of expenditure incurred by the assessee
 in relation to income which is exempt.
Deemed income chargeable to Tax

Section 59
If any expenditure allowed a deduction is subsequently recovered in cash or in kind then the same shall be
taxable. Same as section 41(1) of Income Tax Act, 1961.
These provisions are applicable even in cases of succession and inheritances.
9899555900 Page 94
Agricultural Income
"Farmers - backbone of India, don't pay any tax to govt."
Agriculture is our primary sector of income. In order to encourage more and more people to take up
farming, farmers have been given an incentive, not to pay tax. But if their income is both from
agricultural and non-agricultural sector, then they have to pay tax on the non-agricultural income.
As per Section 10(1) agricultural income is exempt from income tax.

Agricultural income means
Sec. 2 (1A)
(a) Any RENT earned

 from the land situated in India; and
 that land is used for agricultural purposes.
(b) Any income derived from such land by:

(i) Agriculture, or
(ii) The sale of the produce raised or received as rent in kind.
Any income derived from saplings or seedlings* grown in a nursery shall be deemed to be agricultural
income. [* a young plant raised from a seed]
(c) Any income derived from any building occupied by the cultivator
provided that the building is on or in the immediate vicinity* of the land and is a building which the
cultivator requires as a
(i) Dwelling house or
(ii) as a store house.
However income from any such land or building from the use of any purpose other than
agriculture such as letting for residential or business purpose shall not be treated as AI.
Partly Agricultural and partly non – agricultural income

 If assessee is carrying on agricultural operations as well as non-agricultural operation, in
determining non-agricultural income which is chargeable to tax.
 the market value of any agricultural produce which has been raised by the assessee or received
by him as rent in kind and which has been utilized as a raw material in such business.
 shall be deducted and no further deduction shall be made in respect of any expenditure by
the assessee as cultivator or receiver of rent in kind.
For the" purpose of the above market value shall be deemed to be:
(a) Where the agricultural produce is ordinarily sold in the market, the average price at which it has
been sold, during the relevant previous year; or
(b) Where the agricultural produce is not ordinarily sold in the market, the aggregate of the following
shall be its market value:-
9899555900 Page 95
(i) The expenses of cultivation;

(ii) The rent paid for the land on which it was grown and
(iii) Reasonable profit determined by Assessing Officer.
Disintegration of income in specific composite business

Nature of business Non – agricultural income Agricultural income
Growing and manufacturing Tea 40% 60%
Growing and manufacturing Rubber 35% 65%
Growing and manufacturing Coffee 25% 75%
Income for above businesses, first income is computed under the PGBP as if the entire business is non-agricultural
business and then 40 / 35 / 25 of such amount is treated as the taxable income.
Partial integration of agricultural income with

Non – agricultural income
If
(i) Non – agricultural income exceeds exemption limit and
(ii) Agricultural income exceeds ` 5,000
then tax shall be calculated in the following manner:-
Step 1: Add agricultural with non – agricultural income and calculate the tax on the aggregate as if it is the
TI.
Step 2: Compute the tax on [Exemption limit + Agricultural income] as if it is the total income
Step 3: Step 1 – Step 2 will be the tax payable
Step 4: Add surcharge @ 5 % (in case of company)
Step 5: Add Education Cess @ 2% + 1% SHEC
Q. Mr. J whose age is 30 years has non – agricultural income of ` 6,95,000 and agricultural income of ` 50,000.
Compute his tax liability.
Q. Mrs. A whose age is 65 years has non – agricultural income of ` 8,20,000 and agricultural income of ` 10,000.
Compute her tax liability.
9899555900 Page 96
Basis of charge of income tax

Section 4
1. Income of previous year is taxable in the next following assessment year at the rates applicable
to that assessment year. However, there are certain exceptions to this rule.
2. Tax rates are fixed by the annual Finance Act.
3. Tax is charged on every person as defined in Section 2(31).
4. The tax is charged on total income computed in accordance with the provisions of the Act.
Income
Section 2(24)
Under Section 2 (24) income includes:-
(1) The value of any perquisite or profits in lieu of salary taxable under the head salaries.
(2) Any allowance, granted to meet expenses for the performance of the duties of an office.
(3) Allowance granted to meet his personal expenses at the place where the duties of his office are
performed or where he ordinarily resides or to compensate for increased cost of living.
(4) The value of any benefit or perquisite which is obtained by assesses or by any beneficiary.
(5) Profits and gains.
(6) Any compensation due to or received:
(a) for termination/modification of terms of agency,
(b) for vesting of management of any property or business in govt. under any law.
(7) Profits on sale of a license granted under the imports Control order.
(8) Cash assistance against export under any scheme of the Govt. of India.
(9) Duty drawback of customs or excise.
(10) Any amount received by assessee from his employees as contributions to any PF.
(11) The value of any benefit or perquisite received from business of profession.
(12) Interest, salary etc. received by partner from firm to extent allowed deduction u/s 40 (b).
(13) Any sum recovered in the previous year which has been allowed to assesses, or any income which is
chargeable to tax under Sec. 41.
(14) Any capital gain chargeable under Sec. 45.
(15) Any winnings from lotteries cross word puzzles races including horse race card-games and other
games of any sort or form gambling or betting or any form or nature whatsoever.
(16) Any received under a keyman insurance policy including bonus on such policy.
(17) Dividend.
(18) Incomes referred in section 56(2) i.e. gifts in excess of ` 50,000.
9899555900 Page 97
Assessee
Section 2(7)
Assesses means a person by whom any tax or any other sum is payable under the act, and includes:-
(a) Every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income / loss and the amount of refund due to him or of the income / loss of
any other person in respect of which he is assessable.
(b) Every person who is deemed to be an assessee in default under any provision of the Act.
Person
Section 2(31)
The term person includes –
(i) An individual a natural human being;
(ii) A Hindu Undivided Family;
(iii) A Company;
(iv) A Firm;
(v) An Association of Persons or Body of Individuals;
(vi) Local authority;
(vii) Every Artificial Juridical Person, not falling in any of the preceding category.
These are the seven categories of persons chargeable to tax under the Act.
Assessment year
Section 2(9)
Assessment Year may be defined as a year in which the income of the Previous Year is to be assessed. In some
countries it is called Tax Year.
Assessment Year means the period of twelve months commencing on the 1st day of April every year and ends on
31st March of next year.
Previous year
Section 3
Previous year means the financial year immediately preceding the assessment year.
Provided that in the case of
 A business or profession newly set up or
 A source of income newly coming into existence, in the said financial year,
The previous year shall be the period beginning with the date of setting up of the business or profession
or, the date on which the source of income newly comes into existence and ending with the said financial
year.
9899555900 Page 98

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NAGENDRA SOLANKI INCOME TAX

Income – Tax Act, 1961

Total Income [Section 2(45)]

Computation of Total Income of Mr. A

2. Income under head House property (Section 22 to 27)

3. Income under head PGBP (Section 28 to 44DA)

4. Income under head capital gains (Section 45 to 55A)

5. Income from other sources (Section 56 to 59)

Add: Clubbed income under the relevant head xxx

Gross total income XXX

Less: deduction under chapter VI – A OR Section 80C to 80U xxx

Rates of Income Tax for A/Y 2015 – 2016

Add: Surcharge @ 10%

2. The rate of tax for Co – operative Society is as under

4. No Marginal Relief is available in case of Education Cess and SHEC.

Table for surcharge

Residential Status and Tax Incidence

Basic conditions Individual is in India

But only condition (a) is applicable [(b) not checked] if

(II) Non – Resident – If satisfies none of the basic conditions.

B. HUF, Section 6(2)

(ii) Resident But not Ordinarily Resident in India

(i) Wholly controlled from Hong Kong.

C. Firm and every other person, Section 6(4)

(2) Non – resident in India –

D. Company, Section 6(3)

(ii) Foreign Company

2. For Resident but not ordinarily resident assessee (RNOR):-

3. For non – resident assessee (NR):-

Income deemed to accrue or arise in India

4. Income from the transfer of any asset situated in India.

5. Dividend paid by an Indian company outside India. [Exempt u/s 10(34)]

8. Fees for technical services

Amendments after the judgment

9. Income from a business connection in India

Some examples of non – resident having business connection in India are

Income under the head Salary

7 Income deemed to be received

Relationship of the receiver with payer

GRADING SYSTEM (To be discuss in class)

Overtime Payments: Taxable under head Salary.

II. Commuted* pension - It is taxable as under [*To exchange or change]

B. Received by Non – Government employees following is exempt

2. For other than Government employee following shall be the provisions:

(i) Employees covered by the Payment of Gratuity Act, 1972:

Meaning of salary: Last drawn basic and DA only.

(ii) Employees not covered by Gratuity Act:

Q. what will be your answer if he worked for 30 years and 10 months?

2. At the time of retirement OR leaving job

(ii) For Non – Government – Least of following shall be exempt

Following step shall be followed for the limit of (d) point

Compensation on voluntary retirement (Golden hand shake scheme)

(b) Amount notified by Government; (presently amount notified is ` 5,00,000)

(c) Amount received;

Other points are as under:

During Job On retirement

URPF Employee’s cont.-

RPF Taxable in Taxable in Nothing shall be taxable if :-

If none of the above conditions is satisfied

Income deemed to be received

3. Transferred balance in a RPF from URPF

1. Travelling allowance : Granted to meet the cost of travel on tour or on transfer;

6. Uniform allowance : Granted to meet expenditure on purchase or maintenance of uniform.