4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Tax [Red: 1st Important, Blue:2nd Imp, Green: 3rd Imp]

(9883034569/8820696761)
Direct Tax: For B.com 4th Semester AY 2022-23]
Direct Tax [80 Marks]
S. No. Chapters Page Number
1. Unit 1:
Chapter 1: Introduction 01 - 02
Chapter 2: Basic concepts & Definitions 03 - 08
Chapter 3: Income Exempted from Tax 09 - 09
Chapter 4: Rate of Tax 10 - 11
Chapter 5: Residential status 12 – 23
Chapter 6: Agricultural income 24 – 32
2. Unit 2:
Chapter 7: Income from salary 33 – 58
Chapter 8: Income from house property 59 – 70
3. Unit 3:
Chapter 9: Capital Gains & tax computation 71 – 81
Chapter 10: Income from other sources 82 – 86
Chapter 11: Profit & Gains: Depreciation 87 – 90
Chapter 12: Profit & Gains: scientific research 90 – 91
Chapter 13: Profit & Gains: Profit & Gains of PGBP 92–106
4. Unit 4:
Deduction u/s 80 C to 80 U 107 – 117
Set-off & carry forward of losses 118 – 122
Clubbing of Income 123 – 126

5. Question Paper Honours & Pass 2019 127 – 135

6. Question Paper Honours & Pass 2021 136 – 146

Tax Book Price: ₹ 150

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4th Semester: Honours & General

TAXATION-I
Internal Assessment: 20 marks; Semester-end Examinations: 80 marks

Unit 1 : [5 + 5 =10 Marks]

a) Basic Concepts and Definitions under IT Act
Assessee, Previous year, Assessment year, Person, Income, Sources of income, Heads of
income, Gross total income, Total income, Maximum marginal rate of tax, Tax Evasion, Tax
avoidance, Tax planning.
b) Residential Status and Incidence of Tax: Residential status of all persons except company
c) Incomes which do not form part of Total Income Except section 10AA.
d) Agricultural Income: Definition, determination of agricultural and non-agricultural Income,
assessment of tax liability when there are both agricultural and non-agricultural income

Unit 2 : Heads of Incomes (15 + 15 = 30)

a) Salaries
b) Income from House property

Unit 3 : Heads of Incomes (5 + 10 + 10 = 25)

a) Profits and Gains of Business and Profession: Special emphasis on sec. 32, 32AC, 32AD, 35,
35D, 36(i)(ib), (ii), (iii), (iv), (vii), 37, 37(2B), 40A(2), 40A(3), 43B, (Excluding presumptive
taxation)
b) Capital Gains: Meaning and types of capital assets, basic concept of transfer, cost of
acquisition, cost of improvement and indexation, computation of STCG and LTCG, exemptions
u/s 54, 54B, 54EC and 54F, capital gain on transfer of bonus shares, right entitlement and right
shares, taxability of STCG and LTCG.
c) Income from Other Sources: Basis of charge excluding deemed dividend

Unit 4: (5 + 10 = 15 Marks)
a) Income of other Persons included in Assessee’s Total Income: Remuneration of
spouse, income from assets transferred to spouse and Son’s wife, income of minor.
b) Set off and Carry Forward of Losses: Mode of set off and carry forward, inter source and
inter head set off, carry forward and set off of losses u/s 71B, 72, 73, 74, 74A.
c) Deductions from Gross Total Income: Basic concepts, deductions u/s 80C, 80CCC, 80CCD,
80CCE, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGC, 80TTA, 80U
d) Rebate u/s 87A

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Expected Question Pattern:

Group A: [4 Qns of 10 Marks: 40 Marks]
[Out of 8 Questions]
(6 Practicals & 2 theories)
Question 1:
Theory Question from Definition, Basic Concept & Income exempt from tax
Question 2:
Practical Question from Residential Status & Agricultural Income
Question 3:
Practical Question from Salary
Question 4:
Practical Question from Deduction
Question 5:
Practical Question from Deduction
Question 6:
Practical Question from Set off & Carry forward of losses
Question 7:
Practical Question from Business & Profession (Depreciation, Scientific Research, Admissibility)
Question 8:
Theory Question from Clubbing of Income + Theory Question from salary

Group B: [2 Qns of 20 Marks: 40 Marks]

[Out of 4 options] (All Practicals)
Question 9:
1 Practical Question from Salaries
Question 10:
1 Practical Question from House property
Question 11:
1 Practical Question from Business Profession
Question 12:
1 Practical Question from Capital Gains + Income from other sources

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4th Semester: Honours/General

Code Subject's Name Marks Complete Course

fees
CC 4.1 Ch (For Hons) Taxation {Non-MCQ} 100 2500
CC 4.1 Cg (For Pass)

CC 4.2 Ch (For Hons) Cost and Management 100 2500

CC 4.2 Cg (For Pass) Accounting -II
{Non-MCQ}
GE 4.1 Chg Microeconomics II 50 1500
Indian Economy {MCQ} 50
CC 4.1 Chg Entrepreneurship 100 1500
Development and Business
Ethics {MCQ}

 Cost + Tax = ₹ 4, 000 (On one time payment), Else : 1500 x 3 = ₹ 4,500

 Cost + Tax + 1 theory = ₹ 5,000 (On one time), Else: 2000 + 2000 + 1500

 All Subjects = ₹ 6,000 (On one time payment) Else: 2500 + 2000 + 2000

 Online /Offline/Recorded (Unlimited views)

 5 days classes (Monday to Friday), Saturday Reserve for Doubts/Class Test

 Day, Morning/Evening Batches. (1st Batch from Feb 1st week).

 Complete Notes for All Subjects. (No Need to Purchase any Book)

 Complete syllabus in Three Month, After that free revision classes till
exams.

 Contact 9883034569 (office) / 8820696761 (Sir)

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Income Tax Act, 1961

Chapter 1: Introduction
1. What do you mean by Direct Tax and Indirect Tax?
Tax, incidence and impact of which fall on the same person, is known as direct tax such as Income Tax,
Professional Tax etc. On the other hand, tax, incidence and impact of which falls on two different persons, is
known as Indirect Tax such as GST, VAT etc.
Direct Tax
(a) Income Tax Act, 1961
(b) Professional Tax
Indirect Tax
(a) Goods & Service Tax , 2017 (GST)
(b) Custom Act

2. Difference between Direct Tax and Indirect Tax

Differences between direct and indirect taxes

Point of difference Direct Tax Indirect Tax

incidence & a tax is said to be direct when impact and if impact of tax is on one person and
impact incidence of a tax are on one and same incidence on the another, the tax is called
person. ‘indirect’
Burden direct tax is imposed on the individual indirect tax is imposed on commodities
organisation and burden of tax cannot and allows the tax burden to shift.
be shifted to others.
Viability of direct taxes are lesser burden then indirect indirect taxes are borne by the consumers
payment taxes to people as direct taxes are based on of commodities and services irrespective
income earning ability of people. of financial ability as the MRP Includes all
taxes.
administrative the administrative cost of collecting direct Cost of collecting indirect taxes is very
viability taxes is more and improper administration less as indirect taxes are wrapped up in
may result in tax evasion. prices of goods and services and
cannot be evaded.
Penalty it is levied on the assessee. it is levied on supplier of Goods &
Services.

3. Short title, extent and commencement of Income Tax [Sec. 1]

(1) This Act is called the Income-tax Act, 1961.
(2) It extends to the whole of India.
(3) It came into force on 1st day of April, 1962.

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4. Tax evasion, tax avoidance and tax planning ********

(a) Tax evasion: When the taxpayer reduces his tax liability by deliberately suppressing income, inflating
expenses, claiming for setting off of some bogus losses and so on and so forth, such act of the taxpayer
falls under the purview of tax evasion. It is, therefore, an illegal device for reduction of tax liability.
(b) Tax avoidance: Tax avoidance is such an exercise by the taxpayer to ease the burden of tax by
taking the advantages of loopholes or lacuna in the laws of taxation. The taxpayer can adopt such
exercise without breaking the laws of taxation but it vitiates the objects of tax laws.
(c) Tax planning: It is a dignified and intelligent device adopted by the taxpayer to reduce his tax liability
by availing of various incentives, allowances, concessions, rebates, reliefs, etc. as provided by the Act.
Thus, arrangement of affairs by the taxpayer through the intelligent application of the tax laws not
resorting to any colourable devices with a view to ease the burden of tax comes under the purview of tax
planning. Adoption of such device obviously requires the expertise knowledge on tax laws.

5. Difference between Tax Planning, Tax Avoidance & Tax Evasion

Points of Tax Planning Tax Avoidance Tax Evasion

Distinction
Definition It is a way to reduce tax It is an exercise by which the assessee legally It is the illegal way to
liability by taking full takes advantage of the loopholes in the Act. reduce tax liability by
advantages provided by the deliberately suppressing
Act through various income or sale or by
exemptions, deductions & increasing expenses, etc.,
relief.
Features Tax planning is a practice to Tax avoidance is a practice of bending the law Tax evasion is illegal
follow the provisions of the without breaking it. both in script & moral.
law within the moral
framework.
Objects To reduce tax liability by To reduce the tax liability to the minimum by To reduce tax liability by
applying script & moral of applying script of law only. applying unfair means.
law.
Benefits Generally, arises in long run. Generally, arises in short run. Generally, benefits do
not arise but it causes
penalty and prosecution.
Practice It is tax saving. It is tax hedging. It is tax concealment.
Treatment of It uses benefits of the law. It uses loopholes of the law. It overrules the law.
law

6. Tax Evasion & Tax Planning [B.com Honours 2014]

Tom deposited ₹ 10,000 into PPF account and purchased NSC for ₹ 5,000 to reduce his tax liability. On the
other hand, Jerry did not show his interest on bank deposited amounting to ₹ 8,000 and thereby reduced his
tax liability. Comment on the nature of tax saving policies adopted by Tom and Jerry

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 2:
Basic Concepts & Definitions:
Sections (IncomeTax Act, 1961) Details

Section 14 Heads of income

Section 2(31) Person
Section 2(7) Assessee
Section 2(9) Assessment year
Section 3 Previous year
Section 2(24) Income
Section 2(45) Total income

1. Person [Section 2 (31)]****

Person [Section 2(31)]:
Income-tax is charged in respect of the total income of the previous year of every person. Hence, it is
important to know the definition of the word person.
As per section 2(31) of Income Tax Act, 1961, Person includes:
(i) An Individual;
(ii) A Hindu Undivided Family (HUF);
(iii) A Company;
(iv) A Firm;
(v) An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not;
(vi) A local authority;
(vii) Every artificial juridical person not falling within any of the preceding sub-clauses.

2. Individual
 The word ‘individual’ means a natural person, i.e. human being. “Individual” includes a minor or a
person of unsound mind.
 Examples: Mr. A, Mrs. B, Miss C

3. Hindu Undivided Family (HUF)

 Under income tax act, 1961 a Hindu undivided Family (HUF) is treated as separate entity for the
purposes of assessment. it consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters and also a stranger who has been adopted by the family.
 Only those undivided families are covered here, to which Hindu law applies. It also includes Jain and
Sikh families.
 Muslim undivided family cannot be treated as HUF.
 Examples: A joint family of X, Mrs. X and their two children.

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4. Company
 It include domestic company, Foreign company, company in which public are substantially interested.
 Examples: ABCL Limited, Life The Life Insurance Corporation of India.

5. Firm
 A firm includes a partnership firm whether registered or not and shall include a Limited Liability
Partnership as defined in the Limited Liability Partnership Act, 2008.
 Examples: Roy Sen & Co., a partnership firm.

6. Association of Person :
 Two or more persons join in for a common purpose or common action to produce income, profits or
gains.
 It may consist of individuals, HUF, companies, firms, etc. as members
 The object must be to produce income. it is not enough that the persons receive the income
jointly.
 Examples: Co-operative Society, All india Bank Union

7. Body of Individuals
 Body of Individuals denote the status of persons who are assessable in like manner and to the same
extent as the beneficiaries individually.
 Only individuals can be the members
 individuals join together for common purposes
 Examples: Co-heirs, co-donees, Club etc.

8. Difference between AOP and BOI

 In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its
member i.e. entities like Company, Firm etc. can be the member of AOP but not of BOI.
 In case of an AOP, members voluntarily get together with a common will for a common intention or
purpose, whereas in case of BOI, such common will may or may not be present.

9. Local Authority****
 A local authority means a municipal committee, district board, body of Port Commissioners, Panchayat,
Cantonment Board, or other authorities legally entitled to or entrusted by the Government with the
control and management of a municipal or local fund.
 Example: Kolkata Municipal corporation etc.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

10. Artificial Juridical Person *****

This is a residuary clause. If the assessee does not fall in any of the first six categories, he is assessed under
this clause. Generally, a statutory corporation, or charitable institution or an endowment for charitable or
religious purposes falls under artificial juridical person.
Artificial juridical person are entities -
 which are not natural person;
 has separate entity in the eyes of law;
 may not be directly sued in a court of law but they can be sued through person(s) managing them
 Examples: University, Bar Council, etc.

11. Determine the legal status of the following assessee:****

(a) Mr. X, an employee of a private limited company.
(b) Netaji Sangha.
(c) Mr. R, a partner of a firm.
(d) Mr. A, a managing director of A Ltd.
(e) The University of Burdwan.
(f) Roy Sen & Co., a partnership firm.
(g) Bidhannagar Co-operative Society,
(h) Kolkata Municipal Corporation.
(i) The Life Insurance Corporation of India.
(j) A joint family of X, Mrs. X and their two children.
(k) A and B are legal heirs of C. C died in 2005 and A 'and B carry on his business without entering into a
partnership,
Answers :
(a) an individual; (b) Body of individuals; (c) an individual; (d) an individual; (e) Artificial Juridical person;
(1) a firm; (g) Association of persons: (h) a local authority; (i) a company (j) a Hindu undivided family (k)
Body of Individual

12. Legal status of the following: ****

Case Status
a) Howrah Municipal Corporation Local authority
b) Corporation Bank Ltd. Company
c) Mr. Amitabh Bachchan Individual
d) Amitabh Bachchan Corporation Ltd. Company
e) A joint family of Sri Ram, Smt. Ram and their son Lav and Kush HUF
f) Calcutta University Artificial juridical person
g) X and Y who are legal heirs of Z BOI
h) Sole proprietorship business Individual
i) Partnership Business Firm

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

13. Assessee [Section 2(7)]:

In common parlance every tax payer is an assessee. As per Section 2(7) of Income Tax Act, assessee is A
person by whom any tax or any other sum of money is payable under income tax act.

14. Assessment year [Sec. 2(9)]:****

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is the
year (just after the previous year) in which income earned in the previous year is charged to tax. E.g.,
A.Y.2022-23 is a year, which commences on April 1, 2022 and ends on March 31, 2023. Income of an
assessee earned in the previous year 2021-2022 is assessed in the A.Y. 2022-23.
Note:
Duration: Period of 12 months starting from 1st April.
Relation with Previous Year: It falls immediately after the Previous Year.
Purpose: Income of a previous year is assessed and taxable in the immediately following Assessment Year.

15. Previous year [Sec. 3]: ******

Previous year means the financial year immediately preceding the assessment year. Income earned in a year
is taxable in the next year. The year in which income is earned is known as previous year. The present
previous year is 2021-22 and its Assessment Year is 2022-23.

16. Previous year for a newly set up business or profession

In case of Previous year is the period

Business or profession being newly set-up Beginning with the date of setting up of the business &
ending on 31st March of that financial year.
A source of income newly coming into existence Beginning with the date on which the new source of income
comes into existence & ending on 31st March of that financial
year.
Example 1 :
Y sets up a new business on May 15, 2021. What is the previous year for the assessment year 2022-
23.
Answer : Previous year for the assessment year 2022-23 is the period commencing on May 15, 2021
and ending on March 31, 2022.

Example 2 :
A joins an indian company on February 17, 2021. Prior to joining this indian company he was not in
employment nor does he have any other source of income. determine the previous year of a for the
assessment years 2021-22 and 2022-23.
Answer : Previous years for the assessment years 2021-22 and 2022-23 will be as follows.
Previous year Assessment year
Feb. 17, 2021 to March 31, 2021 2021-22
April 1, 2021 to March 31, 2022 2022-23

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

17. Income chargeable to tax in the same previous year: ****

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

18. Income U/s 2 (24)

According to section 2 (24) of income Tax Act, 1961, ‘Income’ includes:
(i) Profits or gains of business or profession.
(ii) Dividend.
(iii) Voluntary Contribution received by a Trust/Instituition
(iv) Value of perquisite or profit in lieu of salary taxable u/s 17
(v) Any special allowance or benefit specifically granted either to meet personal expenses or for
performance of duties of an office or an employment of profit.
(vi) Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences etc.
(vii) Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from such Firm.
(viii) Capital Gains chargeable u/s 45.
(ix) Winnings from lotteries, crossword puzzles, races including horse races, card games and other games
of any sort or from gambling or betting of any form or nature whatsoever.
(x) Gift received for an amount exceeding ₹ 50,000

19. Heads of Income [Section 14]******

According to Section 14 of the Income-tax Act, 1961, for the purpose of computation of total income, all
income of an assessee shall be classified under the following five heads:
(a) Income under the head “Salaries” (section 15 to 21)
(b) Income from House property (section 22 to 27)
(c) Profits & gains of business (section 28 to 44D)
(d) Capital gain (section 45 to 55A)
(e) Income from other sources (section 56 to 59)
If any type of income does not become part of any one of the above mentioned first four heads, it should be
part of the fifth head, i.e. Income from other sources, which may be termed as the residual head.
Significance of heads of income
 Income chargeable under a particular head cannot be charged under any other head.
 The Act has self-content provisions in respect of each head of income.
 If any income is charged under a wrong head of income, the assessee may lost the benefit of
deduction available to him under the correct head.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

20. Computation of Total Income

Computation of Total Income for the A.Y._____
Particulars Amount
1. Salaries ***
2. Income from House Property ***
3. Profits and Gains of Business or Profession ***
4. Capital Gains ***
5. Income from Other Sources ***
Total [(1) + (2) + (3) + (4) + (5)] ****
Less: Adjustment on account of Set-off and Carry Forward of Losses ***
Gross Total Income ****
Less: Deduction under Chapter 80C to 80U (Or Chapter VI A) ****
Total Income ****

21. Distinguish between Heads of income and Sources of income?*****

The following are some of the points of distinction between the heads of income and sources of income:
a. Heads of income are clearly specified in the Act, but no explicit and specific indication is made by
the Act regarding the sources of income.
b. Separate sections are provided by the Act for the assessment of income under each head. Income
from a particular source is to be computed following the rules provided for the specific head in which
the said income is to be assessed.
c. Total income is the aggregate of income assessed under each head (subject to deductions under
Chapter VIA) while income from each head is to be computed after taking into consideration the
specific sources of income to be assessed under the relevant head.

22. Gross total income [Section 80B]*****

'Gross total income' refers to the aggregate of income assessed under each head of income as specified in
section 14 of the Act. 'Gross total income' may also be interpreted as the total income or taxable income of
an assessee before making any deduction admissible under Chapter VIA of the Act.

23. Total income or Taxable Income [Sec. 2(45)]:

Section 2(45) defines 'total income' as the total amount of income referred to in section 5, computed in the
manner laid down in this Act. To put it differently 'total income' means the 'gross total income' as reduced by
the deductions admissible under Chapter VIA [i.e. sections 80C to 80U].

24. Casual Income

Causal income is that receipt, which is accidental, unexpected & non-recurring in nature including winnings
from lotteries, quiz & game show, horse races, camel-race etc. However following receipts are not treated as
casual income:-
(a) any receipt which is taxable as capital gain under section 45.
(b) any receipt which arises from business or profession or occupation.
(c) any receipt which makes addition to remuneration of an employee. [Example: Bonus received by an
employee]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 3:
Income Exempted from Tax.
1. Mention any five incomes Which are fully Exempt
under the Income – tax Act, 1961.****
Sec. 10 enlists the various income which are exempt from tax i.e. does not form part of total income of the
assessee. These are –

(a) Agricultural Income [Section 10(1)]******

Agricultural income is totally exempt, provided it falls within the definition of agricultural income
given under section 2(1A). Agricultural income, though exempt, is to be aggregated in case of
certain assessees for the purpose of determining the rate of tax on non-agricultural income.

(b) Sum received by a Member from HUF [Section 10(2)]*****

Any sum received by an individual, as a member of a Hindu undivided family, shall be exempt in the
hands of the member provided the following conditions are satisfied:
(i) Such sum has been received out of the income of the family, or
(ii) In case of any impartible estate, such sum has been paid out of the income of the estate
belonging to the family.

(c) Share of Profit of a Partner from a Firm [Section 10(2A)]*****

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

(d) Allowances or perquisites outside India [Section 10(7)|*****

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of
India, for rendering services outside India, are exempt.

(e) Scholarships [Section 10 (16)]****

Scholarships granted to meet the cost of education are exempt from tax.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 4:
Rate of Taxation.
Tax On Casual Income: 30%
Tax On Long term capital Gain: 20%
Tax On Balance Income : Slab Rate

Income tax slabs rate for Old Tax regime -FY 2021-22
(I) Individual below 60 years, HUF & NRIs:

(1) Upto ₹ 2,50,000 Nil

(2) ₹ 2,50,000 to ₹ 5,00,000 5%
(3) ₹ 5,00,000 to ₹ 10,00,000 20 %
(4) Above ₹ 10,00,000 30%

(II) For resident senior citizen (who is of 60 years but less than 80 years)

(1) Upto ₹ 3,00,000 Nil

(2) ₹ 3,00,000 to ₹ 5,00,000 5%
(3) ₹ 5,00,000 to ₹ 10,00,000 20 %
(4) Above ₹ 10,00,000 30%

III) For resident super senior citizen (who is of 80 years or More)

(1) Upto ₹ 5,00,000 Nil
(2) ₹ 5,00,000 to ₹ 10,00,000 20 %
(3) Above ₹ 10,00,000 30%

Rebate of maximum ₹ 12,500 for resident individuals having total income

up to ₹ 5,00,000 lakh [Section 87A]

With a view to provide tax relief to the individual tax payers who are in lower income bracket, the
Act has provided rebate from the tax payable by an assessee, if the following condition and
satisfied:

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(a) The assessee is an individual
(b) He is resident in India,
(c) His total income does not exceed ₹ 5,00,000.
Quantum of rebate:
The rebate shall be equal to:
(a) the amount of income-tax payable on the total income for any assessment year or
(b) ₹ 12,500,
Whichever is less.
Surcharge:
Total Income Rate of Surcharge
Upto ₹ 50 lakhs Nil
Exceeds ₹ 50 lakhs & upto ₹ 100 lakhs 10 % of tax after rebate
Exceeds ₹ 100 Lakhs & upto ₹ 200 lakhs 15 % of tax after rebate
Exceeds ₹ 200 Lakhs & upto ₹ 500 lakhs 25 % of tax after rebate
Exceeds ₹ 500 Lakhs 37 % of tax after rebate

Health & Education Cess:

 Applicable on: All assessee

 Rate of cess: 4% of Tax liability after Surcharge

Rounding off of total income [Section 288A]:

Total Income is rounded off to nearest rupees ten. For this purpose any part of a rupee consisting of
paise shall be ignored. Thereafter if the last digit of tax payable is 5 or more, it is rounded off to
higher ten, whereas if the last digit of tax payable is less than 5, it is rounded off to lower ten.
Thus, if the total income works out to ₹ 41,645, it should be rounded off to ₹ 41,650, but if it works
out to ₹ 41,644.98, it should be rounded off to ₹ 41,640.

Rounding off of Tax liability [Section 288B]:

The tax calculated on the total income should be rounded off to the nearest ₹ 10. Amount of tax
(including TDS or advance tax), interest, penalty, etc. and refund shall be rounded off to the nearest
₹ 10.
Tax liability actually worked out (₹) 4,876.49 6,452.50 8,738.92 5,132.75
Tax liability as rounded off (₹) 4,880 6,450 8,740 5,130

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Computation of Taxable Income

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Computation of Tax Liability

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 5:
Residential Status
1. Residential status of an individual [Section 6 (1)]
Residential status of Individuals

Resident Non Resident

Resident and Resident but

Ordinarily Resident not ordinarily resident

(1) Resident [sec 6(1)]

Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies
any one of the following conditions:
a) He is in India in the previous year for a period of 182 days or more [Section 6 (1) (a)] ; or
b) He is in India for a period of 60 days or more during the previous year and 365 days or more
during the 4 years immediately preceding the previous year [Section 6 (1) (c)];
If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the
above conditions are not satisfied, the individual is a non-resident.
Note:
(a) It is not necessary that the period of stay must be continuous.
(b) It is not necessary that the stay is at the samer place in India.
(c) For the purpose of counting the number of days stayed in India, both the date of departure as
well as the date of arrival are considered to be in India.

Special Exceptional Situations:

In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
(a) An Indian citizen, who leaves India during the previous year for employment purpose.
(b) An Indian citizen, who leaves India during the previous year as a member of crew of an Indian
ship.
(c) Indian citizen or person of Indian origin1 who, being outside India comes on a visit to India
during the relevant previous year.
Indian Origin:
A person is deemed to be of Indian origin if he or either of his parents or grand parents were born
in undivided India. Here, grand parents may be paternal or maternal.

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(2) Non-Resident in India

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

(3) Resident and Ordinary Resident (ROR) [sec 6(6)(a)]

Additional Conditions:
An individual resident is treated as “Resident and ordinarily resident” in India if he satisfies the
following two additional conditions:
a) He has been resident in India for at least 2 out of 10 previous years immediately preceding the
relevant previous year; and
b) He has been in India for 730 days or more during 7 years immediately preceding the relevant
previous year.

(4) Resident and Not Ordinary Resident (RNOR):

An individual, not being an Indian citizen, would be not-ordinarily resident person if he satisfies any one of
the conditions specified under section 6(6), i.e.,
(a) If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the
relevant previous year, or
(b) If such individual has during the 7 previous years preceding the relevant previous year been in India
for a period of 729 days or less.

2. Residential Status of an HUF [Section 6 (2)]

Residential status of HUF

Resident Non Resident

Resident and Resident but

Ordinarily Resident not ordinarily resident

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Resident HUF [Section 6 (2)]:

When the control & management of affairs of HUF is wholly or partly situated in India during the relevant
previous year, then it is treated as resident in India.

Non-resident HUF:
An HUF is non-resident in India if the control & management of its affairs is wholly situated outside India.
The place of central control & management is situated where the head, the seat & the directing power is
situated.

An HUF can be Ordinarily resident OR “not ordinarily resident”

If the ‘karta’ or manager of a resident HUF satisfies both additional conditions given u/s 6(6), HUF is said to
be an ordinarily resident otherwise it will be Resident but not ordinarily Resident.

Meaning of place of control and management :

The expression control and management refers to the functions of decision-making and issuing directions but
not the places where from the business is carried on.

3. State the incidence of tax for different types of incomes of

an individual if he is (i) Resident and (ii) Non-resident
Tax Incidence [sec-5]. Incidence of taxpayer depends on his residential status and also on the place and
time of accrual or receipt of income.
Particulars of Income Resident and Not-ordinarily Non-
ordinarily Resident Resident
resident
1.
Income received or deemed to be Yes Yes Yes
received in India
2. Income which accrues or arises or is Yes Yes Yes
deemed to accrue or arise in India
3. Income which accrues or arises Yes Yes No
outside India and received outside
India from a business partly or wholly controlled
From India.
4. Income which accrues or arises Yes No No
outside India and received outside
India from a business wholly controlled
From outside India.
5. Income which accrues or arises Yes No No
outside India and received outside
India in the previous year from any other source.
6. Income/ which accrues or arises No No No
outside India and received outside
India during the years preceding the previous year and
remitted to India during the previous year.
7. Agricultural income in india No No No
[exempt under Section 10(1)]

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4. Example on Residential Status

Question:
Andy, a British national, comes to India for the first time during 2017-18. During the financial years 2017-
18, 2018-19, 2019-20, 2020-21 and 2021-22, he was in India for 55 days, 60 days, 80 days, 160 days and 70
days respectively. Determine his residential status for the assessment year 2022-23.
Answer:
During the previous year 2021-22, Andy was in India for 70 days & during 4 years immediately preceding
the previous year, he was in India for 355 days as shown below:

Year 2017-18 2018-19 2019-20 2020-21 Total

No. of days stayed in India 55 60 80 160 355

Thus, he does not satisfy Sec.6(1) & consequently, he is a non-resident in India for the P.Y. 2021-22.

5. Example on Residential Status

Question:
Mr. X, aged 19 years, left India for first time on May 31, 2021. Determine his residential status for the
previous year 2021-22 if:
i) He left India for employment purpose
ii) He left India on world tour.
Answer:
During the previous year 2021-22, Mr. X was in India for 61 days as shown below –
P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
20-21 30 31 - - - - - - - - - - 61
During the previous year 2021-22, X stayed in India for 61 days. Further, he was in India for more than 365
days during 4 years immediately preceding the relevant previous year (as he left India for first time).

i) Since he left India for employment purpose, condition of sec. 6(1)(c) shall not be applicable on such
assessee. He will be treated as resident in India, if and only if, he resided in India for at least 182 days
during the previous year. Hence, Mr. X is a non-resident in India for the previous year 2021-22.

ii) Since he left India on world tour, which is not an exception of sec. 6(1), satisfaction of any one
condition of sec. 6(1) makes him resident in India for the previous year 2021-22. As he satisfies 2nd
condition of sec. 6(1) [shown above], he is resident in India. Further, he also satisfies dual conditions
specified u/s 6(6) (since he left India for first time). Therefore, he is an ordinarily resident for the
previous year 2021-22.

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6. Example on Residential Status

Question:
X came India for first time on July 24, 2017. From July 24, 2017 to December 25, 2018 he was in India.
Again, he came to India on August 5, 2021 for employment purpose & left India on November 25, 2021
permanently. Determine his residential status for the previous year 2021-22 assuming -
(a) He is a foreign citizen
(b) He is an Indian citizen
Answer:
During the previous year 2021-22, X was in India for 113 days as shown below:
Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
21-22 - - - - 27 30 31 25 - - - - 113
Further, he was in India for more than 365 days during 4 years immediately preceding the previous year as
shown below:
Year Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Total
17-18 - - - 8 31 30 31 30 31 31 28 31 251
18-19 30 31 30 31 31 30 31 30 25 - - - 269
19-20 - - - - - - - - - - - - -
20-21 - - - - - - - - - - - - -
As he satisfies condition given in sec. 6(1) (c), he is a resident in India.
Further, he was resident during 2 out of 10 years immediately preceding the relevant previous year but he
was in India only for 520 days in 7 years immediately preceding the relevant previous year. As he is not
satisfying dual conditions of sec. 6(6), he is a resident but not ordinarily resident in India for the previous
year 2021-22.
Note:
His status shall remain same in both the cases as -
1. Foreign citizens are not covered by ‘exceptions to sec. 6(1)(c)’.
2. Coming in India for employment purpose is not covered by ‘exceptions to sec. 6(1)(c)’.

7. Example on Residential Status

Question:
Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has been his
practice for the past 10 financial years. Find out his residential status for the assessment year 2022-23.
Answer:
(a) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2022- 23:-
Period of stay during previous year 2021-22 = 100 days
Calculation of period of stay during 4 preceding previous years (100 x 4 = 400 days)
Mr. Brett Lee has been in India for a period more than 60 days during previous year 2021-22 and for a
period of more than 365 days during the 4 immediately preceding previous years. Therefore, since he
satisfies one of the basic conditions under section 6(1), he is a resident for the assessment year 2022-23.
Total period of stay during 7 preceding previous years = 100 x 7=700 days. Since his period of stay in India
during the past 7 previous years is less than 730 days, therefore, Mr. Brett Lee is a resident but not
ordinarily resident for the assessment year 2022-23.

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8. Example on Residential Status (important)********

Question:
Mr. S, a resident of U.S.A. came to India for the first time on May 1, 2015. He stayed here without any break
for 3 years and left for South Africa on May 1, 2018. He returned to India on April 1, 2019 and went back to
U.S.A. on December l, 2019. He was posted back to India on January 20, 2022 and is still here. Determine
his residential status for the assessment year 2022-23.
Answer:
Mr. S stays in India for 71 days during the previous year 2021-22 and 641 days during the four years
preceding the previous year 2021-22 (2017-18 : 365 days ; 2018-19 : 31 days; 2019-20 : 245 days ; 2019-20 :
Nil). Thus, he satisfies one of the basic conditions of section 6(1) i.e., stay in India for at least 60 days during
the previous year and at least 365 days during 4 years preceding the relevant previous year.
Moreover, he is resident in India for more than 1 previous year out of 10 previous years preceding the
relevant previous year and has been in India for more than 729 days during 7 previous years preceding the
relevant previous year. Thus, he satisfies both the additional conditions of section 6(6)(a).
Therefore, Mr. S is resident and ordinarily resident in lndia for the assessment year 2022-23.

9. Example on Residential Status (important)********

Question:
Mr. Thomas, a foreign national, comes to India for the first time on May 11, 2017. During the financial years
2017-18, 2018-19, 2019-20, 2020-21 and 2021-22 he has been in India for 110 days, 140 days, 27 days, 185
days and 92 days respectively. Determine his residential status for the assessment year 2022-23.
Answer:
Mr. Thomas stays in India for a period of not less than 60 days (actual stay being 92 days) during the
previous year 2021-22 and for a period of not less than 365 days (actual stay being 462 days) during four
years preceding the previous year 2021-22. Thus, he satisfies one of the basic conditions of section 6 (1). But
he fails to satisfy one of the additional conditions of section 6(6)(a) (i.e., stay in India for more than 729 days
during 7 years preceding the relevant previous year).
Therefore, Mr. Thomas is resident but not ordinarily resident in India for the assessment year 2022-23. The
fact that Mr.Thomas is a foreign national is not relevant for the purpose of detennining his residential status
as residential status does not depend on citizenship in this case.

10. Example on Residential Status (important)********

Question:
Mr. Roy, a citizen of India, is employed with XYZ Ltd. at Kolkata. He left India for the first time on June 30,
2020 for the purpose of working on a project of his employer company in U.S.A. After completion of the
project he came back to Kolkata on January 1, 2022. Determine his residential status for the assessment years
2021-22 and 2022-23.

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Answer:
Residential status of Mr. Roy for the assessment year 2021-22
Mr. Roy stays in India for 90 days during the previous year 2021-22. Thus, he fails to satisfy the condition of
section 6 (1) read with Explanation l (a) to section 6 (1). Therefore, he is non-resident in India for the
assessment year 2021-22. It is assumed that he is not deemed resident in India as per section 6(IA).

Residential status of Mr. Roy for the assessment year 2022-23

Mr. Roy stays in India for 89 days during the previous year 2021-22 and stays not les than 365 days during
four years preceding the relevant previous year. Thus, he satisfies the second condition of section 6 (1) i.e.
condition specified in section 6(l)(c) Moreover, he satisfies both the conditions of section 6(6)(a). Therefore,
he is resident and ordinarily resident in India for the assessment year 2022-23.

11. Example on Residential Status (important)***

Question:
Mr. Rupankar Roy. an Indian citizen, left India for the purpose of employment in USA for the first time on
October 1, 2021. He came back to India on March 30, 2022 for visit and returned back to USA after staying
20 days in India. During the previous year 2021-22 he earned the following income:
(a) Salary earned in USA ₹ 5,00,000 and credited in USA.
(b) Interest received in India from fixed deposit in bank ₹ 1,20,000.
Detennine his residential status and tax incidence in India for the assessment year 2022-23.
Answer:
Mr. Roy stays in India for 186 days during the previous year 2021-22. So, he satisfies the condition of
section 6 (1) read with Explanation l(a). Moreover, he satisfies both the additional conditions of section
6(6)(a). Therefore, Mr. Roy is resident and ordinarily resident in India for the assessment year 2022-23.
As per section 5(1) salary earned in USA and received in USA and interest received in India from fixed
deposit in bank are taxable in his hands.

12. Practical problem on tax incidence [B.com 1998

Honours]
Question:
From the following information, compute the taxable income of Shri Amiyo Roy Choudhury for the
assessment year 2022-23, assuming that Shri Roy Choudhury is a (i) Ordinarily Resident (ii) Resident but
not ordinarily resident, and (iii) Non-resident.
(a) Remuneration for consultancy services rendered in Italy ₹ 30000 but received in India.
(b) Income from business in Ireland and received in Ireland ₹ 65000. The business is, however,
controlled from India.
(c) Pension for services rendered in India but received in Israel ₹ 25,000.
(d) Interest on deposit in a local bank in Indonesia and received in Indonesia ₹ 20000.

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Answer:
Calculation of taxable income of Shri Amiyo Roy Choudhury for the assessment year 2022-23,
relating to previous year 2021-22

Particulars Resident & Resident but not Non-

Ordinarily resident ordinarily resident resident
Remuneration for consultancy services rendered in Italy but 30,000 30,000 30,000
received in India (Income accrued outside India but received
in India)
Income from business in Ireland and received in Ireland 65,000 65,000 NIL
(Income accrued outside India from a business controlled
from India and received outside India)
Pension for services rendered in India but received in Israel- NIL NIL NIL
{Income accrued in India Less standard deduction under
section 16(ia) }
Interest on deposit in a local bank in Indonesia and received 20,000 NIL NIL
in Indonesia (Income accrued and received outside India)

Gross Total Income 1,15,000 95,000 30,000

Less: Deduction under chapter VIA NIL NIL NIL

Taxable Income 1,15,000 95,000 30,000

13. Practical problem on tax incidence [B.com 2016 Honours]

Compute gross total income of Smt. Saha from the following particulars of income as furnished by her for
the previous year 2021-22 if she is a (i) Ordinarily Resident (ii) Resident but not ordinarily resident, and (iii)
Non-resident.
(a) Dividend from Australian company received therein ₹ 50,000.
(b) Agricultural income from Nepal but received in India ₹ 1,20,000.
(c) Pension from a former employer in India received in Bangladesh ₹ 2,00,000.
(d) Profit from a business in Thailand 2,50,000 and 40% received in India. The business is controlled from
India.
(e) Dividend paid by an Indian Company credited in a bank Account at London ₹ 15,000
(f) Agricultural Income from Nepal received there but later on remitted to India ₹ 10,000
(g) Interest from an American Development Bond ₹ 7,000 (30% of which is received in London)
(h) Profit from a business in India controlled from London received in America ₹ 15,000
(i) Past untaxed Profit brought to India ₹ 38,000
(j) Gift in foreign currency recived in India from a friend ₹ 65,000

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Answer:
Calculation of Gross total income of Smt. Saha for the assessment year 2022-23, relating to
previous year 2021-22

Particulars Resident & Resident but not Non-

Ordinarily resident ordinarily resident resident
Dividend from Australian company receiived therein (income 50,000 NIL NIL
accrued and received outside India)

Agricultural income from Nepal but received in India 1,20,000 1,20,000 1,20,000
(income accrued outside India but received in India)
Pension from a former employer in India received in 1,50,000 1,50,000 1,50,000
Bangladesh {Income accrued in India Less standard
deduction of ₹ 50,000 under section 16(ia) }
Profit from a business in Thailand ₹ 2,50,000 and 40% 1,00,000 1,00,000 1,00,000
received in India. (income accrued outside India but
received in India) (2,50,000 x 40%)
Profit from a business in Thailand ₹ 2,50,000 and 60% 1,50,000 1,50,000 NIL
received outside India but the business is controlled from
India. (income from business earned & received outside
India) (2,50,000 x 60 %)
Dividend paid by an Indian Company credited in a bank 15,000 15,000 15,000
Account at London (Income deemed to accrue or arise in
India)
Agricultural Income from Nepal received there but later on 10,000 NIL NIL
remitted to India (income accrued and received outside
India)
Profit from a business in India controlled from London 15,000 15,000 15,000
received in America {Income accrued in India}
Past untaxed Profit brought to India (Not an Income and NIL NIL NIL
hence not taxable)
Gift in foreign currency recived in India from a friend 65,000 65,000 65,000

Gross Total Income 6,75,000 6,15,000 4,65,000

Less: Deduction under chapter VIA NIL NIL NIL

Taxable Income 6,75,000 6,15,000 4,65,000

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14. Example on Residential Status

Question:
Miss Monica, a foreign national, comes India every year for 90 days since 2006-07.
(a) Determine her residential status for the previous year 2021-22.
(b) Will your answer differ, if she comes India for 100 days instead of 90 days every year.

15. Practical problem on Residential status [B.com 2004 Honours]

Mr. A came to India for the first time on May 1, 2021 and left India on –
(i) June 20, 2021
(ii) November 15, 2021
Determine the residential status of Mr. A for the assessment year 2022-23 in each of the above cases.
[(i) Non –resident (ii) Resident but not ordinarily resident]

16. Practical problem on Residential status [B.com 2012 Honours]

Brown, a citizen of Bahama, came to India for the first time on 10th August, 2015 and stayed up to 5th March,
2017. Subsequently he stayed in India during 2017-18, 18-19, 19-20, 20-21 and 21-22 for 120 days, 110
days, 100 days, 85 days and 62 days respectively. Determine his residential status for the A.Y. 2022-23.
During the previous year 2021-22, he earned income of ₹ 2,50,000 from a business in Bahama which is
controlled from India. Discuss the taxability of such income in India.
[Answer: Resident but not ordinarily resident; Income from a business in Bahama will be taxable,
since business is controlled from India]

17. Practical problem on Residential status [B.com 2013 Honours]

(a) Sri Amitabha Roy is the karta of a Hindu Undivided Family who is residing at Dhaka for last 7 Years.
The business of the HUF is carried on in India and also partly controlled from India. Determine the
residential status of the HUF for the assessment year 2022-23.
(b) Which income of a non-resident Indian assessee is taxable in India?
[Answer: (a) Resident but not ordinarily resident (b) Income earned or Received in India

18. Practical problem on Residential status

Compute income liable to be taxed in India of Smt. Saha from the following particulars of income as
furnished by her for the previous year 2021-22 if she is a
a) Ordinarily Resident
b) Resident but not ordinarily resident and
c) Non-resident for the given previous year
i. Dividend from Australian company received therein ₹ 1,00,000.
ii. Agricultural income from Nepal but received in India ₹ 2,40,000
iii. Pension from a former employer in India received in Bangladesh ₹ 4,00,000.
iv. Profit from a business in Thailand ₹ 5,00,000 and 40 % received in India. The business
controlled from India.
v. Dividend paid by an Indian Company credited in a bank Account at London ₹ 15,000
vi. Past untaxed Profit brought to India ₹ 38,000

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Chapter 6: Agricultural Income

1. Definition of agricultural income [Section 2(1A)] ****
This definition is very wide and covers the income of not only the cultivators but also the land holders who
might have rented out the lands. Agricultural income may be received in cash or in kind.
Three ways: Agricultural income may arise in any one of the following three ways:-
(a) It may be rent or revenue derived from land situated in India and used for agricultural purposes.
(b) It may be income derived from such land through agriculture
(c) Lastly, agricultural income may be derived from any farm building required for agricultural operations.
Conditions:
(a) Rent or revenue should be derived from land.
(b) Land has to be situated in India.
(c) Land should be used for agricultural purpose.

2. Examples of Agricultural Income****

Following income have been held to be agricultural income:
(a) Income from growing trade or commercial products like jute, cotton, etc
(b) Income from growing flowers and creepers ****
(c) Plants sold in pots are an agro income provided basic operations are performed. ****
(d) Any remuneration (salary, commission, etc.) received by a partner from a firm engaged in agricultural
operation is an agro income. ****
(e) Interest on capital received by a partner from a firm, engaged in agricultural operation ****
(f) Income earned by the owner of a tea garden by selling tea leaves grown by him in his garden after being
processed and packed ****
(g) Where there is no market for the sugarcane produced by the cultivator in its natural condition, income
from sale of Jaggery.****
(h) Rent received from a land which is leased out for the grazing of cattle needed for agricultural
operations***
(i) Where denuded parts of the forest are replanted and subsequent operations in forestry are carried out, the
income arising from the sale of replanted tree ****
(j) Compensation received for the requisition of the land of the assessee by the Government which were
used by him for agricultural purposes even at the time of requisition****
(k) Agricultural income may be derived from any farm building required for agricultural operations.****
(l) Profit made on sale of standing crop or the produce after harvest by cultivating owner or tenant of land
(m) Entire compensation received from an insurance company for damage caused by hailstorm to the green
leaf forming part of the assessee's tea garden
(n) Income from the sale of tobacco leaves after being dried to make them fit for sale
(o) Income from sale of coffee after being dried and cured
(p) Income derived from the sale of seeds when the mother plant is grown on land

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3. Examples of Non - agricultural Income
The following have been held as non-agricultural income though connected with land
(a) Dividend received by a shareholder from a company carrying on agricultural operations as the effective
and immediate source of income is shareholding and not the land.****
(b) Salary received by an employee from any business (having agricultural income) is non-agro income.
(c) Interest on arrears of rent receivable in respect of agricultural land is non-agro income.
(d) Rent received from a land which is originally leased out for agricultural purposes but actually used
otherwise i.e. for housing and accommodating refugees or for running on a shop or a market
(e) Income by way of purchasing paddy, hulling it and selling the resultant rice
(f) Profit made by sale of sugar manufactured out of sugarcane
(g) Income from sale of products like wild grass, seeds, trees, fruits, flowers, etc. which grow spontaneously
on the land not involving any human labour or skill upon the land *****
(h) Income received by a money-lender in the form of agricultural produce
(i) Commission earned by the landlord for selling agricultural produce of his tenant****
(j) Income from salt produced by flooding the land with sea-water is non-agro income.
(k) Income from fisheries, poultry farming, dairy farming, butter & cheese making, etc. is non-agro income.
(l) Profit and gain arising from the sale of agricultural land ****
(m) Fees paid by tenant for renewal of the lease of agricultural land.
(n) Receipts from TV serial shooting in farm house
(o) Income from a land situated outside India is non-agro income.
(p) Income on supply of water for agricultural operation is non-agro income.

4. Income partially agricultural & partially Non –agricultural

In case assessee is engaged in an integrated activity, comprising of agricultural activity as well as non-
agricultural activity, then profit of such integrated activity shall be segregated into agricultural income and
non-agricultural income in the following manner –
Type of income Agricultural Non-agricultural
income income
Income from sale of centrifuged latex or cenex 65% 35%
manufactured from rubber plants grown by the seller in
India
Income from the sale of coffee grown and cured by the 75% 25%
seller
in India
Income from the sale of coffee grown, cured, roasted 60% 40%
and grounded by the seller in India with or without
mixing of chicory or other flavouring ingredients

Income from the sale of tea grown and manufactured by 60% 40%
the seller
Example:
If an assessee earns ₹ 5 lakh (as per sec. 28) from the business of growing & manufacturing tea in India, then
his business income will be ₹ 2 lakh (i.e., 40% of ₹ 5 lakh) & agro income will be ₹ 3 lakh (i.e. 60% of ₹
5 lakh)

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5. Impact of agricultural income on tax computation
Sec. 10(1) of the Act exempts agricultural income from tax as our Constitution does not provide power to the
Parliament to levy tax on agro-income. However, since 1973 an indirect method has been found, to levy tax
on agro-income. According to this method, agricultural income is included in the total income of the assessee
for deciding the tax slab of the assessee.
The way to apply higher rate of tax-slab on non-agricultural income by including agricultural income in the
total income of the assessee are as under:
Indirect way of taxing agricultural income –
Conditions:
1. The assessee is an individual, a Hindu-undivided family, a body of individual, an association of persons or
an artificial juridical person.
2. The assessee has non-agricultural income exceeding the exempted ceiling (i.e. in case of super senior
citizen ₹ 5, 00,000 or senior citizen ₹ 3,00,000, in case of resident Individual Below 60 year ₹ 2,50,000)
3. The agricultural income of assessee exceeds ₹ 5,000.
Treatment:
Step 1 : Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.
Step 2 : Compute income tax on (Agricultural income + Maximum exempted limit).
Step 3 : Tax liability before cess = (Tax as per step 1) – (Tax as per step 2).
Step 4 : The sum so arrived at shall be increased by Health & education cess @ 4 %.

Practical Questions:
6. Tax computation
Question:
Mr. X (aged 52 years) has agricultural income of ₹ 5,200 and non-agricultural income of ₹ 5,26,800.
Compute his tax liability for the previous year 2021-22.
Answer:
Computation of tax liability of Mr. X for the A.Y. 2022-23
Particulars ₹
Income Tax on ₹ 5,32,000 (i.e. agro income ₹ 5,200 + non agro ₹ 5,26,800) 18,900
Less: Tax on ₹ 2,55,200 (i.e. agro income ₹ 5,200 + maximum exempted limit ₹ 2,50,000) 260
Tax liability 18,640
Less: Rebate u/s 87A Nil
18,640
Add: Health & Education Cess (4% of ₹ 18,640) 746
Tax and cess payable (Rounded off u/s 288B) 19,386

Tax and cess payable (Rounded off u/s 288B) 19,390

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7. Agricultural Income: Tax Computation ***
Mr. X aged 42 years has non-agro income of ₹ 3,45,000 and agro income of ₹ 2,30,000. Compute his tax
liability before rebate for the A.Y. 2022-23.
Solution
Computation of Tax Liability of Mr. X for the A.Y. 2022-23
Particulars ₹
Income tax on ₹ 5,75,000 (i.e. agro income ₹ 2,30,000 + non agro ₹ 3,45,000) 27,500
Less: Tax on ₹ 4,80,000 (i.e. agro income ₹ 2,30,000 + maximum exempted limit ₹ 11,500
2,50,000)
Tax liability 16,000
Less: Rebate u/s 87A 12,500
3,500
Add: Health & Education Cess (4% of ₹ 3,500) 140
Tax and cess payable 3,640

8. Agricultural Income: Tax Computation [B.com 2013 Honours]***

Mr. Jiban Samanta is 54 years old and furnished the following information for P.Y. 2021-22:
₹
Agricultural Income 70,000
Income from House Property 2,00,000
Income from other Sources 1,30,000
Compute tax payable by Mr. Jiban Samanta for the assessment year 2022-23.
Solution
Computation of total Income & Tax Liability of Mr. Jiban Samanta for the A.Y. 2022-23
Particulars ₹
Income from House Property 2,00,000
Income from other Sources 1,30,000
Total Income 3,30,000
Tax on above
Income Tax on ₹ 4,00,000 (i.e. agro income ₹ 70,000 + non agro ₹ 3,30,000) 7,500
Less: Tax on ₹ 3,20,000 (i.e. agro income ₹ 70,000 + maximum exempted limit 3,500
₹ 2,50,000)
Tax liability 4,000
Less: Rebate u/s 87A 4,000
Nil
Add: Health & Education Cess [4% of ₹ Nil] Nil
Tax & Cess Nil

9. Agricultural Income: Tax Computation ***

Mr. X aged 42 years has non-agro income of ₹ 6,00,000 and agro income of ₹ 1,30,000. Compute his tax
liability for the A.Y. 2022-23.

10. Agricultural Income: Tax Computation ***

Mr. X (aged 52 years), a resident individual, has agricultural income of ₹ 1,30,000 and non-agricultural
income of ₹ 4,50,000 for the previous year 2021-22. Calculate his tax liability for the A.Y. 2022-23.

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11. Agricultural Income: Computation of taxable Income
Ms. Rajnita Bose is 60 years old and furnished the following information for the previous year 2021-22.
Compute her taxable income for the Assessment Year 2022-23.
Income from growing and manufacturing Tea ₹ 1,20,000.
Income from growing and manufacturing Rubber ₹ 2,00,000.
Solution
Computation of taxable income
Particulars Amount
Income from growing and manufacturing Tea [₹ 1,20,000 x 40 %] 48,000
Income from growing and manufacturing Rubber [₹ 2,00,000 x 35%] 70,000
Total income 1,18,000

12. Agricultural Income: Computation of taxable Income

Mr. Krishna Daripa, engaged in growing and manufacturing of tea, furnished the following information for
the previous year 2021-22;
Sale of Tea ₹ 15,00,000
Growing and manufacturing expenses of tea ₹ 5,00,000
You are required to compute the taxable income of Mr. Krishna Daripa for the A.Y. 2022-23.
Solution
Computation of taxable income of Mr. Krishna Daripa
Particulars Amount
(₹)
Sale of tea 15,00,000
Less: Growing and manufacturing expenses of tea 5,00,000
10,00,000
Less: 60% of above being considered as agricultural income 6,00,000
Total income 4,00,000

13. Agricultural Income: Computation of taxable Income

Mr. M, engaged in growing and manufacturing of tea, furnished the following information for the previous
year 2021-22;
Sale of Tea ₹ 10,00,000
Growing and manufacturing expenses of tea ₹ 3,00,000
You are required to compute the taxable income of Mr. M for the A.Y. 2022-23.

14. Agricultural Income: Computation of taxable Income

Question:
X is the owner of a suger factory. He has also an agricultural land which is utilised for producing sugercane.
The following data are available for the previous year 2021-22:
₹
Sale proceeds of sugar 8,50,000
Cultivation expenses for producing sugarcane 1,20,000
Manufacturing expenses for producing sugar 90,000
Market value of sugarcane transferred to factory and used 2,30,000
Based on the above data cdalculate business income (i.e. Non-agricultural Income and agricultural Income of
X)

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15. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****
Discuss with reasons, whether the following incomes are treated as agricultural income for the purpose of income-tax:
a. Rent received from a tenant to whom an agricultural land situated in India is let out for agricultural purposes.
b. Remuneration received from an agricultural farm whose entire income is derived from agricultural operations.
c. Dividend received from a company whose major income constitutes agricultural income.
d. Share of profit received by a partner from the farm whose entire income constitutes agricultural income.
e. Rent received by way of leasing land for grazing of cattle required for agricultural operations.
f. Profit earned by selling agricultural produce from a land situated at Bangladesh.
g. Interest received from a defaulting tenant to whom an agricultural land in India is leased out for agricultural
operations.
h. Interest received from the mortgage of agricultural land in India who has been using such land for agricultural
purposes.
i. Profit earned from the sale of wild grass of spontaneous growth.
j. Compensation received from the Government for the requisition of land which has been used for agricultural
purposes.
k. Income by way of selling rice produced from the paddy purchased by the assessee.
l. Profit earned from the sale of agricultural land.
m. Income earned from the sale of tea grown and manufactured by the assessee.
Solution;
a. Rent received from a tenant to whom an agricultural land in India is let out for agricultural purposes is treated as
agricultural income in view of the provision of section 2(1A)(a).
b. Remuneration received from an agricultural farm is not treated as agricultural income as there exists an employer-
employee relationship between the assessee and the farm
c. Dividend received from an agricultural company is not an agricultural income as the effective and immediate
source of income is shareholding and not the land
d. Share of profit received by a partner from the farm whose entire income constitutes agricultural income is treated as
agricultural income
e. Rent received by way of leasing land for grazing of cattle required for agricultural operations is an agricultural
income
f. Profit earned by selling agricultural produce from a land situated at Bangladesh is not an agricultural income as the
land is not situated in India [Sec. 2(1A) (a)].
g. Interest received from a defaulting tenant to whom an agricultural land in India is leased out for agricultural
operations is not an agricultural income as such income has no relation with the land
h. Interest received from the mortgage of agricultural land is not agricultural income as such income is derived for the
grant of loan having no connection with the land
i. Profit earned from the sale of wild grass of spontaneous growth is not an agricultural income as no human labour or
skill is involved on the land
j. Compensation received from the Government for the requisition of land which has been used for agricultural
purposes is treated as agricultural income
k. Income by way of selling rice produced from the paddy purchased by the assessee is not an agricultural income as
no basic agricultural operation is involved on land for the production of rice
l. Profit earned from the sale of agricultural land is not an agricultural income in view of the Explanation to section
2(1A)/ However, if such agricultural land is situated in any area within the jurisdiction of a municipality or a
cantonment board having a population of not less than ten thousand or in any area within such distance, not being
more than eight kilometers from the local limits of such municipality or cantonment board, the land would be
treated as capital asset as per section 2(14) and profits and gains arising on sale of such land would be chargeable to
tax under section 45.
m. 60% of the income earned from the sale of tea grown and manufactured by the assessee is treated as agricultural
income and the balance 40% is treated as business income as per Rule 8 of the Income-tax Rules, 1962.

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16. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****
State the tax treatment of the following income –
a. A is employed in an agricultural farm and entrusted with tilling of land, his remuneration being 50% of
the net profits earned by the farm.
b. C receives a dividend of ₹ 12,000 from a company whose entire income is derived from agricultural
operations only.
c. D of Kolkata earns an income of ₹ 12,000 from agricultural land owned by him and situated in
Bangladesh. Such income is received in Bangladesh.
d. F receives ₹ 600 on account of interest on loan on the mortgage of land which is used for agricultural
purposes.
e. G earns an income of ₹ 1200 from lease of land for grazing of cattle required for agricultural operations.
f. H receives ₹ 400 on account of interest on arrears of rent in respect of land used by tenant for
agricultural operations.
g. Income from the sale of replanted trees where the denuded parts of the forest are replanted and
subsequent operation in forestry are carried out.
h. Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry
operations alone are performed.
Solution:
a. Since Mr. A is an employee of the concern, therefore his income shall be taxable under the head
‘Salaries’ and shall not be treated as agricultural income. However, if Mr. A is a partner of the concern
then such income shall be treated as agricultural income.
b. Dividend received from a company (engaged in agricultural business) cannot be treated as agricultural
income. However, dividend from a domestic company shall be exempted u/s 10(34). If such dividend is
received from a company other than domestic company the same should be taxable under the head
“Income from other sources”.
c. Any income from a land situated outside India is not an agro-income and taxable under the head
“Income from other sources”. It is to be noted that such income shall be taxable only if the assessee is an
ordinary resident in India.
d. Interest on loan on the mortgage of land used for agricultural purpose is not an agro-income.
e. Any rent derived from land used for grazing of cattle, used for agricultural operation, is an agro-income.
f. Interest on arrears of rent receivable in respect of agricultural land is non-agricultural income.
g. Assume replantation of trees has been done with application of basic operation on land. Hence such
income is agro-income.
h. Income from sale of trees, grass grown spontaneously and without any human effort is non-agricultural
income.

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17. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****
Are the following items agricultural incomes? Give reason.
a) A is employed in an agricultural farm and entrusted with tilling of land, his remuneration being 50%
of the net profits earned by the farm.
b) B owns a tea garden in Darjeeling and earns ₹ 50,000 by selling tea manufactured from the green
leaves produced in the garden.
c) C receives a dividend of ₹ 12,000 from a company whose entire income is derived from agricultural
operations only.
d) D of Kolkata earns an income of ₹ 12,000 from agricultural land owned by him and situated in
Bangladesh.
e) E, a partner of a tea plantation farm, receives a salary of ₹ 500 p.a. from the farm besides his shares of
profits in the farm determining after deducting such salary.
f) F receives ₹ 600 on account of interest on loan on the mortgage of land belonging to the borrower and
used for agricultural purposes.
g) G earns an income of ₹ 1,200 from lease for grazing of cattle requires for agricultural operations.
Solution
a) If he is employed as a partner in the firm, it is agro-income, otherwise, taxable as salary.
b) 60% of profit is agro-income and rest is business income.
c) Dividend is not an agro-income.
d) Any income from a land situated outside India is not an agro-income and taxable as income from other
sources.
e) Any remuneration to a partner of tea plantation farm is agro-income.
f) Interest on loan on mortgage of land used for agricultural purpose is not an agro-income.
g) Any rent derived from land used for grazing of cattle, used for agricultural operation, is an agro-
income.

18. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****

Discuss, with reasons, whether the following incomes are treated as agricultural income for the purpose of
income tax:
i. Income by way of selling rice produced from the paddy purchased by assessee
ii. Profit earned from the sale of agricultural land
iii. Profit earned from the sale of wild grass of spontaneous growth
iv. Income earned from the sale of tea grown and manufactured by the assessee
v. Profit earned by selling agricultural produce from a land situated at Bangladesh.
Solution
i. Income by way of selling rice produced from the paddy purchased by assessee shall not be treated as
agricultural income as any income derived by processing the agricultural produce so as to render it fit
for sale in market is treated as agricultural income u/s 2(1A) only in hands of cultivator or receiver of
rent in kind.
ii. Profit earn on sale of agricultural land shall not be considered as agricultural income as the same
income is not derived from such land.
iii. Income from sale of trees, grass grown spontaneously and without any human effort is non-
agricultural income as basic operation is not performed on land.
iv. As per rule 8, 60 % of income earned from sale of tea grown and manufactured by the assessee shall
be treated as agricultural income.
v. As land is situated outside India, income from selling agricultural produce shall not be treated as
agricultural income.
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19. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****
State with the reasons whether following are agro-income –
a) Income from the sale of the replanted trees where the denuded parts of the forest are replanted and
subsequent operation in forestry are carried out.
b) Income from sale of tree of forest which are of spontaneous growth and in relation of which forestry
operations alone are performed.
c) Income derived from lease of hand for grazing of cattle required for agricultural operations.
Solution
a) Assume replantation of trees involved basic operation on land, hence it is agro-income.
b) Since trees have grown spontaneously, hence, there is no basic operation on land. So, it is not an agro-
income.
c) Any rent derived from land used for grazing of cattle, used for agricultural operation, is an agro-
income

20. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****

State with reason in brief, whether the following incomes are agricultural income or not:
a) Income earned from the sale of tea grown and manufactured by the assessee.
b) Income from growing flowers and creepers.
c) Profit earned from selling agricultural products from a land situated at Bangladesh.
d) Interest on capital received by a partner from the firm engages in agricultural operation.
e) Profit earned from the sale of agricultural land.
Solution
a) 60% of income earned from the sale of tea grown and manufactured by the assessee is treated as
agricultural income.
b) Income from growing flowers and creepers is treated as agricultural income.
c) As land is not located in India, profit earned from selling agricultural products from a land situated at
Bangladesh is not treated as agricultural income.
d) Interest on capital received by a partner from the firm engaged in agricultural operation I treated as
agricultural income.
e) Profit earned from the sale of agricultural land is not treated as agricultural income.

21. Agricultural Income: Identify Agricultural & Non-Agricultural Income*****

Can the following items be treated as agricultural income?
a) Remuneration receivable by a partner from a firm engaged in agricultural operations.
b) Dividend received from a company engaged in agricultural operating only.
c) Interest on arrears of rent payable in respect of agricultural land.
d) Compensation received from insurance company for damages caused by hail storm to the green leaves
of assessee's tea garden.
e) Agricultural income from land situated in Bangladesh.
[Hints: a) Yes b)No c)No d)Yes e )No]

22. Agricultural Income: Identify Agricultural Income [B.com 2012 Honours]***

State with reasons in brief, whether the following incomes are agricultural income or not.
(a) Income earned from the sale of tea grown and manufactured by the assessee.
(b) Income from growing flowers and creepers.
(c) Profit earned from selling agricultural products from a land situated at Bangladesh.
(d) Interest on capital received by a partner from the firm engaged in agricultural operation.
(e) Profit earned from the sale of agricultural land.
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Chapter 7:
INCOME FROM SALARY:
1. Basis of charge (u/s 15)
(1) There should be employer employee relationship.
(2) If an employee is paid tax-free salary than gross salary is chargeable u/s 15 and deduction for tax is
allowable u/s 16(iii)
(3) Salary is taxable on “Due” or “Receipt” basis whichever is earlier

2. SALARY U/S 17 (1)

U/s 17(1) salary includes:
i. Wages or Salaries
ii. Any annuity or pension
iii. Any gratuity
iv. Any, fees, commissions, perquisites or profit in lieu of salary
v. Any advance of salary
vi. The payment received on account of unavailed leave
vii. Interest earned in excess of 9.5% on Recognized Provident Fund(RPF)
viii. Amount transferred in excess of 12% of Salary to RPF
The aggregate of above incomes, after the exemptions available, if any, is known as “gross salary”. From the
gross salary, the following three deductions are allowable u/s 16:
i. Standard deduction u/s 16 (ia)
ii. Deduction for entertainment allowance u/s 16 (ii)
iii. Deduction on account of any sum paid toward tax on employment u/s 16 (iii)

3. Perquisite U/S 17 (2)****

In common parlance, perquisite means, any casual emoluments or benefits attached to an office or position,
in addition to salary or wages, which is availed by an employee. In other words, perquisites are the benefits
in addition to normal salary. As per sec. 17(2) of the Income Tax Act, Perquisite includes –
i. The value of rent free accommodation {u/s 17 (2) (i)}
ii. Any concession in matter of rent in respect of accommodation {u/s 17 (2) (ii)}
iii. The value of any benefit or amenity granted or provided free of cost or at concessional rate {u/s 17 (2)
(iii)}
iv. Obligations of the employee paid by the employer {u/s 17 (2) (iv)}
v. any sum payable by the employer, whether directly or through a fund, other than a recognised
provident-fund or an approved superannuation fund or a Deposit-linked Insurance Fund, to effect an
assurance on the life of the assessee or to effect a contract for an annuity [Sec. 17(2)(v)].
vi. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly,
by the employer or former employer, free of cost or at concessional rate to the assessee [Sec. 17(2)(vi)]
vii. the amount of any contribution to Recognised Provident Fund (RPF), an approved superannuation fund
by the employer in respect of the assessee, to the extent it exceeds ₹ 7,50,000 [Sec. 17(2)(vii)].
viii. the value of any other fringe benefit or amenity as may be prescribed [Sec. 17(2)(viii)].
Note:
Perquisites u/s 17 (2) (iii) will be taxable in hands of specified employees only.

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4. Specified employee U/S 17 (2) (iii)*****
U/s 17 (2) (iii) an employee shall be an specified employee if
i. He is a director of a company
ii. He has a substantial interest in the company i.e. he holds 20% or More of the voting power
iii. His income under the head of salary exclusive of all non-monetary benefits or amenities exceeds ₹
50000.
For computing the sum of ₹ 50,000, following are to be excluded/deducted:
(a) All non-monetary benefits;
(b) Non-taxable monetary benefits;
(c) Deduction u/s 16(ia), 16(ii) and 16(iii) and
(d) Employer’s contribution to Provident Fund.

5. Profit in lieu of salary U/S 17 (3)*****

As per section 17(3) of the Income Tax Act, 1961, “Profits in lieu of salary” includes—
(a) Any amount due or received as compensation in connection with Termination of is employment, or
Modification of the terms and conditions of the employment
(b) Payment received from the unrecognized provident fund, i.e., employer and employee contribution
and interest accrued thereon, will be taxable.
(c) Any amount received under the keyman insurance policy taken by the employer for the life of the
employee. It includes any sum provided by way of bonus on such policy.
(d) Any amount due or received by the employee, whether lump sum or otherwise,
• Before joining the employment, or
• After cessation of the employment.
(e) Any other amount received by the employee from the employer shall be treated as profit in lieu of
salary unless that amount is specifically exempt under the Income-tax act.

7. Basic Salary
Basic Salary: It is the sum paid by employer to employee as salary.
Treatment: Fully taxable in all cases.
Illustration:
A joins the service in the grade of 10,000-1000-15,000-2,000-25,000 on 01.08.2017 at a salary of ₹ 13,000.
Compute taxable salary for AY 2022-23.
Solution:
Computation of Taxable Salary for Previous Year 2021-22 (1-4-2021 to 31-3-2022):
Salary from 1.8.2017 to 31.7.2018 : 13,000 p.m.
Salary from 1.8.2018 to 31.7.2019 : 14,000 p.m.
Salary from 1.8.2019 to 31.7.2020 : 15,000 p.m.
Salary from 1.8.2020 to 31.7.2021 : 17,000 p.m.
Salary from 1.8.2021 to 31.7.2022 : 19,000 p.m.
Salary for Previous year 2021-22 will be divided into two parts:
Salary from 1.4.2021 to 31.7.2021 = 17,000 * 4 = 68,000
Salary from 1.8.2021 to 31.3.2022 = 19,000 * 8 = 1,52,000
Total Salary for P.Y. 2021-22 = ₹ 2,20,000

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6. COMPUTATION OF INCOME UNDER THE HEAD SALARY
Basic salary ***
Bonus ***
Commission ***
Advance salary (taxable in the year of receipt) ***
Gratuity ***
Less: Exemption u/s 10 (10) *** ***
Uncommuted pension ***
Commuted pension ***
Less: Exemption u/s 10 (10 A) *** ***
Leave salary ***
Less exemption u/s 10(10AA) *** ***
Allowances
Dearness Allowance ***
City compensatory Allowance ***
Medical Allowance ***
Lunch Allowance ***
Entertainment Allowance (taxable in full, deduction u/s 16 to be provided later on) ***
House rent allowance ***
Less: exemption u/s 10(13 A) *** ***
Special Allowance ***
Less Exemption u/s 10 (14) *** ***

Employer’s contribution to RPF (in excess of 12% of salary) ***

Interest credited to RPF (in excess of 9.5%) ***

Perquisite U/s 17(2)

Rent free accommodation or accommodation provided at concessional rate 17 (2) (i) & (ii) ***
Perquisite taxable in hands of specified employees U/s 17 (2) (iii) ***
Obligation of the employee paid by the employer U/s 17 (2) (iv) ***
Any other prescribed fringe benefit or amenities U/s 17 (2) (viii) ***
Profit on lieu of salary u/s 17 (3)
Retrenchment compensation ***
Less: exemption u/s 10 (10B) *** ***
Compensation received on voluntary retirement ***
Less: Exemption U/s 10 (10C) *** ***
Any other item ***
Gross salary ***
Less: Deduction u/s 16
Standard deduction u/s 16 (ia) ***
Deduction for entertainment allowance u/s 16 (ii) ***
Deduction for payment of professional tax u/s 16 (iii) *** ***
Income from salary ***

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8. Exemption of HRA u/s 10 (13A) and rule 2A

House situated in Delhi, Mumbai, Chennai & Kolkata Any other place
Least of the following Least of the following
i. Allowance actually received i. Allowance actually received
ii. Rent paid in excess of 10% of salary ii. Rent paid in excess of 10% of salary
iii. 50% of salary iii. 40% of salary
Notes:
(a) Here salary means, Basic + D.A. (if it forms a part of retirement benefit) + Commission as a fixed %
on turnover.
(b) Salary is to be taken on due basis.
(c) Exemption is not available if employee lives in his own house.

9. Special Allowance [Exemption u/s 10 (14) ]

Allowances, which are exempt to the extent of actual amount received or amount, spent which ever is
less u/s 10(14):
ii. Travelling Allowance: - Allowances granted to meet the cost of travel on tour or on transfer
iii. Daily Allowance: - Granted on tour or for the period of transfer to meet the daily charges
iv. Conveyance Allowance: - Granted to meet the expenses on conveyance on performance of duty
v. Uniform Allowance: - Expenses incurred on purchase or maintenance of uniform
vi. Helper Allowance: - Granted to meet the expenses on helper
Allowance which are exempt to the extent of amount received or specified limit, which ever is less:
Children Education Allowance
Treatment: Minimum of the following is exempted from tax -
(a) ₹ 100 per month per child (to the maximum of two children)
(b) Actual amount received for each child (to the maximum of two children)

Children Hostel Allowance

Treatment: Minimum of the following is exempted from tax -
(a) ₹ 300 per month per child (to the maximum of two children)
(b) Actual amount received for each child (to the maximum of two children)

Notes for Children Education Allowance and Hostel Allowance:

(a) Child may be major or minor child.
(b) Deduction is available irrespective of actual expenditure incurred on education of child.

10. Treatment of Entertainment Allowance

In case of Entertainment allowance an assessee will not get any exemption but would be eligible for
deduction under section 16(ii) from gross salary. The deduction is allowed to government employees only;
Non- Government employees will not be eligible for this deduction. The entire amount of entertainment
allowance will be added to gross salary.
The minimum of the following shall be available as deduction in case of Government employees:
(a) Actual amount of entertainment allowance received during the year
(b) 20% of his salary exclusive of any allowance, benefit or other perquisites.
(c) ₹ 5,000.
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11. Fully Taxable Allowances
(a) Dearness Allowance (DA) or Dearness Pay (DP): This is a very common allowance these days on
account of high prices. It is included in the income from salary and is taxable in full.
(b) Fixed Medical Allowance: It is fully taxable.
(c) Deputation Allowance: When an employee is sent from his permanent place of service to some other
place or institution or organisation on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(d) Overtime Allowance: When an employee works for extra hours over and above his normal hours of
duty he is given overtime allowance as extra wages. It is fully taxable.
(e) Tiffin Allowance: It is given for lunch and refreshments to the employees. It is taxable.
(f) Servant Allowance: It is fully taxable even if it is given to a low paid employee, not being an officer,
(g) Transport Allowance: It is given to meet the expenditure for the purpose of travelling between the
place of residence and the place of duty. It is fully taxable.
(h) Other Allowances: like Family allowance, Project allowance, Marriage allowance, City Compensatory
allowance, Dinner allowance, Telephone allowance etc. These are fully taxable.
Note:
Sometimes, it is given that DA/DP is not forming a part of retirement benefit (Leave encashment,
Pension, Provident Fund, etc.). In such case, DA/DP itself shall be fully taxable. However, for
calculating taxable Leave encashment, Pension, HRA, etc., DA/DP will be included in ‘salary’ only if it
forms a part of retirement benefit.

12. Allowances at a glance

General Allowance (Fully Taxable) House Rent Allowance, City Compensatory Allowance,
Tiffin Allowance, Medical Allowance, Servant Allowance,
Entertainment Allowance
Allowance u/s 10(14)(i), deductions from which Travel or Transfer allowance, Daily Allowance,
depends upon actual expenditure Conveyance Allowance, Uniform Allowance
Allowance u/s 10(14)(ii), deductions from which do Children Education Allowance, Children Hostel Allowance,
not depend upon actual expenditure

13. Commission
Commission: It may be as a percentage of turnovers or as a percentage of profit.
Treatment:
a. Fully taxable.
b. It is taxable in the year of receipt.

14. Bonus
Bonus: Bonus may be contracted or voluntary.
Treatment:
a. Fully taxable.
b. It is taxable in the year of receipt.

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15. Gratuity {Exempt U/s 10 (10)}
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services.
Section 10 (10) deals with the exemptions from gratuity income.
Case A: Gratuity received during continuation of service
Gratuity received during continuation of service is fully taxable in the hands of all employee (whether
Government or non-Government employee).

Case B: Gratuity received at the time of termination of service by Government employee

Gratuity received at the time of termination of service by Government employee is fully exempt from tax u/s
10(10) (i).
Case C: Gratuity received by non–government employee, covered by the Payment of Gratuity Act.
In such case, minimum of the following shall be exempted from tax u/s 10(10)(ii):
(a) Actual Gratuity received;
(b) ₹ 20,00,000; or
(c) 15 working days salary for every completed year of service
[Arithmetically, 15/26 x Completed year of service x Salary p.m.]
Notes:
(a) Completed year of service includes any fraction in excess of 6 months. (e.g. 7 years 9 months will be
treated as 8 years; 7 years 5 months will be treated as 7 years and 7 years 6 months will be treated as 7
years).
(b) Salary here means Basic + DA, last drawn

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

16. Pension {Exempt under section 10 (10A)}

Pension means a periodical payment received by an employee after his retirement. On certain occasions,
employer allows to withdraw a lump sum amount as the present value of periodical pension. When pension
is received periodically by employee, it is known as Uncommuted pension. On the other hand, pension
received in lump sum is known as Commuted pension.

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Case A: Uncommuted pension
Uncommuted pension is fully taxable in the hands of all employees whether Government or Non –
Government employee.

Case B: Commuted pension received by a Government employee

Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).

Case C: Commuted pension received by an employee who also received gratuity [Sec. 10(10A)(ii)]
One third of total pension (which assessee is normally entitled for) commuted is exempt.

Case D: Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]
One half of total pension (which assessee is normally entitled for) commuted is exempt.

17. Leave encashment { Exempt under section 10 (10AA)}

As per service contract and discipline, normally, every employee is allowed certain period of leave (with
pay) every year. Such leave may be availed during the year or accumulated by the employee. The
accumulated leave lying to the credit of an employee may be availed subsequently or encashed. When an
employee receives an amount for waiving leave lying to his credit, such amount is known as leave salary
encashment.
Case A: Leave salary received during continuation of service
Leave salary during continuation of service is fully taxable in the case of the Government employee as well
as other employees.

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

At the time of termination of service, leave salary received by the Central or State Government employee is
fully exempted u/s 10 (10AA) (i).

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

It is exempted to the minimum of the following u/s 10(10AA)(ii):
a) Actual amount received as leave salary
b) ₹ 3,00,000/-
c) 10 x Average salary p.m.
d) Unavailed leave x Average salary p.m.
[To the maximum of 30 days (normally taken as 1 month) average salary for every completed year of
service subject to deduction for actual leave availed during the tenure of service]
Notes:
(a) Average salary means Basic + DA (forming part of salary for retirement benefit) + Commission (as a
fixed percentage on turnover) being last 10 months average salary ending on the date of retirement or
superannuation. (e.g. if an employee retires on 18/11/2021 then 10 months average salary shall be a
period starting from 19th Jan’ 2021 and ending on 18th Nov’ 2021).
(b) If DA is not forming a part of retirement benefit then the same shall not be included in salary for the
above purpose. However, DA itself shall be fully taxable.
(c) While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9 months
shall be taken as 10 years.
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18. Retrenchment compensation [Sec. 10 (10B) ]
Exemption shall be minimum of the following u/s 10 (10B) -
a) Actual amount received
b) ₹ 5,00,000
c) An amount calculated in accordance with Industrial Dispute Act, 1947

19. Compensation received at the time of voluntary retirement [Sec. 10 (10C) ]

Exemption shall be minimum of the following u/s 10 (10C) -
a) Actual amount received
b) ₹ 5,00,000.

Perquisites, which are taxable in hands of all employees

20. Valuation of rent free accommodation under rule 3 (1): U/s 17 (2) (i)
Valuation of rent free unfurnished accommodation
(a) When provided by the government to its employee: - License fees as determined
(b) Other Employees:
The value of perquisite is determined as per the following table:

City in which accommodation is Accommodation is owned by the Accommodation is hired by

provided employer the employer
Having population exceeding 25lacs 15% of salary for the period during which
as per 2001 census the employee occupied the said
accommodation.
Having population exceeding 10 lacs 10% of salary for the period during which Rent paid or payable by the
employer or 15% of salary,
but not exceeding 25 lacs as per 2001 the employee occupied the said
census accommodation. whichever is lower.

Any other city 7.5% of salary for the period during which
the employee occupied the said
accommodation.

Notes:
Here salary = Basic + DA (forming part of retirement benefit) + bonus + commission + all other taxable
allowance (only taxable amount) + any other monetary payment changeable to tax (excluding perquisites,
Retirement benefits, Gratuity, Contribution to Provident Fund etc)
Valuation of Rent-free furnished accommodation
Value of Furnished accommodation = Value of accommodation + Value of furniture
Valuation of Furniture: As per the following table
Case Taxable value
Furniture owned by the employer 10% of original cost of furniture
Furniture hired by the employer Actual hire charges paid/payable by the employer
Notes:
(a) Furniture includes Television sets, radio, refrigerator, other household appliance, air-conditioning plant
or equipment.
(b) The above rule is applicable to Government as well as Non-Government Employees.

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21. Valuation of accommodation provided at concessional rent {u/s 17 (2) (ii)}
Valuation will be made as if the rent-free accommodation is provided and the amount so computed will be
reduced by the rent payable by the employee.
Value of Rent free accommodation as usual *****
Less: Rent payable by employee to employer for the above facility ****
Taxable value of perquisite ****
Notes:
Here salary = Basic + DA (forming part of retirement benefit) + bonus + commission + all other taxable
allowance (only taxable amount) + any other monetary payment changeable to tax (excluding perquisites,
Retirement benefits, Gratuity, Contribution to Provident Fund etc)

22. Valuation of monetary obligation of the employee discharged by the

employer{u/s 17 (2) (iv)}
It is considered as a perquisite and taxable in case of all employees. Few examples are as below:
 Gas, electricity bill paid or reimbursed
 Children education expenses paid or reimbursed
 Income-tax or professional-Tax paid by the employer
 LIP paid by the employer on the life of the employee
 Salary of Domestic Servant , cook etc paid by the employer
Notes:
(a) If rent-free accommodation (owned by the employer) is provided with gardener then gardener’s
salary and maintenance cost of garden shall not be taxable
(b) Any amount charged from the employee for such facility shall be reduced from above value.

23. Valuation of perquisites in respect of interest free loan or concessional rate of

interest
Interest free or loan given to employee at concessional rate: -
 In case of loan for house/conveyance: - Specified limit as per SBI
 In respect of other loan: Specified limit as per SBI
(a) Concessional interest: Any interest paid by the employee to the employer for such loan shall be
reduced from the above computed value.
(b) Amount on which interest shall be calculated: If loan amount is more than ₹ 20,000, interest shall
be levied on total loan amount, rather than the excess amount.

24. Perquisites which are taxable in hands of specified employee

[u/s 17 (2) (iii)]
Valuation of motor car: See Later

Valuation of perquisite in respect of free domestic servant

The total amount of salary paid or payable by the employer for the services as reduced by the any amount
paid by the employee for such services will be the value of perquisite and hence taxable.

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Valuation of perquisite in respect of supply of gas electric energy or water
 Actual amount paid by the employer to the agency supplying gas electric energy or water
 If resources owned by the employer then mfg. Cost will be the value of perquisite

Valuation of perquisite in respect of free or concessional education facility

 If educational institution is owned by the employer: - There will be no perquisite value if the cost of
education does not exceed ₹ 1000 p.m. per child.
 In any other case actual amount of expenses in incurred by the employer

Valuation of perquisite in respect of medical facility

 Medical facility in a hospital maintained by the employer/Govt.: - not taxable
 Medical facility in private clinic is fully taxable.

25. Taxable value of Motor Car Facility

Table – 1: Value of perquisite when motor car is owned by the employer
Cases Running and maintenance Running and maintenance
expenses are met or reimbursed expenses relating to personal use
by the employer are met by the employee
(a) The car is used partly for
official purposes and partly
for private purposes of the
employee or any member
of his household –
i. Where cubic capacity ₹ 1,800 per month for the use of ₹ 600 per month for the use of
of the engine does not car + ₹ 900 per month for car + ₹ 900 per month for
exceed 1.6 litres. chauffeur, if provided by the chauffeur, if provided by the
employer (amount, if recovered employer (amount, if recovered
from the employee is not from the employee is not
deductible). deductible).
ii. Where cubic capacity ₹ 2,400 per month for the use of ₹ 900 per month for the use of
of the engine exceeds car + ₹ 900 per month for car + ₹ 900 per month for
1.6 litres. chauffeur, if provided by the chauffeur, if provided by the
employer (amount if recovered employer (amount, if recovered
from the employee is not from the employee is not
deductible). deductible).

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Table – 2: Value of perquisite when motor car is owned by the employee
Cases Running and maintenance Running and maintenance
expenses are met or reimbursed expenses relating to personal
by the employer use are met by the employee
(a) The car is used partly for Actual expenditure incurred by the Not a perquisite [Deduction for
private purposes and partly employer as reduced by the expenses relating to official
for official purpose s. following amount: purposes may be claimed by the
₹ 1,800 or ₹ 2,400 per employee under section 10(14) if
month of car + ₹ 900 per he bears such expenses].
month for chauffeur
depending on the cubic
capacity of the engine
[discussed in the second
column of Table 1 in
point (c)];

26. Treatment of Gift given by Employer

(a) Where worth of gift is in excess of ₹ 5,000 then amount in excess of ₹ 5,000 shall be taxable.
(b) No such exemption (₹ 5,000) is available on gift made in cash or convertible into money.

27. Tax free perquisite for all employees

Following perquisites are exempted in hands of all employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place.
3. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of
employee by the employer whether by way of direct payment or reimbursement.
4. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided
ownership is not transferred to the employee).
5. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.
6. Conveyance facility: Conveyance facility provided to employees for journey between office and
residence and vice versa.
7. Training: Amount spent on training of employees including boarding & lodging
8. Loans: Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed ₹ 20,000.
9. Medical facility: Medical facility provided to the employee or his family in a hospital, clinic, dispensary
or nursing home maintained by the employer/Government.
10. Free education facility: Free education facility to the children of employee in an institution owned or
maintained by the employer provided cost of such facility does not exceed ₹ 1,000 p.m. per child.
11. Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions.
12. Health club, Sports Club facility.

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28. Taxability of perquisites at a glance
Rule / Section Perquisite Whether it is taxable in the hands of
s
Specified Non-specified
employee employee
Rule 3(1) Rent-free residential accommodation
- Unfurnished
- Furnished Yes

Rule 3(3) Free domestic servant

- Appointed by employer Yes No
- Appointed by employee Yes Yes
Rule 3(4) Gas, electricity or water facility
- If facility is in the name of employer Yes No
- If facility is in the name of employee Yes Yes
Rule 3(5) Free education
- In case of reimbursement Yes Yes
- In any other case Yes No
Sec.10(10CC) Income tax paid by employer on - Yes Yes

Proviso to Medical facility

Sec. 17(2) - In case of reimbursement Yes Yes
- In any other case Yes No
Sec. 17(2)(iv) Any obligation of employee paid by employer (unless Yes Yes
otherwise specifically exempted)

29. Treatment of provident fund for income tax purposes

Provident fund is of four types, viz:
(a) Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the
Provident Funds Act, 1925. Government and Semi-Government organisations, local authorities,
railways, Universities and recognised educational institutions maintain Statutory Provident Fund.

(b) Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s
Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act).

(c) Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer,
which is not recognised by the Commissioner of Income tax, then such fund is known as
Unrecognised provident fund.

(d) Public Provident Fund (PPF): Any member of the public, whether salaried or self-employed, can
contribute to the fund by opening a provident fund account at any branch of the State Bank of India
or its subsidiaries or other specified bank. Interest is credited every year but payable only at the time
of maturity. Interest earned on this fund is exempt from tax u/s 10(11).

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Tax Treatment
Particulars SPF RPF URPF PPF

Exempted up to 12% of Salary

Not taxable in the
Employer’s (here, salary means Basic + DA year of deposit, Not
Not taxable
Contribution forming part of salary for retirement but taxable in the Applicable
benefit + year of withdrawl
Commission as a fixed percentage on
Turnover)
Eligible for Not eligible for Eligible for
Employee’s
deduction u/s Eligible for deduction u/s 80C deduction u/s deduction
Contribution
80C 80C u/s 80C

Exempted @ 9.5% p.a. (Interest rate),any Not taxable in the

Interest Not Taxable excess interest will be taxable as salary. year of deposit, Not taxable
but taxable in the
year of withdrawl
Notes:
Lump sum amount withdrawn from URPF
Particulars Tax treatment

Accumulated employer’s contribution Fully taxable under the head Salaries

Accumulated employee’s contribution Not taxable
Accumulated interest on employer’s contribution Fully taxable under the head Salaries
Accumulated interest on employee’s contribution Fully taxable as income from other sources

30. Deduction from salary (section 16)

Standard Deduction {u/s 16 (ia)}
Lower of the following shall be allowed as standard deduction to all employee:
(a) ₹ 50,000
(b) Gross Salary

Entertainment allowance {u/s 16 (ii)}:

Entertainment allowance is initially included in taxable allowances as fully taxable. Thereafter, a deduction is allowed
under this section from gross taxable salary. However, deduction u/s 16(ii) shall be available to the Government
employee only.
Deduction for Entertainment allowance being minimum of the following:
(a) Actual Entertainment Allowance
(b) ₹ 5,000/-
(c) 20% of Basic Salary
Notes:
(a) Deduction allowed shall be irrespective of actual expenditure incurred, whether for office or personal purpose.
(b) No deduction is available under this section to a Non-government employee.

Professional tax {u/s 16(iii)}

 Deduction is available only in the year in which the professional tax is paid.
 If the professional tax is paid by the employer on behalf of the employees then it is first included in
the salary as perquisite u/s 17 (2) (iv) and then the same is allowed as deduction u/s 16 (iii).

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31. Meaning of Salary for different purposes
For Retirement benefit

Gratuity (covered by the Payment of Gratuity (Basic + DA) last drawn

Act)

Gratuity (not covered by the Payment of (Basic +DA forming part of salary for
Gratuity Act) retirement benefit + Commission on turnover)
being average of last 10 months preceding
the month of retirement.

Leave encashment (Basic +DA forming part of salary for

retirement benefit + Commission on turnover)
being average of last 10 months immediately
from the retirement.
For regular benefit

Rent Free Accommodation (Basic + DA forming part of salary for

retirement benefit + Commission on turnover
+ Bonus + Fees + Any other taxable
allowance + Any other monetary benefits
excluding perquisite)

Specified employee (Basic + DA + Commission on turnover +

Bonus + Fees + Any other taxable allowance
+ Any other monetary benefits – Deduction
u/s 16)
Entertainment Allowance Basic only

House Rent Allowance Basic + DA forming part of salary for

retirement benefit + Commission on turnover
Recognised Provident Fund Basic + DA forming part of salary for
retirement benefit + Commission on turnover
Any other case Basic + DA forming part of salary for
retirement benefit + Commission on turnover

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Practical Questions: Short Question
1. Income from Salary [House Rent Allowance [Compiled by RKB]****
R, an employee of a private concern in Delhi, furnishes the following particulars of his salary income for the
previous year 2021-22:
Basic pay ₹ 3,500 per month; Dearness allowance (forms part of salary) ₹ 1,500 per month; House rent
allowance ₹ 700 per month; Bonus ₹ 2,000; Commission @ 2% of turnover of the company of ₹ 3, 00,000.
He stays in a rented accommodation in Delhi paying a rent of ₹ 1,500 per month. Calculate the house rent
allowance exempt from tax.
Solution:
Calculation of house rent allowance exempt from tax
₹
Exemption as provided in section 10 (13A) and rule 2A – least of the following sums:
(a) Actual house rent allowance received by R 8,400
(b) Excess of rent paid over 10% of salary [₹ 1,500 x 12 – 10% of ₹ 66,000] 11,400
(c) 50% of salary [i.e., 50% of ₹ 66,000] 33,000
Therefore, ₹ 8,400, being the least, is exempt from tax
Note: Salary for the purpose of the above comes to ₹ 66,000 (i.e. Basic salary ₹ 42,000 + D.A. ₹ 18,000 +
Commission ₹ 6,000). Commission is included on the assumption that the turnover is achieved by R and
such commission is given as per terms of employment.

2. Income from Salary [House Rent Allowance] [B.com 2005 Pass]

Compute the exemption available u/s 10 (13A) in the following cases for the Assessment year 2022-23:
Name of employee A B
Place of residence Patna Bangalore
Salary p.m. (₹ ) 3,000 5,000
House Rent allowance p.m. (₹ ) 1,000 1,500
Rent Paid p.m. (₹ ) 800 400
[Exemption available u/s 10 (13A): Patna ₹ 6,000 & Bangalore ₹ Nil]

3. Income from Salary [House Rent Allowance] [Compiled by RKB]

A, is entitled to a basic salary of ₹ 5,000 p.m. and dearness allowance of ₹ 1,000 p.m., 40% of which forms
part of retirement benefits. He is also entitled to HRA of ₹ 2,000 p.m. He actually pays ₹ 2,000 p.m. as rent
for a house in Delhi. Compute the taxable HRA.
[Taxable HRA: ₹ 6,480]

4. Income from Salary [House Rent Allowance] [B.com 2012 Pass]

Mustaq is an employee of a private concern in Kolkata. He furnishes the following particulars of his salary
income of the previous year 2021-22:
Basic Pay ₹ 7,000 per month; Dearness allowance (50% forming part of salary) ₹ 3,000 per month; House
Rent Allowance ₹ 3,400 per month; Bonus ₹ 3,000; Medical Allowance ₹ 1,200 per month.
He stays in a rented house in Kolkata paying a rent of ₹ 3,200 per month. Calculate taxable House Rent
Allowance.
[Ans: Taxable HRA ₹ 12,600; Salary for the purpose of HRA ₹ 1,02,000]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

5. Income from Salary [Gratuity] [Compiled by Ravi Bhalotia]****
B, an employee of a private concern not covered by the Payment of Gratuity Act, 1972, retires on February
22, 2022 after a continuous service of 28 years and 9 months and receives gratuity of ₹ 1,25,000 on March
15, 2022. The other relevant particulars are as follows:
Basic salary at the time of retirement (increment ₹ 7,200 per month
of ₹ 600 per month fell due on 1st April each year)
Dearness allowance (forms part of salary) ₹ 1,700 per month
House Rent Allowance ₹ 1,500 per month
Commission 5% of the turnover of
₹ 6, 00,000.
Calculate the amount of gratuity received by B exempt from tax.
Solution:
Calculation of gratuity received by B exempt from tax
₹
Gratuity exempt from tax under section 10 (10) (iii) – least of the following sums:
i. Gratuity actually received 1, 25,000
ii. One-half month’s salary for each completed year of service [i.e. ½ x Average monthly
salary x Completed years of service – ½ x ₹ 11,900 x 28] 1, 66,600
iii. Maximum Limit 20,00,000
₹ 1, 25,000 being the least, is exempt from tax.
₹ 1, 25,000
Notes:
(a) Calculation of average salary:
Salary for 10 months from April 2021 to January 2022: ₹
Basic salary (₹ 7,200 x 10) 72,000
Dearness allowance (₹ 1,700 x 10) 17,000
Commission (5% of ₹ 6, 00,000) 30,000
1, 19,000
Average salary per month: ₹ 11,900 (₹ 1, 19,000 ÷ 10).
(b) Salary is calculated on the assumption that salary became due on the last date of the month of rendering service.
(c) Entire commission is included in salary on the assumption that turnover as given in the question relates to the
period from April, 2021 to January, 2022 and such turnover is achieved by B. House rent allowance is not
considered as definition of salary for the purpose of section 10 (10) (iii) given by the Act does not include such
allowance.

6. Income from Salary [Gratuity] [B.com 2000 Honours]****

Mahasin retired from non-government service on 31.8.2021. He had joined the service on 1.4.1999. At the
time of retirement he drew ₹ l0,000 as basic pay and dearness allowance @ 30% on basic pay. He received
retirement gratuity ₹ 1,80,000 for the AY 2022-23 assuming that he is covered under Gratuity Act, 1972.
[Answer: Taxable Gratuity: ₹ 15,000]

7. Income from Salary [Gratuity] [B.com 2006 Honours]****

Mr. Singha after serving 22 years and 10 months of service in a Private concern in Kolkata, retires on
December 31, 2021 and receives gratuity of ₹ 35,000. His basic salary and Dearness allowance at the time of
retirement was ₹ 3,500 and ₹ 1,750 (50% of basic salary) per month respectively. His annual increment of
salary of ₹ 100 per month fell due on 1st April each year. Calculate the taxable amount of gratuity for Mr.
Singha assuming employee is not covered under Gratuity Act.
[Answer: Taxable Gratuity: Nil]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

8. Income from Salary [Gratuity] [B.com 2012 Pass]****
Anindya Dey is an employee of a private concern. He is not covered by the Payment of Gratuity Act 1972.
He retired on December 31, 2021 after rending 25 years and 7 months of service and received gratuity of
₹ 4,10,000. His basic salary and dearness allowance (not form part of salary) at the time of retirement was
₹ 18,000 per month and ₹ 9,000 per month respectively. Compute the taxable amount of gratuity received
by him.
[Answer: Taxable Gratuity: 1,85,000]

9. Income from Salary [Pension] [B.com 2001 Honours]

Kanchan retired from H.L.Ltd. on 31.5.2021 and granted a pension of ₹ 3000 p.m. with effect from 1.6.21.
Out of his monthly pension, she commuted ₹ 1800 with effect from 1.8.21 and received ₹ 3,60,000 being the
commuted value. She also received gratuity of ₹ 1,50,000 from H.L.Ltd.
Discuss the taxability of each receipt (except gratuity) for the Assessment year 2022-23.
[Answer: Taxable uncommuted Pension ₹ 15,600; Taxable portion of commuted Pension ₹ 1,60,000;
Total Taxable Pension ₹ 1,75,600]

10. Income from Salary [Pension] [[Compiled by Ravi Bhalotia]

Ramesh, an employee of a private concern, retired on January 31, 2022 and his pension is fixed at ₹ 3,500
per month. He, however, has received ₹ 21,000 as the commuted value of 60% of his monthly pension in
February, 2022. Discuss the taxability of pension in the hands of Ramesh for the assessment year 2022-23
assuming that (i) he has also received gratuity and (ii) he has not received gratuity.
Solution:
The periodical amount of pension of ₹ 1,400 (40% of ₹ 3,500) per month is taxable for two months (i.e. February and
March, 2020) for the assessment year 2022-23.
The taxable amount of the commuted pension received by Ramesh for the assessment year 2022-23 is determined as
follows:
If he receives gratuity If he does not receive
[case (i)] gratuity [case (ii)]
₹ ₹
Commuted pension received 21,000 21,000
Less: Exemption under section 10(10A) (ii):
• Commutes value of one-third of the pension which he
normally entitled to receive
[(₹ 21,000 x 100/60) x 1/3] 11,667
• Commuted value of one-half of the pension which he
normally entitled to receive
[(₹ 21,000 x 100/60) x 1/2] 17,500
Taxable amount 9,333 3,500

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4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

11. Income from Salary [Leave encashment] [B.com 1999 Honours]
E, an employee of XYZ. Ltd. retires on 30-11-2021. At the time of his, retirement, he received ₹ 1,50,000 as
leave salary. The following information is provided as under:
> Salary at the time of retirement (per month) ₹ 9000
> Period of service 20 years & 10 months
> Leave availed while in service 14 month
> Balance unavailed leave at time of retirement 16 month
> Avg. salary for February 2021 to Nov. 2021 ₹ 8,800
> Leave encashment 1 ½ month for every completed year
Compute the amount of taxable leave encashment.
[Taxable leave encashment ₹ 97,200]

12. Income from Salary [Leave Encashment] [B.com 2007,05,03 Hons]****

Mr. Das retired on 19th March 2022 from a private company, after completion of 30 years 10 month of
service. He was entitled to 25 days leave for each completed year of service. He availed 12 months leave
during his service life. His basic pay was ₹ 12,000 p.m from 01-04 -2021 and DA @ 50 % of Basic Pay. He
received ₹ 3,20,000 from leave encashment. Find out the amount of leave salary to be taxed for the
Assessment year 2022-23.
[Taxable leave encashment ₹ 1,40,000]

13. Income from Salary [Leave encashment]

Mr. Sourav, an employee of a mercantile firm, retired on 30th November, 2021 at a monthly salary of ₹
4,000 after completing his 24 years and 8 months of service and received ₹ 56,000 as leave encashment
for 14 months. From the following information, calculate the taxable amount of leave encashment of Mr.
Sourav.:
Leave entitlement 40 days for each completed years of service
Leave availed while in service 18 months
Leave standing to the credit at the time of retirement 14 months
Average monthly salary ₹ 3,900
[Taxable leave encashment ₹ 32,600]

14. Income from Salary [Leave encashment] [B.com 2009]****

From the following information, compute taxable leave of Mr. India for the A.Y 2022-23.
Date of joining 01.01.1997
Date of retirement 31.10.2021
Earned leave entitled as per service rule 33 days for each completed year of service
Leave enjoyed during service period 420 days
Average salary of last 10 months ₹ 18,000
Leave salary received ₹ 2, 23,200
[Taxable leave encashment ₹ 43,200]

15. Income from Salary [Rent-free accommodation] [B.com 2005 Pass]

Mr. X is an employee of a company in Calcutta. His particulars of income are as follows:
Basic salary ₹ 5000 p.m.
Dearness allowance ₹ 2000 p.m. in terms of employment
Bonus ₹ 1000 p.a.
He is provided with a rent free furnished accommodation by the employer, the fair rent of which is ₹ 9,000
p.m. Cost of furniture used in the house is ₹ 12000.
Find out the value of rent-free furnished accommodation.
[Taxable value of rent-free furnished accommodation ₹ 13,950]
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

16. Income from salary: Discuss the taxability
Discuss the taxability of the following items:
(a) X receives ₹ 5,20,000 from unrecognised provident fund maintained by his employer on his
retirement where he and his employer contributed in the ratio of 3 : 2. Interest of ₹ 1,80,000 is
included in the above amount.
(b) Y, an employee of a private concern, after rendering 24 years and 11 months of service retires on June
30, 2021 and draws mothly pension of ₹ 25,000 per month and commuted pension of 8,55,000 for
75% of his monthly pension commuted. In addition, he receives gratuity of ₹ 7,80,000. His average
monthly salary for the preceding 10 months was ₹ 72,800.
Solution:
(a) Payment received from unrecognised provident fund is taxable under the head 'Salaries' as 'profits in
lieu of salary' to the extent of employer's contribution and interest included thereon. Interest on
employee's own contribution is, however, taxable under the head 'Income from other sources'.
Therefore, out of ₹ 5,20,000 received by X from unrecognised provident fund ₹ 2,08,000 (Employer's
contribution ₹ 1,36,000 + Interest on such contribution ₹ 72,000) is taxable as 'profits in lieu of salary'
under the head 'Salaries' and ₹ 1,08,000 (interest on employee's own contribution) is taxable under the
head 'Income from other sources'.

(b) Monthly pension @ ₹ 25,000 per month received by Y is taxable in full tmder the head 'Salaries'.
The taxable amount of commuted pension received by Y is computed as under

Commuted pension received 8,55,000

Less: Exemption under section 10 (10A) (1/3 x 8,55,000 x 100/75) 3,80,000
Taxable amount 4,75,000

The taxable amount of gratuity received by Y is worked-out as under

₹ ₹
Gratuity received 7,80,000
Less: Amount exempt under section 10 (10) (iii)-
least of the following sums :
(a) Gratuity actually received 7,80,000
(b) One-half month's salary for each completed 8,73,600
year of service (1/2 x ₹ 72,800 x 24)

(c) Maximwn amount 20,00,000

7,80,000, being the least sum, is exempt 7,80,000

Taxable amount Nil

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

17. Income from salary: Discuss the taxability
(a) Scholarship of ₹ 8,500 granted to the son of P through a scholarship scheme instituted by the
employer-company where P has no right to claim such scholarship grant.

(b) Free meals (value per meal ₹ 60) provided to X by his employer during office hours who draws salary
of 40,500 per month.

(c) A car (800 cc) along with a driver provided to Y free of charge, an employee of a Govemirent
concern, both for priyate and official works, who draws a consolidated salary of ₹ 36,500 per month.

(d) A rent-free accommodation in Kolkata is provided to R by his employer, the reasonable rent and
municipal value of which is ₹ 2,16,000 and ₹ 1,80,000 respectively. He draws salary of ₹ 62,500 per
month. The accommodation is owned by the employer.

(e) Mr. X is an employee of a private concern. He draws transport allowance of 6,500 per month along
with other items of salaries for the purpose of commuting between place of his residence and the
place of his duty. Compute the taxable amount of transport allowance drawn by him He is not a
handicapped employee.

(f) A bonus of ₹ 1,25,000 is declared by the company on March 22, 2022 but the employee has not eived
the same till the end of the previous year 2021-22.

Solution:
(a) Educational scholarship of 8,500 granted to the son of P through a scholarship scheme instituted by
the employer-company where P has no right to claim such scholarship is not taxable.

(b) Free meal provided by the employer during office hours is taxable as perquisite in the hands of X in
excess of ₹ 50 per meal. Hence cost of meal i.e. 60 – 50 = ₹ 10 per meal is taxable in his hands.

(c) Car of 1,800 cc provided by the employer for private and official works of the employee free of
charge is taxable as perquisite in the hands of Y @ ₹ 1,800 p.m. for car and ₹ 900 p.m. for driver.

(d) 15% of salary of ₹ 7,50,000 i.e. ₹ 1,12,500 is the value of perquisite taxable in the hands of R.
Reasonable rent and municipal value of the accommodation are not relevant information for the
pwpose of valuation of such perquisite.

(e) The entire amount of transport allowance of f 6,500 per month is taxable. Exemption under section
10(14) for such allowance is withdrawn from the assessment year 2019-20.

(f) Bonus is taxable in the year of receipt. Thus, bonus declared by the company in the financial year
2021-22 but not paid during the year·is not taxable in the hands of the employee in the said previous
year.

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4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

18. Income from salary: Discuss the taxability
(a) A wrist-watch worth ₹ 22,500 is given by the employer (X co. Ltd.) to an employee as a gift on
wedding ceremony held on December 24, 2021.

(b) Mr. X has incurred medi al expenditure of ₹ 87,800 for the treatment of his own in a private ursing
home. His employer reimburses the entire amount of such expenditure. Calculate taxable amount in
respect of reimbursement of medical expenditure.

(c) An employee retires on July 25, 2021 and gratuity becomes payable on the date of retirement under
the terms of employment. The gratuity has, however, been paid by the employer on Apnl 5,2022.

Solution:
(a) Gift of wrist-watch (i.e. gift in kind) made by the employer on the wedding ceremony of the
employee is taxable in excess of ₹ 5,000. Therefore, taxable value of perquisite is 17,500 (₹ 22,500 –
₹ 5,000)

(b) Entire amount of medical expenditure of ₹ 87,800 reimbursed by the employer is treated as perquisite
taxable in the hands of Mr. X if he is a 'specified employee'. Exemption up to ₹ 15,000 is withdrawn
from the assessment year 2019-20.

(c) Gratuity is taxable under the head 'Salaries' on due or receipt, whichever matures earlier. Therefore,
gratuity becoming payable on the date of retirement to the employee who retires on July 25, 2021 is
taxable in the assessment year 2022-23 though the same has not been paid during the previous year
2021-22. However, in such a case, the employee is not entitled to deduction under section 10 (10) as
such deduction is allowed when gratuity is actually received by the employee.

19. Income from salary [B.com 2013 PASS]

Mr. Bose is an employee of a private concern. Details of his income for the previous year 2021–22 are given
below:
i. Basic salary ₹ 15,000 p.m.
ii. Dearness allowance @ 50% of basic salary.
iii. House rent allowance ₹ 2,500 p.m.
(Rent paid for his house in Durgapur ₹ 2,000 p.m.)
iv. Children education allowance @ ₹ 300 p.m. for education of his two children.
v. Employer’s contribution to RPF @ 15% of basic salary. Mr. Bose also contributes the same amount.
vi. Interest credited to RPF @ 12% p.a. ₹ 12,000
vii. The club bill of Mr. Bose for ₹ 15,000 paid by the employer.
viii. The life insurance premium for the life of Mr. Bose for ₹ 12,500 paid by the employer.
ix. ₹ 200 p.m. deducted from his salary as Profession Tax.
Compute Income from Salary of Mr. Bose for the assessment year 2022-23.
[Ans: Taxable HRA ₹ 30,000; Taxable Children education allowance ₹ 1,200; Taxable Employer's
Contribution NIL; Taxable Interest on RPF ₹ 2,500; Taxable club facility ₹ 15,000; Gross salary ₹
3,31,200; Income from Salary ₹ 2,78,800; Salary for the purpose of HRA & RPF ₹ 2,70,000]

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4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

20. Income from salary [B.com 2014 PASS]
Mrs. Paramita is the Chief Accountant of a Limited Company. From the following particulars of her income
for the previous year 2021-22, compute her income from salary for the assessment year 2022-23.
i. Basic pay on 01-04-2021, ₹ 18,000 p.m. (Annual increment of ₹ 500 falls due on 1st July each year)
ii. Dearness allowance- 20% of basic pay.
iii. Medical Allowance- ₹ 500 p.m.
iv. House Rent allowance- ₹ 2,500 p.m.
(Actual rent paid ₹ 3,200 p.m. for a house in Kolkata)
v. Own contribution to RPF- ₹ 6,000 (Employer contributed an equal amount).
vi. Interest credited to RPF @ 14% p.a. - ₹ 9,100.
vii. Life insurance premium paid by her employer- ₹ 6,000.
viii. Professional tax paid by her employer- ₹ 1,600.
[Ans: Basic Salary ₹ 2,20,500; Taxable HRA ₹ 18,060; Taxable Employer's Contribution NIL; Taxable
Interest on RPF ₹ 2,925; Gross salary ₹ 2,99,185; Income from Salary ₹ 2,47,585; Salary for the
purpose of HRA & RPF ₹ 2,64,600]

21. Income from salary [B.com 2015 PASS]

Mr. Sen the Accountant of a company has furnished the following particulars of his income for the previous
year 2021–22 ₹
Net salary after deduction of TDS and own Contribution to RPF and P. Tax 2, 50,000
Tax deducted at source 9,200
Own contribution to RPF 39,000
P. Tax 1,800
Employer’s Contribution to RPF 39,000
Interest on RPF credited to his account @ 10% 12,000
House rent allowance (Rent paid by him ₹ 50,000) 48,000
Children education allowance (for three children) 36,000
A servant has been provided by the employer for him.
The company paid ₹ 1,000 p.m. as salary of servant
Life insurance premium paid by his employer 10,000
Compute the income from salary of Mr. Sen for the assessment year 2022–23.
[Ans: Basic Salary (₹ 2,50,000 + 39,000 + 9,200 + 1,800) ₹ 3,00,000; Taxable HRA ₹ 28,000; Taxable
children education allowance ₹ 33,600; Taxable Employer's Contribution ₹ 3,000; Taxable Interest on
RPF ₹ 600; Gross salary ₹ 3,87,200; Income from Salary ₹ 3,35,400; Salary for the purpose of HRA &
RPF ₹ 3,00,000]

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4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

22. Income from salary [B.com 2012 Honours]
Mr. Amitava Chowdhury is working is working with ABC Ltd. for the P.Y. 2021-22, he furnished the
following information:
₹
Basic Salary 32,000 p.m.
Dearness Allowance @ 20% of basic salary
Medical Allowance 1,500 p.m.
Entertainment Allowance 500 p.m.
Employer’s contribution to a Recognised Provident Fund 32,000
Interest credited to said RPF @ 12% p.a. 10,800
Facility of motor car of less than 1600 CC with driver --
(entire expenses borne by the employer)
Children education allowance for 2 children 500 p.m.
Rent free furnished house in Kolkata for which employer pays rent of ₹ 6,000 p.m. --
Cost of furniture provided in the house 50,000
Free services of watchman 600 p.m.
He paid professional tax ₹ 2,640 during the year. Compute Income from salary of Mr. Chowdhury for the
A.Y. 2022-23.
[Taxable Children education allowance ₹ 3,600; Taxable Employer's Contribution NIL; Taxable
Interest on RPF ₹ 2,250;Taxable Rent free Accommodation ₹ 72,000 + ₹ 5,000 = ₹ 77,000; Car facility
₹ 32,400; Gross salary ₹ 6,07,250; Income from Salary ₹ 5,54,610, Salary for the purpose of Rent free
accommodation ₹ 4,88,400; Salary for the purpose of RPF ₹ 4,60,800]

23. Income from salary [B.com 2013 Honours]

Sri Samir Saha furnished the following information for the previous year 2021-22:
Basic Salary ₹ 1,60,000
Dearness allowance 25% of basic pay
Transport allowance ₹ 2,800 p.m.
Contribution to RPF 15% of basic salary and DA
Children education allowance (For two children) ₹ 500 p.m.
Interest credited on the balance of RPF @ 12% ₹ 7,200
Entertainment allowance ₹ 1,000 p.m.
i. He is provided with a rent-free accommodation in Kolkata for which company pays rent ₹ 5,000 p.m.
ii. During the previous year he spent ₹ 20,000 for medical treatment of himself in a private nursing home and his
employer reimbursed the entire amount.
iii. He engaged a domestic servant at a salary of ₹ 500 p.m. and his employer paid the salary.
iv. His employer presented him a Laptop computer costing ₹ 15,000 in the previous year.
v. Professional tax of ₹ 1,600 was paid by his employer.
Compute taxable income for salary of Sri Saha for the A.Y. 2022–23.
[Taxable Children education allowance ₹ 3,600; Taxable Employer's Contribution ₹ 6,000; Taxable
Interest on RPF ₹ 1,500; Taxable Rent free Accommodation ₹ 34,500]

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4/3/24, 10:22 PM Taxation 1 Bhalotia AY 22-23

Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

24. Income from salary [B.com 2014 Honours]
Irfan furnishes the following details of his salary income for the financial year 2021-22:
₹
Salary 20,000 p.m.
Dearness Allowance 5,000 p.m.
Children Education Allowance (he has 3 children) 500 p.m.
Employer’s contribution to the recognised provident fund 10% of basic salary
Own contribution to the recognised provident fund 10% of basic salary
Interest on the accumulated balance of recognised provident fund @ 2,600
13% p.a.
Irfan is provided with an unfurnished accommodation in Mumbai for which the employer charges ₹ 1,000 p.m. The fair
rent of the house is ₹ 50,000 p.a. The house is owned by the employer.
He is also provided with a car (1.8 litre engine capacity) without driver by his employer. All expenses are met by him.
The car is used for official as well as for private purposes.
Medical expenses reimbursed by employer ₹ 25,000 during the previous year. He has also been given a loan of ₹
2,00,000 @ 6% p.a. on 1.7.2021 for purchasing a flat. State Bank of India charges interest @ 10 % p.a. (as on 1.4.2021)
for such loan. ₹ 200 p.m was deducted from his salary as profession tax.
Compute taxable income from salary of Irfan for the assessment year 2022-23.
[Taxable Children education allowance ₹ 3,600; Taxable Employer's Contribution NIL; Taxable
Interest on RPF ₹ 700; Taxable Rent free Accommodation ₹ 33,540; Taxable medical reimbursement ₹
10,000; Taxable Motor car facility ₹ 10,800; Taxable value of Loan at concessional rate ₹ 6,000; Gross
salary ₹ 3,64,640; Salary for the purpose of Rent free accommodation ₹ 3,03,600]

25. Income from salary [B.com 2015 Honours]

(a) Mr. Joydeep Das joins Chittaranjan Ltd. On 1st February 2020 as an Accountant in the pay scale of
₹ 12,000-600-15,000-800-19,000.
(b) The company allows to all employees 60 % of Basic Pay as dearness allowance (forming part of salary)
and 15% of Basic Pay as house rent allowance.
(c) During the previous year 2021-22 Mr. Das also received Children Hostel allowance of ₹ 1,000 p.m (he
has two children).
(d) His employer provided him with the free use of motor car having engine capacity of 20 H.P; without
driver throughout the year for both private and official purpose.
(e) His employer paid his life insurance premium of ₹ 5,000, professional tax of ₹ 1,500 and reimbursed
personal electric bill of ₹ 7,500.
(f) In his scale of pay annual professional tax is ₹ 2,400. Mr. Das himself paid the balance of the
professional tax. Both Mr. Das and his employer contributed 14% of salary to a RPF.
(g) Interest credited to R.P.F @11% ₹ 12,100.
(h) He paid house rent @ ₹ 5,000 p.m for his residence in Kolkata.
(i) You are required to compute the income of Mr. Das under the head ‘Salaries’ for the Assessment year
2022-23.
[Basic Salary ₹ 1,52,400; HRA Exempt u/s 10 (13A) ₹ 22,860; Taxable HRA: NIL; Taxable Children
education allowance ₹ 4,800; Taxable Employer's Contribution ₹ 4,877; Taxable Interest on RPF ₹
1,650; Taxable Motor car facility ₹ 28,800; Gross salary ₹ 2,97,967; Income from Salary ₹ 2,45,567;
Salary for the purpose of HRA & RPF ₹ 2,43,840]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

26. Income from salary [B.com 2007,2005 Honours]
From the following particulars, compute the 'Income from Salary’ of Mrs. Roy for the Assessment year
2022-23 who is working in a Private Firm :
(a) Basic Pay as per scale 10,000-500-13,000-800-17,000. She was appointed on 1st January 2019.
(b) Dearness Allowance @ 75% of Basic salary.
(c) Car allowance @ ₹ 1,000 p.m. but he spent ₹ 800 p.m. for travelling for her office duties.
(d) Medical allowance @ ₹ 600 p.m. She spent this year only ₹ 5,000 for medical treatment of her family.
(e) Entertainment allowance @ ₹ 700 p.m. but he spent ₹ 9,000 this year for entertainment customers at
office.
(f) Children education allowance @ ₹ 150 p.m. for each of her 3 children.
(g) She and her employer each contributed 14 % of her basic salary to Recognised Provident Fund. Interest
credited to this fund ₹ 19,000 in this year.
(h) House rent allowance received ₹ 24,000. She stays in a house at Kolkata paying rent @ ₹ 3,000 p.m.
(i) Her Employer pays the wages of sweeper @ ₹ 1,000 p.m. and cook @ ₹ 1,500 p.m. provided to her.
(j) Her Employer also reimbursed gas bills of ₹ 3.000, Electric Bills of ₹ 6,000 during the year.
(k) She paid Professional Tax @ ₹ 130 p.m.
[Basic Salary ₹ 1,33,500; HRA Exempt ₹ 12,637; Salary ₹ 2,93,428]

27. Income from salary [B.com 2006, 2003] Honours]***

Mr. Ghosh Roy, a resident Indian, an employee of P Ltd., furnishes the following information. Compute his
Income from Salary for the Assessment year 2022-23.
a) Basic pay ₹ 10000 p.m.
b) D.A. 41% of basic pay
c) Deputation allowance ₹ 300 p.m.
d) Lunch allowance ₹ 500 p.m.
e) Computer allowance ₹ 200 p.m.
f) He and his employer both contributed 15% of his basic and DA to RPF & interest credited to RPF @
12% p.a. was ₹ 6,000.
g) He is provided with a rent free furnished accommodation in Kolkata having municipal value of
₹ 36,000 and furnished with furniture costing ₹ 25000
h) He is provided with a car (without Driver) of 1.6 liters both for official and private purpose. Entire
expenses are borne by employer.
i) He received leave travel assistance for a trip to Andaman ₹ 40,000 for his whole family.
j) He has taken an interest free loan of ₹ 20,000 from his employer for purchase of a colour television,
market rate of interest is 10%.
[Taxable Rent free Accommodation ₹ 27,180 + ₹ 2,500 = ₹ 29,680; Car facility ₹ 21,600; Interest free
loan Nil; Taxable Employer's Contribution ₹ 5,076; Taxable Interest on RPF ₹ 1,250; Gross salary ₹
2,38,806, Net Income from Salary ₹ 1,88,806 ]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

28. Income from salary [B.com 2000, 2010 Honours]*****
Mr. Rahman has the following income during the Previous year 2021-22
(a) Basic salary (after the deduction of tax ₹ 4,000) ₹ 80,000
(b) Dearness allowance ₹ 1,000 p.m.
(c) Medical allowance ₹ 6,000 (actual expenditure ₹ 5,700)
(d) Traveling allowance ₹ 7,200 (actual expenditure ₹ 6,500)
(e) Commission @ 2% of turnover of ₹ 3,00,000
(f) He and his employer both contributed to RPF @ 14 % of salary and interest accrued thereupon @ 13%
p.a. was 2600
(g) He is provided with a rent free unfurnished accommodation having fair rental value of ₹ 9,600
(h) He is provided with a motor car (Without Driver) of 15 HP both for official and private use. Expenses
relating to his private use amounting ₹ 8000 was paid by his employer.
(i) He spends ₹ 18,000 on medical treatment of himself in an unrecognized private nursing home and his
employer reimbursed the entire amount.
(j) He is provided with free gas and electricity costing ₹ 6,000 for official and private use (50% & 50%)
(k) He engaged a domestic servant at a salary of ₹ 500 p.m. which is paid by his employer.
Compute his Income from Salary for the AY 2022-23.
[Basic Salary ₹ 84,000; Taxable Rent free Accommodation ₹ 16,305; Car facility ₹ 21,600; Taxable
Employer's Contribution ₹ 2,040; Taxable Interest on RPF ₹ 700; Income from salary ₹ 1,14,345]

29. Income from salary [B.com 2004] Honours]

Mr. PQ has been appointed as an Accountant in a private company in the pay scale of ₹ 7,500 – 50 – 9,500
on January 1, 2021. For the year ended 31-3-2022, his particulars of income were as under:
(a) Basic pay as per scale
(b) D.A. ₹ 3600 p.m.
(c) Special allowance ₹ 400 p.m.
(d) Own contribution to recognized provident fund ₹ 14,000
(e) Employer's contribution to recognized provident fund ₹ 13,500
(f) Interest credited to balance of recognized provident fund ₹ 2,640 @ 11%
(g) A rent-free furnished accommodation provided by the employer at Kolkata. Furniture costing ₹ 150,00
has been provided by the employer. Some furniture, hired by the company at ₹ 200 p.m., are also'
provided in that accommodation.
(h) His employer provided with a chauffeur driven car of 1.8 liters. This car is used for both for official
and private purposes. All the expenses of the car are borne by the employer.
(i) Following expenses of Mr. PQ are borne by the employer:
(i) Life insurance premium ₹ 2500 p.a.
(ii) Telephone bill ₹ 1500 p.a. for his residence
(iii) Wages of a sweeper for his residence @ ₹ 200 p.m.
(j) Mr. PQ incurred the following expenses:
(i) Contribution to Public Provident Fund ₹ 5000
(ii) Payment of life insurance premium on the life of his wife ₹ 3000 p.a.
Compute his Income from Salary for the Assessment year 2022-23.
[Basic Salary ₹ 90,150; Taxable Rent free Accommodation ₹ 24,623; Car facility ₹ 39,600; Taxable
Employer's Contribution NIL; Taxable Interest on RPF ₹ 360; Income from salary ₹ 1,47,633]
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 8:
Income from House property
Chargeability (sec22):
Annual value of a property consisting of any building or land appurtenant thereto of which the assessee is the
owner is chargeable to tax under the head Income From House Property. The annual value is chargeable to
Income From House Property if the following three conditions are satisfied:
i) The property must consist of building and land appurtenant thereto
ii) The Assessee must be the owner of such property
iii) The property should not be used by the owner for the purpose of any business or any profession carried
on by him, the profits of which are chargeable to tax.
Notes:
(a) Land appurtenant to a building includes car parking area, approach roads, backyards, courtyards, etc.
attached to such building.
(b) Vacant land is not a house property. Hence, income from letting of vacant land is not taxable under
this head but taxed as income from other sources.
(c) Income from sub-letting is not taxable under IFHP but under the head ‘Income from other sources’.
(d) When a person carries on business or profession in his own house property, annual value thereof is
not taxable u/s 22 but it is chargeable under the head “Profits & gains of business or profession”.
(e) If an assessee lets out the property to his employee, where such letting out supports smooth flow of
his business, then such letting out shall be shall be chargeable under the head “Profits & gains of
business or profession”.
(f) If a building consists of several flats, then each flat is considered as a separate house property.

Deemed ownership (sec-27)

The following person though not the legal owner are deemed to be the owners to:
iv) Transfer to spouse or Minor child
v) Person who acquires any right in a property by way of lease for not more than 12 Years.

When income from house property is not chargeable to tax

In the following cases income from house property is not chargeable to tax:
i) Income from a farm house is used as dwelling house or as a store house for agriculture purpose
iii) Property used for own business/profession

Computation of Income
(a) Let out property [Sec. 23(1)]
(b) Property not actually occupied by the owner [Sec. 23(2)(b)]
(c) Self-occupied property [Sec. 23(2)(a)].
(d) Partly let out and partly self occupied property [Sec. 23(3)]
(e) Deemed to be let out property [Sec. 23(4)].
(f) Recovery of arrears of rent and unrealized rent [Sec. 25A]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Let out property [sec. 23(1)]
Computation of Income from house property of …………. for the Assessment Year ……….

Particulars Details Amount

Gross Annual Value (GAV) ****
Less: Municipal tax ****
Net Annual Value (NAV) ****
Less: Deductions u/s
24(a) Standard deduction [30% of NAV] ****
24(b) Interest on borrowed capital **** ****
Income from house property ****

Gross Annual Value (GAV)

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

(A) Gr
Gross
oss Municipal V
Value
alue
It means the annual value of the property decided by municipality on which they charge municipal tax.
Such valuation may also be taken as evidence of earning capacity of a property.

(B) Fair or Notional Rent of the P

Property
roperty
Fair or notional rent of a property means rent fetched by a similar property in the same or similar
locality. For instance, a property was let out to a friend for a monthly rent of ₹ 2,000 which might be
let out to another person at the rate of ₹ 2,500 p.m. In such case, fair rent of the property shall be ₹
2,500 p.m.

(C) Sta
Standard
ndard Rent under the Rent Control A Act
ct
Standard rent is the maximum rent, which a person can legally recover from his tenant under the Rent
Control Act prevailing in the State in which the property is situated.

(D) Actual Rent Receivable [ARR] (De facto rrent)

ent)
Any sum receivable as rent of the house property for the previous year is an evidence for knowing the
earning capacity of the building. Such actual rent receivable is to be computed on accrual basis.

Notes:
While computing actual rent receivable, outstanding rent shall be considered but advance rent
received during the financial year is not to be considered.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

GAV shall be computed as under
Steps Particulars Amount
1st Compute Reasonable Expected Rent [RER]
Gross Municipal Value (a) ****
Fair Rent (b) ****
Higher of the (a) and (b) [A] ****
Standard Rent [B] ****
Reasonable Expected Rent [Lower of (A and B)] [C] ****
2nd Actual Rent Received or Receivable (ARR) – Unrealised Rent of the current year (UR) [D] ****
3rd Gross Annual Value
Higher of C and D shall be considered as GAV ****
4th However, where ‘ARR – UR’ is lower due to vacancy, then ‘ARR - UR’ computed in step 2 will ****
be treated as GAV.

Unreal
Unrealised
ised Rent [Rule 4]
4]::
Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable, provided the
following conditions are satisfied:
(a) The tenancy is bona fide;
(b) The defaulting tenant has vacated the property or steps have been taken to compel him to
vacate the property;
(c) The defaulting tenant is not in occupation of any other property of the assessee;
(d) The assessee has taken all reasonable steps for the recovery of the unpaid rent

Example 1: Comp. of GAV: When there is unrealised rent but no vacancy

Find out the gross annual value in case of the following properties let out throughout the previous year
for the assessment year 2021-22 (₹ in ‘000)
Particulars H1 H2 H3 H4 H5
Municipal annual value 90 500 30 100 315
Fair rent 300 300 300 300 300
Standard rent under the Rent Control Act 50 800 240 250 500
Actual rent receivable p.a. 120 600 180 360 150
Unrealised rent of the P.Y. 2020-21 (in terms of months) 2 3 1 3 2
Solution:
Computation of gross annual value (₹ in ‘000)

Steps Particulars H1 H2 H3 H4 H5
1 st Calculation of RER
Gross Municipal Value 90 500 30 100 315
Fair Rent 300 300 300 300 300
Higher of the above [A] 300 500 300 300 315
Standard Rent [B] 50 800 240 250 500
Reasonable Expected Rent [lower of A and B] [C] 50 500 240 250 315

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

2 nd Calculation of (ARR – Unrealised Rent)
Actual rent receivable p.a. 120 600 180 360 150
Unrealised rent 20 150 15 90 25
ARR – Unrealised Rent [D] 100 450 165 270 125
3rd Gross Annual Value (being higher of step 1 and step 2) 100 500 240 270 315

Example 2: Comp. of GAV: [When there is vacancy but no unrealised rent]

Find out the Gross annual value in case of the following properties (₹ in 000)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Fair rent p.a. 300 600 750 180 200 400
Standard rent under the Rent Control Act p.a. 300 180 280 225 250 240
Actual rent p.a. 600 900 300 240 216 240
Property remains vacant (in number of month) 1 3 2 1 2 1

Solution:
Computation of Gross Annual Value (₹ in ‘000)
Step Particulars Working H1 H2 H3 H4 H5 H6
1st Calculation of RER Higher of GMV and FR (RER cannot exceed 300 180 280 225 250 240
SR)
2 nd ARR For the period actually let out 550 675 250 220 180 220
3 rd Higher of above Higher of Step 1 & Step 2 550 675 280 225 250 240
4 th Gross Annual Value 550 1 6751 250 2 2202 250 3 220 4

1. In H1 and H2 Actual rent receivable is already higher than RER therefore vacancy period is not
making any impact on GAV.
2. In H3 & H4, ARR is less than RER due to vacancy (otherwise ARR would have been ₹ 3,00,000 & ₹
2,40,000 respectively). Therefore, GAV will be the ARR computed in step 2.
3. In H5, ARR is less than RER not only due to vacancy but also due to other factors. In such case, value
of RER shall be taken as GAV.
4. In H6, ARR is less than RER due to vacancy period otherwise ARR would have been equal to RER.

Municipal Tax
Municipal Tax includes services tax like Water Tax and Sewerage Tax levied by any local authority. It can
be claimed as a deduction from the Gross Annual Value of the Property.
Conditions:
(a) It should be actually paid during the previous year. It must be paid by the assessee (owner)
(b) Municipal Tax can be claimed as a deduction only in respect of let out or deemed to be let out
properties.
(c) It must be related to the previous year or any year preceding the previous year.
(d) Payment of municipal tax in advance (liability in respect of which has not yet incurred) shall not be
allowed as deduction in the year of payment.
(e) Municipal taxes met by tenant are not allowed as deduction.
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Deductions
Deduction u/s 24
1. Standard deduction u/s 24(a)
2. Interest on loan or interest on borrowed capital u/s 24(b).
No deduction can be claimed in respect of expenditures which are not specified under this section e.g., no
deduction is allowed for repairs, collection charges, insurance, ground rent, land revenue, etc.

Standard deduction u/s 24(a)

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

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

(a) Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction, repairs,
renewal or reconstruction of the house property.
(b) Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is not paid
during the financial year.
(c) Brokerage: Any brokerage or commission paid for acquiring the loan will not be allowed as a
deduction.
(d) Prior period interest: Prior Period Interest shall be allowed in five equal installments commencing from
the financial year in which the property was acquired or construction was completed.
Note:
Pre-construction period means the period starting from the day of commencement of construction or the
day of borrowing whichever is later and ending on March 31 immediately prior to the year of completion of
construction.

Particulars Pre-construction period Post-construction period

Starts from The day of commencement of construction or the day of The first day of the previous year in
borrowing, whichever is later which construction is completed
Ends on March 31 immediately prior to the year of completion of When loan is fully paid
construction
Tax The interest incurred during aforesaid period shall be accumulated The interest expenses for the year (on
treatment and allowed as deduction in 5 equal installments from the year of accrual basis) shall be allowed as
completion of construction. deduction in the respective year.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Self-occupied property [sec. 23(2)(a)]
As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part
thereof:
(a) is in the occupation of the owner for the purposes of his own residence;
(b) is not actually let out during the whole or any part of the previous year; and
(c) no other benefit there from is derived by the owner.
Treatment: The annual value of such house or part of the house shall be taken to be nil.
Notes:
(a) If an assessee occupies more than two house properties as self-occupied, he is allowed to treat only
two houses as self-occupied at his option. The remaining self-occupied house property(ies) shall be
treated as ‘Deemed to be let out’.
(b) In the light of the above provision –
Combination Treated as
Fully self occupied Self occupied property
Partly self occupied & partly vacant Self occupied property
Partly self occupied & partly let out Partly self occupied & partly let out (discussed later)
Partly self occupied & partly use for own business Self occupied to the extent used for self occupation

Computation of taxable income of self-occupied property

Particulars Amount
Net Annual Value Nil
Less: Interest on borrowed capital u/s 24(b) ***
Income from house property (***)
Standard deduction u/s 24(a) is not available
Net Annual value
Net Annual value of two self-occupied house properties, at the choice of the assessee, is taken as nil. He can
choose those house properties as self-occupied through which tax liability can be reduced.

Deduction under section 24 In case of Self occupied property:

Conditions Maximum Interest
allowed in aggregate
Where loan is taken on or after 1/4/99 and following conditions are satisfied –
1. Loan is utilized for construction or acquisition of house property on or
After 1-4-1999;
2. Such construction or acquisition is completed within 5 years from the
end of the financial year in which the capital was borrowed; and ₹ 2, 00,000

In any other case ₹ 30,000

Note:
(a) For Let-out or Deemed Let-out property, No maximum limit for Deduction u/s 24b. entire interest is
allowed as deduction

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Tax treatment of partly self-occupied and partly let-out house property
Case 1) Area wise division
Case 2) Time wise division
Case 3) Area as well as Time wise division
Case 1) Area wise division
In this case, a house property consists of two or more independent units and one or more of which are
self-occupied and remaining units are let out.
Treatment
• Self-occupied portion & let out portion shall be treated as two separate house (i.e. Unit A & Unit B);
• Common value like municipal value, fair rent, standard rent, municipal tax and interest shall be
proportionately divided;
• Income of both units shall be computed separately.

Case 2) Time wise division

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

Case 3) Area as well as Time wise Division

Merger of Case 1 and Case 2

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

Applicability
The assessee has received arrears of rent received from a tenant or the unrealised rent realised
subsequently from a tenant.

Tax Treatment
The amount so received shall be taxable under the head ‘Income from house property’ in the year of
receipt after deducting standard deduction @ 30% of such amount.

Arithmetically, taxable amount shall be -

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

Notes:
(a) No other deduction shall be allowed from such income except standard deduction i.e. 30% of
such receipt. (even legal expenditure shall not be allowed as deduction)

(b) The income is taxable on cash basis.

(c) Such receipt shall be chargeable as income from house property although the assessee is not the
owner of such property in the year of receipt.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Practicals Questions
1. Income from House Property [B.com 2002 Honours]*
From the following data calculate the “Gross annual value of the following houses:
House I II III IV V
Municipal Value(gross) 20,000 36,000 15,000 45,000 32,000
Rent received 24,000 27,000 18,000 48,000 40,000
Fair rent 23,000 30,000 16,000 42,000 44,000
Standard Rent 22,000 33,000 20,000 N.A N.A
[GAV: ₹ 24,000; ₹ 33,000; ₹ 18,000; ₹ 48,000; ₹ 44000]

2. Income from House Property [B.com 2007,2005 Honours]****

Mr. Sen is the owner of 2 houses in India. From the following data, compute the Gross annual value of the
houses:
House I House II
Municipal Value p.a. 30,000 15,000
Fair Rent p.a. 22,500 14,000
Standard Rent p.a. 25,000 12,000
Actual Rent p.a. 21,600 18,000
Vacancy (in Months) 2 Nil
Unrealised Rent Nil ₹ 2,500
[GAV: ₹ 25,000; ₹ 15,500]

3. Income from House Property [B.com 2004 Honours]****

Mr. A Saha started construction of his residential house on 1-7-2019 by taking a loan of ₹ 12,00,000 at 10%
p.a. interest. The house was completed on 30-6-2021. He refunded a part of loan of ₹ 2,00,000 on 1-10-2021
Compute the amount of interest of loan admissible for deduction in computing income from house property
for the Assessment year 2022-23.
[Interest on Loan for Pre-construction Period ₹ 2,10,000; Interest on loan for post construction period
₹ 1,10,000; Deduction u/s 24 (b) = 1/5th of 2,10,000 + 1,10,000 = ₹ 1,52,000]

4. Income from House Property [B.com 2008 Honours]**

Mr. Biswas constructed a house in Kolkata for his own residence. The construction of the house started on
July 1, 2018 and it was completed on October 31, 2021. For this purpose, he took a loan of ₹ 20,00,000 at
10% p.a. interest on 1st July, 2018. Mr. Biswas repaid ₹ 8,00,000 of this loan (principal) on April 1, 2021.
Determine the amount of Deduction under section 24(b) for the assessment year 2022-23.
[Interest on Loan for Pre-construction Period ₹ 5,50,000; Interest on loan for post construction period
₹ 1,20,000; Deduction u/s 24 (b) = 1/5th of 5,50,000 + 1,20,000 = ₹ 2,30,000, Restricted to maximum
limit ₹ 2,00,000]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

5. Income from House Property****
Mr. Abul Hasan owns three houses at Ranchi. He furnishes the following particulars for the PY 2021-22:
House No. I: The house was constructed in 2020 and let out to a friend at a monthly rent of ₹ 10,000 upto
31.1.2022 and thereafter, it was let out at its fair rent of 15,000 per month. He has paid 15,000 as municipal
taxes @ 10% of Municipal Value. He has also paid fire insurance premium of ₹ 2,000.
House No. II: Ground floor is let out @ ₹ 20,000 p.m. first floor, identical to ground floor, is occupied by him
for his residence. Municipal taxed paid @ 20% amounted to ₹ 80,000.
House No. III: The house was constructed in 2010 and is used for his business. The annual value of this house
is ₹ 1,00,000 and he spent ₹ 5,000 as municipal taxes and ₹ 2,000 for repairs.
Other Information:
A loan of ₹ 40,00,000 has been taken on 01.06.2019 for construction of House No. II. Construction of the
house was completed on 01.06.2020. he repaid the entire loan on 31.12.2021. Interest on loan is payable @
12% p.a. compute his income from house property for the A.Y. 2022-23.
Solution
Computation of Income from House Property of Mr. Abul Hasan for the A.Y. 2021-22
Particulars Details Details Amount
House 1: Let out
Gross Annual Value 1,80,000
Less: Municipal Tax 15,000
Net Annual Value 1,65,000
Less: Deduction u/s
24(a) Standard Deduction 49,500
24(b) Interest on loan Nil 49,500 1,15,500
House 2: Ground Floor (Let out)
Gross Annual Value 2,40,000
Less: Municipal Tax[50%] 40,000
Net Annual Value 2,00,000
Less: Deduction u/s
24(a) Standard Deduction 60,000
24 (b) Interest on loan 2,20,000 2,80,000 (80,000)
House 2: First Floor (self occupied)
Net Annual Value Nil
Less: Deduction u/s
24(b) Interest on loan 2,00,000 (2,00,000)
House 3: Used in own business (Not Taxable under Nil
IFHP)
Income from house Property (1,64,500)
Workings:
(a) Fair Rent: Since 1st house is let out by assessee to his friend @ ₹ 10,000 p.m. and the same property is let
out to other tenant @ ₹ 15,000 p.m., this signifies that 2nd houses has fair rent is ₹ 15,000*12 = ₹ 1,80,000.
(b) Calculation of interest to be deducted in A.Y. 2021-22
Month Interest
Pre-construction Interest
2019-20 10 4,00,000
1/5th of pre-construction interest 80,000
Post construction interest (b)[₹ 40,00,000 x 12% x 9/12] 9 3,60,000
Total interest charged (a)+(b) 4,40,000
50% for ground floor 2,20,000

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

6. Income from House Property [B.com 2000 Pass] **
Mr. A is the owner of two houses. Both the houses are let out. The particulars for the year ended 31st March,
2022 in connection with the houses are:
1st House 2nd house
How used For residence For Business
Construction completed 10.04.2010 28.02.2010
₹ ₹
Municipal Value 70,000 ₹ 45,000
Rent received 50,000 ₹ 60,000
Standard Rent 56,000 ----------
Municipal tax 12% 10%
(paid by owner) (Paid by tenant)
Fire Insurance Premium 1,500 1,250
Repairing Expenses 2,000 3,000
Collection Charges 1,000 600
Ground Rent 250 400
Land Revenue 400 500
Interest on Loan 10,500 7,000
Vacancy Period 2 Month --------
Compute the income form house property of Mr. A for the Assessment year 2022-23.
[GAV of House 1: ₹ 50,000; Income from House 1: ₹ 18,620; [GAV of House 2: ₹ 60,000; Income from
House 2: ₹ 35,000;Income from House Property: ₹ 53,620; Assuming that both the properties are
situated in non-metro city]

7. Income from House Property [B.com 2008 Honours]:****

Mr. Sen is the owner of three houses in Kolkata and he furnishes the following particulars. You are required to
compute his income from house property for the assessment year 2022-23:
House No. 1 House No. 2 House No 3
How Used Let out for residence Let out for Business Self Occupied
₹ ₹ ₹
Gross Municipal Value 70,000 45,000 30,000
Fair Rent 60,000 40,000 45,000
Standard Rent 65,000 N.A N.A
Rent Received 50,000 60,000 ------
Municipal Tax paid 12 % 10 % 10 %
(paid by the owner) (paid by the tenant) (paid by the owner)
Fire Insurance premium paid 1,500 1,250 Nil
Date of completion of construction 10.4.2003 28.3.2004 1.1.2006
Interest on loan taken
for construction of house 10,500 7,000 25,000
Vacancy period 2 month ----- 3 Month
Unrealized rent of 2020-21 12,000 ----- --------
[Income from House 1: ₹ 29,708; Income from House 2: ₹ 35,000; Income from House 3: ₹ (-) 35,000;
Income from House property ₹ 39,708]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

8. Income from House Property [B.com 2012 Honours]:
Mr. Debangshu Moulick furnished the following information for the P.Y. 2021-22:
House 1 House 2
Where situated Kolkata Durgapur
How used Let Out Self occupied
Gross Municipal Value (₹ ) 30,000 25,000
Fair Rent (₹ ) 60,000 40,000

Annual Rent (₹ ) 72,000 -

Standard Rent (₹ ) 55,000 -
Vacancy Period 3 months -
Municipal Tax 10% of municipal value 1,200
Repairs Paid 2,500 -
Loan taken for construction @ 8% p.a. (₹ ) 1,00,000 2,00,000
Other Information:
In case of House 1, municipal tax for the last quarter remains unpaid while unpaid municipal tax of ₹ 475
for the year 2020-21 was paid during 2021-22:
Compute ‘Income from House Property’ of Mr. Moulick for the A.Y. 2022-23.

9. Income from House Property [B.com 2014 Honours]: [Important]******

Mini owns three houses in Kolkata. The particulars for the year ended 31.3.22 are given below:
House I House II House III
₹ ₹ ₹
Purpose of use Let out for residence Self occupied For own business
Municipal tax 5,000 3,500 4,000
Fire Insurance Premium 3,000 2,500 3,600
Interest on loan paid 3,200 3,600 12,000
Repairs 7,000 5,400 6,000
Standard Rent 40,000 - -
Rent received 35,000 - -
Vacancy period 2 months - -
Municipal value 36,000 35,000 48,000
Compute income from house property for the A.Y. 2022-23 after considering the following
additional information:
i. Municipal tax of ₹ 1,500 in respect of House-I was in arrears.
ii. Interest on loan of ₹ 1,400 in respect of House-II was in arrear
[Income from House I: ₹ 18,850; Income from House II: ₹ (-) 5,000; Income from House property ₹
13,850, As House III is used by the assessee for his own business, it is not assessable under the head
‘Income from house property’. It is assessable under the head ‘Profit & Gains of Business or
Profession]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

10. Income from House Property [B.com 2013 Honours]:
Sukesh Saha is the owner of a house in Kolkata. The house is divided in two equal residential units.
One unit is used for own residential purpose and the other unit is rented for ₹ 8,000 p.m. The rented
unit was vacant for two months during the previous year. The particulars of house for the previous
year 2020–21 are as under:
Standard rent ₹ 1, 62,000 p.a.
Municipal valuation ₹ 1, 90,000 p.a.
Fair rent ₹ 1, 85,000 p.a.
Municipal tax 15% of municipal value
Light and water charges ₹ 500 p.m.
Interest on borrowed capital ₹ 2,500 p.m.
Repairs ₹ 32,000 p.a.
Compute income from house property of Mr. Saha for the A.Y. 2021–22.
[Answer: Unit A: Annual value Nil; Interest on Loan ₹ 15,000; Income from House A: ₹ (-)
15,000; Unit B: Gross annual value ₹ 80,000; Municipal Tax 14,250; Interest on Loan ₹
15,000; Income from Unit 2: ₹ 31,025; Income from House property ₹ 16,025]

11. Income from House Property [2011]****

Mr. De owns two houses in Kolkata. The first one is occupied by him for his residence and the second
house, consisting of two flats of equal sizes, is let out to tenants @ ₹ 12,000 per month per flat for
residential purpose.
Following are the particulars regarding his Houses for the financial year ended 31st March, 2022
First house Second house
Construction started 01 – 09 – 2017 01 – 03 – 2016
Construction completed 30 – 06 – 2019 31 – 10 – 2017
Municipal tax @ 15% ₹ 24,300 ₹ 35,100
Insurance premium ₹ 3,600 ₹ 2,400
Vacancy period - One flat for 3 months

Mr. De borrowed ₹ 9, 00,000 for the construction for first house @ 8 % p.a. on 1–9–2017. He also
borrowed ₹ 6, 00,000 for the construction of second house @ 9.5 % on 01 – 03 – 2016. He paid interest
regularly but loans remain unpaid on 31 – 03 – 2022.
Compute Mr. De’s income from house property for the assessment year 2022–23.
[Income from House 1: ₹ (-) 94,800; Income from House 2: ₹ 82,500; Income from House property (-)
12,300]

Complete course fees:

 Cost + Tax = ₹ 4, 0000

 Cost + Tax + 1 theory = ₹ 5,000

 All Subjects = ₹ 6,000

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 9: Capital Gain

1. Basis of charge [Section 45 (1)]
The following are the essential condition for taxing capital gain:
1. There must be a capital asset
2. The capital asset must be transferred
3. There must be profit or gain on such transfer

2. Capital asset [U/s 2 (14)] ****

Capital asset means any kind of property held by an assessee but does not include the following:
(1) Stock in Trade: Stock in trade, consumable stores or raw materials held for business or profession.
(2) Personal Effect: Personal effect means any movable property held for personal use of the assessee
or for any dependent member of his family but excludes the followings:
a. Jewellery
b. Archaeological collections
c. Drawings
d. Paintings
e. Sculptures; or
f. Any work of art.
Stress
 An immovable property and jewellery held for personal use are not personal effect and hence are
capital assets.
 Personal effect includes wearing apparel, furniture, car, cycle, scooter used by the assessee for
personal purpose.
(3) Agricultural Land in Rural Area: Agricultural land in India is not a capital asset except the
following –
• Land which is situated within the jurisdiction of any Municipality or Cantonment Board having
population of 10000 or more; or
• in any area within the distance, measured aerially,—
Population of the municipality or cantonment board Area within the aerial distance from the local
limits of such municipality or cantonment
board isnon-rural area
More than 10,000 but not exceeding 1,00,000 Upto 2 kilometres
More than 1,00,000 but not exceeding 10,00,000 Upto 6 kilometres
More than 10,00,000 Upto 8 kilometres
Notes:
 If such land is not agricultural land, it will be treated as capital asset irrespective of its location.
 Profit on sale of agricultural land in rural area shall not be treated as capital gain.
(4) Gold Bonds 1977, Gold Bonds 1980, National Defence Gold Bonds, 1980. :
(5) Special Bearer Bond 1991
(6) Gold Deposit Bonds 1999 or deposit certificates issued under the Gold Monetisation Scheme,
2015

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

3. Types of capital assets:
Capital assets are of two types:
(a) Short-term capital asset
(b) Long-term capital asset
Short-term capital asset [Section 2(42A)]:
A capital asset held by an assessee for not more than 36 months immediately preceding the date of its
transfer is known as a short term capital asset.
Long term Capital Asset [Section 2 (29 A)]
An asset other than short term capital assets is regarded as a long term capital assets
Exceptions
In the following cases, an asset shall be termed as a short-term capital asset (STCA) if it is held for not more than following
period before the date of transfer:
12 months 24 months
• Equity or preference share in a company (listed in • Equity or preference share in an unlisted company
India)
• Any security e.g. debenture, Government securities, • Immovable property being land or building or
etc. (listed in India) both
• Units of UTI (whether quoted or not)

4. CAPITAL GAIN
Short-term Capital Gain means the gain arising on transfer of short-term capital asset.

Long-term Capital Gain means the gain arising on transfer of long-term capital asset.

5. Computation of Short Term Capital Gain (STCG)

computation of capital gain of for the Assessment Year ……..
Particulars Details Amount
Sale consideration (Full value of consideration) ****
Less: Expenses on transfer ****
Net sale consideration ****
Less: i) Cost of acquisition ****
ii) Cost of improvement **** ****
Short Term Capital Gain ****
Less: Exemption u/s 54B, 54D, 54G, etc. (****)
Taxable Short Term Capital Gain *****

6. EXAMPLE OF SHORT TERM CAPITAL GAIN

Question:
Mr. Divesh had purchased a golden ring as on 17/8/2019 for ₹ 20,000. On 1/05/2020, he has sewn a diamond
on it costing ₹ 25,000. On 1/08/2020, he sold such ring for ₹ 80,000 and incurred brokerage for arranging
customer ₹ 5,000. Compute capital gain.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Solution:
Computation of capital gain of Mr. Divesh for the A.Y.2021-22
Particulars Details Amount
Sale consideration 80,000
Less: Expenses on transfer 5,000
Net sale consideration 75,000
Less: i) Cost of acquisition 20,000
ii) Cost of improvement 25,000 45,000
Short Term Capital Gain 30,000

7. Computation of Long-term Capital Gains

Computation of capital gain of for the Assessment Year ………….

Particulars Details Amount

Sale consideration (Full value of consideration) ****
Less: Expenses on transfer ****
Net sale consideration ****
Less: i) Indexed cost of acquisition ****
ii) Indexed cost of improvement **** ****
Long Term Capital Gain ****
Less: Exemption u/s 54, 54B, 54D, 54EC, 54F, etc. ****
Taxable Long Term Capital Gain ****

Indexed cost of acquisition= cost of Acquisition x Index of year of transfer

Index of year of acquisition

Indexed cost of improvement = Cost of Improvement x Index of year of transfer

Index of year of improvement

Cost Inflation Index for different financial years are as follows:

Financial Year Index Financial Year Index

2001- 02 100 2011- 12 184
2002- 03 105 2012- 13 200
2003- 04 109 2013- 14 220
2004- 05 113 2014- 15 240
2005- 06 117 2015- 16 254
2006- 07 122 2016- 17 264
2007- 08 129 2017- 18 272
2008- 09 137 2018- 19 280
2009- 10 148 2019- 20 289
2010- 11 167 2020-21 301
2021 -22 317

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

8. Treatment of assets acquired before 1/4/2001

Cost of acquisition If an asset is acquired before 1/4/2001 then its cost of acquisition shall be
higher of the following:

a) Actual cost of acquisition (ignoring cost of improvement incurred before

1/4/2001); or

b) Fair market value of the asset as on 1/4/2001

Exception: The option is not available in case of –

• Asset on which depreciation is allowed u/s 32(1)(ii);

• Self generated assets (other than bonus share)

Cost of improvement Any cost of improvement incurred by the assessee or the previous owner before
1/4/2001 shall not be considered.
Indexation Where an asset is acquired before 1/4/2001, then indexation benefit shall
be available from the year 2001-02.

9. EXAMPLE OF CAPITAL GAIN

Question:
On 23rd December, 2021, Rajat sold 500 grams of gold, the sale consideration of which was ₹ 13,50,000.
He had acquired this gold on 20th August, 2000 for ₹ 4,00,000. Fair market value of 500 grams of gold on
1st April, 2001 was ₹ 3,60,000. Find out the amount of capital gain chargeable to tax for the assessment year
2022-23.
Solution:
Computation of capital gains of Rajat for the A.Y. 2022-23

Particulars Working Amount

Sale consideration 13,50,000
Less: Expenses on transfer Nil
Net Sale consideration 13,50,000
Less: Indexed cost of acquisition ₹ 4,00,000 * 317/100 12,68,000
Long term capital gain 82,000

Notes:
Here the asset is acquired before 1/4/2001 then its cost of acquisition will be higher of the following:
(a) Actual cost of acquisition ₹ 4,00,000
(b) Fair market value of the asset as on 1/4/2001 ₹ 3,60,000

10. EXAMPLE OF CAPITAL GAIN

Question:
Mr. Anand has purchased a house property as on 17/08/2002 for ₹ 5,00,000. On 1/05/2004, he constructed
a new floor on the same house at a cost of ₹ 2,50,000. On 1/10/2021, he sold such house for ₹ 18,00,000
and incurred brokerage @ 2% for arranging customer. Compute capital gain.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Solution:
Computation of capital gain of Mr. Anand for the A.Y. 2022-23
Particulars Working Details Amount
Sale consideration 18,00,000
Less: Expenses on transfer 2% of ₹ 18,00,000 36,000
Net sale consideration 17,64,000
Less: i) Indexed cost of acquisition ₹ 5,00,000 * (317/105) 15,09,524
ii) Indexed cost of improvement ₹ 2,50,000 * (317/113) 7,01,327 22,10,851

Long Term Capital Loss (4,46,851)

11. Assets received under a gift /will /succession /inheritance

Cost of Where cost of acquisition of Cost of acquisition of previous owner.

acquisition of an previous owner is ascertainable.
asset Where cost of acquisition of The fair market value of the asset on the date on which the
previous owner is unascertainable previous owner had acquired the same shall be deemed to be
the cost of acquisition.
Improvement cost of improvement includes improvement expenditure incurred by the previous owner or current
expenditure owner
Period of holding Period of holding of the previous owner shall be considered for classifying the asset into short term or
long-term capital asset.
Indexation benefit Indexation benefit shall be available from the year when the current owner first held the property
on cost of
acquisition
Taxpoint: Index of the year of transfer
Indexed cost of acquisition = Cost of acquisition × Index of the year in which the asset was first held
by the current owner

Indexation benefit Indexation benefit shall be available from the year when the improvement expenditure incurred
on cost of whether by current owner or by the previous owner.
improvement
Taxpoint: Index of the year of transfer
Indexed cost of improvement = Cost of improvement ×
Index of the year of improvement

Previous owner means the last owner who acquired such asset through a mode other than the modes mentioned above.

12. EXAMPLE OF CAPITAL GAIN

Mrs. Parminder has jewellery, being gifted on 1/04/2005 by her brother Jitendar. Jitendar acquired such
asset for ₹ 60,000 as on 1/07/1995. On 1/07/2002, Jitendar has sewn a diamond worth ₹ 25,000 in such
jewellery. On 1/04/2009, Mrs. Parminder incurred polish expenditure on such jewellery costing ₹ 5,000. As
on 1/04/2021, Mrs. Parminder sold such jewellery for ₹ 12,00,000. Brokerage @ 1% of sale value was paid
by her. The fair market value of the jewellery as on –
1/04/2001 is ₹ 2,00,000; 1/04/2005 is ₹ 5,00,000; and 1/04/2021 is ₹ 7,50,000.
Compute capital gain in hands of Mrs. Parminder for the A.Y. 2022-23.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Solution:
Computation of capital gain in the hands of Mrs. Parminder for the A.Y. 2022-23

Particulars Working Details Amount

Sale consideration 12,00,000
Less: Expenses on transfer 1% of ₹ 12,00,000 12,000
Net sale consideration 11,88,000
Less: i) Indexed cost of acquisition ₹ 2,00,000 * 317/117 5,41,880
ii) Indexed cost of improvement ₹ 25,000 * 317/105 75,476 6,17,356
Long Term Capital Gain 5,70,644
Notes:
1. Fair market value as on 1/04/2005 and 1/04/2020 are irrelevant.
2. Cost of acquisition shall be taken as cost of acquisition in the hands of previous owner or fair market
value as on 1/04/2001, whichever is higher. However, indexation benefit shall be available from the year
in which the assessee acquired the property.
3. Benefit of indexation in case of cost of improvement shall be available when the actual improvement
expenditure was incurred.
4. Polish expenditure on jewellery does not amount to improvement as such expenditure is not a capital
expenditure and does not increase value of the asset.

13. Sale of Debenture

Indexation benefit is not available even if Debenture is long term capital asset.

14. EXAMPLE OF CAPITAL GAIN

Question:
Miss Isha has 1,000 10% Debentures of X Ltd. acquired on 17/04/2009 for ₹ 120 each. As on 1/02/2022, she sold such
asset for ₹ 1,45,000. Brokerage @ ½ % of sale value was paid by her. Compute capital gain.
Solution:
Computation of capital gain in the hands of Miss Isha for the A.Y. 2021-22

Particulars Working Details Amount

Sale consideration 1,45,000
Less: Expenses on transfer ½ % of ₹ 1,45,000 725
Net sale consideration 1,44,275
Less: i) Cost of acquisition 1,000 Debentures @ ₹ 120 each 1,20,000
ii) Cost of improvement Nil 1,20,000
Long Term Capital Gain 24,275
Note: Though the asset sold is long term capital asset still indexation shall not be applicable as indexation benefit is not
available on transfer of debentures.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

15. Conversion of capital assets into stock in trade

Sale consideration Fair Market value as on date of such conversion.

Cost of acquisition/Cost of improvement/ Expenditure As usual
on transfer
Indexation benefit available (if any) Till year of conversion
Taxable In the year in which such stock is actually sold
[Actual sale value – FMV as on date of conversion –
Treatment of difference of actual sale value and Fair
market value as on date of conversion Expenditure on transfer] shall be treated as business
Income.

16. Computation of capital gain in case of Depreciable Assets

The capital asset which forms a part of a block of assets in respect of which
depreciation has been allowed u/s 32 as per WDV method.
E.g. a residential house property being not used for business purpose, on which no
Meaning
depreciation is allowed under Income tax Act shall be treated as a non- depreciable
asset. Whereas if the same house is used for the residence of employee of the
business and depreciation has been claimed under I.T. Act then it shall be treated as
depreciable asset.
Capital gain arising on transfer of depreciable asset shall always be a short-term capital
Nature of Capital gain
gain.
Benefit of indexation Indexation benefit cannot be claimed on such asset.
For computation of capital gain on transfer of such asset, refer Depreciation (u/s 32) of
Computation
the chapter “Profits & gains of business or profession”
Note: Depreciable asset itself may be a long term capital asset or short term capital asset depending upon the period
of holding (whether held for more than 36 months or not), however gain on transfer of aforesaid depreciable asset shall
always be short term capital gain.

17. Capital gain in the case of Self-generated assets (Goodwill etc)

Tax treatment on transfer of such assets shall be as under –
Sale consideration Actual
Cost of acquisition Nil
Cost of improvement Nil
Expenditure on transfer Actual
Capital gain Sale consideration less expenditure on transfer
Notes:
 If Self Generated assets are developed before 1/4/2001, the option of adopting fair market value shall not be
applicable and even in such case the cost of acquisition will be Nil.
 In case of goodwill, right to manufacture or produce any article or right to carry on any business or profession,
cost of improvement shall always be nil.
 The above rule is applicable only in the case of self-generated asset. In any other case, purchase cost shall be
taken as cost of acquisition and any expenses for improvement shall be taken as cost of improvement.
 Gain of Sale of Self Generated Assets are Generally long term capital Assets (Period of holding depends on the
period over which it has been developed.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

18. Capital gain in case of Bonus Share
Tax treatment on transfer of bonus shares shall be as under:

Sale consideration As usual

Expenditure on transfer As usual
Period of holding Starts from the date of allotment of such share
Fair market value of such shareas
If bonus shares are allotted before 1/4/2001
Cost of acquisition on 1/4/2001
If bonus shares are allotted on or after 1/4/2001 Nil

19. Capital gain in case of transfer of Right share and Right entitlement
Tax treatment of right issue and right entitlements shall be as under:

Case Right shares Right Entitlement Shares acquired by Right

Renouncee

Cost of Acquisition Right issue price Nil Amount paid for acquisition of
right entitlements + Amount paid
to company for right share

Period of holding The date of allotment of The date of declaration of The date of allotment of such
starts from such shares such right by the company shares

Sale consideration Amount charged from Amount charged from Amount charged from
transferee transferee transferee

20. CONVERSION OF INVENTORY INTO CAPITAL ASSETS

Tax treatment:
Sale consideration As usual
Cost of acquisition Fair Market Value taken as income u/s 28(via)
Period of holding Starts from the date of such conversion or treatment
Benefit of indexation Available from the year of such conversion or treatment

21. Deduction from Capital Gain U/S 54****

Applicable to Individual or HUF

1. Assessee has transferred a long-term residential house, income of which is taxable
under the head “Income from house property”.
Conditions 2. Residential house (let-out or self occupied) must be a long term capital asset.
3. Assessee must acquire a new residential house within prescribed time limit.
Amount of Minimum of the following:
Deduction • Cost of New house; or
• Gross Long term Capital gain

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22. Deduction from capital gain on transfer of land used for agro-purpose
[Section 54B]

Applicable to Individual & HUF

1. Assessee must have transferred a capital asset being an agricultural land
(whether long term or short term).
Conditions Tax point: A rural agricultural land is not a capital asset hence on transfer of
rural land no capital gain arises and sec 54B does not apply.
2. Assessee must purchase a new land for agricultural purpose within prescribed
time limit. The new land may be in urban area or rural area.
Amount of Deduction Minimum of the following:
• Cost of new agricultural land; or
• Gross amount of Capital gain

23. Deduction from Capital Gain U/S 54F****

Applicable to Individual or HUF

Conditions 1. Assessee must have transferred a long-term capital asset other than a residential
House property.
2. Assessee must acquire one residential house within prescribed time limit, income of
which is taxable u/s 22.
Amount of Minimum of the following:
Deduction • Cost of New residential house * Gross long term Capital Gain
Net Sale Consideration
• Gross long term Capital gain
Net sale consideration = Sale consideration – Expenditure on transfer

24. Capital Gain: Identify the Capital Assets

Identification of assets as ‘capital assets’.
Nature of asset Whether the asset is a ‘capital asset’
As per section 2 (14)
(a) House for own residence of the assessee As it is not a movable asset, it is not considered as ‘personal
effect’ and hence it is a capital asset.
(b) Stock-in-trade of the business It is not a ‘capital asset’ as per section 2 (14) (i).

(c) Motor car used for business As it is not held for personal use, it is a ‘capital asset’.

(d) Motor car for personal use As it is a movable asset and held for personal use, it is not a
‘capital asset’

(e) Ornaments held for personal use Though ornaments are movable assets and held for personal
use, these are ‘capital assets’ as per section 2 (14)

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(f) Furniture held for personal use As furniture is movable asset and held for personal use, it is
not ‘capital asset’.

(g) Machinery for business It is ‘capital asset’.

(h) Agricultural land in India within the ‘specified It is a ‘capital assets’ as per section 2 (14) (iii).
distance’ of the municipality
(i) Agricultural land in India in rural area It is not a ‘capital asset’ as per section 2 (14) (iii).

(j) Share of a company It is a ‘capital asset’.

(k) House property held by a dealer in house property As house property is stock-in- trade of the dealer’s business,
is not a ‘capital asset’ as per section 2 (14) (i).
(l) Goodwill of a business (Self-generated) It is a ‘capital asset’.

25. Capital Gains [B.com 2013 Honours]

State whether the following items are Capital asset or not u/s 2(14):
(i) Furniture held for personal use;
(ii) Agricultural land situated in a municipality having population of 22,000;
(iii) Stock of raw materials held for business purpose.
[Answer: (i) No (ii) Yes (iii) No]

26. Capital Gains [B.com 2014 Hons] [Exemption u/s 54]

What are the cost of acquisitions of bonus share if—
i. Bonus shares were allotted on 10-10-1998
ii. Bonus shares were allotted on 10-10-2001.

27. Capital Gains [B.com 2000, 2007 Honours]**

Sekhar furnishes the following information for the previous year 2021-22:
Building Shares
Date of Acquisition May 3, 2005 July 21, 2010
Date of Sale August 21, 2021 September 2, 2021
Cost of acquisition 3,50,000 10,000
Sale Proceeds 6,25,000 12,000
Compute taxable income from capital Gains for the assessment year 2022-23.
[Cost Inflation Index: 2005- 06 = 117, 2010- 11 = 167, 2021-22 = 317]

28. Capital Gains [Compiled by Ravi Bhalotia]****

K. Mandi furnishes the following particulars for the year 2021-22:
(a) He sold his residential house on December 15, 2021 for ₹ 16, 20,000 (he has inherited the house on the
death of his father on March 2, 1998 who constructed it at a cost of ₹ 75,000 – fair market value on
April 1, 2001 was ₹ 1, 20,000).
(b) He purchased a residential house in Kolkata on March 3, 2022 for ₹ 5,40,000.
(c) He sold the shares of X Co. Ltd. on February 12, 2022 for ₹ 18,700 (purchased on March 21, 2020 for
₹ 15,300). Such sale is not made in a recognised stock exchange in India.
[Cost Inflation Index: 2001- 02 = 100, 2021-22 = 317]

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29. Capital Gains [Compiled by Ravi Bhalotia] [B.com 2013 Hons type]****
X furnishes the following particulars in respect of his residential house property :
₹
House purchased on 03.07.1999 80,000
Fair Market Value as on 01.04.2001 1,20,000
Improvement made to the house on 08.07.2007 3,15,000
House sold on June 12, 2021 25,00,000
Expenses on transfer 2%
New residential house purchased on February 5, 2022 6,50,000
Compute capital gain chargeable to tax for the assessment year 2022-23.
[Cost Inflation Index: 2000- 01 = 100, 2007- 08 = 129, 2021-22 = 317]

30. Capital Gains [B.com 2012 Hons] [Exemption u/s 54F]

On 25-10-2021 Dimpi sold shares in a Co. for ₹ 7,60,000. She acquired those shares on 12-08-2010 for ₹
2,91,000. Expenses in connection with sales ₹ 4,500. She purchased a residential house on 20-01-2021 for ₹
3,00,000. Compute taxable capital gain for the assessment year 2022-23 (STT is not applicable).
[Cost Inflation Index: 2010- 11 = 167, 2021-22 = 317]

31. Capital Gains [B.com 2014 Hons] [Exemption u/s 54]

Mr. Banik furnishes the following information for the previous year 2021-22:
Residential house property at Gold
Howrah
Date of acquisition December 10, 2016 April 15,2015
Cost of acquisition ₹ 6,00,000 ₹ 8,00,000
Date of sale March 15, 2022 September 5, 2021
Sale proceeds ₹ 34,00,000 ₹ 25,00,000
Brokerage 2% on Sale Proceeds ----
During the previous year 2021-22, Mr. Banik purchased a residential house property at Shyambazar for ₹
12,00,000. Compute his taxable income from capital gains for the assessment year 2022-23.
[Cost Inflation Index: 2015- 16 = 254, 2016- 17 = 264, 2017- 18 = 272, 2021-22 = 317]

32. Capital Gains [B.com 2015 Hons]

Mr. Sardar acquired a inherited property on 30.8.2006 from his grandfather who purchased it at ₹ 2,10,000
on 30.6.2000. The Market Value of the property as on 1.4.2001 was 5,10,000. On 1.7.2005 he purchased
gold valued ₹ 1,50,000 the market value of which was ₹ 1,57,000 as on 1.4.2005. He sold both the assets on
30.11.2021 for ₹ 60,00,000 and ₹ 21,00,000 respectively. Calculate the amount of capital gain of Mr. Sardar
for the Assessment year 2022-23.
[Cost Inflation Index: 2001-02 = 100, 2005- 06 = 117, 2022-23 = 317]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 10:
Income From other sources
1. Basis of charge
As per sec. 56(1), any income, which is not specifically exempted and not chargeable under any other heads
of income, shall be chargeable under the head “Income from other sources”. This is the last and residuary
head of income.
A receipt shall be taxable under this head if the following conditions are satisfied:
• Such receipt shall be a taxable income; and
• Such income does not specifically fall under any one of the other four heads of income

2. List of incomes u/s 56(2) which are specifically taxable under this head
Income absolutely charged under this head:
The following income shall be chargeable to income-tax under the head 'Income from other sources:
(a) Dividends (Dividends from Indian company & Dividend from foreign Company both are taxable).
However collection charges & Interest on loan taken for investment will be allowed as deduction.****
(b) Gross amount of Casual Income before deducting TDS (any winnings from lotteries, crossword puzzles,
races including horse-races, card games and other games of any sort or from gambling or betting) ****
(c) Gifts (Where any sum of money exceeding ₹ 50,000 received by an individual or a Hindu undivided
family without consideration from a specified person, full amount will be taxable)
Income chargeable under this head if not charged under the head ‘Profits and gains of business or
profession’
(d) Interest on securities
(e) Income from letting of machinery, plant or furniture
(f) Composite Rent

3. List of incomes chargeable under this head by virtue of sec. 56(1)

Section 56(2) does not provide an exhaustive list of incomes chargeable under this head. Apart from the
incomes as mentioned above, the following are some of the examples of income chargeable to tax under this
head :
(a) Income from sub-letting ; ****
(b) Agricultural income outside India ****
(c) Fees received by a director for attending Board Meeting; ****
(d) Family pension payable on the death of the employee; ****
(e) Remuneration received from a person other than his employer for evaluation of answer scripts. However,
if such remuneration is received from employer, then the same will be taxable under the head “Salaries”.
(f) Honorarium for writing an article ****
(g) Interest on bank deposits, company deposits & loans.****
(h) Income from activity of owning & maintaining race-horses.****
(i) Rent from a vacant plot of land****
(j) Income from private tuitions.****
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4. Conversion of income received into gross income in case of casual income
Procedure of grossing up are as follow-
Lottery Income Received = Gross Lottery Income – TDS @ 30% on Gross Lottery Income.
Lottery Income Received = 70% of Gross Lottery Income
Lottery Income Received
Gross Lottery Income =
70%

5. Admissible deductions from Incomes under the head ‘Income from other
sources’
(a) Deduction for computing income from dividend: Any reasonable sum paid by way of commission or
remuneration to a banker or any other person for the purpose of realising dividend or interest on behalf
of the assessee shall be deducted.
(b) Deduction in respect of rental income from machinery, plant or furniture: current repairs and
insurance premium paid in respect of the premises ; amount paid in respect of repairs and insurance of
machinery, plant and furniture ; depreciation of buildings, machinery, plant or furniture
(c) Deduction in respect of income by way of family pension: One-third of such pension or ₹ 15,000,
whichever is less, will be allowed as deduction. For this purpose, 'family pension' means a regular
monthly amount payable by the employer to a person belonging to the family of an employee in the
event of his death.*****

6. Identification of heads of income

State the particular head of income under which the following incomes are to be assessed under the Income-
tax Act:
(a) Honorarium received by an author for writing an article in 'The Chartered Accountant',
(b) Family pension received by the widow on the death of her husband
(c) Salary received by a partner from the partnership firm for rendering a technical service in the concern.
(d) Dividend received by a dealer in shares held by him as stock-in-trade for his business,
(e) Remuneration received by a practising Chartered Accountant from the University of Kolkata for serving
there as a part-time lecturer.
(f) Fees received by a director of a company for attending Board meeting.
(g) Remuneration received by a professor for examining the answer scripts of MBA Examination. Solution:
Answer:
(a) Honorarium received by an author for writing an article in "The Chartered Accountant' is assessable
under the head 'Income from other sources' as there is no employer-employee relationship between the
author and the Institute.
(b) Family pension received by the widow is assessable under the head 'Income from other sources' as the
widow did not receive the pension as an employee.
(c) Salary received by a partner from the partnership firm is taxable under the head 'Profits and gains of
business or profession' as per Explanation 2 to section 15.
(d) Dividend received by a dealer in shares is assessable under the head 'Income from other sources' as per
section 56(2) though the shares are held by the assessee as stock-in trade for his business. However, such
dividend is exempt from tax under section 10(34) if the dividend is paid by a domestic company.

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(e) Remuneration received by a practising Chartered Accountant from the University of Kolkata for serving
there as a part-time lecturer is assessable under the head 'salaries' as he received the remuneration as an
employee of the University.
(f) Fees received by a director of a company for attending Board meeting shall be assessable under the head
'Income from other sources' as he received such fees for discharging his duties as director and not as an
employee of the company.
(g) Remuneration received by a professor for examining the answer-scripts of MBA Examination is
assessable under the head 'Income from other sources' as examining the answer-scripts is another act
apart from the terms of employment.

7. Identification of heads of income*****

Are the following incomes taxable? If they are taxable under which each will be taxed? Explain with
reasons.
(a) 1st prize won in a lottery ₹ 2,00,000.
(b) Remuneration received for valuation of answer-scripts from different universities ₹ 5,000.
(c) Interest from Post Office Savings Bank Account ₹ 4,000.
(d) Rent of a warehouse attached to his farm house in a remote village ₹ 40,000.
(e) A person bought a piece of land with trees. He sold the timbers of those trees for ₹ 10,000.
Answer:
(a) Income from lottery is treated as income and taxable in full. Therefore, lottery income of ₹ 2,00,000 is
fully taxable and to be assessed under the head 'Income from other sources'.
(b) Remuneration received for valuation of answer-scripts from different universities is assessable under the
head 'IFOS' as employer-employee relationship does not exist between the payer and the payee.
(c) Interest from Post office Savings Bank Account is exempt upto ₹ 3500 from tax under section 10(15).
(d) Rent received from a warehouse attached to the farm-houses in a remote village (assuming in India) is an
agricultural income as per section 2(1A)(c) and such income is exempt from tax under section 10 (1).
(e) Income from trees of spontaneous growth without any agricultural operations is not an agricultural
income and is, therefore, fully taxable. It is assessable under the head 'Income from other sources'.

8. Practical problem on IFOS : [B.Com 2004]

State the heads of income under which the following incomes are to be assessed:
(a) Family pension received by the widow of an ex-government employee.
(b) Fees received by a director of company for attending board meeting.
(c) Salary received by a partner from a partnership firm.
(d) Income from sub-letting.
(e) Property let out to employees of assessee's business.
Solution:
(a) Income from other sources
(b) Income from other sources
(c) Profit & Gains of Business or profession
(d) Income from other sources
(e) Profit & Gains of business or profession

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9. Practical problem on IFOS : [B.Com 2006 Honours]****
P submits the following particulars of his incomes and outgoings for the year 2022-23:
a. Dividend received from X CO. Ltd., an Indian company, ₹ 4,160; interest paid on capital borrowed for
the purpose of investment in such shares ₹ 500;
b. Interest on American Government Bond ₹ 15,700;
c. Winnings from horse races ₹ 13,200; expenses incurred for the same ₹ 2,000;
d. Income by way of owning and maintaining race-horses ₹ 8,900; expenses incurred for maintaining such
horses ₹ 1,200;
e. Winnings from lottery (net after deduction of tax @ 30%) ₹ 8,400;
f. Rent by way of letting plant and machinery along with a building (rent of building is not separable) ₹
18,000; rent collection charge ₹ 250; insurance premium ₹ 1,200; depreciation of buildings, plant and
machinery ₹ 4,500.
Compute his income from other sources for the relevant assessment year.
Solution:
Computation of income from other sources of P, a resident individual, for the
Assessment year 2022-23 relating to the previous year 2021-22
₹ ₹
Dividend from X Co. Ltd (4160 – 500) (Taxable) 3,660
Interest on American Government Bond 15,700
Winnings from horse races [no deduction for expenses is admissible as per section 58(4)] 13,200
Income by way of owning and maintaining race horses 7,700
[Gross income : ₹ 8,900 (-) Admissible expenses : ₹ 1,200]
Winnings from lottery (Gross: ₹ 8,400 x 100 ÷ 70) 12,000
Rent from letting of building, plant and machinery 18,000
Less: Admissible expenses (Collection charge ₹ 250 + Insurance premium ₹ 1,200 + 5,950 12,050
Depreciation ₹ 4,500)
Income from other sources 64,310
Note:
(a) It is assumed that ₹ 13200 being winning from horse race is already grossed up.
(b) No expenditure is allowed as deduction from winning from horse races.

10. Practical problem on IFOS :****

From the following information, compute income from other sources of Mrs. Biswas for the A.Y. 2022-23.
(i) Family pension @ ₹ 4,500 p.m.
(ii) Dividend received from an Indian Company ₹ 7,000 and from a foreign company ₹ 5,000.
(iii) Sub-letting of house @ ₹ 6,000 per month. Rent paid to landlord ₹ 4,500 per month, municipal
tax paid ₹ 2,000.
(iv) Winning from horse races ₹ 13200; expenses incurred for the same ₹ 2000
(v) Income by way of owning and maintaining race horses ₹ 8,900; expenses incurred for maintaining
such horses ₹ 1200
(vi) Winning from lottery (Net after deduction of tax @ 30%) ₹ 8,400
(vii) Accrued interest on NSC (including 6th year Interest ₹ 5,000) ₹ 25,000
[Answer: Income from other sources ₹ 1,24,900]

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11. Practical problem on IFOS : [B.com 2012 Honours]
From the following information, compute income from other sources of Mrs. Biswas for the A.Y. 2022-23.
(a) Family pension @ ₹ 4,500 p.m.
(b) Dividend received from an Indian Company ₹ 7,000 and from a foreign company ₹ 5,000.
(c) Sub-letting of house @ ₹ 6,000 per month. Rent paid to landlord ₹ 4,500 per month, municipal tax
paid ₹ 2,000.
[Answer: Taxable family pension ₹ 39,000; Dividend from Indian company ₹ 7000 ; Income from sub-
letting ₹ 16,000; Taxable dividend from foreign company ₹ 5,000; IFOS ₹ 67,000]

12. Practical problem on IFOS : [B.com 2015 Honours]

Mr. Mithun Mukherjee furnished the following information for the financial year 2021-22:
Director’s fee ₹ 22,000; interest on post office saving bank deposit ₹ 700; rent received from sub-letting a
house ₹ 33,250; rent payable by Mukherjee for the above house ₹ 19,000; other expenses incurred in
connection with the house amounted to ₹ 8,000; dividend from a foreign company ₹ 2,500. You are required
to calculate income from other sources of Mr. Mukherjee for the assessment year 2022-23.
[Answer: Taxable Director's fees ₹ 22,000; interest on post office saving bank deposit exempt under
section 10 (15); Income from sub-letting ₹ 6,250; Taxable dividend from foreign company ₹ 2,500;
Income From Other Sources ₹ 30,750]

13. Practical problem on IFOS : [B.com 2012 Pass]

Compute income from other sources for the assessment year 2022-23.
(i) Income from lottery (Net after deduction of tax @ 30%) ₹ 14,000.
(ii) Dividend from B LTD., an Indian Company ₹ 4,000.
(iii) Rent from sub-letting of house ₹ 18,000, rent collection charge ₹ 300, Insurance Premium ₹ 800.
(iv) Dividend from AK Ltd. a foreign company ₹ 12,000.
[Answer: Taxable Income from lottery ₹ 20,000; Dividend from Indian Company Taxable ₹ 4000;
Income from sub-letting ₹ 16,900; Taxable dividend from foreign company ₹ 12,000; Income From
Other Sources ₹ 52,900]

14. Practical problem on IFOS : [B.com 2013 Pass]

Shri Ajoy Ghosh furnishes the following particulars of his income for the year 2021-22:
(a) Dividend received from ABC Ltd., a foreign company ₹ 15,500;
(b) Dividend from HCL Ltd., an Indian Company ₹ 17,000;
(c) Interest received on fixed deposits from SBI ₹ 11,000;
(d) Interest on Post Office Savings Account ₹ 2,000;
(e) Directors’ fees for attending company meetings ₹ 22,000.
Compute Income from Other Sources for the assessment year 2022-23 of Mr. Ghosh.
[Answer: Income from other sources ₹ 65,500]

15. Practical problem on IFOS : [B.com 2014 Pass]

Amir furnishes the following particulars of his incomes for the year 2021-22.
i. Income from sub-letting ₹ 16,000;
ii. Winning from lottery (Net after deduction of tax @ 30%) ₹ 70,000;
iii. Dividends from Indian companies ₹ 18,000;
iv. Remuneration for setting question-paper ₹ 1,200;
v. Interest on Government bonds ₹ 5,000.
Compute his income from other sources for the assessment year 2022-23.
[Answer: Income from other sources ₹ 1,40,200]
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 11: Depreciation

Types of Assets
Sec. 32 provides for depreciation on -

Tangible assets Building, Machinery, Plant and Furniture.

Intangible assets Know how, Copyright, Trade Mark, Patent, Licence, Franchise, or any other business or
commercial right of the similar nature
The method of computing depreciation as per Income tax Act is entirely different from accountancy
method. For Income tax purpose, assets are categorised into Block of Assets.

Block of assets{u/s 2(11)}

Block of assets means a group of assets of same nature, in respect of which same rate of depreciation is
charged.
In other words, to fall in the same block, the following two conditions are to be satisfied:
• Assets must be of same nature;
• Rate of depreciation on such asset must be same.

Method of Depreciation
Depreciation shall be allowed on written down value method at the rates prescribed.

Rates of depreciation

Plant/Machinery 15% In general (if nothing is mentioned regarding nature of plant & machinery and
including motor car not used for hiring purpose)
Furniture 10% Any furniture including electrical fittings
Buildings 5% Residential building other than hotels and boarding
Buildings 10% Non residential building, godown, office, factory, etc. including hotels
Intangible assets 25% Acquired after 31/3/98

Calculation of depreciation (at a glance)

Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Assets (falling within the block) acquired during the previous year ***
ABC
Less: Sale Proceeds of assets (falling within the block) sold during the previous year (DE)
[subject to max. of ABC]
Written Down Value [XYZ cannot be negative] XYZ
Less: Depreciation (as a % on XYZ) (***)
Opening WDV for 1 st day of next year ****

When depreciation is not charged

Depreciation is not charged in the following two cases:
(1) When ‘DE’ (Sale proceeds) exceeds ABC, the excess shall be treated as short term capital gain.
(2) When ‘XYZ’ (Value of block before depreciation) is positive but the block does not have any asset. In
such case, such positive value shall be treated as short term capital loss.
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Significance of date of purchase (Effect of time on depreciation)
Significance of date of purchase (Effect of time on depreciation)
Where –
(a) An asset is acquired by the assessee during the previous year; and
(b) Is put to use in the same previous year for less than 180 days,
The depreciation in respect of such asset is restricted to 50% of the normal depreciation.
Except above, date of purchase has no relevance.
Note: There is no significance of date of sale for computation of depreciation

Additional depreciation [Sec. 31(1) (iia)]*

Applicability
 Additional depreciation is applicable on all assessee engaged in the business of manufacture or
production of any article or thing.
 Additional depreciation shall be available only on plant and machinery and not on other asset
like furniture, building, etc.
Rate of additional depreciation
 Rate of additional depreciation is 20% of actual cost of such plant or machinery.
 However, if the asset is acquired and put to use for less than 180 days then the rate additional
depreciation @ 10% (i.e., 50% of 20%) of actual cost shall be allowed in that previous year and
the deduction for the balance 10% shall be allowed in the immediately succeeding previous year.

Practical Questions
1. Depreciation u/s 32 [W.D.V. reduces to zero and the block ceases to exist]
From the undernoted particulars for the year 2021-22, calculate the amount of depreciation and capital gain
(or loss):
W.D.V. of the block of plant and machinery on April 1, 2021 ₹
(Consisting of plants A and B – depreciation rate 15%) 1, 50,000
Cost of plant C (Depreciation rate 15%) acquired during the year 50,000
All plants are sold during the year for (i) ₹ 1,80,000 and (ii) ₹ 2, 50,000.
Solution:
Computation of depreciation allowance and capital gain (or loss) for the previous year 2021-22
Case no. (i) Case no. (ii)
₹ ₹
W.D.V. of the block of plant and machinery on April 1, 2021 1, 50,00 1, 50,000
Add: Cost of plant C acquired during the year 50,000 50,000
2, 00,000 2, 00,000
Less: Sale proceeds of plant A, B & C 1, 80,000 2, 50,000
Short-term capital gain (+) / loss (-) (-) 20,000 (+) 50,000
Notes:
1. W.D.V. of the block for the year 2021-22 is nil irrespective of the sale proceeds of plants, as no plant
exists in the block on the last date of the previous year.
2. Depreciation allowance is not admissible for the previous year 2021-22 on this block as such block
ceases to exist on the last date of the previous year.
3. Excess and shortfall of sale proceeds are treated as short-term capital gains and short-term capital loss
respectively in view of the provision of section 50 (2).

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2. Depreciation u/s 32 [B.com 2007, 2005 Honours]
The information given below relates to Y ltd:
Machinery Motor Car
W.D.V on 01.04.2021 3,00,000 1,50,000
Purchases during 2021-22 1,00,000 75,000
Sales during 2021-22 50,000 2,50,000
Rate of depreciation 15 % 20 %
Other information
Purchases of Machinery includes one machine costing ₹ 40,000 purchased on 07.11.2021.
Calculate depreciation admissible or Capital gains, if any, for the Assessment year 2022-23.
[Depreciation on Machinery ₹ 49,500; Depreciation on Motor Car Nil; STCG on Motor Car ₹ 25,000]

3. Depreciation u/s 32 [B.com 2002 Honours]****

X, Ltd provides the following information regarding plant & machinery:
Opening WDV as on 1-4-2021 ₹ 6,00,000
Purchase of new machine on 28-11-2021 ₹ 2,00,000
Rate of depreciation chargeable 15%
Calculate dep. for the Assessment year 2022-23 if the sale proceeds of old machines is (a) ₹ 3,00,000 (b) ₹
6,50,000 (c) 10,00,000
[Depreciation on Machinery under case (a) ₹ 60,000 (b) ₹ 11,250 (c) Nil; STCG ₹ 2,00,000]

4. Depreciation u/s 32 [B.com 2000 Honours]****

Wriddhi supplied the following information for the Previous year 2021-22:
Plant & Machinery Patents
Written down value as on 1.4.21 2,00,000 --------
Purchases during 2021-22 1,20,000 80,000
Written down value of assets sold 80,000 -------
Sale proceeds of assets 70,000 -------
Plant and machinery costing ₹ 50,000 was purchased on 1st January, 2022
Rate of depreciation: Plant & Machinery 15%, Patent as per Income Tax Rules.
You are required to calculate depreciation for the Assessment year 2022-23.
[Depreciation on Machinery ₹ 33,750; Depreciation on Patent ₹ 20,000]

5. Depreciation u/s 32 [B.com 2012 Honours]****

From the following information compute allowable Depreciation u/s 32 for the A.Y. 2022-23:
(i) Original cost of Plant and Machinery on 1.4.21 ₹ 18,00,000.
(ii) W.D.V. of the Plant and Machinery on 1.4.21 ₹ 11,00,000.
(iii) Additions to the Plant and Machinery ₹ 3,00,000.
(Out of which Plant and Machinery costing ₹ 1, 00,000 purchased on 15.10.21)
(iv) Sale proceeds of machinery ₹ 1,00,000 (originally bought on 1.7.19 for ₹ 1, 40,000 and W.D.V.
on 1.4.21 ₹ 1, 01,150)
(v) Rate of depreciation is 15% for plant and machinery.
[Ans: Depreciation on Machinery ₹ 1,87,500]

6. Depreciation u/s 32 [B.com 2010 Honours]****

From the following information compute allowable Depreciation u/s 32 for the A.Y. 2022-23:
(a) W.D.V of the Machinery as on 1.4.2021 ₹ 1,00,000.
(b) A new Machinery was purchased on 15.6.2021 for ₹ 60,000 but put to use on 1.1.2022.
(c) Machine sold as scrap for ₹ 10,000.
(d) Rate of depreciation is 15%, additional depreciation is 20 %.
[Ans: Depreciation on Machinery ₹ 18,000; Additional Depreciation ₹ 6,000]
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

7. Depreciation u/s 32 [B.com 2012 Honours]****
From the following information compute allowable Depreciation & Capital gain/loss for the A.Y. 2022-23:
₹
(a) Written down value of Building A & B as on 1-4-2021 (Depreciation rate 10%) 2,50,000
(b) Cost of Building C purchased on November 15, 2021 (Depreciation rate 10%) 3,00,000
(c) (i) If all the buildings (A, B & C) are sold for ₹ 6,00,000
(ii) If Building (A & B) are sold for ₹ 5,00,000
(iii) If Building (A) is sold for ₹ 50,000.
[Ans: Case (i) STCG ₹ 50,000 (ii) Depreciation ₹ 2,500 (iii) Depreciation ₹ 35,000]

Chapter 12:
Expenditure on scientific research
1. Scientific Research [Sec. 35]
Scientific research means any activity for the extension of knowledge in the fields of natural or applied
science including agriculture, animal husbandry or fisheries [Sec. 43(4)]
Such research can be categorised either as –
(A) In-House research : Research done by the assessee himself (in connection with his business).
(B) Research through outside institutions: Any sum paid to outside agencies, engaged in scientific
research, to be used for scientific research.

2. In-house scientific research:

a) Revenue expenditure: All revenue expenses laid out or expended on scientific research during the PY
are fully allowed as deduction. (For example: Salary, Cost of Material, other revenue expenditure)
b) Capital expenditure: All capital expenses (except expenditure on acquisition on land) are allowed in
full like revenue expenses. (For example: Plant & Machinery, Furniture, Equipment etc)
Note:
Where a deduction is allowed in any previous year in respect of any capital expenditure or scientific
research, no deduction u/s 32 shall be allowed on such assets. [Sec. 35(2)(iv)]

3. Contribution/donation to outsiders
Deduction @ 100% shall be allowed in respect of expenditure on Research through outside institution.

4. Expenditure on scientific research [B.com 2007, 2005 Honours]

East India Pharmaceuticals Ltd. submitted the following list of expenses incurred in connection with research
during the Previous year 2021-22
For in-house research relating to its business
Cost of land ₹ 50000, purchase of machinery ₹ 75000 and ₹ 80000 towards salary of research personnel.
Contribution for carrying out approved research
₹ 40000 to Calcutta University for carrying out approved social research project. Calculate the amount of
deduction admissible for scientific research.

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5. Expenditure on scientific research [B.com 2011 Honours]
Mr. Majumdar, a businessman incurred the following scientific research expenditure during the
previous year 2021-22:
(a) Purchase of Land ₹ 1,50,000
(b) Construction cost of Building ₹ 2,80,000
(c) Purchase of Plant & Machinery ₹ 2,50,000
(d) Salary of Research Personnel ₹ 80,000
(e) Payment to Kolkata university for approved statistical research ₹ 50,000
Compute allowable deduction u/s 35 of Income Tax Act for the AY 2021-22.

6. Expenditure on scientific research

M/s North India a manufacturing Firm submitted the following list of expenditure incurred in connection
with research during the previous year 2021-22. Compute deduction u/s 35 of Income Tax Act, 1961:
i. For in-house research Expenditure:
Cost of land ₹ 3,50,000
Purchase of machinery ₹ 2,75,000
Salary to research personnel ₹ 1,00,000
Purchase of materials for research purpose ₹ 1,50,000
ii. For contribution to approved research project: Payment to National Laboratory for approved Scientific
Research ₹ 50,000.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 13:
Profits and gains of business
1. Chargeability:
Under sec 28 (i) an income will be chargeable to tax if the following conditions are satisfied:
 There should be a business or profession
 The business or profession should be carried on by the assessee
 The business or profession should be carried for some time during the PY

2. Business Loss:
Following business loss is deductible in computing profits & gains of business or profession:
i. Loss on account of embezzlement by an employee
ii. Loss of stock-in-trade by fire and other natural calamities
iii. Loss on account of robbery and theft
iv. Loss due to non-recovery of advances for supply of supply raw-materials
v. Loss caused due to breach of contract for delivery of goods

3. Other deduction (section 36)

i. Insurance premium of stock
ii. Insurance of health of an employee
iii. Bonus or commission to employee
iv. Interest on borrowed capital
v. Employers’ contribution to a RPF or approved superannuation fund
vi. Bad debts {u/s 36 (1) (vii)}

4. General deduction { u/s 37(1)}

i. Salary and perquisite paid to an employee
ii. Penalty or interest paid for delay in completion of a contract
iii. Legal expenses incurred in connection with the business or profession
iv. Legal charges and other expenses for obtaining the loan
v. Legal and court expenditure spent for preparation and pursuing income-tax appeals

5. Expenses allowable under Central Board of Direct Tax (CBDT)

i. Dewali and mahurat expenses
ii. Advertisement expenses
iii. Sales tax

6. Losses/expenses, which are not deductible

i. Loss incurred due to damage, destruction, etc of capital assets
ii. Anticipated losses of subsequent year (For example: Provision for bad debts)
iii. Penalty paid to custom authorities, sales tax authorities, income tax, authorities, etc for infraction of laws
is not deductible
iv. Legal expenditure to acquire the title of a capital asset
v. Income Tax, Wealth Tax
vi. Any interest, royalty, salary, fees for technical services, etc. payable outsid India on which tax is not
deducted at source
vii. Excessive or unreasonable payment made to relative.

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7. Cash Payment Disallowed if payment exceeds 10,000 [Section 40A (3)]
Under section 40A(3) where an assessee incurs any expenditure, in respect of which payment is made, in a sum
exceeding ₹ 10,000 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft, 100 % of
such expenditure shall not be allowed as a deduction.
Exceptions [Rule 6DD]
Where the payment is made for the purchase of Agricultural or forest produce to the cultivator, grower or
producer of such articles, produce or products;

8. Recovery of bad debts [Sec. 41(4)]

Particulars Amount
Amount recovered ******
Less: Bad debt claimed – Bad debt allowed as deduction ******
Taxable bad debt recovery ******

9. Expenditures allowed on cash basis [Sec. 43B]

Deduction in respect of following expenses are allowed only if payment is made on or before the due date for
furnishing return of income of the previous year in which such liability is incurred:
(a) Any sum payable by way of tax, duty, cess, fee etc
(b) Any sum payable as bonus or commission to employees for services rendered.
(c) Any sum payable as interest on loan
(d) Any sum payable by an employer by way of contribution to any provident fund, superannuation
fund, gratuity fund or any other fund for the welfare of employees.
Note:
If payment is not made before the date mentioned above, then no allowance shall be allowed in respect of the
outstanding liability. Deduction can, however, be claimed in the year of payment.

10. Computation of income from business or profession (Direct Method)

Income as per section 28:

Consultation fees
Audit Fees
Other revenue Income
Less: Expenditure allowed u/s 30 to 43 D
Office Rent (Section 30)
Repairs of plant & Machinery (Section 31)
Depreciation (Section 32)
Sundry Expenditure [as per section 37 (1)]

Profit or gains of business or profession

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

11. Computation of income from business or profession (indirect Method)
A simple format for computation of income from business:

Computation of Business Income (Indirect Method)

Particulars ₹ ₹
Net profit as per Profit and Loss Account Xxx
Add: Expenses debited to P/L Account but disallowed by the Income-tax Act:
Income-tax xxx
Depreciation as per Books Xxx
Legal charges & Penalty for infraction of law Xxx
Provision for bad debt Xxx
Donations xxx
Interest on capital Xxx
Expenses of other heads xxx
Salary paid to self xxx
Rent paid to Self xxx
Goods Withdrawn for personal use (cost Price) xxx
Life insurance Premium paid xxx xxx
Household Expenses (For example: Salary to Domestic servant, cook etc)
Less: Expenses not debited to P/L Account but allowed by the Income-tax Act
Capital expenditure on scientific research Xxx
Depreciation as per Income-tax Rules, etc. Xxx Xxx
Less: Incomes credited to Profit and Loss Account but not chargeable under Xxx
The head ‘Profits and gains of business or profession’:
Bank interest Xxx
Dividend received Xxx Xxx
Capital Gains
Less: Items credited to P/L Account as income but not taxable as per the Act: Xxx
Income Tax Refund Xxx
Bad debt recovered out of bad debt disallowed in earlier year, etc. Xxx

Selling price Goods Withdrawn for personal use (Included in sales) Xxx Xxx

Stock Adjustment:
Add: Overvaluation of Opening Stock
Add: Undervaluation of Closing Stock
Less: Undervaluation of Opening Stock
Less: Overvaluation of Closing Stock
Profit & Gains of Business or Profession
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Long Question:
1. Profit & Gains of Business or profession [Admissibility]
Discuss the admissibility of the following losses in computing the income chargeable under section 28:
(a) The cashier of a concern has been entrusted to collect the dues from one of its customers who have
collected the same but embezzled.
(b) Loss suffered by a bank due to dacoity where huge amount of cash along with ornaments kept by the
customers in safe deposit lockers have been carried away by the dacoits at mid-night.
(c) Compensation paid by a concern due to delay in delivery of the goods as per contract.
(d) A deposit was made in a bank which has become sick and the assessee could not recover 60% of such
deposit.
Solution:
(a) Embezzlement of cash by the cashier, in such a case, is a trading loss as collection of cash by the cashier
is a normal practice in the course of trade and hence allowable as deduction
(b) Loss of cash and ornaments suffered by the bank due to dacoity even after office hours is a trading loss
and hence allowable as deduction
(c) Compensation paid by the concern due to delay in delivery of the goods is treated as normal loss
incidental to business and hence allowable
(d) Loss for non-recovery of advances made in the bank caused by the failure of such bank should be treated
as a loss incidental to trade and hence allowable

2. Profit & Gains of Business or profession [Admissibility]

Indicate, with reasons, whether the following expenses are deductible in computing income from business
for the assessment year 2022-23:
(a) ₹ 15,000 paid to a lawyer for conducting income-tax appeal; the appeal was, however, dismissed.
(b) ₹ 5,000 paid to a Chartered Accountant for preparation and filing of income-tax return.
(c) ₹ 10,000 paid to a lawyer to examine the title deed of a land which the assessee intends to purchase.
(d) The title of a building acquired by the assessee is under dispute and the assessee is being used by a party
claiming as the owner of the said building. The assessee deputed a lawyer to defend the suit and paid him
₹ 18,000 during the year.
(e) Fines of ₹ 5,000 paid for delay in payment of sales tax.
(f) Penalties of ₹ 2,500 paid to custom authority for infraction of custom rules.
Solution:
(a) ₹ 15,000 paid to a lawyer for conducting income-tax appeal is allowable as deduction in full.
(b) An amount of ₹ 5,000 paid to a Chartered Accountant for preparation and filing of income-tax return is
not allowable as deduction
(c) Amount of ₹ 10,000 paid to a lawyer by the assessee for examining the title deed of a land which has
not yet acquired by him is a capital expenditure and hence disallowed
(d) ₹ 18,000 paid to a lawyer to defend a suit filed by a party on the title of an existing asset of the assessee
is allowable as deduction in full under section 37 (1)
(g) ₹ 5,000 paid as fine for delay in payment of sales tax is allowable as deduction in full under section 37 (1)
(h) Penalty of ₹ 2,500 paid to custom authority for infraction of custom rules is not allowable as deduction

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

3. Profit & Gains of Business or profession [B.com 2001 Honours]****
From the following receipts and payments account submitted by Dr. Sekhar Roy chowdhury, a medical practitioner,
compute his professional income for the relevant assessment year.
Receipts and Payments Account for the year ended 31st March, 2022
₹ ₹
To balance b/d 18,300 By electricity (chamber) 1,000
To consultation fees 46,300 By LIC premium 4,400
To visiting fees 15,800 By cost of medicines 6,100
To dividends 8,200 By purchase of T.V. set 14,000
To surgical fees 20,500 By rent of chamber 6,600
To interest on fixed deposits 7,600 By household expenses 60,200
To gifts from patients 1,400 By compounder’s salaries 9,600
To sale of medicines 12,900 By motor car expenses 10,000
To sale of land 70,000 By subscription to medical journal 1,800
By travelling expenses (personal) 20,000
By balance c/d 67,300
2, 01,000 2, 01,000
Notes:
i. Depreciation allowable: On surgical instruments ₹ 4,500; On motor car ₹ 5,000; (ii) 25% of the use of the
motor car may be attributed to private purpose; (iii) Fees still payable to Indian Medical Association ₹
1,000; Professional tax payable ₹ 250.
Solution:
Computation of income from profession of Dr. Sekhar Roy chowdhury, a resident individual,
For the assessment year 2022-23 relating to the previous year 2021-22
₹ ₹
Gross professional income:
Consultation fees 46,300
Visiting fees 15,800
Surgical fees 20,500
Sale of medicines 12,900
Gifts from patients (Assuming it has resulted
from the exercise of his profession) 1,400 96,900
Less: Admissible expenses:
Electricity expenses for chamber 1,000
Purchase of medicines 6,100
Rent of chamber 6,600
Compounder’s salaries 9,600
Motor car expenses (75/100 x ₹ 10,000) 7,500
Depreciation of motor car (refer to note 4) 5,000
Depreciation of surgical instruments 4,500
Subscription of medical journal 1,800
Fees to Indian Medical Association 1,000 43,100

53,800
Notes:
1. Dividends and interest on fixed deposits are assessable under the head ‘Income from other sources’.
2. Sale of land is assessable under the head ‘Capital gains’.
3. The following expenses are not allowed as deduction as such expenses are not related to profession: LIC premium,
household expenses and personal travelling expenses. Purchase of T.V. set is a capital expenditure and hence not
allowed as deduction.
4. It is assumed that depreciation on motor car of ₹ 5,000 given in the problem represents the amount of depreciation
allowable for the portion of the motor car used for the purpose of the profession.
5. Fees payable to Indian Medical Association are allowed as deduction on the assumption that accounts are
maintained on mercantile system.
6. Professional tax not paid within the previous year is not allowed as deduction on the assumption that it is not paid
on or before the due date of furnishing the return of income.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

4. Profit & Gains of Business or profession
The following is the Profit and Loss Account of S. Dhar for the year ended 31st March, 2022:
₹ ₹
To Office salaries 52,000 By Gross Profit 2, 38,300
To Proprietor’s salaries 24,000 By Commission 5,400
To Rent 36,000 By Income tax refund 1,800
To Insurance of stock 8,300 By Bank interest 7,900
To Life insurance premium 9,700 By interest from US 64 Bonds 5,200
To Purchase of furniture 12,500 By profit on sale of machinery 12,500
To Motor car expenses 15,700
To Donation 3,500
To Bad debt 7,200
To Reserve for bad debt 8,500
To Income-tax 9,700
To Depreciation 12,000
To Interest on capital 7,300
To general expenses 3,700
To Net Profit 61,000
2, 71,100 2, 71,100
Compute income from business of S. Dhar for the assessment year 2022-23 after taking into consideration the following
additional information:
(a) Rent includes ₹ 12,000 being the rent of the building occupied by the proprietor for his own residence.
(b) 20% of the motor car is used for private works of the proprietor.
(c) Depreciation as per I.T. Rules amounts to ₹ 9,700.
Solution:
Computation of income from business of S. Dhar, a resident individual, for the
Assessment year 2022-23 relating to the previous year 2021-22
₹ ₹
Net profit as per Profit and Loss Account 61,000
Add: Inadmissible expenses:
Proprietor’s salaries 24,000
Rent of the building occupied by the proprietor 12,000
Life insurance premium (being personal expenses) 9,700
Purchase of furniture (being capital expenditure) 12,500
Motor car expenses (20% of ₹ 15,700) 3,140
Donations 3,500
Bad debt (Assumed allowed by A.O.) Nil
Reserve for bad debt 8,500
Income-tax 9,700
Depreciation (treated separately) 12,000
Interest on capital 7,300 1, 02,340

1, 63,340
Less: Admissible expenses:
Depreciation as per Income-tax rules 9,700
1, 53,640
Less: Income not taxable:
Income tax refund 1,800
Interest from US 64 Bonds 5,200 7,000
1, 46,640
Less: Income not taxable under this head:
Bank interest
7,900
Profit on sale of machinery 12,500 20,400
Income from business 1, 26,240

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

5. Profit & Gains of Business or profession [Important]*****
Mr. Pinka Mekherjee submits the following Profit and Loss Account of his business for the year ended
31.3.2022
Particulars Amount Particulars Amount
(₹) (₹)
To Opening Stock 45,000 By Sales 4,90,000
To Purchases 3,50,000 By Closing Stock 50,000
To Salaries 21,000 By Bad Debt Recovered 3,000
To Depreciation 22,000 (Disallowed in earlier year)
To Advertisement 30,000 By Interest on fixed deposit 10,000
To Provision for Income Tax 10,000
To life insurance premium 5,000
To GST 6,000
To Provision for Bad Debt 1,000
To Bad Debt 5,000
To Interest on Capital 2,000
To Legal Expenses 6,000
To Net Profit 50,000
5,53,000 5,53,000
Other Information:
i. Depreciation as per Income Tax Rule ₹ 25,000
ii. Salary include ₹ 6,000 paid to Mr. Mukherjee
iii. Closing stock overvalued by ₹ 5,000
iv. Sale include ₹ 20,000 being the value of goods withdrawn by the proprietor, cost of which is ₹
18,000.
v. Legal charges include ₹ 2,000 paid as penalty for infringement of GST Law.
Compute income from business for the Assessment year 2022-23.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Solution
Computation of Profits and gain or profession for the A.Y. 2022-23
Particulars Note Details Amount
Net loss as per books of accounts 50,000
Add: Expenditure disallowed but debited in P/L A/c
Provision for income tax 1 10,000
Life Insurance Premium 2 5,000
Provision for Bad Debts 3 1,000
Interest on Capital 4 2,000
Depreciation 5 22,000
Salary to himself 4 6,000
Goods withdrawn for personal use 4 18,000
Penalty 6 2,000 66,000
1,16,000
Less: Expenditure allowed but not debited in P/L A/c:
Depreciation as per I.T. Rules 5 25,000
Less: Income not taxable but credited to P/L A/c
Bad debts recovered 3,000
Overvaluation of stock 5,000
Sales to himself 4 20,000
Less: Income taxable under other head of income:
Interest on fixed deposit 10,000 63,000
Profits and Gains of Business or Profession 53,000

Notes:
1. Income tax is specifically disallowed u/s 40(a)
2. Personal expenditure is not allowed as deduction
3. Any anticipated loss is not allowed as deduction.
4. Sales, salary to himself on capital to proprietor is not allowed as no one can earn from himself.
5. Depreciation as per I.T Rules shall be allowed.
6. A fine paid in contravention of law is disallowed.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

6. Profit & Gains of Business or profession
Mr. Rupam Goswami (45 years) is a medical practitioner of Kochi. His income and expenditure account for
the year March 31, 2022 is as under:
₹ ₹
Medicine consumed 6,72,000 Consultation fee 8,00,000
Staff salary 3,40,000 Medical charges 8,80,000
Clinic consumables 1,24,000 Dividend from Indian companies 34,800
Rent paid 96,000 Winning from lottery 28,000
Administrative expenses 2,00,000 Rent from property let out 43,200
Payment to IIT Delhi for Approved 80,000
scientific research

Depreciation on clinical equipments 40,000

Net profit 2,34,000

17,86,000 17,86,000
Other information:
a) Clinical equipments are – April 1,2021, opening WDV: ₹ 3,60,000 new acquisition on October 1,
2021: ₹ 80,000.
b) Rent paid includes ₹ 28,800 paid by cheque towards rent for his residence.
c) Rent received relates to property let out at Kochi. The municipal tax of ₹ 7,200 paid in January 2022
has been included in “administrative expenses”.
d) Rate of depreciation on clinic equipment is 15%.
Compute income from Profession of Mr. Goswami for the A.Y. 2022-23.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Solution
Computation of Profits & Gains of business or profession of Mr. Rupam Goswami for the A.Y.
2022-23
Particulars Details Amount Amount
Income:
Consultation fees 8,00,000

Medical charges 8,80,000 16,80,000

Less; Expenses allowed
Medical consumed 6,72,000

Staff salary 3,40,000

Clinic consumables 1,24,000
Rent paid ₹ 96,000 – ₹ 28,800 67,200
Administrative Expenses ₹ 2,00,000 – ₹ 7,200 1,92,800
Payment to IIT Delhi 100% of 80,000 80,000
Depreciation (₹ 3,60,000 + ₹ 80,000) x 15% 66,000 15,42,000
Profits & Gains of business or profession 1,38,000
Notes:
1. Rental income from house property is taxable under the head ‘income from house property’.
2. Winning from lottery is taxable under the head ‘Income from other sources’.
3. Dividend from Indian companies is taxable under the head ‘Income from other sources’.
4. It has been assumed that new Equipments have been put to use for more than 180 days durimng
the previous year 2021-22.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

7. Profit & Gains of Business or profession [B.com 2013 Pass]**
Dr. D. Mukherjee is a renowned medical practitioner. He furnishes his Receipts & Payments Account for the
year ended 31st March, 2022:
₹ ₹
To Balance b/d 2, 70,000 By Rent of clinics 35,000
To Consultation fees 1,70,000 By Electricity & water 60,000
To Visiting fees 80,000 By Purchase of professional books 20,000
To Loan from Bank 5, 00,000 By household expenses 50,000
(for Professional purpose)
To Gifts from patients 20,000 By purchase of motor car 2,00,000
By Surgical instruments 3,00,000
By Salary to compounder 60,000
By Life insurance premium 40,000
By Interest on loan 30,000
By Car expenses 60,000
By Balance c/d 1,85,000
10,40,000 10,40,000
Compute his Income from Profession for the assessment year 2022-23 considering the following additional
information:
(a) One-fourth of the car expenses are in connection with personal use;
(b) Depreciation on motor car is allowed @ 15%.
(c) Depreciation on surgical instruments is allowed @ 40%.

8. Profit & Gains of Business or profession [B.com 2015 Pass]**

Following is the Receipt and Payment Account of Sri Biyani, a practicing Chartered Accountant for the year
ended 31st March, 2022:
Receipts Payments
Balance b/d 2,000 Rent 12,000
Audit fees 35,000 Salary to Office Staff 5,000
Fees from other accounting works 3,500 Electric Charges 2,000
Examiner’s remuneration from ICAI 1,500 Remuneration to Audit Clerk 3,000
Gift from Clients 1,000 Household expenses 10,000
Interest on Deposit 2,000 Motor car expenses 8,000
Life Insurance Premium 2,500
Books and Journals 500
Membership Fee of ICAI 1,000
Balance c/d 1,000
45,000 45,000
Further information:
(a) The rent and electric charges are in respect of a house, of which half the portion is used for self
residence and remaining half portion is used for the office of his profession.
(b) W.D.V. of motor car as on 1.4.21 ₹ 40,000. Depreciation allowable on motor car @ 15 % p.a. 50%
of the use of motor car is for personal purposes.
Compute Income from Profession of Mr. Biyani for the assessment year 2022-23.
[Ans: Profit & Gains of Business or Profession ₹ 16,000; Depreciation allowable u/s 32 ₹ 3,000]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

9. Profit & Gains of Business or profession [B.com 2013 Honours]**
Following is the Receipts and Payments Account of Mrs. Shruti Chomal, a particing Chartered Accountant, for the
year ended 31st March, 2022:
Receipts ₹ Payments ₹
To Balance b/f 30,000 By Rent 30,000
To Audit Fees 1,80,000 By Stipend to article clerk 12,000
To income from accounting works 60,000 By Salary to office staff 25,000
To Examiner’s Remuneration 5,000 By household expenses 64,500
To Presents from clients 2,000 By Motor Car expenses 18,000
To Dividend from Indian Company 13,000 By Subscription to C.A. Institute 2,500
By Donation to C.U. 5,000
By Books and journals purchased for 2,400
professional purposes
By Motor Car purchased 1,00,000
By Life Insurance premium 7,600
By Balance c/f 23,000
2,90,000 2,90,000
Other Information:
(a) Rent is in respect of premises occupied by MRS. Chomal. One half of the premises were used by her for own
residence and the other half was used for office.
(b) One half of motor car expenses are in respect of her professional practice.
(c) WDV of motor car as on 01.04.2021 ₹ 50,000. Sale proceeds of old motor car ₹ 40,000. New Motor car
purchased on 01.01.2022. Depreciation allowable on motor car @ 15 % p.a.
Compute income from profession of Mrs. Shruti Chomal for the assessment year 2022–23.
[Ans: Profit & Gains of Business or Profession ₹ 1,71,600; Depreciation allowable u/s 32 ₹ 4,500]

10. Profit & Gains of Business or profession [B.com 2015 Honours]**

CA. Arijit Mukherjee is a practicing Chartered Accountant at Kolkata. From the following receipts and
payments Accounts compute income from profession for Assessment year 2022-23.
Receipts Amount Payments Amount
Balance b/f 2,00,000 Salary to staff 2,79,500
Professional receipts 8,14,000 Professional expenses 14,000
Income from accounting work 40,000 Miscellaneous office expense 8,000
Salary from collage as guest Lecturer 25,000 Purchase of car 2,00,000
Interest on Fixed Deposits 80,000 Motor car expenses 1,15,000
Gift from client (on appreciation of service) 20,000 Donation to Calcutta university 10,000
Examiner’s remuneration 7,500 Household expenses 10,000
Purchase of professional journals 50,000
Balance c/f 5,00,000
11,86,500 11,86,500
Other information:
(a) 1/4th of the motorcar expenses related to personal use.
(b) Depreciation allowable of the motor car as per I.T. Rules is ₹ 17,250.
[Ans: Profit & Gains of Business or Profession ₹ 4,19,000; Depreciation allowable u/s 32 ₹ 17,250]

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

11. Profit & Gains of Business or profession [B.com 2012 Pass]**
Pankaj submits the following Profit & Loss Account of his business for the year ended 31st March, 2022.
₹ ₹
To Opening Stock 45,000 By Sales 4,91,400
To Purchases 3,50,000 By Closing Stock 55,000
To Wages 21,000 By Bad Debts recovered 6,300
To Salaries 22,700 (disallowed in earlier year)
To Rent 14,000 By Bank Interest 15,500
To Depreciation 14,200
To Advertisement 21,300
To Provision for income-tax 4,000
To Life Insurance Premium 6,800
To Provision for bad debts 6,400
To Bad Debts 8,400
To Interest on Capital 2,800
To Miscellaneous Expenses 4,800
To Net Profit 46,800
5,68,200 5,68,200
Compute Income from business for the assessment year 2022-23 considering the following additional
information:
(a) Depreciation as per I.T Rules amounts to ₹ 14,000.
(b) Sales include ₹ 20,000 being the value of goods withdrawn by the proprietor. The cost and market price
of such goods on the date of withdrawal were ₹ 18,000 and ₹ 25,000 respectively.
[Ans: Profit & Gains of Business or Profession ₹ 43,200]

12. Profit & Gains of Business or profession [B.com 2014 Pass]**

Debesh is a business-man. He furnishes his Profit & Loss account for the year ended 31st March, 2022:
₹ ₹
To Opening Stock 55,000 By Sales 5,30,000
To Purchases 3,75,000 By Closing Stock 66,000
To Wages 31,000 By Profit from sale of Building 12,300
To salaries 22,700 By Bank Interest 5,200
To Advertisement 14,000 By Commission Received 5,300
To Depreciation 19,200 By Bad Debt Recovered 12,000
To Audit Fees 8,000 (Allowed in previous year)
To Provision for Income-Tax 4,500
To Import Duty 11,300
To Donation 6,700
To Provision for Bad Debts 5,500
To Motor Car Expenses 7,800
To Miscellaneous Expenses 9,300
To Net Profit 60,800
6,30,800 6,30,800

Compute his Income from Business for the assessment year 2022-23 considering the following additional
information:
i. Stocks are overvalued by 10%
ii. Depreciation as per IT Rules amounts to ₹ 20,000
iii. 1/3 rd of motor car expenses are in connection with personal use.

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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

13. Profit & Gains of Business or profession [B.com 2014 Honours]**
From the following Profit and Loss A/c other relevant information, compute income from business of
Ratanlal for the A.Y. 2022-23:
₹
To opening stock 11,000 By Sales 5,20,000
To Purchases 2,50,000 By Dividend from foreign Company 4,000
To Salaries 50,000 By Bad debt recovery 35,000
(Disallowed in 2009-10)
To Business expenses 7,500 By Bank Interest 15,000
To Income Tax 8,500 By closing stock 66,000
To Fine paid to Excise Dept. 12,000
To provision for bad debts 8,000
To Depreciation 27,000
To Donation to Puri temple 10,000
To Sales Tax 16,000
To Travelling expenses 5,000
To Advertisement 15,000
To Net Profit 2,20,000
6,40,000 6,40,000
Additional information
(a) Both opening and closing stock have been valued at 10% above cost.
(b) Business expenses include (i) wages @ 200 p.m. to his domestic servant; (ii) Life insurance premium of
₹ 1,600 on his own life.
(c) Purchases include a payment of ₹ 40,000 made in cash.
(d) Depreciation as per I.T. Rules ₹ 22,000.
[Ans: Profit & Gains of Business or Profession ₹ 2,48,500]

14. Profit & Gains of Business or profession [B.com 2002 Honours]****

The Profit & Loss Account of Mrs. S. Chatterjee for the Previous year 2021-22 showed a net profit of ₹
75,000 for her proprietary business. The Assessing Officer analyses the following irregularities:
(a) P/L A/c. is debited with interest on capital - ₹ 18,000, own salary - ₹ 12,000 and income tax - ₹ 20,000;
(b) Salary includes payment of wages @ ₹ 500 p.m. to the servant and @ ₹ 250 p.m. to the cook of his own
residence;
(c) Rent includes a sum of ₹ 6,000 paid for the godown belonging to the assessee;
(d) Profit & Loss Account is debited with provision for doubtful debts ₹ 4,000 and bad debts of ₹ 6,000; of
which a debt of ₹ 2,000 is disputed in the court and not yet settled;
(e) Depreciation on business assets excess debited to the P/L A/c by ₹ 6,000 as per I. T. Rules;
(f) Legal charges includes ₹ 4,000 paid for income tax appeal case and ₹ 6,000 as penalty for infringement
of Custom's Rules;
(g) Insurance includes premium paid on LIC on own life of ₹ 4,000 per year;
(h) Sundry expenses includes the donation to P.M. National Relief Fund ₹ 5,000 and ₹ 2,000 to Janata Dal;
(i) The opening stock (₹ 45,000) is valued at 10% below cost but closing stock (₹ 60,000) is valued at 20%
above cost;
(j) Sales include for the amount of ₹ 12,000 goods withdrawn by assessee for his personal consumption.
Cost of such goods is ₹ 12,000, but present market value is ₹ 15,000;
(k) Profit & Loss Account is credited by refund of income tax ₹ 6,000, bad debts recovered ₹ 5,000 (related
to bad debts disallowed in earlier assessment), Dividend from UTI ₹ 12,000 and Bank interest ₹ 7,000.
Compute income from business of Mrs. S. Chatterjee for the Assessment year 2022-23.
[Profit & Gains of Business or profession ₹ 1,22,000]
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Note:
(i) Interest on capital, Salary and Rent to proprietor is not allowed as no one can earn from himself.
(ii) Income tax is specifically disallowed.
(iii) Expenditure of personal nature is not allowed as deduction.
(iv) Any reserve or provisions are not allowed as deduction as these are not expenditure or loss.
(v) Depreciation is allowed as per I.T. Act not as per books.
(vi) Donation is not allowed as it is not related to business.
(vii) Bad debt recovery is taxable only if it is earlier allowed.
(viii) Refund of Income tax is not an income.
(ix) UTI Dividend is exempt u/s 10 (35) & Bank Interest is taxable as income from other sources.
(x) Over valuation of closing stock ₹ 10,000 & Under valuation of opening stock ₹ 5,000
(xi) Payment of LIC premium is eligible for deduction u/s 80 C.
(xii) Bad Debt is allowed as deduction even if it is disputed in the court.

15. Profit & Gains of Business or profession [B.com 2006 Honours]**

From the following profit and loss account of Mr. X for the year ending on March 31, 2022, compute his
income from business for the Assessment year 2022-23:
Particulars ₹ Particulars ₹
To Opening Stock 4,00,000 By Sales 40,00,000
To Purchases 30,00,000 By Closing Stock 4,80,000
To Salaries 8,00,000 By Income from house property 80,000
To Rent, rates and taxes 1,20,000 By Dividend from an Indian Co 9,000
To Legal charges 40,000
To Miscellaneous expenses 20,000
To Provision for bad debts 30,000
To Provision for income tax 40,000
To Salary to Mrs. X 36,000
To Depreciation 40,000
To Net Profit 43,000
45,69,000 45,69,000
(a) Purchase includes ₹ 1,00,000 paid in cash to a cultivator for purchase of agricultural produce
(b) Purchases also include ₹ 10,000 paid by way of compensation of a suppliers as the assessee was unable
to take delivery of goods due to lack of storage space and finance.
(c) Opening stock was overvalued by 25% and closing stock was undervalued by 25%
(d) Salary includes ₹ 15,000 paid as bonus on the occasion of Diwali over and above the bonus payable
under the Payment of Bonus Act, 1965.
(e) Rent, rates and taxes include ₹ 10000 on account of disputed sales tax demand, ₹ 3,000 on account of
municipal taxes for let out property. It also includes ₹ 5,000 as customs penalty paid during the year
(f) An amount of ₹ 20,000 due from customer was written off from the provision for bad debts.
(g) Mrs. X is a law graduate and is actively working in the assessee's firm.
[Profit & Gains of Business or Profession ₹ 2,52,000]
Note:
(i) Any anticipated loss is not allowed as deduction.
(ii) Income tax is specifically disallowed.
(iii) Municipal tax paid on let out property shall be deducted from income from house property.
(iv) Any payment for infringement of law is not allowed as deduction.
(v) Bad debt written off is allowed u/s 36 (1).
(vi) Dividend is exempted u/s 10 (34).
(vii) Under valuation of closing stock ₹ 1,60,000; Overvaluation of opening stock ₹ 80,000.
(viii) As Mrs. X is actively engaged in the business, it is assumed that salary paid to her is not in excess.
(ix) Cash payment to cultivator is covered under rule 6DD, thus such payment does not hit by provision of
section 40A (3).
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Bhalotia Classes (9883034569): Taxation I (4th Semester AY 2022-23)

Chapter 14: Deductions Chapter VIA

In computing the total income of an assessee, certain deductions are permissible under sections 80C to 8OU
from Gross Total, Income. These deductions are however not allowed from the following incomes although
these incomes are part of Gross Total Income:
(a) Long-term capital gains.
(b) Winnings of lotteries, races, etc.
Note:
Deductions cannot exceed Gross Total Income [Excluding Long term capital Gain & Winning from lotteries]

Deduction u/s 80C in respect of Life Insurance Premium,

contributions to provident fund, etc
Applicable to
An Individual or a Hindu Undivided Family (whether resident or non-resident)
Qualifying Amount:
Deduction allowed on account of the following savings/investment:
(a) Life insurance paid for himself, spouse and any child of the individual [Child may be
married/unmarried, dependent/not dependent]; No deduction for premium paid for Parents; Brothers,
sisters etc. [Maximum deduction 20 % of policy value or sum assured if the policy is taken before
1/4/2012 & 10% if the policy is taken on or after 1/4/2012] [LIP paid by employer will also be
deductible]

(b) Any contribution by the employee towards a statutory provident fund (SPF) or recognised provident
fund (RPF) or public provident fund (PPF); (No Deductions u/s 80C for Employer’s Contribution to
any Provident fund & Contribution to Unrecognised Provident Fund)

(c) Subscription to national saving certificate (VIII issue)

(d) Any interest accrued on national saving certificates which is deemed to be reinvested also qualifies
for deduction [Excluding sixth year interest]

(e) Any sum paid as tuition fees [Excluding development fees or donations] to any university, college,
school, or other educational institution situated within India for full time education [For maximum of
2 children]. Private tuition fee is not covered.

(f) Repayment of housing loan taken from Government; any Bank; Life insurance corporation etc.
[Excluding Interest]

(g) Term deposit for a fixed period of 5 years or More.

(h) Investment in Tax Saving Bonds & Infrastructure bonds

Quantum of deduction
Deduction under this section shall be minimum of the following:
(a) Aggregate of the eligible contributions, expenditure or investments (discussed above)
(b) ₹ 1,50,000

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