Chapter-1 Basic Concepts of Income Tax

Income Tax Assessment Year 2010-11
CHAPTER-1
BASIC CONCEPTS OF INCOME TAX
TAX - MEANING THEREOF - Every state needs funds to govern the country. The
need of funds can be fulfilled by taking loans from their countries, grants & aids
from other countries, share of profit in govt. run organizations and through taxes.
Therefore, tax is that amount which is borne by the persons and
paid to the state for running the state.
KINDS OF TAXES - Taxes are of two kinds:-
(1) Direct Taxes; and (2) Indirect taxes.
DIRECT TAXES - These are borne and paid by the same person. For example:
Income tax, Wealth tax, Gift tax (Gift tax has been abolished in India) and
Interest tax.
INDIRECT TAXES - These are borne by persons who are different from the
payers. For example: Custom duty, Excise duty, Sales Tax, Entertainment tax,
Octroi etc.
INCOME TAX ACT, 1961 -
The current Income tax Act was regulated from 1.4.1961 and its
rules were brought into working from 1.4.1962. Every year the finance minister
of the country proposes for various changes in the Act through the Finance Bill.
This bill, when gets nod in the parliament, becomes ' The Amendment Act.'
SPECIFIC TERMS TO BE USED IN THE ACT-
PREVIOUS YEAR (SECTION 3): It refers to the year in which a person earns his
income which is taxable in the relevant assessment year. The period of previous
year is normally of 12 MONTHS starting from 1st April to 31st March in the next
calendar year. But in case of NEWLY SET-UP Business/profession or new
source of income the period of previous year may be less than 12 months. Thus
the period of previous year can be of less than 12 months in case of new source of
income but afterwards the period is always equal to 12 months.
ASSESSMENT YEAR [SECTION 2(9)]: It refers to the year in which income of a
person (who has earned his income in the relevant previous year) is charged to
tax. THIS MEANS THAT EACH PREVIOUS YEAR HAS A UNIQUE ASSESSMENT
YEAR. ALSO THE ASSESSMENT YEAR ALWAYS FOLLOWS THE PREVIOUS YEAR
e.g.
a) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR
2004-05 2005-06
(1.4.2004 TO 31.3.2005) (1.4.2005 TO 31.3.2006)
INCOME EARNED INCOME CHARGED TO TAX
b) PREVIOUS YEAR RELEVANT ASSESSMENT YEAR
2009-10 2010-11
(1.4.2009 TO 31.3.2010) (1.4.2010 TO 31.3.2011)
INCOME EARNED INCOME CHARGED TO TAX
This also leads to the conclusion that every financial year (1st April
to 31st March) is :- (1) ASSESSMENT YEAR for preceding Financial year; AND
Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1

(2) PREVIOUS YEAR for next financial year.

PERSON [SECTION 2(31)]: The definition as per the act is 'INCLUSIVE' one and
it includes:-
(1) INDIVIDUAL (may be minor, insane or lunatic).
(2) HINDU UNDIVIDED FAMILY
(3) COMPANY (Indian or Foreign or an entity recognised as Company by
C.B.D.T.).
(4) FIRM (a Partnership firm including a Limited Liability Partnership as per
The Limited Liability Partnership Act, 2008).
(5) ASSOCIATION OF PERSONS/BODY OF INDIVIDUALS (e.g. Co-op. society)
(6) LOCAL AUTHORITY (e.g. Municipal Corporation, Port Trust etc.).
(7) EVERY OTHER ARTIFICIAL JURIDICAL PERSON (e.g. Indian Railways,
University).
ASSESSEE [SECTION 2(7)]: Assessee means a person (as referred above) who is
liable to pay income tax or any other amount (interest or penalty) under the Act.
It also includes a person on whom any proceeding has been taken for
assessment of his income/loss or refund due to him.
It also includes a person who represents some other person who is liable
to pay tax. He is called “REPRESENTATIVE ASSESSEE’ or ‘DEEMED ASSESSEE’
(e.g. Father, filing the return of his working minor child, on his behalf).
It also includes a person who has made default under any provision of the
Income Tax Act. He is called ' ASSESSEE IN DEFAULT'. For example if a person
was responsible to deduct the Tax at Source but has not deducted the tax or after
deducting the tax he has not deposited such tax. Another example may be a
person who was liable to pay advance tax but he has not paid such advance tax.
INCOME [SECTION 2(24)]: The definition of 'Income’ under the Act is inclusive
and not exhaustive. It includes:
a) Profits and gains from business or profession;
b) Dividends;
c) Voluntary contributions received by a WHOLLY OR PARTLY CHARITABLE
OR RELIGIOUS TRUST/INSTITUTION EXCEPT the contribution forming
part of the CORPUS of the trust;
d) Perquisites and profit in lieu of salary;
e) ALLOWANCES or BENEFITS received by the assessee to meet his expenses
for PERFORMANCE OF HIS DUTIES;
f) ALLOWANCES received by the assessee to meet his personal expenses at
the place of duty or compensation for increased cost of living;
g) BENEFITS OR PERQUISITES enjoyed (by a Director or a person having
substantial interest or a relative of Director/such person) in a Company;
h) BENEFITS OR PERQUISITES obtained by REPRESENTATIVE ASSESSEE OR
any amount paid by representative assessee for the benefits of the
BENEFICIARY which is required to be paid by the beneficiary only;
i) Compensation (or similar payments) received by or due to a person under
PGBP;
J) Income of Trade associations (Professional also) who provide specific

services to its members;

k) BENEFITS OR PERQUISITES from BUSINESS OR PROFESSION;
l) Export Incentives to Exporters;
m) Any interest, salary, bonus, commission received by a partner from Firm;
n) Any sum received under Key man Insurance Policy;
o) Profit and Gains of Managing Agency;
p) Income from speculative transaction;
q) Recovery of any amount which has been allowed as deduction in any
preceding Assessment Year;
r) Income from sale of any fixed asset (except land) put to scientific research
without using it for any other purpose before sale;
s) Recovery of Bad debts, allowed as deduction in any preceding Assessment
Year;
t) Amount transferred to Special Reserve under section 36(i) (viii);
u) Recovery out of any discontinued business or profession;
v) Capital gains;
w) Insurance profit computed under section 44;
x) Casual Income;
y) Any sum received by employer from his employees as contribution to
RPF or any other approved fund and the amount not deposited with in
'DUE DATES’ as per section 43B.
z) Any sum received under a Key-man Insurance Policy.
za) any gift of money received by an individual from non-specified person(s)
in excess of Rs.50000.
THE POINTS TO BE NOTED:-
- A REVENUE INCOME IS TAXABLE UNLESS OTHERWISE STATED IN THE
ACT.
- A CAPITAL INCOME IS EXEMPTED UNLESS OTHERWISE STATED IN THE
ACT.
- PERSONAL GIFTS ARE NOT INCOME IN THE HANDS OF RECIPIENT
(EXCEPT GIFT OF MONEY EXCEEDING RS. 50000 RECEIVED
BYINDIVIDUAL OR HUF WITHOUT CONSIDERATION).
- PIN MONEY IS NOT INCOME OF THE HOUSEWIFE.
- AWARDS RECEIVED BY A PROFESSIONAL SPORTS PERSON IS TAXABLE
BUT AWARDS RECEIVED BY AMATEURE SPORTS PERSON IS NOT
TAXABLE AS INCOME.
- THE BURDEN OF PROVING THAT A RECEIPT IS TAXABLE IS ON THE
INCOME TAX DEPARTMENT. BUT THE BURDEN OF PROVING THAT AN
INCOME IS EXEMPT IS ON THE ASSESSEE.
CAPITAL RECEIPTS vs. REVENUE RECEIPTS:
As discussed earlier, that the revenue receipts are taxable, unless
these are specifically exempted from tax under the Act and the Capital Receipts
are exempted unless these are specifically charged to tax under the Act, so it
becomes necessary to understand the difference between the two. We have only
the cases decided by the courts with the help of which we can draw general

conclusions. These are as follows:-

a) The receipt is capital or revenue is to be considered only from recipient’s
point of view. The payer's motive is to be ignored.
b) Lump sum payments or payment received in Installment do not affect the
nature of the receipt.
c) Compensation received lieu of source of income is CAPITAL RECEIPT
whereas the compensation received for temporary disablement is a
revenue receipt.
d) Income from wasting assets (like mines and quarries are treated as
revenue income).
e) Insurance receipt for loss of current asset or against loss of profit is
Revenue Receipt. But Insurance claim for loss of Fixed Asset is capital
Receipt. The insurance claim for loss of goods, which are not for
business/profession, is Capital Receipt.
f) The receipt due to change in exchange rate of the currency on current
assets is Revenue receipt. But the receipt due to change in exchange rate of
the currency on FIXED ASSETS/INVESTMENTS is CAPITAL RECEIPT.
g) The subsidy received for setting up a business or completing a project is
CAPITAL RECEIPT. But the subsidy received for carrying out business
activities and after the commencement of production is REVENUE
RECEIPT.
HEADS OF INCOME: The Income Tax is levied an income of a person. This
income is divided into five heads as follows:-
1) INCOME UNDER HEAD SALARY
Income due/received by an employee from his past/present/future
employer is taxable under this head.
2) INCOME UNDER HEAD HOUSE PROPERTY
Income received/earned/deemed to be earned by a person from house
property is charged under this head.
3) INCOME UNDER HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION
Income received/earned by a person from his business or profession is
charged to tax under this head.
4) INCOME UNDER HEAD CAPITAL GAINS
Income earned /received by a person from sale/transfer of any capital
asset is charged under this head.
5) INCOME FROM OTHER SOURCES
Income from all other sources which can't be covered under first four
heads is charged to tax under this head.
IMPORTANT: INCOME TAX IS CHARGED ON ALL INCOMES OF A PERSON.
VARIOUS INCOMES ARE NOT CHARGED TO TAX SEPARATELY. For example: Mr.
X has income from:
a) Salary Rs. 10, 00,000/-; b) House property Rs. 2, 00,000/-; c) Profit from
cloth business Rs. 2, 00,000/-; d) Profit from Gold business Rs. 1, 00,000/-;
and e) Interest income of Rs. 50,000/-.
All these incomes will be charged to tax in only one RETURN OF INCOME i.e. of

Mr. X. All these incomes will be shown in the above said Return of Income only.
METHOD OF ACCOUNTING: Under the Act only two accounting methods are
allowed - a) Mercantile system and; b) Cash system.
But these two methods can only be employed for computing income
under head-a) Profit & Gain of Business or profession; & b) Income from other
sources.
The remaining three heads of Income i.e. a) 'Salary; b) House
property and; c) Capital Gain do not recognize any method of accounting
followed by the person/assessee. Under these three heads, income is calculated
as per provisions given in the chapter concerned.
Previous Year for Cash Credits, Investments, Money etc.
1. Cash Credit (sec 68): Where any sum is found credited in the books of an
assessee for any previous year for which the assessee has no satisfactory
explanation then such cash credit is treated as income of the assessee of the
previous year in which such income was credited.
2. Unexplained Investments (sec 69): Where in any previous year the assessee
has made any investments which are not recorded in the books of account
maintained by him and the assessee has no satisfactory explanation about the
source of investment then such unexplained investment is treated as income of
the assessee of the previous year in which such investment was made.
3. Unexplained Money (Sec 69A): Where in any previous year the assessee is
found to be the owner of any money, bullion, Jewellery or other valuable article
which is not recorded in the books of account and the assessee has no
satisfactory explanation about the source of money etc. then such unexplained
money etc. is treated as income of the assessee of the previous year in which the
assessee was found to be the owner.
4. Investments not fully disclosed in the books of account (sec 69B): Where
in any previous year the assessee has made any investments which are recorded
in the books of account maintained by him at an amount less than amount
expended and the assessee has no satisfactory explanation about the source of
excess amount expanded in investment then such excess amount is treated as
income of the assessee of the previous year in which such investment was made.
5. Unexplained Expenditure (Sec 69 C): Where in any previous year an
assessee has incurred any expenditure and the assessee has no satisfactory
explanation about the source of expenditure or part thereof then such
unexplained explained expenditure or part thereof is treated as income of the
assessee of the previous year in which such expenditure was incurred. Also such
unexplained expenditure can not be allowed as deduction under any head of
income.
6. Amount borrowed or repaid on Hundi (sec 69D): Where any amount is
borrowed on a Hundi from, or any amount due thereon is repaid to, any person
otherwise than through an account payee cheque drawn on a bank, the amount
so borrowed or repaid shall be deemed to be the income of the borrower or
repayer for the previous year in which such amount was borrowed /repaid. If
amount borrowed has already been taxed then there will be no tax levied at the

time of repayment of such amount.

EXECPTIONS TO THE GENERAL RULE THAT INCOME OF A
PREVIOUS YEAR IS CHARGED TO TAX IN THE RELEVANT
ASSESSMENT YEAR:
1. Non resident shipping business (sec 172) – In case of a non-resident
assessee owning a ship or ship is chartered by such assessee carrying passengers,
livestock, goods or mail shipped at any Indian Port then 7.5% of fare on account
of such carriage is deemed to be the income of such assessee. Such income is
taxable in the same year in which such fare was collected. It is immaterial
whether such assessee has any agent or representative in India or not.
2. Persons leaving India (sec 174) – If it appears to the Assessing Officer that
an individual may leave India during the previous year or shortly thereafter and
the such individual has no intention of returning back to India then the income of
such individual upto the probable date of his departure from India shall be
charged to tax in the same previous year itself.
3. AOP/BOI/ juridicial person formed for short duration (sec174A) – If an
AOP/BOI/ artificial juridicial person is formed for short duration for a particular
event or purpose and if it appears to the Assessing Officer that such AOP etc. may
be dissolved during the previous year or shortly thereafter then the income of
such AOP etc. of the previous year shall be charged to tax in the same previous
year itself.
4. Person trying to alienate (transfer) his assets to avoid tax liability (sec
175) -- If it appears to the Assessing Officer that an individual may sell, transfer,
dispose off or otherwise part with any of movable or immovable asset with a
view to avoid payment of any liability under the Income Tax Act then the income
of such individual upto date of starting proceedings under this section shall be
charged to tax in the same previous year itself.
5. Discontinued Business (sec 176) – If any business or profession is
discontinued during the previous year then the Assessing Officer may charge the
income of the previous year to tax in the previous year itself. Alternatively, the
Assessing Officer may charge such income to tax in the relevant assessment year.
PERFORMA OF COMPUTATION CHART OF INCOME TAX

Name of person :
Address :
Father's Name (if applicable) :
Date of Birth (if applicable) :
Previous Year :
Assessment year :
Ward/Circle/Range :
Permanent Account Number :

PARTICULARS AMOUNT
1. INCOME UNDER HEAD 'SALARIES' + 

2. INCOME UNDER HEAD 'HOUSE PROPERTY' + 
3. INCOME UNDER HEAD 'PROFITS & GAINS + 
OF BUSINESS'
4. INCOME UNDER HEAD 'CAPITAL GAINS’ + 
5. INCOME UNDER HEAD ‘OTHER SOURCES’ + 
Less: Setting off of brought forward losses - 

GROSS TOTAL INCOME (OR G.T.I.)
Less: Deduction under Chapter VI A - 

(Section 80C to 80U)
NET INCOME (OR NET TAXABLE INCOME)
(OR TOTAL INCOME)
TAX LIABILITY
Tax on special Incomes (like casual Income or long 

term Capital Gains or undisclosed Incomes or
incomes of non-residents)
Tax on Normal Income + 
TOTAL
Add: Surcharge (if applicable) + 

Add: Education Cess @2% of Tax and surcharge + 
Add: Secondary & Higher Education Cess @1% of
Tax and surcharge + 
TOTAL
Less: Rebate u/s 86, 89, 90 & 91 - 
Add: Interest u/s 234 A,234 B & 234 C + 
Less: Tax Deducted or collected at source - 
Advance Income Tax - 
Self Assessment Tax - 
NET AMOUNT PAYABLE / REFUND DUE
RATES OF TAX FOR ASSESSMENT YEAR 2010-11-
A. On Normal Income -
1(a) for woman, resident in India and below 65 years of age till 31.03.2010
Upto Rs. 1,90,000 Nil
From Rs.1,90,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%

1(b) For an Individual (man or woman), resident in India who is of 65 years of

age or more at any time during the previous year
From Rs.2,40,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(c) For Individuals (other than those mentioned above), HUF, AOP/BOI (other
than co-operative societies)
From Rs.1,60,010 to Rs. 3,00,000 10%
From Rs.3,00,010 to Rs. 5,00,000 20%
Above Rs. 5,00,000 30%
1(d) For Firms (including LLP’s) – A firm’s normal income is taxable @ 30%.
1(e) (i) For Domestic Company normal income is taxable @ 30%.
(ii) For Foreign Company normal income is taxable @ 40%.
1(f) For Co-operative societies
Upto Rs. 10,000 10%
From Rs.10,010 to Rs. 20,000 20%
Above Rs. 20,000 30%
1(g) For Local Authorities: A Local Authority’s normal Income is taxable @ 30%.
(B) On Special Incomes:
1. Short Term Capital Gain u/s 111 A is taxable @ 15%.
2. Long Term Capital Gain u/s 112 is taxable @20%.
3. Winning from Lotteries, crossword puzzles, card games etc. u/s 115 BB is
taxable @ 30%.
SURCHARGE: In case a Company (Domestic or Foreign) has a total income not
exceeding Rs. 1,00,00,000 then there is no surcharge otherwise there is
surcharge of 10% (in case of Domestic Company) and 2.5% in case of foreign
company on income tax less rebate (if any).
In above case there is marginal relief of surcharge.
For other persons there is no surcharge for A.Y. 2010-11.
EDUCATION CESS: Education cess is 2% of total tax (including surcharge) for all
assessees.
SECONDARY & HIGHER EDUCATION CESS: It is 1% of total tax (including
surcharge) for all assessees.
* * *

CHAPTER-2
RESIDENTIAL STATUS
A person may earn/receive his income from a source or at a place
with in India or outside India. Such income is charged to a person on the basis of
Residential Status. Residential Status is different from 'Nationality’ or ‘Domicile.’
Before starting the concept of understanding different types of residential status
it is necessary to understand that:
1) Each and every person has a distinctive residential status for every
relevant previous year. It means that the person can be either '
ORDINARILY RESIDENT' or 'NOT ORDINARILY RESIDENT’ or ‘NON
RESIDENT’:
2) Every person has to consider his residential status in every relevant
previous year. It means that a person Resident in A.Y.2009-10 may be non-
resident in AY 2010-11 according to the rules to be studied later on.
3) It is not necessary that a person, who is resident in India, can't be Resident
in any other country in the same previous year. It simply means that a
person can be Resident in more than one country in the same previous
year.
4) If a person is resident in a particular previous year for one source of
income then he is also resident for other sources of income for that
previous year. This means that a person has same residential status
for incomes of a particular previous year.
The residential status is studied by dividing the persons in following
five categories:-
a) Individual b) H.U.F. c) Firm/AOP or BOI.
d) Company e) every other person.
A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual can be:

i) Resident; ii) Resident but not ordinarily resident; or iii) Non-resident.
RESIDENT & ORDINARILY RESIDENT [Sec 6(1), 6(6)(a)]: An individual is
resident in India in a previous year if he fulfills at least one of the following
two conditions:
a) He is in India for at least 182 days in the previous year; or
b) He is in India for at least 60* days in the previous year and at least 365
days in four years preceding the relevant previous year.
*This period of 60 days is to be replaced by 182 days if:
i) Individual is Indian Citizen or a person of Indian origin who comes for a
visit to India; or
ii) Individual is Indian Citizen who leaves India during the relevant previous
year for employment purpose outside India or as a crew member of Indian
Ship.
NOTE: AN INDIVIDUAL IS A PERSON OF INDIAN ORIGIN IF HE OR EITHER OF
HIS PARENTS OR ANY OF HIS GRAND PARENTS (BOTH PATERNAL &
MATERNAL) WAS BORN IN UNDIVIDED INDIA.

An individual, who fulfills either of 'a' or 'b' or both conditions given

above, has to fulfill both of the conditions given below to be ordinarily Resident:-
a) He is resident in India for at least 2 years out of 10 years immediately
preceding the relevant previous year; &
b) He is in India for at least 730 days in 7 years preceding the relevant
previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT [SEC6 (1), 6(6)(a)]: An
individual who fulfills at least one of the Basic conditions of resident but does not
fulfill both of the conditions for ordinarily resident is RESIDENT BUT NOT
ORDINARILY RESIDENT.
NON RESIDENT:- An individual who does not fulfill any of the basic condition of
resident is called NON-RESIDENT.
B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F. can also be i)

Resident and ordinarily resident; ii) Resident but not ordinarily resident; & iii) Non
resident.
RESIDENT & ORDINARILY RESIDENT [Sec.6 (2)]: The H.U.F. is resident in
Indian in a previous year if de-facto (actual) control and management of its
affairs is situated wholly or partly in India.
The H.U.F., who is Resident, has to fulfill both of the conditions given
below to be ordinarily resident:-
a) The Karta (Manager) is resident in India for at least 2 years out of 10 years
immediately preceding the relevant previous year; &
b) The Karta is in India for at least 730 days in 7 years preceding the relevant
previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT: The HUF who is resident in India
(i.e. the Control & Management of its affairs is in India either wholly or partly)
but it does not fulfill both of the conditions for ordinarily resident is resident but
not ordinarily resident.
NON-RESIDENT: The H.U.F., control & management, of whose affairs, is wholly
outside India is Non-resident.
C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6 (2)]: A firm can be

either i) resident; or ii) Non resident.
RESIDENT: A firm is resident in India if control and management of its affairs is
situated wholly or partly with in India.
NON RESIDENT: A firm/AOP or BOI is non resident in India if Control and
management of its affairs is situated wholly outside India.
NOTE: A Firm is not 'ordinarily' or 'not ordinarily resident’.
D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)]: The company can be

either: i) Resident; or ii) Non- resident
RESIDENT: The Company, which is registered in India (Called Indian Company),
is always resident in India. A foreign company is resident in India if control and
management of its affairs is situated wholly with in India.

NON RESIDENT: A foreign company is non resident in India if control &

management of its affairs is wholly or partly outside India.
NOTE: A company is never 'ORDINARILY RESIDENT' or 'NOT ORDINARILY
RESIDENT.
E) RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC 6(4)]: In case
of every other person, same rules are applicable as are in case of a
FIRM/AOP/BOI.
TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

PARTICULARS ORDINARILY RESIDENT NON
RESIDENT BUT NOT RESIDENT
ORDINARILY
RESIDENT
1 Income received in India TAXABLE TAXABLE TAXABLE
(Where ever accrued)
2 Income deemed to be TAXABLE TAXABLE TAXABLE
received in India
(wherever accrued )
3 Income accrued in TAXABLE TAXABLE TAXABLE
India(wherever received)
4 Income deemed to be TAXABLE TAXABLE TAXABLE
accrued in India
(wherever received)
5 Income accrued and TAXABLE TAXABLE NOT
received outside India, TAXABLE
from a business controlled
from India or a profession
set up in India (wholly or
partly)
6 Income accrued and TAXABLE NOT TAXABLE NOT
received outside India, TAXABLE
from a business controlled
from outside India or a
profession set up outside
India
7 Income accrued and NOT TAXABLE NOT TAXABLE NOT
received outside India TAXABLE.
during any preceding
previous year but
remitted to India during
the previous year.
INCOME DEEMED TO BE RECEIVED IN INDIA: The following are incomes which

are deemed to be received in India:-
i) Annual accretion to balance in Recognised provident fund of an employee

i.e. interest credited at a rate exceeding 9.5%.

ii) Contribution in excess of 12% of General Salary (to be discussed in chapter
'Salary') by the Employer towards R.P.F.
iii) Transfer balance from U.R.P.F. to R.P.F.
iv) Tax Deducted at source on income of payee.
v) Deemed Profit u/s 41 and 59 i.e. Recovery of any deduction or bad debts or any
income after closure of business or profession or sale of any asset used for
scientific research.
vi) Contribution by Central Government towards pension fund of its employees
under section 80 CCD.
vii) Special Incomes like cash credits, unexplained money etc..
INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following are incomes

deemed to accrue or arise in India:-
i) Income from Business connection in India.
ii) Income from property or any source of Income which is situated in India.
iii) Income from Transfer of Capital Asset situated in India.
iv) Salary (other than allowances and perquisites) received by Indian National
(citizen) Government employees posted outside India.
v) Salary of an individual if service is rendered in India.
vi) Dividend received by any person from an Indian Company.
vii) Income by way of interest or royalty or fees from technical service
received by any person from Central or State Govt.
viii) Income by way of interest or royalty or fees for technical service received
by any person from any other person if the fund or money or source of
income from royalty is used in India.
NOTE: Business connection may be of many types i.e. an agent in India or an

Indian Branch Office etc.. But in case of a Non-resident person the
following are not treated as business connection in India:
a) Activities confined to purchase of goods in India for exports;
b) Activities confined to collection of news and views for transmission
outside India by or on behalf of Non-resident engaged in business of news
agency or publishing newspapers, magazines or journals;
c) Activities confined to shooting of cinematographic film in India if such
Non-resident is:
i) an individual- not an Indian citizen; or
ii) a firm- having no partner being Indian Citizen or Indian Resident; or
iii) a company- having no shareholder being Indian Citizen or Indian
Resident.
* * *

Chapter-3
INCOME UNDER HEAD "SALARIES"
The first head of Income is ‘Income from Salaries’. First of all let us understand
some important concepts about it:-
a) EMPLOYER-EMPLOYEE RELATIONSHIP: The relationship between payer
and the payee must be that of employer and employee (i.e. master and
servant relationship). Whether the relationship is of master & servant or
not, is decided on case to case basis. The general rule is that a master is a
person who directs the servant WHAT IS TO BE DONE, WHEN IT IS TO BE
DONE, & HOW IT IS TO BE DONE. But this rule can't be applied in all cases.
[for example in case of a teacher or a doctor the above rule fails].
 Remuneration received by a Member of Parliament is not chargeable as
salary because the relationship between him and the Government is not of
employer & employee. [It is chargeable under head “Income from other
sources”].
 Remuneration received by a partner from his partnership firm is not
chargeable as salary because the relationship between him and the firm is
not of employer & employee. [It is chargeable under head "Profits & Gains
of business and profession"].
b) SURRENDER OF SALARY: Any salary surrendered by the employee to the
Central Government under Section 2 of The Voluntary Surrender of
Salaries (Exemption from taxation) Act, 1961 is not charged to tax. The
employee may be in private, public or Government service.
c) FOREGOING OF SALARY: If any salary is foregone by the employee (not
surrendered as per point (b) then it is to be charged to tax.
d) PLACE OF ACCRUAL OF SALARY: The salary income is accrued where the
employee renders the services. The place of receipt of salary is of NO
IMPORTANCE.
* But there is one exception to this rule. The salary, received by Indian
National Government Employee posted outside India, is deemed to accrue
or arise in India.
e) TAX FREE SALARY: If an employee receives tax free salary from his
employer then it simply means that tax has been paid by the employer.
The tax paid by employer will be added back to find total salary due to the
employee.
f) SALARY PAID BY FOREIGN EMPLOYER: If employee rendering service in
India is paid salary by his foreign employer; it is taxable in India (unless
otherwise stated to be exempt u/s 10).
g) SALARY DUE OR RECEIVED IN FOREIGN CURRENCY: If the employee
earns/receives salary in foreign currency, it will be converted in Rupees by
applying. TELEGRAPHIC TRANSFER BUYING RATE on the last day of the
month preceding the month in which salary is due or paid or is in arrears.
h) DISTINCTION BETWEEN SALARY & WAGES NOT IMPORTANT: The Act

does not make any difference between salary and wages. Both are
chargeable under 'SALARY'.
i) BASIC SALARY IN GRADE SYSTEM: Under this system, the annual
increments to be given to the employee are already fixed in the grade. Let
us take an example of an employee, who joins service on 1.7.2008 and is in
the grade of 15000-500-20000-1000-40000. It means that in the first year
of service i.e. from 1.7.2008 to 30.6.2009 he will get Rs. 15,000 per month.
In the next year from 1.7.2009 to 30.6.2010, his basic salary will be Rs.
15,500 (including increment of Rs. 500). He will get annual increments of
Rs. 500 till his basic is Rs. 20,000. Then his annual increments will be Rs.
1,000 till his basic is Rs. 40,000. After then there will be no increment.
j) SALARY FROM MORE THAN ONE SOURCE: If an employee gets his salary
from more than one employer then all the salary is taxable under head
income from 'SALARIES.'
k) SALARY FROM PAST, PRESENT OR FUTURE EMPLOYER: Any
remuneration received from past, present or future employer is to be
charged under head 'SALARIES'.
l) SALARY WHEN DUE: There are two approaches - i) Salary is due on the
last date of month; and ii) Salary is due on the first date of next month.
m) BASIS OF ACCOUNTING IRRELEVANT: The books of accounts kept by
employee (if any) and accounting method followed by him (cash or
mercantile) are not relevant for calculating salary income of the employee.
MEANING OF SALARY U/S 17(1): The definition of Salary is inclusive one. It

includes:-
- Wages;
- Any annuity or pension;
- Any Gratuity;
- Any fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages;
- Any advance of Salary;
- Any payment received by an employee in respect of any period of leave not
availed by him;
- Annual accretion to the balance at the credit of an employee participating
in a recognized provident fund to the extent to which it is chargeable to
tax;
- The aggregate of all sums that are comprised in the transferred balance of
an employee participating in a recognised provident fund to the extent to
which it is chargeable to tax.
- The contribution made by the Central Government to the account of an
employee under pension scheme referred to in section 80 CCD.
The above definition is inclusive. But in general, Salary
includes all the payments made by employer to employee (including gratuitous
payments, allowances and perquisites).

PROCESS OF COMPUTING SALARY INCOME:

It can be understood from the following table:-
Basic Salary + 
Fees and Commission + 
Bonus + 
Entertainment Allowance + 
Other Allowances (Taxable parts only) + 
Perquisites (Taxable parts only) + 
Retirement Benefits (taxable parts only) + 
GROSS SALARY
Less: Deduction for Entertainment - 
Allowance u/s 16 (ii)
Less: Deduction for Professional/ - 
Employment tax u/s 16(iii)
INCOME UNDER HEAD SALARY
BASIS OF CHARGE (SECTION 15): Salary is charged to tax in "due or receipt"

basis whichever is earlier. But advance salary is taxable on Receipt basis. Arrears
of Salary is taxable on receipt basis if not charged to tax in any previous year on
due basis. Similarly Bonus is taxable on receipt basis if not charged to tax earlier
on due basis. Salary in lieu of notice period is always taxable on Receipt basis.
Now we shall study all the components of salary and their taxability one by
one.
BASIC SALARY: It is taxable or due on receipt basis whichever is earlier.
FEES & COMMISSION: It is also taxable on due or receipt basis w.e. is earlier.
BONUS: It is taxable on receipt basis if not charged to tax earlier on due basis.
However relief u/s 89 can be claimed if it is taxed on receipt basis.
SALARY IN LIEU OF NOTICE PERIOD [Section 15]: It is taxable only on receipt
basis.
ADVANCE SALARY [Section 17(1)(v)]: It is taxable on receipt basis because it is
never due. However relief u/s 89 can be claimed.
ARREARS OF SALARY: It is taxable on receipt/ allowed basis if it is not taxed
earlier on due basis. However relief u/s 89 can be claimed.
ANNUITY: It is taxable on due or receipt basis w.e. is earlier. If it is received from
present employer, it is taxed as Salary. If it is received from past employer, it is
taxed as profits in lieu of Salary.
RETIREMENT BENEFITS
There are following types of retirement benefits:
1. Gratuity
2. Pension
3. Leave Salary
4. Retrenchment Compensation
5. Compensation on voluntary retirement.
6. Provident Fund

7. Approved Superannuation fund

Now we shall study these one by one:
GRATUITY (DEATH-CUM-RETIREMENT)[Section 10(10)]:
Gratuity is received by employee from his employer in appreciation of past
services. It can be received by either:-
i) The employee himself on his retirement; or
ii) The legal heir on the death of employee.
The Gratuity received by employee is taxable under head ' Salaries'
but the Gratuity received by the Legal heir is not taxable (if employee died
while in service). But some part of Gratuity is exempt u/s 10(10). For this
the employees are divided into three categories:
i) Central/ State Government employees and employees of local authorities.
ii) Employees covered under ' The payment of Gratuity Act, 1972’.
iii) Other Employees.
EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES & EMPLOYEES OF

LOCAL AUTHORITIES [SECTION 10(10)(i)]: Full amount of Gratuity received
by the employee is EXEMPT from tax.
EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE PAYMENT OF

GRATUITY ACT, 1972 [SECTION 10(10)(ii)]: Least of the following three
amounts is exempt from tax:
a) Actual Gratuity Received;
b) 15 days of salary for every completed year of service a part thereof in
excess of six months;
c) Rs. 3,50,000/-.
NOTE 1) In case of seasonal employee 15 days are to be replaced with 7 days.
2) The number of days in a month are taken as 26.
3) Salary means Basic salary and Dearness Allowance last drawn.
4) Salary in case of a piece-rated employee is calculated on the basis of average of
last three months’ wages (excluding wages for overtime work) preceding
retirement.
4) The payment of Gratuity Act, 1972 is applicable in case of every
shop/establishment (employing more than 9 workers) and every factory, mine,
oilfield, port, plantation etc.
EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]: Least of the

following is exempt from tax:
a) Actual Gratuity Received;
b) ½ month’s average Salary for each completed year of service;
c) Rs. 3,50,000/-.
NOTE: 1) Salary means Basic Salary, Dearness Allowance (if terms of
employment so provide) and commission based on fixed percentage of turnover
ACHIEVED BY THE EMPLOYEE.
2) Average Salary means salary (discussed as above) for 10 months immediately

preceding the month of retirement/resignation/leaving the job.

3) In case of employees not covered under The payment of Gratuity Act, 1972 the
maximum amount of Gratuity exempt from tax in their lives is Rs.3,50,000 .
PENSION [SECTION 17(1) (ii)]:

Pension is paid by the employer after retirement or death of employee in
appreciation of his past services. It can be received by either:
i) The employee himself on his retirement; or
ii) The legal heir on the death of the employee.
The pension received by employee is taxable under head ‘Salaries’. The
pension received by the legal heirs is called 'Family Pension’ and it is taxable
under head ‘Income from other sources’.
Pension can be either commuted or uncommuted.
Uncommuted Pension: It is received on monthly basis by the employee after
retirement. It is fully in taxable in case of all employees.
Commuted pension: It is received by the employee on lump-sum basis.
Exemption is available as follows:-
Exemption for Central or State Government or Local Authority or Statutory
Corporation Employees:
Commuted pension received by these employees is fully exempt from tax.
Exemption in case of other employees:
a. If the employee receives gratuity also: The commuted value of
1/3rd of the pension is EXEMPT from tax.
b. If the employee does not receive gratuity: The commuted value of ½
of the pension is EXEMPT from tax.
Pension scheme for Employee Central Government or any other employer
joining on or after 1st January, 2004:- The conditions to be fulfilled:
1) The assessee is an Individual.
2) He is employed by the Central Government or any other employer on or
after 1st January, 2004.
3) He has paid or deposited any amount not less than 10% of salary in his
account under a pension scheme notified by the Central Government in the
previous year.
4) The employer also contributes an amount equal to 10% of his salary in his
pension account. Such contribution is fully taxable under head Salaries.
5) Employee’s contribution as above (not exceeding 10% of his salary) plus
Employer’s contribution to the above pension fund (not exceeding 10% of
his salary) is deductible under section 80CCD.
6) If the employee or his nominee receives any amount on account of closure
of the account or as pension during the previous year then such amount
received will be taxable in the hands of the employee or his nominee, as
the case may be, in the year of receipt.
7) Salary means Basic Salary plus Dearness Allowance, if the terms of
employment so provide.

LEAVE SALARY [Section 10(10)]: The Employees are entitled to various types
of leaves while in service like casual leaves, medical leaves, outstation leaves etc.
The employee can take all these leaves. But if he does not avail all leaves then
some of the leaves may either lapse or be cancelled while some may be earned
(earned leaves). These earned leaves can be encashed by the employee either in
the same year or any other year while he is in service OR he may get earned leave
encashed on retirement or resignation or his legal heirs may get this amount
after his death.
A) If leave Salary is encashed by the employee when he is in service with the
same employer then it is FULLY TAXABLE. However relief u/s 89 can be
claimed.
B) If Leave Salary is encashed by the employee at the time of retirement or
leaving the job then the exemption is as follows:
i) Exemption for Central or State Government Employees [SECTION
10(10AA)(i)]: Leave encashment at the time of retirement/leaving the job
is FULLY EXEMPT.
ii) Exemption for other employees [SECTION 10 (10AA)(ii)]: Leave
encashment at the time of retirement/ leaving the job is exempt to the least of
following:
(a) Leave Encashment actually received;
(b) 10 months X Average Salary;
(c) (Total leave entitlement by taking maximum 30 days for every completed
year of service - Months of leaves availed/encashed) X Average Salary.
(d) Rs 3,00,000/- (Rupees Three Lac only).
NOTE:
1. Salary Means Basic Salary, Dearness Allowance (if the terms of
Employment so provide) and Commission based on fixed percentage of
turnover achieved by the employee.
2. Average Salary means “Salary of 10 months immediately preceding
retirement/leaving the job.
3. Leave salary paid to legal heirs of the deceased employee is not taxable.
4. In case of other employees, maximum amount of leave salary exempt from
tax is Rs. 3,00,000. This is applicable if the employee has more than one
employer in his life.
RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any compensation received

by a workman at the time of his retrenchment is exempt to the least of following:
a. Actual amount received;
b. Amount as per section 25 F (b) of the Industrial Disputes Act, 1947;
c. Rs 5,00,000/- (Rupees five Lac only).
Note: Under The Industrial Disputes Act, 1947, a workman is entitled to receive
compensation equal to 15 days’ average salary for every completed year of
service a part thereof in excess of six months.
COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C) & RULE 2 BA]:

The compensation received by the employee at the time voluntary retirement is

exempt if following conditions are satisfied –
1. Compensation is received by the employee at the time of voluntary
retirement/ separation.
2. Compensation is received by an employee of the following undertakings:
a. an Authority established under a Central, State or Provincial Act;
b. local Authority;
c. university;
d. an Indian Institute of Technology;
e. the State Government;
f. the Central Government;
g. a notified institute having importance throughout India or any State;
h. a notified institute of management;
i. a public sector company;
j. any company or a co-operative society.
3. Compensation is received in accordance with the scheme of voluntary
retirement/ separation which is framed in accordance with prescribed guidelines
as per Rule 2BA.
4. Where exemption has been allowed to an employee under section 10(10C) for
any assessment year, no exemption there under shall be allowed to him in
relation to any other assessment year.
EXEMPTION AMOUNT IS LEAST OF THE FOLLOWING.
(a) Actual Compensation received;
(b) Rs 5,00,000/- (Rupees five Lac only).
GUIDELINES OF VOLUNTARY SCHEME [RULE 2BA]:
(1) The employee must have completed at least 10 years of service or be of at
least 40 years of age.
(2) The employee may be worker or executive but not Director of Company/
Co-operative Society.
(3) The voluntary retirement is to reduce the existing strength of employees
and no appointment will be made for the vacancy caused by Voluntary
retirement.
(4) The retiring employee is not to be employed in other concern belonging to
the same management.
(5) The amount receivable is least of –
(a) Three months salary for each completed year of service.
(b) Number of Months for retirement x Salary at the time of retirement.
NOTE: Salary means Basic Salary, Dearness Allowance (if the terms of
employment so provide) and commission (based on fixed %ge of turnover
achieved by the employee) last drawn.
PROVIDENT FUND: There are four types of Provident Funds:

(a) Statutory Provident fund (SPF or GPF): It is set up under the provisions
of The Provident Funds Act, 1925. This fund is for employees of Central
Government, State Government, Local Authorities, Semi-Government

Organisations, Railways, Universities and recognised Educational

Institutions.
(b) Recognised Provident fund (RPF): It is set up under the provisions of
The Employees’ Provident Fund and Miscellaneous Provisions Act,
1952. This fund is for employees of those establishments which have
employed 20 or more workers. The establishments having less than 20
workers can also join this scheme. Any establishment has two options
for RPF: 1) Join scheme of the Government set up under the above Act;
or 2) To have own scheme of provident fund and to get it recognised
from the Commissioner of Income Tax as per rules under Part A of the
IV schedule to The Income Tax Act.
(c) Unrecognised Provident fund (URPF): Any establishment having own
scheme of provident fund but fails to get it recognised from the
Commissioner of Income Tax as per rules under Part A of the IV
schedule to The Income Tax Act then such provident fund is known as
unrecognised provident fund.
(d) Public Provident Fund (PPF): The Central Government has established
Public Provident Fund for general public. Any individual can be
member PPF (whether employee or not) by opening PPF account at
Post Office or nationalized banks. PPF is different from others because
even a non–employee can have PPF Account. Thus in PPF employer
does not contribute any amount.
TREATMENT FOR TAX PURPOSES
PARTICULARS SPF RPF URPF
1 Employer’s Fully Exempt Exempt up to Ignore for the
Contribution 12% of Salary time being
(NOTE-1)
2 Employee’s Deduction u/s Deduction Deduction u/s
contribution 80C available u/s 80C 80C not available
available
3 Interest on P.F Fully Exempt Exempt UPTO Ignore for the
Balance. 9.5% p. a. time Being.
4. Receipt of Lump sum Fully Exempt Generally Note-3

amount on Exempt
Retirement or (Note-2)
Resignation
NOTE:
1) Salary means Basic Salary, Dearness Allowance (if the terms of employment so
provide) and commission based on fixed percentage turnover achieved by the
employee.
2) The receipt of Lump sum amount on Retirement/ resignation on shall be
exempt if:

(a) The employee has completed continuous service for 5 years or more; OR
(b) The employee has been terminated due to employee’s ill health, closure
of employer’s business or other reason beyond control of the employee;
OR.
(c) The employee continues with same Provident fund Account with other
employer.
(3) The receipt of Lump-sum amount on URPF balance shall be treated on
follows:-
(a) Employer’s Contribution (total) + Interest on employer’s Contribution
shall be fully taxable as Salary.
(b) Interest on Employee’s Contribution Shall be fully taxable as ‘Income from
other Sources’;
(4) PPF: Annual contribution by individual/ HUF fully qualifies for Deduction
u/s 80C. The annual Interest on PPF is fully exempt. The Lump sum
amount received is also fully exempt.
APPROVED SUPERANNUATION FUND: Superannuation fund is also one of the

schemes of retirement benefits. If such fund has been and continues to be
approved by the Commissioner of Income Tax according to rules contained in
Part B of IV schedule of the Income Tax Act. The tax treatment is as follows-
1. Employer’s Contribution during the previous year is exempt from tax in
the hands of employee upto Rs. 1,00,000. Excess contribution is charged to tax.
2. Employee’s Contribution qualifies for Deduction under section 80C.
3. Interest on fund Balance is fully exempt from tax.
4. Any payment from fund shall be fully exempt if-
(a) It is made on the death of a beneficiary; or
(b) It is made on retirement at or after specified age or employee becoming
incapacitated before such retirement; or.
(c) It is made as refund of contributions on the death of beneficiary; or
(d) It is made as refund of contribution of employee leaving service (other
than due to (b)) to the extent of contributions made before 1/4/1962.
TRANSFERRED BALANCE (URPF Converted in to the RPF): Whenever the

URPF is converted in to the RPF, the employee may opt to transfer his URPF A/c
balance (either fully or partially) to RPF A/c. Such balance transferred to RPF A/c
on the date of conversion is called transferred balance. The tax treatment is as
under –
(a) The URPF Shall be treated as RPF from the beginning. Each year’s
Employer’s Contribution in excess of 12% Salary (10% of salary till A.Y
1997-98) is calculated. This amount is taxable in the year URPF is
converted in to RPF.
(b) The Interest on RPF balance in excess of 9.5% p.a. (12% p.a. till A.Y2001-
02) is calculated. This amount is taxable in the year when URPF is
converted into RPF.

ALLOWANCES
Allowance is fixed amount of money paid/payable by the employer
to the employee for meeting some expense-the expense may be official or
personal. All allowances are taxable UNLESS OTHERWISE CLEARLY STATED TO
BE EXEMPT. The taxable allowances are taxed on due or receipt basis whichever
is earlier. The allowances can be studied under following heads –
(a) Fully exempted allowances.
(b) Allowances Exempted UPTO some Limit.
(c) Entertainment allowance.
(d) Fully Taxable Allowances.
Now we shall study them one by one.
FULLY EXEMPTED ALLOWANCES: These are:
(1) Allowances (all) to Indian National Government Employees posted out
side India.
(2) Allowances to High Court Judges under section 22A (2) of the High court
Judges (Conditions of service) Act, 1954.
(3) Sumptuary Allowance to High court and Supreme Court Judges.
(4) Allowances to UNO employees.
ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied as:

 House Rent Allowance u/s 10 (13 A); &
 Notified Allowances u/s 10 (14).
HOUSE RENT ALLOWANCE [SEC. 10 (13 A) & RULE 2 A]:

House Rent Allowance is exempt to the least of the following-
(a) Actual HRA received (period of occupation of rented place only).
(b) Rent Paid- 10% of Salary (period of occupation of rented place only).
(c) 40 % (50% in case of rented place at Mumbai, Delhi, Calcutta or Chennai) of
Salary (period of occupation of rented place only).
NOTE: 1. Salary means Basic Salary, Dearness Allowance (if the terms service so
include) and commission based on fixed %ge of turnover achieved by the
employee.
2. Salary for this purpose is determined on DUE Basis only.
3. If there is any change in Salary, Rent, Place of Residence or HRA in the year
then the exemption shall be calculated in parts.
NOTIFIED ALLOWANCES U/S 10 (14) & RULE 2BB:

The allowances are further sub-divided in to three categories as follows-
(A) ALLOWANCES- (AMOUNT RECEIVED OR AMOUNT SPENT WHICH EVER
IS LESS IS THE AMOUNT EXEMPT):
(1) Travelling Allowance- It is given to meet cost of travel on tour or on
transfer of duty.
(2) Daily allowance- It is given to meet daily ordinary charges due to absence
from normal place of duty when on official tour or on transfer of duty.
(3) Conveyance Allowance – It is given to meet conveyance expenses for

official purpose.
(4) Helper Allowance: It is given to meet expenditure of helper for official
purpose.
(5) Academic Allowance: It is given to meet academic/ research/ training
costs in Educational & Research Institutions.
(6) Uniform Allowance: It is given to meet the cost of purchase and
maintenance of uniform for official purpose.
(B) ALLOWANCES–(AMOUNT RECEIVED OR LIMIT SPECIFIED WHICH

EVER IS LESS IS THE AMOUNT EXEMPT): In case of following allowances actual
expenditure is not considered at all:
(1) Children Education allowance – Exempt up to actual amount received
per child or Rs 100 p.m. per child up to maximum of 2 children w.e. is less.
(2) Hostel Expenditure Allowance- Exempt up to actual amount received
per Child or Rs 300 p.m. per child up to maximum of 2 children w. e. is less.
(3) Tribal Area Allowance – Exempt up to actual amount received or Rs 200
p.m. w.e. is less.
(4) High Altitude allowance (Special Composite Hill Compensatory
Allowance): Exempt from Rs. 300 p.m. to Rs.7,000 p. m. depending upon
level of difficulty.
(5) Border Area/ Remote Area & Disturbed Area Allowance- Exempt from
Rs. 200 p. m. to Rs 1,300 per month.
(6) Compensatory field Area Allowance- Exempt up to Rs 2,600 p.m.
(7) Compensatory Modified field Area Allowance- Exempt up to Rs 1,000
p.m.
(8) Counter Insurgency allowance- Exempt up to Rs 3,900 p.m.
(9) Transport Allowance- It is given to meet cost of commuting between
office to home. Exempt up to Rs 800 per month (In case of Disabled
persons u/s 80 U it is Rs 1,600 p.m.)
(10) Under ground Allowance – It is given to coal mine workers. Exempt up to
Rs 800 p.m.
(11) High Altitude (Uncongenial climate) allowance- It is given to member
of armed forces. Exempt up to Rs 1,060 p.m. (for altitude of 9000 ft to
15000 ft) and up to Rs. 1,600 p.m. (for altitude of above 15000 ft).
(12) Special Compensatory highly active field area Allowance- It is given to
members of armed forces. Exempt to the extent of Rs 4,200 p.m.
(13) Island duty allowance- It is given to members of armed forces for
Andaman & Nicobar & Lakshadweep Islands. Exempt up to Rs 3,250/-p.m.
(C) TRANSPORT ALLOWANCE-(CERTAIN %GE OF AMOUNT RECEIVED OR

CERTAIN LIMIT WHICH EVER IS LESS IS EXEMPT):
An employee of transportation employer receiving fixed allowance to meet
his duties of running such transport from one place to another can claim
exemption as follows –
(a) 70% of allowance; or

(b) Rs 6,000 p.m. w. e .is less.

But such employee can’t get benefit of this allowance plus Daily allowance
simultaneously.
ENTERTAINMENT ALLOWANCE
This allowance is given to entertain various persons while
performing official duty. This is fully taxable. But in case of Central/ State
Government Employees, a deduction u/s 16(ii) can be claimed to the least of the
following:
(a) Actual Entertainment allowance;
(b) 20% of Basic Salary;
(c) Rs 5,000 (Rupees five Thousand only).
ALLOWANCES WHICH ARE FULLY TAXABLE

All other allowances are full taxable. Some of these are -
 City Compensatory Allowance;
 Dearness allowance;
 Medical allowance;
 Lunch/Tiffin allowance;
 Over time allowance;
 Servant allowance ;
 Warden Allowance;
 Non practicing allowance;
 Family Allowance.
PERQUISITES
Perquisites (or perks) are the benefits/ facilities in cash or in kind
provided by the employer to the employee either free of cost or at concessional
rate. The most important feature of perk is that the employee must have a right
to the same and it should not be voluntary or contingent (i.e. may or may not be)
payment.
PERQUISITES AS PER SECTION 17 (2) – DEFINITION:

The Act gives inclusive definition. Accordingly perquisites include-
(a) The value of Rent free Accommodation provided to the employee by the
employer;
(b) The Value of Concessional Rent Accommodation provided to the employee
by the employer;
(c) The VALUE of any benefit or facility provided or granted either free or at
concessional rates in the case of specified employees (to be discussed later
on);
(d) The obligation of employee paid by employer;
(e) The amount paid/payable (on accrual basis) by the employer for Life
Insurance or Contract of Annuity of the employee (except RPF, approved
superannuation fund & deposit Linked Insurance fund);

(f) The value of sweat equity shares or any specified security (like Debentures
or Warrants) allotted or transferred (directly or indirectly) by the employer
either free or at concessional rates to the employee;
(g) The amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
(h) The value of any other benefit or amenity as may be prescribed.
NOTE: The perquisites from (a), (b), (d), (e) and (h) are taxable in the hands of all
employees whether specified or non-specified. In case of specified employees
perquisites mentioned in (c) are also taxable. Perquisites as per (f) and (g) are
taxable only if conditions mentioned therein are fulfilled.
TAXABILITY OF PERQUISITES
Perks are divided into three categories as follows-
1) Perks taxable in case of all the employees.
2) Perks taxable in case of specified employees only.
3) Perk of sweat equity shares or any specified security (like Debentures
either free or at concessional rates to the employee.
4) Perk of employer’s contribution towards approved superannuation fund in
excess of Rs. 1,00,000.
5) Tax-free or exempted perks.
PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES

The following perquisites are taxable in case of all employees-
1. The Value of Rent Free Accommodation provided to the employee by the
employer;
2. The Value of Concessional Rent Accommodation provided to the employee
by the employer,
3. The monetary obligation of employee paid by the employer;
4. The amount paid/payable (on accrual basis) by the employer for life
Insurance or Contract of Annuity of employee (except RPF, approved
superannuation fund and Deposit Linked Insurance Fund);
5. The value of any other benefit or amenity (excluding the fringe benefits
chargeable to tax under Chapter XII- H) as may be prescribed.
PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES ONLY

First of all, let us understand who is a specified employee-
SPECIFIED EMPLOYEE
 It includes a Director of the company (Full/part time Director for full year
or a single day); or
 An employee having substantial interest (being beneficial owner of 20% of
the voting power) in the employer company; or
 An employee having Monetary Salary exceeding Rs 50,000. Here monetary
Salary refers to all taxable Cash payments less deduction u/s 16 (ii) & 16 (iii) of
Entertainment allowance and Professional tax.

All monetary obligations of employee paid by employer are taxable

perquisites in the hands of ALL EMPLOYEES. But if the employer provides non-
monetary benefit to the employee then they are taxable in the hands of
SPECIFIED EMPLOYEES only. Some examples are-
 If watchman/sweeper/gardener/personal attendant is employed by
the employee and his salary is reimbursed by the employer then it’s
taxable in all cases being the obligation of the employee met by the
employer. But if the watchman/sweeper/gardener/personal attendant is
provided by the employer then this perk is taxable only in case of specified
employees.
 Free or concessional use of gas/electricity/water for household
consumption is taxable in all cases if the bills for above facilities are in the
name of employee being the obligation of the employee met by the
employer. If such bills are in the name of employer then it will be
perquisite in case of specified employee only.
 If the school fees of children of the employee is reimbursed to him or
paid by employer on his behalf to the school then such amount shall be
perquisite in case of all employees being the obligation of the employee
met by the employer. If the children of employee are studying in a school
maintained by employer or in a school with which the employer has an
agreement then if shall be perquisite in case of specified employee only.
 Free or concessional use of motor car
 Private journey of employee and/or any member of household provided
free of cost or at concessional rates
 Any other benefit provided to the employee
So any non-monetary benefit (other than exempted perks and perks which
are taxable in all cases) is taxable in case of specified employees only.
NOTE: Besides above the following perks are also taxable if conditions
mentioned therein are fulfilled:
(i) The perk of sweat equity shares or any specified security (like Debentures
either free or at concessional rates to the employee;
(ii) The perk of amount of employer’s contribution towards approved
superannuation fund in excess of Rs. 1,00,000;
PERQUISITES TAXABLE IN CASE OF ALL EMPLOYEES

RENT FREE ACCOMODATION [RULE 3 (1)]
The term ‘accommodation’ includes a house, flat, farm house (or a part
thereof), or accommodation in a hotel, motel, service apartment, guest house,
mobile home, ship or any other floating structure.
The accommodation provided may be unfurnished or furnished. The
Employees are divided into two categories:-
(a) Central and state Government Employees
(b) Private Sector or other employees.
The accommodation is valued as under:

FOR CENTRAL & STATE GOVERNMENT EMPLOYEES:

This employee’s category includes Government employees on deputation
and presently working with any undertaking under Control of Govt. However
employees of foreign Government are not covered under this category.
1. Where the accommodation is unfurnished – The value of perk shall be
‘Licence fee’ determined by Government in accordance with rules framed
by it.
2. Where the accommodation is furnished –The value of perk shall be: Value
of unfurnished accommodation plus 10% p.a. of ‘ACTUAL COST’ of
furniture (if owned by the employer) plus actual hire charges
paid/payable by the employer (if furniture is hired by the employer)..
FOR PRIVATE SECTOR & OTHER EMPLOYEES: This category includes those
employees who are not covered under the above category.
i) Where the accommodation is unfurnished.
Population of It accommodation is owned If accommodation
City as per by employer taken on lease or rent
2001 census by the employer
More than 15% of salary in respect of 15% of salary OR actual
25,00,000 period during which the rent paid/payable by
accommodation is occupied by the employer which
the employee. ever is less.
More than 10% of salary in respect of
10,00,000 but period during which Same as above
up to 25,00,000 accommodation is occupied by
the employee.
Any other city 7.50% of salary in respect of
period during which Same as above
accommodation is occupied by
the employee.
ii) Where the accommodation is furnished:- The value of perk shall be :

value of unfurnished accommodation plus 10% p.a. of actual cost of
furniture (if owned by the employer) plus actual hire charges
paid/payable by the employer (if furniture is hired by the employer).
SPECIAL NOTE: FOR ACCOMMODATION PROVIDED BY EMPLOYER

(GOVERNMENT OR OTHER) IN A HOTEL
The perk is not taxable if:-
a) Such accommodation is provided for a period not exceeding 15 days; AND
b) It has been provided on transfer of the employee.
In every other case it will be valued as:-
i) 24% of salary for the previous year; or
ii) Actual charges of such hotel whichever is less, for the period for which the
accommodation in hotel is provided.

NOTE:
- MEANING OF SALARY FOR RENT FREE ACCOMMODATION: For this
purpose, salary includes:-
Basic salary, dearness allowance / pay (if the terms of employment
so provide), Bonus, Commission, fees, all taxable parts of allowances and
all monetary payments chargeable to tax (like leave encashment, pension
of current year).
For this purpose salary does not include:-
Dearness allowance / pay (if the terms of employment do not so
provide), employer’s contribution to PROVIDENT FUND ACCOUNT of the
employee, all allowances or part of allowances exempt from tax, value of
perquisites specified under section 17 (2) of the Act.
- Accommodation includes house, flat, farm house or part there of or
accommodation in a hotel, motel, service apartment, guest house, caravan,
mobile home, ship or other floating structure.
- Hotel includes licensed accommodation in motel, service apartment or
guest house.
- Salary is to be computed an accrual basis.
- Salary from all employers (in case of two or more employers) will be taken
into consideration for the period during which the accommodation is
provided.
- If employee is provided accommodation is a remote area and the employee
is working at mining site or onshore oil exploration site or project
execution site or an offshore site of similar nature then value of such
accommodation in NIL.
- If an employee is transferred from one place to other and he is provided
accommodation at new place while he occupies the old accommodation
also then value of perk will be only for one accommodation having lower
value till first 90 days and thereafter both the accommodations will be
charged to tax.
VALUATION OF ACCOMMODATION PROVIDED AT CONCESSIONAL RATE: The

value calculated as Rent Free Accommodation (other than hotel accommodation)
as above is reduced by actual Rent paid by the employee. In case of hotel
accommodation rent paid or payable by the employee is deducted from
calculated value of Rent Free Accommodation.
VALUATION OF OBLIGATION OF EMPLOYEE MET BY EMPLOYER: If any

monetary obligation of employee is met by the employer then value of such perk
is equal to AMOUNT SPENT BY THE EMPLOYER in this regard. This perk is
taxable in case of ALL EMPLOYEES. Some examples are :-
a) Salary of watchmen/ sweeper/ gardener (engaged by the employee)
paid/reimbursed by the employer;
b) Gas, electricity or water bill (in the name of employee) paid/reimbursed
by the employer;

c) Income tax/professional tax of employee paid/reimbursed by the

employer;
d) Medical Expenses reimbursed in excess of Rs.15,000.
VALUATION OF LIFE INSURANCE PREMIUM/DEFERRED ANNUITY: Any
amount paid/payable by the employer as life Insurance premium or deferred
annuity premium is a perk taxable in case of ALL EMPOYEES. The value of perk
shall be AMOUNT PAID/PAYABLE (ON DUE BASIS) AS PREMIUM FOR SUCH
POLICY. This is perk only if the EMPLOYEE HAS VESTED INTEREST IN THE
POLICY.
* ESI/ Group Insurance/ Fidelity Guarantee Premium paid by employer is NOT A
PERK as such scheme is generally for the benefit of the employer.
VALUATION OF FRINGE BENEFITS:
The fringe benefits provided by the employer to the employees are taxable in the
hands of all employees. According to rule 3(7), the following are prescribed
benefits:-
i) Interest free or concessional loan
ii) Travelling, accommodation and any other expenses paid/ borne/
reimbursed by the employer for any holiday availed of by the employee
and/or any family member
iii) Free food and beverages
iv) Any gift voucher or token
v) Expenses on credit cards
vi) Club membership and expenses in club
vii) Use of any moveable Assets by the employee.
viii) Transfer of any moveable assets by the employer in favour of the
employee (directly or indirectly).
i) Interest free or concessional loans [Rule 3(7)(i)]:- The value of benefit

from loan availed by the employee (directly or indirectly) from the employer is
calculated as follows :-
Purpose of loan Period or Amount of loan Rate to be applied for
valuation of perks
a) For house Up to 5 years 9.75%^ ,10.25%*
Above 5 years but up to 15 years 10%^,10.50%*
Above 15 years but up to 20 years 10.25%^,10.75%**,
11%***
b) For Car Up to 3 years (below Rs. 7.50 Lac) 11.75%
Up to 3 years (Rs. 7.50 Lac and 11.50%
above)
Above 3 years but upto 5 years 11.75%
Above 3 years but up to 7 years 12%
c) For Two 16.25%
Wheelers
c)For Education Loan Amount up to Rs. 4 Lac 11.75%^^
Loan Amount above Rs. 4 Lac up 13.25%^^

to Rs. 7.50 Lac

Loan amount above Rs. 7.50 Lac 12.50%^^
d)Personal 16.50%
Loan
e) ESOP Loan 14.50%
^ Up to Rs. 30 Lac
* Above Rs. 30 Lac
** Above Rs. 30 Lac but up to Rs. 75 Lac
*** Above Rs. 75 Lac
The interest shall be calculated on Maximum monthly balance outstanding.
If any interest is ACTUALLY PAID by the employee (directly or indirectly) then.
Value of benefit will be reduced by such interest actually paid.
But In The Following Cases There Will Be No Perk:
- If the amount of loans do not exceed Rs. 20,000; OR
- If the loan is for medical treatment of specified diseases (as per rule 3A).
But if any amount is reimbursed by the Insurance Company to the
employee then benefit shall be taxable on amount so reimbursed by
Insurance Company from the month of such reimbursement.
- Maximum monthly outstanding balance means outstanding balance on last
day of each month.
- The term directly means employee and ‘indirectly’ means spouse, children
and their spouses, parents, servants and dependents.
ii) Valuation of Perk of Travelling, accommodation and any other

expenses paid or borne or reimbursed (to employee) by employer for
any holiday availed by the said employee or any member of
household [Rule 3(7)(ii)]:
Situation Value of perk
1) If such facility (maintained by Value at which such facilities are
employer) is not available to all offered by other agencies to public.
employees
2) If employee (on official tour) Value equal to such amount of
takes any member of his household expenditure incurred
and expenses are incurred by
employer on such member
3) If official tour is extended as Value equal to amount of
vacation expenditure incurred for vacation
period
4) In any other case Value equal to amount of
expenditure incurred
Note: If any amount is paid by or recovered from employee for such benefit then
the value of perk will be reduced by such amount.
iii) Valuation of Perk of free food and non-alcoholic beverages [[Rule
3(7)(iii)]:

1) Tea or snacks during working Nil

hours
2) free food and non-alcoholic Nil
beverages during working hours in
remote area or offshore installation
3) free food and non-alcoholic Nil if amount is up to Rs. 50 per
beverages during working hours; meal. Excess amount is value of
a) at office or business premises; or perk. Such perk is to be reduced by
b) through non-transferable paid amount recovered from employee.
vouchers usable only at eating joints
4) In any other case Value equal to amount incurred by
employer. Such perk is to be
reduced by amount recovered from
employee.
iv) Valuation of perk of Gift, Token or Voucher [Rule 3(7)(iv)]:

1) If gift is in cash or gift cheque/ Value equal to actual amount of
voucher convertible into cash cash gifted/gift cheque or voucher.
2) If gift is of other item and value of Nil
such non-cash gift, token etc is upto
Rs. 5,000
2) If gift is of other item and value of Value equal to actual amount of gift
such non-cash gift, token etc is less Rs. 5,000
above Rs. 5,000
v) Valuation of membership fees and expenses on credit cards [Rule

3(7)(v)]:
1) If such expenses are incurred Nil*
wholly and exclusively for official
purposes
2) In any other case Value equal to amount
paid/reimbursed by the employer.
Such perk is to be reduced by
amount recovered from employee.
*The employer: a) has to maintain a complete detail of such expenses; and
b) has to give a certificate in this regard that such expenses are incurred
wholly and exclusively for official purposes.
vi) Valuation of perk of Club membership and expenses incurred in a

club [Rule 3(7)(vi)]:
1) If such expenses are incurred Nil*
wholly and exclusively for official

purposes
2) In any other case Value equal to amount
paid/reimbursed by the employer.
Such perk is to be reduced by
amount recovered from employee.
*The employer: a) has to maintain a complete detail of such expenses; and
b) has to give a certificate in this regard that such expenses are incurred
wholly and exclusively for official purposes.
vii) Use of moveable assets (owned or hired by employer) [Rule

3(7)(vii)]:
1. Use of laptops and computer Nil.
2. Movable assets except as per i)10% p.a. of actual cost of assets
point (1) and already specified in owned; and
the rules. ii)actual hire charges (paid/
payable) on assets hired; less
amount recovered from the
employee.
viii) Transfer of movable assets owned by employer [Rule 3(7)(viii)]:

Asset transferred Value of benefit
1. Computers and electric items Actual cost less 50% of WDV for
each completed year less amount
paid by the employee.
2. Motor cars Actual cost less 20% of WDV for
each completed year less amount
paid by the employee.
3. Any other assets Actual cost less 10% of original
cost for each completed year less
amount paid by the employee.
Note: Completed years means full number of years from date of asset put to use
till date of transfer to employee. Any part of the year is to be ignored.
ix) Valuation of any other benefit, amenity, facility etc. provided by the
employer [RULE 3 (7) (ix)]: The value of such benefit (for example: sale of
goods to employee at concessional rates) shall be cost to the employer under an
arm’s length transaction less employee’s contribution. But this rule does not
apply to perk of telephones and mobiles which is fully exempt.
PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES

i) Valuation of perk of motor car and other vehicles [RULE 3 (2)]: This
perk is taxable to specified employees only except when the car is owned by the
employee and expenses are met by the employer (as it becomes obligation of
employee met by the employer).

Circumstances Value of Perk

I. If car is owned by employee
a) Car expenses met by employee Nil. (not a perk)
b) Car expenses are met by employer
i) Car used wholly for official Nil. (NOTE- I)
purpose
ii) Car used wholly for private Actual expenditure incurred by
purpose employer
iii) Car used partly for official and Actual expenditure by employer
partly for private purpose less amount (@ Rs. 1800 pm. for
car upto 1.6 litres capacity and
Rs. 2400 p.m. for car exceeding
1.6 litres capacity plus @ Rs. 900
p.m. if chauffeur is provided) or
higher amount for official
purpose (as per note -1)
II. If car is owned/hired by employer
a) Car expenses are met by employee
i) Car used wholly for official Nil. (Not a perk)
purpose
ii) Car used wholly for private 10%p.a. of Actual cost of car
purpose (owned by employer) OR Actual
hire charges of car (hired by
employer) plus actual salary of
chauffer (if provided)
iii) Car used partly for official and Rs. 600 pm. for car up to 1.6
partly for private purpose litres capacity or Rs. 900 pm. for
car more than 1.6 litres capacity
plus RS. 900 pm. for chauffer (if
provided).
b) Car expenses are met by the
employer
i) Car used wholly for official Nil. (Note -1)
purpose
ii) Car used wholly for private Actual expenses of running and
purpose maintenance plus actual salary of
chauffer (if provided) plus 10%
p.a. of actual cost (if car owned
by employer) OR actual hire
charges (if car hired by
employer)
iii) Car used partly for official and Rs. 1800 p.m. for car up to 1.6
partly for private purpose. litres capacity and Rs. 2400 p.m.

for car exceeding 1.6 litres

capacity plus Rs. 900 p.m.. for
chauffer (if provided)
III If any other automotive
conveyance owned by employee
and running & maintenance
expenses are met by employer
i) Used wholly for official purpose Nil (Note -1)
ii) Used partly for official and Actual expenses incurred by
partly for private purpose employer less amount @ Rs. 900
p.m. or higher amount for official
purpose (as per note-1)
Note :-
1. Car is used for official purpose wholly only if following conditions are fulfilled:
a) Employer has maintained full detail of journey for official purpose; &
b) Employer gives certificate in this regard.
2. Month means complete month as per English calendar and part of the month is
ignored.
3. If employee is allowed to use more than one car then perk of one of the cars
will be as if car is used partly for official and partly for private purpose and perk
of other cars will be as if these are used wholly for private purpose.
4. If employee pays some amount for the perk enjoyed then such amount shall be
deducted from the value of perk. But in case of car used partly for official &
partly for private purpose nothing will be deducted if car is owned/leased by
the employer.
5. Use of car by employee from residence to office and back is not chargeable to
tax.
6. Conveyance facility to High Court Judges and Supreme Court Judges in not
taxable.
ii) Valuation of perk of Sweeper, Gardener, Watchman or Personal

Attendant [RULE 3 (3)]: The value of benefit is actual cost paid / payable by the
employer less any amount recovered from the employee (if any). This perk is
taxable to all employees if such workman is engaged by the employee (as it
becomes obligation of employee met by the employer). Otherwise it is taxable in
case of specified employees only. But the method of valuation of perk is same in
both situations.
Note: If gardener is provided to employee along with rent free or concessional
rent accommodation owned by the employer then salary of gardener is not
taxable as it is not a perk.
iii) Valuation of perk of gas, electricity or water [RULE 3(4)]: If the

connection is in the name of the employee than this perk is taxable is case of all
employees (as it becomes obligation of employee met by the employer).

Otherwise it is taxable in case of specified cases only. The value of perk is as

follows:-

a) If supply is from employer’s own Perk @ manufacturing cost per
source without purchasing from unit. Such perk is to be reduced
outside agency. by amount recovered from
employee.
b) In any other case Value equal to amount
paid/reimbursed by the
employer. Such perk is to be
reduced by amount recovered
from employee.
iv) VALUATION OF FREE/CONCESSIONAL EDUCATIONAL FACILITIES

[RULE 3(5)]:
a) If the educational institution is
owned and maintained by the
employer or employer has an
agreement with the institution.
i) Education facility is provided to Cost of such education in similar
employee’s children in situation in or near the locality
less Rs. 1000 p.m. per child less
amount recovered from the
employee.
ii) Education facility is provided to Cost of education in similar
any member (other than children) institution in or near the locality
less amount recovered from the
employee.
b) In any other case Amount incurred by the
employer less amount recovered
from the employee.
Note:
1. Perk of Free education covered under point (b) is taxable in case of all
employees. Perk covered under point (a) is taxable in case of is taxable in
case of specified employees only.
2. Free education facility and training of employees in not taxable.
3. Fixed education allowance in exempt up to Rs. 100 p.m. per child (for
maximum of two children) and Hostel allowance is exempt up to Rs. 300
pm. per child (for maximum of two children). Excess is taxable.
4. Scholarship to children of employee by the employer solely at employer’s
discretion is not a perquisite.
VALUATION OF PERK OF FREE/CONCESSIONAL JOURNEY IN CASE

EMPLOYEES OF A TRANSPORTER EMPLOYER [RULE 3(6)]:

The value of benefit is amount offered by such employer to the
public as reduced by amount recovered from the employee. This perk is taxable
only in case of specified employees.
NOTE: Privilege passes and tickets granted to Railway and Airline Employees are
Tax Free perks.
VALUATION OF SWEAT EQUITY SHARES [RULE 3(8)] & SPECIFIED
SECURITIES [RULE 3(9)]:
The value of such specified securities or sweat equity shares shall be
their fair market value on the date when the option is exercised by the employee
as reduced by the amount recovered from him in respect of such security or
shares.
Note: The fair market value is:
CASE 1: Equity Share is listed in only one recognised stock exchange:
a) Average of opening price and closing price on the date when option is
exercised.
b) Closing price on the date closest to date of exercise of option preceding such
date of exercise if no trading has been done on date of exercise.
CASE 2: Equity Share is listed in more than one recognised stock exchange:
a) Average of opening price and closing price on the date when option is
exercised in that exchange where there is highest volume of trade on that date.
b) Closing price on the date closest to date of exercise of option preceding such
date of exercise in that exchange where there is highest volume of trade on that
date.
CASE 3: Equity Share is not listed in any recognised stock exchange:
Value determined by a merchant banker on the date of exercise of option
or any date not more than 180 days earlier than date of exercise.
CASE 4: Specified security not being equity share in the company:
Value determined by a merchant banker on the date of exercise of option
or any date not more than 180 days earlier than date of exercise.
Employer’s contribution towards approved superannuation fund:
Employer’s contribution towards approved superannuation fund in excess of Rs.
1,00,000 is taxable perquisite in the hands of the employee.
TAX FREE PERQUISITES
These perks are exempted from tax in case of all (whether specified or
non-specified) employees.
1. Medical Facilities or Medical reimbursement:
a) Medical facility provided to an employee or any member of his
family in hospital/ nursing home/dispensary maintained by the employer
is FULLY EXEMPT.
b) Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment in hospital maintained by Govt /
Local Authority or any other Govt approved hospital is fully EXEMPT.
c) Medical Reimbursement of any expenditure by employee on his or
any of his family member’s treatment for PERSCRIBED DISEASES (as per

Rule 3A of Income tax Rules, 1962) in approved hospital is Fully EXEMPT.

d) Medical Reimbursement of any other expenditure by employee on
his family member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000.
e) Group Medical Insurance (Mediclaim) obtained by employer for his
employees or reimbursement of Mediclaim insurance premium (for his
health or any of his family member’s health) is Fully EXEMPT.
2. Food & non- alcoholic Beverages provided by the employer during
working hours:
a) in the office or factory; or
b) through non-transferable paid vouchers which are usable at only
the eating joints is EXEMPT up to Rs. 50 per meal;
c) Tea or snacks is fully exempt;
d) free food and non-alcoholic beverages during working hours in
remote area or offshore installation is fully exempt.
3. Recreational facilities provided to a group of employees (not to only a few
employees) is FULLY EXEMPT.
4. Interest free/ Concessional Interest Loan to Employee:
a) If the loans to employee do not exceed Rs 20,000 then the value of
benefit of such loan is FULLY EXEMPT.
b) If the loan to employee is given for treatment of specified diseases (as
per Rule 3A of the Income Tax Rules, 1962), then the value of benefit of
such loan is FULLY EXEMPT.
5. Perquisites to Indian National Government Employees posted outside
India are FULLY EXEMPT.
6. The benefit of training of employee and cost met by the employer for
refresher management course is FULLY EXEMPT.
7. Rent free Accommodation and free conveyance facility given to a Judge
of High Court or Supreme Court is FULLY EXEMPT.
8. Rent Free accommodation to officer of Parliament, union Minister or
leader of opposition is FULLY EXEMPT.
9. Rent free/ concessional Rent accommodation provided to employee in
remote area at mining site or oil exploration site (offshore), or project
execution site is Fully EXEMPT.
10. Free Education provided to children of employee in educational institute
(either maintained and owned by employer; or other institute) is exempt
up to Rs.1000 per month per child (no limit on number of children).
11. Use of health club, sports facilities provided to Employees is Fully
EXEMPT.
12. USE (not ownership) of laptops/ computers by the employee or any of his
family members for official / personal purpose is FULLY EXEMPT.
13. Expense on telephone/ mobile phone incurred by the employer for the
employee is FULLY EXEMPT.
14. Employer’s Contribution to approved superannuation fund up to Rs.
1,00,000 is exempt. Excess contribution is taxable.
15. Pension or Deferred Annuity Scheme or or Deposit Linked Insurance fund

is fully exempt.
16. Employer’s Contribution to Staff Group Insurance Scheme is FULLY
EXEMPT.
17. Premium paid by employer on personal accident policy of employee is
FULLY EXEMPT.
18. Transfer (without consideration) of a movable asset (other than computer,
electronic item and car) by the employer to the employee after using it for
10 years or more is FULLY EXEMPT.
19. Tax paid by the employer on non-monetary perquisites of the employee is
FULLY EXEMPT.
20. Leave Travel Concession is exempt upto limits mentioned in the rules of
valuation discussed later on.
Medical facility or Medical Reimbursement

(a) Medical facility- Medical facility provided to an employee or any member
of his family in hospital/ nursing home/dispensary maintained by the employer
is FULLY EXEMPT.
(b) Medical Reimbursement (With in India)-
-Medical Reimbursement of any expenditure by employee on his or any of his
family member’s treatment in hospital maintained by Govt / Local Authority or
any other Govt approved hospital is fully EXEMPT.
-Medical Reimbursement of any expenditure by employee on his or any of his
family member’s treatment for PERSCRIBED DISEASES (as per Rule 3A of Income
tax Rules, 1962) in approved hospital is Fully EXEMPT.
-Medical Reimbursement of any other expenditure by employee on his family
member’s treatment is EXEMPT UPTO MAXIMUM OF Rs. 15,000/-(SEE NOTE-2).
-Group Medical Insurance (Mediclaim) obtained by employer for his employees
or reimbursement of Mediclaim insurance premium (for his health or any of his
family member’s health) is Fully EXEMPT.
(c) Medical facility/Medical Exp. Reimbursement for treatment of the
employee or any of his family member is exempt as follows (OUT OF INDIA
TREATMENT) –
-Amount Spent in Medical treatment-Exempt up to amount permitted by RBI.
-Amount spent on Stay abroad of patient and one attendant-Exempt up to
amount permitted by RBI.
-Amount Spent on Travel of patient and one attendant – EXEMPT only if GROSS
TOTAL INCOME (before this perk of travelling) does not exceed Rs, 200,000/-
NOTE: 1 Family means the spouse and children of employee (dependent or non-
dependent); and parents, brothers and sisters of employee, wholly or mainly
dependent on the employee.
1. If medical bills are in the name of the employee then these are taxable in
case of ALL EMOPLOYEES and if the bills are in the name of employer, then these
are taxable in the hands of Specified employees only.
LEAVE TRAVEL CONCESSION [Sec 10(5)]:

(a) For all employees- The LTC received/receivable by the employee from his
present/past employer is entitled for exemption if-
 he proceeds on leave to any place in India; or
 he proceeds to any place in India after retirement/ termination of his
service.
AMOUNT OF EXEMPTION
IF JOURNEY IS PERFORMED BY AIR EXEMPT UPTO ECONOMY FARE OF
NATIONAL CARRIER BY SHORTEST
ROUTE.
IF JOURNEY PERFORMED OTHER EXEMPT UPTO 1ST CLASS AC FARE BY
THAN BY AIR & ORIGIN & SHOTREST ROUTE
DESTINATION PLACES ARE
CONNECTED BY RAIL
IF ORIGIN AND DESTINATION EXEMPT UPTO 1ST CLASS FAIR OF
PLACES ARE NOT CONNECTED BY RECOGNISED PUBLIC TRANSPORT BY
RAIL SHOREST POSSIBLE ROUTE.
IN CASE OF NO RECOGNISED PUBLIC
TRANSPORT. EXEMPT UPTO 1ST
CLASS AC FARE OF RAIL BY
SHORTEST ROUTE (IMAGINING
JOURNEY PERFORMED BY RAIL)
NOTE: 1The Amount Exempt can never be more than actual amount spent on
Fare.
1. The LTC exemption is allowed 2 times in block of 4 calendar years. If LTC
Exemption is not availed in any block then only one LTC exemption can be
carried forward to first year of next block of 4 years.
2. The other expenses of journey (like boarding, lodging, conveyance) are not
subject to exemption.
3. LTC is for family (including spouse and children of the employee; parents,
brothers and sisters of employee wholly/mainly dependent upon him).
4. From 1st October, 1998, the benefit of LTC is for only 2 children. But
children borne before 1.10.1998 as well as multiple birth after one child
after 30.9.1998 are eligible for exemption.
LTC FOR FOREIGN CITIZENS
Passage money received by foreign citizen is fully chargeable to tax.
PROFITS IN LIEU OF SALARY [SECTION 17 (3)]: The payments are received in

lieu of or in addition to salary. These include:-
1. Retrenchment compensation (taxable portion only).
2. Compensation due to modification in terms of employment.
3. Employer’s contribution to URPF/ unrecognised superannuation fund and
interest there on (at the time of retirement/leaving the job).
4. Amount received by employee under Keyman insurance policy.
5. Amount received before joining employment and after leaving the job.

6. Any other sum received by the employee form the employer like:-
a) Taxable part of gratuity.
b) Taxable part of pension.
c) Taxable part of RPF
d) Taxable part of approved superannuation fund
e) Taxable part of HRA.
Therefore except terminal and other payments exempt under sec 10
(10) to sec 10 (13A), all other payments received by the employee from
past/present/future employer is taxed as profit in lieu of salary.
DEDUCTIONS FROM SALARIES

Till now we have learnt about taxability or exemption of various
components of salary. All these taxable components and full entertainment
allowance when added become ‘GROSS SALARY’. From gross salary, the following
two deductions are allowed:-
1. Entertainment Allowance U/S 16 (ii).
2. Professional tax/tax an employment U/S 16 (iii)
ENTERTAINMENT ALLOWANCE U/S 16(ii):

In case of Central or State Government employees least of the
following is amount of deduction:
a) Actual entertainment allowance;
b) 20% of basic salary;
c) Rs. 5,000 (Rupees five thousand only).
PROFESSIONAL TAX/TAX ON EMPLOYMENT U/S 16 (iii):

Professional tax (levied by a state under article 276 of the
Constitution of India) actually paid is allowed as deduction.
If professional tax is paid by employer then it is taxable perk in all
cases (as it becomes obligation of employee met by employer) then the same is
deductible U/S 16 (iii).
DEDUCTION UNDER SECTION 80 C

This Deduction from Gross Total Income is allowed to Individual and H.U.F. only.
The deduction can be calculated in following manner:-
Step 1.:- Calculate Gross qualifying amount.
Step 2.:- Calculate Net qualifying amount.
Step 3.:- Calculate amount of deduction U/S 80 C.
STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of the following:
1. Life insurance paid (up to maximum of 20% of sum assured) by individual
to effect/keep in force an insurance on his life of spouse or any child. In
case of HUF, premium paid (up to maximum of 20% of sum assured) must
be on life of any member of the family.
2. Any payment by individual for non-commutable deferred annuity (except
as per point 10 below).

3. Any sum deducted from salary payable by or on behalf of Government to

an individual for securing him a deferred annuity OR making provision for
his spouse or children. The sum deducted should not be more than 20% of
salary.
4. Employee’s contribution to RPF or SPF (other than repayment of loan).
5. Contribution to 15-year PPF account (other than repayment of loan).
6. Employee’s contribution to approved superannuation fund.
7. Subscription to National Saving Scheme 1992 (discontinued with effect
from 1.11.2002).
8. Subscription to National Saving Certificates. Interest accrued on these
NSC’s also qualifies for first five years.
9. Contribution to unit link insurance plan of UTI and LIC mutual fund ( i.e.
ULIP and Dhanraksha).
10. Payment made to effect or keep in force notified annual plan of LIC or any
other insurer (e.g. New Jeevan Dhara, New Jeewan Akshay etc.).
11. Subscription to notified units i.e. Equity Linked Saving Schemes of UTI and
approved mutual fund.
12. Contribution by Individual to a notified pension fund set up by UTI or
13. Any sum paid ( including interest) to home loan account scheme of
national housing Bank or contribution to notified pension fund set up by
the national housing Bank.
14. Any sum paid as subscription to scheme of :-
a) A public sector company which is engaged in providing long term
finance for construction or purchase of houses in India for residential
purposes; OR
b) Any authority constituted in India by as under any law enacted
either for purpose of dealing with and satisfying the need for housing or
for the purpose of planning development or improvement of cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a new
residential house property. This amount does not include interest on loan
or cost of addition / renovation/repair of property. But this includes
stamp duty and other expenses for purchase of such property. The Loan
must be taken from Government, Bank, Co-op. Bank, LIC, National Housing
Bank, assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or Corporation
established/ considered under a Central or State Act.
16. Any sum paid by an Individual as Tuition Fees (not being development
fees/ donation/ payment of similar nature) to any university/ college/
educational institution in India for full time education of his children for a
maximum of two children.
17. Amount invested in shares / debentures of a public company engaged in
infrastructure (including power sector) or units of mutual funds the
proceeds of which are utilised for development and maintenance of

infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for a period
not less than 5 years in accordance with the scheme framed and notified
by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving Scheme.
21. Any sum deposited in 5 years term deposit account in Post Office as per
the Post Office Time Deposit Rules, 1981.
STEP 2. NET QUALIFYING AMOUNT
The aggregate of payments from (1) to (21) above is the Gross Qualifying
Amount. The Net Qualifying Amount is determined as follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of deduction
under section 80 C. The point to remembered is that the aggregate of deductions
under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.
*****

Chapter 4
INCOME FROM HOUSE PROPERTY
CHARGEABILITY [SECTION 22]: The annual value of a property, consisting of

any buildings or lands appurtenant thereto of which the assessee is the owner
shall be charged to tax under the head ‘Income from house property’ after
claiming deduction u/s 24 provided such property (or any portion of such
property) is not used by the assessee for the purpose of any business or
profession carried on by him, the profit of which are chargeable to Tax.
There are three conditions to be fulfilled for calculation of Income from
house property. These are:-
1) The property must consist of Buildings or lands appurtenant there to; AND
2) The assessee must be owner of such property; AND
3) The property must not be used by the owner for the purpose of any business
or profession carried on by him, the profits of which are chargeable to tax.
These three conditions are discussed in detail as below:-
(A) PROPERTY MUST CONSIST OF BUILDINGS OR LANDS APPURTENANT
THERETO: The term ‘building’ is not defined in the Act. But many courts
have given the interpretations according to which it may be said that
building is enclosure of brick or stone work or even mud walls having a
roof. But for a non-residential Building (like open air stadium, open air
swimming pool) roof is not necessary.
The term ‘Land appurtenant thereto’ means approach road to and from
public streets, courtyard, backyard, playground, kitchen garden, motor
garage, stable, cattle shed etc. for Residential Buildings. In case of non-
residential Buildings it means car parking space, roads connecting
different departments, playgrounds etc.
It is to be noted that Income from vacant plot of land is not taxable under
this head, but is taxable either under head ‘Profits & Gains of Business or
Profession’ or under head ‘Income From other sources’.
(B) ASSESSEE MUST BE OWNER OF THE SAID PROPERTY: The income is
taxable under this head of only if the assessee is owner of the said
property. The term ‘ownership’ includes legal owner (either through
Registered Deeds as per Transfer of Properties Act, 1881 or through
Agreement and Power of Attorney only) and Deemed Owner. The assessee
need not to be owner of the land/site on which such building stands.
Ownership includes ‘Freehold’ as well as ‘Leasehold’ Rights.
DEEMED OWNERSHIP (SECTION 27) : The following persons are deemed
to be the owners of the house property:
a) Transfer to a spouse: If an individual transfers any house property to
his/her spouse otherwise than adequate consideration, then the transferor
in such case is deemed to be the owner of such property transferred. But
this provision is not applied if such transfer is in connection with
agreement to live apart.

b) Transfer to minor child: If an individual transfers any house property to

his/her minor child otherwise than adequate consideration, then the
transferor in such case is deemed to be the owner of such property
transferred. But this provision is not applied if such transfer is to married
minor daughter.
NOTE : If the individual transfers cash to his/her spouse or minor child (as
above) and the recipient of cash acquires a house property out of such
cash, then transferor shall not be deemed to be owner of house property.
However income from such property shall be clubbed as per provisions of
Sec. 64(1) in the hands of transferor of cash.
c) Holder of impartible estate: In case of HUF, which has been discontinued
/broken, if any property has not been divided among the co-parceners,
then the holder of such property is deemed to be the owner.
d) Member of Co-operative Society, Company etc: A member of a Co-
operative society/company/other AOP (to whom a building or a part
thereof is allotted or leased under a House Building Scheme of a
society/company /AOP) shall be deemed to be owner of that Building or
part thereof ALTHOUGH the legal ownership is with the Co-operative
Society/Company/other AOP.
e) Deemed owner as per section 53 A of Transfer of Properties Act. : As
per this section if : a) there is a written contract for sale (agreement to
sell); b) the sale consideration has been paid or the buyer is willing to pay
to the seller; and c) the buyer has taken possession of such property, then
such buyer shall be deemed to be owner of the said property even if it is
not registered in his name.
f) Right in a property for a period net less than 12 years: A person who
acquires any right in any building or part thereof by way of LEASE FOR
NOT LESS THAN 12 YEARS shall be deemed to be the owner of that
property.
C) PROPERTY MUST NOT BE OCCUPIED BY THE OWNER FOR HIS
BUSINESS OR PROFESSION: When a person carries on a business or
profession in his own house property, then Annual value of such house
property is not chargeable under this head if such business or profession is
chargeable to tax. This rule is applicable even if in any year the income of
such business is NIL or is in negative (LOSS).
NOTE: There are some typical cases which are given as follows:
1) House property in foreign country: An ordinarily resident person has to
pay tax on the property in a foreign country. The ‘Not ordinarily Resident’
person or ‘Non-Resident’ person has to pay tax on such property only if income
from such property is received in India. When such income is taxable it will be
presumed as if such property is situated in India.
2) Disputed Ownership: If the ownership of a house property is under
dispute in a court of law then the Income Tax Department decides the owner for
tax purpose. Generally the person enjoying the possession of house property or
who receives the income is treated as owner.

3) Property held as stock in trade: If the house property is held by the

assessee as stock in trade or if the assessee is engaged in the business of letting
out of property on rent, the annual value of such property is chargeable under
this head only.
4) Property owned by co-owners: If a house property is owned by two or
more persons, then share of each co-owner in the income from house property
shall be included in his total income.
5) Property let out for running the business efficiently: If the property is
let out to run the business efficiently then the income from such property shall be
taxed under head ‘Income from Business or Profession’.
6) Properties Let out the rent of which is inseparable (COMPOSITE
RENT): When the property is let out with some other facilities also (like plant &
machinery, furniture etc.) and the two lettings are inseparable (i.e. letting one is
not possible without letting of the other) then such income is taxable under head
‘Profit & Gains of business or profession’ or ‘Income from other sources’. But if
such lettings are separable (i.e. letting of house property and other facilities can
be given to different persons) then the rental income of Building shall be taxed
under this head and Rental Income of facilities shall be taxed under head 'Profits
and Gains of Business or profession' or ‘Income from other sources'.
CASES WHEN INCOME FROM HOUSE PROPERTY IS NOT TAXABLE

In the following cases the income from house property is not
taxable:
a) Income from farm house.
b) Annual value of one palace of ex-ruler.
c) Property income of a local authority.
d) Property income of approved scientific research association.
e) Property income of approved Educational Institution / Hospitals.
f) Property income of Registered Trade Unions.
g) House property held for charitable purpose (approved).
h) Property income of a political party.
i) Property used for own business or profession.
j) One self occupied property (only in case of individual and HUF assessee).
TYPES OF HOUSE PROPERTIES

It is very important to understand that it is not the Actual Income
from house property which is charged under this head. A person may be charged
to tax under this head even if he has not earned any house property income in
the previous year. There are following three types of house properties:
a) Actually let out houses
b) One self occupied house property
c) Deemed to be let out house property.
The let out house includes the property let out for residential as well
as commercial purpose. The self occupied property means the house property
used for own residence by the assessee and no other benefit is derived from such

property. This also includes a house property which is not actually occupied by
the owner due to employment or business carried on at any other place. If an
assessee is owner of more than one self occupied house properties then only one
house is treated as self occupied and other houses as Deemed to be let out
houses.
A) INCOME FROM LET OUT HOUSE (INCLUDING DEEMED TO BE LET OUT
HOUSE PROPERTY):
It is calculated as under:
Gross annual value ***
Less: Municipal taxes actually paid by owner ***
__________
NET ANNUAL VALUE 
Less: Deduction U/s 24

-Standard Deduction @ 30% of Net Annual Value ***
-Interest on Borrowed capital ***
__________
INCOME FROM LET OUT / DEEMED TO BE 
LET OUT HOUSE: ___________
How to calculate GROSS ANNUAL VALUE (ANNUAL RENTAL VALUE):

Gross annual value of let out house or deemed to be let out house is
dependent upon following values:
a) Municipal valuation: It means value determined by the Local Authority of
the house for charging municipal taxes.
b) Fair Rent: It means rent fetched by similar property in same or similar
locality.
c) Standard Rent: It means rent of property as per Rent Control Acts (if
applicable).
d) Actual rent received / receivable: It means rent of actually let out
property on accrual basis for full year.
e) Unrealised Rent: It means rent which could not be realized if:
(1) tenancy was bonafide;
(2) the defaulting tenant has vacated or steps have been taken to vacate
the house;
(3) the defaulting tenant is not occupying any other property of the
assessee;
(4) all reasonable steps have been taken by the assessee for recovery of
unpaid rent or the legal proceedings in this regard are useless (in case of
death of tenant).
f) Loss of Rent due to vacancy: If, in case of let out property, the property
remained vacant for some period then loss of rent due to vacancy shall be
calculated on the basis of actual annual rent for vacancy period.
Thus gross annual value is dependent on:

Municipal valuation = (a)

Fair Rent = (b)
Standard Rent = (c)
Actual Annual Rent = (d)
Unrealised Rent = (e)
Loss of Rent due to vacancy= (f)
STEP I: Expected Rent of house is (a) or (b) w.e. is higher subject to maximum of
(c). If step 2 and step (3) are not applicable then expected rent is gross annual
value (It will be so in case of deemed to be let out house).
STEP II: Find out Actual Annual Rent less unrealized rent i.e. [d- e].
STEP III: Find out amount which is higher of amount as per Step 1 or amount as
per step II.
STEP IV: From the amount as per step 3 deduct Loss due to vacancy. This is
Gross annual value. i.e. GAV = Amount as per Step III – (f).
NOTE: If the ownership of such house property is for a period less than 12
months then values as per (a), (b), (c) and (d) shall be calculated for period of
ownership only.
DEDUCTION OF MUNICIPAL TAXES
The municipal taxes levied by the local authority on such house
property are deducted from gross annual value only if these are borne and
actually paid by the owner during the previous year.
The amount after deduction of municipal tax is called NET ANNUAL
VALUE or ANNUAL VALUE.
STANDARD DEDUCTION U/S 24(a): The standard deduction is 30% of Net
Annual Value.
INTEREST ON BORROWED CAPITAL U/S 24(b): The interest on capital
borrowed (for purchase, construction, repair, renewal or re-construction of the
house) is deductible on accrual basis. Interest is divided into two parts:
a) Interest on loan for pre – construction period: It is a period starting
from date of borrowal till 31st March immediately preceding the date of
completion of construction/date of purchase or date of repayment of loan w.e. is
earlier. This is deductible in FIVE EQUAL ANNUAL INSTALMENTS STARTING
FROM THE YEAR OF COMPLETION OF CONSTRUCTION / YEAR OF PURCHASE.
b) Interest on post construction period: It is deductible in the year to
which it belongs on ACCRUAL BASIS.
Note :
1) Interest on unpaid interest is not deductible.
2) Interest on fresh loan taken to repay original housing loan is deductible.
3) It is not necessary that such property must be given as security for availing
such loan.
4) If interest on such loan is payable out of India, it is available for deduction
only if TDS has been deducted on such interest.
B) INCOME FROM SELF-OCCUPIED HOUSE (INCLUDING HOUSE NOT

OCCUPIED DUE TO EMPLOYMENT REASONS):

It is calculated as under:
Gross Annual Value NIL
Less: Municipal Taxes NIL
Net Annual Value NIL

Standard Deduction NIL
Interest on borrowed capital ***
Income from Self occupied house (-)
DEDUCTION OF INTEREST ON BORROWED CAPITAL: The provisions for

deduction of interest on borrowed capital are same except that maximum limit
for self occupied property is fixed at Rs. 30,000*.
* Rs. 30,000 is replaced with Rs. 1,50,000 if following conditions are fulfilled:
a) Capital is borrowed after 31/3/1999 for acquisition / construction of
house property (NOT for repair, renewal or reconstruction); AND
b) Construction / acquisition should be complete within three years from the
end of financial year in which the capital was borrowed; AND
c) The person granting the loan certifies that such interest is on the loan
given for acquisition or construction of the house.
NOTE:
1. The above provisions are applicable in respect of only one self occupied
House (of assessee’s choice) of the assessee in case assessee owns more than one
self occupied house.
2. The above provisions are also applicable if the assessee owns a house
which could not be occupied by him due to employment / business reasons and
he has not derived any other benefit from such house.
C) INCOME FROM HOUSE PARTLY SELF OCCUPIED PARTLY LET OUT: If
assessee is the owner of one house property which consists of two or more units
one of which is self occupied and other unit(s) is (are) let out then the income is
calculated as follows :
1. Unit self occupied - Calculation as per income form self occupied
house.
2. Units let out - Calculation as per income from let out house.
D) INCOME FROM HOUSE SELF OCCUPIED FOR PART OF THE YEAR AND
LET OUT FOR PART OF THE YEAR: In this case the calculation shall be made
assuming the house was let out for full year. Only difference is that in this case
actual rent for let out period is taken in (d).
NOTE: The ‘Individual’ and ‘H.U.F.’ are entitled to benefits of SELF OCCUPIED
HOUSE. Other persons can’t occupy the house for residential purpose.
UNREALISED RENT ALLOWED EARLIER BUT RECOVERED LATER ON –
TAXABILITY THEREOF:
a) Deduction allowed in assessment year 2001-2002 or earlier (Sec.
25A) : If unrealized rent is recovered in any previous year then it is
deemed to be income of the year in which it is recovered. It is to be remembered

that firstly, the unrealized rent which was not allowed as deduction earlier will
be covered and balance if any is taxable. This is taxable as income from house
property whether or not the assessee is owner of the said house in the year of
recovery.
b) Deduction allowed in assessment year 2002-2003 or subsequent year
(Sec. 25AA): If the assessee cannot realize rent during previous year 2001-2002
or any subsequent year (and it is allowed as deduction in that year) and the
assessee realizes such rent, the amount so realized (to the extent it has not been
included in ANNUAL VALUE earlier) shall deemed to be the income of previous
year in which rent is realized whether not the assessee is owner of that property
in that previous year.
ARREARS OF RENT RECEIVED – TAXABILITY THEREOF (SEC. 25B) If
the owner of house property receives arrears of rent not charged to tax in any
previous year then it is taxable in the year of receipt after standard deduction @
30% of such amount under head ‘Income from house property’. It is immaterial
whether or not the assessee is owner of that property in that previous year.
* * *

CHAPTER - 5
INCOME UNDER HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION”
BASIS OF CHARGE (SEC. 28): The following incomes shall be charged to tax
under this head:
a) The profits and gains of any business carried on by the assessee at any
time during the year;
b) Any COMPENSATION or other payments due to or received by:
1. any person in connection with termination/modification of his
agreement for managing the whole or substantially the whole of the affairs
of an Indian Company or any other company;
2. any person holding an agency in India for any part of the activities
relating to the business of any other person at or in connection with
termination / modification of the terms of the agency;
3. any person for or in connection with the vesting in the Government (or
in any corporation owned by or controlled by Government) under any law
for the time being imposed, of the management of any property or
business.
c) Income derived by a trade, professional or similar association from
specific services performed for its members.
d) Exports incentives, which include:
1. profits on sales of import licences granted under imports (control) order
on account of exports;
2. cash assistance (by whatever name called), received or receivable
against exports;
3. Duty drawbacks of Customs and Central Excise Duties;
4. Profit on transfer of Duty Entitlement Pass Book Scheme;
5. Profit on transfer of Duty Free Replenishment Certificate
e) the value of any benefit or perquisite whether convertible into money or not
arising during the course of carrying on of any business / profession;
f) any interest, salary, bonus, commission, or remuneration due to or
received by a partner of firm from the firm in which he is a partner. Such
amount shall be adjusted according to provisions of Section 40 (b);
g) any sum received / receivable in cash or in kind under agreement for:
1. not carrying out activity in relation to any business; or
2. not sharing know how, patent, copyright, trade mark, licence, franchise
or any other business or commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of goods or
provision for services.
But the point g (i) above shall not apply where the amount is received /
receivable for TRANSFER / SALE of rights (which is chargeable under head
‘Capital Gains’).
h) any sum received under a Keyman Insurance Policy including the sum
allocated by way of bonus on such policy;
i) where speculative transactions carried on by an assessee are of such a

nature as to constitute a business then such speculative business shall be

deemed to be distinct and separate from any other business.
BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME: The following are
basic principles for arriving at business income:
1) Business includes trade, commerce, manufacture or any adventure in
the nature of trade, commerce or manufacture: This head includes trade
(purchase of goods for resale), commerce (trade at large scale), manufacture
(selling the goods which are produced by conversion of goods purchased by
applying physical labour or mechanical power) and any such transaction in the
nature of trade, commerce or manufacture. There must be profit motive for
business. Also business can not be carried on by entering into a transaction with
himself only.
2) Business / Profession carried on by the assessee: The assessee must
have right to carry on the business and the business must have been carried on in
exercise of that right by the assessee either personally or through his agent or
servant. It is not necessary that the assessee must carry on the business
physically himself.
3) Business / Profession must be carried on during the previous year:
The business or profession should be carried on by the assessee at any time
during the previous year. It is not necessary that the business or profession
should be carried on for whole previous year or till end of previous year.
However, the following receipts are taxable even if no business or profession is
carried on by the assessee during the previous year:
a) Recovery of any loss, expenditure or trading liability earlier allowed as
deduction [Sec. 41(1)];
b) Balancing charge in case of Electricity Companies [Sec. 41(2)];
c) Sale of capital asset used for scientific research [Sec.41 (3)];
d) Recovery against Bad debts [Sec.41 (4)];
e) Amount withdrawn from special reserve created under section 36 (1)
(viii) [Sec. 41 (4A)];
f) Sum received after discontinuance of business or profession [Sec. 176
(3A)/4].
4. Income of previous year is taxable in relevant assessment year:
General rule is that income of previous year is taxable in relevant
assessment year. But there are some exceptions as follows:
a) Income of Non-resident Shipping Company;
b) Income of a person leaving India for good;
c) Income of bodies formed for short duration;
d) Income of a person trying to dispose off his assets to avoid tax liability;
e) Income of discontinued business.
5. Tax incidence is on all business or professions: The tax incidence arises
on all business or professions carried on by the assessee. Incomes and losses of
all business professions are combined to calculate tax liability. However the
business is divided into two categories- (a) speculative, (b) non-speculative.
6. Legal ownership versus beneficial ownership: The courts can go into

the question of beneficial ownership and decide who should be held liable for tax.
7. Real profit versus anticipated profits: The profits or losses which may
occur in future are not considered for calculating business or profession income
for previous year. However there is one exception: Stock in trade is valued at
cost or market price which ever is lower.
8. Real Profits versus notional profits: Real profits are charged to tax and
notional profits are not taxable. So no profit can be shown on drawing of goods
by the proprietor by treating them (at sale price) as sale.
9. Mode of book entry is not relevant: The mode of book entry cannot
change the basic character of a transaction. So a trading receipt will remain
trading receipt even if it is shown in the books as capital receipt.
10. Illegal Business: It is immaterial whether business is legal or illegal. Both
businesses are taxable under the law.
11. Business loss or Loss incidental to trade: Business profit is computed
after allowing deduction for business loss. Business loss should be trading loss
and must fulfill following conditions:
a) Loss should be real loss and not notional / fictitious
b) Loss should be revenue in nature.
c) Loss should be incurred during the pervious year.
d) Loss must have actually arisen and been incurred, not merely anticipated
as certain to occur in future.
e) Loss should be incidental to business and profession carried on by the
assessee.
f) There should not be any, direct or indirect, prohibition under the Act
against deductibility of such loss.
The following losses are deductible as business loss:
- Losses of stock in trade as result of enemy action.
- Losses of stock in trade by an act of God.
- Losses arising out of failure on the part of assessee to accept delivery of
goods.
- Losses caused by confiscation of cash from gold smuggler by custom
authorities.
- Depreciation in funds kept in foreign currency for purchase of stock in
trade.
- Loss due to exchange rate fluctuations of foreign currency held on revenue
account.
- Loss arising from sale of short term investments.
- Loss of cash and securities in bank on account of dacoity (with in or after
working hours).
- Loss on realization of amount advanced in connection with business.
- Loss due to embezzlement by the employee.
The following losses are not deductible:
- Loss of capital asset.
- Loss on sale of Trade / Non-trade investment.
- Depreciation of funds kept in foreign currency for capital purposes.

- Loss arising from non-recovery of tax paid by an agent on behalf of the

non-resident.
- Anticipated future losses.
- Losses relating to any business / profession discontinued before
commencement of the relevant previous year.
CERTAIN INCOMES NOT TAXABLE UNDER HEAD “PROFITS AND GAINS OF

BUSINESS”
1. Rent from house property: The income from letting of house property is
always taxable under head “Income from House Property”. But if residential
houses / flats are let out to the employees for efficient conduct of assessee’s
business (not of letting of house property) then such income shall be taxable as
business income. Also in case of Composite Rent (when the letting of house is
inseparable from letting of other assets), the income is taxable either as ‘business
income’ or ‘income from other sources’.
2. Dividend income: An assessee who is carrying on the business of dealing in
shares and securities and earns dividend income then such dividend income shall
be taxable under head ‘Income from other sources’.
3. Winning from lotteries, races etc.: Any winning from lotteries, races etc. is
taxable under head ‘Income from other sources’, even if it is regular business
activity.
METHOD OF ACCOUNTING [SECTION 145 & 145A]: The accounting methods

may be either 'mercantile' ‘or 'cash’. An accounting method once followed cannot
be changed in ordinary course.
Further the profit from business and profession shall be computed in
accordance with accounting standards which may be prescribed by Central
Government from time to time. Accordingly there two accounting standards to be
followed by the assessee maintaining books on MERCANTILE system:-
a) Accounting standard I relating to disclosure of accounting policies.
b) Accounting standard II relating to disclosure of prior period and extra
ordinary items and changes in accounting policies.
Further valuation of purchase and sale of goods and inventory for
the purpose of determining the income chargeable under the head “profits and
gains of business or profession” shall be:-
a) In accordance with method of accounting regularly followed by the
assessee; and
b) Further adjusted to include the amount of tax, duty, cess or fees (by
whatever name called) actually paid or incurred by the assessee to bring
the goods to the place of its location and condition as on the date of
valuation.
It may be noted that even if the assessee is allowed modvat / cenvat credit
of EXCISE DUTY or CVD of CUSTOM DUTY paid by him, such duty shall be
included in valuation of purchase and sale of goods and inventory in determining
the business income.

SCHEME OF BUSINESS DEDUCTIONS / ALLOWANCES: The deductions are

covered from section 30 to section 43D. Before studying the deductions let us
study the principles of admissibility of deductions:-
1. Onus of proof: It is the responsibility of the assessee to prove that a
particular deduction is admissible in his case.
2. Allowances are cumulative: Deductions from section 30 to 36 are
expressive and deduction U/S 37 is residuary. If a particular expense is expressly
dealt with by a particular section, its admissibility under section37 cannot be
denied unless the particular section prohibits any deduction under any other
provision.
3. Expenditure should relate to the relevant previous year: It is self
explanatory. However for incomes under section 41 and 176 any expenditure
incurred for such income is deductible whether or not they are incurred in the
relevant previous year.
4. Business carried on during the previous year: If business is
discontinued before the commencement of previous year, no deduction is
permissible in respect of such discontinued business.
5. Expenditure should be incurred for assessee’s own business:
Deduction is allowed only if expenditure is incurred for assessee's own business
otherwise it is disallowed.
6. Benefit of expenditure may extend to some body else: The benefit of
expense may extend to some body else even then it is allowed as deduction. For
example- insurance, repair of leased plant & machinery incurred by Lessor are
deductible from income of Lessor even though the benefit may be to the lessee.
7. Benefit of expenditure may extend beyond relevant previous year: A
revenue expenditure incurred during the year is deductible even of benefit of
expenditure is extended beyond the year of expenditure.
8. No allowances in respect of wasting assets: No deduction is admissible
on diminution or exhaustion of Capital Asset from which income is derived.
Wasting assets such as mines and quarries are capital assets and their exhaustion
is capital loss which is not allowed as deduction.
9. No allowance for non-assessable business: If income from a business is
not taxable in India then any deduction can be claimed regarding expenditure or
losses of such business.
10. Expenditure of illegal business: The expenditure of illegal business is
deductible from business income. However the penalty or damages paid in
connection with infringement of law are not deductible.
11. Revenue expenditure and capital expenditure: Deductions from
section 30 to 36 are deductible expressively. These may include capital
expenditure also. The deduction U/S 37 is only for revenue expenditure.
12. No deduction in respect of depreciation of Investments: No deduction
in respect of depreciation of investment in shares and securities is allowed.
13. No allowance in respect of expenditure incurred before setting up of
a business: Except the deductions under section 35A, 35D and 35E , no
expenditure which is incurred before setting up of a business shall be allowed as

deduction from income under the head ‘Profits and Gains of Business or
Profession’.
14. No allowance in respect of anticipated losses: Except while valuing the
closing stock (at cost or realisable value whichever is less), no deduction is
allowed for any anticipated loss from income under the head ‘Profits and Gains of
Business or Profession’.
EXPENSES EXPRESSLY ALLOWED AS DEDUCTION: - Section 30 to 37 cover

expenses expressly allowed as deduction. There are as follows:-
1. Rent, rates, taxes, repairs and insurance for buildings [section 30]: The
premises used for the purpose of business or profession has entitlement of
following deductions:-
a) Where the premises are occupied by the assessee as:-
i) A tenant: The rent for such premises, and if he has undertaken to bear the
cost of repairs of such premises, the amount paid on such repairs (not
being capital expenditure).
ii) Otherwise than as a tenant: The amount paid by him for current repairs of
the premises;
b) Any sum paid (whether as owner or tenant) as land revenue, municipal
taxes etc. However these are allowable subject to provisions of section 43B (i.e. if
these are claimed on due basis, the payment of the same must be made on or
before the due date of furnishing the return of income or actual date of furnishing
the return which ever is earlier);
c) Any insurance premium paid (whether as owner or tenant) in respect of
insurance against risk of damage or destruction of the premises.
2. Repairs and insurance of plant, machinery and furniture [sec.31]: The

expenditure incurred on current repairs and insurance of plant, machinery and
furniture is allowed as deduction if such plant, machinery and furniture are used
business purposes.
3. Depreciation (sec. 32): One should satisfy the following condition for
claiming depreciation:-
A) Assessee must be the OWNER of the asset;
B) The asset must be used for business or profession;
C) The assets should be used during the previous year;
D) Depreciation is available on tangible as well as intangible assets.
a) Asset must be used for business or profession: The owner is the
person who can exercise the rights of the owner not on behalf of own but in his
own rights. Owner needs not to be registered owner. If the assessee carries on
business or profession from leasehold building then he is entitled to depreciation
on capital expenditure incurred by him. In any other case, the depreciation is
available to the Lessor.
b) Asset must be used for business or profession: The depreciation is
allowed only if the asset is used for business or profession. If asset is used for

business partly and partly for other purposes then depreciation is allowed only
for use for business or profession. When residential quarters are given to
employees for efficient running of business then depreciation is allowed on such
buildings and other assets like fridge, fans etc. given to employees.
c) Asset should be used during the previous year: The asset must be used
at least for some time during the relevant previous year for business purpose to
claim normal depreciation. However 50% of normal depreciation is allowed if
following two conditions are satisfied:-
i) Asset is acquired during the preview year; AND
ii) It is put to use for the purpose of business or profession for less than 180
days during that year.
d) Depreciation is available on tangible assets as well as intangible
assets: i) Tangible assets mean and include building, Machinery, plant and
furniture.
ii) Intangible assets means assets acquired after 31 st March, 1998 and include
know-how, patents, copyright, trademarks, license, franchises or any other
business or commercial rights of similar nature.
NOTE: From assessment year 2002-03 depreciation is available whether the
assessee has claimed deduction for depreciation in computing his income or not.
STEPS FOR CALCULATION OF DEPRECIATION: The depreciation is calculated
on BLOCK OF ASSETS on WRITTEN DOWN METHOD as per RATES OF
DEPRECIATION PRESCRIBED UNDER THE ACT. However from 1.04.1997
ONWARDS, an undertaking engaged in generation OR generation and
distribution of power can claim depreciation on STRAIGHT LINE METHOD.
Now are shall understand the meaning of following terms:-
 BLOCK OF ASSETS
 WRITTEN DOWN VALUE
 ACTUAL COST
1. Block of assets [sec. 2 (11)]: It means a group of assets falling with in a class
of asset namely :-
a) Tangible assets being buildings, machinery, plant or furniture.
b) Intangible assets being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar nature.
There are 13 different blocks out of which 1 to 12 are in respect of tangible assets
and block13 is for intangible assets.
BLOCK NATURE OF ASSET Rate of
Depreciation
1. Buildings: Residential other than Hotels and boarding
houses. 5%
2. Buildings: Office, factory etc. not being residential
buildings (it includes hotels and boarding houses but does 10%
not include block I & 3).
3. Buildings –a) Temporary wooden or other structure 100%
b) Buildings acquired on or after 1-09-2002 for installing
plant & Machinery for water supply project or water

treatment system for providing INFRASTRUCTURAL

FACILITIES under section 80 I A (4) (i).
4. Furniture: Any furniture including electrical fitting. 10%
5. Plant and Machinery: Any plant or machinery (not 15%
covered from block 6 to 12) and Motor cars (other than
those used in business of running on hire) acquired or put
to use after 31-03-1990.
6. Plant & machinery: Ocean going ships, vessels ordinarily 20%
operating on inland waters including speed boats
7. Plant & machinery: buses, lorries and taxies used in the 30%
business of running on hire, machinery used in semi-
conductor industry, moulds used in rubber and plastic
goods factories and life saving medical equipment
8. Aero planes, commercial vehicle acquired after 40%
30.09.1998 but before 01.04.1999 and put to use before
01.04.1999 for business or profession, Specified life
saving medical equipment as per rule 5(2).
9. Plant & machinery – a) Containers of glass or plastic used 50%
as refills.
b) New commercial vehicle acquired during 2001-02 and
put to use before 31.03.02 for business or profession.
c) Machinery used in weaving processing and garment
sector of textile industry which is purchased under TUFS
(Technology up-gradation fund scheme) during 1-04-01
to 31-03-04 and put to use before 31-03-04.
10. Plant & machinery:
a) Computers including computer software
b) New commercial vehicle acquired in replacement of
vehicles of 15 years of age and put to use before 01-04-99 60%
(if acquired from 1-10-98 to 31-03-99) or before 01-04-
2000 (if acquired from 01.04.99 to 31.03.00)
c) Books of professional (other than annual publications)
d) Gas cylinders, plants used in field operations by
mineral oil concerns, direct fire glass melting furnaces
11. Plant & machinery: Energy saving devices; renewal 80%
energy devices; rollers in flour mills, sugar works and
steel industry.
12. Plant & machinery: Air pollution control equipments,
water pollution control equipments; solid waste control
equipments, recycling and resource recovery systems, 100%
machinery acquired and installed after 31.08.2002 in
water supply project or water treatment system, wooden
parts of artificial silk manufacturing machines,
cinematograph films, bulbs of studio lights, wooden
match frames, Tubs, ropes and safety lamps in mines and

quarries, salt pans, reservoirs made of earthy or sandy or

clayey material;
books (being annual publication) owned for profession,
books owned by libraries (may be annual or not).
13. Intangible assets: Know how, Patents, Copyrights, Trade 25%
Marks, Licences, Franchises and other rights acquired
after 31.3.98
WRITTEN DOWN VALUE [SEC. 43 (b)] : The WDV for assessment year 2010-11
is determined as follows :-
(a) Find out depreciated value of block of asset as on 1.04.2009.
(b) To this, add “Actual Cost” of assets falling in the same block acquired during
the previous year 2009-10.
(c) From the resultant figure deduct money received / receivable (including
scrap value) in respect of that asset falling in the same block of assets which is
sold, discarded, demolished or destroyed during the previous year 2009-10.
However the net figure can not be negative.
This net figure is written down value of the block of assets on 31-03-2010.
WRITTEN DOWN VALUE IN CASE OF SLUMP SALE: Slump sale as per section 2
(42C) means the transfer of one or more undertakings as a result of the sale for a
lump-sum consideration without values being assigned to individual assets and
liabilities.
Here also first three steps are same as in the above said case. Step (d) is added for
calculation. a), b), and c) are same as in simple cases of WDV. d) In case of slump
sale, deduct actual cost of asset falling within that block as reduced :
(i) By the amount of depreciation actually allowed to him in respect of any
previous year till 31.03.1987; and
(ii) By the amount of depreciation that would have been allowable to the
assessee from 1.04.-1987 onwards if the asset was only asset in the relevant
block of assets. However the net figure can’t be negative. The resultant figure
shall be WDV of the block of assets on 31-03-2010 after slump sale.
COMPUTATION OF NORMAL DEPRECIATION: The normal depreciation is
calculated by multiplying the WDV of block of asset as on 31-03-10 with rate of
depreciation. But this rule has following exceptions:
1. If the WDV of the block of assets is reduced to zero (though the block
assets does not cease to exit on 31-03-2010) NO DEPRECIATION is
charged on such block.
2. If a block of assets ceases to exist (i.e. all the assets of the block have been
transferred and the block is empty on 31-03-2010) NO DEPRECIATION is
charged on such block.
3. IMPORTED CARS: a) If it is used for running it on hire for tourist or for
business or profession outside India then DEPRECIATION IS ALLOWED AT
USUAL RATE.
b) If it is used for business or profession in India No depreciation is
available if it is acquired from 1-03-1975 to 31-03-2001. Otherwise usual
depreciation is available.

4. In case of SUCCESSION, AMALGAMATION, BUSINESS REORGANISATION

OR DEMERGER the following points are kept under consideration:-
a) The aggregate depreciation allowable to the predecessor and the
successor shall not exceed depreciation calculated as if there was no
succession/amalgamation/demerger; and
b) Such depreciation shall be apportioned between the predecessor and
the successor in the ratio of number of days for which the assets were used
by them.
5. If the asset is acquired during the previous year; AND it is put to use for
period of less than 180 days then depreciation shall be restricted to 50%
of the amount calculated at the prescribed percentage . It is to be noted
that this restriction is applicable only in the year in which the asset is
acquired and not in subsequent years. This is also not applicable in case of
successor, dissolution, partition of HUF.
COMPUTATION OF ADDITIONAL DEPRECIATION ON NEW PLANT &
MACHINERY: An additional depreciation is allowed to give a boost to the
manufacturing sector. Such additional depreciation is allowed apart from normal
depreciation. It is allowed to all kinds of persons.
1. ASSESSEES ELIGIBLE FOR ADDITIONAL DEPRECIATION: An assessee which
is an INDUSTRIAL UNDERTAKING i.e. he is engaged in the business of
manufacture or production of any article or thing, shall only be eligible for such
additional depreciation.
2. ASSETS ON WHICH ADDITIONAL DEPRECIATION IS ALLOWED: Any new
machinery or plant which has been acquired and installed by the above said
assessee after 31-03-2005 is eligible for additional depreciation. But following
assets are not eligible for additional depreciation:
(a) Ship or aircraft;
(b) Any machinery or plant which before its installation by the assessee was
used by any other person either with in or outside India;
(c) Any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house;
(d) Any office appliances or road transport vehicles;
(e) Any machinery or plant, the whole of the actual cost of which is allowed as
deduction (whether by way of depreciation or otherwise) in computing the
Income under head "Profits and gains of business or profession” of any previous
year.
(3) RATE OF ADDITIONAL DEPRECIATION: Additional Depreciation shall be
allowed @ 20% of actual cost of the eligible asset. However if the asset is put to
use for less then 180 days in the year in which it is acquired, the rate of
depreciation shall be 10%.
NOTE: 1. Additional depreciation is allowed only once i.e. in the previous year in
which asset was acquired and installed.
2. Additional Depreciation allowed is deducted while calculating opening WDV
for the next year.
MEANING OF ACTUAL COST: Actual cost means actual cost to the assessee as

reduced by that portion of the cost thereof if any, as has been met directly or
indirectly by any other person or authority.
1) INTEREST TO BE INCLUDED/ EXCLUDED IN ACTUAL COST:
(a) Interest pertaining to the period till the asset is first put to use should be
added to the actual cost of the asset.
(b) Interest incurred relatable to any period after the asset is first put to use,
cannot be included in the Actual Cost. It is to be treated as deduction u/s
36 (i)(iii).
Note: It does not matter whether the business is new or existing one.
2) TRAVELLING EXPENDITURE: For acquiring depreciable assets is a part of
Actual Cost.
3) NOTIONAL ACTUAL COST: In the following cases, the actual cost shall be
a notional cost as follows:
(a) Assets used in Business after it ceases to be used for Scientific Research-
NOTIONAL ACTUAL COST 'NIL'
(b) Asset acquired by gift or inheritance- Actual cost to previous owner MINUS
Depreciation actually allowed till 31.03.1987 MINUS Depreciation
allowable on that asset after 31.03.1987 assuming it is only asset in the
block.
(c) Asset transferred to reduce tax liability by claiming Depreciation at
enhanced cost – Actual cost determined by Assessing officer with approval
of Joint Commissioner. However genuine cases are not covered.
(d) Assets earlier transferred re-acquired by the assessee- Notional Actual
cost will be – (Actual price for which re-acquired) OR (original cost minus
depreciation actually allowed to him till 31.03.1987 MINUS Depreciation
allowable on that asset after 31.03.1987 assuming it is only in the block)
which ever is less.
(e) Asset previously used by any person and on which depreciation was
allowed to him is acquired by another person but leased back to seller-
NOTIONAL ACTUAL COST in the hands of LESSOR shall be equal to W.D.V
of the asset to the seller at the time of transfer thereof.
(f) Buildings brought into use for business purpose subsequent to its
acquisition- NOTIONAL ACTUAL COST shall be. Original Cost of building
MINUS A DEPRECIATION that would have been allowable had the building
been used for business since acquisition.
(g) Assets transferred by holding Company to 100% Subsidiary or vice versa
where the transferee Company is an Indian Company – NOTIONAL
ACTUAL COST to the transferee Company shall be the same value as would
have been to the Transferor Company if it continued to hold it.
(h) Assets transferred under a scheme amalgamation- Notional Actual cost to
the Amalgamating Company shall be same value as would have been to the
Amalgamating Company, if it continued to hold it. This rule is also
applicable if the Amalgamated Company is Indian Company.
(i) Asset transferred to the to the Resulting Company in case of Demerger:
Notional Actual cost to Resulting Company shall be same value as would

have been to the Demerged Company, if it continued to hold it.

(j) Actual Cost of CENEVATABLE ASSET shall be Original COST MINUS DUTY
OF EXCISE/ CUSTOMS for which credit of CENVAT has been taken.
(k) Asset acquired where position of cost met by some other person-
ORIGINAL COST MINUS COST MET BY SOME OTHER PESON shall be
Notional Actual Cost.
(l) Assets acquired by Non-Resident outside India but brought by him to India
for purpose of Business or Profession Notional Actual Cost shall be
ORIGINAL COST MINUS DEPRECIATION THAT WOULD HAVE BEEN
ALLOWABLE in India since date of acquisition.
(m) Assets acquired by a Company under a scheme of Corporatisation of a
Recognised stock Exchange in India – Notional Actual Cost to the Company
shall be the amount which would have been regarded as actual Cost had
there been no such Corporatisation.
(n) Capital Asset on which deduction has been allowed or allowable under
section 35 AD – Notional actual cost shall be NIL.
UNABSORBED DEPRECIATION: The following procedure is followed for
charging depreciation:
1. Depreciation of the previous year is deductible from income chargeable
under head ‘Profit & Gains of Business or Profession’.
2. If Depreciation is not fully deductible under head ‘Profit & gains of
Business or Profession’ due to absence or inadequacy of profits it is deductible
from income chargeable under other heads of Income (except Income under head
Salaries) for same previous year.
3. If Depreciation is still not deductible, it can be carried forward to
subsequent assessment year(s) for indefinite period, if necessary.
4. In next year(s), unabsorbed depreciation can be set off against any income
from ‘Profits and Gains of Business Profession’ or under any other head (except
Income under head Salaries). The same business may or may not be continued. In
next years, following priority order should be maintained-
 Current year’s Depreciation.
 Brought forward Business Loss.
 Unabsorbed (Brought Forward) Depreciation.
 So, if in any subsequent year(s), there is no brought forward business Loss,
unabsorbed depreciation can be added to current depreciation for claiming the
deduction u/s 32.
DEPRECIATION ON STRAIGHT LINE BASIS: An undertaking engaged in

generation OR generation and distribution of power can claim depreciation in
respect of assets acquired after 31.03.1997 according to either WDV basis or
straight Line Basis (the rates of Depreciation as per SLM are given in Appendix
1A of the Income Tax Rules). The option shall be exercised before due date of
furnishing the return of Income. Once the option is exercised, it shall be final and
shall apply to all subsequent years.
(a) TERMINAL DEPRECIATION: If an asset of a power unit on which

depreciation has been claimed on Straight Line Basis is sold, demolished or

destroyed in any previous year; terminal depreciation can be claimed. The
amount of terminal Depreciation is simply the Loss on sale of such asset.
However following points are to be considered:
(i) When the asset is sold, discarded etc in the previous year in which it is first
put to use, any loss arising there from shall not be TERMINAL DEPRECIATION
but will be SHORT TERM CAPITAL LOSS.
(ii) Terminal Depreciation is allowed only if the asset is sold after using if for
sometime in the year of sale.
(iii) Terminal Depreciation is allowed only if it is actually written off in the books
of the assessee.
(b) BALANCING CHARGE- If an asset of a POWER UNIT on which depreciation
has been claimed on straight Line Basis is sold discarded, demolished liked or
destroyed in any previous year, balancing charge is treated as Business Income.
Balancing charge is least of following two:
(i) Actual Profit on sale of such asset; OR
(ii) Accumulated Depreciation on such asset.
The above Provisions apply even if the business is not in existence in the year
when the money payable the on such asset became due.
(c) CAPITAL GAIN: When money payable including scrap value of the asset sold,
discarded etc, exceeds the cost of acquisition of such asset such Excess shall be
treated as Capital Gain.
TEA or COFFEE or RUBBER DEVELOPMENT ACCOUNT (SECTION 33 AB): An

assessee can claim deduction u/s 33 AB if he fulfills the following conditions:-
(a) The assessee is engaged in the business of growing and manufacturing tea
or coffee or rubber in India;
(b) The assessee has, with in six months from the end of previous year or
before furnishing return of income whichever is earlier –
(i) Deposited with National Bank for Agriculture and Rural Development
(NABARD) any amount(s) in a special account maintained by the assessee
with that bank in accordance with and for the purpose specified in a
scheme approved in this behalf by the TEA BOARD OR COFFEE BOARD OR
RUBBER BOARD; OR
(ii) Deposited any amount in TEA DEPOSIT ACCOUNT opened by the
assessee in accordance with and for the propose specified in a scheme
framed by the TEA BOARD OR COFFEE BOARD OR RUBBER BOARD with
the previous approval of Central Government;
(c) The assessee must get its accounts audited by a CHARTERED
ACCOUNTANT and furnish the report of such audit in form 3AC along with the
return of Income.
AMOUNT OF DEDUCTION: The deduction is LEAST of:-
(a) The amount (s) deposited in schemes as above; or
(b) 40% of profits of such business under head ‘Profits and Gains of Business
or profession’ before this deduction and before adjusting brought forward

business Losses.
NOTE: If separate accounts are not maintained for growing and manufacturing of
tea or coffee or rubber IN INDIA then profits from such tea or coffee or rubber
Business will be calculated as under:
Profit from Tea (or coffee or rubber) Business=
Profit of business x Turnover of tea or coffee or rubber Business / Total turnover.
(ii) Where deduction has been allowed u/s 33 AB, no deduction shall be
allowed in respect of such amount in any other previous year.
(iii) Where a deduction has been claimed and allowed under this section, to an
Association of Persons or Body of Individuals, no deduction shall be allowed to
any member of AOP or BOI in respect of the same deposit.
(iv) Any excess deposit made during a previous year is not treated as a deposit
made in next year or other year.
UTILISATION OF DEPOSITED AMOUNT: The amount standing to the credit of
the assessee in special account of NABARD or TEA OR COFFEE OR RUBBER
DEVELOPMENT Account is to be utilised for the business of the assessee with
respect to the points as per the scheme. But no deduction shall be allowed for the
purchase of:
1. Any machinery or plant to be installed in any office or residential place
(including guest house);
2. Any office appliances (not being computer(s));
3. Any machinery or plant, the whole of the actual cost of which is allowed
as deduction (whether by Depreciation or otherwise) in computing
Income chargeable under head ‘profit & gains of Business or Profession' of
any previous year;
4. Any new machinery or plant to be installed in an Industrial undertaking
for purpose of business of construction, manufacture or production of any
article or thing specified in eleventh Schedule of Income tax (i. e. low
priority items).
WITHDRAWAL OF DEPOSIT: Any amount deposited as above shall not be
withdrawn except for the purposes specified in the scheme. Otherwise it is
allowed to be withdrawn in following circumstances: (i) closure of business; (ii)
Death of the assessee; (iii) Partition of HUF; (iv) Dissolution of firm; (v)
liquidation of Company.
Amount withdrawn for (i) & (iv) reasons in taxable as profits in the year of
withdrawal while for remaining cases such withdrawal is not taxable.
WITHDRAWAL OF DEDUCTION: In following cases deduction is withdrawn:
(a) Any amount withdrawn but not utilised with in same previous year for the
specified purpose shall be treated as income of that year;
(b) Any asset acquired to the scheme, is sold or transferred before expiry of 8
years from end of year of purchase; the cost of such asset relatable to deduction
allowed will be income in the year of sale of asset or transfer of asset.
However these provisions are not applicable in case of conversion of firm into a
company and sale of asset to Government, Local Authority, Statutory Corporation
or government Company.

SITE RESTORATION FUND [SECTION 33ABA]: An assessee can claim deduction

u/s 33ABA if he fulfills following conditions:
a) The assessee is carrying on the business of prospecting for or extraction or
production of PETROLEUM OR NATURAL GAS OR BOTH in India and for which an
agreement has been entered into with the Central Government.
b) The assessee has before the end of the previous year:
i) Deposited with State Bank of India, any amount(s) in a special
account maintained by the assessee in a scheme approved in this behalf by
the Ministry of Natural Gas and Petroleum of Govt. of India; OR
ii) Deposited any amount in the site Restoration Account opened by
the assessee in a scheme framed by the aforesaid ministry (this is called as
DEPOSIT SCHEME).
c) The accounts of assessee should be audited by a Chartered
Accountant and the report of auditor in FORM 3AD is filed along with the
return of relevant assessment year.
AMOUNT OF DEDUCTION: The amount of deduction is LEAST OF:
a) The amount deposited in the scheme referred to above; or
b) 20% of profit of such business computed under head 'Profits and Gains of
Business or profession' before deduction under this section and before adjusting
brought forward business loss.
NOTE: 1) Profits from business in this case are to be calculated in the same
manner as in section 33AB.
2) In case of a firm, AOP or BOI, no deduction shall be allowed in computation
of Income of any partner or member.
3) Where deduction has been claimed under this section, no deduction
shall be allowed in respect of such amount in any other previous year.
4) Any interest credited to such special Account or Site Restoration Fund
shall be deemed to be a deposit.
UTILISATION OF DEPOSITED AMOUNT: This provision is same as in section
33AB for TEA DEVELOPMENT ACCOUNT.
WITHDRAWL OF DEPOSIT: Any amount deposited in the SPECIAL account
maintained with State Bank of India or SITE RESTORATION account shall not be
allowed to be withdrawn EXCEPT for the purpose specified in the
scheme/Deposit scheme.
WITHDRAWL OF DEDUCTION: The provisions are same as in section 33AB of
Tea Development Account. The following extra provision is applicable:
On closure of account by the assessee The amount so withdrawn
from the account as reduced by amount payable to central Government as share
of profit shall be deemed to be income under head 'Profit & Gains of Business’ of
that previous year (even if this business is not existence in that previous year).
EXPENDITURE ON SCIENTIFIC RESEARCH [SEC.35]: The term scientific

research means any activity for extension of knowledge in the field of natural or
applied sciences including agriculture, animal husbandry research is classified
as:

a) REVENUE EXPENDITURE:
(i) Incurred by the assessee himself relating to his own business;
(ii) As contribution made to outside agencies engaged in scientific work.
b) Capital Expenditure incurred by the assessee himself relating to his own
business.
c) Revenue or Capital Expenditure for approved in-house research.
Now we shall study these in detail.
a)(i) Revenue Expenditure incurred by Assessee himself [Sec 35(1)(i)]:
1. All revenue expenses laid out or expended on scientific research during the
previous year are fully allowed as deduction.
2. It has been further provided that following revenue expenses laid out or
expended during three years immediately preceding the date of commencement
of business shall be deemed to be the expenditure of the previous year in which
the business commences and therefore shall be allowed in that year to the extent
these are certified by the prescribed authority:
i) Payment of salary (except perquisites) to employees engaged in
scientific research; and
ii) Purchase of material used for scientific research
NOTE: It is to be noted that the research must relate to the business of the
assessee.
a)(ii) Contribution made to outsiders [Sec 35(1)(ii), (iia) & (iii)]:
Where the assessee does not himself carry on scientific research but
makes contribution to other the institutions for this purpose then a weighted
deduction is allowed of 125% of any sum paid to a scientific research association
or university, college or other institution (APPROVED BY CENTRAL GOVT.)
NOTE: It is to be noted that the research may or may not relate to the business of
the assessee.
Contribution made to National Laboratory or University or IIT [Sec
35(2AA)]: Where the assessee pays any sum to a 'NATIONAL LABORATORY' or
'UNIVERSITY' or ‘INDIAN INSTITUTE OF TECHNOLOGY' or a ‘SPECIFIED
PERSON' (means a person approved by prescribed authority), then such sum is
eligible for weighted deduction of 125% of such sum paid.
National Laboratory means a scientific laboratory functioning at national
level under the aegis of Indian Council of Agricultural Research, Indian Council of
Medical Research, The Council of Scientific and Industrial Research, The Defence
Research and Development Organisation, The Department of Electronics, the
Department of Bio-Technology and The Department of Atomic Energy Prescribed
Authority shall be the head of a National Laboratory or a University or an Indian
Institute of Technology as the case may be. In the case of 'specified person' the
prescribed authority shall be The Principal Scientific Advisor to the Government
of India.
NOTE: It may be noted that the research may or may not relate to the business of
the assessee.
b) Capital Expenditure incurred by assessee himself [Sec 35(1)(iv)]:
1. Where the assessee incurs any expenditure of capital nature RELATED TO

THE BUSINESS OF THE ASSESSEE, the whole of such expenditure incurred in any
previous year is allowable as deduction for that previous year.
2. Further capital expenditure incurred during three years immediately
preceding the date of commencement of business shall be deemed to be expenses
of the previous year of the commencement of business and allowed in that year.
Capital Expenditure may be for acquisition of plant or equipment or construction
of Building (excluding cost of Land), acquisition of vehicles for scientific research.
NOTE: 1. No Depreciation is available on an asset used in scientific research.
2. If the asset is sold without having been used for other purposes, surplus (i.e.
sale price) or deduction allowed under section 35 whichever is less shall be
chargeable to tax as business income of the previous year in which the sale took
place. The excess of sale price over cost of acquisition (or indexed cost of
acquisition) is chargeable to tax under head capital gain and the deficiency is
treated as capital loss under the same head.
c) Expenditure on in-house Research & Development by a Company
assessee [Section 35(2AB)]: A weighted deduction of 150% of sum incurred
will be allowed to a COMPANY assessee if:
i) It is engaged in business of manufacture or production any article or thing
except those notified I the Eleventh Schedule; and
ii) It has incurred expenditure (except on Land and Building) on in house
scientific research and development facility approved by the prescribed
authority.
iii) It has entered into agreement with prescribed authority for co-operation in
such research and for audit of the accounts maintained for that facility.
NOTE:1. The expenditure on Building acquisition or construction shall be
allowed @ 100%.
2. No weighted deduction @150% will be allowed to Company assessee after
31.03.2012.
3. If capital expenditure on scientific research can not be allowed due to absence
or inadequacy of profits of the business, the deficiency so arising is to be carried
forward as if it is unabsorbed depreciation.
4. In pursuant to an agreement of arrangement of the amalgamation if the
amalgamating company, transfers to the amalgamated company which is an
Indian company, any asset representing the capital expenditure on scientific
research, the above said provisions of section 35 shall apply to the amalgamated
company as if there is no amalgamation.
EXPENDITURE FOR OBTAINING LICENSE TO OPERATE

TELECOMMUNICATION SERVICES [SECTION 35 ABB]: Where any capital
expenditure is incurred by the assessee for acquiring any right to operate
telecommunication services either before the commencement of the business to
operate telecom service or thereafter any time during any previous year and for
which payment has been actually made to obtain a licence, a deduction will be
allowed in equal installments over the period for which the license remains in
force subject to following:

1. If the fees is paid for acquiring any right to operate telecommunication

services before the commencement of such business - the deduction shall be
allowed for the previous years beginning with the previous year in which such
business commenced.
2. If the fees is paid for acquiring such rights AFTER commencement of such
business - the deduction shall be allowed for the previous years beginning with
the previous year in which the licence fees is actually paid.
Sale or Transfer of Licence:
Case a) the entire licence is transferred:
i) If the sale Proceeds of transfer are less than WDV of the licence, a
deduction equal to such WDV as reduced by the proceeds of transfer shall
be allowed in respect of previous year, in which the licence has been
transferred.
ii) If the sale proceeds of transfer are more than WDV of the Licence
then such excess (i.e. profit) is taxable as under:
a) Where sale proceeds are less than Original Cost of Licence: The
Sale Value of Licence as reduced by WDV shall be income under this
section.
b) Where sale proceeds are more than Original Cost of Licence:
-The Original Cost of Licence as reduced by WDV shall be income
under this section.
-The Sale Value as reduced by Original Cost of Licence (indexed cost
in case licence is held for more than 36 months) is treated as Income
under head 'Capital Gains' is the previous year in which the licence
has been transferred.
Case b) If a part of the licence is transferred:
i) If a part of the licence is transferred for a sum less than the WDV of
the total licence, then the balance amount not yet written off shall be
allowed as deduction in balance number of equal installments over the
unexpired period.
ii) If a part of licence is transferred for a sum more than written down
value of total licence, then such excess(i.e. profit) is taxable as under:
a) Where sale proceeds are less than Original Cost of Licence: The
Sale Value of Licence as reduced by WDV shall be income under this
section.
b) Where sale proceeds are more than Original Cost of Licence:
-The Original Cost of Licence as reduced by WDV shall be income
under this section.
-The Sale Value as reduced by Original Cost of Licence (indexed cost
in case licence is held for more than 36 months) is treated as Income
under head 'Capital Gains' is the previous year in which the licence
has been transferred.
Note: 1. In case of amalgamation/demerger the above provisions are applicable
as if there is no amalgamation/demerger if the amalgamated/resulting company
is Indian company.

2. If a deduction is claimed under this provision it shall not be allowed under any
other provision of the Act for any year.
EXPENDITURE ON ELIGIBLE PROJECTS/SCHEMES [SEC 35AC]: Where an

assessee incurs any expenditure by way of payment of any sum to:
a) Public sector company; or
b) A local authority; or
c) An association or institution approved by National Committee
for carrying out any eligible project or scheme for PROMOTING SOCIAL AND
ECONOMIC WELFARE OF OR UPLIFT OF PUBLIC as Central Government may
specify, the AMOUNT SO PAID shall be allowed as deduction provided a certificate
in form No.58A is obtained from the said institution and furnished along with the
return of Income.
However in case of a company, the deduction of such expenditure is
allowed along with direct expenditure incurred directly by the company on the
eligible project or scheme undertaken by it. The deduction will be allowed for
direct expenditure if a certificate from a Chartered Accountant in Form No.58 B is
NOTE: If a deduction is claimed under this provision it shall not be allowed under
any other provision of the Act for any year.
EXPENDITURE ON SPECIFIED BUSINESS [Section 35 AD]: This section has

been introduced w.e.f. A.Y. 2010-11 for promoting investment certain specified
business. The following conditions are to be fulfilled under this section:
1. The assessee is carrying on any of following specified business:
a) Setting up and operating a cold chain facility;
b) Setting up and operating a warehousing facility for storage of
agricultural produce;
c) Laying and operating a cross country natural gas or crude or petroleum
oil pipeline network for distribution, including storage facilities being
integral part of such network (only for Indian Company or their
Consortium or Authority set up under any Central or State Act as approved
by Petroleum and Natural Gas Regulatory Board).
2. The above business should have commenced on or after 1st April, 2009.
3. The above business is not formed by splitting up or reconstruction of a
business already in existence.
4. It is not formed by transfer to a new business of machinery or plant previously
used for any purpose. However any such old plant machinery can be transferred
to new industrial undertaking provided value of such old plant or machinery
does not exceed 20% of total value of plant and machinery of new industrial
undertaking.
Amount of Deduction: 100% of Capital Expenditure incurred, wholly and
exclusively, for the specified business is deductible in the previous year in which
such expenditure was incurred.
However, if the capital expenditure was incurred prior to commencement of its
operations and such amount is capitalized in the books of account of the assessee

then such expenditure will be allowed as deduction for the previous year in
which the operations were commenced.
EXPENDITURE BY WAY OF PAYMENTS TO ASSOCIATIONS AND

INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT PROGRAMS [SEC
35CCA]: Any assessee who is carrying on a business/profession shall be allowed
a deduction of the amount of expenditure incurred by way of payment of any sum
to:
a) An association or institution, which has as its objectives the undertaking of
any rural development programme approved by the prescribed authority;
b) An association or institution engaged in training of persons for
implementing rural development programmes;
c) National fund for Rural Development set up by the Central Government;
d) National Urban Poverty Eradication Fund set up and notified by the
Central Governments.
NOTE:1. For clause (a) and (b) deduction for making the payment to an
association/institution shall be allowed provided the project has been approved
by the prescribed authority before 1st March, 1983.
2. If deduction is claimed u/s 35 CCA, it shall not be allowed under any other
provision of the Act.
AMORTISATION OF PRELIMINARY EXPENSES [SEC 35D]: Deduction under

this section can be claimed by:
a) Indian Company; or
b) A RESIDENT Non-Corporate assessee.
A foreign company can't claim deduction under this section even if it is Resident
in India.
Time and Purpose of Preliminary Expenditure
When expenses incurred Why expenses is incurred
a) before commencement of For setting up any undertaking or

business business.
b) After commencement of In connection with extension of an
business Industrial unit or in connection with
setting up a new Unit.
Expenses qualified for deduction:

Work carried on by assessee itself or Work carried on by assessee itself or
by a concern approved by Board by any concern ( approved or not)
Expenses incurred in connection with a) Legal charges for drafting any
preparation of a feasibility report or agreement between the assessee and
project report, conducting survey for any other person relating to setting up
the business of the assessee or or conduct of the business of the
engineering services relating to the assessee;
business of the assessee b) When the assessee is Company:

expenditure by way of legal charges for

drafting the Memorandum and Articles
of Association of the Company, on
printing of the same, on Registration
fees of the company, public issue
expenses of share or debentures of the
company;
c) Any other expenditure which is
prescribed. (till now nothing is
prescribed)
AMOUNT QUALIFYING FOR DEDUCTION: The aggregate of expenditure

referred to in clauses (a) to (d) shall not exceed 5% of cost of project in case of all
assessees other than company.
In case of a company it can't exceed 5% of:
i) Cost of Project; or
ii) Capital employed in the business of company
whichever is beneficial to the company.
AMOUNT OF DEDUCTION: The qualifying amount as above shall be allowed as a
deduction in 5 equal installments beginning with the year in which the business
commences or as case may be the previous year in which extension of
undertaking is completed or new unit starts production or operation.
NOTE:1. In case of non-corporate Assessee, the deduction under this section is
available only if Audit Report in Form 3AE is taken from a Chartered Accountant.
2. In case of amalgamation/demerger, the provision of this section shall apply as
if no amalgamation or demerger has taken place, if the amalgamated/resulting
company is Indian company.
3. The chart given below explains how the expenditure is deductible under
various circumstances:
Nature of Expense Incurred by new Incurred by existing
concern before concern after
commencement of commencement of
business business
Expense on Issue of Allowed under sec 35 D Allowed under sec 37(1)
bonus shares
Expense on Issue of Allowed under sec 35 D Allowed under sec 35 D
shares (not being Bonus
Shares)
Expense on Issue of Allowed under sec 35 D Allowed under sec 37(1)
Debentures
Expense on Raising of Allowed under sec 35 D Allowed under sec 37(1)
Loan (long term or short
term)
AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION or

DEMERGER [SEC 35 DD]: Where an assessee, being an Indian Company incurs

any expenditure, an or after 01.04.1999 wholly and exclusively for the purpose of
amalgamation or demerger of an undertaking the assessee shall be allowed a
deduction of amount equal to 1/5th of such expenditure for each of five
successive previous years beginning with the previous year in which the
amalgamation or demerger takes place.
Note: No deduction shall be allowed in respect of the expenditure mentioned
above under any other provisions of the Act.
AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY

RETIREMENT SCHEME [SEC 35DDA]: Where an assessee incurs any
expenditure in any previous year by way of payment of any sum to an employee
at the time of his voluntary retirement in accordance with any scheme(s) of
voluntary retirement, 1/5th of the amount so paid shall be deducted in
computing the profits and gains of the business for that previous year and the
balance shall be deducted in equal installments for each of the four immediately
succeeding previous years.
NOTE:1. No deduction shall be allowed in respect of such expenditure under any
other provisions of the Act.
2. Where the undertaking of Indian company entitled to deduction for
amortization of voluntary retirement expense is transferred before the expiry of
the period specified to another Indian company in a scheme of amalgamation or
demerger the deduction shall continue to be available to the amalgamated or
resulting Company (as the case may be) as if the amalgamation or demerger had
not taken place.
3. Similarly in case of reorganization where a firm or proprietary concern is
succeeded by a company, the deduction shall continue to be available to the
successor company.
4. In the year of transfer, no deduction shall be available to the amalgamating
company, the Demerged Company or to the firm or proprietary concern.
AMORTISATION OF EXPENDITURE ON PROSPECTING ETC. FOR CERTAIN

MINERALS [SEC.35E and RULE 6AB]: Where an Assessee being Indian company
or a person (other than a company) resident in India, is engaged in any
operations relating to prospecting for or extraction or production of specified
minerals (mentioned in seventh Schedule) and incurs any specified expenditure
after 31st March, 1970, the assessee shall be allowed to amortize such
expenditure.
SPECIFIED EXPENDITURE: The expenditure should be incurred by the
assessee at any time during the year of production and any one or more of the
four years immediately preceding that year, wholly and exclusively on any
operations relating to prospecting for any mineral or a group of associated
minerals specified in part A or part B respectively of 'seventh schedule' or on the
development of a mine or other natural deposit of any such mineral or group of
associated minerals.

EXPENSES NOT INCLUDED IN SPECIFIED EXPENDITURE: The following are

excluded in qualified expenditure:
i) Expenditure met directly or indirectly by any person or authority;
ii) Any proceeds realised by the assessee from sale, salvage, compensation or
insurance in respect of any property or rights brought into existence as a result
of such expenditure;
iii) Expenditure on acquisition of the site of the source of any specified
minerals or group of associated minerals or of any rights in or over such site.
iv) Expenditure on the acquisition of the deposits of any of the specified
minerals or groups of associated minerals or of any rights in or over such deposit.
v) Expenditure of a capital nature in respect of any building, machinery, plant
or furniture for which depreciation is admissible under section 32.
QUANTUM AND PERIOD OF DEDUCTION: The amortization of specified
expenditure is allowed in equal installments over a period of 10 years. The
amount deductible for each year (starting from year of commercial production)
is:
i) 1/10th of specified expenditure; or
ii) Income (before deduction u/s 35E) of the previous year arising from
commercial exploration of mine or deposit of minerals of any other nature;
whichever is less.
NOTE:1. The assessee (not being a company) shall be allowed this deduction only
if audit report in form 3B is obtained from a Chartered Accountant.
2. No deduction shall be allowed in respect of such expenditure under any
other provisions of the Act.
3. In case of amalgamation/demerger, the provision of this section shall
apply as if no amalgamation/demerger has taken place if the
amalgamated/resulting company is Indian company.
INSURANCE PREMIUM [SECTION 36(1)(i)]: The amount of any premium paid

in respect of insurance against risk of damage or destruction of stocks or stores
used for the purposes of business or profession is allowed as deduction.
INSURANCE PREMIUM PAID BY A FEDERAL MILK CO-OPERATIVE SOCIETY

[SECTION 36(1)(ia)]: Insurance premium paid by a federal milk co-operative
society, on the lives of cattle owned by the members of a primary milk co-
operative society affiliated to it is allowed as deduction.
INSURANCE ON HEALTH OF EMPLOYEES [SEC36(1)(ib)]: An employer can

claim deduction in respect of premium paid by him by any mode other than Cash
for insurance on health of his employees in accordance with the scheme framed
by the General Insurance Corporation (and approved by the Central
Government) or any other insurer (and approved by IRDA).
BONUS OR COMMISSION TO EMPLOYEES [SEC 36(1)(ii)]: Bonus or

commission paid to an employee is allowable as deduction subject to certain

conditions:-
a) The amount payable to employees as bonus or commission should not
otherwise have been payable to them as profit or dividend.
b) Bonus or Commission is allowed as deduction only where payment is
made: i) during the previous year; or
ii) on or before due date or actual date of filing the return
which ever is earlier [As per provisions under section 43 B if assessee follows
accrual basis].
INTEREST ON BORROWED CAPITAL [SECTION 36(1)(iii)]: Interest on

borrowed capital is allowed as deduction if:
a) The assessee has borrowed money; and
b) The money so borrowed is used for business purposes; and
c) The assessee has paid the interest or is payable on borrowings (in case
mercantile basis).
NOTE:1) Interest paid to shareholders on paid up capital is not allowed as
deduction.
2) Interest paid by firm to partners is deductible according to the provisions
of section 40(b). But interest paid by AOP/BOI to its members is not deductible.
3) The Income Tax department has no right to question the need of
borrowing (in case the assessee has ample funds of own).
4) Interest on money borrowed for meeting income tax liability, interest for late
payment or non-payment of advance tax or for late filing of returns is not allowed.
5) Interest paid/payable for capital Asset pertaining to the period from the
date of borrowal till the asset is first put to use is to be added in actual cost of the
Capital Asset. Interest on capital borrowed pertaining to the period after the
asset is first put to use is deductible under section 36.
6) Interest paid outside India is allowed as deduction only if tax has been paid
or tax has been deducted at source.
7) Interest on money borrowed for payment of dividend is allowed as
deduction.
8) Interest on borrowings from financial Institutions and interest on term
loan from a scheduled bank is allowed as deduction only if the payment is made
during the previous year OR on or before due date of furnishing the return of
income [As per provisions under section 43 B if assessee follows accrual basis].
9) No deduction shall be allowed in respect of any expenditure (including
interest) incurred by assessee is relation to income which does not form part of
the total income.
DISCOUNT ON ZERO COUPON BONDS [SEC 36(1)(iiia)]: The discount on zero

coupon bonds (redemption value less amount received on issue) shall be allowed
as deduction during the period of life of Bond on pro-rata basis.
EMPLOYER'S CONTRIBUTION TO RECOGNISED PROVIDENT FUND OR

APPROVED SUPERANNUATION FUND [SEC.36(1)(iv)]: Employer's

contribution towards a recognised provident fund and approved superannuation

fund are allowed as deduction (subject to limits laid down by fourth schedule and
Rules 87 and 88) [As per provisions under section 43 B if assessee follows
accrual basis].
EMPLOYER'S CONTRIBUTION TO APPROVED GRATUITY FUND [SECTION

36(1)(v)]: Employer's contribution towards approved gratuity fund created by
him exclusively for the benefit of his employees under an irrevocable trust is
allowed as deduction [As per provisions under section 43 B if assessee follows
accrual basis].
EMPLOYEE'S CONTRIBUTION TOWARDS CERTAIN STAFF WELFARE

SCHEMES [SEC 36 (1) (va)]: Any sum deducted from the salary of the employees
as their contribution towards PF, ESI etc is treated as income of the employer
under section 2(24)(x). However, if such contribution is actually paid on or
before due dates mentioned above, the deduction shall be allowed for the same.
WRITE OFF OF ALLOWANCE OF ANIMALS [SEC 36(I)(vi)]: In respect of

animals which are used for purpose of business or profession (not as stock in
trade) and have died or become useless, the difference between the actual cost of
the animals to the assessee and the amount realized (if any) for carcasses or sale
of animals is allowed as deduction.
BAD DEBTS [SEC 36(1)(vii)]: The following conditions must be fulfilled:

a) There must be a Debt;
b) The debt must be incidental to the Business or profession of the assessee.
It includes money lent in ordinary course of business of banking or money
lending carried on by the assessee.
c) Such debt must have been taken into account in computing the income of
the assessee or it is money lent in ordinary course.
d) The Debt must have been written off in the books of account of the
assessee for the previous year. Such Bad Debt is fully allowed as deduction in the
previous year in which it is written off.
NOTE:1)Provision for bad debts is not deductible in case of non-banking
concern.
2) No debts can be claimed as bad in respect of business which has been
discontinued before the commencement of previous year.
3) Bad debt allowed earlier and recovered in subsequent years is treated as
income of the previous year in which such amount is recovered.
PROVISION FOR BAD AND DOUBTFUL DEBTS OF CERTAIN BANKS AND

FINANCIAL INSTITUTIONS [SEC 36(1) (viia)]
a) A scheduled bank or a non-scheduled bank (except foreign Bank or co –
operative bank) is allowed deduction for provision for doubtful debts of:
1) Amount not exceeding 7.5% of total Income (before deduction under

this clause and chapter VI A); and

ii) Amount not exceeding 10% of aggregate average advance made by rural
branches of such bank computed in prescribed manner.
However an option has been given to above Banks to claim further deduction in
respect of provision made by it for doubtful or loss Assets of an amount not
exceeding income derived from redemption of securities as per scheme framed
by Central Government.
b) A bank incorporated by or under any foreign laws or a public Financial
Institution or State Industrial Corporation or a State Industrial Investment
Corporation, deduction for provision for doubtful debts is allowed of amount not
exceeding 5% of the total income (before deduction under this clause and before
chapter VI A).
SPECIAL RESERVE CREATED AND MAINTAINED BY FINANCIAL

CORPORATION ETC [SEC 36(I)(viii)]: The deduction under this section is
allowed in case of following:
Entity Eligible Business
1. a) Finance Corporation as per section Engaged in providing long term finance
4A of The Companies Act, 1956 for (a) Industrial or agricultural
b) Finance Corporation being a public development in India; or (b) for
sector company development of infrastructure facility
c) Banking Company in India or (c) for development of
d) Co-operative Bank (other than housing in India
primary agricultural credit society or
primary co-operative agricultural and
rural development bank)
2. A Housing Finance Company Engaged in providing long term finance
for construction or purchase of houses
in India for residential purposes
3. Any other financial corporation Engaged in providing long term finance
including public Company for development of infrastructure
facility in India
QUANTUM OF DEDUCTION: Least of following is deduction:

a) amount transferred to special reserve during the previous year;
b) 20% of profits from such business before this deduction;
c) 200% of paid up share capital and general reserve on last day of the
previous year minus balance of special reserve account on the first day of the
previous year.
AMOUNT WITHDRAWN FROM RESERVE ACCOUNT: If in any year any amount
is withdrawn from such reserve on which deduction was allowed under this
section, it will be charged to tax in the year in which it is withdrawn.
FAMILY PLANNING EXPENDITURE [SECTION 36(1)(ix)]: Any bona fide

expenditure incurred by a COMPANY for promoting family planning among its

employees is allowable as deduction. However, if such expenditure is of capital

nature, 1/5th of such expenditure is allowed as deduction for the previous year in
which it was incurred and the balance is deductible in equal installments in next
four years.
REVENUE EXPENDITURE INCURRED BY ENTITIES CREATED UNDER ACT OF

PARLIAMENT [SEC 36(1)(xii)]: Any revenue expenditure incurred by such
notified entity (having no profit motive) is allowed as deduction in calculating
income under head Profits & Gains of Business or Profession.
CONTRIBUTION BY FINANCIAL INSTITUTIONS TO NOTIFIED CREDIT

GUARANTEE FUND TRUST FOR SMALL INDUSTRIES [SEC 36(1)(xiv)]: Any
sum paid by public financial institution as contribution to notified credit
guarantee fund trust for small industries is allowed as deduction.
SECURITIES TRANSACTION TAX [SEC 36(1)(xv)]: Securities transaction tax

paid by the assessee during the previous year on taxable securities transactions
entered into by him in the course of his business is allowed as deduction from
income under head ‘Profits & Gains of Business or Profession’, if income from
such taxable securities transactions is included in the income under head ‘Profits
& Gains of Business or Profession’.
EXPENSES DEDUCTIBLE UNDER SECTION 37(1): This section is residuary in

nature. The following condition must be fulfilled:
a) The Expenditure should not be covered by section 30 to section 36.
b) It should not be of capital nature.
c) It should not be personal expenditure of the assessee.
d) It should have been incurred in the previous year.
e) It should be in respect of business carried on by the assessee.
f) It should have been wholly and exclusively spent for the purpose of such
business.
g) It should not have been incurred for any purpose which is an offence or is
prohibited by any law.
NOTE:1) The examples of Expenses allowed under this section are: Salary to
employees, Advertisement Expenses, Legal Expenses, Fines or Penalty or
damages (other than Fees or penalties paid for breach of any Act), Expenses on
raising of Loans (after commencement of business), printing & stationery,
Freight & Carriage Expenses, Postage & Telephone Expenses, Travelling &
Conveyance Exp., General Expenses etc.
2) Expenses on shifting of registered office are not deductible.
3) Fees or penalties paid for breach/violation/infringement of any Act is
disallowed.
4) Diwali and Mahurat expenses are allowed as deduction.
5) Deposit for telephone or telex is treated as deduction under this section.
6) Advertisement in any souvenir, brochure etc. of a political party is

disallowed.
7) First time expenditure on fluorescent lights is treated as fixed asset but all
replacement expenses of tubes are allowed as deduction.
BUILDING, PLANT & MACHINERY OR FUNITURE NOT EXLUSIVELY USED FOR

BUSINESS OR PROFESSION [SEC. 38(1) & (2)]:
1. Where a part of any premises occupied as a tenant is used as dwelling house by
the assessee, the deduction of rent, repairs, land revenue, local rates and
municipal tax under section 30 shall be only for the part of the premises used for
the purpose of the business or profession.
2. Where any building (occupied otherwise as a tenant), plant and machinery,
furniture is not exclusively used for the purpose of the business or profession,
the deduction on account of current repairs and insurance premium and
depreciation in respect of these assets shall be only a fair proportionate part
thereof with regard to the use of such assets for the purposes of business or
profession.
EXPENSES NOT DEDUCTIBLE

Section 40, 40 A and 43B are in the nature of overriding provisions that even if an
expenditure or allowance comes within the provisions of any of sections 30 to 37
(1) as well as 40, 40A or 43B, sections 40,40 A and 43 B shall prevail and the
provisions of sections 30 and 38 shall have no application.
AMOUNTS NOT DEDUCTIBLE UNDER SECTION 40
A) In case of any assessee [section 40 (a)]:
i) Any interest, royalty, fees for technical services or other similar sum
chargeable under income tax act which are payable:
a) outside India; or
b) in India to a non-resident (other than a Company) or to a Foreign
Company; on which tax has not been deducted at source or after deduction
tax has not been paid during the previous year or in subsequent year
before the expiry of time prescribed under section 200(1).
However if in any subsequent years, the tax is paid on any such sum or
tax is deducted at source after the expiry of time limit given in section
200(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such sum has been paid;
ii) Any interest, commission or brokerage, fees for professional services or
fees for technical services, or amounts payable to a contractor or sub-
contractor payable to a resident on which tax is deductible at source under
Chapter XVIIB and such tax has not been deducted or after deduction has
not been paid:
a) in case Tax was deductible and was so deducted during the last
month of previous year- on or before the expiry of time limit
prescribed under section 139(1).
b) in any other case- on or before last day of the previous year.
However if in any subsequent years, the tax is paid on any such sum or

tax is deducted at source after the expiry of time limit given in section
200(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such sum has been paid;
iii) Any sum paid on account of any rate or tax levied on the profit or gains
of any business or profession or assessed at a proportion of or otherwise
on the basis of, any such profits or gains;
iv) Any sum paid on account of wealth tax under the Wealth Tax Act and
any tax of a similar character chargeable under any law in force in any
country outside India;
v) Salary payable:
a) out of India (to a resident or non-resident);
b) in India to a non-resident;
if tax has not been paid nor deducted at source.
vi) Any payment to provident fund or other fund established for the
benefit of employees of the assessee, unless the assessee has made
effective arrangements to secure that tax shall be deducted at source from
any payments made from the funds, which are chargeable to tax under the
head ‘Salaries’.
vii) Any tax actually paid by employer on non-monetary perquisites
provided to the employees.
B) In case of partnership firm [section 40 (b)]:-
These will be discussed in detail in the chapter ‘Assessment of
partnership firms’. Interest on partners’ capital/loan is allowed up to 12% p.a.
and salary, commission etc. to a WORKING PARTNER is allowed up to certain
limits and as per terms to the partnership Deed.
C) In case AOP/BOI [section 40 (ba)]:-
This will be discussed in detail in the chapter ‘Assessments of
AOP/BOI’. Any amount paid to member of AOP/BOI as salary, remuneration,
bonus or commission is fully disallowed.
EXPENSES/PAYMENTS NOT DEDUCTIBLE UNDER SECTION 40A(2):- Any

amount is disallowed under this section only if following three conditions are
fulfilled:-
i) The payment is in respect of any expenditure;
ii) The payment has been made or is to be made or a specified person in
respect of such expenditure;
iii) The payment for expenditure is considered excessive or unreasonable
having regard to :-
a) The fair market value of goods, services or facilities; or
b) The legitimate business needs of the assessee's business or profession;
or
c) The benefit derived by or accruing to the assessee from the payment.
AMOUNT OF DISALLOWANCE: If the above conditions are fulfilled, the assessing
officer can disallow the expenditure to the extent he considers it excessive or
unreasonable by the above standards.

SPECIFIED PERSONS: The specified persons in case of various assessees are as

under:-
Assessee Specified persons
Individual a) Any relative of such individual i.e. spouse, brother,
sister, lineal ascendant or descendant;
b) Any person in whose business or profession the
individual or his relatives has SUBSTANTIAL
INTEREST.
Company, firm, AOP a) Any director of the company, partner of the firm or
or HUF. member of the AOP or HUF or any relatives of such
person;
b) Any person in whose business or profession the
assessee or director, partner or member of assessee
or any relative of such person has substantial
interest.
c) Any individual who has substantial interest in the
business or profession of the assesses;
d) A company, firm AOP or HUF having
SUBSTANTIAL INTEREST in business/profession of
the assessee or any director, partner or member of
any such person;
e) A company, firm AOP or HUF of which a director,
partner or member has a substantial interest in the
business/profession of the assessee or any director,
partner or member of any such person or any
relative of any such person.
Note:- Substantial interest in the business / profession means :-
a) In case of company, if such person is beneficial owner of at least 20
percent of Equity share capital at any time during the previous year;
b) In case of any other person, if such person is entitled to at least 20 percent
profit of such concern at any time during the previous year;
EXPENDITURE NOT DEDUCTIBLE UNDER SECTION 40A(3)(a): Where an

assessee incurs any expenditure, in respect of which the payment or aggregate of
payments is made to a person in a day, in a sum exceeding Rs. 20,000/Rs.
35,000* otherwise than by an account payee cheque or account payee bank draft,
100% of such expenditure shall not allowed as deduction.
* Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying,
hiring or leasing goods carriage.
However there are certain exceptions provided in rule 6DD under
which the expenditure, even exceeding Rs. 20,000/35,000* shall be allowed as
deduction even though the payment is not made by a crossed cheque / draft.
These are -
a) Payment made to RBI or any other Bank, life Insurance corporation and
primary agricultural credit society or primary credit society.

b) Payment made to government, where such payment is required to be

made in legal tender e.g. payments of sales tax, custom duty, excise duty
etc.
c) Payment made by way of any letter of credit, telegraphic transfer, transfer
from one Bank account to another bank account in same bank or any other
bank, through bill of exchange payable to a Bank, through use of electronic
clearing system through a bank, a credit card or a debit card.
d) Where the payment is made by way of adjustment against the amount of
any liability incurred by the payee for any goods supplied or services
rendered by the assessee to such payee.
e) Payment for purchase of:-
i) Agricultural or forest produce.
ii) The produce of animal husbandry, dairy or poultry farming.
iii) Fish or fish products or
iv) Products of horticulture or apiculture if the payment is made to the
cultivator, grower or producer of such articles, produce or products.
f) Payment made for purchase of products manufactured or processed
without the aid of power in a cottage industry to the producer of such
products.
g) Where the payment is made in a village or town, which is not served by
any bank to any person who ordinarily resides or is carrying on business /
profession in any village/town.
h) Payment by way of gratuity, retrenchment compensation or similar
terminal benefits made to an employee or his legal heirs, if the aggregate of
such sums payable to the employee or his legal heir does not exceed Rs.
50000.
i) Payment by way of salary to its employees after deducting income tax
from the salary if such employee is temporarily posted for continuous
period of fifteen days or more in a place other than his normal place of
duty or on a ship and the employee does not maintain any Bank account at
such place.
j) Where the payment was required to be made on a day on which the Banks
were closed either on account of holiday or strike.
k) Payment made by any person to his agent who is required to make
payments in cash for goods or services on behalf of such person.
l) Where the payment is made by an authorized dealer or a money changer
against purchase of foreign currency or travellers cheques in normal
course of his business.
NOTE :- 1) If an assessee makes payment of two or more bills (none of them
exceeds Rs. 20,000) /Rs. 35,000* at the same time (otherwise than by an
account payee cheque or account payee bank draft), section 40 A (3) is not
applicable even if the aggregate payment is more than Rs. 20,000/Rs.
35,000*.
2) Section 40 A (3) is not applicable if an assessee purchases a capital asset or
in respect of an expenditure which is not to claimed as deduction under

sections 30 to 37.
3) It is possible that a person may make different payments (otherwise than
by an account payee cheque or account payee bank draft) at different time
during the day to the same person and none of the payments during the
day to same party exceeds Rs. 20,000/Rs. 35,000*.But if the aggregate
payment exceeds Rs. 20000/Rs. 35,000* then whole of such payment is
disallowed.
4) Section 40 A (3) is applicable only in computing income under head
‘profits and gain of business or profession’ and ‘income from other
sources'.
* Rs. 35,000 in case payment is made on or after 1st October, 2009 for plying,
hiring or leasing goods carriage.
DISALLOWANCE IN RESPECT OF PROVISION FOR GRATUITY [SECTION

40A(7)] : Gratuity is allowed as deduction only if :-
a) Gratuity has actually become payable during the previous year to the
employees (if not covered as per clause (b)); or
b) Provision is made for payment of a sum by way of any contribution
towards an approved gratuity fund.
Therefore no deduction is allowed in respect of any provision made for payment
of gratuity only unless the said sum is deposited to approved gratuity fund as per
provision of sector 43 B.
DISALLOWANCE IN RESPECT OF CONTRIBUTION TO NON-STATUTORY

FUNDS [SECTION 40A(9)]: The sum contributed by the assessee as an employer
towards approved gratuity fund, recognized provident fund or an approved
superannuation fund shall be allowed as deduction. No deduction shall be
allowed in respect sum paid towards setting up or formation of any other fund,
trust, society etc. for any other purpose which is not approved or recognised.
DISALLOWANCE OF UNPAID LIABILITY [SEC 43B]: When the books of

accounts are maintained on mercantile basis, the deduction of following sums is
allowed only on payment during the previous year or within the stipulated
period mentioned against each of these expenditures:
Nature of expense Stipulated time period
a) Any sum payable by way of tax, duty, Payment should be made on or before
cess or fee, by whatever name called due date of furnishing the return of
under any law for time being in force. income under section 139(1) and the
proof of payment should be enclosed
along with the return of income.
However if payment is made after
due date, deduction can be claimed in
the year of payment.
b) Any sum payable by the assessee as SAME AS ABOVE
employer as contribution to provident

fund or gratuity fund or any other fund

for welfare of employees.
c) Any sum payable to employee as SAME AS ABOVE
bonus or commission for service
rendered.
d) Any sum payable as interest on any SAME AS ABOVE
loans or borrowing from any public
financial institution (i.e. ICICI, IDBI, LIC,
IFCI, UTI etc)
e) Any sum payable as interest on any SAME AS ABOVE
loan or advance from a scheduled Bank
including a co-operative Bank.
f) Any sum payable as employer in lieu SAME AS ABOVE
of leave at the credit of his employee.
NOTE: Employer’s Contribution to provident fund or gratuity fund or any other
fund for welfare of employees is covered under point (b) above u/s 43 B.
But Employee’s Contribution to provident fund or gratuity fund or any
other fund for welfare of employees is allowed as deduction only when the
payment of the same is made on or before the due date mentioned under
respective welfare Acts. Employee’s Contribution to such fund paid after
the due date mentioned under respective welfare Acts is not allowed as
deduction u/s 36(1)(va).
DEEMED PROFITS CHARGEABLE TO TAX: The following deemed profits

chargeable to tax as income under head business or profession:
a) Recovery against any allowance or deduction allowed as deduction:
(i) Any deduction was allowed in any previous year in respect of Loss or
Expenditure (revenue or capital) or trading liability AND during the
current previous year the assessee has obtained refund or remission or
cessation thereof then such amount will be income of assessee under head
Profits & Gains of Business & Profession. [Section 41(1)(a)]
(ii) If in above case, instead of the assessee, the successor had has obtained
refund or remission or cessation thereof then such amount will be income
of successor under head Profits & Gains of Business & Profession. [Section
41(1)(b)]
b) Balancing charges on assets if undertaking engaged in generation or
generation and distribution of power. [Section 41(2)]
c) Sale of scientific research capital asset without putting it for any other use.
[Section 41(3)]
d) Recovery of Bad debts allowed earlier as deduction. [Section 41(4)]
e) Amount withdrawn from special reserve created and maintained by certain
financial institutions. [Section 41(4A)]
f) Losses of previous year in which business ceased to exist can be set off from
deemed incomes under Section 41(1), (3), (4) or (4A) even after period of 8
years has passed and even if return of loss was not submitted in time [section

41(5)].
g) Any sum received after the discontinuation of the Business or Profession is
deemed to be the income of the recipient and is charged to tax in the year of
the receipt [section 176 (3A) and 176(4)].
NOTE: The above incomes are taxable in the year of receipt even if in that year
the business is not in existence.
UNDISCLOSED INCOME AND INVESTMENTS HOW AND WHEN TAXED:- The

tax treatment is as follows :-
a) Cash credits [section 68]:- These are taxable in the year in which
credited in the books of account of the assessee.
b) Unexplained investments [section 69]:- These are taxable in the year in
which such investments were made.
c) Unexplained money etc. [section 69A]:- These are taxable in the year in
which the assessee is found the owner of such money.
d) Investment not fully disclosed in books of accounts [section 69B]:-
The undisclosed amount is taxable in the year in which the assessee has
made such investments.
e) Unexplained expenditure [section 69C]:- These expenses are taxable in
the year in which these are incurred.
f) Amounts borrowed or repaid on Hundi [section 69D]:- These amounts
are taxable in the year of borrowal or repayment. But if amount is taxed in
the year of borrowal repayment shall not be taxed again.
MAINTENANCE OF ACCOUNTS [SECTION 44AA]: To understand compulsory

maintenance of books of account it is necessary to understand the meaning of
‘specified profession’ and ‘Non-specified profession’.
SPECIFIED PROFESSION: Specified profession includes persons carrying on an
legal, medical, engineering, architectural, accountancy, technical consultancy or
interior decoration or any other notified profession [i.e. authorised
representatives, film artists, company secretaries and information technology
professionals].
NON-SPECIFIED PROFESSION: - Non-specified profession is a profession other
than specified profession.
PRESCRIBED BOOKS OF ACCOUNT [Rule 6F]:
a) Category A :- [Persons carrying on ‘specified profession’ and their gross
receipts in profession do not exceed Rs. 1,50,000 in any of three years
immediately preceding the previous year (or in case of newly set up
profession, the gross receipts in profession for the previous year are not
likely to exceed the said amount of Rs. 1,50,000)]. These persons are
required to maintain such “books of accounts and other documents” as
may enable the assessing officer to compute their taxable income under
The Income Tax Act.
b) Category B:- [Persons carrying on ‘specified profession and their gross
receipts in profession exceed Rs. 1,50,000 in ALL of three years

immediately preceding the previous year (or in case of newly set up

profession, the gross receipt in profession for the previous year are likely
to exceed Rs. 1,50,000)] These persons are required to maintain
prescribed books of accounts as per rule 6 F(2) as follows :-
i) cash book. ii) a journal, if mercantile system is followed. iii) a Ledger. iv)
carbon copies of bills (machine numbered) exceeding Rs. 25 issued by a
person, and v) original bills wherever issued to the person and receipts in
respect of expenditure incurred by the person (or if bills and receipts are
not issued and the expenditure incurred is not more than Rs. 50, payment
vouchers prepared and signed by the person).
Apart from above a person carrying on medical profession is required to
keep following additional books :- a) A daily case Register in form 3C; b) an
inventory, on first day and last day of the previous year, of stock of
medicines and other consumable accessories used for his profession.
c) Category C :-[Persons carrying on Non-specified profession or any
business if their from such business or profession does not exceed Rs.
1,20,000 and the total sale, turnover or gross receipt there of are not in
excess of Rs. 10,00,000 in all three years immediately preceding the
previous year (or in case of newly setup business or non-specified
profession total income and total sale, turnover or gross receipt are not
likely to exceed the said amounts)]. These persons are not required to
maintain any books of accounts.
d) Category D :- [Person carrying an ‘Non-specified profession' or any
business if their income from such profession or business exceeds Rs.
1,20,000 or the total sale, turnover or gross receipts there of are in excess
of Rs. 10,00,000 in any of three years immediately preceding the previous
year ( or when the profession or business in newly set up, income / total
sale etc. are not likely to exceed the said amounts)] - These persons are
required to maintain such “Books of accounts and other documents” as
may enable the assessing officer to compute their taxable income under
the income tax Act.
This category also includes assessee covered under section 44 AD or 44AE
or 44AF or 44BB or 44BBB if it is claimed that profits and gains from the
business are lower than profits as per these sections.
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44 AB]: The following persons

are required to get their accounts audited by a chartered accountant:
a) A person carrying on business, if the total sale, turnover or gross receipts
in business for the previous year exceed Rs. 40,00,000.
b) A person carrying in profession, if his gross receipts in profession for the
previous year exceed Rs. 10, 00,000.
c) A person covered under section 44AD, 44AE, 44AF, 44BB or 44BBB who
claims that the profits and gains from such business are lower than the
profits and gains computed under these sections.
DUE DATE OF GETTING BOOKS AUDITED AND FORM: The due date of getting

books audited is 30th September of the assessment year in case of all assessees.
The chartered Accountant gives his audit report in form 3 CA (if the assessee in
required to get his accounts audited under any law) or in form 3 CB (if the
assessee is NOT required to get his accounts audited under any other law). The
details of such audit are given in form 3CD.
SUBMISSION OF AUDIT REPORT: The audit report as per section 44AB is not to
be attached with new return forms. Such audit report should not be submitted to
income tax department before, on or after due date of filing the return i.e. 30th
September. However, the audit report should be obtained on or before due date.
NOTE: - If the date is extended by the income tax department then 30th
September shall replaced by such date.
SPECIAL PROVISIONS FOR COMPUTING INCOME ON ESTIMATED BASIS:

These are given under section 44 AD, 44 AE, 44AF, 44B, 44BB, 44BBA and 44BBB
as follows :-
PROFITS & GAINS OF CIVIL CONSTRUCTION BUSINESS [SECTION 44 AD]: The
conditions of this provision are:-
1. The assessee may be any person and may be a resident or non-resident.
2. The assessee must be engaged in business of civil construction or supply of
labour for civil construction work.
3. The civil construction includes construction or repair of buildings, dams,
bridges or other structures or roads or canals. It also includes electrical fitting,
plumbing, landscaping work.
4. This section is applicable if gross receipts from such business don’t exceed Rs.
40,00,000.
5. The income from such business is estimated at 8% of gross receipt paid or
payable to the assessee. The assessee can voluntarily declare higher income in
his return of income.
6. The income as above is after deduction of all expenses from section 30 to 38
including depreciation. But in case of firm, salary and interest on capital to
partners under section 40(b) shall be allowed from such income.
7. Such assessee is not required to maintain any books of account. He is also not
required to get his accounts audited. But in case he carries any other business
also and total gross receipts of all business is more than Rs. 40, 00,000 then he
will get his accounts audited under section 44 AB.
8. Such assessee is eligible for deductions under chapter VI A, if conditions
therein are fulfilled.
9. Such assessee can however claim his income to be lower but he will have
maintain the books of account as per section 44AA and get his accounts audited
under section 44AB.
PROFITS & GAINS OF BUSINESS OF PLYING, LEASING OR HIRING TRUCKS

[SECTION 44AE]: The features are as follows:
2. The assessee must be engaged in business of plying, hiring or leasing the

trucks.
3. The assessee does not own more than 10 goods carriages at any time during
the year. For this purpose, a goods carriage taken on hire purchase or on
installments shall be deemed to be owned by the assessee.
4. The income of a heavy goods vehicle (the unladen weight of which is more
than 12000 kilogram) is estimated at Rs. 3500/- per month (or part of month)
during which the goods carriage in owned by the assessee.
5. The income of a good carriage other than heavy goods vehicle is estimated at
Rs. 3150/- per month (or part of a month) during which the goods carriage
owned by the assessee.
6. The assessee can voluntarily declare higher income.
7. The income as above is after deduction of all expenses from section 30 to 38
including depreciation. But in case of firm, salary and interest on capital to
partners under section 40(b) shall be allowed from such income.
8. Such assessee is not required to keep any books of accounts. He is also not
required to get his accounts audited.
9. Such assessee is eligible for deductions under chapter VI A, if conditions
therein are fulfilled.
under section 44AB.
PROFITS AND GAINS OF RETAIL TRADERS [SEC 44AF]: The conditions to be

fulfilled are:
2. The assessee must be engaged in retail trade of any goods or merchandise.
3. The turnover of the assessee from the above business does not exceed Rs.
40,00,000.
4. The estimated income from such business is 5% of gross receipts. The assessee
may voluntarily declare higher income in his return of income.
5. The income as above is after all deductions under section 30 t0 38 including
depreciation. But in case of a firm, salary and interest on capital to partners
under section 40(b) shall be allowed from such income.
6. The assessee is not required to maintain any books of account. He is also not
required to get his accounts audited.
under section 44AB.
PROFITS AND GAINS OF SHIPPING BUSINESS OF NON-RESIDENT ASSESSEE

[SEC 44B]: The conditions to be fulfilled are:
1. The assessee is a non-resident person.
2. He is engaged in the business of operation of ships.
3. He has earned any amount, paid or payable whether in or out of India, on
account of carriage of passengers, livestock, mail or goods shipped at any port in

India; and he has received or deemed to received in India, any amount, on

account of carriage of passengers, livestock, mail or goods shipped at any port
outside India.
4. The income of such assessee from operation of ships shall be a sum equal to
7.5% of the amounts referred to in point 3 above.
PROFITS AND GAINS OF NON-RESIDENT ASSESSEE SUPPLYING MACHINERY

ON HIRE FOR EXPLORATION ETC. OF MINERAL OILS [SEC 44BB]: The
conditions to be fulfilled are:
2. He is engaged in the business of providing services or facilities in connection
with, or supplying plant and machinery on hire which is used or to be used in
prospecting for or extraction or production of mineral oils.
account of services or facilities in connection with, or supplying plant and
machinery on hire which is used or to be used in prospecting for or extraction or
production of mineral oils in INDIA; and he has received or deemed to received in
India, any amount, on account of services or facilities in connection with, or
supplying plant and machinery on hire which is used or to be used in prospecting
for or extraction or production of mineral oils outside India.
4. The income of such assessee from such business shall be a sum equal to 10% of
the amounts referred to in point 3 above.
under section 44AB.
PROFITS AND GAINS OF NON-RESIDENT ASSESSEE FROM BUSINESS OF

OPERATION OF AIRCRAFT [SEC 44BBA]: The conditions to be fulfilled are:
2. He is engaged in the business of operation of aircraft.
account of carriage of passengers, livestock, mail or goods from any place in
India; and he has received or deemed to received in India, any amount, on
account of carriage of passengers, livestock, mail or goods from a place outside
India.
PROFITS AND GAINS OF FOREIGN COMPANY FROM BUSINESS OF CIVIL

CONSTRUCTION ETC. IN CERTAIN TURNKEY POWER PROJECTS [SEC.
44BBB]: The conditions to be fulfilled are:
1. The assessee is a foreign company.
2. Such company is engaged in the business of civil construction or erection of
plant and machinery or testing or commissioning thereof, in connection with a
turnkey power project approved by the Central Government.

3. Any amount is received or receivable by such company in connection with the

above said business.
under section 44AB.
METHOD OF VALUATION OF CLOSING STOCK: The method of valuation of

stock of goods is not prescribed under The Income Tax Act or The Income Tax
Rules. The assessee may value its stock at cost or net realizable value (market
value) whichever is less (as is normal practice in financial accounting). Such
valuation can be as per individual method or as per global method. Both opening
and closing stock should be valued on same basis.
Further value of closing stock should include any tax, duty, cess or fee paid or
incurred to bring the goods to the place of its location and condition on the date
of its valuation.
***

Chapter-6
INCOME UNDER THE HEAD CAPITAL GAINS
BASIS OF CHARGE [SEC 45]: Any profits or gains arising from transfer of capital
asset effected in the previous year, shall be chargeable to tax under the head
‘Capital Gains’ and shall be deemed to be income of the previous year in which
the transfer took place unless such capital gain is exempt u/s 54,54B, 54D, 54EC,
54F, 54G or 54GA. Thus, the following are essential conditions for taxing capital
gains:
(a) There must be a capital Asset.
(b) The capital asset must have been ‘transferred’ by the Assessee. (But in
some cases capital gains arise even if there is no transfer of Capital Asset).
(c) Such transfer must have taken place during the previous year. (But in
some cases capital gain is taxable in a year other than the year in which the
capital asset is transferred).
(d) There must be profits or gains on such transfer, which is called ‘Capital
gains’.
(e) Such profit or gains should not be exempt u/s 54,54B, 54D, 54EC, 54F, 54G
or 54GA.
NOTE: According to section 45 (1A), in case of profits or gains from insurance
claim due to damage or destruction of property by fire or other calamities, there
will be capital gain, although no asset is transferred in such case.
(A) THERE MUST BE A CAPITAL ASSET: Capital Gain arises only on transfer
of a ‘Capital Asset'. Capital Asset means property of any kind (whether FIXED OR
CIRCULATING, MOVABLE OR IMMOVABLE, TANGIBLE OR INTANGIBLE) held by
the assessee. However, the following are not included in the definition of Capital
Asset:
(a) Any stock-in-trade, consumable store or raw material held for the purpose
of the business or profession of the assessee;
(b) Personal effects of the assessee which means movable property including
wearing apparel and furniture held for personal use by the assessee or any
member of his family dependent upon him. However, the following assets
are not treated as personal effects even if these are held for personal use:
Jewellery, Paintings, Drawings, archaeological collections, sculptures or
any work of art.
(c) Agricultural land in India which is not urban agricultural Land. In other
words, it must be a rural agricultural Land;
(d) 6 ½ % Gold Bonds, 1977, 7% Gold Bonds 1980 or National Defence Gold
Bonds, 1980 issued by the Central Government;
(e) Special Bearer Bonds, 1991 issued by the Central Government;
(f) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
NOTE: (1) The item as per (d) and (e) do not exist now.
(2) Personal effects include only movable property. Thus personal effect does
not cover the house property in which the assessee lives.
(3) Jewellery Includes - ornaments of gold silver, platinum or any other

precious metal or any alloy containing one or more of such precious

metals, whether or not containing any precious or semi precious stone and
whether or not worked or sewn into any wearing apparel; and
- Precious or semi precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn in any wearing apparel.
(4) Rural Agricultural Land means an agricultural Land in India-if situated in
any area which is comprised with in the jurisdiction of a municipality then
its population should be less than 10,000 as per last census.
-If situated outside the limits of municipality then it should be situated
certain kilometers away from the local limits of any municipality as
specified by the Central Government in the official Gazette.
(5) Urban Agricultural Land is a capital asset but any capital gain arising from
the COMPULSORY ACQUISITION of such land is exempt from tax under
section 10(37).
(6) All assets like goodwill, leasehold rights, manufacturing licence, route
permits, shares of companies, residential or commercial houses, patents,
trade marks, Jewellery, land are called capital Assets.
(7) Personal Effects which are movable like household utensils, appliances,
furniture, carpets, paintings, T. V. Sets, Vehicles, Refrigerators, musical
instruments are not capital assets.
TYPES OF CAPITAL ASSETS: The capital assets are of two types:

(a) Short term Capital Asset
(b) Long term Capital Asset
SHORT TERM CAPITAL ASSET [Sec 2(42A)]: A Capital asset held by an assessee
for not more than 36 months immediately preceding the date of its transfer is
known as a short term capital Asset. However in following cases the above period
of 36 months shall be replaced by 12 months:
(a) Equity or Preference shares of a Company (quoted or not)
(b) Securities (like Debentures or Government Securities) listed in a
recognized stock exchange in India (quoted).
(c) Units of the Unit Trust of India or units of a Mutual fund specified u/s 10
(23D) (quoted or not).
(d) Zero Coupon Bonds (quoted or not).
LONG TERM CAPITAL ASSET [Sec 2(29A)]: A Capital Asset other then short
term capital Asset is a Long term Capital Asset.
NOTE: The Depreciable Assets are always treated as short term capital assets
even if these are held for more than 36 months.
CALULATION OF PERIOD OF HOLDING: In the following five cases the
inclusion/ exclusion of period is determined as under:
CASE EXCLUSION/ INCLUSION OF PERIOD
(a) Shares held in Company in EXCLUDE the period subsequent to
Liquidation date of Liquidation.
(b) Property acquired u/s 49(1) i.e. INCLUDE the holding period of
Gift, Will etc. Previous owner also.

(c) Shares of Amalgamated Company INCLUDE the holding period of shares

acquired in scheme of amalgamation. in Amalgamating Co, by assessee.
(d) Shares in Indian Resulting INCLUDE the holding period of shares
Company acquired in case of demerger in the Demerged company by the
Assessee.
(e)(i) Trading or clearing rights of INCLUDE the period for which the
recognised stock exchange pursuant to person was a member of the
demutualization or Corporatisation recognised stock exchange in India.
(e)(ii) Equity shares in a company INCLUDE the period for which the
acquired by a person pursuant to the person was a member of the
demutualization or Corporatisation of recognised stock exchange in India.
recognised stock exchange.
PERIOD OF HOLDING FOR BONUS AND RIGHT SHARES: The Holding period
for the purpose of capital gains in case of shares or securities will be determined
as under:
CASE RELEVANT DATE
1. Right shares or any other securities Period shall be from Date of Allotment
(financial assets) purchased by original of such financial asset.
holder.
2. Right shares or any other securities Period shall be from Date of Allotment
(financial assets) purchased by the of such financial asset.
renouncee in whose favour right has
been renounced by original security
holder.
3. Right renounced by original security Period shall be from the date of offer to
holder in favour of renounce. the date of renouncement.
4. Financial Asset allotted without any Period shall be from Date of Allotment
payment (on the basis of holding of of such financial asset.
other financial asset) e.g. Bonus Shares
5. Specific security or sweat equity Period shall be from Date of Allotment
shares allotted/transferred by or transfer of such financial asset.
employer directly/ indirectly to
employee either free of cost or at
concessional rate.
NOTE: REASON FOR DISTINCTION OF LONG TERM CAPITAL ASSET AND

SHORT TERM CAPITAL ASSET: The long term capital gain is taxed at
concessional /lower rates. Whereas the short term capital gain is taxed at
Normal Rates.
(B) CAPITAL ASSET MUST HAVE BEEN TRANSFERRED: Capital gain arises
only where there is a transfer of capital Asset. If the capital asset is not
transferred, there will be NO CAPITAL GAIN. However, Insurance claim due to
damage or destruction of property by fire or other calamities, there will be

capital gain although no asset has been transferred in such case.

WHAT IS TRANSFER OF CAPITAL ASSET [Section 2(47)]: Transfer includes:
a). the sale, exchange or relinquishment of the asset; or
b). the extinguishments of any rights in an asset; or
c). the compulsory acquisition of a capital asset under any law [but any
capital gain arising from the COMPULSORY ACQUISITION of such land
is exempt from tax under section 10(37)]; or
d). in a case where the asset is converted by the owner there of into or is
treated by him as stock in trade of business carried on by him on or after
01.04.1984, such conversion or treatment; or
e). the maturity or redemption of Zero Coupon Bonds;
f). any transaction involving the allowing the possession of any immovable
property to be taken or retained in part performance of a contract of the
nature referred to in Section 53A of the Transfer of properties Act, 1882;
or
g). any transaction (whether by way of becoming a member of or acquiring
shares in a Co-operative Society, Company or other Association of persons
or by way of any agreement or any arrangement or in any other manner
whatsoever) which has the effect of transferring or enabling the
enjoyment of any immovable property.
EXAMPLES OF TRANSFER: (a) Redemption of preference shares by a Company
is a transfer in the hands of share holders and they will be liable to Capital gain
for the same.
(b) Conversion of preference shares into ordinary shares amounts to transfer
in the hands of shareholders.
(c) Distribution of capital assets in kind in case of liquidation of a Company is
not transfer in the hands of company but a transfer in case of the
shareholders (regarding shares held by them).
(d) Proprietorship business taken over by a firm.
(e) Slump sale of an undertaking of a business.
(f) Grant of mining lease at a premium.
(g) Premium or Salami received for lease of plot for 99 years.
TRANSACTIONS NOT INCLUDED IN TRANSFER [SEC 46 & 47]: In the following
cases, the transactions will not be considered as transfer –
(i) Distribution of assets in kind by a company to its shareholders on its
liquidation shall not be transfer in the hands of Company.
(ii) Any distribution of Capital Assets on total or partial partition of Hindu
Undivided family.
(iii) Any transfer of a Capital Asset under a Gift or will or an irrevocable trust.
(However from A.Y. 2001-02, transfer under a Gift or irrevocable trust of
capital asset being shares, debentures or warrants allotted by Company,
directly or indirectly to its employees under the Employees Stock option
Plan or Scheme framed in accordance with guidelines issued by the central
Government shall be deemed as ‘TRANSFER’).
(iv) Any transfer of Capital Asset by a Company to its WHOLLY OWNED

INDIAN SUBSIDARY COMPANY.

(v) Any transfer of Capital Asset by a wholly owned subsidiary Company to its
Indian Holding Company.
NOTE: However in case of provisions as per (iv) & (v) above, if the transfer
of capital Asset is made after 29.2.1988 as stock in trade the same will be
treated as TRANSFER.
(vi) Any transfer in the scheme of amalgamation of a Capital Asset by the
amalgamating Company to the Amalgamated Company if Amalgamated
Company is Indian Company.
(vii) Any transfer in a scheme of amalgamation of shares held in Indian
Company by the amalgamating foreign Company if:
(a) At least 25% of the shareholders of the amalgamating foreign
Company continue to remain shareholders of the amalgamated
foreign Company; and
(b) Such a transfer does not attract capital gain tax in the Country, in
which such amalgamating Company is incorporated.
(viii) Any transfer, in the scheme of amalgamation of a Banking Company with a
Banking Institution sanctioned and brought into force by the Central
Government under section 45(7) of the Banking Regulation Act, 1949, of a
Capital Asset by the Banking Company to the Banking Institution.
NOTE: Where the assessee acquires the Capital Asset by way of a transaction as
per points (ii) to (viii), then the cost of acquisition of such asset shall be cost to
the previous owner. Further in such case, the period of asset held by previous
owner shall also be included to find whether the asset is short term capital Asset
or Long term capital Asset.
(ix) From A.Y 2000-01, any transfer, in a demerger, of a Capital Asset by the
Demerged Company to the resulting Company provided the resulting
Company is an Indian Company.
(x) Any transfer of shares held in an Indian Company by a Demerged foreign
Company to the resulting foreign Company if :
(a) The shareholders holding not less than 75% in the value of
shares of the Demerged foreign Company continue to remain
shareholders of the resulting foreign Company; and
(b) Such transfer does not attract tax in capital gain in the country,
in which the Demerged foreign Company is incorporated. It is
further provided that provisions of section 391 to 394 of The
Companies Act, 1956 shall not apply in such a case.
(xi) Any transfer in a business reorganisation, of a capital asset by the
predecessor co-operative bank to the successor co-operative bank.
(xii) Any transfer by a shareholder, in a business reorganisation, of a capital
asset being share(s) held by him in predecessor co-operative bank in
consideration of the allotment of any share(s) in the successor co-
operative bank.
(xiii) Any transfer or issue of shares by the resulting company in a scheme of
demerger to the Shareholders of the Demerged Company, if the transfer or

issue is made in consideration of Demerger of the undertaking.

(xiv) Any transfer by a Shareholder, in the scheme of amalgamation, of share(s)
held by him in an amalgamating Company if the transfer is made in the
consideration of allotment to him of any share(s) in the amalgamated
Company and the amalgamated Company is an Indian Company.
(xv) Any transfer of urban Agricultural Land in India before 01-03-1970.
(xvi) Any transfer of bonds or Global Depository Receipts referred to in section
115AC(1) (i.e. bonds/GDR’s/shares of a public sector Company) purchased
in foreign currency, made outside India by a Non-Resident to another Non-
resident.
(xvii) Any transfer of Capital asset, being any work of art, archaeological,
scientific or art collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the National
Museum, National Art Gallery, National Archives or any other such public
museum or institution as may be notified by the central Government.
(xviii) Any transfer by way of conversion of bonds / debenture /debenture stock
or deposit certificate in any form of a company into shares or Debentures
of that company.
(xix) Any transfer made on or before 31-12-1998 by a person (not being a
company) of a capital asset being MEMBERSHIP of a recognized stock
exchange in India to a company in exchange of shares allotted by that
company to the transferor. Such shares must be retained by the transferor
for a period of not less then three years from the date of transfer.
(xx) Any transfer of LAND of a sick industrial company made under a scheme
prepared and sanctioned under section 18 of the sick Industrial companies
(SPL Provision) Act 1985 where such sick Industrial Company is managed
by its workers co-operative.
However, the transfer should be made during the period
commencing from the previous year in which the said company has
become a sick industrial company under section 17(1) of that Act and
ending with the previous year during which the entire NET WORTH of
such company becomes equal to or exceeds the Accumulated Losses.
(xxi) Transfer of a capital asset to the company where firm is succeeded by a
company in the business carried on by it subject to the following
conditions:-
a) All assets and liabilities of the firm relating to the business immediately
before the succession shall become the assets and liabilities of the
Company.
b) All the partners of the firm immediately before succession become
shareholders in the Company in the same proportion in which their capital
accounts stood in the books of account of the firm on the date of the
succession.
c) The partners do not receive any consideration or benefit directly or
indirectly, in any form or manner other than by way of allotment of shares
in the company.

d) The aggregate of shareholding of the partners in the Company is not less

than 50% of total voting power in the Company and shareholding shall
continue to be so for a period of five years from the date of the succession.
(xxii) Transfer of a capital asset to the company where proprietary concern is
succeeded by a company in the business carried on by it subject to the
following conditions:-
a) All assets and liabilities of the sole proprietary concern relating to the
business immediately before the succession shall become the assets and
liabilities of the Company.
b) The shareholding of the sole proprietor in the Company is not less than
50% of total voting power in the Company and shareholding shall continue
to be so for a period of five years from the date of the succession.
c) The sole proprietor does not receive any consideration or benefit directly
or indirectly, in any form or manner other than by way of allotment of
shares in the company.
(xxiii) Any transfer under ‘Security Lending Scheme, 1997’ for lending of any
securities under an agreement or arrangement, which the assessee has
entered into with the borrower of such securities and witch is subject to
the guidelines issued by the SEBI or RBI. (w. e. f. A. Y 2003-04 the
guidelines are issued by RBI).
(xxiv) Any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government.
(C). CAPITAL GAIN SHOULD ARISE IN THE PREVIOUS YEAR IN WHICH
TRANSFER TOOK PLACE: Generally capital gain arises in the previous year
which the transfer took place regarding the Capital Asset. However there
following exceptions:
(a) Conversion of Capital Asset in to stock in trade.
(b) Compulsory acquisition of asset.
(c) Damage or Destruction of any Capital Asset by fire or other calamities from
A.Y 2000-01
COMPUTATION OF CAPITAL GAIN [Section 48]: Now it has become clear that
the capital gain is of two types-Short Term Capital Gain & Long term Capital Gain.
A Performa to Calculate these Gain is given as follows:
COMPUTATION OF SHORT TERM CAPITAL GAINS:
Full Value of Consideration ***
Less: expenditure incurred wholly and exclusively
in connection with such transfer ***
(i) Cost of acquisition ***
(ii) Cost of Improvement *** ***
Balance ***
Less: exemption u/s 54B/ 54D/54G/54GA ***

SHORT TERM CAPITAL GAIN ***

COMPUTATION OF LONG TERM CAPITAL GAINS:

Full Value of Consideration ***
Less: Expenditure incurred wholly and exclusively
In connection with such transfer ***
(ii) Indexed Cost of Acquisition ***
(iii) Indexed Cost of Improvement *** ***
Balance ***
Less: Exemption u/s 54/54B/54D/54EC/54F/54G/54GA ***

LONG TERM CAPITAL GAIN ***
NOTE: 1. In case of an assessee covered by Section 48 (first proviso), 115AB,

115AC, 115 ACA, 115AD or 115D, the benefit of Indexation is not available. The
benefit of Indexation is also not available on transfer of Capital Asset being bonds
or Debenture (except Capital Indexed Bonds issued by the Government) [Section
48, proviso 3].
2. The securities transaction tax paid on purchase of equity shares and units of
equity oriented fund shall not form part of cost of acquisition. Similarly the
securities transaction tax paid on sale of equity shares and units of equity
oriented fund shall not be treated as expenses on transfer.
FULL VALUE OF CONSIDERATION: Full value of consideration means what the

transferor receives or is entitled to receive a consideration of the Capital Asset. It
is not always the market value of the asset on the date of transfer.
NOTE: (1) If the consideration (received or to be received) in transfer of land or
Building or both is less than the value adopted for the purpose of payment of
stamp duty in respect of such Transfer, the value so adapted or assessed shall be
deemed to be the full value of consideration and capital gain shall be computed
accordingly (from A.Y. 2003-04).
(2) If the full value of consideration agreed upon is received in installments in
different years, the value of Consideration has to be taken into consideration for
computing the capital gains in the year of transfer of such Capital Asset.
DEEMED FULL VALUE OF CONSIDERATION: In the following cases the full

value of consideration shall be the deemed value:
SL N O. MODE OF TRANSFER DEEMED FULL VALUE OF
CONSIDERATION
1. Money or asset received from Value of money and/or fair Market
an insurer on account of value of asset on the date of receipt.
damage or destruction of any
asset by fire or other
calamities from A.Y 2000-01.
2. Conversion of capital asset Fair Market Value of the asset on the
into stock in trade from A.Y. date of its conversion.
1985-86

3. Introduction of Capital IN Amount recorded in the books of

KIND into firm/AOP/BOI by Account of FIRM/AOP/BOI/as Value
partner or member of Capital Asset.
4. Distribution of asset in kind Fair Market Value of such Asset on
on dissolution of the date of distribution.
FIRM/AOP/BOI.
5. Shareholder receiving assets Market Value of the assets on date of
from Liquidator on distribution LESS Amount of deemed
Liquidation of the Company. Dividend u/s 2(22)(e).
6. Gift of shares or Debentures Fair Market Value on the date of Gift
etc. to employees under etc.
employees stock option plan
or scheme
7. Transfer of Land or building The value adopted by Stamp
or both when sale Valuation Authority for the purpose
consideration declared in the of Stamp Duty.
Conveyance Deed is less than
the value adopted by Stamp
Valuation Authority for the
purpose of Stamp Duty.
EXPENSES ON TRANSFER: Expenditure incurred wholly and exclusively in

connection with transfer of capital asset is deductible from full value of
consideration. Examples of such expenses are - brokerage or commission paid for
securing a purchaser, cost of stamp, registration fees borne by the vendor,
travelling exp. incurred in connection with transfer, litigation expenses for
claiming enhancement of compensation awarded in case of compulsory
acquisition of assets.
However, any expenses which have already been claimed as deduction under
any other provisions of the Act cannot be claimed as deduction under this clause.
COST OF ACQUISITION [SEC 55(2)]: Cost of acquisition of asset is the value for
which it was acquired by the assessee. Expenses of capital Nature for completing
or acquiring the title to the property are included in the cost of acquisition. The
examples are:
1) Interest on money borrowed to purchase asset is part of actual cost of
asset. But in case of asset being used for business or profession refer to
chapter ‘Profits & Gain of Business or Profession’.
2) Litigation expenses incurred by the assessee, who holds shares of a
Company, to acquire better voting rights, in respect of such shares, by
filing suit to get articles of association amended and expenses incurred for
compelling the company to register the shares in the name of the assessee
would from part of cost of acquisition of the shares.
3) Where a mortgage was created by the previous owner during his life time
and the same is subsisting on the date of his death, the successor obtains

only mortgagor’s interest in the property and by discharging the debt he

acquires the mortgagee’s interest in the property. Therefore, the amount
paid to clear off the mortgage is the cost of acquisition.
However the estate Duty paid in respect of inherited property can
neither be treated as part of cost of acquisition nor cost of improvement.
DEEMED COST OF ACQUISITION

I. COST TO PREVIOUS OWNER [SEC.49 (1)]: The cost to the previous owner is
deemed to be the cost of acquisition to the assessee in cases where capital asset
became the property of the assessee under any mode of transfer as below:
a) Acquisition of property on any distribution of assets on total or partial
partition of a Hindu Undivided family; or
b) Acquisition of a property under a gift or will; or
c) Acquisition of a property by succession, inheritance or devolution; or
d) Acquisition of a property on any distribution of assets on the dissolution of
a firm/ AOP/ BOI till 31st March, 1987; or
e) Acquisition of a property on any distribution of assets on liquidation of a
Company; or
f) Acquisition of a property under a transfer to a revocable or an irrevocable
trust; or
g) Acquisition of a property on any transfer by a wholly owned Indian
Subsidiary Company from its holding Company; or
h) Acquisition of a property on any transfer by an Indian Holding Company
from its wholly owned subsidiary Company; or
i) Acquisition of a property on any transfer, in a scheme of amalgamation of
two Indian Companies as referred to in Section 47 (vi ); or
j) Acquisition of a property on any transfer, in a scheme of amalgamation of
two foreign Companies as referred to in Section 47 (vi a); or
k) on any transfer of a capital asset by a Banking Company to the Banking
Institution in a scheme of amalgamation of the Banking Company with the
Banking Institution; or
l) Acquisition of a property by a HUF on conversion of self acquired property
of a member of a Hindu Undivided family into joint family property after
31-12-1969.
NOTE: 1. Previous owner means the previous owner who actually paid for the
asset.
2. If the cost for which previous owner acquired the property cannot be
ascertained, the cost of acquisition will be FAIR MARKET VALUE of the
asset on the date on which previous owner became the owner.
3. To find out whether the capital Asset is short term or long term in the
above cases, the previous of holding of the prevision owner shall be
included.
4. The benefit of indexation will be available from the year in which the asset
was first held by the Current owner.

(II) COST OF SHARES OF AMALGAMATED COMPANY [SEC. 49 (2)]:

Where a person holds shares in a Company which merged with an Indian
Company then in lieu of shares in the amalgamating company he will get shares
in the Amalgamated Company. In such a case, the cost of shares of amalgamating
Company will become the cost of shares of the amalgamated Company.
NOTE: 1.To find out whether the Capital Asset is short term or long term in the
above case, the period of holding shall be determined from date of
acquisition of shares in amalgamating company.
2. The benefit of indexation will be available from the year in which the
shares in amalgamated company were allotted.
(III) COST OF SHARES/DEBENTURES ACQUIRED ON COVERSION OF

DEBENTURES [SEC 49 (2A)]: Where any person holds debenture/ debenture
stock/ deposit certificates etc and such debentures etc are converted into shares
or Debentures of that Company. In such a case, the cost of shares or debentures
so converted shall be that part of cost of debentures etc which has been
appropriated towards shares or debentures.
NOTE: 1.To find out whether or not such shares/debentures are long term or
short term capital asset the period of holding shall be determined from the
date of allotment of such new shares/debentures.
2. The benefit of Indexation will be available from the year which such new
shares were allotted. (The benefit of Indexation is not available in case of
Debentures).
(IV) COST OF ACQUISTION OF SHARES / SECURITIES ACQUIRED UNDER

EMPLOYEES STOCK OPTION PLAN [SEC. 49(2AA)]: Where the employee holds
shares/securities (issued by his employer Company) offered to him by employer
or any other person under ESOP then cost of acquisition of such shares/
securities shall be Amount actually paid by the employee.
Note: In case the employee has exercised the option during the previous year
1999-2000 then cost of acquisition of such shares/ securities shall be fair market
value on the date of exercise of such option.
(V) COST OF ACQUISITION OF THE SHARES IN THE INDIAN RESULTING

COMPANY [SEC 49 (2C)]: Cost of acquisition of shares in the Indian resulting
company shall be calculated by following formula:
(Cost of acquisition of shares held by the assessee in the Demerged Company) X
(Net book value of the assets transferred in demerger) / (Net worth of the
Demerged
Company immediately before demerger).
NOTE: 1. Net worth means aggregate of the paid up share capital and general
reserves in the books of account of Demerged Company immediately
before demerger.
2. To find out whether or not such shares in resulting Company are long
capital asset, the period of holding shall be determined from date of

acquisition of shares in Demerged Company.

3. The benefit of indexation will be available from the year in which shares in
resulting Company are allotted.
(VI) COST OF ACQUISITION OF ORIGINAL SHARES OF THE DEMERGED

COMPANY [SEC 49 (2D)]: The cost of acquisition of such shares will be COST OF
ACQUISITION OF ORIGINAL SHARES LESS COST OF SHARES IN RESULTING
COMPANY.
(VII) COST OF ACQUISITION OF ASSETS ACQUIRED BEFORE 01-04-1981 [SEC

55 (2) (6)]: The following cases, the assessee may take at his option EITHER
ACTUAL COST OR THE FAIR MARKET VALUE OF THE ASSET (other than
depreciable Asset) as on 01-04-1981 as the cost of Acquisition :
(a) Where the capital asset became the property of the assessee before 01-04-
1981; or
(b) Where the capital asset became the property of the assessee by any mode
referred to in section 49 (1) and the capital asset became the property of
the previous owner before 01-04-1981.
NOTE: 1). This option is not available in case of DEPRECIABLE assets.
2) This option is not available in case of Goodwill of a Business, Brand or
Trademark associated with business, tenancy rights, loom hours, route
permits and right to manufacture, produce or process any article or thing,
whether self-generated or purchased.
3) We should take cost of asset or fair market value as on 01-04-1981 which
ever is higher as Cost of acquisition.
(VIII) COST OF ACQUISITION IN CASE OF DEPRECIABLE ASSETS [SEC 50]:

The cost of acquisition in case of Depreciable Assets is calculated only
when the Block of Assets is reduced to zero for any of the following reasons:
SITUATION ONE: The sale value of the asset sold/transferred along with scrap
value exceeds written down value of the Block in the beginning of the year and
actual cost of asset (s) acquired during the previous year.
SITUATION TWO: All the assets in the relevant block may be sold or transferred
during the year.
The short term Capital Gain in situation one is as:
Full value of consideration of asset (s) sold or transferred ***
in connection with transfer ***
W. D. V. of the block of assets in the beginning
of the previous year ***
Actual cost of assets acquired during the year and falling in the same block ***
____
SHORT TERM CAPITAL GAIN ***_
In situation two the net result may be short term capital Gain or loss. It is also

calculated as above.
(IX) COST OF ACQUISITION OF BONUS SHARES [SEC. 55 (2) (aa)(iii a)] :

The cost of acquisition of any additional financial asset as Bonus shares (or
security or otherwise) which is received without any payment by the assessee on
the basis of his holding any financial asset shall be determined as follows:
CASE COST OF ACQUISITION
1. If Bonus shares are allotted Fair Market Value as on 1-4-1981
before 01.04.1981.
2. If Bonus shares are allotted after NIL.
31-3-1981
Note: 1) The period of holding of such shares shall be determined from the date
of allotment of BONUS SHARES.
2) The cost of acquisition of Original shares determined as follows:
a) If such original shares were acquired by the owner (or the previous owner)
before 01.04.1981 then Actual Cost or F.M.V. as on 1-4-1981 w. e. in higher.
b) If such original shares were acquired by the owner (or the previous owner)
on or after 01.04.1981 then Actual Cost.
(X) COST OF ACQUISITION IN CASE OF RIGHT SHARES [SEC. 55(2)(aa)] : The

cost of acquisition of original shares, right entitlement and right shares is as
follows :
1. Original shares Actual Cost or F.M.V. as on 1-4-1981 w. e.
a) If purchased before 01- in higher.
04-1981
b) If purchased after Actual Cost.
31.03.1981
2. Right Entitlement which is NIL
renounced by the assessee in
favour of any person
3. Right shares acquired by the Amount actually paid by the assessee for
original shareholder acquiring Right Shares.
4. Right-Shares acquired by the Amount paid to the renouncer of Right
person in whose favour the right entitlement plus amount paid to the
entitlement has been renounced Company for acquiring Right shares.
(XI) COST OF ACQUISITION IN CASE OF INTANGIBLE ASSETS [SEC 55

(2)(a)]: The cost of acquisition of goodwill of business (not of profession), trade
mark or Brand Name associated with Business, Right to manufacture, produce or
process any article/thing or right to carry on any business, tenancy rights, route
permits or loom hours is determined as follows :

1. Such asset is purchased Actual Cost

2. Such asset is Self generated NIL

3. Such asset is acquired in any Actual Cost to Previous owner
mode as per section 49 (1)
NOTE :(1) The transfer of self generated asset not relating to business is not
chargeable to tax . e g. Goodwill of profession, a new formula patented by the
Inventor to grow seedless oranges.
(2) If such asset is purchased before 01-04.1981 then Cost of acquisition shall
be Actual Cost. The option of F.M.V. on 01.04.1981 is not available in such
case.
5. If such asset is self generated then cost of acquisition will be NIL EVEN IF
SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981
(XII) COST OF ACQUISITION IN CASE OF SLUMP SALE [SEC 50B]: In case of

slump sale, the cost of acquisition of capital asset (being one or more under
taking) shall be equal to 'NET WORTH' net worth means aggregate of total assets
of the undertaking as reduced by value of liabilities as appearing in Books of
Account.
NOTE:1) To find out whether capital gain is short term or long term, the period
of ownership of undertaking shall be considered.
2) The benefit of indexation shall not be available.
3) A report in form 3CEA shall be submitted along with return of income for
calculation of net worth (certified by a chartered accountant).
(XIII) COST OF ACQUISITION OF TRADING & CLEARING RIGHTS AND EQUITY

SHARES ALLOTTED TO THE SHAREHOLDER OF A RECOGNISED STOCK
EXCHANGE IN A SCHEME OF DEMUTUALISATION OR CORPORATISATION OF
A RECOGNISED STOCK EXCHANGE IN INDIA [SEC 55(2)(ab)]
a) The cost of such equity shares shall be the cost of acquisition of his original
membership of the exchange.
b) The cost of such trading & clearing rights (who has been allotted equity
shares as per point (a)) shall be deemed to be NIL.
Note: The period of holding shall be determined from the date of holding of
membership ticket in the old exchange.
ADJUSTMENT OF COST OF ACQUISITION IN CASE OF RECEIPT OF ADVANCE

MONEY [SEC 51]: Where any capital asset was, on any previous occasion, subject
to negotiations for its transfer, any advance or other money received and
forfeited by the assessee in respect of such negotiations shall be DEDUCTED
FROM THE COST OF ACQUISITION. The following points should be kept in mind:
a) Advance money received by and forfeited by any previous owner shall not be
deducted.
b) Advance money received and forfeited by current owner (i.e. assessee) shall be

deducted.
c) There is no difference between advance or other money received and forfeited
by the assessee. The other money may be deposit made by proposed purchaser
(but not forming part of purchase consideration) to guarantee the performance
of contract.
COST OF IMPROVEMENT [SEC 55(1)(b)]: The cost of improvement means:

a) Cost of improvement in relation to goodwill of a business or right to
manufacture, process or produce any article or thing is taken as NIL;
b) Cost of improvement in relation to any other capital asset-
ii) Where the capital asset became the property of the assessee [or the
previous owner in cases specified under section 49(1)] before 01-04-1981,
means all expenses of capital nature incurred in making any addition to
alteration of the capital asset on or after 01-04-1981 by the assessee (or
the previous owner as above);
iii) in other cases, means all expenses of capital nature incurred in making any
addition or alternation to the capital asset by the assessee [or the previous
owner in a case specified by section 49(1)].
iv) The cost of Improvement however do not include :
a) expenditure incurred prior to 01-04-1981
b) any expenditure which is deductible in computing the income chargeable
under the heads 'Income from house property', 'profit and gains of
Business or profession' and ‘Income from other sources’. Only Expenses of
CAPITAL NATURE are to be considered as cost of improvement.
INDEXED COST OF ACQUISITION AND INDEXED COST OF IMPROVEMENT

[SEC 48, Explanation (iii)]: In case of calculation of long term Capitol gain
Indexed cost of Acquisition and Indexed Cost of Improvement is deducted from
full value of consideration.
The Indexed Cost is calculated with the help of Cost Inflation Index. The
central Government has notified 'COST INFLATION INDEX' for long term Capital
gain' as follows:
FINANCIAL COST INFLATION FINANCIAL YEAR COST INFLATION

YEAR INDEX INDEX
1981-82 100 1996-97 305
1982-83 109 1997-98 331
1983-84 116 1998-99 351
1984-85 125 1999-00 389
1985-86 133 2000-01 406
1986-87 140 2001-02 426
1987-88 150 2002-03 447
1988-89 161 2003-04 463
1989-90 172 2004-05 480

1990-91 182 2005-06 497

1991-92 199 2006-07 519
1992-93 223 2007-08 551
1993-94 244 2008-09 582
1994-95 259 2009-10 632
1995-96 281
The Indexed Cost of Acquisition and Indexed Cost of Improvement is
calculated under Five DIFFERENT Situations as follows:
SITUATION ONE: CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE BEFORE
01-04-1981 [not being modes referred to in section 49 (1)]:
(a) Indexed Cost of Acquisition:
Fair Market value of asset on 1.4.81 Cost Inflation Index for the year in
or X which asset is transferred
Actual cost of Acquisition to the Cost Inflation Index for year 1981-82
assessee, w. e. is more (i. e. 100)
(b) Indexed Cost of Improvement:
Cost of improvement on or after Cost Inflation Index for the year in
01-04-1981 X which asset is transferred
Cost Inflation Index for year in which
improvement took place.
SITUATION 2-CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE ON OR
AFTER 01-04-1981 [not being modes referred to in Sec 49 (1)]:
(a) Indexed Cost of Acquisition :
Actual Cost of Acquisition to the C.I.I for the year in which asset was
assessee transferred
X
C.I.I for the year in which asset is
acquired

Cost of Improvement on or after C.I.I for the year in which at asset was
01-04-1981 OR transferred
X
C.I.I for the year in which improvement
took place.
SITUATION 3: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE BY ANY MODE
REFERRED TO IN SEC 49 (1) BEFORE 01-04-1981 AND SAME WAS
ORIGINALLY ACQUIRED BY PREVIOUS OWNER BEFORE 01-04-1981:
(a) Indexed Cost Acquisition:
FMV of the asset on 1.4.1981 C.I.I for the year in which asset was
OR transferred
X
Cost of acquisition of previous C.I.I for 1981-82 (i.e.100)
owner, w. e. is more


Cost of Improvement incurred by C.I.I for the year in which asset was
Assessee on or after 01-04-1981 transferred
X
took place.
SITUATION 4: CAPITAL ASSETS ACQUIRED THE ASSESSEE BY ANY MODE

REFERRED TO IN SEC 49 (1) AFTER 31-03-1981 BUT SAME WAS
ORIGINALLY ACQUIRED BY PREVIOUS OWNER BEFORE 01-04-1981:
FMV of the asset on 1.4.1981 C.I.I for the year in which asset was
OR transferred
X
Cost of acquisition of previous C.I.I for the year in which the asset was
owner, w. e. is more acquired by the assessee
Cost of Improvement incurred by C.I.I for the year in which the asset was
the assessee and previous owner on transferred
or after 01-04-1981 X

took place.
SITUATION 5: CAPITAL ASSETS ACQUIRED BY THE ASSESSEE BY ANY MODE

REFERRED TO IN SEC 49 (1) AFTER 31-03-1981 AND SAME WAS
ORIGINALLY ACQUIRED BY PREVIOUS OWNER ON OR AFTER 01-04-1981:
Cost of acquisition of the previous C.I.I for the year in which asset was
owner transferred
X
C.I.I for the year in which the asset was

acquired by the assessee
Cost of Improvement incurred by C.I.I for the year in which other asset was
the assessee and previous owner transferred
on or after 1.4.1981 X
took place.
INDEXATION NOT ALLOWED: In the following cases, the indexation is not

allowed to find out long term Capital Gain:
-Transfer of bonds or debentures (except Capital Indexed Bonds issued by the

Government (Proviso 3 to Sec 48).

-Transfer of shares/ debentures acquired by a non-resident in foreign currency
in an India Company (Proviso 1 & 2 to Sec 48).
-Transfer of undertaking in a Slump Sale (sec 50 B).
-Transfer of units of unit Trust of India or Mutual Fund covered under section 10
(23D) purchased in foreign currency by overseas financial Organisation (also
known as offshore funds) (Sec 115AB)
-Transfer of Global Depository Receipt or Bonds of an Indian Company or
share/bonds of public sector Company sold by the Government and purchased in
foreign currency by a Non-Resident [Sec 115 AC].
-Transfer of Global Depository Receipt purchased in foreign Currency by an
Individual resident in India and employee of Indian Company (Sec 115ACA).
-Transfer of Securities by foreign Institutional Investors (Sec 115 AD).
-Transfer of foreign exchange asset by a non-resident Indian (Sec 115 D).
NOTE: In case of Depreciable Asset, there is no question of Indexation as there is

always SHORT TERM CAPITAL GAIN in transfer of Depreciable Assets.
COMPUTATION OF CAPTAL GAIN IN SPECIAL CASES
(1) INSURANCE CLAIM RECEIVED FOR DAMAGE OR DESTRUCTION OF A

CAPITAL ASSET [SEC 45(1A)]: The following points are to be considered:
a) A Capital asset is damaged/ destroyed due to -
i) Flood, Typhoon, hurricane, Cyclone, earthquake or other natural
calamities; or
ii) Riot or civil disturbance; or
iii) Accidental fire or explosion; or
iv) Action by enemy.
b) The assessee has received compensation under Insurance during the year.
c) The value of money or Fair Market value of other assets received (on the
date of receipt) shall be ‘full value of consideration'.
NOTE: Where any capital asset is destroyed and there is no insurance or no
insurance compensation is received, there will be no Capital Loss under section
45 or 45(1A). This loss will be treated as Dead Loss.
(2) CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE [SEC 45(2)]:

The following points are to be considered:
(a) The capital Asset must have been converted into stock in trade on or after
01-04-1984 (before this date such Conversion is not regarded as transfer).
(b) The Capital Gain shall be chargeable to tax in the year in which such stock
in trade (Converted) is sold.
(c) The full value of consideration of such capital asset shall be the fair Market
Value (on the date of such Conversion) of such capital asset.
(d) Exemption u/s 54 EA, 54 EB or 54EC can be claimed if specified
investment is made with in 6 months from the date of sale of stock in

trade.
(3) CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET BY A

PARTNER/MEMBER TO FIRM/ AOP/BOI [SEC 45(3)]: The following points are
to be considered:
a) A person is partner in a firm or member of a AOP/ BOI;
b) He transfers a capital asset to such firm/AOP /BOI;
c) The amount recorded in the books of account of the firm/AOP/BOI as
value of such asset shall be taken as full value of consideration.
4. CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET BY WAY OF

DISTRIBUTION ON THE DISSOLUTION OF A FIRM/AOP/BOI [SEC 45(4)]: The
following points are to be considered:
a) The transferor is a firm/AOP/BOI;
b) Such firm/AOP/BOI transfers a capital asset to its partner/member on its
dissolution;
c) For computing capital Gain ‘the fair market value’ of the asset on the date
of transfer is taken as full value of consideration.
NOTE: The partner/member receiving such capital asset shall take actual cost of
asset at the value at which it was transferred to him.
5. CAPITAL GAIN ON COMPULSORY ACQUISITION OF ASSET [SEC 45(5)]:

The following points are to be considered:
a) This provision is applicable in case of- i) transfer of a capital asset by way
of compulsory acquisition under any law; or ii) a capital asset is transferred and
consideration is approved or determined by the Central Government/RBI;
b) The Capital Gain will be taxed in the year in which the compensation or
part there of is first received. The capital gain as calculated by taking ' INITIAL
COMPENSATION' as full value of consideration.
c) The enhanced compensation is taxed in the year in which such enhanced
compensation is received. In such a case cost of acquisition and improvement are
taken as NIL. The legal expenses for getting the compensation enhanced are
treated as expenses on transfer.
NOTE: Where the amount of compensation or consideration is subsequently
reduced by any court, Tribunal or other authority, the capital gain of that year, in
which the compensation was taxed, shall be recomputed by the Assessing Officer
with in 4 years from the end of the year in which such order for reduction of
compensation was passed.
6. SHARES/DEBENTURES ACQUIRED ON COVERSION OF DEBENTURES [SEC

49(2A)]: Where any person holds debenture/ debenture stock/ deposit
certificates etc and such debentures etc are converted into shares or Debentures
of that Company. In such a case, the cost of shares or debentures so converted
shall be that part of cost of debentures etc which has been appropriated towards
shares or debentures.

NOTE: 1.To find out whether or not such shares/debentures are long term or
short term capital asset the period of holding shall be determined from the
date of allotment of such new shares/debentures.
2. The benefit of Indexation will be available from the year which such new
shares were allotted. (The benefit of Indexation is not available in case of
Debentures).
3. If preference shares are converted into equity shares, it will be regarded as
transfer of preference shares and capital gain on such transfer shall be on
the date of allotment of equity shares. The full value of consideration shall
be fair market value of the equity shares on the date of allotment of such
equity shares.
7. CAPITAL GAIN ON DISTRIBUTION OF CAPITAL ASSET BY COMPANY IN
LIQUIDATION [SEC 46]: The following points are to be considered:
a) The Company is under liquidation;
b) Such company distributes capital Assets to its shareholders;
c) Calculate the market value of assets received and add cash received to this
figure;
d) From the amount as per point(c) deduct value of dividend (to the extent of
accumulated profit of the company). This net value is ' Full value of
consideration ' on transfer of shares.
e) If such capital asset received by the shareholder as in point (b) above is
subsequently transferred then the Market value of asset on the date of
distribution shall be the cost of acquisition of such asset.
8. TRANSFER OF INTANGIBLE ASSETS [SEC 55 (2)(a)]: The cost of
acquisition of goodwill of business (not of profession), trade mark or Brand
Name associated with Business, Right to manufacture, produce or process any
article/thing or right to carry on any business, tenancy rights, route permits or
loom hours is determined as follows :
1. Such asset is purchased Actual Cost
2. Such asset is Self generated NIL
3. Such asset is acquired in any Actual Cost to Previous owner
mode as per section 49 (1)
NOTE :(1) The transfer of self generated asset not relating to business is not
chargeable to tax . e g. Goodwill of profession, a new formula patented by the
Inventor to grow seedless oranges.
(2) If such asset is purchased before 01-04.1981 then Cost of acquisition shall
be Actual Cost. The option of F.M.V. on 01.04.1981 is not available in such
case.
6. If such asset is self generated then cost of acquisition will be NIL EVEN IF
SUCH ASSET WAS ACQUIRED BEFORE 01-04-1981
9. TRANSFER OF DEPRECIABLE ASSETS [SEC 50]: The capital gain in

case of Depreciable Assets is calculated only when the Block of Assets is reduced

to zero for any of the following reasons:

SITUATION ONE: The sale value of the asset sold/transferred along with scrap
value exceeds written down value of the Block in the beginning of the year and
actual cost of asset (s) acquired during the previous year.
SITUATION TWO: All the assets in the relevant block may be sold or transferred
during the year.
The short term Capital Gain in situation one is as:
Full value of consideration of asset (s) sold or transferred ***
in connection with transfer ***
W. D. V. of the block of assets in the beginning
of the previous year ***
Actual cost of assets acquired during the year and falling in the same block ***
____
SHORT TERM CAPITAL GAIN ***_
In situation two the net result may be short term capital Gain or loss. It is also
calculated as above.
10. CAPITAL GAIN IN CASE OF SLUMP SALE [SEC 50B]: In case of slump sale,
the cost of acquisition of capital asset (being one or more under taking) shall be
equal to 'NET WORTH' net worth means aggregate of total assets of the
undertaking as reduced by value of liabilities as appearing in Books of Account.
NOTE:1) To find out whether capital gain is short term or long term, the period
of ownership of undertaking shall be considered.
2) The benefit of indexation shall not be available.
3) A report in form 3CEA shall be submitted along with return of income for
calculation of net worth (certified by a chartered accountant).
11. CAPITAL GAIN IN CASE OF LAND AND BUILDING [SEC 50C]: The following
conditions must be fulfilled:
a) There is transfer of land or building or both. Such asset may be long term or
short term capital asset. It may be depreciable or non-depreciable asset.
b) The sale consideration is less than the value adopted for the purpose of
payment of stamp duty in respect of such transfer of land or building or both.
If the above conditions are satisfied then there can be following three
situations:
Situation 1: If the assessee accepts the value adopted for payment of the
Stamp duty then full value of consideration will be equal to the value adopted for
payment of the Stamp duty.
Situation 2: If the assessee disputes the value adopted for payment of the
Stamp duty then full value of consideration will be equal to the value finally
accepted for payment of the Stamp duty.
Situation 3: If the assessee claims before the Assessing Officer that the
value adopted for payment of the Stamp duty is more than the Fair market value

then full value of consideration will be equal to the value adopted for payment of
the Stamp duty or Fair market value which ever is less (In this case the assessee
has not disputed the value while stamp duty proceedings).
12. CAPITAL GAIN PURCHASE BY A COMPANY OF ITS OWN SHARES OR

OTHER SECURITIES [SEC 46A]: Any consideration received by a shareholder (or
holder of other specified securities) from any company of purchase of its own
shares (or other specified securities) held by such shareholder (or holder of
other specified securities) shall be chargeable to tax. The difference between cost
of acquisition (or indexed cost of acquisition as the case may be) and full value of
consideration shall be treated as capital gains.
13. CAPITAL GAIN ON TRANSFER OF SHARES/ SECURITY BY AN EMPLOYEE

RECEIVED AS STOCK OPTION / SWEAT EQUITY PLAN [SEC 49(2AA)]: The
different situations are discussed as under:
Situation 1: If the option was exercised by the employee in the previous
year 1999-2000: a) The perquisite of allotment of shares / securities is taxable
in A.Y. 2000-01 (the perk being Fair market value minus cost of acquisition paid
by the employee).
b) If such shares or securities are transferred by the employee (other than by gift
or under irrevocable transfer) then capital gain shall be sale value of such shares
or securities minus fair market value on the date of acquisition (or indexed cost
as the case may be).
c) If such shares or securities are transferred by gift or under irrevocable transfer
then capital gain shall be fair market value of such shares or securities on the
date of such transfer minus fair market value on the date of acquisition (or
indexed cost as the case may be).
Situation 2: If the option was exercised by the employee in a previous year
other than 1999-2000: a) The perquisite of allotment of shares / securities is
not taxable.
b) If such shares or securities are transferred by the employee (other than by gift
or under irrevocable transfer) then capital gain shall be sale value of such shares
or securities minus actual cost of acquisition (or indexed cost as the case may
be).
c) If such shares or securities are transferred by gift or under irrevocable transfer
then capital gain shall be fair market value of such shares or securities on the
date of such transfer minus actual cost of acquisition (or indexed cost as the case
may be).
14. CAPITAL GAIN ON TRANSFER OF SECURITY IN DEMAT FORM [SEC

45(2A)]: The following conditions must be fulfilled:
a) The shares or securities are transferred in DEMAT form.
b) The beneficial owner of such shares or securities shall be charged tax under
head capital gain.
c) The cost of acquisition and period of holding shall be determined on the basis

of First-in-first-out method.
NOTE: With effect from 1st October, 2004 securities transaction tax is applicable
if the equity shares or units of equity oriented mutual fund are transferred in a
recognised stock exchange in India.
15. WITHDRAWL OF EXEMPTION GIVEN IN CERTAIN CASES [SEC 47A]:

The following three transactions are not regarded as transfer for the purpose of
capital gain when certain conditions are satisfied:
a) Transfer of a capital asset by a holding company to its wholly owned
Indian Company or vice versa [Sec 47(iv) and (v)];
b) Transfer by a person other than a company of membership of a
recognised stock exchange to a Company in exchange of shares
allotted [Sec 47 (ix)];
c) Transfer where a firm / proprietary concern is succeeded by a
Company [Sec 47 (xiii) and (xiv)].
If the conditions mentioned under above respective sections are not complied
with then the exemption allowed earlier shall be withdrawn as per section 47A.
a) Transfer of a capital asset by a holding company to its wholly owned
Indian Company or vice versa [Sec 47A(1)]: Any transfer of capital Asset by a
Company to its wholly owned Indian subsidiary Company or by a wholly owned
Subsidiary Company to its Indian Holding Company is not treated as transfer by
virtue of section 47 (iv)/(v). But in the following cases, the exemption shall be
other withdrawn:
(a) If at any time before the expiry of eight years from the date of transfer of a
capital asset referred to in section 47 (iv)/(v), such capital asset is
converted by the transferee company into stock in trade of its business.
(b) The holding company ceases to hold whole of the share capital of the
subsidiary Company before expiry of eight years as aforesaid.
In above cases the capital gain shall be calculated for transferor
Company by treating sale price of the asset as full value of consideration. The
same amount shall be treated as cost of acquisition of Transferee Company.
b) Transfer by a person other than a company of membership of a
recognised stock exchange to a Company in exchange of shares allotted:
Where the shares allotted by a company to the transferor in exchange of
membership of stock exchange are transferred with in 3 years from the date of
transfer of membership, the capital gain not charged to tax earlier shall be
deemed to be the income chargeable under head Capital Gains of the previous
year in which such shares are transferred.
c) Transfer where a firm / proprietary concern is succeeded by a Company:
Where the aggregate of the shareholding of the partners or the shareholding of
the sole proprietor, as the case may be, in the company does not continue to
remain 50% of the total voting power for a period of five years from the date of
succession, the capital gain not charged to tax earlier shall be deemed to be the
income of the SUCCESSOR COMPANY chargeable under head Capital Gains of the
previous year in which such requirement is not complied with.

16. CAPITAL GAIN IN CASE OF TRANSFER OF SHARES/ DEBENTURES BY

NON-RESIDENT [PROVISO 1 TO SEC 48 AND RULE 115A]: The following
procedure is adopted:
a) The tax payer is non-resident (may be Indian or Foreign citizen, or a
Corporate or non-corporate assessee but must not be covered under sec
115 AC or 115 AD).
b) The capital asset is ' Shares/Debentures' in an Indian Company purchased
by utilising foreign currency (may be short term or long term capital
asset).
c) The full value of consideration and expenses on transfer are converted into
same foreign currency by applying Average Exchange Rate on the date of
transfer.
d) The cost of acquisition is converted into same foreign currency by applying
Average exchange Rate on the date of purchase of such shares/debentures.
e) The capital gain calculated in foreign currency shall be converted into
Indian currency by applying buying Exchange Rate on the date of transfer.
NOTE: If a non-resident Indian transfers such capital asset and then invests the
whole or any part of net consideration in any of following asset with in six
months from date of such transfer -
- Shares in Indian company, debentures of/ deposits in Indian Public
Limited Company, Central Government Securities or National Saving Certificates
VI & VII issues, the exemption u/s 115 F is allowed as follows:
Amount invested in specified securities
Long term Capital Gain X Net consideration of foreign currency asset
(being shares/debentures of Indian Company)
It is to be noted that exemption u/s 115 F is allowed only on long term capital
gain of Foreign Currency Asset Such asset being specified securities should not be
transferred or converted into money with in 3 years from the date of acquisition,
otherwise the exemption u/s 115 F shall be treated as long term capital gain of
the year in which such new asset is transferred or converted into money.
17. CAPITAL GAIN IN CASE OF TRANSFER OF ZERO COUPON BONDS:

In case of Zero coupon Bonds, the Maturity or Redemption is treated as transfer.
If the period of holding of such bonds does not exceed 12 months then there is
Short Capital Gain on these on bonds. But if the period of holding is more than 12
months then there is Long Term Capital Gain.
In case of Long Term Capital Gain on such Bonds the tax liability will be
least of: i) 20% of Long Term Capital Gain (after Indexation); or
ii) 10% of Short Term Capital Gain (without Indexation).
VALUATION OF A CAPITAL ASSET REFERRED TO VALUATION OFFICER [SEC

55A]: In following cases the Assessing officer may refer valuation of capital asset

to the valuation officer:-

a) Where the value of asset, as claimed by the assessee is in accordance with
estimate made by Registered Valuer and the Assessing officer is of opinion
that the value so claimed is less than the market value; or
b) Where Assessing officer is of opinion that the fair market value of the asset
exceeds value of asset as claimed by the assessee by more than 15% of
value of asset or by Rs.25001/- or more; or
c) Where the Assessing officer is of the opinion that having regard to nature
of asset and relevant circumstances, it is necessary to do so.
EXEMPTIONS FROM CAPITAL GAIN

These exemptions are of two types:
(A) Exemptions of capital gains under various sub-clauses of section 10;
(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H.
These are discussed in detail as follows:
(A) Exemptions of capital gains under various sub-clauses of section 10
1. CAPITAL GAIN ON TRANSFER OF UNITS OF US 64 ON OR AFTER

01.04.2002 [SEC 10(33)]: Any income arising from the transfer of a capital
asset, being a unit of US 1964 shall be exempt if such transfer takes place on or
after 01.04.2002.
2. LONG TERM CAPITAL GAIN ON ELIGIBLE EQUITY SHARES EXEMPT IF THE

SHARES ARE ACQUIRED WITH IN A CERTAIN PERIOD [SEC 10(36)]: Any
income arising from the transfer of a long term capital asset, being an eligible
equity share in a company shall be exempt if such shares are acquired on or after
01.03.2003 but before 01.3.2004 and held for a period of 12 months or more.
NOTE: Eligible equity share means –
a) any equity share in a company being a constituent of BSE-500 Index of the
Stock Exchange, Mumbai as on 01.03.2003 and the transactions of
purchase and sale of such equity share are entered into on a recognised
stock exchange in India;
b) any equity share in a company allotted through a public issue on or after
01.03.2003 and listed in a recognised stock exchange in India before
01.03.2004 and the transactions of sale of such equity share are entered
into on a recognised stock exchange in India;
3. CAPITAL GAIN ON COMPENSATION RECEIVED ON COMPULSORY

ACQUISITION OF AGRICULTURAL LAND SITUATED WITH IN SPECIFIED
URBAN LIMITS [SEC 10(37)]: Any capital gains (may be short term or long
term) arising to an Individual or a Hindu Undivided Family from transfer of
agricultural land situated in specified urban limits by way of compulsory
acquisition shall be exempt if:
a) The compensation and enhanced compensation is received on or after
01.04.2004;

b) Such land has been used for agricultural purpose during preceding two years
by such individual or his parent or by such HUF;
c) The land may have been compulsorily acquired before 01.04.2004.
NOTE: If a part of original compensation has been received before 01.04.2004
then exemption on original compensation will not be available but enhanced
compensation received on or after 01.04.2004 shall be exempt.
4. LONG TERM CAPITAL GAIN ON SALE OF SHARES AND UNITS ON OR AFTER

01.10.2004 [SEC 10 (38)]: Any income on or after 01.10.2004 from the transfer
of a long term capital asset being an equity share in a company or a unit of an
equity oriented fund shall be exempt if:
a) Such equity shares are sold through a recognised stock exchange, whereas the
units of an equity oriented fund may be sold through a recognised stock exchange
or may be sold to the Mutual fund.
b) Such transaction is chargeable to securities transaction tax.
5. CAPITAL GAIN ON TRANSFER OF AN ASSET OF A POWER GENERATING

UNDERTAKING: Any income arising from transfer of a Capital Asset, being an
asset of an undertaking engaged in the business of generation, transmission or
distribution of power is exempt if such transfer is made to an Indian Company
notified under section 80 IA(4)(v)(a) before 1.4.2006.
(B) Exemptions u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54H.
TRANSFER OF RESIDENTIAL HOUSE PROPERTY [SEC 54]: The following

conditions should be satisfied:
a) The capital asset must be residential house property (whether self
occupied or let out) and must be long term capital asset.
b) The assessee (transferor) must be an individual or Hindu Undivided
family.
c) The assessee (transferor) has purchased a residential house (within a
period of one year before the transfer or within 2 years from the date of transfer)
or has constructed a residential house property (within a period of 3 years after
date of transfer).
AMOUNT OF EXEMPTION: The cost of new house property (up to maximum
of capital gain) is exemption under section 54.
NOTE:1) If such new house property is sold with in 3 years from the date of
acquisition/completion of construction then exemption allowed u/s 54 shall be
deducted from cost of acquisition of new house property.
2) Where the capital gain is not utilised by the assessee for the
purchase/construction of new house property before due date of
furnishing the return, it shall be deposited by him in 'CAPITAL GAIN
DEPOSIT ACCOUNT'.
3) Exemption is not limited to one house property.
4) In case of compulsory acquisition of a residential house, the limit of 1

year/2 years/3 years is calculated from the date of receipt of

compensation.
5) If the amount deposited in 'Capital Gain Deposit Account' is not utilised
with in the stipulated period then such amount not utilised shall be treated
as long term Capital Gain of the previous year in which the period of three
years from the date of transfer of original asset expires.
TRANSFER OF AGRICULTURAL LAND [SEC 54B]: The following conditions

should be satisfied:
1. The capital assets must be agricultural land and may be short term
or long term capital asset.
2. The assessee (transferor) must be an individual.
3. The agricultural land was used by the assessee or his parents for
agricultural purpose for at least two years before the date of
transfer.
4. The assessee (transferor) has purchased new agricultural land
within a period of 2 years from the date of such transfer.
AMOUNT OF EXEMPTION: The cost of new agricultural land (up to maximum of
capital Gain) is exemption under section 54 B.
NOTE:1) If such new agricultural land is sold with in 3 years from the date of
acquisitions then exemption allowed u/s 54 B shall be deducted from cost of
acquisition of new land.
2) Where the capital gain is not utilised by the assessee for purchase of new
agricultural land before due date of furnishing the return, it shall be
deposited by him in 'CAPITAL GAIN DEPOSIT ACCOUNT'.
3. In case of compulsory acquisition of agricultural land the time limit of 2
years shall be calculated from date of receipt of compensation.
4. If the amount of deposit in 'Capital Gain Deposit Account' is not utilised
with in the stipulated period, then such amount not utilised shall be
treated as short term long term or capital gain (as original gain) of the
previous year in which the period of two years from the date of transfer of
original asset expires.
COMPULSORY ACQUISITION OF LAND & BUILDING FORMING PART OF

INDUSTRIAL UNDERTAKING [SEC 54D]: The following conditions should be
satisfied:
a) The capital asset must be land or building which forms part of the
Industrial undertaking. The capital asset may be short term or long term
capital asset.
b) The assessee (transferor) may be any person.
c) The above said Capital Asset was used by the assessee for purpose of
Industrial undertaking for at least two years before the date of
COMPULSORY ACQUISITION.
d) The assessee (transferor) has purchased any land or building or
constructed a building within a period of three years from the date of

receipt of compensation.
e) The newly acquired Land or building is used for shifting or re establishing
the said undertaking or setting up another industrial undertaking.
AMOUNT OF EXEMPTION: The cost of new land or building (up to maximum of
capital gain) is exemption u/s 54D.
NOTE:1) If such new land or building is sold/transferred within 3 years from the
date of acquisition/completion of construction then exemption allowed
u/s 54D shall be deducted from the cost of acquisition of new land or
buildings.
2. Where the Capital Gain is not utilised by the assessee for
purchase/construction before the due date of furnishing the return, it shall
be deposited by him in Capital Gain Deposit Account'.
3) If the amount deposited in Capital Gain Deposit Account is not utilised
within the stipulated period, then such amount not utilised shall be treated
as short term/long term capital gain (as original gain) of the previous year
in which the period of three years from the date of transfer of original
asset expires.
LONG TERM CAPITAL GAIN INVESTED IN CERTAIN BONDS [Sec 54 EC]: The
following conditions must be satisfied:
a) There must be a long term Capital Asset.
c) The assessee (transferor) has invested in following securities within six
months from the date of transfer of the asset -
i) Bonds of National Bank for Agriculture & Rural Development; or
ii) Bonds of National Highways Authority of India; or
iii) Bonds of Rural electrification Corporation Ltd; or
v) Bonds of National Housing Bank; or
vi) Bonds of Small Industries Development Bank of India.
AMOUNT OF EXEMPTION: The cost of above securities (up to maximum of
capital gain) is exemption u/s 54 EC.
NOTE:1) If such securities are transferred/converted into money/loan taken on
security of such securities with in 3 YEARS from the date of their acquisition then
the amount exempted earlier shall be treated as long term Capital Gain of the
previous year in which such new securities are transferred.
2) The cost of specified securities considered for exemption u/s 54EC shall
not be eligible for deduction u/s 80C.
LONG TERM CAPITAL GAIN OF CERTAIN LISTED SECURITIES/

UNITS/INVESTED IN SPECIFIED EQUITY SHARES [SEC 54 ED]: The following
conditions must be fulfilled:
a) The long term capital Asset must be either a security listed in any
recognised stock exchange in India or a unit of UTI or a mutual fund
(whether listed or not).
b) The assessee may be any person.

c) The assessee (transferor) has invested in shares issued by a public

company registered in India to the public with in six months from the date
of transfer of asset.
AMOUNT OF EXEMPTION: Cost of new shares (up to maximum of Capital Gains)
is exemption u/s 54 ED.
NOTE:1) For this section securities include shares also.
2) The new shares must be equity shares only.
3) If the new equity shares are transferred with in one year from the date of
acquisition then the amount exempted earlier shall be treated as long term
capital Gain of the previous year in which such securities are transferred.
4) The cost of new shares considered for exemption u/s 54ED shall not be
eligible for the deduction u/s 80C.
5) With effect from 1st October, 2004 securities transaction tax is applicable if
the equity shares or units of equity oriented mutual fund are transferred in
a recognised stock exchange in India. In such case long term capital gain on
transfer of these assets is exempt from tax u/s 10 (38).
LONG TERM CAPITAL GAIN INVESTED IN RESIDENTIAL HOUSE PROPERTY
[SEC 54F]: The following conditions must be fulfilled:
a) There is long term Capital Asset other than residential House property.
b) The assessee is an individual or Hindu undivided family.
c) The assessee (transferor) does not own more than one residential house
(other than new house) on the date of transfer of original asset.
d) The assessee has purchased with in one year before the date of transfer or
two years after the date of transfer or constructed within 3 years after the
date of transfer a residential house.
AMOUNT OF EXEMPTION:
a) If cost of new house is not less than net consideration of above said Capital
asset then entire capital gain is exempt.
b) In all other cases exemption is equal to
Long term capital Gain X Cost of new asset

Net consideration of capital asset transferred
NOTE:
1) If such new residential house property is transferred with in 3 years from
date of purchase or completion of construction or the assessee purchases a
new residential house with 2 years from transfer of original asset or
constructs a new residential house with 3 years from transfer of original
asset then long term capital gain exempted earlier shall be treated as long
term capital Gain in the year of transfer/purchase of new house.
2) The scheme of capital Gain deposit is same as in section 54.
3) If the amount deposited in 'Capital Gain Deposit Account' is not utilised
with in 3 years from the date of transfer of original assets then
proportionate amount as below shall be treated as long term capital gain:-

Unutilised amount of capital Gain X Original Capital Gain

deposit Account Net Sale consideration
CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL UNDERTAKING

FOR SHIFTING FROM URBAN AREA [SEC 54G]: The following conditions must
be fulfilled:-
a) The capital asset is plant, machinery, land or building or any right in land
or building situated in Urban Area and used for Industrial undertaking.
c) The assessee has transferred above assets due to shifting to any area other
than urban area.
d) The assessee has with in one year before or 3 years after date of transfer-
i) purchased new plant or machinery; or
ii) acquired land or building or constructed building; or
iii) shifted original assets; or
iv) incurred expenses on purposes specified in a scheme framed by Central
Government.
AMOUNT OF EXEMPTION: The total amount invested as per point (d) above
(upto maximum of Capital Gain) is exemption u/s 54 G.
NOTE:1) If such new asset is transferred with in 3 years from the date of
acquisition/construction then exemption allowed u/s 54G shall be deducted
from cost of acquisition of such new asset
2) The scheme of Capital Gain Deposit Account is same as in section 54D.
3) The treatment of unutilised amount of capital Gain Deposit Account is
same as in section 54D.
CAPITAL GAIN ON TRANSFER OF ASSETS OF INDUSTRIAL UNDERTAKING

FOR SHIFTING FROM URBAN AREA TO SPECIAL ECONOMIC ZONE [SEC
54GA]: The following conditions must be fulfilled:-
a) The capital asset is plant, machinery, land or building or any right in land
or building situated in Urban Area and used for Industrial undertaking.
c) The assessee has transferred above assets due to shifting to SPECIAL
ECONOMIC ZONE.
d) The assessee has with in one year before or 3 years after date of transfer-
i) purchased new plant or machinery for industrial undertaking at SEZ; or
ii) acquired land or building or constructed building for industrial
undertaking at SEZ; or
iii) shifted original assets to industrial undertaking at SEZ; or
v) incurred expenses on purposes specified in a scheme framed by Central
Government.
AMOUNT OF EXEMPTION: The total amount invested as per point (d) above
(upto maximum of Capital Gain) is exemption u/s 54 GA.

NOTE:1) If such new asset is transferred with in 3 years from the date of
acquisition/construction then exemption allowed u/s 54GA shall be deducted
from cost of acquisition of such new asset
2) The scheme of Capital Gain Deposit Account is same as in section 54D.
3) The treatment of unutilised amount of capital Gain Deposit Account is
same as in section 54D.
EXTENSION OF TIME LIMIT IN CASE OF COMPULSORY ACQUISITION (SEC

54H): In case of compulsory acquisition the time limit under sections 54, 54B,
54D, 54EC and 54F shall be calculated from dates of receipts of compensation
(both initial as well as enhanced).
TAX RATE ON LONG TERM CAPITAL GAIN [SEC 112]: The long term capital
gain is charged to tax @ 20%.
NOTE: Deductions under chapter VIA are not allowed from long term capital
gain. But rebate under section 88 E is allowed from Long term capital gain.
OPTIONS FOR TAX ON LONG TERM CAPITAL GAIN ON LISTED SECURITIES &
UNITS: The following conditions must be fulfilled:
a) The long term capital asset is listed shares/ securities in any recognised
stock exchange in India or unit of UTI or a mutual fund.
b) The assessee may be any person.
c) The assessee has two options
OPTION I
The assessee may take benefit of indexation of cost of acquisition and the
tax rate shall be 20%.
OPTION II
The assessee may not take benefit of Indexation of cost of acquisition and
the tax rate shall be 10%.
The assessee should opt for that option where the tax incidence is
lower.
NOTE: With effect from 1st October, 2004 securities transaction tax is applicable
if the equity shares or units of equity oriented mutual fund are transferred
in a recognised stock exchange in India. In such case long term capital gain
on transfer of these assets is exempt from tax u/s 10 (38).
TAX ON SHORT TERM CAPITAL GAIN IN CASE OF EQUITY SHARES AND

UNITS OF EQUITY ORIENTED FUND TRANSFERRED ON OR AFTER
01.10.2004[ SEC 111A]: The following conditions must be fulfilled:
a) The assessee may be any person;
b) Such assessee has short term capital gain from transfer of equity shares and
units of equity oriented fund on or after 01.10.2004 through a recognised stock
exchange in India or to a mutual fund;
c) Such transaction is charged to securities transaction tax.
In such case, such short term capital gain is taxable @ 10% (plus surcharge

plus education cess). No deduction under chapter VI A shall be available.

However the benefit of NIL slab can be utilised in some cases.
*****
Chapter-7
INCOME FROM OTHER SOURCES
As per section 56(1), the following conditions must be satisfied to
tax any income under the head ‘Income from other sources':-
1. There must be an income;
2. Such income is not exempt under the provisions of this Act;
3. Such income is not chargeable to tax under any first four heads of income.
Thus this head ‘income form other sources’ is residuary head of income.
METHOD OF ACCOUNTING: Income chargeable under this head is calculated

according to method of accounting regularly employed by the assessee. The
method of accounting may be ‘Cash system’ or ‘mercantile system’. HOWEVER in
case of dividends, the method of accounting has no significance as dividends are
taxed on certain specified basis.
SPECIFIED INCOMES INCLUDED UNDER ‘INCOME FROM OTHER SOURCES’:-

As per section 56 (2), the following incomes are charged to tax under this head:-
a) dividends (other than dividend referred to in section 115 O);
b) any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting
of any form or nature whatsoever;
c) any sum received by the assessee from his employees as contribution to
any staff welfare scheme (if not taxable under head 'profits and gains of
Business or profession')
d) interest an securities (if not charged to tax under the head ‘profits & gains
of business or profession);
e) income from machinery, plant or furniture let out on hire (if not charged
to tax under head profits & gains of business or profession);
f) income from letting of plant, machinery or furniture along with building
and letting of building is inseparable from letting of plant, machinery or
furniture (if not charged to tax under head ‘profits & gains of business or
profession').
g) any sum received under a key man insurance policy including bonus (if
not taxed as salary or business income).
h) where any sum of money exceeding Rs.25000 is received without

consideration by an individual or a Hindu Undivided Family from any

person after 31.08.2004, the whole of such sum.
OTHER INCOMES NORMALLY INCLUDED UNDER HEAD INCOME FROM
OTHER SOURCES:- The following incomes are also chargeable under this head :-
a) Income from sub-letting of a house property by a tenant;
b) Interest on bank deposit and deposit with companies;
c) Interest on loans;
d) Income from royalty (if not charged to tax under head ‘profits & gains of
business or profession');
e) Director’s fee;
f) Director’s commission for standing guarantor to bankers;
g) Director’s commission for underwriting shares of new company;
h) Ground rent of the plot;
i) Agricultural income from a place out side India;
j) Examination fees received by a teacher from a person other than
employer;
k) Insurance commission received by agent;
l) Mining rent and royalties;
m) Casual income;
n) Annuity received as per will, contract or trust deed (excluding annuity
payable by employer which is charged to tax under the head ‘Salaries’);
o) salary received by a member of parliament;
p) interest on securities issued by foreign government;
q) family pension received by family members of a deceased employee;
r) interest on employee’s contribution to unrecognized provident fund (at
the time of retirement or leaving the job etc.).
s) income from undisclosed sources;
t) gratuity paid to a director who is not employee of the company;
u) income form racing establishment;
v) compensation received for use of a business asset;
w) annuity received by lender of trade mark;
x) income form granting grazing rights;
y) interest received on refund of income tax.
NOTE: - 1. The Supreme Court has held that interest received by the assessee
from bank on a fixed deposit is income in the hands of the assessee and there
could be no deduction there from unless there is a law permitting such
deduction. The interest on loan taken by the assessee on the security of fixed
deposits did not go to reduce the income by way of interest on the Fixed Deposits
as there was no provision for deduction of such interest on loan.
2. The interest earned on short term investment of funds borrowed for
setting up of factory during construction of factory before commencement of
business has to be assessed as income from other sources and it cannot be held
to be non-taxable on the ground that it would go to reduce interest liability on
borrowed amount which could be capitalised.

TAXABILITY OF DIVIDEND [SECTION 56 (2) (i)]:-Dividends can be of three

types:-
a) Dividends declared by a domestic company;
b) Dividends or any other income distributed by unit trust of India ;
c) Dividends declared by a foreign company.
Any amount declared distributed or paid by a domestic company by way of
dividends as per section 115 O (interim or final) on or after 01.04.2003 (whether
out of current or accumulated profits) shall be exempt in the hands of
shareholders.
Similarly income received (other than Capital Gain on transfer of such units) in
respect of units from the Administrator of the specified undertaking or the
specified company or a Mutual Fund specified under section 10(23D) shall be
exempt.
Dividend from a Foreign Company or deemed dividend shall be TAXABLE under
the head ‘Income from other sources’.
NOTE: 1. The dividend from a Domestic Company which is exempt under section
10(34) includes deemed dividend but shall not include deemed dividend under
section 2(22) (e), i.e. loan or advance given by a closely held company to a
specified shareholder or concern.
2. Since dividends from a domestic company is exempt, no deduction of any
expense shall be allowed for such dividends from other taxable incomes under
head ‘income from other sources.
3. The domestic company is liable to pay corporate dividend tax on such dividend
@ 12.5% plus surcharge @ 10% plus education cess @ 2%.
DIVIDEND-MEANING THERE OF: - Dividend in its common parlance means any

sum paid to or received by a shareholder proportionate to his shareholding in a
company out of the total sum distributed. As per section 2 (22), dividend includes
the following disbursements by the company to the shareholders, to the extent of
accumulated profits.
a) Any distribution by a company to the extent of accumulated profits
involving the release of the assets of the company [Section2 (22) (a)]:- Any
distribution by a company to the extent of accumulated profit whether
capitalised or not, if such a distribution entails the release by a company to its
shareholders of all or any part of the assets of the company.
However only capitalization of accumulated profits by issue of
bonus shares to equity shareholders does not entail the release of assets of the
company and hence shall not be deemed as dividend.
Two conditions are essential for treating a distribution as deemed dividend:
i) the company should possess accumulated profit;
ii) such accumulated profits are distributed in cash or in kind. Where the
distribution is in kind, the market value of the asset (and not the book value)
shall be deemed dividend in the hands of shareholders.
NOTE:- The provisions of section 2(22) (a) are not attracted in case where a
company merges into another company is scheme of amalgamation.

b) Distribution of debentures/deposit certificates to shareholders and

bonus shares to preference shares [section 2 (22) (b)]:-
i) Any distribution to shareholders (equity or preference) by a company of
debentures, debenture stock or deposit it certificates in any form, with or
without interest to the extent of accumulated profit whether capitalised or not;
and
ii) any distribution to its preference shareholders of shares by way of bonus,
to the extent to which the company possesses accumulated profit, whether
capitalized or not.
c) Distribution to shareholders on liquidation of the company [section
2(22) (c)]:- Any distribution made to the shareholder of a company on its
liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation
whether capitalized or not.
NOTE:-The provisions of section 2(22) (c) are not attracted in case where a
company merges into another company in a scheme of amalgamation.
d) Distribution on reduction of share capital [sec. 2(22) (d)]:- Any
distribution to its shareholders by a company on reduction of its capital to the
extent of accumulated profits of the company immediately before date of
resolution permitting reduction of capital, whether capitalized or not.
NOTE:- Under sub clause (c) and (d) above, deemed dividend shall not include
any distribution to shareholders on liquidation or reduction of capital of
the company:
a) in respect of any shares issued for full cash consideration, where the
holder of the share is not entitled, in the event of liquidation to participate
in the surplus assets.
b) in so far as such distribution is attributable to capitalized profits of the
company representing bonus shares allotted to equity shareholders in
previous year 1964-65.
e) Loans /advances to certain shareholders/concerns [sec. 2(22) (e)]:-
Any payment by a company, (other than a company in which the public is
substantially interested), of any sum (whether representing a part of
assets of the company or otherwise) by way of advance or loan to the
extent of accumulated profits (excluding capitalized profits) to:-
i) an equity shareholder who is beneficial owner of shares holding not less
than 10% of voting power; or
ii) any concern in which such shareholder (holding not less than 10% voting
power) is a member /partner and has substantial interest (holding not less
then 20% voting power/profit) in that concern.
iii) any person on behalf, or for the individual benefits, of any such
shareholders (holding not less than 10% voting power).
Dividend does not include the following:
(a) any advance or loan to a shareholder or such concern by a company in
ORDINARY COURSE OF BUSINESS, where lending of money is substantial
part of business of the company.

(b) Any dividend paid by a company which is set off by the company against
the whole or any part of loan or advance previously paid by it and which
has been treated as deemed dividend under section 2 (22) (e).
(c) Any distribution to shareholders on liquidation or reduction of capital of
the company under clause (c) or (d) of section 2(22) in respect of any
shares issued for full cash consideration, where the holder of the share is
not entitled, in the event of liquidation to participate in the surplus assets
(d) Any payment made by a company on purchase of its own shares from a
shareholder in accordance with provision of section 77A of the Companies
Act 1956.
(e) Any distribution of shares pursuant to demerger by resulting company to
the shareholders of demerged company.
BASIS OF CHARGE OF DIVIDEND [SECTION 8]:- Method of accounting does not
affect the basis of charge dividend income. Different types of dividends are
taxable as follows:-
a) Normal Dividend: - Dividend declared at annual general meeting is
income of previous year in which it is declared.
b) Deemed Dividend: - Notional dividend under section 2(22) is treated as
income of previous year in which it is paid.
c) Interim Dividend: - Interim dividend is deemed to be income of previous
year in which the amount of such dividend is unconditionally made
available by the company to its shareholders (i.e. date of issue of dividend
warrant).
PLACE OF ACCRUAL [SECTION 9(1) (iv)]:- Dividend paid by Indian company is
deemed to accrue or arise in India.
GROSSING UP OF DIVIDEND: - Dividend is taxable in the hands of a person
whose name appear in the register of members and is taxed on gross amount
where gross amount is calculated as:
= Net Dividend x 100
(100-rate of T.D.S.)
DEDUCTIONS FOR EXPENSES FROM DIVIDEND INCOME [SECTION 57(i) & 57
(iii)]:- The following expenses are allowed as deduction from dividend income:-
a) Collection charges: - Any reasonable sum paid by way of commission or
remuneration to bank or any other person for the purpose of realizing the
dividend.
b) Interest on loan: - Interest on money borrowed for purchasing the shares
can be claimed as deduction. The interest can be claimed even if no income
is earned as dividend on such shares.
Note:-If interest is payable outside India, it shall be allowed as deduction only if
tax has been deducted at source.
c) Any other expenditure: - Any other expenditure wholly and exclusively
for earning such income can be claimed as deduction. For example legal
and traveling expenses incurred for protecting dividend income would be
deductible.
NOTE:- 1. Dividend is chargeable to tax even if the company has declared

dividend out of exempted income.

2. The shareholder is liable to pay tax on entire dividend income whether or not
he was shareholder for entire period for which dividend is declared.
WINNING FROM LOTTERIES, CROSSWORD PUZZLES, HORSE RACES AND

CARD GAMES [SEC 56(2)(ib)] :- Any winning from lotteries, crossword puzzles,
races including, horse races, card games and other games of any sort, gambling or
betting of any form or nature whatsoever are taxable under the head income
from other sources.
NOTE:-1. No deduction in respect of any expenditure in connection with such
income shall be allowed.
2.. Winnings from lottery does not include amount foregone in favour of
government agency conducting lotteries.
3. Income of agent/ trader in respect of prize on unsold/unclaimed lottery tickets
in possession of agent/trader is business income.
GROSSING UP OF LOTTERY INCOME ETC.:- The tax is to be deducted from
income from winning from lotteries, horse races and crossword puzzles. The net
winning is to be grossed as follows:-
(Net winning from lotteries/horse races/Crossword puzzles)X 100
(100-rate of T.D.S.)
NOTE:- 1. No T.D.S. is deducted at source of income from lottery/crossword

puzzles does not exceed Rs. 5,000 ( in case of horse race income this amount is
Rs. 2,500).
2.The rate of T.D.S. is 30% plus surcharge (if applicable) plus education cess @
2%.
RATE OF TAX ON WINNINGS FROM LOTTERIES ETC. (SEC.115BB):-This
income is taxable @30% plus surcharge (if applicable) plus education cess @ 2%
on gross winnings.
NOTE:-1. No deduction under sections 80C to 80U is allowed from such income.
INTEREST ON SECURITIES [SEC. 56(2) (id)]:- The securities refer to debt

which is secured. The securities may be divided into four categories:-
a) securities issued by Central/State Government;
b) debentures/bonds issued by local authority;
c) debentures/bonds issued by companies;
d) debentures/bonds issued by a corporation established by a central, State or
Provincial Act. (i.e. statutory corporations).
CHARGEABILITY OF INTEREST ON SECURITIES: - Interest securities is charged
on cash basis or due basis as the books of accounts are maintained. But in case,
no system of accounting is followed then it shall be taxable on due basis.
DUE DATE OF INTEREST:-Interest as securities does not accrue every day as per
period of holding of security. It becomes due on dates specified on securities. The
person who is registered owner of the security on the due date shall be entitled
to receive interest for the period irrespective of his period of holding.

INTEREST ON SECURITIES EXEMPT FROM TAX [SEC.10 (15)]:- Interest on

following securities is exempt from tax:-
a) 12 year national saving annuity certificates; national defence gold bonds
1980; special bearer bonds 1991; treasury deposit (saving) certificate; P.O.
cash certificates (5 years); National plan certificates (10 years / 12 Years);
P.O. national saving certificates (12 years / 7 years); P.O. saving bank
account; public account of post office saving account rules (interest upto
Rs. 5000); P.O. cumulative time deposit; special deposit scheme 1981; and
Non-resident (Non-repartriable) rupee deposit scheme.
b) Interest on 7% capital investment bonds (for individual and H.U.F.).
c) Interest on 9% relief bonds (for individual and H.U.F.).
d) Interest on notified bonds/ debentures of public sector company.
e) Interest received by non-resident Indian from notified bonds purchased in
foreign currency.
f) Interest on deposits made by a retired government or public sector
employee out of money due to him on retirement in such scheme for a lock
in period of three years.
g) Interest on securities held by the welfare commissioner, Bhopal gas victim,
Bhopal.
h) Interest a gold deposit bonds, 1999.
i) Interest on notified bonds issued by a local authority.
GROSSING UP OF INTEREST:- Gross interest on securities is chargeable to tax. If
net interest (after deducting T.D.S.) in given then it has to be grossed up.
In case of government securities, no grossing up is required as there is no
T.D.S. however in case of following securities grossing up is required :-
i) tax free non-government securities.
ii) less tax non-government securities.
100
Gross interest = Net interest X (100- rate of TDS)
The rates of T.D.S. are as under :-
a) In case of listed non-government securities – 10% plus surcharge (if
applicable) plus education cess @ 2%.
b) In case of unlisted Non-government securities -20% plus surcharge. (if
applicable) plus education cess @ 2%.
DEDUCTIONS FOR EXPENSES FROM INTEREST ON SECURITIES:-The
deductions for interest on securities are same as in case of dividend.
AVOIDANCE OF TAX [SEC. 94]:- If an assessee tries to avoid tax on interest on

securities, he will be taxed as per section 94(1) and 94(2) as follows:-
Bond washing Transaction [sec. 94(1)]:- If the owner of any securities
sells/transfers any securities and buys back or re-acquires the same or similar
securities and if the interest on such securities is receivable by any other person,
such interest shall be deemed to be income of transferor and not of the
transferee.
Sale-Cum interest [sec. 94 (2)]:- If an assessee having beneficial interest in

securities during the previous year, sells them in such a way that either no
income is received or income received is less than the sum he would have
received if interest had accrued from day to day, then income from such
securities for such year shall be income of transferor and not of the transferee.
NOTE:-The above provisions under section 94(1) or 94(2) are not applicable if
the owner proves that:-
a) There has been no avoidance of income tax; or
b) The avoidance of income tax was EXCEPTIONAL and NOT SYSTEMATIC
and that there was no avoidance of income tax by such a transaction in any
of three preceding years.
LOSS FROM PURCHASE AND SALE OF SECURITIES NOT ALLOWED U/S 94(7):
Where –a) any person buys or acquires any security or unit with in a period of 3
months before the record date;
b) such person sells or transfers such securities with in a period of 3 months
after such record date; OR
sells or transfers such units with in a period of 9 months after such record
date;
c) the dividend or income on such securities or unit is exempt from tax;
then, the loss, if any, arising to him on account of such purchase and sale of
securities or unit (subject to maximum of dividend or income received/
receivable) shall be ignored for computing his income chargeable to tax.
BONUS STRIPPING U/S 94(8): Where –a) any person buys or acquires any unit
with in a period of 3 months before the record date;
b) such person is allotted or is entitled to additional units on the basis of such
units acquired with making any payment;
c) such person sells or transfers such units (while continuing to hold all or any
of additional units) with in a period of 9 months after such record date;
then, the loss, if any, arising to him on account of such purchase and sale of units
shall be ignored for computing his income chargeable to tax.
Further, the amount of loss so ignored shall be deemed to be the cost of
acquisition of such additional units as are held by him on the date of such sale or
transfer.
INCOME FROM LETTING OUT MACHINERY, PLANT OR FURNITURE [SEC.

56(2) (ii)]:- Income from machinery, plant or furniture belonging to the assessee
and let on hire is taxable as income from other sources if the same is not taxable
under the head’ Profits and gain of business or profession’.
INCOME FROM LETTING OF BUILDING WITH MACHINERY, PLANT OR

FURNITURE [SEC. 56(2) (iii)]:- If letting of building is inseparable from letting
of machinery, plant or furniture then income from such letting is taxable under
the head ‘income from other sources’ if the same is not taxable under head
‘profits and gains of business or profession’.
DEDUCTIONS ALLOWED FOR LETTING OF MACHINERY, PLANT OR

FURNITURE WITH/WITHOUT BUILDING [SEC. 57 (ii) and (iii)]:- The

following deductions are allowed:-
a) Current repairs to the premises owned [as per section 30 (a) (ii)].
b) Insurance premium of the premises owned [as per sec. 30 (c)].
c) Repair and insurance of machinery, plant or furniture [as per section 31].
d) Depreciation [as per section 32].
e) Any other revenue expenditure [as per section 37].
INCOME TO INCLUDE GIFT OF MONEY FROM UNRELATED PERSONS ON OR

AFTER 01.09.2004 [SEC. 56 (2) (v)]: The following conditions must be fulfilled:
a) The assessee is an Individual or Hindu Undivided Family (may be resident
or non-resident);
b) Such assessee has received any sum of money exceeding Rs.25000 without
consideration on or after 01.09.2004;
c) The sum so received does not fall in the exception list.
If all of the above conditions are fulfilled then whole of such sum received will
be taxable in the hands of the assessee under head ‘Income from other
sources’.
EXCEPTION LIST: Amounts received under following circumstances are not
treated as income: a) Sum of money received from a relative; or
b) Sum of money received on occasion of marriage of the individual; or
c) Sum of money received under a will or by way of inheritance; or
d) Sum of money received in contemplation of death of the payer.
RELATIVE: It covers: 1) spouse of the individual;
2) brother or sister of the Individual;
3) brother or sister of the spouse of the Individual;
4) brother or sister of either of the parents of the Individual;
5) any lineal ascendant or descendant of the individual;
6) any lineal ascendant or descendant of the spouse of the individual;
7) spouse of a person referred to in points 2 to 6 above.
FAMILY PENSION RECEIVED BY LEGAL HEIRS OF DECEASED EMPLOYEE: -

The family pension received by legal heirs of deceased employee is taxable under
head income from other sources. From this family pension standard deduction
@33⅓% of such pension or Rs. 15,000 w.e. is less is allowed under section 57
(iia).
EMPLOYEES CONTRIBUTION TO STAFF WELFARE FUND (SEC 56(2) (ic)]:-

Employee’s contribution to staff welfare schemes is taxable under this head if it is
not taxable under head ‘profit and gains of business or profession’. If such sum is
deposited by the assessee in the relevant fund account on or before due dates
then such sum shall be allowed as deduction under section 57 (ia).
ANY OTHER INCOME TAXABLE UNDER THIS HEAD: - If there is any income
taxable under this head (other than those discussed above) then deduction will

be allowed for any revenue expenditure (as per section 37).
AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM OTHER SOURCES [SEC.

58]:- The following amounts are not deductible:-
a) Personal expenses of the assessee.
b) Interest paid outside India on which tax has not been deducted at source.
c) Salaries paid outside India on which tax has not been deducted at source.
d) Any expenditure referred to in section 40 A. like excess payment to
relatives, cash payment in excess of Rs. 20,000.
e) Income tax/wealth tax paid.
f) Expenses incurred for earning casual income. However the expenses on
owing and maintaining race horses shall be allowed as deduction.
DEEMED INCOME CHARGEABLE TO TAX [SEC. 59]:- The section 59 has same
provisions as per section 41 (1). Accordingly where any deduction/allowance is
allowed in any year under this head and is recovered later on, then such amount
recovered shall be taxable in the year of recovery under head ‘Income form other
sources'.
*****
CHAPTER 8
CLUBBING OF INCOME
Generally, an assessee is taxed in respect of his own income. But

there are cases where the assessee makes an attempt to reduce his tax bill by
transferring his asset to family member or by arranging his sources of income in
such a manner that tax incidence falls on other but benefit of income is derived
by him directly or indirectly. So the provisions under section 60 to 64 are
provided to counteract these practices of tax avoidance which are as following:
(a) Income of other persons included in an assessee's total Income (Sec 60 to63);
or
(b) Income of other persons included in the Individual’s Total Income (Sec 64).
(A) INCOME OF OTHER PERSONS INCLUDED IN THE ASSESSEE'S TOTAL
INCOME
(1) Transfer of Income where there is no transfer of Assets (Sec.60):
Where there is transfer of an income by a person to another person, without the
transfer of the asset from which the income arises, such income shall be included
in the total Income of the transferor.
(2) Revocable Transfer of Assets (Sec .61): Where there is revocable
transfer of assets by a person to another person, any income arisen/derived from
such assets shall be included in the total income of the transferor.
Revocable transfer of asset-Meaning (Sec. 63): A transfer of asset is revocable
if-
a) it contains any provision re-transfer (directly or indirectly) of the whole or any
part of income or asset to the transferor during the life of beneficiary or
transferee as the case may be; or
(b) it gives the transferor a right to re-assume power directly or indirectly
over the whole or any part of the income or assets during the life time of the
beneficiary or the transferee as the case may be.
NON-APPLICATION OF SEC 61 (SEC.62): In the following cases the provision of
sec 61 shall not apply:
(a) In case of transfer by way of trust, the transfer is not revocable during the
life time of the beneficiary.
(b) In case of any other transfer, the transfer is not revocable during the life
time of the transferee;
(c) In case the transfer is made before 01-04-1961, the transfer is not
revocable for a period exceeding 6 years.
These provisions of exception to section 61 are applicable if the transferor
derives NO DIRECT OR INDIRECT BENEFIT FROM SUCH INCOME.
(B) INCOME OF OTHER PERSONS INCLUDED ONLY IN INDIVIDUAL'S

TOTAL INCOME
(1) REMUNERATION OF SPOUSE FROM A CONCERN IN WHICH OTHER
SPOUSE HAS SUBSTANTIAL INTEREST (SEC: 64 (1) (ii)): Any remuneration
(Salary, Commission, fees or any other form of remuneration) derived by a
spouse from a concern in which the other spouse has a substantial interest shall
be clubbed in the hands of the spouse who has a substantial interest in that
concern. However, remuneration which is solely attributable to the application of
technical or professional knowledge and experience of the spouse shall not be

clubbed.
NOTE :(1) Substantial Interest means if the assessee (individually along with
his relatives) beneficially holds at least 20% of voting power in a company or at
least 20% of profits in a concern company at any time during the previous year.
(2) Relatives means husband, wife, brother, sister or any lineal ascendant/
descendant of that individual
(3) Where both the husband and wife have a substantial interest in the
concern and both receive the remuneration from such concern, the
remuneration shall be included in total income of husband or wife whose
total income, excluding such remuneration, is greater. Once the income is
included in total income of other spouse it shall be clubbed as such in
subsequent years unless the assessing officer is satisfied that it is
necessary to do so.
(2) Income from assets transferred to the spouse (Sec 64 (i)(iv)) : Any
income arising directly or indirectly to the spouse of such individual from
assets (other than house property) transferred directly or indirectly to the
spouse of such individual otherwise than for adequate consideration or in
connection with agreement to live apart shall be included in the income of
such individual.
NOTE :1. This provision is not applicable to house property as in that case
individual is deemed owner of such house property.
2. The income from transferred assets shall not be clubbed if:
(a) the transfer is for adequate consideration; or
(b) the transfer is to live apart (as agreed), or
(c ) the relationship of husband and wife does not exist, either at the time of
transfer of such asset or at the time of accrual of income.
(3) If any property is acquired by the wife out of an allowance given by her
husband for her personal exp (i. e. pin money) then the above provision of
clubbing shall not apply.
(4) If the asset transferred as above has changed shape and identification then
the income from such changed asset shall also be clubbed.
3. INCOME FROM ASSETS TRANSFERED TO SON'S WIFE (SEC .64 (i) (vi)) :
Any income which arises from assets transferred directly or indirectly by an
individual to his son's wife after 01-06-1973, otherwise than for adequate
consideration, shall be included in the income of the transferor.
NOTE : If the asset transferred directly or indirectly an individual to his spouse
or son's wife are invested by such transferee :-
(i) in a firm as capital as capital contribution of partner, them amount to
be clubbed in transferor's hand is :
Amount invested by transferee out of
Interest on capital from assets transferred with out adequate
firm X consideration on first day of previous
year

---------------------------------------------------------------------------------
Total investment by the transferee as on first day of previous year.
ii) in any business (except as point (i) above), then the income to be
included in the hands of transferor is :
Income of from Business Amount invested by transferee out of
X assets transferred with out adequate
consideration on first day of previous
year
-----------------------------------------------------------------------------------------------
Total investment by the transferee as on first day of previous year.
4. INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR BENEFIT

OF SPOUSE (SEC. 64 (i) (vii)) : Where an asset is transferred by the individual to
some other person or Association of persons, without adequate consideration,
for the benefit of the spouse of such individual (as well as for other persons),
income on such asset to the extent of benefit accruing to the spouse shall be
included in total in come of such individual.
5. INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR BENEFIT
OF SON'S WIFE (SEC. 64 (i) (viii)) : Where an individual transfers any assets
after 01.06.1973 to any person or association of persons otherwise then for
adequate consideration for the benefit of son's wife (as well as other persons), in
come from such asset to the extent of benefit accruing to the son's wife shall be
included in total income of such individual.
6. INCOME OF MINOR CHILD (SEC-64 (IA)) : All income arising or accruing
to the minor child shall be clubbed in the income of that parent whose total
income excluding income of minor child is greater. Where, however, the marriage
of the parents does not subsist, the income of minor child will be included in the
income of that parent who maintains the child in the previous year.
NOTE :1. The clubbing is not done if minor child is suffering from disabilities
specified under section 80 U or minor child earns in come from his skill, talent or
manual labour.
2. The income arising to minor married daughter is clubbed.
3. There is exemption upto Rs 1500 per minor child under section 10(32).
(7) INCOME FROM SELF ACQUIRED PROPERTY CONVERTED TO
PROPERTY OF H.U.F. (SEC.64 (2)) : Where an individual after 31.12.1969 (a)
converts his separate property as property of H. U. F; or
(b) throws the property into common stock o the family; or
(c) transfers his individual property to the family;
otherwise than for adequate consideration then the income from such property
shall continue to be included in the total income of the individual.
If such property has been subject matter of partition either (another
partial or total) among the members of the family, the income from such
converted property as received by the spouse on partition shall be deemed to

arise to the transferor.

NOTE : 1. Income is to be clubbed as per above provision but income on in
come can not be clubbed in the hands of transferor.
2. Clubbing of Income means clubbing of loss also.
*****
CHAPTER 9
SET OFF OR CARRY FORWARD & SET OFF OF LOSSES
Income tax is charged on total Income of a person during the previous year. Such
person may have income under 'FIVE' different heads of Income. He may have
income from different sources but under same head of Income. There may be
cases where 'NET INCOME' from a particular source or head of Income may be a
Loss. This loss may be set off against other sources or head as per provisions
given under section 70 to 80 of Income Act.
This process can be covered in following three steps:

(a) STEPI : 1 Inter source adjustment under same head of Income
(b) STEPI : 2. Inter head adjustment in the same assessment year.
(c) STEPI : 3. Carry forward of a loss and set off in next assessment year (s).
(A) INTER-SOURCE ADJUSTMENT (SEC. 70) : If net result for any

assessment year in respect of any source under any head of income is a loss, then
the assessee is entitled to have the amount of such loss set off against his income
from any other source under SAME HEAD OF INCOME. This may also be called
INTRA HEAD ADJUST MENT. But there are certain EXCEPTIONS as follows:
(a) Loss from speculation Business: Loss from speculation Business can be set
off only against profit from speculation business.
(b) Long Term Capital Loss: From assessment year 2003-04, long term Capital
Loss can be set off only from long term Capital Gain.
(c) Loss from business of owning and maintaining race horses: Loss incurred
in the business of owning and maintaining race horses. Can be set off only
from profits from business of owing and maintaining race horses.
(d) Loss cannot be set off from winnings from lotteries: No loss can be set off
from winnings from lotteries, crossword puzzles etc.
NOTE:
(1) Inter source adjustment can be made even in case of clubbing of Income
under section 64.
(2) If income from particular source is EXEMPT then loss from such source
cannot be set off against income chargeable to tax.

(B) INTER HEAD ADJUSTMENT (SEC. 71) : If net result of computation made
for any assessment year in respect of any head of income is Loss, then the same
can be set off against income from other heads. But there are certain
EXCEPTIONS as follows:
(a) Loss from speculation Business: Loss from speculation Business cannot
be adjusted from any income under other head (It can be adjusted only from
profit from speculation Business).
(b) Loss under head Capital Gains: Loss under head 'Capital gains' cannot be
adjusted from any income under other head. (Long term capital Loss can be
adjusted from long term capital gains. Short term capital Loss can be adjusted
from Long term as well as short term capital gain).
(c) Loss from business of owning and maintaining race horses: Loss from
business of owning and maintaining race horses cannot be adjusted from any
income under other head. (It can be adjusted only from profit from business of
owning and maintaining race houses).
(d) Loss cannot be set off from wining from lotteries etc: No loss under any
head can be adjusted from lotteries, crossword puzzles etc.
(e) Business or Profession Loss cannot be set off against Salary Income:
With effect from A.Y. 2005-06, loss from business or profession cannot be set off
against income under head ‘Salaries’.
NOTE :(1) Before making inter head adjustment, the assessee must make inter-
source adjustment.
(2) As No order of priority is given in the Act, the assessee should try to first
set off those losses which cannot be carried forward next year.
(C) CARRY FORWARD AND SET OFF OF LOSSES: If a Loss cannot be set off
under same head or under different head (s) in the same assessment year. Then
such loss can be carried forward and set off against income of subsequent
assessment year (s).
ONLY FOLLOWING LOSSES CAN BE CARRIED FORWARD:
(a) House Property Loss (from assessment year 1999-2000);
(b) Business Loss (Speculative or Non-speculative);
(c) Capital Loss (Short term or Long term);
(d) Loss from owing and maintaining race horses.
NOTE: Such losses can be carried forward only if loss has been determined by
the Assessing officer from a return of loss submitted by the Assessee on or before
due date of filing the return under section 139 (1). But Loss under head House
property' and Unabsorbed depreciation can be carried forward return even if
return of Loss is not submitted on or before due date.
CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY (SEC.71
B) : A Loss under the head house property, if could not be set off in the same
assessment year from other heads of income, will be allowed to be carried

forward for EIGHT assessment years and set off from income from house
property. But such loss must belong to assessment year 1999-2000 or
afterwards.
CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN
SPECULATION LOSS (SEC-72): The right of carry forward and set off of loss
arising from a business or profession is subject to following restrictions:
1. Loss can be set off only against Business Income: A loss can be carried
forward and set off against the profits of any business or profession in a
subsequent year (not necessarily same business/profession in which loss
has been incurred). For this purpose, business profit would include profit
derived from business activity but assessable under head other then
'Profits and Gains of business or profession. Example: Dividend Income
from shares held as stock in trade.
2. Losses can be carried forward by the person who incurred the loss:
The loss can be carried forward and set off against the profits of the
assessee who incurred the loss. However, this rule has following
exceptions :
(a) Accumulated business loss of an amalgamating company (under section 72
A);
(b) Accumulated business loss of a demerged company ;
(c) Accumulated business loss of a proprietary concern or a firm when its
business is taken over by a company by satisfying condition of section
47(xii)/(xiv);
(d) Loss of business acquired by inheritance.
(3) Loss can be carried forward for EIGHT years: The Loss cannot be
carried forward for more than eight years. But the following can be carried
forward for indefinite period as these are not Business Losses as per
Income Tax Law:
 Unabsorbed Depreciation;
 Unabsorbed capital expenditure on Scientific Research;
 Unabsorbed expenditure on family Planning.
(4) Return of Loss should be submitted in time: The return of loss should
be submitted on or before due date under section 139 (1) for carrying
forward business loss.
(5) Continuity of Business is not necessary: From assessment year 2000-01,
the Loss from a particular business or profession can be carried forward
even if such particular business is discontinued.
(6) Order of set off: The order of set off from profits from business is as
follows:
(a) Current year Depreciation ;
(b) Current year capital exp-on Scientific research and current year
expenditure on family Planning'
(c) Brought forward Business/ Profession Loss;
(d) Unabsorbed Depreciation;
(e) Unabsorbed capital Exp on scientific Research;

(f) Unabsorbed expenditure on family planning.
CARRY FORWARD AND SET OFF OF SPECULATIVE BUSINESS LOSS

(SEC-73):- If a speculative business loss could not be set off from income from
another speculation business in the same assessment year then it is allowed to be
carried forward and set off in subsequent assessment year from income of
speculation business only. Such loss can be carried forward for four Assessment
years (EIGHT Assessment years till previous year 2004-05) immediately
succeeding the assessment year in which the loss was first computed. It is not
necessary that same speculative business must continue in the year of set off of
loss. But filing of return on or before due date is necessary for carry forward of
such loss.
NOTE :
1. The loss from Illegal /Banned speculative business cannot be carried
forward to subsequent year.
2. In case of a company (other than investment company and a company
involved in Banking or granting loans / advances) the business of
purchase and sale of shares (with actual delivery or not) shall be treated as
speculative loss.
CARRY FORWARD AND SET OFF OF CAPITAL LOSS (SEC. 74 ) :-

Where in respect of any assessment year the net result of the
computation under the head capital gains is a loss, the loss shall be carried
forward to the following assessment year and set off from income under head
'Capital gains' Such loss can be carried forward for EIGHT assessment years
immediately succeeding the assessment year in which the loss was first
computed. But filing of return on or before due date is necessary for carry
forward of such loss.
NOTE : From Assessment year 2003-04, long term capital loss can be set off only
from long term capital Gains. But short term capital loss can be set off against
short term as well as long term capital Gains.
CARRY FORWARD AND SET OFF OF LOSS FROM BUSINESS OF OWNING AND
MAINTAINING RACE HORSES (SEC 74A):-
If any loss from business of owning and maintaining race horses
could not be set off in the same assessment year, then it shall be carried forward
and set off only from income from owning and maintaining race horses in
subsequent assessment years. Such loss can be carried forward for a maximum of
FOUR Assessment years immediately succeeding the assessment year in which
the loss was first computed. Such loss can be carried forward only if the activity
of owning and maintaining race horses is carried on by the assessee in the
previous year. Filing of return on or before due date is necessary for carry
forward of such loss.

NOTE :1) The losses which are eligible to be carried forward must be set off
from income of immediately succeeding year and if there is any balance still to be
set off, it should be set off in immediately next succeeding year(S) with in the
time allowed.
2) Where any person carrying on any business/profession has been
succeeded in such capacity by another person OTHERWISE THAN BY
INHERITANCE, then such other person is not entitled to carry forward and
set off such loss against his income. But if there is succession of firm by a
company as per section 47(xiii), the carry forward and set off of loss is
allowed to such company.
3) The profits of a partnership firm are shared by partners and are exempt in
the hands of partners but losses of a firm are not shared among partners.
The firm can only set off and carry forward and set off its own losses (not
the partners). If there is change in constitution of a firm, the firm shall not
be entitled to carry forward and set off so much of the loss proportionate
to the share of retired /deceased partner as exceeds his share of profits, if
any in the firm in respect of previous year.
*****

CHAPTER 10
DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
The aggregate of income computed under each of five heads after giving effect to
provisions for clubbing of incomes and set off losses is called ‘GROSS TOTAL
INCOME. From G.T.I. certain deductions are made under sections 80 C to 80U to
find out ‘TOTAL INCOME’. However these deductions are not allowed from
following incomes although these incomes are part of ‘gross total income’:-
a) Long term capital gain;
b) Short term capital gain on transfer of equity shares and units of equity
oriented fund on or after 01.10.2004 through a recognised stock exchange
under section 111 A;
c) Winning from lotteries, races etc.;
d) Income referred to in section 115A, 115AB, 115AC, 115ACA, 115AD,
115BBA and 115D.
These deductions are of two types:-
a) Deductions on certain payments and investments (from section 80C to
80GGC).
b) Deductions on certain incomes included in G.T.I. (from section 80-IA to
80U).
BASIC RULES OF DEDUCTIONS:-

1. The deduction from section 80C to 80U cannot exceed the gross total
income (exclusive of long term capital gain, winning from lotteries etc. and
incomes referred to in sections 115A to 115AD, 115BBA and 115D) of the
assessee.
2. The deduction should be claimed by the assessee.
3. The burden is on the assessee to prove that his case falls within particular
provision claimed by him.
4. Where, in computing the total income of an A.O.P./B.O.I. any deduction
allowed under this chapter, then deduction for same cannot be allowed to
the members of AOP/BOI.
DEDUCTIONS FOR CERTAIN PAYMENTS

DEDUCTION UNDER SECTION 80 C: This Deduction from Gross Total Income is
allowed to Individual and H.U.F. only. The deduction can be calculated in
following manner:-
Step 1.:- Calculate Gross qualifying amount.
Step 2.:- Calculate Net qualifying amount.
Step 3.:- Calculate amount of deduction U/S 80 C.
STEP 1. GROSS QUALIFYING AMOUNT: Find the aggregate of the following:
1. Life insurance paid (up to maximum of 20% of sum assured) by individual
to effect/keep in force an insurance on his life of spouse or any child. In
case of HUF, premium paid (up to maximum of 20% of sum assured) must
be on life of any member of the family.
2. Any payment by individual for non-commutable deferred annuity (except

as per point 10 below).

3. Any sum deducted from salary payable by or on behalf of Government to
an individual for securing him a deferred annuity OR making provision for
his spouse or children. The sum deducted should not be more than 20% of
salary.
4. Employee’s contribution to RPF or SPF (other than repayment of loan).
5. Contribution to 15-year PPF account (other than repayment of loan).
6. Employee’s contribution to approved superannuation fund.
7. Subscription to National Saving Scheme 1992 (discontinued with effect
from 1.11.2002).
8. Subscription to National Saving Certificates. Interest accrued on these
NSC’s also qualifies for first five years.
9. Contribution to unit link insurance plan of UTI and LIC mutual fund ( i.e.
ULIP and Dhanraksha).
10. Payment made to effect or keep in force notified annual plan of LIC or any
other insurer (e.g. New Jeevan Dhara, New Jeewan Akshay etc.).
11. Subscription to notified units i.e. Equity Linked Saving Schemes of UTI and
12. Contribution by Individual to a notified pension fund set up by UTI or
13. Any sum paid ( including interest) to home loan account scheme of
national housing Bank or contribution to notified pension fund set up by
the national housing Bank.
14. Any sum paid as subscription to scheme of :-
a) A public sector company which is engaged in providing long term
finance for construction or purchase of houses in India for residential
purposes; OR
b) Any authority constituted in India by as under any law enacted
either for purpose of dealing with and satisfying the need for housing or
for the purpose of planning development or improvement of cities/villages
or both.
15. Any payment made towards cost of purchase/construction of a new
residential house property. This amount does not include interest on loan
or cost of addition / renovation/repair of property. But this includes
stamp duty and other expenses for purchase of such property. The Loan
must be taken from Government, Bank, Co-op. Bank, LIC, National Housing
Bank, assessee’s employer being Public Company/ Public Sector
Company/ University/ Co-op. Society/ Authority or Board or Corporation
established/ considered under a Central or State Act.
16. Any sum paid by an Individual as Tuition Fees (not being development
fees/ donation/ payment of similar nature) to any university/ college/
educational institution in India for full time education of his children for a
maximum of two children.
17. Amount invested in shares / debentures of a public company engaged in
infrastructure (including power sector) or units of mutual funds the

proceeds of which are utilised for development and maintenance of

infrastructure.
18. Any sum deposited in a term deposit with a scheduled bank for a period
not less than 5 years in accordance with the scheme framed and notified
by the Central Government.
19. Subscription to notified bonds of NABARD.
20. Any sum deposited in an account under Senior Citizen Saving Scheme.
21. Any sum deposited in 5 years term deposit account in Post Office as per
the Post Office Time Deposit Rules, 1981.
STEP 2. NET QUALIFYING AMOUNT
The aggregate of payments from (1) to (21) above is the Gross Qualifying
Amount. The Net Qualifying Amount is determined as follows:
a) Gross Qualifying Amount; or
b) Rs. 1,00,000 whichever is less.
STEP:3 AMOUNT OF DEDUCTION
The net qualifying amount as calculated in step 2 is the amount of deduction
under section 80 C. The point to remembered is that the aggregate of deductions
under section 80 C, 80 CCC and 80 CCD cannot exceed Rs. 1,00,000.
Deduction in respect of pension fund [sec. 80CCC]:- Conditions to be fulfilled:-
i) The assessee is individual (may be resident or non-resident).
ii) Such individual has paid/deposited any amount in the previous year under
annuity plan of life insurance corporation of India or any other insurer for
receiving pension from the fund set up by LIC /any other insurer referred
to in section 10(23AAB).
iii) The above amount is paid out of his income chargeable to tax.
Amount of deduction:- The actual amount paid/deposited or Rs. 1,00,000
whichever is less.
NOTE:
a) If the assessee or his nominee receives any amount on account of
surrender of annuity plan or as pension during the previous year then
such amount received will be taxable in the hands of the assessee or his
nominee, as the case may be, in the year of receipt.
b) When deduction has been allowed U/S 80CCC, deduction U/S 80C will not
be available for the same amount.
Deduction in respect of contribution to pension scheme of Central
Government (Sec. 80CCD) :- The conditions to be fulfilled:
1) The assessee is an Individual.
2) He is employed by the Central Government or any other employer on or
after 1st January, 2004.
3) He has paid or deposited any amount not less than 10% of salary in his
account under a pension scheme notified by the Central Government in the
previous year.
4) The employer also contributes an amount equal to 10% of his salary in his
pension account. Such contribution is fully taxable under head Salaries.
Amount of deduction: Employee’s contribution as above (not exceeding

10% of his salary) plus Employer’s contribution (i.e. Central Govt.) to the
above pension fund (not exceeding 10% of his salary).
NOTE:
a) If the assessee or his nominee receives any amount on account of closure
of the account or as pension during the previous year then such amount
received will be taxable in the hands of the assessee or his nominee, as the
case may be, in the year of receipt.
b) When deduction has been allowed U/S 80CCD, deduction U/S 80C will not
be available for the same amount.
c) Salary means Basic Salary plus Dearness Allowance, if the terms of
employment so provide.
Limits on deductions under sections 80C, 80CCC and 80CCD[sec 80CCE]: The
aggregate amount of deduction under section 80 C, 80 CCC and 80 CCD cannot
exceed Rs. 1,00,000.
Deduction in respect of medical insurance premia (sec.80D):- The conditions

to be fulfilled:-
i) The assessee is individual or H.U.F. (may be resident or non-resident).
ii) Such assessee has paid any sum toward MEDICAL INSURANCE PREMIUM
to general insurance corporation or any other insurer on the health of
following:-
a) in case of individual –
1)-on health of assessee, spouse (dependent or independent), dependent
children; and
2) on health of parents (dependent or independent) of the assessee.
b) in case of HUF – on health of any member of the family.
iii) The premium is paid by any mode other than cash.
iv) The premium is paid out of income chargeable to tax.
Amount of deduction :
a) in case of individual –
1)-on health of assessee, spouse (dependent or independent), dependent
children- Actual premium paid or Rs.15,000* whichever is less; and
2) on health of parents (dependent or independent) of the assessee- Actual
premium paid or Rs.15,000* whichever is less.
b) in case of HUF – on health of any member of the family- Actual premium
paid or Rs.15,000* whichever is less.
NOTE: In case of senior citizen additional deduction of amount not exceeding Rs.
5000 is allowed. Senior citizen means a person of at least 65 years of age
and Resident in India.
Deduction in respect of maintenance including medical treatment of

Handicapped Dependent [sec. 80DD]:- The conditions to be fulfilled:-
i) The assessee is a ‘Resident’ individual or a Resident H.U.F.
ii) Such assessee has during the previous year:-
a) incurred any expenditure for medical treatment (including nursing),

training and rehabilitation of a handicapped dependent; or/and

b) Paid /deposited any amount under a scheme framed in this behalf by the
life insurance corporation or any other insurer or U.T.I. and approved by
the CBDT, for maintenance of handicapped dependent.
iii) The expenditure is incurred or amount is paid/ deposited out of eligible
assessee's income chargeable to tax.
Amount of deduction:- Rs.50,000 irrespective of actual expenditure
incurred/amount deposited. A higher deduction of Rs.1,00,000 shall be
allowed where such dependant is a person with severe disability having
any disability of 80% or over.
NOTE:
a) Dependant for an individual means the spouse, children, parents, brothers
and sisters of the individual or any of them. Dependent for a H.U.F. means
a member of H.U.F. Handicapped dependent means a person who is
relative of the individual or as the case may be, is a member of the H.U.F
and is not dependent on any person other than such individual or H.U.F.
for his support or maintenance; and
b) He is suffering from a permanent physical disability ((including blindness)
or is subject to mental retardation, being a permanent physical disability
or mental retardation specified in the rules made by the CBDT for purpose
of section 80DD; and
c) Such disability is certified by a physician, a surgeon, an oculist or a
psychiatrist, as the case may be, working in a government hospital; and
d) Such disability should have the effect of reducing considerably such
person's capacity for normal work or engaging in a gainful employment or
occupation.
e). If the handicapped dependent predeceases the individual or the member
of H.U.F. in whose name money has been deposited, an amount equal to
the amount paid/deposited under the scheme shall be deemed to be
income of the assessee of the previous year in which such amount is
received by the assessee and shall be charged to tax in that year.
DEDUCTION IN RESPECT OF MEDICAL TREATMENT [SE. 80DDB]: The

Conditions to be fulfilled:-
1. The assessee is a ‘Resident’ individual or a Resident H.U.F.
2. The assessee has incurred any expenditure for medical treatment of a
specified disease or ailment as per rule 11D.
3. Such assessee has incurred medical expenses for himself or any dependent
relative (in case of individual) or for any member of the family (in case of
H.U.F.).
4. Such assessee furnishes a certificate in form 10-I from a post graduate
doctor registered with Indian medical association.
Amount of deduction: Rs. 40,000* or Actual Expenditure incurred by the
assessee whichever is less.
* Rs. 60,000 if the person receiving medical treatment is senior citizen.

NOTE :1.Relative has same meaning as in section 80DD.

2.Senior citizen has same meaning as in section 80D.
3.If any amount is received under an insurance from the insurer or
reimbursed by the employer, the amount so received shall be reduced
from the deduction allowable under this section.
DEDUCTION IN RESPECT OF LOAN TAKEN FOR HIGHER EDUCATION (SEC.

80E): The conditions to be fulfilled:-
1. The assessee is an individual.
2. Such assessee had taken loan from a financial institution or approved
charitable institution.
3. The loan was taken for pursuing higher education of the assessee or any of
his relatives.
4. The assessee has repaid such loan including interest on such loan.
5. Such amount is paid out of his income chargeable to tax.
Amount of deduction :- Actual amount of interest repaid during the year
(only interest, principal repayment is excluded).
Period of deduction :- Deduction is allowed for 8 years starting from the
year in which loan/interest was first repaid or till amount is repaid in full
w.e. is earlier.
NOTE:1. Financial institution means a Banking company or any other
notified financial institution.
2.Approved charitable institution means an institution under section
10(23C) or 80G(2)(a).
3.Higher Education means studies of any course of study after passing
Senior Secondary Examination or its equivalent.
4. Relative means spouse, children or the individual for whom the assessee
is legal guardian.
DEDUCTIONS IN RESPECT OF DONATIONS TO CERTAIN FUNDS,
CHARITABLE INSTITUTIONS ETC. [SE. 80G]: The conditions to be fulfilled:
1. The Assessee may be any person.
2. Such assessee has made donation to specified funds or institutions.
3. Donation is a sum of money. It should not be ‘IN KIND’.
4. The assessee must produce the proof of payment to get deduction under
this section.
STEPS TO BE FOLLOWED FOR CALCULATION OF DEDUCTION:- This
deduction is calculated under three steps as follows :-
a) Gross qualifying amount.
b) Net qualifying amount.
c) Amount of deduction.
STEP I. Gross qualifying amount:- It is aggregate of the donations made to any
of the institutions/funds given in the chart below (as per column I).
STEP II. Net qualifying amount:- Net qualifying amount is limited to 10% of
gross total income less :-
a) Amount of long term capital gain;

b) Short term capital Gain on transfer of equity shares through a recognised

stock exchange under section 111 A;
c) Such income on which tax is not payable (i.e. share of profit from
A.O.P./BOI.
d) All deductions under sections 80C to 80U (except sec. 80G);
e) Income referred to in section 115A, 115AB, 115AC, 115ACA or 115AD.
These ceilings apply only to donations of point (C) and (D) in the chart given
below.
STEP III. Net qualifying amount is eligible for deduction as per column 3 of
the chart below:-
Name/Type of charitable Maximum DEDUTION
funds/Institution limit (AS
PERCENT
OF NET
QUALIFYIN
G
AMOUNT)
(A) a) National Defence fund set up by Not 100%
central Govt. applicable
b) Prime Minister’s national relief fund Not 100%
applicable
c) Prime Minister’s Armenia Not 100%
earthquake relief FUND applicable
d) Africa (Public contribution – Indian) Not 100%
fund applicable
e) National foundation for commercial Not 100%
harmony applicable
f) An approved university/education Not 100%
institution applicable
g) Maharashtra chief Minister’s Not 100%
earthquake relief fund applicable
h) Any fund set up by Government of Not 100%
Gujarat for providing relief to applicable
earthquake victims in Gujarat
i) Zila Saksharta Samiti Not 100%
applicable
j) National/State Blood transfusion Not 100%
council applicable
k) Fund set up by State Government Not 100%
for medical relief to the poor. applicable
l) Army /Air force central welfare fund Not 100%
and India naval benevolent fund. applicable
m) Andhra Pradesh Chief Minister’s Not 100%
cyclone relief fund applicable

n) National illness assistance fund Not 100%

applicable
o) Chief Minister/Lieutenant Not 100%
Governor’s Relief fund applicable
p) National sports fund set up by Not 100%
q) National cultural fund set up by Not 100%
r) Fund for technology development Not 100%
and application applicable
s) National trust for welfare of persons Not 100%
with autism, cerebral palsy, mental applicable
retardation and multiple disabilities
(B) a) Jawaharlal Nehru Memorial fund Not 50%
applicable
b) Prime Minister’s Drought Relief Not 50%
fund applicable
c) National children fund. Not 50%
applicable
d) Indira Gandhi Memorial Trust Not 50%
applicable
e) Rajiv Gandhi foundation Not 50%
applicable
(C) a) Government/approved local As given 100%
authority or institution/association for below
promotion of family planning.
b) Indian Olympic association / As given 100%
notified institution for i) Development below
of infrastructure for sports and games
in India; or ii) The sponsorship of
sports and games in India (DONOR
BEING COMPANY)
(D) a) Any other fund/Institution which As given 50%
satisfies conditions of section 80G (5). below
b) Government/approved local As given 50%
authority or institution /association below
for any charitable purpose other than
promoting family planning.
c) Any corporation specified in section As given 50%
10(26BB) for promoting interest of below
minority community
d) Any notified temple, mosque, As given 50%
Gurdwara, Church or other place (for below
renovation or repair)
e) Any authority constituted in India As given 50%

by any law enacted either for dealing below

with and satisfying need for housing
accommodation or for planning
development or improvement of cities,
lawns and villages or for both.
MAXIMUM AMOUNT: It the aggregate of sums mentioned in (C) and (D) above
exceeds 10% of adjusted gross total income (as per step II), then the amount in
excess of 10% of adjusted gross total income will be ignored while computing the
aggregate of the sums in respect of which deduction is to be allowed.
DEDUCTION IN RESPECT OF RENT PAID [SEC. 80 GG]:- The Conditions to be

fulfilled:-
1. The assessee is an individual;
2. Such assessee has paid rent for his residential accommodation;
3. The assessee is either self-employed or an employee neither entitled to
house rent allowance nor a rent-free accommodation.
4. Such assessee, his spouse or minor child or his H.U.F. (of which he is a
member) does not own any residential accommodation at the place where
such assessee ordinarily resides or works or carries his business.
5. If such assessee owns any residential accommodation at any place, other
than as mentioned above, then such property should not be assessed as
self occupied property in the hand of such individual assessee.
6. The assessee files a declaration in form-10BA along with his return.
AMOUNT OF DEDUCTION: Least of following is deductible :-
a) 25% of adjusted total income;
b) Rent paid-10% of adjusted total income;
c) Rs. 2000 per month.
NOTE: Adjusted total income means ‘Gross total income less ( a)Long term
capital gain’ and b) Short term Capital Gain on transfer of equity shares through a
recognised stock exchange under section 111 A and c) all deductions under
section 80C to 80U (except deduction U/S 80GG) and d) incomes referred to in
sec. 115A to 115D).
DEDUCTION IN RESPECT OF DONATIONS FOR SCIENTIFIC RESEARCH OR

RURAL DEVELOPMENT [SEC. 80GGA]: The Conditions to be fulfilled:-
1. The assessee may be any person;
2. Such assessee does not have income under ‘Profits gains of business or
profession’;
3. Such assessee has made donation/payments to :-
a) Approved scientific research association or approved University
College or other institution to be used for scientific research;
b) Approved University, College or other institution for research in
social science or statistical research;
c) Approved association or institution undertaking rural development
(provided the assessee furnishes certificates as required in sec. 35CCA);

d) Approved public sector company or local authority or association or

institution for carrying out any eligible project or scheme (provided the
assessee furnishes certificate as required in sec. 35AC (2) (a);
e) National Urban Poverty eradication fund;
AMOUNT OF DEDUCTION: 100% of sum paid as above.

NOTE: 1. Where deduction under this section is claimed and allowed, deduction
will not be allowed for same amount under any other provision of the Act for
same or any other assessment year.
2. If approval granted to any of the above institution is withdrawn even then the
deduction for payment made earlier by the assessee cannot be denied.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY INDIAN COMPANIES
TO POLITICAL PARTIES [SEC 80GGB]: Any sum contributed by an Indian
Company in the previous year to any political party shall be allowed as deduction
while computing its total income.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY ANY PERSON TO

POLITICAL PARTIES [SEC 80GGC]: Any sum contributed by an assessee being
any person (except Local Authority and every Artificial Juridicial Person wholly
or partly funded by the Government) to any political party shall be allowed as
deduction while computing its total income.
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM BUSINESS OF
INFRASTRUCTURE DEVELOPMENT [SEC.80-IA]: The deduction under this
section is available to an assessee whose gross Total Income includes any profits
and gains derived by:
a) any enterprise carrying on the business of infrastructure facility; or
b) an undertaking which is engaged in the business of telecommunication
services etc.;
c) an undertaking which develops, maintains etc. an Industrial park or
special economic zone; or
d) an undertaking which is engaged in generation, transmission, distribution
of power etc;
e) an undertaking owned by an Indian Company and set up for
reconstruction or revival of a power generating plant.
A) CONDITIONS FOR BUSINESS OF INFRASTRUCTURE FACILITY
1) The enterprise should carry on the business of:
a) developing; or
b) operating and maintaining; or
c) developing, operating and maintaining any infrastructure facility;
2) The enterprise is owned by an Indian company or a consortium of such
companies or by an authority or a Board or a Corporation or any other
body established or constituted under any Central or State Act;
3) The enterprise has entered into an agreement with central/State

Government or local authority or any other statutory body for such

business;
4) The enterprise has started or starts such business on or after 01.04.1995.
B) CONDITIONS FOR BUSINESS OF TELECOMMUNICATION SERVICES.
1) The undertaking should have started or starts providing
telecommunication service whether basic or cellular, including radio
paging, domestic satellite services or network of trunking, broadband
network and internet services;
2) It is allowed to all assessees;
3) It should start providing such services on /after 01.04.1995 but before
31.03.2005.
4) Such undertaking should not be formed by splitting up or the
reconstruction of a business already in existence. (But this condition is not
applicable if circumstances of sec 33B are fulfilled.)
5) It should not be formed by transfer of any plant or machinery previously
used for any purpose to it. However such old plant or machinery can be
used to the extent of 20% of total value of plant and machinery of such
new undertaking.
C) CONDITIONS FOR BUSINESS OF DEVELOPMENT OF INDUSTRIAL PARK
OF ECONOMIC ZONE
1) The undertaking should develop, develop and operate or maintain and
operate an industrial park or special economic Zone notified by the Central
Government in accordance with scheme framed for such purpose.
2) The industrial park should begin to operate, develop etc, at any time on or
after 01.04.1997 but before 01.04.2011.
(D) CONDITIONS FOR BUSINESS OF POWER GENERATION:
1) The undertaking is set up in any part of India for generation or generation
and distribution of power if it begins to generate power at any time during
the period beginning on 01-04-1993 and ending on 31-03-2011.
2) It start transmission or distribution by laying a network of new
transmission or distribution lines at any time during the period beginning
on 01-04-1999 and ending on 31-03-2011.
3) It undertakes substantial renovation and modernization of the existing
transmission or distribution lines (i.e. at least 50% increase in book value
of such plant and machinery as on 01.04.2004) at any time during 1.4.2004
to 31.3.2011.
4) Such undertaking should not be formed by splitting up or the
reconstruction of a business already in existence. (But this condition is not
applicable if circumstances of sec 33B are fulfilled.)
4) It should not be formed by transfer of any plant or machinery previously
used for any purpose to it. However such old plant or machinery can be
used to the extent of 20% of total value of plant and machinery of such
new undertaking.
E) CONDITIONS FOR UNDERTAKING SET UP FOR RECONSTRUCTION OR
REVIVAL OF A POWER GENERATING PLANT:

1) Such undertaking must be owned by an Indian Company.

2) Such Indian Co. is formed before 30.11.2005 with public sector companies
as majority of equity shareholders for the purpose of enforcing the
security interest of the lenders to the company.
3) Such Indian Co. is notified before 31.12.2005 by the Central Govt. for this
purpose.
4) Such undertaking begins to generate or transmit or distribute power
before 31.3.2011.
AMOUNT OF DEDUCTION
a) FOR BUSINESS OF TELECOMMUNICATION SERVICES:
For first five successive years @ 100% of profits and for next FIVE
successive years @30% of the profits [out of 15 years beginning with the
year of starting provision of telecommunication services].
b) FOR BUSINESS OTHER THAN (a) ABOVE:
100% of Profits of such business for 10 successive years (out of 15 years
beginning with the year of start of such business).
* In case of infrastructure facilities other than PORT, AIRPORT, INLAND
WATERWAY OR INLAND PORT this period is 20 years .
NOTE:
1) For getting/claiming deduction under this section audit of accounts and
submission of a Report in Form 10CCB duly certified by a chartered Accountant
along with the return of income is compulsory.
2) The Central Government may in official Gazette, notify that the deduction
under this section not to apply to any class of industrial undertaking or
enterprise with effect from any notified date.
3) Deduction is allowed if and if only if the return of income is submitted on or
before due date of filing the return u/s 139 (1).
DEDUCTION IN RESPECT OF PROFITS AND GAINS BY AN UNDERTAKING OR
ENTERPRISE ENGAGED IN DEVELOPMENT OF SPECIAL ECONOMIC ZONE
(SEC 80 IAB): If a Special Economic Zone is notified on or after 1.4.2005 then it is
not eligible for deduction u/s 80 IA. These undertakings will be allowed
deduction under section 80 IAB.
The deduction under this section is available if the Gross Total Income of an
Assessee, being the developer, includes any profit derived by an undertaking or
an enterprise from any business of developing of a Special Economic Zone,
notified on or after 1.4.2005 under the Special Economic Zones Act, 2005.
AMOUNT OF DEDUCTION: 100% of the profits and gains from such business for
10 consecutive years out of 15 years beginning from the year in which the special
economic zone has been notified by the Central Govt.
NOTE:
1) For getting/claiming deduction under this section audit of accounts and
submission of a Report in Form 10CCB duly certified by a chartered Accountant
along with the return of income is compulsory.
2) The Central Government may in official Gazette, notify that the deduction
under this section not to apply to any class of industrial undertaking or

enterprise with effect from any notified date.

3) Deduction is allowed if and if only if the return of income is submitted on or
before due date of filing the return u/s 139 (1).
DEDUCTION IN RESPECT OF PROFITS & GAINS FROM CERTAIN BUSINESSES

OTHER THAN INFRASTRUCTURE DEVELOPMENT (SEC.80-IB): This section
applies if the assessee is engaged in the business of:
a) an industrial undertaking including cold storage;
b) a ship;
c) a hotel;
d) multiplex Theatres;
e) convention centre;
f) scientific and industrial research and development;
g) commercial production and refining of mineral oil;
h) developing and building housing projects;
i) handling, storage and transportation of food grains;
j) operating and maintaining a hospital in a rural area;
k) Five year tax holiday to hospitals in certain areas.
A. CONDITIONS FOR INDUSTRIAL UNDERTAKING
1) The industrial undertaking is not formed by splitting up or reconstruction
of a business already in existence. (However this clause is not applicable if
conditions u/s 33B are fulfilled).
2) It is not formed by transfer to a new business of machinery or plant
previously used for any purpose. However any such old plant machinery can be
transferred to new industrial undertaking provided value of such old plant or
machinery does not exceed 20% of total value of plant and machinery of new
industrial undertaking.
3) It manufactures or produces any article or thing other than articles
specified in ELEVENTH SCHEDULE or operates one or more cold storage
plant or operates cold chain facility in any part of India. However a Small
Scale Industrial undertaking or Industrial Undertaking located in an
industrially backward state can produce article/thing specified in
ELEVENTH SCHEDULE and can claim this deduction..
4) Such industrial undertaking employs ten or more workers in a
manufacturing process carried on with the aid of power or employs
twenty or more workers in a manufacturing process carried on without
the aid of power.
5) The Industrial undertakings begin to manufacturer or to operate cold
storage plant or cold chain facility as per table given below
INDUSTRIAL UNDERTAKING PERIOD TO START
PRODUCTION
a) Any eligible industrial undertaking other 01.04.1991 to
than those given in clause (b) to (f) below 31.03.1995
b) Eligible Small Scale Industrial undertakings 01.04.1991 to
other than those given in clauses (c) to (f) 31.03.2002

c) Industrial undertaking set up in an 01.04.1993 to

Industrially backward state 31.03.2004 (till
31.3.2012 in case of
Jammu & Kashmir)
d) Industrial undertaking set up in notified 01.10.1994 to
industrially backward districts of category A 31.03.2004
e) Industrial undertaking set up in notified 01.10.1994 to
backward District of category B 31.03.2004
f) Industrial undertaking set up and operating 01.04.1999 to
cold chain facility for agricultural produce 31.03.2004
AMOUNT OF DEDUCTION
ASSESSEE PERIOD OF %AGE OF

DEDUCTION PROFIT AS
DEDUCTION
1 A Industrial undertaking
.
i) in an industrially backward state
ii) in districts of category A (BUT NOT
NORTH EASTERN REGION)
iii) operating a cold chain facility
a) Owned by a Company First 5 years 100%
Next 5 years 30%
b) Owned by a co-operative Society First 5 years 100%
Next 7 years 25%
c) Owned by any other assessee First 5 years 100%
Next 5 years 25%
B) Notified Industries in North Eastern First 10 years 100%
Region
2 Industrial Undertaking in Industrially
. backward districts of category 'B'
i) owned by a Company First 3 years 100%
Next 5 years 30%
ii) Owned by a Co-operative Society First 3 years 100%
Next 9 yeas 25%
iii) Owned by other assessee First 3 years 100%
Next 5 years 25%
3 Industrial undertaking other than
. those specified above
i) Owned by a Company First 10 years 30%
ii) Owned by a Co-operative society First 12 years 25%
iii) Owned by any other assessee First 10 years 25%

B CONDITIONS FOR OPERATION OF A SHIP

1) It is owned by an Indian Company and it is wholly used for the purpose of
business carried on by it.
2) It was not owned or used in Indian Territorial Waters by a person resident
in India before its acquisition by the Indian company.
3) It was brought into use by Indian company with in from 01.04.1991 to
31.03.1995.
AMOUNT OF DEDUCTION: 30% of eligible profits for 10 years starting from
initial assessment year.
C. CONDITIONS FOR BUSINESS OF ANY HOTEL
1) The business of hotel is owned and carried on by an Indian Company with
a paid up capital of not less than Rs.5,00,000.
2) Such business of hotel is not formed by splitting up or reconstruction of
the business already in existence or by transfer to a new business of a
building previously used as a Hotel or of any machinery or plant
previously used for any purpose.
3) The Hotel is for the time being approved by the prescribed authority.
4) The hotel must start functioning during period and in area as mentioned
below:
TYPE OF HOTEL PERIOD WITHIN
WHICH HOTEL MUST
START
a) i) Hotel located in a hilly area/rural area or 01.04.1990 to
place of pilgrimage or any other place 31.03.1994
notified by Central Government
ii) Hotel located in a hilly area or rural area or 01.04.1997 to
a place of pilgrimage or such other place as 31.03.2001
notified by the Central Govt But such Hotel
should not be located within Municipal
limits of Calcutta, Delhi, Mumbai and
Chennai
b) i) Any other hotel 01-04-1991to 31-03-
1995
ii) Any other hotel located in a place other 01.04.1997 to
than with in Municipal limits of Calcutta, 31.03.2001
Chennai, Delhi and Mumbai
AMOUNT OF DEDUCTION
Assessee Period of %ge of profit as
Deduction deduction
a) Hotel located in hilly/rural area 10 years 50%
or notified place of pilgrimage
b) Any other Hotel 10 years 30%
D. CONDITIONS FOR MULTIPLEX THEATRE

1) The assessee should derive profits and gains from the business of building,
owning and operating a multiplex theatre.
2) Such multiplex theatre should have been constructed at any time during
the period 01.04.2002 to 31.03.2005 .
3) The business of multiplex theatre should not be formed by splitting up or
reconstruction of a building already in existence.
4) It should not be formed by the transfer to a new business of any building
or of any machinery or of plant previously used for any purpose.
5) The multiplex theatre should not be located at a place with in the
municipal limits of Kolkatta, Chennai, Delhi or Mumbai.
6) The assessee should furnish along with return of income, the report of an
audit in such form and containing such particulars as may be prescribed
duly certified by a prescribed.
AMOUNT OF DEDUCTION: 50% of the profits such business for a period of five
successive years starting from initial assessment year.
E. CONDITIONS FOR CONVENTION CENTRE
1) The assessee should derive profits and gains from the business of building,
owning and operating a convention centre.
2) The convention centre should be constructed at any time during the period
01.04.2002 to 31.03.2005.
3) The business of convention centre should not be formed by splitting up or
the reconstruction of a business already in existence.
4) It should not be formed by transfer to a new business of any building or
any machinery or plant previously used for any purpose.
5. The assessee should obtain a report of an audit in such form and
containing such particulars as may be prescribed from a Chartered
Accountant certifying that deduction has been correctly claimed and
submitted along with the return of income.
AMOUNT OF DEDUCTION: 50% of the profits and gain from such business for a
period of FIVE SUCCESSIVE years beginning from initial assessment year.
F. CONDITIONS FOR ENTERPRISES CARRYING ON SCIENTIFIC AND
INDUSTRIAL RESEARCH AND DEVELOPMENT:
1) The enterprises must be a Company registered in India;
2) The company has main object of scientific and industrial research and
development;
3) The company is for the time being, approved by the prescribed authority.
4) The deduction is available from assessment year 1997-98 and if it starts at
a later date, the deduction is available from the year of start of business.
AMOUNT OF DEDUCTION:
a) If Company was approved before 1st April, 1999: 100% of eligible profits
for FIVE YEARS commencing from initial assessment year.
a) If Company was approved on or after 1st April, 2000 but before 1st April,
2007: 100% of eligible profits for TEN YEARS commencing from initial
assessment year.

G. UNDERTAKING ENGAGED IN BUSINESS OF REFINING OF MINERAL OIL

1) The assessee is industrial undertaking which begins commercial
production of mineral oil in any part of India.
2) Where Industrial undertaking is situated in North Eastern Region it has
begun production of mineral oil BEFORE OR AFTER 01.04.97. But if it is
situated in any other part of India it begins commercial production ON or
AFTER 01.04.1997.
AMOUNT OF DEDUCTION: 100% OF ELIGIBLE PROFITS FOR SEVEN YEARS
starting from initial assessment year.
H. UNDERTAKING ENGAGED IN DEVELOPING AND BUILDING HOUSING
PROJECTS:
1) The assessee may be any person.
2) It is allowed on account of housing project approved by local authority
before 31.03.2008 and the area of plot is minimum of one acre.
3) The residential unit has a build up area of not exceeding 1000 square feet
for residential unit in Delhi or Mumbai or within 25 kms of Municipal
limits of these cities and 1500 square feet at any other place.
4) The undertaking commences development and construction of the
housing project on or after 01.10.1998 and completes the same
a) in case the housing project has been approved by the local authority
before 01.04.2004, it should complete the same before 31.03.2008;
b) in case the housing project has been approved by the local authority on
or after 01.04.2004, it should complete the same with in 4 years form the
end of financial year in which the housing project has been approved by
the local authority.
AMOUNT OF DEDUCTION: 100% of profits from such project.
I. UNDERTAKING ENGAGED IN INTEGRATED BUSINESS OF HANDLING,
STORAGE AND TRANSPORTATION OF FOOD GRAINS
2) Such assessee starts the integrated business of handling and
transportation of food grains on or after 1.04.2001
AMOUNT OF DEDUCTION
%AGE OF
PERIOD PROFIT
ASSESSEE OF DEDUCTION AS DEDUCTION.
a) Owned by a Company First 5 years 100

Next 5 years 30
b) Owned by any other person First 5 years 100
Next 5 years 25
J. UNDERTAKING OPERATING AND MAINTAINING A HOSPITAL IN A RURAL

AREA
1) Such hospital is constructed at any time during the period from 01.10.2004 to
31.03.2008;

2) The hospital has at least 100 beds for patients;

3) The construction of the hospital is in accordance with the regulations, for the
time being in force, of the local authority;
4) The report from a Chartered Accountant regarding correct claim of deduction
is furnished along with the return of income.
Amount of deduction: 100% of profits and gains of such business for a period of
5 consecutive assessment years beginning with the initial assessment year.
K. FIVE YEAR TAX HOLIDAY TO HOSPITALS IN CERTAIN AREAS:
1) The hospital is located in any area except the excluded area.
2) The hospital is constructed at any time during 1st April, 2008 to 31st March,
2013 and starts functioning within above said period.
3) The hospital has at least 100 beds for patients;
4) The construction of the hospital is in accordance with the regulations, for the
time being in force, of the local authority;
5) The report from a Chartered Accountant regarding correct claim of deduction
is furnished along with the return of income.
Amount of deduction: 100% of profits and gains of such business for a period of
5 consecutive assessment years beginning with the initial assessment year.
DEDUCTION IN RESPECT OF PROFITS & GAINS OF CERTAIN UNDERTAKINGS

IN CERTAIN SPECIAL CATEGORY OF STATES [SEC 80-IC]:-
Where the gross total income of an assessee includes any profits and gains
derived by an undertaking or an enterprise from any:
a) business of manufacturing or producing any article or thing (not being an
article or thing mentioned in Schedule XIII ) in any notified specified area in
the states of Sikkim, Himachal Pradesh, Uttaranchal or the North-Eastern States,
or
b) business of manufacturing or producing any article or thing or operates a
service mentioned in Schedule XIV in any area in the said states,
a deduction from such profits and gains shall be allowed under this section
provided certain conditions are satisfied as follows:
1) It is not formed by splitting up or the reconstruction, of a business already in
existence. (However this clause is not applicable if conditions u/s 33B are
fulfilled).
2) It is not formed by transfer to a new business of machinery or plant
previously used for any purpose. However any such old plant machinery can be
transferred to new industrial undertaking provided value of such old plant or
machinery does not exceed 20% of total value of plant and machinery of new
3) It has begun or begins to manufacture or produce any article or thing or
undertakes substantial expansion during the period-
i) from 23.12.2002 to 31.03.2012 in the state of Sikkim; or
ii) from 07.01.2003 to 31.03.2012 in the states of Himachal Pradesh or
Uttaranchal; or
iii) from 24.12.1997 to 31.03.2007 in any of the North-Eastern states.

Amount of Deduction: The deduction shall be-

1) in the case of any undertaking in the state of Sikkim or North-eastern states –
100% of such profits and gains for ten assessment years commencing from the
initial assessment year.
2) in the case of any undertaking in state of Himachal Pradesh or Uttaranchal -
100% of such profits and gains for five assessment years commencing from the
initial assessment year and thereafter 25% (30% in case of a company assessee)
of such profits and gains for next five assessment years.
NOTE: 1) The Initial Assessment year means the assessment year relevant to the
previous year in which the undertaking begins to manufacture or produce
articles or things or commences operation or completes substantial expansion.
2) The total period of deduction shall not 10 assessment years.
3) The provisions of Computation of profits of eligible business, audit of accounts,
restriction on double deduction, adjustment of loss and effects of merger or
demerger are same as in section 80-IA.
DEDUCTION IN RESPECT OF PROFITS & GAINS FROM BUSINESS OF

COLLECTING AND PROCESSING BIO DEGRADABLE WASTE (SEC. 80 JJA):
2) The assessee is engaged in business of collecting and processing or
treating of bio-degradable waste for
a) generating power; or
b) producing, bio fertilisers, bio pesticides or other biological agents; or
c) providing bio-gas; or
d) making pellets or briquettes for fuel; or
e) organic manure.
AMOUNT OF DEDUCTION: 100% of profits from such business for FIVE
SUCCESSIVE YEARS starting from the year of commencement of business.
DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW WORKMEN

(SEC.80JJAA)
1) The assessee is an Indian Company.
2) The company assessee is engaged as industrial undertaking.
3) The Industrial undertaking is not formed by splitting up or reconstruction
of an existing Industrial undertaking or amalgamation in the another
4) The company employs new regular workman in the previous year..
5) The company furnishes along with return of income a report in form 10DA
duly certified by a chartered Accountant.
AMOUNT OF DEDUCTION: 30% of the additional wages paid to new regular
workers employed in the previous year.
NOTE: Additional wages means wages paid to new regular workman in excess of
100 workmen employed during the previous year.

DEDUCTION IN RESPECT OF INCOMES OF OFF-SHORE BANKING UNITS

[SEC.80LA]:-
Conditions to be fulfilled:-
1) The assessee is a scheduled Bank.
2) It has a branch in India located in a Special Economic Zone.
3) the gross total income of the assessee includes (a) any income from the
aforesaid branch in the special economic zone; (b) from the business referred to
in section 6(1) of the Banking Regulation Act, 1949, with an undertaking located
in a special economic zone or any other undertaking which develops, develops
and operates and maintains a special economic zone; (c ) any income received in
foreign exchange in accordance with the regulations made under the Foreign
Exchange Management Act, 1999.
4) The report from a Chartered Accountant in prescribed form certifying that the
deduction has been correctly claimed in accordance with the provisions of the
section should be submitted along with the return of income.
5) A copy of permission obtained under section 23(1)(a) of the Banking
Regulation Act, 1949 should be submitted along with the return of income.
Amount of Deduction: 100% of such income for 3 consecutive years beginning
from the assessment year relevant to the previous year in which permission
under section 23(1)(a) of the Banking Regulation Act, 1949 was obtained; and
thereafter 50% of such income for two consecutive assessment years.
DEDUCTION IN RESPECT OF INCOME OF CO-OPERATIVE SOCIETY [SEC.80P]:

The deduction is allowed as follows-
1) 100% of the profits from following activities:
a) Carrying on business of banking or providing credit facilities to its
members;
b) a cottage industry;
c) the marketing of the agricultural produce grown by its members;
d) the purchase of agricultural implements, seeds, livestock or other articles
intended for agriculture for the purpose of supplying them to its members;
e) the processing, without aid of power, of agricultural produce of its
members;
f) the collective disposal of labour of is members;
g) fishing or allied activities.
2) 100% of profits from following activities:
Supplying milk, oil seeds, fruit, vegetables grown by its members to
a) a federal co-operative society;
b) the Government or local authority;
c) a Government company or a statutory corporation.
3) In case of other activities deduction is limited to Rs. 50,000 (Rs. 1,00,000 in
case of consumers Co-operative Society).
4) 100% of profits as interest or dividend from another co-operative society.
5) 100% of profits from letting of Godowns or warehouse for

storage/processing or facilitating marketing of commodities.

6) 100% of interest income from securities and property (upto maximum of
Rs.20,000) in case of co-operative society NOT BEING housing society or urban
consumers society or Society carrying transport business or manufacturing with
the aid of power.
DEDUCTION IN RESPECT OF ROYALTY INCOME, ETC., OF AUTHORS OF

CERTAIN BOOKS OTHER THAN TEXT BOOKS [SEC. 80QQB]:-
Conditions to be fulfilled:
1. The assessee is Individual who is resident in India and is an author of a book.
2. The book should be a work of literary, artistic or scientific nature.
3. The income must be derived by him in the exercise of his profession.
4. The income must be either:
a) on account of any lump sum consideration for the assignment or grant of any
of his interests in the copyright of such book; or
b) of royalty or copyright fees (whether receivable in lump sum or otherwise).
5. A certificate in Form 10CCD duly verified by any person responsible for
making such payment to the assessee should be enclosed along with the return of
income of the assessee.
6. A certificate in Form 10H from the prescribed authority (in case of any such
income earned from any source outside India) should be enclosed along with the
return of income of the assessee.
Amount of deduction: 100% of such income or Rs.3,00,000 whichever is less.
However, where the income by way of such royalty or the copyright fee is not a
lump sum consideration in lieu of all rights of the assessee in the book, then such
royalty, etc. before allowing expenses, in excess of 15% of the value of such books
sold during the previous year, shall be ignored.
Further, where any income is earned from any source outside India, only so much
of the income shall be taken into account for the purpose of this section as is
brought into India by, or on behalf of , the assessee in convertible foreign
exchange with in a period of six months from the end of the previous year in
which such income is earned or within such further period as the competent
authority may allow in this behalf.
DEDUCTION IN RESPECT OF ROYALTY ON PATENTS [SEC. 80RRB]:

Conditions to be fulfilled:
i.The deduction is available to an Individual who is resident in India and is
Patentee.
2) The patent should be registered on or after 01.04.2003 under the Patents Act,
1970.
3) His gross total income of the previous year includes royalty in respect of such
patent.
2) A certificate in Form 10CCD duly verified by any person responsible for
making such payment to the assessee should be enclosed along with the return of
income of the assessee.
. 5) A certificate in Form 10H from the prescribed authority (in case of any such

income earned from any source outside India) should be enclosed along with
the return of income of the assessee.
Amount of deduction: 100% of such royalty income or Rs. 3,00,000
whichever is less.
However, where a compulsory licence is granted in respect of any patent under
the Patents Act, 1970, the income by way of royalty for the purpose of allowing
deduction under this section shall not exceed the amount of royalty under the
terms and conditions of a licence settled by the Controller under that Act.
Further, where any income is earned from any source outside India, only so much
of the income shall be taken into account for the purpose of this section as is
brought into India by, or on behalf of , the assessee in convertible foreign
exchange with in a period of six months from the end of the previous year in
which such income is earned or within such further period as the competent
authority may allow in this behalf. DEDUCTION IN RESPECT OF PERMANENT
PHYSICAL DISABILITY [SEC80U]:
1) The assessee is individual who is resident in India and is a person with
disability as per Sec 2(i) of The persons with Disabilities (Equal opportunities,
protection of Rights and full participation) Act, 1995.
2) He is certified by the Medical Authority (i.e. any hospital or institution
specified as per section 2(p) of for the purpose of The persons with Disabilities
(Equal opportunities, protection of Rights and full participation) Act, 1995) to be
a person with disability, at any time during the previous year.
3) The assessee furnishes the above said certificate along with the return of
income under section 139, in respect of the assessment year for which the
deduction is claimed.
Amount of deduction: Rs. 50,000* in case of a person with disability.
* Rs.75,000 in case the assessee suffers 80% or more of one or more disabilities.
*****
Chapter -11
AGRICULTURAL INCOME & ITS TAX TREATMENT
Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from
income-tax. The reason for keeping the agricultural income outside the purview
of Income-Tax Act is the Constitution of India gives exclusive powers to the State
Legislature to make laws with respect to taxes on agricultural income. However,
from assessment year 1974-75 and onwards, net agricultural income is added to
the total non-agricultural income computed as per Income-tax Act, for the

purpose of determining the income-tax on non -agricultural income, although the

agricultural income will remain fully exempt.
Summarised definition of Agricultural Income as given in section 2 (1A) of
the Income-tax Act includes the following incomes as agricultural income
provided the land is situated in India and is used for agricultural purposes:
(i) any rent or revenue derived from land;
ii) any income derived from such land by agriculture or from processing of
agricultural produce;
(iii) any income from farm building.
The above three types of income shall be treated as ' agricultural
income' only when the following conditions are satisfied:
(i) Income should be derived from land: The expression derived from land
would mean springing from land or arising from land. It points to a source
from out of which the income springs. But such source should be the
immediate and effective source and not any secondary or remote source;
that is, the proximate source and not the source to which it may ultimately
be referable has to be considered.
Some instances where income held as not derived from land:
a) Mutation fees paid by tenant on succession to a holding by
inheritance.
b) Fees paid by tenants for renewal of leases (as well as fees paid for
recognizing the distribution of holding on a partition) would not be
income derived from land, since they are payments made for
administrative services rendered by the landlord, just like registration
fees.
c) Receipts from the supply of water (with water tank) in an
agricultural land.
(ii) Land should be situated in India: Land should be situated anywhere in
India, though, it may or may not be subject to land revenue or any local
rate. The land may be situated in an urban area or in a rural area. If the
land is located outside India, any agricultural income derived from such
land will not be deemed to be agricultural income and the same will not
enjoy any exemption u/s 10(1). In the case of a person residing in India,
such income from agricultural land situated outside India will be included
in his total income and would be liable to tax.
(iii) Land should be used for agricultural purpose: The Supreme Court [in CIT v
Raja Benoy Kumar Sahas Roy (1975)] has held that the land is said to be
used for agricultural purpose where the following two types of operations
are carried out on such land:
(a) Basic Operations: These involve cultivation of the ground, in the sense of
tilling of the land, sowing of the seeds, planting and similar operations on
the land. Such basic operations demand the expenditure of human labour
and skill upon the land itself and further they are directed to make the
crop sprout from the land.
(b) Subsequent Operations: After the crop sprouts from the land, there are

subsequent operations which have to be performed the agriculturists for

the efficient production of the crop such as weeding, digging the soil
around the growth, removal of undesirable growths, prevention of the
crop from insects and pests and from damage by cattle and attention,
pruning, cutting, etc.
Both the basic and the subsequent operations together form the
integrated activity of the agriculturist. The performance of the subsequent
operation on the produce of the land would not be enough to invest the
subsequent operations with agricultural character. They should be in
combination with, and in carry-over of, the basic operation which is end
result of an agricultural operation. In other words, basic operations must
be performed before any income is called agricultural income.
The basic operation need not necessarily be tilling of the land,
sowing of the seeds or planting; it may be an operation of a similar kind.
Instead of tilling (involving the use of a plough) the soil may be broken
with the aid of a shovel where the soil is loamy. A crowbar and spade
would be enough for digging pits in the soil to plant a sapling. Ploughing is
mostly necessary for sowing of seeds and not for planting.
Income from Nurseries [Explanation 3 to section 2(1A)]: Any income
derived from saplings or seedlings grown in nursery is treated as
agricultural income.
The above three types of agricultural incomes have been defined
u/s 2(1A) (a), 2(1A) (b) and 2(1A) (c) respectively. The definition is being
discussed in detail as under:
1(a). Any rent or revenue derived from land which is situated in India and
is used for agricultural purposes [Section 2(1A)(a)]: The following conditions
must be satisfied to treat income derived from land as 'agricultural income':
(i) rent or revenue should be derived from land.
(ii) such land should be situated in India.
(iii) the land should be used for agricultural purposes.
(ia) Rent from land: Rent should be a payment in cash or in kind (or
in money or in money's worth), by one person to another in respect
of a grant of a right to use land. To treat any income or revenue in
the nature of rent, there should be an established relationship of a
landlord and tenant (or Lessor and lessee) between the parties. For
example, the share of agricultural produce received by a landlord is
though in kind but it is rent and thus agricultural income.
(ib) Revenue from Land: The expression 'revenue' would mean
income of every kind derived from agricultural land, other than:
(a) rent; or
(b) the income which falls under section 2(1A) (b) and (c).
(ic) Rent or revenue should be derived from land: This would mean
that such rent or revenue should be generated from land or arise
from land. If the immediate and effective source is not land, the
income will not be agricultural income. The following are not

agricultural income as these are not derived from land.

 Dividend received by shareholder from a company carrying on
agricultural operations is not agricultural income in his hands. The
shareholder receives the dividend not by virtue of any activity of
agriculture carried on by him, but by virtue of the investment of
his funds in the company in buying up its shares.
 Loan obtained by a shareholder out of accumulated profits of a
company having only agricultural income, which is liable to be
treated as 'deemed dividend', is not agricultural income in the
hands of the recipient.
 Interest on arrears of cess or rent payable by a tenant to his
landlord is revenue but it is not revenue derived from land and
hence it is not agricultural income.
 Commission earned by a broker for selling agricultural produce of
an agriculturist is not agricultural income.
 Salami or Nazarana paid shall not be agriculture income in the
hands of the recipient (unless it is a payment of rent in advance).
1(b) Any income derived from such land by agricultural operations
including processing of the agricultural produce, raised or received as rent
in kind, so as to render it fit for the market, or sale of such produce [Section
2 (1A)(b)]: Section 2(1A)(b) gives the following three instances of agricultural
incomes:
(1) Any income derived by agriculture from land situated in India and used
for agricultural purpose. The following will be treated as income derived
from agricultural land:
(i) standing crop or the raw produce after harvest, sold by the agriculturist
himself.
(ii) crop used by the cultivator for his own consumption;
(iii) crop used as raw material by the cultivator in his business.
(2) Any income derived by a cultivator or receiver of rent in kind of any
process ordinarily employed to render the produce raised or received by him
to make it fit to be taken to market. The produce raised from the land may
not have a market in its original form. It may become necessary to perform
a process on the produce to make it marketable or saleable. Such process
may be called 'marketing process’ or ‘agricultural process' for the sake of
convenience. The gain in the value of the produce by such marketing
process or agricultural process is also classified as income from
agriculture. If marketing process is performed on agricultural produce,
which could be sold without such process, shall not be agricultural income.
e.g. sugarcane can be generally sold as such; therefore the process of
conversion of sugarcane into gur (jiggery) shall not be a process necessary
to be applied where there is a market for sugarcane being sold as such.
[Brihan Maharashtra Sugar Syndicate Ltd. v CIT (1946) 14 ITR 611 (Bom)].
However, conversion of coconut into copra and drying the leave of tobacco
by the grower shall be treated as process ordinarily employed to make it

fit for market and hence shall be agricultural income.

(3) Any income derived from the sale by a cultivator or receiver of rent in
kind of the produce raised or received by him in respect of which no
process has been performed other than a process of the nature as referred
in (2) above. Income from sale of agricultural produce is exempt from tax
to the extent to which no process has been performed on the produce,
except the marketing process, discussed above. If any other processes have
been performed, the sale proceeds will have to be disintegrated to find out
that part of it which constitutes agricultural income, so as to exempt that
part alone from Income-tax.
1(c). Any Income attributable to a building (farm house) is treated as
agricultural income provided the following conditions are satisfied [Section
2(1A)(c)]: If all the conditions given below from (i) to (iv) are satisfied then the
income from farm building is exempt from tax.
(i) Building should be owned by owner of agricultural land and occupied
by the owner or cultivator of such land.
(ii) Building should be on or in the immediate vicinity of land situated in
India which is used for agricultural purpose.
(iii) Building should be required by the occupier (i.e. receiver of rent or
revenue or the cultivator) by reason of his connection with the agricultural
land as:
(a) dwelling house;
(b) store house;
(c) other out building.
(iv) The land should be assessed to land revenue or a local rate. However,
if it is not assessed to land revenue or local rate then such land should be
situated outside urban area.
Urban area means an area:
(a) if the land is situated within the jurisdiction of a municipality or a
Cantonment Board the population of that municipality, etc. is 10,000 or
more.
(b) if the land is situated in any other area - it is situated within notified
distance (upto maximum 8 kms.) from the limits of such municipality or
Cantonment Board.
Use of building or land for purpose other than agriculture shall not
constitute agricultural income: Explanation 2 to section 2(1A) has been
inserted to clarify that income derived from any building or land referred
to in sub-clause ( c) above arising from the use of such building or land for
any purpose (including letting for residential purpose or for the purpose of
any business or profession) other than agriculture shall not be agricultural
income.
What does agriculture include?
Agricultural would include horticulture, floriculture, arboriculture and
sylviculture. It would include the raising of grooves, plantations, raising of grass
or pastures. It would extend to cultivation of all commodities of food value like

sugarcane, coffee, mangoes, etc. Artistic and decorative value like flowers and
creepers, housing value like bamboo, timber, fuel value medicinal and health
value.
Agriculture income would, however, cover only those incomes which are derived
by human effort.
Agricultural income: Following incomes have been held to be agricultural
income:
(a) Income from toddy is agricultural income when it is received by the actual
cultivator of the trees.
(b) Where the owner himself performs slaughter tapping and then sells the
rubber, the income is agricultural income.
(c) Lease income derived by a Lessor from lease of a coconut garden, to a
lessee who pays rent and takes the coconuts from the trees during the
term of the lease and has to deliver possession of the coconut garden back
to the Lessor at the end of the term, would be treated as agricultural
income in the hands of the Lessor.
(d) Where the requisitioned lands were used by the assessee for agricultural
purposes in the accounting year and also in the earlier years, and those
lands were under cultivation at the time of their requisition by the
Government, the compensation paid for the requisitioned lands which
were used for agricultural purposes by the assessee was held to be
(e) If the grass is grown by human effort, by tilling, sowing, planting of any
particular kind of seed or cutting, or by any similar operations, basic
operations would have been performed. Consequently, the crop would be
agricultural and any income by sale of grass would be agricultural income.
(f) Income from growing flowers and creepers would be agricultural income.
(g) Interest on capital and share of profit received by a partner from a firm
which is engaged in agricultural operations is agricultural income.
(h) Lease rent received for leasing out land for grazing of cattle required for
agricultural pursuits, is agricultural income.
(i) Compensation received from an insurance company on account of
damaged caused to the crop is an agricultural income.
(j) Seeds are clearly a product of agriculture and the income derived from the
sale of seeds derived on account of cultivation by the assessee is an
agriculture income.
Non-agricultural income: Following incomes have been held to be non-
agricultural income, hence taxable:
(a) Income from sale of forests, trees, wild grass, fruit and flowers grown
spontaneously and without human effort.
(b) Income from salt produced by flooding the land with sea water and then
extracting salt there from.
(c) Income from stone quarries.
(d) Income from breeding of livestock.
(e) Income from dairy farming, butter and cheese making.

(f) Income from poultry farming.

(g) Income from fisheries.
(h) Preservation of potatoes by refrigeration as it is not a process ordinarily
employed by a cultivator.
(i) Income from brick making.
(j) Income from supplying surplus water to other agriculturists.
(k) Interest on arrears of rent in respect of agricultural land.
(l) Profit on sale of standing crops/agricultural produce purchased by the
assessee.
(m) Income derived from letting out of land/ Godowns for storing crops.
(n) Royalty income of mines.
(o) Annuity payable to vendor of agriculture land or payable to a person
giving up his claims to piece of agricultural land.
(p) Harvest Crop on purchased land.
(q) Compensation/ damages paid for loss of agricultural income due to late
payment of installments of the consideration price of rubber plantation
site.
(r) Registration fee collected from the contractor who is bidding at the auction
conducted for sale of plantation is not an agricultural income as such
registration fee had no nexus with land.
(s) Hire charges received for use of the garden for shooting films could not be
treated as agricultural income, as it has no nexus with the land, except that
it was carried out on the agricultural land.
Computation of Net Agricultural Income
Although the agricultural income is exempt from income-tax, but it is included in
non-agricultural income of an individual or HUF etc. for purpose of determining
the Income-tax on non-agricultural income. Hence, agricultural income will have
to be computed. The computation of net agricultural income is done as per Rules
given in Part IV of Schedule 1 of the relevant Finance Act. These have been
summarized as under:
(1) Rent or revenue derived from land is computed under the head ‘Income
from Other Sources’ and the provisions of sections 57 to 59 of this Act, so
far as may be, apply accordingly. Thus, any expenditure (not being in the
nature of capital expenditure or personal expenses of the assessee) laid out
or expended wholly and exclusively for the purpose of earning rent or
revenue will be allowed as deduction is computing the rent or revenue
from agricultural land. However, the provisions of section 40A (other than
the provision of sections 40A (3) and (4) relating to payment exceeding Rs.
20,000 in cash) which are applicable for income from other sources also,
shall be applicable in this case. [Rule 1]
(2) Income by way of agriculture or processing of agricultural produce, etc. as
discussed already will be computed under the head ‘profit and gains of
business or profession’ and therefore, all the provisions of sections
30,31,32,36,37,38, 40, 40A [excluding 40A (3) and (4)], 41, 43, 43A, 43B,
43C of that Chapter will be applicable. [Rule 2] It may be noted that

provisions of section 35 will not apply in the computation of such income

and hence no deduction shall be allowed in respect of expenditures on
scientific search in computing such income. Depreciation will, however, be
admissible in respect of the assets used for purpose of earning such
(3) Income derived from any building which is used as a dwelling house by the
receiver of the rent or revenue or cultivator or receiver of rent in kind
would be computed as if it was income from House Property and the
provisions of sections 23 to 27 of the Act shall, so far as may be, apply
accordingly. [Rule 3] On the other hand, agricultural house property which
is used as store house or other out building will be treated in the same
manner as house property used for the purpose of business.
Income which is partially agricultural and partially from business

(A) Income from growing and manufacturing of any product other than tea,
rubber and coffee [Rule 7]: An assessee may have composite business
income which is partially agricultural and partially non-agricultural, for
example, where XYZ Ltd. grows potatoes and further process its produce to
sell them as wafers. In this case the company has composite income i.e. from
agriculture and from business. The composite income has to be disintegrated
and for computing business income the market value of any agricultural
produce raised by the assessee or received by him as rent in kind and utilized
as raw material in his business is deducted. No further deduction is
permissible in respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent in kind. For computing agricultural income the
market value of agricultural produce will be total agricultural receipt on
account of potatoes. From such agricultural receipts, expenses such as
cultivation expenses etc. incurred in connection with such receipt will be
deducted and balance will be agricultural income, which will be exempt.
For example, in the above case, if the market value of the potatoes
grown by the company, which have been used for the purpose of making its own
wafers, is Rs. 5 lakhs and the cost of cultivation of such potatoes is Rs. 4 lakhs.
From the business income of wafers Rs. 5 lakhs i. e. the market value, shall be
deducted and no other expense shall be allowed for such potatoes. On the other
hand, the agricultural income shall be Rs. 1 lakh (5 lakhs-4 lakhs). This
agricultural income of Rs. 1 lakh shall be exempt.
(B) Income from growing and manufacturing of rubber (Rule 7A):
(1) Income derived from the sale of centrifuged latex or cenex or latex based
crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe,
re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified
block rubbers manufactured or processed from field latex or coagulum obtained
from rubber plants grown by the seller in India shall be computed as if it were
income derived from business, and 35% of such income shall be deemed to be
income liable to tax.
(2) In computing such income, an allowance shall be made in respect of the cost

of planting rubber plants in replacement of plants that have died or become

permanently useless in an area already planted, if such area has not previously
been abandoned, and for the purpose of determining such cost, no deduction
shall be made in respect of the amount of any subsidy which, under the
provisions of section 10(31), is not includible in the total income.
(C) Income from growing and manufacturing of coffee (Rule 7B):
(1) (a) Income derived from the sale of coffee grown and cured by the seller in
India, shall be computed as if it were income derived from business, and 25% of
such income shall be deemed to be income liable to tax.
(b) Income derived from the sale of coffee grown, cured, roasted and grounded
by the seller in India, with or without mixing chicory or other flavorings
ingredients shall be computed as if it were income derived from business, and
40% of such income shall be deemed to be income liable to tax.
(2) In computing such income, an allowance shall be made in respect of the cost
of planting coffee plants in replacement of plants that have died or become
permanently useless in an area already planted, if such area has not previously
been abandoned, and for the purpose of determining such cost, no deduction
shall be made in respect of the amount of any subsidy which, under the
provisions of section 10(31), is not includible in the total income.
(D) Income from growing and manufacturing of tea (Rule 8):
Where the assessee has a business of growing tea leaves and then processing it
(or manufacturing the same), the procedure adopted to disintegrate is given
under Rule 8 which is as under:
Step 1 Compute the income of growing as well as manufacturing tea under the
head 'profits and gains of business or profession' after claiming the deductions
available under that head. In computing such income an allowance shall be made
in respect of the cost of planting bushes in replacement of bushes that have died
or become permanently useless in an area already planted, if such area has not
previously been abandoned and for the purpose of determining such cost, no
deduction shall be made in respect of the amount of any subsidy which under the
provisions of sections 10(30), is not includible in the total income.
Step 2 60% of the income computed in Step 1 will be treated as net agricultural
income and 40% of such income, so arrived at, is treated as business income.
Tax on non-agricultural income (if the assessee earns agricultural income

also): As already discussed, there is no tax on agricultural income but if an
assessee has non-agricultural income as well as agricultural income, such
agricultural income is included in his Total Income for the purpose of
computation of Income-tax on non-agricultural income. This is also known as
partial integration of agricultural income with non-agricultural income or
indirect way of taxing agricultural income. Such partial integration is done only
in the case of :
(i) Individual;
(ii) HUF
(iii) AOP/BOI;

(iv) Artificial Juridicial Person

The agricultural income is not to be added in Non-agricultural Income for
computing tax on Non-Agricultural income in the case of :
(i) Firm;
(ii) Company;
(iii) local authority;
(iv) Co-operative society.
The partial integration is done to compute the tax on non-agricultural
income only when the following two conditions are satisfied:
(i) non-agricultural income of the assessee exceeds the maximum exemption
limit (which for assessment year 2010-11 is Rs. 2,40,000 in the case of an
resident individuals at least 65 years old; Rs.1,90,000 in case of resident women
less than 65 years old; and Rs.1,60,000 in case of other individuals and HUF’s);
and
(ii) the Net Agricultural Income exceeds Rs. 5,000.
In other words, if the non-agricultural income is less than the
maximum limit or Net Agricultural Income is Rs. 5,000 or less, no partial
integration is required.
Computation of Tax where there is agricultural income also: The following
steps should be followed to calculate the tax:
Step 1: Add agricultural income and non-agricultural income and calculate tax on
the aggregate as if such aggregate income is the Total Income.
Step 2: Add agricultural income to the maximum exemption limit available in the
case of the assessee and compute tax on such amount as if it is the Total Income.
Step 3: Deduct the amount of Income-tax as computed under Step 2 from the tax
computed under Step 1.
The amount so arrived at shall be total Income-tax payable by the assessee.
Step 4: Add education cess @ 2% and Secondary and higher education cess @1%
on tax.
******
Chapter-12
ASSESSMENT OF COMPANIES

A company has been defined as a juristic person having an

independent and separate legal entity from its shareholders. Income of the
company is computed and assessed separately in the hands of the company. The
company is liable to pay tax at a flat rate like a firm. In addition to such tax, if the
company is a domestic company, it shall be liable to pay tax under section 115-O
on the amount distributed as profits to its shareholders. However, the income of
the company which is distributed to its shareholders as dividends is exempt
under section 10(34) in the hands of the shareholders, unless it is in the nature of
dividends other than the dividends referred to in section 115-O. Such
distribution of income is not treated as an expenditure in the hands of company,
the income so distributed is an appropriation out of the profits of the company.
Definitions
1. Company: As per section 2(17), company means:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside
India, or
(iii) any institution, association or body which was assessed as a company for
any assessment year under the Income-tax Act, 1922 or was assessed
under this Act as a company for any assessment year commencing on or
before 1-4-1970, or
(iv) Any institution, association or body, whether incorporated or not and
whether Indian or Non-Indian, which is declared by a general or special
order of CBDT to be a company.
2. A Company in which the public are substantially interested: Section 2 (18)
of the Income-tax Act, has defined " a company in which the public are
substantially interested". It includes:
(i) A company owned by Government or Reserve Bank of India.
(ii) A company having Govt. participation i.e. A company in which not less than
40% of the shares are held by Government or the RBI or a corporation
owned by the RBI.
(iii) Companies registered under section 25 of the Indian Companies Act, 1956:
Companies registered under section 25 of the Companies Act, 1956 are
companies which are promoted with special object such as to promote
commerce, art, science, charity or religion or any other useful object and
these companies do not have profit motive. However, if at any time these
companies declare dividend they would loose the status of a company in
which the public are substantially interested.
(iv) A company declared by the CBDT: It is a company without share capital and
which having regard to its object, nature and composition of its
membership or other relevant consideration is declared by the Board to be
a company in which public are substantially interested.
(v) Mutual benefit finance company, where principal business of the company
is acceptance of deposits from its members and which has been declared
by the Central Government to be a Nidhi or a Mutual benefit Society.
(vi) A company having co-operative society participation: It is a company in

which at least 50% or more equity shares have been held by one or more
co-operative societies.
(vii) A public limited company: A company is deemed to be a public limited
company if it is not a private company as defined by the Companies Act,
1956 and is fulfilling either of the following two conditions:
(a) Its equity shares were listed on a recognized stock exchange, as
on the last day of the relevant previous year; or
(b) Its equity shares carrying at least 50-% of the voting power (in the
case of an industrial company the limit is 40%) were beneficially held
throughout the relevant previous year by Government, a statutory
corporation, a company in which the public is substantially interested or a
wholly owned subsidiary of such a company.
3. Widely held company: It is a company in which the public are
substantially interested.
4. Closely held company: It is a company in which the public are not
substantially interested.
Burden of proof. The onus is on the revenue to establish that the
public are not substantially interested in a company. [Jayantilal Amritlal
Ltd. v CIT (1965) 55 ITR (SC)]. In other words, the onus is on the
department to establish that the company is a closely-held company. On
the other hand, the Bombay High Court had earlier held that the burden of
proving that a company is one in which the public are substantially
interested is on the company. [P.M. Hutheesingh & Sons Ltd. v CIT (1946)
14 ITR 653 (Bom)].
5. Indian company [Section 2(26))]: Indian Company' means a company
formed and registered under the Companies Act, 1956 and includes-
(i) a company formed and registered under any law relating to companies
formerly in force in any part of India (other than the State of Jammu and
Kashmir and the Union Territories);
(ia) a corporation established by or under a Central, State or Provincial ACt;
(ib) any institution, association or body which is declared by the Board to be a
company;
(ii) In the case of the state of Jammu and Kashmir, a company formed and
registered under any law for the time being in force in that State;
(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa,
Daman and Diu, and Pondicherry, a company formed and registered under
any law for the time being in force in that Union Territory.
Provided that the registered or, as the case may be, principal office of the
company, corporation, institution, association or body, in all cases is in India.
6. Domestic company [Section 2(22A)]: A domestic company means an
Indian company or any other company which in respect of its income, liable to
tax under the Income-tax Act, has made the prescribed arrangements for the
declaration and payment within India, of the dividends (including dividends on
preference shares) payable out of such income.
7. Foreign company [Section 2(23A)]:Foreign company means a company

which is not a domestic company.

8. Investment company: Investment company means a company whose
gross total income consists mainly of income which is chargeable under the
heads Income from house property, Capital gains and Income from other sources.
Residence of a Company [Section 6 (3) ]
A company is said to be a resident in India during the relevant
previous year if: (a) it is an Indian company, or (b) if it is not an Indian company
then, the control and the management of its affairs is situated wholly in India.
The company is said to be non-resident in India if it is not an Indian
company and some part of the control and management of its affairs is situated
outside India.
Computation of Total Income
The total income of a company is also computed in the manner in
which income of any other assessee is computed. The first and the foremost step
in this direction is to ascertain Gross Total Income. Income computed under four
heads (salary head is not applicable), is aggregated. While aggregating the
income, section 60 and 61 shall be applicable. Further, effect to set off of losses
and adjustment for brought forward losses will also be done. From the gross total
income so computed, the following deductions of Chapter VIA should be allowed:
1.80G Donations to certain funds/ charitable institutions, etc.
2.80GGA Certain donations for scientific research or rural development.
3.80GGB Contributions given by companies to political parties.
4.80-IA profits and gains of new industrial undertaking or enterprises
engaged in infrastructural development, etc.
5.80-IB Profits gains from certain industrial undertakings other than
infrastructure development undertakings.
6.80-IC Deduction in respect of certain undertaking or enterprises in certain
special category States (W.e.f. assessment year 2004-05).
7.80JJA Deduction in respect of profits and gains from business of collecting
and processing of bio-degradable waste.
8.80JJAA Deduction in respect of employment of new workmen.
Carry forward and set off of losses in case of certain companies
[Section 79]
In the case of closely held companies, no loss incurred in any year
prior to the previous year shall be carried forward and set off against the income
of the previous year unless on the last day of the previous year in which loss is
set off and on the last day of the previous year in which the loss was incurred, the
shares of the company carrying not less than 51% of the voting power were
beneficially held by the same persons.
Where a change in voting power of more than 49% of the
shareholding of a closely held company has taken place between two relevant
dates (viz., the last day of previous year in which set off is claimed and the last
date of the previous year in which the loss was incurred), the assessee will not be
entitled to claim set off of such losses.
This provision shall not apply to a change in the vot8ing power consequent upon:

(a) the death of a shareholder, or

(b) on account of transfer of shares by way of gifts to any relative of the
shareholder making such gift.
Further, section 79 shall not apply to any change in the shareholding
of an Indian company which is subsidiary of a foreign company arising as a result
of amalgamation or demerger of a foreign company subject to the condition that
51 per cent of the shareholders of the amalgamating or the demerged foreign
company continue to remain the shareholders of amalgamated resulting foreign
company.
Assessment of Companies
This principal officer of the company is required to file the return of
total income of the company on or before 31st October of the assessment year. A
company is assessed like any other assessee. However, its liability differs in two
respects:
1. No exemption limit: A company does not enjoy any exemption limit.
2. Flat Rate of Tax: A company pays income -tax at a flat rate instead of slab
rate.
Rates of income-tax for the assessment year 2009-10 are as under:
1. Short-term capital gain on equity shares in a company or units of an equity
oriented fund where the transaction is chargeable to securities transaction
tax. 10%
2. Tax on long-term capital gains 20%
(where the long-term capital gain is covered by section 115AB, 115AC or
115 AD, it is taxable at 10%)
3. Tax on winnings from lotteries, cross word puzzles, races including horse
races, etc. 30%
4. Tax or any other income
(a) Domestic company 30%
(b) Foreign company
(i) for all income other than given under (ii) below: 40%
(ii) Royalty received from Government or an Indian concern in
pursuance of an agreement made by it with the Indian concern after March
31, 1961 but before April 1,1976 or fees for rendering technical services in
pursuance of an agreement made by it after February 29, 1964 but before
Ist April, 1976 and where such agreement has in either case been
approved by the Central Government
50%
The amount of income-tax computed as above shall be increased by a
surcharge of 10% in case of domestic companies and 2.5% in case of
foreign companies, if net income exceeds Rs 1 crore.
Education cess: Education cess @ 2% and Secondary and higher education cess
@1% shall be levied on the total tax (including surcharge) payable by the
assessee.
Provisions of MAT for payment of tax by certain companies [Section 115JB]
Tax payable (before adding surcharge and cess) for any assessment year

cannot be less than 10% of book profit: Where in the case of a

company, the income -tax payable on the total income as computed under
the Income-tax Act, is less than 10% of its book profit shall be deemed to
be the total income of the assessee and the tax payable by the assessee on
such total income (book profit) shall be the amount of the income-tax at
the rate of 10%.
Allowing tax credit in respect of tax paid on deemed income under MAT
provisions against tax liability in subsequent years [sec 115JAA]:
With effect from assessment year 2006-07, where any tax is paid under section
115JB(1) by a company for any assessment year beginning on or after
1.04.2006, the credit in respect of taxes so paid for such assessment year
shall be allowed on the difference of the tax paid under section 115 JB and
the amount of tax payable by the company on its total income as per other
provisions of the Act.
The amount of tax credit shall be allowed to be carried forward and
set off in a year when tax becomes payable on the total income computed
under the regular provisions. But such tax credit can be carried forward
only upto 5 assessment years. Also no credit will be allowed for MAT paid
in any assessment year before 2006-07.
Profit and loss Account of the company to be prepared as per provisions of
the Companies Act[Section 115JB (2)]
Every company shall for the purpose of this section, prepare
its profit and loss account for the relevant previous year in accordance
with the provisions of Parts II and III of Schedule VI to the Companies Act,
1956. In other words, if the company does not prepare its profit and loss
account according to Part II + III of Schedule VI of the Companies Act, the
Assessing Officer can recalculate the net profit as per profit and loss
account prepared in accordance with the said Schedule.
Profits and loss account prepared for section 115JB(2) and annual
accounts including profit and loss account prepared and placed before
AGM should have same accounting policies, standards, etc.[Provisos to
section 115JB(2)]: While preparing the annual accounts including profit and
loss account:
(i) the accounting policies of the company
(ii) the accounting standards followed by the company for preparing such
accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation by the
company shall be the same as have been adopted for the purpose of
preparing such accounts including profit and loss account as laid before
the company at its annual general meeting in accordance with on the
provisions of section 210 of the Companies Act, 1956[Proviso 1].
Further, where the company has adopted or adopts the financial
year under the Companies Act, 1956 which is different from the previous
year under the Income-tax Act, the above three (i.e. accounting policies,
accounting standards and method of calculating depreciation) shall

correspond to the accounting policies, accounting standards and the

method and rates for calculating the depreciation which have been
adopted for preparing such accounts including profit and loss account for
such financial year or part of such financial year falling within the relevant
previous year[Proviso 2]
When an Assessing Officer has power to alter the net profit: In
the following cases, the Assessing Officer shall have power to rework or
rewirte the profit and loss account:
(1) Where the profit and loss account submitted is not as per Part II
and III of the Schedule VI of the Companies Act.
(2) Where the accounting policies or accounting standards or rate of
depreciation adopted are different from those adopted for the profit and
loss prepared for the annual genral meeting.
Assessing Officer has no power to scrutinize profit and loss
account: Where the profit and loss account has been prepared in accordance
with Part II and III of Schedule VI to the Companies Act and which has been
scrutinized and certified by the statutory auditors and relevant authorities, the
Assessing Officer has no power to scrutinize net profit in profit and loss account
except to the extent provided in Explanation to 115J. [Apollo Tyres Ltd. v CIT
(2002) 255 ITR 273 (SC)].
How to compute book-profits [Explanation to 115JB(1) and (2)]
Step 1: The net profit as shown in the profit and loss account (prepared as
per Part II and III of Schedule VI) for the relevant previous year, shall be
increased by the following, if debited to the Profit and Loss Account:
(a) the amount of income-tax paid or payable, and the provision
therefore; or
(b) the amounts carried to any reserves by whatever name called
(other than a reserve specified under section 33AC, inserted as per
the Finance Act, 2002, w.e.f. assessment year 2003-04); or
(c) the amount or amounts set aside to provisions made for meeting
liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary
companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to
which section 10, 10A, 10B, 11 or 12 applies (i.e. incomes which are
exempt from tax).
W.e.f. assessment year 2005-06 expenses of infrastructure capital
fund or company referred to in section 10(23G) shall not be added
back.
Step 2: The profit as per the Profit and Loss Account shall be reduced by
the following:
(i) the amount withdrawn from any reserves or provisions, if any,
such amount is credited to the profit and loss account.
A clarificatory amendment has been made by the Finance Act, 2002

w.r.e.f assessment year 2001-2002 to section 115JB to provide that the

amount withdrawn from the reserve or provision, created not out of profits
before 1-4-1997, if credited to the profit and loss Account shall not be
deducted while computing book profit. In other words, the amount
withdrawn from any reserve, credited before 1-4-1997, shall not be
reduced from the net profit unless the same was debited to the profit and
loss account at the time when such reserve was created. Similarly, the
amount withdrawn from the reserve created on or after 1-4-1997 and
credited to the profit and loss account shall not be deducted while
computing book profit unless the book profit in the year of creation of such
reserve was increased by such reserve at that time.
Example: R Ltd. transferred a sum of Rs. 40 lakhs to Reserve for bad and
doubtful debt account in the financial year 2001-2002. It withdrew a sum
of Rs. 15 lakhs out of the reserve during the financial year 2004-2005 by
debiting the reserve account and crediting the profit and loss account of
that year. In this case, Rs. 40 lakhs must have been added back to net profit
for computing the book profits of financial year ending 31-3-2002. Hence,
Rs. 15 lakhs credited back to profit and loss account of year ended 31-3-
2005 shall be reduced to calculate the book profits of that year.
(ii) the amount of income to which any of the provision section 10, 10A, 10B,
11 or 12 applies (i.e. incomes which are exempt from tax), if any such
amount is credited to the profit and loss account; or
W.e.f. assessment year 2005-06 exempted income of infrastructure
capital fund or company referred to in section 10 (23G) shall not be
deducted.
(iii) the amount of loss brought forward or unabsorbed depreciation,
whichever is less as per books of account. The loss shall, however, not
include depreciation. Further the provision of this clause shall not apply if
the amount of brought forward loss or unabsorbed depreciation is Nil; or
(iv) the amount of profits of sick industrial company for the assessment year
commencing from the assessment year relevant to the previous year in
which the said company has become a sick Industrial company under sub-
section (1) of section 17 of Sick Industrial.Companies (Special Provisions)
Act, 1985 and ending with the assessment year during which the entire net
worth of such company becomes equal to or exceeds the accumulated
losses.
(v) the amount of profits eligible for deduction under section 80HHC (for
direct exporter and /or supporting manufacturer), subject to the
conditions specified in that section;
(vi) the amount of profits eligible for deduction under section 80HHE (for
direct exporter and /or supporting manufacturer), subject to the
conditions specified in that section;,
(vii) the amount of profits eligible for deduction under section 80HHF, subject
to the conditions specified in that section;
The amount computed after increasing or decreasing the above in Step 1 and

Step2, respectively, is known as Book-profit.

How much brought forward loss/unabsorbed depreciation are deductible
from book profits: As per clause (iii) above, the amount of loss brought forward
of unabsorbed depreciation as per books of account whichever is less is to be
deducted from the book profits. It has been however clarified that loss however
shall not include depreciation In this case brought forward loss and unabsorbed
depreciation as per income-tax shall have no relevance.
It has been clarified that where the value of the amount of either
loss brought forward or unabsorbed depreciation is 'nil', no amount on account
of such loss brought forward or unabsorbed depreciation would be reduced from
the book profit. This amendment will be effective from assessment year 1997-98
in case of section 115JA and from assessment year 2001-2002 in case of section
115JB.
Furnishing of Report of an Accountant [Section 115 JB (4) and Rule 40B]
Every company to which this section applies, shall furnish a report
in Form No. 29B from a chartered accountant certifying that the book profit has
been computed in accordance with the provisions of this section along with the
return of income filed under section 139(1) or along with the return of income
furnished in response to a notice under section 142(1)(i).
It may, however be noted the company shall have to file such report
even if it furnishes the return of Income under section 139 (4) instead of section
139(1) or in response to a notice under section 142 (1) (i).
Unabsorbed depreciation or losses which can be carried forward [Section
115JB (3)]
Although, the assessee is liable to pay tax @ 10% (plus surcharge
and cess as applicable) of the book profits if its total income computed as per
Income-tax Act is less but it is entitled to determine unabsorbed depreciation u/s
32(2), business loss u/s 72(1), speculation loss u/s 73 and capital loss u/s 74 and
loss u/s 74A and shall be allowed to carry forward such unabsorbed
depreciation or losses to the subsequent year (s) for claiming set off as per the
normal provisions of Income-tax Act.
Are the provisions of section 115JB applicable to foreign companies?
In the connection of old section 115J (the provisions of section
115JB are similar in this case) the Authority for Advance Rulings held that such
provisions are applicable to foreign companies also and the foreign companies
shall calculate its Indian profits separately for the purpose of minimum alternate
tax
Other provision of the Act shall continue to apply to such companies
[Section 115JB(5)]
Save as otherwise provided in section 115JB, all other provisions of
the Income-tax Act shall apply to such companies. Hence, all other provisions
relating to Advance tax, interest under sections 234A, 234B and 234C penalty,
etc. shall apply to such companies also.
*****

Chapter-13
BUSINESS REORGANISATION
The business and economic environment of the country has thrown up the
need for rationalization of laws relating to business reorganization for
restructuring of production system and better utilization of resources which
have become necessary with a view to enable the Indian industry to rearrange
itself to become globally competitive. It was in this back ground that tax
concessions to conversion of proprietary concern/firms into company were

provided for in The Finance (No. 2) Act, 1998.

With the same end in view, the Finance Act, 1999 introduced the following
new provisions which relate to:
(a) demerger of a company;
(b) sale or transfer of business as a going concern through slump sale.
In addition, the existing provisions of amalgamation have also been rationalized.
The Income-tax Act now provides for tax concessions in the following cases of
business reorganization:
(1) Amalgamation/merger of companies;
(2) Conversion of proprietary concern/firm into a company;
(3) Demerger of a company;
(4) Slump sale.
33.1 Some important terms as used in financial management
(1) Merger: Merger is a combination of two or more companies into one
company. It may involve either absorption or consolidation. A merger, in which
one of the companies loses its identity and assets and liabilities of this company
are taken over by the other (acquiring) company, is referred to as absorption. A
merger, in which all the participating companies go out of existence to form a
new company, is referred to as Amalgamation.
Examples for absorption variety includes the merger of Tata Oil Mills
Company (TOMCO) with Hindustan Lever Limited (HLL), Merger of Reliance
Petrochemicals with Reliance Industries and merger of Renusagar Power Supply
with Hindalco Industries.
Examples for the amalgamation consolidation variety include the merger
of Tetrapak and Alfa Laval to form Tetra Level; the merger of the two Tata Group
of companies-Forbes Campbell with Gokak Patel Volkart to form a new company
Forbes Gokak; the merger of the three S.K. Birla group of companies- Oriental
Carpets, Digvijay Woolen Mills and Universal Electric to form VXL India Limited;
and the merger of the two advertising agencies owned by Mudra Communication
Interact Communication and Vision Advertising to form a new company Interact
Vision.
(2) Acquisition/takeover: Acquisition/ Takeover involve the transfer of
controlling interest in a company from one management group to another.
Typically it involves the bidding company making a tender offer directly to the
shareholders of the target company. The tender offer is an offer to purchase the
share of the target company at a fixed price per share from shareholders who
"tender" their shares. To induce the shareholder of the target to sell their shares,
the tender price is usually set significantly above the current market price. Use of
tender offer allows the acquiring company to bypass the management of the
company it wishes to acquire. The term 'takeover' is also used to refer to this
process.
Examples include acquisition of controlling interest: (a) in Chloride India
by the S.K. Birla Group; (b) in Harrison Malayalam Plantation by the R.P.Goenka
groups; (c) in Rallis India by Tata Tea; and (d) in Consolidated Coffee by Tata Tea.
Mergers and acquisitions distinguished: In merger transactions, the

consideration is paid for and received in shares and both the merging partners
receive money in future periods of time in the form of future dividends on yields.
No money transaction is usually implied at the time of entering into a merger
agreement. Whether share capital is pooled or assets are pooled, so long as a
share for share exchange takes place between the contracting parties, the
transaction is a merger.
In an acquisition, the consideration is in the form of cash. The
person or the corporation intending to control another corporation pays cash for
the number for shares that give him the control. Thus the seller of the share
receives money in the current period of the transaction and the buyer of the
share also pays in 'today's values'.
(3) Demerger: The term "demerger" signifies spinnings of or hiving off the
existing divisions of the company into a separate company. Thus, demerger is a
split or a division of the company. The division hived off could be transferred to
the new company or it can be sold to an existing company.
The demerger may take place due to various reasons like internal
restructuring or family settlements. It may also be undertaken as a tool of tax-
planning.
(4) Slump sale: Slump sale refers to the sale of the undertaking as a whole
including all the assets and liabilities as a going concern. In this case the
consideration is not fixed for each and every asset separately but a lump sum
consideration is determined for the undertaking/division as a whole.
Legal aspects of amalgamation/merger as per Companies Act
The term amalgamation has not been defined under the Companies
Act but as per section 394 of the Companies Act and various judicial decisions,
amalgamation includes absorption and the meaning of term amalgamation and
absorption is same as described above. The amalgamation under the company
law may be by order of court or by the Central Government if it is in public
interest.
The legal procedure to be followed for the amalgamation of the
companies is as follows:
Procedure:
1. Provision in the object clause: There must be a provision in the
Memorandum of Association of both the Companies to amalgamate with any
other company.
2. Obtaining Government Approval: Under sections 391 and 394 of the
Companies Act, 1956, the Central Government's approval of the merger proposal
is necessary for filing petition before the High Court for the approval of the
merger.
RBI's approval is also necessary under section 29 of the Foreign
Exchange Regulation Act, 1973 for transfer of share involving NRI's or foreign
nationals.
3. Intimation to Stock Exchange: The information on the proposal of the
merger should be given to the Stock Exchange in whose jurisdiction the listed
companies proposing to merger are located. All notices and other resolutions in

the connection are to be sent to the Stock Exchange for their record.
4. High Court's Approval: Under section 391 of the Companies Act, 1956 and
Companies (court) Rules, 1959, each company has to make separate applications
in High Court seeking summons to convene the meeting of the members of the
two companies. Separate meeting of equity and preference shareholders are
required to be convened. Under section 394 of the Companies Act, the court may
sanction a proposed amalgamation. However, the court would do so after hearing
all the parties concerned, e.g., shareholders, creditors, tax authorities, etc. It
would also see that the scheme of amalgamation is reasonable, workable, fair
keeping in view the general conditions, background and object of amalgamation.
Section 396 also gives power to the Central Government to provide
for amalgamation of two or more companies if it is satisfied that it is essential in
public interest.
Amalgamation Under Income-tax Act

Meaning of Amalgamation [Section 2 (1B)]
The Act has defined amalgamation under section 2 (1B). The
purpose of giving such definition is that the benefits/ concessions under income-
tax shall be available to both amalgamating and amalgamated companies only
when all the conditions, mentioned in the said section, are satisfied. Further, if
the amalgamated company wishes to set off the losses and unabsorbed
depreciation of the amalgamating company with its profits, the conditions
mentioned in section 72A of the Income-tax Act shall also have to be fulfilled.
According to section 2(1B) 'amalgamation' in relation to companies
means the merger of one or more companies with another company of the
merger of two or more companies to form one company (the company or
companies which so merge being referred to as the amalgamating company or
companies and the company with which they merge or which is formed as a
result of the merger, as the amalgamated company) in such a manner that-
(i) All the property of the amalgamating company or companies
immediately before the amalgamation becomes the property of the
amalgamated company by virtue of amalgamation.
(ii) All the liabilities of the amalgamating company or companies
immediately before the amalgamation become the liabilities of the
amalgamated company by virtue of amalgamation.
(iii) Shareholders holding not less than ¾th in value of the shares in
amalgamating company or companies (other than shares held therein
immediately before the amalgamation or by a nominee for the amalgamated
company or its subsidiary) become shareholders of the amalgamated company
by virtue of the amalgamation, otherwise than as a result of the acquisition of the
property of one company by another company pursuant to the purchase of such
property by the other company or as a result of distribution of such property to
the other company after the winding up of first mentioned company.
Therefore, due to amalgamation the following situations may emerge:-
(i) R Ltd. merges with G Ltd. Thus R Ltd. goes out of existence.

(ii) R Ltd. and G Ltd. both merge and form a new company say T Ltd. Thus
both R Ltd. and G Ltd. go out of existence, and a new company is formed.
In the above case, the companies which go out of existence are
known as amalgamating companies and the 'merged' company or the newly
formed company will be known as amalgamated company.
Thus, in order that an amalgamation may fall under the above
definition, the following conditions must necessarily be fulfilled:
(i) All the property of the amalgamating company should be vested in the
amalgamated company.
(ii) All the liabilities of the amalgamating company should be vested in the
amalgamated company.
(iii) Shareholders holding not less than ¾th in value of the share in the
amalgamating company should become the shareholders of the
amalgamated company. However, shares already held by or by a nominee
for the amalgamated company or its subsidiary immediately before the
amalgamation shall be excluded.
Example: Where "A" merges with another company "B" in a scheme of
amalgamation, and immediately before the amalgamation, company "B" held 20
per cent of the shares in company "A", the above-mentioned condition, will be
satisfied if shareholders holding not less than ¾th in value of the remaining 80
per cent of share in company "A" i.e. 60 per cent thereof ( ¾ th of 80), become
shareholders of company "B" by virtue of the amalgamation.
Merger which will not be called an amalgamation: The last paragraph of this
definition excepts the following two cases where the element of merger exists,
but yet there is no ' amalgamation' within the meaning of this clause:
(a) where the property of the company say 'A' which merges is sold to the
other company say 'B' and the amalgamation comes about by virtue of a
transaction of sale;
(b) where the company 'A' which merges is wound-up in liquidation and the
liquidator distributes the property of company 'A' to the company 'B' and the
amalgamated company 'B' receives the property of company 'A' (the
amalgamating company) from the liquidator as on liquidation.
Tax concessions/incentives in case of amalgamation
If any amalgamation takes place within the meaning of section
2(1B) of the income-tax, the following tax concession shall be available:
(1) Tax concession to amalgamating company.
(2) Tax concession to shareholders of the amalgamating company.
(3) Tax concession to amalgamated company.
a) Tax concession to amalgamating company
(i) Capital Gains tax not attracted: According to section 47(vi), where there is
a transfer of any capital asset in the scheme of amalgamation, by an
amalgamating company to the amalgamated company, such transfer will not be
regarded as a transfer for the purpose of capital gain provided the amalgamated
company, to whom such assets have been transferred, is an Indian company.
(ii) Tax concession to a foreign amalgamating company [Section 47 (via)]:

Where a foreign company holds any shares in an Indian company and transfers
the same, in the scheme of amalgamation, to another foreign company, such
transaction will not be regarded as transfer for the purpose of capital gain under
section 45 of the Income-tax Act if the following conditions are satisfied:
1. Atleast 25% of the shareholders of an amalgamating Foreign company
should continue to remain shareholders of amalgamated foreign company, and
2. Such transfer does not attract tax on capital gains in the country, in
which the amalgamating company is incorporated.
b) Tax concessions to the shareholders of a amalgamating company
[Section 47(vii)]: Where a shareholder of an amalgamating company transfers
his shares, in a scheme of amalgamation, such transaction will not be regarded as
a transfer for capital gain purposes, if following conditions are satisfied:
(i) the transfer of shares is made in consideration of the allotment to him of
any share or shares in the amalgamated company, and
(ii) the amalgamated company is an Indian company.
c) Tax concessions to the amalgamated company: The amalgamated

company shall be eligible for tax concessions only if the following two
conditions are satisfied:
(i) The amalgamation satisfies all the three conditions laid down in section
2(1B); and
(ii) The amalgamated company is an Indian company.
(1) Expenditure on Scientific research [Section 35 (5)]: Where an
amalgamating company transfers any asset represented by capital
expenditure on the scientific research to the amalgamated Indian company
in a scheme of amalgamation, the provisions of section35 which were applicable
to the amalgamating company shall become applicable to the amalgamated
company consequently:-
(i) Unabsorbed capital 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.
(ii) if such asset ceases to be used in a previous year for scientific research
related to the business of amalgamated company and is sold by the
amalgamated company without having being used for other purposes, the
sale price, to the extent of the cost of the asset shall be treated as business
income of the amalgamated company. The excess of the sale price over the
cost of the asset shall be subject to the provisions of the capital gains.
(2) Expenditure for obtaining license to operate telecommunication
services [Section 35ABB(6)]: Where in a scheme of amalgamation, company
sells or otherwise transfer its license to the amalgamated company (being an
Indian company), the provisions of section 35ABB whichwe4re applicable to the
amalgamating company shall become applicable in the same manner to the
amalgamated company, consequently:
(i) The expenditure on acquisition of licence, not yet written off, shall be
allowed to the amalgamated company in the same number of balance

installments.
(ii) 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.
(3) Treatment of preliminary expenses [Section 35D(5)]: Where an
amalgamating company merges in a scheme of amalgamation with the
amalgamated company, the amount of preliminary expenses of the amalgamating
company, which are not yet written off, shall be allowed as deduction to the
amalgamated company in the same manner as would have been allowed to the
(4) Amortisation of expenditure in case of amalgamation {Section 35DD] :
(1) Where an assessee, being an Indian company, incurs any expenditure, on or
after the 1st day of April, 1999, wholly and exclusively for the purposes of
amalgamation or demerger of an undertaking, 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 or demerger takes place.
(2) No deduction shall be allowed in respect of the expenditure mentioned in
sub-section (1) under any other provision of this Act.
(5) Treatment of expenditure on prospecting etc. of certain minerals
[Section 35E(7A: Where an amalgamating company merges in a scheme of
amalgamation with the amalgamated company, the amount of expenditure on
prospecting, etc. of certain minerals of the amalgamating company, which are 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.
(6) Treatment of capital expenditure on family planning [Section
36(1)(ix)]: Where the asset representing the capital expenditure on family
planning is transferred by the amalgamating company to the Indian amalgamated
company, in a scheme of amalgamation, the provisions of section 36(1)(ix) to the
amalgamating company shall become applicable, in the same manner, to the
amalgamated company consequently:
(i) The capital expenditure on family planning not yet written off shall be
allowable to the amalgamated company in the same number of balance
instalments.
(ii) Where such assets are sold by amalgamated company, the treatment of
the deficiency/surplus will be same as would have been in the case of
(7) Treatment of bad debts [Section 36(1) (vii)]: Where due to
amalgamation, the debts of amalgamating company have been taken over by the
amalgamated company and subsequently such debt or part of the debt becomes
bad, such bad debt will be allowed as a deduction to the amalgamated company.
[CIT v T. Veerabhadra Rao, K.Koteswara Rao & Co. (1985) 155 ITR 152 (SC)].
(8) Deduction available under section 80-1A or 80-1B or 80-IC: Where an
undertaking which is entitled to deduction under section 80-IA/80-IB/80-IC is
transferred in the scheme of amalgamation before the expiry of the period of

deduction under section 80-IA or 80-IB or 80-IC, then-

(i) no deduction under section 80-IA/80-IB/80-IC shall be available to the
amalgamating company for the previous year in which amalgamation takes
place; and
(ii) the provisions of section 80-IA/80-IB/80-IC shall apply to the
amalgamated company in such manner in which they would have applied to the
(9) Carry forward and set off of business losses and unabsorbed
depreciation of the amalgamating company: In addition to the above
benefit/concessions, the amalgamated company shall be allowed to carry
forward and set off the business losses and unabsorbed depreciation of the
amalgamating company if all the conditions mentioned in section 72A are
satisfied. For details of the conditions refer to Chapter on set off and carry
forward of losses.
Tax planning in case of amalgamation
1. The benefit of tax concession is allowed to the amalgamating and
amalgamated company only when the amalgamation satisfies the conditions
provided under section 2(1B) of the Income-tax Act. One of the conditions laid
down is that all the assets and liabilities of the amalgamating company, as on the
date of amalgamation should be taken over by the amalgamated company.
Therefore if some assets or liabilities of the amalgamated company are not
proposed to be taken over by the amalgamated company the same should be
disposed off or discharged by the amalgamating company before the
amalgamation takes effect.
2. Similarly there is a condition that at least 75% of the shareholders of the
amalgamating company should become shareholders of the amalgamating
company. If more than 25% of the shareholders of the amalgamated company are
not willing to become shareholders of the amalgamated company, then so much
shares of such shareholders may be purchased by the other shareholders or by
the amalgamated company, before the amalgamation, so that at the time of
amalgamation the condition of 75% of the shareholders becoming shareholders
of the amalgamated company is satisfied.
3. As per section 72A the amalgamated company can carry forward the
business loss and unabsorbed depreciation of the amalgamating company only
when certain conditions, are satisfied.
Where it is not possible to satisfy such conditions the companies
may opt for a Reverse merger i.e. instead of the loss making company merging
with the profit making company the profit making company may merge with the
loss making. In this case, the amalgamated company, which was the loss making
company will be able to carry forward its own business loss and unabsorbed
depreciation and set it off against the profits of the business which has merged
with it, in the scheme of amalgamation.
4. As already discussed, the benefit under section 47(viii) shall be allowed
only when the shareholders of the amalgamating company are allowed only
shares of the amalgamated company in lieu of shares held by them in the

amalgamating company. If the shareholders are allotted something more than

shares in the amalgamated company viz. bonds or debentures, etc. no benefit wil
be available under section 47(viii)
*****
Chapter-14
Concepts of Tax-Planning and Specific Management Decisions
Taxes are what even an honest citizen despises the most as human being
by very nature is selfish. He would like to have first of all every good thing for
himself and he would hardly like that the fruits of his labour are enjoyed by
others and particularly by those with whom he has no relationship. He will try
his best to see to it that his hard earned money is not taken away by others
forcibly whether it is by snatching or by the rule of law. But it is also a duty of the
individual to save legally from payment of taxes so that the same may be
available with him to make him and his dependants to be good and honorable
citizens. On the other hand, the practical concept of taxation laws is to realize the
revenue by way of tax to the maximum. Therefore, the perceptions of the tax
payer and the tax collector are different. The tax payer spares no efforts in
maximizing his profits and attracting the least incidence. The tax-collector, on the
other hand, tries to maximize revenue within the framework of law. It is here
that the tax planning has assumed far-reaching importance in the confounded

complexities of the taxation laws. The primary objective of tax planning is to save
the hard labour of the taxpayer in enjoying the fruits of his income and wealth to
the maximum possible extent.
Methods commonly used by tax payers to minimize tax liability
As discussed above, the goal of the tax payers is to minimize his tax liability. To
achieve this goal the following three methods are commonly used by him:
1. Tax evasion
2. Tax avoidance
3. Tax planning
Tax evasion
Unscrupulous citizens evade their tax liability by dishonest means. Some of
which are:
(a) Concealment of income;
(b) Inflation of expenses to suppress income;
(c) Falsification of accounts
(d) Conscious violation of rules.
These devices are unethical and have to be condemned. The courts
also do not favour such unethical means. Evasion, once proved, not only attracts
heavy penalties but may also lead to prosecution.
Such an evader of tax is not a good citizen and tax evasion as a
means to reduce tax liability cannot be advocated by any one.
Tax avoidance
Tax avoidance is minimizing the incidence of tax by adjusting the
affairs in such a manner that although it is within the four corners of the taxation
laws but the advantage is taken by finding out loopholes in the laws. The shortest
definition of tax avoidance is that it is the art of dodging tax without breaking the
law.
In the case of tax avoidance, the tax payer apparently circumvents
the law, without giving rise to a criminal offence, by the use of a scheme,
arrangement or device, often of a complex nature but where the main purpose is
to defer, reduce or completely avoid the tax payable under the law.
In the words of Justice O. Chinnappa Reddy of Supreme Court in
McDowell & Co. Ltd. v CTO (1985) 154 ITR 148 (SC) at p. 160 the evil
consequences of tax avoidance are manifold and may be summarized as under:
(a) Substantial loss of much needed public revenue, particularly in a welfare
State like ours.
(b) Serious disturbance caused to the economy of the country by piling up of
mountains of black money directly causing inflation
(c) Large hidden loss to the community by some of the best brains in the
country being involved in the perpetual war waged between tax avoider
and his expert team of advisers, lawyers and accountants on one side,
and the Tax Officer and his perhaps not so skillful advisers on the other
side.
(d) Sense of injustice and inequality which tax avoidance arouses in the
breasts of those who are unwilling or unable to profit by it.

(e) Ethics (or lack of it) of transferring the burden of tax liability to the
shoulders of the guideless, good citizens from those of artful dodgers.
As to the ethics of taxation, the learned judge observed: We now live
in a welfare State whose financial needs, if backed by the law, have to be
respected and met. We must recognize that there is behind taxation laws as much
moral sanction as behind any other welfare legislation and it is pretence to say
that avoidance of taxation is not unethical and that it stands on no less moral
plane than honest payment of taxation.
Tax planning
Tax planning is the arrangement of financial activities in such a way
that maximum tax benefits are enjoyed by making use of all beneficial provisions
in the tax laws. It entitles the assessee to avail certain exemptions, deductions,
rebates and relief's, so as to minimize his tax liability. This is permitted and not
frowned upon.
Tax planning is permissible even after McDowell's case. There might be a
difference of opinion in various quarters in respect of tax avoidance, as these
days Judges have started thinking in the interest of the State with a firm
determination to leave the age-old accepted thinking of 1936 and to look into
future. But tax planning is still not touched by these judgments and in the words
of Ranganath Mishra, J. of Supreme Court in McDowell's case itself, it is
permissible provided it is within the frame work of law. He observes:
Tax planning may be legitimate provided it is within the framework
of law. Colourable devices cannot be part of tax planning and it is wrong to
encourage or entertain the belief that it is honorable to avoid the payment of tax
by resorting to dubious methods. It is the obligation of every citizen to pay taxes
honestly without resorting to subterfuges.
Distinction between tax planning, tax avoidance and tax evasion:Tax
planning, tax avoidance and tax evasion are three different approaches to the
same objective viz., to reduce tax liability. However, they have different
characteristics. Tax planning is perfectly legal as the object of tax reduction is
achieved by making use of the beneficial provisions in the tax laws. On the other
hand, tax avoidance is also legal though technically satisfying the requirements of
law. Tax evasion is a method of evading tax liability by dishonest means like
suppression, conscious violation of rules, inflation of expenses, etc.
Tax planning imply compliance with the taxing provisions in such a
manner that full advantage is taken of all exemptions, deductions, concessions,
rebates and relief's permissible under the Act so that the incidence of tax is the
least. Tax planning, therefore cannot be equated to tax evasion or tax avoidance.
Tax planning may be regarded as a method of intelligent application of expert
knowledge of planning corporate affairs with a view to securing consciously
provided tax benefits on the basis of the national priorities in keeping with the
interest of the State and the public.
The cases covered under "Tax avoidance' are those where the tax
payer has apparently circumvented the law, without giving rise to a critical
offence by the use of a scheme arrangement or device often of a complex nature

whose sole purpose is to defer reduce or completely avoid the tax payable under
the law. In other words tax avoidance is a method of reducing incidence of tax by
taking advantage of certain loopholes in tax laws.
Tax evasion is a dubious way of attempting to solve tax problems by
suppression of income, conscious violation of rules inflation of expenses, etc. Tax
evasion, therefore, cannot be construed as tax planning because it amounts to
breaking of law whereas tax planning is devised within the legal framework by
availing of what the legislature intended.
There is no dispute in accepting tax avoidance is different from tax
planning but the subtle difference between tax avoidance and tax planning is
often over looked.
Thus, any legitimate step taken by an assessee towards maximising
tax benefits keeping in view the intention of law will not only help him but
the society also. All those who do the tax planning could help themselves in
efficient and economic conduct of their business affairs without getting entangled
in the controversy of tax avoidance or evasion.
35.4b Tax Management:
Tax management refers to the compliance with the statuary
provisions of law. While tax planning is optional, tax management is mandatory.
It includes maintenance of accounts, filing of return, payment of taxes, deduction
of tax at source, timely payment of advance tax, etc. Poor tax management may
lead to levy of interest, penalty, prosecution, etc. In some cases it may lead to
heavy financial loss if proper compliance is not made, e.g. if a loss return is not
filed in time it will result in a financial loss because such loss will not be allowed
to be carried forward.
35.5 Objectives of tax planning
The prime objectives of tax planning may be summarized as follows:
(i) Reduction of tax liability.
(ii) Minimisation of litigation.
(iii) Productive investment
(iv) Healthy growth of economy.
(v) Economic stability
(i) Reduction of tax liability: One of the supreme objectives of tax planning
is the reduction of the tax liability of the taxpayer and the resultant saving of the
earnings for a better enjoyment of the fruits of the hard labour. By proper tax
planning, a taxpayer can oblige the administrators of the taxation laws to keep
their hands off from his earnings.
(ii) Minimisation of litigation: Where a proper tax planning is resorted to by
the taxpayer in conformity with the provisions of the taxation laws, the chances
of unscrupulous litigation are certainly to be minimized and the tax-payer may be
saved from the hardships and inconveniences caused by the unnecessary
litigations which more often than not even knock the doors of the supreme
judiciary.
(iii) Productive investment: The planning is a measure of awareness of the
taxpayer to the intricacies of the taxation laws and it is the economic

consciousness of the income-earner to find out the ways and means of productive
investment of the earnings which would go a long way to minimize his tax
burden. The taxation laws offer large avenues for the productive investment of
the earning granting absolute or substantial relief from taxation. A taxpayer has
to be constantly aware of such legal avenues as are designed to open floodgates
of his well-being, prosperity and happiness. When earnings are invested in the
avenues recognized by law, they are not only relieved of the brunt of taxation but
they are also converted into means of further earnings.
(iv) Healthy growth of economy: The saving of earnings is the only basement
upon which the economic structure of human life is founded. A saving of earnings
by legally sanctioned devices is the prime factor for the healthy growth of the
economy of a nation and its people. An income saved and wealth accumulated in
violation of law are the scours on the economy of the people. Generation of black
money darkens the horizons of national economy and leads the nation to
avoidable economic destruction. In the suffocating atmosphere of black money, a
nation sinks with its people. But tax planning is the generator of a superbly white
economy where the nation awakens in the atmosphere of peace and prosperity, a
phenomenon undreamt of otherwise.
(v) Economic stability: Under tax planning, taxes legally due are paid without
any headache either to the taxpayer or to the tax collector. Avenues of productive
investments are largely availed of by the taxpayers. Productive investments
increase contours of the national economy embracing in itself the economic
prosperity of not only the taxpayers but also of those who earn the income not
chargeable to tax. The planning thereby creates economic stability of the nation
and its people by even distribution of economic resources.
Types of Tax planning

Tax planning can be broadly divided into two heads:
(a) Short-term tax planning
(b) Long-term tax planning
A short-term tax planning is normally for a period upto a year and it
is done from year to year to achieve some particular objective. On the other hand,
the long-term planning will be for a longer period and it may not pay off
immediately.
Factors on the basis of which Tax planning is done
The following factors are helpful for effective tax planning:
(i) Residential status and citizenship of the assessee.
(ii) Heads of income/Assets to be included in computing net wealth.
(iii) Latest legal position.
(iv) Form v Substance.
(i) Residential status: As we know that non-resident in India is not liable to
pay income-tax on incomes which accrue or arise and also received outside India,
whereas a resident in India is liable to pay income-tax on such incomes.
Therefore, every assessee would like to be a non-resident in India, if he has any
income which accrues or arises outside India.

If any individual wishes to be a non-resident in India, he should be careful

about the facts given below:-
1. If an individual is a citizen of India and visits India in any previous
yeas, he should not stay in India for more than 181 days in that previous year.
Where he wishes to stay in India for more than 181 days at a stretch, he should
plan his stay in such a manner that his stay in one previous year does not exceed
181 days.
For example he can stay from 2nd October of a particular previous year to 28th
September of next previous year aggregating to 362 days at a stretch, still he will
be called non-resident in India as the period of stay in each year will not exceed
181 days.
The above also hold good in case of a person of India Origin.
Notes: One should however, in the above case be careful regarding leap year as
the number of days for the month of February in that case shall be 29 instead of
28.
2. The citizen of India, who wishes to leave India in any previous year for
employment abroad, should leave India by 28th September so that his
stay in India does not exceed 181 days and he may be called non-resident
in India for that previous year.
3. A citizen of India, who does not leave India for employment abroad, should
leave India by 29th May of the previous year if he had been in India for 365
days or more in the 4 preceding previous years.
4. Foreign national can stay in India-for 181 days in the previous year and he
will still be non-resident in India provided his stay in India during the 4
preceding previous years immediately preceding the relevant previous
year does not exceed 364 days. If it exceeds 364 days, then, in such a case,
he can not stay in India for more than 59 days in that previous year.
However, he can stay at a stretch of 59+59 days if these fall in two
previous years. Thus such person can come to India in the first week of
February and stay up to May 29th of the next year.
If an individual can not become non resident in India, he can still
escape the liability of tax on all foreign incomes which accrue or arise and
received outside India except if such incomes accrue or arise from a business or
profession set up or controlled from India provided he is not ordinarily resident
in India.
The HUF will be non- resident in India only when entire control and
management of its affairs is situated outside India. If it is not possible, HUF can
claim the status of not ordinarily resident in India provided the karta of HUF
satisfies both or any of the two additional conditions.
There can not be any planning of residential status in case of an
Indian company because it is always resident in India irrespective of its control
and management. However, a non-Indian company can be non-resident in India if
any part of the control and management of its affairs is situated outside India.
A non-resident in India can bring his income to India, which accrued
or arose to him outside India in any previous year, after the previous year of

accrual because in that case it will not be treated as received in India. It will be
called as remitted to India.
The same holds good in case of not ordinarily resident in India
provided such income is not from the business or profession which is set up or
controlled from India.
(ii) Heads of Income: Before the tax-planner goes in for his task, he has to
have a full picture of the sources of income of the taxpayer and the members of
his family. Though total income includes all income from whatever source
derived, the scope of tax planning is not similar in respect of all sources of
income. The assessee can avail the benefits of exemption and deduction under
each head of income. Further, he can avail the benefit of rebate and relief under
the Act. A consolidated tax planning may be attempted only after the tax-
planning in respect of the different heads of income and a failure to do so may
jeopardize the tax planning and may not achieve the desired result. Similarly, the
tax-planner should know which assets are liable to Wealth tax and what are the
exemptions allowable in case of such assets to avail the maximum benefit and
reduce the Wealth tax liability.
(iii) Latest legal position: It is the foremost duty of a tax-planner to keep
himself fully conversant with the latest position of the taxation laws along with
the allied laws and also the judicial pronouncements in respect thereof. For this
purpose, he must have a thorough and up-to-date understanding of the annual
Finance Acts, the Taxation law Amendments, the amendments, if any, of the other
allied laws, the latest judicial pronouncements of the High Courts and the
Supreme Court, various Circulars of the Central Board of Direct Taxes which seek
to clarify the legal position in so far as the Revenue is concerned. A successful tax
planning can be attempted only if the tax-planners knowledge of legal principles
is up-to-date.
(iv) Form v Substance: A tax-planner will have to thoroughly understand the
true nature of any transaction which relates to income- plus or minus. In this
connection, he will have to bear in his mind the following principles enunciated
by the Courts on the question as to whether form or substance of a transaction
should prevail in Income-tax matters:
(a) Form of transaction: When a transaction is arranged in one form known to
law, it will attract tax liability while, if it is entered into another form which is
equally lawful, it may not. In considering, therefore, whether a transaction
attracts tax or not, the form of the transaction put through by the taxpayer is to
be considered and not the substance thereof. But this rule applies only to genuine
transactions. Where statutorily the parties have to reduce a certain transaction
into writing, it is not open to Courts or any other authority to permit oral
evidence to be adduced by the parties or to entitle them to go behind the
statement document. A citizen can not be taxed merely with a view to swell the
revenues, ignoring the legal position by regarding the substance of the
transaction. It is not open to the Income Tax Authorities to deduce the nature of
document from the purported intention by going behind the document or to
consider the substance of the matter or to accept it in part and reject it in part or

to rewrite the documents merely to suit the purpose of the revenue. [CIT v Motors
& General Stoeres (P) Ltd. (1967) 66 ITR 692 (SC)].
(b) Genuineness transaction: In deciding whether the transaction is a genuine
or colorable one because in such a situation, it is not the question of form and
substance but of appearance and truth it will be open to the authorities to pierce
the corporate veil and look, behind the legal façade, at the reality of the
transaction. The taxing authority is entitled and indeed bound to determine true
legal relation resulting from a transaction. If the parties have chosen to conceal
by a device the legal relation, it is open to the taxing authority to unravel the
device and determine the true character of the relationship. But the legal effect of
a transaction cannot be displaced by probing into the substance of the
transaction. The true legal relation arising from a transaction alone determines
the taxability of a receipt arising from the transaction. [CIT v B.M.Kharwar(1969)
72 ITR 603 (SC)].
(c) Expenditure: In the case of an expenditure, the mere fact that the payment
is made under an agreement does not preclude the department from enquiring
into the actual nature of the payment. [Swadeshi Cotton Mills Co. Ltd. v CIT (1967)
63 ITR 57 (SC)]. In order to determine whether a particular item of expenditure
is of revenue or capital nature, the substance and not merely the form should be
looked into. [Assam Bengal Cement Co. Ltd.v CIT (1955) 27 ITR 37 (SC)].
Areas of tax planning
Tax planning may be effective in every area of business management.
Some of the important areas where planning may be attempted are:
(i) Location of business.
(ii) Nature and size of business.
(iii) Form of business organization and the pattern of its ownership.
(iv) Specific management decisions like make or buy, own or lease, capital
structure, renew or replace, etc.
(v) Employees remuneration.
(vi) Mergers/Amalgamation of companies.
(vii) Double Taxation Relief.
(viii) Non-residents.
(ix) Advance Ruling.
Location of Business
Tax planning is relevant from location point of view. There are
certain locations which are given special tax treatment. Some of these are as
under:-
1. Full exemption under section 10B for ten years in the case of a newly
established 100% export oriented industrial undertaking in free trade
zones, etc.
2. Full exemption under section 10A for ten years in the case of a newly
established industrial undertaking in free trade zones, etc.
3. Full exemption under section 10BA for 10 years in the respect of profits
from the export of eligible article or things.
4. Deduction under section 80-IB in the case of newly set up industrial

undertaking in an industrially backward State or district.

5. Deduction under section 80-IC in case of newly set up industrial
undertaking or substantial expansion of an existing undertaking in
certain special category States.
Nature of business
Tax planning is also relevant while deciding upon the nature of business.
There are certain businesses which are granted special tax treatment. Some of
them are as follows:
1. Newly established industrial undertaking in free trade zones,
etc.[Section 10A].
2. Newly established hundred per cent export-oriented undertakings
[Section 10B].
3. Tea Development Account, coffee Development Account and Rubber
Development Account [Section 33AB].
4. Site restoration fund [Section 33ABA].
5. Amortisation of certain preliminary expenses [Section 35D].
6. Deduction for expenditure on prospecting for certain minerals [Section
35E].
7. Deduction for special reserve created by a financial corporation under
section 36(1)(viii).
8. Special provision for deduction in the case of business for prospecting for
mineral oil [Sections 42 and 44BB].
9. Special provisions for computing profits and gains of business of civil
construction [Section 44AD].
10. Special provisions in the case of business of plying, hiring or leasing
goods carriages [section 44AE].
11. Special provisions for computing profits and gains of retail business
[Section 44AF].
12. Special provisions in the case of shipping business [Section 44B].
13. Special provisions in the case of business of operation of aircraft [Section
44BBA].
14. Special provisions in the case of certain turnkey power projects [Section
44BBB].
15. Special provisions in the case of royalty income of foreign companies
[Section44D].
16. Profits and gains of industrial undertakings or enterprises engaged in
infrastructure development, etc. [Section 80-IA].
17. Profits and gains from certain industrial undertaking other than
infrastructure development undertaking [Section 80-IB].
18. Special provisions in respect of certain undertaking or enterprises in
certain special category States [Section 80-IC].
19. Profits and gains from the business of collecting and processing of bio-
degradable waste [Section 80JJA].
20. Employment of new workmen [Section 80JJAA].
21. Special tax rate under sections 115A, 115AB, 115AC, 115AD, 115B,

115BB, 115BA and 115D.

Form of ownership
The form of ownership is an important tool of tax planning. There
are different forms of organizations having different tax incidences at a given
level of operation. The form of ownership may be sole proprietorship,
partnership, company, co-operative society, etc. It is the form of ownership which
determines the sharing of profits, responsibilities of the activities to third parties,
etc.
There are different tax treatments under different forms of
ownership which are given different status under tax laws. These forms of
ownership are also allowed different tax concession and rebates under tax laws.
Therefore, the tax implication on the project under different forms of ownership
at a certain level of profit are to be analyzed and a form of ownership suitable to
those circumstances is selected.
1. Sole proprietorship: The most common form of ownership found in
the business world is sole proprietorship. In this form of organization, the
proprietor is the only owner of the business assets and he is solely responsible
for the affairs of the business. The merits and demerits of a sole proprietary form
of organization may be summarized as under:
Merits
(a) A sole proprietorship is easy to establish because of little interference of
government regulations.
(b) The cost of adopting this form of organization is small because of there
being no legal requirement
(c) All the profits of the business go in the hands of proprietor himself.
(d) In case of persons carrying on business on small scale and having small
income from other sources, this form of organization would be suitable because
the proprietor can avail of the ceiling of exempt income i.e. Rs. 1,50,000 for the
assessment year 2009-10 and his tax liability will be minimum as the individual
is subject to income-tax at slab rate and the maximum marginal rate of income
tax in his case is 30% plus surcharge as applicable + education cess @ 2%+
secondary & higher education cess@1%
(e) Besides the deduction which are allowed to all assesses under Chapter
VIA, a sole proprietor, being assessed as individual, is entitled to get certain
deductions under sections 80C, 80CCC, 80CCD, 80DD, 80DDB, 80E, 80GG, 80GGC,
80QQB, 80RRB and 80U.
Demerits
(a) The liability of the proprietor is unlimited and it can extend even to his
personal assets. When the proprietor incurs losses and business assets are not
sufficient enough to meet the liabilities of business, his personal assets can be
used for discharging the business liabilities.
(b) The proprietor does not get deduction on account of remuneration payable
to him attributable to the rendering of services. It is felt that it is the capital
contributed and risk taken by the proprietor for which he is rewarded in profits
and that he must be given remuneration for the service rendered by him which

should be allowed as deductible expenditure. But this is not so in income-tax law.

(c) Another main drawback of this form of organization is that it does not
provide opportunities to finance the expanding business activities. In the case of
a partnership firm, on the other hand, finance can be raised by the existing
partners or by entering another partner.
(d) In case of a business growing at a high speed, and yielding higher profits, a
sole proprietary organization may not be beneficial. As the salary paid to the
proprietor, and interest paid on capital are not allowable, the profits become
higher and tax incidence goes high. In case of other entities, on the other hand,
remuneration payable to partners/managing director, interest paid to partners
are allowed as admissible expenditure to the extent specified in the Act.
2. Hindu Undivided Family: A joint Hindu family pays tax on its total income
at prescribed rates on the basis of slab system. The family can pay reasonable
remuneration to the Karta and other family members for their services to the
business and it is allowed as a deduction in computing the business income.
However, interest on capital contributed by HUF for business is not deductible in
computing business income. The member of the family, who has received the
remuneration from the family will include it in his income under the head
Salaries.
A Hindu undivided family will also get a basic exemption of Rs.
1,50,000. Besides the deductions which are allowed to all assesses, it is allowed
certain deductions under sections 80D, 80DD, 80DDB, 80GG and 80GGC like
individuals. The tax rates in case of HUF are same as applicable to individual.
The demerits of HUF, however, are similar to that of individuals.
3. Partnership firm
Merits of partnership
1. A partnership form of organization is also easy to establish. The only
procedure for the formation of partnership is to draw up a partnership
deed and a nominal charge in terms of cost of stamps for the deed is to be
incurred.
2. The decision making on important business matter is quick as compared
to a company form of organization because partners meet frequently
together. Therefore, decision on any important business matter cannot be
delayed.
3. The chances of getting involved in risky activities is very less because
every important decision is made with the concurrence of all the partners.
4. As compared to sole proprietorship, the problem of raising additional
resources is much less. Whenever the business expands and it is necessary
to raise finance, it will be easy to raise it by admitting a new partner or
raising it by way of borrowing because of number of partners and their
joint and several liabilities to pay the debts of the firm, the lenders will be
more interested in lending.
5. The firm can pay interest on capital and loan to partners at the maximum
rate of 12% p.a. Further it can also give remuneration to its working
partners subject to the limits mentioned in section 40(b).

6. This form of organization is suitable from income-tax point of view in such

cases where the amount of profit is not large and the partners of the firm
do not have any other additional income except by way of remuneration
and interest from the partnership firm. In such a case the profit of the firm
shall be lower and the individual partners can also avail of the maximum
ceiling of income exempt under Income-tax Act.
7. The share in the profit of the partnership firm is exempt from tax under
section 10(2A) of the Income-tax Act.
8. The risk as to losses and liability incurred is divided amongst the
partners.
9. As in the case of company form of organization where the change of
business requires a long procedure, there is no tedious procedure in the
partnership form of organization. The business can be changed only with
the consent of partners.
10. The firm is taxable at a flat rate of 30% + surcharge @ 10% + education
cess @ 2%+ secondary & higher education cess @ 1%, after allowing
interest and remuneration to working partners (if provided in the
partnership deed and subject to section 40 (b) of the Income-tax Act.
Demerits of partnership
1. The risk taking capacity of the partners becomes limited. Every decision
relating to important business matters is made with the consultation of
other partners, which restricts the risk taking activities which may yield
much higher profits.
2. As far as the operations of business are limited to small or medium scale,
there is no problem in financing the expansion of business operation. But
when business gets expanded to a large scale, then it will be suitable to
adopt a company form of organization because partnership can be formed
up to maximum number of 20 partners.
3. One of the main drawbacks is that one partner becomes liable for the acts
of another. Therefore, a partner is liable for the wrongs of another partner
if it is done within the legal limits.
4. In the new scheme of assessment of partnership firms, the share of
partners is exempt from tax under section 10(2A) but the partners cannot
claim standard deduction in respect of remuneration receivable by them
from the firm. Also, the firm cannot claim deduction in respect of interest
payable to partners in excess of 12% per annum.
5. Where the partnership firm does not comply with the requirements of
section 184 of the Income Tax Act, it can be assessed in the status of an
association of persons, as a consequence of which it shall not be allowed
any deduction on account of interest and remuneration to its partners.
However, in some cases, if the firm is assessed as AOP it can result into less
tax liability as the AOP is taxable at the maximum rate of 30% + surcharge
+ education cess whereas the firm is charged tax flat rate @ 30% +
surcharge + education and SHEC.
6. A partnership firm may come to a sudden closure of business on account of

death, lunacy or insolvency. In the case of a business running efficiently

and profitably, such a happening will cause a great loss. Also, dissolution
will attract section 45(4) which imposes tax liability in respect of capital
gain arising on transfer of capital assets from the firms to partners.
4. Company
Benefits
1. The corporate sector presents itself as a good medium of investment
before the modern lending financial institutions. These financial
institutions are in search of good medium in which the savings of the
public can be invested. They make investment in the shares and
debentures of these companies. In this way this sector also helps in
mobilizing saving of public.
2. This form of organization has also gained society's attention. Since the
capital of these companies comprises a big amount divided into a large
number of shares of small value, a person with limited resources also takes
interest in investing in such shares. This social recognition also thus helps
in promoting the industrialization of the country.
3. The activities carried on by a corporate entity are generally on large scale.
This puts complexities in the day-to-day affairs. Also, the scattered
ownership of the company makes it a difficult task to handle these
activities by all the related people. This requires managerial professionals
having special skills, techniques, etc. A company form of organization,
therefore, helps in developing managerial professionals.
4. This form of organization has also received social recognition because of
the disclosure of some information, for example, publishing of final
accounts, etc. This social recognition helps in boosting the industrialization
of an economy, as is being experienced nowadays in India.
5. The company is subject to income-tax at the flat rate of 30% + surcharge of
10%(if net income exceeds Rs.1 crore).
Disadvantages
Some of the demerits of this form of organization which are generally felt are
as under:
1. The first main disadvantage is the formation of company which requires a
long procedure to be adopted. In addition to complying with certain legal
requirement, a large amount on account of fees on share capital with
which company is being incorporated and many other expenses have to be
incurred.
2. The stringent legal requirements to be complied with are also a major
drawback. The management has to face, at every step, legal provisions as
are to be complied with.
3. Lack of profit motive mindset amongst the persons handling the affairs of
the company is also one of the drawbacks. Since the company is not
managed by the real owner, in most of the cases, but by the managerial
professional who do not have financial stake in the company, the degree of
interest and enthusiasm, as found in the proprietor and partners, cannot

be expected in a company form of organization. Nevertheless, it does not

mean that paid officials are devoid of initiative, however, there are many
officials who do lack initiative.
4. Despite strict legal requirements, the chances of defrauding the innocent
public are quite real. In many cases the management indulges in
manipulating the figures of the results and invites public to invest therein.
5. Decisions on important business matters cannot be taken immediately. For
this, the meeting of the Board of Directors has to be convened which takes
some time. Delayed decisions happen to be one of the drawbacks of this
form of organization.
6. Many times, it is found that there may be clash in the interest of two class
of shareholders, viz, equity shareholders and preference shareholders or
group shareholders.
Lease or buy decisions: In recent years, leasing has become a popular
source of financing in India. From the lessee’s point of view, leasing has the
attraction of eliminating immediate cash outflow, and the lease rentals can
be claimed as admissible expenditure against the business income. On the
other hand, buying has the advantages of depreciation allowance and
interest on borrowed capital being tax-deductible. Thus, an evaluation of
the two alternatives is to be made in order to take a decision.
Disadvantages of lease finance: Before opting for a lease decision one has to
keep in mind the following disadvantages:
(i) Leased assets are not owned assets and therefore, the asset cover to equity
comes down due to increased dependence on lease finance.
(ii) Financial ratios are also distorted due to greater dependence on lese
finance.
(iii) Lease rent payments are made out of working capital funds which mean
that fixed assets are financed out of short-term funds.
(iv) The asset taken on lease is taken back by the lessor at the expiry of lease
period. Thus, he will be bothered about finding alternative asset at the
expiry of lease period.
Make or buy decision: The leasing or buying decision is taken only when it
is finalized that a particular asset is to be acquired. In most of the
industries, the conception of establishing a new project itself involves
acquisition of fixed assets. In assembling industry different components
are assembled to make a product. Now a decision regarding the
manufacturing of these components is to be taken. It is decided whether
the product/ part/component of product should be bought from the
market or should be manufactured by having necessary manufacturing
facilities. The main consideration affecting such a decision is cost. In a
make or buy decision, the variable cost of making the product or
part/component of product is compared with its purchase price prevailing
in the market.
In this decision making process, it may be possible that the decision
to manufacture does not result in increasing the fixed cost, and the existing

manufacturing facilities cannot be otherwise utilized profitably. Thus,

where no fixed costs are incurred for producing the product or
component, the main criterion is that it would be more profitable to
manufacture than to purchase, if the variable cost is lower than the
purchase price.
For example, if a particular component can be acquired at a cost of
Rs. 20 from the market then it will be profitable for the project to produce
that component if the variable cost is below Rs. 20. Here it is assumed that
no extra fixed costs are to be incurred on the manufacturing of these
components.
However, where the component manufacturing involves additional
fixed expenditure, purchase of any plant and machinery or establishment
of a new separate unit, then total cost will have to be considered. In such
special situations the following tax consideration must be kept in mind:
1. Where the manufacturing of the product requires additional fixed cost also:
Since in this case, the assessee will have to incur the additional fixed cost it
will form part of the cost of manufacturing of the product.
2. Where the manufacturing of the product requires the purchase of additional
plant & machinery.
3. Where the manufacturing of the product requires establishment of a new
unit: in this case, although, there will be cash outflow for establishing a
new unit, but the tax incentives shall be as under:-
(i) Exemption under section 10A: If the product to be manufactured is for
exports, there will be full exemption of income till assessment year 2009-
10,if the unit is established in a free trade zone and certain conditions are
satisfied.
(ii) Exemption under section 10B: If the product to be manufactured is for
exports, there will be full exemption of income till assessment year 2009-
10 if the unit is an Export Oriented unit and certain conditions are
satisfied.
(iii) Depreciation under section 32: Since a new unit will be established, it will
acquire building, plant and machinery, furniture and certain intangible
assets, the assessee, in this case, shall be eligible for depreciation on such
assets.
(iv) Deduction of Interest on money borrowed for acquisition of such capital
assets: If the money is borrowed for the acquisition of above capital assets,
the assessee will be eligible to claim interest as deduction.
(v) Deduction under section 80-IB: if the unit established is a new unit, it shall
be eligible for deduction under section 80-IB if the assessee cannot claim
exemption under section 10A and 10B.
4. if the facilities for production are existing & the assessee wishes to
discontinue the manufacturing of such product: It is possible that buying of
such product is cheaper than manufacturing and it is is to be continued for
a very long time, the assessee may have to sell the existing plant and
machinery etc. In this case, there will be short term capital gain/loss if the

entire block of assets is sold or there will be short term capital gain if the
part of the block is sold for a price more than the W.D.V. of the block.
Repair/Renewal or Replacement of an asset: The old and worn out
assets need to be either repaired/renewed or replaced at regular intervals.
Sometimes, even a good machine requires up gradation or replacement so
as to compete in the market. The main tax consideration in these cases
shall be whether the assessee, while computing his business income, shall
be allowed deduction on account of such expenditure or not.
Repairs/Renewal: Deduction for expenditure on repairs/renewal will be
allowed as revenue expenditure in computation of business income ass under:
If the building is a rented building, any expenditure on repairs shall
be allowed as deduction. On the other hand, if the building is owned, only current
repairs shall be allowed as deduction.
As regards plant & machinery, only current repairs shall be allowed
as deduction.
However, the accumulated repairs in the above cases can be claimed
under section 37(1).
For detailed discussion of what is current repairs refer to sections
30, 31 and 37(1).
It may be noted that if the repairs expenditure are of capital nature
it shall not be allowed as deduction either under section 30,31,or 37.
Replacement of assets: If the asset has to be replaced, the
expenditure incurred on replacement shall be capital expenditure and the
asessee shall only be entitled to depreciation on such assets and as such, the
entire expenditure cannot be claimed as deduction which was allowed in case of
repairs. The capital expenditure incurred on construction of super structure on
rented building is also eligible for depreciation under section 32.
Tax planning in case of employee's remuneration

This requires consideration from the point of view of -
(a) Employer: While calculating the business income of the employer, the
remuneration payable to the employee, in whatever form, should be fully
deductible otherwise the employer will have to pay tax on such remuneration
also as the same will not be allowed as deduction while computing his business
income.
(b) Employee: The salary received by the employee, whether in cash or kind,
should attract minimum income-tax liability. He should be in a position to avail
maximum exemption/concession in respect of such salary received by him. Some
of the exemptions/concession available to employee under Income-tax Act are as
under:
1. Section 10(10) Exemption in case of death-cum -retirement gratuity.
2. Section 10(10A) exemption of commuted pension.
3. Section 10(10B) exemption of retrenchment compensation.
4. Section 10(10C) exemption of compensation on voluntary retirement.
5. Section 10(13A) exemption of House Rent Allowance

6. Section 10(14) exemption of specified/notified special allowance.

7. Tax free perquisites, like medical facility, reimbursement of medical
expenses, telephone at the residence of employee, free lunch or
dinner/free refreshment, leave travel concession, etc.
8. Contribution by the employer to the provident fund or other welfare
fund of the employee.
9. Perquisites taxable at concessional rate, like rent free accommodation,
motorcar, etc.
*****
Chapter-15
Double Taxation Relief
Double taxation means taxation of same income of a person in more than

one country. This results due to countries following different rules for
income taxation. There are two main rules of income taxation i.e. (a)
Source of income rule and (b) residence rule.
As per source of income rule, the income may be subject to tax in the
country where the source of such income exists (i.e. where the business
establishment is situated or where the asset/property is located) whether the
income earner is a resident in that country or not.
On the other hand, the income earner may be taxed on the basis of his
residential status in that country. For example if a person is resident of a country,
he may have to pay tax on any income earned outside that country as well.
Further, some countries may follow a mixture of the above two rules
Thus problem of double taxation arises if a person is taxed in respect of
any income on the basis of source of income rule in one country and on the basis
of residence in another country or on the basis of mixture of above two rules.
In India, the liability under the Income-tax Act arises on the basis of the
residential status of the assessee during the previous year. In case the assessee is
resident in India, he also has to pay tax on the income, which accrues or arises
outside India, and also received outside India. The position in many other
countries being also broadly similar, it frequently happens that a person may be
found to be a resident in more than one country or that the same item of his
income may be treated as accruing, arising or received in more than one country

with the result that the same item becomes liable to tax in more than one
country. It is to prevent this hardship that the provisions in the present Chapter
are primarily intended.
Relief against such hardship can be provided mainly in two ways: (a)
Bilateral relief, (b) Unilateral relief.
Bilateral relief
The Governments of two countries can enter into double taxation avoidance
agreement to provide relief against such Double Taxation, worked out on
the basis of mutual agreement between the two concerned sovereign
states. This may be called a scheme of ‘bilateral relief’ as both concerned
powers agree as to the basis of the relief to be granted by either of them.
Agreement for ‘bilateral relief’ may be of following two kinds-
(a) Exemption method: Agreement, where two countries agree that income
from various specified sources which are likely to be taxed in both the
countries should either by taxed only in one of them or that each of the
two countries should tax only a particular specified portion of the income
so that there is no overleaping. Such an agreement will result in a
complete avoidance of double taxation of the same income in the two
countries. This is known as exemption method of relief.
(b) Tax credit method: The agreement that does not envisage any such scheme
of single taxability but merely provides that, if any item of income is taxed
in both the countries, the assess should get relief in a particular manner.
Under this type of agreement, the assessee is liable to have his income
taxed in both the countries but is given a deduction, from the tax payable
by him in India of a part of the taxes paid by him thereon, usually the lower
of the two taxes paid. This is known as tax credit method of relief.
In practice the former type of agreement also works in the same way as the later.
Bilateral agreements ensure that either country is to refrain from taxing
the whole or part of the income only if the other country has kept to its
part of the bargain. This can be only proved by producing the assessment
order in that country which will, naturally, take time. Moreover, even in
these agreements, there is a provision that if any item (not being covered
by specific provisions) is chargeable to tax in both countries, each country
should allow abatement to the doubly taxed income. Thus, even in an
avoidance agreement, generally, the income may get taxed in both places
but the assessee is able to get the benefit of the collection of the
appropriate tax being kept in abeyance or by way of relief in the form of
deductions later, on proving that he has paid tax thereon in the other
country as well. The relief under either of these types of agreement
depends on an agreement between the countries concerned.
Unilateral relief
The above procedure for granting relief will not be sufficient to
meet all cases. No country will be in a position to arrive at such agreement as
envisaged above with all the countries of the world for all time. The hardship of

the taxpayer, however, is a crippling one in all such cases. Some relief can be
provided even in such cases by home country irrespective of whether the other
country concerned has any agreement with India or has otherwise provided for
any relief at all in respect of such double taxation. This relief is known as
unilateral relief.
Double Taxation Relief Provision In India
In India the relief against the double taxation is provided under
sections 90 and 91 or the Income –tax Act.
Where there is agreement with foreign countries [Section 90] [Bilateral relief]
The Central Government may enter into an agreement with the Government of
any country outside India to provide for the following:
(a) granting of relief in respect of –
(i) income on which income-tax has been paid both in India and in that
country; or
(ii) income –tax chargeable in India and under the corresponding law in force
in that country to promote mutual economic relations, trade and
investment, or
(b) the type of income which shall be chargeable to tax in either country so
that there is avoidance of double taxation of income under this Act and
under the corresponding law in force in that country.
In addition the Central Government may enter into an agreement to
provide:
(i) for exchange of information for the prevention of evasion or avoidance of
income-tax chargeable under this Act or under the corresponding law in
force in that country, or investigation of cases of such evasion or
avoidance, or
(ii) for recovery of income-tax under this Act and under the corresponding law
in force in that country
In the above cases, the Central Government may, by notification in the Official
Gazette, make such provisions as may be necessary for implementing the
agreement.
Provisions of income-tax laws are subject to provision of DTAA: The liability to tax
arising under provisions of sections 4 and 5 of Income –tax Act are subject to
provisions of Double Taxation Avoidance Agreements between India and foreign
country. Thus Treaty provisions shall prevail over income-tax provisions. [CIT v
P.V.A.L. KULANDAGAN Chettiar (2004) 137 Taxman 460]
But, situations could arise where due to subsequent amendments, the
statute law is more beneficial than the provision in the treaty. Since the tax
treaties are intended to grant tax relief and not to put residents of a contracting
country at a disadvantage, vis-à-vis other taxpayers, sub-section (2) was inserted
by the Finance (No.2) Act, 1991 with retrospective effect from Ist April, 1972, to
clarify that any beneficial provision in the law will not be denied to a resident of a
contracting country merely because the corresponding provision in the tax treaty
is less beneficial.
Effect of double taxation avoidance agreement: If an agreement is entered

into under this section, the effect of the same shall be as under:
(i) If no tax liability is imposed under our Act, the question of resorting to the
agreement would not arise. An agreement cannot impose any tax liability
where the liability is not imposed by the Act. [CIT v R.M. Muthaiah (1993)
202 ITR 508 (Kar) affirmed in UOI v Azadi bachao Andolan (2003) 263 ITR
706 (SC)].
(ii) If a tax liability is imposed under one Act, the agreement may be resorted
to for negating or reducing it.
(iii) In case of difference between the provision of the Act and of an agreement
under section 90, the provisions of agreement prevail over the provisions
of the Act and can be enforced by the appellate authorities and the court.
However, as per sub-section 2, the provisions of this Act apply to the
assessee in the event these are more beneficial to the assessee.
(iv) Where there is no specific provision in the agreement, it is the basic law i.e.
Income-tax Act which will govern to taxation of income.
(v) Where the Government of State certified that a person is a resident of that
state or has a permanent establishment in the State, the certificate is
binding on the other Government [UOI v Azadi Bachao Andolan (2003)
263 ITR 706 (SC) and Arabian Express Line Ltd., V UOI (1995) 212 ITR 31
(Guj)].
Method of giving relief from double taxation: Relief from double taxation is
provided by abatement on the basis of mutual agreement between two states
concerned whereby the assessee is given relief by credit/ refund in a particular
manner even though he is taxed in both countries. Relief may be in the form of
credit for tax payable in another country or by charging tax at lower rate.
The procedure to be adopted by the authorities for granting relief is
to determine in the first place, the total income of the person liable to tax in India
in accordance with the provisions of the Income-tax Act, and then allow relief as
per the terms of the tax treaty entered with the other contracting country where
the income has suffered double taxation.
Almost every treaty provides that the tax paid in the contracting
country should be deducted from the tax payable by the assessee in the assessing
country on the income taxable in both the countries. The treaty generally
stipulates which country will grant relief and the manner and extent of the relief
on the various heads of income. For example income from immovable property is
taxed in the source country where it is situated, but the country of residence of
the owner can also tax the same income unless the tax treaty between the
countries expressly provides for exclusion of the property income from being
taxed in the country of residence of the assessee. Relief can however be claimed
and given in terms of tax treaty on providing proof of payment or at least proof of
assessment.
Relief cannot be granted unless the income which has been taxed in
one of the contracting countries has also suffered tax in the other contracting
country. Proof has to be provided of the income having suffered double taxation.

If there is no tax treaty with the country levying double tax, then relief can be
granted unilaterally under section 91.
Various models of treaties: Although treaties entered into by various countries
cannot be exactly identical, a certain amount of uniformity is desirable in its
framework: with this in view, tax treaties have been based on models such as:
OECD model (Organisation of Economic Co-operation and Development).
U.N. Models Double Taxation Convention between developed and developing
countries, 1980.
Most of India’s treaties are based on OECD models
Concept of business connections and permanent establishment: The liability
to tax in the source country generally arises out of “ business connection” or
through what is called “Permanent establishment”. Most of the agreements spell
out what they regard as “Permanent Establishment” as this is of utmost
importance while fixing the tax liability. These agreements also lay down
maximum limits of tax that can be levied or withheld and the manner which it
can be levied.
The term “business connection” has not been defined in the Act. It admits
of no precise definition and a solution to the problem whether there is any
business connection would depend upon facts of each case.
Types of agreements: Agreements can be divided into two main categories-
(1) Limited agreements
(2) Comprehensive agreements
Limited agreements are generally entered into to avoid double taxation
relating to income derived from operation of aircraft, ships, carriage of cargo and
freight.
Comprehensive agreements, on the other hand are very elaborate
documents which lay down in detail how incomes under various heads may be
dealt with.
Limits under various heads like income from immovable property, capital
gains, dividends, interest, royalties, fees for technical services, etc. and the
manner of taxing the same are generally laid down in the comprehensive
agreements. Some of the agreements provide for taxation of annuities and
pensions.
Countries with which no agreement exists [Section 91] [Unilateral Relief]
If any person who is resident in India in any previous year proves
that, in respect of his income which accrued or arose during that previous year
outside India (and which is not deemed to accrue or arise in India), he has paid in
any country with which there is no agreement under section 90 for the relief or
avoidance of double taxation, income-tax, by deduction or otherwise, under the
law in force in that country, he shall be entitled to the deduction from the Indian
income-tax payable by him of a sum calculated on such doubly taxed income at
the Indian rate of tax or the rate of tax of the said country, whichever is the lower,
or at the Indian rate of tax if both the rates are equal.
In other words, where section 90 does not apply, unilateral relief will be
available, if the following conditions are satisfied:

(1) The assessee in question must have been resident in India in the previous
year.
(2) That some income must have accrued or arisen to him outside India during
the previous year and it should also be received outside India. Such income
must not be deemed to accrue or arise in India.
(3) The income should be taxed both in India and in a foreign country and
there should be no reciprocal arrangement for relief or avoidance from
double taxation with the country where income has accrued or arisen.
(4) In respect of that income, the assessee must have paid by deduction or
otherwise tax under the law in force in the foreign country in question in
which the income outside India has arisen.
If all the above conditions are satisfied, such person shall be entitled to deduction
from the Indian income-tax payable by him of a sum calculated on such doubly
taxed income-
(a) at the average Indian rate of tax or the average rate of tax of the said
country, whichever is the lower, or
(b) at the Indian rate of tax if both the rates are equal.
Average rate of tax means the tax payable o total income, after deduction of any
relief due under the provisions of this Act but before deduction of any relief due
under this Chapter, divided by the total income.
Steps for calculating relief under this section
Step 1 Calculate tax on total income inclusive of the foreign income on
which relief is available. Claim any relief allowable under the
provision of this Act including rebates available under section 88E
but before relief due under sections 90 and 91.
Step II Calculate average rate of tax by dividing the tax computed under
step 1 with the total income (inclusive of such foreign income).
Step III Calculate average rate of tax of the foreign country by dividing
income-tax actually paid in the said country after deduction of all
relief due but before deduction of any relief due in the said country
in respect of double taxation by the whole amount of the income as
assessed in the said country.
Step IV Claim the relief from the tax payable in India at the rate calculated at
Step II or Step III whichever is less.
*****

Chapter-1 Basic Concepts of Income Tax

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Chapter-1 Basic Concepts of Income Tax

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Income Tax Assessment Year 2010-11

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 1

(2) PREVIOUS YEAR for next financial year.

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services to its members;

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conclusions. These are as follows:-

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time of repayment of such amount.

PERFORMA OF COMPUTATION CHART OF INCOME TAX

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1. INCOME UNDER HEAD 'SALARIES' + 

Less: Setting off of brought forward losses - 

Less: Deduction under Chapter VI A - 

Tax on special Incomes (like casual Income or long 

Add: Surcharge (if applicable) + 

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1(b) For an Individual (man or woman), resident in India who is of 65 years of

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A) RESIDENTIAL STATUS OF INDIVIDUAL: An individual can be:

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An individual, who fulfills either of 'a' or 'b' or both conditions given

B) RESIDENTIAL STATUS OF H.U.F.: Like Individual, the H.U.F. can also be i)

C) RESIDENTIAL STATUS OF FIRM/AOP OR BOI [Sec. 6 (2)]: A firm can be

D) RESIDENTIAL STATUS OF A COMPANY [Sec 6(3)]: The company can be

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 10

NON RESIDENT: A foreign company is non resident in India if control &

TAX INCIDENCE FOR DIFFERENT RESIDENTIAL STATUS:

INCOME DEEMED TO BE RECEIVED IN INDIA: The following are incomes which

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 11

i.e. interest credited at a rate exceeding 9.5%.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: The following are incomes

NOTE: Business connection may be of many types i.e. an agent in India or an

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 12

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MEANING OF SALARY U/S 17(1): The definition of Salary is inclusive one. It

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PROCESS OF COMPUTING SALARY INCOME:

BASIS OF CHARGE (SECTION 15): Salary is charged to tax in "due or receipt"

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7. Approved Superannuation fund

EXEMPTION FOR CENTRAL/STATE GOVT. EMPLOYEES & EMPLOYEES OF

EXEMPTION FOR EMPLOYEES COVERED UNDER 'THE PAYMENT OF

EXEMPTION FOR OTHER EMPLOYEES (SECTION 10(10)(iii)]: Least of the

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 16

preceding the month of retirement/resignation/leaving the job.

PENSION [SECTION 17(1) (ii)]:

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RETRENCHMENT COMPENSATION [SEC 10(10B)]: Any compensation received

COMPENSATION ON VOLUNTARY RETIREMENT [SEC 10(10C) & RULE 2 BA]:

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The compensation received by the employee at the time voluntary retirement is

PROVIDENT FUND: There are four types of Provident Funds:

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Organisations, Railways, Universities and recognised Educational

4. Receipt of Lump sum Fully Exempt Generally Note-3

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APPROVED SUPERANNUATION FUND: Superannuation fund is also one of the

TRANSFERRED BALANCE (URPF Converted in to the RPF): Whenever the

Prepared by Navin Chandra: M.Com, M.A. (Eco), FCA Page 21

ALLOWANCES EXEMPT UPTO SOME LIMIT: These can be studied as: