TAXATION B.

COM SEMESTER 4
 ABOUT MEPL CLASSES

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Chapter 1 BASIC CONCEPTS 1-16
Chapter 2 RESIDENTIAL STATUS 17-35
Chapter 3 AGRICULTURAL INCOME 36-43
Chapter 4 INCOME, WHICH DO NOT FORM PART OF TOTAL 44-52
INCOME
Chapter 5 INCOME UNDER HEAD SALARIES 53-105
Chapter 6 INCOME FROM HOUSE PROPERTY 106-126
Chapter 7 CAPITAL GAIN 127-150
Chapter 8 PROFITS AND GAINS OF BUSINESS OR 151-182
PROFESSION
Chapter 9 AGGREGATE OF INCOME, SET OFF CARRY 183-195
FORWARD OF LOSSES
Chapter 10 INCOME UNDER HEAD INCOME FROM OTHER 196-219
SOURCE
Chapter 11 INCOME OF OTHER PERSONS INCLUDED IN 220-229
ASSESSEES TOTAL INCOME

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 CHAPTER 1: BASIC CONCEPTS
1.1INTRODUCTION:

In a Welfare State, the Government takes primary responsibility for the welfare
of its citizens, as in matters of health care, education, employment,
infrastructure, social security and other development needs. To facilitate these,
Government needs revenue. The taxation is the primary source of revenue to
the Government for incurring such public welfare expenditure. In other words,
Government is taking taxes from public through its one hand and through
another hand; it incurs welfare expenditure for public at large. However, no
one enjoys handing over his hard-earned money to the government to pay
taxes. Thus, taxes are compulsory or enforced contribution to the Government
revenue by public. Government may levy taxes on income, business profits or
wealth or add it to the cost of some goods, services, and transactions.

1.2DIRECT TAX & INDIRECT TAX:

There are two types of taxes:
Direct Tax and Indirect Tax
Tax, of which incidence and impact fall on the same person, is known as Direct
Tax, such as Income Tax. On the other hand, tax, of which incidence and impact
fall on two different persons, is known as Indirect Tax, such as GST, etc. It
means, in the case of Direct Tax, tax is recovered directly from the assessee,
who ultimately bears such taxes, whereas in the case of Indirect Tax, tax is
recovered from the assessee, who passes such burden to another person & is
ultimately borne by consumers of such goods or services.
Direct Tax Indirect Tax
1.Incidence and impact fall on the 1.Incidence and impact fall on two
same person different persons
2.Assessee, himself bears such taxes. 2.Tax is recovered from the assessee,
Thus, it pinches the taxpayer. who passes such burden to another
3.Levied on income person. Thus, it does not pinch the
4.E.g. Income Tax taxpayer.
5.Progressive in nature i.e., higher tax 3. Levied on goods and services.
are levied on person earning higher Thus, this type of tax leads to
income and vice versa. inflation and have wider base.

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 4. E.g. GST, Customs Duty, etc.
5. Regressive in nature i.e., all
persons will bear equal wrath of tax
on goods or service consumed by
them irrespective of their ability.
6. Useful tool to promote social
welfare by checking the consumption
of harmful goods or sin goods
through higher rate of tax.

1.3 SOURCES OF INCOME TAX LAWS IN INDIA:

1. Income tax Act, 1961 (Amended up to date):
The provisions of income tax extend to the whole of India and became effective
from 1/4/1962 (Sec. 1). The Act contains provisions for –
(a) determination of taxable income;
(b) determination of tax liability;
(c) procedure for assessment, appeals, penalties and prosecutions; and
(d) powers and duties of Income tax authorities.

2. Annual Amendments:
(a) Income tax Act has undergone several amendments from the time it was
originally enacted through the Union Budget. Every year, a Finance Bill is
presented before the Parliament by the finance minister. The Bill contains
various amendments which are sought to be made in the areas of direct and
indirect taxes levied by the Central Government.
(b) When the Finance Bill is approved by both the Houses of Parliament and
receives the assent of the President, it becomes the Finance Act. The provisions
of such Finance Act are thereafter incorporated in the Income Tax Act.
(c) If on the 1st day of April of the Assessment Year, the new Finance Act has
not been enacted, the provisions in force in the preceding Assessment Year or
the provisions proposed in the Finance Bill before the Parliament, whichever is
more beneficial to the assessee, will apply until the new provisions become
effective [Sec. 294] Note: Besides these amendments, whenever it is found

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necessary, the Government introduces amendments in the form of various
Amendment Acts and Ordinances.

3. Income tax Rules, 1962 (Amended up to date):

(a) As per Sec. 295, the Board may, subject to the control of the Central
Government, make rules for the whole or any part of India for carrying out the
purposes of the Act.
(b) Such rules are made applicable by notification in the Gazette of India.
(c) These rules were first made in 1962 and are known as Income tax Rules,
1962. Since then, many new rules have been framed or existing rules have
been amended from time to time and the same has been incorporated in the
aforesaid rules.

4. Circulars and Clarifications by CBDT:

(a) U/s 119, the Board may issue certain circulars and clarifications from time to
time, which have to be followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the
Income tax authorities, but the same are not binding on the assessee.
However, assessee can claim benefit under such circulars.
Note: These circulars are not binding on the Income Tax Appellate Tribunal or
on the Courts.
5. Judicial decision:
(a) Decision of the Supreme Court: Any decision given by the Supreme Court
shall be applicable as law till there is any change in law by the Parliament. Such
decision shall be binding on all the Courts, Tribunals, Income tax authorities,
assessee, etc.
(b) Contradiction in the decisions of the Supreme Court: In case, there is
apparently contradiction in two decisions, the decision of larger bench,
whether earlier or later, shall always prevail. However, where decisions are
given by benches having equal number of judges, the decision of the recent
case shall be applicable.

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(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or
ITAT are binding on all assessees and Income tax authorities, which fall under
their jurisdiction, unless it is over ruled by a higher authority.

1.4 BASIC PRINCIPLES FOR CHARGING INCOME TAX [SEC. 4]:

1. Income of the previous year of a person is charged to tax in the immediately
following assessment year.
2. Rate of tax is applicable as specified by the Annual Finance Act of that year.
Further, though the Finance Act prescribes the rates of tax, in respect of certain
income, the Income Tax Act itself has prescribed specific rates, e.g. Lottery
income is to be taxed @ 30% (Sec.115BB), Long term capital gain is to be taxed
@ 20% (Sec.112), short term capital gain on listed shares u/s 111A is to be
taxed @ 15%, etc.
3. In respect of income chargeable to tax, tax shall be deducted at source, or
paid in advance (wherever applicable).
Sec. 4 is a charging section and it is the backbone of the Income Tax Act. The
tax liability arises by virtue of this section and it arises at the close of a previous
year. However, the finalisation of amount of tax liability is postponed to the
assessment year. It follows the rule that the liability to tax is not dependent
upon assessment.

1.5 ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]:

Assessment year means the period of 12 months commencing on the 1st day
of April every year. It is the year (just after the previous year) in which income
earned in the previous year is charged to tax. E.g., A.Y.2021-22 is a year, which
commences on April 1, 2021 and ends on March 31, 2022. Income of an
assessee earned in the previous year 2020-2021 is assessed in the A.Y. 2021-22.
Tax point:
Duration: Period of 12 months starting from 1st April.
Relation with Previous Year: It falls immediately after the Previous Year.
Purpose: Income of a previous year is assessed and taxable in the
immediately following Assessment Year.

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1.6 PREVIOUS YEAR OR UNIFORM PREVIOUS YEAR [SEC. 3]:
Previous Year means the financial year immediately preceding the Assessment
Year. Income earned in a year is assessed in the next year. The year in which
income is earned is known as Previous Year and the next year in which income
is assessed is known as Assessment Year. It is mandatory for all assessee to
follow financial year (from 1st April to 31st March) as previous year for Income-
Tax purpose.
Financial Year:
According to sec. 2(21) of the General Clauses Act, 1897, a Financial Year
means the year commencing on the 1st day of April. Hence, it is a period of 12
months starting from 1st April and ending on 31st March of the next year. It
plays a dual role i.e. Assessment Year as well as Previous Year.
Example: Financial year 2020-21 is –
Assessment year for the Previous Year 2019-20; and
Previous Year for the Assessment Year 2021-22.

Determination of the first previous year in case of a newly set-up business or

profession or for a new source of income:
In case of Previous year is the period
Business or profession being newly Beginning with the date of setting up
set-up. of the business & ending on 31st
March of that financial year.
A source of income newly coming Beginning with the date on which the
into existence. new source of income comes into
existence & ending on 31st March of
that financial year.
Notes:
1. Above explanation signifies that the first previous year may be a period of
less than 12 months but in any case it cannot exceed a period of 12 months.
However, next and subsequent previous years shall always be a period of 12
months.

2. Where an assessee has an existing regular income from various sources

and he earns an income from a new source during the financial year, his
previous year shall commence –

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 • For the existing income: From 1st April of previous year; and
• For new income: From the date when on which the new source of income
comes into existence.

However, assessee is liable to tax on aggregate income from all the sources,
therefore, all the income will be included in the previous year.

Exceptions to the general rule that income of a Previous Year is taxed in its
Assessment Year:
This is the general rule that income of the previous year of an assessee is
charged to tax in the immediately following assessment year. However, in the
following cases, income of the previous year is assessed in the same year in
order to ensure smooth collection of income tax from the taxpayer who may
not be traceable, if assessment is postponed till the commencement of the
Assessment Year:
1. Income of a non-resident assessee from shipping business (Sec. 172)
2. Income of a person who is leaving India either permanently or for a long
period (Sec. 174)
3. Income of bodies, formed for a short duration (Sec. 174A)
4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)
5. Income of a discontinued business (Sec. 176). In this case, the Assessing
Officer has the discretionary power i.e. he may assess the income in the same
previous year or may wait till the Assessment year.

1.7 ASSESSEE [SEC. 2(7)]:

“Assessee” means,
1. a person by whom any tax or any other sum of money (i.e., penalty or
interest) is payable under this Act (irrespective of the fact whether any
proceeding under the Act has been taken against him or not);
2. every person in respect of whom any proceeding under this Act has been
taken (whether or not he is liable for any tax, interest or penalty) for the
assessment of his income or loss or the amount of refund due to him;
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 3. a person who is assessable in respect of income or loss of another
person;
4. every person who is deemed to be an assessee under any provision of
this Act; and
5. a person who is deemed to be an ‘assessee in default’ under any
provision of this Act. E.g. A person, who was liable to deduct tax but has
failed to do so, shall be treated as an ‘assessee in default’

1.8 PERSON [SEC. 2(31)]:

The term person includes the following:
i) an Individual;
ii) a Hindu Undivided Family (HUF);
iii) a Company;
iv) a Firm;
v) an Association of Persons (AOP) or a Body of Individuals (BOI), whether
incorporated or not;
vi) a Local authority; &
vii) every artificial juridical person not falling within any of the preceding
categories.
Notes:
1. On the basis of a well settled principle that “the Crown cannot be charged to
tax”, it can be said that unless otherwise specifically mentioned the Union
Government cannot be taxed in India.
2. An association of persons or a body of individuals or a local authority or an
artificial juridical person shall be deemed to be a person, whether or not such
person or body or authority or juridical person was formed or established or
incorporated with the object of deriving income, profits or gains.
3. A firm includes limited liability partnership.

Individual:

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The word ‘individual’ means a natural person, i.e. human being. “Individual”
includes a minor or a person of unsound mind. However, Deities are assessable
as juridical person.
Trustee of a discretionary trust shall be assessed as an individual.

Hindu Undivided Family (HUF):

A Hindu Undivided Family (on which Hindu law applies) consists of all persons
lineally descended from a common ancestor & includes their wives &
unmarried daughters.
Tax point:
Only those undivided families are covered here, to which Hindu law
applies. It also includes Jain and Sikh families.
Once a family is assessed as Hindu undivided family, it will continue to be
assessed as such till its partition.

Company [Sec. 2(17)]:

Company means:
a. any Indian company; or
b. anybody corporate, incorporated under the laws of a foreign country; or
c. any institution, association or body which is or was assessable or was
assessed as a company for any assessment year on or before April 1, 1970; or
d. any institution, association or body, whether incorporated or not and
whether Indian or non-Indian, which is declared by general or special order of
the Central Board of Direct Taxes to be a company.

Indian Company [Sec. 2(26)]:

An Indian company means a company formed & registered under the
Companies Act, 1956 & includes

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a. 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 & Kashmir
and the Union territories specified in (c) infra;
b. a company formed and registered under any law for the time being in force
in the State of Jammu & Kashmir;
c. a company formed and registered under any law for the time being in force
in the Union territories of Dadar & Nagar Haveli, Goa, Daman & Diu and
Pondicherry;
d. a corporation established by or under a Central, State or Provincial Act;
e. any institution, association or body which is declared by the Central Board of
Direct Taxes (CBDT) to be a company u/s 2(17).
In the aforesaid cases, a company, corporation, institution, association or body
will be treated as an Indian company only if its registered office or principal
office, as the case may be, is in India.

Domestic Company [Sec. 2(22A)]:

Domestic company means:
i) an Indian company; or
ii) any other company, which in respect of its income liable to tax under the
Act, has made prescribed arrangements for the declaration and payment of
dividends (including dividend on preference share), payable out of such
income, within India.

Foreign Company [Sec. 2(23A)]:

Foreign company means a company which is not a domestic company.
Company in which public are substantially interested [Sec. 2(18)] Following
companies are said to be a company in which public are substantially
interested:
1. Government Company;
2. A company u/s 8 of the Companies Act, 2013;

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3. Mutual benefit finance company;
4. Listed company;
5. Company in which shares are held by co-operative societies;
6. Company which is prescribed by CBDT.

Firm:
As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship
between persons who have agreed to share profits of the business carried on
by all or any one of them acting for all”. Persons, who enter into such business,
are individually known as partners and such business is known as a Firm. A firm
is, though not having a separate legal entity, but has separate entity in the eyes
of Income-tax Act.
Tax point:
A partnership firm is a separate taxable entity apart from its partners.
In Income tax, a Limited liability partnership shall be treated at par with
firm.

Association of Persons (AOP) or Body of Individuals (BOI):

An AOP means a group of persons (whether individuals, HUF, companies, firms,
etc.) who join together for common purpose(s). Every combination of person
cannot be termed as AOP. It is only when they associate themselves in an
income-producing activity then they become AOP. Whereas, BOI means a
group of individuals (individual only) who join together for common purpose(s)
whether or not to earn income.
Co-heirs, co-dones, etc joining together for a common purpose or action would
be chargeable as an AOP or BOI. In case of income of AOP, the AOP alone shall
be taxed and the members of the AOP cannot be taxed individually in respect
of the income of the AOP Difference between AOP and BOI
In case of BOI, only individuals can be the members, whereas in case of
AOP, any person can be its member i.e. entities like Company, Firm etc.
can be the member of AOP but not of BOI.

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 In case of an AOP, members voluntarily get together with a common will
for a common intention or purpose, whereas in case of BOI, such
common will may or may not be present.

Local Authority:
As per Sec. 3(31) of the General Clause Act, a local authority means a municipal
committee, district board, body of Port Commissioners, Panchayat,
Cantonment Board, or other authorities legally entitled to or entrusted by the
Government with the control and management of a municipal or local fund.
Artificial Juridical Person Artificial juridical person are entities –
which are not natural person;
has separate entity in the eyes of law;
may not be directly sued in a court of law but they can be sued through
person(s) managing them
E.g: Deities, Idols, University, Bar Council, etc.
Note: Under the Income-tax Act, such person has been provided exemption
from payment of tax under separate provisions of the Act, if certain conditions
mentioned therein are satisfied.

1.9 INCOME [SEC. 2(24)]:

To consider any receipt as income, following points should be kept in mind: -
Cash vs. Kind Income may be received in cash or in kind. Income
received in kind is to be valued as per the rules
prescribed and if there is no specific direction
regarding valuation in the Act or Rules, it may be
valued at market price.
Significance of method Method of In case of income under the
of accounting accounting is head “Salaries”, “Income from
irrelevant house property” and “Capital
gains” method of accounting is
irrelevant.

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 Method of In case of income under the
accounting is head “Profits & gains of
relevant business or profession” and
“Income from other sources”
(other than Dividend) income
shall be taxable on cash or
accrual basis as per the
method of accountancy
regularly followed by the
assessee.
Notional income A person cannot make profit out of transaction
with himself. Hence, goods transferred from one
department to another department at a profit,
shall not be treated as income of the business.
Source of income Income may be from a temporary source or from a
permanent source.
Capital vs. Revenue A capital receipt is not liable to tax, unless
receipt specifically provided in the Act, whereas, a
revenue receipt is not exempted, unless
specifically provided in the Act. (Further refer
following heading)
Loss Income also includes negative income.
Disputed income In case of dispute regarding the title of income,
assessment of income cannot be withheld and
such income, normally, be taxed in the hands of
recipient.
Lump-sum receipt There is no difference between income received in
lump sum or in instalment.
Reimbursement Mere reimbursement of expenses is not an
income.
Legality The Act does not make any difference between
legal or illegal income.
Double taxation Same income cannot be taxed twice.
Income by mutual In this regard it is to be noted that in case of
activity mutual activities, where some people contribute
to the common fund and are entitled to
participate in the fund and the surplus arises
which is distributed among the contributors of the
fund, such surplus cannot be termed as income.
Exceptions:

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 Income derived by a trade, professional or
similar association from rendering specific
services to its members shall be taxable u/s
28(iii).
Profits and gains of any insurance business
carried on by a mutual insurance company
or by a co-operative society.
Profits and gains of any business of banking
(including providing credit facilities) carried
on by a co-operative society with its
members.
Pin money Pin money is money received by wife for her
personal expenses & small savings made by a
woman from money received from her husband
for meeting household expenses. Such receipt is
not treated as income.

Note: Income on investment out of pin money

shall be treated as income.
Award Award received, by a person related to his
business or profession, shall be treated as income
incidental to such business or profession. However,
award received by a non-professional person is in
nature of gift and/or personal testimonial, the
taxability thereof is subject to other provisions of
the Act.
Embezzlement Money embezzled is a gain to the embezzler and,
therefore, falls within the wider definition of
income.
Contingent income A contingent or anticipated income is not taxable.
Subsidy Assistance in the form of a subsidy or grant or cash
incentive or duty drawback or waiver or
concession or reimbursement (by whatever name
called) by the Central Government or a State
Government or any authority or body or agency in
cash or kind to the assesse, e.g. LPG Subsidy2 ,
Subsidy for establishing manufacturing unit in
backward area, etc.

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 However,
a. subsidy or grant or reimbursement which is
taken into account for determination of the actual
cost of the asset as per Explanation 10 to sec.
43(1) is not taxable separately.

b. the subsidy or grant by the Central Government

for the purpose of the corpus of a trust or
institution established by the Central Government
or a State Government - shall not be taxable.

1.10 HEADS OF INCOME [SEC. 14]:

According to Sec.14 of the Act, all income of a person shall be classified under
the following five heads:
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources. For computation of income, all taxable income
should fall under any of the five heads of income as mentioned above. If any
type of income does not become part of any one of the above mentioned first
four heads, it should be part of the fifth head, i.e. Income from other sources,
which may be termed as the residual head.

Significance of heads of income:

• Income chargeable under a particular head cannot be charged under any
other head.
• The Act has self-content provisions in respect of each head of income.
• If any income is charged under a wrong head of income, the assessee may
lost the benefit of deduction available to him under the correct head.

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 Distinguish between Heads of income and Sources of income:
There are only five heads of income as per Sec. 14 of the Act, but the assessee
may generate the income from various sources. In the same head of income,
there may be various sources of income.
E.g., under the head ‘Income from house property’, there may be two or more
house properties and each house property shall be termed as a source of
income. The source of income decides under which head (among the five
heads) income shall be taxable.

1.11. TAX PLANNING, TAX EVASION AND TAX AVOIDANCE:

Points of Tax planning Tax Avoidance Tax Evasion Tax
distinction Management
Definition It is a way to It is an exerciseIt is the illegal It is a
reduce tax by which the way to reduce procedure to
liability by assessee legally tax liability by comply with
taking full takes advantage deliberately the provisions
advantages of the suppressing of the law.
provided by the loopholes in the income or sale
Act through Act. or by increasing
various expenses, etc.,
exemptions, which results in
deductions, reduction of
rebates & relief. total income of
the assessee.
Feature Tax planning is Tax avoidance is Tax evasion is It is
a practice to a practice of illegal, both in implementation
follow the bending the law script & moral. or execution
provisions of without part of taxation
law within the breaking it. department of
moral an
framework. organisation.
Object To reduce tax To reduce the To reduce tax To comply with
liability by tax liability to liability by the provisions
applying script the minimum applying unfair of laws.
& moral of law. by applying means.
script of law
only

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Approach It is futuristic It is futuristic It is concerned It is a
and positive in but short term with past and continuous
nature. The in nature, as applied after approach,
planning is loophole of the the liability of which is
made today to law will be tax has arisen. concerned with
avail benefits in corrected in It is done with past
future. future by negative (rectification,
amendments of approach to revisions etc.),
the law. avail benefits present (filing
by killing the of return, etc.)
moral of law. & future
(corrective
action).
Benefit Generally, Generally, arises Generally, Penalty,
arises in long in short run. benefits do not interest &
run. arise but it prosecution can
causes penalty be avoided.
and
prosecution.
Treatment It uses benefits It uses law. It overrules It implements
of Law of the law. loopholes in the the law. the law.
law.

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 CHAPTER 2: RESIDENTIAL STATUS
2.1 INTRODUCTION:
Residential status of an assessee determines the scope of chargeability of his
income. Whether a person will be charged to a particular income or not,
depends on his residential status. Sec. 6
provides the test for residential status for the persons which can be categorized
as under:

2.2 GENERAL POINTS TO BE KEPT IN MIND REGARDING RESIDENTIAL STATUS

OF A PERSON:
Different for each previous year Residential status is determined in
respect of each previous year. In
other words, residential status of a
person may vary from one previous
year to another previous year
Single Status for each source of A person can have only one
income residential status for a previous year
i.e., he cannot be a resident for one
source of income and non-resident
for another source.
Impact of citizenship Citizenship and residential status are
two different concepts. A citizen of
India may not be a resident in India
for the purpose of income-tax.
Country Specific A person can have same residential
status in more than one country.

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2.3 DETERMINATION OF RESIDENTIAL STATUS
Individual [Sec. 6(1)] Amended
First of all, an individual is classified as resident or non-resident and again a
resident individual may further be categorized as Ordinarily Resident or Not
Ordinarily Resident in India.

Resident in India:
An individual is said to be a resident in India, if he satisfies any one of the
following conditions -
i) He is in India in the previous year for a period of 182 days or more [Sec.
6(1)(a)]; or
ii) He is in India for a period of 60 days or more during the previous year and
for 365 or more days during 4 previous years immediately preceding the
relevant previous year [Sec. 6(1)(c)]
Tax point:
Given Conditions are alternative in nature i.e., assessee needs to satisfy any
one condition.

Non-Resident in India:
An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in
India for the relevant previous year.

Illustration 1.
Sam came to India first time during the P.Y. 2020-21. During the previous year,
he stayed in India for

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(i) 50 days;
(ii) 183 days; &
(iii) 153 days. Determine his residential status for the A.Y. 2021-22.

Solution:
(i) Since Sam resides in India only for 50 days during the P.Y. 2020-21, he does
not satisfy any of the conditions specified in sec. 6(1). He is, therefore, a non-
resident in India for the P.Y. 2020-21.
(ii) Since Sam resides in India for 183 days during the previous year 2020-21, he
satisfies one of the conditions specified in sec. 6(1). He is, therefore, a resident
in India for the P.Y. 2020-21.
(iii) Sam resides in India only for 153 days during the previous year 2020-21.
Though he resided for more than 60 days during the previous year but in 4
years immediately preceding the previous year (as he came India first time), he
did not reside in India. Hence, he does not satisfy any of the conditions
specified in sec. 6(1). Thus, he is a non-resident for the P.Y. 2020-21.

Illustration 2.
Andy, a British national, comes to India for the first time during 2016-17. During
the financial years 2016-17, 2017-18, 2018-19, 2019-20 and 2020-21, he was in
India for 55 days, 60 days, 80 days, 160 days and 70 days respectively.
Determine his residential status for the assessment year 2021-22.

Solution:
During the previous year 2020-21, Andy was in India for 70 days & during 4
years immediately preceding the previous year, he was in India for 355 days as
shown below:
Year 2016-17 2017-18 2018-19 2019-20 Total
No. of days 55 60 80 160 355
stayed in
India

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Thus, he does not satisfy Sec.6(1) & consequently, he is a non-resident in India
for the P.Y. 2020-21.

Exceptions to the above rule

A. In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
1. An Indian citizen, who leaves India during the previous year for employment
purpose.
2. An Indian citizen, who leaves India during the previous year as a member of
crew of an Indian ship.
Tax point: Above assessee shall be treated as resident in India only if he resides
in India for 182 days or more in the relevant previous year.

B. In case of an Indian citizen or a person of Indian origin# comes on a visit to

India during the previous year, modified condition (ii) of sec. 6(1) is applicable:
Case Modified condition (ii) of sec. 6(1)
His total income, other than the He is in India for a period of 120 days
income from foreign sources , or more (but less than 182 days)
exceeds 15 lakhs during the previous during the previous year and for 365
year. or more days during 4 previous years
immediately preceding the relevant
previous year.
His total income, other than the He is in India for a period of 182 days
income from foreign sources, does or more during the previous year and
not exceed `15 lakhs during the for 365 or more days during 4
previous year. previous years immediately
preceding the relevant previous year.

C. An individual shall be deemed to be resident in India, if following conditions

are satisfied:
a. He is a citizen of India
b. His total income, other than the income from foreign sources, exceeds 15
lakhs during the previous year;
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c. He is not satisfying any of the basic conditions given u/s 6(1) [i.e., 182 days or
60 days + 365 days]; and
d. He is not liable to tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature. [Sec. 6(1A)]
Tax point:
➢ However, if such individual has satisfied either of the basic conditions,
then he shall be treated as resident in India u/s 6(1).
➢ Further note that the exception is not applicable in case of foreign citizen
even if he is a person of Indian origin.
➢ If these conditions are satisfied, then such individual shall be deemed as
resident irrespective of number of days of his stay in India.
In case of NRIs and foreign nationals who was stranded in India due to Covid
19, the Government has assured that their stay in the country during the
period will not be counted for the purpose of determining their residency
status for taxation purpose.
In case of an individual, being a citizen of India and a member of the crew of
a ship, the period or periods of stay in India shall, in respect of an eligible
voyage, not include the period beginning on the date entered into the
Continuous Discharge Certificate in respect of joining the ship by the said
individual for the eligible voyage and ending on the date entered into the
Continuous Discharge Certificate in respect of signing off by that individual
from the ship in respect of such voyage. In simple words, in the Continuous
Discharge Certificate the date of joining is recorded as 1st January 2020 and
the date of ending the voyage is recorded as 31st January 2020,
then the entire period of 31 days shall be excluded from his stay in India

“Eligible voyage” shall mean a voyage undertaken by a ship engaged in the

carriage of passengers or freight in international traffic where

i. for the voyage having originated from any port in India, has as its
destination any port outside India; and
ii. for the voyage having originated from any port outside India, has as its
destination any port in India.’.

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Additional conditions to test whether resident individual is ‘Ordinarily resident
or not’ [Sec. 6(6)] Amended
A resident individual in India can further be categorised as -
i) Resident and ordinarily resident in India
ii) Resident but not ordinarily resident in India

Resident and ordinarily resident:

If a resident individual satisfies the following two additional conditions, he will
be treated as resident & ordinarily resident in India -
(a) He has been resident in India [as per sec. 6(1)] in at least 2 out of 10
previous years immediately preceding the relevant previous year; and
(b) He has resided in India for a period of 730 days or more during 7
previous years immediately preceding the relevant previous year.

Tax point: To be a Resident & Ordinarily resident in India, one has to satisfy
at least one condition of sec. 6(1) & both the additional conditions of sec.
6(6).

Resident but not ordinarily resident:

If a resident individual does not satisfy both additional conditions as given u/s
6(6), he is “Resident but not ordinarily resident in India”.

Exceptions:
A. An individual shall be deemed to be resident but not ordinarily resident in
India, if following conditions are satisfied:
a. He is a citizen of India
b. His total income, other than the income from foreign sources, exceeds 15
lakhs during the previous year; and
c. He is not liable to tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature.

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d. He is deemed to be resident in India u/s 6(1A).

B. An individual shall be deemed to be resident but not ordinarily resident in

India, if following conditions are satisfied:
a. He is an Indian citizen or a person of Indian origin.
b. He comes on a visit to India during the previous year
c. His total income, other than the income from foreign sources, exceeds 15
lakhs during the previous year
d. He is in India for a period of 120 days or more (but less than 182 days) during
the previous year and for 365 or more days during 4 previous years
immediately preceding the relevant previous year.
Tax point: If aforesaid conditions are satisfied, then such individual shall be
deemed to be resident but not ordinarily resident even though he has satisfied
both conditions specified u/s 6(6).

Practical Problems:
Illustration 1.
Mr. X, aged 19 years, left India for first time on May 31, 2020. Determine his
residential status for the previous year 2020-21 if:
i) He left India for employment purpose
ii) He left India on world tour.

Illustration 2.
X came India for first time on July 24, 2016. From July 24, 2016 to December
25, 2017, he was in India. Again, he came to India on August 5, 2020 for
employment purpose & left India on November 25, 2020 permanently.
Determine his residential status for the previous year 2020-21 assuming –
a) He is a foreign citizen
b) He is an Indian citizen

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Hindu Undivided Family (HUF) [Sec. 6(2)]:
An HUF can be either a resident or non-resident in India. Again, a resident HUF
can further be classified as ‘Ordinarily resident’ and ‘Not ordinarily resident’.
Resident HUF: When the control & management of affairs of HUF is wholly or
partly situated in India during the relevant previous year, then it is treated as
resident in India.

Control & management means:

• controlling & directive power;
• actual control & management (mere right to control & manage is not
enough);
• central control & management and not the carrying out of day-to-day affairs.
The place of central control & management is situated where the head, the
seat & the directing power is situated.

Non-resident HUF:
An HUF is non-resident in India if the control & management of its affairs is
wholly situated outside India.
Ordinarily resident in India: If the ‘karta’ or manager of a resident HUF satisfies
both additional conditions given u/s 6(6), HUF is said to be an ordinarily
resident. If the ‘karta’ or manager of a resident HUF do not satisfy both
additional conditions given u/s 6(6), HUF is said to be a not-ordinarily resident.
Tax point: Residential status of the karta for the previous year is not important
but his status for preceding 10 years is important.

Company [Sec. 6(3)]

Resident Company: An Indian company is always a resident in India.
A non-Indian company is said to be a resident in India, if its place of effective
management, in that year, is in India.

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“Place of effective management” means a place where key management and
commercial decisions that are necessary for the conduct of the business of an
entity as a whole, are in substance made.’
Non-Resident Company: If place of effective management, in that year, is not in
India, the said company is non-resident in India for the relevant previous year.
Tax point: In case of company, there is no sub-division like ‘Ordinarily resident’
or ‘Not ordinarily resident’.

Firm or an Association of Persons (AOP) or Body of Individuals (BOI) [Sec.

6(4)]:
Resident: A firm or an AOP or BOI is said to be a resident in India, if control &
management of its affairs are wholly or partly situated in India during the
relevant previous year.
Control & management is vested in hands of partners in case of firm and
principal officer in case of an AOP/BOI.

Non-resident: If control & management of its affairs are situated wholly

outside India, then it is a non-resident in India.
Tax point: In case of firm or BOI or AOP, there is no subdivision like ‘Ordinarily
resident’ or ‘Not ordinarily resident’.

Any Other Person

Resident: Any other assessee will be treated as resident in India if the control &
management of its affairs is situated wholly or partly in India.
Non-Resident: If control & management of affairs of the assessee, are situated
wholly outside India, it is a non-resident in India.

2.4 INCIDENCE OF TAX [SEC. 5]:

The following chart highlights the provisions of tax incidence in brief:

Page | 25
 Nature of Income Tax incidence in the case of
Resident & Resident but Non
ordinarily not resident
resident ordinarily
resident
Income accrued or deemed to Taxable Taxable Taxable
be accrued and received or
deemed to be received in India.
Income accrued outside India Taxable Taxable Taxable
but received or deemed to be
received in India.
Income accrued or deemed to Taxable Taxable Taxable
be accrued in India but received
outside India
Income accrued and received Taxable Taxable Not taxable
outside India from a business
controlled in or profession set-
up in India.
Income accrued and received Taxable Not taxable Not taxable
outside India from a business
controlled or profession set-up
outside India.
Income accrued and received Taxable Not taxable Not taxable
outside India in the previous
year (it makes no difference if
the same is later remitted to
India).
Income accrued and received Not taxable Not taxable Not taxable
outside India in any year
preceding the previous year and
later on remitted to India in
current financial year.
Note: In case of resident assessee like company, firm etc. (other than
Individual and HUF) in which there is no classification as ‘Resident but not
ordinarily resident’, income accrued and received outside India from a
business controlled or profession setup outside India shall be taxable.

Page | 26
Illustration 3.
Ram provides following details of income, calculate the income which is liable
to be taxed in India for the A.Y.2021-22 assuming that –
a) He is an ordinarily resident
b) He is not an ordinarily resident
c) He is a non-resident.

Particulars Amount
Salary received in India from a former employer of UK 1,40,000
Income from tea business in Nepal being controlled from India 10,000
Interest on company deposit in Canada (1/3rd received in India) 30,000
Profit from a business in Mumbai controlled from UK 1,00,000
Profit for the year 2002-03 from a business in Tokyo remitted to 2,00,000
India
Income from a property in India but received in USA 45,000
Income from a property in London but received in Delhi 1,50,000
Income from a property in London but received in Canada
2,50,000
Income from a business in Jambia but controlled from Turkey
10,000

2.5 INCOME RECEIVED IN INDIA:

Income received in India is taxable in all cases (whether accrued in India or
elsewhere) irrespective of residential status of the assessee, therefore it is
significant to know the meaning of income received in India. If the place, where
the recipient gets the money (on first occasion) under his control, is in India, it
is said to be income received in India.
Taxpoint: Receipt is different from remittance. The receipt of income refers to
the first occasion when the recipient gets the money under his control. Once
the amount is received as income (at any place outside India), any subsequent
remittance or transmission of the amount to India does not result to receipt in
India
Example: Mr. X, a non-resident, received dividend from an Italian company in
Japan on 15/12/2020. On 17/12/2020, he remitted such income in India. Such

Page | 27
income shall not be taxable in India as income has neither received in India nor
accrued in India.

2.6 INCOME DEEMED TO BE RECEIVED IN INDIA:

Following incomes shall be deemed to be received in India and taxable in hands
of all assessee irrespective of their residential status -
a) The annual accretion in the previous year to the balance at the credit of an
employee participating in a recognized provident fund, to the extent provided
in Rule 6 of part A of the IV schedule i.e.-
i) Employer’s contribution to the recognised provident fund in excess of
12% of salary.
ii) Interest credited on the above balance by a rate exceeding 9.5% [Sec.
7(i)]
b) The transferred balance in recognised provident fund, to the extent liable to
income tax [Sec. 7(ii)]
c) The contribution made, by the employer in the previous year, to the account
of an employee under a pension scheme notified u/s 80CCD [Sec. 7(iii)]
d) Tax Deducted at source [Sec. 198].
e) Deemed profit.
f) Income from undisclosed sources.

2.7 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SEC. 9]:

Following incomes are deemed to accrue or arise in India:
Income from connection in India [Sec. 9(1)(i)]
All income accruing or arising, whether directly or indirectly:
a) through or from any business connection in India; or
b) through or from any property / asset or source of income in India; or
c) through the transfer of a capital asset situated in India.

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Income from business connection in India Amended
Income, which arises outside India because of business connection (or
Professional connection) in India is deemed to accrue or arise in India and shall
be taxable in hands of all assessee irrespective of his residential status.
Meaning: Business connections may be in several forms, e.g. a branch office in
India or an agent/ organisation of a non-resident in India.
Business connection shall include any business activity carried out through a
person who, acting on behalf of the non-resident:
a) has and habitually exercises in India, an authority to conclude contracts on
behalf of the non-resident or habitually concludes contracts or habitually plays
the principal role leading to conclusion of contracts by that non-resident and
the contracts are.
i) in the name of the non-resident; or
ii) for the transfer of the ownership of, or for the granting of the right to use,
property owned by that non-resident or that non-resident has the right to use;
or
iii) for the provision of services by the non-resident; or
b) has no such authority, but he maintains in India habitually a stock of goods
or merchandise from which he regularly delivers goods or merchandise on
behalf of the non-resident; or
c) habitually secures orders in India mainly for the non-resident.

Exceptions:
1. Business activity through a broker: Business connection shall not include any
business activity carried out through a broker, general commission agent or any
other agent having an independent status and acting in the ordinary course of
his business. However, where broker, general commission agent or any other
agent, who mainly or wholly works on behalf of a non-resident or other non-
resident(s) under the same management, he shall not be deemed to be a
broker, general commission agent or an agent of an independent status.
2. Business activity confined to purchase of goods: In the case of a non-
resident, no income shall be deemed to accrue or arise in India to him from

Page | 29
operations, which are confined to the purchase of goods in India for the
purpose of export.
3. Business activity of a news agency confined to collection of news, etc.: In the
case of a non-resident, being a person engaged in the business of running a
news agency or of publishing newspaper, magazines or journals, no income
shall be deemed to accrue or arise in India to him through or from activities,
which are confined to the collection of news and views in India for transmission
out of India.
4. Business of mining of diamonds: In the case of a foreign company engaged in
the business of mining of diamonds, no income shall be deemed to accrue or
arise in India to it through or from the activities which are confined to the
display of uncut and unassorted diamond in any special zone notified by the
Central Government
5. Business activity confined to shooting: In the case of a non-resident, being –
➢ An individual who is not a citizen of India; or
➢ A firm which does not have any partner, who is a citizen of India or who
is resident in India; or
➢ A company, which does not have any shareholder who is a citizen of or
resident in India; no income shall be deemed to accrue or arise in India
through or from operations, which are confined to the shooting of any
cinematography film in India.
Note:
• In the case of a business [other than the business having business connection
in India on account of significant economic presence] of which all operations
are not carried out in India, the income of the business deemed to accrue or
arise in India shall be only such part of the income as is reasonably attributable
to the operations carried out in India. [Explanation 1(a)]
• An asset or a capital asset being any share or interest in a company or entity
registered or incorporated outside India shall be deemed to be situated in
India, if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India. [Explanation 5].
However, the provision is not applicable, in case, where an asset or capital
asset, being held by a non-resident by way of investment, directly or indirectly,

Page | 30
in Category-I or Category-II foreign portfolio investor under the SEBI (Foreign
Portfolio Investors) Regulations, 2014 or similar regulation of 2019.
• The significant economic presence of a non-resident in India shall constitute
“business connection” in India and “significant economic presence” for this
purpose, shall mean:
a. transaction in respect of any goods, services or property carried out by a
non-resident with any person in India including provision of download of
data or software in India, if the aggregate of payments arising from such
transaction or transactions during the previous year exceeds such
amount as may be prescribed; or
b. systematic and continuous soliciting of business activities or engaging in
interaction with such number of users in India, as may be prescribed.

Tax point:
The transactions or activities shall constitute significant economic presence in
India, whether or not:
i. the agreement for such transactions or activities is entered in India; or
ii. the non-resident has a residence or place of business in India; or
iii. the non-resident renders services in India:

Only so much of income as is attributable to the transactions or activities

referred above shall be deemed to accrue or arise in India.
• The income attributable to the operations carried out in India shall include
income from:
i. such advertisement which targets a customer who resides in India or a
customer who accesses the
advertisement through internet protocol address located in India;
ii. sale of data collected from a person who resides in India or from a person
who uses internet protocol address located in India; and
iii. sale of goods or services using data collected from a person who resides in
India or from a person who uses internet protocol address located in India.
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• In the case of an eligible investment fund, the fund management activity
carried out through an eligible fund manager acting on behalf of such fund
shall not constitute business connection in India of the said fund [Sec. 9A].

Income from any property/assets or source of income in India:

Following income shall be deemed to accrue or arise in India –
• Income from any assets or property in India whether tangible / intangible,
movable / immovable; or
• Income from a source situated in India

Income on transfer of a capital asset situated in India:

Any gain on transfer of a capital asset situated in India, shall be deemed to
accrue or arise in India.

Salaries earned in India [Sec. 9(1)(ii)]

Salary payable for –
a) Services rendered in India; and
b) The rest period or leave period which is preceded and succeeded by the
period during which services were rendered in India and forms part of the
service contract of employment,
- shall be deemed to accrue or arise in India.

Salary payable by the Government to Indian citizen for services rendered

outside India [Sec. 9(1)(iii)]
Any salary -
• payable by the Government of India;
• to a citizen of India;
• for services rendered outside India;

Page | 32
- shall be deemed to accrue or arise in India.

Note: In this regard it is to be noted that any allowances or perquisites paid by

the Government to a citizen of India for services rendered outside India shall
be exempted [Sec. 10(7)]

Income from dividend [Sec. 9(1)(iv)]

Any dividend paid by an Indian company outside India is deemed to accrue or
arise in India.

Income from Interest [Sec. 9(1)(v)]

Following interest shall be deemed to accrue or arise in India –

Interest payable by Condition

The Government Nil
A resident person Money borrowed is not used for the purpose of
• business or profession carried on by such person
outside India; or
• earning any income from any source outside India.
A non-resident person Money borrowed is used for the purpose of
business or profession carried on by such person in
India.
Tax point: In case money borrowed and used for the
purpose of earning an income from any other
source in India, interest shall not be treated as
deemed to accrue or arise in India.

Income from royalty [Sec. 9(1)(vi)]

Following royalty shall be deemed to accrue or arise in India –

Interest payable by Condition

The Government Nil
A resident person Money borrowed is not used for the purpose of
• business or profession carried on by such person
outside India; or
• earning any income from any source outside India.
A non-resident person The right, property, information or services must be
utilised for the purpose of –

Page | 33
 • business or profession carried on by such person
in India; or
• earning any income from any source in India.

Income from technical services [Sec. 9(1)(vii)]

Following income by way of fees for technical service shall be deemed to
accrue or arise in India.

Interest payable by Condition

The Government Nil
A resident person Such services must not be utilised in –
• business or profession carried on by such person
outside India; or
• earning any income from any source outside India
A non-resident person Such services must be utilized in –
• business or profession carried on by such person
in India; or
• earning any income from any source in India.

Deemed Receipts of Gift [Sec. 9(1)(viii)]

When
- a non-resident or a foreign company receives any sum of money referred to in
sec. 56(2)(x)3
- such receipt is from a resident person
- such money is received outside India
- such money is received on or after 05-07-2019
then
- such receipt is treated as income deemed to accrue or arise in India.

Practical Problem:

Illustration 4.
Miss Monica, a foreign national, comes India every year for 90 days since 2005-
06.
a) Determine her residential status for the previous year 2020-21.
b) Will your answer differ, if she comes India for 100 days instead of 90 days
every year.

Page | 34
Solution:
a) Since Miss Monica stayed for 90 days during the previous year 2020-21 and
for 360 days (90 days X 4 years) during the 4 years immediately preceding the
previous year, hence, she is not satisfying any of the conditions
of sec. 6(1). Thus, she is a non-resident for the previous year 2020-21.

b) Since Miss Monica stayed for 100 days during the previous year 2020-21 and
for 400 days (100 days X 4 years) during the 4 years immediately preceding the
previous year, hence, she is satisfying sec. 6(1)(c). Thus, she is
resident for the previous year 2020-21. Further, she resides for only 700 days
(100 days X 7 years) during the 7 years immediately preceding the previous
year. Hence, she does not satisfy one of the conditions of sec. 6(6).
Thus, she is resident but not ordinarily resident for the previous year 2020-21.

Illustration 5.
Mr. Sid, a British national, joined XYZ Co. Ltd. as an engineer in India on 1st
May, 2010. On 31st December, 2011, he went to Sri Lanka on deputation. On
1st April, 2016, he came back to India and left for Sri Lanka again on 31st May,
2016. He returned to India and joined his original post on 1st July, 2020.
Determine his residential status for the A.Y. 2021-22.

Page | 35
 CHAPTER 3: AGRICULTURAL INCOME

3.1 MEANING By virtue of sec. 2(1A):

agricultural income means –
1. Any rent or revenue derived from a land, which is situated in India & is used
for agricultural purposes;
Tax point:
➢ Rent may be in cash or in kind.
➢ Assessee may be the owner or tenant of such land.

2. Any income derived from such land by agriculture.

3. Any income derived from such land by the performance by –

a) a cultivator;
b) receiver of rent in kind; - of any process ordinarily employed by a them to
render the produce raised or received by him fit to be taken to market.

4. Any income derived from such land by the sale by

a) a cultivator of the produce raised by him; or
b) receiver of rent-in-kind of the produce received by him; - in respect of which
no process has been performed other than a process required to render it fit
for the market.

Tax point:
The process must be employed only to convert ‘the produce or rent in kind’ in
marketable form. If marketing process is performed on the ‘produce or rent in
kind’, which can be sold in its raw form in market, then income derived from
such product is partly agricultural & partly non-agricultural income. (Detail
discussion is given later in this chapter)

Page | 36
5. Any income derived from a building subject to fulfillment of the following
conditions –
a) The building should be occupied by the cultivator or receiver of rent in kind.
b) The building should be on or in the immediate vicinity of the land, being
situated in India and used for agricultural purposes.
c) The building should be used as dwelling house or store-house or other out
building.
d) The land is either situated in –
i) Rural area; or
ii) Urban area and assessed to land revenue / local rates.

Tax point:
➢ Where such land or building is used for non-agricultural purpose then
any income derived from such land or building shall not be treated as
agricultural income.
➢ Income derived from land being let out for storing crop shall not be
agricultural income.
➢ Building should be owned and occupied by the land-holder if he receives
rent or revenue from the land. On the other hand, in case of cultivator or
receiver of rent in kind, it is enough that the building is occupied by him.

Notes:
a) Profit on transfer of agricultural land: Profit on transfer of agricultural land
shall not be treated as agricultural income.
b) Nexus between agro-activity and agro-income: There must be a close nexus
between agro-activity and agro-income. Income by way of sale of commodity,
being different from what is raised and processed, is not agricultural income.
E.g. Assessee growing mulberry leaves to feed silkworms and to obtain silk-
cocoons, income on sale of such silk-cocoons shall not be treated as
agricultural income.

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Agriculture or Agricultural operations or Agricultural purposes:
The Act nowhere defines the term agricultural operations or agricultural
purposes. However, the Supreme Court laid down guidelines for the
determination of the scope of these terms in CIT -vs.- Raja Benoy Kumar Sahas
Roy. Accordingly, for the purpose, agricultural activity is divided into two parts:
a) Basic Operation: It means application of human skill & labour upon the land,
prior to germination. E.g. Tilling of land, sowing of seeds, planting, irrigation,
etc.
Tax point:
Any spontaneous growth from land itself (i.e. without any human effort)
cannot be termed as agricultural operation.

b) Subsequent Operation: It means operations –

• which fosters the growth and preserves the produce;
• for rendering the produce fit for sale in market; and
• which are performed after the produce sprouts from the land.
E.g. Digging the soil around the growths, removal of undesirable
undergrowth’s, weeding, tending, pruning, cutting, harvesting, etc.

3.2 INSTANCES OF AGRICULTURAL (AGRO) INCOME:

1. Income from growing trade or commercial products like jute, cotton, etc. is
an agro income.
2. Income from growing flowers and creepers is an agro income.
3. Plants sold in pots are an agro income provided basic operations are
performed.
4. Remuneration and interest to partner: Any remuneration (salary,
commission, etc.) received by a partner from a firm engaged in agricultural
operation is an agro income. Interest on capital received by a partner from a
firm, engaged in agricultural operation is an agro income.

Page | 38
5. Income arising by sale of trees grown on denuded parts of the forest after
replanting and by carrying on subsequent operations, is an agro income.
6. Compensation received from insurance company for damage caused by hail-
storm to the green leaf of the assessee’s tea garden is agricultural income.
Further, no part of such compensation consists of manufacturing income, as
such compensation cannot be apportioned under Rule 8 between
manufacturing income and agricultural income.
7. Any fee derived from land used for grazing of cattle, being used for
agricultural operation, is an agro income.
8. Any income derived from saplings or seedlings grown in a nursery shall be
deemed to be agricultural income.

3.3 INSTANCES OF NON-AGRICULTURAL (NON-AGRO) INCOME:

Instances of Non-agricultural (Non-agro) Income
1. Salary received by an employee from any business (having agricultural
income) is non-agro income.
2. Dividend received from a company engaged in agricultural operation is non-
agro income.
3. Income from salt produced by flooding the land with sea-water is non-agro
income.
4. Income from fisheries, poultry farming, dairy farming, butter & cheese
making, etc. is non-agro income.
5. Breeding & rearing of livestock is non-agro income.
6. Interest received by a moneylender in the form of agricultural produce is
non-agro income.
7. Profit on sale of standing crops after harvest, where such crops were
acquired through purchase is non-agro income.
8. Royalty income from mines is non-agro income.

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9. Remuneration to a Director or Managing Director from a company engaged
in agricultural business is nonagro income. The provision holds good even
when such remuneration is on the basis of certain percentage of net profit.
10. Income earned by a cultivator from conversion of sugarcane (raised on own
land) to jaggery is non-agro income to the extent to which income is related to
such conversion only. This is because sugarcane itself is marketable.
11. Interest on arrears of rent receivable in respect of agricultural land is non-
agro income.
12. Income from a land situated outside India is non-agro income.
13. Annuity received by a person in consideration of transfer of agricultural
land, is non-agro income.
14. Income on supply of water for agricultural operation is non-agro income.
The provision holds good even when such income is received in the form of
agro-produce.
15. Income from sale of trees and grasses grown spontaneously (without any
human effort), is non-agro income.

3.4 TREATMENT OF PARTLY AGRICULTURAL & PARTLY NON-

AGRICULTURAL INCOME [RULE 7]:
Treatment of Partly Agricultural & Partly Non-Agricultural Income In case
assessee is engaged in an integrated activity, comprising of agricultural activity
as well as non- agricultural activity, then profit of such integrated activity shall
be segregated into agricultural income and non-agricultural income in the
following manner –
Rule Case Agricultural Non-Agricultural
Income Income
8 Assessee is engaged in the 60% of income 40% of income
business of growing and
manufacturing tea in India.
E.g., If an assessee earns 5 lakh (as per sec. 28) from the business of
growing & manufacturing tea in India, then his business income will
be 2 lakh (i.e., 40% of 5 lakh) & agro income will be 3 lakh (i.e., 60%
of 5 lakh)

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 7(A) Assessee is engaged in the 65% of income 35% of income
business of growing and
manufacturing rubber in
India
Assessee is engaged in the business of growing and manufacturing
Coffee in India.
7B(1) Coffee grown and cured by 75% of income 25% of income
the seller in India.
7B(1A) Coffee grown, cured, roasted 60% of income 40% of income
and grounded by the seller
in India, with or without
mixing chicory or other
flavouring ingredients.
Salary and interest received by a partner from a firm growing and
manufacturing tea, coffee or rubber: Such remuneration or interest shall be
treated as partly agricultural income and partly business income as stated
above.

Any other case:

For computing agricultural income from a business having both agricultural as
well as non-agricultural income,
1. Assessee is required to prepare two Profit or Loss statements, one for agro-
business & another for non-agro-business
2. Agro expenses debited to Agro Profit or Loss and non agro expenses shall be
debited to non-agro-business Profit or Loss.

➢ Note: Non-apportionable expenditure, related to composite business of

agriculture and non-agriculture, is fully charged to non-agricultural
business.
3. Market value of any agricultural produce, which is utilised as raw material in
such business, is to be treated as income for agro-business and expenditure for
non-agro-business.

Illustration 1.

Page | 41
X Ltd. grows sugarcane to manufacture sugar. Details for the previous year
2020-21 are as follows:
Particulars in lacs.
Cost of cultivation of sugarcane (5,000 tons) 10
Sugarcane sold in market (1,000 tons) 3
Sugarcane used for sugar manufacturing (4,000 tons) --
Cost of conversion 5
Sugar produced & sold in market 25
Compute income of X Ltd.

Solution:
Computation of income of X Ltd. for the A.Y. 2021-22.
Particulars Manufacturing Agriculture
Sale of agro product in market 3
Sale of manufactured product in market 25
Notional sale of agro product used in the 12
process of manufacturing
(4,000 ton 3 lacs per ‘000 ton)
Revenue [A] 25 15
Less: Expenses incurred
Cost of conversion 5
Market value of sugarcane used (4,000 ton 3 12
lacs per ‘000 ton)
Cost of cultivation 10
Expenditure [B] 17 10
Income [A – B] 8 5

3.5 IMPACT OF AGRICULTURAL INCOME ON TAX COMPUTATION:

Impact of agricultural income on tax computation Sec. 10(1) of the Act exempts
agricultural income from tax as our Constitution does not provide power to the
Parliament to levy tax on agro-income. However, since 1973 an indirect method
has been found, to levy tax on agro-income.
According to this method, agricultural income is included in the total income of
the assessee for deciding the tax slab of the assessee. The way to apply higher
rate of tax-slab on non-agricultural income by including agricultural income in

Page | 42
the total income of the assessee are as under: Conditions for including
agricultural income in the total income of the assessee
1. The assessee is an individual, a Hindu-undivided family, a body of individual,
an association of person or an artificial juridical person.
2. The assessee has non-agricultural income exceeding the maximum amount
of exemption (i.e., in case of Senior citizen 3,00,000, Super Senior citizen
5,00,000 and in case of other individual/ HUF/AOP / BOI /artificial juridical
person 2,50,000).
3. The agricultural income of the assessee exceeds 5,000.
Treatment:
Step 1: Compute income tax on total income of assessee including Agro-
income.
Step 2: Compute income tax on (Agro-income + Maximum exempted limit)
Step 3: Tax liability before cess = (Tax as per step 1) - (Tax as per step 2)

Illustration 2.
Mr. X aged 42 years has non-agro income of 3,25,000 and agro income of
2,55,000. Compute his tax liability for the A.Y. 2021-22.
Solution:
Computation of tax liability of Mr. X for the A.Y. 2021-22
Particulars Rs
Income Tax on 5,80,000 (i.e., agro income 2,55,000 + non agro 28,500
3,25,000)
Less: Tax on 5,05,000 (i.e., agro income 2,55,000 + maximum 13,500
exempted limit 2,50,000)
Tax liability 15,000
Less: Rebate u/s 87A 12,500
2,500
Add: Health & Education Cess (4% of 2,500) 100
Tax and cess payable (Rounded off u/s 288B) 2,600

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CHAPTER 4: INCOME, WHICH DO NOT FORM PART OF
TOTAL INCOME
4.1 INCOME EXEMPT FROM TAX:
Sec. 10 enlists the various income which are exempt from tax i.e., does not
form part of total income of the assessee.
These are –
Agricultural Income [Sec. 10(1)]:
Refer chapter Agricultural income

Member’s Share in Income of HUF [Sec. 10(2)]:

Any sum received by an individual as a member of a Hindu undivided family –
• Where such sum has been received out of the income of the family; or
• Where such sum has been received out of the income of an impartible estate
belonging to the family.

Share of Profit from a Firm [Sec. 10(2A)]:

Share in the total income of the firm is exempt in the hands of partner.

Interest Income of Non-resident [Sec. 10(4)/(4B)]:

• Interest on specified securities or bonds, including premium on redemption
of such bonds is exempted in the hands of a non-resident [Sec. 10(4)(i)]
• Interest on Non-Resident (External) Account in any bank in India to a person
who is a resident outside India as per as defined in sec. 2(w) of the Foreign
Exchange Management Act, 1999 or is a person who has been permitted by the
Reserve Bank of India to maintain the aforesaid Account
• Interest on notified savings certificates issued before 1-6-2002 by the Central
Government to a non-resident, being a citizen of India or a person of Indian
origin [Sec. 10(4B)]

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Interest on Rupee Denominated Bond [Sec. 10(4C)]:
Interest payable to a non-resident, not being a company, or to a foreign
company, is exempt if following conditions are satisfied:
(a) Interest is payable by any Indian company or business trust.
(b) Such interest is payable in respect of monies borrowed from a source
outside India by way of issue of rupee denominated bond, as referred to in sec.
194LC(2)(ia).
(c) Such bond has been issued during 17-09-2018 and 31-03-2019.

Income received by specified fund [Sec. 10(4D)]:

➢ Any income accrued or arisen to, or received by a specified fund as a
result of transfer of capital asset referred to in sec. 47(vii ab), on a
recognised stock exchange located in any International Financial Services
Centre; and
➢ Where the consideration for such transaction is paid or payable in
convertible foreign exchange or as a result of transfer of securities (other
than shares in a company resident in India) or any income from
securities issued by a non-resident (not being a permanent
establishment of a non-resident in India) and
➢ Where such income otherwise does not accrue or arise in India or any
income from a securitisation trust which is chargeable under the head
“Profits and gains of business or profession”
- to the extent such income accrued or arisen to, or is received, is
attributable to units held by non-resident (not being the permanent
establishment of a non-resident in India) computed in the prescribed
manner.
➢ Specified fund means a fund established or incorporated in India in the
form of a trust or a company or a limited liability partnership or a body
corporate:
▪ (i) which has been granted a certificate of registration as a
Category III Alternative Investment Fund and is regulated
under the Securities and Exchange Board of India
(Alternative Investment Fund) Regulations, 2012, made
under the Securities and Exchange Board of India Act, 1992;

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 ▪ (ii) which is located in any International Financial Services
Centre;
▪ (iii) of which all the units are held by non-residents other
than units held by a sponsor or manager;

Leave Travel Concession [Sec. 10(5)]:

Refer chapter Salaries.

Remuneration to Person who is not a Citizen of India in certain cases [Sec.

10(6)]:
Following remuneration to an individual who is not a citizen of India shall be
exempt –
• Remuneration received by him as an official of an embassy, high commission,
legation, commission, consulate, or the trade representation of a foreign state
or as a staff of any of these officials provided corresponding Indian officials in
that foreign country enjoy similar exemptions in their country - Sec. 10(6)(ii).
• Remuneration received as an employee of a foreign enterprise for services
rendered by him during his stay in India provided –
a. the foreign enterprise is not engaged in any business or profession in
India;
b. his stay in India does not exceed 90 days in aggregate; and
c. such remuneration is not liable to be deducted from the income of the
employer under this Act - Sec. 10(6)(vi)
• Remuneration for services rendered in connection with his employment on a
foreign ship provided his total stay in India does not exceed 90 days in the
previous year - Sec. 10(6)(viii)
• Remuneration received as an employee of the Government of a foreign State
during his stay in India in connection with his training in any undertaking
owned by Government, Government company, subsidiary of a Government
company, corporation established by any Central, State or Provincial Act and
any society wholly financed by the Central or State Government – Sec. 10(6)(xi)

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Tax paid by Government on Royalty or Fees for Technical Service [Sec.
10(6A)]:
Tax paid by Government on Income of a Non-resident or a Foreign Company
[Sec. 10(6B)]:
Tax paid on Income from Leasing of Aircraft [Sec. 10(6BB)]:
Tax paid by an Indian company on income arising from leasing of aircraft, etc.
to the Government of a foreign state or foreign enterprise under an approved
agreement entered into with such Indian company engaged in the business of
operation of aircraft, provided such agreement was entered into between 1-4-
1997 and 31-3-1999 or after 31-3-2007.

Tax point:
Only tax paid on such income is exempt, however such income is taxable.

Fees for Technical Services in Project connected with Security of India [Sec.
10(6C)]:
Any income arising to notified foreign company by way of royalty or fees for
technical services received in pursuance of an agreement entered into with
Central Government for providing services in or outside India in projects
connected with security of India.

Income from service provided to National Technical Research Organisation

[Sec. 10(6D)]:
Any income arising to a non-resident or to a foreign company, by way of royalty
from, or fees for technical services rendered in or outside India to, the National
Technical Research Organisation.

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Allowance or Perquisite paid Outside India [Sec. 10(7)]:
Any allowance or perquisite paid outside India by the Government to a citizen
of India for rendering services outside India.
Remuneration received for Co-operative Technical Assistance Programmes
with an Agreement entered into by the Central Government in certain cases
[Sec. 10(8)]
Remuneration received by Non-resident Consultant or Employee or Family
Member of such Consultant [Sec. 10(8A), (8B) & (9)]
Death-cum-retirement-gratuity [Sec. 10(10)]
Refer chapter Salaries.
Commutation of Pension [Sec. 10(10A)]
Refer chapter Salaries.
Leave Encashment [Sec. 10(10AA)]
Refer chapter Salaries.
Workmen’s Retrenchment Compensation [Sec. 10(10B)]
Refer chapter Salaries.
Compensation under Bhopal Gas Leak Disaster Act, 1985 [Sec. 10(10BB)]
Compensation for any Disaster [Sec. 10(10BC)]
Any amount received or receivable from the Central Government or a State
Government or a local authority by an individual or his legal heir by way of
compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a
deduction under this Act on account of any loss or damage caused by such
disaster.

Payment under Voluntary Retirement Scheme [Sec. 10(10C)]

Refer chapter Salaries.

Page | 48
Tax paid by Employer on behalf of Employee on Non-monetary Perquisites
u/s 17(2) [Sec. 10(10CC)]
Refer chapter Salaries.
Sum received under a Life Insurance Policy [Sec. 10(10D)]
Any sum received under a life insurance policy including bonus on such policy is
wholly exempt from tax. However, exemption is not available on -
1. any sum received u/s 80DD(3) or u/s 80DDA(3); or
2. any sum received under a Keyman insurance policy; or
3. any sum received under an insurance policy issued on or after 1-4-20121 in
respect of which the premium payable for any of the years during the term of
the policy exceeds 10%2 of the actual capital sum assured.

Notes:
a. Point (3) shall not apply to any sum received on the death of a person.
b. Actual capital sum assured shall mean the minimum amount assured under
the policy on happening of the insured event at any time during the term of the
policy.
c. For calculating actual capital sum assured (for point 3), no account shall be
taken for -
•the value of any premiums agreed to be returned; or
•any benefit by way of bonus or otherwise over and above the sum actually
assured, which is to be or may be received under the policy by any person.

Payment from Statutory or Public Provident Fund [Sec. 10(11)]

Refer chapter Salaries.

Payment from Sukanya Samriddhi Account [Sec. 10(11A)]

Page | 49
Any payment from an account, opened in accordance with the Sukanya
Samriddhi Account Rules, 2014 made under the Government Savings Bank Act,
1873.
Payment from Recognised Provident Fund [Sec. 10(12)]
Refer chapter Salaries.
Payment from National Pension Trust [Sec. 10(12A) & 10(12B)]
Any payment from the National Pension System Trust to an assessee on closure
of his account or on his opting out of the pension scheme referred to in sec.
80CCD, to the extent it does not exceed 60% of the total amount payable to
him at the time of such closure or his opting out of the scheme [Sec. 10(12A)]
Any payment from the National Pension System Trust to an employee under
the pension scheme referred to in sec.
80CCD, on partial withdrawal made out of his account in accordance with the
terms and conditions, specified under the Pension Fund Regulatory and
Development Authority Act, 2013, to the extent it does not exceed 25% of the
amount of contributions made by him [Sec. 10(12B)].

Payment from Approved Superannuation Fund [Sec. 10(13)]

Any payment from an approved superannuation fund made -
•on the death of a beneficiary; or
• to an employee in lieu of or in commutation of an annuity on his retirement
at or after a specified age or on his becoming incapacitated prior to such
retirement; or
• by way of refund of contributions on the death of a beneficiary; or
• by way of refund of contributions to an employee on his leaving the service
(otherwise than by retirement at or after a specified age or on his becoming
incapacitated prior to such retirement) to the extent to which such payment
does not exceed the contributions made prior to 1-4-1962 and any interest
thereon.
•by way of transfer to the account of the employee under a pension scheme
referred to in sec. 80CCD and notified by the Central Government.

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House Rent Allowance [Sec. 10(13A)]
Refer chapter Salaries.

Notified Special Allowances [Sec. 10(14)]

Refer chapter Salaries.

Interest on Securities [Sec. 10(15)]

1. Interest, premium on redemption or other payment on notified securities,
bonds or certificates
2. Interest in the hands of an individual and Hindu undivided family on
Specified Capital Investment Bonds or Specified Relief Bonds
3. Interest on specified bonds to non-resident or his nominees if such bonds
are purchased by a non-resident Indian in foreign exchange; and
4. The interest and principal received in respect of such bonds, whether on
their maturity or otherwise, is not allowable to be taken out of India. Interest
on securities held by the Issue Department of the Central Bank of Ceylon;
5. Interest payable to any bank incorporated in a country outside India and
authorised to perform central banking functions in that country on any
deposits made by it, with the approval of the RBI, with any scheduled bank;
6. Interest payable on a loan advanced by the Nordic Investment Bank for an
approved project;
7. Interest payable to the European Investment Bank for financial co-operation
agreement;
8. Interest payable by a government, local authority, certain industrial
undertakings or financial institution on money borrowed before 1/6/2001
9. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims
or deposits for the benefit of the victims of the Bhopal gas leak disaster.
10. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme,
1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015

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11. Interest on specified bonds issued by a local authority or by a State Pooled
Finance Entity.
12. Interest received by a non-resident or a person who is not ordinarily
resident, in India on a deposit made on or after 1-4-2005 in an offshore banking
unit referred in the Special Economic Zones Act, 2005.
13. Interest payable to a non-resident by a unit located in an International
Financial Services Centre in respect of monies borrowed by it on or after 01-09-
2019.

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 CHAPTER 5: INCOME UNDER HEAD SALARIES
5.1 BASIC ELEMENTS OF SALARY:
• Payer and payee must have employer and employee (or Master & Servant)
relationship; and
• Payment must have been made by the employer in such capacity. Employer-
employee relationship A payment can be construed as salary only if the payer is
the employer and payee is the employee of the payer.
• Criteria for employer-employee relationship: The key criteria to hold this
relationship is that, employee is always bound to work as per direction and
supervision of the employer.
• Payment in employer’s capacity: To treat any payment as salary it is necessary
that payer, being the employer, must have made the payment in such
(employer’s) capacity.
• Contract of service vs contract for service: In “contract of service”, the
employer can direct and control the duties and the manner of performance of
employee hence employer-employee relationship exists in such contract.
However, in case of “contract for service” the contractee can simply decide and
quote the object or target to be achieved but cannot decide or direct the
manner of performance.
• Agent and Principal: If a person is acting as an agent for his principal, any
commission or remuneration earned by the agent is not taxable under the
head “Salaries”. This is because, an agent is not the employee of his principal.
• Salary received by a partner from its firm shall not be taxable as salary,
because there is no employer-employee relationship between the firm and the
partner. Such salary shall be taxable under the head “Profits & gains of business
or profession”.
• Salary received by proprietor from his proprietorship firm is not an income.
As proprietor and proprietorship firm are the same person and no one can earn
from himself.
• Remuneration to director from his company can be treated as salary only if
the director is employee of the company, otherwise the same shall be taxable
under the head “Income from other sources”.

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Note: Directors’ sitting fee is taxable under the head “Income from other
sources”.
• Pension received by the widow or legal heir of deceased employee is not
taxable as salary as no employer employee relationship exists between the
payer and the payee.
However such amount shall be taxable under the head “Income from other
sources”.
• Remuneration received by Judges is taxable under the head “Salaries” even
though they are not having any employer is not taxable under the head
“Salaries” but may be taxed under the head “Profits & gains of business or
profession” or “Income from other sources”.

Illustration 1.
State whether the following receipts should be treated as salary or not?
• A teacher receives emoluments in kind from school in which he teaches. Yes,
it is immaterial whether salary has been received in cash or in kind.
• A teacher of a college receives fees from a University for checking answer
sheets. No, as employer – employee relationship does not exist between payer
and payee. (College-teacher is not the employee of the University). Such
receipt shall be taxable under the head ‘Income from other sources.
• A payment made to the Member of the Parliament or the State legislature.
No, as employer-employee relationship does not exist. A member of the
Parliament or the State legislature is not treated as employee of the
Government. Payment received by them shall be taxable under the head
“Income from other sources”.

5.2 DEFINITION OF SALARY [SEC. 17(1)]:

As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following:
a) Wages;
b) Any annuity or pension;
c) Any gratuity;

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d) Any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages;
e) Any advance of salary;
f) Any payment received in respect of any period of leave not availed of by the
assessee;
g) The portion of the annual accretion in any previous year to the balance at
the credit of an employee, participating in recognised provident fund, to the
extent it is taxable;
h) Transferred balance in a Recognised Provident Fund to the extent it is
taxable.
i) Contribution made by the employer in the previous year, to the account of an
employee under a pension scheme referred to in sec. 80CCD [National Pension
Scheme and Atal Pension Yojana].

5.3 GENERAL NOTES:

• Salary & Wages are identical in the Income-tax Act
• Voluntary Payments: The Act does not make any difference between
voluntary and contractual payment. Both are taxable as salary.
• Remuneration for Extra Work: Where an employee gets extra payment from
his employer (in such capacity) for work performed outside the duties of his
office and thus, such payment shall be taxable as salary.
• Salary from more than one source: If an individual receives salary from more
than one employer during the same previous year, salary from each employer
shall be accumulated and taxable under the head “Salaries”.
• Salary from former, present or prospective employer is chargeable to tax
under the head “Salaries”. E.g. Pension from a former employer and advance
salary from prospective employer shall be taxable under the head “Salaries”.
• Foregoing of salary: Once salary has been earned by an employee, its
subsequent waiver does not make it exempt from tax liability. Such waiver shall
be treated as application of the income.

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Note: However, where an employee opts to surrender his salary to the Central
Government u/s 2 of Voluntary Surrender of Salaries (Exemption from Taxation)
Act, 1961, the salary so surrendered shall not be taxable.

5.4 BASIS OF CHARGE [SEC. 15]:

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever
is earlier. Hence, taxable salary includes:
a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under
the head ‘Salaries’ in the year of receipt.
Note: Such advance salary shall not be included again in the total income when
the salary becomes due.
b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the
head ‘Salaries’ in the year in which it falls due.
Note: Such due salary shall not be included again in the total income when it is
received.
c) Arrear salary: Any increment in salary with retrospective effect which have
not been taxed in the past, such arrears will be taxed in the year in which it is
allowed. Arrear salary are taxable on receipt basis.

5.5 COMPUTATION OF SALARY, AT A GALANCE:

Computation of income under the head “Salaries” of ….. for the A.Y. ……
Particulars Details Amount
Basic Salary **
Fees **
Commission **
Bonus **
Gratuity **
Leave Encashment **
Pension **
Retrenchment Compensation **
Compensation received under Voluntary **
Retirement Scheme **
Allowances: **
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 Dearness Allowance (DA) /Dearness Pay (DP) **
House Rent Allowance **
Children Education Allowance **
Children Hostel Allowance **
Entertainment Allowance **
Medical Allowance **
Conveyance Allowance **
City Compensatory Allowance **
Uniform Allowance **
Professional Development Allowance **
Transport Allowance **
Other Allowances ** **
Perquisites u/s 17(2)
Any Obligation of Employee paid by Employer **
Accommodation **
Shares and securities issued under ESOP **
Employer’s Contribution to Superannuation **
Fund **
Gas, Electricity & Water **
Medical Facility **
Other fringe benefits **
Leave Travel Concession ** **
Contribution of Employer to Provident Fund **
Interest on Recognised Provident Fund **
Any other item **
Gross Salary **
Less: Deduction u/s 16 **
(i) Standard Deduction **
(ii) Entertainment Allowance **
(iii) Tax on employment/Professional tax ** **
Taxable Salary **

Basic Salary: It is the sum paid by employer to employee as salary and shall be
fully taxable.
Pay-Scale (Grade system): It is a system of payment where increment scale is
pre-known to employee. E.g., Basic salary is given as 5,000 – 1,000 – 8,000 –
2,000 – 12,000. The above data indicates the increment schedule. As per this
schedule initial payment is 5,000 p.m. which will increased by 1,000 every year
until salary reaches to 8,000 p.m. Once salary reaches to 8,000 then increment

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will be 2,000 every year till salary reaches the scale of 12,000. Accordingly,
basic salary is calculated.

Dearness Allowance (DA) or Dearness Pay (DP): It is an extra amount given to

an employee to meet the burden of inflation or increased cost of living. This is
fully taxable.
Note: Sometimes, it is given that DA/DP is not forming a part of retirement
benefit (Leave encashment, Pension, Provident Fund, etc.). In such case, DA/DP
itself shall be fully taxable. However, for calculating taxable Leave encashment,
Pension, HRA, etc., DA/DP will be included in ‘salary’ only if it forms a part of
retirement benefit.
Fees: An employee may be given apart from basic salary, extra remuneration
for doing specific job under the terms of employment. Such extra remuneration
is termed as fee and shall be fully taxable.
Commission: It may be as a percentage of turnover or as a percentage of profit.
In either case, it is taxable.

Bonus: Bonus may be contractual or voluntary. In either case, it is fully taxable.

(i) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as
perquisite.
(ii) It is taxable in the year of receipt.
(iii) If arrear bonus is received, assessee can claim relief u/s 89(1).

5.6 GRATUITY:
Gratuity is a retirement benefit given by the employer to the employee in
consideration of past services. Sec. 10(10) deals with the exemptions from
gratuity income. Such exemption can be claimed by a salaried assessee.
Gratuity received by an assessee other than employee shall not be eligible for
exemption u/s 10(10).
E.g., Gratuity received by an agent of LIC of India is not eligible for exemption
u/s 10(10) as agents are not employees of LIC of India.

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Treatment:

Case A: Gratuity received during continuation of service Gratuity received

during continuation of service is fully taxable in the hands of all employee
(whether Government or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government
employee Gratuity received at the time of termination of service by
Government employee is fully exempt from tax u/s 10(10) (i).
Tax point: Government employee, here, includes employee of the Central or
the State Government or local authority but does not include employee of
statutory corporation.
Case C: Gratuity received at the time of termination of service by non–
government (including foreign government) employee, covered by the
Payment of Gratuity Act. In such case, minimum of the following shall be
exempted from tax u/s 10(10)(ii): 1. Actual Gratuity received; 2. ` 20,00,000; or
3. 15 working days salary for every completed year of service [Arithmetically,
15/26 * Completed year of service * Salary p.m.]

Notes:
a) Completed year of service includes any fraction in excess of 6 months. (e.g.,
7 years 9 months will be treated as 8 years; 7 years 5 months will be treated as
7 years and 7 years 6 months will be treated as 7 years).
b) Salary here means Basic + DA, last drawn.

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Illustration 2.
Ashok, an employee of ABC Ltd., receives 2,05,000 as gratuity under the
Payment of Gratuity Act, 1972. He retires on 10th September, 2020 after
rendering service for 35 years and 7 months. The last drawn salary was 2,700
per month. Calculate the amount of gratuity chargeable to tax.

Case D: Gratuity received at the time of termination of service by non-

government employee (including foreign government employee) not covered
under the Payment of Gratuity Act.
Gratuity received at the time of termination of service by non-government
employee being not covered under the Payment of Gratuity Act shall be
exempted from tax u/s 10(10)(iii) to the extent of lower of the following:
1. Actual Gratuity received;
2. 20,00,000; and
3. ½ Completed year of service Average Salary p.m.
Notes:
a) While calculating completed year of service ignore any fraction of the year.
(e.g., 7 years 9 months will be treated as 7 years only)
b) Average Salary here means, Basic + DA + Commission (being a fixed
percentage on turnover) being last 10 months average salary, immediately
preceding the month of retirement. (E.g., If an employee retires on 18/11/2020
then 10 months average salary shall be a period starting from Jan’ 2020 and
ending on Oct’ 2020).
If DA is not forming a part of retirement benefit, then the same shall not be
included in salary for above purpose. However, DA itself shall be fully taxable.

Case E: Gratuity received after death of employee The Act is silent on

treatment of gratuity received after death of employee. However, on following
grounds, it can be concluded that gratuity received by a legal heir shall not be
taxable in the hands of the recipient –

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• A lump sum payment made gratuitously to widow or legal heir of employee,
who dies while in service, by way of compensation or otherwise is not taxable
under the head “Salaries”. [Circular No.573, Dated 21.08.1990].
• Unutilised deposit under the capital gains deposit account scheme shall not
be taxable in the hands of legal heir. [Circular No.743 dated 6/5/1996].
• Legal representative is not liable for payment of tax on income that has not
accrued to the deceased till his death.
• Leave salary paid to the legal heir of deceased employee is not taxable as
salary. [Circulars Letter No. F.35/1/65-IT(B), dated 5/11/1965]. Further, leave
salary by a legal heir of the Government employee who died in harness is not
taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].

Tax point: If gratuity becomes due before the death of the assessee (no matter
when and by whom received), it shall be taxable in the hands of employee.
Whereas if gratuity becomes due after the death of assessee, it shall not be
taxable (even in the hands of legal heir of the assessee).

Illustration 4.
Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary
structure is as under:
Basic 5,000 p.m. Dearness allowance 3,000 p.m. On 15/12/2020, she died.
State the treatment of gratuity in following cases:
Case 1: Mrs. X retired on 10/12/2020 & gratuity 4,00,000 received by her
husband (legal heir) as on 18/12/2020.
Case 2: Husband of Mrs. X received gratuity on 18/12/2020 falling due after
death of Mrs. X. Mrs. X is covered by the Payment of Gratuity Act.

5.7 LEAVE SALARY ENCASHMENT:

As per service contract and discipline, normally, every employee is allowed
certain period of leave (with pay) every year. Such leave may be availed during
the year or accumulated by the employee. The accumulated leave lying to the

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credit of an employee may be availed subsequently or encashed. When an
employee receives an amount for waiving leave lying to his credit, such amount
is known as leave salary encashment.

Treatment:

Case A: Leave salary received during continuation of service Leave salary during
continuation of service is fully taxable in the case of the Government employee
as well as other employees [Sec. 17(1)(va)].

Case B: Leave salary received by Government employee on termination of

service At the time of termination of service, leave salary received by the
Central or State Government employee is fully exempted u/s 10(10AA)(i).
Tax point: Government employee here does not include employee of local
authority or public sector undertaking or foreign Government employee.

Case C: Leave salary received by non-Government employee on termination of

service At the time of termination of service, leave salary received by a non-
Government employee (including employee of foreign Government, local
authority, public sector undertaking) is exempted to the minimum of the
following u/s 10(10AA)(ii):
a) Actual amount received as leave salary
b) 3,00,000/-
c) 10 Average salary p.m.

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d) To the maximum of 30 days (normally taken as 1 month) average salary1 for
every completed year of service2, subject to deduction for actual leave availed
during the tenure of service.

Academically: [{(1 * completed year of service) – leave actually taken in terms

of month} * average salary p.m.]
1. Average salary means Basic + DA# + Commission (as a fixed percentage on
turnover) being last 10 months average salary ending on the date of retirement
or superannuation. (e.g., if an employee retires on 18/11/2020 then 10 months
average salary shall be a period starting from 19th Jan’ 2020 and ending on
18th Nov’ 2020).
If DA is not forming a part of retirement benefit then the same shall not be
included in salary for the above purpose. However, DA itself shall be fully
taxable.
2. While calculating completed year of service, ignore any fraction of the year.
E.g., 10 years 9 months shall be taken as 10 years.

Notes:
a) Leave encashment received from more than one employer: Where leave
encashment is received from more than one employer in the same previous
year, the aggregate amount exempt from tax shall not exceed the statutory
deduction i.e., 3,00,000.
b) Earlier deduction claimed for leave encashment: While claiming the
statutory amount (i.e., 3,00,000) any deduction claimed earlier as leave
encashment shall be reduced from 3,00,000.

Illustration 6.
Mr. Das retired on 31/3/2021. At the time of retirement, 18 months leave was
lying to the credit of his account. He received leave encashment equivalent to
18 months Basic salary 1,26,000. His employer allows him 1½ months leave for
every completed year of service. During his tenure, he availed of 12 months

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leave. At the time of retirement, he also gets D.A. 3,000. His last increment of `
1,000 in basic was on 1/4/2020. Find taxable leave encashment.

Solution:
Working:
1. Calculation of completed year of service: Employee has received 18 months
leave encashment on termination of service as well he had enjoyed leave of 12
months during his tenure. That means he had received a leave benefit of 30
months. Since leave allowed by employer is 1½ months for every completed
year of service, this signifies that Mr. Das had completed 20 years (being
30/1½) of service.
2. Salary here means, Basic + DA + Commission, being last 10 months average
from the date of retirement. There is no increment in last 10 months (last
increment was on 1/4/2020) and there is no commission, hence Av. Salary =
7,000 (i.e., 1,26,000/18) + 3,000 = 10,000 p.m.
Leave Encashment received 1,26,000
Less: Minimum of the following is exempt u/s
10(10AA) (ii):
a) Actual amount received 1,26,000
b) Statutory Amount 3,00,000
c) 10 months Av. Salary p.m. (10 * 10,000) 1,00,000
d) {1 completed year of service - Leave taken} Avg.
salary p.m. 80,000 80,000
[{1 *20 – 12} 10,000]
Taxable Leave Encashment 46,000 46,000

Case D: Leave salary paid to the legal heir Leave salary paid to the legal heir of
deceased employee is not taxable. [Circulars Letter No. F.35/1/65-IT(B), dated
5/11/1965]. Further, leave salary received by a legal heir of the Government
employee who died in harness is not taxable in the hands of the recipient
[Circulars No.309, dated 3/7/1981].

5.8 PENSION [SEC. 17(1)(ii)]:

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Pension means a periodical payment received by an employee after his
retirement. On certain occasions, employer allows to withdraw a lump sum
amount as the present value of periodical pension. When pension is received
periodically by employee, it is known as Uncommuted pension. On the other
hand, pension received in lump sum is known as Commuted pension. Such
lump sum amount is determined considering factors like the age and health of
the recipient, rate of interest, etc.

Treatment:

Case A: Uncommuted pension Uncommuted pension is fully taxable in the

hands of all employees whether Government or Non –Government employee.
Case B: Commuted pension received by a Government employee Commuted
pension received by a Government employee is fully exempt from tax u/s
10(10A)(i).
Note: Government employee here includes employee of the Central or State
Government, Local authority as well as employee of Statutory corporation.
Judges of the High Court and the Supreme Court are also entitled to the
exemption [Circular No.623 dated 6/1/1992]

One third of total pension (which assessee is normally entitled for) commuted
is exempt.
Tax point: It is immaterial whether the employee is covered by the Payment of
Gratuity Act or not.

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Case D: Commuted pension received by an employee who does not receive
gratuity [Sec. 10(10A)(ii)] One half of total pension (which assessee is normally
entitled for) commuted is exempt.
Notes:
a) Pension received by a widow or legal heir of a deceased employee shall not
be taxable as salary but taxable u/s 56 as income from other sources (further
refer chapter “Income from other sources”.)
b) Where commuted pension is taxable, relief u/s 89 is available.
c) Pension received from United Nations Organisation is not taxable. Further,
pension received by a widow of the United Nations ex-officials from UN Joint
Staff Pension Fund is also exempt.

Illustration 7.
Mr. Amit has retired from his job on 31/3/2020. From 1/4/2020, he was
entitled to a pension of 3,000 p.m. On 1/8/2020, he got 80% of his pension
commuted and received 1,20,000. Compute taxable pension if he is: Case
a) Government employee; Case
b) Non-Government employee & not receiving gratuity Case
c) Non-Government employee (receiving gratuity, but not covered by the
Payment of Gratuity Act).

5.9 RETRENCHMENT COMPENSATION:

Retrenchment means cancellation of contract of service by employer.
Tax Treatment [Sec. 10(10B)]:
Any compensation received by a worker at the time of retrenchment is
exempted to the extent of minimum of the following:
a) Actual amount received;
b) 5,00,000; or

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c) An amount calculated in accordance with the provisions of sec. 25F(b) of
Industrial Dispute Act, 1947 (Under the said Act a workman is entitled to
retrenchment compensation equivalent to 15 days’ average pay, for every
completed year of service or any part thereof in excess of 6 months).
Notes:
a) In case, where the compensation is paid under any scheme approved by the
Central Government nothing shall be taxable.
b) Compensation received by a workman at the time of closing down of the
undertaking in which he is employed is treated as compensation received at
the time of his retrenchment.

5.10 COMPENSATION RECEIVED AT THE TIME OF VOLUNTARY

RETIREMENT [SEC. 10(10C)]:
If an employee accepts retirement willingly in lieu of compensation then such
retirement is known as Voluntary Retirement. Voluntary retirement
compensation received or receivable by an employee is eligible for exemption
subject to the following conditions - Conditions for exemption
1. Compensation is received from specified employer#
2. Compensation is received as per Voluntary Retirement Scheme (VRS) framed
in accordance with prescribed guidelines
Amount of exemption
Exemption shall be minimum of the following –
a) Actual amount received as per guidelines; or
b) 5,00,000.

Guidelines [Rule 2BA]

1. Scheme (VRS) must be applicable to all employees (other than director) who
have either completed age of 40 years or has completed 10 years of service.
(This condition is, however, not applicable in the case of an employee of a
public sector company)

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2. Such scheme must be framed to reduce the number of employees.
3. The vacancy caused by VRS is not to be filled up.
4. The retiring employee is not to be employed in another company or concern
belonging to the same management.
5. The amount of compensation does not exceed
• the amount equivalent to 3 months’ salary for each completed year of
service; or
• salary at the time of retirement multiplied by the balance month of service
left.
Note: Salary here means [Basic + DA (if forms a part of retirement benefit) +
fixed percentage of commission on turnover], last drawn.

Specified Employer:
Any company; or an authority established under Central, State or Provincial
Act; or A local authority; or A Co-operative society; or A specified University; or
An Indian Institute of Technology (IIT); or Any State Government; or The Central
Government; or Notified Institution of Management (IIM Ahmedabad, IIM
Bangalore, IIM Calcutta, IIM Lucknow, and the Indian Institute of Foreign Trade
New Delhi); or Notified Institution.
Tax point: Voluntary retirement compensation received from the employer
being an individual, firm, HUF, AOP, etc. is fully taxable in the hands of
employee.

Note:
• Where exemption is allowed to an assessee under this section in any
assessment year then no deduction is allowed in any subsequent
assessment years. It means deduction under this section is allowed once
in life of an assessee.
• Where any relief has been allowed to an assessee u/s 89 in respect of
voluntary retirement, no exemption shall be allowed under this section.

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5.11 ANNUITY [SEC. 17(1)(ii)]:
Annuity means a yearly allowance, income, grant of an annual sum, etc. for life
or in perpetuity.

Treatment:

5.12 SALARY RECEIVED IN LIEU OF NOTICE PERIOD:

When an employer retrenches an employee then he has to give a proper
notice. If an employer fails to do so then he will have to pay salary equivalent
to notice period, apart from retrenchment compensation. Such amount is
known as salary received in lieu of notice period and it is fully taxable.

5.13 PROFITS IN LIEU OF SALARY [SEC. 17(3)]:

Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the
(a) termination of his employment,
(b) modification of the terms and conditions of employment.

2. Any payment due to or received by an assessee from his employer or former

employer except the following:
• Gratuity exempted u/s 10(10);
• House rent allowance exempted u/s 10(13A);
• Commuted pension exempted u/s 10(10A);

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• Retrenchment compensation exempted u/s 10(10B);
• Payment from an approved Superannuation Fund u/s 10(13);
• Payment from statutory provident fund or public provident fund;
• Payment from recognised provident fund to the extent it is exempt u/s
10(12).

3. Any payment from unrecognised provident fund or such other fund to the
extent to which it does not consist of contributions by the assessee or interest
on such contributions.

4. Any sum received by the employee under the Keyman Insurance Policy
including the sum allocated by way of bonus on such policy.

5. Any amount due to or received by the employee (in lump sum or otherwise)
prior to employment or after cessation of employment.

5.14 ALLOWANCES:
Allowance means fixed quantum of money given regularly in addition to salary
to meet particular requirement. The name of particular allowance may reveal
the nature of requirement, e.g. House Rent Allowance, Tiffin Allowance,
Medical Allowance etc.
Allowances at a glance:
General Allowance House Rent Allowance, City Compensatory
Allowance, Tiffin Allowance, Medical
Allowance, Servant Allowance, Entertainment
Allowance
Allowance u/s 10(14)(i), Travel or Transfer allowance, Daily Allowance,
deductions from which Conveyance Allowance, Assistant Allowance,
depends upon actual Professional Development Allowance,
expenditure [Rule 2BB(1)] Uniform Allowance.
Allowance u/s 10(14)(ii), Few of these allowances are: Children
deductions from which do Education Allowance, Children Hostel

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not depend upon actual Allowance, Truck Drivers’ Allowance,
expenditure [Rule 2BB(2)]. Transport Allowance, Tribal Areas Allowance,
Special Compensatory Allowance, Border Area
Allowance, etc.
Allowances to a Government employee being an Indian citizen working
outside India [Sec. 10(7)]
Allowances received from UNO
Compensatory allowance under Article 222(2) of the Constitution
Allowance to judges of the High Court and the Supreme Court
Allowances to teacher / professor from SAARC Member States
Any other Allowance

Tax treatment of various allowances are as follows

Following allowances are fully taxable:
Allowances Meaning
City Compensatory An allowance to meet personal expenses, which arise
Allowance due to special circumstances, or to compensate extra
expenditure by reason of posting at a particular place.
Tiffin Allowance An allowance to meet the expenditure on tiffin,
refreshment etc.
Medical Allowance An allowance to meet the expenditure on medical
treatment etc
Servant Allowance An allowance to meet the expenditure of servant for
personal purpose.
Non-practicing Allowance given to professionals to compensate them
Allowance for restriction on private practice.
Warden or Proctor Allowances given to employees of educational
Allowance institutions for working as warden of the hostel or
working as proctor in the institutions.
Deputation Allowances given to an employee, when he is sent on
Allowance deputation for a temporary period from his permanent
place of service.
Entertainment It is an allowance to meet expenditure on
Allowance entertainment, by whatever name called. Government
employee can claim deduction u/s 16(ii) discussed
later in this chapter.

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House rent allowance (HRA) [Sec. 10(13A) and rule 2A]:
An allowance to meet the expenses in connection with the rent of the house,
by whatever name called.
Tax Treatment: Minimum of the following is exempted from tax:
a. Actual HRA received.
b. An amount equal to 50% of salary1 (when house is situated in a metro city)
or 40% of salary1 (when house is situated in any other place) for the relevant
period.
c. The excess of rent paid over 10% of salary1 . [Arithmetically, (Rent Paid –
10% of Salary)] 1. Salary here means: Basic + D.A. (if it forms a part of
retirement benefit) + Commission as a fixed % on turnover.

Notes:
a) Salary shall be determined on due basis for the period for which the
employee occupies rented accommodation in the previous year and gets HRA.
b) Exemption is not available if employee lives in his own house, or in a house
for which he does not pay any rent.
c) For criteria of 50% or 40% of salary as deduction, place of employment is not
significant but place where the house is situated is important.
d) Deduction from HRA depends on Salary of the employee, Amount of HRA,
place of residence (not place of employment), rent paid by the employee.

Special allowance exempt u/s 10(14)

Allowances, deduction from which depends on actual expenditure [Sec.
10(14)(i):
Allowances Meaning
Travel or transfer An allowance, by whatever name called, to meet the
Allowance cost of travel on tour. Cost of travel includes any sum
paid in connection with transfer, packing and
transportation of personal effects on such transfer.

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Daily Allowance An allowance, by whatever name called, granted on
tour (or for the period of journey in connection with
transfer) to meet the ordinary daily charges incurred by
employee on account of absence from his normal place
of duty.
Conveyance Any allowance granted to meet the expenditure on
Allowance conveyance in performance of duties of the office,
provided free conveyance is not provided by the
employer.
Tax point: Expenditure for covering the journey
between office and residence is not treated as
expenditure in performance of duties of office and
consequently not covered under this allowance. (Refer
Transport allowance).
Helper / Assistant Any allowance (by whatever name called) to meet the
Allowance expenditure of assistant or helper, provided such helper
is appointed for the performance of duties of an office.
Tax point: Servant allowance is fully taxable.
Research Any allowance, by whatever name called, granted to
Allowance encourage academic, research and other professional
pursuits. This allowance may also be termed as
Professional Development / Academic allowance.
Uniform Allowance Any allowance, by whatever name called, to meet the
expenditure on purchase or maintenance of uniform
wear, during the performance of duties of an office.
Tax point: Uniform allowance is different from Dress
allowance. Dress allowance is fully taxable.

Tax Treatment of aforesaid allowances:

Minimum of the following shall be exempted:
a) Actual amount received; or
b) Actual expenditure incurred for such purpose.
Allowances, deduction from which do not depend on actual expenditure [Sec.
10(14)(ii)]
Children Education Allowance

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An allowance to meet the expenses in connection with education of children,
by whatever name called.
Treatment: Minimum of the following is exempted from tax -
a) 100 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)

Children Hostel Allowance

An allowance to meet the hostel expenses of children, by whatever name
called.
Treatment: Minimum of the following is exempted from tax -
a) 300 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)
Notes for Children Education Allowance and Hostel Allowance:
a) Child includes adopted child, step-child but does not include illegitimate
child and grandchild.
b) Child may be major or minor child.
c) Deduction is available irrespective of actual expenditure incurred on
education of child.

Truck Driver’s Allowance:

Any allowance (by whatever name called) granted to an employee working in
any transport system to meet his personal expenditure during his duty
performed in the course of running of such transport (from one place to
another place), provided such employee is not in receipt of daily allowance.
Treatment: Minimum of the following shall be exempted:
a) 70% of allowance.
b) 10,000 p.m.
Tax point: If assessee is in receipt of Daily allowance, then above allowance
shall be fully taxable.

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Transport Allowance:
An allowance, by whatever name called, to meet the expenditure for the
purpose of travelling between the place of residence and the place of duty.
Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.
Treatment: Minimum of the following shall be exempted:
a. Actual amount received; or
b. 3,200 p.m.
Tax point: No exemption is available to the assessee other than specified
above.
Allowance to Government employees outside India As per sec. 10(7), any
allowance or perquisite allowed outside India by the Government to an Indian
citizen for rendering services outside India is wholly exempt from tax.

Tax point:
1. Assessee must be -
a) Government employee
b) Citizen of India; and
c) Working outside India
2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)

Allowance received from UNO (United Nations Organisation)

Basic salary or Allowance paid by the UNO to its employees are not taxable.
Compensatory allowance under Article 222(2) of the Constitution
It is fully exempt from tax.
Allowance to judges of the High Court or the Supreme Court:
Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary
allowance u/s 22C of the “High Court Judges (Conditions of Service) Act, 1954”

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is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.
Salary to teacher or professor from SAARC Member States [DTAA]:
Salary including allowances and perquisites of a teacher or professor or
research scholars from SAARC Member States shall not be taxable if following
conditions are satisfied:
1. Such professor, teacher or research scholar is a resident of other SAARC
member State (i.e., Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan & Sri
Lanka) prior to visiting another member State.
Tax point: An individual is deemed to be a resident of a member State if he/she
is resident in that member State in the fiscal year in which he visits the other
member State or in the immediately preceding fiscal year.
2. Such visit is for the purposes of teaching or engaging in research or both at a
university or college or similar approved institution in that other Member
State.
3. The remuneration from aforesaid activities in other Member State is exempt
for a period of 2 years from the date of arrival in the other member State.

5.15 PERQUISITE [SEC. 17(2)]:

Meaning and Chargeability Amended In common parlance, perquisite means,
any casual emoluments or benefits attached to an office or position, in addition
to salary or wages, which is availed by an employee. In other words, perquisites
are the benefits in addition to normal salary. As per sec. 17(2) of the Income
tax Act, Perquisite includes –
i. Value of rent-free accommodation provided by the employer.
ii. Value of concession in rent in respect of accommodation provided to the
assessee by his employer.
iii. The value of any benefit or amenity granted or provided free of cost or at
concessional rate to ‘specified employees.
iv. Amount paid by an employer in respect of any obligation which otherwise
would have been payable by the employee.

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Tax point: Any obligation of the employee met by employer shall be taxable on
cash basis i.e. in the year in which amount is paid by the employer. Example:
Employer paid employees’ professional tax liability pertaining to period 2018-
19 in April 2019, such perquisite shall be taxable in the previous year 2019-20.

v. Sum payable by an employer, whether directly or through a fund other than

recognised provident fund or approved superannuation fund or deposit-linked
insurance fund, to effect an assurance on the life of the assessee or to effect a
contract for an annuity.
Tax point: Such sum shall be taxable on accrual basis.

vi. The value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assessee.
vii. The amount or the aggregate of amounts of any contribution made to the
account of the assessee by the employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD(1) [i.e., NPS]; and
(c) in an approved superannuation fund, - to the extent it exceeds 7,50,000 in a
previous year.
Tax point: There is combined upper limit of 7,50,000 in respect of employer’s
contribution in a year to NPS, superannuation fund and recognised provident
fund and any excess contribution is taxable.

viii. The annual accretion (like interest, dividend, etc.) during the previous year
to the balance at the credit of the aforesaid fund or scheme to the extent it
relates to the contribution referred above.
Tax point: Such accretion shall be included in the total income and shall be
computed in such manner as may be prescribed. ix. the value of any other
fringe benefit or amenity as may be prescribed.

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Notes:
a) Perquisites are taxable under the head “Salaries” only if, they are:
• Allowed by an employer to his employee or any member of his household.
• Resulting in the nature of personal advantage to the employee.
• Derived by virtue of employee’s authority.
b) Perquisite may be contractual or voluntary. In other words, it is not
necessary that the benefit must have been received under an enforceable
right.
c) Perquisite may be received from the former, present or prospective
employer
d) Member of household includes:
• Spouse (whether dependent or not)
• Parents (whether dependent or not);
• Servants; and
• Children and their spouse (whether dependent or not);
• Dependents.

Specified employees [Sec. 17(2)(iii)]

Specified employee means: 1. A director employee. Note: It is immaterial –
a) whether he is a nominee of the workers, financial institutions, etc. on the
board;
b) whether the employee is full time director or a part time; and
c) whether he was a director throughout the previous year or not.
Tax point:
➢ A director-employee shall be treated as specified employee of that
company only. Example: If Manu is working with X Ltd. as director-
employee and with Y Ltd. as employee only, she will be treated as
specified employee only for X Ltd. and not for Y Ltd.

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 ➢ Director even for a day is construed as specified employee of such
company.

2. An employee who has substantial interest in the employer company.

Substantial interest means the employee who beneficially holds 20% or more
voting power in the employer company.
Tax point:
➢ Such employee shall be treated as specified employee of that company
only.
➢ The main criteria is beneficial ownership and not the legal ownership.
➢ Substantial interest must be held by the assessee individually, and not
together with relative.
Example: Mr. Mohan holds 18% equity share of X Ltd. and his wife holds 7%
equity share of the same company. In such case Mr. Mohan will not be treated
as specified employee.

3. An employee whose aggregate salary from all employers together exceeds

50,000 p.a. For computing the sum of 50,000, following are to be
excluded/deducted:
a) All non-monetary benefits;
b) Non-taxable monetary benefits;
c) Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
d) Employer’s contribution to Provident Fund.

Tax point:
Where salary is received from two or more employers, the aggregate salary
from all employers shall be considered for calculation of above ceiling. And if
aggregate salary exceeds 50,000 p.a. the employee shall be treated as specified
employee of all employers.
Example: Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary
salary from X & Co. is 36,000 p.a. and from Y Ltd. is 45,000 p.a. Since the

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aggregate salary is more than 50,000 p.a. Mr. Rohan will be treated as specified
employee for both the employer i.e. X & Co. and Y Ltd.
Even ‘DA not forming a part of salary for retirement benefit’ shall be included
in salary, while determining the above limit of ` 50,000 p.a.

Exempted Perquisites Following perquisites are exempted in hands

of employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided
during working hours.
2. Food: Food provided by employer in working place.
3. Recreational facilities: Recreational facilities extended to a group of
employees.
4. Goods sold to employee at concessional rate: Goods manufactured by
employer and sold by him to his employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided –
• to employees for journey between office and residence and vice versa.
• to the judges of High Court and Supreme Court
6. Training: Amount spent on training of employees including boarding &
lodging expenses for such training.
7. Services rendered outside India: Any perquisite allowed outside India by the
Government to a citizen of India for rendering services outside India.
8. Contribution in some specified schemes
• Employer’s contribution to a pension or deferred annuity scheme.
• Employer’s contribution to staff group insurance scheme.
• Annual premium paid by the employer on personal accident policy
affected by him in respect of his employee.
9. Loans:
• Loan given at nil or at concessional rate of interest by the employer
provided the aggregate amount of loan does not exceed 20,000.

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 • Interest free loan for medical treatment of the diseases specified in
Rule 3A.
10. Medical facility: A provision of medical facility at office is exempt. Note:
However, medical allowance is fully taxable.
11. Periodicals and journals: Periodicals and journals required for discharge of
work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually
incurred on behalf of employee by the employer whether by way of direct
payment or reimbursement.
13. Free education facility: Free education facility to the children of employee
in an institution owned or maintained by the employer provided cost of such
facility does not exceed 1,000 p.m. per child. Note: Such facility is not restricted
to two children as in case of Children Education allowance.
14. Computer or Laptop: Computer or Laptop provided whether to use at office
or at home (provided ownership is not transferred to the employee).
15. Movable assets: Sale or gift of any movable asset (other than car and
electronic items) to employee after being used by the employer for 10 or more
years.
16. Leave Travel Concession: Leave Travel Concession (LTC) subject to few
conditions.
17. Rent-free accommodation
• Rent-free official residence provided to a Judge of a High Court or the
Supreme Court.
• Rent-free furnished residence (including maintenance thereof) to
Official of Parliament, a Union Minister or a Leader of opposition in
Parliament.
18. Accommodation: Accommodation provided –
• on transfer of an employee in a hotel for a period not exceeding 15
days in aggregate.
• in a remote area to an employee working at a mining site or an
onshore exploration site or a project execution site or a dam site or a
power generation site or an offshore site.

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19. Tax on non-monetary perquisite paid by employer on behalf of employee.
With effect from A.Y. 2003-04 a new sec. 10(10CC) has been inserted which
provides that income tax paid by employer on behalf of employee on income,
being non-monetary perquisite, is not a taxable perquisite.
20. Health club, Sports club facility.

5.16 VALUATION OF ACCOMODATION

Valuation of Rent-free unfurnished accommodation (RFA) [Rule 3(1)]
Rent-free accommodation is taxable in the hands of all employees (except the
Judges of High Court or Supreme Court and Official of the Parliament or Union
Minister and a leader of Opposition).
Accommodation here includes fixed as well as floating structure.
Fixed Structure A house, flat, farm house (or a part there of),
accommodation in hotel, motel, service apartment, a
guest house, etc.
Floating Structure A caravan, mobile home, ship etc.

For the purpose of valuation, employees are divided into three categories:
a. Employees of the Central or State Government or of any undertaking under
the control of the Government;
b. Accommodation provided by Government to an employee serving on
deputation
c. Other employees
I) Central and State Government Employee (including military person) Where
the accommodation is provided by the Central Government or any State
Government to the employees either holding office or post in connection with
the affairs of the Union or of such State, the value of perquisite in respect of
such accommodation is equal to the licence fee, which would have been
determined by the Central or State Government in accordance with the rules
framed by the Government.
{Academically, the taxable value of the perquisite will be mentioned in the
problem}

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Tax point: Employees of a local authority or a foreign government are not
covered under this category.
II) Accommodation provided by Government to an employee serving on
deputation Where the accommodation is provided by the Central Government
or any State Government to an employee who is serving on deputation with
anybody or undertaking under the control of such Government, then the value
of perquisite of such an accommodation shall be:
City in which accommodation is Value of perquisite
provided
Having population exceeding 25 lacs 15% of salary for the period during
as per 2001 census which the employee occupied the
said accommodation.
Having population exceeding 10 lacs 10% of salary for the period during
but not exceeding 25 lacs as per 2001 which the employee occupied the
census said accommodation.
Any other city 7.5% of salary for the period during
which the employee occupied the
said accommodation.

Note:
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) +
Bonus + Commission + Fees + All other taxable allowances (only taxable
amount) + Any other monetary payment by whatever name called (excluding
perquisites and lump-sum payments received at the time of termination of
service or superannuation or voluntary retirement, like gratuity, severance pay
leave encashment, voluntary retrenchment benefits, commutation of pension
and similar payments)
Tax point:
➢ Salary shall be determined on due basis.
➢ Where an assessee is receiving salary from two or more employers, the
aggregate salary for the period during which accommodation has been
provided (by any of the employer) shall be taken into account.
➢ Monetary payments, which are not in the nature of perquisite, shall be
taken into account. E.g. Leave encashment received during the

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 continuation of service shall be included in salary for this purpose.
However, if such pay leave is received at the time of retirement, then
such receipt shall not be considered.
➢ Here salary does not include employer’s contribution to Provident Fund
of the employee.
b) The employer of such an employee shall be deemed to be that body or
undertaking where the employee is serving on deputation.

III) Other Employees (residual category)

The value of perquisite is determined as per the following table:
City in which Accommodation is owned Accommodation is
accommodation is by the employer not owned by the
provided employer
Having population 15% of salary for the
exceeding 25 lacs as per period during which the
2001 census employee occupied the
said accommodation.
Having population 10% of salary for the Rent paid or payable
exceeding 10 lacs but period during which the by the employer or
not exceeding 25 lacs as employee occupied the 15% of salary,
per 2001 census said accommodation. whichever is lower.
Any other city 7.5% of salary for the
period during which the
employee occupied the
said accommodation.

Notes:
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) +
Bonus + Commission + Fees + All other taxable allowances (only taxable
amount) + Any other monetary payment by whatever name called (excluding
perquisites and lump-sum payments received at the time of termination of
service or superannuation or voluntary retirement, like gratuity, severance pay
leave encashment, voluntary retrenchment benefits, commutation of pension
and similar payments)

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Tax point:
➢ Salary shall be determined on due basis.
➢ Where an assessee is receiving salary from two or more employers, the
aggregate salary for the period during which accommodation has been
provided (by any of the employer) shall be taken into account.
➢ Monetary payments, which are not in the nature of perquisite, shall be
taken into account. E.g. Leave encashment received during the
continuation of service shall be included in salary for this purpose.
However, if such pay leave is received at the time of retirement, then
such receipt shall not be considered.
➢ Here salary does not include employer’s contribution to Provident Fund
of the employee.
b) Exemption of 90 days in case of allotment of two houses: Where an
employee is transferred from one place to another and he is provided with an
accommodation at new place also, the value of perquisite shall be taken for
only one such house having lower value for a period not exceeding 90 days.
Thereafter, the values of both such houses are taxable.
c) Any accommodation provided to an employee working at a mining site; or an
on-shore oil exploration site; or a project execution site; or a dam site; or a
power generation site; or an off-shore site, which
a. being of a temporary nature and having plinth area not exceeding 800
sq.ft. is located not less than 8 kms away from the local limits of any
municipality or a cantonment board; or
b. is located in a remote area.
d) Remote area here means an area located at least 40 K.M. away from a town
having population not exceeding 20,000 as per latest published census.

Illustration 10.
Miss Stuti has the following salary structure: `
a) Basic salary 15,000 p.m.
b) Dearness Allowance 5,000 p.m.
(Not forming part of retirement benefit)

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c) Hostel Allowance 1,000 p.m.
(Does not have any child)
d) Tiffin Allowance 500 p.m.
e) Transport Allowance 200 p.m.
f) Bonus 20,000 p.a.
g) Commission 15,000 p.a.
h) Free refreshment in office worth 5,000 p.a.
i) Mobile phone facility by employer 900 p.m.
j) Computer facility worth 10,000 p.a.
She has been provided a Rent-free Accommodation (owned by employer) in
Kolkata. The house was allotted to her with effect from 1/5/2020 but she could
occupy the same only from 1/6/2020. Find her gross taxable salary.

Illustration 11.
In above illustration, how shall answer differ if the property is situated in a city
where population is only 14,60,000.

5.17 INSURANCE PREMIUM PAYABLE BY EMPLOYER:

As per sec. 17(2)(v), following sums payable by an employer shall be taxable
perquisite in the hands of all employees, whether it is paid directly or through a
fund (other than recognised provident fund or approved superannuation fund
or deposit-linked insurance fund),
• to affect an assurance on the life of the assessee; or
• to affect a contract for an annuity,
Note: Employee can claim deduction u/s 80C for LIC premium paid by
employer.

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5.18 VALUATION OF SWEAT EQUITY SHARES ALLOTTED OR
TRANSFERRED TO THE ASSESSEE:
Meaning:
Specified security means the securities as defined in sec.2(h) of the Securities
Contracts (Regulation) Act, 1956 and, where employees’ stock option has been
granted under any plan or scheme therefore, includes the securities offered
under such plan or scheme. As per sec.2(h) of the Securities Contracts
(Regulation) Act, 1956, securities includes:
a. shares, scripts, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
b. derivative;
c. units or any other instrument issued by any collective investment scheme to
the investors in such schemes;
d. security receipt as defined in sec. 2(zg) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.
e. units or any other such instrument issued to the investors under any mutual
fund scheme;
f. any certificate or instrument (by whatever name called), issue to an investor
by any issuer being a special purpose distinct entity which possesses any debt
or receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be;
g. Government securities; h. such other instruments as may be declared by the
Central Government to be securities; and i. rights or interest in securities.
Sweat equity shares means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash
for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
Tax point: If such shares are allotted or transferred not for above reasons (i.e,
for providing know-how, etc.), then it is not taxable as perquisite. E.g., if such

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option is granted to the employee against acquisition of immovable property
by the company, then such benefit shall not be considered as perquisite.
However, employee is liable to pay tax, if any, under the head ‘Capital Gain’

Perquisites:
Value of any specified security or sweat equity shares shall be considered as
perquisites in hands of employee if the following conditions are satisfied:
a. Such security or sweat equity shares are allotted or transferred on or after
01-04-2009.
b. Such security or sweat equity shares are allotted or transferred by the
employer (former or present) directly or indirectly. c. Such security or sweat
equity shares are allotted or transferred free of cost or at concessional rate to
the assessee.

5.20 VALUATION OF PERQUISITES IN RESPECT OF VEHICLE OTHER

THAN MOTOR CAR:
The facility provided by employer is taxable in the hands of employee on the
following basis:

5.21 VALUATION OF PERQUISITES IN RESPECT OF FREE DOMESTIC

SERVANTS [RULE 3(3)]:

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Value of perquisite is determined as under:

Note:
a) If rent-free accommodation (owned by the employer) is provided with
gardener then gardener’s salary and maintenance cost of garden shall not be
taxable. [Circular No.122 dated 19/101973]
b) Any amount charged from the employee for such facility shall be reduced
from above value.
c) Domestic servant allowance given to employee is fully taxable.
d) Reimbursement of servant-salary by the employer shall be taxable in hands
of all employee.

5.22 GAS, ELECTRICITY OR WATER FACILITY [RULE 3(4)]

It is taxable on the following basis:

5.23 VALUATION OF PERQUISITES IN RESPECT OF FREE EDUCATION

[RULE 3(5)]:
Taxable value of perquisite is as follows:

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Who is chargeable?

Notes:
a) 1,000 per month per child shall be exempted without any restriction on
number of children.
b) Child includes adopted child, stepchild of the assessee, but does not include
grandchild or illegitimate child.
c) Any amount charged from the employee for such facility shall be reduced
from the above value.
d) Contribution made under an Educational Trust, created for the children of
particular group of employees, is not taxable.

5.24 VALUATION OF PERQUISITES IN RESPECT OF FREE TRANSPORT

[RULE 3(6)]
The facility provided by employer is taxable in the hands of employee on the
following basis:
Case Treatment
If employer is engaged in Amount charged from public for such
transportation business. facility is taxable in the hands of
specified employee.

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 In any other case Actual cost of employer for such
facility is taxable in the hands of all
employees.

Notes:
a) In case above facility is provided to employees of Railways & Airlines,
nothing shall be chargeable to tax.
b) Any amount charged from the employee for such facility shall be reduced
from the above value.
c) Conveyance facility provided to the employee for journey between office and
residence is not taxable.

5.25 VALUATION OF PERQUISITES IN RESPECT OF INTEREST FREE

LOAN OR CONCESSIONAL RATE OF INTEREST [RULE 3(7)(i)]:
Perquisite in respect of interest free loan or loan at concessional rate of
interest to the employee or any member of his household by the employer or
any person on his behalf, is not taxable if aggregate amount of loan given by
the employer (or any other person on his behalf) does not exceed 20,000. The
taxable value of such perquisite shall be determined as per the rate as on the
1st day of the relevant previous year charged by the State Bank of India in
respect of loans for the same purpose advanced by it.
Notes:
a) Maximum outstanding monthly balance: Interest is calculated on the
maximum outstanding monthly balance. Maximum outstanding monthly
balance means the aggregate outstanding balance for each loan as on the last
day of each month.
b) Loan for medical treatment: Nothing is taxable if loan is given for medical
treatment of the employee or any member of his household in respect of
diseases specified in rule 3A. However, such exempted loan will not include the
amount that has been reimbursed by an insurance company under any medical
insurance scheme.
c) Concessional interest: Any interest paid by the employee to the employer for
such loan shall be reduced from the above computed value. If rate of interest
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charged by the employer is higher than the above rate, nothing is taxable as
perquisite.
d) Amount on which interest shall be calculated: If loan amount is more than
20000, interest shall be levied on total loan amount, rather than the excess
amount.
e) Treatment of outstanding loan taken earlier: Interest on loan, taken before
insertion of this provision, shall also be treated as taxable perquisite. [Circular
No.15/2001dated 12/12/2001]

5.26 TRAVELLING/TOURING/HOLIDAY HOME EXPENDITURE ON

HOLIDAY [RULE 3(7)(iii)]:
Valuation of perquisite in respect of travelling, touring, holiday home or any
other expenses paid for or borne or reimbursed by the employer for any
holiday availed of by the employee or any member of his household is taxable
in the hands of all employees as per the following table:
Case Taxable value of perquisite
Where such facility is maintained by Notional cost of such facility. In other
employer and is not available words, value at which such facilities
uniformly to all employee are offered by other agencies to the
public.
Where the employee is on official The amount of expenditure so
tour and the expenses are incurred in incurred for the accompanying
respect of any member of his member of his household.
household accompanying him
Where any official tour is extended as The value will be limited to the
a vacation expenses incurred in relation to such
extended period of stay or vacation.
In any other case Amount incurred by the employer.

Notes:
a) Any amount charged from employee shall be reduced from the above
determined value.
b) The above provisions are not applicable in case of Leave Travel Concession
(discussed earlier)

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5.27 VALUATION OF PERQUISITES IN RESPECT OF FREE MEALS [RULE
3(7)(iii)]
The facility provided by employer is taxable in the hands of employee on the
following basis:
Case Tax treatment
Tea, snacks or other non-alcoholic Nil
beverages in the form of light
refreshment provided during office
hours (including over-time)
Free meals provided during office Nil
hours in:
• Remote area; or
• An offshore installation
Free meals provided by the employer Expenditure on free meals in excess
during office hours: of 50 per meal shall be taxable
• At office or business premises; or perquisite to the extent of excess
• Through paid vouchers which are amount in hands of all employees.
not transferable and usable only at
eating joints. E.g. Free meal given to employee
worth 70 per meal through non-
transferable coupon for 300 times in
a year. Taxable perquisite in such case
shall be 6,000 {being (70 – 50) * 300}
In any other case The actual expenditure incurred by
employer as reduced by amount
charged from employee for such
lunch or meal shall be taxable in the
hands of all employees. i.e. [Actual
expenditure to employer – Amount
charged from employee]

5.28 GIFT, VOUCHER OR TOKEN GIVEN BY EMPLOYER [RULE

3(7)(iv)]:
The value of any gift, voucher, or token (in lieu of which any gift may be
received) given to the employee (or any member of his household) on

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ceremonial occasion or otherwise by the employer shall be taxable in the
hands of all employees. However, gift, voucher or token up to 5,000, in
aggregate, during the previous year, shall be exempted.
Notes:
a) Where worth of gift is in excess of 5,000 then amount in excess of 5,000 shall
be taxable.
b) No such exemption (5,000) is available on gift made in cash or convertible
into money.

5.29 CREDIT CARD [RULE 3(7)(v)]:

Expenditure incurred by an employer in respect of credit card facility to
employee shall be treated as under:
Case Treatment
Where such credit card is used wholly nil
and exclusively for office purpose and
specified conditions are satisfied.
Where expenses (including If directly paid by the employer
membership and annual fees) are Any amount incurred by the
incurred by the employee or any employer as reduced by amount
member of his household, which is charged from the employee shall be
charged to a credit card (including taxable in the hands of all employees
any add-on card) provided by the
employer or otherwise, are paid or If amount reimbursed by the
reimbursed by the employer. employer
Any amount reimbursed by the
employer shall be taxable in the
hands of all employees.

a. Complete details in respect of such expenditure are maintained by the

employer which may, inter-alia, include the date of expenditure and the nature
of expenditure; and
b. The employer gives a certificate for such expenditure to the effect that the
same was incurred wholly and exclusively for the performance of official duty.

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5.30 CLUB EXPENDITURE [RULE 3(7)(vi)]:
Expenditure incurred by employer in respect of club facility to employee shall
be treated as under:
Case Treatment
Where such expenses are incurred nil
wholly and exclusively for office
purpose and specified conditions#
are satisfied.
Where health club, sports and similar nil
facilities are provided uniformly to all
employees by the employer.
Where the employer has obtained Amount incurred by employer for
corporate membership of the club such facility shall be taxable
and the facility is enjoyed by the perquisite in the hands of all
employee or any member of his employees. However, initial fees paid
household. for obtaining corporate membership
shall not be a taxable perquisite.
Any payment or reimbursement by If directly paid by the employer
the employer of any expenditure Any amount incurred by the
incurred (including the amount of employer as reduced by amount
annual or periodical fee) in a club by charged from the employee shall be
employee or any member of his taxable in the hands of all employees
household.
If amount reimbursed by the
employer
Any amount reimbursed by the
employer shall be taxable in the
hands of all employees.

a. Complete details in respect of such expenditure is maintained by the

employer which may, inter alia, include the date of expenditure, the nature of
expenditure and its business expediency; and
b. The employer gives a certificate for such expenditure to the effect that the
same was incurred wholly and exclusively for the performance of official duty;

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5.31 VALUATION OF PERQUISITES IN RESPECT OF USE OF MOVABLE
ASSETS [RULE 3(7)(vii)]:
If employee (or any member of his household) uses any movable asset (other
than the assets for which provisions have been made) belonging to employer,
then such facility is taxable in the hands of all employees. The value of such
benefit is determined as per the following table:
If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the
employer

Notes:
a) Any sum charged from the employee shall be reduced from the value
determined as above.
b) Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c) Here movable asset does not include car.

5.32 VALUATION OF PERQUISITES IN RESPECT OF MOVABLE ASSETS

SOLD BY AN EMPLOYER [RULE 3(7)(viii)]:
If the sale price is less than the written down value (calculated as per method
and rate mentioned below) then the difference would be treated as perquisite
and taxable in the hands of all employees. Rates and methods of depreciation
for different types of assets are as follow:

Mathematically, taxable perquisite is as under:

Original cost to the employer 000
Less: Accumulated depreciation for each completed year during
which such asset is used by the Employer 000
Written down value 000
Less: Amount charged from employee 000
Value of Perquisite(if positive) 000
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Tax point: No depreciation shall be charged for a part of the year.

5.33 MEDICAL FACILITY [PROVISO TO SEC. 17(2)]

Medical facility is taxable as under:
a) Medical facility provided in India.
Case Treatment
Medical facility provided to the employee or his Fully Exempted
family in a hospital, clinic, dispensary or nursing home
maintained by the employer.
Reimbursement of medical bill of the employee or his Fully Exempted
family of –
• Any hospital maintained by Government or Local
Authority; or
• Any hospital approved by the Government for its
employee.
Payment/reimbursement by employer of medical Fully Exempted
expenses incurred by an employee on himself/his
family in a hospital, which is approved by the CCIT, for
the prescribed diseases (like Cancer, TB, AIDS, etc.)

Employee must attach with the return of income –

• a certificate from the approved hospital specifying
the prescribed disease or ailment for which
hospitalisation was required; and
• a receipt for the amount paid to the hospital.
Group medical insurance (i.e., Mediclaim) obtained by Fully Exempted
the employer for his employees.
Any reimbursement by employer of any insurance Fully Exempted
premium paid by the employee, for insurance of his
health or the health of any member of his family.

b) medical facility provided outside India

Case Treatment

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 Medical Expenditure Exempted to the extent permitted by
RBI.
Cost of stay abroad (Patient + One Exempted to the extent permitted by
Attendant/Care taker RBI.
Cost of travel (Patient + One Exempted only when gross total
Attendant/Care taker) Income of the employee excluding
this (cost of travel) perquisite, does
not exceed ` 2,00,000 p.a.

Tax point: In calculation of gross total

income ceiling, taxable value of
medical treatment perquisite and
cost of stay perquisite shall be
included.

Notes:
a) Hospital includes a dispensary, a clinic or a nursing home.
b) For this purpose, ‘family’ means:
• Spouse, children of the individual; and
• Parents, brothers, sisters of the individual, wholly or mainly dependent
on him.
c) Fixed Medical Allowance is fully taxable.
d) The expenditure on medical treatment by the employer may be by way of
payment or reimbursement.
e) The perquisite is taxable in the hands of specified employee, however if the
bills are issued in the name of employee and reimbursed by the employer, then
it shall be taxable in the hands of all employees.

5.34 LEAVE TRAVEL CONCESSION [SEC.10(5)]:

If an employee goes on travel (on leave) with his family and traveling cost is
reimbursed by the employer, then such reimbursement is fully exempted.
Notes:
1) Journey may be performed during service or after retirement.

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2) Employer may be present or former.
3) Journey must be performed to any place within India.
4) In case, journey was performed to various places together, then exemption is
limited to the extent of cost of journey from the place of origin to the farthest
point reached, by the shortest route.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.

Notes:
a) No exemption can be claimed without performing journey and incurring
expenses thereon.
b) Block-period: Exemption is available in respect of 2 journeys performed in a
block of 4 calendar years commencing from 1st January 1986. Academically, for
the A.Y. 2021-22, the relevant block is Jan 2018 to Dec. 2021.
c) Carry-forward facility: Where concession is not availed during the preceding
block (whether on one occasion or both), then any one journey performed in
the first calendar year of the immediately succeeding block will be additionally
exempted (i.e. not counted in two journey limit)
d) Family: Family here means –
• Spouse and children of the individual; and
• Parents, brothers and sisters of the individual, who are wholly or mainly
dependent on him.
e) Restriction on number of children: Exemption can be claimed for any
number of children born on or before 30/9/1998. In addition, exemption is
available only for 2 surviving children born on or after 1/10/1998. However,
children born out of multiple birth, after the first child, will be treated as one
child only.
f) Fixed Leave travel allowance: Fixed amount paid to employees by way of
leave travel allowance shall not be exempt.
g) The exemption u/s 10(5) is for travel cost and does not include stay cost or
other cost.

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5.35 OTHER PERQUISITES:
The value of any other facilities, benefits, amenities, services, rights or
privileges (which is not discussed earlier) provided by the employer shall be
determined on the basis of cost to the employer under an arm’s length
transaction, as reduced by the employee’s contribution, if any.

Taxability of perquisites at a glance

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5.36 PROVIDENT FUND:
Provident fund scheme is a saving device in the hands of salaried class. It is a
retirement benefit scheme. Under this scheme, a stipulated sum is regularly
deducted from the salary of the employee as his contribution towards the
fund. The employer also, generally, contributes a similar amount out of his
pocket to the fund. The employer’s and employee’s contribution are together
invested in such fund. Interest earned thereon is also credited to the fund of
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the employee. Thus, provident fund scheme is a great media to initiate and
mobilise small savings to a large scale. On termination of service or retirement,
employee receives the whole accumulated fund, subject to certain conditions.
Hence, provident fund has four components i.e., Employer’s contribution;
Employee’s contribution; Interest on employer’s contribution; and Interest on
employee’s contribution. Provident fund is of four types, viz:
a) Statutory Provident Fund (SPF): Statutory provident fund is set up under the
provisions of the Provident Funds Act, 1925. Government and Semi-
Government organisations, local authorities, railways, Universities and
recognised educational institutions maintain Statutory Provident Fund.
b) Recognised Provident Fund (RPF): The provident fund scheme is framed
under the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952
(hereinafter referred as PF Act). The PF Act covers any establishment employing
20 or more persons. However, any establishment employing less than 20
persons can also join the scheme provided employer and employee both agree
to do so. Further, if an employer creates his own scheme for provident fund
then he can do so subject to recognition from the Commissioner of Income tax.
c) Unrecognised Provident Fund (URPF): If a provident fund scheme is created
by an employer, which is not recognised by the Commissioner of Income tax,
then such fund is known as Unrecognised provident fund.
d) Public Provident Fund (PPF): The Central Government has established a
fund for the benefit of public to mobilise personal savings. Any member of the
public, whether salaried or self-employed, can contribute to the fund by
opening a provident fund account at any branch of the State Bank of India or its
subsidiaries or other specified bank. Even a salaried employee can
simultaneously become a member of employee’s provident fund (whether
statutory, recognised or unrecognized) and public provident fund. Any amount
in multiple of 5 (subject to minimum of 500 and maximum of 1,50,000 p.a.)
may be deposited in this account. Interest is credited every year but payable
only at the time of maturity. Interest earned on this fund is exempt from tax u/s
10(11).

Points to be remembered:

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1. Employer’s Contribution to the New pension System (as specified u/s 80CCD)
is fully taxable under the head ‘Salaries’. However, deduction is available u/s
80CCD. 2. The amount or the aggregate of amounts of any contribution made
to the account of the assessee by the employer:
(a) in a Recognised Provident Fund (RPF);
(b) in the scheme referred to in sec. 80CCD (1) [i.e., NPS]; and
(c) in an approved superannuation fund, - to the extent it exceeds 7,50,000 in a
previous year.
Tax point: There is combined upper limit of 7,50,000 in respect of employer’s
contribution in a year to NPS, superannuation fund and recognised provident
fund and any excess contribution is taxable.

3. The annual accretion (like interest, dividend, etc.) during the previous year to
the balance at the credit of the aforesaid fund or scheme to the extent it
relates to the contribution referred above.
Tax point: Such accretion shall be included in the total income and shall be
computed in such manner as may be prescribed.

Transferred Balance (Conversion of URPF to RPF) [Rule 11(4) of Part A of the

Fourth schedule]:
An organisation maintaining URPF, may later get recognition from
Commissioner of Income tax. In such case, the accumulated balance under
URPF shall be converted to RPF. Tax treatment of such transferred balance will
be as under:
Calculation is made of all sums comprised in the transferred balance that
would have been liable to income tax
if the recognition of the fund had been in force from the date of institution of
the fund. However, in case of serious accounting difficulty, the Commissioner
may make a summary calculation of such aggregate.
Such aggregate sum is deemed to be the income received by the employee in
the previous year in which the recognition of the fund takes effect.

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Note: On taxability of such conversion, assessee cannot claim relief u/s 89(1).

Illustration 12.
Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2018,
since then he is working with the same company. The salary structure and
increment details are as under:
Basic 5000 - 1000 - 8000 -1500 – 14000
D.A. 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA. Every year 9%
interest is credited to such fund. As on 1/4/2020, the fund gets recognition.
Hence, the accumulated balance in URPF was transferred to RPF. Comment on
tax treatment of such transferred balance.

DEDUCTION FROM GROSS SALARY [SEC. 16]

5.37 STANDARD DEDUCTION [SEC. 16(ia)]
Standard Deduction [Sec. 16(ia)]
Lower of the following shall be allowed as standard deduction to all employee:
a. 50,000
b. Amount of gross salary

5.38 ENTERTAINMENT ALLOWANCE [SEC. 16(ii)]

Entertainment allowance is initially included in taxable allowances as fully
taxable. Thereafter, a deduction is allowed under this section from gross
taxable salary. However, deduction u/s 16(ii) shall be available to the
Government employee only. Deduction for Entertainment allowance being
minimum of the following:
a. Actual Entertainment Allowance
b. 5,000/-

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c. 20% of Basic Salary.
Tax point:
➢ Deduction allowed shall be irrespective of actual expenditure incurred,
whether for office or personal purpose.
➢ No deduction is available under this section to a non-government
employee.

Illustration 13.
Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad
from the following data:
Basic salary 8,000 p.m. D.A. 2,000 p.m. Taxable perquisite 35,000,
Entertainment Allowance 4,000 p.m. Out of such allowance 20,000 is expended
and balance amount is saved.
Assuming he is:
a. Government employee
b. non-Government employee.

5.39 TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC. 16(iii)]

Tax on employment, profession, trade, etc. levied by a State under Article 276
of the Constitution will be allowed as deduction on cash basis, whether paid by
employee or by employer (on behalf of employee) from gross taxable salary.
Note: If employer (on behalf of employee) pays Professional tax then: a. Firstly,
it is to be included as taxable perquisite; and b. Further, it is allowed as
deduction u/s 16(iii).

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 CHAPTER 6: INCOME FROM HOUSE PROPERTY

6.1 CHARGEABILITY [SEC. 22]:

Annual value of the property shall be taxable under the head “Income from
house property” subject to the following:

Condition 1:
Building or land appurtenant there to
The term ‘house property’ is not defined in Income tax Act. However, various
judicial interpretation has construed the term house property as –
• any land surrounded by wall having roof or not; and
• any land appurtenant to a building.
Notes:
a) Building includes an enclosure of bricks, stone work or even mud walls
b) Building includes residential as well as commercial houses.
c) Vacant land is not a house property. Hence, income from letting of vacant
land is not taxable under this head but taxed as business income or as income
from other sources.
d) Roof is not necessary for a non-residential house property. A large stadium
or a open air swimming pool is also considered as building
e) It should be a permanent structure meant for a useful purpose.
f) If a building consists of several flats, then each flat is considered as a
separate house property.

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g) An incomplete, a ruined or demolished house cannot be termed as house
property.
h) Land appurtenant to a building includes car parking area, approach roads,
backyards, courtyards, etc. attached to such building.

Condition 2:
Owner Annual value of a property is assessed to tax only in the hands of the
owner even if he is not in receipt of any income. Any person other than the
owner, even though he is in receipt of rent shall not be liable to tax under this
head. That is why, income from sub-letting is not taxable under this head but
under the head ‘Income from other sources.
E.g., Mr. X being a tenant of a house property acquired it at a monthly rent of `
10,000 from Mr. Y (owner of such house property). Mr. X sublets the property
to Mr. Z for a monthly rent of 12,000. Income from subletting being 2,000 p.m.
is taxable as business income or as income from other sources. Owner includes
legal owner, beneficial owner and deemed owner. Legal owner: Legal owner
means a person who has the legal title of the property as per the Transfer of
Property Act, Registration Act, etc.
Beneficial owner: For income tax purpose it is not necessary that the property
must be registered in the name of the assessee. If the assessee is enjoying the
property as an owner to full extent he will be treated as a beneficial owner of
such property and will be charged under the head ‘Income from house
property’. Fictional owner or Deemed owner [Sec. 27] U/s 27, in the following
cases, a person shall be treated as deemed owner of the property and liable to
tax (in such case legal owner or beneficial owner shall not be further liable to
tax)
1.Transfer to spouse or minor child [Sec. 27(i)]: When an individual transfer a
house property to –
• his or her spouse (not being a transfer in connection with an
agreement to live apart); or
• a minor child (not being a married daughter) - without adequate
consideration, then transferor shall be treated as deemed owner of such
property.

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 E.g.: Mr. X transfers his house property worth 5,00,000 to Mrs. X out of
love and affection. In such case, though Mrs. X is the legal owner but Mr.
X will be liable to tax as deemed owner of such property.
Note: In case of transfer to spouse, marriage should subsist on both the days
i.e., on the day of transfer as well as on the day when income arises.
Tax point:
➢ Transferee must be spouse or minor child other than married daughter.
➢ Transfer must be without adequate consideration.
Transferred property must be a house property. E.g. Mr. X transfers cash
of ` 5,00,000 to Mrs. X and Mrs. X purchases a house property from such
cash, then such transfer of cash and subsequent purchase of property
shall not attract provision of sec. 27(i).
However, the income from such property shall be clubbed in the hands
of Mr. X as per the provision of sec. 64(1)(iv) [For detail refer chapter
Clubbing of Income].

2. The holder of an impartible estate [Sec. 27(ii)]: The holder of an impartible

estate (property which is not legally divisible) is treated as deemed owner of
house property. Impartible estate is an estate to which the assessee has
succeeded by grant or covenant.

3. Property held by a member of a company, society or any other association

[Sec. 27(iii)]:
Property held by a member of a company, co-operative society or other
association of persons to whom a building or a part thereof is allotted or leased
under House Building Scheme of the company or association, is treated as
deemed owner of that building or a part thereof.
Tax point:
➢ Assessee is the member of a company, co-operative society or other
AOP.
➢ He has been allotted or leased a building on account of such
membership.

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 ➢ Though he is not the legal owner of such property, still he will be liable to
tax.
4. A person who acquired a property u/s 53A of the Transfer of Property Act
[Sec. 27(iiia)]:
A person who is allowed to take or retain possession of any building (or part
thereof) in part performance of a contract u/s 53A of the Transfer of Property
Act, 1882, is deemed as the owner of that building (or part thereof).
Tax point:
➢ Assessee has taken the possession of the property.
➢ He has partly performed or promised to perform the contract i.e., he has
paid (or is ready to pay) a part of the consideration.
➢ The contract must be in writing. Though sale-deed might not be
executed in favour of the buyer, still certain other document like ‘power
of attorney’ or ‘agreement to sell’ has been executed.

5. Lessee of a building u/s 269UA(f) [Sec. 27(iiib)]: A person who acquires any
right u/s 269UA(f) in or with respect to any building or part thereof, by way of
lease agreement for a period not less than 12 years is deemed as the owner of
that building (or part thereof).
Notes:
a) Lease period should not be less than 12 years [as per sec. 269UA(f)]
including extension period.
b) Above provision does not include any right by way of lease from month to
month or for a period not exceeding 1 year. E.g.: X lets out a property to Miss Y
on a lease of 9 years. However, Miss Y has a right to renew the lease for further
period of 3 years. In such case, Miss Y shall be deemed as an owner of the
property u/s 27. However, if such right of renewal of lease (for 3 years) is
subject to condition that at each occasion it will be renewed for a period of 11
months, then X will be owner of the property and liable to tax u/s 22.

Condition 3:

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Property is not used for business or profession carried on by the assessee
When a person carries on business or profession in his own house property,
annual value thereof is not taxable u/s 22 provided income of such business is
chargeable to tax.

Incidences thereof
• Letting out to employees: If an assessee lets out the property to his
employee, where such letting out supports smooth flow of his business, then
such letting out shall be deemed to be incidental to business and such rent
shall be chargeable under the head “Profits & gains of business or profession”.
• Letting out to Government Agencies: Where an assessee let out his property
to any Government agency for locating branch of a nationalized bank, police
station, post office, excise office, railway staff quarters, etc. for the purpose of
running the business of assessee more efficiently, such letting out shall be
deemed to be incidental to business and such rent shall be chargeable under
the head “Profits & gains of business or profession”.
• Letting out to ancillary units: Where an assessee lets out its property to
ancillary units, which manufactures components required by the assessee.
Income from such letting out shall be taxable under the head “Profits & gains
of business or profession”.

Letting out property for promotion of own business –vs.- Business of letting
out the property:

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6.2 SOME SPECIAL CASES:
Foreign property If house property is situated abroad, then annual value of
such property shall be taxable as:
Assessee Condition for liabilities
Ordinarily resident Always taxable
Not ordinarily resident or non- Income must be received in India
resident

Note: The annual value of such property would be computed as if the property
is situated in India.
Disputed ownership
Merely, due to dispute regarding the title of property, assessment cannot be
postponed. In such case, person who is in receipt of income or who enjoys the
possession of the property is assessable to tax.
Composite rent
Together with rent of the building, if the owner gets charges for other services
or rent of other assets provided in the building (e.g. furniture, machinery, etc.),
amount so received is termed as ‘composite rent’.
Composite Rent = Rent for building + Rent for assets / Charges for various
services.

Tax treatment of composite rent is as follows:

• Rent including charges for amenities or services like garden facility, food,
lighting, etc. or other separable assets (like machinery, plant, furniture):
If the owner of house property gets composite rent for both property as well
as for services rendered or other separable asset, such composite rent shall be
treated as under:
Particulars Taxable under the head
Sum received for the use of building. ‘Income from house property’.
Sum received for other amenities or ‘Profits & gains of business or
other separable assets. profession’; or ‘Income from other
sources’

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However, if segregation of composite rent is not possible, then the whole
amount will be taxed either under the head ‘Profits & gains of business or
profession’ or ‘Income from other sources.

Tax point:
Rent from paying guest is, generally, taxable under the head ‘Income from
other sources.
• Letting of building with other inseparable assets (like machinery, plant,
furniture):
If letting of only building is not possible or not acceptable to the other party,
then sum received as rent from the properties is chargeable as business
income or income from other sources even if the composite rent is segregable.
E.g., letting out of hotel rooms, auditoriums, etc.
Co-ownership [Sec. 26]
If two or more persons own a house property jointly, then they are known as
co-owners. If individual share of each co-owner is definite and ascertainable
then the share of each such person shall be taxable as his income from house
property.
Tax treatment
1. Share of each co-owner in the income from the property as computed in
accordance with sec. 22 to 25 shall be included in his total income.
2. Where the house property is owned by co-owners and is occupied by each of
the co-owner then all of them can claim benefit u/s 23(2)(a) and interest on
loan shall be allowed to all the co-owners to the extent of 30,000/2,00,000 as
the case may be.
Note: Provision of Sec. 26 is mandatory and not optional.
Partner’s property used by the firm:
The business carried on by the firm should be regarded as carried on by all the
partners. Thus, annual letting value of a property belonging to the assessee

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which is in occupation of the firm in which assessee is the partner, is not
includible in income of the assessee-partner u/s 22
Property held as stock-in-trade [Sec. 23(5)]:
Where house property is held as stock-in-trade & not let out during any part of
the previous year, then annual value of such property shall be computed as
under:

Doctrine of mutuality:
Sec. 22 levies tax on annual value of house-property and not on actual income
from house property. In case of a club, which provides recreational facilities
exclusively to its member and their guest and not to any non-members, it is
considered as a non-profit seeking person and run on no-profit no-loss basis.
Such club is running on the principle of mutuality and its members are not
entitled to any share of profit. In the case of such a mutual concern, not only
the surplus of the organisation but also the annual value of the club house shall
be exempted from tax.

6.3 EXEMPTED PROPERTIES:

Income from the following house properties are exempted from tax:
1. Any one palace or part thereof of an ex-ruler, provided the same is not let
out [Sec. 10(19A)].
Tax point: If the ex-ruler has a house property and the part of which is self-
occupied and remaining let out then only the self-occupied part of the house
property shall be exempted.
2. House property of a local authority [Sec. 10(20)].
3. House property of an approved scientific research association [Sec. 10(21)].
4. House property of an educational institution [Sec. 10(23C)].

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5. House property of a hospital [Sec. 10(23C)].
6. House property of a person being resident of Ladakh [Sec. 10(26A)]
7. House property of a political party [Sec. 13A]
8. House property of a trade union [Sec. 10(24)]
9. A farm house [Sec. 10(1)]
10. House property held for charitable purpose [Sec. 11]
11. House property used for own business or profession [Sec. 22].

6.4 COMPUTATION OF INCOME:

The chapter is divided into the following categories for the purpose of
computation:
• Let out property [Sec. 23(1)]
• Property not actually occupied by the owner [Sec. 23(2)(b)]
• Self-occupied property [Sec. 23(2)(a)].
• Partly let out and partly self-occupied property [Sec. 23(3)]
• Deemed to be let out property [Sec. 23(4)].
• Recovery of arrears of rent and unrealized rent [Sec. 25A]

6.5 LET OUT PROPERTY [SEC. 23(1)]

Computation at a glance Computation of Income from house property of
…………. for the Assessment Year ……….

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Gross Annual Value (GAV):
Normally, income tax is charged on income, but under the head ‘Income from
house property’, tax is not charged on the rent earned from house property but
on the inherent earning capacity of the house property. Such earning capacity
is termed as Annual Value. Annual value is determined considering the
following factors:

A) Actual Rent Receivable [ARR]

Any sum receivable as rent of the house property for the previous year is
evidence for determining the earning capacity of the building. Such actual rent
receivable is to be computed on accrual basis. However, where tenant pays
rent, which is influenced by benefits provided by the owner of the property,
such rent must be disintegrated to determine actual rent i.e., De-facto rent of
the property. De facto rent = ARR – Cost of amenities.
Tax point: While computing actual rent receivable, outstanding rent shall be
considered but advance rent received during the financial year is not to be
considered.

B) Gross Municipal
Value It means the annual value of the property decided by municipality on
which they charge municipal tax. Such valuation may also be taken as evidence
of earning capacity of a property. In metro cities (i.e., Chennai, Delhi, Kolkata,
Mumbai), municipal authorities charge tax on Net Municipal Value after giving
a deduction for repairs (being 10% of Gross Municipal value) and an allowance
for service taxes (like sewerage tax, water tax etc. as a % of Net Municipal
value). Hence, the relation between Gross Municipal Value and Net Municipal
Value can be concluded as under –

C) Fair or Notional rent of the property

Fair or notional rent of a property means rent fetched by a similar property in
the same or similar locality. Though two properties might not be exactly similar
still it is an indicator of rent reasonably expected from the property. An inflated
or deflated rent due to emergency, relationship and such other conditions need
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to be adjusted to determine fair rent. For instance, a property was let out to a
friend for a monthly rent of 2,000 which might be let out to another person at
the rate of 2,500 p.m. In such case, fair rent of the property shall be 2,500 p.m.

D) Standard rent under the Rent Control Act Standard rent is the maximum
rent, which a person can legally recover from his tenant under the Rent Control
Act prevailing in the State in which the property is situated. A landlord cannot
reasonably expect to receive from a tenant any amount more than Standard
Rent. Accordingly, it can be concluded that if the property is covered by the
Rent Control Act then Reasonable Expected Rent (RER) cannot exceed Standard
Rent.
Tax point: Reasonable Expected Rent cannot exceed Standard Rent but can be
lower than Standard Rent Computation of Gross Annual Value.
Step 1: Calculate reasonable expected rent (RER) of the property being higher
of the following:
a) Gross Municipal Value.
b) Fair Rent of the property.
Note: RER cannot exceed Standard Rent. Reasonable Expected Rent (RER) is
also known as Annual Letting Value (ALV).
Step 2: Calculate Actual Rent Received or Receivable (ARR) for the year less
current year unrealised rent (UR) subject to certain conditions#.
Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in
full from Actual Rent Receivable, provided the following conditions are
satisfied:
(i) The tenancy is bona fide;
(ii) The defaulting tenant has vacated the property or steps have been taken to
compel him to vacate the property;
(iii) The defaulting tenant is not in occupation of any other property of the
assessee;
(iv) The assessee has taken all reasonable steps to institute legal proceeding for
the recovery of the unpaid rent or has satisfied the Assessing Officer that legal
proceedings would be worthless.

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Step 3: Compare the values calculated in step 1 and step 2 and take the higher
one.
Step 4: Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less
than the RER, then ‘ARR - UR’ computed in step 2 will be treated as GAV.

6.6 TAXES LEVIED BY LOCAL AUTHORITY (MUNICIPAL TAX) [PROVISO TO SEC.

23(1)] :
Tax levied by the municipality or local authority is deductible from Gross
Annual Value (GAV). As per sec. 27(vi), taxes levied by a local authority in
respect of any property shall include service taxes levied by such local authority
in respect of such property. Municipal tax includes Service taxes like fire tax,
water tax, etc. levied by a local authority.
Such taxes shall be computed as a % of Net Municipal Value and allowed as
deduction subject to the following conditions:
1. It should be actually paid during the previous year.
2. It must be paid by the assessee.
Tax point: Unpaid municipal tax or municipal tax paid by tenant shall not be
allowed as deduction.
3. It must be related to the previous year or any year preceding the previous
year.

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Tax point:
Tax paid to foreign local If property is situated in a foreign country, tax
authority paid to foreign local authority shall be allowed
as deduction
Tax exceeds GAV (Negative In case municipal tax paid includes tax paid
NAV) for several past years and the total amount of
tax so paid by the owner exceeds GAV, then
Net Annual Value (NAV) can be negative.
Refund of tax Refund of Municipal tax paid for a property is
not taxable u/s 22.
Advance Municipal Tax paid Municipal tax paid in advance is not allowed,
by the assessee as the Act provides that “the taxes levied by
any local authority in respect of property shall
be deducted, irrespective of the previous year
in which the liability to pay such taxes was
incurred by the owner.” [Proviso to sec. 23 of
Income tax Act, 1961]
As per the above language it is construed that
for claiming deduction in respect of municipal
tax, such tax must have already been levied by
the local authority. Hence payment of
municipal tax in advance (liability in respect of
which has not yet incurred) shall not be
allowed as deduction in the year of payment.

6.7 DEDUCTIONS U/S 24:

The list of deduction u/s 24 is exhaustive i.e., no deduction can be claimed in

respect of expenditures which are not specified under this section e.g., no
deduction is allowed for repairs, collection charges, insurance, ground rent,
land revenue, etc.
1. Standard deduction u/s 24(a)

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30% of the net annual value is allowed as standard deduction in respect of all
expenditures (other than interest on borrowed capital) irrespective of the
actual expenditure incurred.
Note: Where NAV is negative or zero, standard deduction u/s 24(a) is not
available.

2. Interest on loan or borrowed capital u/s 24(b)

Interest payable on amount borrowed for the purpose of purchase,
construction, renovation, repairing, extension, renewal or reconstruction of
house property can be claimed as deduction on accrual basis.

For the purpose of calculation, interest on loan is divided into two parts:

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In nutshell, tax treatment is as under:
Particulars Pre-construction period Post-construction period
Start from The day of commencement of The first day of the previous
construction or the day of year in which construction is
borrowing, whichever is later completed
End on March 31 immediately prior to When loan is fully paid
the year of completion of
construction
Tax The interest incurred during The interest expenses for the
treatment aforesaid period shall be year (on accrual basis) shall be
accumulated and allowed as allowed as deduction in the
deduction in 5 equal respective year.
instalments from the year of
completion of construction.

Other Points
a) Interest on borrowed capital is allowed on accrual basis even if the books of
account are kept on cash basis.
b) Interest paid on fresh loan, which is taken to repay the original loan (being
taken for above-mentioned purpose) shall be allowed as deduction.
c) Interest on new loan, taken for paying outstanding interest on old loan, is not
deductible
d) Amount paid as brokerage or commission, for arrangement of the loan, is
not deductible.
e) Interest on loan taken for payment of municipal tax, etc. is not allowed as
deduction.

Amount not deductible from Income from house property [Sec. 25]
Any interest chargeable under this Act which is payable outside India, is not
allowed as deduction if:
• on such interest, tax has not been deducted at source and paid as per the
provision of chapter XVIIB; and

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• in respect of such interest there is no person in India who may be treated as
an agent u/s 163.

6.8 SELF-OCCUPIED PROPERTY [SEC. 23(2)(a)]:

As per sec. 23(2)(a), a house property shall be termed as self-occupied property
where such property or part thereof:
• is in the occupation of the owner for the purposes of his own residence;
• is not actually let out during the whole or any part of the previous year; and
• no other benefit there from is derived by the owner. Treatment: The annual
value of such house or part of the house shall be taken to be nil.
If an assessee occupies more than two house properties as self-occupied, he is
allowed to treat only two houses as self-occupied at his option. The remaining
self-occupied house properties shall be treated as ‘Deemed to be let out’.

Tax point: In the light of the above provision –

Computation of taxable income of self-occupied property

Net annual value of self-occupied property shall be taken as nil. As a
consequence, deduction u/s 24(a) (standard deduction) shall also be nil.
Interest on loan u/s 24(b) shall be allowed, subject to certain ceiling.
Computation at a glance:
Net Annual Value 000
Less: Interest on borrowed capital u/s 24(b) 000
Income from house property 000
Standard deduction u/s 24(a) is not available 000

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Net Annual value:
Net Annual value of two self-occupied house properties, at the choice of the
assessee, is taken as nil. He can choose those house properties as self-occupied
through which tax liability can be reduced.
Normally (but not always) house property with higher gross annual value is
treated as self-occupied property but it is advised to calculate total income
under the head ‘Income from house property’ by applying each option
separately and then choose the option which reduces total income.

Interest on loan u/s 24(b)

Interest on loan taken for construction, acquisition, repair, renovation or
extension is allowed according to the following table:
conditions Maximum Interest
allowed in
aggregate
Where loan is taken on or after 1/4/1999 and following 2,00,000
conditions are satisfied –

1. Loan is utilized for construction or acquisition of

house property on or after 1-4-1999;
2. Such construction or acquisition is completed within 5
years from the end of the financial year in which the
capital was borrowed; and
3. The lender certifies that such interest is payable in
respect of the loan used for the acquisition or
construction of the house or as refinance of the earlier
loan outstanding (principal amount) taken for the
acquisition or construction of the house.
In any other case 30,000
Tax point: In any case, deduction in respect of interest on loan on self-
occupied properties cannot exceed 2,00,000 in a year.

Notes:

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a) Calculation and deduction of interest for the period of pre and post
construction, acquisition, etc. is same as discussed in the case of let out house
property.
b) Assessee shall always have nil income or loss up to 2,00,000 from properties
u/s 23(2)(a).

6.9 UNOCCUPIED PROPERTY [SEC. 23(2)(b)]

Where an assessee has a residential house (kept for self-occupation) and it
cannot actually be occupied by the owner owing to his employment, business
or profession carried on at any other place and hence he has to reside at that
place in a building not belonging to him, such house shall be termed as
unoccupied property.
Tax point:
➢ Assessee has a residential house kept for self-occupation.
➢ The house cannot be occupied by the owner owing to his employment
and no other benefit is derived from such house. In case house remains
unoccupied by the owner owing to his personal convenience, then no
benefit under this section shall be allowed
➢ He has to reside in a house not belonging to him, whether rent is paid for
that house or not.
Treatment: Same as self-occupied property.

6.10 DEEMED TO BE LET-OUT HOUSE PROPERTY [SEC. 23(4)]:

Where the assessee occupies more than two house properties as self-occupied
or has more than two unoccupied properties, then for any two of them, benefit
u/s 23(2) can be claimed (at the choice of the assessee) and remaining
property or properties shall be treated as ‘deemed to be let out’.
Treatment:
1. Gross Annual value: Since assessee does not let out such property & do not
receive rent, therefore GAV will be determined from Step 1 only. Step 2, 3 & 4
of calculation GAV are irrelevant.

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Tax point: GAV of deemed to be let out property will be the ‘Reasonable
expected rent (RER)’of the property.
2. Municipal taxes and deduction u/s 24(a) and 24(b) shall be available as in the
case of let out house property

6.11 PARTLY SELF-OCCUPIED AND PARTLY LET-OUT [SEC. 23(3)]:

Where a house or part of the house, which is self-occupied, is let out during
any part of the previous year, such property is termed as ‘Partly self-occupied
and partly let out’. Further, such division may be made in the following ways:

Case 1): Area wise Division In this case, a house property consists of two or
more independent units and one or more of which are self-occupied and
remaining units are let out.
Treatment
• Self-occupied portion & let out portion shall be treated as two separate
house (i.e. Unit A & Unit B);
• Common value like municipal value, fair rent, standard rent, municipal tax
and interest shall be proportionately divided;
• Income of both units shall be computed separately.

Case 2): Time wise division In such case, the house property is self-occupied
by the assessee for a part of the year and let out for remaining part of the year.
Treatment:
In such case, assessee will not get deduction for the self-occupied period and
income will be computed as if the property is let out throughout the year. In
this regard, it is to be noted that the reasonable expected rent (RER) shall be
taken for the full year but the actual rent receivable (ARR) shall be taken only
for the let-out period.

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Practical Problems:
Illustration 1.
Mr. Rana used his house property for self-occupation till 1/8/2020 and let out
the same for remaining period for rent of 6,000 p.m. Compute his income from
house property from the following details:
Municipal value 1,00,000, Fair Rent 80,000, Standard Rent 96,000, Municipal
tax 16%, Interest on loan 10,000.

Illustration 2.
How shall your answer differ if in the above illustration, property is let out to
tenant from 1/4/2020 to 1/12/2020 and from 1/12/2020 to 1/3/2021, it was
self-occupied. Standard rent of such property is 50,000.

Illustration 3.
Miss Rani used her house property for self-occupation till 1/9/2020 and let out
the same for remaining period for rent of ` 6,000 p.m. Municipal tax paid 5,000,
interest on loan accrued 10,000. Compute her taxable income from house
property.

Illustration 4.
Mr. Ajnabi has a house property in Cochin. The house property has two equal
dimension residential units. Unit 1 is self-occupied throughout the year and
unit 2 is let out for 9 months for 10,000 p.m. and for remaining 3 months it was
self-occupied. Compute his taxable income from the following details:
Municipal value 2,00,000, Fair Rent 1,60,000, Standard rent 3,00,000,
Municipal tax 10% (60% paid by assessee), Interest on loan 40,000, Expenditure
on repairs 20,000.

6.12 RECOVERY OF UNREALISED RENT AND ARREARS RENT [SEC. 25A]:

Applicability

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The assessee has received arrears of rent received from a tenant or the
unrealised rent realised subsequently from a tenant
Tax Treatment
The amount so received shall be taxable under the head ‘Income from house
property’ in the year of receipt after deducting standard deduction @ 30% of
such amount.

Arithmetically, taxable amount shall be

70% × [Recovery of Arrear Rent or Unrealised Rent]

Tax point:
➢ No other deduction shall be allowed from such income except standard
deduction i.e. 30% of such receipt. (even legal expenditure shall not be
allowed as deduction)
➢ The income is taxable on cash basis.
Note: Such receipt shall be chargeable as income from house property
although the assessee is not the owner of such property in the year of receipt.

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 CHAPTER 7: CAPITAL GAIN
Scope and year of chargeability [Section 45]:
Any profits or gains arising from the transfer of a capital asset effected in the
previous year will be chargeable to tax under the head 'Capital Gains', and
shall be deemed to be the income of the previous year in which the transfer
took place [Section 45(1)]
Section Profits and gains P.Y. in which income Deemed Full Value of
arising from the is chargeable to tax consideration for
following transactions computation of
chargeable as income capital gains under
section 48
45(1A) Money or other asset The previous year in The value of money
received under an which such money or the fair market
insurance from an or other asset is value of another
insurer on account of received. asset received.
damage/destruction
of any capital asset, as
a result of, flood,
hurricane, cyclone,
earthquake or other
convulsion of nature,
riot or civil
disturbance,
accidental fire or
explosion, action by
an enemy or action
taken in combating an
enemy
45 (2) Transfer by way of The previous year in The fair market value
conversion by the which such stock-in- of the capital asset
owner of a capital trade is sold or on the date of such
asset into stock-in otherwise conversion.
trade of a business transferred by him.
carried on by him.
45(5) Transfer by way of The previous year in Compensation or
compulsory which the consideration
acquisition under any consideration or determined or
law, or a transfer, the part thereof is first approved in the first
consideration for received. instance by the
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 which was Central Government
determined or or RBI
approved by the
Central Government
or RBI.
If the compensation The previous year in Amount by which
or consideration is which the the compensation or
further enhanced by consideration or consideration is
any court, Tribunal or part thereof is first enhanced or further
other authority, the received. enhanced. For this
enhanced amount will purpose, cost of
be deemed to be the acquisition and cost
income. of improvement shall
However, any amount be taken as 'Nil'.
of compensation
received in pursuance
of an interim order of
a court, Tribunal or
other authority shall
be deemed to be
income chargeable
under the head
"Capital Gains" of the
previous year in which
the final order of such
court, Tribunal or
other authority is
made.
45(5A) Transfer of a capital The previous year in The stamp duty value
asset, being land or which the certificate of his share in the
building or both, by of completion for project, being land or
an individual or Hindu the whole or part of building or both, on
undivided family, who the project is issued the date of issuing of
enters into a specified by the competent said certificate of
agreement for authority. completion.
development of a
project, provided he
does not transfer his Consideration
share in project on or received in cash, if
before the date of any,

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 issuance of
completion
certificate.

Definitions [Section 2]:

Section Term Definition

2(14) Capital Capital Asset means —
Asset (a) property of any kind held by an assessee,
whether or not connected with his business
or profession;
(b) any securities held by a Foreign Institutional
Investor which has invested in such
securities in accordance with the
regulations made under the SEBI Act, 1992.
Exclusions from the definition of Capital Asset:
Stock in trade [other than securities referred to
in (b) above], raw materials or consumables held
for the purposes of business or profession;
• Personal effects except jewellery,
archaeological collections, drawings,
paintings, sculptures or any work of art;
• Rural agricultural land in India i.e.
agricultural land not situated within
specified urban limits.

The agricultural land described in (a) and (b)

below, being land situated within the specified
urban limits, would fall within the definition of
"capital asset", and transfer of such land would
attract capital gains tax -

(a) agricultural land situated in any area within

the jurisdiction of a municipality or cantonment
board having population of not less than ten
thousand, or
(b) agricultural land situated in any area within
such distance, measured aerially, in relation to
the range of population as shown hereunder –

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 • Gold Deposits Bonds issued under the
Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold
Monetisation Scheme, 2015 and Gold
Monetisation Scheme, 2018 notified by
the Central Government;
• 6 1/2 0/0 Gold Bonds, 1977 or 7% Gold
Bonds, 1980 or National Defence Gold
Bonds, 1980, issued by the Central
Government;
• Special Bearer Bonds, 1991 issued by the
Central Government.
Note: 'Property' includes and shall be deemed
to have always included any rights in or in
relation to an Indian company, including rights
of management or control or any other rights
whatsoever.

2(42A) Short Asset Period of holding

term to be treated as
capital STCA
asset A security (other than a not more than 12
unit) listed in a months
recognized stock immediately
exchange in India, a unit preceding the
of UTI or a unit of an date of its
equity-oriented fund or a transfer
zero coupon bond
A share of a company not more than 24
(not being a share listed months
in a recognized stock immediately
exchange in India) preceding the
date of its
transfer
An immovable property, not more than 24
being land or building or months
both immediately

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 preceding the
date of its transfer

Any other capital asset not more than 36

months
immediately
preceding the
date of its transfer
2(29A) Long- Capital asset which is not a short-term capital
term asset is a long-term capital asset.
capital Asset Period of holding
asset to be treated as
LTCA
A security (other than a More than 12
unit) listed in a months
recognized stock immediately
exchange in India, a preceding the date
unit of UTI or a unit of of its transfer
an equity-oriented
fund or a zero-coupon
bond
A share of a company More than 24
(not being a share months
listed in a recognized immediately
stock exchange in preceding the date
India) of its transfer

Transactions not regarded as transfer [Section 47]:

Some Examples
❖ Any distribution of capital assets on the total or partial partition of a
HUF.
❖ Any transfer of capital asset under a gift or will or an irrevocable trust Any
transfer of capital asset by a holding company to its 100% subsidiary
Indian company or by a subsidiary company to its 100% holding Indian
company.

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 ❖ Any transfer or issue of shares by the resulting company, in a scheme of
demerger to the shareholders of the demerged company.
❖ Any transfer by a shareholder in a scheme of amalgamation of shares
held by him in the amalgamating company.
❖ Any transfer by an individual of sovereign gold bonds issued by RBI by way
of redemption.
❖ Any transfer by way of conversion of bonds, debentures, debenture stock,
deposit certificates of a company, into shares or debentures of that
company.
❖ Any transfer by way of conversion of preference shares of a company into
equity shares of that company.
❖ Any transfer of a capital asset in a transaction of reverse mortgage under
a scheme made and notified by the Central Government.

Mode of computation of Capital Gains [Section 48]:

Computation of long-term capital gains

Full value of consideration received or accruing as a result of transfer 00

Less: Expenditure incurred wholly and exclusively in connection with
00
such transfer
(e.g. brokerage on sale)
(Note: Deduction on account of STT paid will not be allowed)
Net Sale Consideration 00
Less: Indexed cost of acquisition and indexed cost of improvement 00
Less: Exemption under sections 54/54B/54D/54EC/54F 00
00
Long-term capital gains

Notes:
(i) Deduction on account of securities transaction tax paid will not be allowed.
(ii) Indexed Cost of Acquisition =
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 𝑖𝑠 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑
Cost of acquisition × 𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 𝑤𝑎𝑠
𝑓𝑖𝑟𝑠𝑡 ℎ𝑒𝑙𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑠𝑠𝑒𝑒 𝑜𝑟 2001−02,𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 𝑖𝑠 𝑙𝑎𝑡𝑒𝑟

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(iii) Indexed Cost of Improvement =
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 𝑖𝑠 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑
Cost of improvement ×
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑡ℎ𝑒 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 𝑡𝑜𝑜𝑘 𝑝𝑙𝑎𝑐𝑒

(iv) Benefit of indexation will, however, not be available in respect of long-term

capital gains from transfer of bonds or debentures other than capital indexed
bonds issued by the Government and sovereign gold bonds issued by RBI and
in respect of long-term capital gains chargeable to tax under section 112A.

Computation of short-term capital gains

Full value of consideration received or accruing as a result of 00
transfer
Less: Expenditure incurred wholly and exclusively in connection 00
with such transfer (e.g., brokerage on sale)
(Note: Deduction on account of STT paid will not be allowed)
Net Sale Consideration 00
Less: Cost of acquisition and cost of improvement 00
Less: Exemption under sections 54B/54D 00
Short-term capital gains 00

Capital Gains: Special Provisions:

SECTION 50:
Any income from transfer of depreciable assets is deemed to be capital gains
arising from transfer of short-term capital assets, irrespective of the period of
holding (i.e., indexation benefit would not be available even if the period of
holding of such assets is more than 36 months).

SECTION 50B:
Capital Gains on Slump Sale
Any profits and gains arising from slump sale effected in the previous year shall
be chargeable to income-tax as capital gains arising from the transfer of capital
assets and shall be deemed to be the income of the previous year in which the
transfer took place.
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Where the undertaking being transferred under slump sale is held for more than
36 months, the resultant gain is long-term; However, no indexation benefit
would be available. If the undertaking is held for less than 36 months, the
resultant gain is short-term.
Net worth is deemed to be the cost of acquisition and the cost of improvement
- 'Net worth' shall be aggregate value of total assets minus value of liabilities of
such undertaking as per books of account.
Fair market value is deemed to be the full value of consideration - Fair market
value of the capital asset as on the date of transfer, calculated in the prescribed
manner, shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer of such capital asset.
Accordingly, the CBDT has prescribed that, for the purpose of section 50B(2)(ii),
the fair market value (FMV) of capital assets would be the higher of—
1. FMV 7, being the fair market value of capital assets transferred by way of
slump sale (determined on the date of slump sale); and
2. FMV 2, being the fair market value of the consideration (monetary and
non-monetary) received or accruing as a result of transfer by way of slump
sale
Capital gains = Fair market value — Net Worth
Aggregate value of total assets would be the aggregate of the following.
i) Written Down Value of depreciable assets;
ii) Nil, in case of self-generated goodwill.
iii) Nil, in case of capital assets in respect of which the whole of the expenditure
has been allowed or is allowable as deduction under section 35AD; and
iv) Book value for other assets.
Revaluation of assets shall be ignored for computing Net Worth.

SECTION 50C:
Computation of capital gains on sale of land or building or both

Sl. Condition Deemed Sale

No. Consideration

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 1. Stamp Duty Value > Actual Stamp Duty Value
Consideration
If Stamp Duty Value > 110% of Actual sale consideration
actual consideration
If Stamp Duty Value 110% of
actual sale consideration
2. Actual Consideration > Stamp Actual Sale Consideration
Duty Value
3. Value ascertained by Valuation Stamp Duty Value
Officer > Stamp Duty Value
4. Value ascertained by Valuation Value ascertained by
Officer < Stamp Duty Value Valuation Officer
Note — If the date of agreement is different from the date of transfer, stamp
duty value on the date of agreement can be considered, if whole or part of the
consideration is received by way of account payee cheque/bank draft or ECS or
prescribed electronic modes (IMPS, UPI, RTGS, NEFT, Net banking, debit card,
credit card or BHIM Aadhar Pay) on or before the date of agreement.
Otherwise, stamp duty value on the date of transfer has to be considered.

SECTION 50CA:
Fair Market Value deemed to be full value of consideration in case of transfer
of unlisted shares in certain cases.

If consideration received or accruing FMV of such share

as a result of transfer of unquoted determined in the
share < FMV of such share prescribed manner would be
determined in the prescribed deemed as the full value of
manner. consideration
The provisions of this section would
not, however, be applicable to any
consideration received or accruing
as a result of transfer by such class
of persons and subject to such
conditions as may be prescribed.

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SECTION 50D:
Fair Market Value deemed to be full value of consideration in certain cases.

Where the consideration received or FMV of the said asset on the

accruing as a result of the transfer of date of transfer would be
a capital asset by an assessee is not deemed as the full value of
ascertainable or cannot be consideration.
determined.

SECTION 51:
Advance money received and forfeited up to 31.3.2014
Where the assessee has received advance money on an earlier occasion for
transfer of capital asset, but the transfer could not be effected due to failure of
negotiations, then, the advance money forfeited by the assessee has to be
reduced from the cost of acquisition (and indexation would be calculated on
the cost so reduced) while computing capital gains, when the capital asset is
transferred or sold.

Advance money received and forfeited on or after 1.4.2014 Such advance

money received on or after 1.4.2014 would be:
taxable under section 56(2) under the head "Income from other sources".
Therefore, advance money received and forfeited on or after 1.4.2014 should
not be deducted from the cost for determining the indexed cost of acquisition
while computing capital gains arising on transfer of the asset.

SECTION 111A:
Tax on short-term capital gains on transfer of equity shares and units of equity-
oriented fund on which STT is chargeable
❖ Any short-term capital gains on transfer of equity shares or units of an
equity-oriented fund shall be liable to tax @15%, if securities transaction
tax has been paid on such sale.
❖ In case of resident individuals and HUF, the short-term capital gain shall
be reduced by the unexhausted basic exemption limit and the balance
shall be taxed at 15%.

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 ❖ No deduction under Chapter VI-A can be claimed in respect of such short-
term capital gain.
❖ Short-term capital gains arising from transaction undertaken in foreign
currency on a recognized stock exchange located in an International
Financial Services Centre (IFSC) would be taxable at a concessional rate
of 15% even when STT is not paid in respect of such transaction.

SECTION 112:
Tax on long-term capital gains
❖ Any long-term capital gains, other than long term capital gains taxable
under section 1 12A, shall be liable to tax 20%.
❖ In case of resident individuals and HUFs, the long-term capital gain shall
be reduced by the unexhausted basic exemption limit, and the balance
shall be subject to tax at 20%.
❖ In case of non-corporate non-resident or foreign company, capital gains
arising from the transfer of a capital asset, being unlisted securities, or
shares of a closely held company shall be chargeable to tax @10% without
giving effect to the indexation provision under second proviso to section
48 and currency conversion under first proviso to section 48.
❖ Capital gains on transfer of listed securities (other than units) or zero-
coupon bonds shall be chargeable to tax@10% computed without the
benefit of indexation or @20% availing the benefit of indexation,
whichever is more beneficial to the assessee.
❖ No deduction under Chapter VI-A can be claimed in respect of long-term
capital gains.

SECTION 112A:
Tax on long-term capital gains on certain assets
❖ Any long-term capital gains exceeding 1,00,000 on transfer of equity
shares or units of an equity oriented fund shall be liable to tax @10% on
such capital gain, if securities transaction tax has been paid on acquisition
and such sale in case of equity share, and on such sale in case of units of
an equity oriented mutual fund.

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 ❖ In case of resident individuals and HUF, the long-term capital gain shall
be reduced by the unexhausted basic exemption limit and the balance
shall be taxed at 10%.
❖ No deduction under Chapter VI-A or rebate under section 87A can be
claimed in respect of such long-term capital gain.
❖ Long-term capital gains (in excess of arising from transaction
undertaken on a recognized stock exchange located in an International
Financial Services Centre (IFSC) would be taxable at a concessional rate
of 10%, where the consideration for transfer is received or receivable in
foreign currency, even when STT is not paid in respect of such
transaction.

Cost of Acquisition (Section 55):

Sl. Nature of asset Cost of acquisition

No.
1. Goodwill of business or profession,
trademark, brand name etc.,
❖ Self-generated Nil
❖ Acquired from previous owner Purchase price
However, in case of capital asset, Purchase price as reduced by
being goodwill of a business or the total amount of
profession, in respect of which depreciation obtained by the
depreciation u/s 32(1) has been assessee under section 32(1).
obtained by the assessee in any
P.Y. (up to P.Y.2019-20) Purchase price for such
previous owner.

❖ Became the property of the

assessee by way of distribution
of assets on total or partial
partition of HUF, under a gift or
will, by succession, inheritance,
distribution of assets on Purchase price as reduced by
the total amount of
liquidation of a company, etc.
depreciation obtained by the
and previous owner has acquired
assessee under section 32(1).
it by purchase
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 However, in case of capital asset,
being goodwill of a business or
profession, which was acquired
by the previous owner by
purchase and in respect of which
depreciation u/s 32(1) has been
obtained by the assessee in any
P.Y. (upto P.Y.2019-20)
The cost of improvement of such assets
would be Nil.
2. Bonus shares
If bonus shares are allotted before FMV on 1.4.2001
1.4.2001 Nil
If bonus shares are allotted on or after
1.4.2001
The higher of —
Bonus shares allotted before 1.2.2018, Actual cost of acquisition (i.e.,
on which STT has been paid at the time Nil, in case of bonus shares
of transfer. allotted on or after 1.42001;
and
FMV on 1.4.2001, in case of
bonus shares allotted before
1.4.2001) Lower of —
(a) FMV as on 31.1.2018; and
(b)Actual sale consideration
3. Rights Shares Amount actually paid for
Original shares (which forms the basis of acquiring the original shares
entitlement of rights shares) Amount actually paid for
Rights shares subscribed for by the acquiring the rights shares Nil.
assessee
Rights entitlement (which is renounced
by the assessee in favour of a person)
Rights shares which are purchased by Purchase price paid to the
the person in whose favour the renouncer of rights
assessee has renounced the rights entitlement as well as the
entitlement. amount paid to the Co. which
has allotted the rights shares.
4. Long term capital assets Cost of acquisition shall be the
higher of -

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 ❖ being, equity shares in a company (i) cost of acquisition of such
on which STT is paid both at the asset; and
time of purchase and transfer or (ii) lower of
❖ unit of equity-oriented fund on
which STT is paid at the time of the FMV of such asset on
transfer. 31.1.2018; and
acquired before 1st February, 2018.
the full value of consideration
recd or accruing as a result of
the transfer of the capital
asset.
5. Any other capital asset Cost of the asset to the
Where such capital asset became the assessee, or FMV as on
property of the assessee before 1.4.2001, at the option of the
1.4.2001. assessee. However, in case of
capital asset being land or
building, FMV as on 1.4.2001
shall not exceed stamp duty
value as on 1.4.2001.
Cost to the previous owner or
FMV as on 1.4.2001, at the
option of the assessee.

Where capital assets became the

property of the assessee by way of However, in case of capital
distribution of assets on total or partial asset being land or building,
partition of HUF, under a gift or will, by FMV as on 1.4.2001 shall not
succession, inheritance, distribution of exceed stamp duty value as on
assets on liquidation of a company, etc 1.4.2001.
and the capital asset became the
property of the previous owner before
1.4.2001.
The FMV on the date on which
Cost of the property in the hands of the capital asset become the
previous owner cannot be ascertained. property of the previous
owner would be considered as
cost of acquisition.

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Cost of improvement of certain assets [Section 55]:

Nature of asset Cost of improvement

Goodwill of a business, right to Nil

manufacture, produce or
process any article or thing,
right to carry on any business or
profession
Where the capital asset became All expenditure of a capital nature
the property of the previous incurred in making any addition or
owner or the assessee before alteration to the capital asset on or after
1-4-2001 1.4.2001 by the previous owner or the
assessee.
In relation to any other capital All capital expenditure incurred in making
asset additions or alterations to the capital
asset on or after 1.4.2001

❖ by the assessee after it became

his property; and
❖ by the previous owner [in a case
where the assessee acquired
the property by modes
specified in section 49(1)].

Capital Gains: Exemptions under section 10:

SECTION 10(37):
Where any individual or HUF owns urban agricultural land which has been used
for agricultural purposes for a period of two years immediately preceding the
date of transfer by such individual or a parent of his or by such HUF and the
same is compulsorily acquired under any law or the consideration for such
transfer is determined or approved by the Central Government or the RBI,
resultant capital gain will be exempt provided the compensation or
consideration for such transfer is received on or after 1.4.2004.

SECTION 10(43):

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The amount received by the senior citizen as a loan, either in lump sum or in
instalments, in a transaction of reverse mortgage would be exempt from
income-tax.

Exemption of Capital Gains [Sections 54 to 54F]:

Particulars Section 54 Section 54B Section 54D Section 54EC Section 54F
Eligible Individual/ Individual/ Any assessee Any assessee Individual/
Assessee HUF HUF HUF
Asset Residential Urban Land & Land or Land or
transferred House (LTCA) Agricultural building building or building or
Land forming part both (LTCA). both (LTCA).
of an
industrial
undertaking.
Other Income from Land should Land & Assessee
Conditions such house be used for building have should not
should be agricultural been used for own more
chargeable purposes by business of than one
under the assessee or undertaking residential
head “Income his parents or for at least 2 house on the
from house HUF for 2 years date of
property”. years immediately transfer. He
immediately preceding the should not
preceding the date of purchase
date of transfer. The within 2 years
transfer. transfer or construct
should be by within 3 years
way of after the date
compulsory of transfer,
acquisition of another
the industrial residential
undertaking. house.
Qualifying One Land for being Land or Bonds of One
asset i.e., Residential used for building or NHAI or RECL Residential
asset in House agricultural right in land or any other House
which capital situated in purpose or building bond notified situated in
gains has to India/Two (Urban/ Rural) by C.G. India.
be invested. residential (Redeemable
houses in after 5 years)
India, at the
option of the
assessee,
where capital
gains does
not exceed 2
crore.
Time limit for purchase Purchase Purchase/ Purchase Purchase
purchase/ within 1 year within a construct within a within 1 year
construction. before or 2 period of 2 within 3 years period of 6 before or 2

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 years after years after after the date months after years after
the date of the date of of transfer, for the date of the date of
transfer (or) transfer. shifting or re- transfer. transfer (or)
construct establishing Construct
within 3 years the existing within 3 years
after the date undertaking after the date
of transfer. or setting up a of transfer.
new industrial
undertaking.
Amount of Cost of new Cost of new Cost of new Capital Gain Cost of new
Exemption Residential Agricultural asset or or amount Residential
House or two Land or Capital Gain, invested in House ≥ Net
houses, as the Capital Gain, whichever is specified sale
case may be whichever is lower. bonds, consideration
or Capital lower, is whichever is of original
Gain, exempt. lower. asset, entire
whichever is Maximum Capital gain is
lower, is permissible exempt. Cost
exempt. investment of new
out of capital Residential
gains arising House < Net
in any sale
financial year consideration
is 50 lakhs, of original
whether such asset,
investment is proportionate
made in the capital gain is
current FY or exempt.
subsequent
FY or both.

Practical Question:
Question 1:
Mr. Mithun purchased 700 equity shares of M/S Goodmoney Co. Ltd. on 01-04-
2006 at rate of 7,000 per share in public issue of the company by paying
securities transaction tax.
Company allotted bonus shares in the ratio of on 07.72.2021. He has also
received dividend of 70 per share on 07.05.2022.
He has sold all the shares on 07.70.2022 at the rate of "4,000 per share through
a recognized stock exchange and paid brokerage of 7% and securities transaction
tax of 0.02% to celebrate his 75th birthday.

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Compute his total income and tax liability for Assessment Year 2023-24,
assuming that he is having no income other than given above. Fair market value
of shares of M/S Goodmoney Co. Ltd. on 31.7.2078 is "2,000.

Answer:
Computation of total income and tax liability of Mr. Mithun for A.Y. 2023-24.

Long term capital gains on sale of original shares

Gross sale consideration (1 00 x 4,000) 4,00,000
Less: Brokerage @1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x 2,000) (Refer Note 2) 2,00,000
1,96,000
Long term capital gains
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x 4,000) 4,00,000
Less: Brokerage @1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/S Goodmoney Co. Ltd. is taxable in the 2,000
hands of shareholders [200 shares x 10 per share]
Total Income
5,94,000
Tax Liability
Tax on dividend
NIL
15% of (3,96,000 - 2,98,000, being unexhausted basic exemption
14,700
limit)
9,600
10% of (1,96,000 - 1,00,000)
24,300
972
Add: Health and education cess @4%
Tax payable 25,272
Tax payable (rounded off) 25,270

Notes:
1. Long-term capital gains exceeding 1 lakh on sale of original share
through a recognized stock exchange (STT paid at the time of acquisition

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 and sale) is taxable under section 1 12A at a concessional rate of 10%,
without indexation benefit.
Cost of acquisition of such equity shares acquired before 1.2.2018 is
higher of
Cost of acquisition i.e., 1,000 per share and lower of
Fair market value of such asset i.e., 2,000 per share and Full
value of consideration i.e., 4,000 per share.
So, the cost of acquisition of original share is 2,000 per share.

2. Since bonus shares are held for less than 12 months before sale, the gain
arising there from is a short-term capital gain chargeable to tax@15% as
per section 1 1 IA after adjusting the unexhausted basic exemption limit
less 2,000, being the amount of dividend). Since Mr. Mithun is
over 60 years of age, he is entitled for a higher basic exemption limit of
for A.Y. 2023-24.
3. Brokerage paid is allowable since it is an expenditure incurred wholly and
exclusively in connection with the transfer. Hence, it qualifies for
deduction under section 48(i).
4. Cost of bonus shares will be Nil as such shares are allotted after 1.04.2001.
5. Securities transaction tax is not allowable as deduction.

Question 2
Aarav converts his plot of land purchased in July, 2004 for "80,000 into stock-in
trade on 31st March, 2022. The fair market value as on 37.3.2022 was 3,00,000.
The stock-in-trade was sold for 3,50,000 in the month of January, 2023.
Find out the taxable income, if any, and if so under which head of income and
for which Assessment Year?
Cost Inflation Index: F.Y. 2004-05:713; E Y. 2027-22: 377.

Answer:
Conversion of a capital asset into stock-in-trade is a transfer within the meaning
of section 2(47) in the previous year in which the asset is so converted. However,

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the capital gains will be charged to tax only in the year in which the stock-in trade
is sold.
The cost inflation index of the financial year in which the conversion took place
should be considered for computing indexed cost of acquisition. Further, the fair
market value on the date of conversion would be deemed to be the full value of
consideration for transfer of the asset as per section 45(2). The sale price less
the fair market value on the date of conversion would be treated as the business
income of the year in which the stock-in-trade is sold.
Therefore, in this problem, both capital gains and business income would be
charged to tax in the A.Y. 2023-24.

Capital Gains
Full value of consideration (Fair market value on the date of 3,00,000
conversion)
Less: Indexed cost of acquisition (80,000 × 317/113) 2,24,425
Long-term capital gain 75,575
Profits & Gains of Business or Profession
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000

Computation of taxable income of Mr. Aarav for A.Y.2023-24:

Particulars
Profits and gains from business or profession 25,000
Long term capital gains 75,575
Taxable Income 1,00,575

Question 3
Mrs. Harshita purchased a land at a cost of "35 lakhs in the financial year 2004-
05 and held the same as her capital asset till 20th March, 2022.
She started her real estate business on 21st March, 2022 and converted the said
land into stock-in-trade of her business on the said date, when the fair market
value of the land was "270 lakhs.

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She constructed 75 flats of equal size, quality and dimension. Cost of
construction of each flat is 70 lakhs. Construction was completed in February,
2023. She sold 70 flats at e30 lakhs per flat in March, 2023. The remaining 5 flats
were held in stock as on 31st March, 2023.
She invested "50 lakhs in bonds issued by National Highways Authority of India
on 31St March, 2023 and another 50 lakhs in bonds of Rural Electrification
Corporation Ltd. in April, 2023.
Compute the amount of chargeable capital gain and business income in the
hands of Mrs. Harshita arising from the above transactions for Assessment Year
2023-24 indicating clearly the reasons for treatment for each item.
[Cost Inflation Index: F.Y. 2004-05: 773; F.Y. 2027-22: 377].

Answer
Computation of capital gains and business income of Harshita for A.Y. 2023-24
Capital Gains
Fair market value of land on the date of conversion deemed as 2,10,000,000
the full value of consideration for the purposes of section 45(2).
Less: Indexed cost of acquisition [35,00,000 x 317/113] 98,18,584
1,11,81,416

Proportionate capital gains arising during A.Y. 2023-24 74,54,277

[1,11,81,416 x 2/3]
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y.2023-24 24,54,277
Business Income
Sale price of flats [10 x 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion [210 lacs x 1,40,00,000
2/3]
Cost of construction of flats [10 x 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2023-24 60,00,00,000

Notes:
1. The conversion of a capital asset into stock-in-trade is treated as a transfer
under section 2(47). It would be treated as a transfer in the year in which

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 the capital asset is converted into stock-in-trade (i.e., P.Y.2021-22, in this
case).
2. However, as per section 45(2), the capital gains arising from the transfer
by way of conversion of capital assets into stock-in-trade will be
chargeable to tax only in the year in which the stock-in-trade is sold.
3. The indexation benefit for computing indexed cost of acquisition would,
however, be available only up to the year of conversion of capital asset
into stock-in-trade (i.e., P.Y.2021 -22) and not up to the year of sale of
stock-in trade (i.e., P.Y.2022-23).
4. For the purpose of computing capital gains in such cases, the fair market
value of the capital asset on the date on which it was converted into stock
in-trade shall be deemed to be the full value of consideration received or
accruing as a result of the transfer of the capital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats)
is sold in the P.Y.2022-23, only proportionate capital gains (i.e., 2/3rd)
would be chargeable to tax in the A.Y.2023-24.
5. On sale of such stock-in-trade, business income would arise. The business
income chargeable to tax would be the difference between the price at
which the stock-in-trade is sold and the fair market value on the date of
conversion of the capital asset into stock-in-trade.
6. In case of conversion of capital asset into stock-in-trade and subsequent
sale of stock-in-trade, the period of 6 months is to be reckoned from the
date of sale of stock-in-trade for the purpose of exemption under section
54EC [CBDT Circular No.791 dated 2.6.2000]. In this case, since the
investment in bonds of NHAI has been made within 6 months of sale of
flats, the same qualifies for exemption under section 54EC. With respect
to long-term capital gains arising on land or building or both in any
financial year, the maximum deduction under section 54EC would be 50
lakhs, whether the investment in bonds of NHAI or RECL are made in the
same financial year or next financial year or partly in the same financial
year and partly in the next financial year. Therefore, even though
investment of 50 lakhs has been made in bonds of NHAI during the P.Y.
2022-23 and investment of 50 lakhs has been made in bonds of RECL

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 during the P.Y. 2023-24, both within the stipulated six-month period, the
maximum deduction allowable for A.Y. 2023-24, in respect of long-term
capital gain arising on sale of long-term capital asset(s) during the P.Y.
2022-23, is only 50 lakhs.

Question 4
Mr. A is an individual carrying on business. His stock and machinery were
damaged and destroyed in a fire accident.
The value of stock lost (total damaged) was 6,50,000. Certain portion of the
machinery could be salvaged. The opening balance of the block as on 7.4.2022
(i.e., WDV as on 37.3.2022 after providing depreciation for P. Y. 2027-22) was
10,80,000.

During the process of safeguarding machinery and in the firefighting operations,

Mr. A lost his gold chain and a diamond ring, which he had purchased in April,
2005 for 1,20,000. The market value of these two items as on the date of fire
accident was 1,80,000.

Mr. A received the following amounts from the insurance company:

Towards loss of stock 4,80,000
Towards damage of machinery 6,00,000
Towards gold chain and diamond ring 1,80,000

You are requested to briefly comment on the tax treatment of the above three
items under the provisions of the Income-tax Act, 1967.

Answer:
(i) Compensation towards loss of stock: Any compensation received from the
insurance company towards loss/damage to stock in trade is to be construed as
a trading receipt. Hence, 4,80,000 received as insurance claim for loss of stock
has to be assessed under the head “Profit and gains of business or profession”.
Note - The assessee can claim the value of stock destroyed by fire as revenue
loss, eligible for deduction while computing income under the head “Profits
and gains of business or profession”.
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(ii) Compensation towards damage to machinery: The question does not
mention whether the salvaged machinery is taken over by the Insurance
company or whether there was any replacement of machinery during the year.
Assuming that the salvaged machinery is taken over by the Insurance company,
and there was no fresh addition of machinery during the year, the block of
machinery will cease to exist. Therefore, 4,80,000 being the excess of written
down value (i.e. 10,80,000) over the insurance compensation (i.e. 6,00,000)
will be assessable as a short-term capital loss. Note – If new machinery is
purchased in the next year, it will constitute the new block of machinery, on
which depreciation can be claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold chain
and diamond ring are capital assets as envisaged by section 2(14). They are not
“personal effects”, which alone are to be excluded. If any profit or gain arises in
a previous year owing to receipt of insurance claim, the same shall be
chargeable to tax as capital gains. The capital gains have to be computed by
reducing the indexed cost of acquisition of jewellery from the insurance
compensation of 1,80,000.

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 CHAPTER 8: PROFITS AND GAINS OF BUSINESS OR
PROFESSION
Method of Accounting [Section 145]:
Income chargeable under this head shall be computed in accordance with the
method of accounting, either cash or mercantile basis, regularly and
consistently employed by the assessee.

Income chargeable under this head [Section 28]:

1. The profits and gains of any business or profession carried on by the
assessee at any time during the previous year.
2. Any compensation or other payment due to or received by a person, at or in
connection with -
a) Termination of his management or modification of the terms and
conditions relating thereto, in case the person is managing the whole or
substantially the whole of the affairs of an Indian company.
b) Termination of his office or modification of the terms and conditions
relating thereto, in case the person is managing the whole or substantially
the whole of the affairs in India of any other company.
c) Termination of agency or modification of the terms and conditions
relating thereto, in case the person is holding an agency in India for any
part of the activities relating to the business of any other person.
d) Vesting in the Government or in any corporation owned and controlled
by the Government, under any law for the time being in force, of the
management of any property or business.
e) Termination or the modification of the terms and conditions, of any
contract relating to his business.
3.Income derived by a trade, professional or similar association from specific
services performed for its members.
4. In the case of an assessee carrying on export business, the following
incentives –
a) Profit on sale of import entitlements;

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 b) Cash assistance against exports under any scheme of GoI;
c) Customs duty or excise re-paid or repayable as drawback;
d) Profit on transfer of Duty-Free Replenishment Certificate.
5.Value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of profession.
6. Any interest, salary, bonus, commission or remuneration due to, or received
by, a partner of a firm from such firm (to the extent allowed as deduction in the
hands of the firm).
7. Any sum, received or receivable, in cash or kind under an agreement for –
a) not carrying out any activity in relation to any business or profession; or
b) not sharing any know-how, patent, copyright, trademark, licence,
franchise or any other business of commercial right of similar nature or
information or technique likely to assist in the manufacture or
processing of goods or provision of services.
8. Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
9. Fair market value of inventory as on date on which it is converted into or
treated as a capital asset.
10. Any sum, whether received or receivable, in cash or kind, on account of any
capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, in respect of which the whole
of the expenditure had been allowed as deduction under section 35AD.

Computation of income under the head “Profits and gains of business or

profession”
As per section 29, the income referred to in section 28 has to be computed in
accordance with the provisions contained in sections 30 to 43D.

Admissible Deductions:

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Section 30.
Amount paid on account of rent, rates, taxes, repairs (not including
expenditure in the nature of capital expenditure) and insurance for buildings
used for the purpose of business or profession.
In case the premises are occupied by the assessee as a tenant, the amount of
repairs would be allowed as deduction only if he has undertaken to bear the
cost of repairs to the premises.

Section 31.
Amount paid on account for current repairs and insurance of machinery, plant
and furniture used for the purpose of business or profession.

Section 32.
Depreciation
Depreciation is mandatorily allowable as deduction.
Conditions for claiming depreciation
• Asset must be used for the purpose of business or profession at any time
during the previous year.
Note: If the asset is acquired during the previous year and is put to use for
less than 180 days during that previous year then, only 50% of the
depreciation calculated at the rates prescribed will be allowed.
• The asset should be owned (wholly or partly) by the assessee.
• The depreciation shall be allowed on the written down value of block of
assets at the prescribed rates (except in the case of assets of power
generating units, in respect of which depreciation has to be calculated as a
percentage of actual cost).
As per section 2(11), block of assets means a group of assets falling within a
class of assets comprising:
(a) tangible assets, being buildings, machinery, plant or furniture,

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 (b) intangible assets, being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of
similar nature, not being goodwill of a business or profession;
in respect of which, the same rate of depreciation is prescribed.

Written Down Value of Assets (W.D.V.) [Section 43(6)]:

(1) W.D.V. of the block of assets in immediately preceding previous 000
year
(2) Less: Depreciation actually allowed in respect of that block of 000
assets in said preceding previous year
Opening balance as on 1st April of the current P.Y. 000

Increased by
(3) Actual cost of assets acquired during the previous year, not being
000
on account of acquisition of goodwill of a business or profession
(4) Total (1) - (2) + (3) 000

Reduced by
(5) Money receivable in respect of any asset falling within the block 000
which is sold, discarded, demolished or destroyed during that
previous year together with scrap value. However, such amount
cannot exceed the amount in (4).

(6) In case of slump sale, actual cost of the asset (-) amount of 000
depreciation that would have been allowable to the assessee for
any assessment year as if the asset was the only asset in the block.
However, such amount of reduction cannot exceed the WDV.

(7) W.D.V at the end of the year (on which

000
depreciation is allowable) [(4) – (5) – (6)].

(8) Depreciation at the prescribed rate

000
(Rate of Depreciation × WDV arrived at in (7) above).
Note – If the actual cost includes cost of asset put to use for less than 180
days in the relevant P.Y. of acquisition, then, depreciation on such cost would
be 50% of the prescribed rate.

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Section 32 (1)(iia).
Additional depreciation at the rate of 20% of actual cost of plant or
machinery acquired and installed after 31.03.2005 by an assessee engaged in
the business of manufacture or production of any article or thing or in the
business of generation, transmission or distribution of power, shall be allowed.
If plant and machinery is acquired and put to use for the purpose of business
or profession for less than 180 days during the previous year in which it is
acquired, additional depreciation will get restricted to 10% of actual cost (i.e.,
50% of 20%). The balance additional depreciation@10% of actual cost will be
allowed in the immediately succeeding previous year.
However, additional depreciation will not be allowed on the following plant or
machinery:
• Ships, aircraft, road transport vehicles, office appliances;
• Machinery previously used by any other person;
• Machinery installed in any office premises, residential accommodation, or
guest house;
• Machinery in respect of which, the whole of the actual cost is fully allowed
as deduction (whether by way of depreciation or otherwise) of any one
previous year.

Section 35.
Expenditure on Scientific Research
Expenditure incurred by assessee
• Any revenue and capital expenditure (other than cost of acquisition of land)
on scientific research for in-house research related to its business is
allowable as deduction
[Section 35(1)(i) & Section 35(1)(iv) read with section 35(2)].
• Deduction is also allowed in respect of payment of salary or purchase of
material inputs for such scientific research during 3 years immediately
preceding the year of commencement of business. Such expenditure is
deemed to have been incurred in the year of commencement of business
and is, hence, allowed as deduction in that year [Section 35(1)(i)].

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Capital expenditure incurred during 3 years immediately preceding the year of
commencement of the business is also deemed to have been incurred in the
year in which the business commences, and is hence, allowed as deduction in
that year [Section 35(1)(iv) read with section 35(2)].
• In case of companies engaged in the business of biotechnology or
manufacture or production of article or thing, other than the article or
thing listed in the Eleventh Schedule (alcohol spirits, tobacco and tobacco
products, cosmetics and toilet preparations, confectionary and chocolates,
tooth paste, dental cream, tooth powder and soap), deduction of 100% of
expenditure incurred on scientific research on in-house research and
development facility is allowed (other than expenditure on cost of land or
building) [Section 35(2AB)].

Contributions to Outsiders:
Contributions made by any assessee to certain specified/ approved institutions
shall be entitled to deduction of 100% of contribution made to:

Section Association/University/Company/College/IIT

35(1)(ii) Notified approved research association/university/ college/ other

institution for scientific research
35(1)(iia) Approved notified Company for scientific research
35(1)(iii) Notified approved research association/university/ college/ other
institution for research in social science or statistical research

35(2AA) Approved National Laboratory/ University/ IIT/ specified person to

be used for scientific research undertaken under an approved
programme.

Section 35AD.
This section provides for investment-linked tax deduction in respect of the
following specified businesses commencing operations on or after the dates
specified thereto -

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➢ setting-up and operating ‘cold chain’ facilities for specified products
(commencing operations on or after 1.4.2009);
➢ setting-up and operating warehousing facilities for storing agricultural
produce (commencing operations on or after 1.4.2009);
➢ laying and operating a cross-country natural gas or crude or petroleum
oil pipeline network for distribution, including storage facilities being an
integral part of such network (commencing operations on or after
1.4.2007);
➢ building and operating a hotel of two-star or above category, anywhere
in India (commencing operations on or after 1.4.2010);
➢ building and operating a hospital, anywhere in India, with at least 100
beds for patients (commencing operations on or after 1.4.2010);
➢ developing and building a housing project under a notified scheme for
slum redevelopment or rehabilitation framed by the Central
Government or a State Government (commencing operations on or after
1.4.2010);
➢ developing and building a housing project under a notified scheme for
affordable housing framed by the Central Government or State
Government (commencing operations on or after 1.4.2011);
➢ production of fertilizer in India (commencing operations on or after
1.4.2011);
➢ setting up and operating an inland container depot or a container freight
station notified or approved under the Customs Act, 1962 (commencing
operations on or after 1.4.2012);
➢ bee-keeping and production of honey and beeswax (commencing
operations on or after 1.4.2012);
➢ setting up and operating a warehousing facility for storage of sugar
(commencing operations on or after 1.4.2012);
➢ laying and operating a slurry pipeline for transportation of iron-ore
(commencing operations on or after 1.4.2014);
➢ developing or maintaining and operating or developing, maintaining and
operating a new infrastructure facility (commencing operations on or
after 1.4.2017).

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Quantum of deduction - 100% of the capital expenditure (other than
expenditure on acquisition of any land, goodwill or financial instrument)
incurred during the previous year, wholly and exclusively for the above
specified businesses would be allowed as deduction from the business
income of an assessee, if he has opted for the provisions of section 35AD.

Further, the expenditure incurred, wholly and exclusively, for the purpose of
specified business prior to commencement of operation would be allowed
as deduction during the previous year in which the assessee commences
operation of his specified business, provided the amount incurred prior to
commencement has been capitalized in the books of account of the
assessee on the date of commencement of its operations.

Payment exceeding ` 10,000 to be made through prescribed electronic

modes to qualify for deduction u/s 35AD - Any expenditure in respect of
which payment or aggregate of payment made to a person of an amount
exceeding ` 10,000 in a day otherwise than by account payee cheque drawn
on a bank or an account payee bank draft or use of electronic clearing system
through a bank account or through such other prescribed electronic modes
would not be eligible for deduction.

Non-eligibility for deduction u/s 10AA or Chapter VI-A - An assessee availing

investment-linked tax deduction u/s 35AD in respect of any specified business
in any assessment year, is not eligible for claiming profit-linked deduction
under Chapter VI-A or section 10AA for the same or any other A.Y. in respect of
such specified business if the assessee has claimed or opted for section 35AD
and deduction thereunder has been allowed to him.

Asset to be used only for specified business for 8 years - Any asset in respect
of which a deduction is claimed and allowed under section 35AD shall be
used only for the specified business, for a period of 8 years beginning with
the previous year in which such asset is acquired or constructed. If such asset
is used for any purpose other than the specified business, the total amount
of deduction so claimed and allowed u/s 35AD in any previous year in
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respect of such asset, as reduced by the depreciation allowable under
section 32 as if no deduction had been allowed under section 35AD, shall be
deemed to be the business income of the assessee of the previous year in
which the asset is so used.

Section 35D.

Preliminary expenditure incurred by Indian companies and other resident

non-corporate assessees shall be allowed as deduction over a period of 5
years beginning with the previous year in which business commences or in
which extension of the undertaking is completed or the new unit commences
operation or productions.
Examples of Preliminary expenses – expenses on preparation of project
report, feasibility report, market survey, engineering services, legal charges for
drafting agreement.
In case of a Company, preliminary expenses would include, in addition to the
above, legal charges for drafting MOA, AOA, printing of MOA and AOA, fee for
registration of Co., expenditure in connection with issue of shares or
debentures of Co. (i.e. underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement of the prospectus)
Qualifying amount - Maximum aggregate amount of the qualifying expenses
that can be amortized is 5% of the cost of project (i.e., actual cost of fixed
assets in the books of account on the last day of the P.Y.).
In case of an Indian company, 5% of the cost of project or at its option, 5% of
the capital employed by the company (aggregate of issued share capital,
debentures, long-term borrowings as on the last day of the P.Y.), whichever is
higher.

Section 35DDA.

One-fifth of the expenditure incurred by an assessee-employer in any

previous year in the form of payment to any employee in connection with his
voluntary retirement in accordance with a scheme of voluntary retirement,

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shall be allowed as deduction in that previous year and the balance in four
equal instalments in the immediately four succeeding previous years.

Section 36(1)(iii).

Interest paid in respect of capital borrowed for the purposes of business or

profession.
However, any interest paid for acquisition of an asset (whether capitalized in
the books of account or not) for any period beginning from the date on which
the capital was borrowed for acquisition of the asset till the date on which
such asset was first put to use, shall not be allowed as deduction.

Section 36(1)(iv).

Any sum paid by the assessee as an employer by way of contribution towards a

recognized provident fund or approved superannuation fund.

Section 36(1)(iva).
Any sum paid by the assessee as an employer by way of contribution towards
a pension scheme referred to in section 80CCD, to the extent of 10% of salary
of any employee. Salary includes dearness allowance, if the terms of
employment so provide. Correspondingly, section 40A(9) disallows the sum
paid in excess of 10% of the salary of any employee.

Section 36(1)(va).
Amount received by assessee-employer as contribution from his employees
towards their welfare fund to be allowed as deduction only if such amount is
credited by the assessee to the employee’s account in the relevant fund on or
before due date under the relevant Act/Rule/order/notification. Amount
credited after the said due date but on or before the due date under section
139(1) would not be eligible for deduction.

Section 36(1)(vii)

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Any bad debts written off as irrecoverable in the accounts of the assessee for
the previous year, provided the debt has been taken into account in
computing the income of the previous year or any earlier previous year.
Amount of debt taken into account in computing the income of the assessee on
the basis of notified ICDSs to be allowed as deduction in the previous year in
which such debt or part thereof becomes irrecoverable. If a debt, which has
not been recognized in the books of account as per the requirement of the
accounting standards but has been taken into account in the computation of
income as per the notified ICDSs, has become irrecoverable, it can still be
claimed as bad debts under section 36(1)(vii) since it shall be deemed that the
debt has been written off as irrecoverable in the books of account by virtue of
the second proviso to section 36(1)(vii). This is because some ICDSs require
recognition of income at an earlier point of time (prior to the point of time
such income is recognised in the books of account). Consequently, if the whole
or part of such income recognised at an earlier point of time for tax purposes
becomes irrecoverable, it can be claimed as bad debts on account of the
second proviso to section 36(1)(vii).

Section 36(1)(ix).
Any bona fide expenditure incurred by a company for the purpose of
promoting family planning amongst its employees.
In case the expenditure or part thereof is of capital nature, one-fifth of such
expenditure shall be deducted for the previous year in which it was incurred;
and the balance in four equal instalments in four succeeding previous years.
Family planning expenses, whether revenue or capital, is not allowable as
deduction for non-corporate assesses, like individuals, HUFs, firms, LLPs.

Section 36(1)(xv).
An amount equal to the securities transaction tax (STT) paid by the assessee in
respect of taxable securities transactions entered into in the course of his
business during the previous year, if the income arising from such taxable
securities transactions is included in the income computed under the head
“Profits and gains of business or profession”.

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Section 36(1)(xvi).
An amount equal to commodities transaction tax (CTT) paid in respect of
taxable commodities transactions entered into the course of business during
the previous year, if the income arising from such taxable commodities
transactions is included in the income computed under the head “Profits and
gains of business or profession”.

Section 37(1).
An expenditure shall be allowed under section 37, provided:
➢ it is not in the nature of expenditure described under sections 30 to 36;
➢ it is not in the nature of capital expenditure;
➢ it is not a personal expenditure of the assessee;
➢ it is laid out and expended wholly and exclusively for the purpose of
business/profession;
➢ it is not incurred for any purpose which is an offence or which is
prohibited by law; and
➢ it is not an expenditure incurred by the assessee on CSR activities
referred to in section 135 of the Companies Act, 2013.

Expenditure incurred for any purpose which is an offence or which is

prohibited by law” shall include and shall be deemed to have always included
the expenditure incurred by an assessee, -
a) for any purpose which is an offence under any law for the time being in
force, in India or outside India or which is prohibited by any law for the
time being in force, in India or outside India; or
b) to provide any benefit or perquisite to a person, whether or not carrying
on a business or exercising a profession, and acceptance of such benefit
or perquisite by such person is in violation of any law or rule or regulation
or guidelines, as the case may be, for the time being in force, governing
the conduct of such person; or
c) to compound an offence under any law for the time being in force, in India
or outside India.

Section 37(2B).

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Any expenditure incurred for advertisement in any souvenir, brochure, tract,
pamphlet etc. published by a political party is not allowable as deduction.

Section 40(a)(i):
Any interest, royalty, fees for technical services or other sum chargeable under
the Act, which is payable outside India or in India to a non-corporate non-
resident or to a foreign company, on which tax deductible at source has not
been deducted or after deduction has not been paid on or before the due
date specified u/s 139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due
date specified under section 139(1), such sum shall be allowed as deduction in
computing the income of the previous year in which such tax is paid.

Section 40(a)(ia):
30% of any sum payable to a resident on which tax is deductible at source
under Chapter XVII-B and such tax has not been deducted or, after deduction
has not been paid on or before the due date for filing of return of income u/s
139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due
date specified under section 139(1), 30% of such sum shall be allowed as
deduction in computing the income of the previous year in which such tax is
paid.

Section 40(a)(ii):
Any sum paid on account of income-tax including surcharge or cess

Section 40(a)(ii):
Any payment chargeable under the head “Salaries”, if it is payable outside
India or to a non-resident, if tax has not been paid thereon nor deducted
therefrom

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Section 40(a)(v):
Tax paid by the employer on non-monetary perquisites provided to its
employees, which is exempt under section 10(10CC) in the hands of the
employee.

In case of partnership firms or LLPs –

Section 40(v)(i):
Salary, bonus, commission or remuneration, by whatever name called, paid to
any partner who is not a working partner;

Section 40(v)(ii):
Payment of remuneration to a working partner or interest to any partner,
which is not –
• authorized by the partnership deed; or
• in accordance with the terms of the partnership deed.

Section 40(v)(iii):
Payment of remuneration to a working partner or interest to any partner
authorized by and in accordance with the terms of the partnership deed, but
relates to a period falling prior to the date of such partnership and is not
authorized by the earlier partnership deed.

Section 40(v)(iv):
Payment of interest to any partner authorised by and in accordance with the
terms of the partnership deed and falling after the date of the partnership
deed to the extent of the excess of the amount calculated at 12% simple
interest per annum.

Section 40(v)(v):

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Payment of remuneration to a working partner which is authorized by and in
accordance with the partnership deed to the extent the aggregate of such
payment to working partners exceed the following limits –
On the first 3,00,000 of the book- 1,50,000 or 90% of the book-profit,
profit or in case of a loss whichever is more.
On the balance of book-profit. 60% .

Meaning of Book profit:

Book profit means the net profit as shown in the P & L A/c for the relevant
previous year computed in accordance with the provisions for computing
income from profits and gains.
The above amount should be increased by the remuneration paid or payable
to all partners of the firm if the same has been deducted while computing net
profit.

Expenses or payments not deductible in certain circumstances:

Section 40A(2):
Any expenditure incurred in respect of which a payment is made to a related
person or entity, to the extent it is considered excessive or unreasonable by
the Assessing Officer.
Few examples of related persons are as under:

HUF or Any member of the AOP or HUF or any relative of such member
AOP
Company Director of the company or any relative of the director

Any Any individual who has a substantial interest (20% or more

assessee voting power or beneficial entitlement to 20% of profits) in the
business or profession of the assessee; or A relative of such
individual.

Section 40A(3):

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Any expenditure, in respect of which a payment or aggregate of payments
made to a person in a single day otherwise than by account payee cheque or
account payee bank draft or ECS through bank account or through such other
prescribed electronic modes exceeds 10,000.
In case of payments made to transport operator for plying, hiring or leasing
goods carriages, an enhanced limit of 35,000 shall apply.
If the payment/payments exceed this limit, the entire expenditure would be
disallowed.
However, disallowance would not be attracted if the cases and circumstances
in which payment is made otherwise than by way of an account payee cheque
or bank draft are covered in Rule 6DD.

Few Examples of exceptions covered in Rule 6DD:

Payment to RBI, SBI, Co-operative banks
Payment made to Government, which according to its Rules, has to be made in
legal tender
Payment for purchase of agricultural produce, forest produce, fish and fish
products, productions of horticulture or apiculture to the cultivator, grower or
producer of such produce or products.

Section 40A(3A):
Where an expenditure has been allowed as deduction on accrual basis in any
previous year, and payment is made in a subsequent previous year otherwise
than by account payee cheque or account payee bank draft or ECS through
bank account or through such other prescribed electronic modes and such
payment (or aggregate of payments made to a person in a day is made in a
subsequent previous year) is in excess of the limits of ` 10,000/ ` 35,000
specified above, the payment/aggregate of payments so made shall be
deemed as profits and gains of the business or profession and charged to tax
as income of the subsequent previous year.
However, the deeming provision will not apply in the cases and circumstances
covered in Rule 6DD.

Section 40A(7):
Provision for payment of gratuity to employees.

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However, disallowance would not be attracted if provision is made for
contribution to approved gratuity fund or for payment of gratuity that has
become payable during the year.

Profits chargeable to tax [Section 41]:

Section 41(1):
Where deduction was allowed in respect of loss, expenditure or trading liability
for any year and subsequently, during any previous year, the assessee or
successor of the business has obtained any amount in respect of such loss or
expenditure or some benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained or the value of benefit
accrued shall be deemed to be income of the P.Y. in which such benefit was
obtained.

Section 41(3):
Amount realized on transfer of an asset used for scientific research without
being used for other purposes is taxable as business income in the year of sale
to the extent of lower of –
➢ deduction allowed under section 35(1)(iv); and
➢ sale proceeds

Section 41(4):
Any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received.

Certain Deductions to be allowed only on Actual Payment [Section 43B]:

In respect of the following sums payable by an assessee during the P.Y.,
deduction is allowable only if the sum is actually paid on or before the due
date of filing of return u/s 139(1) for the said P.Y. Otherwise, the same would
be allowed only in the year in which the sum is actually paid.

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Section 43B (i):
Tax, duty, cess or fee, under any law for the time being in force; or
Section 43B (ii):
Contribution to any provident fund or superannuation fund or gratuity fund or
any other fund for the welfare of employees; or
Section 43B (iii):
Bonus or commission for services rendered by employees, where such sum
would not have been payable to him as profits or dividend if it had not been
paid as bonus or commission; or
Section 43B (iv):
Interest on any loan or borrowing from any public financial institution or a
State Financial Corporation or a State Industrial Investment Corporation, in
accordance with the terms and conditions of the agreement governing such
loan or borrowing; or
Section 43B (v):
Interest on any loan or borrowing from a deposit taking NBFC or systemically
important non-deposit taking NBFC (i.e., whose total assets as per the last
audited Balance Sheet is 500 crore or more), in accordance with the terms and
conditions of the agreement governing such loan or borrowing.
Section 43B (vi):
Interest on any loan or advance from a scheduled bank or cooperative bank
other than a primary agricultural credit society or a primary co-operative
agricultural and rural development bank in accordance with the terms and
conditions of the agreement governing such loan or advances; or
Section 43B (vii):
Payment in lieu of any leave at the credit of his employee.
Section 43B (viii):
Any sum payable to the Indian Railways for use of Railway assets.

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Other Provisions:
Section 43CA:
Where the consideration for the transfer of an asset (other than capital asset),
being land or building or both, is less than the stamp duty value, the value so
adopted or assessed or assessable (i.e., the stamp duty value) shall be
deemed to be the full value of the consideration for the purposes of
computing income under the head “Profits and gains of business or
profession”.
However, if the stamp duty value does not exceed 110% of the actual
consideration received or accruing then, such consideration shall be deemed
to be the full value of consideration for the purpose of computing profits and
gains from transfer of such asset.
Further, where the date of an agreement fixing the value of consideration for
the transfer of the asset and the date of registration of the transfer of the asset
are not same, the stamp duty value may be taken as on the date of the
agreement for transfer instead of on the date of registration for such transfer,
provided at least a part of the consideration has been received by way of an
account payee cheque/ account payee bank draft or use of ECS through a bank
account or through such other prescribed electronic modes on or before the
date of the agreement.

Mandatory audit of accounts of certain persons:

Category of person Condition for applicability of section

44AB
1. In case of a person carrying on
business
(a) In case of a person carrying on If his total sales, turnover or gross
business receipts in business > 1 crore in the
relevant PY
Note – The requirement of audit u/s
44AB does not apply to a person who
declares profits and gains on
presumptive basis u/s 44AD and his
total sales, turnover, or gross receipts
does not exceed 2 crore.

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 If in case of such person If his total sales, turnover or gross
carrying on business – receipts in business > 10 crore in the
(i) Aggregate cash receipts in relevant PY
the relevant PY ≤ 5% of
total receipts (incl. receipts
for sales, turnover, gross
receipts); and
(ii) Aggregate cash payments
in the relevant PY ≤ 5% of
total payments (incl.
amount incurred for
expenditure)

Note – For this purpose, the payment or receipt, as the case may be, by a
cheque drawn on a bank or by a bank draft, which is not account payee, would
be deemed to be the payment or receipt, as the case may be, in cash.

(b) In case of an assessee If such assessee claims that the profits

covered u/s 44AE i.e., an and gains from business in the relevant
assessee engaged in the P.Y. are lower than the profits and gains
business of plying, hiring or computed on a presumptive basis u/s
leasing goods carriages who 44AE [i.e., 1000 per ton of gross vehicle
owns not more than 10 weight or unladen weight in case of each
goods carriages at any time heavy goods vehicle and 7,500 for each
during the P.Y. vehicle, other than heavy goods vehicle,
for every month or part of the month for
which the vehicle is owned by the
assessee].

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(c) In case of an eligible If he declares profit for
assessee carrying on any of the five
business, whose total successive PYs (say,
turnover, sales, gross P.Y.202223) not in
receipts ≤ 200 lakhs, accordance with section
and who has opted for 44AD (i.e., he declares
section 44AD in any profits lower than 8% or
earlier PY (say, 6% of total turnover,
P.Y.2021-22) sales or gross receipts,
as the case may be, in
that year), then he
cannot opt for section
44AD for five successive
PYs after the year of
such default (i.e., from
P.Y.2023-24 to
P.Y.2027-28). For the
year of default (i.e.,
P.Y.2022-23) and five
successive previous
years (i.e., P.Y.2023-24
to P.Y.2027-28), he has
to maintain books of
account u/s 44AA and
get them audited u/s
44AB, if his income
exceeds the basic
exemption limit.

II In case of persons carrying on

profession
(a) In case of a person carrying on If his gross receipts in profession >
profession 50 lakhs in the relevant PY

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 (b) In case of an assessee carrying If such resident assessee claims that
on a notified profession under the profits and gains from such
section 44AA (1) i.e., legal profession in the relevant PY are lower
medical, engineering, than the profits and gains computed
accountancy, architecture, on a presumptive basis u/s 44ADA
interior decoration, technical
(50% of gross receipts) and his income
consultancy, who’s gross
exceeds the basic exemption limit in
receipts ≤ 50 lakhs
that PY.

Presumptive Income provisions:

44AD Any individual, HUF or firm who 8% of gross receipts or total
is a resident (other than LLP) who turnover or such higher sum
has not claimed deduction under claimed to have been earned
section 10AA or Chapter VI-A by him.
under the heading “C – However, the presumptive
Deductions in respect of certain income would be 6%
incomes” engaged in any (instead of 8%) of total
business (except the business of turnover or sales, in respect
plying, hiring or leasing goods of amount which is received
carriages referred to in section
• by an account payee
44AE) and whose total turnover
or gross receipts in the previous cheque or
year does not exceed 2 crores. • by an account payee bank
Non-applicability of section 44AD draft or
This section will not apply to – • by use of electronic
➢ a person carrying on clearing system through a
specified professions bank account or
referred to in section 44AA • through such other
(1), prescribed electronic
➢ a person earning income in modes
the nature of commission during the previous year or
or brokerage; before the due date of filing
➢ a person carrying on of return u/s 139(1) in
agency business. respect of that previous year.
44ADA An assessee, being an individual 50% of the gross receipts or
or a partnership firm (other than such higher sum claimed to
LLP) resident in India, who is have been earned by him.

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 engaged – in any profession
referred to in section 44AA (1)
such as legal, medical,
engineering or architectural
profession or the profession of
accountancy or technical
consultancy or interior decoration
or any other profession as is
notified by the Board in the
Official Gazette; and whose total
gross receipts does not exceed 50
lakhs in a previous year.
44AE Any assessee who owns not more For each heavy goods
than ten goods carriages at any vehicle, 1,000 per ton of
time during the previous year and gross vehicle weight or
who is engaged in the business of unladen weight, as the case
plying, hiring and leasing goods may be, for every month or
carriages. part of a month during
which the vehicle is owned
by the assessee.
For each vehicle, other than
heavy goods vehicle, 7,500
per month or part of a
month during which such
vehicle is owned by the
assessee
(or) an amount claimed to
have been actually earned
from such vehicle, whichever
is higher.

Taxability in case of composite income

In cases where income is derived from the sale of rubber manufactured or
processed from rubber plants grown by the seller in India, coffee grown and
cured/grown, cured, roasted and grounded by the seller in India, or tea grown
and manufactured by the seller in India, the income shall be computed as if it
were income derived from business, and a specified percentage of such
income, as given in the table below, shall be deemed to be income liable to tax-

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 Rule Nature of composite income Business income Agricultural
(Taxable) Income
(Exempt)
7A Income from sale of rubber 35% 65%
products derived from rubber
plants grown by the seller in
India.
7B Income from sale of coffee
grown and cured by the seller 25% 75%
in India.
40% 60%
grown, cured, roasted and
grounded by the seller in India.
8 Income from sale of tea grown 35% 35%
and manufactured by the seller
in India.

Practical Problems:
Question 1
Mr. Venus., engaged in manufacture of pesticides, furnishes the following
particulars relating to its manufacturing unit at Chennai, for the year ending
31-3-2023:

WDV of Plant and Machinery on 31.3.2022 30

Depreciation including additional depreciation for P.Y. 2021-22 4.75
New machinery purchased on 1-9-2022 10
New machinery purchased on 1-12-2022 8
Computer purchased on 3-1-2023 4

Additional information:
• All assets were purchased by A/c payee cheque.
• All assets were put to use immediately.

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• New machinery purchased on 1-12-2022 and computer have been installed
in the office.
• During the year ended 31-3-2022, a new machinery had been purchased on
31-10-2021, for ` 10 lacs. Additional depreciation, besides normal
depreciation, had been claimed thereon.
• Depreciation rate for machinery may be taken as 15%.
Compute the depreciation available to the assessee as per the provisions of the
Income-tax Act, 1961 and the WDV of different blocks of assets as on 31-3-
2023. Assume that he does not opt for section 115BAC.

Answer:
Computation of written down value of block of assets of Venus Ltd. as on
31.3.2023

Particulars Plant & Computer

Machinery
Written down value (as on 31.3.2022) 30 Nil
Less: Depreciation including additional depreciation 4.75
for P.Y. 2021-22

Opening balance as on 1.4.2022 25.25

Add: Actual cost of new assets acquired during the
year
New machinery purchased on 1.9.2022 10.00
New machinery purchased on 1.12.2022 8.00
Computer purchased on 3.1.2023 4.00
43.25 4.00
Less: Assets sold/discarded/destroyed during the Nil Nil
year
Written Down Value (as on 31.03.2023) 43.25 4.00

Computation of Depreciation for A.Y. 2023-24

Particulars Plant & Computer
Machinery

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 1. Assets put to use for more than 180 days,
eligible for 100% depreciation calculated applying
the eligible rate of normal depreciation and
additional depreciation
Normal Depreciation
WDV of plant and machinery (25.25 lacs x 15%) 3.79
New Machinery purchased on 1.9.2022 (10 lacs x 1.50
15%)
A 5.29
Additional Depreciation
New Machinery purchased on 1.9.2022 2.00
(10 lakhs x 20%)
Balance additional depreciation in respect of new
machinery purchased on 31.10.2021 and put to use 1.00
for less than 180 days in the P.Y. 2021-22 (10 lakhs x
20% x 50%)
B 3.00
2. Assets put to use for less than 180 days,
eligible for 50% depreciation calculated applying
the eligible rate of normal depreciation and
additional depreciation, if any
Normal Depreciation
New machinery purchased on 1.12.2022 0.60
[8 lacs x 7.5% (i.e., 50% of 15%)]

Computer purchased on 3.1.2023 [4 lacs x 20% 0.80

(50% of 40%)]
C 0.60 0.80
Total Depreciation (A+B+C) 8.89 0.80

Notes:
1.As per section 32(1)(iia), additional depreciation is allowable in the case of any
new machinery or plant acquired and installed after 31.3.2005, by an assessee
engaged, inter alia, in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.

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However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.
In view of the above provisions, additional depreciation cannot be claimed in
respect of -
1. Machinery purchased on 1.12.2022, installed in office and
2. Computer purchased on 3.1.2023, installed in office.

2.Balance additional depreciation@10% on new plant or machinery acquired

and put to use for less than 180 days in the year of acquisition which has not
been allowed in that year, shall be allowed in the immediately succeeding
previous year.
Hence, in this case, the balance additional depreciation@10% (i.e., 1 lakh,
being 10% of 10 lakhs) in respect of new machinery which had been purchased
during the previous year 2021-22 and put to use for less than 180 days in that
year can be claimed in P.Y. 2022-23 being immediately succeeding previous
year.

Question 2.
Examine, with reasons, the allowability of the following expenses under the
Income tax Act, 1961 while computing income from business or profession for
the Assessment Year 2023-24:
(i) Provision made on the basis of actuarial valuation for payment of gratuity
5,00,000. However, no payment on account of gratuity was made before
due date of filing return.
(ii) Purchase of oil seeds of 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee 20,000.
(iv) Payment of 50,000 by using credit card for fire insurance.
(v) Salary payment of 4,00,000 to Mr. X outside India by a company without
deduction of tax assuming Mr. X has not paid tax on such salary income.
(vi) Payment made in cash 30,000 to a transporter in a day for carriage of goods.

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Answer
(i) Not allowable as deduction: As per section 40A(7), no deduction is allowed
in computing business income in respect of any provision made by the
assessee in his books of account for the payment of gratuity to his
employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by
way of contribution towards an approved gratuity fund; or
(2) where any provision is made for the purpose of making any payment
on account of gratuity that has become payable during the previous
year.
Therefore, in the present case, the provision made on the basis of
actuarial valuation for payment of gratuity has to be disallowed under
section 40A(7), since, no payment has been actually made on account of
gratuity.
Note: It is assumed that such provision is not for the purpose of
contribution towards an approved gratuity fund.

(ii) Allowable as deduction: As per Rule 6DD, in case the payment is made for
purchase of agricultural produce directly to the cultivator, grower or
producer of such agricultural produce, no disallowance under section
40A(3) is attracted even though the cash payment for the expense exceeds
10,000.
Therefore, in the given case, disallowance under section 40A(3) is not
attracted since, cash payment for purchase of oil seeds is made directly to
the farmer.
(iii) Not allowable as deduction: Income-tax of 20,000 paid by the employer in
respect of non-monetary perquisites provided to its employees is exempt
in the hands of the employee under section 10(10CC).
As per section 40(a)(v), such income-tax paid by the employer is not
deductible while computing business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as
deduction under section 36(1). Since payment is made by credit card, which
is a prescribed electronic mode, disallowance under section 40A(3) is not
attracted in this case.

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(v) Not allowable as deduction: Disallowance under section 40(a)(iii) is
attracted in respect of salary payment of 4,00,000 outside India by a
company without deduction of tax at source.
Allowable as deduction: The limit for attracting disallowance under section
40A(3) for payment otherwise than by way of account payee cheque or
account payee bank draft or use of ECS through a bank account or through such
other prescribed electronic mode is 35,000 in case of payment made for plying,
hiring or leasing goods carriage. Therefore, in the present case, disallowance
under section 40A(3) is not attracted for payment of 30,000 made in cash to a
transporter for carriage of goods.

Question 3.
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and
Loss Account for the year ended 31st March, 2023:
Trading and Profit and Loss Account for the year ended 31.03.2023

Particular Particular
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 1,13,97,600
1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of
shares 8,700
(Short term) 7,060
To Other general
expenses 50,000
To Net Profit 3,06,000 3,06,000

Additional Information:
(i) It was found that some stocks were omitted to be included in both the
Opening and Closing Stock, the values of which were:
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 Opening stock 9,000
Closing stock 18,000
(ii) Salary includes 10,000 paid to his brother, which is unreasonable to the
extent of 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of
onetime payment to Mr. Ramesh.
(iv) The depreciation provided in the Profit and Loss Account 1,05,000 was
based on the following information:
The opening balance of plant and machinery (i.e., the written down value as
on 31.3.2022 minus depreciation for P.Y. 2021-22) is 4,20,000. A new plant
falling under the same block of depreciation was bought on 01.7.2022 for
70,000. Two old plants were sold on 1.10.2022 for 50,000.
(v) Rent and rates includes GST liability of 3,400 paid on 7.4.2023.
(vi) Other general expenses include 2,000 paid as donation to a Public
Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under
presumptive taxation under section 44AD and profits and gains as per normal
provisions of the Act assuming he has not opted for the provisions of section
115BAC. Assume that the whole of the amount of turnover received by account
payee cheque or use of electronic clearing system through bank account during
the previous year.

Answer
Computation of business income of Mr. Sivam for the A.Y. 2023-24
Particulars Amt Amt
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses/ losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable [Section 2,000
40A(2)]

Printing and stationery - whole amount of 23,200

printing & stationery paid in cash would be
disallowed, since such amount exceeds 10,000
[Section 40A(3)]

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 Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300

Less: Items to be deducted: 2,08,300

Under valuation of opening stock 9,000

Income from UTI [Chargeable under the head 2,400

“Income from Other Sources]

Business income before depreciation 1,96,900

Less:
Depreciation (See Note 1) 66,000
1,30,900

Computation of business income as per section 44AD :

As per section 44AD, where the amount of turnover is received, inter alia, by
way of account payee cheque or use of electronic clearing system through bank
account or through such other prescribed electronic modes, the presumptive
business income would be 6% of turnover, i.e., 1,12,11,500 x 6 /100 = 6,72,690.
Notes:
1.Calculation of depreciation:

Particulars `
Opening balance of plant & machinery as on 1.4.2022 (i.e. 4,20,000
WDV as on 31.3.2022 (-) depreciation for P.Y. 2021-22)
Add : Cost of new plant & machinery 70,000
4,90,000
Less : Sale proceeds of assets sold 50,000
WDV of the block of plant & machinery as on 31.3.2023 4,40,000
Depreciation @ 15% 66,000
No additional depreciation is allowable as the assessee is not
engaged in manufacture or production of any article.

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2.Since GST liability has been paid before the due date of filing return of income
under section 139(1), the same is deductible.

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CHAPTER 9: AGGREGATE OF INCOME, SET OFF CARRY
FORWARD OF LOSSES

Inter-source and Inter-head set-off of losses [Sections 70 & 71]:

SECTION:70
Provision Provision
Inter-source set-off of losses under i. Loss from speculation business can
the same head of income be set-off only against profits from
Any loss in respect of one source another speculation business.
shall be set-off against income from
any other source under the same
head of income. For example, ii. Loss from specified business
loss from textile business can be under section 35AD can be setoff
set-off against profit from printing only against profits from any other
business. specified business.

loss from one house property can iii. Long term capital loss (LTCL) can
be set-off against income from be set-off only against long term
another house property. capital gains (LTCG).

short-term capital loss (STCL) can be

set-off against both STCG and LTCG. iv. Loss from the activity of owning
and maintaining race horses can be
short-term capital loss (STCL) can be set-off only against income from the
set-off against both STCG and LTCG. activity of owning and maintaining
race horses.
Inter head adjustment
Loss under one head of income can i. Loss under the head “Profits and
be set-off against income gains of business or profession”
assessable under any other head of cannot be set off against income
income. under the head “Salaries”
For example, business loss can be
set-off against income from house
ii. Loss from specified business
property.
under section 35AD can be setoff

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 only against profits from any other
specified business.

iii. Speculation loss, losses from

specified business under section
35AD and loss from the activity of
owning and maintaining race horses
cannot be set-off against income
under any other head.

iv. Loss from house property can be

set-off against income under any
other head only to the extent of 2
lakhs. The remaining loss can be
carried forward for set-off against
income from house property of the
succeeding year(s).

Losses which cannot be set-off or carried forward:

Loss from gambling, betting, card games etc.
Loss from an exempt source [for example, share of loss of partnership firm
cannot be set-off against any other business income]

Maximum period of carry forward of losses & Manner of set-off of brought

forward losses:

Section Nature of loss to Income against which Maximum period

be carried forward the brought forward loss [from the end of the
can be set-off relevant assessment
year] for carry
forward
of losses
32(2) Unabsorbed Income under any head Indefinite period
depreciation other than
salaries

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71B Unabsorbed loss Income from house 8 assessment years
from house property
property
72 Unabsorbed Profits and gains from 8 assessment years
business business or profession
loss
73 Loss from Income from any 4 assessment years
speculation speculation business
business
73A Loss from specified Profit from any specified Indefinite period
business under business, irrespective of
section whether such business is
35AD eligible for deduction u/s
35AD
74 Long-term capital Long-term capital 8 assessment years
loss gains
Short-term capital Short-term/Long-term 8 assessment years
loss capital gains
74A Loss from the Income from the activity 4 assessment years
activity of owning of owning and
and maintaining maintaining race horses.
race horses

Order of set-off of losses:

1. Current year depreciation / Current year capital expenditure on scientific
research and current year expenditure on family planning, to the extent
allowed.
2. Brought forward loss from business/profession [Section 72(1)]
3. Unabsorbed depreciation [Section 32(2)]
4. Unabsorbed capital expenditure on scientific research [Section 35(4)].
5. Unabsorbed expenditure on family planning [Section 36(1)(ix)].

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Note - As per section 80, filing of loss return under section 139(3) within the
due date specified under section 139(1) is mandatory for carry forward of the
above losses except loss from house property and unabsorbed depreciation.

Practical Problems
Question 1
Compute the gross total income of Mr. F for the A.Y. 2023-24 from the
information given below –

Income from house property (computed) 1,25,000

Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of unlisted shares 56,000
Long term capital loss from sale of property (brought forward from (90,000)
A.Y. 2022-23)
Income from tea business 1,20,000
Dividends from Indian companies carrying on agricultural operations 80,000
(Gross)
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)

Answer
Gross Total Income of Mr. F for the A.Y. 2023-24
Income from house property (Computed) 1,25,000
Income from business
Profits before depreciation 1,35,000
Less: Current year depreciation 26,000
Less: Brought forward business loss 45,000
64,000
Income from tea business (40% is business income) 48,000 1,12,000
Capital gains
Short term capital gains 56,000

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Income from Other Sources
Dividend income (taxable in the hands of shareholders) 80,000

Gross Total Income 3,73,000

Notes:
1. Dividend from Indian companies is taxable at normal rates of tax in the
hands of resident shareholders.
2. 60% of the income from tea business is treated as agricultural income and
therefore, exempt from tax;
3. Long-term capital loss can be set-off only against long-term capital gains.
Therefore, long-term capital loss of 90,000 brought forward from
A.Y.2022-23 cannot be set-off in the A.Y.2023-24, since there are no long-
term capital gains in that year. It has to be carried forward for set-off
against long-term capital gains, if any, during A.Y.2024-25.

Question 2
Mr. Soohan submits the following details of his income for the assessment year
2023-24:

Income from salary (computed) 3,00,000

Loss from let out house property (-) 40,000
Income from sugar business 50,000
Loss from iron ore business b/f (discontinued in P.Y. 2017-18) (-) 1,20,000
Short term capital loss (-) 60,000
Long term capital gain 40,000
Dividend 5,000
Income received from lottery winning (Gross) 50,000
Winnings from card games (Gross) 6,000
Agricultural income 20,000
Short-term capital loss under section 111A (-) 10,000
Bank interest on Fixed deposit 5,000

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Calculate gross total income and losses to be carried forward, assuming that he
does not opt for the provisions of section 115BAC.

Answer:22
Computation of Gross Total Income of Mr. Soohan for the A.Y.2023-24.

Salaries
Income from salary 3,00,000
Less: Loss from house property set-off against salary
income as per section 71 (40,000) 2,60,000
Profits and gains of business or profession
Income from sugar business 50,000
Less: Brought forward loss of 1,20,000 from iron-ore
business set-off as per section 72(1) to the extent of (50,000) Nil
50,000
Balance business loss of 70,000 of P.Y.2017-18 to be
carried forward to A.Y.2024-25
Capital gains
Long term capital gain 40,000
Less: Short term capital loss of 60,000 set-off to the extent
of 40,000 (40,000) Nil
Balance short-term capital loss of 20,000 to be carried
forward
Short-term capital loss of 10,000 u/s 111A also to be
carried forward
Income from other sources
5,000
Dividend (fully taxable in the hands of shareholders)
Winnings from lottery 50,000
Winnings from card games 6,000
Bank FD interest 5,000 66,000
Gross Total Income 3,26,000
Losses to be carried forward to A.Y.2024-25
Loss of iron-ore business (1,20,000 – 50,000) 70,000

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Short term capital loss (20,000 + 10,000) 30,000

Notes:
1. Agricultural income is exempt under section 10(1)
2. It is presumed that loss from iron-ore business relates to P.Y.2017-18, the
year in which the business was discontinued.

Question 3
Mr. Batra furnishes the following details for year ended 31.03.2023:

Short term capital gain 1,40,000

Loss from speculative business 60,000
Long term capital gain on sale of land 30,000
Long term capital loss on sale of unlisted shares 1,00,000
Income from business of textile (after allowing current year
depreciation) 50,000
Income from activity of owning and maintaining race horses 15,000
Income from salary (computed) 1,00,000
Loss from house property 40,000

Following are the brought forward losses:

1. Losses from activity of owning and maintaining race horses-pertaining to
A.Y.2020-21 25,000.
2. Brought forward loss from business of textile 60,000 - Loss pertains to A.Y.
2015-16.
Compute gross total income of Mr. Batra for the Assessment Year 2023-24,
assuming that he does not opt for the provisions of section 115BAC. Also
determine the losses eligible for carry forward to the Assessment Year 2024-25.

Answer
Computation of Gross Total Income of Mr. Batra for the A.Y. 2023-24

Salaries 1,00,000
Less current year lose from house property 40,000 60,000

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 Profit and 24 gains of business or profession
Income from textile business 50,000 Nil
Less: Loss of 60,000 from textile business b/f
from A.Y. 2015-16 set-off to the extent of ` 50,000
50,000
Income from the activity of owning and
maintaining race horses 15,000 Nil
Less: Loss of 25,000 from activity of owning and
maintaining race horse’s b/f from A.Y. 2020-21 15,000
set-off to the extent of 15,000
Balance loss of 10,000 to be carried forward to
A.Y.
2024-25 [See Note 2]
Capital Gain
Short term capital gain 1,40,000
Long term capital gain on sale of land 30,000
Less: Long term capital loss of 1,00,000 on sale of 30,000 Nil
unlisted shares set-off to the extent of 30,000
Balance loss of 70,000 to be carried forward to
A.Y.
2024-25 [See Note 3]
Gross Total Income 2,00,000

Losses to be carried forward to A.Y. 2024-25

Current year loss from speculative business [See Note-4] 60,000
Current year long term capital loss on sale of unlisted shares 70,000
Loss from activity of owning and maintaining of race horse pertaining 10,000
to A.Y.2020-21

Notes:-
1. As per section 72(3), business loss can be carried forward for a maximum
of eight assessment years immediately succeeding the assessment year
for which the loss was first computed. Since the eight year period for
carry forward of business loss of A.Y. 2015-16 expired in the A.Y. 2023-24,

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 the balance unabsorbed business loss of 10,000 cannot be carried
forward to A.Y. 2024-25.

2. As per section 74A(3), the loss incurred on maintenance of race horses

cannot be set-off against income from any source other than the activity
of owning and maintaining race horses. Such loss can be carried forward
for a maximum period of 4 assessment years.

3. Long-term capital loss on sale of unlisted shares can be set-off against

long-term capital gain on sale of land. The balance loss of 70,000 cannot
be set-off against short term capital gain or against any other head of
income. The same has to be carried forward for set-off against long-term
capital gain of the subsequent assessment year. Such long-term capital
loss can be carried forward for a maximum of eight assessment years.

4. Loss from speculation business cannot be set-off against any income

other than profit and gains of another speculation business. Such loss
can, however, be carried forward for a maximum of four years as per
section 73(4) to be set-off against income from speculation business.

Question 4
Mr. Aditya furnishes the following details for the year ended 31-03-2023:

Loss from speculative business A 25,000

Income from speculative business B 5,000
Loss from specified business covered under section 35AD 20,000
Income from salary (computed) 3,00,000
Loss from let out house property 2,50,000
Income from trading business28 45,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized stock 1,02,000
exchange (STT paid at the time of acquisition and sale of shares)

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Following are the brought forward losses:
1. Losses from owning and maintaining of race horses pertaining to A.Y.
2021-22 2,000.
2. Brought forward loss from trading business 5,000 relating to A.Y.2018-19.

Compute the total income of Mr. Aditya and show the items eligible for carry
forward, assuming that he does not opt for the provisions of section 115BAC.

Question 5
Mr. A furnishes you the following information for the year ended 31.03.2023:

Income from plying of vehicles (computed as per books) 3,20,000

(He owned 5 light goods vehicles throughout the year)
Income from retail trade of garments
(Computed as per books) (Sales turnover 1,35,70,000) 7,50,000
Mr. A had declared income on presumptive basis under section
44AD for the first time in A.Y. 2022-23. Assume 10% of the
turnover during the previous year 2022-23 was received in cash
and balance through A/c payee cheque and all the payments in
respect of expenditure were also made through A/c payee
cheque or debit card.
He has brought forward depreciation relating to A.Y. 2021-22 1,00,000

Compute taxable income of Mr. A and his tax liability for the assessment year
2023-24 with reasons for your computation, assuming that he does not opt for
section 115BAC.

Answer26
Computation of total income and tax liability of Mr. A for the A.Y. 2023-24.

Income from retail trade – as per books (See Note 1 below) 7,50,000
Income from plying of vehicles – as per books (See Note 2 below) 3,20,000

10,70,000

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Less: Set off of b/f depreciation relating to A.Y. 2021-22 1,00,000
Total income 9,70,000
Tax liability 1,06,500
Add: Health and Education cess @4% 4,260
Total tax liability 1,10,760

Note:
1. Income from retail trade: Presumptive business income under section
44AD is 8,41,340 i.e., 8% of 13,57,000, being 10% of the turnover
received in cash and 6% of 1,22,13,000, being the amount of sales
turnover received through A/c payee cheque. However, the income
computed as per books is 7,50,000 which is to be further reduced by the
amount of unabsorbed depreciation of 1,00,000. Since the income
computed as per books is lower than the income deemed under section
44AD, the assessee can adopt the income as per books.
However, if he does not opt for presumptive taxation under section
44AD, he has to get his books of accounts audited under section 44AB,
since his turnover exceeds 1 crore (the enhanced limit of 10 crore would
not available, since more than 5% of the turnover is received in cash).
Also, his case would be falling under section 44AD (4) and hence tax
audit is mandatory. It may further be noted that he cannot opt for
section 44AD for next five assessment years, if he does not opt for
section 44AD this year.

2. Income from plying of light goods vehicles: Income calculated under

section 44AE(1) would be 7,500 x 12 x 5 which is equal to 4,50,000.
However, the income from plying of vehicles as per books is 3,20,000,
which is lower than the presumptive income of 4,50,000 calculated as
per section 44AE(1). Hence, the assessee can adopt the income as per
books i.e. 3,20,000, provided he maintains books of account as per
section 44AA and gets his accounts audited and furnishes an audit report
as required under section 44AB.

It is to be further noted that in both the above cases, had presumptive income
provisions been opted, all deductions under sections 30 to 38, including
depreciation would have been deemed to have been given full effect to and no
further deduction under those sections would be allowable.
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Question 6
Mr. Garg, a resident individual, furnishes the following particulars of his income
and other details for the previous year 2022-23.

Particulars
(1) Income from Salary (computed) 15,000
(2) Income from business 66,000
(3) Long term capital gain on sale of land 10,800
(4) Loss on maintenance of race horses 15,000
(5) Loss from gambling 9,100

The other details of unabsorbed depreciation and brought forward losses

pertaining to Assessment Year 2022-23 are as follows:

Particulars
(1) Unabsorbed depreciation 11,000

(2) Loss from Speculative business 22,000

(3) Short term capital loss 9,800

Compute the Gross total income of Mr. Garg for the Assessment Year 2023-24
and the amount of loss, if any that can be carried forward or not.

Question 7
Ms. Geeta, a resident individual, provides the following details of her income /
losses for the year ended 31.3.2023:
➢ Salary received as a partner from a partnership firm 7,50,000. The same
was allowed to the firm.
➢ Loss on sale of shares listed in BSE 3,00,000. Shares were held for 15
months and STT paid on sale and acquisition.
➢ Long-term capital gain on sale of land 5,00,000.
➢ 51,000 received in cash from friends in party.

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 ➢ 55,000, received towards dividend on listed equity shares of domestic
companies.
➢ Brought forward business loss of assessment year 2021-22, 12,50,000.

Compute gross total income of Ms. Geeta for the Assessment Year 2023-24 and
ascertain the amount of loss that can be carried forward.

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 CHAPTER 10: INCOME UNDER HEAD INCOME FROM
OTHER SOURCE

As per sec. 56(1), any income, which is not specifically exempted and not
chargeable under any other heads of income, shall be chargeable under the
head “Income from other sources”. This is the last and residuary head of
income.
Tax point: A receipt shall be taxable under this head if the following conditions
are satisfied:
► Such receipt shall be a taxable income; and
► Such income does not specifically fall under any one of the other four heads
of income (i.e., ‘Salaries’, ‘Income from house property’, ‘Profits and gains of
business or profession’ or ‘Capital gains’).
Sec. 56(2) lays down a list of incomes, which are taxable under this head. Such
list is not exhaustive. Apart from the income stated in sec. 56(2) any other
income, which is fulfilling all the above conditions, shall be taxable under this
head.

Sec. 56(2) lays down the list of incomes, which are specifically taxable under
this head:
Income absolutely chargeable under this head:
1. Dividends [Sec. 56(2)(i)] [discussed later]
2. Casual income e.g., Winning from lotteries, etc. [Sec. 56(2)(ib)] [discussed
later]
3. Gift [Sec. 56(2)(x) [discussed later]
4. Share premium in excess of fair market value of shares [Sec. 56(2)(viib)
[discussed later]
5. Income by way of interest received on compensation or on enhanced
compensation [Sec.56(2)(viii)] [discussed later]

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6. Sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, if:
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset [Sec.
56(2)(ix)] [Discussed in Capital Gain]
Income chargeable under this head if not charged under the head ‘Profits and
gains of business or profession’
7. Any sum received by the assessee from his employees as contribution to
provident fund, etc. [Sec. 56(2)(ic)]
8. Interest on securities [Sec. 56(2)(id)] [discussed later]
9. Income from letting of machinery, plant or furniture [Sec. 56(2)(ii)]
[discussed later]
10. Composite Rent [Sec. 56(2)(iii)] [discussed later].
Income chargeable under this head if not charged under the head ‘Profits and
gains of business or profession’ or under the head ‘Salaries’-
11. Any sum (including bonus) received under a Keyman Insurance Policy [Sec.
56(2)(iv)] Keyman Insurance Policy means a life insurance policy taken by a
person on the life of another person, who is either the employee or is
connected in any manner with the business of the former person [Explanation
to Sec. 10(10D)]
12. Any compensation or other payment, due to or received by any person, in
connection with the termination of his employment or the modification of the
terms and conditions relating thereto. [Sec. 56(2)(xi)].

Apart from above, the following incomes are also chargeable under this head
by virtue of sec. 56(1):
In this regard it is to be noted that the following list is merely indicative and not
exhaustive.
1. Income from sub-letting of a house property.
2. Interest on bank deposits.

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3. Interest on company deposits, interest on loans, etc.
4. Remuneration received from a person other than his employer for evaluation
of answer scripts. However, if such remuneration is received from employer,
then the same will be taxable under the head “Salaries”.
5. Rent from a vacant land.
6. Insurance commission.
7. Income from undisclosed sources
8. Income from private tuition.
9. Interest on income tax refund.
Tax point: Income tax refund itself is not an income.
10. Family pension received by the family members of a deceased employee
[discussed later]
11. Dividend received from a co-operative society.
12. Directors’ sitting fee for attending Board Meetings.
13. Income from activity of owning and maintaining race-horses.
14. Stipend to trainee.
15. Interest on employee’s contribution towards unrecognized provident funds
at the time of payment of lump sum amount.

10.1 BASIS OF CHARGEABILITY [SEC.145]:

Income under this head shall be chargeable on ‘accrual’ or ‘cash’ basis
depending on the method of accounting regularly followed by the assessee (i.e.
either mercantile or cash system of accounting). Exception: Dividend is charged
as per the method specified in sec. 8 (discussed later in this chapter)

10.2 CASUAL INCOME: WINNING FROM LOTTERIES, CROSSWORD PUZZLES,

ETC. [SEC. 56(2)(ib)]:
Winnings from –
1. Lotteries;
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2. Crossword puzzles;
3. Races including horse races;
4. Gambling and betting of any nature or form; or
5. Card games, game show or entertainment program on television or
electronic mode and any other game of any sort, - are taxable under this head.
Lottery includes winnings from prizes awarded to any person by draw of lots or
by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called.
Card game and other game of any sort includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game.
Exemption/deduction [Sec. 58(4)]: Such income shall be fully taxable & no
deduction shall be allowed.
Tax rate [Sec. 115BB]: Tax is charged at a flat rate of 30%.

Notes:
(a) Income of jockey: Income of jockey from such profession is not treated as
winning from horse races.
(b) Winning from a motor car rally: Winning from a motor car rally is a return
for skill and effort and cannot be treated as casual income but taxable as
normal income.
(c) Lottery held as stock in trade: Winning from lottery to an agent or trader out
of its unsold stock (tickets) shall be treated as incidental to business and taxed
under the head “Profits & gains of business or profession”.
(d) Expenditure to be deducted: No deduction can be claimed from such
income even if such expenditure is incurred exclusively and wholly for earning
such income.
(e) Deduction: Deduction u/s 80C to 80U is not available from such income.

Method of grossing up of income / Conversion of income received into gross

income in case of casual income Sometime in the problem, lottery income

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received is given rather than lottery income. In such case, students are required
to gross up the lottery income received. Relation between lottery income
earned and lottery income received is as under - Lottery income received =
Lottery income earned – Tax deducted at source on such income.
Tax deducted at source: By virtue of sec. 194B & 194BB, tax is deductible at
sources @ 30% on payment in respect of winning from lotteries, etc.

Procedure of grossing up, in case of resident individual or HUF, are as follow:

Lottery Income Received = Gross Lottery Income – TDS 30% on Gross Lottery
Income.
Lottery Income Received = 70% of Gross Lottery Income
𝐿𝑜𝑡𝑡𝑒𝑟𝑦 𝐼𝑛𝑐𝑜𝑚𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
Gross Lottery Income =
70%

Note: Tax is not deducted in following cases, hence, there is no need of

grossing up. -
(a) If the amount of winning from lottery etc. or horse race is not more than `
10,000.
(b) In case of winning from racing other than horse race e.g., camel races, etc.

10.3 INCOME FROM MACHINERY, PLANT OR FURNITURE LET ON

HIRE [SEC. 56(2)(ii)]:
Income from letting of machinery, plant or furniture on hire is charged to tax
under this head, if such income is not chargeable under the head “Profits and
gains of business or profession”.
Notes:
(a) Any income by way of letting out an asset as a part of business activity or as
commercial asset shall be taxable under the head “Profits & gains of business
or profession”.

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(b) In case of temporary discontinuance of business due to any reason without
any intention of the assessee to part with or close the business, if the business
assets are leased out for a certain period, then such lease rent shall be taxed
under the head “Profits & gains of business or profession”.

10.4 INCOME FROM MACHINERY, PLANT OR FURNITURE LET ON

HIRE ALONG WITH BUILDING (COMPOSITE RENT) [SEC. 56(2)(iii)]:
Generally, income from letting of building is taxable under the head Income
from house property; but if such letting is inseparable from letting of
machinery, plant or furniture, then income from such letting is charged to tax
under the head “Income from other sources” if not taxed under the head
“Profits & gains of business or profession”. [Further refer the chapter “Income
from house property”].
Notes:
1. If letting of such building alone is acceptable, then income from letting of
building is taxable under the head ‘Income from house property’.
2. Mere knowledge of rent charged against each asset does not make it
separable, unless and until the property is separately lettable.

10.5 DEDUCTIONS ALLOWED AGAINST INCOME U/S 56(2)(ii) &

56(2)(iii) [SEC. 57(ii) & (iii)]:
By virtue of sec. 57(ii) and (iii), following expenditures are deductible from such
income:
1. Current repairs shall be allowed as deduction [as per sec. 30(a)(ii) or 31(i)].
2. Insurance premium paid for machinery, plant, furniture or building [as per
sec. 30(c) or 31(ii)]
3. Depreciation and unabsorbed depreciation (as per sec. 32).
4. Any other revenue expenditure expended, during the previous year, wholly
and exclusively for earning such income.

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10.6 FAMILY PENSION:
Meaning: Family pension means a regular monthly amount payable by the
employer to a person belonging to the family of a deceased employee (e.g.
widow or legal heirs of a deceased employee)
Tax Treatment: It is taxable under the head “Income from other sources” after
allowing standard deduction.
Standard Deduction [Sec. 57(iia)]:
Minimum of: 1/3rd of such pension; or 15,000.
Relief u/s 89 on arrears of family pension:
Relief is available on arrears of family pension received by the family member
of a deceased employee, as in case of arrears/advance salary.
Notes:
(a) Lump-sum payment made gratuitously or by way of compensation or
otherwise to the widow or other legal heirs of an employee, who dies while still
in service, is non-taxable income.
(b) Ex-gratia payment made to the widow or other legal heir of an employee,
who dies while still in active service would not be taxable as income provided it
is paid by the Central Government or State Government or local authority or
Government or public sector undertaking.

Illustration 1.
Sunder died on 31st July 2020 while being in Central Government service. In
terms of rules governing his service, his widow Mrs. Sunder is paid a family
pension of ` 10,000 p.m. and dearness allowance of 40% thereof. State whether
the amount of family pension is assessable in her hands, and if so, under what
head of income. Can she claim any relief/deduction on such receipt?
Compute taxable income for the assessment year 2021-22 and tax thereon.

10.7 GIFT [SEC. 56(2)(x)] Amended

Following receipts by any person shall be considered as his income:

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 Nature of Conditions to be satisfied for Extent of Remarks
Receipt considering income Income
Any sum a. During the previous year, The whole of Aggregate
of money such person has received any the aggregate amount of
sum of money (cash, cheque, value of such cash gift r e c
draft, etc.) from one or more sum shall be eived
persons considered as during the
b. Such sum is received without income of period shall
consideration that previous be
c. The aggregate value of such year. considered.
receipt during the previous year
exceeds 50,000.
Any a. During the previous year, The stamp The limit of `
immovable such person has received duty value of 50,000/- is
property immovable property such property APPLICABLE
b. Such immovable property is shall be per
received without consideration. considered as incidence.
c. The stamp duty value of such income of
property exceeds 50,000 that previous
d. Such asset is a capital asset in year.
hands of recipient.
Any a. During the previous year, The stamp The limit
immovable such person has received duty value of (50,000/- or
property immovable property such property 5%) is
b. Such immovable property is Less applicable
received for a consideration consideration per
c. Stamp duty value of such paid, shall be incidence.
property exceeds such considered as
consideration income of the
d. Such excess is more than the previous year.
higher of the following: -
50,000; or - 10% of the
consideration

Note: Where the date of the

agreement fixing the amount of
consideration for the transfer of
immovable property and the
date of registration are not the
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 same, the stamp duty value on
the date of the agreement may
be taken. This benefit is
available only in a case where
the amount of consideration or
a part thereof, has been paid by
of an account payee cheque or
an account payee bank draft or
by use of electronic clearing
system through a bank account
or through other prescribed
electronic modes, on or before
the date of the agreement for
the transfer of such immovable
property.
Any a. During the previous year, The whole of Aggregate
movable such person has received the aggregate amount of
property movable property from one or fair market cash gift r e c
more persons b. Such movable value of such eived
property is received without property shall during the
consideration c. The aggregate be considered period shall
fair market value of such as income of be
receipts during the previous the previous considered.
year exceeds ` 50,000 d. Such year.
asset is a capital asset in hands
of recipient.
Any a. During the previous year, The aggregate Aggregate
movable such person has received fair market amount of
property movable property from one or value of such cash gift r e c
more persons property Less eived
b. Such movable property is consideration during the
received for a consideration. paid, shall be period shall
c. Such consideration is less considered as be
than the aggregate fair market income of the considered.
value of the property by an previous year.
amount exceeding 50,000.
d. Such asset is a capital asset in
hands of recipient.
Tax point:

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 (a) The limit of 50,000/- is also for per category. In other words, one may
receive cash gift of ` 35,000 and gift in kind of 36,000 without attracting any
tax.
(b) In case of dispute in stamp duty valuation: Refer section 50C discussed in
chapter ‘Capital Gains’.

10.8 SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE [SEC.

56(2)(viib)]:
Where a company, not being a company in which the public are substantially
interested, receives, in any previous year, from any person being a resident, any
consideration for issue of shares that exceeds the face value of such shares, the
aggregate consideration received for such shares as exceeds the fair market
value of the shares shall be treated as income of the company.
Tax point:

The sec.56(2)(viib) deals as under:

a. A company, not being a company in which the public are substantially
interested, issues shares (preference or equity) at premium during the previous
year
b. Such company receives consideration against such shares from a resident
person
c. Such consideration exceeds the fair market value of issued shares.
d. Such excess consideration shall be treated as the income of the recipient
company.
• The allottee should be resident during the previous year in which shares
are issued to him.
• The provision is not applicable when shares are issued at par or at
discount even though issue price of such shares exceeds the fair market
value.
• The provision is not applicable if such company is converted into a
company in which the public are substantially interested during the
previous year itself after issuance of shares.

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Fair market value of the shares shall be the higher of the following:
i. Value substantiated by the company to the satisfaction of the Assessing
Officer, based on the value, on the date of issue of shares, of its assets,
including intangible assets being goodwill, know-how, patents,
copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature,
ii. Value determined in accordance with prescribed method; or

Exceptions:
Sec. 56(2)(viib) shall not be applicable where the consideration for issue of
shares is received:
i. by a venture capital undertaking from a venture capital company or a venture
capital fund or a specified fund; or
• Specified fund means a fund established or incorporated in India in the
form of a trust or a company or a limited liability partnership or a body
corporate which has been granted a certificate of registration as a
Category I or a Category II Alternative Investment Fund and is regulated
under the Securities and Exchange Board of India (Alternative
Investment Fund) Regulations, 2012 made under the Securities and
Exchange Board of India Act, 1992.
ii. by a company from a class or classes of persons as may be notified by the
Central Government in this behalf.
• Where the provision has not been applied to a company on account of
fulfilment of conditions specified in the notification and such company fails to
comply with any of those conditions, then,
i. Any consideration received for issue of share that exceeds the fair
market value of such share shall be deemed to be the income of that
company chargeable to income-tax for the previous year in which such
failure has taken place; and
ii. It shall be deemed that the company has under-reported the income
in consequence of the misreporting referred to in sec. 270A(8) and (9)
[i.e. penalty proceedings] for the said previous year.

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10.9 INCOME BY WAY OF INTEREST RECEIVED ON COMPENSATION
OR ON ENHANCED COMPENSATION [SEC.56(2)(viii)]:
Interest received by an assessee on compensation or on enhanced
compensation, as the case may be, shall be deemed to be the income of the
year in which it is received.
Tax Treatment: It is taxable under the head “Income from other sources” after
allowing standard deduction of 50% of such income.
E.g., During the previous year 2020-21, Mr. X received 65,000 (45,000
pertaining to the previous year 2019-20) as interest on delayed compensation.
Such interest after allowing standard deduction shall be considered as an
income of the previous year 2020-21 (irrespective of previous year to which
such interest pertains). Thus, 32,500 (i.e., 65,000 – 32,500 being standard
deduction @ 50%) shall be considered as income of the previous year 2020-21.

10.10 EMPLOYEE’S CONTRIBUTION TOWARDS STAFF WELFARE

FUND OR SCHEME [SEC. 56(2)(ic)]:
Any amount received or deducted by an employer from employee towards any:
• Provident Fund;
• Superannuation Fund;
• Fund set up under the provisions of Employee’s State Insurance Act, 1948; or
• Other fund set up for the welfare of such employees,
shall be treated as income of the employer under this head if not taxable under
the head “Profits & gains of business or profession”. Subsequently, when such
sum is credited by the employer to the employee’s account in the relevant fund
on or before the due date prescribed under the relevant Act, then deduction of
equal amount is available.
Tax Point:
If employee’s contribution taken and No treatment
deposited within time
If employee’s contribution taken and Taxable as income from other source
not deposited within time if not taxable as business income.

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10.11 INTEREST ON SECURITIES [SEC. 56(2)(id)]:
As per sec. 2(28B), “interest on securities” means –
(a) Interest on any security of the Central Government or a State Government;
(b) Interest on debentures or other securities issued by or on behalf of –
● a local authority; or
● a company; or
● a corporation established by a Central, State or Provincial Act.

Tax treatment:
Case Treatment
When the securities are held as Interest on securities is charged to
stock-in-trade tax under the head ‘Profits & gains of
business or profession’
When the securities are held Interest on such securities is charged
otherwise than as stock in-trade. to tax under the head ‘Income from
other sources.

Chargeability: It is taxable as per cash basis or due basis, depending on the

method of accounting regularly followed by the assessee. However, where no
method of accountancy is followed, then it shall always be taxable on due
basis.
Due date of interest: Interest shall be taxable when such interest falls due.
Interest on securities shall not accrue on day-to-day basis. It accrues on the due
date of interest as prescribed by the issuing authority. Entire interest shall be
charged in the hands of assessee who holds security on such date (irrespective
of the date of acquisition of such security).
E.g. Mr. X acquired debenture of A Ltd. as on 7/9/2020. Due date of interest on
debenture is 31st March every year. Interest on such debenture shall be taxable
in hands of Mr. X for the whole year.

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Tax point: In case of death of assessee before the due date, the income of the
whole year shall be taxable in the hands of recipient of income.

Grossing-up of interest if it is given net of TDS: Sometime in the problem,

Interest income received is given rather than Interest earned. In such case,
students are required to gross up the interest income received. Relation
between interest income earned and interest income received is as under:
Interest income received = Interest income earned – Tax deducted at source on
such income.
Accordingly, Gross income from interest = [Interest received * 100/ (100 - TDS
rate i.e.10% or 7.5% )]
Tax is required to be deducted @ 10% or 7.5%. However, in certain cases, tax is
not required to be deducted (For further details refer Chapter Tax Deducted at
Source).

Expenditure allowed as deductions:

By virtue of sec. 57(i) and (iii), the following expenditure are deductible from
interest income:
(a) Collection expenditure
(b) Interest on loan
(c) Any other expenditure
Tax point: However, any expenses covered u/s 58 shall not be allowed.

Avoidance of tax by certain transaction in securities [Sec. 94]:

1. Bond Washing Transactions [Sec. 94(1)]: Interest on securities shall not
accrue on day-to-day basis. It accrues on the due date of interest as prescribed
by issuing authority. Entire interest shall be charged in the hands of assessee
who holds security on such date (irrespective of the date of acquisition of such
security). Tax liability may be evaded by transferring securities just before the
due date of interest (interest includes dividend) to any person (like friend or
relative who has low income) and reacquiring the same, after the interest is

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received by the transferee. With this practice, income, which should have been
charged at higher rate, shall be charged at lower rate or nil rates. To avoid
these practices, sec. 94(1) provides that - where an assessee transfers the
securities before the due date of interest and reacquires the same, then the
interest received by the transferee will be deemed to be the income of the
transferor.
E.g: Mr. X transferred 1,000 10% debentures (due date of interest of such
debenture is 31st March every year), to his brother Mr. Y on 27/03/2021 to
evade tax. Such security is repurchased by him on 5/04/2021. Interest for the
previous year 2020-21, though received by Mr. Y shall be taxable in hands of
Mr. X due to sec. 94(1).

2. Transaction relating to securities resulting into less or no income: Sec. 94(2)

provides that –
• Where a person has had at any time during the previous year any beneficial
interest in securities; &
• The result of any transaction relating to such securities is that, either no
income is received by him or the income received by him is less than the
income from such securities on day to day basis, - then the income from such
securities for such year shall be deemed to be the income of such person.

Exceptions to sec. 94(1) & 94(2)[Sec. 94(3)]:

However, nothing provided in sec. 94(1) and (2) shall be applicable, if the
owner of securities satisfies the AO that –
(i) There has been no avoidance of income tax or the avoidance of income tax
is exceptional and not systematic; and
(ii) There was not any avoidance of income tax u/s 94 during 3 years preceding
the previous year.
Note: The Assessing Officer may (by notice in writing) require any person to
furnish within such time (not less than 28 days), such particulars as he
considers necessary in respect of all securities –
• of which such person was the owner; or

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• in which he had a beneficial interest at any time during the period specified
in the notice [Sec. 94(6)].
Income on Deep Discount Bond:
Deep Discount Bond is a form of zero-interest bond. These bonds are sold at a
discounted value and on maturity, face value is paid to the investors.
However, during the life of bonds, no interest shall be payable on such bonds.

Treatment:
(A) Income on Deep discount bond (issued on or after 15/2/2002):
If such bond is • Any change in the market value (MV) of Deep discount
neither bond from the end of one financial year to another shall
transferred nor be treated as interest income of the assessee.
matured. • Where the assessee is not an original subscriber then,
income for the valuation date immediately falling after
acquisition shall be “market value on valuation date less
cost”.

Tax point: Interest income in the year in which assessee

acquired such bond Income = MV at the end of the 1st
year – Original cost.
Interest income in subsequent years
Income = MV at the end of the year - MV at the beginning
of the year.

Note: For this purpose, market values of different

instruments declared by the Reserve Bank of India or by
the Primary Dealers Association of India jointly with the
Fixed Income Money Market and Derivatives Association
of India may be referred.
If such bond is • The difference between the redemption price and the
redeemed value as on the last valuation date immediately preceding
the maturity date, shall be treated as interest income.
Tax point: Interest income = Redemption price - Value as
on the last valuation date immediately preceding the
maturity date

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 • Where such bond is redeemed by the intermediate
purchaser (not the original subscriber) then the difference
between cost# and redemption price shall be taken as
interest income.
Cost means acquisition cost plus income, if any, already
offered to tax by such transferor up to the date of transfer.
Tax point: Interest income = Redemption price –
Acquisition cost – Income from such bond already offered
to tax.
If such bond is The difference between the sale price and cost of the
transferred bond (including income, if any, already offered to tax by
before maturity. such transferor up to the date of transfer) will be taxable
under the head ‘Capital gains.
(B) Income on Deep discount bond (issued before 15/2/2002):
If such bond is The difference between the redemption price and the
redeemed issue price shall be treated as interest income and taxed
entirely in the year of redemption. Tax point:
• Interest income = Redemption price – Issue Price
• Taxable in the year of redemption
If such bond is The difference between the sale price and cost of
transferred acquisition of the bond will be taxable under the head
before maturity. ‘Capital gains.

Tax point:
• Capital gain = Sale Price – Issue Price
• Taxable in the year of such transfer.
Note: However, in all the above cases if such bond is kept by the assessee as
stock, then such income shall be treated as business income.

Option to small non-corporate investors Applicable to:

Assessee is a non–corporate small investor.
Small investor is a person holding Deep discount bond issued after 15/2/2002,
of an aggregate face value not exceeding 1,00,000.
Option: The assessee can treat the income on deep-discount bond (issued after
15/2/2002) either –
(a) as per ‘Rule of valuation as applicable on bonds issued before 15/2/2002’,
or

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(b) as per ‘Rule of valuation as applicable on bonds issued on or after
15/2/2002’.

10.12 BONUS STRIPPING [SEC. 94(8)]:

Conditions for applicability Where—
(a) any person buys or acquires any units$ within a period of 3 months prior to
the record date;
(b) such person is allotted additional units without any payment on the basis of
holding of such units on such date;
(c) such person sells or transfers all or any of the units referred to in clause

(a) within a period of 9 months after such date, while continuing to hold all or
any of the additional units referred to in clause (b).

Tax treatment:
(a) Loss, if any, arising to him on account of such purchase and sale of all or any
of such units shall be ignored for the purposes of computing his income
chargeable to tax; and
(b) Notwithstanding anything contained in any other provision of this Act, the
amount of loss so ignored shall be deemed to be the cost of purchase or
acquisition of such additional units referred to in clause (b) as are held by him
on the date of such sale or transfer.
Unit means unit of mutual fund specified u/s 10(23D) or of Unit Trust of India.
Record date means such date as may be fixed by –
a. a company for the purposes of entitlement of the holder of the securities to
receive dividend; or
b. a Mutual Fund or the Administrator of the specified undertaking or the
specified company as referred to in the Explanation to section 10(35), for the
purposes of entitlement of the holder of the units to receive income, or
additional unit without any consideration, as the case may be.

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10.13 DIVIDEND [SEC. 2(22)]:
Dividend, in general, means the amount received by a shareholder (whether in
cash or in kind) in proportion to his shareholding in a company whether out of
past or present income; or taxable or exempted income; or revenue or capital
income. However, the Income-tax Act gives an inclusive definition of dividend.
As per sec. 2(22), the following payments or distributions by a company to its
shareholders are deemed as dividends to the extent of accumulated profits of
the company:
(a) Any distribution of accumulated profits (whether capitalized or not), which
results in the release of assets of the company [Sec. 2(22)(a)]
Notes:
1. Treatment of bonus share: Bonus share declared by the company to its
equity share-holders shall not be treated as dividend as there is no release of
asset.
2. Valuation: In case of release of asset other than cash, the market value of the
asset and not the book value shall be considered as deemed dividend in the
hands of shareholder.
3. Exception: Above provision is not applicable in case of amalgamation

b) Any distribution of -
• Debenture, debenture-stock, deposit certificates in any form whether with or
without interest to its shareholders (equity as well as preference); and
• Shares to preference shareholders by way of bonus,
- to the extent to which company possess accumulated profit (whether
capitalized or not) [Sec. 2(22)(b)]
Tax point: Such distribution shall be treated as dividend in the hands of
recipient even there is no release of assets of the company.
c) Distribution made on liquidation to the extent to which company possess
accumulated profit immediately before liquidation (whether capitalized or not)
[Sec. 2(22)(c)]

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Notes:
1. Payment to preference shareholder: Any distribution of asset made in
respect of preference share (issued for full cash consideration) shall not be
treated as dividend.
2.Distribution out of profits earned after liquidation: Any distribution made out
of profits earned after the date of liquidation shall not be treated as dividend
u/s 2(22)(c).
3. Exception: Above provision is not applicable in case of amalgamation
d) Distribution made on reduction of capital of the company to the extent it
possesses accumulated profit (whether capitalized or not) [Sec. 2(22)(d)]
Exception: Any distribution in respect of preference share shall not be treated
as dividend.
e) Any payment (whether in cash or in kind) by a company in which public are
not substantially interested to the extent of accumulated profit (excluding
capitalized profit) -
i) by way of loan or advance to its equity shareholder, who is registered as well
as beneficial owner of the shares, holding not less than 10% of voting power in
the company (hereinafter referred as specified shareholder);
Tax point:
The provision of sec. 2(22)(e) is applicable on equity shareholder, who is
registered as well as beneficial owner of the shares
ii) by way of loan or advance to a concern (whether HUF, Firm, AOP, BOI or a
Company) of which such specified shareholder is a member or partner at the
time of such payment and has substantial interest# in such concern; or
#Substantial interest: A person shall be deemed to have substantial interest in
a concern, if he is beneficially entitled to not less than 20% of income of such
concern (20% of voting power in case of company) at any time during the
previous year.

Tax point:
► The clause is applicable where –

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a) Such shareholder holds at least 10% voting right in the payer company; and
b) Such shareholder is a member or partner of the payee concern and
beneficially entitled to not less than 20% of income (20% of voting power in
case of a company) of payee concern.
► In case of loan to concern, dividend shall be taxable in the hands of such
concern and not in the hands of shareholder.
iii) by way of loan or advance to any person on behalf of or for the benefit of
such specified shareholder [Sec.2(22)(e)]

Notes:
a) No exemption on repayment of such loan: Loan to a specified-shareholder is
treated as deemed dividend even if such loan or any part of such loan was
refunded before the end of previous year.
b) Advance means an advance given in the nature of loan (with or without
interest), which shall be refunded to the company. Trade advances which are in
the nature of commercial transactions would not fall within the ambit of the
word ‘advance’ in sec. 2(22)(e).

Exceptions:
a. Set-off of loan with forthcoming declaration of dividend: In case the loan
granted to member is adjusted with the forthcoming dividend, then such
dividend (newly declared) shall not be taxable in the hands of shareholder who
adjusted such loan.
b. Advance or loan in the ordinary course of business: Sec. 2(22)(e) is not
applicable if an advance or loan is made by a company in the ordinary course of
its business, where the lending of money is substantial part of the business of
the company.
Meaning of Accumulated profit:
For the purpose of dividend u/s 2(22), accumulated profit shall be:
Case Accumulated profit

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 Company which is not in liquidation Up to the date of distribution or
payment
Company which is in liquidation Up to the date of liquidation
Dividend u/s 2(22)(e) Up to the date of grant of such loan
or advance.

Tax point: In the case of an amalgamated company, the accumulated profits,

whether capitalised or not, or loss, as the case may be, shall be increased by
the accumulated profits, whether capitalised or not, of the amalgamating
company on the date of amalgamation.
Exceptions:
Following payments shall not be treated as ‘Dividend’ -
1. Any payment made by a company on buy-back of shares
2. Any distribution of shares made in accordance with the scheme of demerger

Tax treatment Amended

Dividend (from foreign company, domestic company or co-operative society) is
taxable in the hands of the recipient.

Place of accrual [Sec. 9(1)(iv)]

Dividend shall be deemed to accrue or arise in India, if it is declared by an
Indian company.

Deduction available from dividend income [Sec. 57] Amended

No deduction shall be allowed from the dividend income, or income in respect
of units of a Mutual Fund other than deduction on account of interest expense.
Further, in any previous year such deduction shall not exceed 20% of the
dividend income, or income in respect of such units, included in the total
income for that year.
Tax point: Apart from interest expenses (max. up to 20% of dividend income),
no deduction shall be allowed from dividend income.

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10.14 SPECIFIC DISALLOWANCE [SEC. 58]:
Following expenditures shall not be deducted from any income under this
head:
1. Any personal expenses of the assessee. [Sec. 58(1)(a)(i)]
2. Any interest which is payable outside India on which tax has not been
deducted at source. [Sec. 58(1)(a)(ii)]
3. Any salary payable outside India on which tax has not been deducted at
source. [Sec. 58(1)(a)(iii)]
4. 30% of any payment made to a resident on which TDS provision is applicable
without deducting TDS as referred u/s 40(a)(ia)
5. Any amount paid as Wealth tax or Income tax. [Sec. 58(1A)]
Tax point: Interest paid on amounts borrowed for meeting tax liability is not
deductible.
6. Any amount specified u/s 40A like -
• payment to relative in excess of requirement; or
• payment in excess of ` 10,000 otherwise than an account payee
cheque/draft/specified electronic modes [Sec.58(2)]
7. No deduction in respect of any expenditure shall be allowed in computing
the income by way of any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort or form,
gambling or betting of any form or nature, etc. taxable under the head “Income
from other sources”. [Sec. 58(4)]
Note: Above provision shall not apply in computing the income of an assessee,
being the owner of horses maintained by him for running in horse races, from
the activity of owning and maintaining such horses.

10.15 DEEMED PROFITS [SEC. 59]:

Sec. 59 provides that where -

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(a) An allowance or deduction has been allowed for any year in respect of loss,
expenditure or trading liability incurred by the assessee; and
(b) Subsequently, any amount is obtained, as revocation of such loss,
expenditure or remission of liability, whether in cash or in any other manner,
during any previous year, - then such amount received or amount remitted
shall be charged to tax.
Note: Above provision holds good even in case of succession or inheritance.

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CHAPTER 11: INCOME OF OTHER PERSONS INCLUDED
IN ASSESSEES TOTAL INCOME

11.1 INTRODUCTION:
Generally, an assessee is taxed on income accruing to him only and he is not
liable to tax for income of another person. However, there are certain
exceptions to the above rule (mentioned u/s 60 to 64). Sec. 60 to 64 deals with
the provisions of clubbing of income, under which an assessee may be taxed in
respect of income accrued to other person,
e.g. certain income of minor child shall be clubbed in the hands of his parents,
income from asset transferred to spouse for inadequate consideration shall be
clubbed in the hands of the transferor, etc. These provisions have been enacted
to counteract the tendency on the part of the taxpayers to dispose of their
income or income generating assets to escape tax liability.

11.2 GENERAL RULES:

•Computation of income to be clubbed
The income, which is to be clubbed, shall be first computed in the hands of
recipient and all expenditure related to such income shall be allowed as per the
respective provisions of the Act and thereafter the net income shall be
clubbed.
E.g.: Standard deduction u/s 24(a) from Income from house property shall be
allowed in the hands of the recipient and thereafter the net income shall be
clubbed.

• Clubbing Head
Income shall be, first, computed in the hands of recipient and then clubbing
shall be made head wise.
E.g.: Bank interest of minor child shall be clubbed under the head “Income
from other sources” of parent.

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•Deduction under chapter VIA:
If the clubbed income is eligible for deduction u/s 80C to 80U, then such
deduction shall be allowed to the assessee in whose hands such income is
clubbed.
E.g. If interest on saving bank account of the minor is clubbed in the hands of
parent u/s 64(1A) then parent can claim deduction u/s 80TTA.

• Clubbing of negative income:

As per explanation 2 to sec. 64, clubbing of income includes clubbing of
negative income i.e. where an income is liable to be clubbed, loss from the
same source shall also be clubbed. Clubbing provisions is mandatory and shall
be applied even in those cases where the application of such provision causes
loss of revenue to the Income tax department.

11.3 TRANSFER OF INCOME WITHOUT TRANSFERRING ASSETS [SEC.

60]:
Where an income is transferred without transferring the asset yielding such
income, then income so transferred
shall be clubbed in the hands of the transferor.
The above provision holds good -
• whether the transfer is revocable or not; or
• whether the transaction is affected before or after the commencement of
this Act.

11.4 REVOCABLE TRANSFER [SEC. 61]:

If an assessee transfers an asset under a revocable transfer, then income
generated from such asset, shall be clubbed in the hands of the transferor.
Revocable transfer:
As per sec. 63(a), a transfer shall be deemed to be revocable if –

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• It contains any provision for the retransfer (directly or indirectly) of any part
or whole of the income/assets to the transferor; or
• It, in any way, gives the transferor a right to re-assume power (directly or
indirectly) over any part or whole of the income/assets.
Exceptions [Sec. 62]:
As per sec. 62(1), the provision of sec. 61 shall not apply to an income arising to
a person by virtue of –
(i) A transfer by way of creation of a trust which is irrevocable during the
lifetime of the beneficiary;
(ii) Any transfer which is irrevocable during the lifetime of the transferee; or
(iii) Any transfer made before 1.4.61, which is not revocable for a period
exceeding 6 years.
In any case, the transferor must not derive any benefit (directly or indirectly)
from such income.
Note: As per sec. 62(2), income, in any of the above exceptional case, shall be
taxable as under –
Situation Taxable in hand
When the power to revoke the transfer arises (whether Transferor
such power is exercised or not)
When the power to revoke the transfer does not arise Transferee

11.5 REMUNERATION TO SPOUSE [SEC. 64(1)(ii)]:

The total income of an individual shall include income arising (directly or
indirectly) to the spouse by way of salary, commission, fees or any other
remuneration (whether in cash or in kind) from a concern in which such
individual has substantial interest.
Tax point: Any other income, which is not specified above, even if it accrues to
spouse from the concern in which the assessee has substantial interest, shall
not be clubbed.
Substantial interest: An individual shall be deemed to have substantial interest
in a concern if —

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 In case of He beneficially holds not less than 20% of its equity
company shares at any time during the previous year. Such share
may be held by the assessee or partly by assessee and
partly by one or more of his relatives.
Other concern He is entitled to not less than 20% of the profits of such
concern at any time during the previous year. Such share
of profit may be held by the assessee himself or together
with his relatives.
Relative here includes spouse, brother or sister or any lineal ascendant or
descendant of that individual [Sec. 2(41)].

Exception Income generated through technical or professional qualification of

the spouse is not to be clubbed in the total income of the individual.
Technical or professional qualification: The term technical or professional
qualification must be construed in a liberal manner as the term has not been
defined in the Act. It does not necessarily relate to technical or professional
qualification acquired by obtaining a certificate, diploma or degree or in any
other form, from a recognised body like University or Institute. It can be
treated as fitness to do a job or to undertake an occupation requiring
intellectual skill and also includes technicality generated through experience,
skill etc. Technical qualification includes specialization in a particular subject
(e.g., accountancy, management, commerce, science, technology etc.).

Note:
Where both, husband and wife, have Remuneration from such concern will
substantial interest in a concern be included in the total income of
When both, husband and wife, have husband or wife, whose total income
substantial interest in a concern and excluding such remuneration, is
both are drawing remuneration from higher. Where such income is once
that concern without possessing any included in the total income of either
specific qualification. of the spouse, then such income
arising in any subsequent years
cannot be included in the total
income of the other spouse unless
the Assessing Officer is satisfied that
it is necessary to do so. However,

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 Assessing Officer will do so only after
giving to the other spouse an
opportunity of being heard.
When both, husband and wife, are Remuneration from such concern will
not having any other income not be clubbed.
When both, husband and wife, have
substantial interest in a concern and
both are drawing remuneration from
that concern without possessing any
specific qualification and both are not
having any other income apart from
the said remuneration.
Computation of salary, fee, Income prescribed in sec. 64(1)(ii)
commission, remuneration etc shall be first computed (allowing all
deductions from the respective
income) in the hands of recipient and
thereafter net income shall be
clubbed in the hands of the other
spouse.
E.g. salary, remuneration, etc shall be
first calculated as per provisions of
sec. 15 to 17, in the hands of
recipient and thereafter, net taxable
salary shall be clubbed in the hands
of the other spouse.

11.6 INCOME FROM ASSET TRANSFERRED TO SPOUSE [SEC. 64(1)(iv) & (vii)]
Asset transferred to Spouse [Sec. 64(1)(iv)]
In computing the total income of an individual [subject to the provisions of sec.
27(i)], income arising from assets transferred to spouse without adequate
consideration, shall be included in the income of that individual.
Tax point: In the following cases clubbing provision shall not be attracted on
transfer of property to spouse -
When such transfer is for adequate consideration; or
The transfer is under an agreement to live apart; or

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Where the asset transferred is house property (as such transfer will be
governed by Sec. 27).

Illustration 1.
Mr. X gifted 1,000 shares of a non-domestic company worth 6,00,000 (acquired
on 15/3/2020) to Mrs. X out of natural love and affection as on 15/4/2020. On
31/1/2021, Mrs. X received dividend 60,000 on such shares in India. On
1/2/2021, Mrs. X sold such shares for 10,00,000 and received consideration in
India. Show tax treatment, if on 1/2/2021, Mrs. X invested 10,60,000 in –
Case A) A house property from which rent accrued in the previous year 2020-
21 is 53,000.
Case B) A newly formed partnership firm and contributed initial capital. Interest
received (taxable portion) on such contribution 13,250 and share of profit `
20,000.
Case C) A newly started proprietorship business & contributed capital, profit
accrued for the year is 42,400.

11.7 INCOME OF MINOR CHILD [SEC. 64(1A)]:

Income of a minor child shall be clubbed with income of the parent whose total
income (excluding this income) is higher. Exceptions The above clubbing
provision shall not apply in the following cases –
1. The income arises or accrues to the minor child due to any manual work
done by him; or
2. The income arises or accrues to the minor child due to his skill, talent,
specialised knowledge or experience; or
3. The minor child is suffering from any disability of nature specified u/s 80U.

Exemption [Sec. 10(32)] In case income of a minor child is clubbed in hands of

parent as per provision of sec. 64(1A), the assessee (parent) can claim
exemption of an amount being minimum of the following –
a) 1,500; or

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b) Income so clubbed.
Tax point: Such exemption shall be available for each child (irrespective of the
number of children) whose income is so clubbed.

When marriage does not subsist between parents:

In case marital relationship does not subsist at the time of accrual of income to
the minor child, income of minor child shall be clubbed with income of that
parent who maintains the minor child during the previous year.
Tax point: Income of the minor child shall be clubbed in hands of parent in the
following manner –
Relation between parent Tax treatment
When marriage subsists With the income of that parent whose total
income excluding this income is higher
When marriage does not With the income of that parent who
subsist maintains the minor child in the previous
year

Illustration 2.
Mr. & Mrs. Mantri have income under the head “Profits & gains of business or
profession” of 3,00,000 and 4,00,000 respectively. They have 7 children. From
the following details compute taxable income of Mr. and Mrs. Mantri for the
A.Y. 2021-22:
• 1st child (aged 26 years) is a chartered accountant. His annual income from
profession is 4,00,000. His income from house property for the P.Y. 2020-21 is
30,000. He has a son (4 years old) who has earned interest on fixed deposit of
5,000.
• 2nd child (aged 17 years being a married daughter) who is a stage singer,
earned income of 1,00,000 during the P.Y. 2020-21. She earned interest on fixed
deposit 8,000. Such fixed deposit has been made out of such singing income.
• 3rd child (aged 16 years) is suffering from disability specified u/s 80U (to the
extent 55%) blind. He has received interest income of 40,000 for loan given to a
private firm. He is dependent on Mrs. Mantri.

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• 4th child (aged 14 years) has earned income of 45,000 during the P.Y.2020-21
out of his physical and mental effort. Expenditure incurred to earn such income
is 15,000. His loss from house property is 30,000.
• 5th child (aged 12 years) is a partner in a partnership firm from which he
earned interest income (taxable) of 40,000 and share of profit of 35,000. Other
two partner of the firm are Mr. & Mrs. Mantri.
• 6th child (aged 9 years) has 1,000 debentures of 100 each of a public sector
company acquired through will of his grandfather. Interest income on such
debenture is 10,000. Expenditure incurred to collect such interest is 200. Such
debenture was sold and long-term capital gain earned 25,000.
• 7th child (aged 7 years) has earned interest on fixed deposit 500.

11.8 CONVERSION OF SELF ACQUIRED PROPERTY INTO HUF

PROPERTY [SEC. 64(2)]:
Applicability: An individual, being a member of an HUF, has converted a
property after 31/12/1969 (being self-acquired asset of the individual) into
property of HUF of which he is a member, otherwise than for adequate
consideration.
Tax-Treatment: For the purpose of computation of total income of such
individual for any assessment year commencing on or after 1/4/1971, the
income derived from such converted property (property so converted or
transferred by individual to HUF) or any part thereof shall be deemed to arise
to the individual and not to the family. Where the converted property has been
the subject matter of partition (whether partial or total) amongst the members
of the family, the income derived from such converted property as is received
by the spouse shall be clubbed in the hands of transferor.
Tax point:
• Asset was originally self-acquired property of the individual
• Such asset is transferred directly or indirectly to HUF hotch-pot for
inadequate consideration.
• Treatment is as under

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 Case Income to be clubbed in hands of transferor
Before partition The entire income from such property
After partition Income from the assets attributable to the spouse of
transferor.

11.9 LIABILITY OF THE TRANSFEREE [SEC. 65]:

Applicability Were, by reason of the –
• provisions contained in this Chapter; or
• provisions contained in sec. 27(i)
the income from any asset (or from membership in a firm) of a person other
than the assessee, is included in the total income of the assessee.
Impact: On the service of a notice of demand by the Assessing Officer in this
behalf, the person in whose name such asset stands (or who is a member of
the firm) shall be liable to pay that portion of the tax levied on the assessee
which is attributable to the income so included.
Notes:
a) Such liability cannot exceed the value of assets so transferred.
b) Where any such asset is held jointly by more than one person, they shall be
jointly and severally liable to pay the tax which is attributable to the income
from the assets so included.
Tax point: After application of provisions of clubbing (on transfer of property
without adequate consideration as discussed above in several sections),
income is taxable and tax liability arises in the hands of the transferor. But sec.
65 empowers the income tax authorities to serve demand notice (in respect of
tax on clubbed income) upon transferee.

11.10 IMPORTANT GENERAL NOTES:

TDS Where an income is includible u/s 64 and tax has been
deducted at source from such income, the credit of tax
deducted at source shall be given to the person in whose
hands the income is taxable [Sec. 199].

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 Advance Tax The advance tax paid by the income earner (say spouse or
minor child) with reference to such income is not eligible for
adjustment towards the tax liability of the individual in
whose hands such income has been clubbed. In such case, it
is open to the payer of advance tax (i.e. spouse or the minor
child) to apply for refund of advance tax so paid.
Mode of Unless there are compelling circumstances the modes of
Clubbing clubbing cannot be changed by the ITO. Merely, for the
cannot be benefit of the revenue such mode cannot be changed.
changed for
the benefit of
the revenue.

Illustration 4.
A proprietary business was started by Smt. Rani in the year 2018. As on
1.4.2019 her capital in business was 3,00,000. Her husband gifted 2,00,000, on
10.04.2019, which amount Smt. Rani invested in her business on the same
date.
Smt. Rani earned profits from her proprietary business for the financial years
2019-20, 1,50,000 and financial year 2020-21 3,90,000. Compute the income,
to be clubbed in the hands of Rani’s husband for the A.Y. 2021-22.

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