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CA PRANAV CHANDAK
 ❖ CA Inter May 2023 & November 2023
❖ CMA Inter June 2023 & December 2023
❖ CS Executive June 2023 & December 2023

DIRECT TAX
BY CA PRANAV CHANDAK

क्षणशः कणशश्चैव ववद्यामर्थं च साधयेत् । क्षणत्यागे कुतो ववद्या कणत्यागे कुतो धनम्॥

Knowledge should be gained through minute by minute efforts. Money should be

earned utilizing each and every resource. If you waste time, how can you get
knowledge. If you waste resources, how can you accumulate the wealth.

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 Index - Direct Tax Concept Book – Full Book

SN Name of the Chapter Page No. No. of MCQs given in MCQ Book

1 Basic Concepts of Income Tax 1 – 19 141

2 Residential Status 20 – 34 118

3 Income from Salary 35 – 66 259

4 Income from House Property 67 – 79 154

5 Profits & Gains of Business & Profession 80 – 115 441

6 Capital Gains 116 – 147 271

7 Income from Other Sources 148 – 158 119

8 Clubbing of Income 159 – 165 87

9 Set off & carry forward of Losses 166 – 174 99

10 Chapter VI-A Deductions 175– 193 167

11 Exempt Income u/s 10 & Agricultural Income 194 – 204 106

12 TDS & TCS 205 – 232 269

13 Advance Tax & Interest u/s 234 233 – 238 48

14 Return of Income & Assessment 239 – 253 119

15 Total Computation & AMT & New Tax Regime 254 – 265 NA [Case Study Based Only]

MCQ Discussion Video will be uploaded on YT channel of “Pranav Chandak Academy”.

☛ Whatsapp on 8888111134 to get Video Link of Free MCQs Discussion.

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▪ A tax may be defined as a "pecuniary (monetary) burden laid upon individuals or property owners to
support the Government [Black's Law Dictionary].
▪ It is financial charge (fee) imposed by Government on income, commodity or activity.
▪ A tax "is not a voluntary payment or donation, but an enforced contribution. However, it is non-penal.
▪ Thus, it can be said that Tax is “Compulsory Extortion of Money” by the government.

▪ Taxes constitute basic source of revenue to the Government which are utilized for meeting expenses of
Government like defence, provision of education, health-care, facilities like roads, dams etc.
▪ They are levied & collected to fulfill the soci-economic objectives of the government.

Basis Direct Tax Indirect Tax

Definition ▪ If tax is levied directly on income/wealth ▪ If tax is levied on price of a good or service,
of a person, it is a direct tax. it is an indirect tax.
Incidence & ▪ Impact & incidence of tax are on same ▪ Impact & incidence of tax are on different
Impact person. person.
Levied on ▪ Income/wealth of the person. ▪ Price of Goods or Services
Burden ▪ There is No Shifting of burden. ▪ Burden is shifted to subsequent buyer.
Borne by ▪ Directly borne by the taxpayer. ▪ Burden falls on final consumer.
Nature ▪ Progressive in nature ▪ Regressive in nature
Collection ▪ Yearly basis. ▪ @ the time of sale/purchase of G/S.
Examples ▪ Income tax, Tax on undisclosed Income. ▪ GST, Custom duty.

▪ In India, Constitution (COI) is the parent law. All other laws should be enacted (made) without exceeding
the framework of COI & subject to the norms (T&C) laid down in it. It consists of a Preamble, 25 parts
containing 448 Articles & 12 Schedules.
▪ Article 265 of CoI provides that no tax shall be levied or collected except by authority of law.
▪ CoI gives power to levy & collect taxes to Central Government (CG) & State Government.
▪ Parliament (Union) & State Legislature are empowered to make laws by virtue of Article 246 of CoI.
▪ Seventh Schedule to Article 246 contains 3 lists which are as follows:
Union List CG has exclusive power to make laws on the matters contained in Union List.
State List SG has exclusive power to make laws on the matters contained in State List.
Concurrent List Both CG & SG have power to make laws on the matters contained in this list.

▪ Article 254 deals with Inconsistency b/w laws made by Parliament & State Legislatures.
 If State Legislature make any Law on the matter enumerated in concurrent list & the law so made
is inconsistent with → (1) Any Law made by Parliament; (2) Any Existing Law w.r.t this matter.
 BUT ASSENT OF PRESIDENT is received to such Law made by State Legislature,
 THEN, Law Formulated by such state shall prevail in such State instead of Law made by parliament.
▪ Entry 82 of Union List (List I to Seventh Schedule of COI) gives power to Parliament to levy taxes on
Income other than Agricultural Income. [Power to levy taxes on agricultural income is with SG].

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1 INCOME TAX ACT, 1961
➢ It came into force on 1st April, 1962. The act contains 298 sections & XIV schedules.
➢ A section may have sub-sections, clauses & sub-clauses.
When each part of the section is independent of each other & one is not related
Clause
with other, such parts are called a “Clause”.
It refers to such parts of a section where each part is related with other & all
Sub-section
sub-sections taken together completes the concept propounded in that section.

Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines “amalgamation”.
Ex: Section 5 defining the scope of total income (TI) has two sub-sections (1) & (2).
Sub-Section (1) defines the scope of TI of a Resident; Sub-section (2) defines the scope of TI of a NR.
PC Note: Each sub section is related with the other in the sense that only when one reads them all,
one gets the complete idea related with scope of total income.
➢ A Section may also have Provisos & Explanations.
Proviso It gives the exceptions to the provision contained in the respective section.
Explanation It gives clarification relating to the provision contained in that section.

➢ The Act (since it is Revenue-based Act) undergo changes every year with additions & deletions
brought by the Annual Finance Act passed by the parliament.
2 ANNUAL FINANCE ACT
➢ Every year, Finance Minister Introduces the Finance Bill in Parliament’s Budget session.
▪ Part A of budget speech contains the proposed policies of government in fiscal area.
▪ Part B of budget speech contains the detailed tax proposals.
➢ When the Finance Bill is passed by both the houses of the Parliament & gets the assent of the
President, it becomes the Finance Act which is incorporated in the Income-Tax Act.
➢ Amendments are made every year to the Act & other tax laws by the Finance Act.
➢ The First Schedule to the Finance Act contains four parts which specify the rates of tax.
3 INCOME TAX RULES, 1962
➢ Administration of direct taxes is looked after by Central Board of Direct Taxes (CBDT).
➢ CBDT is empowered to make rules for proper administration of the Act. [Ex: Sec 32 states that
depreciation will be allowed as deduction but rates of depreciation are given by Rule 5].
4 NOTIFICATIONS

➢ Notifications are subordinate legislation issued by CG to give effect to the provisions of the Act.
➢ The CBDT is also empowered to make & amend rules by issuing notifications.
➢ They are binding on everyone. [Assessee + Income Tax department]
5 CIRCULARS
➢ Circulars are issued by the CBDT to deal with certain specific problems & to clarify the doubts
regarding the scope & meaning of the provisions of the law.
➢ Circulars are issued for the guidance of the Income Tax officers &/or Assessees.
➢ These circulars are binding on the department but not on the assessee.
➢ However, assessee can take advantage of beneficial circulars.
6 CASE LAWS (JUDICIAL DECISIONS)
➢ It is not possible to make law for all the possible issues that may arise. Hence, any new point which
arises (on which law is not made) will be heard by the courts & decision given by court becomes Law.
➢ Supreme Court Decisions becomes Judicial Precedent (Law) & are binding on all the courts,
Appellate Tribunal, Income Tax Authorities & on Assessees.
➢ High Court decisions are binding on the Assessees & Income Tax Authorities which come under

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 its jurisdiction unless it is overruled by a higher authority (Supreme Court).
➢ Decision of a High Court cannot bind other High Court.
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PC Note: In some cases, more than one rule of interpretation may appear to be applicable to a given
situation. In such cases, Courts decide the most appropriate rule considering the facts of the case.

 Income-tax is a tax levied on the Total Income (TI) of the Previous Year of every person.

Steps/Procedure for computation of TI of the person for levy of Income tax is as follows:
Step 1 - Determination of Residential Status.
Step 2 - Classification of Income under 5 different heads.
Step 3 - Computation of Income under each head.
Step 4 - Clubbing of income of spouse, minor child etc.
Step 5 - Set-off or carry forward & set-off of losses.
Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5].
Step 7 - Deductions from Gross Total Income. [Payment based/Income Based deductions].
Step 8 - Total income [GTI – Deductions under Step 7].
Step 9 - Application of Rates of Tax on the total income.
Step 10 - Surcharge / Rebate u/s 87A.
Step 11 - Health & Education Cess on Income Tax.
Step 12 - Advance tax & TDS.
Step 13 - Tax Payable/Tax Refundable.
PC Note: We will study all the above steps in detail in the Respective Chapters.

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➢ The term 'India' means –
▪ Territory of India as per Article 1 of the Constitution,
▪ Territorial Waters of India (TWI), seabed & subsoil underlying such waters,
▪ Continental Shelf,
▪ Exclusive Economic Zone;
▪ Any other specified maritime zone & air space above its territory & TWI.
Specified maritime zone means the maritime zone as referred to in Territorial Waters, Continental
Shelf, Exclusive Economic Zone & other Maritime Zones Act, 1976.

➢ Any person by whom any tax or any other sum of money is payable under this Act.
➢ It includes:
Tax Every Person by whom any tax or any other sum of money is payable under this
Payable Act whether or not any proceeding under this act has started against him.
Proceeding Any Person i.r.o. whom any proceeding has been taken under this act whether or
started not any tax, penalty etc. is payable by him under this act.
Proceeding may be taken for/of -
▪ Assessment of his income (or loss) sustained by him;
▪ Income (or loss) of any other person i.r.o. whom he is assessable;
▪ Refund due to him or to such other person.
Deemed Sometimes, a person becomes assessable i.r.o. the income of some other persons.
Assessee In such a case, he may be deemed as an assessee. Ex: Legal Heir.
Assessee Any person who does not deduct tax at source or after deducting tax, fails to pay
in default deducted tax to the government or who fails to pay advance tax is deemed to be
assessee in default u/s [201(1)]/218.

Examples:
1. Income of Chirag (Age: 35 yrs) is Rs. 2,50,000. He does not file his ROI since his income is below BEL. No
action/proceeding is initiated by IT Department. He is not assessee because no tax is due from him.
2. Income of Manish (Age: 38 years) is Rs. 2,55,000. He does not file his ROI. Since he is supposed to pay tax by filing
ROI (since his income > BEL Rs. 2.5 Lacs), he is an ‘assessee’. [ROI Provisions to be studied later]
3. Income of Raj (age: 51 years) is Rs. 75,000. He files his ROI (even if his taxable income is < BEL). Assessment order
is passed by AO without any adjustment. Raj is an “assessee” since he files his ROI.
4. Loss of Ram is (Rs. 60,000). He files his ROI to carry forward such loss. He is an ‘assessee’.
5. Income of Sudhir (Age: 28 years) is < BEL. He files his ROI to claim refund of TDS by X Ltd. on interest paid to him.
Sudhir is an ‘assessee’.
6. Income of Sham (Age: 30 Years) is < BEL. He does not file his ROI. During the PY, he has paid salary of Rs. 2,90,000
to an employee. Though he was supposed to deduct tax at source, yet due to ignorance of law, no tax is deducted
by him. Sham is an assessee as he has failed to deduct tax at source. [Assessee in Default].

➢ Any person who is the beneficial owner of shares (not being shares entitled to fixed rate of dividend),
whether participating in profit or not, carrying at least 20% of total voting power.

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➢ Individual means only a natural human being (Male/Female/Minor/Unsound Mind).
➢ Income of Minor & Person of unsound Mind → Assessed in hands of Guardian or Manager u/s
161(1) who is entitled to receive his income.
➢ In the case of Deceased person, assessment would be made on the legal representative.

➢ HUF is treated as separate entity (from members) for assessment purpose & tax is payable by HUF.
➢ As per Hindu Law, it consists of all males lineally descended from a common ancestor & includes
their wives & unmarried daughters.
➢ The Status in HUF is received by birth & not by operation of law.
➢ Even a single male member can have HUF (w.e.f 6/9/2005).
➢ Only Co-parceners have the right to Partition.
➢ Coparceners → HUF may contain many members, but only members within 4 degrees including
KARTA are called co-parceners (including daughters w.e.f 6/9/2005).
PC Note: Wife/ daughter-in-law cannot be co-parceners; however, they can be members.
➢ Jain & Sikh undivided families would also be assessed as a HUF under IT Act.

DIFFERENT OPINIONS OF SCHOOLS OF HINDU LAWS

Dayabaga school of Hindu law Mitakshara school of Hindu law
▪ Prevalent in West Bengal & Assam ▪ Prevalent in the Rest of India
▪ Nobody acquires the right, share in the ▪ One acquires the right to the family
property by birth if karta is alive. property by his birth & not by succession
▪ Thus, the children do not acquire any right, irrespective of the fact that his elders are
share in the family property, if his father is living.
alive & children will acquire right/share in ▪ Thus, every child born in the family
the property only after the death of his father. acquires a right/share in the family
▪ Hence, father & his brothers would be the property.
coparceners of the HUF. ▪ Thus Every child will be co-parcener of HUF

➢ ‘Company’ has a much wider meaning under Income Tax Act than Companies Act.
➢ It means:
▪ Any Indian Company defined in section 2(26);
▪ Any Body Corporate incorporated under the foreign laws [Foreign company];
▪ Any institution, association or body (incorporated/not) whether Indian or non-Indian, which is
declared by general or special order of CBDT to be a company.
PC Note: Classes of Companies is explained in Detail in Later Part of the Chapter.

➢ A firm includes a partnership firm (registered or not) & shall include a LLP.
➢ “Partnership firm” has same meanings as assigned to them in Indian Partnership Act. However,
a minor admitted to the benefits of existing partnership would also be treated as partner [Sec 2(23)]
➢ Same Tax Treatment would be applicable for both General Partnerships & LLPs.

➢ When two or more persons combine together for promotion of joint enterprise, they are assessable
as an AOP when they do not constitute a partnership legally.
➢ Conditions to form AOP: Persons must join in a common purpose, common action & their object
must be to produce Income, but they should not form a partnership.
➢ Co-heirs, co-donees joining together for common purpose would be chargeable as AOP.

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 ➢ Persons who merely receive the income jointly & who may be assessable in like manner & to the
same extent as the beneficiaries individually. [Ex: Executors/trustees]
➢ Co-Executors/Co-trustees are assessable as BOI since their title & interest are indivisible.
Note: Tax is not payable by the assessee on share of Income received by him from BOI on which
the tax has already been paid by such BOI. [To avoid Double Taxation]

➢ Municipal committee, district board, Municipality, body of port commissioners etc. legally entitled/
➢ entrusted by Government with control & management of Municipal/ local fund.
PC Note: Income of LA is taxable only if it is derived from the business of supply of
commodity/service (other than water & electricity) outside its own jurisdictional area. Income
arising from supply of water & electricity even outside its own jurisdictional areas → Exempt.
H EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above categories)
➢ This is a residuary clause. If the assessee does not fall in any of the first six categories, he is
assessed under this clause. Ex: An idol, or deity.
CQ1. What is the difference between AOP & BOI?
Answer:
1. AOP: Voluntary getting together for definite purpose; BOI: Just a body without an intention to get together.
2. Members of BOI can be individuals only; Members of AOP can be individual or non-individual (Artificial persons).

𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐈𝐧𝐜𝐨𝐦𝐞 𝐓𝐚𝐱 calculated on Total Income using applicable slab rate
Average Rate of Tax =
𝐓𝐨𝐭𝐚𝐥 𝐈𝐧𝐜𝐨𝐦𝐞

PC Example:

➢ Highest Slab Rate of Tax (including SC) specified in Finance Act of relevant PY for Individual.

➢ MMR for PY 2022-23 = 30 % (Rate of Tax) + 37% Surcharge + 4% HEC = 42.744%.

6
➢ An Indian company or
➢ Any other company which has made prescribed arrangements for declaration & payment of
dividends (including dividends on preference shares) within India payable out of the income
taxable in India.

❖ If the company satisfy the following conditions:

➢ Company should have been formed & registered under any law in India &
➢ Registered office or Principal office of the company should be in India.

❖ ‘Indian Company’ includes the following if “their registered/principal office is in India”:

1. A corporation established by or under a Central, State or Provincial Act.
Ex: Financial Corporation/State Road Transport Corporation.
2. Institution/association/body → Declared by CBDT to be a company u/s 2(17)(iv).
3. For J&K → Company formed & registered under any law in force in J&K.
4. For Union territories of Dadra & Nagar Haveli, Goa, Daman & Diu, & Pondicherry → Company
formed & registered under any law in force in that territory.

A Company which is not a domestic company.

1. Company owned by Indian Government (CG/SG) or by RBI.

2. Company in which ≥ 40% shares are held by Indian Government/RBI or corporation owned by
RBI.
3. Company which is registered u/s 8 of the Companies Act, 2013.
4. Company having NO Share capital which is declared by CBDT to be a company in which public is
substantially interested for specified No. of AYs.
5. Company which is not a private company & which fulfill any of the following conditions:
(a) Equity shares should have been listed in RSE in India as on last day of the relevant PY or
(b) Equity shares carrying at least 50% (40% in case of industrial companies) voting power should
have been unconditionally allotted to or acquired by & should have been beneficially held
throughout the relevant PY by -
- Government or
- Statutory Corporation or
- Company in which public are substantially interested or
- Any wholly owned subsidiary of company mentioned in (c).
- One or more co-operative societies.
(c) Company which carries on its principal business of accepting deposits from its members &
which is declared by CG u/s 620A of the Companies Act to be Nidhi/Mutual Benefit Society.

➢ Income is a periodical monetary return with some sort of regularity.

➢ Generally, the word ‘Income’ covers receipts in the shape of money or money’s worth.
➢ However, all receipts do not form the basis of taxation under the Act.

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 Income includes: [Each of these will be covered in Respective Chapter in Detail]
1. Profits & gains.
2. Dividends.
3. Voluntary Contributions (donations) received by charitable/religious trust or by research associations
or universities & educational institutions or hospitals & medical institutions or electoral trust.
4. Value of any perquisite or profit in lieu of salary taxable u/s 17(2) & 17(3).
5. Any special allowance or benefit other than the perquisite included above.
6. Any allowance granted to the assessee to meet his personal expenses at the place where the duties of
his office or employment of profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increased cost of living.
7. Value of any benefit or perquisite obtained from a company either by a director or by a person who has
a substantial interest in the company or by a relative of director or such person & any sum paid by
such company i.r.o any obligation which would have been payable by director or other person aforesaid.
8. Value of any benefit or perquisite, whether convertible into money or not, which is obtained by any
representative assessee or by any beneficiary or any amount paid by the representative assessee for
the benefit of the beneficiary which the beneficiary would have ordinarily been required to pay.
9. Profits & gains of business or profession chargeable to tax u/s 28.
10. Deemed profits chargeable to tax u/s 41 or u/s 59.
11. Any capital gains chargeable u/s 45.
12. Profits & gains of any insurance business carried on by Mutual Insurance Company or by a
cooperative society, computed in accordance with Section 44 or any surplus taken to be such profits
& gains by virtue of provisions contained in first Schedule to the Act.
13. Profits & gains of any business of banking carried on by a co-operative society with its members.
14. Any winnings from lotteries, cross-word puzzles, races including horse races, card games &
other games of any sort or from gambling, or betting of any form or nature whatsoever. [IFOS]
15. Any sum received by assessee from his employee as contributions to any PF/SAF/ESI.
16. Any sum received under a Keyman insurance policy including bonus on such policy.
17. Any sum under an agreement for not carrying out any activity in relation to any business or
profession; or not sharing any know-how, patent, copyright, trademark, licence, franchise, or any
other business or commercial right of a similar nature, or information or technique likely to assist in
manufacture or processing of goods or provision of services → Taxable u/h ‘PGBP’ [Sec 28(va)]
18. FMV of inventory which is converted into or treated as a capital asset [Section 28(iva)].
19. Any consideration received for issue of shares exceeding their FMV [Section 56(2)(viib)].
20. Advance received & forfeited on failure of negotiation for transfer of a capital asset [56(2)(ix)].
21. Money or property received for inadequate/without consideration by any person [56(2)(x)].
22. Compensation or other payment, due to or received by any person, in connection with termination
of his employment or modification of T & Cs relating thereto [Section 56(2)(xi)].
23. Assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession
or reimbursement by CG or SG or any authority or body in cash or kind.
Note: Subsidy or Grant which are not included in the definition of income u/s 2(24):
(i) Subsidy or grant which has been considered for determination of actual cost of depreciable
asset as per Explanation 10 to section 43(1)
(ii) Subsidy or grant by CG for corpus of a trust or institution established by CG/SG.
2. REGULARITY OF INCOME
➢ Income means periodical monetary return coming from definite source with some regularity.
➢ However, this does not mean that income which does not arise regularly will not be treated as
income for tax purposes. [Ex: Winnings from lotteries, card games, etc. which do not arise from definite
source & do not have element of regularity are specifically included in Income under IT Act]
➢ Even a single transaction can constitute business. Repetition of such transactions is not
necessary under Income Tax Act.
3. CASH/KIND
➢ Income received by the assessee need not be in the form of cash only.
➢ It may also be some other property or right which has monetary value.
➢ Wherever income is received in kind (like perquisites), then their value has to be found as per the
prescribed rules & this value shall be taken to be the income.

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4. ILLEGAL/ TAINTED INCOME
➢ Income is income, though tainted (with illegality). Thus, illegal Income is also taxed.
5. DISPUTED INCOME
➢ Dispute regarding the title of Income cannot stop assessment of income in the hands of recipient.
➢ Disputed income is taxable in the hands of recipient though there may be rival claims to it.
6. CONTINGENT INCOME
➢ Contingent income is not Income. Until the contingency has happened, it cannot be assumed
that income has accrued or has arisen to the assessee.
7. PERSONAL GIFTS [To be studied in IFOS]
8. PIN MONEY
➢ Pin money received by a woman (Moneys given to a woman by her husband for running the
expenses of the kitchen) would not be income in the eyes of the law.
➢ Any property acquired using such money/savings is a Capital Asset of the lady.
9. LUMPSUM RECEIPT
➢ Receipt in lumpsum or in instalments would not affect its taxability.
Ex: If a person receives arrears of salary in a lumpsum amount, it would still be his income.
10. RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE [Sec 145]
Heads Relevant Method of Accounting

Salaries ▪ Taxable on due basis or on receipt basis whichever is earlier.

(15-17) ▪ Method of accounting followed by the assessee is irrelevant.

HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is irrelevant.

PGBP ▪ PGBP Income is taxable as per method of accounting followed by assessee.

(28-44DB) If assessee follows Accrual basis of accounting → Income taxed on accrual basis.
If assessee follows Cash basis of accounting → Income taxed on Cash basis.
PC Note: Certain payments are allowable only on Payment basis. [Refer Sec 40b]

Cap. Gain ▪ Taxable in the PY in which the capital asset is transferred.

(45 – 55A) ▪ Method of accounting followed by the assessee is irrelevant.

IFOS Same as PGBP.

11. CAPITAL & REVENUE RECEIPTS [VERY IMPORTANT]
Particular Capital Receipts Revenue Receipts
Meaning ▪ Receipt referable to fixed capital. ▪ Receipt referable to circulating capital.
▪ Receipts towards substitution of ▪ Any receipt toward substitution of
source of income. Income.
▪ Amount received as compensation for ▪ Any compensation received for the Loss
surrender of any right of ownership. of future profit.
Tax ▪ Not Taxable unless expressly provided. ▪ Taxable unless specifically exempted.
Treatment Ex: Profit from Sale of Capital Asset is Ex: Profits arising from sale of Trading
taxable u/h Capital Gains u/s 45. Asset is taxable as Business Income.
How to determine whether a receipt is a Revenue receipt or Capital receipt?
➢ If Income-generating activity is within the normal dealing of the Assessee → Revenue receipt.
➢ If Income-generating activity is outside the normal dealing of the Assessee → Capital receipt.
Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital Nature. But
Profit on sale of shares & securities held by a stock broker as SIT would be of Revenue Nature.
PC Note: Taxability of profits from transactions outside the normal dealing of the assessee, although
connected with his business, would depend upon whether transactions constitute trading activity.

9
Points to be noted:
 Liquidated damages received directly & intimately linked with the procurement of a capital asset,
which lead to delay in coming into existence of the profit- making apparatus → Capital receipt. Amount
received towards compensation for sterilization of profit earning source is not in ordinary course of
business. [CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)]
 Compensation on Termination of Agency Business → Capital receipt if such agency business being
the only source of income by the assessee; However, it will be taxable u/s 28(ii)(c).
But if the assessee has several agencies & one of them is terminated & compensation is received, the
receipt would be revenue receipt since taking agencies & exploiting the same for earning income is in
the ordinary course of business & loss of one agency would be made good by taking another.
 Compensation received from employer or from any person for premature termination of service is a
capital receipt but is taxable as profit in lieu of salary u/s 17(3) or IFOS u/s 56(2)(xi), respectively.
 Compensation received or receivable in connection with termination/modification of T&C of any
contract relating to its business shall be taxable as business income.

12. APPLICATION OF INCOME VS DIVERSION OF INCOME [VERY IMPORTANT]

Application of Income Diversion of Income
▪ If assessee applies his income to discharge ▪ If there is an overriding charge on the source of
his obligation after the income reaches in income which diverts the income, it is diversion
the hands of the assessee, of Income.
▪ it would be application of income & ▪ Income gets diverted before it reaches the
▪ This would result in taxation of such assessee,
income in the hands of the assessee. ▪ It cannot be treated as an income of the assessee.
Conditions: Conditions:
1. Income accrues to the assessee 1. An overriding charge/title on income &
2. Income reaches the assessee 2. Income is diverted at source.
3. Income is applied to discharge obligation 3. Charge is on sources of income; not on Receiver.

FY ▪ Financial year means a year starting on 1st April & ending on 31st March of next year.

PY ▪ FY in which the income is earned is called “Previous Year”.

▪ PY means the Financial Year immediately preceding the AY.

AY ▪ The year in which income is assessed to tax is called Assessment Year.

▪ AY 2023-24 will commence on 1.4.2023 & will end on 31.3.2024.
▪ Thus, Income earned during PY 2022-23 will be assessed/taxed in AY 2023-24.

PC Note: PY → FY in which Income is earned; AY → FY (Next) in which income is taxed.

Ex: A is running a business from 2003 onwards. Determine PY for AY 2023-24. [Ans: PY = 1.4.2022 - 31.3.2023]

➢ First PY = The period beginning from the date of setting up of the business or from the date the new
source came into existence & ending on the last day of that FY (31st March).
➢ Therefore, first PY of a newly set-up business/ profession or a new source of income will be either 12
months or less than 12 months. It can never exceed a period of 12 months.

PC Note: Same provision will be applicable for ‘New Source of Income’.

CQ2. Mr. PC set up a new business on 24.02.2022, what will be first PY for that business?
Ans: From 24.02.2022 – 31.03.2022; PY 2021-22; AY 2022-23.

CQ3. What will be the 2nd PY for his business? Ans: [PY 2022-23; AY 2023-24]

10
 ▪ Each financial year is both Previous Year as well as Assessment Year.
▪ It is PY for income earned during that FY & AY for the income earned during the preceding FY.
Example:
FY Previous Year [PY] Assessment Year [AY]
2020-21 FY 2020-21 → PY for income received or FY 2020-21 → AY for incomes earned in PY
accrued during 1 April 2020 to 31 March 2021. 2019-20.
2021-22 FY 2021-22 → PY for income received or FY 2021-22 → AY for incomes earned in PY
accrued during 1 April 2021 to 31 March 2022. 2020-21.

➢ All Assessees are required to follow FY as their PY uniformly for every year. [1st April - 31st March]
➢ An Assessee may maintain books of account on calendar year basis but for Income Tax purpose, his
previous year will be financial year & not the calendar year.

Ex: Mr. PC can maintain books of accounts on calendar year basis, but tax will be levied on the basis of FY only.
Calender Income as per Splitting of Income as per FY
Year (CY) books of A/c Jan – March April – Dec Taxable Income
2019 12 Lacs 3 Lacs 9 Lacs PY 2019-20 = 9L + 6L = 15L.
2020 24 Lacs 6 Lacs 18 Lacs PY 2020-21 = 18L + 9L = 27 L.
2021 36 Lacs 9 Lacs 27 Lacs PY 2021-22 = 27L +___ = __ L

➢ General Rule: Income earned during any PY is assessed to tax in immediately succeeding AY.
➢ However, in following circumstances, income is taxed in PY in which it is earned. Thus AY & PY in these
exceptional circumstances will be same. These exceptions have been made to protect the interests of revenue.

FOLLOWING ARE THE EXCEPTIONS:

➢ If a ship belonging to or chartered by NR carries passengers/livestock/mail/goods shipped at a

port in India,
➢ Such Ship is allowed to leave the port only when tax has been paid or satisfactory arrangement
has been made for payment thereof.
➢ Income = 7.5% of the freight paid/payable to the owner or his agent whether in India or o/s India
for such carriage.
➢ Such income is charged to tax in the same year in which it is earned.

➢ Where it appears to AO that any individual may leave India during the current AY or shortly after
its expiry &
➢ He has no present intention of returning to India,
➢ Then Total Income of such individual for the period from the expiry of the respective PY up to the
probable date of his departure from India is chargeable to tax in that AY.

Ex: Suppose Mr. X is leaving India for USA on 10.06.2022 & it appears to AO that he has no intention to
return. Before leaving India, Mr. X will be required to pay tax on the income earned during PY 2021-22 as
well as the total income earned during the period 1.4.2022 to 10.06.2022.

11
 ➢ If AOP/BOI etc. is formed or established for a particular event or purpose &
➢ AO apprehends that AOP/BOI is likely to be dissolved in the same year or in next year,
➢ he can make assessment of the income upto date of dissolution as income of relevant AY.

➢ During the current AY, if it appears to AO that a person is likely to charge, sell, transfer, dispose
any of his assets
➢ to avoid payment of any liability under this Act,
➢ Total income of such person for the period from the expiry of PY to the date when AO commences
proceedings is chargeable to tax in that assessment year.

➢ If any business or profession is discontinued in any AY,

➢ Income of the period from the expiry of the PY up to the date of such discontinuance may,
➢ at the discretion of AO
➢ may be charged to tax in that assessment year.

PC Note: Section 176 is a Discretionary power. AO has the discretion of applying it.
AO may choose not to apply it & wait till the end of the Assessment Year.

▪ Where any sum is found credited in the books of the assessee & assessee offers no explanation
about the nature & source or explanation offered is not satisfactory,
▪ Such Sum so credited may be charged as income of the assessee of that PY.

▪ If assessee has made investments which are not recorded in books of account & Assessee offers no
explanation about nature & source of investment or explanation offered is not satisfactory,
▪ Value of investments are taxed as income of assessee of such FY in which investment is made.

▪ Where in any FY, assessee is found to be owner of any money, bullion, jewellery etc. &
▪ Such asset is not recorded in books of account & the assessee offers no explanation about nature
& source or explanation offered is not satisfactory,
▪ Money & Value of bullion etc. will be deemed to be income of the assessee for such FY.
▪ Ownership is important & mere possession is not enough.
▪ Thus, if the assessee is in possession of the above-mentioned things but he is not the owner, then
such other person who is the owner will be questioned about the source & will be assessed to tax.

▪ Where in any FY, assessee has made investments or is found to be the owner of any bullion,
jewellery or other valuable article &
▪ AO finds that amount spent on making such investments exceeds the amount recorded in his
books & assessee offers no explanation for the difference or explanation offered is unsatisfactory,
▪ Such excess may be deemed to be the income of the assessee for such FY.
Ex: If Assessee is found to be the owner of 100 gms of gold (market value = Rs. 3,00,000) during PY 2022-23
but he has recorded to have spent Rs. 1,50,000 in acquiring it, AO can add Rs. 1,50,000 as the income of the
assessee, if the assessee offers no satisfactory explanation thereof.

12
 ▪ Where in any FY, Assessee has incurred any expenditure & he offers no explanation about the
source of such expenditure or the explanation offered is unsatisfactory,
▪ AO may treat such unexplained expenditure as the income of the assessee for such FY.
▪ Such unexplained expenditure which is deemed to be income of the assessee shall not be allowed
as deduction under any head of income.

CQ4. AO found, during the course of assessment of a firm, that it had paid rent i.r.o its business premises
of Rs. 60,000, which was not debited in the books of A/c for PY 2022-23. Firm did not explain the source
for payment of rent. AO proposes to make an addition of Rs. 60,000 in the hands of the firm for AY 2023-
24. Firm claims that even if the addition is made, the sum of Rs. 60,000 should be allowed as deduction
while computing its business income since it has been expended for purposes of its business. Examine the
claim of the firm. [Based on ‘Unexplained Expenditure u/s 69C’ - CA Final Module]
Answer: Action of AO in making addition of Rs. 60,000, being payment of rent not debited in the books of
A/c (for which the firm failed to explain the source of payment) is correct in law since it is an unexplained
expenditure u/s 69C. Proviso to section 69C states that such unexplained expenditure, which is deemed
to be the income of the assessee, shall not be allowed as a deduction under any head of income. Claim of
the firm for deduction of Rs. 60,000 in computing its business income is not tenable.

▪ Where any amount is borrowed on hundi or is repaid (other than through A/c Payee Cheque),
▪ Amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying
for the PY in which the amount was borrowed or repaid.
▪ Amount repaid shall include interest paid on the amount borrowed.
▪ But if any amount borrowed on hundi has been taxed as income of the person, he will not be again
liable to be assessed i.r.o. such amount on repayment of such amount.
Ex: Mr. PC has borrowed Rs. 5 Lacs on Hundi from Mr. AC in cash. Since the amount is borrowed by the mode
other than A/c payee cheque, Rs. 5 Lacs will be deemed to be the income of Mr. PC in the year of borrowing. Now
when PC will repay the amount to Mr. AC (even if repaid in cash), it cannot be taxed again to PC on repayment.

CQ5. Mr. C borrowed on Hundi, a sum of Rs. 25,000 by way of bearer cheque on 11.09.2022 & repaid the
same with interest amounting to Rs. 30,000 by A/c payee cheque on 12.10.2022. AO wants to treat the
amount borrowed as income during the previous year. Is the action of AO valid?
Based on “Amount borrowed on Hundi u/s 69D” [CA Final Module]
Answer:
▪ Section 69D provides that where any amount is borrowed on a hundi or any amount due thereon is
repaid otherwise than by way of A/c Payee cheque, amount so borrowed or repaid shall be deemed to
be the income of the person borrowing or repaying the amount for PY in which the amount was so
borrowed or repaid.
▪ Mr. C has borrowed Rs. 25,000 on Hundi by way of bearer cheque. Therefore, it shall be deemed to be
income of Mr. C for PY 2022-23.
▪ Since repayment of the same along with interest was made by A/c payee cheque, it would not be taxed.
▪ If the amount is deemed as an Income at the time of borrowing, it will not be taxed again on repayment.
▪ Therefore, action of AO treating the amount borrowed as income during PY is valid in law.

RATE OF TAX u/s 68 & 69 [Section 115BBE]

 Such Deemed Incomes are taxed @ 60% + surcharge @ 25% of tax.
 Thus, Effective rate of tax (including SC @ 25% of tax & cess @ 4% of Tax & SC) is 78%. [Section 115BBE].
 Neither BEL nor any allowance nor set off of any loss shall be allowable against such income.

13
CHARGE OF INCOME TAX & RATE OF TAX [SECTION 4]
 Tax rates are fixed by the Annual Finance Act & not by the Income Tax Act.
 For the purpose of A, B, C, D, E, F below, Total income means total income from all sources after
All Permissible Deduction Except Incomes Taxable at Specified Rates.

A. INDIVIDUAL/HUF/AOP/BOI/AJP [R/NR] [Specific rates are given for AOP & BOI u/s 167B]
Total Income Rate of Tax
Upto Rs. 2,50,000 [Basic Exemption Limit] Nil
From Rs. 2,50,001 to Rs. 5,00,000 5%
From Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
B Resident Senior Citizen [60 years or more but < 80 years at any time during PY]
Total Income Rate of Tax
Upto Rs. 3,00,000 Nil
From Rs. 3,00,001 to Rs. 5,00,000 5%
From Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
C. For Resident Super Senior Citizen [80 years or above at any time during PY]
Total Income Rate of Tax
Upto Rs. 5,00,000 Nil
From Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Clarification regarding attaining age of 60 years/80 years on 31st March if birthday falls on 1st April
❖ Question is whether a person born on 1 st April of a particular year can be said to have completed a
particular age on 31st March on preceding day of his/her birthday or on 1st April itself of that year.
❖ CBDT has clarified that a person born on 1st April would be considered to have attained a particular
age on 31st March, the day before his birthday.
❖ Thus, resident individual whose 60th birthday falls on 1st April 2023 would be treated as having attained
60 years on 31st March 2023 (i.e. in PY 2022-23) & would be eligible for higher BEL of Rs. 3 Lacs &
❖ Resident individual whose 80th birthday falls on 1st April 2023, would be treated as having attained the
age of 80 years in PY 2022-23 & would be eligible for higher BEL of Rs. 5 lacs for AY 2023-24.

NEW SECTION 115BAC

 Individuals & HUFs have an option to pay tax i.r.o. their total income at following concessional rates

 other than income taxable at special rates under Chapter XII (Special Income)
 if they do not avail certain exemptions/deductions like LTC, standard deduction u/h ‘Salaries’, interest
on housing loan on SOP, Chapter VI-A deductions (other than 80CCD(2) or 80JJAA) etc.
Income ≤ 2.5 L > 2.5 L ≤ 5 L > 5 L ≤ 7.5 L > 7.5 L ≤ 10 L > 10 L ≤ 12.5 L > 12.5 L ≤ 15 L > 15 L
Rate Nil 5% 10% 15% 20% 25% 30%

PC Note: Individuals & HUFs exercising option u/s 115BAC are not liable to AMT u/s 115JC.
PC Note: Higher BEL of Rs. 3 Lacs & 5 Lacs will not be available if person opts for 115BAC.
SECTION 115BAC WILL BE STUDIED IN DETAIL IN “TOTAL COMPUTATION” CHAPTER.

Conceptual Question. Mr. X has a total income of Rs. 12 Lacs for PY 2022-23, comprising of income from house
property & interest on fixed deposits. Compute his tax liability for AY 2023-24 if his age is
CQ6. 45 years; CQ7. 63 years; CQ8. 82 years.
[Assume that Mr. X has not opted for the provisions of section 115BAC]

14
Answer to CQ6: Age = 45 years
First Rs. 2,50,000 Nil
Next Rs. 2,50,000 @ 5% Rs. 12,500
Next Rs. 5,00,000 @ 20% Rs. 1,00,000
Balance Rs. 2 Lacs @ 30% Rs. 60,000
Total Rs. 1,72,500
Add: 4% HEC Rs. 6,900
Total Tax (rounded off) Rs. 1,79,400
PC Note: Tax on Rs. 10 Lacs = Rs. 1,12,500 in case of Normal Individual (Remember this). Only Tax on Income
above Rs. 10 Lacs shall be calculated & such amount shall be added by Rs. 1,12,500 to arrive at final tax amount.

Answer to CQ7: Age = 63 years. Mr. X is a senior citizen, he will get BEL of Rs. 3 Lacs & remaining slabs will be same.
First Rs. 3,00,000 Nil
Next Rs. 2,00,000 @ 5% Rs. 10,000
Next Rs. 5,00,000 @ 20% Rs. 1,00,000
Balance Rs. 2,00,000 @ 30% Rs. 60,000
Total Rs. 1,70,000
Add: 4% HEC Rs. 6,800
Tax rounded off Rs. 1,76,800

Answer to CQ8: Age = 82 Years. Since Mr. X is a super-senior citizen, he will get BEL of Rs. 5 lacs.
First Rs. 500,000 Nil
Next Rs. 5,00,000 @ 20% Rs. 1,00,000
Balance Rs. 2,00,000 @ 30% Rs. 60,000
Total Rs. 1,60,000
Add: 4% HEC Rs. 6,400
Tax rounded off Rs. 1,66,400

CQ9. Total income of Mr. Joe (70 yrs) NR in India for PY 2022-23 is Rs. 12 lacs. Compute his tax liability.
Solution: Mr. Joe is not eligible for higher BEL since he is a NR. However, he is eligible for BEL of Rs. 2,50,000.
Tax on Rs. 10 Lacs Rs. 1,12,500
Balance Rs. 2 Lacs @ 30% Rs. 60,000
Total Rs. 1,72,500
Add: 4% HEC Rs. 6,900
Total Tax (rounded off) Rs. 1,79,400

Eligible Assessee Resident Individuals whose Total Income ≤ Rs. 5,00,000.

Amount of Rebate Lower of (i) Income Tax payable on Total Income OR (ii) Rs. 12,500.

Points to be noted:
 Rebate u/s 87A is not available i.r.o tax payable on LTCG u/s 112A.
 Rebate u/s 87A shall be taken before adding 4% HEC.

PC Note:

15
CQ10. Total income of Mr. Raghav (26 years) is Rs. 4,40,000. Compute the tax liability for AY 2023-24. [ICAI SM Q6]
Solution: Since Mr. Raghav is a resident having Total Income < Rs. 5,00,000, rebate u/s 87A is available.
First Rs. 2,50,000 Nil
Next Rs. 1,90,000 @ 5% Rs. 9,500
Less: Rebate u/s 87A = Lower of (i) Tax payable i.e Rs. 9,500; OR (ii) Rs. 12,500 (Rs. 9,500)
Tax payable after rebate u/s 87A Nil

CQ11. Total income of Mr. Anup (22 years) resident in India is Rs. 5,00,000. Compute tax liability for AY 2023-24.
Solution: Since Mr. Anup is a resident having Total Income = Rs. 5,00,000, rebate u/s 87A is available.
First Rs. 2,50,000 Nil
Next Rs. 2,50,000 @ 5% Rs. 12,500
Total Rs. 12,500
Rebate u/s 87A = Lower of (i) Tax payable or (ii) Rs. 12,500 (Rs. 12,500)
Tax payable after rebate u/s 87A Nil

CQ12. Total income of Mr. Rahul (22 years) resident in India is Rs. 5,00,100. Compute tax liability for AY 2023-24.
Solution: Since Mr. Rahul is a resident having Total Income > Rs. 5,00,000, rebate u/s 87A is NOT available.
First Rs. 2,50,000 Nil
Next Rs. 2,50,000 @ 5% Rs. 12,500
Next Rs. 100 @ 20% Rs. 20
Total Rs. 12,520
Rebate u/s 87A = Lower of (i) Tax payable or (ii) Rs. 12,500 NA
Add: 4% HEC Rs. 500.80
Tax payable (rounded off) Rs. 13, 020

D. Firms/ LLP/ Local Authority Whole Income is taxable @ Flat 30% without any BEL.
E. CO-OPERATIVE SOCIETIES
Total Income Rate of Tax
Upto Rs. 10,000 10%
From Rs. 10,001 to Rs. 20,000 20%
Above Rs. 20,000 30%
New Section 115BAD – Not in Inter Syllabus & Thus deleted
F. COMPANY
Nature of Company Tax Rate
1 Manufacturing company exercising option u/s 115BAB 15%

2 Company exercising option u/s 115BAA 22%

Domestic
3 If Turnover/Gross Receipt in PY 2020-21 ≤ Rs. 400 Cr. 25%

4 Any other case 30%

 Provisions of MAT → NA to domestic companies specified in (1) & (2) above.
 MAT is payable by companies specified in (3) & (4) above;

Foreign Company (Other than Domestic Company) 40%

Foreign Royalties & FTS received from GoI or Indian concern in pursuance of 50%
an agreement, approved by CG made by company with GoI/Indian concern
b/w 1.4.1961 - 31.3.1976 (Royalties) & b/w 1.3.1964 - 31.3.1976
PC Note:

16
NEW SECTION 115BAA & 115BAB [Relevant for Finals Only]
 Domestic company can opt for section 115BAA or section 115BAB subject to certain conditions.
 Total income of such companies would be computed without giving effect to –
- deductions u/s 10AA, 32AD, 33AB, 33ABA, 35AD, 35CCC, 35CCD,
- 80-IA to 80RRB (except section 80JJAA/80M),
- additional depreciation u/s 32(1)(iia) etc. &
- without set-off of brought forward loss & unabsorbed depreciation attributable to such deductions.

HEALTH & EDUCATION CESS [Applicable on TI of ALL Assessees]

➢ Health & Education cess @ 4% is levied on Total Income tax + SC - Rebate u/s 87A.

ROUNDING OFF OF INCOME & TAX PAYABLE [SECTION 288A/B]

➢ Total income/Tax shall be rounded off to the nearest multiple of 10 Rupees.

A Individual/HUF/AOP/BOI/AJP [PC Method]

1 If there is NO ‘Share Market Income [STCG u/s 111A, LTCG u/s 112A, Dividend & LTCG u/s 112]

(a) TI ≤ Rs. 50 Lacs No Surcharge

(b) TI > Rs. 50 Lacs but ≤ Rs. 1 Cr. Rate of Surcharge = 10% of Income Tax

(c) TI > Rs. 1 Cr. but ≤ Rs. 2 Cr. Rate of Surcharge = 15% of Income Tax

(d) TI > Rs. 2 Cr. but ≤ Rs. 5 Cr. Rate of Surcharge = 25% of Income Tax

(e) TI > 5 Cr. Rate of Surcharge = 37% of Income Tax

2 If there is ‘Share Market Income’ [STCG u/s 111A, LTCG u/s 112A & Dividend & LTCG u/s 112]

PC Note: Surcharge Rate of 25% & 37% are not applicable on ‘Share Market Income’

(a) TI ≤ Rs. 50 Lacs No Surcharge

(b) TI > Rs. 50 Lacs but ≤ Rs. 1 Cr. Rate of Surcharge = 10% of Income Tax

(c) TI > Rs. 1 Cr. but ≤ Rs. 2 Cr. Rate of Surcharge = 15% of Income Tax

(d) TI > 2 Cr.

(i) Share Market Income Rate of Surcharge = 15% of Income Tax

(ii) Other Incomes –

– ≤ Rs. 2 Cr. Rate of Surcharge = 15% of Income Tax
– > 2 Cr. but ≤ Rs. 5 Cr. Rate of Surcharge = 25% of Income Tax
– > 5 Cr. Rate of Surcharge = 37% of Income Tax

B Firms/LLP/Co-operative society/LA Rate of Surcharge = 12% of IT if TI > 1 Cr.

C Domestic Companies

 TI > Rs. 1 Cr but ≤ Rs. 10 Cr Rate of SC = 7 % of Income Tax.

 TI > Rs. 10 Cr Rate of SC = 12 % of Income Tax.

17
 DOMESTIC COMPANY WHICH OPTED FOR OPTION U/S 115BAA OR U/S 115BAB ↓

▪ Rate of SC = 10% of Income Tax computed u/s 115BAA or u/s 115BAB.

▪ There is no threshold limit for applicability of surcharge.
▪ Consequently, there is no marginal relief.

D Foreign Companies [Note: Foreign companies are not eligible for 115BAA/BAB]
 TI > Rs. 1 Cr but ≤ Rs. 10 Cr Rate of SC = 2 % of Income Tax.

 TI > Rs. 10 Cr Rate of SC = 7 % of Income Tax.

FORMAT GIVEN BY ICAI FOR SURCHARGE [USE PC METHOD TO SOLVE THE QUESTIONS]
Particulars SC @

1 TI (including dividend & STCG u/s 111A & LTCG u/s 112A) > Rs. 50 Lacs but ≤ Rs. 1 crore. 10%

Example: Dividend - Rs. 10 lacs; STCG u/s 111A - Rs. 20 lacs; LTCG u/s 112A - Rs. 25 lacs;
Other income - Rs. 40 lacs.
Rate of Surcharge = 10% on income-tax computed on total income of Rs. 95 lacs.

2 TI (including dividend & STCG u/s 111A & LTCG u/s 112A) > Rs. 1 Cr. but ≤ Rs. 2 Cr. 15%

Example: Dividend - Rs. 10 lacs; STCG u/s 111A - Rs. 60 lacs; LTCG u/s 112A - Rs. 65 lacs;
Other income - Rs. 50 lacs.
Rate of Surcharge = 15% on income-tax computed on total income of Rs. 1.85 Crores.

3 TI (excluding dividend & STCG u/s 111A & LTCG u/s 112A) > Rs. 2 Cr but ≤ Rs. 5 Cr. 25%

Rate of Surcharge on income-tax payable on portion of dividend & STCG u/s 111A & 112A 15%

Example: Dividend - Rs. 60 lacs; STCG u/s 111A - Rs. 54 lacs; LTCG u/s 112A - Rs. 55 lacs;
Other income - Rs. 3 Cr [PC Note: Other income being > 2 Cr]
Rate of Surcharge = 25% on income-tax computed on other income of Rs. 3 crores.
Surcharge @ 15% would be levied on Dividend - Rs. 60 lacs; STCG u/s 111A - Rs. 54 lacs;
LTCG u/s 112A - Rs. 55 lacs;

4 TI (excluding dividend & STCG u/s 111A & LTCG u/s 112A) > Rs. 5 Cr. 37%

Rate of Surcharge on income-tax payable on portion of dividend & STCG u/s 111A & 112A 15%

Example: Dividend - Rs. 60 lacs; STCG u/s 111A - Rs. 50 lacs; LTCG u/s 112A - Rs. 65 lacs;
Other income - Rs. 6 Cr [PC Note: Other income being > 5 Cr]
Rate of Surcharge = 37% on income-tax computed on other income of Rs. 6 crores.
Surcharge @ 15% would be levied on Dividend - Rs. 60 lacs; STCG u/s 111A - Rs. 50 lacs;
LTCG u/s 112A - Rs. 65 lacs;

5 TI (including dividend & STCG u/s 111A & LTCG u/s 112A) > Rs. 2 Cr [in cases not covered 15%
under (3) & (4) above] [PC Note: Other income being ≤ 2 Cr]
Example: Dividend - Rs. 55 lacs; STCG u/s 111A - Rs. 60 lacs; LTCG u/s 112A - Rs. 55 lacs;
Other income - Rs. 1.10 Cr.
Surcharge would be levied @ 15% on income-tax computed on TI of Rs. 2.80 crore.

18
  If surcharge is applicable on Total Income, Marginal relief is available to ALL Assessees.

 Steps to calculate Marginal Relief:

1. Calculate Tax (including surcharge) on Total Income of the Assessee.
2. Calculate Tax payable on Rs. 50 Lacs/1 Cr/2 Cr/5 Cr (as the case may be).
3. Calculate ‘Extra Tax Payable’ because of Income above Rs. 50 Lacs/1 Cr/2 Cr/5 Cr. [Step 1 - 2]
4. Marginal Relief = Extra Tax Payable – Income above Rs. 50 Lacs/1 Cr/2 Cr/5 Cr.

 PC Note: If Extra Tax > Extra Income, Marginal Relief = Extra Tax - Extra Income.

CQ13. Compute the tax liability of Mr. A (Age 25), having total income of Rs. 51 Lacs for AY 2023-24. [ICAI SM Q2]
Solution: Computation of tax liability of Mr. A for AY 2023-24
1. Tax payable including surcharge on Total Income of Rs. 51,00,000 Rs 14,76,750.
2. Tax Payable on total income of Rs. 50 Lacs Rs. 13,12,500.
3. Excess tax payable = [(1) - (2)] = Rs. 14,76,750 – Rs. 13,12,500 Rs. 1,64,250.
4. Marginal Relief = [(Rs. 1,64,250- Rs. 1,00,000) Income in excess of Rs. 50,00,000] Rs. 64,250.
5. Tax Payable = Rs. 14,76,750 – Rs. 64,250 (Marginal Relief) = Rs. 14,12,500 + 4% HEC Rs. 14,69,000

CQ14. Compute tax liability of Mr. B (Age 42), having total income of Rs. 1,01,00,000 for AY 2023-24. [ICAI SM Q3]
Solution: Computation of tax liability of Mr. B for AY 2023-24
1. Tax payable including surcharge on total income of Rs. 1,01,00,000 @ 15% Rs. 32,68,875.
2. Tax Payable on total income of Rs. 1 crore [SC @ 10%] Rs. 30,93,750.
3. Excess tax payable = [(1) - (2)] = Rs. 32,68,875 - Rs. 30,93,750 Rs. 1,75,125.
4. Marginal Relief = [(Rs. 1,75,125 - Rs. 1,00,000) Income in excess of Rs. 50,00,000] Rs. 75,125.
5. Tax Payable = Rs. 32,68,875 – Rs. 75,125 (Marginal Relief) = Rs. 31,93,750 + 4% HEC Rs. 33,21,500

CQ15. Total income of Mr. John aged 35 years (NR) in India is Rs. 4,50,000. Compute tax liability for AY 2023-24.
Solution: Since Mr. John is a Non- Resident, rebate u/s 87A is Not available.
First Rs. 2,50,000 Nil
Next Rs. 2,00,000 @ 5% Rs. 10,000
Total Rs. 10,000
Add: 4% HEC Rs. 400
Tax rounded off Rs. 10,400

CQ16. State the instances where the income of the PY is assessable in the PY itself instead of the AY. [ICAI SM Ex. Q3]

CQ17. Describe ‘Average rate of tax’ & ‘Maximum marginal rate’ u/s 2(10) & 2(29C). [ICAI SM Ex. Q1]

CQ18. Write a short note on “Surcharge”.

CQ19. Write a short note on “Marginal Relief”

CQ20. Explain the provisions relating to Rebate u/s 87A.

CQ21. Explain “Assessee”, “Deemed Assessee”, “Assessee in Default” with suitable examples. [ICAI SM Ex. Q2]

CQ22. List out the capital receipts which are taxable under the Income Tax Act, 1961.

19
❖ Incidence (burden) of Tax of any Assessee depends upon his residential status under the Act.
❖ Taxability of Income would depend on -
 Nature of Income
 Place of Accrual/Receipt of Income
 Residential Status of Assessee
❖ Residential status of the assessee must be determined separately for each Previous Year.
❖ Residential Status of a person in current PY MAY be different from his residential status in earlier PY.
❖ To determine whether a particular Income is taxable in the hands of Assessee or not, we have to
determine the residential status of the assessee.

ROR RNOR

 Only Individuals & HUF can be resident & ordinarily resident (ROR).
 All other classes of assessees can be either a Resident or Non-Resident.

BASIC CONDITIONS: Individual is a Resident in India if he satisfies ANY ONE of the Basic Conditions:

1. He has been in India for a total period of 182 days or more during PY OR
2. (a) He has been in India for at least 60 days in the relevant PY AND
(b) He has been in India for at least 365 days during Last 4 PYs.

PC Note:
 Individual satisfy ANY 1 Condition → Resident ✓ [Check Additional Conditions].
 If Both conditions are NOT satisfied → Non-Resident ✓.

CQ1. Mr. B, a Canadian citizen, comes to India for the first time during PY 2018-19. During PY 2018-19, PY
2019-20, PY 2020-21, PY 2021-22 & PY 2022-23, he was in India for 55 days, 60 days, 90 days, 150 days & 70
days respectively. Determine his residential status for AY 2023-24. [ICAI SM Q3]
Solution:
▪ During the relevant PY 2022-23, Mr. B was in India for 70 days.
▪ During the Last 4 PYs, he was in India for 355 days (i.e. 55 + 60 + 90 + 150 days).
▪ Thus, he does not ANY of the basic conditions. Thus, he is a NR.

EXCEPTIONS: Following Individuals will be Resident only if Period of Stay in India during PY ≥ 182
days. [2nd Condition → NA in the following cases]

1. Indian Citizen who leaves India during PY as a Member of Crew of Indian ship.
2. Indian Citizen who leaves India during PY for employment outside India;
3. Indian Citizen or Person of Indian Origin who comes on visit to India in PY.
PC Note: Such Person must be engaged in employment or business o/s India].

20
 Amendment Inserted by Finance Act, 2020
However, Indian Citizen or Person of Indian Origin having total (taxable) income > Rs. 15 lacs
during PY (other than income from foreign sources) will be treated as resident in India if –
- Period of his stay in India during relevant PY ≥ 182 days OR
- he has been in India (i) during Last 4 PYs for ≥ 365 days AND (ii) for ≥ 120 days in the PY.

MEANING OF ‘INCOME FROM FOREIGN SOURCES’ →

Income which accrues/arises outside India & which is not deemed to accrue or arise in India
Except (i) Income from a business controlled from India or (ii) Profession set up in India.

DEEMED RESIDENT [SECTION 6(1A)] [Amendment Inserted by Finance Act, 2020]

❖ An Individual (being an Indian citizen) &

❖ having total (taxable) income, other than the income from foreign sources > Rs. 15 lacs during PY &
❖ he is not liable to pay tax in any other country or territory by reason of his domicile or residence or
any other criteria of similar nature, then he shall be deemed to be resident in India in that PY.
PC Note: Deemed Resident u/s 6(1A) would always be “Not Ordinarily Resident” [Clause (d) of Sec. 6(6)]
PC Note: Provision of “Deemed Resident u/s 6(1A) → NA to individual who is a resident of India in PY.

▪ ROR is one who satisfies both ff the conditions specified u/s 6(6) (Additional Conditions)
1 If such individual has been Resident in India in atleast 2 PYs out of Last 10 PYs AND

2 If such individual has been in India for 730 days or more during Last 7 PYs.

PC Note:
▪ An Indian citizen or Person of Indian Origin who comes on a visit to India during PY &
having total (taxable) income > Rs. 15 lacs during PY (other than income from foreign sources) &
stay in India during PY is ≥ 120 days but < 182 days will always be RNOR.

Meaning of “liable to tax” in relation to a person and with reference to a country, means that there is
an income-tax liability on such person under the law of that country for time being in force. It also
includes a person who has subsequently been exempted from such liability under the law of that country.

PERSON OF INDIAN ORIGIN

 If the person himself or his parents/grandparents (maternal/paternal) were born in UNDIVIDED INDIA.

PC Note:
➢ Continuous Stay in India → Not Necessary.
➢ Date of Arrival & Departure → Considered to be in India for counting days stayed in India.
➢ Individual can be resident in more than 1 country, but he can be citizen in ONLY ONE Country.

CQ2. Brett Lee, an Australian cricket player visits India for 100 days in every PY. This has been his practice for
the past 10 PYs. [ICAI SM Q2]
(a) Find out his residential status for AY 2023-24.
(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who resides in Australia &
represents the Australian cricket team?
(c) What if Srinath had visited India for 120 days instead of 100 days every year, including PY 2022-23?

21
Answer:
(a) Determination of Residential Status of Mr. Brett Lee for AY 2023-24:
▪ Period of stay during PY 2022-23 = 100 days.
▪ Calculation of period of stay during 4 preceding previous years (100 x 4=400 days)
▪ Mr. Brett Lee has been in India for more than 60 days during PY 2022-23 & for more than 365 days during
last 4 PYs.
▪ Since he satisfies one of the basic conditions u/s 6(1), he is a resident for AY 2023-24.
▪ Stay in India during Last 7 PYs = 100 x 7=700 days. Since his period of stay in India during last 7 PYs is <
730 days, he is a not-ordinarily resident during AY 2023-24. (See Note below)
▪ Therefore, Mr. Brett Lee is a resident but not ordinarily resident during PY 2022-23.

(b) If above facts relate to Mr. Srinath, an Indian citizen, who residing in Australia, comes on a visit to India, he
would be treated as non-resident in India, irrespective of his total income (excluding income from foreign
sources), since his stay in India in the current financial year is, in any case, less than 120 days.

(c) If Srinath’s total income (excluding income from foreign sources) exceeds Rs. 15 lacs, he would be treated as
resident but not ordinarily resident in India for PY 2022-23, since his stay in India is 120 days in PY 2022-23
& 480 days (i.e., 120 days x 4 years) in Last 4 PYs.
If his total income (excluding income from foreign sources) does not exceed Rs. 15 lacs, he would be treated
as non-resident in India for PY 2022-23, since his stay in India is less than 182 days in PY 2022-23.

CQ3. Mr. Roy is a foreign national. During PY 2022-23, he comes to India for 91 days. Determine his residential
status for AY 2023-24 if during PY 2010-11 to PY 2021-22, he was present in India as follows:
2010-11 16 days 2013-14 179 days 2016-17 359 days 2019-20 67 days
2011-12 40 days 2014-15 362 days 2017-18 180 days 2020-21 12 days
2012-13 72 days 2015-16 22 days 2018-19 307 days 2021-22 134 days
Solution:
▪ During PY 2022-23, Mr. Roy is in India for 91 days. Thus, he does not satisfy 1st basic condition.
▪ During Last 4 PYs, he was in India for 520 days (134 + 12 + 67 + 307 days). Thus, he satisfies 2nd basic condition.
▪ Thus, he is Resident.

Additional conditions:
PY Stay in India Comments
2021-22 134 (566 days in last 4 PYs) Satisfy 2nd Basic Condition; Thus Resident (for 1st time)
2020-21 12 (866 days in last 4 PYs) Do not satisfy any Basic Condition; Thus, Non-resident
2019-20 67 (868 days in last 4 PYs) Satisfy 2nd Basic Condition; Thus Resident (for 2nd time)
2018-19 307 Not necessary to determine
2017-18 180 further as resident for 2 years
2016-17 359
2015-16 22

▪ Total stay in 7 preceding PY in India is 1081 days. Thus, Roy satisfies both the additional conditions.
▪ Thus, Mr. Roy is ROR in India for AY 2023-24.

CQ4. Mr. Atif Aslam, a Non-Resident, residing in Pakistan since 2003 came to India on 19.02.2021 for permanent
settlement in India. Explain his Residential Status for AY 2023-24. [CA Inter May 2015/ Similar to
ICAI SM Ex. Q2]

22
Solution:
▪ Since Assessee has come back to India in India on 19.02.2021 & has not gone back from India, his stay during PY
2022-23 will be 365 days.
▪ Thus, he satisfies first basic condition for PY 2022-23. Hence, Atif Aslam is a Resident in India.
▪ Additional Conditions:
(a) Total Stay in India in Last 7 PYs ▪ PY 2021-22: 365 days;
▪ PY 2020-21: Feb (10 days) + March (31 days) = 41 days;
▪ PY 2018-19; PY 2017-18; PY 2016-17; PY 2015-16; PY 2014-15 = Nil
▪ Total Stay in India in Last 7 PYs = 41+365 + Nil = 406 days.
▪ So, 1st Condition is Not satisfied. Thus, he is a RNOR.
(b) Resident Status in Last 10 PYs No Need to check because to be ROR, all conditions are to be satisfied.

CQ5. Mr. Raj, a citizen of India, is an export manager of XYZ Ltd, an Indian Company, since 01.05.2018. He has
been regularly going to USA for export promotion. He spent following days in USA for last 5 yrs:
Previous Year PY 2022-23 PY 2021-22 PY 2020-21 PY 2019-20 PY 2018-19
Days spent in USA 294 311 271 150 317
Determine his residential status for AY 2023-24 assuming that prior to 1.5.2018 he had never travelled abroad.
Solution:
▪ This case does not fall in the exceptions to 2nd Basic condition since he has not gone for employment outside
India but has gone out of India during the employment in India. Thus, Both Basic Conditions are applicable.

▪ Basic Conditions:
(a) Stay during PY 2022-23: 71 Days (365 - 294) & thus 1st basic condition is not satisfied.
(b) (i) Stay in India during PY 2022-23 = 71 days &
(ii) Stay in 4 preceding PYs [48 + 215 + 94 + 55] = 412 days.
PY PY 2021-22 PY 2020-21 PY 2019-20 PY 2018-19
Days in USA 311 271 150 317
Days in India 54 94 215 48
Thus, Mr. Raj satisfies 2nd basic condition. Thus, he is a resident in India.

Additional conditions:
1 Stay in India in Last 7 PYs = 54 + 94 + 215 + 48 + 365 + 365 + 365 = 1506. He satisfies 1st additional condition.
PY 2021-22 2020-21 2019-20 2018-19 2017-18 2016-17 2015-16
Days 54 94 215 48 365 365 365
2 Previous Year Stay in India Residential Status
2021-22 54 Days Non-Resident
2020-21 94 Days Resident (1st time). Satisfy 2nd Basic Condition.
2019-20 215 Days Resident (2nd time)
2018-19 48 Days No need to check
Prior to 2018-19 365 Days No need to check
He satisfies 2nd additional condition of being resident in at least 2 out of 10 PY prior to the relevant PY.
Since Mr. Raj satisfy both additional conditions, he is a ROR.

23
 ❖ Period of Stay in India of an Individual (Indian Citizen) leaving India as a Member of Crew of Foreign
Bound ship shall not include the following period i.r.o. an eligible voyage:
Period Commencing from Ending on

Date entered into CDC for joining the ship Date entered into the CDC for signing off.

❖ Eligible voyage: A voyage by a ship engaged in carriage of passengers/freight in international traffic:

(a) For voyage having originated from any port in India → Destination should be any port o/s India.
(b) For voyage having originated from any port o/s India → Destination should be any port in India.

CQ6. Mr. Anand is an Indian citizen & member of crew of a Singapore bound Indian ship engaged in carriage of
passengers in international traffic departing from Chennai port on 6th June 2022. Determine residential status of Mr.
Anand for AY 2023-24, assuming that his stay in India in last 4 PYs is 400 days & last 7 PYs is 750 days: [ICAI SM Q1]
Date entered into Continuous discharge certificate i.r.o joining the ship by Mr. Anand 6th June 2022
Date entered into Continuous discharge certificate i.r.o signing off the ship by Mr. Anand 9th Dec 2022
Solution:
▪ Mr. Anand is an Indian citizen & leaving India during PY 2022-23 as a member of the crew of Indian ship, he would
be resident in India if he stayed in India for 182 days or more.
▪ Voyage is undertaken by Indian ship engaged in carriage of passenger in international traffic originating from port
in India (Chennai) & having its destination at port o/s India (Singapore). Hence it is an eligible voyage.
▪ Period from 6th June 2022 & ending on 9th Dec 2022, has to be excluded for computing the period of his stay in India.
▪ Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from period of his stay in India.
▪ Thus, Mr. Anand’s period of stay in India during PY 2022-23 would be 178 days [i.e., 365 days – 187 days].
▪ Since his period of stay in India during PY 2022-23 is less than 182 days, he is a NR for AY 2023-24.

CQ7. Mr. B, an Indian citizen, leaves India on 22.09.2022 for the first time, to work as an officer of a company in France.
Determine his residential status for the AY 2023-24. [ICAI Ex. Q1]
Solution:
▪ During PY 2022-23, Mr. B was in India for 175 days (30+31+30+31+31+22). He does not satisfy 1st basic condition.
▪ Since he is an Indian citizen leaving India for employment, 2nd Basic condition is not applicable to him.
▪ Therefore, Mr. B is a NR.

CQ8. Mr. Shakib was born in Dhaka in 1945. He has been staying in Canada since 1974. He comes to visit India on
13.10.2022 & returns on 29.3.2023. Determine his residential status for AY 2023-24.
Solution:
▪ His stay in India during PY 2022-23 is 168 days. He does not satisfy 1st Basic condition.
▪ Since Shakib was born in Dhaka in 1945 (undivided India), he is a person of Indian origin & thus 2nd basic condition
is not applicable to him.
▪ Thus Mr. Shakib is a Non-Resident in India for AY 2023-24.

CQ9. Mr. Nirmal is a citizen of Nepal. His grandfather was born near Multan (Now in Pakistan) in 1945. He came to
India for the first time since 1986 on 05.10.2022 for a visit of 294 days. Find his residential status for AY 2023-24.
Solution:
▪ Mr. Nirmal’s stay in India during PY 2022-23 is 178 days. [Oct – 27; Nov – 30; Dec – 31; Jan – 31; Feb – 28; March –
31]. Thus, he does not satisfy 1st Basic Condition.
▪ Since his grandfather was born in undivided India, he is a person of Indian origin & thus 2 nd basic condition is not
applicable to him.
▪ Therefore, Mr. D is a Non-Resident in AY 2023-24.
PC Note: The fact that he has come for 294 days is irrelevant. No. of days in PY is to be considered.

24
CQ10. Mr. PC comes to India, for the first time on 14.04.2020. During his stay in India upto 03.10.2022, he stays at
Mumbai upto 08.04.2022 & then stays in Delhi till his departure. Determine his residential status for AY 2023-24.
Solution:
▪ During PY 2022-23, Mr. PC was in India for 186 days (1.4.2022 to 3.10.2022). [1st Basic condition → Satisfied]. Thus,
Mr. PC is a Resident in India.
▪ To determine whether he is ROR/RNOR, we need to check additional conditions.
AC 1: Residential Status in Last 10 PYs:
Mr. PC is resident in India for PY 2020-21 & PY 2021-22 since his stay in India ≥ 182 days.
AC 2: Mr. PC is in India from 14.04.2020 to 31.03.2022 (i.e. 717 days).
▪ Mr. PC satisfies only one of the two additional conditions. Thus Mr. PC is a RNOR in India.

CQ11. Mr. Raju, an Indian citizen left India for first time on 24.09.2021 for employment in USA. During PY 2022-
23, he comes to India on 5.6.2022 for 165 days. Determine his residential status for PY 2021-22 & PY 2022-23.
Solution:
PY 2021-22 ▪ He is a citizen of India & has left India during PY 2021-22 for employment outside India.
▪ Thus, 2nd basic condition is not applicable.
▪ PY 2021-22, his stay in India = 177 days [30 (A) + 31 (M) + 30 (J) + 31 (J) + 31 (A) + 24(S)].
▪ Thus, he does not satisfy 1st basic condition.
▪ Thus, he is NR in India during PY 2021-22.
PY 2022-23 ▪ During PY 2022-23, his stay in India is of 165 days. He does not satisfy 1st basic condition.
▪ Since he is a citizen of India & comes on a visit to India, 2nd basic condition is not applicable.
▪ He is a NR in India during PY 2022-23.

CQ12. Mr. Akshay was born in 1977 in India. His parents were born in India in 1950. However, his grandparents
were born in England. Mr. X was residing in India till 16.03.2019. Thereafter, he migrated to England & took the
citizenship of that country on 15.03.2020. He visits India during PY 2022-23 for 90 days. Determine residential
status of Mr. Akshay for AY 2023-24.
Solution:
▪ Mr. Akshay is neither a citizen of India nor a person of Indian origin, because neither he nor his parents nor
his grandparents were born in undivided India. Thus 2nd basic condition is applicable.
▪ (a) 1st Basic Condition: Stay in India during PY 2022-23: 90 days. Thus, he does not satisfy 1st basic condition.
▪ (b) 2nd Basic Condition: (i) Stay in India during PY 2022-23: 90 days;
(ii) Stay in India during Last 4 PY: 350 days
[PY 2021-22: Nil; PY 2020-21: Nil; PY 2019-20: Nil; PY 2018-19: 350 days].
▪ Since he does not satisfy Any Basic Condition, he is a Non-Resident in India.

25
 ❖ Residential Status of HUF depends on the place where C&M of HUF is situated.

If Control & Management of HUF is situated wholly/partly in India HUF is Resident

If Control & Management of HUF is situated wholly outside India HUF is Non-Resident

❖ DETERMINATION OF ROR/RNOR
➢ Status of KARTA will determine whether HUF is ROR/RNOR.
▪ If KARTA satisfy both of the first 2 Additional Conditions → HUF is ROR
▪ If KARTA does not first both/any of the first 2 Additional Conditions → HUF is RNOR.
PC Note: No Need to check Basic Conditions for KARTA.

FIRMS/ AOP/LA/AJP
If Control & Management is situated wholly/partly in India Resident

If Control & Management is situated wholly outside India Non-Resident

❖ A Company shall be Resident in India if:

1. It is an Indian company;
2. POEM is in India in that PY (Other than Indian Company).

PC Note: Indian Company is Always RESIDENT even if its POEM is in India/not. Thus, criterion
of POEM is relevant for Foreign Company only.

Meaning of POEM: A Place where key management & commercial decisions necessary for the conduct
of the business of entity as a whole are substantially made.

Meaning of Control & Management (C&M) [Only for Knowledge]

➢ C&M is situated at a place where “head & brain” is situated. C&M refers to Central C&M & not day-to-day
business activities. Business may be done from outside India & yet its C&M may be within India.
➢ Place of Control → May differ from usual place of running business & registered office. This is because C&M
need not be necessarily done from the place of business/from registered office.

CQ14. Business of a HUF is transacted from Australia & all the policy decisions are taken there. Mr. A, the karta of
the HUF (born in Kolkata) visited India during PY 2022-23 after 15 years. He comes to India on 1.4.2022 & leaves
for Australia on 01.12.2022. Determine the residential status of HUF for AY 2023-24. [ICAI SM Q4]
Solution: Determination of Residential Status of “HUF”
Since the business of the HUF is transacted from Australia & nothing is mentioned regarding its control &
management, it is assumed that C & M is also wholly outside India. Therefore, HUF is a NR for PY 2022-23.

CQ15. ABC Ltd is registered in India. All the meetings of BODs of ABC Ltd were held in China during PY 2022-23.
Determine the residential status of ABC Ltd. for AY 2023-24.
Answer: As ABC Ltd. is an Indian Company, it is always resident in India even if its POEM is outside India. It is
irrelevant that all the board meetings are held in China.

26
➢ Taxability of total income of an assessee depends upon the following factors:
(a) Residential Status of the assessee.
(b) Place of Accrual/Receipt of Income.
(c) Point of time at which income had accrued/received by the assessee or his agent.

To understand the scope of Total Income, we must first understand some terms:
INDIAN INCOME 1. Income Received or deemed to be received in India OR
2. Income Accrued or deemed to be accrued in India.

FOREIGN INCOME Income which is NEITHER Received in India NOR Accrued in India.

1 INDIVIDUAL/HUF

Nature of Income Tax Treatment

ROR RNOR NR

Indian Income Taxable Taxable Taxable

Foreign Income Taxable Only 2 types of Foreign Incomes are taxable ** Not Taxable
Others foreign incomes are not taxable in India.

Following Foreign Incomes are taxable in the hands of RNOR **

1. Business Income which is controlled wholly/partly from India.
2. Income from Profession set up in India.
Above 2 Incomes must be included in TI of RNOR even if they accrues/arises outside India.
PC Note: No other foreign Income (Salary, Rent, Interest etc.) is taxable to RNOR in India.

2 Other than INDIVIDUAL/HUF

Nature of Income Tax Treatment
Resident Non-Resident
Indian Income Taxable Taxable
Foreign Income Taxable Not Taxable

PC Note
❖ Indian Income → Taxable to EVERYONE (R/NR).
❖ ROR → Every Income (Indian/Foreign) is Taxable.

Circular: Clarification regarding liability to Tax in India of NR Seafarer receiving Remuneration in NRE
(Non-Resident External) A/c maintained with Indian Bank
Income by way of salary, received by non-resident seafarers, for services rendered outside India on a foreign
going ship (with Indian flag or foreign flag) & received into NRE bank A/c maintained with an Indian bank
shall not be included in the total income.

27
A. RECEIPT OF INCOME
Income received ➢ Receipt → First occasion(time) when the recipient gets money under his control.
in India
➢ Any Further Remittance/Transmission of the received amount to another
place/person does not result in “Receipt” in the hands of subsequent recipient.
Space for Class Ex:

Income deemed (i) Employer’s Contribution to RPF in excess of 12% of salary.

to be received in (ii) Interest credited to RPF of the Employee in excess of 9.5% p.a.
India
(iii) Amount transferred from URPF to RPF (Employer’s contribution & its interest).
(iv) Contribution made by CG/other employer in the PY under Pension scheme
[80CCD] to the account of employee.
(v) Any Tax deducted at source.
CQ16. Discuss the taxability of the following items of receipt in the case of RNOR:
(i) Rs. 1,00,000 was earned from a business in the USA but the profit has been remitted to India. The assessee used
to attend to the business only when he was in the USA.
(ii) Remuneration of Rs. 20,000 due to him for services rendered in Russia was credited to his bank account in
Russia & immediately thereafter remitted to India.
Solution:
(i) Remmitance of profit to India does not mean that business is controlled in India.
For RNOR, income accruing outside India is taxable only when it is from a business controlled from India or
from a profession set up in India. Thus, income of Rs. 1,00,000 is not taxable in India.
(ii) Salary accrues where services are rendered. In the present case services were rendered in Russia & income
received there, it is income accruing outside India & received outside India. Hence it is not taxable in India.
B. ACCRUAL OF INCOME
➢ Accrue means the right to receive income.
➢ Due means the right to enforce payment of the accrued income.

Examples:
1. Salary for work done in December will accrue throughout the month, day to day, but will become due on the
salary bill being passed on 31st Dec or 1st Jan.
2. Interest on Government securities payable on specified dates arise during the period of holding but will become
due for payment on specified dates.

Explanation to Section 5
1 Income accruing/arising outside India shall not be deemed to be received in India merely because
it is taken into account in Balance Sheet prepared in India.
2 Income taxed on Accrual basis cannot be assessed again on Receipt basis, as it will amount to
double taxation.

PC Class Note:

28
▪ Some Incomes are deemed to accrue/arise in India even though they actually accrue outside India.
▪ PC Note: This section is relevant only for NR because for ROR, Global Income is taxable.

1 INCOME FROM BUSINESS CONNECTION IN INDIA

❖ Conditions for Taxability of Income from Business Connection:

(a) Assessee has a “Business Connection” in India.
(b) Income arises outside India by virtue of such Business Connection to the assessee.
PC Note: Even if such income arises outside India, it will be deemed that such income has accrued
in India & will be taxable in India.

❖ Meaning of Business Connection: Business connection includes any Business Activity carried
out through a person acting on behalf of NR.
Person Acting on behalf of NR (Agent) must satisfy foll n conditions to form Business Connection:

1. Agent of NR must have Authority to conclude contracts on behalf of NR. Such contract
▪ Should be in the name of NR.
▪ Should be for Provision of Services by that NR.
▪ Should be for the transfer of ownership of Property owned by that NR.
▪ Should be for granting of Right to use Property owned by that NR/under control of NR.

2. If the agent does not have above Authorities but he habitually maintains stock of goods/
merchandise from which he regularly delivers goods/merchandise in India on behalf of NR.

3. Where he habitually secures orders in India for NR.

PC Note: If agent’s authority is limited to purchase of goods for NR, No BC exists.

❖ Examples of Business Connection

(a) Branch office in India or Agent of a NR in India or an organization/factory of a NR in India.
(b) Appointing an agent in India for systematic & regular purchase of Raw Material or for sale of
NR’s goods for other business purpose.
(c) Formation of subsidiary company in India to carry on business of NR parent company.
(d) Any profit of NR which can be reasonably attributable to such part of operations carried out
in India through business connections in India are deemed to be earned in India.

❖ Independent Agent: Agent who do not work mainly or wholly for NR: Where NR carries on
business through broker/commission agent, there will be NO business connection if such a
person is acting in ordinary course of his business.

❖ ONE AGENT – 2 NR:

There may be situations when a person acting on behalf of NR secures order for another NR too.
In such situation, business connection for other NR is established if:
(a) such other NR controls the NR or
(b) such other NR is controlled by the NR or
(c) such other NR is subject to same control as that of NR.
In all 3 situations above, business connection is established where a person habitually secures
orders in India, mainly or wholly for such non-residents.

29
SIGNIFICANT ECONOMIC PRESENCE [EXPLANATION 2A TO SECTION 9(1)(I)] [NEWLY ADDED]
▪ Significant Economic Presence of a NR in India shall also constitute business connection in India.
▪ Significant economic presence means-
Nature of transaction Condition
(a) i.r.o. any goods, services or property carried out by a Aggregate of payments arising from
non-resident with any person in India including such transaction(s) during PY should
provision of download of data or software in India exceed Rs. 2 crores.
(b) systematic & continuous soliciting of business Number of users should be atleast 3
activities or engaging in interaction with users in India lakhs.

▪ Further, the above transactions or activities shall constitute SEP in India, whether or not,
(1) Agreement for such transactions or activities is entered in India;
(2) NR has a residence or place of business in India; or
(3) NR renders services in India.

▪ However, where a business connection is established by reason of SEP in India, only so much of
income as is attributable to the transactions or activities referred to in (a) or (b) above shall be
deemed to accrue or arise in India.

Space for PC Analysis:

30
 FOLLOWING SHALL NOT BE TREATED AS BUSINESS CONNECTION IN INDIA to NR

(a) Business whose All operations are not carried out in India
▪ Proportionate Income attributable to the operations carried out in India shall be deemed to
accrue or arise in India.
▪ Income which cannot be attributed to the operations in India shall not be deemed to
accrue/arise in India.
Income attributable to the operations carried out in India includes:
▪ Income from advt. targetting customers residing in India or accessing advt. through IPA in
India;
▪ Income from sale of data collected from persons residing in India or using IPA located in
India
▪ Income from sale of goods & services using data collected from persons residing in India or
using IPA located in India
(b) Purchase of Goods in India for Export by NR
No Income shall be deemed to accrue in India from operations which are confined to purchase
of goods in India for Export by NR.
(c) Collection of News & Views in India for transmission out of India by NR
If a person is engaged in news agency business etc, income from activities which are confined to
collection of news & views in India for transmission out of India → Not deemed to accrue in Idnia
(d) Shooting of Cinematograph films in India by NR
Income from operations confined to shooting of any cinematograph film in India, if such NR is:
(a) Individual, who is not a citizen of India or
(b) Firm which does not have any partner who is a Citizen of India or who is Resident in India;
(c) Company which does not have any Shareholder who is a Citizen or Resident of India.
(e) Display of Rough Diamonds in SNZ by Foreign Company
Income from the activities carried out by Foreign Company which are confined to display of
uncut & unassorted diamonds (without any sorting or Sale) in any SNZ notified by CG.
2 INCOME FROM PROPERTY OR ASSET OR SOURCE OF INCOME IN INDIA

❖ Income from Property/Asset situated in India → Deemed to accrue in India.

Ex: Rent paid o/s India for use of machinery/buildings situated in India is deemed to accrue in India.
Ex: Deposits with an Indian company for which interest is received o/s India.
3 CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA

❖ Capital Gain on Transfer of Capital Asset situated in India is deemed to accrue in India even if:
▪ Place of Registration of Document of Transfer is in India or outside India; &
▪ Place of Payment of consideration for transfer is in India or outside India.
4 DIVIDEND INCOME FROM INDIAN COMPANY
❖ Dividends paid by Indian company outside India → Deemed to Accrue in India.
❖ It would be taxable in the hands of shareholders at normal slab rates.
5 INCOME FROM SALARIES

❖ Salary is deemed to accrue/arise at the place where the services are rendered.
❖ Salaries payable by Government to a citizen of India for services rendered outside India would be
deemed to accrue India (even if services are rendered outside India).
However, Allowances & Perquisites paid outside India by Government are exempt u/s 10(7).

31
 Exception u/s 9(2): Pension payable outside India by the Government to its officials & judges who
permanently reside outside India shall not be deemed to accrue or arise in India.
6 INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAID TO NON-RESIDENT
(a) Payable by Government of India (CG/SG): deemed to accrue/arise in India
(b) Payable by Resident: Always deemed to accrue/arise in India
Exceptions: [In following cases, income is not deemed to accuse in India]
(a) If borrowed money is used by the payer of interest (NR) for a business/profession carried
on outside India or for earning any income from the source outside India.
(b) Payment of Royalty or Technical fees related to a Business/profession carried on by the
payer outside India or for earning any income outside India.
(c) Payable by Non- Resident: deemed to accrue/arise in India in (a) & (b) cases only.
(a) If borrowed money is used by the payer of Interest for a business/profession carried on in
India or for earning any income in India.
(b) Payment of Royalty or FTS related to a Business/profession carried on by the payer in India
or for earning any income in India.
Exception: Interest on money borrowed by NR for any purpose other than business or profession
in India will NOT be deemed to accrue or arise in India.
Ex: If a NR ‘A’ borrows money from a non-resident ‘B’ & invests the same in shares of an Indian
company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India.
PC Note: Income by way of Interest, Royalty, FTS from services utilized in India would be deemed to
accrue in India & be included in NR’s TI, whether or not such services were rendered in India &
whether or not NR has a residence or place of business or business connection in India.
Consideration for sale, distribution or exhibition of cinematographic films is covered within the
scope of royalty [AMENDMENT INSERTED BY FA 2020, w.e.f. A.Y.2021-22]
7 MONEY PAID BY RESIDENT INDIAN TO A NR (NON-CORPORATE)/FOREIGN COMPANY
❖ Any sum of money paid (without consideration) by Indian resident person to a NR (non-corporate)
or foreign company on or after 05.07.2019
❖ would be deemed to accrue or arise in India if the same is chargeable to tax u/s 56(2)(x).
❖ Section 56(2)(x): If aggregate sums received exceeds Rs. 50,000 in a FY.

CQ17. Mr. Rashid Khan, a national of Iraq received the following fees for technical services during PY 2022-23.
1 From Government of India 1,00,000
2 From Government of Iraq 4,00,000
3 From S, a ROI, services have been utilised for earning income in India 40,000
4 From V, a ROI, services have been utilised for earning income outside India 80,000
5 From J, a NR for services for a business carried on in India 70,000
Compute his TI for AY 2023-24. He has come for first time in India during PY 2022-23 & stayed for 181 days.
Solution: Since Mr. Rashid does not satisfy any basic conditions; he is a NR. Thus, only Indian Incomes are taxable.
Fees for technical services received from:
1 Government of India [taxable u/s 9(vii)(a)] 1,00,000
2 Government of Iraq [not taxable since paid by foreign government to NR] .-
3 S [Paid by Resident & services has been used for earning Income in India] 40,000
4 V [Paid by Resident & services has been used for earning Income outside India] -
5 J [Paid by one NR to another NR but services has been given for business in India] 70,000
Total Income 2,10,000

CQ18. What if Rashid came to India on 15.06.2022 & stayed upto. 31.12.2022, what will be his taxable income?

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Solution: If Mr. Rashid stays in India from 15.06.2022 to 31.12.2022, his stay in India = 200 days. Thus, he will
be Resident in India. However, he shall be "RNOR" as he does not satisfy both the additional conditions.
For RNOR, income earned & received o/s India is taxable only when it is from a business controlled from or
profession set up in India. Assuming that this condition is not satisfied, FTS received from Government of Iraq as
well as from V will still be exempt from tax in India. Hence, Total Income of Rashid will remain at Rs. 2,10,000.

CQ19. Discuss the correctness of the statement - “Income deemed to accrue or arise in India to a NR by way of
interest, royalty & fees for technical services is to be taxed irrespective of territorial nexus”. [ICAI EX Q4]
Answer:
▪ As per section 9, if any NR has provided any patent right or any managerial, technical services & such patent
right etc. was used in India, in such cases any royalty or fee received by NR shall be considered to be income
accruing/arising in India & shall be taxable & it do not matter that NR do not have residence or place of business
or business connection in India i.e. there is no territorial nexus or NR has not rendered services in India.
▪ Ex: If Suzuki of Japan, a NR company has provided technical know-how in Japan to Maruti Udyog Ltd for use in
India & has received Rs. 3 Cr. Such income is deemed to be accruing in India & is taxable even if Suzuki do not
have any Territorial Nexus with India i.e. company do not have place of residence or PoB in India.
▪ If any loan was given by NR to other NR & such other NR has utilized loan amount in India in business or
profession, interest received by NR shall be considered to be his income accruing in India even if such NR do
not have any territorial nexus with India.

MQ01. Compute total income of Mr. PC assuming him (i) ROR (ii) RNOR (iii) NR for AY 2023-24. [Modified]
Particulars Amt
1 Interest on UK Development Bonds (50% of interest received in India) 10,000
2 Interest for debentures in an Indian company (received in London) 10,000
3 Income from a business in Chennai managed from London (50% is received in India) 20,000
4 Profits on sale of shares of Indian company (received in London) 20,000
5 Dividend from British Company (received in London) 5,000
6 Profits on Sale of Plant at Germany (50% of profits are received in India) 40,000
7 Business income in Germany which is controlled from Delhi (40,000 is received in India) 70,000
8 Profits from a business in Delhi but managed entirely from London 15,000
9 Income from House in London deposited in Indian Bank at London, brought to India (computed) 50,000
10 Royalty/Fees for technical services rendered in India (received in London) 8,000
11 Pension for services rendered in India (received in Burma) 4,000
12 Income from property situated in Pakistan received there 16,000
13 Past foreign untaxed Income brought to India during the PY 5,000
14 Income from agricultural land in Nepal received there and then brought to India 18,000
15 Income from profession in Kenya which was set up in India, received there but spent in India 5,000
16 Gift received on the occasion of his wedding 20,000
17 Income from a business in Russia, controlled from Russia 20,000
18 Dividend from Reliance Petroleum Limited, an Indian company 5,000
19 Honorarium received from Government of India (Rs. 15,000 was paid for travelling expenses) 20,000
20 Income from Business connection in India, received in London 10,000
21 Speculation profit earned & received outside India 20,000
22 Salary drawn for 2 months for working in Indian Embassy's Office in Australia & received there 80,000

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Solution: Computation of Total Income for AY 2023-24
Particular ROR RNOR NR
1 Interest on UK Development Bonds. 10,000 5,000 5,000
It is foreign Income. But 50% of interest received in India is Indian Income.
2 Interest for debentures in an Indian company 10,000 10,000 10,000
Since Interest is paid on debentures by Indian company, it is an Indian Income. Thus, taxable to Everyone.
3 3. Income from a business in Chennai (50% is received in India) 20,000 20,000 20,000
Since business is situated in India, 100% is Indian Income irrespective of the place it is managed from.
4 Profits on sale of shares of Indian company received in London 20,000 20,000 20,000
5 Dividend from British company received in London [Foreign Income] 5,000 - -
6 Profits on sale of plant at Germany [50% Foreign & 50% Indian Income] 40,000 20,000 20,000
7 Income earned from business in Germany which is controlled from Delhi 70,000 70,000 40,000
Since the business has been controlled from India, such foreign income is taxable to RNOR also.
8 Profits from business in Delhi [Indian Income & thus taxable to everyone] 15,000 15,000 15,000
9 Income from property in London deposited in London, later on remitted to 50,000 - -
India [Foreign Income & thus taxable to ROR]; No tax on Remittance
10 Royalty/FTS rendered in India; Indian Income & thus taxable to everyone 8,000 8,000 8,000
11 Pension for services rendered in India & [Thus Indian Income] 4,000 4,000 4,000
12 Income from property situated in Pakistan [Foreign Income; tax – ROR] 16,000 - -
13 Past foreign untaxed income brought to India during the PY - - -
Since income relates to past year, it is assumed that it must have been taxed in that PY. Thus, it is not
taxable in this PY.
14 Income from Agricultural land in Nepal received there [Foreign Income] 18,000 - -
15 Income from profession in Kenya which was set up in India [Refer Pt. 7] 5,000 5,000 -
16 Gift received on the occasion of his wedding [not taxable] - - -
17 Income from business in Russia, controlled from Russia [Foreign Income] 20,000 - -
18 Dividend from Reliance Limited, Indian Company 5,000 5,000 5,000
19 Honorarium received from Government of India [Indian Income]. But, 5,000 5,000 5,000
Allowance are exempt u/s 10(7). Thus, travelling expenses are not taxable.
20 Income from Business connection in India, received in London 10,000 10,000 10,000
21 Speculation profit earned & received outside India [Foreign Income] 20,000 - -
22 Salary for working in Indian Embassy's Office in Australia & received there. 80,000 80,000 80,000
[Deemed to accure in India & thus Indian Income]

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➢ Every payment made by an employer to his employee for service rendered during the
course of employment would be taxable as Income from Salaries.

➢ Employer-Employee Relationship: To be taxable u/h “Salaries”:

(a) There should be Employer-Employee relationship.
(b) Employee may be full-time or part-time employee.
(c) Employer may be operating in India or Abroad.
PC Note: Amount received by an Individual shall be treated as salary only if relationship
b/w payer & payee is of Employer & Employee/Master & Servant/Principal & Agent.

Examples:
1. Commission received by director:
▪ Taxed u/h “Salaries” if the director is an employee of the company.
▪ If he is not Employee → Such commission may be taxed u/h PGBP/IFOS as the case may be.
2. Member of Parliament/State Legislature → MPs & MSL are not employees of the Government &
thus their salary is not taxable u/h salaries. It is taxable u/h IFOS.
3. Salary paid to a Partner by a Firm: It is an appropriation of profits. It is not treated as Salary
since no Employer-Employee relationship exists b/w the partner & firm. It is taxed u/h PGBP.

➢ Salary includes both Monetary & Non-Monetary facilities.

(a) Monetary Facilities: Basic salary, Bonus, Commission, Allowances etc.
(b) Non- Monetary facilities: Accommodation, Medical facility, Interest free loans etc.

➢ Salary & wages are same (not different) terms for the purpose of Income Tax Act.
➢ Salary from more than one source: Salary from each source is taxable u/h Salaries.

➢ Meaning of ‘salary’ for income-tax is much wider than what is normally understood.
➢ Salary includes the following:
Wages.
Annuity or Pension.
Gratuity.
Any fees, Commission, Perquisite or Profits in lieu of or in addition to any salary.
Advance Salary.
Payment received i.r.o. any Period of Leave not availed by him.
Leave Salary or Leave Encashment.
Portion of the annual accretion in any PY to the balance at the credit of an employee
participating in a recognised PF to the extent it is taxable.
Transferred balance in recognized PF (only taxable portion)
Contribution made by the employer under a pension scheme u/s 80CCD.

➢ It is an inclusive definition & includes monetary as well as non-monetary items.

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 1 Salary is taxable on Due or Receipt basis whichever is earlier.

2 Advance Salary: Advance salary is taxable on Receipt basis (whether it is due or not).
▪ Advance Salary which has been taxed on Receipt basis in earlier PYs (in which it is received)
cannot be taxed again on due basis in the PY in which it becomes due.
▪ Relief u/s 89(1) is available in this case.
3 Salary in Arrears: Salary in Arrears becomes taxable on due basis (whether it is paid or not).
▪ Since Salary paid in arrears is already taxed on due basis, it cannot be taxed again on paymene
basis (i.e when it is paid).
▪ But in some circumstances, it may not be possible to tax salary on due basis.
Ex: If ‘Pay Commission’ is appointed by Central Government & it recommends revision of salaries of
employees, arrears received in that connection will be charged on receipt basis.
▪ Relief u/s 89(1) is available in this case.

Examples:
(i) A draws his salary in advance for April 2022 in March 2022 itself. Salary of April 2022 is taxable on receipt
basis & is to be taxed as income of PY 2021-22. However, salary for PY 2022-23 will not include salary of
April 2022.
(ii) If salary due for March 2022 is received later in April 2022, it is still chargeable as income of PY 2021-22
i.e. AY 2023-24 on due basis. Obviously, salary for PY 2022-23 will not include salary of March 2022.

ANALYSIS OF SECTION 15
Nature of Salary Taxable in
Salary becomes due in PY 2022-23 (Paid in Subsequent Year) PY 2022-23
Salary is received in PY 2022-23 (becomes due Subsequent Year) PY 2022-23
Arrears of salary received during PY 2022-23 although it pertains to one of the PY 2022-23
earlier years & same were not taxed on due basis.
Arrears of salary received during PY 2022-23 although it pertains to one of the PY in which it was due
earlier years but same were taxed on due basis.

PLACE OF ACCRUAL OF SALARY [SEC 9(1)]

General Rule: Salary is deemed to accrue or arise at the place where the services are rendered.
Place of Service Place of Payment Deemed to accrue in India ? Taxable ?
India India Yes Yes
India Abroad Yes Yes
India Pension is paid Abroad Yes Yes
Leaves Earned in India Leave salary is paid abroad Yes Yes

PC Note: If an employee gets pension outside India for the services rendered in India, such pension will
be deemed to accrue in India. [Same will apply for Leave Salary paid outside India].

Exception to General Rule - Sec 9(1)(iii)

➢ Salary paid by Government to Citizen of India (R/NR) for the services rendered outside India to
the Government is deemed to accrue/arise in India.
➢ However, Allowance or Perquisites paid outside India by GOI to a citizen of India for rendering
services outside India will be fully exempt. [Section 10(7)].

36
CQ1. Mr. A, a citizen of India, is posted in USA as our Ambassador. Obviously, he renders his services outside
India. He also receives his salary outside India. He is also a NR. The question, therefore, arises whether he can
claim exemption i.r.o. his salary paid by GOI to him outside India.
As per general rule, such salary cannot be taxed in his hands because services are rendered outside
India.
But section 9(1)(iii) provides that salaries payable by GOI to a citizen of India for services outside India shall
be deemed to accrue or arise in India & thus it will be Indian Income. However, Allowance/Perquisites paid
outside India by the Government to a citizen of India for rendering services outside India will be fully exempt
u/s 10(7).

TABULAR SUMMARY of Sec 9(1)(ii) & Sec 9(iii)

Is it taxable in India
Who is employee Employer Place of Service
Salary Allowance/Perquisite
1 Indian Citizen (R/NR) GOI Outside India Yes No
2 NR (Other than 1) Any Outside India No No
3 ROR (Other than 1) Any Anywhere Yes Yes

▪ Salary paid tax-free does not mean that tax is not levied on such salary.
▪ It means that Employer bears the burden of the tax on salary of employee.
▪ It does not matter whether employer pays the tax under T&Cs of the employment
contract or voluntarily.
▪ In such case, Income from salaries = Salary Income + Tax on employee’s Salary paid
by the employer.
▪ However, as per section 10(10CC), Income-tax paid by the employer on Non-Monetary
Perquisites on behalf of the employee would be exempt in the hands of the employee.

▪ Loan is different from salary. It cannot be taxed as Salary.

▪ Advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted with his salary over
a specified time period.
▪ When an employee takes a loan from his employer, which is repayable in certain
specified instalments, the loan amount cannot be brought to tax as salary of the
employee.

Space for PC
Note

▪ Salary is chargeable to tax on due or receipt basis (whichever is earlier).

▪ If employee foregoes his salary, it does not mean that salary foregone is not taxable.
▪ Once salary accrues, subsequent waiver by the employee does not make it exempt.
▪ Such waiver is only an application & hence, is taxable.
▪ Surrender of Salary to Central Gov: If an employee surrenders his salary to u/s 2 of
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961 → It is Exempt.

CQ2. Mr. A, an employee instructs his employer that he is not interested in receiving salary for April
2022 & salary for April 2022 shall be donated to a charitable institution. In this case, Mr. A cannot
claim that he cannot be taxed i.r.o salary for April 2022. It is only due to his instruction that donation
was made to a charitable institution by his employer. It is only an application of income. Hence, salary
for April 2022 will be taxable in hands of Mr. A. However, he is entitled to claim a deduction u/s 80G
for the amount donated to the institution.

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 RECEIPTS TREATMENT
Basic Salary
Dearness allowance/pay
Leave encashment while in service
Salary in lieu of Notice
Fully Taxable
Fees & Commission
Monthly Pension (uncommuted)
Annuity from Employer
Profits in lieu of Salary

Advance Salary Taxable in PY of Receipt

Arrears of Salary Taxable in PY in which it becomes due.

Bonus Taxable on Receipt Basis [if not taxed earlier on due basis].

Annual Accretion to the credit balance in ▪ Excess of Employer's contribution over 12% of salary
RPF (Taxable Amount) ▪ Excess of Interest over 9.5% is taxable.

Leave Encashment on Retirement ▪ Government employees: Exempt

Gratuity/Commuted Pension ▪ Non-Government employee: Exempt in some cases.

Salary to Partner Not taxable under "Salaries", but taxable under "PGBP"

Salary/Pension from UNO Not chargeable to tax.

Compensation received under VRS Exempt in some cases.

Pension under NPS Taxable at the time of receipt.

Allowance/Perquisites Definition of Salary for such purpose

Gratuity for Covered Employees. Basic Salary + DA (whenever DA is paid)

(a) Gratuity for other cases Basic Salary + Dearness Allowance (if it forms part of salary for
computing all retirement benefits) + Commission (if paid as % of
(b) National Pension Scheme
turnover).
(c) Employer’s Contribution to RPF
PC Class Note:
(d) Leave salary; (e) HRA (f) VRS

Perquisite for calculating value of Basic Salary + Dearness Allowance (if it forms part of salary for
Rent-Free Accommodation computing all retirement benefits) + Bonus + Any Commission (Paid
+ Any other monetary payment by whatever name but Excludes:
(a) Employer's contribution to PF of the employee;
(b) Exempt Allowances;
(c) Value of Taxable Perquisites u/s 17(2);
(d) Medical Allowance to the extent it is not taxable.
(e) Payment/Expenditure for Allotment of shares or Debentures or
Warrants under ESOP etc.

38
Meaning of Allowance: Fixed quantity of money given regularly to employees in addition to salary to meet
some particular requirements connected with service or compensation for unusual conditions of that service.
It is fixed, predetermined & given irrespective of actual expenditure.

Fully Taxable Allowances Partly Taxable Allowances Fully Exempt Allowances

▪ Dearness Allowance ▪ House Rent Allowance ▪ Allowance to Government
▪ Overtime Allowance ▪ Special Allowances employees outside India
▪ Fixed Medical Allowance ▪ Sumptuary allowance granted
to HC/SC Judges.
▪ City Compensatory Allowance
▪ Allowance paid by UNO.
▪ Interim Allowance
▪ Compensatory Allowance
▪ Servant Allowance
received by a judge
▪ Project Allowance
▪ Tiffin/Lunch Allowance
▪ Any other cash allowance
▪ Warden Allowance
▪ Non-practicing Allowance
▪ Transport Allowance Except
Handicapped Employees.

HOUSE RENT ALLOWANCE [SEC 10(13A) ► Least of the following is Exempt ↓

1. Actual amount of HRA received for the Relevant Period.

2. Excess of Rent paid over 10% of salary for the Relevant Period.

3. City of Residence:
(a) Mumbai, Delhi, Kolkata, Madras (chennai): 50% of Salary for Relevant Period.
(b) Other cities: 40% of Salary for Relevant Period.

Points to Remember:
✓ For HRA, Salary = Basic Salary + DA (Retirement benefits) + Commission (if paid as % of TO).
✓ Salary of the PY shall only be considered for calculating HRA Exemption. Salary of the period other
than PY is not considered even if it is received in the PY & is taxable on receipt basis (Advance salary).
✓ Salary of the period during which rental accommodation is not occupied in PY is also not considered.
✓ No Exemption if employee lives in his own house/in a house where he does not pay rent.
✓ Relevant period means the period during which house was occupied by the assessee during PY.

CQ3. Mr. Roy, staying at Chennai, receives Rs. 12,500 monthly as basic salary; Rs. 1,500 p.m as DA provided in terms
of employment & 4% as commission on turnover achieved by him. He is paid HRA of Rs. 1,800 p.m. Turnover achieved
by him for the year is Rs. 15 Lacs. House rent paid by him is Rs. 2,500 p.m. He received advance salary of Rs. 50,000 in
March 2023 relating to the period April 2023 to July 2023. Find taxable HRA for AY 2023-24.
Solution: Salary for HRA = Basic Salary + Dearness Allowance (Retirement Benefits) + Commission (% of TO)
= (12,500 x 12 months) + (1,500 x 12 months) + 4% on 15,00,000 = Rs. 2,28,000.
Computation of Taxable House Rent Allowance of Mr. Roy
Particulars Rs. Rs.
Actual House Rent allowance (Rs. 1800 x 12 months) 21,600
Less: Exempt u/s 10 (13A) to the extent of least of the following:

39
 1. Excess of rent paid over 10% of the salary (30,000 – 22,800) 7,200
2. 50% of salary (50% of 2,28,000) 1,14,000
3. Actual HRA received 21,600 7,200
Taxable HRA 14,400
PC Note: Though advance Salary is taxable in AY 2023-24 on receipt basis, it should not be considered in computing
Salary for the purpose of calculating exemption u/s 10(13A).

➢ Actual Expenditure incurred by the employee is RELEVANT for the purpose of exemption.
➢ Exemption = Lower of (a) Allowance Received or (b) Amount utilized for specific purpose.
PC Note: There is no limit on the amount which employee can receive from the employer as allowance.

SN Allowances Nature of Allowance

(a) Travelling Allowance granted to meet the cost of travel on tour or on transfer (including any
/Transfer sum paid for transfer, packing & transportation of personal effects on such
Allowance transfer).
(b) Daily Allowance granted on tour or for journey in connection with transfer, to meet the
Allowance ordinary daily charges incurred due to absence from his normal place of duty.
(c) Conveyance Granted to meet expenditure on conveyance in performance of duties of office.
Allowance PC Note: Expenditure for journey between office & residence is not exempt.
(d) Helper Any allowance (by whatever name called) to meet the expenditure on a helper where
allowance such helper is engaged for the performance of official duties.
(e) Research Any allowance (by whatever name called) granted for encouraging the academic
Allowance research & other professional pursuits.
(f) Uniform Any allowance (by whatever name called) to meet expenditure on purchase or
Allowance maintenance of uniform for wear during the performance of duties of an office.

SECTION 115BAC: An employee who opts for the provisions of section 115BAC would be entitled
for exemption only i.r.o. (a) – (c) above.

CQ5. During PY 2022-23, the following allowances are given to X by the employer company:
Amount of Amount Actually Amount taxable
Nature of allowance
Allowance spent
Travelling allowance for official purposes 36,000 32,000 4,000
Transfer allowance given on transfer of X 40,000 41,000 Nil
Conveyance allowance for official purposes 50,000 42,000 8,000
Helper allowance of helper for official purposes 68,000 64,000 4,000
Research allowance 1,00,000 90,000 10,000
Uniform allowance for official purposes 18,000 17,000 1,000

➢ Actual Expenditure incurred by the employee is IRRELEVANT for the purpose of exemption.
➢ Exemption = Lower of (a) Allowance actually received or (b) Amount specified in Rule 2BB.

PC Note: There is a limit on the amount which employee can receive from the employer as allowance.
Any amount received by the employee in excess of these specified limits will be taxable in the hands of
employee as salary income.

40
 Name of Allowance Nature & Given to & Conditions Exemption
Children Education Given for children's education Rs. 100 p.m per child upto
Allowance Maximum of 2 children

Hostel Expenditure Given for meeting expenditure of child Rs. 300 p.m per child upto
Maximum of 2 children

Transport Allowance Expenses for communicating between Rs. 3,200 p.m; only for
place of his residence & place of duty. Handicapped employees

Allowance for Transport Granted to meet personal expenses during (a) 70% of such Allowance;
Employees his duty if not in receipt of daily allowance.
(b) Rs. 10,000 p.m (Lower)

Tribal areas/Scheduled For MP, Tamil Nadu, UP, WB, Bihar, Rs. 200 p.m
Areas Allowance Orissa, Karnataka, Tripura, Assam

Special Compensatory High Altitude/Snow Area Allowance Rs. 300 - Rs. 800 p.m
(Hilly Areas) Allowance [7,000 p.m in Siachen of J&K]

Border Area Allowance Border area/Remote locality Allowance Rs. 200 – Rs. 1,300 p.m
Compensatory Allowance Employee cannot claim Border Area (a) 2,600 p.m in some cases
(a) Field area Allowance if this exemption is taken (b) 1,000 p.m in some cases
(b) Modified Field Area
Underground Allowance Employee working in/under mines. Rs. 800 p.m
High Altitude Allowance Granted to Members of Armed forces Altitude (fts) Exemption
operating in High Altitude areas.
9000-15000 Rs. 1,060 p.m
Above 15000 Rs. 1,600 p.m
Highly Active Field Area Granted to Members of Armed forces. Upto Rs. 4,200 p.m
Island Duty Allowance Granted to Members of Armed forces in Upto Rs. 3,250 p.m
Andaman & Nicobar; Lakshadweep.
Counter Insurgency Members of armed forces operating in Rs. 3,900 p.m
Allowance areas away from their permanent locations.

SECTION 115BAC: An employee who opts for the provisions of section 115BAC would be entitled
for exemption only i.r.o. transport allowance granted to handicapped employee of Rs. 3,200.

CQ6. During PY 2022-23, following allowance are given to X by the employer company:
Name of Allowance Received Spent Exempt Tax
1. Tribal area allowance for X posted in Assam for 2 months 1000 NA 200 p.m 600
2. Child education allowance for X’s elder son 1800 NA 100 p.m 600
3. Child education allowance for X’s younger son 900 NA Nil 900
4. Child education allowance for X’s daughter 1080 NA 100 p.m Nil
5. Hostel expenditure allowance for X’s elder son 6600 NA 300 p.m 3000

PC Note for (Pt. 2, 3, & 4): If Education allowance is received for more than 2 children, exemption of Rs.
100 p.m shall be taken for 2 children for whom highest allowance is received. Child for whom lowest
allowance is received shall be made taxable (as it will be beneficial for the assessee).

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Definition of ➢ Any Casual Emolument or benefits attached to office/position in addition to salary.
Perquisite ➢ It is an extra benefit in addition to the basic salary. It may be provided in cash or kind.
➢ It is not necessary that a recurring or regular receipt is alone perquisites; even a casual
or non-recurring receipt can be perquisite.

Any Sum received shall be taxed as Perquisite only if following conditions are satisfied:
(a) Given by Employer. (If received from other person → Taxed u/h PGBP/IFOS)
(b) Given during the continuance of employment & must be directly related to service
(c) Resulting in personal advantage to an employee;
(d) Derived by virtue of employer’s authority
(e) Perquisite may be given for the benefits of employee or his Member of household.

Points to Remember:
❖ Reimbursement of Expenses incurred in official discharge of duties → Not a Perquisite.
❖ Perquisite will become taxable only if it has a legal origin. An unauthorized advantage
taken by an employee without his employer’s sanction cannot be considered as a
perquisite. Such unauthorized amount would be chargeable u/h IFOS.
Ex: Suppose Mr. A is given a house by his employer. On 31.3.2022, he is terminated from service.
But he continues to occupy the house without the permission of the employer for 6-months
after which he is evicted by the employer. The question arises whether the value of the benefit
enjoyed by him during 6-month period can be considered as a perquisite & be charged to salary
for PY 2022-23. It cannot be taxed u/h ‘Salaries’ since the relationship of employer- employee
ceased to exist after 31.3.2022. It will be taxable u/h “IFOS”.
❖ Income-tax paid by the employer out of his pocket on the salary of the employee is a
perquisite in the hands of the employee whether payment is contractual or voluntary.
❖ Member of Household shall include:
(a) Spouse (b) Children & their spouses (c) Parents (d) Servants & Dependants.
❖ Children includes step child & adopted child.
❖ Children born out of multiple birth after 1st child will be treated as “one child only.”

Nature of Expenditure Taxable Perquisite

1 Training of employees Not Taxable
2 Education facility provided to family members Fully Taxable. No Exemption is available.
Payment/reimbursement of tuition fees.

3 Education facility provided to children of Employee Reasonable cost of education is taxable.

Exemption → Rs 1000 p.m per child.

PC Note: Scholarship given by an employer to the children of its employees → Not a perquisite.

CQ7. The employer has made arrangements for education of 3 childrens of his employee in his own school &
has incurred Rs. 1,500 p.m per child & has recovered Rs. 300 p.m per child from the employee. Calculate the
value of taxable perquisite.
Solution: Exemption of Rs. 1,000 p.m is available irrespective of number of children.
▪ Value of perquisite per children = Rs. 1,500 – Rs. 300 – Rs. 1,000 (Exemption) = Rs. 200 p.m.
▪ Value of taxable perquisite = Rs. 200 p.m × 12 months × 3 children = Rs. 7,200.

42
‘Accommodation’ includes a house, flat, farm house (or part), or accommodation in a hotel, motel, service
apartment, guest-house, caravan, mobile home, ship or other floating structure.
Employee Value of perquisites
(a) CG or SG employees License fee determined by CG or SG.
(b) Other than Government Employee
❖ Accommodation owned by Employer Population of place of Perquisite
Accommodation
Less than 10 lacs 7.5% of salary
10 lacs – 25 lacs 10% of salary
More than 25 lacs 15% of salary

❖ Accommodation is taken on Lower of: (i) 15% of salary or (ii) Actual lease rent paid
rent/lease by the employer by employer for the occupied period.
(c) Accommodation Provided in Hotel Lower of (i) 24% of salary or
(Gov/Non-Government Employer) (ii) Actual Hotel charges paid by employer.
PC Note: If Accommodation is provided ≤ 15 days on his transfer from one place to another → No Tax.

Accommodation provided at two places:

If any employee has been transferred & employer has provided him accommodation at the new place also, in
such cases only one of the accommodations having lower perquisite value shall be taxable upto 90 days (3
months) & after 90 days, both of the accommodations shall be taxable as perquisite.

VALUATION OF FURNISHED ACCOMODATION

Valuation shall be done as if employer has provided unfurnished accommodation
Add: 10% p.a of original cost of furniture (if furniture is owned by employer).
Add: Lease charges/Rent paid for hiring furniture (If furniture is hired by employer).

PC Note: Rent-free official residence provided to a Judge of HC/SC & Officer of Parliament → Not taxable.

CQ8. Mr. Lakshman informs you the particulars of salary for previous year ending 31.03.2023: Basic pay: Rs.
36,000; DA: Rs. 4,800 (not forming part of salary); Bonus: Rs. 6,000; Commission: Rs. 4,000; City Compensatory
Allowance: Rs. 3,600. Calculate the value of perquisite i.r.o. rent-free furnished house if Mr. Lakshman stays in
a city with a population (a) more than 25 Lacs, (b) less than 10 Lacs, (c) between 10 Lacs & 25 Lacs. Cost of
furniture provided is Rs. 16,000. Sofa was taken on rent for Rs. 300 p.m.
Solution: Salary = BS + Bonus + Commission + City Compensatory Allowance = 36,000 + 6,000 + 4,000 + 3,600 = 49,600
Value of Rent-free unfurnished Accomodation
(a) Population > 25 Lacs → 15% of salary = 15% of Rs. 49,600 = Rs. 7,440
(b) Population 10 lac – 25 lacs → 10% of salary = 10% of Rs. 49,600 = Rs. 4960
(c) Population < 10 lacs → 7.5% of salary = 7.5% of Rs. 49,600 = Rs. 3,720
Value of Furnished Accommodation
Particulars Population > 25L 10 Lacs – 25 Lacs Population < 10L
Value of unfurnished accommodation 7,440 4,960 3,720
Add: Perquisites for value of furniture 5,200 5,200 5,200
[(10% of Rs. 16,000) + (300 x 12)]
Value of furnished accommodation 12,640 10,160 8,920
Note: Since DA is not forming part of salary for retirement benefits, it shall not be included in salary for the purpose of
computation of Value of Rent free Accomodation.

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 A. Medical Facilities in India
Place of Provision of Medical Treatment Value of Taxable Perquisite
(a) Hospital owned/maintained by employer;
(b) Government Hospital;
(c) Private Hospital (if recommended by Nothing shall be Taxable in such cases
Government for treatment of its employees).
(d) Specified facility for prescribed diseases in
hospital approved by PCC/CC.
(e) Illness relating to COVID 19
Any other facility in India (Ex: Family doctor) Fully Taxable

B. Medical Facility outside India

Type of Expenditure Value of Taxable Perquisite
(a) Medical treatment in Abroad ▪ Exempt to the extent permitted by the RBI.
(b) Cost of Stay in Abroad (including one ▪ Taxable Perquisite = Amount exceeding the
attendant who accompanies the patient) amount permitted by RBI.
(c) Cost on Travel (including one attendant who Exempt only if GTI of employee computed before
accompanies patient) deducting (including) this expenditure ≤ Rs. 2 lacs.

PC Note:
1. Health Insurance Premium paid by employer in approved scheme of CG/IRDA→ Not Taxable.
2. Medical Facilities may be provided to an employee or any member of his family.
3. Family → Spouse + Children (Maximum 2) + [Parents + Brothers + Sisters – Dependent].
4. Fixed Medical Allowance → Always taxable.

CQ9. Compute taxable perquisite i.r.o. medical facilities received by Mr. G from his employer: [ICAI SM Q12]
Medical premium paid for insuring health of Mr. G Rs. 7,000
Treatment of Mr. G by his family doctor Rs. 5,000
Treatment of Mrs. G in a Government hospital Rs. 25,000
Treatment of Mr. G’s grandfather in a private clinic by family doctor Rs. 12,000
Treatment of Mr. G’s sister (dependant) in a nursing home Rs. 3,000
Treatment of Mr. G’s brother (independent) Rs. 6,000
Treatment of Mr. G’s father (75 years & dependant) abroad Rs. 50,000
Expenses of staying abroad of the patient (Limit specified by RBI = 75,000) Rs. 30,000
Solution: Medical Facilities outside India
Total Expenditure on Treatment + Expense of Stay = Rs. 50,000 + Rs. 30,000 Rs. 80,000
Less: Exempt to the extent permitted by RBI (Limit specified by RBI) Rs. 75,000
Value of Taxable Perquisite Rs. 5,000
Medical Facilites in India
Medical premium paid for insuring health of Mr. G Exempt
Treatment of Mr. G by his family doctor Rs. 5,000
Treatment of Mrs. G in a Government hospital Exempt
Treatment of Mr. G’s grandfather in a private clinic Rs. 12,000
Treatment of Mr. G’s sister (dependant) in a nursing home Rs. 3,000
Treatment of Mr. G’s brother (independent) Rs. 6,000
Perquisite of Medical facilities in India Rs. 26,000
PC Note: Grandfather & Independent brother are not included within the meaning of family of Mr. G.

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➢ If a loan is given by the employer to employee/member of his household, it is a taxable perquisite.
How to value the amount of Perquisite when loan is given ?
1. Find out the Maximum outstanding Monthly balance on last day of every month.
2. Find out Differential Interest for each month on the outstanding amount. [SBI rate on loan of
same kind – Concessional rate given by employee]
3. Value of Perquisite on loan = Sum of Differential Interest of all months.

➢ Maximum outstanding monthly balance = Aggregate outstanding balance for each loan as on the
last day of each month.

➢ Exceptions: In following cases, Interest-free Loan is not treated as perquisite:

(a) If the amount of total loans ≤ Rs. 20,000.
(b) If Loan is given for Medical Treatment of Prescribed Diseases (Cancer, tuberculosis, etc).
However, any amount reimbursed (given) to the employee by insurance company shall be considered
for valuation of Perquisite. [PC Note: Insurance company ne reimburse kiye hue paise = Perquisite]

Class Note:

CQ10. Mr. Raju is employed in Kangana Ltd. and he has taken a loan of Rs. 5 lacs from employer on 20.04.2022
at a rate of 4% p.a. but SBI rate is 10% p.a. and loan was repaid in monthly installment of Rs. 1 lac each starting
from 10.07.2022. Find the value of taxable perquisite.
Solution:
April 2022 5,00,000 x 6% x 1/12 Rs. 2,500
May 2022 5,00,000 x 6% x 1/12 Rs. 2,500
June 2022 5,00,000 x 6% x 1/12 Rs. 2,500
July 2022 4,00,000 x 6% x 1/12 Rs. 2,000
August 2022 3,00,000 x 6% x 1/12 Rs. 1,500
September 2022 2,00,000 x 6% x 1/12 Rs. 1,000
October 2022 1,00,000 x 6% x 1/12 Rs. 500
Taxable amount Rs. 12,500

Circumstances Value of perquisite

Facility is provided uniformly to all employees Actual Expenditure incurred by the employer

Facility is not available uniformly to all Actual value offered to public by other agencies
employees

Employee is on official tour & he takes his family Amount of expenditure incurred for such family
member with him member

Any official tour is extended as a vacation. Expenses incurred for extended period.

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 Different situations of Journey Amount of exemption (LOWER OF 1 or 2)
1. Journey by Air (a) Fare of Economy class by shortest route or (b)
Amount spent
2. Journey by Rail or by other mode even if Routes (a) Fare of AC 1st class rail by shortest route or
of journey are connected by rail (b) Amount spent.
3. If origin & destination of journey (or part) are not connected by rail:
(a) If Recognised public transport Exists 1st/Deluxe fare by shortest route
(b) If No recognised public transport Exist AC 1st class rail fare by shortest route

Points to Remember:
❖ Exemption is available only for going anywhere in India along with family.
❖ Family: Spouse & children (Max 2 children), Dependent Parents, brothers, sisters.
❖ Only 2 journeys in a block of 4 years are Exempt: Block of 4 years applicable for AY 2023-24 is 2022-
2025 (1 Jan 2022 - 31 Dec 2025). Earlier blocks were 2018-2021 & so on.
❖ Exemption is based on Actual Expenditure: No Exemption without performing any journey.
❖ Exemption is available only on Bus fare, Rail fare, Air fare → No exemption of taxi charges, loading
charges, boarding expenses is available.
❖ CARRY FORWARD OF EXEMPTION
If any of the LTC available in earlier block has not been availed by the assessee, then assessee can
claim carry forward of such unavailed exemption (ONLY ONE) in 1st calendar year of the next block.
Such Carried forward exemption availed will not be counted i.r.o 2 journey in next block.
Ex: For the block of 2018-2021, X can claim exemption of LTC on two occasions. If X has not availed the exemption
(or has availed exemption only on one occasion) during 2018-2021, then he can carry forward unavailed
concession. The benefit of carry forward is available i.r.o. only one journey in 1st year of the next block (i.e during
Calendar Year 2022). In addition, he can avail exemptions on two more occasions during 2022-2025.

CQ11. Mr. D went on a holiday on 25.12.2022 to Delhi with his wife & 3 children (one son – age 5 years; twin
daughters – age 2 years). They went by flight (economy class) & total cost of tickets reimbursed by his employer
was Rs. 60,000 (Rs. 45,000 for adults & Rs. 15,000 for the three minor children). Compute the amount of LTC exempt.
Solution: Since the son’s age is more than the twin daughters, Mr. D can avail exemption for all his three children.
The restriction of two children is not applicable to multiple births after one child. The holiday being in India and the
journey being performed by air (economy class), the entire reimbursement met by the employer is fully exempt.

CQ12. Will there be any difference if among his three children the twins were 5 years old & son 3 years old?
Solution: Since the twins’ age is more than the son, Mr. D cannot avail for exemption for all his 3 children. LTC
exemption can be availed i.r.o. only two children. Taxable LTC = 15000 × 1/3 = Rs. 5000.

➢ Value of perquisite = Actual cost to the employer.

Cash gifts Fully taxable without any exemption.
Gifts in Kind Aggregate Exemption of Rs. 5,000 in a year.
PC Note: Gift or voucher or token may be received by the employee or by member of his household.
Ex: Employer provides a cash gift of Rs 3,000 to X. Beside this, X gets a wrist watch of Rs. 8,000 from his employer.
Answer: Rs. 3,000 being cash is fully taxable. Further Rs. 3,000 (Rs. 8,000 – Rs. 5,000) is taxable for gift-in-kind.

➢ If employer pays/reimburses telephone bills or mobile charges of employee → No Perquisite.

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➢ Taxable Amount = Actual Cost (Total salary paid by employer – amount recovered from employee)
PC Note: When a house owned by employer is given to employee & employer incurs expenditure on
maintenance of garden → Not a perquisite.
As per CBDT circular, provisions of gardener (when gardener is provided along with a house owned by the employer)
cannot be taken as a perquisite, as employer in any case would have maintained the garden irrespective of the fact
whether building was occupied by employee or lying vacant.

CQ13. Mr. X employed in XYZ Ltd. as a computer analyst gives you the list of perquisites provided by the company
to him for PY 2022-23:
1. Domestic servant was provided at the residence of Mr. X. Salary of domestic servant is Rs. 1,500 p.m. The servant
was engaged by him and the salary is reimbursed by the company (employer).
2. Free education was provided to his two children Y & Z in a school maintained and owned by the company. The
cost of such education for Y is computed at Rs. 900 p.m and for Z at Rs. 1,200 p.m. No amount was recovered by
the company for such education facility from Mr. X.
3. A gift voucher worth Rs. 10,000 was given on the occasion of his marriage anniversary. It is given by the company
to all employees above certain grade.
4. Telephone provided at the residence of Mr. X & bill aggregating to Rs. 25,000 paid by the employer.
Compute the chargeable perquisite in the hands of Mr. X for AY 2023-24.
Solution:
1. Domestic servant was employed by the employee & salary of such domestic servant was paid/reimbursed by the
employer. It is taxable as perquisite for all employees. Taxable perquisite value = Rs. 1,500 × 12 = Rs. 18,000.
2. Where the educational institution is owned by the employer, value of perquisite i.r.o free education facility shall
be determined with reference to the reasonable cost of such education in a similar institution in or near the
locality. However, there would be no perquisite if the cost of such education per child ≤ Rs. 1,000 p.m.
Therefore, there would be no perquisite i.r.o. cost of free education provided to his child Y.
However, the cost of free education provided to his child Z would be taxable, since the cost exceeds Rs. 1,000 p.m.
The taxable perquisite value would be Rs. 2,400 (Rs. 200 × 12).
3. The value of any gift or voucher or token in lieu of gift received by the employee or by member of his household
not exceeding Rs. 5,000 in aggregate during the previous year is exempt. Value of perquisite would be Rs. 5,000.
4. Telephone provided at the residence of the employee & payment of bill by the employer is a tax-free perquisite.

Nature of expenditure Taxability of perquisite.

1. Tea or snacks provided during working hours Not a perquisite
2. Meal provided in office Cost to employer (in excess of Rs 50) – Amount
recovered from the employee
3. Food & non-alcoholic beverages provided in Not a perquisite if provided in working hours
remote area or an off-shore installation
PC Note: Working hours include overtime & working on holidays.
Ex: Mr. X is employed in the office of Chartered Accountant and during the year he was given free lunch on many
occasions and value per lunch is Rs. 175. In such case Rs. 125 (Rs. 175 – Rs. 50) per lunch is taxable.

47
➢ Perquisite = Total expenditure incurred (including Membership fees) by the employer
Less: Expenditure incurred for official purposes [Complete details should be maintained]
Less: Amount recovered from employee.

➢ Perquisite = Total expenditure incurred (including annual fees) for club facilities
Less: Expenditure incurred for official purposes [Complete details should be maintained]
Less: Amount recovered from employee.
➢ Expenditure pertaining to health club, sports facilities etc. → Not a perquisite.
PC Note: Where the employer has obtained corporate membership of the club, value of perquisite shall
not include the initial fee paid for acquiring such corporate membership.

➢ Employer: Engaged in the carriage of passengers or goods;

➢ Services given: Free/concessional Tickets for Personal Journey/Goods;
➢ Perquisite = Value at which such benefit or amenity is offered by such employer to the public.
PC Note: In case of Employees of Airline or Railways → No Perquisite.

➢ Value of perquisite is determined as follows:

Asset given Value of benefit
(a) Laptops & computers NIL
(b) Other Movable assets 10% p.a. of Actual Cost (Hire/Rent Charges)

➢ Completed years of Use is not required. Even use of asset for part of year will be perquisite.

➢ Perquisite = WDV [Actual Cost – Depreciation] – Sale Consideration paid by employee.

➢ Depreciation shall be calculated only if asset has been used by employer for business purpose.
➢ Depreciation shall be calculated as follows for completed years of use only. (Fraction of years → Ignored)
1. Computer & electronics items 50% on WDV for each completed year of usage.
2. Motor car 20% on WDV for each completed year of usage.
3. Any other Asset 10% on SLM for each completed year of usage
➢ Electronics items do not include household electronic appliances.

CQ14. Find out the taxable value of the perquisite in the following cases for AY 2023-24:
1. Mr. X is given a laptop by his employer for using it for private purpose. Cost of the laptop is Rs. 96,000.
2. On 18.10.2022, the company gives its music system to Mr. X for domestic use. Ownership is not transferred.
Cost of music system (in 2014) to the employer is Rs. 30,000.
3. The employer sells the following assets to the employees on 1.1.2023:
Name of employee W X Y
Asset sold Car Computer Fridge
Cost of the asset to employer Rs. 8,50,000 Rs. 95,000 Rs. 30,000
Date of purchase [put to use on the same day) 14.5.2018 14.5.2018 14.5.2018
Sale price Rs. 3,00,000 Rs. 19,000 Rs.10,000
Before sale on 1.1.2023, these assets were used for business purpose by the employer.

48
Solution:
1. Free use of laptop is not a taxable perquisite.
2. S is provided a music system by the employer. Taxable perquisite is determined @ 10% p.a. of cost for the
165
period of use (From 18.10.2022 – 31.3.2023). Thus, Taxable perquisite = Rs. 1,356 [Rs. 30,000 x 10% x ].
365

3. The taxable value of the perquisite in the hands of W, X & Y shall be determined as follows-
Particulars Car Computer Fridge
Cost of the asset on 14.5.2020 8,50,000 95,000 30,000
Less: Normal wear & tear for 1st
year ending 13.5.2021
1,70,000 47,500 3,000
(20% of Rs. 8,50,000; 50% of Rs. 95,000; 10% of Rs.30,000)
Balance on 14.5.2021 6,80,000 47,500 27,000
Less: Normal wear & tear for 2nd
year ending 13.5.2022
1,36,000 23,750 3,000
(20% of Rs. 6,80,000; 50% of Rs. 47,500; 10% of Rs. 30,000)
Balance on 14.5.2022 5,44,000 23,750 24,000
Less: Sale consideration 3,00,000 19,000 10,000
Taxable value of the perquisite 2,44,000 4,750 14,000

PC Note: Depreciation is deductible for completed years of use only. (Fraction of years → Ignored).

CQ15. Mr. X is employed with ABC Ltd. His son is allowed to use a motor cycle belonging to the company. The
company had purchased this motor cycle for Rs. 60,000 on 1.5.2019 & given him on the same date. The motor
cycle was finally sold to him on 1.8.2022 for Rs. 30,000. Compute the taxable perquisite in the hands of Mr. X.
Solution:
(a) Perquisite for Use of motor cycle = 60,000 x 10% p.a. for 4 months [1.4.2022 – 31.7.2022] = Rs. 2,000.
Note: Only the period of use in this previous year shall be considered for valuation of perquisite. Because
we are determining the taxability for this PY. Students generally make mistake on this point.
(b) Perquisite i.r.o. Transfer of motor cycle:
Depreciated value of the motor cycle = Original cost - Depreciation @ 10% p.a. for 3 completed years
= Rs. 60,000 - (Rs. 60,000 x 10% p.a. x 3 years) = Rs. 42,000.
Taxable Perquisite = Rs. 42,000 - Rs. 30,000 = Rs. 12,000.

➢ No immediate benefit & benefit will accrue at a future date only if certain events take place.
➢ Moreover, employers would be taking such policy in their business interest only, so as to indemnify
themselves from payment of any compensation.
➢ Therefore, the premium so paid will not be a taxable perquisite in the employees’ hands.

➢ Taxable amount = Actual Cost (Total Expenditure of Employer – Amount Recovered from Employee)
➢ If Employee himself is manufacturer → Perquisite = Manufacturing cost incurred by employer.

CQ16: Mr. X is employed in Bisleri and the company has provided him free water facility for which manufacturing
cost of the company is Rs. 1,000 & its market value is Rs. 1,100, in this case, perquisite value shall be Rs. 1,000.

➢ Perquisite = Cost to Employer (Arms length price) – Amount recovered from employee.

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 Owned by Expenses by Purpose of use Taxable Perquisite
1. Employer Employer Fully Official No Perquisite
2. Employer Employer Fully Personal (a) Actual expenditure on car +
(b) Remuneration to driver +
(c) Depreciation @ 10% p.a on actual cost.
Expenses recovered from employee are deductible. No limit of Rs. 900 for driver’s salary.
3. Employer Employer Partly official & CC of Engine Perquisite
Partly Personal
Upto 1600 CC 1,800 p.m + 900 p.m for
driver = Rs 2,700 p.m

Above 1600 CC 2,400 p.m + 900 p.m for

driver = Rs 3,300 p.m
Rs. 900 p.m shall be taxable if driver is provided. Expenses recovered from employee are NOT deductible.

4. Employer Employee Partly official & CC of Engine Perquisite

Partly Personal
Upto 1600 CC 600 p.m + 900 p.m for
driver = Rs 1,500 p.m

Above 1600 CC 900 p.m + 900 p.m for

driver = Rs 1,800 p.m
Rs. 900 p.m shall be taxable if driver is provided. Expenses recovered from employee are NOT deductible.

5. Employee Employer Partly official & Actual Expenditure incurred Less ↓

Partly Personal
CC of Engine Perquisite
Upto 1600 CC 1,800 p.m + 900 p.m for
driver = Rs 2,700 p.m
Above 1600 CC 2,400 p.m + 900 p.m for
driver = Rs 3,300 p.m
Rs. 900 p.m shall be taxable if driver is provided. Expenses recovered from employee are NOT deductible.

6. Employee Employer Official use Not a perquisite.

7. Employee Employer Partly official & Actual Expenditure incurred by Employer
owns other Partly Personal Less: Rs. 900 p.m
conveyance
but not car
8. Employer Employee Fully Personal 10% p.a on actual cost of Car/hire charges

PC Note:
❖ Meaning of Month: Month means completed months.
❖ When two or more cars are provided by employer to the employee: If an employer provides two or more
cars (which falls in category 3), taxable value of only one such car (at employee’s option) shall be
determined according to the rules given in category 3. For other cars, value of perquisite shall be
calculated under category 2.
❖ Car facility between residence & office: Not taxable.
❖ Facility for HC/SC Judges/Chairman/members of UPSC: Not taxable.
❖ Transport allowance provided to serving chairman/members of UPSC is also not taxable.

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CQ17. Mr. X is employed in ABC Ltd. getting basic pay of Rs. 22,000 p.m. Employer has provided him rent free
accommodation which is owned by employer himself (Population of 5,00,000). [CA Exam Question]
Employer has provided him 3 motor cars for official as well as personal use with particulars as given below:
Particulars I II III
Actual cost 4,00,000 3,00,000 2,50,000
Engine capacity 1.8 litres 1.6 litres 1.4 litres
Petrol expenses 3,000 10,000 15,000
Repairs 5,000 4,000 3,000
Driver 4,000 p.m. 3,000 p.m. no driver
All the expenses are met by the employer. Compute his gross salary.
Solution:
Basic Pay (22,000 x 12) Rs. 2,64,000
Rent free accommodation (Sec 17(2)(i) Rule 3(1)} [7.5 % of Rs. 2,64,000] Rs. 19,800
Motor Car {Sec 17(2)(iii) Rule 3(2)} [See working Note] Rs. 1,62,600
Gross Salary Rs. 4,46,400

Working Note:
Option I: Car I is for official & personal purposes; Car II & III for personal purposes; perquisite value shall be:
Car I = (Rs. 2,400 + Rs. 900) x 12 Rs. 39,600
Car II = Rs. 30,000 + Rs. 10,000 + Rs. 4,000 + Rs. 36,000 Rs. 80,000
Car III = Rs. 25,000 + Rs. 15,000 + Rs. 3,000 Rs. 43,000
Perquisite value Rs. 1,62,600

Option II: Car II is for official & personal purpose; Car I & Car III is for personal use; perquisite value shall be:
Car I = Rs. 40,000 + Rs. 3,000 + Rs. 5,000 + Rs. 48,000 Rs. 96,000
Car II = (Rs. 1,800 + Rs. 900) x 12 Rs. 32,400
Car III = Rs. 25,000 + Rs. 15,000 + Rs. 3,000 Rs. 43,000
Perquisite Value Rs. 1,71,400

Option III: Car III is for official & personal purpose; Car I & Car II is for personal use; perquisite value shall be:
Car I = Rs. 40,000 + Rs. 3,000 + Rs. 5,000 + Rs. 48,000 Rs. 96,000
Car II = Rs. 30,000 + Rs. 10,000 + Rs. 4,000 + Rs. 36,000 Rs. 80,000
Car III = Rs. 1,800 x 12 Rs. 21,600
Perquisite Value Rs. 1,97,600

Conclusion: 1st option is better.

51
➢ Perquisite = FMV on Exercise Date – Amount Actually paid by the Employee.
➢ Year of taxability: Taxable in the year of Allotment of Shares.
PC Note: If the shares have been sold by employee, Cost of Acquisition = FMV on Exercise Date [Sec 49(2AA)].

CQ18. AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2022. Shares were allotted at Rs. 200
per share as against FMV of Rs. 300 per share on the date of exercise of option by Sri Chand.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be COA of those sweat equity shares?
Solution: Value of sweat equity shares = FMV on Exercise Date – Amount Actually paid by the Employee.
Perquisite = (Rs. 300 – Rs. 200) x 1000 shares = Rs. 1,00,000
As per section 49(2AA), where capital gain arises from transfer of sweat equity shares, the cost of acquisition
of such shares shall be the fair market value which has been taken into account for perquisite valuation u/s
17(2)(vi). (The provisions of section 49 are discussed in Unit 4: Capital Gains of this chapter).
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, COA would be Rs. 3,00,000.

A. Determination of FMV of specified security or sweat equity share, being an equity share
1 If Shares are listed on RSE → FMV = Average of Opening price & Closing price on exercise date.

2 If shares are listed on more than one RSE → FMV = Average of Opening price & Closing price on
exercise date on a RSE which records the highest volume of trading in the share.

3 If no trading in share on RSE → If on exercising date, there is no trading on any RSE, FMV shall be
(a) Closing price on any RSE on a date closest to exercise date & immediately preceding such date; or
(b) Closing price on a RSE, which records highest volume of trading in such share, if closing price, on
the date closest to exercise date & immediately preceding such date, is recorded on more than 1 RSE.

Closing price = Price of the last settlement on such date on such RSE. However, where stock exchange
quotes both “buy” and “sell” prices, closing price shall be the “sell” price of the last settlement.
Opening price = Price of the first settlement on such date on such RSE. However, where the stock
exchange quotes both “buy” & ‘sell’ prices, opening price shall be the “sell” price of the first settlement.

4 If shares are not listed on any RSE on exercise date → FMV = Value determined by a merchant
banker on the specified date.
Specified date” means (i) date of exercising of the option; or (ii) Any date earlier than exercise date,
not being a date, which is more than 180 days earlier than the date of the exercising.
PC Note: Where any amount has been recovered from the employee, the same shall be deducted to
arrive at the value of perquisites.

B. Determination of FMV of specified security or sweat equity share, NOT being an equity share
FMV = Value determined by a merchant banker on the specified date.

52
 TYPES OF PERQUISITES
A PERQUISITES TAXABLE IN THE CASE OF ALL EMPLOYEES
Rent Free/concessional Accommodation Already Discussed [Sec 17(2)(i)]

Payment by the employer i.r.o. an Amount paid by employer i.r.o. any obligation which
obligation of employee [Sec 17(2)(iv)] otherwise would have been payable by employee.

Ex: If a domestic servant is engaged by employee & employer reimburses the salary paid to the servant, it
becomes an obligation which the employee would have discharged even if employer did not reimburse it.
This perquisite will be covered by section 17(2)(iv) & will be taxable in the hands of all employees.
Amount payable by employer Amount payable by an employer directly or indirectly to
directly/indirectly to effect an assurance effect an assurance on the life of the assessee or to effect a
on the life of assessee (employee) contract for an annuity, other than payment made to
RPF or approved SAF or deposit-linked insurance fund
established under Coal Mines PF & Miscellaneous Provisions
Fund, 1948 or Employees’ PF & Miscellaneous Provisions Act,
1952 [Section 17(2)(v)].
However, there are schemes like group annuity scheme,
employees state insurance scheme & fidelity insurance
scheme, under which insurance premium is paid by
employer on behalf of the employees. Such payments are
not regarded as perquisite in view of the fact that employees
have only an expectancy of the benefit in such schemes.

Specified security or sweat equity Already Discussed [Sec 17(2)(vi)]

shares allotted/transferred by employer

Aggregate amount of any contribution Aggregate contribution made by employer to the account
made by employer of the assessee in (i) RPF; (ii) NPS; (iii) Approved SAF
to the extent it exceeds Rs. 7,50,000 [Sec 17(2)(vii)].

Annual accretion to the balance in Annual accretion by way of interest, dividend or any other
RPF/NPS/approved SAF which relates amount of similar nature during PY to the balance at the
to employer’s contribution & included credit of RPF/NPS/Approved SAF to the extent it relates
in TI (on account of the same having to the employer’s contribution which is included in TI in any
exceeded Rs. 7,50,000) PY u/s 17(2)(vii) [Sec 17(2)(viia)]. [Given in Detail Below]

Any other fringe benefit or amenity [Rule ✓ Interest free/concessional Loan

3(7)] ✓ Travelling, touring and accommodation
✓ Free or concessional food and non-alcoholic beverages
[Already discussed Earlier] ✓ Gift, voucher or tokens, Credit card & Club expenditure
✓ Use of movable assets; Transfer of movable assets etc.

B TAX FREE PERQUISITES IN CASE OF ALL EMPLOYEES

Telephone at employee’s residence Telephone provided by employer at his residence

Privilege passes & tickets granted by Indian Railways to its employees;

Transport Facility provided by employer engaged in business of carrying of passengers/goods to

employees;

Employer’s contribution to staff group insurance scheme

53
 (1) The amount or aggregate of amounts of any contribution made by the employer to the account of the
assessee in –
- RPF
- NPS referred to in section 80CCD(1) &
- Approved Superannuation Fund
to the extent it exceeds Rs. 7,50,000 would be perquisite in the hands of employee [Section 17(2)(vii)]

(2) Any annual accretion by way of interest, dividend or any other amount of similar nature during PY
to the balance at the credit of RPF or NPS or SAF to the extent it relates to the employer’s
contribution which is included in total income in any PY u/s 17(2)(vii), computed in prescribed manner
would also be perquisite taxable u/h ‘Salaries’ [Section 17(2)(viia)]

𝐏𝐂
×𝐑
𝟐

TP1 Aggregate of taxable perquisite u/s 17(2)(viia) for the previous year or years commencing on/after
01.04.2020 other than the current previous year (See Note).
PC Note: पुराने PYs ka Taxable Perquisite u/s 17(2)(viia).

PC Aggregate amount of employer’s contribution in excess of Rs. 7.5 lacs to specified fund/scheme
during the current PY (i.e. PY 2022-23).
PC Note: Employer’s contribution in excess of Rs. 7,50,000.

PC1 Aggregate amount of employer’s contribution in excess of Rs. 7.5 lacs to specified fund or scheme
for the previous year or years commencing on/after 1st April 2020 other than current previous
year (See Note).
PC Note: पुराने PYs ka excess contribution above Rs. 7,50,000.

R 𝐈
=
𝐀𝐠𝐠𝐫𝐠𝐚𝐭𝐞 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐚𝐜𝐜𝐫𝐮𝐞𝐝 𝐟𝐨𝐫 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐏𝐘
𝐅𝐚𝐯𝐠 (𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐨𝐟 𝐅𝐮𝐧𝐝+𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐨𝐟 𝐅𝐮𝐧𝐝)/𝟐

I Aggregate amount of income accrued during current PY in specified fund or scheme account.

Favg Aggregate amount of balance to the credit of specified fund or scheme on 1 st day of current PY
(i.e., on 1st April 2022) + Aggregate amount of balance to the credit of the specified fund or scheme
on last day of current PY (i.e., on 31st March 2023)/2
PC Note: (Opening Balance of Fund + Closing Balance of Fund)/2

Note: Specified fund/scheme → RPF, NPS referred to in section 80CCD(1) & approved superannuation fund.

CQ19. Mr. X is appointed as a CFO of ABC Ltd. in Mumbai from 01.09.2020. His basic salary is Rs.
6,00,000 p.m. He is paid 8% as DA. He contributes 10% of his pay & DA towards his RPF & company
contributes the same amount. Accumulated balance in RPF as on 1.4.2021, 31.3.2022 & 31.3.2023 is
Rs. 50,35,000, Rs. 71,46,700 & Rs. 94,57,700 respectively. Compute the perquisite value
chargeable in the hands of Mr. X u/s 17(2)(vii) and 17(2)(vii) for AY 2022-23 & AY 2023-24.

54
Solution: Computation of perquisite value of Mr. X u/s 17(2)(vii) and 17(2)(vii) for AY 2022-23
1 Perquisite value taxable u/s 17(2)(vii) = Rs. 27,600 [Rs. 7,77,600 - Rs. 7,50,000]
2 Annual accretion on perquisite taxable u/s 17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2)*0.0914 + 0 = Rs. 1,261

PC ABC Ltd.’s contribution in excess of Rs. 7.5 lakh to RPF during PY 2021-22 = Rs. 27,600
PC1 Nil since employer’s contribution is less than Rs. 7.5 lakh to RPF in PY 2020-21.
TP1 Nil
R I/Favg = 5,56,500/60,90,850 = 0.0914
I RPF balance as on 31.3.2022 – employee’s and employer’s contribution during the year – RPF
balance as on 1.4.2021= Rs. 5,56,500 (Rs. 71,46,700 – Rs. 7,77,600 – Rs. 7,77,600 – Rs. 50,35,000)
Favg Balance to the credit of RPF as on 1st April, 2021 + Balance to the credit of RPF as on 31st March,
2022)/2 = (Rs. 50,35,000 + Rs. 71,46,700)/2 = Rs. 60,90,850.

PC Note: Since employee’s contribution to RPF exceeds Rs. 2,50,000 in PY 2022-23, interest on Rs. 5,27,600
(i.e., Rs. 7,77,600 – Rs. 2,50,000) will also be chargeable to tax.

Computation of perquisite value of Mr. X u/s 17(2)(vii) and 17(2)(vii) for AY 2023-24
1 Perquisite value taxable u/s 17(2)(vii) = Rs. 27,600 [Rs. 7,77,600 - Rs. 7,50,000]
2 Annual accretion on perquisite taxable u/s 17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2)*0.0910 + (27,600 + 1261) * 0.0910 = Rs. 1,256 + Rs. 2,626 = Rs. 3,882

PC ABC Ltd.’s contribution in excess of Rs. 7,50,000 to RPF during PY 2022-23 = Rs. 27,600
PC1 Employer’s contribution in excess of Rs. 7,50,000 to RPF in PY 2021-22 = Rs. 27,600
TP1 Taxable perquisite u/s 17(2)(viia) for PY 2021-22 = Rs. 1261.
R I/Favg = 7 ,55,800/83,02,200 = 0.0910.
I RPF balance as on 31.3.2023 – Employee’s and employer’s contribution during the year – RPF
balance as on 1.4.2022 = Rs. 7,55,800 (Rs. 94,57,700 – Rs. 7,77,600 – Rs. 7,77,600 – Rs. 71,46,700)
Favg Balance to the credit of RPF as on 1st April, 2022 + Balance to the credit of RPF as on 31st March,
2023)/2 = (Rs. 71,46,700 + Rs. 94,57,700)/2 = Rs. 83,02,200.

PC Note: Interest on aggregate of the following will also be taxable during AY 2023-24:
(1) Rs. 5,27,600 [Employee’s contribution exceeding Rs. 2,50,000 during PY 2021-22]
(2) Rs. 5,27,600 [Employee’s contribution exceeding Rs. 2,50,000 during PY 2022-23]
(3) Interest accrued on Rs. 5,27,600 being excess employee’s contribution of PY 2021-22.

C PERQUISITES TAXABLE ONLY IN HANDS OF SPECIFIED EMPLOYEES [SECTION 17(2)(iii)]

➢ Monetary perquisites are taxable in the hands of all employees [Specified + Non-Specified].
➢ Non-Monetary perquisites are taxable in the hands of specified employees only.
➢ Following Perquisites will be taxable in the hands of Specified Employees only. [V. IMP]
▪ Provision of Sweeper, gardener, watchman or personal attendant
▪ Facility of use of Gas, Electricity or Water supplied by employer
▪ Free or Concessional tickets; Free or concessional Educational Facilities & Use of Motor Car.

55
 Specified Director ▪ Any Director of the company.
Employee Employee
Substantial ▪ Person has substantial interest in a company if he is a beneficial owner
Interest of equity shares carrying ≥ 20% of voting power in the company.
Salary > Rs. ▪ Employee drawing a salary of more than Rs. 50,000.
50,000
While calculating limit of Rs. 50,000, following payment shall be ignored:
(a) All Non-monetary benefits;
(b) Exempt Monetary benefits u/s 10. [Ex: HRA to the extent it is exempt]
(c) Standard deduction of Rs. 50,000;
(d) Deduction for Entertainment allowance & Professional tax.

Non-Specified Employee: Employees other than specified employees.

CQ20. Mrs. Roma, an employee of XYZ Ltd., submits the following information for AY 2023-24:
Salary: Rs. 1,86,000; City compensatory allowance: Rs. 8,000; Bonus: Rs. 10,200; Education allowance: Rs. 4,000
(for her grandchildren); Income tax penalty paid by the employer: Rs. 2,000: Medical expenses reimbursed by
the employer: Rs. 12,000; Leave travel concession: Rs. 1,000 (expenditure incurred by the employee nil); Free
residential telephone: Rs. 4,000; Free refreshment during office hours: Rs. 4,000; reimbursement of electricity
bill by the employer: Rs. 1,060; reimbursement of gas bills: Rs. 1,000; Professional tax paid by the employer: Rs.
300 on behalf of Mrs. Roma; Professional tax paid by Mrs. Roma: Rs. 150. Determine Total Income of Mrs. Roma.
Solution: Computation of Salary Income of Mrs. Roma
Basic Salary Rs. 1,86,000
City Compensatory Allowance Rs. 8,000
Bonus Rs. 10,200
Education Allowance [Fully taxable since given for grandchildren] Rs. 4,000
Income tax Penalty paid by employer [Income tax paid by employer on non- Rs. 2,000
monetary perquisites is exempt. In this case, penalty is paid. Thus, it is a taxable perquisite]
Medical Reimbursement [other medical facilities are fully taxable] Rs. 12,000
Leave Travel Concession [taxable since actual expenditure is not incurred] Rs. 1,000
Residential Telephone Nil
Refreshment [Since during office hours] Nil
Payment of electricity bills by employer [It is a taxable perquisite] Rs. 1060
Reimbursement of gas bills [It is a taxable perquisite] Rs. 1000
Professional tax paid by employer [First included in salary & then allowed as deduction u/s Rs. 300
16(iii)]
Gross Salary Rs. 2,25,560
Less: Standard deduction u/s 16(ia) (Rs. 50,000)
Less: Professional Tax paid by employee as well as employee [Rs. 300 + Rs. 150] (Rs. 450)
Taxable salary Rs. 1,75,110

56
 Particulars SPF RPF URPF PPF
Employer’s Fully Exempt upto 12% of Not taxable to employee at NA as there is
contribution Exempt salary. the time of contribution only assessee’s
Amount in excess of 12% own
of salary is taxable. contribution.
Employee’s Deductible Deductible u/s 80C No deduction. Deductible u/s
contribution u/s 80C. 80C
Interest on Fully Exempt  Exempt upto 9.5% p.a. Not taxable at the time of NA.
Employer’s  Excess over 9.5% p.a. credit of interest
Contribution is taxable.
Interest on Exempt upto  Exempt upto 9.5% p.a. Not taxable at the time of Fully Exempt
Employee’s certain limit  Excess over 9.5% p.a. credit of interest
Contribution of is taxable. [Note 2]
contribution
[Note 1]
Amount Exempt u/s Exempt u/s 10(12) Exempt u/s
withdrawn on 10(11) subject to certain 10(11)
retirement or conditions [Note 3]
termination

IMPORTANT NOTES
1. Interest credited on Employee’s contribution: [Contains Amendment]
▪ As per section 10(11), any payment from PF or PPF Public Provident Fund would be exempt.
▪ Accumulated balance payable to an employee participating in RPF would be exempt u/s 10(12).
▪ However, exemption u/s 10(11) or 10(12) would not be available i.r.o. income by way of interest accrued
during PY to the extent it relates to the amount or aggregate of amounts of contribution made by that
person/employee exceeding Rs. 2,50,000 in any previous year in that fund, on/after 1 st April 2022.
▪ If contribution by such employee is in a fund in which there is no employer’s contribution, then, a
higher limit of Rs. 5,00,000 would be applicable for such contribution, and interest accrued in any
previous year in that fund on/after 1st April, 2022 would be exempt upto that limit.
▪ PC Note: Interest accrued on contribution to such funds upto 31 st March, 2022 would be exempt
without any limit, even if the accrual of income is after that date.
Interest income accrued during PY which is not exempt (taxable interest) shall be computed as the
interest accrued during the previous year in the taxable contribution account.
For this purpose, separate accounts within PF A/c shall be maintained during PY 2021-22 & all
subsequent previous years for taxable contribution and non-taxable contribution made by a person.
(a) Non-taxable contribution account – Aggregate of
(i) closing balance in the account as on 31.03.2021;
(ii) any contribution made by the person in the account during the previous year 2021-22 and
subsequent previous years, which is not included in the taxable contribution account; and
(iii) interest accrued on (i) and (ii), as reduced by the withdrawal, if any, from such account.
(b) Taxable contribution account – Aggregate of
(i) contribution made by the person in the account during the previous year 2021-22 and
subsequent previous years, which is in excess of the yearly threshold limit; and
(ii) interest accrued on (i) as reduced by the withdrawal, if any, from such account.

2. URPF
▪ Accumulated Employee’s contribution is not taxable.
▪ Accumulated Employer’s contribution + its interest is taxable as “profit in lieu of salary”.
▪ Interest on Employees Contribution is taxable u/h IFOS.

57
3. RPF: Withdrawal of accumulated balance by employee from RPF is exempt in following cases:
(a) If employee has rendered continuous service with his employer for a period of 5 years/more.
(b) If service has been terminated by reason of (a) employee’s ill health, (b) discontinuance of employer’s
business, (c) reasons which are beyond employee’s control. [even if continuous service < 5 years].
(c) If employee joins new employment on cessation of his old employment & accumulated balance in his
PF A/c (due to him) is transferred to his individual A/c in any RPF maintained by new employer. In
such case, for calculating period of service for (i) & (ii) above, period for which employee rendered
continuous service under his former employer shall be included.
If accumulated balance is paid to employee otherwise than in circumstances referred above (Ex: where
employee voluntarily resigns before 5 years of service, amount paid is taxable. In such cases, deduction
allowed shall be withdrawn. Thus,  Employer’s contribution + Interest on it (which was not taxed earlier)
→ Taxed as Profit in lieu of salary.  Interest on employee’s contribution → Taxable u/h IFOS.

CQ21. Mr. X retires from service on 31st Dec 2022 after 25 years of service. Particulars for PY 2022-23 are as follows:
Basic pay @ Rs. 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) for 9 months [Rs. 8,000 p.m × 9 months] 72,000
Lumpsum payment received from UPPF 6,00,000
Deposits in PPF A/c 40,000
Out of the amount received from PF, employer’s share was Rs. 2,20,000 & interest thereon Rs. 50,000. Employee’s
share was Rs. 2,70,000 & interest thereon Rs. 60,000. What is the taxable portion of the amount received from URPF
in the hands of Mr. X for AY 2023-24?
Solution: Taxable portion of the amount received from URPF in the hands of Mr. X for AY 2023-24
1. Amount taxable u/h ‘Salaries’ [Profit in lieu of salary]
Employer’s share in the payment received from URPF Rs. 2,20,000
Interest on the employer’s share Rs. 50,000
Total Rs. 2,70,000

58
 2. Amount taxable u/h ‘IFOS’
Interest on Employee’s contribution Rs. 60,000
Total taxable amount in the hands of Mr. X Rs. 3,30,000
PC Note: Accumulated Employee’s contribution of Rs. 2,70,000 will not be taxable since it was not allowed as deduction
at the time of payment.

CQ22. Mr. B is working in XYZ Ltd. & has given the details of his income for PY 2022-23. You are required to
compute his gross salary from the details given below:
Basic Salary Rs. 10,000 p.m.
D.A. (50% is for retirement benefits) Rs. 8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year Rs. 50,00,000
Bonus Rs. 40,000
Gratuity Rs. 25,000
His own contribution in the RPF Rs. 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. Rs. 13,000
Solution: Computation of Gross Salary of Mr. B for AY 2023-24
Particulars Rs Rs
Basic Salary [Rs. 10,000 × 12] 1,20,000
Dearness Allowance [Rs. 8,000 × 12] 96,000
Commission on turnover [0.1% × Rs. 50,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employer’s contribution to RPF [20% of Rs. 1,20,000] 24,000
Less: Exempt [Note 2] (20,760) 3,240
Interest accrued in the RPF @ 13% p.a. 13,000
Less: Exempt @ 9.5% p.a. (9,500) 3,500
Gross Salary 2,92,740
Note:
1. Gratuity received during service is fully taxable.
2. Employer’s contribution in the RPF is exempt up to 12% of the salary. i.e., 12% of [Basic Salary + Dearness
Allowance forming part of retirement benefits + Commission based on turnover] = 12% of [Rs. 1,20,000 +
(50% × Rs. 96,000) + Rs. 5,000] = 12% of Rs. 1,73,000 = Rs. 20,760
3. Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s 80C.

59
➢ Amount received by encashment of unutilized leave on retirement/termination of employment.
➢ Leave salary received during the period of service → Fully Taxable. (Gov/Non-Gov. Employees)
➢ Taxability of leave salary received at the time of retirement is different. It is as follows:
 Government Employees (at the time of retirement): Fully Exempt.
 Non-Government Employees (at the time of retirement): Partly Exempt.
(on retirement) Least of the following is EXEMPT↓
1. Leave Salary Actually received.
2. Rs. 3,00,000
3. 10 × AMS (on the basis of average salary of last 10 Months)
4. Leaves Earned (in No. of Months) × AMS.

➢ Leaves Earned = [Completed years of service × No. of leaves credited/month (Maximum 30 days allowed
in a year)] – Leaves actually taken/ availed.
➢ AMS = Average Salary of 10 months immediately preceding date of retirement.
➢ Leave entitlement credited cannot exceed 30 days for every year of actual service rendered.

PC Note:
 Receipt of Leave salary from two or more employers: in the same year/ different year, then the aggregate
amount of leave salary exempt from tax cannot exceed Rs. 3,00,000.
 If Leave salary is received in any earlier year from former employer & again received from another employer
in later year, limit of Rs. 3,00,000 will be reduced by amount of leave salary exempt earlier.
 Leave salary paid to legal heir & family of government servant who died in harness (on duty) → Exempt.
CQ23. X was employed by PQR Ltd. upto March 15, 2008. At the time of leaving PQR Ltd, he was paid Rs. 3,50,000
as leave salary out of which Rs. 57,000 was exempt from tax u/s 10(AA)(ii). Thereafter he joined ABC(P.) Ltd. &
received Rs. 4,12,200 as leave salary at the time of his retirement on 31st Dec 2022. Determine taxable leave salary:
1 Salary at the time of retirement (p.m) Rs. 22,900
2 Average salary received during 10 months ending on December 31,2022
- From March 1, 2022 to July 31, 2022 (p.m) Rs. 22,600
- From August 1, 2022 to December 31, 2022 (p.m) Rs. 22,900
3 Duration of service (a) 14.75 years
4 Leave entitlement for every year of service (b) 45 days
5 Leave availed while in service (c) 90 days
6 Leave at the credit of employee at the time of retirement [(14 years x 45 months - 90)/30] 18 months
7 Leave salary paid at the time of retirement @ Rs. 22,900 p.m (i.e., Rs. 22,900 x 18) Rs. 4,12,200
Solution:
1 Leave Salary Received Rs. 4,12,200
2 Leave Salary Exempt u/s 10(10AA) [Lower of the following]
(i) Amount actually received = Rs. 4,12,200
(ii) Rs. 3 Lacs – Rs. 57000 (Amount already exempted from previous employer) Rs. 2,43,000
(iii) 10× 22,750 (Note 1) = Rs. 2,27,500
(iv) 11 × 22750 (Note 2) = Rs. 2,50,250 (Rs. 2,27,500)
3 Taxable Leave Salary [1 – 2] Rs. 1,84,700
Note 1: AMS = [(Rs. 22600 × 5) + (Rs. 22900 × 5)] ÷ 10 = Rs. 22750.
Note 2: Leaves Earned = {Completed years of service × No. of leaves credited/month (Max. 30 days allowed in a PY)]
– Leaves actually taken} ÷ 30 days. = [{14 × 30} – 90] ÷ 30 = 11 months.

60
 → [Payable at time of cessation of employment]
Type of Employee EXEMPTION I.R.O GRATUITY
1. Government Employees Fully Exempt u/s 10(10)(i)

2. Non-Government Employees
1 EMPLOYEES COVERED BY 1. Gratuity Actually Received
GRATUITY ACT, 1972 2. Rs. 20 Lacs
Exempt Gratuity = Least of → 3. Length of Service (LOS) x 15 days Salary
(a) How to calculate LOS: More than half year = Full year [Ignore less than half part]
𝐒𝐚𝐥𝐚𝐫𝐲 𝐥𝐚𝐬𝐭 𝐝𝐫𝐚𝐰𝐧 × 𝟏𝟓
(b) 15 days salary = .
𝟐𝟔
2 EMPLOYEES NOT COVERED 1. Gratuity Actually received.
BY GRATUITY ACT, 1972
2. Rs. 20 Lacs
Exempt Gratuity = Least of →
3. ½ Month’s Average Salary x Completed YOS
AMS: Average salary for 10 months immediately preceding Retirement Month (& not date).

PC Note:
❖ Gratuity Received during the period of Service → Fully Taxable.
❖ Gratuity received by Members of Defence Service → Fully Exempt.
❖ Retirement Gratuity received by Employees of CG/Members of Civil Services/LA → Fully Exempt.
❖ Gratuity is received by Widow, Children or Dependents of Deceased Employee → Fully Exempt.
❖ Completed YOS (year of service) will include the period of earlier employment if the employee was not
entitled to gratuity at that time/during that employment.
❖ Exemption Limit of Rs. 20 Lacs is the maximum amount of gratuity exempt. If gratuity is received in
any earlier year from former employer (if any) & again received from another employer in later year,
limit of Rs. 20 Lacs will be reduced by the amount of gratuity exempt earlier.

CQ24. Mr. Raj not being covered by Payment of Gratuity Act, 1972 retires during PY 2022-23 from XYZ
Private Ltd & receives Rs. 45,000 as gratuity after service of 40 years 11 months. His average monthly
salary during last 10 months of services was Rs. 2,200. Determine taxable gratuity for AY 2023-24.
Solution: Computation of taxable gratuity of Mr. Raj
1 Amount of Gratuity Received Rs. 45,000
2 Amount of Gratuity Exempt u/s 10(10) [Least of the following] Rs. 44,000
(1) Amount of Gratuity actually received = Rs. 45,000
(2) Specified Amount = Rs. 20 Lacs
(3) Rs. 2,200 x ½ x 40 = Rs. 44,000
3 Taxable gratuity [ 1 – 2] Rs. 1,000

❖ Pension → Periodic payment made to employee after his retirement in consideration of past services.
1 COMMUTED PENSION ▪ Converting future right to receive monthly pension into
[Commutation = Inter-Change] lumpsum amount receivable immediately on retirement.
▪ It is lumpsum payment in lieu of periodical payment.
2 UNCOMMUTED PENSION ▪ It is periodical payment of pension.
(Monthly pension) ▪ It is always TAXABLE to both Gov & Non-Gov Employees.

Ex: If a person is entitled to receive a pension of Rs. 10,000 p.m. for the rest of his life. He may commute 50% of this
amount & get a lumpsum of Rs. 3 lace (random amount). After commutation, his monthly pension will now be the
balance 50% of Rs. 10,000 p.m. = Rs. 5,000 p.m.

61
❖ TAX TREATMENT OF UNCOMMUTED (MONTHLY) PENSION: It is always TAXABLE in the hands of
both Government/Non-Government Employee.

❖ TAX TREATMENT OF COMMUTED PENSION [Taxable Pension = Pension Received – Exempt Pension]
Type of Employee Tax Treatment
1. Government Always EXEMPT.

2. Non-Government EXEMPTION I.R.O COMMUTED PENSION

Employees A If Gratuity is Exemption = 1/3rd of the Pension which he would
received have been normally entitled to receive had he not
by Employee commuted the pension (Total Pension).
B If Gratuity is Exemption = 1/2th of the Pension which he would
not received have been normally entitled to receive had he
by Employee commuted the pension (Total Pension).
𝐂𝐨𝐦𝐦𝐮𝐭𝐞𝐝 𝐏𝐞𝐧𝐬𝐢𝐨𝐧
PC Note: For this purpose, Total Pension =
% 𝐨𝐟 𝐜𝐨𝐦𝐦𝐮𝐭𝐢𝐨𝐧

PC Note:
 Commuted Pension to Judges of HC/SC → Fully Exempt.
 Commuted Pension received by Individual out of annuity plan of LIC → Exempt.
 Pension received from UNO by the employee or his family members → Exempt.
 Family Pension received by the family members of Armed forces → Exempt u/s 10(19).
 Family Pension received by family members after death of an employee (Other than armed forces) →
Taxable u/h IFOS. Deduction u/s 57 = Lower of Rs 15000 OR 1/3rd of Pension.

CQ25. Mr. X retires from PQR Ltd. on 31.3.2021. He is paid Rs. 1,800 p.m. as pension. On his request, RG
Co. pays Rs. 36,000 to Mr. X in lieu of 50% of his monthly pension on 1.12.2023. Calculate taxable pension
in the hands of Mr. X for AY 2023-24 assuming that (i) Gratuity is paid, (ii) Gratuity is not paid.
Solution: Mr. X has commuted his pension on 1.12.2022. Till 31.11.2022 (i.e for 8 months), he was receiving
monthly pension of Rs. 1,800. Now from 1.12.2022, he will receive only Rs. 900 as monthly pension since he
Rs. 36,000
has commuted 50% of his monthly pension. Total pension = = Rs. 72,000 for exemption.
50%

Case I: Gratuity is paid to Mr. X Amount Total

1 Uncommuted Pension (Always Taxable to all employees)
- Before commutation (Rs. 1,800 x 8 months) 14,400
- After commutation (Rs. 900 x 4 months) 3,600 18,000
2 Taxable Commuted Pension [A – B]
A. Commuted Pension Received 36,000
B. Exempt u/s 10(10A) = 1/3rd of Total Pension [1/3 x Rs. 72,000] (24,000) 12,000
Total Taxable Pension [1 + 2] 30,000

Case II : Gratuity is not paid to Mr. X Amount Total

1 Uncommuted Pension (Always Taxable to all employees)
- Before commutation (Rs. 1,800 x 8 months) 14,400
- After commutation (Rs. 900 x 4 months) 3,600 18,000
2 Taxable Commuted Pension [A – B]
C. Commuted Pension Received 36,000
D. Exempt u/s 10(10A) = 1/2 of Total Pension [1/2 x Rs. 72,000] (36,000) Nil
Total Taxable Pension [1 + 2] 18,000

62
➢ Any compensation received by a workman at the time of his retrenchment shall be Exempt to the
Extent of Lower of the following:
(a) Actual Amount Received.
(b) Rs. 5,00,000.
(c) 15 days Average Pay × Length of service (More than half year shall be treated as full year).

PC Note: Compensation received by workman as per the scheme approved by CG → Exempt u/s 10(10B).

CQ26. Mr. Garg received retrenchment compensation of Rs. 10 Lacs after 30 years 4 months of service. He was
drawing basic salary Rs. 20,000 p.m.; DA - Rs. 6,000 p.m. Compute his taxable retrenchment compensation.
Solution: Taxable Retrenchment compensation = Rs. 10 lacs – Rs. 4,50,000 (Refer WN below) = Rs. 5,50,000
WN - Calculation of Exempt Retrenchment compensation = Lower of
(a) Actual Amount Received = Rs. 10 lacs (b) Rs. 5,00,000.
(c) 15 days Average Pay × LOS (More than half is treated as full) = Rs. 26000 × 15/26 × 30 years = Rs. 4,50,000.

➢ Maximum Exemption upto Rs. 5,00,000 is available if following condition is satisfied:

Condition: Amount payable for VRS should not exceed [Higher of (a) or (b)]
(a) 3 Months Salary for each completed year of service.
(b) Salary @ time of retirement × Balance months of service left before retirement/superannuation.

PCNote:
❖ Relief u/s 89 is not available if exemption is taken in this section.
❖ Exemption u/s 10(10C) shall be allowed once in a lifetime.
❖ It applies to an employee who has completed 10 years of service or completed 40 years of age. [Except
employee of a public sector company under voluntary separation scheme framed by the company].
❖ It applies to all employees except directors of a company or a cooperative society.

CQ27. Mr. Dutta received voluntary retirement compensation of Rs. 7,00,000 after 30 years 4 months.
He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary Rs.
20,000 p.m.; Dearness allowance (which forms part of pay) Rs. 5,000 p.m. Compute taxable VRS.
Solution: Exemption of Rs. 5,00,000 is available if Amount payable for VRS does not exceed Higher of
(a) 3 Months Salary for each completed year of service = 3 × Rs. 25,000 × 30 years = Rs. 22,50,000;
(b) Salary @ time of retirement × Balance months of service left before retirement = Rs. 25,000 × 72 =
Rs. 18 lacs;
 Thus, If VRS Compensation received does not exceed Rs. 22,50,000, Exemption of Rs. 5,00,000 will be
available.
 Amount of VRS Compensation received = Rs. 7,00,000. Thus Rs. 5,00,000 will be Exempt.
 Taxable VRS = Rs. 2,0,000.

Applicability Only to new employees of government or any other employer.

Scheme Every employee is required to contribute 10% of his salary every month towards NPS.
A matching contribution is made by the employer.

Tax Treatment 1. Employer’s contribution: First included in salary income of the employee &
deduction (upto 10%/14% of salary) is given u/s 80CCD(2).
2. Employee’s contribution: Deductible (upto LOWER OF 10% of salary or Rs. 1.5
lacs) u/s 80CCD(1).

Maturity amount Pension received out of the aforesaid amount → Taxable to recipient.

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Standard Deduction ▪ Lower of (i) Rs. 50,000 or (ii) Amount of Salary.
[Sec 16(ia)]
Entertainment ▪ It is first included in salary income & then deduction is available u/s 16.
Allowance ▪ Least of the following is Exempt for GOVERNMENT EMPLOYEES only.
[Section 16(ii] Amount of entertainment allowance actually received during PY.

Rs. 5,000.

20% of basic salary.

▪ Actual expenditure towards entertainment is NOT RELEVANT.

▪ Non-Government Employee → Entertainment allowance is not deductible.

Professional Tax ▪ It is levied by a State under Article 276 of the Constitution. SG cannot impose
[Section 16(iii)] more than Rs. 2,500 as profession tax.
▪ It is deductible only when it is actually paid by the Employee during PY.
PC Note: Student should note that the Limit of Rs. 2,500 is for the levy of
professional tax in a previous year by the State Government. However, under
Income Tax Act, there is no such limit on claiming deduction in a PY. Thus, if
Rs. 5,000 is paid as professional tax during the PY, whole of Rs. 5,000 will be
deductible in the PY in which it is paid.
▪ If an Employer pays Professional Tax on behalf of Employee, it shall be first
included in salary of the employee as perquisite & then shall be allowed as
deduction on payment basis.

CQ28. Mr. D, a Government employee gets Rs. 20,000 per year as entertainment allowance out of which he
spends Rs. 2,000 for official purpose; Rs. 3,200 for personal purposes & save the balance Rs. 14,800. Basic
salary amounts to Rs. 60,000. Compute the taxable entertainment allowance.
Solution: Computation of taxable entertainment allowance
1 Entertainment allowance actually received for the year 20,000
2 Least of the following will be deductible u/s 16(ii)
1. Specified Amount (i.e. Rs. 5,000);
2. 20% of basic salary: Rs. 60,000 × 20% = Rs. 12,000
3. Actual entertainment allowance: Rs. 20,000 (5,000)
3 Taxable Entertainment Allowance [ 1 – 2] 15,000

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➢ If any individual receives any portion of his salary in arrears or in advance or receives profits in lieu of
salary (gratuity, commuted pension), family pension & as a result of such receipt, his income is assessed
at a higher rate than the rate at which it would have been assessed if there was no such aforesaid receipts, he
can claim relief u/s 89.

➢ Procedure for computing relief as given in Rule 21A is as follows:

1 Calculate the tax payable of PY in which the arrears/ advance salary is received on
(a) Total Income including of advance salary/ salary in arrears.
(b) Total Income excluding of advance salary/ salary in arrears
Difference between (a) & (b) is the tax on additional salary included in the total income.

2 Calculate the tax payable of PY to which the advance salary/salary in arrears relates.
(a) Total Income including of advance salary/ salary in arrears
(b) Total Income excluding of advance salary/ salary in arrears.
Calculate the difference between (a) & (b) for every PY to which the additional salary relates.

3 Excess tax on additional salary as calculated in 1 & 2 shall be Relief admissible u/s 89.

CQ29. Mr. Hari, who turned 70 years on 28.3.2023, salary for PY 2022-23 is Rs. 10,20,000 & Arrears of salary
received is Rs. 3,45,000. Further, you are given the following details relating to the earlier years to which the
arrears of salary received is attributable to:
Previous year Taxable Salary Arrears now received
2010 – 2011 7,10,000 1,03,000
2011 – 2012 8,25,000 1,17,000
2012 – 2013 9,50,000 1,25,000
Compute relief u/s 89 & tax payable for AY 2023-24. Assume that Mr. Hari does not opt for section 115BAC.
Note: Rates of Taxes:
AY Slab rates of income-tax for Resident Individual
For Senior For Others
2011–12 Upto 2,40,000 Nil Upto Rs. 1,60,000 Nil
2,40,001 - 5,00,000 10% Rs. 1,60,001 - Rs. 5,00,000 10%
5,00,001 - 8,00,000 20% Rs. 5,00,001 - Rs. 8,00,000 20%
Above 8,00,000 30% Above Rs. 8,00,000 30%
2012–13 Upto 2,50,000 Nil Upto Rs. 1,80,000 Nil
2,50,001 - 5,00,000 10% Rs. 1,80,001 - Rs. 5,00,000 10%
5,00,001 - Rs. 8,00,000 20% Rs. 5,00,001 - Rs. 8,00,000 20%
Above Rs. 8,00,000 30% Above Rs. 8,00,000 30%
2013–14 Upto Rs. 2,50,000 Nil Upto Rs. 2,00,000 Nil
2,50,001 - 5,00,000 10% Rs. 2,00,001 - Rs. 5,00,000 10%
5,00,001 - 10,00,000 20% Rs. 5,00,001 - Rs. 10,00,000 20%
Above 10,00,000 30% Above Rs. 10,00,000 30%
Note: Education cess @ 2% & SHEC @ 1% was attracted on the income-tax for all above preceding years.

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Solution: Computation of tax payable by Mr. Hari for AY 2023-24
Particulars Incl. arrears of salary Excl. arrears of salary
Current year salary 10,20,000 10,20,000
Add: Arrears of salary 3,45,000 -
Taxable Salary 13,65,000 10,20,000
Income-tax thereon 2,19,500 1,16,000
Add: HEC @ 4% 8,780 4,640
Total payable 2,28,280 1,20,640

Computation of tax payable on arrears of salary if charged to tax in respective AYs

Particulars AY 2011-12 AY 2012-13 AY 2013-14
Incl. arrears Excl. arrears Incl. arrears Excl. arrears Incl. arrears Excl. arrears
Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000
Add: Arrears of salary 1,03,000 - 1,17,000 - 1,25,000 -
Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000
Tax 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000
Add: Cess@3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450

Computation of Relief u/s 89

Particulars Rs. Rs.
Tax payable in AY 2023-24 on arrears:
Tax on income including arrears 2,28,280
Less: Tax on income excluding arrears 1,20,640 1,07,640
Tax payable in respective years on arrears:
Tax on income including arrears (Rs. 1,00,837 + Rs. 1,38,638 + Rs. 1,51,925) 3,91,400
Less: Tax on income excluding arrears (Rs. 78,280 + Rs. 1,02,485 + Rs. 1,18,450) 2,99,215 92,185
Relief u/s 89 [Diffn b/w tax on arrears in AY 2023-24 & tax on arrears in respective 15,455
years]

------------------------------------------------------------THE END --------------------------------------------------------------------

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  Sale of House Property → Taxable u/h ‘Capital Gains’.
 Renting of House Property → Taxable u/h ‘House Property’.
Note: Annual Value is taxable & not the rent.

BASIS OF CHARGE [SECTION 22]

➢ ‘Annual value’ of any house property which is owned by the assessee is taxable u/h ‘Income from HP.
➢ House property shall include all types of house properties [i.e. residential houses, shops, godowns,
cinema building, workshop building, hotel buildings etc].

ANALYSIS OF SECTION 22

1 Property should consist of any Building or/& Land attached (appurtenant) to the building (thereto)

▪ Land appurtenant means land connected with the building [Ex: Garden, Garage, Parking]
▪ Letting out of vacant land → Taxable u/h IFOS [as No Building]
▪ Subletting of House Property → Taxable u/h IFOS [as No Ownership]

2 Assessee must be the owner of the rented House Property

▪ Ownership of land on which the building stands is not necessary. [Land may be on lease].
▪ Ownership in PY is relevant & not in AY.
▪ Registration of the sale deed → Not necessary. [& thus includes also a beneficial owner]
▪ Ownership includes deemed ownership (discussed in Section 27 later).
▪ House Property with Disputed Title of Ownership: It will be the decision of Income-tax
Department as to who is the owner till the court gives its decision on such property.

3 Purpose

▪ HP may be used for any purpose by the owner (other than for his business/profession).
▪ If house property is used by the assessee for his own business/profession, annual value of such
house property is not taxable u/h ‘house property’.
Ex: Mr. X uses the property for his office. Income from such property cannot be taxed u/h HP.

STEPS TO COMPUTE “INCOME FROM HOUSE PROPERTY”

A. Gross Annual Value (GAV) xxx

B. Less: Municipal tax paid by the owner during the PY. (xxx)

C. Net Annual Value (NAV) [A – B] xxx

D. Less: Deduction u/s 24 (xxx)

Section 24(a): Standard deduction (30% of NAV) (xxx)

Section 24(b): Interest on borrowed Capital (xxx)

67
 A. DETERMINATION OF GROSS ANNUAL VALUE [SECTION 23]

1 Calculate Expected Rent (ER) = Higher of (a) MV or (b) FR subject to maximum of SR.

2 Calculate Actual Rent Received (ARR) = Rent receivable - Unrealized Rent [See PC Note Below].

3 GAV = Higher of ER or ARR.

❖ Unrealized Rent → House was let out, but rent could not be recovered from tenant.
❖ Vacancy Loss → Loss of rent because house property remained vacant during such period.

CQ2. When Unrealized Rent shall be deducted from Rent Received/Receivable?

Answer: Unrealized rent shall be deducted from rent if all the following conditions are satisfied:
(a) Tenancy is bonafide;
(b) Defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) Defaulting tenant is not in occupation of any other property of the assessee;
(d) Assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid
rent or satisfies AO that legal proceedings would be useless.

CQ3. Jayashree owns five houses in Chennai, all of which are let-out. Compute GAV of each House.
Particulars House I House II House III House IV House V
Municipal Value 80,000 55,000 65,000 24,000 80,000
Fair Rent 90,000 60,000 65,000 25,000 75,000
Standard Rent NA 75,000 58,000 N.A. 78,000
AR received/Receivable 72,000 72,000 60,000 30,000 72,000
Solution: Computation of GAV of each house owned by Mr. X
Particulars House I House II House III House IV House V
(i) Municipal value 80,000 55,000 65,000 24,000 80,000
(ii) Fair rent 90,000 60,000 65,000 25,000 75,000
(iii) Higher of (i) & (ii) 90,000 60,000 65,000 25,000 80,000
(iv) Standard rent N.A. 75,000 58,000 N.A. 78,000
(v) Expected rent [Lower of (iii) & (iv) 90,000 60,000 58,000 25,000 78,000
(vi) Actual rent received/receivable 72,000 72,000 60,000 30,000 72,000
GAV [Higher of (v) & (vi)] 90,000 72,000 60,000 30,000 78,000

COMPUTATION OF GAV FOR DIFFERENT TYPES OF HOUSE PROPERTIES

1. Self-occupied (SOP)/ ▪ GAV = Nil for 2 Houses [Only for Individual/HUF]
unoccupied House Property ▪ No deduction of Municipal taxes paid by the owner.
2. Property Let out for whole ▪ GAV = Higher of (i) ER or (ii) ARR.
year ▪ No Question of vacancy since property was occupied for whole
year.
3. Let out Property vacant for ▪ ER shall be calculated for whole year.
a part of year. ▪ While computing ARR, rent for the period for which the house was
vacant shall be excluded.
If ARR > ER GAV = ARR
If ARR < ER due to vacancy GAV = ARR
If ARR < ER due to other reason GAV = ER

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 4. Let out for part & self ▪ ER shall be calculated for the whole year.
occupied for part of year ▪ ARR shall be computed for let out period.
▪ GAV = Higher of (i) ER (for whole year) or (ii) ARR (for let out part).
5. Deemed Let out property If Assessee is having more than 2 houses & he is using all of them for
himself, he has the option to choose any 2 houses as SOP & other
houses will be deemed to be let out.
▪ GAV of DLOP → ER because there is no rent since both HPs are SOP.
▪ GAV of SOP = Nil;
6. Single House – One portion is ▪ SOP → GAV = Nil; No deduction of Municipal taxes paid;
let & other portion is self- ▪ Interest is deductible subject to the limit of Rs. 30,000/2,00,000.
occupied
▪ For LOP → ER shall be computed on proportionate basis.

CQ4. Anirudh has a property whose municipal valuation is Rs. 1,30,000 p.a. Fair rent is Rs. 1,10,000 p.a. &
Standard rent is Rs. 1,20,000 p.a. The property was let out for a rent of Rs. 11,000 p.m. throughout the PY.
Unrealised rent was Rs. 11,000. Compute gross annual value.
Solution: Computation of Gross Annual Value
ER = Higher of (a) MV or (b) FR subject to maximum of SR. Rs. 1,20,000
ARR = Rent receivable – Unrealized Rent = Rs. 1,32,000 – Rs. 11,000 Rs. 1,21,000
GAV = Higher of ER or ARR [Higher of Rs. 1,20,000 or Rs. 1,21,000] Rs. 1,21,000

CQ5. Ganesh has a property whose municipal valuation is Rs. 2,50,000 p.a. Fair rent is Rs. 2,00,000 p.a. &
standard rent is Rs. 2,10,000 p.a. Property was let out for a rent of Rs. 20,000 p.m. However, tenant vacated
the property on 31.1.2021. Unrealised rent was Rs. 20,000. Compute GAV.
Solution: Property was vacant for 2 months. So, while calculating ARR, we will take only 10 months.
ER = Higher of (a) MV or (b) FR subject to maximum of SR. [For whole year] Rs. 2,10,000
ARR = Rent receivable/received – Unrealized Rent = Rs. 2,00,000 – Rs. 20,000 Rs. 1,80,000
Now, if the property was let out for 2 months, i.e for the period it remained vacant, ARR would be Rs.
2,40,000 – Rs. 20,000 = Rs. 2,20,000. Thus, we can say that ARR < ER due to vacancy, thus GAV = ARR = Rs.
1,80,000.

CQ6. Smt. Rajalakshmi owns a house property at Adyar in Chennai. Municipal value of the property is Rs.
5,00,000, fair rent is Rs. 4,20,000 & standard rent is Rs. 4,80,000. The property was let-out for Rs. 50,000
per month upto December 2022. Thereafter, the tenant vacated the property & Smt. Rajalakshmi used the
house for self- occupation. Rent for Nov. & Dec. 2020 could not be realised. Compute GAV.
Solution:
ER = Higher of (a) MV or (b) FR subject to maximum of SR. [For whole year] Rs. 4,80,000
ARR = Rent receivable – URR = Rs. 4,50,000 – Rs. 1,00,000 [for let out period] Rs. 3,50,000
GAV = Higher of ER (for whole year) or ARR (for let out period) Rs. 4,80,000

CQ7. Ganesh has three houses, all of which are self-occupied. Particulars of the houses for PY 2022-23 are:
Particulars House I House II House III
Municipal valuation p.a. 3,00,000 3,60,000 3,30,000
Fair rent p.a. 3,75,000 2,75,000 3,80,000
Standard rent p.a. 3,50,000 3,70,000 3,75,000
Date of completion/purchase 31.03.1999 31.03.2001 01.04.2014
Municipal taxes paid during the year 12% 8% 6%
Interest on loan for repair of property during current year - 55,000
Interest for current year on loan taken in July 2016 for purchase 1,75,000

69
Compute Ganesh’s income from house property for AY 2023-24 & suggest which houses should be opted by
Ganesh to be assessed as self-occupied so that his tax liability is minimum.
Solution: Let us first calculate ‘income from each house’ assuming that they are deemed to be let out.
Computation of Income from House Property of Ganesh
Particulars House I House II House III
GAV [GAV = ER; ER = Higher of MV & FR, but restricted to SR] 3,50,000 3,60,000 3,75,000
Less: Municipal taxes (paid by the owner during PY) 36,000 28,800 19,800
Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200
Less: Deductions u/s 24
(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital - 55,000 1,75,000
Income from house property 2,19,800 1,76,840 73,640

Now, Mr. Ganesh can opt to treat any two of the above house properties as self-occupied.
Option 1: House I & II - Self-occupied & House III - Deemed to be let out
House I (Self-occupied) Nil
House II (Self-occupied) (interest deduction restricted to Rs. 30,000) (30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640
Option 2: House I & III - Self-occupied & House II - Deemed to be let out
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (1,75,000)
Income from house property 1,840
Option 3: House II & III - Self-occupied & House I - Deemed to be let out
House I (Deemed to be let-out) 2,19,800
House II (SOP) [Interest deduction restricted to Rs. 30,000)
House III (SOP) (Total interest deduction of 2 SOP restricted to Rs. 2,00,000) (2,00,000)
Income from house property 19,800

Conclusion: Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self-occupied
& House II as deemed to be let out. Income from house property = Rs. 1,840.

B. MUNICIPAL TAXES
➢ Municipal taxes are to be deducted from GAV if:
(a) Municipal taxes have been borne by the owner & (b) they have been actually paid during PY.

PC Note:
▪ Municipal Taxes are allowed as deduction in PY of payment even if they relate to past years.
▪ Municipal Taxes levied by foreign local authority → Deductible if such taxes are paid by the owner.
▪ If Municipal taxes are borne by tenant, rent received/receivable should not be increased to calculate
rent since it is the duty of occupier of HP (i.e. tenant) to pay the municipal taxes.

C. NET ANNUAL VALUE NAV = GAV - Municipal Taxes paid & borne by the owner.

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 DEDUCTIONS U/S 24
(a) Standard Deduction [Sec 24(a)]
▪ Standard deduction = 30% of NAV shall be allowed from NAV.
▪ This is a flat deduction & is allowed irrespective of the actual expenditure incurred.
▪ No other expenses shall be allowed as deduction while computing house property income.
▪ For SOP → Standard Deduction = Nil (as NAV itself is Nil).

(b) Interest on Borrowed Capital [Sec 24(b)]

1 Current year Interest

Deduction Interest = Amount of Loan × ROI p.a (Without any limit)

From When Interest relating to the PY of completion of construction can be fully claimed in
that PY (irrespective of the date of completion).

Purpose Loan can be taken for Acquisition, construction, repair, renovation, reconstruction
of HP.

Accrual Deduction u/s 24(b)for interest is available on accrual basis. Thus, Interest
accrued but not paid during PY can also be claimed as deduction.

2 Pre-construction period Interest

Deduction Pre-commencement Interest is allowed as deduction in 5 successive PYs starting

from PY of completion of construction. [1/5th of Total Interest]

Meaning Pre-construction Period means period during which loan was taken but the
construction of HP was/could not be started.

Pre- Start: From Date of Borrowing &

Construction End: (a) 31st March immediately prior to date of completion of construction
Period
(b) Date of payment of Loan (Whichever is earlier).

Note: Interest will be aggregated from the date of borrowing till the end of the PY prior to the PY
in which the house is completed and not till the date of completion of construction.

Points to Remember:
(a) Loan may be taken for purchasing the land even if construction is done out of the own funds.
(b) Interest on unpaid interest is not deductible.
(c) Interest on fresh loan taken to repay original loan is allowed as a deduction.
(d) Amount paid as brokerage/commission for arrangement of loan → NOT Allowed as deduction.
(e) If loan is taken from outside India, Interest is deductible if tax has been deducted at source.
(f) Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with
interest due, the seller becomes the lender in relation to unpaid purchase price & buyer becomes the
borrower. In such case, unpaid purchase price can be treated as capital borrowed for acquiring
property & interest paid can be allowed as deduction.

71
 CQ8. If Mr. X had taken a loan of Rs. 5,00,000 for construction of property on 01.10.2021 & interest is
payable @ 10% p.a. & construction was completed on 30.06.2022, interest allowed u/s 24(b) shall be:
(a) Current year Interest = Interest for PY 2022-23 = 10% of Rs. 5,00,000 = Rs. 50,000;
(b) Pre-construction Period = Date of borrowings to 31st march immediately preceding date of
completion.
▪ Date of Completion = 30.6.2022. Pre-construction period will end on 31st March immediately
preceding 30.6.2022 which is 31st March 2022. Pre-construction period = From 1.10.2021 -
31.03.2022.
▪ Pre-construction Interest = 10% x 5 Lac for 6 months (from 01.10.2021 to 31.03.2022) = Rs. 25,000.
▪ Prior period interest to be allowed in 5 equal annual installments of Rs. 5,000 from PY of completion
of construction i.e. PY 2022-23.
▪ Therefore, total interest deduction u/s 24(b) = 50,000 + 5000 = Rs. 55,000.

LIMIT ON DEDUCTIONS OF INTEREST FOR SELF OCCUPIED PROPERTIES

Loan is taken for ↓ Max. Interest Allowed

Acquisition/Construction/Repair/Renovation/Reconstruction before 1.4.1999 (Maximum of Rs. 30,000)

Repair or Renovation of House property on/after 1.4.1999 Actual Interest payable

(Maximum Rs. 30,000)

Acquisition or Construction of House Property on/after 1.04.1999 & such Actual interest payable
acquisition or construction is completed within 5 years from the end of the (Maximum Rs. 2,00,000)
PY in which capital was borrowed.

PC Note: Above-mentioned Limits are applicable combinedly for 2 SOP & not for each SOP.
PC Note: No such limit is applicable in case of Let-out property or Deemed Let out property.

CQ9. Mr. Manas owns 2 houses at Bombay, wherein his family resides & other at Delhi, which is unoccupied.
He lives in Chandigarh for his employment purposes in a rented house. For acquisition of house property at
Bombay, he has taken a loan of Rs. 30 lacs @ 10% p.a. on 1.4.2021. He has not repaid any amount so far.
i.r.o. house property at Delhi, he has taken a loan of Rs. 5 lacs @ 11% p.a. on 1.10.2021 towards repairs.
Compute deduction available to him u/s 24(b) for AY 2023-24 i.r.o. interest payable on such loan.
Solution: Mr. Manas can claim both of his houses as SOP & thus annual value of both the houses will be Nil.
Computation of deduction u/s 24(b) for AY 2023-24
1 Interest on loan taken for acquisition of residential house property at Bombay [30 Rs. 2,00,000
lacs x 10%] = Rs. 3,00,000 (Restricted to Rs. 2,00,000)
2 Interest on loan taken for repair of residential house property at Delhi [Rs. 5 lacs x Rs. 30,000
11% = Rs. 55,000 (Restricted to Rs. 30,000)
Total interest Rs. 2,30,000
Deduction u/s 24(b) i.r.o. (I) and (II) above to be restricted to Rs. 2,00,000

72
UNREALISED RENT & ARREARS OF RENT RECEIVED SUBSEQUENTLY [SEC 25A]
Unrealized Rent Arrears of Rent

▪ Rent which could not be realized from the ▪ If assessee has increased the rent payable by the
Assessee. tenant retrospectively & there is a dispute over such
▪ If such amount is realized subsequently, it increase; & later on the assessee receives the
gets taxed in the PY of Receipt. increased rent as arrears, it is called arrears of
rent.
▪ However, deduction shall be allowed @ 30%
of such unrealized rent. ▪ It is taxable in the PY of Receipt.

▪ Taxable @ 70% of received amount. ▪ Deduction of 30% is allowed from such arrears.
▪ Taxable @ 70% of received amount.

PC Note: It does not matter whether the Assessee is owner of such house property in PY of receipt.
Space for PC Analysis:

COMPOSITE RENT

➢ Meaning: The owner of a property may sometimes receive rent i.r.o. building as well as
(i) Other assets [Ex: Furniture, plant and machinery] or
(ii) for different services provided in the building [Ex: Lifts; Security; Power backup].

➢ Tax Treatment

Two lettings are separable Two lettings are not separable

▪ Rent from HP → Taxable u/h HP. ▪ Taxable u/h PGBP or IFOS.

▪ Rent from Use of other services → Taxable u/h Ex: Hotel business/paying guest
PGBP or IFOS. accommodation or warehousing or auditorium

PC Note: All the expenses for other facilities → Deducted while computing its income u/h PGBP or IFOS.
Space for PC Class Note:

73
*CQ10. Mr. Sanju aged 50 years owns a house property at Gwalior which is let out for residential purposes:
Rent of house and amount charged for different amenities Rs. 2,40,000
Note: Rs. 2,40,000 includes charges for the following amenities - water charges: Rs. 12,000,
electricity charges: Rs. 18,000, lift charges: Rs. 15,000 & security charges: Rs. 18,000)
Rent of 1 month could not be collected (1/12 of Rs. 2,40,000) Rs. 20,000
Municipal taxes paid by the tenant Rs. 15,000
Municipal valuation Rs. 1,60,000
Fair rent Rs. 1,50,000
Standard Rent Rs. 1,90,000
Repairs (met by the tenant) Rs. 10,000
Insurance Rs. 9,000
Collection charges and litigation expenses for collection of rent Rs. 7,000

For providing different amenities, the following expenses are incurred by Sanju:
Depreciation Rs. 2,000
Electricity bills Rs. 20,000
Lift maintenance Rs. 5,000
Salary of liftman Rs. 9,000
Depreciation of lift Rs. 3,000
Salary of guard Rs. 21,000

During PY 2014-2015, Sanju had claimed deduction of unrealized rent of Rs. 20,000 out of which Rs. 15,000
was allowed as deduction for that year. Sanju recovers Rs. 9,000 from defaulting tenant (expenditure on
recovery of rent: Rs. 1,000) in this PY. Find his taxable Income & state the heads under which it is taxable.

Solution: Since house property is provided with all other amenities which are separable, we should only
take the rent of HP for calculation of Annual Value.
▪ Rent of house property = Rs. 2,40,000 - Rs. 12,000 - Rs. 18,000 - Rs. 15,000 – Rs. 18,000 = Rs. 1,77,000
▪ ARR = Rs. 1,77,000 – (1/12 of Rs. 1,77,000) = Rs. 1,62,250.
▪ ER = [Higher of MV or FR subject to max of SR] = Rs. 1,60,000;
Computation of Income u/h “House Property”
GAV [Higher of ER or ARR] Rs. 1,62,250
Less: Less: Municipal tax (not deductible as paid by tenant) Nil
Net Annual Value Rs. 1,62,250
Less: Standard deduction @ 30% (Rs. 48,675)
Income from House Property Rs. 1,13,575
Add: Unrealized rent taxed @ 70% [Refer Note below] [Rs. 9,000 – Rs. 5,000] × 70% Rs. 2,800
Income under the head "Income from house property" Rs. 1,16,375

Note: Rs. 15,000 of unrealized rent was allowed as deduction in PY 2014-15 itself. Thus Rs. 5,000 was not
allowed as deduction in PY 2014-15. Thus, we can say that Rs. 5,000 was taxed in PY 2014-15 itself. Now if
we recover any such unrealized rent in later years, Unrealized rent received upto Rs. 5000 will not be
taxable. Receipt of unrealized rent over Rs. 5,000 will only be taxable & 30% will be allowed as deduction.

Income from other sources

Amount collected from tenant for providing different amenities 57,750
[11/12 of (Rs. 12,000 + Rs. 18,000 + 15,000 + 18,000)]
Less: Expenses (i.e., Rs. 2,000 + Rs. 20,000 + Rs. 5,000 + Rs. 9,000 + Rs. 3,000 + Rs. 60,000 (2,250)
21,000)

74
 INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

1. ROR in India (Note) Always Taxable (whether or not such income is received in India).

2. RNOR/NR in India Taxable only if it is received in India.

PC Note: Municipal Taxes Paid o/s India – Deductible if Tax has been deducted at source.

*CQ11. Mrs. Rohini Ravi, a citizen of USA is ROR in India during PY 2022-23. She owns a house property at
Los Angeles, USA which is used as her residence. Annual value of the house is $20,000. 1 $ = Rs. 75.
She took ownership & possession of a flat in Chennai on 01.07.2022, which is used for self-occupation, while
she is in India. Flat was used by her for 7 months only during PY 2022-23. MV = Rs. 32,000 p.m. & FR = Rs.
4,20,000 p.a. She paid the following to Corporation of Chennai: (i) Property Tax – Rs. 16,200; (ii) Sewerage
Tax – Rs. 1,800.
She had taken a loan from Chartered Bank in June, 2020 for purchasing this flat. Interest on loan was:
Period prior to 1.4.2022 Rs. 49,200
1.4.2022 to 30.6.2022 Rs. 50,800
1.7.2022 to 31.3.2023 Rs. 1,31,300

She had a house property in Bangalore, which was sold in March, 2019. In respect of this house, she received
arrears of rent of Rs. 60,000 in March, 2023. This amount has not been charged to tax earlier.
Compute the income u/h house property of Mrs. Rohini Ravi for AY 2023-24. [ICAI Ex. Q4 + May 2009]
Solution:
▪ Since the assessee is a ROR, her global income will be taxable in India.
▪ She possesses a self-occupied house at Los Angeles as well as at Chennai. She can take the benefit of
“Nil” Annual Value i.r.o. both the house properties.
▪ As regards the Bangalore house, 70% of arrears of rent will be taxable as income from house property
in the year of receipt u/s 25A. It is not essential that the assessee should continue to be the owner.
Accordingly, the income from house property of Mrs. Rohini Ravi will be calculated as under:
Particulars Amount
1 House at Los Angeles [SOP 1]
Annual value Nil
Less: Deduction u/s 24 Nil Nil
2 House property at Chennai [SOP 2]
Annual value Nil
Less: Interest on borrowed capital (See Note below) 1,91,940 (1,91,940)
3 Arrears i.r.o. Bangalore property (Section 25A)
Arrears of rent received 60,000
Less: Deduction @ 30% u/s 25A(2) (18,000) 42,000
Loss u/h "Income from house property” (1,49,940)

Note: Interest on borrowed capital

Interest for the current year (Rs. 50,800 + Rs. 1,31,300) Rs. 1,82,100
Add: 1/5th of pre-construction interest (Rs. 49,200 x 1/5) Rs. 9,840
Interest deduction allowable under section 24 Rs. 1,91,940

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 TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]
Co-owned HP is Self occupied Co-owned HP is Let out

For Each Co-owner: ▪ Income from such HP shall be computed as if

▪ Annual Value → NIL property is owned by one owner & then
▪ Deduction of Rs. 30,000/2 Lacs u/s 24(b) ▪ Income so computed shall be apportioned
separately for each co-owner. amongst each co-owner as per their share.

Note: Maximum deduction of interest to each co-owner i.r.o interest payable on loan taken for co-owned
house property & interest payable on loan taken for another SOP cannot exceed Rs. 30,000/Rs. 2,00,000.
Note: If Shares of co-owners are not definite → Income from HP is taxed as income of AOP (Co-owners).

TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP FIRM

➢ Income is assessable in the hands of firm & not in the hands of partners.

*CQ12. Two brothers Arun & Bimal are co-owners of a house property with equal share. The property was
constructed during the PY 1998-1999. The property consists of 8 identical units and is situated at Cochin.
During PY 2022-23, each co-owner occupied 1 unit for residence & balance of 6 units were let out at a rent
of Rs. 12,000 p.m. per unit. MV of house property is Rs. 9,00,000 & municipal taxes of 20% were paid during
PY. Other expenses:
Repairs Rs. 40,000
Insurance premium (paid) Rs. 15,000
Interest payable on loan taken for construction of house Rs. 3,00,000
One of the let-out units remained vacant for 4 months.
Arun could not occupy his unit for 6 months as he was transferred to Chennai. He does not own any other
house. Compute House Property Income for AY 2023-24. [ICAI Ex. Q5 + Nov 2012]
Solution:
Particulars Arun Bimal
I Self-occupied portion (25%)
Annual value Nil Nil
Less: Interest on loan taken for construction Rs. 37,500 (being 25% of Rs. 1.5 30,000 30,000
lacs) restricted to maximum of Rs. 30,000 for each co-owner since property was
constructed before 1.04.1999. Hence, it is assumed that loan was taken before
1.04.1999.
Loss from self-occupied property (30,000) (30,000)
II Let-out portion (75%)
(a) Municipal value (75% of Rs. 9 lacs) 6,75,000
(b) Actual rent [(Rs. 12,000 x 6 x 12) – (Rs. 12,000 x 1 x 4)] 8,16,000
Gross Annual Value [Higher of (a) or (b)] 8,16,000
Less: Municipal Tax [75% of Rs. 1,80,000 (20% x 9 lacs)] (1,35,000)
Net Annual Value (NAV) 6,81,000
Less: Deduction u/s 24
(a) 30% of NAV (2,04,300)
(b) Interest on loan taken [75% of Rs. 3 lacs] (2,25,000) (4,29,300)
Income from let-out portion of house property 2,51,700
Share of each co-owner (50%) 1,25,850 1,25,850
Income from house property 95,850 95,850

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**CQ13. Assessee owns 4 houses. Following are the particulars i.r.o properties. Compute assessee's income
from HP.
Particulars A B C D
Municipal Value 80,000 1,60,000 1,15,000 1,20,000
Rent p.m. 10,000 6,000 10,000
Local taxes paid 8,000 16,000 15,000 1,00,000
Used for Let-out for ½ used for own Let-out for residential Self-occupied
business business, ½ given to the purpose
manager
Actual repairs 5,000 12,000 3,000 6,000
Ground rent due 2,000 - 3,000 -
Insurance Premium - 2,000 - 4,000
Vacancy 2 months - 1 month -
Annual charges - 2,000 - -
Solution: Computation of Assessee's Income from house property
1 House
st
GAV = ARR [ARR = 1,00,000 (vacant for 2 months); ER (MV) = 80,000 since no 1,00,000
(Let out for other information about FR & SR is given]
business) Less: Municipal taxes paid (8,000)
NAV 92,000
Less: Standard Deduction @ 30% 27,600
Income from 1st House 64,400
2nd
House Nil as used for own business. House given to manager is also considered to be used for
business.
3rd House GAV [ARR < ER due to vacancy; thus GAV = ARR [Rs. 1,10,000] 1,10,000
[Let out for Less: Municipal taxes paid (15,000)
residential
NAV 95,000
use]
Less: Standard Deduction @ 30% (28,500)
Income from 3 rd
House 66,500
4th House NAV Nil
(Self- Less: Standard Deduction @ 30% Nil
occupied)
Income from 4 th
House Nil

PC Note: No deduction of any other expenses will be allowed like repairs, ground rent, insurance etc.

CQ14. Can Net Annual Value be negative? Ans: Yes, only if MT paid by the owner are more than GAV.

CQ15. Can there be any loss under the head income from house property?
Answer:
(a) SOP: NAV = Nil. No deductions are allowed except for interest on borrowed funds up to a maximum of
Rs. 30,000/Rs. 2,00,000. Thus, Maximum loss i.r.o. such SOP shall be either Rs. 30,000 or Rs. 2,00,000.

(b) LOP/DLOP: There are no restrictions on deductions & therefore, there can be loss u/h HP due to
municipal taxes & deductions. Similarly, deductions u/s 24 in case of DLOP can be more than NAV.

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HOUSE PROPERTY HELD AS SIT
➢ If house property constitutes SIT of a business, rental income from such house property is to be taxed
u/h ‘Income from House Property’. [Since specific head has been given for income from house
property, it cannot be taxed under any other head].
➢ HP held as SIT → Annual value = NIL for 2 years from the end of FY in which completion certificate
is obtained from competent authority, if such property is not LOP during such period. [Sec 23(5)]

PC Note: Rental Income earned by an assessee engaged in the business of letting out of properties on
rent would be taxable as Business Income. [SC ruling in Rayala Corporation (P) Ltd. v. Asstt. CIT]

CQ1. Write a note on letting out of building which is supplementary to the business.
Answer:
▪ If any assessee has let out any house property for any purpose which is supplementary to his business,
▪ in such cases rental income from such house property shall be taxable u/h ‘PGBP’ &
▪ all expenses of such house property will be allowed as deduction u/h ‘PGBP’ (if admissible).

Ex: If a Public school has let out a part of its building to a Bank. Rent received shall be considered to be
income u/h “PGBP” & all the expenses of such house property shall be debited to P&L A/c.

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DEEMED OWNERSHIP [SECTION 27]

1 Transfer to a spouse: If an Individual transfer any house property to his/her spouse for Inadequate
consideration, such transferor is deemed to be the owner of the transferred House property.
Exception: If a property is transferred to a spouse in connection with an agreement to live apart.
Ex: Mr. X has two house property each having income of Rs. 10 lacs and Mr. X has gifted one house
property to Mrs. X. In this case, income from such house property shall be taxable in the hands of
Mr. X but if Mr. X has sold the house property to Mrs. X and has taken full payment, income from
house property shall be taxable in the hands of Mrs. X.
Note: Where an individual gives cash to his/her spouse or minor child & such transferee acquires HP
from such cash, transferor shall not be treated as deemed owner. It will attract clubbing provisions.

2 Transfer to Minor Child: If an Individual transfer any house property to minor child for inadequate
consideration, transferor is deemed to be the owner of transferred house property.
Exception: Where a property is transferred to a minor married daughter.

3 Holder of an Impartible estate: Holder of an Impartible estate (Impartible estate is a property

which is not legally divisible) shall be deemed to be owner of all properties in the estate.
Ex: A Property could not be divided at the time of partition since it was occupied by the temple. Mr.
X being the eldest son is the owner of the property as per the family convention. Property is given
to Mr. X because the property could not be divided amongst the younger brother. Mr X in this case
if not the beneficial owner of the property. He holds the property as a trustee on behalf oh his
younger brothers since all members of the family have right to enjoy benefits of the property. Mr. X
is deemed as owner of property.

4 Member of a Co-operative Society, etc: Member of a co-operative society, company or other AOPs
to whom a building or part thereof is allotted or leased under a House Building Scheme of a
society/company/association, shall be deemed to be owner of that building or part thereof allotted
to him although the co-operative society/company/association is the legal owner of that building.

5 Person in possession of a property: A person who is allowed to take possession of any building or
part thereof in part performance of a contract of the nature referred to in section 53A of the TOPA
shall be deemed owner of that house property. This would cover cases where -
(a) Possession of property has been handed over to the buyer,
(b) Sale consideration has been paid or promised to be paid to the seller by the buyer,
(c) Sale deed has not been executed in favour of the buyer.
Buyer would be deemed to be the owner of the property although it is not registered in his name.
Ex: Mr. X has sold his house property to Mr. Y for Rs. 50 lakcs & has taken full payment and possession
has been given to Mr. Y but conveyance deed is not prepared in the name of Mr. Y. Mr. Y is the
deemed owner.

6 Person having right in a property by way of Lease for 12 years or more: A person who acquires
any building by way of lease for a period of 12 years or more shall be deemed to be the owner of
that building or part thereof.
Exception: This will not cover the case where any Lease is acquired from month-to-month basis or
for a period not exceeding one year.

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 Business ▪ Business = Any ‘Recurring Economic Activity’ done with the objective of earning profit.
[Sec 2(13)]
▪ However, ‘Isolated Activity’ (which has an element of trade) can also be termed as
‘business’ depending on the facts & circumstances of the case.
▪ Thus, Profit from single venture which has the element of trade may be treated as
business.
▪ Business includes any Trade, Commerce, Manufacture or any adventure or concern in
the nature of TCM.
▪ Adventure: Doing an activity for first time without knowing its outcome.

Profession ▪ The term “Profession” has not been defined in the act.
▪ In general sense, it means an occupation requiring some degree of learning.
▪ The term ‘Profession’ includes Vocation also [Section 2(36)].
Ex: Painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect & even an
astrologer are persons who can be said to be carrying on a profession.

PC Note: For the purpose of Income tax, it is immaterial whether a person is carrying on a ‘Business’ or
‘Profession’ or ‘vocation’. Profits from all these sources are treated & taxed alike.

Cash or Kind ▪ Profits may be realized in money or in money’s worth (cash or in kind).
▪ Profit is realized in any form other than cash → Cash Equivalent (FMV) of the
received item/thing on the date of receipt is taken as value of the Income.

Capital Receipt ▪ Capital receipts are generally not taxable u/h PGBP.

Voluntary ▪ Voluntary Payment received in the course of a business/profession would be

Receipts treated as income in the hands of the Recipient. (There should be Nexus between
the Business & Payment received).
Ex: Any amount paid to a lawyer by a person who was not a client, but who has been
benefited by the lawyer’s professional service to another would be assessable as the
lawyer’s income.

Application of ▪ Purpose for which the profits earned in business/profession are use is immaterial.
Profit (use) It will be taxed irrespective of the manner & reason of application.

Legality ▪ Even the profit earned from illegal source is taxable.

Distinct ▪ Tax is chargeable on the Aggregate profits of all the business carried on by the
Businesses assessee even though the computation of profit is done separately.

Computation of ▪ Tax is levied on the ‘profits & gains’ & not on gross receipts.
Profits
▪ Profits should be computed after deducting losses & expenses incurred for
earning the income in the regular course of the business/profession unless the
loss or expenses is expressly disallowed by the Act.

80
1 Profits & Gains of any business or profession carried on at any time during PY by the assessee.
▪ Capital Receipt → Not Taxable. (Subject to certain exceptions)
▪ Capital Loss → Not Deductible.

2 Compensation for Loss of Office.

Any compensation or other payment due to or received by any person in relation to -
(a) Termination or Modification of Managing agent’s agreement in relation to an Indian
Company/any other company in India;
(b) Termination or Modification of contract relating to an Agency in India;
(c) Vesting of management of any property or business with Government/their Corporation.
(d) Termination or Modification of terms & conditions, of any contract relating to his business.
PC Class Note:

3 Income of Trade/Professional Association from Specific Activities for its Members.

▪ This is an exception to “Principle of Mutuality” since association & its members are treated as
Same Person. [Ex: Chambers of commerce, stock brokers’ associations etc]
▪ As a result, association performing specific services for its members is deemed to be carrying on
business i.r.o these services & Income arising from such specific activities is Taxable.

4 Export Incentives.
(a) Profit on sale of import entitlements.
(b) Cash assistance against exports under any scheme of Government of India.
(c) Customs duty or excise re-paid or repayable as drawback.
(d) Profit on transfer of Duty Entitlement Passbook Scheme/Duty-Free Replenishment Certificate.

5 Remuneration to Partners is taxable in the hands of Partner to the extent it is deductible to firm.
CQ1. The allowable rate of interest is 12% p.a. u/s 40(b). Now if a firm pays interest to a partner at
15% p.a, excess 3% paid will be disallowed to firm u/s 40(b). Thus 12% which is allowed as
deduction to the firm u/s 40(b) shall be taxed in the hands of partener. Excess interest of 3% which
has been disallowed to the firm u/s 40(b) will not be taxed in the hands of the partner again.
6 Amount received for Non-Competence Fees are taxable [even if they are capital receipts].
Any sum received under an agreement,
▪ For not carrying out any activity in relation to any business or profession.
▪ Not to share any know-how, patent, copyright, trade mark likely to assist in the manufacture or
processing of goods or provision for services etc.

7 Keyman Insurance Policy (including Bonus) is taxable in the hands of employer if maturity Amount
is Received by Employer.

8 FMV of Inventory (SIT) on its conversion into Capital Asset → FMV of Inventory on the date of
its conversion into capital asset would be taxable as business income.

9 Value of Benefit arising from Business/Profession. (Whether Convertible into Money or not).
(There should be Nexus between the business & the benefits received).

10 Sum received or receivable on demolition, destruction or transfer of any Capital Asset (Except
Land/GW/Financial Instrument), whole cost of which was allowed as deduction u/s 35AD.

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 Deemed ▪ Items which normally do not have the character of income;
Income ▪ but are deemed as income as they have been allowed as deduction in the earlier years
(Section 41)
▪ irrespective of whether the business/profession is continued or not.

Discontinued ▪ This relates to a situation where the income is earned after discontinuance of
Business business/profession.
(Sec 176) ▪ Income from discontinued business is also taxable.

❖ ‘Speculative transaction’ means a transaction in which a contract for purchase or sales of any
commodity (including stocks & shares) is periodically/ultimately settled otherwise than by the Actual
delivery or transfer of the commodity/Scrips [section 43(5)].
❖ Deeming provision: Where any part of the business of a company consists of purchase & sale of the
shares of other companies, such company is deemed to be carrying on speculation business to the
extent of such business of the purchase & sale of such shares.
However, this Deeming Provision does not apply to the following companies: [Read once]
1. A company whose GTI consists of mainly income taxable u/h IFOS, House property, Capital gains.
2. A company whose principal business is:
(i) Trading in shares; (ii) Banking; (iii) Granting of loans & advances.
Thus, if these companies carry on the business of purchase & sale of shares of other companies, they
would not be deemed to be carrying on speculation business. [Explanation to sec 73]

❖ Profits/Losses resulting from Speculative Transaction must be treated as separate & distinct from
other profits & gains of business & profession because Loss from Speculative Business can be set off
only against Profit of Speculative Business & no other business (Section 73). [VERY IMP]

TRANSACTIONS NOT DEEMED TO BE SPECULATIVE TRANSACTIONS

1. Hedging Contract i.r.o Raw Materials or Merchandise: A contract i.r.o raw materials or merchandise
entered into by a person in the course of his manufacturing or merchandising business to guard against
loss through future price fluctuations i.r.o his contracts for the actual delivery of goods manufactured
by him or merchandise sold by him.
2. Hedging contract i.r.o Stocks & Shares: A contract i.r.o Stocks & Shares entered into by a
dealer/investor to guard against loss in his holdings of stocks & shares.
3. Forward Contract: A Contract entered into by a Member of a Forward Market or Stock Exchange in
the course of any transaction in the nature of Jobbing or Arbitrage to guard against any loss which
may arise in the ordinary course of his business as a member.
4. Trading in Derivatives: Eligible transaction carried i.r.o Trading in Derivatives in RSE.
5. Trading in Commodity Derivatives: Eligible transaction i.r.o trading in commodity derivatives carried
out in a recognized association, which is chargeable to CTT.

RELEVANCE OF METHOD OF ACCOUNTING [Section 145(1)]

❖ Income chargeable u/h ‘PGBP’ or ‘IFOS’ shall be computed in accordance with the method of accounting
regularly followed by the Assessee.
❖ If Assessee follows Mercantile System of Accounting → Income will be taxed on “Due” basis.
❖ If Assessee follows Cash basis of Accounting → Income will be taxed on “Receipt” basis.

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 A. SPECIFIC DEDUCTIONS [SECTION 30 – 36]
❖ We know that Profit = Receipts – Expenditures.
❖ However, there may be some expenditures which are deducted by the Assessee while computing his
income, but they are not allowable as deduction under Income Tax Act.
❖ Section 30 - 36 gives the list of the expenditures which are allowed as deductions while calculating income
under this head.
❖ Let us study each of them in detail.

Nature of Expenditure Conditions

Rent Paid by the Tenant for Building occupied by him for his business.

Revenue Repairs Done by Owner/Tenant. [Capital Repairs are not covered in this section]

Rates & Taxes Land Revenue, Local Rates & Municipal Tax [Section 43B will Apply]

Insurance Premium Paid by the owner.

PC Note:
✓ Premises used partly for Business & partly for other purposes: Proportionate Expenditure of the
premises used for Business will be allowed as a deduction.
✓ Deduction in case of Subletting of rented premises = Rent paid – Rent recovered from sub-tenant.
✓ No Deduction for Notional Rent: If the owner uses his own premises for his business, No Notional
Rent shall be allowed as deduction.
But if firm runs its business in the premises owned by one of its partners, rent payable to the partner
will be an allowable deduction to the extent it is reasonable & is not excessive.
✓ Cesses, Rates & Taxes levied by a Foreign Government → Allowed as deduction.

Nature of Expenditure Conditions

Revenue Repairs Done by Owner & Tenant.

Insurance Premium Paid by Owner.

PC Note:
1. Insurance & Repair charges of the Assets which have been discarded (though owned by the assessee)
or have not been used for the business during the PY → Not Allowed as Deduction.
2. To Claim Deduction u/s 31 → Asset must be used (atleast for 1 day) for assessee’s business.
3. Repairs include Renewal or Renovation of an asset but not its Replacement or Reconstruction.

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❖ Depreciation is to be claimed on the BLOCK OF ASSETS & Not on Individual Asset.
❖ Claiming Depreciation is Mandatory. Assessee does not have any option to not claim it.
❖ Only WDV Method of charging depreciation is recognized under the Act. However, Power Generation
units have option to claim depreciation on SLM.

1 Ownership of Asset

▪ Assessee must be the owner of the asset (fully or partly owned).

▪ Registered ownership is not necessary (It can be a beneficial ownership).
▪ To claim depreciation on building, ownership of land on which building is constructed is not
necessary. Land may be lease-hold.

PC Note: If Tenant has incurred any Capital Expenditure on construction, renovation, extension
of the building taken on lease/rent, he can take depreciation on such capital expenditure.

2 Asset must be used by the assessee for his business/profession during relevant PY

▪ Asset must be put to use at any time during the previous year.
 Even if the asset is used for a single day during the year, full depreciation shall be allowed
Except for first year of use of asset.

 Use of Asset in 1st year of Asset: Asset must be used for atleast 180 days to get full
depreciation. If it is used for less than 180 days in 1st year, only 50% of the allowable
depreciation can be claimed.
Ex: If Assessee acquires the asset in PY 2022-23 on 1 December 2022, only 50% of the allowable
depreciation can be claimed by the Assessee in PY 2022-23. However, from PY 2023-24, full
depreciation can be claimed even if the asset has been used even for a single day in PY 2023-24.
However, if asset is acquired in PY 2022-23 & it is not put to use in PY 2022-23, no depreciation
can be claimed for PY 2022-23. Now PY 2023-24 cannot be said to be the first year of asset. Thus
100% depreciation will be allowed in PY 2023-24.
PC Note: In case of Partition of HUF, Dissolution of Firm, Conversion of firm into Company,
no asset is acquired by the successor & thus condition of 180 days is Not Applicable.

▪ Use includes ‘Passive use’ also [Asset is said to be in use even when it is ‘kept ready for use’]

PC Note:
1. Asset used Partly for Business & partly for Personal purposes → Depreciation proportionate to
business is allowed as deduction u/s 32 & only such amount is deducted from WDV.
2. Asset used Partly for Business & partly for Agricultural purposes → Depreciation proportionate
to business shall be allowed as deduction u/s 32, but 100% depreciation is deducted from WDV.

PC Note: Allowability of Depreciation in case of Letting of assets on hire (Under Which Head)
If Letting of Assets on Hire is the business of the Depreciation on such let out assets is allowed as
assessee & asset is let out. deduction u/s 32 to the assessee
If Letting of assets on Hire is NOT the business Depreciation on such let out assets is allowed as
of the assessee & asset is let out. deduction u/s 57(ii) to the assessee
3 Asset must fall under the eligible class of Asset
(a) Class A: Tangible assets. It included building, machinery, plant or furniture.
(b) Class B: Intangible assets. It includes 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. [W.E.F AY 2023-24]

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CONCEPT OF “BLOCK OF ASSETS”
Meaning: Group of assets falling within Same Class & having Same Rate of Depreciation.

Points to be considered while forming block of asset: (Only for Better Understanding)
 Building includes Roads, bridges & tubewells attached to the building or forming part of it.
 Machinery → Asset which is directly connected with Production/Manufacture/ processing.
 Furniture → Asset used for Convenience & Decoration.
 Plant → Any Asset not falling under any other classification, but which are Essential to carry out the
business.
Includes: Ships, vehicles, books, scientific apparatus & surgical used for business.
Excludes: Tea bushes or livestock etc.; animal, human body or stock- in-trade; Buildings.
However, Theatre buildings, hospital buildings & hotel buildings though specially equipped for business
are still buildings & cannot be treated as plant.

PC Note:
▪ Assets Ineligible for depreciation [Land/Personal assets] will not form part of any block.
▪ While calculating Depreciation on Building, Cost of Land is to be Excluded.

1. Classify assets into (i) Tangible Assets & (ii) Intangible Assets (except GW of business/profession).
2. All the Tangible Assets shall further be classified into
(a) Building,
(b) Plant & Machinery &
(c) Furniture
3. Group the classified assets in each category separately on the basis of Rate of depreciation.
4. Assets having same rate of depreciation should be grouped together.

1. Find Closing WDV of each block for PY.

Opening WDV as on 1st April of current PY
Add: Actual Cost of Assets purchase during PY (not being GW of business/profession)
Less: Sale Value of assets sold, discarded, demolished or destroyed during PY

2. Bifurcate Closing WDV of each block into two categories:

(i) WDV of the assets used for less than 180 days during PY
(ii) Balance WDV. [Note that it is not always equals to WDV of Assets used for > 180 days]

3. Apply Rate of depreciation on (i) Assets used for less than 180 days. [50% Rate Depreciation]
4. Apply Rate of depreciation on (ii) Balance WDV. [100% depreciation (as per the rates)].

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 SN Nature of Asset (%)
A. Building
I Block 1: Residential Building (Except hotels & boarding houses) 5
Block 2: Buildings which are not used mainly for residential purposes & not covered by Block 10
(1) above & (3) below (Office, factory, Godowns & other buildings)
Block 3: Building used for installing P&M of Water supply project/Water treatment system. It 40
should be used for the business of providing Infrastructure facilities.
Block 4: Any temporary erections (wooden structures) 40
AII Furniture - Any furniture & fittings including electrical fittings. 10
A. Plant & Machinery
III Block 1: Motor cars (Except cars used in the business of running them on hire) 15
Block 2: Buses, lorries & taxies used in the business of running them on hire 30
Block 3: Moulds used in rubber & platics goods factory 30
Block 4: Aeroplanes & Aeroengines. 40
Block 5: Specified Pollution control equipments (air/water); Solid waste control equipment etc. 40
Block 6: P&M used in semi-conductor industry covering all Integrated Circuits (ICs) 30
Block 7: Life saving medical equipments. 40
Block 8: P&M in Water supply project/Water treatment system. It should be used for the 40
business of providing Infrastructure facilities.
Block 9: Oil wells 15
Block 10: Renewable Energy Saving Devices
Windmills & any specially designed devices which run on windmills (including any special
devices including electric generators & pumps running on wind energy)
(a) installed on or after 1.4.2014 40
(b) installed before 1.4.2014 15
Block 11: Computers & computer softwares. 40
Block 12: Books (Annual publication/not) owned by assessees carrying on profession 40
Block 13: Books owned by assessees carrying on business of running Libraries 40
Block 14: Any other Plant & Machinery 15
A. Ships - Block 1: Ocean-going ships 20
IV Block 2: Vessels ordinarily operating on inland waters not covered by Block (3) below 20
Block 3: Speed boats operating on inland water 20
B All Intangible Assets (Know-how, patents, copyrights, TMs, licences, franchises or any other 25
business or commercial rights of similar nature, not being goodwill of business/ profession)

CQ2. Rajan Ltd. has 2 machines [S & M] in the block as on 01.04.2022 [WDV = Rs. 3 Lacs]. Machine L was
acquired on 12.11.2022 for Rs. 1,50,000 & put to use on the same date. The same machine L is sold on
24.03.2023 for Rs. 2 Lacs. (Only for 1st Revision)
(a) Compute the depreciation allowable u/s 32 for AY 2023-24 on the block.
(b) What will be the depreciation allowed, if machine S is sold instead of machine L.
(c) What will be the depreciation allowed if both S & M are sold instead of machine L.
(d) What will be the depreciation allowed, if machine S is sold at Rs. 3,20,000 instead of L.
Solution:

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 (a) Opening WDV of the block as on 01.04.2022 3,00,000
Add: Actual cost of Machine L (Acquired & put to use for less than 180 days) 1,50,000
Less: Sale consideration of machine L (sold in this same year) (2,00,000)
WDV for charging depreciation 2,50,000
Depreciation on Rs. 2,50,000 @ 15% [Since No asset used for < 180 days exist on 31.3.2022] (37,500)
Note: Depreciation @ 15% has been charged on total WDV, as machine L which was put to use for < 180 days
during PY, ceases to exist on 31.03.2023. If machine L would have been in the block on 31.03.2023, then actual
cost of Machine L to the extent of WDV of the block would be eligible to only 50% of the normal depreciation.
(b) WDV of the block as on 1.4.2022 3,00,000
Add: Actual cost of Machine L (Acquired & put to use for less than 180 days) 1,50,000
Less: Sale consideration of machine S (2,00,000)
WDV for charging depreciation 2,50,000
Depreciation on Rs. 1,00,000 @ 15% (15,000)
Depreciation on Rs. 1,50,000 @ 7.5% (half of Normal Depreciation) (11,250) (26,250)
(c) WDV of the block as on 1.4.2022 3,00,000
Add: Actual cost of Machine L (Acquired & put to use for less than 180 days) 1,50,000
Less: Sale consideration of machine S & M sold during the year (2,00,000)
WDV for charging depreciation 2,50,000
Depreciation on Rs. 1,00,000 @ 15% 15,000
Depreciation on Rs. 1,50,000 @ 7.5% 11,250 26,250
*Although only one asset L is left in the block whose cost is Rs.1,50,000, still depreciation will be allowed on
the balance amount Rs. 1,00,000 @15% as the block has not ceased to exist.
(d) WDV of the block as on 1.4.2022 3,00,000
Add: Actual cost of Machine L (Acquired & put to use for less than 180 days) 1,50,000
Less: Sale consideration of machine L (sold in this same year) (3,20,000)
WDV for charging depreciation 1,30,000
Depreciation on Rs. 1,30,000 @ 7.5% 9,750
As machine L is in the block on 31.03.2023, actual cost of Machine L to the extent of the WDV of the block
would be eligible to only 50% of normal depreciation, as machine L was put to use for < 180 days during PY.

Eligibility The Assessee must be engaged in the business of:

(a) Manufacturing or production of any article or thing, or
(b) Generation, transmission or Distribution of Power

Benefits Additional depreciation is available @ prescribed rates to the eligible assessees for
Investment in New Plant & Machinery. [No Land & Building or OLD P&M]

Ineligible 1. Ships & Aircrafts

Investments 2. Any second-hand P&M (in/out of India)
3. Any P&M installed in office premises, residential house or guest house.
4. Any other office appliances or road transport vehicles.
5. Any P&M whose whole of Actual cost has been allowed as deduction.

Rate 20% of Actual cost of new P&M

Assets put to use for less than 180 days in 1st PY: Additional depreciation will be allowed as:
1st PY = Restricted to 50% (i.e. 10%); Next PY = Remaining 50% that was disallowed in the 1 st PY
 Addition depreciation will be over & above normal depreciation allowed.
 It should be reduced from WDV of the asset.
 PC Note: Additional depreciation is available only when normal depreciation is claimed on WDV basis.
Circular No. 15/2016: Printing or Printing & Publishing amounts to manufacture & thus an Assessee
engaged in such business is eligible for Additional Depreciation u/s 32(1)(iia).

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CQ4. Rama Ltd. has started a new business of manufacturing paints on 01.04.2022. The company has purchased the
following assets during PY 2022-23.
Asset Actual COA ROD Date when it is put to use
Furniture 6,00,000 10% 20.04.2022
AC installed in office 3,00,000 15% 22.06. 2022
Motor Car 24,00,000 15% 16.07. 2022
Plant A 1,50,00,000 15% 25.04.2022
Plant B 60,00,000 15% 14.11.2022
Plant C 2,40,000 100% 18.09.2022
Computer installed in office 3,00,000 60% 09.07.2022
Computer for factory 4,50,000 60% 12.07.2022
Compute normal & additional depreciation allowable for AY 2023-24 to Rama Ltd.
Solution: Computation of Normal & Additional Depreciation for AY 2023-24
Asset Furniture Plant Plant & Car (15%) Plant
(10%) (60%) (100%)
Opening WDV as on 1.4.2022 NIL NIL NIL NIL
Add: Cost of assets acquired during PY 6,00,000 7,50,000 2,37,00,000 2,40,000
WDV for charging Depreciation 6,00,000 7,50,000 2,37,00,000 2,40,000
Less: Normal Depreciation 60,000 4,50,000 (WN 2) 31,05,000 (WN 3) 2,40,000
Additional Depreciation NIL (WN 1) 90,000 (WN 2) 36,00,000 (WN 3) Nil
WDV as on 01.04.2023 [Closing WDV] 5,40,000 2,10,000 1,69,95,000 Nil
Working Note
1 Additional depreciation is not available on furniture as the same is not covered u/s 32 (1)(iia).
2 Plant also consists of computer. Further computer installed in office is not eligible for additional depreciation.
Normal depreciation @ 60% on Rs. 7,50,000 Rs. 4,50,000
Additional Depreciation @ 20% on Rs. 4,50,000 Rs. 90,000
3 Normal Depreciation on Plant (inclusive of Motor-Car) has been calculated as under:
Depreciation @ 15% on Rs. 1,77,00,000 Rs. 26,55,000
Depreciation @ 7.5% on Rs. 60,00,000 (as put to use for less than 180 days) Rs. 4,50,000
Total Depreciation Rs. 31,05,000
Additional Depreciation on Plant (inclusive of Motor-Car)
Asset Plant A (20%) Plant B (10%) Plant C (Nil)
Actual cost Rs. 1,50,00,000 Rs. 60,00,000 -
Additional Depreciation Rs. 30,00,000 Rs. 6,00,000 Nil
Note: Balance of Additional depreciation of Rs. 6 Lacs [50% of Rs. 12 lacs] would be allowed in AY 2023-24.

CQ5. Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars: [ICAI Module Q1]
SN Particulars Rs.
1 Opening WDV of plant & machinery as on 1.4.2022 30,00,000
2 New plant & machinery purchased & put to use on 08.06.2022 20,00,000
3 New plant & machinery acquired & put to use on 15.12.2022 8,00,000
4 Computer acquired & installed in the office premises on 02.01.2023 3,00,000
Compute the amount of depreciation & additional depreciation for the AY 2023-24.
Solution: Computation of Normal Depreciation & Additional depreciation for AY 2023-24
Particulars P& M 15% Computer 40%
Normal depreciation
@ 15% on Rs. 50,00,000 [See Working Note 1] 7,50,000 -
@ 7.5% on Rs. 8,00,000 60,000 -
@ 20% (50% of 40%) on Rs. 3,00,000 - 60,000

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 Additional Depreciation
@ 20% on Rs. 20,00,000 + @10% on Rs. 8,00,000 4,00,000 + 80,000 -
Total depreciation 12,90,00 60,000
Working Note
1 Computation of WDV of Plant & Machinery as on 31.03.2023 (Particulars) P&M Computer
Written down value as on 1.4.2022 30,00,000
Add: Plant & Machinery purchased on 08.06.2022/Computer in office 20,00,000 3,00,000
Add: Plant & Machinery acquired on 15.12.2022 [Less than 180 days] 8,00,000
WDV on 31.3.2023 58,00,000 3,00,000
2 Balance Additional Depreciation of Rs. 80,000 would be allowed as deduction in AY 2023-24.
3 Additional depreciation is not allowable on computer installed in the office premises.

Applicability For Undertakings engaged in Generation, transmission, Distribution of Power.

Before DD of Filing ROI u/s 139(1) relevant to the PY in which they begin to generate
Time to Exercise
power. The option once exercised shall be Final.

Option of SLM → For Intangible Assets, only WDV method shall be applicable.
Tangible Assets Such undertakings can charge depreciation on tangible assets individually, i.e. SLM or
only WDV whichever is beneficial for assessee.

New Assets used Newly acquired assets put to use < 180 days → Depreciation is allowable at 50% of
for < 180 days ROD; Remaining 50% will be allowed in next AY.

Sale in Year of
Profit/Loss arising shall be treated as STCG/STCL.
First Use

SN Conditions Treatment

1 NSC < WDV Terminal Depreciation = WDV ─ NSC. It shall be Deductible u/s 32.

2 NSC > WDV but < COA Balancing Charge (Profit) = NSC ─ WDV. It shall be Taxable u/s 41(2).

3 NSC > COA Capital Gain = NSC ─ Original COA.

Balancing Charge = Original COA ─ WDV. It shall be Taxable u/s 41(2).

CQ6. Bijii Ltd. a power generating unit purchased a machinery of Rs. 15,00,000 on 01.01.2022 on which depreciation
rate is 7.84% on SLM. Machinery is sold on 31.12.2022 for: (i) Rs. 7,50,000; (ii) Rs. 14,41,200; (iii) Rs. 18 Lacs.
Calculate depreciation for PY 2022-23 & the tax implications on transfer of the asset in each of the above cases.
Solution: Depreciation as per SLM for Bijli Ltd. for PY 2021-22 = Rs. 58,800. Thus, WDV as on 1.4.2022 is Rs. 14,41,200.
Case 1 ▪ Assets is sold on 31.12.2022 for Rs. 7,50,000: WDV = Rs. 14,41,200.
▪ Thus SC < WDV, Terminal depreciation = WDV – SC = Rs. 14,41,200 – Rs. 7,50,000 = Rs. 6,91,200.
Case 2 ▪ Assets is sold on 31.12.2022 for Rs. 14,41,200: WDV = Rs. 14,41,200.
▪ Thus SC = WDV, Thus No Terminal depreciation & no Balancing charge.
Case 3 ▪ Assets is sold on 31.12.2022 for Rs. 18,00,000: WDV = Rs. 14,41,200.
▪ In this case, actual sale consideration > WDV. Thus Capital gain & Balancing charge will arise.
▪ Balancing charge = Original COA – WDV = Rs. 15,00,000 – Rs. 14,41,200.
▪ Capital Gains = Sale consideration – Acutal COA = Rs. 18 lacs – Rs. 15 lacs = Rs. 3,00,000.

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 In Case of: ▪ These are the cases of Change in ownership.
(i) Succession, ▪ In such cases, depreciation shall be calculated on the assumption
that no change in ownership has taken place.
(ii) Amalgamation,
▪ Then the amount of depreciation so calculated shall be apportioned
(iii) Demerger,
between predecessor & successor in the ratio of number of days for
(iv) Business Re-organization. which the asset is USED by them.
PC Note: Consideration for which the assets are transferred to the resulting company is irrelevant for
calculation of depreciation. Students should not get confused by such amount given in question.

CQ7. Harsh Ltd. has a block of assets (depreciation @ 15%), WDV of which on 1.4.2022 was Rs. 12 lacs. It purchased
& put to use another asset on 1.11.2022 for Rs. 3 lacs. Harsh Ltd. is converted into Harsh LLP on 1.1.2023 & the block
of assets were transferred to Harsh LLP at Rs. 18 lacs. Though the conversion into LLP took place on 1.1.2023, but
assets were put into use by Harsh LLP on 1.3.2023. Explain the tax implications. [ICAI SM Q2 + Q3]
Solution: Depreciation shall be calculated first as if no conversion has taken place & then aggregate depreciation shall
be apportioned between the predecessor company & the successor LLP.
WDV as on 1.4.2022 Rs. 12,00,000
Add: Actual cost of asset acquired during the year [Put to use for less than 180 days] Rs. 3,00,000
WDV on 31.3.2023 Rs. 15,00,000
Depreciation @ 15% on Rs. 12,00,000 [WDV of assets used for > 180days] Rs. 1,80,000
Depreciation @ 7.5% on Rs. 3,00,000 [WDV of assets used for < 180days] Rs. 22,500
Depreciation for PY 2022-23 Rs. 2,02,500
Apportionment of Depreciation between Predecessor & successor
Harsh Ltd 1,80,000 × 275/306 = 1,61,765 22,500 × 61/92 = 14,918 Rs. 1,76,683
Harsh LLP 1,80,000 × 31/306 = 18,235 22,500 × 31/92 = 7,582 Rs. 25,817
Note: No. of days of January & February has not been considered for apportioning the depreciation as Harsh LLP
has put to use assets only on 1.3.2021 i.e. after 2 months from Conversion.
Calculation of Depreciation for Harsh LLP
Actual Cost of Assets acquired from Harsh Ltd. [WDV on Date of conversion] (Rs. 12 L + Rs. 3 L) 15,00,000
Less: Depreciation allowable to Harsh Ltd (1,76,683)
WDV for AY 2023-24 13,23,317
Less: Depreciation for Harsh LLP on Rs. 15,00,000 - Apportioned depreciation (25,817)
WDV as on 1.4.2022 12,97,500

Cost of Acquisition/Construction of Asset Rs.

Less:
(a) Excise Duty i.r.o which CENVAT credit is Allowed xxx
(b) Subsidy or Grant received by any Authority (Directly/Indirectly) xxx (xxx)
Add:
(a) Interest on loan borrowed payable upto date of commencement of production. xxx
(b) Expenses incurred for acquiring Asset [Freight, Insurance, loading, unloading] xxx
(c) Expenses incurred in connection with the Instalment of Asset. xxx
(d) FOREX Fluctuations arising i.r.o asset acquired from abroad [Sec 43A] xxx xxx

ACTUAL COST for the purpose of computing Depreciation xxx

PC Note: Any Expenditure for Acquisition of any Asset for which aggregate payments made to a person in a
day, otherwise than by A/c Payee Cheque or A/c Payee Draft or Electronic clearing system exceeds Rs.
10,000, such expenditure shall not be included in Cost of such asset.

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SN Cases Actual Cost
1. Scientific Asset/Specified business Asset Actual cost – deduction allowed u/s 35 = Nil
u/s 35AD brought into business.
1A Conversion of Capital Asset into SIT FMV of Capital Asset on the date of conversion of capital
asset into SIT
Conversion of SIT into Capital asset & FMV of SIT on the date of conversion of SIT into capital
used into business asset.
2. Asset acquired by Gift, Will or WDV to the previous owner.
Inheritance

3 Second hand asset If AO is satisfied that main purpose was to reduce the
Income Tax Liability by claiming depreciation on
enhanced cost, he may, with the previous approval of
JCIT, determine the Actual Cost having regard to all the
circumstances of the case.

CQ8. Mr. A transfers P&M used in his business for several years for Rs. 20,00,000 to Mr. B. WDV in the books of Mr.
of the said asset was Rs. 5,00,000. FMV of the asset on the date of transfer was Rs. 4,00,000. Determine the Actual
cost of asset in the case of Mr. B for computing depreciation u/s 32.
Solution: According to Explanation 3 to Sec. 43(6), where any asset has been acquired from another person, who
has been using the asset for his business, AO has the power to determine actual cost of the asset to act as a deterrent
against excess deprecation to be claimed on the enhanced cost. In this case, as FMV of the asset as on date of
acquisition is only Rs. 4 Lacs, AO may determine it as CoA instead of Rs. 20 Lacs being the purchase consideration.

4 Re-acquisition of asset used for (a) WDV at the time of original transfer or
Business/profession earlier. (b) Cost of re-acquisition [whichever is Lower]

CQ9. Mr. A acquired an asset on 15.04.2021 for Rs. 2 Lacs on which depreciation is charged @ 10%. He sold the
asset to Mr. B for Rs. 2 Lacs on 01.04.2022. Again on 16.09.2022, it was reacquired by Mr. A for Rs. 2 Lacs. Compute
the actual cost in the hands of Mr. A for AY 2023-24.
Solution:
Cost of Asset as on 15.04.2021 2,00,000
Less: Depreciation for PY 2021-22 (20,000)
WDV on the date transfer of asset (a) 1,80,000
Value of Reacquisition (b) 2,00,000
Cost to be adopted – as per Explanation 4 Sec. 43(1) [(a) or (b) whichever is less)] 1,80,000
4A Sale & Leaseback transactions WDV of the asset in the hands of transferee = WDV of the asset
in the hands of the person to whom it has been leased back.
(Assets previously used by transferor for his B/P are acquired by the transferee & let out or hired or leased
back to the same transferor)
CQ10. Mr. A owns an asset & uses it for the purpose of his business/profession. A has claimed depreciation i.r.o
such asset. The said asset is transferred by A to Mr. B. Mr. A then acquires the same asset back from B on lease, hire
or otherwise. B being the new owner will be entitled to depreciation.
Cost of acquisition of transferred assets in hands of B = WDV of the said assets at the time of transfer.
5 Building (now brought into business) Actual cost of building – Deemed Depreciation @ rate on
which was used for non-business that date) that would have been allowed had the asset
purpose earlier. been used for business since the date of acquisition.
[PC Note: Only for Building] Note: Other assets should be recorded @ original COA.
CQ11. Mr. A Converted the following assets used for personal purposes into his business assets on 1.4.2022:
Particulars COA DOA FMV on 1.4.2022 Value recorded in books on 1.4.2022
Building 20,00,000 1.4.2020 30,00,000 30,00,000
Land 10,00,000 1.4.2020 50,00,000 10,00,000

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 Solution: Computation of Actual Cost of the asset of Mr. A
Particulars Rs.
Cost of asset as on 1.4.2020 20,00,000
Less: Notional depreciation @ 5% for PY 2020-21 (1,00,000)
WDV as on 31.03.2021 19,00,000
Less: Notional depreciation @ 5% for PY 2021-22 (95,000)
Cost to be capitalized as per Explanation 5 Sec. 43(1) 18,05,000
Explanation 5 to Sec. 43 requires the notional deprecation to be computed only in the case of building & not in
case of any other asset. Therefore, the value of other fixed assets namely Land shall get recorded at Rs. 10 Lacs.
In case of building, cost to be adopted for computing depreciation shall be Rs. 18,05,000 & not at Rs. 30 Lacs.
CQ12. Dr. X purchased a house property on 1.12.2020 for Rs. 10 lacs. Till 01.05.2022, the same was self-occupied
as a residence. On this date, the said building was brought into use for the purpose of his medical profession. What
would be the depreciation allowable for AY 2023-24 assuming that he owns no other building & ROD is 10%.
(b) What if house property had been gifted by his mother, who had purchased the same on 01.05.2019 for Rs 9 lacs?
(c) What if the asset would have been a car?
Ans:
(a) As per Explanation 5 to Sec. 43(1), depreciation of Rs. 50,000 for PY 2020-21 & Rs. 95,000 for PY 2021-22 will
be notionally computed & deducted from the cost of Rs. 10 Lacs. Dr. X can claim depreciation at 10% on Rs.
8,55,000 which works out to Rs. 85,500 for AY 2023-24.
(b) Yes, the answer would differ has the building been gifted by his mother.
Explanation 2 to Sec. 43(1) provided that where an asset is acquired by way of gift or inheritance, actual cost
of asset to the assessee will be the WDV to the previous owner. Deprecation thereafter shall be allowed
assuming the asset as the only asset remaining in the block.
Depreciation on the building that would have been allowed/allowable as under:
PY 2019-20: Rs. 90,000 PY 2020-21: Rs. 81,000 PY 2021-22: Rs. 72,900
Cost = Rs. 6,56,100 (Rs. 9 Lacs - Rs. 2,43,900). Depreciation for AY 2023-24 = Rs. 65,610.
(c) Actual cost of car would be taken as cost of acquisition for charging depreciation.
6 Interest on capital borrowed Interest relating to a period after the asset is first put to
use will NOT form part of Actual cost.

7 Adjustments of ITC of GST Where ITC on capital goods has been availed i.r.o GST,
it shall not form part of cost.

8 Subsidy on capital investment Specific Subsidy: Deducted from Actual COA.

General subsidy: Proportionate Subsidy relatable to the
asset shall be deducted from COA.

9 Asset acquired outside India by NR & Actual cost – depreciation calculated @ rate in force
brought to India & used for the purpose that would have been allowable had the asset been used
of his business/profession. in India since the date of acquisition.

10 Capital asset is acquired under a scheme Amount which would have been regarded as actual cost
for corporatization of RSE. had there been no such corporatization.

CASES WHEN NO DEPRECIATION IS ALLOWED [Refer Section 50 in Cap. Gains]

➢ In the following cases, no depreciation will be allowed to the Assessee during PY:
WDV is Zero but Block is not Empty No Depreciation & STCG u/s 50(1) will arise.
Block is empty but WDV is not Zero No Depreciation & STCL u/s 50(2) will arise.

Space for PC Class Note:

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UNABSORBED DEPRECIATION [SECTION 32(2)]
1. Where depreciation is not fully deductible u/h ‘PGBP’ because of absence or inadequacy of profits, it is
deductible from other heads of Income for the same AY. If depreciation is still unabsorbed, it can be c/f
to subsequent AY without any time limit. In the subsequent years, unabsorbed depreciation can be set
off against any income whether chargeable under the head PGBP or under any other head of income.
2. In the matter of set off, the following priority is followed in the subsequent years
(i) Current year Depreciation (ii) Brought Forward Business Loss (iii) Unabsorbed Depreciation.
PC Note: Set off will be allowed even if the said business to which it related has been discontinued.

REVENUE EXPENDITURE [Sec 35(1)(i)] - [100 % Deduction]

Pre-commencement Only following expenditures will be allowed as deduction:

Period Expenditure (i) Salary (excluding perquisites) to research personnel.
[only 3 years prior (ii) Purchase of Materials used in scientific research.
to Commencement]

Post-commencement Any Revenue Expenditure incurred on scientific research is allowed as deduction.

CAPITAL EXPENDITURE [Sec 35(1)(iv) & 35(2)] - [100 % Deduction]

Pre-commencement Any Capital Expenditure incurred will be allowed as deduction (Except Land).
Period Expenditure [only of 3 years prior to Commencement]

Post-commencement Any Capital Expenditure incurred will be allowed as deduction (Except Land).

Assessee Company only

Eligible Business Bio-technology or any business of manufacture/production of any articles or thing,
not being an article or thing specified in the list of the Eleventh schedule.
Expenditure Capital & Revenue Expenditure [Excluding Cost of Land & Building]
Deductions 100% of Capital & Revenue Expenditure [Except cost of Land & Building]

PC Note: For Company → Pre-commencement expenditure & cost of Building is not allowed as deduction
u/s 35(2AB). Thus, company will not be able to claim deduction u/s 35(2AB). But they are allowed as
deduction @ 100% u/s 35(1) & 35(2). Thus, company will claim 100% deduction on Pre-commencement
expenditure & cost of Building u/s 35(1)/(2).

Purpose Sec Contribution to whom Deduction

Scientific 35(2AA) National laboratory/ National university/ IITs/ IIMs 100%

Research
35(1)(ii) Approved Research association/University/College/Institutions 100%
35(1)(iia) Company Registered in India having scientific research as its main
100%
business objective.
Social or 35(1)(iii) Approved Research association/University/College/institutions
Statistical 100%
Research

PC Note: Deduction of contribution made shall not be denied merely on the ground that the approval granted
to such institutions was withdrawn after payment of such sum by the assessee to them.

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CQ13. Mr. X has furnished following particulars related to payment made towards scientific research for PY 2022-23:
SN Particulars (Rs. In Lacs)
(i) Payments made to K Research Ltd. 20
(ii) Payment made to LMN College 15
(iii) Payment made to OPQ College 10
(iv) Payment made to National Laboratory 8
(v) Machinery purchased for in-house scientific research 25
(vi) Salaries to research staff engaged in in-house scientific 12
Note: K Research Ltd. & LMN College are approved research institutions & these payments are to be used for the
purposes of scientific research. Compute the amount of deduction available u/s 35. [May 2011]
Solution:
Particulars Amount Sec % of Deduction Deduction
Payment for scientific Research
K Research Ltd (WN 2) 20 35(1)(ii) 100% 20
LMN College 15 35(1)(ii) 100% 15
OPQ College 10 - Nil Nil
National Laboratory 8 35(2AA) 100% 8
In-house Research [WN 2]
Capital expenditure 25 35(1)(iv) r/w 35(2) 100% 25
Revenue expenditure 12 35(1)(i) 100% 12
Deduction allowable u/s 35 80

PC Note:
❖ Deduction of Pre-commencement expenditure shall be allowed in the year of commencement of
business to the extent certified by the prescribed authority.
❖ Assessee must incur the expenditure on scientific research. Actual payment is not compulsory.
❖ Assessee is not eligible for deduction by mere transfer of asset from business purpose to scientific
research purpose [i.e Merely by transfer entry in books of accounts].
❖ No depreciation will be allowed on any capital asset whose cost has been allowed as deduction u/s 35.
❖ It is not necessary that capital asset must be complete & used for scientific purpose in the PY itself. It is
also irrelevant that construction of building is not completed & the building has not been used in the PY.
❖ No deductions u/s 35(2AB) shall be allowed to company accepting donations u/s 35(1)(iia).
❖ UNABSORBED CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH: Treated same as unabsorbed
depreciation (can be carried forward for infinite years without any time limit).

SALE OF SCIENTIFIC ASSET [SECTION 41(3)]

1. Assessee may use scientific research asset for his other business purpose after completion of scientific
research. [Conversion of scientific research asset into normal business asset] OR
2. Assessee may sell SR asset without using it for another purpose after completion of scientific research.
In both cases, tax liability could arise.
1 Asset is sold after using it for Business [Section 41(1)]
▪ Such asset will form part of the block of asset. COA = Nil (Since whole cost is allowed as deduction)
▪ No amount will be added in block value as COA = Nil.
▪ On sale of such asset, sale value of such asset will be taxed in the hands of assessee.
2 Asset is sold without using it for business [Section 41(3)]
▪ If sale proceeds + deduction u/s 35 > Capital Expenditure; Taxable Amount = Lower of (i) or (ii)
(i) Sale Price + Deduction allowed u/s 35 – Capital Expenditure; (ii) Deduction allowed u/s 35.

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 ❖ Only Capital Expenditures are covered u/s 35AD [Other than Land/GW/Financial Instrument]
Nature of Specified Business
1 Setting up & operating a Cold chain facility
2 Warehousing facility for storage of agricultural produce.
3 Affordable Housing project
4 Production of Fertilizer
5 Hospital (at least 100 Beds)
6 Cross country pipeline for petroleum or crude oil, natural gas
7 Hotel (2 Star +)
8 Slum Re-development Housing
9 Setting up & operation ICDs or CFS notified or approved under the customs act, 1962
10 Bee-keeping & production of honey & bees wax
11 Warehousing facility for storage of sugar
12 Laying & Operating Slurry Pipeline for the transportation of iron ore.
13 Setting & operating Semiconductor Wafer Fabrication Manufacturing unit
14 Developing or/& maintaining or/& operating a new infrastructure facility.

1 Prior Period Expenses If they are capitalized in the books of accounts.

2 Post Commencement Expenses Any Capital Expenditure incurred during the PY.

PC Note: Any Expenditure for Acquisition of any Asset for which the aggregate payments made to a person
in a day, otherwise than by A/c Payee Cheque or A/c Payee Draft or Electronic clearing system (as
specified earlier) exceeds Rs. 10,000 would not be eligible for deduction.

PC Note: Assessee is deemed to be carrying on the specified business of building & operating hotel if
assessee builds a hotel of two-star or above category. After building the hotel, he transfers the operation of
the hotel to another person; However, he should continue to own the hotel.

CONDITIONS:
1 It is NOT set up by Splitting up or reconstruction of a business already in existence.
2 It is NOT set up by transfer of Second-hand Plant & Machinery.
Exceptions:
(a) Imported P&M will be treated as new for this section &
(b) Used P&M upto 20% of Total value of P&M shall be allowed under this section.
3 No Deduction under any other section: (i.e 10AA & 80IA-80RRB) in any PY.
4 Set-off & carry forward of loss: [To be studied in respective chapter later]
5 Transfer, destruction, demolition, discarding of asset for which deduction was allowed:
If any asset on which a deduction u/s 35AD has been claimed & allowed, is demolished, destroyed,
discarded or transferred, Sum received on such transfer is taxable u/s 28(vii).
6 Use of specified business asset till 8 years for Specified Business only: Where such asset is used
for any purpose other than specified business during 8 years, following amount shall be deemed to
be the income of the assessee of the PY in which the asset is used for non-specified purpose.
Income = Total Deduction Claimed & Allowed in one or more PYs - Depreciation allowable (as if no
deduction was allowed u/s 35AD)
Exception: If the company becomes a sick within 8 years, this provision will not be applicable.

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 CQ14. Mr. Arnav is a proprietor having two units – Unit A carries on specified business of setting up &
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of operating
a warehouse for storage of edible oil. Unit A commenced operation on 1.4.2022 & it claimed deduction of
Rs. 100 lacs incurred on purchase of 2 buildings for Rs. 50 lacs each (for operating a warehouse for storage
of sugar) u/s 35AD for AY 2022-23. However, in Feb 2023, Unit A transferred one of its buildings to Unit
B. Examine the tax implications of such transfer to Mr. Arnav. [ICAI Module Q11]
Solution: Since the capital asset, i.r.o which deduction of Rs. 50 lacs was claimed u/s 35AD, has been
transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in PY
2022-23, the deeming provision u/s 35AD(7B) is attracted during the AY 2023-24.
Particulars Amount
Deduction allowed u/s 35AD for AY 2022-23 Rs. 50,00,000
Less: Depreciation allowable u/s 32 for AY 2022-23 [10% of Rs. 50 lacs] (Rs. 5,00,000)
Deemed income u/s 35AD(7B) Rs. 45,00,000
By virtue of section 43(1), Mr. Arnav can claim depreciation u/s 32 on building in Unit B for AY 2023-
24. For the purpose of claiming depreciation on building in Unit B, actual cost of the building would be:
Actual cost to the assessee - Depreciation allowable u/s 32 for AY 2022-23 = Rs. 50 L – Rs. 5 L = Rs. 45 Lac.
7 Transfer of goods/services to Non-Specified Business of the Assessee himself:
▪ Where any goods or services held for specified business are transferred to any other business
carried on by the assessee, or vice versa, &
▪ Consideration for such transfer does not correspond with FMV of the goods or services,
▪ Profits of Specified Business shall be computed as if the transfer was made at FMV.

CQ15. An assessee, who is already in the business of trading in textiles, commences the business of cold chain
facility w.e.f. 01.07.2022 & has incurred the following expenditure:
Machinery purchased on 26.02.2022 & capitalized in the books of accounts 4,00,000
LAND purchased on 1.04.2022 & capitalized 6,00,000
Building constructed on 30.06.2022 10,00,000
Goodwill purchased on 05.06.2022 2,00,000
Machinery purchased on 20.01.2023 3,00,000
Calculate the deduction allowed u/s 35AD for PY 2022-23.
Solution:
▪ Deduction of 100% of capital expenditure incurred wholly for cold chain business shall be allowed during the
year in which the expenditure is incurred.
▪ All capital expenditures are eligible for 100% deduction (except LAND, GW & any financial instrument).
▪ Land, Goodwill will not qualify for deduction.
▪ Capital expenditure incurred before commencement shall be deductible in the year of commencement, if
expenditure is capitalized in books of account on date of commencement.
▪ Total deduction allowed for PY 2022-23 = 100% of [Rs. 4L (machinery purchased before commencement of
business since capitalized) + Rs. 10 L (building) + Rs. 3 L(machinery) = Rs. 17,00,000.

CQ16. Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains,
sugar & edible oil on 01.04.2022. He incurred capital expenditure of Rs. 80 lacs, Rs. 60 lacs & Rs. 50 lacs, respectively,
on purchase of land & building during Jan. 2022 to March 2022 exclusively for the above businesses, and capitalized
the same in its books of A/c as on 1st April, 2022. Cost of land included in above figures is Rs. 50 lacs, Rs. 40 lacs & Rs.
30 lacs respectively. During PY 2022-23, he incurred capital expenditure of Rs. 20 lacs, Rs. 15 lacs & Rs. 10 lacs,
respectively, for extension/reconstruction of the building purchased & used exclusively for the above businesses.
Compute income u/h “PGBP” for AY 2023-24 & the loss to be carried forward, assuming that Mr. A has fulfilled all the
conditions specified for claim of deduction u/s 35AD & has not claimed any other deduction.
Profits from the business of setting up a warehousing facility for storage of food grains, sugar & edible oil (before
claiming deduction u/s 35AD & section 32) for AY 2023-24 is Rs. 16 lacs, Rs. 14 lacs & Rs. 31 lacs, respectively. Also,
assume i.r.o expenditure incurred, the payments are made by A/c payee cheque or use of ECS through bank.

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Solution: Computation of profits and gains of business or profession for AY 2023-24
Particulars Amount
Profit from business of setting up of warehouse for storage of edible oil (before providing for Rs. 31 Lacs
depreciation u/s 32)
Less: Depreciation u/s 32 [10% of Rs. 30 lacs, being (Rs. 50 lacs – Rs. 30 lacs + Rs. 10 lacs) (Rs. 3 Lacs)
Income chargeable under “Profits and gains from business or profession” Rs. 28 Lacs

Computation of income/loss from specified business u/s 35AD

Particulars Food Grains Sugar Total
A. Profits from the specified business of setting up a warehousing 16 14 30
facility (before providing deduction u/s 35AD)
Less: Deduction u/s 35AD
B. Capital expenditure incurred prior to 1.4.2022 (commencement of
business) & capitalized in books of A/c as on 1.4.2022 (excluding
expenditure incurred on acquisition of land) = Rs. 30 lacs (Rs. 80 30 20 50
lacs – Rs. 50 lacs) & Rs. 20 lacs (60 L – 40 L)
C. Capital expenditure incurred during the PY 2022-23 20 15 35
D. Total capital expenditure (B + C) 50 35 85
E. Deduction u/s 35AD [100% of capital expenditure] 50 35 85
F. Loss from the specified business of setting up and operating a
warehousing facility (after providing for deduction u/s 35AD) to be (34) (21) (55)
carried forward as per section 73A [A-E]
Notes:
1. Deduction of 100% of capital expenditure is available u/s 35AD for AY 2023-24 i.r.o specified business of setting
up & operating a warehousing facility for storage of sugar & setting up and operating a warehousing facility for
storage of agricultural produce.
2. However, since setting up and operating a warehousing facility for storage of edible oils is not a specified business,
Mr. A is not eligible for deduction u/s 35AD i.r.o capital expenditure incurred i.r.o such business.
3. Mr. A can, however, claim depreciation @ 10% u/s 32 i.r.o the capital expenditure incurred on buildings. It is
presumed that the buildings were put to use for more than 180 days during the PY 2022-23.
4. Loss from a specified business can be set-off only against profits from another specified business. Therefore, the
loss of Rs. 55 lacs from the specified businesses of setting up and operating a warehousing facility for storage of
food grains and sugar cannot be set-off against the profits of Rs. 28 lacs from the business of setting and operating
a warehousing facility for storage of edible oils, since the same is not a specified business. Such loss can, however,
be carried forward indefinitely for set-off against profits of the same or any other specified business.

Assessee (a) Indian Company or (b) Any other person Resident in India.
Eligible (a) In case of New companies → Expenses for setting up any business.
Expenditure (b) In case of Existing companies → Expenses for Expansion of Business.
▪ Expenditure on Preparation of feasibility report, Project report, conducting
market survey or engineering services relating to the business.
▪ Legal charges for drafting any agreement relating to the business.
▪ Legal charges for drafting the MOA & AOA of the company.
▪ Printing charges of the MOA & AOA of the company.
▪ Registration fees of the company.
▪ Expenditure on public issue of shares/debenture, underwriting commission,
brokerage & charges for drafting, & advertising prospectus.
Maximum 1. Indian Company Higher of 5% of [Cost of Project OR Capital Employed]
Limit
2. Any other Assessee 5% of Cost of Project.

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 Qualifying 1. Eligible Expenditure incurred or
Expenditure 2. Maximum Limit (whichever is Lower)
Deduction 1/5th of the Qualifying expenditure in 5 successive PYs.
Audit COMPULSORY AUDIT for the years in which expenditure is incurred.
PC Note: If Indian Co. is amalgamated with another Indian Co. before expiry of 10 years → Above provisions
will apply to amalgamated company as if the amalgamation had not taken place.
❖ Meaning of Cost of Project → Actual cost of Fixed assets [L & B, P & M, F & F etc];
❖ Meaning of Capital Employed → Aggregate of Issued share capital, Debentures, Long-term borrowings;
(as on the last day of PY in which business is commenced).

CQ17. X Ltd. is incorporated in Mumbai on 6 September 2022. It commences production on 15 March 2023. Following
expenses are incurred by the company before commencement of business. Calculate deduction u/s 35D.
(a) Expenses on incorporation, issue of shares: Rs. 92,000.
(b) Preparation of feasibility report & conducting market survey: Rs. 1,40,000.
(c) Engineering services (work is carried on by a concern which is unapproved by Board): Rs. 1,30,000.
Particulars as on last day of PY in which business is commenced are: Cost of fixed asset – Rs. 55 Lacs; Share capital -
Rs. 40 Lacs; Debentures - Rs. 12 Lacs; Long-term borrowing from FIs (repayable for not less than 7 years) - Rs. 8 Lacs
Solution:
Cost of Project Rs. 55,00,000
Capital Employed (Rs. 40 lacs + Rs. 12 lacs + Rs. 8 lacs) Rs. 60,00,000
1. Eligible Expenditure
(a) Expenses on incorporation (Included even if work is undertaken by unapproved person) Rs. 92,000
(b) Preparation of feasibility report, project report & conducting market survey (approved) Rs. 1,40,000
(c) Engineering services (it is not included since carried by unapproved concern) Nil
Total Eligible Expenditure Rs. 2,32,000
2. Maximum Limit (5% of Rs. 55 lacs or Rs. 60 lacs, whichever is higher) Rs. 3,00,000
Qualifying Amount for Deduction Lower of (i) or (ii) Rs. 2,32,000
Amount deductible in 5 years for AY 2023-24 to 2027-28 Rs. 46,400

Eligible Assessee Any Assessee

Eligible Expenditure Payment of any sum to Employee for his voluntary retirement.
Deduction ▪ 1/5th of Expenditure shall be deductible for 5 succeeding PYs.
▪ Each Part Payment of VRS is deductible in 5 Instalments.
▪ 1st Instalment is deductible in the PY in which such sum is Actually Paid.
PC Note: In case of any Business Re-organization → Deduction shall be allowed to resulting company
(organisation) for Remaining years.

CQ18. X Ltd. made payment of VRS to its employee Y as under: PY 2022-23: Rs. 4,00,000; PY 2023-24: Rs. 3,00,000;
PY 2024-25: Rs. 1,40,000. How much deduction will be allowed to X Ltd. for AY 2023-24 to AY 2024-25?
Solution: Deduction of VRS Expenditure
AY Payment 1/5th Deduction from PY of payment Period of 5 years from year of payment
2023-24 4,00,000 80,000 AY 2023-24 to 2026-27
2024-25 3,00,000 60,000 AY 2023-24 to 2027-28
2025-26 1,40,000 28,000 AY 2024-25 to 2028-29
(i) Total Deduction u/s 35DDA for AY 2023-24 = Rs. 80,000.
(ii) Total Deduction u/s 35DDA for AY 2024-25 = Rs. 80,000 + Rs. 60,000 = Rs. 1,40,000.

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(i) Stocks or stores against risk of damage or destruction.
(ia) Lives of Cattles owned by members & paid by primary milk co-operative society.
(ib) Health of Employees → Paid by the employer [Any mode other than Cash].

(ii) Bonus/commission PAID to the Employees by the employer. [not payable as profit or dividend]
PC Note: Amount paid to the employees as bonus or commission shall not be payable to them as profits
or dividends if it had not been paid as bonus or commission.
It is a provision intended to safeguard escaping tax by distributing a part of its profits by way of bonus amongst
the members, or employees of their own concern instead of distributing the money as dividends or profits.

➢ Interest for the period after the asset is put to use is allowed as deduction.
PC Note: Interest payable for the period before the asset is put to use → Capitalized & added to COA
of Asset & thus not deductible u/s 36(1)(iii).

PC Note:
❖ Interest on own capital → Not deductible.
❖ Guaranteed interest paid to shareholders on paid-up capital → Not Deductible.
❖ Interest paid on money borrowed for payment of dividends → Deductible.
❖ Interest paid on money borrowed for payment of Tax → Not Deductible.
❖ Interest paid by a firm to partners → Deductible; Interest paid by AOP to its members → Not Deductible.

(iii)(a) Amortization of Discount on a Zero-Coupon Bond is deductible over the life of such bond.
Tax Treatment in the hands of Issuing Company
▪ Discount (Amount payable on Maturity – Issue Price) on ZCB is deductible on Pro rata basis.
▪ No TDS u/s 194A by the payer company.

Tax Treatment in the hands of Investor

▪ Maturity or redemption of ZCB will amount to transfer u/s 2(47)(iva).

(iv) RPF or Approved SF, Subject to section 43B.

(iva) Pension scheme to the extent of 10% of salary of the employee in PY.
(v) Approved Gratuity Fund subject to Section 43B.

(va) Employee’s contribution towards RPF/SF/ESIC, if deposited by the employer before DD.
PC Note: Employee’s contribution is first included in total income of the employer. Then deduction is
given under this section if the sum received is deposited before due date under relevant law.
As per the Employees Provident Funds Scheme, 1952, amounts under consideration i.r.o. wages of the
employees for any particular month shall be paid within 15 days of the close of every month.
PC Note: It is clarified that provisions of section 43B does not apply & would deemed never to be applied
on employee’s contribution received by employer towards any welfare fund of such employee. In effect,
extended time upto due date of filing of ROI is not available for credit of employee’s contribution towards
any welfare fund received by the employer.

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 Conditions:
➢ Debt (Loan) must be incidental to the business & must be written off in books of accounts.
➢ Such debt must be charged as income in computing the income if the assessee of any PY
➢ Debt may be money lent in the ordinary course of banking or money lending business

Second Proviso inserted by FA, 2015:

If whole or part of Debt has been included in the income of PY in which it becomes irrevocable or earlier
PYs without recording the same in the books of accounts; such Debt amount shall be allowed in PY in
which, it becomes irrevocable and it shall be deemed that such amount has been written off in A/cs

Other points:
1. In case of succession → Successor is entitled to claim the deduction when a debt originally due to the
predecessor is written off as bad debt by the successor in his books of accounts.
2. Recovery of Bad debts is taxable as business income in the PY of recovery. [sec 41(4)]

➢ Any expenditure incurred by the company for promoting family planning amongst employees will be
allowed as deduction in the hands of company.

Amount of Deduction will be as follows:

▪ Revenue Expenditure: Fully allowed in the PY in which it is incurred.
▪ Capital Expenditure: 1/5th of the expenditure allowed in 5 PY’s.
PC Note: Treatment of Unabsorbed expenditure is same as treatment of unabsorbed depreciation.

(xv) Securities Transaction Tax [STT] paid by the assessee is deductible if the income arising from
such a taxable securities transaction is included u/h “PGBP”

(xvi) Commodity Transaction Tax [CTT] paid by the assessee is deductible if the income arising from
such a taxable commodities transaction is included u/h “PGBP”.

CQ19. Profit & loss account for the relevant PY is as follows:

Cost of goods sold 75,000 Sale proceeds of goods 2,30,000
Salary to employees 99,000
Other expenses 10,000
Net profit 46,000
Salary of Rs. 99,000 comprises Rs. 9,000 as employee’s contribution towards RPF. Out of Rs. 9,000, Rs. 6,000 is credited
in employees’ PF within due date & Rs. 3,000 is credited after due date. Compute net income of X for the relevant AY.
Solution:
Net profit 46,000
Add: Employees contribution towards PF [it is first included in income - Section 2(24)(x)] 9,000
Total 55,000
Less: Employees contribution towards PF if credited on a date before DD [Section 36(1)(va)] (6,000)
Net income 49,000

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 GENERAL DEDUCTIONS [SECTION 37]
▪ Section 30-36 provides for Specific deductions i.r.o certain expenditures.
▪ But still there can be Certain Expenditures which might not get covered in Section 30-36.
▪ Thus Section 37 provides for General deductions.
▪ Only Business Expenditure is Allowable u/s 37.
▪ Deduction u/s 37 is limited only to the amount actually expended & does not extend to a reserve created
against a contingent liability.
▪ Business losses such as those arising out of embezzlement, theft, destruction of assets, misappropriation
by employees etc are allowable u/s 29 as losses incidental to the business.

CONDITIONS FOR ALLOWANCE U/S 37: Such expenditure shall

1. Not covered in Section 30 to 36.
2. Not a capital expenditure (Only revenue expenditure is deductible u/s 37).
3. Incurred during the PY.
4. It must have been incurred after the business was set up.
5. Incurred wholly & exclusively for business (Personal Expenditure is NOT deductible).
6. Legal Purpose only: Expenditure should not be for any purpose which is an offence or prohibited by law.

PC Note:
1. There should be Nexus between Expenses & business.
2. Exclusive benefit may or may not be derived by the assessee. Section 37 requires that expenditure should
be wholly & exclusively incurred for business. AO cannot question the necessity of expenditure in allowing
the deduction for such expense which was incurred for the purpose of the business but was unnecessary.

Some Important Decisions based on Case Laws:

Particulars Deduction u/s 37(1)
Penalties imposed for Infraction of any Law. Not Allowed
Penalty paid for failure to deduct TDS under Income Tax Not Allowed
Any interest or penalty paid under Income Tax Not Allowed
Interest paid to GST Department on Arrears of GST Allowed
Interest paid under Employees PF & Misc. provision Act, 1952. Allowed
Penalty paid by the assessee (contractor) for non-completion of contract Allowed as it is not a fine paid
within stipulated time. for infraction of law.
Demurrage paid to port authorities for releasing confiscated goods. Allowed as it is not a fine.

CONTRIBUTION TO POLITICAL PARTIES [SEC 37(2B)]

➢ Any expenditure on advertisement in any souvenir, brochure, tract, pamphlet published by Political
parties is not deductible.
➢ However, it can be claimed as deduction u/s 80GGB & 80GGC as “Donations to PP”.

Some Important Circulars:

1. Expenditure incurred on keyman insurance policy: Premium paid on the Keyman Insurance Policy is
allowable as business expenditure.
2. Expenses incurred in providing freebees to medical practitioner: Any expense incurred in providing
freebees to medical practitioner is in violation of the provisions of Indian Medical Council Regulations,
2002 & thus not allowed as deduction.
3. Expenditure incurred on CSR: Not deemed to be incurred for Business & thus not deductible.

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 PART B. SPECIFIC DISALLOWANCES

➢ Payable out of India (to any person) or

➢ Payable in India (to any NR or Foreign Company)

Conditions for (i) Tax is not deducted before the end of the PY. OR
Disallowance (ii) Tax is deducted but not paid before due date of filing ROI u/s 139(1).

Consequences 100 % of such amount paid/payable is disallowed in that PY.

Deduction or (i) Where tax has been deducted in any subsequent PY OR

Payment in (ii) has been deducted during the PY but paid after the Due date;
Subsequent PY then 100% of such sum shall be allowed as deduction in computing the income
of PY in which such tax has been paid (PY of Payment of tax to government).

It is to be noted that to get deduction of any sum paid on which tax is deductible;
(i) Tax should be deducted before the end of PY (i.e before 31 st march of the relevant PY) AND
(ii) Such deducted tax should be paid to government before due date of filing ROI u/s 139(1).
Both conditions should be satisfied together to get deduction in the relevant PY.

IMP CASE → There may exist a situation when tax is deducted after 31 st march of relevant PY but such
tax is paid to government before due date of filing ROI. In such case, amount paid shall be disallowed in
the relevant PY since tax has not been deducted before 31 st march. However, it will be allowed as
deduction in the next PY. Both the conditions given above goes hand in hand – [Refer case 5 Below]
CQ20. For PY 2022-23; Due date of filing ROI u/s 139(1) is 31st October 2023.
Case Date of TDS Date of Payment of TDS Deductible in PY
1 26.07.2022 15.10.2023 PY 2022-23
2 31.03.2023 12.12.2023 PY 2023-24
3 16.05.2022 Not deposited Not Deductible
4 20.04.2023 20.07.2024 PY 2024-25
5 30.04.2023 10.05.2023 PY 2023-24
Payment of Tax by Payee of such sum [Sec 201]
If assessee fails to deduct the whole or any part of tax on any such sum but is not deemed as assessee in
default under the first proviso to section 201(1) by reason that such payee:
(a) has furnished his return of income u/s 139;
(b) has taken into account such sum for computing income in such return of income; &
(c) has paid the tax due on the income declared by him in such return of income, and the payer furnishes
a certificate to this effect from an accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted & paid the tax on such sum on the date on which ROI
has been furnished by the payee.

PC Note: Since date of furnishing ROI by the payee is taken as the date on which payer has deducted tax
at source & paid the same, such expenditure/payment i.r.o which the payer has failed to deduct tax at
source shall be disallowed u/s 40(a)(i) in the year in which the said expenditure is incurred. However,
such expenditure will be allowed as deduction in the subsequent year in which ROI is furnished by the
payee, since tax is deemed to have been deducted & paid by the payer in that year.

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Conditions for (i) Such tax is not deducted before the end of PY OR
disallowance (ii) Tax is deducted but not paid before Due Date of ROI u/s 139(1)

Consequences 30% of such amount paid/ payable is disallowed as deduction in that PY.

Deduction or (i) Where tax has been deducted in any subsequent PY OR

payment in (ii) has been deducted during the PY but paid after the said DD,
subsequent PY 30% of such sum shall be allowed as deduction in computing the income of the PY in
which such tax has been paid.

▪ If Tax on such income has been paid by the payee by showing such sum as his income in his ROI,
then it shall be deemed that Assessee has deducted & paid tax & thus No disallowance under this section.
▪ Deemed Date of TDS & Payment of tax → Date of filing ROI by the payee.

Since date of filing ROI by resident payee is deemed to be the date on which the payer has deducted &
paid tax → 30% of such expenditure/payment shall be disallowed u/s 40(a)(ia) in the year in which the
said expenditure is incurred. However, 30% of such expenditure will be allowed as deduction in the
subsequent year in which ROI is furnished by the resident payee.

Ex: Tax on royalty paid to Mr. A, a resident, has been deducted during PY 2022-23 & it has to be paid by 31st
July/31st October 2023, as the case may be. Otherwise, 30% of royalty paid would be disallowed in computing
the income for AY 2023-24. If i.r.o. such royalty, tax deducted during PY 2022-23 has been paid after 31st
July/31st October 2023, 30% of such royalty would be allowed as deduction in the year of payment.

➢ Payment of Salary on which tax has been neither deducted before the end of PY nor paid before DD
of filing ROI u/s 139(1) will be disallowed.
■ Payable out of India (to any person) or ■ In India (to any NR)
➢ PC Note: It is a permanent disallowance.

CQ21.
SN Date of TDS Date of Payment PY in which Salary is Deductible
1 31.07.2022 10.11.2022 PY 2022-23
2 31.03.2023 30.04.2023 PY 2022-23
3 Not Deducted 12.05.2023 PY 2022-23
4 31.03.2023 Not Deposited PY 2022-23
5 Not Deducted Not Deposited Not Deductible

➢ Tax paid on non-monetary perquisites by the employer → Not Deductible to Employer.

➢ Such tax will be exempt in the hands of employee – [Sec 10(10CC)].

INCOME TAX PAID on income of business/profession is not deductible - Section 40(a)(ii)/(iia)

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 Following payments to partners are disallowed in the hands of Partnership firm:
1. Remuneration to Non- Working Partner.
2. Remuneration to Working Partner if:
(a) Not Authorized by Partnership deed.
(b) Not in Accordance with T&C of partnership deed.
(c) For the period prior to the date of agreement.
(d) Exceeding the limit given below ↓
Book Profit Amount of Remuneration
Book Loss OR Upto Rs. 3 Lacs of Book Profit Rs 1.5 Lacs OR 90% of Book Profit [Higher]
On the balance of Book Profit [Above 3 Lacs] 60% of the Book Profit

Interest paid to the partners is disallowed to partnership firm in the following cases:
(a) Not Authorized by the Partnership deed
(b) For the period prior to the date of the Partnership Deed.
(c) At a Rate Exceeding 12% p.a.

CQ22. X & Y, a partnership firm consisting of 2 partners, reports net profit of 7,00,000 before deduction of following:
1. Salary of Rs. 20,000 each p.m payable to 2 working partners of firm (as authorized by the deed of partnership).
2. Depreciation on plant & machinery u/s 32 (computed): Rs. 1,50,000.
3. Interest on capital at 15% p.a (as per p’ship deed). Amount of capital eligible for interest is Rs. 5,00,000.
Compute:
(i) Book-profit of the firm u/s 40(b) of the Income-Tax Act 1961.
(ii) Allowable working partner salary for AY 2023-24 as per section 40(b). [NOV-2011 + ICAI Module Q16]
Solution (i) Computation of Book- Profits u/s 40(b) of Income Tax Act 1961
Net Profit 7,00,000
Less: Depreciation u/s 32 (1,50,000)
Less: Interest on capital (5,00,000 x 12%) (60,000)
Book Profit as per section 40(b) 4,90,000
(ii) Calculation of allowable salary to partners
Allowable Salary
On first 3,00,000 of book profit: 90% of book profits or 1,50,000 whichever is higher 2,70,000
On balance book profit: 60% on balance book profit (1,90,000 x 60/100) 1,14,000
Hence, salary as per section 40(b) would be 3,84,000

➢ Salary, Bonus, Commission paid by AOP/BOI to its Member → Not Deductible.

Applicability: This section is applicable if:

(a) Payment for any Expenditure is made to a related person &
(b) Such payment is considered to be excessive or unreasonable by AO.

Disallowance: Expenditure to the extent it is Excessive or unreasonable is Disallowed.

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 Payer Meaning of Relatives Payments made to/received by (Payee)
Individual (i) Relative (spouse, brother or sister or any lineal ascendant/descendant of that individual);
(ii) Person in whose business individual or his relative has a substantial interest.
Company (i) Director of the company & their relatives
(ii) Person in whose business Company, Director or his relative has substantial interest.
(iii) Relative of such Director/Partner/Member or any other Company carrying on business
or profession in which the first mentioned Company has substantial interest.
Firm (i) Partner & their relatives;
(ii) Any Person in whose business, firm, partner or their relatives has SI.
HUF/AOP (i) Member & their relatives;
(ii) Any Person in whose business, HUF/AOP, Member & their relatives has SI.
Any other (i) Individual who has a substantial interest in the Assessee’s business/profession, or
Assessee relatives of such individual, or
(ii) Company/Firm/AOP/HUF/having substantial interest in the assessee’s business or
profession, or any director/partner/Member of such company/Firm/AOP/HUF, or any
relative of such director/Partner/Member.

Conditions for Disallowance u/s 40A(3)

1. Assessee incurs any expenditure exceeding Rs. 10,000 which is deductible u/h PGBP.
2. A Payment or Aggregate of Payments made to A Person in A Day for an Expenditure > Rs. 10,000.
[Rs. 35,000 in case of payment made for Plying, Hiring, Leasing Goods Carriages].
3. Above Payment is made otherwise than by A/c payee cheque/draft/Specified Electronic Modes.
Then → NO DEDUCTION shall be allowed for such expenditure.
Ex: If for an expenditure of Rs. 32,000 incurred by X Ltd, 4 cash payments of Rs. 8,000 each are made on a day
to Mr. Y as: (1) Morning at 10 AM; (2) @ 12 Noon; (3) @ 3 PM & (4) @ 6 PM, Entire expenditure of Rs. 32,000
would be disallowed u/s 40A(3), since Aggregate cash payments made during a day to Mr. Y > Rs. 10,000.
PC Note:
1. If any expenditure has been allowed as deduction in any earlier PY on accrual basis (if assessee is
following accrual basis) & payment for such expenditure has been made in any subsequent PY
exceeding Rs. 10,000/35,000 in cash to a person in a day, then such payment shall be deemed to be
the income of the PY in which payment is made.
2. In following cases, Sec 40A(3) does not Apply:
(a) Repayment of Loans (It is not an expenditure deductible in computing the taxable income) But it
applies to interest payments since interest is a deductible expenditure.
(b) Payment made by commission agents for goods received by them for sale on commission basis
(such payment is not a deductible expenditure in computing taxable income of commission agent).
However, where commission agent purchases goods on his own account but not on
commission basis, section 40A(3) will apply.
Exceptions: [In the following cases, NO Disallowance even if amount paid > Rs. 10,000]
1 Payment made to Banks (including Private & Co-operative Bank, Credit Societies & LIC.)
2 Payment made to Government when such payment is required to be made in legal tender.
3 Payment through Banking System.
4 Payment by Book Adjustments against any liability incurred.
5 Payments made to the Cultivator, Grower or Producer of agricultural, forest, animal husbandry or
dairy or poultry, fish, horticulture, apiculture products.
6 Payment to the producers of goods in cottage industry without the aid of power.

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 7 Payment made at the place which on the date of payments is not served by bank.
8 Any terminal benefits [Ex: Retirement or gratuity etc.] ≤ Rs. 50,000.
9 Payment to Employees on temporary posting for continuous period of 15 days or more if such
payment is made after TDS & such employee does not maintain any bank A/c at such place.
10 Payment made on a day on which Banks were closed due to holiday or strike.
11 Payments made by any person to his commission agent who is required to make payment in cash
for goods or services on behalf of such person.
12 Payment made by Authorized Dealer or Money changer against purchase of Foreign currency or
Traveller’s cheque in the normal course of his business.

CQ23. Determine the amount of disallowance in following cases:

1. Salary of Dec. 2022 is paid to A, B & C by Bearer cheque (Rs. 6,000, Rs. 10,000 & Rs. 12,500, respectively).
2. X ltd. Purchases goods on credit from Y Ltd. on 06.05.2022 for Rs. 76,000 which is paid as follows:
(a) Rs. 5,000 in cash on 11.05.2022 (b) Rs. 30,000 by a bearer cheque on 5.6.2022 & remaining with net banking.
3. Z Ltd. Purchases goods on credit from A Ltd. on 10.5.2022 for Rs. 6,000 & on 30.5.2022 for Rs. 5,000. The total
amount is paid on 1.7.2022 in cash.
4. A Ltd. purchases goods on credit from a relative of a director on 20.6.2022 for Rs. 50,000 (Market value; Rs.
42,000). The amount is paid in cash on 25.6.2022.
5. A Ltd purchase raw material on credit from B ltd. in which A Ltd. holds 20% equity shares, (amount of bill being
Rs. 26,000, market price being Rs. 9,000). It is paid in cash on 26.07.2022 [PC Note: Beneficial to assessee approach]
Solution:
1. Rs. 12,500, being 100% of salary paid by bearer cheque to C, will be disallowed.
2. Nothing will be disallowed out of the payment of Rs. 5,000 cash on 11.05.2022, as the payment does not exceed Rs.
10,000. 100% of Rs. 30,000 will be disallowed. Nothing will be disallowed in case of Netbanking.
3. Though the amount of payment exceeds Rs. 10,000, nothing shall be disallowed. To attract disallowance, the
amount of bill as well as the amount of payment should be more than Rs. 10,000.
4. Out of the payment of Rs. 50,000 Rs. 8,000 (being excess payment to relative) shall be disallowed u/s 40(A)(2). As
payment is made in cash & remaining amount exceeds Rs. 10,000, 100% (i.e. Rs. 42,000) is disallowed u/s 40A(3).
5. Out of the payment of Rs. 26,000, Rs. 17,000 (being the excess payment to person holding a substantial interest)
shall be disallowed u/s 40A(2). Remaining amount (i.e. Rs. 9,000) does not exceed Rs. 10,000. Nothing shall be
disallowed u/s 40A(3) even if the payment is made in cash. [Hint: Sequence]

CQ24. Please advise whether sec. 40A(3) will apply to cases given as below
(a) Advance for purchase of material was paid in cash Rs. 60,000 on 15.6.2022. Material was delivered on 07.08.2022
Balance payment of Rs. 2,00,000 was made by crossed cheque.
(b) Donations paid in cash Rs. 35,000.
(c) Cash payment of Rs. 80,000 made to a farmer for purchase of agriculture produce in a village served by bank.
(d) Purchase of Raw Material of Rs. 40,000 was made on 10.10.2022 from nephew, market price is rated Rs. 30,000.*
(e) Mode & Date (i) 1.11.2022 Cash - Rs. 5000 (ii) 1.12.2022 bearer cheque - Rs. 10000 (iii) 15.1.2023 Cash - Rs. 25000.
(f) Cash purchase of land Rs. 10,00,000 held as stock-in-trade by an estate dealer.*
(g) Cash payment of Rs. 70,000 made by the consignee for the goods received on consignment.
(h) Cash payment of Rs. 5,00,000 made by an authorized dealer against travelers cheque.
Solution:
(a) Cash advance given against purchase of raw material is also an outgoing expenditure. 100% of Rs. 60,000 will be
disallowed. Also, 100% of Rs. 2,00,000 is disallowed as payment is made by crossed cheque.
(b) Section 40A(3) does not apply to cash donations as it is not deductible u/s 30 to 37. [Check 80G conditions]
(c) Cash Payment > Rs. 10,000 for the purchase of agriculture produce to the cultivator has been excluded from the
ambit of Sec. 40A(3) vide rule 6DD. Hence, there will be no disallowance.
(d) Section 40A(2) does not apply as nephew is not relative. Brother’s son is not included in the definition of relative.
(e) Cash payment of Rs. 25,000 on 15.1.2023 shall be covered by the disallowance u/s 40A(3).
(f) Rs. 10,00,000 will be disallowed as purchase of stock-in-trade is a business revenue expenditure.
(g) Section 40A(3) is not applicable to consignee as he has not purchased the goods on his account.
(h) Section 40A(3) does not apply to an authorised dealer or money changer.

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➢ Any Provision made for payment of unapproved gratuity which is not yet due → Not Deductible.
Exceptions:
1. Contribution towards Approved Gratuity Fund.
2. Provision for Gratuity that has become Due & Payable during PY by virtue of Employee’s Retirement,
Death, Termination of service etc.

CQ25. Discuss the amount deductible in the following cases

(i) X retires from the services of Y Ltd. on May 31, 2023. The company pays gratuity of Rs. 1,60,000, according to
the provisions of the Payment of Gratuity Act, 1972. Y Ltd. does not maintain any provision for gratuity account.
(ii) Z Ltd. maintains an approved gratuity fund. A sum of Rs. 1,00,000 being employer's contribution towards the
gratuity fund, is debited to the P & L A/c ending March 31, 2023.
Solution:
(i) Where gratuity is paid during PY or where gratuity has become payable during PY, it is deductible if no deduction
has been claimed earlier. Consequently, Rs. 1,60,000 is allowed as deduction for AY 2023-24.
(ii) Where any provision is made for the purpose of payment of a sum by way of any contribution towards an
approved gratuity fund, it is allowed as deduction. It is assumed that provisions of section 43B are satisfied.

➢ Contribution to Any Fund which is not required by Law (Non-Statutory) is not allowed as deduction.

CQ26. X Ltd. contributes 20% of basic salary to the account of each employee under pension scheme referred in sec.
80CCD. DA = 40% of basic salary & it forms part of pay of the employees. Compute deduction allowable u/s
36(1)(iva) if basic salary is Rs. 10 lacs. Would disallowance u/s 40A(9) be attracted? [ICAI Module Q12]
Solution: Computation of deduction u/s 36(1)(iva) & disallowance u/s 40A(9)
Particulars Rs.
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of Rs. 10 lacs) 2,00,000
Less: Permissible deduction (10% of basic salary + DA) = 10% of Rs. 14,00,000 = Rs. 1,40,000) 1,40,000
Excess contribution disallowed u/s 40A(9) 60,000

➢ Deduction of any Loss, Expenditure or Trading Liability was allowed in any earlier PY; &
➢ During the current PY, the assessee has obtained:
▪ Refund of such expenditure OR
▪ Some Benefits i.r.o such Trading liability. (Remission/Cessation of such liability; then
➢ Such refunded expenditure or remitted/ceased liability shall be deemed to be income of the Assessee.
➢ Year of Taxability → PY in which Amount is Recovered OR Liability is Remitted.

Examples:
1. Rs. 1,50,000 is paid as GST by X during PY 2018-19 & same is allowed as deduction. Mr. X claims a refund of Rs.
10,000 on 16.06.2022 from GST department after getting a favourable verdict from Delhi High Court. Rs. 10,000
is taxable for the PY 2022-23.
2. An assessee is allowed deduction for PY 2019-20 i.r.o Rs. 42,000 misappropriated by his cashier. In PY 2022-23
Rs. 8,000 (out of the sum so misappropriated) is recovered by the assessee. Rs. 8,000 is chargeable to tax as
business income for PY 2022-23.

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➢ Balancing Charge on assets on which depreciation is charged on SLM basis, in case of power
generating/distributing undertakings.
➢ Year of Taxability: Year of transfer/sale.

➢ Already Covered with Section 35

➢ Year of Taxability: Year of transfer/sale.

➢ Year of Taxability: Year of Recovery.

➢ Generally, loss from business cannot be c/f after 8 years.

➢ However, loss suffered in the year of Discontinuance (only) can be set off against any income taxable
u/s 41(1), (3), (4), (4A) [Above deemed Incomes].

CQ27. A business (not speculative) is discontinued on 10th Dec 1990. There was unadjusted business loss of Rs.
35,000 (i.e. Rs. 10,000 of PY 1989-90 & Rs. 25,000 pertaining to the period 1st April 1990 – 10 Dec 1990). On 20th
May 2022, assessee recovers a debt of Rs. 48,000 from a debtor which was allowed as bad debt in PY 1989-90 (or
may be in some other year). Find out taxable notional profit for PY 2022-23 u/s 41.
Solution:
▪ Bad debt recovered in PY 2022-23 will be taxable u/s 41(4). However, such deemed income can be set off
(adjusted) against the unabsorbed loss of the year of discontinuance. Thus, loss of Rs. 25,000 can be set off against
such deemed Income. Thus, taxable income for PY 2022-23 = Rs. 48,000 – Rs. 25,000 = Rs. 21,000.
▪ It is to be noted that loss of earlier years of discontinuance cannot be adjusted against such deemed income.

➢ Conditions for Applicability of 43B: Assessee following Mercantile Basis of Accounting only.
➢ Following Expenses (which are deductible in normal circumstances) are deductible in the relevant
PY only if they are paid before due date of filing ROI of such PY u/s 139(1).
1. Tax, Duty, Cess or Fee (by whatever name called) levied under any law.
2. Employer’s Contribution to any PF/SAF/Gratuity Fund or any recognized welfare fund.
3. Bonus or Commission to employees [Arrears of salary & other benefits → not covered in 43B].
4. Sum payable by the employer in lieu of any Leave standing at the credit of his employee.
5. Interest on any Loan or borrowing from any PFI/SFC/SIIC.
6. Interest on any Loan or advances from a Scheduled Bank (including co-operative bank).
7. Interest on any loan or borrowing from a deposit taking NBFC or systemically important non-deposit
taking NBFC, in accordance with T&Cs of the agreement governing such loan or borrowing.
8. Any sum Payable to Indian Railways for the use of Railways Assets.

PC Note: Conversion of unpaid interest into Fresh Loan by Bank /FI → If unpaid Interest is converted
into Loan/Advances, it shall not be deemed to be paid & thus no deduction shall be allowed.

Deposit taking NBFC NBFC which is accepting or holding public deposits & is registered with RBI.
Systemically Important NBFC which is not accepting or holding public deposits & having total assets
Non-Deposit taking NBFC ≥ Rs. 500 Cr. as per last audited balance sheet & is registered with RBI.

CQ28. Hari, an individual, carried on the business of purchase & sale of agricultural commodities like paddy,
wheat, etc. He borrowed the following loans & has not paid interest as detailed hereunder: [New Question]
- Andhra Pradesh State Financial Corporation (PY 2021-22 & PY 2022-23): Rs. 15 Lacs.

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 - Indian Bank (PY 2022-23): Rs. 30 Lacs.
Both APSFC & Indian Bank, while restructuring the loan facilities of Hari during PY 2022-23, converted the
above interest payable by Hari to them as a loan repayable in 60 equal installments. During PY 2022-23, Hari
paid 5 installments to APSFC & 3 installments to Indian Bank.
Hari claimed entire interest of Rs. 45 Lacs as an expenditure while computing business income of purchase &
sale of agricultural commodities. Examine whether his claim is valid & what is the amount of interest allowable.
Solution: According to section 43B, any interest payable on the term loans to specified financial institutions &
any interest payable on any loans & advances to, inter alia, scheduled banks shall be allowed only in the year
of payment of such interest irrespective of the method of accounting followed by the assessee. Where there is
default in the payment of interest by the assessee, such unpaid interest may be converted into loan. Such
conversion of unpaid interest into loan shall not be construed as payment of interest for section 43B. Amount
of unpaid interest so converted as loan shall be allowed as deduction only in the year in which converted loan
is actually paid.
In this case, unpaid interest of Rs. 15 Lacs due to APSFC & of Rs. 30 Lacs due to Indian Bank was converted into
loan. Such conversion would not amount to payment of interest & would not be eligible for deduction in the
year of such conversion. Hence, claim of Hari that entire interest of Rs. 45 Lacs is to be allowed as deduction in
the year of conversion is not tenable. Deduction shall be allowed only to the extent of repayment made during
FY. Accordingly, amount of interest eligible for deduction for AY 2023-24 shall be calculated as follows:
Banks Interest Number of Amount per Instalments Interest
outstanding Instalments instalment paid allowable
APSFC 15 lacs 60 25,000 5 1,25,000
Indian Bank 30 lacs 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000
CQ29. An analysis of the P & L A/c & balance sheet of X as on 31.03.2023 reveal that the following expenses
which were due, were debited to P&L A/c but have been paid after 31.03.2023.
Service Tax Rs. 1,00,000 Rs. 80,000 paid on 1.4.2023 & Rs. 20,000 paid on 25.4.2024
Interest on loan taken from PFI Rs. 80,000 Rs. 70,000 paid on 30.6.2023 & Rs. 10,000 paid on 08.07.2024
Commission to staff Rs. 40,000 Paid on 01.08.2023
Employer’s contribution to ESI Rs. 15,000 Rs. 10,000 paid on 28.6.2023 & Rs. 5,000 paid on 08.09.2023
Due date of filing ROI is 31.07.2023. In which AYs can the above payments be claimed as a deduction?
Solution:
Nature of Payment AY 2023-24 AY 2024-25 AY 2025-26
Service Tax Rs. 80,000 ---- Rs. 20,000
Interest on loan taken from PFI Rs. 70,000 & Rs. 10,000 ---- -----
Commission to Staff ---- Rs. 40,000 -----
Employer’s contribution to ESI Rs. 10,000 Rs. 5,000 -----
Total deduction allowed Rs. 1,70,000 Rs. 45,000 Rs. 20,000

❖ If any business asset is acquired/Loan is taken in foreign currency & at the time of payment, there is
a change in foreign exchange rates (as compared to the rates on the date of loan), such difference
[Increase/decrease in liability] shall be adjusted to –
- Actual cost of acquisition of Asset u/s 43(1)
- Capital expenditure incurred on scientific research u/s 35(1)(iv)
- Capital expenditure incurred by a company for promoting family planning u/s 36(1)(ix)
- Cost of acquisition of a non-depreciable capital asset falling u/s 48.
to the extent of amount paid. [Change in outstanding amount shall be ignored]
▪ Such Increased/Decreased cost shall be taken into consideration for all purposes of Tax.
PC Note: Consider Profit/loss only on amount paid during PY & Ignore loss/profit on outstanding amount.

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 FVC I.R.O TRANSFER OF L&B HELD AS SIT [SEC 43CA] To be Studied with Sec 50C u/h ‘Capital Gains’.

Illustration based on Section 43CA

SN Transfer ASC SDV on DoA SDV on DoR FVC Explanation
1 1.09.2022 100 (Rs. 10 120 130 120 As part of consideration is received by
lacs received (1.07.2022) (1.09.2022) A/c payee cheque on the date of
by A/c payee agreement, FVC = SDV on DoA, since
cheque on SDV exceeds 110% of consideration
1.07.2022) i.e., Rs. 110 lacs.
2 1.09.2022 100 (Rs. 10 109 130 130 FVC = SDV on DoR & such SDV
lacs received (1.07.2022) (1.09.2022) exceeds 110% of consideration i.e.,
by cash on Rs. 110 lacs.
1.07.2022) Since part of consideration is received
by cash on DoA, SDV on DoA cannot
be considered as FVC.
3 31.01.2023 100 (Rs. 10 109 130 100 FVC = ASC, since SDV on DoA < 110%
Lacs (1.7.2022) (31.01.2023) of ASC.
received by SDV on DoA can be taken as part of
A/c payee the consideration has been received
cheque on by A/c payee cheque on DoA.
1.07.2022)
4 31.03.2023 100 (Full 120 130 130 FVC = SDV on DoR since SDV > 110%
amount (1.05.2022) (31.03.2023) of ASC.
received in
cash on
DoR)

A Specified Professionals
GR > Rs. 1,50,000 in All of last 3 PYs Books prescribed u/r 6F.

GR ≤ 1,50,000 in Any of last 3 PYs Such books of account & documents which enable AO
to compute their taxable income.
Meaning of Specified Profession: Persons carrying on Legal, Medical, Engineering, Architectural,
Accountancy, Technical consultancy or Interior Decoration or any other Notified profession. Notified
Professions: Authorised representatives, film artists & Company secretaries & Information Technology.

B Person required to maintain such books of A/cs which will enable AO to compute their income
1 Individual/HUF carrying Non-Specified Business or Profession

Income > Rs. 2,50,000 OR Sales/TO/GR > 25,00,000 in ANY ONE of the last 3 PY.

2 Person other than Individual/HUF carrying non-specified profession or business

Income > Rs. 1,20,000 OR Sales/TO/GR > Rs. 10,00,000 in ANY ONE of the last 3 PY.

3 Person showing Lower Income than Income computed on Presumptive basis u/s 44AE.

4 If Section 44AD(4) is applicable to him & his income exceeds BEL in any of those PY:

If Any assessee is NOT Eligible to claim benefit of section 44AD(1) for 5 AYs subsequent to the PY
in which profit has not been declared as per 44AD(1) & his Income exceeds BEL during the PY.

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 CQ30. Mr. X carrying on profession as film artist gives the details of his gross receipts from profession:
(i) PY 2019-20: Rs. 1,15,000; (ii) PY 2020-21: Rs. 1,80,000; (iii) PY 2021-22: Rs. 2,10,000.
Is he required to maintain any books of account u/s. 44AA? If so, what are these books? [ICAI SM Q18]
Answer: Gross receipts from profession should be > Rs. 1,50,000 in all 3 immediately preceding PYs.
Since in PY 2019-20, GRs has not exceeded Rs. 1,50,000, Mr. X is not required to maintain books of A/cs u/s.
44AA. He will maintain such books of account so as to enable AO to compute his income.

SOME OTHER PROVISIONS: [To be Read once]

1 Place at which books are to be kept & maintained:
▪ Place where the person is carrying on the profession, or where there is more than one place, at the
principal place of his profession.
▪ However, if he maintains separate set of books for each place of his profession, such books &
documents may be kept & maintained at the respective places.
2 Minimum period for maintenance of books of A/Cs: 6 years from the end of the relevant AY.
3 Books of accounts & documents prescribed in Rule 6F: [To be Read once]
(a) Cash book; Ledgers
(b) Journal, if accounts are maintained on mercantile basis;
(c) Carbon copies of Bills & Receipts issued (serially numbered) for Amount > Rs. 25;
(d) Original Bills & receipts issued to the person i.r.o expenditure incurred by the person;
If such bills & receipts are not issued, payment voucher prepared & signed by the person incurring
expenditure (provided the amount < Rs. 50).
If cash book contains adequate particulars, preparation & signing of payment voucher is not required.
Additional requirement in case of person carrying on Medical Profession:
(a) Daily case registers in Forms 3C.
(b) Inventory under broad heads of the stock of drugs, medicines & other consumable accessories as on
the First & last day of the PY used for his profession.

SN Different Taxpayer Circumstances when audit is compulsory before specified date

(a) Person carrying Business If Sale, Turnover, Gross Receipt for PY > Rs. 1 Cr. [Refer Note Below]
(b) Professionals If his Gross Receipts for PY > Rs. 50 Lacs.
(c) Person covered u/s 44AE If such person claims that his income is LOWER than Income
computed on Presumptive basis u/s 44AE.
PC Note: Such Audit have nothing to do with their turnover.
(d) Person covered u/s 44AD & If such person claims that his income is LOWER than Income
44ADA computed on Presumptive basis & his Income > BEL in PY.
(e) Person covered u/s 44AD(4) If his Income > BEL in PY.

Note for (a) above

1. Requirement of Compulsory Audit u/s 44AB does not apply to a person who declared profit u/s 44AD
on presumptive basis & his Total Sales, Turnover, or Gross Receipts ≤ Rs. 2 Crores.

2. Limit of Audit increased from Rs. 1 Cr to 10 Crores subject to following conditions:

- Total Cash receipts in RPY ≤ 5% of total receipts (including receipt for sales/TO/GR); &
- Total Cash payments in RPY ≤ 5% of total payments (including amount incurred for expenditure)
3. Accounts audited under other statutes are considered.
Thus, provision regarding compulsory audit does not imply a second or separate audit of accounts of
companies whose accounts are already required to be audited under the Companies Act, 2013.
The provision only requires that companies should get their accounts audited under the Companies Act,
2013 before the specified date & in addition to the report required to be given by the auditor under
the Companies Act, 2013 furnish a report for tax purposes in prescribed form in this behalf by CBDT.

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 MEANING OF SPECIFIED DATE
❖ ‘Specified date’ in relation to the accounts of PY or years relevant to any AY means the date one
month prior to due date for furnishing ROI u/s 139(1).
Ex: Due date for filing ROI in case of assessees (other than companies) who are required to get their
accounts audited is 31st October of the RAY. Hence, specified date for tax audit is 30th Sep of RAY.

CQ31. Mr. Ram is having three businesses. State whether he has to get his books of account audited u/s 44AB?
Particulars Turnover during PY 2022-23
Business 1 60 Lacs
Business 2 35 Lacs
Business 3 (44AE) 8 Lacs
Answer:
▪ Though Aggregate turnover of all the three businesses exceeds Rs. 1 Crore, according to Sec 44AE, for the purpose
of computing monetary limit, the gross receipts from the business referred to in Sec. 44AE shall be excluded.
▪ Accordingly, Rs. 8 lacs shall not form part of the computation of limits for the purpose of Sec. 44AB.
▪ Aggregate turnover of other two businesses is < Rs. 1 Crore (Rs. 95 lacs). Books of A/c of Mr. Ram is not subject to
tax audit u/s 44 AB.

Eligible ▪ Resident Individual/HUF/Partnership Firm (not being a LLP) &

Assessee ▪ Assessee has not claimed deduction u/s 10A/AA/B/BA, 80HH - 80RRB in relevant AY.
▪ Eligible Business: Any business (other than Negative Listed).
▪ Turnover in the PY of such business does not exceed Rs 2 Crores

Negative list ▪ The provisions of Sec. 44AD are NOT applicable to:
(a) Person carrying on specified profession as referred in Sec. 44AA(1),
(b) Person earning income in the nature of Commission or brokerage, or
(c) Person carrying on any Agency business.
(d) Business of plying, hiring, or leasing goods carriages specified u/s 44AE.

Income ▪ Income = 8% of Turnover.

▪ However, Income = 6% of Turnover/GR for amount received by A/c Payee
cheque/draft/Netbanking during PY or before DD of Filing ROI u/s 139(1)
Deductions ▪ No Deduction u/s 30 - 38 shall be available.
Maintenance
▪ Not required.
of Books
Audit ▪ Not required.
Chapter VI-A
▪ Deduction u/s 80C to 80U shall be available to the Assessee.
Deductions
Advance Tax ▪ He is required to pay Advance Tax in 1 installment on/before 15th March.
▪ Depreciation for subsequent PY when he ceases to be eligible assessee for section 44AD:
Depreciation
WDV of Assets shall be computed, as if Depreciation had been allowed in earlier PYs.

Q. Can Assessee declares Lower Income? YES

1. He will have to maintain books of accounts. &
2. If the declared income exceeds BEL, he will have to get his books of accounts audited.

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CQ32. Mr. Ramanshu is an eligible assessee business u/s 44AD. Particulars are as under:
Gross receipt Rs. 80,00,000
Expenditure deductible u/s 30 to 37 Rs. 76,60,000
Net Profit Rs. 3,40,000
Deduction u/s 80C Rs. 1,00,000
Calculate total taxable income if he opts for sec 44AD. Can the assessee claim lower profits.
Solution:
▪ If an assessee opts for Section 44AD, profit from his business whose turnover does not exceed Rs. 2 crores shall be
presumed to be 8% of the turnover.
▪ Thus, 8% of Rs. 80,00,000 i.e. Rs. 6,40,000 shall be presumed to be his profit from his business & no further deduction
shall be allowed to him u/s 30 to 38.
▪ His total taxable income will be Rs. 5,40,000 (Rs. 6,40,000 - Rs. 1,00,000 80C Deduction) & assessee is not required
to maintain books of account.
▪ However, if the assessee wants to claim the lower profit of Rs. 3,40,000 from PGBP, then he can do so without
maintaining the books of accounts as required u/s 44AA & without getting his accounts audited u/s 44AB, since in
that case his total taxable income shall be Rs. 2,40,000 (Rs. 3,40,000 - Rs. 1,00,000 80C Deduction) which is < BEL.
Note:
(i) In above case, if deduction was not available to assessee & he wants to claim lower profit, then he is required to
maintain the books of accounts & others document referred to in sec 44AA & get his accounts audited u/s 44AB.
(ii) Also, as per the amendment made by the Finance Act, 2016, if Mr. Ramenshu wants to claim profits lower than the
presumptive profits within the period of 5 years from the year he was first covered u/s 44AD, then shall not be
eligible for claiming presumptive income u/s 44AD for next five A.Y & required to maintain books of A/cs & other
document & get his accounts audited in the years in which his total income exceeds the BEL.

SECTION 44AD(4)
❖ If an eligible assessee declares profit for any PY as per 44AD on presumptive basis & he does not declare
profit on presumptive basis as per section 44AD(1) for any of the next 5 consecutive PY, he becomes
ineligible to claim the benefit of presumptive income as per AD(1) for next 5 AYs subsequent to PY in
which profit has not been declared as per 44 AD.
Ex: If assessee declares profit for any of the five successive PYs (say, PY 2022-23) not in accordance with
section 44AD (i.e., he declares profits lower than 8% or 6% of total turnover, sales or gross receipts in that
year), then he cannot opt for section 44AD for five successive PYs after the year of such default (i.e., from PY
2023-24 to PY 2027-28). For the year of default (i.e., PY 2022-23) & five successive PYs (i.e., PY 2023-24 to
PY 2027-28), he has to maintain books of account u/s 44AA & get them audited u/s 44AB, if his income
exceeds BEL.

CQ33. Mr. A, being an eligible assessee u/s 44AD whose GR do not exceed Rs. 2 crores in any of the AYs between AY
2023-24 to AY 2025-26
Particulars AY 2023-24 AY 2024-25 AY 2025-26
Gross receipts Rs. 1,80,00,000 Rs. 1,90,00,000 Rs. 2,00,00,000
Income offered for taxation Rs. 14,40,000 Rs. 15,20,000 Rs. 10,00,000
% of gross receipts 8% 8% 5%
Income offered as per 44AD Yes Yes No
▪ In above case, Mr. A opts for presumptive taxation u/s 44AD for AY 2023-24 & AY 2024-25 & offers income of Rs.
14.40 lacs & Rs. 15.20 lacs on GR of Rs. 1.80 crore & Rs. 1.90 crore respectively.
▪ However, for AY 2025-26, he offers income of only Rs. 10 lacs on GR of Rs. 2 crores, which amounts to 5% of his GR.
He maintains books of accounts u/s 44AA & gets the same audited u/s 44AB.
▪ Since he has not offered income on presumptive basis as per section 44AD(1) for 5 consecutive AYs after AY 2025-
26, he will not be eligible to opt sec. 44AD for next 5 AYs succeeding AY 2025-26 i.e., for AY 2026-27 to AY 2030-31.

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CQ34. AB & Co. a partnership firm engaged in the manufacturing business has a gross receipt of Rs. 59 Lacs. The
partnership deed provides for the salary of Rs. 20,000 p.m to each of the partners A & B. Firm uses machinery for
business & WDV of the Machinery as on 1.4.2022 is 2 lacs. Machinery is eligible for depreciation @ 15%. Compute the
profits from business for AY 2023-24, if firm opts for scheme u/s 44AD & has received the following amount by A/c
payee cheques: (i) 25 Lacs till 31.03.2023; (ii) 6 Lacs b/w 31.3.2023 & 31.7.2023; (iii) 5 Lacs after 31.07.2023.
Solution: As per Sec. 44AD profits will be computed as under:
6% of Gross receipts of 31 Lacs [amount received by A/c Payee Cheque till DD of filing ROI u/s 139(1)] 1,86,000
8% of gross receipts of 28 Lacs [Rs. 59 Lacs – Rs. 31 Lacs] 2,24,000
Total Income as per section 44AD 4,10,000
Note:
1. No Deduction will be allowed on account of depreciation.
2. WDV of Machinery for next year shall be taken as Rs.1,70,000 (2,00,000- 15% of 2,00,000) assuming as if
depreciation has been allowed.
3. No deduction shall be allowed on account of salary paid to partners even if it is provided in partnership deed.

Eligible ▪ Resident Individual/Firm (not being LLP) engaged Legal, Medical, Engineering,
Architectural, Accountancy, Technical consultancy or Interior Decoration or any
Assessee other NOTIFIED profession. Authorised representatives, film artists & company
secretaries & Information Technology have been notified for this purpose till date.
▪ Gross Receipt does not exceed 50 Lacs.

Income ▪ 50% of Gross Receipt. However, Assessee can declare Higher Income.

No Deduction ▪ No Deduction u/s 30 - 38 shall be available.

Maintenance of ▪ Not required.

Books

Audit ▪ Not required.

Deductions ▪ Deduction u/s 80C to 80U shall be available to the Assessee.

Advance Tax ▪ He is required to pay Advance Tax in 1 installment on/before 15th March.

▪ Depreciation for subsequent PY when he ceases to be eligible assessee for section

Depreciation 44AE → WDV of the Assets shall be computed, as if Depreciation had been
allowed in earlier year.

Q. Can Assessee declares Lower Income? YES.

1. He will have to maintain books of accounts &
2. If the declared income exceeds BEL, he will have to get his books of accounts Audited.

Eligible Assessee ▪ Persons carrying on business of plying, hiring, & leasing goods carriages & not
owning more than 10 Goods Carriages at any time during the PY.

Income Heavy Goods Vehicles Rs. 1,000 per ton of gross vehicle weight or
unladen weight for every month or part of it.
Other than Heavy Vehicles Rs. 7,500 for every month or part of it.
[Note: irrespective of the weight]
only for the period during which vehicle is owned by Assessee in the PY.
No Deduction ▪ No Deduction u/s 30 - 38 shall be available.

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 ▪ However, Salary & Interest paid by firm to partner → Deductible.
Maintenance of ▪ Not required.
Books & Audit
Chapter VI-A ▪ Deduction u/s 80C to 80U shall be available to the Assessee.
Deductions
Advance Tax ▪ No Concession is available. Normal Advance Tax provisions shall be applicable.
Depreciation ▪ Depreciation for subsequent PY when he ceases to be eligible assessee for section
44AE → WDV of the Assets shall be computed, as if Depreciation had been allowed
in earlier year.

Q. Can Assessee declares Lower Income? YES.

1. He will have to maintain books of accounts &
2. If the declared income exceeds BEL, he will have to get his books of accounts audited.

Meaning of “Heavy Vehicle”: Any goods carriage whose gross vehicle weight > 12,000 kgs.

CQ35. Mr. X commenced the business of operating goods vehicles on 1.4.2022. He purchased the following vehicles
during the PY 2022-23. Compute his income u/s 44AE for AY 2023-24. [ICAI Module Q20]
SN Gross Vehicle Weight (in kilograms) Number Date of purchase
(1) 7,000 2 10.04.2022
(2) 6,500 1 15.03.2023
(3) 10,000 3 16.07.2022
(4) 11,000 1 02.01.2023
(5) 15,000 2 29.08.2022
(6) 15,000 1 23.02.2023
(b) Would your answer change if the goods vehicles purchased in April, 2022 were put to use only in July, 2022?
Solution: Since Mr. X does not own more than 10 vehicles at any time during PY 2022-23, he is eligible to opt for
presumptive taxation scheme u/s 44AE.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kg.
(1) (2) (3) (4)
No. of Vehicles Purchase Date No. of months for which vehicle is owned No. of months × No. of
vehicles [(1) × (3)]
For Heavy goods vehicle
2 29.08.2022 8 16
1 23.02.2023 2 2
18
For goods vehicle other than heavy goods vehicle
2 10.4.2022 12 24
1 15.3.2023 1 1
3 16.7.2022 9 27
1 2.1.2023 3 3
55
Presumptive income of Mr. X u/s 44AE for AY 2023-24 = Rs. 6,82,500, i.e., 55 × Rs. 7,500, being for other than heavy
goods vehicle + 18 x Rs. 1,000 x 15 ton being for heavy goods vehicle.

(b) Answer would remain the same even if the two vehicles purchased in April, 2022 were put to use only in July, 2022,
since the presumptive income has to be calculated p.m or part for which vehicle is owned by Mr. X.

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1. There should be a Capital Asset;
If all the above conditions are satisfied,
2. It should be transferred by the assessee; Capital Gain shall arise & shall be deemed to
3. Such transfer should take place during the PY; be the income of the PY in which transfer
4. Any Profit/Gains should arise from such transfer; took place & taxed accordingly.
5. Such Capital Gain should NOT be exempted u/s 54 series.

Capital Asset means:

(a) Any Property (Movable/immovable), connected with assessee’s business/profession ot not.
(b) Any Securities held by FIIs (invested as per SEBI regulations) [Always CA → Even if held as SIT]
(c) Any unit linked insurance policy (ULIP) issued on/after 01.02.2021, to which exemption u/s 10(10D)
does not apply on account of premium payable exceeding Rs. 2,50,000 for any of the PYs during the
term of such policy.
In a case where premium is payable by person for more than 1 ULIP issued on/after 1.2.2021 &
aggregate of premium payable exceeds Rs. 2,50,000 in any of the PYs during the term of any such
ULIP(s), exemption u/s 10(10D) would be available in respect of those ULIPs (at the option of assessee)
whose aggregate premium payable do not exceeds Rs. 2,50,000 for any of the PYs during their term.
Note: All other ULIPs are capital assets. [Detail study in FINAL SYLLABUS]
Exceptions: [Following are NOT CAPITAL ASSETS]
1 SIT/RM/Consumables stores held for business/profession; (Except Securities held by FIIs as SIT).
PC Note: Securities held by FIIs will be Capital Asset even if they are held as SIT.
2 Movable Personal effects (including apparel & furniture) held for his/family member’s personal use
but excludes - [Capital Assets even if held for personal use]
Jewellery, Archaeological collections; Drawings; Paintings; Sculptures Any other work of Art.

Note: To constitute Personal Effect, Asset should be used by the assessee. Daily use is not necessary.
 Jewellery: Jewellery is a capital asset & the profits/gains arising from the transfer of jewellery held
for personal use are taxable u/h “capital gains”.
 If Precious stones/metals are sewn/worked/set into Wearing Apparel/ furniture, it is classified into
the category of jewellery & thus it is a Capital Asset.
Ex: Throne made of Gold/Platinum/Diamonds; Shirt with diamond buttons sewn into it.
3 Rural Agricultural Land in INDIA [Urban Agricultural land → Capital Asset]
❖ Rural Land means land outside the following Specified limits:
Population Distance from Municipality/Cantonment Board
≤ 10,000 0 Kms
> 10,000 & ≤ 1,00,000 2 Kms
> 1,00,000 & ≤10,00,000 6 Kms
Above 10,00,000 8 Kms

❖ Agricultural Land: Land must be used for agricultural purposes for 2 yrs prior to transfer.
PC Note: Capital Gain on Urban Agricultural Land → Not treated as Agricultural Income & thus it is
not exempt u/s 10(1). Capital Gains arising from such transfer would be taxable u/s 45.

4 Gold Deposit bonds/Certificates issued under Gold Monetisation Scheme, 2015.

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CQ1. Discuss the Tax treatment in the following cases: [CA - Capital Asset & SIT - Stock in Trade]
Cases Whether Capital Asset or not ?
Sale of Flats by a construction company Not a CA since flat is a SIT for construction company.
Sale of Flats held by Mr. X as an investment CA since Mr. X has held it as an investment.
Sale of Securities in Indian Company held by FIIs CA since specifically included in definition of Capital Asset u/s
as investment sec 2(14).
Sale of Securities in Indian Company held by FIIs CA since specifically included in definition of Capital Asset u/s
as SIT sec 2(14) even if held as SIT.
Sale of car by Mr. AC for Rs. 10 lacs which was used CA used for business is not excluded u/s 2(14) & thus it is a CA.
for his business purpose
Sale of Personal Jewels (Diamond) for Rs. 3 cr CA since it is included u/s 2(14) even if movable PE.
Sale of Painting by Miss Jacqueline for Rs. 10 cr CA since it is included u/s 2(14) even if movable PE.
House property used for personal purpose CA since PE does not include immovable property.
Agricultural Land situated in Urban Area Capital Asset
Non-Agricultural Land situated in Rural Area Capital Asset
Agricultural Land situated in Rural Area used for Capital Asset
non-agricultural purpose permanently
Rural Agricultural land used permanently for Capital Asset since situated Outside India.
agricultural purpose situated in Europe

CQ2. Determine which of the lands will be Capital Assets:

Land Population Shortest aerial Distance Rural Land? CA?
A 9,000 1 km Yes No
B 12,000 1.5 kms No Yes
C 11,00,000 2 kms No Yes
D 80,000 3 kms Yes No
E 3,00,000 4 kms No Yes
F 12,00,000 5 kms No Yes
G 8,000 6 kms Yes No
H 4,00,000 7 kms Yes No
I 10,50,000 8 kms No Yes
J 15,00,000 9 kms Yes No

CQ3. Mrs. X contends that sale of a work of art held by her is not liable to capital gains. Is she correct?
Answer: “Personal effects” excludes any work of art. As a result, any work of art will be considered as a capital
asset & thus sale will attract capital gains tax. Thus Mrs. X is not correct.

CQ4. State whether the capital gains will arise in the following independent cases for AY 2020-21:
Profit on Sale of jewellery by Mr. A, a jewellery dealer. No
Profit on Sale of personal furniture/car/bike by Mr. B. No
Profit on Sale of Residential house Yes
Profit on Sale of drawings & paintings by Mr, PC to a National Musuem No*
Profit on Sale of Gold Deposit Bonds No
* However, transfer of a capital asset to National Museum is exempt u/s 47.

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 TYPES OF CAPITAL ASSET [Section 2(42A)]
1. STCA: If Period of Holding (POH) of Asset ≤ 36 months immediately before the date of transfer.
2. LTCA: If Period of Holding (POH) of Asset > 36 months immediately before the date of transfer.

Exceptions: Following assets become LTCA if POH is more than 12/24 Months.
A LTCG if Period of Holding (POH) > 12 Months
(i) Listed Equity/Preference shares in a company.
(ii) Listed Securities (Debentures/bonds) other than units.
(iii) Units of UTI/ Equity oriented mutual fund.
(iv) Zero Coupon Bonds.
B LTCG if Period of Holding (POH) > 24 Months
(i) Unlisted Equity or Preference shares. [Shares in private/unlisted public companies].
(ii) Immovable property, being Land or Building or both.

Ex: State the period required for the Capital Asset to become LTCA.
Nature of Asset Minimum Period to become LTCA
Units of Equity Oriented Mutual Fund 12 Months
Units of Debt Oriented Mutual Fund 36 Months
Units of UTI & Zero Coupon Bonds 12 Months
Listed Debentures/Bonds/Govt. Securities 12 Months
Unlisted Debentures/Bonds/Govt. Securities 36 Months
Listed shares in a company 12 Months
Unlisted shares in a company 24 Months
Land or building 24 Months
Other Assets 36 Months

Why CAPITAL ASSETS are divided into STCA & LTCA? [To be read once]
➢ Tax incidence under Capital Gains depends upon whether asset is LTCA or STCA.
➢ If asset is STCA, capital gain will be Short- term capital gains.
➢ If asset is LTCA, capital gain will be Long- term capital gains.
➢ In case of DEPRECIABLE ASSET, always STCG will arise irrespective of POH.

DEFINITION OF TRANSFER OF CAPITAL ASSET [SECTION 2(47)]

1 Sale, exchange or relinquishment of the asset.
2 Extinguishment of any rights in the asset.
3 Compulsory Acquisition of any Capital Asset under any law.
4 Conversion of Capital Asset into Stock in trade.
5 Maturity/Redemption of ZCB.
6 Giving possession of IMMOVABLE PROPERTY under Part performance of a contract.
Under Income Tax Act, the above transaction is considered as transfer by applying ‘substance over form’.
7 Transactions which have the effect of transferring the enjoyment of Immovable property.
Ex: A person may become a member of a co-operative society which may be a house/flat. When he
pays an agreed amount, the society etc. hands over possession of the house to the person concerned.
No conveyance is registered. Such transaction is a transfer under Income Tax Act.
PC Note: Even power of attorney transactions are regarded as transfer.

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 DATE OF COMPLETION OF TRANSFER [Read Once]
MOVABLE ▪ Date on which property is delivered after the contract of sell.
PROPERTY
▪ Entries in Books of A/c → Irrelevant for determining date of transfer.

IMMOVABLE (i) Documents are registered → Date on which deed is executed or registered.
PROPERTY
(ii) Documents are not registered → If the following conditions are satisfied:
▪ There should be a contract in writing;
▪ Transferee has paid consideration/is willing to perform his part of the contract;
▪ Transferee should have taken the possession of the property.

HOW TO COMPUTE CAPITAL GAINS (Section 48)

Full Value of Consideration (Sec 50C may be applicable for L&B) Xxx

Less: Expenses of Transfer (xxx)

Less: Cost of Acquisition (Indexation available if Capital Asset is LTCA) (xxx)

Less: Cost of Improvement (Indexation available if Capital Asset is LTCA) (xxx) (xxx)

SHORT/LONG TERM CAPITAL GAIN XXX

Note: STT levied on purchase/sale of Equity shares & units of EOMF → Not deductible u/h Capital Gains.

➢ Meaning: Consideration received/receivable by the transferor for the transferred capital asset.
➢ It may be in cash/ kind. [If consideration is received in kind, then FMV = Full value of consideration].
➢ Adequacy of Consideration & Receipt of Consideration → IRRELEVANT for determining FVC.

➢ Expenditure incurred wholly & exclusively in connection with transfer of capital asset.
➢ Such expenses of transfer are deductible from FVC.
Ex: Brokerage, stamp fees, registration fees, legal expenses, commission paid for securing a purchaser, cost
of stamp, litigation expenditure etc.
PC Note: STT paid on purchase/sale of Equity shares & units of EOMF → Not deductible u/h CG.

➢ The value for which the asset was acquired by the assessee.
➢ Only capital expenditures for completing/acquiring title to the property are includible in COA.
➢ Any Revenue expenditure incurred → will not form part of COA.
➢ Amount paid for discharge of mortgage is part of ‘COA’ if mortgage was not created by transferor.

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➢ Sale consideration is the price at which the asset is sold in the PY. However, asset may be purchased
in some earlier year. Money spent years before & sale consideration received in PY cannot be compared.
➢ Thus, deducting the cost of acquisition that has been incurred many years earlier from the sale
consideration that has been received in this PY is unfair for the assessee.
➢ Thus, Indexation is given for the Long-term capital assets.
➢ Thus, Indexation of COA means bringing into line COA with that of Sale Consideration.

Meaning of Indexed COA:

▪ As per Section 48, COA will be increased by applying the cost inflation Index (CII).
▪ Once the Cost Inflation Index is applied to COA, it becomes Indexed COA.

Steps to Calculate Indexed COA:

1. Find out the type of asset on the basis of POH (whether the asset is STCA/LTCA)
2. Apply Indexation to Cost of Acquisition only if asset is Long Term Capital Asset.

INDEXED COST OF ACQUISITION

Cost of acquisition
X CII of year of Transfer of Asset
CII of the year in which asset was first held by Assessee ∗∗
𝐎𝐑 CII of 2001 − 2002 (whichever is Later)
** PC Note: CII of year of acquisition of asset by Previous owner [For Transfer u/s 49(1).

COST INFLATION INDEX for Different FYs [FY 2021-22: 317; FY 2022-23: 331]
PY CII PY CII PY CII PY CII PY CII
2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280
2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289
2004-05 113 2008-09 137 2012-13 200 2016-17 264 2020-21 301

1. Zero Coupon Bonds

2. Debentures/ Bonds [Except Capital Indexed Bonds/ Soverign Gold Bonds issues by RBI]
3. Slump Sale [Section 50B]
4. Depreciable Assets [Since capital gain arising on depreciable asset is always STCG]
5. Share/Debentures acquired by NR in foreign currency in Indian company. (1st Proviso to sec 48)
6. Long term capital assets specified u/s 112A.

➢ Capital expenditure incurred in making any additions/improvements/protect capital asset.

➢ Routine expenditure on repairs or maintenance will NOT be included in Cost of improvement.

Points to Remember:
1. In case of Goodwill of Business (whether Self-generated/Purchased) → COI = Nil.
2. COI → Considered only if incurred on/after 1.4.2001.
3. COI incurred by Previous Owner → Considered if incurred on/after 1.4.2001.

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 Cost of Improvement
= CII of the year of Improvement x CII of year of transfer of Asset

Q. How to decide whether to take Indexation of Cost of Improvement or not?

❖ It should be decided from the nature of the asset.
❖ If Asset is LTCA→ Take Indexed COI &
❖ If Asset is STCA → Take COI (without Indexation).

Note: Year in which Improvement is done in the Asset → Not Relevant.

➢ If Capital Asset is acquired before 1.4.2001 → Assessee have the option to take FMV of the Asset on
1.4.2001 as COA of the Asset. [Option is exercised when FMV on 1.4.2001 > Original COA of asset]
➢ This option is not available in case of Depreciable Assets; Goodwill of Business/other like assets.
➢ However, in case of capital asset, being Land or building or both, FMV of such asset on 1.04.2001
shall not exceed SDV of such asset as on 1.04.2001. [Inserted by FA, 2020]
PC Class Note:

CQ5. During PY 2021-22, Mr. Ramesh sells the following capital assets:
Capital Assets Sold for COA Date of Acquistion FMV on 1.04.2001 SDV on 1.04.2001
Land 50,00,000 10,00,000 31.05.1999 14,00,000 12,00,000
Gold 15,00,000 5,00,000 1.04.2010 NA NA
Debenture (Listed) 3,50,000 90,000 12.09.1999 80,000 NA
Compute the taxable Capital Gains for AY 2022-23. [CII: FY 2007-08: 129; FY 2021-22: 317]
Solution:
Particulars Land Gold Listed Debentures
Full Value of Consideration 50,00,000 15,00,000 3,50,000
Less: COA/Indexed COA (38,04,000) (12,28,682) (90,000)
[12L × 317/100] (Note 1) [5L × 317/129] (Note 2)
LTCG 11,96,000 2,71,318 2,60,000
Note:
1. Since FMV on 1.4.2001 > Original COA, FMV is taken as COA for computing Capital Gain. However, in case of
capital asset, being Land or building or both, FMV of such asset on 1.04.2001 shall not exceed SDV of such asset
as on 1.04.2001. Since FMV on 1.04.2001 exceeds SDV on 1.04.2001, SDV on 1.4.2001 shall be taken as COA.
2. No indexation is allowed in case of debentures. Since COA > FMV on 1.4.2001, option will not be exercised.

CQ6. Mr. PC purchases a house property for Rs. 1,06,000 on 15th May 1995. The following expenses are incurred
by him for making addition/alternation to the house property:
Cost of construction of first floor in 1997-98 Rs. 3,10,000
Cost of construction of second floor in 2002-03 Rs. 7,35,000
Reconstruction of the property in PY 2020-21 Rs. 5,50,000

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FMV of the property on 1.4.2001 is Rs. 8,50,000. House property is sold by Mr. PC on 10th August 2021 for Rs. 68 lacs.
Expenses incurred on transfer: Rs. 50,000. Compute the Capital Gain for AY 2022-23.
[CII: FY 2002-03: 105; 2017-18: 272; FY 2021-22: 317]
Solution: Computation of Capital Gains of Mr. C for AY 2022-23
Particulars Rs. Rs.
Gross Sale Consideration 68,00,000
Less: Expenses on transfer (50,000)
Net sale consideration 67,50,000
Less: Indexed COA [Rs. 8,50,000 × 317/100] (26,94,500)
Less: Indexed COI
(i) Construction of 1st Floor in PY 1997-98 → Ignored Since incurred before 1.4.2001 (Nil)
(ii) Construction of 2nd floor in PY 2002-03 → (Rs. 7,35,000 × 317/105) (22,19,000)
(iii) Alternation/reconstruction in PY 2020-21 → (Rs. 5,50,000 × 317/301) (5,79,236) (27,98,236)
Long Term Capital Gain 12,57,264

Circumstances Full value of consideration

A If Actual Sale Consideration > Stamp Duty value Actual Sale Consideration

B If Actual Sale Consideration < Stamp Duty value Stamp Duty value

PC Note: If SDV ≤ 110% of Actual sale consideration → FVC = Actual Sale Consideration.
Space for Class Example: [Based on Amendment]

SDV WHEN DATE OF AGREEMENT (DoA) & DATE OF REGISTRATION (DoR) ARE NOT SAME
(a) If Payment (Full/Part) has been received by A/c payee cheque/draft/Netbanking on/before DoA →
FVC = SDV on Date of Agreement.
(b) If NO Payment is received by A/c payee cheque/draft/Netbanking on/before DoA → FVC = SDV on
Date of Registration.
Space for PC Note:

PC Example:
Transfer SC SDV on DOA SDV on DOR FVC
1.5.2019 100 Lac (10 Lac received by cheque on 1.9.2018) 120 (1.9.2018) 210 (1.5.2019) 120
1.5.2019 100 Lac (10 Lacs received by cash on 1.9.2018) 120 (1.9.2018) 210 (1.5.2019) 210
31.3.2020 100 Lac (Full amount received on DOR) 120 (1.5.2018) 210 (31.3.2020) 210

Example: For transfer of building, ASC = 100 Lacs, SDV on DOA = Rs. 109 lacs; SDV on DOR = Rs. 112 lacs;
(i) If any part of the consideration is paid by prescribed electronic mode on/before DOA
FVC = ASC of Rs. 100 lacs since SDV of Rs. 109 lacs on date of agreement < 110% of ASC of Rs. 100 lacs.
(ii) If no part of the consideration is paid by prescribed electronic mode on/before DOA
FVC = SDV of Rs. 112 lacs on date of transfer since it is > 110% of actual consideration of Rs. 100 lacs.

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 बिच का िन्दर
Circumstances Full value of consideration
A. Value by VO > SDV Stamp Duty Value
B. Value by VO > Actual Sale Consideration but < SDV Value by Valuation officer
Example:
SN Actual SC SDV Value by VO Full Value of Consideration
1 50 45 - 50
2 50 75 - 75
3 50 75 85 75
4 50 75 55 55
5 50 75 45 50

CQ7. Miss Disha transferred a house to her friend Ms. Teju for Rs. 40 lacs on 01.11.2022. The sub-registrar valued
the house @ Rs. 50 Lacs. Miss Disha contested the valuation & matter was referred to divisional revenue officer
who valued the house @ Rs. 45 lacs. Ms. Disha had purchased the house on 15 th May, 2011 for Rs. 20 lacs &
registration expenses were Rs. 2,00,000. [CII: FY 2011-12: 184; FY 2021-22: 317]
Solution: Computation of Capital Gain in the hands of Miss Disha for AY 2022-23
Full Value of Consideration [Refer Note Below] 45,00,000
Less: Cost of acquisition [(20 Lacs + 2 Lacs) × 331/184] (39,57,609)
Long Term Capital Gains – Taxable @ 20% 5,42,391

PC Note:
1. If Value by VO > Actual Sale Consideration but < SDV, then FVC = Value by Valuation officer.
2. Registration expenses paid at the time of purchase shall be added to cost of acquisition of asset.

 If Sale consideration < FMV of such share, FMV shall be deemed to be full value of consideration.

→
 If Consideration is not determinable → FVC = FMV of the capital asset on the date of transfer.

1 Advance Money Forfeited Before 1.4.2014 Reduce from Original COA.

2 Advance Money Forfeited on/After 1.4.2014 Taxable u/h IFOS u/s 56(2)(ix).

PC Note:
❖ Forfeited Advance shall be reduced from original COA before Indexation & NOT after Indexation.
❖ Date of Forfeiture of Advance should be considered & NOT the date of Receipt of Advance.
❖ Amount Received & Forfeited by Previous owner → Not to be considered.

Ex Date of Receipt of Advance Date of Adv. Forfeited Taxable Treatment

1 15.06.2012 10.08.2013 AY 2014-15 Reduce from COA of asset
2 20.05.2014 30.09.2014 AY 2015-16 IFOS

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CQ8. A house was purchased on 1.05.2001 for Rs. 2 Lacs & was used as a residence by Mr. Lalla. Mr. Lalla had
contracted to sell this property in June 2012 for Rs. 8 lacs to Miss. Shona & received an advance of Rs. 50,000
towards sale. The deal was not finalized & hence the amount was forfeited by Mr. Lalla on 15.08.2012. He again
contracted to sell this property & received an advance on 24.02.2015. However, this deal was also not finalized
& hence the amount was forfeited on 30.04.2015. The property was sold in June 2022 to Miss. Jina for Rs. 10 Lacs.
Mr. Lalla paid 2% brokerage on sale of the house. Calculate capital gains. [CII: FY 2001-02: 100; FY 2022-23: 331]
Solution: Computation of Capital Gain in the hands of Mr. Lalla for AY 2023-24
Full Value of consideration 10,00,000
Less: Expenses on transfer [Brokerage @ 2% of Sale Value] (20,000)
Net Sale Consideration 9,80,000
Less: (Cost of acquisition - Forfeited Advance) = [(2L – 50,000) × 331/100] (4,96,500)
Long- Term Capital Gain 4,83,500
Note: Advance forfeited on/after 1.4.2014 shall be taxed u/h “IFOS” u/s 56(2)(ix).

CAPITAL GAINS IN CASE OF DEEMED SALE

Circumstances for (i) Natural activities/causes; (ii) Riot/civil disturbances.

Destruction (iii) Accidental fire/explosion; (iv) Action of Enemy (war/without war)

Sale Consideration Insurance Compensation (Money + FMV of replaced Asset).

Year of Taxability Capital Gain is taxable in PY of Receipt of Insurance Money.

Period of Holding From Date of Acquisition till the Date of Destruction.

Indexation Indexation is available till PY of destruction & not till receipt of Compensation.

CQ9. Mr. Raj owns a House purchased by him on 1.5.1999 for Rs. 5 lacs. House was destroyed by fire on 3.04.2021
& Mr. Raj received Rs. 50 lacs on 5.05.2022 from the Insurance Company. FMV of house on 1.4.2001 = Rs. 12 lacs.
SDV on 3.4.2021 = Rs. 60 lacs & SDV on 1.04.2001 = Rs. 15 Lacs. Calculate Capital Gain of Mr. Raj for AY 2023-24.
Solution: POH: 1.5.1999 – 3.4.2021 > 24 Months & Thus, it is a LTCA & Indexation will be available.
Sale Consideration [Insurance compensation as per section 45(1A)] 50,00,000
Less: Indexed COA [Rs. 12,00,000 × 317/100] [Refer Note 1 & 2] (38,04,000)
Long-term Capital Gain 11,96,000

PC Note:
1. In case of deemed sale u/s 45(1A), SDV on the date of sale is not relevant.
2. Since FMV on 1.4.2001 > Actual COA, FMV on 1.4.2001 shall be taken as COA. Since FMV on 1.4.2001 does not
exceeds SDV on 1.04.2001, FMV shall be taken as COA.
3. Sale Consideration = Insurance compensation & Capital Gain is chargeable to tax in the PY in which Insurance
money is received. Indexation of COI will be done till the year of destruction of capital asset.

Sale Consideration FMV of the asset on the date of conversion.

Year of Taxability Year in which SIT is sold/ transferred & not in year of conversion into SIT.

Period of Holding From Date of Acquisition till the Date of conversion into SIT.

Indexation Only till the PY in which conversion took place.

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CQ10. X purchased gold ornaments of Rs. 1 Lac on 4.01.2009 for investment. On 12.01.2015, he started a business
of dealing in Jewellery & converts the gold into SIT. FMV of the gold ornaments on date of conversion was Rs. 5
Lacs. These gold ornaments were sold in PY 2022-23 for Rs. 6 Lacs. (a) Compute Capital Gain & Business Income.
(b) What would be the answer if the gold ornaments are held by the assessee till 31.3.2023?
Solution:
(a) Conversion of Capital Asset into SIT is treated as a transfer u/s 2(47). In this case, conversion took place
on 12.01.2015. Therefore, it will be treated as transfer of PY 2014-15. But Capital Gain will be taxable in
PY in which such asset is sold i.e. PY 2022-23.
Capital Gain of AY 2023-24
Full Value of Consideration Rs. 5,00,000
Less: Indexed cost of acquisition [1,00,000 × 240/137] Rs. (1,75,180)
Long-term capital gain Rs. 3,24,820
Business Income for AY 2023-24
Sale Price Rs. 6,00,000
Less: FMV on the date of conversion Rs. (5,00,000)
Business Income Rs. 1,00,000
(b) There will neither be business income nor capital gain because converted asset has not yet been sold.

▪ Given provisions are applicable when the asset has been compulsorily acquired by government.
▪ However, these rules are also applicable when consideration is approved by RBI/CG (Even if there is no
compulsory acquisition).

A. INITIAL COMPENSATION
SC Amount of Initial Compensation

Taxed in PY of Receipt of Initial Compensation (either Whole/Part)

➢ If compensation is received in Instalments, ENTIRE Capital gain on Total Compensation
is taxable in PY of receipt of 1st Instalment.

POH From: Date of Acquisition of asset.

Till: Date of Compulsory Acquisition.

Indexation Upto the year of Compulsory Acquisition of the Asset & NOT till the year of payment.

B. ENHANCED COMPENSATION
SC Amount of Enhanced Compensation.

Taxed in Enhanced compensation is taxable in PY of Receipt.

➢ Enhanced Compensation is received in Instalments → only Proportionate Capital Gain
to the amount of Instalment received during PY, shall be taxable in that PY.
Note: Enhanced compensation received under interim order will be taxable in the PY in
which final order of court is passed.

COA/COI Nil. However, Litigation expenses are allowed as deduction.

C. REDUCTION OF ENHANCED COMPENSATION
▪ Where capital gain has been charged on compensation received by the assessee & subsequently such
compensation is reduced by any court or tribunal;
▪ Assessed capital gain of that year shall be recomputed by taking into consideration the reduced amount.

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PC Note:
1. Interest on compensation will be taxable in PY of Receipt irrespective of the year for which it has been
paid. Such interest is deductible to the extent of 50% of amount received u/s 57.
2. Enhanced Compensation is taxable in the hands of recipient → If assessee is dead on date of receipt of
enhanced compensation, such compensation received by his legal heir shall be taxable in their hands.

CQ11. Mr. X acquired a house for Rs. 20,000 in 1997-98. On his death in October 2006, house was acquired by his
son Mr. Y. Fair Market Value of the house on 1.4.2001 was Rs. 80,000.
This house was acquired by the Government on 15.3.2010 for Rs. 3 Lacs & a compensation of Rs. 2,20,000 is paid
to him on 25.03.2022 & balance Rs. 80,000 on 15.04.2022.
Mr. Y filed a suit against Government challenging the quantum of compensation & court ordered additional
compensation of Rs. 1 Lacs. He incurred an expenditure of Rs. 2,000.
50% of the enhanced compensation is received on 14.02.2023 & other 50% is received in PY 2024-25.
Compute taxable capital gains in the hands of Mr. X. [FY 2009-10: 148; FY 2021-22: 317; FY 2022-23: 331]
Solution:
(a) Capital gain on Initial Compensation [Taxable in PY 2021-22 (AY 2022-23)] during which part of the
compensation was actually received by him, although the balance of Rs. 80,000 was received in PY 2022-23.
POH (Including POH of previous owner): PY 1997-98 to PY 2009-10. Indexation only upto PY 2009-10.
Sale Consideration [Total Initial Compensation] Rs. 3,00,000
Less: Indexed cost of acquisition: [Rs. 80,000 × 148/100] (Rs. 1,18,400)
Long-term capital Gain Rs. 1,81,600
(b) Capital Gain for PY 2022-23 (AY 2023-24) as half of enhanced compensation was received on 14.02.2023.
Sale Consideration Rs. 1,00,000
Less: Expenses of transfer i.e., Litigation Expenses (Rs. 2,000)
Long-term capital Gain Rs. 98,000
PC Note: In AY 2023-24, Capital gain tax on half of enhanced compensation only shall be payable.
Remaining tax shall be payable in AY 2025-26 when the other half is received.

Applicability Individual & HUF

Transaction Capital Gain on Transfer of Land & Building or Both under Specified Agreement.

Year of Taxability CG arising from such transfer shall be taxable as income of PY in which Completion
Certificate for the whole/part of the project is issued by the competent authority.

Sale Stamp Duty Value of his share (being land or building or both) in the project on the
Consideration date of issue of certificate of completion + Consideration received in cash.

Meaning of ▪ Registered agreement in which a person owing land/building or both agrees to

Specified allow another person to develop a real estate project on such land/building;
Agreement ▪ in consideration of a share (being land/building or both) in such project with or
without payment of part of the consideration in cash.

Consequences of Transfer before Date of Issue of Completion Certificate

▪ Benefit u/s 45(5A) is not available if assessee transfers his share in the project on/before issue of
completion certificate to any person. In such case, CG shall arise in the year of such transfer.
▪ In such case, section 45(5A) will not apply for determining full value of consideration.
▪ Thus, FVC = Higher of (i) SDV on the date of transfer of his share or (ii) Actual consideration.

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 Sale Consideration Amount given by the company to Shareholder on buy-back of shares/securities.

COA Amount at which shares were Purchased by the shareholder.

Tax Treatment on Buyback of

Shares (Listed/Unlisted) by Specified Securities by

Taxability in
hands of
Domestic Company (DC) Other than DC Any company

Company Taxable @ 23.296% Not taxable Not taxable

Shareholder Exempt u/s 10(34A) Taxable as CG u/s 46A Taxable as CG u/s 46A.

Meaning of Specified Securities: As per Section 68 of CA, 2013, ‘specified securities’ includes employees'
stock option or other securities as may be notified by the Central Government from time to time.

CQ12. Mr. X has acquired 2,000 equity share of ABC Ltd on 1.04.2007 @ Rs. 350 per share. The company buybacks
20,000 shares on 30.01.2023 @ 900 per share. Compute the capital gain taxable in his hands.
Solution: Capital Gains on buyback in the hands of Mr. X
Sale Consideration [Buyback price] (2,000 × 900 per share] Rs. 18,00,000
Less: Indexed COA [2,000 shares × Rs. 350 per share × 331/129] (Rs. 17,96,124)
Long Term Capital Gain 3,876

Nature of (i) Goodwill of a business or a trademark or brand name associated with a business or
Assets (A)
(ii) Right to manufacture/produce any article or thing or;
(iii) Right to carry on any business or profession or;
(iv) Tenancy rights, stage carriage permits & loom hours.

Cost of 1 Self-Generated Assets (specified Above) COA = Nil

Acquisition
2 Purchased from another Person COA = Purchase price

3 Acquired by any of the modes u/s 49(1) COA = Purchase price of Previous Owner

Ex: If Mr. A purchase a stage carriage permit from B for Rs. 2 Lacs, then COA = Rs. 2 Lacs.
However, in case of a capital asset, being goodwill of business or profession, i.r.o. which depreciation u/s
32(1) has been obtained by the assessee in any PY (upto PY 2019-20), COA of such goodwill = Purchase
price - total amount of depreciation (upto PY 2019-20) obtained by the assessee u/s 32(1).
PC Note: Option to take FMV on 1.4.2001→ Not Available in case of Above Assets.

CQ13. Mr. Pranav commenced a business on 15.4.2002. The said business is sold by Mr. Pranav on 18.04.2021 &
he received Rs. 9 Lacs towards goodwill. Compute Capital Gains in the hands of Mr. Pranav for AY 2021-22.
Solution: Capital Gain of AY 2021-22
Sale Consideration 9,00,000
Less: Indexed cost of acquisition (Self-Generated) (Nil)
Long-term capital gain 9,00,000

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CQ14. What if in above CQ, Mr. Pranav had acquired goodwill for this business for a consideration of Rs. 2 Lacs?
Solution:
Sale Consideration 9,00,000
Less: Indexed cost of acquisition (Purchased) [2,00,000 × 317/105] (6,03,810)
Long-term capital gain 2,96,190

CQ15. Mr. Amol purchased tenancy right on 1.04.1999 for Rs. 3,00,000. The same was sold by him on 14.8.2021
for Rs. 15 Lacs. FMV of tenancy right as on 1.4.2001 was Rs. 5,00,000. Compute the Capital Gain for AY 2021-22.
Solution:
Sale Consideration 15,00,000
Less: Indexed cost of acquisition (Purchased) [3,00,000 × 317/100] (9,51,000)
Long-term capital gain 5,49,000

PC Note: In case of tenancy right, option to take FMV on 1.4.2001 as COA is not available.

1 If Bonus shares acquired before 1.4.2001 COA = FMV as on 1.4.2001

2 If Bonus shares acquired on/after 1.4.2001 COA = Nil since no option is available

3 Bonus shares allotted before 1.2.2018 on which COA = Higher of (a) & (b)
STT has been paid at the time of transfer
(a) Actual cost of acquisition i.e
- Nil (if allotted on/after 1.4.2001)
- FMV on 1.4.2001 (if allotted before 1.4.2001)
(b) Lower of (i) & (ii)
(i) FMV as on 31.1.2018; &
(ii) Actual sale consideration

PC Note: Indexation is available from date of allotment of Bonus Shares.

1 Right Shares ➢ Purchased by Original Shareholder: COA = Issue Price

➢ Purchased by Purchaser of Right: COA = Issue price + Cost of Right

2 Right COA = Always Nil & Always STCG

Sale Consideration Amount received on sale of shares.

COA FMV on the date of exercising ESOP option.

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 ❖ COA of LTCA being –
- Equity shares in a company on which STT is paid both at the time of purchase & transfer or
- Unit of equity-oriented fund or unit of business trust on which STT is paid at the time of transfer.
acquired before 1st February, 2018 shall be higher of (i) & (ii) –
(i) Cost of acquisition of such asset; &
(ii) Lower of (a) FMV on 31st Jan 2018 & (b) Full value of consideration.

Ex: An equity share is acquired on 1st Jan 2017 at Rs.100; its FMV is Rs. 200 on 31st Jan 2018 & it is sold on
1st April 2018 at Rs. 250. As the actual cost of acquisition < FMV on 31 st Jan 2018, FMV of Rs. 200 will be
taken as the cost of acquisition & the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).

Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, FMV is Rs. 200 on 31st Jan 2018 & it is sold on 1st
April 2018 at Rs. 150. In this case, actual COA < FMV on 31st Jan 2018. However, sale value is also < FMV
on 31st Jan 2018. Thus, sale value of Rs. 150 will be taken as COA & LTCG = Nil (Rs.150 – Rs.150).

Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, its FMV is Rs. 50 on 31st Jan 2018 & it is sold on
1st April 2018 at Rs. 150. In this case, FMV on 31st Jan 2018 < Actual cost of acquisition & thus actual cost
of Rs. 100 will be taken as actual cost of acquisition & LTCG will be Rs. 50 (Rs. 150 – Rs. 100).

Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, FMV is Rs. 200 on 31st Jan 2018 & it is sold on 1st
April 2018 at Rs. 50. Actual COA < FMV on 31st Jan 2018. Sale value < FMV on 31st Jan 2018 & actual COA.
Therefore, actual cost of Rs. 100 will be taken as COA. Hence, LTCL = Rs. 50 (Rs. 50 – Rs. 100).

Meaning of Fair Market value

Circumstance Fair Market Value

Cap. asset is listed on any RSE as on 31.01.2018 ❖ If there is trading in such asset on such RSE on
31.01.2018 → Highest price of capital asset quoted
on such RSE on 31.01.2018.
❖ If there is no trading in such asset on such RSE
on 31.01.2018 → Highest price of such asset on
such RSE on date immediately preceding 31.1.2018
when such asset was traded on such RSE.

Cap. asset is not listed on any RSE on 31.01.2018 Net Asset Value of such unit as on 31.01.2018.

Cap. asset is equity share in company which is - An amount which bears to COA the same proportion
- not listed on a RSE on 31.01.2018 but listed on as CII for FY 2017-18 bears to the CII for the first
such exchange on the date of transfer year in which the asset was held by the assessee or
on 01.04.2001, whichever is later.
- listed on a RSE on date of transfer & which
became property of assessee in consideration Space for PC Note:
of share which is not listed on such exchange
as on 31.01.2018 by way of transaction not
regarded as transfer u/s 47.

COA FOR WHICH THE PREVIOUS OWNER ACQUIRED THE PROPERTY CANNOT BE ASCERTAINED

COA to previous owner = FMV on the date on which capital asset became property of the previous owner.

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  Capital gain arising on depreciable asset will always be STCG irrespective of POH.
Conditions for Claiming Depreciation u/s 32
1. There must be at least one asset in the block.
2. There must be some WDV for the block on which prescribed rate of Depreciation can be applied.
If any of the 2 conditions are not satisfied, section 32 ceases to apply & section 50 becomes applicable.
Section 50: Capital Gain on Depreciable Assets will arise only in the following two cases:
1 STCG ▪ If Sale Consideration received on transfer of one or more capital asset > WDV of Block,
WDV of the block will be Zero & therefore no Depreciation can be claimed.
▪ In such case, STCG = Sale consideration – WDV of the block.

2 STCL ▪ If all assets in the block are sold, block is empty & thus no depreciation can be claimed
even if there is WDV left in the block.
▪ In such case, short term capital loss will arise to the extent of remaining WDV.
If SC of all assets in Block < WDV of the Block, STCL = SC of all the assets – WDV of the block.

CQ16. Singhania & Co., a sole proprietorship owns 6 machines, put in use for business in March 2021. Rate
of Depreciation is 15%. WDV of these machines as on 1st April 2021 was Rs. 8,50,000. Three of the old
machines were sold on 10th June 2022 for Rs. 11,00,000. A second-hand plant was bought for Rs. 8,50,000 on
30th November 2022. You are required to: (1) Determine depreciation for AY 2023-24;
(2) Compute Capital Gains for AY 2023-24.
(3) If 3 machines are sold in June 2022 for Rs. 21 lacs, will there be any difference in your above workings?
Solution:
1 Computation of depreciation for AY 2022-23 (i.e PY 2021-22)
Particulars Rs.
W.D.V. of the block as on 1.4.2021 8,50,000
Add: Purchase of second-hand plant during the year on 10 June 2021
th
8,50,000
Less: Sale consideration of old machinery during the year (11,00,000)
WDV of the block as on 31.03.2022 6,00,000
Note: Since, Second-hand machinery was put to use for less than 180 days, depreciation is
restricted to 50% of 15%. Therefore, depreciation for the year = Rs. 45,000, being 7.5 % of Rs.
6,00,000.
2 Capital Gains on depreciable assets [Section 50] is applicable only in following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than value of block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
In (a) & (b), SC > WDV of the block, STCG would arise. In (c), Since SC < WDV of block, STCL would
arise.
In the given case, capital gains will not arise as the block of asset continues to exist, & some of the
assets are sold for a price which is lesser than WDV of the block.
3 If 3 machines are sold in June 2021 for Rs. 21,00,000, STCG would arise since SC > aggregate of
opening WDV of the block + Additions made during the year.
Sale consideration 21,00,000
Less: WDV of the machines as on 1.4.2021 8,50,000
Less: Purchase of second plant during the year 8,50,000 (17,00,000)
Short term capital gains 4,00,000

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 Applicability Only for undertakings engaged in Generation/Generation & distribution of power.

Option Such undertakings have option to use SLM method for depreciation.

COA COA of the asset shall be WDV of Asset as appropriately adjusted.

TABLE FOR COMPUTATION OF CAPITAL GAINS

Conditions Treatment

1. SC < WDV ▪ Terminal Depreciation (Loss) = WDV – SC.

▪ It is Deductible u/s 32 u/h PGBP.
2. SC > WDV but < Original COA ▪ Balancing Charge (Profit) = SC – WDV.
▪ It is Taxable u/s 41(2) u.h PGBP.
3. SC > Original COA ▪ Capital Gain = SC - Original COA.
▪ Balancing Charge (Profit) = SC- WDV.
▪ It is Taxable u/s 41(2) u/h PGBP.
PC Note: Question on the same provision has been given in PGBP. [Question starting with Bijli Ltd].

MEANING ▪ Sale of whole undertaking/ unit for lumpsum consideration.

▪ In slump sale, whole undertaking/division is transferred for lumpsum consideration.
▪ Individual assets are not transferred & thus, sale consideration for the individual
assets is not known.
▪ Therefore, Sale consideration of whole undertaking/division is compared with NET
WORTH of the undertaking to find out the Capital gain.

Full Value of Higher of (a) or (b)

Consideration (a) Actual Sale consideration on sale of whole undertaking
(b) FMV of the capital assets as on the date of transfer [Section 50B(2)(ii)

COA & COI ❖ COA & COI = Net worth of the undertaking/ division.
❖ Net worth shall be calculated as follow:
Total value of All Assets of an undertaking/division [Note 1]
Less: Total value of All Liabilities of such undertaking/division [Note 2]

❖ Any change in the value of assets on account of REVALUATION of Assets shall NOT
be considered for this purpose.

INDEXATION No Indexation shall be allowed on COA/COI.

Nature of ❖ If POH of the undertaking/division ≤ 36 Months → STCG would arise.

Capital Gains ❖ If POH of the undertaking/division > 36 Months → LTCG would arise.

PC Note:
1. Aggregate value of total assets shall be calculated as follows:
▪ Depreciable Assets: WDV of block of assets determined in accordance with sec 43(6)
▪ Sec 35AD Assets: Nil
▪ All other Assets: Book value.
2. All Liabilities should be assumed to be paid off in full unless otherwise specified.

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CQ17. X Ltd. has several undertakings carrying on several businesses. During PY 2022-23, company sold one of its
undertakings (as it was continuously generating loss since last 5 years) for a lump sum value of Rs. 300 lacs without
assigning value to individual asset & liabilities. Brokerage on transfer paid @ 5%. Compute taxable capital gain.
Book value of sundry assets & liabilities of the undertaking as on the date of sale is as under:
Items Book Value FMV
Land Rs. 50 lacs (Stamp duty Value = Rs. 70 Lacs) Rs. 100 lacs
Machinery Rs. 30 lacs (WDV as per IT Act Rs. 60 lacs) Rs. 100 lacs
Furniture Rs. 50 lacs (WDV as per IT Act Rs. 90 lacs) Rs. 75 lacs
Stock Rs. 30 lacs Rs. 35 lacs
Debtors Rs. 40 lacs Rs. 40 lacs
Creditors Rs. 50 lacs -
Solution: Since the undertaking is owned by the company for > 3 years, LTCG shall arise.
Calculation of Net Worth
A. Value of Assets taken over: B. Value of liabilities taken over:
Asset Value Basis (i) Creditors = Rs. 50 Lacs – Basis of Book Value.
Land Rs. 50 Lacs Book Value
Machinery Rs. 60 Lacs WDV
Furniture Rs. 90 Lacs WDV Net Worth = Assets – Liabilities = A - B
Stock Rs. 30 Lacs Book Value = 270 Lacs – R50 Lacs = Rs. 220 Lacs

Debtors Rs. 40 Lacs Book Value

Total Rs. 270 lacs

Computation of Capital Gains in the hands of X Ltd. for AY 2023-24

Sale consideration Rs. 300 lacs
Less: Expenses on transfer = (5% of Rs.300 lacs) (Rs. 15 Lacs)
Net sale consideration Rs. 285 lacs
Less: Cost of acquisition i.e. Net Worth: Calculated above (Rs. 220 lacs)
Less: Cost of improvement (Rs. Nil)
Long Term Capital Gain Rs. 65 Lacs

➢ If a NR acquires shares or debentures of an Indian Company by utilizing foreign Currency, then capital
gain shall be computed in same foreign currency. After calculating capital gains in foreign currency,
it will be converted into Indian Currency.
➢ Benefit of INDEXATION is NOT AVAILABLE.

STEPS TO COMPUTE CAPITAL GAINS

1. Sale Consideration, Expenses of Transfer & Cost of Acquisition will be given in Rupees in the question
as the shares/debentures were acquired by utilizing foreign currency.
2. So, we need to convert them into Foreign Currency by using AVERAGE BUYING RATE on the date of
TRANSFER/ ACQUISITION.
3. Calculate CAPITAL GAINS in FOREIGN CURRENCY.
4. Capital Gain in Foreign Currency shall be Re-converted into INDIAN CURRENCY by applying BUYING
Rate on the date of transfer.

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CQ18. Mr. R, a NRI, remits $40,000 to India on 16.09.2009. The amount is partly utilized on 03.10.2009 for
purchasing 10,000 shares in A Ltd., an Indian company @ Rs. 12 per share. These shares are sold for Rs. 36 per
share on 30.03.2023. Telegraphic transfer buying & selling rate of US dollars adopted by SBI is:
Date TT Buying Rate TT Selling Rate Average TT Rate [ Buying + Selling]/2
16.9.2009 18 20 19.5
3.10.2009 19 21 20
30.3.2022 44 46 45
Compute capital gain for AY 2023-24 on the assumption that these shares have not been sold through RSE.
Solution:
Sale consideration (Rs. 3,60,000/45) $ 8,000
Less: Cost of acquisition (Rs. 1,20,000/20) ($ 6,000)
Long-term capital gain $ 2,000
Long term Capital gain covered into Rupees (US$ 2,000 x Rs. 44/US$) Rs. 88,000

 In following cases, cost of acquisition of the asset shall be deemed to be cost for which the previous
owner of the property has acquired it.
 To this cost, CoI to the asset incurred by previous owner or assessee must be added.
 Where the capital asset became the property of the assessee:
(a) on any distribution of assets on the total or partition of a HUF;
(b) under a gift or will;
(c) by succession, inheritance or devolution;
(d) on any distribution of assets on the liquidation of a company;
(e) under a transfer to revocable or an irrevocable trust;
(f) under any transfer of capital asset by holding company to its WOS Indian company or by
subsidiary company to its 100% holding Indian company, ref. in section 47(iv) & 47(v) respectively;
(g) under any transfer referred to in section 47(vi) of a capital asset by amalgamating company to
amalgamated Indian company, in a scheme of amalgamation;
(h) under any transfer referred to in section 47(vib), of a capital asset by the demerged company to
the resulting Indian company, in a scheme of demerger;
(i) Conversion by individual of his separate property into HUF property [by mode ref. in sec. 64(2)].

 Case Law: Bombay High Court in CIT v. Manjula J. Shah 16 Taxman 42 (Bom.)
▪ Bombay HC held that Indexed CoA in case of gifted asset has to be computed w.r.t. the year in which
previous owner first held the asset & not the year in which assessee became the owner of the asset.
▪ Section 2(42A) provides that in all such cases, for determining the period for which the capital asset
is held by the transferee, period of holding of the asset by previous owner shall also be considered.
PC Note: In case of mode of acquisition of asset specified u/s 49(1), Period of holding of the previous
owner shall also be considered for the purpose of taking Indexation of Cost of Acquisition.

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TRANSACTIONS NOT TREATED AS TRANSFER [SEC 46 & 47]
➢ In following cases, No Capital Gain would arise since they are NOT treated as Transfer.
➢ Thus, NO TAX will be payable on such transfer by the transferee.

Distributes Assets in Kind

COMPANY Shareholder
Give up their Right in the Shares of the Company

FOR COMPANY IN LIQUIDATION [Section 46(1)]

❖ Any Asset distributed in kind by the company to its shareholders on liquidation → shall NOT be
regarded as a transfer by the company.
❖ Thus, No Capital Gain shall arise to company on distribution of such Assets.

PC Note: If liquidator sells the assets of company & distributes funds so collected, capital gain shall
arise on such transfer.

FOR SHAREHOLDERS [Section 46(2)]

❖ Capital Gain shall arise in the hands of Shareholders on transfer of such shares to the company.
❖ Sale Consideration = FMV of Assets received in Kind – Deemed Dividend u/s 2(22)(c).
❖ Deemed dividend u/s 2(22)(c) → Distribution of Accumulated Profits by the company on liquidation
is treated as deemed dividend u/s 2(22)(c). Since DDT has been abolished from AY 2021-22 & thus
such dividend shall be taxable in the hands of shareholders u/h IFOS & such amount of dividend
shall be deducted from sale consideration for computation of capital gains.

CAPITAL GAIN ON TRANSFER OF ASSETS RECEIVED IN KIND BY THE SHAREHOLDERS

❖ When the asset received in kind is transferred by the shareholder later, Capital Gain will arise.
❖ COA of such asset = FMV of such asset on date of distribution by the company.
❖ POH shall be reckoned from the date of receipt of asset on liquidation.

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CQ19. Mr. PC purchased 10,000 equity shares of XYZ Co. Pvt. Ltd on 28.2.2007 for Rs. 1,20,000. The company was
wound up on 31.07.2022. The following is the summarized financial position of the company as on 31.07.2022:
Liabilities Rs. Assets Rs.
60,000 Equity shares 6,00,000 Agricultural lands 42,00,000
General Reserve 40,00,000 Cash at bank 6,50,000
Provision for taxation 2,50,000
48,50,000 48,50,000
▪ Tax liability (towards DDT) was ascertained at Rs. 3 Lacs, after considering refund due to the company.
▪ The remaining assets were distributed to the shareholders in the proportion of their shareholding.
▪ The market value of the 6 acres of the agriculture land (in an urban area) as on 31.07.2022 is Rs. 10 Lacs per acre.
▪ Agriculture land received above was sold by Mr. PC on 29.2.2023 for Rs. 15 Lacs. Discuss tax treatment.
Solution:
1 CG arising in hands of company on distribution of asset in kind to shareholders on liquidation is exempt u/s 46.
2 Computation of Capital Gains in the hands of Mr. PC
Sale consideration [refer Note 1] 4,00,000
Less: Indexed cost of acquisition [1,20,000 × 331/122] (3,25,574)
Long term capital gain 74,426
3 Capital Gains arising on sale of urban agricultural land received in the hands Mr. PC
Sale consideration Rs. 15 Lacs
Less: COA [deemed to be FMV on date of distribution] (Rs. 10 Lacs)
Short term capital gain Rs. 5 Lacs

Working Note:
1 Calculation of Sale Consideration of Shares: Mr. PC holds 1/6th of shareholding of the company, so
Agriculture land received (60 Lacs/6) Rs. 10,00,000
Cash at bank (6,50,000 – 3 Lacs)/6 Rs. 58,333
Less: Deemed dividend u/s 2(22)(c) [40 Lacs - 50,000)/6 ---- Taxable u/h IFOS] (6,58,333)
Sale consideration Rs. 4,00,000
2 Dividend u/s 2 (22)(c) i.e. Rs. 6,58,333 will be taxable u/h IFOS in the hands of Mr. PC.
3 Tax liability has been ascertained at Rs. 3 Lacs as against the provision of Rs. 2,50,000. Therefore Rs. 50,000 (Rs.
3 Lacs - Rs. 2,50,000) has to be reduced from general reserve for calculating deemed dividend u/s 2(22)(c).

➢ Distribution of Capital Asset by HUF to its members on partition of HUF is NOT treated as Transfer &
thus NO Capital Gain shall arise in the hands of HUF.
➢ However, Capital Gain shall arise when the asset received on partition, is sold by member.
➢ For computing capital gain in the hands of member on the transfer of said asset ↓
COA in the hands of Member Cost of Asset to the HUF
Period of Holding of Member From the date of Acquisition of Asset by HUF

CQ20. On 18.08.2005, Ramu acquired 1000 debentures of X Ltd. & house on partition of its HUF. House was acquired
by HUF on 1.04.1995 for Rs. 3 lacs & Debentures were acquired on 1.04.2002 for Rs. 2 lacs. FMV of the house on
1.04.2001 is Rs. 4 lacs. COI incurred by HUF on 15.3.2002 was Rs. 2 lacs. On 17.07.2022, Ramu sold the house for Rs.
20 lacs & its debentures are taken by the company at Rs. 2,50,000. Compute capital gain of Ramu for AY 2023-24.
Solution: Computation of capital gain in the hands of Ramu for AY 2023-24
I. HOUSE → POH: 1.4.1995 – 17.07.2022
Sale Consideration 20,00,000
Less: Indexed cost of acquisition [4,00,000 × 331/100] (13,24,000)

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 Less: Indexed cost of improvement [2,00,000 × 317/100] (6,34,000)
Long-term capital gain 42,000

II. Debenture → POH: 01.04.2002 – 17.07.2022

Sale Consideration 2,50,000
Less: Cost of acquisition [No indexation is available] (2,00,000)
Long-term capital gain 50,000
PC Note: COA = Cost to Previous owner in case of Gift.

➢ Transfer of capital asset under a gift or will or irrevocable trust is NOT treated as transfer & thus NO
CAPITAL GAIN shall arise in the hands of transferor.
➢ However, Capital Gain will arise in the hands of Recipient when he transfers such capital asset.
➢ For computing capital gain in the hands of recipient of gifts/will/irrevocable trust.

COA in the hands of Recipient Cost to the Previous owner

Period of Holding/Indexation ▪ Includes Period of Holding of previous owner;

▪ Indexation will be taken from DoA of Asset by Previous owner

PC Note: If assets received as gift is made taxable u/s 56 (2)(vii)/(viia), then COA of such assets shall be
the value taken into accounts for the purpose of sec 56(2)(vii) or (viia).
In such case, POH of previous owner shall not be included. [To be Studies with IFOS]

CQ21. Mr. A purchased gold in 1970 for Rs. 25,000. FMV on 1.4.2001 was Rs. 1,30,000. In PY 2017-18, he gifted it
to his son. FMV on the date of receipt of gift was Rs. 2,00,000. His son sold it PY 2022-23 for Rs. 5,00,000. Discuss
the tax implications in the hands of Mr. A & his son.
Solution:
Gift is exempt by virtue of Section 47 & thus NO capital gain arises in the hands of Mr. A.
Computation of Capital Gains in the hands of Son of Mr. A [Note: COA = Cost to Previous owner in case of Gift]
Sale Consideration 5,00,000
Less: Indexed cost of acquisition [1,30,000 × 331/100] (4,30,300)
Long-term capital gain 69,700

COA in the hands of WOS Cost to Holding company (Previous owner)

POH of WOS Company Includes POH of Holding company (Previous owner).

Transfers
Amalgamating Company Amalgamated Company
Asset

COA to Amalgamated Company Cost to Amalgamating company (Previous owner)

POH Include POH of Amalgamating company (Previous owner)
Indexation From DoA of capital asset by amalgamating company

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COA in the hands of Holding company Cost to WOS company (Previous owner)

POH of Holding Company Includes POH of WOS company (Previous owner).

PC Note: For transfers between HC & SC,
(a) Recipient Company (company receiving capital asset) shall be Indian Company.
(b) Exemption will NOT apply if a Capital Asset is transferred as SIT.

Transfers
Demerged Company Asset Resulting Indian Company

COA to Resulting company Cost to Demerged company (Previous owner)

POH Include POH of demerged company (Previous owner)

Indexation From DoA of capital asset by demerged company

(Transfers) Shares in Amalgamating Co.

Mr. X Company

(Receives) Shares in Amalgamated Indian Co.

COA of shares in Amalgamated company COA of shares in Amalgamating Company

POH of shares for Amalgamated company Include POH of shares in Amalgamating Company.

PC Note: In this case, shares in amalgamated company are allotted to the shareholders (of amalgamating
company) in exchange of their shares in the amalgamating company, except where the shareholder
itself is amalgamated company.
Ex: A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd. amalgamates with A Ltd. Since A Ltd. itself
is the shareholder of B Ltd., A Ltd., being the amalgamated company, cannot issue shares to itself. However, A
Ltd. has to issue shares to the other shareholders of B Ltd.
PC Note: Same provision would apply in case of conversion of company into LLP – [Sec 47(xiiic)]
❖ Cost of share in LLP = COA of Shares in the company immediately before its conversion.

Shares in Cost of Acquisition

Resulting Net BV of Asset in demerged company 𝐚𝐟𝐭𝐞𝐫 demerger
COA of shares in Demerged Company ×
Company Net BV of Asset in demerged company 𝐛𝐞𝐟𝐨𝐫𝐞 demerger

Demerged
COA of share in Demerged Co. ─ Cost apportioned to shares of Resulting Co.
Company
PC Note: For determining POH of Shares in Resulting Co. → Includes POH of Shares in demerged Co.

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CQ22. Mr A. acquired 1000 shares in XY ltd of Rs. 20,000. XY Ltd. was demerged on 25.09.2022 & net book value of
the asset transferred to Y Ltd (the resulting company) was 30 Lacs. Compute the cost of acquisition of shares of Mr. A
in demerged company as well as resulting company assuming the paid-up capital & general reserve of XY Ltd before
demerger were 1 crore.
Solution: COA of Shares in
Resulting Net BV of Asset in demerged co. 𝐚𝐟𝐭𝐞𝐫 demerger 30
COA of shares in Demerged Co. × = 20,000 × = Rs. 6,000.
Company Net BV of Asset in demerged co. 𝐛𝐞𝐟𝐨𝐫𝐞 demerger 1 crore

Demerged COA of share in Demerged Co. ─ Cost apportioned to shares of Resulting Co. = Rs. 20,000 – Rs. 6,000
Company = Rs. 14,000.

Government securities (Periodic interest)

Mr. X (Non-Resident) Mr. Y (Non-Resident)

Archaeological, Scientific or Art

Collection, Book, Manuscript, Drawing, Painting, Photograph etc to Government, University, National
Museum, National Art Gallery, other Public Museum or Institution of National Importance → Exempt.

Transfers Debentures
Mr. X Company
Receives Shares
COA of Shares received Cost of Bonds/Debenture given up
POH of Shares Include POH of Debentures given up

CQ23. Mr. B purchased convertible debentures for Rs. 5,00,000 during August 2001. Debentures were
converted into shares in September 2012. These shares were sold for Rs. 20 Lacs in August 2022.
Brokerage expenses are Rs. 50,000. You are required to compute Cap. Gains for AY 2023-24.
Solution: Computation of Capital Gains of Mr. B for AY 2022-23
Particulars Rs.
Sale consideration 20,00,000
Less: Expenses on transfer (Brokerage paid) (50,000)
Net sale consideration 19,50,000
Less: Indexed cost of acquisition (Rs. 5,00,000 × 331/100) (16,55,000)
Long term capital gain 2,95,000

Transfers units in Consolidating scheme

Mr. X Company
Receives units in consolidated scheme
COA of unit in Consolidated scheme COA of units in Consolidating Scheme
POH of unit in consolidating scheme Includes POH of units in consolidating scheme for
determining POH of units in consolidated scheme
PC Note: Consolidation should be of 2 or more schemes of EOMF or of a fund other than EOMF.

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 Transfer of Rupee denominated bond of Indian company issued outside India by NR to another NR -
[Section 47(viiaa)].

Redemption of Sovereign Gold Bonds by Individual issued under Sovereign Gold Bond Scheme, 2015
[Section 47(viic)].

Conversion of Preference shares into Equity shares: Any transfer by way of conversion of preference
shares of a company into equity shares of that company [Section 47(xb)].

➢ Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made & notified
by the Central Government would not amount to a transfer. [Section 47(xvi)]

Morgages House
Senior citizen Bank
Receives Loan

PC Note: Sec 10(43) exempts any lumpsum amounts or instalments received as a loan under a scheme
of reverse mortgage from the bank by senior citizens.
Meaning ▪ Reverse Mortgage scheme is for the benefit of senior citizens who own residential house.
▪ Senior citizens can mortgage their house property with scheduled bank/housing finance
company for lumpsum amount or a regular monthly/quarterly/annual income.

Scheme ▪ Senior citizens can mortgage their house & get the contracted amount.
▪ They can continue to live in their house & receive regular income without having to pay
back the loan.
▪ Borrower can use the loan amount for renovation & extension of residential property,
family’s medical & emergency expenditure etc., amongst others.
▪ However, he cannot use the amount for speculative or trading purposes.
▪ Bank/housing finance company would revalue the property once every 5 years.

Recovery ▪ Bank will recover loan with interest by selling house after the death of the borrower.
▪ Excess amount will be given to the legal heirs.
▪ However before selling the house, preference will be given to the legal heirs to repay the
loan & interest & get the mortgaged property released.

Taxation ▪ Transfer of capital asset in a transaction of reverse mortgage under a scheme made &
notified by CG would not amount to a transfer - Section 47(xvi).
▪ Amount received by the senior citizen as a loan (Lump sum/Instalments) in a transaction of
reverse mortgage would be exempt from income-tax- Section 10(43).
▪ Capital gains would arise in the hands of senior citizen only when the mortgaged property is
sold by the bank/housing finance company for the purposes of recovering the loan.

CQ24. Mr. X a senior citizen, pledged his residential house with a bank, under a notified reverse mortgage scheme. He was
getting loan from bank in monthly instalments. Mr. X did not repay the loan on maturity & hence gave possession of the
house to the bank to discharge his loan. How will the treatment of LTCG be on such reverse mortgage transaction?
Answer:
▪ Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a scheme
made & notified by CG shall not be considered as a transfer for the purpose of capital gain.
▪ Accordingly pledging of residential house with bank by Mr. X will not be regarded as a transfer. Therefore, no capital
gain will be charged on such transaction.
▪ Amount received by senior citizen as a loan in a transaction of reverse mortgage would be exempt [Section 10(43)].
Therefore, the monthly instalment amounts received by Mr. X would not be taxable.
▪ However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by the
bank for the purposes of recovering the loan.

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Exemption from Capital Gains is available in two categories:

A. Exemption ▪ These exemptions are available on Transfer of Notified Capital Assets.

u/s 10 ▪ No Investment in any new capital asset is required to avail these Exemption.

B. Exemption ▪ These exemptions are available only if the Specified (New) Capital Asset is Acquired
u/s 54 or Constructed.

1. Capital Gain arising to Individual/HUF on Compulsory Acquisition of Urban Agricultural Land

[Section 10(37)]
▪ Exemption is available only if compensation is received on/after 1.4.2004.

2. Capital Gain arising on Buy-back of shares (listed/unlisted) by Domestic Company [Sec 10(34A)]

CQ25. Mr. Kumar has agricultural land (costing Rs. 6 lacs) in Lucknow & has been using it for agricultural purposes
since 1.4.2000 till 1.8.2011 when the Government took over compulsory acquisition of this land. Compensation of Rs.
10 lacs was settled. The compensation was received by Mr. Kumar on 1.7.2021. Compute the amount of capital gains
taxable in the hands of Mr. Kumar for AY 2022-23.
Solution:
▪ Compulsory acquisition of an urban agricultural land has taken place & the compensation is received after 1.4.2004.
This land had also been used for at least 2 years by the assessee himself for agricultural purposes.
▪ Thus, as per section 10(37), entire capital gains arising on such compulsory acquisition will be fully exempt &
nothing is taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e. AY 2022-23.

CQ26. Will your answer be any different if Mr. Kumar had by his own will sold this land to his friend Mr. Sharma?
Solution:
▪ As per section 10(37), exemption is available if compulsory acquisition of urban agricultural land takes place.
▪ Since the sale is out of own will & desire, the provisions of this section are not attracted & the capital gains arising on
such sale will be taxable in the hands of Mr. Kumar.

CQ27. Will your answer be different if Mr. Kumar had not used this land for agricultural activities? Explain.
Solution:
▪ As per section 10(37), exemption is available only when such land has been used for agricultural purposes during
the preceding two years by such individual or a parent of his or by such HUF.
▪ Since the assessee has not used it for agricultural activities, the provisions of this section are not attracted & the
capital gains arising on such compulsory acquisition will be taxable in the hands of Mr. Kumar.

CQ28. Will your answer be different if the land belonged to ABC Ltd. & not Mr. Kumar & compensation on compulsory
acquisition was received by the company? Explain.
Solution:
▪ Section 10(37) exempts capital gains arising to an individual or a HUF from transfer of agricultural land by way of
compulsory acquisition.
▪ If the land belongs to ABC Ltd., a company, the provisions of this section are not attracted & the capital gains arising
on such compulsory acquisition will be taxable in the hands of ABC Ltd.

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 Eligible Assessee Individual or HUF

Which Asset must Residential House Property (LTCA)

be transferred Income from such house should be chargeable u/h “Income from HP”.

Which asset must If Capital gains > Rs. 2 crores → ONE If Capital gains ≤ Rs. 2 crores → TWO
be acquired Residential House in India Residential House in India

Note: If in any AY, assessee has exercised the option to purchase or construct 2 residential houses in
India, he shall not be subsequently entitled to exercise the option for same AY or any other AY.
Ex: If an assessee has availed the option of claiming benefit of section 54 i.r.o purchase of 2 residential
houses in Jaipur & Jodhpur i.r.o capital gains of Rs. 1.50 crores arising from transfer of residential house
at Bombay in PY 2021-22 then, he will not be entitled to avail the benefit of section 54 again i.r.o. purchase
of 2 residential houses in Pune & Baroda, i.r.o capital gains of Rs. 1.20 crores arising from transfer of
residential house in Jaipur in PY 2023-24, even though capital gains arising on transfer of residential
house at Jaipur < Rs. 2 crores.
Time limit for Purchase → Within 1 yr before transfer or within 2 years after transfer.
acquiring new asset Construct → Within 3 years after the date of transfer.

Quantum of (a) Investment in New House or Houses or

Exemption (b) Capital Gain (whichever is lower)

Consequences of Exemption granted will be taken back.

transfer of Newly For computing STCG on transfer of new asset:
acquired asset
within 3 years. Cost of New House = (Cost of acquisition- Capital gains exempted earlier).

Example 1. CG = Rs. 7 lacs & Cost of New house= Rs. 9 lacs; Exemption = Rs. 7 lacs.
2. CG = Rs. 7 lacs & Cost of New house=Rs. 5 lacs; Exemption = Rs. 5 lacs.
Continuing Ex, if the new house was sold after 2 years for Rs. 12 lacs, then STCG =
Particulars Rs. Rs.
Net Consideration 1200000
Cost of acquisition 9,00,000
Less: CG exempt earlier u/s 54 (7,00,000) (200000)
Taxable STCG 1000000

CQ29. Mr. Cee purchased a residential house on 20th July 2019 for Rs. 10,00,000 & made some additions to
the house incurring Rs. 2,00,000 in August 2019. He sold the house property in April 2022 for Rs. 20 Lacs.
Out of the sale proceeds, he spent Rs. 5,00,000 to purchase another house property in September 2021.
Find the amount of capital gains taxable in the hands of Mr. Cee for AY 2023-24?
Solution: House is sold before 24 months from the date of purchase. Hence, the house is a STCA.
Particulars Rs.
Sale consideration 20,00,000
Less: Cost of acquisition (10,00,000)
Less: Cost of improvement (2,00,000)
Short-term capital gains 8,00,000

PC Note: The exemption of capital gains u/s 54 is available only in case of LTCA. As the house is STCA. Mr. Cee
cannot claim exemption u/s 54. Thus, the amount of taxable STCA is Rs. 8,00,000.

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PC Note:
▪ Date of completion of construction is relevant. Date of commencement of construction is irrelevant.
Construction may be commenced even before the transfer of house.
▪ Allotment of Flat under Self-financing scheme is treated as construction of house for Section 54.
▪ Holding of Legal Title → Not Necessary. If the taxpayer pays whole/part of consideration & gets the
possession of new house, exemption available u/s 54 is available.
▪ Investment → Includes Cost of Purchase of House + Cost incurred to make habitable.
▪ A person may Sell 2 Houses & Purchase 1 House for the purpose of availing exemption u/s 54.

Eligible Assessee Individual or HUF

Which asset shall be Urban Agricultural land (LT/ST).

transferred Such land must have been used by Assessee or his parents/HUF for
agricultural purposes for 2 yrs immediately preceding date of transfer.

Which asset is acquired Agricultural Land (Rural/Urban)

Time limit for acquiring Within 2 years from the date of transfer.
new asset

Quantum of Exemption Same as Section 54.

Consequences of transfer Same as Section 54. However, if new agricultural land is a rural agricultural
within 3 years land, there would be no CG on transfer of such land.

Eligible Assessee Any Assessee.

Which asset shall be Industrial Land or Building (STCA/LTCA)

transferred Such Land/building should have been used by assessee for Industrial
undertaking for 2 years immediately preceding the date of transfer.

Which asset is acquired Land or Building for Industrial purpose

Time limit for acquiring Within 3 years from the date of Receipt of compensation.
new asset

Quantum of Exemption Same as Section 54.

Consequences of Same as Section 54

transfer within 3 years

Eligible Assessee Any Assessee

Which asset shall LTCA being Land or Building or both

be transferred (Even a depreciable asset held for more than 36 months is a LTCA even if they are
always regarded as STCA under other sections of the act)

Which asset is Bonds of National Highways Authority of India (NHAI) & Rural Electrification
acquired Corporation Ltd (RECL) redeemable after 5 years.
Bonds issued by Power Finance Corporation Limited on/after 15.06.17 & Bonds
issued by Indian Railway Finance Corporation Limited on/after 08.08.17 &
redeemable after 3 years.

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 Time limit Within 6 months from the date of transfer.

Quantum of Capital Gain or Amount Invested in Bonds (whichever is Lower).

Exemption PC Note: Maximum Investment that can be made in bonds of NHAI & RECL from
CG arising from the transfer of one/more LTCA during the PY of transfer & in
subsequent FY cannot exceed Rs. 50 lacs.

Lock-in-period Bonds should not be transferred for a period of 5 Years. Assessee should not
transfer/convert or avail loan on security of such bonds for 5 years from the date of
acquisition of such bonds. Otherwise, exemption granted earlier shall be taken back.

PC Note: Receipt of money on liquidation of company is taxable in the hands of shareholders [Section 46(2)].
In such case there is no transfer of capital asset & thus exemption u/s 54EC is not available.

CQ30. Capital gain of Rs. 75 lacs arising from transfer of LTCA on 01.05.2022 will be exempt from tax if
such capital gain is invested in the bonds redeemable after 5 years, issued by NHAI u/s 54EC. Comment
whether true or false.
Answer: False: The exemption u/s 54EC has been restricted by limiting the maximum investment in long term
specified assets (i.e. bonds of NHAI or RECL redeemable after 3 years) to Rs. 50 lacs whether such
investment is made during the relevant PY or subsequent PY or both. Therefore, in this case, the exemption
u/s 54EC can be availed only to the extent of Rs. 50 lacs provided the investment is made before 1.11.2022
(i.e., within 6 months from the date of transfer).

Eligible assessee Individual & HUF

Which asset shall Transfer of LTCA other than Residential House Property.
be transferred Thus, Transfer of Vanact Plot of Land → Eligible for Exemption.
Provided that assessee should not own more than 1 Residential House on the date
of transfer (except the newly acquired house property).

Which asset is ONE Residential House Property in India

acquired

Time limit for Assessee should either

acquiring new ▪ Purchase: Within 1 year before transfer or within 2 years after transfer.
asset
▪ Construct: Within 3 years from the date of transfer.

Quantum of Proportionate Exemption. Thus, to get the exemption of amount of capital gains,
Exemption the whole amount of sale consideration shall be invested.
𝐋𝐓𝐂𝐆
= 𝐀𝐦𝐨𝐮𝐧𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐢𝐧 𝐧𝐞𝐰 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐢𝐚𝐥 𝐡𝐨𝐮𝐬𝐞 x 𝐍𝐞𝐭 𝐬𝐚𝐥𝐞 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐚𝐭𝐢𝐨𝐧

Withdrawal of ▪ If the new house is transferred within 3 years from the date of acquisition.
Exemption ▪ If assessee purchases another residential house within 2 years from the date of
transfer of original asset.
▪ If assessee completes construction of another residential house in India/outside
India within 3 years from the date of transfer of original asset.

CQ31. Compute capital gains of Mr. D for AY 2022-23. CII are as follows: FY 2004-05: 113; FY 2021-22: 317]
Cost of jewellery [Purchased in FY 2001-02] Rs. 5,00,000
Sale price of jewellery sold in January 2022 Rs. 20,20,000
Expenses on transfer Rs. 15,000
Residential house purchased in March 2022 Rs. 6,00,000

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Solution: Computation of taxable capital gains for AY 2022-23
Particulars Rs.
Gross consideration Rs. 20,20,000
Less: Expenses on transfer (Rs. 15,000)
Net consideration Rs. 20,05,000
Less: Indexed COA (Rs. 5,00,000 × 317/100) (Rs. 15,85,000)
Long term Capital Gains Rs. 4,20,000
Less: Exemption u/s 54F (Rs. 6,00,000 × Rs. 4,20,000/ Rs. 20,05,000) (Rs. 1,25,686)
Taxable Long-term Capital Gains Rs. 2,94,314

Scheme of ▪ For Section 54, 54B, 54D, 54F, Capital Gain is exempt to the extent of Investment of
deposit ‘Capital gains/Net Sale Consideration’ (for 54F) in specified assets within specified time
limit.
▪ If such Investment is not made before DD of filing of ROI, then Capital Gain/Net sale
consideration (for 54F) has to be deposited under the CGAS to get exemption.

Time limit for ▪ Such deposit in CGAS should be made before filing ROI or before DD of filing ROI,
acquiring new whichever is earlier.
asset
▪ Proof of such deposit should be attached with the return.
▪ Deposit can be withdrawn for the specified purposes.

Consequences ▪ If the amount deposited is not utilized for specified purpose within stipulated period,
of non- then unutilized amount shall be charged as capital gain of the PY in which specified
utilization period expires. For Sec 54F, Proportionate Amount will be Taxable.
▪ If Individual dies before the stipulated period, unutilized amount is not taxable in
the hands of legal heirs of deceased individual because such unutilized amount is not
income but is a part of the estate devolving upon them.

➢ In case of compulsory acquisition of original asset, time limit for acquiring new asset/making deposit in
CGAS is considered from date of receipt of compensation & not from date of transfer.
➢ For Determination of Year of Chargeability of Capital Gain: Whole Capital gain is taxable in the PY in
which 1st Instalment of Compensation is received.
But for Determining Time Limit for Acquiring the Asset, Dates of Receipt of different Instalments shall be
considered.

AO may refer valuation officer with a view to ascertain FMV of a capital asset in following cases:
(i) Where the value of the asset claimed by the assessee is in accordance with valuation made by the
registered valuer, but AO is of the opinion that value so claimed is less than FMV of the Asset.
▪ AO can make a reference to VO in cases where FMV is taken to be sale consideration.
▪ If FMV on 1.4.2001 is taken as COA, AO can make a reference to VO if he is of the view that there
is any variation between FMV on 1.4.2001 claimed by assessee & FMV on that date.
(ii) Where the AO is of the opinion that FMV of the asset exceeds the value claimed by
▪ More than 15% of the value claimed by the assessee or Rs. 25,000 (whichever is less).
(iii) Where AO thinks that it is necessary to do so having regards to the nature of asset & relevant
circumstances.

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 STCG LTCG

Others Sec 112A @ 10% Others

Sec 111A @ 15%
Slab Rate (above 1 Lac) 20%

1 STCG u/s 111A: Taxable @ 15%

▪ STCG on transfer of –
- Equity shares on which STT is paid → Taxed @ 15%
- units of EOMF

▪ Benefit of UNEXHAUSTED BEL will be available for Resident Individual/HUF.

▪ No deduction under Chapter VI-A against STCG taxable u/s 111A.

▪ STCG arising on transactions undertaken in foreign currency on RSE located in International

Financial Services Centre is taxable @ 15% even if STT is not leviable on such transactions.
2 Other STCG
STCG other than Section 111A are treated as Normal Income & will be taxed @ Slab Rate along with
Other Incomes.

1 LTCG u/s 112A [Taxable @ 10% on LTCG exceeding Rs. 1 Lac]

▪ LTCG on transfer of –
- Equity shares on which STT is paid → Taxed @ 10% above Rs. 1 Lac
- units of EOMF

▪ Benefit of UNEXHAUSTED BEL will be available for Resident Individual/HUF.

▪ No deduction under Chapter VI-A against STCG taxable u/s 112A.
▪ Rebate u/s 87A → Not Available against LTCG taxable u/s 112A.

▪ LTCG arising on transactions undertaken in foreign currency on RSE located in International

Financial Services Centre is taxable @ 10% even if STT is not leviable on such transactions.

PC Note:
1. Equity share → STT is to be paid on acquisition & transfer of such capital asset.
2. Units of EOMF/Business Trust → STT is to be paid on transfer of such capital asset.

2 OTHER LTCG: Taxable @ 20%

▪ No deduction under Chapter VI-A is available against LTCG.
▪ Resident Individual & HUF → 20%. Benefit of Unexhausted BEL is available.
▪ Other Person & Domestic Company → 20%. No Benefit of Unexhausted BEL.
▪ Foreign company/ Non-corporate Non-Resident:
LTCG on unlisted securities or shares in Private 10% without Indexation & currency
company fluctuations under 1st proviso to sec 48.

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 Other Assets 20%

❖ LTCG arising from transfer of Listed Securities (other than units) & ZCBs
▪ Assessee will have the option to pay tax @ 10% without Indexation.
PC Note: LTCG on transfer of units & unlisted securities are not eligible for concessional rate of tax @
10% (without indexation benefit). Therefore, such LTCG is taxable @ 20% (with indexation benefit).

❖ What about Debt-oriented MF or unlisted securities?

▪ LTCG on transfer of units of debt-oriented MF & unlisted Securities are not eligible for concessional
rate of 10% (without indexation benefit). Thus taxable @ 20% with indexation.

❖ We know that entire LTCG is taxable @ 20% & STCG u/s 111A @ 15% without any exemption.
❖ But in case of Resident Individual/HUF, benefit of BEL is available if BEL is unexhausted.
❖ Unexhausted BEL means: taxable income (excluding LTCG) is less than the BEL.
❖ In such case, the shortfall* shall be deducted from LTCG/STCG u/s 111A as the case may be.
❖ Shortfall = BEL – (Taxable income – LTCG).

CQ33. Calculate the Income Tax Liability for AY 2023-24 in following cases:
Particulars A (Age 45) B (Age 62) C (Age 81) D (Age 82)
Status Resident NR Resident NR
Income other than LTCG 2,40,000 2,80,000 5,90,000 4,80,000
LTCG 15,000 [Sale of 10,000 [Sale of listed 60,000 [Sale of Rural Nil
Vacant site] Shares (STT paid)] Agricultural land]
Solution: Computation of Income Tax Liability for AY 2023-24
Particulars A (Age 45) B (Age 62) C (Age 81) D (Age 82)
Residential Status Resident NR Resident NR
BEL Rs. 2,50,000 Rs. 2,50,000 Rs. 5,00,000 Rs. 2,50,000
Asset sold Vacant site Listed shares Rural Agro. land -
LTCG Rs. 15,000 Rs. 10,000 Rs. 60,000 -
[Taxable @ 20%] [Not taxable since < 1 L] [Exempt – Not CA]
Other income Rs. 2,40,000 Rs. 2,80,000 Rs. 5,90,000 Rs. 4,80,000
Tax on LTCG (After Rs. 1,000 - - -
Adjusting BEL) (15,000 – 10,000) ×20%
On Other Income Nil Rs. 1,500 Rs. 18,000 Rs. 11,500
Less: Rebate u/s 87A Rs. 1,000 NA (since NR) - NA (since NR)
Tax Payable Nil Rs. 1,500 Rs. 18,000 Rs. 11,500
Add: HEC @ 4% Nil Rs. 60 Rs. 720 Rs. 460
Total Tax Liability Nil Rs. 1,560 Rs. 18,720 Rs. 11,960

Notes:
1. Since Mrs. B & Mr. D are non-residents, they cannot avail the higher basic exemption limit of Rs. 3,00,000
& Rs. 5,00,000 for persons over the age of 60 years & 80 years, respectively.
2. Since Mr. A is a resident whose total income does not exceed Rs. 5,00,000, he is eligible for rebate of
Rs. 12,500 or the actual tax payable, whichever is lower, u/s 87A.
3. No rebate u/s 87A is available to Non-Resident (Mr. D).

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 SOME CLARIFICATIONS REGARDING SECTION 112A
Q1. What is the point of chargeability of the tax?
Answer: Tax will be levied only upon transfer of specified LTCA on or after 1 st April 2018.

*Q2. How do we determine the cost of acquisition for assets acquired on or before 31 st Jan 2018?
Answer: COA of LTCA specified u/s 112A acquired before 1 st Feb 2018 shall be Higher of (a) or (b)
(a) Cost of Acquisition or
(b) Lower of (i) FMV of such asset or (ii) Actual Sale consideration.
Alternative Explanation as given in study material [Answer will be same]
▪ Cost of acquisition for specified LTCA acquired on/before 31st Jan 2018 → Actual cost.
▪ But if Actual cost < FMV of such asset on 31st Jan 2018 → FMV on 31st Jan 2018 = COA.
▪ Further, if FVC on transfer < FMV, then Higher of (i) FVC or (ii) Actual COA will be deemed as COA.
Ex: An equity share is acquired on 1st of Jan 2017 at Rs.100; its FMV is Rs. 200 on 31 st Jan 2018 & it is sold
on 1st April 2018 at Rs. 250. As the actual cost of acquisition < FMV on 31 st Jan 2018, FMV of Rs. 200 will be
taken as the cost of acquisition & the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).
Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, its FMV is Rs. 200 on 31st Jan 2018 & it is sold on
1st April 2018 at Rs. 150. In this case, actual cost of acquisition < FMV on 31 st Jan 2018. However, sale value
is also < FMV on 31st Jan 2018. Thus sale value of Rs. 150 will be taken as cost of acquisition & LTCG = NIL
(Rs.150 – Rs.150).
Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, its FMV is Rs. 50 on 31st Jan 2018 & it is sold on 1st
April 2018 at Rs. 150. In this case, FMV on 31st Jan 2018 < Actual cost of acquisition & thus actual cost of Rs.
100 will be taken as actual cost of acquisition & LTCG will be Rs. 50 (Rs. 150 – Rs. 100).
Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, its FMV is Rs. 200 on 31st Jan 2018 & it is sold on
1st April 2018 at Rs. 50. In this case, actual cost of acquisition < FMV on 31 st Jan 2018. Sale value < FMV on
31st Jan 2018 & also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the
cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 – Rs. 100) in this
case.

Q3. Whether the cost of acquisition will be inflation indexed?

Answer: No Indexation of Cost of acquisition.

Q4. What will be the tax treatment of transfer made on or after 1st April 2018?
Answer: LTCG > Rs. 1 Lacs arising from transfer of these assets made on after 1st April, 2018 will be taxed
at 10%. However, there will be no tax on gains accrued upto 31st January, 2018.

Q5. Whether tax will be deducted at source in case of gains by resident tax payer?
Answer: No. There will be no deduction of tax at source from the payment of LTCG to a resident tax payer.

Q6. What will be the cost of acquisition in the case of bonus shares acquired before 1 st February 2018?
Answer: CoA of bonus shares acquired before 31st January, 2018 will be determined as per section 55(2)(ac).
Therefore, FMV of bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in some
typical situations explained in Ans 5), & hence, the gains accrued upto 31st January, 2018 will continue to
be exempt.

Q7. What will be the cost of acquisition in the case of right share acquired before 1st February 2018?
Answer: CoA of right share acquired before 31st January, 2018 will be determined as per section 55(2)(ac).
Therefore, FMV of right share as on 31st Jan 2018 will be taken as cost of acquisition (except in some typical
situations explained in Ans 5), & hence, gains accrued upto 31st January, 2018 will continue to be exempt.

Q8. What will be the treatment of LTCL arising from transfer made on or after 1st April, 2018?
Answer: LTCL arising from transfer made on or after 1st April, 2018 will be allowed to be set-off & carried
forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other
LTCG & unabsorbed loss can be carried forward to subsequent eight years for set-off against LTCG.

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BASIS OF CHARGE [SECTION 56]
▪ Every Income which is not taxable under any other heads of Income is taxable u/h IFOS.
▪ Such Income should not be Exempt from Tax. (i.e it is taxable in the hands of assessee).
▪ IFOS is Residuary Head of Income & brings within its scope all the taxable incomes which fall outside
the scope of all other 4 heads of Income.

RELEVANCE OF METHOD OF ACCOUNTING

▪ Income chargeable u/h IFOS has to be computed in accordance with Method of Accounting regularly
employed by the assessee.
▪ If assessee follows cash system of accounting, income shall be taxed on cash basis.
▪ If assessee follows mercantile method of accounting, income shall be taxed on accrual basis.
PC Note: However, Deemed Dividend u/s 2(22)(e) is taxable on Payment Basis u/s 8.

FOLLOWING INCOMES ARE GENERALLY TAXABLE U/H ‘IFOS’

▪ Dividends Except Dividend u/s 115-O ▪ Interest on Income Tax Refunds.

▪ Casual & Non-Recurring Income ▪ Lotteries, Puzzles, Horse Races, Cards etc.

▪ Income from Undisclosed Sources ▪ Rent from vacant piece of Land (Ground Rent)

▪ Income from Agricultural Land OUTSIDE India ▪ Income from Sub - Letting of House Property

▪ Remuneration received by MPs/MLAs ▪ Examination Fees received by Teacher from the

Director’s Sitting Fee non-employer.

▪ Director’s Commission for Underwriting shares. ▪ Director’s Guarantee Commission from bank

▪ Gratuity received by Director (Not as Employee) ▪ Family Pension received by family of deceased

▪ Interest on Employees Contribution from URPF Person [Check Section 57]

▪ Interest received on Compensation for Compulsory Acquisition by Government of India.

▪ Compensation or any other payment received in connection with termination of his employment or the
modification of the terms & conditions of the employment [Section 56(2)(xi)]

FOLLOWING INCOMES ARE TAXABLE U/H ‘IFOS’ IF NOT TAXABLE U/H ‘PGBP’
▪ Interest on securities & Interest on Bank Deposits/Deposits with Companies. [Discussed Later]
▪ Employee Contribution to PF/SAF etc. received by Employer [If not remitted before Due Date]
▪ Income from letting out on hire Plant, Machinery, Furniture.
▪ Income from letting out → When letting of buildings is inseparable from letting of P&M/furniture.
▪ Sum received from Keyman Insurance Policy including Bonus if received by any person other than
employer & employee.
▪ Insurance Commission.
▪ Income from Royalty.

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 Basis of Charge of Dividend
▪ Dividends received from any company (domestic/foreign) is taxable at normal rates of tax (slab
rates) in the hands of shareholder.
PC Note: Dividends are always taxable u/h IFOS [whether shares are held as SIT or as Investment].

▪ Any income received i.r.o -

(a) units from the Administrator of the specified undertaking, or
(b) the specified company, or
(c) a Mutual Fund specified u/s 10(23D) shall also be taxable in the hands of shareholders.

Nature of Dividend Year of Taxability

Normal Dividend Year of Declaration

Deemed Dividend Year of Distribution/Payment

Interim Dividend Year in which dividend is unconditionally made available to shareholders

PC Note: Method of Accounting employed by the assessee is irrelevant in case of taxability of Dividends
since Section 8 specifically give the basis of charge of Dividend Income.
PC Note: Dividend declared by Indian company outside India → Deemed to accrue/arise in India.

❖ These Payments are not dividend in reality, but for the purpose of Income tax, they are deemed as
dividend so as to check tax avoidance.
❖ Following Payments/Distribution by the company to its shareholders are treated as Dividend to the
extent of ACCUMULATED PROFITS of the company.

(a) Distribution of Accumulated Profit by the company to its shareholders resulting into Release
of Company’s Asset

▪ There should be distribution from accumulated profits of the company whether capitalised or
not & not from capital.
▪ Such distribution must result in the release of company’s asset (In cash/kind).
PC Note: In case of issue of bonus shares to equity shareholders → No Assets are released since
it is capitalization of profit & thus it is not deemed as dividend.

CQ1. PCA Educator Ltd. has accumulated profits of Rs. 9 Lacs excluding capitalized profits i.e. bonus shares of
Rs. 6 Lac issued in the past. It distributed assets of Rs. 15 Lacs to the shareholders during PY 2022-23. Compute
taxable dividend if market value of the asset on the date of the distribution is Rs. 10 Lacs.
What will be your answer if market value of the distributed assets is (ii) Rs. 14,00,000; (iii) Rs. 17,00,000.
Answer: Deemed dividend shall be taxable in the hands of shareholders proportionate to their shareholding.
Shareholders shall be liable to pay tax on FMV of the asset on the date of distribution subject to the maximum
extent of accumulated profits, whether capitalized or not. Thus, deemed dividend to be taxed proportionately
in the hands of the shareholders = Rs. 10 Lacs.
(ii) Rs. 14 Lacs; (iii) Rs. 15 Lacs (accumulated profits including capitalized profit i.e bonus shares).
(b) Distribution of Accumulated profit by company in the form of Debentures/Debentures stock
or Bonus shares to Preference Shareholders
Any distribution by a company of:
▪ Bonus Debentures/Debenture Stock → to any shareholders;
▪ Bonus shares → to Preference shareholders. [No Dividend if given to Equity Shareholders]

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 PC Note: In this clause, Release of asset is not necessary.
Taxable Amount: Bonus shares/Debenture: FMV is taxable in the hands of shareholders.

CQ2. Mr. X is holding 100 preference share in ABC Ltd. Company has issued him 100 bonus shares having
market value of Rs. 1,200. Rs. 1,200 will be deemed as dividend to the extent of accumulated profits.
(c) Distribution of accumulated profit at the time of liquidation
▪ Any distribution by the company on liquidation shall be deemed as dividend to the extent of
accumulated profit (Capitalized/not) immediately before its liquidation.
PC Note: Distribution made out of Profits after Liquidation → Repayment towards capital.
(d) Distribution on Reduction of Share Capital by the Company
▪ Any distribution by the company on Reduction of its share capital to the extent of Accumulated
profits (whether capitalized or not) is deemed as Dividend.

CQ3. Mr. X is holding 1000 shares of ABC Ltd. of Rs. 10 each & company has reduced its share capital &
has refunded Rs. 5 per share to the shareholders, the amount so received by the shareholders shall be
considered to be dividend to the extent of accumulated profit.
(e) Distribution of Accumulated Profits by way of Loan/Advance
Any payment by Closely held company by way of Advance/Loan to:
1. Shareholders beneficially holding at least 10% Equity shares in the company.
2. Any Person on behalf of such shareholders/for benefit of such shareholder.
3. Any Concern in which such shareholder has substantial interest (atleast 20% shares)
4. Any Concern in which such shareholder is Member/Partner.

CQ4. ABC Pvt. Ltd. a closely held company has general reserves of Rs. 7 lacs & current profits of Rs. 2 lacs.
Company has given a loan of Rs. 3 lacs to one such shareholder Mr. X. In this case, it will be considered as
dividend in the hands of Mr. X. However, if loan given by the company is Rs. 10 Lacs, dividend = Rs. 9 lacs.

Exception to Section 2(22)(e)

1. Money lending is substantial business of company & loan is given in ordinary course of business.
2. Set-off of Dividend → Where any payment (loan) has been treated as dividend & subsequently
company declares dividend & dividend so paid is adjusted (set-off) by the company against the
previous borrowing, adjusted amount will not be again treated as a dividend.

CQ5. PCA Educators Pvt. Ltd gave a loan of Rs. 5,00,000 to Mr. Shubham who had 10% shares in the
company. The loan is still outstanding. Thereafter, company declared dividend & has to pay a dividend of
Rs. 1,00,000 to Mr. Shubham & such dividend is set off against such loan. In such case, Rs. 5,00,000 shall
be deemed dividend as per section 2(22)(e). However, dividend of Rs. 1,00,000 which has been set off
against such loan would not be liable to tax in the hands of Mr. Shubham.
If the amount distributed as dividend is not set off against the loan, shareholder shall be liable to pay tax
on such amount paid also. Further, if such dividend has been declared after the loan is refunded by Mr.
Shubham, then he would be liable to pay tax on dividend of Rs. 1,00,000.
Following Payments shall not be treated as Deemed Dividend:
(a) Payment on Buy-back of shares.
(b) Dividend does not include any distribution of shares in the scheme of Demerger.
(c) Trade Advances in the nature of commercial transactions → Not a Deemed Dividend.

CQ6. Rahul holding 28% of equity shares in a company, took a loan of Rs. 5 lacs from the same company.
On the date of granting loan, company had accumulated profit of Rs. 4 lacs. Company is engaged in some
manufacturing activity.
(i) Is the amount of loan taxable as deemed dividend in the hands of Rahul, if the company is a company
in which the public are substantially interested?
(ii) What would be your answer, if the lending company is a private limited company (i.e. a company in
which the public are not substantially interested)? [ICAI SM Q1]

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 Solution: Any payment by a company, other than a company in which the public are substantially
interested, of any sum by way of advance or loan to an equity shareholder, being a person who is the
beneficial owner of shares holding not less than 10% of the voting power, is deemed as dividend u/s
2(22)(e), to the extent the company possesses accumulated profits.
(i) Provisions of section 2(22)(e), however, will not apply where the loan is given by a company in which
public are substantially interested. Loan is not taxable as deemed dividend to Rahul.
(ii) However, if the loan is taken from a private company (i.e. a company in which the public are not
substantially interested), which is a manufacturing company & not a company where lending of
money is a substantial part of the business of the company, then, the provisions of section 2(22)(e)
would be attracted, since Rahul holds more than 10% of the equity shares in the company.
Amount chargeable as deemed dividend cannot, however, exceed the accumulated profits held by the
company on the date of giving loan. Therefore, amount taxable as deemed dividend in the hands of
Rahul would be limited to accumulated profit (Rs. 4 lacs) & not amount of loan (i.e.Rs. 5 lacs).

MEANING OF ACCUMULATED PROFITS [To be Read Once]

1. It includes all profits upto the date of Distribution/Liquidation (if company is in liquidation).
2. Accumulated profit includes capital profits (Bonus shares issued) only for clause [a-d] & not for clause
‘e’. Thus, Capitalized profit is not considered for Section 2(22)(e).
3. It includes tax-free Income (Agricultural Income). However capital receipts are included in accumulated
profits only if they are taxable u/h “Capital Gains” in the hands of recipient company.
4. Does not includes Provision for taxation/dividend, depreciation reserves (provisions for outsiders)
5. If Government/Government company has compulsorily acquired the company → Accumulated profits do
not include any profits prior to 3 successive PYs immediately preceding the PY of compulsory acquisition.
6. In case of Amalgamated company → Accumulated Profits of amalgamating company on date of
amalgamation shall be included in accumulated profits of amalgamated company.

➢ It includes casual income in the nature of winning from lotteries, crossword puzzles, horse races,
card games & other games of any sort, gambling, betting etc.
➢ Taxable @ 30% + SC (if any) + 4% HEC on tax u/s 115BB.
➢ No deduction for any Expenditure is allowed from such income.
➢ Deduction under Chapter VI-A is not allowable from such income.
➢ Adjustment of unexhausted BEL is not permitted against casual income.

➢ Securities held as Investment → Interest from such securities is taxable u/h IFOS.
➢ Securities held as Stock in Trade → Interest from such securities is taxable u/h PGBP.

Grossing up of Winning from Lottery/Interest on securities

▪ If net amount is given, then it shall be grossed up. Tax will be levied on Gross Income.
𝐍𝐞𝐭 𝐚𝐦𝐨𝐮𝐧𝐭
▪ Gross amount =
[𝟏−𝐓𝐚𝐱 𝐑𝐚𝐭𝐞]

Exceptions: Following Interest Income would be EXEMPT u/s 10(15):

(a) Interest on Post Office Savings Bank Account is exempt from tax only to the extent of:
Individual A/c → Rs. 3,500; Joint A/c → Rs. 7,000.
(b) Interest payable to any foreign bank on deposit made by it with scheduled bank (with RBI approval)
(c) Interest payable by:
(i) Public sector companies on bonds/debentures notified by CG in the official gazette.

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 Interest from the following bonds is Exempt: India Infrastructure Company Ltd & tax-free Bonds
of Indian Railway Finance Corporation Ltd. (IRFCL), NHAI, RECL, Housing & Urban Development
Corporation Ltd. (HUDCL), Power Finance Corporation (PFC), Jawaharlal Nehru Port Trust, Dredging
Corporation of India Limited, Ennore Port Ltd & Indian Renewable Energy Development Agency Ltd.
(ii) GOI on deposit made by employee of CG/SG/Public sector company in accordance with notified
scheme of moneys due to him on account of his retirement.
(d) Bhopal Gas Victims: Interest on deposits made for benefit of victims of Bhopal Gas Disaster in
account with RBI or any public sector bank notified by CG → Exempt u/s 10(15).
(e) Interest on Gold Deposit Bond/Certificates issued u/s Gold Monetization Scheme, 2015.
(f) Interest on bonds issued by (a) Local authority; (b) State Pooled Finance Entity notified by CG.
Interest from “Tax-Free Pooled Finance Development Bonds” → Exempt u/s 10(15).
(g) Interest received by NR/RNOR from deposit in Offshore Banking Unit referred u/s 2(u) of SEZ Act,
2005 made on/after 1.4.2005.
(h) Interest receivable by NR from unit located in IFSC i.r.o moneys borrowed by it on/after 1.9.2019.

Interest from non-SLR Securities of Banks: Whether chargeable u/h PGBP or IFOS?
▪ Investments made by banking concern are part of business of banking.
▪ Thus, income arising from such investments is attributable to business & thus fall u/h PGBP.
▪ Therefore, expenses relatable to investment in non-SLR securities → Allowed as deduction u/s 57(i).

→
1 Applicability of Section 56(2)(x)
▪ Section 56(2)(x) would apply only if Gift (Property) received is a Capital asset for recipient.
▪ It would not apply the property received is SIT/RM/CS of the recipient.
▪ Only transfer of capital asset for inadequate/without consideration would attract sec 56(2)(x).

2 Taxability

SN Nature of Gift Taxability in the hands of Recipient

1 Cash/Cheque/Draft If Total Amount of Money received from one or more person during
(All Transactions) a PY > Rs. 50,000 → Whole Amount of Money received is Taxable

PC Note: If Money received is less than Rs. 50,000 → Nothing will be taxable.

2 Receipt of MOVABLE PROPERTY (All Transactions)

Free (Without If Aggregate FMV of all Movable properties received > Rs.50,000
Consideration)
→ Whole amount of FMV of Movable Properties received is taxable.

Concessional If Aggregate Discount on all Movable properties received > Rs.50,000

→ then Total Discount received is taxable.

PC Note: If Value/Discount received is less than Rs. 50,000 → Nothing will be taxable.

3 Receipt of IMMOVABLE PROPERTY (Single Transactions)

Free If SDV > Rs. 50,000 → Whole SDV is taxable.

Concessional If Discount > Higher of (i) Rs. 50,000 or (ii) 10% of Consideration →
Discount is taxable.

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 3 FOLLOWING GIFTS ARE NOT TAXABLE IRRESPECTIVE OF THEIR AMOUNT
While calculating the above limit of Rs 50,000, following amount shall not be considered.
▪ Gifts from Relatives ▪ In Contemplation of Death of the payee/donor.
▪ On occasion of marriage. ▪ From Local Authority.
▪ Under a Will/ By Inheritance ▪ From Registered Charitable trust referred u/s 10(23C).
▪ Gift received by a trust from Individual. (Trust must be created for benefit of relative of individual)
▪ Transaction not regarded as transfer u/s 47(i)/(iv)/(v)/(vi)/(vib)/(vid)/(vii).
✓ Transfer b/w HC & its WOS; or Transfer b/w subsidiary company & its 100% Indian HC.

4 MEANING OF RELATIVES
For Individual ▪ Spouse of the individual + Brother/Sister of the individual & his/her spouse.
▪ Brother/sister of either of the parents of the individual.
▪ Any lineal ascendant or descendant of individual & spouse of the individual.
▪ Spouse of any of the persons referred to above.
For HUF Any Member of HUF
PC Note: Which Value is to be considered if DOA & DOR are different: Refer Capital Gains.

CQ7. Mr. A, a dealer in shares, received the following without consideration during PY 2022-23 from a friend B:
(i) Cash gift of Rs. 75,000 on his marriage, 15th April, 2022.
(ii) Bullion, the FMV of which was Rs. 60,000, on his birthday, 19th June, 2022.
(iii) A plot of land at Faridabad on 1st July, 2022; SDV is Rs. 5 lacs on that date. Mr. B had purchased it in April, 2021.
(iv) Mr. A purchased from his friend Mr. C, who is a dealer in shares, 1000 shares of X Ltd. @ Rs. 400 each on 19th June,
2022, FMV of which was Rs. 600 each. Mr. A sold these shares in the course of his business on 23rd June, 2022.
(v) On 1st Nov 2022, Mr. A took possession of building booked by him two years back at Rs. 20 lacs. SDV of the
property as on 1st Nov 2022 was Rs. 32 lacs & on the date of booking was Rs. 23 lacs. He had paid Rs. 1 lac by A/c
payee cheque as down payment on the date of booking.
On 1st March, 2023, he sold the plot at Faridabad for Rs. 7 lacs.
Compute the income of Mr. A chargeable u/h “IFOS” & “Capital Gains” for AY 2023-24. [ICAI SM Q3]
Solution: Computation of “Income from other sources” of Mr. A for AY 2023-24
SN Particulars Rs.
(i) Cash gift since received on occasion of his marriage, it will not be taxable even if > Rs. 50,000. Nil
(ii) Since bullion is included in the definition of property, therefore, when bullion is received 60,000
without consideration, it is taxable since the aggregate FMV > Rs. 50,000
(iii) SDV of plot of land at Faridabad, received without consideration, is taxable u/s 56(2)(x) 5,00,000
(iv) Shares of X Ltd. purchased from Mr. C, a dealer in shares, is not taxable as it is SIT of Mr. A. -
(v) Difference b/w SDV on date of booking of Rs. 23 lacs & ASC of Rs. 20 lacs paid is taxable u/s 3,00,000
56(2)(x) since difference > Rs. 1 lac [being higher of Rs. 50,000 & 10% of consideration].
PC Note: SDV on date of booking is taken since Rs. 1 lac was paid by A/c payee cheque on the date of booking.
Income from other Source 8,60,000
Computation of “Capital Gains” of Mr. A for AY 2023-24
Sale Consideration 7,00,000
Less: COA [deemed to be SDV charged to tax u/s 56(2)(x) as per section 49(4)] (5,00,000)
Short-term capital gains 2,00,000

CQ8. Discuss the taxability or otherwise of the following in the hands of the recipient u/s 56(2)(x). [ICAI SM Q4]
(i) Akhil HUF received Rs. 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister). Akhil is Karta of HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to HUF without consideration. SDV = 9 Lacs.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25 th marriage anniversary.
FMV on that date was Rs. 100 per share. He received jewellery of Rs. 45,000 (FMV) from his nephew on same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks. FMV of the car is Rs. 5,25,000.

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Solution:
(i) Taxable 75,000 Sum of money exceeding Rs. 50,000 received without consideration from non-relative
is taxable u/s 56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of Akhil HUF,
since she is not a member of Akhil HUF.
(ii) Non- taxable Nil Immovable property received without consideration by a HUF from its relative is not
taxable u/s 56(2) (x). Since Nitisha is a member of the HUF, she is a relative of the HUF.
However, income from such asset would be clubbed in the hands of Nitisha u/s 64(2).
(iii) Taxable 55,000 As per section 56(2)(x), if aggregate FMV of movable property received without
consideration exceeds Rs. 50,000, whole of aggregate value shall be taxable. In this
case, aggregate FMV of shares (Rs. 10,000) & jewellery (Rs. 45,000) exceeds Rs. 50,000.
Hence, entire amount of Rs. 55,000 shall be taxable. [Nephew is not a relative].
(iv) Non- taxable Nil Car is not a capital asset & therefore, same shall not be taxable.

CQ9. Mr. Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is a dealer
in automobile spare parts for Rs. 90 lacs on 1.1.2023, when SDV was Rs. 150 lacs. The agreement was, however,
entered into on 1.09.2022 when SDV was Rs. 140 lacs. Mr. Hari had received a down payment of Rs. 15 lacs by a
crossed cheque from Rajesh on the date of agreement. Discuss the tax implications in the hands of Hari & Rajesh,
assuming that Mr. Hari has purchased the building for Rs. 75 lacs on 12th July, 2021.
Would your answer be different if Hari was a share broker instead of a property dealer? [ICAI SM Q5]
Solution: Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of Mr. Hari In the hands of Mr. Rajesh
▪ Provisions of section 43CA would be attracted as ▪ Since Mr. Rajesh is a dealer in automobile spare
building is his SIT & he has transferred it for a parts, building purchased would be a capital
consideration < SDV; & SDV > 110% of consideration. asset in his hands.
▪ u/s 43CA, option to take SDV on DOA can be exercised ▪ Section 56(2)(x) would be attracted in the hands
only if whole/part of consideration has been received of Mr. Rajesh who has received immovable
on or before DOA by way of A/c payee cheque or draft property, being a capital asset, for inadequate
or by use of ECS through bank A/c or through such consideration & difference b/w consideration &
other prescribed electronic mode on/before DOA. SDV > Rs. 4,50,000, being the higher of Rs. 50,000
▪ Since, down-payment of Rs. 15 lacs is received on date & 10% of consideration.
of agreement by crossed cheque & not A/c payee ▪ Therefore, Rs. 60 lacs [Difference b/w SDV on
cheque, option cannot be exercised. DoR - Actual Consideration] (Rs. 150 lacs - Rs. 90
▪ Therefore, Rs. 75 lacs [Difference b/w SDV on date of lacs) would be taxable u/s 56(2)(x) in the hands
transfer (i.e., 150 lacs) & purchase price (i.e. Rs. 75 of Mr. Rajesh, since payment is made by crossed
lacs), would be chargeable as business income in the Cheque & not A/c payee cheque/draft or ECS or
hands of Mr. Hari, since SDV > 110% of consideration. through such other prescribed electronic mode.

Case 2: Tax implications if Mr. Hari is a stock broker

In the hands of Mr. Hari In the hands of Mr. Rajesh
▪ If Mr. Hari is a stock broker, building would ▪ There would be no difference in the taxability in
represent his capital asset & not SIT. Sec 50C would the hands of Mr. Rajesh, whether Mr. Hari is a
be attracted in the hands of Mr. Hari. property dealer or a stock broker.
▪ STCG = Rs. 75 lacs [difference b/w SDV on DOR (i.e., ▪ Therefore, provisions of section 56(2)(x) would
Rs. 150 lac) & purchase price (i.e., Rs. 75 lac). apply to Mr. Rajesh who has received immovable
▪ It may be noted that u/s 50C, option to adopt the property, for inadequate consideration.
SDV on DOA can be exercised only if whole/part of ▪ Therefore, Rs. 60 lacs, being difference b/w SDV of
consideration has been received on/before DOA by the property on DOR (i.e., Rs. 150 lacs) & ASC (i.e.,
way of A/c payee cheque or draft or by use of ECS Rs. 90 lacs) would be taxable u/s 56(2)(x) in the
through a bank A/c on/ before DOA hands of Mr. Rajesh.

PC Note: As per section 43CA, SDV on the date of agreement can be adopted, if whole or part of consideration is
received otherwise than by way of cash on or before the date of agreement. However, both section 50C & 56(2)(x)
permit adoption of SDV on date of agreement only if whole/part of consideration is received/paid by way of
account payee cheque or account payee bank draft or by use of ECS through a bank A/c.

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155
 Date of forfeiture Tax Treatment
A. Advance money forfeited upto 31.3.2014 Reduce from original COA of capital asset.
B. Advance money forfeited on/after 1.4.2014 Taxable u/h IFOS. Such advance would not be reduced
from the cost of acquisition for computing capital gains.
PC Note: Date of Forfeiture of Advance Money is Relevant & not date of receipt of advance money.

➢ Taxable Amount: (in the hands of closely held company) = Issue Price of Share – FMV of share.

Exceptions: If consideration for issue of shares is received by:

(i) Venture Capital Undertaking from Venture Capital Fund (VCF)/Venture Capital Company (VCC)
(ii) Company from a class of persons as notified by CG for this purpose.

CQ10. IP - Issue Price; FV – Face Value; FMV – Fair Market Value.

Name FV IP FMV Applicability of section 56(2)(viib)
A Ltd 100 120 120 IP > FV. Thus shares are issued at premium & thus 56(2)(viib) is attracted.
Taxable Amount = IP – FMV = Rs. 120 – Rs. 120 = Nil.
Note: Even if Sec 56(2)(viib) is attracted, there is no tax since IP = FMV.
B Ltd 100 100 120 IP = FV. Thus shares are NOT issued at premium & thus 56(2)(viib) is NOT attracted.
Thus, no tax even if shares are issued above FMV.
C Ltd 100 110 90 IP > FV. Thus shares are issued at premium & thus 56(2)(viib) is attracted.
Taxable Amount = IP – FMV = Rs. 110 – Rs. 90 = Rs. 20 per share.
D Ltd 100 98 100 IP < FV. Thus shares are NOT issued at premium & thus 56(2)(viib) is NOT attracted.
Thus, no tax even if shares are issued above FMV.

➢ Taxable in PY of Receipt irrespective of the year for which it is paid & irrespective of the method of
accounting followed by the assessee [Section 145A].

CQ11. During PY 2022-23, Mr. Gagan received Rs. 5,32,000 towards interest on compensation from SG i.r.o.
compulsory acquisition of his land effected during FY 2012-13. Above amount include interest relating to FYs:
FY 2015–16: Rs. 1,58,000 FY 2016-17: Rs. 1,78,000 FY 2017-18: Rs. 1,96,000
He incurred legal expenses of Rs. 75,000 in PY 2018-19 to receive interest on such enhanced compensation.
Determine how much Interest on enhanced compensation would be taxable for AY 2023-24? Can he claim
deduction i.r.o legal expenses from the amount of interest on enhanced compensation? [N14/M17 &M14]
Solution:
▪ Section 145A provides that interest received on enhanced compensation shall be deemed to be the income
of the PY of receipt, irrespective of method of accounting followed & irrespective of FY to which it relates.
▪ 50% of such income shall be allowed as deduction by virtue of section 57(iv). Therefore, he cannot claim
deduction i.r.o. legal expenses incurred to receive interest on enhanced compensation from such income.
Computation of interest on enhanced compensation taxable u/h ‘IFOS’ for AY 2023-24 Rs.
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,32,000
Less: Deduction u/s 57(iv) (50% x Rs. 5,32,000) 2,66,000
Taxable interest on enhanced compensation 2,66,000

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1 Interest on Loan: Interest on loan for purchasing the shares can be claimed as a deduction. Interest
can be claimed even if no income is earned by way of dividend on such shares.
Dividend or income i.r.o. units of mutual fund specified u/s 10(23D) or of specified company:
Interest expenditure to earn such income is allowed as deduction subject to a maximum of 20% of
dividend income included in the total income, without deduction under this section.
PC Note: Deduction on account of interest shall not exceed 20% of dividend income or income from
units included in the total income for that PY without deduction u/s 57 (i.e before deduction).
2 Interest on Securities: Commission & Remuneration paid to any person to realise such interest if
such income is taxable in the hands of recipient [Ex: Collection charges paid to bank/interest on
loan]
3 Family Pension → Deduction = Lower of (a) Rs. 15,000 or (b) 1/3rd of Family Pension Received.
4 Interest on compensation for Compulsory acquisition = 50% of amount received during PY.
5 In case of income from letting of P&M/furniture on hire with/without building:
Following items are allowed as deductions in computation of income:
(a) Amount paid for current repairs to P&M/furniture.
(b) Insurance premium paid against risk of damage/destruction of P&M/furniture.
(c) Normal depreciation allowance for P&M/furniture due.
6 Employee Contribution remitted before due date by the Employer.
Employee contribution to PF is treated as income in the hands of Employer. Such employee’s
contribution is allowed as deduction to employer if remitted before Due Date as per the relevant law.
7 Any other Revenue expenditure incurred wholly & exclusively for earning such Income.

1 Personal Expenses Any personal expense of the assessee

2 Casual Income No deduction from any casual income.
PC Note: Activity of owning & maintaining race horses → Expenses incurred
shall be allowed. Such loss shall be allowed to be carried forward in
accordance with the provisions of section 74A.
3 Income Tax Any Income-tax paid/payable
4 Interest Payable outside India if No TDS or after TDS, not paid to government
5 Salaries Payable outside India if No TDS or after TDS, not paid to government
6 Payment to 30% of Sum paid shall be disallowed if -
Residents ▪ Tax is NOT deducted or;
▪ Tax after deduction is NOT paid before DD of filing ROI u/s 139(1).
7 Payment to Relative Excessive payment shall be disallowed. [Same as section 40A(2)]
8 Cash Payment Same as section 40A(3).

➢ The provisions of section 41(1) are made applicable to the computation of income u/h IFOS.
➢ Thus, any income u/s 41(1) which comes under the purview of IFOS shall be taxable u/h IFOS.

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 MASTER QUESTION ON “INCOME FROM OTHER SOURCES”
MQ1. Mr. PC furnishes the following particulars of his incomes for PY 2022-23. Compute his IFOS for AY 2023-24.
1 Dividend on equity shares Rs. 6,000
2 Dividend on preference shares Rs. 5,000
3 Dividend from a foreign company Rs. 10,000
4 Dividends received from Assam Tea Ltd. (60% of the income is agricultural Income) Rs. 25,000
5 Income from agricultural land in India Rs. 12,000
6 Income from agricultural land in Pakistan Rs. 10,000
7 Interest on Securities (Net) Rs. 18,000
8 Winning from Horse-Race (Gross) Rs. 13,000
9 Rent from sub-letting a house Rs. 40,000
10 Rent payable by Mr. Mohan for the sub-let house Rs. 25,000
11 Other expenses on sub-let-house Rs. 5,000
12 Income from letting on hire of building & machinery under one composite lease Rs. 22,000
13 Interest on Bank Deposits Rs. 4,000
14 Directors sitting fees received Rs. 10,000
15 Ground rent received from Land in Pathankot Rs. 6,000
16 Income from undisclosed sources Rs. 65,000
17 Amount received on account of winnings from lotteries Rs. 25,000
Following deductions are claimed by him
(a) Allowable depreciation on Building & Machinery Rs. 6,000
(b) Fire Insurance on Building & Machinery Rs. 1,000
(c) Amount spent for buying lottery ticket Rs. 5,000
Solution: Computation of Income u/h IFOS in the hands of Mr. PC
Dividend on equity shares Rs. 6,000
Dividend on preference shares Rs. 5,000
Dividend from a foreign company Rs. 10,000
Dividends received from Assam Tea Ltd. (Since it is Indian company) Rs. 25,000
Income from agricultural land in India Exempt
Income from agricultural land in Pakistan Rs. 10,000
Interest on Securities (after grossing up @ 10%) [18000/90%] Rs. 20,000
Winning from Horse-Race [Gross amount is given, so no need to gross up again] Rs. 13,000
Rent from sub-letting a house [Rs. 40,000 – 25,000 – 5,000] Rs. 10,000
Income from letting of machinery & building after Expense [Rs. 22,000 - (Rs. 6,000 + Rs. 1000)] Rs. 15,000
Interest on Bank Deposits Rs. 4,000
Directors sitting fees received Rs. 10,000
Ground rent received from Land in Pathankot Rs. 6,000
Income from undisclosed sources – Taxable @ 78% Rs. 65,000
Amount received on account of winnings from lotteries Rs. 25,000
Notes:
(i) Amount spent for buying lottery ticket is not deductible. (Winning from lottery is taxable @ 30%)
(ii) Agricultural income from land situated in India is exempt u/s 10.

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➢ If any person transfers the income from any asset without transferring the asset, such transferred
Income is included in Total Income of the transferor.
➢ Transfer can be Revocable or Irrevocable.
Ex: Mr. A confers the right to receive rent i.r.o his house property on his wife, Mrs. A, without transferring
the house itself to her. In this case, the rent received by Mrs. A will be clubbed with the income of Mr. A.

CQ1. Mr. Vatsan has transferred income arising from a godown to his son through a duly registered
document, without transferring the godown. In whose hands will rental income from godown be charged?
[ICAI SM Q1]
Answer: According to Section 60 transfer of income without transfer of asset is chargeable in the hands of
the transferor. Thus, rental income from godown will be charged in the hands of Mr. Vatsan.

➢ If any Asset is transferred under ‘Revocable Trust’, Income from such asset is included in TI of transferor.
➢ Meaning of Revocable Transfer: A transfer shall be deemed to be Revocable if Transfer:
(a) Contains ANY Provision for RE-TRASNFER (directly/indirectly) of whole/part of the Asset
or Income to the transferor, during the Life-Time of Beneficiary or Transferee.

Examples:
1. X transfers a house property to a trust for the benefit of A & B. However, X has a right to revoke
the trust during the lifetime of A or B. It is a revocable transfer & income arising from house
property shall be included in the hands of X.
2. X transfers a house property to A. However, X has a right to revoke transfer during the lifetime
of A. It is a revocable transfer & income arising from the house property is taxable in the hands
of X.
3. X transfers an asset. As per T&C of transfer, he has a right to utilize the income of the asset for
his benefit. However, he has not exercised this right as yet. Income of the asset would be
taxable in the hands of X, even if he has not exercised the aforesaid right.
(b) Gives Right to the Transferor to RE-ASSUME Power (directly/indirectly) over the
whole/part of the Asset or Income during the Life-Time of Beneficiary or Transferee.

Ex: X transfers an asset. As per T&C of transfer, he has a right to use the asset for the personal
benefits of his family members whenever he wants. Till date, he has not exercised this right. It is
a revocable transfer. The entire income from the asset would be taxable in the hands of X.

➢ Exceptions [Section 62] → Income will NOT be clubbed even in case of revocable Transfer
 If transfer is not revocable during the Lifetime of Beneficiary/Transferee. In such cases,
Income shall be taxable in the hands of transferee provided transferor derives no benefit.

Ex: R transfers his house property to a trust for the benefit of G till his death. In this case, this transfer is
irrevocable till the death of G. Thus, till the death of G, Income from house property is taxable in the hands of
Transferee (trust). However, on death of G, income from such house shall be included in total income of R since
on that date the transfer has become revocable. In above case, if R had reserved a right to get back house or its
income from G during lifetime of G, then, such transfer shall be revocable & Income from such house shall be
taxable in hands of R from beginning.

PC Note: Income arising from revocable transfer of the asset/income is taxable when the power to
revoke the transfer arises even if the power to revoke has not been exercised by transferor.

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➢ Any Remuneration received by Spouse from a Concern in which other Spouse has Substantial
Interest, shall be clubbed in the hands of the spouse who has Substantial Interest.
➢ NO CLUBBING → If Remuneration is received by Spouse due to his/her Qualifications.
➢ Substantial Interest: Individual is deemed to have substantial interest in concern if Individual along
with his relatives beneficially holds 20 % or more equity shares at any time during PY.
➢ Relative = Husband, wife, brother or sister or Lineal Ascendant or Descendant of the individual.

Ex: Mr. X is a partner in a partnership concern & is entitled to 50% share of the profit of the firm. Mrs. X is
employed as the General Manager of the firm & is getting a salary of 25,000 p.m. Taxable salary of Mrs. X
will be clubbed with TI of Mr. X u/h ‘Income from salaries’. However, if Mrs. X is receiving the salary on
account of her technical or professional knowledge or experience, then the salary would not be clubbed.

CQ2. Mr. X is a CA in practice. He engages his wife Mrs. X as an employee for audit works & pays a sum of
Rs. 20,000 p.m. towards salary. Mrs. X before marriage has completed her CA articleship & is presently
awaiting result of the final examination. Examine the tax implication.
Answer: Where the spouse of the assessee has qualification, remuneration received will not be clubbed.
Thus, Income of Mrs. X should not be clubbed with that of Mr. X.

PC Note:
1. Clubbing is Mandatory, even if such clubbing in some case results into benefit to the assessee.
2. If both Husband & Wife have Substantial Interest & both are in Receipt of Remuneration without
qualification from the Same Concern → Remuneration of other spouse will be clubbed in total
income of Husband/Wife whose Total Income excluding such remuneration is Greater.
3. Once the clubbing is done in the hands any spouse (Say X) since his Income was greater in 1 st year
of clubbing than Income of other spouse (Mrs. X), Income of Mrs. X shall be clubbed in the hands
of X in subsequent years also even if Income of Mrs. X is greater in subsequent year.

CQ3. Mr. A & Mrs. A, whose other incomes are Rs. 5,60,000 & Rs. 5,80,000 respectively are both employed
in X Ltd & getting remuneration of Rs. 20,000 p.m. & Rs. 18,000 p.m. respectively. Their shareholding in the
company along with relatives are Mr. A- l0%, Mrs. A - 5%, Mr. A’s brother - 6%, Mrs. A’s brother - 8%.
In this case A & Mrs. A both have substantial interest determined as:
▪ Mr. A: His own share 10% + 5% (Mrs A’s share) + 6% (A’s brother’s share) = 21%.
▪ Mrs. A: Her own share 5% + 10% (A’s share) + 8% A’s brother’s share = 23%.
Thus, the income of Mr. A from X Ltd. will be clubbed in the hands of Mrs. A.
Mrs. A’s Total Income
Salary Income (18,000x 12) 2,16,000
A’s Salary Income (20,000 x 12 = 1,20,000) 2,40,000 4,56,000
Other Income 5,80,000
Gross total income 10,36,000
A’s Total Income
Other incomes 5,60,000
Gross Total Income 5,60,000

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 ➢ If Individual transfer any asset (other than house property) to his/her spouse for inadequate
consideration, Income from such asset shall be included in Total Income of the transferor.
Ex: Mr. PC transfers debentures of X ltd to his wife for inadequate consideration. Interest income on such
debentures shall be clubbed in the hands of Mr. PC.
PC Note:
1 Transfer of House Property by Individual to Spouse for Inadequate Consideration → Transferor
shall be deemed as Owner of House Property u/s 27 & Income from such House Property is taxed
in the hands of the transferor as he is deemed owner as per section 27.
PC Note: CAPITAL GAIN on Transfer of such House Property → Clubbed in hands of Transferor.

2 Marriage should exist both at the time of Transfer & when Income is Accrued. [Transfer before
Marriage & After Divorce → No Clubbing]

3 If Any Property is acquired by the Wife out of the Pin Money → No Clubbing.

4 Transfer should be for inadequate Consideration. [Adequate Consideration → No Clubbing].

 Transfer of Asset in connection with Agreement to Live Apart → Deemed to be transfer with
Adequate Consideration & thus No Clubbing.
 If Consideration is Payable in Parts → Only Proportionate Income shall be clubbed.

5 CHANGE IN IDENTITY OF TRANSFERRED ASSET: If transferred asset has changed the shape
& Identification, then Income from such Changed Asset shall be Clubbed.
Ex: Mr. PC gifted shares to his wife. His wife sold the shares & acquired a house which was let out, the
income from house property shall be clubbed in the hands of Mr. PC.
6 NO CLUBBING ON ACCRETION OF INCOME
Income from Transferred Asset is to be Clubbed. But Income on Income is Not Clubbed: Income
derived on the accretion of transferred property cannot be clubbed except in case of Minor Child.

Ex: X transfer 10,000 bonds of IDBI to his wife Mrs. X. Mrs. X receive interest of 70,000 p.a on the bonds. Rs.
70,000 is to be clubbed in the hands of Mr. X. However, if Mrs. X accumulates 50,000 out of the interest income
& deposits it with the company at an interest of 10% p.a, then interest of Rs. 5,000 p.a received by her on the
deposit will not be clubbed in Income of Mr. X.

➢ If Individual Transfers any Asset to his/her son’s wife for Inadequate Consideration → Income from
such Asset shall be clubbed in Total Income of the Transferor.
Ex: Mr. PC transfers debentures of X ltd to his son’s wife for inadequate consideration. Interest income on
such debentures shall be clubbed in the hands of Mr. PC.
PC Note: All Provisions relating to Transfer of Asset to Spouse shall also apply to Son’s Spouse.

➢ When Individual transfers any assets to Any Person/AOP for Inadequate consideration, Income
from such transferred Assets shall be clubbed in the Income of the transferor (to the extent of benefit
which accrues to the spouse/son’s wife).

Ex: Mr. X transfers a house to Mr. Y with a direction that 50% of Rental Income is to be used for the benefit
of his wife Mrs. X & 50% for others, then Rental Income to the extent of 50% shall be included in TI of X.

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 ➢ All Income which accrues to Minor Child → Clubbed in the hands of Either of his Parents.
➢ Clubbing in Father’s or Mother’s Hands: Income of Minor shall be clubbed in the hands of that
Parent whose Total Income (excluding Income of Minor) is Greater.
➢ If Marriage of his Parents does not Subsist: Income shall be clubbed in the hands of that Parent
who maintains the minor child in the PY.
➢ If Both Parents are Dead: Income of Minor cannot be assessed in hands of his grandparents.
➢ Rs. 1500 Exemption to Minor’s Parent u/s 10(32):
Parent in whose Income, the income of Minor is clubbed will get exemption of (a) Rs. 1,500 OR (b)
Amount of Income Clubbed (whichever is less) i.r.o. each minor child.

NO CLUBBING:
1. Income has been earned by the Minor due to his own Skills.
2. Minor is suffering from disabilities referred in Section 80U.

PC Note:
1. Section 64(1A) apply to Minor Married Daughter. Income of Minor Married Daughter is also clubbed.
2. If Minor attains Majority during PY → Income till the date he was minor in that PY is clubbed.

PC Analysis:
 If asset transferred to a minor child (not being a minor married daughter) without consideration or for
inadequate consideration is a house property, then, by virtue of section 27(i), transferor-parent will be
the deemed owner of the house property. Therefore, income from house property will be taxable in the
hands of transferor-parent, being deemed owner and not in the hands of the minor child.
Consequently, clubbing provisions under section 64(1A) would not be attracted i.r.o. such income,
due to which the benefit of exemption u/s 10(32) (discussed above) cannot be availed against such
income.
 However, if house property is transferred by a parent to his or her minor married daughter, without
consideration or for inadequate consideration, then, section 27(i) is not attracted. In such a case, the
income from house property will be included u/s 64(1A) in the hands of that parent, whose total
income before including minor child’s income is higher; and benefit of exemption u/s 10(32) can be
availed by that parent i.r.o. the income so included.

CQ7. Mr. A has three minor children – two twin daughters, aged 12 years & one son, aged 16 years. Income of the
twin daughters is Rs. 2,000 p.a. each and that of the son is Rs. 1,200 p.a. Mrs. A has transferred her flat to her minor
son on 1.4.2022 out of natural love and affection. Flat was let out on same date & rental income from the flat is Rs.
10,000 p.m. Compute the income i.r.o. minor children, to be included in the hands of Mr. A and Mrs. A u/s 64(1A)
(assuming that Mr. A’s total income is higher than Mrs. A’s total income, before including income of minor children).
Solution: Taxable income, i.r.o. minor children, in the hands of Mr. A is:
Particulars Rs. Rs.
Twin minor daughters [Rs. 2,000 × 2] 4,000
Less: Exempt under section 10(32) [Rs. 1,500 × 2] 3,000 1,000
Minor son 1,200
Less: Exempt under section 10(32) 1,200 Nil
Income to be clubbed in the hands of Mr. A 1,000
Note: As per section 27(i), Mrs. A is deemed owner of house property transferred to her minor son. Natural love &
affection do not constitute adequate consideration. Accordingly, income from HP of Rs. 84,000 [i.e., Rs. 1,20,000 –
30%) would be taxable directly in her hands as deemed owner. Consequently, clubbing provisions u/s 64(1A)
would not be attracted i.r.o. income from house property, owing to which exemption u/s 10(32) cannot be availed
by her.

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CQ8. The following details are furnished i.r.o. Mr. X & his family members. Determine their GTI:
Particulars Mr. X Mrs. X Minor Child
Income as child Artist in films - - 60,000
Business Income (Own) (40,000) - -
Salary from X Ltd. in which Mr. X holds 25% Voting power - 30000 -
Share of profit from Firm AB & Co. 80,000 (40%) - 20,000 (10%)
Commission from AB & Co. - 20,000 --
Interest Income 8000 5000 4000
Note:
1. Mrs. X possesses B. Com degree & works as accountant of X Ltd. & she does not render any services to AB & Co.
2. Interest received by Mrs. X is from investment of Rs. 40,000 gifted by Mr. X & Rs. 40,000 from her own resource.
Solution: Computation of Gross Total Income
Particulars Mr. X Mrs. X Minor Child
Salaries: Salary from X Ltd - 30,000 --
Profits & gains from business/ Profession: Income /(Loss) (40,000) -- 60,000
Income from other sources
(i) Interest income Own (Mr. X) = 8,000 2,500
Add: Spouse – Sec 64(1) [5000 x 40,000/80,000] = 2,500 10,500 -- --
Total Income for Clubbing of Minor’s Income (29500) 32,500 -
Interest Income of Minor Child Rs. 4,000 -- 2,500 --
Less: Exempt u/s. 10(32) (Rs. 1,500) Rs. 2,500
Commission income of spouse u/s. 64(1) 20,000 -- --
Gross Total Income (9,500) 35,000 60,000
Notes:
1. Share of profit from firm is exempt from tax u/s. 10(2A).
2. Income of the minor child will be clubbed in the hands of the parent whose income before such clubbing is
greater. Thus, the interest income of minor child is clubbed in the hands of Mrs. X.

➢ If Self-Acquired Property of Individual is converted into HUF Property for Inadequate Consideration
→ Income derived by HUF from such property is Clubbed in Income of transferor.
Ex: Mr. X owns a house property from which he derives an income of Rs. 6,00,000 p.a. It is income of Mr.
X & shall be included in computation of his TI u/h ‘Income from House Property’. If he converts this
property as the property of HUF of which he is a member, income shall henceforth be received by HUF
but it shall be deemed to be income of Mr. X & shall be taxed to in the hands of Mr. X & not to HUF.

➢ CLUBBING AFTER PARTITION: If converted property is subsequently transferred amongst the

members of the family, Income from such converted property which is received by Spouse of
Transferor + Minor Child (subject to T&C) shall be clubbed in the hands of the transferor.
Ex: In the example given above, if there is partition in the family & there are 5 members entitled to a
share in the HUF property i.e. Mr. X, Mrs. X, a minor child of X & two major sons of X assuming they decide
to share the property equally then the income from the property shall be treated as follows:
(a) Income from 1/5th share of X Rs. 120000;
(b) Income from 1/5th share of Mrs. X Rs. 1,20,000 (to be clubbed with the income of X);
(c) Income from 1/5th share of minor child of X Rs. 1,20,000 (to be clubbed with the income of X or Mrs.
X, whose income is higher u/s 64(1A). However, X can claim exemption upto Rs. l5,000);
(d) Income from 2/5th share of other members shall be taxable in the hands of major sons individually.

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 ➢ Income includes Loss. Thus, Losses shall also be Clubbed.
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.

➢ Firstly, Income shall be computed in the hands of Recipient & then clubbing shall be done headwise.
➢ All expenditures related to such income shall be allowed as per the respective provisions of the Act
and thereafter the net income shall be clubbed.
Ex: Standard deduction u/s 16(ia) from gross salary shall be allowed in the hands of the recipient &
thereafter, net income shall be clubbed.
➢ Deduction under chapter VIA - Allowed: If 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.
Ex: 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.

➢ Section 61: Section 61 applies only to Revocable transfer made by ANY Person.
➢ Section 64: It applies to Revocable & Irrevocable Transfers made only by Individuals.

❖ Instances: Two transactions are Inter-connected in such a way that they seem to be two different
transactions but in reality, they are the parts of the same transaction.
❖ In case of Cross Transfers → Income from transferred assets would be assessed in the hands of
the deemed transferor if transfers are so intimately connected as to form part of a single transaction,
and each transfer constitutes consideration for the other.
❖ CIT v. Keshavji Morarji [1967]: SC observed that if two transactions are inter-connected & are
parts of the same transaction in such a way that it can be said that the circuitous method was
adopted as a device to evade tax, the implication of Clubbing provisions would be attracted.

CQ9. Mr. Ramesh gifted Rs. 5 lacs to his brother's minor son. His brother gifted debentures worth Rs. 6 lacs to
Mrs. Ramesh. Son of Mr. Ramesh' brother invested the amount in fixed deposit with BOI @ 9% p.a. ROI & Mrs.
Ramesh received interest of Rs. 45,000 on debentures received by her. Discuss.
Answer:
▪ Mr. Ramesh gifted Rs. 5 lacs to his brother's minor son & simultaneously, his brother gifted debentures
worth Rs. 6 lacs to Mr. Ramesh's wife. Mr. Ramesh's brother's minor son invested the gifted amount of Rs.
5 lacs in fixed deposit with Bank of India. These transfers are in the nature of cross transfers.
▪ Accordingly, income from assets transferred would be assessed in the hands of the deemed transferor
because the transfers are so intimately connected to form part of a single transaction & each transfer
constitutes consideration for the other by being mutual or otherwise.
▪ If two transactions are inter-connected & are part of same transaction in such a way that it can be said that
the circuitous method was adopted as a device to evade tax, implication of clubbing provisions would be
attracted. Accordingly, interest income arising to Mr. Ramesh's brother's son from fixed deposits would be
included in TI of Mr. Ramesh's brother, assuming that Mr. Ramesh's brother's TI is higher than his wife's
total income, before including minor's income. Mr. Ramesh's brother can claim exemption of Rs. 1,500.
▪ Interest on debentures arising in the hands of Mrs. Ramesh would be taxable in the hands of Mr. Ramesh.
▪ This is because both Mr. Ramesh & his brother are the indirect transferors of the income to their spouse &
minor son, respectively, with an intention to reduce their burden of taxation.
▪ In the hands of Mr. Ramesh, interest received by his spouse on debentures of Rs. 5 lacs alone would be included
& not entire interest income on debentures of 6 lacs, since cross transfer is only to the extent of Rs. 5 lacs.
▪ Hence, only proportional interest (5/6th of interest) Rs. 37,500 would be includible in the hands of Mr. Ramesh.

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 APPROPRIATION WHEN TRANSFERRED ASSET IS INVESTED IN A BUSINESS
1. Find Total Investment of the Transferee (spouse) in the business on 1 st day of PY.
2. Find out the amount Invested by the transferee (spouse) out of the assets transferred to her for
Inadequate consideration on 1st day of PY in the said business.
3. Find out Taxable Income from Business. [If transferee becomes partner of a Firm by investing said
Asset (Capital Contribution), only Interest is considered (share of profit from firm is Exempt)].
2×3
4. Amount which shall be included in the hands of Transferor is determined as follows: [ ]
1

CQ4. Mr. Vaibhav started a proprietary business on 1st April 2021 with a capital of Rs. 5,00,000. He incurred
a loss of Rs. 2 Lacs during PY 2021-22. To overcome the financial position, his wife Mrs. Vaishaly, a software
Engineer, gave a gift of Rs. 5 Lacs on 1st April 2022, which was immediately invested in the business by Mr.
Vaibhav. He earned a profit of Rs. 4 Lacs during PY 2022-23. Compute the amount to be clubbed in the hands
of Mrs. Vaishaly for AY 2023-24. If Mrs. Vaishaly gave the said amount as loan, what would be the amount to
be clubbed? [ICAI SM Q5]

Solution: Income to be clubbed in the hands of Mrs. Vaishaly for AY 2023-24 is computed as under:
▪ Since Mr. Vaibhav has incurred loss of Rs. 2,00,000, remaining amount of Rs. 3,00,000 is the amount of
Capital he has in the business on 1.4.2022.
▪ Total Capital Contribution on 1.4.2021 = Rs. 8,00,000 [Includes Rs. 5,00,000 taken from his wife]
▪ Profit of PY 2022-23= Rs. 4,00,000.
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑚𝑎𝑑𝑒 𝑜𝑢𝑡 𝑜𝑓 𝑆𝑝𝑜𝑢𝑠𝑒 𝑀𝑜𝑛𝑒𝑦
▪ Amount to be clubbed in the hands of Mrs. Vaishali = [ 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑛 𝑓𝑖𝑟𝑠𝑡 𝑑𝑎𝑦 𝑜𝑓 𝑃𝑌
× 𝑃𝑟𝑜𝑓𝑖𝑡 ]
𝑅𝑠. 5,00,000
=[ × 𝑅𝑠. 4,00,000 ] = Rs. 2,50,000
𝑅𝑠. 8,00,000

▪ Thus, Rs. 2,50,000 shall be clubbed in the hands of Mrs. Vaishali.

CQ5. X & Y form a partnership from 1st April 2022 (PSR - 2: 3) by investing Rs. 10 Lacs & Rs. 15 Lacs
respectively. The investment has been financed from the following sources.
Particulars X Y
Gift from Mrs. X 6,60,000 -
Gift from Mrs. Y - 8,00,000
Past savings of X & Y 3,40,000 7,00,000

For PY 2022-23, Share of Profit from the firm is as follows:

Interest on Capital @ 12% 1,20,000 1,80,000
Salary as working partner 24,000 24,000
Share of Profit 1,08,000 1,62,000
Find out the Income chargeable to tax in the hands of X & Mrs. X
Solution:
Particulars Mr. X Mrs. X
Share of profit [Exempt u/s 10(2A)] Nil -
Salary from Firm 24,000 -
Interest on Capital [*(Rs. 1,20,000 × Rs.6.6 lacs)/Rs. 10 lacs] 40,800 79,200*
Business income 64,800 79,200

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➢ Total Income earned by the Assessee during the PY is taxable under Income Tax Act.
➢ It is worthy to be noted that Total Income from All Sources/Heads is to be taxed & not the Income
from Individual source/head.
Thus, it becomes Important to know Mechanism of Set off & Carry forward of Losses.
Ex: Mr. PC carries on two businesses. He gets loss in one business & profit in another one. His PGBP income will be
the net income i.e. after an adjustment of the loss.
➢ It might also happen that Net Result from a Particular Source/Head of Income may be Loss. This Loss
can be Set off against other Source/Head in a Specified Manner.
➢ Thus, it can be said that Loss from one Source/Head can be Adjusted against Income form other
Source/Head Subject to Certain Conditions.

MEANING OF SET-OFF & CARRY FORWARD OF LOSSES

Set off of Loss Adjustment of Losses against Profits from Another Source/Head of Income in Same AY.

Carry Forward If Losses cannot be Set-off in Same Year due to Inadequacy of Eligible Profits, then such
of Losses Losses are carried forward to Next AY for Adjustment against Eligible Profits of that year.

THIS TOPIC CAN BE DIVIDED INTO 2 PARTS:

A. Set off of Loss in Same Year
1. Intra-Head/Inter-Source Adjustments [Set off within Same Head of Income]
2. Inter Head Adjustements [Set off against other Head of Income]

B. Carry Forward & Set off of Loss in Next Year.

1. INTRA HEAD ADJUSTMENT [SECTION 70]

General Rule: Loss from Any Source of Income can be set off (adjusted) against Income from any other
source under the SAME HEAD.

Examples:
1. Loss from one house property can be set off against the Income from another house property as both these sources
of income fall under one head of income.
2. If the assessee has two house & income from one house is Rs. 30,000 while loss from other house is Rs. 10,000,
then such loss shall be adjusted against other income from same source & after set off, income u/h HP = Rs. 20000.
3. Loss from one business (textiles) can be set off against income from any other business (printing) in same year as
both these sources of income fall under one head of income.

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EXCEPTIONS to Intra Head Adjustment: In following cases, Loss from one source cannot be adjusted
against Income from another source although both falls under Same head:
Nature of Loss Details
Speculation Business ▪ Speculative Business Loss CANNOT be set off from Normal Business Income
Loss [Sec 73(1)] (Non- Speculative Business Income).
▪ Speculation Business Loss can be set off against Income of ANY other
Speculation Business only.

Loss of Specified ▪ Loss of Specified Business CANNOT be set off against Normal /Speculative
Business u/s 35AD Business Income.
[Sec 73A] ▪ Loss of Specified Business can be set off against Income of ANY Specified
Business only.
PC Note: Normal business losses can be set off against specified business income

Loss from Activity of ▪ Such Loss can be set-off only against Income from Activity of Owing &
Owning &Maintaining Maintaining Race Horses only.
Race Horses [Sec 74A]
Long Term Capital ▪ LTCL can be set off against LTCG only & NOT even against STCG.
Loss [Sec 70(3)] ▪ However, STCL can be set off against both STCG & LTCG.

Loss from Lottery, ▪ NO SET OFF against any Income. It is Taxable @ 30%.
Puzzles, Card Games ▪ Expenditure Incurred for Buying Lottery Ticket → Not Deductible.

Exempt Source ▪ Loss from Exempt Source cannot be set-off against Profits from Taxable Source.

CQ1. R carries two businesses A & B. Business A is a manufacturing business while business B is a speculative
business. State whether the loss can be set off in the following two situations:
Particulars Situation I Situation II
Manufacturing Business (+) 3,00,000 (-) 15,00,000
Speculation Business (-) 1,40,000 (+) 2,00,000
Solution:
▪ Situation I: Set off is NOT Possible as speculation loss can be set off only against speculation Income. Thus Loss
from speculation business cannot be set off against Normal Business Income & it will be carried forward to Next
year & will be adjusted against profit from speculation business (if any).
▪ Situation II: Set off is Possible since Loss from Normal Business can be set off against profit form Speculative
Business. Thus Normal business loss of Rs. 2,00,000 can be adjusted against Speculation Business Income.
Remaining Business loss of Rs. 13,00,000 will be carried forward to Next year & will be adjusted against profit from
Normal Business only (if any).

CQ2. Give the provisions regarding Set off & Carry forward in the following situations:
Particulars Situation I Situation II
Short-term Capital Gain (-) 5,00,000 (+) 3,00,000
Long-term Capital Gain (+) 7,00,000 (-) 2,00,000
Solution:
▪ Situation I: STCL of Rs. 5,00,000 can be set off against LTCG. Hence, Net LTCG = Rs. 2,00,000;
▪ Situation II: LTCL can be set off from LTCG only. It cannot be set off from STCG.
Hence, STCG of Rs. 3,00,000 shall be taxable & Rs. 2,00,000 of LTCL will be carried forward to Next year & adjusted
against LTCG only (if any).

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2. INTER HEAD ADJUSTMENT [SECTION 71]
General Rule: Loss from one Head can be set off against Income from Another Head.
Ex: Mr. X has loss from Business/Profession of Rs. 3,00,000 & Income from House Property of Rs. 5,00,000. In
such case, Loss from business (One head) can be set off against Income from House Property (Another Head).

EXCEPTIONS to Inter Head Adjustment:

1 Capital Loss ▪ Loss u/h Capital Gains can be set off against Income u/h Capital Gains
only.
▪ Loss u/h ‘Capital Gains’ CANNOT be set-off against Income under Any other
Head.

2 Loss u/h PGBP ▪ Loss u/h PGBP CAN be set off against Income from Any Head of Income
[Sec 71(2A)] Except Income from Salary.

3 Loss u/h ‘House ▪ Loss u/h ‘House Property’ can be set off against any Head upto Rs. 2 Lacs
Property’ only.
▪ Note: Maximum Loss from House Property which can be set-off = Rs. 2 lacs.

4 Since Intra-Head Adjustment is NOT Permitted in the following cases & thus Inter-Head
Adjustment is ALSO NOT Permitted
(a) Loss from Speculation Business;
(b) Loss from Specified Business u/s 35AD;
(c) Loss from Activity of owning & Maintaining Race Horses;
(d) Loss of Lottery, Crossword Puzzles, Card Games;
(e) Loss from Exempt Source of Income.

PC Note
1. Loss from any Head (other than Capital Gain & PGBP) can be adjusted against Income from ANY Head
of Income, including Capital Gain & Salary in Same AY.
2. Assessee may choose to set off the losses in the manner which is Most Beneficial to him.
3. It is Mandatory to Set off Loss if Eligible Income is there. Assessee cannot ignore it.

PART B. CARRY FORWARD OF LOSSES

▪ If Loss cannot be set off either under Same Head or under other Heads of Income
▪ due to Absence of Eligible Income in Same AY,
▪ it shall be carried forward to the next year &
▪ Set off against Income from Same Head in next AYs subject to prescribed Time Limit.

PC Note:
1. Once a Loss is carried forward, it can be set off only against Income from Same Head.
2. Loss from Lottery cannot be set off nor Carried Forward.

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TREATMENT OF VARIOUS LOSSES IN DETAIL [V.IMP]
Loss u/h Combined Provisions of Set off & Carry Forward
House Property ▪ Firstly, Loss from one House Property shall be adjusted against Income from Another
[Section 71B] House Property.
▪ If still there is Unabsorbed Loss, it shall be set-off against income from any other
head upto Rs. 2,00,000 only.
▪ Remaining (Unabsorbed) Loss will be carried forward to Next Year.
▪ Such b/f Loss can be set-off against Income u/h ‘House Property’ only in next PY.

Normal ▪ Firstly, Normal business loss can be set off against income u/h ‘PGBP’.
Business Loss
▪ If still there is unabsorbed Loss, it can be set off against Income under any other
[Section 72] head Except “salaries”.
▪ If still there is a loss, it can be carried forward to Next Year.
▪ Such b/f Loss can be set-off against ‘income u/h PGBP’ only in Next PY.

PC Note:
❖ Unabsorbed Depreciation can be set off against ANY HEAD OF INCOME.
❖ It is not necessary that Business whose Loss is being set off must be continued.
❖ Business Losses can be set off only by the assessee who has incurred loss: Only
the person who has incurred the loss is entitled to c/f or set off the loss. Thus,
successor of a business cannot c/f or set off losses of his predecessor.

Specified ▪ Specified business loss u/s 35AD can be set off only against income of any other
Business Loss specified business.
[Section 73A] ▪ Unabsorbed loss will be c/f to next AY & set off against income from Specified Business.

Note: Loss from a specified business can be set-off against Profit of another specified
business u/s 73A even if other specified business is not eligible for deduction u/s 35AD.

Ex: Assessee can set-off Losses of Hospital/Hotel Business which is eligible for deduction
u/s 35AD against Profits of Existing Business of Hotel (Above 2 star) even if Hotel business
is not eligible for deduction u/s 35AD.
Speculation ▪ Speculation Business Losses can be set off only against any other Speculation
Business Loss Business Income.
[Section 73]
▪ If there is no other Speculation Income, it can be c/f to subsequent years & set-off
only against income from any speculation business carried on by the assessee.
PC Note: It is not necessary that same speculation business must continue in AY in
which Loss is to be set off.
PC Note: Loss from activity of trading in derivatives is not treated as speculative loss.

Capital Loss ▪ STCL can be set off against both STCG & LTCG.
▪ LTCL can be set-off only against LTCG & not against STCG.
▪ Carry Forward:
(a) STCL: It can be set off against ANY Capital Gains.
(b) LTCL: It can be set off ONLY against LTCG.
▪ Capital Loss cannot be set off against Income under any other Head.

Owning & ▪ Losses from Activity of owning & Maintaining Race Horses can be set off only against
Maintaining Income from Activity of owning & Maintaining race horses only.
Race Horse ▪ Loss = Stake money – Revenue Expenditure for Maintaining Race Horses.
[Sec 74A]

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CQ3. Compute the Taxable Income in following situation:
Particulars Situation I Situation II
Long term capital gain/loss 30,000 (3,00,000)
Short term capital gain/loss (50,000) 1,10,000
Business income/loss (80,000) (90,000)
Solution:
Particulars Situation I Situation II
Long term capital Gain/Loss 30,000 (3,00,000) [Note 4]
Short term capital Loss/Gain (50,000) 1,10,000
Income u/h Capital Gain after Set off Nil [Note 1] 1,10,000 [Note 2]
Set off of Business Income/Loss Nil [Note 4] (90,000) [Note 3]
Total income Nil 20,000

Note:
1. STCL can be set off against LTCG. Thus STCL of Rs. 30,000 will be set off against LTCG. Remaining STCL
will be carried forward to next year & will be set off in next year against income u/h ‘Capital Gains’.
2. LTCL can only be set off against LTCG. It cannot be set off against STCG also. Thus, LTCL of Rs. 3,00,000
will be carried forward & set off in next year against LTCG.
3. Business Loss can be set off against Income under any head except salary. Business loss can be set off
against CG.
4. Business Loss of Rs. 80,000 will be carried forward & will be set off in next year against income u/h
“PGBP.

CQ4. Compute Total Income of Mr. A for AY 2023-24 from the following details: [ICAI Module Q1]
Income from salary 4,00,000
Loss from Self-occupied property (70,000)
Loss from Let-out property (1,50,000)
Business Loss (1,00,000)
Bank Interest (FD) received 80,000
Solution: Computation of Total Income of Mr. A for AY 2023-24
Particulars Amount Amount
Income from salary 4,00,000
Loss from House Property of Rs. 2,20,000 to be restricted to Rs. 2 Lacs [Sec 71(3A)] (2,00,000) 2,00,000
Balance loss of Rs. 20,000 from house property will be carry forward to next AY
Income from other Sources (Interest on fixed deposit with bank) 80,000
Business Loss Set-off (1,00,000) -
Business loss of Rs. 20,000 to be carried forward
Gross total income/Total Income [See Note below] 2,00,000

Note: GTI includes after adjusting loss of Rs. 2 Lacs from house property. Balance loss of Rs. 20,000 from house
property will be c/f salary of Rs. 2 Lacs. Business loss of Rs. 1 Lac is set off against bank interest of Rs. 80,000 &
remaining business loss of Rs. 20,000 will be c/f as it cannot be set off against salary.

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CQ5. Compute the taxable income in the following two situations:
Particulars Situation I Situation II
Income from Manufacturing business (Normal Business) 1,50,000 (3,60,000)
Income from Speculation Business (80,000) 3,50,000
Loss from a Specified Business u/s 35AD (40,000) 40,000
Short Term Capital Gains (1,70,000) (1,70,000)
Agricultural Income (40,000) 60,000
Solution:
Particulars Situation I Situation II Notes for Situation II
Income from manufacturing business 1,50,000 (3,60,000) Loss from Normal Business can be set
off against Speculative Income &
Income from speculation business Nil [Note 1] 3,50,000
specified business Income also
Loss from specified business Nil [Note 1] 40,000
Total income 1,50,000 30,000

Note:
1. Loss from Speculation/Specified Business can be set off only against Income from Speculative/Specified
business respectively. Thus, Loss of Rs. 80,000 & Rs. 40,000 will be c/f to next year & will be set off in next
year against Speculative/Specified Business Income respectively.
2. STCL cannot be set off from any other head. It will be carried forward & set off against “Capital Gains”.
3. Loss from exempt source cannot be set off against any income & No loss can be set off from agriculture income.

CQ6. Compute total income of A for AY 2023-24:

Income from Salary 1,80,000
Income from House Property 40,000
Business Loss (1,90,000)
Loss from Specified Business (60,000)
Short-term capital Loss (60,000)
Long-term capital Gain 2,40,000
Solution: Computation of total income of A for AY 2023-24
(i) Income u/h “Salary” 1,80,000
(ii) Income u/h “House Property” 40,000
Less: Business loss adjusted against House property Income (10,000) 30,000
(iii) Business Loss (1,90,000)
Less: Set off against Capital Gain 1,80,000
Less: Set off against House Property Income 10,000 Nil
Loss from specified business not allowed to be set off (-) 60,000
(iv) Income u/h “Capital Gain”
Long-term Capital Gain 2,40,000
Less: Short-term capital loss (60,000)
Less: Business loss adjusted (1,80,000) Nil
Gross total income/Total Income 2,10,000

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Note:
1. Business loss should first be set off from LTCG as it is taxable @ 20% whereas HP is taxable @ 5%.
2. Business loss cannot be set off against income u/h salary.

CQ7. Mr. B, a resident individual, furnishes the following particulars for the AY 2023-24: [ICAI Module Q2]
Income from business (non-speculative) (22,000)
Income from speculative business (4,000)
Short-term capital losses (25,000)
Long-term capital gains 19,000
What is the total income chargeable to tax for the AY 2023-24?
Solution: Total income of Mr. B for AY 2023-24
Particulars Amount Amount
Profits & gains of business & profession
Business loss to be carried forward (22,000)
Speculative loss to be carried forward [Note 1] (4,000)
Capital Gains
LTCG 19,000
STCL [STCL of Rs. 6,000 is to be carried forward [Note 2] (25,000)
Taxable income Nil

Note 1: Speculative business Loss of Rs. 4,000 can be set off only against speculative business income. Thus, it is
carried forward.
Note 2: STCL can be set off against both STCG & LTCG. Therefore, STCL of Rs. 25,000 can be set-off against LTCG
to the extent of Rs. 19,000. Balance STCL of Rs. 6,000 cannot be set-off against any other income & has to be c/f.

Nature of Loss to be c/f Income against which Brought Maximum Period for Carry
Forward Loss can be set-off Forward of Losses

House Property Loss Any Income u/h House Property 8 AYs

Normal Business Loss Any Income u/h PBGP. 8 AYs

Speculation Business Loss Any Speculation Business Income 4 AYs

Specified Business Loss Any Specified Business Profit Indefinite Period

Long Term Capital Loss Long Term Capital Gains 8 AYs

Short Term Capital Loss STCG/LTCG 8 AYs

Loss from Activity of owning Income from Activity of owning & 4 AYs
Maintaining Race Horses.
& Maintaining Race Horses

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 1. Current year Depreciation/Current year Capital Expenditure on Scientific Research

2. Brought Forward Business Loss [Section 72(1)]

3. Unabsorbed Depreciation of Earlier Years [Section 32(2)]

4. Unabsorbed Capital Expenditure on Scientific Research of Earlier Years [Section 35(4)]

5. Unabsorbed Expenditure on Family Planning of Earlier Years [Section 36(1)(ix)].

▪ Return of Loss u/s 139(3) shall be filed within time limit of section 139(1) to carry forward losses.
▪ However, Loss u/h “House Property” & Unabsorbed Depreciation can be carried forward even if Return
of Loss is not filed within DD u/s 139(1).

▪ If Business/Profession is No Longer in Existence & there is Deemed Income Taxable u/s 41(1), 41(3),
41(4)/(4A) i.r.o. that Business/Profession;
▪ then Any Loss (Exceept Speculation Loss) of such Discontinued Business in the year of Discontinuance
▪ which could not be set off in the year of Discontinuance can be set off against Deemed Income u/s
41(1), 41(3), 41(4)/(4A).

▪ Losses which are carried forward must be set off against Eligible Income of Immediately succeeding
year & if there is any balance still to be set off, it should be set off in Immediately Next succeeding
years within the time allowed.
▪ If Losses are not set off against Income of Immediately Next year, it cannot be set off in Later year.

CQ8. R had incurred a business loss of Rs. 4,00,000 during PY 2021-22. During PY 2022-23, he has
earned business income of: (a) 5,00,000; (b) 2,50,000. What will be the consequences if he does not set
off the loss in AY 2023-24 & wishes to set off the same in AY 2023-24?
Solution: (a) R can set off the loss of Rs. 4,00,000 in AY 2023-24 against the income of Rs. 5,00,000. If
he does not do so, he cannot carry forward such loss of 4,00,000 to AY 2023-24.
(b) R can set off the loss of Rs. 2,50,000 only out of loss of Rs. 4,00,000 in AY 2023-24. If he does not do
so, he will not be able to carry forward & set off Rs. 2,50,000 in Next AY. However, he can carry forward
the balance Rs. 1,50,000 which could not be set off due to insufficient income during AY 2023-24.

CQ9. During PY 2022-23, Mr. C has following incomes & brought forward losses: [ICAI SM Q3]
Short term capital gains on sale of shares 1,50,000
Long term capital loss of AY 2021-22 (96,000)
Short term capital loss of AY 2022-23 (37,000)

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 Long term capital gain 75,000
What is the capital gain taxable in the hands of Mr. C for AY 2023-24?
Solution: Taxable capital gains of Mr. C for AY 2023-24
(i) Short term capital gains on sale of shares 1,50,000
Less: Brought forward Short-term capital loss of AY 2022-23 (37,000) 1,13,000
(ii) Long term capital gain 75,000
Less: Brought Forward Long-term capital loss of AY 2021-22 (75,000) Nil
Total Taxable Capital Gains 1,13,000
Note: LTCL cannot be set off against STCG. Hence, unadjusted LTCL of AY 2021-22 of Rs. 21,000 (i.e. Rs.
96,000 – Rs. 75,000) has to be carried forward to the next year to be set-off against LTCG of that year.

CQ10. Mr. D has the following income for PY 2022-23: [ICAI SM Q4]
Income from the activity of owning & maintaining the race horses 75,000
Income from textile business 85,000
Brought forward textile business loss 50,000
Brought forward loss from activity of owning & maintaining race horses (relating to AY 2020-21) 96,000
What is the total income in the hands of Mr. D for AY 2023-24?
Solution: Total income of Mr. D for AY 2023-24
Particulars Rs. Rs.
(i) Income from the activity of owning & maintaining race horses 75,000
Less: Brought forward loss from the activity of owning & maintaining race horses (96,000)
To be carried forward to Next AY (21,000)
Income from textile business 85,000
Less: Brought forward business loss from textile business. 50,000 35,000
Total income 35,000
Note: Loss from activity of owning & maintaining race horses cannot be set-off against any other source/head.
Loss from activity of owning & maintaining race horses (relating to AY 2020-21) can be set off only to the extent
of Rs. 70,000. Thus Remaining Amount of Rs. 21,000 will be carried forward to AY 2023-24.

HWQ11. Mr. E has furnished his details for AY 2023-24 as under: [ICAI SM Q5]
Income from salaries 1,50,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
STCG 80,000
Long term capital loss of AY 2021-22 (30,000)
What is the taxable income of Mr. E for AY 2023-24? [Answer: Taxable income = Rs. 2,50,000]

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 Exempt ▪ Some Incomes are NOT at all included in Income Computation process (Section 10).
Incomes ▪ Such Incomes are called Exempt Incomes. They are NOT INCLUDED in GTI.

Deductions ▪ There are certain incomes which are first included in GTI & then they are allowed as
deductions on certain basis while calculating Taxable Income.
▪ Such Deductions are given in Chapter VI-A which are allowed as deduction from GTI.

PC Note: Deduction is allowed from GTI. If NO GTI → NO DEDUCTION.

PC Note: Chapter VI-A Deductions are NOT ALLOWED from (i) Capital Gains (ii) Casual Incomes

Gross Total ▪ Total Income computed under each of the 5 heads, after applying Provisions for
Income Clubbing of Income & Set off of Losses is known as Gross Total Income.

Total Income ▪ Gross Total Income – Deductions under Chapter VI-A.

Investment based deductions Deductions given when certain Payments & Investments are made.
Income based deductions Deductions given i.r.o. Certain Incomes included in GTI.

Sec. 80A ▪ Deduction u/s 80C - 80U shall be allowed from GTI while computing TI of the Assessee
▪ Total Amount of Deductions u/s 80C - 80U shall NOT Exceed GTI. Thus, there cannot
be a Loss as a result of Chapter VI-A deductions.
▪ Deductions cannot be carried forward to next year if GTI < Eligible Deductions.
▪ Chapter VI-A Deductions shall be allowed ONLY IF they are claimed in ROI.

Sec. 80AB ▪ For computing Profit/Income-Linked deductions, Net Income Calculated as per Income-
tax Act ((before making deduction under Chapter VI-A) shall be regarded as the income
received by the assessee & which is included in his GTI.

Sec. 80AC ▪ Income Based Deductions u/s 80 IA/IAB/IB/IC/ID/IE shall be allowed to the assessee
only if he furnishes a ROI on or before the due date specified u/s 139(1).

CQ1. For claiming deduction u/s 80JJAA, filing of audit report is must for a corporate assessee; filing of return
within DD laid down in section 139(1) is not required. Examine.
Ans: Incorrect. Section 80AC stipulates compulsory filing of ROI on or before DD u/s 139(1), as a pre-condition
for availing the benefit of deduction u/s 80JJAA.

CQ2. Filing of Belated ROI u/s 139(4) will debar an assessee from claiming deduction u/s 80M. Examine.
Ans: Correct. As per section 80AC, the assessee has to furnish his ROI on or before DD u/s 139(1), to be eligible
to claim deduction u/s 80M.

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Eligible Assessee Only Individual or HUF (R/NR)

Deduction Lower of ► (i) Amount Invested/Paid or ► (ii) Rs. 1,50,000.

1. PREMIUM PAID ON LIFE INSURANCE POLICY ON LIFE OF ↓

Assessee Premium paid on the life of ↓
Individual ▪ Individual himself; Spouse of the individual;
▪ Any Child of such Individual. (Married/Single/Dependent/Independent).
HUF Any Family Member.
Maximum amount of Premium Eligible for deduction u/s 80C
Premium paid on Insurance Policy ↓ Deduction u/s 80C
1. Issued before 1.4.2003 Upto 20% of sum assured.
2. Issued between 1.4.2003 & 31.3.2012 Upto 20% of sum assured.
3. Issued on/after 1.4.2012 but before 1.4.2013 Upto 10% of sum assured.
4. Issued on/after 1.4.2013 on life of a person Upto 15% of sum assured.
(a) with Disability referred u/s 80U or
(b) Suffering from Specified Disease u/s 80DDB
PC Note: Actual Capital Sum assured shall not include any bonus/premium agreed to be returned.

EXEMPTION ON RECEIPTS OF MATURITY AMOUNT FROM LIC [Sec. 10(10D)]

(a) Maturity Amount received (including Bonus) under Life Insurance Policy is NOT Exempt if
Premium paid for any year during the term of Policy Exceeds SPECIFIED % given in Sec 80C.
PC Note: Maturity Amount of Policy issued before 1.4.2003 → Always Exempt.
(b) Any Sum received u/s 80DD(3) & Keyman Insurance Policy → Not Exempt u/s 10(10D).

CQ3. Compute deduction u/s 80C for AY 2023-24 on life insurance premium paid by Mr. G:
Date of Issue of policy Person Insured Sum assured Premium Paid in PY 2022-23
1.04.2011 Self Rs. 3,00,000 Rs. 40,000
1.05.2016 Spouse Rs. 1,50,000 Rs. 20,000
1.06.2018 Handicapped Son Rs. 4,00,000 Rs. 80,000
Solution:
Date of Issue Person Insured Sum Assured Premium Paid (Restricted to % Deduction u/s
during PY 2022-23 of Sum Assured) 80C
1.04.2011 Self Rs. 3,00,000 Rs. 40,000 20% Rs. 40,000
1.05.2016 Spouse Rs. 1,50,000 Rs. 20,000 10% Rs. 15,000
1.06.2018 Handicapped son Rs. 4,00,000 Rs. 80,000 15% Rs. 60,000
Total Rs. 1,15,000
2. CONTRIBUTION TOWARDS SPF/PPF/RPF/SAF

▪ Contribution to be made → In Account of Individual/Spouse/Any Children.

▪ For HUF: Contribution shall be made in the account of any member of the family.

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3 Subscription to SUKANYA SAMRIDHI ACCOUNT Scheme in the name of:
▪ Girl child/Individual himself (in case assessee is a girl child).
4 SUBSCRIPTION TO
▪ National Saving Scheme, 1992/National Savings Scheme, 1992.
▪ National Savings Certificates (VIII or IX Issue).
▪ Bonds issued by NABARD.
▪ Approved Equity Shares/Debentures of wholly public company where such proceeds are
utilized for infrastructure company. [Lock-in-period: 3 years].
▪ Notified units of MF/UTI
▪ Notified Deposit Scheme/Pension Fund set up by National Housing Bank. (Home Loan Account
Scheme of the National Housing Bank has been notified).

5 Any sum deposited in -

▪ Account under the Senior Citizens Saving Scheme Rules, 2004.
▪ 5-years time deposit in an account under the Post Office Time Deposit Rules, 1981.
▪ Term deposit for a fixed period of not less than 5 years with a scheduled bank.

6 Payment made by Individual for NON-COMMUTABLE DEFERRED ANNUITY on life of:

(a) Individual himself; (b) Spouse & (c) Any Child of such Individual.

7 Any Sum deducted from Salary of Government Employee for DEFERRED ANNUITY
▪ Maximum Sum deducted Eligible for deduction u/s 80C = 20% of Salary.
▪ Deferred Annuity shall be for the benefit of Individual, Spouse, Any Children.

8 Payment of TUITION FEES IN INDIA for FULL TIME EDUCATION [MAX. 2 CHILDREN]

Any sum paid as tuition fees excluding any payment towards development fees or donation
▪ at any time on admission or afterwards.
▪ to any university, college, school or other educational institution in India.
▪ for full-time education.
▪ for any 2 Children of such Individual.

PC Class Note:

9 Contribution to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008

10 Contribution in Unit-Link Insurance Plan of UTI or LIC Mutual Fund.

PC Note: Contribution may be made in the name of any person mentioned in (1) above.

11 Contribution to Approved Annuity Plan (New Jeevan Dhara/I & New Jeevan Akshay/I/II)

12 Subscription to Notified Deposit Scheme of:

Public Sector Company engaged in providing LT finance for Construction/Purchase of houses in
India for Residential Purposes [Ex: Public Deposit Scheme of HUDCO]
13 REPAYMENT OF HOUSING LOAN including Stamp Duty, Registration Fee [Principal Only]
Such payment may be made towards:
(a) Installment of Amount due under any self-financing scheme or other notified scheme.
(b) Installment of Amount due towards the cost of the house property allotted to him.
(c) Repayment of the amount borrowed by the assessee from:
▪ CG/SG/Bank, LIC, National Housing Bank.
▪ Indian Public Company carrying on business of providing LT finance for construction or
purchase of houses in India for residential purposes.

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 ▪ Public company/Co-operative society engaged in financing construction of Houses.
▪ Employer of Assessee if such employer is Public Sector company/University/College.
(d) Stamp Duty, Registration fee & other expenses for transfer of such house.

FOLLOWING PAYMENTS ARE NOT ALLOWED AS DEDUCTION:

▪ Admission Fee, Cost of Share of co-operative society & Initial Deposit
▪ Cost of Renovation/Repair/Alteration of the house after issue of completion certificate.
▪ Any Expenditure i.r.o. which deduction is allowable u/s 24.

14 CONTRIBUTION TO ADDITIONAL ACCOUNT UNDER NPS by CA Employee

❖ Contribution by CG employee to additional A/c under NPS (specified A/c) referred to in section
80CCD for a fixed period of not less than 3 years in accordance with the scheme notified by CG.
❖ There are two types of NPS account i.e., Tier I & Tier II, to which an individual can contribute.
▪ Section 80CCD provides deduction i.r.o contribution to individual pension A/c [Tier I A/c].
▪ Deduction u/s 80C is allowable i.r.o contribution to additional A/c [Tier II] of NPS which does
not qualify for deduction u/s 80CCD.
▪ Thus, Contribution to Tier II A/c is allowed as deduction u/s 80C only to CG employee.

PC Note:
1. Deduction u/s 80C is available on Payment Basis.
2. Interest Accrued on NSC every year (except for Last Year) → Deemed to be Reinvested & Such Amount of
Interest is also entitled for deduction u/s 80C.
3. Such Payment/contribution/deposit can be made out of taxable Income or Exempt Income. [MCQ Point]

Termination of Insurance Policy or ULIP or Transfer of House Property or Withdrawal of Deposit

If in any PY, an assessee:
1. Terminates his contract of Insurance by notice OR where the contract of insurance has ceased because
of non-payment of premium & the assesse does not revive the contract
(a) In case of Single Premium Policy → Within 2 years after date of commencement of Insurance;
(b) In any other case → Before Premiums have been paid for two years.
2. Terminates ULIP by notice OR where his participation has ceased because of non-payment of premium
& assessee does not revive his ULIP before participation have been paid for 5 years.
3. Transfers House before expiry of 5 years from the end of FY in which possession is obtained by him,
then NO further Deduction will be allowed & Total Deductions allowed in earlier PYs is deemed to be the
Income of the assessee of such PY & shall be taxed in AY relevant to such PY.
4. If amount deposited under Senior Citizens Savings Scheme is withdrawn before the expiry of 5 years from
the date of its deposit, then withdrawn amount is deemed to be the Income of the assessee of PY in which
the amount is withdrawn. Amount so withdrawn is taxable in the AY relevant to such previous year.
❖ If Interest received/withdrawn is taxed in earlier PYs → It will not be taxed again.
❖ If Interest on deposit was not taxed in earlier PYs → Such Interest would be taxed.
❖ Amount received by Legal heir on the death of assessee → Not taxable in hands of Legal Heir.

Condition i.r.o. unit linked insurance policies issued on/after 01.02.2021 for exemption u/s 10(10D)
❖ In order to deter high net-worth individuals from claiming exemption u/s 10(10D) by investing in ULIPs with huge
premium, additional condition has been stipulated i.r.o ULIPs issued on/after 1.2.2021.
❖ ULIP means a life insurance policy, which has components of both investment and insurance and is linked to a
unit defined under IRDA (ULIP) Regulations, 2019.
❖ Accordingly, exemption u/s 10(10D) would not be available with respect to any ULIP issued on or after 1.2.2021, if
the amount of premium payable exceeds Rs. 2,50,000 for any of the previous years during the term of such ULIP.
Moreover, in a case where premium is payable by a person for more than one ULIP issued on or after 1.2.2021,
exemption u/s 10(10D) would not be available where the aggregate amount of premium exceeds Rs. 2,50,000 in
any of the previous years during the term of any such ULIP(s) issued on or after 1.2.2021.
❖ However, in case any sum is received on the death of a person, exemption u/s 10(10D) would be available, even if
the premium/aggregate premium for any year during the term of such ULIP/any such ULIP issued on or after
1.2.2021 exceeds Rs. 2,50,000.

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CQ4. Mr. A, (age 61 years) has earned a lottery of Rs. 1,20,000 (gross) during PY 2022-23. He also has interest on FD
of Rs. 30,000. He invested Rs. 10,000 in PPF & Rs. 24,000 in NSC. What is the total income of Mr. A for AY 2023-24?
Solution: Computation of Total Income of Mr. A for AY 2023-24
Particulars Rs. Rs.
Income from other sources
Interest on Fixed Deposit Rs. 30,000
lottery income Rs. 1,20,000
Gross Total Income Rs. 1,50,000
Less: Deductions under Chapter VIA [See Note below]
u/s 80C - Deposit in Public Provident Fund Rs. 10,000
- Investment in National Saving Certificate Rs. 24,000
Total Eligible Investments for deduction u/s 80C Rs. 34,000
But Deduction u/s 80C is restricted to (Rs. 30,000)
Total Income Rs. 1,20,000
Note: Even though eligible investment is Rs. 34,000, however, deduction under Chapter VIA is not avaible against
casual Incomes. Therefore, maximum permissible deduction u/s 80C = Rs. 1,50,000 – Rs. 1,20,000 = Rs. 30,000.

CQ5. Mr. Bharat has made the investments as given below. Compute deduction u/s 80C for AY 2023-24.
(a) Fixed deposit with State Bank for two years Rs. 5,000.
(b) Deposit in Public Provident Fund Account in the name of minor son Rs. 8,000.
(c) LIC Premium of major married independent daughter on 15.09.2022 Rs. 9,000. (Sum assured Rs. 1,00,000).
(d) LIC Premium of major married independent son on 11.11.2022 Rs. 5,000. (sum assured Rs. 20,000)
(e) Investment in Home Loan A/c Scheme of National Housing Bank Rs. 15,000 (Investment made from Past saving)
(f) Investment in units of MF notified u/s 10(23D) Rs. 25,000. (Investment was made from Exempt Income).
(g) Investment in Equity Shares of Infrastructure Companies Rs. 35,000.
(h) Payment of Tuition fees of his son to a private coaching centre for coaching in taxation Rs. 5,000.
Solution: Computation of Deduction u/s 80C
Fixed deposit with State Bank for two years Nil
Public Provident Fund (Minor Son) Rs. 8,000
LIC in name of Major married Independent daughter (10% of Sum assured is deductible) Rs. 9,000
LIC policy in name of major married independent son [10% of Sum Assured is only allowed] Rs. 2,000
Home Loan Account Scheme Rs. 15,000
Units of Mutual Funds Rs. 25,000
Equity Shares of Infrastructure Companies Rs. 35,000
Tuition Fees (Since paid to private coaching centre) Nil
Total Deduction u/s 80C 1,00,000

Assessee Only Individuals (R/NR)

Qualifying ▪ Amount Deposited during PY by such individual for any Annuity Plan of LIC or any
Payment other Insurer for receiving Pension out of his taxable income.
PC Note: Interest/Bonus accrued → Not deemed as Contribution & thus No deduction will be available.
Deduction Lower of (a) Amount Deposited (Excluding Interest/Bonus) or (b) Rs. 1,50,000.
PC Note:
1. Pension received is taxable in the PY of Receipt of Maturity Amount.
2. If Deduction is Allowed u/s 8OCCC, Deduction u/s 80C will NOT be available.

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 Eligible ▪ Employee of CG (Compulsory to Join NPS)
Assessee ▪ Any other employees (Optional to join NPS)
▪ Self-employed individual (Optional to join NPS)
Deduction Employee’s Contribution [Sec 80CCD(1)] Upto 10% of Salary is deductible.
Employer’s Contribution [Sec 80CCD(2)] Employer Deduction
Central Government Upto 14% of salary
Other than CG Upto 10% of salary
For Self-employed Individual Upto 20% of GTI is deductible.
▪ Meaning of Salary is same as that in the case of HRA.
▪ Employer’s Contribution is firstly taxable as Salary Income in the hands of Employee.
▪ Atal Pension scheme has been notified by CG till now.
▪ No deduction shall be allowed u/s 80C if deduction has been claimed u/s 80CCD.

Additional Deduction upto Rs. 50,000 of Payment under NPS is allowed u/s 80CCD(1B) over & above
deduction u/s 80CCD(1).
PC Note: Deduction u/s 80CCD(1) is subject to overall limit of Rs. 1.50 lacs u/s 80CCE. But, deduction
u/s 80CCD(1B) is in addition to overall limit of Rs. 1.50 lacs u/s 80CCE.

TAXABILITY OF PENSION RECEIVED

1. Amount received on Closing NPS Account or opting out of NPS Taxable
2. If Amount is received by Nominee on the Death of Assessee Exempt
3. Pension received out of NPS Taxable
4. Amount received (Specified in 1,2,3) utilized for purchasing annuity plan in same PY Exempt
5. Pension received out of Annuity Plan specified in (4) Taxable

Payment from NPS to an employee on closure of his A/c or on his opting out of scheme
❖ Section 10(12A): Any payment from NPS to an assessee on account of closure or his opting out of the
pension scheme referred to in section 80CCD, to the extent it does not exceed 60% of the total
amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from
tax.
❖ Section 10(12B): Any payment from NPS to an employee under pension scheme referred to in section
80CCD, on partial withdrawn made out of his account shall be exempt from tax to the extent it does
not exceed 25% of amount of contributions made by him.

▪ Total Deduction u/s 80C + 80CCC + 80CCD(1) → cannot Exceed Rs. 1,50,000.
▪ PC Note: Maximum Limit of Rs. 1,50,000 is Not Applicable to Employer’s contribution u/s 80CCD(1B).
Section Maximum Deduction Max deduction (80CCE)
80C Rs. 1,50,000
80CCC Rs. 1,50,000 Rs.1,50,000
Employee’s Contribution u/s 80CCD(1) 10% of Salary
Additional Deductions u/s 80CCD(1B) Rs. 50,000 Not Applicable
Employer’s contribution u/s 80CCD(2) 14% or 10% of Salary Not Applicable

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CQ6. Basic salary of Mr. A is Rs. 1,00,000 p.m. He is entitled to Dearness Allowance which is 40% of Basic Salary.
50% of Dearness Allowance forms part of retirement benefits. Both Mr. A & his employer contributes 15% of
Basic Salary to Pension scheme referred in section 80CCD. Explain tax treatment of such contribution to Mr. A.
Solution: Tax treatment in the hands of Mr. A u/s 80CCD
Basic Salary Rs. 12 Lacs
Dearness Allowance forming part of retirement benefits [(40% of Rs. 12 lacs) × 50%] Rs. 2.4 Lacs
Salary for the purpose of deduction u/s 80CCD = Basic Salary + DA (Retirement) Rs. 14.40 Lacs

➢ Mr. A’s contribution to pension scheme = 15% of Basic salary = Rs. 1,80,000;
➢ Employer’s Contribution = Rs. 1,80,000.

(a) Employer’s contribution would be treated as salary since it is specifically included in the definition of “salary”
u/s 17(1)(viii). Therefore, Rs. 1,80,000 will be first included in Mr. A’s salary.
Deduction u/s 80CCD(2) [Maximum of Upto 10% of Salary] = Rs. 1,44,000.
PC Note: Deduction u/s 80CCD(2) would be restricted to Rs. 1,44,000, even though entire employer’s
contribution of Rs. 1,80,000 is included in salary u/s 17(1)(viii).
However, this deduction of Employer’s contribution of Rs. 1,44,000 would be outside the overall limit of Rs.
1,50,000 u/s 80CCE. It would be over & above the other deductions which are subject to limit of Rs. 1,50,000.
(b) Mr. A’s Contribution will be Deductible u/s 80CCD(1). However, the deduction is restricted to 10% of salary.
Deduction u/s 80CCD(1) [Upto 10% of Salary] = Rs. 1,44,000 (Even though Actual contribution is Rs.
1,80,000). This would be subject to the overall limit of Rs. 1,50,000 u/s 80CCE.
However, Addition Deduction u/s 80CCC(1B) upto Rs. 50,000 will be allowed for Employee Contribution.
As per section 80CCD(1B), a further deduction of upto Rs. 50,000 is allowable. Therefore, deduction u/s
80CCD(1B) is Rs. 36,000 (Rs. 1,80,000 – Rs. 1,44,000).
Rs. 36,000 allowable as deduction u/s 80CCD(1B) is outside the overall limit of Rs. 1,50,000 u/s 80CCE.
Thus, we can say that if the employee’s contribution is more than the specified limit of Section 80CCD(1) or
80CCE, he can avail additional deduction upto Rs. 50,000 u/s 80CCD(1B).
Alternate View: Rs. 50,000 can be claimed as deduction u/s 80CCD(1B). Balance Rs. 1,30,000 (Rs. 1,80,000 – Rs.
50,000) can be claimed as deduction u/s 80CCD(1).

CQ7. GTI of Mr. X for AY 2023-24 is Rs. 5,00,000. He has made following investments during PY 2022-23:
Contribution to PPF 110000
Payment of tuition fees to Apeejay School, New Delhi, for education of his son studying in Class XI 45000
Repayment of housing loan taken from Standard Chartered Bank 25000
Contribution to approved pension fund of LIC 105000
Solution: Computation of deduction under Chapter VI-A for AY 2023-24
Particulars Rs.
A. Deduction u/s 80C
1. Contribution to PPF – fully allowed, since it is within the limit of Rs. 1,50,000 1,10,000
2. Payment of tuition fees to Apeejay School, New Delhi, for education of his son in Class XI 45,000
3. Repayment of housing loan 25,000
Total Eligible Investment 1,80,000
But Maximum Permissible Deduction u/s 80C is Rs. 1,50,000 1,50,000
B. Deduction u/s 80CCC
4. Contribution to Approved Pension fund of LIC Rs. 1,05,000 1,05,000
Deduction u/s 80 CCC 1,05,000
As per section 80CCE, Total deduction u/s 80C, 80CCC & 80CCD(1) is restricted to Rs. 1,50,000. Thus,
Deduction allowable under Chapter VIA for AY 2023-24 = Rs. 1,50,000.

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 Eligible Assessee Only Individual or HUF [Resident/Non-Resident]
Mode of Payment Any Mode other than Cash [Preventive Health Check-up → Cash is Allowed)
MAXIMUM AMOUNT OF DEDUCTION u/s 80D

Particulars INDIVIDUAL HUF

For whose benefit payment shall be made → Family Parents Member

1 (a) Medical Insurance Premium ✓ ✓ ✓

(b) Contribution to CG Health Scheme ✓ × ×

(c) Preventive Health Check-up [Max. Rs. 5000] ✓ ✓ ×

❖ Maximum Deduction for (a), (b), (c) Rs. 25000 Rs. 25000 Rs. 25000
❖ Additional Deduction on (a) when Medi-claim policy
is taken on Life of Senior Citizen = Rs. 25,000. Rs. 25,000 Rs. 25,000 Rs. 25,000

2 Medical Expenditure on health of Senior citizen if NO

Rs. 50,000 Rs. 50,000 Rs. 50,000
Medical Insurance is paid on his health (Max. Limit)

3 Combined Maximum Deduction for 1 & 2 Rs. 50,000 Rs. 50,000 Rs. 50,000

PC Note:
❖ Maximum Deduction for Preventive Health Check-up of Family + Parents → Rs. 5,000.
❖ Family = Individual + Spouse + Dependent Children.
❖ Parents = Father + Mother (Dependent or independent); Father-in-Law & Mother-in-Law → 
❖ Notified Scheme = Contributory Health Service Scheme of Department of Space.

LUMPSUM HEALTH INSURANCE PREMIUM PAID FOR MORE THAN ONE YEAR
➢ Deduction u/s 80D for each PY shall be allowed on Proportionate basis.

CQ8. Mr. Y (40 yrs) paid medical insurance premium of Rs. 22,000 during PY 2022-23 to insure his health & health of
his spouse & dependent children. He also paid medical insurance premium of Rs. 33,000 during the year to insure the
health of his mother, aged 67 years, who is not dependent on him. He incurred medical expenditure of Rs. 20,000 on
his father, aged 71 years, who is not covered under mediclaim policy. His father is also not dependent upon him. He
contributed Rs. 6,000 to CG Health Scheme during the year. Compute deduction allowable u/s 80D for AY 2023-24.
Solution: Deduction allowable u/s 80D for the AY 2023-24
Particulars Rs. Deduction
(i) Medical Insurance Premium paid for self, spouse & Dependent children Rs. 22,000
(ii) Contribution to CGHS Rs. 6,000
Total Expenditure for Family Rs. 28,000 Rs. 25,000
(iii) Medi-claim premium paid for mother, who is over 60 years Rs. 33,000
(iv) Medical expenditure for father (over 60 yrs) & not covered by any insurance Rs. 20,000
Total Expenditure for Parents Rs. 53,000 Rs. 50,000
Total Deduction u/s 80D = Rs. 25,000 + Rs. 50,000 Rs. 75,000

CQ9. Mr. A, aged 40 years, paid medical insurance premium of Rs. 20,000 during PY 2022-23 to insure his health as well
as the health of his spouse. He also paid medical insurance premium of Rs. 47,000 during the year to insure the health
of his father, aged 63 years, who is not dependent on him. He contributed Rs. 3,600 to CG Health Scheme during the
year. He has incurred Rs. 3,000 in cash on preventive health check-up of himself & his spouse & Rs. 4,000 by cheque
on preventive health check-up of his father. Compute deduction u/s 80D for AY 2023-24.

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Solution: Deduction allowable u/s 80D for AY 2023-24
Particulars Amt Paid Deduction
1 Premium paid & medical expenditure incurred for self & spouse
(a) Medical insurance premium paid for self & spouse 20,000 20,000
(b) Contribution to CGHS 3,600 3,600
(c) Exp. on preventive health check-up of self & spouse 3,000 1,400
26,600 25,000
2 Premium paid & medical expenditure incurred for father, who is a senior citizen
(a) Medi-claim premium paid for father, who is over 60 years of age 47,000 47,000
(b) Expenditure on preventive health check-up of father 4,000 3,000
51,000 50,000
Total deduction u/s 80D (Rs. 25,000 + Rs. 50,000) 75,000
Notes:
1. Total deduction for 1(a),(b),(c) above should not exceed Rs. 25,000. Therefore, expenditure on preventive health
check-up for self & spouse would be restricted to Rs. 1,400 (Rs. 25000 - Rs. 20000 - Rs. 3600).
2. Total deduction for 2(a)&(b) above should not exceed Rs. 50,000. Therefore, expenditure on preventive health
check-up for father would be restricted to Rs. 3,000 (Rs. 50,000 - Rs. 47,000).
3. In this case, total deduction allowed on account of expenditure on preventive health check-up of self, spouse &
father is Rs. 4400 (Rs. 1400 + Rs. 3000), which is less than the maximum permissible limit of Rs. 5,000.

Assessee Resident Individual/HUF

Eligible ➢ Expenditure for Medical Treatment (including nursing), training & rehabilitation of a
Payment dependant disabled.
➢ Amount paid under approved scheme for Maintenance of Dependant Disabled.

Deduction ➢ Rs. 75,000;

➢ Rs. 1,25,000 with severe disability.

PC Note:
❖ Deduction u/s 80DD is allowed irrespective of the amount of Actual Expenditure incurred.
❖ Meaning of ‘Dependant’
(a) For Individual: Spouse, Children, Parents, Brothers & Sisters of Individual.
(b) For HUF: Any member of HUF; dependant wholly/mainly on such individual/HUF for support &
who has not claimed any deduction u/s 80U during PY.
❖ Person with severe disability = Person with 80% or more of one or more disabilities.
❖ If Dependant Disabled dies before Assessee → Amount deposited is deemed as Income in PY of receipt.

CQ10. Mr. X is a resident individual. He deposits a sum of Rs. 50,000 with LIC every year for maintenance of his
handicapped grandfather wholly dependent on him. A copy of certificate from the medical authority is submitted.
Compute the deduction available u/s 80DD for AY 2023-24.
Solution: Since the amount deposited by Mr. X was for his grandfather & grandfather is not covered in definition of
relative u/s 80DD, he will not be allowed any deduction u/s 80DD.

CQ11. What will be the deduction if Mr. X had made this deposit for his dependant father?
Solution: Since the expense was incurred for dependent father who comes under the definition of dependant disabled
relative, Mr. X will be entitled to claim a deduction of Rs. 75,000 u/s 80DD, irrespective of the amount deposited. In
case his father has severe disability, the deduction would be Rs. 1,25,000.

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 Eligible Assessee Resident Individual/HUF

Eligible Payment Expenditure on Medical Treatment of Specified Disease in Rule 11DD for:
for Deduction
Assessee Expenditure for
Individual → Himself or Dependant
HUF → Member of HUF
Deduction ➢ Amount Actually Paid or Rs. 40,000 (whichever is Lower)
➢ Senior Citizen: Amount Actually Paid or Rs. 1,00,000 (whichever is Lower)

PC Note: If any amount is received under insurance or reimbursed by employer for Medical treatment,
received amount shall be reduced from the deduction allowable under this section.

Eligible Assessee Individuals only

Source of Loan Loan must have been taken from:

(a) Bank (b) Financial institution (c) Approved charitable institution

Purpose of Loan Loan must have been taken for pursuing higher education of
(a) Assessee himself;
(b) His Relatives (Spouse/Children);
(c) Student for whom the assessee is Legal Guardian.
PC Note: Courses after Class XII or Equivalent → Qualify for deduction.
❖ Loan can be taken for study in India or Outside India also.
❖ Course may be Full-time or Part-time.

Deduction Interest paid during PY on higher Education Loan out of taxable Income.

Period of Deduction shall be allowed for 8 AYs starting from the AY in which the assessee
Deduction starts paying the interest on loan.

CQ12. Mr. B has taken three education loans on 1st April 2022. Compute deduction u/s 80E for AY 2023-24.
Particulars Loan 1 Loan 2 Loan 3 Loan 4 Loan 5
For whose education loan was taken B Son of B Daughter of B Spouse Y, his Friend
Purpose of Loan MBA B. Sc. 10th BA CA
Amount of Loan 5,00,000 2,00,000 4,00,000 10,00,000 6,00,000
Annual repayment of Loan 1,00,000 40,000 80,000 2,00,000 1,20,000
Annual repayment of Interest 20,000 10,000 18,000 40,000 24,000
Solution:
▪ Deduction u/s 80E is available to Individual for any Interest paid by him in PY i.r.o. loan taken for pursuing
higher education of himself/spouse/children. No deduction is vaialble for loan taken for 10th class.
▪ Therefore, Interest repayment of Loan 1, Loan 2, Loan 4 will qualify for deduction.
▪ Deduction u/s 80E = 20,000 + 10,000 + 40,000 = Rs. 70,000.

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 Eligible Assessee Individuals only [R/NR]

Source of Loan Loan must have been taken from: (a) Bank; (b) FI; (c) Housing finance company

Purpose of Loan Loan must be taken for Acquisition of Residential House Property.

Conditions ➢ Loan must have been sanctioned during the FY 2016-17.

➢ Amount of Loan Sanctioned ≤ Rs. 35 Lacs.
➢ Value of Residential House Property ≤ Rs. 50 Lacs.
➢ Assessee should not own any Residential House on the Date of Sanction of
Loan.

Deduction LOWER of (a) Interest paid on Loan during FY or (b) Rs. 50,000.
This deduction is over & above deduction u/s 24(b) for interest paid i.r.o. loan
borrowed for acquisition of a self-occupied property.

Period of Deduction Deduction is available Till Repayment of loan continues.

CQ13. Mr. A purchased a residential house property for self-occupation @ Rs. 45 lacs on 1.4.2017 for which he took
a loan of Rs. 35 lacs from HDFC @ 11% p.a. on same date. Loan was sanctioned on 28.03.2017. Compute deduction
u/s 80EE for AY 2023-24 assuming entire loan was outstanding as on 31.3.2023 & he does not own any other house.
Solution: Total Interest payable for AY 2023-24 = 35 lacs × 11% = Rs. 3,85,000.
Deduction allowable u/s 24(b) while computing Income u/h “Income from house property” = Rs. 2,00,000.
Deduction u/s 80EE = Rs. 1,85,000 (3,85,000 – 2,00,000). But Maximum Deduction u/s 80EE = Rs. 50,000.

Eligible Assessee Individuals only [R/NR]

Source of Loan Loan must have been taken from: (a) Bank; (b) FI; (c) Housing finance company

Purpose of Loan Loan must be taken for Acquisition of Residential House Property.

Conditions ➢ Individual should not be eligible to claim deduction u/s 80EE.

➢ Loan must have been sanctioned b/w 1.4.2019 & 31st March 2022.
➢ SDV of Residential House Property ≤ Rs. 45 Lacs.
➢ Assessee should not own any Residential House on Date of Sanction of Loan.

Deduction LOWER of (a) Interest paid on Loan during FY or (b) Rs. 1,50,000.

Period of Deduction Deduction is available Till Repayment of loan continues.

PC Note:
☛ In respect of SOP, interest deduction u/s 24(b) is restricted to Rs. 2 Lacs.
☛ Section 71(3A) restricts amount of loss from house property to be set-off against any other head of
income to Rs. 2 Lacs.
☛ Accordingly, if interest payable i.r.o. acquisition of eligible house property is more than Rs. 2,00,000,
excess can be claimed as deduction u/s 80EEA, subject to fulfilment of conditions.

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 Eligible Assessee Individuals only [R/NR]

Source of Loan Loan must have been taken from: (a) Bank; (b) Any deposit taking NBFC;
(c) Systemically important non-deposit taking NBFC.

Purpose of Loan Loan must be taken for Purchase of Electric Vehicle.

Conditions ➢ Loan must have been sanctioned b/w 1.4.2019 & 31.3.2023.

Deduction LOWER of (a) Interest paid on Loan during FY or (b) Rs. 1,50,000.

Period of Deduction is available Till Repayment of loan continues.

Deduction

CQ14. Following are the particulars of Mr. A, B, C & D, salaried individuals, for AY 2023-24: [ICAI SM Q12]
Particulars Mr. A Mr. B Mr. C Mr. D
Amount of loan Rs. 43 Lacs Rs. 45 Lacs Rs. 20 Lacs Rs. 15 Lacs
Loan taken from HFC Deposit taking Deposit taking Public sector bank
NBFC NBFC
Sanction Date 1.4.2021 1.4.2020 1.4.2020 30.3.2019
Disbursement 1.5.2021 1.5.2020 1.5.2020 1.5.2019
Purpose of loan Acquisition of Acquisition of Purchase of electric Purchase of electric
residential house for residential house vehicle for personal vehicle for personal
self-occupation for self-occupation use use
SDV of house Rs. 45 Lacs Rs. 48 Lacs - -
Cost of E- Vehicle - - Rs. 22 Lacs Rs. 18 Lacs
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.
Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act, 1961 for AY 2023-24
in the hands of Mr. A, Mr. B, Mr. C and Mr. D. Assume that there has been no principal repayment during PY 2022-23.
Solution:
Interest deduction for AY 2023-24 to Mr. A
1 Deduction allowable while computing income u/h ‘house property’
Deduction u/s 24(b) Rs. 3,87,000 [Rs. 43,00,000 × 9%] Restricted to 2,00,000
2 Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA: Rs. 1,87,000 (Rs. 3,87,000 – Rs. 2,00,000) Restricted to 1,50,000
Interest deduction for AY 2023-24 to Mr. B
1 Deduction allowable while computing income u/h ‘house property’ 2,00,000
Deduction u/s 24(b) Rs. 4,05,000 [Rs. 45,00,000 × 9%] Restricted to
2 Deduction under Chapter VI-A from Gross Total Income Nil
Deduction u/s 80EEA is not permissible since: loan is taken from NBFC & SDV > Rs. 45 lacs.
Mr. C: Deduction under Chapter VI-A
1 Deduction u/s 80EEB for interest payable on loan taken for purchase of electric vehicle 1,50,000
[Rs. 20 lacs x 10% = Rs. 2,00,000 restricted to Rs. 1,50,000].
Mr. D: Deduction under Chapter VI-A
1 Deduction u/s 80EEB is not permissible since loan was sanctioned before 1.4.2019 Nil

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Eligible Assessee Any Assessee (R/NR)

Eligible Payment Donations made to specified funds which are approved u/s 80G.

Mode of Payment ➢ Amount shall be paid by Any Mode other than Cash.
However, Donations ≤ 2000 can be made in Cash.
➢ Donation in kind → No Deduction Allowed (Donation should be made in Money).
➢ Donations can be from Earlier year’s Income/Exempt Income.

Adjusted GTI Adjusted GTI = GTI as Reduced by the following:

▪ LTCG u/s 112 & 112A
▪ STCG u/s 111A
▪ All Permissible Deductions u/s 80C - 80U [Except deduction u/s 80G]
▪ Exempt Income

Qualifying Limit Qualifying Limit = 10% of Adjusted GTI

Deduction Deduction u/s 80G = Total of Deductions permissible under A, B, C & D.

AMOUNT OF DEDUCTION u/s 80G [Refer “How to calculate Deduction” Below]
A Donations Eligible for 100% Deduction WITHOUT QUALIFYING LIMIT
▪ National Defence Fund/National Foundation for Communal Harmony;
▪ Zila Saksharta Samiti/State/National Blood Transfusion Council;
▪ PM’s National Relief Fund/[(Maharashtra CM’s/PM’s Armenia) Earthquake Relief Fund]
▪ Africa (Public Contributions India) Fund;
▪ Approved University/Educational Institution of National Eminence;
▪ Fund set up by SG of Gujarat for providing relief to Victims of Earthquake in Gujarat;
▪ Fund set up by SG to provide Medical Relief to Poor People;
▪ Army/Airforce Central Welfare Fund/Indian Naval Benevolent Fund;
▪ Andhra Pradesh CM’s Cyclone Relief Fund, 1996;
▪ CM’s Relief Fund/Lieutenant Governor’s Relief Fund in any State or Union Territory.
▪ National Illness Assistance Fund/National Sports Fund/National Cultural Fund;
▪ Fund for Technology Development & Application set up by CG.
▪ National Trust for Welfare of persons with Autism, Cerebral Palsy, Mental Retardation etc;
▪ National Fund for control of Drug Abuse (Inserted by FA, 2015 w.e.f. A.Y. 2016 -17)
▪ Donations made to Swachh Bharat Kosh/ Clean Ganga Fund set up by CG
▪ National Children’s Fund.
▪ Prime Minister's Citizen Assistance & Relief in Emergency Situations Fund (PM Cares Fund)
B Donations Eligible for 50% Deduction WITHOUT QUALIFYING LIMIT
▪ Jawaharlal Nehru Memorial Fund/Prime Minister’s Drought Relief Fund.
▪ Indira Gandhi Memorial Trust/ Rajiv Gandhi Foundation.
C Donations Eligible for 100% Deduction SUBJECT TO QUALIFYING LIMIT
▪ Donation to Government/Approved LA/Institution for Promoting Family Planning;
▪ Donations by Company to Indian Olympic Association/any other association established in India
& notified by CG for Sponsorship/Development of Infrastructure for Sports & Games.
D Donations Eligible for 50% Deduction SUBJECT TO QUALIFYING LIMIT
▪ Donation to Government/Approved LA/Institution for Any Charitable Purpose other than
Promoting Family Planning.

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 ▪ Authority constituted for satisfying the need for housing accommodation/Improvement of cities,
towns & villages.
▪ Corporation established by CG/SG specified u/s 10(26BB) for Promoting Interests of Minority
▪ Notified Temple, Mosque, Gurdwara, Church notified by CG to be of historic importance, for
Renovation/Repair of such Place.

How to Calculate Deduction u/s 80G [V.IMP]

1. Calculate Adjusted GTI.
2. Calculate Qualifying Limit [= 10 % of Adjusted GTI]
3. Eligible donations in C & D (which are subject to Qualifying Limit) should be Aggregated.
4. Qualifying Limit gives us “Total Amount of Donations” eligible for Deduction. [It is mistaken that
Qualifying Limit gives us Maximum Possible Deduction]
5. Firstly, Donations eligible for 100% Deduction (C) should be adjusted against Qualifying Limit.
6. Balance Qualifying Limit shall be adjusted against Donations Eligible for 50% Deduction & then
deduction of 50% shall be calculated.
7. Total Deduction under (C) & (D) should be limited to Qualifying Limit (10% of Adjusted GTI)
8. Donations made under (A) & (B) are fully allowed as deduction without QUALIFYING LIMIT.

CQ15. Mr. Shiva (age 58 years) has GTI of Rs. 7,75,000. He made following investment:
(i) Premium paid to insure life of major daughter on 1.4.2022 (Sum Assured Rs. Rs. 1,80,000) - Rs. 20,000.
(ii) Medical Insurance Premium for self - Rs. 12,000; Spouse- Rs. 14,000.
(iii) Donation to a public charitable institution registered u/s 80G - Rs. 50,000 by way of Cheque.
(iv) LIC Pension Fund - Rs. 60,000.
(v) Donation to National Children’s Fund - Rs. 25,000 by way of Cheque.
(vi) Donation to Jawaharlal Nehru Memorial Fund - Rs. 25,000 by way of Cheque.
(vii) Donation to approved institution for promotion of family planning - Rs. 40,000 by Cheque.
(viii) Deposit in PPF – Rs. 1,00,000.
Compute the total income of Mr. Shiva for AY 2023-24.
Solution: Computation of Total Income of Mr. Shiva for AY 2023-24
Gross Total Income 7,75,000
Less: Deduction u/s 80C
Deposit in PPF (1,00,000)
Life insurance premium paid for insurance of major daughter (18,000)
(Maximum 10% of Sum Assured as the policy is taken after 1.3.2012)
Deduction u/s 80CCC i.r.o. LIC pension fund (60,000)
Total Investment eligible for deduction u/s 80C 1,78,000
Deduction u/s 80C [Restricted to Rs. 1,50,000] (1,50,000)
Deduction u/s 80D
Medical Insurance premium i.r.o. self & spouse (restricted to Rs. 25,000) (25,000)
Deduction u/s 80G (See Working Note below) (87,500)
Total income 5,79,950

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Working Note: Computation of Deduction u/s 80G
(i) Adjusted GTI = GTI – All Deductions except 80G = Rs. 7,75,000 – Rs. 1,50,000 – Rs. 25,000 = Rs. 6,00,000.
(ii) Qualifying Limit = 10% of Adjusted GTI = Rs. 60,000.
Particulars of donation Donation % of Deduction Deduction u/s 80G
National Children’s Fund 25,000 100% 25,000
Jawaharlal Nehru Memorial Fund 25,000 50% 12,500
Approved Institution for 40,000 100%, subject to Qualifying Limit 40,000
promotion of family planning
Public Charitable Trust 1,50,000 50% subject to qualifying limit 10,000
Total Deduction u/s 80G Rs. 87,000

PC Note:
▪ Firstly, donation of Rs. 40,000 to approved institution for family planning qualifying for 100% deduction
subject to qualifying limit, should be adjusted against Qualifying Limit of Rs. 60,000.
▪ Thus, Qualifying Limit left after such adjustment = Rs. 20,000 [Rs. 60,000 – Rs. 40,000].
▪ Now, even though we have donated Rs. 1,50,000 to public charitable trust, only balance qualifying limit of Rs.
20,000 shall be available for taking deduction.
▪ Thus, we will calculate deduction as if we have contributed only Rs. 20,000 to public charitable trust.
▪ Hence, contribution of Rs. 1,50,000 to public charitable trust is restricted to Rs. 20,000 (Rs. 60,000 - Rs. 40000)
50% of which would be deduction u/s 80G.
▪ Deduction i.r.o. donation to public charitable trust = Rs. 10,000 (50% of Rs. 20,000).

Assessee ▪ Any Self-Employed Individual OR

▪ Employed Individual (Not in Receipt of HRA/Rent-Free Accommodation)

Payment Rent paid for his Residential Accommodation along with his family.

Deduction (a) Rs. 5,000 p.m

(b) Excess of Rent paid over 10% of Adjusted GTI
(c) 25% of Adjusted GTI [Whichever is lower]

Adjusted GTI Adjusted GTI for this purpose means GTI as REDUCED by:
1. LTCG which have been included in GTI & STCG u/s 111A.
2. All Deductions u/s 80C-80U Except Deduction u/s 80GG.
Conditions ▪ Assessee should not be receiving any HRA exempt u/s 10(13A).
▪ Rented House should be occupied by the assessee for his own residence.
▪ Assessee, spouse or minor child or HUF of which assessee is a member, does not
own any residential accommodation at the place where assessee ordinarily resides
or at the place where he works or carries on his business or profession.
▪ If assessee owns any residential accommodation at any place, other than the place
of residence or work of the assessee, then the concession i.r.o. self-occupied property
is not claimed by the assessee.

CQ16. Mr. Ganesh, a businessman, whose total income (before allowing deduction u/s 80GG) for AY 2023-24 is Rs.
4,60,000. He paid house rent at Rs. 12,000 p.m. i.r.o. residential accommodation occupied by him at Mumbai. Compute
the deduction allowable to him u/s 80GG for AY 2023-24.
Solution: Deduction u/s 80GG = Least of all the below given points = Rs. 60,000.
(i) Actual Rent paid - 10% of Adjusted GTI = Rs. 1,44,000 – Rs. 46,000 = Rs. 98,000.
(ii) 25% of Adjusted GTI = 25% × Rs. 4,60,000 = Rs. 1,15,000.
(iii) Rs. 5,000 × 12 Months = Rs. 60,000.

189
 Assessee Any Assessee NOT having PGBP Income

Eligible Payment made during PY to the following:

Payment ▪ Approved Research Association/University/College to be used for Scientific or Social or
Statistical Research or Rural Development as specified u/s 35CCA.
▪ Notified rural development fund/National Urban Poverty Eradication Fund.
▪ Public sector company/LA/Association/Institution approved by National Committee, for
carrying out any eligible project/scheme specified in Sec. 35AC
▪ National Urban Poverty Eradication Fund (NUPEF)

Deduction 100% of the Donation Paid.

Mode of ▪ Amount shall be Paid by any mode other than Cash.

Payment
▪ Donations ≤ 2,000 can be made in Cash.

PC Note: Deduction allowed to the assessee shall not be denied even if approval granted to any of the above
institution is withdrawn after the payment of donation by the assessee.

Eligible Assessee Indian Companies only.

Eligible Payment Any sum contributed in PY to any Political party or Electoral Trust.
Expenditure on advertisement in Brochure of Political party → Eligible.

Deduction 100% of the Donation Paid.

Mode of Payment Amount shall be paid by Any mode other than Cash.

CQ17. During PY 2022-23, ABC Ltd, Indian company contributed Rs. 2 lacs to an electoral trust & incurred Rs.
25,000 on advertisement in a brochure of political party. Is the company eligible for deduction u/s 80GGB?
Solution: Indian company is eligible for deduction u/s 80GGB i.r.o. any sum contributed by it in the previous year
to any political party or an electoral trust.
Further, the word “contribute” in section 80GGB has the meaning assigned to it in section 293A of the Companies
Act, 1956, & accordingly, it includes expenditure incurred on advertisement in a brochure of a political party.
Therefore, ABC Ltd. is eligible for a deduction of Rs. 2,25,000 u/s 80GGB i.r.o. sum of Rs. 2 lacs contributed to an
electoral trust & Rs. 25,000 incurred by it on advertisement in a brochure of a political party.
PC Note: There is a specific disallowance u/s 37(2B) i.r.o. expenditure incurred on advertisement in brochure of
Political party. Therefore, the expenditure of Rs. 25,000 would be disallowed while computing business
income/GTI. However, such expenditure incurred by Indian company is allowable as deduction from GTI u/s
80GGB.

Eligible Assessee Any Person [Except Local Authority & Every AJP funded by Government]

Eligible Payment Any sum contributed in PY to any Political party or Electoral Trust.

Deduction 100% of the Donation Paid.

Mode of Payment Amount shall be paid by Any mode other than Cash.

PC Note: Government companies cannot give political donations.

190
 B. INCOME BASED DEDUCTIONS

Eligible Individual/HUF whose GTI includes Interest on Deposits in Saving A/c in Bank/Co-
Assessee operative Bank/Post office (Except Time Deposit repayable after Fixed Period)

Deduction Interest on Saving Deposits (other than Time Deposits) upto Rs. 10,000.

PC Note:
1. Interest from Deposit in Savings A/c held by firm/AOP/BOI → No Deduction to Partner/Member.
2. Deduction u/s 80TTA is not available to Resident Senior Citizen eligible for deduction u/s 80TTB.
3. Section 10(15)(i) → Saving A/c Interest in POST OFFICE is Exempt upto Rs. 3,500/Rs. 7,000.

Eligible Resident Senior Citizen whose GTI includes Interest on Deposits in Bank/Co-operative
Assessee Bank/Post office.

Deduction Interest on Saving Deposits upto Rs. 50,000.

PC Note: It may be Interest on Saving A/c, Fixed Deposit or any other Interest.

SPACE FOR PC Analysis - Section 80TTA Vs. 80TTB

Eligible Assessee Resident Individual who is registered as True & First Inventor under the Patents Act,
1970, including co-owner of the patent.

Deduction Lower of (a) Amount of Royalty Received or (b) Rs. 3 lacs.

Income Eligible Royalty Income including Consideration for:

for Deduction
(i) Transfer of Rights in the Patent or
(ii) Providing information for working or use in India.
It includes Advance Royalty which is Not Returnable.
Note: Exemption is not Available on Consideration for Sale of Product Manufactured
using of Patented process/Article for Commercial Use.

Royalty from Royalty brought to India in Convertible Foreign Exchange within 6 Months or
Foreign Country extended period (by RBI) shall only be allowed as Deduction.
Assessee is required to furnish a Prescribed Certificate along with ROI.

Subsequent If Patent is Subsequently Revoked → Deduction allowed shall be deemed to have

Revocation of been Wrongly Allowed & Assessment shall be rectified u/s 155.
Patent Note: Period of 4 years for Rectification u/s 155 shall be reckoned from the end of PY
in which order of the Revocation is Passed.

191
 Eligible Assessee Resident Individual who is an Author/Joint Author.

Deduction Lower of (a) Amount of Royalty Received or (b) Rs. 3 lacs.

Income Eligible Royalty Income.

for Deduction
❖ Such book should be a work of Literary, Artistic or Scientific Nature.
❖ Royalty Income from Textbook for Schools, Guides, Commentaries, Newspapers,
Journals, Pamphlets → Not Eligible for Deduction.

PC Note: Royalty Income (before allowing Expenses attributable to such income) shall Not Exceed 15%
of the value of books sold during PY. [If it Exceed 15%, Excess amount is Not deductible].
However, this condition is not applicable where Royalty is receivable in lumpsum in lieu of all rights of
the author in the book.

Royalty from Royalty brought to India in Convertible Foreign Exchange within 6 Months or
Foreign Country extended period (by RBI) shall only be allowed as Deduction.
Assessee is required to furnish a Prescribed Certificate along with ROI.

CQ18. Mr. X receives royalty of Rs. 1 Lacs @ 18% & incurs Rs. 10,000 as expenditure for earning royalty. The
books are covered u/s 80QQB & royalty is received from abroad. Rs. 50,000 are remitted to India till 30 th
September 2022. Determine deduction u/s 80 QQB for AY 2023-24.
Solution:
1,00,000
▪ Eligible income for deduction (before allowing expenditure) = 15% = 18%
x 15% = Rs. 83,334.
▪ Income brought to India in convertible foreign exchange = Rs. 50,000.
▪ Thus, Income eligible for deduction = Rs. 50,000.
▪ Royalty Income = Rs. 50,000 – Rs. 10,000 (expenditures) = Rs. 40,000.
▪ Deduction u/s 80 QQB = Rs. 50,000 – Rs. 10,000 = Rs. 40,000.

CQ19. Mr. Aakash received royalty of Rs. 2,88,000 from a foreign country for a book authored by him, being a
work of literary nature. Rate of royalty is 18% of value of books. Expenditure incurred for earning this royalty
was Rs. 40,000. Amount remitted to India till 31.10.2022 is Rs. 2,30,000. Remaining amount was not remitted
till 31.03.2023. Compute the amount includible in GTI of Mr. Aakash & deduction u/s 80QQB.
Solution: Net royalty of Rs. 2,48,000 (Rs. 2,88,000 – Rs. 40,000) is includible in gross total income.
Deduction u/s 80QQB
Royalty [
2,88,000 𝑥 15%
] Rs. 2,40,000
18%
Restricted to
Amount brought into India in convertible foreign exchange within the prescribed time Rs. 2,30,000
Less: Expenses already allowed as deduction while computing royalty income (Rs. 40,000)
Deduction u/s 80QQB Rs. 1,90,000

Assessee Resident Individual certified by medical authority to be disabled person with disability.

Deduction ➢ Rs. 75,000 [Person with disability];

➢ Rs. 1,25,000 [Person with Severe Disability (over 80%)]

T&Cs Assessee shall furnish a copy of Medical Certificate along with ROI.

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 C. OTHER DEDUCTIONS

Applicability Assessee to whom Section 44AB (Tax Audit) Apply.

Deduction 30% of Additional Employee Cost incurred in the PY would be allowed for 3 AYs including
the AY relevant to PY in which such Employment is provided.

Conditions (a) Business should Not be formed by Splitting up or reconstruction of Existing Business
(b) Business should Not be Acquired by the Assessee by way of Transfer from any other
Person or as a result of any Business Re-organisation.
(c) Prescribed Audit Report should be furnished along with ROI.

AEC AEC = Total Emolument Paid to Additional Employees Employed during PY.
(Additional A. In case of Existing Business: AEC = Nil
Employee
Cost) (i) If there is No Increase in Number of Employees from Total Number of Employees
Employed on Last Day of Preceding Year; [Even if New Employees are Employed]
(ii) If Payment is made otherwise than by A/c Payee Cheque/Draft/Netbanking.
B. In case of New Business:
AEC = Emoluments Paid to Employees Employed during that PY.
Additional Employee who has been Employed during PY & his employment has increased Total No.
Employee of Employees on the last day of Preceding year but does not include:
(a) Employee whose T otal Emoluments > Rs. 25,000 p.m;
(b) Employee for whom Entire Contribution is Paid by Government under the Employees’
Pension Scheme;
(c) Employee Employed for < 240 days during PY.
PC Note: If Assessee engaged in Business of Manufacturing of Apparel, Footwear,
Leather Products → Employee employed for < 150 days during PY]
(d) Employee who does Not Participate in RPF.
Emolument Any Sum Paid/Payable to Employee for his Employment but does Not Include:
(a) Contribution Paid/Payable by Employer to Pension fund/PF/Any other Fund for the
benefit of the Employee under any law;
(b) Any Lump-sum Payment Paid/Payable to Employee at the time of Termination or
Superannuation/Voluntary Retirement. [Ex: Gratuity, Pension, VRS etc]

CQ19. Mr. Krishanan has commenced the operations of Manufacture of goods in a factory on 1.4.2022. He employed
105 New Employees during PY 2022-23 as under:
(a) 10 Employes who does not participate in PF benefits;
(b) 30 Employees employed from 1.4.2022 to 30.3.2023;
(c) 50 Employees employed on 1.5.2022, to whom Salary is paid at Rs. 30,000 p.m;
(d) 15 Employees employed on 1.9.2022.
Compute deduction available to Mr. A for AY 2023-24 if Salary paid to each employee at Rs. 10,000 p.m. except those
employed on 1.5.2022 & Profits from the Manufacture of Goods in Factory for AY 2023-24 is Rs. 4,75,000.
Solution: Computation of Deduction u/s 80JJAA
Particulars Additional Employee Reason
10 Employees No Does not participate in RPF.
30 Employees employed from 1.4.2022 to 30.3.2023 30 Employed for more than 240 days
50 Employees whose wages are Rs. 30,000 pm. Nil Total emoluments > Rs. 25,000 p.m
15 Employees employed on 1.9.2022 Nil Employed for less than 240 days
Additional Employees 30
▪ Additional Employee Cost = Rs. 10,000 × 30 Employees × 12 months = Rs. 36,00,000.
▪ Deduction u/s 80JJAA = Rs. 36,00,000×30% = Rs. 10,80,000.

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(a) Rent/Revenue derived from letting of land situated in India & used for agricultural purposes.

Rent: Rent received by the original tenant from sub- tenant would also be agricultural income.
Revenue: fees received for renewal of lease of land would be revenue derived from land.
PC Note: If agricultural land is situated in foreign country, Agricultural Income is taxable u/h IFOS.
PC Note: If rent has not been received in time & accordingly interest has been received, such interest
shall not be considered to be agricultural income. It shall be taxable u/h ‘IFOS’.

(b) Income derived from Agricultural Operations or other related activities.

(c) Income derived from Farm building (in Rural Area) required for agriculture operations.
Ex: Farm building used as dwelling house for farmers; as a store house for agricultural produce/tools.

PC Note: Income arising from use of farm building for any purpose other than agriculture referred
in (a) & (b) above would not be agricultural income (Ex: Letting for residential purpose/for business)
PC Note: If Farm Building is in Urban Area, it should be constructed on agricultural land.

PC Note: Income from saplings/seeds grown in Nursery (whether/not basic operations were carried out
on land) is also an agricultural Income.

▪ Dividend received by any shareholder from a company having agricultural income shall not be considered to be
agricultural income.
▪ It shall be treated as “Dividend Income” in the hands of shareholder.

CQ1. PC Ltd., an Indian company having agricultural income of Rs. 12 Crore distributes dividend of Rs. 60 lacs.
Mr. AC (shareholder of PC Ltd.) has received dividend of Rs. 6 lacs. Discuss tax treatment.
Solution: Tax Treatment: Dividend received by Mr. AC shall be taxable to him at slab rate.

▪ If any foreign company is doing agriculture, its agricultural income in India shall also be exempt .
▪ If company has paid dividend to shareholders, it will be taxable in the hands of the shareholder.

CQ2. What would be your answer if PC Ltd is a foreign Company in CQ1.

Solution:
Tax Treatment in the hands of Mr. AC: Dividend received by Mr. AC shall be taxable in his hands. Tax payable
on Rs. 6 Lacs = 1 Lacs x 20% + 2.5 Lacs x 5% = Rs. 32,500 + HEC @ 4% = Rs. 33,800.
Tax Treatment in the hands of PC Ltd: Agricultural Income of Rs. 12 Crores shall be exempt u/s 10(1).

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 AGRICULTURAL INCOME NON-AGRICULTURAL INCOME

Income derived from the sale of seeds. Income from breeding of livestock.

Income from growing of flowers & creepers. Income from poultry farming.

Rent received from land used for grazing of cattle Income from fisheries.
required for agriculture activities.

Income from growing of bamboo. Income from dairy farming.

SOME OTHER IMPORTANT CASE LAWS

 Compensation received from an insurance company on account of damage caused to the crops is
agricultural income [B. Gupta Private Ltd, v CIT, (HC)]
 Income from butter & cheese making is not agricultural income [Venkataswamy Naitlu vs CIT (SC)]
 Income from supplying surplus water to other agriculturists is not agricultural income [Sri Kanga
Vilas Ginning & Oil Mills v. CIT, (HC)]
 If assessee was growing mulberry leaves, feeding them to silkworms & obtaining silk cocoons, income
from sale of silk cocoons would not be agricultural income [K. Lakshmansa & Co. v CIT, (SC)].

CQ3. Mr. Amol Chandak is a professor in PKV Agricultural University, Akola & is getting salary of Rs. 50,000 p.m. He
claims that it is his agricultural income. Discuss.
Solution: Income from PKV Agricultural university cannot be considered to be agricultural income. It is taxable u/h
salary in the hands of Mr. Amol Chandak.

CQ4. Discuss whether Rent Received for letting out Agricultural land for a Movie shooting & amounts Received
from Sale of saplings & seedlings in Nursery adjacent to Agricultural Land owned by Assessee can be regarded
as Agricultural Income.
Answer: Rent for Movie shooting: It is not an Agricultural Income, since it is not Income derived ‘through
Agriculture’. This constitutes Rental Income for ‘non – agricultural purposes’.
Sales of saplings & seedlings in Nursery: As per Explanation 3 to section 2(1A), Income derived from Sale
of Plants & Seedlings grown in Nursery constitutes Agricultural Income & thus exempt u/s 10(1).

PAYMENT RECEIVED BY PARTNER FROM PARTNERSHIP FIRM HAVING AGRICULTURAL INCOME

 If any partnership firm has agricultural income, it will be exempt from income tax and if partnership
firm has paid any salary or interest to the partners, it will be considered to be agricultural income to the
partners as decided in U.M. Chidambaram Pillai v C1T (SC)
 If any partner has received any share out of profits of partnership firm, it will be exempt u/s 10(2A) & it
does not matter whether partnership firm has agricultural income or non-agricultural income.

PROFIT ON TRANSFER OF URBAN AGRICULTURAL LAND: Whether Agricultural Income?

❖ No, as per Explanation to section 2(1A), CG arising from the transfer of urban agricultural land would not
be treated as agricultural income u/s 10 but will be taxable u/s 45.

Ex: If I sell agricultural land situated in Mumbai for Rs. 10 lacs & make profit of Rs. 8 lacs over its COA. This surplus
will not be an agricultural income exempt u/s 10(1). It will be taxable u/s 45 since it is urban agricultural Land &
thus it is a capital asset.

195
 Business Income Sale proceeds of final product manufactured by using agricultural produce
– Market value of Agricultural produce used in manufacturing of such Product
– Manufacturing Expenses.

Agriculture Income Market Value of Agricultural produce – Cost of Cultivation.

CQ5. Mr. B grows sugarcane & uses the same for the purpose of manufacturing sugar in his factory. 30% of sugarcane
produce is sold for Rs. 10 lacs & cost of cultivation of such sugarcane is Rs. 5 lacs. Cost of cultivation of 70% is Rs.14
lacs & market value of the same is Rs. 22 lacs. After incurring Rs.1.5 lacs in manufacturing process on the balance
sugarcane, the sugar was sold for Rs. 25 lacs. Compute B’s business income & agricultural income. [ICAI SM Q1]
Solution: Income from sale of sugarcane is agricultural income & Income from sale of sugar is business income.
Business income = Sale proceeds - MV of 70% of sugarcane (used in manufacture of sugar) - Manufacturing expenses
= Rs. 25 lacs - Rs. 22 lacs - Rs. 1.5 lacs = Rs. 1.5 lacs.
Agricultural income = Market value of sugarcane produce - Cost of cultivation.
= [Rs. 10 lacs + Rs. 22 lacs] – [Rs. 5 lacs + Rs. 14 lacs] = Rs. 13 lacs.

How to determination of Market Value?

SN Situation Market Value
1 If Agricultural produce is capable of being sold in Value calculated at Average price at which it
market as such/after ordinary processing has been sold during the relevant PY.
2 If Agricultural produce is incapable of being sold Cultivation Expenses +
in market as such/after ordinary processing Rent paid for Land in which it was grown +
Such profit as AO thinks to be reasonable.

CQ6. X Ltd. grows sugarcane to manufacture sugar. Data for the PY 2022-23 is as follow:
1. Cost of cultivation of sugarcane 6,00,000
2. Market value of Sugarcane when transferred to factory 10,00,000
3. other manufacturing cost 6,00,000
4. Sale of sugar 25,00,000
5. Salary of Managing Director who looks after all operation of the company 3,00,000
Determine the Income of the company.
Solution:
Particulars Rs. Rs.
1. Profit & Gain of Business or Profession:
Sales of sugar 25,00,000
Less: Average market Value of Sugarcane 10,00,000
Salary to managing Director 3,00,000
Manufacturing cost 6,00,000 (19,00,000)
Business Income 6,00,000
2. Computation of Agricultural Income:
Market Value of Sugarcane 10,0000
Less: Cost of Cultivation (6,00,000)
Agricultural Income 4,00,000

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APPORTIONMENT OF INCOME B/W BUSINESS INCOME & AGRICULTURE INCOME
Rule Apportionment of Income in certain cases Agriculture Business
7A Income from growing & manufacturing of rubber 65% 35%
7B Income from growing & manufacturing of coffee
Income derived from sale of coffee grown & cured 75% 25%
Income derived from sale of coffee grown, cured, roasted & grounded 60% 40%
8 Income from growing & manufacturing of tea 60% 40%

CQ7. Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the market for
Rs. 30 lacs. Cost of growing rubber plants is Rs. 10 lacs & that of manufacturing latex is Rs. 8 lacs. Compute his total
income.
Solution: The total income of Mr. C comprises of agricultural income & business income.
Total profits from the sale of latex= Rs. 30 lacs – Rs. 10 lacs – Rs. 8 lacs = Rs. 12 lacs.
Agricultural income = 65% of Rs. 12 lacs = Rs. 7.8 lacs; Business income = 35% of Rs. 12 lacs. = Rs. 4.2 lacs.

PARTIAL INTEGRATION OF AGRICULTURAL INCOME WITH NON-AGRICULTURAL INCOME [PIT]

Objective of PIT Tax the non-agricultural Income at higher rates.

Applicability of PIT Individuals, HUF, AOP/BOI & artificial persons. [Company & Firms]

Conditions for Partial 1. Net Agricultural Income should exceed Rs 5,000 p.a. &
Integration of Tax 2. Non-Agricultural Income should exceed BEL.

STEPS for calculation of tax in case of PIT

1. Calculate Tax on Net Agricultural Income + Non-Agricultural Income.
2. Calculate Tax on Net Agricultural Income + BEL.
3. Income tax Calculated in Step 1 – Income Tax calculated in Step 2.
4. Sum arrived in Step 3 shall be increased by SC (if applicable) & reduced by rebate u/s 87A.
5. Add Health & Education cess @ 4%.

CQ8. Mr. Shubham (Age 24), a resident, has provided the following particulars of his income for PY 2022-23:
Income from salary (computed) Rs. 3,00,000
Income from house property (computed) Rs. 2,10,000
Agricultural income from a land in Nagpur Rs. 2,10,000
Expenses incurred for earning agricultural income Rs. 1,10,000
Compute tax liability of Mr. Shubham for AY 2023-24.
Solution: Computation of tax liability
Particulars Amount
1. Income from salary (computed) Rs. 3,00,000
2. Income from house property (computed) Rs. 2,10,000
Gross Total Income Rs. 5,10,000
Computation of tax Liability
Step 1 Tax on Rs. 6,10,000 (Rs. 1,00,000 + Rs. 5,10,000) = Rs. 34,500.
Step 2 Tax on Rs. 3,50,000 (Rs. 1,00,000 + Rs. 2,50,000) = Rs. 5,000.
Step 3 Tax Payable = tax in (1) – Tax in (2) = Rs. 34,500 – Rs. 5,000 = Rs. 29,500
Step 4 & 5 Rs. 29,500 + 4% = Rs. 30,680.
Tax Payable Rs. 30,680.
PC Note: Net Agricultural Income = Rs. 2,10,000 – Rs. 1,10,000 = Rs. 1,00,000

197
Eligible profits Profits derived from Export of articles/things or providing any service from the unit
established in SEZ shall be allowed as deduction from total income.

Eligible Assessee Assessee engaged in Export of articles/things or providing any service.

𝐄𝐱𝐩𝐨𝐫𝐭 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐨𝐟 𝐮𝐧𝐢𝐭 𝐢𝐧 𝐒𝐄𝐙
Quantum of = Profits from unit in SEZ ×
Deduction 𝐓𝐨𝐭𝐚𝐥 𝐭𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐨𝐟 𝐔𝐧𝐢𝐭 𝐢𝐧 𝐒𝐄𝐙

Export turnover: Consideration in respect of export by the undertaking but does not include
freight, telecommunication charges or insurance attributable to the delivery of the articles or
things outside India or rendering services.

PC Note: Freight, insurance, telecommunication charges & expenses incurred in foreign

exchange for rendering services outside India are to be excluded both from ‘Export
turnover’ & ‘total turnover’, while calculating deduction u/s 10AA to the extent they are
attributable to the delivery of articles or things outside India.

PC Note: Profits derived from on-site development of computer software (including services
for development of software) outside India shall be deemed to be the profits & gains derived
from the export of computer software outside India.

Period of Deduction u/s 10AA shall be allowed for a total period of 15 relevant AY.
Deduction
For first 5 AY 100% of profits & gains of export.

For Next 5 AY 50% of profits or gains of export.

For Next 5 AY Amount not exceeding 50% of profits debited to P&L A/c of PY in
respect of which deduction is to be allowed & credited to SEZ
Reinvestment Reserve Account & utilised for specified purposes.

PC Note: Deduction u/s 10AA shall not exceed such total income of assessee.

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Conditions for claiming deduction for further 5 years (after 10 years) [Sec 10AA(2)]
1. Amount credited to SEZ Re-Investment Reserve Account is utilized for:
(a) Acquiring P&M which is first put to use before expiry of 3 years following the PY in which reserve was created;
(b) Until acquisition of aforesaid P&M: For the business of the undertaking.
2. However, it should not be utilized for:
(a) distribution of dividends/ remittance o/s India as profits; or (b) for the creation of any asset outside India;

Consequences of mis-utilisation or non-utilisation of reserve

Where any amount credited to SEZ Re-Investment Reserve Account –
(a) has been utilised for any purpose other than those referred to in 10AA(2), amount utilized shall be deemed to be
profits of the year in which the amount was utilized.
(b) has not been utilised before the expiry of 3 years, unutilized amount shall be deemed to be profits of the year
immediately following the said period.

Amalgamation/ Demerger [Section 10AA(5)]

▪ Deduction shall be allowable in the hands of the amalgamated or resulting company.
▪ No Deduction shall be allowed u/s 10AA to amalgamating company or demerged company for the PY in which
amalgamation/demerger takes place.

CONDITIONS
1 Assessee has been granted a letter of approval by development commissioner to set a unit in SEZ.

2 It begins to manufacture articles or things or provide services during PY 2005-06 or after in SEZ.

3 It should not be formed by splitting up/reconstruction of business already in existence.

4 It should not be formed by transfer of old P&M to new business.

Exception: It can be formed by transfer of old P&M upto 20% of total value of P&M. Imported P&M
are not treated as old P&M.

5 Assessee should furnish report of CA with ROI certifying that deduction has been correctly claimed.

RESTRICTION ON OTHER TAX BENEFITS

1 Business Loss or Capital loss or unabsorbed depreciation in so far as such loss relates to business of
the undertaking (being the Unit) shall be allowed to be carried forward or set off in subsequent years.
2 WDV after tax holiday: During tax holiday period, depreciation is deemed to have been allowed on
assets & WDV shall be computed after tax holiday as if depreciation has been claimed as deduction.
3 If deduction u/s 10AA is allowed from profit of specified business u/s 35AD, no deduction shall be
allowed u/s 35AD for any AY.

CQ9. Y Ltd. gives the following information for AY 2023-24. Compute deduction u/s 10AA for AY 2023-24.
Total turnover of Unit A located in Special Economic Zone 100 Lacs
Profit of the business of Unit A 30 Lacs
Export turnover of Unit A 50 Lacs
Total turnover of Unit B located in Domestic Tariff Area (DTA) 200 Lacs
Profit of the business of Unit B 20 Lacs
Solution: 100% of profit derived from export of articles/things or services is eligible for deduction u/s 10AA,
assuming that PY 2022-23 falls within first 5-years period commencing from the year of manufacture or production
of articles or things or provision of services by the Unit in SEZ. Deduction u/s 10AA = Profits from unit in SEZ ×
Export Turnover of unit SEZ/Total turnover of Unit in SEZ = [30 Lacs * (50 Lacs/100 Lacs)] = Rs. 15 Lacs.

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RESTRICTION ON ALLOWABILITY OF EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME [Sec. 14A]
➢ Any expenditure incurred to earn Exempt Income shall not be allowed as deduction while computing
income under any head since the exempt income is not taxable.

Method for determining amount of expenditure incurred to earn Exempt Income - Rule 8D
▪ If AO, having regard to the accounts of the assessee, is not satisfied with -
(a) Correctness of the claim of the expenditure incurred by the assessee; or
(b) Assessee has claimed that no expenditure has been incurred to earn exempt income in the PY,
he shall determine amount of expenditure incurred to earn exempt income in following manner:

Expenditure incurred to earn Exempt Income = (i) + (ii)

(i) Amount of Expenditure incurred directly to earn Exempt Income.
(ii) 1% of Annual Average of Monthly Averages of value of investment, income from which is Exempt.
However, (i) + (ii) shall not exceed total expenditure claimed as deduction in PY.

PC Note: Section 14A r/w Rule 8D states that expenditure incurred to earn exempt income shall be
disallowed even if assessee has not earned any exempt income in a particular year.

PC Note: All the Exemptions u/s 10 will not be discussed in this chapter. Some Exemptions u/s 10 are
discussed in some of the chapters to be discussed later.
So, in this chapter we will discuss only those exemptions which will not be discussed in other chapters.

Salaries ▪ Leave Travel Concession & HRA.

▪ Allowance payable outside India by GOI to a Citizen of India [Foreign Diplomats].
▪ Gratuity/Commuted Pension/Leave Encashment [Salary].
▪ Retrenchment Compensation & Voluntary Retirement Receipts.
▪ Income-tax paid by employer on behalf of employee.
▪ Payment from Provident Funds/Superannuation Fund.
▪ Special Allowance to meet expenses relating to duties or personal expenses.
▪ Specified Allowances & Perquisites paid to Chairman/Member of UPSC [Section 10(45)]

Deductions ▪ Receipts from LIC.

from GTI ▪ Payment from NPS Trust to an employee on Closure of his Account/Opting out of Pension
Scheme/Partial Withdrawal.

IFOS ▪ Interest Income arising to Certain Persons.

▪ Family Pension received by Widow/Nominated heirs of Armed Forces Members.

Clubbing ▪ Exemption (Rs. 1,500) i.r.o Minor's Income included in hands of Parent [Sec 10(32)].

Capital ▪ Income received on buy-back of Shares (Listed/unlisted) of Domestic Company [10(34A)]

Gains
▪ Capital Gain on Compulsory Acquisition of Urban Agricultural Land [Section 10(37)]
▪ Loan received by Individual under Reverse Mortgage Scheme → Exempt [Section 10(43)]

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SHARE OF HUF INCOME RECEIVED BY A MEMBER FROM HUF [SECTION 10(2)]
➢ Income earned by the HUF is assessable in its own hands since HUF is a ‘person’ under Income Tax Act.
➢ Any sum received by an Individual as a member of HUF
▪ either out of the family income or
▪ out of the impartible estate belonging to the family
shall be exempt in the hands of the member even if such income is exempt in the hands of HUF.

CQ1. Mr. A, member of HUF, received 10,000 as his share from income of HUF. Discuss Tax Treatment.
Answer: Such income is not includible in Mr. A’s chargeable income since section 10(2) exempts any sum received
by an individual as a member of a HUF where such sum has been paid out of the income of the family.

SHARE OF PROFIT OF A PARTNER FROM A FIRM [SECTION 10(2A)]

➢ Share of the Partner in total income of the firm shall be exempt in the hands of partner even if taxable
income becomes nil in the hands of firm due to any exemptions or deductions.

INTEREST ON NON-RESIDENT (EXTERNAL) A/C (only for Individual) [SEC 10(4)(ii)]

➢ Interest received on moneys in Non-Resident (External) A/c in any bank in India → Exempt to NR.

PC Note:
❖ Exemption is available only if such NR person is permitted by RBI to maintain such account.
❖ Joint-holders of NRE A/c will not be treated as AOP merely because they have A/c in joint names.
❖ Exemption will be available to each of the joint-holders only if they fulfill other prescribed T&Cs.

↓ Sec. Exemptions & Conditions for claiming Exemptions

(ii) Remuneration of Foreign Diplomats in India:

Conditions for Claiming Exemption:
1. Remuneration received by Indian official in such foreign countries should be Exempt.
2. Foreign officer is not engaged in any other business/profession/employment in India.

(vi) Remuneration of Employees of a Foreign Enterprise for services rendered in India:

Conditions for claiming Exemption:
1. Employees’ Stay in India ≤ 90 days in PY.
2. Remuneration paid to such employee is not deductible from employer’s income &
3. Employer is not engaged in any Business/Trade in India.

(viii) Salary received by NR Non-citizen of India as a crew Member of Foreign Ship:

Condition for claiming Exemption: His stay in India ≤ 90 days in a PY.

(xi) Remuneration received by Foreign Gov. Employees from Foreign Government for specified
training in India
Training should be in any establishment/office of or in any undertaking owned by the following:
(a) Government; (b) Any Statutory corporation;
(c) Company wholly owned by CG/SG or Jointly by CG & SG or its Subsidiary company
(d) Any registered society which is wholly financed by CG/SG/Jointly by CG & SG.

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ALLOWANCES OR PERQUISITES O/S INDIA TO A CITIZEN OF INDIA [SEC 10(7)]
Nature Allowance & Perquisites [Basic Salary]

Paid by Government of India Foreign Diplomats

& Ambassadors
Paid to Citizen of India

Paid for Rendering services outside India to Government of India

COMPENSATION RECEIVED ON ACCOUNT OF ANY DISASTER [SEC 10(10BC)]

➢ Compensation received for any disaster from CG/SG/LA by an Individual/his legal heir → Exempt.
➢ No Exemption: If the amount of Loss has been allowed as deduction.

PENSION RECEIVED BY RECIPIENT OF GALLANTRY AWARDS [SEC 10(18)]

➢ Pension received by Individual who was CG/SG employee & who has been awarded Param Vir
Chakra/Maha Vir Chakra/Vir Chakra → Exempt.
➢ In case of Death of Awardee: Family pension received by the member of his family is exempt.
➢ Disability pension granted to disabled personnel of armed forces (naval, military or air) who have been
invalided on account of disability attributable to or aggravated by such service would be exempt from
tax.
Note: Exemption will not be available to personnel who have been retired on superannuation or
otherwise.

INCOME OF A SIKKIMESE INDIVIDUAL [SECTION 10(26AAA)]

➢ Exempt Incomes:
(a) Income from any source in the State of Sikkim; or
(b) Income by way of Dividend or Interest on securities.
➢ Exemption is not available → Sikkimese woman who marry Non-Sikkimese man on/after 1.4.2008.

CQ2. Exemption is available to Sikkimese individual, only in respect of income from any source in Sikkim.
Answer: Incorrect. Exemption u/s 10(26AAA) is available to a Sikkimese individual not only in respect of the said
income, but also in respect of income by way of dividend or interest on securities.

Nature of Policy Tax treatment

Any sum received from a policy u/s 80DD(3) Taxable.
Any sum received under a Keyman Insurance Policy Taxable.
Any other policy (sum received on death of Person) Exempt
Any other policy (not received on death of Person)
(i) Issued before 1.4.2003
(ii) Issued on/after 1.4.2003 but before 1.4.2012 Fully Exempt
(iii) Issued during 2012-2013 Exempt if Premium ≤ 20% of sum assured.
(iv) Issued on or after 1.4.2013(for Disabled perosn) Exempt if Premium ≤ 10% of sum assured.
Exempt if Premium ≤ 15% of sum assured.

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PC Note: Question for this section is given in the topic “TDS”. Students are advised to read the provisions
of this section after completing “TDS”.

10(10CC) Tax on Non-Monetary Perquisites paid by the Employer.

10(11) Any Payment from PF/PPF set up by CG.

10(11A) Interest & Withdrawals from Sukanya Samriddhi A/c.*

10(12) Payment from Accumulated Balance of RPF to the employee.

10(12A) Any payment from NPS trust to an assessee on closure/opting out of scheme u/s 80CCD is
exempt upto 60% of total amount payable to him.

10(12B) Any payment from NPS trust to an employee on partial withdrawals out of his account from
NPS referred u/s 80CCD is exempt upto 25% of contributions made by him.

10(13) Any Payment from Approved Superannuation Fund.

10(15) (i) Interest on Gold Deposit Bonds (ii) Interest on bonds issued by LA.

10(16) Scholarships granted to meet the Cost of Education.

10(17) Daily & Constituency allowance received by MPs & MLAs.

10(17A) Awards or Rewards given by CG/SG (in cash/kind).

10(19) Family Pension received by Family Members of Armed Forces who died on duty.

10(19A) Annual value of one palace of the ex-ruler

10(21) Income of an approved research association

10(22B) Income of specified news agency set-up in India solely for collection & distribution of news if
such news agency does not distribute its income t the member.

10(23C) Income of certain funds of National Importance set up by CG:

(i) Swachh Bharat Kosh (ii) Clean Ganga Fund or such other specified funds.
(iii) University/Educational institution formed solely for educational purpose & not for profit.
(iv) Hospital/medical institution formed solely for philanthropic purpose & not for profit.

10(23D) Income of Notified Mutual Funds

10(32) Income of minor clubbed in the hands of a parent upto Rs. 1500.

10(37) CG arising on transfer of urban agricultural land by way of compulsory acquisition to

Individual/HUF is exempt if compensation is received on/after 1.4.2004.
PC Note: Rural Agricultural land is not a capital asset & thus CG will arise in such case.

10(39) Specified Income from International Sporting Event held in India.

10(43) Amount received by Individual as loan under Reverse Mortgage Scheme → Exempt

10(44) Income of NPS Trust is Exempt.

10(45) Notified Allowance/Perquisite paid to Chairman/Member of UPSC.

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 MASTER QUESTION
MQ01. Find out the net income & tax liability of Mr. X (35 years) for the AY 2023-24. [Modified RTP]
Income from the activity of owning & maintaining race horses 7,00,000
Winnings from camel races in Dubai 3,00,000
Winnings from Government lottery 1,00,000
Cost of purchase of Lottery ticket 11,000
Salary from A Ltd. (includes entertainment allowance of Rs. 5,000) engaged in cultivation & 5,50,000
manufacture of coffee in India
Share of profit from LLP firm for PY 2022-23 (X is a sleeping partner in the firm & share of profit 10,70,000
includes LTCG on transfer of a plot of land of Rs. 1,50,000)
Share of profit from the family business 2,65,000
Interest income of minor child (of deposit made out of gift received by the child from brother of 21,500
Mrs. X)
Income of Mrs. X [It is interest on company deposit (50% deposit is made out of gift received 1,00,000
from X & 50% is made out of gift received form her father).
PPF contribution 2,05,000
Receipt of accumulated balance of PPF A/c (it includes interest of Rs. 1,10,000) 6,10,000
Solution: Computation of Total Income & tax liability of Mr. X
(i) Salary (after standard deduction of Rs. 50,000) [Note 1] 5,00,000
(ii) Business income (owning & maintaining race horses) 7,00,000
(iii) Income from other sources -
- Interest income of minor child [Rs. 21,500 - Rs. 1,500 exemption u/s 10(32)] 20,000
- Winnings from camel races (expenditure is not deductible) 3,00,000
- Winnings from lottery (expenditure is not deductible) 1,00,000
- Interest income of Mrs. X on deposit made by her out of money gifted by X 50,000
Gross total income 16,70,000
Less: Deduction u/s 80C (1,50,000)
Total Income 15,20,000
Tax Payable = (30% of Rs. 4,00,000 + Normal tax @ Slab Rate = 11,20,000) + 4% HEC = Rs. 2,79,240.

Note:
1. Salary shall be taxable even if it is paid out of agricultural income by the employer.
2. Accumulated balance of PPF & Interest on such balance is exempt u/s 10(11).
3. Share of profit from a firm (LLP) is Exempt u/s 10(2A) even if X is a sleeping partner & profit includes LTCG.
4. Share of profit from HUF Business received by the member of HUF is Exempt u/s 10(2).

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▪ We all know that Income of PY is assessed to tax during next AY. Thus, Income earned during PY 2022-
23 will be assessed to tax in AY 2023-24.
▪ However, Tax on such Income is taken from the assessee in the PY itself in following ways:
(a) TDS: In case of some income, tax is deducted at source by the payer at the prescribed rate.
(b) TCS: In some cases, tax is collected at source by the seller from buyer.
(c) Advance Tax: Sometimes assessee is under obligation to pay Advance Tax.
(d) Tax paid by the employer u/s 192(1A) on non-monetary perquisites provided to the employee.
▪ Taxes deducted/collected at source or paid as advance tax in PY itself are known as pre-paid taxes.
Such prepaid taxes are deducted from the total tax due from the assessee.

▪ Self-Assessment Tax (SAT) u/s 140A: At the time of filing ROI, assessee has to pay SAT u/s 140A,
after deducting (adjusting) the following
- TDS & TCS, Advance Tax paid, Tax paid u/s 192(1A),
- Relief u/s 89,
- AMT credit - Tax credit claimed to be set off in accordance with the provisions of section 115JD.
- Tax or interest payable according to the provisions of section 191(2).

CQ1. Income of Mr. PC is Rs. 10 Lacs. In this income, Rs. 50,000 was earned by way of Interest on which payer
deducted tax @ 10% (Rs. 5,000). He paid Advance Tax of Rs. 25,000 in different instalments. TCS collected at
Source was Rs. 10,000. Calculate SAT to be paid u/s 140A at the time of filing ROI.
Solution:
(i) Total Tax liability on Rs. 10 Lacs = Rs. 1,12,500.
(ii) TDS + TCS + Advance Tax paid by Mr. Pranav Chandak = Rs. 5,000 + Rs. 25,000 + Rs. 10,000 = Rs. 40,000.
(iii) SAT payable u/s 140A = Rs. 1,12,500 – Rs. 40,000 = Rs. 72,500.
PC Note: Since the amount of tax has been already deducted at the time of payment of Interest to Mr. PC, he
will get the credit of that amount while calculating Tax payable u/s 140A.

▪ In the following cases, income-tax is payable by the assessee directly:

(a) Income on which tax is not required to be deducted at source [Provisions of TDS → NA]
(b) Income on which tax is to be deducted at source but has not been deducted.
[Provisions of TDS → Applicable; but TDS ×]
▪ Recovery proceedings shall be initiated against the assessee whose tax was to be deducted but has
not been deducted. [To be Studied @ CA FINAL Level]
▪ Assessee in default → A person who was liable to deduct tax but does not deduct tax (whole/part) OR
after deducting tax, does not pay tax to government, such person liable to deduct tax shall be deemed
to be assessee in default. [Explanation to Section 191]
However, if the assessee himself has paid the tax, this provision will not apply.

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Nature of Payment Salary (Taxable Salaries only).

Deductor Employer

Payee Employee having taxable salary.

Exemption Limit ▪ Basic Exemption Limit (Rs 2,50,000).

▪ No TDS if Estimated Salary ≤ BEL (even if employee does not have PAN).

Rate of TDS ▪ Tax should be deducted @ Average rate of tax on total income.
Income Tax on Total Income using Slab Rate
▪ Average Rate of Tax = .
Total Income

▪ If employee intends to opt for concessional rate of tax u/s 115BAC & intimates to the
deductor (his employer) of such intention, then employer shall compute his TI & deduct
tax as per the provisions of section 115BAC.
▪ If employee does not intimate employer of such intension, employer shall deduct tax
at source without considering the provision of section 115BAC.

Inclusion of Incomes On application by the employee, Employer shall consider:

& Losses from other
▪ Income from All Heads (Considering any TDS on such income) &
heads.
▪ Loss u/h House Property while calculating TDS of such employee.

Tax on Non-Monetary ▪ Employer may (at his option) pay tax on non-monetary perquisites in lieu of
Perquisite given to deduction of tax at source from salary payable of the employee.
Employee [192(1A)]
▪ Payment of tax will have to be made every month along with tax deducted at
source on monetary payment of salary, allowances etc.
PC Note: Tax paid by the employer u/s 192(1A) shall be taken as if it was a
tax deductible at source from salary payable to the employee.

Relief u/s 89(1) Relief u/s 89(1) shall be considered while calculating TDS (if available).

Space for PC Note:

When a person is employed by one or more employers during FY?
❖ In such case, tax will be deducted by the employer separately. However, employee will have choice to
choose one employer & give details (in Form No. 12B) of other employment to the chosen employer.
❖ The chosen employer will deduct the balance tax on Aggregate Salary.

Ex: Salary in Company 1 (ABC Ltd) = 20 Lacs & salary in Company 2 (XYZ Ltd) = 10 Lacs.
▪ Now, Employee will have to choose any one employer & give details about other employment.
▪ Suppose he chooses ABC Ltd & gives details regarding his salary in XYZ Ltd. to ABC Ltd.
▪ Since he has given details to ABC Ltd. & not to XYZ Ltd about his other employment, XYZ Ltd will deduct tax
on Rs. 10 Lacs at average rate of tax.
▪ ABC Ltd. will deduct only balance amount of tax on Total Income & not tax calculated on Rs. 20 Lacs.
(i) Tax on Total Income (i.e Rs. 30 Lacs) = Rs. 7,12,500;
(ii) Tax on 10 Lacs deducted by XYZ Ltd. = Rs. 1,12,500;
(iii) ABC Ltd. will deduct only Rs. 6,00,000 [Rs. 7,12,500 – Rs. 1,12,500].

CQ2. Mr. X is employed in ABC Ltd. getting salary Rs. 50,000 p.m. & he has invested Rs. 50,000 in NSC. In this
case, TDS at the time of payment of salary shall be:
Gross Total Income Rs. 6,00,000
Less: Deduction u/s 80C [NSC] (Rs. 50,000)
Total Income Rs. 5,50,000

206
 Tax on 5,50,000 + HEC @ 4% Rs. 23,400
TDS to be deducted every month shall be (Rs. 23,400/12) Rs. 1,950
If employer has deducted tax at source for April & salary was increased to Rs. 60,000 p.m. w.e.f. 1.5.2022,
tax to be deducted in subsequent instalments shall be:
Salary (50,000 x 1) + (60,000 x 11) Rs. 7,10,000
Less: Deduction u/s 80C [NSC] (Rs. 50,000)
Total Income Rs. 6,60,000
Tax on Rs. 6,60,000 + HEC @ 4% Rs. 46,280
Less: Tax deducted at source in the month of April (Rs. 1,950)
Balance Amount of Tax [Rs. 46,280 – Rs. 1,950] Rs. 44,330
Tax to be deducted in subsequent months (Rs. 44,330/11) Rs. 4,030

Deductor Trustees of the payment of Employees’ PF Scheme, 1952. [Trustee of RPF]

Payee Employee.

Eligible ▪ Taxable Premature Withdrawal of Accumulated balance from RPF. (If period of
Payment for continuous service < 5 years).
TDS
▪ Withdrawal of Accumulated balance is taxable in the following cases: Refer Salary.

Rate of TDS 10% (If PAN is not provided to the Deductor of Tax, then TDS @ MMR).

No TDS If Aggregate Payment < Rs. 50,000.

For calculating 5 years time-limit, services rendered to previous employer shall be included if
1. If previous employer maintained RPF & balance of employee in PF A/c was transferred to him by
employer.
2. If employment has been terminated because of certain reasons which are beyond his control.
3. If entire balance standing to the credit of the employee is transferred to his account under a pension
scheme referred to in Sec 80CCD & notified by CG (NPS).

PC Note: Tax on withdrawn amount is required to be calculated by re-computing the tax liability of the
years for which contribution to RPF has been made by treating it as contribution to URPF [Rule 9].

Deductor Every person paying Interest on securities.

Payee Resident Non-corporate Assessee/Domestic company.

TDS Rate 10%

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NO TDS Any Interest payable on:
❖ National Development Bonds/Notified Debentures by CG
❖ 7-year NSC (IV Issue)
❖ 54EC Capital Gains Bonds: PFCL & IRFCL Bonds. [If informed within 60 days]
❖ Securities of CG/SG [However, TDS applicable if interest payable during the FY on 8%
saving (taxable) bonds, 2003 or 7.75% Savings (Taxable) Bonds, 2018 > Rs. 10,000].
❖ Debentures of public company (listed or not),
▪ to Resident Individual or HUF
▪ by A/c Payee Cheque
PC Note: Total interest paid/payable in FY ≤ 5,000.
❖ Interest payable to LIC/GIC/Subsidiary of GIC/any other insurance company provided
▪ securities are owned by them or they have full beneficial interest in such securities.
❖ Listed Securities held in DEMAT form.

Deductor Principal officer of a domestic company.

Payee Resident shareholders only.

TDS Rate 10%

NO TDS ❖ Total dividend distributed or paid or likely to be paid to a shareholder ≤ Rs. 5,000 &
- Shareholder is an individual &
- Dividend is paid by any mode other than cash during the FY&

❖ Payable to LIC/GIC/Subsidiary of GIC/any other insurance company provided shares

are owned by them or they have full beneficial interest in such shares.

Deductor (a) All Person (other than Individual/ HUF) &

(b) Individual/HUF [if Tax Audit is required to be done u/s 44AB (a)(b) in Last PY]

Payee Resident Non-corporate Assessee/Domestic company.

Rate 10%

Exemption 1 Aggregate Interest paid or credited ≤ Rs 5,000

2 Aggregate Interest paid by Bank/Co-operative Society/Post office on ≤ Rs 40,000

(a) Time deposits with bank/co-operative banks
(b) deposits with post office under notified schemes.

PC Note: For ‘Resident Senior Citizen’ - Exemption Limit is Rs. 50,000.

PC Note:
▪ Exemption Limit of Rs. 40,000/Rs. 50,000 shall be computed with reference to each Branch.
▪ But if CBS is adopted, limit of Rs. 40,000/Rs. 50,000 shall be computed with reference to Whole bank
(All branches) & not with reference to Individual Branch.
▪ This applies on Time Deposits including Recurring deposits.

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 NO TDS even if amount paid/credited > Rs. 5,000:
1. Interest on loans given to Banks/Fin. Institutions/LIC/UTI/Insurance company.
2. Interest paid by Firm to partners.
3. Interest paid on Refund of Tax by Government.
4. Interest paid to Banks/Financial institutions/UTI/National Skill Development Fund/HUDCO.
5. Interest on ZCBs.
6. Interest paid by a Co-operative society to its member or to any other co-operative society; [However,
Co-operative Banks → Members; TDS provisions will be applicable if interest credited/paid is > 40,000]
7. Interest paid by Primary Agricultural Credit society or a Primary Credit society or a co-operative Land
Mortgage bank or Co-operative Land Development Bank in respect of deposits with them.
8. Interest on compensation awarded by Motor Accidents Claims Tribunal & paid by Insurance company
→ NO TDS on CREDIT of any Interest & NO TDS ON PAYMENT ≤ Rs. 50,000 in a FY.

CQ3. Examine TDS implications u/s 194A in the cases mentioned hereunder: [ICAI SM Q1]
(a) On 1.10.2022, Mr. Harish made a six-month fixed deposit of Rs. 10 Lacs @ 9% p.a. with ABC Co-operative
Bank. The fixed deposit matures on 31.3.2023.
(b) On 1.6.2022, Mr. Ganesh made three 9-months FDs of Rs. 3 lacs each carrying interest @ 9% with Dwarka
Branch, Janakpuri Branch & Rohini Branch of XYZ Bank (bank has adopted CBS). FD mature on 28.2.2023.
(c) On 1.10.2022, Mr. Rajesh started a 1-year recurring deposit of Rs. 2,00,000 p.m @ 8% p.a. with PQR Bank
which matures on 31.3.2023.
Solution:
(a) ABC Co-operative Bank has to deduct tax at source @ 10% on interest of Rs. 45,000 (9% × Rs. 10 Lacs ×
½) u/s 194A. TDS u/s 194A = Rs. 4,500.
(b) XYZ Bank has to deduct tax at source @ 10% u/s 194A, since aggregate interest on FD with 3 branches of
the bank is Rs. 60,750 [Rs. 3 Lacs × 3 × 9% × 9/12] which exceeds Rs. 40,000.
Since XYZ Bank has adopted CBS, the aggregate interest credited/paid by all branches has to be considered.
(c) No TDS u/s 194A by PQR Bank on interest of Rs. 28,000 falling due on RD on 31.3.2023 to Mr. Rajesh, since
‘recurring deposit’ is included in definition of ‘time deposit’ & interest does not exceed Rs. 40,000.

Deductor Bookmaker or a person to whom a license has been granted by the Government for
horse racing or for arranging for wagering or betting in any race course.

Rate of TDS 30%

Exemption Limit Total Winning ≤ Rs. 10,000.

Lottery in KIND Winner shall pay tax first & then lottery amount can be claimed.

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 Deductor ▪ Individual/HUF/AOP/BOI (if tax audit u/s 44AB(a)/(b) is done in Last PY).
▪ CG/SG/LA/Statutory corporation; Company, Firm; Cooperative society; Trust, Societies.
▪ Any statutory authority dealing with housing accomodations,
▪ Any university established under a Central, State or Provincial Act & institution declared
to be a university under the UGC Act, 1956;
▪ Government of foreign State or foreign enterprise or any association established o/s India;

Rate Payee is Individual/HUF → 1%

(if paid Payee is Other than Individual/HUF → 2%
to)
Tax should be deducted on -
(a) Invoice Value - Value of material (if value of material is shown separately in Invoice)
(b) Whole of Invoice Value (if Not Shown separately in the Invoice)

No TDS (a) Contract of Personal nature for Individual/HUF.

(b) Single payment to a person ≤ Rs. 30,000 during a FY &
(c) Aggregate payment to a person during a year ≤ Rs. 1,00,000.
(d) Transport charges paid to Contractor in a business of leasing/hiring goods carriages not
owning more than 10 trucks at any time & who furnishes PAN to payer [Section 194C(6)].

Nature of (a) Advertisement

Payment
(b) Broadcasting & Telecasting (including production of programmes)
(c) Transportation of Goods & Passengers by any mode (OTHER THAN by RAILWAYS)
(d) Catering Services
(e) Manufacturing or supplying a product according to the requirement or specification of the customer
by using materials purchased from the customer or its associate, being a person related to the
customer in such manner as defined u/s 40A(2)(b).
PC Note: If raw material is purchased from a person other than such customer or his associate, such
a contract is a contract for ‘sale’ which is not covered u/s 194C.
(f) Any works contract including supply for labour. (Not for Contract of SALE).

PC Note:
1. Sec. 194C will apply only to ‘Works Contracts’ & ‘Labour Contracts’ & will not cover contracts for Sale.
2. Separate provisions for ‘fees for professional services’ have been made u/s 194J & thus Section 194C
will not be attracted in such cases.

CQ4. ABC Ltd. makes following payments to Mr. X, a contractor, for contract work [ICAI SM Q2]
(a) Rs. 20,000 on 1.5.2022; (b) Rs. 25,000 on 1.8.2022; (c) Rs. 28,000 on 1.12.2022.
On 1.3.2023, a payment of Rs. 30, 000 is due to Mr. X on account of contract work. Whether ABC Ltd. is liable to
deduct tax at source u/s 194C from payments made to Mr. X in PY 2022-23.
Solution:
▪ In this case, Individual contract payments made to Mr. X does not exceed Rs. 30,000. However, since the
aggregate amount paid to Mr. X during PY 2022-23 exceeds Rs. 1 Lac (on account of last payment of Rs. 30,000,
due on 1.3.2023, taking the total from Rs. 73,000 to Rs. 1,03,000), TDS provisions u/s 194C would get attracted.
▪ ABC ltd. would be liable to deduct tax @ 1% on entire amount of Rs. 1,03,000 from last payment of Rs. 30,000.
▪ TDS = Rs. 1,03,000 × 1% = Rs. 1,030 & balance of Rs. 28,970 (i.e. Rs. 30,000 – Rs. 1,030) has to be paid to Mr. X.

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 Deductor Any person paying commission for soliciting or procuring insurance business

Recipient A Resident person

Rate 5%

Exemption Commission ≤ Rs. 15,000 during a FY to a person on aggregate basis.

Deductor Insurance Companies

Payee A resident person.

Rate ▪ 5% on Income [Sum Received – Insurance Premium paid] if not exempt u/s 10(10D)

Exemption < Rs. 1,00,000 (on Aggregate basis to a person in a FY)

CQ5. Examine the applicability of TDS provisions u/s 194DA in the following cases: [ICAI SM Q4]
(a) Mr. X, a resident, is due to receive Rs. 4.50 Lacs on 31.03.2023, towards maturity proceeds of LIC policy taken
on 1.4.2019, for which the sum assured is Rs. 4 Lacs & annual premium is Rs. 1,25,000.
(b) Mr. Y, a resident, is due to receive Rs. 3.95 Lacs on 31.3.2023 on LIC policy taken on 31.3.2012, for which the
sum assured is Rs. 3.5 Lacs & annual premium is Rs. 30,100.
(c) Mr. Z, a resident, is due to receive Rs. 95,000 on 1.8.2022 towards maturity proceeds of LIC policy taken on
1.8.2015 for which the sum assured is Rs. 90,000 & annual premium was Rs. 10,000.
Solution:
(a) Since Annual premium > 10% of Sum Assured i.r.o a policy taken after 31.3.2012, maturity proceeds of Rs.
4.50 lacs are not exempt u/s 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted @ 5%
u/s 194DA on the amount of income comprised therein i.e on Rs. 75,000 [Rs. 4,50,000 – Rs. 3,75,000].
(b) Since Annual premium < 20% of Sum Assured in respect of a policy taken before 1.4.2012, Sum of Rs. 3.95
lacs due to Mr. Y would be exempt u/s 10(10D) in his hands. Hence, No TDS u/s 194DA to Mr. Y.
(c) Even though Annual premium > 10% of Sum Assured i.r.o a policy taken after 31.3.2012, & consequently,
maturity proceeds of Rs. 95,000 would not be exempt u/s 10(10D) in the hands of Mr. Z, TDS provisions u/s
194DA are not attracted since the maturity proceeds are less than 1 lac.

Payee NR Sportsman/Athlete/Sports Association/Entertainer [Foreign Citizen]

Eligible Payment Any payment referred to in section 115BBA.

Rate 20% + Surcharge (if applicable) + 4% HEC (since paid to NR)

CQ6. Calculate the amount of TDS on payment made to Ricky Ponting, an Australian cricketer non-resident in
India, by a newspaper for contribution of articles Rs. 25,000. [ICAI SM Q5]
Solution:
▪ As per section 194E, person responsible for payment of any amount to non-resident sportsman for
contribution of articles relating to any game or sport in India in a newspaper shall deduct tax @ 20%.
▪ Further, since Ricky Ponting is a non-resident, HEC @ 4% on TDS would also be added.
▪ TDS = 20 + 4% HEC = 20.8% = Rs. 25,000 x 20.80% = Rs. 5,200.

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Rate 10%

Exemption Payment < Rs 2,500 (on aggregate basis to a person in a FY)

Deductor Post office

Payee Any person.

Payment Payment (Principal + Interest) out of national saving scheme,1987.

PC Note: If payment is made to legal heirs of a deceased depositor → No TDS.

Rate 20%

Deductor Mutual fund/UTI

Payee Unit holders of MF or UTI u/s 80CCB(2).

Payment Payment on account of repurchase of units referred in Section 80CCB.

Deductor Any person paying commission on sale of lottery tickets.

Payee Any person.

Rate 5%

Exemption Commission ≤ Rs. 15000

PC Note: If an authorised lottery ticket agent purchases tickets in bulk at a discount from SG & sells the
same at a price of his choice, Section 194G is not applicable.

Deductor (a) All Person (other than Individual/ HUF) &

(b) Individual/HUF (if Tax Audit is done u/s 44AB (a)/(b) in Last PY)

Rate 5%

Exemption Aggregate Commission ≤ Rs. 15,000 to a person during FY.

NO TDS (i) Insurance Commission.

(ii) Commission to Stock broker.
(iii) Commission by BSNL/MTNL to their Public Call Office (PCO) franchisees.
PC Note: This section is not applicable to professional services.

CQ7. Moon TV, a television channel, made payment of Rs. 50 Lacs to a production house for production of
programme for telecasting as per the specifications given by the channel. The copyright of the programme is
also transferred to Moon TV. Would such payment be liable for tax deduction at source u/s 194C? Discuss.
Also, examine whether the provisions of tax deduction at source u/s 194C would be attracted if payment was
made by Moon TV for acquisition of telecasting rights of the content already produced by production house.

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Solution: In this case, since the programme is produced by the production house as per the specifications
given by Moon TV, a television channel, & the copyright is also transferred to the television channel, the same
falls within the scope of definition of the term ‘work’ u/s 194C.
Therefore, the payment of Rs. 50 Lacs made by Moon TV to the production house would be subject to tax
deduction at source u/s 194C.
If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already
produced by the production house, there is no contract for ‘’carrying out any work”, as required in section
194C(1). Therefore, such payment would not be liable for tax deduction at source u/s 194C.

Deductor (a) All person (other than Individual/ HUF) &

(b) Individual/HUF (if Tax Audit is done u/s 44AB (a)/(b) in Last PY).

Payee Resident person only

Payment Rent of L & B (including factory building), P & M, F & F, Equipment.

Rate P&M, Equipments → 2% L&B, F&F & others → 10% [Excluding GST & Municipal Tax]

No TDS (a) Aggregate of Rent paid/credited ≤ Rs 2,40,000 during a FY to a person.

(b) Rent paid to GOVERNMENT/REIT.

CQ8. Mrs. Indira, a landlord, derived income from rent from letting a house property to M/s Vaibhav
Corporation Ltd. of Rs. 1,00,000 p.m. She charged GST @ 15% on lease Rent charges. Calculate TDS to be made
by M/s Vaibhavi Corporation Ltd. on payment made to Mrs. Indira.
Solution: GST paid by the tenant does not partake the nature of income of the landlord. Landlord only acts as a
collecting agency for collection of GST. Therefore, TDS u/s 194-I would be required to be made on the amount
of rent paid or payable excluding GST (TDS u/s 194-I on Rs. 12 lacs only). TDS = 12 Lacs × 7.5% = Rs. 90,000.

Deductor Individual/HUF (if last year tax audit was NOT done u/s 44AB (a)(b);

Payment Rent of Land or Building or Both

Rate 5%

Exemption If Rent p.m or part of the month ≤ Rs. 50,000 during the PY.

Time of TDS (a) At the time of credit of Rent for Last month of PY or Last month of tenancy (if
property is vacated during the year)] to the account of the payee OR
(b) At the time of Payment, whichever is earlier.
PC Note: Deduction not to exceed rent for Last Month even if NO PAN is provided
▪ Where tax is required to be deducted as per section 206AA, such deduction u/s 194IB shall not exceed
rent payable for the last month of PY or last month of the tenancy.
CQ9. Mr. X, a salaried individual, pays rent of Rs. 55,000 p.m to Mr. Y from June, 2022. [ICAI SM Q8]
(a) Compute TDS; Time of deduction of Tax;
(b) Would your answer change if Mr. X vacated the premises on 31st December 2022?
(c) What would be your answer if Mr. Y does not provide his PAN to Mr. X?
Solution:
(a) Since Mr. X pays rent exceeding Rs. 50,000 p.m in PY 2022-23, he is liable to TDS @ 5% of such rent for PY
2022-23 u/s 194-IB. Thus Rs. 27,500 [Rs. 55,000 x 5% x 10 months] has to be deducted for March 2023.
(b) If Mr. X vacated in Dec. 2022, TDS of Rs. 19,250 [Rs. 55,000 x 5% x 7] from rent payable for Dec 2022.

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(c) If Mr. Y does not provide his PAN to Mr. X → TDS @ 20%, instead of 5%.
(a) TDS = Rs. 1,10,000 [Rs. 55,000 x 20% x 10] but restricted to Rs. 55,000 only being rent for March 2023.
(b) TDS = 77,000 [Rs. 55,000 x 20% x 7] but restricted to Rs. 55,000 only, being rent for December 2022.

Deductor Any person paying consideration for transfer of immovable property

TDS Rate ▪ 1% of Higher of ASC or SDV [Amendment]

▪ 20% if no PAN is furnished by the payee.

No TDS Consideration AND SDV < Rs. 50 lacs.

IMP Note: If Consideration or SDV ≥ Rs. 50 lacs, Section 194IA is applicable.

PC Note: TDS on compulsory acquisition of immovable property is covered u/s 194LA & thus, section
194-IA do not get attracted in that case.
PC Note: No requirement to obtain TAN to the Deductor under this section.
Ex: Mr. X has purchased one building for Rs. 65 Lacs. In this case TDS shall be Rs. 65 lacs x 1% = Rs. 65,000.
But if building was purchased for Rs. 47 Lacs, amount of TDS shall be nil since consideration < Rs. 50 Lacs.
CQ10. Mr. X sold his house property in Bangalore as well as his rural agricultural land for a consideration of
Rs. 60 lacs & Rs. 15 lacs, respectively, to Mr. Y on 1.8.2022. He has purchased the house property & land in the
year 2021 for Rs. 40 lacs & Rs. 10 lacs, respectively. The stamp duty value on the date of transfer, i.e., 1.8.2022,
is Rs. 85 lacs & Rs. 20 lacs for house property & rural agricultural land, respectively. Examine the tax
implications in the hands of Mr. X & Mr. Y & the TDS implications, if any, in the hands of Mr. Y, assuming that
both Mr. X & Mr. Y are resident Indians.
Solution:
❖ Tax implications in the hands of Mr. X: As per section 50C, FVC = SDV since SDV > 110% of ASC. Therefore,
STCG = Rs. 45 lacs (i.e., Rs. 85 lacs – Rs. 40 lacs) on transfer of house property
Since rural agricultural land is not a capital asset, No Capital Gains will arise in the hands of Mr. X.
❖ Tax implications in the hands of Mr. Y: If immovable property is received for inadequate consideration,
difference between SDV & ASC (i.e discount) would be taxable u/s 56(2)(x), if such difference exceeds the
higher of Rs. 50,000 & 10% of the consideration. Therefore, in this case Rs. 25 lacs (Rs. 85 lacs – Rs. 60 lacs)
would be taxable in the hands of Mr. Y u/s 56(2)(x).
Since agricultural land is not a capital asset, the provisions of section 56(2)(x) are not attracted in respect
of receipt of agricultural land for inadequate consideration, since the definition of “property” u/s 56(2)(x)
includes only capital assets specified thereunder.
❖ TDS implications in the hands of Mr. Y: Since the sale consideration of house property exceeds Rs. 50
lakh, Mr. Y is required to deduct tax at source u/s 194-IA on higher of ASC or SDV. Thus, Tax to be deducted
u/s 194-IA would be Rs. 85,000, being 1% of Rs. 85 lacs (Higher of ASC i.e 60 Lacs or SDV i.e 85 Lacs). TDS
provisions u/s 194-IA are not attracted i.r.o. transfer of rural agricultural land.

Deductor Any person.

Payment Consideration paid to a resident under a specified agreement u/s 45(5A).

Rate 10% on Amount Paid

Non-applicability of section 194-IA: Since TDS provisions for specified agreement u/s 45(5A) is covered
u/s 194-IC, provisions of Section 194-IA do not get attracted in such cases.

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 Deductor Any person paying compensation.

Payee Resident Person only.

Payments Compensation/Enhanced Compensation on account of Compulsory Acquisition of Land

& Building (other than Agricultural Land).

Rate of TDS 10% of Initial/Enhanced Compensation

No TDS Aggregate Payment ≤ Rs. 2.5 Lacs during FY to a Person.

Deductor ▪ Every person other than Individual/HUF

▪ Individual/HUF [if Tax Audit is required to be done u/s 44AB (a)(b) in Last PY] are
required to deducted tax at source for fees for professional & technical services only.

Payee Resident Person

Nature of (a) Professional services

Payment (b) Technical services
(c) Any Remuneration or fees or commission (except salary to director of company)
(d) Royalty (including royalty for cinematographic films)
(e) Non-Compete Fees referred in Section 28(va).

Rate of TDS ▪ 2% (in case of fees for technical services or royalty for cinematographic films).
▪ 10% in all other cases
Note: TDS Rate = 2% if payee is engaged only in business of operation of call centre.

NO TDS (a) on services provided to Individual/HUF for Personal Purposes.

(b) Aggregate payment ≤ Rs 30,000 to a person in a FY

PC Note: Limit of Rs. 30,000 is available separately for Individual services. Thus, if
payment to a person towards each of the above is < Rs. 30,000, no tax is required to be
deducted at source, even though aggregate payment or credit > Rs. 30,000.
However, NO Exemption Limit is available for ‘Director’s fees’.

Notified Professional Services for section 194J: Sports Person, Umpires & Referees, Coaches &
Trainer, Team Physician & Physiotherapist, Event Manager, Commentator, Anchor & Sports Columnist.

Meaning of “Fees for technical services”

▪ Any consideration (including lumpsum consideration) for rendering following services: Managerial
services; Technical services; Consultancy services; Provision of services of technical or other personnel.
▪ It is expressly provided ‘fees for technical services’ will not include following types of consideration:
(a) Consideration for any construction, assembly, mining or like project or
(b) Consideration which is chargeable under the head ‘Salaries’.

CQ11. XYZ Ltd. makes a payment of Rs. 28,000 to Mr. X on 2.8.2022 towards fees for professional services & another
payment of Rs. 25,000 to him on same date towards fees for technical services. Discuss whether Sec. 194J is attracted.
Solution: TDS provisions u/s 194J would not get attracted, since limit of Rs. 30,000 is applicable for fees for
professional services & fees for technical services, separately. It is assumed that there is no other payment to Mr. X
towards fees for professional services & fees for technical services during PY 2022-23. [ICAI SM Q9]

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 Deductor Any person responsible for paying any income i.r.o.
▪ units of a Mutual fund
▪ units from Administrator of the specified undertaking
▪ units from the specified company

Payee Resident Person.

Rate of TDS 10%

NO TDS ▪ Aggregate payment ≤ Rs 5,000 to a person in a FY

▪ Income is of the nature of capital gains.

Deductor Individual/HUF (other than those who are required to deduct tax u/s 194C/194H/194J)

Payee Resident Person.

Rate of TDS 5% if Aggregate amount of such sums credited/paid during PY > Rs. 50 Lacs.

Nature of Any Payment for

Payment (a) Carrying out any work (including supply of labour for carrying out any work) in
pursuance of a contract; or
(b) Commission (not being insurance commission referred in sec 194D) or brokerage;
(c) Fees for professional services.

No TAN Provisions of sec. 203A containing the requirement of obtaining Tax deduction A/c
number (TAN) shall not apply to the person required to deduct tax in accordance with
the provisions of section 194M.

CQ12. Examine whether TDS provisions would be attracted in the following cases, & if so, under which section.
Also specify the rate of TDS applicable in each case. Assume that all payments are made to residents.
SN Payer Nature of Payment Aggregate Payment in PY 2022-23
1 Mr. Ganesh, individual carrying Contract Payment for repair of Rs. 5 lacs
on retail business with house
turnover of Rs. 2.5 crores in PY
Payment of commission to Mr. Rs. 80,000
2021-22
Vallish for business purposes
2 Mr. Rajesh, a wholesale trader Contract Payment for Rs. 20 lacs in Jan 2023,
whose turnover was 95 Lacs in reconstruction of residential house Rs. 15 lacs in Feb 2023 &
PY 2021-22 (made during Jan – Mar 2023)
Rs. 20 lacs in March 2023.
3 Mr. Satish, salaried individual Payment of brokerage for buying a Rs. 51 lacs
residential house in March, 2023
4 Mr. Dheeraj, a pensioner Contract payment made during Oct- Rs. 48 lacs
Nov 2022 for reconstruction of
residential house
Solution:
SN Payer Nature of payment Payments Whether TDS?
1 Mr. Contract Payment for Rs. 5 Lacs TDS u/s 194C is not attracted since payment is for
Ganesh repair of house personal purpose & TDS u/s 194M is not attracted

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 as total payment to a payee in PY 2021-22 < Rs. 50
lacs.
Payment of commission Rs. Yes, u/s 194H, since payment > Rs. 15,000 & Mr.
to Mr. Vallish for business 80,000 Ganesh’s turnover > Rs. 1 crore in PY 2021-22.
2 Mr. Contract Payment for Rs. 55 Yes, u/s 194M, since aggregate of payments (i.e Rs.
Rajesh reconstruction of house Lacs 55 lacs) > Rs. 50 lacs.
Since his turnover does not exceeds Rs. 1 Cr, he is
not subject to tax audit in PY 2021-22. Hence, TDS
provisions u/s 194C are not attracted in respect of
payments made in PY 2022-23.
3 Mr. Payment of brokerage for Rs. 51 Yes, u/s 194M, since payment of Rs. 51 lacs made in
Satish buying a residential house Lacs March 2023 > Rs. 50 lacs. Since Mr. Satish is a
salaried individual, Sec. 194H is not applicable.
4 Mr. Contract payment for Rs. 48 TDS provisions u/s 194C are not attracted since Mr.
Dheeraj reconstruction of house Lacs Dheeraj is a pensioner & not liable to tax audit.
Provisions u/s 194M are also not applicable since
payment of Rs. 48 lacs < Rs. 50 lacs.

Deductor (a) Banking company; (b) Co-operative bank; (c) Post office

Payments Aggregate cash payment during PY exceeding Rs. 1 crore to any person from one or more
accounts maintained by such recipient-person with the Deductor.

Rate of TDS 2% of sum exceeding Rs. 1 crore.

Modification in Rate of TDS & withdrawal limit for recipient who has not furnished ROI for last 3 PY
If recipient has not furnished ROI for all 3 AYs relevant to 3 PYs, for which time limit of filing ROI u/s
139(1) has expired, immediately preceding the PY in which the payment of the sum is made, sum shall
mean the amount or aggregate of amounts, as the case may be, in cash > Rs. 20 lacs during PY, & tax
shall be deducted at the rate of -
- 2% of sum, where aggregate amount being paid in cash > 20 Lacs but ≤ Rs. 1 Cr.
- 5% of sum, where aggregate amount being paid in cash > Rs. 1 Cr.

Non-applicability of TDS u/s 194N [Second Proviso to section 194N]

Any payment made to:
(a) Government;
(b) Banking company or co-operative banks or a post-office;
(c) Business correspondent of a banking company or co-operative bank;
(d) White label ATM operator of a banking company or co-operative bank.

Central Government may specify, with the consultation of RBI, by notification, the recipient in whose case
section 194N shall not apply or apply at reduced rate, subject to the satisfaction of the conditions
specified in such notification. Accordingly, Central Government has, after consultation with RBI has
specified

1 Cash Replenishment Agencies (CRA) & Franchise Agents of White Label ATM Operators (WLATMO)

▪ maintaining separate bank A/c from which withdrawal is made for replenishing cash in ATM only &
▪ WLATMO have furnished a certificate every month to bank certifying that bank of CRA & franchise
agents of WLATMO have been examined & amounts being withdrawn from their bank A/c has been
reconciled with the amount of cash deposited in ATMs of WLATMO.

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 2 Commission Agent/Trader operating under APMC (registered under any Law relating to AMP)

▪ who has intimated his A/c no. to bank/Co- operative society/PO through which he wishes to
withdraw cash in excess of Rs. 1 crore in PY along with his PAN & details of the PY &
▪ has certified that cash withdrawn from such A/c in excess of Rs. 1 crore during PY is for making
payments to the farmers on A/c of purchase of agriculture produce &
▪ Bank/Co-operative society/PO has ensured that PAN quoted is correct & commission agent or
trader is registered with APMC & necessary evidences have been collected & placed on record.

3 (a) Authorised Dealer & its Franchise Agent & Sub-Agent

(b) Full-Fledged Money Changer (FFMC) licensed by RBI & its franchise agent;
Such persons should maintain a separate bank A/c from which withdrawal is made only for:
1. Purchase of foreign currency from foreign tourists or non-residents visiting India or from resident
Indians on their return to India, in cash as per the directions or guidelines issued by RBI; or
2. Disbursement of inward remittances to the recipient beneficiaries in India in cash under Money
Transfer Service Scheme (MTSS) of the RBI;

PC Note [Sub-rule (3A) in Rule 37BA]

✓ Credit for TDS u/s 194N shall be given to the person from whose A/c tax is deducted & paid to CG
✓ For the AY relevant to PY in which such deduction is made.

Applicability If Sale of goods or provision of services of E-commerce participant is facilitated by E-commerce

operator through its digital or electronic facility or platform.

Deductor E-commerce operator making payment to E-commerce participant

Rate of TDS 1% of gross amount of such sales/services/both

Deduction (a) At the time of credit of amount of sale/services to the account E-commerce participant or
[Earlier of → (b) at the time of payment thereof to such e-commerce participant by any mode
No TDS Any sum credited/paid to E-commerce participant (being Individual/HUF), where the gross amount
of such sale or services or both during PY ≤ Rs. 5 lacs & such e-commerce participant has furnished
his PAN/Aadhaar to e-commerce operator.

❖ Deemed credit: Any payment made by a purchaser of goods or recipient of services directly to an e-commerce
participant for sale of goods or provision of services, facilitated by an e-commerce operator, would be deemed to
be amount credited or paid by e-commerce operator to e-commerce participant. Such payment would be
included in gross amount of such sales/services for TDS u/s 194-O.

❖ Cases when section 194-O may be applicable twice [AMENDMENT]

▪ In an e-commerce transaction, payments are generally facilitated by payment gateways.
▪ It is possible that section 194-O may be applicable twice: (1) On main e-commerce operator who is facilitating
sale of goods & (2) On payment gateway who is also an e-commerce operator for facilitating service.

▪ Ex: Buyer buys goods worth Rs. 1 Lac on e-commerce website "XYZ". He makes payment of Rs. 1 Lac through
digital platform of "ABC". On these facts, liability to deduct tax u/s 194-O may fall on both "XYZ" & "ABC".
▪ To remove this difficulty, it is provided that payment gateway will not be required to deduct tax u/s 194O
on a transaction, if the tax has been deducted by e- commerce operator u/s 194O, on the same transaction.

▪ Hence, if "XYZ" has deducted tax u/s 194O on Rs. 1 Lac, "ABC" will not be required to deduct tax u/s 194-O on
the same transaction.

▪ To facilitate proper implementation, "ABC" may take an undertaking from XYZ" regarding deduction of tax.

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 Applicability TDS on the basis of rates in force by a specified bank, being a notified banking company,
on total income of specified senior citizen for relevant AY, computed after giving effect to
deduction allowable under Chapter VI-A; and rebate u/s section 87A.
Exemption Specified senior citizen is exempted from filing his ROI for the AY relevant to the PY in
which the tax has been deducted under this section.
❖ Specified bank: Banking company which is a scheduled bank & has been appointed as agents of RBI.
❖ Specified senior citizen: Resident Individual (Age ≥ 75 years during PY) who is having pension income.
- He should have no other income except interest income from any account maintained by such
individual only in same specified bank in which he is receiving his pension income]; and has
furnished a declaration to specified bank containing prescribed particulars.

CQ13. Mr. Sharma, a resident Indian (77 yrs) gets pension of Rs. 52,000/month from UP Government. It is
credited to his savings A/c in SBI, Lucknow Branch. In addition, he gets interest @ 8% on fixed deposit of Rs. 20
lacs with said bank. Out of the deposit of Rs. 20 lacs, Rs. 2 lacs represents 5-year term deposit made by him on
1.4.2022. Interest on savings bank credited to his SBI savings account for PY 2022-23 is Rs. 9,500.
(a) Compute total income & tax liability of Mr. Sharma for AY 2023-24.
(b) What would be the amount of TDS by SBI, assuming that the same is a specified bank? Is Mr. Sharma required
to file his ROI for AY 2023-24, if tax deductible at source has been fully deducted? Examine.
(c) Would your answer to (b) be different if the fixed deposit of Rs. 20 lacs was with Canara Bank instead of SBI,
other facts remaining the same?
Solution:
(a) Computation of total income of Mr. Sharma for AY 2023-24
Particulars Rs. Rs.
1 Salaries
Pension (Rs. 52,000 x 12) 6,24,000
Less: Standard deduction u/s 16(ia) (50,000) 5,74,000
2 Income from Other Sources
Interest on fixed deposit (Rs. 20 lacs x 8%) 1,60,000
Interest on savings account 9,500 1,69,500
3 Gross total income 7,43,500
Less: Deductions under Chapter VI-A
Section 80C: Five-year term deposit (Rs. 2 lacs, restricted to Rs. 1.5 lacs) 1,50,000
Section 80TTB: Interest on fixed deposit and savings account, restricted 50,000 2,00,000
to Rs. 50,000, since Mr. Sharma is a resident Indian of the age of 77 years.
4 Total Income 5,43,500
5 Computation of tax liability for AY 2023-24
Tax payable [Rs. 43,500 x 20% + Rs. 10,000] + 4% HEC 19,448
(b) SBI, being a specified bank, is required to deduct tax at source u/s 194P (after considering tax deducted on
pension u/s 192) & remit the same to CG. Mr. Sharma would not be required to file his ROI u/s 139.
(c) If fixed deposit of Rs. 20 lacs is with a bank other than SBI, which is the bank where his pension is credited,
then, Mr. Sharma would not qualify as a “specified senior citizen”, consequent to which SBI would not be
liable to deduct tax u/s 194P. In this case, Mr. Sharma would have to file his ROI u/s 139, since his total
income (without giving effect to deduction under Chapter VI- A) exceeds the basic exemption limit.
It may be noted that, TDS provisions u/s 192 would, in any case, be attracted in respect of pension
income. Further, Canara Bank would, be liable to deduct tax @ 10% u/s 194-A on interest on fixed
deposit, since the same exceeds Rs. 50,000.

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 Deductor Buyer who is responsible for paying any sum to any resident-seller for purchase of goods
of the value or aggregate of such value exceeding Rs. 50 lacs in a PY.

Rate if TDS 0.1% of such sum exceeding Rs. 50 Lacs

Time of Deduction is to be made at the time of credit of such sum to the account of the resident-
deduction seller or at the time of payment thereof by any mode, whichever is earlier.

No TDS Tax is not required to be deducted under this section i.r.o. a transaction on which –
(a) tax is deductible under any of the provisions of this Act; &
(b) tax is collectible under the provisions of section 206C, other than section 206C(1H).

Note In case of a transaction to which both section 206C(1H) & 194Q applies, tax is required
to be deducted u/s 194Q.

Meaning of Person whose Sales/TO/GR > Rs. 10 crores during last FY. However, buyer does not
buyer include a person as notified by CG for this purpose, subject to fulfillment of T&Cs.
PC Note: Students are advised to read section 206AA, 206C(1H) & 206CC before solving this CQ.

CQ14. Mr. Gupta, a resident, is in retail business & his turnover for PY 2021-22 was Rs. 12 crores. He regularly
purchases goods from another resident, Mr. Agarwal, a wholesaler & aggregate payment during PY 2022-23 was
Rs. 95 lacs (Rs. 20 Lacs on 1.6.2022, Rs. 25 Lacs on 12.8.2022, Rs. 22 Lacs on 23.11.2022 & Rs. 28 Lacs on
25.3.2023). Assume that the said amounts were credited to Mr. Agarwal’s account in the books of Mr. Gupta on
the same date. Mr. Agarwal’s turnover for PY 2021-22 was Rs. 15 crores.
(a) Examine the TDS/TCS implications, if any, under the Income-tax Act, 1961.
(b) Would your answer be different if Mr. Gupta’s turnover for PY 2021-22 was Rs. 8 crores?
(c) Would your answer to (1) and (2) change, if PAN has not been furnished by the buyer or seller, as required?
Solution:
(a) Since Mr. Gupta’s turnover for PY 2021-22 > 10 crores & payments made by him to Mr. Agarwal, a resident
seller > Rs. 50 lacs in PY 2022-23, he is liable to TDS @ 0.1% of Rs. 45 lacs (in excess of 50 Lac).
- No TDS u/s 194Q on payments made on 1.6.2022 & 12.8.2022, since aggregate payments till that date i.e.
45 lacs, has not exceeded the threshold of Rs. 50 lacs.
- TDS of Rs. 1,700 (i.e., 0.1% of Rs. 17 lacs) u/s 194Q from payment/credit of Rs. 22 Lacs on 23.11.2022 [Rs.
22 Lacs – Rs. 5 lacs, being the balance unexhausted threshold limit].
- TDS of Rs. 2,800 (i.e., 0.1% of Rs. 28 Lacs) u/s 194Q from the payment/credit of Rs. 28 lacs on 25.3.2023.
PC Note: In this case, since both section 194Q and 206C(1H) applies, tax has to be deducted u/s 194Q.

(b) If Mr. Gupta’s turnover for PY 2021-22 was only Rs. 8 crores, TDS provisions u/s 194Q would not be
attracted. However, TCS provisions u/s 206C(1H) would be attracted in the hands of Mr. Agarwal, since his
turnover exceeds Rs. 10 crores in PY 2021-22 and his receipts from Mr. Gupta exceed Rs. 50 lacs.
- No TCS u/s 206C(1H) on 1.6.2022 & 12.8.2022, since aggregate receipts till that date i.e. 45 lacs, has not
exceeded the threshold of Rs. 50 lacs.
- Tax of Rs. 1,700 (i.e., 0.1% of Rs. 17 lacs) has to be collected u/s 206C(1H) on 23.11.2022 (Rs. 22 Lacs – Rs.
5 lacs, being the balance unexhausted threshold limit).
- Tax of Rs. 2,800 (i.e., 0.1% of Rs. 28 lacs) has to be collected u/s 206C(1H) on 25.03.2023.

(c) In case (1), if PAN is not furnished by Mr. Agarwal to Mr. Gupta, then, Mr. Gupta has to deduct tax @ 5%,
instead of 0.1%. Accordingly, tax of Rs. 85,000 (i.e., 5% of Rs. 17 lacs) and Rs. 1,40,000 (5% of Rs. 28 lacs)
has to be deducted by Mr. Gupta u/s 194Q on 23.11.2022 and 25.3.2023, respectively.
In case (2), if PAN is not furnished by Mr. Gupta to Mr. Agarwal, then, Mr. Agarwal has to collect tax @ 1%
instead of 0.1%. Accordingly, tax of Rs. 17,000 (i.e., 1% of Rs. 17 lacs) and Rs. 28,000 (1% of Rs. 28 lacs) has
to be collected by Mr. Agarwal u/s 206C(1H) on 23.11.2022 and 25.3.2023, respectively.

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 Guidelines for Section 194Q[Newly Inserted]
1 Adjustment for GST, various state levies & taxes other than GST, Purchase returns
▪ If component of 'GST' is indicated separately, No TDS on GST amount. In case of Advance payment,
TDS is done on whole amount since invoice amount is not known.
▪ Purchase Return: TDS is already done. If money is refunded by seller against this return, then, tax deducted
may be adjusted against next purchase against the same seller.
▪ Replacement: No adjustment is required if purchase return is replaced by other goods.
2 Can Non-resident be a buyer u/s 194Q?
▪ No. However, if such NR buyer has PE in India & purchase is effectively connected with that PE → 194Q apply.
3 Should tax be deducted when the seller is a person whose income is exempt?
▪ No. 194Q is not attracted if the income of seller is fully exempt.
▪ The above clarifications would not apply if only part of the income is exempt & thus 194Q will apply.
4 Should tax be deducted on advance payment?
▪ Advances paid before 1.07.2021 → No TDS. But if Advances paid on/after 1.07.2021 → TDS.
5 Would provisions of section 194Q apply to buyer in the year of incorporation?
▪ No since TO/GR in Last FY = Zero.
6 Would provisions of section 194Q apply to buyer if turnover from business is Rs. 10 crore or less?
▪ Sales/GR/TO from business carried on by him must exceed Rs. 10 crores.
▪ His turnover or receipts from non-business activity is not to be counted for this purpose.
7 Applicability of section 194Q in cases where exemption has been provided u/s 206C(1A)
▪ Section 206C(1A) provides that no TCS is required if resident buyer furnishes a declaration that goods are to
be utilized for manufacturing or producing articles or for generation of power & not for trading purposes.
▪ Section 194Q does not apply i.r.o. those transactions where tax is collectible u/s 206C [except 206C(1H)].
▪ Since by virtue of section 206C(1A), tax is not required to be collected for goods covered u/s 206C(1), in such
cases, section 194Q will apply & buyer shall be liable to deduct tax under the said section.
8 Applicability of section 194Q in case of Government department not being a PSU or corporation
▪ As per section 194Q, for a person to be considered as a buyer if following conditions are fulfilled:
(1) Such person shall be carrying out a business/commercial activity;
(2) Total sales, gross receipts or turnover in Last FY from such business/commercial activity > Rs. 10 crores.
▪ If any Government Department is not carrying out any business activity, such an organisation would not be
considered as 'buyer' for section 194Q & thus No TDS.
▪ However, if it is carrying on a business/commercial activity, section 194Q would apply.
▪ Moreover, Government department will NOT be considered as a ‘seller’ for TDS u/s 194Q & no TDS is required.
▪ Any other person, such as a PSU or corporation established under Central or Stale Act or any other such body,
authority or entity, shall be required to comply section 194Q and tax shall be deducted accordingly.
9 Cross application of section 194-O, section 206C(1H) and section 194Q
▪ If both section 194O & 194Q apply, Tax shall be deducted u/s 194-O & not u/s 194Q.
▪ If both section 194O & 206C(1H) apply, Tax shall be deducted u/s 194O & not u/s 206C(1H).
▪ If both section 194Q & 206C(1H) apply, Tax shall be deducted u/s 194Q & not u/s 206C(1H).
▪ However, if, for any reason, tax has been collected u/s 206C(1H) before buyer could deduct tax u/s 194Q on
same transaction, such transaction would not be subjected to TDS again by the buyer. This concession is to
remove difficulty, since rate of TDS u/s 194Q & TCS u/s 206C(1H) are same.

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Deductor Person paying/providing any benefit or perquisite to a resident arising out of Business or Profession.

Rate if TDS 10% of value of such benefit

Deduction Deduction is to be made before providing such benefit or perquisite

No TDS (a) Aggregate value of such benefit or perquisite < Rs. 20,000 during the FY.
(b) Turnover of business of the payee during last FY of such individual or HUF < Rs. 1 crore or
(c) Turnover of profession of the payee during last FY of such individual or HUF < Rs. 50 Lacs

PC Note: If benefit or perquisite is wholly in kind or partly in kind & partly in cash, but cash Part < Rs. 20,000, then
person responsible for providing such benefit has to ensure that TDS i.r.o. such benefit or perquisite has been paid.

▪ Where, under an agreement or other arrangement, the tax chargeable on any income is to be borne by
the person by whom the income is payable, then, for the purposes of deduction of tax under those
provisions such income shall be increased to such amount as would, after deduction of tax thereon, be
equal to the net amount payable under such agreement or arrangement.
▪ However, no grossing up is required in the case of tax paid u/s 192(1A) by an employer on the non-
monetary perquisites provided to the employee.

▪ No TDS on any sum payable to the following persons:

- Government; RBI.
- Corporation established by/under Central Act, which is exempt from Income-tax.
- Mutual Fund specified u/s 10(23D).
▪ This provision for non-deduction is when such sum is payable to above entities by way of:
(i) Interest/Dividend i.r.o. securities/shares owned (full beneficial interest) by them; or
(ii) Any income accruing or arising to them.

For Sections Time when Tax should be deducted

193, 194A/C/D/G/H/I/IA/IB/IC/J (a) At the time of Credit of A/c of the payee

(b) Date of Payment whichever is earlier

192, 192A, 194, 194B/BB/DA/EE/LA On the Date of Payment

PC Note: A/c to which sum is credited may be called ‘Suspense Account’ or by any other name.
 Deduction is to be made at the time of credit of such sum to the account of the payee or at the time of
payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
 Where such sum is credited to any account, whether called suspense account or by any other name,
in the books of accounts of the person liable to pay such sum, such crediting shall be deemed to be
credit of such sum to the account of the payee and tax has to be deducted accordingly.

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▪ Section 197 is operative in case of section 192, 193, 194, 194A/C/D/G/H/I/J/K/LA/M/0.
▪ In such cases, assessee can make an application to AO for TDS at Lower rate/No TDS.
▪ If AO is satisfied that TI of recipient justifies TDS @ lower rate or No TDS, he may give such certificate.
▪ Where AO issues such a certificate, then deductor shall deduct income-tax at such lower rates specified
in certificate or deduct no tax, until such certificate is cancelled by AO.

▪ A declaration in writing by the assessee in duplicate that tax on his estimated TI of PY will be Nil.
▪ Deductor shall deliver or cause to be delivered to PCC or CC or PC, one copy of the declaration on or
before 7th day of the next month following the month in which the declaration is furnished to him.
1 Filing of declaration for receipt of NSS payment & dividend without TDS [Sub-section (1)]
▪ Resident individual whose estimated TI of the PY < BEL may file a declaration in duplicate to receive
dividend (u/s 194) or any sum out of National Savings Scheme A/c (u/s 194EE), without TDS.
▪ Declaration shall state that tax on estimated TI of the declarant of the PY in which such income is
to be included in computing his TI will be Nil.
▪ Declaration is to be furnished to the person responsible for paying such income u/s 194/194EE.
2 Declaration for non-deduction of tax u/s 192A/193/194A/194D/194DA/194I/194K by
persons, other than companies & firms [Sub-section (1A)]
▪ If a person, who is not a company/firm, furnishes to the person responsible for paying any income
referred to in these sections, a declaration in writing in duplicate that tax on his estimated TI of
the PY in which such income is to be included in computing his total income will be Nil.
3 Filing of declaration is not permissible if income/aggregate of incomes > BEL [Sub-section (1B)]
Declaration cannot be furnished as per the above provisions, where -
(a) Payments of dividend; (b) Payments i.r.o. deposits under National Savings Schemes;
(c) Payment of premature withdrawal from EPF; (d) Interest on securities or other interests;
(e) Insurance commission; (f) Payment i.r.o. life insurance policy; (g) Rent; (h) Income from units;
(i) Aggregate of the amounts of such incomes in (a) to (h) above
credited/paid or likely to be credited/paid during PY in which such income is to be included > BEL.
4 Filing of declaration by resident senior citizens for no TDS [Sub-section (1C)]
If a resident senior individual furnishes a declaration in writing in duplicate to the payer, that tax on
his estimated TI of the PY in which such income is to be included in computing his total income is
Nil, no TDS shall be made u/s 192A/193/194/194A/194D/194DA/194EE/194I/194K.
The restriction contained in sub-section (1B) will not apply to resident senior citizens.
5 Non-deduction of tax in certain cases
▪ Interest payments by an Offshore Banking Unit to NR/RNOR [Sub-section (1D)]
No deduction of tax shall be made by an Offshore Banking Unit from the interest paid on –
(a) deposit made by NR/RNOR or (b) borrowing from NR/RNOR on or after 1.4.2005.
❖ Payment to any person for, or on behalf of, the NPS Trust [Sub-section (1E)]
No TDS shall be made from any payment to any person for, or on behalf of, NPS Trust.
6 Time limit for delivery of one copy of declaration [Sub-section (2)]
On receipt of the declaration referred to in sub-sections (1), (1A) or (1C), person responsible for
making the payment will be required to deliver or cause to be delivered to PCC/CC/PC/CIT, one copy
of the declaration on/before 7th of the month following the month in which declaration is furnished
to him.

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TIME LIMIT, FORM & MANNER OF DEPOSITING TDS u/s 194IA, 194IB & 194M
1 Time limit & prescribed form for remittance of TDS [Rule 30(2C)]
Any sum deducted u/s 194-IA, 194-IB & 194M shall be paid to the credit of CG within 30 days from the end of
the month in which the deduction is made & shall be accompanied by a challan-cum statement in Form
26QB, 26QC, 26QD.
2 Manner of remittance of TDS [Rule 30(6C)]
Where tax deducted is to be deposited accompanied by a challan-cum-statement in Form No. 26QD, amount
of tax so deducted shall be deposited to the credit of Central Government by remitting it electronically within
30 days from the end of the month in which the deduction is made into RBI or SBI or any authorised bank.
3 TDS Certificate & time limit for furnishing such certificate to the payee [Rule 31(3C)]
Every person responsible for deduction of tax u/s 194-IA, 194-IB & 194M shall furnish the TDS certificate in Form
No.16B, 16C & 16D, respectively, to the payee within 15 days from the due date for furnishing the challan- cum-
statement in Form No.26QB, 26QC & 26QD, respectively, under Rule 31A, after generating & downloading the
same from the web portal specified by the PDGIT (Systems) (in case of section 194-IB & 194M) or DGIT (Systems)
or the person authorized by him.
4 Time limit & manner of submission of Challan-cum Statement [Rule 31A(4C)]
Every person responsible for deduction of tax u/s 194-IA, 194-IB & 194M shall also furnish to PDGIT (Systems) (in
case of section 194IB & 194M), DGIT (Systems) or any person authorized by them, a challan-cum-statement in
Form No. 26QB, 26QC & 26QD, respectively, electronically within 30 days from the end of the month in which
the deduction is made.

1 Assessee in Default
Any person including principal officer of the company who is:
(a) Required to deduct Tax at Source or (b) Being an employer opts for payment of tax u/s 192 (1A)
does not deduct or pay (whole/part) tax, such person shall be deemed to be assessee in default.
2 Payer NOT deemed to be “Assessee in Default”
▪ If such payee has filed ROI u/s 139 & has included such sum in computing his total income in ROI
& has paid tax on such sum.
PC Note: No penalty u/s 221 if failure is due to good & sufficient reason.
3 INTEREST FOR DELAY IN DEDUCTION OR PAYMENT
If (i) No Tax is deducted OR (ii) Tax has been deducted but not paid to CG; interest payable will be:
Late Deduction Simple Interest @ 1% p.m or part of the month of Late Deduction:
From Date on which tax should have been deducted
Upto Date on which such tax was actually deducted
Late Payment Simple interest @ 1.5% p.m or part of the month of Late Payment
From Date on which tax was deducted
Upto Date on which such tax is actually paid to CG
Ex: If assessee has deducted tax at source on 31.12.2022 & assessee pays TDS on 17.01.2023, Interest
u/s 201(1A) shall be charged in the manner given below:
(i) Interest u/s 201 shall be charged for 3 months @ 1% for the period 10.10.2022 to 31.12.2022.
(ii) Interest u/s 201 shall be charged for 1 month @ 1.5% p.m from 31.12.2022 to 17.01.2023.

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 CQ15. Rs. 40,000 was paid to Mr. X on 1.7.2022 towards professional fees w/o TDS. Subsequently, another
payment of Rs. 50,000 was due to Mr. X on 28.2.2023, from which tax @ 10 % (Rs. 9,000) on entire amount
of Rs. 90,000 was deducted. However, this tax of Rs. 9,000 was deposited only on 22.6.2023. Compute
Interest u/s 201(1A). [ICAI SM Q11]
Solution: Computation of Interest u/s 201(1A)
Particulars Rs
1% on tax deductible but not deducted [1 % on Rs. 3,000 for 8 months (1.7.2022 to 28.2.2023) 240
1.5% on tax deducted but not deposited [1.5% on Rs. 6,750 for 4 months (28.2.2022 to 22.6.2023) 405
Total Interest u/s 201(1A) 645
4 Time Limit for deeming a person to be Assessee-in-default for failure to deduct tax at source
Order u/s 201(1) deeming a person as assessee in default shall be passed at any time before
▪ 7 years from the end of FY in which payment is made or credit is given. [Whichever is later]
▪ 2 years from the end of FY in which correction statement is delivered under proviso to sec. 200(3)
5 No Time Limit is prescribed deeming a person to be Assessee-in-default in following cases
▪ Tax has been deducted but not paid to the government;
▪ Employer has failed to pay tax (wholly/partly) u/s 192(1A) [Since No question of deduction arises];
▪ Deductee is a Non-Resident [It may not be possible to recover the tax from NR].

SN Deductor Cases Due Date

1 Government Tax paid without production of Tax Challan Same Day of TDS
Tax paid accompanied by Tax Challan 7 days from end of TDS month.
2 Any other Deduction made in April - February 7 days from end of TDS month.
Person
If income is credited/paid in March 30th April.

▪ Tax deducted u/s 194IA/IB/M have to be remitted within 30 days from the end of TDS month &
▪ Challan-cum-statement in Form 26QB/QC/QD → within 30 days from the end of TDS month.

QUARTERLY PAYMENT OF TDS:

▪ In special cases, AO may (with prior approval of JCIT) permit quarterly payment of TDS u/s
192/194A/D/H on/before 7th of the month following the quarter for 1 st three quarters in the FY
& 30th April i.r.o. the quarter ending on 31st March.

Every person responsible for deduction of tax shall deliver quarterly statements to the DGIT (Systems).
Statement of TDS u/s ↓ Form No.
1 Section 192 Form No. 24Q
2 Other sections Deductee is a NR or RNOR or foreign company Form No. 27Q
All other deductee Form No. 26Q
Quarter ending on 30th June 30th Sep 31st Dec 31st March
Due Date for filing statement 31 July of FY 31 Oct of FY 31 Jan of FY 31 May of next FY
▪ Tax deducted u/s 194IA/IB/M have to be remitted within 30 days from the end of the month of TDS.
▪ Challan-cum-statement in Form No. 26QB/QC/QD has to be furnished within 30 days from the end of
the month of TDS.

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➢ Deductor shall issue a certificate to the payee of Income that tax has been deducted & specify the
amount deducted, rate at which tax has been deducted & such other prescribed particulars.
➢ Every Employer shall furnish to the employee a certificate (for Tax u/s 192(1A) that tax has been paid
& specify the amount of Tax paid, rate at which tax has been paid & such other prescribed particulars.

TDS CERTIFICATE [Rule 31]

TDS u/s 192 In Form No. 16 → Issued annually by 15th June of next FY.

Other sections In Form 16A → Issued Quarterly w/i 15 days from DD for filing TDS statement u/r 31A.

1 Following adjustments can be made during the computerized processing of statement of TDS:
▪ Arithmetical Errors in the statement; or
▪ Incorrect claim if such incorrect claim is apparent from any other information in the statement.
2 ‘Incorrect claim apparent from any information in the statement’ shall mean claim:
▪ which is Inconsistent with another entry of the same or some other item in such statement;
▪ where Rate of TDS is not in accordance with the provisions of the Act.

3 Interest has to be computed on the basis of the sums deductible as computed in statement
4 Fee u/s 234E: A fee of Rs. 200 per day is levied u/s 234E for late furnishing of TDS statement.
▪ From: DD of furnishing of TDS statement - To: Date of Actual furnishing of TDS statement.
▪ Total fee u/s 234E shall not exceed Total Amount of TDS/TCS.
▪ Such fee has to be paid before delivering the TDS statement.
5 Sum payable by the deductor should be determined after Adjustment of Interest & Fee against the
amount paid u/s 200/201/234E & any other amount paid by way of Tax/Interest/Fee.
6 Intimation will be sent to the deductor, specifying his tax liability or refund due within 1 year from
the end of FY in which statement is filed. Refund due shall be granted to the deductor.

❖ Both deductor & deductee have to compulsorily quote PAN of the deductee in all correspondence, bills,
vouchers & other documents exchanged between them.
❖ In case of failure to provide PAN, RATE OF TDS shall be higher of the following rates:
(a) Rate prescribed in the Act;
(b) Rate in force (i.e. rate mentioned in Finance Act) or
(c) 20% [5% in case tax is required to be deducted at source u/s 194O & 194Q]
❖ Above provision is also applicable if taxpayer files a declaration in Form 15G/15H but does not provide
PAN. Similar No certificate u/s 197 will be granted by AO if PAN is not furnished.
❖ If PAN provided is invalid or it does not belong to the deductee, it shall be deemed that the deductee
has not furnished his PAN to the deductor.
Ex: In case of rental payment for plant and machinery, where the payee does not furnish his PAN to the
payer, tax would be deductible @ 20% instead of @ 2% prescribed u/s 194-I. However, non-furnishing of
PAN by the deductee in case of income by way of winnings from lotteries, card games etc., would result in
tax being deducted at the existing rate of 30% u/s 194B. Therefore, wherever tax is deductible at a rate
higher than 20%, this provision would not have any impact.

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 ❖ Section 206AB requires tax to be deducted at source under the provisions of this Chapter on any sum
or income or amount paid (or payable) or credited by a person (deductee) to a specified person, at
higher of the following rates –
(a) Twice the rate prescribed in the relevant provisions of the Act;
(b) Twice the rate or rates in force i.e., the rate mentioned in the Finance Act; or
(c) 5%
❖ Section 206AB is not applicable to section 192, 192A, 194B, 194BB or 194N, 194IA, 194IB, 194M.
❖ If both section 206AA & 206AB are applicable to specified person, then, tax is required to be deducted
at higher of the two rates provided in section 206AA and section 206AB.
❖ Meaning of Specified person: A person who has not filed ROI for both of 2 AYs relevant to 2 PYs
immediately prior to the PY in which tax is required to be deducted, for which time limit of filing ROI
u/s 139(1) has expired, & aggregate of TDS & TCS is Rs. 50,000 or more in each of these 2 PYs.
Note: Specified person does not include a NR who does not have a permanent establishment in India.

1. Every banking company or co-operative society or public company referred to in the proviso to section
194A(3)(i) shall prepare prescribed statements if it is responsible for paying interest u/s 194 to a
resident not exceeding Rs. 40,000 & Rs. 5,000 in any other case.
2. Such persons should prepare & deliver or cause to be delivered statements within the prescribed time
to the prescribed income-tax authority or the person authorized by such authority.

195A INCOME PAYABLE NET OF TAX

❖ If Tax is to be borne by Payer: Income of Payee = Income Received + Tax Paid by the payer.
❖ However, no grossing up is required in case of tax paid [u/s 192(1A)] by an employer on
non-monetary perquisites provided to the employee.
197A(1F) NO TDS on following payments in case such payment is made by a person to a bank
(excluding a foreign bank) or to any payment systems company authorised by RBI:
❖ Bank guarantee commission; credit or debit card commission for transaction b/w merchant
establishment & acquirer bank, Depository charges on maintenance of DEMAT accounts;
❖ Cash management service charges; underwriting service charges; warehousing services charges
❖ Clearing charges (MICR charges) including interchange fee or other similar charges charged at
the time of settlement or for clearing activities under Payment & Settlement Systems Act, 2007.
198 Tax deducted is treated as Income of the payee & tax credit is available to him.
However, tax deducted u/s 194N & tax paid by an employer u/s 192 (1A) on Non-monetary
perquisites provided to the employees shall not be deemed to be income received by deductor.
199 Credit for TDS → Amount of TDS shall be allowed as Set off in the year in which income is
assessed. Any sum referred to in Section 192(1A) & paid to CG, shall be treated as the tax
paid on behalf of the person in respect of whose income such payment of tax has been made.
202 DEDUCTION ONLY ONE MODE OF RECOVERY
❖ Recovery of tax through deduction at source is one of the methods of recovery of Tax.
❖ AO can use any other prescribed methods of recovery in addition to tax deducted at source.
205 BAR AGAINST DIRECT DEMAND OF TAX FROM ASSESSEE
❖ Assessee cannot be asked to pay tax on income on which tax has already been deducted.
❖ If Deductor has not paid tax to government, department cannot recover tax from assessee.
❖ Only the person deducting the tax shall be liable to pay tax to the government.

PC NOTE: Rule Numbers & Form Numbers are only for the reference. No Need to memorize them.

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228
 Nature of Goods/Services % of
TCS
1 Sale of Certain Goods [Section 206C(1)]

1. Alcoholic liquor for human consumption 1%

2. Tendu Leaves 5%
3. Timber obtained under a forest Lease 2.5%
4. Timber obtained by any other mode than under a forest lease 2.5%
5. Any other forest produce not being timber or tendu leaves 2.5%
6. Scrap 1%
7. Minerals (Being Coal, Lignite or Iron Ore) 1%

2 Leasing/Licensing Services [Parking lot/Toll Plaza or Mining/Quarry] [Section 206(1C)] 2%

Every person who grants a lease or a licence or enters into a contract or otherwise transfers any
right/interest in any parking lot/Toll Plaza or Mining/Quarry (Other than Mineral oil, Petroleum,
Natural Gas) to any person other than Public Sector Company.

3 Sale of Motor Vehicle of value > Rs. 10 lacs [Only for Retail Sale] [Section 206C(1F)] 1%

▪ Limit of Rs. 10 Lacs is applicable to Single sale & not to Aggregate value of sale made during FY.
▪ Mode of Payment is irrelevant to attract TCS in case of Sale of Motor Vehicle.
▪ No TCS on sale of Motor Vehicle by manufacturers to dealers/ distributors.
▪ This Provision is applicable for ANY Motor Vehicles including Luxury Cars.
▪ No TCS on sale made to Government, institutions notified under UN (Privileges & Immunities) Act
1947 & Embassies, Consulates, High Commission, Legation, Commission & trade representation of
a foreign State.

4 TCS on sale of goods of value exceeding Rs. 50 lacs [Section 206C(1H)] 0.1%
▪ As per section 206C(1H), tax is also required to be collected by a seller, who receives any amount
as consideration for sale of goods of the value or aggregate of such value exceeding Rs. 50 lacs in a
PY [other than exported goods or goods covered under sub-sections (1)/(1F)/(1G)].
▪ TCS = 0.1% of sale consideration exceeding Rs. 50 lacs.
▪ Time of TCS → At the time of receipt of consideration.
▪ However, nax is not required to be collected if buyer is liable to deduct tax at source under any other
provision of the Act on goods purchased by him from the seller & has deducted such tax.
▪ Non-furnishing of PAN or Aadhar by buyer to seller → Rate of TCS = Higher of (a) Twice the rate
specified in this sub-section; & (b) 1%.
5 Overseas remittance or overseas tour package [Section 206C(1G)] 5%

❖ Authorized dealer, who receives amount, for overseas remittance from a buyer (being a person
remitting such amount out of India);
❖ Seller of an overseas tour programme package who receives any amount from the buyer who
purchases the package.
❖ Meaning of Overseas tour program package → Any tour package which offers visit to a country
or territory outside India. It includes expenses for travel/stay/boarding/lodging or any other
expenditure of similar nature or in relation thereto. [Clause (ii) of Explanation to sec. 206C(1G)].

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 RATE OF TCS IN CASE OF COLLECTION BY AN AUTHORIZED DEALER
Amount and purpose of remittance Rate of TCS
1 (a) Where amount is remitted for a purpose other than purchase of overseas Nil (No tax to be
tour programme package; & collected at source)
(b) Aggregate amounts being remitted by a buyer < Rs. 7 lacs in a FY.
2 (a) where the amount is remitted for a purpose other than purchase of 5% of aggregate
overseas tour programme package; & amount in excess of
(b) Aggregate of the amounts in excess of Rs. 7 lacs is remitted by the buyer Rs. 7 lacs
in a FY.
3 (a) Where the amount being remitted out is a loan obtained from any 0.5% of aggregate
financial institution, for the purpose of pursuing any education; & amounts in excess of
(b) Aggregate amounts in excess of Rs. 7 lacs is remitted by buyer in FY Rs. 7 lacs

CASES WHERE NO TAX IS TO BE COLLECTED

1 No TCS by authorized dealer on an amount i.r.o which the sum has been collected by the seller.

2 No TCS, if buyer is liable to deduct tax at source under any other provision of the Act & has deducted
such tax.

3 No TCS, if buyer is CG/SG/Embassy, a High Commission, a legation, a commission, a consulate, the

trade representation of a foreign State, a local authority or NR visiting India.

❖ Tax should be collected at the time of (a) debit or (b) receipt whichever is earlier.
Note: Sale of Motor Vehicle > Rs. 10 Lacs & Sale of goods > Rs. 50 Lacs → Receipt of consideration.

No TCS if the resident buyer furnishes a declaration in writing in duplicate to the collector that –
- Goods are to be utilised for Manufacturing/Processing/Producing articles or for generation of power &
- not for trading purposes.

SN Person Circumstances Time Limit

1 Government Tax paid without production of Income Tax Challan Same Day of TCS

Tax paid accompanied by Income Tax Challan 7 days from end of month

2 Other than Government → Within 1 Week from last day of Month of TCS.

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1 For “Sale of goods of value > Rs. 50 Lacs [Section 206C(1H)]

A person who purchases any goods but does not include –

(a) CG/SG, an embassy, a High Commission, legation, commission, consulate & trade representation
of a foreign State, or
(b) Local authority
(c) Person importing goods into India or any other person as CG may, by notification in the Official
Gazette, specify for this purpose, subject to stipulated conditions.

2 For ‘Sale of Certains Goods & Leasing/Licensing servies’ [Section 206C(1) & 206(1C)]

A person who obtains in any sale (Auction/Tender/Any other mode) goods specified above or right to
receive any such goods but does not include:
(a) Public sector company, CG, SG & Embassy, High commission, legation, commission, consulate &
the trade representation, of a foreign State & a club, or
(b) Buyer in the Retail sale of such goods purchased by him for personal consumption.

3 For “Sale of motor vehicle > Rs. 10 Lacs [Section 206C(1F)]

A person who obtains in any sale, goods of the nature specified therein, but does not include:
(a) CG, SG, & Embassy, High Commission, legation, commission, consulate & trade representation of
a foreign State; or Local authority; or
(b) Public sector company which is engaged in the business of carrying passengers.

1 For “Sale of goods of value > Rs. 50 Lacs [Section 206C(1H)]

Person whose total sales, gross receipts or turnover from the business carried on by him exceed
Rs. 10 crores during FY immediately preceding the financial year in which goods are sold.

2 For “Sale of Certain Goods & Motor Vehicles” [Section 206C(1) & 206C(1F)]

▪ CG/SG/LA or corporation;
▪ Authority established by or under a Central, State or Provincial Act;
▪ Any Company or a Firm or Co-operative society
▪ Individual/HUF [Tax audit u/s 44AB(a)/(b) is done in last PY].
▪ Seller includes Individual/HUF whose total sales, gross receipts or turnover from the business
or profession carried on by him exceed Rs. 1 Crores in case of business & Rs. 50 Lacs in case
of profession during FY immediately preceding the financial year in which the goods of the nature
specified in the Table in point (1) are sold. [Explanation to section 206C] [W.e.f. 1st October, 2020]

Waste & scrap from the manufacture or mechanical working of materials which is definitely not usable
as such due to breakage, cutting up, wear & other reasons [Explanation to section 206C].

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❖ Persons responsible for deducting tax or collecting tax at source should apply to AO for the allotment
of a ‘Tax-deduction & Collection-account number’.
❖ Documents/certificates/returns/challans in which TAN has to be compulsorily quoted:
▪ Challans for payment of any sum in accordance with the provisions of section 200/206C(3);
▪ Certificates furnished u/s 203/206C(5);
▪ Statements prepared & delivered as per the provisions of section 200(3)/206C(3).
▪ Returns delivered in accordance with the provisions of section 206/206C(5B); &
▪ All other documents pertaining to such transactions prescribed in the interests of revenue.
❖ Requirement of obtaining & quoting of TAN shall not apply to such person notified by CG.

TDS TCS

▪ TDS is Tax Deduction at Source ▪ TCS is Tax Collection at Source.

▪ Payer is required to deduct tax at source at the ▪ Seller of certain goods/services is responsible for
prescribed rate. collecting tax at source at prescribed rate.

▪ Tax is required to be deducted at the time of ▪ Tax is required to be collected at source at the time
credit or payment, whichever is earlier. of debit or receipt whichever is earlier.
▪ However, in certain cases, tax is required to be ▪ In case of sale of Motor-Vehicle, tax shall be
deducted at the time of payment. collected at the time of receipt of amount.

▪ Section 206CC requires TCS at higher rates if person paying any sum on which tax is collectible at
source fails to furnish his PAN to person responsible for collecting tax at source -
(a) Twice the rate specified in the relevant provision of the Act
(b) at 5% [1% for section 206C(1H)]
▪ Higher rate of TCS would be attracted even if the person furnishes a declaration u/s 206C(1A)
but does not provide his PAN.
▪ PC Note: NR not having a permanent establishment in India → Section 206CC does not apply.

▪ Section 206CCA requires TCS at higher rates from a specified person:

(a) Twice the rate specified in the relevant provision of the Act;
(b) at 5%
▪ If both provisions of section 206CC & 206CCA are applicable to a specified person, then, tax is required
to be collected at higher of the two rates provided in section 206CC & 206CCA.
▪ Meaning of Specified person: A person who has not filed ROI for both of 2 AYs relevant to 2 PYs
immediately prior to the PY in which tax is required to be deducted, for which time limit of filing ROI
u/s 139(1) has expired, & aggregate of TDS & TCS is Rs. 50,000 or more in each of these 2 PYs.
PC Note: NR not having a permanent establishment in India → Not a specified person.

▪ It may be noted that whereas section 206CC is applicable to persons paying any sum or amount (on which
tax is collectible at source) who have not furnished PAN, section 206CCA is applicable to specified persons
who have failed to file ROI [See definition of specified person in (iii) below].

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➢ We know that income earned during PY 2022-23 shall be taxed in AY 2023-24.
➢ But assessee is required to pay tax, in advance, on taxable income of PY 2022-23 during PY 2022-23
itself. Such tax paid is known as Advance Tax.
➢ Advance tax is payable on estimated current income in installments during the previous year.
➢ Such advance tax is in addition to TDS/TCS.
➢ Credit for Advance Tax [Section 219]: Advance tax paid by the assessee is treated as payment of tax for
PY & Credit of Advance Tax paid is given to him while calculating tax payable u/s 140A.

❖ Any person whose Advance Tax liability ≥ Rs 10,000 in the FY on estimated current income is liable to
pay Advance Tax.

❖ Exception: Senior Resident Individual (Age ≥ 60 yrs during PY) & does not have any Income u/h PGBP
→ Not required to pay Advance Tax even if his Advance Tax liability ≥ Rs. 10,000.

❖ Advance Tax is payable on Estimated Current Income

➢ Estimated Current Income = Expected Income during current PY under 5 heads of Income.
➢ Thereafter, brought forward losses shall be set off.
➢ From Estimated GTI, deductions likely to be claimed u/s 80C to 80U will be deducted.
❖ How to calculate ADVANCE TAX LIABILITY?

Tax on Estimated Total Income

Less: Rebate u/s 87A or Relief u/s 89 If this amount comes out to be ≥ Rs. 10,000;
Add: Surcharge + Health & Edu. Cess then such person is liable to pay advance
tax.
Less: TDS/TCS

PC Note:
1. Assessee is not required to submit any estimate or statement of estimated income to AO unless he
has been asked (served with notice) by AO to submit the estimates.
2. Proviso to Section 209(1)(d): Tax deductible but not so deducted cannot be reduced for computing
Advance Tax liability of the payee.
3. Estimated Net Agricultural Income of the PY has to be considered for computing advance tax.

A ASSESSEE COMPUTING PROFITS ON PRESUMPTIVE BASIS U/S 44AD or 44ADA

➢ Pay whole amount of Advance Tax on/before 15th March of the PY in one installment.
➢ This option is not available for Section 44AE.
Space for PC Note:

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 B ASSESSEES OTHER THAN MENTIONED ABOVE IN (A)

Schedule of Payment of Advance Tax (Minimum Installments)

Payment date All Assessees (other than eligible person u/s 44AD)

15 June 15% of Advance Tax Liability

15 September 45% of Advance Tax Liability - Amount paid in 1st Installment

15 December 75% of Advance Tax Liability - Amount paid in 1st & 2nd Installments

15 March 100% of Advance Tax Liability - Amount paid in 1st, 2nd & 3rd Installments

PC Note:
✓ Revision of Estimated Income: Each installment shall be calculated on estimated income on cumulative
basis after revision of estimated income @ every date of payment (15th of June/Sep/Dec/March).
✓ Any amount paid by way of advance tax on or before 31st March shall also be treated as advance tax paid
during each financial year on or before 15th March.
✓ Assessed in Default: Where the assessee does not pay any installment by the due date, he shall be deemed
to be an assessee in default in respect of such installment.
✓ If Banks are closed on Last day for Payment of any instalment of Advance Tax → Assessee can pay such
installment on next working day; No Interest u/s 234B/234C will be charged.

SOME OTHER IMPORTANT POINTS

Q1. Can AO issue order to an assessee to pay Advance Tax?
Answer:
(a) If the person was required to pay advance tax & such person has not paid it. OR
(b) If any person has been already assessed by way of regular assessment for any earlier PY, AO can
serve an order u/s 210(3) to such person to pay advance tax specifying the amount of Advance Tax
& Installments in which such advance tax is to be paid. Such order may be served at any time but
latest by last day of February.

What shall be the basis for computation of Advance Tax payable?

For this purpose, basis for computation of advance tax payable shall be higher of (i) or (ii):
(i) Total income of latest PY in which assessee has been assessed by way of regular assessment.
(ii) Total income declared by assessee in any ROI for any subsequent PY of regular assessment.

Q2. Can AO revise demand notice sent to the assessee?

Answer: If after making demand notice (order) by AO, but before 1 st March of the FY,
(i) ROI is furnished by assessee u/s 139(1)/142(1);
(ii) Regular assessment is completed for any later PY for higher amount of income,
AO may revise such demand order u/s 210(4) on the basis of the computation of the returned income
or assessed income. Such revision shall be made by AO before 1st March of the PY.

Q3. Whether Assessee has the option to pay less advance tax than specified by AO in notice?

Answer: Such person to whom the order has been passed by AO has the option to show lesser liability
of advance tax than specified by AO in demand order by filing declaration in form no. 28A to AO &
showing the calculation of his estimate on or before the due date of last installment.

Q4. Whether assessee has option to show higher liability than specified by AO in notice?

Answer: Option to show higher liability always exists & tax shall be paid on such higher income.

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SHORTFALL IN ADVANCE TAX DUE TO CAPITAL GAINS/CASUAL INCOMES
▪ It is not possible for an assessee to estimate certain incomes which are generally unexpected.
▪ Such incomes include:
✓ Capital gains & Winnings from lotteries, crossword puzzles etc;
✓ Income u/h ‘PGBP’ in cases where income accrues or arises for the first time.
✓ Dividend income
▪ If any such income arises after DD of any installment, then entire amount of advance tax payable (after
TDS) on such income, shall be paid in remaining installments of advance tax or by 31st March of the
relevant PY (if no installment is remaining).
▪ If entire amount of tax payable is paid, then No Interest u/s 234B or 234C shall be payable.

CQ1. Mr. Amol Chandak estimates his income for PY 2022-23 at Rs. 5,00,000. Besides this income, he has LTCG
of Rs. 1,00,000 on transfer of gold on 01.12.2022. He has won a lottery on 25th March 2023 of Rs. 2,00,000.
Compute the advance tax payable by Mr. Amol Chandak in various instalments.
Solution:
▪ In this question, Mr. Amol has LTCG on 1.12.2021 which falls after payment of 2 installment of advance Tax.
▪ Thus, for calculating first 2 installments, LTCG will not be considered.
▪ Tax Liability of Mr. Amol Chandak for AY 2023-24 for 1st & 2nd Installment: Rs. 12,500 + Rs. 500 = Rs. 13,000.
(i) First Installment of Advance Tax payable on 15.6.2022 = 15% of Rs. 13,000 = Rs. 1950.
(ii) Second Installment of Advance Tax payable on 15.9.2022 = 45% of Rs. 13,000 – Rs 1950 = Rs. 3900.
▪ Tax Liability of Mr. Amol Chandak for AY 2023-24 for 3rd & 4th Installment:
Tax on Rs. 5,00,000 Rs. 12,500
Tax on LTCG of Rs. 1 Lac @ 20% Rs. 20,000
Add: Health & Education cess @ 4% of Tax Rs. 1,300
Total Tax Liability Rs. 33,800

(iii) Third Installment payable on 15.12.2022 = 75% of Rs. 33,800 – Rs 1950 – Rs. 3900 = Rs. 19,500.
(iv) Fourth Installment payable on 15.03.2023 = 100% of Rs. 33,800 – Rs 1950 – Rs. 3900 - Rs. 19,500 = Rs. 8450.

▪ Now, Mr Amol has won a lottery on 25th March 2023 which falls after the payment of all installments. Thus, he
will have to pay the tax on such amount before 31st march.
▪ If paid before 31st march, it will be considered to have been paid before the due date & thus No interest u/s
234B or 234C will be levied.
▪ Tax on Rs. 2 Lacs @ 30% = Rs. 60,000. Thus Mr. Amol has to pay Rs. 60,000 as tax on lottery before 31st March
2023. Otherwise, Sec. 234B & 234C will get attracted.
▪ Since Tax on Lottery would have been deducted (TDS) @ 30% [i.e Rs. 60,000] Mr. Amol will not be required to pay
any tax. He will only have to give details about this transaction (Income & TDS) to prescribed authority.

CQ2. Following are the particulars of estimated income of Mr. Pranav Chandak for PY 2022-23:
(a) Salary Income (after standard deduction of Rs. 50,000) Rs. 5,00,000
(b) Income u/h House Property @ Rs. 10,000 p.m. Rs. 1,20,000
(c) Income from Interest on Government securities Rs. 50,000
(d) Winnings from lotteries (Gross) Rs. 40,000
(e) Share of profit from the Income of HUF Rs. 1,50,000

Calculate the amount of Advance Tax payable by him in various instalments. Tax of Rs. 12,000 has been deducted
at source out of the lottery. He has deposited Rs. 10,000 in PPF.

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Solution: Computation of Total Income of Mr. Pranav Chandak for AY 2023-24
Particulars Rs.
Salary Rs. 5,00,000
House Property (Rs. 1,20,000 - 30% Standard Deduction u/s 24(a) Rs. 84,000
Interest on Govt. Securities Rs. 50,000
Winning of Lottery Rs. 40,000
Gross Total Income Rs. 6,74,000
Less: Deduction u/s 80C (Rs. 10,000)
Taxable Income Rs. 6,64,000
Computation of Advance Tax Liability
Tax on Lottery Income of Rs. 40,000 @ 30% Rs. 12,000
Tax on other income of Rs. 6,24,000 [Rs. 12,500 + Rs. 24,800] Rs. 37,300
Total Tax payable + Health & Education cess @ 4% of Tax Rs. 51,272
Less: TDS (Rs. 12,000)
Advance Tax Payable (rounded off) Rs. 39,270
Computation of Minimum Installments of Advance Tax
1st Installment [on/before 15.6.2022] (15% of Rs. 39,270) Rs. 5891
2nd Installment [on/before 15.9.2022] (45% of Rs. 39,270) – Rs. 5891 Rs. 11780
3rd Installment [on/before 15.12.2022] (75% of Rs. 39,270) – Rs. 5891- Rs. 11780 Rs. 11781
4th Installment [on/before 15.03.2023] (100% of Rs. 39,270) - Rs. 5891- 11780 – 11781 Rs. 9818

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Circumstances ► If No ROI is filed; OR ► ROI is filed after Due Date u/s 139(1)

Consequences Simple Interest @ 1% p.m (or part of the month) is payable on:
Tax on Assessed Income - TDS/TCS - Advance Tax – Relief u/s 89

Time for Levy From Next day following the Due Date for filing ROI.
of Interest
Upto (i) If ROI is filed after DD Date of filing ROI

(ii) If NO ROI is filed Date of Completion of BJA u/s 144

PC Note:
1. No Interest u/s 234A shall be charged on SAT u/s 140A paid by assessee on/before DD of filing ROI
(even if ROI is submitted after DD of filing ROI).
If SAT u/s 140A is paid after DD of filing ROI, Interest u/s 234A is applicable.
2. Interest payable u/s 234A shall be reduced by Interest paid on SAT u/s 140A towards interest u/s 234A.

CQ3. Determine the interest payable u/s 234A in the following cases:
Particulars X Y Z
DD of filing ROI 31.07.2023 31.07.2023 31.10.2023
Date of filing ROI 15.08.2023 06.11.2023 15.12.2023
Tax on Assessed Income by AO Rs. 1,09,000 Rs. 60,000 Rs. 65,000
Advance Tax + TDS Rs. 74,000 Rs. 35,000 Rs. 35,000
SAT paid u/s 140A Rs. 35,000 Rs. 20,000 Rs. 20,000
Date of Payment of SAT u/s 140A 25.07.2023 25.07.2023 11.11.2023
Solution:
Particulars X Y Z
Tax on Assessed Income – (Advance Tax + TDS) Rs. 35,000 Rs. 25,000 Rs. 30,000
Less: SAT u/s 140A paid before DD of filing ROI (Rs. 35,000) (Rs. 20,000) (Rs. 20,000)
Balance Tax payable Nil Rs. 5,000 Rs. 10,000

Calculation of Interest u/s 234A

1. In case of Mr. X: Entire outstanding amount is paid by way of SAT on 25.07.2023 (i.e before DD of filing
ROI). However, ROI is submitted after DD. Since whole amount of tax has been paid before DD of filing ROI
by way of SAT, Interest u/s 234A is not applicable.
2. In case of Y: SAT is paid partly (Rs. 20,000) before DD of filing ROI & ROI is filed belatedly. Thus, Interest
u/s 234A is payable on Rs. 5,000 for 4 months @ 1% p.m.
3. In case of Z: SAT is paid partly (Rs. 20,000) after DD of filing ROI & ROI is filed also belatedly. Interest u/s
234A is payable on Rs. 30,000 @ 1% for 1 month (part thereof) [till date of payment of SAT] & on remaining
tax of Rs. 10,000 for 2 Months @ 1% p.m till ROI is filled. Interest u/s 234A = Rs. 300 = Rs. 200 = Rs. 500.

CQ4. Compute Interest payable u/s 234A by Mr. Thermal Gattu for AY 2023-24.
(a) DD of ROI: 30.9.2023; (b) Actual Date of filing ROI: 20.03.2024; (c) TDS = Rs. 5000;
(d) Advance Tax paid = Rs. 15000; (e) Tax paid on Self-assessment before DD of filing ROI = Rs. 2,000;
(f) Tax determined on Regular Assessment on the basis of Returned Income = Rs. 25,000.

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 Solution:
▪ Due Date of filing ROI: 30.9.2023; Date of Filing ROI: 20.3.2024.
▪ Delay in filing ROI: 5 months & 20 days = 6 months (part of the month is treated as full)
▪ Interest u/s 234A = [Tax determined on Assessment – TDS – Advance Tax] × 1% p.m * No. of Months.
= 25,000 – 5,000 – 15,000 – 2,000 (SAT paid before DD) = 3,000 × 1% p.m × 6 Months = Rs. 180.
PC Note: For computing interest u/s 234A, SAT u/s 140A shall be deducted if paid before DD of filing ROI.

If a person who is required to file ROI u/s 139 does not file ROI within time limit prescribed u/s 139(1),
he shall pay fees of Rs. 5,000.
PC Note: If Total Income of the person ≤ Rs. 5 lacs, fees payable shall not exceed Rs. 1,000.

Circumstances ► No Advance Tax is paid OR

► Advance Tax paid is < 90% of Assessed Tax

Consequences SI @ 1% p.m (or part) is payable on Assessed Tax – Advance Tax paid
Note: Assessed Tax = Tax on Total Income - TDS/TCS – Advance Tax – Relief u/s 89
– Tax credit allowed to be set off in accordance with section 115JD.

Time for Levy of From 1st April of the relevant AY

Interest
Upto Date of determination of total income u/s 143(1).

PC Note: Where self-assessment tax is paid by assessee u/s 140A or otherwise, interest shall be calculated
upto the date of payment of such tax & reduced by the interest (if any) paid u/s 140A towards the interest
chargeable under this section. Thereafter, interest shall be calculated at 1% on the amount by which the
tax so paid together with the advance tax paid falls short of the assessed tax.

1 Assessees opting for Presumptive Scheme u/s 44AD OR 44ADA

❖ Interest u/s 234C = [Advance Tax Payable – Advance Tax paid] × 1%.

2 Assessees [other than (1)]

DD Adv Tax INTEREST PAYABLE u/s 234C

15 June 15% S.I @ 1% p.m for 3 months on shortfall from 15%.

(No Interest if Advance Tax paid ≥ 12%)

15 Sep 45% S.I @ 1% p.m for 3 months on shortfall from 45%.

(No Interest if Advance Tax paid ≥ 36%)

15 Dec 75% S.I @ 1% p.m for 3 months on shortfall from 75%.

15 Mar 100% S.I @ 1% p.m for 1 month on shortfall from 100%.

Shortfall = [Advance Tax Payable – Advance Tax paid]

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 1 Companies & ▪ Companies & Firms are compulsorily required to file ROI for every PY on/before
Firms the due date in the prescribed form.
PC Note: Even in case of Loss, they are compulsorily required to file ROL.

2 Others (than 1) ▪ Person other than a company/firm are required to file ROI only if
▪ his Total Income or total income of ‘any other person’ i.r.o which he is assessable
during PY exceeds BEL before claiming Chapter VI-A deductions or Section
54/54B/54D/54EC/54F.

PC Note:
1. Total Income for determining whether a person is required to file ROI or not = Income before
claiming deductions under Chapter VI-A & Section 10A, 10AA.
2. ‘ Any other person’ includes ‘Representative assesses’ & ‘Legal Representatives’.

CQ1. Mr. X, a non-resident (age 82 years) having total income of Rs. 1,60,000 after deduction of Rs. 1,20,000 u/c
VI-A. His total income comprises of property & interest income. Whether he is required to file ROI.
Answer: As per section 139(1), every person, whose total income without giving effect to the provisions of
Chapter VI-A exceeds BEL is required to furnish ROI for the relevant AY on/before the due date.
GTI of Mr. X (before deduction under Chapter VI-A) is Rs. 2,80,000 which exceeds BEL of Rs. 2,50,000. Therefore,
Mr. X has to furnish his ROI for AY 2023-24.

Any Person (other than a company/firm) who is not required to furnish a return u/s
139(1), shall be required to file Return of Income if (during PY), such person:
1 Deposit in bank A/c > Rs. 1 Crore: has deposited an amount or aggregate of the amounts > Rs. 1
Cr in one or more current A/c with a banking company or a co-operative bank.

2 Foreign Travel > Rs. 2 Lacs: has incurred expenditure of an amount or aggregate of the amounts
> Rs. 2 lacs for himself or any other person for travel to a foreign country;

3 Electricity Bill > Rs. 1 Lac: has incurred expenditure of an amount or aggregate of the amounts
> Rs. 1 lac towards consumption of electricity; or

4 Turnover from business > 60 Lacs during PY

5 Gross Receipt > 10 Lacs during PY

6 Aggregate TDS + TCS ≥ Rs. 25,000 during PY [Rs. 50,000 for Senior Resident Individual]

7 Aggregate Deposit in Saving Bank A/cs ≥ Rs. 50 Lacs during PY

▪ ROR who is not required to furnish ROI u/s 139(1) in normal circumstances would be required to file
ROI or ROL for the PY,
▪ if such person, at any time during the previous year:
(a) holds (as a beneficial owner or otherwise) any asset located outside India or has a signing authority
in any A/c located outside India.
(b) is a beneficiary of any asset located outside India.
PC Note: Asset includes any financial interest in any entity o/s India.
❖ This proviso is not applicable to RNOR.

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 5th Proviso to ▪ An Individual who is a beneficiary of any asset located outside India
Section 139(1) ▪ is not required to file ROI under 4th proviso to section 139(1),
▪ if such income is includible in the Income of the Beneficial owner.

PC Note: Assessee can furnish his ROI even if his Total Income < Basic Exemption Limit. The Law doesn’t
prohibit the assessee to file ROI if his total income does not exceed BEL.

CQ2. Paras is resident of India. During PY 2022-23, interest of Rs. 2,88,000 was credited to his Non-resident (External)
Account with SBI. Rs. 30,000, being interest on fixed deposit with SBI, was credited to his saving bank A/c during this
period. He also earned Rs. 3,000 as interest on this saving account. (a) Is Paras required to file ROI?
(b) What will be your answer, if he owns one shop in Kerala having area of 150 sq. ft.?
(c) What if he has incurred Rs. 3 lacs as travel expenditure of self & spouse to US to stay with his married daughter?
Solution:
(a) Individual is required to furnish a ROI u/s 139(1) if his total income, before giving effect to the deductions under
Chapter VI-A & exemption u/s 10(38), exceeds BEL.
Computation of Total Income of Mr. Paras for AY 2023-24
Income from other sources
Interest earned from Non-resident (External) Account Rs. 2,88,000 [Exempt u/s 10(4)(ii),
assuming that Mr. Paras has been permitted by RBI to maintain the aforesaid account] Nil
Interest on fixed deposit with SBI 30,000
Interest on savings bank account 3,000
Gross Total Income 33,000
Less: Deduction u/s 80TTA (Interest on saving bank account) (3,000)
Total Income 30,000
Since total income of Mr. Paras for AY 2023-24, before giving effect to the deductions u/c VI-A, is less than
BEL of Rs. 2,50,000, he is not required to file return of income for AY 2023-24.
Owning a shop having area of 150 sq. ft in Kerala would not make any difference to the answer.
Note: In the above solution, Interest of Rs. 2,88,000 earned from NR (External) A/c has been taken as exempt
assuming that Mr. Paras, a resident, has been permitted by RBI to maintain aforesaid account.
(b) However, if he is not permitted, interest would be taxable. In such case, his TI, before giving effect to the
deductions under Chapter VIA, would be Rs. 3,21,000 (Rs. 30,000 + Rs. 2,88,000 + Rs. 3,000), which is > BEL.
Consequently, he would be required to file ROI for AY 2023-24. Ownership of shop in Kerala is immaterial.
(c) If he has incurred expenditure of Rs. 3 lacs on foreign travel of self and spouse, he has to mandatorily file his
return of income on or before the due date u/s 139(1).

Assessee Due date

1 Assessee (including partners) who is required to furnish TPR u/s 92E 30 November of relevant
relating to International transaction or specified domestic transaction. AY

2 ▪ Any Company (other than company required to furnish TPR u/s 92E); 31st October of the
▪ Any other person whose books of A/cs are required to be audited relevant AY
under this Act or under any other law for the time being in force; or
▪ Working Partner of Firm whose Accounts are required to be Audited
under this Act or under any other law for the time being in force.

3 Any other Assessee. 31 July of relevant AY.

PC Note:
1. Firm whose A/cs are not required to be audited → Last date for filing ROI by firm as well as partners
(whether working or non-working) shall be 31st July of the AY.
2. If last date of filing of ROI/ROL is public holiday → Assessee can file ROI/ROL on next working day.

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 ❖ ROL is required to be furnished if a person wants to carry forward his losses.
❖ ROL shall be furnished in same manner as of ROI within the time allowed u/s 139(1).
❖ If any person has sustained any loss in PY & he wants to carry forward following losses:
▪ Business loss u/s 72(1); Speculation business loss u/s 73(2); Specified business Loss u/s 73A(2);
▪ Loss u/h “Capital Gains” u/s 74(1);
▪ Loss from the activity of owning & maintaining race horses u/s 74A(3);
he shall mandatorily furnish a ROL within the time prescribed u/s 139(1) to carry forward loss.
❖ Section 139(3) r/w sec. 80 require the assessee to file ROL in same manner as that of ROI within the
time allowed u/s 139(1) & all the provisions of this Act shall apply to ROL as if it is a ROI u/s 139(1).
PC Note: It is not mandatory to file ROL (Except in case of Company/Firm) as there is no income.
Requirement of Section 80: In order to carry forward the above losses, assessee shall file ROL u/s
139(3) on/before DD specified u/s 139(1).
Losses which can be carried forward even if ROL is filed after DD u/s 139(1)
(i) Loss u/h “Income from house property” u/s 71B & (ii) Unabsorbed depreciation u/s 32.

PC Note:
1. Section 139(3) r/w section 80 does not prohibit the set off of losses of the current year even if ROI is filed
after the due date u/s 139(1). It only prohibits the carry forward of such losses.
Thus, Loss can be set off (Inter - Source Set off u/s 70 & Inter - Head Set off u/s 71) even if the ROL is
filed after the DD u/s 139(1).
2. Loss of Current Year cannot be Carried Forward unless ROL is submitted before the Due Date.
But Brought Forward Losses can be carried forward (Loss of earlier years for which ROL was filed within
DD in that year) even if No ROL is filed in Current Year.
3. Belated ROL filed u/s 139(4) cannot be said to be filed in accordance with section 139(3) & thus loss
cannot be carried forward. However, the assessee may seek remedy by making an application to CBDT
for relaxation of time to carry forward the loss. – Circular 8/2001.

CONCEPTUAL QUESTIONS
CQ3. Whether loss can be carried forward if ROI is furnished after DD specified in section 139(1)?
Answer: Section 80 r/w section 139(3) provides that the loss u/s 72(1)/73(2)/73A(2)/74(1)/74A(3) cannot be
carried forward if ROL is filed after DD u/s 139(1). However, HP loss & unabsorbed depreciation can be carried
forward even if ROI is furnished after DD of filing ROI.

CQ4. Can loss be set off if ROI is furnished after the due date specified in Section 139(1)?
Answer: Section 80 r/w section 139(3) prohibits the "carry forward of losses" if ROI is filed after DD u/s 139(1). It
does not prohibit the set off of losses. Therefore, losses can be set-off even if ROI is furnished after DD.

CQ5. DD of filing ROI is 31.10.2023 of Mr. A. ROI is filed on 15.11.2023 as follows: Loss from Business: (Rs. 8 Lacs);
IFOS: Rs. 6 Lacs; Total Income: (Rs. 2 lacs). Is set off of loss u/h "PGBP" correct as per Section 80 r/w Sec 139(3)?
Answer: Yes. Loss can be set off (Inter- source Set off u/s 70 & Inter-Head set off u/s 71) even if the ROL is filed after
the DD u/s 139(1). However, loss of Rs. 2 Lacs cannot be carried forward.

CQ6. Due Date of filing ROI is 31.10.2023 in case of Mr. C. ROI is filed on 15.11.2023 as follows:
Current Year Business Loss: (Rs. 1 Lacs); B/F losses for AY 2022-23 (ROL filed w/I DD): (Rs. 3,00,000). Whether losses
can be carried forward?
Answer:
Brought forward Losses of AY 2022-23 of Rs. 3,00,000 can be carried forward to next AY as ROI for that AY was filed
before the due date u/s 139(1) for that AY.
However, Current year business loss shall not be carried forward to the next AY as ROI is not filed before due date.

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 ➢ If any person has not furnished a ROI within time allowed u/s 139(1), he may still furnish the ROI
for any PY at any time
(a) Before 3 months prior to the end of the relevant AY or
(b) Before the completion of Assessment u/s 144, whichever is earlier.
Ex: Last date for filing ROI for PY 2022-23 (AY 2023-24) is 31.10.2023; but a belated return may be filed at any
time on/before 31.12.2023 (before 3 month prior to the end of AY 2023-24).

CONCEPTUAL QUESTIONS
CQ7. For PY 2022-23, upto what date can the assessee file ROI if no ROI has been filed & no assessment order has
been made u/s 144 till date.
Answer: Belated ROI can be filed before 3 months prior to the end of AY 2023-24. i.e before 31.12.2023.
CQ8. For PY 2022-23, no ROI has been filed. AO makes a BJA u/s 144 on 25.12.2023. Upto what date can assessee file
Belated ROI u/s 139(4).
Answer: Belated ROI can be filed before 3 months prior to the end of AY 2023-24. (i.e before 31.12.2023) OR before
assessment (i.e before 25.12.2023) whichever is earlier. Thus, belated ROI can be filed before 25.12.2023.

When a ROI If an assessee after filing ROI

can be revised (a) u/s 139(1) → [Original ROI]; (b) u/s 139(4) → [Belated ROI]
Discover any omission or wrong statement in filed ROI, he may file a revised return.

Time Limit of Such revised return can be filed at any time: (whichever is earlier)
filing Revised (a) Before 3 months prior to the end of the relevant AY or
ROI
(b) Before the completion of assessment u/s 143(3) or u/s 144

Ex: If ROI is filed by the assessee for AY 2023-24 on 31.10.2023 & he afterwards discovers some mistake, he can
file a revised return at any time upto 31.12.2023 or before the completion of the assessment, whichever is earlier.

PC Note:
1. ROL u/s 139(3) is deemed as ROI u/s 139(1). Thus, ROL can be revised u/s 139(5).
2. If original ROL is revised as per section 139(5), then Revised ROL shall substitute the original ROL
from the date original ROI is filled & such revised ROL shall be deemed to be filed within time limit of
section 139(1) & loss claimed in revised ROL can be carried forward.
3. Revised return substitutes the original return.
4. There is no provision in Income Tax Act to enable assessee to revise his income by filing a revised
statement of income to AO. The only option available to the assessee is to file revised return.
5. Belated Return u/s 139(5) can be revised.
6. Even a Revised Return can be revised again within the time limit of section 139(5).

CQ9. Mr. X filed a ROI for PY 2022-23 on 31.07.2023. He later files a revised return on 15.12.2023 declaring a loss of
Rs. 1,00,000. Can the loss be allowed to be carried forward?
Answer: Revised return substitutes the original return. Since original ROI was filed within DD u/s 139(1), revised
ROL shall be deemed to have been filed within DD & thus loss of Rs. 1,00,000 shall be allowed to be carried forward.

CQ10. Original return for PY 2022-23 was submitted by X on 15.06.2023. Return was processed u/s 143(1) on
05.08.2023. X wishes to file revised return. (a) Upto what time can he do? (b) What if regular assessment is completed
on 31.08.2023.
Answer:
(a) He can file a revised return, processing of return u/s 143(1) is not treated as assessment for this purpose.
Revised return can be filed at any time before 3 months prior to the end of AY 2023-24 i.e upto 31.12.2023.
(b) In this case revised return can be filed before completion of Assessment i.e. upto 30.08.2023.

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CQ11. How many times can a return be revised? Any Number of times but within the time limit of Sec. 139(5).

CQ12. Can a return filed within time extended by CBDT u/s 119 be revised?
Answer: Yes, as return filed within the extended time limit is deemed to be filed within time limit of 139(1).

CQ13. Explain with brief reasons whether ROI can be revised u/s 139(5) in the following cases:
(a) Belated return filed u/s 139(4) (b) Return already revised once u/s 139(5). (c) ROL filed u/s 139(3).
Solution:
(a) A belated return filed u/s 139(4) can be revised.
(b) Return revised earlier can be revised again as the first revised return replaces original return. Therefore, if the
assessee discovers any omission or wrong statement in such revised return, he can furnish 2 nd revised return
before 3 months prior to the end of relevant AY or before completion of assessment, whichever is earlier.
(c) ROL filed u/s 139(3) is deemed to be return filed u/s 139(1) & thus can be revised u/s 139(5).

Optional It is optional to file updated ROI.

Time Limit Within 24 months from the end of the relevant AY.
Ex: Updated return for AY 2023-24 can be filed till 31.3.2026.

Note A Person who has not furnished ROI u/s 139(1) or belated return u/s 139(4) or revised return u/s for
that assessment year can also file updated Return.
Not Provisions of updated return would not apply if the updated return for that assessment year is
Applicable (1) is a loss return; or
(2) has the effect of decreasing the total tax liability determined on the basis of return furnished u/s
139(1) or 139(4) or 139(5); or
(3) results in refund or increases refund due on the basis of return furnished u/s 139(1) or 139(4) or
139(5).
Only Once Updated Return can be filed only once for the relevant AY.

Not Updated Return cannot be filed if any proceeding for assessment or reassessment or recomputation
Allowed or revision of income is pending or has been completed for the relevant AY.

PC Note:
 Updated return can be filed if original return is a loss return & updated return is a return of income. 🤣
Ex: If Mr. X has furnished his ROL for AY 2023-24 on 31.05.2023 consisting of Rs. 5 Lacs as business loss, he can
furnish an updated return for AY 2023-24 upto 31.03.2026 if such updated return is a return of income.

 Updated return to be furnished for subsequent PY also:

If loss is carried forward or unabsorbed depreciation carried forward u/s 32(2) or tax credit carried forward u/s 115JD
is to be reduced for any subsequent previous year as a result of furnishing of updated return of income for a previous
year, an updated return is required to be furnished for each such subsequent PY/PYs.

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Power of AO AO has the power to call upon the assessee to rectify a defective return.

Intimation of If AO considers that ROI filed by assessee is defective, he may intimate the defect
defect to assessee & give him an opportunity to rectify defect within 15 days from the
date of such intimation.

Extension of Time AO has the discretion to extend the time beyond 15 days on application by
by AO assessee.

Consequences of If the defect is not rectified within 15 days or such further extended period as
Non-rectification allowed by AO, then the return would be treated as an invalid return and it would
be deemed that the assessee had failed to furnish the return.

Condonation of If assessee rectifies defect after 15 days or extended period, but before assessment
Delay is made, AO may can condone the delay & treat the return as a valid return.
ROI SHALL BE REGARDED AS DEFECTIVE IN THE FOLLOWING CONDITIONS
1. Annexures, Statements & columns in ROI relating to computation of income chargeable under each head
of income, computations of GTI & total income have NOT been duly filled in.
2. ROI is NOT Accompanied by the following:
(a) Statement showing the computation of tax payable on the basis of the return.
(b) Audit Report u/s 44AB. (If such report has been furnished prior to furnishing ROI, a copy of such report
& the proof of furnishing the report should be attached).
(c) Proof regarding the tax claimed to have been deducted or collected at source & Advance tax & SAT
claimed to have been paid.
(However, the return will not be regarded as defective if (a) TDS/TCS certificate was not furnished u/s
203/206C to the person furnishing his ROI, (b) such certificate is produced within 2 years).
(d) Proof of the amount of compulsory deposit claimed to have been paid under the Compulsory Deposit
Scheme (Income-tax Payers) Act, 1974;
(e) Proof of payment as required u/s 140B if updated return is filed u/s 139(8A).
3. If Regular books of A/c are maintained by Assessee → ROI is NOT Accompanied by:
(i) Copies of Manufacturing A/c; (ii) Trading A/c; (iii) P&L A/c; (iv) Balance sheet;
(v) Personal accounts as detailed below:
◾ Personal Accounts of the Proprietor ◾ Personal Accounts of Partners (Members in case of AOP)

4. Regular books of A/c are not maintained by assessee → ROI is NOT Accompanied by
(i) Statement indicating Amount of turnover or gross receipts, gross profit, expenses; & net profit.
(ii) Basis on which such amounts mentioned in (i) above have been computed,
(iii) Amount of total sundry debtors, sundry creditors, SIT & cash balance as at the end of PY.

5. Copies of Audited P&L A/c, Balance sheet & Auditor’s report.

Cost Audit Report (If Cost A/c of an assessee have been audited u/s 148 of CA, 2013).

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1 LEGAL REQUIREMENT
Every person who has not been allotted a PAN shall (within such time as may be prescribed) apply
to AO for the allotment of PAN in the following cases:

SN Persons required to apply for PAN Time limit for application

1 Every person whose his TI or total income of any other On/before 31st May of AY for which
person i.r.o. which he is assessable > BEL such income is assessable

2 Every person carrying on any business/profession Before the end of that PY

whose total sales, turnover or gross receipts are or is
likely to exceed Rs. 5 Lacs in any previous year

3 Every person being a resident, other than an individual, On/before 31st May of the
which enters into a financial transaction of an amount immediately following FY
aggregating to Rs. 2,50,000 or more in a financial year

4 Every person who is a MD, director, partner, trustee, On/before 31st May of immediately
author, founder, karta, CEO, principal officer or office following FY in which the person
bearer of any person referred in (iv) above or any person referred in (iii) enters into specified
competent to act on behalf of such person referred in financial transaction.
(iv) above

2 POWER OF CG

➢ CG is empowered to specify any class/classes of persons by whom tax is payable by notification

in OG for allotment of PAN. Such persons are required to apply within prescribed time in
notification for the allotment of a PAN [Sub-section (1A)].
➢ For collecting any useful/relevant information, CG may notify any class or classes of persons &
such persons shall apply to AO for allotment of a PAN [Sub-section (1B)].

3 POWER OF AO
➢ AO may allot PAN to any other person having regard to nature of transactions (whether any tax
is payable by him or not) in the prescribed manner.

4 SUO MOTO APPLICATION BY THE ASSESSEE

➢ Any person (other than mentioned above) may apply to AO for allotment of PAN.

A Person must quote PAN in all the following documents:

(a) All Returns to any authority/All challans for the payment of any sum due under the Act;
(b) All documents pertaining to the following transactions entered into by any person.

Nature of transaction Value of transaction

Sale or Purchase of securities Transaction Value > Rs. 1 lac
Sale/purchase of Unlisted shares from open market Transaction Value > Rs. 1 lac
Payment for Purchase of units of MF Transaction Value > Rs. 50,000.
Payment for acquiring Debenture/Bonds Transaction Value > Rs. 50,000
Payment to RBI for acquiring Bonds issued by it Transaction Value > Rs. 50,000

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 OTHER ASSETS
Sale/Purchase of Immovable property If SC/SDV referred in 50C > Rs. 10 lacs.
Sale/Purchase of Goods or Services Transaction Value > Rs. 2 lacs
Sale/Purchase of Vehicle which requires registration All Transactions (other than two-wheeler)

Nature of transaction Value of transaction

Opening a Bank account (other than Time Deposit) All Transactions

Making Application for Issue of Credit/Debit Card All Transactions.

Opening Demat Account All Transactions.

Cash Deposit with Bank Total Cash Deposit > Rs. 50,000 in a day

Note: Cash Deposits > Rs. 2,50,000 during 9th Nov 2016 - 30th Dec 2016 → PAN required.

Purchase of Bank Draft/Pay orders/Cheque Payment in cash > Rs. 50,000 in one day.
Time deposit with Deposit > Rs. 50,000 at a time OR
(i) Banking company/Co-operative bank/Post office Total Deposit > Rs. 5 Lacs during a FY.
(ii) Nidhi Company [Ref. in Sec 406 of CA, 2013]
(iii) Registered NBFC.
Payment for Prepaid Payment Instruments to Total Payment in cash/bank draft/pay
Banking company/Co-operative bank. order > 50,000 during the FY.

Nature of Transactions Value of Transaction

Hotels/Restaurants bills at any one time Cash Payment > Rs. 50,000

Payment for Travel to Foreign Country or Payment for Cash Payment > Rs. 50,000
Purchase of Foreign Currency at any one time

Payment of Life Insurance Premium to Insurer Total amount >Rs 50,000 in a FY

PC Note: In case of Change in Address/Name & Nature of Business → Intimate such change to AO.
 MINOR → shall quote PAN of his Parent or Guardian while entering into above transactions.

 PERSON NOT HAVING PAN → Declaration in Form No. 60 giving details of such transaction.

 NON-APPLICABILITY: Provisions of this rule shall not apply to: (i) CG/SG; (ii) Consular Offices.

Every Payee (person who receives any amount from which tax has been deducted at source) shall intimate
his PAN to the deductor (person responsible for deducting such tax).

❖ Where any amount has been paid after deducting tax at source, deductor shall quote the PAN of payee
(person to whom the amount was paid) in the following documents:
▪ Statement furnished u/s 192(2C) giving particulars of Perquisites/Profits in lieu of salary;
▪ Certificates for Tax Deducted issued to the person to whom payment is made (payee);
▪ Returns made to the prescribed income-tax authority u/s 206;
▪ Statements prepared & delivered in accordance with section 200(3).

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❖ Every person collecting tax in accordance with section 206C shall quote PAN of every buyer/licensee
or lessee in the following documents:
▪ in all certificates issued for tax collected in accordance with the provisions of section 206C(5);
▪ in all returns prepared and delivered or caused to be delivered to any income-tax authority in
accordance with the provisions of section 206C(5A)/(5B)
▪ in all statements prepared and delivered or caused to be delivered in accordance with the provisions
of section 206C(3) [Sub-section (5D)].
❖ Exception to sub-sections (5A) & (5B): Above sub-sections (5A) & (5B) shall NOT apply to:
(i) Person who does not have taxable income or
(ii) Person who is not required to obtain PAN;
if such person furnishes a declaration u/s 197A that Tax on his Total Income for PY will be NIL.

❖ Every person who is required to furnish or intimate or quote his PAN may furnish or intimate or quote
his Aadhar Number in lieu of the PAN w.e.f. 1.9.2019 if:
▪ he has not been allotted a PAN but possesses the Aadhar No.;
▪ he has been allotted a PAN & has intimated his Aadhar No. to prescribed authority in accordance
with the requirement contained in section 139AA(2);
& PAN would be allotted in prescribed manner to a person who has not been allotted a PAN but
possesses Aadhar number.
❖ Manner for Allotment of PAN to a person who has not been allotted a PAN but possesses Aadhaar
[NN 59/2019]
▪ Rule 114(4) requires submission of application for allotment of PAN by the applicant in prescribed form
accompanied by prescribed documents as proof of identity, address & DOB of such applicant.
▪ Sub-rule (1A) to Rule 114 (w.e.f. 1.9.2019): [Newly Inserted]
Any person who has not been allotted PAN but possesses Aadhaar no. & has furnished/intimated or quoted
his Aadhaar no. in lieu of PAN in accordance with section 139A(5E), shall be deemed to have applied for
allotment of PAN & shall not be required to apply or submit any documents u/r 114.
▪ Sub-rule (1B) to Rule 114 (w.e.f. 1.9.2019): [Newly Inserted]
Any person who has not been allotted PAN but possess Aadhaar no. may apply for allotment of PAN u/s
139A(1)/(1A)/(3) by intimating his Aadhaar no. & he shall not be required to apply or submit any documents
u/r 114.

COMPUTERIZED PAN
▪ CBDT had introduced a new scheme of allotment of computerized 10-digit PAN.
▪ Such PAN comprises of 10 Alphanumeric characters & is issued in the form of laminated card.
▪ All person who were allotted PAN earlier (Old PAN) & all person who were required to apply for PAN &
did not apply, shall apply to AO for new series PAN within specified time.
▪ Once the new series PAN is allotted to any person, the old PAN shall cease to have effect.
▪ No person who has obtained the new series PAN shall apply, obtain or process another PAN.

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 Mandatory Quoting Every person eligible to obtain Aadhar Number must mandatorily quote Aadhar
of Aadhar No. Number in: (a) Application form for Allotment of PAN; (b) ROI.

NO Aadhar → Quote If a person does not have Aadhar Number, he is required to quote Enrolment ID
Enrolment Id of Aadhar application form.
Enrolment ID: 28 Digit Enrolment Identification Number issued to a resident at
the time of enrolment for Aadhar.

Update Aadhar No. to Every person who has been allotted PAN & who is eligible to obtain Aadhar
Authorities Number, shall intimate his Aadhar No. to the prescribed authority before date
notified by CG. i.e 31.03.2022.

Fees u/s 234H Where a person fails to intimate his Aadhaar u/s 139AA(2) on/before 31.03.2022, he would
be liable to pay a fee at the time of making intimation u/s 139AA(2) after the said date.
Amount of Fee
(a) Rs. 500 if intimation is made within 3 months of specified date(i.e 30.06.2022
(b) Rs. 1,000 in all other cases.
Exceptions: Provisions of Sec 139AA would not apply to Individual who does not possess Aadhar number
or Enrolment ID & is:
(a) Residing in States of Assam, Jammu & Kashmir and Meghalaya; (b) Non-Resident;
(b) Super Senior Citizen [Age ≥ 80 years at any time during PY; (d) Not a Citizen of India.

Accordingly, Rule 114AAA specifies the manner of making permanent account number inoperative.
Rule Provision
(1) If a person, who has been allotted PAN as on 1st July, 2017 & is required to intimate his Aadhaar number
u/s 139AA(2), has failed to intimate the same on/before 31st March 2022, PAN of such person would become
inoperative immediately after 31st March 2022) for furnishing, intimating or quoting under Income-tax Act.
(2) Accordingly, where a person, whose PAN has become inoperative, is required to furnish, intimate or quote
his PAN under the Act, it shall be deemed that he has not furnished, intimated or quoted PAN. Consequently,
he would be liable for all the consequences under the Act for not furnishing, intimating or quoting the PAN.
However, consequences shall have effect from the date specified by the CBDT i.e., 1 st April, 2023.
(3) Where such person who has not intimated his Aadhaar No. on/before 31 st March 2022, intimates his Aadhar
number u/s 139AA(2) after 31 st March 2022 after payment of fee specified in section 234H r/w Rule
114(5A), his PAN would become operative from the date of intimation of Aadhaar Number.
Accordingly, consequences in sub-rule (2) would not be applicable from date of intimation.
(4) PDGIT (Systems) or DGIT (Systems) has to specify the formats and standards along with the procedure for
verifying the operational status of PAN under sub-rules (1) and (2).
(5) If PAN of a person has become inoperative, he will not be able to furnish, intimate or quote his PAN and would
be liable to all the consequences under the Act for such failure.
(a) The person would not be able to file return using the inoperative PAN.
(b) Pending returns will not be processed.
(c) Pending refunds cannot be issued to inoperative PANs.
(d) Pending proceedings as in case of defective returns cannot be completed once the PAN is inoperative.
(e) Tax will be required to be deducted at a higher rate as PAN becomes inoperative.

In order to have smooth application of section 234H and existing rule 114AAA, it is clarified that the impact of Rule
114AAA(2) would come into effect from 1st April, 2023; and the period beginning from 1st April, 2022 and ending with
31st March, 2023, would be the period during which Rule 114AAA(2) would not have its negative consequences.
However, tax payer would be liable to pay a fee in accordance with section 234H r/w Rule 114(5A).

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 ▪ To enable any specified class or classes of persons to prepare & furnish their ROI through TRP
authorized to act as TRP under the Scheme.
▪ TRP shall assist the persons furnishing ROI in a manner that will be specified in the Scheme & shall
also affix his signature on such ROI.

▪ CBDT has framed the Tax Return Preparer Scheme, 2006, which came into force from 1.12.2006.
▪ TRP → Any Individual who has been issued a TRP Certificate & Unique Identification Number to
carry on the profession of preparing ROI as per the provisions of this Scheme.
Scheme may provide for the following:
- Manner & Time Period for which TRPs shall be authorized;
- Educational & other qualifications, & training etc. to act as a TRP;
- Code of conduct for TRP & Duties & Obligations of TRP;
- Circumstances under which authorization given to TRP may be withdrawn; &
- Any other relevant matter as may be specified by the Scheme.

▪ Individual, who holds a bachelor’s degree from recognised Indian University/institution, or

▪ Individual who has passed Intermediate level exam conducted by ICAI, ICSI, ICAI(CMA).

▪ Tax Return Preparer can be any Individual, OTHER THAN

(a) Officer of Scheduled bank in which assessee maintain current A/c or has regular dealings.
(b) Legal practitioner who is entitled to practice in any civil court in India.
(c) Chartered Accountant.
(d) Employee of “Specified class of Person”.

“SPECIFIED CLASS OF PERSONS” → ANY PERSON OTHER THAN

(a) Company;
(b) Person whose accounts are required to be audited u/s 44AB & is required to furnish ROI.
PC Note: We have studied that Employees of “specified class of persons” cannot act as TRP & we
know that “Specified class of persons” excludes Company & Person whose accounts are required to
be audited u/s 44AB & who is required to furnish ROI. Thus, Employees of companies & persons
whose accounts are required to be audited u/s 44AB can act as TRP.

(a) Any Person other than Individual & HUF. [Only Individual & HUF are eligible person]
(b) Individual/HUF carrying out Business or Profession during PY & their Accounts are required to
be audited u/s 44AB or under any other law for the time being in force; or
(c) Individual/HUF who is a Non-Resident in India during the previous year.
PC Note: Eligible person cannot furnish a Revised ROI for any AY through a TRP unless he has
furnished original ROI for that AY through such or any other Tax Return Preparer.

CQ14. Mrs. Hetal, an individual engaged in the business of Beauty Parlour, has got her books of account for PY
2022-23 audited u/s 44AB. Her total income for AY 2023-24 is Rs. 3,35,000. She wants to furnish her ROI for AY
2023-24 through a tax return preparer. Can she do so?
Answer:
▪ Section 139B provides a scheme for submission of ROI for any AY through a TRP.
▪ However, it is not applicable to persons whose books of account are required to be audited u/s 44AB.
▪ Therefore, Mrs. Hetal cannot furnish her return of income for AY 2023-24 through a TRP.

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▪ CBDT has power to may make rules to exempt any class/classes of persons from the requirement to
furnish documents, statements, receipts, certificate, audit reports etc, along with ROI.
▪ However, on demand, the said documents, statements, receipts, certificate, reports of audit or any other
documents have to be produced before the Assessing Officer – [Section 139C]

Section 139D empowers the CBDT to make Rules related to:

(a) Class or classes of persons who shall be required to furnish ROI in electronic form;
(b) Form & Manner in which ROI in electronic form may be furnished;
(c) Documents, statements, receipts, certificates or audited reports which may not be furnished along
with ROI in electronic form but have to be produced before AO on demand;
(d) Computer resource or Electronic Record to which ROI in electronic form may be transmitted.

▪ If any tax is payable on the basis of Total Income in ROI filed u/s 139(1), such tax shall be paid by
the assessee himself after taking credit of (i) Any Tax already paid (ii) TDS/TCS (iii) Advance Tax (iv)
Relief u/s 89.
▪ Any Interest u/s 234A/B/C or Fees payable for any delay in filing ROI or any default Shall also be
paid with the tax payable before filing ROI.
▪ ROI shall be accompanied by Proof of Payment.

▪ If SAT paid u/s 140A(1) < Tax + Interest + Fees, then amount so paid shall first be adjusted
towards
✓ fees payable &
✓ thereafter towards Interest & Order of Adjustment
✓ Balance amount shall be adjusted towards Tax payable.

▪ Assessee shall be deemed to be Assessee in Default i.r.o. such unpaid Tax or Interest or fees.

– Theory Question [2M]

AO shall make assessment of Total Income or Loss to the best of his judgment & determine tax
payable by the assessee, if:
(a) Assessee does not file ROI u/s 139.
(b) Does not comply with notice issued u/s 142 to file ROI/books/furnish required information.
(c) Does not get his Accounts Audited as directed by AO.
(d) Does not comply with all the terms of a notice issued u/s 143(2).

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 TAX ON UPDATED RETURN [SECTION 140B] [Amendment]
1 Payment of tax, additional tax, interest and fee before furnishing updated return of income
(a) If no return is furnished earlier [Section 140B(1)]
▪ Assessee would be liable to pay such tax together with interest & fee payable for any delay in furnishing
the return or any default or delay in payment of advance tax, along with the payment of additional tax
computed u/s 140B(3), before furnishing the return.
▪ Tax payable is to be computed after taking into account the following –
- Tax, if any, already paid, as advance tax
- Tax deducted or collected at source
- Relief of tax claimed u/s 89; and
- Tax credit claimed to set-off in accordance with the provisions of section 115JD
(b) If return is furnished earlier [Section 140B(2)]
▪ If ROI u/s 139(1) or 139(4) or 139(5) has been furnished by an assessee and tax is payable, on the basis of
updated return to be furnished by such assessee u/s 139(8A), assessee would be liable to pay such tax
together with interest payable under any provision of this Act for any default or delay in payment of
advance tax, along with the payment of additional tax computed u/s 140B(3) (as reduced by the amount
of interest paid under the provisions of this Act in the earlier return) before furnishing the return.
▪ Tax payable is to be computed after taking into account the following –
- Amount of relief or tax referred in section 140A(1), credit for which has been taken in the earlier return.
- Tax deducted or collected at source on any income which is subject to such deduction or collection
and which is taken into account in computing TI & which has not been included in the earlier return.
- Tax credit claimed to set-off as per section 115JD, which has not been claimed in earlier return.
▪ Aforesaid tax would be increased by the amount of refund, if any, issued i.r.o. such earlier return.
2 Additional income-tax payable at the time of updated return [Section 140B(3)]
▪ If such return is furnished after expiry of time limit u/s 139(4) or 139(5) & before completion of 12 months
from the end of relevant AY: 25% of aggregate of tax & interest payable, as determined above,
▪ If such return is furnished after 12 months from the end of relevant AY but before completion of 24 months
from the end of relevant AY: 50% of aggregate of tax and interest payable, as determined above,
3 Interest u/s 234B where earlier return has been furnished [Section 140B(4)]
▪ If earlier return has been furnished, interest payable u/s 234B has to be computed on the assessed tax or, as
the case may be, on the amount by which the advance tax paid falls short of the assessed tax.
▪ “Assessed tax” means the tax on TI as declared in updated return to be furnished u/s 139(8A), after considering:
- Amount of relief or tax referred in section 140A(1), credit for which has been taken in the earlier return.
- Tax deducted or collected at source on any income which is subject to such deduction or collection and
which is taken into account in computing TI & which has not been included in the earlier return.
- Tax credit claimed to set-off as per section 115JD, which has not been claimed in earlier return.
▪ Aforesaid tax would be increased by the amount of refund, if any, issued i.r.o. such earlier return.
4 Computation of Additional income-tax
▪ Tax would include surcharge and cess on such tax.
▪ Interest payable would be interest chargeable under any provision of the Act, on the income as per updated
return furnished u/s 139(8A), as reduced by interest paid in the earlier return, if any.
▪ However, interest paid in earlier return would be considered to be nil, if no earlier return has been furnished.
5 Interest u/s 234A if no earlier return has been furnished
▪ If no earlier return has been furnished, interest payable u/s 234A has to be computed on tax on TI as declared
in the updated return u/s 139(8A), in accordance with the provisions of sub-section (1A) of section 140A.
6 Interest u/s 234 if earlier return has been furnished
▪ Interest payable u/s 234C, where an earlier return has been furnished, has to be computed after taking into
account the income furnished in the return u/s 139(8A) as the returned income.

251
 Assessee ROI Verified by:

1 Individual Himself

Individual is Absent from India Person duly authorized by him in this behalf holding a
valid power of attorney from such individual. (Such power
of attorney should be attached to ROI).

Individual is Mentally Incapacitated from His guardian; or

attending to his affairs
Any other person competent to act on his behalf

Individual cannot to verify ROI for any Any person duly authorized by him in this behalf holding
other reason a valid power of attorney from the individual (Such power
of attorney should be attached to ROI).

2 Hindu Undivided Family Karta

Karta is Absent from India or Mentally Any other adult member of the HUF.
Incapacitated from Attending to his
affairs

3 Company Managing Director

There is No MD or MD cannot verify By any Director or Person, appointed by the Adjudicating

ROI for any unavoidable reason Authority (i.e., NCLT constituted u/s 408 of the
Companies Act, 2013)

Company is non-Resident Any person who holds Valid Power of Attorney.

Such Power of attorney should be attached to ROI.

Company in Liquidation/Winding up The Liquidator

Company’s Management is taken over by The Principal Officer.

CG/SG.

Where an application for corporate Insolvency Professional appointed by such Adjudicating

Insolvency Resolution Process has been Authority.
admitted by Adjudicating Authority
under the Insolvency & Bankruptcy
Code, 2016.

4 Firm/LLP Managing Partner/ Designated partner

There is No MP/DP or MP/DP cannot Firm: Partner of the firm not being a minor.
verify ROI for unavoidable reason
LLP: Any Partner or Person, appointed by the
Adjudicating Authority (i.e., NCLT constituted u/s 408 of
the Companies Act, 2013)

5 Local authority Principal officer thereof

6 Political party CEO of such party (whether known as Secretary or by any

other designation).

7 Any other association Any Member of Association or Principal Officer.

8 Any other person Such Person or his Agent.

252
▪ Salaried employee of eligible employer has the option to file ROI for any P Y to his employer, in
accordance with the scheme notified by CBDT & subject to specified conditions.
▪ Such employer shall furnish all the ROIs received by him on/before DD in such form (including on a
floppy, diskette, magnetic cartridge tape, CD-ROM) & manner specified in that scheme.
▪ Any employee who has filed ROI to his employer is deemed to have filed ROI u/s 139(1).

Specified Terms & Conditions are:

▪ This option is not available to employee having PGBP income.
▪ ‘Eligible Employer’ means an employer having minimum 50 employees with income exceeding BEL &
who has been allotted Tax Deduction Account number (TAN).

▪ It enables taxpayer to file ROI in computer readable media, without interface with the department.
▪ Such person may furnish ROI in accordance with scheme notified by CBDT, in such form (including
on a floppy, diskette, magnetic cartridge tape, CD-ROM) & manner as may be prescribed.
▪ Such return shall be deemed to be a return furnished u/s 139(1).

▪ CG may by notification in OG exempt any class or classes of persons from filing ROI subject to
satisfying prescribed conditions.
PC Note: This section has been inserted for reducing the compliance burden of small taxpayers.

The prescribed form of the return shall require the assessee to furnish the particulars of:
▪ Incomes exempt from tax;
▪ Assets of the prescribed nature & value, held by him as a beneficial owner or otherwise or in which
he is a beneficiary;
▪ His bank account & credit card held by him;
▪ Expenditure exceeding the prescribed limits incurred by him under prescribed heads; &
▪ Such other outgoings as may be prescribed.

▪ Audit Report referred to in section 44AB.

▪ Particulars of the location & style of the principal place where he carries on the business or profession
& all the branches thereof.
▪ Names & addresses of his partners in such business or profession.
▪ If he is a member of AOP/BOI:
✓ Names of the other members of AOP/BOI &
▪ Extent of the share of the assessee & the shares of all such partners or members in the profits of the
business or profession.

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 CHAPTER 15A. ALTERNATE MINIMUM TAX
1 APPLICABILITY OF AMT [CHAPTER XII-BA] [SECTION 115JEE(1)]

▪ Any Person (other than a company as they are covered by MAT)

▪ who has claimed any ‘income-based deduction’ under any section included in Chapter VI-A - heading ‘C:
Deductions i.r.o certain incomes’ i.e Sec 80IA – 80 RRB (other than Sec. 80P) or Section 10AA or 35AD;
would be subject to AMT.

2 EXCEPTIONS [PROVISIONS OF AMT → NA]

▪ Individual/HUF/AOP/BOIs (whether incorporated or not)/AJP if Adjusted TI ≤ Rs. 20 lacs.

▪ This exception is not applicable to Firm/LLP.
▪ It means, AMT is applicable on Firm/LLP even though its Adjusted TI ≤ 20 Lacs. [MCQ Point]
▪ Individual/HUF opting for concessional rate of tax u/s 115BAC → AMT not applicable.

3 WHAT IS AMT [SECTION 115JC]

▪ If Regular tax payable by an individual for a PY computed as per the normal provisions of the Act < AMT payable
for such PY, then Adjusted TI shall be deemed to be the TI of the person &
▪ Such person shall be liable to pay tax on Adjusted TI @ 18.5% + 4% HEC.
PC Note: AMT is levied @ 9% in case of non-corporate assessee being a unit located in International Financial
Services Centre & deriving its income solely in convertible foreign exchange. Surcharge & cess as applicable
will also be levied.

4 MEANING OF “ADJUSTED TOTAL INCOME”

Total Income of the Assessee (as per normal provisions) XXX

Add:

(a) Income-based Deductions claimed u/ 80IA-Sec 80 RRB Xx

(b) Deductions claimed u/s 10AA Xx

(c) Deduction claimed u/s 35AD - Depreciation allowable u/s 32 (as if no deduction u/s 35AD Xx
was allowed i.r.o the asset for which such deduction is claimed)

Adjusted Total Income XXX

PC Analysis:
 If (a), (b), (c) is ‘Nil’, provisions of AMT is not applicable to such assessee.
 If Adjusted TI ≤ 20 lacs, provisons of AMT is not applicable to Individual/HUF/AOP/BOIs (whether
incorporated or not)/AJP. This exception is not applicable to Firm/LLP. It means, AMT is applicable on
Firm/LLP even though its Adjusted TI ≤ 20 Lacs. [MCQ Point]
Space for PC Diagram

254
CQ1. Compute the tax of the following assessee: [CMA SM]
Particulars Mr. Akshay Mr. Bharat Mr. Shree M/s SS (Firm) AC LLP

Gross Total Income (Business Income) 15,00,000 25,00,000 27,00,000 32,00,000 8,00,000

Deduction u/s 80C 1,00,000 1,00,000 1,00,000 Nil Nil

Deduction u/s 80G 25,000 1,00,000 Nil 1,00,000 1,00,000

Deduction u/s 80IE 7,75,000 Nil 8,00,000 Nil 2,00,000

Total Income 6,00,000 23,00,000 18,00,000 31,00,000 5,00,000

Regular Tax 32,500 5,02,500 3,52,500 9,30,000 1,50,000

Adjusted Total Income 13,75,000 23,00,000 26,00,000 31,00,000 7,00,000

Whether 115JC is applicable or not No No Yes No Yes

AMT u/s 115JC [18.5% of Adjusted TI] NA NA 4,81,000 NA 1,29,500

Tax (Higher of Regular Tax or AMT) 32,500 5,02,500 4,81,000 9,30,000 1,50,000

Add: HEC @ 4% 1,300 20,100 19,240 37,200 6,000

Tax Liability (Rounded off) 33,800 5,22,600 5,00,240 9,67,200 1,56,000

255
 TAX CREDIT FOR AMT [SECTION 115JD]
▪ Tax credit = Excess of AMT paid over regular tax payable under the provisions of the Act for PY.
▪ Tax Credit = Tax paid u/s 115JC – Normal Tax Payable.
▪ Such tax credit shall be carried forward & set-off against tax payable in later AY to the extent of excess of regular
tax payable over AMT payable in that AY.
▪ Balance Tax credit shall be c/f to next AY for set-off in a similar manner.
▪ No Interest shall be payable on the tax credit allowed. [MCQ Point]

Maximum Period for carry forward of AMT: AMT credit can be c/f for set-off upto a maximum of 15 AYs succeeding
the AY in which the credit becomes allowable.

PC Note: Tax Credit allowable even if Adjusted TI ≤ Rs. 20 lacs in the year of set-off [Sec 115JEE(3)]
In case where the assessee has not claimed any deduction u/s 10AA or section 35AD or deduction u/s 80JJAA, 80QQB
& 80RRB in any PY and the adjusted TI of that year does not exceed Rs. 20 lacs, it would still be entitled to set-off his
brought forward AMT credit in that year.

SOME OTHER POINTS:

 All other provisions of the Act, like advance tax, interest u/s 234A/B/C shall apply to assessee liable to pay AMT.
 Report in Form 29C from a CA is required to be obtained on/before due date of filing return of income u/s 139(1).
 If AMT is payable, rate of surcharge shall be determined on the basis of Adjusted TI.

CQ2. Compute tax liability of the firm X & Co. for AY 2023-24 considering the provisions of section 115JC. Business
income is Rs. 21,00,500 before deduction u/s 35AD of Rs. 11 Lacs because of which depreciation of Rs. 40, 000 cannot be
claimed. Deduction u/s 80IB Rs. 1 Lac. Donation paid to political party is Rs. 85,000. [CS Module Q3]
Solution:
Business Income before deduction u/s 35AD Rs. 21,00,500
Less: Deduction u/s 35AD (Rs. 11,00,000)
Income u/h ‘PGBP’ or Gross Total Income Rs. 10,00,500
Less: Chapter VI-A Deductions
Donation to Political Party – u/s 80GGC (Rs. 85,000)
Deduction u/s 80IB (Rs. 1,00,000)
Total Income 8,15,500
Normal Tax on Rs. 8,15,500 @ 30% + HEC @ 4% of Tax 2,54,436
Computation of Adjusted total income
Total Income 8,15,500
Add: Deduction u/s 80IB 1,00,000
Add: Deduction u/s 35AD – Depreciation u/s 32 = 11,00,000 – 40,000 10,60,00
Adjusted Total Income 19,75,500
AMT on Rs. 19,75,500 @ 18.5% + HEC @ 4% 3,80,085
Tax payable is Rs. 3,80,090 being higher of tax liability Rs. 2,54,436 and AMT Rs. 3,80,090.
Tax Credit = Rs. 3,80,090 - Rs. 2,54,436 = Rs. 1,25,654.

CQ3. Mr. X, carrying on the business of operating a warehousing facility for storage of sugar, has a total income of Rs. 80
lacs. In computing the total income, he had claimed deduction u/s 35AD of Rs. 70 lacs on investment in building (on
01.04.2022) for operating warehousing facility for storage of sugar. Compute his tax liability for AY 2023-24. [CS SM Q5]

256
Solution: Computation of Tax payable by Mr. X for AY 2023-24
Computation of Normal Tax
Particulars Amount (Rs. in lacs)
Tax liability under the normal provisions of the Income-tax Act, 1961 22.125
Add: Surcharge @ 10% of Total income > 50 lacs 2.2125
Add: Health and Education Cess @ 4% of Rs. 24.3375 Lacs 0.9735
Total Tax Liability 25.311
Computation of Alternate Minimum Tax
Particulars Amount (Rs. in lacs)
Adjusted Total Income 80.00
Add: Deduction u/s 35AD – Depreciation u/s 32 [70 – 7] 63.00
Adjusted Total Income 143.00
AMT @18.5% 26.46
Surcharge @ 15% (since Adjusted TI > Rs. 100 lacs) 3.97
Tax 30.43
Add: Health and Education Cess @ 4% 1.217
Total tax Liability 31.647

Since regular income tax payable < AMT payable, Adjusted TI of Rs. 143 lacs shall be deemed to be total income of Mr.
X & tax is payable @18.5% + SC @ 15% & HEC @4%. Therefore, tax liability is 31.647 lacs. However, Mr. X would be
eligible for credit in 15 subsequent years to the extent of difference b/w AMT & Normal Tax i.e. Rs. 6.336 lacs.

CQ4. Mr. Rajesh has income of Rs. 45 lacs u/h ‘PGBP’. One of his businesses is eligible for deduction @ 100% of profits
u/s 80-IB for AY 2023-24. The profit from such business included in the business income is Rs. 20 lacs. Compute tax
payable by Mr. Rajesh, assuming that he has no other income during PY 2022-23. [CA Final SM Q9]
Solution:
Computation of Regular Income-tax payable under the provisions of the Act
Particulars Rs.
Profits and gains of business or profession 45,00,000
Less: Deduction u/s 80-IB 20,00,000
Total Income 25,00,000
Tax on Rs. 25 Lacs 5,62,500
Computation of Alternate Minimum Tax (AMT)
Particulars Rs.
Total Income as per the Income-tax Act, 1961 25,00,000
Add: Deduction u/s 80-IB 20,00,000
Adjusted Total Income 45,00,000
AMT = 18.5% × 45,00,000 8,32,500

 Since regular tax payable < AMT, Adjusted total income of Rs. 45 lacs would be deemed to be the total income of Mr.
Rajesh and he would be liable to pay tax @ 18.5% thereof.
 Tax payable by Mr. Rajesh for AY 2023-24 = Rs. 8,32,500 + 4% HEC = Rs. 8,65,800.

 Tax Credit: Mr. Rajesh would be eligible for credit to the extent of Rs. 2,80,800 [Rs. 8,65,800 – Rs. 5,85,000 (i.e., Rs.
5,62,500 + 4% cess)] to be set-off in the year in which tax on total income computed under the regular provisions of
the Act exceeds the AMT. Such credit can be carried forward for succeeding 15 assessment years.

257
 CHAPTER 15B. COMPUTATION OF TOTAL INCOME
STEPS INVOLVED IN COMPUTATION OF TOTAL INCOME OF INDIVIDUAL
1 Determine the residential status of the person as per section 6 of the Act.

2 Calculate the income as per the provisions of respective heads of income. Section 14 classifies the income under
five heads.
▪ Income from salaries
▪ Income from House Property
▪ Profits and gains of business or Profession Exclude the incomes exempt u/s 10 of the Act.
▪ Capital Gains
▪ Income from other sources

3 Consider all the deductions & allowances given under the respective heads before arriving at net income under
each head.

4 Gross Total Income = Aggregate of incomes computed under 5 heads of income after applying clubbing
provisions & making adjustments of set off & carry forward of losses.

5 Deduct the deductions admissible u/s 80C to 80U. The balance is called Total income.

6 Total Income = Gross Total Income – Chapter VI-A Deductions

7 Total income is rounded off to the nearest multiple of Rupees ten. (Section 288A)

8 Add Agriculture income in the total income calculated above.

Calculate tax on Agricultural Income + Non-agricultural Income as if such aggregate income is TI.

9 Calculate Tax on Net Agricultural Income + BEL as if such increased net agricultural income.

10 Tax determined under (9) above will be deducted from the amount of tax determined under (8).
Tax Payable = Tax calculated in 8 - Tax calculated in 9.

11 Calculate tax on capital gains u/s 112, 112A, 111A & on other income at specified rates.

12 Total Income Tax Payable = Tax Payable under 10 + tax Payable under 11.

13 Deduct the following from the amount of tax calculated under (12) above.
▪ Rebate under section 87A (if applicable).
▪ Tax deducted and collected at source.
▪ Advance tax paid.
▪ Double taxation relief (Section 90 or 91).

14 Balance of amount left after deduction of items given in (13) above, shall be the net tax payable or net tax
refundable for the assessee.

15 Net tax payable/refundable shall be rounded off to the nearest multiple of Ten rupees (Section 288B).

16 Along with the amount of net tax payable, the assessee shall have to pay penalties or fines, if any, imposed on
him under the Income-tax Act.

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 TABLE - COMPUTATION OF TOTAL INCOME OF INDIVIDUAL
Computation of Tax Liability Sections Amount

1. INCOME FROM SALARY 15 to 17

Less: Deductions u/s 16
16(ia): Standard Deduction of Rs. 50,000
16(ii): Entertainment Allowance
16(iii): Professional Tax Paid XXX

2. INCOME FROM HOUSE PROPERTY 22 to 27

Less: Deduction u/s 24
24(a): Standard Deduction
24(b): Interest on House Property Loan XXX

3. PROFITS & GAINS FROM BUSINESS & PROFESSION 28 to 44 XXX

4. INCOME FROM CAPITAL GAINS 45 to 55A

Less: Deduction u/s 54 XXX

5. INCOME FROM OTHER SOURCES 56 to 59 XXX

Add/Less: Apply Provisions of Clubbing & Set Off & Carry Forward

Gross Total Income [GTI] XXX

Less: Deductions under Chapter VIA 80C to 80U (XXX)

TOTAL INCOME (Rounded off to nearest Rs.10 U/s 288A) XXX

Tax on Total Income XXX

Add: Surcharge on Total Tax (if applicable) XXX

Less: Rebate U/s 87A (XXX)

Add: 4% Health & Education Cess on [Total tax + Surcharge – Rebate] XXX

Net Tax Liability XXX

Less: (i) TDS (ii) Advance Tax (iii) Relief u/s 89 (XXX)

Balance tax payable on Self Assessment U/s 140A XXX

Less: Self-Assessment tax paid XXX

Balance Tax NIL

259
 INCOME TO BE CONSIDERED WHILE COMPUTING TOTAL INCOME OF INDIVIDUALS
SN Capacity in which income Treatment of income earned in each capacity
is earned

1 In his personal capacity Income from salaries, Income from HP, PGBP, Capital gains & IFOS.

2 As a partner of a firm (i) Salary, bonus etc. received by a partner from firm is taxable as his business
income.
(ii) Interest on capital & loans to the firm is taxable as business income of the
partner.
(iii) Share of profit in the firm is exempt in the hands of the partner.
PC Note: Income mentioned in (i) & (ii) above are taxable to the extent they are
allowed as deduction to the firm.

3 As a member of HUF (i) Share of Income of HUF → Exempt in the hands of the member
(ii) Income from Impartible estate of HUF → Taxable in the hands of the holder of
the estate who is the eldest member of the HUF.
(iii) Income from self-acquired property converted into HUF property.

4 Income of other persons  Transferee’s income, where there is a transfer of income without transfer of
included in the income of assets
the individual  Income arising to transferee from a revocable transfer of an asset.
PC Note: In (i) & (ii), income is includible in the hands of transferor.
 Income of spouse as mentioned in section 64(1).
 Income from assets transferred otherwise than for adequate consideration to
son’s wife or to any person for benefit of son’s wife.
 Income of minor child as mentioned in section 64(1A)

Space for PC Class Note:

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NEW TAX REGIME [SECTION 115BAC] [INSERTED BY FINANCE ACT, 2020]
1 Option to pay tax at concessional Slab Rates
▪ Individuals or HUFs have an option to pay tax i.r.o. their total income at the concessional rate
▪ other than income taxable at special rates u/s 111A, 112, 112A, 115BB etc.
▪ subject to certain conditions specified u/s 115BAC(2).
Income ≤ 2.5 L > 2.5 L ≤ 5 L > 5 L ≤ 7.5 L > 7.5 L ≤ 10 L > 10 L ≤ 12.5 L > 12.5 L ≤ 15 L > 15 L
Rate Nil 5% 10% 15% 20% 25% 30%
2 Conditions to be satisfied for availing concessional rates of tax
(a) Certain deductions/exemptions not allowable
Following deductions/exemptions would not be allowed, if individual or HUF opts for concessional rates:
Section Exemption/Deduction
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption i.r.o. special allowances or benefit to meet expenses relating to duties or personal
expenses (other than those as may be prescribed for this purpose)
10(17) Daily allowance or constituency allowance of MPs and MLAs
10(32) Exemption i.r.o. income of minor child included in the income of parent
10AA Tax holiday for units established in SEZ
16 ▪ Standard deduction u/h “Salaries”
▪ Entertainment allowance
▪ Professional tax
24(b) Interest on loan in respect of self-occupied property
32(1)(iia) Additional depreciation
35 Deduction in respect of contribution to -
▪ Notified approved research association/ university/college/other institutions for scientific
research [Section 35(1)(ii)]
▪ approved Indian company for scientific research [Section 35(1)(iia)]
▪ notified approved research association/ university/college/other institutions for research in
social science or statistical research [Section 35(1)(iii)]
▪ An approved National laboratory/university/ IIT/ specified person for scientific research
undertaken under an approved programme [Section 35(2AA)]
35AD Investment linked tax incentives for specified businesses
35CCC Deduction i.r.o. expenditure incurred on notified agricultural project
57(iia) Deduction i.r.o. family pension
80C to Deductions under Chapter VI-A. However, following deductions will be available
80U ▪ Employers contribution towards NPS u/s 80CCD(2) &
▪ Deduction i.r.o. employment of new employees un/s 80JJAA)
(b) Certain losses not allowed to be set-off
While computing total income, set-off of following losses would not be allowed.
- Loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation
is attributable to any of the deductions referred to in (a) above; or

261
 [Such loss & depreciation would be deemed to have been already given effect to & no further
deduction for such loss or depreciation shall be allowed for any subsequent year]
- u/h house property with any other head of income.

(c) Depreciation

Depreciation i.r.o. any block of assets entitled to more than 40% ROD, would be restricted to 40% on WDV
of such block of assets. Additional depreciation u/s 32(1)(iia) cannot be claimed.

(d) Exemption or deduction for allowance or perquisites

Where there is a depreciation allowance i.r.o. a block of asset from earlier AY attributable to additional
depreciation u/s 32(1)(iia), which has not been given full effect prior to AY 2021-22 & which is not allowed to be
set-off in AY 2021-22 due to exercise of option u/s 115BAC from that year, corresponding adjustment shall be
made to WDV of such block of assets as on 1.4.2020 in the prescribed manner i.e., WDV as on 1.4.2020 will be
increased by unabsorbed additional depreciation not allowed to be set-off.
Ex: Mr. X, who carries on business of manufacturing of steel. He has unabsorbed depreciation as on 1.4.2020
which includes amount attributable to additional depreciation u/s 32(1)(iia) of PY 2019-20 or any earlier PY i.r.o.
block of P&M. If he exercises option u/s 115BAC for PY 2020-21 relevant to AY 2021-22, amount so attributable
to additional depreciation of earlier years remaining unabsorbed as on 1.4.2020 would not be eligible for set-off
against current year income. Accordingly, WDV of the block as on 1.4.2020 has to be increased by the said amount
not allowed to be set-off.
3 Time limit for exercise of option

(a) In case of individual/HUF having NO income from business or profession:

Option has to be exercised along with ROI to be furnished u/s 139(1) for PY relevant to the AY.
PC Note: Such individual/HUF can choose whether or not to exercise the option in each PY. He may choose
to exercise the option in one year & not to exercise the option in another year.

(b) In case of individual/HUF having income from business or profession:

Option has to be exercised on/before the due date specified u/s 139(1) for furnishing ROI for any PY relevant
to AY 2023-24 or any later AY & once such option is exercised, it would apply to subsequent AYs.
Option can be withdrawn only once where it was exercised by individual/HUF having business income for a
PY other than the year in which it was exercised. Thereafter, individual/HUF shall never be eligible to exercise
option under this section, except where such individual or HUF ceases to have any business income in which
case, option under (i) above shall be available.

4 Consequences for failure to satisfy conditions mentioned in section 115BAC(2)

(a) In case of individual/HUF having NO income from business or profession:

On failure to satisfy the conditions mentioned in point no.(1), (2) and (3) of II above in any previous year, the
option exercised would be invalid i.r.o. the AY relevant to that PY.
Consequently, the other provisions of the Income-tax Act, 1961 would apply as if the option had not been
exercised for the AY relevant to that previous year.

(b) In case of an individual or HUF having income from business or profession:

On failure to satisfy the conditions mentioned in point no. (1),(2) and (3) above in any previous year, option
exercised would be invalid i.r.o. the AY relevant to that PY & subsequent AYs.
Consequently, the other provisions of the Income-tax Act, 1961 would apply to the person as if the option
had not been exercised for the AY relevant to that PY & subsequent AYs.

PC Note: Individuals or HUFs exercising option u/s 115BAC are not liable to AMT u/s 115JC.

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SOME OTHER POINTS:
1. In case of individuals or HUFs not having income from business or profession, total income & tax liability
(including provisions relating to AMT, if applicable under normal provisions) may be computed every
year both in accordance with normal provisions of the Income-tax Act, 1961 & in accordance with the
provisions of section 115BAC, in order to determine which is more beneficial & accordingly decide
whether or not to opt for section 115BAC for that year.
2. For the purpose of tax deduction at source, CBDT has, vide Circular No. C1 of 2020, dated 13 April, 2020,
clarified that an employee, having income other than income u/h "Profits & gains of business or profession"
& intending to opt for concessional rate u/s 115BAC, is required to intimate to the deductor, being his
employer, of such intention for each previous year & upon such intimation, deductor shall compute his
total income, & make TDS thereon in accordance with the provisions of section 115BAC. If such intimation
is not made by the employee, employer shall make TDS without considering the provisions of section
115BAC.
It is also clarified that the intimation so made to the deductor shall be only for the purposes of TDS during
the previous year and cannot be modified during that year. However, the intimation would not amount to
exercising option in terms of section 115BAC and the person shall be required to do so alongwith the return
to be furnished under section 139(1) for that previous year. Thus, option at the time of filing of return of
income under section 139(1) could be different from the intimation made by such employee to the
employer for that previous year.
Further, in case of a person who has income u/h "Profit and gains of business or profession" also, the option
for taxation u/s 115BAC once exercised for a previous year at the time of filing of return of income u/s 139(1)
cannot be changed for subsequent previous years except in certain circumstances.
Accordingly, a person having income u/h “Profits and gains from business or profession” also shall also
intimate to his employer. However, the intimation to the employer in his case for subsequent previous
years must not deviate from the option under section 115BAC once exercised in a PY.

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CQ1. Mr. Ram, who is 58 years old, resident in India, furnishes the following information: [CS SM Q3]
Basic salary Rs. 15000 p.m
Dearness Allowance (20% forming part for retirement benefits) 40% of basic salary
City Compensatory Allowance Rs. 300 p.m
Children education allowance for 2 children Rs. 200 p.m per child
Transport allowance Rs. 2000 p.m
House Rent Allowance Rs. 6000 p.m
Actual rent paid for a house in Delhi Rs. 7000 p.m
He travels via Delhi metro from his residence to office & back in which he spends Rs. 1500 p.m.
Medical allowance Rs. 1000 p.m
Lunch allowance Rs. 200 p.m

He owns a house property in Mumbai whose construction is completed in 2006 and which is let out for Rs.
40,000 pm. The standard rent as per Rent Control Act is Rs. 3, 10,000. He pays Rs. 32,000 for municipal taxes
and interest on capital borrowed for construction of house Rs. 75,000. Further, he incurs Rs. 10,000 on repairs
of the house.
 Long-term capital gains: Rs. 2,25,000
 Short term capital gains for the year: Rs. 1,01,000 (STT not applicable).
 Dividend received from Indian Company X Ltd: Rs. 12,000.
 Interest received @10% on listed debentures of face value: Rs. 13,00,000.
 Diwali Gift of gold coins received from a friend. Market value: Rs. 60,000
 Share of profit from a Firm: Rs. 40,000; Share of profit from HUF: Rs. 34,000.
 Income from Lotteries (gross): 50,000
 Mr. Ram invested in PPF Rs. 1,50,000 and also paid a life insurance premium of Rs. 21,000.
 Donation to National Defence Fund: Rs. 10,000.
Compute the total income & Tax liability of Mr. Ram for AY 2023-24.
Solution: Computation of Total Income
Particulars Rs. Rs.
1. Income from Salary
Basic salary (15000 x 12) 1,80,000
Dearness Allowance (180,000 x 0.40) 72,000
CCA (fully taxable) (300 x 12) 3,600
Children Education Allowance [Rs. 4800 – Rs. 2400] 2400
Transport allowance 24,000
House Rent Allowance (Note) 7440
Lunch Allowance 2400
Medical Allowance 12000
Less: Standard Deduction u/s 16(ia) (50,000) 2,53,840
2. Income from house property
Gross annual Value (Rent Received: 40,000 x 12) 4,80,000
Less: Municipal Taxes (32,000)
Net annual Value 4,48,000

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 Less: Standard Deduction [30% of Rs. 4,48, 000] (1,34,400)
Less: Interest on capital borrowed (75,000) 2,38,600
3. Profits & Gains from Business & Profession
Share of Profit from Firm – Exempt u/s 10(2A) Nil
Share of Profit from HUF - Exempt u/s 10(2) Nil Nil
4. Income under the head Capital Gains
Long-term capital gains u/s 112 2,25,000
Short term Capital Gain u/s 111A 1,01,000 3,26,000
5. Income from other sources
Dividend received from Indian Company X Ltd. (Exempt) Nil
Interest received on listed debentures 1,30,000
Winning from Lotteries 50,000
Gift in kind 60,000 2,40,000
Gross Total Income 10,58,440
Less: Deduction u/s 80C to 80U
(i) u/s 80C (150,000)
(ii) u/s 80G (10,000) (1,60,000)
Total Income 8,98,440

Computation of Tax on Total Income

Total Income Rs. 8,98,440
Tax on winning from lotteries (30% of Rs. 50,000) Rs. 15,000
Tax on long-term capital gains (20% of Rs. 2,25,000) Rs. 45,000
Balance of Total Income Rs. 6,33,440 on slab rate Rs. 37,188
Total tax Rs. 97,188
Add: Health and Education cess at 4% Rs. 3,888
Total liability Rs. 1,01,076
Total liability (round off) Rs. 1,01,080

Notes:
1. House Rent Allowance: Least of the following is exempt:
(a) HRA received = Rs. 72,000
(b) 50% of the salary (house is in Delhi) = 1,94,400 x 50% = Rs. 97,200.
(c) Rent paid – 10% of the salary = (7000 * 12) – 0.10 * 194400 = 84000 - 19440= Rs. 64,560
Exempted HRA = Rs. 64,560; Taxable HRA = Rs. 72,000 - Rs. 64,560 = Rs. 7,440.
Salary for HRA = Basic salary + Dearness allowance (retirement benefits)
= Rs. 1,80,000 + Rs. 1,80,000 x 40% x 20% = Rs. 1,94,400
2. Tax liability is subject to set-off of TDS for winning from lotteries and interest from listed debentures.

REQUEST TO ALL MY DEAR STUDENTS: PLEASE SOLVE ALL THE

QUESTIONS OF THIS TOPIC GIVEN IN PRACTICE QUESTION BOOK.

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