Taxation Law (Direct and Indirect Taxation)

Module 1

Introduction

This subject is going to give you a wide idea about taxation laws and helps to reduce errors while filing
taxes i.e. tax return (ITR) – can be filed for individuals, corporates, companies, partnership firms, HUF.

Note: Self-Assessment of Income

It helps us to understand what is to be taxed, how it is to be taxed and to what extend it is to be taxed.

What deductions we can avail, exemptions are provided for business and individuals with a sense of
security especially when planning an annual budget.

Basic Concepts

What is Tax?

Tax are considered to be cost of living in as society. Tax are levied by the Government to meet the common
welfare expenditure of the society. Tax is a charge usually of money imposed by authority on persons or
property for public purposes.

Types of Taxes: Direct Tax (Income Tax) & Indirect Tax (GST, Custom Duty)

 Direct Tax: If tax is levied directly on income and wealth of a person, then it is a direct tax. The person
who pays the tax to the government cannot recover it from somebody else i.e. the burden of Direct
Tax cannot be shifted. E.g.: Income Tax. As per the Indian Income Tax Act, 1961, it is mandatory for
Indian as well as foreign companies to pay direct taxes to the government. Direct tax in India is
administered by the Central Board of Direct Taxes (CBDT) and it is governed by the Department of
Revenue.
 Indirect Tax: If the Tax is levied on the price of good or service, then it is an Indirect Tax. In this cas e,
the person paying the tax passes on the incidence to another person. E.g.: GST, Custom Duty. In India,

1|P ur va T ha vi
 the Central Board of Indirect Taxes and Customs (CBIC) manages indirect taxes and is also governed
by the Department of Revenue.

Comparative analysis of the difference between direct and indirect tax –

Points of difference Direct tax Indirect tax

Tax imposition Imposed on income Imposed on goods and services

Tax levy Levied on the taxpayer himself Levied on the assessee but paid
by the end consumer

Amount of tax Depends on your income The rate depends on the type of
goods and services but it is the
same for everyone

Transferability Cannot be transferred to It is transferable

another taxpayer

Tax evasion Is possible Is not possible

2|P ur va T ha vi
 Calculation and payment Is a bit technical and complex Is quick and simple

Tax collection The collection is done at a The collection is done when a

specified date good or service is purchased or
sold

Nature of tax Progressive Regressive

Why Taxes are levied:

 The reason levy of taxes is that they constitute the basic source of revenue to the government.
Revenue so raised is utilized for meeting the expenses of government like defence, provision of
education, health care, infrastructure facilities – roads, etc.
 Taxes are levied by governments on their citizens to generate income for undertaking projects to boost
the economy of the country and to raise the standard of living of its citizens.

Power to Levy Taxes:

The Constitution of India – Article 265 lays downs that No Tax shall be levied or collected except by an
authority of law.

Accordingly for levy of any tax, a law needs to be framed by the government. COI gives power to levy and
collect taxes whether direct or indirect, to the Central and State Government.

Constitutional Validity Of Taxes:

The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts containing 444
articles and 12 schedules. Any tax law, which is not in conformity with the Constitution, is called ultra vires
the Constitution and held as illegal and void. Some of the provisions of the Constitution are given below:

3|P ur va T ha vi
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority
of law. It means tax proposed to be levied must be within the legislative competence of the legislature
imposing the tax.

Article 246 read with Schedule VII divides subject matter of law made by legislature into three categories:

 Union list (only Central Government has power of legislation on subject matters covered in the list)
 State list (only State Government has power of legislation on subject matters covered in the list)
 Concurrent list (both Central & State Government can pass legislation on subject matters).

If a state law relating to an entry in List III is repugnant to a Union law relating to that entry, the Union law
will prevail, and the state law shall, to the extent of such repugnancy, be void. (Article 254).

Following major entries in the respective list enable the legislature to make law on the matter:

 Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax

 State List (List II) Entry 46 - Taxes on agricultural income.

Income Tax Act, 1961

 The levy of Income Tax in India is governed / guided by the Income Tax Act, 1961.

 This Act is applicable to Whole of India including Jammu & Kashmir.

 This Act came into force on 1st April 1962.

 It contains 298 Sections and 14 Schedule.

4|P ur va T ha vi
The Finance Act (1st April – 31st March)

 Every year, the Finance Minister of GOI introduces the Financial Bill in the Parliament’s Budget Session.
When the bill is passed by both the house of parliament and gets the assent of the President, it
becomes a Finance Act.

 Amendments are made every year to the Income Tax Act, 1961 and other tax laws by the Finance Act.

The 1st Schedule of The Finance Act Contains 4 Parts which specify the rates of Tax -

 Part 1: specifies the rates of taxes applicable for the current Assessment Year (AY)

 Part 2: specifies the rates at which taxes are deductible at source (TDS) for the current Financial Year
(FY)

 Part 3: gives the rates for calculating Income Tax for deducting tax from income chargeable under the
head salaries.

 Part 4: gives rules for computing net agriculture income.

Income Tax Rules, 1962

 The administration of direct taxes is looked after by the Central Board of Direct Taxes.

 The CBDT is empowered to make rules for carrying out the purpose of the Act, for the proper
administration of the IT, 1962, the CBTD frames rules from time to time and these rules are collectively
called Income Tax Rules, 1962.

Circulars and Notifications

 Circulars: are issued by the CBDT from time to time to deal with certain specific problems & to clarify
doubts regarding the scope and meaning of certain provisions. Circulars are issued for the guidance of
the officers / assesses.

 Notifications: are issued by the Central Government and give effect to the provisions of the Act.

Case Laws
5|P ur va T ha vi
CL refer to the decisions given by the court and the study of CLs is an important and unavoidable part of
the study of the Income Tax.

Income Tax Act

Definition:

1) Assessee: Section 2 (7) – A person by whom any tax or sum of money is payable under this Act. Any
individual who has income earned or losses incurred, and is liable to pay taxes on these to the
government in a particular assessment year, is an assessee.

Categories of the assessee:

a) Normal Assessee

 a person against whom proceedings are going on under the Income Tax Act, despite the fact that any
tax or other amount is payable by him or not;

 a person who has undergone loss and filed a return of loss u/s 139(3);

 a person by whom some amount of interest or tax or penalty is payable under the income tax Act;

 any person who is entitled to refund of tax under this Act.

b) Representative Assessee

 A person may not be liable for his own income or loss but he might also be liable for the income or
loss of other persons say for example agent of a non-resident, guardian of a minor or a lunatic person,
etc. In such cases, the person responsible for the assessment of the income of such a person is called
representative assessee. Such a person is deemed to be an assessee.

c) Deemed Assessee

 In the case of a deceased person who has died after writing down his will, the administrators of the
property of the deceased are deemed as assessee.

 In case if a person dies intestate (without writing down his will) the eldest son or other legal heirs of
the deceased person are deemed as assessee.

6|P ur va T ha vi
 In case a minor, lunatic or an idiot person has income taxable under the Income Tax Act, their guardian
is deemed to be an assessee.

 In case a non-resident has income in India, any person acting on his behalf is deemed as an assessee.

d) Assessee-in-default

 A person is deemed as an assessee-in-default if he fails to fulfill his statutory obligations. In case an

employer is paying a salary or a person who is paying interest, it is their duty to deduct TDS and deposit
the amount of tax so collected in Government treasury. If he fails to deduct TDS or deducts tax but
does not deposit it in the treasury, he is known as assessee-in-default.

2) Assessment: Section 2 (8) – This is the procedure by which income of the assesse is determined. It
includes reassessment.

3) Person: Section 2 (31) – The definition of assessee leads us to the definition of person. Person
includes— (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association
of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every
artificial judical person, not falling within any of the preceding sub-clauses.

Notes:

1. On the basis of a well settled principle that “the Crown cannot be charged to tax”, it can be said that
unless otherwise specifically mentioned the Union Government cannot be taxed in India.

2. An association of persons or a body of individuals or a local authority or an artificial juridical person

shall be deemed to be a person, whether or not such person or body or authority or juridical person
was formed or established or incorporated with the object of deriving income, profits or gains.

3. A firm includes limited liability partnership.

4) Income: Section 2 (24) – The Income is defined by the IT Act, 1961 as inclusive definition and not an
exhaustive one. Therefore the following items of receipts are specially included in income –

7|P ur va T ha vi
 Profits and Gains

 Dividends

 Voluntary Contribution received by the trust / charitable / religious purpose

 The value of any perquisite (benefits)

 Any Capital Gains

 Any winnings from lottery, crossword puzzles, races, gambling, betting.

Previous Year and Assessment Year

 Previous Year: 1st April 2020 – 31st March 2021

Income earned during the PY : Income Earned Year

 Assessment Year: 1st April 2021 – 31st March 2022

Income is earned in PY and such income is taxable in the immediately following AY.

Assessment Year: The term has been defined u/s 2 (9). This means a period of 12 months commencing on
1st April every year. Income earned in the PY is taxable in the AY.

Note: AY always starts from 1st April and it is always a period of 12 months.

Previous Year: The term has been defined u/s 3. It means the FY immediately preceding the AY. The
Income earned during the PY is taxable in the AY.

Business or Profession is newly set up during the FY. In such case, the PY shall be the period beginning on
the date of setting up of business / profession and ending with 31 st March of the said FY.

Undisclosed Sources of Income

 Cash Credit – Section 68

 Unexplained Money – Section 69 A

8|P ur va T ha vi
 Investments not fully disclosed – Section 69 B

 Unexplained Expenditure – Section 69 C

Charge of Income Tax

Section 4 of the IT Act, 1961, is the charging section which provides that:

 Tax shall be charged at the rates prescribed for the year by the Annual Finance Act or IT Act, 1961 or
both.

 The charge is on every person.

 Tax shall be levied in accordance with subject to the provisions contained in the Act.

Accordingly, the section provides that :

a) The rates are prescribed under the finance act of every assessment year. Income tax for the previous
year is to be charged according to the given rates.

b) The taxable income is that of the previous year not the assessment year.

c) The total income, computed according to the provisions of the act, is leviable.

d) TDS or advance tax wherever applicable is to be charged.

Slab Rates

Where the total income does not exceed Rs. Nil

2,50,000 /-

Where the total income exceeds Rs. 2,50,000 5 % of the amount by which the total income
/- but does not exceed Rs. 5,00,000 /- exceeds Rs. 2,50,000 /-

Where the total income exceeds Rs. 5,00,00 /- Rs. 12,500 /- plus 20 % of the amount by which
but does not exceed Rs. 10,00,000 /- the total income exceeds Rs. 5,00,000 /-

9|P ur va T ha vi
 Where the total income exceeds Rs. 10,00,000 Rs 1,12,500 /- plus 30 % of the amount by
/- which the total income exceeds Rs. 10,00,000
/-

Slab Rates for Individual

Mr. X has a total income of Rs. 12,00,000 /- for PY 2020 – 21 comprising of income from home property
and interest on fixed deposits. Compute his tax liability for AY 2021 – 22 assuming his age is:

a) 45 years

b) 63 years

c) 82 years

Solution a) : Computation of Tax Liability of Mr. X (age 45 years)

Tax Liability:

Rs. 2,50,000 /- Nil

2,50,000 – 5,00,000 5 % of 2,50,000 – 12,500

5,00,000 – 10,00,000 20 % OF 5,00,000 – 1,00,000

Balance i.e. 12,00,000 minus 10,00,000 30 % of 2,00,000 – 60,000

Total: Rs. 1,72,500 /-

Health and Education cess @ 4% + 6,900

1,72,500 x 4%

Tax Liability Rs. 1,79,400 /-

Income Tax Slab Rates for Senior Citizens

(Being Resident individuals of the age of 60 years or more but less than 80 years)

10 | P u r v a T h a v i
 Where the total income does not exceed Rs. Nil
3,00,000 /-

Where the total income exceeds Rs. 3,00,000 5 % of the amount by which the total income
but does not exceed Rs. 5,00,000 /- exceeds Rs. 5,00,000 /-

Where the total income exceeds Rs. 5,00,000 Rs. 10,000 plus 20 % of the amount by which
but does not exceed Rs. 10,00,000 /- total income exceeds Rs. 5,00,000 /-

Where the total income exceeds Rs. 10,00,000 1,10,000 /- plus 30 % of the amount by which
/- the total income exceeds Rs. 10,00,000 /-

Solution b) : Computation of Tax Liability of Mr. X (age 63 years)

Total Income: Rs. 12,00,000 /- for PY 20 – 21

Tax Liability

First 3,00,000 Nil Nil

Next 3,00,000 – @ 5 % of Rs. 2,00,000 10,000

5,00,000

Next 5,00,000 – @ 20 % of Rs. 5,00,000 1,00,000

10,00,000

Balance i.e. 12,00,000 – @ 30% of 2,00,000 60,000

10,00,000

1,70,000

Add Health and 1,70,000 x 4% 6,800

Education cess 4 %

1,76,800

For resident individuals of the age 80 years or more at any time during the PY (Very Senior Citizen)

11 | P u r v a T h a v i
 Where the total income does not exceed Rs. Nil
5,00,000 /-

Where the total income exceeds Rs. 5,00,000 20 % of the amount by which the total income
/- but does not exceed Rs. 10,00,000 /- exceeds Rs. 5,00,000 /-

Where the total income exceeds Rs. 10,00,000 1,00,000 /- plus 30 % of the amount by which
/- the total income exceeds Rs. 10,00,000 /-

Solution c) : Computation of Tax Liability of Mr. X (age 82 years)

Module 2

Head of Income

5 Head

 Income from Salaries

 Income from Home Property

 Profits and Gains from Business or Profession

 Capital Gains

 Income from other sources (Residual Head)

12 | P u r v a T h a v i
Accordingly, income earned is classified as follows:-

a) Salary, Pension earned, Gratuity, PF under the head ‘Salaries’

b) Rental income is taxable under the head ‘Income from HP’

c) Income derived from carrying on any business or profession is taxable under the head ‘Profits and
Gains from Business or Profession’

d) Profit from Sale of Capital Asset (like land) is taxable under the head ‘Capital Gains’

e) The fifth head of income is ‘Residuary Head’. Income which is chargeable to tax but not taxable under
the first four heads and will be taxed under the head ‘Income from other sources’

Procedure for computation of total income

Step 1: Determination of Residential Status

The residential status of a person has to be determined to ascertain which income to be included in
computing the total income.

Residential Status as per IT Act, 1961

Resident Non Resident

 Resident and Ordinarily Resident

 Resident but not Ordinarily Resident

Step 2: Classification of income under different heads

Step 3: Computation of income under each head

Step 4: Clubbing of income of spouse, minor child, etc.

As the tax system is progressive i.e. as the income increases the applicable rates of tax increases. So, some
tax payers in the higher bracket have a tendency to divert some portion of their income to their spouse,

13 | P u r v a T h a v i
minor child, etc. to minimize tax burden. In order to prevent such tax avoidance, clubbing provision has
been incorporated.

Step 5: Set off or carry forward and set off losses

Step 6: Computation of Gross Total Income (GTI)

Step 7: Deductions from GTI (Sec 80 C to 80 H)

Step 8: Total Income (TI)

Tax Evasion: It is using illegal means to avoid paying taxes. It usually involves:

a) Hiding or Misrepresenting Income

b) Under Reporting Income

c) Inflating Deductions and Expenditure without Proof

d) Hiding or not reporting cash transactions

e) Hiding money in offshore accounts.

Tax Avoidance: Any person who is able to avoid taxes is considered as a wise person. It signifies a situation
in which a taxpayer reduces his tax liabilities by taking advantage of the loopholes and ambiguities in the
legal provisions.

Residential Status

a) Residential status of an assessee determines the scope of chargeability of his income. Whether a
person will be charged to a particular income or not, depends on his residential status.
b) The term ‘stay in India’ includes stay in the territorial waters of India i.e. 12 nautical miles from Indian
coastline.

c) It is not necessary that the period of stay must be continuous or active or nor it is essential that the
stay should be at the usual place of Residence, business or employment of the individual.

14 | P u r v a T h a v i
d) For the purpose of counting the number of days date in India both the departure and date of arrival
are to be considered.

e) The residence of an individual for income tax purpose I think to do with citizenship, place of birth or
domicile.

Section 6 provides the test for residential status for the persons which can be categorized as under:

General Points To Be Kept In Mind Regarding Residential Status Of A Person:

Different for each previous year Residential status is determined in respect of each previous year.
In other words, residential status of a person may vary from one
previous year to another previous year

Single Status for each source of A person can have only one residential status for a previous year
income i.e. he cannot be a resident for one source of income and non-
resident for another source.

Impact of citizenship Citizenship and residential status are two different concepts. A
citizen of India may not be a resident in India for the purpose of
income-tax.

Country Specific A person can have same residential status in more than one
country.

Deemed Resident (Section 6 (1 A)):

15 | P u r v a T h a v i
And individual, being an Indian citizen, having total income, other than the income from foreign sources
(that is income which accrues outside India) and which is not deemed to accrue or arise in India exceeding
rupees 15 lakhs during the previous year would be deemed to be resident in India in that previous year
(who has been in India for 120 days or more but less than 182 days during the PY).

Ordinarily Resident

Only Individuals and HUF

A not an Ordinarily Resident Person who satisfies any one of the following conditions:

a) Individual has been non - resident in India in 9 out of 10 previous years preceding the relevant previous
year or;

b) If such individual has during the seven previous year preceding the relevant previous year been in India
for a period of 729 days or less

A Residential Status of an individual is determined on the basis of Period of his stay in India.

Resident – If a person satisfy any of the basic Non – Resident – Not satisfies any of the basic
conditions: conditions

a) Present in India for 182 days or more during

the PY (Section 6 (1) (a))

b) Present in India for 60 days or more during

the PY and 365 days or more during the four
years immediately (Section 6 (1) (c)

Exceptions:

a) And Indian citizen who leaves India during the previous year for the purpose of employment outside
India or as a member of crew of an Indian ship. (In this case, the assessee shall be treated as resident
in India only if he resides in India for 182 days or more in the relevant previous year.)

16 | P u r v a T h a v i
b) An Indian citizen for a person of Indian Origin who be outside India comes on a visit to India during the
previous year. ( In this case, modified condition (ii) of sec. 6(1) is applicable)

Case Modified condition (ii) of sec. 6(1)

His total income, other than the income from He is in India for a period of 120 days or more (but
foreign sources , exceeds `15 lakhs during the less than 182 days) during the previous year and
previous year. for 365 or more days during 4 previous years
immediately preceding the relevant previous year

His total income, other than the income from He is in India for a period of 182 days or more
foreign sources, does not exceed `15 lakhs during during the previous year and for 365 or more days
the previous year during 4 previous years immediately preceding the
relevant previous year.

 Person of Indian origin: A person is deemed to be of Indian origin if he or either of his parents or
grandparents were born in undivided India. Here, grand parents may be paternal or maternal.
 “Income from foreign sources” means income which accrues or arises outside India (except income
derived from a business controlled in or a profession set up in India) and which is not deemed to accrue
or arise in India.

c) An individual shall be deemed to be resident in India, if following conditions are satisfied -

 He is a citizen of India
 His total income, other than the income from foreign sources, exceeds `15 lakhs during the previous
year;
 He is not satisfying any of the basic conditions given u/s 6(1) [i.e., 182 days or 60 days + 365 days]; and
 He is not liable to tax in any other country or territory by reason of his domicile or residence or any
other criteria of similar nature. (Section 6(1)(a)).

If the assessee is the Resident, further check whether –

 He is a resident in at least two out of 10 PY preceding the relevant PY, and

 His stay in India in last 7 years preceding the relevant PY is 730 days.
17 | P u r v a T h a v i
 Resident and Ordinarily Resident (ROR) Resident but not an Ordinarily Resident (RNOR)

If satisfies basic and additional conditions RNOR satisfies basic but not additional conditions

Practical Sums

Q1. Brett Lee, an Australian Cricketer visits India for 100 days in every financial year. This has been his
practice for the past 10 FY. Find out his residential status for the AY 2021 – 2022.

Solution: Determination of Residential Status of Mr. Brett Lee for the AY 2021 – 2022 –

Period of stay during PY 2020 – 21 = 100 days

Calculation of period of stay during 4 preceding PY (100 x 4 = 400 days)

18 | P u r v a T h a v i
 2019 -2020 100 days

2018 – 2019 100 days

2017 – 2018 100 days

2016 – 2017 100 days

Total 400 days

Mr. Brett Lee has been in India for a period of more than 60 days during the PY 2020 – 2021 and for a
period of more than 365 days during the immediately preceding PY. Therefore, since he satisfies one of
the basic condition u/s 6 (1), he is a Resident for the AY 2021 – 2022.

Computation of period of stay during 7 preceding PY = 100 x 7 = 700 days. Since his period of stay in India
during the last 7 PY is less than 730 days, he is not ordinarily resident during the AY 2021 – 2022.

He is a Resident but NOR (RNOR) for the AY 2021 – 2022.

Q2. Mr. B, a Canadian Citizen, comes to India for the first time during the PY 2016 -2017. During the FY’s
2016- 2017, 2017-2018, 2018-2019, 2019-2020 and 2020-2021, he was in India for 55 days, 60 days, 90
days , 150 days and 70 days, respectively. Determine his residential status for the AY 2021 – 2022.

Solution: During the PY 2020 – 2021, Mr. B was in India for 70 days and during the 4 preceding PY 2020 –
2021, he was in India for (55 +60+90+150) 355 days.

Thus, he does not satisfy Section 6(1). Therefore he is a non – resident for the PY 2020 – 202.

Q3. Dr. A, an Indian Citizen and a professor in IIM, Lucknow, left India on September 15, 2019 for USA to
take up professor’s job in MIT, USA. Determine his residential status for the AY 2020 – 2021.

Solution: Dr. A stayed in India –

April May June July August September Total

30 31 30 31 31 15 168 Days

(only in the relevant PY)

19 | P u r v a T h a v i
Dr. A being a citizen of India and who has gone out of his country for employment, will be governed by
182 days test only and therefore the second condition u/s 6 (1) will not be applicable.

So, Dr. A shall be non – resident in India for the AY 2020 – 2021 as condition of 182 days stay in relevant
PY is not satisfied.

Q4. Mr. Anil, an Indian Citizen leaves India on 22 nd September, 2019 for the first time to work as an
Engineer in France. Determine his Residential Status for AY 2020 – 2021.

Solution: Mr. Anil stated in India -

April May June July August September Total

30 31 30 31 31 22 175 Days

(only in the relevant previous year)

Since, Mr. Anil shall be non – resident in India for the AY 2020 – 2021 as condition of 182 days stay in
relevant PY is not satisfied.

(Since he is leaving India for purpose of employment, 2nd basic condition shall not be applicable on him.)

Q5. Mr. X, aged 19 years, left India for first time on May 31, 2020. Determine his residential status for the
previous year 2020-21 if: i) He left India for employment purpose ii) He left India on world tour.

Solution: During the previous year 2020-21, 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
2020-21.
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 2020-21. As he satisfies 2nd
condition of sec. 6(1) [shown above], he is resident in India. Further, he also satisfies dual

20 | P u r v a T h a v i
 conditions specified u/s 6(6) (since he left India for first time). Therefore, he is an ordinarily
resident for the previous year 2020-21.

Income which do not form a part of Total Income

Exemptions: u/s 10 Deduction under Chapter VI – A

The income which are exempt under Section 10 Incomes from which deductions are allowable
will not be included for computing total income. under Chapter IV – A will first be included in GTI
(Gross Total Income) and then the deductions will
be allowed from GTI.

Fully Exempted Income Partially Exempted Income

 Agricultural Income  Gratuity

 Compensation received on account of disaster  Enactment of unutilized earned leave on

retirement (leave encashment)
 Payment from Sukanya Samriddhi Account

21 | P u r v a T h a v i
  Pension received by recipient of gallantry  Voluntary retirement receipts
awards
 Payment from NPS Trust (National Pension
 Education Scholarships awards by the Scheme) to an assessee on closure of his
Government account or on his opting out of the pension
scheme
 Share Income of a partner
 Commutation of Pension
 Certain payments to MP’s and MLA’s
 HRA (House Rent Allowance)
 Family pension received by widow/ children/
nominated heirs of armed forces members  Receipts from LIC

 Income received on buy – back of shares of  Exemption in respect of clubbed income of

domestic company minor

 Income received in transaction of reverse  Exemption of specified income of a Sikkimere

mortgage. Individual.

Basis of Charge (Section 15)

a) Section 15 deals with Basis of Charge. Salary is chargeable to tax either on ‘due basis or on receipt
basis’ whichever is earlier.

b) However, where any salary, paid in advance is assessed in the year of payment, it can be subsequently
brought to tax in the year in which it becomes due.

c) If the salary is paid in arrears has already been assessed on due basis, the same cannot be taxed again
when it is paid.

Meaning of Salary

Salary Perquisite Profits in lien of Salary

Section 17 (1) Section 17 (2) Section 17 (3)

22 | P u r v a T h a v i
Section 17 (1) defines the term salary. It is an inclusive definition and includes monetary and non-
monetary items.

Salary u/s 17 (1) includes the following:

a) Wages

b) Any annuity or pension

c) Gratuity

d) Any fees, commission, perquisites in addition to any salary or wages

e) Any advance salary

f) Leave encashment or leave salary

g) Provident fund

h) Housing Accommodation

i) Medical facility

j) Interest – free loans

Allowances:

Allowances: Different types of allowances are given to the employee by their employers

Allowance means the fixed sum paid by employer to employee to meet official or personal expenses.
Different types of allowances are given to employees by their employers. Generally allowances are given
to employees to meet some particular requirements like house rent, expenses on uniform, conveyance
etc. Under the Incometax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier.

Fully Taxable Partly Taxable Fully Exempt

Entertainment Allowances HRA Allowances to HC Judges

u/s 10 (13 A)

Dearness Allowances Special Allowances Allowances paid by the UNO

23 | P u r v a T h a v i
 u/s 10 (14)

Overtime Allowances Compensatory Allowances

received by Judge

Fixed Medical Allowances Allowances granted to

Government Employees
outside India

City Compensatory Allowances

(to meet the increased cost of
living in cities)

Servant Allowance

Project Allowance

Tiffin / Lunch / Dinner

Warden Allowance

Transport Allowance to employee

Allowances which are fully taxable:

a) City Compensatory Allowance: Is normally intended to compensate the employees for the higher cost
of living in cities. It is taxable irrespective of the fact whether it is given as compensation for performing
his duties in a particular place.

b) Entertainment Allowance: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers. The Act gives a deduction towards entertainment allowance only
to a Government Employee.

c) Transport Allowance: Transport Allowance granted to an employee to meet his expenditure for the
purpose if commuting between the place of his residence and the place of his duty and is fully taxable.
However, in case of blind / deaf / dumb / orthopedically handicapped, employees exemption up to Rs.
3,200 p.m. is provided u/s 10 (14)

24 | P u r v a T h a v i
Allowances which are partially taxable:

HRA – Section 10 (13 A) House Rent Allowance

a) HRA is a special allowance specifically granted to an employee by his employer towards – payment of
rent for residence of the employee.

b) HRA granted to an employee is exempt to the extent of least of the followings:

Metro Cities (Delhi, Kolkata, Mumbai, Chennai) Other Cities (Other Non – Metro Cities)

a) HRA actually received for the relevant period a) HRA actually received for the relevant period

b) Rent paid (-) 10 % of salary for the relevant b) Rent paid (-) 10 % of the salary for the relevant
period period

c) 50 % of salary for the relevant period. c) 40 % of salary for the relevant period.

Note:

a) Exemption is not available to the assessee who lives in his own house, or in a house for which he has
not incurred the expenditure of Rent.

b) Salary for HRA: Salary means Basic Salary, Dearness Allowance (DA) if provided in terms of
employment and commission (as fixed % of turnover)

Salary = Basic Salary + DA (part of employment) + commission (as a fixed % of turnover)

c) Relevant period means the period during which the said accommodation was occupied by the assessee
during the previous year.

Practical Problems On Calculation of HRA (Section 10 (13 A)):

Q1. Mr. Raj Kumar has the following from his employer:

Basic Pay 40,000 p.m.

D.A. 6,000 p.m.

Commission 50,000 p.a.

25 | P u r v a T h a v i
 Motor Car for personal use (expenses met by the 1,500 p.m.
employer)

House Rent Allowance 15,000 p.m.

Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a rent of Rs
16,000 p.m. for his accommodation at Kanpur. D.A. forms part of salary for retirement benefits.

Solution: Calculation of HRA u/s 10 (13 A)

HRA received: Rs. 15,000 x 12 = 1,80,000 (working note 1)

Less: Exempt u/s 10 (13 A) = 1,36,800

Taxable HRA = 43,200

Note 1: Working Note

Exemption shall be least of the following three limits:-

a) HRA actually received for the relevant period – Rs 15,000 x 12 = 1,80,000

b) Rent Paid minus 10% of the salary for the relevant period – Rs. 16,000 x 12 – 10% of the salary =
1,92,000 – 10% * 5,52,000 = 1,92,000,- 55,200 = 1,36,800

Salary = Basic Pay + Dearness Allowance (part of retirement benefits) + commission (if it is a % of turnover)

Salary = 40,000 + 6,000 * 12 = Rs. 5,52,000

c) 40 % of salary for the relevant period = 40 % * 5,52,000 = 2,20,800

Notes:

a) For the purpose of exemption u/s 10 (13 A), salary includes dearness allowances only when the terms
of employment so provide.

b) Here in this question, commission is not included as a part of basic salary as it is not given as fixed %
of turnover.

c) Salary for HRA for the purpose of exemption u/s 10 (13 A) excludes all other allowances and
perquisites.

26 | P u r v a T h a v i
Q2. Determine the Taxable portion of HRA of Mr. for the AY 20 – 21:

Mr. X resides in Chennai gets Rs 3,00,000 pa as basic salary. DA forming the part of salary for service
benefits Rs. 40,000 and 2% Commission on turnover achieved by him. (Turnover achieved by him during
the relevant period is Rs. 3,00,000.) He receives Rs. 60,000 as HRA. Though he pays a rent of Rs. 80,000
pa.

Particulars Rs

H.R.A Received 60,000

Least of the following is exempted u/s 10 45,400

1. Actual H.R.A Received = 60,000

2. Rent paid – 10% of Salary (80,000 –

3,46,000 x 10%) = 45,400

3. 50% of salary for Metro city or 40% of

salary other than metro(3,46,000 x 50%) =
1,73,000

Taxable H.R.A 14,600

Working Note: Calculation of Salary for HRA 3,46,000

Salary = Basic pay + DA (SB)+ Commission on

Turnover

Salary = (3,00,000+40,000+6,000)

Q3. Mr. X, resides in Ajmer, gets Rs.48,000 p.a. as basic salary during the previous year 2019-20. He gets
Rs.4,800 as D.A. Forming part of salary and 7% Commission on sales made by him. (Sales made by him

27 | P u r v a T h a v i
during the relevant period is Rs. 86,000) He receives Rs.6,000 as H.R.A. Though he pays a rent of
Rs.5,800p.a. Determine the exempted and taxable HRA.

Particulars Rs

H.R.A Received 6,000

Least of the following is exempted u/s 10 NIL

1. Actual H.R.A Received = 6,000

2. Rent paid – 10% of Salary (5,800 – 5,882 )

(58,820 x 10%) = NIL

3. 50% of salary for Metro city or 40% of salary

other than metro (58,820 x 40%) = 23,528

Taxable H.R.A 6,000

Working Note: Calculation of Salary for HRA 58,820

Salary = Basic pay + DA (SB)+ Commission on

Turnover

Salary = (48,000+4,800+6,020)

Q4. Mr. A, resides in Salam is a government employee and gets the following emoluments in Previous year
2019-20. Basic salary - Rs.50,000 p.a. D.A - Rs.30,000 p.a., Bonus Rs.10,000 p.a. Medical allowance
Rs.2,800 p.a. H.R.A - Rs.2,500 pa He residing in a house, for which no rent is paid by him throughout the
year.

H.R.A exempted is Nil, Since Mr. A, resides in Salam and stays in a house where does not pay any rent,
HRA is fully taxable. Taxable H.R.A is Rs. 2,500 x 12 = Rs.30,000.

Direct Taxation Law and Practice of Income Tax - by Vinod K Singhania

Q1. Mr. Srikant has two sons. He is in receipt of children Education Allowance of Rs. 1500 p.m. for his elder
son and Rs. 70 p.m. for his younger son. Both his sons are going to school. He also receives the allowances:

28 | P u r v a T h a v i
 Transport Allowance 1800 p.m.

Tribal Area Allowance 500 p.m.

Compute his taxable allowance

Solution: Taxable Allowance in the hands of Mr. Srikant is computed as under:-

Particulars Rs

Children Education Allowance

Elder Son (150-100*12) 600

Younger Son (70-70*12) Nil 600

Transport Allowance (1800*12) 21600

Tribal Area Allowance (500- 3600

200*12)

Taxable Allowance 25,800

Q2. Compute the taxable portion of allowances from the information furnished by Mr. Hari Haran for the
A.Y. 2020-21.

Particulars Rs.

Travelling allowance (Expenditure Rs.750 p.m.) 1,500 p.m.

Helper allowance (Expenditure Rs.1,350 p.m.) 1,200 p.m.

Tribal area allowance 2,400 p.m.

Education allowance (per child) 300 (for 3 children)

Hostel exp. Allowance (per child) Rs.2,500 (for 3 children)

(Actual expenditure incurred Rs.2,500 p.m. per

child)

29 | P u r v a T h a v i
 Transport allowance (Expenditure Rs.15,000 p.m.) 19,000 p.m.

Conveyance allowance (50% personal) 1,500 p.m.

Dog allowance 1,000 p.m.

Solution: Computation taxable allowances of Mr. Hari Haran for the A.Y. 2020-21

Particulars Rs Taxable Amount

(Rs.)

Travelling allowance ( 1500 x 12) 18,000

Less: Exempted up to 750p.m. (750 x 12) 9,000 9,000

Helper allowance (1200 x 12) 14,400

Less: Actual exp. is Exempted–(1,350x12) 16,200 Nil

Tribal area allowance – (2,400 x 12) 28,800

Less: Exempted up to 200 p.m. (200 x12) 2,400 26,400

Education allowance (300 x12 x 3) 10,800

Less: Exempted up to 100p.m.( Max. 2 Children) 2,400 8,400

Hostel exp. Allowance (2,500 x12 x 3) 90,000

Less: Exempted up to 300 p.m. (Max. 2 Children) 7,200 82,80

Transport allowance (19,000 x 12) 2,28,000

Less: Exempted up to ( 70 % of such allowance or 10,000 p.m. 1,20,000 1,08,000

Whichever is less if daily allowance not received) If they receipt of
daily allowance, they can claim actual amount spent) (70 % of
2,28,000 = 1,59,600 or 10,000 x12 =1,20,000) whichever is less

Conveyance allowance (1,500 X 12) 18,000

Less: Exempted for official purpose (18,000 x50%) 9,000 9,000

30 | P u r v a T h a v i
 Fully Taxable Allowance

Dog allowance – (Rs.1,000 x 12) 12,000

Taxable Allowance 2,55,600

Q3. Mr. Shri Sugi receives the following allowances during the P.Y.2019-20

Particulars Rs

High cost of living allowance 20,000

City compensation allowance 7,500

Subsidized lunch allowance 2,800

Marriage allowance 1,200

Helper allowance (Expenditure Rs.1,200) 1,280

Medical allowance (Expenditure Rs.9,800) 8,200

Travelling allowance (Expenditure Rs.150) 650

Children Education allowance (Expenditure 12,000

Rs.15,000)

Overtime allowance 500

Education allowance grand children 5,000

Entertainment allowance 13,800

Warden ship allowance 1,380

Basic Pay (Rs.2,500 p.m.) 30,000

State the tax treatment of the above allowances in the following cases:

A. Mr. Shri Sugi is a Government Employee

B. Mr. Shri Sugi is a Government Employee posted outside India.

31 | P u r v a T h a v i
C. Mr. Shri Sugi is Employee in public sector

Solution: Computation of Taxable allowances Mr. Shri Sugi the A.Y.2020-21.

Fully Taxable Allowance:

Particulars Rs

High cost of living allowance 20,000

City compensation allowance 7,500

Subsidized lunch allowance 2,800

Marriage allowance 1,200

Overtime allowance 500

Education allowance grand children 5,000

Entertainment allowance 13,800

Warden ship allowance 1,380

Medical allowance 8,200

Partially Taxable Allowance:

Particulars Rs

Travelling allowance 650

Less: Expenditure 150 500

Helper allowance 1280

Less: Expenditure 1200 80

Education allowance 12000

Less: Expenditure (100 x 2x12) 2400 9600

32 | P u r v a T h a v i
Total Taxable Allowance: Rs 70,560

Particulars Rs

Basic Salary 30,000

Taxable allowance 70,560

Gross Salary 1,00,560

Deduction U/S 16

1. Standard deduction 16 (i) 50,000

2. Entertainment allowance 16 (ii) (Government Employee only) 5,000

3. Professional tax Nil 55,000

Net Taxable Income from Salary 45,560

Working Note:

Least of the following is Exempted:

a) Rs.5,000

b) 20% of Basic Salary (30,000 X 20%) = Rs.6,000

c) Actual E.A received Rs.13,800

B. Any allowance received by Government Employees working outside India are fully exempted.

Particulars Rs

Basic Salary 30,000

Taxable allowance 70,560

Gross Salary 1,00,560

Deduction U/S 16

1. Standard deduction 16 (i) 50,000

33 | P u r v a T h a v i
 2. Entertainment allowance 16 (ii) (Government Employee only) Nil

3. Professional tax Nil 50,000

Net Taxable Income from Salary 50,560

Working Note:

Least of the following is Exempted:

a) Rs.5,000

b) 20% of Basic Salary (30,000 X 20%) = Rs.6,000

c) Actual E.A received Rs.13,800

C. Employee working in Public Sector Companies E.A Fully taxable

Q4. Shri. Manoj receives the following emoluments during the previous year 2019-20.

Particulars Rs

Basic Salary 90,000

Commission 60% of Basic Salary 54,000

Entertainment Allowance (EA) 12,000

Dearness Allowance (DA) (Forming part of salary) 10,000

Determine the deduction of EA from salary if –

a) Shri. Manoj is Government employee since 1974

b) Shri. Manoj is an employee of RBI since April 1953 and received Entertainment allowance since then

c) He is employee of Cavin Ltd. since 1952 and receiving Entertainment allowance since then.

Solution: Computation of Taxable allowances Mr. Manoj the A.Y.2020-21

34 | P u r v a T h a v i
 Particulars Rs

Basic Salary 90,000

Commission 60% of Basic Salary 54,000

Entertainment Allowance (EA) 12,000

Dearness Allowance (DA) (Forming part of salary) 10,000

Gross Salary 1,66,000

Deduction u/s 16

Standard deduction 16 (i) 50,000

Entertainment allowance 16 (ii) 5,000

Professional tax Nil 55,000

Net taxable income from Salary 1,11,000

Working Note:

Entertainment allowance – (E) Government Employee only

Least of the following is Exempted:

a) Rs.5,000

b) 20% of Basic Salary (90,000 X 20%)= Rs.18,000

c) Actual E.A received Rs.12,000

Note:

a) In the case of B & C Non-Government employee EA is included in Gross Salary, but (Including
employees of statutory corporation like RBI, Railways and local authority) entertainment allowance is
not deductible. So, as employee of RBI or of Cavin Ltd., the assessee is not eligible for deduction of
E.A. from gross salary.

b) Length of service and the year from which a person is employed have no relevance at all in the context
of entertainment allowance, as per the latest rules.

35 | P u r v a T h a v i
Computation of Income from Salary of Mr. X for A.Y. 2020 – 2021

Particulars Rs

Basic Salary, Bonus, Commission ***

Allowances, Perquisites ***

Profits in lien of salary ***

(Arrears and Advances)

Retirement Benefits ***

(Gratuity, Pensions, Provident Funds)

Gross Salary ***

Less Deductions u/s 16

- Standard Deduction ***

- Entertainment Allowance (Government ***

Allowance) ***
- Profession Tax

Income Taxable under the head Salary ***

Pension / Annuity

a) Annuity is treated as salary

b) Annuity is a sum payable in respect of a particular year. It is a yearly grant.

c) If a person invests sum money entitling him to series of equal annual sums, such annual sums are
annuities in the hands of investors.

d) Annuity received from the present employer is to be taxed as salary.

e) Annuity received from the past employer is taxable as profit in lien of salary.

36 | P u r v a T h a v i
f) Annuity received from person other than employer is taxable as income from other sources.

Pension

Pension is a periodic payment made especially by Government or a company or other employers to the
employee in consideration of past service payable after his retirement,

Pension can be of two types:

Uncommuted Pension Commuted Pension

It refers to pension received periodically Commutation means inter change.

It is fully taxable in the heads of both government Commuted Pension means lump sum amount
and non-government employee taken by commuting the whole or part of the
pension.

Exemption in respect of commuted pension (Section 10 (10 A))

a) As per Section 10 (10 A), the payment in respect of commuted pension is exempt subject to the
conditions specified therein. Its statement is as follows:

Employees of the CG / Local authority/ statutory corporation / members of civil services/ defence services
– Any commuted pension is exempt from tax

b) Judges of the SC and HC will be entitled to exemption of the entire commuted pension.

c) Any commuted pension received by an individual out of annuity plan of LIC from a fund set up by that
corporation will be exempted.

d) Other employees: Any commuted pension received is exempt from tax to the extent of the following:

Case A Case B

If the employee is in the receipt of gratuity also - If the employee doesn’t receive gratuity -

37 | P u r v a T h a v i
 Exemption = 1/3rd of the amount of pension which Exemption = 1/2 of the amount of pension which
he would have received had he commuted the he would have received had he commuted the
whole of the pension whole of the pension

1 commuted pension received 1 commuted pension received

∗ ∗ 100 % ∗ ∗ 100 %
3 commutaion % 2 commutaion %

Q1. Mr. Sagar who retired on 01.10.2021 is Rs 5000 p.m. as pension. On 01.02.2022 he commuted 60% of
his pension and received Rs 3,00,000 as commuted pension. You are required to compute his taxable
pension assuming:-

a) He is a government employee

b) He is a private sector employee and received gratuity of Rs. 5,00,000 at the time of retirement.

c) He is a private sector employee and did not receive any gratuity at the time of retirement.

Solution:

a) He is a government employee.

Uncommuted pension (October – March)

October – January = Uncommuted Pension = 5000 x 4 months

February – March = 60 % Commuted Pension

40 % Uncommuted Pension = 5000 x 40% x 2 months

= [ 5000 * 4 months ] + [ 40 % of Rs. 5000 * 2 months ]

= [ 20,000 ] + [ 4,000 ]

= Rs. 24,000 / -

Uncommuted Pension Received 24,000

Commuted Pension Received 3,00,000

38 | P u r v a T h a v i
 Less Exempt u/s 10 (10 A) 3,00,000

Taxable Pension 24,000

b) He is a private sector employee and received gratuity of Rs. 5,00,000 at the time of retirement.

Uncommuted Pension Received (October – March) 24,000

(5000 * 4 months) + 40 % of 5000 * 2 months

Commuted Pension 3,00,000

Less Exempt u/s 10 (10 A) 1,66,667

1 commuted pension received 1,33,333

∗ ∗ 100 %
3 commutaion %

Taxable Pension 1,57,333

c) He is a private sector employee and did not receive any gratuity at the time of retirement.

Uncommuted Pension Received (October – March) 24,000

(5000 * 4 months) + 40 % of 5000 * 2 months

Commuted Pension 3,00,000

Less Exempt u/s 10 (10 A) 2,50,000

1 commuted pension received 50,000

∗ ∗ 100 %
2 commutaion %

Taxable Pension 74,000

Q2. Mr. Sagar who retired on 01.09.2021 is Rs 5000 p.m. as pension. On 01.01.2022 he commuted 50% of
his pension and received Rs 5,00,000 as commuted pension. You are required to compute his taxable
pension assuming:-

a) He is a government employee

39 | P u r v a T h a v i
b) He is a private sector employee and received gratuity of Rs. 5,00,000 at the time of retirement.

c) He is a private sector employee and did not receive any gratuity at the time of retirement.

Gratuity - Section 10 (10)

a) Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the

employee.

b) The Act is applicable on gratuity is Payment of Gratuity Act, 1972.

c) Gratuity has become a normal payment applicable to all employees.

Exemption in respect of Gratuity (Section 10 (10))

a) Retirement gratuity received and applicable to members of the Defence Services id fully exempt form
tax.

b) Employees of Central Government / members of civil services / local authority employees – Any death
cum retirement gratuity is fully exempt from tax.

Gratuity Section 10 (10)

Received during the service - Received at the time of retirement / death

Fully Taxable Employees of Other Employees

CG / CS / LA (cont.. below table)

Fully exempt

u/s 10 (10)

Other Employees

40 | P u r v a T h a v i
 Covered under The Payment of Gratuity Act, 1972 Not covered under The Payment of Gratuity Act,
1972

Least of the following would be exempt u/s 10 (10) Least of the following would be exempt u/s 10 (10)

 20 lakhs  20 lakhs

 Actual gratuity received  Actual gratuity received

 15 days salary (based in the last drawn salary)  Half month salary (based on average)
for every completed year of service or part in
excess of 6 M

Provident Fund

a) PF scheme is a scheme intended to give substantial benefits to an employee at the time of his
retirement.

b) Under this scheme, a specified sum is deducted from the salary of the employee as his contribution
towards the fund.

c) The employer generally contributes the same amount of his pocket to the fund.

d) The contribution of the employer and the employee are invested in approved securities.

e) Interest earned thereon is also credited to the account of the employees.

f) The accumulated balance in the PF a/c is paid to the employee at the time of his retirement or
resignation. In case of death of the employee, the same is paid to his legal heirs.

Types of PF

Recognized Provident Unrecognized Provident Statutory Provident Public Provident Fund

Fund (RPF) Fund (URPF) Fund (SPF) (PPF)

RPF means a fund This fund is not The SPF is governed by PPF is operated under
recognized by the recognized by the the Provident Funds The PPF Act, 1968. A
commissioner of commissioner of Act, 1925 membership of the fund
Income – tax is open to every

41 | P u r v a T h a v i
Income – tax for the individual though it is
purpose of income tax. ideally suited for self –
employed people.
This fund is contributed
under The Employees
Provident Fund and
Miscellaneous
Provisions Act, 1952

The Tax treatment of PF amount :

Particulars RPF URPF SPF PPF

Employer’s Contribution in Not taxable at the Fully exempt NA (as there is

Contribution excess of 12% of time of only assessee’s
salary is taxable as contribution own contribution)
‘salary’

Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s 80 C deduction deduction u/s 80 C deduction u/s 80 C

Interest credited Amount in excess Not taxable at the Fully Exempt N.A.
on Employer’s of 9.5% p.a. is time of credit of
Contribution taxable as salary interest

Interest credited Amount in excess Not taxable at the Exempt up to Fully Exempt
on Employee’s of 9.5% p.a. is time of credit of certain limit of
Contribution taxable as salary interest contribution

(Meaning of salary
check WN1)

Amount Exempt u/s 10 (12) Employee’s Exempt u/s 10 (11) Fully exempt u/s
withdrawn on subject to certain contribution is not 10
conditions taxable (11)

42 | P u r v a T h a v i
 retirement / Interest on
termination. employee’s
contribution is
taxable under
income from other
sources.

Employer’s
contribution and
interest thereon is
taxable as ‘Profit
in lien of salary.’

Note: Salary for this purpose means basic salary and (deserves allowance – if provided in the terms of
employment for retirement benefits) and commission as a % of turnover

Salary = Basic Pay + DA (part of retirement benefits) + Commission (%of turnover)

Q1. Mr. A retires from service on December 31st 2021 after 25 years of service. Following are the
particulars of his income / investments for the PY 2021 – 2022

Particulars Rs

Basic pay @ Rs 16,000 per month for 9 months 1,44,000

Dearness pay (505 forms part of retirement 72,000

benefits)

8000 per month for 9 months

Lump sum payment received form Unrecognized 6,00,000

PF

43 | P u r v a T h a v i
 Deposits in the PPF a/c 40,000

Out of the amount received from URPF, the employer’s contribution was 2,20,000 and the interest
thereon Rs. 50,000.

The employee contribution was Rs. 2,50,000 and the interest thereon Rs. 60,000.

What is the taxable portion of the amount received from URPF in the hands of Mr. A for the AY 2022 –
2023.

Solution:

Taxable portion of the amount received from URPF in the hands of Mr. A for the AY 2022 – 2023 is
computed hereunder:

Particulars Rs

Amount Taxable under the head ‘salaries’

Employee’s share in the payment received from the URPF 2,20,000

Interest on Employer’s share 50,000

Total 2,70,000

Amount Taxable under the head ‘Income from Other Sources’

Interest on the Employee’s share 60,000

Total Amount taxable from the amount received from the 3,30,000
fund

Note 1: Since the employee is not eligible for deduction u/s 80 C, the employee’s contribution received
from URPF is not taxable at the time of withdrawal.

Note 2: If in case of URPF, The Contribution were made in RPF when the entire maturity amount after
service of 25 years will be exempt from taxes.

Q2. Mr. B is working in XYZ Ltd. and has given details of his income for the previous year 2021 – 2022.
You are required to compute his gross salary from the details given below:-
44 | P u r v a T h a v i
 Basic Salary 50,000

DA (50 % is for retirement benefits) 8,000 p.m.

Commission as % of turnover 0.1 %

Turnover 50 Lakhs

Bonus 40,000

Gratuity 25,000

His own contribution in RPF 20,000

Employer’s Contribution to RPF 20 % of basic salary

Interest accrued in the RPF @ 13% p.a. 13,000

Solution:

Computation of Gross Salary of Mr. B for the AY 2022 – 2023

Particulars Rs. Rs.

Basic Salary (10,000 *12) 1,20,000

Dearness Allowance (8000 * 12) 96,000

Commission on turnover (0.1% * 50,00,000) 5,000

Bonus 40,000

Gratuity (Note 1) 25,000

Employer ‘s Contribution to RPF @ 13% p.a. 13,000

Less exempt: ( 20,760 ) 3,240

(Note 2)

Interest accrued in RPF @ 13 % p.a. 13,000

13,000 / 13% = 1,00,000

45 | P u r v a T h a v i
 - Exempt @ 9.5 % p.a. ( 1,00,000 * 9.5% ) ( 9,500 ) 3,500

Gross Salary 2, 92, 740

Note 1: Gratuity received during service is fully taxable.

Note 2: Employer’s Contribution in the RPF is exempt up to 12% of salary.

Here Salary = Basic Salary + DA (forming part of retirement benefits) + Commission based on turnover

i.e. 12% of [ 1,20,000 + ( 50 % of 96,000) + 5000 ]

= 12% of 1,73,000

= 20,760

HEAD 2

Income from Home Property

Chargeability: Section 22

The process of computation of income under the head Income from home property (HP) starts with the
determination of annual value of the property.

The concept of annual value and the method of determination is laid down in Section 23

The Annual value of any property comprising of buildings or lands appurtenant there to of which the
assessee is the owner is chargeable to tax under the head ‘Income from HP’

Buildings include – Land Appurtenant includes –

 Factory buildings Land connected with buildings like Garden,

Garage, etc.
 Offices

 Shops

 Godowns

 Commercial premises

46 | P u r v a T h a v i
For Income to be taxed as ‘Income from HP’, the following points to be noted –

a) Income from property or land situated in India

b) Annual value u/s 23 (Annual Value = Annual Rental Value)

c) The Assessee should be the owner of the property. (Deemed Owner)

Cases when rental income from building is not treated as HP Income –

a) Letting out of HP for smooth conduct of assessee’s business / profession

If a person let out property for smooth conduct of business or profession, the rental income from such
house property shall not be treated as house property income rather it shall be treated as income under
the head business or profession.

b) Income from sub – letting of house property

If a person occupies a building as tenant and let out full or part of the hired building to another person it
is called subletting. This rental Income is to be taxable under Income from Other Sources.

c) Composite Letting Out

Meaning of composite rent: The owner of the property may sometimes receive rent in respect of building
as well as – Other assets like furniture, P/M ; for different service provided in the building like lifts, security,
power backup ; the amount so received is known as ‘Composite Income’

Tax Treatment of Composite Income

Where composite rent includes rent of building and charges for different services (lifts, security), the
composite rent is has to be split up in the following manner –

If let out building and other assets are in separable If let out building and other assets are separable

Where composite rent is received from letting out Where composite rent is received from letting out
of building and other assets (furniture) and the of building and other assets and the two lettings
two lettings are not separable then, rent is taxable. are separable then,

47 | P u r v a T h a v i
 As Business Income. Income from Other Income from Income from Income from
Sources. letting out if letting out letting out
building is other assets is other assets is
taxable under taxable under taxable as
‘Income from ‘Business ‘Income from
HP’ Income’ Other Sources’

d) Income from hotel business / paying guest accommodation

Hotel used for business Hotel used for let out

Business Income HP Income

Determination of Gross Annual Value (GAV)

Step 1 a) Municipal Rental Value (MRV) XXX

b) Fair Rental Value (FRV) XXX

(whichever is higher in value is to be considered)

Step 2 a) Higher Value (Step 1) XXX

b) Standard Rent (SR) XXX

(whichever less is Expected Rental Value – ERV)

Step 3 a) Expected Rental Value (EVR) (Step 2) XXX

b) Actual Rent Value (AVR) XXX

(whichever is more is value is GAV)

Gross Annual Value XXX

Calculation of GAV

Q1. From the figures given below Calculate Expected Rental Value (ERV)

48 | P u r v a T h a v i
 Rental Value Case A Case B Case C

MRV 30,000 30,000 30,000

FRV 36,000 36,000 36,000

Standard Rent (SR) NA 33,000 42,000

Solution: Calculation of Expected Rental Value

Rental Value Case A Case B Case C

Step 1 MRV 30,000

FRV 36,000

Whichever is 36,000
higher

Step 2 Higher Value (step 36,000

1) NA
SR 36,000 33,000 36,000
Whichever is lower
is EVR

Q2. From the figures given below calculate Annual Rental Value (ARV)

Rental Value Case A Case B

MRV 60,000 60,000

FRV 66,000 66,000

SR 69,000 69,000

Actual Rent 72,000 63,000

49 | P u r v a T h a v i
Solution: Calculation of Annual Rental Value (ARV)

Rental Value Case A Case B

Step 1 MRV 60,000 60,000

FRV 66,000 66,000

(whichever is higher) 66,000 66,000

Step 2 Higher Value from Step 1 66,000 66,000

SR 69,000 69,000

(whichever is lower is ERV (A) 66,000 66,000

Step 3 Actual Rent (B) 72,000 63,000

ARV (A or B whichever is higher) 72,000 66,000

Q3. From the figures given below. Compute Gross Annual Value

Rental Value House A House B

MRV 80,000 80,000

FRV 1,00,000 1,00,000

SR 70,000 1,20,000

AR 1,20,000 90,000

Solution 1,20,000 1,00,000

Q4. Mr. Prakash has constructed a multistory building at Delhi of 40 flats is let out @ 1,000 p.m. The
Municipal Authorities have fixed the rental value of this property as Rs. 4,50,000. The owners bear the
following expenses –

Particulars Rs

Lift Maintenance 12,000 p.a.

50 | P u r v a T h a v i
 Pump Maintenance 8,000 p.a.

Salary of Gardener 3,600 p.a.

Swimming Pool Expenses 9,000 p.a.

Compute the Annual Rental Value of the property.

Solution: Calculation of AVR

Rental Value Rs Rs Rs

Municipal Rental Value 4,50,000

(MRV)

Actual Rent

(40 flats x 1000 p.m. x 12) 4,80,0000

Less: Lift Maintenance 12,000

Pump Maintenance 8,000

Salary of Gardener 3,600

Swimming Pool 9,000

Expenses 32,600 4,47,4000

Whichever is Higher is 4,50,000

ARV

Q5. Loss due to vacancy period.

From the following given below Calculate Annual Rental Value

Case a) House was vacant for 2 months during the PY 2019 – 2020

b) House Rent of the House is Rs. 4000 p.m. and was vacant for 2 months

Rental Value Rs

MRV 60,000 p.a.

51 | P u r v a T h a v i
 FRV 66,000 p.a.

AR 7,000 p.a.

SR 69,000 p.a.

Solution: Calculation of ARV

Rental Value Case A Case B

MRV 60,000 60,000

FRV 66,000 66,000

Whichever is higher 66,000 66,000

SR 69,000 69,000

Whichever is less is EVR (A) 66,000 66,000

Actual Rent (B) 84,000 48,000

(7000 x 12) (4000 x 12)

GAV (A or B whichever is higher) 84,000 66,000

Less: Loss due to vacancy period 14,000 8,000

(7,000 x 2 m (4,000 x 2 m)

ARV 70,000 58,000

Type : Unrealized Rent

Q6. Calculate ARV from the particulars given below : -

During the PY assessee could not realize the rent for 2 m –

Rental Value Rs

MRV 60,000 p.a.

52 | P u r v a T h a v i
 FRV 66,000 p.a.

Actual Rent 7,000 p.m.

SR 69,000 p.a.

Solution: Computation of Annual Rental Value (ARV)

Rental Value Rs

MRV 60,000

FRV 66,000

Whichever is higher 66,000

SR 69,000

Whichever is less is ERV (A) 66,000

Actual Rent (7000 x 12 m) 84,000

Less: Unrealized Rent (7000 x 2 m) 14,000

Actual Rent Received (B) 70,000

AVR (A or B whichever is higher) 70,000

Q7. Calculate ARV from the particulars given below:

During the PY assessee could not realize the rent for 2 months

Rental Value Rs

MRV 60,000 p.a.

FRV 66,000 p.a.

AR 6,000 p.m.

SR 69,000 p.a.

53 | P u r v a T h a v i
Solution: 66,000

Computation of Income from HP for different categories of Property

Let out Property

Particulars Rs

(A)Computation of GAV xxx

(B) Less: Municipal Taxes (paid by the owner xxx

during the PY)

(A - B)Net Annual Value (NAV) xxx

Deductions u/s 24

a) 30 % of NAV xxx

b) Interest on borrowed capital xxx

Income from House Property xxx

Note 1: Interest on borrowed capital

Loan borrowed before 1.4.99 Loan borrowed after 1.4.99

Actual Interest payable in aggregate for one or 2 Actual Interest payable in aggregate subject to
self-occupied properties, subject to max of 30,000 maximum of Rs 2,00,000

Note 2: For Pre – construction Period – the assessee will be allowed, a deduction on account of interest
1/5th of the accumulated interest of pre – construction period.

Note 3: Annual Value of Self Occupied have is Nil.

Income from House Property

54 | P u r v a T h a v i
Q1. Aniruddh has a property whose MV is Rs. 1,30,000 p.a. The fair rent is Rs. 1,10,000 p.a. and the
standard rent fixed by The Rent Control Act is Rs. 1,20,000 p.a. The property was let out for rent of Rs.
11,000 p.m. throughout the P.Y. Unrealized rent was 11,000 and all conditions prescribed by the Rule 4
are satisfied. He paid Municipal Taxes @ 10 % of Municipal Valuation. Interest on borrowed Rs. 40,000 for
the year. Compute his income from House Property for AY 2022 – 2023.

Solution: Computation of Income from House Property for Mr. Aniruddh

Particulars Rs Rs

Computation of GAV

Step 1: Compute ER Higher of

MV and FR but restricted to SR

MV = 1,30,000 p.a.

FR = 1,10,000 p.a.
1,20,000
SR = 1,20,000 p.a.

Step 2: Compute AR received /

receivable

Actual Rent Received

11,000 x 12 = 1,32,000 1,21,000

Less: Unrealized Rent = 11,000

Step 3: Compare ER of 1,20,000

and Actual Rent received of
1,21,000

Step 4: GAV is higher of ER and

Actual rent received / receivable

Gross Annual Value (GAV) 1,21,000

Less: Municipal Taxes

55 | P u r v a T h a v i
 (paid by the owner during the PY
) 13,000
(1,30,000 x 10 %)

Net Annual Value (NAV) 1,08,000

Less: Deductions u/s 24

a) 30% of NAV 32,000

1,08,000 x 30 % 40,000 72,400

b) Interest on borrowed capital

Income from Gross Property 35,600

Head 3

Profits and Gains of Business or Profession

The tax payable by an assessee on his income under this head is in respect of the profits and gains of any
business or profession carried on him or on his behalf during the PY.

Business Profession

The term business is concerned in the nature of The term Profession means occupation requiring
trade, commerce or manufacture some degree of learning.

Charging Section (Section 28):

The various items of income chargeable to tax as income under the head profits and gains of business or
profession are as under:

a) Income from business or profession

b) Any compensation or other payment due received

c) Incentives received or receivable by assessee carrying on export business

56 | P u r v a T h a v i
d) Value of any benefit or perquisite

e) Sum due to or received by a partner of a firm

Computation of Profits and gains from Business or Profession (Section 29)

Admissible Deductions Inadmissible Deductions Profits Chargeable to Tax

(Section 30 to 37) (Section 40) (Section 41)

a) Rent, Taxes, Repairs, and

Insurance for buildings

b) Depreciation (Section 32)

Blocks of Assets

Part A

I Buildings

Block 1 Buildings used for residential 5 %

purpose

II Furniture and Fittings 10 %

III Plant and Machinery

Block 1 Motor Car 30 %

Block 4 Aero planes, Aero Engines 40 %

Block 7 Life Saving Medical Equipment 40 %

Block 11 Computers 40 %

Block 12 Books ( Annual Publication) 40 %

IV Ships

Block 3 Speed Boats 20 %

Part B: - Intangible Assets

57 | P u r v a T h a v i
 Know – how, Patents, 25 %
copyrights, trade mark

 Expenditure on scientific research

 Contribution to CSR

 Contribution of advertisement in souvenirs of political parties

Inadmissible Deductions (Section 40)

Section 40 (a) (i)

Any interest, royalty, fees for technical services or other sums chargeable under the Act,

a) Outside India

b) In India to NR or to a foreign company,

the tax is not deductible or such tax has not been deducted or after deduction has not been paid on or
before the due date of filing the return.

Section 40 A (3)

Payments in excess of Rs. 1,00,000 made otherwise than through prescribed modes –

Payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or by
use of electronic system exceeds 10,000such expenditure is disallowed as deduction.

Section 44 A

Compulsory Maintenance of Accounts

Maintenance of books of Account and other documents by notified Profession

This Section provides that every person carrying on legal, medical, engineering or architectural profession
or accountancy or technical consultancy or interior decoration or any other notified profession by CBDT
in the official gazette must statutorily maintain BOA.

Notified Profession –

58 | P u r v a T h a v i
The professions notified so far as the profession of authorized representative the profession of film artist,
the profession of company secretary and information technology professionals.

Maintenance of BOA and other documents in the following cases:

a) If gross receipts exceeds Rs, 1,50,000 in all 3 years and immediately preceding the PY or,

b) If, where the profession has been newly set up in the PY, his gross receipts are likely to exceed Rs.
1,50,000 in that year.

Prescribed BOA and other documents:

a) A Cash Book

b) A journal, if accounts are maintained on mercantile basis.

c) A ledger

d) A carbon copies of bills and receipts

e) Original bills and receipts

Q1. Vinod is a film artist. His gross receipts from profession are as under:

Particulars Rs

Financial Year 2018 – 2019 1,15,000

Financial Year 2019 – 2020 1,80,000

Financial Year 2020 – 2021 2,10,000

What is his obligation regarding maintenance of BOA for AY 2022 – 2023 under Section 44 A of IT Act,
1961

Solution: In the present case, Vinod is a person carrying on profession as film artist, which is a notified
profession. Since his gross receipts have not exceeded Rs. 1,50,000 in financial year 2018 -2019, the
requirement under Section 44 A A to compulsorily maintain the prescribed BOA is not applicable to him.

Audit of Accounts of Certain person carrying on business or profession

59 | P u r v a T h a v i
Requirement of Tax Audit

It is obligatory for the person to get his accounts audited before the specified date by the Chartered
Accountant, if his total sales, turnover or gross receipts in business is greater than Rs. 1 Crore in the
relevant PY.

Note: The requirement of audit u/s 44 A D does not apply to a person who declares profits and gains on
presumption basis u/s 44 A B and his total sales, turnover or gross receipts does not exceed Rs. 2 Crore.

Hence the specified date for tax audit would be 30th September of the relevant AY.

Head 4

Income from Capital Gains

Capital Gains (Profit) – arising from sale or transfer of a capital asset.

Meaning of Capital Gain (Section 45)

Any profit or gain arising from the sale or transfer of a capital asset is chargeable to tax under the head
Capital Gains. Capital Asset means any movable or immovable asset like –

 Land

 Building

 Plot

 Silver

 Jewellery

 Shores

 Securities

Profit / Loss arising from transfer of such assets is compared under the head of capital gains from Income
tax point of view.

Items included under Capital Gains (Section 45) –

a) Profit from transfer of capital assets

60 | P u r v a T h a v i
b) Insurance Claim

c) Conversion of Capital Assets in to stock in trade

d) Assets transferred to firm / AOP

e) Profits from distribution of capital assets on dissolution

f) Profits arises from compulsory acquisition of capital assets

g) Capital gain on repurchase of units of Mutual Fund.

Exceptions:

It does not include under Capital assets :-

a) Stock in trade

b) Personal Effect assets

c) Agricultural Land in rural area

d) Gold bonds – issued by CG

e) Special Bearer Bonds – issued by CG

f) Gold Deposit Bonds – issued by CG

Types of Capital gain

@ 15% @ 20 %

Short Term Capital Gains Long Term Capital Gains

Short Term Capital Assets – Long Term Capital Assets –

a) Shares, security, bonds, units are held by the a) Shares, security, bonds, units are held by the
assessee for not more than 12 Months before assessee for more than 12 Months.
any turnover. b) Any other asset which is held by the assessee
for more than 36 months.

61 | P u r v a T h a v i
 b) Any other asset which is held by the assessee
for not more than 36 months.

E.g.: Land, Building, precious metal, jewellery, etc.

Computation of Capital Gains or Loss

Sales Consideration xxx

(-) a) Transfer Exp xxx

b) Cost of Acquisition xxx

c) Cost of Improvement xxx

STCG / LTCG xxx

Head 5

Income from other Sources

a) This is the last and residual head of charge of income.

b) Any income which does not specifically fall under any one of the preceding 4 heads of income is to be
compared and brought to charge u/s 56, Income from other sources.

Items Taxability

Dividend on Shares

a) Dividend from domestic company Exempt

b) Dividend from units Exempt

c) Dividend from non-domestic company or Taxable

cooperative societies.

Interest on Securities

62 | P u r v a T h a v i
 a) Interest on tax free government securities Exempt

b) Interest on less tax government securities Taxable

c) Interest on commercial securities. Taxable

Interest on bank deposits up to Rs. 10,000 Taxable as it is

Lottery

a) If prize amount is given Fully Taxable

b) if net amount is given and such amount is more Net Amount x 100 / 70
than 5000

Horse Race Income Fully Taxable

Causal Income Fully Taxable

Family Pension Received Amount – 1/3rd or 15,000 whichever is

less

Royalty, director’s fees, income from exam Received amount - expenses

remuneration

Income from sub tenant Net Income

Income from machinery, furniture on hire Rent Received – Expenses and depreciation

Agricultural Income outside India Taxable

Income from non-agricultural in India Taxable

Salary or MP or MLA Taxable

Income from undisclosed sources Taxable

Cash Gifts Fully Taxable

(if the aggregate amount exceeds Rs. 50,000 in FY)

from other persons except relatives.

The form Relative Mean :

63 | P u r v a T h a v i
a) Spouse if the individual

b) Brother or sister of the spouse of the individual

c) Brother or sister of the individual

d) Brother or sister of either of the parents of individuals.

Note:

a) On the occasion of marriage of the individual this limit of 50,000 is not valid.

b) Under a will or by way of inheritance this limit of 50,000 is not valid.

c) In contemplation of death of the payer

d) Aggregate of money not exceeding Rs. 50,000 from the persons.

Clubbing of Income

a) Income of Minor shall be included in income of his parents (mother or father which income is higher)

b) Up to Rs 1500 in case of minor’s income is exempt so remaining amount is taxable.

c) If the minor earns income from self-efforts, then such income will not be added to income of his
parents. Exemption of Rs. 1500 is available for every minor.

Set off and Carry Forward of Losses

Set off – means adjustments of losses against the profit from another source / head of income in the same
AY.

Carry Forward – If losses cannot be set off in the same year due to inadequacy of profits, then such losses
are carried forward to the next AY for adjustments against eligible profits of that year.

Deduction of Tax Source and Advance Payment

Income tax is recovered from the assessee in the PY itself through:

a) TDS (Tax Deduction at Source)

b) TCS (Tax Collection at Source)

c) Payment of Advance Tax

64 | P u r v a T h a v i
There taxes are deductible from the total tax due from the assessee. The assessee while filing return of
income has to pay self – assessment tax under Section 140 A, if tax is due on the total income after
adjusting TDS, TCS, relief claimed u/s 89, tax credit claimed to be set off in accordance with the provisions
of IT Act, 1961.

TDS (Tax Deduction at Source)

If a person (deductor) is liable to make payment to any other person (deductee) will deduct tax at source
and transfer the balance to the deductee. The TDS amount deducted will be remitted to the Central
Government.

Advance Payment of Tax (Sec 207 to 219)

 Advance Tax is the amount of income tax that is paid much in advance rather than a lump sum amount
at the year end. Also known as Earn Tax, Advance Tax is to be paid in installments as per the due dates
decided by the income department.

 u/s 208, obligation to pay advance tax arises in every case where the advance tax is payable is ( Rs.
10,000 or more)

Tax Collected at Source (TCS)

 Tax collected at Source or TCS, is a tax imposed on goods by the seller, who collects it from the buyer
at the time of sale. Section 206 C of the IT Act, 1961 specifies the goods and services on which TCS is
applicable.

 The household for TCS on the sale of goods is Rs. 50 Lakhs.

Return of Income

 Return of Income is the declaration of income and the resultant tax by the assessee in the prescribed
format.

 The format of filing the return by different assessee is notified by the CBDT.

65 | P u r v a T h a v i
Compulsory filing of Return of Income (Section 139 (1))

As per Section 139 (1), it is compulsory for companies and firms to file a return of income or loss for every
PY or before the due date in the prescribed form.

In case of a person other than company or firm, filing of return of income on or before due date is
mandatory, if his total income or total income of any other person in respect of which he is assessable
under this Act during the PY exceeds the basic exemption.

Due Dates:

Due date means –

1) 31st October of the AY, where the assessee is referred as below:

a) A company

b) A person (other than company) whose accounts are required to be audited under IT Act, 1961 or any
other law for time being in force.

c) A partner of firm whose accounts are required to be audited under the IT Act, 1961 or any other law
for time being in force.

2) 30th November of the AY, in case of an assessee including the partners of the firm being such assessee
who is required to furnish a report referred in Section 92 E.

3) 31st July of the AY in case of other assessee

Interest for default in furnishing return of Income Tax (Section 234 A)

 Interest under Section 234 A is attracted for failure to file return of income on or before due date u/s
139 (1) i.e., interest payable where an assessee furnishes the return of income after the due date or
does not furnish return of income.
 Simple interest @ 1 % per month or part of month is payable of the period commencing from the date
immediately following the due date.

66 | P u r v a T h a v i
Free for default in furnishing Return of Income (Section 234 F)

Where a person, who is required to furnish a return of income u/s 139, fails to do that within the
prescribed time limit u/s 139(1), he shall pay, by way of fee, a sum of Rs. 5000. However if the total income
of the person does not exceed Rs 5 Lakhs, the fees payable shall not exceed Rs. 1000

Return of Loss (Section 139 (3))

 This section requires the assessee to file a return of loss in the same manner as in the case of return
of income within time allowed u/s 139 (1)

 Section 80 requires mandatory filing of return of loss u/s 139 (3) on or before the due dates specified
u/s 139 (1) to carry forward the losses.

Belated Return (Section 139 (4))

Any person who has not furnished a return within the time allowed to him u/s 139 (1) may furnish the
return for any PY at any time –

a) Before 3 months prior to the end of relevant AY (PY 20210- 2022 i.e. 31.12.20200)

b) Before completion of the assessment

whichever is earlier.

Defective Return (Section 139 (9)

 Under this section, The AO has the power to call upon the assessee to rectify a defective return.

 When the AO considers that the return of income furnished by the assessee is defective, he may
intimate the defect of the assessee, and give him opportunity to rectify the defects within the period
of 15 days from the date of such intimation.

 If the defect is not rectified within the period of 15 days or such further extended period, then the
return would be treated as invalid return.
67 | P u r v a T h a v i
Self-Assessment (Section 140)

 Self-Assessment refers to any balance that has to be paid by an assessee on his assessed income after
the TDS and Advance Tax have been taken in to account before filing the return of income.

 The IT department cannot accept filing of return and IT return cannot be submitted till the time all the
taxes have been paid.

 Tax payable: Tax on Total Income – Advance Taxes paid – TDS / TCS – Relief u/s 89 – Tax credit claimed
to be set off in accordance with Section 115 J D – Tax interest payable u/s 191 (2)

Return to be accompanied by proof of payment of

Taxable Payment + Interest u/s 234 (A) , 234 (B) and 234 (C) + Fee payable u/s 234 (F)

Goods and Service Tax (GST)

 It is a destination and consumption based tax.

 As per the Amendment in Article 366 (12 A), it defines GST.
 Goods and Service Tax means any tax on supply of goods and services or both except taxes on the
supply on alcoholic liquor for human consumption.

Particulars Income Tax GST Custom

Tax Income Goods and Service Tax Only on Goods

When levied When Income Arises Only supply of goods Export / Import
and services

Article 1 defines India for GST

68 | P u r v a T h a v i
 Outside India High Sea Sales 200 NM EE2 (Exclusive Economic 12 NM (nautical miles) Territorial
Zone) for oil and gas water of India

TWI

Article 246 A – Special provision with respect to GST. Article overruled A – 246 AND A – 254.

Article 246 (1) Article 246 (2)

Applicable on Intra State Supply Applicable on Inter State Supply

Provisions made by parliament and state assembly Provisions made by parliament only

GST Charge = GST Charge =

CGST + SGST ISGST

CGST + UTGST

69 | P u r v a T h a v i
 Above GST is not applicable on the following goods:

a) Petroleum Crude
b) High Speed Diesel
c) Motor Spirit
d) Natural Gas
e) Aviation Turbine Fuel

GST on these good swill be applicable, when recommended by the GST Council

E.g. 1:

Supply Nature GST

Haryana -------- UP Inter IGST

UP -------- UP Intra GST + SGST

UP -------- Chandigarh Inter IGST

Chandigarh -------- Chandigarh Intra GST + SGST

Chandigarh -------- Andaman Inter IGST

Delhi -------- Mumbai Inter IGST

Article 265: No tax shall be levied or collected without authority of law.

Income tax = Income Tax Act, 1961

Custom = Custom Act, 1962 and Custom Tariff Act, 1975

70 | P u r v a T h a v i
GST = CGST Act, 2017

SGST Act, 2017 – 31 States

UTGST Act, 2017

IGST Act, 2017

GST Compensation Act, 2017

Meaning Of Intra – State and Inter State Supply as per IGST Act, 2017

Section 8 of the IGST Act, 2017 Section 7 of the IGST Act, 2017

Intra State Supply Inter State Supply

Where the location of supplier and place of supply Where the location of supplier and place of
(POS) – supplier (POS) –

is in the same state or same UT a) two different states

b) two different UT
c) one state, one UT

Article 279 A – Formation of GST Council

 GST Council formed – 10 / 9 / 2016

 GST Council Notified – 12 / 9 / 2016

 Members in GST Council = 33

GST Council makes recommendation on the following:

a) Taxes to be subsumed
b) Goods / Services to be subjected or to be exempted from GST
c) Apportionment of IGST
d) Special rate for specified period.

71 | P u r v a T h a v i
Introduction and Background of GST

 Problems and Limitations in old system:

 Multiple Tax
 Multiple Taxable events
 Cascading effect (tax on tax)
 No uniformity
 Classification issue
 Different department and different types of taxes
 Higher compliances

To remove the above problems, government introduced GST Laws in India, wef 1st July, 2017

(in J / K 8th July onwards)

Picture after GST Laws ( wef 1st July 2017)

Multiple Taxes GST ( excise, S Tax, VAT, CST, Ent. Tax, etc.)

Multiple Taxable Event Supply

Assesse Name Supplier (Taxable Person)

Intra State Intra State

Inter State Inter State

International Trade Inter State

Double Tax No Double Tax

Cascading Effect No Cascading Effect ( Seamless Flow Of Credit)

No Uniformity One Nation One Tax

(5%, 12%, 18%, 28%) – Central Board of Indirect

Taxes and Custom (CBIC)

Higher Compliance Cost Lesser Compliance

Input Tax Credit (ITC)

72 | P u r v a T h a v i
Tax payers shall be allowed to take credit of taxes paid on inputs, capital goods and input services and
utilize the same for payment of output tax.

ITC

CGST SGST IGST

First to pay CGST First to pay CGST First to pay IGST

Second to pay IGST Second to pay IGST Second to pay CGST (Now in any
order)

Not allowed from SGST Not allowed from CGST Third to pay SGST (Now in any
order)

Anti-Profiteering provisions in GST Laws

Profiteering: In terms of Section 171 of CGST Act, 2017 the suppliers of goods and services should pass the
benefit of any reduction in the rate of tax or the benefit of ITC to the recipients by way of commensurate
reduction in prices

Money Laundering Concept:

 Prevention of Money Laundering Act, 2002 was enacted to fight against the criminal offence of
legalizing the income / profits from an illegal source.
 To disclose GST Funds, this act enables the government or police authority to confiscate the property
earned from the illegally gain proceeds.

73 | P u r v a T h a v i