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CHAPTER 1- INTRODUCTION AND BASIC CONCEPTS

What is Tax

 Tax is a fee charged by a government on a product, income or activity.


 There are two types of taxes. Direct taxes and Indirect taxes.
 If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g.
income-tax, wealth tax.
 If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise
duty, custom duty, service tax and sales tax or value added tax. In the case of indirect
taxes, the person paying the tax passes on the incidence to another person.

Brief history of income-tax in India

1. Income-tax was introduced for the first time in 1860, by Sir James Wilson in order to
meet the losses sustained by the Government on account of the Military Mutiny of 1857.
Thereafter; several amendments were made in it from time to time.
2. A separate Income tax Act was passed in 1886. This Act remained in force up to, with
various amendments from time to time.
3. In 1918, a new Income-tax Act was passed and again it was replaced by another new Act
which was passed in 1922. This Act remained in force up to the assessment year 1961-62
with numerous amendments.
4. The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the Law Commission in
1956 with a view to simplify and prevent the evasion of tax.
5. The Law Commission submitted its report-in september 1958, but in the meantime the
Government of India had appointed the Direct Taxes Administration Enquiry Committee
which submitted its report in 1956.
6. In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
7. The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the
whole of India including Jammu and Kashmir.
Overview of Income-Tax Law in India

Income-tax is the most significant direct tax. The income-tax law in India consists of the
following components.

1. Income tax Acts

2. Income tax rules

3. Finance Act

4. Circulars, notifications etc

5. Legal decision of courts.

Some basic concepts

Assessment Year 2(9): “Assessment year” means the period starting from April 1 and ending on
March 31 of the next year. Income of previous year of an assessee is taxed during the assessment
year at the rates prescribed by the relevant Finance Act for tax rates.

Previous year (section 3): Income earned in a particular year is taxable in the next year. The
year in which income is earned is known as previous year. In other words, previous year is the
financial year immediately preceding the assessment year.

Exceptions to the general rule that “previous year’s income is taxable during the assessment
year”

In the following situations income of an assessee is liable to be assessed to tax in the same year
in which he earns the income:

a. Income of non-residents from shipping;

b. Income of persons leaving India either permanently or for a long period of time;

c. Income of bodies formed for short duration;

d. Income of a person trying to alienate his assets with a view to avoiding payment of tax;

e. Income of a discontinued business.


Person 2(31):

The term “person” includes:

1. An individual;

2. A Hindu undivided family;

3. A company;

4. A firm;

5. An association of persons or a body of individuals, whether incorporated or not;

6. A local authority; and

7. Every artificial juridical person not falling with in any of the preceding categories.

Assessee 2(7):

Every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable or of the loss sustained by him or by such other person or the amount of refund due to
him or to such other person may be called an assessee.

Deemed Assessee:

A person who is deemed to be an assessee for some other person is called “Deemed Assessee”.

Assessee in Default:

When a person is responsible for doing any work under the Income Tax Act and he fails to do it,
he is called an “Assessee in default”.

INCOME - 2 (24):

The definition of the term “income” in section 2(24) is inclusive and not exhaustive. Therefore,
the term “income” not only includes those things that are included in section 2(24) but also
includes those things that the term signifies according to its general and natural meaning.
Income, in general, means a periodic monetary return which accrues or is expected to accrue
regularly from definite sources. However, under the Income-tax Act, 1961, even certain incomes
which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries,
crossword puzzles.

Gross Total Income Sec - 80b (5):

As per section 14, the income of a person is computed under the following five heads:

1. Salaries.

2. Income from house property.

3. Profits and gains of business or profession.

4. Capital gains.

5. Income from other sources.

If the income is not derived from any of the above sources, it is not taxable under the Act. The
aggregate income under these heads is termed as “gross total income”.

Total Income - 2(45):

Total income means the amount left after making the deductions under section 80C to 80U from
the gross total income.
Chapter 2-Basis of Charge

Income tax is levied on the taxable income of every person. For calculation of income tax,
taxable income is the basis. To determine taxable income, residential status of the person and
scope of total income are the initial steps. There are two types of taxpayers from residential point
of view – Resident in India and Non-resident in India. Indian income is taxable in India whether
the person earning income is resident or nonresident. Conversely, foreign income of a person is
taxable in India only if such person is resident in India. Foreign income of a non-resident is not
taxable in India. Therefore, the determination of the residential status of a person is very
significant in order to find out his tax liability.

An assessee’s residential status must be determined with reference to the previous year in respect
of which the income is sought to be taxed (and not with reference to the assessment year).

Residential status of an individual

An individual may either be a

(i) Resident in India or

(ii) Non-resident in India

However, individual cannot be simply called resident in India. If individual is a resident in India
he will be either;

(a) Resident and ordinarily resident in India (ROR) or

(b) Resident but not ordinarily resident in India (RNOR).

Basic condition for an individual to be resident

Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any
previous year if he:

(a) is in India in the previous year for a period or periods amounting in all to one hundred and
eighty-two days or more i.e., he has been in India for at least 182 days during the previous year;
or,

(b) has been in India for at least three hundred and sixty-five days (365 days) during the four
years preceding the previous year and has been in India for at least sixty days (60 days) during
the previous year except in following cases; where if condition (a) is satisfied then an individual
is resident otherwise he will be Non-Resident.

– Citizen of India, who leaves India in any previous year as a member of the crew of an Indian
ship, or for the purpose of employment outside India, or

– Citizen of India or Person of Indian origin engaged outside India (whether for rendering
service outside or not) and who comes on a visit to India in the any previous year.

Additional Conditions for a person to be resident and ordinary resident (ROR)

An individual may become a resident and ordinarily resident in India if he has satisfy both the
following conditions given u/s 6(1) besides satisfying any one of the above mentioned
conditions:

(i) he is a resident in at least any two out of the ten previous years immediately preceding the
relevant previous year, and

(ii) he has been in India for 730 days or more during the seven previous years immediately
preceding the relevant previous year.

Resident and not ordinary resident:

An individual is not ordinarily resident in any previous year if he has been a non-resident in
India in at least nine out of the ten previous years preceding that previous year, or has during the
seven previous years preceding that previous year been in India for a period of, or periods
amounting in all to, seven hundred and twenty-nine days (729 days) or less. In other words, if
resident individual is not able to satisfy both the additional conditions, then he will be resident
but not ordinary resident (RNOR).

Steps to solve residential status of an Individual:

Step 1: Determine whether the person falls under exception to basic condition;

Step 2: If yes, apply only first basic condition, if satisfied, then he will be resident otherwise non-
resident. If no, then apply both basic conditions and Individual becomes Resident on satisfaction
of any one condition.

Step 3: Resident Individual will be called ROR if satisfies both the additional conditions,
otherwise he will be called RNOR.
Residential status of HUF

HUF: Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and management of its affairs
is wholly or partly situated in India.

A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the
family (including successive kartas) satisfies the following two additional conditions as laid
down by section 6(6)(b).

Additional conditions

(i) Karta has been resident in India in at least 2 out of 10 previous year’s preceding the relevant
previous year.

(ii) Karta has been present in India for a period of 730 days or more during 7 previous years
immediately preceding the relevant previous year.

If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional
conditions, the family is treated as resident but not ordinarily resident in India.

A HUF will be non-resident if the control and management of its affairs is situated wholly
outside India during the previous year.

Residential Status of Firm and Association of Persons

As per section 6(2), a partnership firm and an association of persons are said to be resident in
India if control and management of their affairs are wholly or partly situated within India during
the relevant previous year. They are, however, treated as non-resident in India if control and
management of their affairs are situated wholly outside India.

Residential Status of a Company


As per section 6(3), an Indian company is always resident in India. A foreign company is
resident in India only if, during the previous year, control and management of its affairs is
situated wholly in India. However, a foreign company is treated as non-resident if, during the
previous year, control and management of its affairs is either wholly or partly situated out of
India.

Scope of Total Income (Section 5)


Resident and ordinarily resident:

Total income of an assessee who is resident and ordinarily resident includes:

i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
ii. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year ; or
iii. Any income accrues or arises to him outside India during such year.

Resident but not ordinarily resident:

i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
ii. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year ; or
iii. Any income accrues or arises to him outside India from a business controlled in or a
profession set up in India.

Non- resident:

i. Any income received or deemed to be received in India during the previous year by or on
behalf of the assessee ; or
iv. Any income accrues or arises or deemed to accrue or arise to him in India during the
previous year.
Chapter 3- Incomes Exempted from Tax

Section 10 provides that in computing the total income of an assessee, any income which falls in
its ambit shall not be included in the total income, provided the assessee proves that a particular
item of income is exempt and falls within a particular clause. The onus is on the assessee i.e. the
assssee has to prove that his income falls under Section 10.

The following Income is exempt from Income tax:-


1. Agriculture Income [Sec. 10(1)]
2. Payments received from family income by a member of HUF [Sec. 10(2)]
3. Share of profit from a firm [Sec. 10(2A)]
4. Interest received by a non resident from prescribed securities [Sec. 10(4)]
5. Interest received by a person who is resident outside India on amounts credited in the
nonresident (External) account [Sec. 10(4)]
6. Leave travel concession provided by as employer to his Indian citizen employee, [Sec.
10(5)]
7. Remuneration received by foreign diplomats of all categories [Sec. 10(6)]
8. Salary received by a foreign citizen as an employee of a foreign enterprise provided his
stay in India does not exceed 90 days [Sec. 10(6)(vi)]
9. Salary received by a non-resident foreign citizen as a member of ship’s crew provided his
total stay in India does not exceed 90 days [Sec. 10(6)(vii)]
10. Remuneration received by an employee, being a foreign national, of a foreign
government deputed in India for training in a Government establishment or public sector
undertaking [Sec. 10(6)(xi)]
11. Tax paid on behalf of foreign companies [Sec. 10(6A)]
12. Tax paid by Government or an Indian concern in case of a non-resident / foreign
company [Sec.10 (6B)]
13. Income arising to notified foreign companies from services provided in or outside India
in project connected with the security of India [Sec. 10(6C)]
14. Foreign allowance granted by the Government of India to its employees posted abroad
[Sec. 10(7)]
15. Remuneration received from a foreign Government by an individual who is in India in
connection with any sponsored co-operative technical assistance programme with a
foreign Government and the income of the family members of such employee [Sec.
10(8)and(9)]
16. Remuneration/fee received by non-received consultants and their foreign employees [Sec.
10(8A),(8B) and (9)]
17. Death-cum-retirement gratuity [Sec. 10(10)]
18. Commuted value of pension and any payment received by way of commutation of
pension by as individual out of annuity plan of LIC or any other insurer from a fund set
up by that corporation or insurer [Sec. 10(10A)]
19. Leave salary [Sec. 10(10AA)]
20. Retrenchment compensation [Sec. 10(10B)]
21. Compensation received by victims of Bhopal gas leak disaster [Sec. 10(10BB)]
22. Compensation from the Central Government or a state Government or a local authority
received by an individual or his legal heir on account of any disaster [Sec. 10(10BC)]
23. Compensation received from a public sector company at the time of voluntary retirement
or separation [Sec. 10(10C)]
24. Tax on perquisite paid by employer [Sec. 10(10CC)]
25. Any sum (including bonus) on life insurance policy (not being a keyman insurance
policy) [Sec. 10(10D)]
26. Any amount from provident fund paid to retiring employee [Sec. 10(11)]
27. Amount from an approved superannuation fund to legal heirs of the employee [Sec.
10(13)] House rent allowance subject to certain limits [Sec. 10(13A)]
28. Special allowance granted to an employee [Sec. 10(14)]
29. Interest from certain exempted securities [Sec. 10(15)]
30. Payment made by an Indian company, engaged in the business of operation of an aircraft,
to acquire an aircraft on lease from a foreign Government or foreign enterprise [Sec.
10(15A)] Scholarship granted to meet the cost of education [Sec. 10(16)]
31. Daily allowance of a member of parliament or state Legislature (entire amount is
exempt), any other allowance subject to certain conditions [Sec. 10(17)]
32. Rewards given by the central or state Government for literary, scientific or artistic work
or attainment or for service for alleviating or for service for alleviating the distress of the
poor, the weak and the ailing, or for proficiency in sports and games or gallantry awards
approved by the Government [Sec. 10(17A)]
33. Pension and family pension of gallery award winners [Sec. 10(18)]
34. Family pension received by family members of armed forces [Sec. 10(19)]
35. National property income of any one place occupied by a former ruler [Sec. 10(19A)]
36. Income from local authorities [Sec. 10(20)]
37. Any income of housing boards constituted in India for planning, development or
improvement of cities, town or villages [Sec. 10(20A)]
38. Any income of an approved scientific research association [Sec. 10(21)]
39. Income of specified non- agencies [Sec. 10(22B)]
40. Any income (other than interest on securities income from property income received for
rendering any specific services and income by way of interest or dividends) of approved
professional bodies [Sec. 10(23A)]
41. Any income received by any person on behalf of any regimental fund or non public fund
established by the armed forces of the union for the welfare of the past and present
members of the such forces or their dependents [Sec. 10(23AA)]
42. Income of funds established for the welfare of employees [Sec. 10(23AAA)]
43. Any income of the pension fund set by LIC or any other insurer approved by the
Controller of Insurance or Insurance Regulatory and Development Authority [Sec.
10(23AAB)]
44. Any income (other than business income) of a trust or a society approved by Khadi and
Village Industries Commission [Sec. 10(23B)]
45. Income of an authority whether known as Khadi and Village Industries Board or by any
other name for the development of Khadi and Village Industries [Sec. 10(23BB)]
46. Income of the European Economic Community derived in India by way of, interest,
dividends or capital gains in certain cases [Section 10(23BBB)]
47. Any income arising to anybody or authority established, constituted or appointed under
any enactment for the administration of public religious or charitable trusts or
endowments or societies for religious or charitable purposes [Section 10(23BBA)]
Chapter 4- Assessment of Agricultural Income

Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature. However while computing tax on non-
agricultural income agricultural income is also taken into consideration.

Agriculture income includes

a. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes, or.
b. Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
c. Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc.

In order to consider an income as agricultural income certain points have to be kept in mind:

i. There must me a land.


ii. The land is being used for agricultural operations.
iii. Agricultural operation means that efforts have been induced for the crop to sprout out of
the land.
iv. If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.
v. In order to assess income of farm house as agricultural income the farm house building
must be situated on the land itself only and is used as a store house/dwelling house.

Certain incomes which are treated as Agriculture Income:

i. Income from sale of replanted trees.


ii. Rent received for agricultural land.
iii. Income from growing flowers and creepers.
iv. Share of profit of a partner from a firm engaged in agricultural operations.
v. Interest on capital received by a partner from a firm engaged in agricultural operations.
vi. Income derived from sale of seeds.

Certain incomes which are not treated as Agricultural Income:

(a) Income from poultry farming.

(b) Income from bee hiving.

(c) Income from sale of spontaneously grown trees.

(d) Income from dairy farming.

(e) Purchase of standing crop.

(f) Dividend paid by a company out of its agriculture income.

(g) Income of salt produced by flooding the land with sea water.

(h) Royalty income from mines.

(i) Income from butter and cheese making.

(j) Receipts from TV serial shooting in farm house.

Partly agriculture income

Partly agricultural income consists of both the element of agriculture and business, so non
agricultural part of the income is taxed. Some examples for partly agricultural income are given
below:

1. Profit of business other than Tea

This rule applicable to agricultural produce like cotton, tobacco, and sugarcane etc, here the
market value of the agricultural produce raised by the assessee for utilizing it as raw material for
his business will be deducted out of the total profit of such assessee while calculating tax on his
income.

2. Profit from Tea manufacturing

If a person using his own tealeaves grown by him for his tea manufacturing business, then 60%
of his income will be treated as agricultural income and the remaining 40 % will be treated as
business income. So he has to pay tax on that remaining 40% of income.
3. Income from the manufacturing of centrifuged latex or cenex.

If a person manufacturing centrifuged latex by using his own made raw then, 65 % of the income
derived from the sale of the same is treated as agricultural income so he has to pay tax remaining
part of the income.

4. Income from the coffee manufacturing

a) 75% of the income derived from the sale of coffee grown and cured by the seller in India is
deemed to be agricultural income 25% is taken as business income.

b) 65% the income derived from the sale of coffee grown, cured, roasted and grounded by the
seller in India is deemed to be agricultural income 35% is taken as business income.

Assessment of Agriculture Income

With effect from assessment year 1974-75, agricultural income is integrated with non
agricultural income in certain cases of assesses. The integration is done only in those cases where
assessee has both agricultural and non-agricultural income.

When to integrate:

1. Integration is done only in case of individuals, HUF, AOP, BOI and artificial juridical
persons.
2. Integration is done only if non-agricultural income of all the persons mentioned above
exceed exemption limit.
3. Integration is done only if net agricultural income of all the above persons exceeds Rs
5,000 in the relevant previous year.

How to integrate:

1. Net agricultural income is added with non agricultural income if above conditions are
fulfilled.
2. Tax is calculated on this total at current rates of tax.
3. Net agriculture income is added with the agricultural is added with the exempted limit
i.e., Rs 250,000/ Rs 300,000/ Rs 500,000.
4. Tax is calculated on this total at current rates of tax.
5. Tax calculated at point (4) is deducted out of tax calculated at point (2) above.
6. Add surcharge @10% of tax if total income exceeds Rs 1 crore.
7. Add education cess @ 2% plus SHEC @1% of such tax + surcharge if any.
8. Total is tax payable.
chacha
 According to section 14 of the Income Tax Act, the income of a person is
computed under the following five heads:

1. Income from Salaries [section 15, 16 and 17] (Deductions U/S 16)

2. Income from House Property [section 22 to 27] (Deductions U/S 24)

3. Profits /Gains from Business or Profession [section 288 to 44](Deductions U/S 30-37)

4. Income from Capital Gains [section 45 to 55] (Deductions U/S 48)

5. Income from Other Sources [section 56 to 59] (Deductions U/S 57)

Total of all five = GTI i.e. Gross total income

Deduction from 80C to 80U if available

The resulting figure is NTI (Net Total Income)

[Carry forward and set of losses u/s 70-79]


Chapter 5. INCOME FROM SALARIES

[Section-15, 16, 17]

 Salary under section 15


- Following incomes are chargeable to tax under the head “Salaries”
1) Any salary due from an employer or a former employer to an assessee in the
previous year whether paid or not;
2) Any salary paid or allowed to the employee in the previous year by or on
behalf of an employer or a former employer though not due or before it
becomes due to him;
3) Any arrears of salary paid or allowed to an employee in the previous year by
or on behalf of an employer or a former employer if not charged to Income
Tax for any previous year.
Remember the following points
1. Salary from more than one employer shall be all taxable under the head ‘
Salaries’
2. Salary from present, past or prospective is also taxable under this head.
3. Salary received by any member of the Parliament is not taxable under the
head ‘Salaries’ but taxable under the head ‘Income from other sources’ and
any allowance received is totally exempted from tax.
4. Any perquisite or benefit or any other remuneration received or receivable
from persons other than employer shall be taxable under the head ‘Income
from other sources’ rather than Income from ‘Salaries’.
5. Any salary received by a teacher or researcher from a SAARC member state
is exempted from tax up to 2 years only.
6. Any salary or pension received or receivable by any UNO employee is fully
exempted from tax.
7. Any salary, commission or remuneration received by a working partner
from a partnership firm shall not be taxable under the head ‘Salaries’ but
under the head ‘Profits and gains of business or profession’.
8. Any payment or compensation received by the widow or other legal heirs of
a deceased employee who dies during the service is not taxable income. But
family pension received or receivable is taxable under the head ‘Income
from other sources’.
9. Any payment received by an employee from the employee after the
cessation of employment is taxable under the head ‘Salaries’.
10. Any foregoing of salary by an employee voluntarily is taxable when due but
any voluntary surrender of salary is exempted from tax.
11. Salary becomes taxable on due basis whether received or not U/S 15(a).
12. Any deduction made by the employer out of the salary payable to the
employee is deemed to be received by the employee and thus is added back
while calculating the salary income of the employee. the deductions may be;
(i)-Deductions made by the employer to recover the loan paid to the
employee.
(ii)- Any amount deducted by the employer from the employee for the
payment of life insurance premium of the employee.
(iii)-Employee’s contribution towards the provident fund, income tax and
professional tax.
 Computation of Income under the head ‘Salaries’.

Salary ____
Allowances ____
Perquisites ___

Gross Salary
Less: Deduction under section 16 ___
___
(a) entertainment allowance [sec.16(ii)] ___
(b) professional tax [sec. 16 (iii)]
Resulting figure is Income from ‘Salaries’

Note: professional tax is deductible on payment basis. If it is paid by the employer on the
behalf of employee, then same is first included in the gross salary as perquisite and then
deduction is made under section 16(iii).

 Treatment of different forms of Salary

Basic Salary Taxable


Wages Taxable
Dearness pay/ Taxable
allowance
Advance Salary Taxable in the year of receipt.
Arrears of Salary Taxable in the year of receipt, if not taxed on due basis
earlier.
Leave encashment Taxable
during the service
1) For Govt. employee; it is fully exempted from tax.
2) For non-Govt. employee; it is exempted from tax least
of the following;
(i)- 10 months average salary; or
Leave encashment at (ii)- Cash equivalent of leave salary in respect of the
the time of retirement period of earned leave at the credit of the
or leaving the job employee at the time of retirement (30 days
average salary for every completed year of
service); or
(iii)- Amount specified by the Govt. which is
Rs. 3,00,000; or
(iv)- Leave encashment actually received at the time of
retirement.
Note:
1) Govt. employee means central or state govt. employee.
2) Average salary here means average salary drawn during
the period of 10 months immediately preceding the
retirement.
Salary in lieu Taxable
of Notice
Any Fees and Taxable
Commission
Bonus Taxable on receipt basis if not taxed earlier on due basis
Annuity from Taxable as salary
employer
Gratuity (1) For Govt. employee it is fully exempted from tax.
(2) For non-Govt. employees;
a) covered under the Payment of Gratuity Act 1972, it is
exempted from tax least of the following;
(i)- 15 days salary for each years of service; or
(ii)- Rs. 10,00,000 or
(iii)- Gratuity actually received
b) Not covered under the Payment of Gratuity Act 1972, it is
exempted from tax least of the following;
(i)- half months salary for each completed years of
service; or
(ii)- Rs. 10,00,000 or
(iii)- Gratuity actually received.
Note:
1) Govt. employee means central or state govt. employee.
2) Average salary here means average salary drawn during the
period of 10 months immediately preceding the month in which the
employee has retired..

Pension  Uncommitted pension is taxable in all cases


 Commuted pension;
 (i)- In case of a Govt. employee (central Govt. State Govt., Local
authority and Statutory Corporation), fully exempted from tax.
 (ii)- in case of non-Govt. employee, it is exempted to the extent
as; (a)- if employee receives gratuity, then 1/3 of the normal
pension is exempted; or
(b)- If the employee does not receive gratuity, then ½ of the
normal pension is exempted.

Employee 1) Employer’s contribution is first included in the salary and then a


covering under deduction up to the 10 % of the salary (under section 80CCD).
new pension 2) Employee’s contribution is deductible up to 10% of the salary
scheme in case (under section 80CCD).
joining the 3) When pension is received from the aforesaid amount, then it will
employment on be taxable in the year of receipt.
or after 1
January 2004
Annual (1) Excess of employer’s contribution over 12% of salary is taxable.
accretion to the (2) Excess of interest over notified interest rate (9.5 %) is taxable.
credit balance in
the recognized
provident fund
Retrenchment  Exempted from tax to the extent of least of the following;
compensation
 (i)- amount calculated under section 25F(b) of the Industrial
Disputes Act; or
 (ii)- Amount specified by the Govt. which is Rs. 5, 00,000.
Compensation - Exempted up to Rs. 5,00,000 if following conditions are
received under fulfilled;
voluntary  if amount payable in case of voluntary retirement of
retirement voluntary separation does not exceed over;
scheme a) the amount equivalent to the 3 months salary for
each completed year of service; or
b) Salary at the time of retirement multiplied by
remaining months of service left before the date
of his/her retirement.

 Different types of Allowances and their Tax Treatment [Section 17)3)]

House rent - Exemption is allowed up to the extent of least of the following;


allowance a) 50% of salary in metropolitan cities of Delhi, Mumbai, Calcutta
and Chennai (Madras) and rest of the states, 40% of salary;
b) Actual House rent allowance; or
c) Excess of rent paid over 10% of salary.
Entertainment  in case of Non-Govt. Employees, it is fully taxable;
Allowance
 in case of Govt. employees, least of the following is exempted
from tax; [section 16(ii)]
(i)- Rs 5,000 or
(ii)- 20% of salary; or
(iii)- actual amount of entertainment allowance
Note: This allowance is first included in the salary and then
deduction is allowed.
City .
compensatory Fully taxable (u/s 15)
allowance

Continue
Children education - Exempted from tax up to the limit of Rs. 100 per child
allowance per month for a maximum of 2 children.

Hostel expenditure - It is exempt from tax up to the limit of Rs.300 per month
allowance per child for a maximum of two children.
Transport allowance - It is exempted up to Rs. 1600 per month;
- for handicapped or disabled employees, it is exempted
up to Rs. 3200
Allowance for - allowance provided to the transport employees to meet
transport employees their personal expenditure during duty in course of
running such transport from one place to another; it is
exempt from tax up to the limit of least of the following,
(a)- 70 % of the allowance or (b) Rs. 6,000 per month
Travelling/ - Exemption is allowed up to the extent the amount is
conveyance allowance utilized for the specific purpose for which the allowance
is created.
Transfer/ helper/ - Exemption is allowed up to the extent the amount is
uniform/ academic utilized for the specific purpose for which the allowance
research allowance is created.

Tiffin allowance - Taxable


Fixed medical - Taxable
allowance
Foreign allowance - Exempted from tax if paid outside India by the Govt. to
an Indian citizen for rendering service outside India.
Allowance received by - Not taxable up to 2 years.
a teacher or
researcher from a
SAARC member state
Sumptuary allowance - Exempted from tax
to chairman/
members of UPSC
Allowance provided - An allowance (subject to the maximum of Rs.14000) for
to retired Chairman meeting the expenses of secretarial assistance on
and retired member contractual basis; is not chargeable to tax.
of UPSC
Running Flight - Exempted up to 70% of salary; or Rs. 10,000 per month,
allowance whichever is less
Underground - Exempted up to Rs. 800 per month
allowance provided to
coal mine workers
Compensatory field - Exempted up to Rs. 2600 per month.
area allowance
Compensatory - Exempted up to Rs.1000 per month.
modified field area
allowance
 Nature of Salary for different purposes
For Calculation Of HRA/ Pay + DP + DA + Any commission on
Provident Fund/Gratuity And turnover
Leave Encashment

For Gratuity under Payment of Pay + DA


Gratuity Act
For Deduction u/s 16(ii) Basic pay

Rent Free House Pay + DP + DA + any commission,


bonus (not gratuity bonus) + taxable
portion of all allowances (fully taxable
and partly taxable) + Taxable EA +
Leave encashment of the current year

 Different types of Perquisites and their Tax Treatment [ Section 17(2)]

Rent Free  In case of Gove employee; (Central Govt., State Gove


Unfurnished House employee or a Govt. employee on deputation to a public
sector undertaking):
Taxable value is the license fees of the house as per house
allotted scheme of the Govt.
 Non-Govt. employee;
(i)- If the house is owned by the employer; 15% of the
value of salary is taxable of the relevant period;
7.5% if the population is 10 lakh or less and it is
10% if the population is above 10 lakh but not more
than 25 lakh.
(ii)- If the house is taken on lease by the employer;
taxable value is 15 % of the salary or lease rent;
whichever is lower.
Rent- free Furnished  Taxable value: The value of furniture will be added to the
House value of rent-free unfurnished house as computed above;
 The value of furniture is 10% of the cost of furniture per
annum or the rent of furniture paid by the employer ( if
taken on rent by the employer)

Continue
Free Domestic  Taxable value is the actual expenditure incurred by the
Servants employer on the servants less by any amount paid by the
employee.
Free Education  Any expenditure incurred by the employer for the training
Facility of the employee is not taxable.
 If the education facility is provided to the family members
of the employee, then expenditure incurred by the employer
is the taxable value of the perquisite.
 if the education facility is provided to the family members
through the education institution owned by the employer,
then exempted limit is Rs.1000 per child per month and rest
is taxable value of the perquisite.
Free Gas, The taxable value is the actual amount incurred by the
Electricity or employer less any amount paid by the employee.
Water
Medical facilities in  Not taxable if provide in a hospital owned or maintained by
India the employer.
 Not taxable if provided in a Govt. hospital, approved
hospital or a private hospital (if recommended by the Govt.
for the treatment of Govt. employees).
Medical Insurance  Not chargeable to tax
Premium paid by
the employer
Medical Facility  Expenditure incurred by the employer on the medical
outside India treatment of the employee (including boarding and lodging)
is not taxable in the hands of the employee up to the limit
prescribed by the RBI.
 If the employer provides travelling expenses for going
outside India for medical treatment purpose, then the whole
amount is taxable in the hands of employee.
Leave Travel  Only 2 journeys in a block of 4 years is exempted from
Concession (LTC) taxable, however, carryover concession is available.
Use of Employers  Taxable up to 10% of the actual cost of asset to the
Movable Assets employer or any hire charges less any amount recovered
from the employee.
 in case of computer/ laptop; nothing is taxable
Concessional Loan/  Not taxable if the loan provided does not exceed Rs. 20,000.
interest free loan
 if exceeds Rs. 20,000, then find out the maximum
outstanding balance on the last date of each month, multiply
it with the SBI landing rate on the first day of previous year.
Any amount recovered from the employee in the form of
interest payment is deductible to reach at the figure of
taxable amount.
 If loan is provided for the purpose of medical treatment of
the employee or his family members, then it is exempted
from tax.
Continue
Sale of Movable  Actual cost of the asset to the employer less depreciation and
Asset sales consideration paid by the employee is taxable.
 Depreciation for each year of use is calculated as; (a) for
electronic items/ computers, 50% by reducing installment
method, (b) for car it is 20% by reducing installment method,
and (c) 10% of the cost on any other asset.
Motor Car  if car is owned/hired by the employer, expenses incurred by
the employer;
a) If partly used for official and partly for personal
purpose, then the value of perk which is taxable is as; Rs.
18,00 per month (up to 1600 cc), Rs 24,00 (above 1600 cc)
and Rs. 900 per month for driver.
b) Used wholly for personal purpose; entire expenditure
incurred by the employer including depreciation is taxable in
the hands of employee. The rate of depreciation is 10 % per
annum on the actual cost of the car. Any expense incurred by
the employee in this regard is deductible.
c) Wholly for office purpose; not considered as a perk
 If car owned/hired by the employer used partly for the
official and partly for the personal purpose and expenses
are met by the employee, then taxable value for the car
perquisite is as; (a) Rs. 600 pm (up to 1600 cc), Rs. 900 pm
(above 1600 cc), and Rs. 900 pm for the driver. Any
expenditure recovered from the employee is not deductible.
 Conveyance facility provided in case of Supreme Court
Judge, High Court Judge and serving Chairman/ Member
of UPSC; Not taxable.
 Conveyance facility provided to the employee of an
organization between office and residence is not taxable.
Free Transport  Considered as a taxable perquisite in the hands of employee at
the value at which the employer offers such benefit to the
public, deduct any amount recovered from the employee in this
regard.
 In case of railways and airlines, it is considered as tax free
perquisite.
Telephone/mobil  Not taxable
e Phone
Perquisite  Not chargeable to tax up to 2 years.
received by a
Teacher or
Researcher from
a SAARC
Member State
Approved  Employers contribution in excess of Rs. 1,00,000 per
Superannuation assessment year is taxable
Fund
Continue
Lunch, refreshment  Any food or non-alcoholic beverages provided in working
etc hours in remote area or off shore installation is fully
exempted from tax.
 Any food or lunch provided at any other place and the cost
in excess of Rs.50 per meal is taxable value of perquisite in
the hands of employee less any expenditure recovered from
that employee.
 Any tea or snakes provided during the working hours is not
taxable perquisite.
Travelling , Touring  When such kind of facility is available uniformly to all
Accommodation employees; taxable perquisite on the basis of actual
expenditure of the employer less any amount recovered
from the employee.
 When such kind of facility is not available uniformly to
all employees; taxable perquisite on the basis of value at
which such facilities are provided by other agencies to the
public less any amount recovered from the employee.
Any Gift, Voucher or  Taxable on the basis of actual expenditure incurred by the
Token employer;
 Gift may be provided to the employee or any member from
his family.
 Any gift provided in kind up to the amount of Rs. 5000 per
annum is not taxable.
Credit Card Facility  Taxable up to the actual amount incurred by the employer
less actual expenditure pertaining to the official use less
any amount recovered from the employee by the employer.
Specified Security or  Taxable up to fair market value of the shares or securities
Sweat equity Shares on the date on which option is exercised by the employee if
such shares or securities are allotted on or after 1 April
2009 less any amount recovered from the employee.

Residential  The value of telephone free of cost not taxable.


Telephone to a  The telephone calls to the extent of Rs. 1500 pm (apart
retired from free calls by the telecom authorities) is exempted
Chairman/member from tax.
of UPSC
Any other kind of  taxable up to the extent of actual expenditure incurred by
facility provided by the employer less any amount recovered from the
the employer employee

Continue
 Treatment of Employee’s Provident Fund
1. Statutory Provident Fund:
 Deduction u/s 80C on employee’s contribution available;
 All other contributions/interest or any lump sum payment is exempted
from tax.
2. Recognized Provident Fund:
 Deduction u/s 80C is available.
 Excess of employer’s contribution over 23 % of salary is taxable.
For this purpose salary is the sum of Pay + DA + commission on
turnover.
 Excess of interest over 9.5 % is taxable.
3. Unrecognized Provident Fund:
 No availability of deduction u/s 80C.
 Employer’s contribution plus interest are exempted from tax.
 Lump sum payment received at the time of retirement (except
employee’s contribution) is taxable income.

 Deduction Under Section 80C


 This deduction is available to the assessee being an individual or a Hindu
undivided family.
 The availability of deduction will be the actual amount paid or deposited during
the previous year in the prescribed saving scheme; or Rs. 1,500,00
(Whichever is lower)

Note: The detailed information about the qualifying amount or deductions


U/S 80C has been described in the separate chapter.
CHAPTER 6. INCOME FROM HOUSE
FROPERTY
[Section 22 to 27]

 Section 22 to 27 of the Income Tax Act deal with the computation of


income from House Property.
 It includes income from houses, buildings, bunglows, godowns, docks and
warehouses.
According to section 22 of the Income Tax Act,
Income under this head is not based upon the actual income of the property but
upon notional income or the annual value of that building.
The annual value of the property consisting of consisting of any building or lands
appurtenant thereto of which assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried on
by him the profits of which are chargeable to income tax, shall be chargeable to
income tax under the head ‘Income from house property’
In simple words

 Income from house property to be computed on the basis of annual value.


 The annual vale of the house property consisting of building or land
appurtenant thereto shall be chargeable to income tax.
 The house property or any portion of that which is used by the assessee for
his own business or profession and the property for his own residential
purpose shall not be included under this head.

For the computation of tax under this head following points should be taken into
consideration
1. Building or land appurtenant thereto: it includes the income from buildings or lands
attached or situated in the vicinity of the building i.e. the land which is not appurtenant to
any building does not come within the purview of this section.
2. Annual Value: only the annual value of the building or land appurtenant thereto is to be
taxed not the rent received. (annual value to be calculated according to section 23 of
income tax act)
3. The assessee should be the owner of the house property: only the real owner or
deemed owner is considered as assess and to be taxed under this head of income.
Therefore, income from subletting is not included under this head and is treated as
‘Income from other sources’.

 Deemed Owner of the House Property

Section 27 of the income tax act considers the assessee in the following cases as a deemed
owner of the house property.

1. An individual who transfers any house property to his or her spouse otherwise than
for adequate consideration, not being a transfer in conformity with an agreement to
live apart, or transfer to a minor child not being a married daughter.
2. The holder of an impartial estate shall be considered as a deemed owner of the
whole estate.
3. A member of a cooperative society to whom a building or any part thereof is
allotted or leased under the house building scheme of the society.
4. A person who retains the possession of any building or any part thereof in part
performance of contract of the nature referred to in section 53 A of the transfer of
property Act1882.
5. A person who acquires any rights in or with respect to any building or any part
thereof, by virtue of transfer by way of lease for a period of not less than 12 years
whether originally or by extension

4. The property should not be used by the assessee for his own business or profession.
Remember: income from the following house property is chargeable to tax under the
head income from house property;
1) Hose property held as stock in trade by the assessee in the course of carrying on
the business of purchase and sale of such house property.
2) House property of a partner used by the firm for the purpose of its business or
profession, the annual value of such property shall be chargeable to tax under the
head income from house property in the hands of the partner.
3) House property held in the name of the business but not used actually for that
business is to be assessed under the head income from house property.
5. In case of disputed ownership; it is actually the person who receives the rent is
considered as owner of that property and thus assessed for tax.
6. House property situated in foreign country: an assessee who is resident of India
having any house property situated in foreign country, the income of such house property
to taxable in Indian under the head income from house property.
7. Letting out of building along with plant, machinery, furniture, fittings or some
additional facilities: if rent is chargeable separately for additional facilities then rent
received will be split into two parts, via, (i) rent from building and (ii) rent from plant,
machinery, furniture, fittings and other amenities. The rent from second part will be
chargeable to tax not under this head but ‘Income from other sources’ or ‘Income from
business or profession if such letting is the business of the assessee.
8. Income from subletting: when the main tenant lets out full or part of the hired building
to another person, then it is called sub-letting and any income from sub- letting is
chargeable to tax not under this head but ‘Income from other sources’. and such income
is computed as per section 56 of the Act after deducting all the expenses relating to the
subletting. [ for any clarification, refer to illustration and question no. 1 respectively
from the book Tax Laws and Practice assessment year 2015-16]
 Exempted incomes from house property Section 10 of the Income tax Act

Following are the incomes which are not included in the total income of the assessee
these are:

1) Agricultural house property. [Sec. 2(1) (c)]. Income from house property which is
situated on or in the close vicinity of the agriculture land used for the agriculture
purpose is exempted from tax.
2) House property used for charitable purpose [ sec. 11]
3) Self – occupied but vacant house [sec 23(3)]. In case the assessee is not living in
his self occupied house and is residing in rented house elsewhere due to his
employment or profession, then income from such house is exempted from tax.
4) One self occupied house: in case assessee owns more than one house then under
such situation only one house shall be treated as self occupied usually on the
choice of the assessee normally with high value and rest of the houses will be
deemed as let out.
5) Property held by the registered trade union, [ sec.10 (24)]
6) Income from the house property held by the following persons shall be exempted
from tax.
a) House property held by the local authority.
Tax treatment
b) House propertyof house
held byproperty in case
the scientific of Cooperative
research institution. Society
c) House property held by a political party.
 In case the
d) gross
Housetotal income occupied
property of a co-operative society [notand
by a university beingany
a housing society, urban
other education
consumer cooperative
institution society
workingorforany society carrying
spreading educationa transport
and not forbusiness]
earning does not exceed
profits.
Rs. 20000 e) and thereproperty
House is income from
held by house property
a hospital includedinstitution
or medical in its gross total income,
working for the then
whole of such income
medical is deductible
services for the while
peoplecomputing
and not foritsearning
total income.
profits.
 If a cooperative society lets out godowns or warehouses for storage, processing or
facilitating of marketing activates, then whole of income derived from such let out is
deductible while computing its total income.

 Annual Value [section23]


Section 23(1) of the Income Tax Act defines the term annual value as “the sum for
which the property might reasonably be expected `to let from year to year”. The
annual value is the value which any house can fetch from the market under the
prevailing circumstances such as local conditions, the demand for the house,
municipal valuation, type and standard of construction, rent for similar type of
house in the similar type of locality.
In other words, the annual value does not mean the rent received or the rental value
of the house but the notional rent at which the house can be reasonably be let out.
 PROFORMA SHOWING COMPUTATION OF INCOME FROM HOUSE
PROPERTY
 Municipal Rental Value (MRV) OR
 Fair Rental Value (FRV) Whichever is higher is
 Expected Rental Value (ERV) OR
 Standard Rental Value (SRV)
(if applicable as per Rent Control Act) Whichever is less is
 ANNUAL Rental Value (ARV)
(Deduct the amount of local/ municipal taxes, water tax, sanitation tax, education
tax etc.) the resulting figure is
 Net Annual Value (NAV)
 Deduction u/s 24
(1) For self occupied house
(a) Actual interest for the year 2014-15 plus 1/5 of preconstruction interest ___
(b) Interest on loan taken for the construction, repair, innovation or purchase
the houses up to Rs 30000 or actual interest whichever is less. The limit ___
increased up to Rs. 2,00,000 if loan taken for acquisition or construction
before 01/04/1999 and such acquisition or construction is completed within
three years from the end of financial year in which capital is borrowed.
(2) Let-out house
(a) Standard deduction: 30% of the annual value every year ___
(b) interest on loan taken for the construction repair, renovate the house as: ___
___
Actual interest for the previous year 2014-25 (with no limit) plus 1/5th of
preconstruction
____
The balancing figure is income from house property
 Remember the following notes:

Self occupied Only one house of assesssee’s choice will be exempted and
house other houses shall be deemed to be let out.
Part of the year Treated to be let out for the whole year and no benefit for the
let-out and part of self occupation.
the year self-
occupied
More than one Each such unit/ house/ flat shall be treated as separate house
unit/ house and shall be treated respectively.
Co-owners of Treated as separate assessee if their shares are determinable
house property and income from house property will be included in their
individual income.
Unrealized rent Amount of unrealized rent to be deducted from the actual rent
received for the calculation of Annual Rental Value (ARV) if
conditions are fulfilled.
Recovery of Deemed to be the income of that year in which realized
unrealized rent
Arrears of rent Deemed as income from house property of the year in which
recovered but after allowing standard deduction @ 30%.
Joint expenses of Apportioned on the basis of Municipal Rental Value
two or more
houses
Loss from house Loss from house property can be set off from income under
property any other head. Loss from self occupied house due to interest
on loan can also be set off from income under any other head
and loss from both the houses can be carry forward under the
head ‘House Property’ for 8 succeeding previous years.
House used for
assessees own Annual value of such property is taken nil
business or
profession
 Description of different types of rental values

1. Actual Rent: it is the rent which is actually received by the owner of the house from the
tenant. It should be noted that if the tenant pays the composite rent comprising of rent for
building, plant and machinery, furniture and fixtures etc and is separable, then actual rent is
reduced by the amount of rent of plant and machinery, furniture and fixtures etc and the
balance is actual rent of the house property.
2. Real rental value (RRV): real rental value is the value which is calculated by deducting the
certain types of expenses common facilities provided by the owner like pump maintenance,
salary of gardener and watchman, lighting of common stairs and corridor and water and
electricity bills from the actual rent and the balancing figure is real rental value (RRV).
It should be noted that if cost of such facilities as stated above is charged separately by
the owner i.e. above the rent, then it is treated as separate source of income and is taxable
under the head ‘Income from other sources’.
3. Municipal Rental Value (MRV): it is that rental value which is fixed by the local authority
i.e. Municipal Corporation/Committee and Municipal Corporation collects different types of
municipal taxes on the basis of this value.
4. Fair Rental Value (FRV): it is that type of rental value which a house property can fetch in
the situated locality as compared to similar size of accommodation or house in that locality.
5. Standard Rental Value (SRV): it is the rental value which is fixed under the Rent Control
Act wherever applicable.

 Treatment of Municipal/Local Taxes while computing Income From House


Property
1. Any form of tax levied by local authority/ Municipal Committee in case of house
property shall be allowed as deduction.
2. These taxes include: House tax, Fire tax, water tax, Conservancy tax, Education
cess, Sanitation cess, Sewerage tax etc.
3. Such local; taxes shall be deductible from the gross annual value of the house
property.
4. These local taxes shall be allowed as deduction in the previous year in which
such taxes are actually paid. It means, any local tax in respect of house property
not paid yet at the end of previous year shall not be allowed as deduction.
5. Such local taxes shall be allowed as deduction only if born by the owner not by
the tenant.
6. If the owner has paid the municipal taxes of the house property situated in foreign
country, then such taxes are also allowed as deduction from the gross annual
value, provided they are paid by the owner not by the tenant.
CHAPTER 7 PROFITS AND GAINS OF BUSINESS OR
PROFESSION

[SECTION 28-44DB]
 Profits and gains of business or profession are calculated under section 28 to 44
of the Income Tax Act 1961 and constitute an important part of the total income
of an assessee.
 Method of Accounting: Income from business or profession is calculated on the
basis of method of accounting employed by the assessee;
 if the assessee has adopted mercantile system of accounting, then income is
calculated on accrual basis and expense which are allowed as deduction are
also deductible on accrual basis.
 (ii) If the assessee has followed cash system of accounting, then income is
followed on receipt basis and admissible expenses will be deducted only on
payment basis.
 Definition of business: in common terminology business means an economic
activity carried on for the purpose of earning profits. But according to section 2
(13) of the Income Tax Act business “any trade, commerce, manufacture or any
adventure or concern in the nature of trade, commerce and manufacture”.
 Definition of Profession: profession refers to the occupational activities where
the individuals earn their livelihood through their intellectual or manual skills.
For example, engineer, doctor, author or writer, lawyer etc. According to section
2(36) of the Income Tax Act, ‘Profession includes Vocation’.
Vocation simply means any type of activity which is conducted by the
individual for earning their livelihood and it does not necessarily mean
organized or systematic activities.
 Business or Professional Income: The profits and gains of any business or
profession carried on by the assessee at any time during the previous year
whether continued throughout the year or not are assessed under the head
‘Profits and Gains of Business or profession. [ section 28(i)]
Specific Deductions allowed under section 30 to 37

 Section 30 to 37 covers the expenses which are expressly allowed as deductions


while computing income from business. These are as follows.

Sections
1 Rent, rates, taxes, repairs, and insurance for building used by the 30
assessee purely for the business or profession.
2 Repairs and insurance of plant, machinery and furniture used in the 31
business or profession.
3 Depreciation of building, plant, machinery or furniture 32
4 Tea development account and reserve for shipping companies 33AB,
33AC
5 Expenditure on scientific research 35
6 Expenditure on Patents and copyrights 35A
7 Expenditure on know-how 35AB
8 Expenditure on eligible projects or schemes 35AC
9 Expenditure in the form of payments associations and institutions 35CCB
carrying out Rural Development Programme
10 Amortization of certain preliminary expenses 35D
11 Expenditure on demerger or amalgamation 35DD
12 Expenditure incurred under voluntary retirement scheme 35DDA
13 Expenditure on prospecting, etc, for certain minerals 35E
Certain other deductions in the form of expenses which are; 36
 Insurance premium of stock in trade or stores
 Bonus or commission to employees
 Bad debts
 Discount on zero coupon bonds
 Transfer of money to special reserve only in case of financial
institutions
 Interest on borrowed capital
 Employer’s contribution to the recognized Provident and other
funds
 Employees contribution to the approved gratuity fund and
approved superannuation fund
 Expenditure incurred on family planning
(only in case of companies)
 Interest on borrowed capital
 Employee’s towards staff welfare schemes
 Securities transaction tax if assessee is dealer in securities
14 Any other type of expense incurred not covered under section 30 to 37
36
General deduction under section 37 (1)

 Following are some of the expenses allowable as deduction under this section;
1. All the expenses and payments made for the purchase of raw materials, manufacture
and sale of goods.
2. Day-to-day expenses to carry on the business.
3. Expenses incurred in case of advertisement for the enhancement of sale.
4. Royalty paid for the use of intangible assets like patents, trade mark, copyrights etc.
5. Payment of sales tax and all those expenses in relation to sales tax appeal.
6. Subscription to be paid compulsorily for the protection of business interests.
7. Any commission paid for the procurement of business orders.
8. Expenses incurred for the welfare activities of the employees.
9. Reasonable expenses incurred on the occasion of Diwali, Puja, Mahurat or other
festivals.
10. Legal expenses incurred to claim damages or compensation under the situation of
non-fulfillment of a contract.
11. Pension, gratuity, and any other voluntary payment given to the employees.
12. Any gift given to the employees provided such gifts do not prevail in the category of
perquisites.
13. Any commission paid to the employee for the termination of his/her service.
14. Any commission paid to the managing agent for the termination of his agency.
15. Any bonus paid as industrial award to the employees.
16. Insurance premium paid for the insure policy of the employees against injury,
accident or any other mishap during working and any amount paid to the employees
due to such injury or accident. (It should be noted that any compensation received
from the insurance company on this behalf shall be treated as taxable income and
credited to profit and loss account.
17. Embezzlement by an employee during the normal course of business.
18. Expenses incurred for making the necessary alterations in the memorandum of
association and article of association.
19. Any amount of expenses paid by the assessee to the rivals for not competing with the
business of assessee.
20. Any expense incurred on entertainment of the employees.
21. Any legal expenses incurred for the interest or betterment of the business.
22. Expenses incurred in connection with the raising of loans or issuing of debentures
whether short term or long term.
23. Any other expense in addition to above stated ones which satisfy the income tax
department that such expenses were incurred for the betterment of the business.
 To avail deductions according to section 37 (1), the following conditions should be
satisfied:
1) The expenditure should not be of the nature described in section 30 to 36.
2) It should not be a capital expenditure.
3) It should not be the personal expenditure of the assessee.
4) It should have been incurred for the business only.
5) It should have been incurred in the previous year.
6) It should have not been incurred for the purpose which is prohibited by any law.
Expenditure on Scientific research [section 35]

1) The revenue expenditure on scientific research is deductible in the


year in which such expenditure incurs if research relates to the
business.
2) Any capital expenditure (not being the cost of land) on scientific
research related to the business of the assessee is fully deductible in
the year in which such expenditure is incurred.
3) Contribution to the approved research association, approved
university/college/ any other institutions is deductible at the rate of
175 per cent of the actual contribution.
4) Contribution to the approved university, college or any other
approved institution for the purpose of research in social science or
statistical research is deductible at the rate of 125 per cent of the
actual contribution.
5) Any contribution to an approved national lab, university, IIT, there is
specific deduction allowed at the rate of 200 per cent of the
contribution.
6) Expenditure to an approved in-house research and development
facilities of a company (if company is involved in the business of
biotechnology or production of articles except those specified in
Eleventh Schedule) is qualified for the deduction which is 200 per
cent of the expenditure.

 Specific Disallowances: Section 372b, 40, 40A, and 43B cover those
expenses which are not allowed.

Disallowance under section 37(2B)

No deduction is allowed in case of expenditure incurred on advertisement in any


souvenir, brochure, tract etc published by a political party.
Disallowance under Section 40
1. Interest, Royalty, fees for technical services:
(a) Payable outside India or to a non resident [section 40 (a)(i);
if tax is deductible at source but the assessee has not deducted the same
before the end of the previous year, or the amount has been deducted but
not paid to the govt. before the due date, then same shall not be allowed
(with effect from the assessment year 2015-16).
(b) Payable to a resident [section 40 (a)(ia);
If tax is deductible at source, but has not been deducted during the
previous year or after deduction has not been paid to the govt. before due
date , then under such circumstances, 30% of such amount shall not be
allowed to be debited to P and L A/C in the previous year in which expense
is incurred.
Note: Royalty, licence fees, service fees etc payable to the state Govt. by the
state Govt. undertaking shall not be allowed as deduction as deduction
2. Fringe Benefit Tax:
Any expenditure incurred in case of fringe benefit tax, then same shall not be
allowed to be debited (section 40(ic).
3. Wealth tax on business assets under wealth tax act 1957: to be allowed
as deduction U/S 40(a)(i)(a).
4. Salary payable outside India: tax should be deducted at source by the
assessee according to the law, if tax is not deducted at source by the assessee,
then same shall not be allowed as deduction
5. Salary , interest, commission or bonus to the partners U/S 40(b):
a. Any payment in the form of salary, commission, remuneration or
bonus paid to the partners which is not authorized by its partnership
deed is totally disallowed;
b. If paid to the non working partner, then such amount is not allowed;
c. If allowed by the partnership deed then interest to the partner should
not exceed 12%.
d. Salary and remuneration to the partners cant not exceed a specified
percentage of book profits if the aggregate payments exceed
Rs.1,50,000 and excess payment will not be allowed. The maximum
remuneration which is deductible is as:
(i)- On the first Rs.3, 00,000 of book profits/loss: Rs. 1, 50,000 or
90% of the book profits (whichever is more).
(ii)- On the remaining balance of book profit: 60% of book profit.
6. Salary and interest payable by an Association of Persons (AOP)/ Body
of Individuals (BOP) to its members: Not deductible
Expenditures which are Disallowed under Section 40A

1) Amount paid or payable to relative or interconnected concern: any


amount paid or payable to the specified persons (like relatives, interconnected
concerns) shall not be allowed to the extent to which such expenditure is
considered excessive or unreasonable by the Assessing Officer keeping in
view the fair market value of the goods or facilities provided by the assessee.
Note: the limit has been set up to 5 crore from the assessment year 2016-17
2) Contribution towards unapproved gratuity fund: amount of expenditure
not deductible.
3) Employers contribution towards non-statutory funds like unrecognized
provident fund : amount of expenditure not deductible.

Disallowable deductions in case of certain unpaid Liabilities (u/s


43B)

There are certain expenses which are deductible only on the payment
basis i.e. only deductible if paid by the assessee. These are as:

1) Any sum payable by the way of tax, fee or cess under any law for
the time being in force.
2) Any amount payable by the employer as contribution to the
provident fund, superannuation fund or any other fund meant for
welfare of the employees.
3) Any sum payable to the employees as bonus or commission for the
service rendered.
4) Interest on loan taken from scheduled bank including a cooperative
bank or a public financial institution like ICICI, IFCI, IDBI, LIC
and UTI.
5) Any amount payable by the employer in lieu of leave at the credit
of his employee.
Exception: When deductible on accrual basis; these payments are
deductible on accrual basis if the payment is actually made on or
before the due date of submission of return of income.
Pro Forma Showing Computation of Profits and Gains of Business or Profession

Balance as per Profit and Loss account Amount


Add items of expenses debited to p and L A/C but not allowed under the Act
(i)- All provisions and reserves (except reserves created by financial ___
corporations u/s 36 ___
(ii)- All taxes like Income Tax, Advance Income Tax, Wealth Tax etc
( except taxes like Sales Tax, Excise Duty, and Local Tax of
___
premises used for business)
(iii)- All capital expenses except expenses on scientific research
___
(iv)- All capital losses ___
(v)- Rent for residential portion or for self ___
(vi)- Any amount of interest on capital unless the amount is borrowed ___
(vii)- Any kind of charity or donation ___
(viii)- All expenses relating to other heads of income (like tax on house ___
property) ___
(ix)- Any type of fine or penalty ___
(x)- Any payment to a partner (in case of a partnership firm like salary, ___
interest, bonus, commission, or remuneration beyond the prescribed ___
limits)
___
(xi)- Past losses,
(xii)- Personal life insurance premium
___
(xiii)- Any depreciation, if wrongly debited ___
(xiv)- Any kind of gift or present ___
(xv)- Any salary or interest payable outside India unless Tax is deducted at ___
source or is paid according to the law ___
(xvi)- Any type of expense which is not incurred according to the provisions of ___
law ___
(xvii)- Any amount invested in the savings like NSS, NSCPPF etc. ___
(xviii)- Personal life insurance premium ___
(xix)- Salary paid to self or any family member for casual help in business ___
(xx)- Difference in trial balance
___
(xxi)- Expense on illegal business
(xxii)- Contribution by the employer to any unrecognized provident fund
___
(xxiii)- Any cost of technical know-how or patent rights being capital ___
expenditure ___
(xxiv)- Legal expense on acquiring or curing title of the asset ___
(xxv)- Speculation losses __
(xxvi)- Preliminary expenses if capital expenditure in nature ___
Total of all is added to the profit or adjusted to the loss ___

Deduct ( from the total arrived at A )any of the following expenses which are
allowed under the Act but not debited to P and L A/C: A
II (i)- Depreciation not charged to P and L A/C
(ii)- Any bad debt not debited to P and L A/C
(iii)- Any other expenditure incurred but not debited according to the provisions
of the Law
(iv)- Difference due to over debiting of stock
Deduct total of all these from A as stated above to get

continue
B
III Deduct from B those incomes which are either exempted or not taxable
under this head
(a) incomes which are exempted from tax under this head
(i)- Agricultural receipts ___
(ii)- Income Tax refund ___
(iii)- Post office saving bank interest ___
___
(iv)- Any bad debt recovered but disallowed earlier
___
(v)- Any capital receipt
___
(vi)- Life insurance maturity amount ___
(vii)- Any gift from relatives
(viii)- Withdrawal from PPF ___
(b) incomes which are not taxable under this head ___
(i)- Capital gains ___
(ii)- Interest on securities ___
(iii)- Rent from let out house property ___
(iv)- Dividend, Bank interest ___
(v)- Winnings from lotteries, horse races etc.
(vi)- Part-time salary ___
_________
After deducting above stated incomes or receipts from B, we get profit
which is taxable from business

Computation of Taxable Income of a Doctor or Medical Practitioner

Amount
Professional Receipts
(i)- Consultation fees __
(ii)- Visiting fees __
(iii)- Operation fees __
(iv)- Sale of medicine __
(v)- Any gift from patients __
(vi)- Nursing home receipts __
(vii)- Any other professional receipts __
Total of above
(Less): Professional Expenses __
(i)- Cost of medicine
- If accounts are maintained on cash basis, then cost of actual
medicine
- If accounts are maintained on mercantile system, then opening
stock + purchases – closing stock __
(ii)- Depreciation on surgical equipments and x-ray machine __
(iii)- Dispensary expenses __
(iv)- Motor car expenses like depreciation if used for the professional
work __
(v)- Nursing home expenses __
(vi)- Cost of books used for professional purposes __
(vii)- Any other professional expenditure
The resulting figure is income from profession of a doctor
Computation of Taxable Income in case of a chartered Accountant

Amount
Professional Receipts: ___
(i)- Audit fees ___
(ii)- Income from accountancy ___
(iii)- Institution fees ___
(iv)- Examination fees ___
(v)- Consultancy services ___
(vi)- Any gift from clients
Total of above
Less: Professional Payments: ___
(i)- Institute expenses ___
(ii)- Office expenses ___
(iii)- Cost of books used for the profession ___
(iv)- Membership fees ___
(v)- Motor car expenses if used for the profession ___
(vi)- Depreciation on office equipments, furniture, car etc if used for the ___
profession
(vii)- Subscriptions
(viii)- Stipend to trainees
The resulting figure is income from profession
CHAPTER 8 PROFITS AND GAINS OF BUSINESS OR
PROFESSION-II

[DEPRECIATION (Section 32)]

 Depreciation: the Income Tax Act 1961 nowhere defines the term depreciation,
however in common terminology, the word ‘depreciation’ means gradual/
permanent and continuous decrease in the value of an asset due to its wear and
tear, exhaustion, obsolescence or efflux of time.
In other words, depreciation is the process of allocating the cost of usage of a
long term asset in a systematic and rational manner. With the passage of time,
the real value of a fixed asset goes on diminishing and this decreasing value is
measure through the process of depreciation in monetary terms which is treated
as business expenses and ultimately debited to profit and loss account.
 Category of Charging Depreciation: depreciation can be charged on:
1) Profits and Gains of Business or Profession by the assessee during the
relevant previous year;
2) Under the head ‘Income from Other Sources’ under the situation when
the assets are let out for a certain period of time and letting is not the
regular business of the assessee.
 Conditions for claiming Depreciation:
1. Depreciation is allowable on capital assets only.
2. It is available on both tangible as well as intangible assets; tangible assets like
building, plant and machinery, furniture and fixtures, motor vehicles etc.
intangible assets like patents, trademarks, copyrights, licenses, franchises, any
other business or commercial right.
3. The asset must be owned by the assessee.
4. It must be used for the purpose of assesssee’s business or profession.
5. It should be used during the relevant previous year. And
6. The assessee cannot claim the depreciation in the year of sale of asset.
7. Depreciation is allowed on the written down value of the asset.
 Method of charging Depreciation:
The Income tax Department computes the depreciations on ‘block of assets’
basis rather than individual basis.
 Block of assets [section 2(11)]: block of assts means a a group of assets falling
within a class of assets and assets have been divided into blocks on the basis of
rates of depreciation under rule 5 of the Income Tax Act and it comprises;
a) Tangible assets- buildings, plant, machinery or furniture.
b) Intangible assets- patents, trademarks, copyrights, licenses, franchises or
any other commercial or business right.
 Written down value of the asset: as already mentioned above, depreciation is
calculated on the written down value of the asset and written down value for the
block of assets for the assessment year 2015-16 can be determined as follows;
1. Find out the depreciated value of the block on 1 April 2014.
2. Add actual cost of the asset falling in the block acquired during the previous
year 2014-15.
3. From the resulting figure, deduct money received or receivable along with
scrap value in respect of the asset falling in the block of asset which is sold,
discarded or destroyed during the previous year 2014-15.
4. The net resulting figure is the written down value of the block of assets on
31 March 2015.
Different Rates of Depreciation via Written Down Value Method (WDV)
A tax payer may have 13different block of assets for the purpose of computing
depreciation which are as follows;
Nature of Asset Rates
A. Tangible Assets
1 All Residential Buildings except hotels and boarding houses 5% block
2 All Non-residential buildings 10% Block
3 Buildings for installing machinery and plant forming part of 100%block
water supply project or water treatment system; and
temporary erections like wooden structures
4 Furniture and fittings including electric fittings 10% block
5 (i)- Plant and machinery (except 6,7,8,9,10,11 or 12
block)
(ii)- Motor cars, motor cycle, scooters, bus, truck (other 15% block
than those in a business of running them on hire)
(iii)- Air-conditioners
(iv)- Surgical equipments
6 Plant and machinery- ocean going ships, vessels ordinarily 20% block
operated on inland waters including speed boats
7 (i)- Motor buses, lorries and taxies used in the business of
running them on hire 30% block
(ii)- Machinery used in a semi- conductor industry
(iii)- Moulds used in rubber and plastic goods industry
8 Aircraft, aero engines and life saving medical equipments 40% block
9 Containers made of glass and plastic used as refills 50% block
10 (i)- Computers including computer software,
(ii)- books used for professional use other than annual
publications 60% block
(iii)- gas cylinders, burners, Direct fire glass melting
(iv)- Mineral Oil concerns
11 Energy saving devices, renewal energy devices, rollers in 80% block
flour mills, sugar works and steel industry
12 Air pollution control equipment, water pollution control 100%
equipments, solid waste control equipments, recycling and block
resource recovery system.
B. Intangible Assets (acquired after 31 March 1998)

13 Patents, copyrights, know-how, trademarks, licenses,


25% block
franchises or any other business or commercial right

 Newly set up unit/ fixed asset


 Actual cost: In case of a new unit or new plant and machinery or any other fixed
asset, depreciation is to be calculated n the actual cost incurred by the assessee for
acquiring the asset;
 The actual cost plus certain expenses: the actual cost of the asset shall include the
following costs;
1) Cost paid for acquiring the asset.
2) Cost of installation.
3) Expenses on insurance, freight, loading and unloading.
4) Modifications and repairs before the actual use of the asset.
5) Interest or bank charges paid in connection with purchase of asset.
6) Any salary, rent, lighting etc, incurred before the actual use of the asset.
 Subsidy: in case the assessee has received any subsidy or grant related t the
particular asset, then such amount of subsidy shall be reduced from the actual cost.
If the amount of subsidy is not only related to the particular asset but o many or all
capital assets, then amount of subsidy shall be apportioned in the ratio of cost of
asset to cost of al assets.
 In simple terms;
Actual cost = cost of purchase + pre- use period expenses – subsidy


 Additional Depreciation [ section 32(1)(iiA)]
 The additional depreciation is applicable on plant and machinery form the
assessment year 2006-07.
 The rate of additional depreciation is @ 20% of the actual cost of the plant and
machinery.
 To claim the additional depreciation, the following conditions should be fulfilled
by the assessee.
1) The assessee must be engaged in the manufacturing/production of articles
or goods or generation and distribution of power.
2) The plant and machinery should be totally new not used earlier.
3) New plant and machinery should be acquired and installed after March 31,
2005.
4) The additional depreciation is applicable @ 20% on the actual cost and the
asset must be used for not less than 180 days in the previous year. If the
plant and machinery is used less than 180 days, then only 10% will be
allowed and remaining 10 % will be allowed in the next previous year.
5) The additional depreciation is not applicable in case of aircrafts, ships,
second hand assets, road transport vehicles and assets installed in office,
residence, guest house, office appliances etc.
6) It is not applicable even for those assets which are eligible for 100%
deduction in the first year under any provisions of the Act

 Unabsorbed Depreciation [ U/S 32(2)]


The unabsorbed depreciation can be adjusted in the following manner.
1) Deprecation allowance of the previous year is first deductible from the income
chargeable under the head ‘Profits and gains of business or profession’.
2) If there are no profits or inadequate profits under the head ‘Income from profits
and gains of business or profession’ and as such depreciation allowance is not
fully deductible then same is charged under other heads of income (except the
head’ salaries’) for the same assessment year.
3) If depreciation allowance still remains unabsorbed, then same shall be carried
forward to the subsequent years by the assessee and no time limit is fixed in this
regard.
 Invest allowance [Section 32AC]
 In addition to the depreciation under section 32, a corporate assessee
engaged in the manufacturing or production of any article or things can
claim Investment Allowance if a ‘new plant and machinery’ is purchased
and installed.
 The rate of investment allowance is 15% of the actual cost of the new
plant and machinery.
 For claiming the investment allowance, the plant and machinery must be
totally new.
 No investment allowance will be applicable in case of the following;
(i)- Any plant or machinery installed in any office premises in any
residential accommodation.
(ii)- A used plant and machinery whether in India or outside India.
(iii)- Any office appliances including computers or comport software.
(iv)- Any ship, aircraft or vehicle.
(v)- Any plant or machinery whole of actual cost of which is allowed
as deduction by way of depreciation or otherwise.
 The new asset so installed in the business should not be sold or
transferred within 5 years from the date of its installation, if sold or
transferred by the assessee, then under such situation, the amount of
investment allowance allowed shall be considered as deemed income of
the assessee.
 From the assessment year 2015-16 to 2017-18, investment allowance is
allowable if the aggregate amount of the cost of new plant and machinery
acquired and installed during the previous year exceeds Rs. 25 crore.
CHAPTER 9- INCOME FROM CAPITAL GAINS
[Section 45- 55]

 Under section 45(1), of the Income Tax Act, any income arising from the
transfer of a capital asset in the relevant previous year shall be chargeable to
income tax under the head ‘Capital Gains’ and shall be deemed to be the
income of the previous year in which transfer of asset takes place.
 It means tax is to be levied on any profit or gain occurring on the transfer of
a capital asset.
 Capital Asset: Section 2(14) of the Income Tax Act define the capital asset
as,
a) Property of any kind held by an assessee whether or not
connected with his business or profession.
b) Any security held by a Foreign Institutional Investors which has
invested in such security in accordance with the regulations made
under SEBI Act 1992. (from the assessment year 2015-16)
1) As per the section 2(14), the term capital assets includes all types of
properties, whether tangible or intangible, movable or immovable, fixed or
floating.
2) Any right, or in relation to, goodwill, right to subscribe for shares, an Indian
company including right of management or control, share of a partner in
partnership firm or any other right whatsoever are also considered as capital
assets under this head.
 Items not included in the Capital Assets: as per Section 2(14), following
are the assets excluded from the definition of capital assets;-
1) Stock in trade, raw materials or stores.
2) Personal effects. It means any movable property held for the personal
use of the owner or for the use of any member of his family does not
come under the preview of capital assets and it includes wearing
apparel, furniture, motor car, electric appliances etc.
3) the term personal effects under the Act does not include, jewellery,
archaeological collections, drawings, paintings, sculptures or any art
work held for the personal use.
4) Agricultural land in a rural area in India, it should not be situated in;
(i)- any area within the jurisdiction of a municipal or a cantonment
boar having a population of 10,000 or more; or
(ii)- Area within 8 kilometers from the local limit of such
municipality/cantonment. This limit is 2 kms if population of
the municipality/cantonment is from 10,001 to 1, 00000; or 6
kms if the population of the municipality/ cantonment is from
1, 00001 to 10, 00000.
5) Special Bearer Bonds 1991.
6) Gold Deposit Bond issued under the Gold Deposit Scheme 1999.
Continue
 Types of Capital Assets
 There are two types of capital assets;
(1) Short term capital assets (2) long term capital assets.
 if the assessee holds the capital asset up to 36 months, then asset is
considered as long term;
 If the assessee holds the capital asset up to less than 26 months, then asset
is considered as short term.
 However, the capital asset held by the assessee for more than 12 months is
treated as long term in the following cases;
a) if transfer of any share in a company, Govt. securities, listed
debentures, units of UTI/ mutual fund and zero coupon bond takes
place on or before 10 July 2014; or
b) If transfer of listed shares in any company, Govt. securities, listed
debentures, units of equity oriented mutual fund and zero coupon
bonds takes place after 10 July 2014.

 Concept of Transferability
 The gain from capital asset arises only on its transfer.
 If the any asset transferred is not a capital asset, then no capital gain shall arise.
 The transfer includes, sale, exchange or relinquishment of the capital assets; or the
extinguishment of any rights therein; or the compulsory acquisition thereof under any
law.
 There are certain cases which are not treated as ‘transfer’ and as such no
capital gain will arise, these are as follows;
1. Distribution of capital assets in kind by a company to its shareholders on its
liquidation.
2. Distribution of capital assets in kind by a Hindu Undivided Family to its members
on its full or partial partition.
3. Transfer of capital assets between holding company and its 100 % subsidiary
company, provided the transferee company is an Indian company.
4. Any transfer of capital asset under gift or at will or an irrevocable trust.
Exception; Gift of ESOP shares are chargeable to tax and fair market value of the
share is taken as sales consideration on the date of gift.
5. Transfer of capital assets in case of amalgamation/demerger, provided the
transferee company is an Indian company.
Continue
6. Transfer of shares in the amalgamating company/demerged company in place of
allotment of shares in amalgamated company/resulting company.
7. Transfer of capital assets in case of amalgamation of a banking company with a
banking institution.
8. Transfer of shares in an Indian company held by a foreign company to another
foreign company in case of amalgamation/demerger of two foreign companies.,
provided a few conditions are satisfied.
9. Any transfer of capital asset in a reverse mortgage.
10. Any transfer involved in scheme of lending of securities, if a few conditions are
satisfied.
11. Transfer of capital assets at the time of conversion of a firm or a sole proprietary
concern in a company, if a few conditions are satisfied.
12. Transfer of capital assets by a private company or a unlisted public company to a
limited liability partnership (LLP) during the case of conversion of company into
limited liability partnership.
13. Any transfer by way of conversion of bonds or debentures or debenture-stock or
deposit certificate into share or debentures of any company.
14. Any piece of land transferred by a sick industrial company if few conditions are
satisfied.
15. Transfer of a capital asset by a non-resident of foreign currency convertible bonds
or Global Depository Receipts to another non-resident, if the transfer id made
outside India.
16. Transfer of any work of art, archaeological, scientific or art collection, book,
manuscript painting, photograph, drawing or print to the Govt. or a University or
to a National Museum, National Art Gallery or any other notified public museum.
17. Transfer of a capital asset , being share of a special purpose vehicle to a business
trust in exchange of units allotted to the transferor.
18. Transfer of a capital asset, being a Govt. Security carrying a periodical payment
of interest made outside India, through an intermediary dealing in settlement of
securities by a non- resident to another non- resident.
 Statement Showing Computation of Capital Gain

 For short term capital gain: (arises on transfer of short term capital asset)
___
- Value of consideration ___
Less; - cost of acquisition
___
- cost of improvement
- any expenditure incurred for transfer by the transferor

 Long term Capital Gain: (arises on transfer of long term capital asset)
___
-Value of consideration ___
Less; - Indexed cost of acquisition
___
- Indexed cost of improvement
- any expenditure incurred for transfer by the transferor

 However, in certain cases, the benefit of indexation is not available even if


the transfer is of long term capital asset, these are as follows;-
1) Depreciable assets.
2) Bonds or debentures issued by the Govt. other than capital indexed
bonds.
3) Global Depository Receipts/ Units/ Securities given in section 115AB,
115AC, 115ACA and 115AD.
4) Slump sale.
5) Shares and debentures acquired by a non-resident in India in foreign
currency, if a few conditions are satisfied.
Note; it does not include any expenditure on improvement incurred before 1
April 1981.
 Conversion of cost of acquisition into indexed cost of acquisition;
Cost of acquisition multiplied by Cost Inflation Index (CII) of the year in which
the capital asset is transferred divide by Cost Inflation Index of the year in
which asset was first held by the assessee.
 Conversion of cost of improvement into Indexed cost of improvement;

Cost of improvement × Cost Inflation Index (CII) of the year of transfer of asset
÷ CII of the year in which improvement took place
Note: For Cost Inflation Index (CII) of different previous years, refer to any
book on tax Laws and practices.
 Exempted Capital Gains (under section 10)

1. Transfer of units of US64.


2. Long term capital gains on transfer of shares or units if securities transaction tax
is applicable.
3. Capital gains arising to a shareholder on buy- back of shares by a company,
provided such shares are no listed.
4. Compulsory acquisition of urban agricultural land owned by an individual or
HUF, if such land was used merely for agricultural purposes by the owner or any
of his parents during 2 years immediately before its acquisition.
5. Any capital gain arising on account of conversion of an Indian branch of a
foreign bank into an Indian subsidiary, provided such conversion takes place in
according with the scheme framed by the RBI subject to the conditions notified
by the Central Govt.

 Computation of Capital gain under Special mode

 When cost of asset pertaining to the previous owner is taken into


consideration: when an assessee acquires the capital asset by any mode
under section 49, cost of acquisition to the previous owner is taken as a cost
of acquisition;
The cost of acquisition to the previous owner is taken into consideration
under the following cases;
1) Acquisition of asset by any member of the HUF at the time of partition.
2) Acquisition of property or capital asset under a scheme of conversion of
private/ unlisted company into limited liability partnership (LLP).
3) Acquisition of property in case of amalgamation provided the transferee
company is an Indian company.
4) Acquisition of property in case of a conversion of a firm /sole-proprietary
into company.
5) Acquisition of property by any gift/will or by succession, inheritance etc.
6) Acquisition of capital asset by a holding company from its 100%
subsidiary company or by a subsidiary company from its holding company
provided the transferee company is an Indian company.
Note: (a) - to identify whether asset is short term or long term, the period of
holding by the previous owner is also taken into consideration.
(b)- The benefit of Indexation is available from the year in which the previous
owner acquires the property. (Continue)
 Depreciable Assets: if asset transferred is a depreciable asset, then the capital
gain or loss can be determined as follows;
a) When the written down value of the block of assets on the last date of
previous year becomes zero.
b) When the block of assets on the last date of previous year becomes empty.
 Under these two situations, the capital gain or loss arises on the transfer of
a depreciable asset. Then in such case the cost of acquisition will be the
depreciable value of the block of assets on the first date of the previous
year plus actual cost of the assets acquired at any time during the previous
year.
 It should be noted that capital gain or loss which occurs on the transfer of
depreciable asset is always taken as short term capital gain or loss.
 Forfeiture of amount by the transferor: if the transferor has forfeited any
advance money from the transferee at the time of negotiating transfer due to
failure of transferee to pay the remaining consideration or non-performance.
Then under such situation, the advance money forfeited shall be deductable from
the cost of acquisition for calculating the capital gain.
Remember; From the assessment year 2015-16, such advance money which is
forfeited by the recipient is taxable under the head ‘Income from other sources’
in the hands of recipient and will not be deductible from the cost of acquisition.
 Conversion of Capital Asset into Stock-in-trade: if capital asset is converted
into stock-in-trade during the previous year relevant to the assessment year
1985-86 or any subsequent year,
a) It will be assumed that capital asset is transferred in the year of conversion.
b) Fair market value of the asset on the date of conversion will be taken as full
value of the consideration.
c) Capital gain will not be taxable in the year of conversion but in the year in
which stock-in-trade is transferred.
 Capital Asset transferred to a firm by a partner as capital contribution:
- It is treated as a transfer of capital asset.

-The amount recorded in the books of account of the firm is taken as full
value of consideration.
 Distribution of capital asset by a firm to the partners at the time of
dissolution:

- It is treated as a transfer of capital asset.

- Capital gain is taxable in the hands of the firm.

- Fair market value of the asset on the date of distribution is taken as


value of consideration.


 Self- Generated Assets:
a) In case of transfer of self-generated assets like goodwill, right to manufacture
/produce an article or right to carry on business, the cost of acquisition and
cost of improvement are taken as nil.
b) In case the transfer of self-generated assets is in the form of tenancy right,
route permit, trade name or brand name, then cost of acquisition is taken as
nil.
c) In case of transfer of any other self-generated asset, capital gain is always
taken as zero.
d) if the capital asset is purchased being in the form of goodwill of business,
right to manufacture/produce an article/thing, or right to carry on business,
then at the time of transfer, cost of improvement is taken as nil.
 Compulsory acquisition of a capital asset:
a) Initial compensation is taken as full value of consideration.
b) Capital gain is chargeable to tax in the year in which the initial compensation
or part thereof is first received.
However, the amount of compensation received in pursuance of an interim
order of the court, tribunal or other authority shall be chargeable to tax in the
previous year in which the final order from such court, tribunal or other
authority is made.
c) Indexation benefit is available up to the year in which the asset was
compulsory acquired.
d) Additional compensation received; if court/tribunal/authority enhances
compensation, then it will be taxable in the year of receipt. For this purpose,
cost of acquisition and cost of improvement are taken as nil, although any
litigation expenses incurred for obtaining the additional compensation is
deductible.
 Capital gain on transfer of shares/debentures in the hands of non-residents:
if a non-resident acquires shares or debentures of an Indian company by utilizing
foreign currency, then the capital gain will be calculated in the same foreign
currency and after the calculation capital gain in foreign currency, it will be
converted into Indian currency. The benefit of indexation is not available.
 Bonus Shares:
1) If bonus shares were allotted before April 1, 1981, then cost of acquisition is
the fair market value on April 1, 1981.
2) If bonus shares are allotted after April 1, 1981, then cost of acquisition is
taken as zero.
 Transfer of rights entitlement for additional shares:
1) If the existing shareholder transfers the right by selling the rights
entitlement of acquiring additional shares in the company at a
predetermined price, then amount so released from the transfer is taxable
in the year of transfer of the right entitlement.
2) The cost of acquisition of right entitlement is always taken as zero.
3) The capital gain is always taken as the short term capital gain.
 Conversion of debentures/bonds into shares:
1) Conversion not considered as transfer of the asset.
2) Cost of acquisition of bonds/debentures will become the cost of
acquisition of shares.
3) In order to determine whether shares are long-term or short-term capital
asset, the time period of holding the shares shall be counted right from the
allotment of shares.
4) The indexation benefit is available from the allotment of shares.
 Demat securities:
- The cost of acquisition and period of holding any security in Demat form
shall be determined on the basis of first-in-first-out (FIFO) method
 Insurance Compensation:
1) Taxable in the year of receipt.
2) The amount of compensation will be taken as full value of consideration.
3) This rule is applicable only when the insurance compensation is received
in lieu of damage to the capital assets occurred because of the following;
(i)- Cyclone, hurricane, earthquake, flood or other convulsion of nature.
(ii)- Any riot or civil disturbance.
(iii)- Accidental fire explosion.
(iv)- Action by an enemy or action taken in combating an enemy.
Note: if insurance compensation is received with regard of a capital asset
because of any other reason apart from stated above, then it shall not be
taxable.
 Transfer of Sweat Equity shares:
1) If shares are allotted during 1999-2000 or on or after 1 April 2009, cost
of acquisition is the market value on the date of exercise of option.
2) If shares are allotted during 1 April 2007 and 31 March 2009, then cost
of acquisition is the fair market value on the date of vesting of option.
3) If shares are allotted before 1 April 2007 (not being during 1999-2000),
the amount actually paid by the employee will be the cost of acquisition.
 Conversion of Firm into Company: [Exempted U/S 47(xiii)]
The transfer of capital assets in case of conversion of a firm into company is
exempted from tax, if the following conditions are satisfied;
1) All the assets and liabilities of the firm immediately before succession
become the assets and liabilities of the company.
2) All the partners of the firm immediately before succession become the
shareholders of the company in the same proportion in which their capital
accounts stood on the date of succession.
3) The partners of the firm do not receive any consideration or any other
benefit directly or indirectly in any form whatsoever other than by way of
allotment of shares in the company.
4) The aggregate of the shareholding of the partners in the company is not
less than 50 % of the total voting power in the company and their
shareholding continues successively up to 5 years from the date of
succession.
 Transfer in case of Buy-back of shares:
1) If shares are Listed; Capital gain whether short-term or long-term is
calculated in the hands of shareholder and shareholder is liable to pay the
tax.
2) If shares are Unlisted;
(i)- Capital gain is exempted in the hands of shareholder.
(ii)- The company which buy-backs its own shares is liable to pay the
tax (at the rate of 20% + SC + EC + SHEC) on ‘distribution
income’ U/S 115QA.
‘Distribution Income purpose is the amount paid by the company
at the time of Buy-back less amounts received at the time of
allotment of shares.
 Transfer of Land and Building: [ U/S 50C]
- If the sale consideration is less than the assessed value assed by the
stamp duty authority for the purpose of collecting stamp duty, stamp
value shall be taken as full value of consideration.
- The transferor before the stamp duty authority can challenge the stamp
duty valuation if not satisfied.
 If the consideration as a result of transfer is not determinable (U/S 50D):
- Then fair market value of the asset on the date of transfer is taken as full
value of consideration.

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 Capital Gain in case of Slump sales: [Exempted U/S 50B]
1) Any profits or gains arising from the slump sale affected in the previous
year shall be chargeable as long term capital gains and deemed to be the
income of the previous year in which the transfer took place.
But, if the capital asset being one or more undertakings owned and held by
the assessee for more than 36 months is transferred under the slump sale,
then capital gain shall be deemed as short term capital gain.
2) The benefit of Indexation shall not be available.
3) In case the capital asset being one or more undertaking, then the ‘net worth’
of the undertaking shall be taken as the cost of acquisition and the cost of
improvement.
Net worth in this regard will be the aggregate value of the total assets of the
undertaking or division reduced by the value of liabilities as appearing in
the books of accounts. It should be noted that no change shall be
incorporated in case of revaluation of assets while computing the net worth.
In case of depreciable assets, the aggregate value of total assets of such
undertaking shall be the written down value of the block of assets and book
value for all other assets.
4) If net worth is negative, then it is taken as equal to zero an d sale
consideration will become capital gain.

 Exemptions available Under Section 54 to 54GB

1. Exemption U/S 54
Type of assessee  An individual or HUF
Type of asset eligible for  A residential house property (long term)
Exemption
Type of asset to be acquired  Only one residential house property situated in
for claiming the exemption India
 Purchase of another house within one year or
Time limit for acquiring the two years after the sale
new asset  Construction of another house within three
years after the sale.
Limit of Exemption  Investment in the new asset or capital gain ,
whichever is lower.
 The new asset should not be transferred within 3
years from the date of acquisition.
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2. Exemption U/S 54 B
Type of assessee  An individual or HUF
 Agriculture land if used for agricultural purpose
Type of asset eligible for
during at least 2 years immediately prior to
Exemption
transfer.
Type of asset to be acquired  Agricultural land (urban or rural)
for claiming the exemption
Time limit for acquiring the  2 years after the sale
new asset
Limit of Exemption  Investment in the new asset or capital gain,
whichever is lower.
 The new asset should not be transferred within 3
years from the date of acquisition of new asset.
3. Exemption U/S 54D
Type of assessee  Any Taxpayer
 Land or building forming the part of an
industrial undertaking which is compulsorily
Type of asset eligible for
acquired by the Govt.
Exemption
 used for the industrial purposes during 2 years
prior to its acquisition
Type of asset to be acquired  Land or building for industrial purposes
for claiming the exemption
Time limit for acquiring the  3 years after the sale
new asset
Limit of Exemption  Investment in the new asset or capital gain,
whichever is lower.
 The new asset should not be transferred within 3
years from the date of acquisition of new asset.
4. Exemption U/S 54EC
Type of assessee  Any Taxpayer
Type of asset eligible for  Any long term capital asset sold or transferred
Exemption after March 31, 2000
 Bond of National Highways Authority of India
(NHAI) or Rural Electrification Corporation
(REC).
Type of asset to be acquired  Maximum limit of investment in 1 financial year
for claiming the exemption is Rs. 50 lakh, however, the investment made in
the above stated bonds from the capital gains
arising from transfer of one or more original
assets should not exceed Rs. 50 lakh.
Time limit for acquiring the  6 months after the sale
new asset
Limit of Exemption  Investment in the new asset or capital gain,
whichever is lower.
 The new asset should not be transferred within 3
years from the date of acquisition of new asset.
 The new asset should not be converted into
money or loan or any advance should not be
taken on the security within 3 years from the date
of acquisition of the asset.
5. Exemption U/S 54 F
Type of assessee  An individual or HUF
Type of asset eligible for  Any long term capital asset (other than a
Exemption residential house property.
Type of asset to be acquired  one residential house property situated in India
for claiming the exemption
Time limit for acquiring the  purchase; 1 year backward or 2 years forward
new asset construction; 3 years forward
Limit of Exemption  Investment in the new asset ÷ (Net sales
consideration × capital gain.
 The new asset should not be transferred within 3
years from the date of acquisition of new asset.
6. Exemption U/S 54G
Type of assessee  Any Taxpayer
 Land, building, plant or machinery transferred
Type of asset eligible for
in order to shift an industrial undertaking from
Exemption
urban area to rural area.
 Land, building, plant or machinery in order to
Type of asset to be acquired
shift an industrial undertaking from urban area
for claiming the exemption
to rural area.
Time limit for acquiring the  1 year before or 2 years after sale.
new asset
Limit of Exemption  The difference between capital gain and cost of
new asset is taxable u/s 45.
 If capital gain is less than cost of new asset,
then it is fully exempted..
7. Exemption U/S 54GA
Type of assessee  Any Taxpayer
 Land, building, plant or machinery transferred
Type of asset eligible for
in order to shift an industrial undertaking from
Exemption
urban area to any special economic zone (SEZ).
 Land, building, plant or machinery in order to
Type of asset to be acquired
shift an industrial undertaking to any special
for claiming the exemption
economic zone (SEZ).
Time limit for acquiring the  1 year before or 3 years after sale
new asset
Limit of Exemption  Investment in the new asset or capital gain,
whichever is lower.
 The new asset should not be transferred within 3
years from the date of acquisition of new asset
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8. Exemption U/S 54GB

Type of assessee  An individual or HUF


 Residential property (long term, a house or a
Type of asset eligible for
piece of land) if transfer takes place in
Exemption
between April 1, 2012 and March 31, 2017.
Type of asset to be  Equity shares in an eligible company.
acquired for claiming the
exemption
 Equity shares in an eligible company should
be acquired on or before the due date of
furnishing the return of income u/s 139(1).
Time limit for acquiring
 The concerned company should utilize this
the new asset
amount for the purchase of a new asset
within one year from the date of subscription
in equity shares.
Limit of Exemption  Investment in the new asset by the eligible
company ÷ (Net sales consideration × capital
gain.
 Exemption cannot exceed the capital gain.

 Rate of Tax on Capital Gains

(A) - Long Term Capital Gains;


- Long term capital gains are taxed at the rate of 20 % U/S 112.
Remember:
1) No deduction is available for long term capital gains U/S 80C to 80U.
2) The exemption limit is available only to the resident individual or a resident Hindu
undivided family.
3) In case of long term capital gains covered under the section 115AB, 115AC,
115AD, or 115E, tax rate is 10 %.
4) In case of unlisted securities like unlisted shares, unlisted debentures are
transferred by a foreign company, long term capital gain is taxed at the rate of 10
%. But it should be noted that this rule is applicable only if indexation benefit is not
claimed and capital gain is calculated in Indian currency.
5) In case of listed securities, any unit of UTI/ mutual fund or zero coupon bonds,
capital gain will be taxed at the rate of 10 % provided indexation benefit is not
availed. But it should be noted that this tax rate of 10 % is not available if units of
UTI/mutual funds are transferred after 10 July 2014.
(B) - Short Term Capital Gains;
- If securities transaction tax is available, Short term capital gains
are taxed at the rate of 15 % U/S 111A.
- Remember:
1) No deduction is available for long term capital gains U/S 80C to 80U.
2) The exemption limit is available only to the resident individual or a
resident Hindu undivided family.
CHAPTER 10- INCOME FROM OTHER SOURCES
[SECTION 56-59]

 “Income from other sources” is the fifth and last head of income included while
computing the gross total income of an assessee.
 Section 56, 57, 58 and 59 of the Income Tax Act deal with the computation of
income under this head.
 According to section 56 (1), every kind of income which is included in the total
income under this Act and which is not charged to tax under any first four heads
specified in section 14 is chargeable to income-tax under the head “ Income from
Other Sources”.
 There are two types of income included in this head;
(I) General Incomes covered under section 56(1), and
(II) Specific Incomes covered under section 56(2).
 Both general and specific incomes fall under the head of Income from other sources.

 General Incomes section 56 (1) as ‘Income from Other


Sources’
1) Income earned by the assessee from licenses granted to brick-makers, to erect
brickklins upon his land and making use of the brick-earth for making bricks.
2) Interest on loans, securities, deposits, cooperative debentures and current
accounts.
3) Income from agriculture land situated outside India.
4) Income derived by a coal mine owner from rent and royalties.
5) Any withdrawal from the National Saving Scheme up to an amount on which
deduction under section 80CCA has been claimed.
6) Remuneration received for being as a director, not as employee.
7) Income received from a person other than the employer like University
remuneration.
8) Family pension received by the legal heirs of employee.
9) Income received by a professional man as a university examiner.
10) Income received from sub-letting of house.
11) Remuneration from lectures delivered outside India.
12) Tips received by a waiter or taxi driver not from their employer.
13) Any amount or pension received from LIC or other insurer under section 80CCC.
14) Deemed incomes.
15) Income from writing articles by a non-journalist.
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16)
 General Incomes section 56 (1) as ‘Income from Other Sources’

17) Gratuity received by a non-employee director.


18) Commission received by an agent of Life Insurance Corporation, Postal Savings, Unit
Trust of India or other type of mutual funds if it is not his regular business.
19) Commission received by a director for standing as a guarantor.
20) Commission received by a director for under righting the shares of a new company.

 Specific Incomes section 56 (2) as ‘Income from Other


Sources’
1) Any winning from lotteries, crossword puzzles, races including horse races, car
games or any other games or from gambling or betting of any form or natural.
2) Dividends (except dividend covered u/s 115-O).
3) Income from plant, machinery or furniture let on hire, provided such income is
not charged to tax under the head ‘profits and Gains of Business or Profession’.
4) Any sum received by the assessee from his employees as contribution to any
provident fund or superannuation fund or any fund set up under provisions of the
Employees State Insurance Act 1948, o from any other fund from the welfare of
such employees, provided such income is not charged to tax under the head
‘Profits and Gains of Business or Profession’.
5) Income received in the form of interest on securities, provided such income is
not charged to tax under the head ‘Profits and Gains of Business or Profession.
6) Income from let-out of building along with plant, machinery or furniture and let-
out of building is inseparable from such plant, machinery or furniture, provided
income from such let-out is not charged to tax under the head ‘Profits and Gains
from Business or Profession’.
7) Any sum or bonus received from key man insurance policy if such sum is not
chargeable to tax as salary or bonus income.
8) Any sum of money received without consideration by an individual or HUF, the
aggregate value of which exceeds Rs.50, 000, from any person on or after 1
April 2006 but before 1 October 2009. The whole amount will be charged to tax
under the head ‘Income from Other Sources’.
9) Income received by in the form of interest on compensation or on enhanced
compensation.
10) Any consideration received by a closely held company for the issue of shares
that exceeded the face value of such shares.
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11) Any sum received as an advance or otherwise in the course of negotiation for
the transfer of a capital asset and such amount is forfeited due to non transfer of
such capital asset.
12) if a firm or closely held company receives any property in the form of shares of
a closely held company in any previous from any person:
a) Without any consideration, the aggregate fair market value of which
exceeds Rs.50,000, such aggregate fair market value of shares shall be
taxable under the head ‘Income from Other Sources’.
b) For a consideration which is less than the fair market value of such shares
by an amount exceeding Rs. 50000, the excess of aggregate fair market
value of such shares over such consideration shall be taxable under the
head ‘Income from Other Sources’.
13) The treatment of Gifts by an Individual or HUF:
a) Any sum of money received by an individual or HUF from any person
without consideration exceeds Rs.50000 in aggregate during the previous
year, whole of such amount shall be chargeable to tax under the head ‘Income
from other sources’.
b) Immovable property:
(i)- Any immovable property received by an individual or HUF from any
person without any consideration having stamp duty exceeding Rs.50000,
the stamp duty value shall be taxable under the head ‘Income from other
sources’.
(ii)- Any immovable property received by an individual or HUF on or after 1
April 2014 for a consideration which is less than the stamp duty value of
such property by an amount exceeding Rs. 50000, the stamp duty value of
such property as exceeding such consideration is taxable under the head
‘Income from other sources’.
c) Other than Immovable Property;
(i)- Property other than immovable property received by an individual or
HUF from any person without any consideration, the aggregate fair
market value of which exceeds Rs.50000, whole of the aggregate fair
market value of such property shall be taxable under the head ‘income
from other sources’.
(ii)- Property other than immovable property received by an individual or
HUF from any person for a consideration, which is less than the
aggregate fair market value of the property by an amount exceeding
Rs. 50000, the excess of aggregate fair market value of such property
over such consideration is taxable under the head ‘Income from other
sources’.
 Tax treatment of Dividend received from Indian companies, Units
of UTI and other Mutual Funds
1) Dividend declared by an Indian company or by a mutual fund on its units
is fully exempted from tax.
2) Bonus shares allotted to preference shareholders shall be deemed as
dividend and their market price shall be fully taxable.
3) If loan is taken by any person who has substantial interest (holding 10%
or more shares whether held by himself his spouse or minor child) in the
affairs of a Private Limited Company whose business is not money
lending, then such loan is deemed as advance dividend up to
accumulated reserves of the company. If such loan is adjusted with the
future dividend, it will not be taxable.
4) Deemed dividend as mentioned above in case of (b) and (c) shall be fully
taxable.

 Winning from Lotteries, Crossword puzzles, Races including Horse


Races, Car games or any other games or from Gambling or Betting
of any form or natural.
1) Fully taxable as per section 56(2).
2) No expenditure is allowed to be deducted out of these incomes.
3) Tax is deductable at source (TDS) which is @ 30 % with the limit as
follows;
a) If prize exceeds Rs. 10,000 in case of winning from lotteries,
crossword puzzle, card games, and T.V game shows.
b) If prize exceeds up to the limit of Rs. 5000, in case of winning from
horse race.
4) No TDS in case of winning from other races, gambling, betting etc.
5) In case amount of prize is ‘Net’, ‘Received or ‘ After deduction of tax’ or
‘Is collected by the bank’ then it has to be grossed as ;
Net × 100/100-30
 Deduction by the employer: any amount deducted by the employer not
carrying on business or profession as income-tax or E.S.I Fund
contribution or their contribution to provident fund etc. shall be treated
as income of the year.
 Interest on securities:
(i)- Interest on securities due to an assessee provided by the Central or
the State Govt. shall be chargeable to tax under interest on
securities.
(ii)- Interest on debentures or other securities for money issued or on
the behalf of a local authority or a company or a corporation
established by the Central, State of Provincial Act shall be
charged to tax under interest on securities.
(iii)- Tax treatment of Interest:
(i)i Any interest which accrues to a person during the
previous year is added to his gross total income.
(i)ii Interest is taxable on due basis whether received or not.
(i)iii Interest on securities issued by the Govt. of India is
considered to be accrued in India even if enforced to pay
outside India.
(i)iv Interest accrues on the name of the person on whose name
securities stand on the date of accrual of interest.
Deduction of Tax at source. It is the duty of the security issuing
authority to deduct tax at source before making the payment of interest on
securities at the prescribed rate. (Section 193)
 No TDS in case of Interest on Debentures (section 193), if certain
conditions are fulfilled, these are;
(i)- Debentures are issued by a company in which the public are
substantially interested.
(ii)- Interest is paid to a resident debenture holder.
(iii)- Debentures are listed on a recognized stock exchange.
(iv)- Interest is paid through account payee cheque.
(v)- The amount of interest does not exceed Rs. 5000, payable in a
financial year.
 Commission on Sale of Securities:
(i)-Any amount of commission or other form incurred by the assessee in
case of purchase or sale of securities is not allowable deduction out of
the income of interest on such securities.
(ii)- Any amount of commission paid at the time of purchase of securities
are included in the cost of these securities and any commission paid
on the sale of such securities are allowed to be deducted out of the
selling price of these securities.
 Interest on Securities exempted from Tax. U/S 10(15)

 Interest on certain type of Bonds issued by public sector


companies/undertakings has been exempted from tax, these are;
1. 7% capital investment bonds.
2. 10% secured redeemable NTPC bonds 1986. (Ist series)
3. 9% and 10% secured redeemable non convertible bonds issued by
Indian Railway Finance Corporation.
4. 10% secured redeemable non convertible bonds issued by Mahanagar
Telephone Nigam Ltd.
5. 10% secured redeemable non convertible bonds 1987 (B series) issued
by National Hydro Electric Power Corporation Ltd.
6. 9% (Tax free) secured redeemable bonds issued by Power Finance
Corporation Ltd.
7. 6.5%, 8%, 9%, and 10% National Relief Bonds.
8. 10% (Tax free) secured redeemable non-convertible bonds issued by
Indian Telephone Industries Ltd.
9. 10-years 9% (Tax free) secured redeemable non-convertible PFC bonds-
II series (private placement) issued by issued by Power Finance
Corporation.
10. 10-years 9% (Tax free) secured redeemable non-convertible NTPC
bonds-IV issue (private placement).
11. 10-years 9% (Tax free) secured redeemable non-convertible REC bonds
issued by the Rural Electrification Corporation Ltd.
12. 10-years 9% (Tax free) secured redeemable non-convertible (C series)
issue by Neyveli Lignite Corporation Ltd.
 Interest on Securities exempted from Tax.
- Interests on securities earned by the following types of assessees are
exempted from tax.
1) Political parties.
2) A local authority.
3) A registered trade union.
4) Trustees of a recognized provident fund.
5) An approved scientific research association.
6) Members of scheduled tribes living in tribal areas.
7) A non-resident of Indian origin and securities and bonds were issued
before June 1, 2002.
8) Public charitable and religion trusts.
 Deductions under section 57

 While computing the income under the ‘Income from other sources’, certain
deductions are allowed up to certain extent as per section 57 of the Act which
are as:
1. Deduction in case of Dividends and interest on securities: deduction will be
allowed in case of any amount spent by way of providing commission or
remuneration to a banker or any other person as bank charges for realizing the
dividend or interest on securities.
2. Deductions for Repairs, Depreciations in case of letting of machinery, plant
or furniture with or without building;
(i)- Expenditure incurred on current repairs of building, plant, machinery,
furniture.
(ii)- Insurance premium paid of all these assets.
(iii)- Depreciation on plant, machinery and furniture
(iv)- Depreciation on building, provided assessee is the owner. Deduction
will not be allowed if assessee is lessee or mortgagee in possession of
the building.
3. Standard Deduction out of Family Pension: [U/S 57(iia)], If regular monthly
pension is paid by the employer to the legal heirs of the deceased employee. A
deduction is allowed up to the amount equal to 331/3 % of such pension or Rs.
15,000whichever is less.
4. Deduction with regard to the employee’s contribution in staff welfare
scheme. [U/S 57(ia)], amount received by the employer from the employees
as contribution of provident fund, E.S.I fund or superannuation fund is
considered as deemed income if not taxable under the head ‘Profits and gains of
business or profession’.
If employer deposits such amount in these funds before prescribed due date,
then such amount is allowed as deduction.
5. Deduction allowed from royalties received by authors except film writers;
Actual expenditure incurred can be claimed for deduction.
6. Interest on compensation or enhanced compensation; if assessee has
received interest on commission or enhanced commission, then a deduction up
to 50 % of such income is allowed as deduction.
7. Other Deductions [U/S 57(iii)], Any expenditure which is spent to earn
income chargeable to tax under this head is allowable as deduction from such
income.
 No TDS for Certain Incomes
- Following are the type of incomes under the head ‘income from other sources’
on which tax cannot be deducted at source ;
1) Incase winning from bettings.
2) Interest on Govt. securities.
3) Deemed dividend under section 2(22) (c).
4) Interest on any security under section 193.
5) Interest paid to an individual or HUF in account payee cheque for an
amount not exceeding Rs.5000 by certain companies.
6) Winning from lotteries, puzzles, card games and games of other sort up to
Rs. 10,000.
7) Winning from races up to amount Rs. 5,000.
8) Bank interest on Fixed deposit credited up to Rs. 10,000.
- Different Rates of TDS Prevailing for Individuals, HUF, Association of
Persons with no Surcharge.

Type of Income Rate of TDS


Interest on securities issued by statutory bodies or local
authority 10%

Listed debentures of a company 10%


Unlisted debentures of a company 10%
Bank interest 10%
Casual incomes 30%
Chapter-11 Set-off and Carry Forward of Losses

Income tax is levied on the total income of previous year of an assessee. Hence it is necessary to
ascertain the total income by aggregating the income of different heads. An assessee may have
both positive income and negative income (loss). The department of income tax have given relief
to assessees that if there is loss from one head of income it can be set off from other heads of
income. But if a loss cannot be set off in the same assessment year it can be forward and set off
in future against income of that year. Therefore the topic is divided into two headings namely: i)
set-off of losses; and ii) carry forward and set off losses.

A. Set-off of Losses: A loss can be set-off primarily within the same head and if it still
remains unadjusted it can be set off from other heads of income. It has been divided into
following two types:
1. Set-off of loss from one source against income from another source within the
same head of income. (sec.70). The general rule is that loss from one source can be
set-off from another source falling under the same head of income. For example, an
assessee is running two businesses A and B. There is a profit of Rs 200,000 in
business A whereas there is a loss of Rs. 100,000 in business B. The assessee can set-
off loss from business B with the income of business A and his total income will be
Rs 100,000.
However are six exceptions to the rule that a loss can be set-off against any other
income under the same head.
 Loss from speculation business cannot be set off against income from other sources.
This loss can be set off only against income from another speculation business.
 Loss of specified business under section 35AD cannot be set off against income from
other business. This loss can be set off only against income from other specified
business.
 Long term capital loss cannot be set off against short term capital gain. This loss can
be set off only against long term capital gain.
 Loss from the activity of owning and maintaining race horses shall be set off against
income from owning and maintaining race horses only and not against any other
income under the head other sources.
 Loss in respect of casual income falling under section 56(2)(ib), viz, lottery,
gambling, betting, winning from races (including horse races) cannot be set-off
against any income falling under head other sources. In fact, such a loss can’t be set-
off at all.
 Loss from an exempted source can’t be set-off from a source of income which is
taxable. For example, agriculture income can’t be set-off from non agriculture
income.
2. Set-off of loss of one head against the income of another head in the same
assessment year, i.e., inter-head set-off:
The general rule is that loss under one head of income can be adjusted against
income under another head. However, there are certain exceptions to this rule as:
 Where the net result of the computation under any head of income (other than
‘Capital Gains’) is a loss, the assessee can set-off such loss against his income
assessable for that assessment year under any other head, including ‘Capital Gains’.
 Where the net result of the computation under the head “Profits and gains of business
or profession” is a loss, such loss cannot be set off against income under the head
“Salaries”.
 Where the net result of computation under the head ‘Capital Gains’ is a loss, such
capital loss cannot be set-off against income under any other head.
 Speculation loss and loss from the activity of owning and maintaining race horses
cannot be set off against income under any other head.
B. Carry forward and set off of losses
If it is not possible to set off the losses during the same assessment year in which they
occurred, so much of the loss as the assessee has not been able to set off out of the
following losses can be carried forward for being set off against his income in the
succeeding years provided the losses have been determined in pursuance of a return filed
by the assessee within the time allowed u/s 139(i) and it is the same assessee who
sustained the loss.
 Loss under the head income form house property: Any loss under this head can
be carried forward up to 8 assessment years immediately following the assessment
year for which the loss was first computed and set off from the same head.
 Loss of non speculation business or profession: Any non-speculation business loss
can be carried forward up to 8 assessment years immediately following the
assessment year for which the loss was first computed and set off against any income
falling under the business or profession.
 Loss of speculation business: Any speculation business loss can be carried forward
up to 4 assessment years immediately following the assessment year for which the
loss was first computed and set off against the profit of any speculation business
carried on by assessee.
 Loss of specified business: No limit is prescribed by the Act which means it can be
carried forward till it is set off. But loss can be set-off against prom any specified
business carried on by assessee.
 Short term capital loss or long term capital loss: Any loss under this can be carried
forward up to 8 assessment years immediately following the assessment year for
which the loss was first computed.
Mode of set-off: A brought forward long term capital loss can be set-off against long
term capital gain while as brought forward short term capital loss can be set off
against any capital gain.
 Loss from activity of owning and maintaining race horses: such loss can be
carried forward up to 4 assessment years and can be set off against income from
owning and maintaining of horses.

Rules regarding unabsorbed depreciation:

With effect from AY 2003-04, unadjusted depreciation can be carried forward till it is fully
adjusted from any income during the succeeding previous years. It shall be treated as
depreciation of succeeding previous years. In case there is carry forward business loss as well as
carry forward unabsorbed depreciation, then the following order should be followed for set off

 Firstly current depreciation secondly brought forward business loss and thirdly brought
forward unabsorbed depreciation.
Chapter 12- Deductions to be made from Gross Total Income

The deduction from gross total income is available only where the gross total income is positive.
If however income is negative, the question of any deduction does not arise. Section 80A to 80 U
of the Income-tax Act lays down the provisions relating to the deductions available to assessees
from their gross total income.

Deductions are available in two categories:

a. Deduction in respect of certain payments (section 80C to 80GGC).


b. Deduction in respect of certain incomes (section 80IA to 80U).
A. Deduction in respect of certain payments
A1. Deduction regarding approved savings in P.F., LIC Premium etc (80C)
Eligible assesses: Individual and HUF
Entitlement: Deduction from the Gross Total Income of an amount equal to the
investments made, subject to a maximum amount of Rs. 150,000.
Nature of Investments:
a. Life Insurance policy taken on the life of an individual assessee or spouse and any child
of such individual, and any member of the Hindu Undivided Family.
b. Amounts paid to effect or to keep in force a contract for a non-cumulative deferred
annuity not being an annuity plan.
c. Deduction from the salary payable by or on behalf of the Government to any individual,
in accordance with the conditions of his service, for securing to him a deferred annuity or
making provision for his wife or children, to the extent of one-fifth of salary.
d. Any contribution made by an individual only to any provident fund to which the
Provident Funds Act, 1925, applies; a Recognised provident fund; an approved
superannuation fund.
e. Subscription to the notified securities of the Central Government.
f. Any contribution to a PPF by individual or HUF.
g. Subscription to other notified savings certificates defined in Section 2(c) of the
Government Savings Certificates Act, 1959.
h. Contributions made by an individual or HUF, for participation in the Unit-Linked
Insurance Plan, 1971.
i. Any contribution to effect or keep in force any notified annuity plan of the LIC or any
other insurer.
j. Any subscription, to any units of any Mutual Fund or the Unit Trust of India under any
notified plan formulated by the Central Government.
k. Subscription to the notified deposit scheme of or contribution to any such pension fund
set up by the National Housing Bank established under Section 3 of the National Housing
Bank Act, 1987.
l. Tuition fees (excluding any payment towards any development fees or donation or
payment of similar nature), whether at the time of admission or thereafter, to any
university, college, school or other educational institution situated within India;
m. For purchase or construction of a residential house property, the income of which is
chargeable to tax under the head “Income from House Property”, where such payments
are made towards or by way of:
a. Any instalment or part payment of the amount due under any self- financing or
other scheme of any development authority, housing board or other authority
engaged in the construction and sale of house property on ownership basis; or
b. Any instalment or part payment of the amount due to any company or co-
operative society of which the assessee is a shareholder or member towards the
cost of the house property allotted to him; or
c. Re-payment of the amount borrowed by the assessee from: (1) the Central
Government or any State Government; or (2) any bank, including a co-operative
bank, or (3) the Life Insurance Corporation, or (4) the National Housing Bank, or
(5) any public company formed and registered repayment of principal part only
not interest in India with the main object of carrying on the business of providing
long-term finance for the construction or purchase of houses in India for
residential purposes, eligible for deduction under Section 36(1)(viii), or (6) any
company in which the public are substantially interested or any co-operative
society, where such company or co-operative society is engaged in the business of
financing the construction of houses; or (7) the assessee’s employer where such
employer is a public company or a public sector company or a university
established by law or a college affiliated to such university or a local authority or
a cooperative society; (8) the assessee’s employer where such employer is an
authority or a board or a corporation or any other body established under a Central
or State Act (w.e.f. A.Y. 2006-07).
d. Stamp duty, registration fee and other expenses for the purpose of transfer of such
house property to the assessee.
n. Subscription to equity shares or debentures or units forming part of any eligible issue of
capital.
o. Fixed deposits for a minimum period of 5 years in any Scheduled Banks (w.e.f. A.Y.
2007-08).
p. As subscription to such bonds issued by the National Bank for Agriculture and Rural
Development, as the Central Government may, by notification in the Official Gazette
specify in this behalf.
q. In an account under the Senior Citizens Savings Scheme Rules, 2004.
r. As five year time deposit in an account under the Post Office Time Deposit Rules, 1981.

A-2. Deduction in respect of contribution to certain pension funds persons (80CCC)


covered- individual.
Eligible Amount- Deposit or payment made to LIC or any other insurer in the approved annuity
plan for receiving pension.
Extent of Deduction- Least of amount paid or Rs. 1,50,000/- .
A-3. Deduction in Respect of Contribution to Pension Scheme of Central Govt., or of any
other Employer (80CCD).
Covered - Individual.
Eligible Amount: the amount of deduction shall be as follows
1. For employees (Govt., or Non-Govt.,): Employees own contribution or 10% of salary
whichever is less and contribution of central govt./ other employer or 10% of salary
whichever is less.
2. For other employees (self employed): depositors own contribution or 10% of gross total
income, whichever is less.
The maximum amount of deduction u/s CCD is Rs 1,50,000 only.

Restriction on total amount of deduction (80CCE)

The aggregate amount of deduction available u/s 80C, 80CCC and 80CCD shall not in any case
exceed Rs. 1,50,000.

A-4. deduction in respect of investment made under any notified saving scheme (80CCG)

Deduction is allowed if the following conditions are satisfied:


1. The assessee is a resident individual.
2. His gross total income does not exceed 12 Lakh.
3. He has acquired listed shares or listed units of an equity oriented funds in accordance
with a notified scheme
4. The investment is locked in for a period of 3 years from the date of acquisition in
accordance with the above scheme.
5. The assessee satisfies any other condition as may be prescribed.
If the above conditions are satisfied, a deduction will be allowed under section 80CCG.
The amount of deduction is 50% of the amount invested in equity shares. However, the
amount of deduction under this section cannot be more than ` 25,000. The deduction shall
be allowed for 3 consecutive assessment years beginning with assessment years in which
listed equity shares or units were first acquired.
A-5. Deductions in Respect of Medical Insurance Premia (80D)

Deduction regarding health insurance is allowed to individuals and HUFs.


Where the assessee is an individual, the sum referred to in sub-section (1) shall be the
aggregate of the following:
(a) the whole of the amount paid to effect or to keep in force an insurance on the health of
the assessee or his family or “any contribution made to the Central Government Health
Scheme” or such other scheme as may be notified by the Central Government in this
behalf or any payment made on account of preventive health check-up of the assessee or
his family and the sum does not exceed in the aggregate Rs 25000 (Rs 30000 in case of
senior citizens); and
(b) the whole of the amount paid to effect or to keep in force an insurance on the health
of the parent or parents of the assessee or any payment made on account of preventive
health check-up of the assessee or his family as does not exceed in the aggregate Rs Rs
25000 (Rs 30000 in case of senior citizens).
The deduction in respect of payment made on account of preventive health check up shall
not exceed Rs 5,000.
Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1)
shall be the whole of the amount paid to effect or to keep in force an insurance on the
health of any member of that Hindu undivided family as does not exceed in the aggregate
Rs 25000 (Rs 30000 in case of senior citizens).

A-6. Deductions in respect of maintenance including medical treatment of a dependant


who is a person with disability (80DD)

Persons Covered- Resident Individual/HUF.


Eligible Amount-
(a) Expenditure incurred on medical treatment [including nursing], training and
rehabilitation of a disabled dependant, or
(b) Any payment or deposit made under a scheme framed by LIC or any other insurer or
the administrator or the specified company and approved by the Board for payment of
lump sum amount or annuity for the benefit of dependant with disability.
Extent of Deduction: (a) Rs. 75,000/- in case of normal disability or (b) Rs. 125,000/- in
case of severe disability.

A-7. Deduction in respect of medical treatment, etc. (80DDB)


Persons Covered- Resident Individual/HUF.
Eligible Amount- Expenditure actually incurred for the medical treatment of such
diseases or ailments specified in Rule 11DD (some of the diseases are parkinsons disease,
malignant cancers, full blown AIDS, chronic renal failure, thalassaemia etc.) for self or
dependant relative (spouse, children, parents, brothers and sisters) in case of individual or
any member of HUF in case of HUF.

A-7. Deduction in respect of interest on loan taken for education (80E).

Persons Covered- Individual.


Eligible Amount- Any amount paid by way of interest on loan taken from any financial
institution or any approved charitable institution for his/her higher education or w.e.f. 1-
4-2008 for the purpose of higher education of his/her spouse, children and legal guardian
of the Individual.
Relevant Conditions/Points:
1. Amount should be paid out of income chargeable to tax.
2. All field of studies including vocational studies pursued after passing the Senior
secondary examination or its equivalent from any school, board or university recognized
by the central govt. or state govt. or local authority or by any other authority authorised
by the central govt. or state govt. or local authority to do so.
3. Approved charitable institution means an institution established for charitable purposes
and notified by the Central Government u/s. 10(23C) or referred in 80G(2)(a).
4. Financial institution means banking company or financial institution notified by
Central Government.
5. The deduction is allowed in the initial assessment year (i.e., the assessment year
relevant to the previous year, in which the assessee starts paying the interest on loan) and
7 assessment years.
immediately succeeding the initial assessment year or until the interest is paid in full
whichever is earlier.
Extent of Deduction- Entire amount of interest.

A-8. Deduction in respect of donations to certain funds, charitable institutions etc. (80G):

Deduction under this section is allowed to all type of assesses.


Quantum of deduction:
(A) 100% Deduction without any qualifying limit:
(i) National Defence fund.
(ii) Prime Minister’s National relief fund.
(iii) Prime Minister’s Earthquake relief fund.
(iv) Africa fund.
(v) National Trust for welfare of persons with autism, cerebral palsy, mental retardation
and multiple disabilities.
(vi) National cultural fund set up by the Central Government.
(vii) The Chief Minister’s relief fund or the lieutenant Governor’s relief fund.
(viii) National Illness Assistance fund.
(ix) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996.
(x) The Army/Air force Central welfare fund or the Indian Naval Benevolent fund.
(xi) Any fund set up by a State Government to provide medical relief to poors.
(xii) The National/State Blood transfusion Council.
(xiii) Zila Saksharta Samiti constituted in any district.
(xiv) Any fund set up by the State Government of Gujarat, exclusively for providing
relief to the victims ofearthquake in Gujarat.
(xv) Maharashtra Chief Minister’s Earthquake Relief Fund.
(xvi) University/Educational Institute of National Eminence approved by the prescribed
authority.
(xvii) National foundation for communal harmony.
(xviii) Fund for technology development and application, set up by the Central
Government.
(xix) National sports fund set up by the Central Government.
(xx) National Children’s Fund.
(B) 50% Deduction without any qualifying limit:
(i) Jawaharlal Nehru Memorial Fund.
(ii) Indira Gandhi Memorial Trust.
(iii) Rajiv Gandhi Foundation.
(iv) Prime Minister’s Drought Relief Fund.
(C) 100% Deduction subject to qualifying limit:
(i) Any sum to Government or any approved local authority, institution or association to
be utilized for
promoting family planning.
(ii) Any sum paid by the assessee, being a company, in the previous year as donation to
Indian Olympic Association or to any other association established in India and notified
by the Central Government for:
I. Development of infrastructure for sports and games or
II. Sponsorship of sports and games in India.
(D) 50% Deduction subject to qualifying limit:
(i) Donation to Government or any approved Local Authority, Institution or Association
to be utilized for any charitable purpose other than promoting family planning.
(ii) Any other Fund or Institution, which satisfies the conditions of Section 80G(5).
(iii) Notified Temple, Mosque, Gurudwara, Church or any other place notified by the
Central Government to be of historic, as chorological or artistic importance, for
renovation or repair of such place.
(iv) Any corporation established by the Central or State Government specified under
Section 10(26BB) for promoting interests of the members of a minority community.
(v) Any authority constituted in India by or under any law for satisfying the need for
housing accommodationor for the purpose of planning development or improvement of
cities, towns and villages or for both for applying qualifying limit, all donations made to
funds/institutions covered under (C) and (D) above shall be aggregated and the aggregate
amount shall be limited to 10% of adjusted Gross Total Income.
**for numerical questions refer to book.
A-9. Deduction in respect of expenditure incurred on payment of house rent (80GG):

Persons Covered- Individual.


Deductions admissible under this Section is:
i. Statutory limit Rs 2000;
ii. Actual rent paid less 10% of ‘Adjusted Total Income’.
iii. 25% of such ‘Adjusted Total Income’.
Whichever is less.
Adjusted GTI= GTI - (LTCG + STCG on shares covered under STT + income referred to
in section 115A+ all other deductions u/s 80except 80GG).

A-10. Deduction in respect of contribution given by companies to political parties or


electoral trust (80GGB)

Any sum contributed by an Indian Company, other than cash, in the previous year to any
political party or to an electoral trust shall be allowed as deduction while computing its
total income.

A-11. Deduction in respect of contribution given by any person to political parties or


electoral trust (80GGC)

Any sum contributed by an assessee, other than cash, in the previous year to any political
party or to an electoral trust except local authority and every artificial juridical person
wholly or partly funded by the government shall be allowed as deduction while
computing its total income.
B. Deduction in respect of certain incomes

B-1. Deduction in respect of profits and gains from industrial undertakings or enterprise engaged
in infrastructure development (section 80-IA).

Where gross total income of assessee includes any profits and gains derived by an
undertaking or an enterprise from any eligible business, a deduction shall be allowed to
stated percentage of profit and gains from such business for stated number of years.
1. Undertaking engaged in providing infra structure facility (80IA(40(i))
Eligible business: developing, operating and maintaining or developing operating ang
maintaining infrastructure facility.
Form of organisation: industrial undertaking owned by a company registered in india
or by a consortium of such companies.
Rate of deduction: @100% of profits of such eligible business.
Commencement of operation: on or after 1-4-1995
Period of deduction: 10 years out of 20 years (out of 15 years in case of ports airport
etc)beginning with the year in which undertakings develops such infrastructural
facility.
2. Telecommunication services (80IA(4)(ii))
Eligible business: telecommunication services, radio paging, domestic satellite
services, network of trunking, broadband network and internet services.
Form of organisation: all enterprises whether corporate or not.
Commencement of operation: on or after 1-4-1995 but on or before31-3-2005.
Rate of deduction: 100% of profits and gains from such business for first 5
consecutive AY’s out of first 15 years.
3. Industrial Park (80IA(4)(iii))
c
4. Power Sector (80IA(4)(iv))
Eligible business: generation of power; or generation and distribution of power; or
transmission or distribution by laying a network of new transmission; or undertaking
substantial renovation and modernisation of the existing transmission or distribution
lines.
Form of organisation: all enterprises whether corporate or not.
Commencement of operation: after 1-4-1993 to 31-3-20017.
Rate of deduction: 100% of profits and gains from such business for any 10
consecutive AY’s out of first 15 years beginning from the year in which undertaking
starts operation.
5. Undertaking setup for reconstruction or revival of power generating plant
(80IA(4)(v))
Eligible business: reconstruction or revival of power generating plant.
Form of organisation: Indian Co.
Commencement of operation: before 31-3-20017.
Rate of deduction: 100% of profits and gains from such business for any 10
consecutive AY’s out of first 15 years beginning from the year in which undertaking
starts operation.

B-2. Deduction in respect of profits and gains from certain industrial undertakings other than
infra structure development undertakings (section 80-IB).

The deduction under section 80-IB is available to an assessee whose gross total income
includes profits and gains derived from the following business. **for details refer to bare
Act.

B-3. Special provision in respect of certain undertakings or enterprises in certain special category
states (section 80-IC). **for details refer to bare Act.

B-4. Deduction in respect of employment of new workmen (80JJAA).

Eligible assessee: Indian co.

GTI should include should include profits and gains derived from manufacture of goods
in factory.
Amount of deduction: 30% of additional wages paid to new regular workmen employed
by the assessee in the previous year for three assessment years including the assessment
year relevant to the previous year in which such employment is provided.

Additional wages means the wages paid to new regular workman in excess of 100
workmen employed during the previous year.

However in case of an existing factory additional wages shall be nil if the increase in the
number of regular workmen employed during the year is less than 10% of the existing
number of workmen employed in such factory as on the last day of the preceding year.

B-5. Deduction in respect of royalty income etc., of authors of certain books other than text
books (80QQB).

Amount of deduction: the gross total income of assessee pertaining to the previous year
includes royalty or the copyright fees, there shall, in accordance with and subject to the
provisions of this section, be allowed a deduction of 100% of such income or Rs.
300,000, whichever is less.

B-6. Deduction in respect of royalty on patents (80RRB):

(1) Where in the case of an assessee, being an individual, who is –

(a) resident in India;

(b) a patentee;

(c) in receipt of any income by way of royalty in respect of a patent registered on or after
the 1st day of April, 2003 under the Patents Act, 1970, and

his gross total income of the previous year includes royalty, there shall, in accordance
with and subject to the provisions of this section, be allowed a deduction of 100% of such
income or Rs 300,000, whichever is less.

B-7. Deduction in respect of interest on deposits in savings account (80TTA):

Eligible assessee: individual or HUF.

Eligible income: interest on deposits in saving accounts with:


a) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies
(including any bank or banking institution referred to in section 51 of that Act);

(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank); or

(c) a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898.

Amount of deduction: actual interest or Rs 10,000 whichever is less.

B-8. Deduction in case of a person with disability (80U):

Amount of deduction: In computing the total income of an individual, being a resident,


who, at any time during the previous year, is certified by the medical authority to be a
person with disability, there shall be allowed a deduction of a sum of Rs 50,000; or a
person with severe disability shall be allowed a deduction of a sum of Rs 1,00,000.
Chapter 13 - Assessment of Individuals

Individual includes both male and female assessees. The total income has to be computed as per
the provisions of the Income-tax Act, 1961. In addition to individuals own income, income of
other persons received by him in some other capacity or received by other persons is to be
clubbed with individual assesses income. An individual may have income under any or all of the
heads of income.

Tax treatment of income received from different institutions:

1. As a member of HUF: Exempted u/s 10(2). But where an individual converts his
individual property into common pool of HUF of which he is a member, income from
such property shall be included in his individual income.
2. Income received as share from AOP. Share from AOP is treated as:
If the individual income of all partners does not exceed the exempted first income slab,
then share from such AOP is to fully added. However, if the individual income of any
partner exceeds the first exempted income slab, then share from such AOP is not to be
added in the income of the individual.
3. As a partner of firm assessed as firm u/s 184. Exempted
But remuneration and interest on capital received is taxable under the head profits and
gains to the extent it is allowed as deduction to the firm.
4. As a partner of firm assessed as firm u/s 185. Exempted
But remuneration and interest on capital received from such firm is also exempted.
5. As a share holder of a company. Exempted

Income of other persons to be included in the total income of an individual

The following incomes although accruing to other persons are included in the income of
individual assessee:

1. Transfer of an income without transfer of asset.


2. Revocable transfer of asset.
3. Income of minor child.
4. Income from asset transferred to spouse, daughter in law by an individual without
adequate consideration shall be included in the income of that individual.
5. Income from the asset transferred by an individual in such a way that benefit accrues
directly to him.

Computation of Gross Total Income:

The final figures of income or loss under each head of income, after allowing the deductions,
allowances and other adjustments, are then aggregated, after giving effect to the provisions
for clubbing of income and set-off and carry forward of losses, to arrive at the gross total
income.

Deductions from Gross Total Income:

There are deductions prescribed from gross total income. The allowable deductions in case of
an individual are deductions under sections 80C, 80CCC, 80CCD, 80CCF, 80D, 80DD,
80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID,80-IE,
80JJA, 80QQB, 80RRB, 80TTA and 80U. These deductions are allowed as per the rules
prescribed in the incometax act.

Computation tax liability

After computing the total income, nest step is to compute the tax liability. The following
steps are to be followed:

1. Round of total income to the nearest multiple of10.


2. Divided the total income into four parts:
i. LTCG - calculate tax @20%.
ii. STCG on shares which are subject to STT- calculate tax @15%.
iii. On casual income- calculate tax @30%.
iv. Balance is total income. calculate tax at following rate:
Application of the rates of tax on the total income:
The basic exemption limit is Rs 2, 50,000 for the assessment year 2016-17.
A) Normal Rates (individual whether male or female):
Up to Rs: 2,50,000 : Nil
Rs: 2,50,000 to 5,00,000 : 10%
Rs: 5,00,000 to 10,00,000 : 20%
Above Rs: 10,00,000 : 30%
B) Individual- Senior citizen (60 years or more but less than 80 years):
Up to Rs: 3,00,000 : Nil
Rs: 300,000 to 5,00,000 : 10%
Rs: 5,00,000 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
C) Individual- Super senior citizen (80 years or more):
Up to Rs: 5,00,000 : Nil
Rs: 5,00,000 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
3. Rebate u/s 87A. In case of resident individuals, a rebate of Rs 2000or tax calculated
whichever is less, shall be allowed provided their total income does not exceed Rs
5,00,000.
4. Surcharge- if total income exceeds Rs 1 crore surcharge @ 10% of tax shall be added.
5. Education cess- add education cess to the tax calculate above. Education cess @ 2%
and SHEC @ 1%.
6. After adding education cess, rebates u/s 86 and relief u/s 89(1) are allowed:
7. Balance is tax payable which will be rounded off to the nearest multiple of Rs 10.
Chapter 14- Assessment of Firms including LLP

Assessment as a Firm (Section 184)


As per the scheme, a partnership firm in the first assesment year shall be assessed as a firm if the
followingconditions are satisfied:
1. The partnership is evidenced by an instrument i.e. partnership deed.
2. The individual shares of the partners are specified in that instrument.
3. A copy of the partnership deed certified by all the partners in writing (other than the minors) is
submitted along with the return of income in respect of which assessment as a firm is first
sought.
Where the return is made after the dissolution of the firm, the copy of the partnership deed
should be certified in writing by all persons (excluding minors) who were partners of the firm
immediately before its dissolution and by the legal representative of any deceased partner.
Assessment as a Firm (section 185)
The firm will be assessed as a firm but shall not be eligible for deduction on account of interest,
salary, bonus, etc. Where the firm –
(a) fails to make the return required under Section 139(1) and has not made a return or revised
return under Section 139(4) or 139(5), or
(b) fails to comply with all the terms of a notice issued under Section 142(1) or fails to comply
with a direction issued under Section 142(2A), or
(c) having made a return, fails to comply with all the terms of a notice issued under Section
143(2),
(d) does not comply with three conditions mentioned above u/s 184.
then the firm shall not be eligible for any deduction on account of interest to a partner and
remuneration to a working partner although the same is mentioned in the partnership deed.

Assessment of firm/LLP u/s 184


Computation of firms business income:
Adjustment of net profit as per profit and loss account of the firm:
Calculate firms business profit as per provisions given under section 28 to 44. However, for
payment of remuneration to partners and interest on capital are allowed subject to conditions laid
down under section 40(b).
Section 40(b), contain the following conditions which need to be complied with while making
payment of remuneration and interest on borrowed capital to the partners:
(i) Payment of salary, bonus, commission or remuneration by whatever name called to a non-
working partner shall not be allowed as deduction. Such payments are allowed only to working
partners if it is authorised by and is in accordance with partnership deed.
(ii) Interest payable to a partner, although authorised by the partnership deed shall be allowable
as deduction subject to a maximum of 12% p.a. If the partnership deed provides for interest at
less than 12% p.a., the deduction of interest shall be allowed to the extent provided by the
partnership deed.
(iii) the payment of remuneration to working partner, although authorised by partnership deed
however it issubject to maximum of the following limits.
On the first Rs 3,00,000 of the book profit or in case of loss----------- Rs150,000 or 90% of Book
profit w.e.is higher
On the balance of the book profit---------60% of the book profit.

Computation of total income of a firm


1. Income is computed head wise. Firm can’t have salary income.
2. It can’t have self occupied house.
3. Profits and gains, capital gain and income from other sources are computed as per
relevant provisions of the Act.
4. Deductions out of GTI: A firm can claim deductions u/s 80G, 80GGA, 80GGC, 80IA,
80IB, 80IC, 80ID, 80IE and 80JJA.
5. Rate of tax
In the case of a firm which is assessable as such (i.e. as a firm), tax is chargeable on its
total income at the rate of 30%.
On LTCG @ 20% and on STCG on shares which are subject to STT @ 15%.
Surcharge @10% shall be applicable where the total income exceeds Rs 1 crore.
Assessment of firm/LLP u/s 185
It is assessed in the same manner as u/s 184 except partner’s remuneration and interest on capital
is not allowed.
Chapter 15- Assessment of Companies

Constitutional Provisions:
Corporate tax means any tax on income, so far as that tax is payable by companies and is a tax in
case the following conditions are fulfilled:
(a) that it is not chargeable in respect of agricultural income;
(b) that no deduction in respect of tax paid by companies is by any enactments which may apply
to the tax authorised to be made from dividends payable by the companies to individuals;
(c) that no provision exists for taking the tax so paid into account for computing for the purposes
of Indian income tax, the total income of individuals receiving such dividends, or in computing
the Indian income tax payable by, or refundable to, such individuals.
Categories of companies under the Income-tax Act, 1961
1. Indian company
2. Domestic company
3. Foreign company
4. Widely held company
5. Closely held company
6. Company in which public are substantially interested

Residential status of companies:

1. Resident companies: A company is said to be resident in India in any previous year if it is


an Indian company or during the relevant previous year the control and management of
its affairs is situated wholly in India.
2. Non Resident: A company shall be non resident if it is not resident in India during the
relevant previous year.

Computation of Gross Total Income of a company

1. Head wise calculation: the income of a company is computed under all the heads of
income except under the head salaries under various provisions of the Act.
2. Agriculture income of a company: it is totally exempted u/s10 (1). Even there is no
integration of agriculture income.
3. Set off and carry forward of losses: set off and carry forward of losses is done under
relevant provisions of Act.
4. Deductions out of GTI: A company can claim deductions u/s 80G, 80GGA, 80GGC,
80IA, 80IB, 80IC, 80ID, 80IE and 80JJA.
5. Rates of tax
i. On STCG on shares covered under STT @15%
ii. On LTCG @20%
iii. On income from units purchased in foreign exchange @10%
iv. On casual income @30%
v. On dividend received from specified foreign subsidiary company @15%
vi. On any other income @30%
vii. On profits declared, paid or distributed as dividend u/s115O @15%.
CHAPTER 16 - VALUE ADDED TAX

The Value Added Tax (VAT) in India is a state level multi-point tax on value addition which is
collected at different stages of sale with a provision for set-off for tax paid at the previous stage
i.e., tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales minus
purchase) which equivalent is to wages plus interest, other costs and profits. It is a tax on the
value added and can be aptly defined as one of the ideal forms of consumption taxation since the
value added by a firm represents the difference between its receipts and cost of purchased
inputs. Value Added Tax is commonly referred to as a method of taxation whereby the tax is
levied on the value added at each stage of the production/distribution chain.

Advantages of VAT
 To encourage and result in a better-administered system;
 To eliminate avenues of tax evasion;
 To avoid under valuation at all stages of production and distribution;
 To claim credit on tax paid on inputs at each stage of value addition;
 Do away with cascading effect resulting in non distortion of the business decisions;
 Permits easy and effective targeting of tax rates as a result of which the exports can be
zero-rated;
 Ensures better tax compliance by generating a trail of invoices that supports effective
audit and enforcement strategies;
 Contribution to fiscal consolidation for the country. As a steady source of revenue, it
shall reduce the debt burden in due course;
 To help our country to integrate better in the WTO regime;
 To stop the unhealthy tax-rate war and trade diversion among the States, which had
adversely affected the interests of all the States in the past.

Problems of erstwhile sales tax system

 Narrow base of tax


 Multiple rates of tax
 Cascading effect of tax
 Large scope of tax evasion

Features of VAT

 Multiple point of tax


 Burden of tax
 Tax evasion relatively less possible
 No exemptions.
 Tax credit system

Methods of Computation of VAT

VAT can be computed by using any of the three methods detailed below:
1. The Subtraction method: Under this method the tax rate is applied to the difference
between the value of output and the cost of input;
2. The Addition method: Under this method value added is computed by adding all the
payments that are payable to the factors of production (viz., wages, salaries, interest
payments, etc.);
3. Tax Credit method: Under this method, it entails set-off of the tax paid on inputs from
tax collected on sales. Indian States opted for tax credit method, which is similar to
CENVAT.

Procedure of VAT

The VAT is based on the value addition to the goods and the related VAT liability of the
dealer is calculated by:
 Deduct input tax credit from tax collected on sales during the payment period.
 This input tax credit is given for both manufacturers and traders for purchase of
input/supplies meant for both sales within the State as well as to the other States
irrespective of their date of utilization or sale.
 If the tax credit exceeds the tax payable on sales in a month, the excess credit will be
carried over to the end of the next financial year.
 If there is any excess unadjusted input tax credit at the end of the second year then the
same will be eligible for refund.
 For all exports made out of the country, tax paid within the State will be refunded in
full.
 Tax paid on inputs procured from other States through inter-State sale and stock
transfer shall not be eligible for credit.
 VAT has been introduced by 30 States / UTs. However, Central Sales Tax will
continue to govern inter-State Sales and Exports.