UNIT 2 – Part 2

The Income tax Act, 1961

Basis of taxation of Income- Person,

Residential status and

Incidence of Tax

Income from salaries

Income from house property

Income from business or profession

Capital gains

Income from other resources

Set off, and Carry forward loss

Incomes exempt from tax

Permissible Deductions and Chapter VI A Deductions

Assessment and kinds of assessment

Income tax authorities- Appointment, powers and Functions

INCOME FROM BUSINESS OR PROFESSION

"Profits and Gains of Business or Profession" [Sections 28 to 44DB]

Meaning of Business or Profession

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- The word Business is defined in Section 2(13) to include any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or
manufacture.
- Trading continuously/ systematically by applying of his labour skill.
- The word business has a wider content than the word trade, commerce or
manufacture.
- In Lakshminarayan Ram Gopal V Govt of Hyderabad 1954 the Supreme Court
pointed out that the activities which constitute carrying on of business need not
necessarily consist of activities by way of trade, commerce or manufacture. They
may even consist of rendering services to others of a variegated character. The
definition of business being an inclusive definition and not being exhaustive is
indicative of extension and expansion and not restriction.
- The word "business" is one of wide import and it means activity carried on
continuously and systematically by a person by the application of his labour or
skill with a view to earning an income. The expression business does not
necessarily mean trade or manufacture only. Barendra Prasad Rav v ITR
(1981).

Profession

- The term 'business' is defined in section 2(13) while 'profession' is defined in

section 2(36). This section does not state what profession means; it only states
that profession will include vocation.
- "The word Profession implies professed attainment in special knowledge as
distinguished from mere skill. A profession involves labour, skill, education and
special knowledge and implies a vocation requiring higher education and
learning, intellectual skill as distinguished from one that used an occupation for
the production or sale of commodities..."
- Profession involves occupation requiring purely intellectual or manual skill. CIT
v Manmohan Das (1966).

Chargeability/scope of income under the head (Sec 28)

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The following incomes shall be chargeable to income-tax under the head "Profits and
gains of business or profession":

1. Income from business or profession The profits and gains of any business
which was carried on by the assessee at any time during the previous year.
2. Any compensation or other payment due to or received by-
Any compensation received or receivable by any person, by whatever name called,
in connection with-
- the termination or
- the modification of the terms and conditions of any contract relating to his
business.
In other words, compensation received or receivable by any person, whether
revenue or capital, in connection with the above, shall be taxable as business
income.
3. Income derived by a trade, professional or similar association from specific
services performed for its members.
- This is an exception to the general principle that a surplus arising to mutual
association cannot be regarded as income chargeable to tax. Every trade,
professional or similar association which renders specific services to its own
members for remuneration related to those services would come within the
purview of this sub-section.
- Indian Tea Planter's Association Ltd. v CIT (1971). It may however be noted
that income derived by a social club/resident welfare association, etc. shall be
exempt even if the specific services are rendered by it to its members as these are
not trade, professional or similar association.
- In order to bring an income within this clause two essential facts have to be
established, namely that the association rendered specific services to its
members, and that a remuneration was paid by the members for these services,
and there must be a connection between remuneration and the service rendered.
Ismaillia Grain Merchants Association Ltd v CIT (1957) ;
4. Export incentives
- profits on sales of import licences granted under Imports (Control) Order on
account of exports.
- cash assistance, by whatever name called, received or receivable against export.
- duty drawbacks of Customs and Central Excise duties;
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5. Value of any benefit or perquisite
- the value of any benefit or perquisite, Weather convertible into money or not,
arising during the course of the carrying on of any business profession.
6. Sum due to, or received by, a partner of a firm
- Any interest, salary, bonus, Commission or remuneration due to or received by a
partner of a firm from the firm in which he is a partner.
7. Any sum whether received or receivable in cash or in kind under an
agreement for:
- not carrying out activity in relation to any business or profession, or
- not sharing any know-how, patent, copyright, trade-mark, licence, franchise or
any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provision
for services.
8. Any sum received under a Keyman Insurance policy
9. Fair market value of inventory on its conversion/treatment as capital asset
- The fair market value of inventory as on the date on which it is converted into, or
treated as, a capital asset determined in the prescribed manner.

10.Sum received on account of capital asset referred under section 35AD

- Any sum, whether received or receivable, in cash or kind, on account of any

capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, if the whole of the expenditure
on such capital asset has been allowed as a deduction under section 35AD.

Computation of PGBP- Sec 29

- The profit and gains of any business or profession, Chargeable under Sec 28 are
to be computed in accordance with the provisions are to be contained in Sec 30-
43D.
- Admissible deductions
 Sec 30-36 Specific Allowances / Expenses which are expressly allowed as
deduction.

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  Sec 37 (1) Further permits allowances of items of expenses under the
residuary Section, which extends the allowance of items of business
expenditures according to accepted commercial practices.
- Inadmissible deduction Sec 40
- Expenses or payment not deductable in certain circumstances Sec 40 A
- Profit Chargeable to tax Sec 41
- Other provisions

Admissible deductions (30-37)

Meaning of the term 'paid"

Before we discuss the specific expenses, it is necessary to understand the meaning

of the term 'paid', which will be used in relation to these expenses. According to
section 43(2) 'paid' means actually paid or incurred according to the method of
accounting upon the basis of which the profits or gains are computed under the
head Profits and gains of business or profession Therefore, where the assessee
follows the mercantile system of accounting expenses incurred during the
previous year shall be treated to be 'paid' irrespective of the fact whether they have
been actually paid or not. If the assessee follows the cash system then the expenses
shall be treated to be paid' only when they have been actually paid during the
previous year.

1. Rent, rates, taxes, repairs and insurances for building Sec 30

In respect of rent, rates, taxes, repairs and insurance for premises, used for the
purposes of the business or profession, the following deductions shall be allowed:

a. where the premises are occupied by the assessee

- as a tenant the rent paid for such premises, and further if he has undertaken to
bear the cost of repairs to the premises, the amount paid on account of such
repairs;

- otherwise than as a tenant the amount paid by him on account of current repairs
to the premises;

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b. any sum paid (whether as owner or tenant) on account of land revenue, local
rates or municipal taxes; However, these are allowable subject to provisions of
section 43B i.e, if these expenses are claimed on due basis, the payment of the
same must be made on or before the due date of furnishing the return of income.
c. any insurance premium paid (whether as owner or tenant) in respect of
insurance against risk of damage or destruction of the premises.
d. The amount paid on account of the cost of repairs
- Revenue repairs – repair to maintain the capacity ( allowable)
- Capital repair- repair to enhance the capacity (Not allowable). It is added to cost
of asset, and depreciation is allowed there on.
Particulars Rent Taxes, Insurance Revenue Capital
rates repair repair

Owner Not Allowed Allowed Allowed Not

Applicable Allowed

Tenant Allowed Allowed Allowed Allowed Not

Allowed

2. Repairs and insurance of machinery, plant and furniture (Sec 31)

In respect of machinery, plant or furniture used for the purpose of business, the
following deductions available
- Amount paid on account of current (revenue) repairs
- Any insurance premium paid in respect of insurance against risk of damage or
destruction of the plant and machinery or furniture.
Particulars Rent Insurance Revenue repair Capital repair

Owner Not Allowed Allowed Not Allowed

Applicable
Tenant Allowed Allowed Allowed Not Allowed
u/s 37

3. Depreciation (Section 32)

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- Depreciation is calculated in different way in taxation as compared to accounts.
- The more depreciation an assessee claims, the less becomes his profit, thereby
reducing the tax liability.
- In order to curb the fraudulent practices in relation to depreciation, Section 32
lays down elaborate rules for calculating and claiming depreciation for the
purposes of calculating PGBP.

- Conditions to claim depreciation

The grant of depreciation allowance is subject to the following rules

a. the allowance is granted only in respect of certain specified assets,
b. the assets should be owned by the assessee who claims the depreciation;
c. the asset may be owned wholly or partially by the assessee;
d. the assets should be used for the purpose of a business or profession
carried on by the assessee;
e. In case of any block of asset, the depreciation is computed on the written
down value of the block as defined in section 43(6). However, in case of
electricity undertakings it may be claimed at certain percentage of actual
cost;
f. The assets should be used during the relevant previous year.
g. In case of any block of asset, the depreciation is allowable at a prescribed
percentage of the written down value of the block as defined in section
43(6) as on the last day of the previous year. Due to the block concept,
actual cost of the asset brought into use during the year will be added on
to the existing block, if any. However, in case of power generating
undertakings, it may be claimed at certain percentage of actual cost.

Classes of assets

1. Tangible asset
None of the tangible assets except 'plant' have been defined under the Act.
Accordingly, the meaning and scope of such tangible assets have to be gathered
in the context of the scheme of the Act and based on judicial guidance.

- Building - Building does not include land: The expression building does not
include land because the land does not depreciate. Any expenditure incurred by
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 an assessee, directly referable to the land and not referable to the building, as
distinct from land, cannot constitute a part of the cost of construction of the
building for the purpose of allowance of depreciation. [ Vijay shree P. Lid v CIT
(1968)]

- Machinery - The word "machinery" has also not been defined in the Act. For
ascertaining the meaning of the expression "machinery" what appears to be
essential is that there must be some mechanical contrivances which by
themselves or the combination with one or more other mechanical contrivances,
by the combined movement and interdependent operation of their respective
parts generate power evoke, modify, apply or direct natural forces.
- Plant - As per section 43(3), "Plant" includes ships, vehicles, books, scientific
apparatus and surgical equipments used for the purpose of the business or
profession but do not include tea bushes or livestock’s. It shall also not include
buildings or furniture fittings.
- Furniture and fittings: The word furniture is also not defined in the Act.
Webster's New International Dictionary defines furniture to mean article of
convenience or decoration used to furnish a house, apartment, place of business
or of accommodation.

2. Intangible asset
As mentioned earlier, depreciation under section 32 of the Act is allowable on
specified intangible assets being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of a similar
nature not being goodwill of a business or profession.
The items of intangible assets have been discussed in brief hereunder:
- know-how: The expression know-how means any industrial information or
technique likely to assist in the manufacture or processing of goods or in the
working of a mine, oil-well or other sources of mineral deposits (including
searching for discovery or testing of deposits for the winning of access thereto).
- Patents, copyrights, trademarks, licences, franchises, business or
commercial rights: The above terms have not been defined under the Act. Thus,
one may refer to the normal dictionary meanings assigned to them or look into
laws governing the acquisition and use of such assets, wherever applicable.

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- Assessment year 2021-22, depreciation on Goodwill of a business or profession
shall not to be allowed.

Block of assets Sec 2(11)

Block of assets means group of assets falling within a class of assets comprising.

The following blocks can be formed on the basis of class of assets and rates of
depreciation are given below:

Sl No Asset Rate
1. Building
a. Residential building 05%
b. General building (other than residential) 10%
c. Temporary building 40%
2. Furniture 10%
3. Intangible asset 25%
4. Plant and machinery
a. Motor vehicles
- Used for hiring business 40%
- Other use 30%
b. Ship 20%
c. Aircraft 40%
d. Computers 40%
e. Books 40%
f. Pollution control equipment 40%
g. Windmills and equipments
- Installed before 1/4/2014 15%
- Installed after 1/4/2014 40%
h. Oil wells 15%
i. Other plant and machinery 15%

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How to form blocks:

Since building is one of the class of assets which has three rates of depreciation,
there will be three blocks of buildings.

- All buildings owned by the assessee and used for business, carrying 5%
depreciation will be grouped as Block-1. These will be residential buildings given
to the employees of the assessee.
- All buildings owned by the assessee and used for business carrying 10%
depreciation will be grouped under Block-II.
- Similarly, all buildings owned by the assessee and used for business carrying
40% depreciation will be grouped under Block-III Similar, procedure will be
followed for making blocks of plant and machinery. However, for intangible assets
and furniture and fittings there will be only one block in each case.

Actual cost -Section 43(1)

"Actual cost" means the actual cost of the assets to the assessee, reduced by that
portion of the cost thereof, if any, as has been met directly or indirectly by any other
person or authority

The above definition contains 3 elements:

(a) It should be the actual cost of the asset,

(b) It should be the actual cost of the asset to the assessee;

(c) It should be exclusive of any portion of the cost which has been met directly or
indirectly by any other person or authority.

Actual cost to include all expenditure necessary to bring such asset into
existence and to put that in working condition: The Supreme Court held in
Challapalli Sugars Ltd. v CIT (1975) 98 ITR 167 (SC) that the term actual cost
should be construed in the sense which no commercial man would misunderstand
and that the accepted rules of accountancy should be adopted for determining the
actual cost. The accepted accountancy rule is to include all expenditure necessary to
bring such assets into existence and to put them in working condition and it is
wholly irrelevant whether the asset was acquired prior to the commencement of the
business or subsequent to such commencement.

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Actual cost include

- Add- Purchase price

- Installation charges
- Transportation charges
- Trial run expenses
- Interest on loan
- Less- sale of trial run product

Computation of depreciation

Depreciation is computed on various assets according to the system of classifying

the assets various blocks of assets. The value of each block is computed separately
and then depreciation calculated on the written down value of each block at the
end of the year at the rates prescribed each block.

Written-down value is the value of an asset after accounting for depreciation or

amortization. In short, it reflects the present worth of a resource owned by a company
from an accounting perspective. This value is included on the company's balance sheet
in its financial statements.

Steps for computing depreciation

(i) Find the opening written down value of each block at the beginning of the year.

(ii) Add cost of acquisition of assets acquired during the year in the respective blocks
to which the new assets belong.

(iii) Deduct the money received/receivable along with scrap value, if any, in respect
of the assessee of the same block, which are sold, discarded or destroyed during the
year.

(iv) (i)+(ii)-(iii) is the written down value of each block as on the last day of the
previous year.

(v) On the closing written down value, compute the depreciation at the rates
prescribed for each block.

Final depreciation allowed for deduction.

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Exceptions

1. No depreciation is admissible where written down value has been reduced to

zero, though the block of assets does not cease to exist on the last day of the
previous year.

2. If a block of assets ceases to exist or if all assets of the block have been
transferred and the block of assets is empty on the last day of the previous
year, no depreciation is admissible in such case.

3. In the case of transfer of depreciable assets because of succession,

amalgamation, business reorganization or demerger in the previous year,
depreciation is first calculated as if there is no transfer of depreciable assets
and the quantum of depreciation so calculated shall be apportioned between
the predecessor and successor in the ratio of number of days for which the
assets are used by them during the previous year.

4. If in the first year (in which an asset is acquired), it is put to use for less than
180 days, depreciation is available at half of the normal rate.

Unabsorbed Depreciation

1. Depreciation allowance of the previous year is first deductible from the income
chargeable under the head “Profits and gains of business or profession”.

2. If depreciation allowance is not fully deductible under the head “Profits and
gains of business or profession” because of absence or inadequacy of profits, it
is deductible from income chargeable under other heads of income [except
income under the head “Salaries”] for the same assessment year.

3. If depreciation allowance is still unabsorbed, it can be carried forward to the

subsequent assessment year(s) by the same assessee. No time-limit is fixed for
the purpose of carrying forward of unabsorbed depreciation.

4. Investment allowance
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 In respect of a ship, aircraft, machinery or plant which is owned by the assessee
and is wholly used for the purposes of business carried on by him, there shall in
accordance with the subject to the provisions of this section, be allowed a
deduction, in respect of the previous year in which the ship, aircraft, machinery
or plant was installed or, if the ship, aircraft, machinery or plant is first put to
use in the immediately succeeding previous year, then in respect of that previous
year, of a sum by way of investment allowance equal to 25% of actual cost of the
ship, aircraft, machinery or plant of the assessee.
5. Sec. 33AB: Tea, Coffee and Rubber Development Account
a) The assessee must be engaged in the business of growing and manufacturing
tea and coffee or rubber in India
b) Must deposit in special account with the National Bank for Agricultural and
rural Development.
c) The deposit should be made within a period of six months from the end of the
PY or before furnishing the return of his income, whichever is earlier.
d) Limit: Sum equal to deposited or 40% of profits of such business (before
making deduction under this section and before setting off brought forward
business losses), whichever is less.
e) Utilization of funds: Must be used in the same previous year in which it is
withdrawn.
6. Expenditure on scientific research [Sec. 35]
- Revenue expenditure on scientific research is deductible in the year in which the
expenditure is incurred, if such research relates to the business. Revenue
expenses (other than expenditure on providing perquisites to employees) incurred
before the commencement of business (but within three years immediately before
commencement of business) on scientific research related to the business are
deductible (to the extent it is certified by the prescribed authority) in the previous
year in which the business is commenced.
- Capital expenditure (not being cost of land) on scientific research related to the
business of taxpayer is fully deductible in the year in which the expenditure is
incurred. Capital expenses incurred before the commencement of business (but
within three years immediately before commencement of business) on scientific
research related to the business, are deductible in the previous year in which the
business is commenced. In such case, depreciation is not deductible.

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- Contribution to approved research association, approved university/college/
other institutions is deductible at the rate of 100 per cent of actual contribution.
- Contribution to an approved university, college or other institution for the
purpose of research in social science or statistical research is deductible at the
rate of 100 per cent of actual contribution.
- Contribution to an approved national lab, university, IIT, specified person is
deductible at the rate of 100 per cent of the contribution if such contribution is
given for an approved research programme.
- Expenditure on approved in-house research and development facilities of a
company is qualified for deduction at the rate of 100 per cent of the expenditure
if a few conditions are satisfied. One of the conditions is that the company should
be engaged in business of bio-technology or in any business of manufacture or
production of any article or thing except those specified in Eleventh Schedule.
7. Investment linked tax incentive [Sec. 35AD]
Conditions – The following conditions should be satisfied —
 The taxpayer should be in the business of
1. setting up and operating a cold chain facility,
2. setting up and operating a warehousing facility for storage of
agricultural produce
3. approved laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including storage
facilities being an integral part of such network
4. building and operating, anywhere in India, a hotel of two star or above
category as classified by the Central Government
5. building and operating, anywhere in India, a hospital with at least 100
beds for patients
6. developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central
Government/State Government and notified by the Board in accordance
with prescribed guidelines.
7. developing and building a notified affordable housing project
8. production of fertilizers in India
9. setting up and operating an inland container depot or a container
freight station

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 10. bee-keeping and production of
honey and beeswax
11. setting up and operating a
warehousing facility for storage of sugar
12. laying and operating a slurry
pipeline for the transportation of iron ore
13. setting up and operating a semi-
conductor wafer fabrication manufacturing unit
14. Developing or maintaining and
operating or developing, maintaining and operating a new infrastructure
facility.
 The aforesaid activities should commence on or after April 1, 2009. However,
this date is April 1, 2007 in the case of lying and operating a cross-country
natural gas pipeline network for distribution or storage, April 1, 2010 in the
case of hotel, hospital and housing project, April 1, 2011 in the case of
housing project for affordable housing and production of fertilizer, April 1,
2012 if the specified business is of the nature referred to in Point Nos. (9), (10)
and (11), April 1, 2014 if the specified business is of the nature referred to in
Point Nos. (12) and (13) and April 1, 2017 if the specified business is of the
nature referred to in Point No. (14).
 The aforesaid business should be a new business (i.e., not set up by splitting
up, or reconstruction of, of an existing business).
Deduction – If the aforesaid conditions are satisfied, 100 per cent of the capital
expenditure is deductible in the year in which the expenditure is incurred.
However, expenditure incurred on the acquisition of any land or goodwill or
financial instrument is not eligible for any deduction under section 35AD.
8. Deduction under section 36
The following expenses are deductible under section 36 —
- Insurance premium
Premium paid in respect of insurance against risk of damage or destruction of
stocks or stores, used for the purposes of business or profession, is allowable as
deduction.
- Premium for insurance on health of employees

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 Premium paid by employer (by any mode other than cash) for insurance on the
health of his employees in accordance with the scheme framed by the General
Insurance Corporation and approved by the Central Government or any other
insurer and approved by IRDA, is allowable as deduction.
- Bonus or commission to employees
Allowable as deduction if not otherwise payable as profit or dividend. Deduction
is available on payment basis. Where, however, payment is made after the end of
the previous year but on or before the due date of furnishing return of income,
deduction is available on accrual basis.
- Interest on borrowed capital
Allowable as deduction subject to fulfilment of three conditions:
1. The assessee must have borrowed money.
2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid or payable on such borrowing.
- Employer’s contribution to recognized provident fund, approved
superannuation fund and notified pension scheme
Allowable as deduction subject to the limits laid down for the purpose of
recognized provident fund [RPF] or approving superannuation fund. Employer’s
contribution towards notified pension scheme (NPS) is deductible (to the extent of
10 per cent of “salary” of employees). Meaning of “salary” for this purpose and for
the purpose of calculating house rent allowance exemption is the same.

- Bad debts
Bad debt written off in the books of account is deductible. However, the following
conditions should be satisfied —
1. Debt must be incidental to the business or profession of the assessee.
2. Debt must have been taken into account in computing assessable income.
3. Adjustment at the time of recovery – Where debt ultimately recovered is less
than the difference between the amount of debt and bad debt allowed as
deduction, such deficiency will be deductible in the previous year in which the
ultimate recovery is made, provided such deficiencies is written off in the
books of account. Conversely, where the debt ultimately recovered is more
than the difference between the debt and the amount of bad debt deducted,
such excess amount will be chargeable to tax in the year of recovery.

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 4. Bad debt related to sales allowed and related to loan not allowed for deduction
( except the business of money lending)

9. General deduction [Sec. 37(1)]

Conditions – Section 37(1) is a residuary section. To avail deduction, the following
conditions should be satisfied –
1. The expenditure should not be of the nature described under sections 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of such
business.
7. It should not have been incurred for any purpose, which is an offence or is
prohibited by any law.
Other points – Interest on delayed payments to micro, small and medium
enterprise is not deductible. Any expenditure on activities relating to corporate
social responsibility (CSR) is not deductible under section 37(1) [CSR expenditure
may be claimed as deduction under any other section if the relevant conditions of
that section are satisfied].
- Inadmissible deduction Sec 40
1. Sec 40(a) (i) : Payment made to Non- Resident/ Foreign company
If the following three conditions are satisfied, the assessee (i.e., the payer) is
supposed to deduct tax at source (TDS) —
1. The amount paid is interest, royalty, fees for technical services or other sum.
2. The aforesaid amount is chargeable to tax under the Act in the hands of the
recipient.
3. The aforesaid amount is paid/payable to a non-resident.
If the above three conditions are satisfied, the assessee (the payer) is supposed to
deduct tax at source and deposit the same with the Government.
- Amount paid/ credited to non-resident/foreign company shall be completely
disallowed(100%) if:
1. TDS is not deducted in previous year, or
2. TDS is deducted but not paid to government upto due date of returning file.

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 Note: If TDS is deducted in any subsequent year but paid to government
after due date of filing, then such sum shall be allowed in the year in which
such TDS has been paid to government.

2. Section 40(a) (ia): Payment made to resident.

- Amount paid/ credited to resident/ company shall be disallowed to (30%) if:
1. TDS is not deducted in previous year, or
2. TDS is deducted but not paid to government upto due date of returning
file.

Note: If TDS is deducted in any subsequent year but paid to government

after due date of filing, then such sum shall be allowed in the year in which
such TDS has been paid to government.

3. Section 40(a) (ii b) : Royalty, Fees Charged By State Government.

If any royalty, fees, service charge etc. is exclusively collected by state government
from state government undertaking, then such royalty/ fee is disallowed
expenditure of state government undertaking.

4. Section 40 (a) (iii) : TDS on salary payable outside India or to Non – Resident

If any salary is paid outside India or the Non- resident in India and if:

- TDS is not deducted

- TDS is deducted but not paid to government upto due date of TDS payment,
- Such salary expenditure shall be disallowed.

5. Sec 40 (a) (v): Tax on Non-monetary perquisites.

if any tax on non-monetary perquisites of employee is paid by employer on his own,

such tax is not allowed to employer

6. Section 40A (2) : Payment to relative.

If any payment is made to relative, then assessing officer can disallow excessive or
unreasonable amount.

(Anyone who has substantial interest)

7. Section 40A (3) : Cash payment in excess of Rs 10,000 is disallowed.

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If the following conditions are satisfied, payment is not deductible —

1. The assessee incurs any expenditure, which is otherwise deductible under the
other provisions of the Act for computing business/profession income
(e.g., expenditure for purchase of raw material, trading goods, expenditure on
salary, etc.). The amount of expenditure exceeds Rs. 10,000.

2. A payment (or aggregate of payments made to a person in a day) in respect of

the above expenditure exceeds Rs. 10,000.

3. The payment mentioned above is made otherwise than by an account payee

cheque or an account payee demand draft or use of electronic clearing system
through a bank account (or through prescribed electronic mode).

If all the above conditions are satisfied, 100 per cent of such payment will be
disallowed.

If an outstanding liability was allowed as deduction in any of the earlier years and
during the current year payment in respect of such liability is made otherwise than
by an account payee cheque or draft and if such payment to a person in a day
exceeds Rs. 10,000, the payment so made shall be chargeable to tax as business
income in the year of payment which is not deductable.

8. Any contribution made to gratuity, non-statutory or unrecognized welfare

fund is not deductable. [Sec 40 A(7) and 40 A(9)].
9. Deduction based on Actual Payment [Sec 43 B]
Certain expenses which are otherwise deductable shall be disallowed unless
payment is made within a stipulated time limit and evidence for payment of such
tax is not furnished along with the return of income.
1. Any sum payable by assessee in the form of
- Any tax, cess, duty, cess fee under any law in force.
- Any bonus or commission to employees.
- Any interest on borrowings from any public financial institutions.
- Any sum payable to employees in lieu of any leave at the credit.
2. Any sum payable by assessee as interest on any term loan by scheduled bank
shall be allowed as deduction only when it is actually paid.

19
 3. In case of contribution to recognized provident fund , or gratuity or any other
welfare fund for employees deduction can be claimed only when actually paid
by the employer.

- Deemed profits chargeable to tax under PGBP (Sec 41)

1. Recovery against any allowance or deduction allowed earlier [Section 41(1)]

A. Recovery by the same assessee Section 41(1)(a)]:

Where an allowance or deduction has been made in the assessment for any
year in respect of (i) loss, (ii) expenditure, or (iii) trading liability incurred by
the assessee and subsequently, during any previous year, he (the same
assessee) has obtained, whether in cash or in any other manner, whatsoever.
B. Recovery by the successor in business or profession [Section 41(1)(b)].
2. Sale of capital assets used for Scientific Research [Section 41(3)].
3. Recovery out of bad debts allowed as deduction [Section 41(4).

ETC.,

20
COMPUTATION OF INCOME FROM BUSINESS
- Net profit as per profit and loss account XXX

- Add:

Inadmissible expenses (means expenses and losses debited to profit and

+XXX
loss account but not allowed as deduction) (Depreciation should be
added)

- Add:

Incomes chargeable under this head but not credited to profit and loss +XXX
account

- Less:

Expenses allowed but not debited to profit and loss account (Computed -XXX
depreciation under IT Act)

- Less:

Incomes from other sources but credited to profit and loss account -XXX

Income chargeable under PGBP head XXX

21
 INCOME FROM CAPITAL GAINS (Sec 45 to 55A)

Basis of charge [Sec 45(1)]

Any profits or gains arising from the transfer of capital asset effected in the previous
year, shall be chargeable to income-tax under the head ‘Capital Gain’ and shall be
deemed to be the income of the previous year in which the transfer took place.
Unless such capital gain is exempt under Sec 54, 54B, 54D, 54EC, 54F, 54G, 54GA
or 54GB.

The following are the essential conditions for taxing capital gains:

(A) There must be a capital asset;

Capital gain arises only when a capital asset is transferred. If the asset transferred
is not a capital asset, it will not be covered under the head ‘capital gain’

What is a capital asset [Section 2(14))

"Capital asset" means

(a) Property of any kind (movable/immovable/tangible/intangible) held by an

assessee, whether or not connected with his business or profession;

But does not include

(1) Any stock-in-trade consumable stores or raw materials held for the purposes of
business or profession.
This includes all those goods or commodities which are dealt in, in the buying
and selling in the course of business activity, but it cannot be said to include a
commodity which is acquired for the purpose of being let to hire. [H Mohamed &
Co v CIT (1977)]
Capital gain v Business income: Whether a particular asset is stock-in-trade or
capital asset does not depend upon the nature of the article, but the manner in
which it is held. The same item may be stock-in-trade in the hands of the
assessee who deals in that item. But it will be capital asset in the case of an
assessee who uses it for earning income or holds as an investment and derives
income from leasing or retiring of the property.

22
 For example, a dealer in real estate holds a piece of land or house property as
stock-in- trade. But it will be a capital asset in the hands of a person who holds
it as an investment and derives income from leasing or renting of the property.

(2) Personal effects, that is to say, movable property (including wearing apparel
and furniture), held for personal use by the assessee or any member of his
family. Personal effects clothing, furniture, utensils, table ware, vehicle, etc. held
for personal use by the assessee or any dependent member of his family.
However, the following shall not be treated as personal effects though these
assets moveable and may be held for personal use:

(a) jewellery,

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or any work of art.

Jewellery vis-a-vis utensils and other items of precious metals: From Assessment
year 1973-74 jewellery has been included in the category of capital asset.

As per Explanation to section 2(14), jewellery includes:

(a) Ornaments made of gold, silver, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not containing any
precious or semi-precious stone, and whether or not worked or sewn into any
wearing apparel;

(b) Precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel)

It may be noted that as per the definition given above only ornaments made of
precious metal are included. Thus, items other than ornaments, made of precious
metals can be treated as personal effects provided they are commonly and ordinarily
used or intended to be used for personal or household use.

23
(3) Agricultural land in India, which is not an urban agricultural land. In other
words, it must be a rural agricultural land.
Agricultural land in India, not being land situate:
a. in any area which is comprised within the jurisdiction of a municipality
(whether known as a municipality, municipal corporation, notified area
committee, town area committee, town committee, or by any other name) or
a cantonment board and which has a population of not less than ten
thousand; or
b. in any area within the distance, measured aerially,-
- not being more than two kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more
than ten thousand but not exceeding one lakh; or
- not being more than six kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more
than one lakh but not exceeding ten lakh; or
- not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more
than ten lakh.
(4) 6.5% Gold Bonds, 1977, 7% Gold Bonds, 1980 or National Defence Gold Bonds,
1980 issued by the Central Government.
(5) Special Bearer Bonds, 1991, issued by the Central Government.
(6) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under Gold Monetisation Scheme, 2015 and 2019 notified by
the Central Government.

The items covered under clauses (4) and (5) are only of academic significance, as
these instruments do not exist now.
(B) The capital asset must have been transferred;
Transfer includes, [Section 2(47)]
 Sale of capital asset.
 Exchange of capital asset.
 Relinquishment of capital asset/ extinguishment of right in capital asset.
 Conversion of Capital Asset into Stock in trade.
 Compulsory Acquisition of Capital Asset.

24
  Allowing possession of immovable property.
 Transfer of shares of any Co-operative Society.
 Redemption of Zero Coupon Bonds.

Where a assessee, owner of land, entered into agreement with a builder to

develop said land, however, later on development agreement could not be
executed and, finally a compromise deed was executed between parties in
terms of which assessee became ready to relinquish its right of ownership on
said land after receiving certain sale consideration from builder, it could be
concluded that transaction in question would fall under section 2(47and
thus, assessee was liable to pay capital gain tax accordingly. Seshasayer
Steels (P.) Ltd. ACIT (2020)

Transfer in connection with agreement to live apart: Where an assessee gives

a property to his wife in connection with agreement to live apart, assessee's
rights in the property gets extinguished, so that it is a case of 'transfer' in
favour of wife within the meaning of section 2(47). However, as the assessee
did not receive any material or pecuniary benefit by giving up the property,
no capital gain is accrued to the assessee in terms of section 45. [CIT v
Maharani Manekaraje Pawar (HH) (1996) 219 ITR 577 (MP)]

(C) There must be profits or gains on such transfer, which will be known as
capital gain;

(D) Such capital gain should not be exempt under section 54, 54B, 54D, 54EC,
54EE, 54F, 54G, 54GA or 54GB.

Types of Capital Assets

1. Short–term capital assets 2 (42 A)

2. Long-term capital assets 2 (29AA)

Assets are classified into Short–term and long-term capital assets on

depending on period of holding.

25
- The following shall be treated has short term capital asset if held less
than 12 months and long term capital Asset if held for more that 12
months.
 Security including shares (other than unit) listed in a recognised
stock exchange in India. (National stock exchange ltd/ Bombay stock
exchange ltd etc)
 A unit of an equity oriented fund. (the mutual funds unit that invest in
equity stocks) ( ex: UTI units )
 A zero coupon bond.
- The following shall be treated has short term capital asset if held less
than 24 months and long term capital Asset if held for more that 24
months.
 Share of a company (not being share listed in a recognised stock
exchange in India)
 An immovable property being land and building or both.
- The following shall be treated has short term capital asset if held less
than 36 months and long term capital Asset if held for more that 36
months.
- Unit of debt oriented fund.(Debentures)
- Unlisted securities other than shares. (bonds other than shares)
- Other Capital Assets.

Computation of Short- term Capital gains

Full value of consideration xxx

Less a. Expenditure incurred in connection with transfer -xxx

Less b. Cost of acquisition -xxx

26
Less c. Cost of improvement -xxx

= Gross short term capital gains xxx

Less Exemptions, if available u/s 54B/54D/54G/54GA -xxx

Taxable short term capital gains Xxx

Computation of long- term Capital gains

Full value of consideration xxx

Less a. Expenditure incurred in connection with transfer -xxx

Less b. Indexed cost of acquisition -xxx

Less c. Indexed cost of improvement -xxx

= Gross long term capital gains xxx

Less Exemptions, if available u/s -xxx

54/54B/54D/54EC/54EE/54F/54G/54GA/54GB.
Taxable long term capital gains Xxx

The concept of Cost inflation Index numbers

- Every year, government of India announces what is known as cost of inflation.
- It is used to estimate the increase in the prices of assets year by year due to
inflation.
- The cost of acquisition and cost of improvement are indexed on the basis of
certain percentage of the consumer price index, which is determined keeping in
view the rise in prices due to inflation.

- Indexed cost of acquisition means an amount which bears to the cost of

acquisition the same proportion as cost inflation index for the year in which the
asset is transferred bears to the co inflation index for the first year in which the
asset was held by the assessee or for the year beginning on 1.4.2001 whichever is
later.

27
- Cost Inflation Index, in relation to a previous year, means such Index as the
Central Government may, having regard to 75% of average rise in the Consumer
Price Index (urban) for the immediately preceding previous year to such previous
year, by notification in the Official Gazette, specify, in behalf.
- Cost inflation index(CII)
 Index number for Previous year 2001-02- 100
 Index number for Previous year 2002-03- 105
 Index number for Previous year 2022-23- 331
 Index number for year 2023-24- 348
- Computation of indexed cost of acquisition

As per the definition of indexed cost of acquisition given above, it is the cost of
acquisition has to be indexed. An analysis of the definition would indicate that for
indexation of acquisition there are three important points:

(i) Cost of acquisition

(ii) CII of the previous year in which the asset is transferred,
(iii) CII of the year in which the asset was first held by the assessee or
1.4.2001 whichever is later.

There are two modes in which the asset can be acquired by the assessee and
therefore, t indexation of the cost of acquisition will be done as under:

Assets acquired directly by the assessee himself: The cost of acquisition shall be
the amount which the assessee has paid to acquire that asset.

Asset acquired from the previous owner: the cost of acquisition is taken as the cost
to the previous owner and it is this cost which will have to be indexed.

Indexation in both the case will be done as under:

Cost of acquisition × CII of the year of transfer

CII of the year of acquisition
- Computation of indexed cost of improvement

28
Indexed cost of improvement means an amount which bears to the cost of
improvement the same proportion as cost inflation index for the year in which the
asset is transferred bears to the cost inflation index for the year in which the
improvement to asset took place.

As already discussed under cost of improvement, any expenses or improvement

before 1.4.2001 are to be completely ignored. Therefore, cost of improvement only
after 1.4.2001), by the assesses should be indexed. However, if the asset is acquired
by the assessee from the previous owner in any mode given u/s 49(1), the expenses
on improvement incurred by the previous owner after 1.4.2001 will also have to be
indexed.

Capital expenditure on improvement × CII of the year of transfer

CII of the year in which the improvement was made.

Exemptions under Capital Gains

The list below entails the Income Tax Act sections discussing exemptions under
capital gains.

 Section 54 of the Income Tax Act

 Section 54 D
 Section 54 B
 Sections 54 E, EA and EB
 Section 54 EC
 Section 54 EE
 Section 54F
 Section 54 G, GA and GB

Section 54 of The Income-tax Act, 1961

Selling a residential property can be a daunting task, especially when it
comes to taxes. But Section 54 of the Income Tax Act can save a lot on
taxes for property sellers. It allows taxpayers to claim an exemption on the
CG arising from the sale of their residential property, subject to certain

29
conditions. You can sell your current property and reinvest the sale
proceeds without worrying about paying hefty taxes.

Section 54 Explanation

Section 54 of The Income Tax Act applies to individuals

and Hindu Undivided Families (HUFs) who have earned
Applicability
long-term Capital Gain (LTCG) from the sale of a residential
property.

Conditions for
Such sale proceeds must be invested in purchasing or
availing the
constructing a residential house property located in India
exemption

Lower of –
Amount of
1) Amount of CG earned or
Exemption
2) The amount invested in the new residential property

The taxpayer has to purchase another residential

property within 1 year before or within 2 years after the
Time Limit for
sale of such residential property or should construct a
Investment
residential house property within 3 years from the date of
such sale.

Limitations on Allows taxpayers to claim the exemption for the sale of only
the Number of 2 residential properties in their lifetime, provided the long
Properties term capital gain does not exceed Rs. 2 Crore

If the entire amount of LTCG is not utilized for the

purchase of the new residential property, the unutilized
Utilization of portion will be taxable as LTCG in the year of sale of the old
Exemption property. In other words, if the cost of the new property is
less than the LTCG, the taxpayer will have to pay tax on
the unutilized amount.

30
 If the new residential property is sold within 3 years from
Conditions on its purchase or construction, the exemption claimed will be
Transfer of the withdrawn by deducting the amount of exemption earlier
New Property provided from the Cost of Acquisition of the new house
sold.

It is important to note that it applies only to the sale of

residential property and not to commercial properties.
Other Important Additionally, the exemption is available only for LTCG,
Points which means that gains from the sale of a property held for
less than 2 years will not be eligible for exemption under
this section.

Section 54B of The Income-Tax Act, 1961

If a farmer or a rural landowner looking to sell agricultural land might
want to take advantage of this section. It offers eligible individuals to
reinvest the sale proceeds from their agricultural land into a new
agricultural land and get capital gain exemptions.

Only individuals/HUF who are Indian residents and who sell

agricultural land situated in an urban area can avail the
Eligibility benefits.
Note: Agricultural land in Rural areas is NOT a Capital
asset and hence no CG tax is charged on its transfer.

The sale proceeds from such urban agricultural land must be

used to purchase new agricultural land anywhere in India
Conditions (whether in urban/rural areas).
Further, the capital gain resulting from such transfer can be
both Short term or Long term for this section.

The time limit The entire sale proceeds must be invested in the new
of Investment agricultural land within 2 years from the date of such sale.

The new agricultural land must be held for a minimum of 2

Holding Period
years from the date of purchase. If it is sold before the 2 year
of the New
period, the CG tax exemption will be revoked, and the
Land
individual will be required to pay the tax.

31
Exemption The capital gain exemptions is limited to the amount of
limit capital gain or the investment made, whichever is lower.

1) If an individual has sold multiple agricultural lands,

Other the capital gain exemptions can only be claimed for one
Important such sale in a financial year.
Points 2) If the agricultural land is jointly owned, each owner can
claim an exemption in proportion to their share in the land.

Section 54 D of The Income-Tax Act, 1961

Section 54D of the Income Tax Act provides helps industrialists who face
the compulsory acquisition of their property. By investing in a new
industrial asset and adhering to the prescribed conditions, they can save
on taxes and continue contributing to the growth and development of the
industrial sector. So, if you’re facing a compulsory acquisition, don’t
despair.

Section 54D Explanation

This exemption is for all the assessees having a capital gain

Applicability on compulsory acquisition made by the government of Land
& Building (L&B) forming part of an Industrial undertaking.

Assessee must have used such L&B for purposes of the

Conditions business of industrial undertaking in the 2 years
immediately preceding the date of transfer.

Assessee must purchase another L&B or construct any

Time Limit for building within 3 years from the date of transfer. Such a
Investment purchase should be only for shifting or re-establishing the
existing undertaking or setting up a new undertaking.

Lower of
Amount of
1) CG on compulsory acquisition of land or building
Exemption
2) Amount of investment in acquiring new L&B.

32
 If the new residential property is sold within 3 years from
Conditions on its purchase or construction, the capital gain
Transfer of the exemptions claimed under Section 54D will be withdrawn
New Property by deducting the exemption amount earlier provided from
the cost of acquisition of the new asset.

Section 54 EC of The Income–Tax Act, 1961

This section is for investors looking to minimize their tax liabilities. By
providing an exemption from CG tax on the sale of certain assets, it
encourages individuals to reinvest their profits in specified bonds, thereby
stimulating the economy and driving growth. This provision is crucial for
those who are looking to diversify their portfolios.

Section 54EC Explanation

It applies to all assessees who have earned long-term

Applicability Capital Gain (LTCG) from the sale of an immovable asset –
Land or Building.

The maximum amount of exemption under Section 54EC is

Exemption Limit limited to Rs. 50 lakh per Financial year and in subsequent
Financial years altogether.

Only specific bonds notified by the Central Government are

eligible for investment under Section 54EC. As of 2023, the
Eligible Bonds eligible bonds are National Highways Authority of India
(NHAI) and Rural Electrification Corporation Limited (RECL)
bonds.

The investment in eligible bonds must be made within 6

Time limit of
months from the date of transfer of the long-term capital
Investment
asset that generated the LTCG.

The eligible bonds if brought before 01/04/2018, then it

Holding Period
must be held for a minimum of 3 years from the date of

33
 their acquisition. If the eligible bonds are brought after
01/04/2018, then the lock-in period shall be 5 years from
date of such acquisition.

The amount of capital gain exemptions is limited to Rs. 50

Tax Exemption
lakhs.

The eligible bonds cannot be transferred or pledged as

Transfer of security during the holding period of 3 or 5 years. But, the
Bonds bonds can be sold or redeemed after the completion of the
holding period.

If the bonds are redeemed or sold before the completion of

Tax Implications the holding period, the LTCG tax exemption claimed will be
on Redemption reversed and the exemption claimed earlier shall be directly
taxable as LTCG.

Section 54F of The Income-Tax Act, 1961

This section offers a golden opportunity to save tax if you invest the sale
proceeds from any long-term asset (including residential or commercial
property) into specified assets within a certain time frame.

Section 54F Explanation

Section 54F of the I-T Act applies to individuals and HUF

Applicability who have earned LTCG from the sale of any long-term
capital asset other than a residential house property.

The sale proceeds must be invested in -A residential house

Conditions for
property located in India (the taxpayer should not own
availing of
more than one residential house property, other than the
exemption
new asset purchased).

34
 The taxpayer has to purchase another residential property
Time Limit for within 1 year before or within 2 years after the sale of such
Investment residential property or should construct a residential house
property within 3 years from the date of such sale.

The entire net sale proceeds must be invested in the

Investment specified assets to claim the full exemption. If the entire
amount sale proceeds are not invested, the exemption will be
allowed proportionately.

The amount of capital gain exemptions is calculated as

follows:
If the cost of the new asset is equal to or greater than the
Amount of net sale proceeds, the entire CG is exempt from tax.
Exemption If the cost of the new asset is less than the net sale
proceeds, the CG is proportionately exempt from tax based
on the investment amount i.e. – (LTCG/ Net sale
consideration) * Investment Amount

If the new residential property is sold within 3 years of its

Conditions on
purchase or construction, then the amount exempted
Transfer of the
earlier shall be taxable as LTCG in the year of such
New Property
transfer.

Section 54G of The Income-Tax Act, 1961

Section 54G aims to encourage industrial development in the rural areas
and SEZ area of the country by providing tax incentives to taxpayers who
reinvest their CG in the acquisition of new industrial units in these areas.
The provision also helps in the growth of small and medium enterprises, as
it provides a tax-efficient way for business owners to expand or relocate
their operations.

SECTION 54G Explanation

35
 This capital gain exemption is for all the assessees having
Applicability an STCG/LTCG on shifting of industrial undertaking from
an urban area to a rural area

Asset to be 1) Plant & Machinery (P&M)

Transferred 2) Land & Building (L&B)of the Industrial Undertaking

Asset to be Purchase/Construct of P&M or L&B in such rural area or

Purchased shifting original assets to that area

The assessee has to purchase the specified asset within 1

The time limit year before or within 2 years from the date of transfer or
for Investment should construct the asset within 3 years from the date of
such transfer.

Lower of
Amount of
1)CG on the transfer
Exemption
2)Amount of investment

If the assets acquired by the assessee is transferred within a

Conditions on period of 3 years from the date of acquisition/construction,
Transfer of the then the exemption claimed under Section 54D will be
New Asset withdrawn by deducting the amount of exemption earlier
provided from the Cost of Acquisition of the new asset.

Note: Section 54GA is exactly similar to Section 54G with the only
difference being that the exemption under 54GA is for all the assessees
having an STCG/LTCG on shifting of industrial undertaking in an urban
area to a Special Economic Zone (SEZ).
Section 54GB of The Income-Tax Act, 1961
This section has been introduced to promote startups in India. The
government wants individuals to risk their assets, sell them, and invest
such money in their own startups. This provision is a well-thought-out
measure by the government to encourage investment in long-term

36
infrastructure projects, which will ultimately benefit the economy as a
whole.

Section 54GB Explanation

This capital gain exemption is applicable to Individuals

Applicability
and HUF. Here, only LTCG is covered.

Asset to be
Residential Property (House/plot of land)
Transferred

The net proceeds from the sale of the above-mentioned

Asset to be assets should be used to purchase subscriptions in equity
purchased shares of eligible companies. This ensures that the
individual has a controlling interest in such a Company.

Such an eligible company utilizes the amount collected

from the subscription for the purchase of a new Plant &
Conditions
Machinery within 1 year from the date of such
subscription.

The time limit for

Shares should be subscribed up to the due date of filing of
purchase of
Income Tax return.
shares

Lower of –
Amount of
1)(Cost of new Asset/Net Consideration ) *LTCG
Exemption
2) CG

1) Assessee should not transfer the controlling interest in

Conditions on the equity shares for a period of 5 years from its
Transfer of the acquisition and
Asset 2) The company should not transfer the new P&M within a
period of 5 years from its purchase.

Summarised List of Capital Gain Exemptions

37
The list below elaborately dqawetails the capital gains exemptions under
each section of the Income Tax Act for capital gains.

Sections
Amount for
of the IT Description Application
Deduction
Act

Construction is done
Cost of New
within 3 years of the
Sale of Residential property or
sale of the
House/Property, Long Term
house/property. In
54 Long-term capital Capital Gains
case of purchase, It is
asset (LTCA) by an (LTCG),
purchased 1 year prior
individual or HUF whichever is
or 2 years after the
lower.
property’s sale.

Construction or
purchase of New
House Property. The
Sale of any Long
property has been Cost of new
Term Capital
purchased 1 year prior asset * LTCG/
54F Asset (LTCA) by
or 2 years after its sale Net sale
an individual or
or constructed a new consideration
HUF
property within 3
years from the date of
sale.

There must be an
investment within 6
months of transfer.
These investments Purchase price
must be made in NHAI of the bonds up
Sale of any land, and REC bonds. These to ₹50 lakhs, or
54EC building or both bonds must be the capital
as LTCA redeemable only after gains,
5 years from the whichever is
investment date. The lower.
amount for investment
must be lower than
₹50 lakhs.

38
 New agricultural land
Sale of purchased within 2 Agricultural
agricultural land years of its sale. The land’s cost or
54B (LTCA/STCA) by land should be used capital gains,
an individual or for agricultural whichever is
HUF purposes for at least 2 lower.
years before the sale.

The acquired land or

building must be used
Compulsory for industrial purposes
New asset’s
acquisition of land for 2 years before the
cost or capital
and building used transfer. Purchase of
54D gains,
for industrial land or building for
whichever is
purposes or shifting or re-
lower.
undertaking establishing industrial
undertaking within 3
years of the transfer.

The investment
amount in the notified
funds should not
Cost of
exceed ₹50 lakhs. The
Investments in investment or
investment must take
54EE units of specified capital gains,
place within 6 months
funds whichever is
of the sale of assets
lower.
and should not be sold
till 3 years from the
date of investment.

Purchase of new land,

building, machinery or
plant to shift an
The sale or industrial undertaking
Cost of new
shifting of from an urban to a
assets or
industrial rural area. One must
54G capital gains,
undertaking from purchase these assets
whichever is
urban to rural within 1 year prior
lower.
areas. and 3 years after the
sale of assets. These
assets can be an
LTCA/STCA.

39
 Purchase of a new
Shifting an plant, machinery, land
Cost of new
industrial or building must be
assets or
undertaking from done within 1 year
54GA capital gains,
an urban area to before or 3 years after
whichever is
Special Economic the date of transfer.
lower.
Zone (SEZ) The sold assets can be
LTCA or STCA.

Such an eligible
Capital Gains
company utilises the Lower of (Cost
from the transfer
amount collected from of new
of residential
the subscription to Asset/Net
54 GB property if the
purchase a new Plant Consideration
proceeds are
& Machinery within 1 *LTCG) or
invested into a
year from the date of Capital Gains.
startup
such subscription.

Final Word
In conclusion, the capital gain exemption is an important aspect of
taxation in India, and understanding the various exemptions available can
help taxpayers minimize their tax liability and optimize their investments.
It is necessary for novice and experienced investors to be well aware of
taxations incurred on different capital gains. Keeping a note of the tax
deductions and exemptions under capital gains helps you reduce your tax
liabilities and plan your finances effectively.

Income under the head ‘Income from other sources’

(Section 56-59)

Chargeability

As pet section 56(1), income of every kind, which is not to be excluded from the total
income under this act, shall be chargeable to income-tax under the head “Income
from other sources” if it is not chargeable to the total income chargeable to Income-
tax under any of the first four heads specified in section 14.

40
In other words, the following conditions must be satisfied before an income can be
taxed under head "Income from Other Sources

(a) there must be an income;

(b) such income is not exempt under the provisions of this Act;
(c) such income is not chargeable to tax under any first four heads viz.. "Income
from Salary". "Income from House Property", "Profits and Gains of Business or
Profession" and "Income from Capital Gain".

Income from other sources is, therefore, a residuary head of income.

Where an income can appropriately fall under section 28 as business income, or any
other specific head of income, no resort can be made to section 56.

Method of Accounting

As per section 145 income, chargeable under this head, is to be computed in

accordance with the method of the accounting regularly employed by the assessee. If
the books of account are maintained mercantile system, the income is to be
computed on due basis. On the other hand, if books of account are maintained on
cash system, income is taxable on receipt basis and expenditure shall be allowed as
a deduction on payment basis.
Specific incomes included under ‘Income from other Sources’ Section 56(2)
There are many incomes which are taxable under the head ‘Income from other
sources’. However, Section 56(2) enlists certain specific incomes which shall be
chargeable to income- tax under the head ‘Income from other sources’. These are:
1. Taxability of dividend

Dividends can be of three types:

(a) Dividends declared by a domestic company.

(b) Dividends or any other income distributed by Unit Trust of India,

(c) Dividends declared by a foreign company.

41
W.e.f. 1.4.2020, any amount declared, distributed or paid by a domestic company by
way of dividends (whether interim or otherwise) whether out of current or
accumulated profits shall be included in computing the total income of a previous
year of any person. Hence, dividends shall be taxable in the hands of the
shareholders.

Dividend from a foreign company shall also be taxable under the head "Income from
Other Sources"

Dividend means

Dividend in its ordinary connotation means the sum paid to or received by a

shareholder proportionate to his shareholding in a company out of the total sum
distributed. However, section 2(22) of the Income-tax Act, 1961 has devised a special
inclusive definition of dividend. As per the definition given in section 2(22), 'dividend'
includes the following disbursements by the company to the shareholders, to the
extent of accumulated profits.

It includes

- Any distribution by a company to the extent of accumulated profits involving the

release of the assets of the company.
- Distribution of Debentures/Deposit Certificates to shareholders and bonus
shares to preference shareholders.
- Distribution to shareholders on liquidation of the company.
- Any distribution to its shareholders by a company on the reduction of its capital,
to the extent to which the company possesses accumulated profits, whether such
accumulated profits have been capitalised or not.

Dividends not to include the following:

- Any advance or loan to a shareholder or specified concern by a company in the

ordinary course of its business, where the lending of money is a substantial part
of the business of the company. 'Ordinary course of business' shall mean that the
loan or advance should be given shareholder at the same rate and terms as it is
given to other borrowers.

42
- Any dividend paid by a company which is set of by the company against whole or
any part of loan or advance previously paid by it and which has been treated as
deemed dividend shall not be treated as dividend in hands of shareholder.

Deductions for expenses from dividend income (Section 57(6) and 57(10)

The following expenses can be claimed as deductions from gross dividend income:

Interest on loan: Interest on money borrowed for purchasing the shares can be
claimed as a deduction. The interest can be claimed even if no income is earned by
way of dividend on such shares.

2. Winnings from lotteries, crossword puzzles, horse races and card games
Any winnings from
- Lotteries
- Crossword puzzles
- Races including horse race
- Card games or any other
- Gambling or betting

are chargeable to tax as income from other sources.

Special rate of Income-tax in case of winnings from lotteries, crossword

puzzles, races, etc. [Section 1158B)

Although, winnings from lotteries, etc. is part of total income of the assessee, such
income is taxable at a special rate of Income-tax, which at present, (is 30% +
surcharge, if applicable + health and education cess @ 4%).

Deduction of any expenses, allowance or loss not allowed from such winnings:
According to section 58(4), no deduction in respect of any expenditure or allowance,
in connection with such come, shall be allowed under any provision of the Income-
tax Act. However, expenses relating to the activity of owning and maintaining race
horses are allowable.

3. Interest on Securities

Income, by way of interest on securities, is chargeable under the head “Income from
other sources", if such income is not chargeable to income-tax under the head,
"Profits and gains of Business or Profession".
43
According to section 2(28B) "Interest on securities" means:

(i) Interest on any security of the Central Government or a State Government;

(ii) interest on debentures or other securities for money issued by, or on behalf of a
local authority or a company or a corporation established by Central, State or
Provincial Act

Thus securities may be divided into following categories:

(i) securities issued by Central/State Governments;

(ii) debentures/bonds issued by a local authority,

(iii) debenture/bonds issued by companies;

(iv) debenture/bonds issued by a corporation established by a Central, State or

Provincial Act ie autonomous and statutory corporations.

Chargeability of Interest on Securities

Interest on securities may be taxed on receipt basis or on due basis, depending

upon the system of accounting if any, adopted by the assessee. If the assessee
follows the cash system of accounting, interest is taxable on receipt basis otherwise
it shall be taxable on due basis. If no system of accounting is followed, it will always
be taxable on 'due' basis.

Deductions for expenses from Interest on Securities [Section 57(i) and (iii)]

As discussed in the case of dividends, the following deductions will also be allowed
from the gross interest on securities:

(a) Collection charges [Section 57(6)]: Any reasonable sum paid by way of
commission or remuneration to a banker, or any other person for the purpose of
realising the interest.

(b) Interest on loan [Section 57(iii)]: Interest on money borrowed for investment in
securities can be claimed as a deduction.

44
(c) Any other expenditure [Section 57(iii)]: Any other expenditure, not being a
expenditure of a capital nature, expended wholly and exclusively for the purpose of
making or earning such income can be claimed as a deduction.

4. Income from letting out of machinery, plant or furniture [Section 56(2)(ii)]

Income from machinery, plant or furniture, belonging to the assessee and let on
hire, is chargeable as income from other sources, if the income is not chargeable to
income tax under the head “ Profits and Gains Business or Profession"

In case any such assets are hired out as a part of the business activity carried on by
the assessee or commercial assets belonging to the assessee, the income derived
there from is assessable as business come under section 28 and not as Income from
other sources under section 56.

5. Income from composite letting of machinery, plant or furniture and

buildings [Section ) 56(2)(ii)]

Where an assessee lets on hire the machinery, plant or furniture belonging to

him and also buildings, and the letting of the buildings is inseparable from the
letting of the said machinery, plant or furniture, the income from such letting,
known as composite rent, if it is not chargeable to income-tax under the head
"Profits and Gains of Business or Profession", shall be chargeable as income from
other sources.

Deductions permissible from letting out of machinery, plant or furniture and

buildings Section 57(ii) and (iii)]

The following deductions are allowable:

(a) Current repairs, to the premises held otherwise than as tenant.

(b) Insurance premium against risk of damage or destruction of the premises.

(c) Repairs and insurance of machinery, plant or furniture.

(d) Depreciation based upon block of assets, in the same manner as allowed under
section 32 in the case of Income from Business and Profession subject to the
provisions of section 38

45
(e) Any other expenditure not being of the capital nature.

6. Gifts ( movable immovable) Section 56(2) (x)

Where any person receives, in any previous year, from any person or persons on
or after 1.4.2017 the following income, it shall be chargeable to income tax under
the head income from other source.
Particulars of Income Amount taxable under the head
income from other sources.

(a) Any some of money- (a) The whole of the aggregate

- Without consideration, the value of such sum.
aggregate of which exceeds Rs
50000/-
(b) Any immovable property (b) The stamp duty of such
- Without a consideration, the property.
stamp duty value of such if
exceeds 50,000/-
(c) Any property, other than (c)
immovable property-
- Without consideration, the - The aggregate fair market value
aggregate fair market value if
which exceeds 50,000/- - The aggregate fair market value
- For a consideration which is less of such property as exceeds
than the fair market value then such consideration.
the aggregate fair market value
exceeding consideration if
amount is exceeding 50,000/-

Section 56(2)(x), not to apply in certain cases

Section 56(2)(x), shall not apply to any sum of money or any property received-

(i) from any relative; or

46
(ii) on the occasion of the marriage of the individual; or

(iii) under a will or by way of inheritance; or

(iv) in contemplation of death of the payer or donor, as the case may be, or

(v) from any local authority as defined in the Explanation to section 10(20); or

(vi) from any fund or foundation or university or other educational institution or

hospital or other medical institution or any trust or institution referred to in section

10(23C); or

(vii) from or by any trust or institution registered under section 12A or section 12AA;

or

(viii) by any fund or trust or institution or any university or other educational

institution or any hospital or other medical institution ;

(ix) by way of transaction not regarded as transfer under section 47(i) or (iv) or (v) or

(vi) or (via) or (viaa) or (vib) or (vic) or (vica) or (vicb) or (vid) or (viiac) or (viad): (viiae)

or (viaf) or

(x) from an individual by a trust created or established solely for the benefit of

relative of the individual.

7. Interest on compensation or enhanced compensation [Section 56(2)(vii)]

As per section 145B (1), any interest received by an assessee on compensation or

enhanced compensation, as the case may be, shall be deemed to be the income of

the year in which it is received.

Further, as per section 56(2)(viii), income by way of interest received on

compensation or on enhanced compensation referred to in section 145B(1) above

47
shall be taxable under the head income from other sources in the previous year in

which such interest is received.

Deduction from such interest [Section 57(iv)): In the case of above interest which

is taxable under the head income from other sources, a deduction of a sum equal to

50% of such income shall be allowed to assessee and no deduction shall be allowed

under any other clause of sec 57.

7. Forfeiture of advance received for transfer of a capital asset to be taxed

under the head "income from other sources" [Section 56(2)(x)]

According to section 56(2)(ix), any sum of money, received as an advance or

otherwise in the course of negotiations for transfer of a capital asset shall be due the

head income from other sources if:

(a) such sum is forfeited, and

(b) the negotiations do not result in transfer of such capital asset

8. Family pension payments received by the legal heirs of a deceased

employee

After the death of the employee, if there is any family pension received by the legal

heirs of the deceased, it will deemed to be the income of the legal heir and will be

taxable under the head Income from Other Sources'.

On such pension, as per section 57(iia) a standard deduction shall be allowed to the

legal heir 1/3rd of such pension, or 15,000, whichever is less.

9. Any other income taxable under this head

48
If there is any other income, which is not discussed above, but is taxable under the

head Income from Other Sources', the deduction will be allowed on account of any

expenditure incurred (not being in the nature of capital expenditure) laid out or

expended wholly and exclusively for the purpose of making or earning such income.

For example, remuneration received by a teacher, from an institute other than his

employer, will be income taxable under this head, but any expenditure incurred by

him will be allowed as a deduction provided the conditions prescribed are satisfied.

Amounts not deductible in computing the income under the head 'Income

from Other Sources' [Section 58]

The following payments shall not be deductible in computing the income chargeable

under the head 'Income from Other Sources':

(a) personal expenses of the assessee (Section 58(1)(a)(i)];

(b) like section 40(a)(ia), 30% of any sum payable to a resident on which tax is

deductible at source under section 192 to section 194LA and such tax has not been

deducted or after deduction has not been paid on or before the due date specified in

section 139(1) [Section 58(1A)].

However, where in respect of any such sum, -

(i) tax has been deducted in any subsequent year, or

(ii) has been deducted during the previous year but paid after the due date specified

in section 139(1),

30% of such sum shall be allowed as a deduction in computing the income of the

previous year in which such tax has been paid,

49
(c) interest paid outside India on which tax has not been deducted at source [Section

58(1)(a)(ii)];

(d) salaries paid outside India on which tax is not deducted at source [Section

58(1)(a)(iii)]; (d

(e) any expenditure referred to in section 40A [Section 58(2)] like excessive payments

to relatives referred to in Section 40A(2)], cash payments exceeding

₹10,000/235,000 made in a mode other than account payee cheque/draft, etc.

referred to in section 40A(3) & (3A), payment of gratuity referred in section 40A(7),

etc.;

(f) any expenditure or allowance in connection with winning of lottery, crossword

puzzles, etc.

50
 Set Off and Carry Forward of Losses

(Section 70-80)

Profit and losses are two sides of a coin. Losses, of course, are hard to digest.

However, the Income-tax law in India does provide taxpayers some benefits of

incurring losses too. The law contains provisions for set-off and carry forward of

losses which are discussed in detail below:

Set off of losses

Set off of losses means adjusting the losses against the profit or income of that

particular year. Losses that are not set off against income in the same year can be

carried forward to the subsequent years for set off against income of those years. A

set-off could be an intra-head set-off or an inter-head set-off.

Intra-head Set Off (sec 70)

The losses from one source of income can be set off against income from another

source under the same head of income.

For eg: Loss from Business A can be set off against profit from Business B, where

Business A is one source and Business B is another source and the common head of

income is “Business”.

Exceptions to an intra-head set off:

 Losses from a Speculative business will only be set off against the profit of the

speculative business. One cannot adjust the losses of speculative business

with the income from any other business or profession.

51
  Loss from an activity of owning and maintaining race-horses will be set off

only against the profit from an activity of owning and maintaining race-horses.

 Long-term capital loss will only be adjusted towards long-term capital gains.

However, a short-term capital loss can be set off against both long-term

capital gains and short-term capital gain.

 Losses from a specified business under (Sec 35D) ( e.g, Business of cold chain

faicility, business of business of building and operating hotel, business of

warehouse for storage of agriculture produce, etc) will be set off only against

profit of specified businesses. But the losses from any other businesses or

profession can be set off against profits from the specified businesses.

 Loss an account of lottery, etc. cannot be set off against winnings from

lotteries, crossword puzzles, card games, etc.: No expenditure or allowance is

allowed from winning from lotteries or crossword puzzle, etc. Similarly, no loss

from any lottery, card games, nes etc. is allowed to be set off from the income

of the winnings of lotteries, crossword puzzles card games, races, etc.

 Loss from a source which is exempt: Loss incurred by an assessee from a

source, income from which is exempt, cannot be set off against income from a

taxable source. [CIT Thyagarajan (S.S.) (1981) 129 ITR 115 (Mad)]

Inter-head Set Off/ adjustments ( Section 71)

After the intra-head adjustments, the taxpayers can set off remaining losses against

income from other heads.

Eg. Loss from house property can be set off against salary income.

Given below are few more such instances of an inter-head set off of losses:

52
  Loss from House property can be set off against income under any head upto

Rs 2,00,000/- Sec 71(3A)

 Business loss other than speculative business can be set off against any head

of income except income from salary Sec 71(2A).

One needs to also note that the following losses can’t be set off against any other

head of income:

a. Speculative Business loss

b. Specified business loss

c. Capital Losses

d. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head

adjustments, there could still be unadjusted losses. These unadjusted losses can be

carried forward to future years for adjustments against income of these years. The

rules as regards carry forward differ slightly for different heads of income.

These have been discussed here:

Losses from House Property: Sec 71B

 Can be carry forward up to next 8 assessment years from the assessment year

in which the loss was incurred

 Can be adjusted only against Income from house property

53
  Can be carried forward even if the return of income for the loss year is

belatedly filed.

Losses from Non-speculative Business (Regular Business) Loss - Sec 72

 Can be carry forward up to next 8 assessment years from the assessment year

in which the loss was incurred

 Can be adjusted only against Income from business or profession

 Not necessary to continue the business at the time of set off in future years

 Cannot be carried forward if the return is not filed within the original due

date.

Speculative Business Loss- Sec 72

 Can be carry forward up to next 4 assessment years from the assessment year

in which the loss was incurred

 Can be adjusted only against Income from speculative business

 Cannot be carried forward if the return is not filed within the original due

date.

 Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD- Sec 73A

 No time limit to carry forward the losses from the specified business under

35AD

 Not necessary to continue the business at the time of set off in future years

 Cannot be carried forward if the return is not filed within the original due date
54
  Can be adjusted only against Income from specified business under 35AD

Capital Losses- Sec 74

 Can be carry forward up to next 8 assessment years from the assessment year

in which the loss was incurred

 Long-term capital losses can be adjusted only against long-term capital gains.

 Short-term capital losses can be set off against long-term capital gains as well

as short-term capital gains

 Cannot be carried forward if the return is not filed within the original due date

Losses from owning and maintaining race-horses- Sec 72A

 Can be carry forward up to next 4 assessment years from the assessment year

in which the loss was incurred

 Cannot be carried forward if the return is not filed within the original due date

 Can only be set off against income from owning and maintaining race-horses

only

Points to note:

 A taxpayer incurring a loss from a source, income from which is otherwise

exempt from tax, cannot set off these losses against profit from any taxable

source of Income

 Losses cannot be set off against casual income i.e. crossword puzzles, winning

from lotteries, races, card games, betting etc.

55
 Agriculture Income and its Tax treatment

Section 2(1A) and 10(1)

Agriculture is said to be the primary occupation in India. It is usually the only

source of income for the large rural population in India. The country as a whole is

entirely dependent on agriculture for its basic food requirements. The government

has numerous amount of schemes, policies and other measures to promote growth

in this sector – one of them being an exemption from income tax.

It may seem like the fact of exemption to income tax is all that we need to know

when it comes to the taxation of agricultural income but there is more to it. Let us

take a look at the provisions of the law in this regard.

Meaning of Agricultural Income (2(1A)

The Income-tax Act has its own definition of agricultural income which constitutes

the following 3 main activities:

I. Rent or revenue earned from agricultural land situated in India:

Rent is the amount received to grant the right to use the land. The scope of the

possible sources of income that can be derived from land is many. An example

would be fees received for renewal of grant of land on lease.

However, the amount received on the sale of land is not covered under the definition

of agricultural income.

II. Income from agricultural land in the following ways:

56
 Agriculture: The meaning of agriculture though not covered in the Act, has been

laid down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas

Roy where agriculture has been explained to consist of two types of operations –

basic operations and subsequent operations.

 The basic operations would include cultivation of the land and consequently

tilling of the land, sowing of seeds, planting and all such operations that require

the human skill and effort directly on the land itself.

 The subsequent operations would include operations that are carried out for

growth and preservation of the produce like weeding, digging soil around the

crops grown etc and also those operations which would make the product fit for

use in the market like tending, pruning, cutting, harvesting, etc. Income derived

from saplings or seedlings grown in a nursery would also be considered to be

agricultural income whether or not the basic operations were carried out on land.

 Through the performance of a process by the cultivator or the receiver of rent (in-

kind) that results in the agricultural produce being fit to be taken to the

market: Such processes involve manual or mechanical operations that are

ordinarily employed to make the agricultural produce fit for the market and the

original character of such produce is retained.

 Through the sale of such agricultural produce: Where the produce does not

undergo ordinary processes employed to become marketable, the income arising

on sale would generally be partly agricultural (exempt) income and part of it will

be non-agricultural (taxable) income.

57
The Income Tax has prescribed rules to make this bifurcation regarding

agricultural and non-agricultural produce for products like tea, coffee, rubber,

etc

Agricultural Non-Agricultural
Operation
Income Income

Growing and
60% 40%
Manufacturing Tea

Manufacturing
65% 35%
Rubber

Growing and curing

75% 25%
Coffee

Coffee grown, cured,

roasted, and

grounded with or

without mixing 60% 40%

chicory or other

flavouring

ingredients

58
III. Income derived from farm building required for agricultural operations:

The conditions for classifying income derived from farm building as agricultural

income are as follows:

- The building should be on or in the surrounding area of the agricultural land.

Also, the rent receiver or cultivator of the land, by reason of his connection with

the land, requires the building as a house to stay or as a storehouse or uses it for

these kinds of situations

- Either of the two conditions should be satisfied:

 The land is assessed by either land revenue or a local rate assessed and

collected by government officers; OR

 If the above condition is not satisfied, the land should not be located within the

following region:

Population as per last

Aerial distance from municipality*
preceding census.

Within 2 kms 10,000 to 1,00,000

Within 6 kms 1,00,000 to 10,00,000

Within 8 kms > Rs. 10,00,000

*Municipality includes municipal corporation, notified area committee, town area

committee, town committee and cantonment board.

59
Note: Even where the local population is < 10,000, the land should also not be

situated within the jurisdiction of the local municipality or cantonment board.

In cases where the activities have only some distant relation to land like dairy

farming, breeding, rearing of livestock, poultry farming, etc. they do not form a part

of agriculture income.

Examples of Agricultural Income

The following are some the examples of agricultural income:

 Income from the sale of seeds.

 Income from the sale of replanted trees.

 Interest on capital received by a partner from a firm engaged in agricultural

operations.

 Income from growing flowers and creepers.

 Rent received for agricultural land.

 Profits received by a partner from a firm involved in agrarian produce or

activities.

Examples of Non-Agricultural Income

Below are some examples of non-agricultural income:

 Income from poultry farming.

 Income from agricultural land held as stock-in-trade

 Any dividend paid from an organization’s agriculture income.

60
  Income from dairy farming.

 Income from bee hiving.

 Income from cutting and selling timber trees.

 Income from butter and cheese making.

 Receipts from TV serial shooting in the farmhouse.

Taxation of Agricultural Income

As discussed above, agricultural income is exempt from income tax.

However, the Income-tax Act has laid down a method to indirectly tax such

income. This method or concept may be called the partial integration of agricultural

income with non-agricultural income. It aims at taxing the non-agricultural income

at higher rates of tax.

Applicability:

This method is applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical

persons, when the following conditions are met:

 Net agricultural income is greater than Rs. 5,000 during the year; and

 Non-agricultural income is above the basic exemption limit:

 Greater than Rs 2.5 lakh for individuals below 60 years of age and all

other applicable persons

 Greater than Rs 3 lakh for individuals between 60 – 80 years of age

 Greater than Rs 5 lakh for individuals above 80 years of age

61
In simple terms, the non-agricultural income should be greater than the maximum

amount not chargeable to tax (as per the slab rates).

Thus companies, firms/LLP, co-operative societies, and local authorities are

excluded from using this method.

Agricultural Income in Income Tax

Under Section 10(1) of the ITA, 1961, agricultural income is exempt from taxation.
This exemption implies that the Central Government does not impose or levy any tax
on agricultural income.

However, agricultural income tax persists at the state level. The legislature uses a
method called partial integration of agricultural income with non-agricultural
income to tax such earnings. This method is applicable when the conditions
mentioned below are met by an individual:

 Net agricultural income was more than Rs. 5,000 in the previous financial
year.

 Total income, minus this net agricultural income, is higher than the
exemption limit of Rs. 2,50,000 for individuals below 60 years of age, Rs.
3,00,000 for senior citizens and Rs. 5,00,000 for super senior citizens.

Calculation of Agricultural Income Tax

When the aforementioned criteria are met by an individual, his/her tax on

agricultural income is computed using a three-step calculation:

Step 1: Evaluating tax on non-agricultural income + net agricultural income.

Step 2: Calculation of tax on net agricultural income + maximum exemption limit as

per slab rates.

Step 3: Calculation of the final tax as a difference of the figures derived in Steps 1
and 2. This step derives the following –

 Deduction of a rebate, if available.

 Addition of surcharge, if applicable.

 Addition of Health and Education Cess.

62
The example discussed below provides a detailed explanation of this process –

An individual taxpayer aged 50 years earns Rs. 3,00,000 in agricultural income. Her
non-agricultural income is worth Rs. 5,00,000. Therefore, her agriculture income
tax for the FY is calculated as follows:

Step 1: Evaluating tax on non-agricultural income + net agricultural income, i.e.,

Rs. 8,00,000 (Rs. 3,00,000 + Rs. 5,00,000)

Tax on the first Rs. 2,50,000 = Nil

Tax on the second Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500

Tax on balance Rs. 3,00,000 = Rs. 3,00,000 x 20% = Rs. 60,000

So, the total tax on non-agricultural income + net agricultural income

is Rs. 72,500. (1)

Step 2: Calculation of tax on net agricultural income + maximum exemption

limit as per slab rates, i.e., Rs. 5,50,000 (Rs. 3,00,000 + Rs. 2,50,000)

Tax on the first Rs. 2,50,000 = Nil

Tax on next Rs. 2,50,000 = Rs. 2,50,000 x 5% = Rs. 12,500

Tax on balance Rs. 50,000 = Rs. 50,000 x 20% = Rs. 10,000

So, the total tax here stands as Rs. 22,500. (2)

Step 3: Calculation of the final tax as a difference of the figures derived in Step 1
and 2. The difference between (1) and (2) is Rs. 50,000 (Rs. 72,500 – Rs. 22,500).

So, final tax = Rs. 50,000

(+) Health and Education cess @ 4% = Rs. 2000

Therefore, her total tax liability amounts to Rs. 52,000.

Representation of Agriculture Income in Income Tax Return

Agricultural revenue should be reported in ITR 1 under the Agriculture Income

column. However, ITR 1 can only be used if your agricultural income is less than Rs
5,000. If the stated income exceeds this limit, form ITR-2 must be filed.

63
 Incomes exempt from tax

Under Section 10, there are different sub-sections that define what kind of income is

exempt from tax. This can range from agricultural income to house rent allowance.

The term "Exempt Income" refers to any income that a person gets or earns

throughout the course of a financial year and is judged to be non-taxable.

Exempt income can take on a variety of shapes, including interest from agricultural

sources, PPF interest, long-term capital gains from shares and stocks, and much

more.

According to the Income Tax Act, certain sources of income are exempt from

taxation as long as they adhere to the rules and regulations established in the Act.

Exempted income differs from income tax deduction in that tax deduction refers to

an amount deducted from the total income whereas exempted income refers to

income that is not at all taxed. The comprehensive list can be found below.

Income Exempt from Tax as Per Section 10

Exempted income specified under Section 10 is as follows:

1. Section 10(1): Exemption of Agriculture Income

According to this section, agricultural income from land situated in India is entitled

to tax exemptions. (Discussed above)

2. Section 10(2): Exemption on the Income of a HUF

As per Section 10(2), those who earn the income of HUF are entitled to get tax

exemption, provided:

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o The income received by the individual must be paid out of the family's income.

o In the case of an impartible estate, the income must be paid out of the income of

the estate belonging to the family.

Please go through the given illustration for a better understanding:

Example:

Mr. Mahesh is part of a HUF. Now he earns an income of Rs. 1,00,000 from the HUF

and Rs. 10,000 as interest income. The interest income, in this case, becomes his

income. The income of Rs. 1,00,000 is not taxable since it is received from the HUF.

However, the interest income of Rs. 10,000 is taxable.

3. Section 10(2A): Exemption of Income from a Partnership Firm

The partner of a firm enjoys several benefits under Section 10(2A). Under this

section, the profit which a co-owner or the partner earns is exempted from tax. The

partnership firm must be classified and taxed as a Partnership Firm under the

Income Tax Act of 1961. Such tax exemption is limited to the share of the profit

earned by the partners of the LLP/Firm.

Example:

XYZ partnership firm's FY 2021-22 profit is Rs. 5,00,000. Mr. Sharma's share in the

partnership firm is 40%. Thus, the income from the firm earned by Mr. Sharma is

Rs. 2,00,000, which is 40% of Rs. 5 lakh. This amount of Rs. 2 lakh is exempt from

tax.

4. Section 10(4): Exemption of Income Received by an NRI from India:

65
Those who are Non-Resident Indians (NRI) are entitled to enjoy tax exemptions on

certain investments. These include:

o Income earned by way of interest on bonds or securities specified by the

government for exemption

o Premium income on redemption of such bonds

o Interest income from the credited amount in a Non-Resident (External) Account

o Interest income earned by a resident outside India from the credit in a Non-

Resident (External) Account

5. Section 10(5): Exemption on Leave Travel Concession

According to Section 10(5), an employee can get a tax exemption on his leave travel.

Under this section of the Income Tax Act, all the employees (including Indian and

foreign citizens) are entitled to enjoy this benefit.

Conditions for this section are:

o The travel concession must be received from the existing employer for the travel

of the employee/ individual and their family in the particular financial year

o The current or previous employer must receive it in connection with their future

travel.

o The employees are entitled to travel concessions with respect to any amount from

their employer on leave across India.

6. Section 10(6): Exemption on Remuneration to Indian Citizens Who are

Working Outside India

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This is a special package for individuals working outside India and representing

India in that country. Individuals who are officials at an embassy, high commission,

consulate, or trade representative of a foreign state, or individuals acting as a

member of these officials, enjoy the benefits of this section.

The employees of the foreign companies are also entitled to enjoy the tax benefit

under this act, subject to the following limitations:

o The foreign company should not be engaged in any business or trade in India

o The living tenure of the employees should not be more than 90 days in India

o Under this act, the remuneration of the employer is not entitled to be deducted

7. Section 10(7): Exemption on Allowances and Perquisites Paid by the

Government

All the allowances and the perquisites that the Government of India provides to its

employees for furnishing its services outside India are entitled to tax exemptions.

Indian citizens who are government employees are entitled to avail of this benefit.

8. Section 10(10CC): Exemption on Tax on Perquisites Paid by the Employer

Sometimes, employers pay taxes for non-monetary perquisites on behalf of their

employees. In such a case, the tax paid by the employer is treated as a tax

exemption in the hands of the employee.

9. Section 10(10D): Exemption on the Tax of Life Insurance Policy Maturity

The maturity amount and the bonus of a Unit Link Insurance Plan, Capital

Guarantee Plan, or an life insurance policy earned by a citizen of India is exempt

67
from tax under Section 10(10D) of the Income Tax Act. However, the following are

some of the criteria to receive the benefit under Section 10(10D):

o Policies issued before 1st April 2012 and the premium paid on this policy is not

more than 20% of the sum assured.

o Policies issued after 1st April 2012 and the premium paid on this policy is not

more than 10% of the sum assured.

o Maturity and bonus amount on the life insurance policy to a person with

disability or disease specified under Section 80U and 80DDB.

Changes in Benefits under Section 10(10D) According to the Union Budget

2023 (will continue for 2024-25):

Under the Section 10(10D), the tax exemption benefits on the maturity amount of

the Life insurance policy issued after 1st April 2023 are allowed as per the following

conditions:

o For a ULIP policy, if the total premium amount paid is up to Rs. 2.5 lakhs.

o If the total premiums paid for other life insurance policies are up to Rs. 5 lakhs.

NOTE: Taxpayers can avail of the tax benefits under Section 10(10D) only

under the old tax regime. It must be noted that the deductions u/ Section 10(10D)

are not provided with the new tax regime, which is the new default income tax

regime from 01st April 2023.

10. Section 10(11): Exemption on Payment Made in Provident Fund and

Sukanya Samriddhi Account

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Any amount received in terms of contribution or interest from a provident fund

account on retirement or termination of service is exempted. In addition, any

payment made from the Sukanya Samriddhi Account is eligible for tax exemption

under Section 10(11).

11. Section 10(10BC): Exemption on the Remuneration Received Against a

Disaster

The employee is entitled to enjoy the exemption on tax if he receives compensation

for natural disasters from the Central Government, the State Government, or a local

authority.

12. Section 10(13A): Exemption on House Rent Allowance (HRA)

The salaried employees are entitled to receive the allowance on the house rent paid,

which is exempted from tax. The part of the salary an employee receives towards

rent and accommodation is exempt from tax under this section. The following are

the conditions:

o Actual HRA received by the employee

o HRA is 40% of the salary for the rented property in non-metro cities or 50% for

metro cities.

o Actual rent paid is less than 10% of salary.

**New Budget Update: Delhi, Mumbai, Chennai, and Kolkata are recognized as

metro cities for HRA exemption under section 10(13A), with the condition that

50% of the basic salary is considered. Bengaluru, Hyderabad, and Pune will also

qualify as metro cities. Enabling employees in these cities to receive HRA

69
exemption based on 50% of their basic salary, aligning with the current metro

city standards.

13. Section 10(14): Exemption of Special Allowance

An employer can offer a special allowance to its employees to support the employee's

expenses. These expenses should be incurred by the employee while performing his

duties. There is no specified limit on the amount an employer provides his employee

as a special allowance, but allowances must be utilized only for the mentioned

purpose.

This section is further subdivided into two parts, namely,

1. Exemption of Allowance under Section 10(14) (i)

 Travel Allowance: This allowance is provided by the employer to meet the

employee's travel expenses while performing office duties.

 Daily Allowance: The employee can receive a daily allowance to meet his

daily expenses. Such a type of allowance is given when the employee is not at

his actual place of duty.

 Uniform Allowance: Employees who need to purchase or maintain their

uniforms while on duty can receive a uniform allowance.

 Academic or Research Allowance: The allowance is granted to encourage

employees' research, academic or training pursuits.

 Helper Allowance: This allowance is given to meet the expense of hiring a

helper to perform office duties.

2. Exemption of Allowance under Section 10(14) (ii)

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The allowance is granted to meet expenses that are incurred while performing one's

duties. If these allowances are received above the prescribed limits, they are then

taxable in the hands of the employees. For this section, the allowances are

prescribed in Rule 2BB.

- Children's Education Allowance: An allowance of Rs. 100 each month per child,

up to two children is given.

- Tribal Area Allowance: An allowance of Rs. 200 per month for tribal areas,

schedule areas, and agency areas.

- Compensatory Field Area Allowance: The employee can claim either a

Compensatory Field Area Allowance of Rs. 2,600 per month or a Border Area

Allowance.

- Border Area Allowance: This allowance is allowed for army personnel and

ranges from Rs. 200 to Rs. 1,300 per month.

- Special Compensatory Allowance: For employees working in hilly regions of the

country, allowances like high altitude allowance, uncongenial climate allowance,

snowbound area allowance, or avalanche allowance are offered, which range from

Rs. 300 to Rs. 7,000 per month.

- Counter Insurgency Allowance: Individuals from the armed forces living away

from their homes receive this allowance with a monthly limit of Rs. 3,900.

- High Active Field Area Allowance: Members of the armed forces receive this

allowance with a limit of Rs. 4,200 per month.

- Island Duty Allowance: Members of armed forces posted in Andaman and

Nicobar Islands, and Lakshadweep Group of Islands are eligible to receive this

allowance with a limit of Rs. 3,250 per month.

Section 10(15) the Income Earned from Interest on Investments

71
Those who earn income from interest are exempted as per the rules of Section

10(15). The table below provides the details.

Section Income Tax-exempt citizens.

10(15)(i) The exemption would be availed on All assesses

the interest, redemption, or premium

on bonds, securities, deposits, and

certificates that are subject to some

conditions and limitations.

10(15)(iib) Interest on the bonds of Capital HUF/Individual

Investment should be notified before

the date of 01-06-2002

10(15)(iic) Interest on Relief bonds HUF/Individual

10(15)(iid) Interest on declared bonds (which NRI-Individual/NRI

should be declared before 1-6-2002) gift the bonds to the

and should be bought in foreign individual.

exchange, which must be subject to

some limitations and conditions.

10(15)(iii) Securities' interest Issue department

under the Central

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 Bank of Ceylon

10(15)(iiia) The interest on deposits with the Incorporation of bank

scheduled bank with the approval broad

from RBI

10(15)(iiib) Paying off interest to Nordic Nordic Investment

Investment Bank Bank

10(15)(iiic) In the execution of an agreement on European Investment

25-11-1993, the interest is payable Bank

to the European Investment Bank for

granting the loan between that bank

and the central government.

10(15)(iv)(a) Receiving the interest from the local All the assets which

authority or the government on are committed to lent

money lent to it before 1-6-2001 on money from

sources outside the

nation

10(15)(iv)(b) Under the loan agreement, received Approved the financial

the interest from the industrial institutions of foreign

undertaking in India before 1-6- nations

2001.

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10(15)(iv)(c) Receiving the interest at a certain All the assesses who

rate from the industrial undertaking have committed to

of India on debt or lent before the lending such cash

date of 1-6-2001 in a foreign nation

for purchasing the capital plant, raw

materials, and machinery within

certain limitations and conditions.

10(15)(iv)(d) Receiving the interest before 1-6- All the assessees who

2001 at an approved rate from have committed to

certain financial institutions on the lend such money

lending money in India

10(15)(iv)(e) Receiving the interest at an approved All the assessees who

rate from the country's financial have committed to

institutions on the lending of money lend such money

from outside India before 1-6-2001

under the certain loan agreement

10(15)(iv)(h) Receiving interest from any company All assesses

concerning approved debentures or

bonds

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Other exemptions (discussed under the heads of salary)

- Death cum retirement gratuity 10(10)

- Commuted value of pension 10(10A)
- Retrenchment Compensation 10(10 B)
- Voluntary retirement 10( 10 C )
- Payment received from Statutory and recognized provident fund 10(11) and
10(12) simultaneously.
- Any payment from approved superannuation fund 10(13)

Other exemptions (discussed under the heads of house property)

- annual value of any one palace of an ex-ruler. [Sec. 10(19A)].

- property income of a local authority. [Sec. 10(20)].
- property income of an approved scientific research association.[Sec. 10(21)].
- property income of a university or other educational institutions.[Sec. 10(23C)].
- property income of a hospital or other medical institution. [Sec.10 (23 C)].
- property income of a trade union. [Sec. 10(24)).

Conclusion:

Section 10 of the Income Tax Act focuses on the income tax exemptions that a

salaried Indian citizen can avail of. In addition, various subsections of the act can

legally enable the taxpayer to avoid paying taxes under specified allowances or

incomes.

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 Income Tax Assessment: Types of Assessment in Income Tax

Every assessee, who earns income beyond the basic exemption limit in

a Financial Year (FY), must file a statement containing details of his income,

deductions, and other related information. This is called the Income Tax Return (ITR).

Once you as a taxpayer file the income returns, the Income Tax Department will

process it. There are occasions where, based on set parameters by the Central Board

of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment.

Income Tax Assessment

The income tax returns filed by individuals are scrutinized and reviewed by

the income tax authorities at the end of every financial year, this is called income tax

assessment.

In India, the income tax provisions have a structural flow of tax assessment,

which must be adhered to by the individuals and the income tax department. The

flow of assessments laid down by the income tax act are,

 Self-assessment, section 140A

 Summary-assessment, section 143(1)

 Scrutiny-assessment, section 143(3)

 Best judgment-assessment, section 144

 Income escaping assessment, section 147

1. Self Assessment

The assessee himself determines the income tax payable. The tax department

has made available various forms for filing income tax return. The assessee
76
consolidates his income from various sources and adjusts the same against losses or

deductions or various exemptions if any, available to him during the year. The total

income of the assessee is then arrived at. The assessee reduces the TDS and Advance

Tax from that amount to determine the tax payable on such income. Tax, if still

payable by him, is called self assessment tax and must be paid by him before he files

his return of income. This process is known as Self Assessment.

In self-assessment, the assessee must compute income tax returns on his

own, calculating the income earned against loss incurred and other deductions. If the

amount computed exceeds the tax deducted at source (TDS) or the advance tax, he

must pay the outstanding amount before filing the income tax returns which is

known as self-assessment tax.

In simple words, self-assessment tax is the remaining amount the assessee

must pay to the income tax department when the tax arrived at is exceeding the tax

deducted at source TDS and advance tax.

The excess amount can occur when the taxpayer acquires capital gains or any

other income on which TDS is deducted at a lower rate but the taxpayer is coming

under higher slabs. If the assessee files income tax returns without self-assessment

tax, such filing will be considered void and subject to interest on account of non

adherence to provisions of the law.

2. Summary Assessment 143(1)

It is a type of assessment carried out without any human intervention. In this type of

assessment, the information submitted by the assessee in his return of income is

cross-checked against the information that the income tax department has access to.

In the process, the reasonableness and correctness of the return are verified by the

77
department. The return gets processed online, and adjustment for arithmetical errors,

incorrect claims, and disallowances are automatically done.

Example, credit for TDS claimed by the taxpayer is found to be higher than what is

available against his PAN as per department records. Making an adjustment in this

regard can increase the tax liability of the taxpayer. After making the aforementioned

adjustments, if the assessee is required to pay tax, he will be sent an intimation

under Section 143(1). The assessee must respond to this intimation accordingly.

Summary assessment is the first stage of tax assessment where overview scrutiny will be

conducted, no detailed scrutiny will be there to check plausible clerical errors such as,

1. Mathematical miscalculations or arithmetical errors in the return.

2. Incorrect claim

3. Incorrect disallowance

4. Errors occurring from form16, 16A, or 26AS.

5. Disallowance of expenses u/s 10AA, 80 IA to 80 IE if the return is furnished

beyond the due date specified u/s 139(1).

No such adjustment shall be made unless an intimation is given to the assessee of

such adjustment in writing or electronic mode.

3. Regular Assessment

a) The income tax department authorizes the Assessing Officer or Income Tax

authority, not below the rank of an income tax officer, to conduct this

assessment. The purpose is to ensure that the assessee has neither

78
 understated his income or overstated any expense or loss or underpaid any

tax.

4. Scrutiny Assessment

After submitting an income tax return, an Income Tax Officer may be assigned

by the Income Tax Department to assess the tax filing. The CBDT has set

certain parameters based on which a taxpayer’s case gets picked for a

scrutiny assessment.

a. If an assessee is subject to a scrutiny assessment, the Department will send

a notice well in advance. However, such notice cannot be served after the

expiry of 6 months from the end of the Financial year, in which return is

filed.

b. The assessee will be asked to produce the books of accounts, and other

evidence to validate the income he has stated in his return. After verifying all

the details available, the assessing officer passes an order either confirming

the return of income filed or makes additions. This raises an income tax

demand, which the assessee must respond to accordingly.

The taxpayer is informed of this through an Income Tax Notice under Section

143(2). The officer may request information, documents, and books of accounts for

scrutiny assessment, which will be thoroughly examined. The officer then calculates

the income tax payable by the taxpayer, and if there is a mismatch between the

income and the tax due, the taxpayer can either pay the extra amount or receive a

refund.

If the taxpayer is not satisfied with the assessment, they can apply for

recitation under Section 154 or submit a revision application under Section 263 or

Section 264. If the Scrutiny Assessment order is still considered invalid, the taxpayer

79
can appeal to higher authorities such as CIT (A), ITAT, High Court, and The Supreme

Court, in that order.

5. Best Judgement Assessment

This assessment gets invoked in the following scenarios:

 If the assessee fails to respond to a notice issued by the department instructs

him to produce certain information or books of accounts.

 If he/she fails to comply with a Special Audit ordered by the Income tax

authorities.

 The assessee fails to file the return within due date or such extended time limit

as allowed by the CBDT.

 The assessee fails to comply with the terms as contained in the notice issued

under Summary Assessment After providing an opportunity to hear the

assessee’s argument, the assessing officer passes an order based on all the

relevant materials and evidence available to him. This is known as Best

Judgement Assessment.

6. Income Escaping Assessment

When the assessing officer has reasons to believe that any income chargeable

to tax has escaped assessment for a financial year, an income escaping-assessment

will be conducted. In such case, the income tax department holds full authority to

revisit and review 6 years’ tax filing, if the alleged amount is Rs. 1,00,000 or more.

As per budget 2021, the time limit of opening the case has been reduced from

6 years to 3 years. However, for cases where concealment of income exceeds Rs.50L

(Serious Tax evasion cases), cases can be opened for 10 years.

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 Circumstances under which income is deemed to have escaped assessment

are,

1. When the assessee is found to have taxable income but has not filed income

tax returns for the financial year.

2. The submitted income tax return is under or overstated

3. Failure to furnish information relating to international income

4. Unaccounted overseas assets

5. When the income of the assessee exceeds the tax exemption limit but has not

filed income tax returns.

Assessment could close quickly for some taxpayers, while it could prove to be

quite grueling for others. If you are not comfortable dealing with income tax officers, it

is suggested that you take the help of a Chartered Accountant to help you with your

case.

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 Various Tax Authorities and their Powers under the Income Tax Act

Section 116-119

The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962,

Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual

Finance Acts and Judicial pronouncements by Supreme Court and High Courts.

The Income Tax authorities are required to exercise their powers and perform their

functions so as to prevent harassment of assesses, tax-evasion, unnecessary

discrimination in collection of tax. However, there have been a number of instances

of misuse of these rule- making powers which have the effect of contradicting

statutory provisions that have been given binding effect, displacing the authoritative

pronouncements of the Higher Judiciary and causing an erosion of the

constitutionally-mandated effect of Supreme Court declarations under Article 141.

In this scenario, for the purpose of effective financial management it becomes

imperative to understand the functioning, the powers and the limitation on the

powers of these tax authorities. Various tax authorities under the Income Tax Act,

appointment of income tax authorities, the Central Board of Direct Taxes and it’s

powers, powers of other Income Tax authorities, jurisdiction of the Income-Tax

Authorities are discussed below

VARIOUS TAX AUTHORITIES UNDER THE INCOME TAX:

The Government of India has constituted a number of authorities to execute the

Income Tax Act and to control the Income Tax Department efficiently. There shall be

the following classes of income-tax authorities for the purposes of the Act as given

under Section 116, namely:

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  The Central Board of Direct Taxes constituted under the Central Boards of

Revenue Act, 1963 (54 of 1963).

 Directors-General of Income-tax or Chief Commissioners of Income-tax,

 Directors of Income-tax or Commissioners of Income-tax or Commissioners of

Income-tax (Appeals),

 Additional Directors of Income-tax or Additional Commissioners of Income-tax

or Additional Commissioners of Income-tax (Appeals),

 Joint Directors of Income-tax or Joint Commissioners of Income-tax.

 Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or

Deputy Commissioners of Income-tax (Appeals),

 Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,

 Income-tax Officers,

 Tax Recovery Officers,

 Inspectors of Income-tax.

APPOINTMENT OF INCOME TAX AUTHORITIES:

The Central Government can appoint those persons whom it thinks are fit to become

Income Tax Authorities. The Central Government can authorize the Board or a

Director-General, a Chief Commissioner or a Commissioner or a Director to appoint

income tax authorities below the ranks of a Deputy Commissioner or Assistant

Commissioner, According to the rules and regulations of the Central Government

controlling the conditions of such posts.

THE CENTRAL BOARD OF DIRECT TAXES AND IT’S POWERS:

The board works under Ministry of Finance. The CBDT was constituted under the

Central Boards of revenue Act, 1963. CBDT has the power of administration,

83
supervision and control in the area of direct taxes levied by central government.

Some of the important powers and functions assigned to the board under Income-

Tax Act are as under:

- To declare any institution, association or body to be a company [Section 2(17)).

- To declare any institute having no share capital to be a company in which the

public is substantially interested [Section 2(18)].

- To notify any profession under which it will be compulsory to maintain accounts

and to make rules regarding maintenance of accounts [Section 44AA].

- To make rules and specify the permanent physical disability for purpose of

deduction under section 80U.

- To specify the income-tax authorities who are empowered to issue summons for

search and seizure [Section 132).

- To require any authority, body or officer, under any law to disclose information

regarding any assessee [Section 138].

- To transfer or to authorise the CIT to transfer any appeal which is pending

before the First Appellate Authority under certain circumstances [Section 246].

- To prescribe educational qualifications for a person to qualify to be an

authorised representative [Section 288].

- To condone delay in obtaining approval of the Board, wherever such approval is

required [Section 293B].

Besides the above powers the Board has the following special powers

(i) Control of income tax authorities [Section 118]

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The Board may, by notification in the Official Gazette, direct that any income-tax

authority or authorities specified in the notification shall be subordinate to such

other income-tax authority or authorities as may be specified in such notification.

(ii) Power to issue order instructions and direction to other income tax

authorities [Section 119(1)]

The Board may, from time to time, issue such orders, instructions and directions to

other income-tax authorities as it may deem fit for the proper administration of this

Act, and such authorities and all other persons employed in the execution of this

Act shall observe and follow such orders, instructions and directions of the Board:

However, no such orders, instructions or directions shall be issued-

(a) so as to require any income-tax authority to make a particular assessment or to

dispose of a particular case in a particular manner, or

(b) so as to interfere with the discretion of the Joint Commissioner (Appeals) or the

Commissioner (Appeals) in the exercise of his appellate functions.

CBDT cannot issue any instructions or directions to any income tax authority to

make a particular assessment or to dispose of a case in a particular manner, hence,

portion of Central Action Plan prepared by CBDT which gave higher weightage for

disposal of appeals by orders favouring revenue was to be set aside. [Chamber of

Tax Consultants v Central Board of Direct Taxes (2019) 263 Taxman 551

(Bom)]

(iii) Power to issue orders in certain cases by way of relaxation or otherwise

[Section 119(2)(a)]

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The Board may, if it considers it necessary or expedient so to do for the purpose of

proper and efficient management of the work of assessment and collection of

revenue, issue, from time to time, general or special order in respect of any class of

income or class of cases subject to the following:

The above order may set forth directions or instruction as to the guidelines,

principles or proceedings to be followed by other income-tax authorities in the work

relating to (i) assessment or (ii) collection of revenue or (iii) the initiation of

proceedings for the imposition of penalties. However, the above direction and

instructions shall not be prejudicial to the assessee;

Where the circular issued was contrary to the provisions of the Act and also that it

was beyond the powers of the CBDT to issue such a circular against the interest of

the assessees, the High Court held that under section 119(2), the CBDT is given the

power to issue instructions to subordinate authorities for the purpose of proper and

efficient management of the work of assessment and collection of revenue, provided

that such instructions are not prejudicial to the assessees. Therefore, any

instruction to be issued should not affect the interests of the assessees. If such

directions are issued, they have to be held ultra virus the scope of section 119(2).

[Madura Coats v Dy. CIT (2005) 273 ITR 32 (Mad))

Apart from the fact that the circulars issued by the Board are binding on the

department, the department is precluded from challenging the correctness of the

said circulars even on the ground of the same being inconsistent with the statutory

provision. The ratio of the judgment of the court further precluded the right of the

department to file an appeal against the correctness of the binding nature of the

circulars. Therefore, it is clear that so far as the department is concerned, whatever

action it has to take, the same will have to be consistent with the circular which is
86
in force at the relevant point of time. [Paper Products Lid v CCE (2001) 115

Taxman 147 (SC)].

(iv) Power to extend time to admit an application or claim [Sec119(2)(b)]

(v) Power to relax any requirement of Chapter IV Chapter VIA [Section

119(2)(c)]

JURISDICTION OF INCOME-TAX AUTHORITIES:

Income Tax authorities are required to exercise their powers and perform their

functions in accordance with directions given by the Board. Tax authority higher in

rank, if directed by Board, shall exercise the powers and perform tie functions of the

Income- Tax authority lower in rank. The directions of CBDT include direction to

authorize any Income Tax authority to issue instructions to their subordinates. In

issuing instruction or orders, the Board or the Income-Tax authority may adopt any

one or more of the following criteria -

(a) Territorial area

(b) Person or classes of persons

(c) Incomes or classes of incomes

(d) Cases or classes of cases

The Board can also authorize Director General or Chief Commissioner or

Commissioner to issue orders in writing to the effect that the functions conferred or

assigned to the Assessing Officer in respect of the above four criteria shall be

exercised or performed by Joint Commissioner or Joint Director.

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Assessing Officer

In this connection, it may be noted that under section 2(7A), the term ‘Assessing

Officer’ means –

(a) The Assistant Commissioner or Deputy Commissioner or Assistant Director or

Deputy Director; or

(b) The Income-tax Officer who is vested with the relevant jurisdiction by virtue of

directions or orders issued under section 120(1) or (2) or any other provision of the

Act; and

(c) The Additional Commissioner or Additional Director or Joint Commissioner or

Joint Director who is directed under section 120(4)(b) to exercise or perform all or

any of the powers and functions conferred on, or assigned to, an Assessing Officer.

Also, the Assessing Officer has been vested with jurisdiction over any area or

limits of such area -

1. If a person carries on business or profession only in that area. In respect of that

person; or

2. If a person carries on business or profession in more than one place, then the

principal place of business or profession situated in that area; or

3. In respect of any other person residing within that area.

Any dispute relating to jurisdiction to assess any person by an Assessing Officer

shall be determined by Director General /Chief Commissioner/Commissioner of

Income Tax If the dispute is relating to areas within the jurisdiction of different

Director General /Chief Commissioner/ Commissioner, then such issue is to be

solved mutually among themselves. If the above authorities are not in agreement
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among themselves such matter has to be decided by the Board or Director General/

Chief Commissioner/ Commissioner authorized by the Board.

Powers of Assessing Officer:

The Assessing Officer is a very important functionary under the Income-tax Act. He

has a very important role to play in the administration of the Income-tax laws, He is

the first authority with whom the assessee has to come into contact with. He issues

the notice to the assessee to file a return of income if he has not done so within the

prescribed time. He initiates the assessment proceeding against the assessee and

issues a notice of demand, if any tax is payable by the assessee. The assessment

order passed by him is final unless an appeal is preferred against it by the assessee

or the Principal Commissioner or Commissioner of Income-tax decides to revise the

order on the ground that it is erroneous in so far as it is prejudicial to the revenue.

He has been vested with various powers under different provisions of the Act. The

important powers are mentioned below:

1. To determine the proportion of expenses for allowing deduction in respect of

premises used partly for the purpose of business or profession [Section 38].

2. To grant relief under section 89(1) where arrears of salary have been received by

an assessee [Section 89].

3. Power regarding discovery, production of evidence, etc. [Section 131].

4. Power of search and seizure, if authorised [Section 132].

5. Power to requisition books of account if authorised [Section 132A].

6. To apply of the assets seized and retained under section 132 in satisfaction of the

existing liabilities of the assessee under Direct Taxes Act (Section 132B)

7. Powers to call for information [Section 133].

8. Power to collect certain information [Section 133B).

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9. Power to call for information by the prescribed income tax authority [Section

133C]

10. Powers to inspect register of companies (Section 134].

11. Power to allot permanent account number [Section 139A].

12. Power to impose penalty for non-payment of self-assessment tax (Section 140A].

13. Power to direct an assessee to get his accounts audited with prior permission of

Commissioner of Income-tax [Section 142A].

14. Power to make assessment [Sections 143, 144].

15. Power to reassess income which has escaped assessment [Section 147].

16. Power to rectify mistakes apparent from the records, either on his own or on an

application made by the assessee [Section 154].

17. Power to grant a certificate to an assessee to receive a payment without

deduction of tax at source or deduction of tax at source at a lower rate than

prescribed [Sections 194, 195, 197].

18. Power to impose penalty for default in payment of a tax [Section 221].

19. Power to grant refund [Sections 237, 240].

20. Power to adjust the refund against any demand of tax etc. outstanding against

the assessee [Section 245].

21. Power to impose penalty under Chapter XXI

POWERS OF OTHER INCOME TAX AUTHORITIES:

Powers of the Income Tax Authorities vary with the nature of the position acquired.

Given below are the various tax authorities along with the powers they hold under

that position.

Director General/ Director:

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The Director General/ Director, appointed by the Central Government, are required

to perform such functions as maybe assigned by the Central Government, are

required to perform such functions as may be assigned by the Central Board of

Direct Taxes. This position enjoys the following powers under different provisions of

the Act:

a. To give instructions to the Income-Tax officers

b. To enquire or investigate into concealment

c. To search and seizure

d. To requisite books of account

e. To survey

f. To make any enquiry

Commissioners of Income Tax:

Commissioners are appointed by the Central Government. Generally, they are

appointed to head income-tax administration of a specified area. As the head of

administration, a Commissioner of income-tax enjoys certain administrative as well

as judicial powers. A commissioner may exercise powers of an assessing officer. It

has the power to transfer any case from one or more assessing officers to any other

assessing officer. It can grant approval for an order issued by the assessing officer.

Prior approval is required for reopening of an assessment. Its, also, has the power to

revise an order passed by an assessing officer in addition to many other powers as

given in the Income Tax Act, 1961.

Commissioner (Appeals):

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Commissioners of Income-Tax (Appeals) are appointed by the Central Government. It

is an appellate authority vested with the following judicial powers:

a. Power regarding discovery, production of evidence etc.

b. Power to call information.

c. Power to inspect registers of companies.

d. Power to set off refunds against tax remaining payable.

e. Power to dispose of appeals.

f. Power to impose penalty.

Joint Commissioners:

Joint Commissioners are appointed by the Central Government. The main function

of the authority is to detect tax- evasion and supervise subordinate officers. Under

the different provisions of the Act, the Joint Commissioner enjoys the power to

accord approval to adopt fair market value as full consideration, instruct income tax

officers, exercise powers of income tax officers, the power to call information, to

inspect registers of companies, to make any enquiry among other powers.

Income-Tax Officers:

While Income-Tax officers of Class I services are appointed by the Central

Government, Income-tax Officers of Class II services are appointed by the

Commissioner of Income-Tax. Powers, functions and duties of Income-Tax officers

are provided in many sections, some of which are Power of search and seizure,

Power of assessment, Power to call for information, Power of Survey etc.

Inspectors of Income-Tax:
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They are appointed by the Commissioner of Income-Tax. Inspectors of Income-Tax

have to perform such functions as are assigned to them by the Commissioner or any

other authority under whom they are appointed to work.

THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX

AUTHORITIES:

The Income Tax Act, 1961 specifies the scope of the powers handed to the income-

tax authorities. Given below are some of the important powers of the Income Tax

Authorities and their scope as given in the Sections provided under the Income Tax

Act, 1961:

- Power to Transfer Cases [Section 127]:

CBDT can transfer the case from Assessing Officer to another A.O. subordinate

to him after giving a reasonable opportunity of being heard to the

concerned assessee. However, no opportunity of being heard shall be required if

the case is to be transferred from one A.O. to another A.O. within the same city,

town or locality. Disputes regarding jurisdiction shall be resolved by the

concerned CCIT or CIT on mutual understanding. However, for any

disagreement, the matter shall be referred to CBDT and CBDT shall resolve the

dispute by way of issuing a notification in the Official Gazette of India.

- Opportunity of Being Reheard [Section 129]:

Whenever, an Income Tax Authority ceases to exercise jurisdiction over a

particular case and is being succeeded by another Income Tax Authority, then

the successor Income Tax Authority shall continue the pending proceeding from

the same stage at which it was left over by the predecessor Income Tax

Authority. There shall be no requirement on the part of the successor Income

Tax Authority to reissue any notice already issued by his predecessor. However,
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 if the concerned assessee demands that before the successor Income Tax

Authority continues the proceeding, he shall be given an opportunity of being

reheard to explain his case to the successor Income Tax Authority, then in such

case, an opportunity of being reheard has to be given to the assessee. (However,

such an opportunity of being reheard is required to be given only if the

concerned assessee demands for it and not otherwise).The time of A.O. lost in

giving such opportunity of being reheard to the assessee, shall be excluded

while calculating time limit to complete the assessment.

- Discovery, Production of Evidence etc. [Section 131]:

The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner,

Commissioner (Appeals), the Chief Commissioner and the Dispute Resolution

Panel referred to in section 144C have the powers vested in a Civil Court under

the Code of Civil Procedure, 1908 while dealing with the following matters:

 discovery and inspection;

 enforcing the attendance of any person, including any officer of a banking

company and examining him on oath;

 compelling the production of books of account and documents; and

 issuing commissions

- Search and Seizure [Section 132]:

Today it is not hidden from income tax authorities that people evade tax and

keep unaccounted assets. When the prosecution fails to prevent tax evasion, the

department has to take actions like search and seizure. Under this section,

wide powers of search and seizure are conferred on the income-tax authorities.

The provisions of the Criminal Procedure Code relating to searches and seizure

would, as far as possible, apply to the searches and seizures under this Act.

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 Contravention of the orders issued under this section would be punishable with

imprisonment and fine under section 275A.

- Power to Requisition Books of Account etc. [Section 132A]:

Where the Director or the Director-General or Commissioner or the Chief

Commissioner in consequence of information in his possession, has reason to

believe that (a), (b), or (c) as mentioned under section 132(1) and the book of

accounts or other documents or the assets have been taken under custody by

any authority or officer under any other law, then the Chief Commissioner or

the Director General or Director or Commissioner can authorize any Joint

Director, Deputy Director, Joint Commissioner, Assistant Commissioner,

Assistant Director, or Income tax Officer to require the authority to provide sue

books of account, assets or any documents to the requisitioning officer, when

such officer is of the opinion that it is no longer necessary to retain the same in

his custody.

- Application of Retained Assets [Section 132B]:

This section provides that the seized assets can be appropriated against all tax

liabilities of the assessee. However, if the nature of source of acquisition of

seized assets is explained satisfactorily by the assessee, then, such assets are

required to be released within a period of 120 days from the date on which last

of the authorisations for search under section 132 is executed after meeting any

existing liabilities. For this purpose, it has been provided that

the assessee should make an application to the Assessing Officer within a

period of 30 days from the end of the month in which the asset was seized.

The assessee shall be entitled to simple interest at ½% per month or part of a

month, if the amount of assets seized exceeds the liabilities eventually, for the

period immediately following the expiry of 120 days from the date on which the
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 last of the authorisations for search under section 132 or requisition under

section 132A was executed to the date of completion of the assessment under

section 153A or under Chapter XIV-B.

- Power to call for information [Sections 133]:

The Commissioner The Assessing Officer or the Joint Commissioner may for the

purpose of this Act:

 Can call any firm to provide him with a return of the addresses and names

of partners of the firm and their shares;

 Can ask any Hindu Undivided Family to provide him with return of the

addresses and names of members of the family and the manager;

 Can ask any person who is a trustee, guardian or an agent to deliver him

with return of the names of persons for or of whom he is an agent, trustee

or guardian and their addresses;

 Can ask any person, dealer, agent or broker concerned in the management

of stock or any commodity exchange to provide a statement of the

addresses and names of all the persons to whom the Exchange or he has

paid any sum related with the transfer of assets or the exchange has

received any such sum with the particulars of all such payments and

receipts;

- Power of Survey [Section 133A]

The term 'survey' is not defined by the Income Tax Act. According to the

meaning of dictionary 'survey' means casting of eyes or mind over something,

inspection of something, etc. An Income Tax authority can have a survey for the

purpose of this Act. The objectives of conducting Income Tax surveys are:

(a)To discover new assessees;

(b)To collect useful information for the purpose of assessment;

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 (c)To verify that the assessee who claims not to maintain any books of accounts

is in-fact maintaining the books;

(d)To check whether the books are maintained, reflect the correct state of

affairs.

- Power to Collect Certain Information [Section 133B]:

For the purpose of collection of information which may be useful for any

purpose, the Income tax authority can enter any building or place within the

limits of the area assigned to such authority, or any place or building occupied

by any person in respect of whom he exercises jurisdiction.

- Power to Inspect Registers of Companies [Section 134]:

The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals),

or any person subordinate to him authorised in writing in this behalf by the

Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), as

the case may be, may inspect and if necessary, take copies, or cause copies to

be taken, of any register of the members, debenture holders or mortgagees of

any company or of any entry in such register.

- Other Powers [Sections 135 and 136]:

The Director General or Director, the Chief Commissioner or Commissioner and

the Joint Commissioner are competent to make any enquiry under this act and

for all purposes they shall have the powers vested in an Assessing Officer in

relation to the making of enquiries. If the Investigating officer is denied entry

into the premises, the Assessing Officer shall have all the powers vested in him

under sections 131(1) and (2). All the proceedings before Income tax authorities

are judicial proceedings for purposes of section 196 of the Indian Penal Code,

1860, and fall within the meaning of sections 193 and 228 of the Code. An

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income-tax authority shall be deemed to be a Civil Court for the purposes of

section 195 of the Criminal Procedure Code, 1973.

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