Index Contents Page Number Acknowledgement 2 Introduction to Tax 3 Introduction to Income Tax 4 Residential Status 6 Heads of Income 9 Income from Salaries 10 Income from House Property 15 Capital Gains 19 Profits and Gains of Business or Profession 30 Income from Other Sources 55 Advance Payment of Tax 60 Computation of Total Income 61 Computation of Tax Liability on Total Income 64 TDS Rates for Assessment Year 09 – 10 66 1
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Index
Contents Page Number
Acknowledgement 2
Introduction to Tax 3
Introduction to Income Tax 4
Residential Status 6
Heads of Income 9
Income from Salaries 10
Income from House Property 15
Capital Gains 19
Profits and Gains of Business or Profession 30
Income from Other Sources 55
Advance Payment of Tax 60
Computation of Total Income 61
Computation of Tax Liability on Total Income 64
TDS Rates for Assessment Year 09 – 10 66
Assessment of Firms 72
Assessment of Companies 74
1
Acknowledgement
I owe a great many thanks to a great many people who helped and supported me during
the writing of this book.
My deepest thanks to Prof. (Professor’s Name), the Guide of the project for guiding me
throughout the project and make necessary correction as and when needed.
My deep sense of gratitude to (Name and Position of the Work Guide) support and
guidance. Thanks and appreciation to the helpful people at (Name of the Office where the
Project was done) for their support.
I would also thank my Institution and my faculty members without whom this project
would have been a distant reality. I also extend my heartfelt thanks to my family and well
wishers.
2
Tax:
Tax is nothing but the Money people have to pay to the government which is used to provide
Public Services.
There are two Types of Taxes. They are
1. Direct Tax and
2. Indirect Tax.
Direct tax is the charge that is paid directly to the government by the persons on whom it is
imposed.
Direct Tax is divided into 3 parts,
1. Income Tax,
2. Wealth Tax and
3. Corporate Tax.
Indirect tax is the charge that is paid by one individual at the beginning, but the burden of which
will be passed over to some other individual, who eventually holds the burden.
Indirect Tax is divided into 3 parts,
1. Sales Tax,
2. Excise Duty and
3. Custom Duty.
3
Income Tax Introduction
The direct tax which is paid by individual to the Central Government of India is known as
Income Tax. It is imposed on our income and plays a vital role in the economic growth &
stability of our country. For years the Government is generating revenue through this tax system.
The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax' mean
'Income Estimate,' which helps the government to know the actual economic strength of a
person. It is also a way to set up an economic standard for general people. It helps the
Government to know the distribution of money among country's people.
Income Tax has been in force in different forms since years. If we go through the history of
India, we get relevant information regarding the taxation system of India. In ancient history, it is
mentioned that at about such system which were imposed on the income, expenditure and other
subject. Even information of such is given Manu Smriti and Arthasatra which confirms its
existence at that time.
In modern India, Income Tax came into existence in 1860 with the implementation of first
Income Tax Act. After implementation of this Act, people became aware of the actual meaning
of Income Tax. This act was in force for first five years. After this, in 1865, second Act came
into force. There were major changes in this Act relative to the first. It proved itself as a good
factor for the growth of our economy. With this Act a new concept of Agriculture Income came
into existence.
After this, different new Act was also implemented. The most important of them is the Income
Tax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose salary from any
source of income is more than the maximum limit of unchargeable amount will be liable to pay
Income Tax. There is also a provision of deduction and exemptions in Income Tax, depending
upon the type of assessee, source of income, residential status and investment in saving schemes.
Income tax rates are a matter of chang, which is declared by Ministry of Finance, Government of
India regularly, usually on annual basis.
4
Assessee [Sec. 2(7)]
Assessee means a person by whom income-tax or any other sum of money is payable under the
Act. It includes every person in respect of whom any proceeding under the Act has been taken
for the assessment of his income or loss and the amount of refund due to him. It also includes a
person who is assessable in respect of the income or loss of another or who is deemed to be an
assessee or an assessee in default under any provision of the Act.
Person [Sec. 2(31)] includes
1. An Individual,
2. A Hindu Undivided Family,
3. A Company,
4. A Firm,
5. An Association of Persons or A Body of Individuals,
6. A Local Authority and
7. Every Artificial Juridicial Person not falling within any of the preceding categories.
Assessment Year [Sec. 2(9)]
Assessment Year may be defined as a year in which the income of the previous year is to be
assessed. In some countries it is called “Tax Year”. It always starts on April 1st and ends on
March 31st of the next year.
Previous Year [Sec. 3]
Income of the previous year is taxed in the immediately following assessment year. In some
countries it is called “Income Year”.
In the case of a newly set up business or profession or a source of income newly coming into
existence, the first previous year will be the period commencing from the date of setting up of
the business/ profession, or as the case may be, the date on which the source of income newly
comes into existence and ending on the immediately following March 31st.
5
The exceptions to the rule that the income of the previous year, is not taxable in the immediately
following assessment year are
1. Income of a Non-Resident from Shipping,
2. Income of Persons leaving India either Permanently, or for a very long time,
3. Income of Bodies formed for a Short Duration,
4. Income of a Person trying to Alienate his Assets with a view to Avoid Payment of Tax
and
5. Income of a Discontinued Business.
Residential Status – General Norms
Assesses are either
1. Resident in India, or
2. Non-Resident in India
However, Resident Individuals and Hindu Undivided Families have to be
1. Resident and Ordinary Resident, or
2. Resident but Not Ordinary Resident.
The Residential status of each assesse is to be determined for each previous year.
Residential Status of an Individual [Sec. 6]
Basic Conditions [Sec. 6(1)]
1. He is in India in the previous year for a period of 182 days or more
2. He is in India for a period of 60 days or more during the previous year and for a period of
365 days or more during the four years immediately preceding the previous year.
6
Additional Conditions [Sec. 6(6)]
1. He has been a resident of India in at least 2 out of 10 previous years immediately
preceding the relevant previous year.
2. He has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant previous year.
Resident and Ordinary Resident
An Individual is said to be a Resident and Ordinary Resident in India in any previous year, if he
satisfies at least one of the basic conditions, and both the additional conditions.
Resident but not Ordinary Resident
An Individual is said to be a Resident but not Ordinary Resident in India in any previous year, if
he satisfies one or more of the basic conditions, but does not satisfy the two additional
conditions.
Non-Resident
An Individual is said to be a Non-Resident in India in any previous year, if he satisfies none of
the basic conditions.
Residential Status in the case of Other Persons
Residential Status of a Hindu Undivided Family [Sec. 6(2)]
Resident and Ordinary Resident
A Hindu Undivided Family is said to be a Resident and Ordinary Resident in India if the control
and management of its affairs are wholly or partly situated in India and if it satisfies both the
additional conditions.
7
Resident but not Ordinary Resident
A Hindu Undivided Family is said to be a Resident but not Ordinary Resident in India if the
control and management of its affairs are wholly or partly situated in India but does not satisfy
the two additional conditions.
Non-Resident
A Hindu Undivided Family is said to be a Non-Resident in India, if its control and management
is situated wholly outside India.
Residential Status of a Firm or an Association of Persons [Sec. 6(4)]
Resident
A Firm or an Association of Persons is said to be a Resident in India, if its control and
management is situated wholly within India during the relevant previous year.
Non-Resident
A Firm or an Association of Persons is said to be a Non-Resident in India, if its control and
management is situated wholly outside India.
Residential Status of a Company [Sec. 6(3)]
Resident
An Indian Company is always a Resident in India
A Foreign Company is said to be a Resident in India, if its control and management is situated
wholly within India during the relevant previous year.
Non-Resident
8
A Foreign Company is said to be a Non-Resident in India, if its control and management is
situated wholly outside India.
Heads of Income [Sec.14]
Income of a person is Computated under the following Five Heads
1. Income from Salaries,
2. Income from House Property,
3. Profits and Gains from Business or Profession,
4. Capital Gains and
5. Income from Other Sources.
The Aggregate Income under these Heads is Termed as “Gross Total Income”.
9
Income From Salaries
Income under heads of salary is defined as remuneration received by an individual for services
rendered by him to undertake a contract whether it is expressed or implied.
Basis of Charge
According to Income Tax Act there are following conditions where all such remuneration are
chargeable to income tax:
1. When due from the former employer or present employer in the previous year, whether
paid or not.
2. When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
3. When arrears of salary is paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.
Under section 17 of the Income Tax Act, 1961 the following incomes comes under the head of
salary:
1. Basic Salary
2. Dearness Allowance
3. Advance Salary
4. Arrears of Salary
5. Leave Encashment
6. Salary in Lieu of Notice
7. Salary to Partner
8. Fees and Commissions
9. Bonus
10. Gratuity
11. Pensions
12. Annuity from Employer
10
13. Annual Accretion to the Credit Balance in a Recognised Provident Fund
14. Contribution by Central Government towards Pension Fund
15. Retrenchment Compensiation
16. Remuneration for Extra Work
17. Voluntary Payment
18. Salary from a United Nations Organisatin
19. Salary to a Foreign Citizen
20. Payment Received at the Time of Voluntary Retirement
Basic Salary
It is fully taxable under Sec. 15
Dearness Allowance
It is fully taxable under Sec. 15
Advance Salary
It is Taxable in the Year of Receipt
Arrears of Salary
It is Taxable in the Year of Receipt, if not Taxable on due basis
Leave Encashment
In case of a Government Employee, any amount received is fully Exempted [Sec. 10(10AA)(i)].
In case of a Non-Government Employee, the least of the following is Exempted [Sec. 10(10AA)
(ii)]
1. Cash Equivalent of the Leave Salary in respect of the Period of Earned Leave to the
Credit of an Employee only at the Time of Retirement whether on Superannuation or
Otherwise
11
2. 10 months Average Salary
3. Rs.3,00,000
4. Actual Leave Encashment.
Salary in Lieu of Notice
It is Taxable on Receipt basis
Salary to Partner
Not chargeable under Salaries but Taxable under Profits and Gains from Business or Profession.
Fees and Commission
It is fully Taxable under Sec. 15
Bonus
It is fully Taxable under Sec. 15
Gratuity
In case of a Government Employee, any amount received is fully Exempted [Sec. 10(10)(i)].
In case of a Non-Government Employee covered under The Payment of Gratuity Act,1972, the
least of the following is Exempted [Sec. 10(10)(ii)]
1. 15 days’ salary.
2. Rs.3,50,000.
3. Actual Gratuity.
In case of a Non-Government Employee, the least of the following is Exempted [Sec. 10(10AA)
(ii)]
1. Half Month Salary for each Completed year of Service.
12
2. Rs.3,50,000.
3. Actual Gratuity.
Pension
Any Uncommuted Pension is Taxable as Salary under Sec. 15 in the hands of a Government as
well as a Non- Government Employee.
Any Commuted Pension received by a Government Employee is wholly Exempted from Tax
Under Sec. 10(10A).
Any Commuted Pension received by a Non-Government Employee
1. In case where the Employee receives Gratuity, the Commuted value of 1/3 of the Pension
he is normally entitled to receive,
2. In any other case, the Commuted value of ½ of such Pension
Is Exempt from Tax.
House Rent Allowance [Sec. 10(13A) and Rule 2A]
Exemption in respect of House rent Allowance is regulated by Rule 2A.
The least of the following is exempt from tax
1. Amount equal to 50% of salary, where the Residential house is situated at Bombay,
Calcutta, Delhi or Madras; and an amount equal to 40% of salary, where the Residential
house is situated at any other place.
2. Actual House Rent Allowance Received.
3. Excess of Rent paid over 10% of Salary.
Entertainment Allowance [Sec. 10(ii)]
Entertainment Allowance is first included in Salary Income and there after a deduction is given.
13
In case of a Government Employee, the least of the following is deducted,
1. Rs. 5,000
2. 20% of Basic Salary or
3. Actual Entertainment Allowance received
In case of a Non-Government Employee, no deduction is available.
Perquisites [Sec. 17(2)]
Perquisites are any casual emolument or benefit attached to an officer or a position in addition to
salary or wages
There are following perquisites which are tax free:
1. Medical facility
2. Medical reimbursement
3. Refreshments
4. Subsidised Lunch/ Dinner provided by employer
5. Facilities For Recreation
6. Telephone Bills
7. Products at concessional rate to employee sold by his/ her employer
8. Insurance premium paid by employer
9. Loans to employees by given by employer
10. Transportation
11. Training
12. House without rent
13. Residence Facility to member of Parliament, judges of High Court/ Supreme Court
14. Conveyance to member of Parliament, judges of High Court/ Supreme Court
15. Contribution of employers to employee's pension, annuity schemes and group insurance
14
Income From House Property
Under the Income Tax Act the owner of a House property is taxed on the income in the form of
its annual value under the head “Income from House Property”.
Owner
It is the Legal Owner of the house property who is chargeable to tax in respect of property
income.
In the following cases enumerated by Sec. 27, persons are deemed to be owners of the house
property for the purpose of computing income from house property,
1. An individual, who transfers house property otherwise than for adequate consideration to
his or her spouse or to his minor child, is treated as deemed owner of the house.
2. The holder of an impartible estate is treated as deemed owner of the house property.
3. A member of a co-operative society, company or other association of persons, to whom a
building or a part thereof is allotted or leased under a house building scheme of the
society, company or association of persons, is treated as deemed owner of such property.
4. A person who comes to have control over the property in part performance of a contract
of the nature referred to in Sec. 53A of the Transfer of Property Act or by virtue of such
transaction are referred to in clause (f) of Sec. 269UA is deemed as owner of such
property.
Basis of computing Income from a let out house property
Income from a let out house property is determined as
Gross Annual Value XXX
Less: Municipal Taxes XXX
Net Annual Value XXX
15
Less: Deductions
Standard Deduction XXX
Interest on Borrowed Capital XXX
Income from House Property XXX
Gross Annual Value [Sec. 23(1)]
Though the tax under the head “Income from House Property” is a tax on income, yet it is not a
tax upon rent but upon inherent capacity of a building to yield income. The standard selected as a
measure of income to be taxed is Annual Value.
Gross Annual Value is determined as
Reasonable Expected Rent of the Property XXX
Actual Rent Received XXX
The above higher value XXX
Loss due to Vacancy XXX
Gross Annual Value XXX
Reasonable Expected Rent of the Property
Reasonable Expected Rent is deemed to be the sum for which the property might reasonably be
expected to be let out from year to year.
Reasonable Expected Rent of the Property can be determined by taking into consideration the
following factors
1. Municipal Value
2. Fair Rent
16
3. The higher value of (1) and (2) is the Expected Rent
Municipal Value
For collecting Municipal Taxes, the Local Authority makes a periodic survey of all buildings in
its jurisdiction. The value estimated is the Municipal Value.
Fair Rent
This is estimated on the basis of the rent collected for a similar property in a similar location.
Standard Rent
If a property is covered under a Rent Control Act, its reasonable expected rent cannot exceed the
standard rent fixed in the Act.
Actual Rent Received
This is the rent collected in the previous year for which the property is available for letting out
less the unrealised rent.
Municipal Taxes
These taxes are deductable only if
1. They are borne by the owner and
2. They are actually paid by him during the previous year.
Deductions under Sec. 24
There are two deductions available under this Section
1. Standard deduction and
2. Interest borrowed on capital
17
Standard deduction
It is 30% of Net Annual Value irrespective of any Expenditure incurred by the Taxpayer.
Interest borrowed on capital
It is deducted if the capital is borrowed for the purpose of purchase, construction, repair, renewal
or reconstruction of the house property.
Interest on Pre-Construction Period
Interest payable by an assessee in respect of funds borrowed for the acquisition or construction
of a house property and pertaining to a period prior to the previous year in which such property
has been acquired or constructed.
18
Capital Gains
Capital Asset is defined to include property of any kind held by assessee whether fixed or
circulating, movable or immovable, tangible or intangible.
The following assets are excluded from Capital Assets.
1. Any stock-in-trade, consumable stores or raw materials held for the purpose of business
or profession;
2. Personal effects of the assessee;
3. Agricultural land in India.
4. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980
issued by the Central Government.
5. Special Bearer Bonds, 1991; and
6. Gold Deposit Bonds, issued under the Gold Deposit Scheme, 1999.
Types of Capital Assets
Short Term Capital Asset means a capital asset held by an assessee for not more than 36 months
immediately prior to its date of Transfer. However, in a few cases, an asset held for not more
than 12 months, is treated as Short Term Capital Asset.
1. Equity or Preference share of a Company,
2. Securities listed in a Recognised Stock Exchange in India,
3. Units of UTI,
4. Units of Mutual Funds specified under Sec. 10(23D)
5. Zero Coupons Bonds
Any Asset other than a Short Term Capital Asset is regarded as a Long Term Capital Asset.
19
Determining the Period of Holding
Different Situations Period of Holding Calculation
Shares held in a Company-in-Liquidation The Period Subsequent to the date on which
the Company goes into Liquidation shall be
Excluded
Capital Assets which becomes the Property of
the Assessee in the circumstances mentioned in
Sec. 49(1)
The Period for which the asset was held by the
Previous Owner should be Included
Allotment of Shares in Amalgamated Indian
Company in Lieu of Shares held in
Amalgamating Company
The Period of holding shall be counted from
the date of Acquisition of shares in the
Amalgamating Company
Right Shares The Period of holding shall be counted from
the date of Allotment
Right Entitlement The Period of holding shall be counted from
the date of offer to Subscribe to Shares to date
when such Right is Renounced by a Person
Bonus Shares The Period of holding shall be counted from
the date of Allotment
Issue of Shares by the Resulting Company in a
Scheme of Demerger to the Share Holders of a
Demerged Company
The Period of holding shall be counted from
the date of Acquisition of Shares in the
Demerged Company
Membership Right held by a Member of
Recognised Stock Exchange
The Period of holding shall be counted from
the date of becoming a Member of the Stock
Exchange
20
Sweat Equity Shares Allotted by Employer The Period of holding shall be counted from
the date of Allotment or Transfer
Transactions in Shares and Securities not given above
Date of Purchase Date of Purchase by Broker on behalf of
Investor
Date of Transfer Date of Broker’s note provided such
transactions are followed up by Delivery of
Shares and also the Transfer Deeds
Date of Purchase or Transfer Date of Contract of Sale as declared by the
parties provided it is followed up by actual
Delivery of Shares and the Transfer Deeds
Date of Purchase or Sale of Shares and
Securities purchased in several Lots at
different points of time but Delivery taken off
in one lot and subsequently sold in Parts
The First-in-First-out method shall be adopted
to reckon the Period of the holding of the
Security
Transfer of a Security by a Depository The First-in-First-out method shall be adopted
to reckon the Period of the holding
Computation of Capital Gains
Computation of Capital Gains depends upon the Nature of Capital Assets transferred.
Computation of Short Term Capital Gains
Value of Consideration XXX
Less : Expenditure incurred during Transfer XXX
Less : Cost of Acquisition XXX21
Less : Cost of Improvement XXX
XXX
Less : Exceptions [ Sec. 54B, 54D and 54G] XXX
Short Term Capital Gains XXX
Computation of Long Term Capital Gains
Value of Consideration XXX
Less : Expenditure incurred during Transfer XXX
Less : Cost of Acquisition XXX
Less : Cost of Improvement XXX
XXX
Less : Exceptions [ Sec. 54, 54B, 54D ,54EC,
54ED, 54F and 54G] XXX
Long Term Capital Gains XXX
Benefit of Indexation
In the following cases the Benefit of Indexation is not available
1. Bonds or Debentures
2. Shares in or debentures of an Indian Company acquired by utilizing Convertible Foreign
Exchange
3. Depreciable Assets
22
4. Undertaking or Division transferred by way of Slump Sale
5. Units purchased in Foreign Currency
6. Global Depository Receipts purchased in Foreign Currency
Cost of Acquisition
Cost of Acquisition of an asset is the value for which it was acquired by the assessee. Expenses
of the Capital nature for completing or acquiring the title to the property are includible in the
Cost of Acquisition.
Cost Inflation Index
Cost Inflation Index for any year means such index as the Central Government ma, having regard
to 75% of the average rise in the Consumer Price Index for Urban Non-Manual Employees, for
the immediately preceding previous year to such previous year, by notification in the Official
Gazette, specify in this behalf.
The Central Government has notified the Cost Inflation Index for the purpose of Long-Term
Capital Gain
Financial Year Cost Inflation Index Financial Year Cost Inflation Index
1981 – 82 100 1995 – 96 281
1982 – 83 109 1996 – 97 305
1983 – 84 116 1997 – 98 331
1984 – 85 125 1998 – 99 351
1985 – 86 133 1999 – 2000 389
1986 – 87 140 2000 – 01 406
23
1987 – 88 150 2001 – 02 426
1988 – 89 161 2002 – 03 447
1989 – 90 172 2003 – 04 463
1990 – 91 182 2004 – 05 480
1991 – 92 199 2005 – 06 497
1992 – 93 223 2006 – 07 519
1993 – 94 244 2007 – 08 551
1994 – 95 259 2008 – 09 582
Computation of Indexed Cost of Acquisition and Indexed Cost of Improvement
Indexed Cost may be computed under any of the following Situations
Situation 1:
Capital Asset is Acquired by the Assessee, before 1.4.81
Indexed Cost of Acquisition:
Fair Market Value of the Asset on
1.4.81 X or Cost of Acquisition,
whichever is more
Cost Inflation Index for 1981 – 82
Cost Inflation Index for the year in
which the Asset is Transferred
24
Indexed Cost of Improvement:
Cost of Improvement
X
Cost Inflation Index for the
Improvement Year
Cost Inflation Index for the year in
which the Asset is Transferred
Situation 2:
Capital Asset is Acquired by the Assessee on or after 1.4.81
Indexed Cost of Acquisition:
Cost of Acquisition
X
Cost Inflation Index for the year in
which Assets are Acquired
Cost Inflation Index for the year in
which the Asset is Transferred
Indexed Cost of Improvement:
Cost of Improvement incurred
X
Cost Inflation Index for the
Improvement Year
Cost Inflation Index for the year in
which the Asset is Transferred
Situation 3:
Capital Asset is Acquired by the Assessee, before 1.4.81 in one of the
circumstances specified in Sec. 49(1) and originally Acquired by the
Previous Owner before 1.4.81
Indexed Cost of Acquisition:
25
Fair Market Value of the Asset on
1.4.81 X or Cost of Acquisition
to the Previous Owner, whichever
is more .
Cost Inflation Index for 1981 – 82
Cost Inflation Index for the year in
which the Asset is Transferred
Indexed Cost of Improvement:
Cost of Improvement incurred by
the X Assessee and the
Previous Owner .
Cost Inflation Index for the
Improvement Year
Cost Inflation Index for the year in
which the Asset is Transferred
Situation 4:
Capital Asset is Acquired by the Assessee on or after 1.4.81 in one of the
circumstances specified in Sec. 49(1) and originally Acquired by the
Previous Owner before 1.4.81
Indexed Cost of Acquisition:
Fair Market Value of the Asset on
1.4.81 or Cost of Acquisition,
whichever is more X
Cost Inflation Index for the year in
which the asset was first held by
the Assessee
Cost Inflation Index for the year in
which the Asset is Transferred
Indexed Cost of Improvement:
26
Cost of Improvement incurred by
the X Assessee and the
Previous Owner .
Cost Inflation Index for the
Improvement Year
Cost Inflation Index for the year in
which the Asset is Transferred
Situation 5:
Capital Asset is Acquired by the Assessee on or after 1.4.81 in one of the
circumstances specified in Sec. 49(1) and originally Acquired by the
Previous Owner on or after 1.4.81
Indexed Cost of Acquisition:
Cost of Acquisition to the
Previous X Owner
.
Cost Inflation Index for the year in
which the asset was first held by
the Assessee
Cost Inflation Index for the year in
which the Asset is Transferred
Indexed Cost of Improvement:
Cost of Improvement incurred by
the X Assessee and the
Previous Owner .
Cost Inflation Index for the
Improvement Year
Cost Inflation Index for the year in
which the Asset is Transferred
Computation of Capital Gains for Non-Residents
27
Under the First Provision in Sec. 48, Capital Gain is calculated in Foreign
Currencies in some Cases
Conditions
1. The Taxpayer is a Non-Resident
2. He acquires Shares in an Indian Company utilizing Foreign
Currency
3. The Asset may be a Short Term or Long Term
Special Provisions for Non-Residents
Conditions
1. The Taxpayer is a Non-Resident
2. He has Transferred Specified Asset, Acquired or Purchased with, or
Subscribed to in, Convertible Foreign Exchange
3. Asset is a Long-Term Capital Asset
4. Within Six months of the transfer of the Original Asset, the Taxpayer
has Invested the Whole or Part of Net Consideration in any of the
following
a. Shares in an Indian Company
b. Debentures of an Indian Public Limited Company
c. Deposit with an Indian Public Limited Company
d. Central Government Securities
e. National Savings Certificates VI and VII Issues
Computation of Capital Gain for Self-Generated Assets
Self-Generated Assets Sale
Consi-
deration
Cost of
Acqui-
sition
Cost of
Improve
-ment
Expenses
on Transfer
Capital Gain
Goodwill of a Business, Right Actual Nil Nin Actual Sale Consideration less
28
to Manufacture, Produce or
Process any Article or Right to
Carry on any Business
Expenses on Transfer
Tenancy Rights, Route Permits
and Loom Hours, Trade Mark
or Brand Name associated with
a Business
Actual Nil Actual Actual Sale Consideration less
Cost of Improvement
less Expenses on
Transfer
Cost of Acquisition of Bonus Shares
Sec. 55 has been amended with effect from the Assessment year 1996 – 97
so as to specify that the Cost of Acquisition of any Additional Financial
Asset as Bonus Shares or Security or otherwise which is received without
any payment by the Assessee on the basis of his Holding any financial Asset
shall be taken to be Nil.
The Effect of the Aforesaid Amendment may be summarised as
Cost of Acquisition if Original and bonus
Shares are Transferred after 31.3.95
If Original Shares and Bonus Share are
Acquired before 1.4.81
Original – Actual Cost or Fair Market Value
on 1.4.81, whichever is more
Bonus – Fair Market Value on 1.4.81
If Original Shares are Acquired before 1.4.81,
but bonus Shares are Allotted after 1.4.81
Original – Actual Cost or Fair Market Value
on 1.4.81, whichever is more
Bonus – Nil
If Original and Bonus Shares are Acquired
after 1.4.81
Original – Actual Cost
Bonus – Nil
Capital Gain on Transfer of Right Share and Right Entitlement
29
Cost of Acquisition in Different Situations
Situations Cost of Acquisition
Original Shares Amount actually paid for Acquisition
Rights Entitlement Nil
Rights Shares Acquired by the Taxpayer by
Exercising his Rights Entitlement
Amount actually paid for Acquisition
Rights Shares purchased by the person in
whose Favour the Rights Entitlement has been
Renounced
Purchase Price Paid to Renouncer of rights
Entitlement plus Amount paid to the Company
which has Allotted the Rights Shares.
Tax Charge on Short-term or Long-term Capital Gains
Gross Total Income Excluding Capital Gains XXX
Less: Deductions Permissible under Sec. 80C to 80U XXX
Other Net Income XXX
Income Tax on Other Net Income (A) XXX
Long Term Capital Gain XXX
Income Tax on Long Term Capital Gain Sec. 112 (B) XXX
Short Term Capital Gain XXX
Income Tax for Short Term Capital Gain Sec. 111A (C) XXX
Total Income Tax XXX
Surcharge XXX
Education Cess XXX
Tax Liability XXX
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Long Term Capital Gain is Taxable at a flat rate of 20%.
In a few cases if Long Term Capital Gain is covered by Sec. 115AB, 115AC,
115AD or 115E, is Taxable at the rate of 10%.
31
Profits and Gains of Business or Profession
The following Incomes are chargeable under the head “Profits and Gains of
Business and Profession.
1. Profits and Gains of any Business or Profession carried on by the
assessee at any time during the previous year. Income earned from
the exercise of any profession or vocation, which involves the idea of
occupation requiring either purely intellectual skill or any manual
skill, is taxable under this head.
2. Any compensation or other payment due to or received by any person
specified by Sec. 28(ii).
3. Income derived by a Trade, Profession or similar Association from
specific services performed for its members.
4. Profit on sale of a licence granted under the Imports (Control) Order,
1955 made under the Imports and Exports (Control) Act, 1947.
5. Cash Assistance received or receivable by any person against Exports
under any Scheme of the Government.
6. Any duty of Customs or Excise repaid or repayable as drawback to
any person against Exports under the Customs and Central Excise
Duties Drawback Rules, 1971.
7. Value of any benefits or perquisites arising from a business or the
Excise of a Profession.
8. Interest, Salary, Bonus, Commission or Remuneration due to or
received by a partner of a firm for such firm.
9. Any sum received for not carrying out any activity in relation to any
business or not to share any Know-how, Patent, Copyright,
Trademark, etc.
10. Any sum received under a Keyman Insurance Policy including the
sum by way of bonus on such policy.
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11. Any sum received, on account of any capital asset being demolished,
destroyed, discharged or transferred, if the whole of the expenditure
on such capital asses has been allowed as a deduction under Sec.
35AD.
Expenses expressly allowed as deduction
Rent, Rates, Taxes, Repairs and Insurance for Buildings [Sec. 30]
In case of premises taken out in rent, the actual rent paid by the assessee and,
if he has undertaken to bear cost of repairs, the expenditure on repairs are
permissible deductions. In respect of premises owned by the assessee, no
deduction is allowable on account of notional rent; amount spent on current
repairs is however, allowed as deduction. Besides, the amount paid on
account of Land Revenue, Local Rates and Insurance Premium against the
risk of damage or destruction of the business premises are also allowed as
business deduction under this Sec.
Repairs and Insurance of Machinery, Plant and Furniture [Sec. 31]
the Expenditure incurred on Current Repairs, in respect of the Machinery,
Plant and Furniture used for business purpose is allowable as deduction
under this section. If, however, Expenditure is incurred to bring into
existence an advantage of an Enduring nature or a New Capital asset, it
cannot be regarded as an expenditure on current repairs. Similarly the
Premium paid in respect of insurance against risk of damage or destruction
of such asset is an allowable deduction.
Depreciation [Sec. 31]
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In order to claim Depreciation, an assessee has to fulfil the following
Conditions
1. The asset should be Owned by the assessee. Where, however, an
assessee carries on Business or Profession in a building not owned
but taken on lease, he is entitled to depreciation in respect of the
Capital Expenditure incurred by him after 31.3.70 on the construction
of any structure or any work in relation to the building by way of
Improvement, Renovation or Extension.
2. The asset, in respect of which Depreciation is claimed, must have
been used for the purpose of business. Where, however the asset is
partly used for business or profession and partly used for personal
purposes, a reasonable portion of Depreciation attribute to the
Business user of the asset is allowed.
Disallowance of Depreciation
No Depreciation is allowed under Sec. 37(4)(ii) in respect of a building used
as a Guest House. Any other asset used therein also does not qualify for
Depreciation Allowance.
Where a car is used otherwise than in a business of running it on hire for
tourists:
1. Depreciation is not allowed on the excess of the actual cost over
Rs.25,000 if the car is acquired after 31.3.67 but before 31.3.75; and
2. Depreciation is wholly disallowed if the car is a Foreign car and has
been acquired after 28.2.75 but before 1.4.01.
Block of Assets [Sec. 2(11)]
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The term Block of Assets has been defined as a Group of Assets falling
within a class of assets, comprising
1. Tangible Assets – Building, Machinery, Plant or Furniture and