DIRECT TAXATION

(FOR PRIVATE CIRCULATION ONLY)

2022

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 PROGRAMME COORDINATOR
Dr. Prashant Ubarhande

COURSE DESIGN AND REVIEW COMMITTEE

Prof. Dalip Mehra Prof. Sudhir Gijre
Prof. Arun Vartak Prof. Avinash Nene
Dr. N.M. Vechlekar Dr. Ravi Chitnis
Dr. Prashant Ubarhande Prof. Kedar Phadke
Prof. Jyoti Peswani

COURSE WRITERS
Satish M. Inamdar Parag Saraf

EDITOR
Mr.

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July 2013 (Revision 06, 2022)

Copyright © 2022 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.

Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.

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 PREFACE
This SLM on ‘Direct Taxation” covers various important sections of the “Income Tax Act, 1961” (for
convenience purposes, hereinafter referred to as “Act”) which is probably one of the most complicated
pieces of legislations in the country. The Act also has a very great sensitivity effect on virtually all
the citizens of the country. This is one of the Acts in which amendments take place very frequently.
Income Tax is charged on the income of previous year, at the rates prescribed by the Finance Act for
the relevant assessment year. According to the Constitution of India, income tax is a central subject.
The Income Tax Act, 1961 has been brought into force with effect from 1st April, 1962. It applies to
the whole of India (including Jammu and Kashmir). Since then, several amendments of far-reaching
nature have been made in the Income Tax Act by the Finance Acts of every year. Besides this,
amendments have also been made by various Amendments Acts.
Though the discussions pertain to the provisions of the Act in general, more thrust is given on the tax
liability from the angle of an Individual Tax Payer.
All attempts have been made to incorporate the latest status of the provisions of the Act. At the same
time, a learner needs to be in constant touch with the various amendments made to the Act which take
place very frequently.
Students are advised to go through “Appendix” given at the end of the SLM where they would find
“Taxation at a Glance “and practical problems on “Gross Total Income”
All attempts have been made to make the text error-free. However, some omissions may still be
remaining. We will be grateful if they can be pointed out so that necessary corrections can be made
in the subsequent editions.

Satish M. Inamdar
Parag Saraf

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 ABOUT THE AUTHORS

Satish M. Inamdar, M.Com, LLB. (Fellow Member of the Institute of Chartered Accountants of
India, Graduate Member of The Institute of Cost & Works Accountants of India, Associate Member
of The Institute of Company Secretaries of India, Charter Member of Rotary Club of Pune). He has
been associated with the industry for the last two decades in various senior capacities. He has also
been associated with Symbiosis Institute of Business Management as a Faculty of Finance. He has
conducted Management Development Programmes and Executive Development Programmes for
various private sector and public sector organisations. He has authored three books on subjects such
as Cost & Management Accounting and Financial Management.
Parag Prakash Saraf, M.Com. Ph.D. C.A, LLB. He is an experienced faculty and practising
Chartered Accountant. He is Associated with Symbiosis since the last ten years as evaluator, guest
lecturer and author for SLM. He has published total 73 books for B.Com, M.Com., MBA and NET/
SET preparation. He is a Ranker in 12th, B.Com and M.Com examination. He had completed his Ph.D
at an early age and his thesis of Ph.D. was approved by SAARC. Presently his thesis is used as post
graduate syllabus at Dhaka University, Bangladesh. He has published various papers on commerce
and management at state and national level. He also conducts workshops and seminars on various
management subjects

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 CONTENTS

Unit No. TITLE Page No.

1 Definitions Under Income Tax Act 1 - 12
1.1 Introduction
1.2 Definitions under the Act
1.3 Total Income
1.4 Residential Status
1.5 Accrual of Income Received in India
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Income Exempt from Tax 13 - 28
2.1 Introduction
2.2 Incomes Exempt under Section 10
2.2.1 Agricultural Income
2.2.2 Share of profit of a partner from a Firm
2.2.3 Amount received under a Life Insurance Policy
2.2.4 Interest, premium or bonus on specified investments
2.2.5 Educational Scholarship
2.2.6 Payments to MPs, MLAs etc.
2.2.7 Income of a Local Authority
2.2.8 Income of a Mutual Fund
2.2.9 Income of Venture Capital Fund
2.2.10 Income of Trade Unions
2.2.11 Income of Certain Funds
2.2.12 Income of Employees State Insurance Fund
2.2.13 Capital gains arising from the transfer of units of UTI
2.2.14 Dividend received from domestic Companies
2.2.15 Some other exemptions
2.2.16 Occasional Incomes or Gifts
2.3 Newly Established Undertakings in Free Trade Zones,
Software Technology Park
2.4 Income of 100% Export Oriented Units
2.5 Income of a Political Party
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
3 Income from Salaries 29 - 58
3.1 Meaning of Salary
3.2 Exemptions
3.2.1 Leave Travel Concession
3.2.2 Gratuity
3.2.3 Pension
3.2.4 Leave Salary
3.2.5 Retrenchment Compensation
3.2.6 VRS Compensation
3.2.7 Provident Fund
3.2.8 Super Annuation Fund
3.2.9 House Rent Allowance
3.2.10 Special allowances
3.3 Perquisites - Sec. 17
3.3.1 Employees Stock Option Plan (ESOP)
3.3.2 Rent Free Accommodation
3.3.3 Furnished Accommodation
3.3.4 Perquisites in respect of Furnished accommodation in hotel
3.3.5 Perquisites in respect of Use of Motor Car
3.3.6 Domestic servant
3.3.7 Gas, Electric Energy and water supply for household
consumption
3.3.8 Perquisites in respect of Educational facilities
3.3.9 Other fringe benefits or amenities [Section 17(2) (VI)]
3.3.10 Transfer of Employers Movable Assets: Section 17 (2)(vi)
3.3.11 Medical Facility – Provison to sect 17(2)
3.4 Perquisites Exempt from Tax
3.5 Deductions - [Section 16]
3.5.1 Entertainment Allowance
3.5.2 Professional Tax
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
4 Income from House Property and other Sources 59 - 78
4.1 Introduction & Scope
4.2 Deemed Ownership Under Section 27
4.3 Gross Annual Value [Section 23 (1)]
4.4 Steps for Computing Income from House Property
4.4.1 Let Out House Property
4.4.2 Deemed Let Out House Property
4.4.3 Self-Occupied House Property
4.5 Net Annual Value (NAV)
4.6 Deductions from income of House Property [Section 24]
4.7 Deductions from income from House Property under Section 24
4.8 Inadmissible Expenses [Section 25]
4.9 Income from other sources Sec. 56
4.10 Deductions from income from other sources
4.11 Inadmissible expenses Section (58)
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
5 Profits and Gains from Business or Professions 79 - 100
5.1 Incomes Chargeable to Tax Under the Head “Profits and Gains of
Business or Profession” [Section 28]
5.2  Expenses/Deductions Expressly Allowed as Deduction From
Profit and Gain of Business or Profession
5.3 Disallowed Expenses
5.4 General Rules
5.5 Format of Computation of Taxable Income From Business or
Profession
5.6 Personal Incomes (Disallowed Incomes )
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure

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 Unit No. TITLE Page No.
6 Capital Gains 101 - 126
6.1 Introduction
6.2 Capital Asset
6.2.1 Transfer of Capital asset
6.3 Calculation of Capital Gains
6.3.1 Cost of Acquisition
6.3.2 Cost of Improvement
6.4 Deductions from Capital Gains
6.4.1 Transfer of Residential House
6.4.2 Transfer of Agricultural land
6.4.3 Investment in Bonds
6.4.4 Transfer of Securities/Units
6.4.5 Transfer of asset other than House Property
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
7 Deductions from Total Income 127 - 150
7.1 Introduction
7.2 Deductions (General)
7.2.1 Medical Insurance
7.2.2 Medical Treatment of Dependants
7.2.3 Medical Treatment
7.2.4 Repayment of Loan
7.2.5 Donations
7.2.6 Rent paid
7.2.7 Scientific Research Donation
7.3 Profits from Biodegradable Waste
7.3.1 Deduction in respect of Employment of New Workmen
7.3.2 Income of Offshore Banking Units
7.3.3 Income of a Person with Disability
7.4 Profits from Infrastructural Activity
7.4.1 Profits from Other Undertakings
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
8 Tax Deducted at Source, Interest, Rebates and Relief 151 - 180
8.1 Introduction
8.2 Tax Deducted at Source (TDS)
8.2.1 Payment of salary
8.2.2 TDS- Interest on Securities
8.2.3 TDS- Interest on other than Securities
8.2.4 TDS- Winnings from Lotteries
8.2.5 TDS- Payment to Contractors
8.2.6 TDS- Insurance Commission
8.2.7 TDS- Payment to Non Resident
Sportsmen or Sports Association
8.2.8 TDS- Payment in respect of NSC
8.2.9 TDS- Repurchase of Mutual Funds
8.2.10 TDS- Commission or Brokerage
8.2.11 TDS- Rent
8.2.12 TDS- Professional Fees
8.3 Advance Tax
8.4 Self Assessment Tax
8.5 Interest
8.5.1 Late filing of Return
8.5.2 Interest – Non Payment of Advance Tax
8.5.3 Interest – Deferment of Advance Tax
8.5.4 Interest on Refund
8.5.5 Interest – Late Payment of Tax
8.5.6 Interest – Failure to pay TDS
8.6 Rebate in respect of securities Transaction tax
8.6.1 Rebate to Member of Association of Persons
8.6.2 Relief for Arrears of Salary
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
9 Assessment and Procedures 181 - 202
9.1 Introduction
9.2 Powers of Income Tax Officers
9.3 Filing of Returns of Income
9.3.1 Filing of Bulk Returns
9.3.2 E-Filing Of Returns
9.3.3 Loss Return
9.3.4 Belated Returns
9.3.5 Returns by Trusts
9.3.6 Returns by Political Parties
9.3.7 Returns by Certain Associations
9.3.8 Revised return
9.3.9 Defective Returns
9.3.10 Signature on Return
9.4 Enquiry Before assessment
9.4.1 Assessment
9.4.2 Best Judgment Assessment
9.4.3 Income escaping Assessment
9.4.4 Notice under escaping Assessment
9.4.5 Assessment of any other Person
9.5 Appeals to High Court
9.5.1 Revisions by Commissioner of Income Tax
9.5.2 Revision of other Orders
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
10 Taxation of Partnership Firms 203 - 214
10.1 Introduction
10.2 Assessment as a Firm
10.3 Change in Constitution
10.4 Succession of Firms
10.5 Joint and Several Liabilities of Firms
10.6 Dissolution of Firms
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
11 Taxation of Companies 215 - 230
11.1 Introduction
11.2 Concept of Amalgamation
11.3 Concept of Demerger
11.4 Taxation of Companies
11.4.1 Minimum Alternate Tax
11.4.2 MAT - Foreign Companies
11.4.3 Credit of MAT
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
12 Set Off and Carry Forward of Losses 231 - 240
12.1 Introduction
12.2 Set off of Losses
12.3 Deemed Income
12.3.1 Cash Credit
12.3.2 Unexplained Investment
12.3.3 Unexplained Money, Jewellery
12.3.4 Unexplained Expenditure
12.3.5 Investment not Fully Disclosed
12.3.6 Any Amount Borrowed/Repaid on Hundi
12.4 Carry Forward of Losses
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Unit No. TITLE Page No.
13 Tax Audit 241 - 260
13.1 Introduction
13.2 Form 3CD
13.3 Presumptive Profits
13.3.1 Business of Civil Construction
13.3.2 Business of Plying and Hiring
13.3.3 Retail Business
13.4 Method of Accounting
13.5 Amount Admissible under Act
13.5.1 Section 33AB - Tea or Coffee or Rubber Development Account
13.5.2 Section 33ABA - Extraction of Oil & Natural Gas
13.5.3 Section 35 - Scientific Research Expenditure
13.5.4 Section 35AC - Sum Paid to Public Sector Co.
13.5.5 Section 35CCA - Payment to Certain Associations
13.5.6 Section 35D - Preliminary Expenses
13.5.7 Section 35E - Extraction of Minerals
13.6 Amounts Debited to P and L Account
13.7 Payment made to Specified Persons
13.8 Deemed Profits
13.9 Profits Chargeable to Tax
13.10 Deduction on Actual Basis
13.11 Details of Loan borrowed and accepted
13.12 Brought Forward Losses
13.13 Deduction under Chapter VIA
13.14 Tax Deduction at Source
13.15 Quantitative Details
13.16 Cost Audit Report
13.17 Accounting Ratios
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Appendix 1 - Gross Total Income 261 - 262
Appendix 2 - Taxation at a Glance 263 - 266

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 Definitions Under Income Tax Act
UNIT

1
Structure:

1.1 Introduction
1.2 Definitions under the Act
1.3 Total Income
1.4 Residential Status
1.5 Accrual of Income Received in India
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Definitions Under Income Tax Act 1

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• State the basics of Income Tax Act.
----------------------
• Discuss definitions under the Act.
---------------------- • Analyse the rates of taxation in India.
---------------------- • Explain the concept of residential status of a person.

----------------------
1.1 INTRODUCTION
----------------------
In India, the Constitution is the parent law. All other laws should be
---------------------- enacted without violating the framework of the Constitution and subject to
---------------------- the norms laid down therein. The constitution of India authorises the Central
Government to levy tax on income. By virtue of this power and to achieve this
---------------------- goal, the Income Tax Act-1961 was enacted and it extends to entire India.
---------------------- “It was only for the good of his subjects that he collected taxes from them, just
as the Sun draws moisture from the Earth to give it back a thousand fold”
----------------------
– Kalidas in Raghuvansh eulogising King Dalip.
---------------------- It is a matter of general belief that taxes on income and wealth are of
recent origin but there is enough evidence to show that taxes on income in some
----------------------
form or the other were levied even in primitive and ancient communities. The
---------------------- origin of the word “Tax” is from “Taxation” which means ‘estimate’.

---------------------- The rapid changes in administration of direct taxes, during the last
decades, reflect the history of socio-economic thinking in India. From 1922 to
---------------------- the present day, changes in direct tax laws have been so rapid that except in the
bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act
---------------------- as it stands amended to date. It was but natural, in these circumstances that the
---------------------- set up of the department should not only expand but undergo structural changes
as well.
----------------------
1.2 DEFINITIONS UNDER ACT
----------------------
Every person whose total income of the previous year exceeds the
----------------------
maximum amount which is not chargeable to income tax, is an Assessee and
---------------------- chargeable to income tax at the rate or rates prescribed in the Finance Act for
the relevant Assessment Year. However, his total income shall be determined on
---------------------- the basis of his residential status.
---------------------- Assessment Year and Previous Year

---------------------- According to Section 2(9), Assessment Year (AY) is the period of 12

months which starts from 1st April and ends on 31st March.
----------------------

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 According to Section 2(34), Previous Year means the Previous Year as Notes
defined in Section 3 of the Act.
----------------------
Section 3 of the Act defines Previous Year as the financial year immediately
preceding Assessment Year, e.g. income earned during previous year 1.4.2017 ----------------------
to 31.3.2018 will be assessed or charged to tax in A.Y. 2018-2019.
----------------------
Significance of these two terms is that the income earned by a person
during the Previous Year is subjected to tax during the Assessment Year. ----------------------
The term Previous Year should not be confused with the Accounting
----------------------
Year for financial accounting purposes. There may be a possibility that an
organisation may have the Accounting Year for financial accounting purposes ----------------------
which does not end on 31st March. However, for income tax purposes, Previous
Year essentially ends on 31st March. ----------------------
Person ----------------------
According to Section 2(31), the term Person includes: ----------------------
a. An Individual
----------------------
b. A Hindu Undivided Family (HUF) - The term has not been defined under
the Act. However, HUF means a family consisting of all persons ideally ----------------------
descended from a common ancestor including their wives and unmarried
----------------------
daughters.
c. A Company - A Company means a company formed as per the provisions ----------------------
of Companies Act, 2013.
----------------------
d. A Firm - A Firm means a partnership firm.
----------------------
e. An Association of Persons (AOP) or A Body of Individuals (BOI) - AOP
is formed when two or more persons come together to earn the income. ----------------------
BOI is formed when more than two individuals come together to earn the
income. ----------------------

f. A Local Authority ----------------------

g. Every Artificial Person not falling under any of the preceding sub-clauses. ----------------------
We will restrict our discussions in respect of taxability of an individual, a
----------------------
company and a firm.
Assessee ----------------------
According to Section 2(7), Assessee means a person by whom any tax or ----------------------
any other sum of money (say interest and/or penalty) is payable under the Act
and includes the following - ----------------------

a. Every person on whom any proceeding under the Act has been taken for ----------------------
the assessment of his income or the income of any other person in respect
of which he is assessable to determine the loss sustained by him or by ----------------------
such other persons to determine the amount of refund due to him or to ----------------------
such other person.
----------------------

Definitions Under Income Tax Act 3

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 Notes b. A person who is deemed to be an Assessee under the provisions of this
Act. This would include the legal representative of a deceased person or
---------------------- agent of a person.
---------------------- c. Every person who is deemed to be an Assessee in default as per the
provisions of the Act. A person is said to be Assessee in default if he
---------------------- fails to comply with the provisions of the Act. E.g. A person who fails to
deduct the tax at source and pay the same to the Central Government.
----------------------

---------------------- Check your Progress 1

----------------------
Fill in the blanks.
---------------------- 1. The origin of the word “Tax” is from “Taxation”, which means ______.
---------------------- 2. The significance of two terms, i.e. assessment year and previous year,
is that the income earned by Mr ‘X’ during previous year is subjected
---------------------- to income tax during the _______.
---------------------- 3. A person who fails to deduct the tax at source and pay the same to the
Central Government is known as _______.
----------------------

----------------------
1.3 TOTAL INCOME
----------------------
For calculating the Total Income of the Assessee, the income is required
---------------------- to be classified under the following five heads of income.
---------------------- a. Income from Salaries
---------------------- b. Income from House Property
c. Profits from Business and Profession
----------------------
d. Income from Capital Gains
----------------------
e. Income from Other Sources
---------------------- For calculating the income from the heads of incomes stated above, the
---------------------- deductions available for each of the above heads of income are considered. E.g.
while calculating the Income from Salaries, deductions under Section 16 are
---------------------- considered or while calculating income from House Property, deductions under
Section 24 are considered.
----------------------
Combined amount of all the above five heads of income gives the amount
---------------------- of Gross Total Income (GTI).
---------------------- From GTI, the amounts available as deductions as per the provisions of
Chapter VI-A of the Act are deducted. These deductions are as per the provisions
---------------------- of Section 80C to Section 80U of the Act.
---------------------- Gross Total Income duly reduced by the deductions as per the provisions
of Chapter VI- A of the Act gives the Total Income.
----------------------

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 1.4 RESIDENTIAL STATUS Notes
The tax liability of an Assessee under the tax is affected due to the Residential ----------------------
Status of the assessee. There are different rules for deciding the residential
status of an individual, a firm and a company. Let us discuss the same in detail. ----------------------
Individual ----------------------
As per the provisions of Section 6 of the Act, an Individual is classified basically ----------------------
as Resident and Non-Resident. Resident Individual is further classified as
Ordinarily Resident and Not Ordinarily Resident. ----------------------
Resident and Ordinarily Resident (R-OR) ----------------------
An individual is treated as Resident and Ordinarily Resident if he satisfies Any One
----------------------
of the following Basic Conditions and Both the following Additional Conditions -
Basic Conditions ----------------------
a. He is in India for a period or periods amounting in all to at least 182 days ----------------------
in the relevant Previous Year.
----------------------
b. He is in India for 60 days or more during the relevant Previous Year
and has been in India for 365 days or more during four Previous Years ----------------------
immediately preceding the relevant Previous Year.
----------------------
Note -
----------------------
a. In case of an individual who is a citizen of India and who leaves India
in any Previous Year for the purpose of employment out of India or as a ----------------------
crew member of an Indian ship, the period of 60 days stated above shall
be substituted by 182 days. ----------------------
b. In case of an individual who is a citizen of India or is a person of Indian ----------------------
origin, who comes on a visit to India, the period of 60 days stated above
shall be substituted by 182 days. A person is considered to be of Indian ----------------------
origin if he or either of his parents or any of his grandparents (maternal or
----------------------
paternal) was born in undivided India.
c. While calculating the period of stay in India, it is not necessarily a ----------------------
continuous period or that the stay should be at one place only.
----------------------
Additional Conditions
----------------------
a. He has been Resident in India for at least 2 out of 10 Previous Years
immediately preceding the relevant previous year. ----------------------
b. He has been in India for 730 days or more during 7 Previous Years ----------------------
immediately preceding the relevant previous year.
----------------------
Resident but Not-Ordinarily Resident (R-NOR)
An individual is treated as Resident but Not-Ordinarily Resident if he satisfies ----------------------
Any One of the Basic Conditions and One or None of the Additional Conditions.
----------------------
The basic conditions and the additional conditions are the same as applicable to
a Resident and Ordinarily Resident. ----------------------

Definitions Under Income Tax Act 5

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 Notes Non-Resident (NR)
An individual will be considered to be a Non-Resident if none of the
----------------------
Basic Conditions are satisfied by an individual.
---------------------- Partnership Firms
---------------------- A partnership Firm is said to be a Resident in India in any previous year
if the control and management of the affairs of the firm are situated in India.
----------------------
A partnership Firm is said to be a Non-Resident in India in any previous
---------------------- year if the control and management of the affairs of the firm are situated outside
India.
----------------------
The management and control of the firm will be assumed to be in India if
---------------------- the partners of the firm are residents of India and the principal place of business
of the firm is situated in India.
----------------------
Company
----------------------
A Company is said to be a Resident in India in any Previous year if -
---------------------- a. It is an Indian Company or
---------------------- b. The control and management of the affairs of the Company are situated in
India.
----------------------
A Company is said to be a Non-Resident in India in any Previous Year if -
---------------------- a. It is not an Indian Company and
---------------------- b. The control and management of the affairs of the Company are situated
outside India.
----------------------
Incidence of Tax and Residential Status - Section 5
----------------------
As per the provisions of Section 5 of the Act, the incidence of tax of the
---------------------- assessee depends upon his residential status and also on the place and time of
accrual of income.
----------------------
Resident and Ordinarily Resident - Section 5(1)
---------------------- A Resident and Ordinarily Resident is taxable in respect of -
---------------------- a. Income which is received or deemed to be received in India in the previous
year.
----------------------
b. Income which accrues or arises or is deemed to accrue or arise in India
---------------------- during the previous year.
---------------------- c. Income which accrues or arises outside India.
Resident but Not-ordinarily Resident - Section 5(1)
----------------------
A Resident but Not Ordinarily Resident is taxable in respect of -
----------------------

----------------------

----------------------

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 a. Income which is received or deemed to be received in India in the previous Notes
year.
----------------------
b. Income which accrues or arises or is deemed to accrue or arise in India
during the previous year. ----------------------
c. Income which accrues or arises outside India from a business controlled
----------------------
or profession set up in India.
d. Income received outside India from a business controlled or profession ----------------------
set up in India.
----------------------
Non-Resident
----------------------
A Non-Resident is taxable in respect of -
a. Income which is received or deemed to be received in the previous year. ----------------------

b. Income which accrues or arises or is deemed to accrue or arise in India ----------------------

during the previous year.
----------------------
The taxability as discussed above is summarised in the table shown below:
----------------------
Table 1.1: Taxability
----------------------
Types of Income/Status ROR RNOR NR
Income received in India, whether accrued in India ----------------------
or outside India Yes Yes Yes ----------------------
Income deemed to be received in India, Whether
----------------------
accrued in India or outside India Yes Yes Yes
Income accruing or arising in India, whether ----------------------
received in India or outside India Yes Yes Yes
----------------------
Income deemed to accrue or arise in India, Whether
received in India or outside India Yes Yes Yes ----------------------
Income received or accrued outside India from a ----------------------
business controlled in or profession set up in India Yes Yes No
----------------------
Income received or accrued outside India from
a business controlled from outside India or a ----------------------
profession set up outside India Yes Yes No
----------------------
Income (other than business or profession) received
and accrued outside India Yes No No ----------------------
Income earned and received outside India and ----------------------
remitted to India No No No
----------------------
Note
ROR indicates Resident and Ordinarily Resident RNOR indicates Resident but ----------------------
Not Ordinarily Resident NR indicates Non-Resident
----------------------

----------------------

Definitions Under Income Tax Act 7

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 Notes 1.5 ACCRUAL OF INCOME RECEIVED IN INDIA
---------------------- Any income received by the assessee in India is liable for the payment of
tax irrespective of the residential status of the assessee and place of accrual of
---------------------- such income.
---------------------- Income deemed to be received in India - Section 7

---------------------- The following incomes are deemed to be received in India even if they are not
actually received
----------------------
a. Annual accretion to the balance of an employee who is the member of
---------------------- a Recognised Provident Fund. As a result, following amounts will be
deemed to be the income in the hands of employee -
----------------------
Employer’s contribution to the provident fund in excess of 12% of
---------------------- the salary of the employee.
Interest credited on the balance at the rate exceeding 9.5%
----------------------
b. Transferred balance in a Recognised Provident Fund
----------------------
c. Any contribution made by the Central Government to the account of an
---------------------- employee under pension scheme referred to in Section 80 CCD.
---------------------- d. Tax deducted at source from the several incomes shall be deemed to be
received in the hands of the payee. In simple words, for deciding the tax
---------------------- liability, the income will be grossed up by adding the tax deducted at
source to the net income received.
----------------------
e. Unexplained investments or unexplained cash credits are deemed to the
---------------------- profits on which the assessee is required to pay the tax.
---------------------- f. Deemed profits on which the assessee is required to pay the tax as per the
provisions of Section 41 of the Act, are discussed in the later units.
----------------------
Incomes which are deemed to accrue or arise in India - Section 9
---------------------- In case of resident assessee, the place where the income is deemed to
---------------------- accrue or arise is not material. However, in case of a Non-Resident assessee,
the income is subjected to tax only if it accrues or arises in India. However, the
---------------------- following are some of the incomes which are deemed to have accrued or arisen
in India, even if they accrue or arise outside India:
----------------------
a. Income from a business connection in India
----------------------
b. Any income which arises from any tangible property situated in India,
---------------------- whether movable or immovable
c. Income from transfer of any capital asset situated in India
----------------------
d. Any salary earned in India, even if it is paid outside India
----------------------
e. Salary paid by Government to an Indian citizen or Indian national for
---------------------- services rendered outside India

----------------------

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 Notes
Check your Progress 2
----------------------
State True or False.
----------------------
1. As per the provisions of Section 5 of the Act, the incidence of tax of
the assessee depends upon his residential status and not on the place ----------------------
and time of accrual of income.
----------------------
2. A person is considered to be of Indian origin if he or either of his
parents or any of his grandparents (maternal or paternal) was born in ----------------------
undivided India. ----------------------

----------------------
Summary
----------------------
●● The origin of the word “Tax” is from “Taxation” which means ‘estimate’.
●● Every person whose total income of the previous year exceeds the ----------------------
maximum amount which is not chargeable to income tax, is an Assessee. ----------------------
●● For calculating the Total Income of the Assessee, the income is required
to be classified under the following five heads of income. ----------------------
a. Income from Salaries ----------------------
b. Income from House Property
----------------------
c. Profits from Business and Profession
d. Income from Capital Gains ----------------------
e. Income from Other Sources. ----------------------

Keywords ----------------------

----------------------
●● Assessment Year (AY): It is the period of 12 months which starts from
1st April and ends on 31st March. ----------------------
●● Previous Year: It is the financial year immediately preceding Assessment Year.
----------------------
●● Assessee: It is a person by whom any tax or any other sum of money (say
interest and/or penalty) is payable under the Act ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Discuss the conditions for deciding the Residential Status of an individual.
How does the tax liability of the individual get affected due to his ----------------------
residential status?
----------------------
2. Write short notes on the following -
Assessment Year and Previous year ----------------------
Assessee ----------------------
Person
----------------------
Rates of Tax

Definitions Under Income Tax Act 9

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 Notes Problems
Problem 1
----------------------
Mr. A, a citizen of UK, comes to India for the first time during the financial year
---------------------- 2007- 2008. His stay in India during the financial years 2008-2009, 2009-2010,
2010-2011, 2011-2012 and 2012-2013 is as below:
----------------------
2008-2009 - 55 days
----------------------
2009-2010 - 63 days
----------------------
2010-2011 - 75 days
---------------------- 2011-2012 - 166 days
---------------------- 2012-2013 - 65 days
---------------------- Determine his residential status for the Assessment Year 2013-2014.
---------------------- Problem 2
Mr. Ashok provides the following details about his stay in India -
----------------------
Year Duration Year Duration Year Duration
---------------------- of Stay of Stay of Stay
---------------------- 2001 -2002 365 days 2002-2003 365 days 2003-2004 366 days
2004-2005 115 days 2005-2006 080 days 2006-2007 050 days
---------------------- 2007-2008 180 days 2008-2009 067 days 2009-2010 160 days
2010-2011 059 days 2011-2012 105 days 2012-2013 120 days
----------------------
Determine the residential status of Mr. Ashok for the Assessment Year 2013-
---------------------- 2014.

---------------------- Problem 3
Mr. Ashok is the member of crew of an Indian ship. He leaves India for the
---------------------- first time on 15th November, 2010. Without returning to India, he takes up
---------------------- employment in USA. He comes back to India on a visit on 10th July, 2012 and
stays for 196 days. Determine his residential status for the Assessment year
---------------------- 2013-2014.

---------------------- Problem 4
Mr. Ashok submits the details of his income for the Assessment Year 2013-
----------------------
2014.
---------------------- Particulars `
Profit from business carried on in India 1, 00,000
----------------------
Profit from consultancy set up in India 0, 45,000
---------------------- Profit from business carried on in UK (income is earned in UK and
the business is controlled from UK) 4,50,000
---------------------- Pension for services rendered in Sweden and received in Sweden
but remitted to India 6,00,000
----------------------
Interest on bank deposits received in UK 2, 00,000
---------------------- Capital Gains on a property situated in Mumbai, received in UK 3, 00,000

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 Calculate the Gross Total Income of Mr. Ashok assuming that he is - Notes
Resident and Ordinarily Resident
----------------------
Resident but Not-Ordinarily Resident
----------------------
Non-Resident
Answers ----------------------

Problem 1 ----------------------
Solution ----------------------
Mr. A has been in India for a period of 65 days during the previous year 2012-
----------------------
2013. However, his stay in India during the previous 4 previous years is 359
days. As such, he does not satisfy both the conditions that his stay should be ----------------------
minimum 60 days during the previous years and should be 365 days during the
preceding four previous years. As he does not satisfy any of the basic conditions, ----------------------
his status will be that of a Non-Resident.
----------------------
Problem 2
----------------------
Solution
Mr. Ashok has been in India for more than 60 days during the previous year and ----------------------
for 391 days during the preceding four previous years. As such, he is Resident. ----------------------
However, as he is in India for a total period of 701 days during the preceding
seven previous years, he is a Resident but Not-Ordinarily Resident. ----------------------
Problem 3 ----------------------
Solution
----------------------
During the previous year 2012-2013, Mr. Ashok was in India for a period of 196
days. As such, he is a Resident. Moreover, his stay in India during the preceding ----------------------
four previous years exceeds 365 days. As such, Mr. Ashok will be a Resident
----------------------
and Ordinarily Resident.
Problem 4 ----------------------
Solution ----------------------
Calculation of Gross Total Income of Mr. Ashok ----------------------
ROR RNOR NR ----------------------
Profit from business carried on in India 1,00,000 1,00,000 1,00,000
----------------------
Profit from consultancy set up in India 0,45,000 45,000 45,000
----------------------
Profit from the business carried on in UK 4,50,000 4,50,000 Nil
(income is earned in UK and the business is ----------------------
controlled from UK)
----------------------
Pension for services rendered in Sweden and Nil Nil Nil
received in Sweden but remitted to India ----------------------

----------------------

Definitions Under Income Tax Act 11

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 Notes Interest on bank deposits received in UK 2,00,000 Nil Nil
---------------------- Capital Gains on a property situated in 3,00,000 3,00,000 3,00,000
Mumbai, received in UK
----------------------
Gross Total Income 10,95,000 4,45,000 4,45,000
---------------------- Note -
---------------------- ROR - Resident and Ordinarily Resident
---------------------- RNOR - Resident but Not Ordinarily Resident
NR - Non-Resident
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- Fill in the blanks.
1. The origin of the word “Tax” is from “Taxation”, which means estimate.
----------------------
2. The significance of two terms, i.e. assessment year and previous year, is
---------------------- that the income earned by Mr ‘X’ during previous year is subjected to
---------------------- income tax during the assessment year.
3. A person who fails to deduct the tax at source and pay the same to the
---------------------- Central Government is known as Assessee in default.
---------------------- Check your Progress 2
---------------------- State True or False.
1. False
----------------------
2. True
----------------------

---------------------- Suggested Reading

---------------------- 1. incometaxmanagement.com
---------------------- 2. Lal. Direct Taxes. Pearson Education India.

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

12 Direct Taxation

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 Income Exempt from Tax
UNIT

2
Structure:

2.1 Introduction
2.2 Incomes Exempt under Section 10
2.2.1 Agricultural Income
2.2.2 Share of profit of a partner from a Firm
2.2.3 Amount received under a Life Insurance Policy
2.2.4 Interest, premium or bonus on specified investments
2.2.5 Educational Scholarship
2.2.6 Payments to MPs, MLAs etc.
2.2.7 Income of a Local Authority
2.2.8 Income of a Mutual Fund
2.2.9 Income of Venture Capital Fund
2.2.10 Income of Trade Unions
2.2.11 Income of Certain Funds
2.2.12 Income of Employees State Insurance Fund
2.2.13 Capital gains arising from the transfer of units of UTI
2.2.14 Dividend received from domestic Companies
2.2.15 Some other exemptions
2.2.16 Occasional Incomes or Gifts
2.3 Newly Established Undertakings in Free Trade Zones,
Software Technology Park
2.4 Income of 100% Export Oriented Units
2.5 Income of a Political Party
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Income Exempt from Tax 13

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• List the Exemptions under the Income Tax Act.
----------------------
• Analyse exemption to EOU/SEZ Units.
---------------------- • Explain the concept of Agricultural Income Under the Act.
----------------------
2.1 INTRODUCTION
----------------------
Generally an assessee is required to pay tax on all the receipts made by
----------------------
him which give rise to the income, unless it is specifically considered to be the
---------------------- income which is not included while calculating the total income, in other words
the income which is considered to be the exempt income.
----------------------
Following incomes do not form a part of Total Income:
---------------------- a. Incomes exempt as per the provisions of Section 10 of the Act.
---------------------- b. Incomes of newly established industrial undertaking in Free Trade Zones
(FTZ) - Section 10A.
----------------------
c. Incomes of newly established 100% Export Oriented Units (EOUs) -
---------------------- Section 10B.
---------------------- d. Income of political parties - Section 13A.

---------------------- 2.2 INCOMES EXEMPT UNDER SECTION 10

----------------------
While calculating the total income of the Assessee, certain incomes will
---------------------- not be considered as the incomes chargeable to tax. Following are some of the
important incomes which are exempt from tax:
----------------------
2.2.1 Agricultural Income
---------------------- As per section 2(1A), agricultural income generally means (a) Any rent or
---------------------- revenue derived from land which is situated in India and is used for agricultural
purposes. (b) Any income derived from such land by agriculture operations
---------------------- including processing of agricultural produce so as to render it fit for the market
or sale of such produce. (c) Any income attributable to a farm house subject to
---------------------- satisfaction of certain conditions specified in this regard in section 2(1A). Any
---------------------- income derived from saplings or seedlings grown in a nursery shall be deemed
to be agricultural income.
---------------------- Meaning of Agricultural Income:
---------------------- Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an
income under the following three sources:
----------------------
(i) Any rent or revenue derived from land which is situated in India and
---------------------- is used for agricultural purposes: The assessee will not be liable to pay

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 tax on the rent or revenue arising from agricultural land subject to the Notes
conditions:
----------------------
(a) The land should either be assessed to land revenue in India or be subject
to a local rate assessed and collected by officers of the Government. ----------------------
(b) In instances where such a land revenue is not assessed or not subject
----------------------
to local rate, the land should not be situated within the jurisdiction
of a municipality (whether known as a municipality, municipal ----------------------
corporation, notified area committee, town area committee, town
committee or by any other name) or a cantonment board, and which ----------------------
has a population of more than ten thousand (according to the last
----------------------
preceding census which has been published before the first day of
the previous year in which the sale of land takes place); or it should ----------------------
not be situated:
----------------------
- more than 2kms. from the local limits of any municipality or
cantonment board and which has a population of more than ----------------------
10,000 but not exceeding 1,00,000; or
----------------------
- not being more than 6kms. from the local limits of any
municipality or cantonment board and which has a population ----------------------
of more than 1,00,000 but not exceeding 10,00,000; or
----------------------
- not being more than 8kms. from the local limits of any
municipality or cantonment board and which has a population ----------------------
of more than 10,00,000.
----------------------
(c) The revenue must not include any income arising out of transfer of
such land. ----------------------
(ii) Any income derived from such land by agricultural operations including ----------------------
processing of agricultural produce, raised or received as rent in kind or
any process ordinarily employed by cultivator or receiver of rent-in-kind ----------------------
so as to render it fit for the market, or sale of such produce.
----------------------
(iii) Any income derived from any building owned and occupied by the
assessee, receiving rent or revenue from the land, by carrying out ----------------------
agricultural operations: The building must be on or in the immediate
----------------------
vicinity of the land. It must be used by the assesee as a dwelling house or
store-house or an out-building, in connection with the land. ----------------------
2.2.2 Share of profit of a partner from a Firm ----------------------
The share of profit earned by a partner from a partnership firm is exempt
from tax. The detailed discussion is given in the unit on Taxation of Partnership ----------------------
Firms. ----------------------
Interest on securities or bonds held by a Non-Resident or interest on Non-
Resident (External) Account - Section 10(4) ----------------------

In case of any assessee who is a Non-Resident in India, income by way ----------------------

of interest on specified securities or the premium on the redemption of specified
----------------------
securities is exempt from tax.

Income Exempt from Tax 15

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 Notes Foreign Allowance - Section 10(7)
Any allowance or perquisite paid outside India by the Government to a
----------------------
citizen of India for rendering services outside India is exempt from tax.
---------------------- 2.2.3 Amount received under a Life Insurance Policy
---------------------- Any sum received under a Life Insurance Policy, including the amount of
bonus on such policy shall be exempt from tax. However, the section does not
---------------------- apply to-
---------------------- a. any sum received under Section 80DD (3) or Section 80DDA (3)

---------------------- b. any sum received under a Keyman Insurance Policy

c. any sum received in respect of an insurance policy issued after 1st April
---------------------- 2003 in respect of which the premium payable for any of the years during
---------------------- the term of policy exceeds 20% of the actual sum assured. However, this
provision will not apply to any sum received on the death of the person.
----------------------
2.2.4 Interest, premium or bonus on specified investments
---------------------- a. Any income by way of interest, premium on redemption or any other
payment on the notified securities, bonds, annuity certificates, saving
----------------------
certificates, etc. issued by the Central Government are exempt from tax.
---------------------- b. In case of the individuals and HUF, the interest on notified Capital
Investment Bonds and Relief Bonds is exempt from tax.
----------------------
2.2.5 Educational Scholarship
----------------------
Scholarships granted to meet the cost of education are exempt from income tax.
----------------------
2.2.6 Payments to MPs, MLAs etc.
---------------------- Following incomes are exempt from income tax -
---------------------- a. Daily allowance received by a Member of Parliament (MP) or a Member
of Legislative Assembly (MLA) or any committee thereof.
----------------------
b. Any other allowance received by a MP under the Members of Parliament
---------------------- (Constituency Allowance) Rules, 1986.

---------------------- c. All allowances received by any person by reason of his membership of

any state legislature or any committee thereof.
---------------------- Pension to gallantry award winners - Section 10(18)
---------------------- Any pension received by an individual who was the employee of the State
Government or Central Government and has been awarded Param Vir Chakra or
----------------------
Maha Vir Chakra or Vir Chakra or any such gallantry award as may be specified
---------------------- by the Government, is exempt from tax. The pension received by the family of
such an individual is also exempt for tax.
----------------------
Family pension under certain circumstances - Section 10(19)
---------------------- Family pension received by the widow or children or legal heirs of a
member of armed forces (including Para-military forces) of the Union, where
----------------------

16 Direct Taxation

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 the death has occurred during the course of operational duties, in the specified Notes
circumstances as specified by Central Board of Direct Taxes (CBDT), will be
exempt from tax. ----------------------
Property in possession of a former ruler - Section 10(19A) ----------------------
Annual Value of any one palace in possession of a former ruler is exempt from
----------------------
tax.
2.2.7 Income of a Local Authority ----------------------
Following income of a local authority like Panchayats, Municipalities or ----------------------
Cantonment Boards is exempt from tax -
----------------------
a. Income by way of Income from House Property, Capital Gains and
Income from Other Sources. ----------------------
b. Income arising from a trade or business of supplying a commodity or ----------------------
service (except water and electricity) within its own jurisdiction.
----------------------
c. Income from the supply of water and electricity within or outside its
own jurisdiction. In other words, entire income of a local authority is ----------------------
exempt from tax except the income arising from a trade or business of
any commodity or service (except water and electricity) outside its own ----------------------
jurisdiction.
----------------------
Income of a specified news agency - Section 10(22B)
----------------------
Any income of the notified news agencies set up in India for collection and
distribution of news is exempt from tax, provided that the said agency applies ----------------------
its income for collection and distribution of news and does not distribute its
income to its members. For the purpose of this section, following news agencies ----------------------
have been notified by the Central Government - ----------------------
Press Trust of India (PTI)
----------------------
United News of India (UNI)
----------------------
Income of Professional Institutions - Section 10(23A)
Any income (other than Income from House Property or any income ----------------------
received for rendering specific services or income by way of dividend or interest
----------------------
on investments) of an association or institution in India having as its objective
the supervision, control, regulation and encouragement of certain specified ----------------------
professions is exempt from tax. The various professions which are specified for
this purpose are - ----------------------
Law ----------------------
Medicine ----------------------
Accountancy
----------------------
Engineering
----------------------
Architecture
Company Secretaryship ----------------------

Income Exempt from Tax 17

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 Notes Chemistry
Materials Management
----------------------
Town Planning
----------------------
2.2.8 Income of a Mutual Fund
---------------------- Any income of the following mutual funds is exempt from tax -
---------------------- a. A mutual fund registered under Securities and Exchange Board of India
Act, 1992 or the regulations made thereunder.
----------------------
b. Any other mutual fund set up by a public sector bank or public financial
---------------------- institution or authorised by RBI.
---------------------- 2.2.9 Income of a Venture Capital Fund
This section applies to a Venture Capital Company or a Venture Capital
----------------------
Fund which has been granted the certificate by Securities and Exchange Board
---------------------- of India (SEBI) and which fulfils the terms and conditions as may be specified
by SEBI. The deduction under this section is available if the Venture Capital
---------------------- Company or Venture Capital Fund is set up to raise funds for investment in a
Venture Capital Undertaking where the term Venture Capital Undertaking as a
----------------------
company -
---------------------- a. which is a domestic company,
---------------------- b. whose shares are not listed in a recognised stock exchange in India.

---------------------- If the above conditions are satisfied, any income of such Venture Capital
Company or Venture Capital Fund is exempt from tax, even if the shares of the
---------------------- Venture Capital Undertaking in which the Venture Capital Company or Venture
Capital Fund has made the initial investment, are subsequently listed on the
---------------------- stock exchange.
---------------------- 2.2.10 Income of Trade Unions
---------------------- Any income chargeable under the heads “Income from House Property”
and “Income from Other Sources” of a trade union, registered under the Trade
---------------------- Unions Act, 1926 formed for the purpose of regulating the relationship between
workmen and employers or between workmen and workmen is exempt from
----------------------
tax.
---------------------- 2.2.11 Income of Certain Funds
---------------------- The income stated below is exempt from income tax -

---------------------- a. Interest on securities held by a statutory provident fund and any capital
gains arising from the transfer of such securities.
---------------------- b. Any income received by the trustees on behalf of a recognised provident
---------------------- fund, approved superannuation fund and approved gratuity fund.
c. Any income received by the Board of Trustees of the Deposit Linked
----------------------
Insurance Fund.
----------------------

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 2.2.12 Income of Employees State Insurance Fund Notes
Any income received by the Employees State Insurance Fund set up under
----------------------
Employees State Insurance Act (ESI Act) is exempt from tax.
2.2.13 Capital Gains arising from the transfer of units of UTI ----------------------
Any amount of Capital Gains arising from the transfer of units of Units ----------------------
Trust Scheme, 1964 is exempt from tax, provided that the transfer takes place
after 1st April 2002. ----------------------
2.2.14 Dividend received from a Domestic Company ----------------------
Any amount of dividend received by the assessee from a domestic ----------------------
company is exempt from tax.
2.2.15 Some other Exemptions ----------------------

Income from Mutual Fund - Section 10(35) ----------------------

Any income received in respect of the units of the specified Mutual Funds ----------------------
or the specified Company is exempt from tax.
----------------------
Long term capital gains on the transfer of listed equity shares - Section
10(36) ----------------------
Long Term capital gains arising from the transfer of certain equity shares ----------------------
are exempt from tax if the following conditions are satisfied -
a. The assets transferred must be a long term capital asset being an eligible ----------------------
equity share in a company. ----------------------
b. The shares must have been purchased after 1st March 2003 and before
----------------------
1st March 2004 and must have been held for a period of more than 12
months. ----------------------
c. Eligible Equity Shares means (i) any equity shares in a company which is
----------------------
a constituent of BSE-500 Index of the Mumbai Stock Exchange as on 1st
march 2003 and is traded on the stock exchanges in the country or (ii) any ----------------------
share allotted through the public issue made after 1st March 2003 and is
traded on the stock exchanges in the country. ----------------------
Capital Gains due to compulsory acquisition of agricultural land - Section ----------------------
10(37)
----------------------
Any capital gains arising due to the compulsory acquisition of an
agricultural land situated within the jurisdiction of a municipality or a ----------------------
cantonment board will be exempt from tax if such land was being used by the
individual or by his parents for agricultural purposes for a period of two years ----------------------
immediately preceding the date of such acquisition. ----------------------
Long Term Capital Gains from the transfer of securities - Section 10(38)
----------------------
Long Term Capital Gains arising out of the sale and transfer of securities
through the recognised stock exchange will be exempt from tax. The securities ----------------------
for the purpose of this exemption consist of -
----------------------

Income Exempt from Tax 19

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 Notes Shares, debentures or bonds
Units of mutual funds
----------------------
Government securities
----------------------
2.2.16 Occasional Incomes or Gifts
---------------------- Following incomes will be exempt from tax -
---------------------- Any income referred to in Section 2(24)(xiii), to the extent that the aggregate of
such incomes does not exceed ` 50,000.
----------------------
Note - Section 2(24)(xiii) provides as below -
----------------------
Following amount will be considered to be income -
---------------------- Any sum received by an individual in cash or a cheque or a draft or by
way of credit or any amount received otherwise than by way of consideration
----------------------
for goods or services. However, following amounts will not be covered by the
---------------------- above section -The amount received or credited from a relative out of natural
love and affection.
----------------------
The amount received or credited under a will or inheritance.
---------------------- The amount received by an employee or dependant of the deceased
---------------------- employee from the employer, by way of bonus or gratuity or pension or
insurance solely in recognition of the services rendered by the employee.
---------------------- For this section the term “relative” means -
---------------------- i. Spouse of the individual
---------------------- ii. Brother or sister of the individual
iii. Brother or sister of the spouse of the individual
---------------------- iv. Brother or sister of either of the parents of the individual
---------------------- v. Any lineal ascendant or descendant of the individual
vi. Any lineal ascendant or descendant of the spouse of the individual
----------------------
vii. Spouse of the person referred to in “ii” to “vi” above.
---------------------- Agricultural Income
---------------------- As per the provisions of Section 2(1A) of the Income Tax Act, 1961, the
term Agricultural Income means -
----------------------
a. Any rent or revenue derived from land which is situated in India and is
---------------------- used for agricultural purposes.
---------------------- b. Any income derived from such land by agricultural operations including
processing of the agricultural produce
----------------------
c. Income attributable to a farm house provided that the building is situated
---------------------- on or is in immediate vicinity of the land and is used as dwelling house,
store house or other outbuilding and the land is assessed to land revenue or
---------------------- a local rate or alternatively, the building is situated on or is in immediate
---------------------- vicinity of the land (which though not assessed to land revenue or local

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 rate) is situated outside the urban areas. Notes
Urban area is defined as any area which is included within the jurisdiction
----------------------
of a municipality or a cantonment board having a population of 10,000 or more
or in any area within 8 kilometers from the local limits of such municipality or ----------------------
cantonment board.
----------------------
Check your Progress 1 ----------------------

State True or False. ----------------------

1. In case of any assessee, who is a Non-Resident in India, income by ----------------------
way of interest on specified securities such as fixed deposits in Non
resident external account is exempt from tax. ----------------------
2. Income of newly established 100% Export Oriented Units (EOUs) do ----------------------
form a part of total income of Indian domestic company.
3. Any allowance or perquisite paid outside India to an IAS officer on ----------------------
deputation abroad by the Government for rendering services outside
----------------------
India is exempt from Income tax.
4. Any sum received under a Life Insurance Policy, including amount of ----------------------
bonus and any sum received under a Keyman Insurance Policy shall be
exempt from tax. ----------------------
5. Any Scholarships granted to meet the cost of education are exempt ----------------------
from income tax.
----------------------
6. Any pension received by an individual, who was the employee of
Central Government and has been awarded Param Vir Chakra or any ----------------------
gallantry award as may be specified by the Government, excluding the
pension received by the family of such an individual, is exempt for tax. ----------------------
7. Agricultural Income means any rent or revenue derived from land, ----------------------
which is situated in India and is used for agricultural purposes.
----------------------

Activity 1 ----------------------

----------------------
●● Visit the website
----------------------
https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-
taxation.aspx and collect information about direct taxes in India ----------------------

----------------------

2.3 NEWLY ESTABLISHED UNDERTAKINGS IN FREE ----------------------

TRADE ZONES, SOFTWARE TECHNOLOGY PARK ----------------------
Section 10A applies to all the assessees who derive the profits or gains ----------------------
from an undertaking engaged in the export of an article or things or computer
software which are established in the following areas: ----------------------

Income Exempt from Tax 21

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 Notes a. Free Trade Zones - For the purpose of this section, following are the Free
Trade Zones
----------------------
Kandla Free Trade Zone
---------------------- Santacruz Electronics Export Processing Zone
---------------------- Falta Export Processing Zone

---------------------- Madras Export Processing Zone

Cochin Export Processing Zone
----------------------
Noida Export Processing Zone
----------------------
b. Electronic Hardware Technology Park - Electronic Hardware Technology
---------------------- Park means any park set up according to Electronic Hardware Technology
Park Scheme notified by the Central Government, Ministry of Commerce
---------------------- and Industry.
---------------------- c. Software Technology Park - Software Technology Park means any park
set up according to Software Technology Park Scheme notified by the
---------------------- Central Government, Ministry of Commerce and Industry.
---------------------- d. Any special economic zone as notified by the Central Government for this
section.
----------------------
For claiming the exemption under this section, the assessee should satisfy
---------------------- the following conditions:

---------------------- a. The sale proceeds of the articles or things or computer software exported
out of India must have been received in or must be brought in India by
---------------------- the assessee in convertible foreign exchange during the previous year or
within six months from the end of the relevant previous year. E.g. For the
---------------------- exports made during the previous year ending on 31st March 2020, the
---------------------- proceeds must be brought into India before 30th September 2020.
b. The assessee should enclose a certificate of a chartered accountant in Form
----------------------
No. 56F along with the return of income certifying that the deduction has
---------------------- been correctly claimed.
c. The undertaking should not be formed by splitting up or reconstruction of
----------------------
existing business.
---------------------- Important Notes
---------------------- Profits and gains derived from on-site development of computer software
outside India shall deemed to be profits and gains derived from export of
---------------------- computer software.
---------------------- No deduction is available if return of income is not submitted within due
date of filing income tax return as per section 139(1).
----------------------
If the above conditions are satisfied, the amount of deduction under
---------------------- Section 10A will be -
----------------------

22 Direct Taxation

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 Export Turnover of such Undertakings Notes
Profits of Undertakings ×
Total Turnover of such Undertakings
----------------------
The deduction will be available for a period of 10 consecutive assessment
years commencing from the assessment year relevant to the previous year ----------------------
in which the assessee begins to manufacture or produce articles or things or
----------------------
computer software.
In case of an undertaking situated in any Special Economic Zone and ----------------------
which begins to manufacture or produce articles or computer software after 1st
----------------------
April 2003, the deduction will be as below -
a. 100% of the profits or gains derived from the export of such articles or ----------------------
things or computer software for a period of 5 consecutive assessment ----------------------
years commencing from the assessment year relevant to the previous
year in which the assessee begins to manufacture or produce articles or ----------------------
things or computer software, and thereafter 50% of the profits or gains for
further two consecutive assessment years. ----------------------

b. For the next three consecutive assessment years, 50% of the profits ----------------------
provided that the same profits are debited to Profit and Loss Account
and credited to (“Special Economic Zone Re-Investment Allowance ----------------------
Reserve Account”). The amount credited to this account should be used ----------------------
for acquiring new machinery within the period of three years following
the year in which the reserve was created. If the assessee uses the amount ----------------------
in this reserve account for any other purpose or does not use the amount
within the specified period, the amount so used or not used shall be ----------------------
deemed to be the profit and shall be subjected to tax. ----------------------

2.4 INCOME OF 100% EXPORT ORIENTED UNITS ----------------------

Section 10B applies to all the assessees who derive any profits or gains ----------------------
from 100% Export Oriented Units by the export of articles or things or computer ----------------------
software.
For claiming the exemption under this section, the assessee should satisfy ----------------------
the following conditions - ----------------------
a. The sale proceeds of the articles or things or computer software exported
----------------------
out of India must have been received in or must be brought in India by
the assessee in convertible foreign exchange during the previous year or ----------------------
within six months from the end of the relevant previous year. E.g. For the
exports made during the previous year ending on 31st March, 2020, the ----------------------
proceeds must be brought into India before 30th September 2020.
----------------------
b. The assessee should enclose a certificate of a chartered accountant in Form
No. 56G along with the return of income certifying that the deduction has ----------------------
been correctly claimed.
----------------------
c. The undertaking should not be formed by splitting up or reconstruction of
existing business. ----------------------

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 Notes If the above conditions are satisfied, the amount of deduction under
Section 10B will be -
----------------------
Export Turnover of such Undertakings
Profits of Undertakings ×
---------------------- Total Turnover of such Undertakings
---------------------- The deduction will be available for a period of 10 consecutive assessment
years commencing from the assessment year relevant to the previous year
---------------------- in which the assessee begins to manufacture or produce articles or things or
computer software.
----------------------

---------------------- 2.5 INCOME OF A POLITICAL PARTY

---------------------- Following types of incomes earned by a political party are exempt from tax -
---------------------- a. Income from House Property, Capital Gains or Income from Other
Sources
----------------------
b. Any income by way of voluntary contributions
---------------------- For claiming the deduction under this section, the political party needs to
satisfy the following conditions -
----------------------
i. The political party maintains such books of accounts and documents so
---------------------- as to enable the assessing officer to calculate the amount of income of the
---------------------- political party therefrom.
ii. The political party maintains the records of each voluntary contribution
---------------------- in excess of ` 10,000 and the name and address of each person who has
---------------------- made such contribution.
iii. The accounts of the political party are audited by a Chartered Accountant.
----------------------
Specific Incomes Exempt from Tax
----------------------
Following incomes exempt from tax have been discussed in detail in the unit
---------------------- “Income from Salaries”:

---------------------- Section Particulars

10(5) Leave Travel Concessions or Leave Travel Allowance
----------------------
10(10) Death-Cum-Retirement Gratuity
---------------------- 10 (10A) Pensions
10(10AA) Leave Encashment
----------------------
10(10B) Retrenchment Compensation
---------------------- 10(10C) Compensation on Voluntary Retirement Scheme
---------------------- 10(11) Any payment from a Provident Fund
10(12) Accumulated balance in a Provident Fund
----------------------
10(13) Payment from a Superannuation Fund
---------------------- 10(13A) House Rent Allowance
----------------------

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 Notes
Check your Progress 2
----------------------
Multiple Choice Multiple Response. ----------------------
1. The following categories of income of political parties is exempt from
income tax: ----------------------
i. Income earned from house property ----------------------
ii. Income from capital gains
iii. Voluntary contributions received ----------------------
iv. Income from lotteries ----------------------
2. Following income from salaries is exempt from under Sec 10:
i. Leave travel concession ----------------------
ii. Retrenchment compensation ----------------------
iii. Accumulated balance of provident fund
----------------------
iv. Non-agri income
3. Income by way of gift received from a relative out of natural love ----------------------
and affection is exempt from income tax to a certain limit. The term
relative of an individual includes: ----------------------
i. Spouse ----------------------
ii. Brother or sister
iii. Brother or sister of spouse ----------------------
iv. Step mother ----------------------

----------------------
Summary
----------------------
●● Although an assessee is required to pay tax on all income, there are certain
categories of income that are free from Income tax. Such categories have ----------------------
been discussed in this unit. They are dealt with in section 10 of the Income
----------------------
Tax Act.
The following incomes are exempt from Income Tax: ----------------------
a) Incomes exempt as per the provisions of Section 10 of the Act. ----------------------
b) Incomes of newly established industrial undertaking in Free Trade ----------------------
Zones.
c) Incomes of newly established 100% EOUs. ----------------------

d) Income of Political parties. ----------------------

----------------------
Keywords
----------------------
●● Income Exempt from Tax: While calculating the total income of
the Assessee, certain incomes will not be considered as the incomes ----------------------
chargeable to tax.
----------------------

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 Notes ●● Newly Established Undertakings in Free Trade Zones, Software
Technology Park: Section 10A- applies to all the assessees who derive
---------------------- the profits or gains from an undertaking engaged in the export of an article
or things or computer software are exempt from tax.
----------------------
●● Income of 100% Export Oriented Units: SECTION 10B- applies to
---------------------- all assessees who derive any profits or gains from 100% Export Oriented
Units by the export of articles or things or computer software.
----------------------

---------------------- Self-Assessment Questions

---------------------- 1. State and discuss any fifteen types of incomes which are exempt from tax
as per the provisions of Section 10 of the Income Tax Act, 1961.
----------------------
2. Discuss the provisions of Section 10A in respect of exemption available
---------------------- to undertakings situated in Free Trade Zones etc.
---------------------- 3. Discuss the provisions of Section 10B in respect of exemption available
to 100% Export Oriented Units.
----------------------
4. Write short notes on the following:
---------------------- Income of a political party
---------------------- Agricultural Income
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
---------------------- State True or False.
---------------------- 1. True
---------------------- 2. False

---------------------- 3. True
4. False
----------------------
5. True
----------------------
6. False
---------------------- 7. True
----------------------

---------------------- Check your Progress 2

Multiple Choice Multiple Response.
----------------------
1. The following categories of income of political parties is exempt from
---------------------- income tax:
---------------------- i. Income earned from house property
ii. Income from capital gains
----------------------

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 iii. Voluntary contributions received Notes
2. Following income from salaries is exempt from under Sec 10:
----------------------
i. Leave travel concession
----------------------
ii. Retrenchment compensation
iii. Accumulated balance of provident fund ----------------------

3. Income by way of gift received from a relative out of natural love and ----------------------
affection is exempt from income tax to a certain limit. The term relative
of an individual includes: ----------------------

i. Spouse ----------------------
ii. Brother or sister ----------------------
iii. Brother or sister of spouse
----------------------

Suggested Reading ----------------------

1. Garman, E. Thomas, Raymond Forgue. 2007. Personal Finance. Cengage ----------------------

Learning. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Income Exempt from Tax 27

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 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Income from Salaries
UNIT

3
Structure:

3.1 Meaning of Salary

3.2 Exemptions
3.2.1 Leave Travel Concession
3.2.2 Gratuity
3.2.3 Pension
3.2.4 Leave Salary
3.2.5 Retrenchment Compensation
3.2.6 VRS Compensation
3.2.7 Provident Fund
3.2.8 Super Annuation Fund
3.2.9 House Rent Allowance
3.2.10 Special allowances
3.3 Perquisites - Sec.17
3.3.1 Employees Stock Option Plan (ESOP)
3.3.2 Rent Free Accommodation
3.3.3 Furnished Accommodation
3.3.4 Perquisites in respect of Furnished accommodation in hotel
3.3.5 Perquisites in respect of Use of Motor Car
3.3.6 Domestic servant
3.3.7 Gas, Electric Energy and water supply for household consumption
3.3.8 Perquisites in respect of Educational facilities
3.3.9 Other fringe benefits or amenities [Section 17(2) (VI)]
3.3.10 Transfer of Employers Movable Assets: Section 17 (2)(vi)
3.3.11 Medical Facility – Provison to sect 17(2)
3.4 Perquisites Exempt from Tax
3.5 Deductions -[Section 16]
3.5.1 Entertainment Allowance
3.5.2 Professional Tax
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concept of Salary under the Income Tax Act.
----------------------
• Discuss different deductions and exemptions under salary.
---------------------- • Enumerate different perquisites and their taxability under Act.
---------------------- • Analyse the practical problems under salaries.

----------------------
3.1 MEANING OF SALARY
----------------------
As per the provisions of Section 17(1) of the Act, Salary is defined to
---------------------- include mainly the following items:
---------------------- a. Wages
b. Annuity or Pension
----------------------
c. Gratuity
----------------------
d. Fees, commission, perquisites or profits in lieu of salary or in addition to
---------------------- salary or wages

---------------------- e. Advance of Salary

f. Payment received from the employer for the period of leave not availed
----------------------
The Central Government has introduced a new pension scheme for
---------------------- the employees employed on or after 1st January, 2004. These employees are
required to contribute 10% of their salaries to this pension scheme and the
----------------------
Central Government will make an equal contribution. Any contribution made
---------------------- by the Central Government to this pension scheme will be considered to be the
salary income in the hands of the employee.
----------------------
Salary for this purpose includes dearness allowance if the terms of
---------------------- employment so provides, but excludes all other allowances and perquisites.

---------------------- Wages
Conceptually, there is no difference between salary and wages. Therefore,
---------------------- wages are treated just like salary and are taxable on the same basis as salary.
---------------------- Annuity
---------------------- Annuity is an annual grant and when made by an employer, falls under
the head Salaries. It may be paid by the employer voluntarily or on account of
---------------------- a contractual agreement. When annuity is payable by a present employer, it is
taxable as salary. If it is received from a former employer, then it is taxed as
----------------------
profits in lieu of salary. A deferred annuity will not be taxable until the right to
---------------------- receive the same arises.

----------------------

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 Profits in lieu of salary Notes
Section 17(3) defines profits in lieu of salary to include:
----------------------
Terminal Compensation: This includes any amount of compensation
a. 
received or receivable by the employee from the employer at the time of ----------------------
termination of his employment or at the time of modification of terms and
----------------------
conditions in connection with the employment.
Amount from an unrecognised provident fund or unrecognised
b.  ----------------------
superannuation fund: This includes the amount received from the
----------------------
unrecognised provident fund or unrecognised superannuation fund
representing the employer’s contribution and interest thereon. ----------------------
Amount received under Keyman Insurance Policy: Any amount
c.  ----------------------
received by the assessee under a Keyman Insurance Policy including the
bonus on such policy is taxable under the head salaries. ----------------------
Note: Keyman Insurance Policy is taken by a person (usually employer) on ----------------------
the life of another person (usually a senior employee) where the employee
pays a key role in the organisation of the employer. If the maturity proceeds of ----------------------
such policy are received by the employee, the same are taxed as Income from
Salaries. ----------------------

Basis of Charge (Section 15) ----------------------

As per section 15, the following income shall be chargeable to income- ----------------------
tax under the head “salaries”:
----------------------
(a) Any salary due from an employer (or a former employer) to an assessee
in the previous year, whether paid in that previous year or not; ----------------------
(b) Any salary paid or allowed to him in the previous year by or on behalf of ----------------------
an employer (or a former employer) though not due in that previous year
or before it becomes due to him; ----------------------
(c) Any arrears of salary paid or allowed to him in the previous year by or on ----------------------
behalf of an employer (or a former employer) if not charged to Income-
tax in any earlier previous year, ----------------------
Where any salary is paid in the advance is included in the total income of ----------------------
any person for any previous year, it shall not be included again in the total
income of the person when the salary becomes due. . ----------------------
If the salary is payable on a monthly basis, it normally becomes due at the ----------------------
end of the month although it is paid in the next month. In this case, it will
be taxable on ‘due’ basis because ‘due’ is earlier than ‘receipt’. Therefore, ----------------------
salary is normally taxable from April to March as the salary of March
----------------------
becomes due at the end of the month.
However, in some cases the salary becomes due on the 1st day of the ----------------------
next month. In that case, we shall tax the salary from March to February
----------------------
because salary of the month of March of current year will be due only in
the next financial year and salary of the month of March of previous year ----------------------
became due only on 1st April of the current year.
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 Notes The head of income in the form of Income from Salaries is applicable in
respect of the remuneration received by an employee from the employer. For
---------------------- charging the income in the form of salaries, there needs to be an employer-
employee relationship between the payer and the payee. E.g. Remuneration
---------------------- received by a University Teacher received from his college will be treated as
---------------------- his salary. However, similarly, any remuneration received by a Member of
Parliament or a Member of Legislative Assembly is taxable as Income from
---------------------- Other Sources.
---------------------- If an employee receives the salary from more than one employer during
the previous year, salary from each source will be clubbed together to calculate
---------------------- Income from Salaries.
---------------------- Exceptions
a) 
A Member of Parliament or of state legislature is not Government
----------------------
employee and therefore remuneration received by him is not taxable as
---------------------- salary income, but as income from other sources.

---------------------- b) Partner’s Salary: Any salary, bonus, commission or remuneration due to

or received by an assessee from a firm, in which he is partner, shall not
---------------------- be taxable under the head “Salaries” as there is no employer-employee
relationship. It will, however, be taxable under the head “Profits and gains
---------------------- of business or profession.”
---------------------- Important Concept
---------------------- 1] Surrender of Salary
Any salary surrendered by the employee to the Central Government,
----------------------
under the Voluntary Surrender of Salaries (Exemption from Taxation)
---------------------- Act, 1961, will not be included while computing his taxable income,
whether he is a private sector/public sector or Government employee.
----------------------
2] Foregoing of Salary
---------------------- Once salary has been earned by an employee, it becomes taxable in his
---------------------- hands though he may subsequently waive the right to receive the same
from the employer. The waiver of salary by the employee would be treated
---------------------- as application of the income and salary though waived would be taxable
in his hands.
----------------------
3] Place of Accrual [Section 9(1)]
---------------------- The golden rule is that salary will be deemed to accrue or arise, at a place
---------------------- where services are rendered. If the services are rendered in India and salary
on account of such services are received out side India, it will treated as
---------------------- income which is deemed to accrue or arise in India. If a person retires
and settles abroad and receives any pension on account of the same, such
---------------------- pension shall be an income which is deemed to accrue or arise in India as
---------------------- the services on account of which pension accrues were rendered in India.

----------------------

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 4] Arrears of Salary Notes
Although salary is taxable on ‘due’ or ‘ receipt whichever is the earlier
----------------------
basis, but if there are arrears of salary which have not been taxed in the
past, such arrears will be taxed in the year in which these arrears are paid ----------------------
or allowed to the employee. For example, if the government announces
an increase in dearness allowance in the previous year 2019-2020 which ----------------------
was never due earlier, these arrears will be taxed in the previous year in
----------------------
which these are paid or allowed although the arrears of salary relate to
past periods in the past year. In such cases, the assessee can claim relief ----------------------
of income tax under section 89(1).
----------------------
5] Basis of Accounting
The provisions of section 145 which relate to the method of accounting ----------------------
are not attracted in the salary income of the assessee because salary is
----------------------
taxable when it becomes due or when it is paid, whichever is earlier.
6] Exempt Income ----------------------
Income which does not form part of total income is called as income ----------------------
exempt from tax as per section 10 to 13 A, certain income are either
totally exempt from tax or exempt up to a certain amount. ----------------------

Therefore, these incomes, to the extent they are exempt, are not included ----------------------
in the total income of an assessee for computation of his total Income.
----------------------
7] Bonus
----------------------
Bonus is taxable on receipt basis. Therefore, it will be included in the
gross salary only in the year in which the bonus is received. If bonus is ----------------------
received in arrears, the assessee can claim relief u/s 89(1).
----------------------
3.2 EXEMPTIONS ----------------------
3.2.1 Leave Travel Concession ----------------------
Value of travel concession or assistance received by an individual from
----------------------
his employer or former employer for himself and his family in connection with
his proceeding: ----------------------
a) On leave to any place in India
----------------------
b) To any place in India after retirement from service or after the termination
of his service shall be exempt “Family”, for the purpose of this provision ----------------------
means: ----------------------
a) The spouse and children; and
----------------------
b) Parents, brothers and sisters of the individual wholly or mainly dependent
on the individual. ----------------------
Note: ----------------------
1) The exemption shall not be available to more than two surviving children
----------------------
of an individual after 1 October 1998. This restriction shall not apply

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 Notes in respect of children born before 1st October, 1998 and also in case of
multiple births after one child.
----------------------
2) The exemption shall be available in respect of 2 journeys performed in a
---------------------- block of 4 calendar years commencing from the calendar year 2016 to 2019.
The block of 4 calendar years is uniform for all the employees. Where an
---------------------- individual does not avail such travel concession or Assistance during any
such block of 4 calendar years, the value of travel concession or assistance
----------------------
first availed during first calendar year of the immediately succeeding block.
---------------------- This exemption shall be in addition to the exemption that will be available
in respect of two journeys for that succeeding block. Therefore, only one
---------------------- trip can be carried forward to be availed in the immediately succeeding
block. The next block of calendar year is 2020-23. e.g. Mr. Ashok can
----------------------
claim the exemption for two journeys in the block of four years i.e. 2011-
---------------------- 2015. If Mr. Ashok has availed the exemption only once or has not availed
any exemption at all, he can carry over the exemption to the next block of
---------------------- four years i.e. 2016-2019 provided that he avails the exemption of LTC in
the first calendar year of the next block i.e. 2016. In addition, he can get
----------------------
the exemption for two journeys during the block 2016-2019.
---------------------- Note:
---------------------- The deduction under this section is applicable to the expenses incurred in
connection with the travel by air, by rail or by road. It does not cover any other
---------------------- expenses like lodging and boarding in connection with the travel.
---------------------- 3.2.2 Gratuity:

---------------------- This is the amount payable by the employer to the employee as recognition
for the long term association of the employee with the employer. The gratuity
---------------------- may be payable by the employer –
---------------------- To the employee on his retirement
To the legal heirs of the employee on the death of the employee
----------------------
The amount paid by the employer to the employee on his retirement is
---------------------- taxed as “Income from Salaries” while the amount paid by the employer on the
death of the employee is taxed as “Income from Other Sources”.
----------------------
a] Government employee: Any death cum retirement gratuity received by
---------------------- government employees is wholly exempt from tax.
---------------------- b] 
Employees covered by The Payment of Gratuity Act, 1972: Any
gratuity received by an employee covered by the said Act, is exempt from
---------------------- the tax to the extent’ of the least of the following:
---------------------- (i) `10,00,000
---------------------- (ii) 15 days salary (out of 26 days) based on last drawn salary for
each completed year of service or part of the year-in excess of 6
---------------------- months; however in case of an employee who is- employee in a
seasonal establishment & is not so employed throughout the year,
----------------------
the exemption shall be for 7 days wages for each season;

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 or Notes
(iii) Gratuity actually received.
----------------------
*Salary for retirement benefit means :
----------------------
Basic + Dearness Allowance (D.A.) (forming part of salary)
In case D.A . has not been mentioned as forming “part “ of salary ----------------------
then it is not considered as a part of salary. ----------------------
c] Any other employee: Any gratuity received by any other employee on
retirement, death, termination or resignation is exempt from tax to the ----------------------
extent of the least of the following: ----------------------
i) `10,00,000/- or.
----------------------
ii) Half month’s salary (on the basis of last 10 months average #
salary immediately preceding the month in which any such event ----------------------
occurred) for each completed year of service; i.e. 1/2 x Avg. Salary
----------------------
x Completed Years only.
iii) Gratuity actually received. ----------------------
# Salary means Basic + D.A. (if provided in terms of employment) + ----------------------
Commission (as% of turnover achieved by the employee)
----------------------
3.2.3 Pension
Pension indicates a periodical payment received by the employee from ----------------------
the employer after he ceases to be the employee. Pension received is taxed as ----------------------
salary for all practical purposes.
----------------------
Calculation of pension can be done in basically two forms:
Uncommuted Pension: Uncommuted pension refers to regular periodical ----------------------
pension to employee, which is taxable to all kinds of employees.
----------------------
Commuted Pension: Commuted Pension is a lump-sum payment in lieu
of periodical pension: ----------------------
(a) In case of commuted pension received by government employee is wholly ----------------------
exempt, including judges of High courts and Supreme Court.
----------------------
(b) Non-government employees can avail exemption to the following extent:
i) If employee is in receipt of gratuity, 1/3 of full value (i.e. 100%) of ----------------------
commuted pension ----------------------
ii) If not, then one-half of full value (i.e. 100%) of commuted pension.
----------------------
(c) Pension scheme in case of an employee joining central government on or
after January 1st 2004. ----------------------
i) Contribution by central government to the pension scheme is first ----------------------
included under the head ‘Salaries’ in the hands of employee.
----------------------
ii) Such contribution is deductible (to the extent of 10% of the salary
of the employee) under section 80CCD. ----------------------

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 Notes iii) Employees contribution to the pension scheme (to the extent of 10%
of the salary of the employee) is deductible under section 80CCD. .
----------------------
iv) When pension is received out of the aforesaid amount it will be
---------------------- chargeable in the hand of recipient.
3.2.4 Leave Salary
----------------------
a) In case of Government employee: Any amount received as cash equivalent
---------------------- of leave at the time of retirement whether on superannuation or otherwise
is exempt.
----------------------
b) Other Employees: least of the following exempt:
----------------------
i) Cash equivalent of the leave (on the basis of the average of last
---------------------- 10 months’ *salary) to the credit of the employee at the time of
retirement (calculated at 30 days credit for each completed year of
---------------------- service): or
---------------------- ii) 10 months’ salary (average of last 10 months salary); i.e. 10xAvg.
Salary
----------------------
iii) ` 3,00,000; or
----------------------
iv) Actual amount received.
---------------------- *Salary = Basic + D.A. (if provided in terms of employment) + Commission
---------------------- (as % of Turnover achieved)
* Avg. means avg. of last 10 months.
----------------------
3.2.5 Retrenchment Compensation
----------------------
Retrenchment means the termination by the employer of the service of a
---------------------- work man for any reason whatsoever, other than as a punishment inflicted by
way of disciplinary action but does not include:
----------------------
i. voluntary retirement of a workman or
---------------------- ii. Retirement of a workman on reaching the age of superannuation.
---------------------- iii. Termination of service of workman as a result of non-renewal of contract
of employment
----------------------
iv. Termination of service of workman on the grounds of continued ill health.
---------------------- Compensation received by workman at the time retrenchment is exempt
---------------------- to the extent least of the following :-
a. *Amount calculated under Industrial Dispute Act, 1947; or b. ` 5,00,000/;
----------------------
or
---------------------- c. Actual amount received.
---------------------- *under the said Act a workman is entitled to retrenchment compensation equal
to 15 days’ average pay for every completed year of service or any part thereof
---------------------- in excess of 6 months.
----------------------

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 3.2.6 VRS Compensation Notes
This Section deals with the amount paid by the following types of
----------------------
employers at the time of Voluntary Retirement Scheme:
●● A Public Sector Company ----------------------
●● Any other company ----------------------
●● An authority established under a Central or State Act
----------------------
●● A Local Authority
●● A Co-operative Society ----------------------
●● A University ----------------------
Exemption: Least of the following is exempt. ----------------------
a. Higher of
----------------------
i) Last drawn salary* × 3 × completed year of service
----------------------
ii) Last drawn salary × remaining months of service; or
b. ` 5,00,000/-; or ----------------------
c. Actual Compensation received. ----------------------
*Salary = Basic + D.A.(if provided in terms of employment) + Commission ----------------------
(as% of Turnover achieved)
Guidelines provided in Rule 2BA ----------------------

i) It applies to all employees of the company who have completed 10 years ----------------------
of service or completed 40 years of age.
----------------------
ii) Directors of Company or a Co-operative Society are not eligible for
exemption under section 10(10C). ----------------------
iii) The scheme has been drawn up to result in overall reduction in existing ----------------------
strength of the employees of the company.
----------------------
iv) The vacancy caused by the scheme is not to be filled up.
v) The retiring employee shall not be employed in another company or ----------------------
concern belonging to the same management. ----------------------
vi) The amount received on account of voluntary separation of the employee,
does not exceed amount equivalent to 3 months salary for each completed ----------------------
year or Salary at the time of retirement x Balance month of service left. ----------------------
3.2.7 Provident Fund
----------------------
Provident Fund (hereinafter referred to as “PF”) Scheme is an employee
welfare scheme. According to this scheme, a certain amount is deducted from ----------------------
the salary of the employee which is referred to as Employee’s Contribution
----------------------
to PF. In some cases, the employer also contributes as equal amount, which
is referred to as Employer’s Contribution to PF. Such Provident Fund is ----------------------
called Contributory Provident Fund. Both employees’ contribution as well as
employer’s contribution is invested. The interest earned on such investment is ----------------------

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 Notes credited to the PF Account of the employee. The amount accumulated to the
credit of the employee’s account is paid at the time of retirement or resignation.
---------------------- In case of death of the employee, the same is paid to the legal heirs of the
employee. Rebate under section 88 (discussed in later units) is allowed on
---------------------- Employee’s Contribution to PF.
---------------------- Types of Provident Fund
---------------------- a. Statutory Provident Fund – This is set up as per the provisions of
the Provident Fund Act, 1925. This is maintained by Government
---------------------- organisations, local authorities, universities and educational institutions.
---------------------- b. Recognised Provident Fund – This is the provident fund to which the
provisions of Employees Provident Fund and Miscellaneous Provisions
---------------------- Act, 1952 apply.
---------------------- c. Unrecognised Provident Fund – The provident fund which is not
recognised by the income tax authorities is called as unrecognised
---------------------- provident fund.
---------------------- Tax Treatment
---------------------- a. Statutory Provident Fund – Employer’s Contribution to PF as well
as interest credited to the employee’s account is not liable to any tax
---------------------- payment. Similarly, the lump sum received at the time of retirement or
resignation or death is also exempt under section 10(11) and 10(12).
----------------------
b. Recognised Provident Fund – Employer’s Contribution to PF is not
---------------------- taxable if it does not exceed 12% of the salary, where “salary” includes
basic salary plus dearness allowance, if the terms of employment so
----------------------
provide. Interest credited to employee’s account is not taxable if the rate
---------------------- of interest does not exceed the prescribed percentage, which is 9.5%
per annum at present. Lump sum received at the time of retirement or
---------------------- resignation or death is exempt from tax if certain conditions are satisfied.
The basic condition in this case being that the employee should have
----------------------
rendered continuous service of minimum 5 years.
---------------------- c. Unrecognised Provident Fund – Employer’s contribution to PF is not
taxable in the year of contribution. Interest credited to the account of
----------------------
employee is not taxable in the year of credit. Taxability of the Lump sum
---------------------- received on the retirement or resignation or death is as below:

---------------------- Employee’s contribution to PF is exempt from tax.

Interest on employee’s contribution is taxable as “Income from Other
---------------------- Sources.”
---------------------- Employer’s Contribution to PF and interest thereon is taxable as “Income
from Salaries”.
----------------------

----------------------

----------------------

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 3.2.8 Superannuation Fund Notes
Superannuation Fund is an employee welfare scheme which is usually
----------------------
applicable in case of very senior employees. Employer may be contributing to
the superannuation fund along with the contribution of the employee. When ----------------------
the employee ceases to be the employee, employee’s contribution, employer’s
contribution and the interest thereon is paid to the employee and in case of ----------------------
death of the employee, to the legal heirs of the employee. The tax treatment in
----------------------
case of an Approved Superannuation Fund is as below:
a. Employee’s contribution to the superannuation fund is eligible for rebate ----------------------
under Section 80C of the Act. The provisions relating to tax rebate are
----------------------
discussed in the later units.
b. Employer’s contribution to the superannuation is exempt from tax. ----------------------
c. Interest on the accumulated balance in the superannuation fund is exempt ----------------------
from tax.
----------------------
d. According to the provisions of Section 10(13) of the Act, following
payments received from an Approved Superannuation Fund are exempt ----------------------
from tax:
----------------------
The amount paid to the employee in lieu of or in commutation of an
annuity on his retirement on or after the specified age or on his becoming ----------------------
incapacitated prior to such retirement.
----------------------
The amount paid by way of refund of contribution to the legal heirs on the
death of the beneficiary. ----------------------
3.2.9 House Rent Allowance ----------------------
H.R.A. granted to an assessee by his employer is exempted to the extent
----------------------
least of the following:
i) Excess of rent paid over 10% of salary* due for relevant period; or ----------------------

ii) If the accommodation is in: Mumbai, Kolkata, Delhi and Chennai – 50% ----------------------
of salary and in any other places - 40% of the salary due in relevant period;
or ----------------------

iii) Actual allowance received for the relevant period. ----------------------

*Salary = Basic + D.A. (if provided in terms of employment) + Commission ----------------------
(as % of Turnover achieved)
----------------------
Notes:
Salary is calculated only for the period of rental accommodation of house ----------------------
during the previous year and only for the period for which allowance (H.R.A.) ----------------------
has been provided No exemption if employee stays in his own house..
No exemption if rent is paid by employee up to ten percent of above said salary. ----------------------
Exemption of H.R.A depends upon the following. ----------------------

----------------------

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 Notes Salary of the employee;
H.R.A.
----------------------
Rent paid by the employee
----------------------
The place where the house is taken on rental basis.
---------------------- If any of the above changes, the H. R.A. is calculated on a monthly basis.
---------------------- 3.2.10 Special Allowances
---------------------- (A) Allowances which are exempt to the extent amount received or the amount
spent whichever is less:
----------------------
a) Travel on tour or on transfer
---------------------- b) Ordinary daily charges incurred on account of absence from normal
place of duty
----------------------
c) Conveyance allowance granted to meet the expenditure incurred
---------------------- on conveyance, performance of duties, provided free conveyance is
---------------------- not provided by the employer
d) Expenditure incurred on a helper in the performance of duties
----------------------
e) The academic, research and training pursuits in educational and
---------------------- research institutions
---------------------- f) Purchase or maintenance of uniform for wear during the performance
of duties
----------------------
(B) Allowances which are exempt to the extent of amount received or the
---------------------- limit specified in Rule 2BB whichever is less:
a) Children Education Allowance: `100 per month per child up to
----------------------
maximum two children.
---------------------- b) Children Hostel Allowance: `300 per month per child up to
---------------------- maximum two children.
c) Transport allowance: ` 800 per month for the purpose of commuting
---------------------- between the place of his residence and the place of his duty. In case
---------------------- of blind or orthopaedically handicapped with disability, ` 1600 per
month.
---------------------- d) Under ground allowance granted to an employee in coal mines in
---------------------- uncongenial unnatural climate underground, `800 per month.
e) Allowance granted to an employee working in any transport system
----------------------
to meet his persona expenses during his duty performed in course
---------------------- of such transport from one place to another place, is exempt to the
extent of 70% of such allowance or `6000 per month whichever is
---------------------- less.
---------------------- f) Tribal area allowance at `200 per month is exempt if the place of
employment is Assam, Bihar, Karnataka, Madhya Pradesh, Orissa,
---------------------- Tripura, TamilNadu, Uttar Pradesh, and West Bengal.

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 g) Composite hill compensatory allowance ` 300 p.m. is exempt Notes
provided the place is located at a height of 1000 mtrs or more above
the sea level. ----------------------
(C) Allowances that are fully taxable: ----------------------
a) Dearness Allowance
----------------------
b) City Compensatory Allowance
----------------------
c) Medical Allowance
d) Lunch/TiffinAllowance ----------------------

e) Servant Allowance ----------------------

f) FamilyAllowance ----------------------
g) Warder Allowance
----------------------
h) Overtime Allowance
----------------------
i) FamilyAllowance
----------------------
Check your Progress 1
----------------------

State True or False. ----------------------

1. The term ‘Place of Accrual’ means if the services are rendered in India ----------------------
and salary on account of such services is received outside India, it will
not be treated as income, which is deemed to accrue or arise in India. ----------------------
2. The amount of gratuity paid by the employer to the employee on his ----------------------
retirement is taxed as “Income from Salaries” while the amount paid
by the employer on the death of the employee is taxed as “Income ----------------------
from Other Sources”.
----------------------
3. Although the pension received by an employee is taxable, like salary,
if the employee commutes 1/3 of his pension, it is wholly exempt from ----------------------
income tax.
----------------------

----------------------
Activity 1
----------------------
1. Mr. Zakaria, Staying at Chennai, receives ` 12,500 monthly as basic ----------------------
salary, ` 1,500 as D.A. provided in terms of employment and 4% as
commission on turnover achieved by him. He is paid house rent allowance ----------------------
of ` 1,800 p.m. The turnover achieved by him for the year is ` 15 lakhs.
----------------------
House rent paid by him is ` 2,500 p.m. He received advance salary
of ` 50,000/- in March 2015 relating to the period April to July 2015. ----------------------
Determine the taxable quantum of house rent allowance.
----------------------

----------------------

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 Notes 2. Mr. Kurien resides at Bangalore, and draws a remuneration of ` 15,000
p.m. He is paid D.A. of ` 2,500 p.m. provided in the terms of employment.
----------------------
In addition, he is paid HRA of ` 3,000 p.m. and he is entitled to 5%
---------------------- commission on turnover achieved by him. The turnover achieved by
him is ` 40,00,000. He pays rent of ` 7,500 p.m. Calculate the taxable
---------------------- income under the head “Salaries”.
---------------------- 3. Ramu resides at Hyderabad, and draws a remuneration of 12,500/- p.m.
He is paid D.A. of ` 1,500/- p.m. as per the terms of employment. He is
---------------------- also paid HRA of ` 4,000/- p.m. and he is eligible for a commission in
---------------------- respect of the turnover achieved by him at 3%. The turnover achieved
by him during the year is ` 62,00,000/- He is staying in a rented house
---------------------- for which he pays ` 9,000/- p.m. Calculate the taxable income under this
head.
----------------------
4. Mr. Kapil is in receipt of the following allowances and seeks your advice
---------------------- about the taxable quantum of these allowances.
---------------------- Helper allowance - ` 300 p.m. Mr. Kapil appointed a helper for 9 months
during the year, to whom he paid ` 200 p.m.
----------------------
Conveyance allowance - of ` 750 p.m. Mr. Kapil owns a car which is
---------------------- used both for personal purposes and official purposes. Total monthly
expenses amounts to ` 1,200 of which 40% is attributable to office use.
----------------------
During the year Mr. Kapil received as education allowance for his 3
---------------------- children a sum of ` 250 per month each towards education and hostel
expenditure. All the children are staying in hostels.
----------------------
During the year for six months Mr. Kapil was posted at Khandala, a hilly
---------------------- area located at a height of 1,200 mts. above sea level. Hill compensatory
allowance of ` 2,400 has been received by him at ` 400/- per month.
---------------------- Please advise him.
---------------------- 5. Mr. Arvind is working as a pilot in Indian airlines and apart from basic
salary ` 15000/-, he is paid the following allowances:
----------------------
Entertainment allowance ` 1200 p.m.
----------------------
Uniform allowance ` 800 p.m. Actual amount spent ` 500 p.m.
---------------------- Conveyance allowance ` 2000 p.m. spent for office purposes ` 1200
p.m.
----------------------
Special allowance to meet personal expenses while on duty ` 5000 p.m.
---------------------- Education and hostel expenditure allowance: ` 500 pm. He has two
children studying in school who stay in hostel.
----------------------
Determine the taxable amount of the above allowances.
---------------------- 6. Mr. Anil retired from A Ltd. after completing service of 39 years and 9
---------------------- months. His salary drawn at the time of retirement was ` 10,500 per month
while the average salary drawn for the preceding 10 months worked out to
---------------------- ` 9,800 per month. The actual amount of gratuity received by him at the

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 time retirement was ` 2, 80,000. Calculate the amount of gratuity exempt Notes
from tax assuming that he is covered by the provisions of Payment of
----------------------
Gratuity Act, 1972. Will the calculations be different if he is not covered
by the Payment of Gratuity Act, 1972? ----------------------

3.3 PERQUISITES - SEC.17 ----------------------

----------------------
Perquisites indicate benefits or amenities provided by the employer to
the employee, either free of cost or at a concessional rate. The value of these ----------------------
perquisites is taxed in the hands of the employee as the taxable salary.
----------------------
For the purpose of income tax, the perquisites can be classified into two
categories: ----------------------
a. Perquisites which are taxable in case of all types of employees – In practical ----------------------
circumstances, these perquisites include the rent-free accommodation
provided to the employee. ----------------------
b. Perquisites which are taxable only in the hands of specified employee – In ----------------------
practical circumstances, these perquisites include the following categories
of perquisites: ----------------------
Motor Car ----------------------
Services of sweeper, gardener, watchman or personal attendant
----------------------
Gas, electricity and water provided for personal consumption
----------------------
Free or concessional educational facilities
For the above purpose, a specified employee means: ----------------------

A. the person who is the director of a company (Income from Salaries 45) ----------------------
B. the employee who has substantial interest in the company by having 20% ----------------------
or more of the voting power
----------------------
C. the employee whose income under the head salaries (including all the
taxable monetary payments of salary but excluding the value of any non- ----------------------
monetary benefits or perquisites) after allowing deductions under Section
16, exceeds ` 50,000. ----------------------
While computing the limit of ` 50000, the following are deducted/excluded: ----------------------
(a) All non-monetary benefits ----------------------
(b) Monetary benefits which are exempt under Sect.l0 (c) Deduction under
section 16(I), (ii), & (iii) ----------------------

3.3.1 Employees Stock Option Plan (ESOP): ----------------------

If the shares, debentures or warrants are issued in accordance with the ----------------------
guidelines prescribed by the Central Government, the value thereof or the
concession given thereof is not taxable as a perquisite. ----------------------

----------------------

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 Notes 3.3.2 Rent Free Unfurnished Accommodation
The accommodation includes a house, flat, farm house or part thereof. or
----------------------
accommodation in a hotel, motel, service apartment, guest house, mobile home,
---------------------- ship or other floating structure.
Hotel accommodation
----------------------
Where the accommodation is provided by any employer in a hotel, then
---------------------- 24 % of salary paid or payable for the previous year or the actual charges paid
or payable to such a hotel, whichever is lower, shall be the value of perquisite,
----------------------
the value shall be reduced by the rent, if any, actually paid or payable by the
---------------------- employee if the accommodation for a period is not, exceeding 15 days on
transfer of employee from one place to another place, there will be no taxable
---------------------- perquisites.
---------------------- In short there will be no taxable perquisite if the accommodation is
provided in a hotel if the following conditions are fulfilled-
----------------------
(a) Such accommodation is provided for a period not exceeding 15 days and
---------------------- (b) It has been provided on the transfer of the employee from one place to
---------------------- another.
Sr. Particulars Place of Valuation of
----------------------
No. Accommodation Perquisite
---------------------- 1 Central and State Any where License Fee (commonly
Government referred as ‘Standard
---------------------- Employees Rent’) in respect of such
accommodation fixed in
----------------------
accordance with rules framed
---------------------- by that Government.
2 Other employees Population exceed 15% of Salary (#)
---------------------- Accommodation 25 lakhs
owned by the Population 10 lakhs 10% of Salary (#)
----------------------
employer. to 25 lakhs
---------------------- Population below 7.5% of Salary
10 lakhs
---------------------- A c c o m m o d a t i o n Any where 15% Salary of actual rent
taken on lease or rent paid which is less
----------------------
by employer
---------------------- # Salary includes:
---------------------- All pay, allowance, bonus or commission payable monthly or otherwise or and
monetary payment by whatever name called from one or more employers but
---------------------- excludes:-
---------------------- i. Dearness allowance not forming part in computation of superannuation or
retirement benefit.
----------------------
ii. Employer’s contribution to the PF a/c of the employee.
----------------------

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 iii. Allowances which are exempt from tax Notes
iv. Value of taxable perquisites under section 17(2)
----------------------
v. 
Any payment or expenditure in the nature of allotment of shares,
debentures or warrants under ESOP or any other scheme. ----------------------
vi. Any allowances in the nature of medical facility to the extent not taxable. ----------------------
3.3.3 Furnished Accommodation ----------------------
Where the accommodation is provided with furniture, (including household
appliances and fittings) the value is first worked out as if accommodation is ----------------------
unfurnished and to that value the following is added. ----------------------
Source Value of Perquisite
----------------------
Where the furniture is owned by the 10% p.a. of the original cost of furniture
employer. ----------------------
Where the furniture is hired by the The actual hire charges payable by the
----------------------
employer employer for such furniture.
Furniture includes radio sets, television sets, refrigerators, air conditioners ----------------------
and other household appliances.
----------------------
Accommodation at concessional rate [Section 17 (2) (ii)
----------------------
Where the employer provides the employee with an accommodation
but charges certain rent, the taxable value of perquisite shall be calculated as ----------------------
follows:
----------------------
i) Value of any Benefit as if it is provided rent free
----------------------
ii) Less: Rent payable by the employee under section
iii) Balance [(i)-(ii)]: Taxable perquisite u/s 17(2) (ii) ----------------------
Note: III) Section 17 (2) (iii) Value of any Benefit or Amenity & Section 17(2) ----------------------
(iv) any sum made by the employer in respect of any obligation of the employee
----------------------
3.3.4 Perquisites in respect of Furnished accommodation in hotel
Value of perquisite is least of following ----------------------

1. 
24% of salary paid or payable for the period during which such ----------------------
accommodation is provided in previous year
----------------------
2. Actual charges paid or payable by employee to such hotel
----------------------
Here salary =Basic +D.A. (forming part)+ Bonus+ Commission+ Fees+
Taxable allowances + Any monetary benefit chargeable under Act ----------------------
It may be noted that no perquisite would arise, if the employee is provided such ----------------------
accommodation on transfer from one place to another for a period of 15 days
or less. ----------------------

----------------------

----------------------

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 Notes 3.3.5 Perquisites in respect of Use of Motor Car

---------------------- S. Circumstances Engine Capacity Engine Capacity

No. upto 1600 cc above 1600 cc
---------------------- 1 Where the motor car is owned or hired by the employer
---------------------- 1 (a) The motor car used wholly Nil Nil
and exclusively in the
---------------------- performance of his official.
---------------------- duties;
1 (b) The motor car is used Actual amount of expenditure incurred
----------------------
exclusively for the private by the employer on the running and
---------------------- or personal purposes of the maintenance of motor car including
employee or any member of remuneration paid by the employer to the
---------------------- his household and the running chauffeur and increased by the amount
and maintenance expenses representing normal wear and tear of the
----------------------
are met or reimbursed by the motor car less any amount charged from
---------------------- employer. the employee for such use.
1 (c) The motor car is used partly
----------------------
in the performance of duties
---------------------- and partly for private or
personal purposes of the
---------------------- employee or any member of
his household and
----------------------
(i) 
the expenses on ` 1,800 (plus ` 900, ` 2,400 (plus `
---------------------- maintenance and if chauffeur is also 900, if chauffeur
running are met or provided to run the is also provided to
----------------------
reimbursed by the motor car) run the motor car)
---------------------- employer
(ii) the expenses on running ` 600 (plus ` 900, ` 900 (plus ` 900,
----------------------
and maintenance for if chauffeur is also if chauffeur is also
---------------------- such private or personal provided by the provided to run the
use are fully met by the employer to run the motor car)
---------------------- assessee. motor car)
---------------------- 2. Where the employee owns the vehicle and the actual running and
maintenance charges including remuneration of the chauffeur are
---------------------- met or reimbursed to him by the employer.
---------------------- 2 (i) Nil Nil
---------------------- The reimbursement is P r o v i d e d t h a t t h e Provided that
for the use of the vehicle documents specified in the documents
---------------------- wholly and exclusively clause (B) of this sub- specified in clause
for official purposes rule are maintained by (B) of this sub-rule
---------------------- the employer. are maintained by
---------------------- the employer.

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 2 (ii) The reimbursement Subject to the provisions Subject to the Notes
is for the use of the of clause (B) of this sub- provisions of clause
vehicle partly for rule, actual expenditure (B) of this sub-rule, ----------------------
official purposes and incurred by the actual expenditure ----------------------
partly for personal or employer as reduced by incurred by the
private purposes of the the amount specified in employer as ----------------------
employee or any member Sl.No.(1)(c)(i) above. reduced by the
of his household. amount specified ----------------------
in Sl.No.(1)(c)(i) ----------------------
above.
----------------------
3. Where the employee owns any other automotive conveyance but the
actual running and maintenance charges are met or reimbursed to ----------------------
him by the employer
----------------------
Nil
such reimbursement is P r o v i d e d t h a t t h e Not Applicable ----------------------
for the use of the vehicle documents specified in ----------------------
wholly and exclusively for clause (B) of this sub-
official purposes; rule are maintained by the ----------------------
employer.
----------------------
such reimbursement is for Subject to the provisions Not Applicable
the use of vehicle partly of clause (B) of this sub- ----------------------
for official purposes and rule, the actual amount of
partly for personal or expenditure incurred by ----------------------
private purposes of the the employer as reduced
----------------------
employee. by the amount of ` 900.
Provided that where one or more motor-cars are owned or hired by the ----------------------
employer and the employee or any member of his household are allowed the use
----------------------
of such motor-cars (otherwise than wholly and exclusively in the performance
of his duties), the value of perquisite shall be the amount calculated in respect ----------------------
of one car in accordance with Sl. No. (1)(c)(i) of the above Table as if the
employee had been provided one motor-car for use partly in the performance ----------------------
of his duties and partly for his private or personal purposes and the amount
----------------------
calculated in respect of the other car or cars in accordance with Sl. No. (1)(b) of
above Table as if he had been provided with such car or cars exclusively for his ----------------------
private or personal purposes.
----------------------
(B) Where the employer or the employee claims that the motor-car is
used wholly and exclusively in the performance of official duty or that the ----------------------
actual expenses on the running and maintenance of the motor-car owned by the
employee for official purposes is more than the amounts deductible in Sl. No. ----------------------
2(ii) or 3(iii) of above Table, he may claim a higher amount attributable to such ----------------------
official use and the value of perquisite in such a case shall be the actual amount
of charges met or reimbursed by the employer as reduced by such higher amount ----------------------
attributable to official use of the vehicle provided that the following conditions
are fulfilled:- ----------------------

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 Notes (a) the employer has maintained complete details of journey undertaken for
official purpose which may include date of journey, destination, mileage,
---------------------- and the amount of expenditure incurred thereon;
---------------------- (b) the employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
----------------------
Explanation - For the purposes of valuation, the normal wear and tear of a
---------------------- motor-car shall be taken at 10% per annum of the actual cost of the motor-car
or cars.
----------------------
3.3.6 Domestic servant
---------------------- a) The value of benefit to the employee or any member of his household
---------------------- resulting from the provision by the employer of the services of a sweeper,
a gardener, a watchman or a personal attendant, shall be the actual cost
---------------------- to the employer. The actual cost in such a case shall be the total amount
of salary borne by the employer as reduced by the amount borne by the
---------------------- employee for such services.
---------------------- b) If the employer pays salary for the domestic servants employed by the
employee, the actual amount borne by the employer is chargeable to tax
---------------------- as perquisite in the case of all employees.
---------------------- c) In case the attendant is provided by the employer, the same is taxable
perquisites in hand of all employees.
----------------------
d) If an employer provides a rent free house (owned by the employer) to
---------------------- his employee, expenses (inclusive of salary of gardner) incurred by the
employer on the maintenance of garden and ground attached to the house
----------------------
is not taxable separately.
---------------------- 3.3.7 Gas, Electric Energy and water supply for household consumption
---------------------- 1)  In case of supply from own sources: taxable perquisites shall be
manufacturing cost incurred by the employer.
---------------------- 2) In case the supply is from outside agencies: - taxable perquisites shall be
---------------------- amount paid by the employer to such agencies.
Note:
---------------------- 1. Above taxable perquisites shall be reduced by the amount recovered from
---------------------- the employee.
2. If gas connection, water connection, electricity connection is in the name
---------------------- of the employee, it becomes obligatory payments chargeable in hands of
all employees under section 17(2) (iv).
----------------------

----------------------

----------------------

----------------------

----------------------

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 3.3.8 Perquisites in respect of Educational facilities Notes
Sr. Particulars Valuation of Perquisites
----------------------
No.
1. 2 Educational facility for any member of Actual expenditure incurred ----------------------
employee household (other than children by employer
of employee) ----------------------
2. Education facility provided in institution ‘NIL’ is cost of such ----------------------
which is maintained and owned by the education in a similar
employer or where free educational institution in or near the ----------------------
facilities for such member of employees’ locality provided it does not
----------------------
household are allowed in any other exceed per child ` 1000/-
educational institution by reason of his PM ----------------------
being in employment of that employer.
----------------------
3.3.9 Other fringe benefits or amenities [Section 17(2) (VI)]
It includes the value of any other fringe benefits or amenities (excluding ----------------------
the fringe benefits chargeable to tax under Chapter XII-H) as may be prescribed. ----------------------
a) 
Interest Free or concessional loan made available for employee or
any member of his household: The taxable perquisites shall be the sum ----------------------
equal to interest computed at the rate charge per annum as on the 1st ----------------------
day of relevant previous year in respect of loan for the same purpose
advanced by it. ----------------------
Table 3.1: Nature of loan & Rate of interest ----------------------
Nature of loan Rate of interest
----------------------
Housing
Up to 5 years 8.75% ----------------------
Above 5 years up to 15 years 10%
Above 15 years 10.25% ----------------------
Car
Up to 3 years 11.25% ----------------------
Above 3 years up to 7 years 11% ----------------------
Personal 16.75%
Important Points ----------------------

The interest calculation shall be with reference to maximum outstanding ----------------------

monthly balance.
----------------------
The above taxable perquisites shall be reduced by the amount of interest
charged by the employer. ----------------------
b) Use of movable assets . ----------------------
If any moveable asset (excluding the assets already covered above and
----------------------
also laptops and computers) owned or hired by the employer is used by the
employee or any member of his household, 10% per annum of the actual cost of ----------------------
such asset or the amount of hire charges incurred by the employer shall be the
value of perquisite. ----------------------

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 Notes 3.3.10 Transfer of Employers Movable Assets: Section 17 (2)(vi)
If the employer transfers any movable asset directly or indirectly to the
----------------------
employee or any member of his household, the amount determined as taxable
---------------------- perquisite is the actual cost incurred to the employer on such asset as reduced
by the cost of normal wear and tear calculated for each completed year as
---------------------- follows:
---------------------- * Electronic items means data storage and data handling devices like computers,
Digital Dairy & Printers. However, it does not include household appliances.
----------------------
3.3.11 Medical Facility – Provison to sect. 17(2)
---------------------- Medical facilities provided by the employer
---------------------- Following shall not be treated as perquisites:

---------------------- a. Medical facility provided in a hospital, dispensary, clinic or nursing home,

maintained by the employer.
----------------------
b. Group medical insurance obtained by the employer for his employees or
---------------------- reimbursement of medical insurance premium to an employee in respect
of policy in the name of the employee or his family members.
----------------------
c. Reimbursement of amount spent by the employee in respect of medical
---------------------- treatment for himself or his family members from any doctor, not
exceeding ` 15,000 in a year. However, if the employee is in receipt of the
---------------------- fixed medical allowance, it will be taxable in the hands of the employee.
---------------------- Medical Facility Outside India

---------------------- Medical treatment of the employee or any member of the * family of

such employee outside India and travel, and stay abroad of the patient and one
---------------------- attendant subject to the condition that:

---------------------- 1. The expenditure on medical treatment on stay abroad will be exempt to

the extent permitted by the Reserve Bank of India.
----------------------
2. The expenditure on travel shall be exempt only in the case of an employee
---------------------- whose gross total income, as computed before including therein the said
travel expenditure does not exceed ` 2,00,000. In other words, if the
---------------------- employees’ gross total income before including taxable travel expenditure
exceeds ` 2,00,000 the expenses on travel of the patient and the attendant
----------------------
shall become taxable.
---------------------- *’Family means
---------------------- (a) The spouse and children

---------------------- (b) Parents, brothers and sisters of the individual, wholly or mainly dependent
on the individual.
----------------------

----------------------

----------------------

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 Notes
Check your Progress 2
----------------------
Multiple Choice Multiple Response. ----------------------
1. Perquisites to employees means
----------------------
i. Benefits/amenities provided by the employer
ii. It’s free of cost ----------------------
iii. It’s at concessional rates ----------------------
iv. Its dearness allowance
----------------------
v. These are taxable at the hands of employee
2. Furnished accommodation ----------------------
i. Includes furniture/household appliances/fittings
----------------------
ii. If furniture is owned by the employer, the value of perquisites is
10% of the original cost ----------------------
iii. If furniture is owned by the employer, the value of perquisites is
----------------------
20% of the original cost
iv. If furniture is hired by the employer, the actual hire charges are ----------------------
considered as value of perquisites
----------------------
3. The following medical facilities provided by the employer should not
be treated as perquisites: ----------------------
i. Reimbursement given to employee up to Rs. 25,000 in a year
----------------------
ii. Group medical insurance policy taken by the employee
iii. Hospital/dispensary/clinic maintained by the employer ----------------------
iv. Reimbursement given to employee up to Rs. 15,000 in a year ----------------------

----------------------
3.4 PERQUISITES EXEMPT FROM TAX
----------------------
Following are some of the perquisites which are generally exempt in the
hands of the employees: ----------------------

a. Tea or other non-alcoholic beverages and snacks (in the form of light ----------------------
refreshments) provided during the office hours.
----------------------
b. Free meals provided by the employer during the office hours provided
that the value per meal does not exceed ` 50. ----------------------
c. Amount spent for training the employees and amount spent by the ----------------------
employer as fees for sending the employee to refresher courses (including
the lodging and boarding expenses incurred by the employee). ----------------------
d. Annual premium paid by the employer for the accident insurance policy ----------------------
taken by the employer in the name of the employee.
----------------------
e. The amount of telephone bills (including the mobile phone bills) of the
employee reimbursed by the employer. ----------------------

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 Notes f. Any recreational facility provided by the employer to a group of employees
(not being restricted to a select few employees) is exempt from tax.
----------------------

----------------------
3.5 DEDUCTIONS - [SECTION16]

---------------------- The income chargeable under the head “Salaries” shall be computed after
making the following deductions from gross salary:-
---------------------- 3.5.1 Entertainment Allowance
---------------------- Entertainment allowance is not eligible for exemption but it only qualifies
for deduction. Therefore, entertainment allowance is first included in gross
----------------------
salary and then deduction is allowed under section 16(ii).
---------------------- The deduction is available only in the case of government employees to
the extent of the least of following:
----------------------
i) ` 5000 or
----------------------
ii) 1/5th of salary; [20% of Basic Salary]
---------------------- iii) Actual entertainment allowance received for the previous year.
---------------------- 3.5.2 Professional Tax
---------------------- Deduction is allowed in respect of any sum paid by the assessee on account
of a tax on employment. In case the profession tax is paid by the employer on
---------------------- behalf of the employee, the amount so paid should be included in Gross salary
as perquisite and then deduction under section 16(iii) can be claimed.
----------------------

---------------------- Check your Progress 3

----------------------
State True or False.
---------------------- 1. Entertainment allowance is eligible for exemption but it only qualifies
---------------------- for deduction.
2. Fringe benefits include interest free or concessional loan made
----------------------
available for employee for acquisition/purchase of house/car or for
---------------------- personal use.
3. In case the profession tax is paid by the employer on behalf of the
----------------------
employee, the amount so paid should not be included in gross salary
---------------------- as perquisite and then deduction under section 16(iii) can be claimed.

----------------------

----------------------

----------------------

----------------------

----------------------

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 Summary Notes

●● Different deductions and exemption under salary. are: ----------------------

Leave travel concession (LTC) Gratuity ----------------------
Pension
----------------------
VRS
----------------------
Provident fund
HRA ----------------------

●● Certain special allowances and perquisites are: ESOPs, Accommodation, ----------------------

Domestic Servants, Educational Facility, Entertainment Allowance and
----------------------
others.
●● The Central Government has introduced a new pension scheme for the ----------------------
employees employed on or after 1st January, 2004. These employees are
required to contribute 10% of their salaries to this pension scheme and the ----------------------
Central Government will make an equal contribution. Any contribution ----------------------
made by the Central Government to this pension scheme will be
considered to be the salary income in the hands of the employee. Salary ----------------------
for this purpose includes dearness allowance if the terms of employment
so provides but excludes all other allowances and perquisites. ----------------------

----------------------
Keywords
----------------------
●● Salary: As per the provisions of Section 17(1) of the Act, Salary is defined
----------------------
to include mainly the following items:
a. Wages ----------------------
b. Annuity or Pension ----------------------
c. Gratuity
----------------------
d. Fees, commission, perquisites or profits in lieu of salary or in
addition to salary or wages ----------------------
e. Advance of Salary ----------------------
f. Payment received from the employer for the period of leave not ----------------------
availed
----------------------
●● Perquisites: Perquisites indicate benefits or amenities provided by the
employer to the employee, either free of cost or at the concessional rate. ----------------------
The value of these perquisites is taxed in the hands of the employee as the
taxable salary. ----------------------

----------------------

----------------------

----------------------

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 Notes
Self-Assessment Questions
----------------------
1. Write a detailed essay on Valuation of Perquisites as per the provisions of
---------------------- Income Tax Act, 1961.
2. Explain the provisions of Income Tax Act, 1961 in respect of the valuation
----------------------
of following perquisites:
---------------------- Rent Free Accommodation
---------------------- Motor Car
---------------------- Movable Assets transferred to the employee
Loans given at a concessional rare of interest
----------------------
3. Explain the taxability of following items under Income from Salaries –
----------------------
House Rent Allowance
---------------------- Leave Travel Allowance
---------------------- Leave Encashment
---------------------- Compensation under Voluntary Retirement Scheme
Retrenchment Compensation
----------------------
Death cum Retirement Gratuity
----------------------
Pension
---------------------- 4. What do you mean by Provident Fund? What are the different types of
---------------------- Provident Funds?
Explain the taxability of different types of Provident Funds.
----------------------
5. Explain and illustrate the various deductions available from Income from
---------------------- Salaries.
---------------------- 6. Write short notes on the following:

---------------------- Taxability of Allowances

Relief under Section 89(1) of the Income tax Act, 1961
----------------------
Perquisites exempt from tax
----------------------
Specified Employees
---------------------- Medical and Educational facilities or assistance provided by the employer
Problems
----------------------

----------------------

----------------------

----------------------

----------------------

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 Problem 1. Notes
Mr. Ashok works in the Central Government. Details of his salary are as under:
----------------------
Basic
Salary – ` 6,000 per month ----------------------
Entertainment Allowance – ` 1,000 per month ----------------------
The employer has deducted an amount of ` 2,100 from his salary towards his ----------------------
contribution to the professional tax.
Calculate the deductions available to Mr. Ashok under Section 16 of the Act for ----------------------
the AY 2013-2014. ----------------------
If Mr. Ashok is not a Government Employee, will the calculations be different
for him If yes, how? ----------------------

Problem 2. ----------------------
Mr. Anil was employed as the Finance Manager of A Ltd. since 1st January ----------------------
1991. His salary was fixed at ` 26,600 in the grade of ` 25,000 – 800 – 33,000
with effect from 1st July 2012. In addition to the basic salary, he was paid ----------------------
dearness allowance, 20% of which is not treated as a part of salary for the
----------------------
computation of retirement benefits. He retired from service with effect from 1st
December 2012. He received ` 3, 30,000 as gratuity from A Ltd. ----------------------
Calculate the Income from Salaries of Mr. Anil for the Assessment Year 2013-
----------------------
2014 if –
a. Payment of Gratuity Act, 1972 applies to Mr. Anil ----------------------

b. Payment of Gratuity Act, 1972 does not apply to Mr. Anil ----------------------
Solutions ----------------------
Problem 1.
----------------------
Solution
----------------------
Calculation of deduction u/s 16 for Mr. Ashok
----------------------
Basic Salary 72,000
Entertainment Allowance 12,000 ----------------------
Total Salary 84,000
----------------------
Deductions –
----------------------
Section 16(ii) – Entertainment Allowance as per the
Working shown below 05,000 ----------------------
Section 16(iii) – Professional Tax 02,100 ----------------------
Taxable Salary 46,900
----------------------
Note:
----------------------
The amount of deductible entertainment allowance will be least of the following
amounts ----------------------

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 Notes a. ` 5,000
b. Actual amount received i.e. ` 12,000
----------------------
c. 1/5th of salary of ` 72,000 i.e. ` 14,400
----------------------
As ` 5,000 is the least, the same will be deducted from the salary.
---------------------- If Mr. Ashok is not a Government employee, the deduction under Section 16(ii)
---------------------- for entertainment allowance will not be available to him. In other words, the
entertainment allowance will be fully taxable.
---------------------- Problem 2.
---------------------- Solution
---------------------- Calculation of taxable gratuity for Mr. Anil
Service completed – 21 years and 11 months
----------------------
Salary for the period from February 2006 to June 2006 – ` 27, 400 per month
----------------------
Salary for the period from July 2006 to November 2006 – ` 28,200 per month
---------------------- Total salary for the past 10 months – ` 27400 × 5 months × 28200 × 5 months
---------------------- = ` 2,78,000
Average salary for the past 10 months – ` 27,800
----------------------
If Payment of Gratuity Act, 1972 applies to Mr. Anil
----------------------
Least of the following amounts will be exempt from tax:
---------------------- a. 15 days’ salary for each completed year of service based upon last salary
---------------------- drawn assuming 26 days in a month i.e. ` 28,200 × 15/26 = ` 16,269 per
completed year and for 22 years ` 3,57,918
---------------------- b. ` 3,50,000
---------------------- c. ` 3,30,000 being the amount of gratuity actually received.
---------------------- As ` 3,30,000 is the least, the entire gratuity received shall be exempt from tax.
If Payment of Gratuity Act, 1972 does not apply to Mr. Anil
----------------------
Least of the following amounts shall be exempt from tax:
---------------------- a. Half month’s salary based upon the average salary for the last 10 months
---------------------- for every completed year of service i.e. ` 27,800/2 × 21 = ` 2,91,900
b. ` 3,50,000
----------------------
c. ` 3,30,000 being the amount of gratuity actually received.
----------------------
As ` 2,91,900 is the least, the same will be exempt and the balance amount
---------------------- of ` 38,100 shall be taxable.

----------------------

----------------------

----------------------

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 Answers to Check your Progress Notes
Check your Progress 1 ----------------------
State True or False. ----------------------
1. False
----------------------
2. True
----------------------
3. True
Check your Progress 2 ----------------------
Multiple Choice Multiple Response ----------------------
1. Perquisites to employees means ----------------------
i. Benefits/amenities provided by the employer
----------------------
ii. It’s free of cost
----------------------
iii. It’s at concessional rates
v. These are taxable at the hands of employee ----------------------
2. Furnished accommodation ----------------------
i. Includes furniture/household appliances/fittings ----------------------
ii. If furniture is owned by the employer, the value of perquisites is
----------------------
10% of the original cost
iv. If furniture is hired by the employer, the actual hire charges are ----------------------
considered as value of perquisites
----------------------
3. The following medical facilities provided by the employer should not be
treated as perquisites: ----------------------
ii. Group medical insurance policy taken by the employee ----------------------
iii. Hospital/dispensary/clinic maintained by the employer ----------------------
iv. Reimbursement given to employee up to Rs. 15,000 in a year
----------------------
Check your Progress 3
----------------------
State True or False.
1. False ----------------------
2. True ----------------------
3. False ----------------------

----------------------
Suggested Reading
----------------------
1. Fischer, Paul, William Tayler, Rita Cheng. 2007. Fundamentals of
Advanced Accounting. Cengage Learning. ----------------------

----------------------

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 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Income from House Property and other Sources
UNIT

4
Structure:

4.1 Introduction & Scope

4.2 Deemed Ownership Under Section 27
4.3 Gross Annual Value [Section 23 (1)]
4.4 Steps for Computing Income from House Property
4.4.1 Let Out House Property
4.4.2 Deemed Let Out House Property
4.4.3 Self-Occupied House Property
4.5 Net Annual Value (NAV)
4.6 Deductions from income of House Property [Section 24]
4.7 Deductions from income from House Property under Section 24
4.8 Inadmissible Expenses [Section 25]
4.9 Income from other sources Sec. 56
4.10 Deductions from income from other sources
4.11 Inadmissible expenses Section (58)
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concept of Income from House Property under Income
---------------------- Tax Act.
---------------------- • Discuss the essential conditions for taxability under house property.
• Arrive at determination of Annual Value and other deductions
----------------------
under Act.
---------------------- • Analyse the practical problems under Income from House Property.
---------------------- • List other sources under the Income Tax Act.
---------------------- • Discuss different types of income under Income from Other Sources.
• Analyse deductions under the Act.
----------------------

---------------------- 4.1 INTRODUCTION & SCOPE

---------------------- “The Annual Value of property consisting of any buildings or lands
appurtenant thereto of which the assessee is the owner, other than such portion
---------------------- of such property as he may occupy for the purposes of any business or profession
---------------------- carried on by him the profits of which are chargeable to income tax, shall be
chargeable to income tax under the head “Income from House Property”.
----------------------
The above definition reveals that for income to be treated as the Income
---------------------- from House
Property, following conditions should be satisfied:
----------------------
a. The property must consist of buildings and land appurtenant thereto. If the
---------------------- assessee earns some income from only a vacant piece of land, it will not
be taxed as Income from House Property but it will be taxed as Income
----------------------
from Other Sources.
---------------------- b. The assessee must be the owner of the property. If the assessee receives
---------------------- any income from a property which is not owned by him, it cannot be
taxed as Income from House Property. Eg. Mr. A takes a house on rent
---------------------- paying the rent of ` 10,000 per month to the landlord. He sublets the same
to Mr. B for a rent of ` 12,000 per month. The rent received by Mr. A will
---------------------- be taxed as Income from Other Sources and not as Income from House
---------------------- Property.
c. The property should not be used by the assessee for any business or
---------------------- profession, the profits of which are chargeable to income as Income from
---------------------- Business & Profession.
Related Case Law
----------------------
Chelmsford Club V CIT [2002] (SC)
----------------------
Subject matter: Chargeability to tax under section 22 (Mutual Club)
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 The assessee, a club, provided recreational and refreshment facilities to Notes
its members and their guests. Its facilities were not available to non-members.
The club was run on ‘no profit no loss’ basis. The members were not entitled ----------------------
to share profits. Surplus, if any, was used for the maintenance and development
of the club. Held that the assessee was not liable to income tax in respect of ----------------------
the clubhouse under section 22. The business of the assessee was governed ----------------------
by the principles of mutuality; even the deemed income from its property was
governed by that principle. ----------------------
Essential conditions for taxing income under this head ----------------------
A. The property must consist of buildings and lands appurtenant thereto,
----------------------
B. The assessee must be the owner of such house property,
----------------------
C. The property may be used for any purpose, but it should not be used
by the owner for the purpose of any business or profession carried on ----------------------
him, the profit of which is chargeable to tax (Even if in a particular year
income from Business or Profession is NIL or there is a loss) ----------------------

Important Points: ----------------------

In case of Individual/H.U.F (R-OR) foreign property is treated the same ----------------------
as Indian property.
----------------------
If any income is derived from vacant land then this income would not be
taxed under the head ‘house property’ because there is no building. ----------------------
Sub letting of house property is not covered under the head house property
----------------------
but chargeable under the head ‘Income from Other Sources’.
The person who owns the Building need not be owner of land upon which ----------------------
the Building stands.
----------------------
Even if it is the business of the assessee to own and give houses on rent
or to trade in houses, the annual value of the houses owned by him during the ----------------------
previous year would be taxable as ‘Income From House Property’.
----------------------
The letting out of the property if incidental to the main business of the
assessee and in the case deductions/allowances, would have to be calculated as ----------------------
relating to profits/ gains business and not as relating to house property.
----------------------
Ownership includes both free hold and lease hold rights and also includes
deemed ownerships. ----------------------
In case of disputed ownership, the person who is in receipt of income or ----------------------
the person who enjoys the possession of a H.P. is treated as Owner.
----------------------
4.2 DEEMED OWNERSHIP UNDER SECTION 27 ----------------------
a) Transfer to a spouse and child [section 27 (i)]:An individual who ----------------------
transfers otherwise than for adequate consideration any house property to
his or her spouse, not being a transfer in connection with an agreement to ----------------------
live apart or to minor child not being a married a daughter, is deemed to
be the owner of the house property so transferred. ----------------------

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 Notes b) Holder of an impartible estate [section 27 (ii)]: The holder of the
impartible estate deemed to be the individual owner of all the properties
---------------------- comprised in the estate.
---------------------- c) Members of co-operative Society, etc. [section 27 (iii)]: A member of
cooperative society, company or other association of persons to whom
---------------------- building or part thereof is allotted lease under a house building ‘scheme
of the society, company, or association, as the case may be, is deemed to
----------------------
be the owner of that building or part thereof.
---------------------- d) Person in possession of a property [Section 27 (iiia)]: a person who is
allowed to take or retain possession of any building or part thereof in part
----------------------
performance of a contract of the nature referred to in section 53A of the
---------------------- Transfer of Property Act, 1882, is deemed to be the owner of that building
or part thereof.
----------------------
e) Person having Right in a property for a period not less than 12 years
---------------------- Section (iiib)]: A person who acquires any right in or with respect to any
building or part thereof, by virtue of any transaction as is referred to in
---------------------- section 269UA(f) that is transfer by way of lease for not less than 12 years
shall be deemed to be the owner of that building or part thereof. This will
----------------------
not cover the case where any right by way of a lease is acquired from
---------------------- month to month basis or for a period not exceeding one year.

---------------------- Classification of house property

For Income Tax purpose the house property may be classified as under :
----------------------
House Property
----------------------

---------------------- Let Out House Deemed Let Self-occupied

House used for own Out House House
----------------------
Profession or Business
----------------------

----------------------
Check your Progress 1
----------------------
State True or False.
----------------------
1. If the assessee receives any income from a property, which is not
---------------------- owned by him, it can be taxed as Income from House Property.
2. Ownership of the property includes both free hold and lease hold
----------------------
rights and does not include deemed ownerships.
---------------------- 3. For Income Tax purposes, the house property may be classified as Let
out house, deemed let out house and self occupied house.
----------------------

----------------------

----------------------

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 4.3 GROSS ANNUAL VALUE [SECTION 23 (1)] Notes
The gross annual value depends upon the following seven factors: ----------------------
(A) Municipal Value (M.V.) : The value of property declared by municipal ----------------------
corporation for charging municipal tax is municipal value. It is also called
as Municipal Record Value. ----------------------
(B) Fair Rent (F.R.) : The value of similar property in same locality is fair ----------------------
rental value.
----------------------
(C) Standard Rent (S.R.) : The rent which declared under Standard Rent
Control Act is standard rent. The owner cannot be expected to get a rent ----------------------
higher than the standard rent fixed under the Rent Control Act.
----------------------
(D) Annual Rent : Rent of the previous year or that part of the previous year
when the property is available for letting it out. ----------------------
(E) Unrealised Rent : It is the rent which the owner cannot be realized.
----------------------
(F) Loss of rent because of vacancy : Where the property is let out but was
vacant during the whole or any part of previous year and owing to such ----------------------
vacancy there is loss of rent. ----------------------
(G) Actual rent received or receivable : Annual Rent − (Unrealised Rent +
Rent pertaining to vacancy period). ----------------------

----------------------
4.4 STEPS FOR COMPUTING INCOME FROM HOUSE
----------------------
PROPERTY
----------------------
Steps for Computing Income from House Property :
----------------------
`
Step I : Fair Rental value or Municipal value which is higher but xxx ----------------------
not more than standard Rent under Rent Control Act`
Step II : Annual Rent − Unrealised Rent xxx ----------------------
Step III : Step I or Step II which is higher xxx ----------------------
Step IV : Vacancy Allowance. (Proportionate to Annual Rent) xxx
Step V : Gross Annual Value (GAV) (Step III − Step IV) ----------------------
Less : Municipal tax paid by landlord only xxx ----------------------
Net Annual Value (NAV) xxx
Less : Deduction u/s 24 (xxx) ----------------------
24(1) Standard deduction (30% of NAV) ----------------------
24(2) Interest on Housing Loan (xxx)
Income from House Property xxx ----------------------
* Only one S.O.P shows negative income (if housing loan for it is taken). ----------------------

----------------------

----------------------

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 Notes Problem 1:
From following details find out income from house property.
----------------------
`
----------------------
M.V. 2,10,000
---------------------- F.R.V. 2,40,000
---------------------- Standard Rent 2,20,000

---------------------- Annual Rent 3,00,000

Vacancy Allowance 2 months
----------------------
Unrealise Rent 20,000
----------------------
Ground Rent 15,000
---------------------- Municipal tax paid
---------------------- By Tenant 10,000
---------------------- By Landlord 12,000
Insurance 15,000
----------------------
Interest on Housing Loan 42,000
----------------------
Status of Property − Let out
---------------------- Solution :
---------------------- Statement showing Income from House Property
---------------------- ` `
Step I : M.V. or F.R.V. 2,10,000
----------------------
which ever is higher but not more 2,40,000
---------------------- S.R. 2,20,000 2,20,000
Step II : Annual Rent
---------------------- Unrealise Rent 2,80,000
---------------------- (3,00,000 − 20,000)
Step III : Step I or Step II whichever is higher 2,80,000
---------------------- Step IV : Vacancy Allowance 50,000
---------------------- 2
3,00,000 ×
12
---------------------- Gross Annual Value 2,30,000
---------------------- GAV (Step III − Step IV)
Less : Municipal tax paid by landlord 12,000
---------------------- Net Annual Value (NAV) 2,18,000
---------------------- Less : Deduction u/s 24
24(1) Standard deduction (30% of NAV) 65,400
---------------------- 24(2) Interest on Housing Loan 42,006
---------------------- Income from House Property 1,10,600

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 Problem 2 : Notes
Mr. Suresh having three houses. Find out income from house property.
----------------------
House
Particulars ----------------------
I II III
M.V. 2,40,000 3,00,000 2,80,000
----------------------
F.R.V. 2,60,000 2,80,000 2,50,000
S.R. 3,00,000 3,20,000 2,60,00 ----------------------
Annual Rent 3,60,000 3,00,000 3,00,000
Unrealised Rent 20,000 − 30,000 ----------------------
Vacancy Allowance 2.5 Mths − 1 Mth
----------------------
Municipal Tax paid by Landlord 20,000 30,000 14,000
Insurance 16,000 14,000 20,000 ----------------------
Interest on Housing Loan 40,000 36,000 30,000
Ground Rent 12,000 14,000 12,000 ----------------------
Status LOP SOP LOP
----------------------
Solution :
----------------------
Income from House II (SOP)
Particulars ` ----------------------
Net annual Value Nil ----------------------
Less : Deduction u/s 24 −
24(1) Standard deduction 36,000 ----------------------
24(2) Interest on Housing Loan
----------------------
Income of SOP (−) 36,000
Income from Let Out Property House I and III ----------------------
Particulars Hs. I Hs. III ----------------------
Step I : M.V. or F.R.V. which higher not more S.R. 2,60,000 2,60,000
Step II : A.R. – Unrealise Rent 3,40,000 2,70,000 ----------------------
Step III : Step II or Step III which is higher 3,40,000 2,70,000
----------------------
Step IV : Vacancy Allowance 75,000 30,000
GAV Step III − Step IV 2,65,000 2,40,000 ----------------------
Less : Municipal tax by landlord 20,000 14,000
Net Annual Value 2,45,000 2,26,000 ----------------------
Less : Deduction u/s 24
24(1) Standard Deduction 73,500 67,800 ----------------------
(30% of NAV) ----------------------
24(2) Interest on Housing Loan 40,000 30,000
Income from House Property 1,31,500 1,28,200 ----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes Mr. Suresh
Income from House Property
----------------------
`
---------------------- House I (LOP) 1,31,500
---------------------- House II (SOP) (36,000)
House III (LOP) 1,28,200
---------------------- 2,23,700
---------------------- 4.4.1 Let Out House Property
---------------------- Determination of Gross Annual Value (GAV) :
Step I : Find out the reasonable expected rent (E.R.)
----------------------
(a) Where the Standard Rent is not applicable : Reasonable Expected
---------------------- Rent is the M.V. or F.R. whichever is higher.
---------------------- (b) Where the Standard Rent (S.R.) is applicable : Reasonable Expected
Rent is the least of the following two :
----------------------
(i) M.V. or F.R. whichever is higher.
---------------------- (ii) Standard Rent.
---------------------- For example :
---------------------- 1. M.V. = ` 40,000

---------------------- F.R. = ` 46,000

S.R. = Not applicable. Find out expected rent.
----------------------
Reasonable Expected Rent = M.V. or F.R. which is higher
----------------------
= ` 46,000
---------------------- Reasonable Expected Rent ` 46000
---------------------- 2. M.V. = ` 40,000
---------------------- F.R. = ` 46,000
S.R. = ` 45,000
----------------------
Find out expected rent.
----------------------
Reasonable expected rent is least of following two :
----------------------
(i) M.V. or F.R. which is higher ` 46,000
---------------------- (ii) Standard Rent (S.R.) ` 45,000
---------------------- Reasonable Expected Rent ` 46000
---------------------- Step II : Find out rent actually received.
Actual Rent Received (A.R.R.)
----------------------
= Annual Rent − (Unrealised Rent + Loss due to vacancy)
----------------------

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 Annual Rent − Rent for 12 months Notes
Step III : Find out Gross Annual Value
----------------------
(a) If the actual rent received is more than the expected rent then (A.R.R. >
E.R.). ----------------------
Gross Annual Value = Actual Rent Received ----------------------
(b) If the actual rent received is less than the expected rent (A.R.R. < E.E.), then ----------------------
Gross Annual Value = E.R. − Loss due to vacancy
----------------------
4.4.2 Deemed Let Out House Property
----------------------
In case of deemed let out property,
Gross Annual Value = Expected Rent ----------------------
4.4.3 Self-Occupied House Property ----------------------
Oneself occupied property always exempted from Income Tax. Self-occupied ----------------------
property exempted means its net annual value taken as nil.
From that Net Annual Value only one deduction is allowed i.e. interest on ----------------------
housing loan with certain limitation. So self-occupied property always shows ----------------------
negative income.
----------------------
4.5 NET ANNUAL VALUE (NAV) ----------------------
After getting Gross Annual Value by deducting municipal taxes from it, ----------------------
you get Net Annual Value. Municipal taxes paid by landlord are only consider
for ascertaining Net Annual Value. If municipal taxes paid by tenant then it not ----------------------
to be consider municipal taxes are allowed on payment basis only.
----------------------
4.6 DEDUCTIONS FROM INCOME OF HOUSE ----------------------
PROPERTY [SECTION 24]
----------------------
There are two different deduction from income from house property :
----------------------
1. Standard Deduction [Section 24 (1)] :
----------------------

Standard deduction is allowed from Net Annual Value. Standard deduction
is 30% of NAV. Once you get standard deduction no other expenses are ----------------------
allowed as deductions. So repairing charges, ground rent paid, insurance
premium, land revenue expenses are not allowed as deductions. ----------------------
2. Interest on Borrowed Capital [Section 24 (2)] : ----------------------
If property is L.O.P., then no limitation for deduction of interest. ----------------------
But when property is S.O.P. then interest deduction having limitations :
----------------------
(i) 
If property is S.O.P. and loan taken before 1-4-1999 and if
construction should not be completed within three years from the ----------------------
end of the financial year, then interest deduction allowed. Actual
----------------------
interest paid or ` 30,000 which is lower or less.

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 Notes (ii) If property is S.O.P. and loan taken on or after 1-4-1999 and
construction should be completed within three years from the end
---------------------- of the financial year, then interest deduction allowed. Actual interest
paid or ` 1,50,000 which is lower or less.
----------------------
(iii) 
If loan taken for repairs, then date of loan is immaterial and
---------------------- maximum deduction is allowed. Actual interest paid or ` 30,000
which is lower or less.
----------------------
Format for Computation of Income from House Property
----------------------
(Let Out and Deemed Let Out)
---------------------- For the Assessment Year 2019-2020
---------------------- Particulars Amount Amount
` `
---------------------- Gross Annual Value xxx
---------------------- Less : Municipal Tax paid by landlord xxx
Net Annual Value xxx
---------------------- Less : Deductions u/s 24
Standard Deduction u/s 24 (1) xxx xxx
---------------------- 30% of Net Annual Value)
Interest on Borrowed Capital u/s 24 (2) xxx
----------------------
Income from House Property xxx
---------------------- Format for Computation of Income from House Property (Self-occupied)
---------------------- For the Assessment Year 2019-2020

---------------------- Particulars Amount Amount

` `
---------------------- Net Annual Value Nil
Less : Deductions u/s 24
---------------------- Standard deduction u/s 24 (1) N.A. (− xxx)
---------------------- (30% of Net Annual Value)
Interest on Borrowed Capital u/s 24 (2) xxx
---------------------- Income from House Property (− xxx)
---------------------- Problems on Income from House Property
Problem 3
----------------------
Mr. Sushant has occupied two houses for his personal purpose, the details of
---------------------- which are given as follows :
---------------------- Particulars House I House II
(`) (`)
---------------------- Municipal Valuation 90,000 45,000
---------------------- Fair Rent 1,20,000 60,000
Standard Rent 1,00,000 66,000
---------------------- (Under Rent Control Act) 1,500 1,500
---------------------- Fire Insurance)

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 Municipal taxes 10% of municipal valuation. Mr. Sushant pays ` 5,000 annually Notes
as annuity on House II. He has spent ` 10,000 and ` 15,000 on repairing in
respect of House I and II respectively. ----------------------
You are required to compute income from house property for the A.Y. 2019-20. ----------------------
Solution :
----------------------
Computation of Taxable Income from House Property of Mr. Sushant
----------------------
For the Assessment Year 2019-2020
Particulars Self- Deemed ----------------------
occupied Let out ----------------------
(`) (`)
Gross Annual Value Nil 60,000 ----------------------
Less : Municipal tax paid by landlord (10% of M.V.) Nil 4,500
Net Annual Value − 55,500 ----------------------
Less : Deductions u/s 24 ----------------------
1. Standard Deduction (u/s 24 (1)) − 16,650
(30% of N.A.V.) ----------------------
2. Interest on borrowed capital u/s 24 (2) − − ----------------------
− ----------------------
16,650
Income from House Property Nil 38,850 ----------------------
Income from House Property = House I (S.O.P.) + House II (Deemed to ----------------------
= Nil + ` 38,850
----------------------
Income from House Property ` 38,850
----------------------
Working Note :
----------------------
Mr. Sushant has occupied two houses.
The M.V. of first house is more than second. So, House I is S.O.P. and ----------------------
House II is deemed let out.
----------------------
The G.A.V. of House I (S.O.P.) is nil.
----------------------
So, we calculate the G.A.V. of House II (deemed let out).
Gross Annual Value : ----------------------

(i) First find out Expected Rent : S.R. is applicable, so expected rent is ----------------------
least of following two :
----------------------
M.V. or F.R. which is higher ` 60,000
----------------------
(45,000 and 60,000)
Standard Rent ` 66,000 ----------------------
Expected Rent is least amount i.e. ` 60,000. ----------------------
In case of deemed let out property. ----------------------

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 Notes G.A.V. = Expected Rent.
So, G.A.V. of House II ` 60,000.
----------------------

---------------------- 4.7 DEDUCTIONS FROM INCOME FROM HOUSE

---------------------- PROPERTY UNDER SECTION 24

---------------------- a) Statutory Deduction [section 24 (a): 30% of Net Annual Value (NAV)
b) Deduction for interest on borrowed capital:
----------------------
i) Interest is deductible on the borrowed capital as and when it accrues.
----------------------
ii) Interest attributable to the period prior to completion of construction.
---------------------- In such case interest paid/payable for the period prior to the
previous year in which the property is acquired/constructed (as
---------------------- reduced by any part thereof allowed as deduction under any other
---------------------- provisions of the Income-Tax Act) will be aggregated and allowed
in five successive financial years starting from the year in which the
---------------------- acquisition/construction was completed. Interest will be aggregated
from the date of the borrowing till the end of previous year prior to
---------------------- the previous year in which house is completed and not till the date
---------------------- of completion of construction.
Computation of income of a property which is self-occupied for residential
---------------------- purposes or could not actually be self-occupied owing to employment
---------------------- ‘[section 23(2)(a) & (b)]
As the gross annual value of such House Property is NIL, hence there is question
---------------------- of deduction for Municipal taxes paid.
---------------------- Deduction under section 24
---------------------- (a) Section24 (a) - As NAV is Nil, deduction under this section is Nil.
(b) Section 24 (b) - Deduction for interest paid on borrowed capital (including
----------------------
l/5th of the accumulated interest of pre-construction period) Subject to
---------------------- ceiling as under -

---------------------- Sr. No. Particulars Amount of

Deduction (`)
----------------------
1 Interest on borrowed capital for specific purpose 30,000
---------------------- 2 Interest on borrowed capital on property acquired or
---------------------- constructed after 1.04.1999 and such acquisition or
construction is completed within three years from the end
---------------------- of financial year from the end of financial year in which the
capital was borrowed. 1,50,000
----------------------

----------------------

----------------------

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 Notes
Check your Progress 2
----------------------
Fill in the blanks. ----------------------
1. In case of Co-ownership, wherein two or more persons jointly own
----------------------
a property and if their shares are definite and ascertainable, then the
income from such property cannot be taxed as income of ______ __ ----------------------
_____.
----------------------
2. In case of self occupied property, it is exempt from income tax and
many a times, it shows negative income owing to interest paid/payable ----------------------
on ____ ____.
----------------------
3. Where the standard rent is not applicable, the reasonable expected rent
is determined on the basis of Municipal value or fair rent, whichever is ----------------------
_____ for the immovable property for arriving at Gross annual value.
----------------------

4.8 INADMISSIBLE EXPENSES [SECTION 25] ----------------------

----------------------
In the case of loan borrowed payable outside India, deduction will be
allowed only if TDS is done or tax is paid. ----------------------
A) Unrealised Rent if realised subsequently (up to A.Y. 2001-02) [Section
----------------------
25A]
The amount of unrealised rent recovered is taxable in the previous year in ----------------------
which it is recovered irrespective of ownership (whether it is in existence).
----------------------
The amount realised is taxable to the extent it was allowed as deduction
u/s 24(1)(x). ----------------------
B) Unrealised Rent if realised subsequently (A.Y. 2002-03 onwards) ----------------------
[Section 25AA]
Any amount realised in the previous year to the extent it has not been ----------------------
earlier included in Gross annual Value is taxable irrespective of ownership ----------------------
(i.e. whether it is in existence).
C) Arrears of Rent Received [Section 25B] ----------------------

Where the assessee receives any arrears of rent during the previous ----------------------
year (which was not previously charged as income) is chargeable to tax.
----------------------
However, the arrear of rent is eligible for standard deduction under section
24 (a) (i.e. 30%). ----------------------
D) Co-ownership [Section 26]
----------------------
1) If two or more persons jointly own a property and if their shares
are definite and ascertainable, then the income from such property ----------------------
cannot be taxed as income of association of person. ----------------------
2) The share income of each such, co-owner should be determined and
included in the Individual assessment. Each co-owner is entitled for ----------------------

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 Notes the concessional computation relative to one self occupied property
with reference to his share of property under his occupation,
----------------------
3) When property is owned by two or more persons whose shares
---------------------- are definite and ascertainable, the share of each such person in the
income from property is includible in his respective total income
---------------------- under section 22 even if the co owners are also receiving charge
from the lessee for air conditioning facility, which is assessable as
----------------------
income from other sources.
----------------------
4.9 INCOME FROM OTHER SOURCES SEC. 56
----------------------
Section 56(2) of the Act lists the following specific incomes which are
---------------------- taxable under this head:
---------------------- a. Winning from lotteries, cross word puzzles, card games and other games.
---------------------- b. If the employer deducts certain amounts from the remuneration payable to
the employees as contribution to provident fund or any other welfare fund,
---------------------- such contribution is basically included as income from Other Sources.
However, if the employer deposits the contribution with the respective
----------------------
authorities before the due date for filing the returns, it is allowed as a
---------------------- deduction.
c. Interest on securities – This income includes the interest received on
----------------------
Central or State Government securities. This also includes the interest
---------------------- on debentures or bonds issued by a company or a local authority or a
statutory corporation.
----------------------
d. Hire charges received by the assessee by letting out the assets like
---------------------- machinery, furniture etc. If the hire charges consist of the amount for
letting out the assets like machinery, furniture etc. along with letting of
---------------------- the buildings, such hire charges should be spilt as the hire charges for
---------------------- letting out the building and hire charges for letting out the other assets.
Hire charges for letting out the building are taxed as Income from House
---------------------- Property. It should be noted that repairs & maintenance, insurance
---------------------- expenses etc. incurred for the assets which are let out and the hire charges
on which assets are considered as income from other sources, can be
---------------------- deducted from such income.
---------------------- e. Any sum received under a Keyman Insurance Policy, including any
amount of bonus.
----------------------
Note:
---------------------- a) If from any of the above incomes, tax is deducted at source, the said income
should be grossed up for including in the total income as income from other
----------------------
sources. The grossing up of such income should be done as below:
---------------------- Net Income × 100
---------------------- 100 – Rate of TDS

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 b) If the income from other sources consists of the income by way of Notes
winning from lotteries, cross word puzzles, horse race, gambling,
betting, etc., it will attract the tax at the flat rate of 30% as per the ----------------------
provisions of Section 115BB of the Act.
----------------------
Till the Assessment Year 2003-2004, Dividend received by the
assessee used to be one of the major incomes chargeable under ----------------------
this head. However, with effect from Assessment Year 2004- 2005,
----------------------
dividend received by the shareholders will be treated as the income
exempt from tax under Section 10(34) of the Act. ----------------------
In practical circumstances, following incomes may be included under the
----------------------
head of income from other sources:
a. Bank Interest ----------------------
b. Interest on deposits with the companies ----------------------
c. Interest received on delayed refund of income tax ----------------------
d. Interest on loan
----------------------
e. Insurance commission
----------------------
f. Agricultural income received from a land situated outside India
g. Sitting fees received by a director for attending board meetings ----------------------
h. Remuneration received by a Member of Parliament ----------------------
i. Family Pension – The amount of pension received by the legal heirs of a ----------------------
deceased employee.
----------------------
j. Interest on Income Tax Refund
From the Assessment Year 2010-2011, the following amount will be ----------------------
considered to be income from other sources as per the provisions of
----------------------
Section 2(24) (xiii).
Any sum received by an individual in cash or a cheque or a draft or by way ----------------------
of credit or any amount received otherwise than by way of consideration
----------------------
for goods or services. However, following amounts will not be covered
by the above section: ----------------------
The amount received or credited from a relative out of natural love and ----------------------
affection.
The amount received or credited under a will or inheritance. ----------------------

The amount received by an employee or dependant of the deceased ----------------------

employee from the employer, by way of bonus or gratuity or pension or
insurance solely in recognition of the services rendered by the employee. ----------------------

For this section the term “relative” means: ----------------------

i. Spouse of the individual ----------------------
ii. Brother or sister of the individual ----------------------

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 Notes iii. Brother or sister of the spouse of the individual
iv. Brother or sister of either of the parents of the individual
----------------------
v. Any lineal ascendant or descendant of the individual
----------------------
vi. Any lineal ascendant or descendant of the spouse of the individual
---------------------- vii. Spouse of the person referred to in “ii” to “vi” above.
----------------------
4.10 DEDUCTIONS FROM INCOME FROM OTHER SOURCES
----------------------
As a general principle of the Act, any expenditure incurred for earning the
---------------------- income which is included under the head income from other sources will be
allowed as a deduction from such income provided that the following conditions
----------------------
are satisfied:
---------------------- The expenditure should not be capital expenditure
---------------------- The expenditure should not be personal expenditure
---------------------- The expenditure must have been incurred exclusively for earning the
income chargeable under the head income from other sources.
----------------------
There should be a clear relationship between the expenditure incurred and
---------------------- the income earned.

---------------------- Check your Progress 3

----------------------
State True or False.
----------------------
1. With effect from Assessment Year 2004- 2005, dividend received by
---------------------- the shareholders is being treated as the income exempt from tax under
Section 10(34) of the Act.
----------------------
2. Income from Other Sources is the fifth and the residual head of income.
---------------------- The income, which cannot be taxed under any other heads of income,
is taxable under this head of income.
----------------------
3. Out of Income from house property, statutory deduction at the rate of
---------------------- 25% of Net Annual value is allowed in terms of section 24(a).

----------------------

---------------------- 4.11 INADMISSIBLE EXPENSES SECTION (58)

---------------------- Personal Expenses
---------------------- Wealth Tax
Expenses in the nature of Sec. 40A
----------------------
Interest and salary payable outside India without tax deducted at source
----------------------
No deduction is allowed in case of winning from lotteries, card games,
---------------------- races including horse races, etc, however, in respect of owning and

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 maintaining race horses, expenses incurred shall be allowed even in the Notes
absence of stake money received. Such loss can be carried forward and
set off in accordance with provisions under section 74 A. ----------------------

----------------------
Summary
----------------------
●● There are 3 main conditions for taxability under house property. Ways in
which to determine the Annual Value of a property are discussed. House ----------------------
property can be classified into 5 types:
----------------------
a) House Property which is let out for rent throughout the Previous
Year ----------------------
b) House Property which is let out but remains unoccupied for the ----------------------
whole or part of the year.
c) House Property which is self-occupied by the assessee for residential ----------------------
purposes. ----------------------
d) House Property which is let for part of the year and is self-occupied
----------------------
for part of the year.
e) The assessee holds more than one House Property for self- ----------------------
occupation.
----------------------
●● Income from Other Sources is the fifth and the residual head of income.
The income which cannot be taxed under any other heads of income is ----------------------
taxable under this head of income. If the assessee follows accrual system of
----------------------
accounting, such incomes will be taxed on accrual basis and if the assessee
follows cash system of accounting, such incomes will be taxed on cash basis. ----------------------

----------------------
Keywords
----------------------
●● Income from House Property: The Annual Value of property consisting
of any buildings or lands of which the assessee is the owner, other than ----------------------
such portion of such property as he may occupy for the purposes of any
business or profession shall be chargeable to income tax under the head ----------------------
“Income from House Property”. ----------------------
●● Income from other sources: Income from Other Sources is the fifth and
the residual head of income. The income which cannot be taxed under any ----------------------
other heads of income is taxable under this head of income. ----------------------
●● Interest Income: Any interest income received by person will be charged
under this head of income. ----------------------
●● Dividend: Dividend is distribution of profits among shareholders by ----------------------
companies. It is exempt in the hands of shareholders.
----------------------
●● Grossing up of income: If from any of the incomes, tax is deducted at
source, the said income should be grossed up for including in the total ----------------------
income as income from other sources.
----------------------

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 Notes
Self-Assessment Questions
----------------------
1. Explain the step-by-step process of calculating the Income from House
---------------------- Properties.
2. What do you mean by Annual Value? Explain the significance of the term
----------------------
Annual Value? How is it calculated in case of let out property and self
---------------------- occupied property?

---------------------- Explain the deductions available for calculating the Net Annual Value.
3. State and explain the various deductions while calculating the Income
---------------------- from House Property.
---------------------- 4. State and explain the provisions of Income tax Act, 1961 in respect of:
---------------------- Self occupied property
More than one self occupied house properties
----------------------
Property which is let out but remains vacant for part of the year
----------------------
Property is let out for part of the year and which is self occupied for part
---------------------- of the year

---------------------- 5. State the various types of incomes which are included in the Income
from Other Sources in the practical circumstances. State the deductions
---------------------- available while calculating Income from Other Sources.
---------------------- 6. What are the provisions relating to gift under Act?
7. Define Income from other sources.
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- State True or False.
1. False
----------------------
2. False
----------------------
3. True
----------------------

---------------------- Check your Progress 2

---------------------- Fill in the blanks.

---------------------- 1. In case of Co-ownership, wherein two or more persons jointly own a

property and if their shares are definite and ascertainable, then the income
---------------------- from such property cannot be taxed as income of association of person.

---------------------- 2. In case of self occupied property, it is exempt from income tax and many
a times, it shows negative income owing to interest paid/payable on
---------------------- housing loan.

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 3. Where the standard rent is not applicable, the reasonable expected rent Notes
is determined on the basis of Municipal value or fair rent, whichever is
higher for the immovable property for arriving at Gross annual value. ----------------------

----------------------
Check your Progress 3
----------------------
State True or False.
----------------------
1. True
2. True ----------------------

3. False ----------------------

----------------------
Suggested Reading
----------------------
1. Rawal, Radhakishan. 2006. The Taxation of Permanent Establishments:
An International Perspective. Spiramus Press Ltd. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Profits and Gains from Business or Professions
UNIT

5
Structure:

5.1 Incomes Chargeable to Tax Under the Head “Profits and Gains of Business
or Profession” [Section 28]
5.2 Expenses/Deductions Expressly Allowed as Deduction From Profit and
Gain of Business or Profession
5.3 Disallowed Expenses
5.4 General Rules
5.5 Format of Computation of Taxable Income From Business or Profession
5.6 Personal Incomes (Disallowed Incomes )
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
Annexure

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concepts of Business and Profession under the Income
---------------------- Tax Act.
---------------------- • Discuss different deductions under Business and Profession.
• Enumerate different disallowances and their taxability under the
----------------------
Act.
---------------------- • List the practical problems under salaries.
----------------------
5.1 INCOMES CHARGEABLE TO TAX UNDER THE
----------------------
HEAD “PROFITS AND GAINS OF BUSINESS
----------------------
OR PROFESSION” [SECTION 28]
----------------------
The income from business and profession is known as profit and gains.
---------------------- While calculating the profit and gains, we deduct various expenses from it. The
expenses to be deducted for calculating the gain are defined in the income tax
---------------------- act. Sections 30 to 37 cover expenses, which are expressly allowed as deduction
---------------------- while computing business income, sections 40, 40A and 43B cover expenses
which are not deductible
---------------------- Following incomes are chargeable to tax under the head “Profit and Gains
---------------------- of business or profession”
(1) Profits and gains of any business or profession carried on by assessee at
----------------------
any time during previous year.
---------------------- (2) Compensation or other payment due to or received by any person –
---------------------- (a) managing whole or substantially whole of affairs of an Indian
company or any other company in India at or in connection with
---------------------- the termination of his management or modification of the terms and
conditions relating thereto;
----------------------
(b) on termination or modification of contract of his agency in India;
----------------------
(c) 
For vesting the management of any property or business in
---------------------- Government or any corporation owned or controlled by the
Government.
----------------------
(3) Income derived by trade, professional or other similar association from
---------------------- specific services rendered to its members. This clause is an exception to
general rule that income from mutual activity is not chargeable to tax.
----------------------
(4) Profits on sale of import licence; or Profits on transfer of Duty Entitlement
---------------------- Pass Book (DEPB) or Duty Free Replenishment Certificate (DFRC) under
EXIM Policy;
----------------------

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 (5) Cash assistance against exports from Government of India and Duty Notes
Drawback;
----------------------
(6) Value of any benefit or perquisite, whether convertible into money or not
arising from exercise of business or profession; ----------------------
(7) Interest, salary, bonus, commission or remuneration due to or received
----------------------
by partner from the firm. Such income is taxable in hands of partners to
the extent it is allowed as deduction in hands of firm. Any amount not ----------------------
allowed as deduction to firm under Section 40(b), is not taxable in the
hands of partner. ----------------------
(8) Any sum received or receivable, in cash or in kind, under an agreement ----------------------
for –
----------------------
(a) Non-competition i.e. not carrying out any activity in relation to any
business; or ----------------------
(b) 
Exclusivity i.e. not sharing any know-how, patent, copyright,
----------------------
trademark, licence, franchise or any other business or commercial
right of similar nature or information or technique likely to assist in ----------------------
the manufacture or processing of goods or provision of services.
----------------------
Exceptions : However, sum received for transfer of business, or transfer
of right to manufacture, produce or process any article/thing, which is ----------------------
chargeable under ‘Capital Gains’ is not taxable under this Section.
----------------------
(9) Any sum (including bonus) received under Keyman Insurance Policy..
----------------------
DEFINITION OF BUSINESS [SECTION 2 (13)]
Business means the purchase and sale or manufacture of a commodity ----------------------
with a view to make profit. It includes any trade, commerce or manufacture or
----------------------
any adventure or concern in the nature of trade. It is important that the intention
of purchase or manufacture of goods should be to sell at a profit. ----------------------
DEFINITION OF PROFESSION [SECTION 2 (36)]
----------------------
Profession means the activities for earning livelihood which require
intellectual skill or manual skill, e.g. the work of a lawyer, doctor, auditor, ----------------------
engineer and so on, are in the nature of profession. ----------------------
DEFINITION OF VOCATION
----------------------
Vocation means activities which are performed in order to earn livelihood,
e.g. brokerage, insurance agency, music, dancing, etc. The rules for the ----------------------
assessment of business, profession or vocation are the same.
----------------------
According to Income Tax Act any profit or gain from business or
profession chargeable to tax means profit derived from trading, profit and loss ----------------------
a/c is chargeable to tax. Under this chapter, we will consider the rules for which
----------------------
expenses and incomes are either allowed or disallowed.
DEFINITION OF EXPENDITURE ----------------------
Outflow of cash is expenditure. ----------------------

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 Notes Expenditures are classified under two heads :
(i) Revenue Expenditures : The expenditures incurred repetitively or
----------------------
consistently.
---------------------- (ii) Capital Expenditures : The expenditure incurred once a while.
---------------------- DEFINITION OF INCOME

---------------------- Inflow of cash is Income.

MAIN RULES FOR PREPARATION OF TRADING, PROFIT AND
---------------------- LOSS A/C
---------------------- 1. Trading, profit and loss a/c must be for business.
---------------------- 2. It must be for one year only (previous year).
3. It must record all revenue expenditures and revenue incomes.
----------------------
4. Personal or individual expenses are not recorded.
----------------------

---------------------- 5.2 EXPENSES/DEDUCTIONS EXPRESSLY ALLOWED

AS DEDUCTION FROM PROFIT AND GAIN OF
----------------------
BUSINESS OR PROFESSION
----------------------
1. Expenses in respect of business premises [Section 30] : The following
---------------------- deductions are allowed :
---------------------- (a) Rent, rates, taxes, repairs and insurance for premises used for the
purpose of the business or profession.
----------------------
(b) Any sum paid on account of land revenues, local taxes or municipal
---------------------- taxes.
---------------------- (c) Insurance premium in respect of goods held in stock.
2. Repairs and insurance of machinery, plant and furniture [Section
----------------------
31]: Current repairs and insurance of machinery, plant and furniture used
---------------------- for the purposes of the business or profession.
3. Depreciation [Section 32] : Depreciation is an allowable expenditure
----------------------
subject to the following conditions.
---------------------- (a) The assessee is the owner of the asset.
---------------------- (b) The asset is used for the business purposes.
---------------------- (c) The asset is used in the relevant previous year.
Depreciation is allowed on tangible assets (i.e. building, machinery, plant
----------------------
etc) and also on intangible assets (i.e. know how, patent, Trade mark etc. @
---------------------- 25%) acquired on or after 1.4.1998. Depreciation is to be allowed as per income
tax rules. It is to be allowed on the written down value of the assets. w.e.f.
---------------------- 1.4.2009.
----------------------

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 Depreciation on New Plant and Machinery : In the case of any new Notes
machinery or plant (other than ships and air craft ). Which has been acquired
and installed after 31st March 2005 by an assessee, a further sum equal to 20% ----------------------
of the actual cost of such machinery or plant shall be allowed as deduction.
----------------------
4. Expenditure for research and development [Section 35] : If Research
and development expenses for personal business, then all revenue ----------------------
expenses are allowed.
----------------------

For own research and development any capital expenditure incurred
(purchase of land and building) is totally disallowed. ----------------------
If any donation given for research to any approved institute, university or ----------------------
government department then deduction is cumulative 125% of donation
given. ----------------------
5. Expenditure on government approved programme : Any expenditure ----------------------
incurred for development of society under any government approved
scheme total expenditure are allowed. For such allowance a certificate of ----------------------
chartered Accountant is essential. ----------------------
6. Tele-communication license fees : If any expenses incurred for renewal
of license if totally allowed. ----------------------

In case of Tele-communication license, the expenditure incurred distribute ----------------------

according to their life (period allowed). e.g. Expenditure incurred for
Tele-communication license ` 20,000 and life of the licence is 8 years. So ----------------------
expenditure charges each year is ` 20000/8 years = ` 2,500. ----------------------
7. Purchase of patent or copy rights (Section 35 A) : A manufacturing
----------------------
design or right to manufacture is known as patent.
If patent purchase after 1.4.98. then depreciation 25% is allowed. ----------------------
If patent purchase before 1-4-98, then such expenditure can be distributed ----------------------
over 14 years commencing from the previous year in which the expenditure
is incurred. ----------------------
8. Expenditure of know how/purchase of know-how (secret formula) : If ----------------------
know-how purchase after 1-4-98, then 25% depreciation is applicable.
----------------------
If know-how purchase before 1.4.98, then that expenditures are equally
distribute in 8 years. ----------------------
9. Amortisation of preliminary expenses : Any expenses incurred before ----------------------
commencement of business, department or branch. Such expenses are
allowed to be distributed over 5 years equally. ----------------------
10. Advertisement Expenses : Any advertisement expenditure who’s benefit ----------------------
for short period for e.g. advertisement in newspaper, calendars, pamphlets,
diary etc. are allowed expenses. ----------------------
11. Expenses on Rural Development Programme : Any expenditure incurred ----------------------
by business for rural development programme is allowed as deduction.
----------------------
For such deduction a certificate of chartered Accountant is important.

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 Notes 12. Expenditure for Natural Resources conservation programmes : Any
expenditure incurred by business for natural conservative sources is
---------------------- allowed as deduction.
---------------------- 13. Payment under voluntary retirement scheme (V.R.S.) : Any amount
given to employee for voluntary retirement benefit under any V.R.S.
---------------------- scheme, the lumpsum amount paid charge to each year 1/5 distribute total
exp. in five equal annual installments beginning from the year in which
----------------------
such part payment is made to employee.
---------------------- 14. Expenditure on family planning promotion : Any expenditure incurred
for the promotion of family planning :
----------------------
If it is revenue then 100% allowed
----------------------
If it is capital then 1/5th allowed in a year.
---------------------- When revenue or capital is not given then such expenses are treated as
---------------------- capital expenditure and 15 allowed in each year.
15. Other deductions allowed : The following other deductions are allowed:
----------------------
1. Insurance premium on property.
----------------------
2. Insurance premium on health of the employees.
---------------------- 3. Bonus or commission paid to any employee.
---------------------- 4. Interest on borrowed capital.

---------------------- 5. Contribution to employees recognized provident fund.

6. Contribution to Approved Gratuity Fund and superannuation Fund
----------------------
upto 8.33% of salary.
---------------------- 7. Bad debts.
---------------------- 8. Interest on bank loan (loan must be for business purpose).

---------------------- 9. Any legal charges or fees.

10. Write off bad debts.
----------------------
11. Insurance premium for group insurance.
----------------------
12. Travelling Expenses.
---------------------- 13. Travelling Expenses abroad for study or research.
---------------------- 14. Sales tax, excise duty paid upto the date of filing the Income Tax
Return and expenses incurred in connection with sale tax proceeding
---------------------- including appeals.
---------------------- 15. Any tax, duty, cess or fees paid for carrying on the business or
profession is allowed e.g. sales tax, purchase tax, value added tax,
---------------------- Banking cash transaction tax, professional tax, central excise and
---------------------- custom duties, local tax, service tax, Entry tax etc.
16. Legal expenses for maintenance of right of business.
----------------------

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 17. Advertisement expenditure incurred for launching of new product. Notes
18. Registration expenses of trade mark.
----------------------
19. Maintenance of guest house.
----------------------
20. Interest on money borrowed for payment of dividends, interest for
non-payment of sales tax is deductible. ----------------------
21. Discount on issue of zero coupon bonds are to be allowed on prorata ----------------------
basis.
22. Expenditure for promoting social/economic welfare or uplift of the ----------------------
public (Section 35 AC). ----------------------
23. Securities transaction tax paid in respect of the taxable securities
transactions, if the income arising from such taxable securities is ----------------------
included under the head ‘profits and gains of Business/Profession ----------------------
(w.e.f. 1/4/2009).
----------------------
Check your Progress 1 ----------------------

Fill in the blanks. ----------------------

1. Any expenditure incurred on account of advertisement given by ----------------------
a businessman in a political souvenir, magazine, brochure etc. is
_______, although it is debited to the profit and loss account of the ----------------------
enterprise. ----------------------
2. Depreciation is allowed on tangible assets (i.e. building, machinery,
plant etc.) and also on ________ assets (i.e. know how, patent, Trade ----------------------
mark etc. @ 25%) acquired on or after 1.4.1998. ----------------------
3. Deductions expressly allowed from profit and loss account of business
----------------------
firm include any expenses incurred before commencement of business
and such expenses are allowed to amortise over a period of ___ years ----------------------
equally.
----------------------

5.3 DISALLOWED EXPENSES ----------------------

The following expenses are not allowed to be debited to profit and loss ----------------------
account which is prepared for calculation of taxable income from profits and ----------------------
gains of business or profession:
Advertisement Expenses : Permanent type of advertisement e.g.
1.  ----------------------
permanent sign board, wall painting, electric sign board, lighting effects ----------------------
are totally disallowed.
----------------------

Any advertisement given in political souvenir, magazine, brochure etc. is
totally disallowed. ----------------------

----------------------

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 Notes Any payment in cash in excess of Rs 20,000 : According to RBI rules
2. 
and guidelines issued by Income Tax department, any payment in excess
---------------------- of 20,000 must be required by account payee cheque or demand draft.
---------------------- If such amount paid in cash or by bearer cheque then total amount paid in
cash is disallowed.
----------------------
If amount paid is result of two or more claims then such expenditure is
---------------------- allowed if any claim not exceed ` 20,000.
Any claim exceed ` 20,000 and total amount paid by cash is totally
----------------------
disallowed.
---------------------- 3. Excessive payments to relatives as defined in section 2 (41).
---------------------- 4. 
Interest, royalties, fees for technical services payable outside India
without deduction of tax.
----------------------
5. Income tax.
----------------------
6. Fringe Benefit tax
---------------------- 7. Wealth tax
---------------------- 8. Gift tax

---------------------- 9. Salary payable outside India without tax deduction.

10. Mere provision for gratuity (without any payment)
----------------------
11. Reserve for doubtful debts (it is only a provision hence not allowed).
----------------------
12. Drawings of proprietor/partner.
---------------------- 13. Personal expenses or proprietor/partner.
---------------------- 14. Capital expenditure.

---------------------- 15. Penalties paid by the assessee for breach of law.

16. Litigation expenses of registration of shares.
----------------------
17. Insurance premium paid by partnership firm on life Insurance policies of
---------------------- its partners.
---------------------- 18. Personal expenses.

---------------------- 19. Salary or rent to proprietor.

20. Interest on capital.
----------------------
21. Any Royalty paid outside India without TDS.
----------------------
22. Any charity, donation, reserve, provision.
---------------------- 23. Any fine and penalty
---------------------- 24. Asset purchase.

---------------------- 25. Installation charges of assets.

26. In case of partnership firm, interest paid on capital in excess of 12%.
----------------------
27. Life Insurance Premium.
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 Notes
Check your Progress 2
----------------------
Multiple Choice Multiple Response. ----------------------
1. Incomes chargeable to tax under the head ‘Profit and Gains’ of partner
of partnership firm include: ----------------------
i. Salary ----------------------
ii. Interest earned
----------------------
iii. Commission received
iv. Any amount not allowed as deduction to firm under Section ----------------------
40(b) is taxable in the hands of partner
----------------------
2. Incomes chargeable to tax under the head ‘Profit and Gains’ of an
exporter include: ----------------------
i. Profits on sale of import licence
----------------------
ii. Profits on transfer of Duty Entitlement Pass Book (DEPB)
iii. Duty Free Replenishment Certificate (DFRC) under EXIM ----------------------
policy
----------------------
iv. Cash assistance against exports from Government of India and
Duty Drawback ----------------------
v. Exporter’s sale proceeds
----------------------
3. Incomes chargeable to tax under the head ‘Profit and Gains’ include
compensation due or received by a person ----------------------
i. On termination of a contract in India ----------------------
ii. For vesting the management of any property
iii. For vesting the management of any business in Government ----------------------
iv. Capital gain on Sale of stressed asset ----------------------

----------------------
5.4 GENERAL RULES
----------------------
While computing the income from business or profession it is difficult to
remember which expenses are allowed and which expenses are not allowed under ----------------------
the act therefore, while solving the example apply the following general rules ----------------------
(i) All types of revenue expenses related to business are allowed for
----------------------
deductions.
(ii) The expenses should be in respect of a business or profession carried on ----------------------
by the assessee and the profits and gains of which are to be computed and
----------------------
assessed.
(iii) The expenses should not be a personal expenses of the assessee. e.g. Gifts ----------------------
and Presents.
----------------------
(iv) 
The expenses should have been paid out or expanded wholly and
exclusively for the purpose of such business or profession. ----------------------

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 Notes (v) The expenses should not be in the nature of capital expenditure.
(vi) The expenses should relate to the previous year concerned.
----------------------
(vii) Penalty, fine, interest paid/payable under direct taxes e.g. Income tax are
---------------------- not allowed.

---------------------- (viii) Any type of penalty, fine under sales tax act, Customs Act or Factories
Act are not allowed.
---------------------- (ix) 
Interest and expenses relating to sales tax, customs and excise are
deductible e.g. interest for late payment of sales tax.
----------------------

---------------------- 5.5 FORMAT OF COMPUTATION OF TAXABLE

----------------------
INCOME FROM BUSINESS OR PROFESSION

---------------------- Particulars ` `
Profit as per profit and loss A/c xxxx
---------------------- Add : (i) Expenses or losses not allowed but claimed/ charged
to P & L A/c.
---------------------- e.g. Household expenses, Income tax, LIC, Bad debts reserve, xxx
---------------------- Interest on capital, personal expenses etc.
(ii) Incomes taxable as business income but not credited
---------------------- to Profit and Loss A/c xxx
---------------------- e.g. Interest received on business investments, sale of assets
used for scientific research
----------------------
(iii) 
Expenses in excess of the allowed amount charged to P xxx
---------------------- & L A/c
e.g. Excess salary paid to relatives
---------------------- (iv) Under valuation of closing stock xxx
or over valuation of opening stock xxxx
----------------------
xxxx
---------------------- Deduct :
(i) Expenses or losses allowed but not debited to Profit and xxx
----------------------
Loss A/c e.g. Depreciation
---------------------- (ii) Income not taxable as business income but credited to xxx
the Profit and Loss A/c e.g. Dividends, profit on Sale of
---------------------- investments, Rent form house property.
(iii) Income exempt from tax but credited to Profit and Loss xxx
----------------------
A/c. e.g. Grants and subsidies
---------------------- (iv) Over valuation of closing stock and under valuation of xxx
opening stock. xxxx
----------------------
Taxable Income From Business xxxx
---------------------- Note 1 : If instead of profit there is loss as per the Profit and Loss Account, the
above rules shall be reversed, i.e. items to be added shall be deducted and those
----------------------
to be deducted shall be added.
---------------------- Note 2 : The same rules will apply to Income and Expenditure Account.

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 5.6 PERSONAL INCOMES (DISALLOWED INCOMES ) Notes
1. Interest on investment ----------------------
2. Dividend received ----------------------
3. Personal receipt
----------------------
4. Profit on sale of personal asset
----------------------
5. Dividend received on units
6. Rent received (personal property) ----------------------
Discuss the tax implications in the following situations : ----------------------
1. Personal expenses ` 6,000 were debited to the Profit and Loss A/c. ----------------------
• Personal expenses not allowed to charge to P & L A/c. Here, profit
reduces by ` 6,000. So while calculating Profit as per Income Tax ----------------------
` 6,000 should be added. ----------------------
2. Rent paid for Premises ` 10,200 was by mistaken written on the credit
----------------------
side of P & L A/c.
• Rent paid for premise is allowed deduction but is wrongly recorded ----------------------
at credit side of P & L so it increases profit by ` 10,200. Now correct
----------------------
treatment is deduct ` 20,400 from net profit for ascertaining correct
profit. ----------------------
3. Loss of ` 70,000 on account of embezzelement by an employee.
----------------------
• According to Income Tax Act any embezzlement by employee is
allowed deduction. So ` 70,000 allowed to debit ` 70,000 to P & L A/c. ----------------------

4. Furniture costing ` 15,000 was purchased and debited to P & L A/c. The ----------------------
profit was then calculated to ` 1,00,000. The furniture was put to use for
more than 200 days. ----------------------

• Only revenue expenditure allowed to charge to P & L A/c. No ----------------------

capital expenditure allow to charge to P & L.
----------------------
• Here purchase of furniture charge is disallowed so net profit
increases by ` 15,000. Asset use more than 182 days so total full ----------------------
year charge to P & L A/c i.e. 10% on 15,000 so net effect profit
----------------------
increases by ` 13,500.
So, correct profit now ` 1,00,000 ----------------------
+ Capital Expenses ` 13,500 ----------------------
1,13,500 ----------------------
5. Office expenses ` 3,500 and audit fee ` 4,000 was not debited to P & L
A/c and N.P. was ` 4,50,000. ----------------------

----------------------

----------------------

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 Notes • According to I.T. Act, Office Expenses and Audit Fee both are
allowed expenses but not recorded so allowed to reduce profit by `
---------------------- 7,500.
---------------------- `
N.P. 4,50,000
----------------------
Less : Expenses allowed but not recorded 7,500
----------------------
Profit as per I.T. Act 4,.42,500
---------------------- 6. A company whose N.P. as per P & L is ` 5,00,000/- has debited to P & L
A/c a sum of ` 3,00,000 as one time compensation under VRS approved
----------------------
by competent authority.
---------------------- • For V.R.S. compensation total amount not allowed as deduction but
only 1/5 i.e. 20% of amount paid allowed as deduction. So N.P.
---------------------- as per P & L A/c was ` 5,00,000 and Disallow Expenses 80% of
---------------------- 3,00,000 is 2,40,000. So N.P. as I.T. Act, ` 7,40,000.
7. Mr. John purchase shares of public listed company on 28/02/05 for `
---------------------- 1,00,000 and sold the same through share broker on 1/03/06 for ` 1,70,000.
---------------------- • In case of shares 12 months period is considered to find out short-
term or long-term. Here shares are long-term asset but indexation
---------------------- not applicable. So long-term capital gain is ` 70,000.
---------------------- 8. A company has reported a net loss ` 50,000 in its P & L A/c for year ended
31/03/06. P & L A/c debited R.D.D. ` 1,50,000 and bad debts written off
---------------------- ` 15,000.
• Bad debts written off is allowed expenditure but any provision is
----------------------
disallowed so R.D.D. is disallowed. Now profit is,
---------------------- Loss − 50,000
---------------------- Add :Disallowed Expenses record to P & L 1,50,000

---------------------- Profit of business 1,00,000

---------------------- Check your Progress 3

----------------------
State True or False.
----------------------
1. If the assessee has imported the asset on credit and due to the exchange
---------------------- rate variations, the liability of the assessee increases or decreases, the
amount by which the liability so increases or decreases shall not be
---------------------- added to or reduced from the actual cost of the asset.
---------------------- 2. As per the provisions of IT Act, in case of expenses incurred on
account of compensation paid for Voluntary Retirement scheme, 20%
---------------------- of the amount paid is allowed as deduction for the assessment year.
---------------------- 3. As a general rule, any type of penalty fine under sales tax act/customs
Act is allowed as deduction while computing the income from
---------------------- business or profession.

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 Summary Notes

●● The term ‘Business’ in the Income Tax Act includes trade, commerce or ----------------------
manufacture. ‘Profession’ includes ‘vacation’ too.
----------------------
●● Third head of income is ‘Profit and Gain from Business or Profession’.
There are three main concepts i.e. Business, profession and vocation. The ----------------------
rules for assessment of business, profession and vocation are same.
----------------------
●● Expenditure means outflow of cash and income means inflow of cash.
Expenditures are classified as revenue and capital expenditure. ----------------------
●● There are some expenses which are expressly allowed as deductions from ----------------------
profit and gain of business premises, depreciation, repairs and insurance
of machinery, plant and furniture etc. All personal expenses are disallowed ----------------------
expenses.
----------------------
●● All types of revenue expenditures are allowed expenses and all capital
expenditures are disallowed expenses. Personal income treated as ----------------------
disallowed income.
----------------------
●● Capital expenditure incurred is not allowed as deductible expenditure.
●● This unit also shows, through numerous illustrations, how the calculation ----------------------
of profits from Business & Profession is done with the help of the Profit ----------------------
and Loss Account.
----------------------
Keywords ----------------------
●● Definition Of Business And Profession: Section 2(13) defines the term ----------------------
“Business” to include trade, commerce or manufacture or any adventure
or concern in the nature of trade, commerce or manufacture. Section 2(36) ----------------------
indicates that the word “Profession” will include vocation.
----------------------
●● Allowability of Certain Expenses:
a. Following expenditures which were subject to certain restrictions ----------------------
earlier, are now allowed as expenditures without any limit: ----------------------
Entertainment Expenditure
----------------------
Advertisement Expenditure
----------------------
Traveling Expenditure
Expenditure on the maintenance of Guest House ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Give short note on :
----------------------
(i) Business
----------------------
(ii) Profession
(iii) Vocation ----------------------

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 Notes 2. List out expenses/deductions expressly allowed as deduction from profit
and gain from business or profession.
----------------------
3. List out disallowed expenses.
---------------------- 4. List out disallowed incomes.
---------------------- 5. Discuss the tax treatment of the following items which have been debited
or credited while preparing the Profit and Loss Account of ‘A Limited’ for
---------------------- the year ending 31st March 2018.
---------------------- a. An amount of ` 30,000 is debited to Profit and Loss Account towards
the excise duty payable for the previous year ending on 31st March
---------------------- 2016.
---------------------- The said amount is not paid till the date of filing the income tax return.
---------------------- b. An amount of ` 1,20,000 has been debited towards the travelling
expenses of a Director who travelled abroad for the negotiations in
---------------------- respect of purchase of machinery.
---------------------- c. An amount of ` 5 Lakhs was paid as lump sum for the acquisition
of technical know how.
----------------------
d. A technical consultant was paid the consultancy charges of ` 25,000
---------------------- in cash and the deduction was claimed for the expenditure.

---------------------- e. Provision was made for gratuity as per actuarial valuation amounting
to ` 1,00,000.
---------------------- f. Stock in trade held by the assessee was destroyed by fire and the
---------------------- same was debited to Profit and Loss Account. The cost of this stock
was ` 25,000 while the selling price of the same was ` 30,000.
---------------------- g. An amount of ` 3 Lakhs was paid to the employee as bonus and the
---------------------- same was debited to Profit and Loss Account. Amount payable as
per the provisions of Payment of Bonus Act, 1965 worked out to
---------------------- ` 2.5 Lakhs.
---------------------- h. An amount of ` 3 Lakhs has been debited to Profit and Loss Account
being the cost of one van which was purchased by the assessee for
---------------------- promoting family welfare among the employees.
---------------------- i. A trust has been formed for the welfare of the employees working
for the assessee. The assessee has paid an amount of ` 2 Lakhs as
---------------------- the initial contribution for the formation of the trust and debited the
same to Staff Welfare Expenses Account.
----------------------
j. Advertisement Expenses debited to Profit and Loss Account
---------------------- totalling to ` 1,80,000 include an amount of ` 20,000 being the
advertisement in a brochure published by a political party.
----------------------
k. The assessee has taken an overdraft from the bank for the payment
---------------------- of income tax dues. Interest charged by the bank amounting to
---------------------- ` 24,000 has been debited to Interest Account.

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 Solution (Q5) Notes
Treatment of various items debited/credited to Profit and Loss Account
----------------------
a. As the amount of excise duty is not paid even before the filing of return,
it will be disallowed as per the provisions of Section 43B of the Income ----------------------
tax Act, 1961. The excise duty will be allowed as expenditure on payment
----------------------
basis.
b. The travelling expenses of ` 1,20,000 will be disallowed as revenue ----------------------
expenditure, as the same has been incurred in connection with purchase
----------------------
of machinery. It needs to be capitalised.
c. The amount of ` 5 Lakhs paid as lump sum for the acquisition of ----------------------
technical know how is a capital expenditure and will be disallowed while ----------------------
calculating taxable income of the assessee. However, the assessee can
claim the depreciation on the same. ----------------------
d. The amount of ` 25,000 paid to the consultant in cash will attract the ----------------------
provisions of Rule 6DD of the Act and as such 20% of the expenditure
will be disallowed. ----------------------
e. The provision of ` 1, 00,000 being the provision for the payment of ----------------------
gratuity will be disallowed as the same is not contributed to an approved
gratuity fund. The fact that the provision has been made on the basis of ----------------------
actuarial valuation will not make the same as allowable expenditure.
----------------------
f. The loss due to the fire is business expenditure and as such will be
allowed as expenditure while calculating the taxable income of the ----------------------
assessee. However, while calculating the loss, the cost of the stock will
----------------------
be considered and not the selling price.
g. The amount of ` 3 Lakhs being the bonus paid to the employee will be ----------------------
considered as business expenditure. The amount of bonus payable as per
----------------------
the Payment of Bonus Act, 1965 will be immaterial.
h. The van purchased by the assessee for the promotion of family welfare ----------------------
among the employees is a capital expenditure incurred. As such, as per
----------------------
the provisions of Section 36(I)(ix) of the Income Tax Act, 1961 only 1/5th
of ` 3 Lakhs will be allowed as business expenditure. Remaining 4/5th ----------------------
of the cost of the van can be claimed as expenditure during the next four
assessment years. ----------------------
i. The trust formed for the welfare of the employees is not an approved trust. ----------------------
As such, as per the provisions of Section 40A(9), the initial contribution
paid for the formation of trust will be disallowed. ----------------------

j. Out of the total advertisement expenditure, the amount of ` 20,000 will ----------------------
be disallowed as business expenditure which represents the amount spent
on advertisement in the brochure published by the political party. ----------------------

k. The amount of ` 24,000 will be disallowed as expenditure which represents ----------------------

the interest paid on the overdraft taken by the assessee for the payment of
----------------------
income tax.

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 Notes Answers to Check your Progress
---------------------- Check your Progress 1

---------------------- Fill in the blanks.

1. Any expenditure incurred on account of advertisement given by a
---------------------- businessman in a political souvenir, magazine, brochure etc. is allowed,
---------------------- although it is debited to the profit and loss account of the enterprise.
2. Depreciation is allowed on tangible assets (i.e. building, machinery, plant
----------------------
etc.) and also on intangible assets (i.e. know how, patent, Trade mark etc.
---------------------- @ 25%) acquired on or after 1.4.1998.
3. Deductions expressly allowed from profit and loss account of business
----------------------
firm include any expenses incurred before commencement of business
---------------------- and such expenses are allowed to amortise over a period of five years
equally.
----------------------
Check your Progress 2
---------------------- Multiple Choice Multiple Response.
---------------------- 1. Incomes chargeable to tax under the head ‘Profit and Gains’ of partner of
partnership firm include:
----------------------
ii. Interest earned
----------------------
iii. Commission received
---------------------- iv. Any amount not allowed as deduction to firm under Section 40(b)
is taxable in the hands of partner
----------------------
2. Incomes chargeable to tax under the head ‘Profit and Gains’ of an exporter
---------------------- include:
---------------------- i. Profits on sale of import licence

---------------------- ii. Profits on transfer of Duty Entitlement Pass Book (DEPB)

iii. Duty Free Replenishment Certificate (DFRC) under EXIM policy
----------------------
iv. Cash assistance against exports from Government of India and
---------------------- Duty Drawback
---------------------- 3. Incomes chargeable to tax under the head ‘Profit and Gains’ include
compensation due or received by a person
----------------------
i. On termination of a contract in India
---------------------- ii. For vesting the management of any property
---------------------- iii. For vesting the management of any business in Government
----------------------

----------------------

----------------------

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 Check your Progress 3 Notes
State True or False.
----------------------
1. True
----------------------
2. True
3. False ----------------------

----------------------
Suggested Reading
----------------------
1. Pathak. Business Taxation. Tata McGraw-Hill Education.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes ANNEXURE
Depreciation
----------------------
As per the general understanding of the term ‘Depreciation,’ it indicates the
---------------------- reduction in the value of a Fixed Asset due to –
a. Time factor
----------------------
b. Use factor
---------------------- c. Both Time as well as Use factor
---------------------- d. Obsolescence factor
The calculation of Depreciation under Income Tax Act, 1961 differs from the
---------------------- calculation of Depreciation for Financial Accounting purposes, particularly as
---------------------- per the provisions of Schedule XIV of the Companies Act, 1956. The differences
are as indicated below:
---------------------- a. For the purpose of Schedule XIV of the Companies Act, 1956, the
depreciation can be calculated as per Written Down Value Method (WDV)
----------------------
or as per Straight Line Method (SLM). Income Tax Act, 1961 recognizes
---------------------- only the WDV method.
b. Schedule XIV of the Companies prescribes the rates for calculating the
---------------------- depreciation, both as per WDV as well as SLM. The rates prescribed by
---------------------- Income tax Act, 1961 are obviously under WDV method only and the
rates prescribed by Income tax Act,
---------------------- 1961 are different from the rates prescribed under Schedule XIV of the
Companies Act, 1956. For calculating the depreciation under Income tax
----------------------
Act, 1961, the concept of Block of Assets is prescribed which is discussed
---------------------- in detail in the following paragraphs.
c. For the purpose of calculating the depreciation for the purpose of income
---------------------- tax Act, 1961, it is necessary that –
---------------------- The assessee should be the owner of the fixed asset.
The assessee must have put the fixed asset to use.
----------------------
The fixed asset must have been used by the assessee during the Previous
---------------------- year. If the fixed asset is put to use by the assessee for the purpose of
business or profession for a period of more than 180 days during the
---------------------- Previous Year, he is entitled to the depreciation at the full rate. However,
---------------------- if the fixed asset is put to use by the assessee for the purpose of business
or profession for a period of less than 180 days during the Previous
---------------------- Year, the amount of depreciation will be restricted to 50% of the normal
depreciation.
----------------------
General conditions for Allowability of depreciation
---------------------- For getting the deduction for depreciation, the assessee should satisfy the
following general conditions –
----------------------
a. Depreciation is allowable in respect of certain specified assets. The assets
---------------------- which are specified for the Allowability of depreciation are –
 Buildings, Plant and Machinery and Furniture Intangible assets like
----------------------
patents, trademarks, copyrights, know how, licenses etc.

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 b. The assessee claiming the depreciation should be the owner of the asset. Notes
c. The assessee claiming the depreciation should be the user of the asset.
----------------------
d. In case of any block of assets (the concept of block of assets is discussed
in the following paragraphs), the depreciation is computed on the basis of ----------------------
written down value of the block of assets.
Block of Assets ----------------------
As per the provisions of Section 2(11) of the Act, Block of Assets means a ----------------------
group of assets falling within a class of assets comprising of the tangible assets
and intangible assets in respect of which same percentage of depreciation is ----------------------
prescribed.
----------------------
For the purpose of Block of Assets, following four Class of Assets have been
prescribed ----------------------
a. Buildings
b. Plant and Machinery ----------------------
c. Furniture ----------------------
d. Intangible Assets like patents, copyrights, trademarks, licenses etc.
Following Block of Assets can be formed on the basis of class of assets and the ----------------------
rate of depreciation:
----------------------
a) Buildings
Rate of Depreciation ----------------------
Block 1 Buildings other than those covered under Block 3 and Block 4 ----------------------
stated below mainly used for residential purpose 5%
Block 2 Non-residential building like office, factory, godown other than ----------------------
covered under Block 3 10% Block 3 Buildings used as hotels and dwelling ----------------------
units with plinth area upto 80Sq. Meters 20% Block 4 New buildings with
dwelling units each with plinth area of less than 80 Sq. Meters acquired after ----------------------
1.4.1999 but before 1.4.2002 40% Block 5 Temporary Structures 100%
----------------------
b) Plant and Machinery
Rate of Depreciation ----------------------
 Block 1 General Rate for Plant and Machinery, other than those ----------------------
machineries stated below 25%
Block 2 Motor Cars other than those used in the business of running them ----------------------
acquired and put to use on or after 1.4.1990 20%
----------------------
Block 3 Motor buses, motor lorries and motor taxies used in a business of
running them 40% ----------------------
Block 4 Containers made of glass or plastic used as refills 50% Block 5
----------------------
Computers 60%
Block 6 Pollution Control equipments, Energy saving devices 100% etc. ----------------------
c) Furniture ----------------------
Rate of Depreciation
 Block 1 Furniture used in hotels, restaurants, school, educational ----------------------
institutions, libraries, cinema houses etc. 15% ----------------------
Block 2 Other 10%
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 Notes d)Intangible Assets
Rate of Depreciation
----------------------
Block 1 All intangible assets like Patents, Trade Marks, Copy Rights,
---------------------- Licenses etc. 25%
Effectively, there are totally 14 Block of Assets prescribed under the
---------------------- Income tax Act, 1961.
---------------------- Calculation of Depreciation
For the purpose of calculating the depreciation based upon the concept of
---------------------- Block of Assets, the WDV of the block of assets for the Previous year is
---------------------- taken as below:
a. In case of the assets acquired before the Previous Year, the actual
---------------------- cost of the assets falling within the block of assets less the amount
of depreciation actually allowed to the assessee.
----------------------
b. In case of the assets acquired during the Previous year, the actual
---------------------- cost of the assets to the assessee.
---------------------- Thus the depreciation is calculated as per the following steps –
a. Determine the WDV of the block of assets after considering the
---------------------- depreciation allowed till the immediately preceding Previous year.
---------------------- b. Add the actual cost of the assets acquired during the Previous Year
according to the Block of Assets.
---------------------- c. Deduct the money payable in respect of the assets falling under the
same Block of Assets in respect of the assets sold or discarded or
----------------------
destroyed during the Previous year.
----------------------  Note: The money payable above will mean the price for which the
asset is sold or in case of the assets destroyed or discarded, the
---------------------- insurance or salvage value of the assets.
---------------------- d. The balancing figure is the WDV of the Block of Assets on which
the depreciation will be calculated for the current Previous year.
----------------------
 Note: There may be a possibility that the sale consideration of the
---------------------- block of assets is more than the opening WDV of the block of assets
and the actual cost of the assets acquired during the Previous year.
---------------------- In such cases, the excess of sale consideration over the WDV of the
block of assets and cost of the assets acquired during the Previous
----------------------
year will be considered to be short-term capital gains. Similarly,
---------------------- there may be a possibility that all the assets in the block of assets
is transferred during the Previous Year and the sale consideration
---------------------- of the block of assets are less than the opening WDV of the block
of assets and the actual cost of the assets acquired during the
----------------------
Previous Year. In such cases, the WDV of such block of assets will
---------------------- be reduced to Nil and no depreciation will be allowed in such cases
and the excess of WDV of the block of assets and cost of the assets
---------------------- acquired during the Previous Year over the sale consideration will
be considered to be short-term capital loss.
----------------------

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 For the calculation of depreciation, the calculation of Actual Cost of the Notes
asset is most significant. Actual Cost means the actual cost of the asset
to the assessee, reduced by that portion of the cost which is met directly ----------------------
or indirectly by any other person. Following propositions should be
considered while calculating the actual cost: ----------------------
a.  Any amount of interest paid before the commencement of ----------------------
production, on the funds borrowed for the purchase of the fixed
assets, forms the part of actual cost. ----------------------
b. Any expenditure incurred including cost of materials on the test run ----------------------
of the machinery before the commencement of products is a part of
actual cost. ----------------------
c. If the assessee has imported the asset on credit and due to the ----------------------
exchange rate variations, the liability of the assessee increases
or decreases, the amount by which the liability so increases or ----------------------
decreases shall be added to or reduced from the actual cost of the
asset. ----------------------
E.g. On 10th January 2003, A to Z Ltd. imported a machine from USA for US$ ----------------------
10,000 when the rate was ` 48 per US$. Accordingly, the fixed assets account
has been debited by ` 4,80,000 and the depreciation has been claimed on ` ----------------------
4,80,000 during the AY 2003- 2004. The machine was purchased on credit basis
----------------------
and the actual payment was made on 20th December 2003 when the rate was
` 50 per US$. The difference of ` 20,000 will be assessed to the written down ----------------------
value of the block of assets during the AY 2004-2005.
Illustration ----------------------
ABC Limited owns the following assets as on 1st April 2005. Asset Rate of ----------------------
Depreciation WDV as on 1.4.2005
----------------------
BuildingA10% 40,000
----------------------
Building B 10% 2,40,000
Building C 05% 50,000 ----------------------
Machinery X 25% 5,20,000 ----------------------
Machinery Y 25% 1,40,000 ----------------------
Computers 60% 2,40,000
----------------------
Vehicle P 20% 1,80,000
----------------------
During the Assessment Year 2007-2008, following assets were acquired –
----------------------
Building D eligible for depreciation @5% was purchased on 15th February
2006 for ` 1,50,000, Computer eligible for 60% depreciation were purchased ----------------------
on 9th January 2006 for ` 80,000 and Vehicle eligible for 20% depreciation was
purchased on 16th July 2005 for ` 2, 50,000. Similarly, during the Assessment ----------------------
Year 2005-2006, Machinery Y was sold for ` 2, 00,000.
----------------------
Calculate the amount of depreciation for the AY 2007-2008.
----------------------

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 Notes Solution
Calculation of Depreciation
----------------------
Buildings – Block A (10% Depreciation)
---------------------- Depreciation
---------------------- Opening WDV for building A and B 2, 80,000
Less: Depreciation 28,000
----------------------
Closing WDV 2,52,000
---------------------- Buildings – Block B (5% Depreciation)
Depreciation
----------------------
Opening WDV for building C 50,000
---------------------- Add: Acquired during the Previous year 1,50,000
---------------------- Less: Depreciation @5% on opening WDV and
2.5% on additions 6,250
---------------------- Closing WDV 1,93,750
---------------------- Machinery – Block A (25% Depreciation)
Depreciation
----------------------
Opening WDV for machine X and Y 6,60,000
---------------------- Less: Sale consideration of Machine 2,00,000
Less: Depreciation 1,15,000
----------------------
Closing WDV 3, 45,000
---------------------- Computers (60% Depreciation)
---------------------- Depreciation
Opening WDV 2, 40, 000
---------------------- Add: Acquired during the Previous year 80,000
---------------------- Less: Depreciation @60% on opening WDV and 30%
On additions 1,68,000
----------------------
Closing WDV 1, 52,000
---------------------- Vehicles (20% Depreciation)
Depreciation
----------------------
Opening WDV 1,80,000
---------------------- Add: Acquired during the Previous year 2,50,000
---------------------- Less: Depreciation @20% on opening WDV and
on additions 86,000
---------------------- Closing WDV 3, 44,000
---------------------- Hence, total depreciation ` 4, 03,250
Thus, depreciation can be defined as wear and tear of the assets and calculated
----------------------
as per illustrations given above.
----------------------

----------------------

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 Capital Gains
UNIT

6
Structure:

6.1 Introduction
6.2 Capital Asset
6.2.1 Transfer of Capital Asset
6.3 Calculation of Capital Gains
6.3.1 Cost of Acquisition
6.3.2 Cost of Improvement
6.4 Deductions from Capital Gains
6.4.1 Transfer of Residential House
6.4.2 Transfer of Agricultural Land
6.4.3 Investment in Bonds
6.4.4 Transfer of Securities/Units
6.4.5 Transfer of asset other than House Property
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Differentiate between Short Term and Long term Gain under
---------------------- Income Tax Act.
---------------------- • Discuss different methods of computation of Capital gains.
• Enumerate exemptions and disallowances under Act.
----------------------
• Work out practical problems under Capital Gains.
----------------------

---------------------- 6.1 INTRODUCTION

---------------------- Capital Gains are chargeable to Income Tax if there is any profit or gain
---------------------- arising from the transfer of a capital asset. As such, the income from Capital
Gains arises if the following conditions are satisfied:
---------------------- a. There should be a Capital Asset
---------------------- b. The capital asset should be transferred during the previous year under
consideration.
----------------------
When the consideration for such transfer is received by the transferor,
---------------------- is immaterial, In other words, even if the transfer consideration is not
received during the year of transfer, still the capital gains arising there
----------------------
from will be subjected to tax.
---------------------- c. There should a profit or gain earned by the transferor on such transfer of
asset.
----------------------
Charging section [Section 45]
----------------------
Any profits or gains arising from the transfer of a capital asset effected
---------------------- in the previous year shall be chargeable to tax under the head Capital Gain and
shall be deemed to be the income of the previous year in which the transfer took
---------------------- place.
---------------------- If property transferred is not a capital asset on the date of transfer, no
capital gain will arise. However, it is immaterial whether the property is a
---------------------- capital asset or not on the date of acquisition.
----------------------
6.2 CAPITAL ASSET
----------------------
Capital Asset includes property of any kind, whether fixed or circulating,
---------------------- movable or immovable, tangible or intangible. However, the following assets
---------------------- are excluded from the ambit of the term Capital Asset:
a. Any stock in trade, consumable stores or raw material held for the purpose
---------------------- of business.
----------------------

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 b. Movable property held by the assessee for the personal use of himself or Notes
his dependent family members. However, jewellery held by the assessee
is not excluded for this purpose. ----------------------
c. Agricultural land situated in India provided it is not situated within the ----------------------
jurisdiction of a municipality or a cantonment board having a population
of more than 10,000 according to the latest preceding census before the ----------------------
first day of the previous year or the land situated in the area beyond eight
----------------------
kilometers from the local limits of such municipality or cantonment
board. ----------------------
d. 6.5% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defense
----------------------
Gold Bonds, 1980 issued by Central Government.
e. Special Bearer Bonds, 1991. ----------------------
f. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999. ----------------------
Short term/Long term capital assets: ----------------------
Short term capital assets Long term capital asset
----------------------
Short term capital assets means capital An asset other than a short term
assets held by an assessee for not more than capital asset is regarded as a long ----------------------
36 months, immediately prior to its date of term capital asset.
transfer. ----------------------

However, in the following cases an asset, In other words, assets held ----------------------
held for not more than 12 months, is treated by assessee for more than 36
----------------------
as short term capital asset-(1) Equity or months (or 12 months in a few
preference shares in a company (whether cases, are termed as long term ----------------------
shares are quoted or not) (2) securities (like capital assets.
debentures, Government securities) listed in a ----------------------
recognised stock exchange in India (3) Units
----------------------
of UTI (whether quoted or not) (4) Units of a
mutual fund specified under section 10(23D) ----------------------
(whether quoted or not) [applicable from the
assessment year 2006-2007] ----------------------
Period of Holding – The period of holding in respect of capital assets is ----------------------
determined as follows
----------------------
1. All capital assets (except The period of holding will be considered from the date
few cases mentioned of acquisition of capital asset to the date on which ----------------------
below) such a capital asset is transferred by the assessee.
----------------------
2. S h a r e s h e l d i n a In the case of a share held in a company in liquidation,
company in liquidation the period subsequent to the date on which the ----------------------
company goes into liquidation should be excluded.
----------------------

----------------------

----------------------

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 Notes 3. Where section 49(1) is In the case of a capital asset , which becomes the
applicable property of the assessee in the circumstances mentioned
---------------------- in section 49(1) [i.e. when an asset is acquired by gift
---------------------- or will, etc.], the period for which the share in the
amalgamating company was held by the assessee
---------------------- should be included.
4. Amalgamation In the case of a share in an Indian company which
----------------------
becomes the property of the assessee in a scheme
---------------------- of amalgamation. The period for which the share
in the amalgamating company was held by the
---------------------- assessee should be included.
---------------------- 5. Demerger In the case of a share in an Indian company,
which becomes the property of the assessee in
---------------------- consideration of a demerger, the period of holding
of shares in the demereged company shall be
----------------------
included in the total period of holding of shares in
---------------------- the resulting company by the assessee.
6. 
B o n u s s h a r e s o r The period of holding will be considered from the
----------------------
Right to subscribe to date of allotment of such financial assets.
---------------------- shares or any other
financial assets (here
---------------------- in after called as
‘right entitlement’)
----------------------
subscribed to by the
---------------------- assessee on the basis
of such right.
----------------------
7. Rights shares acquired The period of holding will be considered from the
---------------------- b y t h e p e r s o n i n date of allotment of such financial assets.
whose favour right
---------------------- entitlement has been
renounced by the
----------------------
initial holder of such
---------------------- right entitlement.
8. Right entitlement The period of holding will be considered from the
----------------------
date of offer to subscribe to shares to the date when
---------------------- such right entitlement is renounced by the person.

----------------------
9. Shares and securities
----------------------

----------------------

----------------------

----------------------

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 Period of Holding in Case of Shares or Securities Notes
In the case of shares/securities it will be determined as under Circular No. 704,
----------------------
dated April 28, 1995
----------------------
1. Purchase of shares through Period of holding will be considered from
primary market. the date of allotment by the company. ----------------------
2. Purchase (through stock Period of holding will be considered from
----------------------
exchanges) of shares/ the date of purchase by broker on behalf
securities. of investor. ----------------------
3. Transfer (through stock For computing period of holding the date
----------------------
exchanges) of shares/ of broker’s note will be considered as date
securities. of transfer provided such transactions are ----------------------
followed up by delivery of shares and the
transfer deeds. ----------------------
4. Date of purchase/transfer of For computing period of holding the date ----------------------
shares/securities (transaction of contract of sale as declared by parties
taken place directly between will be considered, provided it is followed ----------------------
parties and not through stock up by actual delivery of shares and the
----------------------
exchanges) transfer deeds.
----------------------
5. Date of purchase/sale of shares/ The first-in-first-out (FIFO) method shall
securities purchased in several be adopted to reckon the period of the ----------------------
lots at different points of time holding of the security in cases where
but delivery taken in one lot and the dates of purchase and sale cannot be ----------------------
subsequently sold in parts. correlated through specific number of
----------------------
the scrips.
6. Sweat equity shares allotted by The period of holding shall be reckoned ----------------------
employer. from the date of allotment or transfer ----------------------
of such equity shares by the employer
to the employee (applicable from the ----------------------
assessment year 2008-09)
----------------------
Transactions not regarded as transfer:
----------------------
For the purpose of Section 45, the following transactions are not regarded as
transfers. ----------------------
1. Company in Distribution of assets in kind by a company to its ----------------------
liquidation shareholders on its liquidation [Sec 46(1)]
----------------------
2. Total or partial Any distribution of capital assets in kind by a Hindu
partition of HUF undivided family to its members at the time of total or ----------------------
partial partition [Sec 47 (i)]
----------------------

----------------------

----------------------

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 Notes 3. Gift, will, etc. Any transfer of capital asset under a gift or a will or an
irrevocable trust [Sec.47 (iii) ] [However, transfer under a
----------------------
gift or an irrevocable trust of a capital asset being shares,
---------------------- debentures or warrants allotted by a company, directly
or indirectly, to its employees under the Employees’
---------------------- stock Option plan or scheme framed in accordance with
guidelines issued by the central Government shall be
----------------------
deemed as transfer from the assessment year 2001-02.
---------------------- 4. Tranfer from a (a) any transfer of a capital asset by a company to its
company to its wholly owned Indian subsidiary company [sec 47 (iv)]
----------------------
100% subsidiary (b) any transfer of a capital asset by a wholly owned
---------------------- or vice versa subsidiary company to its Indian holding company [Sec
47 (v) ]
----------------------
5. Amalgamation (a) Any transfer, in a scheme of amalgamation, of a capital
---------------------- asset by the amalgamating company to the amalgamated
company, if the latter company is an Indian company
---------------------- [sec 47(vi) ](b)Any transfer of shares in Indian company
held by a foreign company to another foreign company
----------------------
in pursuance of a scheme of amalgamation between the
---------------------- two foreign companies, if at least twenty-five per cent of
the shareholders of the amalgamating.
----------------------
Foreign company continues to remain shareholders of the
---------------------- amalgamated foreign company and such transfer does not
attract tax on capital gains in the country, in which the
---------------------- amalgamating company is incorporated[sec.47(via)](c)
Any transfer in a scheme of amalgamation of a banking
----------------------
company with a banking institution [Section 47(viaa),
---------------------- applicable w.e.f. assessment year 2006-07](d) Any
transfer by a shareholder, in a scheme of amalgamation,
---------------------- of share(s) held by him in amalgamating company, if the
transfer is made in the consideration of the allotment to
----------------------
him of any share(s) in the amalgamated company and the
---------------------- amalgamated company is an Indian company [Sec.47(vii)]

---------------------- #Circumstances when exemption can be withdrawn: Where at any time

before the expiry of a period of eight years from the date of the transfer of
---------------------- capital assets referred to in clause (iv) or (v) of section 47,-(i) such capital
assets are converted by the transferee company into, or is treated by it as,
---------------------- stock-in-trade of its business; or (ii) the parent company or its nominees or,
---------------------- as the case may be, the holding company ceases to hold the whole of the share
capital of the subsidiary company, the amount of profits or gains arising from
---------------------- the transfer of such capital assets not charged under section 45 by virtue of the
provisions contained in clause (iv) or (v) of section 47 shall be deemed to be
---------------------- income chargeable under the head “Capital gains” of the previous year in which
such transfer took place. The cost of acquisition of such assets to the transferee
----------------------
company shall be the cost for which such asset was acquired by it.

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 From the assessment year 2008-09 Notes
i. Any transfer in a business reorganisation of co-operative banks, of capital
----------------------
assets by the predecessor to the successor [Sec.47(vica)];
ii. Any transfer by a shareholder, in a business reorganisation of co-operative ----------------------
banks, of a capital asset being a share or shares held by him in predecessor
----------------------
if the transfer is made in consideration of the allotment to him of any
share or shares in successor [Sec.47(vicb); ----------------------
6. Demerger (a) Any transfer in a Demerger of capital assets by the ----------------------
demerged company to resulting company, provided the
resulting company is an Indian company[Sec.47(vib)] ----------------------
(b) Any transfer of shares held in an Indian company
----------------------
by a demerged foreign company to the resulting foreign
company if the following conditions are satisfied- (i) ----------------------
the shareholders holding not less than three-fourths in
the value of shares of the demerged foreign company ----------------------
continue to remain shareholders of the resulting foreign
----------------------
company; (ii) and such transfer does not attract tax on
capital gains in the country, in which the demerged ----------------------
foreign company is incorporated[sec.47(vic)(c) Any
transfer or issue of shares by the resulting company, in a ----------------------
scheme of demerger to the shareholders of the demerged
----------------------
company if the transfer or issue is made in consideration
of demerger of the undertaking [Sec. 47(viia)] ----------------------
7. ForeignCurrency The transfer of capital assets by a non-resident of such
----------------------
convertible foreign currency convertible bonds or Global Depository
bonds or Global Receipts as referred to in section 115AC(1) to another ----------------------
Depository non-resident if the transfer is made outside India
Receipts [sec.47(viia)] ----------------------
8. Agricultural land Any transfer of agriculture land in India effected before ----------------------
March 1, 1970 [Sec. 47(viii)]
----------------------
9. Work of art, Any transfer of a capital asset, being any work of
book drawing, art, archaeological, scientific or art collection, book, ----------------------
painting etc. manuscript, drawing, painting, photograph or print, to
the Government or a University or the National Museum, ----------------------
National Art Gallery, National Archives or any other ----------------------
such public museum or institution as may be notified
by the Central Government (i.e. Indira Gandhi National ----------------------
Centre of Art for the assessment years 1987-88 to 2004-
05) [Sec.47(ix)] ----------------------
10. Conversion of Any transfer by way of conversion of bonds or ----------------------
debenture into debentures, debenture-stock or deposit certificate in any
shares of the form, of a company into shares or debentures of that ----------------------
company company [Sec.47(x)]# ----------------------

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 Notes 11. Membership of a Any transfer with effect from the assessment year 1998-
recognised stock 99 by a person other than company by way of exchange
----------------------
exchange of a capital asset being membership of a recognised
---------------------- stock exchange is effected on or before December 31,
1998 [Sec.47(xi)]#
----------------------
12. Land transferred Transfer of land with effect from the assessment year
---------------------- by sick industrial 1998- 99 under a scheme prepared and sanction under
company section 18 Of the Sick Industrial Companies (Special
---------------------- Provisions) Act, 1985 by a sick industrial company
which is managed by its workers’ co-operative if such
----------------------
transfer is made during the period commencing from the
---------------------- previous year in which it has become a sick industrial
company under section 17(1) of that Act and ending with
---------------------- the previous year during which the entire net worth (i.e.,
paid- up capital and free reserve) of such a company
----------------------
becomes equal to or exceeds the accumulated losses,
---------------------- “Free reserves” for this purpose means all reserves
credited out of the profits and share premium account but
---------------------- does not include reserves credited out of re-evaluation
of assets, Write back of depreciation provisions and
----------------------
amalgamation [Sec. 4(xii)]
---------------------- #Circumstances when exemption can be withdrawn: At any time, before
---------------------- the expiry of a period of 3 years from the date of the transfer of capital assets
referred to in clause (xi) of section 47, any of the shares allotted to the transferor
---------------------- in exchange of membership in a recognised stock exchange are transferred,
the amount of profits and gains not charged under section 45 by virtue of the
---------------------- provisions contained in clause (xi) of section 47 shall be deemed to be the
---------------------- income chargeable under the head “Capital gains” of the previous year in which
such shares are transferred.
----------------------
13.  Transfer of a capital asset to the company (with effect
---------------------- from the assessment year 1999-2000) where a proprietary
concern is succeeded by a company in the business carried
---------------------- on by it subject to following conditions- (i) all assets
---------------------- and liabilities of the sole proprietary concern relating
to the business immediately before the succession shall
---------------------- become the assets and liabilities of the company; (ii)the
shareholding of the sole proprietor in the company is
---------------------- not less than 50 per cent of the total voting power in the
---------------------- company and shareholding shall continue to so remain for
a period of five (iii)the sole proprietor does not receive
---------------------- any consideration or benefit directly or indirectly, in any
form or manner other than by way of allotment of shares
---------------------- in the company. [Sec.47(xiv)]years from the date of the
---------------------- succession;#

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 14. Membership Transfer of Membership right held by a member of Notes
right in a stock recognised stock exchange in India for acquisition of
exchange shares and trading or clearing right acquired by such ----------------------
member in that recognised stock exchange in accordance ----------------------
with the scheme for demutualisation or corporatisation
which is approved by SEBI [Sec.47(xiiia) ----------------------
15. Lending of Any transfer involved in a scheme for lending of any
----------------------
securities securities under an agreement subject to the guidelines
issued by the Securities and Exchange Board of India, or ----------------------
(with effect from assessment year 2003-04) the Reserve
Bank of India in this regard, which the assessee has ----------------------
entered into with the borrower of such securities
----------------------
[Sec.47(xv)].
*Circumstances when exemption can be withdrawn: Where any of the ----------------------
conditions laid down in the proviso to clause (xiii) or (xiv) of section 47 are ----------------------
not complied with, the amount of profits or gains arising from the transfer of
such capital assets or intangible assets not charged under section 45 by virtue ----------------------
of condition laid down in clause (xiii) or clause (xiv) of section 47, shall be
deemed to be the profits and gains chargeable to tax of the successor company ----------------------
for the previous year in which the requirements of clause (xiii) or (xiv), as the ----------------------
case may be, are not complied with.
Previous year in which capital gains are chargeable to tax ----------------------

Generally, capital gain is taxable in the year in which capital asset is transferred. ----------------------
Following rules are applicable in case of movable/immovable assets to ascertain
when a capital asset is “transferred”: ----------------------

1. Immovable property when Title to immovable assets will not pass till the ----------------------
documents are registered conveyance deed is executed or registered- ----------------------
Alapati Venkataramiah v.CIT[1965] 57 ITR
185 (SC). ----------------------
2. Immovable property Even if the documents are not registered but ----------------------
when documents are not the conditions of section 53A’ of the Transfer
registered of Property Act are satisfied, ownership in an ----------------------
immovable property is “Transferred”.
----------------------
*However, in the following cases capital gain is taxable in the year other than
the year of transfer of the asset: (i) conversion of capital asset into stock-in- ----------------------
trade (see Para 48.1); (ii) compulsory acquisition of an asset (see para 48.2); ----------------------
and (iii) damage of any capital asset by fire or other calamities (see para 48.8).
1. When these conditions are satisfied, the transaction will constitute ----------------------
“transfer” for the purpose of capital gains- (a) there should be a contract ----------------------
in writing; (b) the transferee has paid consideration or is willing to
perform his part of the contract; and (c) the transferee should have taken ----------------------
possession of the property.
----------------------

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 Notes 3. Movable property Title to a movable property passes at the
time when property is delivered pursuant
---------------------- to a contract to sell. Entries in the books
---------------------- of account are not relevant for determining
date of transfer – Alapati Venkataramiah v.
---------------------- CIT (supra).
---------------------- 6.2.1 Transfer of Capital Asset
Transfer of a Capital Asset includes sale, exchange or relinquishment of the
----------------------
asset or the extinguishments of any rights therein or the compulsory acquisition
---------------------- thereof under any law.
The following points should be remembered from a practical point of view:
----------------------
a. If the transfer is of immovable property and the documents relating to
---------------------- the property are registered, the title in the property will not be transferred
---------------------- unless the conveyance deed is executed or registered.
b. If the transfer is of immovable property but the documents are not
---------------------- registered, title in the property will be assumed to be transferred if the
---------------------- following conditions are satisfied:
●● There is a contract in writing
----------------------
●● The transferee has paid the consideration or is willing to pay the
---------------------- consideration
---------------------- ●● The transferee has taken the possession of the property
c. If the transfer is of movable property, title in the property is assumed to be
---------------------- transferred at the time when the property is delivered as per the contract
---------------------- to sell.
d. If the capital gains arise on account of compulsory acquisition of the capital
---------------------- asset under any law and any compensation is paid for such acquisition,
---------------------- initial compensation shall be considered to be the sale consideration and
accordingly the capital gains liability will be computed. The capital gains
---------------------- liability will be computed in the previous year in which the compensation
or the part thereof is first received. The previous year in which the capital
---------------------- asset is actually acquired and the property is transferred is immaterial. In
---------------------- some cases, the compensation received by the assessee may be challenged
by him and the compensation may subsequently be enhanced by a court
---------------------- or a tribunal or any other authority. In such cases, the tax implications will
be as below:
----------------------
The enhanced compensation shall be taxable in the previous year in which
---------------------- it is received by the assessee.
---------------------- The cost of acquisition and the cost of improvement shall be taken as Nil.
Litigation expenses incurred for getting the compensation enhanced are
----------------------
considered as expenditure incurred for transfer.
----------------------

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 Notes
Check your Progress 1
----------------------
State True or False. ----------------------
1. In case of transfer of movable property, the entries in the books of
----------------------
account are relevant for determining the date of transfer of such
movable asset, for tax purpose. ----------------------
2. Capital asset includes any stock in trade, consumable stores or raw
----------------------
material held for the purpose of business.
3. Agricultural land is not capital asset, provided it is not situated in the ----------------------
jurisdiction of a municipality or a cantonment board. ----------------------
4. The difference between Short Term Capital asset and Long Term
Capital asset is that the assessee has held the capital asset for not ----------------------
more than 36 months and an asset other than short term capital asset is ----------------------
regarded long term asset. In case of shares, the period of holding will
be 12 months instead of 36 months. ----------------------

----------------------
6.3 CALCULATION OF CAPITAL GAINS
----------------------
Capital Gains arise on account of excess of transfer consideration over the ----------------------
following amounts –
a. Cost of acquisition ----------------------

b. Cost of improvement ----------------------

c. Expenditure incurred wholly and exclusively in connection with the ----------------------
transfer
----------------------
Note – While calculating the Long Term Capital Gains, in place of Cost
of Acquisition, the Indexed Cost of Acquisition and in place of Cost of ----------------------
Improvement, Indexed Cost of Improvement will be considered. The concept
of Indexed Cost of Acquisition or Indexed Cost of Improvement is discussed in ----------------------
the following paragraphs.
----------------------
6.3.1 Cost of Acquisition
----------------------
Cost of acquisition of a Capital Asset is the value for which it was acquired by
the assessee. Any capital expenditure incurred in connection with the acquisition ----------------------
of capital asset will be considered to be a part of cost of acquisition. However,
if the property becomes the property of the assessee before 1st April 2001, ----------------------
the Fair Market Value of the property of the capital asset on that date will be ----------------------
considered to be the cost of acquisition.
If the assessee himself has acquired the capital asset before 1st April 2001, the ----------------------
assessee can consider Fair Market Value as on 1st April 2001 or the actual cost ----------------------
of acquisition to be the cost of acquisition for the calculation of capital gains.
----------------------

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 Notes Following propositions should be remembered:
Interest paid on the loan for acquiring a capital asset will be considered to
----------------------
be a part of cost of acquisition.
---------------------- Cost of acquisition of any financial assets (shares or any other security)
allotted to the assessee on or after 1st April 2001 without any payment and
----------------------
on the basis of holding any other financial asset shall be considered to be Nil.
---------------------- The simple implication of this provision in practical circumstances is that the
cost of acquisition of bonus shares allotted to the assessee shall be taken as nil.
---------------------- However, if the bonus shares are acquired before 1st April 2001, the cost of
acquisition of the same will be the Fair Market Value of the same as on 1st April
----------------------
1981.
---------------------- Cost of acquisition in respect of rights shares is calculated in the following
manner.
----------------------
Rights shares indicate the additional shares to which the assessee is
---------------------- entitled, by virtue of holding certain shares in a company. The rights shares
---------------------- offered to the existing shareholder can be purchased by him, himself or he can
renounce the right in favour of somebody else against some consideration.
---------------------- Illustration:
---------------------- Mr. Ashok is holding 1000 Equity Shares of A Ltd. originally purchased
by him at the face value of ` 10. He is offered the rights to buy additional 500
---------------------- shares of A Ltd. as rights shares at the price of ` 100 per shares. Mr. Ashok
---------------------- buys 250 shares by paying ` 25,000 to the company and renounces right for the
balance 250 shares in favour of Mr. X at the consideration of ` 40 per share.
---------------------- The cost of acquisition will be calculated as below:
---------------------- The cost of acquisition of the original shares will be ` 10,000 i.e. For
1,000 shares @ ` 10 per share.
----------------------
The cost of acquisition for 250 rights shares purchased by him will be `
---------------------- 25,000 i.e. for 250 shares @ `100 per share.

---------------------- The cost of acquisition for 250 right shares for which the rights are
renounced in favour of Mr. X will be Nil.
---------------------- In practical circumstances, many employers issue shares or debentures or
---------------------- warrants to the employees under the Employees Stock Option Plan. As per the
proviso to Section 17(2)(iii) of the Act, the value of any such benefit provided
---------------------- by the employer to the employee shall not be treated as perquisite if such plan
is in accordance with the guidelines issued by the Central Government in this
---------------------- regard.
---------------------- When the employee sells the shares allotted to him under this scheme
assuming that the shares are not listed on any recognised stock exchange, he
---------------------- will be liable to pay the tax under the head Income from Capital Gains. While
---------------------- calculating the tax, the cost of acquisition of these shares will be taken as Nil
if these shares are allotted free of cost. If the employee has paid some price for
---------------------- these shares, the same will be allowed to be deducted as cost of acquisition.

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 If the shares, debentures or warrants are issued under the ESOP, which Notes
is not in accordance with the guidelines issued for this purpose, the fair market
value of these assets as reduced by the amount paid by the employee will be ----------------------
taxed as perquisites. If these assets are sold or transferred subsequently, the
amount considered while calculating the value of perquisites will be considered ----------------------
as cost of acquisition. ----------------------
If the debentures are converted into shares, it is not considered to be
transfer of the capital asset. However, if these shares are sold subsequently, ----------------------
following provisions will apply:
----------------------
Cost of acquisition of debentures shall be considered to be the cost of
acquisition of shares. ----------------------
For deciding whether the shares are long term capital asset or short-term ----------------------
capital asset, the period of holding shall be decided on the basis of date of
allotment of the shares. ----------------------
The indexation will start from the date of conversion of debentures into
----------------------
the shares.
Illustration ----------------------
Mr. A purchased capital asset for Rs. 45 lacs in September 1990 sold ----------------------
the same for Rs. 3 crores. Let us analyze the impact of the change under the
following 3 scenarios: ----------------------

1. Sale is made during FY 2016-17 when the base year had not been shifted ----------------------
2. Sale made in FY 2017-18 after the base has been shifted to 2001 and ----------------------
where the FMV as on 1 April 2001 is greater than the Cost of Acquisition
----------------------
3. Sale made in FY 2017-18 after the base has been shifted to 2001 and
where the FMV as on 1 April 2001 is lesser than the Cost of Acquisition ----------------------
Particulars Scenario A Scenario B Scenario C
----------------------
FMV as on Not Applicable 1,10,00,000 80,00,000
1.4.2001 ----------------------
Sale 3,00,00,000 3,00,00,000 3,00,00,000
consideration ----------------------
(Less) Indexed 2,78,15,934 2,99,20,000 2,17,60,000
Cost of ----------------------
Acquisition
(Purchase price * CII of (FMV * CII of 2017-18 (FMV * CII of 2017- ----------------------
2016-17 / CII of 1990- / CII of 2001-02) 18 / CII of 2001-02)
91) ----------------------
(45,00,000*1125/182) (1,10,00,000*272/100) (80,00,000*272/100)
----------------------
Long Term 21,84,066 80,000 82,40,000
Capital Gains ----------------------
Note:
----------------------
For computing the Indexed Cost of Acquisition for the FY 2016-17, the old CII
has been adopted while the Indexed Cost of Acquisition for FY 2017-18 has ----------------------
been computed adopting the new CII notified vide Notification no. So 1790(e)
----------------------
[no. 44/2017 (f. No. 370142/11/2017-tpl)], dated 5-6-2017.

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 Notes Notional Cost of Acquisition – Section 49(1)
If the Capital Asset becomes the property of the assessee in the manner specified
----------------------
below, the cost of acquisition of the asset shall be deemed to be the cost for
---------------------- which the previous owner has acquired the capital asset. Some of the major
situations specified for this purpose are as below:
----------------------
●● When the property is acquired under gift or will
---------------------- ●● When the property is acquired by succession or inheritance
---------------------- ●● When the property is acquired by distribution of assets on the liquidation
of a company
---------------------- ●● When the property is transferred under a transfer to a revocable or
---------------------- irrevocable trust
If the capital asset becomes the property of the assessee in the modes
---------------------- stated above, the assessee has the option of considering the cost of acquisition
to the previous owner or the Fair Market Value as on 1st April 1981 to be the
----------------------
cost of acquisition for calculation of capital gains.
---------------------- Cost of Inflation Index or Indexed Cost of Acquisition
---------------------- The purpose of Cost of Inflation Index is to give the benefit of inflation
existing in the economy to the assessee while calculating the amount of capital
---------------------- gains. Cost of Inflation Index is the Index Number for which the base year
---------------------- is 2001-02. This is the Index Number as notified by Central Government in
the Official Gazette having regard to 75% of average rise in the Consumer
---------------------- Price Index for the urban non-manual employees for the immediately preceding
previous year in relation to such a previous year.
----------------------
Cost of Inflation Index (CII) notified by the Government for the various
---------------------- financial years is as below:
---------------------- Table 6.1: Cost of Inflation Index

---------------------- Sr Year CII Sr Year CII

1 2001-02 100 10 2010-11 167
----------------------
2 2002-03 105 11 2011-12 184
---------------------- 3 2003-04 109 12 2012-13 200
4 2004-05 113 13 2013-14 220
---------------------- 5 2005-06 117 14 2014-15 240
---------------------- 6 2006-07 122 15 2015-16 254
7 2007-08 129 16 2016-17 264
---------------------- 8 2008-09 137 17 2017-18 272
9 2009-10 148 18 2018-19 280
----------------------
In the situations of Cost of Inflation Index, the cost of acquisition is calculated
---------------------- as below:
---------------------- CII for the year of transfer
Cost of acquisition X =
CII for the year of acquisition
----------------------

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 If the asset is acquired prior to 1st April 2001, the assessee may consider the Notes
Fair Market Value as on 1st April 2001 to be the cost of acquisition.
----------------------
Note: It should be remembered that the indexation of acquisition cost is not
allowed in case of certain capital assets: ----------------------
Debentures/Bonds
----------------------
Shares or Debentures acquired by a non-resident in foreign currency in an
Indian Company. ----------------------
6.3.2 Cost of Improvement ----------------------
Cost of Improvement includes any capital expenditure incurred in ----------------------
making any addition or alteration made to the capital asset. However, cost
of improvement does not include any expenditure, which is deductible from ----------------------
any other head of income. Similarly, while calculating the capital gains, any
expenditure incurred before 1st April 2001 either by the assessee or the previous ----------------------
owner will be ignored. ----------------------
If the cost of improvement is incurred after 1 April 2001, indexation will
st

apply only to the cost improvement incurred after 1st April 2001. ----------------------

----------------------
Activity 1
----------------------
Visit https://www.incometaxindia.gov.in/Pages/tools/indexed-cost-of- ----------------------
acquisition-or-improvement.aspx and calculate indexed cost of acquisition
----------------------

----------------------
6.4 DEDUCTIONS FROM CAPITAL GAINS
----------------------
From the amount of capital gains calculated as per the provisions discussed
----------------------
above, certain deductions are possible. We will consider some of the important
deductions. ----------------------
6.4.1 Transfer of Residential House
----------------------
This deduction is available if certain conditions are satisfied:
----------------------
●● This deduction is available to an individual or a HUF
●● This deduction applies to long-term capital gains arising from the transfer ----------------------
of a residential house property, income from which is taxable under the
----------------------
head “Income from House Property”.
●● The assessee must have purchased or constructed another residential ----------------------
property within the specified period. The term “specified period” means:
----------------------
●● If the new property is purchased, one year before or two years after the
date on which transfer took place. ----------------------
●● If the new property is constructed, three years after the date on which the ----------------------
transfer took place.
----------------------

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 Notes ●● The amount of capital gains which are exempt under this section is
restricted to the cost of new house purchased or constructed.
---------------------- Capital Gains Account Scheme, 1988
---------------------- In order to claim the deduction under this section, the assessee can
purchase or construct the new property during a certain period after the transfer
---------------------- takes place. However, the return of income is required to be submitted within
---------------------- the specified time in the relevant Assessment Year in which the transfer took
place and the tax is required to be paid during the same year.
---------------------- However, the decision to invest in the new property may not be taken by
---------------------- the assessee immediately. In order to overcome the problems in such situations,
the assessee is given the alternative.
---------------------- The amount of capital gains not invested by the assessee for the purchase
or construction of the new property can be deposited by the assessee under the
----------------------
Capital Gains Account Scheme, before the date of filing his return of income.
---------------------- The proof of such deposit can be attached with the return of income for claiming
the deduction under this section. For making the investment in the new property,
---------------------- the amount lying to the credit of this account can be utilised.
---------------------- 6.4.2 Transfer of Agricultural Land

---------------------- This deduction is available if certain conditions are satisfied:

This deduction is available to an individual only
----------------------
This deduction applies to both short-term capital gains as well as long-
---------------------- term capital gains arising from the transfer of an agricultural land which must
have been used by the individual or his parents for agricultural purposes during
---------------------- the two years immediately preceding the date of transfer.
---------------------- The assessee must have purchased another agricultural land (rural or
urban) within the period of two years after the date of transfer of the original
----------------------
agricultural land.
---------------------- The amount of capital gains which are exempt under this section is
restricted to the cost of new agricultural land purchased.
----------------------
It should be noted that the provisions regarding the Capital Gain Account
---------------------- Scheme are applicable in this case also. If the amount deposited in CGAS is not
utilised for the purchase of new agricultural land within the period of two years,
----------------------
the amount which is not utilised shall be taxed as the short term capital gains
---------------------- or long-term capital gains in the year in which the period of two years from the
date of transfer of the original asset expires.
----------------------
Illustration
---------------------- Mr. Ashok was the owner of an agricultural land in Pune which was purchased
---------------------- by him 2005-06 for an amount of Rs. 3, 50,000. He sold the land on 13th July,
2010 for a consideration of Rs. 32, 00,000. On 20th October, 2017, he bought
---------------------- an agricultural land in his village for an amount of Rs. 1, 00,000. On 12th Jan,
2018, he deposited an amount of Rs. 2, 00,000 in the deposit account under
---------------------- CGAS. Calculate the amount of capital gains liability for Mr. Ashok.

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 Solution Notes
Particulars `
----------------------
Sale Consideration 32,00,000
Less: ----------------------
Indexed Cost of Acquisition
Rs. 3, 50,000 × 167/117 4,99,572 ----------------------
Long Term Capital Gain 27,00,427
Less: Deduction u/s 54 ----------------------
Cost of land purchased 01,00,000 ----------------------
Amount deposited in CGAS 02,00,000
Taxable Long Term Capital Gains 24,00,427 ----------------------
6.4.3 Invested in Bonds
----------------------
Section 54EC has been inserted from Assessment Year 2001-2002. Features of
the deduction under this section are as below: ----------------------

a. The section applies to the long-term capital gains earned by any assessee ----------------------
by transferring the long-term capital asset after 1st April 2000.
----------------------
b. Within six months from the date of transfer of the long-term capital asset,
the assessee should invest the whole or part of the capital gains in the ----------------------
specified assets. The specified assets for this purpose mean the bonds
redeemable after 3 years issued by the following institutions: ----------------------

National Bank for Agriculture and Rural Development (NABARD) ----------------------

National Highway Authorities of India ----------------------
National Housing Bank ----------------------
Small Industries Development Bank of India
----------------------
Rural Electrification Corporation Limited
----------------------
c. The quantum of exemption will be the amount invested in the specified
assets or the amount of capital gains, whichever is less. ----------------------
d. If the specified asset is transferred within the period of 3 years from the
----------------------
date of acquisition, the amount of capital gains not charged to the tax
from the transfer of original asset will be taxed as the long-term capital ----------------------
gain in the year in which the specified asset is transferred.
----------------------
e. The cost of specified asset which is considered for the exemption under
Section 54EC shall not be eligible for rebate under Section 88 of the Act. ----------------------
6.4.4 Transfer of Securities/Units ----------------------
Features of exemption available as per the provisions of Section 54ED are as
below: ----------------------

a. The section applies to the long-term capital gains earned by any assessee. ----------------------
b. The long term capital should arise from the transfer of capital asset in the ----------------------
following form:
----------------------

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 Notes  A security listed in any recognised stock exchange in India. A

security for this purpose means shares, debentures, bonds or
---------------------- Government Securities.
----------------------  A unit of Unit Trust of India or any Mutual Fund (whether listed in

a recognised stock exchange or not)
----------------------
c. Within six months from the date of transfer of such capital asset, the
---------------------- assessee should invest whole or part of the capital gains in the equity
shares of an eligible issue. Equity Shares of an eligible issue need to
---------------------- satisfy the following conditions:
---------------------- The issue of equity shares is made by a public limited company

---------------------- The shares should be offered to the public for subscription

d. The quantum of exemption will be the amount invested in the specified
---------------------- assets or the amount of capital gains, whichever is less.
---------------------- e. If the specified asset is transferred within a period of 1 year from the date
of acquisition, the amount of capital gains not charged to the tax from the
----------------------
transfer of original asset will be taxed as the long-term capital gain in the
---------------------- year in which the specified asset is transferred.
f. The cost of specified equity shares which is considered for the exemption
----------------------
under Section 54EC shall not be eligible for rebate under Section 88 of
---------------------- the Act.

---------------------- It should be noted that from Assessment Year 2005-2006, the long term
capital gains arising from the transfer of listed securities will be exempted from
---------------------- tax as per the provisions of Section 10(38) of the Act.

---------------------- 6.4.5 Transfer of Asset other than House Property

The following conditions need to be satisfied for claiming the exemption
---------------------- under Section 54F:
---------------------- a. The assessee is an individual or a HUF.
---------------------- b. The long-term capital gains should arise on account of transfer of a capital
asset other than a residential house property.
----------------------
c. The assessee should invest the net sale consideration by selling the
---------------------- long-term capital asset for buying a residential house property within
one year before or two years after the transfer, or construct a residential
---------------------- house property within the period of three yea ` Such house property is
hereinafter referred to as “new house”.
----------------------
d. The assessee should not purchase any other residential house property
---------------------- (other than the “new house”) within a period of two years from the date of
---------------------- transfer of the original asset or construct a new residential house property
within the period of three years from the date of transfer of the original
---------------------- asset.

----------------------

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 e. If the assessee transfers the “new house” within a period of three years Notes
from the date of its purchase/construction, the following consequences
will arise: ----------------------
Capital Gains arising from the transfer of the “new house” will be treated ----------------------
as short term capital gains.
----------------------
Originally exempt capital gains under Section 54F will be treated as long-
term capital gains in the year in which the “new house” is transferred. ----------------------
f. If the assessee purchases any other property (other than the “new house”)
----------------------
within a period of two years from the date of transfer of the original asset
or constructs a new residential house property within the period of three ----------------------
years from the date of transfer of the original asset, originally exempt
capital gains under Section 54F will be treated as long term capital gains ----------------------
in the year in which the “new house” is transferred.
----------------------
If the above conditions are satisfied, amount of deduction will be calculated as
below: ----------------------

a. If the cost of house purchased or constructed is more than the net ----------------------
consideration of the capital asset transferred, the entire capital gain arising
from the transfer of the capital asset is exempt from tax. ----------------------

b. 
If the cost of house purchased or constructed is less than the net ----------------------
consideration of the capital asset transferred, the exemption is calculated
as below: ----------------------

Amount Invested ----------------------

Capital Gains ×
Net Sale Consideration ----------------------
It should be noted that the provisions regarding the Capital Gain Account
----------------------
Scheme are applicable in this case also. If the amount deposited in CGAS is
not utilised for the purchase or construction of new residential house within the ----------------------
stipulated period, the amount which is not utilised shall be taxed as the capital
gains in the year in which the period of three years from the date of transfer of ----------------------
the original asset expires.
----------------------
Income from other source
----------------------
The income which is not chargeable in any other head is chargeable to tax under
the head of ‘Income from Other Source’. Following are the main source of it. ----------------------
1. Dividend : A share of profit of a company an equity share is dividend. ----------------------
Dividend received from Indian company or domestic company is totally
exempted from tax. Dividend received on units from U.T.I. (Unit Trust of ----------------------
India) is also 100% exempted.
----------------------
2. Interest : Interest received from any post office scheme, government
scheme, state government scheme is totally exempt. But interest received ----------------------
from bank, fixed deposit, recurring deposit is totally taxable.
----------------------

----------------------

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 Notes 3. 
Family Pension : Any pension received to deceased employee to family
members is family pension and exemption from it is:
----------------------
(i) `15,000 or
---------------------- (ii) 1/3rd of pension
---------------------- which is lower or less.

---------------------- 4. Rent for Machine : Any machine let out and rent received from it
chargeable to tax under the head of income from other sources. Any
---------------------- expenses incurred for maintenance of machine or upkeep of machine is
charge to tax as deduction.
----------------------
5. Winning from Lottery, Card Games, Gamble, Races including Horse
---------------------- Races etc. : All are known as casual receipts and chargeable to tax under
the head of income from other source. On casual receipts flat 30% tax
---------------------- charged for which a person who gives it liable to deduct and deposit.
---------------------- 6. Contribution to Provident Fund (employee) : Employee’s part of
contribution to provident fund is not deposited by employer is chargeable
---------------------- to tax under the head of income from other source.
---------------------- 7. 
Any sum received under a keyman insurance policy including bonus if
not taxable as salary or business income.
----------------------
8. 
Any specified properties including sum of money exceeding ` 50,000
---------------------- received without consideration by an individual or H.U.F. from person
other than relatives on or after 1-4-2006 subject to certain exceptions e.g.
----------------------
gift received from any relatives, shall be chargeable to tax.
---------------------- 9. 
Interest received on compensation or enhanced compensation u/s 145 A
(2) (w.e.f. 1-4-2010 i.e. A.Y. 2010-11) : Besides the following income is
----------------------
also chargeable under the head ‘Income from Other Sources’ :
---------------------- (a) Income from subletting.
---------------------- (b) Interest on bank deposit and loans.
---------------------- (c) Income from royalty (if it is not an income from business).
(d) Director’s fee.
----------------------
(e) Agricultural income from a place outside India.
----------------------
(f) Director’s commission for standing as a guarantor to bankers.
---------------------- (g) Directors commission for underwriting shares of new company.
---------------------- (h) Examination fees received by a teacher from a person other than his
employer.
----------------------
(i) Rent of plot of land.
----------------------
(j) Insurance commission.
---------------------- (k) Annuity payable under a will, contract trust deed.
---------------------- (l) Salaries/remuneration paid or payable to a Member of Parliament.

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 (m) Interest on employee’s contribution to unrecognized provident fund Notes
when it becomes due for payment.
----------------------
(n) Income from undisclosed source.
(o) Gratuity paid to a director who is not an employee of the company. ----------------------
(p) Annuity payable to the lender of a trade mark. ----------------------
(q) Assessment fees for answer sheets. ----------------------
expenses which are deductible under the head ‘Income from Other Sources’
[Section 57] ----------------------

(a) 
In respect of dividend income and interest income any reasonable ----------------------
expenditure incurred by way of commission or remuneration for
realization of such income is deductible. ----------------------

(b) In respect of any sum collected from employees towards the Welfare ----------------------
Fund Contribution deduction shall be allowed to the extent the amount is
----------------------
remitted within the relevant due date.
(c) In respect of family pension a sum equal to 33.33% of the pension or ` ----------------------
15,000 whichever is less shall be allowed as deduction.
----------------------
(d) 
In respect of income earned by ways of lease rental on letting of
machinery, plant and furniture with or without building the following ----------------------
shall be deducted : (a) Repairs, (b) Insurance, (c) Depreciation. ----------------------
(e) 
Any other expenditure incurred by the assessee not being capital
expenditure but laid out or expended wholly or exclusively for the purpose ----------------------
of making or earning any income chargeable under this head of income ----------------------
can be claimed.
INADMISSIBLE EXPENSES UNDER THE HEAD ‘INCOME FROM ----------------------
OTHER SOURCE’ [SECTION 58] ----------------------
(a) Personal expenses.
----------------------
(b) Wealth tax.
----------------------
(c) Expenses of the nature described in Section 40 A.
(d) Interest and salary payable outside India, if tax has not been paid or ----------------------
deducted at source. ----------------------
(e) No deduction shall be allowed in respect of winnings from lotteries,
crossword puzzles, card games, races including horse race, gambling, ----------------------
betting etc. ----------------------
BASIS OF CHARGE UNDER THE HEAD ‘INCOME FROM OTHER
SOURCES’ ----------------------

The following income shall be charged to tax only under the head ‘Income from ----------------------
Other Sources’ :
----------------------

----------------------

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 Notes (a) Dividend income covered by sub-clauses (a) to (e) of clause (22) of
Section 2.
----------------------
(b) Income by way of winnings from lotteries, crossword, puzzles, races
---------------------- including horse race, card games and other games of any sort, gambling,
betting, etc. It requires to mention here that such winnings are chargeable
---------------------- to tax u/s 115 BB of a flat rate of 30%.
---------------------- (c) Any sum of money, the aggregate value of which exceeds ` 50,000
received from any person without consideration, by an individual or
---------------------- Hindu Undivided Family.
---------------------- However, exemption is granted in respect of any sum of money received :

---------------------- (i) From any relative or

(ii) On the occasion of marriage of an individual or
----------------------
(iii) Under a will or by way of inheritance or
----------------------
(iv) in contemplation or deaths of the payer or
---------------------- (v) from a local authority, or
---------------------- (vi) 
from any fund, foundation, university other educational institution,
hospital, medical institution, any trust or institution referred to in Section
---------------------- 10 (23 c), or
---------------------- (vii) from charitable institutions registered u/s 12 AA.

---------------------- Illustrations:
1. 
Shri. Hari Gopal is a Member of Parliament from Pune. During the
----------------------
previous year 2010-11 he had the following incomes :
---------------------- 1. As a member of parliament he received a salary of ` 30,000 p.m.
and daily allowance of `40,000 for attending various sessions.
----------------------
2. He held the following investments :
----------------------
(a) 10% preference shares in Pune Sugar Works Ltd. of the face
---------------------- value of ` 10,000.

---------------------- (b) 2,000 equity shares of ` 10 each in Tata Finlay Ltd. The
company declared and paid a dividend at 15% on 15th
---------------------- February, 2011.
---------------------- (c) 10% fixed deposit of ` 2,00,000 is held by him in Indian
Banks Interest is credited annually.
----------------------
(d) He received dividend of ` 1,000 from a co-operative society.
---------------------- 3. He won ` 8,000 in crossword puzzles.
---------------------- 4. On 1st September, 2007, he purchased a plot of land for constructing
his house. On account of shortage of funds, he could not get this
---------------------- house constructed and hence let out the plot at ` 3,000 p.m. from
---------------------- 1st Nov. 2010.

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 5. He has let machinery and furniture and also building to Mr. Krishna Notes
Gopal at a monthly rent of ` 10,000. He spent ` 3,000 on the repair
of machinery, furniture and building during the previous year. ----------------------
Depreciation allowable in respect of these assets for the previous
year was ` 20,000. ----------------------

The bank charged ` 40 as commission on collection of dividends ----------------------

from various companies. Compute the taxable income of Shri. Hari
----------------------
Gopal under the head ‘Income from Other Sources’.
Solution: ----------------------
Computation of Taxable Income of Shri Hari Gopal ----------------------
For the A.Y. 2011-12 ----------------------
Particulars ` `
----------------------
Income from Other Sources
1. Salary as Member of Parliament (30,000 × 12) 3,60,000 ----------------------
2. Daily Allowance (exempted from tax) − ----------------------
3. Dividend on Preference Shares −
4. Final Dividend on Equity Shares (exempted) − ----------------------
5. Dividend from Co-operative Society (No. T.D.S.) 1,000 ----------------------
6. Interest on Fixed Deposit 20,000
----------------------
7. Winning from crossword, puzzles fully taxable 8,000
8. Income from plot of land for 5 months 15,000 ----------------------
9. Rental income from machinery, furniture and building 1,20,000
----------------------
5,74,000
Less : Admissible Expenses ----------------------
(i) Bank Commission on Collection of Dividend (Note 3) Nil 23,000 ----------------------
(ii) Repair Expenses 3,000 ----------------------
(iii) Depreciation 20,000
----------------------
Income from Other Sources 5,01,000
Income from Other Source ` 5,01,000 ----------------------

Note: ----------------------
1. Winning from crossword, puzzles is causal income. Basic exemption is ----------------------
not allowed w.e.f. A.Y. 2003-04.
----------------------
2. Daily allowance for attending session is exempt u/s 10 (17).
3. Dividend on shares of Indian Companies are exempted from tax w.e.f. ----------------------
2004-05 and so, the bank commission on collection as dividend is not ----------------------
allowed.
----------------------

----------------------

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 Notes
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. While computing the capital gain, the cost of bonus shares allotted to
---------------------- an individual assessee shall be considered ____.
---------------------- 2. If the employee sells the shares allotted to him under his employer’s
Employees Stock Option Plan (ESOP), the amount to be considered
---------------------- for calculating the value of perquisites will be _______ ______ of
such shares.
----------------------
3. The purpose of cost of inflation index is to give benefit of ______
---------------------- existing in the economy to the assessee while calculating the amount
of capital gains.
---------------------- 4. Even if both short-term capital gains and _____ ____ capital gains are
---------------------- a part of total income of the assessee, the tax treatment applicable to
both of them is different.
----------------------

---------------------- Activity 2
----------------------
Amar was the owner of an agricultural land in Pune which was purchased by
---------------------- him 1982-83 for an amount of ` 5, 50,000. He sold the land on 13th July,
2011 for a consideration of ` 30, 00,000. On 20th October, 2006, he bought
---------------------- an agricultural land in his village for an amount of ` 6, 00,000. On 12th Jan,
---------------------- 2012, he deposited an amount of ` 4, 00,000 in the deposit account under
CGAS. Calculate the amount of capital gains liability for Amar.
----------------------

---------------------- Summary
----------------------
●● Capital Gains are chargeable to Income Tax if there is any profit or gain
---------------------- arising from the transfer of a capital asset. As such, the income from
Capital Gains arises if the following conditions are satisfied –
----------------------
■ T
here should be a Capital Asset
---------------------- ■ T
he capital asset should be transferred during the previous year
under consideration.
----------------------
●● The time when the consideration for such transfer is received by the
---------------------- transferor is not material, In other words, even if the transfer consideration
---------------------- is not received during the year of transfer, still the capital gains arising
there from will be subjected to tax.
---------------------- ●● There should a profit or gain earned by the transferor on such transfer of
asset.
----------------------

----------------------

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 ●● Even if both Short Term Capital Gains and Long Term Capital Gains are Notes
a part of Total Income , the tax treatment applicable to both of them is
different. ----------------------
●● The short-term capital gains are added to the total income as one of ----------------------
the heads of income. If the short-term capital gains arise on account of
transfer of any securities listed on any recognised stock exchange, the ----------------------
said amount is considered as a separate block of income and are taxable
at a flat rate of 10% (with effect of Assessment Year 2005-2006). ----------------------
●● The long-term capital gains are considered to be a separate block of ----------------------
income and are taxed at a concessional rate of tax of 20%. If the long-
term capital gains arise on account of transfer of any securities listed on ----------------------
any recognized stock exchange, they are exempt from tax (with effect of ----------------------
Assessment Year 2005-2006).
----------------------
Keywords ----------------------
●● Capital Asset: Capital Asset includes the property of any kind, whether ----------------------
fixed or circulating, movable or immovable, tangible or intangible.
●● Short Term and Long Term Capital Asset: Short Term Capital asset ----------------------
means a capital asset for not more than 36 months and an asset other than ----------------------
short term capital asset is regarded long term asset. In case of shares, the
period of holding will be 12 months instead of 36 months ----------------------

----------------------
Self-Assessment Questions
----------------------
1. State and explain step-by-step process for calculating the Income from
Capital Gains. ----------------------
2. State and explain various deductions available while calculating the ----------------------
Income from Capital gains.
----------------------
3. What do you mean by Capital Gains. How does the tax treatment differ
for Long Term Capital gains and Short Term Capital Gains? ----------------------
4. Explain the provisions of Income Tax Act, 1961 in respect of calculation ----------------------
of –
●● Cost of Acquisition ----------------------
●● Cost of Improvement ----------------------
5. Write a note on transactions not regarded as Transfer. Q6. Q6.What do ----------------------
you mean by period of holding?
----------------------

----------------------

----------------------

----------------------

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 Notes Answers to Check your Progress
---------------------- Check your Progress 1

---------------------- State True or False.

1. False
----------------------
2. True
----------------------
3. False
---------------------- 4. True
---------------------- Check your Progress 2

---------------------- Fill in the blanks.

1. While computing the capital gain, the cost of bonus shares allotted to an
---------------------- individual assessee shall be considered Nil.
---------------------- 2. If the employee sells the shares allotted to him under his employer’s
Employees Stock Option Plan (ESOP), the amount to be considered for
----------------------
calculating the value of perquisites will be cost of acquisition of such shares.
---------------------- 3. The purpose of cost of inflation index is to give benefit of inflation existing
in the economy to the assessee while calculating the amount of capital
----------------------
gains.
---------------------- 4. Even if both short-term capital gains and long-term capital gains are a
part of total income of the assessee, the tax treatment applicable to both
----------------------
of them is different.
----------------------

---------------------- Suggested Reading

---------------------- 1. Thomas, Kaye A. 2004. Capital Gains, Minimal Taxes: The Essential
Guide for Investors and Traders. Fairmark Press Inc.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Deductions from Total Income
UNIT

7
Structure:

7.1 Introduction
7.2 Deductions (General)
7.2.1 Medical Insurance
7.2.2 Medical Treatment of Dependants
7.2.3 Medical Treatment
7.2.4 Repayment of Loan
7.2.5 Donations
7.2.6 Rent paid
7.2.7 Scientific Research Donation
7.3 Profits from Biodegradable Waste
7.3.1 Deduction in respect of Employment of New Workmen
7.3.2 Income of Offshore Banking Units
7.3.3 Income of a Person with Disability
7.4 Profits from Infrastructural Activity
7.4.1 Profits from Other Undertakings
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• List deductions under section 80 of the Income Tax Act
----------------------
• Describe the conditions to be fulfilled under these deductions
---------------------- • Discuss different examples and their taxability under the Act work
on practical problems under deductions
----------------------

---------------------- 7.1 INTRODUCTION

---------------------- As discussed earlier, the sum total of all the heads of income clubbed
together gives the amount of Gross Total Income. While calculating the tax
---------------------- liability of an assessee, certain deductions are permissible as per the provisions
---------------------- of Chapter VI-A of the Act. These deductions are based upon the certain
payments made by the assessee or certain investments made by the assessee.
---------------------- However, these deductions are not available from -
---------------------- Income from Long Term Capital Gains
Income from winning of lotteries, races etc.
----------------------
Basic rules for claiming the deduction
----------------------
a. The amount of deductions under the provisions of Chapter VI-A cannot
---------------------- exceed the Gross Total Income.

---------------------- b. As the deduction is available from Gross Total Income, unless there is a
Gross Total Income, the deductions cannot be claimed.
----------------------
c. The deductions under Chapter VI-A are allowed if the assessee claims the
---------------------- deductions and establishes the circumstances warranting the deductions.
Some of the major deductions as per the provisions of Chapter VI-A of
----------------------
the Act are discussed below:
----------------------
7.2 DEDUCTIONS (GENERAL)
----------------------
Deduction in respect of Life Insurance Premium, Differed annuity etc. Section
----------------------
80C (w.e.f. A.Y.2015-16)
---------------------- A. Eligible Assessee: Individual or HUF
---------------------- Quantum of deduction: 100 % of qualifying investment*. Or

---------------------- `150, 000 whichever is less. Qualifying Investment:

A) In case of Individuals
----------------------
i) Life Insurance premium * to effect or keep in force an Insurance
---------------------- Policy (Life Policy or endowment policy) on the life of the assessee
or on the life of the spouse or any child of the assessee (not exceeding
---------------------- 20% of the capital sum assured)

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 ii) Premium paid in respect of non - commutable deferred annuity on Notes
the life of assessee or of the life of the spouse or any child of the
assessee. ----------------------
iii) Contribution to statutory and recognised provident fund. ----------------------
iv) Contribution towards 15 years Public Provident Fund in the name
----------------------
of the assessee or the spouse or any child of the assessee.
v) Amount deducted on behalf of the Government from the salary of ----------------------
Government Employee for securing a deferred annuity or making
----------------------
provisions for his wife or children (not exceeding 20% of the
salary). ----------------------
vi) Assessee’s own contribution to an approved superannuation fund. ----------------------
vii) Sum deposited in Post Office Savings Bank-10 years and 15 years
Rules, in the account of the assessee or the spouse or any child of ----------------------
the assessee. ----------------------
viii) Contribution for participating in Unit Link Insurance Plan of UTI**,
Plan of LIC mutual fund (Dhanraksha Plan of LIC mutual Fund), in ----------------------
the name of the assessee or the spouse or any child ----------------------
ix) Purchase of National Savings Certificates VI, VII and VIII issue.
----------------------
(VI and VII issue new purchase is now not available)
x) Contribution to effect or keep in force a contract for notified annuity ----------------------
plan of LIC (Jeevan Dhara/’Jeevan Akshaya).
----------------------
xi) Subscription towards any notified Pension Fund set up by Mutual
Fund or UTI 1. Equity linked savings scheme of a mutual fund or ----------------------
UTI. ----------------------
xii) 
Subscription to Home Loan accounts Scheme of the National
Housing Bank or notified Pension Fund of the National Housing ----------------------
Bank. ----------------------
xiii) 
Payment made towards the cost of purchase/construction of
residential property. ----------------------

xiv) 
Subscription towards Deposit Scheme of any Public Sector ----------------------
Companies or Housing Development Corporation of India engaged
----------------------
in providing long term finance for housing accommodation and
eligible for deduction under Sec36(i)(viii). ----------------------
xv) Expenditure incurred on the education of children (for maximum
----------------------
two children) by payment of tuition fees (excluding donation or
development fees) to any university, college, school or other ----------------------
educational institution in India for full time education.
----------------------
xvi) Eligible shares or debentures forming part of eligible issue(**) of
capital approved by the Board. ----------------------

----------------------

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 Notes xvii) Any subscription by an Individual or HUF to any units of any
Mutual Fund referred to in section 10 (23D) and approved by the
---------------------- Board.
---------------------- B) In case of HUF
i) Life Insurance premium * to effect or keep in force an Insurance
----------------------
Policy (Life Policy or Endowment Policy) on the life of any member
---------------------- of the family
ii) Purchase of National Savings Certificates VI, VII and VIII issue
----------------------
iii) Contribution to Public Provident Fund in the name of any member
----------------------
iv) Payment made towards the cost of purchase/construction of house
---------------------- v) Sum deposited in 10 years or 15 years Post Office Savings Bank
---------------------- (Cumulative Time Deposit) Rules, in the account of any member
vi) Equity linked savings scheme of a mutual fund or UTI
----------------------
vii) 
Subscription towards Home Loan account Scheme of National
---------------------- Housing Bank
---------------------- viii) Contribution for participating in Unit Link Insurance Plan of UTI**,
Plan of LIC mutual fund (Dhanraksha Plan of LIC mutual Fund), in
---------------------- the name of any member
---------------------- ix) eligible shares or debentures forming part of eligible issue(**) of
capital approved by the Board and
----------------------
x) any subscription by @an Individual or HUF to any units of any
---------------------- Mutual Fund refer to in section 10 (23D) and approved by the Board
---------------------- (**) Means an issue made by a public company form and registered in
India or Public Financial institution and the entire proceeds of the
---------------------- issue are utilized wholly and utilised for the purpose of any business
refer to in section 801-A (4).
----------------------
Points to be noted
----------------------
*In case of the taxpayer discontinues the policy of Life Insurance, before
---------------------- premiums have been paid for 2 years, no deduction will be allowed in respect
of any premium paid on that policy in the year in which the policy is terminated.
---------------------- Further the amount of deductions allowed in respect of premium paid in the
preceding years will be deemed to be the income of the assessee of the year in
----------------------
which the policy is terminated. In case of single premium insurance policy, if
---------------------- such policy is surrendered within two years of the date of commencement of
insurance, the amount of deduction allowed earlier shall be deemed to be the
---------------------- income in the year of surrender.
---------------------- ** No deduction will be allowed in respect of contribution made in such year:
Where a member, participating in Unit Linked Insurance Plan terminates his
---------------------- participation before making the contribution for a period of 5 years, and the
---------------------- amount on which tax deduction has been allowed earlier be deemed to be the tax

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 payable by assessee of the previous year in which he terminates as participant Notes
in the plan.
----------------------
In case of the house property in respect of which, the deduction has been allowed
is transferred by the taxpayer at any time before the expiry of 5 years from the ----------------------
end of the financial. year in which possession of such property as obtained by
him, no deduction in this provision shall be allowed in respect of the previous ----------------------
year in which the transfer is made and any amount of the,tax deduction allowed
----------------------
in the earlier years for the same shall be deemed to be the income of the assessee
of the previous year in which such house is transferred. ----------------------
Following payments made by an Individual or HUF for purchase or construction
----------------------
of a residential house property are eligible for qualifying investment.
a) Any installment or part payment of the amount due under self financing ----------------------
or other scheme of any development authority.
----------------------
b) Any installment or part payment of the amount due to any company or
co-operative society towards cost of the ‘house property allotted to him. ----------------------

c) Stamp duty, registration, fee and other expenses for transfer of house ----------------------
property. d) Repayment of amount borrowed by the assessee from:
----------------------
i. The Central or State Government.
----------------------
ii. Bank
iii. the life Insurance Corporation ----------------------
iv. Public limited companies providing long term finance ----------------------
v. Company engaged in financing the construction National Housing ----------------------
Bank
vi. 
The Assessee’s employer, where such employer is a Public ----------------------
Company or a Public Sector Company or a University or a Loc- ----------------------
31 Authority or a Co-operative Society or a Board. Corporation or
Body established or constituted under Central or State Act, ----------------------
7.2.1 Medical Insurance ----------------------
This deduction is available in respect of the amount of premium paid by
----------------------
the assessee for Mediclaim policy of General Insurance Corporation of India
and its subsidiaries and other private sector insurance companies approved by ----------------------
Insurance Regulatory and Development Authority (IRDA). This deduction is
available if the following criteria are satisfied: ----------------------
This deduction is available to an individual or a HUF. ----------------------
The Mediclaim policy can be bought by the assessee in his/her own name ----------------------
or in the name of the spouse or in the name of dependent parents or in the
name of dependent children. ----------------------
The premium should be paid by cheque. ----------------------
The premium should be paid by the assessee out of his income chargeable
to tax. ----------------------

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 Notes The amount of deduction permissible is actual premium paid or ` 15,000
whichever is less. However, in case of the assessee who is a senior citizen,
---------------------- the maximum amount of ` 15,000 is increased to ` 20,000.
---------------------- 7.2.2 Medical Treatment of Dependants
A) Assessee: Resident Individual or HUF (i.e. even HUF should be resident
----------------------
in India)
---------------------- B) Quantum of deduction
---------------------- (a) In case of dependant being a person with disability* = ` 50,000

---------------------- (b) 
In case of dependant being a person with severe disability =
` 1,00,000 Dependant means:
---------------------- (i) In case of individual: spouse, children, parents, brothers, or
---------------------- sisters.
In case of HUF: A member of HUF such person should be
----------------------
dependent wholly or mainly for support and maintenance and
---------------------- should not have claimed any deduction under Sec. 80U.
*Disability means person with disability person suffering
----------------------
from not less than 40% of any disability as certified by
---------------------- medical authority:

---------------------- Blindness Low vision, Leprosy cured Hearing impairment

Locomotive disability, Mental retardation Mental illness,
---------------------- Autism, Cerebral palsy, multiple disabilities.

---------------------- Person with severe disability - Person with 80% or more with
one or more disabilities as specified above.
---------------------- C) Treatment of amount in case the dependant predeceases the individual or
---------------------- member of HUF: The amount equal to the amount paid or deposited shall
be deem ed income of the previous year in which such amount is received
---------------------- by the assessee.
---------------------- Qualifying sum
(a) 
Any expenditure incurred for medical treatment (including nursing),
----------------------
training and rehabilitation of a dependant, being a person with disability.
---------------------- (b) Paid or deposited any amount under a scheme framed by LIC or any
other insurer or the Administrator or the specified company as approved by
---------------------- the Board (Scheme provides for payment of annuity or lump sum amount
for the benefit of dependant, in the event of death of Life individual or
----------------------
member of HUF in whose name subscription to the scheme has been
---------------------- made).
7.2.3 Medical Treatment
----------------------
A) Assessee: Resident Individual or HUF (Including non-resident)
----------------------
B) Quantum of deduction:
----------------------

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 (i) Amount actually paid; or Notes
(ii) 
` 40000 (`60000 in case of resident senior citizen whichever is less.
----------------------
C) Qualifying sum
----------------------
Expenditure actually incurred for the medical treatment of the following
persons for specified diseases or ailment in case of- ----------------------
a) Individual: himself or a dependant b) HUF - For any member ----------------------
of HUF.
Dependant includes the spouse, children, parents, brothers or sisters of ----------------------
the individual or any of them. ----------------------
D) Conditions
----------------------
A certificate in the prescribed form from a neurologist, an oncologist,
a urologist, a hematologist, an immunologist or such other specialist as ----------------------
may be prescribed, who is working in a Government Hospital should be
----------------------
attached along with the return of the income for claiming deduction under
this section. ----------------------
7.2.4 Repayment of Loan
----------------------
A) Assessee: Only Individual
----------------------
B) Quantum of deduction
Payment during the year by way of payment of Interest thereon; ----------------------

**Higher education means full time studies for any graduate or post- ----------------------
graduate course in engineering, medicine, management or post-graduate
----------------------
course in applied sciences or pure sciences including mathematics and
statistics. ----------------------
C) Period of Deduction:
----------------------
The deduction shall be allowed for 8 assessment years beginning from
the previous year in which assessee starts repaying the loan of interest ----------------------
thereon or until the loan together with interest is repaid in full, whichever
----------------------
is earlier(i.e. maximum 8 yrs from repayment of loan or interest).
7.2.5 Donations ----------------------

This deduction is available if the following conditions are satisfied - ----------------------

●● This deduction is available to all the assessees. ----------------------
●● Donation should have been paid in terms of money (not in kind) to
an approved fund/institution. ----------------------
●● The assessee should produce a proof of payment of such donation. ----------------------
●● The amount of deduction available depends upon the nature ----------------------
of donation. For this purpose, the donations may fall under the
following categories - ----------------------

----------------------

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 Notes a. Donations eligible for 100% deduction without any qualifying limit.
b. Donations eligible for 50% deduction without any qualifying limit.
----------------------
c. Donations eligible for 100% deduction subject to qualifying limit.
----------------------
d. Donations eligible for 50% deduction subject to qualifying limit.
---------------------- For calculating the qualifying limit, all the donations under category c
---------------------- and d above are clubbed together and the qualifying amount will be limited to
10% of the Adjusted Gross Total Income which means Gross Total Income duly
---------------------- reduced by:

---------------------- Long Term Capital Gains

All the deductions under Chapter VI-A except under Section 80G.
----------------------
Gross Qualifying Sum: Aggregate of donations made to the following
---------------------- institutions or funds -
---------------------- (a) No ceiling for deduction for A & B Category

---------------------- Category A of Donation Category B of Donation

Quantum of Deduction: 100% of donation 50% of donation made to below:
---------------------- made to below:
---------------------- i) National Defence Fund i) Jawaharlal Nehru Memorial

---------------------- ii) Prime Minister’s National Relief Fund ii) Prime Minister’s Drought
iii) Prime Minister’s Armenia Earthquake Relief Fund
----------------------
Relief Fund iii) National Children’s Fund
---------------------- iv) Africa (Public Contribution - India)
Fund iv) Indira Gandhi Memorial Trust
----------------------
v) Any trust, institution or fund for
---------------------- providing relief to victims of v) Rajiv Gandhi Foundation
earthquake in Gujarat (Contribution
----------------------
made between
---------------------- 26.1.01 to 30.09.01)

---------------------- vi) Technology Development Fund set up by Central Government

vii) Andra Pradesh Chief Minister’s
----------------------
Cyclone Relief Fund.
----------------------
viii) National Foundation for Communal Harmony
---------------------- ix) An approved University or Educational Institution of national eminence
---------------------- x) Chief Minister’s Earthquake Relief Fund

---------------------- xi) Zilla Saksharta Samti Constituted in any district.

xii) National Blood Transfusion Council and State
----------------------
Council for Blood Transfusion fund set up by the State Government.
----------------------
xiii) National illness assistance Fund
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 xiv) Fund set up by State Govt. for medical relief to the poor Notes
xv) Central Welfare Fund of the Army and Air force and the Indian Naval
----------------------
Benevolent fund
xvi) National sports fund or national cultural fund ----------------------
xvii) National trust for welfare of person with Autism, Cerebral palsy, Mental ----------------------
Retardation and Multiple disabilities
----------------------
(b) Ceiling for deduction under C & D Category is applicable
----------------------
Category C of Donation Category D of Donation
----------------------
i) Donation by company to Olympic i) Any approved institution or fund
Association or other notified established in India for Indian ----------------------
association charitable purpose.
----------------------
ii) Donation to Government or State ii) Any authority set up for dealing
and Government for promoting with and satisfying the need for ----------------------
the interest of the members’ local housing accommodation or for the
authority, institution or of the purpose of planning development ----------------------
minority Community association of towns, villages etc.
----------------------
to be utilised for promoting iii) Any Corporation established by
planning. the Central Government or State ----------------------
Government for promoting the ----------------------
interest of the members of the
company. ----------------------
iv) Government or Local Authority or ----------------------
approved institution or association
to be utilised for the purpose ----------------------
other than of promoting Family-
planning v) Any notified temple, ----------------------
mosque, gurdwara, church or ----------------------
other place (for renovation or
repairs) ----------------------
Illustration ----------------------
The Gross Total Income of Mr. Deshpande of the following incomes: Income
----------------------
from
Salaries - ` 1,20,000 ----------------------

Income from House Property - ` 80,000 ----------------------

Long Term Capital Gains - ` 45,000 ----------------------
Bank Interest - ` 8,000
----------------------
During the Assessment Year 2019-2020, he has paid the Mediclaim premium by
cheque for himself amounting to ` 5,000. He paid the donation of ` 25,000 to a ----------------------
charitable trust, which attracts the deduction of 50% subject to qualifying limit.
----------------------
Calculate the deduction available under section 80G for the AY 2019-2020.

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 Notes Solution:

---------------------- Calculation of Gross Total Income `

Income from Salaries 1,20,000
----------------------
Income from House Property 80,000
----------------------
Bank Interest 8,000
---------------------- GTI (Except LTCG) 2,08,000
---------------------- Less: Deductions
80D 5,000
----------------------
Adjusted GTI 2,03,000
----------------------
Qualifying amount for Section 80G 19,500
---------------------- Deduction under Section 80G 9,750
---------------------- (Being 50% of Qualifying Amount)
---------------------- 7.2.6 Rent paid

---------------------- This deduction is available if the following criteria are satisfied:

This deduction is available to an individual.
----------------------
The assessee must have paid rent for his residential accommodation,
---------------------- whether furnished or unfurnished.
---------------------- The assessee may be self employed or employed. However, if he is
employed, he should not be entitled to house rent allowance or a rent-free
---------------------- accommodation.
---------------------- The individual or his/her spouse or minor child should not own any
residential accommodation at the place of residence or at the place of
---------------------- work.
---------------------- The amount of deduction is restricted to the minimum of the following
amounts:
----------------------
Excess of rent paid over 10% of Adjusted Total Income
---------------------- 25% of the Adjusted Total Income
---------------------- ` 2,000 per month.
---------------------- Adjusted Total Income for this purpose means the Gross Total Income
duly reduced by Long Term Capital Gains and the deductions as per the
---------------------- provisions of Chapter VI-A of the Act.
---------------------- Illustration

---------------------- Mr. Anil is working as an Accountant with A Ltd. He furnishes the

following details for the AY 2019-2020
---------------------- Income from Salaries (Gross) - ` 1,20,000
---------------------- Short term capital gains from the sale of jewellery - ` 25,000

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 Long term capital gains from the sale of land - ` 30,000 Notes
Interest on Government Securities (Gross) - ` 20,000
----------------------
Repayment of the loan taken from the bank for pursuing higher studies
- ` 25,000 ----------------------
Interest on the loan stated above - ` 20,000 ----------------------
Premium paid on Jeevan Suraksha policy of LIC - ` 10,000 ----------------------
Rent paid for a flat in Pune - ` 30,000. Neither he nor any of his family
members own a house. ----------------------

Calculate the deduction under Section 80GG for the AY 2019-2020. ----------------------
Solution ----------------------
Calculation of deduction under Section 80GG
----------------------
`
----------------------
Income from Salaries 1,20,000
Short Term Capital Gains 25,000 ----------------------
Interest on Government Securities 20,000 ----------------------
GTI (Except LTCG) 1,65,000
----------------------
Less: Deductions
80CCC 10,000 ----------------------
80E (Principal + Interest) 40,000
----------------------
50,000
Adjusted GTI 1,15,000 ----------------------
Excess of rent paid over 10% of 20,000 ----------------------
Adjusted GTI
----------------------
25% of Adjusted GTI 28,750
` 2,000 per month 24,000 ----------------------
Least of the above amounts 20,000 ----------------------
Hence, deduction under Section 80GG will be ` 20,000.
----------------------
7.2.7 Scientific Research Donation
A) Assessee: Any (whose GTI does not include income chargeable under the ----------------------
head ‘Profits and Gains of Business or Profession). ----------------------
B) Quantum of deduction 100% of Qualifying Sum. Qualifying sums:
----------------------
(i) Sum paid to an Approved Association, Institution, Public Sector
Company which has as its object the training of persons for ----------------------
implementing program of rural development.
----------------------
(ii) Sum paid to National Urban Poverty Eradication fund set up and
notified by Central Government. ----------------------

----------------------

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 Notes (iii) Sum paid to a Scientific Research Association or to an Approved
University, or College or Other Institutions to be used for Scientific
---------------------- Research or Research in Social Science or Statistical Research.
---------------------- (iv) Sum paid to the National Fund for rural development set up and
notified by the Central Government for the purpose of carrying out
---------------------- rural development programmes.
----------------------
Check your Progress 1
----------------------

---------------------- Multiple Choice Multiple Response.

1. Deductions (General) refers
---------------------- i. Assessee individual or HUF
---------------------- ii. Deduction pertaining to LIC premium
iii. Adjusted total income
----------------------
iv. Deferred annuity
---------------------- v. Contribution towards 15 years Public Provident Fund
---------------------- 2. Deductions available in respect of rent paid:
i. Deduction is available to individual
---------------------- ii. Deduction is available to HUF
---------------------- iii. The assessee must have paid rent for his residential
accommodation
----------------------
iv. If the assessee is employed, he is not entitled to house rent
---------------------- allowance
3. Deduction towards the repayment of loan taken for higher education:
----------------------
i. Assessee only individual
---------------------- ii. Higher education means full time studies
iii. Higher education means part time studies also
----------------------
iv. Deduction shall be allowed for 8 assessment years
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes
Activity 1
----------------------
1. Mr. Ashok is working as an Accountant with A Ltd. He furnishes the ----------------------
following details for the AY 2019-2020.
Income from Salaries (Gross) - ` 1,40,000 ----------------------
Short term capital gains from the sale of jewellery - ` 45,000 ----------------------
Interest on Government Securities (Gross) - ` 30,000
----------------------
Repayment of the loan taken from the bank for pursuing higher studies
- ` 25,000 ----------------------
Interest on the loan stated above - ` 10,000
----------------------
Rent paid for a flat in Pune - ` 30,000. Neither he nor any of his family
members own a house. ----------------------
Calculate the deduction under Section 80GG for the AY 2019-2020.
----------------------
2. The Gross Total Income of Mr. Sunil consists of the following incomes
- Income from Salaries - ` 2,20,000 ----------------------
Income from House Property - ` 1,20,000 ----------------------
Bank Interest - ` 8,000 ----------------------
During the Assessment Year 2019-2020., he has paid the Mediclaim
premium by cheque for himself amounting to ` 6,000. He paid the ----------------------
donation of ` 25,000 to a charitable trust, which attracts the deduction ----------------------
of 50% subject to qualifying limit. Calculate the deduction available
under section 80G for the AY 2019-2020. ----------------------

----------------------
7.3 PROFITS AND GAINS FROM BIO-DEGRADABLE ----------------------
WASTE
----------------------
A) Assessee: Assessee whose Gross total Income includes any profits and
gains derived from the business of collecting, processing and treating bio ----------------------
- degradable waste for the purpose of: ----------------------
(a) Generating power, bio-fertilisers, bio-pesticides or other biological
agents; or ----------------------

(b) Producing bio - gas and making pellets, briquettes for fuel and ----------------------
organic manure
----------------------
B) Quantum of deduction 100% profits & gains from such business.
----------------------
C) Duration of deduction: for period of five consecutive assessment years
beginning with the assessment year relevant to the previous year in which ----------------------
such business commences.
----------------------

----------------------

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 Notes 7.3.1 Deduction in respect of Employment of New Workmen
A) Eligible Assessee: Indian company
----------------------
B) Conditions:
----------------------
(a) Income of the taxpayer includes any profits and gains derived
---------------------- from any industrial undertaking engaged in the manufacturing or
production of article or thing and the same is not formed by splitting
---------------------- up or reconstruction of an existing undertaking or amalgamation
with another industrial undertaking.
----------------------
(b) The assessee furnishes along with the return of income the report of
---------------------- a chartered accountant, giving such particulars in the report as may
---------------------- be prescribed.
C) Quantum of deduction:
----------------------
Deduction shall be allowed of an amount equal to 30% of the additional
---------------------- wages* paid to the new regular workmen employed by the Assessee in the
previous year.
----------------------
Period of deduction: Deduction shall be allowed for three assessment
---------------------- years, including the assessment year relevant to the previous year in
which such employment is provided.
----------------------
*additional wages means-
----------------------
(i) In case of any industrial undertaking: wages paid to the new regular
---------------------- workmen’ in excess of 100 workmen employed during the previous
year. The additional wages shall be Nil if the increase in the number
---------------------- of regular workmen employed during the year is less than 10% of
existing number of workmen’ employed in such an undertaking as
----------------------
on the last day of the preceding year.
---------------------- (ii) In case of existing industrial undertaking: wages paid to the new
---------------------- regular workmen in excess of 100 workmen employed during the
previous year.
---------------------- 7.3.2 Income of Offshore Banking Units
---------------------- A) Assessee: Scheduled bank (not being a bank incorporated by or under the
laws of a country outside India) owning an offshore banking unit* in a
----------------------
special economic zone.
---------------------- B) Eligible Income:
---------------------- a. Income from an offshore banking unit in a special economic zone.

---------------------- b. Income from banking business with an undertaking located in

special economic zone or any other undertaking which develops
---------------------- and operates and maintains a special economic zone.

---------------------- c. income received in foreign exchange under FEMA 1999.

----------------------

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 C) Deduction: 100% of income for 3 consecutive assessment years beginning Notes
from the assessment year relevant to the previous year in which the
permission under Banking Regulation Act was obtained and thereafter ----------------------
50% of such income for 2 consecutive assessment years.
----------------------
“Offshore Banking Unit” means branch of a bank in India located
in special economic zone and has obtained permission u/s 23(1)(a) of ----------------------
Banking Regulation Act, 1949.
----------------------
7.3.3 Income of a Person with Disability
----------------------
A) Assessee: Resident Individual
B) Conditions: ----------------------

i) He is certified by the medical ‘authority to be a person with ----------------------

disability* at any time during the previous year.
----------------------
ii) He furnishes, a certificate issued by the medical authority in the
prescribed form. ----------------------
C) Quantum of deduction ----------------------
i) In case of person with disability* - `50, 000
----------------------
ii) In case of person with severe disability** - `1,00,000
----------------------
* Person with disability:
Person suffering from not less than 40% of any disability as certified ----------------------
by radical authority Blindness, Low vision, Leprosy cured, Hearing ----------------------
impairment, Locomotive disability Mental retardation, Mental illness,
Autism, Multiple disability, Cerebral Palsy ----------------------
** Person with severe disability- ----------------------
Person with 80% or more with one or more disabilities as specified above.
----------------------

Check your Progress 2 ----------------------

----------------------
State True or False.
1. The quantum of deduction in respect of Employment of New Workmen ----------------------
shall be allowed of an amount equal to 30% of the additional wages ----------------------
paid to the new regular workman employed by the Assessee.
----------------------
2. The deduction for construction and maintaining a hospital having at
least 100 beds in rural area is to the extent of 100% for the first three ----------------------
assessment years.
----------------------
3. The quantum of deduction pertaining to assessee with disability and
severe disability is up to Rs. 50,000/- and Rs. 1,00,000/- respectively. ----------------------

----------------------

----------------------

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 Notes 7.4 PROFITS FROM INFRASTRUCTURAL ACTIVITY
---------------------- The deduction is available under this section if the GTI of the assessee
includes profits and gains derived from following types of undertaking:
----------------------
A. 
Industrial undertakings or enterprises engaged in providing
---------------------- infrastructural development

---------------------- B. Telecommunication services

C. Industrial parks or special economic zones
----------------------
D. Power Generation and distribution undertakings
----------------------
(A) 
Industrial under-takings or Enterprises engaged in Infrastructural
---------------------- Development (Sec. 80 IA (4)):

---------------------- Conditions
i. Operating and maintaining the infrastructure facility on or after
---------------------- April 1, 1995.
---------------------- ii. The enterprise (and the same is owned by an Indian company
or consortium of such companies) should carry on business of
---------------------- developing or maintaining and operating or developing, maintaining
---------------------- and operating any infrastructure facility*.
iii. The undertaking has entered into an agreement with Central or
----------------------
state Government or local authority or any other statutory body for
---------------------- developing, maintaining or operating new infrastructure facility
with the condition that transfer of such infrastructure facility shall
---------------------- be transferred to the Central Government, State Government, Local
Authority or other specified authority within a period stipulated in
----------------------
agreement.
---------------------- Infrastructure facility means:
---------------------- i) Road including toll road, bridge, or rail systems

---------------------- ii) Airport, port, inland waterways

iii) Highway project, including housing or other activities being integral
---------------------- part
---------------------- iv) 
Water supply/irrigation/sanitation sewerage system, or water
treatment solid waste management system
----------------------
(B) Telecommunication Undertaking - Section 801A (4) (ii)
----------------------
Telecommunication undertaking engaged in basic or cellular, radio paging,
---------------------- domestic satellite service or network of trunking & Broad band network
and internet services providing telecommunication services at any time
---------------------- on or after 1.4.1995 but on or before 31.3.2005. It will be allowed to all
assessees.
----------------------

----------------------

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 (C) Industrial parks - Section 8OIA (4) (iii) Notes
Industrial undertaking which- (a) develops or (b) develops and operates
----------------------
or (c) maintains and operates notified Industrial parks by Central
Government at any time on or after 1.4.1997 but before 31.3.2006. ----------------------
In case a special economic zone begins to develop or operate or maintain
----------------------
and operate at anytime on or after 1.4.2001 but before 31.3.2006.
(D) Power Undertakings - ----------------------
Industrial undertaking engaged in ----------------------
(a) generation, ----------------------
(b) generation and distribution of power or,
----------------------
(c) an undertaking engaged in transmission or distribution of power,
and same is not formed by splitting up or the reconstruction of a ----------------------
business already in existence (subject to certain exceptions) on
----------------------
or after 1.4.1993 but before 31.3.2006 or starts transmission or
distribution by laying c3 network on or after 1.4.1999 but before ----------------------
31.3.2006.
----------------------
An undertaking which undertakes substantial renovation and
modernisation of the existing transmission or distribution lines ----------------------
in period of 01/04/2004 to 31/03/2006,means increase in plant &
machinery by at least 50%of the book value of above asset as on ----------------------
01/04/2004 restriction imposed on transfer of old plant & machinery
----------------------
not applicable in this case.
(E) Quantum of deduction Sec 80 IA ----------------------
All industrial undertakings other than 100% of profits & gains for 10 ----------------------
consecutive years of the business of providing Telecommunication A.Y.
out of 15 years* beginning with the Service. ----------------------

All industrial undertakings other than 100% of profits and gains for 10 ----------------------
businessof providing telecommu- consecutive A.Y. out of 15 years ----------------------
nication services beginning with the year the enterprise
developed or begins to operate or ----------------------
generate power
----------------------
Telecommunication service For first 5 consecutive A.Y. -100%
Subsequent five consecutive A.Y. -30% ----------------------
out of 15 years
----------------------
* The deduction is available only for 10 consecutive assessment years,
falling within a period of 15 years. (*20 years for Industrial undertakings ----------------------
or enterprises engaged in providing infrastructural facility other than port,
----------------------
airport, inland waterway or inland port) beginning with the assessment
year in which an assessee begins operating and maintaining infrastructure ----------------------
facility. The deduction is available commencing from the initial assessment
year as chosen by the assessee. ----------------------

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 Notes Profits from housing or other activities not liable to tax but have to
transferred to Special reserve account and same is utilised for Highway
---------------------- project other than housing or other activities before expiry of three
years from amount transferred, if not utilised, the same is taxable in that
---------------------- previous year.
---------------------- Computation of Profits and gains for deduction for initial A.Y. or subsequent
A.Y. computed as if such eligible business were the only source of income
----------------------
of the assessee during the previous year relevant to initial A.Y.
---------------------- Where any goods or services held for the purposes of the eligible business
are transferred from or any other business of assessee, the consideration
----------------------
in either case if any for such transfers a recorded in the accounts of
---------------------- eligible business does not correspond to the market value of such services
as on the date of goods or transfer, then for the purposes of the deduction
---------------------- under this section the profits & gains of such eligible business shall be
computed as if the transfer, in either case had been made at market value
----------------------
of such goods or services as on that date.
---------------------- 7.4.1 Profits from other Undertakings
---------------------- Development Undertaking - For the following industrial undertakings
deduction is available:
----------------------
A. Business of industrial undertakings including cold storage and cold chain
---------------------- facility
---------------------- B. Operation of Ship
C. Scientific and Industrial research
----------------------
D. Production of Mineral oil and Refining of Mineral Oil
----------------------
E. Developing and Building Housing Projects
---------------------- F. Multiplex Theatres
---------------------- G. Convention Centers
---------------------- H. Operating and Maintaining a Hospital in a Rural Area
I.. 
Integrated Handling Storage and Transportation of Food grains or
----------------------
processing preservation and packing of fruit or vegetables
---------------------- J. Business of any Hotel
---------------------- A) Industrial Undertaking

---------------------- (a) It is an Undertaking which is mainly engaged in the business of

generation or distribution of electricity or other form of power or in
---------------------- the construction of ships or in the manufacture or processing of goods
or in provided it is not formed by splitting up or the reconstruction
---------------------- of business already in existence subject to exceptions, an industrial
---------------------- undertakings which is formed as a result of reestablishment in
circumstances specified under section 33B.
----------------------

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 (b) It employs 10 or more workers when manufacture is carried out but Notes
with aid of power or employs 20 or more workers when manufacture
is carried out without aid of power. ----------------------
(c) If manufactured or produced any article other than specified in ----------------------
Eleven Schedule except if it is located in industrially backward
state specified in Eight schedule eligible for deduction. ----------------------
(d) Quantum of deduction and period of deduction ----------------------
Type of Business Period of Amount of Period of ----------------------
commencement deduction deduction
for claiming (Years) ----------------------
deduction
a) SSI Units engaged 1-4-1991 to 25% other than First 10 AY; 12 ----------------------
i n p r o d u c t i o n o f 31-3-2002 co. years for co.op. ----------------------
any article 30% for society owned
companies undertaking ----------------------
b) Situated in backward 1-4-1993 to First 5 A. years. ----------------------
s t a t e ( i n c l u d i n g 31-3-2004 100% for all Next 5 A.Y. 07
union territories) 30% other years for co.op. ----------------------
(eight schedule) and than co. society owned
engaged in production undertaking ----------------------
of any article or a cold 30% for
----------------------
storage plant. companies
First 5 A. years. ----------------------
c) Situated in category 1-4-1994 to Next 5 A.Y. 07
‘A’ backward district 31-3-2004 years for co.op. ----------------------
and producing any 100% for all
society owned
article including 25%other than undertaking ----------------------
cold storage plant co.
excluding articles ----------------------
30% for
s p e c i f i e d i n 11 t h ----------------------
companies.
schedule.
d) Situated in category 1-4-1994 to 100% First 3 A. ----------------------
‘B’ backward district 31-3-2004 25% other years. Next 5
and producing any than co. A.Y. ----------------------
article including cold 30% for 09 Ayears ----------------------
storage plant but companies for co.op.
excluding specified society owned ----------------------
in 11th schedule. undertaking
----------------------

----------------------

----------------------

----------------------

----------------------

Deductions from Total Income 145

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 Notes Type of Business Period of Amount of Period of
commencement deduction deduction
---------------------- for claiming (Years)
deduction
----------------------
e) Cold chain facility for 1-4-1999 to 100% for all First 5 year.
---------------------- agricultural produce 31-3-2004 25% other 2 years for
than 1 co. co.op. society
---------------------- 30% for owned
companies. undertaking
----------------------

----------------------
(f) Any other undertaking 1-4-1991 to 25% other First 10 years
---------------------- not specified above and 31-3-1995 than co. 12 years
engaged in production 30% for for co.op.
---------------------- of any article other companies society owned
---------------------- than specified in 11th undertaking
Schedule
---------------------- B) Operation of Ship
---------------------- a) Ship must be owned by an Indian Company.
---------------------- b) It should not have been owned and used in Indian territorial waters
by person resident in India prior to its acquisition by an Indian
---------------------- Company.
---------------------- c) Quantum of deduction: 30% for first 10 Assessment years from
the year of commencement of business (same should commence
---------------------- between 1.04.1991 to 31.03.1995
---------------------- C) Hotel Industry

---------------------- a) 
The business of a hotel is not formed by splitting up or the
reconstruction of business already in existence.
---------------------- b) The business of the hotel is owned & carried on by an Indian
---------------------- Company having paid up capital not less than ` 5,00.000.
c) The hotel is approved by prescribed authority.
----------------------
d) Quantum of deduction:
----------------------
(i) In case of Hilly area rural area place of pilgrimage or other notified
---------------------- areas 50% (business commenced between prescribed period) For
first 10 A.Y. from the year of commencement of business.
----------------------
(ii) In case of other place: 30% for first 10 A.Y. from the year of
---------------------- commencement of business. (business commenced between
prescribed period)
----------------------
D) Company engaged in Industrial and Scientific Research and Development:
---------------------- a) The Company must be Indian and have as its main object Scientific
---------------------- & Industrial research development.

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 b) It is for time being approved by prescribed authority. Notes
c) Quantum of deduction:
----------------------
(i) In case of approval on or after April 1, 2000 but before April
1, 2005, 100% of profits from such business is deductible for ----------------------
10 years beginning with initial A.Y.
----------------------
(ii) In case of-approval on or after 1.04.1999 but before first 10 A.
Ys. ----------------------
E) Mineral Oils and Refining of Mineral Oil ----------------------
a) Deduction is allowed to an industrial undertaking which begins ----------------------
commercial production of mineral oils in any part of India [(on or
after 01.04.1997(no such limit for unit in Northern Eastern region)] ----------------------
b) Undertaking engaged in business of refining of mineral oils on or ----------------------
after 1.10.1998 shall also be eligible for deduction.
----------------------
c) Quantum of deduction: 100% for first 7A.Y.s (provided business
commences prior to 1.4.1997) ----------------------
F) Developing and building housing projects
----------------------
a) Project should be approved by local authority before 31.3.2007
----------------------
b) The minimum plot area should be 1 acre and the maximum built
up area of each residential should be 1500 Sq. Ft. (1000 Sq. Ft. for ----------------------
Delhi and Mumbai and within 25 Km of their local limits)
----------------------
c) In case the housing project has been approved by the local authority
before 1.4.2004 it should complete on or before 31.3.2008. ----------------------
d) In a case where the housing project is approved by the local authority ----------------------
on or after 1.4.2004, it should complete within 4 years from the end
of financial year in which housing project is approved by the local ----------------------
authority.
----------------------
e) Housing project can have shops and other commercial establishment
but the built up area of the shops and other commercial establishment ----------------------
included in the housing project shall not exceed 5% of the aggregate
----------------------
built up area of the housing project or 2000 sq.ft, whichever is less.
f) Quantum of deduction: Deduction shall be allowed 100% of the ----------------------
profits from such project.
----------------------
G) Multiplex Theatres
----------------------
a) The business of the multiplex theatre is not formed by the splitting
up. or the reconstruction, of a business already in existence or by the ----------------------
transfer of any building or of any machinery or of plant previously
used for any purpose, to new business. ----------------------

b) 
Such multiplex theatres are not located at a place within the ----------------------
municipal jurisdiction of Kolkatta, Chennai, Delhi-or Mumbai.
----------------------

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 Notes c) Quantum of deductions: 50% of profit for the first 5 years.
*Multiplex Theatre is a building of a prescribed area comprising
----------------------
two or more cinema theatres and commercial shops of such size
---------------------- and number and having such other facilities and amenities as may
be prescribed.
----------------------
H) Convention Centre
---------------------- a) It means a building of a prescribed area comprising of convention
halls to be used for the purpose of holding conferences and
----------------------
seminars, being of such size and number and having such facilities
---------------------- and amenities as may be prescribed.

---------------------- b) The business of convention is not formed by splitting up or the

reconstruction of a business already in existence or by transfer to a
---------------------- new business of any building or machinery or plant previously used
for any purpose.
----------------------
c) Quantum of deduction: 50% of profit for first 5 years
---------------------- d) A convention centre constructed between 01.04.02 to 31.0.2005 is
---------------------- only eligible for deduction under this section.
I) 
Integrated Handling, Storage and Transportation of Food grains or
----------------------
processing, preservation and packing of fruits or vegetables on or after
---------------------- 1.04.2001:
(a) Condition: It must operate integrated business of handling storage
----------------------
and transportation of food grains.
---------------------- (b) Deductions. In case of -
---------------------- Period of Deduction Deduction

---------------------- (i) Company First 5 years 100%

Next 5 years 30%
----------------------
(ii) Other than Co. First 5 years 100%
---------------------- Next 5 years 25%
---------------------- J) Operating and Maintaining a Hospital in a Rural Area:
(a) The hospital has at least 100 beds for patients and the construction
----------------------
of the hospital is in accordance with the regulations of the local
---------------------- authority (and the construction of the same shall be completed
between 1. 10.2004 to 31.03.2008)
----------------------
(b) Quantum of deduction: 100% for first 5 A.Ys.
----------------------

----------------------

----------------------

----------------------

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 Summary Notes

●● As discussed earlier, the sum total of all the heads of income clubbed ----------------------
together gives the amount of Gross Total Income. While calculating the
----------------------
tax liability of an assessee, certain deductions are permissible as per the
provisions of Chapter VI-A of the Act. These deductions are based upon ----------------------
certain payments made by the assessee or certain investments made by
the assessee. ----------------------

----------------------
Keywords
----------------------
●● Deductions: While calculating net taxable income of a person, we need to
deduct deductions under section 80 of Income Tax act ----------------------
●● Section 80C: This is the most important amendment after A.Y. 2010- ----------------------
2011 where assessee can take the benefit of investments to the extent of
` 1, 00,000 ----------------------

----------------------
Self-Assessment Questions
----------------------
1. What will be deduction available in respect of person with disability?
----------------------
2. Write a short note on offshore banking and its deduction under the Act.
----------------------
3. State the quantum of deduction under section 80 JJA.
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
Multiple Choice Multiple Response.
----------------------
1. Deductions (General) refers
i. Assessee individual or HUF ----------------------
ii. Deduction pertaining to LIC premium ----------------------
iv. Deferred annuity ----------------------
v. Contribution towards 15 years Public Provident Fund
----------------------
2. Deductions available in respect of rent paid:
----------------------
i. Deduction is available to individual
iii. The assessee must have paid rent for his residential accommodation ----------------------
iv. If the assessee is employed, he is not entitled to house rent allowance ----------------------
3. Deduction towards the repayment of loan taken for higher education: ----------------------
i. Assessee only individual
----------------------
ii. Higher education means full time studies
----------------------
iv. Deduction shall be allowed for 8 assessment years

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 Notes Check your Progress 2
State True or False.
----------------------
1. True
----------------------
2. True
---------------------- 3. False
----------------------
Suggested Reading
----------------------
1. Lal B. B. 2008. Income Tax and Central Sales Tax Law and Practice.
----------------------
Pearson Education India.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Tax Deducted at Source, Interest, Rebates and Relief
UNIT

8
Structure:

8.1 Introduction
8.2 Tax Deducted at Source (TDS)
8.2.1 Payment of salary
8.2.2 TDS- interest on securities
8.2.3 TDS- Interest on other than securities
8.2.4 TDS- Winnings from lotteries
8.2.5 TDS- Payment to contractors
8.2.6 TDS- Insurance commission
8.2.7 TDS- Payment to non resident
Sportsmen or Sports Association
8.2.8 TDS- Payment in respect of NSC
8.2.9 TDS- Repurchase of Mutual Funds
8.2.10 TDS- Commission or Brokerage
8.2.11 TDS- Rent
8.2.12 TDS- Professional fees
8.3 Advance Tax
8.4 Self Assessment Tax
8.5 Interest
8.5.1 Late filing of return
8.5.2 Interest – Non payment of Advance Tax
8.5.3 Interest – Deferment of Advance Tax
8.5.4 Interest on Refund
8.5.5 Interest – Late payment of tax
8.5.6 Interest – Failure to pay TDS
8.6 Rebate in respect of securities Transaction tax
8.6.1 Rebate to member of association of persons
8.6.2 Relief for Arrears of Salary
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain concepts of Advance Tax, Interest and TDS, under the
---------------------- Income Tax Act
---------------------- • Discuss essential conditions prevailing for advance tax payment
and interest
----------------------
• Enumerate different sections relating to TDS
---------------------- • Analyse the practical problems relating to interest under section
---------------------- 234 A, B, C
• Discuss Rebates and reliefs under the Income Tax Act
----------------------
• List the conditions to be fulfilled under these Rebates
----------------------
• Analyse different examples and their taxability under the Act
----------------------

----------------------
8.1 INTRODUCTION

---------------------- The net tax payable by the assessee can be paid in the following forms -
a. Advance Tax
----------------------
b. Tax Deducted At Source
----------------------
c. Self Assessment Tax
----------------------
8.2 TAX DEDUCTED AT SOURCE (TDS)
----------------------
In order to avoid the cases of tax evasion on the part of the assessees, the
----------------------
Act has provided for tax deduction at source. As such, the payer of the various
---------------------- types of payments is required to deduct the tax at source from the various
payments made by him to the various payees and deposit the same to the credit
---------------------- of Central Government within the stipulated time.
---------------------- Similarly, the payer is responsible to issue the Tax Deduction Certificate to
the payee within the stipulated time. The payee, at the time of filing his income
---------------------- tax returns, can attach such Tax Deduction Certificates and get the credit for the
same. The person responsible for making such payments is required to file the
----------------------
Annual Returns of TDS in the prescribed form, and within prescribed time limits
---------------------- along with the TDS Challans and copies of the Tax Deduction Certificates.
If the assessee is a company, the annual returns are required to be filed in
----------------------
a computer readable format. For other assessees, it is optional to file the returns
---------------------- either in the computer readable format or regular paper. The computer readable
medium return is to be prepared on the data structure provided by NSDL and
---------------------- the same is to be copied on a floppy. The floppy should carry a label, permanent
account number, tax deduction account number, address of the person filing the
----------------------

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 return, period to which the return pertains and the form number of the return Notes
viz. Form No. 24 or Form No. 26. If the assessee fails to file the annual returns
as specified above, he will be liable to pay the penalty of ` 100 per day during ----------------------
which the default continues.
----------------------
We will discuss the provisions of TDS in relation to the following main
types of incomes received by the payee. ----------------------
a. Payment of Salaries ----------------------
b. Payment of Interest on Securities ----------------------
c. Payment of Interest other than Securities
----------------------
d. Winnings from lotteries, crossword puzzles, card games etc.
e. Payment to the contractors ----------------------

f. Insurance Commission ----------------------

g. Payment of Professional Fees ----------------------
8.2.1 Payment of Salary ----------------------
The provisions are as follows:
----------------------
Payer Employer
----------------------
Recipient Employee
Payment covered by section 192 Taxable salary of employee. For computation ----------------------
of salary for the purpose of tax deduction ----------------------
Time of tax deduction at source At the time of payment.
----------------------
Maximum amount that can be If taxable salary does not exceed maximum
paid without tax deduction. amount not chargeable to tax in case of the ----------------------
taxpayer.
----------------------
Rate of tax deduction at source Normal rates applicable to an individual
----------------------
Salary payment without tax Recipient can apply in Form No.13 to
deduction or with lower tax the Assessing Officer to get a certificate ----------------------
deduction authorising the payer to deduct tax at lower
rate or Nil rate, as may be appropriate. ----------------------

Computation of salary for the purpose of tax deduction - Please refer to the ----------------------
unit “Salaries” for computation of taxable salary.
----------------------
Apart from computing taxable salary for the purpose of tax deduction:
----------------------
1. House rent allowance - While computing taxable house rent allowance
though actual expenditure on payment of rent is considered for claiming ----------------------
deduction under section 10(13A), it has been decided as an administrative
measure that salaried employees drawing house rent allowance up to ` ----------------------
3,000 per month will be exempted from production of rent receipt. It ----------------------
may, however, be noted that this concession is only for the purpose of tax
deduction at source, and, in the regular assessment of the employee, the ----------------------

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 Notes Assessing Officer will be free to make such enquiry as he deems fit for
the purpose of satisfying himself that the employee has incurred actual
---------------------- expenditure on payment of rent - Circular No.6/2004, dated November 6,
2004.
----------------------
2. Deductions - No deductions are to be made from the salary income in
---------------------- respect of any donations for charitable purposes. The tax relief admissible
under section 80G in respect of such donations will have to be claimed by
----------------------
the employee at the time of finalisation of his assessment. However, in cases
---------------------- where contributions are made to the Jawaharlal Nehru Memorial Fund, the
Prime Minister’s Drought Relief Fund, the National Children’s Fund, the
---------------------- Indira Gandhi Memorial Trust or Rajiv Gandhi Foundation, fifty percent
of such contributions may be deducted in computing the total income
----------------------
of the employee. Similarly, the donations to the National Defence Fund,
---------------------- the Prime Minister’s National Relief Fund, the Prime Minister’s Armenia
Earthquake relief Fund, the Africa (Public Contributions - India) Fund,
---------------------- the National Foundation for Communal Harmony, the Chief Minister’s
Earthquake Relief Fund, Maharashtra, National Blood Transfusion
----------------------
Council, State Blood Transfusion Council, Army Central Welfare Fund,
---------------------- Indian Naval Benevolent Fund, Air Force Central Welfare Fund, Andhra
Pradesh Chief Minister’s Cyclone Relief Fund, 1996, National Illness
---------------------- Assistance Fund, the Chief Minister/Lieutenant Governor’s Relief
Fund, the notified University or other educational institute of National
----------------------
eminence, National Sports Fund or National Cultural Fund or Fund for
---------------------- Technology Development and Application or National Trust Welfare of
Person with Autism, Cerebral Palsy, Mental Retardation and Multiple
---------------------- Disabilities, will be eligible for hundred per cent deduction. It is to be
noted that all eligible donations, without any limit, will be deductible
----------------------
under the provisions of section 80G. Besides, the person responsible for
---------------------- making payment should also take into consideration amount deductible
under sections 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G and
---------------------- 80U - Circular No. 6/2004, dated December 6, 2004.
---------------------- 3. Rounding off - The total salary should be rounded off to the nearest
multiple of ` 10 by ignoring the fraction of less than five rupees and
---------------------- increasing the fraction of five rupees or more.
---------------------- Special cases - They are as follows:

---------------------- 1. If a person is employed by Section 192(2) provides for deduction of tax
more than one employer at source by an employer (as the tax payer
---------------------- may choose) from the aggregate salary of an
employee who is, or has been, in receipt of
----------------------
salary from more than one employer in the
---------------------- same year, if the employee furnishes details
to such employer in Form No. 12B.
----------------------

----------------------

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 2. Relief under section 89 If the employee furnishes information in Notes
Form No.
----------------------
10E to the employer, relief under section 89
should be given to the concerned employee ----------------------
while deducting tax at source under section
----------------------
192. However, this facility is available
only if the employer is Government or ----------------------
public sector undertaking or company, co-
operative society, local authority, university, ----------------------
institutions or associations or body.
----------------------
3. Other incomes of employee The employee may or may not declare his
other incomes to the employer on a plain ----------------------
(Sec. 1925(2B))
paper with verification (see rule 26B).
----------------------
Such declaration may include details of his
other incomes (including house property ----------------------
loss from self-occupied or let out property
or properties but not any other loss) and ----------------------
tax deducted there on by others. In case
----------------------
employee does not submit such information,
then employer cannot take into account ----------------------
such income (even though it is otherwise
known to the employer).After receipt of ----------------------
such information, the person responsible
----------------------
for paying salary, shall deduct out of salary
payment, the tax due on the total amount ----------------------
of tax deductible from salary only (except
where house property loss has been taken ----------------------
into account).
----------------------
4. If employer chooses to pay The person responsible for paying any
tax on perquisites (Sec.192 income in the nature of a perquisite (not ----------------------
(1A)) provided for by way of monetary payment)
----------------------
referred to in section 17(2), may pay, at his
option, tax on the whole (or part) of such ----------------------
income without making any deductions
from salary payable to employee. For this ----------------------
purpose, tax shall be determined at the
----------------------
average of income tax computed on the basis
of the rates in force for the financial year, ----------------------
on the income chargeable under the head
“Salaries”. The tax so paid by the employer ----------------------
is not taxable in the hands of the employee
----------------------
as a “perquisite”.
----------------------

----------------------

Tax Deducted at Source, Interest, Rebates and Relief 155

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 Notes 5. Particulars of perquisite and The person responsible for paying salary
profit in lieu of salary (Sec. shall furnish to the recipient a statement
----------------------
192(2C)) giving correct and complete particulars of
---------------------- perquisites or profits in lieu of salary in
Form No. 16 (if taxable salary < `1,50,000)
---------------------- or Form No. 12BA () if taxable salary>
` 1,50,000).
----------------------
8.2.2 TDS - Interest on Securities
----------------------
The provisions are as follows:
----------------------
Payer Payer of interest on securities
----------------------
Recipient A resident person (includes non-resident
---------------------- person too, up to May 31, 2003) holding
securities
----------------------
Payment covered by section Interest on securities
---------------------- 193

---------------------- Time of tax deduction at source At the time of payment or at the time of
accrual, whichever is earlier
---------------------- Rate of tax deduction at source 10% in case of listed debentures and 20% in
---------------------- case of non-listed debentures, if recipient is
resident non- company assessee, 20% if the
---------------------- recipient is a domestic company.

---------------------- Securities not subjected to tax See Note Below

deduction
----------------------
Payment without tax deduction Recipient can apply in Form No. 13 to
---------------------- or with lower tax deduction the Assessing Officer to get a certificate
authorizing the payer to deduct tax at lower
---------------------- rate or Nil rate, as may be appropriate.
----------------------
Securities not subject to tax deduction
----------------------
No tax deduction is made in case of the following payments:
---------------------- (1) 4.25 per cent National Defence Bonds, 1972, where the bonds are held by
any resident individual
----------------------
(2) 4.25 per cent National Defence Loan, 1968 or 4.75 per cent National
---------------------- Defence Loan, 1972 held by an individual
---------------------- (3) National Development Bonds

---------------------- (4) 7-year National Savings Certificates (IV Issue)

(5) Debentures issued by any co-operative society (including a co-operative
----------------------
land mortgage bank or a co-operative land development bank) or any
---------------------- other institution or authority (including a public sector company) notified
by the Central Government
156 Direct Taxation

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 (6) 6½ percent Gold Bonds, 1977 or 7 percent Gold Bonds, 1980, held by a Notes
resident individual, provided he gives a declaration in writing before the
person responsible for making payment that the total nominal value of ----------------------
such bonds (including bonds held on his behalf) does not exceed ` 10,000
at any time during the period to which interest relates ----------------------

(7) Any security of the Central/State Governments (however, from June ----------------------
1, 2007 interest exceeding Rs 10, 000 on 8 percent Savings (Taxable)
----------------------
Bonds, 2003 during the financial year shall be subject to tax deduction
under section 193) ----------------------
(8) Securities beneficially owned by the Life Insurance Corporation of
----------------------
India or the General Insurance Corporation of India or to any of the four
companies formed by virtue of the schemes framed under section 16(1) of ----------------------
the General Insurance Business (Nationalisation) Act, 1972 or any other
insurer (applicable from June 1,2002) ----------------------
(9) Any interest payable up to an aggregate amount not exceeding ` 2,500 ----------------------
in financial year to a resident individual by account payee Cheque on
listed debentures issued by the company in which public is substantially ----------------------
interested.
----------------------
Payment without tax deduction or with lower tax deduction
----------------------
The provisions are as follows:
1. Form 13: The recipient can make an application in Form No. 13 to the ----------------------
concerned Assessing Officer and Obtain a certificate authorising the payer ----------------------
to deduct tax at lower rates or deduct no tax, as may be appropriate
----------------------
2. Form 15G: If Form No. 15G is submitted to the payer, then no tax shall
be deducted at source. Form No. 15G can be submitted, if - (a) recipient ----------------------
is a person other than company or firm, (b) the estimate total income of
the recipient of the financial year is Nil:and (c) amount of interest on ----------------------
securities, dividends, interest other than interest on securities, payments in
----------------------
respect of deposits under National Savings Scheme and income in respect
of units credited or paid during the previous year does not exceed the ----------------------
maximum amount which is not chargeable to income-tax (i.e. ` 1,35,000
in case of a resident woman taxpayer, whose age is less than 65 years at ----------------------
any time during the previous year, ` 1,85,000 in case of a resident senior
----------------------
citizen whose age is 65 years or more at any time during the previous
year and ` 1,00,000 in case of any other individual and every HUF AOP/ ----------------------
BOL). Exemption limit for the financial year 2007-2008 is as follows:
` 1,45,000 in the case of resident woman (below 65 years) ` 1,95,000 in ----------------------
the case of resident senior citizen (65 years or more) ` 1,10,000 in the
----------------------
case of any other individual or every HUF/AOP/BOL.
Regimental Fund - Income of regimental fund or non-public fund ----------------------
established by Armed Forces is exempt under section 10(23AA), therefore,
----------------------
no tax may be deducted at source under sections 193 and 194 -I from the
income of such Fund - circular No. 735 dated January 30, 1996. ----------------------

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 Notes 8.2.3 TDS - Interest on other than securities
The provisions are as follows:
----------------------
Payer Any person paying interest other than
----------------------
interest on securities (not being an individual
---------------------- or HUF whose books of account are not
required to be audited under section 44AB
---------------------- in the immediately preceding financial year)
---------------------- Recipient A resident person

---------------------- Payment covered by section 194A Interest other than interest on securities
Time of tax deduction at source At the time of payment or at the time of
---------------------- accrual, whichever is earlier
---------------------- Maximum amount that can be paid Any payment up to Rs 5,000
without tax deduction
----------------------
Rate of tax deduction at source 10% if the recipient is resident non-corporate
---------------------- assessee and 20%, if the recipient is resident
---------------------- corporate assessee

---------------------- Interest not subject to tax deduction

No tax deduction is made in case of following payments:
----------------------
(1) Where the aggregate amount of interest credited or paid (or likely to be
---------------------- credited or paid) during the financial year does not exceed the limit given.
---------------------- (2) Where interest is credited or paid to any banking company, co-operative
society engaged in banking business, public financial institutions, the
---------------------- Life Insurance Corporation, the Unit Trust of India A company or a
---------------------- co-operative society carrying on the business of insurance, or notified
institutions.
---------------------- (3) Where interest is credited or paid by the firm to its partners.
---------------------- (4) Where interest is credited or paid by a co-operative society to its members
or to any other cooperative society.
----------------------
(5) Where interest is credited or paid in respect of deposits under the schemes
---------------------- of Post Office (Time deposit), Post Office (Recurring Deposits), Post
Office Monthly Income Account, Kisan Vikas Patra, National Savings
----------------------
Certificates VIII Issue, and Indira Vikas Patra.
---------------------- (6) Where interest is credited or paid in respect of deposits other than time
deposit made on or after July 1, 1995 with a banking company or (interest
----------------------
to non-members on deposit) with a co-operative bank.
---------------------- (7) Where interest is credited or paid in respect of deposit (by non - members)
---------------------- with a primary agricultural credit society or co-operative land mortgage
bank or co-operative land development bank.
----------------------

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 (8) Where interest is credited or paid by the Central Government under Notes
different provisions of the direct taxes.
----------------------
(9) Where the interest is paid or credited on compensation awarded by
the Motor Accidents Claims Tribunal if the amount of payment or the ----------------------
aggregate amount of such payment does not exceed Rs 50,000 (applicable
from June 1, 2003). ----------------------
(10) Where income is payable in relation to zero coupon bonds (applicable ----------------------
from June 1, 2005).
----------------------
(11) Interest by an offshore Banking Unit on deposits made after March 31,
2005 by RNOR. ----------------------
No tax deduction if interest does not exceed a specified amount. ----------------------
Tax under section 194A is not deductible where the aggregate amount of interest
credited or paid (or likely to be credited or paid during a financial year does not ----------------------
exceed the amount given below: ----------------------
From June Up to May ----------------------
1, 2007 ` 31, 2007 `
Where the Payer is a banking company and interest 10,000 5,000 ----------------------
is paid or payable on time deposit ----------------------
Where the payer is a co-operative society engaged in 10,000 5,000
carrying on the banking business and interest is paid ----------------------
or payable on time deposit. ----------------------
Where the payer is post office and interest is paid or 10,000 5,000 ----------------------
payable on notified deposit scheme with post office
Where the payer is any other person 5,000 5,000 ----------------------

The aforesaid limits shall be computed with reference to the income credited ----------------------
or paid by a branch of the banking company or the co-operative society, as the ----------------------
case may be. The interest on time deposits made with a primary agricultural
credit society or a primary credit society or a co-operative land mortgage bank ----------------------
or a co-operative land development bank, will not be subject to the requirement
of deduction of income -tax at source. The expression “time-deposit” has been ----------------------
defined to mean deposits, excluding recurring deposits, repayable on the expiry ----------------------
of fixed period.
----------------------
8.2.4 TDS - Winnings from Lotteries
The provisions are as follows: ----------------------

Payer Any person paying winnings from lotteries/ ----------------------

crossword puzzles/card games/other games
----------------------
Recipient Any person
Payment covered by section Winnings from lotteries/crossword puzzles/ ----------------------
194B card games
----------------------

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 Notes Time of tax deduction At the time of payment
Maximum amount that can be Any payment up to `5000
----------------------
paid without tax deduction
---------------------- Rate of tax deduction at source 30%
Payment without tax deduction No such provision
----------------------
or with lower tax deduction
---------------------- Prize money partly in cash and Tax is deductible from cash prize with reference
partly in kind to the aggregate amount of the cash prize and
---------------------- value of prize in kind
---------------------- Tax deduction at source from winnings from horse races (Sec. 194BB)
---------------------- The provisions are as follows:

---------------------- Payer Any person paying winnings from

horse races
---------------------- Recipient Any person
---------------------- Payment covered by section 194BB Winnings from horse races
Time of tax deduction At the time of payment
---------------------- Maximum amount that can be paid Any payment up to ` 2500
---------------------- without tax deduction
Rate of tax deduction at source 30%
---------------------- Payment without tax deduction or with No such provision
---------------------- lower tax deduction
8.2.5 TDS - Payment to Contractors
----------------------
The provisions are as follows:
----------------------
Payer (1) A specified person in case of payment to
---------------------- contractor, and (2) A resident contractor (not being
an individual or HUF whose books of accounts are
----------------------
not required to be audited under section 44AB in
---------------------- the immediately preceding financial year) in case
of payment to sub-contractor
----------------------
Recipient (1) A resident person in case of payment to
---------------------- contractor; and (2) A resident contractor in case
of payment to sub-contractor
----------------------
Payment covered by section Consideration for any work contract or a contract
---------------------- 194C for supply of labour for works contract
Time of tax deduction At the time of payment or accrual, whichever is
----------------------
earlier
---------------------- Maximum amount that Any payment up to ` 20,000 provided the
can be paid without tax aggregate payment/credit to the same party during
----------------------
deduction the financial year does not exceed ` 50,000
----------------------

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 Rate of tax deduction at (1) When payment is made to contractor - Notes
source 2% in case of payment for a contract other than ----------------------
advertising contract and 1% in case of payment
for advertising contract; and (2) When payment ----------------------
is made to sub- contractor - 1%
----------------------
P a y m e n t w i t h o u t t a x Recipient can apply in Form No. 13 to the
deduction or with lower Assessing Officer to get a certificate authorising ----------------------
tax deduction the payer to deduct tax at lower rate or Nil rate, as
----------------------
may be appropriate
Specified persons - The following are “specified persons” for this purpose: ----------------------

(1) the Central Government or any State Government; or ----------------------

(2) any local authority; or ----------------------
(3) any corporation established by or under a Central, State or Provincial Act; or ----------------------
(4) any company; or
----------------------
(5) any co-operative society; or
----------------------
(6) any authority constituted in India by or under any law, engaged either
for the purpose of dealing with and satisfying the need for housing ----------------------
accommodation or for the purpose of planning, development or
improvement of cities, towns and villages, or both; or ----------------------
(7) any society registered under the Societies Registered Act, 1860 or under ----------------------
any law corresponding to that Act in force in any part of India; or
----------------------
(8) any trust; or
(9) any University established or incorporated by or under a Central, State or ----------------------
Provincial Act and an institution declared to be a University under section ----------------------
3 of the University Grants Commission Act, 1956; or
(10) any firm ----------------------

(11) (with effect from June 1, 2007) any individual/HUF whose books of ----------------------
account are required to be audited under section 44AB (a)/(b) during the
immediately preceding financial year. ----------------------

It may be noted that the list does not include an individual or a Hindu ----------------------
undivided family.
----------------------
Payment without tax deducted under section 194C - From October 1, 2004,
no tax deduction shall be made if the amount of any sum credited or paid or likely ----------------------
to be credited or paid to the account of, or to, the contractor or sub-contractor
----------------------
does not exceed ` 20,000. However, the person responsible for paying such
sum is liable to deduct tax at source where the aggregate of amounts of such ----------------------
sums credited or paid or likely to be credited or paid, during the financial year
exceed ` 50,000. In other words, no tax deduction is required if single payment ----------------------
does not exceed ` 20,000 or if aggregate of all payments made in the financial
----------------------
year does not exceed ` 50,000.

Tax Deducted at Source, Interest, Rebates and Relief 161

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 Notes Up to September 30, 2004, no deduction of tax shall be made under section
194C where the amount of any sum credited or paid or likely to be credited or
---------------------- paid to the account of, or to, the contractor or sub-contractor, in pursuance of
a contract whose consideration does not exceed ` 20,000. This provision will
---------------------- apply irrespective of the fact that an individual contract has been divided into
---------------------- two or more contracts to escape tax deduction.
8.2.6 TDS - Insurance Commission
----------------------
The provisions are as follows:
----------------------
Payer Any person paying insurance commission
---------------------- Recipient A resident commission
Payment covered by section 194D Insurance commission
---------------------- Time of tax deduction At the time of payment or accrual, whichever
is earlier
----------------------
Maximum, amount that can be Any payment up to ` 5000
---------------------- paid without tax deduction
Rate of tax deduction at source 10% if the recipient is resident non-
---------------------- corporate assessee and 20% if the recipient
is resident corporate assessee
----------------------
Payment without tax deduction or Recipient can apply in Form No. 13 to
---------------------- with lower tax deduction the Assessing Officer to get a certificate
authorising the payer to deduct tax at lower
---------------------- rate or Nil rate, as may be appropriate
---------------------- 8.2.7 TDS - Payment to non-resident Sportsmen or Sports Associations
The provisions are as follows:
----------------------
Payer Any person making payment to non-resident
---------------------- foreign citizen sportsmen or non-resident sports
---------------------- associations or institution
Recipient Non-resident foreign citizen sportsmen or non-
---------------------- resident sports association or institution
---------------------- Payment covered by section (1) Payment to neo-resident foreign citizen
194E sportsman - Payment of any income by way of
---------------------- participation in India in any game (other than
---------------------- card game or gambling etc.) or advertising or
contribution of articles relating to any game
---------------------- or sports in India in newspapers, magazines or
journals. (2) Payment to non-resident sports
---------------------- association or institution - Payment of any income
---------------------- by way of any amount guaranteed to be paid or
payable in relation of any game (but other than
---------------------- card game, etc.) or sport played in India.
Time of tax deduction At the time of payment or accrual, whichever is
---------------------- earlier
----------------------

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 Rate of tax deduction at 10% Notes
source
Payment without tax Recipient can apply in Form No. 13 to the ----------------------
deduction or with lower tax Assessing Officer to get a certificate authorising
----------------------
deduction the payer to deduct tax at lower rate or Nil rate,
as may be appropriate. ----------------------
8.2.8 TDS - Payment in respect of NSC ----------------------
The provisions are as follows: ----------------------
Payer Post office ----------------------
Recipient Any person
----------------------
Payment covered by section Payment (principal plus interest) out of
194EE National Savings Scheme, 1987 ----------------------
Maximum amount that can be paid Any payment up to ` 2500 ----------------------
without tax deduction
----------------------
Time of tax deduction At the time of payment
Rate of tax deduction at source 20% ----------------------
Payment not subjected to tax Any payment made to the legal heir of the ----------------------
deduction deceased depositor
----------------------
Payment without tax deduction or If Form No. 15G is submitted
with lower tax deduction ----------------------
8.2.9 TDS - Repurchase of Mutual Funds ----------------------
The provisions are as follows: ----------------------
Payer Mutual fund or UTI ----------------------
Recipient Unit holder under section 80CCB
----------------------
Payment covered by section 194F Payment on account of repurchase of units
referred to in section 80CCB ----------------------
Time of tax deduction At the time of payment ----------------------
Rate of tax deduction at source 20%
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Tax Deducted at Source, Interest, Rebates and Relief 163

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 Notes 8.2.10 TDS - Commission or Brokerage
The provisions are as follows:
----------------------
Payer Any person paying commission or brokerage
----------------------
(not being an individual or HUF whose books
---------------------- of account are not required to be audited under
section 44AB in the immediately preceding
---------------------- financial year)
---------------------- Recipient Any resident person, in case commission is
retained by agent
----------------------
Payment covered by section 194H Commission or brokerage
---------------------- Maximum amount that can be Any payment up to ` 2500
---------------------- paid without tax deduction
Time of tax deduction At the time of payment of accrual, whichever
---------------------- is earlier
---------------------- Rate of tax deduction at source 5% (with effect from June 1, 2007, 10%)
---------------------- Payment without tax deduction or Recipient can apply in Form No. 13 to the
with lower tax deduction Assessing Officer to get a certificate authorising
----------------------
the payer to deduct tax at lower rate or Nil rate,
---------------------- as may be appropriate

---------------------- When commission is retained by agent - In case commission or brokerage

is retained by the consignee/agent and not remitted to the consignor/principal
---------------------- while remitting the sale consideration, deduction of tax is required to be made
from the amount of commission because the retention of commission by the
---------------------- consignee/agent amounts to constructive payment of the same to him by the
---------------------- consignor/principal. - Circular No. 169, dated December 4, 1991.
8.2.11 TDS - Rent
----------------------
The provisions are as follows:
----------------------
Payer Any person paying rent (not being an individual
---------------------- or HUF whose books of account are not required
to be audited under section 44AB in the
---------------------- immediately preceding financial year)
---------------------- Recipient Any resident person. It also includes a non-
resident person up to May 31, 2003
----------------------
Payment covered by section Rent
---------------------- 194-I
---------------------- Maximum amount that can be Payment made during the financial year
paid without tax deduction aggregating up to ` 1,20,000
----------------------
Time of tax deduction At the time of payment or accrual, whichever
---------------------- is earlier

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 Rate of tax deduction at source (1) If recipient is individual or HUF - 15% Notes
(2) If any other case - 20% ----------------------
(3) Reduced rate in the case of rent of plant and
machinery with effect from June 2007 - 10% ----------------------
Payment without tax deduction Recipient can apply in Form No. 13 to the ----------------------
or with lower tax deduction Assessing Officer to get a certificate authorising
the payer to deduct tax at lower rate or Nil rate, ----------------------
as may be appropriate
----------------------
Rent - Explanation (i) to section 194-I defines rent as follows - ‘rent’ means any
payment, by whatever name called, under any lease, sub-lease, tenancy or any ----------------------
other agreement or arrangement for the use of (either separately or together) any,- ----------------------
(a) Land; or
----------------------
(b) Building (including factory building); or
(c) Land appurtenant to a building (including factory building);or ----------------------
(d) Machinery; or ----------------------
(e) Plant; or
----------------------
(f) Equipment; or (g) Furniture; or (h) Fittings
[Whether or not any or all of the above are owned by the payee;] ----------------------
Therefore, it is immaterial whether or not the person to whom the rent is paid ----------------------
owns the building.
----------------------
8.2.12 TDS - Professional Fees
The provisions are as follows: ----------------------
Payer Any person paying fees for professional or ----------------------
technical services or (with effect from July
13,2006), royalty (not being an individual ----------------------
or HUF whose books of account are not
required to be audited under section 44AB ----------------------
in the immediately preceding financial year ----------------------
or not being personal purposes)
Recipient Any resident person ----------------------
Payment covered by section 194J Fees for professional or technical services ----------------------
Maximum amount that can be paid Payment made during the financial year
without tax deduction aggregating up to ` 20,000 ----------------------
Time of tax deduction At the time of payment or accrual, whichever ----------------------
is earlier
Rate of tax deduction at source 10 per cent (up to May 31, 2007: 5 per cent) ----------------------
Payment without tax deduction or Recipient can apply in Form No. 13 to ----------------------
with lower tax deduction the Assessing Officer to get a certificate
authorising the payer to deduct tax at lower ----------------------
rate or Nil rate, as may be appropriate
----------------------

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 Notes Meaning of professional/technical services - The expression
“professional services” has been defined to mean services rendered by a
---------------------- person in the course of carrying on legal, medical, engineering or architectural
profession or the profession of accountancy or technical consultancy or interior
---------------------- decorative or advertising (i.e. model, artists, photographers, providing services
---------------------- to an advertising agency) or such other profession as is notified by the Board
for the purposes of section 44AA (i.e., authorised representative, film artist or
---------------------- company secretary or information technology) or of this section.
---------------------- Failure to deduct the tax at source - Section 201
If the person responsible for deducting the tax at source and pay the same
----------------------
to the credit of Central Government fails to do so, he shall be considered to be
---------------------- Assessee in Default. The person who does not deduct the tax source as required
by the Act or after deducting fails to pay the tax as required by the Act, shall
---------------------- be liable to pay the simple interest @1% per month on the amount of such tax
from the date on which the tax was deductible till the date on which such tax is
----------------------
actually paid.
---------------------- Online Tax Accounting System
---------------------- Every person who is required to deduct the tax at source and pay the same
to the Central Government, is required to submit the quarterly statement for the
---------------------- period ending on 30th June, 30th September, 31st December and 31st March
---------------------- and submit the same to the prescribed tax authorities in the specified format
and within the specified time. These details are required to be submitted in
---------------------- addition to the annual returns to be filed in Form No. 24 or Form No. 26. Failure
to file these statements will attract the penalty of ` 100 per day during which
---------------------- the default continues. Based upon these statements and the annual returns, the
---------------------- prescribed income tax authority shall deliver a statement to every taxpayer
specifying the amount of tax paid by him or on his behalf and the individual
---------------------- taxpayer will be given the credit for the tax paid by him.

---------------------- The taxpayer is not required to attach the proof for the amount of tax
deducted at source with the return of income. The person responsible to deduct
---------------------- the tax and pay that the Central Government is not required to issue tax deduction
certificate to the payee. These provisions will apply with effect from 1st April
---------------------- 2005.
---------------------- The penal provisions in respect of failure in respect of non-compliance
with the TDS requirements are enumerated below:
----------------------
Nature of default Penalty
----------------------
271C: Failure to deduct the tax at source Sum equal to the amount of tax
---------------------- which he failed to deduct

---------------------- 276B: Failure to pay the tax deducted Punishable with rigorous
imprisonment at source from 3 months to 7 years and a fine.
---------------------- 272A (2): Failure to file the return of TDS ` 100 per day during which
---------------------- default continues subject to the maximum of amount of tax deductible.

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 272A (2): Failure to issue TDS Certificates ` 100 per day during which Notes
default continues subject to the maximum of amount of tax deductible.
----------------------
272BB: Failure to apply for TAN and failure Maximum penalty of
` 10,000 to quote the same in challans, certificates and returns. ----------------------
Tax-Deduction Account Number (TAN) - Section 203 A
----------------------
If the person responsible for deducting the tax at source and paying
the same to the credit of Central Government has not been allotted the Tax ----------------------
Deduction Account Number (TAN), he shall within one month from the end
----------------------
of the month in which the tax was deducted, apply for the allotment of TAN
Number by filing Form No. 49B. Such TAN is required to be quoted by him in ----------------------
all the challans, certificates and returns required to be prepared/filed as per the
provisions of the Act. ----------------------

----------------------
Check your Progress 1
----------------------
Multiple Choice Multiple Response.
1. TDS relates to the main types of incomes received by the payee: ----------------------
i. Payment of salaries ----------------------
ii. Payment of interest on securities
----------------------
iii. Payment to the contractors
iv. Insurance commission ----------------------
v. Long-term capital gains ----------------------
2. Provisions of interest on securities
i. Recipient a resident person ----------------------
ii. Recipient a Non resident person also ----------------------
iii. TDS at the time of payment of interest/at the time of accrual
----------------------
iv. No tax deduction on certain specified securities
v. Interest above aggregating Rs. 2,500/- payment by account ----------------------
payee cheque
----------------------
vi. Form 16 for payment without tax deduction
3. Provisions for TDS on insurance commission ----------------------
i. Recipient a resident person ----------------------
ii. At the time of payment or accrual, whichever is earlier
----------------------
iii. Up to Rs. 5,000/-, no tax deduction
iv. Up to Rs. 2,500/-, no tax deduction ----------------------
v. Form 13 for no tax deduction at source
----------------------

----------------------

----------------------

----------------------

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 Notes 8.3 ADVANCE TAX
---------------------- The purpose of Advance Tax is to ensure the receipt of tax proceeds by
the Government before the assessment year ends on 31st March. Every assessee
---------------------- is liable to pay advance tax if his tax liability exceeds ` 5,000. All the heads of
income attract the provisions relating to advance tax.
----------------------
When the Advance tax is payable
----------------------
The due date for the payment of advance tax is different for corporate
---------------------- assesses and non corporate assesses.
---------------------- Corporate Assessees
On or before 15th June of the Up to 15% of advance tax
----------------------
previous year payable
----------------------
On or before 15th September Up to 45% of advance tax
---------------------- of the previous year payable payable
---------------------- On or before 15th December Up to 75% of advance tax
---------------------- of the previous year payable payable
On or before 15th March of Up to100% of advance tax
----------------------
Non-Corporate Assessees
----------------------
On or before 15th June of the Nil previous year payable
---------------------- On or before 15th September Up to 30% of advance tax
---------------------- On or before 15th December Up to 60% of advance tax
---------------------- On or before 15th March Up to 100% of advance tax
Note: Any advance tax paid before 31st March is treated as advance tax paid
----------------------
during the previous year.
---------------------- Failure to pay the Advance Tax
---------------------- If the advance tax paid by the assessee is less than 90% of the assessed tax,
the assessee is liable to pay the interest as per the provisions of Section 234B
---------------------- of the Act. Similarly, if advance tax is not paid according to the instalments
---------------------- prescribed, the assessee is liable to pay the interest as per the provisions of
Section 234C of the Act. The discussions about the interest payable as per
---------------------- the provisions of Section 234B and 234C of the Act are done in the following
paragraphs.
----------------------

---------------------- 8.4 SELF-ASSESSMENT TAX

---------------------- If the amount of tax payable by the assessee is higher than the combined
amount of tax deducted at source and advance tax, such tax along with the
---------------------- amount of interest payable should be paid by the assessee at the time of filing
---------------------- the return of income. Such tax is called as Self Assessment tax.

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 8.5 INTEREST Notes
8.5.1 Late filing of Return ----------------------
Section 234A is applicable if the return of income is furnished after the ----------------------
due date or is not furnished. Interest is computed as follows.
----------------------
1. Rate of Interest 1% per month (simple interest)
2. Period for which interest is Commencing on the date immediately ----------------------
payable following due date of filing the return
----------------------
a. if the return is furnished of income and ending on date of
after the due date furnishing of return of income. ----------------------
b. if no return is furnished Commencing on the date immediately
----------------------
following due date of filing the return
of income and ending on date of ----------------------
completion of assessment under section
144 ----------------------
3. Amount on which interest is Tax on total income as declared in the
----------------------
payable return minus advance tax paid and tax
a. where interest is paid under deducted or collected at source ----------------------
section 140A Tax on total income as determined under
----------------------
b. where interest is paid on the section 143(1) or on assessment under
income determined under section 143(3) or 147 or 153A minus ----------------------
section 143(10 or assessed (advance tax paid and tax deducted at ----------------------
under section 143(3) or 144 source)
or 147 or 153A ----------------------
When interest is paid on the income determined under Section 143(3) or ----------------------
144 and interest for delayed filling of return is already paid under Section
140A ----------------------
Interest under section 234A is computed in such cases as follows: ----------------------
1. (Tax on total income as determined under section 143(1) or on assessment
under section 143(3) or 147 or 153A minus (advance tax paid and tax ----------------------
deducted or collected at source) *1% period for which interest under ----------------------
section 234A is payable.
----------------------
2. (Tax on total income as declared in the return minus (advance tax paid
and tax deducted or collected at source) 1%#*period for which interest ----------------------
under section 234A is payable.
----------------------
3. Compute (1) - (2). This is the amount of interest payable for delayed filing
of return when income is determined under section 143(1) or assessed ----------------------
under section 143(3) or 144.
----------------------
8.5.2 Interest - Non Payment of Advance Tax
Interest is payable under section 234B if advance tax is not paid or advance tax ----------------------
paid is less than 90% of the assessed tax. ----------------------

Tax Deducted at Source, Interest, Rebates and Relief 169

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 Notes If no tax has been paid on or after April 1 of the assessment year under section
140A or otherwise -
----------------------
Interest is computed as follows:
----------------------
1. Rate of interest 1%# per month (simple interest)
---------------------- 2. Period for which interest is Commencing from theApril 1 of the assessment
payable year and ending on the date of payment of self-
----------------------
assessment tax.
---------------------- 3. Amount on which interest Tax on total income as determined under
is payable section 143(1) or on assessment under section
----------------------
143(3) or 147 or 153A minus tax deducted or
---------------------- collected at source minus advance tax, if paid.

---------------------- If tax has been paid on or after April 1 of the assessment year under Section
140A or otherwise:
---------------------- Interest is computed as aggregate of the following:
---------------------- Interest is computed @ per month (simple interest) for the period
commencing April 1 of the assessment year and ending on the date of payment
----------------------
of self -assessment tax under section 140A or otherwise on the basis of tax
---------------------- determined under section 143(1) or on assessment under section 143(3) or 147
or 153A minus tax deducted or collected at source minus advance tax.
----------------------
Thereafter, interest is computed @ 1% per month (simple interest) for the
---------------------- period commencing from the date of payment of self assessment tax and ending
on date of determination of income under section 143(1) or on assessment under
---------------------- section 143(3) or
---------------------- 144 or 147 or 153A on the basis of tax determined under section 143(1)
or on assessment under section 143(3) or 147 or 153A minus tax deducted or
---------------------- collected at source minus advance tax minus tax paid under section 140A or
---------------------- otherwise.
It is to be noted that from the amount of interest as computed above, the
---------------------- amount paid under section 140A or otherwise towards interest chargeable under
---------------------- section 234B shall be deducted.
Computation of interest where interest is to be paid at the time of payment
---------------------- of tax under section 140A
---------------------- Interest is computed @ 1% per month (simple interest) for the period
commencing April 1of the assessment year and ending on the date of payment
----------------------
of self-assessment tax under section 140A or otherwise on the basis of tax on
---------------------- returned income minus tax deducted or collected at source minus advance tax.
Example
----------------------
X files his return of income on February 2, 2008 for the assessment year 2010-
---------------------- 2011, showing income of ` 2, 80,000. He has paid ` 3,000 as advance tax during
2009-10 and a tax deduction of ` 1,000 has been made. The due date of filling
----------------------

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 return of income in case of X was October 31, 2010 for the assessment year. Notes
Assume that X pays all his tax dues (i.e. 30,680) and interest under sections
234A, 234B and 234C at the time of payment of self- assessment tax. Compute ----------------------
interest payable under section 234B.
----------------------
X shall compute interest under section 243B at the time of payment of
self-assessment tax under section 140A as follows: ----------------------

1. Rate of interest 1% per month ----------------------

2. Period for which interest is payable April 1, 2007 to February 2, 2008 (i.e.
----------------------
11 months)
3. Amount on which interest is payable ` 33,990 (tax on ` 2, 80,000) - ` 1,000 ----------------------
(TDS) - ` 3,000 (advance tax) = ` 29, 990
or rounded off to ` 29,990 ----------------------

Amount of interest, therefore, works out to be Rs 3,289. ----------------------

Example - 2 Continuing Example -1 above, assessment of X is completed ----------------------
under section 143(3) on May 10, 2010 on income of ` 3, 00,000 Compute
interest payable on assessment under section 143(3). ----------------------
Interest Payable on assessment of income under section 143(3) will be ----------------------
computed in two parts as follows:
----------------------
Part 1
----------------------
1. Rate of interest 1% per month
2. Period for which interest is April 1, 2009 to February 2, 2010 (i.e. ----------------------
payable 11 months) ----------------------
3. Amount on which interest is ` 40,170 (tax on ` 3,00,000) - ` 1,000
payable (TDS) - ` 3,000 (advance tax) = ` 36,170 ----------------------

Amount of interest, therefore, works out to be ` 3,971. ----------------------

Part 2 ----------------------
1. Rate of interest 1% per month ----------------------
2. Period for which interest is payable February 2, 2008 to May 10, 2008 (i.e. ----------------------
3 months)
3. Amount on which interest is payable ` 40,170 (tax on ` 3,00,000) - ` 1,000 ----------------------
(TDS) - ` 3,000 (advance tax) - ----------------------
` 29,990 (tax paid at the time of
self- assessment)= ` 6,180 ----------------------
Amount of interest, therefore, works out to be ` 183. ----------------------
Total interest payable under section 234B is ` 4154 (i.e. `s 3,971 + ` 183). ----------------------
However, interest already paid at the time of payment of self - assessment tax is
` 3289. Therefore, interest payable under section 234B at time of assessment of ----------------------
income under section 234B is ` 865 (i.e. 4,154- ` 3, 289).
----------------------

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 Notes 8.5.3 Interest - Deferment of Advance Tax
Interest is payable under section 234C if assessee has not paid advance
----------------------
tax or has underestimated the instalments of advance tax. It is computed as
---------------------- follows:
In case of a non-company assessee - Interest is computed as follows -
----------------------
Interest is payable if Rate of interest Period of Amount on
----------------------
advance tax paid on (simple interest) interest which interest
---------------------- or before is payable
September 15<30% 1% per month 3 months 30% (a - b) - c
----------------------
(a - b)
---------------------- December 15 <60% 1% per month 3 months 60% (a - b) - d
(a -b)
----------------------
March 15<100% (a-b) 1% per month 1 month 1000% (a - b) - e
----------------------
Notes:
----------------------
1. Tax on the total income as declared in the returns filed by the assessee.
---------------------- 2. Tax deducted or collected at source, double tax relief under sections 90,
90A and 91.
----------------------
3. Amount of advance tax paid on or before September 15 of the financial
---------------------- year immediately preceding the relevant assessment year.
---------------------- 4. Amount of advance tax paid on or before December 15 of the financial
year immediately preceding the relevant assessment year.
----------------------
5. Amount of advance tax paid on or before March 15 of the financial year
---------------------- immediately preceding the relevant assessment year.
---------------------- In case of company assessee - Interest is computed as follows:

---------------------- Interest is payable if Rate of interest Period of Amount on which

advance tax paid on or (simple interest) interest interest is payable
---------------------- before
---------------------- June 15<12% (a - b) 1% per month 3 months 15% (a - b) - c
September 15<36% (a - b) 1% per month 3 months 45% (a - b) - d
----------------------
December 15<75% (a - b) 1% per month 3 months 75% (a - b) - e
----------------------
March 15<12% (a - b) 1% per month 1 month 100% (a - b) - f
----------------------
Notes:
----------------------
1. Tax on the total income as declared in the return filed by the assessee.
---------------------- 2. Tax deducted or collected at source (and, from the assessment year 2007-
08, MAT credit/double taxation relief)
----------------------
3. Amount of advance tax paid on or before June 15 of the financial year
---------------------- immediately preceding the relevant assessment year.

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 4. Amount of advance tax paid on or before September 15 of the financial Notes
year immediately preceding the relevant assessment year.
----------------------
5. Amount of advance tax paid on or before December 15 of the financial
year immediately preceding the relevant assessment year. ----------------------
6. Amount of advance tax paid on or before March 15 of the financial year
----------------------
immediately preceding the relevant assessment year.
Short payment of advance tax in case of capital gains or casual income - ----------------------
No interest will be levied in respect of any shortfall in the payment of advance ----------------------
tax due on the returned income if -
----------------------
a. The shortfall is on account of underestimation or failure to estimate the
amount of capital gains (short-term or long-term) or income of the nature ----------------------
referred to in section 2(24)(ix) (i.e., lottery income, gambling income,
etc.); and ----------------------

b. The assessee has paid the whole of the amount of tax payable in respect of ----------------------
such income, as part of remaining instalments of advance tax, which are
due, or if no instalment is due, then such tax is paid before the end of the ----------------------
financial year. ----------------------
8.5.4 Interest on Refund
----------------------
Section 234D is applicable (i) if any refund is granted under section under
section 143(1) but no refund is due on regular assessment, or (ii) if any refund is ----------------------
granted to the assessee under section 143(1) and the refund so granted exceeds
----------------------
the amount refundable on regular assessment.
For the aforesaid purpose, regular assessment means assessment under section ----------------------
143(3) or 144. If an assessment is made for the first time under section 147 or ----------------------
section 153A, the assessment so made shall be regarded as a regular assessment.
Interest will be computed as follows: ----------------------

Rate of interest 0.5% per month or part of month ----------------------

Period for which interest is payable Commencing from the date of grant of ----------------------
refund under section 143(1) to date of
regular assessment ----------------------

Amount on which interest is payable ----------------------

a. If refund is granted under ----------------------
section 143(1) but no refund is Whole of the amount refunded
due on regular assessment ----------------------
b. If any refund is granted to the ----------------------
assessee under section 143(1) The excess amount refunded under section
and the refund so granted 143(1) over the amount refundable on ----------------------
exceeds the amount refundable regular assessment.
----------------------
on regular assessment
----------------------

Tax Deducted at Source, Interest, Rebates and Relief 173

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 Notes Adjustment under section 234D (2) - Where, as a result of an order under
section 154 or 155 or 250 or 254 or 260 or 262 or 263 or 264 or an order of the
---------------------- Settlement Commission under section 245D (4) the amount of refund granted
under section 143(1) is held to be correctly allowed, either in whole or in part,
---------------------- as the case may be, then the interest chargeable under section 234D(1), shall be
---------------------- reduced accordingly.
8.5.5 Interest - Late Payment of Tax
----------------------
If any assessee fails to pay any tax (other than advance tax) specified
---------------------- in a demand notice within 30 days of the service of notice of demand, he is
liable to pay interest at the rate of 1% for every month or part of month from
----------------------
expiry of time limit mentioned in noticed of demand for payment of income-tax
---------------------- commencing from the date of service of demand notice and ending on the date
on which the amount is paid.
----------------------
Reduction or waiver of interest by CCIT/CIT - CCIT/CIT may reduce or
---------------------- waive the amount of interest paid or payable by an assessee if he is satisfied that
-() payment of such amount has caused or would cause genuine hardship to the
---------------------- assessee; (ii) default in the payment of the amount on which interest has been
paid was payable was due to circumstances beyond the control of the assessee;
----------------------
and (iii) the assessee has co-operated in any inquiry relating to the assessment
---------------------- or any proceeding for the recovery of any amount due from him.

---------------------- Cancellation of assessment order - Where an assessment order is

cancelled under section 146 or cancelled/set aside by an appellate/revisional
---------------------- authority and the cancellation/ setting aside becomes final (i.e., it is not varied
as a result of further appeals/revisions), no interest under section 220(2) can be
---------------------- charged pursuant to the original demand notice. The necessary corollary of this
---------------------- point will be that even when the assessment is reframed, interest can be charged
only after the expiry of 30 days from the date of service of demand notice
---------------------- pursuant to such fresh assessment order - Circular No.334, dated April 3, 1982.

---------------------- Assessment originally made varied or set aside but restored on the
further appeal - Where the assessment made originally by the Assessing Officer
---------------------- is either varied or even set aside by one appellate authority but on further appeal,
the original order of the ITO is restored either in part or wholly, the interest
---------------------- payable under section 220(2) will be computed with reference to the tax finally
---------------------- determined. The fact that during an intervening period, there was no tax payable
by the assessee under any operative order would make no differences to this
---------------------- position - Circular No. 334, dated April 3, 1982.
---------------------- The observation given in Circular No.334 does not find support in the
judicial pronouncement given by the Apex Court in Vikrant Tyres Ltd. v. First
---------------------- ITO (2001) 115 Taxman 202. The Supreme Court has held that section cannot
be invoked to revive a demand notice, which has already been fully satisfied.
---------------------- The landmark ruling of the Supreme Court is a clear pointer to taxpayers to pay
---------------------- tax demands in full (and not in part) as and when they arise to save the burden
of interest in the ultimate.
----------------------

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 8.5.6 Interest - Failure to pay TDS Notes
If the person responsible for deducting tax at source does not deduct tax
----------------------
at source, wholly or partly, under sections 192 to 196C or after deducting tax
fails to pay the same as required by the Act, he is liable to pay interest at the rate ----------------------
of 12% (up to September 7, 2003, 15%) per annum on the amount of such tax
from the date on which such tax was deductible to the date on which the tax is ----------------------
actually paid.
----------------------
8.6 REBATE IN RESPECT OF SECURITIES TRANSACTION TAX ----------------------

(w.e.f. A.Y.2005-06) ----------------------

A) Assessee: An assessee whose total income includes any income-chargeable ----------------------
under the head profits and gains of business or profession arising from
taxable securities transactions ----------------------
B) Quantum of Rebate: The assessee is entitled for rebate least of the below - ----------------------
(i) Security transaction tax paid by the assessee; or
----------------------
(ii) Average rate of tax x business income from such taxable securities
transaction ----------------------
8.6.1 Rebates to Member of an Association of Persons ----------------------
A) Assessee: In case of members of AOP in receipt of any income from AOP ----------------------
and same is included in hands of such a person.
----------------------
B) Quantum of Rebate:
Step 1: Compute tax on total income of member of AOP and ascertain percentage ----------------------
of tax on total income.
----------------------
Step 2: Apply the percentage on share of income from AOP included in total
income and find out resultant amount. ----------------------
Step 3: The amount so arrived is rebate available under Section 86 and it is ----------------------
deductible from 86.
----------------------
8.6.2 Relief for Arrears of Salary
----------------------
When relief can be claimed: If an assessee received arrears of salary or salary in
advance and thereby the rate of tax applicable in his case becomes higher than ----------------------
the usual rate due to the reason of such arrears of salary or advance salary for
a period of more than 12 months’ salary being chargeable in one Assessment ----------------------
Year, or if he received profits in lieu of salary and thereby his rate of tax becomes
----------------------
higher than as usual, he may make an application for relief to the Assessing
Officer. ----------------------
I] Relief for Arrears of Salary or in Advance salary (Rule 21 A (2))
----------------------
1. Calculate the tax payable on the total income, including additional
salary of the relevant previous years in which it is received. ----------------------

----------------------

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 Notes 2. 
Calculate the tax payable on the total income, excluding the
additional salary (i.e. advance salary or arrears of salary) of the
---------------------- relevant previous year(s), in which it is received.
---------------------- 3. Find out difference between tax [3=1-2]
4. Compute the tax on total income after including the additional
----------------------
salary in the previous year to which such salary relates.
---------------------- Compute the tax on the total income after excluding the additional
salary in the previous year to such salary relates.
----------------------
6. Find out the difference between tax at (4) and (5) [6= 4-5]
----------------------
7. Relief = Balance of step 3- Balance of step 6 [Relief = 3-6]
---------------------- II] Computation of relief in respect of Gratuity [Rule 21A (3)]
---------------------- For claiming relief, taxable gratuity must be for 5 or more years’ service
rendered.
----------------------
A] In case gratuity payable is in respect of past service of 15 years or more.
----------------------
(i) Compute average rate of tax* on the total income including the
---------------------- gratuity in the year of receipt.

---------------------- (ii) Find out the tax on gratuity at average rate of computed at (i) above.
(iii) Compute average rate of tax by adding 1/3 of gratuity to other
---------------------- income of each of the preceding 3 years
---------------------- (iv) Find out average of these average rates computed in the manner
specified in (iii) above and compute the tax on gratuity at that rate.
----------------------
(v) The difference between the tax on gratuity computed at (ii) and (iv)
---------------------- will be relief available under-Section 89(1).
---------------------- Total Tax
Average rate of tax = × 100
Total Income
----------------------
B] In case gratuity payable is in respect of past service of 5 years or more but
---------------------- less than 15 years, the relief is computed on the same lines replacing in
above case A Step3 duration for 2 years instead of 3 years and average is
----------------------
computed base on 2 years by adding one-half of the gratuity to the other
---------------------- income of each of the preceding two years.
III] Computation of relief in respect of compensation on termination of
----------------------
employment (Rule 21A (4))
---------------------- Relief shall be available if following conditions are satisfied:
---------------------- a) Compensation is received after continuous service of not less than 3 years.
---------------------- The unexpired term of employment is also not less than 3 years.
The relief is calculated in the same manner as if gratuity was paid to the
----------------------
employee in respect of service rendered for a period of 15 years or more.
----------------------

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 IV] Computation of relief in respect of payments in commutation of pension Notes
Rule 21A(S)
----------------------
A relief can be claimed in respect of payment in commutation of pension
received in is computed in same manner as if gratuity was paid to the employee ----------------------
in respect of service rendered for period of 15 years or more (discussed in supra
A). ----------------------
V] Computation of relief in respect of other payments Rule 21A (6) ----------------------
In case of other payments, CBDT may, having regards to circumstance of each
----------------------
case, allow such relief as it deems fit.
----------------------
Check your Progress 2
----------------------
State True or False.
----------------------
1. If the advance tax paid by the assessee is less than 90% of the assessed
tax, the assessee is liable to pay interest as per the provisions of the IT ----------------------
Act.
----------------------
2. If the payer, at present, fails to deduct and pay tax at source, wholly
or partly, he is liable to pay interest at the rate of 12% per annum. ----------------------

3. For corporate assessee, the advance tax is to be paid at quarterly ----------------------

intervals at the rate of 15%, 45%, 75% and 100% of advance tax of
the previous year payable. ----------------------

----------------------
Summary ----------------------

●● The net tax payable by the assessee can be paid in the following forms - ----------------------
a. Advance Tax ----------------------
b. Tax Deducted At Source
----------------------
c. Self-Assessment Tax
----------------------
●● The payer of the various types of payments is required to deduct the tax at
source from the various payments made by him to the various payees and ----------------------
deposit the same to the credit of Central Government within the stipulated
time. ----------------------
●● Similarly, the payer is responsible to issue the Tax Deduction Certificate ----------------------
to the payee within the stipulated time. The payee, at the time of filing his
income tax returns, can attach such Tax Deduction Certificates and get ----------------------
the credit for the same. The person responsible for making such payments
----------------------
is required to file the Annual Returns of TDS in the prescribed form and
within prescribed time limits along with the TDS Challans and copies of ----------------------
the Tax Deduction Certificates.
----------------------
●● If the assessee is the company, the annual returns are required to be filed
in the computer readable medium. For other assessee, it is optional to file ----------------------

Tax Deducted at Source, Interest, Rebates and Relief 177

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 Notes the returns either in the computer readable medium or regular paper. The
computer readable medium return is to be prepared on the data structure
---------------------- provided by NSDL and the same is to be copied on a floppy. The floppy
should carry a label name, permanent account number, tax deduction
---------------------- account number, address of the person filing the return, period to which
---------------------- the return pertains and the form number of the return viz. Form No. 24
or Form No. 26. If the assessee fails to file the annual returns as specified
---------------------- above, he will be liable to pay the penalty of ` 100 per day during which
the default continues.
----------------------
●● Steps to Determine Tax Liability:
---------------------- 1. Determine the taxable income and find out the tax payable as per
---------------------- the applicable rates for the relevant assessment year.
2. From the tax payable so determined, deduct the following tax
---------------------- rebates u/s 88, 88B, 88C, 88D and 88E,
---------------------- 3. To the balance tax liability determined in step 2 above add surcharge
at applicable rate
----------------------
4. To Tax Liability arrived as per step 3 above add Education Cess @
---------------------- 2% and
---------------------- 5. From Tax calculated under step 4 deduct the following reliefs

---------------------- a. Relief in respect of share of profit from an AOP or BOI

[Section 86]
---------------------- b. Relief in respect of Arrears or Advance salary [Section 89 (1)]
---------------------- c. Relief for doubly taxed income [Section 91]
---------------------- Determine the taxable income and find out the tax payable as per
the applicable rates for the relevant assessment year.
----------------------
6. From the tax payable so determined, deduct the following tax
---------------------- rebates u/s 88, 88B, 88C, 88D and 88E
7. The balance tax liability determined in step 2 above add surcharge
----------------------
at applicable rate
---------------------- 8. To Tax Liability arrived as per step 3 above add Education Cess @
---------------------- 2% and
9. From Tax calculated under step 4 deduct the following relief’s
----------------------
a. Relief in respect of share of profit from an AOP or BOI
---------------------- [Section 86]
---------------------- b. Relief in respect of Arrears or Advance salary [Section 89 (1)]
c. Relief for doubly taxed income [Section 91]
----------------------

----------------------

----------------------

178 Direct Taxation

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 Keywords Notes

----------------------
●● Tax Deduction at Source: In order to avoid the cases of tax evasion on
the part of the assessees, the Act has provided for the tax deduction at ----------------------
source.
●● Advance Tax: The purpose of Advance Tax is to ensure the receipt of ----------------------
tax proceeds by the Government before the assessment year ends on 31st ----------------------
March.
●● Self Assessment tax: If the amount of tax payable by the assessee is ----------------------
higher than the combined amount of tax deducted at source and advance ----------------------
tax, such tax along with the amount of interest payable should be paid by
the assessee at the time of filing the return of income. Such tax is called ----------------------
as Self Assessment tax.
----------------------
●● Interest: Interest is payable if assessee fails to pay tax within due dates of
file return of income within due date. ----------------------
●● Rebates: concessions that are available for specific persons such as ----------------------
Association of persons, salaried persons etc.
----------------------
Self-Assessment Questions ----------------------
1. Write in brief provisions relating to: ----------------------
i. Commission and brokerage
----------------------
ii. Winning from lotteries
----------------------
iii. Repurchase of units of mutual funds
iv. Rent ----------------------

2. Define interest u/s234A, 234B, 234C. ----------------------

3. Discuss Tax Deducted At Source. ----------------------
4. Write a note on Tax Deduction Account Number.
----------------------
5. Discuss the provisions regarding:
----------------------
i. Salary
ii. Professional Fees ----------------------

iii. Interest on securities ----------------------

iv. Rent ----------------------

----------------------

----------------------

----------------------

----------------------

Tax Deducted at Source, Interest, Rebates and Relief 179

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 Notes Answers to Check your Progress
---------------------- Check your Progress 1

---------------------- Multiple Choice Multiple Response.

1. TDS relates to the main types of incomes received by the payee:
----------------------
i. Payment of salaries
----------------------
ii. Payment of interest on securities
---------------------- iii. Payment to the contractors
---------------------- iv. Insurance commission

---------------------- 2. Provisions of interest on securities

i. Recipient a resident person
----------------------
ii. Recipient a Non resident person also
----------------------
iii. TDS at the time of payment of interest/at the time of accrual
---------------------- iv. No tax deduction on certain specified securities
---------------------- v. Interest above aggregating Rs. 2,500/- payment by account payee
cheque
----------------------
3. Provisions for TDS on insurance commission
----------------------
i. Recipient a resident person
---------------------- ii. At the time of payment or accrual, whichever is earlier
---------------------- iii. Up to Rs. 5,000/-, no tax deduction

---------------------- v. Form 13 for no tax deduction at source

----------------------
Check your Progress 2
----------------------
State True or False.
---------------------- 1. True
---------------------- 2. False

---------------------- 3. True

---------------------- Suggested Reading

----------------------
1. Hardy, Dan. 2007. The Complete Pool Manual for Homeowners &
---------------------- Professionals: A Step-by-step Maintenance Guide. Atlantic Publishing
Company.
----------------------

----------------------

----------------------

180 Direct Taxation

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Assessment and Procedures
UNIT

9
Structure:

9.1 Introduction
9.2 Powers of Income Tax Officers
9.3 Filing of Returns of Income
9.3.1 Filing of bulk returns
9.3.2 E-Filing Of Returns
9.3.3 Loss return
9.3.4 Belated Returns
9.3.5 Returns by Trusts
9.3.6 Returns by political parties
9.3.7 Returns by Certain Associations
9.3.8 Revised return
9.3.9 Defective Returns
9.3.10 Signature on Return
9.4 Enquiry Before assessment
9.4.1 Assessment
9.4.2 Best Judgment Assessment
9.4.3 Income Escaping Assessment
9.4.4 Notice under escaping assessment
9.4.5 Assessment of any other person
9.5 Appeals to High Court
9.5.1 Revisions by commissioner of Income Tax
9.5.2 Revision of other orders
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Assessment and Procedures 181

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
•  xplain concepts of Assessment and Procedures under Income Tax
E
---------------------- Act.
---------------------- • Discuss the concepts of filing of returns and its consequences.
• List the powers given to Assessing Officer.
----------------------
• Describe scrutiny procedures under assessment
----------------------
• Analyse different Appeals under the Act
----------------------

---------------------- 9.1 INTRODUCTION

---------------------- The responsibility of an assessee under the Act does not get end with the
payment of tax. Even if the tax required to be paid under the Act is paid, the
---------------------- assessee is required to file the Return of Income.
---------------------- Tax Authorities - Sec. 116
---------------------- There shall be the following classification of Income-Tax authorities, for
implementation of the Act.
----------------------
●● The Central Board of Direct Taxes
---------------------- ●● Directors -General of Income-Tax or Chief Commissioners of Income
Tax
----------------------
●● Directors of Income-Tax or Commissioners of Income-Tax or
---------------------- Commissioners, Income- Tax (Appeals)
---------------------- ●● Additional Directors of Income-Tax or Additional Commissioners of
Income or Additional
---------------------- ●● Commissioners of Income-Tax (Appeals)
---------------------- ●● Joint Directors of Income-Tax or joint Commissioners of Income-Tax
Deputy Directors of Income-Tax or Deputy Commissioners of Income-
---------------------- Tax Assistant Directors of Income-Tax or Assistant Commissioners of
---------------------- Income-Tax Income -Tax Officers
●● Tax Recovery Officers
----------------------
●● Inspectors of Income- Tax
---------------------- “Assessing Officer” means an Income-Tax Officer or Assistant
---------------------- Commissioner or Deputy Commissioner or Assistant Director or Deputy
Director of Income-Tax or the Joint Commissioner or joint Director of Income-
---------------------- Tax who is vested with the relevant jurisdiction and assessment function under
the relevant provisions of the Act, Sec.2(7A)
----------------------
If an Assessing Officer is vested with jurisdiction over any area then he
---------------------- shall have jurisdiction within the limit of such area in the case of any person

182 Direct Taxation

carrying on business or profession within that area or where the business/ Notes
profession is carried on by any person in more places than one, if the principal
place of business or profession is situated within that area, or having place of ----------------------
residence within that area. Any dispute relating to jurisdiction of an Assessing
Officer to assess any person shall be determined by the Director General or ----------------------
Chief Commissioner or Commissioner of Income-Tax. ----------------------
If the question of jurisdiction is relating to areas within the jurisdiction
----------------------
of different Director Generals, Chief Commissioners or Commissioners of
Income-Tax, then the concerned authorities can determine the issue. ----------------------
If they are not in agreement then it shall be decided by the Board or by
----------------------
the Director General of Income-Tax or Chief Commissioner of Income-Tax
or Commissioner as the Board may by notification in the Official Gazette, ----------------------
authorise in this behalf.
----------------------
The assessee can object to the jurisdiction of Assessing Officer within the
time limit specified below: ----------------------
Return of income filed No return of income filed ----------------------
Within one month from the date of Within the time allowed u/s.142(1) or
notice issued u/s.142(1)/143(2) u/s. 148 for filing the ROI ----------------------
or or ----------------------
Before completion of assessment, Time allowed to show cause as to why
----------------------
whichever is earlier best judgment assessment u/s.144
should not be made, whichever is earlier ----------------------

Where the assessee calls on the Jurisdiction of the assessing officer and ----------------------
the assessing officer is not satisfied with such claims, he shall refer the matter
for determination to Director General or chief commissioner or commissioner ----------------------
of Income-Tax before completing the assessment. ----------------------
From financial year (FY) 2020-21 and 2021-22, individual taxpayers
can choose between two tax regimes - the existing or old tax regime and the ----------------------
new, concessional one. The old tax regime allows the taxpayer to continue with ----------------------
existing tax exemptions such as House Rent Allowance (HRA), Leave Travel
Allowance (LTA) and deductions under different sections of the Income-tax ----------------------
Act, 1961. While those opting for the new regime will have to forego most of
the (approximately 70) tax exemptions and deductions that are available under ----------------------
the old regime. ----------------------
With regards to income tax slabs, old regime has higher tax rates and
----------------------
three tax slabs, whereas the new regime has lower tax rates and six tax slabs.
Here is a look at the latest income tax slabs and rates for FY 2020-21 and ----------------------
FY 2021-22. The income tax rates and slabs given below will be applicable
----------------------
for individuals filing income tax returns for FY 2020-21 and planning for tax-
saving for FY 2021-22. ----------------------

----------------------

Assessment and Procedures 183

 Notes We will be comparing income tax rates and slabs under the new and
old tax regimes for individuals, senior citizens, super senior citizens for
---------------------- FY 2020-21 and 2021-22.
---------------------- The left-hand side of the table given below shows the old tax regime
which comes with deductions and tax exemptions. The right-hand side of
---------------------- the table shows rates in the new tax regime without any tax exemptions and
deductions.
----------------------
Income tax slabs for resident individual below 60 years of age, non-resident
---------------------- individuals (NRI) irrespective of age and HUFs
---------------------- Income tax slabs and rates from FY 2021-22

---------------------- Old tax regime Total income New tax regime

(With deductions (without deductions
---------------------- and exemptions) and exemptions)
---------------------- NIL Up to ` 2.5 lakh NIL
---------------------- 5% From ` 2,50,001 to ` 5 lakh 5%
20% From ` 5,00,001 to Rs 7.5 lakh 10%
----------------------
20% From ` 7,50,001 to ` 10 lakh 15%
----------------------
30% From ` 10,00,001 to ` 12.5 lakh 20%
---------------------- 30% From ` 12,50,001 to ` 15 lakh 25%
---------------------- 30% From ` 15,00,001 and above 30%

---------------------- 30% From ` 15,00,001 and above 30%

---------------------- 9.2 POWERS OF INCOME TAX OFFICERS

---------------------- 1. Power of Income - Tax Authorities regarding discovery, production
---------------------- of evidence etc.
The Assessing Officer, Joint Commissioner of Income-Tax, Commissioner
----------------------
(Appeals), Commissioner of Income-Tax and Chief Commissioner shall have
---------------------- powers vested in the court under the Code of Civil Procedure while trying a suit
in respect of the following, matters viz.,
----------------------
a) Discovery and inspection
---------------------- b) Enforcing the attendance of any person including any officer of banking
company and examining such person on oath
----------------------
c) Compelling the production of books of account and other documents
----------------------
d) Issuing commissions [calling witnesses to appear, record statements,
---------------------- conduct enquiry, refer to Valuation Officer, etc.]
----------------------

----------------------

184 Direct Taxation

 Director General or Director of Income-Tax or Joint Director or Deputy Notes
Director or any Authorised Officer for a specific purpose can exercise the above
powers if he has reason to suspect that any income has been concealed or is ----------------------
likely to be concealed by any person even though no proceedings with respect
to such person are pending before him or any other Income tax authority. ----------------------

2. Search & Seizure ----------------------

Circumstances under which Powers of search and seizure (u/s.132) can be ----------------------
exercised in the following circumstances. The Income-Tax authority concerned
must have reason to believe in consequence of information in his possession ----------------------
that:
----------------------
a) Any person to whom summons u/s.131(1) or a notice u/s.142(1) has been
issued to produce or cause to be produced any books of account, or other ----------------------
documents, has omitted or failed to produce or cause to be produced, such
----------------------
books of account or other documents,
Or ----------------------

b) Any person to whom summons or notice as aforesaid has been or might ----------------------
be issued, will not produce or cause to be produced any books of account
or other document, which will be useful for or relevant to any proceedings ----------------------
under the Act, or ----------------------
c) Any person is in possession of any money, bullion, jewellery or other
valuable thing and such money, bullion, jewellery or other valuable things ----------------------
represent either wholly or partly income or property which has not been ----------------------
or would not be disclosed for the purposes of the Act.
----------------------
Authorising officer Authorising officer
----------------------
1) Director General or Director Joint director or Joint Commissioner
o r C h i e f C o m m i s s i o n e r o r Assistant Director/Deputy director ----------------------
Commissioner or Assistant Commissioner/Deputy
----------------------
Commissioner or Income-Tax officer.
2) Joint Director or joint commissioner Assistant Director/Deputy Director ----------------------
empowered by the Board in this or Assistant Commissioner/Deputy
----------------------
behalf. Commissioner or Income Tax Officer.
3. Power to requisition books of account etc. ----------------------

Where the Director General has reason to believe that the books of account ----------------------
have been issued or to be issued for any or documents of any person to whom
----------------------
summons have been issued or to be issued for any proceeding has been taken
into custody by any Officer or authority under any law in force and where any ----------------------
assets representing undisclosed income have been taken into custody by any
officer or authority under any law in force, then such authority may authorise ----------------------
any subordinate authority to make a requisition for delivery of such books of
----------------------
account, documents or assets.
----------------------

Assessment and Procedures 185

 Notes Provisions relating to retention of books etc, seized during the course of search
1.  he books and documents seized shall not be retained by the Authorised
T
----------------------
Officer for a period exceeding 30 days from the date of order of assessment
---------------------- made u/s.153A unless reasons are recorded and the approval of Chief
Commissioner or Commissioner for such is obtained.
----------------------
Retention
---------------------- 2. The Chief Commissioner or Commissioner Shall not authorise such
retention beyond 30 days after all the proceedings under the Act in respect
----------------------
of the relevant years are completed.(Sec.132(8))
---------------------- 3. If a person legally entitled to the book of account or other document
seized during the course of search objects for any reason to the approval
----------------------
given by the Chief Commissioner, Commissioner, Director General or
---------------------- Director for retention of such books or documents, the Board, on receipt
of an application from the person, Board, may pass an appropriate order
---------------------- after giving the opportunity of being heard [Sec. 132(10)].
---------------------- 4. The person from whose custody any books of account or other documents
are seized may make copies thereof, or take extracts there from -Sec.
---------------------- 132(9).
---------------------- 5. The Board, on receipt of application under section 132(10) may, after
giving an opportunity to the assessee to be heard, pass such orders as
---------------------- deem fit. [Sec.132 (12)]
---------------------- 4. Power to call for information
Information can be gathered from a person who is considered to be useful
----------------------
for or relevant to any inquiry or in connection with any pending proceeding.
---------------------- When the information is collected in respect of an inquiry, in a case where
no proceeding is ending, such power shall not be exercised by any Income-
---------------------- Tax authority below the rank of Director or Commissioner without the prior
approval of the Director or the Commissioner.
----------------------
5. Survey
----------------------
1) An Income -Tax authority having jurisdiction or assigned with jurisdiction
---------------------- (being a Director, Commissioner, joint Director, joint Commissioner,
Assistant Director or Deputy Director or an Assessing Officer or a Tax
---------------------- Recovery Officer or for certain limited purposes an Inspector of Income-
---------------------- Tax authorised by any such other authority) may enter any place within
the limits of the area assigned to him or any place occupied by any person
---------------------- in respect of whom he exercises jurisdiction, at which a business or
profession is carried on.
----------------------
On entering such a place, he can require the following:
---------------------- i) To afford him necessary facility to inspect such books of account
---------------------- and documents.
ii) To afford him necessary facility to check or verify cash, stock or
----------------------
other valuable articles or things found.

186 Direct Taxation

 iii) To furnish such information as may be required. Notes
Explanation: If the person carrying on business or profession states
----------------------
that any of his books of account or other documents or assets relating
to his business or profession is kept at some other place, then such ----------------------
other place shall also be covered.
----------------------
2) An Income - Tax authority can enter only during hours at which such
place is open for conduct of business or profession and in respect of any ----------------------
other place only after sunrise and before sunset.
----------------------
3) An Income - Tax authority may do the following during the course of
survey: ----------------------
i)  lace marks of identification on the books and documents or take
P ----------------------
extracts or copies therefrom.
ii) Make an inventory of any cash, stock or other valuable articles. ----------------------

iii) Record the statement of any person ----------------------

4) An Income - Tax authority cannot remove any assets during survey ----------------------
operations, however, an Income-Tax authority is empowered to impound
and retain in his custody any books of account or other document inspected ----------------------
by him. Such power can be exercised only after recording reasons. The
----------------------
books and documents so impounded can be retained beyond 10 working
days only after obtaining the approval of the Chief Commissioner or ----------------------
Director General.
----------------------
5) Where considering the nature and scale of expenses incurred by an assessee
in connection with any function, ceremony or event, if the Income tax ----------------------
authority deems it necessary, he can record a statement after conclusion
of such a function, ceremony or event from the person who incurred such ----------------------
expenses or any other person who is likely to possess information. It may
----------------------
be mentioned here that if the person who has incurred the expenditure is
unable to explain the source or if the explanation offered is not satisfied, ----------------------
then the amount of such expenditure shall be assessed as income in
accordance with section 69 C. ----------------------
6) If a person refuses or evades to provide facility as required under this ----------------------
provision the Income-Tax authority shall have all powers u/s.131 for
enforcing compliance thereof. ----------------------
7) The survey operations cannot be carried out by an Assistant Director or ----------------------
Deputy Director or Assessing Officer or Tax Recovery Officer or Inspector
of Income-Tax unless they obtain approval of the Joint Director or Joint ----------------------
Commissioner. ----------------------
6. Power of Income-Tax authority to collect certain information (door
to door survey) ----------------------

1) 
An Income - Tax authority may, for the purpose of collecting any ----------------------
information useful or relevant for the purposes of the Act, enter any
----------------------
building or place within the limits of the area assigned to such authority

Assessment and Procedures 187

 Notes or any building or place occupied by any person in respect of whom he
exercises jurisdiction, at which a business or profession is carried on and
---------------------- require to furnish such information as may be prescribed. (Rule 112E and
Form No.45D are relevant).
----------------------
2) An Income - Tax authority can enter any such place only during the hours
---------------------- at which it is open for the conduct of business or profession.
---------------------- 3) An Income - Tax authority cannot remove any books, documents and
assets by virtue of this provision.
----------------------
Income tax authority for this purpose means a joint commissioner,
---------------------- Assistant Director/ Deputy Director or an assessing officer and includes an
---------------------- inspector of income tax authorised by the Assessing officer.
7. Power to make enquiry
----------------------
Director General or Director of Income-Tax, Chief Commissioner or
---------------------- Commissioner and Joint Commissioner shall be competent to make any enquiry
---------------------- under the Act and for this purpose shall have all the powers of an Assessing
Officer.
---------------------- 8. Proceedings to be judicial proceedings
---------------------- The proceedings under the Income-Tax Act before an income- tax
authority shall be deemed to be judicial proceedings within the meaning of the
----------------------
relevant provisions of the Indian Penal Code and every Income-Tax authority
---------------------- shall be deemed to be Civil Court for such purposes.

---------------------- 9. Power to disclose information regarding assessees

The Board or any Income-Tax authority specified by the Board by general
----------------------
or special order furnish any information relating to an assessee to any other
---------------------- officer or authority under any law. Where a person makes an application to Chief
Commissioner or Commissioner for any information relating to any assessee,
---------------------- such authority if it is satisfied about the need to furnish such information in the
---------------------- public interest may furnish the information. The decision of such authority in
this regard shall be final and shall not be called in question in any court of law.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

188 Direct Taxation

 Notes
Check your Progress 1
----------------------
State True or False.
----------------------
1. The question of jurisdiction in relation to areas within the jurisdiction
of different Director Generals will be decided by the Board or by the ----------------------
Director General of Income Tax as the Board may, by notification in
the official Gazette, authorise. ----------------------
2. For carrying out surveys, an Income Tax authority need not enter only ----------------------
during hours at which such place is open for conduct of business or
profession and in respect of any other place only after sunrise and ----------------------
before sunset.
----------------------
3. “Assessing Officer” means an Income-Tax Officer who is vested with
the relevant jurisdiction and assessment function under the relevant ----------------------
provisions of the Act, Sec.2(7A)
----------------------
9.3 FILING OF RETURNS OF INCOME
----------------------
139(1) Due date for filing ROI 139(3) Loss returns
----------------------
139(1A) Filing of returns by employers 139(4) Belated returns
139(1B) Electronic returns 139(5) Revised returns ----------------------
139(4A) ROI by trusts 139(9) Defective returns ----------------------
139(4B) ROI by political parties
----------------------
139(4C) ROI by certain institutions
Due dates ----------------------
According to sec.139 (1) ----------------------
i) every person being a company or firm; or ----------------------
ii) b eing a person other than a company or a firm, if his total income or
the total income of any other person in respect of which he is assessable ----------------------
under this Act during the previous year exceeded the maximum amount ----------------------
which is not chargeable to income tax, shall furnish a return of income
within the due dates stipulated hereunder: ----------------------
Assessee Due Date ----------------------
1) In case of a person being
i) Company; ----------------------
ii) a person whose accounts are required to be
audited under this Act or under any other ----------------------
30th September of
Law; relevant assessment ----------------------
iii) working partner of a firm whose accounts Year.
are so required to be audited; and ----------------------
iv) a person who is required to furnish a return
on the basis of 1/6th economic criteria ----------------------
2) In the case of any other assessee 31st July of relevant ----------------------
assessment year.

Assessment and Procedures 189

 Notes 9.3.1 Filing of Bulk Return
In case of salaried class assessees the return of income for any previous
---------------------- year shall be furnished to the employer concerned. Such employer shall furnish
---------------------- all returns of income received by him on or before the due date, in such form
and manner as notified by the CBDT for this purpose. Any employee who has
---------------------- filed a return of income to his employer shall be deemed to have filed a return
of income in accordance with the law.
----------------------
9.3.2 E-Filing of Returns
---------------------- Any person may at his option file returns in electronic form through website
---------------------- of the IT department. E-filing is when you electronically file your income tax
returns online for a particular year. This means you no longer need to visit the
---------------------- nearest Income Tax Department’s office to file your returns physically. Here
you can select the tax regime such as old or new. Tax rates under these regime
---------------------- is given below:
---------------------- 9.3.3 Loss Return

---------------------- Any person who sustained loss in any previous year and claims that such
loss should be carried forward under sec.72, 73, 74 and 74A of the Act shall
---------------------- furnish a return of loss within the time allowed u/s.139(1) in the prescribed
form. Any return so filed shall be treated as a return filed u/s.139 (1) and all the
---------------------- provisions of the Act shall accordingly apply. Students may also refer to Sec.
80 which states that unless loss return is filed in accordance with the due date
----------------------
stipulated u/s.139(3) and loss is determined in pursuance of that return, the loss
---------------------- cannot be carried forward.
The abovementioned stipulation does not cover unabsorbed depreciation
----------------------
carried forward u/s.32 (2) and loss under the head “Income from house property”
---------------------- U/s.71B. These two provisions are not specified even under section 80.
9.3.4 Belated Return
----------------------
Any person who has not furnished a return within the time allowed U/s.139(1)
---------------------- or within the time allowed by the notice issued u/s. 142 (1) can file a belated return
for any previous year at any time before one year from the end of the relevant
---------------------- assessment year or before assessment is completed, whichever is earlier.
---------------------- 9.3.5 Returns by Trusts
---------------------- Every person in receipt of income derived from property held under trust
or other legal obligation wholly or partly for charitable or religious purposes
---------------------- or income by way of voluntary contributions shall furnish a return of the total
income if it exceeds the maximum amount which is not chargeable to tax before
---------------------- giving effect to the provisions of Sec.11 and 12.
---------------------- In the case of a trust whose income does not exceed ` 50,000 audit
requirement does not arise and therefore, return will have to be filed on or before
---------------------- 31st July. Even in case business is carried on, then the due date applicable will
---------------------- be 31st July. If the income exceeds `50,000/- or if business turnover exceeds
` 40,00,000/- and thereby audit requirements arises, then the due date shall be
---------------------- 30th September of the relevant assessment year.

190 Direct Taxation

9.3.6 Returns by Political Parties Notes
The Chief Executive Officer of every political party shall furnish a return
----------------------
of income in respect of which the political party is assessable if it exceeds
the maximum amount each is not chargeable to tax before giving effect to the ----------------------
provisions of Sec.13A. In order to avail exemption u/s.13A, the accounts of a
political party must be audited. Therefore, the due date for filing the return of ----------------------
income is 31st October of the assessment year.
----------------------
9.3.7 Returns by certain Associations
----------------------
The following entities shall furnish their return of income if the total
income, before giving effect to the exemption u/s. 10, exceeds the basic ----------------------
exemption limit:
----------------------
i) Scientific Research Association covered under section 10(21);
ii) News agency covered under section 10(22B); ----------------------

iii) Association or Institution referred to in 10(23A)/(23B); ----------------------

iv) Fund or Institution, University or other educational institution or hospital ----------------------
or other medical institution referred to under section 10(23C) (iv)/(v)/
(vi)/(via); and ----------------------
v) Trade union or association covered under section 10(24). ----------------------
9.3.8 Revised Return ----------------------
Any person who has furnished a return u/s.139(1) or in pursuance of a
notice issued Ws.142(1) can file a revised return if the assessee discovers any ----------------------
omission or any wrong statement in the return filed earlier. Such revised return ----------------------
can be furnished at any time before the expiry of one year from the end of
the relevant assessment year or before completion of assessment whichever ----------------------
is earlier. The effective return for the purposes of assessment is the return
ultimately filed by the assessee. A revised return replaces the original return. ----------------------
Therefore, if the assessee discovers any omission or wrong statement in such a ----------------------
revised return he is entitled to furnish a second revised return.
a)  here belated return is filed u/s.139 (4), assessees cannot file a revised
W ----------------------
return u/ s.139 (5). The provisions of sec.139 (5) provide that a revised ----------------------
return can be filed only where a return has been furnished u/s.139 (1) or
in response to a notice issued u/s.142 (1) - Kumarjagadish Chandra Sinha ----------------------
Vs. CIT220 1’£R 67 (SC).
----------------------
b)  ssessee files a loss return u/s.139 (3). Later it revises the return u/s.139
A
(5) and claims enhanced amount of loss. According to section 139(3), ----------------------
once a return is filed, all the provisions of the Income-Tax Act shall apply
----------------------
as if such return has been filed u/ s.139(1). Consequently, the filing of
revised loss return is valid and section 80 does not come in the way of ----------------------
disallowing the carry forward of such increased amount of loss - CIT
Vs. Periar District Co-operative Milk Producers Union Ltd. 266 ITR 705 ----------------------
(Mad.).
----------------------

Assessment and Procedures 191

 Notes 9.3.9 Defective Return
Circumstances when a return can be treated as defective:
----------------------
A return of income can be regarded as defective by the Assessing Officer
---------------------- under the following circumstances.
---------------------- a) Annexure, statements and columns in the return of income has not been
duly filled;
----------------------
b) Return of income has not been accompanied by -
---------------------- i) Statement showing computation of tax on returned income
---------------------- ii) Proof of tax claimed to have been deducted at source (TDS) before
the first day of 01.04.05
----------------------
iii) Advance tax paid and self-assessment tax paid.
----------------------
However, the return of income shall not be regarded as defective if
---------------------- a certificate for TDS was not received by the person furnishing the
return of income and such certificate is produced within a period
---------------------- of 2 years from the end of the assessment year in which recovered
by the TDS is assessable. Once the certificate is so furnished, the
----------------------
Assessing Officer shall amend the intimation or deemed intimation
---------------------- or the order of assessment for the relevant assessment year by virtue
of sec.155 (14) to grant the credit for the TDS.
----------------------
iv) Tax Audit report u/s. 44AB or copy of such report together with
---------------------- proof of furnishing the report on earlier date.

---------------------- c) 
Where regular books of account are maintained, the copies of
Manufacturing account or Trading account or Profit and Loss account
---------------------- or Income and Expenditure account or any other similar account and
Balance Sheet has not been furnished. Similarly, where, no copies of
---------------------- personal account of the proprietor, partner or member of AOP/ BOI has
---------------------- been filed;
d) If accounts are audited and copies of audited statement of accounts and
---------------------- auditor’ report have not been filed (including cost audit report, if any);
---------------------- e) Where regular books are not maintained, a statement indicating the
amount of turnover or gross receipts, gross profit, expenses and net profit
----------------------
and the basis thereof together with the amount of total sundry debtors,
---------------------- sundry creditors, stock in trade and cash balance at the end of the previous
year have not been filed.
----------------------
No person who has already been allotted a permanent account number
---------------------- under the new series shall apply, obtain or possess another permanent account
number. Therefore, an assessee cannot hold two permanent account numbers.
----------------------
Persons who have agricultural income and who are not in receipt of any
---------------------- other income chargeable to Income-Tax are not required to apply for PAN,
provided that a declaration in Form No.61 is filed by such persons.
----------------------

192 Direct Taxation

 Section 139A(1A) provides that the Central Government may notify any Notes
class or classes of persons including importers and exporters and such persons
shall apply to the Assessing Officer for the allotment of Permanent Account ----------------------
Number within such time as mentioned in that notification.
----------------------
9.3.10 Signature on Return
----------------------
Assessee Signatory
1. Individual Himself ----------------------

 hen absent from India; mentally His guardian or any other person
W ----------------------
incapacitated; for any other reason competent to act on his behalf duly
he is not able to sign ----------------------
authorised by him.
2. H.U.F. Karta ----------------------
Where Karta is absent from India Any other adult member of the family ----------------------
or is mentally incapacitated
----------------------
3. Company Managing Director
Where M.D. is unable to sign or Any other director; ----------------------
where there is no M.D. any person who holds a valid Power of ----------------------
When company is not resident in Attorney from the company
India ----------------------
The liquidator
When the company is in liquidation ----------------------
The Principal Officer
When the company’s management ----------------------
is taken over by the Government.
4. Partnership firm Managing partner or any other partner ----------------------
not being a minor ----------------------
5. LocalAuthority Principal Officer
----------------------
6. Political party Chief executive officer
7. Association of Person Any member or Principal Officer ----------------------
8. Any other person That person or some other person who ----------------------
is competent to sign.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Assessment and Procedures 193

 Notes
Check your Progress 2
----------------------

---------------------- Fill in the blanks.

1. Any person who has not furnished a return within the time allowed
----------------------
U/s. 139(1) or within the time allowed by the notice issued u/s. 142 (1)
---------------------- can file a ______ return for any previous year at any time before one
year from the end of the relevant assessment year or before assessment
---------------------- is completed, whichever is earlier.
---------------------- 2. In order to avail exemption under section 13A, the accounts of a
political party must be audited and hence the due date of filing return
---------------------- of income for them is _____ of the assessment year.
---------------------- 3. A Return of Income can be treated as ______ return by the Assessing
officer, if annexure, statements and columns in the return of Income
---------------------- has not been duly filled.
----------------------

---------------------- 9.4 ENQUIRY BEFORE ASSESSMENT

---------------------- Notice

---------------------- i) I f the assessee has not filed a return within the time allowed u/s.139 (1),
then the notice can require him to furnish the return of income.
---------------------- ii) The notice can require the production of accounts and documents.
---------------------- iii) The notice can require furnishing of information on such points or such
matters including the furnishing of the list of assets and liabilities as the
----------------------
Assessing Officer may require.
---------------------- But, prior approval of Joint Commissioner is necessary before requiring
the assessee to furnish the details of all assets and liabilities not included in the
----------------------
accounts. The Assessing Officer shall not require the production of accounts
---------------------- relating to a period more than 3 years prior to the previous year [Sec.142(1)].
Enquiry
----------------------
The Assessing Officer may make such inquiry as he considers necessary
---------------------- for the purpose of obtaining full information about the income or loss of any
---------------------- person [Sec.142(2)]
Special Audit
----------------------
1) The Assessing Officer at any stage of the proceedings may, have regard
---------------------- to the nature and complexities of the accounts of the assessee and the
interest of the revenue direct the assessee to get the accounts audited and
---------------------- furnish the audit report. Such a direction can be issued only with the prior
---------------------- approval of the Chief Commissioner or Commissioner and the audit shall
be done by a Chartered Accountant nominated by the Chief Commissioner
---------------------- or Commissioner. [Sec.142 (2A)]

194 Direct Taxation

2) The audit can be required to be done even if the accounts are already Notes
audited. The audit report shall be furnished within a period specified by
the Assessing Officer which can be extended up to 180 days from the date ----------------------
of receipt of direction by the assessee on an application made by him. The
expenses for the audit shall be determined by the Chief Commissioner or ----------------------
Commissioner and shall be paid by the assessee. ----------------------
Opportunity
----------------------
The assessee shall be given an opportunity of being heard in respect of
materials gathered on inquiry and proposed to be used in the assessment. [Sec. ----------------------
142 (3)]
----------------------
Estimation by Valuation Officer in certain cases - Sec 142A
----------------------
For the purposes of making an assessment or re-assessment, where an
estimate value of any investment referred to in Sec.69 or Sec.69B or the value ----------------------
of any bullion, jewellery or other valuable article referred to in Sec.69A or
Sec.69B is required to be made, the assessing officer may require the valuation ----------------------
officer to make an estimate of such value and report the same to him. The ----------------------
valuation officer to whom such reference is made shall have all the powers that
he has u/s.38A of the Wealth-tax Act, 1957. ----------------------
On receipt of the report from the valuation officer, the assessing officer ----------------------
may, after giving the assessee an opportunity of being heard, take into account
such report in making such assessment or re-assessment. ----------------------
9.4.1 Assessment ----------------------
According to Sec. 143, intimation is required to be sent only in a case
----------------------
where there is demand payable by the assessee or where refund is due to the
assessee. In all other cases, acknowledgement issued on filing of the return of ----------------------
income shall be deemed to be intimation.
----------------------
9.4.2 Best Judgment Assessment
The provisions of Sec. 144 are mandatory in nature, even if there is one of ----------------------
the 4 defaults mentioned below on the part of the assessee the officer is bound ----------------------
to make assessment to the best of his judgement. The default committed by the
assessee should be indicated in the record. Opportunity given to the assessee ----------------------
must be real and effective. The proper and valid service of notice should be
proved by the department. ----------------------
The Assessing Officer after taking into account all relevant material which ----------------------
he has gathered, is empowered to make the assessment of the total income or
loss to the best of his judgment and determine the sum payable by the assessee ----------------------
on the basis of such assessment under the following circumstances: ----------------------
Failure on the part of assessee Relevant Opportunity to ----------------------
section be heard
1. Failure to make the return or belated 139 (1), (4) To be given ----------------------
return or revised return & (5) ----------------------

Assessment and Procedures 195

 Notes 2. Failure to comply with all the terms of a
notice issued requiring the assessee to:
----------------------
a)  le a return or produce accounts
fi 142(1) Need not be
---------------------- etc. or furnish information called given
for
----------------------
b) get the accounts audited and 142(2A)
---------------------- furnish the audit report To be given
---------------------- c) ensure his attendance or produce 143(2)
evidence supporting the return To be given
---------------------- filed
---------------------- Protective Assessment is made to ensure that when the issue is finally
settled, the assessment of such income should not get time barred. When the
----------------------
issue is finally settled in appeal or otherwise, only one assessment will stand
---------------------- and the other will be cancelled accordingly. It requires to be mentioned that
the Income-Tax Department cannot recover the tax from both the assessees
---------------------- in respect of the same income. Similarly, Protective Assessment cannot be the
basis for levy of penalty.
----------------------
9.4.3 Income escaping Assessment
----------------------
Sec. 147 Sec. 148 Sec. 149 Sec. 151
----------------------
1) Assessment Notice to be Time limit for Sanction required
---------------------- 2) Reassessment Issued Issue of notice For issuing notice
---------------------- 3) Recomputation
---------------------- Assessment, reassessment and recomputation - Sec.147

---------------------- Basis
If the Assessing Officer has reason to believe that any income chargeable
---------------------- to tax has escaped assessment for any assessment year he may assess or reassess
---------------------- such income or recompute the loss or depreciation allowance or any other
allowance for that assessment year.
---------------------- Scope
---------------------- Once the assessment has been re-opened, any other income which has
escaped assessment and which comes to the knowledge of the Assessing Officer
----------------------
subsequently in the course of the proceeding u/s. 147 can also be included in the
---------------------- assessment.
Circumstances when income can be said to escape assessment
----------------------
Explanation 2: In the following cases, it shall be deemed that income chargeable
---------------------- to tax has escaped assessment:
---------------------- 1. Where no return of income has been furnished by an assessee although
his income is above the non-taxable limit.
----------------------

196 Direct Taxation

2. Where a return of income has been furnished but no assessment has been Notes
made and the assessee is found to have understated his income or claimed
excessive loss, deduction etc., in the return. ----------------------
3. Where an assessment has been made but: ----------------------
a) Income chargeable to tax has been under assessed; or
----------------------
b) Such income has been assessed at too low a rate; or
----------------------
c) Excessive relief was given in respect of such income; or
d) Excessive loss/depreciation allowance or any other allowance under ----------------------
this Act as been computed. ----------------------
It may be noted that a proceeding u/s.147 cannot be treated as a revision
or review proceeding. The objective of this section is only to increase revenue ----------------------
collection. Therefore, the tax liability of an assessee cannot be reduced further ----------------------
in respect of a proceeding u/ s.147. This view was upheld by the Supreme Court
in Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297. ----------------------
9.4.4 Notice under escaping Assessment ----------------------
1.  he Assessing Officer shall, before making an assessment, reassessment
T
----------------------
or recomputation u/s.147, serve on the assessee a notice u/s.148 requiring
him to file a return of his income or of any other person in respect of ----------------------
which he is assessable.
----------------------
2.  efore issuing any such notice, the Assessing Officer shall record his
B
reasons for doing so. ----------------------
3. The return of income is required to be furnished within the time prescribed ----------------------
in the notice by the Assessing Officer.
Time limit for completion of Assessments and Reassessments - Sec. 153 ----------------------

153(1) Passing assessment order Within 2 years from end of assessment ----------------------
u/s.143 or 144 year in which income was first ----------------------
assessable
153(2) M a k i n g a s s e s s m e n t Within 1 year from end of financial ----------------------
reassessment etc. u/s.147 year in which notice u/s.148 is served
----------------------
153(2A) M a k i n g a s s e s s m e n t i n Within 1 year from end of a financial
pursuance of order u/s.250, year in which order u/s.250/254 ----------------------
254, 263 or 264 setting aside is received by Commissioner or ----------------------
or cancelling assessment order u/s.263, 264 is passed by the
Commissioner. ----------------------
9.4.5 Assessment of any other Person
----------------------
Where the assessing officer is satisfied that any money, bullion, jewellery or
other valuable article or thing or books of account or documents seized or ----------------------
requisitioned belongs to any other person other than a person in whose case
----------------------
search was made u/s.132 or requisition was made uls.132A, then the seized or
requisitioned records and assets shall be handed over to the assessing officer ----------------------

Assessment and Procedures 197

 Notes having jurisdiction over such other person. Thereafter, such assessing officer
shall proceed to issue notice to such other person and assess or reassess his
---------------------- income in accordance with the provisions of Sec. 153A for a period of six years
proceeding to the previous year in which search or requisition took place.
----------------------
Other points
----------------------
1. Any assessment or reassessment relating to any assessment year falling
---------------------- with in a period or six years pending as on the date of receiving the books
of account or documents or assets seized or requisitioned by the assessing
---------------------- officer having jurisdiction over such other person.
---------------------- 2.  he assessing officer having jurisdiction over such other person can
T
assess or re- assess the total income of such other person for the previous
---------------------- year in which search or requisition took place in the manner provided in
section 153A, even if he receives the books of account or documents or
----------------------
assets seized after the due date for furnishing the return of income of that
---------------------- assessment year and in respect of such assessment year.

---------------------- a) No return of income has been furnished by such other person and
no notice u/s. 142(1) has been issued to him, or
---------------------- b) A return of income has been furnished by such other person but
---------------------- no notice u/s. 143(2) has been served and limitation of serving the
notice u/s. 143(2) has expired, or
---------------------- c) Assessment, if any, has been made. The assessment for the six
---------------------- years period and the year of search shall be completed within a
period of 2 years from the end of the financial year in which last of
---------------------- the authorisation executed or within one year from the end of the
financial year in which the books of account or documents or assets
---------------------- are handed over to the assessing officers.
----------------------
9.5 APPEALS TO HIGH COURT
----------------------
After the Tribunal decides the appeal, an appeal shall be filed in the High
---------------------- Court against the order of the Appellant Tribunal if the High Court is satisfied
---------------------- that the case involves a substantial question of law. The time prescribed for
filing such an appeal is within 120 days from the date of receipt of order. An
---------------------- appeal can be filed by the Chief Commissioner or Commissioner or an assessee
aggrieved by the Appellate Tribunal’s Order.
----------------------
Where the High Court is satisfied that a substantial question of law is
---------------------- involved, the High
---------------------- Court shall formulate that question. The High Court shall decide the
question of law so formulated and deliver such judgement containing the
---------------------- grounds on which such decision is founded. The High Court may award such
cost as it deems fit. The High Court may determine any issue which has not
----------------------
been determined by the Appellate Tribunal or any issue which has been wrongly
---------------------- determined by the Appellate Tribunal.

198 Direct Taxation

 The appeal filing fee will be in accordance with the relevant court rules Notes
applicable and the provisions of the Code of Civil procedure shall apply to all
the appeals covered by Sec.260A. ----------------------
9.5.1 Revision by Commissioner of Income-Tax ----------------------
Revision of orders Prejudicial to the Interest of Revenue - Sec.263
----------------------
i) The Commissioner may call for and examine the record of any proceeding
under this Act and if he considers that any order passed therein by the ----------------------
Assessing Officer is erroneous in so far as it is prejudicial to the interests
----------------------
of revenue, pass such order enhancing or modifying the assessment or
cancelling the assessment and directing a fresh assessment. ----------------------
Such order can be passed only after giving the assessee an opportunity of ----------------------
being heard. For this purpose the Commissioner may make or cause to be
made such enquiry as he deems necessary. ----------------------
ii) “ Record” shall include all records relating to any proceeding available at ----------------------
the time of examination of the file by the Commissioner of Income-Tax.
iii)  here any order passed by the Assessing Officer had been the subject
W ----------------------
matter of appeal, the powers of the Commissioner shall extend to such ----------------------
matters as had not been considered and decided in such appeal.
----------------------
iv) No order shall be made after the expiry of 2 years from the end of the
financial year in which the order sought to be revised was passed. In ----------------------
computing the period of two years limit the time taken in giving an
opportunity to the assessee to be reheard u/ s.129 and any period during ----------------------
which revision proceeding is stayed by Court, shall be excluded.
----------------------
v) An order in revision may be passed at any time in the case of an order
which has been passed in consequence of, or to give effect to, any finding ----------------------
or direction contained in an order of the Appellate Tribunal, the High
----------------------
Court or the Supreme Court.
12.5.2 Revision of other Orders ----------------------
i) In the case of any order other than an order referred to in Sec. 263 passed ----------------------
by a subordinate authority, the Commissioner may, either on his own
motion or on an application by the assessee for revision, call for the ----------------------
record of any proceedings under the Income-Tax Act in which any such ----------------------
order has been passed and may pass such order thereon as he deems fit.
ii) An order prejudicial to the interests of the assessee cannot be passed ----------------------
under this provision. However, Commissioner declining to interfere will ----------------------
not amount to passing of an order prejudicial to the assessee.
----------------------
iii) The Commissioner shall not, on his own motion revise any order if the
order has been made more than one year previously. ----------------------
iv) Application for revision by the assessee must be made within one year
----------------------
from the date on which the order was communicated to him or the date on
which he otherwise came to know of it, whichever is earlier. ----------------------

Assessment and Procedures 199

 Notes v) On every application by an assessee for revision, an order shall be passed
within one year from the end of the financial year in which such application
---------------------- is made by the assessee for revision. In computing this time limit, the time
lost u/s.129 or due to stay order by Court shall be excluded. Besides,
---------------------- there is no time limit for the Commissioner to pass an order of vision in
---------------------- consequence of or to give effect to any finding or direction contained in
an order of the Appellate Tribunal, the High Court or the Supreme Court.
----------------------
vi) Commissioner has the power to condone the delay if he is satisfied that the
---------------------- assessee was prevented by sufficient cause from making the application
within the specified time.
----------------------
vii) If the order is an appealable order, then the application can be made only
---------------------- if the appeal is not filed or where the time limit for filing the appeal has
not lapsed, only if the right of appeal is waived.
----------------------
viii) Every application for revision should be accompanied by a fee of ` 500.
----------------------
Check your Progress 3
----------------------

---------------------- State True or False.

---------------------- 1. Where a return of income has been furnished but no assessment has
been made and the assessee is found to have understated his income or
---------------------- claimed excessive loss, deduction etc. in the return, it shall be deemed
that income chargeable to tax has escaped assessment.
----------------------
2. An appeal can be filed in the High court by Chief Commissioner or an
---------------------- assessee aggrieved by the Appellate Tribunal’s order within 90 days
from the date of receipt of order.
----------------------
3. According to Sec. 143, intimation is required to be sent only in a case
---------------------- where there is demand payable by the assessee or where refund is due
to the assessee. In all other cases, acknowledgement issued on filing of
----------------------
the return of income shall be deemed to be the intimation.
----------------------

---------------------- Summary
---------------------- ●● Under Income Tax Act, Assessment and proceedings are necessary to be
---------------------- carried out by every assessee at the end of financial year. Returns need to
be filed by person as per prescribed guidelines mentioned under Act.
---------------------- ●● If the assessee has not filed a return within the time allowed u/s.139 (1),
then a notice can require him to furnish the return of income.
----------------------
●● According to Sec. 143, intimation is required to be sent only in a case
---------------------- where there is demand payable by the assessee or where refund is due to
the assessee. In all other cases, acknowledgement issued on filing of the
----------------------
return of income shall be deemed to be intimation.
----------------------

200 Direct Taxation

 Keywords Notes

----------------------
●● Assessing Officer: “Assessing Officer” means an Income-Tax Officer or
Assistant Commissioner or Deputy Commissioner or Assistant Director ----------------------
or Deputy Director of Income-Tax or the Joint Commissioner or joint
Director of Income-Tax who is vested with the relevant jurisdiction and ----------------------
assessment function under the relevant provisions of the Act Sec.2(7A)
----------------------
●● Powers of Assessing Officer: under Income Tax Act, Powers are given
to Assessing officer to search or scrutinise the return filed by the assessee. ----------------------
●● Appeal: After the Tribunal decides the appeal, an appeal shall be filed in ----------------------
to the High Court against the order of the Appellant Tribunal if the High
Court is satisfied that the case involves a substantial question of law. ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Write in brief the classification of Income Tax Authorities.
----------------------
2. Discuss in brief - Appeal under Section 264 of Income Tax Act.
3. Discuss in brief - Appeal under Section 263 of Income Tax Act. ----------------------
4. Write in brief assessment under section 147 of Act. ----------------------
5. What do you mean by assessment procedures? ----------------------
6. Define powers to Income Tax Authorities under Income Tax Act.
----------------------
7. What do you mean by retention?
----------------------
8. What do you mean by survey?
9. Define revised returns. ----------------------

10. What do you mean by defective returns? ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
State True or False. ----------------------

1. True ----------------------
2. False ----------------------
3. True
----------------------

----------------------

----------------------

----------------------

----------------------

Assessment and Procedures 201

 Notes Check your Progress 2
Fill in the blanks.
----------------------
1. Any person who has not furnished a return within the time allowed U/s.
---------------------- 139(1) or within the time allowed by the notice issued u/s. 142 (1) can file
a belated return for any previous year at any time before one year from the
----------------------
end of the relevant assessment year or before assessment is completed,
---------------------- whichever is earlier.
2. In order to avail exemption under section 13A, the accounts of a political
----------------------
party must be audited and hence the due date of filing return of income for
---------------------- them is 31st October of the assessment year.

---------------------- 3. A Return of Income can be treated as Defective return by the Assessing

officer, if annexure, statements and columns in the return of Income has
---------------------- not been duly filled.

----------------------
Check your Progress 3
----------------------
State True or False.
----------------------
1. True
---------------------- 2. False
---------------------- 3. True

----------------------
Suggested Reading
----------------------
1. Punamiya, Vimal. Assessment Appeal Procedure of Income Tax.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

202 Direct Taxation

 Taxation of Partnership Firms
UNIT

10
Structure:

10.1 Introduction
10.2 Assessment as a Firm
10.3 Change in Constitution
10.4 Succession of Firms
10.5 Joint and Several Liabilities of Firms
10.6 Dissolution of Firms
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Taxation of Partnership Firms 203

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Discuss the concept of Partnership Firm under Income Tax Act.
----------------------
• Explain taxation of firms
---------------------- • List the conditions to be fulfilled for PFAS
---------------------- • Analyse Practical cases of PFAS

---------------------- 10.1 INTRODUCTION

---------------------- As we know, a partnership firm is an agreement among not more than 20
---------------------- persons. As per the Act, a partnership firm is considered to be a separate taxable
entity provided that the following conditions are satisfied:
---------------------- a. Partnership should be evidenced by a partnership deed.
---------------------- b. The individual shares of the partners should be clearly specified in the
partnership deed.
----------------------
c. A certified copy of the partnership deed should be attached to the return of
---------------------- income pertaining to the year in which the partnership firm was formed.

---------------------- d. If there is any change in the constitution of the partnership firm or there
is any change in the profit sharing ratio, a copy of the revised partnership
---------------------- deed should be attached to the return of income of the previous year in
which such change took place.
----------------------
Rate of tax in the case of a firm- Sec.167A
---------------------- In the case of a firm, which is assessable as a firm, tax shall be charged on
---------------------- its total income at the rate as specified in the finance Act of the relevant year.
The finance Act has specified 30 % as the tax rate for the firms. Surcharge at
---------------------- 10% plus education cess @ 2% is also leviable However, long term capital gains
will be chargeable to tax under section 112 at the rate of 20% plus surcharge and
---------------------- education cess.
----------------------
10.2 ASSESSMENT AS A FIRM
----------------------
A firm shall be assessed as a firm, only when the following conditions are
---------------------- satisfied:
---------------------- The partnership is evidenced by an instrument in writing;
The shares of each partner are specified in such instrument;
----------------------
A Copy of the partnership instrument as certified by all the partners is
---------------------- enclosed with a return of income in respect of the first assessment year for
---------------------- which the status of firm is claimed;
Where once the firm is assessed as firm by complying with the above
---------------------- mentioned conditions it shall continue to be assessed as a firm for subsequent

204 Direct Taxation

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 assessment years so long as there is no change in the constitution of the firms or Notes
in the profits sharing ratio.
----------------------
Where any such change had taken place in the previous year, the firm
shall furnish a certified copy of the revised instrument of partnership along with ----------------------
the return of income for the assessment year relevant to such previous year so
that it can be assessed as a firm. ----------------------
The firm does not commit any default as mentioned in sec. 144, resulting ----------------------
in framing of best judgement assessment by the Assessing Officer.
----------------------
Assessment when Sec. 184 is not complied with - Sec. 185
Where a firm does not comply with any of the provisions of sec 184 for ----------------------
any assessment year, the firm shall be continued to be assessed as a firm for ----------------------
that assessment year. In such cases, no deduction shall be allowed in respect of
payment of any interest, salary, bonus, commission or remuneration to partners. ----------------------
The amount of interest or salary etc. so disallowed in the hands of the firm shall
not be chargeable to tax in the case of respective partners. ----------------------

----------------------
10.3 CHANGE IN CONSTITUTION
----------------------
Where at the time of making an assessment u/s. 144 it is found that a
change has occurred in the constitution of a firm, the assessment shall be made ----------------------
on the firm as constituted at the time of making the assessment. (i.e, single
----------------------
assessment shall be made.)
For the purpose of assessment of a firm “Change” in constitution of firm ----------------------
would mean the following: ----------------------
●● If one or more partners cease to be partners or one or more new partners
are admitted, in such circumstances that one or more of the persons who ----------------------
were partners of the firm before the change, continue as partner(s) after ----------------------
the change;or
●● All the partners continue with a change in their respective shares or in the ----------------------
shares of some of them. ----------------------

Check your Progress 1 ----------------------

----------------------
State True or False.
----------------------
1. In case of a firm, which is assessable as partnership firm, tax shall be
charged on its total income at the unified one rate including long-term ----------------------
capital gains.
----------------------
2. Where a firm carrying on a business/profession is succeeded by another
firm, not by a change in constitution, then separate assessment shall be ----------------------
made.
----------------------
3. A partnership firm is an agreement among not more than 20 persons
including minor. ----------------------

Taxation of Partnership Firms 205

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 Notes 10.4 SUCCESSION OF FIRMS
---------------------- Where a firm carrying on a business or profession is succeeded by another
firm and the case is not covered by sec. 187 (i.e. not a change in constitution)
---------------------- then separate assessment shall be made in the following manner:
---------------------- a) The predecessor firm shall be liable to be assessed in respect of income
of previous year in which the succession took place up to the date of
---------------------- succession. The successor firm shall be liable to tax in respect of the
---------------------- income that previous year derived after the date of succession.
b) Liability of successor firm is the same as stipulated in sec. 170.
----------------------

---------------------- 10.5 JOINT AND SEVERAL LIABILITIES OF FIRMS

---------------------- Where any tax, penalty or any other sum payable by a firm for any
assessment year is due, then every person who was the partner of the firm during
---------------------- the relevant previous year and the legal representative of any such person who
---------------------- is deceased shall be jointly and severally liable in respect of the firm.
Note: The liability of the legal representative of a deceased partner cannot
---------------------- exceed the value of estate inherited by him from such deceased partner- sec
---------------------- 159(6).

---------------------- Check your Progress 2

----------------------
State True or False.
----------------------
1. For any assessment year, while calculating the tax liability of the firm,
---------------------- the liability of the legal representative of a deceased partner cannot
exceed the value of estate inherited by him from such deceased partner.
----------------------
2. The interest on capital and remuneration paid by the firm to the partners
---------------------- will be considered to be expenditure for the firm but it not will be
taxable at the hands of individual partners.
----------------------
3. The firm can pay interest on capital introduced by the working partners
---------------------- only, provided that the rate of interest does not exceed 12 per cent.
----------------------

---------------------- 10.6 DISSOLUTION OF FIRMS

---------------------- a) Where a firm is dissolved or the business or profession in discontinued,
for the purpose of any proceeding pending under the Income-tax Act,
---------------------- the firm shall be deemed to be in existence and the proceeding shall be
---------------------- continued accordingly.
b) For the purpose of initiating any proceeding against such firm, the firm
---------------------- shall be deemed to be in existence.
----------------------

206 Direct Taxation

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 c) In respect of any tax, interest, penalty or any other sum payable by the Notes
firm, all persons who were partners, together with the legal heirs of any
deceased partners, during the previous year when dissolution or the ----------------------
discontinuance took place, shall be jointly and severally liable to pay any
such amount. ----------------------

d) In the course of any proceeding, if the Assessing Officer or the ----------------------
Commissioner (Appeals) is satisfied that the firm was guilty of any of the
----------------------
acts attracting levy of penalty, he may impose or direct the imposition of
a penalty according to the relevant provisions of law. ----------------------
Computation of tax liability of Partnership Firm
----------------------
As in case of any other assessees, Gross Total Income of the Partnership
Firm consists of Income from House Property, Income from Capital Gains, ----------------------
Income from Business or Profession and Income from Other Sources. From the
----------------------
Gross Total Income, adjustments are required to be made for brought forward
losses and deductions under Chapter VI-A of the Act, wherever applicable. ----------------------
Resulting amount is the Total Income on which the firm is taxed at a flat rate
of 30%. The tax amount will be increased by the surcharge @10% and 2% as ----------------------
Education Cess. While calculating the “Income from Business or Profession”
----------------------
of the firm, the firm is allowed to debit following amounts to the Profit and Loss
Account: ----------------------
The firm can pay interest on capital to the partners on the amount of ----------------------
capital introduced by them in the firm provided that the rate of interest does not
exceed 12 per cent per annum. The firm can pay such interest to all the partners, ----------------------
whether working or nonworking.
----------------------
The firm can remunerate the partners in the form of salary, bonus,
commission etc. provided that the partners are working partners. The maximum ----------------------
amount of remuneration which can be paid by the firm to all the working partners
taken together is specified in the Act. Section 44A of the Act provides that the ----------------------
maximum amount of remuneration which the firm can pay to the working partners ----------------------
is decided on the basis of its “book profit” which means the profit as per the Profit
and Loss Account after calculating the interest of capital as stated above and after ----------------------
making the adjustments as per the Act regarding expenses and incomes.
----------------------
After deciding the amount of book profit, the remuneration is decided as
below - If the firm is carrying on a profession: ----------------------
a. On the first ` 1, 00,000 of the book profit or in case of a loss, ` 50,000 or ----------------------
90% of the book profit, whichever is more.
----------------------
b. On the next ` 1, 00,000 of the book profit, at the rate of 60%.
c. On the balance amount of book profit, at the rate of 40%. ----------------------
In case of any other firm - ----------------------
a. On the first ` 75,000 of the book profit or in case of a loss, ` 50,000 or ----------------------
90% of the book profit whichever is more.
----------------------
b. On the next ` 75,000 of the book profit, at the rate of 60%.

Taxation of Partnership Firms 207

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 Notes c. On the balance amount of book profit, at the rate of 40%.
After charging the amount of interest on capital and remuneration as
----------------------
stated above, the firm is required to pay the tax at the flat rate of 30%.
---------------------- The balance remaining which indicates the profit after tax is transferred
to the capital accounts of the partners as “share of profit”, but this share
----------------------
of profit is not taxable in the hands of the individual partners.
---------------------- Notes
---------------------- a. The term working partner is not defined in the Act. Who is to be considered
as the working partner is the matter of interpretation. In simple words, a
---------------------- partner will be considered to be a working partner if he is holding requisite
---------------------- experience or qualifications or knowledge about the business of the firm
and if he is engaged in the following types of activities in connection with
---------------------- the firm:

---------------------- ●● framing of business policies regarding the firm

●● business decision making regarding the firm
----------------------
●● attending the general administration of the firm
---------------------- ●● attending routine jobs regarding the activities of the firm
---------------------- It should be noted that full time attendance to carry out any or all of the
above activities is not required.
----------------------
b. The interest on capital and remuneration paid by the firm to the partners
---------------------- will be considered to be expenditure for the firm but it will be taxable in
the hands of individual partners.
----------------------
Losses incurred by the firm
---------------------- There are no specific provisions in the Act regarding the losses incurred
---------------------- by the firms. As such, the same provisions that apply to other assessees equally
apply to partnership firms.
----------------------
Losses incurred by the firm are allowed to be carried forward to the next
---------------------- assessment years. The detailed discussions on this topic are made in the chapter
on “Set Off and Carry Forward of Losses”.
----------------------
Illustration
---------------------- 1. The profit and Loss Account of M/s XYZ & Co., a partnership firm of
Chartered Accountants for the year ended on 31st March 2019 is as below-
----------------------
Expenses 80,000 Professional Fees 4, 00,000
----------------------
Depreciation 25,000
---------------------- Interest on Capital 36,000
---------------------- Remuneration to
Partners 1, 20,000
---------------------- Profit for the year 1, 39,000
---------------------- Total 4, 00,000 Total 4,00,000

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 Additional information Notes
a. Expenses include an amount of ` 15,000 being the expenses of personal
----------------------
in nature.
b. Depreciation as per the Act amounts to ` 21,000 c. Interest on capital ----------------------
is paid @18 per cent per annum. Calculate the amount of remuneration
----------------------
payable to the working partners.
Solution ----------------------

` ` ----------------------
Profit as per Profit and Loss Account 1, 39,000 ----------------------
Add - Personal Expenses 15,000
----------------------
Depreciation 25,000
Disallowable Interest on Capital 12,000 ----------------------
Remuneration to partners 1, 20,000 1, 91,000 ----------------------
Less - Depreciation as per Income tax 0, 21,000
----------------------
Book Profit 1, 70,000
Remuneration to the partners ----------------------
First ` 1, 00,000 of book profits ` 90,000 ----------------------
Balance @ 60% ` 42,000
----------------------
Total Remuneration ` 1,32,000
----------------------
Summary
----------------------
●● A partnership firm is an agreement among not more than 20 persons. As
----------------------
per the Act, partnership firm is considered to be a separate taxable entity
provided that following conditions are satisfied - ----------------------
a. Partnership should be evidenced by a partnership deed.
----------------------
b. The individual shares of the partners should be clearly specified in
the partnership deed. ----------------------
c. A certified copy of the partnership deed should be attached to the ----------------------
return of income pertaining to the year in which the partnership firm
was formed. ----------------------

d. If there is any change in the constitution of the partnership firm or ----------------------
there is any change in the profit sharing ratio, a copy of the revised
partnership deed should be attached to the return of income of the ----------------------
previous year in which such change took place. ----------------------
●● Rate of tax in the case of a firm- Sec.167A
----------------------
●● In the case of a firm, which is assessable as a firm, tax shall be charged on
its total income at the rate as specified in the finance Act of the relevant ----------------------
year. The finance Act has specified
----------------------

Taxation of Partnership Firms 209

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 Notes ●● 30 % as the tax rate for the firms. Surcharge at 10% plus education cess @
2% is also leviable However, long term capital gains will be chargeable
---------------------- to tax under section 112 at the rate of 20% plus surcharge and education
cess.
----------------------

---------------------- Keywords
---------------------- ●● Partnership Firms: A partnership firm is an agreement among not more
than 20 persons, to jointly carry out business.
----------------------
●● Dissolution of firm: Where a firm is dissolved or the business or
---------------------- profession in discontinued, for the purpose of any proceeding pending
under the Income-tax Act.
----------------------

---------------------- Self-Assessment Questions

---------------------- 1. What are the conditions to be satisfied for a change in constitution?
---------------------- 2. What are the conditions to be satisfied for the dissolution of a firm?

---------------------- 3. What is the maximum salary payable to partners in case of losses?

4. What is the provision in case of loss to partnership firm?
----------------------
Problems
----------------------
Problem 1
---------------------- The profit and Loss Account of M/s XYZ & Co., a partnership firm engaged in
the trading activity for the year ended on 31st March 2018 is as below -
----------------------
Cost of goods sold 5,78,000 Sales 7,86,000
----------------------
Other Expenses 1,21,000 Loss for the year 2,08,000
----------------------
Depreciation 28,000
---------------------- Interest on Capital 47,000
---------------------- Remuneration to Partners 2,20,000
---------------------- Total 9,94,000 Total 9,94,000

---------------------- Additional information

a. Expenses include an amount of ` 12,800 being the expenses of personal
----------------------
in nature.
---------------------- b. Depreciation as per the Act amounts to ` 19,800
---------------------- c. Interest on capital not deductible as per the Act ` 2,300

---------------------- Calculate the amount of remuneration payable to the working partners.

Problem 2
----------------------
Amal, Bimal and Kamal are the partners in a firm sharing profits and losses
---------------------- equally.

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 For the Assessment year 2019-2020, following particulars are available - Notes
a. Loss as per Profit and Loss Account (after debiting partners’ remuneration
----------------------
and interest on capital) ` 2,50,000
b. Remuneration to partners - Amal ` 90,000 ----------------------
Bimal ` 60,000 ----------------------
Kamal ` 30,000 ----------------------
c. Interest on Capital -
----------------------
Capital on 1.4.2006 Interest
----------------------
Amal ` 1,00,000 ` 20,000
Bimal ` 1,00,000 ` 20,000 ----------------------
Kamal ` 1,00,000 ` 20,000 ----------------------
You are required to work out the income of the firm and of its partners for the ----------------------
Assessment Year 2019-2020 assuming that the partners have no other income.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Taxation of Partnership Firms 211

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 Notes Solutions
Problem1
----------------------
` `
----------------------
Profit as per Profit & Loss Account (-)2,08,000
---------------------- Add: Personal Expenses 12,800
---------------------- Depreciation 28,000
Disallowable Interest on Capital 2,300
---------------------- Remuneration to partners 2,20,000 2,63,100
---------------------- Less: Depreciation as per Income tax 19,800
Book Profit 35,300
----------------------
Remuneration to the partners
---------------------- Book Profit ` 35,300
---------------------- Less: Remuneration ` 50,000
Loss ` 14,700
----------------------
Loss of ` 14,700 will be allowed to be carried
---------------------- forward.
Problem 2
----------------------
Calculation of taxable income of the firm
---------------------- Profit as per Profit & Loss Account (-)2,50,000
---------------------- Add -
Disallowable Interest on Capital 24,000
---------------------- Remuneration to partners 1,80,000 2,04,000
---------------------- Book Profit (-) 46,000

---------------------- As book profit is a negative amount, the maximum remuneration which can be
paid to the partners will be restricted to ` 50,000 and the same will be shared
---------------------- among the partners in the ratio in which the remuneration is paid to them i.e.
9:6:3. The total loss of the partnership firm amounting to ` 96,000 will be
---------------------- allowed to be carried forward to the next year.
---------------------- Taxable income of the individual partners will be as below -
---------------------- Amal Bimal Kamal

---------------------- ` ` `
Salary 25,000 16,667 8,333
----------------------
Interest on Capital 20,000 20,000 20,000
----------------------
45,000 36,667 28,333
----------------------

----------------------

----------------------

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 Answers to Check your Progress Notes
Check your Progress 1 ----------------------
State True or False. ----------------------
1. False
----------------------
2. True
----------------------
3. True
----------------------
Check your Progress 2 ----------------------
State True or False. ----------------------
1. True
----------------------
2. False
----------------------
3. False
----------------------
Suggested Reading ----------------------
1. Pathak. 2007. Legal Aspects of Business. Tata McGraw-Hill Education. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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----------------------

----------------------

----------------------

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 Taxation of Companies
UNIT

11
Structure:

11.1 Introduction
11.2 Concept of Amalgamation
11.3 Concept of Demerger
11.4 Taxation of Companies
11.4.1 Minimum Alternate Tax
11.4.2 MAT - Foreign Companies
11.4.3 Credit of MAT
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Discuss Define Company under Income the Tax Act
----------------------
• Explain taxation of a Company
---------------------- • Describe Minimum Alternate Tax (MAT Provisions)
---------------------- • Analyse practical examples of MAT

---------------------- • Explain Tax on Distributed Profit Concept

---------------------- 11.1 INTRODUCTION

---------------------- Types of companies
---------------------- The various types of companies to be identified and recognised for
tax provisions can be brought out by the following chart before the relevant
---------------------- definitions are studied:
---------------------- Sec.2 [17] Company

----------------------

----------------------
Sec.2 [22A] Domestic Sec.2 (23A) Foreign Company
---------------------- Company (includes Indian
---------------------- companies u/s.2 [26] & foreign
com panie s whic h f ulf ill
---------------------- prescribed requirements as
per Sec.194 read with Rule 27)
----------------------

----------------------

---------------------- Other companies

Sec.2 (18) company in which
---------------------- public are substantially (commonly known as
interested (known as widely closely held companies)
---------------------- held companies)
----------------------
Sec 2(17) “Company” means
---------------------- a) Any Indian company; or
---------------------- b) Body corporate incorporated outside India under the laws of foreign
country; or
----------------------
c) Any institution, association or a body which is assessed or was assessable/
---------------------- assessed as a company for any assessment year commencing on or before
April 1, 1970; or
----------------------

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 d) Any institution, association or body whether incorporated or not and Notes
whether Indian or non-Indian which is declared by special order of the
Central Board of Direct Taxes to be a company. ----------------------
Sec 2(18) Company in which the public are substantially interested ----------------------
A company is regarded as company in which the public are substantially
----------------------
interested if-
a) It is owned by the government or the Reserve Bank or in which not less ----------------------
than 40% shares are held singly or taken together by the government or
----------------------
the Reserve Bank or a corporation owned by the Reserve Bank; or
b) It is a company registered u/s. 25 of the Companies Act, 1956, i.e. ----------------------
companies incorporated for promotion of commerce, art, science, religion, ----------------------
charity, and prohibiting the payment of any dividends to its members; or
c) It is a company having no share capital and it is declared by the CBDT to ----------------------
be a company in which the public are substantially interested; or ----------------------
d) It is a company which carries on, as its principal business, the business
of acceptance of deposits from its members and which is declared by the ----------------------
Central Government u/ s.620A of the Companies Act to be a Nidhi or ----------------------
Mutual Benefit Society; or
----------------------
e) It is a company which is not a private company and its equity shares
are, as on the last day of the previous year, listed in a recognized stock ----------------------
exchange in India; or
----------------------
f) It is a company which is not a private company and its shares carrying not
less than 50% of the voting power (40% in the case of Indian companies ----------------------
whose business consists mainly in the construction of ships or in the
manufacture or processing of goods or in mining or in the generation or ----------------------
distribution of electricity or any other form of power) have been allotted
----------------------
unconditionally to, or acquired unconditionally by, and were throughout
the relevant previous year beneficially held by- ----------------------
i) The government; or ----------------------
ii) A statutory corporation; or
----------------------
iii) A company in which the public are substantially interested or any
wholly owned subsidiary of such a company. ----------------------
g) It is a company, wherein equity shares carrying not less than 50% of the ----------------------
voting power have been unconditionally allotted to or acquired by and
were throughout the relevant previous year beneficially held by, one or ----------------------
more co-operative societies.
----------------------
Sec. 2(22A) “Domestic Company” means
----------------------
i) an Indian company or
ii) any other company which, in respect of its income liable to tax under the ----------------------
Act, has made the following prescribed arrangements for the declaration ----------------------

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 Notes and payment of dividends within India in accordance with Sec. 194 read
with Rule 27 of the Rules:
----------------------
a) The share register of the company for all shareholders should be
---------------------- regularly maintained at its principal place of business in India,
in respect of any assessment year, from 1st April of the relevant
---------------------- assessment year.
---------------------- b) The general meeting for passing of accounts of the relevant previous
year and for declaring dividends in respect thereof should be held
---------------------- only at a place within India.
---------------------- c) The dividends declared, if any, should be payable only within India
to all shareholders.
----------------------
Students may note that an Indian company is always a domestic company
---------------------- and the above mentioned conditions are relevant only for other than
Indian Companies.
----------------------
Sec. 2(23A) “Foreign Company” means - a company which is not a domestic
---------------------- company.
---------------------- Sec. 2(26) “Indian Company” means- a company formed and registered under
the Companies Act, 1956. Besides, it includes the following:
----------------------
a) A company formed and registered under any law relating to companies
---------------------- formerly in force in any part of India;
b) A corporation established by or under a Central, State or Provincial Act;
----------------------
c) Any institution, association or body which is declared by the Board to be
---------------------- a company under section 2(17)
---------------------- d) A company formed and registered under any law in force in the State of
Jammu and Kashmir;
----------------------
e) A company formed and registered under any law for the time being in
---------------------- force in the Union territories of Dadra and Nagar Haveli, Daman and Diu,
Pondicherry and State of Goa.
----------------------
In the aforesaid cases, a company, corporation, institution, association
---------------------- or, body will be treated as an Indian company only if its registered or principal
office is in India.
----------------------

---------------------- 11.2 CONCEPT OF AMALGAMATION

---------------------- According to section 2(1B), Amalgamation in relation to companies, means:-
---------------------- i) The merger of one or more companies with another company or
ii) The merger of two or more companies to form a new company.
----------------------
The company or companies which so merge are known as ‘amalgamating
---------------------- company’ or companies and the company with which the merger takes
place or the new company which is formed as a result of the merger is
----------------------

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 known as the ‘amalgamated company’. Any such merger will be treated as Notes
amalgamation only if the following occur by virtue of the amalgamation:
----------------------
a) All the assets of the amalgamating company or companies should
become the property of the amalgamated company. ----------------------
b) All the liabilities of the amalgamating company or companies
----------------------
should become the liabilities of the amalgamated company.
c) Shareholders holding not less than 75% in value of the shares in the ----------------------
amalgamating company or companies should become shareholders
----------------------
of the amalgamated company.
The understanding of the term “amalgamation” is significant since certain ----------------------
concessions are provided in case of amalgamation under some of the provisions ----------------------
of the Income-tax Act. For instance, section 47 provides that if capital assets are
transferred in a scheme of amalgamation to an Indian Company, it is not regarded ----------------------
as transfer for capital gains purposes. Similarly, the loss of amalgamating
company shall be allowed to be set off and carried forward by the amalgamated ----------------------
company by virtue of sec. 72A. ----------------------
In a scheme of amalgamation, the effective date is the date of transfer
specified in the scheme and not the date of High Court’s order approving the ----------------------
scheme. So long as the court does not modify the date specified in the scheme, ----------------------
amalgamation takes effect on the date of transfer specified in the scheme.
The income of the amalgamating company from such date of transfer shall ----------------------
be assessed as the income of the amalgamated company and shall be assessed
accordingly - Marshall Sons and Co. (India) Ltd. vs. ITO (1996) 223 ITR 809 ----------------------
(SC). ----------------------

Check your Progress 1 ----------------------

----------------------
State True or False.
----------------------
1. A company is regarded as company in which the public are substantially
interested if it is registered u/s. 25 of the Companies Act, 1956, for ----------------------
promotion of commerce, art, science, religion, charity and does not
prohibit the payment of any dividends to its members. ----------------------

2. According to section 2(1B), Amalgamation in relation to companies ----------------------

means the merger of one or more companies with another company,
which is known as the amalgamating company. ----------------------

3. A company is regarded as company in which the public are substantially ----------------------

interested if the company is private company and its equity shares are
listed in a recognized stock exchange in India as on the last day of the ----------------------
previous year. ----------------------

----------------------

----------------------

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 Notes 11.3 CONCEPT OF DEMERGER
---------------------- 2(19AA) “demerger” in relation to companies, means the transfer, pursuant
to a scheme of arrangement under sections 391 to 394 of the Companies Act,
---------------------- 1956, by a demerged company of its one or more undertakings to any resulting
company in such a manner that-
----------------------
i) All the property of the undertaking, being transferred by the demerged
---------------------- company, immediately before the demerger, becomes the property of the
---------------------- resulting company by virtue of the demerger;
ii) All the liabilities relatable to the undertaking, being transferred by the
---------------------- demerged company, immediately before the demerger, become the
---------------------- liabilities of the resulting company by virtue of demerger;
iii) The property and the liabilities of the undertaking or undertakings being
----------------------
transferred by the demerged company are transferred at values appearing
---------------------- in its books of account immediately before the demerger;
iv) The resulting company issues, in consideration of the demerger, its shares
----------------------
to the shareholders of the demerged company on a proportionate basis;
---------------------- v) The shareholders holding not less than three-fourths in value of the
shares in the demerged company (other than shares already held therein
----------------------
immediately before the demerger, or by a nominee for, the resulting
---------------------- company or, its subsidiary) become shareholders of the resulting company
or companies by virtue of the demerger,
----------------------
Otherwise than as a result of the acquisition of the property or assets
---------------------- of the demerged company or any undertaking thereof by the resulting
company;
----------------------
vi) The transfer of the undertaking is on a going concern basis;
---------------------- vii) The demerger is in accordance with the conditions, if any, notified under
---------------------- sub-section (5) of section 72A by the Central Government in this behalf.
For the purpose of this definition, “undertaking” shall include any part of
----------------------
an undertaking, or a unit or division of an undertaking or a business activity
---------------------- taken as a whole, but does not include individual assets or liabilities or a
combination of these not constituting a business activity. For determining
---------------------- the value of property which is the subject matter of demerger, any change
in the value of an asset, on account of revaluation, shall be ignored.
----------------------
Splitting up or the reconstruction of any authority or a body constituted or
---------------------- established under any Act, or a local authority or a public sector company,
into separate authorities or bodies or local authorities or companies shall
----------------------
be deemed to be the demerger if such split up or reconstruction fulfills the
---------------------- conditions as may be notified by the Central Government.
2(19AAA) “demerged company “. means the company whose undertaking
----------------------
is transferred, pursuant to a demerger, to a resulting company.
----------------------

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 2(41A) “resulting company” means one or more companies to which the Notes
undertaking of the demerged company is transferred in a demerger and,
the resulting company in consideration of such transfer of undertaking, ----------------------
issues shares to the shareholders of the demerged company and includes
any authority or body or local authority or public sector company or a ----------------------
company established, constituted or formed as a result of demerger. ----------------------
Where there is demerger as defined u/s.2(19AA) of the Act, the implications
----------------------
are as under:
i) There will be no capital gains tax liability in respect of transfer of capital ----------------------
assets by the demerged company to the resulting Indian company by
----------------------
virtue of Sec.47 (vib).
ii) Shareholders of the demerged company are not chargeable to capital ----------------------
gains tax with reference to shares transferred/issued-Sec.47 (vid).
----------------------
iii) No tax liability will arise by deeming any portion distributed to the
shareholders of the demerged company as “deemed dividend”-Sec.2(22) ----------------------
(v) ----------------------
iv) The demerged company shall be entitled to claim depreciation after
demerger in respect of the value arrived at by reducing the written down ----------------------
value of the block of assets prior to demerger by the written down value ----------------------
of assets transferred pursuant to demerger Explanation 2A to Sec. 43(6).
v) In the case of resulting company, depreciation shall be allowed in respect ----------------------
of assets transferred from the demerged company pursuant to demerger on ----------------------
the written down value of the transferred assets of the demerged company
immediately before the demerger Explanation 2B to Sec.43(6). ----------------------
vi) Expenses incurred for demerger shall be allowed over a period of five ----------------------
years in equal installments- sec.35DD.
----------------------
vii) The cost of acquisition of the shares in the resulting company for the
shareholder shall be determined as follows: ----------------------
Net book value of the assets transferred Cost of acquisition of shares held ----------------------
× by the assessee in the demerged co
Net worth of the demerged co. immediately before the demerger ----------------------
The value so arrived at shall be reduced from the cost of acquisition of ----------------------
the original shares held by the shareholders in the demerged company and
balance shall be the cost of acquisition of the shares held in the demerged ----------------------
company. For this purpose, “net worth” means the aggregate of the paid
up share capital and general reserves as appearing in the books of account ----------------------
of the demerged company immediately before the demerger-Sec.49 (2C) ----------------------
and Sec.49 (2D).
viii) Deductions under sections 35ABB, 35D and 35E available to the demerged ----------------------
company can be availed by the resulting company in the same manner as the ----------------------
demerged company would have availed had the demerger not taken place.
Same is the position with respect to deduction under sec.80-IA and 80-IB. ----------------------

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 Notes ix) The resulting company will enjoy the benefit of carry forward of losses
and unabsorbed depreciation of the demerged company as attributable to
---------------------- the demerged undertaking. Of course, the carry forward benefit of loss
can be enjoyed only for the unexpired remaining number of years out of
---------------------- the total period of eight assessment years and unabsorbed depreciation
---------------------- can be carried forward for indefinite period.-Sec.72A(4).
Losses in case of closely held company - Sec. 79
----------------------
In the case of a company in which public are not substantially interested,
---------------------- the unabsorbed business loss relating to any assessment year can be carried
forward and set off against the income in a subsequent assessment year only if
----------------------
the following requirement is fulfilled:-
---------------------- On the last day of the previous year in which the loss is sought to be
set off, the shares of the company carrying not less than 51% of voting power
----------------------
are beneficially held by the persons who beneficially held the shares of the
---------------------- company carrying not less than 51% of the voting power on the last day of the
previous year in which the loss was incurred.
----------------------
Exceptions
---------------------- The above restriction does not apply to a case if the change in the said
---------------------- voting power takes places due to the following reasons:
i) Death of the shareholder
----------------------
ii) Gift by a shareholder to his relative
----------------------
This restriction placed u/s.79 shall not apply to any change in the
---------------------- shareholding of an Indian company which is a subsidiary of a foreign company
as a result of amalgamation or demerger of a foreign company. However, 51%
---------------------- of the shareholders of the amalgamating or demerged foreign company should
continue to be the shareholders of the amalgamated or the resulting foreign
----------------------
company.
---------------------- The provisions of Sec. 79 are applicable only in the case of carry forward
---------------------- of losses. As carry forward of unabsorbed depreciation is covered by sec. 32(2),
its carry forward and set off is not affected by Sec. 79.
----------------------
11.4 TAXATION OF COMPANIES
----------------------
11.4.1 Minimum Alternate Tax
----------------------
1. In the case of a company, It has been provided that where 7.5% of book
---------------------- profit exceeds tax on total income, the book profit shall be deemed to be
---------------------- the total income and the tax payable on such total income shall be 7.5%
thereof. Education cess @ 3% ( 2% for Primary and 1% for secondary)
---------------------- shall be added on the aggregate of Income tax and surcharge.

---------------------- 2. For the purpose of computation of book profit u/s. 115JB, every company
assessee shall prepare its profit and loss account for the relevant previous
---------------------- year in accordance with the provision of Parts II and III of schedule

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 VI of the Companies Act 1956. While preparing the annual accounts Notes
including profit and loss account, the accounting policies, the accounting
standards, the method and rates of depreciation shall be the same as have ----------------------
been adopted for preparing such accounts including profit and loss laid
before the Annual General Meeting u/s 210 of the Companies Act. This ----------------------
requirement applies even if the company adopts a financial year which is ----------------------
different from the previous year under the Income tax Act.
----------------------
The book profit shall be computed by making the following adjustments
contemplated u/s 115JB to the net profit shown in the profit and loss account ----------------------
shall be increased by -
----------------------
a) The amount of Income-tax paid or payable, and the provision therefore or
b) The amounts carried to any reserves by whatever name called (other than ----------------------
reserves for shipping business as specified under section 33AC) or
----------------------
c) The amount or amounts set aside to provisions made for meeting liabilities
other than ascertain liabilities or ----------------------

d) The amount by way of provision for losses of subsidiary companies or ----------------------

e) The amount or amounts of dividends paid or proposed or ----------------------
f) The amount or amounts of expenditure relatable to any income to which
----------------------
Sec 10 other than the provisions contained in sec 10(23G) thereof 10A.
10B. Sec 11 or 12 apply. ----------------------
The above adjustments are called for only if any of the amounts referred
----------------------
to above are debited to the profit and loss account. Further, the following shall
be reduced from the net profit as per the profit and loss account. ----------------------
i) The amount withdrawn from any reserve or provision if any such amount ----------------------
is credited to the profit and loss account or
ii) The amount of income to which Sec 10 other than the provisions contained ----------------------
in sec 10(23G) thereof 10A, 10B, sec 11 or 12 apply, if any such amount ----------------------
is credited to the profit and loss account, or
iii) 
The amount of loss brought forward or unabsorbed depreciation, ----------------------
whichever is less as per books of account (for this purpose the loss shall ----------------------
not include depreciation) or
----------------------
iv) The amount of profits eligible for deduction u/s 80HHC;
v) The amount of profits eligible for deduction u/s 80HHE; ----------------------
vi) The amount of profits eligible for deduction u/s 80HHF; ----------------------
vii) The amount of profits of sick industrial company for the years commencing ----------------------
from the year in which the said company has become a sick industrial
company under the relevant Act and ending with the year in which the ----------------------
entire net worth of such a company becomes equal to or exceeds the
accumulated losses. ----------------------

----------------------

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 Notes 3) The determination of the amounts in relation to the relevant previous year
to be carried forward to the subsequent years under sections 32(2) or 72
---------------------- or 73 or 74 or 74A shall not be affected by the application of section
115JB(1)
----------------------
4) All other provisions of the Income-tax Act, except to the extent otherwise
---------------------- provided in this section, shall apply to every company mentioned in this
section.
----------------------
Note: In computation of the book profit, the amount of loss brought forward or
---------------------- unabsorbed depreciation, whichever is less as per books of account is allowable
as deduction. For this purpose, business loss shall not include depreciation loss.
----------------------
It is clarified that if either the loss brought forward or unabsorbed depreciation
---------------------- is NIL then nothing shall be allowed as deduction.
11.4.2 MAT - Foreign companies
----------------------
Under the Companies Act, every company has to maintain its books of
---------------------- account relating to the Indian business in the manner required u/s 209 of the
---------------------- companies Act and u/s 594 of the same statute, every foreign company has to
file its global accounts. In the case of Foreign company, the income derived
---------------------- from the Indian business is chargeable to tax and therefore, the company has
to furnish a balance sheet and profit and loss account in respect of its Indian
---------------------- Business. In order to comply with this, the company has to calculate its Indian
---------------------- profits of the Indian business of the Foreign company for the purpose of section
115JB.
---------------------- The Authority for Advance Rulings in P. NO. 14 of 1997 234 ITR 335,
---------------------- has held that the provision of sec 115JA (now substituted by sec 115JB) are
applicable to Foreign companies in the case of a foreign company incorporated
---------------------- in Netherlands having permanent establishment in India. Under Article 7 of the
Double Tax Avoidance Agreement, the foreign company is liable to be taxed
---------------------- only on the income attributable to its permanent establishment in India. The
---------------------- company has to furnish a balance sheet and profit and loss account in respect of
its Indian profits separately and there cannot be any special difficulty in finding
---------------------- out the book profit of the Indian business of the foreign company for the purpose
of minimum alternate tax.
----------------------
In the case of a foreign company engaged in exploration of oil and gas
---------------------- fields, deduction of expenditure u/s 42 is allowable only when business income
is computed under chapter IV- D of the Income-tax Act and not for computation
---------------------- of book profit u/s 115JB. The provision of sec. 115JB apply to a foreign company
---------------------- and the provision of sec 42 cannot override sec. 115JB - Niko Resources Ltd vs
CCIT (Authority of Advance Ruling) (1998) 234 ITR 828.
----------------------
11.4.3 Credit of MAT
---------------------- Where any amount of tax is paid u/s 115JB in excess of the payable under the
normal provisions, such excess shall be treated as credit available to the assessee
----------------------
company. The amount of such credit shall be carried forward to the subsequent
---------------------- years and set off against the excess of tax payable under the normal provisions

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 over the tax payable under sec 115JB. It can be so carried forward and set off Notes
within a period of 5 years immediately succeeding the assessment year in which
the tax credit is determined. If in the subsequent 5 years, the company continues ----------------------
to pay minimum alternate tax and the credit is not set off, it shall lapse.
----------------------
Examples
----------------------
M/s Koti & Lalith Ltd. furnishes the following information for the year ending
31.03.2013 It seeks your advice for MAT credit u/s. 115JAA ----------------------
Tax computed u/s 115JB for the A.Y. 5,00,000
----------------------
Tax computed under normal provisions for the A. Y. 2012-13 3,00,000
----------------------
Tax compute u/s 115JB for 2013-14 3,00,000
Tax compute under normal provisions for A. Y. 2013-14 4,00,000 ----------------------

Ans: ----------------------
Computation of credit to be carried forward u/s 115JAA for the A.Y. 2012-2013 ----------------------
Tax computed u/s. 115JB 5,00,000 ----------------------
Tax computed under normal provisions 3,00,000
----------------------
MAT credit to be carried forward u/s 115JAA 2,00,000
----------------------
Total Tax payable for the A.Y. 2013-2014 5,00,000
Computation of credit to be carried forward u/s 115JAA for the A.Y. 2013-2014 ----------------------
Tax computed u/s. 115JB 3,00,000 ----------------------
Tax computed under normal provisions 4,00,000 ----------------------
Higher of the above shall be tax payable u/s. 115JB 4,00,000
----------------------
Less: Set off of credit u/s. 115JAA
----------------------
Tax on total income under normal provisions 4,00,000
Less: Tax computed u/s 115JB 3,00,000 ----------------------
Difference 1,00,000 ----------------------
Tax credit available u/s. 115AA 2,00,000 ----------------------
Restricted to 1,00,000
----------------------
Balance tax payable after MAT credit 3,00,000
----------------------
Note: Bal MAT credit of ` 1,00,000 is eligible for carry forward up to A.Y.
2016-17. ----------------------
Report of a Chartered Accountant u/s 115JB
----------------------
Every company to which the provisions of sec. 115JB are applicable shall
furnish a report in Form 29B from a chartered accountant certified that the book ----------------------
profit has been computed in accordance with the provisions of sec 115JB. ----------------------

----------------------

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 Notes Levy of interest u/s 234B and 234C with reference to tax on book profit
Though companies finalise the statement of accounts in with Schedule VI
----------------------
after the closure of the accounting year, it cannot be regarded that it would be
---------------------- an impossible exercise for a company maintaining its accounts on mercantile
basis to estimate the profits during current year itself and pay advance tax on
---------------------- the estimated current profits. Therefore, interest u/ s.234B is leviable though
115JB is attracted. However a contrary view is opined by the Karnataka High
----------------------
Court in the case of Quality Biscuits Vs. CIT(1999), 243 ITR 519 (KAR). Since
---------------------- companies finalise the statement of accounts in accordance with Schedule VI
after the closure of the accounting year, it is not possible to determine book
---------------------- profit and pay advance tax. Therefore, advance tax provisions are not applicable
to book profit tax.
----------------------
Amount of loss and depreciation to be carried forward
----------------------
It is possible in a case that the assessee avails set off of brought forward
---------------------- loss and unabsorbed depreciation as per normal provision, on account of which
the taxable income is substantially reduced or made nil. Consequently, the
---------------------- assessee may end up paying tax on book profit u/ s 115JB. Issue arises about
the eligibility of the assessee to carry forward such loss or depreciation and set
----------------------
off in the years in which it had paid book profit tax. If such benefit is allowed,
---------------------- in the subsequent years the assessee will get benefit of set off of the same loss
or depreciation.
----------------------
Even where the book profit tax is imposed, the amount of business loss and
---------------------- unabsorbed depreciation at the beginning of the year should be adjusted and set
off as permissible under the normal provisions and only the balance amount of
---------------------- unabsorbed loss and depreciation can be carried forward to the next year.
---------------------- Assessee cannot contend carry forward of entire amount on the ground that
tax has been imposed on book profit. For instance, if the brought forward loss is
---------------------- ` 50 lakhs; unabsorbed depreciation is ` 30 lakhs and income computed under
---------------------- the normal provisions is ` 60 lakhs; then after set off u/s. 72 and u/s 32(2), total
income assessable shall be nil and assessee would be eligible to carry forward
---------------------- unabsorbed depreciation of Rs 20 lakhs. If the book profit is computed at Rs 20
lakhs and the company is made to pay tax thereon at 7.5% with education cess,
---------------------- it would not alter the amount of carry forward loss/depreciation.
---------------------- Capital gains part of book profit
---------------------- While calculating the total income under the Income-tax Act, the assessee
is required to take into account income by way of capital gains u/s 45 of the
---------------------- Income-tax Act. In the circumstances, while computing the book profit under
the Companies Act, the assessee has to include capital gains for computing
----------------------
the book profit u/s 115JB. Even under clause 3(xii) (b) of Part II of Schedule
---------------------- VI to the Companies Act, 1956, profits or losses in respect of transactions
or transactions of an exceptional or non-recurring nature are to be disclosed.
---------------------- This shows clearly that capital gains should be included for the purposes of
computing book profit -CIT vs. Veekaylal Investment Co. P. Ltd (2001) 249
----------------------
ITR 597 (Bom).

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 Notes
Check your Progress 2
----------------------
Fill in the blanks. ----------------------
1. In case of _____ company, the income derived from the Indian business
----------------------
is chargeable to tax and the company has to furnish the financial
statements, i.e. a Balance Sheet and Profit & Loss a/c in respect of its ----------------------
Indian business.
----------------------
2. Under Section 115JB, special provision for payment of _______ tax
has been given. ----------------------
3. Foreign company means a company, which is not a _______ company. ----------------------

----------------------
Summary
----------------------
●● In the case of a company, it has been provided that where 7.5% of book
profit exceeds tax on total income, the book profit shall be deemed to be ----------------------
the total income and the tax payable on such total income shall be 7.5%
----------------------
thereof. Surcharge at 10% shall be added to such amount. Education cess
@ 3%( 2% for Primary and 1% for secondary) shall be added on the ----------------------
aggregate of Income tax and surcharge.
----------------------
Keywords ----------------------
●● Company: ----------------------
a) Any Indian company; or
----------------------
b) Body corporate incorporated outside India under the laws of foreign
country; or ----------------------
c) 
Any institution, association or a body which is assessed or ----------------------
was assessable/assessed as a company for any assessment year
commencing on or before April 1, 1970; or ----------------------
d) Any institution, association or body whether incorporated or not ----------------------
and whether Indian or non-Indian which is declared by special
order of the Central Board of Direct Taxes to be a company. ----------------------

●● “Foreign Company”: a company which is not a domestic company. ----------------------

●● Minimum Alternate Tax: In the case of a company, It has been provided ----------------------
that where 7.5% of book profit exceeds tax on total income, the book
profit shall be deemed to be the total income and the tax payable on such ----------------------
total income shall be 7.5% thereof. Surcharge at 10% shall be added to
such amount. Education cess @ 2% shall be added on the aggregate of ----------------------
Income tax and surcharge. ----------------------

----------------------

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 Notes
Self-Assessment Questions
----------------------
1. What do you mean by Amalgamation? Q2. What do you mean by Demerger?
---------------------- Problem
---------------------- Following particulars have been provided in respect of A Limited for the year
ending on 31st March 2018.
----------------------
(` in Lakhs)
----------------------
Particulars ` `
---------------------- Operating Profit 120
Less: Transfer to Reserves 25
----------------------
Proposed Dividend 15 040
---------------------- Net Profit 080
While calculating the above profit, following amounts have been debited to
----------------------
Profit and Loss Account:
---------------------- Depreciation on SLM basis - ` 30 Lakhs
---------------------- Provision for taxation - ` 40 Lakhs

---------------------- Following further information is provided:

Depreciation on WDV basis as per Income Tax calculations - ` 120 Lakhs
----------------------
As per the income tax records, brought forward business loss - ` 30
---------------------- Lakhs
---------------------- Determine the applicability of Section 115JB to the company and also calculate
the tax liability for the AY 2018-2019.
----------------------
Solution
---------------------- Calculation of Tax Liability for A Limited for AY 2018-2019
---------------------- Calculation of Book Profits
---------------------- ( ` in Lakhs)

---------------------- Particulars ` `
Profit as per Profit and Loss Account 80
---------------------- Add: Transfer to Reserves 25
---------------------- Proposed Dividend 15
Provision for Taxation 40
----------------------
80
---------------------- 160
---------------------- Less: Brought Forward Losses 30 030
Book Profit as per Section 115JB 130
----------------------

----------------------

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 (` in Lakhs) Notes
Particulars ` `
----------------------
Tax payable as per the provisions of
----------------------
Section 115JB -
@7.5% of ` 210 Lakhs ` 9,75,000 ----------------------
Total Tax Liability ` 9,75,000 ----------------------
Calculation of Taxable Income
----------------------
Profit as per Profit and Loss Account 80
----------------------
Add: Transfer to Reserves 25
Proposed Dividend 15 ----------------------

Provision for Taxation 40 ----------------------

Depreciation as per SLM 30 ----------------------
110
----------------------
190
----------------------
Less: Brought Forward Losses 30
Depreciation as per WDV 135 ----------------------
165 ----------------------
Taxable Income 25
----------------------
Tax payable under normal calculations -
----------------------
@35% on ` 25 Lakhs ` 8,75,000
Total Tax Liability ` 8,75,000 ----------------------

As the total tax liability works out to be higher as per the provisions of Section ----------------------
115JB, the tax payable will be ` 9,75,000
----------------------
In either of the cases, the tax payable shall be increased by the education cess
@ 3%. ----------------------

----------------------
Answers to Check your Progress ----------------------
Check your Progress 1 ----------------------
State True or False. ----------------------
1. False
----------------------
2. True
----------------------
3. True
----------------------

----------------------

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 Notes Check your Progress 2
Fill in the blanks.
----------------------
1. In case of foreign company, the income derived from the Indian business is
---------------------- chargeable to tax and the company has to furnish the financial statements,
i.e. a Balance Sheet and Profit & Loss a/c in respect of its Indian business.
----------------------
2. Under Section 115JB, special provision for payment of minimum alternate
---------------------- tax has been given.
---------------------- 3. Foreign company means a company, which is not a domestic company.

----------------------
Suggested Reading
----------------------
1. Sharma, J.P. 2010. An Easy Approach to Company And Compensation
---------------------- Laws. Ane Books Pvt Ltd.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Set Off and Carry Forward of Losses
UNIT

12
Structure:

12.1 Introduction
12.2 Set off of Losses
12.3 Deemed Income
12.3.1 Cash Credit
12.3.2 Unexplained Investment
12.3.3 Unexplained Money, Jewellery
12.3.4 Unexplained Expenditure
12.3.5 Investment not Fully Disclosed
12.3.6 Any Amount Borrowed/Repaid on Hundi
12.4 Carry Forward of Losses
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
•  xplain the concepts of Set off of losses and carry forward of losses
E
---------------------- under Income Tax Act
---------------------- • Discuss different consequences of set off of losses
• Describe the concept of deemed income
----------------------
• Work on practical examples
----------------------

---------------------- 12.1 INTRODUCTION

---------------------- There may be a situation where an assessee has different sources of income
under one head of income and the result of one source is a loss. Similarly, there
---------------------- may be a possibility that the assessee has different heads of income and the
---------------------- result of one head of income is a loss. The question arises as to whether the
assessee gets the benefit of these losses or not. The answer to this question
---------------------- is in the positive. The losses incurred can be set off to reduce the Gross Total
Income.
----------------------
Similarly, there may be a possibility that the Gross Total Income under
---------------------- different heads of income is negative. The question arises as to whether the
assessee gets the benefit of these losses in the subsequent Assessment years or
----------------------
not. The answer to this question is again in the positive. The losses incurred
---------------------- in the current Assessment Year can be carried forward to the subsequent
Assessment Years and can be adjusted against the income earned in the
---------------------- subsequent Assessment Years.
----------------------
12.2 SET -OFF OF LOSSES
----------------------
Inter source adjustment – Sec. 70
----------------------
Where the net result of computation for any assessment year in respect of
---------------------- any source of income falling under any head of income is a loss, the assessee
shall be entitled to have the amount of such loss set off against his income
---------------------- from any other source under the same head. However, the following are the
exceptions to the above rule:
----------------------
i) Loss from speculative business
----------------------
ii) Loss from the activity of owning and maintaining race horses
---------------------- iii) Long term capital loss
---------------------- Inter head adjustment – Sec.71
---------------------- Where the net result of the computation under any head of income in
respect of any assessment year is a loss, the assessee shall be entitled to have
---------------------- such amount of loss set off against his income assessable for that assessment

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 year under any other head of income. This rule of inter head adjustment is Notes
subject to the following exceptions:
----------------------
a) Loss from speculative business
b) Loss from the activity of owning and maintaining race horses ----------------------
c) Loss under capital gains ----------------------
d) Loss under Profits & Gains of Business or Profession against salary ----------------------
income
Students may note that loss under the head “Profits and Gains of Business ----------------------
or Profession” cannot be set off against salary income. However, Set off of ----------------------
business loss against any other head of income is allowed.
According to the Sec. 58(4), any loss or unabsorbed depreciation ----------------------
allowance cannot be set off against any income in the form of winning from ----------------------
lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting. ----------------------
Section Type of Loss Number of years To be set-off against ----------------------
71B Loss from house 8 years Income from house
property property ----------------------
72 Business loss 8 years Income from business
unabsorbed. or profession ----------------------
72A(1) Unabsorbed Indefinite period Any income of the
depreciation of- amalgamated co. ----------------------
Amalgamation Co. ----------------------
72A(4) Demerged company Indefinite period Any income of the
resulting company ----------------------
72A(6) Firm or proprietary Indefinite period Any income of
concern succeeded by successor company ----------------------
a company
72AA Banking company Indefinite period Any income of ----------------------
Banking institution
72A(4) Demerged company Unexpired period out Income from business ----------------------
of the total permissible or profession of the ----------------------
period of 8 years resulting company
72A(6) Firm or proprietary 8 years from the Income from business ----------------------
concern succeeded by expiry or profession of the
a company of the year of successor company ----------------------
conversion of the firm
----------------------
or proprietary concern
into a company [set ----------------------
off in the year of
succession and c/f for ----------------------
8 years]
----------------------

----------------------

----------------------

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 Notes 72AA Banking company 8 years from the Income from business
expiry or profession of the
---------------------- of the year of banking institution
amalgama- tion
----------------------
of such Banking
---------------------- company with
banking institution
---------------------- [set off in the year of
amalgamation
----------------------
and c/f for 8 years]
---------------------- 73 Speculation business 4 years Income from
loss speculation business
---------------------- 74 Loss under the head
‘Capital Gains’
---------------------- a) Short Term Capital 8 years Short term or
Loss long term capital
---------------------- b) Long Term Capital 8 years gainsLong term
Loss capital gains
----------------------
74A Loss from the activity 4 years Income from the same
---------------------- of owning and activity
mainta- ining race
---------------------- horses

----------------------
Check your Progress 1
----------------------

---------------------- State True or False.

1. Where the net result of computation for any assessment year in respect
---------------------- of any source of income falling under any head of income is a loss, the
assessee shall be entitled to have the amount of such loss set off against
----------------------
his income from any other source under the same head.
---------------------- 2. Profits and gains of profession can be set off against salary income.
---------------------- 3. Loss from house property can be set off against income from house
property for indefinite period.
---------------------- 4. Any loss can be set off against any income in the form of winning from
lotteries/gambling/betting.
----------------------

---------------------- 12.3 DEEMED INCOME

---------------------- 12.3.1 Cash credits
---------------------- Where any sum is found credited in the books of an assessee maintained
for any previous year and the assessee offers no explanation about the nature
---------------------- and source thereof, or, the explanation offered is not satisfactory, the sum so
---------------------- credited may be charged as income of the assessee for that previous year.
For the purpose of avoiding the applicability of sec. 68, the burden is on
---------------------- the assessee to prove that:

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 a) The identify of the creditors is established; Notes
b) The capacity of the creditor is beyond doubt; and
----------------------
c) The transaction is genuine.
----------------------
An assessing officer cannot impose penalty u/s. 271D for violation of sec.
269SS in respect of credits treated as income u/s.68. If the credits are genuine, ----------------------
sec.68 does not apply and if they have been borrowed to the tune of `20,000/-
or more from a person in cash then sec. 217D can be invoked. To sum up, sec.68 ----------------------
and sec. 269SS are mutually exclusive.
----------------------
12.3.2 Unexplained Investment
----------------------
Where in the financial year relevant to an assessment year, the assessee
has made investments which are not recorded in the books of account, if ----------------------
any, maintained by him and the assessee offers no explanation or unsatisfactory
explanation, the value of the investment may be deemed to be the income of the ----------------------
assessee for such a financial year. ----------------------
12.3.3 Unexplained Money, Jewellery
----------------------
Where in any financial year the assessee is found to be the owner of any
money, bullion, jewellery or other valuable articles which are not recorded in ----------------------
the books of account, if any, maintained by the assessee and the assessee offers
----------------------
no explanation or unsatisfactory explanation, the money and value of assets so
found may be deemed to be the income of the assessee for such a financial year. ----------------------
12.3.4 Unexplained Expenditure
----------------------
Where in any financial year the assessee has incurred any expenditure and
offers no explanation about the source of such expenditure, or the explanation ----------------------
offered is not satisfactory, then the expenditure to the extent it is not satisfactorily ----------------------
explained may be deemed to be the income of the assessee for such a financial
year. ----------------------
Such unexplained expenditure which is deemed to be the income of the ----------------------
assessee shall not be allowed as a deduction under any head of income.
12.3.5 Investment not Fully Disclosed ----------------------

Where in any financial year, the assessee has made investment or is ----------------------
found to be the owner of any bullion, jewellery or other valuable article and the
----------------------
assessing officer finds that the amount expended for making such investments
exceeds the amount recorded in the books and the assessee offers no explanation ----------------------
or unsatisfactory explanation, the excess amount may be deemed to be the
income of the assessee for such a financial year. ----------------------
12.3.6 Any amount Borrowed/Repaid on Hundi ----------------------
Where any amount is borrowed on hundi from any person or any amount
----------------------
thereon is repaid to such person otherwise than by an account payee cheque
drawn on a bank, the amount so borrowed or repaid shall be deemed to be the ----------------------
income of the person borrowing/repaying the amount for the previous year in
which it is borrowed or repaid. ----------------------

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 Notes 1) Once an amount is deemed as income at the time of borrowal, it cannot be
deemed as income at the time of repayment.
----------------------
2) Amount repaid shall include the amount of interest paid on amount
---------------------- borrowed.
Illustration
----------------------
Mr. Ashok provides the following particulars about his income for the
---------------------- Assessment Year 2018-2019.
---------------------- Particulars `
a. Income from Salary 1,00,000
---------------------- b. Income from House Property
---------------------- House I 24,000
House II (-) 14,000
---------------------- House III (Self occupied) (-) 60,000
c. Profits and gains from business and profession
---------------------- Manufacturing business 68,000
---------------------- Trading business (-) 28,000
Business A (Speculative) (-) 60,000
---------------------- Business B (Speculative) 25,000
d. Long Term Capital Gains from the transfer of house 90,000
---------------------- Short Term Capital Loss from the transfer of shares (-) 48,000
e. Income from Other Sources
----------------------
Winning from lotteries 29,000
---------------------- Income from card games (-) 20,000
Interest 18,000
---------------------- Calculate the Gross Total Income of Mr. Ashok for the Year 2018-2019.
---------------------- Solution
---------------------- Calculation of Gross Total Income for Mr. Ashok for Year 2018-2019

---------------------- Particulars `. `
a. Income from Salaries 1,00,000
---------------------- b. Income from House Property
---------------------- House I 24,000
House II (-) 14,000
----------------------
House III (-) 80,000 (-) 70,000
---------------------- Profits from business & profession (Non-
---------------------- speculative)
c. Manufacturing 68,000
---------------------- Trading (-) 28,000 40,000
---------------------- d. Profits from business & profession
(Speculative)
---------------------- BusinessA (-) 60,000
---------------------- Business B 25,000 Nil.

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 e. Income from Capital gains Notes
Long Term Capital Gains 90,000
----------------------
Short Term Capital Loss (-) 48,000 42,000
f. Income from Other Sources ----------------------
Winning from Lotteries 29,000
----------------------
Interest 18,000 47,000
Gross Total Income 1,59,000 ----------------------
Note: ----------------------
Following losses will be carried forward to the Year 2018-2019
----------------------
% Loss from speculative business – ` 35,000
----------------------
% Loss from card games – ` 20,000
----------------------
Set off and Carry Forward of Losses 285
----------------------
12.4 CARRY FORWARD OF LOSSES
----------------------
If the losses cannot be set off under the same heads of income or under
different heads of income due to non-availability of sufficient income in ----------------------
the same year, such losses can be carried over to the next Assessment Year. ----------------------
According to the provisions of Income Tax Act, 1961, following losses can be
carried forward to the next Assessment Years – ----------------------
Loss under the head “Income from House Properties” ----------------------
As per the provisions of Section 71B of the Act, loss under the head
----------------------
of Income from House Properties can be carried forward and set off in the
subsequent Assessment Years against the Income from House Properties subject ----------------------
to the limit of 8 Assessment years.
----------------------
Loss from Speculation Business
As per the provisions of Section 73 of the Act, the loss from Speculative ----------------------
Business can be carried forward and set off in the subsequent Assessment years ----------------------
against the Speculative Profits subject to the time limit of 8 Assessment years.
Loss from Non-speculative Business ----------------------

Loss from Non-speculative Business may arise on account of the following ----------------------
reasons –
----------------------
a. Unabsorbed Depreciation
----------------------
b. Unabsorbed Business Loss
Unabsorbed depreciation can be carried forward to the subsequent ----------------------
Assessment Years without any time limits. In the subsequent Assessment Years,
----------------------
the unabsorbed depreciation can be set off against any head of income, not
necessarily against Profits from Business and Profession. ----------------------

----------------------

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 Notes Unabsorbed business loss can carried forward and set off in the subsequent
Assessment Years against the any business profits, whether speculative or non-
---------------------- speculative, subject to the time limit of 8 Assessment years.
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. The losses incurred in the current assessment year can be carried
---------------------- forward to the subsequent assessment year by adjusting the income
earned in the subsequent assessment year is called _____ ___ of losses.
----------------------
2. As regards to loss from speculative business, it can be carried forward
---------------------- and set off in subsequent assessment year against speculative profits
subject to the time limit of _____ assessment years.
----------------------
3. The losses of demerged company can be carried forward for _____
---------------------- period and can be set off against any income of the resulting company.
----------------------

---------------------- Summary
---------------------- ●● The provisions regarding set off and carry forward of loses are contained
---------------------- in Sections 70 to 80 of the Income Tax Act, 1961.
●● The provisions regarding set off and carry forward of losses can be
---------------------- considered under the following heads:
---------------------- a. Inter-Source Adjustments – Section 70

---------------------- b. Inter-Head Adjustments – Section 71

c. Carry Forward of losses
----------------------

---------------------- Keywords
---------------------- ●● Set Off of losses: The losses incurred in the current Assessment Year
can be carried forward to the subsequent Assessment Years and can be
----------------------
adjusted against the income earned in the subsequent Assessment Years.
---------------------- ●● Inter source Adjustment: Where the net result of the computation under
any head of income in respect of any assessment year is a loss, the assessee
----------------------
shall be entitled to have such amount of loss set off against his income
---------------------- assessable for that assessment year under any other head of income.
●● Inter Head Adjustment: Where the net result of the computation under
---------------------- any head of income in respect of any assessment year is a loss, the assessee
---------------------- shall be entitled to have such amount of loss set off against his income
assessable for that assessment year under any other head of income.
----------------------

----------------------

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 Notes
Self-Assessment Questions
----------------------
1. State different conditions prevailing in inter head adjustments
2. For how many years can the loss under the head ‘Capital Gains” be carried ----------------------
forward? Q3. For how many years can the loss under the head ‘House
----------------------
Property” be carried forward?
4. Define Unexplained money, jewellery etc. – Sec. 69A ----------------------

5. Define Unexplained expenditure – Sec, 69C ----------------------

6. Define Investment not fully disclosed – Sec. 69B ----------------------
7. Define Any amount borrowed/repaid on hundi - Sec. 69D
----------------------
Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

State True or False. ----------------------
1. True
----------------------
2. False
----------------------
3. False
4. False ----------------------

Check your Progress 2 ----------------------

Fill in the blanks. ----------------------
1. The losses incurred in the current assessment year can be carried forward
----------------------
to the subsequent assessment year by adjusting the income earned in the
subsequent assessment year is called set off of losses. ----------------------
2. As regards to loss from speculative business, it can be carried forward and ----------------------
set off in subsequent assessment year against speculative profits subject
to the time limit of eight assessment years. ----------------------
3. The losses of demerged company can be carried forward for indefinite ----------------------
period and can be set off against any income of the resulting company.
----------------------
Suggested Reading ----------------------
1. Hariharan. 2009. Income Tax: Law & Practice 2E. Tata McGraw-Hill ----------------------
Education.
----------------------

----------------------

----------------------

----------------------

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 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Tax Audit
UNIT

13
Structure:

13.1 Introduction
13.2 Form 3CD
13.3 Presumptive Profits
13.3.1 Business of Civil Construction
13.3.2 Business of Plying and Hiring
13.3.3 Retail Business
13.4 Method of Accounting
13.5 Amount Admissible under Act
13.5.1 Section 33AB - Tea or Coffee or Rubber Development Account
13.5.2 Section 33ABA - Extraction of Oil & Natural Gas
13.5.3 Section 35 - Scientific Research Expenditure
13.5.4 Section 35AC - Sum Paid to Public Sector Co.
13.5.5 Section 35CCA - Payment to Certain Associations
13.5.6 Section 35D - Preliminary Expenses
13.5.7 Section 35E - Extraction of Minerals
13.6 Amounts Debited to P and L Account
13.7 Payment made to Specified Persons
13.8 Deemed Profits
13.9 Profits Chargeable to Tax
13.10 Deduction on Actual Basis
13.11 Details of Loan borrowed and Accepted
13.12 Brought forward Losses
13.13 Deduction under Chapter VIA
13.14 Tax Deduction at Source
13.15 Quantitative Details
13.16 Cost Audit Report
13.17 Accounting Ratios
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

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 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concepts of Assessment and procedures under Income
---------------------- Tax Act
---------------------- • Discuss different concepts of filing of returns and their consequences
• List different powers given to Assessing Officer
----------------------
• Enumerate scrutiny procedures under assessment
----------------------
• Discuss different Appeals under Act
----------------------

---------------------- 13.1 INTRODUCTION

---------------------- Section 44AB

Section 44AB, as inserted by the Finance Act, 1984, provides that
----------------------
every person carrying on business and having sales turnover or gross receipts
---------------------- exceeding ` 40 Lakhs in any previous year has to get his accounts audited by
a Chartered Accountant before the specified date and furnish by that date, the
---------------------- report in the prescribed form, duly signed by the Chartered Accountant. In case
of the person carrying on the profession, the provisions of this section apply if
----------------------
the gross receipts in the profession exceed ` 10 Lakhs.
---------------------- Following points should be noted in this connection -
---------------------- The specified date indicated above is 30th September of the Assessment Year.

---------------------- The assessee is not only required to get the accounts audited by a Chartered
Accountant before the specified date, but is also required to furnish the report of
---------------------- such audit before the specified date, whether the return of income is filed or not.
---------------------- If the person (say a company) is required to get his accounts audited
under any other law (say Companies Act, 1956), it shall be considered to be
---------------------- a sufficient compliance with the provisions of this section if report of audit as
required under such other law is furnished before the specified date along with
----------------------
a further report in the prescribed form under this section.
---------------------- The tax audit report specified above is found mainly in three forms in
practical circumstances:
----------------------
a. Form No. 3CA - This is the form of Audit Report applicable to a person
---------------------- who carries on business and profession and whose accounts are required
to be audited by or under any other law.
----------------------
b. Form No. 3CB - This is the form of Audit Report which applies to a person
---------------------- who carries on business or profession but not being a person referred to in
---------------------- “a” above.

----------------------

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 c. Form No. 3CD - This form of Audit Report contains the particulars in Notes
respect of a person carrying on business which are required to be given
under Section 44AB of the Act. ----------------------
The specimen of the above three forms is given in the Annexure at the end ----------------------
of this unit.
----------------------
If any person fails to get the accounts audited by a Chartered Accountant
under this section and fails to submit the copy of such report, he may be liable ----------------------
to pay the penalty equal to 0.5% of the sales, turnover or gross receipts as the
case may be or ` 1, 00,000 whichever is less. ----------------------

----------------------
13.2 FORM 3CD
----------------------
As stated above, Form No. 3CD of the Tax Audit Report is the form in
which the auditor is required to give his comments on various aspects. The ----------------------
various clauses of Form No. 3CD are discussed in detail in the following
----------------------
paragraphs.
General Information - Clause No. 1 to Clause No. 8 ----------------------
Clause No. 1 to Clause No. 8 of the Form No. 3CD contains the general ----------------------
information about the assessees such as -
----------------------
●● Name of the Assessee
●● Address ----------------------
●● Permanent Account Number ----------------------
●● Status
----------------------
●● Previous Year Ending
----------------------
●● Assessment Year
If the assessee is a firm or association of persons, details of partners/ ----------------------
members and their profit sharing ratios and if there is a change in the constitution
or profit sharing ratios, details thereof. ----------------------

Nature of business or profession and if there is a change in the nature of ----------------------

business or profession, details thereof.
----------------------
Maintenance Of Accounts - Section 44AA - Clause No. 9
----------------------
Section 44AA of the Act requires that every person carrying on the
specified profession is compulsorily required to maintain specified books of ----------------------
accounts and documents to enable the Assessing Officer to compute the total
income of the assessee. Specified professions for this section contain the ----------------------
following professions:
----------------------
●● Law
----------------------
●● Medicine
●● Engineering ----------------------
●● Architecture ----------------------

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 Notes ●● Accountancy
●● Technical Consultancy
----------------------
●● Interior Decoration
---------------------- ●● Film Making
---------------------- ●● Company Secretaryship
●● Information Technology
----------------------
The books of account to be maintained under this section include -
----------------------
●● A Cash book
---------------------- ●● A Journal if the accounts are maintained on accrual basis
---------------------- ●● A Ledger
●● Copies of machine numbered or serially numbered bills and receipts of
----------------------
over ` 25 wherever such bills and receipts are issued.
---------------------- ●● Original bills in respect of expenditure incurred by the person and where
such bills are not available and the expenditure does not exceed ` 50,
---------------------- payment vouchers prepared and signed by the person.
---------------------- It is further provided that the above requirement shall not apply if the
total gross receipts in the profession do not exceed ` 1,50,000 in any one of the
---------------------- 3 years immediately preceding the previous year, or in case of a newly set up
---------------------- profession, if the total gross receipts in the profession for that year are not likely
to exceed ` 1,50,000.
---------------------- If the person carries on the profession not specified above or carries on
---------------------- the business, the requirements in respect of compulsory maintenance of books
of accounts apply if the total income from such business or profession exceeds
---------------------- ` 1,20,000 or his total sales or gross receipts from such business or profession
exceed ` 10,00,000 in any of the 3 years immediately preceding the previous
---------------------- years and in case of newly set up business or profession, if the total income from
---------------------- such business or profession is likely to exceed ` 1,20,000 or his total sales or
gross receipts from such business or profession is likely to exceed `10,00,000.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

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 Notes
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. Section 44AB of the Finance Act, 1984 provides that every person
carrying on business and having sales turnover or gross receipts exceeding ----------------------
_______ in any previous year has to get his accounts audited by a
----------------------
Chartered Accountant and furnish in the prescribed form, duly signed
by the Chartered Accountant. ----------------------
2. Form No 3 CD of the ______ ___ report is the form in which the chartered
----------------------
accountant is required to furnish his comments on various aspects of the
business/profession. ----------------------
3. In case of a person carrying on the profession, if the gross receipts in the
----------------------
profession exceed Rs. _____ in any previous year, such a professional
has to get his accounts audited by the Chartered Accountant, in terms of ----------------------
Section 44 of the Finance Act 1984.
----------------------

13.3 PRESUMPTIVE PROFITS ----------------------

----------------------
Under certain sections of the Act, the profits and gains from certain
specific businesses are calculated on presumptive basis. More frequently found ----------------------
businesses under this category are as below:
----------------------
Section 44AD - Business of Civil Construction
Section 44AE - Business of plying, hiring or leasing goods carriages ----------------------
Section 44AF - Retail Business ----------------------
Let us discuss the provisions of these sections in more details. ----------------------
13.3.1 Business of Civil Construction
----------------------
a. The provisions of this section apply to an assessee engaged in the business
of civil construction or supply of labour for civil construction. ----------------------
b. The provisions of this section apply where Gross Receipts from such ----------------------
business (excluding cost of material supplied by the client) does not
exceed ` 40 Lakhs. ----------------------
c. The profit from such business chargeable to tax shall be deemed to be 8% ----------------------
of Gross Receipts paid or payable to the assessee in the previous year on
account of such business. ----------------------

d. From the profits calculated above, no deduction shall be made for any ----------------------
expenditure except interest and/or remuneration payable to the partners
as per the provisions of Section 40(b) of the Act. ----------------------

e. The written down value of the assets shall be deemed to have been ----------------------
calculated as if the assessee had claimed and had been allowed the
deduction in respect of depreciation. ----------------------

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 Notes f. The provisions of Section 44AA of the Act regarding the compulsory
maintenance of books of accounts do not apply in this case.
----------------------
g. If the assessee feels that the profits earned from the business are less than
---------------------- 8% of the Gross Receipts, he may choose not to opt for this scheme.
However, in that case, he will be required to maintain the books of
---------------------- accounts and get the accounts audited by a Chartered Accountant and
furnish the report of such audit as required under Section 44AB of the
----------------------
Act.
---------------------- 13.3.2 Business of plying & hiring
---------------------- a. The provisions of this section apply to an assessee who owns not more
than 10 goods carriages at any time during the previous year and who
---------------------- is engaged in the business of plying, hiring or leasing of such goods
carriages.
----------------------
b. The profit from each goods carriage owned by the assessee shall deemed
---------------------- to be -
---------------------- For Heavy Goods Vehicles - ` 3,500 for every month or a part of the
month during which the goods carriage is owned by the assessee during
---------------------- the previous year.
---------------------- For goods carriages other than Heavy Vehicles - ` 3,150 for every month
or a part of the month during which the goods carriage is owned by the
---------------------- assessee during the previous year.
---------------------- c. From the profits calculated above, no deduction shall be made for any
expenditure except interest and/or remuneration payable to the partners
----------------------
as per the provisions of Section 40(b) of the Act.
---------------------- d. The written down value of the assets shall be deemed to have been
calculated as if the assessee had claimed and had been allowed the
----------------------
deduction in respect of depreciation.
---------------------- e. The provisions of Section 44AA of the Act regarding the compulsory
---------------------- maintenance of books of accounts do not apply in this case.
f. If the assessee feels that the profits earned from the business are less than
---------------------- as stated above, he may choose not to opt for this scheme. However, in
---------------------- that case, he will be required to maintain the books of accounts and get
the accounts audited by a Chartered Accountant and furnish the report of
---------------------- such audit as required under Section 44AB of the Act.

---------------------- 13.3.3 Retail Business

a. The provisions of this section apply to an assessee engaged in the retail
----------------------
trade in any goods or merchandise.
---------------------- b. The provisions of this section apply where total turnover of such retail
trade business does not exceed ` 40 Lakhs.
----------------------
c. The profit from such business chargeable to tax shall be deemed to be 5%
---------------------- of the total turnover in the previous year on account of such business.

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 d. From the profits calculated above, no deduction shall be made for any Notes
expenditure except interest and/or remuneration payable to the partners
as per the provisions of Section 40(b) of the Act. ----------------------
e. The written down value of the assets shall be deemed to have been ----------------------
calculated as if the assessee had claimed and had been allowed the
deduction in respect of depreciation. ----------------------
f. The provisions of Section 44AA of the Act regarding the compulsory ----------------------
maintenance of books of accounts do not apply in this case.
----------------------
g. If the assessee feels that the profits earned from the business are less
than 5% of the total turnover, he may choose not to opt for this scheme. ----------------------
However, in that case, he will be required to maintain the books of account
and get the accounts audited by a Chartered Accountant and furnish the ----------------------
report of such audit as required under Section 44AB of the Act.
----------------------

13.4 METHOD OF ACCOUNTING ----------------------

Section 145 of the Act provides that in respect of Income from Business ----------------------
and Profession and Income from Other Source, the assessee may follow either
----------------------
Cash System of Accounting or Accrual System of Accounting. In case of cash
system of accounting, the receipts and payments will be accounted for as and ----------------------
when received or paid. In case of accrual system of accounting, the income and
expenditure will be accounted for on accrual basis. ----------------------
The date of receipt of income or payment of expenses is not material ----------------------
in case of accrual system of accounting. In respect of method of accounting,
choice is given to the assessee to select between cash system or accrual system, ----------------------
provided that he follows the system of accounting regularly. The section further
----------------------
provides that the Central Government may notify the various accounting
standards which need to be complied with by various types of assessees in ----------------------
respect of various types of incomes.
----------------------
The auditor is required to comment upon whether the assessee is
complying with the above requirements and whether there is any change in ----------------------
the method of accounting employed by the assessee from the one employed by
him in the immediately preceding previous year and if the answer to the same ----------------------
is in the affirmative, the effect of such change on the Profit and Loss Account is ----------------------
required to be specified.
Valuation of Closing Stock - Section 145A - Clause No. 12 ----------------------

Section 145A of the Act provides that the amount of tax, cess or fee (Eg. ----------------------
Excise Duty, Customs Duty, Sales Tax etc.) actually paid or incurred by the
assessee to bring the goods to the place of its location and condition on the date ----------------------
of valuation of the inventory should be included in the value of the stock in the ----------------------
purchase and sale of the goods and inventory for the purpose of calculating the
income chargeable under the head “Profits from Business and Profession”. ----------------------

----------------------

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 Notes Amounts Not Credited To Profit And Loss Account - Clause No. 13
Clause No. 13 of the Tax Audit Report requires the auditor to specify the
----------------------
amounts which should have been credited to Profit and Loss Account but have
---------------------- not been credited. The amounts which are specified under this clause are as
below -
----------------------
a. The items which fall within the scope of Section 28 of the Act - Section
---------------------- 28 of the Act refers to the following main items of profits which will be
chargeable to tax under Profits from Business and Profession.
----------------------
Profits of any business carried on by the assessee during the previous
---------------------- year. Export incentives received by the assessee which in turn include -

---------------------- ●● Profits on sale of import licenses

●● Cash assistance received or receivable
----------------------
●● Duty drawbacks of customs and central excise duties
---------------------- Any interest, salary, bonus or commission received by the partner of a
partnership firm
----------------------
Any amount received under a Keyman Insurance policy including the
---------------------- amount of bonus thereon
---------------------- Income earned from speculative business transactions

---------------------- Depreciation - Clause No. 14

Clause No. 14 of the Tax Audit Report requires the auditors to disclose
---------------------- various facts about the depreciation from the angle of Income Tax Act, 1961.
---------------------- We have discussed the same in details in the chapter on Profits from Business
and Profession.
----------------------

----------------------
13.5 AMOUNTS ADMISSIBLE UNDER ACT

---------------------- Clause No. 15 requires the Tax Auditor to give the information about
amounts admissible as deductions under various Sections of the Act. The
---------------------- various sections which are specified in this clause are discussed below -
---------------------- 13.5.1 Section 33AB - Tea or Coffee or Rubber Development Account
Section 33AB of the Act applies to an assessee carrying on the business
----------------------
of growing and manufacturing tea or coffee or rubber in India. The deduction
---------------------- under this section is allowed if the assessee has, before the expiry of six months
from the end of the previous year or before the due date for filing the return of
---------------------- income, whichever is earlier -
---------------------- a. deposited with the National Bank for Agriculture and Rural Development
(NABARD) any amount in an account maintained by the assessee with
---------------------- that Bank according to a scheme approved by the Tea Board or Coffee
Board or Rubber Board
----------------------

----------------------

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 b. deposited any amount in an account opened by the assessee according to Notes
a scheme framed by the Tea Board or Coffee Board or Rubber Board with
the prior approval of Central Government. ----------------------
The amount standing to the credit of the above deposit accounts may ----------------------
be withdrawn only for the purposes laid down in the scheme. If the amount
released by NABARD or Tea Board or Coffee Board or Rubber Board in a year ----------------------
is not utilised in the same previous year for the purpose for which it is released,
----------------------
the said amount will be considered to be the taxable profits in that year.
The amount of deduction is - ----------------------
a. a sum equal to the aggregate of the amounts so deposited or ----------------------
b. a sum equal to 40% of the Profits from Business and Profession of the ----------------------
assessee, whichever is less.
13.5.2 Section 33ABA - Extraction of Oil & Natural Gas ----------------------

Section 33ABA of the Act applies to an assessee carrying on the business ----------------------
of prospecting for, or extraction, or production of petroleum or natural gas or
both in India. The deduction under this section is allowed if the assessee has ----------------------
before the end of the previous year - ----------------------
a. deposited with State Bank of India any amount or amounts in an account
----------------------
maintained with that bank for the purpose of a specified scheme (Site
Restoration Fund Scheme, 1999) approved by the Central Government ----------------------
b. deposited any amount in an account (Site Restoration Account) opened in
----------------------
accordance with the scheme framed by Ministry of Petroleum and Natural
Gas. ----------------------
Any amount standing to the credit of such deposit account or the Site ----------------------
Restoration Account may be withdrawn for the purpose specified in the
respective scheme. If the amount released by SBI or the amount withdrawn ----------------------
from site restoration account is not utilised in the same previous year for the
specified purpose, the same will be treated as the taxable profits in the said year. ----------------------
The amount of deduction available is - ----------------------
a. a sum equal to the amount or amounts so deposited or ----------------------
b. a sum equal to 20% of the profits of such business which are taxable
----------------------
under the head “Profits from Business and Profession” whichever is less.
It is further provided that any amount credited by way of interest on these ----------------------
accounts shall be deemed to be a deposit.
----------------------
13.5.3 Section 35 - Scientific Research Expenditure
----------------------
Section 35 of the Act applies to the expenditure incurred by the assessee
on scientific research where scientific research means any activities for the ----------------------
extension of knowledge in the field of natural or applied sciences including
agriculture, animal husbandry and fisheries. ----------------------

----------------------

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 Notes This deduction is available in respect of -
a. Any revenue expenditure incurred by the assessee for carrying out
----------------------
scientific research provided that such research is related to his business. If
---------------------- salary has been given to an employee engaged in the scientific research or
any material has been used in the scientific research, such salary or cost
---------------------- of material paid or incurred within three years immediately preceding the
commencement of business is deemed to have been paid or incurred in
----------------------
the previous year in which the business has commenced.
---------------------- b. Any capital expenditure incurred by the assessee himself for carrying out
the scientific research provided that such research is related to his business.
----------------------
Such capital expenditure might have been incurred by the assessee for the
---------------------- plant and machinery, building etc.
However, the deduction is not available in respect of land purchased.
----------------------
If the capital expenditure has been incurred by the assessee before the
---------------------- commencement of business, such expenditure incurred within three years
immediately preceding the commencement of business is deemed to
---------------------- have been paid or incurred in the previous year in which the business has
commenced.
----------------------
c. If the assessee is a company and is engaged in the business of
---------------------- biotechnology or in the business of manufacture or production of any drugs,
---------------------- pharmaceuticals, electronic equipments, computer, telecommunication
equipments, chemicals or any other notified product, a weighted deduction
---------------------- of 150% is allowed in respect of expenditure on in- house research and
development expenditure. However, this deduction will not be applicable
---------------------- in respect of land purchased. Similarly, this deduction will be available in
---------------------- respect of expenditure incurred till 31st March 2010.
d. If the assessee does not carry out the scientific research himself but
---------------------- makes the contribution to an approved scientific research association of
---------------------- a university/college/ institution/national laboratory, a weighted deduction
125% is allowed in respect of such contributions made, even if the
---------------------- research is not related to the business of the assessee.
---------------------- 13.5.4 Section 35AC - Sum Paid to Public Sector Co.
Section 35AC of the Act applies to any sum paid by the assessee to a public
----------------------
sector company or a local authority or an association or institution approved
---------------------- by National Committee for Promotion of Social and Economic Welfare, for
carrying out any project or scheme for promoting the social and economic
---------------------- welfare of or the uplift of the public.
---------------------- 13.5.5 Section 35CCA - Payment to Certain Associations

---------------------- Section 35CCA of the Act applies to any expenditure incurred by the
assessee by way of payment of any sum to -
---------------------- a. any association or institution to be used for carrying out any programme
---------------------- of rural development.

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 b. an association or institution which has the objective of training the persons Notes
for implementation of a rural development programme.
----------------------
c. the National Fund for rural development set up by the Central Government.
d. the National Urban Poverty Eradication Fund set up by the Central ----------------------
Government.
----------------------
13.5.6 Section 35D - Preliminary Expenses
----------------------
Section 35D applies to the preliminary expenses incurred by a company
which in turn may consist of - ----------------------
a. Expenditure in connection with the preparation of ----------------------
feasibility report
----------------------
project report
----------------------
conducting market survey or any other survey
engineering services relating to the business ----------------------
b. Legal charges for drafting the agreement between the assessee and any ----------------------
other person for the purpose of setting up or conduct of the business.
----------------------
c. Charges in connection with drafting and printing of Memorandum of
Association and Articles of Association. ----------------------
d. Fees for registering the company as per the provisions of Companies Act, ----------------------
1956.
----------------------
e. Expenses in connection with the public issue of shares or debentures like
underwriting commission, brokerage and charges for drafting, typing, ----------------------
printing and advertising of prospectus.
----------------------
The aggregate amount of all the expenditures under the above heads
cannot exceed 5% of the Cost of Project. However, for an Indian Company ----------------------
the aggregate of all the expenditures can be 5% of the Cost of Project or 5% of
Capital Employed, whichever is higher. ----------------------
Section 35D of the Act provides that the preliminary expenses can be ----------------------
amortised and written off to profit and loss account over a period of 5 years
commencing from the year of commencement of business. ----------------------

13.5.7 Section 35E - Extraction of Minerals ----------------------

Section 35E of the Act applies to all the resident assessees engaged in ----------------------
the business of prospecting for or extraction or production of certain specified
minerals. The deduction is available in respect any expenditure incurred by ----------------------
the assessee during the year of commercial operations and four immediately
preceding years, wholly and exclusively on any operations relating to prospecting ----------------------
for any minerals or on the development of a mine or other natural deposit of any ----------------------
such mineral. Such expenditure is allowed to be amortised over a period of 10
years commencing from the year in which the commercial operations start. ----------------------

----------------------

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 Notes 13.6 AMOUNTS DEBITED TO P & L ACCOUNT
---------------------- a. Expenditure of Capital nature - This expenditure is not allowed as per
the provisions of the Act. (Discussed in unit on Profits from Business and
---------------------- Profession).
---------------------- b. Expenditure of Personal nature - This expenditure is not allowed as per
the provisions of the Act. (Discussed in unit on Profits from Business and
---------------------- Profession).
---------------------- c. Expenditure on advertisement in any souvenir, brochure, pamphlet etc. of
a political party - This expenditure is not allowed as per the provisions of
---------------------- the Act.
---------------------- (Discussed in unit on Profits from Business and Profession).
---------------------- d. Expenditure incurred at clubs - Details of such expenditure may be
required in order to decide whether a part of such expenditure is to be
---------------------- considered as perquisites in the hands of certain employees.
---------------------- e. Expenditure by way of penalty or fine - As discussed in unit on Profits
from Business and Profession, any expenditure incurred by way of penalty
---------------------- or fine for violation of any law or for any purpose which is an offense or
which is prohibited by law is not allowed as business expenditure while
----------------------
calculating Profits from Business and Profession.
---------------------- f. Amounts inadmissible under Section 40(a) - The amounts which are not
---------------------- deductible under Section 40(a) of the Act have been discussed in detail in
the unit on Profits from Business and Profession.
---------------------- g. Amounts inadmissible under Section 40(b) - This amount refers to the
---------------------- salary and remuneration and interest on capital payable by a firm to its
partners. Allowability of these amounts has been discussed in details in
---------------------- the chapter on Taxation of Partnership Firms. The auditor is required to
give the computation of these amounts.
----------------------
h. Amounts inadmissible under Section 40A(3) - This amount refers to
---------------------- the payments made by a person in excess of ` 35,000 otherwise than
by a crossed cheque or a crossed demand draft. Tax implication of such
---------------------- payments has already been discussed in the chapter on Profits from
---------------------- Business and Profession.
i. Provision for payment of gratuity not allowable under Section 40A (7) -
----------------------
As discussed in the chapter on Profits from Business and Profession the
---------------------- amount of gratuity will be allowed as deduction only when -
a. the amount of gratuity has actually become payable to the employees
----------------------
during the previous year.
---------------------- b. the provision has been made for the payment of a sum by way of
contribution to an approved gratuity fund. Other than these two
----------------------
situations, any provision made for the payment of gratuity is not
---------------------- allowed as deduction.

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 13.7 PAYMENT MADE TO SPECIFIED PERSONS Notes
Disallowability of the payments made to the persons specified in Section ----------------------
40A (2)(b) of the Act has been discussed in details in the unit on Profits from
Business and Profession. ----------------------

----------------------
13.8 DEEMED PROFITS
----------------------
While discussing Clause No. 15, provisions have already been discussed
about the deemed profits under the following sections ----------------------
●● Section 33AB ----------------------
●● Section 33ABA
----------------------
●● Section 33AC
----------------------
Check your Progress 2 ----------------------

State True or False. ----------------------

1. The provisions of presumptive profits from business of plying, hiring and ----------------------
leasing goods carriages apply to the assessee who owns not more than 20
goods carriages at any time during the previous years. ----------------------

2. The preliminary expenses can be amortised and written off to Profits & ----------------------
Loss account over a period of five years commencing from the year of
commencement of business. ----------------------

3. As regards Retail Trade where total turnover does not exceeds ` 40 lac, ----------------------
the presumptive profit from such business chargeable to tax shall be
----------------------
deemed to be 5% of the total turnover in the previous accounting year.
----------------------

13.9 PROFITS CHARGEABLE TO TAX ----------------------

Section 41 of the Act deals with the deemed profits chargeable to tax ----------------------
which are not credited to Profit and Loss Account. In practical circumstances,
----------------------
following main types of income may fall under this category
a. If any deduction has been allowed in the assessment of any earlier year ----------------------
in respect of any loss or expenditure or trading liability incurred by the ----------------------
assessee and subsequently, during the previous year, the assessee obtains,
whether in cash or otherwise ----------------------
Any amount in respect of such loss or expenditure ----------------------
Some benefit in respect of the trading liability by way of remission thereof.
The amount received by the assessee or the value of benefit received by ----------------------
the assessee shall be deemed to the profit of that previous year. ----------------------

----------------------

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 Notes 13.10 DEDUCTION ON ACTUAL BASIS
---------------------- Clause No. 21 of the Tax Audit Report refers to the details of various
payments which are allowed as deduction only if they are actually paid for.
---------------------- However, if the assessee follows mercantile system of accounting, the said
payments can be claimed on “due” basis as well, provided that the payment of
----------------------
the same is made on or before the due date of furnishing the return of income.
---------------------- The various payments which are referred to the said section are as below:

---------------------- a. Any sum payable by the assessee by way of tax, duty, cess or fee by
whatever name it may be called. In practical situations, these amounts
---------------------- include the taxes like sales tax, excise duty, customs duty, professional
tax etc. It may happen in practical situations that some of these payments
---------------------- don’t affect the profitability of the assessee. Eg. Indirect taxes like sales
---------------------- tax, excise duty etc. Still they are added back as disallowable expenditure
as per the provisions of the said section.
---------------------- b. Any Employer’s Contribution payable by the assessee towards any
---------------------- provident fund or Superannuation fund or gratuity fund or any other fund
for the welfare of the employees.
----------------------
c. Any sum payable by the employer to the employee as bonus or commission
---------------------- for services rendered, where such sum would not have been payable to
him as profits or dividend if it had not been paid as bonus or commission.
----------------------
d. Any sum payable by the assessee as interest on any loan or borrowing
---------------------- made by him from any public financial institution or state financial
corporation as per the terms on the agreement.
----------------------
e. Any sum payable by the assessee as interest on any loan or advances
---------------------- borrowed by him from any scheduled bank as per the terms of the
agreement.
----------------------
f. Any sum payable by the employer in respect of any leave standing to the
---------------------- credit of the employee (i.e. in simple words, Leave Encashment).

---------------------- It goes without saying that if any of the above amounts are not allowed as
deduction in any of the previous years but are paid during the current previous
---------------------- year, they will be allowed as deduction during the current previous year.
----------------------
13.11 DETAILS OF LOAN BORROWED OR ACCEPTED
----------------------
Section 269SS
---------------------- Section 269SS of the Act provides that no person should accept any loan
---------------------- or deposit from any other person otherwise than by account payee cheque or
account payee draft if the amount of such loan or deposit together with the loan
---------------------- or deposit already accepted from such person exceeds ` 20,000. The section
further provides that the said provisions will not apply to the loan or deposits
---------------------- accepted by-
---------------------- ●● Government

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 ●● Banking Company (including the co-operative bank) and post office Notes
savings bank
●● Government company ----------------------
●● Any other notified institution ----------------------
The above clause requires the auditor to give the details of such loans or ----------------------
deposits accepted. Section 269T of the Act provides that no branch of a banking
company or a co-operative bank and no company or co-operative society and no ----------------------
firm or any other person shall repay any loan or deposit made with it otherwise
than by an account payee cheque or account payee bank draft drawn in the ----------------------
name of the person who has made the loan or deposit if - ----------------------
a. the amount of loan or deposit together with the interest payable thereon.
----------------------
b. the aggregate of the loans or deposits made by such person either in his
own name or jointly with other person on the date of such repayment, ----------------------
together with the interest payable thereon exceeds ` 35,000.
----------------------
It is provided if the repayment is made by a branch of a banking company
or a co- operative bank; such repayment can also be made by crediting the ----------------------
amount to the savings or current account of the person with such branch to
----------------------
whom the loan or deposit has to be repaid.
Section 269T does not apply to the repayment of any loan or deposit taken ----------------------
or accepted from:
----------------------
a. Government
----------------------
b. any banking company or co-operative bank
c. any corporation established by the Central or State Act ----------------------

d. any Government Company ----------------------

The above clause requires the auditor to give the details of such loans or ----------------------
deposits repaid.
----------------------
13.12 BROUGHT FORWARD LOSSES ----------------------
Provisions regarding set off and carry forward of losses and depreciation ----------------------
have been discussed in details in the previous unit.
----------------------
The auditor is supposed to state the year wise details regarding the brought
forward losses and depreciation. ----------------------

13.13 DEDUCTIONS UNDER CHAPTER VI-A ----------------------

These deductions have been discussed in details in an earlier unit. ----------------------

----------------------

----------------------

----------------------

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 Notes 13.14 TAX DEDUCTED AT SOURCE
---------------------- Provisions regarding Tax Deducted at Source have been discussed in
detail earlier. The auditor is required to comment as to whether the assessee has
---------------------- deducted the tax at source and paid the same to the credit of Central Government.
If not, the auditor is required to give the details of the same.
----------------------

---------------------- 13.15 QUANTITATIVE DETAILS

---------------------- Clause No. 28 contains the reporting of quantitative details in respect of
trading activity and manufacturing activity. The format of reporting reproduced
----------------------
in the Annexure is self- explanatory.
----------------------
13.16 COST AUDIT REPORT
----------------------
Section 209 of the Companies Act, 1956 requires that the companies
----------------------
engaged in production, mining, manufacturing or mining activities should
---------------------- maintain proper books of account showing the particulars relating to the
utilisation of material or labour or other items of cost as may be prescribed.
---------------------- Section 233 B of the Companies Act, 1956 also provides that the Central
Government may direct that an audit of cost accounts of the company should
----------------------
be conducted. Such audit is required to be carried out by a cost accountant. If
---------------------- sufficient number of cost accountants are not available; such audit can be carried
out by a chartered accountant also. Such auditor is required to be appointed by
---------------------- the Board of Directors of the company with the previous approval of the Central
Government.
----------------------
Clause No. 30 of the Tax Audit Report requires that if the Cost Audit of
---------------------- the company is carried out, the report of such cost audit should be enclosed to
the Tax Audit Report.
----------------------

---------------------- 13.17 ACCOUNTING RATIOS

---------------------- In the Tax Audit Report, the auditor is required to give the calculations of
the following ratios particularly -
----------------------
a. Gross Profit/Turnover
----------------------
b. Net Profit/Turnover
---------------------- c. Stock In Trade/Turnover
---------------------- d. Material Consumed/Finished Goods Produced
----------------------

----------------------

----------------------

----------------------

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 Summary Notes

●● Section 44AB of the Act provides that every person carrying on business ----------------------
and having sales turnover or gross receipts exceeding ` 40 Lakhs in any
----------------------
previous year has to get his accounts audited by a Chartered Accountant
before the specified date and furnish by that date, the report in the ----------------------
prescribed form, duly signed by the Chartered Accountant. In case of the
person carrying on the profession, the provisions of this section apply if ----------------------
the gross receipts in the profession exceed ` 10 Lakhs.
----------------------
●● Following points should be noted in this connection -
----------------------
●● The specified date indicated above is 30th September of the Assessment
Year. ----------------------
●● The assessee is not only required to get the accounts audited by a
Chartered Accountant before the specified date, but is also required to ----------------------
furnish the report of such audit before the specified date, whether the ----------------------
return of income is filed or not.
●● If the person (says a company) is required to get his accounts audited ----------------------
under any other law (say Companies Act, 1956), it shall be considered to ----------------------
be a sufficient compliance with the provisions of this section if report of
audit as required under such other law is furnished before the specified ----------------------
date along with a further report in the prescribed form under this section.
----------------------
●● The tax audit report specified above is found mainly in three forms in
practical circumstances - ----------------------
a. Form No. 3CA - This is the form of Audit Report applicable to a ----------------------
person who carries on business and profession and whose accounts
are required to be audited by or under any other law. ----------------------
b. Form No. 3CB - This is the form of Audit Report which applies to a ----------------------
person who carries on business or profession but not being a person
referred to in “a” above. ----------------------
c. Form No. 3CD - This form of Audit Report contains the particulars ----------------------
in respect of a person carrying on business which are required to be
given under Section 44AB of the Act. ----------------------
The specimen of the above three forms is given in the Annexure at the end ----------------------
of this unit.
----------------------
●● If any person fails to get the accounts audited by a Chartered Accountant
under this section and fails to submit the copy of such report, he may ----------------------
be liable to pay the penalty equal to 0.5% of the sales, turnover or gross
receipts as the case may be or ` 1,00,000 whichever is less. ----------------------

----------------------

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Tax Audit 257

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 Notes Keywords
----------------------
●● Form 3 CD: As stated above, Form No. 3CD of the Tax Audit Report is
---------------------- the form in which the auditor is required to give his comments on various
aspects.
---------------------- ●● Accounting Policies: Section 145 of the Act provides that in respect of
---------------------- Income from Business and Profession and Income from Other Source,
the assessee may follow either Cash System of Accounting or Accrual
---------------------- System of Accounting.
----------------------
Self-Assessment Questions
----------------------
1. With respect to the provisions applicable to the Tax Audit Report, state
---------------------- the provisions of the Income Tax Act, 1061 relating to -
---------------------- a. Maintenance of Books of Account

---------------------- b. Tax payable on the basis of presumptive profits

c. Payments allowed as expenditure on payment basis
----------------------
d. Deemed Profits
----------------------
e. Particulars of loan/deposits borrowed or repaid exceeding ` 20,000
---------------------- f. Payments made to persons as per Section 40A (2)(b)
---------------------- g. Deemed profits not credited to Profit and Loss Account

---------------------- h. Preliminary Expenses

i. Expenditure on scientific research
----------------------
2. Which methods are to be followed as per section 145 of Income Tax Act?
----------------------
3. Discuss in brief amounts not credited to profit and loss account.
---------------------- 4. Discuss deduction under Section 33AB of Act.
---------------------- 5. Discuss deduction under Section 33ABA of Act.

----------------------

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 Answers to Check your Progress Notes
Check your Progress 1 ----------------------
Fill in the blanks. ----------------------
1. Section 44AB of the Finance Act, 1984 provides that every person carrying
on business and having sales turnover or gross receipts exceeding Rs. 40 ----------------------
lac in any previous year has to get his accounts audited by a Chartered ----------------------
Accountant and furnish in the prescribed form, duly signed by the
Chartered Accountant. ----------------------
2. Form No 3 CD of the Tax Audit report is the form in which the chartered ----------------------
accountant is required to furnish his comments on various aspects of the
business/profession. ----------------------
3. In case of a person carrying on the profession, if the gross receipts in the ----------------------
profession exceed Rs. ten lac in any previous year, such a professional
has to get his accounts audited by the Chartered Accountant, in terms of ----------------------
Section 44 of the Finance Act 1984.
----------------------

----------------------
Check your Progress 2
State True or False. ----------------------

1. False ----------------------
2. True ----------------------
3. True
----------------------

Suggested Reading ----------------------

1. Kamerling, R. N. J. 1999. The International Guide to Tax Auditing. IBFD. ----------------------

----------------------

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Tax Audit 259

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 Notes

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260 Direct Taxation

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 Appendix 1 - Gross Total Income Notes

----------------------
GROSS TOTAL INCOME
----------------------
According to Income Tax Act, there are five heads of income i.e.
----------------------
1. Income from salary.
----------------------
2. Income from House Property.
3. Profits and gains of business and profession. ----------------------
4. Capital gains. ----------------------
5. Income from other sources. ----------------------
Total of all five heads is known as Gross Total Income.
----------------------
Every head has its own deduction. So under GTI net taxable income of each
head should be considered. ----------------------

----------------------
CHART SHOWING THE COMPUTATION OF TAXABLE INCOME
----------------------
Particulars ` `
----------------------
(A) Income from Salary ----------------------
(i) Basic pay xxx
----------------------
(ii) Taxable Allowances xxx
(iii) Value of Perquisites xxx ----------------------
Gross Salary xxx
Less: Deductions u/s 16 ----------------------
(i) Entertainment Allowance xxx xxx ----------------------
(ii) Professional Tax xxx
Income from Salary xxx ----------------------
(B) Income from House Property ----------------------
(i) Self-occupied Property Nil (−xxx)
xxx ----------------------
Annual Value
Less: Interest on Loan ----------------------
Loss from Self-occupied Property (−xxx)
(ii) Income from Let Out Property ----------------------
Gross Annual Value xxx ----------------------
Less: Municipal Taxes (− xxx)
Net Annual Value xxx ----------------------

----------------------

----------------------

----------------------

Appendix 1 - Gross Total Income 261

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 Notes Less: Deductions u/s 24

---------------------- (a) Standard deduction xxx (− xxx)

(30% of Net Annual Value) xxx
----------------------
(b) Interest on Loan
---------------------- Income from Let Out Property xxx
Income from House Property (i + ii) xxx
---------------------- (C) Income from Business or Profession
---------------------- Profit as per Profit and Loss Account: xxx xxx
---------------------- Add: (i) Expenses Debited to Profit and Loss A/c but not xxx xxx
allowed (inadmissible expenses)
----------------------
(ii) Income taxable as business income but not
---------------------- credited to Profit and Loss A/c
Less: (i) Expenses allowed but not debited to Profit & xxx
---------------------- Loss A/c xxx (xxx)
---------------------- (ii) Income not taxable as business income but
credited to Profit and Loss A/c
---------------------- Income from Business/Profession xxx
(D) Capital Gains
----------------------
(i) Short-term Capital Gain xxx
---------------------- (ii) Long-term Capital Gain xxx (− xxx)
---------------------- Less: Deduction u/s 54 xxx
Capital Gain xxx
---------------------- (E) Income from Other Sources
---------------------- Gross Total Income (A + B + C + D + E) xxx

---------------------- Less: Deductions allowed u/s 80C to 80U (− xxx)

Total Income xxx
----------------------

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 Appendix 2 - Taxation at a Glance Notes

----------------------
TAXATION AT A GLANCE
----------------------
1. Current Year Loss and Brought Forward Loss
----------------------
Discuss the conditions of set-off of current year and brought forward losses.
----------------------
Section Nature of Loss Details of Set-off Conditions/Exceptions
70 Current Year Loss Set–off within the Exceptions: Loss from ----------------------
N 94 within the same same source/Head 1. Activity of owning or
source of income/ of Income. ----------------------
maintaining of race
Head of Income horses. ----------------------
2. Speculation business.
----------------------
3. Short Term Capital
Loss – set-off against ----------------------
STCG/LTCG.
----------------------
4. Long Term Capital
Loss – set-off only ----------------------
against LTCG.
71 Current Year Loss Set–off against Exceptions: ----------------------
under any head income under any 1. Loss from − ----------------------
other head. (a) Activity of
owning or ----------------------
maintaining of
----------------------
race horses.
(b) Speculation ----------------------
business.
----------------------
(c) Capital Gains.
2. Loss under the head ----------------------
Profits and Gains of
Business or Profession ----------------------
cannot be set-off
----------------------
against Income from
Salaries. ----------------------
3. Loss from specified
business u/s 35AD can ----------------------
be set–off only against
----------------------
Income from any other
specified business. ----------------------
[S.73A]
----------------------

----------------------

----------------------

Appendix 2 - Taxation at a Glance 263

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 Notes 71B Brought forward Set-off only againstPermissible for 8
M 94 Unabsorbed income from House Assessment Years
---------------------- Loss from House Property immediately succeeding the
Property Assessment Year for which
----------------------
the loss was computed.
---------------------- 72 Brought Forward Set-off only against 1. Carry forward and
N 94 Unabsorbed income under the set–off is permissible
---------------------- N 07 Business Loss head profits and for 8 assessment
other than gains of business or years immediately
---------------------- Speculation loss profession. succeeding the
---------------------- assessment year for
which the loss was
---------------------- computed.
2. Loss can be carried
---------------------- forward, only if the
---------------------- return is filed u/s 139
(1) and it is determined
---------------------- and communicated u/s
157.
---------------------- 32 (2) Brought forward Set-off against any Unabsorbed Depreciation
Unabsorbed heat of Income Loss can be carried forward
----------------------
Depreciation for any number of years
---------------------- until it is fully set-off.
73 Brought forward Set-off only Conditions / Exceptions:
---------------------- N 07 Unabsorbed against income 1. Carry forward and
Speculation under Speculation set-off is permissible
---------------------- Business Loss business for 4 assessment
---------------------- years immediately
succeeding the
---------------------- assessment year for
---------------------- which the loss was
computed.
---------------------- 2. Loss can be carried
forward only if
----------------------
the return is filed
---------------------- u/s 139(1) and it
is determined and
---------------------- communicated u/s 157.
73 A Brought forward Set-off only against Carried forward for any
----------------------
loss of Specified Income from any number of years until it is
---------------------- Business u/s other Specified fully set-off.
35AD Business
----------------------

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----------------------

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 74 Brought forward Set-off only against 1. Carry forward and Notes
M 88 Unabsorbed Loss Income under the set-off is permissible
----------------------
under the head head Capital Gain for 8 assessment
Capital Gains. years immediately ----------------------
succeeding the
----------------------
assessment year for
which the loss was ----------------------
computed.
----------------------
2. STCL can be set-off
against any Capital ----------------------
Gain. However, LTCL
----------------------
can be set-off only
against LTCG. ----------------------
3. Loss can be carried ----------------------
forward only if
the return is filed ----------------------
u/s 139(1), and it ----------------------
is determined and
communicated u/s 157. ----------------------
74A Brought forward Set-off only 1. Carry forward and ----------------------
N 98 Unabsorbed Loss against Income set-off is permissible
from activity from owning and for 4 assessment ----------------------
N 05
of owning and maintaining Race years immediately
----------------------
maintaining Race Horses succeeding the
Horses assessment year for ----------------------
which the loss was
computed. ----------------------
2. Loss can be carried ----------------------
forward only if
the return is filed ----------------------
u/s 139(1) and it ----------------------
is determined and
communicated u/s 157. ----------------------
Computation of Total Income and Tax Liability – Steps ----------------------
Step 1: Determine the Residential Status of the Individual u/s 6(1) read with
----------------------
6(6).
Step 2: Determine the chargeable income on the basis of Residential Status u/s ----------------------
5.
----------------------
Step 3: Compute the Total Income in the following manner.
----------------------

----------------------

Appendix 2 - Taxation at a Glance 265

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 Notes Particulars Amount
Income from Salary
---------------------- xxx
Income from House Property
---------------------- Profits and Gains of Business or Profession xxx
Capital Gains (including Long-term Capital Gains) xxx
----------------------
Income from Other Sources xxx
---------------------- xxx
Gross Total Income Total of (a) to (e)
----------------------
Less: Deductions under Chapter VI-A (Not available above
---------------------- for LTCG)
xxx
---------------------- Total Income xxxx
---------------------- Step 4: Compute Tax Liability on Total Income in the following manner:

---------------------- Total Income as per above computation xxx

Less: Income chargeable to tax at special rates as under − xxx
----------------------
Long Term Capital Gain - On Taxable Assets at 20% xxx
----------------------
Short Term Capital Gain: On Securities transferred which were xxx
---------------------- subject
---------------------- to Securities Transaction Tax at 15%
Income from Races including Horse Races, Card Games, and other
----------------------
Games
---------------------- of any sort or gambling or betting of any form or nature whatsoever
---------------------- at
30%
----------------------
Total Income chargeable at normal rate of tax xxx
---------------------- Step 5: Compute Net Tax Payable after Education Cess, Secondary and
Higher Education Cess and Relief
----------------------
Tax on Total Income chargeable at Normal Rates of tax xxx
----------------------
Tax on Total Income chargeable at Special Rates of tax xxx
---------------------- Tax Payable xxx

---------------------- Add: Education Cess at 2% xx

Add: Secondary and Higher Education Cess at 1% xx
---------------------- Total Tax Payable xxx
---------------------- Less: Relief u/s 89 xx
Balance Tax Payable xxx
----------------------

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 Notes

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Appendix 2 - Taxation at a Glance 267

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 Notes

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