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Taxation LAWS-I ( Notes for Exam)

Taxation law (Symbiosis International University)

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Dear Reader,

This material consists of total of 63 pages and is to the best of my knowledge sufficient.
However, kindly note that I have not written notes under Unit I as the same relates to
basic/general points covered primarily under 1.1 (Income Tax Act). Also, as regards unit
3.7 (packaged scheme of incentives) I have not written notes for the same as I couldn’t
find sufficient material for it. It has not been done in class either. As regards the
computation of VAT (3.8), the same is not part of the syllabus for the exam and hence I
have not mentioned it here. Also, I am unsure about my notes on set-off under the VAT
here as the notes which I used for it do not seem very reliable. Please check up on that if
you want to. Please remember to practice the sums given in class with respect to the IT
Act. The source of this material is class notes, Manoharan and Hari, the bare acts (both IT
Act and MVAT Act) and a particular book on MVAT (Snow White). Hope these notes are
sufficient. Happy reading and Best of Luck!

Regards
Ankita Das

TAXATION LAWS-I

Unit I- Introduction to Tax Laws

1.1.1 Principle of Taxation

1.1.2 Concept of Tax
1.1.3 Constitutional Provision for Levy of Tax with reference to Central and State
Government Authority

Unit II- Direct Tax Laws

1.1 Income Tax Act

1. Entry II of the Constitution provides powers to the ministry to levy taxes on the
income of a person.
2. The revenue of the government from the collection of taxes is nearly 18%.
3. The Income Tax Act first came into force in 1961. However, it is amended each
year by way of the Finance Bill (which later becomes the Finance Act) during the
period of presentation of the budget in the month of February. It becomes
applicable from April to March.
4. The finance bill is first presented before both houses of Parliament by the Finance
Minister on behalf of the Government. It then goes for the President’s assent.
After receiving such assent, it gets published in the Official Gazette. The bill/act
comes into effect from the date of publication in the gazette.
5. Part IV of the budget incorporates the Finance Act.

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6. In case of necessary commodities, the budget comes into effect from the time the
President gives his assent as in case of petroleum products.
7. In all other cases, a notification in the official gazette is required.
8. The Central Board of Direct Taxes (CBDT) is the highest authority with respect to
Income Tax. It has the power under S.119 of the Income Tax Act (hereafter
referred to as the Act) to issue notices and circulars to all tax authorities which
shall be binding on them.

1.1.1 Definitions, Concept of Income, Previous Year, Assessment Year

Some important definitions-

1. Person- S. 2(31)- Person includes (please note that the information given under
the various categories are not included under the definition)-
(a) An individual
(b) A Hindu Undivided Family (hereafter referred to as HUF)
(c) A company
(d) A firm- includes a partnership, LLP s
(e) An Association of persons (hereafter referred to as AOP)- includes an
unregistered partnership firm
(f) A body of individuals (hereafter referred to as BOI)
(g) Local authorities
(h) Every other artificial juridical person not included in the above categories

2. Assessment Year- S. 2(9)- It is the period of 12 months commencing from 1st

April to 31st March of the next year. Income of the previous year is to be taxed in
the assessment year as per the rates given in the relevant finance act.
3. Previous Year- S. 3- It is the year preceding the assessment year. It is the year in
which the income is earned.
4. Rules for taxation of income in previous year-
(a) All incomes earned from 1st April to 31st March of the previous year to be
taxed in the assessment year incase of existing businesses/professions, etc.
(b) Incase of newly set up businesses/professions, income to be taxed from the
date such businesses are set up during the previous year till 31st March in
the assessment year.

5. Exceptions to the rule of taxation of income of previous year in the assessment

year OR Incomes taxable in the previous year itself-
(a) S. 172- Income from shipping business of non-resident- taxable at the rate
of 7.5% irrespective of income.
(b) S. 174- Income of persons leaving India permanently or for a long
duration- Incomes upto the time they are staying in India to be taxed.
(c) S. 174A- Income of BOI or artificial juridical persons for a particular
event or purpose. - Particularly when the Income Tax (hereafter referred to

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as IT) Commissioner feels that there are lesser chances of recovery of tax
from such persons.
(d) S. 175- Assessment of a person who is likely to alienate property to avoid
tax.
(e) S. 176- Income from discontinued business- the IT Commissioner must be
given notice of discontinuation of business atleast 15 days prior to the
same.
(f) Income of bodies formed for a short duration (similar to point (c)-
combine)

6. Generally speaking, Income means periodical monetary return with some sort of
regularity. It is generally recurring in nature and is essentially the increase in
wealth of a person during a fixed period of time.
7. S. 2(24) states that income includes the following-
(a) Profits and gains
(b) Dividend
(c) Voluntary contributions received by trust
(d) Perquisites in the hands of the employee
(e) Any special benefit or allowance
(f) City Compensatory Allowance or Dearness Allowance
(g) Any benefit or perquisites given to directors
(h) Any benefit or perquisites given to a representative assessee
(i) Capital gains
(j) Insurance Profits
(k) Banking income of cooperative society
(l) Winnings from lottery
(m)Employee’s contribution to provident fund
(n) Amount received under keyman insurance policy
(o) Amount received as gift exceeding INR 50,000 by an individual or HUF

8. Incase of disputed income, it shall not be considered till such dispute is settled.
9. Contingent income is not considered as being an income.
10. There are two kinds of receipts- Capital receipts and revenue receipts.
11. Capital receipts are obtained by selling capital assets. They shall be exempted
from tax unless expressly taxable such as under S. 45. (capital gains)
12. Revenue Receipts include any form of investment. Whatever returns are obtained
will be treated as an income. They shall be taxable unless expressly exempted
such as under S.10.
13. Gross Total Income- S.14 provides for the following heads which form part of the
gross total income-
(a) Income from salary
(b) Income from house property
(c) Profits and gains from business or profession
(d) Capital gains
(e) Income from other sources

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14. Net Total Income= Gross Total Income- Set off losses
15. Net Taxable Income= Net Total Income- deductions under Ss.80C to 80U
16. With respect to income under profits and gains from business and profession and
income from other sources, the accounting method regularly followed by the
assessee must be followed. With regards the rest, the method of accounting is
irrelevant. (Generally, mercantile system and cash system followed)
17. Tax rates provided in Appendix 1 of the Act.

1.1.2 Basis of Charge, Sources of Income, Residence in India, Deemed Income, Income
excluded from total income

Basis of Charge-

Sources of Income and Deemed Income-

1. Sources of income are of 3 kinds-

(a) Income received or deemed to be received in India- Incomes of resident
both ordinary and non-ordinary and Income of non-resident taxable
(b) Income accrued/arisen or deemed have accrued/arisen in India- Incomes
of resident both ordinary and non-ordinary and Income of non-resident
taxable
(c) Income received/deemed to be received outside India- Incomes of resident
and ordinarily resident taxable. Income of resident and not ordinarily
resident taxable only if control and management is from India. Income of
non-resident is not taxable.

2. S.7 provides as to what income may be considered as being deemed to have been
received in the previous year and chargeable to tax even in the absence of any
actual receipt.
3. Such deemed income includes the following-
(a) Contribution made to the recognized provident fund by the employer in
excess of 12 % of the employee’s salary.
(b) Interest credited to the recognized provident fund of the employee in
excess of 9.5%.
(c) Contribution made by the Central Government or any Employer to the
notified pension scheme.
(d) Any unexplained cash credit investment, jewellery or other valuable
articles.
(e) Tax Deducted at Source (hereafter TDS) is deemed to be received in the
hands of

Residence in India-

1. For tax payers, the residential status is either that of a resident or a non-resident.

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2. Incase of a non-resident, only his Indian income is taxable.

3. A resident can further be-
(d) Resident and ordinarily resident
(e) Resident and not ordinarily resident.

4. Conditions for Resident and ordinarily resident-

(a) Atleast 182 days stay in India in previous year OR
(b) Atleast 60 days stay in India in previous year and 365 days stay in India in
4 previous years.

5. Exceptions to (b)-
(a) Incase the person leaves India for the purpose of employment, the
requirement of 60 days shall be replaced by 182 days
(b) Incase a person who is of Indian origin or is an Indian citizen comes to
visit India, the requirement of 60 days shall be replaced by 182 days.

Example-

A citizen of USA has been staying in India since 1987. He leaves India on July 16, 2009
and returns on January 4, 2010. Determine his residential status for the previous year
2009-10.

Ans- Previous Year (hereafter PY)- 2009-10

Assessment Year (hereafter AY)- 2010-11

2009- (starting from April as financial year begins from April)

April- 30 days
May- 31 days
June- 30 days
July- 16 days

Total- 107 days

2010- (starting from January 4 as he reaches India on such date till March 31st as
it is the end of the financial year)

January- 28 days (inclusive of January 4th)

February- 28 days
March- 31 days

Total- 87 days

Final total- 107+81= 194 days.

Therefore, he is resident and ordinarily resident.

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Example- Mr. X, an Indian citizen left India for the first time on September 21, 2009 for
employment in Germany. During the previous year 2010-11, he comes back to India on
May 5, 2010 for 150 days. Determine his residential status for the assessment years 2010-
11 and 2011-12.

Previous Year- 2009-10

Assessment Year- 2010-11

April- 30 days
May- 31 days
June- 30 days
July- 31 days
August- 31 days
September- 21 days (inclusive of September 21, 2009)

Total= 174 days

Therefore, condition is not fulfilled. He is a resident but not ordinarily resident.

Previous Year- 2010-11

Assessment Year- 2011-12

Total number of days stayed= 150 days.

Therefore, condition is not fulfilled. He is a resident but not ordinarily resident.

6. Incase of resident but not ordinarily resident, the condition to be fulfilled that he
must be resident in India for atleast 2 previous years in the 10 previous years
immediately preceding the relevant preceding year and 730 days during the 7
years immediately preceding the relevant preceding year. (This condition has been
fulfilled in the previous example)
7. S. 6(2)- residential status of HUF-
(a) HUF said to be a resident if it is present wholly in India or partially in
India and partially abroad.
(b) If however, the management and control of the HUF is situated wholly
outside India, it will be regarded as being a non-resident.
(c) HUF shall be treated as resident and ordinarily resident when the Karta
must be a resident of India for 2 years out of 10 previous years
immediately preceding the previous year and must be in India for atleast
730 days during the 7 years immediately preceding the relevant previous
year. If these 2 conditions are not fulfilled, the HUF shall be treated as a
resident but not ordinarily resident.

8. S. 6(3)- Residential status of company-

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(a) It shall be a resident if it is an Indian company or

(b) If during the particular previous year, its control and management is
situated wholly in India (foreign company)

Example: X Ltd. is an Indian company however its business is carried on in UK and all
shareholders are residents of UK. The board meetings are also held in the UK. Determine
its residential status.

Answer- It is a resident as all Indian companies shall be treated as residents irrespective

of where their business is carried on or where their shareholders are or where their board
meetings are held.

Example: X Ltd. is a foreign company whose business is partly controlled in India and
partly in Canada. Determine its residential status and calculate its income to be taxed as
per the following particulars-

Income from property situated in Canada (rent received outside India)- 20,40,000 INR
Income from property situated in Mumbai (rent received outside India) 23,10,000 INR
Royalty from the Government of India (paid outside India)- 6,00,000 INR
Technical fees received from a Canadian company (paid outside India but it is utilized by
the Canadian Company for carrying on a business in India)-18,00,000 INR
Income from business in India- 8,00,000 INR

Answer- It is a non-resident as its business is partly controlled in India and partly in

Canada.

Its income shall be calculated as follows-

Income from property situated in Canada- Foreign Income- nil +
Income from property situated in Mumbai-Indian Income- 23,10,000 INR +
Royalty from the Government of India-Indian Income)- 6,00,000 INR +
Technical fees received from a Canadian company- Indian Income-18,00,000 INR +
Income from business in India- Indian Income- 8,00,000 INR

Therefore, Net Income= 55,10,000

Income excluded from Total Income-

1. Incomes which are not taxable are regarded as being exempted incomes.
2. These have been categorized as under-
(a) Incomes excluded from total income of a person. (S.10)
(b) Income of any undertaking established in Free Trade Zones.
(c) Income of any newly established undertaking in Special Economic Zones.
(d) Income of any export oriented undertaking.
(e) Profits and gains of undertakings engaged in export of eligible articles or
things. (Amended by the Finance Act 2010-11)

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(f) Income from property held for religious or charitable purposes.

(g) Income of political parties.
(h) Income of electoral trust.

3. Certain incomes exempted from being taxed under S.10 have been listed as
follows-
(a) Agricultural income- includes income from horticulture, excludes dairy
farming and nursery.
(b) Income of a member of an HUF from the family income.
(c) Profits of a partner from a firm.
(d) Interest received by non-resident from prescribed securities.
(e) Interest received by person resident outside India on amounts credited to
the Non-Resident Account.
(f) Leave travel concession provided by employer to employee.
(g) Income of a notified foreign company with respect to projects connected
with security outside or inside India.
(h) Allowances given by Government of India to their employees abroad.
(i) Relief given to victims of Bhopal Gas Tragedy.
(j) Income of Trade Unions.
(k) House Rent Allowance subject to certain limits.
(l) Income from an international sporting event.
(m)Any kind of scholarship
(n) Amounts received under an LIC policy (not keyman insurance), including
the bonus amount.
(o) Daily allowances of members of Parliament, State Legislature and any
other allowances subject to certain conditions.
(p) Notional property income of any one palace occupied by a former ruler.
(q) Income of local authorities.
(r) Retrenchment compensation.
(s) Subsidy received by planters
(t) Income of notified non-profit body/organization.

4. S.11 lays down the following four heads under which income is exempted from
being taxed-
(a) Income from property held in trust applied wholly in India for charitable and
religious purposes where 85% of the total income is spent on the purposes of the
trust.
(b) Income from property applied in part for charitable or religious purpose.
(c) Income from property which is applied for charitable purpose outside India.
(d) Voluntary contributions forming part of such purpose. (These need to be
deducted from the total expense to arrive at the sum from which 85% is spent on
the purposes of the trust.

5. S.11 (5) directs the trust to use unused amounts for specified investments only.

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6. Unless the trust is registered under S.12A, the income of such trust shall be
taxable for the entire year.
7. Under S.12A first, application must be filed in form 10A alongwith a copy of the
constitution of the trust, name and address of the trust and property of the trust.
8. This should be submitted before the end of the financial year in which the trust is
created.
9. The IT Commissioner shall after verification of such application grant a certificate
or registration which shall come into effect from the date of registration.
10. The trust shall thereafter be assessable as an association of persons.
11. S.13 lays down certain restrictions with respect to Ss.11 and 12.
12. Under the following circumstances, the trust shall not be eligible for exemption
under Ss.11 and 12-
(a) Income from property held under trust for private religious purpose.
(b) Where it has been created for a particular community or caste which came
into being after 01/04/62.
(c) Where the income of the trust is applied for the benefit of specified persons
such as the settler, trustee or relatives of such settler/trustee.
(d) Where the income of the trust is partly applied, directly or indirectly for the
benefit of such specified persons.
(e) Where the trust functions in contravention of S.11 (5).

13. Also, such exemption will not be applicable with respect to anonymous
donations. (check)
14. When returns are filed for the trust, the gross receipt from the income and
expenditure account is considered and from the same, the amount on corpus for a
specified direction is deducted and expenses on the object of the trust are deducted.
The balance is then subject to interest rates as applicable to an association of persons.
15. The income of political parties are also exempted.
16. However, the following conditions must be satisfies-
(a) Such party is recognised under the Representation of People’s Act and by the
Election Commission.
(b) It must maintain books of accounts.
(c) Such books of account must be audited.
(d) A register of persons, with their names and addresses contributing more than
Rs.20,000 shall be maintained.
(e) The treasurer of the party is required to submit yearly reports under S. 29(c) (3) of
the Representation of People’s Act.

17. Income of electoral trust under S.13B is exempted from tax.

18. Electoral trust is one which is recognised by the Central Board of Direct Taxes
and rules approved by the Central Government.
19. The main object of the same is to collect sums from the people and give it to
recognised political parties.
20. 95% of the amount should be donated to other recognised political parties.
21. If such 95% is not donated, the balance shall be taxable.

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22. Such trust must necessarily function in accordance with the rules made by the
Central government

INCOME FROM SALARY

1. Salary has been defined under S. 17(1) of the IT Act as including the following-
(a) Wages
(b) Annuity or Pension
(c) Gratuity
(d) Any commission, fees, profits or perquisites received in lieu of salary
(e) Any advance of salary
(f) Any amount received by him for leave not availed by him
(g) Any amount annually credited to the balance of credit of a recognised
provident fund in which the employee participates in excess of 12% and interest
in excess of 9.5%
(h) Aggregate amount transferred to the employee contributing to a recognised
provident fund in excess of any sum exempted under S. 10.
(i) Contribution made by the Central Government or any other employee under
any pension scheme as mentioned under S. 80CCD.

2. For the purpose of salary, there must be an employer-employee relationship and

the employer must exercise supervision and control over the employee.
3. Salaries are chargeable on due or receipt basis whichever is earlier.
4. Foregoing salary is such amount as is earned by the individual but has not been
paid to him for some reason. It also forms part of the salary.
5. Arrears of salary (paid on due basis/outstanding salary) are also treated as being
part of salary income for the previous year in which they are received. (S.89)
However, if such outstanding amount is charged in a particular year but received
in a different year, it shall not be charged in the year in which it is received.
6. Salary includes bonus and thus receives a commission on the turnover of a
company.
7. Perquisites deal with non-monetary benefits.
8. Only 2 deductions are allowed under salary (under S.16 (ii) and (iii))-
entertainment allowance (only when received by government employees) and
profession tax.
9. Earlier standard rent used to be a deduction but now the same has been taken out.

ALLOWANCES-

1. Allowances are a fixed amount paid by the employer to his employee in a

particular year for various purposes.
2. Allowances have been divided into three categories-

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(a) Fully exempt- e.g. allowances given to HC judges, allowance received by an

employee of the central government for rendering services outside India,
sumptuary allowance given to SC and HC judges, allowances given to any
employee of the UNO by his employer
(b) Fully taxable- DA (giving to employees for coping up with cost of living of a
particular area), City Compensatory Allowance (generally depends on the
geographical location of certain cities such as those situated in hilly areas, etc),
Entertainment Allowance (fully taxable for all employees), fixed medical
allowance, tiffin allowance, overtime allowance, family allowance, servant
allowance, non-practicing allowance, etc.
(c) Special allowances under S. 10(14) – includes such allowances which are
exempted only upto a certain limit upto which the expenditure has been incurred
by an employee or as otherwise specified.
3. Dearness allowance is allowed as being part of income from salary if there is an
agreement with respect to the same.
4. It depends on the living index and is declared by the government.
5. However, it doesn’t form part of the salary when part of it is transferred for
retirement.
6. Certain special allowances under S.10(14) include the following-
a) Any allowance for the following purposes-
i. Travel on tour or transfer
ii. Expenditure incurred on a daily basis due to absence from duty.
iii. Conveyance allowance granted for meeting expenditure on conveyance for
official duties unless free conveyance provided by employer.
iv. Expenditures incurred for helper in the performance of duties.
v. Expenses incurred with respect to academic research and training payable
by education and research institutions.
vi. Expenses for purchase and maintenance of uniform for wear during
performance of duties.
These allowances are exempt upto the amount actually spent by the employee
for the performance of duties or the amount actually received, whichever is
less.
b) Any allowance granted to an employee working in a transport system for
personal expenses incurred in the course of running such transport from one place
to another upto 70% of the amount received or Rs. 6000, whichever is less.
c) Travel allowance for persons who are blind or orthopaedically handicapped to
commute between their place of residence and work upto Rs. 1600 per month.
d) Travel allowance to all other persons upto Rs. 800 per month.
e) Education allowance for 2 children upto Rs.100 per month per child.
f) Hostel allowance for 2 children upto Rs.200 per month per child.
g) Border area allowance or remote area allowance or difficult area allowance
starting from Rs. 200 to Rs. 1300 per month.
h) Tribal area allowance upto Rs. 200 for employment in a place in Assam, Orissa,
West Bengal, Karnataka, UP, MP, etc.
i) Underground allowance for persons working in coal mines upto Rs. 800 per
month

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j) Special allowance to persons working in the armed forces for island duty in
Andaman and Nicobar islands upto Rs. 3250 per month.

PERQUISITES-

1. This has been provided under S.17(2) which states that perquisites shall include
the following-
i. The value of rent free accommodation provided by the employer to the
employee.
ii. The value of any concession with respect to rent for an accommodation
provided by the employer to the employee.
iii. Any amenity or benefit granted or provided by the employer to specified
employees free of cost or at concessional rates.
iv. Any sum paid by the employee to an employer as part of an obligation on
behalf of the employee.
v. Any sum payable by the employee to effect an assurance on the life of an
employee or to effect a contract for annuity.
vi. The value of specified securities or sweat equity shares made available to
employees free of cost or at concessional rates.
vii. Any contribution to an approved superannuation fund upto the extent it
exceeds Rs.1 Lakh.

2. Any amount of perquisite which is recovered from the employee by the employer
shall be reduced from the valuation of such perquisite.
3. Tax which is borne by the employer at his option with respect to non-monetary
perquisites is exempted under S. 10(cc).
4. After the amendment act of 2005, Chapter XII has been inserted and thus certain
perquisites which were earlier chargeable as salary for employees have now been
shifted to as being taxable in the hands of the employers and this includes fringe
benefits. Hence, the employee is exempted from being taxed for any fringe
benefits.
5. With respect to rent free accommodation, the following are considered as being
part of the salary, namely-
(a) Basic Pay
(b) Allowances
(c) Commission or bonus

6. The following are not considered to be salary-

(a) DA
(b) Any medical facility to the extent not taxable
(c) Employer’s contribution to provident fund on account of the employee
(d) Any payment made with respect to allocation of shares, debentures, etc.
(e) Any allowance exempted from tax
(f) Any perquisites under S. 17(2)

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7. Such rent-free accommodation may either be furnished or unfurnished and may

either be in the hands of government or non-government employees.
8. First we shall take the case of unfurnished accommodation in the hands of
government employees.
9. In such case, only the license fee is taxable.
10. With respect to unfurnished accommodation in the hands of non-government
employees, the following rules have been laid down-
(a) Where such accommodation is owned by the employer-
i. In a city whose population is less than 10 lakhs, 7.5% of the salary shall
be taxable.
ii. In a city whose population is between 10 lakhs and 25 lakhs, 10% of the
salary shall be taxable.
iii. In a city whose population is more than 25 lakhs, 15% of the salary shall
be taxable.

(b) Where such accommodation is taken or leased by the employer, either the
actual rent paid by the employer shall be taxable or 15% of the salary shall be
taxable, whichever is less.

11. If such accommodation is furnished, the taxed to be paid is first to be calculated

as if the accommodation is unfurnished and then the following must be added to
the same-
(a) Where the furniture is owned by the employer, 10% per annum of the original
cost of the furniture.
(b) Where it is hired by him, actual charges for such hire.

12. Furniture for this purpose includes television sets, radio sets, refrigerators, air
conditioners, other household appliances, plantor’s equipments and other such
gadgets and appliances.
13. Incase the employee is provided such accommodation in any hotel by the
government or by any other employer, 24% of the salary or actual charges for the
hotel shall be taxable as perquisite in the hands of the employee, whichever is
lower.
14. Hotel includes licensed accommodation in the nature of motel, service apartment
or guest house.
15. However, if such accommodation is provided for a period not exceeding 15 days
in total on account of transfer of the employee, the same shall be treated as a non-
taxable perquisite.
16. If accommodation is provided in a remote area (8kms away from the local limits
of the municipal corporation or other municipal facilities), the value of the
perquisite shall be treated as being nil.
17. Remote area means 40kms away from the town having a population of not less
than 20,000 as per the latest census.
18. As regards S. 17(2) (ii), for the valuation of accommodation given at concessional
rent, first the value of the perquisite must be calculated as if it were given rent

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free and then whatever was paid by the employee to the employer as regards the
same must be subtracted.
19. Salary with respect to the same shall be considered to be of the same value as that
under rent free accommodation.
20. The perquisites under S.17(2)(iii) and (iv) would seem quite similar but are infact
different.
21. Perquisites under (iii) are those benefits which are provided and paid for directly
by the employer while those under (iv) are such that with respect to which the
employer is under an obligation to pay, i.e. the employer reimburses the employee
as regards the same.
22. Another point of difference is that under (iii), only specified employees’ income is
taxable for such benefits while under (iv), all employees are to be charged.
23. Under S. 17(2) (iii), even if members of the employee’s household avail such
benefits, the same is taxable. Such persons include their respective spouses,
children and their spouses, parents, servants and dependants.
24. Specified employees include the following-
(a) A Director employee of a company
(b) Any employee with substantial interest, i.e. 20% or more in the company.
(c) Any person whose chargeable income under the head salaries exceeds
Rs.50,000 and this doesn’t include non-monetary benefits, monetary benefits
which are exempted under S.10 and deductions under S. 16(ii) and (iii), i.e.
entertainment allowance and profession tax.

25. Such benefits as provided under (iii) and (iv) include the following-
a. Perquisite with respect to domestic servant- If employer pays for
the salary of any gardener, watchman, sweeper or personal attendant, the value of
the perquisite shall be the amount actually paid by the employer for the same. If
the employee pays a part of such amount, the same shall be deductible.
b. Perquisite with respect to gas, electric energy and water- If the
employer provides the same from his own sources, the value of the perquisite
shall be the total manufacturing cost of the same as borne by the employer. If the
source is an outside agency, the value of the perquisite shall be the actual amount
paid by the employer towards the same. Any amount paid by the employee shall
be deducted.
c. Perquisite with respect to educational facilities- Where such
facility is provided by the employer for free or at a concessional rate, the actual
amount paid by the employer shall be the value of the perquisite. Where the
educational institution is wholly owned or maintained by the employer or where
the facilities are provided in an institution where the employer is employed, the
value of the perquisite shall be the amount charged in such similar educational
institution in the same area or locality. However, where the cost for the same per
child doesn’t exceed Rs.1000 per month, the same shall not be taxed as perquisite.
Any amount paid by the employee shall be deducted.
d. Perquisite with respect to interest free or concessional loans-
Where the employee or any member of his household has been advanced an
interest free loan or loan at concessional rates, the value of the benefit shall be the

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interest charged by the SBI with respect to loans for the same purpose as
according to rates prevailing on the first day of the previous year.
e. Perquisite with respect to usage of movable assets- Where any
movable asset owned or hired by the employer is used by the employee or any
member of his family, if it is owned then 10% per annum of its actual cost is the
value of the perquisite and if it is hired then the charges for such hire is the value
of such perquisite. This however doesn’t include such assets as are being used for
official use such as laptops and mobile phones. They also do not include furniture
and cars or any other asset previously covered.
f. Perquisite with respect to transfer of movable assets- Where the
employer transfers any asset directly or indirectly to the employee or any member
of his household, the value of such perquisite shall be determined as per the
Reducing Balance Method with respect to motor cars, computers and electronic
gadgets (depreciation to be taken as 20% of Written Down Value or WDV with
respect to motor cars and 50% with respect to computers and electronic gadgets)
and the Straight Line Method with respect to other assets. In order to compute the
same, depreciated value till the date of transfer and cost of transfer to be
considered and their difference to be taken. In the reducing balance method, there
is a reduction in the WDV every year by the rate of depreciation while in case of
the straight line method, the same value is taken every year.(check again)

26. Under S.17(2)(viii), certain other perquisites have also been provided which
include the following-
(a) Motor car
(b) Free or concessional tickets
(c) Free or concessional meals
(d) Travelling, touring and accommodation.
(e) Membership in a club
(f) Other benefits and amenities.

27. Consider the following information and table with respect to motor car as a
perquisite-

i. When the motor car is owned by the employee and expenses for the
same are paid for by the employee, the question of perquisites doesn’t arise.
ii. Where the motor car is provided by the employer or owned by the
employee but the same is used for wholly official purposes, there are no taxable
perquisites even though the employer pays the expenses for the same.
iii. But, in the above case, all documents with respect to such conveyance
must be maintained by the employer.
iv. Also, conveyance from the employee’s place of residence till his place
of work shall be considered as being use for official purposes.
v. Other categories as chargeable under the head of perquisite with
respect to motor car-

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S.no. Car owned Expenses Wholly personal use Partly personal use
by borne by
1. Employee Employer Actual expenses paid Actual expenses paid by
shall be perquisite employer reduced by the
following-
(i) When engine
capacity is upto 1.6ltrs
cc- Rs.1800 p.m.
(ii) When engine
capacity is above 1.6ltrs
cc- Rs.2400 p.m.

Driver’s salary-Rs.900
p.m.
2. Employer Employee Wear and tear, hire (i) When engine
charges, driver’s salary capacity is upto 1.6ltrs
cc-Rs.600 p.m.
(ii) When engine
capacity is above 1.6ltrs
cc-Rs.900 p.m.

Driver’s salary-Rs.900
p.m.
3. Employer Employer Wear and tear charges, (i) When engine
hire charges, running capacity is upto 1.6ltrs
and maintenance cc- Rs.1800 p.m.
expenses, driver’s (ii) When engine
salary less the amount capacity is above 1.6ltrs
chargeable from the cc- Rs.2400 p.m.
employee for the same.
Driver’s salary-Rs.900
p.m.

vi. Where any other conveyance is provided by the employer, the value of
perquisite is as follows-
(a) When the same is for personal use- running and maintenance charges
(b) When the same is for partly personal use- actual expenses incurred by the employer
less the driver’s salary.

28. Free and concessional tickets-

i. Where an undertaking engaged in the business of carriage of passengers and goods

provides any benefit or amenity to any of its employees or any member of such
employee’s household in the form of conveyance which is free of cost or at

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concessional rates in any conveyance owned, leased or provided by way of any other
arrangement by such organisation, the value at which such benefit or amenity is
provided to the public shall be taken as the value of the perquisite.
ii. Any part of such amount if paid by the employee shall be deducted from the
perquisite.
iii. This provision is not applicable to employees of railways and airlines.

29. Travelling, touring and accommodation-

i. Where the value of any travelling, touring or accommodation for a holiday by an

employee or any member of his household and the expenses for the same are borne
by the employer, the value of perquisite shall be the amount actually paid by the
employer.
ii. However, this provision doesn’t include travel as exempted under S.10 (5).
iii. If however the facility is maintained by the employer but is not available uniformly to
all employees, the value at which such services are provided by other agencies to the
public shall be taken to be the value of the perquisite.
iv. Where the employee is on official tour, the expenses incurred as regards any member
of the household accompanying him shall be treated as a fringe benefit or amenity.
v. However, incase of an extended stay or vacation, the expenses incurred with respect
to the time for which it was extended shall be treated as a fringe benefit or amenity
only.

30. Free or concessional meal-

i. Where free or concessional meals are provided by the employer, they shall be
chargeable as perquisites.
ii. However the following shall not be chargeable as perquisites-
(a) Free meals provided by the employer during working hours in the place of work
or business upto Rs.50.
(b) Free meals provided through paid vouchers which are not transferable and may be
used at eating joints for meals upto the value of Rs.50.
(c) Tea or snacks provided during office hours.
(d) Free meals provided during working hours in a remote area or offshore
installation.

iii. Where the value of any gift or voucher or a token in lieu of such gift is received by an
employee or any member of his household for any ceremonial occasion or otherwise,
the value of the same shall be treated as a perquisite.
iv. However, where the aggregate value of such gift in the previous year is less than
Rs.5000, the value of perquisite shall be taken as being nil.

31. Membership in club-

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i. The amount of expenses incurred by the employer towards the membership fee as
well as annual fee for an employee or any member of his household, charged to credit
card shall be treated as a perquisite.
ii. If the employer reimburses the same, the value of such reimbursement will be taken
to be a perquisite.
iii. Where the employer provides facilities such as health club, sports, etc., there shall be
no taxable perquisite in such regard.
iv. Where the employer has corporate membership of such club, and the facility is
availed of by an employee or any member of his household, the amount paid for the
same will be taxable as a perquisite but shall not include the initial fee for such
membership.
v. Where the expenses with respect to any fee or facility used by the employee or any
member of his household are incurred by the employer, the same shall not be taxable
as perquisite provided complete details of such expenses are maintained by the
employer and he certifies that they were incurred for official purposes only.

32. Other benefit or amenity- Where the employer provides any other benefit or amenity to
the employee, the same shall be chargeable as perquisite at its market value as reduced by
the employee’s contribution. However, this shall not include any expenses paid by the
employer towards the employee’s phone bills or mobile phone charges.

33. The following have been considered as being tax free perquisites, namely-
i. Medical facilities or medical reimbursement upto Rs.15000.
ii. Recreational facilities when provided to a group and not to individuals.
iii. Amount spent on training.
iv. Use of health clubs.
v. Employer’s contribution to an approved superannuation fund upto Rs.1lakh.
vi. Perquisite available outside India for services rendered in India.
vii. Residence to officials of Parliament.
viii. Educational facilities for children of employees.
ix. Leave Travel Concession.

33. Leave Travel Concession has been dealt with under S.10 (5).
34. It has been provided under this section that leave travel concession (LTC) shall be
made available where the LTC is for leave to any place in India which may even be after
retirement from service or termination of service and the journey if the following
conditions are fulfilled-
i. Incase of travel by air, the amount not exceeding the air fare for economy
class by a national carrier by the shortest distance between the place of origin and the
destination shall be exempted.
ii. Incase the place of origin and the destination are connected by rail and the
employee travels by any mode of transport other than by air, then the amount exempted
shall be the value of a first class A/C fare by railway for the shortest distance between the
two places.

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iii. If road transport is used and the same is by way of recognised public
transport, the amount not exceeding first class or deluxe class fare shall be exempted.
iv. Incase of travel by road not by way of a recognised public transport, the
amount equivalent to the first class A/C fare for such journey shall be exempted.

35. The assessee can claim LTC with respect to 2 journeys in a period of 4 years.
36. If the assess has not exercised such option of 2 journeys within a period of 2
years, he can have one journey immediately in the next calendar year.
37. This concession is not available for more than 2 children and must not exceed the
actual expenses incurred.

PROFITS IN LIEU OF SALARY-

1. These are paid by the employer in place of the salary.

2. They include-
i. Payment to unrecognized provident fund by the employer.
ii. Terminal Compensation
iii. Payment under keyman insurance policy- for insurance policy in favour of keyman or
such person who is key to the business and without whom the business cannot be carried
forth.
iv. Any other payment made under any legal obligation or when such payment is made
voluntarily.

3. However these do not include Gratuity, accumulated value of pension, payment

from approved superannuation fund, payment received from approved or recognised
provident fund, accumulated value of pension and retrenchment compensation.

Exemptions-

I. GRATUITY-

1. This has been provided under S.10 (10).

2. With respect to government employees, any death-cum-retirement gratuity is fully
exempted. The salary here is taken to mean the basic salary, the DA (if provided in the
agreement) and commission on the turnover.
3. With respect to employees covered under the Payment of Gratuity Act, 1972, they shall
be exempted to the extent of the least of the following-
(a) Rs.3, 50,000
(b) 15 days salary out of 26 days based on the last drawn salary for each completed year
or part of the year in excess of 6 months.
(c) Actual amount of gratuity paid.

4. The salary for this purpose shall be taken to mean the basic salary and the DA.
5. With respect to any other employee, gratuity shall be exempted incase of death,
resignation, termination or retirement to the extent of the following-
(a) Rs.3, 50,000

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(b) Half month’s salary on the basis of 10 month’s average immediately preceding the
month in which any such event occurs for each completed year of service (fraction to be
ignored).
(c) Actual amount of gratuity paid.

6. The salary for this purpose shall mean basic salary (taken to be average of last 10 month’s
salary), DA and commission on the turnover.
7. However, gratuity received during the tenure of employment is fully taxable irrespective
of what kind of employee the person is.

II. PENSION-

1. S.10 (10A) deals with commuted pension.

2. Incase of both government as well as non-government employees, non-commuted
pension is taxable as salary under S.15.
3. With respect to commuted pension, the same is completely exempted for a government
employee.
4. Incase of a non-government employee receiving gratuity, the amount that will be
exempted will be 1/3rd of the amount he would have received had he commuted the whole
of the pension.
5. Further, if such person is not receiving gratuity, the amount exempted will be ½ of the
amount he would have received had he commuted the whole of the pension.

III LEAVE SALARY/LEAVE ENCASHMENT-

1. This has been provided under S.10 (10AA).

2. It is fully exempted in the hands of a government employee.
3. With respect to a non-government employee, it is exempted to the extent of least
of the following-
(a) Cash equivalent of the leave, on the basis of average of 10 months salary to the credit
of the employee (calculated as 30 days credit for every completed year of service)
(b) 10 months salary on the basis of average of last 10 months salary
(c) Rs.3, 00,000
(d) Leave salary actually received.

4. Salary for the basis of the same shall be basic salary, DA and commission on turnover.
5. Leave salary received during the period of service is taxable.

IV HOUSE RENT ALLOWANCE-

1. This has been provided under S.10 (13A) to be read with rule 2A.
2. House Rent Allowance shall be exempted upto the extent of the least of the following-
(a) Excess of rent paid over 10% of salary due for the relevant period.
(b) 50% of salary incase accommodation situated in Delhi, Bombay or Calcutta and 40% of
salary if it is situated in any other place due for the relevant period.
(c) Actual HRA paid.

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3. Exemption however is not available to such employee who lives in his own house or in
such house where he doesn’t pay rent.
4. Salary for this purpose shall mean basic salary, DA and commission on the turnover
achieved by the employee, calculated on a due basis for the relevant period.
5. The relevant period here would mean the period during which the said accommodation was
occupied by the assessee during the previous year.

V. VOLUNTARY RETIREMENT/SEPARATION SCHEME-

1. This has been provided under S.10 (10C).

2. Exemption is available to the least of the following-
(a) Last drawn salary * 3 * number of years of completed service
OR
Last drawn salary * number of months of service remaining, whichever is lower

(b) Rs.5, 00,000

(c) Actual compensation received.

3. Salary (last drawn) includes the basic salary, DA and commission on turnover.

VI. RETRENCHMENT COMPENSATION-

1. This has been provided under S.10 (10B).

2. Amount received as compensation by a workman at the time of retrenchment is
exempted to the lower of the following-
(a) Amount calculated under the Industrial Disputes Act.
(b) Rs.5 lakh.

VII. STATUTORY/PUBLIC PROVIDENT FUND-

Any payment from a statutory provident fund or public provident fund established by the
Central Government is exempt from tax.

VII. APPROVED SUPERANNUATION FUND-

1. This has been provided under S.10 (13).

2. Any payment from a superannuation fund shall be exempt from tax if it is made-
(a) On the death of a beneficiary.
(b) To an employee in lieu of or in commutation of any annuity on his retirement at or
after a specified age or before such age if the person becomes incapacitated
(c) By way of return of contributions on the death of a beneficiary.

VIII. RECOGNISED AND UNRECOGNISED PROVIDENT FUND-

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1. With respect to Recognised Provident Fund, the following important principles are
followed-
(a) Employer’s contribution in excess of 12% of salary is taxable as salary to the
employee.
(b) Employee’s contribution is deductible under S.80 C.
(c) Interest credit in excess of 9.5% of salary is taxable.
(d) Amount received on retirement is fully exempted under S.10 (12).

2. With respect to Unrecognised Provident Fund, the following principles must be followed-
(a) Employer’s contribution- Not taxable at the time of contribution
(b) Employee’s contribution- No rebate allowed
(c) Interest credit- Interest on own contribution is taxable under income from other
sources
(d) Amount received on retirement- Employer’s contribution and interest on the same is
fully taxable as salary

INCOME FROM HOUSE PROPERTY

1. For income from house property to be calculated, the following conditions must
be fulfilled under S.22-
(a) The property must consist of a building and land adjacent to the building.
(b) Such property must belong to the assessee.
(c) It must be used for any purpose other than for business or profession for profits
chargeable to tax.
2. It is generally the annual rent which is taken into consideration irrespective of the fact as
to whether there is any actual rent received or not. Such rent is determined by the
corporation.
3. If the annual rent is not there, then actual rent or expected rent of that area is taken into
consideration. Exception is made only when the property is transferred. (check)
4. Income under this head is chargeable to the owner or the deemed owner.
5. S. 27 deals with deemed ownership and regards the following as deemed owners-
(a) Any person who transfers the property to his or her spouse for inadequate
consideration or to his minor child not being a minor daughter.
(b) Any person who is the holder of an impartible estate shall become the owner of all
such properties in the estate.
(c) Any person who is a member of a company, cooperative society or any other
association of persons and thus is allotted or leased under a house building scheme such
land/property.
(d) Any person who is allowed to retain possession of a house property in part
performance of a contract under S.53A of TOPA.
(e) Any person who acquires rights with respect to land or property for a period not
less than 12 years.
6. The following shall not be regarded as being house property for the purpose of
this Act-
(a) Any farm house- this is because the same is considered as being agricultural property.
This includes income from any building owned by an agriculturist or receiver of rent of

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such land provided the building is in immediate vicinity of agricultural land and is used
as a dwelling house or a store house or any other building. However, a man made forest is
not considered to be agricultural land.
(b) Any such property used for charitable purposes. (S.11)- This may include any public
or private trust.
(c) Any property used for business of the individual.
(d) Any house property used by a registered trade union
(e) One palace of a former ruler.
7. Incase of open land for the purpose of marriages, the same shall be taxable under income
from house property.
8. But where the property is in the name of the wife but all expenses are paid by the
husband, the amount is taxable in the name of the husband.
9. Income from house property is essentially calculated in the following cases-
(a) House property which is let out for the whole of the year. (let out)
(b) House property which is let out but remains vacant for part of the year or whole of the
year. (let out and deemed let out)
(c) House property which is let out for part of the year and for the rest remains self-
occupied. (let out and deemed let out- If house is let out even for one day during the year,
it is deemed to have been let out throughout the year)
(d) House property which is self occupied but remains vacant due to employment in
another place. (self occupied or unoccupied)
10. Hence, property would essentially be self occupied/unoccupied or let-out/deemed let-out.
11. Let out property gives rise to income. However, with respect to self occupied property,
there is a deeming provision and notional income is chargeable.
12. Incase of deemed let out, similarly notional income is chargeable.
13. Both self occupied as well as let-out property may be for commercial purposes or for
residential purposes.
14. However, self-occupied property for commercial purposes is considered under the head
of income from business or profession.
15. The Gross Annual Value (GAV) of all self-occupied and unoccupied property is taken as
being nil.
16. Further, it must be noted that if a person has 2 houses, he has to choose which property
shall be considered as being self occupied for the purpose of computation of tax. The
other property shall be deemed to have been let-out and the provisions with respect to let-
out/deemed let-out property shall become applicable.
17. Generally, the house with the interest element will be regarded as being self-occupied as
it will fetch negative income and thus tax will be lesser. In both cases however the GAV
must be calculated to find out the more beneficial option.
18. If part of the house is let out and part is self occupied, the GAV is to be calculated on a
proportionate basis and municipal taxes must also be divided accordingly.
19. There are 2 deductions under the IT Act with respect to Income from house property
under S.24, namely- standard deduction and interest on borrowed funds.
20. Standard deduction has now been introduced as there were previously various deductions
and thus now there is a 30% flat rate of deduction irrespective of any repairs or
improvements made, other expenses, etc.

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21. Interest on borrowed funds essentially means interest on any loans taken for construction,
repairs, purchase, reconstruction, etc of the house property.
22. The following are deductible as interest on borrowed funds-
(a) Interest paid or due on loan which is still outstanding- deducted till the time the loan
is subsisting.
(b) Interest on loan taken to repay original housing loan- deducted till the time the loan id
subsisting.
(c) 1/5th share of interest of pre-construction period- In this case, interest is accumulated
from the time the loan is taken prior to construction till the end of the previous year
immediately preceding the previous year in which property is completed. Then, 1/5th
share is deducted every year till a period of five years from the date of completion. E.g.
Loan is taken on 01/04/2004 and property is completed in the previous year 2007-08. The
interest is accumulated from 2004 till the previous year 2006-07. Then, 1/5th is deducted
every year for five years starting from 2007-08.
23. Interest for the year of completion of house property shall be granted for the entire year
irrespective of the date of completion.
24. S. 25 states that interest shall not be deductible where the same is payable outside India.
25. However, it is allowed only if bankers are paying interest in India. (check)
26. Format for determining income from house property incase of let out/deemed let our
property-

Particulars Amount in Rs. Amount in Rs.

1. GAV
a) Municipal value v. Fair Rent Take higher of the two
(called fair rent only)
b) Fair rent only v. Standard rent Take lower of the two
(called reasonable expected rent/
fair rent)

c) Reasonable Expected rent v. Take higher of the two

Actual Rent = GAV (XX)

Note: Incase of deemed let out property, last step not required as there is no actual rent
received

2. Less: Municipal Taxes XX

Net Annual Value(NAV) XX

3. Less: Deductions under S.24-

a) Standard deduction XX
(30% of NAV)
b) Interest on borrowed XX
funds(full amount of
interest deductible)

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Income from House Property XX

27. Format for determining income from house property incase of self occupied/unoccupied
property

Particulars Amount in Rs. Amount in Rs.

1. GAV Nil

2. Less: Municipal Taxes Not Applicable

Net Annual Value(NAV) Nil

3. Less: Deductions under S.24-

a) Standard deduction Not Applicable as NAV is nil
(30% of NAV)

b) Interest on borrowed XX
funds-
(i) Incase of loan for purchase or
Construction, following conditions
must be fulfilled-
 Loan was taken on or after
01/04/1999
 Property is completed within
3 years from the end of the year
in which loan was taken (end of
the year being 31st March)

If both conditions are fulfilled, limit of

interest to be Rs.1, 50,000
If any one or none of the conditions are
fulfilled, the limit on interest to be
Rs.30,000
(ii) Incase of loan for reconstruction, repair,
renovation, etc., limit of interest to be
Rs.30,000

Income from House Property XX

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28. The municipal value/valuation in the above case is one which has been fixed by
the municipal corporation.
29. The fair rent is the market value of such property.
30. The standard rent is applicable if the property comes within the ambit of the Rent
Control Act. In such case, the landlord is not permitted to charge more than the
standard rent as rent.
31. The actual rent is the amount actually received or receivable as rent.
32. Unrealised rent is that which is not realized in the hands of the assessee.
33. The following conditions must be fulfilled to allow for deduction of the same
from the GAV-
(a) Tenancy must be bonafide.
(b) Defaulting tenant must have vacated the premises or steps must have been taken
to recover the rent from him or to vacate the premises.
(c) He must not be in occupation of any other property of the assessee.
(d) The assessee must have taken all possible steps with respect of institution of
legal proceedings for recovery of rent.

34. Under S.25AA, it has been provided that if after a certain period, the unrealised
rent is made good, then the same shall be added as a rent received by the assessee.
35. Computation of GAV incase of unrealised rent-
(a) Take municipal value and fair rent and take whichever is higher as fair rent only.
(b) Take standard rent and the fair rent only (from (a) as above) and take whichever
is lower as reasonable expected rent.
(c) Take reasonable expected rent and actual rent, take whichever is higher.
(d) From the result you get in step (c), deduct the unrealised rent to get the GAV.

36. Incase of vacancy, GAV will be equal to the actual rent.

37. Incase of both unrealised rent as well as vacancy, GAV will be calculated as
follows-
(a) Take municipal value and fair rent and take whichever is higher as fair rent only.
(b) Take standard rent and the fair rent only (from (a) as above) and take whichever
is lower as reasonable expected rent.
(c) Take actual rent and deduct the unrealised rent from the same. Compare this
answer with the reasonable expected rent and take whichever is higher.
(d) Deduct vacancy loss from the answer in (c) to get the GAV.

38. S. 25(b) provides that whenever there are arrears of rent and the same are realized
later, they shall be added to the income of the assessee as income from house
property.
39. S. 26 deals with co-ownership. In such case, where there are two or more owners
of the same house property, after computation of Net Annual Value, the same shall
be divided proportionately amongst them depending on their respective shares in
such house property.
40. Thereafter, deductions shall be granted separately to them as they are different
entities in the eyes of law.

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INCOME FROM OTHER SOURCES

1. S.56 (1) deals with income from other sources. This is a residuary head which
covers all incomes not covered under any of the other four heads.
2. The following conditions must be satisfied for a particular income to be regarded as
being an income under this category-
(a) It must be an income. Every first receipt in the hands of an assessee is regarded
as being an income.
(b) It must not be covered under any of the other four heads.
(c) It must not be exempted under the Act.

3. S. 56(2) states that income from other sources shall include the following-
(a) Dividends
(b) Any amount received from winnings from lotteries, crossword puzzles, games,
races including horse races, betting, etc.
(c) Any sum received by the assessee due to contribution of the employees to a
provident fund.
(d) Any sum received from a keyman insurance policy including bonus.
(e) Any sum exceeding Rs.50, 000 or any immovable property or property other
than immovable property received without consideration or with inadequate
consideration by an individual or HUF.
(f) Any interest on securities
(g) Any income from plant, machinery or furniture and where the same is attached
to any building and the same is inseparable, then the total amount received from the
building alongwith such plant, machinery or furniture.
(h) Income by way of interest on compensation.

4. Some other incomes covered under this category are-

(a) Sub-letting income
(b) Family pension
(c) Insurance commission
(d) Casual income
(e) Income from vacant piece of land
(f) Interest on deposits
(g) Meeting allowances
(h) Income received after discontinuance of business
(i) Income from granting any rights

5. Dividend income though exempted in the hands of shareholders under S.10 (34) is
covered under income from other sources.
6. Dividend has been defined under Ss. 22(2) (a) to (e).
7. Dividend as under S. 22(a) to (d) is fully exempted in the hands of shareholders.
However, dividend covered under S. 22(e) is taxable under the head ‘income from
other sources’.

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8. This includes any payment made after 31/03/1987 by way of loan or advance to a
person who is a beneficial shareholder holding not less than 10% of the shares of a
company in which the public is not interest or having substantial interest in such
firm or company. (check)
9. For the dividend to be exempted, it must be declared, distributed and paid by a
domestic company and must be covered under Ss. 22 (a) to (d).
10. With respect to income from lotteries, races, betting, etc. even illegal acts are taken
into consideration as the IT Act doesn’t take legality or illegality into consideration
and only looks into the matter of taxability.
11. In such cases 30% is deducted at source (TDS) but while computing income from
other sources, the same is not taken into consideration.
12. As regards any receipts without consideration or gifts (taxable under this head after
01/10/2009), when any amount (cash/DD/cheque) or property, movable or
immovable, received without consideration or with inadequate consideration shall
be taxable when they are above Rs.50, 000.
13. Thus, if the amount is above Rs.50, 000, the entire amount is taxable.
14. They were earlier taxable under the gift tax act but now the same has been
abolished.
15. However, under the following circumstances, they will not be regarded as being
taxable-
(a) When received from a relative
(b) When received by a local authority
(c) When received on the occasion of marriage
(d) When received by a charitable institution under S. 12AA
(e) When received from any fund, institution, educational institution, hospital, etc.
under S.10 (23)
(f) When received in anticipation of death of the payer
(g) When received by will or inheritance

16. Related persons include the following-

(a) Spouse
(b) Brother/Sister
(c) Brother/Sister of Spouse
(d) Brother/Sister of Parents
(e) All lineal ascendants/descendants
(f) All lineal ascendants/descendants of spouse
(g) Spouse of persons referred above

17. Where the gift has been received from an unrelated person, the same is taxable as
well.
18. The taxability of such gifts is as follows-
(a) When amount of more than Rs.50, 000 is received without consideration or with
inadequate consideration, the same is fully taxable.
(b) Incase of immovable property which is received without any consideration and
whose stamp duty is above Rs.50, 000, the entire amount of the stamp duty is
taxable.

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(c) Incase of immovable property received for inadequate consideration and whose
stamp duty is above Rs.50, 000 and the consideration is less than such stamp duty,
the difference between the consideration and the stamp duty is taxable.
(d) Incase of movable property received without consideration and whose fair
market value is above Rs.50, 000, the entire fair market value is taxable.
(e) Incase of movable property received for inadequate consideration and whose fair
market value is above Rs.50, 000 and the consideration paid is less than the fair
market value, the difference between the consideration paid and the fair market
value shall be taxable.

19. With respect to other incomes as covered under S.56 such as interest on securities,
sum received under the keyman insurance policy, rental income on machinery, plant
and furniture let out on hire with or without being attached to any building,
employees’ contribution towards staff welfare scheme, the same is taxable under
income from other sources if the same is not derived from any business or
profession.
20. Keyman is any person who is important to an organisation and if he leaves, the
organisation will come to a stop. However, he need not be an employee.
21. Where an insurance policy is taken out in the name of such keyman and the bonus
or other amount is received by the employer, it is treated as an income from
business. When it is received by an employee, it is an income from salary and when
it is received by someone else it is treated as an income from other source.
22. S. 57 deals with permissible deductions which are as follows-
(a) Incase of dividends which are not exempted, any charges paid to acquire the
same will be deducted.
(b) Incase of income, any charges paid to acquire the same will be deducted.
(c) When payment is made to any welfare fund and the same doesn’t form part of
income from business or profession, the same is deductible if paid on the relevant
due date under the act concerned.
(d) Family pension- deductible upto 33 1/3rd % or Rs.15, 000 whichever is lower.
(e) With respect to letting plant, machinery or furniture with or without building,
amount spent on insurance, depreciation and repairs to be deductible.
(f) Any other expenses which are not capital expenses, with respect to income are
deductible.
(g) Interest on compensation or enhanced compensation deductible upto 50%.

23. S.58 deals with inadmissible deductions, namely-

(a) Any kind of personal expenses
(b) Any interest or salary payable outside India provided there is no TDS.
(c) Wealth tax
(d) Anything covered under S.40A
(e) Any winnings from lotteries, horse races, crossword puzzles, etc.

24. It must be noted that even income from owning and maintaining a horse are
regarded as being income from other sources.

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25. S.59 deals with deemed income. It states that any loss which is previously incurred
but from which a benefit is derived later shall be treated as being a deemed income.

INCOME FROM BUSINESS OR PROFESSION

1. With respect to business, the main motive of the activity must be to gain profit.
2. Such activity must be systematic, repetitive and consistent.
3. S. 2(13) defines business as any trade, commerce or manufacture and includes any
adventure in the nature of trade, commerce or manufacture.
4. Trading includes any activity of purchasing and selling.
5. Such inter-state trading is known as commerce.
6. Manufacture consists of three elements- raw material, process and commercial
commodity made out of such raw material and process.
7. It is derived from the latin terms manu which means hand and facere which means
to make.
8. In Duncan Coffee Purchasing case, it was held that when manual labour was used
and the process of mixing was applied to coffee seeds and chikori powder, a new
product was created and hence there was manufacture.
9. In Rajshree Cassette Recording case, it was held that as the recording in a cassette
can be erased, the same is not treated as a manufacture.
10. The meaning of manufacture becomes important as depreciation is more with
respect to manufactured products.
11. Adventure is something done with respect to specified activity and for a relatively
shorter time period.
12. Profession is when intellectual skill of a person is applied. For example as in case of
a doctor.
13. Vocation means an activity on which a person spends major part of his time in order
to earn his livelihood.
14. In CID v. Dharma Reddy, it was held that an activity which constitutes business
need not really include profession, vocation, etc. and it may even be in the form of
rendering services.
15. A person who conducts coaching classes for example indulges in a business as he
doesn’t necessarily conduct all the classes.
16. S. 28 states as to what shall be chargeable under the head of income from business
or profession-
(a) Any profits or gains arising from business or profession carried on by the
assessee at any time of the year.
(b) Any compensation of other amount received in connection with the following-
i) Termination or modification of a contract relating to management of affairs of an
Indian company or any other company.
ii) Termination or modification of a contract relating to agency for business activity
in India.
iii) Vesting of the management of any business in favour of the government or any
corporation managed by the government (nationalization).

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(c) Income from any trade, profession or any similar association from services
provided to its employees
(d) Income received by a partner in a firm by way of profits, bonus, commission,
etc.
(e) Any benefit or perquisite arising from business or profession.
(f) Export incentives such as cash assistance, license fees, excise or customs duty
repaid, etc.
(g) Any amount paid not to carry out any similar business activity or not to share
any know-how, patent, copyright, trademark, license, franchise or any other similar
right.
(h) Any sum received under a keyman insurance policy including bonus.
(i) Any capital asset with respect to which deduction has been allowed which has
been destroyed, discarded, demolished or transferred.

17. The following are the exceptions to S.28 and will be allowed as an income even
where the business is discontinued-
(a) Recovery against any loss or liability which was earlier deducted under S.41.
(b) Balancing charge in case of an electricity company.
(c) Sale of capital asset for the purpose of scientific research.
(d) Recovery against bad debts.
(e) Amount received from any special reserve.
(f) Receipt of discontinued business under cash system of accounting.

18. The following losses which are incidental to the business are however allowed-
(a) Loss due to embezzlement.
(b) Loss of stock in trade on account of fire, any natural calamity, negligence of the
employer, etc.
(c) Loss due to theft, robbery, etc.
(d) Loss because of issue of demand draft on forged letter of the company.
(e) Loss on account of failure of the bank in which money is deposited.
(f) Loss due to fluctuation in inflation rate.
(g) Loss of raw materials and finished goods in transit.
(h) Loss occurred due to financing a subsidiary.

19. The following losses are not deducted from business income-
(a) Loss incurred before commencement of business.
(b) Loss incurred while closing down business.
(c) Loss incurred due to damage to or deconstruction of capital assets.
(d) Loss due to violation of any law, i.e. by way of any penalty.

20. The following incomes from a business are not taxable under this head-
(a) Rent from house property- where the assessee has the business of owning and
letting out houses. (treated as income from house property)
(b) Dividends- where the assessee has a business of dealing with shares and
securities. (treated as income from other sources)
(c) Winnings from lotteries and races. (treated as income from other sources)

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21. Format for computation of business income-

Particulars Amount in Rs. Amount in Rs.

Net profit as per

Profit and loss A/c XX

Add-
Items debited to profit
and loss A/c not allowed
under this head
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX

Add-
Items credited to profit
and loss A/c but chargeable
as business/professional income
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX

Less-
Items credited to profit and
loss A/c not chargeable under
this head
(i)--------------------- XX
(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX

Less-
Items debited to profit and
loss account deductible from
income from business/profession
under the Act
(i)--------------------- XX

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(ii) --------------------- XX
(iii) ----------------------- XX
(iv) ----------------------- XX
XX

Income from business or profession = XX

22. General principles for allowing deductions under income from business/profession-
(a) Expenses should have been incurred in the previous year.
(b) It must be incurred with respect to business or profession.
(c) No deductions shall be allowed incase of a discontinued business or expenses
incurred prior to commencement of business.

23. Deductions with respect to income from business or profession have been
categorized as follows-
(a) Specific deductions under Ss.30 to 36.
(b) General Deductions under S. 37
(c) Overriding provisions

24. Specific deductions as under S.30- S.35-

(a) Rent rates, repairs and insurance with respect to buildings.
(b) Repairs and insurance with respect to plant, machinery and furniture.
(c) Depreciation
(d) Tea/Coffee/Rubber Development Account
(e) Expenditure on eligible projects and schemes
(f) Site Restoration fund
(g) Expenditure on scientific research
(h) Profit on sale of assets used for scientific research
(i) Capital Expenditure on specified business
(j) VRS compensation
(k) Contributions to rural development programmes

25. Certain other deductions as mentioned under S.36 are as follows-

(a) Insurance premium for risk or damage and destruction of stocks or stores.
(b) Insurance premium paid by federal milk cooperative societies on the life of
cattle of any member of such society.
(c) Insurance premium paid for the health of employees under a recognised
insurance scheme.
(d) Bonus or commission paid to employees for services rendered when profits or
dividends are not paid to them for the same.
(e) Interest on borrowed capital for the purpose of business or profession.
(f) Contribution to recognised provident fund or superannuation fund.
(g) Contribution to gratuity fund.
(h) Employee’s contribution to any welfare fund accounts if such sum is remitted on
or before the due date.
(i) The amount of bad debt written off.

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(j) Any amount of banking transaction tax paid.

(k) Securities transaction tax paid in respect of taxable securities transaction.

26. The legislature realized that not all deductions could be specifically covered under
the head of deductions and thus added S.37 which provides for general deductions.
27. S. 37 provides that in order that a particular expenditure be deductible under income
from business or profession, it must satisfy the following conditions-
(a) It must not be covered under Ss. 30 to 36.
(b) It must not be a capital expenditure.
(c) It must not be a personal expenditure.
(d) It must be expended wholly and exclusively for the purpose of business or
profession.

28. Deductions with respect to political parties such as printing of pamphlets,

brochures, etc. are not allowed under S. 37(2) (b).
29. Ss. 40, 40A and 43B provide for certain disallowances.
30. Some of them deal with expenses which are totally disallowed while others are
disallowed on the non-fulfillment of certain conditions.
31. S. 40(a) deals with disallowance in the case of all assessees with respect to the
following-
(a) Any interest, royalty, fees for technical services, etc. paid to an NRI either
outside or in India for which the tax is deductible at source when such tax has not
been deducted or when it has been deducted but has not been paid within the time
period prescribed by law.
(b) Any interest, royalty fees, commission or brokerage, fees for technical services,
amount payable to contractor/ sub-contractor, rent payable, etc. all to residents
where the tax is deductible at source and the same has not been deducted or has
been deducted but has not been paid within the time period prescribed by law.
(c) Income tax, wealth tax, fringe benefit tax are not deductible.
(d) Any tax paid by the employer for any non-monetary perquisites provided to an
employee and exempt under S. 10 (10CC)
32. S. 40(b) deals with disallowance with respect to partnership firms.
33. It provides that any interest received by a partner of such firm, in his representative
capacity and not in his individual capacity and not received on behalf of any other
member of such partnership firm, is not deductible unless the following conditions
are fulfilled-
(a) It is in accordance with the partnership deed.
(b) It is with respect to a time period after the partnership deed was filed.
(c) It doesn’t exceed 12% p.a. simple interest.

34. This section also provides that any remuneration paid to a partner in the form of
salary, bonus, commission, etc. is not deductible unless the following conditions are
satisfied-
(a) It is in accordance with the partnership deed.
(b) It is with respect to a time period after the filing of the partnership deed.
(c) It doesn’t exceed the prescribed limits.

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(d) It is paid to a working partner, i.e. a partner who is actively engaged in

conducting the affairs of the business or profession of the firm of which he is a
partner.

35. S. 40A deals with certain expenses and payments which are not deductible and have
overriding effect over the other provisions of the act with respect to income from
business or profession. They may be stated as follows-
(a) Any expenditure incurred by the assessee towards goods supplied, services
rendered or facilities provided by a specified employee will not be deductible if the
same is unreasonable or excessive (depending on the fair market value for such
goods or services).
(b) Any payment made by the assessee not by cheque or bank draft but by cash
beyond Rs.20, 000 shall not be deductible. However, with effect from 01/10/2009,
any payment made with respect to plying, hiring or leasing goods carriages, which
exceeds Rs.35, 000 shall not be deductible.
(c) Any provision made by an employer to pay gratuity to an employee on
retirement or termination of employment shall not be deductible. But, where such
provision is made for payment into an approved gratuity fund or where the payment
of gratuity has become payable during the previous year, the same shall be
deductible.
(d) Any contribution by the assessee to a non-recognised or a non-statutory welfare
fund shall not be deductible.

36. S. 43B deals with certain expenses which will not be allowed as deductions unless
actually paid with the specified period. These are as follows-
(a) Any duty, cess or fee under any law in force.
(b) Any contribution to a recognised provident fund or superannuation fund or
gratuity fund or welfare fund.
(c) Any bonus or commission payable to employees.
(d) Any interest paid with respect to loans from public financial institutions or state
financial corporations.
(e) Any interest paid with respect to loans and advances from scheduled banks.
(f) Any sum payable by the assessee as an employer in lieu of leave at the credit of
the employee.

37. The above shall be allowed as deductions only when payment is made within the
due date of filing of return. Else, it shall be deducted only in the year in which
payment is actually made.
38. With respect to interest on term loans from specified financial institutions or
scheduled banks, the same when not paid is treated as a loan. Disallowance of
deduction under S.43B shall be made applicable with respect to the same.
39. In order to avoid disallowance, the assessee must show that payment has actually
been made.
40. Under sales tax legislation, where sales tax has been deferred under any scheme but
is treated as being paid, the same shall be treated as being paid under S.43B and
shall be allowed as a deduction.

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41. S.43B overrides the provisions of Ss. 35 and 36. It must be noted that when these
sections are read with S.43B, the expenses covered under these sections shall be
allowed only when they have been paid.
42. The following even though are not in the nature of income shall be deemed to be
income for the purposes of this head-
(a) Cash Credit (S.68)- Any sum credited to the books of account but unexplained
by the assessee and the IT Officer is not satisfied with respect to the same shall be
treated as an income for that previous year in which it is credited.
(b) Unexplained investment (S.69)- Any investment made which is not recorded in
the books of account and the assessee cannot give an explanation as to the nature
and source of such investment, the value of the same shall be treated as an income.
(c) Unexplained money (S. 69(a))- Any jewellery or money or other valuable thing
in the possession of the assessee, for which he has no explanation as to its source or
when such explanation has not been accepted by the IT officer, where the same has
not been recorded in the books of account, the value of the same shall be treated as
income.
(d) Unexplained expenditure (S. 69(c))- Where any expenditure is incurred by the
assessee for which he has no explanation as to the source from which he has
received the amount to be spent shall be treated as an income.
(e) Deemed profit (S.41) - Deemed profit shall include the following-
(i) Any liability of the assessee which later gives rise to a benefit.
(ii) Any amount realized on transfer of an asset used for scientific research
subject to deductions under S.35.
(iii) Any amount recovered by the assessee against bad debt which was earlier
allowed as deduction shall be taxed as income in the year in which it was received.

43. S. 44A provides that Books of Accounts must be maintained by all assessees
carrying on business or profession under Rule 6F which deals with the profession of
law, medicine, accountancy, architecture, etc in the following cases-
(a) Where the income received in any of the preceding 3 years exceeds Rs.1, 20,000
or incase of a newly set up business, it is likely to exceed Rs.1, 20,000 in the current
previous year.
(b) Where the turnover or sales or gross receipts has exceeded Rs.10, 00,000 in any
of the 3 preceding years or incase of a newly set up business, it is like to exceed
Rs.10, 00,000 in the current previous year.
(c) Where the profits and gains from the business are deemed to be profits and gains
of the assessee under Ss. 44AD, 44AE, 44AF, 44BB or 44BBB.

44. S. 44AB provides that incase of any person carrying on-

(a) Any business whose total sales or turnover or gross profits is Rs.40, 00,000, OR
(b) Any profession where the gross receipts exceed Rs.10, 00,000, OR
(c) Any business under Ss.44AD, 44AE, 44AF, 44BB or 44BBB.

The books of account for the above persons shall be audited every year by a
chartered accountant before the specified date (30th September of the relevant

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previous year unless extended by the CBDT by way of a notification), else such
income shall be treated as being defective.

45. As per Rule (g), the audit report must be furnished in Form 3CA and Form 3CD for
income from business and in Form 3CB and Form 3CD for income from profession.
46. S.271 (b) provides a penalty upto Rs.1, 00,000 for non-submission of audit reports
and for not getting accounts audited.
47. S. 44AD deals with civil construction business (which includes construction or
repair of any building, bridge, dam, etc. and the execution of any works contract).
48. It states that where any person is engaged in such business or provides labour for
such business whose gross receipts from the same do not exceed Rs.40, 00,000, a
sum equal to 8% of such gross receipts paid or payable to the assessee or such
higher amount as declared by the assessee shall be deemed to be income from the
same.
49. The assessee however is not required to maintain books of accounts and only the
receipts of civil construction business must be considered for calculation of
turnover.
50. S. 44AE states that where a person is engaged in the business of plying, hiring or
leasing goods carriages and owns not more than 10 goods carriages at any time
during the year, his income from the same shall be deemed to be Rs.3500 for one
heavy vehicle and Rs.3150 for all other vehicles every month or part of every
month for which the goods carriages are in his possession during the previous year
or such higher sum as declared by the assessee.
51. S.44AF states that where the assessee is in retail business with respect to goods or
merchandise and the total turnover doesn’t exceed Rs.40, 00,000, the income from
such business shall be deemed to be 5% of the turnover or such other higher sum
declared by the assessee. However, this provision doesn’t apply when the assessee
is partly engaged in retail business and partly in wholesale business.
52. Where an assessee who is a non-resident is engaged in shipping business, his gross
profits shall be deemed to be 7.5% of the sum paid or payable to him on account of
carriage of passengers, goods, livestock or mail where the same is shipped to any
part of India or even outside India. (S.44B)
53. Under S.44BB, where a non-resident is engaged in the business of providing plant
and machinery for the extraction or production of mineral oils, the gross profits of
such person shall be deemed to be 10% of the sum payable or paid inside or outside
India.
54. S. 44BBA states that where a non-resident is engaged in the business of operating
an aircraft, the gross profits shall be deemed as being 5% of the sum payable or paid
with respect to such business inside or outside India.
55. S.44BBB states that where a foreign company is engaged in civil construction
business or in the erection of any plant or machinery or testing or commissioning
thereof with regards to any turnkey power project approved by the Central
Government, the gross profits shall be deemed to be 10% of the sum paid or
payable inside or outside India with respect to such business.

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INCOME FROM CAPITAL GAINS

1. It is the only head under which capital receipt is charged and thus it deals with such
income which is received by way of selling assets.
2. To get charged under the head of capital gains, the following 2 conditions must be
satisfied-
(a) There must be a transfer. (as per the definition of transfer)
(b) A capital asset must be transferred.

3. There may either be long term capital gain or short term capital gain depending on
whether the asset is a short term capital asset or a long term capital asset.
4. Format for computation of income from short term capital gain-

Particulars Amount in Rs. Amount in Rs.

Full value of
Consideration XX

Less-
Expenses on transfer XX
Net sale consideration XX

Less-
Cost of acquisition XX

Less-
Cost of improvement XX
Gross Capital Gain XX

Less-
Exemptions XX
Short term capital gain XX

5. Format for computation of long term capital gain is as follows-

Particulars Amount in Rs. Amount in Rs.

Full value of
Consideration XX

Less-
Expenses on transfer XX
Net sale consideration XX

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Less-
Index cost of acquisition XX

Less-
Index Cost of improvement XX
Gross Capital Gain XX

Less-
Exemptions XX
Long term capital gain XX

6. Short term capital gain is chargeable on a slab basis while long term capital gain is
chargeable at a flat rate of 20%.
7. There may also be short term or long term capital loss.
8. The definition of a capital asset has been provided under S.2 (14) however the same
is not exhaustive.
9. According to the definition, capital asset includes all assets in the hands of the
assessee, whether or not the same is from any business or profession but doesn’t
include the following-
(a) Stock-in-trade
(b) Any movable asset held by the assessee for personal use or use by any member
of his family except for jewellery, drawings, pictures, sculptures, archeological
collections, other works of art, etc.
(c) Agricultural land not being land situate within the local limits of a municipal
corporation or cantonment board, having a population of not less than 10,000 as per
the last census OR within 8kms from the local limits of such municipal corporation
or cantonment.

10. Earlier gold bonds and special bearer bonds were part of the definition of capital
asset but now the same has been excluded.
11. Jewellery here includes any ornaments made of gold, silver, platinum or any
precious metal or alloy containing one or more of such precious metals, whether or
not the same have been sewn or worked into any wearing apparel. It also includes
precious and semi-precious stones whether or not set in any furniture, utensil or
other article or sewn or worked into any wearing apparel.
12. Agricultural land will be regarded as being a capital asset only when it is situate in a
specified area.
13. A specified area is an urban area located within the local limits of a municipal
corporation/cantonment board or within 8kms from such local limits, having a
population of not less than 10 lakhs as per the last census.
14. S. 2 (29a) defines a long term capital asset as a capital asset which is not a long
term capital asset and S.2 (29b) defines long term capital gain as capital gain arising
from transfer of such long term capital asset.

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15. S.2 (42a) defines a short term capital asset as a capital asset which is held by the
assessee for a period not exceeding 36 months (3 years), except in case of shares,
securities listed on a recognised stock exchange in India and the units of the UTI or
any mutual fund or a zero coupon bond for which shall period shall be 12 months (1
year).
16. S.2 (42b) defines short term capital gain as any gain arising from the transfer of
such short term capital asset.
17. S.2 (47) defines transfer as including the following-
(a) Sale, exchange, relinquishment of the asset
(b) Extinguishment of any rights therein
(c) Compulsory acquisition under any law in force
(d) Transaction involving allowing possession of immovable property in part
performance of contract
(e) Case where the asset is converted to stock in trade by the assessee, e.g. furniture
for personal use put for sale.
(f) Maturity or redemption of a zero coupon bond
(g) Any transaction which has the effect of transferring or enabling the enjoyment
of any immovable property

18. In a cooperative society, a flat owner can merely transfer his share and not the
property as the same belongs to the society. This is also referred to as transfer under
the IT Act.
19. S. 45 deals with the chargeability of capital gains as follows-
(a) Damage to capital asset and compensation paid thereafter- This may include
compensation for damage to any asset due to earthquakes, cyclones, riots, accidents,
etc. The income from capital gains (where any benefit is derived due to such loss
say by way of insurance) shall be chargeable in the year in which such
compensation is received. The full value of compensation or the fair market value
of the asset so destroyed in the relevant previous year shall be taken as income from
capital gains.
(b) Conversion of capital asset to stock in trade- The fair market value of the asset
so converted in the year in which such conversion/transfer takes place shall be
treated as being the income from capital gain. The year in which the stock in trade
is sold or transferred shall be taken as the year in which such capital gain is
chargeable.
(c) Transfer of beneficial interest in securities- It must be noted that even where the
depository is the registered owner of the securities, it is infact the beneficial owner
to whose account such amount is chargeable as capital gain. The income from
capital gain shall be taxable in the relevant previous year in which such transfer
took place.
(d) Transfer of capital asset to corporation, body of individuals or other association
of persons for becoming a member- It will be chargeable as capital gain from the
income of such individual in the relevant previous year when the transfer takes
place.

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(e) Distribution of capital assets by corporation or firm on dissolution- It shall be

taxable as capital gain from the income of the firm or corporation in the relevant
previous year when such distribution/transfer took place.
(f) Compensation or Enhanced compensation received due to any compulsory
acquisition under law- Incase of compensation or enhanced compensation, they
shall be chargeable as capital gain in the year in which they are first received. With
respect to any deductions as made by the court thereafter, the assessed capital gain
of the year in which such reduction takes place shall be recomputed.
(g) Repurchase of units referred to in S.80CCB (2)- The difference between the
amount received on repurchase and the capital value of the units to be taken to be
the capital gain, chargeable in the year in which repurchase takes place or the year
in which the plan (as referred to in the above section) gets terminated.

20. S.49 (1) provides that where asset is transferred by way of will, gift, partition of
HUF, inheritance, amalgamation of companies or amalgamation of banking
companies, business reorganization of cooperative banks, liquidation of a company,
transfer to revocable/irrevocable trust, conversion from self acquired property to
joint family, etc., the cost of acquisition of the previous owner shall be taken as the
cost of acquisition.
21. In all other cases, the cost of acquisition of the assessee shall be taken into
consideration.
22. S. 49(2A) provides that where bonds, debentures, debenture stock or deposit
certificates of a company are converted to get shares and debentures, the cost of
acquisition of such bonds, debentures, debenture stock or deposit certificates must
be taken into consideration.
23. S.55 provides that where the asset was acquired prior to 01/04/1981, the assessee
has the option of taking the fair market value of such asset on 01/04/1981 as the
cost of acquisition.
24. S.51 provides that where the asset concerned was part of a negotiation and advance
for the same had been paid, but the transaction couldn’t be completed, such amount
paid must be deducted from the cost of acquisition or fair market value or written
down value whichever is more suitable.
25. Under S.55, there is no cost of acquisition with respect to self generated business
goodwill. However, with respect to transfer of purchased good will, the actual cost
incurred will be regarded as the cost of acquisition. But, in both cases, there is no
cost of improvement.
26. In the following cases there is no cost of acquisition-
(a) Self generated business goodwill
(b) Tenancy rights
(c) Right to subscribe to rights issue
(d) Right to carry on any business
(e) Right to produce, manufacture or process any article or thing
(f) Bonus shares
(g) Loom hours
(h) Stage carriage permit
(i) Trademark or brand name associated with a business

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(j) Trading or clearing rights of a recognised stock exchange under a scheme of

corporatisation or demutualization.

27. S.55 also provides that cost of any capital expenditure incurred towards any
improvement made and not covered under income from any of the other heads shall
be taken as the cost of improvement.
28. Where the capital asset was acquired prior to 01/04/81 either by the assessee or by
the previous owner whose cost of acquisition is taken into consideration while
computing capital gain, the cost of improvement incurred prior to 01/04/81 shall not
be taken into consideration while calculation of capital gain.
29. Cost of improvement with respect of goodwill of business, right to manufacture,
produce or process any article or thing or the right to carry on any business shall be
taken as being nil.
30. With respect to long term gain, the Cost Inflation Index (CII) has been given as a
multiplier so as to account for inflation.
31. Index cost of acquisition= Cost of Acquisition * CII of year of transfer
CII of year in which asset
was first held

32. Index cost of Improvement= Cost of Improvement * CII of year of transfer

CII of year in which
improvement was first made

33. CII for 1981-82- 100 and CII for 2009-10- 632
34. Certain exemptions available with respect to capital gain have been covered in the
points that follow.
35. S. 54 states that-
(a) Where the assessee is an individual or HUF
(b) Residential house is transferred
(c) There must be a long term capital gain
(d) The income from such asset must be chargeable under the head of income from
house property
(e) Within a year prior to such transfer or 2 years after the date of transfer, a new
residential house is purchased or within 3 years after the date of transfer, a new
residential house is constructed.
(j) Where the cost of the new house is greater than the value of capital gain, the
whole of the capital gain is exempted.
(k) Else, the capital gain to the extent cost of the new house is exempted.

36. S.54B states that-

(a) Where the assessee is an individual
(b) Agricultural land is to be transferred
(c) Such land must have been used for agricultural purposes for 2 years preceding
the year of transfer.
(d) Within 2 years from the date of transfer another agricultural land must be
purchased.

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(e) Where cost of the agricultural land is more than capital gain, the entire capital
gain is exempted.
(f) Else, the capital gain to the extent of the agricultural land is exempted.

37. S.54D states-

(a) This relates to any assessee.
(b) It deals with compulsory acquisition.
(c) The asset includes land and building forming part of an industrial undertaking.
(d) It must have been used for business purpose for 2 years immediately preceding
the acquisition.
(e) Within 3 years of the acquisition, another land or building is purchased or
constructed for the existing industrial undertaking or another one newly set up.
(f) If the cost of the new asset is less than the capital gain, the entire capital gain is
exempted.
(g) Else, the capital gain to the extent of the cost of the new asset is exempted.

38. S. 54EC states-

(a) The assessee may be anyone.
(b) It must be with respect to long term capital assets.
(c) Within 6 months from the date of transfer, the amount of capital gain should be
invested in specified bonds of the Rural Electrification Corporation (REC) Ltd. or
the National Highway Authority of India (NHAI).
(d)Assessee shall not transfer or convert or avail any loan or advance on the
security of such bond for a period of 3 years after the date of acquisition.
(e) The maximum amount of investment must be Rs.50, 00,000 every financial year.
(f) The amount exempted shall be investment in such bond or the capital gain,
whichever is lower.

39. S. 54F states-

(a) It is applicable where an individual or HUF is an assessee.
(b) The asset transferred is a long term capital asset other than a residential house.
(c) Within a period of 1 year before or 2 years after the transfer, a new residential
house is purchased or within 3 years from the date of transfer, a new residential
house is constructed.
(d) The assessee doesn’t own more than one residential house at the date of transfer.
(e) Within one year from the date of transfer, no other residential house is purchased
or within 3 years from the date of transfer, no other residential house is constructed
other than the new asset.
(f) If the cost of the new residential house is not less than the net consideration, the
whole of the capital gain is exempted.
(g) Else, the capital gain is exempted to the proportion as the cost of the new
residential house bears with the net consideration.

40. S. 54G states-

(a) Exemption is granted with respect to any assessee.

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(b) It is with respect to machinery, plant, building or land used for business of an
industrial undertaking situated in an urban area.
(c) Transfer of such asset is due to shifting to an area other than an urban area.
(d) Within a period of 1 year before such transfer or 3 years after such transfer,
purchased machinery or plant, or acquired building or land or purchased land and
completed shifting to the new area.
(e) If the expenses on shifting and cost of new assets are greater than the capital
gain, the entire amount of the capital gain is exempted.
(f) Else, it is exempted to the extent of the cost of the new asset.

41. S. 54GA states-

(a) Exemption shall be made available when capital gain arises due to transfer of
asset (plant, machinery, land, building or any right in such building) effected due to
shifting of an industrial undertaking to an SEZ.
(b) The capital gain derived must be utilized within 1 year prior to or 3 years after
such transfer.
(c) It must be utilized for the purpose mentioned in S. 54GA.
(d) It may be short term or long term capital gain.

42. S. 54H provides that where compensation with respect to compulsory acquisition of
an asset is not received on the date of transfer, the period available with respect to
acquiring a new asset for the purpose of exemption shall be computed taking into
consideration the date on which such compensation is actually received.
43. There can only be short term capital gain or loss with respect to a depreciable asset.
44. Format for computation of short term capital gain with respect to depreciable
assets-

Particulars Amount in Rs. Amount in Rs.

Full value of XX
Consideration

Less-
Written down value XX
Of asset as on 1st April
Of the previous year
(WDV is the depreciated
Value of the asset at the
beginning of the year)

Add-
Cost of additions made XX
during the year (relates to
similar assets bought during
the year)

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Add-
Expenses on transfer XX

Short term Capital gain/loss XX/XX

45. S.111A deals with tax with respect to short term capital gain.
46. When the same arises out of equity shares or equity oriented fund, it is taxed at a
rate of 15%. Incase of any other short term capital gain, tax will be at slab rate.
47. Where the total income of the assessee includes short term capital gain income as
well as other income, tax is payable on such income from short term capital gain at
15% (if the same arises from equity shares or equity oriented fund) and the rest is
payable at slab rate.
48. Incase of long term capital gain, S.112 becomes applicable.
49. As a general rule, a long term capital asset is charged at 20% flat rate.
50. However, with respect to certain long term capital assets, an option is given to the
assessee to charge the same at 10%. However, in such case, indexation is not
allowed and only the cost of acquisition and cost of improvement shall be taken into
consideration.
51. Such assets with respect to which an option is available include listed securities,
units of a UTI fund or mutual fund and zero coupon bonds.
52. Indexation is not allowed in the following cases-
(a) Transfer of bonds and debentures
(b) Transfer of shares or debentures by a non-resident in foreign companies
(c) Transfer of an undertaking or division in a slump sale
(d) Transfer of units of UTI
(e) Transfer of securities of FIIs.
(f) Transfer of foreign exchange assets by non residents.

53. Slump sale is a lump sum sale where there is transfer of all business assets under an
agreement without bifurcating the valuation of any of such assets.
54. If the agreement doesn’t indicate the valuation of any such assets separately, there is
deemed to be no capital gain from such sale. Hence, it gets exempted.
55. S. 55(a) gives power to IT officers to assess as to whether proper valuation has been
done, by finding out the fair market value of an asset.

GENERAL DEDUCTIONS UNDER THE ACT

1. Deductions are not allowed with respect to the following-

(a) Long term and short term capital gain.
(b) Winnings from lotteries
(c) Incomes under Ss.115 (a), 115(b) and 115(c).

2. These deductions are of 2 categories, namely-

(a) Those on account of certain investments or payments as under Ss.80 C to
80GGC.

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(b) Those on account of certain incomes included in the total income as under Ss.80
(J)(A) to 80U.

3. Deductions under S.80C- It deals with deductions with respect to life insurance
premium, contributions to provident fund, deferred annuity, etc.
4. Applicable to individuals and HUF s as assessees.
5. Certain instances where deduction is available under this head-
(a) Amount actually paid towards life insurance premium
(b) Contribution to unit linked insurance plan, 1971.
(c) Contribution to a provident fund under the Provident Fund, 1925.
(d) Contribution to a recognised provident fund
(e) Investment in National Saving Certificates
(f) Subscription to bonds issued by NABARD
(g) Repayment of a housing loan borrowed for the purpose of construction or
purchase or residential house from a government approved institution, specified
employer, board or a corporation or any other body established under the central or
state acts and includes any expenditure towards stamp duty, registration charges,
etc.
(h) Payment made for any tuition fees to any university, college or school or
educational institution in India but doesn’t include any donation or development
fees. (applicable to 2 children)

6. Deduction is allowed upto Rs.1, 00,000.

7. Deductions due to contribution towards LIC premium, public provident fund, unit
linked insurance plan of UTI or LIC mutual fund and any deferred annuity scheme
by individual shall be available for individual, spouse and children. With respect to
such contribution by HUF, the same shall be applicable to any member of the HUF.
8. S.80D is applicable with respect to medical insurance premium which may be with
respect to medical insurance as provided by the GIC or any other insurer approved
by the IRDA.
9. Deductions for individuals is allowed for the individual, his or her spouse and
dependent children.
10. The amount to be deducted is Rs.15, 000 and with respect to senior citizens it is
Rs.20, 000
11. Senior citizen here means someone who is above 65 years of age.
12. S.80DD deals with deductions with respect to medical treatment of dependant with
disability.
13. It is with respect to the individual and HUF as assessees.
14. Deduction is provided with respect to any medical treatment or rehabilitation or
training of dependant with disability as well as any amount deposited by the
assessee under any scheme of the LIC or any other insurer for such dependant with
disability.
15. A person with disability is one covered under the Persons with Disabilities Act,
1995 or the National Trust for Persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disabilities Act, 1999.
16. Deduction available is of a flat amount of Rs.50, 000.

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17. Person with severe disabilities means one who has 80% or more of one or more
disabilities under the 1995 Act. Deduction is available for Rs.1, 00,000 in such
cases.
18. Here, dependant of an individual means the spouse, children, parents, brother and
sisters. While incase of an HUF means any member of such HUF.
19. S.80DDB deals with medical treatment for certain specific ailments such as
neurological diseases, malignant cancers, hematological diseases, etc.
20. It is applicable with respect to individuals (includes dependants) and HUF.
21. Deduction shall be available upto the amount actually paid or Rs.40, 000 whichever
is less.
22. For senior citizens, deduction shall be available upto the amount actually paid or
Rs.60, 000 whichever is less.
23. Deduction shall be allowed only if medical report is furnished alongwith reports of
the relevant specialists.
24. S.80E deals with deductions with respect to loans for higher education.
25. It is applicable only to individuals and their relatives which includes their spouse
and their dependent children.
26. It is applicable when loan is provided by any financial institution or any approved
charitable institution.
27. The deduction is allowed for the initial year, which is the year of commencement of
payment of interest. It continues till 7 years thereafter or till whenever the interest is
fully paid, whichever is earlier.
28. S.80G deals with donations to certain funds, charitable institutions, etc.
29. These have been categorized into the following 3- where there is 100% deduction
without any limit, where there is 50% deduction without any limit and where there
is 100%/50% deduction of the restricted amount.
30. Examples of 100% deduction without any limit- Prime Minister’s National Relief
Fund, National Foundation for Communal Harmony, National Sports Fund to be set
up by the Central Government, National Cultural Fund to be set up the Central
Government.
31. Examples of 50% deduction without any limit- Jawaharlal Nehru Memorial Fund,
Indira Gandhi Memorial Trust, National Children’s Fund, Rajiv Gandhi Foundation.
32. Examples of donations eligible for 100% of restricted amount- contribution of any
company, etc. towards the Indian Olympic Association or development of sports
infrastructure, etc., government or local authority or approved association for the
purpose of family planning.
33. Examples of donations eligible for 50% of restricted amount- Any approved public
trust, government or local authority or approved association for any purpose other
than the purpose of family planning, etc.
34. Steps for calculating deduction under this head-
(a) Gross Total income reduced by deductions under Chapter VIA except S.80G,
long term and short term capital gains, income of non-residents chargeable to tax
under Ss.115A, 115AB, 115AC,115AD and 115BB. This gives you adjusted
income.
(b) Compute 10% of adjusted income.

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(c) Compute actual donation qualifying for restricted deduction, 50%/100% as the
case may be.
(d) Lower of step (b) or (c) is the maximum permissible deduction.
(e) The maximum permissible deduction is given first for deductions qualifying for
100% restricted deductions and thereafter the remaining for 50% restricted
deductions.

35. S.80GG deals with deductions with respect to rent paid.

36. Rent paid is deductible to the least of the following-
(a) Excess of rent paid over 10% of total income
(b) 25% of total income
(c) Rs.2000 p.m.

37. The following conditions must be satisfied-

(a) The assessee must not be in receipt of any HRA.
(b) The assessee, his spouse, minor children or an HUF of which he is a member
must not own any residential house.
(c) No claim for self-occupied property must be made with respect to any
accommodation.
(d) Assessee must file declaration in Form 10BA wherein he confirms the details of
rent paid and fulfillment of other conditions.

38. S.80GGA deals with donations for scientific research, rural development, etc.
39. All such assessees must not have any income under the head of income from
business or profession.
40. They must have made donations to any approved Scientific Research Associations
or Institutions and such deduction shall be granted even if the government revokes
its approval to such institutions later.
41. Deduction when given under this head is not allowed under any other head.
42. Certain other important deductions include-
(a) S.80GGB- contributions by companies to political parties
(b) S.80GGC- contribution by any person to political parties
(c) S.80IA- deductions for industrial undertakings or enterprises engaged in
infrastructural development, etc.
(d) S.80IC- undertakings in special category states especially those in the North
East, HP, etc.
(e) S.80IE- undertakings in north eastern states
(f) S.80P- Income of cooperative societies engaged in special businesses such as
providing banking or credit facilities, cottage industry, marketing or agricultural
produce of its members, labour cooperative societies engaged in fishing, etc.
(g) S.80RRB- deduction of royalties on patents.
(h) S.80U- deduction incase of a person with disability. (as seen earlier)

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COMPUTATION OF TOTAL INCOME-

1. General format-

Particulars Amount is Rs. Amount is Rs.

Income from-
(a) Salary XX
(b) Business and Profession XX
(c) House Property XX
(d) Capital Gains XX
(e) Other Sources XX

Gross Total Income XX

Less-
Deductions under Ss.80C to 80U XX
(except S.80G)*

Other income charged on flat rates-

(a) Capital gains XX
(b) Profits from winnings of lotteries XX

Total taxable Income XX

Computation on slab with respect to the following-

(a) Resident individuals, who are the age of 65 years of age or more (senior citizens)-

Taxable Income Rate of Tax

Upto Rs.2, 40,000 Nil
Rs.2, 40,000 to Rs.3, 00,000 10%
Rs.3, 00,000 to Rs.5, 00,000 20%
Above Rs.5, 00,000 30%

(b) Resident individuals being a woman below 65 years of age-

Taxable Income Rate of Tax

Upto Rs.1, 90,000 Nil
Rs.1, 90,000 to Rs.3, 00,000 10%
Rs.3, 00,000 to Rs.5, 00,000 20%
Above Rs.5, 00,000 30%

(c) Other individuals-

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Taxable Income Rate of Tax

Upto Rs.1, 60,000 Nil
Rs.1, 60,000 to Rs.3, 00,000 10%
Rs.3, 00,000 to Rs.5, 00,000 20%
Above Rs.5, 00,000 30%

Add slab rate with tax on capital gains and winnings from lotteries.
Then add education and higher education cess. (3% of total tax) to get Income Tax
.
2. * Under S.80G, there are 3 categories for deductions.
3. Category I consists of such donations with respect to which 100% deduction is
allowed without any limit.
4. Category II consists of the following under which 50% deduction is allowed
without any limit-
(a) Jawaharlal Nehru Memorial Fund
(b) PM’s Drought Relief Fund
(c) National Children’s fund
(d) Indira Gandhi Memorial Trust
(e) Rajiv Gandhi Foundation

5. Under category 3, donations are eligible for 100% or 50% deduction upto a
restricted amount.
6. Such donations as are eligible for 100% deduction upto a restricted amount are-
(a) Any contribution made by a company towards the Indian Olympic Association,
infrastructural development with respect to sports, etc.
(b) Government or local authority or approved institution/association for the
purpose of promotion of family planning.

7. Donations eligible for 50% deduction upto a restricted amount are-

(a) Renovation of any notified temple, mosque, church or gurdwara or any other
notified place of national importance.
(b) Government or local authority or approved institution/association for any
purpose other than that of promotion of family planning.
(c) Any corporation established by the government for promotion of interests of
scheduled castes, scheduled tribes and other backward classes.
(d) Any authority set up for providing housing accommodation or town planning.
(e) Any approved Public Trust.

8. In such case, follow the rules given in earlier notes with under S.80G.

Income Tax Authorities-

1. Ss.116 and 119 of the Act provide for the Income Tax Authorities.
2. S.116 deals with the appointment of various authorities by the Central Government.

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3. The Central Board of Direct Taxes (CBDT) as seen earlier is the highest authority in
this regard.
4. There is also a Director General of Income Tax who is also known as the
Commissioner of Income Tax.
5. There is a separate Commissioner appointed by the CBDT for different
jurisdictions.
6. The Commissioner is empowered to implement the act within such jurisdiction as
available to him.
7. He not only takes part in the administration but is also a forum for the second
appeal against an order of the lower authority.
8. There are also Additional, Deputy and Joint Commissioners so as to distribute the
work of a particular area.
9. There are essentially 2 branches under the act- the appeal branch and the vigilance
branch.
10. The main task of vigilance branch is associated with search and seizure under the
Act.
11. There is also a tribunal for deciding disputes. Its decision is binding on all IT
authorities as well as such lower authorities subordinate to it.
12. However, its decisions may be appealed against in the HC.
13. There are also several IT officers appointed under each jurisdictional area in order
to assess returns filed by persons.
14. Assessment order in writing is sufficient.
15. There are essentially 3 kinds of assessment- self assessment, regular assessment and
ex parte assessment.

Unit III- Maharashtra Value Added Tax Act, 2002

3.1 Scheme of VAT

1. The system of VAT or Value Added Tax has been introduced primarily to introduce
a uniform system of indirect taxation with respect to sale of goods throughout the
territory of India.
2. Another reason why this system has been introduced is so that the cascading effect
of tax is prevent or simply put so that there is no tax on tax.
3. The concept of VAT was first introduced by Chidambaram in 2003-04.
4. Later, the Empowered Committee was constituted under the chairmanship of Mr.
Dasgupta which recommended that VAT be implemented by all states.
5. VAT introduced in Maharashtra for the first time in 2004-05. This Act replaced the
original Bombay Sales Tax Act.
6. The main aim of the system is to ensure uniform VAT rates throughout the country
and a uniform system of taxation with respect to the same by 2011.
7. VAT is essentially tax paid on any value addition made. It is payable to the
government.
8. For every transaction, VAT needs to be shown so that there can be recovery from
the government.

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9. Every purchase invoice must show the amount of VAT if the seller wants such
amount to be adjusted.
10. Certain advantages of VAT may be stated as follows-
(a) It ensures transparency as one is able to know the total tax incidence while
paying for the goods.
(b) Tax credit- The dealers pay tax on the selling price and get credit for the tax paid
by them.
(c) Lower rates- The rates are lower as there is no tax on tax.
(d) Uniform rate- Different rates are not charged for different goods. Goods have
been divided into 5 categories and tax is charged uniformly with respect to goods in
such category.
(e) No exemptions- Previously, exemptions were provided under several tax
legislations so as to exempt certain areas such as tribal areas, etc. from payment of
certain tax. As the VAT doesn’t provide for any exemptions, it leads to uniformity.
However, exemption is given with respect to goods sold to SEZ s under Form I.
(f) Simple classification- Goods have been categorized under 5 heads and are
uniformly taxed under such heads.

11. The disadvantages of VAT are as follows-

(a) The problem of more dealers computing VAT based on the value added with
respect to their level of activity has created several complications.
(b) There is a problem of record keeping as records with respect to every transaction
where some value is added needs to be shown.
(c) Uniform rates throughout the state or region has lead to greater inequalities as
the people of different regions do not have the same capacity to pay.
(d) Tax audit- Auditing is difficult and cumbersome especially when company
already needs to audit their accounts under Company law as well as the IT Act.
(e) Business audit- The Commissioner is allowed to order for business audit of
assessee’s business and hence it leads to harassment.
(f) It may be called as a draconian law as the complicated process leads to
harassment.
(g) Refund mechanism- The system of refunding the tax after payment is made
further complicates the system.

12. There are essentially three ways in which sale may be effected-
(a) Sales within the state (Part XIII of the Constitution deals with trade, commerce
and intercourse within India)
(b) Sales amongst states or inter-state sales-(Part XIII of the Constitution deals with
trade, commerce and intercourse within India)
(c) Export sales

13. In Matoshi Textile case, it was observed that where goods are transferred to
purchasers, the same shall amount to the transaction of sale. It was held that
printing of letter head is liable to be taxed under VAT.
14. Certain important definitions under the Act are as follows-

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(a) Business (S.2aa)- A business is regarded as any trade, commerce or manufacture

or any adventure or any concern whether or not the same is carried on with any
motive to make profit or gain and whether or not any gain or profit accrues from the
same. It also includes any transaction in connection with or incidental to or
ancillary to such trade, commerce or manufacture or adventure or concern.
Refer to meaning of trade, commerce, manufacture, etc. given in previous notes
(income from business or profession)

(b) Dealer (S.2b)- Dealer is any person who carries on (either regularly or
otherwise) the business of buying, selling, supplying or distributing goods, directly
or indirectly for cash, deferred payment, commission, remuneration or other
valuable consideration and includes- (i) a local authority, cooperative society or any
other society, company, a body corporate, HUF, club, firm or other association of
persons, (ii) a factor, broker, commission agent, del credere agent or any other
mercantile agent engaged in such business, whether or not the name of the principal
is disclosed and (iii) an auctioneer who carries on the business of selling the goods
of the principal whether or not the name of the principal is disclosed and whether or
not the offer of the intending purchaser is accepted by the auctioneer, the principal
or any nominee of the principal.

(c) Goods (S.2d)- Goods includes all materials, articles, commodities and other
kinds of movable property but doesn’t include newspapers, actionable claims,
shares, stocks or securities.

(d) Sale (S.2g)- It means transfer of property in goods from one person to another
for cash, deferred payment or any other valuable consideration and includes-
(i) Transfer otherwise than in pursuance of any contract
(ii) Transfer in pursuance of execution of a works contract (deemed sales)

Note: Works- Value of goods supplied and value of work done in which costs
cannot be bifurcated.

(iii) Delivery of goods under a hire-purchase agreement or any system of payment

by installments.
(iv)Transfer of a right to use goods for any purpose
(v) Supply of goods by an unincorporated association or a body of persons to its
members
(vi) Supply by way of any service of goods being food or any other article for
human consumption or any drink not being a mortgage or a hypothecation or a
charge or pledge on goods.

(e) Sale price (S. 2h)- It means the amount payable to the dealer as consideration for
sale of any goods after deducting any amount for discount as per the prevailing
customs with respect to the same and adding any sum charged for anything done by
the dealer with respect to the goods at the time of or before the delivery of goods

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other than the cost of freight or delivery or installation charges where such cost is
separately charged

Provided incase of a works contract, the sale price shall be determined and in such
manner after deducting the total consideration for the works contract as may be
prescribed.

(f) Place of business (S.2(18))- It means a warehouse, godown or any other place
where the dealer’s goods are stored or where the books of accounts of the business
are maintained.

3.2 Incidence of Tax and Levy of MVAT

1. S.3 deals with the incidence of tax and states that every dealer who immediately
before the appointed day holds a valid or effective certificate of registration or
license under any of the previous laws or who is liable to pay tax under any of the
previous laws or as the case may be in the year ending before the appointed date,
shall if his turnover of sales or purchases exceeds Rs.5, 00,000 or where he is an
importer, his turnover of sales or purchases exceeds Rs.1, 00,000 shall be liable to
pay tax under this Act unless his certificate of registration or license is duly
cancelled under the Act.
2. Turnover of sale as defined under S.2(33) means the aggregate value of sale price
received or receivable by the dealer by way of sale of goods made during a given
period of time after deducting- (i) the sale price which is refunded by the seller to
the purchaser for any goods returned by the purchaser to the seller and (ii) any
deposit if any of it is refunded by the seller to the purchaser in respect of goods sold
by the dealer.
3. Turnover of purchases as defined under S.2(32) means the aggregate of purchase
price paid or payable by the dealer for any goods purchased by him within a
prescribed period after deducting- (i) the purchase price which is refunded by the
seller to the dealer for any goods in respect of any goods purchased by him from the
seller and returned to him and (ii) any deposit if it is refunded to him by the seller
for goods purchased by the dealer from the seller.
4. S. 4 is the charging section under this Act and states that tax is to be levied on every
dealer or every other person liable under the Act in accordance with the taxes levied
or leviable under the act.
5. S.5 states as to what goods shall be exempted under the Act.
6. This mainly includes agricultural products and necessities.
7. Some such goods includes agricultural implements manually operated or animal
driven, aids and implements used by handicapped persons, books, journals and
periodicals, charcoal, vegetables and fruits, condoms and contraceptives, meat, fish,
prawn, etc.
8. These articles or goods have been provided under Schedule A.
9. S.6 deals with the rates of taxes under the Act.

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10. These rates have been provided under Schedules B, C, D and E.

11. Schedule B consists of goods which are chargeable at 1% and this includes gold,
silver and precious metals.
12. Schedule C consists of goods chargeable at 4-5%. (w.e.f. 01/04/2010)
13. Declared goods (such as cast iron, brown oil seeds, banarasi rai oil seeds, etc) are
taxed at 4%.
14. Under the Central Sales Tax Act, the State Government has no authority to tax such
declared goods at a rate higher than 4%.
15. 5 % is charged with respect to industrial and IT goods.
16. Schedule D mainly consists of petroleum and liquor products.
17. The liquor products are charged at 20% while the petroleum products are charged at
10-34%.
18. All other goods not included under Schedules A,B,C and D are chargeable at 12.5%
under Schedule E.
19. S.7 further provides that where goods sold are packed in any materials, tax shall be
charged on such material at the same rate as the tax on the goods irrespective of the
fact as to whether or not such packing material is charged separately or included in
the price of the goods sold.
20. If the goods sold are not taxable, the packing material is not taxable either.
21. S.16 deals with registration.
22. It is mandatory to apply for registration within 30 days.
23. Registration may either be voluntary or compulsory.
24. Under voluntary registration, a sum of Rs.25, 000 must be deposited against one’s
tax liability for the next year. It shall be refundable.
25. A registration fee of Rs.5000 shall also be charged.
26. Incase of compulsory registration, an application must be filed within 30 days under
Form 101. All necessary documents need to be filed as well.
27. Such documents include-
(a) Shops Act license
(b) Proof of place of business
(c) Proof of place of residence
(d) PAN card of all (directors, partners, etc.)
(e) Cancelled cheque of current account
(f) Passport size photograph with signature
(g) Proof of constitution (i.e. MoA or otherwise incase of a company)
(h) Statement of sales
(i) Photocopy of invoices more than Rs.10, 000

28. All these documents and applications can now be filed online at
www.mahavat.gov.in
29. The date from which registration becomes effective is the date on which it is
applied for. However, incase the time limit of 30 days is exceeded, then such later
date as may have been decided.
30. The dealer can only sell such goods as are mentioned in his certificate of
registration.
31. Such certificate must be displayed in a conspicuous part of his place of business.

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32. Cancellation shall be done in the following circumstances-

(a) Discontinuance of business
(b) Where business has been disposed off
(c) Where the business has been transferred
(d) Where the business has been relocated
(e) Where the turnover of sales/purchases of the registered dealer who has become
liable to pay tax has not exceeded the prescribed limits as required under S. 4(3).

33. The dealer may apply to the Commissioner for cancellation of such registration.
The Commissioner shall then conduct an enquiry into the same and after
cancellation, the certificate of registration shall be returned to the Commissioner.
34. Further, where the Commissioner is satisfied that the business has been
discontinued or disposed off or relocated, he shall cancel such registration after
giving the dealer the opportunity to be heard.
35. However, such cancellation will not affect the dealer’s liability under the act. He
will have to pay all taxes, interest if any, penalties, etc. under the act.

3.3 Filing of returns, assessments

1. S.20 deals with returns and self assessment.

2. It states that every registered dealer must submit a correct, complete and self-
consistent return in such form, by such date, for such period and to such authority as
prescribed.
3. If after examining the same, the Commissioner is of the opinion that the dealer has
not infact provided a complete and self-consistent return, he shall serve on the
dealer a defect notice in the prescribed form within 4 months from the date of filing
of the return.
4. After receipt of such notice, the dealer must file another complete and self-
consistent return within 1 month of the receipt of such notice.
5. Returns are of three types- original (monthly/quarterly/half-yearly), revised and
defective.
6. Rule 17(4) provides that subject to the provisions of such rule and S.18(a), every
registered dealer who is a retailer and has opted for composition of tax under
S.42(1) shall file a 6 monthly return within 25 days from the end of the period of 6
months with respect to which such return must be filed.
7. Further, any registered dealer to whom the above clause doesn’t apply and whose
tax liability during the previous year is Rs.12, 000 or less shall file a six monthly
return within 25 days from the end of such six month period.
8. Incase of a registered dealer to whom the above two clauses do not apply and whose
tax liability exceeds Rs.1, 00,000 for the previous year shall file a monthly return
within 21 days from the end of the month incase of the month of January, 31 days in
case of the month of February and 21 days in every other case.
9. In every other case, the registered dealer shall file a quarterly return within 25 days
from the end of such period.

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10. The following forms are applicable with respect to filing returns under the VAT
rules-
(a) Form 231- All deals
(b) Form 232- Composite
(c) Form 233- lease contractors
(d) Form 234- package schemes
(e) Form 235- Oil

11. It is now mandatory to file returns online.

12. Uploading of the same is allowed by making a notification and a grace period of 10
days is allowed.
13. If any ground is incorrect, a revised return may be filed within 9 months.
14. S.42 deals with composite dealers who are engaged in the business of selling a retail
where 9/10ths of their turnover of sales consists of sales made to persons who are
not dealers.
15. The tax to be calculated in such case is 5% with respect to goods under schedule A
and C and 8% for all other goods.
16. This provision is not applicable to manufacturers or importers whose turnover is
more than Rs.50, 00,000.
17. S.23 deals with assessment of a registered dealer.
18. It states that where a registered dealer fails to file returns within the prescribed
period, the Commissioner shall assess tax without giving assessment notice and
without giving an opportunity of being heard and pass the necessary assessment
order.
19. However, where after the assessment order is passed, the registered dealer submits
the return for the prescribed period and gives evidence of payment of tax due with
respect to such return or where he submits evidence of filing of return before such
assessment order was passed alongwith evidence of payment of tax due with respect
to such return, the Commission shall cancel the assessment order in writing and
shall assess the return filed by the dealer in accordance with the provisions of the
Act.
20. Assessment is essentially of 3 types- self assessment, regular assessment and ex
parte assessment or the best judgment principle.
21. Ex parte assessment takes place without the participation of the dealer where such
dealer doesn’t attend regular assessment, fails to prove documents for regular
assessment and such assessment would become time barred.
22. S. 23 also deals with setting aside of an ex parte order.
23. Generally, the principles of justice and equity must be applied in such cases and the
previous history of the dealer must be taken into consideration.

3.4 Appeal, Review, Rectification, Reference

1. S.26 deals with appeal and provides that every original order not being an order
under S.85 shall be appealable if the order is made-
(a) By a sales tax officer or an Assistant Commissioner of sales tax or any other
subordinate officer to the Deputy Commissioner of sales tax.

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(b) By the Deputy Commissioner of sales tax or the Senior Deputy Commissioner
of sales tax to the Joint Commissioner.
(c) By the joint commissioner, additional commissioner or commissioner to the
tribunal.

2. S. 26(2) provides that incase of an order passed by a joint commissioner or a deputy

commissioner, the second appeal shall lie with the tribunal.
3. S. 26(3) provides that every order passed in appeal by the tribunal shall be final
subject to the provisions of Ss.24 and 27.
4. Also, every order passed by any other appellate authority shall be deemed to be
final subject to the provisions of Ss.24, 25 and 27.
5. S.85 provides that every order or proceedings under the act except otherwise under
S.27 shall not be called into question in any court of law subject to the provisions of
S.26.
6. S.24 deals with rectification of mistakes.
7. S.25 deals with review.
8. S.27 deals with appeals to the High Court.
9. S. 26(4) states that subject to the provisions of S.80 and S.81, appeal including
second appeal shall be filed within 60 days from the date of issue of order which is
appealed against.
10. S.80 provides that as regards the provision of Ss. 25, 26 and 27, the provisions of
Arts. 4 and 12 of the limitation act shall be made applicable.
11. Art. 4 of the limitation act states that where in case of any suit or appeal, the
prescribed period expires due to closure of court, the same may be instituted when
the court reopens.
12. Art. 12 further provides that the time for limitation shall not include the time
required in getting a copy of the judgment, a copy of the decree or order, a copy of
the award, etc.
13. S. 81 provides that where under S.26(4), the appeal has not been filed within the
requisite time period but the assessee shows sufficient cause for the same and the
appellate authority is satisfied with such cause given, such appeal shall be allowed.
14. S. 26(5) lays down the powers of the appellate authority subject to all rules and
procedures as follows-
(a) The power to confirm, enhance, reduce or annul any order.
If however, the appeal is filed before a tribunal, it may set aside such order and send
the same back to the concerned authority or officer to make a fresh assessment
taking into consideration the recommendations of the tribunal, after making such
further enquiry as such authority or officer deems fit. The authority or officer must
then proceed to make such fresh assessment and determine the tax payable under
such assessment.
(b) The power to confirm, cancel or modify any order imposing a penalty with
respect to the provisions of the act.
(c) The power to confirm, cancel or modify any order levying interest with respect
to the provisions of the act.
(d) In any other case, the appellate authority may pass any order as it deems fit.

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15. However, the appellate authority shall not enhance any assessment or penalty or
interest or sum forfeited and shall not reduce any amount of set off or refund of tax
unless the appellant has been given an opportunity of being heard as regards the
same.
16. S. 26(6) provides that an appellate authority or tribunal while the appeal is pending
disposal, may stay the order against the appeal in full or in part subject to such
necessary conditions or restrictions.
17. It may also pass a direction for depositing a part or whole of the disputed amount by
the appellant.
18. S.26 (7) provides that such authority has the discretion of considering cases on a
priority basis.
19. It states that where the someone above the age of 75 years who is a partner in a firm
or a proprietor of a business or a director having a substantial interest in a company
incase of a body corporate, makes an application in this regard and the appeal is
filed by such business, firm or company, the appellate authority shall give priority
to the same.
20. S. 24 deals with rectification of mistakes by the Commissioner and clause 1 states
that within 2 years from the end of the financial year in which the order is passed by
the authority rectify any error apparent on the face of the record, either on his own
motion or on application by any person.
21. However, if such rectification reduces the amount refunded or enhances the tax to
be paid, the same shall not be made unless the assessee is given an opportunity of
being heard.
22. Also, where the dealer has applied to the authority that the quantum of tax
chargeable must be reduced due to any order, the recovery of such amount may be
stayed by the tribunal till the application is disposed off.
23. S. 24(2) also provides that where the dealer shows in his books of account that he is
not liable for payment of any tax or that he is liable to pay tax at a reduced rate and
the same has been disallowed earlier as there was no certificate proving such fact,
he may apply to the authority within a period of 2 years from the end of the
financial year in which the order was passed that he has received a certificate with
respect to the same and may request the officer or authority to enquire into the
same, provided he has not filed an appeal against the previous order.
24. Further, where rectification reduces any tax, penalty or interest, the same shall be
refunded to the dealer.
25. Also where the rectification enhances any tax, penalty, interest, etc. the same shall
be recovered from the dealer.
26. S.25 deals with review and provides that the Commissioner may on his own or on
receipt of any information call for examination of any record where any turnover
sales/purchases have not been brought to tax or have been taxed at a lower rate,
have been incorrectly classified, where any claim is incorrectly granted or any
liability is understated or where any order is erroneous and prejudicial to the
interests of revenue, pass any order to his best judgment after giving notice to the
dealer about the same.
27. For this purpose, the Commissioner may call upon the dealer to submit any relevant
books of accounts.

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28. Such review however cannot be conducted by the Commissioner after the expiry of
five years from the date of the order of the subordinate authority.
29. Where such order of the subordinate authority is in appeal before the tribunal, the
Commissioner may make a report as regards such error to the tribunal.
30. S. 25(3) provides that where an order of the tribunal is passed against the state, the
Commissioner may review the same after giving the dealer an opportunity of being
heard and to produce books of accounts and other evidence.
31. Thereafter, the commissioner may pass an order as if no order was passed by the
tribunal against the state. However, he shall stay the recovery of dues till the
decision by the appropriate forum and after such decision may modify the order of
review, give the dealer an opportunity of being heard.
32. No proceedings under this section shall be entertained on any application made by a
dealer or a person.
33. S. 27 provides that an appeal may lie to the High Court from the decision of the
tribunal if the same involves any substantial question of law.
34. Appeal may be made by the commissioner or any dealer within 120 days from the
date of receipt of such order by them.
35. The appeal must be in the form a memorandum clearly stating as to which
substantial question of law is involved.

2.5 Advance ruling, DDQ

1. S.55 deals with advanced ruling.

2. It states that on and from such date as may be specified by the state government by
way of notification in the official gazette, any registered dealer may apply to the
tribunal in the prescribed form and manner to interpret any provision of the act,
rules or notifications in respect of any substantial question of law even though the
same has not been discussed in any proceeding.
3. The tribunal shall then consider such application and if it is of the opinion that the
same is not important and doesn’t involve a substantial question of law, reject the
same after giving the applicant an opportunity to be heard.
4. If the application is admitted, then for the determination of the question, the
President of the tribunal shall constitute a bench consisting of 3 members of the
tribunal, a senior practitioner competent to appear before the tribunal and an officer
from the sales tax department who is not below the rank of a joint commissioner
(and is nominated by the commissioner).
5. The tribunal shall then pronounce an advanced ruling after the hearing on the basis
of a majority vote. All such applications must be disposed off within a period of 4
months from the date of receipt of application by the tribunal.
6. The advanced ruling shall be binding unless there is any change of law on the basis
of which such advanced ruling has been pronounced.
7. Thereafter, no such question shall be entertained in any proceedings by an authority
under the act.
8. S.56 deals with determination of disputed questions.
9. It states that where any question arises other than those before a court or the tribunal
under S.55 or before assessment by the commissioner under S.23, the

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Commissioner shall subject to the rules make an order determining any disputed
questions.
10. These questions may be with respect to the following-
(a) Whether any person, society, club or association or firm or any department of
such firm is a dealer.
(b) Whether any person or dealer needs to be registered.
(c) Whether any particular thing done with respect to any goods will amount to
manufacture.
(d) Whether any transaction is a sale or purchase and if it is so, then what is the sale
price or purchase price.
(e) Whether any tax is payable by a person with respect to sale or purchase and the
rate thereof.
(f) Whether set off can be claimed on any transaction of purchase and if so then on
what conditions can it be claimed.

11. S.61 provides that accounts may be audited in certain cases say for example when
turnover of sales or purchases exceeds Rs.40, 00,000.

2.6 Penalty, Offences and Prosecution

Consider the following table with respect to penalties and offences under the Act-

S.no. Offence/Penalty Punishment

1. Penalty for concealment- concealment of Equal to amount of tax found as a
any material particulars, knowingly result of concealment, commission or
furnishing inaccurate particulars, omission
knowingly misclassified any transaction
liable to tax and knowingly claimed set
off in excess
2. Failure to file return Rs.10,000 (now Rs.5000 after
01/07/2009)
3. Failure to file return but when such return Rs.5000
is filed before initiation of penalty for
levy of penalty
4. Filing of incorrect return Rs.1000
5. Failure to pay tax on time Tax + 1.25% interest p.m. or for part
of the month, after the last date from
which tax should have been paid.
When part of the tax has been paid,
interest must be on the balance
remaining.
6. Non-payment of other amount (any other Tax+ simple interest (to be paid in the
tax other than one stated above) same manner as above)
7. Non-filing of audit reports

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3.7 Package Scheme of Incentives

3.8 Calculation of Tax Liability (Numerical)

Other important points- Set-off

1. The conditions for a set-off have been listed as follows-

(a) There must be a tax invoice as per the requirements of S.36.
(b) Tax invoice must be produced originally for verification before the assessing
officer.
(c) The dealer must maintain a register of purchases in chronological order showing
the details of purchases, due date, invoice number, etc.
(d) The assessing officer will have to verify as to whether or not such dealer has
paid taxes to the government alongwith the return filed.

2. The dealer must pay taxes after adjustment of set off.

3. Dealers can claim set off where there is a refund of tax. The same may even be
carried forward to the next period upto the end of the financial year.
4. In certain cases however full set off is not allowed and the same is subject to rates
as prescribed under S.53 as follows-
(a) Fuel- 3% of the purchase price is not allowed as set-off
(b) If the dealer manufactures any tax free goods, 3% of the purchase price of such
goods used for manufacturing them is not allowed as set-off. Now, this has been
reduced to 2% after June, 2008.
(c) Where the dealer transfers stock to any branch, then 3% of the purchase price of
the corresponding taxable goods used in manufacturing goods shall not be eligible
for set off. There is no set off available in such case with respect to schedule B
goods.
(d) For dealers who have opted for the composition scheme, set off will be reduced
to 4% of the purchase price incase of works contract for executing construction
contracts. For other contracts, the amount of set off will be reduced by 36% of the
tax paid.
(e) With respect to a composition scheme, where the business is discontinued and
the dealer holds stock on the day of the closing of the business, no set-off will be
granted on purchases. However, this provision shall not be applicable where any
person continues such business.
(f) Where a dealer having receipt on account of sale less than 50% of the total
receipts into hotel or restaurants or others, the set off available is only with respect
to such purposes effected in that year corresponding to goods sold within 6 months
of the date of purchase. (check)
(g) Incase of dealers who are not in business of leasing office equipment, furniture
and fixtures, are not allowed to claim full amount of set-off, but there will be a
reduction of 3% in the purchase price in such cases.

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5. Rule 54 provides that set-off is not available under the

following cases-
(a) Motor Vehicles
(b) Motor spirit
(c) Crude Oil
(d) Purchases by shipping companies
(e) Manufacture of scrap only
(f) Purchase of intangible assets except for import licenses, export permits, sim
cards, software in the hands of the dealer who is dealing in such software, copyright
which is resold within 12 months of the date of purchase
(g) Works contract resulting in immovable property
(h) Purchases of capital goods by hotels

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