MB FM 03 TAX PLANNING AND FINANCIAL REPORTING

UNIT 1
ASSESSMENT YEAR (U/s 2(9):
“Assessment Year” means the period starting from April 1 and ending on March 31 of the next
year. Income of the previous year of an assessee is taxed during the next following assessment
year at the rates prescribed by the relevant Financial Act.

Previous Year (U/s 3)

Income earned in a year is taxable in the next year. The year in which income is earned is known
as previous year and the next year in which income is taxable is known as assessment year.

Previous year for newly established firm:

It commences on the date of setting up the business/ profession or on the date when the new
source of income comes into existence.

When income of previous year is not taxable in the immediately following assessment year:
1. Income of non-resident from shipping
2. Income of persons leaving India either permanently or for a long period of time.
3. Income of bodies formed for short duration
4. Income of person trying to alienate his assets with a view to avoiding payment of tax.
5. Income of discontinued business.
In these cases, income of a previous year may be taxed as the income of the assessment year
immediately preceding the normal assessment year.

Assessee:
An assessee means a person by whom income tax or any other sum of money is payable under
the Act. It includes-
a. every person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss or the amount of refund due to him;
b. a person who is assessable in respect of income or loss of another person;
c. a person who is deemed to be an assessee, or an assessee in default under any provision of the
Act.
Income:
Income is a periodical monetary return with some sort of regularity. It may be recurring in
nature. It may be broadly defined as the true increase in the amount of wealth which comes to a
person during a fixed period of time.

Broad principles which clarify the concept of income:

 Regular and definite source

 Different forms of income
 Receipt Vs. Accrual
 Illegal income
 Disputed title
 Relief or reimbursement of expenses not treated as income
 Diversion of income
 Surplus from mutual activity
 Temporary and permanent income
 Tax free income
 Receipt on amount of Darmada
 Income includes loss
 Appropriation of the payment between capital and interest
 Some income cannot be taxed twice
 Income should be real not fictional
 Charge on person
 Source of income need not exist in the assessment year

Extended meaning of ‘income’ under Sec. 2(24):

 Profits and gains

 Dividend
 Voluntary contribution received by a Trust
 Perquisites in the hands of employee
 Any special allowance or benefits
 CCA/DA
 Any perquisites or benefits to a director
 Any perquisites or benefits to a representative assessee
 Any sum chargeable under sec. 28, 41 and 59
 Capital gains
 Insurance profits
 Banking income of co-operative society
 Winning from lottery
 Employer’s contribution towards PF
 Amount received under Keyman Insurance Policy
 Amount exceeding Rs. 50,000 by way of gift
Residential status:
Tax incidence of an assessee depends on his residential status. There are two types of taxpayers-
resident in india and non- resident in india. Indian income is taxable in India whether the person
earning income or non-resident. Conversely, foreign income of a person is taxable in india only
if such person is resident in india. Foreign income of a non-resident in india is not taxable in
india.

Different taxable entities:

a. an individual
b. a Hindu Undivided Family
c. a firm or an association of persons
d. a joint stock company
e. every other person
Residential Status for an individual and HUF; a. resident and ordinary resident in India, b.
resident but not ordinary resident in India c. non-resident in India.
For all other assesses (firm, AOP, Company and others) a. resident in India b. non-resident
in India.

Rule of Resident

Resident and ordinary in India At least one of the basic condition +Both additional
conditions
Resident and non-ordinary resident in At least one of the basic condition +one or none additional
India conditions
Non- resident in India None of the basic conditions, additional conditions are not
relevant
Basic Conditions

In the case if an Indian citizen
who leaves India during the
previous year for the purpose
of employment (or as a
member of the crew of an
Indian ship)
a. Presence of at least 182
days in India during the
previous year.
b. Non functional
In the case of an Indian citizen In the case of an individual
or a person of Indian origin (other than that mentioned in
(who is in aboard) who comes columns 1 and 2
on a visit to India during the
previous year.
a. Presence of at least 182 a. Presence of at least 182
days in India during the days in India during the
previous year. previous year.
b. Non functional b. Presence of at least 60 days
in India during the previous
 year and 365 days during 4
years immediately preceding
the relevant previous year.
Additional Conditions
1. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year
(or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding
previous years)
2. Presence of at least 730 days in India during 7 years immediately preceding the relevant
previous year.

Residential Status of a HUF:

A HUF is said to be resident in India if control and management of its affairs is wholly or partly
situated in India. A HUF is non- resident in India if control and management of its affairs is
wholly situated outside India.
What is ‘control and management’- control and management means de facto control and
management and not merely the right to control or manage. Control and management is situated
at a place where the head, the seal and the directing power are situated. The mere fact is that the
family has a house in India, where some of its member resident in India or the Karta is in India in
the previous year, does not constitute that place as the seal of control and management of the
affairs of the family unless the decisions concerning the affairs of the family are taken at that
place.
When a resident HUF is ordinarily resident in India: A resident HUF is an ordinary resident
in India if Karta or manager of the HUF satisfies the following two additional conditions as:
1. Karta has been resident in India in at least 2 out of 10 previous years immediately preceding
the relevant previous year.
2. Karta has been present in India for a period of 730 days or more during 7 years immediately
preceding the previous year.
If Karta or manager of the resident HUF does not satisfied the two additional conditions, the
family is treated as resident but not ordinary resident in India.

Residential Status of a Firm and AOP [Sec. 6(2)]: As above.

Note: A firm/ an AOP cannot be ‘ordinarily’ or ‘not ordinarily resident’. The residential
status of the partners/ members of the firm/ association is not relevant in determining the
status of the firm/ association.
Residential Status of a Company [Sec. 6(3)]: An Indian company is always a 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.
Note: A company can never be ‘ordinarily’ or ‘not ordinarily resident’ in India.
In order to understand the relationship between residential status and tax liability, one must
understand the meaning of ‘Indian income’ and ‘foreign income’.
Indian income: Any of the following is an Indian income:
1. If income is received (or deemed to be received) in India during the previous year and at the
same time it accrues (or arises or is deemed to be accrued or arise) in India during the previous
year.
2. If income is received (or deemed to be received) in India during the previous year but it
accrues (or arises or is deemed to be accrued or arise) outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or arises or is
deemed to be accrued or arise) in India during the previous year.
Foreign income: If the following two conditions are satisfied, then such income is foreign
income-
1. Income is not received (or does not deemed to be received) in India; and
2. Income is not accrue or arise (or does not deemed to accrue or arise) in India.

Incidence of tax (Individual and HUF):

Resident and Resident but not Non-resident in

ordinarily ordinarily India
Indian Income Taxable in India Taxable in India Taxable in India
Foreign Income Taxable in India Conditional Taxable* Not Taxable
*1. If it is business income and business is controlled wholly or partly from India.
2. If it is income from profession which is set up in India.
No other foreign income like salary, rent, interest etc. is taxable in India in the hand of a
resident but not ordinarily resident taxpayer.
Any other taxpayer:

Resident in India Non- resident in India

Indian income Taxable in India Taxable in India
Foreign income Taxable in India Not taxable

Meaning of Tax planning: Tax planning is an art and the exercise of arranging financial affairs
of tax payers so as to reduce or delay the tax payment which would be necessary, if the words of
tax laws were to be followed in the obvious manner. Tax planning, therefore, may be defined as
arrangement of one’s financial and tax affairs in such a manner that, without violation in any
way legal provisions under the tax and other laws, full advantage is taken of all tax exemptions,
deduction, concessions, rebate, allowances, reliefs and benefits permitted under the tax laws so
that the burden of taxation on the taxpayer is reduce to the minimum.
Elements of tax planning:

 Tax planning is legally recognized.

 Planning in connection with income, expenditure and investment.
 Tax planning is moral
 Tax planning is in accordance with government policy.
 Tax planning reduces tax liabilities and increases after tax income.
 Basis of tax planning. (Deduction, exemption)
 Tax planning is a continuous process
 Tax planning is scientific.

Forms of tax planning:

 Tax planning through savings

 Tax planning on the basis of residential status
 Tax planning through various investments
 Tax planning in respect of income under each head
 Tax planning by changing the date of receipt of income
 Tax planning by establishing industrial units or undertaken in certain specific areas or
during specific periods

Objectives of tax planning:

 Reduction in tax liabilities

 Minimization of litigation
 Productive investment
 Healthy growth of economy
 Economic stability

Tax Avoidance
Tax avoidance is a technique by which incomes, expenditure and investments of an assessee are
so arrange that without violation tax laws his tax liability is reduced to the minimum by taking
advantages of the loopholes or lacunas of tax laws. Thus, there is a very thin line of
determination between tax planning and tax avoidance. The main element which distinguished
between tax planning and avoidance is the element of intention. An element of malafide motive
is involved in tax avoidance. Presence of the following in the tax planning would be termed as
tax avoidance:

 Malafide intentions
 Fraudulent motives
 Use of colorable devices
 Mis-representation or twisting of facts.
 Defeating the genuine spirit of law
 Considering only the strict interpretation of law and suppressing the legislative intent
behind it.
 Tax evasion
Tax evasion is a technique of reducing tax liability or avoiding tax liability by violating tax laws.
It is absolutely illegal. An assessee who is guilty of tax evasion may be punished by way of
penalty or prosecution. Tax evasion may involve the following:
 Knowing stating an untrue statement
 Submitting misleading documents
 Not maintaining proper and correct account of income earned, if required under the law
 Omission of material facts at the time of assessment
 Suppressing the relevant facts at the time of assessment
 Adopting unfair means or methods to evade tax liability

Tax Avoidance Tax Evasion

1. Tax avoidance is legal through it is immoral and

illegitimate. 1. Tax evasion is illegal and against the tax laws
2. In tax avoidance loopholes of laws are taken into 2. In tax evasion an attempt is made to evade tax
consideration for reducing tax liability. liability by violating the law or by using unfair means.
3. tax avoidance is the art of dodging tax without 3. Tax evasion is tax omission. In it the
breaking the law. law is violated.
4. It defeats the main intention of law. 4. It breaks the law
5. Tax avoidance is not punishable. 5. Tax evasion is punishable.
6. Tax avoidance is intentional tax planning before 6. Tax evasion is intentional attempt to
the actual tax. avoid payment of tax
7. It is based on imaginary and mis representation of 7. It is based on suppression or omission
facts of material facts.
Tax Management
Tax management and tax planning are the two sides of the same coin. Tax planning is not
possible without tax management. Tax planning is the technique by which an assessee plans to
reduce his tax liability to the minimum whereas tax management is the process of making the tax
planning to be successful. It means tax planning can be made successful through tax
management.

Following operations are included in tax management:

 Obtaining deep and detailed knowledge of tax provisions.
 Managing the affairs in such a way that all conditions for availing various deductions,
rebates, reliefs and exemptions are fulfilled.
 Adopting a suitable and legal methods of accounting by which correct income may be
ascertained.
 Maintaining proper records, documents and papers for satisfaction of tax authorities.
 Deducting tax at source and depositing the same in the exchequer well in time.
 Filling of the return within the prescribed time,
 Making proper arrangement of a person to present himself before the tax authorities as
and when required to explain about the return
Unit 2
Income from house property
Determination of gross annual value:
GAV is determined on the basis of following four factors:
A. Rent received: it is the actual amount received from a rental property. However, advance rent
cannot be rent received of the year of receipt.
Rent received= actual rent received, or,
Composite rent – expenses borne by the owner for providing facilities except
caretaker, or
Actual rent received excluding unrealized rent and rent for vacant time
But, if the tenant has undertaken to bear the cost of repairs, amount spent by the tenant cannot be
added to rent received to arrive at the annual value.
B. Municipal Value: the annual value determined by the local government body as Municipal
Corporation.
C. Reasonable or fair rent: Fair rent is that national rent which may be received in connection
with the property. The fair rent is determined on the basis of the location, cost, rental value of
similar property and historical importance of the property. Thus, the fair rent may be taken as
rent of the similar property in similar locality.
D. Standard rent: SR means the rent fixed or determined under the Rent Control Act. The
Supreme Court has held that SR is the maximum amount which a person can legally recover
from his tenant under Rent Control Act.

Process of determination of annual value:

A. Ascertain expected rent: Higher of municipal value or fair rent but not more than standard
rent
B. Compare expected rent with actual rent:
I) if actual rent is more than expect rent: gross annual value=actual rent
ii) if actual rent is less than expect rent then:
a. Gross annual income=Rent received if shortage is only due to vacancy
b. Gross annual income=expect rent – rent of vacant period (if shortage is partly due to vacancy
and partly due to other factors)
c. Gross annual income= expect rent, if shortage is due to other factors
Net annual value = GAV – Local municipal taxes.
 House property
Rented Self Occupied Not let out vacant house
1. Not covered by 1. Fully self occupied
Rent Control Act. 2. Not fully self occupied
2. Covered by rent a. not actually self occupied
Control Act. b. partly self occupied partly rented
c. self occupied for part year

Annual value of self occupied house property:

1. House property fully utilized throughout the previous year for self residential purpose
(Sec 23(2)a): the annual value of such house or part of house will be taken to be Nil, if the
following two conditions are satisfied:
a. the property or part thereof is not actually let during whole or any part of the previous year,
b. the owner has not derived any other benefit from the property during the previous year.
2. House property not fully utilized for self residential purpose (Sec 23(2)b) and 23(3): such
property can be divided into three group:

a. house property which is not actually occupied by the owner: the following conditions must be
satisfied:

1. the house property is not actually occupied by the owner by reason of the fact that owing to his
employment, business or profession carried on at any other place;

2. he resides at that other place in a building not owned by him;

3 such house property or part thereof is not actually let out during whole or any part of the
previous year, and

4. the owner has derived no other benefit from such property; the annual value will be Nil

b. house property a part of which is self occupied and remaining part is let out: the annual value
for self occupied part will be Nil and the annual value for rest part will be calculated in the same
manner.

c. House property which is self occupied for a part of the previous year and let out for the
remaining part of the previous year: annual value of such house shall be computed as if property
is let out throughout the previous year. Its expect rent shall be taken for full year but actual rent
received shall be taken only for the period for which it is actually let out.

3. More than one self occupied house properties (Sec 23(4)}: the annual value of only one of
these self occupied houses is taken as Nil. Remaining houses shall be deemed to be let out and
their annual value shall be calculated as let out houses.

Deductions:

1. Standard deduction U/s 24(a): 30% of annual value (not available for self occupied house)

2. Interest on Loan U/s 24(b):

 In case of a let out property, the whole amount of interest on loan is allowed as
deduction. Interest on a loan taken to repay an earlier loan taken for house property, is
also deductible.
 This deduction is not available for the successor of the property.
 In order to avail this deduction there must exist the relationship of lender and borrower.

In case of self occupied property: a maximum limit of Rs. 30,000 p.a. but if the loan is taken on
or after 1 April, 1999 and acquired or construction of property is completed within five years
from the end of the financial year in which the loan is borrowed, the maximum limit is 2,00,000
instead of 30,000. Such limit is only to the loan which has been taken only to acquire ot to
construct the house property, not for any other case like repair etc.

Computation of taxable income from house property:

Gross annual value being:

a. higher of municipal value or fair rent not exceeding the standard rent; i.e. expected rent

or,

b. actual rent received (excluding unrealized rent or rent for vacant period)

whichever is higher --------

Less: local taxes paid by the owner ---------

______

Net annual value ---------

Less: Standard deduction u/s/ 24 (a) @ 30% of A.V ---------

Interest on loan u/s 24(b) 30,000 or 2,00,000 ---------

Capital gain ( Inflation cost of index for the AY2017-18= 1125)

Income under the head capital gains is chargeable to tax if the following conditions are satisfied:

1. There is a capital asset. capital asset means property of any type held by an assessee, whether
or not connected with his business or profession. ‘property’ includes any right in or in relation to
an Indian company, including right of management or control. However, the following are not a
capital assets:

 Any stock in trade, consumable stores or raw materials held for the purpose of business
or profession.
 Personal effects, any movable property (included wearing apparel and furniture) held for
personal use or for the use of any member of the family dependent upon him but
jewellery, archaeological collections, drawings, painting or any work of art are treated as
capital assets.
 Agricultural land in a rural area in India, it should be situated in (i) any area within the
jurisdiction of a municipality or a cantonment board having a population of 10,000 or
more; or (ii) in any area specified by the govt. outside the local limit of a municipality but
within 8 kilometers.
 A few gold bonds and special bearer bonds
 Gold deposits bonds issued under the Gold Deposits Scheme,1999

2. It is transferred during the previous year.

3. Capital gain is generated because of transfer.

4. Capital gain is not exempt from tax.

Types of capital gains:

A. short term capital gain: a period of holding is less than 36 months (12 months in case of
shares, securities, listed debentures, mutual funds, UTI’s units and zero based coupons, in case of
unlisted shares, 24 months)

B. long term capital gains: a period of holding is more than 36 months (12 months in case of
shares, securities, listed debentures, mutual funds, UTI’s units and zero based coupons).

Transfer of assets: Transfer includes sale, exchange or relinquishments (surrender) of asset. The
following are not treated as transfer:

1. Distribution of assets in kind by a company to its shareholders on its liquidation.

2. Any distribution of capital assets in kind by a HUF to its members at the time of total or
partial partition.
 3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception- gift
of ESOP shares is chargeable to tax and fair market value of the share on the date of
transfer is taken as sale consideration)
4. Transfer of capital assets between holding and its 100% subsidiary company if the
transferee company is an Indian company.
5. Transfer of capital asset in the scheme of amalgamation/ demerger, if the transferee
company is an Indian company.
6. Transfer of shares in amalgamating/ demerged company in lieu of allotment of shares in
amalgamated company.
7. Transfer of capital assets in a scheme of amalgamation of banking company with a
banking institution.
8. Transfer of shares in an Indian company held by a foreign company to another foreign
company in a scheme of amalgamation/ demerger of the two foreign companies, if a few
conditions are satisfied.
9. Transfer of capital asset by a non-resident of foreign currency convertible bonds or GDR
to another non- resident if the transfer is made outside India and if a few conditions are
satisfied.
10. Transfer of any work of art, archaeological, book manuscript, drawing, painting or
photograph to the govt. or a university or the national art gallery or any other notified
public museum.
11. Any transfer by the way of conversion of bonds or debentures, debentures-stock or
deposit certificates in any form, of the shares or the debentures of that company.
12. Land transferred by a sick industry, if a few conditions are satisfied
13. Transfer of a capital assets by a private company/ unlisted public company to a limited
liability partnership in the case of conversion of company into LLP.
14. Transfer of capital assets at the time of conversion of a firm/ sole proprietary concern in a
company, if a few conditions are satisfied.
15. Any transfer involved in a scheme for lending of any securities, if a few conditions are
satisfied.
16. Any transfer of capital asset in a reverse mortgage.

Computation of capital gain

Short term capital gain (STCG): full value of consideration – (cost of improvement +
expenditure pertaining to transfer incurred by the transferor).

Long term capital gain (LTCG): full value of consideration – (indexed cost of acquisition +
indexed cost of improvement + expenditure pertaining to transfer incurred by the transferor).
Note: it does not include any expenditure on improvement incurred before April 1, 1981

However, in the following cases the benefits of indexation is not available even if the capital
gain is long term:
  Bond or debenture, but other than capital indexed bonds issued by the govt.
 Depreciable assets.
 Slump sale.
 Units/ GDR/ securities given in sections 115AB, 115AC, 115ACA and 115AD.
 Shares and debentures in Indian acquired by a non- resident in foreign currency, if a few
conditions are satisfied.

How to convert cost of acquisition/ improvement into indexed cost of acquisition/

improvement:

Cost of acquisition x cost inflation index (CII) of the year in which the capital asset is transferred
/ CII of the year in which the assets was first held by the assessee.

Cost of improvement x cost inflation index (CII) of the year in which the capital asset is
transferred / CII of the year in which the improvement took place.

When cost of asset to the previous owner is taken into consideration:

1. Acquisition of a property by amember at the time of partition of HUF

2. Acquisition of a property by gift/ will or by succession etc.
3. Acquisition a capital asset by a holding company from its 100% subsidiary company or
vice versa, if the transferee company is an Indian company.
4. Acquisition of property in a scheme of amalgamation, if the transferee company is an
Indain company.
5. Acquisition of property in a scheme of conversion of private company/ unlisted public
company into LLP,
6. Acquisition of property in a scheme of conversion of a firm/ sole proprietary concern in
accompany.

If the capital asset was acquired by the assessee or by the previous owner, before April 1, 1981,
the fair market value of the capital asset on April 1 1981 can be taken as cost of acquisition.

If capital asset is converted into stock in trade during the previous year relevant to the
assessement year 1985-86, the following special rules are applicable.-

 It will be assumed that capital asset is transferred in the year in which conversion taken
place.
 Fair market value of the asset on the date of conversion will be taken as full value of
conversion.
 However, capital gain will not taxable in the year of conversion. It will be taxable in the
year in which stock in trade is transferred.
Bonus shares: if bonus shares were allotted before April 1, 1981, the cost of acquisition is the
fair market value on April1, 1981. If bonus shares are allotted after April 1 1981, cost of
acquisition is taken as zero.

Transfer of rights entitlement: amount realized by an existing shareholder by selling rights

entitlement i.e. right to acquire additional shares in the company at a pre determined price, is
taxable in the year of transfer of the right entitlement. Cost of such right is always taken as zero
and the capital gain is deemed as short term capital gain.

Conversion of debenture/ bonds into shares: conversion is not taken as transfer. Cost of
acquisition of debenture/ bonds will become cost of acquisition of shares. To find out whether
the shares are short term or long term capital, the period of holding shall be counted from the
date of allotment of shares.

Transfer of sweat shares: if sweat shares are allotted during 1999-2000 or on or after April 1,
2009, cost of acquisition is fair market value on the date of exercise of option. If shares are
allotted during April1,2007 and March 31, 2009, the fair market value on the date of vesting of
option, will the cost of acquisition. If shares are allotted before April 1, 2007(not being during
1999-2000), cost of acquisition will be the amount actually paid by the employee.

Long term capital gains are taxable u/s 112 at the rate of 20%. The following point should be
noted:

No deduction is available from long term capital gains u/s 80C to 80U

The benefit of exemption limit is available only in the case of a resident individual or a resident
HUF.

In the case of listed security, any unit of UTI/ mutual fund or zero coupon bonds, if indexation
benefit is not taken, capital gains will be taxable at the option of the taxpayer at the rate of 10%

In the case of long term capital gain covered by sections 115AB, 115AC, 115AD OR 115E, tax
rate is 10%.

When we buy any kind of property for a lower price and then subsequently sell it at a higher
price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a
regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is
not recurring, i.e., not occur again and again periodically.
Opposite of gain is called loss; therefore, there can be a loss under the head capital gain. We are
not using the term capital loss, as it is incorrect. Capital Loss means the loss on account of
destruction or damage of capital asset. Thus, whenever there is a loss on sale of any capital asset
it will be termed as loss under the head capital gain.
OBJECTIVE
After going through this lesson you will be able to understand the meaning of capital asset, types
of capital asset, what is not capital asset, computation of capital gain, types of capital gains etc.
You will also be learning how to calculate the capital gain of simple problems. The capital gain
is also an income and it is taxable too, at the end of the chapter you will also learn the tax
treatment of the capital gain.
BASIS OF CHARGE
The capital gain is chargeable to income tax if the following conditions are satisfied:
1. There is a capital asset.
2. Assessee should transfer the capital asset.
3. Transfer of capital assets should take place during the previous year.
4. There should be gain or loss on account of such transfer of capital asset.
CAPITAL ASSET
Any income profit or gains arising from the transfer of a capital asset is chargeable as capital
gains. Now let us understand the meaning of capital asset. Capital Asset means property of any
kind, whether fixed or circulating, movable or immovable, tangible or intangible, held by the
assesses, whether or not connected with his business or profession, but does not include, i.e.,
Capital Assets exclude:
1. Stock in trade held for business
2. Agricultural land in India not in urban area i.e., an area with population more than 10,000.
3. Items of personal effects, i.e., personal use excluding jewellery, costly stones, silver, gold
4. Special bearer bonds 1991
5. 6.5%, 7% Gold bonds & National Defence Bonds 1980.
6. Gold Deposit Bonds 1999.
TYPES OF CAPITAL ASSET
There are two types of Capital Assets:
1. Short Term Capital Assets (STCA): An asset, which is held by an assessee for less than 36
months, immediately before its transfer, is called Short Term Capital Assets. In other words, an
asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term
Capital Assets.
2. Long Term Capital Assets (LTCA): An asset, which is held by an assessee for 36 months or
more, immediately before its transfer, is called Long Term Capital Assets. In other words, an
asset, which is transferred on or after 36 months of its acquisition by assessee, is called Long
Term Capital Assets.
The period of 36 months is taken as 12 months under following cases:
• Equity or Preference shares,
• Securities like debentures, government securities, which are listed in recognised stock
exchange,
• Units of UTI
• Units of Mutual Funds
• Zero Coupon Bonds
TYPES OF CAPITAL GAIN
The profit on transfer of STCA is treated as Short Term Capital Gains (STCG) while that on
LTCA is known as Long Term Capital Gains (LTCG). While calculating tax the STCG is
included in Total Income and taxed as per normal rates while LTCG is taxable at a flat rate @
20%. The taxability is discussed in details later in this lesson.
TRANSFER
Capital gain arises on transfer of capital asset; so it becomes important to understand what is the
meaning of word transfer. The word transfer occupy a very important place in capital gain,
because if the transaction involving movement of capital asset from one person to another person
is not covered under the definition of transfer there will be no capital gain chargeable to income
tax. Even if there is a capital asset and there is a capital gain.
The word transfer under income tax act is defined under section 2(47). As per section 2 (47)
Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or
extinguishments of any right therein or the compulsory acquisition thereof under any law.
In simple words Transfer includes:
• Sale of asset
• Exchange of asset
• Relinquishment of asset (means surrender of asset)
• Extinguishments of any right on asset (means reducing any right on asset)
• Compulsory acquisition of asset.
The definition of transfer is inclusive, thus transfer includes only above said five ways. In other
words, transfer can take place only on these five ways. If there is any other way where an asset is
given to other such as by way of gift, inheritance etc. it will not be termed as transfer.
COMPUTATION OF CAPITAL GAINS
The capital gain can be computed by subtracting the cost of capital asset from its transfer price,
i.e., the sale price. The computation can be made by making a following simple statement.
Statement of Capital Gains
Particulars Amount
Full Value of Consideration ---
Less: Cost of Acquisition*(COA) ---
Cost of Improvement*(COI) ---
Expenditure on transfer ---
_________
Capital Gains ----

Less: Exemption U/S 54 -----

_________
Taxable Capital Gains
* To be indexed in case of LTCA
FULL VALUE OF CONSIDERATION
Full value of consideration means & includes the whole/complete sale price or exchange value or
compensation including enhanced compensation received in respect of capital asset in transfer.
The following points are important to note in relation to full value of consideration.
• The consideration may be in cash or kind.
• The consideration received in kind is valued at its fair market value.
• It may be received or receivable.
• The consideration must be actual irrespective of its adequacy.
COST OF ACQUISITION
Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under
transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of
registration, storage etc. expenses incurred on completing transfer.
In other words, cost of acquisition of an asset is the value for which it was acquired by the
assessee. Expenses of capital nature for completing or acquiring the title are included in the cost
of acquisition.
Indexed Cost of Acquisition = COA X CII of Year of transfer
________________________
CII of Year of acquisition
If capital assets were acquired before 1.4.81, the assesses has the option to have either actual cost
of acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the
value as on 1.4.81 then the indexation will also be done as per the CII of 1981 and not as per the
year of acquisition.
COST OF IMPROVMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any addition
or improvement in the capital asset. It also includes any expenditure incurred in protecting or
curing the title. In other words, cost of improvement includes all those expenditures, which are
incurred to increase the value of the capital asset.

Indexed Cost of improvement = COA X CII of Year of transfer

________________________
CII of Year of improvement
Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored. The
reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should
have been purchased before 1st April 1981.
If asset is purchased before 1st April we consider the fair market value. The fair market value of
asset on 1st April 1981 will certainly include the improvement made in the asset.
EXPEDITURE ON TRANSFER
Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on
transfer. It is fully deductible from the full value of consideration while calculating the capital
gain. Examples of expenditure on transfer are the commission or brokerage paid by seller, any
fees like registration fees, and cost of stamp papers etc., travelling expenses, and litigation
expenses incurred for transferring the capital assets are expenditure on transfer.
Note: Expenditure incurred by buyer at the time of buying the capital assets like brokerage,
commission, registration fees, cost of stamp paper etc. are to be added in the cost of acquisition
before indexation.
Illustration 8.1 X purchased a house property for Rs. 1, 00,000 on 31st July 2000. He constructed
the first floor in March 2003 for 1, 10,000. The house property was sold for Rs. 5, 00,000 on 1st
April 2005. The expenses incurred on transfer of asset were Rs. 10,000. Find the capital gain.
Solution: Since the house property is a capital Asset therefore the capital gain will be computed.
The house property was sold after 36 months of its acquisition therefore the capital gain will be
long term capital gain (LTCG). Date of improvement (i.e., additional construction of first floor)
is irrelevant.
Statement of capital Gain
Illustration 8.2
If in the above question the property was acquired by Mr. X on 31st January 2003,
then what will be your answer?
Solution: In this case the house property was sold before 36 months of its acquisition therefore
the capital gain will be short-term capital gain (STCG). Date of improvement (i.e., additional
construction of first floor) is irrelevant.
Statement of capital Gain

Illustration 8.3
Mr. X acquired gold jewellery for Rs. 6,000 in 1979 (Market Value as on 1st April 1981 was Rs.
10,000). The jewellery was sold by Mr. X for Rs. 49,800 in June 2005. Calculate the taxable
amount of capital gain, if the expense on transfer is ¼%.
Solution: Since the jewellery was purchased before 1st April 1981, therefore the assessee has the
option to choose actual cost or FMV as on 1st April was his cost of Acquisition. Since the FMV
is higher therefore, it will be beneficial for Mr. X to choose FMV as his COA.
This is a loss of Rs. 25, we are not using the word long-term capital loss, as it is incorrect, it
means loss due to damage etc.
Illustration 8.4
Mr. X invested Rs. 50,000 in gold jewellery and Rs. 50,000 in equity shares on 1 st June 2004.
The jewellery was sold by Mr. X for Rs. 1, 20,000 and shares for Rs. 1, 80,000 on 4th August
2005. There was a ½% brokerage on both the investments, both at the time of purchase and sale.
Calculate the taxable amount of capital gain.
Solution: Since it is more than 12 months in case of share since its acquisition therefore, shares
are long-term capital asset and in case of gold jewellery it is less than 36 months therefore it is a
short-term capital asset.

Note: Expenses on acquisition are added to COA before indexation, while expenses on transfer
(sale) are subtracted separately to find capital gain.
EXEMPTION FROM CAPITAL GAINS
Exemption means a reduction from the taxable amount of capital gain on which tax will not be
levied and paid. The exemptions are given under section 54, these exemptions are of various
types but here we will discuss only one of the exemptions relating to the house property.
Exemption u/s 54
The exemption u/s 54 relates to the capital gain arising out of transfer of residential house. The
exemption is available to only Individual assessee. The exemption relates to the capital gains
arising on the transfer of a residential house. Conditions: Exemption is available if: -
1. House Property transferred was used for residential purpose.
2. House Property was a long term capital asset.
3. Assesses has purchased another house property within a period of one year before or two years
after the date of transfer or has constructed another house property within three years of date of
transfer i.e. the construction of the new house property should be completed within three years.
The date of starting of construction is irrelevant.
Amount of Exemption: will be the least of: -
1. Capital Gains
2. Cost of new house.
Withdrawal of exemption: If the newly acquired house property is transferred within three years
of acquisition. Thus the earlier exempted capital gain will be charged to tax in the year in which
the newly acquired house property is transferred. For that the cost of acquisition of the newly
acquired house property will be reduced by the amount of exemption already availed thus the
cost will reduce and thus the capital gains on the new house property will be more. Above all the
new house property will be a STCA since for withdrawal of exemption it should had been sold
within three years of its acquisition thus now the capital gain of the new house property will be
STCG which is charged as per the normal rates which may be 30% (a higher rate as compare to
the flat rate of LTCG of 20%) in the case of individuals.
Illustration 8.5 Assume in Illustration 7.1 the assess purchases a new house property for Rs.
2,00,000 on 30th April 2004 how much exemption will be available to him under section 54.
Solution: Since Mr. X has purchased a new house within one year before of the date of sale of
old house property, therefore, he will be eligible for exemption u/s 54. The exemption is least of:
1. Cost of new house property , i.e., Rs. 2,00,000
2. LTCG i.e., Rs. 2,45, 283
Therefore, the exemption will be Rs. 2, 00,000 and the taxable capital gain shall
Be:

Illustration 8.6 Assume in illustration 7.5 Mr. X sell the new house property in
June 2005 for Rs. 7, 00,000 what will be the tax implication.
Solution: In this case since the new house property has been sold within 3 years of its
acquisition, therefore the exemption on the purchase new house property will be withdrawn by
reducing the cost of acquisition of the new house property, in the following manner.
Since the new house property is sold within 36 months of acquisition therefore it is a short term
capital asset.

CAPITAL GAIN ON DEPRECIABLE ASSESTS

Income Tax Act does not defines the term depreciation. However depreciation means a
permanent delivery in the original cost of the asset due to wear and tear, constant use, new
technology etc.
In Income Tax Act depreciation is provided on only four types of assets:
1. Buildings
2. Furniture
3. Machinery and plant
4. Intangible Assets
For calculating depreciation different blocks are made based on the name of asset and then the
rate of depreciation, thus a block will contain only that asset which will have the same name and
same depreciation.
Depreciation = (WDV of the block as on 1st April of PY + Addition to the block – Selling price
of the assets sold) * Depreciation rate.
If an asset is used for less than 180 days during a P.Y. then only ½ of the depreciation will be
provided on that asset.
Illustration 8.7 Mr. X has following assets as on 1st April 2005:
Assets Rate of depreciation W.D.V
Building -A 10% 10, 00,000
Building – B 20% 50, 00,000
Building – C 10% 12, 00,000
Plant - X 20% 24, 00,000
Following Assets were purchased during the year:
Assets Rate of depreciation Purchase price Purchase/Sale Date
Building –D 10% 10, 00,000 Purchase 1/5/05
Building – F 10% 2, 00,000 Purchase 1/2/06
Plant -Y 20% 4, 00,000 Purchase 2/2/06
Following Asses were sold during the year:
Assets Rate of depreciation Sale Price
Building -A 10% 8, 00,000
Building – C 10% 3, 00,000
Plant - X 20% 12, 00,000
Calculate the depreciation as per income tax act.
* Depreciation on plant is not charged as there was only one plant in the block and it is sold thus
physically the block cease to exist. In this case there will be a short term capital gain which will
be computed as below:

Illustration 8.8 In the illustration 7.7 if the sale price of plant X is 32, 00,000 and Building C is
29, 00,000 what will be answer.
Solution: In this case there will be short term capital gain on plant X for Rs. 4,00,000 and in case
of building block – 10 % there will be short term capital gain again because the sale price of
asset is more than the opening WDV and the purchases, even though the block physically exist
there will not be any depreciation since the whole cost of the block has been recovered.

TAXATION OF LTCG
The LTCG is taxable at a flat rate of 20%, however in case of individual the taxation is as
follows:
If the other incomes except LTCG is less than Rs. 1, 00,000 (maximum non taxable limit), Then
Tax on LTCG = 20% (LTCG – (1, 00,000 – other income))
If the other incomes except LTCG is greater than Rs. 1, 00,000, Then Tax on LTCG = 20%
LTCG
Illustration 7.9 Compute the tax on LTCG under following cases:
i) Business income Rs. 4,00,000 LTCG Rs. 1,20,000
ii) Business income Rs. 40,000 LTCG Rs. 1,20,000
Income from Business and Profession:

Admissible Deductions:

(I) Expenses or losses expressly allowed:

Building expenses such as rent, repairs and insurance

Repairs and insurance of machinery, plant and furniture

Depreciation

Expenditure on scientific research

Revenue expenditure incurred by the assessee

Payment to approved research association, educational or other institutions: equal to 1.75 of sum

Payment to an Indian company for scientific research: equal to 1.25 of such sum

Payment to a University, college or other institution for social science or statistical research:1.25
of sum

Capital expenditure on scientific research

Payment to a national laboratory

Expenditure on scientific research on approved in house research and development facility

Consequences on amalgamation

Expenditure on acquisition of patent rights or copyrights

Deduction in respect of capital expenditure on acquisition of patents or copyrights incurred on or

after 1 April, 1998: chargeable to depreciation @25% of its written down value.

INCOME UNDER THE HEAD “INCOME FROM OTHER SOURCES” AND IT’S
COMPUTATION
1. BASIS FOR CHARGE:- The Following conditions must be satisfied for charging income to
tax under income under the head income from other sources:-
a) There must be an income.
b) It should not be an exempt income.
c) Such income should not be charged to tax under any other head of income.
Therefore this head of income is also called as “residuary head of income”.
2. INCOMES TAXABLE UNDER THIS HEAD: - The various types of incomes taxable
under this head can be classified into two parts. These are explained as follows:-

Case 1: - Any Kind of dividend, paid, declared or distributed by a Indian company or units of
mutual fund is liable to dividend distribution tax and hence is exempt from tax in hands of
recipient under section 10(34).
Case 2: -Taxable dividend in case of a foreign company is calculated as follows:-
Gross dividend xxx
Less: -collection charges xxx
Less:-Interest on money borrowed xxx
Less: - Any other expenditure xxx
Equals: - TAXABLE DIVIDEND xxx
Case 3:- Taxable dividend in case of a co-operative society is calculated as follows:-
Gross dividend xxx
Less: -collection charges xxx
Less:-Interest on money borrowed xxx
Less: - Any other expenditure xxx
Equals: - TAXABLE DIVIDEND xxx
NOTE: - INTEREST ON MONEY CAN BE CLAIMED AS A DEUCTION EVEN IF NO
INCOME IS EARNED BY WAY OF DIVIDEND
4. WINNINGS FROM LOTTERIES , CROSSWORD PUZZLES, HORSE RACES,
CROSSWORD PUZZLES, GAMBLING: -
Any kind of income in the nature of lotteries, Crossword puzzles, Horse races, card games,
gambling is taxable at a flat rate of 30%( plus 2% education cess and 1% Secondary and
higher education cess)
NOTE: - a) No deduction is allowed from such income
b) Only deduction on account of expenses relating to owning and maintaining horses is allowed.
c) GROSSING UP: - As TDS is deducted from such income @ of 30%, Such TDS is included in
Dividend income actually received by way of reverse engineering. Such Reverse engineering is
also required to be done in case the organizing company pays tax on behalf on winner. It is to be
noted that such calculation is required only in the case where dividend income actually received
is given and not when dividend income is given. Reverse engineering is done in following
manner: -

5. INTEREST ON SECURITIES: - Interest is taxable on “due” or “receipt” basis, if no

method is adopted by assessee, it is always taxable on “due” basis. It is taxable in hands of
the person who holds the securities on record date (date on which interest becomes due)
and whole amount of interest would be taxable in hands of assessee who holds it on record
date whether he holds securities for whole period or not.
It is to be noted that due care has to adopted while calculating amount of taxable interest as
in some cases there might be written that assessee purchased the securities from company
directly and in this case interest only for the period for which securities are held by the
assessee would be paid to assessee and only that much interest would be taxable.
Note: - It is to be noted that reverse Engineering is also required in case TDS is deducted on
Interest income received. It is also called as grossing up of interest income received. It is done in
following manner:-

It is taxable in the following manner:-

Deductions from interest income:-

a) Collection charges
b) Interest on loan for money borrowed for purchase of securities
c) Any other expenditure, not being of capital nature, expended wholly for the purpose of
earning interest income.
TAXABLE INTEREST INCOME: - Interest income Less Deductions allowed.
6. SOME SPECIAL TRANSACTIONS:-
a) Bond Washing Transactions:-
One person sells securities to another person
Sale is just before Record Date( Date on which interest becomes due)
Such person reacquires title after interest is received
 Then, Such Income is Taxable in hands of transferor
However this provision is not applicable if it is proved:-
There was no avoidance of tax
Avoidance was exceptional and not systematic
b) Dividend Stripping Transactions:-
One person acquires securities or units, 3 months before record date
Such person sells them: -
Securities within 3 months after record date
Units within 9 months after record date
And the dividend on such securities or units is exempt from tax
Then, any capital loss on sale of such securities, to the extent of such dividend, Shall be
ignored for the purpose of computing his taxable income, meaning that such capital loss would
not b allowed to b set off.
c) Bonus stripping: -
This provision is applicable in case of units only
Where one person acquires units 3 months prior to record date,
such person is entitled to bonus units
and he sells all or any of such units within 9 months after record date, retaining any part or all
of additional units
then any loss arising on sale of such units shall be ignored
Further the amount of loss, so ignored, would be deemed to be cost of the additional units held
by the assessee.
7. INCOME FROM LETTING OUT OF PLANT, MACHINARY, FURNITURE: -
If such Income is not taxable under income under the head “profits and gains from business and
profession”, it is taxable under this head.
However Deduction on account of repairs, Depreciation, Insurance premium is allowed as a
deduction.
8. INCOME FROM COMPOSITE LETTING OF PLANT< MACHINARY OR
FURNITURE AND BUILDING: - Such Composite rent would be taxable in income under the
head “income from other sources” only when such income is not taxable under income under the
head “profits and gains from business and profession”.
However, deduction on account of:-
Current repairs to building
Repairs to plant, Furniture
Depreciation
Insurance premium or
Any other expenditure
Is allowed under section 57.
It is to be noted that Deduction on account of only current repairs is allowed, in case of capital
repairs, depreciation on such capital repairs is allowed.
9. GIFTS (section 56(2)(vi) ) : - The amount of gifts is taxable as follows: -
PARTICULARS AMOUNT TAXABLE
CASH GIFT EXCEEDING Rs. 50000 WHOLE AMOUNT IS TAXABLE
IMMOVABLE PROPERTY WITHOUT WHOLE AMOUNT IS TAXABLE
CONSIDERATION WITH STAMP
DUTY VALUE EXCEEDING Rs. 50000
MOVABLE PROPERTY WITHOUT WHOLE AMOUNT IS TAXABLE
CONSIDERATION WITH FARE
MARKET VALUE EXCEEDING Rs.
50000
MOVABLE PROPERTY WITHOUT THE WHOLE OF DIFFRENCE
ADEQUATE CONSIDERATION AND BETWEEN FARE MARKET VALUE
DIFFERENCE BETWEEN FARE AND CONSIDERATION IS TAXABLE
MARKET VALUE AND
CONSIDERATION EXCEEDS Rs.50000
In case of immovable property if there is inadequate consideration, Tax would be charged on the
transferor in nature of capital gains on the basis of stamp duty value but there would be no tax on
the transferee.
CASES WHERE GIFTS ARE NOT TAXABLE: - GIFT RECEIVED FROM A REALTIVE
GIFT RECEIVED ON MARRIAGE OF INDIVIDUAL
RECEIVED UNDER WILL OF INDIVIDUAL
RECEIVED IN CONTEMPLATION OF DEATH OF PAYER OR DONOR
GIFT RECEIVED FROM ANY LOCAL AUTHORITY
GIFT RECEIVED FROM ANY INSTITUTION OR FUND DEFINED u/s 10(23C)
GIFT RECEIVED FROM ANY TRUST OR INSTITUTION REGISTERED u/s 12AA
HERE REALTIVE MEANS:-
Spouse of the individual
Brother and sister of the individual
Brother and sister of spouse of the individual
brother and sister of either of parents of individual
Any lineal ascendant or descendant of the individual
Any lineal ascendant or descendant of spouse of the individual
Spouse of persons referred to in (ii) and (iv) above
TAXABILITY OF SHARES RECEIVED BY FIRM OR COMPANY FOR
INADEQUATE OR WITHOUT CONSIDERATION (section 56(2)(viia)): -
Where a firm or company, not being a company in which public is substantially interested
Receives from a person or group of persons on or after 1-6-2010
Any property, being shares of a company, not being a company in which public is
substantially interested: -
Without consideration: - The aggregate Fair market value of which exceeds Rs. 50000, such
amount of FMV is to be taxed in hands of recipient.
For inadequate consideration: - Where Difference between Fair market Value and
Consideration exceeds Rs.50000, such difference is to be taxed in hands of recipient.
It is to be noted that, this section would not include transactions undertaken for the purpose
of re-organization, amalgamation and demerger.
INTEREST ON COMPENSATION OR ENHANCED COMPENSATION: - It is taxable
in the year in which it is received.
It is taxable under income under the head “income from other sources”.
DEDUCTION ADMISSIBLE: - From such interest a sum equal to 50% of the interest would
be allowed as a deduction and no other deduction would be admissible.
12. FAMILY PENSION: - After death of employee if any family pension is received by his
legal heirs, such income would be taxable in hands of legal heir under income under the head
“income from other sources”.
DEDUCTION ADMISSIBLE: - A sum equal to 1/3 of such pension or Rs. 15000 Whichever
is less would be allowed as a standard deduction from such pension.
13. AMOUNTS NOT DEDUCTIBLE (section 58): -
The following expenses are not deductible while computing income under the head “income
from other sources”:-
Personal expenses
Interest paid out of India without deducting TDS
Salary paid out of India without deducting TDS
Income tax, wealth tax
Expenditure of amount more than Rs. 20000(Rs. 35000 in case of goods carrier)on which A/c
Payee Cheque is not paid
Expenditure in connection with winning of lotteries, Card games, etc.
14. DEEMED INCOME (section 59): - Where any allowance or deduction is made in any
assessment year for any loss under income under the head “income from other sources”, and in
subsequent year assessee recovers the same, the amount so received would be taxable under
Income under the head “income from other sources”.

Deductions on Section 80C, 80CCC, 80CCD & other 80 Deductions

Section 80C
Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple
terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C.
This deduction is allowed to an Individual or an HUF.
A maximum of Rs 1, 50,000 can be claimed for the financial year 2016-17. The limit for the
financial year 2017-18 is also Rs 1, 50,000.
If you have paid excess taxes, but have invested in LIC, PPF, Mediclaim etc., you can file your
Income Tax Return and get a refund.

Section 80CCC: Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer
This section provides a deduction to an Individual for any amount paid or deposited in any
annuity plan of LIC or any other insurer. The plan must be for receiving a pension from a fund
referred to in Section 10(23AAB).
If the annuity is surrendered before the date of its maturity, the surrender value is taxable in the
year of receipt.
Section 80CCD: Deduction for Contribution to Pension Account
Employee’s contribution – Section 80CCD (1) Allowed to an individual who makes deposits
to his/her pension account. Maximum deduction allowed is 10% of salary (in case the taxpayer is
an employee) or 10% of gross total income (in case the taxpayer being self-employed) or Rs 1,
50,000,whichever is less.
From FY 2017-18 – In the case of a self-employed individual, maximum deduction allowed is
20% of gross salary instead of 10% (earlier subject to a maximum of Rs1, 50,000).
However, the combined maximum limit for section 80C, 80CCC and sec 80CCD (1)
deduction is Rs 1, 50,000, which can be availed.
Deduction for self-contribution to NPS – section 80CCD (1B) A new section 80CCD (1B) has
been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a
taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.
Employer’s contribution to NPS – Section 80CCD (2) Additional deduction is allowed for
employer’s contribution to employee’s pension account of up to 10% of the salary of the
employee. There is no monetary ceiling on this deduction.

Deductions on Interest on Savings Account

Section 80 TTA: Deduction from Gross Total Income for Interest on Savings Bank Account
A deduction of maximum Rs 10,000 can be claimed against interest income from a savings bank
account. Interest from savings bank account should be first included in other income and
deduction can be claimed of the total interest earned or Rs 10,000, whichever is less. This
deduction is allowed to an individual or an HUF. And it can be claimed for interest on deposits
in savings account with a bank, co-operative society, or post office. Section 80TTA deduction is
not available on interest income from fixed deposits, recurring deposits, or interest income from
corporate bonds.

Deductions on House Rent

Section 80GG: Deduction for House Rent Paid Where HRA is not Received

 This deduction is available for rent paid when HRA is not received. The taxpayer, spouse
or minor child should not own residential accommodation at the place of employment.
 The taxpayer should not have self-occupied residential property in any other place.
 The taxpayer must be living on rent and paying rent.

Deduction available is the minimum of:

1. Rent paid minus 10% of total income

2. Rs 5000/- per month
3. 25% of total income
For the financial year 2016-17 – Deduction calculation has been raised to Rs 5,000 a month from
Rs 2,000 per month. Therefore a maximum of Rs 60,000 per annum can be claimed as a
deduction.

Deductions on Education Loan for Higher Studies

Section 80E: Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed for interest on loan taken for pursuing higher education. This loan may
have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a
legal guardian. The deduction is available for a maximum of 8 years or till the interest is paid,
whichever is earlier. There is no restriction on the amount that can be claimed.

Deduction for First Time Home Owners

Section 80EE: Deductions on Home Loan Interest for First Time Home Owners

For Financial Year 2013-14 and Financial Year 2014-15

This section provides a deduction on the home loan interest paid. The education under this
section is available only to individuals for the first house purchased where the value of the house
is Rs 40 lakh or less. And the loan taken for the house is Rs 25 lakh or less. The loan has to be
sanctioned between 01.04.2013 to 31.03.2014. The aggregate deduction allowed under this
section cannot exceed Rs 1,00,000 and is allowed for financial years 2013-14 & 2014-15
(Assessment year 2014-15 and 2015-16).
This deduction is not available for the financial year 2015-16 (Assessment year 2016-17).
For Financial Year 2016-17:
This section was revived in Budget 2016 and is applicable starting FY 2016-17. The deduction
under this section is available only to an individual who is a first time home owner. The value of
the property purchased must be less than Rs 50 lakh and the home loan must be less than Rs 35
lakh. The loan must be taken from a financial institution and must have been sanctioned between
01.04.2016 to 31.03.2017.
Under this section, an additional deduction of Rs 50,000 can be claimed on home loan interest.
This is in addition to deduction of Rs 2,00,000 allowed under section 24 of the Income Tax Act
for a self-occupied house property.
If you’re claiming this deduction in FY 2016-17, then you can continue to claim this deduction
till the loan is repaid.
For Financial Year 2017-18:
This deduction is not available for the running FY 2017-18.
Deductions on Rajiv Gandhi Equity Saving Scheme (RGESS)

Section 80CCG: Rajiv Gandhi Equity Saving Scheme (RGESS)

The Rajiv Gandhi Equity Saving Scheme (RGESS) was launched after the 2012 Budget.
Investors whose gross total income is less than Rs. 12 lakhs can invest in this scheme. Upon
fulfillment of conditions laid down in the section, the deduction is lower of, 50% of the amount
invested in equity shares or Rs 25,000 for three consecutive Assessment Years.
Rajiv Gandhi Equity Scheme has been discontinued starting from April 1, 2017. Therefore, no
deduction under section 80CCG will be allowed from AY 2018-19.
However, if you have invested in the RGESS scheme in FY 2016-17 (AY 2017-18), then you
can claim deduction under Section 80CCG until AY 2019-20.

Deductions on Medical Insurance

Section 80D: Deduction for premium paid for Medical Insurance

Deduction is available up to Rs. 25,000/- to a taxpayer for insurance of self, spouse and
dependent children. If individual or spouse is more than 60 years old the deduction available
is Rs 30,000. An additional deduction for insurance of parents (father or mother or both) is
available to the extent of Rs. 25,000/– if less than 60 years old and Rs 30,000 if parents are more
than 60 years old. For uninsured super senior citizens (more than 80 years old) medical
expenditure incurred up to Rs 30,000 shall be allowed as a deduction under section
80D. Therefore, the maximum deduction available under this section is to the extent of Rs.
60,000/-. (From AY 2016-17, within the existing limit a deduction of up to Rs. 5,000 for
preventive health check-up is available).

Deductions on Medical Expenditure for a Handicapped Relative

Section 80DD: Deduction for Rehabilitation of Handicapped Dependent Relative

Deduction is available on:

1. Expenditure incurred on medical treatment, (including nursing), training and

rehabilitation of handicapped dependent relative
2. Payment or deposit to specified scheme for maintenance of dependent handicapped
relative.

Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.
Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,25,000.A
certificate of disability is required from prescribed medical authority.
Note: A person with ‘severe disability’ means a person with 80% or more of one or more
disabilities as outlined in section 56(4) of the ‘Persons with disabilities (Equal opportunities,
protection of rights and full participation)’ Act.
  Certificate can be taken from a Specialist as specified.
 Patients getting treated in a private hospital are not required to take the certificate from a
government hospital.
 Patients receiving treatment in a government hospital have to take certificate from any
specialist working full-time in that hospital. Such specialist must have a post-graduate
degree in General or Internal Medicine or any equivalent degree, which is recognised by
the Medical Council of India.
 Certificate in Form 10I is no longer required. The certificate must have – name and age
of the patient, name of the disease or ailment, name, address, registration number and the
qualification of the specialist issuing the prescription. If the patient is receiving the
treatment in a Government hospital, it should also have name and address of the
Government hospital.

For financial year 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and
Rs 1,00,000 has been raised to Rs 1,25,000.

Deductions on Medical Expenditure on Self or Dependent Relative

Section 80DDB: Deduction for Medical Expenditure on Self or Dependent Relative

A deduction Rs. 40,000/- or the amount actually paid, whichever is less is available for
expenditure actually incurred by resident taxpayer on himself or dependent relative for medical
treatment of specified disease or ailment.
The diseases have been specified in Rule 11DD. A certificate in form 10 I is to be furnished by
the taxpayer from any Registered Doctor.
In case of senior citizen the deduction can be claimed up to Rs 60,000 or amount actually paid,
whichever is less.
For very senior citizens Rs 80,000 is the maximum deduction that can be claimed.

Deductions for Person suffering from Physical Disability

Section 80U: Deduction for Person suffering from Physical Disability

Deduction of Rs. 75,000/- to an individual who suffers from a physical disability (including
blindness) or mental retardation. In case of severe disability, deduction of Rs. 1,25,000 can be
claimed. Certificate should be obtained from a Govt. Doctor. The relevant rule is Rule 11D. This
is a fixed deduction and not based on bills or expenses.
For financial year 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and
Rs 1,00,000 has been raised to Rs 1,25,000.
Deduction for donations towards Social Causes

Section 80G: Deduction for donations towards Social Causes

The various donations specified in Sec. 80G are eligible for deduction up to either 100% or 50%
with or without restriction as provided in Sec. 80G. 80G deduction not applicable in case
donation is done in form of cash for amount over Rs 10,000.
From Financial Year 2017-18 onwards – Any donations made in cash exceeding Rs 2000 will
not be allowed as deduction. The donations above Rs 2000 should be made in any mode other
than cash to qualify as deduction u/s 80G.

Donations with 100% deduction without any qualifying limit:

 National Defence Fund set up by the Central Government

 Prime Minister’s National Relief Fund
 National Foundation for Communal Harmony
 An approved university/educational institution of National eminence
 Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector
of that district
 Fund set up by a State Government for the medical relief to the poor
 National Illness Assistance Fund
 National Blood Transfusion Council or to any State Blood Transfusion Council
 National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation
and Multiple Disabilities
 National Sports Fund
 National Cultural Fund
 Fund for Technology Development and Application
 National Children’s Fund
 Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any
State or Union Territory
 The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force
Central Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
 The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October
6,1993
 Chief Minister’s Earthquake Relief Fund, Maharashtra
 Any fund set up by the State Government of Gujarat exclusively for providing relief to
the victims of earthquake in Gujarat
 Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the
victims of earthquake in Gujarat (contribution made during January 26, 2001 and
September 30, 2001) or
 Prime Minister’s Armenia Earthquake Relief Fund
 Africa (Public Contributions — India) Fund
 Swachh Bharat Kosh (applicable from financial year 2014-15)
 Clean Ganga Fund (applicable from financial year 2014-15)
 National Fund for Control of Drug Abuse (applicable from financial year 2015-16)
Donations with 50% deduction without any qualifying limit.

 Jawaharlal Nehru Memorial Fund

 Prime Minister’s Drought Relief Fund
 Indira Gandhi Memorial Trust
 The Rajiv Gandhi Foundation

Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total
income

 Government or any approved local authority, institution or association to be utilised for

the purpose of promoting family planning
 Donation by a Company to the Indian Olympic Association or to any other notified
association or institution established in India for the development of infrastructure for
sports and games in India or the sponsorship of sports and games in India.

Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total
income

 Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
 Government or any local authority to be utilised for any charitable purpose other than the
purpose of promoting family planning
 Any authority constituted in India for the purpose of dealing with and satisfying the need
for housing accommodation or for the purpose of planning, development or improvement
of cities, towns, villages or both
 Any corporation referred in Section 10(26BB) for promoting interest of minority
community
 For repairs or renovation of any notified temple, mosque, gurudwara, church or other
place.

Deductions on Contribution by Companies to Political Parties

Section 80GGB: Deduction on contributions given by companies to Political Parties

Deduction is allowed to an Indian company for amount contributed by it to any political party or
an electoral trust. Deduction is allowed for contribution done by any way other than cash.
Political party means any political party registered under section 29A of the Representation of
the People Act. Contribution is defined as per section 293A of the Companies Act, 1956.

Deductions on Contribution by Individuals to Political Parties

Section 80GGC: Deduction on contributions given by any person to Political Parties

Deduction is allowed to a taxpayer for any amount contributed to any political party or an
electoral trust. Deduction is allowed for contribution done by any way other than cash.
Political party means any political party registered under section 29A of the Representation of
the People Act.

Deductions on Income by way of Royalty of a Patent

Section 80RRB: Deduction with respect to any Income by way of Royalty of a Patent
Deduction for any income by way of royalty for a patent registered on or after 01.04.2003 under
the Patents Act 1970 shall be available up to Rs. 3 lakhs or the income received, whichever is
less. The taxpayer must be an individual resident of India who is a patentee. The taxpayer must
furnish a certificate in the prescribed form duly signed by the prescribed authority.

Section 80 Deduction Table

Section Deduction on FY 2016-17

Section  Investment in PPF Rs. 1,50,000

80C  Employee’s share of PF contribution
 NSCs
 Life Insurance Premium payment
 Children’s Tuition Fee
 Principal Repayment of home loan
 Investment in Sukanya Samridhi
Account
 ULIPS
 ELSS
 Sum paid to purchase deferred
annuity
 Five year deposit scheme
 Senior Citizens savings scheme
 Subscription to notified
securities/notified deposits scheme
 Contribution to notified Pension
Fund set up by Mutual Fund or UTI.
 Subscription to Home Loan Account
Scheme of the National Housing
Bank
 Subscription to deposit scheme of a
public sector or company engaged
in providing housing finance
 Contribution to notified annuity
Plan of LIC
 Subscription to equity shares/
debentures of an approved eligible
issue
Section Deduction on FY 2016-17

 Subscription to notified bonds of

NABARD

80CC For amount deposited in annuity plan of –

LIC or any other insurer for pension from a
fund referred to in Section 10(23AAB).

80CCD(1) Employee’s contribution to NPS account –

(maximum up to Rs 1,50,000)

80CCD(2) Employer’s contribution to NPS account Maximum up to 10% of salary

80CCD(1B) Additional contribution to NPS Rs. 50,000

80TTA(1) Interest Income from Savings account Maximum up to 10,000

80GG For rent paid when HRA is not received Least of rent paid minus 10% of total
from employer income Rs. 5000/- per month 25% of
total income

80E Interest on education loan Interest paid for a period of 8 years

80EE Interest on home loan for first time home Rs 50,000

owners

80CCG Rajiv Gandhi Equity Scheme for Lower of – 50% of amount invested in
investments in Equities equity shares or Rs 25,000

80D Medical Insurance – Self, spouse, children Rs. 25,000

Medical Insurance – Parents more than 60
Rs. 30,000
years old or (from FY 2015-16) uninsured
parents more than 80 years old
Section Deduction on FY 2016-17

80DD Medical treatment for handicapped o Rs. 75,000

dependant or payment to specified scheme
for maintenance of handicapped dependant  Rs. 1,25,000

 Disability is 40% or more but less

than 80%
 Disability is 80% or more

80DDB Medical Expenditure on Self or Dependent  Lower of Rs 40,000 or the

Relative for diseases specified in Rule amount actually paid
11DD  Lower of Rs 60,000 or the
amount actually paid
 Lower of Rs 80,000 or the
 For less than 60 years old
amount actually paid
 For more than 60 years old
 For more than 80 years old

80U Self-suffering from disability: o Rs. 75,000

 Individual suffering from a physical  Rs. 1,25,000

disability (including blindness) or
mental retardation.
 Individual suffering from severe
disability

80GGB Contribution by companies to political Amount contributed (not allowed in

parties cash)

80GGC Contribution by individuals to political Amount contributed (not allowed in

parties cash)

80RRB Deductions on Income by way of Royalty Lower of Rs 3,00,000 or income

of a Patent received
Unit 3

Tax Planning Under MAT

MAT (Minimum Alternative Tax) is a tax payable under Income tax Act. The concept of MAT
was introduced to target those companies that make huge profits and pay dividend to their
shareholders but pay no/minimal tax by taking advantage of the various deductions, and
exemptions allowed under income tax act. But with the introduction of MAT, the companies
have to pay a fixed percentage of their profits as Minimum alternate Tax.MAT is applicable to
all the companies including foreign companies.
MAT is calculated u/s 115JB of the income tax Act. Every company should pay higher of the tax
calculated under the following two provisions:

1. Tax liability as per the Normal provisions of income tax act(tax rate 30% plus 3% Edu
cess plus surcharge (if applicable)
2. Tax liability as per the MAT provisions given in Sec 115JB(18.5 % of Book Profits Plus
3 % edu cess plus surcharge if applicable)

How to Calculate MAT?

MAT is equal to 18.5% of Book profits(Plus Surcharge and cess as applicable). Book profit
means the net profit as shown in the profit & loss account for the year as increased and decreased
by following items:
Additions to the Net Profit (If debited to P/l A/c):

1. Income Tax paid or payable if any calculated as per normal provisions of income tax
act.
2. Transfer made to any reserve
3. Dividend proposed or paid
4. Provision for loss of subsidiary companies
5. Depreciation including depreciation on account of revaluation of assets
6. Amount/provision of deferred tax
7. Provision for unascertained liabilities e.g. provision for bad debts
8. Amount of expense relating to exempt income u/s 10,11,12 (except sec 10AA and
10(38) (It means income u/s 10AA & long term capital gain exempt u/s 10(38) are
subject to MAT).

Deletions to the Net Profit (If credited to P/L A/c)

1. Amount withdrawn from any reserves or provisions

2. The amount of income to which any of the provisions of section 10, 11 & 12 except
10AA & 10(38) apply.
3. Amount withdrawn from revaluation reserve and credited to profit & loss account to the
extent of depreciation on account of revaluation of asset.
 4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the
books of account. However loss shall not include the depreciation. (if loss brought
forward or unabsorbed depreciation is nil then nothing shall be deducted.)
5. Amount of Deferred Tax, is any such amount is credited in the profit & loss account
6. Amount of depreciation debited to P/l A/c (excluding the depreciation on revaluation of
Assets)

What is MAT CREDIT ?

When any amount of tax is paid as MAT by the company, then it can claim the credit of such tax
paid in accordance with the provision of section 115JAA.
Allowable Tax Credit = Tax paid as per MAT calculation — Income tax payable under normal
provision of Income tax Act, 1961.
(However, no interest shall be paid on this Tax credit by the Department.)
For Instance

ABC ltd has the taxable income as per normal provisions of income tax Act Rs 40 lakhs and Book
profits of Rs 75 lakhs for the FY 2016-17.

Tax payable will be higher of the following two:

1. Tax liability as per Normal provisions will be :

Rs 40, 00,000 @ 30 % plus 3% = 12,36, 000

2. Tax liability as per MAT provisions will be :

Rs 75, 00,000 @ 18.5 % plus 3% = Rs 14,29,125

Hence Tax payable by the company will be Rs 14, 29,125.
MAT CREDIT= Rs 14,29,125 – Rs 12, 36,000 = Rs 1,93,125
Such tax credit shall be carry forward for 10 assessment year immediately succeeding the
assessment year in which such credit is become allowable. For instance If the excess tax is paid
in FY 2016-17, then the credit of such tax can be carried forward in FY 2017-18 .
Tax credit shall be allowed set off in a year when tax becomes payable on the total income in
accordance with the normal provisions of the Act. Set off shall be allowed to the extent of
difference between tax on the total income under normal provision and tax which would have
been payable as pr MAT u/s 115JB.
MAT credit can be better explained with the help of an illustration. So let’s try to understand it
with the help of an example:
Asst Tax Payable Tax Payable as Actual Tax Tax Credit Tax Credit Total Tax
Year under MAT per normal payable Available u/s Set off/ Credit
provisions 115JAA adjusted Available

2013- 8,00,000 5,00,000 8,00,000 3,00,000 – 3,00,000

14

2014- 9,00,000 6,50,000 9,00,000 2,50,000 – 5,50,000

15

2015- 10,00,000 7,00,000 10,00,000 3,00,000 – 8,50,000

16

2015- 7,00,000 10,00,000 7,00,000 – 3,00,000 5,50,000

16

2016- 6,00,000 11,00,000 6,00,000 – 5,00,000 50,000

17

 Actual tax payable = Higher of Tax Payable under MAT OR Tax Payable as per normal
provisions.
 MAT credit set off is allowed only if tax payable as per normal provisions is greater than
tax payable as per MAT and also to the extent of difference between the two.
 MAT Credit Available u/s 115JAA = Tax Payable under MAT — Tax Payable as per
normal provisions

Set off and carry forward of losses

As per Income Tax Act 1961, a Person as defined in Section 2(31) can set off and Carry forward
the losses incurred. It is a big boon to a Person, because it plays an important role on the
financial condition of a Person who has incurred such Losses. So he can get relax to some extent.
Note: Loss from exempt source of Income cannot be set off against profit from any taxable
source of Income, and no losses can be set off against casual income.e g. Winning from
lotteries, crossword puzzles,races,card games, betting etc.

Meaning of Set off and Carry forward of losses

Set off means adjusting the losses against the profit of that Financial year.In case if there is no
adequate profits to set off the entire loss it can be carry forward to next Assessment Years
subject to the conditions stated in the Act.

1. Inter Source Adjustments:(Section 70) Under this an Assessee can set off the Losses incurred
in one source against the profits from any other source under the same head. It is not possible for
an Assessee to do intersource adjustment in the following cases.

a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation
Business only against the profits of any other speculation Business. It is not permissible to set off
speculative Loss against any other Business or Professional Income. An Assessee has an
Opportunity to set off any other Business Loss with the profits of speculation Business.

b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of
any other long term capital gains, but short term capital loss can be set off against both short
term and long term capital gains.

c. Loss from owning and maintaining race horses: This loss can be set off only against the
income from owning and maintaining race horses.

d. Loss of specified Business under section 35AD: Specified Business loss can be set off only
against profit from such specified business, but loss from other business can be set off against the
profit of the specified business.

2. Interhead Adjustments: (Section 71) It is the second step in set off of losses. If it is not
possible for an Assessee to set off of losses under inter source adjustment he can set off the
losses under inter head adjustments. Under this an Assessee can set off the losses incurred under
one head against the profits earned under other heads of Income in that financial year.

a. House Property Losses: House Property Losses can be set off against profits from other heads.
It can be set off against salary income, Business income, Income from capital gain, and income
from other sources except casual income.

b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any
other head except income from salary. Means it can be set off from income from house property,
income from capital gain and Income from other sources except casual income. In the following
cases losses cannot be set off under interhead adjustments.

Speculative Business Losses.

Specified Business Losses.

Capital Gain Losses.(Both short term capital loss and long term capital loss).

Losses from owning and maintaining race Horses.

3. Carry forward of Losses: It is third step in Set off and Carry forward of losses. If it is not
possible for an Assessee to set off the losses under inter source adjustments and interhead
adjustments he can carry forward the same to the next Assessment Years. (Subject to the
conditions given in the Act) It is important to know that Carry forward Losses can be set off only
against that head of income. It must be noted that an Assessee must file the Income Tax Return
within the due date prescribed (under section 139(1)) to carry forward the losses except in the
cases loss arising under the head house property (under section 71B) andcarry forward of
unabsorbed depreciation (under Section 32(2)).

a. House Property Losses: (Section71B) An Assessee can carry forward the losses incurred under
the head house property up to 8 years immediately succeeding the Assessment year in which the
loss has incurred. It can be adjusted only against Hose property Income. In this case an Assessee
can file belated return.

b. Non Speculative Business Losses:(Section 72) An Assessee can carry forward Non
speculative business loss up to 8 years immediately succeeding the Assessment Year in which
the loss has incurred. An Assessee must file Income Tax Return within duedate prescribed under
section139 (1) of Income Tax Act 1961, Otherwise he cannotcarry forward the losses. It can be
set off only against business income.

c. Speculative Business Losses:(Section 73) An Assessee must file the Income Tax Return
within due date prescribed under section 139(1) to carry forward the losses from speculation
Business. It can be Carry forward up to 4 years immediately succeeding the Assessment year in
which the loss has incurred. It can be adjusted only against income from speculation Business.

d. Specified Business Losses:(Section 73A) It can be Carry forward subject to the following
conditions: An Assessee must file Income Tax Return within Due date prescribed under section
139(1). It can be adjusted only against the income from specified businesses. It can be carry
forward for any number of years.

e. Long term/Short term Capital Losses:(Section 74) An Assessee can carry forward the long
term or short term Capital losses subject to the following conditions. An Assessee must file
Income Tax Return within due date prescribed under section 139(1). It can be carry forward up
to 8 years immediately succeeding the Assessment year in which the loss has incurred. Long
term capital loss should be adjusted with only long term capital gains, but short term capital loss
can be adjusted with short term capital gains or long term capital gains.

f. Loss from Owning and maintaining race horses:(Section 74A) An Assessee can carry forward
these losses up to 4 years immediately succeeding the Assessment year in which the loss has
incurred. It can be set off only against that income and an Assessee must file the Income Tax
Return within due date prescribed under section 139(1).

Tax Planning for amalgamation:

Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines ‘amalgamation’ as
merger of one or more companies with another company or merger of two or more companies to
from one company in such a manner that:-

All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.

All the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the liabilities of the amalgamated company by virtue of the
amalgamation

Shareholders holding at least three-fourths in value of the shares in the amalgamating company
or companies (other than shares already held therein immediately before the amalgamated
company or its nominee) becomes the shareholders of the amalgamated company by virtue of the
amalgamation.

(Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately before
the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned condition will be
satisfied if shareholders holding not less than 75% in the value of remaining 80% of shares in X
Ltd i.e. 60% thereof, become shareholders in Y Ltd by virtue of amalgamation)

The motive of giving this definition is that the benefits/concession under Income Tax Act, 1961
shall be available to both amalgamating company and amalgamated company only when all the
conditions, mentioned in the said section, are satisfied. ‘Amalgamating company’ means
company which is merging and ‘amalgamated company’ means the company with which it
merges or the company which is formed after merger. However, acquisition of property of one
company by another is not ‘amalgamation’.

Income Tax Act defines ‘amalgamation’ as merger of one or more companies with another
company or merger of two or more companies to from one company. Let us take an example of
X Ltd and Y Ltd. Here following situations may emerge:-

(a) X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd is Amalgamating
Company and Y Ltd is Amalgamated Company.

(b) X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltd and Y
Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and Y Ltd are
Amalgamated Company and Z Ltd is Amalgamated Company.

Tax Relief’s and Benefits in case of Amalgamation

If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act,
1961, the following tax reliefs and benefits shall available:-
1. Tax Relief to the Amalgamating Company:

o Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-tax
Act, capital gain arising from the transfer of assets by the amalgamating companies to the Indian
Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for
the purpose of Capital Gain.

o Exemption from Capital Gains Tax in case of International Restructuring [Sec.

47(via)]: Under Section 47(via), in case of amalgamation of foreign companies, transfer of
shares held in Indian company by amalgamating foreign company to amalgamated foreign
company is exempt from tax, if the following two conditions are satisfied:

o At least twenty-five per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company, and o Such transfer does
not attract tax on capital gains in the country, in which the amalgamating company is
incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

o Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Income-tax
Act, capital gains arising from the transfer of shares by a shareholder of the amalgamating
companies are exempt from tax as such transactions will not be regarded as a transfer for capital
gain purpose, if:

o The transfer is made in consideration of the allotment to him of shares in the amalgamated
company; and

o Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated Company:

o Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the
amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with the
mergers of the sick companies with healthy companies and to take advantage of the carry
forward of accumulated losses and unabsorbed depreciation of the amalgamating company. But
the benefits under this section with respect to unabsorbed depreciation and carry forward losses
are available only if the followings conditions are fulfilled:- o There should be an amalgamation
of – (a) a company owning an industrial undertaking (Note 1) or ship or a hotel with another
company, or (b) a banking company referred in section 5(c) of the Banking Regulation Act, 1949
with a specified bank (Note 2), or (c) one or more public sector company or companies engaged
in the business of operation of aircraft with one or more public sector company or companies
engaged in similar business.

[Note 1. The term ‘Industrial Undertaking’ shall mean any undertaking engaged in :
(i) the manufacture or processing of goods, or

(ii) the manufacture of computer software, or

(iii) the business of generation or distribution of electricity or any other form of power, or (iv)
mining, or

(v) the construction of ships, aircrafts or rail systems, or

(vi) the business of providing telecommunication services, whether basic or cellular, including
radio paging, domestic satellite service, network of trunking, broadband network and internet
services.

Note 2. Specified bank means the State Bank of India constituted under the State Bank of India
Act, 1955 or a subsidiary bank as defined in the State Bank of India (Subsidiary Bank) Act, 1959
or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition
and Transfer of Undertaking) Act, 1970 or under section 3 of the Banking Companies
(Acquisition and Transfer of Undertaking) Act, 1980.]

o The amalgamated company should be an Indian Company.

o The amalgamating company should be engaged in the business, in which the accumulated
loss occurred or depreciation remains unabsorbed, for 3 years or more.

o The amalgamating company should held continuously as on the date of amalgamation at least
three-fourth of the book value of the fixed assets held by it two years prior to the date of
amalgamation.

o The amalgamated company holds continuously for a minimum period of five years from the
date of amalgamation at least three-fourths in the book value of fixed assets of the amalgamating
company acquired in a scheme of amalgamation

o The amalgamated company continues the business of the amalgamating company for a
minimum period of five years from the date of amalgamation.

o The amalgamated company fulfils such other conditions as may be prescribed to ensure the
revival of the business of the amalgamating company or to ensure that the amalgamation is for
genuine business purpose.

o Expenditure on scientific research [Sec. 35(5)]: When an amalgamating company transfers

any asset represented by capital expenditure on the scientific research to the amalgamated Indian
company in a scheme of amalgamation provisions of section 35 shall be applicable-

o Unabsorbed expenditure on scientific research of the amalgamating company will be allowed

to be carried forward and set off in the hands of the amalgamated company, o If such asset
ceases to be used in the previous year for scientific research related to the business of
amalgamated company and is sold by the amalgamated company the sale price to the extend of
cost of asset shall be treated as business income and the excess of sale price over the cost shall be
subject to the provisions of capital gain.

o Amortization of expenditure in case of Amalgamation [Sec. 35DD]: Under Sec 35DD for
expenditure incurred in connection with the amalgamation the assessee shall be allowed a
deduction of an amount equal to one-fifth of such expenditure for each of the five successive
previous years beginning with the previous year in which the amalgamation takes place.

o Treatment of preliminary expenses [Sec. 35D(5)]: When and amalgamating company

merges with an amalgamated company under a scheme of amalgamation, the amount of
preliminary expenses of the amalgamating company to the extend not yet written off shall be
allowed as deduction to the amalgamated company in the same manner as would have been
allowed to the amalgamating company.

o Expenditure for obtaining a licence to operate telecommunication services [Sec.

35ABB(6)]: Where in a scheme of amalgamation, the amalgamating company sells or otherwise
transfer its licence to the amalgamated company (Being an Indian Company), the provisions of
Section 35ABB which were applicable to the amalgamating company shall become applicable in
the same manner to the amalgamated company, consequently:

o The expenditure on acquisition on license, not yet written off, shall be allowed to the
amalgamated company in the same number of balance installments.

o Where such licence is sold by the amalgamated company, the treatment of the
deficiency/surplus will be same as would have been in the case of amalgamating company.

o Treatment of capital expenditure on family planning [U/S 36(1)(ix)]: If Asset

representing capital expenditure on family planning is transferred by the amalgamating company
to the amalgamated company under a scheme of amalgamation, such expenditure shall be
allowed as deduction to the amalgamated company in the same manner as would have been
allowed to the amalgamating company.

o Treatment of bad debts [Sec. 36(1)(vii)]: When due to amalgamation debts of the
amalgamating company has been taken over by amalgamated company, and subsequently, such
debts turn out to be bad, it shall be allowed as deduction to the amalgamated company.

CHAPTER XII-F
SPECIAL PROVISIONS RELATING TO TAX ON INCOME
RECEIVED FROM VENTURE CAPITAL COMPANIES AND VENTURE CAPITAL
FUNDS
Tax on income in certain cases.
115U. (1) Notwithstanding anything contained in any other provisions of this Act, any income
accruing or arising to or received by a person out of investments made in a venture capital
company or venture capital fund shall be chargeable to income-tax in the same manner as if it
were the income accruing or arising to or received by such person had he made investments
directly in the venture capital undertaking.
(2) The person responsible for crediting or making payment of the income on behalf of a venture
capital company or a venture capital fund and the venture capital company or venture capital
fund shall furnish, within such time as may be prescribed, to the person who is liable to tax in
respect of such income and to the prescribed income-tax authority, a statement in the prescribed
form94 and verified in the prescribed manner, giving details of the nature of the income paid or
credited during the previous year and such other relevant details as may be prescribed.
(3) The income paid or credited by the venture capital company and the venture capital fund
shall be deemed to be of the same nature and in the same proportion in the hands of the person
referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture
capital company or the venture capital fund, as the case may be, during the previous year.
(4) The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the
income paid by a venture capital company or venture capital fund under this Chapter.
(5) The income accruing or arising to or received by the venture capital company or venture
capital fund, during a previous year, from investments made in venture capital undertaking if not
paid or credited to the person referred to in sub-section (1), shall be deemed to have been
credited to the account of the said person on the last day of the previous year in the same
proportion in which such person would have been entitled to receive the income had it been paid
in the previous year.
Following sub-section (6) shall be inserted after sub-section (5) of section 115U by the
Finance Act, 2015, w.e.f. 1-4-2016 :
(6) Nothing contained in this Chapter shall apply in respect of any income, of a previous year
relevant to the assessment year beginning on or after the 1st day of April, 2016, accruing or
arising to, or received by, a person from investments made in a venture capital company or
venture capital fund, being an investment fund specified in clause (a) of the Explanation
1 to section 115UB.
Explanation 1.—For the purposes of this Chapter, "venture capital company", "venture capital
fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in
clause (23FB) of section 10.
Explanation 2.—For the removal of doubts, it is hereby declared that any income which has been
included in total income of the person referred to in sub-section (1) in a previous year, on
account of it having accrued or arisen in the said previous year, shall not be included in the total
income of such person in the previous year in which such income is actually paid to him by the
venture capital company or the venture capital fund.
Unit 4

Section 2. Definitions. -
(a) "Adjudicating authority" means any authority competent to pass any order or decision
under this Act, but does not include the Central Board of Excise and Customs constituted
under the Central Boards of Revenue Act, 1963 (54 of 1963),
Commissioner of Central Excise (Appeals) or Appellate Tribunal;
(aa) "Appellate Tribunal" means the Customs, Excise and Service Tribunal Tax constituted
under section 129 of the Customs Act, 1962 (52 of 1962);
(aaa)"broker" or "commission agent" means a person who in the ordinary course of business
makes contract for the sale or purchase of excisable goods for others;
(b) "Central Excise Officer" means the Chief Commissioner of Central Excise, Commissioner
of Central Excise, Commissioner of Central Excise (Appeals), Additional Commissioner of
Central Excise, Joint Commissioner of Central Excise, Assistant Commissioner of Central
 Excise or Deputy Commissioner of Central Excise or any other officer of the Central Excise
Department, or any person (including an officer of the State Government) invested by the
Central Board of Excise and Customs constituted under the Central Boards of Revenue Act,
1963 (54 of 1963) with any of the powers of a Central Excise Officer under this Act.
(c) "curing" includes wilting, drying, fermenting and any process for rendering an
unmanufactured product fit for marketing or manufacture;
(d) "excisable goods" means goods specified in the First Schedule and the Second Schedule to
the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and
includes salt;
Explanation - For the purposes of this clause, "goods " includes any article, material or
substance which is capable of being bought and sold for a consideration and such goods
shall be deemed to be marketable.
(e) factory" means any premises, including the precincts thereof, wherein or in any part of
which excisable goods other than salt are manufactured, or wherein or in any part of which
any manufacturing process connected with the production of these goods is being carried on
or is ordinarily carried on;
(ee) "Fund" means the Consumer Welfare Fund established under section 12C;
(f) "manufacture" includes any process, -
i) incidental or ancillary to the completion of a manufactured product;
ii) which is specified in relation to any goods in the Section or Chapter notes of the First
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture;
iii) or
which, in relation to the goods specified in the Third Schedule, involves packing or
repacking of such goods in a unit container or labelling or re-labelling of containers
including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer;
and the word "manufacturer" shall be construed accordingly and shall include not only a person
who employs hired labour in the production or manufacture of excisable goods, but also any
person who engages in their production or manufacture on his own account;
(ff) "National Tax Tribunal" means the National Tax Tribunal established under section 3 of the
National Tax Tribunal Act, 2005;
(g) "prescribed" means prescribed by rules made under this Act;
(h) "sale" and "purchase", with their grammatical variations and cognate expressions, mean any
transfer of the possession of goods by one person to another in the ordinary course of trade
or business for cash or deferred payment or other valuable consideration;

(k) "wholesale dealer" means a person who buys or sells excisable goods wholesale for the
purpose of trade or manufacture, and includes a broker or commission
agent who, in addition to making contracts for the sale or purchase of excisable
goods for others, stocks such goods belonging to others as an agent for the purpose of sale.
REGISTRATION:

Every person who manufactures or deals in excisable goods is required to obtain

Central Excise Registration as per Rule 9 of the Central Excise Rules, 2002. The following
categories of persons require registration:

Every manufacturer of dutiable excisable goods;

First and second stage dealers desiring to issue cenvatable invoices;
Persons holding warehouses for storing non duty paid goods;
Persons who obtain excisable goods for availing end use based exemption;
Exporter - manufacturer under rebate/bond procedure; Export Oriented Units which have
interaction with the domestic economy either through DTA sales or procurement of duty
free inputs.

EXEMPTION FROM REGISTRATION:

Persons manufacturing goods, fully exempted or chargeable to NIL rate of duty are
not required to seek registration. However they should file the prescribed declaration in the
beginning of every financial year. The following categories of persons are exempt from
registration:

Manufacturers of goods which are goods on the basis of value of clearance made in a
financial year and remain under the exemption limit (SSI). In cases where the value of
clearances in the current financial year exceeds Rs.90 lakhs the assessee has to file a
declaration prescribed under Notification No. 36/2001-CE (NT), dated 26.6.2001 for getting
exemption from the Central Excise registration;
Persons who get their goods manufactured by others, except the persons who get certain
textile items manufactured on job work;
Persons manufacturing excisable goods under the customs warehousing procedures
subject to certain conditions;
Wholesale traders or dealers of excisable goods (except first stage dealers, second stage
dealer and depot);
Job works of goods under Ch. 61 & 62 and 100% EOU. Deeming EOUs/EPZ units as
registered is not applicable if such units are having clearances in or procurement from
Domestic Tariff Area (DTA).

PROCEDURE:

Ø Before starting production of excisable goods or dealership for the purpose of issuing
invoices to pass cenvat credit registration should be obtained;
Ø Registration is provided at free of cost;

Ø Separate registration is required in respect of separate premises (factory, depot,

godowns etc.,) except where two or more premises are actually part of the same factory
(where processes are inter linked) but are segregated by public road, canal or railway line;

Ø in case of textiles, a single registration will be enough;

Ø several manufacturers owing machinery such as power looms under a common shall
shed or in common premises will be treated as a separate factory each for their respective
machinery and there will be no clubbing of their productions/clearances;

Ø The application form shall be submitted in duplicate to the jurisdictional Deputy/Asst.

Commissioner of Central Excise. The prescribed form is as follows:

o Form A1 - All persons except certain textile processors/cheroot manufacturers;

o Form A2 - Power look weavers/Hand processors/dealers of yarn and fabrics and

manufacturers of ready made garments;

o Form A3 - Manufacturers of hand rolled cheroots of tobacco falling under sub-

heading 2402.00 of Central Excise Tariff.

Ø An attested copy of Permanent Account Number (PAN) allotted by Income Tax

Department should be enclosed with the application;

Ø The computer generated Registration Certificate based on 15 digit permanent account

number in Form RC is handed over either immediately or within seven days;

Ø Verification of the premises will be made within five working days after the issue of
Registration Certificate;

Ø Registration Certificate is not required to be renewed;

Ø No bond or bank guarantee is required for obtaining registration.

OTHER POINTS:

- The same application form is to be used for intimating any change in the information
furnished originally at the time of applying for registration certificate;

- Manufacture of new or additional products need not be intimated;

- If there is a change in the constitution of the business the same should be intimated within
thirty days;
 - The registration is not transferable. When the business is transferred to another person by
way of sale or lease, the person taking over the business should take fresh registration in his
name;

- If the business is not carried out the registration certificate should be surrendered to the
Superintendent of Central Excise. A declaration should be given while surrendering the
certificate;

- The PAN based excise registration number is required to be printed on the top of all
central excise invoices, duty payment challans, PLA and other forms/documents;

- Textile units coming into excise fold for the first time can clear the goods and pay duty
pending registration;

- The registration shall be subject to such conditions, safeguards and procedures as may be
specified in the notification by Board;

- For contravention of provisions or Act/Rules and other specified offences registration

certificate can be suspended or revoked by the Deputy/Assistant Commissioner.

VALUE ADDED TAX

INTRODUCTION
Value Added Tax or VAT is a broad based tax levied at multiple stage with tax on inputs
credited against taxes on output. The origin of VAT can be traced as far back as the writing of F
V on Siemens, who proposed it in 1919 as a substitute for the then newly established German
turnover tax. Since then numerous economists have recommended it in different contexts. In
addition, various committees have examined the tax in detail. However, for its rejuvenation, the
tax owes much to Maurice Faure and Carl Shoup.
The recent evolution of VAT can be considered as the most important fiscal innovation of
the present century.
VAT?
VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each stage of
production and circulation. It is also chargeable on the value of all imported goods. It is charged
by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and
its introduction has not resulted in either increased prices to final consumers or reduced
profitability of business. VAT is levied on the difference between the sale price of the goods
produced or the services rendered, and the cost thereof that is, the difference between the
output and the input.
FEATURES OF VAT:
1. Tax levied and collected at every point of sale.
2. Tax collected at every point of sale and the tax already paid by the dealer at the time of
purchase of goods will be deducted from the amount of tax paid at the next sale.
3. Dealers reselling tax paid goods will have to collect VAT and file returns and pay VAT at
every stage of sale (value addition)
4. It is transparent and easier.
5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the
amount of tax payable on sale.
6. The returns and the challans are filed together in a simple format after self assessment done by
the dealer himself.
7. At the most a few forms are required.
8. Tax on goods and services both.
9. Self assessments by dealers.
10. Penalties will be stricter.
VAT is calculated by deducting tax credit from tax collected during the payment period
The first thing we observe from the above table is that with equal tax rates of 10%, the final price
to the consumer is 33% or Rs. 174 (Rs. 702Rs.528) higher in the cascading (traditional) sales tax
system. A part of this difference is owing to the Rs. 77 (Rs. 125Rs. 48) higher tax receipts of the
government. The rest of the difference, Rs. 97, is taken by 1higher profits of the different
intermediaries, B,C,&D
The second thing we can observe is that almost every time the VAT is charged, it is not an
expense to the person who pays it, but just an advance to the government via the supplier. This is
true for all except the final customer who cannot claim the VAT deduction. Actually, he is the
only one who pays the full amount. The above table assumes that the different intermediaries
want to keep a fixed percentage markup (perhaps because of capital invested in inventory). As a
result, each time there are fewer profits to the business intermediaries who don’t take a markup
on the VAT. This also explains why the VAT is considered a better tax than the sales tax.
We also observe from the last two lines of the above table that the consumer is benefited by Rs.
174 (Rs. 702Rs. 528) in the VAT system whereas the government loses by Rs. 77 (Rs. 125Rs.
48).
Note: In the above illustration, it is observed that in the VAT regime the effect on price to B is
only Rs. 100. This is because the tax paid on purchase by B is allowed to be set off/credited
against the tax (output tax) payable by C on sale of the goods. Similarly, intermediaries C and D
too will be allowed input tax credit until the goods reaches the final consumer (who cannot claim
the VAT deduction).
General Requirements for VAT System:
1. Compulsory issue of tax invoice and retail invoice: Tax invoice is issued to a
dealer/consumer who has to take input VAT Credit whereas retail invoice is meant for interstate
sales or sale to a consumer who does not require input credit of VAT.
2. Registration: There is a compulsory registration of the dealer if the aggregate turnover
exceeds a certain specified limit.
3. Composition scheme: A small dealer whose turnover does not exceed a specified limit (say in
Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself at a
small percentage of gross turnover and in this case buyer of goods with not get input VAT
Credit.
4. Tax payer identification Number (TIN): There will be a taxpayer’s identification number of
11 digit numericals which will be unique to each dealer.
5. Simplified returns of VAT are to filed monthly or quarterly as specified by each state.
6. Self assessment by dealers.
7. Audit under VAT has been made compulsory by various States.
8. No requirement of any declaration form as bill will be raised for each sale and VAT shall be
levied.
9. Comprehensive coverage as only few commodities have been exempted from VAT.
METHODS FOR COMPUTATION OF VAT
The various methods of computation of VAT are:

PROBLEM 1: Methods of Computation VAT – Inputs taxable at different rates

Inputs used for the production of Output ‘M’ are ‘X’ and ‘Y’ respectively. The following are
details of inputs Input VAT Rate Invoice Price (inclusive
of vat)
Product X 12.5% 45,000
Product Y 4% 26,000
The following are the details of Sales and the rate of VAT applicable for the Output ‘M’ is 12.5
%

Solution:
Inference: In the above illustration, total collections under Invoice Method and Subtraction
Method differ due to differences in rates of VAT on inputs and outputs.

PROBLEM 2: Compute the invoice value to be charged and amount of tax payable under VAT
by a dealer who had purchased goods for Rs. 1,20,000 and after adding for expenses of Rs.
10,000 and of profit Rs. 15,000 had sold out the same. The rate of VAT on Purchases and sales is
12.5%.

Advantages of VAT:
VAT being a broad based tax levied at multiple stage is generally perceived as an explicit
replacement of State sales tax for raising additional revenue for the Government. The purpose of
a tax system is to bring in revenues to the Government. Tax revenues can be raised in many
ways.
However, the main characteristic of good tax system should be –
1. The tax system should be fair or equitable;
2. It should cause the least possible harmful effects to the economy and to the extent possible; it
should promote growth to the economy.
3. It should be simple both for its compliance by the payer and for its administration by the
Government.
4. It should be income elastic.
Keeping in view the above objectives, VAT is being implemented in various states in place of
the local sales tax payable by the seller. VAT is also expected to be more effective and efficient
for every person including Government, manufactures, traders and consumers and hold the
following advantages:
1. Easy to Administer & Transparent: This system of charging tax is easy to administer
because of its simplicity. It also reduces the cost of compliance by the dealers and is transparent,
as tax is to be charged in every bill and there will be no local statutory forms.
2. Less Litigation: There will be no litigation with respect to allowability of items, as under
VAT no items will be specified in the registration certificate of the dealer. The dealer will be
allowed to purchase any of the items of his choice in which he intends to deal. He will also be
allowed to purchase any item he requires as raw material for the purpose of manufacturing or for
packing.
3. Tax Credit on purchase of Capital Goods: The dealer will be allowed to purchase capital
goods for manufacturing after paying sale tax and will be entitled to get set off sales tax paid on
such purchases from his sales tax liability, which will arise on the sales made by him.
4. Abolition of Statutory Forms: There are no forms under VAT. Therefore, all problems
related to forms automatically get resolved.
5. Self Assessment: Dealers are not required to appear before the Assessing Authority for their
yearly assessments, as under VAT there is provision for self assessment. All the cases will be
accepted by the department as correct and only a few will be selected for audit as is being done
by Income Tax Department and Excise Department at present.
6. Deterrent against Tax Avoidance: It will act as deterrent against tax avoidance. Under the
present system, tax is charged either on first point basis or at last point basis hence the incentive
to evade tax is high because the dealer saves the whole amount of tax due on such transaction,
whereas under VAT the incentive to evade tax is low because the dealer saves only a part of tax
i.e. (tax amount which he is liable to pay less the amount of tax he has already paid on his
purchases).
7. No Cascading Effect: It does not have cascading (tax on tax) effect due to system of
deduction or credit mechanism. Since VAT does away with cascading, it avoids distorting
business decisions; the need for vertical integration is dictated only by the market forces or
technical considerations, and not by the tax structure.
8. Effective Audit & Enforcement Strategies: The input credit method by generating a trail of
invoices is argued to be system that encourages better compliance since the purchaser seeks an
invoice to get input tax credit. Further, this trail of invoices supports effective audit and
enforcement strategies.
9. Minimum Exemptions: The system will be more effective because of minimum exemptions.
10. Removal of Anomaly of First Point Taxation: VAT eliminates the limitations of single
point tax either at first point or last point. In the case of last point goods, the temptation to evade
tax is high. Firstly, the quantum of tax at one point is high. Secondly, as the exemption is
available against statutory forms, possibility of misuse of forms cannot be ruled out. Similarly,
under first point tax system, tax avoidance by way of selling the goods at first pint to their sister
concerns at lower rates and thereafter increasing the price of the goods because subsequent sales
being exempt as tax paid. This anomaly is also being taken care or under VAT, without
introducing cascading. Since the dealer gets a set off for taxes paid at the earlier stages these are
not treated as part of costs and this is expected to reduce that component of cost as well as the
associated financing requirement. Further, the problem of enhanced cascading via the markup
rule too is also ruled out under the system
Limitations of VAT:
India being a Federal Republic country has state level administration of the local sales tax which
is being replaced by VAT and had been the reason for deferment of its implementation time and
again. Inherently there are certain limitations of VAT due to which it being opposed by some of
the trade associations. Moreover VAT undoubtedly has many advantages but without taking note
of the limitation of VAT, one is just looking only at one side of the coin. The limitations of VAT
are discussed hereunder.
1. Detailed Records: Like any other system VAT is also not free from all evils. Though on
record it is said to be the simplest method, however, it is more complicated than a simple first
point tax. Many small dealers maintain only primitive accounts and it is very difficult for them to
keep proper and detailed records required for VAT purposes.
2. Cause Inflation: It is also argued that VAT causes inflation. It’s impact will depend on
various factors such as inventory holding period, demand supply position of that particular
product, number of intermediaries etc. Investment in stock is bound to increase as tax will be
paid at the time of purchase, hence one will have to carry tax paid stock.
3. Refund of Tax: Credit of tax paid on inputs/capital goods is available to be utilized against
tax liability which will be calculated on the sale of final product. VAT credit cannot be availed if
no tax is payable on final product being exempt or taxable at lower rate.
4. Functional Problems: The functional problem of VAT is that input tax credit is allowed on
the basis of the invoices issued by the dealer. In respect of invoices where tax at the earlier stage
is charged and collected, but not remitted to the State by the concerned dealer, the dealer who
has paid the tax and who is entitle to take credit for the tax paid should not be made to suffer.
Provisions to protect the interest of the dealers who have paid the tax should be made.
5. Increase in Investment: Dealer will be making purchases after paying tax, therefore
investment in stock will go up the extent of tax paid. Under old system the dealer was making
purchases against statutory forms, hence was not liable to pay tax on it’s purchases.
6. Not Credit for Tax paid on Interstate Purchases: The biggest problem of introduction of
VAT is the non availability of credit for tax paid on interstate purchases in initial years. It will
also result in some cascading effect, which goes against the basic spirit of VAT.
7. Audit under VAT: Most of the states introduced VAT on 1.4.2005 and they have
incorporated audit provisions in the Legislation itself. Audit under VAT is important for better
and effective implementation of the VAT system.

Unit 5
THE CUSTOM DUTY ACT
INTRODUCTION
The Constitution of India (Article 265) lays down that no tax shall be levied or collected except
by authority of law . The law for the levy and collection of Customs duties is the Customs Act,
1962. This legislation has been enacted by Parliament in exercise of the exclusive power vested
in it under Article 246 read with Entry 83 of list-I of the Seventh Schedule of the Constitution.
The Customs Duties are major tax revenue for the Union Govt. and constitute around 30% of its
total tax revenues. Together with Central Excise duties, the contribution amount to nearly three-
fourth of total tax revenue of the Union Govt.
An Overview of Customs Law
Customs duties are probably the oldest form of taxation in India. They are as old as international
trade itself. Just as domestic production flows provide the base for excise taxation so also
international trade flows are the basis for customs duties.
Meaning of customs duty
Customs duty is a duty or tax, which is levied by Central Govt. on import of goods into, and
export of goods from, India. It is collected from the importer or exporter of goods, but its
incidence is actually borne by the consumer of the goods and not by the importer or the exporter
who pay it. These duties are usually levied with ad valorem rates and their base is determined by
the domestic value ‘the imported goods calculated at the official exchange rate. Similarly, export
duties are imposed on export values expressed in domestic currency
Development of customs law
There is historical evidence of imposition of import duty during the ancient and medieval era, the
development of organised taxation on imports and exports to its present form, originated in 1786,
when the Britishers formed the first Board of Revenue in Calcutta. In 1808, a New Board of
Trade was established. The provincial import duties were replaced by uniform Tariff Act through
Customs Duties Act, 1859 which was made applicable all territories in the country. The general
rate of duty was 10%, which was subsequently revised to 7.5% in 1864. Several revisions in the
Customs policy and tariff took place during subsequent years, though such revisions were mainly
related to the textile products.
Sea Customs Act was passed by Government in 1878. The Indian Tariff Act was passed in 1894.
Air Customs having been covered under the India Aircrafts Act of 1911, the Land Customs Act
was passed in 1924. The Indian Customs Act, 1934, governed the Customs Tariff. After
Independence, the Sea Customs Act and other allied enactments were repealed by a
consolidating and amending legislation entitled the Customs Act, 1962 (CA). Similarly the Act
of 1934 was repealed by the Customs Tariff Act, 1975(CTA).
Scope and coverage of customs law
There are two Acts, which form part of Customs Law in India, namely, the
Customs Act.1962 and Customs Tariff Act, 1975:

1. The Customs Act, 1962

The Customs Act. 1962 is the basic Act for levy and collection of customs duty in India. I
contain various provisions relating to imports and exports of goods and merchandize as well as
baggage of persons arriving in India. The main purpose of Customs Act, 1962 is the prevention
of illegal imports and exports of goods. The Act extends to the whole of the India. It was
extended to Sikkim w.e.f. 1st October 1979.
2. The Customs Tariff Act, 1975
The Customs Duty is levied on goods imported or exported from India at the rates specified
under the Customs Tariff Act, 1975.The Act contains two schedules - Schedule 1 gives
classification and rate of duties for imports, while schedule 2 gives classification and rates of
duties for exports. In the present Act, the Tariff Schedule was replaced in 1986. The new
Schedule is based on Harmonised System of Nomenclature (HSN). the Internationally accepted
Harmonised Commodity Description and Coding System
Objects of customs duty
The customs duty is levied, primarily, for the following purpose:
1. To raise revenue.
2. To regulate imports of foreign goods into India.
3. To conserve foreign exchange, regulate supply of goods into domestic market.
4. To provide protection to the domestic industry from foreign competition by restricting import
of selected goods and services, import licensing, import quotas, and outright import ban.
Nature of Customs Duty
Entry 82 of List-I (Union List) to the Schedule-VII reads as under 82 ‘Duties of Customs
including Export duties’.
Thus, the levy of duty on imports and exports is subject matter of Union and the parliament
derives power to make laws related to the duties of customs. Accordingly, the Customs Act,
1962 was enacted by the Parliament. Section 12 of the Customs Act provides that duties of
customs shall be levied at such rates as may be specified Under the Customs Tariff Act, 1975 or
any other law for the time being in force, on goods imported into or exported from’ India. Goods
become liable to duty if there is import into and export from India.
Taxable Event
Goods become liable to import duty or export duty when there is ‘import into, or export from
India ‘Import’, as defined in section 2(23), means ‘bringing into India from a place outside
India’. ‘Export’, as defined in section 2(18), means taking out of India to a place outside India’.
‘India’ is defined in section 2(27) to include the territorial waters of India. The definition of India
is an inclusive definition. Article I of the Constitution of India defines “India” as Union of States.
General Clauses Act defines India to mean all territories for the time being comprised in India.
Territorial water of India
Territorial waters mean that portion of sea, which is adjacent to the shores of a country. As per
section 3 of the Territorial waters, Continental Shelf, Exclusive Economic Zones and Maritime
Zones Act, 1978, territorial waters of India extend Upto 12 nautical miles from the baseline on
the coast of India and include any gulf, harbour, creek or tidal river.
Earlier, the territorial waters of India extended upto the 6 nautical miles from the baseline, but it
was extended upto 12 nautical miles (1 NM 1.83 kms) in 1967. This definition is well in
accordance with the Article 3 of the UN Convention on the Law of Sea, which defines territorial
sea.
The determination of territorial waters is important for determination of the Chargeabi1ity of the
Customs duty, as the entry of goods into the territorial waters is a taxable event
Indian customs water
Section 2(28) defines “Indian customs waters” to mean the waters extending into the sea up to
the limit of contiguous zone of India under section 5 of the 263
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act,
1976 and includes any bay, gulf, harbour, creek or tidal river.
Contiguous zone of India comes immediately after the territorial waters of India (i.e. after 12
nautical miles from the baseline) and extends upto 24 nautical miles. Thus, Indian customs water
extends upto 12 nautical miles beyond the territorial waters of India.
The determination of Indian customs waters is necessary in view of certain provisions of the
Customs Act, which empower the Customs Officers:
(a) To arrest a person in India or within the Indian customs water ;( section 1041)
(b) To stop and search any vessel in India or within the Indian customs water; (section 1061)
(c) To fire and/or confiscate the vessel, if it does not stop; (section 115) etc.
Type of customs duties
While Customs Duties include both import and export duties, but as export duties contributed
only nominal revenue, due to emphasis on raising competitiveness of exports, import duties
alone constituted major part of the revenue from Customs Duties. The import duties are imposed
under The Customs Act, 1962 and Customs Tariff Act, 1975. The structure of Customs Duties
includes the following:
Basic Customs Duty
All goods imported into India are chargeable to a duty under Customs Act, 1962 .The rates of
this duty, popularly known as basic customs duty, are indicated in the First Schedule of the
Customs Tariff Act, 1975as amended from time to time under Finance Acts. The duty may be
fixed on ad –valorem basis or specific rate basis. The duty may be a percentage of the value of
the goods or at a specific rate. The Central Government has the power to reduce or exempt any
good from these duties.
Auxiliary Duty of Customs
This duty is levied under the Finance Act and is leviable all goods imported into the country at
the rate of 50 per cent of their value. However this statutory rate has been reduced in the case of
certain types of goods into different slab rates based on the basic duty chargeable on them.
Additional (Countervailing) Duty of Customs This countervailing duty is leviable as additional
duty on goods imported into the country and the rate structure of this duty is equal to the excise
duty on like articles produced in India. The base of this additional duty is c.i.f. value of imports
plus the duty levied earlier. If the rate of this duty is on ad-valorem basis, the value for this
purpose will be the total of the value of the imported article and the customs duty on it (both
basic and auxiliary).
Export Duties
Under Customs Act, 1962, goods exported from India are chargeable to export duty The items on
which export duty is chargeable and the rate at which the duty is levied are given in the customs
tariff act,1975 as amended from time to time under Finance Acts. However, the Government has
emergency powers to change the duty rates and levy fresh export duty depending on the
circumstances.
Cesses
Cesses are leviable on some specified articles of exports like coffee, coir, lac, mica, tobacco
(unmanufactured), marine products cashew kernels, black pepper, cardamom, iron ore, oil cakes
and meals, animal feed and turmeric. These cesses are collected as parts of Customs Duties and
are then passed on to the agencies in charge of the administration of the concerned commodities.
Education cess on customs duty
An education cess has been imposed on imported goods w.e.f. 9-7-2004. The cess will be 2% of
the aggregate duty of customs excluding safeguard duty, countervailing duty, Anti Dumping
Duty.
Protective Duties
Tariff Commission' has been established under Tariff Commission Act, 1951. If the Tariff
Commission recommends and Central Government is satisfied that immediate action is
necessary to protect interests of Indian industry, protective customs duty at the rate
recommended may be imposed under section 6 of Customs Tariff Act. The protective duty will
be valid till the date prescribed in the notification.
Countervailing duty on subsidised goods If a country pays any subsidy (directly or indirectly) to
its exporters for exporting goods to India, Central Government can impose Countervailing duty
up to the amount of such subsidy under section 9 of Customs Tariff Act. Anti Dumping Duty on
dumped articles Often, large manufacturer from abroad may export goods at very low prices
compared to prices in his domestic market. Such dumping may be with intention to cripple
domestic industry or to dispose of their excess stock. This is called ‘dumping'. In order to avoid
such dumping, Central Government can impose, under section 9A of Customs Tariff Act, anti-
dumping duty upto margin of dumping on such articles, if the goods are being sold at less than
its normal value. Levy of such anti-dumping duty is permissible as per WTO (world trade
organisation) agreement. Anti dumping action can be taken only when there is an Indian industry
producing 'like articles'.
Safeguard duty
Central Government is empowered to impose 'safeguard duty' on specified imported goods if
Central Government is satisfied that the goods are being imported in large quantities and under
such conditions that they are causing or threatening to cause serious injury to domestic industry.
Such duty is permissible under WTO agreement. Safeguard duty is a step in providing a need-
based protection to domestic industry for a limited period, with ultimate objective of restoring
free and fair competition
National Calamity Contingent Duty
A National Calamity Contingent Duty (NCCD) of customs has been imposed vide section 129 of
Finance Act, 2001. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies
from 10% to 45%. - - NCCD of customs of 1% was imposed on PFY, motor cars, multi utility
vehicles and two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide
section 134 of Finance Act, 2003.
Rate of duty applicable
There are different rates of duty for different goods there are different rates of duty for goods
imported from certain countries in terms of bilateral or other agreement with such countries
which are called preferential rate of duties the duty may be percentage of the value of the goods
or at specified rate. Provisions in respect of rate of duty are as follows:
Basic Customs duty - The rate of customs duty applicable will be as provided in Customs Act,
subject to exemption notifications, if any, applicable. In case of imports from preferential area,
the preferential rate is applicable, if mentioned in the Tariff. It is needless to mention that if
partial or full exemption has been granted by a notification, the effective rate (as per notification)
will apply and not the tariff rate (as mentioned in Customs Tariff).
Rate for additional duty - Rate for additional duty (CVD) will be as mentioned in Central Excise
Tariff Act, subject to any general exemption notification. Any specific exemption notification
(e.g. exemption to goods manufactured by SSI unit or goods manufactured without aid of power)
is not considered while calculating CVD

Definitions and Concepts

Bill of Entry
This is a very vital and important document which every importer has to submit under section 46
Bill of Entry should be submitted in quadruplicate – original and duplicate for customs, triplicate
for the importer and fourth copy is meant for bank for making remittances.
Baggage
The term has not been defined as such. However, following may be noted: (a) Baggage means all
dutiable articles, imported by passenger or a member of a crew in his baggage (b) Un-
accompanied baggage, if despatched previously or subsequently within prescribed period is also
covered (c) baggage does not include motor vehicles, alcoholic drinks and goods imported
through courier (d) Baggage does not include articles imported under an import licence for his
own use or on behalf of others.
Customs Station
Imported goods are permitted to be unloaded only at specified places. Similarly, goods can be
exported only from specified area. In view of this, a definition of ‘Customs Station’ is important.
Customs Station means (a) customs port (b) inland container depot (c) customs airport and (d)
land customs station
Customs area
Customs area means all area of Customs Station and includes any area where imported goods or
export goods are ordinarily kept pending clearance by Customs authorities. Thus, ‘Customs
Area’ could include some area even outside the ‘Customs Station’.
Drawback
Drawback means the rebate of duty chargeable on any imported materials or excisable materials
used in manufacture or processing of goods which are manufactured in India and exported.
ENTRY
Entry’ in relation to goods means an entry made in a Bill of Entry, Shipping Bill or Bill of
Export. It includes (a) label or declaration accompanying the goods which contains description,
quantity and value of the goods, in case of postal articles u/s 82 (b) Entry to be made in case of
goods to be exported (c) Entry in respect of goods imported which are not accompanied by label
or declaration made as per provisions of section 84. [Section 2(16)].
Exporter
Exporter in relation to any goods at any time between their entry of export and the time when
they are exported includes any owner or any person holding himself out to be the exporter.
[2(20)]

Goods
Customs duty is on ‘goods' as per section 12 of Customs Act. The duty is payable on goods
belonging to Government as well as goods not belonging to Government. Section 2(22), gives
inclusive definition of ‘goods' as - 'Goods' includes (a) vessels, aircrafts and vehicles (b) stores
(c) baggage (d) currency and negotiable instruments and (e) any other kind of movable property.
Thus, ships or aircrafts brought for use in India or for carrying cargo for ports out of India would
be dutiable. Definition of goods has been kept quite wide as Customs Act is used not only to
collect duty on ‘goods' but also to restrict/prohibit import or export of ‘goods' of any description.
Main two tests for ‘goods' are (a) they must be movable and (b) they must be marketable. The
very fact that goods are transported by sea/air/road means that they are
‘movable'. Since most of imports are on payment basis, test of ‘marketability' is obviously
satisfied.
DUTIABLE GOODS - Section 2(14) define 'dutiable goods' as any goods which are chargeable
to duty and on which duty has not been paid. Thus, goods continue to be 'dutiable' till they are
not cleared from the port. However, once goods are assessed at 'Nil' rate of duty, they no more
remain 'dutiable goods'.
IMPORTED GOODS - Section 2(25) define ‘imported goods' as any goods brought in India
from a place outside India, but does not include goods which have been cleared for home
consumption. Thus, once goods are cleared by customs authorities from customs area, they are
no longer ‘imported goods'. (Though in common discussions, goods cleared from customs are
also called 'imported goods').
EXPORT GOODS – As per section 2(19) of Customs Act, ‘export goods’ means any goods
which are to be taken out of India to a place outside India. Goods brought near customs area for
export purpose will be ‘export goods'. Note that once goods leave Indian Territory, Indian laws
have no control over them and hence the term ‘exported goods' has not been used or defined.
Importer
Importer, in relation to any goods at any time between their importation and the time when they
are cleared for home consumption, includes any owner or any person holding himself out to be
the importer. [2(26)]
Person-in-charge means—
(a) in relation to a vessel, the master of the vessel,
(b) in relation to an aircraft, the commander or pilot-in-charge of the aircraft;
(c) in relation to a railway train, the conductor, guard or other person having the chief direction
of the train;
(d) in relation to any other conveyance, the driver or other person-in-charge of the conveyance.
[2(31)]
Prohibited Goods
Prohibited Goods means any goods the import or export of which is subject to any prohibition
under this Act or any other law for the time being in force but does not include any such goods in
respect of which the conditions subject to which the goods are permitted to be imported or
exported have been complied with. [2(33)]
Stores
Stores means goods for use in a vessel or aircraft and includes fuel and spare parts and other
articles of equipment, whether or not for immediate fitting. [2(38)].

Classification of goods
Classification of goods under a particular heading of the import Tariff governed by a set of
General Interpretative Rules, which form an integral part of the CTA. As per these Rules,
classification is to determine according to the terms of the Headings or Sub-headings or Chapter
Notes These Rules also provide that completed unfinished article is to be classified as complete
or finished art. it has an essential character of the latter article. Similarly a con
finished article imported in an unassembled or disassembled condition to be classified an
complete or finished article and not as parts. The Rules also provide for the Classification of
mixtures and. composite goods consisting of different materials or made to of different articles
Once the classification is determined under the Import Tariff, the determination classification
under the Central Excise Tariff for the p1irpos of levy of countervailing duty equal to the excise
duty is a simple affair as both the Tariff are, more or less, aligned with the HSN.
Valuation of goods
Customs duty is payable as a percentage of ‘Value’ often called ‘Assessable Value’ or ‘Customs
Value'. The Value may be either (a) ‘Value’ as defined in section 14 (1) of Customs Act or (b)
Tariff value prescribed under section 14 (2) of Customs Act.
Tariff Value - Tariff Value can be fixed by CBE&C (Board) for any class of imported goods or
export goods. Government should consider trend of value of such or like goods while fixing
tariff value. Once so fixed, duty is payable as percentage of this value. (The percentage
applicable is as prescribed in Customs Tariff Act).
Customs value as per section 14 (1) - Customs Value fixed as per section 14 (1) is the ‘Value’
normally used for calculating customs duty payable (often called ‘customs value’ or ‘Assessable
Value'.)
Section 14 (1) provide following criteria for deciding ‘Value’ for purpose of Customs Duty:
Price at which such or like goods are ordinarily sold or offered for sale
Price for delivery at the time and place of importation or exportation
Price should be in course of International Trade
Seller and buyer have no interest in the business of each other or one of them has no interest
in the other
Price should be sole consideration for sale or offer for sale
Rate of exchange as on date of presentation of Bill of Entry as fixed by CBE&C (Board) by
Notification should be considered
This criterion is fully applicable for valuing export goods. However, in case of imported goods,
valuation is required to be done according to valuation rules Valuation has to be on the basis of
condition at the time of import – (a) CVD should be levied on goods in the stage in which they
are imported – stage subsequent to processing of goods is not relevant - (b) It is well settled that
the imported goods have to be assessed to duty in the condition in which they are imported.
Valuation Rules for imported goods
Valuation in Customs Act has to be done as per valuation rules. These rules are based on ‘WTO
Valuation Agreement’ (Earlier termed as GATT Valuation Code). These rules are only for
valuation of imported goods and not applicable to export goods.
The value of imported goods for purposes of assessment of duly is determined in accordance
with the provisions of Section 14 of 1962 and the Customs Valuation (Determination of Price of
Imported Goods) Rules, 1988, which were brought into force on 16th August, 1988 Rule 3(i) of
the Valuation Rules provides that the value of imported goods shall be the. ‘Transaction value’
under Rule 4 ‘Transaction value’ has been defined as the price actually paid or payable for the
goods when sold for export to India, adjusted in accordance with the provisions of Rule 9. The
adjustments under Rule 9 provide, inter alia, the addition in all cases, of freight and cost of
insurance to the ‘transaction value’ if not already included and also for the addition of loading,
unloading and handling charges for purposes of assessment. In other words, the assessable value
is the safe. Price of the imported goods plus the landing charges subject to any other adjustment
which may be necessary under the provisions of Rule. If the value cannot be determined under
Rule 3(i), the value is to be determined under Rules 5 to 8, which are required to be in that order.
The rate of exchange applicable for conversion of foreign currency in Indian currency is the rate
in force on the date of presentation of the Bill Entry under Section 46. Such exchange rates are
notified by the Govt. fro time to time by notifications issued under clause a (i) of Section 14(3).
Customs Value – Inclusions
Some costs, services and expenses are to be added to the price paid or payable, if these are not
already included in the invoice price. Rule 9 of Customs Valuation Rules provide that following
cost and services are to be added –
Commission and brokerage
Cost of container, which are treated as being one with the goods for customs purposes
Cost of packing whether labour or materials
Materials, components, tools, dies etc. supplied by buyer
Royalties and license fees
Value of proceeds of subsequent sales
Other payment as condition of sale of goods being valued
Cost of transport up to place of importation
Landing charges
Cost of insurance.
Exclusions from Assessable Value
Note to rule 4 provide that following charges shall be excluded:
Charges for construction, erection, assembly, maintenance or technical assistance undertaken
after importation of plant, machinery or equipment
Cost of transport after importation
Duties and taxes in India
Methods of Valuation for Customs
The Valuation Rules, 1988, based on WTO Valuation Agreement (earlier GATT Valuation
Code); consist of rules providing six methods of valuation. The methods are:
(a) Transaction Value of Imported goods
(b) Transaction Value of Identical Goods (c) Transaction Value of Similar Goods
(d) Deductive Value, which is based on identical or similar imported goods, sold in India.
(e) Computed value, which is based on cost of manufacture of goods plus profits
(f) Residual method based on reasonable means and data available.
These are to be applied in sequential order, i.e. if method one cannot be applied, then method
two comes into force and when method two also cannot be applied, method three should be used
and so on. The only exception is that the ‘computed value’ method may be used before
‘deductive value’ method, if the importer requests and Assessing Officer permits.
Transaction value of same goods: This is the first and primary method as per rule 3 of
Valuation Rules. As per rule 4(1), ‘transaction value’ of imported goods shall be the price
actually paid or payable for the goods when sold for exported to India, adjusted in accordance
with provisions of rule 9. [Rule 9 gives costs and services to be added to transaction value].
Transaction value of identical goods: Rule 5 of Customs Valuation Rules provide that if
valuation on the basis of ‘transaction value’ is not possible, the ‘Assessable value’ will be
decided on basis of transaction value of identical goods sold for export to India and imported at
or about the same time, subject to making necessary adjustments. Identical goods’ are defined
under Rule 2(1)(c) as those goods which fulfil all following conditions i.e. (a) the goods should
be same in all respects, including physical characteristics, quality and reputation; except for
minor differences in appearance that do not affect value of goods. (b) The goods should have
been produced in the same country in which the goods being valued were produced. (c) they
should be produced by same manufacturer who has manufactured goods under valuation - if
price of such goods are not available, price of goods produced by another manufacturer in the
same country.
Transaction value of similar goods: If first method of transaction value of the goods or second
method of transaction value of identical goods cannot be used, rule 6 provide for valuation on
basis of ‘Transaction value of similar goods imported at or about the same time'.
Rule 2 (1) (e) define ‘similar goods’ as (a) alike in all respects, have like characteristics and like
components and perform same functions. These should be commercially inter-changeable with
goods being valued as regards quality, reputation and trade mark. (b) the goods should have been
produced in the same country in which the goods being valued were produced. (c) they should be
produced by same manufacturer who has manufactured goods under valuation - if price of such
goods are not available, price of goods produced by another manufacturer in the same country
can be considered.
Deductive Value: Rule 7 of Customs Valuation Rules provide for the next i.e. fourth alternative
method, which is called ‘deductive method'. This method should be applied if transaction value
of identical goods or similar goods is not available; but these products are sold in India. The
assumption made in this method is that identical or similar imported goods are sold in India and
its selling price in India is available. The sale should be in the same condition as they are
imported. Assessable Value is calculated by reducing postimportation costs and expenses from
this selling price. This is called ‘deductive value’ because assessable value has to be arrived at by
method of deduction (deduction means arrive at by inference i.e. by making suitable
additions/subtractions from a known price to arrive at required ‘Customs Value').
Computed Value for Customs: If valuation is not possible by deductive method, the same can
be done by computing the value under rule 7A, which is the fifth method. [This method has been
added w.e.f. 24-4-95]. If the importer requests and the Customs Officer approves, this method
can be used before the method of ‘deductive value'. In this method, value is the sum of (a) Cost
of value of materials and fabrication or other processing employed in producing the imported
goods (b) an amount for profit and general expenses equal to that usually reflected in sales of
goods of the same class or kind, which are made in the country of exportation for export to India.
(c) The cost or value of all other expenses under rule 9 (2) i.e. transport, insurance, loading,
unloading and handling charges.
Residual Method: The sixth and the last method is called “residual method”. It is also often
termed as ‘fallback method’. This is similar to ‘best judgment method’ of the Central Excise.
This method is used in cases where ‘Assessable Value’ cannot be determined by any of the
preceding methods. While deciding Assessable Value under this method, reasonable means
consistent with general provisions of these rules should be the basis and valuation should be on
basis of data available in India. This method can be considered if valuation is not possible by any
other method
In other words, selling price for export to India can alone form the basis. (Thus, fixing ‘tariff
value’ is really against this rule).
Valuation for Assessment of Export Goods
Customs value of export goods is to be determined under section 14 (1) of Customs Act.
Customs Valuation Rules are applicable only for imported goods. Thus, Assessable Value of
export goods shall be “deemed to be the price at which such or like goods are ordinarily sold, or
offered for sale, for delivery at the time and place of exportation in the course of international
trade, where the seller and the buyer have no interest in the business of each
other or one of them has no interest in the other, and the price is the sole consideration for the
sale or offer for sale”.
Normally, ‘FOB Value’ of exports will be the basis. If the export sale contract is a CIF contract,
post exportation elements i.e. insurance and outward freight will have to be deducted. However,
now many instances have come to notice where exported goods have been over-valued to get
export benefits.
Valuation for CVD when goods are under MRP provisions – In respect of some consumer
goods, excise duty is payable on basis of MRP (Maximum Retail Price) printed on the carton. If
such goods are imported, CVD will be payable on basis of MRP printed on the packing.
However, it has been clarified by DGFT vide policy circular No. 38(RE-2000) / 1997-2002 dated
22-1-2001 that labelling requirements for pre-packed commodities are applicable only when they
are intended for retail sale. These are not applicable to raw materials, components, bulk imports
etc. which will undergo further processing or assembly before they are sold to consume.