PRINCIPAL MR. J. K. SHAH INTER CA Taxation Head Office Shraddha, 4th Floor, Old Nagardas Road, Near Chinai College, Andheri (E), Mumbai - 400 069. 022 - 2683 66 66 CAFCINTER CAFINAL CA THE RANKERS FACTORY
PRINCIPAL
MR. J. K. SHAH
INTER CA Taxation
Head Office Shraddha, 4th Floor, Old Nagardas Road,
Near Chinai College, Andheri (E), Mumbai - 400 069.
022 - 2683 66 66
CAFCINTER CAFINAL CA
THE RANKERS FACTORY
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SR. NO. CHAPTER PAGE NO.
1. Introduction 1 - 14
2. Residence of an Assessee 15 - 26
3. Income from Salaries 27 - 62
4. Income From House Property 63 - 75
5. Deductions From Gross Total Income - Chapter VIA (Part I) 76 - 91
6. Income From Business & Profession 92 - 150
7. Agriculture Income 151 - 156
8. Capital Gains 157 - 201
9. Income from Other Sources 202 - 218
10. Clubbing of Income 219 - 232
11. Set off & Carry Forward of losses 233 - 242
12. Deductions From Gross Total Income - Chapter VIA (Part II) 243 - 254
13. Assessment Procedure 255 - 267
14. Advance Tax & Interest 268 - 271
15. Tax Deducted at Source (TDS) 272 - 294
16. Non - Taxable Income 295 - 303
17. Home Work Problems 304 - 328
CONTENTS
THEORY, CLASSWORK & SOLUTIONS
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INTRODUCTION
What is a Tax?
Let us begin by understanding the meaning of tax. Tax is a fee charged by a government on a
product, income or activity. There are two types of taxes – direct taxes and indirect taxes (See
Chart below this paragraph). If tax is levied directly on the income or wealth of a person, then it is
a direct tax e.g. income-tax. If tax is levied on the price of a good or service, then it is called an
indirect tax . In the case of indirect taxes, the person paying the tax passes on the incidence to
another person.
TYPES OF TAXES
DIRECT TAXES INDIRECT TAXES
INCOME TAX CUSTOMS DUTY GST
Why are Taxes Levied?
The reason for levy of taxes is that they constitute the basic source of revenue to the government.
Revenue so raised is utilized for meeting the expenses of government like defence, provision of
education, health-care, infrastructure facilities like roads, dams etc.
Overview of Income-Tax Law in India
Income-tax is the most significant direct tax. In this material, we would be introducing the students
to the Income-tax law in India. The income-tax law in India consists of the following components–
INTRODUCTION
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INTRODUCTION
The various instruments of law containing the law relating to income-tax are explained below:
Income-tax Act, 1961: The levy of income-tax in India is governed by the Income-tax Act, 1961. In
this book we shall briefly refer to this as the Act. This Act came into force on 1st April, 1962. The
Act contains 298 sections and XIV schedules. These undergo change every year with additions
and deletions brought about by the annual Finance Act passed by Parliament. In pursuance of the
power given by the Income-tax Act, 1961 rules have been framed to facilitate proper administration
of the Income-tax Act, 1961.
The Finance Act: Every year, the Finance Minister of the Government of India introduces the
Finance Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the
houses of the Parliament and gets the assent of the President, it becomes the Finance Act.
Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the Finance
Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax -
���� Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the
current Assessment Year.
���� Part II specifies the rates at which tax is deductible at source for the current Financial Year.
���� Part III gives the rates for calculating income-tax for deducting tax from income chargeable
under the head “Salaries” and computation of advance tax.
���� Part IV gives the rules for computing net agricultural income.
Income-tax Rules: The administration of direct taxes is looked after by the Central Board of
Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the
Act. For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time
to time. These rules are collectively called Income-tax Rules, 1962. It is important to keep in mind
that along with the Income-tax Act, 1961, these rules should also be studied.
Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with
certain specific problems and to clarify doubts regarding the scope and meaning of the provisions.
These circulars are issued for the guidance of the officers and/or assessees. The department is
bound by the circulars. While such circulars are not binding on the assessees, they can take
advantage of beneficial circulars. Notifications are issued by the Central Government to give effect
to the provisions of the Act.
For example, under section 10(15)(iv)(h), interest payable by any public sector company in respect
of such bonds or debentures and subject to such conditions as the Central Government may, by
notification in the Official Gazette, specify in this behalf would be exempt. Therefore, the bonds
and debentures, interest on which would qualify for exemption under this section are specified by
the Central Government through Notifications.
The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of
notifications. For example, under section 35CCD, the CBDT is empowered to prescribe guidelines
for notification of skill development project. Accordingly, the CBDT has, vide Notification No.54/
2013 dated 15.7.2013, prescribed Rule 6AAF laying down the guidelines and conditions for
approval of skill development project under section 35CCD. .
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INTRODUCTION
Case Laws: The study of case laws is an important and unavoidable part of the study of income-
tax law. It is not possible for Parliament to conceive and provide for all possible issues that may
arise in the implementation of any Act. Hence the judiciary will hear the disputes between the
assessees and the department and give decisions on various issues. The Supreme Court is the
Apex Court of the country and the law laid down by the Supreme Court is the law of the land. The
decisions given by various High Courts will apply in the respective states in which such High
Courts have jurisdiction.
Income tax Act 1961
Introduction
In India, Constitution is the parent law. All other laws should be enacted without exceeding the
framework of the constitution and subject to the norms laid down therein. The Constitution of India
empowers Central Government to levy tax on income. By virtue of this power and to achieve this
objective the Income Tax Act 1961 was enacted in the place of the Income tax Act 1922.
According to Section 1 of the Income tax Act. The Act is to be called as “The Income Tax Act 1961”
and it extends to whole of India. It came into force on the 1st day of April 1962 i.e from AY 1962-
63 onwards.
Preliminary
a) Section 2 of the Income Tax Act gives definition of the various terms and expressions
used in the Act. Unless the context otherwise requires, these definitions should be applied.
The words “means” , “Includes” and “means and includes” are used in these definitions and
the significance of these terms needs to be understood.
b) When definition uses the word “means”, the definition is self explanatory, restrictive and in
a sense exhaustive. It implies that term or expression so defined means only as to what it is
defined as and nothing else. For example, the terms Agricultural Income, Assessment Year,
Capital Asset are exhaustively defined.
c) When the legislature wants to widen the scope of a term or expression and where an
exhaustive definition cannot be given, it uses the word includes in the definition. Hence, the
inclusive definition provides an illustrative meaning and not an exhaustive meaning. In
practical application the definition could include what is not specifically stated or mentioned
in the definition so long as the stipulated criteria are satisfied. To illustrate reference is
drawn to the definition of the terms Income, Person, Transfer.
d) When the legislature intends to define a term or expression to mean something and also
intends to specify certain items to be included both the words means and includes are
used. Such definition is not only exhaustive but also illustrative in specifying what is intended
to be included. Sometimes specific items are included in an exhaustive definition in order
to avoid ambiguity and with a view to provide clarity. One can find that these words are
used in the definition of the terms Assessee, Firm etc.
e) Apart from the definition under section 2 the Act defines various other terms under the
respective sections where they are used. For Example Section 17(2) defines perquisite,
Section 3 defines Previous year.
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Section 4 :Charging Section
As per Section 4 of the Income tax Act, 1961 Income-tax is payable by every Person on his
total Income earned in the Previous Year at the Rates applicable for the relevant
Assessment Year.
DEFINITIONS
Some of the words used in the above statement require elaboration
1. PERSON : [Section 2 (31)]
Section 4 provides for charging tax on every person and person is defined under sec-
tion 2(31) as including :
1. An individual.
2. A Hindu Undivided Family (H.U.F.).
3. A Company.
4. A Firm; [Partnership Firm Assessed as Such (PFAS)].
5. An Association Of Persons (A.O.P.) or Body Of Individuals (B.O.I.) whether
incorporated or not.
6. Local Authority.
7. Every artificial juridical person, not falling under any one of the preceding
categories.
Thus, this section enumerates seven types of assessees who are covered under the Act.
The seventh category is residuary and includes all sorts of artificial juridical bodies not
covered under any of the first six categories.
(2) INCOME [Section 2(24)]
Income is defined under section 2(24) of the Act. The definition contained in that section
is inclusive and not exhaustive, which means that income includes not only those items
which are enumerated in the section but besides it may include various other items to
which the natural meaning of the word may apply.
Section 2(24) defines as "Income" includes the following;
1. Profits and gains which are covered by section 28 or section 41.
2. Dividend
3. In case of charitable or religious trust or institution or educational institution or uni-
versity or hospital, or an electoral trust, voluntary contribution received.
4. The value of any perquisite taxable u/s 17(2), or profit in lieu of salary taxable u/
s 17(3), under the head salaries.
5. Any special allowance granted by the employer to meet expenses wholly,
necessarily and exclusively for the performance of the duties of employment
& dearness allowance & city compensatory allowance.
6. The value of any benefit or perquisite received by :
director of a company,
person who has a substantial interest in the company,
relative of director or person who has substantial interest in the company,
from a company, which otherwise was the obligation payable by such persons.
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7. The value of any benefit or perquisite obtained / paid by
by the representative assessee on behalf of the beneficiary -
which otherwise was the obligation payable by such beneficiary.
8. Any capital gains chargeable under section 45.
9. The profit and gain of any business or insurance carried on by a mutual
insurance company or by a co-operative society, computed in accordance
with section 44.
10. The profit and gains of any business of banking (including providing credit
facilities) carried on by a cooperative society with its members.
11. Any winnings from lotteries, crossword, puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form
or nature whatsoever.
12. Any sum received by the assessee from his employees as contributions to any
provident fund or super annuation fund or any fund set up under the provisions of
the Employee's State Insurance Act, 1948, or any other fund for the welfare of
such employees.
13. Any sum received under a keyman insurance policy including the sum allocated
by way of bonus on such policy.
14. Any sum of money or any property (movable or immovable) received for no
consideration or inadequate consideration shall be considered as income, subject
to the provisions of section 56.
15. Any consideration received by a closely held company for issue of shares as
exceeds the fair market value of the shares referred to in section 56.
16. Any assistance in the form of subsidy, grant,cash incentive, duty drawback ,
concession or reimbursement provided by Central Government or State
Government or any authority or any agency, except for-
(a) Subsidy provided for acquiring fixed assets for business purposes; and
(b) Subsidy provided by Central Government for the corpus of a trust or
institution set up by Central/State Government.
Following are the broad principles to understand the concept of "Income".
1. Different forms of income - Income may be received in cash or in kind. When
it is received in kind, its valuation is to be made according to the rules prescribed
in the Income-tax Rules. If however there is no prescribed rule, valuation thereof
is made on the basis of market value.
2. Receipt Vs. Accrual - Income arises either on receipt basis or on accrual basis.
Income may accrue to a tax payer without its actual receipt.
Salaries : Due or receipt whichever is earlier
House - property : Due basis
Business & Profession : As per method of accounting regularly followed
Capital Gains : Due basis
Income from other sources : As per method of accounting regularly
followed.
3. Relief or reimbursement of expenses is not treated as income - Mere relief
or reimbursement of expenses is not treated as income; for instance,
reimbursement of conveyance expenses to an employee is not an income.
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4. Temporary and permanent income - For the purpose of income tax there is
no distinction between temporary and permanent income. Even temporary
income is taxable such as casual winnings.
5. Income includes loss - While income and profit and gains represent "plus
income", losses represent "minus income".
6. Revenue receipt Vs. Capital receipts - A revenue receipt is taxable as income
unless it is expressly exempt under the provisions of the Act. On the other hand,
a capital receipt is generally exempt from tax, unless it is expressly taxable.
7. Illegal income - The income - tax law does not make any distinction between income
accrued or arisen from a legal source and income tainted with illegality.
8. Disputed title - Income-tax assessment cannot be held up or postponed merely
because of existence of a dispute regarding the title of income.
9 Surplus from mutual activity - A person cannot make taxable profit out of a
transaction with himself. Income must, therefore, come from outside.Income
should be real and not fictional. Transfer of goods between head office and branch
at invoice price does not result into income. If such goods are sold to outsiders
the profit on sale is regarded as income. Similarly income does not arise on
revaluation of assets.
A surplus arising to a mutual concern cannot be regarded as income chargeable
to tax. A body of individuals, raising contribution to a common fund for the mutual
benefit of members, cannot be said to have earned an income when it finds that
it has overcharged members and some portion of contribution raised may safely
be refunded to the members concerned.
13. Tax-free income- If a person receives tax-free income on which tax is paid by
the person making payment on behalf of the recipient, it has to be grossed up for
inclusion in his total income.
14. Same income cannot be taxed twice : It is a fundamental rule of the law
of taxation that, unless otherwise expressly provided , the same income
cannot be taxed twice.
15. Source of income need not exist in the assessment year : It is not necessary
that a source of income should exist in the assessment year.
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Example : A and B are the joint authors of a book and are to share the remuneration
equally. The book is published in December, 2016 and in January 2017, as per the
Contract, A, the first author receives the entire remuneration of 2,50,000 and 50% of
the same is paid by A to B subsequently. This payment by A to B is "diversion of
income by overriding title", and his taxable income is only 1,25,000 and B's in-
come will also be 1,25,000. Now whatever A & B spend / invest out of their income of
1,25,000 each is an "application of income".
GROSS TOTAL INCOME (G.T.I.) [Section 80B(5)]
G.T.I. means the 'total income' computed under the five heads.
TOTAL INCOME [Section 2(45)]
It means the total amount of income referred to in section 5, computed in the
manner laid down in this Act.
* As per section 14, income of a person is computed under the following five heads
1. Income from salaries
2. Income from house property
3. Profits or gains of business or profession
4. Capital gains
5. Income from other sources
The aggregate of above is G.T.I. from which deductions under sections 80C to 80U are
deducted, and thus we arrive at the total income.
(3) PREVIOUS YEAR [Section 2(34)]
It means the previous year as defined in section 3. Section 3 has defined the pre-
vious year as the financial year immediately preceding the assessment year. In-
come tax is payable on the income earned during the previous year.It is brought to
tax in the immediately succeeding financial year, which is called as an Assess-
ment year. Therefore, the income earned during the previous year 2017-18 i.e. 1st
of April 2017 to 31st March, 2018, will be charged to tax in the assessment year
2018-19.
Provided that, in the case of a business or profession newly set up, or a source of
income newly coming into existence, in the financial year, the previous year shall
be the period beginning with the date of setting up of the business or profession
or, as the case may be, the date on which the source of income newly comes into
existence and ending with the said financial year i.e. 31st March.
For e.g. Mr. "S" sets up a new business on 10th July, 2017 then the period from
10.7.2017 to 31.3.2018 will be his first previous year for the assessment year 2018-
2019 Thereafter every year a period of 12 months of April-March will be his previous
year. Thus only in the first year previous year will be for a broken period.
(4) ASSESSMENT YEAR [Section 2(9)]
Assessment year means the period of twelve months commencing on the 1st day
of April every year.
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This means that every financial year beginning on the first of April and ending on
the 31st of March, is the assessment year. For example, the period from the 1st
April, 2018 to 31st March 2019 is called assessment year 2018 - 2019 in respect
of previous year 2017 - 2018.
Thus Income-Tax is an annual tax, charged on the total income earned by a person.
For computation of Income, the law applicable for the relevant assessment year
should be referred. Income-tax law changes frequently.Income taxable in a year
may be exempt or taxable differently in another assessment year.
The rates of tax may change from one assessment year to another.Thus the amount
of tax may differ from one assessment year to another, although the income earned
is the same in both the years.
(5) TAX RATES FOR ASSESSMENT YEAR 2018-2019
Particulars Individual/H.U.F./A.O.P./B.O.I.A.J.P. Firm & Local Indian Company Foreign Company
Authority
Basic tax S l a b r a t e s Flat rate of 30% Flat rate of 30% Flat rate of 40%
Add: Surcharge I f To t a l I nc o me If Total Income If Total Income > `̀̀̀ 1 If Total Income > `̀̀̀ 1
> `̀̀̀50 lakhs, 10% > `̀̀̀ 1 Crore, 12% Crore but < = `̀̀̀ 10 Crore but < = `̀̀̀ 10
of Basic tax of Basic tax crores, 7% of Basic crores, 2% of Basic
tax. tax.
I f To t a l In co me If Total Income > If Total Income >
> `̀̀̀ 1 Crore, 15 % `̀̀̀10 crores, 12 % of `̀̀̀ 10 crores, 5% of
of Basic tax Basic tax. Basic tax
Add: Education 3% of (Basic tax – 3% of (Basic 3% of (Basic tax + 3% of (Basic tax +
Cess Rebate + Surcharge) tax + Surcharge) Surcharge) Surcharge)
TAX PAYABLE XXXX XXXX XXXX XXXX
(I) SLAB RATES
Resident Senior Citizens Resident Very Senior/ Others (Individuals aged < 60
(Age >= 60 years but < 80 Super Senior Citizens years at any time during the
years at any time during (Age >= 80 yearsat any P.Y., H.U.F, A.J.P.) and all not
the P.Y.) time during the P.Y.) resident individuals
Upto 3,00,000 NIL Upto 5,00,000 NIL Upto 2,50,000 NIL
3,00,001 - 5,00,000 5% 5,00,001 -10,00,000 20% 2,50,001 - 5,00,000 5%
5,00,001 -10,00,000 20% > 10,00,000 30% 5,00,001 -10,00,000 20%
> 10,00,000 30% > 10,00,000 30%
`̀̀̀ 3,00,000, `̀̀̀ 5,00,000 and `̀̀̀ 2,50,000 are called as " BASIC EXEMPTION LIMIT"
since income tax is payable by the person on the income exceeding this limit.
Note : If turnover or gross receipts for previous year 15-16 is upto 50 crores = basic tax is
25% (applicable only to companies).
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(II)
An individual who is resident in India, and whose total income does not exceed
`̀̀̀ 3,50,000, shall be entitled to a deduction, of the amount of "Basic tax" (calculated as
per slab rates) or a maximum of `̀̀̀ 2,500, which ever is less.This rebate shall be
reduced from the basic tax.Please note that this rebate is availabe to "individuals"
only & not to the other six persons as per section 2(31).
(III) MARGINAL RELIEF
(ia) For persons other than companies
The total amount payable as income-tax and surcharge on total income
exceeding 50 lakhs rupees shall not exceed the total amount payable as
income-tax on a total income of 50 lakhs rupees by more than the amount of
income that exceeds one crore rupees.
If
[Basic tax + S.C. on Total Income] – [Basic tax on Total Income of `̀̀̀ 50 lakhs] >
Income in excess of `̀̀̀ 50 lakhs,
Then
Marginal Relief = [Basic tax + S.C. on Total Income] – [Basic tax on Total
Income of `̀̀̀ 50 lakhs] - Income in excess of `̀̀̀ 50 lakhs
(ib) For persons other than companies
The total amount payable as income-tax and surcharge on total income
exceeding one crore rupees shall not exceed the total amount payable as
income-tax on a total income of one crore rupees by more than the amount of
income that exceeds one crore rupees.
If
[Basic tax + S.C. on Total Income] – [Basic tax on Total Income of `̀̀̀ 1 crore]
> Income in excess of `̀̀̀ 1 crore,
Then
Marginal Relief = [Basic tax + S.C. on Total Income] – [Basic tax on Total
Income of `̀̀̀ 1 crore] - Income in excess of `̀̀̀ 1 crore.
(ii) For companies having income
(a) exceeding `̀̀̀ 1 crores but not exceeding `̀̀̀ 10 crores and
(b) exceeding `̀̀̀ 10 crores.
The total amount payable as income-tax and surcharge on total income
exceeding one crore rupees but not exceeding ten crore rupees, shall not
exceed the total amount payable as income-tax on a total income of one crore
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rupees, by more than the amount of income that exceeds one crore rupees.
The total amount payable as income-tax and surcharge on total income
exceeding ten crore rupees, shall not exceed the total amount payable as
income-tax and surcharge on a total income of ten crore rupees, by more than
the amount of income that exceeds ten crore rupees.
If
[Basic tax + S.C. on Total Income] – [Basic tax + S.C. on Total Income of `̀̀̀ 10
crore] > Income in excess of `̀̀̀ 10 crore,
Then
Marginal Relief = [Basic tax + S.C. on Total Income] – [Basic tax on Total
Income of `̀̀̀ 10 crore] - Income in excess of `̀̀̀ 10 crore.
OTHER DEFINITIONS / TERMINOLOGIES/CONCEPTS
(a) Assessee [Section 2(7)]
Assessee means a person by whom any tax or penalty or interest is payable under
the Act. The term includes the following persons :
1. Every person in respect of whom any proceeding under the Act, has been
taken for (a) his income (or loss) or assessment of fringe benefits or (b) of
the income (or loss) of any other person in respect of which he is assessable
i.e. Legal Representative.
2. Every person in respect of whom any proceeding under the Act has been
taken for computation of refund due to him or to such person in respect of
whom he is assessable.
3. Every person who is deemed to be an assessee under any provision of the
Act (for instance, 'representative assessee' is treated as deemed assessee
in respect of income or loss of another person under Section 160 .i.e. say,
trustee in respect of a trust).
4. Every person who is deemed to be an assessee in default under any
provision of the Act (for instance, a person who is under duty to deduct tax at
source on payment of salary, dividend, interest, etc. does not deduct tax, or
after deducting tax fails to deposit the same to the Government's treasury, is
treated as assessee in default).
(b) Representative assessee : Section 160 gives the definition of
representative assessee as follows :
(i) in respect of the income of a non - resident, the agent of the non - resident including
a person who is treated as an agent under section 163.
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager
who is entitled to receive or is in receipt of such income on behalf of the
minor,lunatic or idiot.
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(iii) in respect of income which the Court of Wards, the Administrator
General, the Official Trustee or any receiver or manager appointed by or
under any order of the Court, receives or is entitled to receive, such Court of
Wards, Administrator General, Official Trustee, receiver or manager.
(iv) in respect of income which a trustee appointed under a trust declared by a duly
executed instrument in writing (including a Walk deed) receives or is entitled to
receive on behalf of or for the benefit of the person, such trustee or trustees.
(v) in respect of income which a trustee appointed under an oral trust
receives or is entitled to receive on behalf or for the benefit of the person, such
trustee or trustees.
Every representative assessee shall be deemed to be an assessee for the pur-
poses of the Act.
(c) Relative [Section 2(41)]
'Relative', in relation to an individual, means the husband, wife, brother or sister or any
lineal ascendant or descendant of that individual.
(d) Child [Section 2(15B)]
Child, in relation to an individual, includes a step-child and an adopted child of that
individual.
Rounding - off of Income / Tax [Section 288A / 288B]
The taxable income / tax shall be rounded off to the nearest multiple of ten rupees and
for this purpose any part of a rupee consisting of paise shall be ignored and thereafter
if such amount is not a multiple of ten, then, if the last figure in that amount is five or
more, the amount shall be increased to the next higher amount which is multiple of ten
and if the last figure is less than five, the amount shall be reduced to the next lower
amount which is a multiple of ten.
Example :
Income / tax before rounding off Income / Tax after rounding off as per sec. 288A /
288 B
1, 23, 454.90 1, 23, 450
1, 23, 455.00 1, 23, 460
1, 23, 458.90 1, 23, 460
1, 23, 464.80 1, 23, 460
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Substantial Interest [section 2(32)]
"Person who has a substantial interest in the Company", in relation to a company, means
a person who is the beneficial owner of shares, [not being shares entitled to a fixed
rate of dividend whether with or without a right to participate in profits i.e. equity shares]
carrying not less than 20% of the voting power.
In the case of a non - corporate entity, a person can be said to have substantial interest
if he is entitled for 20% or more of share of profit.
Section 115O to 115Q : Dividend Distribution Tax (DDT) - shares
Dividends whether interim or final or deemed, declared and paid on or after
1.4.2003 by a domestic company (whether out of current or accumulated profits)
shall be charged to additional income-tax (tax on distributed profits) at the rate of
15% plus surcharge of 12% plus education cess of 3% i.e., effective tax rate of
17.304% over and above the normal income tax on the income of the domestic company.
The D.D T. basic rate ( excluding surcharge and education cess)will be
grossed up as under:-
Gross dividend say = 100
Then D. D . T. @15% = 15
Net dividend received = 85
If 15 is expressed as a % of dividend actually received, then :
15 x 100 =17.647% effective basic rate excluding Surcharge & Education Cess.
85
Now effective rate including surcharge and education cess will be :
Basic effective rate : 17.647
+ 12% surcharge : 2.118
Total 19.765
+ 3% education cess : 0.593
Effective rate : 20.358
Sec. 115R to 115T : Dividend Distribution Tax - Units of Mutual Fund
Any amount of income distributed by the specified company [as per sec.
2(h) of U.T.I. (Transfer of undertaking & Repeal) Act, of 2002] or a mutual
fund to its unit holders shall be chargeable to tax at the rate of :
1. 25% on income distributed to an individual or H.U.F.
2. 30% on income distributed to any person other than individual and
H.U.F.
The above rates shall be increased by surcharge of 12% plus education cess
of 3%.
Similar to section 115-0 grossing up :
���� For Individual & HUF recipient
* D.D.T. 25 33.33% effective basic rate
Net received 75 x 100 =
excluding surcharge & education cess
: 13 :
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INTRODUCTION
* Effective rate including surcharge & education cess.
Basic effective rate : 33.333 %
(+) 12% Surcharge : 3.996%
Total : 37.329%
(+) 3% education cess : 1.119%
38.449%
���� Other than Individual & HUF recipient
* (D.D.T. 30) 42.85% excluding surcharge &
(Net received 70)x 100 =
education cess
Basic rate : 42.85%
(+) 12 % Surcharge : 5.14%
Total : 47.99%
(+) 3 % education cess : 1.44%
Effective rate : 49.43 % including
surcharge & educational Cess
CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN THE SAME YEAR
Normally, income earned during any previous year is assessed or charged to tax in the
immediately succeeding assessment year. In the undermentioned cases, the income is
assessed and brought to tax in the same previous year of earning the income. Thus the
previous year and the assessment year in these exceptional cases will be the same.
These exceptions have been incorporated in order to ensure smooth collection of income -
tax from such tax payers who may not be traceable if tax collection procedure is postponed till
the commencement of normal assessment year.
(a) Income of the non - resident from shipping business [Section 172]
A non - resident who is carrying on a shipping business of carrying passengers / goods etc.
from any port in India, will have to pay income - tax before the ship is allowed to leave the
Indian port. Thus, before the vessel leaves the Indian port, the master of the ship is duty
bound to submit the details of the revenue collected from India. 7.5% of the revenue
collected will be deemed to be the income (i.e. 92.5% of revenue is considered expenses)
and tax is levied at the rate applicable to a foreign company.
(b) Income of a person permanently leaving India [Sec. 174]
If the Assessing Officer (A.O.) has knowledge that any individual may leave India
permanently during the current assessment year or shortly after its expiry, the total
income of such individual upto the date of departure from India will be chargeable to
tax in the same assessment year.
Example : If a foreign national who is resident in India since long is leaving India permanently
on 4.5.18 and the assessing officer while completing the assessment of P.Y. 2016-17 A.Y.
2017-18 on 20.3.2018 knows this fact. The A.O. shall make the following three
assessments.
(i) For the P.Y. 2016-17 (1.4.16 to 31.3.17 income earning period) at the normal
rates of tax applicable for A.Y. 2017-2018.
(ii) For the P.Y. 2017-18 (1.4.17 to 31.3.18 income earning period) at the rates of
advance tax given in Part III of the first schedule to the FINANCE ACT, 2017,
applicable for A.Y. 2018-19.
(iii) For the income earning period 1.4.18 to 4.5.18(on estimated basis) i.e. P.Y. 18-
19 also assessed in advance at the rates applicable for A.Y. 18-19 as per (ii)
above, because as at 20.3.18 (date of assessment) the Finance Bill of 2018
would not have been passed and would not have become the Finance Act, 2018.
: 14 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
INTRODUCTION
(c) Income of AOP / BOI / Artificial juridical person formed for a short duration [Sec. 174A]
If the A.O. is of the opinion that the above entities are formed for a short duration and
are likely to be dissolved in the assessment year or shortly after such assessment year,
the total income of such entity for the period from the commencement of that assessment
year, upto the date of its dissolution shall be chargeable to tax in that assessment year.
Example : If an A.O.P. consisting of one firm and one HUF is formed for
constructing & completing one fly over and the construction is likely to be completed
on 9.9.18. During the assessment proceedings on 8.8.18 of P.Y. 17-18 A.Y. 18-19,
the A.O. comes to know about the project completion and will make the following
two assessments for the Assessment Year 2018-19 :
Normal assessment for the previous year 17-19 (i.e. income earning period of
1.4.17 to 31.3.18) at the normal rates of tax applicable for A.Y. 18-19.
For the income period of 1.4.18 to 9.9.18 i.e. A.Y. 19-20 at the rates of tax
applicable for Advance tax payment in relation to A.Y. 19-20 i.e. rates of tax
given in Part III of the first schedule to Finance Act, 2018.
(d) Assessment of persons likely to transfer property to avoid tax [Sec. 175]
If it appears to the Assessing Officer during any current assessment year, that any person
is likely to sell, transfer etc. any of his assets with an intention to avoid his tax liability, then
the total income of such person from the commencement of A.Y. till the date of commencement
of assessment proceedings, shall be chargeable to tax in the same A.Y.
(e) Discontinued business [Sec. 176]
At the discretion of the assessing officer, if any business or profession is discontinued in
any assessment year, the income from the commencement of the assessment year till the
date of such discontinuation may be charged to tax in that assessment year.
Calculate Tax Payable
Q. 1. Person is Individual aged 55 years if income is
Case A = 10,00,000
Case B = 50,00,000
Case C = 1,05,00,000
Q. 2. Person is Indian Company and If income is
Case A = 80,00,000
Case B = 1,00,00,000
Case C = 5,00,00,000
Case D = 10,00,00,000
Case E = 15,00,00,000
Q. 3. Person is HUF and If Income is
Case A = 4,00,000
Case B = 15,00,000
: 15 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
WHAT IS RELEVANCE OF RESIDENTIAL STATUS
Tax incidence on a assessee depends on his residential status. For instance, whether an
income, accrued to an individual outside India, is taxable in India depends upon the residential
status of the individual in India. Similarly, whether an income earned by a foreign national in
India (or outside India) is taxable in India, depends on the residential status of the individual,
rather than on his citizenship. Therefore, the determination of the residential status of a person
is very significant in order to find out his tax liability.
WHAT ONE MUST KNOW FOR DECIDING RESIDENTIAL STATUS
���� Residential status is a term coined under Income Tax Act and has nothing to do with
nationality or domicile of a person. An Indian, who is a citizen of India can be non-
resident for Income-tax purposes, whereas an American who is a citizen of America
can be resident of India for Income-tax purposes. Residential status of a person depends
upon the territorial connections of the person with this country, i.e., for how many days
he has physically stayed in India.
���� The residential status of different types of persons is determined differently. Similarly,
the residential status of the assessee is to be determined each year with reference to
the “previous year”. The residential status of the assessee may change from year to
year. What is essential is the status during the previous year and not in the assessment year.
���� Duty of Assessee - It is assessee’s duty to place relevant facts, evidence and material
before the Income Tax Authorities supporting the determination of Residential status.
���� Dual Residential Status is possible - A person may be resident of one or more
countries in a relevant previous year e.g., Mr. X may be resident of India during previous
year 2013 14 and he may also be resident/non-resident in England in the same previous
year. The emergence of such a situation depends upon the following
(a) the existence of the Residential status in countries under considerations
(b) the different set of rules having laid down for determination of residential status.
���� Different residential status – An assessee is either (a) Resident in India, or (b) non
– resident in India. However, a resident Individual or a Hindu undivided family has to be
(a) resident and ordinarily resident, or (b) resident but not ordinarily resident. Therefore,
an individual and a Hindu undivided family can either be :
(a) Resident and ordinarily resident
(b) resident but not ordinarily resident
(c) Non resident in India.
All other assessees (viz, a firm, an association of person, a joint stock company and
every other person) can either be:
(a) Resident in India or
(b) Non resident in India
RESIDENCE OF AN ASSESSEE
The following chart highlights the same –
Person
Individual & HUF Others (Company, Firm, AOP, BOI, etc.)
Resident in India Non-resident Resident in India Non -resident
Ordinarily Resident in India Not Ordinarily in India
HOW TO DETERMINE RESIDENTIAL STAUS OF AN INDIVIDUAL – SECTION 6(1)
1. Basic Conditions:
(a) If the Individual stayed in India for a period of 182 DAYS OR MORE during the
Relevant Previous Year (RPY), he is Resident of India;
(OR)
(b) If he stayed in India for a period of 60 DAYS OR MORE during Relevant Previous
Year (RPY) and 365 DAYS OR MORE during the four preceding Previous Years,
he is Resident of India.
If the assessee fails to satisfy either of the above basic conditions, as applicable, then
the assessee is a Non-Resident for that Relevant Previous Year.
2. Additional Conditions: Sec. 6(6)(a)
(i) Resident in India for at least 2 years out of the preceding 10 Previous Years.
(Preceding to relevant PY)
(ii) Stay in India for at least 730 days during the 7 preceding Previous
Years(Preceding to relevant PY).
If the assessee satisfies above additional conditions, then assessee is Resident and
ordinarily otherwise Resident but not ordinarily resident.
Resident Basic Non - Resident ANY NONE
Resident
and
ordinarily
Resident
Additional
condition
(2 condition)
Resident but
not ordinarily
ResidentBOTH
ANY ONE OR
NONE
Residential Status in case of individual – section 6(1)
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
: 16 : RESIDENCE OF AN ASSESSEE
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
Special exceptional situations:
For the following persons, condition mentioned in 1(a) above shall only apply to determine
their Residential Status:
(i) Indian citizen who leaves India during the previous year for the purpose of employment
outside India.
(ii) Indian Citizen who leaves India during the previous year as a member of the crew of an
Indian ship, or
(iii) Indian citizen or a person of Indian origin who comes on a visit to during the previous year.
A person is deemed to be of Indian origin if he, or either of his parents or any of his grand
parents was born in undivided India. Grand parents include both maternal and paternal.
Note:
1. The day on which he enters India as well as the day on which he leaves India
shall be taken into account as the stay of the Individual in India.
2. The stay in India need not be at the same place
3. It is also not essential that the stay should be continuous.
4. The place of stay and purpose of stay in India, is not material
HOW TO DETERMINE RESIDENTIAL STAUS OF AN HINDU UNDIVIDED FAMILY–
SECTION 6(2)
A Hindu Undivided Family is said to be R&OR/RNOR in India if control and management of its
affairs is, wholly or partly, situated in India. A Hindu Undivided Family is nonresident in India if
control and management of its affairs is wholly situated outside India.
1. Control and management means de- facto control and management and not merely the
right to control or manage. Control and management is situated at a place where the
head, the seat and the directing power are situated.
2. And ordinarily/ not ordinarily depends upon the individual residential status of the karta,
i.e. satisfaction of additional conditions by the Karta.
HOW TO DETERMINE RESIDENTIAL STAUS OF FIRM AND ASSOCIATION OF PER-
SON – SECTION 6(2)
A partnership firm and an association of person are said to be resident in India if control and
management of their affairs are wholly or partly situated within India during the relevant
previous year.
HOW TO DETERMINE RESIDENTIAL STAUS OF COMPANY [SECTION 6(3)]
An Indian company is always resident in India. A foreign company is resident in India
only if its "Place of effective management", in that year, is in India.
The term "Place of effective management" means a place where Key management
and commercial decisions that are necessary for the conduct of the business of an
entity as a whole are, in substance, made.
Usually control and management of a company's affairs is situated at the place where
meetings of board of directors are held. Moreover, control and management referred
to in section 6 is central control and management and not the carrying on of day to day
business by servants, employees or agents.
The term "control" does not mean shareholding control.
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RESIDENCE OF AN ASSESSEE
HOW TO DETERMINE RESIDENTIAL STAUS OF "EVERY OTHER PERSON" [SECTION 6(4)]
Every other person is resident in India if control and management of his affairs is wholly or
partly situated within India during the relevant previous year. On the other hand, every other
person is non-resident in India if control and management of its affairs is wholly situated
outside India.
SCOPE OF INCOME (SECTION 5)
: 19 :
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RESIDENCE OF AN ASSESSEE
Incomes deemed to accrue or arise in India [Section 9]
Certain Incomes are deemed to accrue or arise in India u/s 9 even though they may actually
arise outside India. The following is a list of such incomes in simple words.
1. Income from business connection – The following conditions should be satisfied –
Condition one – The Taxpayer has a “business connection” in India.
Condition Two – By virtue of business connection in India, income actually arises
outside India
If above conditions are satisfied, income which arises outside India because of business
connection in India is deemed to accrue or arise in India.
Some illustrative instances of a non-resident having business connection in India, are
given below:
(a) Maintaining a branch office in India for the purchase or sale of goods or
transacting other business.
(b) Appointing an agent in India for the systematic and regular purchase of raw
materials or other commodities, or for sale of the non-resident's goods, or for
other business purposes.
(c) Erecting a factory in India where the raw produce purchased locally is worked
into a form suitable for export abroad.
(d) Forming a local subsidiary company to sell the products of the non-resident
parent company.
(e) Having financial association between a resident and a non-resident company.
Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or
arise in India. They are given below:
(1) In the case of a business, in respect of which all the operations are not carried
out in India [Explanation 1(a) to section 9(1)(i)]
In the case of a business of which all the operations are not carried out in India,
the income of the business deemed to accrue or arise in India shall be only such
part of income as is reasonably attributable to the operations carried out in India.
Therefore, it follows that such part of income which cannot be reasonably
attributed to the operations in India, is not deemed to accrue or arise in India.
(2) Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]
In the case of a non-resident, no income shall be deemed to accrue or arise in
India to him through or from operations which are confined to the purchase of
goods in India for the purpose of export.
(3) Collection of news and views in India for transmission out of India [Explanation
1(c) to section 9(1)(i)]
In the case of a non-resident, being a person engaged in the business of running a
news agency or of publishing newspapers, magazines or journals, no income shall
be deemed to accrue or arise in India to him through or from activities which are
confined to the collection of news and views in India for transmission out of India.
(4) Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)] In
the case of a non-resident, no income shall be deemed to accrue or arise in
India through or from operations which are confined to the shooting of any
cinematograph film in India, if such non-resident is :
(i) an individual, who is not a citizen of India or
(ii) a firm which does not have any partner who is a citizen of India or who is
resident in India; or
(iii) a company which does not have any shareholder who is a citizen of India
or who is resident in India.
: 20 :
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RESIDENCE OF AN ASSESSEE
2. Income through or from any property, any asset or source of income in India.
3. Income through the transfer of Capital Asset situated in India.
4. Income which falls under the head "Salaries" shall be regarded as income earned in
India if the income is payable for -
service rendered in India, and
the rest period or leave period, which is preceded and succeeded by services,
rendered in India and forms part of the service contract of employment.
5. Salary paid by the Government to a citizen of India for rendering service outside India.
However the allowances and perquisites paid outside India by the Government to the
citizen of India, is exempt u/s 10(7).
6. Dividend paid by an Indian company outside India.
7. Interest payable by :
a) Government ; or
b) any resident person, unless the interest is payable on any debt incurred or
money borrowed and used for a business or profession carried on by him
outside India or for earning any income from any source outside India ; or
c) any non-resident person, when the interest is payable on any debt incurred or
money's borrowed and used for the purpose of a business or profession
carried on by him in India.
: 21 :
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RESIDENCE OF AN ASSESSEE
8. Royalty payable by :
(a) Government ; or
(b) any resident person, unless the royalty is payable in respect of any right, property
or information used or services utilised for the purposes of a business or
profession carried on by him outside India or for earning any income from
any source outside India ; or
(c) any non-resident person, when the royalty is payable in respect of any right,
property or information used or services utilised for the purposes of a
business or profession carried on by him in India or for earning any income
from any source in India.
9. Income by way of fees for technical services payable by :
a) Government ; or
b) any resident person, unless the technical fees is payable for a business or
profession carried on by him outside India or for earning any income from
any source outside India ; or
c) any non resident person, when the technical fees is payable for a business
or profession carried on by him in India or for earning any income from any
source in India.
The income of the non-resident shall be deemed to accrue or arise in India, whether
or not -
(i) the non-resident has a residence or place of business or business connection
in India
OR
(ii) the non-resident has rendered services in India.
OR
(iii) The possession or control of such right, property or information is with the
payer or used directly by the payer or the location is in India.
: 22 :
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RESIDENCE OF AN ASSESSEE
: 23 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
Q. 1. Dhaval, an Indian citizen serving in the U.S.A. since 1969, came to India for the first
time after 1969 on 30th June, 2011. He stayed here at a stretch for 3 years and left for
Japan on 1st July, 2014. He returned to India on 1st April, 2015 and remained in India
till 31st July 2016 when he went back to the U.S.A. He, permanently, again came to
India taking an employment with an American concern on 31st December, 2017.
Determine Residential status for assessment year 2018 - 19.
Q. 2. X & Co. is an Indian company carrying on business in India as well as in British
East Africa. The control and management of its affairs was wholly situated in India
during the year ended 31st March, 2018. Its income accruing or arising in British
East Africa in that year far exceeded its income accruing or arising in India.
Determine Residential status for assessment year 2018 - 19.
Q. 3. X, an Indian citizen, who is appointed as senior taxation officer by the Government
of Nigeria, leaves India, for the first time, on September 20, 2016 for joining his
duties in Nigeria. During the previous year 2017-2018 he comes to India on a visit
for 176 days. Determine the residential status of X for the assessment years
2017-18 and 2018-19.
Q. 4. 'F' was born in FRANCE in 1969 and his father was born in Australia in 1939, but
F's Grand father was born in Dhakka in 1915. Will 'F'be a resident in India if he
visits India for 181 days during the previous year 2017-18.
Determine Residential status for assessment year 2018 - 19
Q. 5. X, a citizen of India, left India for the 1st time on 6.6.2014 for employment abroad.
During 2015-16 and 2016-17 he visited India for 145 days and 165 days
respectively. In the previous year 2017-18 he came to India on 7.4.17 and left on
30.11.17. Determine the residential status for the assessment year 2018-19.
Q. 6. Mr. A is an Indian citizen and a member of the crew of a Singapore bound Indian ship
engaged in carriage of passengers in international traffic departing from Chennai port on
6th June, 2017. From the following details for the P.Y.2017-18, determine the residential
status of Mr. A for A.Y.2018-19, assuming that his stay in India in the last 4 previous years
(preceding P.Y.2017-18) is 400 days and last seven previous years (preceding P.Y.2017-
18) is 750 days:
Particulars Date
Date entered into the Continuous Discharge Certificate in respect
of joining the ship by Mr. A 6th June, 2017
Date entered into the Continuous Discharge Certificate in respect
of signing off the ship by Mr. A 9thDecember 2017
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
Q. 7. Determine the taxability of income of US based company Heli Ltd., in India on
entering following transactions during the financial year 2017-18.
(i) 5 lacs received from an Indian domestic company for providing technical
know how in India.
(ii) 6 lacs from an Indian firm for conducting the feasibility study for the new
project in Finland.
(iii) 4 lacs from a non-resident for use of patent for a business in India.
(iv) 8 lacs from a non-resident Indian for use of know how for a business in Singapore.
(v) 10 lacs for supply of manuals and designs for the business to be
established in Singapore.No payment for the same was made in India.
Q.8. Following are the particulars of taxable income of Mr R for the previous year ended
31.03.2018.
1. Royalty received from Government of India Rs 24,000
2. Income from business earned in Afganistan Rs 25,000 of which ̀̀̀̀ 15,000 were re-
ceived in India(Controlled from Afganistan).
3. Interest received from G a non- resident against a loan provided to him to run a
business in India `̀̀̀ 5000.
4. Royalty Received in India from S a resident for technical services provided to run a
business outside India `̀̀̀ 20,000.
5. Income from business in Jaipur `̀̀̀40,000. This business is controlled from France
` ` ` ` 20,000 were remitted to France.
6. Profit on sale of shares in Indian Company received in Germany Rs 15,000
7. Dividend
- From Japanese Company received in Japan – `̀̀̀10,000
- From RP Ltd an Indian Company – `̀̀̀ 5,000
8. Income from property in London deposited in a bank in London, later on remitted to
India ̀̀̀̀ 1,00,000.
9. Income from Business in Canada Controlled from Mumbai `̀̀̀ 50,000 of which
`̀̀̀ 27,000 is received in India.
Find out Total Income of Mr R, if he is –
a) Resident and Ordinarily Resident
b) Resident but not Ordinarily Resident
c) Non Resident.
Q . 9. State with reasons whether the following transcations attract income tax in India in the hands
of recipients .
(i) Salary paid by Central Government to Mr. John, a citizen of India `̀̀̀ 7,00,000 for the
services rendered outside India.
(ii) Interest on moneys borrowed from outside India `̀̀̀ 5,00,000 by a non-resident for
the purpose of business within India say in Mumbai.
(iii) Royalty paid by a resident to a non- resident in respect of a business carried on
outside India.
(iv) Legal charges of `̀̀̀ 5,00,000 paid to a lawyer of United Kingdom who visited India to
represent a case at the Delhi High court.
: 25 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
Ans.6. In this case, the voyage is undertaken by an Indian ship engaged in the carriage
of passengers in international traffic, originating from a port in India (i.e., the
Chennai port) and having its destination at a port outside India (i.e., the Singa-
pore port). Hence, the voyage is an eligible voyage for the purposes of section
6(1). Therefore, the period beginning from 6th June, 2017 and ending on 9th
December, 2017, being the dates entered into the Continuous Discharge Cer-
tificate in respect of joining the ship and signing off from the ship by Mr. A, an
Indian citizen who is a member of the crew of the ship, has to be excluded for
computing the period of his stay in India. Accordingly, 187 days
[25+31+31+30+31+30+9] have to be excluded from the period of his stay in
India. Consequently, Mr. A’s period of stay in India during the P.Y.2017-18 would
be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during
the P.Y.2017-18 is less than 182 days, he is a non-resident for A.Y.2018-19.
Note - Since the residential status of Mr. A is “non-resident” for A.Y.2018-19 con-
sequent to his number of days of stay in P.Y.2017-18 being less than 182 days,
his period of stay in the earlier previous years become irrelevant.
Ans. 7. A non- resident is chargeable to tax in India in respect of following incomes.
(i) Income received or deemed to be received in India, and
(ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions taxability of income is determined in following manner :
Sr. no. Particulars `̀̀̀(in lacs)
(i) Amount received from an Indian domestic company for 5
providing technical knowhow in India is deemed to accrue
or arise in India and is, therefore, taxble in India.
(ii) Conducting the feasibility study for the new project in finland Nil
for the Indian firm is not taxable in India as the income
accrues outsde India since such study is done for a
business outside India
(iii) Income received from a non-resident for use of patent for a 4
business in India is taxable in India as it is deemed to
accruse or arise in India.
(iv) Income received from a non-resident Indian for use of knowhow Nil
for a business in Singapore.It is not taxable in India since
it does not accrue or arise in India nor it is deemed to
accrue or arise in India.
(v) Income received for supply of manuals and designs for the Nil
business to be established in Singapore is not taxable in India,
since it does not accrue or arise nor is it deemed to accrue
or arise in India.
Total Income 9
CLASS WORK SOLUTIONS
: 26 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
RESIDENCE OF AN ASSESSEE
Ans. 9. Taxable / Amount Reason
Not liable
Taxable to tax( `̀̀̀)
(i) Taxable 7,00,000 As per section 9(1) (iii), salaries payble by the
Governemnt to a citizen of India for service rendered
outside India shall be deemed to accrue or arise in
Inida. Therefore salary paid by Central Government
to Mr. Jogn for services rendered outside India would
be deemed toa ccrue or arise in India since he is
citizen of India.
(ii) Taxable 5,00,000 As per section 9(1) (v)(c) interest payable by a
non- resident on moneys borrowed and used for the
purposes of business carried on by such person in
India shall be deemed to accrue or arise in India in
the hands of the recipient
(iii) Not ---- Royalty paid by a resident to a non - resident in
Taxable respect of a business carried outside India would
be taxable in the hands of the non- resident provided
the same is not received in India This has been
provided as on exception to deemed accrual
mentioned in section 9(1) (vi)(b)
(iv) Taxable 5,00,000 In case of a non-resident any income which accrues
or arises in India or which is deemed to accrue or
arise in India or which is received in India or is
deemed to be received in India is taxable in India.
Therefore, legal changes paid in India to a non-
resident lawyer of UK, who visited India to repre
sent a case at the Delhi High Court would be taxble in India.
: 27 :
J. K. SHAH CLASSES INTER C.A.- DIRECT TAXES
SALARIES
General Points :
In order to understand the meaning of expression “Salary” one has to keep in mind the
following :
(i) Relationship between payer and payee:
A payment cannot be taxed under the head “Salary” unless the relationship of em-
ployer and employee exists between the payer and payee.
(ii) A member of par liament or state legislature is not treated as an
employee of the Government.
Salary and allowances received by him, are therefore, chargeable to tax under
the head “Income from other sources”.
(iii) Salary and wages :
Conceptually there is no difference between salary and wages. Both are com-
pensation for work done or services rendered, though ordinarily salary is paid in
connection with service of non-manual type of work, while wages are paid in connec-
tion with manual services, therefore, remuneration received by an individual is taxable
under the head “Salaries” whether the remuneration is termed as salary or wages.
INCOME FROM SALARIES
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(iv) Salary from more than one source :
If an individual receives salary from more than one employer during the same previous
year, salary from each source is taxable under the head “Salaries”.
(v) Salary from former employer, present employer or prospective employer:
It is chargeable to tax under the head “Salaries”.
(vi) Foregoing of salary :
If an employee foregoes his salary, it does not mean that salary so foregone is not
taxable. Once salary has accrued to an employee, its subsequent waiver does not make
it exempt from tax liability. Such voluntary waiver or foregoing by an employee of salary due
to him, is merely an application of income and which is nonetheless chargeable to tax.
(vii) Surrender of salary :
If an employee opts to surrender his salary to the Central Government under section 2 of
the Voluntary Surrender of Salaries Act, the salary so surrendered would be excluded while
computing his taxable income. Thus, tax is not payable in respect of salary surrendered,
which can be basic salary as well as different allowances.Benefit of tax exemption in re-
spect of salary surrendered is available to all employees whether they are employed in
private sector or public sector.
(ix) Advance Salary :
Advance Salary is taxable when it is received by the employee, irrespective of the fact
whether it is due or not.
It may so happen that when advance salary is inckuded charged in a particular previous
year, the rate of tax at which the emplyee is assessed may be higher tyhan the normal rate
of tax to which he would have been assessed.Section 89(1) provides for relief in these
types of cases.
(x) Loan or Advance against salary :Loan is different from salary.When an employee takes
a loan from his employer , which is repayable in certain specified installments, the loan
amount cannot be brought to tax as salary of the employee.
Basis of charge (Section - 15) :
As per section 15, salary consists of:
a. any salary due from an employer (or a former employer) to an assesse in the previous
year, whether actually paid or not;
b. any salary paid or allowed to him in the previous year by or on behalf of an employer (or
a former employer), though not due or before it became due; and
c. any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer if not charged to income-tax for any earlier previous year.
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The same is explained in the table given below—
Nature of salary Is it taxable as income of the
previous year 2017-18
Salary becomes due during the previous year
2017-18(whether paid during the same year or not) Yes
Salary is received during the previous year
2017 – 18 (whether it becomes due in a subsequent year) Yes
Arrears of salary received during the previous year
2017-18 although it pertains to one of the earlier
years and the same were not taxed earlier on due basis Yes
Arrears of salary received during the previous year
2017-18although it pertains to one of the earlier years
but the same were taxed earlier on due basis No
���� Salary is taxable on "due” or "receipt" basis whichever is earlier Basis of charge in
respect of salary income is fixed by section 15. Salary is chargeable to tax either on
"due" basis or on "receipt" basis, whichever matures earlier.
���� Accounting method of the employee not relevant - It is worthwhile to mention that
salary is chargeable to tax on "due" or "receipt" basis (whichever matures earlier)
regardless of the fact whether books of account, in respect of salary income, are
maintained by the assessee on mercantile basis or cash basis. Method of
accounting cannot, therefore, vary the basis of charge fixed by section 15.
Format of computation of Income from Salaries
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RELIEF U/S. 89
Where an employee is in receipt of arrears of salary or advance salary in the P.Y., his
total income is assessed at a rate higher than that at which it would otherwise have been
assessed. the Assessing Officer shall, on an application made to him in this behalf, grant
relief from the tax payable by the employer for that year.
Under Rule 21A(2) following are the steps to give the relief :
1. Calculate the total tax payable on the total income, including the additional salary,
of the relevant previous year in which the same is received.
2. Calculate the total tax payable on the total income, excluding the additional salary,
of the relevant previous year in which the additional salary is received.
3. Find out the difference between the tax at (1) and (2) above.
4. Compute the total tax payable on the total income after including the additional
salary in the previous year to which such salary relates.
5. Compute the total tax payable on the total income after excluding the additional
salary in the previous year to which such salary relates.
6. Find out the difference between tax at (4) and (5) above.
7. The excess of tax computed at (3) over tax computed at (6) is the amount of relief
admissible under section 89. No relief is, however, admissible if tax computed
at (3) is less than or equal to tax computed at (6). In such a case, the employee
need not apply for relief.
Incomes deemed to be received in India [Section 7]
The following incomes shall be deemed (i.e. assumed) to be received in India and hence
taxable in India for the assessee, irrespective of his residential status.
1. Annual interest credited to the employee's account in the case of Recognised Provident
Fund in excess of 9.5% per annum rate of interest.
2. Contribution of employer in case of Recognised Provident Fund in excess of 12%
of salary.
3. The contribution made, by the Central Government or any other employer in the previous
year, to the account of an employee under a pension scheme referred to in section
80CCD.[eg. National Pension Scheme (NPS), Atal Pension Yojna (APY)]
Basic salary + Commission + Bonus
1. The first and foremost item of income from salary is basic salary ‘earned’ in the
computation of income.
If basic salary ‘received’ is given, then we have to find out ‘earned’ by adding back
whatever is deducted from salary. It is always fully taxable.
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2. The next item to be considered in the computation of income from salary is “Fixed %
commission on turnover achieved by employee”.
It is a mode of distribution of salary, where we get the best performance from an
employee because of the financial motivation. It forms part of ‘basic salary’
definition for several purposes.
If it is undecided % commission on turnover or simply commission or fixed %
commission on profits, it is taxable fully but does not form part of "salary" for various
purposes.
3. Bonus is a voluntary payment made by the employer to employee in relation to
employment. It is always taxable on receipt basis only (i.e. not on due basis).
ALLOWANCE :
Allowance is generally defined as a fixed quantity of money or other substance given
regularly in addition to salary for the purpose of meeting some particular requirement
connected with the services rendered by the employee or as compensation for unusual
conditions of that service. It is fixed, pro-determined and given irrespective of actual
expenditure. Under the Act, it is taxable under section 15 on "due" or "receipt" basis,
whichever comes earlier, irrespective of the fact that it is paid in addition to or in lieu of
salary. Tax treatment of different allowances is given below:
Foreign Allowance [Sec :10(7)]
Any allowance or perquisites paid or allowed outside India by the Government to an In-
dian citizen for rendering services outside India, is wholly exempted from tax.
House Rent Allowance [Sec 10(13A)] :
is exempt to the extent of least of the following :
(a) amount equal to 50% of the salary in case of Mumbai, Delhi, Calcutta & Chennai.
40% in case of any other city. [depending on location of rented premises]
(b) HRA actually received.
(c) Rent paid in excess of 10% of the salary.
���� Salary = Basic salary + D.A. (in terms) + Fix % commission on turnover, on due basis
for the period the rented accommodation is occupied by the employee only.[i.e. exclud-
ing Advance salary & Arrears of Salary]
���� Exemption is denied where an employee lives in his own house or in a house for which he does
not pay any rent or pays rent which does not exceed 10% of salary.
���� Mode of computation of exemption - The amount of exemption in respect of
house rent allowance received by an employee depends upon the following —
a. "salary" of the employee ;
b. house rent allowance ;
c. rent paid ; and
d. the place where house is taken on rent.
When these four are same throughout the previous year, the exemption should be
calculated on "annual" basis. When, however , there is a change in respect of any of
the aforesaid factors, then the exemption shall be worked out on "monthly" basis.
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Special allowance notified as Exempt - As per rule 2BB [Sec 10(14)(i) ] :
Allowance received which are exempt to the extent of amount spent for the purpose for
which they are given i.e. fully exempted if fully spent or partly exempt if partly spent
or fully taxable if nothing is spent.
���� Tour, Travel or transfer allowance, it also includes any sum paid in connection
with transfer, packing and transportation of personal effects on such transfer.
���� Any allowance, whether, granted on tour or for the period of journey in connection with
transfer, to meet the ordinary daily charges incurred by an employee on account of
absence from his normal place of duty, such as a daily allowance.
���� Conveyance allowance - This is exempt if spent to cover journey between office and
field and back to office.
If conveyance allowance is granted to cover journey between office and residence then
fully taxable. To cover expense of journey from residence to office & back, the
employee should get transport allowance which is discussed below.
���� Helper allowance - Any allowance granted by employer to employee to enable
the employee to meet the expenditure on a helper for the execution / performance
of his official duties.
���� Academic pursuit allowance - Any allowance granted for encouraging the
academic research and other professional pursuits.
���� Uniform allowance - Any allowance to meet the expenditure on the purchase or
maintenance of uniform for wearing during the performance of duties of an office.
Allowance notified as Exempt on the basis of limit - As per rule 2BB [Sec 10(14)(ii) ]
Allowances which are exempt not in relation to the amount spent, but are exempted to
the extent of least of :
Actual amount of allowance received
OR
Amount specified in Rule 2BB.
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Note on Dearness Allowance
The second item to be considered in the computation of income from salary is ‘Dearness
Allowance’ [DA].
It is a fixed amount paid by the employer to employee to enable him to meet the rise in
the cost of living. It is always fully taxable.
DA is of two types :-
���� In terms of employment/forming part of basic salary/considered for retirement benefits.
It forms part of basic salary for all definitions of salary except ‘salary’ definition for
entertainment allowance deduction u/s 16(ii).
���� Not in terms of employment / Does not form part of basic salary/Not considered for
retirement benefits.
It does not form part of any ‘salary’ definition except ‘salary’ definition of employee
covered by ‘Payment of Gratuity Act’.
Every year, the employee shall receive the total D.A. [ D.A. (in terms) and D.A. (not in
terms)] from the employer which shall be fully taxable for the employee. the break-
up of DA, as above, is relevant only for CALCULATION purposes.
RETIREMENT BENEFITS
Section Name of Retirement Benefits
10(10) Gratuity
10(10A) Pension
10(10AA) Leave Salary
10(10B) Retrenchment Compensation
10(10C) Voluntary Retirement Compensation
10(11) & 10(12) Statutory Provident Fund & Recognised Provident Fund
10(13) Superannuation Fund
1. Gratuity [Sec10(10)] :
Gratuity [Sec. 10(10)]- Gratuity is a retirement benefit. It is generally payable at
the time of cessation of /employment and on the basis of duration of service. Tax
treatment of gratuity is given below:
In case of Government Employees – Any death –cum retirement gratuity
received by Government employees is wholly exempt from tax u/s 10(10)(i).
In case of employees covered by thr payment of gratuity act, 1972[Sec.
10(10)(ii) - Any gratuity received by an employee, covered by the Payment of
Gratuity Act, 1972, is exempt from tax on the following basis
1. 15 days salary (7 days salary in the case of employees of a seasonal
establishment) based on salary last drawn for each year of service (i.e. 15
days salary x length of service)
15/26 x last drawn salary x Number of years of service.
2. 10,00,000
3. Gratuity actually received.
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What is exempt from tax – The least of the above three is exempt from tax.
How to find out length of service – If the period of service is 6 months, it shall
be ignored for this purpose. Conversely, if the period of the service is more than 6
months, it shall be taken as one full year.
Consider the following cases-
The difference between date of retirement Length of service for the purpose
and date of joining of section 10(10)(ii)
Case 1 26 years, 5 months and 29 days 26 years
Case 2 26 years and 6 months 26 years
Case 3 26 years, 6 months and 1 day 27 years
Case 4 26 years, 11 months and 29 days 27 years
What is salary – “Salary” for the purpose of the aforesaid limits means salary last
drawn by an employee and includes dearness allowance.
In the case of any other Employee – Any other gratuity received by an employee
on retirement, death, termination, resignation or on his becoming incapacitated
prior to the retirement, is exempt from tax on the following basis-
1. Rs. 10,00,000
2. Half month’s average salary for each completed year of service
½ x Average Salary of 10m x Number of years of service
3. Gratuity actually received
What is exempt from tax- The least of the above three is exempt from tax.
The following points merit consideration-
Completed years of service –How to determine – For calculating length of serv-
ice any fraction of the year shall be ignored. Consider the following cases-
The difference between date of retirement Length of service for the purpose
and date of joining of section 10(10)(iii)
Case 1 26 years, 5 months and 29 days 26 years
Case 2 26 years and 6 months 26 years
Case 3 26 years, 6 months and 1 day 26 years
Case 4 26 years, 11 months and 29 days
���� Average monthly salary - How to determine - Average monthly salary is
calculated on the basis of average salary for the ten months immediately
preceding tire month in which the employee has retired.
���� What is salary for this purpose - Salary for this purpose moans basic
salary. It includes dearness allowance if the terms of employment so provide
(or if dearness allowance/pay is taken into account for computing retirement
benefits). It also includes commission if commission is payable at a fixed
percentage of turnover achieved by an employee.
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���� When gratuity is received from two or more employers - Where gratuity
is received by a nongovernment employee (not covered by the Payment of
Gratuity Act) from two or more employers (maybe in the same year or differ-
ent years), the maximum amount of exemption under section 10(10)(ii) dur-
ing the lifetime of the concerned employee cannot exceed the notified amount,
i.e., Rs. 10,00,000. This provision is applicable only in the case of residual
category of employees.
���� Gratuity paid while in service - Any gratuity paid to an employee while he
continues to remain in service (whether or not after he has put in a minimum
specified period of service) is not exempt from tax.
2. Pension [Sec 10(10A)] :
Pension is chargeable tax as follows -
Pension Status of employee Is it chargeable to tax
Uncommuted pension Government / non- It is chargeable to tax
Government employee
Commuted pension Governemtn employee It is fully exempt tax under
section 10(10A) (i)
Commuted pension Non- Government It is fully or partly exempt from tax
employee under section 10(10A) (ii)
UNCOMMUTED PENSION - It is periodical payment of pension. For instance, X
gets monthly pension of Rs. 2,000. It is taxable as salary under section 15 in the
hands of a Government employee as well as non- Govenment employee.
COMMUTED PENSION - It is a lump sum payment in lieu of periodical payment.
For instance, after his retirement, X gets Rs. 2,000 per month as monthly pension.
As per service rules, he gets 25 per cent of his pension commuted for Rs. 60,000
(after commutation he will get the remaining 75 per cent, i.e., Rs. 1,500 by way of
monthly pension). In this case, Rs. 60,000 is commuted pension which X has re-
ceived in lieu of 25 per cent of his monthly pension.
Commuted pension is taxable as under—
Status of employee Gratuity received / Exemption in respect of commuted
not received pension under section 10(10A)
Governement employee Gratuity may (or may Entire commuted pension is
(i.e. an employee of central not) be received commuted from tax.
Governemnt, State
Government, local authority
and statutory corporation)
Non- Government employee Gratuity is received One-thi rd of the pension which he
is normally entitled to receive is
exempt from tax.
Non - Government employee Gratutity is not One-half of the pension which he is
received normally entitled to receive is
exempt from tax.
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3. Leave Salary [Sec 10(10AA)] :
The provisions regarding taxability of leave salary are given below—
WHAT IS LEAVE SALARY - As per service rules, an employee gets different leaves.
An employee has to earn leave in the first instance and only when he has leave to his
credit, he can apply for leave. If a leave (standing to his credit) is not taken within a
year, as per the service rules, it may lapse or il may be encashed or it may be accumu-
lated. The accumulated leaves standing to the credit of an employee may be availed by
the employee during his service time or, subject to service rules, such leaves may be
encashed at the time of retirement or leaving the job. Encashment of leave by surren-
dering leave standing to one's credit is known as "leave salary"
BROAD TAX TREATMENT - the broad tax treatment is given below -
Nature of leave enchasement Status of employee Whether it is taxable
Leave of enchasement during Government / It is chargeable to tax.
continuity of employment non-Government
employee
Leave enchasement at the time Government employee It is fully exempt from tax
of retirement / leaving job under section
Leave enchasement at the Non- Government It is fully partly exempt from
time of retirement. leaving job employee tax in some cases under section
GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT THE TIME OF
RETIREMENT (SEC. 10(10AA)(i)) - In the case of a Government employee, any amount
received as cash equivalent of leave salary in respect of period of earned leave at his
credit at the time of his retirement.
NON-GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT THE
TIME OF RETIREMENT [SEC 10(10AA)(ii)] - In the case of a non-Govemment
employee, leave salary' is exempt from tax on the basis of least of the following—
1. Period of earned leave (in number of months) to the credit of the employee at
the time of his retirement or leaving the job x Average monthly salary
2. 10 x Average monthly salary
3. The amount specified by the Government [i.e., `̀̀̀ 3,00,000]
4. Leave enchasement actually received at the time of retirement.
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Notes:
1. How to find out leave standing to the credit of an employee at the time of
retirement or leaving the job - It will be calculated as follows—
Step (a) - Find out duration of service in number of years (ignore any fraction of year).
Step (b) - Find out rate of earned leave entitlement from the service rules — how
many days leave is credited for each year of service (earned leave entitlements
cannot exceed 30 days for every year of actual sendee rendered for the em-
ployer from whose service he has retired). For instance, if earned leave is cred-
ited at the rate of 40 days leave for each year of sendee, for Step (b) calculation
shall be made at the rate of 30 days leave for each year of sendee. If, however,
earned leave is credited at the rate of 25 days leave for each year of sendee, for
Step (b) calculation shall be made at the rate of 25 days leave for each year of sendee.
Step (c) - Find out earned leave actually taken or encashed (in number of days)
during the service time.
The computation shall be made as follows —
[Step (a) x Step (b) minus Step (c) ��������30]
2. How to find out average monthly salary- Salary, for this purpose, means
basic salary and includes dearness allowance if terms of employment so
provide.It also includes commission based upon fixed percentage bof turno-
ver achieved by an employee.
"Average salary" for the aforesaid purpose is to be calculated on the basis
of average salary drawn during the period of 10 months immedaiately
preceeding the retirement.
When earned leave enchasement is received from two or more employers -
where leave salary or leave enchasement is received by a non- Governemtn
employee from tow or more employers (may be in the same or different years),
the maximum amount of exemption under section 10(10AA) (ii) during the
lifetime of the concerned employee cannot exceed ` ̀` ` 3,00,000.
4. Retrenchment Compensation [Sec.10(10B)] :
Retrenchment Compensation is exempt from tax to the extent of least of following :
(a) The amount calculated in accordance with provision of section 25F(b) of the
Industrial Dispute Act, 1947.
15/26
x Average salary of 3 months x no. of years of service
(b) `̀̀̀ 5,00,000/-.
(c) Actual amount received.
- Salary = Basic salary + dearness allowance (both)
- No. of years of service = Completed years or part thereof in excess of 6 months
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5. Payment on Voluntary Retirement [Sec.10(10C)]:
Exemption is least of " -
1. Higher of:
(a) "Salary"' x 3 months x Completed years of service.
(b) "Salary" x balance months to retire at superannuation
2. Actual compensation amount .
3. Maximum 5,00,000/-.
- Salary = Basic salary + dearness allowance (in terms) + commission
based on percentage of turnover
- No. of years of service = Completed years
6. Payment from provident fund along with accrued interest at the time of retirement
or termination from service [Sec. 10(11)&10(12)]:
A provident fund is a retirement benefit created for the employees so that they
receive a lumpsum amount on retirement or termination of service. There are 4
types of provident funds.
1. Statutory Provident Fund (SPF)
This is the provident fund maintained for employees working with Govern-
ment, semi-government organizations, rai lways, loca l author it ies,
universities and recognized educational institutions.
2. Recognized Provident Fund (RPF)
A provident fund to which the “Employees Provident Fund and Miscellane-
ous Provisions Act, 1952” applies is called as RPF. As per the Provident
Fund Act, an organization employing 20 or more employees shall be cov-
ered by the provisions of RPF. The Commissioner of Income Tax shall grant
approval or recognition to the PF if the rules imposed on the PF have been
complied with.
3. Unrecognized Provident Fund (URPF)
If the PF does not follow or comply with the rules imposed upon it, the Com-
missioner of Income tax shall not grant the recognition and the PF shall be
called as URPF.
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7. Payment from an approved superannuation fund [Sec. 10(13):
���� Any payment from an approved superannuation fund (i.e. approved by the
Chief Commissioner or Commissioner of Income - tax) shall be fully exempted
if the payment is made to :
(1) the legal heirs on the death of the beneficiary.
(2) an employee in lieu or in commutation of an annuity on his retirement
at or after a specified age or on his becoming incapacitated prior to
such retirement.
(3) an employee on his leaving the service in connection with which the
fund is established otherwise than, in the circumstances mentioned
in point (2) above, i.e. leaving employment for better pay etc. then the
lump sum received will be fully taxable.
���� It is worthwhile to note that :
(1) during employment - employer's contribution to such a fund in excess
of 1,00,000 p.a. per employee is taxable in the hands of the em-
ployee u/s 17(2)(vii)
(2) Employee's contribution is entitled for deduction under Section 80C
from his Gross Total Income.
(3) Interest on accumulated balance is exempt from tax every year.
Perquisites :
Perquisite may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages. It also denotes something that benefits a man by
going into his men pocket. Perquisites may be provided in cash or in kind. However,
perquisites are taxable under the head "Salaries" only if they are (a) allowed by an em-
ployer to his employee; (h) allowed during the continuance of employment; (c) directly
dependent upon service; (d) resulting in the nature of personal advantage to the em-
ployee; and (c) derived by virtue of employer's authority. It is not necessary that a recur-
ring and regular receipt alone is a perquisite. Even a casual and non-recurring receipt
can be perquisite if the aforesaid conditions are satisfied.
The following propositions should also be kept in view:
���� Perquisites are included in salary income only if they are received by an employee
from his employer (maybe former, present or prospective). Perquisites, received
from a person other than employer, are taxable under the head "Profits and gains
of business or profession" or "Income from other source's".
���� A benefit or advantage would be taxable as perquisites only if it has a legal origin.
As unauthorised advantage taken by an employee without his employer's authority
would create a legal obligation to restore such advantage, it would not amount to
"perquisite" taxable under the Act. On the other hand, if the benefit has been con-
ferred unilaterally without the aid of agreement between the parties, the employee
can be taxed on the perquisites. It is not necessary that the benefit should have
been received under an enforceable right.
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Perquisites" as defined in the Act- Under the Act, the term "perquisites" is defined by
section 17(2) as including the following items:
a. the value of rent-free accommodation provided to the assessee by his employer
[sec. 17(2)(i) ;
b. the value of any concession in the matter of rent respecting any accommodation
provided to the assessee by his employer [sec. 17(2)(ii)] ;
c. The value of any benefit or amenity granted or provided tree of cost or at
concessional rate in any of the following cases:
i. by a company to an employee who is a director thereof ;
ii. by a company to an employee, being a person who has substantial interest
in the company ;
ii i. by any employer (including a company) to an employee to whom provisions
of (i) and (ii) above do not apply and whose income under the head "Sala-
ries" exclusive of the value of all benefits or amenities not provided for by
way of monetary benefits, exceeds Rs. 50,000 [sec. 17(2)(iii)];
d. any sum paid by the employer in respect of any obligation which but for such pay-
ment would have been payable by the assessee [sec. 17(2)(iv)j;
e. any sum payable by the employer, whether directly or through a fund other than a
recognised provident fund or approved superannuation fund or a deposit-linked
insurance fund, to effect an assurance on the life of the assessee or to effect a
contract for an annuity [sec. 17(2)(v) ;
f. the value ol any specified security or sweat equity shares allotted or transferred,
directly or indirectly, by the employer, or former employer, free of cost or at
concessional rate to the assessee [sec. 17(2)(vi)];
g. the amount of any contribution to an approved superannuation fund by the em-
ployer in respect of the assessor, to the extent it exceeds Rs. 1,50,000 [sec.
17(2)(vii)]; and
h. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)
(viii)]
Rules for valuation of perquisites :
(a) Valuation of Rent free Unfurnished / Furnished Accommodation
Rent - free Accommodation :
Taxable u/s 17(2)(i) Rent free accommodation
Taxable u/s 17(2)(ii) Concessional rent accommodation
For Central Government & State Government employees :
I Rent free unfurnished accommodation (to be valued at the licence fee which
would have been determined by the Central or State Government in
accordance with the rules framed by the Government for allotment of houses
to its officers).
II Add for furnishing, if any (10% per annum on original cost, if by employer or
actual hire charges, if hired by employer).
III Less rent recovered, if any, by employer, from employee.
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For other employees :
(a) Rent free unfurnished accommodation owned by employer :
I 15% of salary (in cities having population exceeding 25 lacs as per 2001
census) and 10% of salary (in cities having population less than 25 lacs
but greater than 10 lacs), and 7.5% of salary in any other place.
II Add for furnishing, if any (10% per annum on original cost or actual
hire charges).
III Less rent recovered, if any, by employer, from employee.
(b) Rent free unfurnished accommodation taken on lease or rent by the
employer :
I Actual amount of rent payable by employer or 15% of salary, which ever
is lower.
II Add for furnishing, if any (10% per annum on original cost or actual hire
charges).
III Less rent recovered, if any, by employer, from employee.
Other points :
(1) "Salary" here means all monetary payments for the period the accommodation is
provided, i.e. excluding any advance or arrears received but including remuneration
on accrual basis. Moreover, salary from all the employers in respect of the said period
shall be taken into consideration. However, salary does not include the following :
(i) D.A. (not in terms)
(ii) Employer's contribution to provident fund in excess of 12% of salary and Interest
accrued to RPF in excess of 9.5% rate of interest p.a.
(iii) Exempted allowances.
(iv) Deduction u/s 16 (ii) if applicable.
(v) Taxable Perquisites.
(2) Hotel accommodation provided to employees including family members is taxable @ 24%
of salary for the previous year or actual charges paid or payable to such hotel, whichever is
lower, for the period during which such accommodation is provided as reduced by the rent,
if any, actually paid or payable by the employee.
If hotel accommodation is provided because of employee's transfer & not exceeding in
aggregate 15 days, then nothing is taxable.
(3) Where on account of the transfer of an employee from one place to another, he is
provided, with accommodation at the new place of posting while retaining the
accommodation at the other place, the value of perquisite shall be determined with
reference to only one such accommodation which has the lower value for a period not
exceeding 90 days and thereafter the value of perquisite shall be charged for both
such accommodations.
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(b) Perquisite of sweeper / gardner / watchman / personal attendant :
(i) The value of benefit to the employee or any member of his household resulting
from the provision by the employer of the services of a sweeper, a gardener, a
watchman or a personal attendant, shall be the actual cost to the employer.
(ii) The actual cost in such a case shall be the total amount of salary paid or payable by
the employer or any other person on his behalf for such services as reduced by
any amount paid by the employee for such services.
(c) Perquisite of gas /electric energy/water steam , etc :
(i) The value of the benefit to the employee resulting from the supply of gas,
electric energy or water for his household consumption shall be determined
as the sum equal to the amount paid on that account by the employer to the
agency supplying the gas, electric energy or water.
(ii) Where such supply is made from resources owned by the employer, without
purchasing them from any other outside agency, the value of perquisite would
be the manufacturing cost per unit incurred by the employer.
(iii) Where the employee is paying any amount in respect of such services, the
amount so paid shall be deducted from the value so arrived at.
(d) Perquisite value of interest free loan / concessional loan to assessee and
family members :
(a) The value of the benefit to the assessee resulting from the provision of
interest-free or concessional loan for any purpose made available to the
employee or any member of his household during the relevant previous year
by the employer or any person on his behalf shall be determined as the sum
equal to the interest computed at the rate charged per annum by the State
Bank of India, as on the 1st day of the relevant previous year in respect of
loans for the same purpose advanced by it on the maximum outstanding
monthly balance as reduced by the interest, if any, actually paid by him or
any such member of his household. “Maximum outstanding monthly balance”
means the aggregate outstanding balance for each loan as on the last day
of each month.
(b) However, no value would be charged if such loans are made available for
medical treatment in respect of prescr ibed diseases ( like cancer,
tuberculosis, etc.) or where the amount of loans are petty not exceeding in
the aggregate `̀̀̀20,000.
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(e) Perquisite of free / concessional education facilities for any member of
employee's household :
The basis of valuation is briefly given below -
1. Expenditure relating to providing training to employees is not taxable.
2. If education facility is provided to the family members of employee,
expenditure incurred by the employer is the taxable value of perquisite.
Payment of tuition fees or reimbursement of tuition fees is chargeable to
tax.
3. If education facility is provided to the children of employee in an educational
institute owned or maintained by the employer, then reasonable cost of
education in a similar institute* in or near the locality is taxable. Up to Rs.
l,000t per month per child is not taxable, if the employer provides education
facility to the children of an employee in an educational institution owned or
maintained by the employer or where such educational facility is provided in
any institute (having an arrangement with the employer) by reason of
employee's employment with the employer. The benefit of exemption of Rs.
1,000 per month is not available, if such education facility is provided to
other family members (not being children of the employee).
4. Amount of scholarship given by an employer-company to children of its
employees (solely at its discretion without reference to terms of employment)
is not assessable as perquisite in the hands of employees)
(f) Perquisite of movable assets sold by an employer to its employees at a
nominal price :
Particulars Computer and Motor Car Any other Asset
other related electronics
Actual Cost XX XX XX
Less: Depreciation for
completed years (XX) (XX) (XX)
Estimated Cost XX XX XX
Less: Amount
recovered from Employee (XX) (XX) (XX)
Perquisite Value XX XX XX
1. Rate of depreciation and method of depreciation
Computer and other related electronics 50% WDV
Motor Car 20% WDV
Any other Asset 10% SLM
2. Completed year means actual completed year from the date of acquisition
of the asset to the date of transfer of such asset to the employees.
3. Goods manufactured by Employer sold to Employee at concessional price
is Exempt.
4. Any other asset sold to Employee after using it for 10 years or more is not
taxable.
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(g) Perquisite of Use of Movable Assets :
Particulars Perquisite value
Computer, laptop, cell phone, telephone, Exempt
subscription cost to journals and periodicals
Any Other Asset
Owned By Employer 10% pa of Original Cost
Less: Amount Recovered from Employee.
Hired by Employer Hire Charges Paid by Employer
Less: Amount Recovered from Employee.
(h) Valuation of medical facilities:
Valuation of medical facilities - Before discussing the broad provisions, one should
note down the following points -
1. Fixed medicla allowance is always chargeable to tax.
2. For the purpose of valuation of the perquisite in respect of medical facilities,
"family" means -
(a) the spouse and children of the individual; and
(b) the parents, brothers and sister of the individual or any of them, wholly or
mainly dependent on the individual.
MEDICAL FACILITIES IN INDIA - The provisions are given below -
1. Employer's hospital/Government hospital/approved hospital - The perquisite in
respect of medial facility provided by an employer in the following hospitals/clinic
is not chargeable to tax -
a. hospital owned/ maintained by the employer.
b. hospital of Central Government/ State Government/ local authority.
c. private hospital if it is also recommended by the Government for the treat-
ment of Government employees
d. specified medical facility (given in rule 3A) in a hospital approved* by the
Chief Commissioner.
2. Health insurance premium – Medical insurance premium paid or reimbursed by
the employer is not chargeable to tax.
3. Any other facility in India – Any other expenditure incurred or reimbursed by the
employer for providing medical facility in India is not chargeable to tax up to Rs.
15,000 in aggregate per assessment year (fied medical allowance is fully charge-
able to tax).
MEDICAL FACILITIES OUTSIDE INDIA – Any expenditure incurred by the employer
(or reimbursement of expenditure incurred by the employee) on medical treatment of
the employee or any member of the family of such employee outside India, is taxable
subject to the conditions given below-
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Perquisite not chargeable to tax Condition to be satisfied
Medical treatment of employee or any member Expenditure shall be excluded from perquisite
of family of such employee outside India only to the extent permitted by the Reserve
Bank of India.
Cost on travel of the employee/ any member Expenditure shall be excluded from perquisite
of his family and one attendant who only in the case of an employee whose
accompanies the patient in connection with gross total income, as computed before
treatment outside India. including therein the expenditure on travelling,
does not exceed Rs. 2,00,000.
Cost of stay abroad of the employee or any Expenditure shall be excluded from the per
member of the family for medical treatment quisite only to the extent permitted by the
and cost of stay of one attendant who Reserve Bank of India.
accompanies the patient in connection with
such treatment.
(i) Perquisite of free / subsidised meal :
(a) The value of free food and non-alcoholic beverages provided by the employer to an
employee shall be the amount of expenditure incurred by such employer. The amount
so determined shall be reduced by the amount, if any, paid or recovered from the
employee for such benefit or amenity:
(b) However, the following would not be treated as a perquisite -
(1) free food and non-alcoholic beverages provided by such employer during
working hours at office or business premises or through paid vouchers which
are not transferable and usable only at eating joints, to the extent the value
thereof either case does not exceed fifty rupees per meal or
(2) tea or snacks provided during working hours or
(3) free food and non-alcoholic beverages during working hours provided in a
remote area or an off-shore installation.
(j) Perquisite of gifts etc :
1. The value of any gift, or voucher, or token in lieu of which such gift may be
received by the employee or by any member of his household on ceremonial
occassions or otherwise shall be determined as the sum equal to the amount
of such gift. However, where the value of such gift, voucher or token, as the
case may be, is below `̀̀̀ 5,000/- in the aggregate during the previous year,
the value of perquisite shall be taken as nil. If the value of gift exceeds
`̀̀̀ 5,000/- only the value in excess of `̀̀̀ 5,000/- will be taxable.
2. The provisions are not applicable for cheques / cash gifts and they would be
fully taxable even if they are less than `̀̀̀ 5,000.
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(k) Perquisite of credit card expenses :
(a) The amount of expenses including membership fees and annual fees incurred
by the employee or any member of his household, which is charged to a
credit card (including any add-on-card) provided by the employer, or
otherwise, paid for or reimbursed by such employer shall be taken to be the
value of perquisite chargeable to tax as reduced by the amount, if any paid
or recovered from the employee for such benefit or amenity.
(b) However, such expenses incurred wholly and exclusively for official purposes
would not be treated as a perquisite if the following conditions are fulfilled.
(1) complete details in respect of such expenditure are maintained by
the employer which may, inter alia, include the date of expenditure
and the nature of expenditure;
(2) the employer gives a certificate for such expenditure to the effect that
the same was incurred wholly and exclusively for the performance of
official duties.
(l) Pequisite of Club Fees / Expenditure :
(a) The value of benefit to the employee resulting from the payment or reimbursement
by the employer of any expenditure incurred (including the amount of annual or
periodical fee) in a club by him or by a member of his household shall be determined
to be the actual amount of expenditure incurred or reimbursed by such employer on
that account. The amount so determined shall be reduced by the amount, if any, paid
or recovered from the employee for such benefit or amenity. However, where the
employer has obtained corporate membership of the club and the facility is enjoyed
by the employee or any member of his household, the value of perquisite shall not
include the initial fee paid for acquiring such corporate membership.
(b) Further, if such expenditure is incurred wholly and exclusively for business purposes,
it would not be treated as a perquisite provided the following conditions are fulfilled:-
(1) complete details in respect of such expenditure are maintained by the
employer which may, inter alia, include the date of expenditure, the nature of
expenditure and its business expediency;
(2) the employer gives a certificate for such expenditure to the effect that the
same was incurred wholly and exclusively for the performance of official duties.
(c) There would be no perquisite for use of health club, sports and similar facilities
provided uniformly to all employees by the employer.
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(m) Valuation of perquisite in respect of car :
Valuation of perquisite in request of car/ conveyance – Taxable value of perquisite in
different situations shall be calculated as follows -
���� Situation 1 Car is owned or hired by an employer, all expenses are incurred by
employer and provided to an employee only for official purposes - Technically it
is not a "perquisite", as the concerned employee dews not get any personal
benefit at the cost of employer. Consequently, nothing is chargeable to tax.
However, the Board has prescribed two conditions which are to be satisfied by
the employer and only then nothing would be chargeable to tax.
���� Situation 2-Car is owned or hired by employer, expenses are incurred by employer
and provided to an employee wholly for personal purposes - Entire expenditure
incurred by employer (including depreciation at the rate of 10 per cent per annum
of actual cost of the car), is taxable in tire hands of employee. Expenses
recovered from employee are deductible.
���� Situation 3 Car is owned or hired by employer, expenses are incurred by employer
and provided to an employee for partly official and partly personal purposes -
Rs. 1,800 per month (1600 cc or less ) /Rs. 2,400 per month (above 1600 cc) for
car is taxable. If driver is provided, an additional sum at the rate of Rs. 900 per
month shall be taxable. Expenditure recovered from the employee is not
deductible.
���� Situation 4 Car is owned or hired by employer, provided to an employee for
partly official and partly personal purposes, and expenses for private purposes
are incurred by employee - Rs. 600 per month (1600 cc or less)/Rs. 900 per
month (above 1600 cc) for car is taxable. If driver is provided, an additional sum
at the rate of Rs. 900 per month shall be taxable. Expenditure recovered from
the employee is not deductible.
���� Situation 5- Car is owned by employee, expenses are incurred by employer and
car is used for partly official and partly personal purposes - Actual expenditure
incurred by employer minus expenditure pertaining to official use minus anything
recovered from employee, is taxable in the hands of employee. Expenditure
pertaining to official use can be calculated as per logbook of the car . Alternatively,
expenditure pertaining to official use can be calculated at the rate of Rs. 1,800
per month (1600 cc or less)/ Rs. 2,400 per month (above 1600 cc) for car and
Rs. 900 per month for driver.
���� Situation 6 - Any automotive conveyance (other than car) owned by employee
and expenses are incurred by employer - If such conveyance is used only for
official purposes, nothing is chargeable to tax. However, the Board has prescribed
two conditions which are to be satisfied by the employer and only then nothing
would be chargeable to tax. Conversely, it such conveyance is used by the
employee partly for official and partly for private’ purpose, then actual expenditure
incurred by employer minus expenditure pertaining to official use minus anything
recovered from employee, is taxable in the hands of employee. Expenditure
pertaining to official use can be calculated as per logbook of the car.Alternatively,
expenditure pertaining to official use can be calculated at the rate of Rs. 900 per month.
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CONDITIONS TO BE SATISFIED IF CAR IS USED FOR OFFICIAL PURPOSES-
Where the employer or the employee claims that the motor car is used wholly and
exclusively in the performance of official duty (i.e., Situation l), the following two conditions
should be satisfied —
Condition 1 The employer has maintained complete details of journey undertaken for
official purpose which may include date of journey, destination, mileage, and the amount
of expenditure incurred thereon.
Condition 2 - The employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
���� The above conditions should also be satisfied in Situation 5 if the employee
and/or employer claim that the expenses for official purposes is more than Rs.
1,800 per month (or Rs. 2,400 per month if rating of car exceeds 1,600cc)
Profits in lieu of salary :
Profits in lieu of salary “ is defined by section 17(3).These payments are made to an employee
in lieu of or in addition to salary. These are the following –
���� Compensation for loss of employment or modification of the employment terms -
Compensation for loss of employment or modification of terms of employment is
generally treated as a capital receipt. But by virtue of section 17(3)(i), any compensation
due to or received by an assessee from his employer or former employer at or in
connection with the termination of his employment or modification of terms of
employment is taxable as profit in lieu of salary'. It is taxable on "due" or "receipt"
basis, whichever comes earlier. I he recipient may claim exemption under section
10(10B) or 10(10C)
The following are the salient features —
a. compensation is received by an assessee from his employer or former employer;
b. it is received at or in connection with termination of his employment or
modification of terms and conditions relating thereto.
���� Payment from unrecognised provident or unapproved superannuation fund - At any given
time, accumulated balance in any provident fund/superannuation fund consists of the
following —
a. employer's contribution;
b. interest on employer's contribution;
c. employee’s contribution; and
d. interest on employee's contribution.
The first two are taxable as "profits in lieu of salary" subject to the following propositions —
1. The provident fund/superannuation fund is an unapproved fund.
2. These are taxable at the time of payment to the assessee. In other words,
employer's contribution to unrecognised provident/superannuation fund is not
taxable in the year in which contribution is made but is taxable when payment
becomes due or payment is actually made to an employee. Similarly, interest on
employer's contribution is not taxable in the year in which the amount is credited
to the provident fund account but in the year in which payment becomes due or
the payment is made. It may be noted that interest on employee's contribution is
taxable under the head "Income from other sources".
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���� Payment under Keyman insurance policy - Any sum received under Keyman insurance
policy (including the sum allocated by way of bonus on such policy) is taxable as "profits in
lieu of salary".
���� Any payment t before or after employment - Any sum due or received (whether in lump sum
or otherwise) by an assessee before his joining any employment or alter cessation of Iris
employment will be taxable as "profits in lieu of salary".
���� Any other payment - Any other payment (other than what is exempt under different clauses
of section 10) due to or received by an assessee from his employer (or former employer) is
treated as "profits in lieu of salary". For instance, medical allowance is taxable as "profits
in lieu of solar,-".
Exemption is, however, available in respect of following—
c. payment of gratuity exempted under section 10(10)
b. payment of house rent allowance exempted under section 10(13A)
c payment of commuted pension exempted under section 10(10A)
d payment of retrenchment compensation exempted under section 10(10B);
e payment from an approved Superannuation Fund under section 10(13);
f payment from statutory provident fund or public provident fund;
g. payment from recognised provident fund to the extent it is exempt under
section10(12)
Leave Travel Concession
Valuation of leave travel concession in India [Sec. 10(5)] - Leave travel assistance extended by an
employer to an employee for going anywhere in India along with his family is exempt on the basis
of provisions given in the table below —
Different situations Amount of exemption (exemption is
available only in respect of fare for going
anywhere, in India along with family twice in
a block of four years)
Where journey is performed by air Amount of economy class air fare of the
national carrier by the shortest route or the
amount spent, whichever is less.
Where journey is performed by rail Amount of air-conditioned first class rail
fare by the shortest route or amount spent,
whichever is less.
Where the places of origin of journey and Amount of air-conditioned
destination are connected by rail and journey first class rail fare by the shortest route or
is performed by any other mode of transport the amount spent, whichever is less.
Where the places of origin of journey and
destination (or part thereof) are not connected by rail
Where a recognised public transport system exists First class or deluxe class fare by the
shortest route or the amount spent,
whichever is less.
Air-conditioned first class rail fare by the
shortest route (as if the journey had been
performed by rail) or the amount actually
spent, whichever is less.
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���� Meaning of “family" - The aforesaid exemption is available in respect of fare for going
anywhere in India along with "family". For this purpose, "family" includes spouse and
children** of the employee. It also includes parents, brothers and sisters of the employee,
who are wholly or mainly dependent upon the employee. However, family does not include
more than two surviving children of an individual born on or after October 1, 1998 (in
reckoning this limit of two children, children born out of multiple births after the first child will
be treated as 'one child only').
���� Only two journeys in a block of 4 years is exempt - Exemption on the aforesaid basis is
available in respect respect of two journeys performed in a block of four calendar years.
The differ blocks are –
(a) 2010-2013 (i.e., January 1, 2010 to December 31,2013);
(b) 2014-2017 (i.e., January 1,2014 to December 31, 2017).
(c) 2018-2021 (1) Jan 18 to 31/12/21)
���� “Carry-over" concession - If an assessee has not availed travel concession or assistance
during any of the specified four-year block periods on one of the two permitted occasions
(or on both occasions), exemption can be claimed in the first calendar year of the next
block (but in respect of only one journey). This is known as "carry over" concession. In such
case, the exemption so availed will not be counted for the purposes of claiming the future
exemptions allowable in respect of two journeys in the subsequent block
���� Exemption is available in respect of shortest route - Where the journey is performed by a
circuitous route, the exemption is limited to what is admissible by the shortest route.
Likewise, where the journey is performed in a circular form touching different places, the
exemption will be limited to what is admissible for the journey from the place of origin to the
farthest point reached, by the shortest route.
What are permissible deductions from salary (Section 16)
1. Standard deduction – Now standard deduction is not available.
2. Entertainment allowance - Entertainment allowance received is fully taxable and is first to
be included in the salary and thereafter the following deduction is to be made: However,
deduction in respect of entertainment allowance is available in case of Government
employees. The amount of deduction will be lower of:
(i) One-fifth of his basic salary or
(ii) ` ` ` ` 5,000 or
(iii) Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment
allowance received by him is not a relevant consideration at all.
3. Professional tax or Tax on employment - Professional tax or taxes on employment levied by
a State under Article 276 of the Constitution is allowed as deduction only when it is actually
paid by the employee during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the employee,
the amount so paid is first included as salary income and then allowed as a deduction u/s 16.
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Meaning of 'salary' for various purposes :
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Q. 1. Mr Narendra Modi of Mumbai is employed in XYZ Ltd since 2009. For the Previous
year 2017-2018 he had following salary particulars
Basic Salary – `̀̀̀ 45,000pm
Dearness allowance (entering into retirement benefits) – `̀̀̀ 3,000pm
Dearness allowance (entering into retirement benefits) - `̀̀̀ 2,000pm
Bonus due – 85,000.
Commission based on percentage of turnover - `̀̀̀ 40,000
Commission based on percentage of Net Profit - `̀̀̀ 50,000
Advance Salary – `̀̀̀ 60,000
Arrears of Salary – `̀̀̀40,000
Uniform allowance - `̀̀̀ 2,500pm (Actual expenses on purchase of uniform amounts to
`̀̀̀ 22,500)
Children Education Allowance – `̀̀̀ 240pm for 3 children (Actual Expenses on Educa-
tion Amounts to `̀̀̀ 40,000)
Transport Allowance – `̀̀̀ 1,450pm upto December 2017. From January 2018 it was
increased to `̀̀̀ 2,100pm. (Actual expenses on commutation amounts to `̀̀̀ 10,000)
House Rent Allowance received – `̀̀̀ 20,000pm(Rent paid ? 23,000pm)
Project Allowance `̀̀̀ 2,000pm (Actual Expenses amounts to ? 15,000)
Entertainment Allowance `̀̀̀ 700pm (Actual Expenses on entertaining office visitors
`̀̀̀ 12,000)
Professional Tax paid during PY 2017 - 2018
For PY 2016 – 2017 – `̀̀̀ 3,000
For PY 2017 – 2018 - `̀̀̀ 2,000
Compute income from salary for PY 2017 – 2018.
Q. 2. Mr. Karan, an employee of XYZ Co. Ltd. at Mumbai and covered by Payment of Gratu-
ity Act, retires at the age of 60 years (age fixed by company for retirement) on 31-12-
2017 after completing 30 years and 7 months of service. At the time of retirement, his
employer pays `̀̀̀ 18,00,000 as Gratuity and `̀̀̀ 6,00,000 as accumulated balance of
Recognised Provident fund. He is also entitled for monthly pension of `̀̀̀ 8,000. He gets
75% of pension commuted for `̀̀̀ 4,50,000 on 1st February, 2018. Leave encashment of
`̀̀̀ 3,30,000 for 330 days leave balance in his account. He was credited 30 days leave
for each completed year of service. Amount received from superannuation Fund –
`̀̀̀ 4,00,000
Determine the salary chargeable to tax for Mr. Karan for the Assessment Year
2018-19 with the help of following information:
Basic Salary - `̀̀̀ 80,000pm
Bonus received – 36,000
Employers Contribution towards RPF – 1,10,000.
House rent allowance – `̀̀̀ 15,000 pm
Rent paid by Mr Karan – 10,000 pm
Professional Tax paid – 2,700.
CLASS WORK PROBLEMS
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Q. 3. Mr. Albert Pinto is working as officer in multinational organisation since 1st Aug 2013
on a salary scale of `̀̀̀18,000-2,000-24,000-3,000-45,000.In the previous year
2017-18 his other salary particulars as below :
D.A. upto July 2017 (not entering into retirement benefit) : 80% of basic salary
D.A .since Aug. 2017 (entering into retirement benefit as per modified agreement):
40% of basic salary.
Compensation received for modification in terms of employment `̀̀̀ 60,000 (TDS
`̀̀̀ 20,000)
H R A `̀̀̀12,000 per month in a non-metro(Rent paid to house owner being his
father, `̀̀̀14,000 p.m). Gratuity received `̀̀̀2,00,000/-.
Equity shares having fair market price of `̀̀̀ 1,00,000 were allotted to him by the
company at a concessional price of `̀̀̀ 20,000 on 30.5.2016.
You are required to calculate his income from salary for A.Y 2018 -19
Tax on employment paid by employee `̀̀̀2,500.
Q. 4. Mr Vinay aged 42 years, is the sales manager at PQR Ltd (in Mumbai). From the
following details compute his income from Salary for Assessment Year 2018-2019
���� Basic Salary – `̀̀̀ 30,000pm
���� Dearness allowance (entering into retirement benefits) – `̀̀̀ 2,000pm
���� Dearness allowance (entering into retirement benefits) - `̀̀̀ 1,000pm
���� Bonus due – 30,000.
���� Commission – 0.1% of the turnover of the company. The turnover for the F.Y.
2017-18 was `̀̀̀ 10.00 crores
���� Advance Salary – `̀̀̀ 60,000
���� Arrears of Salary – `̀̀̀ 40,000
���� Conveyance allowance - `̀̀̀ 2,500pm (Actual expenses on amounts to ? 22,500)
���� Motor car running and maintenance charges fully paid by employer (The motor
car is owned by the company and driven by the employee. The engine cubic
capacity is above 1.60 litres. The motor car is used for both official and personal
purpose by the employee.) – `̀̀̀ 60,000
���� Expenditure on accommodation in hotels while touring on official duties met by
the employer – `̀̀̀ 80,000.
���� Lunch provided by the employer during office hours. Cost of lunch provided
`̀̀̀ 27,000.
���� Free education was provided to his two children Vidhi and Vinaya in a school
maintained and owned by the company. The cost of such education for Vidhi is
computed at `̀̀̀ 800 per month and for Vinaya at `̀̀̀ 1,300 per month. No amount
was recovered by the company for such education facility from Vinay.
���� Leave travel concession given to employee, his wife and three children (one
daughter aged 7 and twin sons aged 3). Cost of air tickets (economy class)
reimbursed by the employer `̀̀̀30,000 for adults and` ` ` ` 45,000 for three children.
Vinay is eligible for availing exemption this year to the extent it is permissible in
law.
���� He is provided free housing facility which has purchased by company 2 years
ago. He is also provided with refrigerator (Cost of refrigerator Rs 80,000).
���� Company also gifted him iPhone costing `̀̀̀ 82,000.
���� Telephone provided at the residence of Shri Bala and the bill aggregating to
`̀̀̀ 25,000 paid by the employer.
���� Profession tax paid `̀̀̀ 3,000 of which `̀̀̀ 2,000 was paid by the employer.
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SALARIES
Q. 5. Ascertain taxable perquisite value of motor car in the 3 independent situations.
He is provided car facility with cubic capacity of 1200 cc / 1.2 Lt cc :
Details regarding Car facility :
Petrol & maintenance expenses incurred by employer 45,000,
Cost of car 3,25,000,
Driver salary 48,000 incurred by employer
1) Car(owned by ER) is used for full private use & employer recovers 10,000 from EE
2) Car(owned by ER) is used for part private use & employer recovers
10,000 from EE.
3) Car is owned by employee & used by employee for office as well as personal use.
Q. 6. Mr. R, an employee of DB Real Estate Ltd., Mumbai, a private sector company, re-
ceived the following for P.Y. 2017-2018.
Basic pay `̀̀̀ 3,00,000
Bonus `̀̀̀ 50,000
Project Allowance `̀̀̀ 30,000
D.A. (not in terms) `̀̀̀ 2,00,000
D.A. (in terms) `̀̀̀ 2,50,000
Employer's Contribution to R.P.F. `̀̀̀ 6,000 p.m.
Advance Salary `̀̀̀ 20,000
The company gave him an option either to take a rent free unfurnished
accommodation at Mumbai for which the company would directly bear the rent of
`̀̀̀10,000 p.m. or to accept a house rent allowance of `̀̀̀12,000 p.m. and find out his
own accommodation. If he opts for house rent allowance, he will have to pay
`̀̀̀ 9,000 p.m. for an unfurnished house in Pune. Which of the two options should be
selected in order to minimise his tax liability?
Q. 7. Mr. A retires on 15th October 2017, after serving 30 years and 7 months. He gets
`̀̀̀ 3,80,000 as gratuity. His salary details are given below:
FY 2017 -18 Salary `̀̀̀16,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits.
FY 2016 -17 Salary `̀̀̀ 15,000pm D.A. 50% of salary. 40% forms part of retirement
benefits.
Determine the taxable value of gratuity in the following cases:
(i) He retires from Government service
(ii) He retires from private sector, covered by Payment of Gratuity Act, 1972
(iii) He retires from private sector, not covered by payment of Gratuity Act, 1972.
: 56 :
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Q. 8. X, an employee of HMT Ltd., retires on March 31, 2018 after 29 years and 10 months
of continuous service. He receives `̀̀̀85,000 as cash portion of his earned leave, from
the following particulars, compute the amount of exemption u/s. 10(10AA).
(i) Average salary received during the past 10 months :
Basic 4,800 pm
DA (forming part for retirement benefits) 1,200 pm
DA (not forming part for retirement benefit) 1,000 pm
CCA (City compensatory Allowance) 500 pm
Fixed % Commission on turnover 150 pm
(ii) Leave entitlement for each year of service completed 1-1/2 month.
(iii) Leave availed while in service 18 months.
Would your answer be different if X were an I.A.S. Officer of the Central Government.
Q. 9. John is employed in a private company and is paid a sum of `̀̀̀6,00,000 on voluntary
retirement from service. The normal age of retirement in the company is 60 and John,
who was 45 at the time of retirement had completed 20 years of service.
His monthly salary at the time of retirement was as follows :
Basic Pay `̀̀̀ 10,000
Dearness Allowance (50% includible for retirement benefits) `̀̀̀ 6,000
H.R.A. `̀̀̀ 3,000
Conveyance Allowance `̀̀̀ 800
What is the amount of compensation taxable under the Act?
Q. 10. Mr. X retired in P.Y. 2008-09 and had received gratuity of Rs. 45,000 at the time of
retirement. For P.Y. 2017-2018, he was receiving pension of Rs. 10,000 per month. On
31st December 2017, he commuted 40% of his pension for Rs. 6,00,000/-. Calculate
taxable pension for P.Y. 2017-2018 if
(i) Mr. X is a non –government employee
(ii) Mr. X is a government employee.
Q. 11. From the following information submitted by Sunil, in respect of monthly salary and
allowances, find out the house rent allowance chargeable to tax for the assess-
ment year 2018-2019 :
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Q. 12. Mr. Sai, an employee furnished the following particulars for the previous year ending
31.3.2018 :
`̀̀̀
(a) Salary income as computed (after all deduction) for the year 6,70,000
(b) During the year arrears of salary were received (not included
in the above) which relate to financial year 2011-12 90,000
(c) Assessed income of financial year 2011-12 4,85,000
You are requested to compute relief u/s 89 in terms of tax payable.
The rates for the Assessment Year 2012-13 are :
0 - 1,80,000 - NIL
1,80,001 to 5,00,000 - 10%
5,00,001 to 8,00,000 - 20%
Above Rs. 8,00,000 - 30%
Surcharge NIL, Education cess 3%.
Q. 13.Mr. A is employed with X Ltd. (salary before the medical perquisite for the year is
`̀̀̀ 1,80,000). Mr. A has to undergo heart surgery outside India and X Ltd. bears the
following expenses of Mr. A and one attendant.
Cost of medical treatment of Mr. A outside India `̀̀̀ 4,50,000 (out of which permitted
by R.B.I. `̀̀̀ 4,38,000).
Cost of stay abroad of Mr. A and one attendant `̀̀̀ 1,50,000 (out of which permitted
by R.B.I. `̀̀̀ 1,42,000).
Cost of travel of Mr. A and one attendant `̀̀̀ 2,75,000 (out of which permitted by
R.B.I. `̀̀̀ 2,50,000).
Ascertain the taxable perquisite value if :
���� Mr. A does not have any other income.
���� Mr. A has interest on Government securities of `̀̀̀ 6,000.
Q. 14.Mr Akshay a government employee retired on 31.10.2017 after rendering service
for 15 years 10 months . He provides you the following information for the year
ended 31.03.2018.
Basic Salary – `̀̀̀ 25,000pm.
Dearness allowance – `̀̀̀ 10,000pm. (30% of dearness allowance enters into retire-
ment benefit)
Commission - `̀̀̀ 2,000pm
Advance Salary – `̀̀̀ 30,000
Arrears of Salary - `̀̀̀ 70,000
Transport Allowance - `̀̀̀ 2,000pm
Gratuity received – `̀̀̀ 2,00,000
He is entitle for monthly pension of `̀̀̀10,000pm. He gets 70% of his pension
commuted for `̀̀̀4,00,000 on 1st February 2018.
Leave encashment received – 3,00,000.
Amount received from Statutory Provident Fund – 20,00,000 ( `̀̀̀ 7,50,000 is
employer contribution, 7,50,000 is employee contribution and balance 5,00,000 is
interest)
Professional Tax paid – `̀̀̀ 2,500.
Compute Income from salary for Assessment year 2018 – 2019.
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Q. 15. Mr Anupam a government employee provides the following detail of his salary
income for previous year 2017-2018
Basic Salary – 40,000pm
Dearness Allowance - 10,000pm. (80% of dearness allowance does not enter into
retirement benefit)
Entertainment allowance – 5,000pm (Actual Expenses on entertaining office visitors -
20,000)
Transport Allowance - 1350pm (Actual Expenses on commutation – 10,000)
Advance salary – 40,000.
Arrears of Salary - 90,000.
Gratuity received – 1,00,000.
Leave encashment - 70,000.
Employers Contribution to Statutory Provident Fund - 7,000 pm. Employees
Contribution to Statutory Provident Fund - 7,000 pm. Interest credited @ 10% is
1,00,000.
The government has provided him with rent-free accommodation in Mumbai along with
television (WDV 10,000; Cost 25,000) and two air conditioners. The rent paid by
the company for the air conditioners is 400 p.m. each. The television was provided
on 1.7.2017.The licence fees determined by the Government for this accommodation
was 2,000 p.m.
Professional Tax paid – 2,000.
Compute Income from Salary for Previous year 2017 – 2018.
Q .16. Mr. Salman received retrenchment compensation of 10,00,000 after 30 years 4
months of service. At the time of retrenchment, he was drawing basic salary 20,000
p.m.; dearness allowance (entering into retirement benefit) 3,000 p.m. Dearness
allowance (not entering into retirement benefit) 2,000 p.m. Compute his taxable
retrenchment compensation.
: 59 :
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Ans. 3. Mr. Albert Pinto
Computation of income from salaries for A.Y. 2018-2019
Basic Salary 3,12,000
D.A. (in terms) 86,400
D.A. (not in terms) 76,800
Compensation for modification in terms of employment
(60,000+20,000) 80,000
H.R.A. received (12,000 p.m. x 12 months) 1,44,000 23,840
Less: Exempt u/s. 10(13A) (1,20,160)
Gratuity received during service period, FULLY TAXABLE 2,00,000
Perquisite of equity shares allotted at a concessional price,
taxable u/s. 17(2)(vi) (1,00,000 – 20,000) 80,000
GROSS SALARY 8,59,040
Less: Deduction u/s. 16(iii): Professional tax paid (2,500)
NET TAXABLE SALARY 8,56,540
W.N. 1Basic Salary
Date of increase Basic salary per month
1-8-2013 18,000
1-8-2014 20,000
1-8-2015 22,000
1-8-2016 24,000
1-8-2017 27,000
1-8-2018 30,000
Basic salary for P.Y. 2017-2018
From 1-4-2017 to 31-7-2017 :24,000 x 4 months = 96,000
From 1-8-2017 to 31-3-2018: 27,000 x 8 months = 2,16,000
3,12,000
W.N. 2Exemption u/s. 10(13A)
April- July August - March
1. Basic Salary 96,000 2,16,000
2. D.A. (in terms) Nil 86,400
3. Fixed % Commission on turnover Nil Nil
SALARY 96,000 3,02,400
Exemption :- LEAST of
1. 40% of SALARY 38,400 1,20,960
2. Actual HRA received 48,000 96,000
(12,000 x4) (12,000 x 8)
3. Rent paid – 10% of SALARY 46,400 81,760
[(14,000 x 4) – [(14,000 x 8) –
(10% x 96,000)] (10% x3,02,400)]
Exemption = 38,400 + 81,760 = 1,20,160/-
Note:- The TDS of Rs. 20,000 shall be reduced from the tax payable by Mr. Albert Pinto
on his total income since this amount must have been already deposited by the employer
on his behalf with the Central Government.
CLASS WORK SOLUTIONS
: 60 :
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Ans.10. Mr. X
Computation of taxable pension for A.Y. 2018-19
(i) Mr. X is a non –government employee
Uncommuted pension
- From April to December = 10,000 p.m. x 9 months = 90,000
- From January to March = (10,000 p.m. x 60%) x 3 months = 18,000
Taxable uncommuted pension 1,08,000
Commuted pension
Pension received 6,00,000
Less: Exempt u/s. 10(10A)
T.C.V. = 6,00,000 / 40% = 15,00,000
Exempt = 1/3rd of TCV of 15,00,000 (5,00,000)
Taxable Commuted pension 1,00,000
Total pension taxable (A+B) 2, 08,000
(ii) Mr. X is a government employee
Uncommuted pension
- From April to December = 10,000 p.m. x 9 months = 90,000
- From January to March = (10,000 p.m. x 60%) x 3 months = 18,000
Taxable uncommuted pension 1,08,000
Commuted pension
Pension received 6,00,000
Less: Exempt u/s. 10(10A) (6,00,000)
Taxable Commuted pension NIL
Total pension taxable (A+B) 1,08,000
Ans. 12. Mr Sai
Computation of relief under section 89 for A.Y 2018-19
Particulars Amount( `̀̀̀)
Step 1: Actual income for PY 17-18 6,70,000
Add: Arrears of salary for PY 11-12 90,000
TOTAL INCOME 7,60,000
: 61 :
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Basic tax (as per slab rates for AY 18-19) 64,500
Add: Education cess @ 3% 1,935
Tax at (A) 66,435
Step 2: Actual income for PY 2017-18 6,70,000
Basic tax (as per slab rates for AY 18-19) 46,500
Add: Education cess @ 3% 1,395
Tax at (B) 47,895
Step 3: Tax at (A) - Tax at (B) (C) 18,540
Step 4: Actual income for PY 11-12 4,85,000
Add: Arrears of salary for PY 11-12 90,000
TOTAL INCOME 5,75,000
Basic tax (as per slab rates for AY 12-13) 47,000
Add: Education cess @ 3% 1,410
Tax at (D) 48,410
Step 5: Actual income for PY 11-12 4,85,000
Basic tax (as per slab rates for AY 12-13) 30,500
Add: Education cess @ 3% 915
Tax at (E) 31,415
Step 6: Tax at (D) - Tax at (E) (F) 16,995
Step 7: Relief u/s. 89 1,545
If C > F, Relief = C - F [ 18,540 (-) 15,300]
If C < = F, Relief = NIL
COMPUTATION OF TAX PAYABLE FOR A.Y. 2018-19
Total income(including arrears) `̀̀̀ 7,60,000
Basic Tax `̀̀̀ 64,500
Add: Education cess @ 3% `̀̀̀ 1,935
`̀̀̀ 66,435
Less: Relief u/s 89 (`̀̀̀ 1,545)
TAX PAYABLE `̀̀̀64,890
: 62 :
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Ans.13. Computation of taxable perquisite value for A.Y. 2018-2019
Particulars Case I Case II
Perquisite of medical treatment abroad (4,50,000 – 4,38,000) 12,000 12,000
Perquisite of cost of stay abroad (1,50,000 – 1,42,000) 8,000 8,000
Perquisite of cost of travel (W.N.) NIL 2,75,000
Taxable Perquisite Value 20,000 2,95,000
W.N. G.T.I. (excluding perquisite of travel cost)
Particulars Case I Case II
Salary before perquisite of medical treatment abroad 1,80,000 1,80,000
Perquisite of medical treatment abroad 12,000 12,000
Perquisite of cost of stay abroad 8,000 8,000
Any other income NIL 6,000
G.T.I 2,00,000 2,06,000
In the second case, the GTI (excluding perquisite of travel cost) exceeds ̀̀̀̀ 2,00,000
and hence the total travel cost borne by the employer shall be taxable for the
employee and RBI limit for this purpose is irrelevant in deciding taxability.
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: 76 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
General Points :
1. As the name suggests these deductions will reduce the total income of an assessee which
in turn will result in the lower amount of tax liability.
2. The purpose of these deductions is to encourage industrialisation, foreign exchange
earning and to assist the tax payer in meeting their essential expenditure.
3. The various deductions allowed under this chapter can be broadly divided into two
groups.
(i) Deduction in respect of certain payment
(ii) Deduction in respect of certain income
4. All these deductions are allowed out of Gross Total Income (G.T.I.)
(i) If G.T.I. is negative no deduction u/s. 80 can be claimed.
(ii) Total deduction u/s. 80 cannot exceed G.T.I.
(iii) By claiming these deduction you can't make your income negative.
5. These deductions are allowed from G.T.I. and not from particular head of income.
6. The assessee claiming such deductions has to produce proof relating to such de-
ductions.
7. The assessee should claim these deductions in his return of income.
8. These deductions are not available in respect of short - term capital gains u/s
111A, long term capital gains, casual winnings and against profit of any speci-
fied business referred to in section 35 AD.
9. Deduction from G.T.I. (sec.80) is different from income exempt from tax (sec.10). In
case of the latter (sec.10), the income is not at all included in the computation of the
income i.e. they are tax free income, where as in the case of the former, the income is
first added/taken in the computation of the income and thereafter the deduction u/s. 80
will be allowed.
DEDUCTION UNDER SECTION 80C
Section 80C provides deduction in respect of specified qualifying amounts paid paid or deposited
by the assessee in the previous year.
Salient features of section 80C- The following are the main provisions of section 80C —
���� Under section 80C, deduction would be available from gross total income.
���� Deduction under section 80C is available only to an individual or a Hindu undivided family.
���� Deduction is available on the basis of specified qualifying investments/contributions/
deposits/payments (hereinafter referred to as "gross qualifying amount") made by the
taxpayer during the previous year.
���� The maximum amount deductible under sections 80C, 80CCC and 80CCD(1) cannot
exceed Rs. 1,50,000.
DEDUCTIONS FROM GROSS TOTALINCOME - CHAPTER - VIA (PART I)
: 77 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Computation of deduction under section 80C- The deduction is calculated as per the
following steps—
Step 1 - Gross qualifying amount
Step 2 - Net qualifying amount
Step 3 - Amount of deduction
GROSS QUALIFYING AMOUNT - Gross qualifying amount is the aggregate of the following :
Nature of payment
1. Life insurance premium (including payment made by Government employees to the
Central Government Employees' insurance scheme and payment made by a person
under children's deferred endowment assurance policy) [sec Note 1]
2. Payment in respect of non-commutable deferred annuity [see Note 2]
3. Any sum deducted from salary payable to a Government employee for the purpose of
securing him a deferred annuity (subject to a maximum of 20% of salary) [see Note 3]
4. Contribution (not being repayment of loan) towards statutory provident fund and
recognized provident fund
5. Contribution (not being repayment of loan) towards 15-year public provident fund [sec
Notes 4,6 and 9]
6. Contribution towards an approved superannuation fund
7. Subscription to National Savings Certificates, VIII Issue or IX Issue [sec Note 7] and
deposit in Sukanya Samriddhi Account [see Note 10]
8. Contribution for participating in the unit-linked insurance plan (ULIP) of Unit Trust of
India [see Note 5]
9. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual Lund
(i.e., formally known as Dhanraksha plan of LIC Mutual Fund) [see Note 5]
10. Payment for notified annuity plan of LIC (i.e., Jeevan Dhara, Jeevan Akshav) or any
other insurer
11. Subscription towards notified units of Mutual Fund or UTI
12. Contribution to notified pension fund set up by Mutual Fund or UTI
13. Any sum paid (including accrued interest) as subscription to notified Home Loan Account
Scheme of the National Housing Bank or contribution to any notified pension fund set
up by the National Housing Bank
14. Any sum paid as subscription to any scheme of—
a. public sector company engaged in providing long-term finance tor purchase/
construction of residential houses in India (i.e., public deposit scheme of HUDCO
b. housing board constituted in India for the purpose of planning,
development or improvement of cities/towns
: 78 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
15. Any sum paid as tuition fees (not including any payment towards development fees/donation/
payment of similar nature) whether at the time of admission or otherwise to any university/
college/educational institution in India for full time education of any two children of an
individual [Note 8]
16. Any instalment or part payment towards the cost of purchase/construction of a residential
property to a housing board or co-operative society (or repayment of housing loan taken
from Government, bank, cooperative bank, LIC, National Housing Bank, assessor's
employer where such employer is public company/public sector company/ university/
co-operative society)
17. Amount invested in approved debentures of, and equity shares in, a public company engaged
in infrastructure including power sector or units of a mutual fund proceeds of which are
utilised for the developing, maintaining, etc., of a new infrastructure facility
18. Amount deposited as term deposit for a period of 5 years or more in accordance with a
scheme framed by the Government
19. Subscription to any notified bonds of National Bank for Agriculture and Rural Development
(NABARD)
20. Amount deposited under Senior Citizens Saving Scheme [Note 9]
21. Amount deposited in five year time deposit scheme in post office.
Notes:
1. In the case of an individual, policy should be taken on his own life, life of the spouse or any
child (child may be dependent/ independent, male/female, minor/major or married/
unmarried). In the case of a Hindu undivided family, policy may be taken on the life of any
member of the family.
Insurance premium cannot exceed the maximum ceiling given below -
Policy on the life of a person Policy on the life of
with disability or severe disability or any other person
on the life of a person suffering
from disease or ailment as given
in section 80DDB
- If policy is issued before April 1, 2012 20% of sum assured 20% of sum assured*
- If policy is issued during 2012-13 10% of sum assured** 10% of sum assured**
- If policy is issued on or after April 1,2013 15% of sum assured** 10% of sum assured**
*Sum assured does not include any premium agreed to be returned and/or any benefit
by way of bonus.
'"Sum assured means minimum amount assured under the policy without including any
premium agreed to be returned and/or any benefit by way of bonus.
2. Annuity plan should be taken in the name of the individual, his wife/her husband or any
child of such individual.
3. It should be for the benefit of the individual, his wife or children.
: 79 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
4. According to the Public Provident Fund Scheme, an individual can open public provident
fund account in his own name or in the name of minor of whom he is guardian. However,
according to the Income-tax Act, to get the benefit of the deduction under section 80C,
amount deposited by an individual in his own account or in the account of his/her spouse
or in the account of any child (in the case of HUF in the account of any member of the
family) is eligible for deduction.
5. In the case of an individual, ULIP should be taken on his own life, life of the spouse or
any child (child may be dependent/ independent, male/female, minor/major or married/
unmarried). In the case of a Hindu undivided family, ULIP may be taken on the life of
any member of the family.
6. There is no maximum ceiling under the Income-tax Act. However, under the public
provident fund scheme, the maximum contribution is Rs. 1,50,000.
7. Accrued interest (which is deemed as reinvested) is also qualified for deduction
(applicable for all years except last year).
8. Full-time education includes any educational course offered by any university, college,
school or other educational institution to a student who is enrolled full-time for the said
course. Full-time education includes even play-school activities, pre-nursery and nursery
classes. The amount allowable as tuition fees shall include any payment of fee to any
university, college, school or other educational institution in India except the amount
representing payment in the nature of development fees or donation or capitation fees
or payment of similar nature Circular No. 8/2012, dated October 5,2012.
9. Date of encashment of cheque/draft is taken as date of deposit in the case of public
provident fund and Senior Citizens Savings Scheme.
10. In the case of an individual, deposit in Sukanya Samriddhi Account can be made in the
name of individual, or any girl child of that individual or any girl child for whom such
person is the legal guardian, if the scheme so specifies.
NET QUALIFYING AMOUNT - Gross qualifying amount is the total of all investments specified
above. However, deduction under section 80C is available on the basis of net qualifying amount
which is determined as under
- Gross qualifying amount; or
- `̀̀̀1,50,000, whichever is lower.
AMOUNT OF DEDUCTION - Net qualifying amount is the deductible.
The maximum amount deductible under section 80C is `̀̀̀ 1,50,000. Moreover, the aggregate
amount of deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution, by employee
(or any other individual) towards National Pension Scheme (NFS)] cannot exceed `̀̀̀ 1,50,000
DEDUCTION IN RESPECT OF PENSION FUND (SECTION 80CCC)
Who can claim deduction under section 80CCC – Deduction under section 80CCC is
available only to an individual.
What is the qualifying payment to avail deduction – Amount should be paid or deposited
any amount out of his income chargeable to tax to effect or keep in force a contract for any
annuity plan of LIC of India or any other insurer for receiving pension from the fund referred to
in section 10(23AAB), he shall be allowed a deduction in the computation of his total income.
: 80 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
How much deduction available under section 80CCC - The maximum permissible
deduction is `̀̀̀ 1,50,000 (Further, the overall limit of `̀̀̀ 1,50,000 prescribed in section 80CCE
will continue to be applicable i.e. the maximum permissible deduction under sections 80C,
80CCC and 80CCD(1) put together is `̀̀̀1,50,000).
What is tax treatment of pension - Where any amount standing to the credit of the assessee
in a fund referred to in clause (23AAB) of section 10 in respect of which a deduction has been
allowed, together with interest or bonus accrued or credited to the assessee’s account is
received by the assessee or his nominee on account of the surrender of the annuity plan in
any previous year or as pension received from the annuity plan, such amount will be deemed
to be the income of the assessee or the nominee in that previous year in which such withdrawal
is made or pension is received. It will be chargeable to tax as income of that previous year.
Note: Where any amount paid or deposited by the assessee has been taken into account for
the purposes of this section, a deduction under section 80C shall not be allowed with reference
to such amount.
DEDUCTION IN RESPECT OF CONTRIBUTION TO A NATIONAL PENSION
SCHEME (SECTION 80CCD)
What is NPS and Who can join NPS: As per the “New Restructured Defined Contribution
Pension System” applicable to new entrants to Government service, it is mandatory for persons
entering the service of the Central Government on or after 1st January, 2004, to contribute ten
per cent their of salary every month towards their pension account. A matching contribution is
required to be made by the Government to the said account. The benefit of this scheme is
also available to individuals employed by any other employer as well as to self-employed
individuals. Section 80CCD provides deduction in respect of contribution made to the new
pension scheme of the Central Government.
Employer’s contribution to NPS – Is it Income – Employers contribution to NPS is taxable
as salary income in the year of contribution.
Deduction available under section 80CCD(2) in respect of employer’s contribution to
NPS - Under section 80CCD(2), contribution made by the Central Government or any other
employer in the previous year to the said account of an employee, is allowed as a deduction
in computation of the total income of the assessee. However, deduction under section
80CCD(2) would be restricted to 10% of salary.
Deduction available under section 80CCD(1) in respect of employee’s contribution to
NPS - Section 80CCD(1) provides a deduction for the amount paid or deposited by an
employee in his pension account subject to a maximum of 10% of his salary. The deduction in
the case of a self-employed individual would be restricted to 20% of his gross total income in
the previous year.
: 81 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Is there any combined maximum ceiling – The aggregate amount of deduction under
section 80C, 80CCC and 80CCD(1) cannot exceed `̀̀̀1,50,000. However employer ’s
contribution towards NPS shall not be considered for the ceiling of ̀̀̀̀ 1,50,00
Additional deduction of `̀̀̀ 50,000 under section 80CCD(1B) - Section 80CCD(1B) provides
for an additional deduction of up to ̀̀̀̀ 50,000 in respect of the whole of the amount paid or deposited
by an individual assessee under NPS in the previous year, whether or not any deduction is allowed
under section 80CCD(1).
What is tax treatment of pension – The amounts standing to the credit of an assessee in NPS
for which a deduction has already been claimed by the assessee and accretions to such account
shall be taxed as follows –
1. Amount received by the assessee on closure of account or on his opting out of the NPS
Scheme – taxable.
2. If amount is received by a nominee on the death of the assessee – Exempt.
What is Salary – Salary includes basic salary and dearness allowance entering into retirement
benefit.
Limit on deductions under sections 80C, 80CCC & 80CCD(1) [Section 80CCE]
This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1)
to ‘ 1,50,000. It may be noted that the deduction of upto ̀̀̀̀ 50,000 under section 80CCD(1B) and
employer’s contribution to pension scheme, allowable as deduction under section 80CCD(2) in
the hands of the employee, would be outside the overall limit of ̀̀̀̀ 1,50,000 stipulated under section
80CCE.
The following table summarizes the ceiling limit under these sections w.e.f. A.Y.2016-17 –
Section Particulars Ceiling limit
( `̀̀̀)
80C Investment in specified instruments 1,50,000
80CCC Contribution to certain pension funds 1,50,000
80CCD(1) Contribution to NPs of Government 10% salary or
20% of GTI,
as the case may be
80CCE Aggregate deduction under sections 80C, 1,50,000
80CCC & 80CCD(1)
80CCD(1B) Contribution to NPS notified by the Central 50,000
Government (Outside the limit of `̀̀̀ 1,50,000
under section 80CCE)
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DEDUCTION IN RESPECT OF MEDICAL INSURANCE PREMIUM (SECTION 80D)
Deduction under section 80D is available if the following conditions are satisfied –
1. The taxpayer is an Individual or a HUF
2. Payment should be made out of income chargeable to tax.
3. Payment should be made by any mode other than cash. However, payment on account of
preventive health check-up be made by any mode (including cash)
Maximum deductible amount – The maximum deductible amount and other relevant points are
given below –
Deduction in the case Deduction in the case of
of individual HUF
For whose benefit payment can be made Family Parents Any member of HUF
A a. Medi-claim Insurance premium Eligible Eligible Elig ible
b. Contribution to CGHS Eligible - -
c. Preventive health check up payment Eligible Eligible -
Maximum deduction
- General deduction (applicable in respect
of a,b and c) 25,000 25,000 25,000
- Additional deduction (applicable
only in case of (a) when mediclaim policy is
taken on the life of a senior citizen) 5,000 5,000 5,000
B Medical expenditure on the health of a person
who is a super senior citizen if mediclaim
insurance is not paid on the health of
such person Eligible Eligible Eligible
Maximum deduction in respect of (B) 30,000 30,000 30,000
C Maximum deduction in respect of (A) and (B) 30,000 30,000 30,000
Notes-
1. Family includes individual, spouse of the individual and dependent children of the individual
2. Parents include father and mother (dependent or not).
3. The aggregate payment on account of preventive health check-up of self, spouse, dependent
children, father and mother cannot exceed ` ` ` ` 5,000.
DEDUCTION IN RESPECT OF MAINTENANCE INCLUDING MEDICAL TREATMENT
OF A DEPENDENT BEING A PERSON WITH DISABILITY – SECTION 80DD
Who can claim deduction - A resident being an individual or resident Hindu undivided family.
What is the qualifying expenditure - Any amount incurred for the medical treatment (including
nursing), training and rehabilitation of a dependant, being a person with disability, or any amount
paid or deposited under a scheme framed in this behalf by the Life Insurance Corporation or any
other insurer or the Administrator or the Specified Company as referred to in section 2(h) of the
Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, for the maintenance of a
dependant, being a person with disability, qualifies for deduction.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Who is dependent relative suffering from disability - The term ‘dependent’ has been defined
to include in the case of an individual, the spouse, children, parents, brothers and sisters of the
individual and in the case of a Hindu Undivided Family (HUF), a member thereof, who is wholly or
mainly dependent on the assessee and has not claimed any deduction under section 80U in the
computation of his income.
How much deduction is allowed under section 80D - The quantum of deduction is 75,000
and in case of severe disability (i.e. person with 80% or more disability) the deduction shall be
1,25,000.
Certificate if any required - For claiming the deduction, the assessee shall have to furnish a
copy of the certificate issued by the medical authority under the Persons with Disability (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995 along with the return of income
under section 139. Where the condition of disability requires reassessment, a fresh certificate
from the medical authority shall have to be obtained after the expiry of the period mentioned in the
original certificate in order to continue to claim the deduction.
DEDUCTION IN RESPECT OF MEDICAL TREATMENT, ETC. [SECTION 80DDB]
Who can claim deduction - A resident being an individual or resident Hindu undivided family.
What is the qualifying expenditure - Any amount actually paid for the medical treatment of such
disease or ailment as may be specified in the rules made in this behalf by the Board for himself or
a dependent, in case the assessee is an individual or for any member of a HUF, in case the
assessee is a HUF will qualify for deduction.
Person suffering from disease : The above deduction is available to an individual for medical
expenditure incurred on himself or a dependant. It is also available to a Hindu undivided family
(HUF) for such expenditure incurred on any of its members. The term ‘dependent’ has been
defined to include in the case of an individual, the spouse, children, parents, brothers and
sisters of the individual and in the case of a Hindu Undivided Family (HUF), a member thereof,
who is wholly or mainly dependent on the assessee and has not claimed any deduction under
section 80U in the computation of his income.
How much is deductible under section 80DDB - The amount of deduction under this section
shall be equal to the amount actually paid or `̀̀̀ 40,000, whichever is less, in respect of that
previous year in which such amount was actually paid. In case the amount is paid in respect of
a senior citizen, the deduction would be the amount actually paid or `̀̀̀ 60,000, whichever is
less. Further, a higher limit of deduction of upto `̀̀̀ 80,000 is allowable to the assessee, for the
expenditure incurred in respect of the medical treatment of himself or a dependent, being a
very senior citizen.
Certificate if any required – The assessee is required to obtain a prescription from a
specialist doctor for the purpose of availing this deduction.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
DEDUCTION IN RESPECT OF PAYMENT OF INTEREST ON LOAN TAKEN
FOR HIGHER EDUCATION [SECTON – 80E]
Who can claim deduction – Only an individual can claim deduction under section 80E.
What is the qualifying expenditure – If loan is taken by an individual for any study in India or
outside India (i.e any study after passing senior secondary examination or its equivalent) from
a bank, financial institution or an approved charitable institution, interest is deductible in the
year in which interest is paid.
For whose education loan should be taken - The loan must have been taken for the purpose
of pursuing his higher education or for the purpose of higher education of his or her relative
i.e. spouse or children of the individual other student for whom the individual is the legal
guardian.
Maximum monetary ceiling – Entire interest is deductible in the year in which the assessee
starts paying interest on loan and subsequent 7 years or until interest is paid in full. However,
interest should be paid out of income chargeable to tax.
Deduction for interest on loan borrowed for acquisition of self- occupied
house property by an individual [Section 80EE]
(i) As a step towards achieving the Government’s aim of providing ‘housing for all’, first
home buyers availing home loans are encouraged, by providing additional deduction
under section 80EE from A.Y.2017-18 in respect of interest on loan taken by an individual
for acquisition of residential house property from any financial institution. The maximum
deduction allowable is ` ` ` ` 50,000.
(ii) The conditions to be satisfied for availing this deduction are as follows –
(iii) The benefit of deduction under this section would be available till the repayment of loan
continues.
(iv) The deduction of upto ` ` ` ` 50,000 under section 80EE is over and above the deduction
of upto `̀̀̀ 2,00,000 available under section 24 for interest paid in respect of loan
borrowed for acquisition of a self-occupied property.
The assessee
should not own any
residential house
on the date of sanc-
tion of loan
Loan should be
sanctioned during
P.Y. 2016-17Conditions
Value of house <
` ` ` ` 50 lakhs
Loan sacntioned
< `̀̀̀ 35 lakhs
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
DEDUCTION IN RESPECT OF INVESTMENT MADE UNDER EQUITY SAVING
SCHEME (SECTION – 80CCG)
The provision of section 80CCG are given below –
Conditions – Deduction under this section is available if the following conditions are satisfied –
1. The assessee is a resident individual.
2. His GTI does not exceed Rs 12 Lakh.
3. He has acquired listed shares or listed units in accordance with a notified scheme.
4. The assessee is a new retail investor as specified in the above notified scheme.
5. The investment is locked-in for a period of 3 years from the date of acquisition in
accordance with the scheme.
Quantum of deduction – 50% of amount invested or 25,000 whichever is less.
Period of deduction – Deduction is permissible for three consecutive assessment years,
beginning with the assessment year relevant to the previous year in which the listed equity
shares or listed units of equity oriented funds are first acquired.
Note : No deduction for new investments allowed from AY 2018-2019. But deduction upto
FY 2018-2019 can be claimed for investment made in FY 2016-2017 since deduction was
allowed for 3 years.
DEDUTION IN RESPECG OF INTERETS ON SEPOSITS IN SAVING ACCOUNTS -
WHEN AVAILABLE [SEC.80TTA]
Section 80TTA provides a deduction up to ` ` ` ` 10,000 in aggregate to an assessee (being an
individual or a Hindu undivided family( in respect of any income by way of interest on depends
(not being time deposits) in a savings account with-
(a) A banking company ;
(b) a co-operative society engaged in carrying on the business of banking (including a
co-operative land mortgage bank or a co-operative land development bank) ; or
(c) post office
However, where the aforesaid income is derived from any deposit in a savings account held
by, or on behalf of a firm, an association of persons or a body of individuals, no deduction be
allowed in respect of duch income in computing the total income of any partner of the firm or
any member of the association or body.
���� Post office savings bank interest exemption under section 10(15)(i) - Post office savings
bank interets is exempt up to ` ` ` ` 3,500 (in an individual account) and ` ` ` ` 7,000 (in a joint
account) under section 10(15)(i)
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
DECUTION IN THE CASE OF A PERSON WITH DISABILITY - TO WHAT EXTENT
AVAILABLE [SEC.80U]
The provisions ofn section 80U are given in brief -
���� Conditions -The following conditiond should be satisfied -
1. The taxpayer is an individual and resident in India
2. He suffers 40 percent or more than 40 percent of any disability (i.e. blindness,
low vision, leprosy - cured hearing impairment, locomotor disability, mental
retardation, mental illness).
3. The taxpayer shall have a certificate issued by the medical authority. Where
the condition of disability requires reassessment, a fresh certificate from
the medical authority shall have to be obtained after the expiry of the period
mentioned on the original certificate in order to continue to calim the
deduction.
���� Amount of deduction - Fixed deduction of ` ` ` ` 75,000 is available. A higher
deduction of `̀̀̀ 1,25,000 is allowed i respect of a person with severe disability
(i.e., having of 80 percent or above).
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
CLASS WORK PROBLEMS
Q. 1. Mr. X is employed by a multinational company in India on a basic salary of `̀̀̀ 45,000 p.m.
Dearness allowance of `̀̀̀ 25,000 p.m. of which 40% is entering into retirement benefits.
The employer and employee contribute `̀̀̀ 3,500 p.m. (each) to Recognised Provident
Fund. Interest credited to this RPF during the year is `̀̀̀ 65,000 @ 10.5% p.a. The
employer and employee also contribute `̀̀̀ 8,000 p.m.and `̀̀̀ 6,000 p.m.respectively to
the notified pension scheme.
He has income from house property of `̀̀̀ 1,20,000/-. However, he has b/f loss of house
property of `̀̀̀ 70,000 of A.Y. 2012-13. His other incomes taxable under other sources is
`̀̀̀ 6,00,000.
During the year 2017-18, he made the following payments :
(1) Contribution to P.P.F. `̀̀̀ 15,000.
(2) Life insurance premium on policy purchased for self in the year 2007 `̀̀̀ 16,000
(sum assured `̀̀̀ 1,80,000)
(3) Life Insurance Premium on dependent mother `̀̀̀ 6,000 (sum assured ̀̀̀̀ 50,000)
(4) On 21.7.2014 he purchased a life Insurance policy in the name of his wife for which
he paid a premium of `̀̀̀ 14,500. [Sum Assured `̀̀̀ 1,20,000]
(5) Fees paid to school for education of his three children `̀̀̀ 6,000 each.
(6) Fees paid to a coaching class for tution of his three children `̀̀̀ 3,000 each.
You are required to calculate his total income for A.Y. 2018-19.
Q. 2. X is a resident individual who contributes annually a sum of `̀̀̀ 15,000 with LIC for
the maintenance of his handicapped dependant grand father.
What is the deduction u/s 80DD? Will it make any difference if the dependant is a
disabled brother (40% disabled)?
Q. 3. Calculate the deduction u/s 80DDB for the following persons :
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Q. 4. Mrs. Deepali (aged 40 years), working with M/s Good Company Ltd., a manufacturer
of tyres based at Mumbai, has received the following payments during the financial
year 2017-18 from her employer:
Basic salary `̀̀̀ 60,000 per month.
Dearness allowance 40% of basic salary.
Her employer has taken on rent her own house on a monthly rent of `̀̀̀15,000 and the
same has been provided for residence of Mrs. Deepali. Company is recovering
`̀̀̀ 2,000 per month as rent of house.
Mrs. Deepali has further furnished the following details:
(i) S he has paid professional tax of `̀̀̀ 6,000 during financial year 2017-18.
(ii) She is owning only one house and payment of interest of `̀̀̀1,75,000 and
principal of `̀̀̀ 1,00,000 was made for housing loan taken for purchase of house.
(iii) She has also taken a loan of `̀̀̀ 2,00,000 from her employer for study of her son.
SBI rate for such loan is 10%. Her employer has recovered `̀̀̀10,000 as interest
from her salary for such loan during the year.
Compute taxable income and tax liability for assessment year 2018-19.
Q. 5. Mr. Raghu, Marketing Manager of KL Ltd., based at Mumbai furnishes you the following
information for the year ended 31.03.2018:
Basic salary - `̀̀̀ 1,00,000 per month
Dearness allowance (Forming part of salary for retirement benefits) - `̀̀̀ 50,000 per
month
Bonus - 2 months basic salary
Contribution of employer to Recognized Provident Fund - 15% of basic salary plus
dearness allowance Rent free unfurnished accommodation was provided by the
company at Mumbai (accommodation owned by the company). Other details are as
follows
(i) Recognised Provident Fund contribution made by Raghu 1,50,000
(ii) Health insurance premium for insurance of his wife’s health 30,000
(iii) Health insurance premium in respect of parents (senior citizens) 33,000
(iv) Medical expenses of dependent brother with ‘severe disability’ (covered by
Section 2(o) of National Trust for Welfare of Persons with Austism, Cerbral Palsy,
Mental Retardation and Multiple Disabilities Act, 1999) - 6,000
(v) Interest on loan taken for education of his son studying B.Com (full-time) in a
recognized college - 24,000
(vi) Interest on loan taken for education of a student for whom Mr. Raghu is the legal
guardian for pursuing B.Sc.(Physics) ( fu ll - t ime) in a recognized
university - 20,000
Compute the total income of Mr. Raghu for the assessment year 2018-19.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Q. 6. Mr. A purchased a residential house property for self-occupation at a cost of `̀̀̀ 45 lakh
on 1.6.2016, in respect of which he took a housing loan of `̀̀̀ 35 lakh from Bank of
India@11% p.a. on the same date. Compute the eligible deduction in respect of inter-
est on housing loan for A.Y.2018-19 under the provisions of the Income-tax Act, 1961,
assuming that the entire loan was outstanding as on 31.3.2018 and he does not own
any other house property.
Q. 7. The gross total income of Mr. Nepal for the Assessment Year 2018-19, was `̀̀̀ 12,00,000.
He has made the following investment/payments during the previous year 2017-18.
Particulars `̀̀̀
1 L.I.C. premium paid (Policy value `̀̀̀ 1,00,000) (taken on 1.03.2012) 25,000
2 Contribution to Public Provident Fund (PPF) 70,000
3 Repayment of housing loan to Indian Bank 50,000
4 Payment made to L.I.C. pension fund 20,000
5 Medical insurance premium for self, wife and dependent children. 28,000
6 Mediclaim premium for parents (aged over 80 years) 32,000
Compute eligible deduction under Chapter VI-A for the Assessment Year 2018-19.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
Ans. 1. Mr. X
Computation of total income for A.Y. 2018-2019
Particulars `̀̀̀
Income from Salary (W.N. 1) 9,42,190
Income from House Property (W.N. 2) 50,000
Income from Other Sources 6,00,000
GROSS TOTAL INCOME (G.T.I.) 15,92,190
Less deductions u/s 80C to 80U (2,35,000)
NET TAXABLE TOTAL INCOME (N.T.T.I.) 13,57,190
W.N. 1 Income from Salary
Basic Salary (45,000 p.m. x 12 months) 5,40,000
D. A. (in terms) (25,000 p.m. x 12 months x 40%) 1,20,000
D. A. (not in terms) (25,000 p.m. x 12 months x 60%) 1,80,000
Employer’s Contribution to R.P.F. (3,500 p.m. x 12 months) 42,000
Less: Exempt upto 12% of SALARY [12%X(5,40,000+ (42,000) NIL
1,20,000)= 79,200 maximum]
Interest credited to R.P.F. @ 10.5% p.a. 65,000
Less: Exempt upto 9.5% p.a. [65,000 / 10.5% * 9.5% ] (58,810) 6,190
Employer’s contribution to Pension fund
(8,000 p.m. x 12 months) 96,000
GROSS SALARY 9,42,190
Less: Deductions u/s. 16 NIL
NET TAXABLE SALARY 9,42,190
W.N. 2 Income from House Property
Income (as given) 1,20,000
Less: Set off of b/f House Property loss of A.Y. 2012-2013 u/s. 71B (70,000)
50,000
CLASSWORK SOLUTION
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
W.N. 3 Deductions u/s. 80C to 80U
u/s. 80C: Employee contribution to RPF 42,000
Contribution to PPF 15,000
Life Insurance premium:
(a) Self 16,000
(b) Mother, NOT ALLOWED NIL
(c) Wife (Max 10% of Sum Assured) 12,000
School Fees (6,000 x 2 children max) 12,000
TOTAL 97,000
Maximum allowable u/s. 80C 1,50,000
Deduction allowed 97,000
u/s. 80CCD(1):
Employee’s contribution to pension fund, in excess 22,000
of limit of ` ` ` ` 50,000 as per Sec 80CCD(1B)
[72,000 - 50,000]
10% of SALARY of Rs. 6,60,000 66,000
Whichever is less 22,000
Total deductions u/s. 80C, 80CCC and 80CCD(1) 1,19,000
Deduction allowable [in accordance with Section 80CCE] (i) 1,19,000
Employee’s Contribution to Pension Fund (6,000pm x12) 72,000
Maximum allowable u/s. 80CCD(1B) 50,000
Deduction allowed u/s. 80CCD (1B) (ii) 50,000
u/s. 80CCD(2):
Employer’s contribution to pension fund
(8,000 p.m. x 12 months)
10% of SALARY of Rs. 6,60,000 96,000
Whichever is less 66,000
(iii) 66,000
TOTAL DEDUCTIONS u/s. 80C to 80U (i+ii+iii) 2,35,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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Meaning of Business and Profession
Sec.2(13) :- Business
• Any trade, commerce or manufacture; or
• Any *adventure or concern in the nature of trade, commerce or manufacture.
Normally business means recurring economic activity, but for income tax
purposes an isolated activity may be termed as business depending upon facts
and circumstance. Following element shall be considered to judge a transaction
as business transaction.
� Nature of commodity
� Nature of transaction (Whether incidental to a business or not)
� Intention of the related party
� The periodicity or duration of transaction
� Effort applied in transaction
*adventure :- doing activity for the first time without knowing the outcome.
Sec. 2(36) :- Profession
Profession includes vocation.
Profession requires purely intellectual skill or manual skill on the basis of some special
learning and qualification gathered through past training or experience e.g. Chartered
Accountants, Doctors, Lawyer etc. Profession skill can be required only after patient
study and application.
Vocation
Vocation implies natural ability of a person to do some particular work e.g. singing,
dancing etc. Vocation must have the earning feature. Unlike profession, vocation does
not required a degree or special learning.
Notes
2. profit motive – if the motive of an activity is pleasure only, it shall not be treated as
business activity.
3. business Vs Profession - an income arising out of trade, commerce, manufacture,
profession or vocation shall have the same treatment in income tax act. However, a little
segregation is required to be made between business and profession while applying
Sec. 44AA, Sec.44AB, Sec.40(b) etc.
Sec. 28 :- Basis of charge
The following income shall be chargeable to income-tax under the head “PGBP”,-
1. Profit and Gains of any business or Profession [Sec. 28 (i)]:-the profits and
gains of any business or profession which was carried on by the assessee at any
time during the previous year.
CHAPTER NO. 6 PROFITS AND GAINS OF BUSINESS AND PROFESSION
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 93 :
2. Compensation or other payment to management agency [Sec. 28(ii) :- any
compensation or other payment due to or received by an agent, managing the
whole or substantially the whole of the affairs of any person, at the termination of
his management or the modification of the terms and conditions relating thereto;
3. Income of trade or professional association’s [Sec.28(iii)]: income derived by a
trade, professional or similar association from specific services performed for its
members;
4. Export Incentive Sec.28 (iiia) to (iiie) :-
i) Profit on sale of import entitlement license; (iiia)
ii) Cash assistance received by any person against exports under any scheme
of the GOI; (iiib)
iii) Any duty of customs or excise re-paid or re-payable as duty drawback; (iiic)
iv) Any profit on the transfer of the Duty Entitlement Pass Book Scheme; (iiid)
v) Any profit on the transfer of Duty Free Replenishment Certificate; (iiie)
5. Perquisite from business or profession [Sec. 28(iv)] :-the value of any benefit or
perquisite, whether convertible into money or not, arising from business or the
exercise of a profession;
6. Remuneration to Partner [Sec.28 (v)] : any interest, salary, bonus, commission
or remuneration, by whatever name called, due to, or received by, a partner of a
firm from such firm :
provided that where any such sum or any part thereof has been disallowed to the
firm u/s 40(b), it shall not be taxable in the hands of partner to that extent;
[for example, if firm pays remuneration or interest of Rs.50,000 to the partner, but
Rs.23,000 is disallowed u/s 40(b), and only Rs.27,000 is allowed as deduction to the
firm, then only Rs.27,000 shall be taxable in the hands of the partner.]
7. Amount received or receivable for certain agreement [Sec.28(va)]
1. Not carrying out any activity in relation to any business; or
2. Not sharing any know-how, patent, copyright, trade-mark, license, franchise
or any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provisions
for services :
Provided that sub-clause (a) shall not apply to –
I. Any sum, whether received or receivable, in cash or kind, on account of
transfer of the right, which is chargeable under the head “Capital gains”
II. Any sum received as compensation, from the multilateral fund of the
Montreal Protocol under the United Nations Environment Program, in
accordance with the terms of agreement entered into with the Government of
India.
8. Keyman insurance policy :-any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such policy.
9. Recovery against certain capital assets covered u/s.35AD [Sec.28(vii)]anysum
received or receivable, in cash or kind, on account of any capital asset being
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 94 :
demolished, destroyed, discarded or transferred, if such capital expenditure has
been allowed as a deduction u/s 35AD.
Explanation 2 – Where speculative transactions carried on by an assessee are of
such a nature as to constitute a business, the business (hereinafter referred to as
“speculation business”) shall be deemed to be distinct and separate from any other
business.
“Speculative Transaction”
It means a transaction in which a contract for the purchase or sale of any commodity,
including stocks and shares, is periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity or scrip : [Sec. 43(5)]
However the following shall not be deemed to be a speculative transaction. –
• Hedging contract in respect of raw materials or merchandise entered into by a
person in the course of his manufacturing or merchanting business to guard
against loss through future price fluctuations in respect of his contracts for
actual delivery of goods manufactured by him or merchandise sold by him; or
• a contract in respect of stocks and shares entered into by a dealer or investor
therein to guard against loss in his holdings of stock and shares through price
fluctuations; or
• a contract entered into by a member of a forward market or a stock exchange in
the course of any transaction in the nature of jobbing or arbitrage to guard
against loss which may arise in the ordinary course of his business as such
member; or
• an eligible transaction in respect of trading in derivatives carried out in a
recognized stock exchange, or
• an eligible transaction in respect of trading in commodity derivatives carried out
in a recognized association which is chargeable to commodities transaction tax.
Section 29 : Computation of Taxable Profits
According to section 29, the profits and gains of any business or profession are to be
computed in accordance with the provisions contained in sections 30 to 43D. It must,
however, be remembered that in addition to the specific allowances and deductions
stated in sections 30 to 36, the Act further permits allowance of items of expenses
under the residuary section 37(1), which extends the allowance to items of business
expenditure not covered by sections 30 to 36, where these are allowable according to
accepted commercial practices.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 95 :
Format for calculation of taxable profits
Name of Assessee
Computation of Income from Business and Profession
Particulars Rs Rs
Net profit as per Profit and loss account XX
Add: 1. Expenses debited to profit and loss account but not allowed as deduction
2. Incomes not credited to profit and loss account but taxable
XX
XX
XX
Less: 1. Expenses not debited to profit and loss account but allowed as deduction
2. Incomes credited to profit and loss account but taxable under other heads or Exempt
(XX)
(XX)
(XX)
Taxable profits XX
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 96 :
What are specific deductions under the act
Section 30 to 37 covers expenses which are expressly allowed as deduction while computing
business income, Sections 40,40A,43B cover expenses which are not deductible. The following
expenses are expressly allowed as deductions against profits and gains of business or
profession:
Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of
buildings used by the assessee for the purpose of his business or profession.
a. the rent for premises, the amount of repairs, if he has undertaken to bear the cost of
repairs(this is applicable if the assessee has occupied the property as a tenant)
b. the amount of current repairs (if the assessee has occupied the premises otherwise than as a
tenant)
c. any sum on account of municipal taxes
d. premium in respect of insurance against risk of damage or destruction of property.
Points to be considered:
1. Capital expenditure is not allowed under sec 30. Assessee is entitle to depreciation
2. Notional rent is not allowed as deduction.
3. Municipal taxes are deductible subject to the conditions given under section 43B
Section 31 allows deduction in respect of the expenses on current repairs and insurance of
machinery, plant and furniture in computing the income from business or profession.
Usage of the asset: In order to claim this deduction the assets must have been used for
purposes of the assessee’s own business the profits of which are being taxed.
Insurance premium: The deduction allowable in respect of premia paid for insuring the
machinery, plant or furniture.
Cost of repairs and current repairs of capital nature not to be allowed : As per section 31,
the amount paid on account of current repairs of machinery, plant or furniture is allowed as
deduction in the computation of income under the head “profits and gains of business or
profession”
Rent, rates, taxes repairs and insurance for building: [Section 30]
Repairs and insurance of machinery, plant and furniture [Section 31]
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(1) Section 32 allows a deduction in respect of depreciation resulting from the
diminution or exhaustion in the value of certain capital assets. The Explanation to this
section provides that deduction on account of depreciation shall be made compulsorily,
whether or not the assessee has claimed the deduction in computing his total income.
(2) Conditions to be satisfied for allowance of depreciation:
The allowance of depreciation which is regulated by Rule 5 of the Income-tax Rules,
1962, is subject to the following conditions which are cumulative in their application.
(a) The assets in respect of which depreciation is claimed must belong to either of the
following categories, namely:
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature.
(b) The assets should be actually used by the assessee for purposes of his business
during the previous year - The asset must be put to use at any time during the previous
year. The amount of depreciation allowance is not proportionate to the period of use
during the previous year.
Asset used for less than 180 days - However, it has been provided that where any asset
is acquired by the assessee during the previous year and is put to use for the purposes
of business or profession for a period of less than 180 days, depreciation shall be
allowed at 50 per cent of the allowable depreciation according to the percentage
prescribed in respect of the block of assets comprising such asset. It is significant to note
that this restriction applies only to the year of acquisition and not for subsequent years.
The balance depreciation can be claimed in the immediately succeeding previous year. If
the assets are not used exclusively for the business of the assessee but for other
purposes as well, the depreciation allowable would be a proportionate part of the
depreciation allowance to which the assessee would be otherwise entitled. This is
provided in section 38.
Use includes passive use in certain circumstances: One of the conditions for claim of
depreciation is that the asset must be “used for the purpose of business or profession”.
Section 32 Depreciation
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Courts have held that, in certain circumstances, an asset can be said to be in use even
when it is “kept ready for use”.
For example, stand by equipment and fire extinguishers can be capitalized if they are
‘ready for use’’.
(c) The assessee must own the assets, wholly or partly - Depreciation is allowable not
only in respect of assets “wholly” owned by the assessee but also in respect of assets
“partly” owned by him and used for the purposes of his business or profession.
(3) Computation of Depreciation Allowance - Depreciation allowance will be calculated
on the following basis:
(i) Power generation undertakings: In the case of assets of an undertaking engaged in
generation or generation and distribution of power, such percentage on the actual cost
to the assessee as prescribed by Rule 5(1A).
Rule 5(1A) - As per this rule, the depreciation on the abovementioned assets shall be
calculated at the percentage of the actual cost at rates specified in Appendix IA of these
rules. However, the aggregate depreciation allowed in respect of any asset for different
assessment years shall not exceed the actual cost of the asset. It is further provided that
such an undertaking as mentioned above has the option of being allowed depreciation
on the written down value of such block of assets as are used for its business at rates
specified in Appendix I to these rules.
However, such option must be exercised before the due date for furnishing return
under section 139(1) for the assessment year relevant to the previous year in which it
begins to generate power. It is further provided that any such option once exercised
shall be final and shall apply to all subsequent assessment years.
(ii) Block of assets: In the case of any block of assets, at such percentage of the written
down value of the block, as may be prescribed by Rule 5(1).
Block of Assets: A “block of assets” is defined in clause (11) of section 2, as a group of
assets falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
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(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses,
franchises or any other business or commercial rights of similar nature, in respect of
which the same percentage of depreciation is prescribed.
(iii) Additional depreciation on Plant & Machinery acquired by an Industrial
Undertaking: Additional depreciation is allowed on any new machinery or plant (other
than ships and aircraft) acquired and installed after 31.3.2005 by an assessee engaged in
the business of manufacture or production of any article or thing or in the business of
generation or transmission or distribution of power at the rate of 20% of the actual cost
of such machinery or plant. Businesses eligible for claim of additional depreciation
under section 32(1)(iia)
Such additional depreciation will not be available in respect of:
(i) any machinery or plant which, before its installation by the assessee, was used within
or outside India by any other person; or
(ii) any machinery or plant installed in office premises, residential accommodation, or in
any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head “Profits and Gains of Business or Profession” of any one
previous year.
Asset put to use for less than 180 days: Balance 50% of additional depreciation to be
allowed in the subsequent year, where the plant and machinery is put to use for less
than 180 days during the previous year of acquisition and installation
[Sections 32(1)]
To remove the discrimination in the matter of allowing additional depreciation on plant
or machinery used for less than 180 days vis-a-vis used for 180 days or more, third
proviso to section 32(1)(ii) provides that the balance 50% of the additional depreciation
on new plant or machinery acquired and used for less than 180 days which has not been
allowed in the year of acquisition and installation of such plant or machinery, shall be
allowed in the immediately succeeding previous year.
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(iv) Terminal depreciation: In case of a power concern as covered under clause (i)
above, if any asset is sold, discarded, demolished or otherwise destroyed in the previous
year, the depreciation amount will be the amount by which the monies payable in
respect of such building, machinery, plant or furniture, together with the amount of
scrap value, if any, falls short of the written down value thereof. The depreciation will
be available only if the deficiency is actually written off in the books of the assessee.
4) Written down value [Section 43(6)]
(i) Assets acquired by the assessee during the previous year: In the case of assets
acquired by the assessee during the previous year, the written down value means the
actual cost to the assessee.
(ii) Assets acquired before the previous year: In the case of assets acquired before the
previous year, the written down value would be the actual cost to the assessee less the
aggregate of all deductions actually allowed in respect of depreciation. For this purpose,
any depreciation carried forward is deemed to be depreciation actually allowed [Section
43(6)(c)(i) read with Explanation 3].
The written down value of any asset shall be worked out as under in accordance with
section 43(6)(c):
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Meaning of “Moneys payable” and “Sold”
Term Meaning
Moneys payable In respect of any building, machinery, plant or furniture
includes—
(a) any insurance, salvage or compensation moneys
payable in respect thereof;
(b) where the building, machinery, plant or furniture is
sold, the price for which it is sold, so, however, that
where the actual cost of a motor-car is, in accordance
with the proviso to section 43(1), taken to be ` 25,000,
the moneys payable in respect of such motor-car shall
be taken to be a sum which bears to the amount for
which the motor-car is sold or, as the case may be, the
amount of any insurance, salvage or compensation
moneys payable in respect thereof (including the
amount of scrap value, if any) the same proportion as
the amount of ` 25,000 bears to the actual cost of the
motor-car to the assessee as it would have been
computed before applying the said proviso;
Sold Includes a transfer by way of exchange or a compulsory
acquisition under any law for the time being in force
but does not include a transfer, in a scheme of
amalgamation, of any asset by the amalgamating
company to the amalgamated company where the
amalgamated company is an Indian company or a
transfer of any asset by a banking company to a banking
institution in a scheme of amalgamation of such
banking company with the banking institution,
sanctioned and brought into force by the Central
Government.
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An illustrative example of few blocks of assets.
Block
Number
Nature of Assets Rate of
Dep.
Block 1
BUILDINGS Residential buildings other than hotels 5% and boarding houses
5%
Block 2
BUILDINGS - office, factory, godowns, hotels, boarding houses or buildings which are not mainly used for residential purpose i.e. other
10
Block 3
than block 1 and block 3 below. Buildings : 100% * Building acquired after 1.9.02 for installing machinery and plant forming part of water supply prozect or water treatment system and which is put to use for the purpose of business of providing
infrastructure facilitates u/s 80 IA (4) (i) * Temporary erections such as wooden structures
100
Block 4 Furniture - Any furniture / fittings including electrical fittings. 10
Block 5
PLANT & MACHINERY : * Any plant and machinery which is not covered by B lock
6,7,8,9,10,11 or 12 * Motor cars other than those used in a business of
running them on hire, acquired or put to use on or after 1.4.90
15
Block 6 Plant & Machinery of any type of ship 20
Block 7 Plant and Machinery : * Buses, lorries, and taxies used in the business o f
running them on hire * Machinery used in semi conductor industry * Moulds used in rubber and plastic factories and l ife
saving medical equipment
30
Block 8 * Plant & Machinery of Aeroplans Aeroengines * Specified life saving medical equipment
40
50
Block 9 Plant and Machinery Containers made of glass or plastic used as refi lls
50
Block 10
Plant & Machinery - Computers including computer software. 'Books' other than annual subscription
60
Block 11
Plant & Machinery – Energy saving devices, renewal energry devices, rollers in flour mills, sugar work s and steel industry
80
Block 12
Plant & Machinery - * AIR / water pollution control equipments * Solid waste control equipments * Rectifying and resource recovery systems * Machinery aquired and installed on or after 1.9.02 in a
water supply prozect or water treatment system or f or the purpose of providing instrastructure facility
* Wooden parts used in artificial silk manufacturing machinery
* Cinematograph films * Bulbs of studio lights * Wooden match frames
100
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* Some plants used in mines, quarries and salt works * Professional reference books * Books in the business of running lending libraries
Block 13
Intangible assets acquired on or after 1.4.98 such as know - how patents, copyrights, trade marks,licences, franchises and any other business or commercial rights of simi lar nature.
25
6) Other points
1) Balancing Charge
Section 41(2) provides for the manner of calculation of the amount which shall be
chargeable to income-tax as income of the business of the previous year in which the
monies payable for the building, machinery, plant or furniture on which depreciation has
been claimed under section 32(1)(i), i.e. in the case of power undertakings, is sold,
discarded, demolished or destroyed. The balancing charge will be the amount by which
the moneys payable in respect of such building, machinery, plant or furniture, together
with the amount of scrap value, if any, exceeds the written down value. However, the
amount of balancing charge should not exceed the difference between the actual cost
and the WDV.
The tax shall be levied in the year in which the moneys payable become due. The
Explanation below section 41(2) makes it clear that where the moneys payable in
respect of the building, machinery, plant or furniture referred to in section 41(2) become
due in a previous year in which the business, for the purpose of which the building,
machinery, plant or furniture was being used, is no longer in existence, these provisions
will apply as if the business is in existence in that previous year.
2) Composite Income: Explanation 7 provides that in cases of ‘composite income’, for
the purpose of computing written down value of assets acquired before the previous
year, the total amount of depreciation shall be computed as if the entire composite
income of the assessee is chargeable under the head “Profits and Gains of business or
profession”. The depreciation so computed shall be deemed to have been “actually
allowed” to the assessee.
For instance, Rule 8 prescribes the taxability of income from the manufacture of tea.
Under the said rule, income derived from the sale of tea grown and manufactured by
seller shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax. If the turnover is, say, ` ` ` ` 20 lakh, the
depreciation ` ` ` ` 1 lakh and other expenses ` ` ` ` 4 lakh, then the income would be ` ` ` ` 15
lakh. Business income would be ` ` ` ` 6 lakh (being 40% of ` ` ` ` 15 lakh). As per earlier Court
decisions, only the depreciation “actually allowed” i.e., ` ` ` ` 40,000, being 40% of ` 1 lakh,
has to be deducted to arrive at the written down value.
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The ambiguity in this case has arisen on account of the interpretation of the meaning of
the phrase “actually allowed” used in section 43(6)(b). However, the correct legislative
intent is that the WDV is required to be computed by deducting the full depreciation
attributable to composite income i.e. ` ` ` ` 1 lakh in this case. Explanation 7 clarifies this
legislative intent.
3. Building previously the property of the assessee: Where a building which was
previously the property of the assessee is brought into use for the purposes of the
business or profession, its actual cost to the assessee shall be the actual cost of the
building to the assessee, as reduced by an amount equal to the depreciation calculated
at the rates in force on that date that would have been allowable had the building been
used for the purposes of the business or profession since the date of its acquisition by
the assessee [Explanation 5].
4. In case of succession of firm/sole proprietary concern by a company or
amalgamation or demerger of companies
In order to restrict the double allowance under the proviso to section 32, in the cases of
succession or amalgamation or demerger, the aggregate deduction in respect of
depreciation allowable in the hands of the predecessor and the successor or in the case
of amalgamating company and the amalgamated company or in the case of the
demerged company and the resulting company, as the case may be, shall not exceed
the amount of depreciation calculated at the prescribed rates as if the
succession/amalgamation, demerger had not taken place.
It is also provided that such deduction shall be apportioned between the two entities in
the ratio of the number of days for which the assets were used by them.
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A numeric illustration of block method of accounting for depreciation u/s 32,
spread into several years in relation to its varied features.
Year 1 PLANT & MACHINERY - 15%
Opening W.D.V. 5,000 58,00,000
(+) Purchase during the year
and
used for < 180 days during such
a year of purchase 8,000 12,00,000
TOTAL 13,000 70,00,000
(-) Sold during the year (8,000) (12,00,000)
Qualifying amount for depreciation 5,000 58,00,000
(-) depreciation u/s 32
12,00,000 × ��
� × 50 % = 90,000
46,00,000 × ��
� × 100 % = 6,90,000
(BAL.) 100
Closing W.D.V. 5,000 50,20,000
Remarks :
In this situation the 8,000 machines which were purchased during the year and used for
less than 180 days during such a year of purchase, are sold, yet depreciation is
reduced as above and the reason is that the identity, personality and individuality of the
asset gets lost in the common hotch pot of the block and value based calculations are
made. Thus, whatever is sold, is not recognised under the system, and the fact remains
that such purchase value of `̀̀̀12,00,000 is retained in the block for less than 180 days
and thus is entitled to depreciation @ 50% of the block's rate of depreciation.
In order to attract the provisions of restriction of depreciation to 50% of the block's rate,
two conditions are to be satisfied together i.e.
� asset should be purchased during the year.
AND
� used for less than 180 days during such year of purchase. If an asset is purchased
in say year 1 but not used in year 1 at all, no depreciation would be allowed in
year 1. If such an asset is installed and used in year 2 for < 180 days, yet
depreciation would be allowed @ 100% of the block's rate and not 50%, since the
asset is not purchased in year 2.
� In case such 8,000 machines would have been sold for say `̀̀̀ 60,00,000, then
qualifying amount for depreciation would be `̀̀̀10,00,000. Such `̀̀̀ 10,00,000 would
be subject to restriction of 50% of the block's rate since it is less than purchase
value of `̀̀̀ 12,00,000. In other words the restriction is applicable on purchase
value of less than 180 days or qualifying amount for depreciation, whichever is
less.
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Year 2 PLANT & MACHINERY - 15%
Opening WDV 5,000 50,20,000
(+) Purchase during the year ---- ----
The year TOTAL 5,000 50,20,000
(-) Sold during the year (100) (20,00,000)
Q. A. for depreciation 4,900 30,20,000
(-) Depreciation u/s 32 (4,53,000)
Closing WDV 4,900 25,67,000
Remarks :
In this situation apparently there is a huge capital gain on the sale of 100 machines, which under the block method is not calculated separately if there is positive assets and positive value as qualifying amount for depreciation, such gain gets absorbed in current depreciation and closing WDV and the effect is that depreciation is reduced by Gain* block's rates of depreciation and the balance of the gain reduces the closing WDV.
Year 3 PLANT & MACHINERY - 15%
Opening WDV 4,900 25,67,000
(+) Purchased during the year --- ----
Total 4,900 25,67,000
(-) Sold during the year (4,000) (500)
Q. A. for depreciation 900 25,66,500
(-) Depreciation (3,84,975)
Closing WDV 900 21,81,525
Remarks :
In this situation apparently, there is a huge capital loss on the sale of 4,000 machines, which under the block method of accounting for depreciation is not calculated separately if there are positive assets and positive value as qualifying amount for depreciation, but such loss gets adjusted in current depreciation and closing WDV and the effect is that current depreciation is increased by Loss* block's rate of depreciation and the balance of loss increases the closing WDV.
Year 4 PLANT & MACHINERY - 15%
Opening WDV 900 21,81,525
(+) Purchased during the year ---- ----
Total 900 21,81,525
(-) Sold during the year (300) (50,00,000) 21,81,525
(28,18,475)
Q. A. for depreciation 600 NIL
(-) Depreciation NIL
Closing WDV 600 NIL
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Capital Gains
Sale consideration 50,00,000
(-) Cost of acquisition of depreciable asset u/s 50(1)
(All assets in the block are not sold)
Opening WDV 21,81,525
(+) Purchased during the year NIL (21,81,525)
S.T.C.G. taxable u/s 45 28,18,475 Remarks : In this situation i.e. when all assets are not sold and the sale consideration of whatever is sold, exceeds the opening WDV. (+) purchased during the year (+) transfer expenses, such excess is always short - term capital gain as above. � Always short - term because the identity, individuality gets lost in the common hotch pot of the block,
thus what is sold is not recognised under the system and hence even if the asset is held for more than 3 years prior to its sale, it would be short - term. Further also because value based calculations are made and such value keeps on changing every year.
� Always capital gains In this situation when all assets are not sold, there can never be a possibility of short - term capital loss (if there is actually a loss, it will be covered by year 3 situation) i.e. there will always be short - term capital gains only, or the block continues.
Year 5 PLANT & MACHINERY - 15%
Opening WDV 600 NIL (+) Purchase during the year ---- ---- Total 600 NIL (-) Sold during the year (300) (3,00,000)
NIL Q. A. for depreciation 300 (3,00,000) NIL (-) Depreciation u/s 32 NIL Closing WDV 300 NIL Capital Gains Sale consideration 3,00,000 (-) Cost of acquisition of depreciable asset u/s 50(1) (All assets in the block are not sold) Opening WDV NIL (+) Purchased during the year NIL NIL S.T.C.G. taxable u/s 45 3,00,000
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Remarks : Same as year 4 situation. Year 6 PLANT & MACHINERY - 15%
Opening WDV 300 NIL (+) Purchased during the year & used for > 180 days 200 2,00,000 TOTAL 500 2,00,000 (-) Sold during the year (500) (1,20,000) 2,00,000 Q. A. for depreciation NIL 80,000
NIL Block ceases to exist Capital Gains
Sales consideration 1,20,000 (-) Cost of acquisition of depreciable asset u/s 50(2) (All assets in the block are sold) Opening WDV NIL (+) Purchased during the year 2,00,000 (2,00,000) Short - term Capital Loss (80,000)
Remarks : In this situation all assets in the block are sold and here there are two possibilities, i.e. short - term capital loss as above or short - term capital gains / NIL. If the 500 machines would have been sold for say `̀̀̀ 3,00,000, then `̀̀̀ 1,00,000 would be short - term capital gains taxable u/s 45.
Sec. 32AD:- Investment in new Plant or Machinery [Inserted by FA 2015 w-e-f PY 15-16]
Assessee Any Assessee, who sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh, Bihar, Telangana or West Bengal
Investment Acquires and installs new plant and machinery during the period beginning on 1st April, 2015 and ending on 31st March, 2020 in the said backward area. New plant or machinery shall not include – a) Ship or aircraft b) Any plant or machinery which before its installation by the assessee was used either within or outside India by any other person;
c) Any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
d) Any office appliances including computers or computer software;
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e) Any vehicle; or f) Any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) u/h PGBP
Deduction Deduction = 15% of Actual Cost of new P&M acquired and installed during the PY,
Lock in period 5 years from the date of installation
Withdrawal of deduction
If sold or otherwise transferred within 5 years, the deduction allowed under this section shall be treated as income u/h PGBP. Exception : amalgamation or demerger of companies or business reorganization u/s 47 (xiii), (xiiib) or (xiv). However the lock in will be applicable for remaining period to the successor
Sec. 35:- Expenditure on Scientific Research
“Scientific Research” means any activity for the extension of knowledge in the fields of
natural or applied science including agriculture, animal husbandry or fisheries. Besides
scientific research, research in social sciences like human behavior and marketing
research work are also covered under this section.
Contribution made by the assessee to outside agencies
Sec 32(2AA) Contribution to National Laboratory or university
or an IIT, to carry out scientific research
Provided that such university, college or other institution –
(A) Is for the time being approved by prescribed authority; and (B) Is notified in the Official Gazette, by the Central Government; Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form as may be prescribed.
Deduction=150%
of sum paid
Sec. 35(1)(ii) : contribution to university, college or association
to carry out scientific research
Provided that such university, college or other institution –
(A) Is for the time being approved; and (B) Is notified in the Official Gazette, by the Central Government;
Deduction=150%
of sum paid
Sec. 35(1)(iia) : Contribution to a company to be used by it for
scientific research :
Provided that such company –
(i) Is registered in India, (ii) Has as its main object the scientific research and
development, (iii) Is, for the purposes of this clause, for the time being
approved by the prescribed authority in the prescribed manner, and
Deduction=100%
of sum paid
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(iv) Fulfills such other conditions as may be prescribed; [Sec.35(1)(iia)(C)]
Sec. 35(1)(iii): Contribution to research association, university, college or other institutions, to carry out research in social sciences or statistical research. Provided that such association, university, college or other institution – (A) Is for the time being approved; and (B) Is notified in the Official Gazette, by the Central Government;
Deduction=100% of sum paid
Explanation : - The deduction in respect of any sum paid to a scientific research association, university, college or other institution, or national laboratory university, Indian Institute of Technology shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution has been withdrawn.
Scientific Research carried on by the assessee himself (Research work shall relate to the business of the assessee)
REVENUE EXPENDITURE [Sec. 35(1) (i)]
Pre-commencement period (3 years preceding the commencement of business)
a) Payment of salary to research personnel; b) Purchase of materialized in scientific research (as certified by the prescribed authority)
Post – commencement period All expenses laid out or expended on scientific research
CAPITAL EXPENDITURE [Sec.35(1) (iv) and 35(2)]
Pre-commencement period (3 years preceding the commencement of business)
Any capital expenditure (Except cost of land)
Post – commencement period Any capital expenditure (except cost of land)
EXPENDITURE ON IN-HOUSE R&D BY COMPANIES [Sec.35(2AB)]:
ASSESSEE Company only
ELIGIBLE BUSINESS
Bio-technology or any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule
EXPENDITURE Capital or revenues expenditure excluding cost of any land and building.
TIME Expenditure or revenue expenditure excluding cost of any land and building. No deduction shall be allowed to a company accepting donations u/s.35(1)(iia)(C)
CONDITIONS • The R&D facility is approved by the prescribed authority
• The co. has entered into an agreement with the prescribed authority for co-operation in such R&D facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.
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• The prescribed authority shall submit its report in relation to the approval of the said facility to the 34 [Principal Chief Commissioner or Chief Commissioner or] 35 [Principal Director General or] Director General in such form and within such time as may be prescribed.
DEDUCTION 150% of revenue and capital expenditure except cost of land and building Note :- pre-commencement expenses and cost of building is not allowed under section 35(2AB). Hence they shall be entitled for 100% deduction u/s 35(1) and 35(2)
Other issues :
1. Sale of the asset : Sec.41(3) : the surplus arising on sale of the asset is chargeable
as business income to the extent of deduction allowed. Balance, if any, shall be
treated as capital gains.
2. Consequences in case of amalgamation [Section 35(5):- if the amalgamating
company transfers capital asset to the amalgamated company (being an Indian
company), the above provisions would apply to the amalgamated company.
3. Unabsorbed Capital Expenditure : if on account of inadequacy or absence of
profits of the business, deduction on account of capital expenditure on scientific
research cannot be allowed, fully or partly, the deficiency so arising is to be C/F as if
it is unabsorbed depreciation.
Sec. 35ABB:- Expenditure for obtaining license to operate telecommunication services
EXPENDITURE Capital expenditure for acquiring right to operate telecommunication services
DEDUCTION :
1) Fee paid before commencement of business
Amortized over period starting from the PY in which business is commenced and ending with the PY in which the license expires.
2) Fee paid after commencement of business
Amortized over period starting from the PY in which the license fee is paid and ending with the PY in which the license expires.
SALE OF LICENSE
(i) Entire license is transferred
a) Where sale proceeds < un-amortized amount, such deficiency shall be allowed as deduction in the PY in which the license is transferred.
b) Where sale proceeds > un-amortized amount, such excess, to the extent of deductions already allowed in the past, shall be taxable as business income of the year in which the license is transferred.
(ii) Part of the license is transferred
a) Where sale proceeds < un-amortized amount of the total license, the balance shall be deductible over the remaining life of the license.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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b) Where sale proceeds > un-amortized amount, such excess, to the extent of deductions already allowed in the past, shall e taxable as business income of the year in which the license is transferred.
AMALGAMATION OR DEMERGER
The amalgamated or resulting company is entitled to claim deduction to the same extent as it would have been allowable to the amalgamating company or demerged company.
Sec. 35ABA:- Spectrum charges (Same as 35ABB)
Sec. 35AD:- Deduction in respect of expenditure on specified business
Capital exp. [Other than land / goodwill / financial Instrument
Nature of business
Deduction
100%
Business commenced on or after
Operating a cold chain facility 1-4-09
Warehousing facility for storage of agricultural produce 1-4-09
Affordable housing project 1-4-11
Production of fertilizer 1-4-11
Hospital (100 beds) 1-4-10
Cross country pipeline for oil and as 1-4-07
Hotel (2 star +) 1-4-10
Slum re-development housing 1-4-10
inland container depot or a container freight station notified or approved under the Customs Act, 1952
1-4-12
Bee-keeping and production honey and bees wax 1-4-12
Warehousing facility for storage of sugar 1-4-12
Laying and operating a slurry pipeline for the transportation of iron ore
1-4-14
Setting up and operating a semi-conductor wafer fabrication manufacturing unit, which is notified by the CBDT
1-4-14
NATURE OF EXPENDITURE
Prior period expenses
Capital expenditure incurred prior to the commencement and capitalized in the books,
shall be allowed as deduction during the PY in which the operations commence
Post commencement expenses
Any capital expenditure incurred during the PY
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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Other conditions
1. It is not set up by splitting up, or the reconstruction, of a business already in
existence:
2. It is not set up by the transfer to the specified business of machinery or plant
previously used for any purpose;
Exceptions :
i) Imported plant and machinery, and
ii) 20% of total value
3. Where the assessee builds a hotel of 2 star or above category as classified by the
Central Government and subsequently, while continuing to own the hotel, transfers
the operation thereof to another person, he shall be deemed to be carrying on the
specified business
4. Where the business is of cross-country natural gas or crude or petroleum oil pipeline
network, such business, -
1. Is owned by an indian company or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any Central
or State Act;
2. Has been approved by the Petroleum and Natural Gas Regulatory Board and
notified by the Central Government in the Official Gazette in this behalf;
3. Has made not less than prescribed percentage of its total pipeline capacity
available for use on common carrier basis by any person other than the
assessee or an associated person;
No Deduction
Deduction not allowed u/s 10AA and 80IA to 80RRB in relation to specified business for
the same or any other AY
Double deduction
No deduction in respect of such expenditure shall be allowed under any other section in
any previous year or under this section in any other previous year.
Use of Asset [inserted by FA 14 w-e-f PY 14-15]
Any asset in respect of which a deduction is claimed and allowed under this section
shall be used only for the specified business, for a period of 8 years beginning with
the previous year in which such asset is required or constructed.
Where such asset, is used for a purpose other than the specified business during such
period, the following amount shall be deemed to be the income of the assessee
chargeable under the head “Profits and gains of business or profession” of the previous
year in which the asset is so used
Total amount of deduction so claimed and allowed in one or more previous years
xxx
Less : the amount of depreciation allowable u/s 32, as if no deduction under this section was allowed
xxx
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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Exception : if the company becomes a sick industrial company during the period
specified.
Note : Capital Expense exceeding `̀̀̀ 10,000/- not allowed as deduction if made through
other than A/c payee Cheque/Draft/ ECS in a single day to a single person.
Sec. 35D: Amortization of certain Preliminary Expenses
Assessee Indian company or any other person who is resident in India.
Eligible expenses
(I) Before commencement of business
Expenses for setting up any undertaking or business
(II) After commencement of business
Expenses in connection with expansion of an undertaking or in connection with setting up a new unit
Qualifying Expenditure
a) Expenditure in connection with preparation of a feasibility report, preparation of a project report, conducting market survey or any other survey necessary for the business of the assessee, engineering services relating to the business of the assessee.
b) Legal charges for drafting any agreement relating to the setting up or conduct of the business.
c) Where the assessee is company, following expenditure – i) Legal charges of drafting the MOA and AOA of the
company; ii) Printing charges of the MOA and AOA iii) Registration fees of a company iv) Expenses in connection with public issue of
shares or debentures, underwriting commission, brokerage and chares for drafting, typing, printing and advertisement of the prospectus.
Maximum Ceiling Indian company : 5% of the cost of the project, or 5% of the capital employed, w-e-more Any other assessee : 5% of the cost of the project
Deduction 1/5thof the qualifying expenditure in 5 successive PY’s
Audit of Books Required for the years in which the expenditure was incurred.
“Cost of the Project”
Means the actual cost of fixed assets namely, land, buildings, leaseholds, plant,
machinery, furniture, fittings and railway sidings, etc. which are shown in the books of
the assessee as on the last day of the previous year in which the business is
commenced.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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“Capital Employed”
Means the capital employed in the business of the company and includes the aggregate
of the issued share capital, debentures and long term borrowings, as on the last day of
the previous year in which the business is commenced.
Sec. 35DD :- Amortization of expenditure in case of amalgamation or demerger
Where an assessee, being an Indian Company, incurs any expenditure, wholly and
exclusively for the purposes of amalgamation or demerger of an undertaking, the
assessee shall be allowed a deduction of an amount equal to 1/5th of such
expenditure for each of the 5 successive PY’s beginning with the previous year in
which the amalgamation or demerger takes place.
Sec. 35DDA :- Amortization of compensation paid under VRs
Where an assessee incurs any expenditure in any PY by way of payment of any sum to
an employee in connection with his voluntary retirement, 1/5th of the amount so paid
shall be deductible in 5 succeeding PY’s.
TREATMENT IN CASE OF AMALGAMATION OR DEMERGER : where the
undertaking is transferred, before the expiry of 5 years, in a scheme of amalgamation,
or demerger, the deduction under this section shall, be allowed to the amalgamated or
resulting company for the balance PY’s.
Similar treatment in case of transfer of undertaking by a firm to a company u/s 47(xiii) or
a private company or unlisted public company to the LLP u/s 47(xiiib), or by a
proprietary concern to a company u/s 47(xiv).
Sec. 35CCC:- Expenditure on agricultural extension project
1. Where an assessee incurs any expenditure on agricultural extension project
notified by the Board, deduction = 100% of such expenditure.
2. Where a deduction under this section is claimed and allowed for any assessment
year in respect of such expenditure, deduction shall not be allowed in respect of
such expenditure under any other provisions of this Act for the same or any other
assessment year.
Sec. 35CCD :- Expenditure on skill development project
1. Where a company incurs any expenditure (not being expenditure in the nature of
cost of any land or building) on any skill development project notified by the
Board, deduction = 150% of such expenditure.
2. Where a deduction under this section is claimed and allowed for any assessment
year in respect of such expenditure, deduction shall not be allowed in respect of
such expenditure under any other provisions of this Act for the same or any other
assessment year.
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INCOME FROM BUSINESS & PROFESSION
OTHER DEDUCTIONS
36(1)(i) Insurance premium on stock in The amount of any premium paid in respect of
trade insurance against risk of damage or destruction of
stocks or stores, used for the purposes of the
business or profession, is allowable as deduction.
36(1)(ib) Premium paid by employer Group insurance scheme of General Insurance Cor
poration and approved by the Central Goverment
or any other insurer and approved by the Insurance
Regulatory and Development Authority, and premium
paid on mediclaim insurance policy which is paid by
any mode of payment other than cash, is allowed
as a deduction.
36(1)(ii) Bonus & commission to employees Allowed on payment basis in view of sec.43B. Should
be in relation to employment and not in relation to
share holding i.e. payment of dividend as understanding.
36(1)(iii) Interest on borrowed capital it is The following points merit consideration.
allowed if : (a) Brokerage & commission for securing a loan will
(a) The loan is borrowed by the not be allowed here in this section i.e. allowed
assessee u/s 37(1).
(b) Loan used for the purpose of (b) Interest paid during construction period is to be
his business. capitalised (absolutely new organisation).
(c) Interest is paid / payable by Interest paid on loan towards acquisition of
the assessee on such a loan. an asset for the period prior to the date on which
the asset is put to use will not be allowed
under this section, i.e. it has to be capitalised
and depreciation has to be claimed.
36(1)(iii a) Pro-rata deduction of discount on Zero coupon bonds are issued by any infrastructure
a zero coupon bond. capital company / fund or a public sector company
or scheduled bank on or after 1.6.05 and the Life of
the bond should be 10 years or more but not
exceeding 20 years.
The difference between the amount payable on the
redemption or maturity of such bond, and the amount
received on the issue of such zero coupon bond is
known as discount, and such discount will be allowed
as a deduction from the year in which the services
commence on pro-rata basis.
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Pro-rata basis means that the deduction is available
u/s 36(1)(iiia) having regard to the period of life of
such bond i.e. the period commencing from the date
of issue of the bond and ending on the date of maturity
or redemption of such bond.
36(1)(iv) Em p loye r ' s c on t r ibu t i on t o It is allowed on payment basis u/s 43 B.
recognised provident fund or
approved superannuation fund.
36(1)(iva) Employer’s contribution towards It is allowed as a deduction provided it does not exceed
pension scheme as referred to in 10% of the salary of the employee in the previous year
section 80CCD [Salary means Basic + DA (in terms ) only].
36(1)(v) Contribution to approved gratuity Allowed, i f it is for the exclusive benefit of the
fund. employees & under an irrevocable trust, regulated by
the provisions of 43 B.
36(1)(va) Deduction made from staff salary Contributions received from employees is considered
for s taf f welfare scheme i.e. income and as and when the assessee (employer)
employee's contribution credits the employees account in the relevant fund
on or before the fund's due date, it is allowed as a
deduction under this section.
36(1)(vii) Bad debts Condition for allowance :
(1) It should be related to business of assessee.
(2) It should have been taken into income consideration
initially (in mercantile system of accounting for
credit sales).
(3) Bad debts in the course of money lending business
carried on by the assessee is also allowed.
(4) Bad debts of a business discountinued prior to
the commencement of the previous year is not
deductible. Even such bad debt cannot be deducted
from the profits of a separate existing business.
(5) In case one of the partners takes over the entire
business after dissolution or a firm is converted
into a private limited company, the successor of a
business is entitled to claim deduction in respect
of debt created by the predecessor.
(6) Subsequent recovery of bad debts after its allowance,
will be taxable in the year of receipt u/s. 41(4).
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36(1)(viia) Provision for bad and doubtful debts made by banks and financial institutions
1. This Section applies to :
(a) Scheduled Bank (incorporated in India) or Non scheduled Bank
(b) Co-operative Bank(incorporated in India)
(c) Public Financial Institutions
(d) State Financial Corporation
(e) State Industrial Investment Corporation
(f) A foreign bank
(g) Non-Banking Financial Institutions
2. For point (a) & (b) above :
Deduction allowed : 8.5% of G.T.I.(excluding deduction under this section)
+
10% of Aggregate average advances made by RURAL branches of such banks.
3. For point (c), (d), (e), (f) & (g) above :
Deduction allowed = 5% of GTI (excluding deduction under this section)
4. If the actual bad debts written off in a particular year exceed the provision made
u/s 36(1)(viia) upto that year, the excess shall be allowed as a deduction u/s
36(1)(vii) in the year of write off.
36(1)(ix) Family planning expenses Any expenditure incurred by a company for family
planning programs is allowed. An expenditure of capital
nature will be allowed over a period of 5 years in 5
equal annual instalments.
36(1) (xv) Securities transaction tax (S.T.T.) When a share broker sells equity shares / units of an
paid by the assessee equity oriented mutual fund held as stock in trade
through recognized stock exchange and S.T.T.(Security
Transaction Tax) is paid on sales value, such S.T.T.
paid is allowed as a deduction under this section.
36(1)(xvi) Commodities transaction tax An amount equal to the commodities transaction
(CTT) paid by the assessee tax paid by the assessee in respect of the taxable
commodities transactions entered into in the course
of his business during the previous year, if the income
arising from such taxable commodities transactions
is included in the income computed under the head
“Profits and gains of business or profession”.
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37(1) Any Expenditure which is not covered u/s. 30 to 36, which is not capital in
nature, and if incurred wholly and exclusively/necessarily for the purpose
of the assessee's business or profession will be allowed as a deduction.
New explanation is inserted with retrospective effect from 1.4.62
by the Fin Act 1998,
"For the removal of doubts, i t is here by declared that any
expenditure, incurred by an assessee for any purpose which is an
offence or which is prohibited by law shall not be deemed to have
been incurred for the purpose of business or profession and no
deduction or allowance shall be made in respect of such expenditure".
Thus payment on account of protection money, extortion, hafta, bribes
etc. will not be allowed as a business expenditure in the computation
of legal as well as illegal business.
The following points emerge :
1. Expenditure incurred by the assessee in the previous year.
2. Expenditure related to assessee's business.
3. Expenditure should not be capital in nature.
4. Expenditure should not be personal in nature.
5. Expenditure should not be covered by specified deductions.
6. Should not be prohibited by law.
Then allowed as a deduction u/s 37(1).
Note : W.e.f. P.Y. 2014-15, any expenditure incurred by a company on activities
related to Corporate Social Responsibility (CSR) as required by the Companies
Act 2013 shall not be allowed as a deduction.
EXPRESS DISALLOWANCE OF EXPENDITURE
37(2B) Advertisement expenses in No allowance shall be made in respect of expenditure
relation to a political party. incurred by an assessee on advertisement in any
souvenir, brochure, tract, pamphlet, magazine or the
like published by a political party.
This is because assesse is entitled to claim deduction
u/s 80GGB & u/s 80 GGC from his G.T.I. towards such
expenditure.
38 W h en b u i l d i ng p l a n t & Proportionate expenditure in relation to non - business
machinery or furniture not used for rent, rates, taxes, insurance, repairs and
wholly used for business depreciation will be disallowed.
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INCOME FROM BUSINESS & PROFESSION
If the following three conditions are satisfied, the assessce (i.e., the
payer) is supposed to deduc t tax source (TDS) under section 195—
1. The amount paid is interest, royalty, fees for technical sendees
or any other sum (not being salary).
2. The aforesaid amount is chargeable to tax in India in the hands
of the recipient.
3. The aforesaid amount is paid/payable to a non-resident.
If the above three* conditions are satisfied, theassessee (the
paver) is supposed to deduct tax at source and deposit :he same
with the Government.
Disallowance of expenditure under section 40(a)(1) - If TDS default is
committed in respect of payment/credit given j to a foreign company/
non-resident, the expenditure is disallowed in the hands of payer un-
der section 40(a)(i). These provisions are given below -
TDS default Is such expenditure Is such expenditure deductible
deductible in the current year in any susbequent previous year
Case - 1 Tax is deductible 100 per cent of such expen- If tax is deducted in any subsequent
but not deducted diture is disallowed in the year, theexpenditure (which is
current year disallowed in thre current year)
will be deducted in the year in
which TDS will be deposited by
the assessee with the Government.
Case 2 - Tax is deductible 100 per cent of such ependiture If tax is deposited with the
(and is so deducted) is disallowed in the current year Government after the due date of
during the current financial submission of return of income,
year but it is not deposited the expenditure (which is disal-
on or before the due date lowed in the current year) will be
of submission of return deductible in that year in which
of income under tax will be deposited)
Section 1399(1)
Note - If recipient is non -resident or foreign company and TDS default is committed
by the prayewr, 100 per cent of the expenditure is disallowed in the hands of payer, as
given above. Similar rule is applicable if receipient is a resident and TDS default is
committed (however, not 100 percent but 30 per cent expenditure is disallowed). The
rule pertaining to TDS default (in case receipient is resident) is given by section 40(a) (ia)
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INCOME FROM BUSINESS & PROFESSION
Any sum payable to a resident [Sec. 40 (a) (ia) ] - In respect of the following paymenta /
credit to a resident, tax is deductible under te Income tax Act (i.e. ,sections 192 to
206AA) -
1. Salary
2. Interest
3. Dividends
4. Winnings from lottery or crossword puzzles
5. Winnings from horse races
6. Payments to contractors
7. Commission or brokerage (including insurnace commission)
8. Payment in respect of life insurance policy
9. Payment in respect of deposits under NSS
10. Payment on account of certain units
11. Rent
12. Payment on purchase of immovable property
13. Technical / professional fees, royalty , fees to a part time director
14. Payment of compensation on acquisition of immovable property
Dissallowance of above expenditure under sectuion 40(a) (ia) - If TDS default
is commited in respect of the above payment / credit given to a resident, 30
percent of such expenditure is disallowed in the hands of payer under section
40(a) (ia) .These provisions aregiven below -
TDS default Is such expenditure Is such expenditure deductible
deductible in the current year in any susbequent previous year
Case 1 - Tax is deductible 30 per cent of such expenditure Is tax is deducted in any ssubsequent
deducted is disallowed in the current year year, the expenduiture (which is
disallowed in the current year) will
be deducted in the year in which TDS
will be deposited by the assrssee with
the Government
Case 2 - Tax is deductoible 30 per cent of such expenditure If tax is deposited with the Govern-
(and is so deducted) during is disallowed in the current year ment after the due date of submission
the current financial year but of return of income, the expenditure
it is not deposited on or before (which is disallowed in the current
the due date of submission of year) will be deductible in that year in
return of income under which tax will be deposited
section 139(1)
When Receipient has paid tax -
Under the provisions, the relief is given in Case 1 (and not in cASe 2). Thie relief is
available if the following conditions conditions are satisfied -
1. Tax is deuductible on the aforesaid payments but it is not deducted by the prayer
(i.e. Case 1)
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2. The payer is not deemed to be an assessee - in - defalut under the first proviso
to section 201(1). Under the first proviso to section 201(1), the payer is not
deemed to be an assessee -in -deafult if -
(a) The resident recipient has furnished his return of income under section
139;
(b) The resident recipient has taken into account the above income in such
return of income
(c) The resident recipient has paid the tax due on the income declared in
such return income, and
(d) The payer furnishes a certificate [in Form No. 26] to this effect from a
chartered accountant.
If the above conditions are satisfied, then for the pupose of section 40(a)(ia) shall be
deemed that the payer has deducted and paid the tax on such amount on the date of
the furnishing of return of income by the resident recipient.
Tax of non - monetary perquisite paid by the employer [sec. 40(a) (v) ] - the provisions
of section 40(a) (v) are given below-
1. The employer provides non- monetary perquisites to employees
2. Tax on non -monetary perquisites is paid by the employer.
3. The tax so piad by the employer is no taxable in the hands of employees by
virtue of section 10(10CC).
4. While calculating income of the employer, the tax paid by the employer on non-
monetary perquisites is not deductible under section 40(a) (v).
Provisions illustrated
During the previous year 2015-16, Ltd. pays Rs. 40,000 per month as salary to X
(age : 3 years) and provides a rent - free unfurnished house (lease rent being Rs.
10,000 per month). The tax on perquisite is paid by A Ltd. as follows -
Rs.
Salary 4,80,000
Value of perquisite (5 percent of salary) 72,000
Gross : Salary 5,52,000
Les Deduction ---
Net income 5,52,000
Tax on net income (including education cess and
secondary and higher education cess) 36,462
Average rate of tax (Rs. 36,462/Rs. 5,52,000 x 100) : 6.605%
Tax on prequisite (6.605% of Rs. 72,000) 4,756
Total expenditure incurred by A Ltd. in respect of employee X is as follows:
Rs.
Salary to X 4,80,000
Rent - free house to X (Rs. 10,00 x 12) 1,20,000
Tax on perquisite borne by A Ltd. 4,756
Total 6,04,756
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INCOME FROM BUSINESS & PROFESSION
While calculating business income of A Ltd. Rs. 4,756 is not deductible by virtue of
section 40 (a (v) [amount deductible being Rs. 4,80,000 + Rs. 1,20,000]. In the
hands of X, Rs. 4,756 is not chargeable to tax. The same rule is applicable if tax on
perquisite paid by A Ltd. is lower than Rs. 4,756.If however, tax paid by A Ltd. is
more than Rs. 4,756 then the "excess" amount is deductible in the handas of A Ltd.
and the same is chargeable to tax in the hands of X.
40(a) Income tax is not deductible. Income tax also includes interest paid on delayed
(ii) & (iia) payment of Income tax, Interest paid on delayed filing of income tax and TDS
returns.
40(b) Interest on capital at a rate exceeding 12% p.a. simple interest. (for all
partners)
Salary, bonus, commission or other remuneration to non working partner
(sleeping partner).
Salary, bonus, commission or other remuneration to working partners if
not authorised or covered in partnership deed.
Salary, bonus, commission or other remuneration in relation to a period
prior to the date of partnership deed.
For working partners, excess of remuneration vis a vis the limits prescribed
is disallowed.
LIMIT AGGREGATE REMUNERATION
ALLOWABLE
* On the first 3,00,000 of the book `̀̀̀1,50,000/- or at the rate of 90% of the
profits or in the case of a loss book profit, whichever is more.
* On the balance of book profits 60% of the Balance
* Remuneration allowable u/s 37(1) along with the provisions of
sec. 40(b) would be least of :
Actual aggregate remuneration paid to working partners.
OR
���� Maximum aggregate remuneration allowable as per limits
discussed above.
"Working partner" means a partner who is actively engaged in conducting the
affairs of the business or profession of the firm.
"Book profits" means the net profit as shown in the profit and loss account
for the relevant previous year, computed as per the provisions of Income
from business or profession, and such profits should be increased by the
remuneration paid or payable to all the partners of the firm, if the same
has been deducted while computing the above net profits.
Taxable Income of Firm
Book profit / (loss)
Less : Remuneration allowed
Income / (loss) as per Taxation
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40 A(2) Amounts not deductible in respect of payment to relatives [Sec. 40A (2)]-
Section 40 A(2) is aj if expenditure is incurred for goods, services or facilities,
payment is made to the persons given below am payment is considered as
excessive or unreasonable having regard to -
(a) the fair market value of the commodity or service or facility; or
(b) Legitimate business needs of the assessee; or
(c) benefit derived by or accruing to assessee as a result of the expediture.
To the extent payment is considered as excessive or unreasonable, it will be
disallowed.
To whom the payment is amde - Section 40A(2) is applicable in the
following cases (list is bot complete only important cases are given) -
1. Payment made by an individau to his or her relative
2. Payment made by a company to a director of the company or any
relative of the director
3. Payment made by a firm/ AOP/HUF to a partner/ member or a
relative of partner / member.
4. Payment made to an individaul who has a substantial interest in
the business of the payer or a relative of such individual
5. Payment made to a company who has a substantial interest in
the business of the payer, any director of such company or
relative of such director.
6. Payment made to a firm /AOP/ HUF who has a substantial inter-
est in the business of the payer or partner/ member of such
person or relative of partner /member.
7. Payment made to a person in whose business the payer/ any
relative of payer ahs s substantial interest.
Relative - "Realtive in relation to an individual, means the husband ,
wife, brother or sister or any lineal ascendantor descendant of that
individual.
Susbstantial intrest -A person is deemed to have susbtantial interets in
the business or profession, if such person is the benefie ownre of at
least 20 percent of equity capital (in any other case) at any time during
the previous year.
40A(3) Amount not deductible in respect of expendture exceeding Rs. 10,000
[Sec. 40A(3)] - The provisions of section 40(A) (3) are given below -
Rule of a disalllowance - Disallowance is attrated under section 40A(3)
if the following conditions are satisfied -
1. The assessee incurs any expenditurte which is otherwise
deductible under the other provisions of the Act for computing business/
profession income (e.g., expenditure for purchase of raw material, trad-
ing goods, expenditure on salary, etc). The amount of expenditure
exceeds ` ` ` ` 10,000.
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2. A Payment (or aggregate of payments made to a person in a day) in
respect of the above expenditure exceeds `̀̀̀ 10,000.
3. The above payment is made otherwise than by an account payee cheque
or an account payee demand draft.
If all the above conditions are satisfied, then 100 per cent of such
payment will be disallowed.However, the monetary limit of `̀̀̀ 10,000 has
been raised to `̀̀̀ 35,000 in case of payment made for plying, hiring or
leasing goods carriages.
Exceptions - The above rule is not applicable to a afew cases given
below -
1. Payment m,ade to a bank (including private sector banks, co-operative
bank, credit societies), LIC, etc.
2. Payment made of Government.
3. Payment through banking system.
4. Payment made by book adjustment by an assessee in the account of the
payee against money due to the assesee for any goods supplied or
services rendered by him to the payee.
5. Payment made to a cultivator, grower or producer in respect of the pur-
chase of agricultural or forest produce or product of animal husbandry
(including licestock, meat, hides and skins) or diary or poultry farming or
fish or fish products of horticulture or apiculture (even if these products
have been subjected to some processing provided the processing has
been done by the cultivator, grower or the producer of the product).
6. Payment made to a producer in respect of the purchase of the products
manufactured or processed without the aid of power in a cottage
industry.
7. Payment made to a person who ordinarily resides or carries on
business in a village not served by any bank.
8. Payment of terminal benefits, such as gratuity, retrenchment
compensation, etc. not exceeding `̀̀̀ 50,000.
9. Payment made by an assessee by way of salary to his employee after
deducting tax and when such employee is temporarily posted for a con-
tinuous period of 15 days or more in a place other than his normal
place of duty or on a ship and does not maintain any account in any bank
at such place or ship.
10. Payment required to be made on a day on which the banks were closed
either on account of holiday or strike.
11. Payment made by any person to his agent who is required to make pay-
ment in cash for goods or services on behalf of such person.
12. Payment made by an authorized dealer or a money changer against
purchase of foreign currency or travellers cheques in the normal course
of his business.
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40A(3A) (WHEN OUTSTANDING LIABILITY OF EARLIER YEARS IS PAID IN THE CUR
RENT YEAR [SEC.40A(3A)]- Section 40A (3A) is applicable if an outstanding
liability was allowed as deduction in any of the earlier years and during the
current year payment in respect of such liability is made otherwise than by an
account payee cheque or draft. If such payment to a person in a day exceeds
`̀̀̀ 10,000 ( `̀̀̀35,000 in the case of payment for plying, hiring or leasing goods
carriages), the payment so made shall be chargeable to tax as business
income in the year of payment. This rule will, however, be not applicable in the
exceptions given above.
40A(7) (Amount not deductible is respect of provision for unapproved gratuity fund
[Sec.40A(7)]- Provision for gratuity fund (for meeting future liability) is
deductible only if such gratuity fund is an approved gratuity fund. In other words,
any provision for unapproved gratuity fund (for meeting future liability) is not
deductible.
The following points should be noted –
1. An employee retires during the current year. The employer does not
maintain any gratuity fund. Gratuity is paid to him during the current year.
it is deductible during the current year.
2. An employee retires during the current year. Gratuity is payable to him. A
part of the amount is paid during the current year and the balance will be
paid in the next year. A provision is made towards gratuity in the books
of account of the current year for makingpayment in the next year. The
entire amount is deductible during the current year (if no deduction was
claimed earlier). In this case, deduction is available during the current
year even if provision is made for gratuity fund, which is unapproved.
3. A company has 50 employees. To meet future liability to pay them gratu-
ity at the time of retirement, a gratuity fund is created and the employer
makes contribution every year.Employers’ contribution to this fund id de-
ductible only if the fund is an approved gratuity fund.
40A (Amount not deductible is respect of contributions to non-statutory funds
(9,10,11) [Sec. 40A(9)]- Any sum paid by the assessee as an employer by way of
contribution towards recognised provident fund, or approved superannuation fund
or an approved gratuity fund, is deductible to the extent it is required by any law.
- What is not deductible – If the following conditions are satisfied, then contri-
bution or payment is not deductible by section 40A(9)-
1. The contribution/payment is made by an assessee as an employer.
2. It is paid toward setting up (or formation of) any trust, company, association
of person, body of individuals, society or it is paid by way of contribution to
any fund.
3. The contribution or payment is not required by any law.
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41 Deemed Profit and their Treatment
The following receipts are chargeable to tax as business income :
Nature of deemed profit Taxable in which PY
1. Recovery against deduction of any loss, PY in which the amount is re
expenditure or trading liability, or remission or covered or liability is remitted
cessation of tradingliabilities. (including or the liability is written back as
“remission or cessation” of any liability arising income upon its cessation
out of a unilateral act of the assessee).
(chargeable in the hands of successor in
business also)
2. Balancing charge on assets on which PY in which the asset is sold
depreciation is charged on SLM basis, or transferred
in case of an undertaking engaged in
generation or generation and distribution
of power.
3. Surplus, (i.e., sale proceeds + deduction PY in which the sale took place
allowed – cost of the asset) arising on transfer
of capital asset used in scientific research or
family planning, or the amount of deduction
allowed, whichever is less
4. Recovery of bad debt allowed as deduction PY in which it is recovered
under section 36(1)(vii)
43CA Full value of consideration for transfer of land or building held as stock in trade
1. Where the consideration received or accruing as a result of the transfer by
an assessee of land or building or both, is less than the stamp value [adopted
or assessed or assessable by any authority of a State Government for the
purpose of payment of stamp duty], such stamp value shall be deemed to
be the full value of the consideration received or accruing as a result of
such transfer.
2. The provisions of section 50C(2) and (3) shall, so far as may be, apply.
3. Where the date of agreement fixing the value of consideration and the date
of registration of such transfer are not the same, and the amount of consid-
eration or a part thereof has been received by any mode other than cash on
or before the date of agreement, the stamp value may be taken as the
value assessable on the date of the agreement.
43B Certain deduction to be allowed only on actual payment :-
(a) Any amount payable to Government for any tax, duty, cess, fee, or any
other payment.
(b) Employer's contribution to provident fund or superannuation fund or
gratuity fund.
(c) Any sum payable as bonus or commission to employees for services rendered.
(d) Interest payable on loan or borrowing taken from Public Financial Institution
or State Financial Corporation or a State Industrial Investment Corporation,
in accordance with the terms and conditions of the agreement governing
such loan or borrowing.
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(e) Interest on any loan or advance from a scheduled bank in accordance with
the terms and conditions of the agreement governing such loan or
advance.
If such outstanding interest is converted into a loan or advance, it shall
not be deemed to have been actually paid.
(f) Any sum payable by the asessee as an employer in lieu of any leave at
the credit of his employee.
(g) Any payment made to Indian Railways for use of Railway assets.
(h) Interest on loans from Co-opearative banks also allowed on Payment
basis. Co-operative banks will not include 'Primary Agricultural Credit
Society' and 'Priamry Co-operative Agricultural and Rural Develpoment
Bank'
Conditions :
(i) The above items will be allowed only in the year of actual payment.
(ii) This is irrespective of regular accounting method followed by
assessee and irrespective of the year, in which the liability accrues.
(iii) However, if payments are made for the above after the close of
Previous Year, but before due date of filing the return u/s. sec. 139(1), will
be allowed in the previous year in which the liability to pay accrues,
provided the assessee attaches or encloses proof of such payment along
with the return.
44 AA Maintenance of books of account
a) ‘specified profession – specified profession include persons carrying
on legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration
or any other profession as is notified by the Board in the Official Gazette.
Authorized representatives, film artists and company secretaries have
been notified for this purpose.
b) ‘non-specified profession’:- a non-specified profession is a profession
other than a ‘specified profession’ mentioned above.
Who shall maintain compulsory books of account? – in order to determine who
shall maintain compulsory books of account, different taxpayers are grouped
into different categories -
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Rule 6F : the books of account and other documents shall be the following,
namely –
i) A cash book
ii) A journal, if mercantile system of accounting
iii) A ledger
iv) Carbon copies of bills and receipts, whether machine numbered or
otherwise serially numbered, wherever such bills or receipts are issued
by the person, for sums exceeding Rs.25/-
v) Original bills and receipts wherever issued to the person in respect of
expenditure incurred or, where such bills and receipts are not issued
and the expenditure incurred is = < Rs.50/- payment vouchers prepared
and signed by the person unless the cashbook contains adequate
particulars in respect of such expenditure
vi) A person carrying on medical profession shall, in addition to the books
of account and other documents specified above, keep and maintain
the following, namely :-
a) A daily case register in Form No.3C;
b) An inventory under broad heads, as on the first and the last day of
the PY, of the stock of drugs, medicines and other consumable
accessories.
The books of account and other documents specified above shall be kept and
maintained for a period of 6 years from the end of the relevant AY.
44 AB Audit of Books of Accounts
Who has to get his accounts audited on compulsory basis?
Business / Conditions Audit required or not
profession
In case of If Assessee covered by section 44AD/ADA /AE Audit is not required.
business a. If assessee declares minimum income prescribed
in relevant sections
b. If assessee declares less than minimum Audit is required
income prescribed in relevant sections (irrespective of
turnover)
If assessee does not covered by above sections
a. If total sales / turnover / gross receipts exceeds Audit is required
Rs. 1 crore
b. If total sales / turnover / gross receipts does not
exceeds Rs 1 crore Lacs Audit is not required
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In case of If Assessee covered by section 44ADA
Profession a. If assessee declares minimum income prescribed
in relevant section Audit is not required.
c. If assessee declares less than minimum income
prescribed in relevant section Audit is required
(irrespective of turnover)
If assessee does not covered by above sections
c. If total gross receipts exceeds Rs. 50lacs Audit is required
d. If total sales / turnover / gross receipts does not
exceeds Rs 50 Lacs Audit is not required
Points to be noted
Year-to-year basis
Applicability / non-applicability of section 44AB is to be decided on year-to-year
basis.
More than one business
If assessee carrying on more than one business, aggregate of sales / turnover /
gross receipts of all the business should be considered (i.e. section is applicable
assessee wise not business wise.
Due date for filling of audit report
• Due date = 30th September of relevant assessment year.
• However, if the audit report is submitted on or before due date but return is
filed subsequently, then the following should be submitted along with return -
(i) copy of the tax audit report; and
(ii) the proof of filling the tax audit report.
44AD Special provisions for comput ing profits and gains of business on
presumptive basis
(i) Eligible business:
The presumptive taxation scheme under section 44AD covers all small
businesses with total turnover/gross receipts of up to ̀ 200 lakh (except
the business of plying, hiring and leasing goods carriages covered un-
der section 44AE).
(ii) Eligible assessee: Resident individuals, HUFs and partnership firms (but
not LLPs) and who has not claimed deduction under any of the section
10AA or deduction under any provisions of Chapter VIA under the head-
ing “C.—Deductions in respect of certain incomes” in the relevant as-
sessment year would be covered under this scheme.
(iii) Presumptive rate of tax: The presumptive rate of tax would be 8% of
total turnover or gross receipts. However, the assessee has the option
to declare in his return of income, an amount higher than the presumptive
income so calculated, claimed to have been actually earned by him.
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Amendment : Persumptive Income reduced to 6% from 8% for turnover
or gross receipts which is received by A/c Payee Cheque /Draft/ ECS
upto due date of thing ROI.
(v) No further deduction would be allowed: All deductions allowable under
sections 30 to 38 shall be deemed to have been allowed in full and no
further deduction shall be allowed. Moreover, expenditure in the nature
of salary, remuneration, interest etc. paid to the partner as per section
40(b) shall not be deductible while computing the income under section
44AD since section 40 does not mandate for allowance of any expendi-
ture; it merely places a restriction on deduction of amounts, otherwise
allowable under section 30 to 38.
(vi) Written down value of the asset: The WDV of any asset of such business
shall be deemed to have been calculated as if the assessee had claimed
and had been actually allowed the deduction in respect of depreciation
for each of the relevant assessment years.
(vii) Relief from maintenance of books of accounts and audit: The intention
of widening the scope of this scheme is to reduce the compliance and
administrative burden on small businessmen and relieve them from the
requirement of maintaining books of account.
Such assessees opting for the presumptive scheme are not required to
maintain books of account under section 44AA or get them audited
under section 44AB.
(viii) Higher threshold for non -audit of accounts for assessees opting for
presumptive taxation under section 44AD: Section 44AB makes it
obligatory for every person carrying on business to get his accounts of
any previous year audited if his total sales, turnover or gross receipts
exceed ` 1 crore. However, if an eligible person opts for presumptive
taxation scheme as per section 44AD(1), he shall not be required to get
his accounts audited if the total turnover or gross receipts of the relevant
previous year does not exceed ̀ 2 crore. The CBDT, has vide its Press
Release dated 20 th June, 2016, clarified that the higher threshold for
non-audit of accounts has been given only to assessees opting for pre-
sumptive taxation scheme under section 44AD.
(xi) Advance tax: Further, since the threshold limit of presumptive taxation
scheme has been enhanced to Rs.2 crore, the eligible assessee is now
required to pay advance tax by 15th March of the financial year.
(x) Persons not eligible for presumptive taxation scheme: The following
persons are specifically excluded from the applicability of the
presumptive provisions of section 44AD -(a) a person carrying on
profession as referred to in section 44AA(1) i.e., legal, medical,
engineering or architectural profession or the profession of accountancy
or technical consultancy or interior decoration or any other profession
as is notified by the Board (namely, authorized representatives, film
artists, company secretaries and profession of information technology
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have been notified by the Board for this purpose); (b) a person earning
income in the nature of commission or brokerage; or (c) a person
carrying on any agency business.
(xi) Where an eligible assessee declares profit for any previous year in
accordance with the provisions of this section and he declares profit for
any of the five consecutive assessment years relevant to the previous
year succeeding such previous year not in accordance with the
provisions of sub-section (1), he shall not be eligible to claim the benefit
of the provisions of this section for five assessment years subsequent to
the assessment year relevant to the previous year in which the profit has
not been declared in accordance with the provisions of sub-section (1).
This is provided in new sub-section (4).
Example: Let us consider the following particulars relating to a resident
individual, Mr. A, being an eligible assessee whose gross receipts do
not exceed Rs. 2 crore in any of the assessment years between A.Y.2017-
18 to A.Y.2019-20 -
Particulars A.Y.2017-18 A.Y.2018-19 A.Y.2019-20
Gross receipts (Rs.) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation (Rs.) 14,40,000 15,20,000 12,00,000
% of gross receipts 8% 8% 6%
Offered income as per presumptive
taxation scheme u/s 44AD Yes Yes No
In the above case, Mr.A, an eligible assessee, opts for presumptive
taxation under section 44AD for A.Y.2017-18 and A.Y.2018-19 and of-
fers income of Rs.14.40 lakh and Rs.15.20 lakh on gross receipts of
Rs.1.80 crore and Rs.1.90 crore, respectively. However, for A.Y.2019-
20, he offers income of only Rs.12 lakh on turnover of Rs.2 crore, which
amounts to 6% of his gross receipts. He maintains books of account
under section 44AA and gets the same audited under section 44AB.
Since he has not offered income in accordance with the provisions of
section 44AD(1) for five consecutive assessment years, after A.Y. 2017-
18, he will not be eligible to claim the benefit of section 44AD for next five
assessment years succeeding A.Y.2019-20 i.e., from A.Y.2020-21 to 2024-25.
(xii) An eligible assessee to whom the provisions of sub-section (4) are ap-
plicable and whose total income exceeds the basic exemption limit has
to maintain books of account under section 44AA and get them audited
and furnish a report of such audit under section 44AB. This is provided
in new sub-section (5) of section 44AD.
(xiii) Summary of amendments in section 44AD
- Increase in treshold limit of eligible business from Rs.1 crore to
Rs.2 crore
- Salary, interest, remuneration paid to partner as per section 40(b)
not deductible
- Advance tax to be paid on or before 15th March of the financial year
- In case of non-offering of income as per section 44AD for five
continuous years, eligible assessee cannot opt for section 44AD
for the next five AYs after the assessment year of first non-option
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44ADA Presumptive Taxation Scheme for assessees engaged in eligible profession
(i) Section 44AD provides for a presumptive taxation scheme for eligible
persons engaged in eligible business in order to reduce compliance
burden of small tax payers.
(ii) For reducing the compliance burden of small tax payers having income
from profession, the Finance Act, 2016 has introduced a presumptive
taxation regime for professionals.
(iii) In this regard, new section 44ADA has been inserted in the Income-tax
Act, 1961 providing a presumptive taxation scheme for estimating the
income of an assessee: · who is engaged in any profession referred to
in section 44AA(1) such as legal, medical, engineering or architectural
profession or the profession of accountancy or technical consultancy or
interior decoration or any other profession as is notified by the Board in
the Official Gazette; and · whose total gross receipts does not exceed
fifty lakh rupees in a previous year, at a sum equal to 50% of the total
gross receipts, or, as the case may be , a sum higher than the aforesaid
sum claimed to have been earned by the assessee. (iv) Eligible Assessee
(iv) Eligible Assessee
Eligible Assessees
Resident assessee engaged in notified Total gross receipts
profession u/s 44AA(1) = Rs.50 lakhs
(v) Under the scheme, the assessee will be deemed to have been allowed
the deductions under section 30 to 38. Accordingly, no further deduction
under those sections shall be allowed. (vi) Further, the written down value
of any asset used for the purpose of the profession of the assessee will
be deemed to have been calculated as if the assessee had claimed and
had actually been allowed the deduction in respect of depreciation for
the relevant assessment years. (vii) The eligible assessee opting for
presumptive taxation scheme will not be required to maintain books of
account under section 44AA(1) and get the accounts audited under
section 44AB in respect of such income unless the assessee claims that:
(a) the profits and gains from the aforesaid profession are lower than
the profits and gains deemed to be his income under section
44ADA(1); and
(b) his income exceeds the maximum amount which is not charge-
able to income-tax.
(viii) Consequential amendment has been made in section 44AB requiring
every person carrying on profession to have his accounts audited by an
accountant before the specified date and furnish audit report by that date
if such persons have claimed lower profits and gains than the deemed
profits under section 44ADA and his total income exceeds the basic
exemption limit.
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44 AE Special provisions for computing profits and gains of business of
plying, hiring or leasing goods carriages:
(i) Eligible business: This section provides for estimating business
income of an owner of goods carriages from the plying, hire or
leasing of such goods carriages ;
(ii) Eligible assessee: The scheme applies to persons owning not more
than 10 goods vehicles at any time during the previous year ;
(iii) Presumptive Income: The estimated income from each goods
vehicle , whether heavy goods vehicle or other than heavy goods
vehicle, will be deemed to be `̀̀̀ 7,500 for every month or part of a
month during which such vehicle is owned by the assessee for the
previous year. The assessee can also declare a higher amount in his
return of income. In such case, the latter will be considered to be his income;
(iv) All other deduction deemed to be allowed: The assessee will be
deemed to have been allowed the deductions under sections 30 to
38. Accordingly, the written down value of any asset used for the
purpose of the business of the assessee will be deemed to have
been calculated as if the assessee had claimed and had actually
been allowed the deduction in respect of depreciation for each of
the relevant assessment years.
(v) Not requirement to maintain books of accounts and get the accounts
audited: The assessee joining the scheme will not be required to
maintain books of account under section 44AA and get the accounts
audited under section 44AB in respect of such income.
(vi) Option to claim lower profits: An assessee may claim lower profits
and gains than the deemed prof i ts and gains specif i ed in
sub- section (1) of that section subject to the condition that the books
of account and other documents are kept and maintained as required
under sub-section (2) of section 44AA and the assessee gets his
accounts audited and furnishes a report of such audit as required
under section 44AB.
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Q. 1. Kishore Industries owned six machines which were in use in its business of
manufacturing of plastic goods in March, 2017. Depreciation on those machines
was available as "plant". The written down value of these machines at the end of
previous year relevant to assessment year 2017-18 was `̀̀̀ 6,50,000.
A new plant was bought for `̀̀̀ 6,50,000 on 30th November, 2017. Three of the old
machines were sold on 10th June, 2017 for `̀̀̀ 9,00,000. Rate of depreciation is 15%.
Required :
(i) compute the claim of depreciation for assessment year 2018-19 ;
(ii) capital gains liable to tax for the same assessment year ;
(iii) if Kishore Industries had sold the three machines in June, 2016 for `̀̀̀14,00,000,
will there be any difference in your above working? Explain.
Q. 1.(b) (as modified) May 1999 - (7 Marks)
Q. 2. Determine the previous year in which the expenditure is allowable in the following
cases (TDS is supposed to be deducted with regard to all the payments) :
(i) PQR Ltd., paid interest of `̀̀̀ 2,10,000 to Mr. A, a non - resident, on 16.2.2018
and deducted tax at source on the same date. However the tax was deposited
on 27.6.2018.
Will it make any difference if Mr. A was a resident?
(ii) The company has paid technical fees on 1.1.2018 and no tax has been
deducted at source.
(iii) XYZ Ltd. paid professional fees of 1,00,000 to Mr. X on 12.01.2018 and
deducted tax at source on the same date. Tax was deposited on 27.12.2018.
Q. 3. Dr. Krishna furnishes you the following information :
Income and Expenditure Account for the year ended 31st March, 2018
` `` `` `` `
(i) Rent paid includes rent for his residential accommodation of `̀̀̀ 30,000 (paid
by cheque).
(ii) Hospital equipments (eligible for depreciation @ 15%)
01.04.2017 Opening WDV `̀̀̀ 5,00,000
07.12.2017 Acquired (Cost) `̀̀̀ 2,00,000
(iii) Medic ines consumed include medicines (cost) `̀̀̀10,000 used fo r
Dr. Krishna'a family.
(iv) Rent received relates to a property situated at Mysore (Gross Annual Value).
The municipal tax of `̀̀̀ 2,000 paid in December, 2017 has been included in the
"administrative expenses".
(v) He received `̀̀̀ 5,000 per month as salary from Full Cure Hospital. This has not
been included in the "fee receipts" credited to income and expenditure account.
Compute Dr. Krishna's professional income for the year ended 31.3.2018.
CLASS WORK PROBLEMS
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Q. 4. X is a business man, following is the P & L for the previous year 2017-18.
Profit & Loss A/c
Particulars `̀̀̀ Particulars `̀̀̀
To Purchase 21,00,000 Sales 75,00,000
To Salaries and Wages 3,00,000 Closing Stock 5,50,000
To Rent and taxes 30,000 I.T. refund
To Commission 20,000 (including interest of `̀̀̀ 2,000) 10,500
To Sundry expenses 50,000
To Income tax 25,000
To Gifts to clients 30,000
To Contribution to approved authority
for approved prog. set by
National Committee 50,000
To Interest outstanding 40,000
To Reserve for bad debts 17,000
To Net Profit 53,98,500
Total 80,60,500 Total 80,60,500
The following additional particulars are furnished.
(1) Salary and wages include :
(a) Bonus to staff `̀̀̀ 50,000.
Paid allowable bonus on or before due date of filing the return `̀̀̀ 27,000.
(b) Contribution to unrecognised provident fund 75,000.
(c) Contribution to approved gratuity fund prior to due date of filing return
but after due date of the fund 80,000.
(d) Entertainment allowance of `̀̀̀15,000 paid to employees.
(2) Outstanding interest includes outstanding bank interest of `̀̀̀ 25,000 on term
loan of a scheduled commercial bank, which is unpaid till the date of filing
the return.
(3) Commission includes `̀̀̀ 15,000 paid to a resident Indian on which tax has
not been deducted at source.
(4) Purchases include goods purchased from a relative for `̀̀̀ 2,00,000 whose
market value is `̀̀̀ 1,50,000/-. Mr. X had paid `̀̀̀ 1,00,000 by account payee
cheque and `̀̀̀ 1,00,000 in cash.
(5) Sundry expenses of `̀̀̀ 50,000 represent cost of computer purchased on
30.9.2017 put to use on 7.10.2017
Compute income from business for the year ended 31.3.2018.
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Q. 5. Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss
Account for the year ended 31st March, 2018.
Trading and Profit and Loss Account for the year ended 31.3.2018
` `` `` `` `
To Opening stock 90,000 By Sales 12,11,500
Purchases 10,04,000 Income from UTI 2,400
Gross Profit 3,06,000 Other business receipts 6,100
Closing Stock 1,80,000
14,00,000 14,00,000
To Salary 60,000 Gross Profit b/d 3,06,000
Rent and rates 36,000
Interest on loan 15,000
Depreciation 1,05,000
Printing and Stationery 23,200
Postage and Stationery 1,640
Loss on sale of shares
(Short - term) 8,100
Other general expense 7,060
Net Profit 50,000
3,06,000 3,06,000
Additional Information :
(i) It was found that some stocks were omitted to be included in both the Opening
and Closing Stock, the values of which were :
Opening stock `̀̀̀ 9,000
Closing stock `̀̀̀ 18,000
(ii) Salary includes `̀̀̀ 10,000 paid to his brother, which is unreasonable to the
extent of `̀̀̀ 2,000.
(iii) The whole amount of printing and stationery was paid in cash.
(iv) The depreciation provided in the Profit and Loss Account `̀̀̀1,05,000 was
based on the following information :
The written down value of plant and machinery is `̀̀̀ 4,20,000. A new plant
falling under the same Block of depreciation of 15% was bought on 1.7.2016
for `̀̀̀ 70,000. Two old plants were sold on 1.10.2016 for `̀̀̀ 50,000.
(v) Rent and rates includes sales tax liability of `̀̀̀ 3,400 paid on 7.4.2017.
(vi) Other general expenses include `̀̀̀ 2,000 paid as donation to a Public Charitable
Trust and penalty of `̀̀̀ 3,000 for contravention of sales tax.
You are required to advise Mr. Sivam whether he can offer his business income
under section 44AD i.e. presumptive taxation.
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Q. 6. Sun Manufacturing Company Limited sets up a factory in the notified backward area in
the state of Telangana on 1-6-2017. It purchased new plant and machinery costing
`̀̀̀ 30 crores on 16-7-2017. This new machinery was put to use on 21-10-2017.
Compute the deductions allowable to the assessee in respect of the purchase of this
machinery under various provisions of the Income tax Act, 1961.
Describe the changes in the following independent cases if :
(a) The assessee was an individual; or
(b) The factory was set up in Maharashtra; or
(c) The cost of the machinery was `̀̀̀ 10 crores.
Q. 7. An assessee acquired a telecom license from T.R.A.I. [Telecom Regulatory
Authority of India] in year 1 for `̀̀̀ 10,00,00,000 (life 10 years) in three independent
situations as under:
- Situations 1 : Pays entire amount in year 1 and starts services in year 1 itself.
- Situation 2 : Acquired license in year 1 but commenced services in year 3
(construction and setting equipment in year 1 & 2).
- Situation3: Acquired license in year 1, starts services in year 1 but paid in
instalments as under :
Year 1 : Paid `̀̀̀ 5,00,00,000
Year 2 : Paid `̀̀̀ 3,00,00,000
Year 3 : Paid `̀̀̀ 2,00,00,000
Compute deduction u/s 35ABB
Q. 8. X & Co., a partnership firm as such, furnishes the following profit and loss
account for the previous year ending 31st March, 2018 :
To Cost of Goods 5,00,000 By Sales 12,60,000
To Other expenses 1,10,000
To Interest to partners on capital 1,50,000
@ 15% P.A.
To Remuneration to working partners 4,00,000
To Net Profit 1,00,000
12,60,000 12,60,000
The other expenses debited include `̀̀̀ 20,000 not allowable under section 37(1) of
the Act.
You are required to compute for the assessment year 2018-19 :
(i) Book profits of the firm
(ii) Permissible remuneration to partners under section 40(b)
(iii) The income of the firm
What difference would it make if the sales would be `̀̀̀ 8,50,000 and all other things
remain unchanged.
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Q. 9. On April 1, 2017, X Ltd. commences the operation of a cold storage facility in
Andhra Pradesh. The following information is available from the records of
company.
Expenses incurred prior to April 1, 2017
Purchase of land for cold storage facility 50,00,000
Construction cost of cold storage facility 3,00,000
Purchase of know-how for cold storage facility 6,00,000
These expenses are capitalized on March 31, 2017
Expenses incurred during 2017-18
Construction cost of cold storage facility 100,00,000
Purchase of old plant and machinery (from domestic market) 2,00,000
Purchase of new plant and machinery 9,00,000
Profit and loss account for the year 2017-18
Find out the taxable income of X Ltd. for the assessment year 2018-19 on the
assumption that X Ltd. has income from the business of commission agency :
20,15,000 (computed under the provisions of the Income-tax Act).
Q. 10. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading
and Profit & Loss Account for the year ended 31.03.2018:
Manufacturing, Trading and Profit & Loss A/c for the year ended 31.03.2018
Particulars Particulars
To Opening Stock 71,000 By Sales 32,00,000
To Purchase of Raw Materials 16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & Expenses 5,70,000
To Gross Profit 10.60.000
34,00,000 34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To State VAT penalty 5,000 By Dividend from domestic 15,000
companies
To State VAT paid 1,10,000 By Income from agriculture (net) 1,80,000
To General Expenses 54,000
To Interest to Bank 60,000
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000
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INCOME FROM BUSINESS & PROFESSION
Following are the further information relating to the financial year 2017-18.
(1) Administrative charges include 46,000 paid as commission to brother of
the assessee. The commission amount at the market rate is 36,000.
(2) The assessee pa id 33 ,000 in cash to a t ranspor t ca r r ier on
29.12.2017.This amount is included in manufacturing expenses (Assume that
the provisions relating to TDS are not applicable to this payment.)
(3) Bank term loan interest actually paid upto 31.03.2018 was 20,000 and
the balance was paid in Dec. 2018.
(4) Depreciation allowable under the act is to be computed on the basis of the
following information.
Plant & Machinery (depreciation rate @ 15%)
Opening WDV as on 01.4.2017 12,00,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Compute the business income of Mr. Raju for the assessment year 2018-19.
Q. 11.Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down
value on 01.04.2017 was 40 lacs. It purchased another asset (second-hand plant
and machinery) of the same block on 01.11.2017 for 14.40 lacs and put to use on the
same day. Sai Ltd. was amalgamated with Shirdi Ltd with effect from 01.01. 2018
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2018 assuming that the assets were transferred to Shirdi
Ltd. at 60 lacs.
Q. 12. Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year
ended 31-3-2017 revealed the following information :
(1) The net profit was ` ` ` ` 11,20,000.
(2) The following incomes were credited in the profit and loss account:
(a) Dividend from UTI ` ` ` ` 22,000.
(b) Interest on debentures ` ` ` ` 17,500.
(c) Dividend From Indian Companies ` ` ` ` 15,000.
(3) It was found that some stocks were omitted to be included in both the opening and
closing stocks, the value of which were:
Opening stock ` ` ` ` 8,000.
Closing stock ` ` ` ` 12,000.
(4) ` ` ` ` 1,00,000 was debited in the profit and loss account, being contribution to a
University approved and notified under section 35(1)(ii).
(5) Salary includes ‘ 20,000 paid to his brother which is unreasonable to the extent of
` ` ` ` 2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing ` ` ` ` 1,000 per
packet presented to important customers.
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(7) Total expenses on car was ` ` ` ` 78,000. The car was used both for business and
personal purposes. ¾th is for business purposes.
(8) Miscellaneous expenses included `̀̀̀ 30,000 paid to A &Co., a goods transport
operator in cash on 31-1-2017for distribution of the company’s product to the
warehouses.
(9) Depreciation debited in the books was ` ` ` ` 55,000. Depreciation allowed as per
Income-tax Rules, 1962 was ` ` ` ` 50,000.
(10) Drawings ` ` ` ` 10,000.
(11) Investment in NSC ̀̀̀̀ 15,000.
(12) Contribution to PPF – 10,000
Compute the total income of Mr. Y for the assessment year 2017-18.
Q. 13. Mr. Vidyasagar, a resident individual aged 64, is a partner in Oscar Musicals & Co., a
partnership firm. He also runs a wholesale business in medical products. The following
details are made available for the year ended 31.3.2018:
Sr No. Particulars ` `` `` `` `
1. Interest on capital received from Oscar Musicals & Co.,at 15% 1,50,000
2. Interest from bank on fixed deposit (Net of TDS `̀̀̀ 1,500) 13,500
3. Income-tax refund received relating to assessment year
2016-17 including interest of `̀̀̀2,300 34,500
4. Net profit from wholesale business 5,60,000
Amounts debited include the following:
Depreciation as per books 34,000
Motor car expenses 40,000
Municipal taxes for the shop
(For two half years; payment for one half year made on
12.6.2018 and for the other on 14.11.2018) 7,000
Salary to manager by way of a single cash payment 21,000
5. The WDV of the assets (as on 1.4.2017) used in above wholesale
business is as under:
Computers 1,20,000
Motor car (20% used for personal use) 3,20,000
6. LIP paid for major son 60,000 60,000
PPF of his wife 70,000
Compute the total income of the assessee for the assessment year 2018-19. The
computation should show the proper heads of income. Also compute the WDV of the different
blocks of assets as on 31.3.2018.
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INCOME FROM BUSINESS & PROFESSION
Q. 14. Ms Deepika, a resident individual aged 50, provides the following information for the
FY 2017 – 18
(1) She is a partner in SK & Co and received the following amounts from the firm:
Share of profit from the firm Rs 35,000
Interest on capital @ 15% p.a Rs 3,00,000
Salary as working partner Rs 1,00,000
(Fully allowed in the hands of the firm)
(2) She is running a rice mills as proprietor. The Net profit as per Profit and Loss
account is Rs 4,50,000. The following items are debited to Profit and Loss
account:
- Income tax Paid Rs 1,00,000
- Personal Drawings Rs 50,000
The following items are credited to profit and loss account:
- Interest on savings bank account with SBI Rs 12,000
- Interest on savings account with post office Rs 5,000
- Dividend from Indian Company Rs 80,000
(3) She owned a house property in Mumbai which was sold in January 2016. She
received Rs 90,000 by a way of arrear rent in respect of the said property in
October 2017
(4) She made the following investments
Life Insurance Premium on a policy in the name of her married daughter Rs
60,000 (The policy was taken on 1.10.2015 and sum assured being Rs 5,00,000)
Health Insurance premium on a policy covering her mother aged 75, She is not
dependant on Ms Deepika. Premium paid by cheque Rs 35,000
Compute the total Income for AY 2018-2019.
Q. 15. Mr. Rajiv, aged 50 years, a resident individual and practicing Chartered Accountant,
furnishes you the receipts and payments account for the financial year 2017-18.
Receipts and Payments Account
Receipts `̀̀̀ Payment `̀̀̀
Opening balance (1.4.2017) Staff salary, bonus and stipend to 21,50,000
Cash on hand and at Bank 12,000 articled clerks
Fee from professional Services 59,38,000 Other administrative expenses 11,48,000
Rent 50,000 Office rent 30,000
Motor car loan from Canara Bank 2,50,000 Housing loan repaid to SBI 1,88,000
(@ 9% p.a.) (includes interest of `̀̀̀ 88,000)
Life insurance premium 24,000
Motor car (acquired in Jan. 2018) 4,25,000
Medical insurance premium
(for self and wife) 18,000
Books bought (annualpublications) 20,000
Computer acquired on1.11.2017
(for professional use) 30,000
Domestic drawings 2,72,000
Public provident fund subscription 20,000
Motor car maintenance 10,000
Closing balance (31.3.2018)
Cash in Hand and Bank 19,15,000
Total 62,50,000 Total 62,50,000
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INCOME FROM BUSINESS & PROFESSION
Following further information is given to you:
(1) He occupies 50% of the building for own residence and let out the balance for
residential use at a monthly rent of `̀̀̀ 5,000. The building was constructed during the
year 1997-98, when the housing loan was taken.
(2) Motor car was put to use both for official and personal purpose. One-fifth of the
motor car use is for personal purpose. No car loan interest was paid during the year.
(3) The written down value of assets as on 1-4-2017 are given below:
Furniture & Fittings `̀̀̀ 60,000
Plant & Machinery `̀̀̀ 80,000
(Air-conditioners, Photocopiers, etc.)
Computers `̀̀̀ 50,000
Note: Mr. Rajiv follows regularly the cash system of accounting.
Compute the total income of Mr. Rajiv for the assessment year 2018-19.
Q. 16. Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2017,
he owns 10 trucks (out of which 6 are heavy goods vehicles). On 2nd May, 2017, he sold
one of the heavy goods vehicles and purchased a light goods vehicle on 6th May, 2017.
This new vehicle could however be put to use only on 15th June, 2017.
Compute the total income of Mr. Sukhvinder for the assessment year 2018-19, taking note
of the following data:
Particulars `̀̀̀ `̀̀̀
Freight charges collected 12,70,000
Less : Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non- business income 70,000
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Ans. 2.(i) The tax has been deducted in February 2018 & deposited with the Central Gov-
ernment before the due date for filing return of income for P.Y. 2017-2018. Hence,
the expenditure shall be allowed as a deduction in P.Y. 2017-2018, whether Mr. A
is a resident or non-resident.
(ii) Since tax is not deducted at source by the payer, the expenditure shall be disal-
lowed fully (if the receiver is a non-resident person) or disallowed to the extent of
30% (if the receiver is a resident person). Subsequently, if tax is deducted by the
payer, the expenditure shall be allowed as a deduction in that financial year in
which the TDS is deposited with the government.
If tax is not deducted by the payer but the resident receiver has paid the income
tax on that amount to the government, then it shall be deemed that the payer has
deducted and deposited TDS on the date of filing return of income by the receiver.
Accordingly the expenditure shall be allowed as a deduction in P.Y. 2017-18.
(iii) Since tax is deducted but deposited after due date of filing return, the expendi-
ture shall be disallowed fully (if the receiver is a NR) or disallowed to the extent
of 30% (if the receiver is a resident). Subsequently if tax is deposited, the ex-
penditure shall be allowed as a deduction in that financial year in which the TDS
is deposited with the government. In the given case 70% is allowed in PY 2017 –
18 and 30% in PY 2018 – 19 (if receiver is resident) and 100% in PY 2018 – 19
(if receiver is NR).
Ans. 4. Mr.X
Computation of income from business for A.Y 18-19
Particulars
Net profit as per P&L Account 53,98,500
Add: Expenses debited to P&L account but disallowed
1) Provision for bad debts 17,000
2) Income tax [Sec 40(a)] 25,000
3) Unpaid Bonus [50,000-27,000] 23,000
4) Outstanding interest 40,000
5) Contribution to URPF 75,000
6) Cost of computer 50,000
7) Unreasonable payment to relative for goods [working] 50,000
8) Cash payment for goods [working] 50,000 3,30,000
Less:Income credited to P&L a/c but exempt/taxable under
different heads
1) Income tax refund, not taxable. 8,500
2) Interest on IT refund, taxable as IFOS 2,000 (10,500)
Less: Expenses not debited to P&L a/c but allowed
1) Interest on loan [40,000-25,000] (Note) 15,000
2) Depreciation u/s 32 on computer [50,000 X 60% X ½] 15,000 (30,000)
Taxable Business Income 56,88,000
CLASS WORK SOLUTIONS
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Notes & Assumptions
1) It has been assumed that the interest of 15,000 is on loans from private
parties & hence deduction of this amount has been allowed on PAYABLE basis.
2) It has been assumed that the resident receiver has paid income tax on the
commission of 15,000 & therefore deduction of this amount has been allowed
to Mr. X even if tax was not deducted at source by him.
Working for adjustment
Cost of goods = 2,00,000
Market Value = 1,50,000 Unreasonable/Excess 50,000
Account Payee cheque Cash 50,000 Cash
1,00,000
Disallowed u/s. 40A(2)
Allowed Disallowed u/s. 40A(3)
Ans. 5. Mr. Sivam
Computation of Income from Business (on actual basis) for A.Y. 2018-2019
Particulars ` `` `` `` `
Net Profit as per P & L A/c. 50,000
Add: Expenses debited to P & L A/c. but disallowed
1 Depreciation as per books 1,05,000
2 Unreasonable salary to brother [Section 40A(2)] 2,000
3 Printing and Stationery, assumed to be paid in
cash on a SINGLE DAY [Section 40A(3)] 23,200
4 Loss on sale of shares 8,100
5 Penalty for contravention of sales tax 3,000
6 Donation to Public Charitable trust,
allowed u/s. 80G from GTI 2,000 1,43,300
Add: Income not credited to P & L A/c. but taxable
Omission of closing stock 18,000
Less: Incomes credited to P & L A/c. but exempt / not taxable
under this head
Income from UTI (2,400)
Less:Expenses not debited to P & L A/c. but allowed
1 Depreciation u/s. 32
Opening WDV 4,20,000
Add: Addition on 1-7-2017 70,000
Less: Sale on 1-10-2017 (50,000)
Qualifying Amount 4,40,000
x Block rate 15% 66,000
2 Omission of Opening Stock 9,000 (75,000)
INCOME FROM BUSINESS (actual basis) 1,33,900
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INCOME FROM BUSINESS & PROFESSION
Computation of Income from Business (on presumptive basis) for A.Y. 2018-2019
Particulars `̀̀̀
Sales 12,11,500
Add : Other business receipts 6,100
Turnover / Gross receipts 12,17,600
x Rate of profit u/s. 44AD 8.00%
INCOME FROM BUSINESS (presumptive basis) 97,408
Conclusion :
Since the income calculated on actual basis is greater than the income on
presumptive basis, `̀̀̀ 1,33,900 i.e. income on actual basis shall be treated as the
taxable income from business.
If the income on actual basis would have been lower than the income on presumptive
basis and the assessee wishes to declare the lower amount as his income, it is
possible but the provisions of Section 44AA- Compulsory maintenance of books and
Section 44AB- Compulsory tax audit shall be applicable to him.
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Ans.8. X & Co. a partnership firm
Before changes
(i) Book profits of the firm
Net profit as per profit & loss A/c 1,00,000
Add :
� disallowed expenses u/s 37(1) 20,000
� interest disallowed u/s 40(b) 30,000
in excess of 12% P.A.
1,50,000 * 3 (15 - 12)
15
� Remuneration to working partners 4,00,000 4,50,000
5,50,000
Less : NIL
Book profits 5,50,000
(ii) Permissible remuneration to partners u/s 37(1) read with u/s 40(b)
Remuneration allowable to working partners as per partnership deed u/s 37(1)
read with (r.w.) 40(b) is Least of :
� Actual remuneration paid 4,00,000
OR
� Maximum allowable as per section 40(b)
* upto Rs.3,00,000 of book profits
- 90% 2,70,000 or 1,50,000 (higher)
* above Rs.3,00,000 @ 60%
i.e. 2,50,000 @ 60% = 1,50,000
(5,50,000 - 3,00,000)
(2,70,000 + 1,50,000) : 4,20,000
(iii) The income of the firm :
Book profits as above 5,50,000
(-) allowable remuneration u/s 37(1)
r. w. 40(b) (4,00,000)
Taxable profits 1,50,000
After changes
(i) Book profits of the firm
Net profit as per profit & loss A/c (loss) (3,10,000)
Add disallowed expenses u/s 37(1) 20,000
interest disallowed u/s 40(b) 30,000
Remuneration to working partner 4,00,000 4,50,000
Book profits 1,40,000
(ii) Permissible remuneration to partners u/s 37(1) r. w. u/s 40(b) which is least of :
Actual remuneration paid 4,00,000
OR
Maximum allowable as per section 40(b)
* upto `̀̀̀1,40,000 of book profits
- 90% or `̀̀̀ 1,50,000 (higher) 1,50,000
(iii) The income of the firm
Book profits as above 1,40,000
(-) allowable remuneration (1,50,000)
u/s 37(1) r. w. 40(b)
Loss of firm (10,000)
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Ans. 9. Amount Deductible under Section 35AD
Particulars `̀̀̀
A. Amount deductible under section 35AD
1. Expenditure incurred prior to commencement
of operation (to the extent they are capitalized)
� Purchase of land (not qualified for deduction) Nil
� Construction cost of cold storage facility 3,00,000
� Purchase of know-how 6,00,000
2. Expenditure incurred during P.Y. 2016-2017
� Construction cost of cold storage facility 100,00,000
� Purchase of machinery (`̀̀̀2,00,000 + `̀̀̀9,00,000) 11,00,000
Eligible capital expenditure 1,20,00,000
Deduction under section 35AD 1,20,00,000
B. Computation of Income from cold storage facility
Net Profit as per P & L A/c 81,70,000
Add : Depreciation / Amortisation as per books
(i) Building 3,15,000
(ii) Machinery 2,64,000
(iii) Know-how 3,00,000 8,79,000
Less : Deduction u/s 35AD (1,20,00,000)
LOSS FROM COLD STORAGE FACILITY (29,51,000)
Computation of income
`̀̀̀ `̀̀̀
Commission agency 20,15,000 20,15,000
Warehouse Loss c/f u/s 73A (29,51,000)
Business income [loss from operating cold storage facility, being a
specified business under section 35AD cannot be set off against
any other income except income from any specified business of
future, without any time limit]
Total Income 20,15,000
Notes –
1. The business of operating cold storage facility is formed by using new
machinery of `̀̀̀ 9,00,000 and old machinery of `̀̀̀ 2,00,000. Value of old plant and
machinery does not exceed 20% of the total value of plant and machinery. Other
conditions of section 35AD are satisfied. X Ltd. is, therefore, eligible for
deduction for the total value of Plant and Machinery under section 35AD.
2. Loss from operating cold storage facility (by virtue of section 73A) can be set off
only against profit and gains, if any, of any other specified business under section
35AD. In this case, X Ltd. does not have any other specified business. Loss will be
carried forward (without any time-limit) for being set off against income from
operating cold storage facility or any other specified business under section 35AD.
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Ans. 10.Computation of income from business of Mr. Raju for the A. Y. 2018 – 19
Particulars ` `` `` `` `
Net profit as per the and loss account 5,00,000
Add: 1.Excess commission paid to brother disallowed 10,000
under Section 40A (2)
2. Disallowance under section 40A (3) is not attracted NIL
since the limit for the one time cash payment is
`̀̀̀ 35,000 in respect of payment to transport
operators. Therefore, amount of `̀̀̀ 33,000 paid in
cash to transport carrier is allowable as deduction.
3. Bank term loan interest paid after the due date of filling
of return- disallowed as per section 43B 40,000
4. State VAT penalty paid disallowed 5,000
5. Depreciation debited to profit and loss account 2,00,000 2,55,000
Less: 1. Dividend from domestic companies, exempt 15,000
2.Income from agriculture[ Exempt under section 10(1)] 1,80,000
3.Depreciation u/s 32 [ W.N.] 2,85,000 (4,80,000)
Taxable business Income 2,75,000
Working note :
Computation of depreciation u/s 32
Particulars `̀̀̀
Depreciation @ 15% on `̀̀̀ 14 lakh (Opening WDV of `̀̀̀ 12 lakh plus assets
Purchased during the year and used for more than 180 days `̀̀̀ 2 lakh) 2,10,000
Depreciation (half) @ 15% on `̀̀̀ 2 lakh (Cost of assets used for < 180 days) 15,000
Additional Depreciation ( 2,00,000 x 20% ) + ( 2,00,000 x 20% x ½) 60,000
2,85,000
Ans. 11.Statement showing computation of depreciation aiiowable to Sai Ltd. & Shirdi
Ltd. for A.Y. 2018-19
Particulars `̀̀̀
Written down value (WDV) as on 1.4.2017 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on `̀̀̀ 40,00,000 @ 15% 6,00,000
Depreciation on `̀̀̀ 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
(a) Apportionment between two companies:
Amalgamating company, Sai Ltd.
`̀̀̀ 6,00,000 x 275/365 4,52,055
`̀̀̀ 1,08,000 x 61/151 43,629
4,95,684
(b) Amalgamated company, Shirdi Ltd.
`̀̀̀ 6,00,000 x 90/365 1,47,945
`̀̀̀ 1,08,000 x 90/151 64,371
2,12,316
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INCOME FROM BUSINESS & PROFESSION
Notes:
(1) The aggregate deduction, in respect of depreciation allowable to the amalga-
mating company and amalgamated company in the case of amalgamation shall
not exceed, in any case, the deduction calculated at the prescribed rates as if
the amalgamation had not taken place. Such deduction shall be apportioned
between the amalgamating company and the amalgamated company in the ra-
tio of the number of days for which the assets were used by them.
(2) The price at which the assets were transferred i.e. rs. 60,00,000/- has no impli-
cation in computing eligible depreciation.
Ans. 16. Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the
business of plying goods carriages and owns not more than ten goods carriages at
any time during the previous year.
Section 44AE provides for computation of business income of such assessees on
a presumptive basis. The income shall be deemed to be ̀ ̀ ̀ ̀ 7,500 from each goods
carriage (whether it is heavy or light vehicle) - for every month or part the month
during which such carriage vehicle is owned by the assessee in the previous year or
such higher sum as declared by the assessee in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE
is ̀ ̀ ̀ ̀ 9,07,500 (See Notes 1 & 2 below) and his total income would be ` ̀` ` 9,77,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains
if he keeps and maintains proper books of account as per section 44AA and gets
the same audited and furnishes a report of such audit as required under section
44AB. If he does so, then his income for tax purposes from goods carriages would
be ` ` ` ` 4,45,000 instead of ` ` ` ` 9,07,500 and his total income would be ` ` ` ` 5,15,000.
Computation of total income of Mr Sukhvinder for AY 2018 – 2019
Particulars Presumptive Where books are
Income maintained
Income from business of plying goods carriages 9,07,500 4,45,000
Other income 70,000 70,000
Total Income 9,77,500 5,15,000
Calculation of presumptive income as per section 44AE
Type of carriage No. of months Rate Amount
per month
9 goods carriage – held throughout the year 12 7,500 8,10,000
1 goods carriage – held upto 2nd May 2 7,500 15,000
1 goods carriage – held from 6th May 11 7,500 82,500
Total 9,07,500
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AGRICULTURE INCOME
Introduction
Section 10(1) exempts agricultural income from tax and also provides for its exclusion
incomputing the total income of the assessee. The reason of exemption of agricultural income
from Central taxation is that the Constitution gives exclusive power to make laws with respect
to taxes on agricultural income to the State Legislatures. From the assessment year 1974-75,
agriculture income is, however taken into account to determine tax on non-agricultural income
in certain cases. This Chapter explains the meaning of agricultural Income and mode of
aggregation of agricultural income with non- agricultural income to determine tax incidence
on the latter.
What is the scheme of partial integration of non-agricultural income with agricultural
income.
The scheme of partial integration of non-agricultural income with agricultural income is applicable
if the following conditions are satisfied-
Condition 1 – The taxpayer is an person liable to pay tax as per slab rates.
Condition 2 – Agricultural income of the taxpayer exceeds Rs 5,000
Condtion 3 – The taxpayer non agricultural income exceeding the basic exemption limit
Computation of tax in cases covered by the scheme
Step 1: Add non-agricultural income with net agricultural income. Compute tax on the
aggregate amount.
Step 2: Add net agricultural income and the maximum exemption limit available to the
assessee (i.e., ` ` ` ` 2,50,000 / ` ` ` ` 3,00,000/ ` ` ` ` 5,00,000). Compute tax on the
aggregate amount.
Step 3: Deduct the amount of income tax calculated in step 2 from the income tax
calculated in step 1 i.e., Step 1 – Step 2.
Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be
reduced by the rebate if any available u/s 87A.
Step 5: Thereafter, it would be increase by education cess @2% and secondary and
higher education cess @1%.
Definition of agricultural income [Section 2(1A)]: This definition is very wide and covers
the income of not only the cultivators but also the land holders who might have rented out the
lands. Agricultural income may be received in cash or in kind.
Three ways: Agricultural income may arise in any one of the following three ways:-
(1) It may be rent or revenue derived from land situated in India and used for agricultural
purposes.
(2) It may be income derived from such land through agriculture or the performance of a
process ordinarily employed by a cultivator or receiver of rent in kind to render the
produce fit to be taken to the market or through the sale of such agricultural produce in
the market.
(3) Lastly, agricultural income may be derived from any farm building required for agricultural
operations.
AGRICULTURE INCOME
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Now let us take a critical look at the following aspects:
(1) Land has to be situated in India - If agricultural lands are situated in a foreign State,
the entire income would be taxable.
(2) “Agriculture” and “agricultural purposes” - These terms have not been defined in
the Act. However, cultivation of a field involving expenditure of human skill and labour
on the land can be broadly termed as agriculture.
(a) “Agriculture” means tilling of the land, sowing of the seeds and similar operations.
These are basic operations and require the expenditure of human skill and labour
on land itself. Those operations which the agriculturists have to resort to and
which are absolutely necessary for the purpose of effectively raising produce
from the land are the basic operations.
(b) Operations to be performed after the produce sprouts from the land (e.g.,
weeding, digging etc.) are subsequent operations. These subsequent operations
would be agricultural operations only when taken in conjunction with and as a
continuation of the basic operations. Simply performing these subsequent
operations without raising such products is not characterized as agriculture.
(c) “Agriculture” comprises within its scope the basic as well as the subsidiary
operations regardless of the nature of the produce raised on the land. These
produce may be grain, fruits or vegetables necessary for sustenance of human
beings including plantation and groves or grass or pasture for consumption of
beasts or articles of luxury such as betel, coffee, tea, spices, tobacco or
commercial crops like cotton flax, jute hemp and indigo. The term comprises of
products of land having some utility either for consumption or for trade and
commerce and would include forest products such as sal, tendu leaves etc.
(d) However, the term ‘agriculture’ cannot be extended to all activities which have
some distant relation to land like dairy farming, breeding and rearing of live stock,
butter and cheese making and poultry farming. This aspect is discussed in detail
later on.
(3) Process ordinarily employed - The process to which the agricultural produce is
subject should be a process which is ordinarily employed by a cultivator. It may be
manual or mechanical. However, it must be employed to render the produce fit to be
taken to the market. For example, before making rice fit to be taken to the market we
have to remove the basic grain from the hay, we have to remove the chaff from the
grain, we have to properly filter them, we have to remove stones etc. and we have to
pack the grain in gunny bags. In that condition alone the rice can be taken to the market
and sold. This process of making the rice ready for the market may involve manual
operations or mechanical operations. All these operations constitute the process
ordinarily employed to make the product fit for the market. The produce must retain its
original character in spite of the processing unless there is no market for selling it in
that condition.
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(4) Income from farm building - Income from any farm building which satisfies the
following conditions would be agricultural income and would consequently be exempt
from tax. Income derived from any such building arising from any other use (other than
those discussed below) shall not be agricultural income.
(a) The building should be on or in the immediate vicinity of the agricultural land;
(b) It should be owned and occupied by the receiver of the rent or revenue of any
such land or occupied by the cultivator or the receiver of rent in kind of any land
with respect to which land or the produce of which land the process discussed
above is carried on;
(c) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind
should, by reason of his connection with such land require it as a dwelling house
or other out building.
In addition to the above three conditions any one of the following two conditions should
also be satisfied:
(i) The land should either be assessed to land revenue in India or be subject to a
local rate assessed and collected by the officers of the Government as such or;
(ii) Where the land is not so assessed to land revenue in India or is not subject to
local rate:-
(a) It should not be situated in any area as comprised within the jurisdiction
of a municipality or a cantonment board and which has a population not
less than 10,000.
(b) It should not be situated in any area within such distance, measured
aerially, in relation to the range of population according to the last
preceding census as shown hereunder –
Shortest aerial distance from Population according to the last
the local limits of a municipality preceding census of which the
or cantonment board referred relevant figures have been published
to in item (a) before the first day of the previous year.
(i) 2 kilometers > 10,000 < 1,00,000
(ii) 4 kilometers > 1,00,000 <10,00,000
(iii) 8 kilometers > 10,00,000
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(5) Income from nursery - In the past, there have been court rulings that only if a nursery
is maintained by carrying out the basic operations on land and subsequent operations
in continuation thereof, income from such nursery would be treated as agricultural income
and would qualify for exemption under section 10(1). The Supreme Court has, in CIT v.
Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, held that the basic operations must
be performed before any income can be called agricultural income. The basic
operations involve cultivation of the ground, in the sense of tilling of the land, sowing of
the seeds, planting and other similar operations on the land. Such basic operations
demand the expenditure of human labour and skill upon the land itself and further, they
are directed to make the crop sprout from the land. Therefore, income derived from
sale of plants grown directly in pots would not be treated as agricultural income.
However, the Madras High Court, in CIT v. Soundarya Nursery (2000) 241 ITR 530,
observed that nursing activity involves carrying out of several operations on land before
the saplings were transplanted in suitable containers including pots and thereafter kept
in shade or green house for further operation and growth. Therefore, income arising
from nursery should be considered as agricultural income.
Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or
not the basic operations were carried out on land. This Explanation ratifies the view
taken by the Madras High Court in favour of the taxpayer.
Examples of Agricultural income:
For better understanding of the concept, certain examples of agricultural income and
nonagricultural income are given below:
Agricultural income
1. Income derived from the sale of seeds.
2. Income from growing of flowers and creepers.
3. Rent received from land used for grazing of cattle required for agricultural
activities.
4. Income from growing of bamboo.
Non-agricultural income
1. Income from breeding of livestock.
2. Income from poultry farming.
3. Income from fisheries.
4. Income from dairy farming.
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AGRICULTURE INCOME
Composite income
WHAT IS THE TAX TREATMENT OF INCOME WHICH IS PARTLY AGRICULTURAL AND
PARTLY BUSINESS(Rule 7,7A,7B and 8)
For disintegrating a composite business income which is partly agricultural and partly non-
agricultural, the following rules are applicable -
For tea, coffee & latex :
For any other case [Rule 7]
For disintegrating a composite business income which is partly agricultural and
partly non agricultural, the market value of any agricultural produce, raised by the
assessee or received by him as rent-in-kind and utilised as raw material in his
business, is deducted. No further deduction is permissble in respect of any ex-
penditure incurred by the assessee as a cultivator or receiver of rent in kind.
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AGRICULTURE INCOME
Q. 1. (a) For the previous year ending March 31, 2018, non-agricultural income of X
is 90,000, whereas agricultural income is 5,70,000. Is he liable to pay
income-tax?
(b) For the assessment year 2018-19, net agricultural income of Mrs. X
(47 years) is 3,40,000 and non-agricultural income is 2,80,000.
Determine her basic tax liability.
(c) For A.Y. 2018 - 19, the agricultural income of ABC Pvt. Ltd. is 7,60,000 and
the non-agricultural income is 6,00,000/-. Calculate the tax payable.
Q. 2. Discuss whether the following items of income constitute "Agricultural Income" for
the purpose of the Income-tax Act.
(a) Income derived from rubber plantation in Singapore.
(b) Rent received from a tenant to whom land in India has been let out and who
uses it for cultivating wheat.
(c) Income derived from sale of timber of spontaneous growth on Indian soil.
Q. 3. X Ltd. grows sugarcane to manufacture sugar. Data for 2017-18 is as follows :
( `̀̀̀ In lakh)
Cost of cultivation of sugarcane 6
Market value of sugarcane when sugarcane is transferred to factory 10
Other manufacturing cost 6
Sales turnover of sugar 25
Salary of managing director who looks after non-agricultural
operations of the company 3
Compute agriculture income and income from business.
Q. 4. Mr. Tenzingh is engaged in composite business of growing and curing (further
processing) coffee in Coorg, Karnataka. The whole of coffee grown in his
plantation is cured. Relevant information pertaining to the year ended 31.03.2018
are given below :
WDV of car as on 1.4.2017 (15% rate) 3,00,000
WDV of machinery as on 1.4.2017 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
The expenses incurred for car running and maintenance are `̀̀̀ 50,000. The
machines & the car were used in coffee curing business operations only.
Compute the income arising from the above activities for the assessment year 2018-19.
Q. 5. Mr. Kamal grows paddy and uses the same for the purpose of manufacturing of rice in his
own Rice Mill. The cost of cultivation of 40% of paddy produce is `̀̀̀ 7,00,000 which id sold
for 15,00,000; and the cost of cultivation of balace 60% of paddy is `̀̀̀ 12,00,000 and the
market valueof such paddy is ̀̀̀̀ 24,00,000.To manufacture the rice, he incurred `̀̀̀ 2,00,000
in the manufacturing process on the balance (60%) paddy.
The rice was sold for ̀̀̀̀ 30,00,000.
Compute the Business income and Agriculture Income of Mr. Kamal.
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CAPITAL GAINS
Sec. 45 - Charging Section
CAPITAL GAINS / LOSS IS THE GAIN / LOSS WHICH IS COMPUTED [Sec.48] ON THE
TRANSFER [Sec. 2(47)] OF A CAPITAL ASSET [Sec.2(14) WHICH IS CHARGEABLE
TO TAX.
WHAT IS CAPITAL ASSET [Sec.2(14)]:
“Capital asset” is defined to include property of any kind whether fixed, circulating, movable,
or immovable, tangible or intangible. The word "Property" includes any rights in or in relation
to an Indian company including rights of management or control or any other rights whatso-
ever such as equity shares .
W.E.F. P.Y. 14 -15, securities held by a foreign Institutional Investors (F.I.I.) shall also be re-
garded as capital assets u/s 2(14).
The following assets are, however, excluded from the definition of “Capital assets”:
(a) Any stock in trade, consumable stores or raw material held for the purpose of busi-
ness or profession, since its effects would be covered in Income from business & pro-
fession.
(b) Personal Effects of the assessee that is to say movable property (Land, house prop-
erty, commercial property are immovable, therefore they are capital assets) includ-
ing wearing apparel and furniture held for his personal use or for the use of any mem-
bers of his family - dependent upon the assessee. However Jewellery archaeological
collections, drawings, paintings, sculptures, or any work of art, are treated as a capital
asset even though they are meant for personal use of the assessee.
[Gold and silver coins and bars used for puja of deities as a matter of pride and orna-
mentation and normally not intended for personal or household use and securities are
not personal effects and are therefore treated as capital assets.
Furniture, vehicle on which depreciation is not claimed, are also not a capital
asset].
(c) Agriculture land (Non-urban)in India provided it is not situated : In any area which is
comprised within the jurisdiction of any municipality /cantonment board having
population of :
- not being more than 2 kms from the local limits where population
exceeds 10,000 but does not exceed 1,00,000.
- not being more than 6 kms from the local limits where population
exceeds 1,00,000 but does not exceed 10,00,000.
- not being more than 8 kms from the local limits where population
exceeds 10,00,000.
(d) (i) 6.5% Gold bonds, 1977, or
(ii) 7% Gold Bonds, 1980, or
(iii) National Defence Gold Bonds, 1980, or
(iv) Special Bearer Bonds, 1991, or
(v) Gold Deposit Bonds issued under the Gold Deposit scheme, 1999 notified
by the Central Government or deposit certificates issued under the Gold
Monetisation Scheme, 2015.
CAPITAL GAINS
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CAPITAL GAINS
TRANSFER [Sec. 2(47)]
Transfer, in relation to a Capital Asset, includes sale, exchange or relinquishment of the asset
or the compulsory acquisition thereof under any Law. Transfer also includes disposing of or
parting with an asset or any interest therein, or creating any interest in any asset in any manner
whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way
of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding
that such transfer of rights has been characterized as being effected or dependent upon or
flowing from the transfer of a share or shares of a company registered or incorporated outside
India.
The foreign company or entity should have assets (not net of liabilities) exceeding ̀ 10 crs. in
India which represent atleast 50% or more of the fair market value of all the assets (not net of
liabilities) owned by such foreign company or entity.
Transfer also includes the following :
1. From the assessment year 85-86, i.e. with effect from 1.4.84 and onwards, if a ‘Capi-
tal asset’ is converted by the owner thereof into (or is treated by him as) stock in trade
of a business carried on by him, such conversion (or treatment of) the capital asset
shall also be regarded as ‘Taxable transfer’ of the asset.
CASE NAME : CIT v/s. BAI SHIRIN BAI. K. KOOKA - [Section 45(2)].
Note:
(1) If the converted asset is not sold in the year of conversion, there will be no capital
gains tax in such a year of conversion even though it is a taxable transfer, since
there is no liquidity generation to pay the capital gains tax.
(2) Assessee will be brought to both capital gains tax and income from business &
profession in the year of sale of converted stock in trade i.e. the year of
liquidity generation.
(3) For the computation of capital gains, the sale consideration is taken at the market
value on the date of conversion. If Indexation is done, then done up to the date of
conversion only .
2. From the assessment year 88-89, i.e. with effect from 1.4.87 and onwards,the follow-
ing transactions are also regarded as a “Taxable transfer” :
(a) Any transaction involving the allowing of the possession of any immovable
property to be taken or retained in part performance of a contract of the nature
referred to in Section 53A of the TRANSFER OF PROPERTY ACT, 1882.
As per section 53A of the Transfer Of Property Act [TOPA], 1882 in the year in
which all the 3 conditions undermentioned are fulfilled, the buyer would be
considered deemed owner u/s 27 and the assesse seller will be brought to
capital gains tax even though he still is the legal owner of the property.
(i) There should be a contract for consideration, in writing, duly signed, in
relation to transfer of immovable property i.e. “sale deed” is made even
though it is not applied for registry transfer.
(ii) The transferee (i.e. the buyer) should have taken the possession of the
property from the seller.
(iii) The transferee has performed or is willing to perform his part of the contract
(i.e. the buyer has paid the consideration or shall pay it and there is no
dispute regarding the same).
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(b) Any transaction (whether by way of becoming a member of, or acquiring shares in
a co-operative society, company, or other association of persons, etc.) which has
the effect of transferring, or enabling the enjoyment of any immovable property.
Example: Mr. A takes a house from DDA (Delhi Development Authority) i n
installment purchase. The registry (ownership) is not transferred to Mr.A, Mr. A
will be considered deemed owner u/s 27 and DDA would be brought to capital
gains tax. Subsequently when Mr. A Sells the house to Mr.B (with the consent
of DDA being the registered owner still), then Mr. B will be considered deemed
owner and Mr. A will be brought to capital gains tax.
3. W. E. F. 1.6.2005 & onwards the maturity or redemption of a "zero coupon
bond", shall be considered as a taxable transfer.
[Zero coupon bond means a bond :
- issued by any infrastructure capital company or infrastructure capital fund
or public sector company or scheduled bank,
- in respect of which no payment and benefit is received or receivable
before maturity or redemption from the bond issuing organisations.
- such bonds will be notified by the Central Government in the official ga-
zette]
- If held for more than 12 months, then long term capital asset -
which would be taxable @ 10% u/s 112 without indexation under
option 2.
Types of capital Assets
There are two types of Capital Assets :
(i) Long term capital asset
(ii) Short term capital Asset
Long term and Short term depends on holding period which is as follows:
In case of following assets holding period is 12 months
1. Listed shares
2. Securities Listed on RSE in India
3. unit of UTI (Listed or Not)
4. unit of equity oriented MF (Listed or Not)
5. Zero coupon Bonds (Listed or Not)
In Case of following assets holding period is 24 months
1. Unlisted shares
2. Land/ Building
In Case of all other assets holding period is 36 months
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CAPITAL GAINS
CAPITAL GAINS HOW COMPUTED : [Sec. 48]
(A) COMPUTATION OF SHORT TERM CAPITAL GAINS :
Full value of consideration xx
Less :
(i) Expenditure incurred wholly and exclusively
in connection with such transfer xx
(ii) Cost of acquisition xx
(iii) Cost of improvement. xx (-) xx
GROSS SHORT TERM CAPITAL GAINS xx
Less :
[Exemption u/s. 54B, 54D, 54G]* (-) xx
NET SHORT TERM CAPITAL GAIN xx
(B) COMPUTATION OF LONG TERM CAPITAL GAINS :
Full Value of consideration. xx
Less :
(i) Expenditure incurred wholly and exclusively
in Connection with such transfer. xx
(ii) INDEXED cost acquisition xx
(iii) INDEXED cost of improvement xx (-) x
GROSS LONG TERM CAPITAL GAIN xx
Less :
Exemption u/s. 54, 54B, 54D, 54EC, 54F & 54 G (-) xx
NET LONG TERM CAPITAL GAIN xx
(a) Full value of consideration i.e. sale consideration.
The consideration (in money or in kind) what the transfererrer receives in
place of the asset he transfers. (It is detailed later on).
(b) Expenditure incurred wholly and exclusively in connection with such transfer.
It includes all expenditure by the seller to complete the sale and transfer the
ownership of the asset to the buyer such as brokerage, stamp duty,
registration fees etc.(It is detailed later on).
(c) Cost of acquisition
It is the purchase cost of the asset and it includes all expenses of capital nature
of acquiring title (i.e. ownership) of such asset purchased.
(It is detailed later on and it is the most important aspect in the computation
of capital gains).
(d) Cost of improvement
It includes all the expenditure of capital nature by the seller in increasing the
value of the capital asset (It is detailed later on).
(e) Exemption u/s 54 are based on certain investments of capital gains within a
given time limit.
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What is Cost inflation Index :
“Cost inflation index” in relation to a previous year, means such index as the Central
Government may, having regard to seventy-five percent of average rise in the Consumer
Price Index for (Urban) 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 as follows :
Financial Year / Previous Year Cost Inflation Index
2001-2002 100
2002-2003 105
2003-2004 109
2004-2005 113
2005-2006 117
2006-2007 122
2007-2008 129
2008-2009 137
2009-2010 148
2010-2011 167
2011-2012 184
2012-2013 200
2013-2014 220
2014-2015 240
2015 - 2016 254
2016 -2017 264
2017 - 2018 272
Note :
(1) These are normally given in the examination.
(2) No indexation benefit in case of long term capital gains from sale of
debentures, bonds, Global deposit receipts, 0% discount bonds etc. (except
capital indexed bonds of central government and Sovereign Gold Bonds).
(3) If the capital asset (except self-generated asset of goodwill etc. and
depreciable asset under block method) is acquired prior to 1-4-01, then Fair
Market Value (FMV) as decided by approved valuers as at 1-4-01 or the
purchase cost, whichever is more, is taken as cost of acquisition u/s 55(2)
and then subject to indexation.
* INDEXED COST OF ACQUISITION
The amount which bears to the cost of acquisition, the same proportion as
cost inflation index for the year in which the asset is transferred / sold, bears
to the cost inflation Index for the first year in which the asset was held by the
assessee, or for the year beginning on 1 .4. 01, whichever is later.
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CAPITAL GAINS
Tax Rate
Short term capital gains tax in respect of equity shares/ units of an equity oriented
fund [Section 111A]
(i) This section provides for a concessional rate of tax (i.e. 15%) on the short-term capital
gains on transfer of -
(1) an equity share in a company or
(2) a unit of an equity oriented fund or
(3) a unit of a business trust.
(ii) The conditions for availing the benefit of this concessional rate are –
(1) the transaction of sale of such equity share or unit should be entered into on or
after 1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act,
2004 came into force; and
(2) such transaction should be chargeable to securities transaction tax under the
said Chapter.
(iii) The proviso to this section provides that in the case of resident individuals or HUF, if
the basic exemption is not fully exhausted by any other income, then the short-term
capital gain will be reduced by the unexhausted basic exemption limit and only the
balance would be taxed at 15%. However, the benefit of availing the basic exemption
limit is not available in the case of non-residents.
(iv) Deductions under Chapter VI-A cannot be availed in respect of such short-term capital
gains on equity shares of a company or units of an equity oriented mutual fund included
in the total income of the assessee.
The expression “equity oriented fund” has the same meaning assigned to it in the
explanation to section 10(38) i.e., “Equity oriented fund” means a fund –
(1) where the investible funds are invested by way of equity shares in domestic
companies to the extent of more than 65% of the total proceeds of such fund;
and
(2) which has been set up under a scheme of a Mutual Fund specified under clause (23D).
Tax on long-term capital gains [Section 112]
(1) Where the total income of an assessee includes long-term capital gains, tax is payable
by the assessee @20% on such long-term capital gains. The treatment of long-term
capital gains in the hands of different types of assessees are as follows -
(i) Resident individual or Hindu undivided family: Income-tax payable at normal
rates on total income as reduced by long-term capital gains plus 20% on such
long-term capital gains. However, where the total income as reduced by such
long-term capital gains is below the maximum amount which is not chargeable
to income-tax then such long-term capital gains shall be reduced by the amount
by which the total income as so reduced falls short of the maximum amount which
is not chargeable to income-tax and the tax on the balance of such long-term
capital gains will be calculated @ 20%.
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(ii) Domestic Company: Long-term capital gains will be charged @ 20%.
(iii) Non-corporate non-resident / foreign company: (i) Long-term capital gains
arising from the transfer of a capital asset, being unlisted securities, or shares
of a company not being a company in which public are substantially interested,
would be calculated at the rate of 10% on the capital gains in respect of such
asset without giving effect to the indexation provision under second proviso to
section 48 and currency fluctuation under first proviso to section 48.
(2) In respect of other long-term capital gains, the applicable rate of tax would be 20%.
(i) Residents (other than those included in (i) above): Long-term capital gains will
be charged @20%.
(ii) Where the tax payable in respect of any income arising from the transfer of a
listed security (other than a unit) or a zero coupon bond, being a long-term capital
asset, exceeds 10% of the amount of capital gains before indexation, then such
excess shall be ignored while computing the tax payable by the assessee.
Consequently, long term capital gains on transfer of units of debt oriented mutual
fund and unlisted securities are not eligible for concessional rate of tax@10%
(without indexation benefit). Therefore, the long-term capital gains, in such cases,
is taxable@20% (with indexation benefit).
However, in case of non-corporate non-residents and foreign companies, long
term capital gains arising from transfer of a capital asset, being unlisted securities
or shares in a company in which public are not substantially interested are eligible
for a concessional rate of tax@10% (without indexation benefit).
(iii) For this purpose, "listed securities" means securities as defined by section 2(h)
of the Securities Contracts (Regulation) Act, 1956.
(iv) The provisions of section 112 make it clear that the deductions under Chapter
VIA cannot be availed in respect of the long-term capital gains included in the
total income of the assessee.
The priority of set off of minimum exemption limit applicable towards N.T.T.I and
the taxability of L.T.C.G u/s 112 as well as S.T.C.G U/S 111A in the case of Individual
& H.U.F.
The minimum exemption limit applicable for individuals of 2,50,000 or 3,00,000 or
5,00,000 and for HUF of 2,50,000 is applied towards the N.T.T.I (Net Taxable Total
Income)in the following priority.
* 1st applied towards the N.T.T.I portion of income from salary, house property,
business & profession, normal short term capital gains taxable at slab rates
and income from other sources all incomes except casual winnings (i.e. excluding
incomes in the nature of L.T.C.G, S.T.C.G taxable u/s 111A and casual winnings).
* 2nd priority : If any portion of minimum limit remains after above, then that is
adjusted towards any long-term capital gains, and the balance is taxable @ 20%
(10%in case of option 2 discussed at Para).
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* 3rd priority: If any portion of minimum limit still remains after above, then that is
set off towards short-term capital gains generated on sale of equity shares / units
of an equity oriented mutual fund sold via stock exchange[S.T.T is paid there on];and
the balance of such short term capital gains will be taxable at a flat rate of 15% u/
s 111A.
Please note that the minimum exemption limit remaining spare cannot be adjusted
against casual winnings.
CERTAIN TRANSACTIONS NOT INCLUDED IN TRANSFER.
The following transactions are not regarded as taxable transfer even though the ownership of
asset has shifted from the transferer to the transferee.
Please note:
* If in these situations the transferer and transferee both are not brought to capital
gains tax because of the under mentioned provisions, and later on the transferee
sells such a capital asset, his cost of acquisition will be the cost of acquisition of
the asset of the previous owner u/s 49(1).
* If the previous owner has acquired the asset prior to 1-4-81, then the option u/s
55(2) of taking the F.M.V as at 1-4-81 or the original purchase cost of the previous
owner(whichever is more), will also be available to the transferee.
* In such cases the period for which the capital asset was held by the previous owner
should be included in the period held by the assessee to know if it is long term or
short term. But indexation is allowed only for the holding period of the assessee
i.e. current owner of the capital asset.
(A) Distribution of capital assets in cash or in kind by a company to its
share holders on its liquidation [Sec. 46(1)].
Note:
* The ‘company’ is not brought to capital gains tax u/s 46(1), since now
the shareholders become the legal owners of the net assets distributed
by company upon liquidation.
* The shareholder is brought to capital gains tax u/s 46(2), since he is
surrendering one asset i.e. share certificates, which has become
worthless, and getting another asset i.e. in cash or in kind.
If received in kind, then F.M.V. of asset received is taken as sale
consideration and the first portion of the sale consideration is received
towards the deemed dividend u/s 2(22)(c)and the balance is received
towards the share capital.
Subsequently when such a shareholder sells such a capital asset ,
whatever was taken as sale consideration in the hands of shareholder
u/s 46(2), becomes his cost of acquisition and the holding period of
the asset will be taken from the date he got the asset till the date he
sold it subsequently.
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(B) Any distribution of Capital Assets in cash or in kind by a Hindu
Undivided Family to its members at the time of partition [Sec. 47(i)].
Note:
* The H.U.F is a collective body of Hindu family members and is
considered an assessee for income tax purposes.
Upon partition, when it distributes assets to its members, it is not
brought to tax as no outsider is involved.
* The receiving H.U.F members is also not brought to tax, since he is only
receiving the capital asset and not surrendering any capital asset.
* The receiving H.U.F member will be brought to tax only when he sells
such a capital asset.
(C) Any distribution of asset in kind on the dissolution of the firm, body
of individuals, association of persons if such dissolution took place
prior to 1-4-87 i.e. till 31.3.87 [sec 47(ii)]
Note:
* Section47 (ii) was valid up to P.Y. 86-87 A.Y. 87-88
- For income tax purposes ‘partner’ and ‘partnership firm’- are
considered separate persons.
* Section 47(ii) (omitted from P.Y. 87-88 A.Y.88-89)
In a situation where the firm distributed the asset to partner upon
dissolution prior to 1-4-87 and it was not brought to tax then because
of section 47(ii)and the partner receiving the asset was also not
brought to tax then, since he was receiving the capital asset only and
not surrendering any capital asset.
If such an asset is sold in the current year by the partner, his cost of
acquisition would be the cost to the firms u/s 49(I) read with 47(ii).
* Whenever a partner gives an asset to the firm as his capital
contribution, the amount recorded in the books of the firm (i.e.
the agreed value) is taken as sale consideration in the hands of the
partner (and not the market value of asset ) and the partner is brought
to capital gains tax.
* On or after 1-4-1987 if the firm distributes assets to its partners upon
dissolution, the market value is taken as sale consideration in the
hands of the firm (i.e. the agreed value is not relevant at all) and the
firm is brought to capital gains tax.
(D) Any transfer of capital asset under a gift or a will or an irrevocable
trust [Sec. 47(iii)].
W.E.F. A.Y. 2001-2002 it has been provided that this clause shall not apply
to transfer under a gift or an irrevocable trust of a capital asset being shares,
debentures or warrants allotted by a company directly or indirectly to its em-
ployees under the Employee's Stock Option Scheme [E.S.O.P] or Employ-
ee's Stock Purchase Scheme framed in accordance with the guidelines is-
sued by Central Government.
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Notes:* The receiver of gift is not brought to capital gains tax, since he is only
receiving and not giving any asset .
* Subsequently when the transferee will sell such an asset in future, hiscost of acquisition will be the cost to the previous owner u/s 49(1) r.w47(iii).
* The E.S.O.P securities are gifted or transferred by way of an irrevocabletrust during the life time of the transferer, then the provisions of section47(iii) are not applicable and the transferer will be brought to capital gains
tax and for that purpose the market value of the securities will be taken assale consideration, i.e. the provisions of section 47 (iii) are not applicable.
* If E.S.O.P securities are sold then agreed value (and not the market value)will be taken a sale consideration for the purpose of capital gains tax.
* If E.S.O.P Securities are transferred by way of will or inheritance afterthe death of the employee, then the provisions of section 47(iii) applyand transferer’s estate (property left behind ) will not be brought totax.
(E) Any transfer by individual of Sovereign Gold Bond issued by R.B.I under theSovereign Gold Bond Scheme, 2015 by way of redemption.[sec47(viic)].
(F) Any transfer by way of conversion of bonds or debentures, debenture Stockor deposit certificate in any form, of an Indian company, into shares or de-bentures of that company (placed with retrospective effect from 1.4.1962)[Sec. 47(x)]NOTES:* If the debentures [Fully Convertible Debenture (F.C.D) or Partly
Convertible Debenture (P.C.D)] get converted into shares andsubsequently such converted shares are sold, then for computing
capital gains on the sale of such converted shares , the cost ofacquisition of the debentures which has been appropriated towardsthe converted shares, shall be the cost of acquisition of such converted
shares [sec 49(2A)]* The holding period of the debentures will not be included in the hold-
ing period of the shares i.e. the holding period of the converted shares
will be from the date they were converted till the date they were sold.(G) Any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government. [Sec. 47(xvi)]
Notes:* ”Reverse Mortgage”
A reverse mortgage (or life time mortgage) is a loan available to
senior citizens. In this a person pledges a property he owns with noexisting loan against it, with a bank. The bank gives a series of fixedmonthly cash flows for a fixed tenure. The normal tenure is 15 years
and the owner of the house and the spouse continue to live in the housetill their death- which can occur later than the tenure of reversemortgage. Thus the senior citizen /spouse will get the amount monthly
for 15 years which will not be taxable in their hands, since it is a loani.e. a capital receipt and hence exempted u/s 10(43)If one of the spouse dies, the other can still continue living in the house. If
both die the bank will give their legal heirs two options:-- Settle the overall outstanding loan and retain the house, or- the bank will sell the house, use the proceeds to settle the
outstanding loan and give the rest to the legal heirs which will
not be taxable in the hands of their legal heirs.
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(H) Conversion of Preference Share into Equity Shares [Sec 47(xb)]
(I) Transfer of Rupee Denominated Bond of Indian Company Issued outside
India, by Non- Resident to another Non- Resident .
Since the above transaction are not covered recognised as “taxable
transfers” for the purpose of Sec. 45, therefore any profit or gain
arising on the above noted transactions is not chargeable to tax u/s.
45, conversely, any loss arising there from is not liable to be set off
against other incomes of the assessee.
’Full value of consideration ‘or ‘Sale consideration’ of various types detailed.
It is the gross due amount (in ‘money or the fair market value ‘if in kind) which the transferer
would receive in lieu of the asset he sells / transfers.
Such amount cannot be reduced by any outgoings by the transferer such as brokerage
commission, stamp duty etc. (such outgoings have to be claimed as transfer expenses).
Normally the agreed sale consideration is taken as sale consideration and not the fair
market value, which could be more or less than agreed sale consideration.
In the following cases however the “Fair Market Value” will be taken as sale consideration
for the computation of capital gains.
(a) While computing capital gains in the case of conversion of capital asset into stock
in trade with effect from 1.4.84 and onwards (i.e. A.Y. 85-86).
The fair market value of the capital asset on the date on which it was converted or treated
as stock in trade shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer of the capital asset.
(b) In the case of transfer by way of distribution of capital assets by a firm, by an
association of persons or by a body of individuals, the fair market value of the
asset as on the date of transfer shall be deemed to be the full value of the consid-
eration as a result of such transfer. In other words the agreed sale consideration is
NOT relevant at all. [Section 45 (4)].
Note: In case the partner gives the asset to the firm as a capital contribution, then
agreed value will become the sale consideration in the hands of the partner.[sec 45(3)]
(c) In case of barter / exchange.
(d) In case of assets distributed in "kind" at the time of liquidation of a company sec.
46(2) taxable in the hands of the share holder as" sale consideration of the
shares"(which have become worthless), the fair market value of the asset received
from the company.
Notes:
* The first portion of the sale consideration is always taken towards the deemed
divided u/s 2(22)(c)& the balance received is towards the share capital.
* The Indian company is brought to tax on behalf of the shareholder u/s 115-0
towards the deemed dividend u/s 2(22)(c), hence exempted in the hands of
the shareholders u/s 10(34).
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(e) Where shares, debentures or warrants referred to in the proviso to sec. 47 (iii) are
transferred under a gift or an irrevocable trust, the market value on the date of such
transfer shall be deemed to be the full value of consideration received or accruing as a
result of transfer for the purposes of this section.
Notes:
* If such E.S.O.P securities are transferred during the life time of the transferer
by way of:
- ”Gift or irrevocable trust”, then market value on the date of transfer
will be taken as sale consideration.
- ”Sale”, then the agreed value will be taken as sale consideration even
if market value is more than agreed value.
* If such E.S.O.P securities are transferred after death of the transferer by
way of will / inheritance, then exempt u/s 47(iii).
* The cost of acquisition ,if taxable, will be the market value of such securities on
the date the employee got it from his employer u/s 49(2AA) [i.e.the cost of
purchase paid to employer (+) taxable perquisite value taxed earlier under salaries
u/s 17(2)(vi)].
(f) Where the consideration received or accruing as a result of the transfer of a capi-
tal asset by an assessee is not ascertainable or cannot be determined, then, for
the purpose of computing income chargeable to tax as capital gains, the fair mar-
ket value of the said asset on the date of transfer shall be deemed to be the sale
consideration. [Section 50D]
(g) Where any person receives at any time during any previous year any money or
other assets under an insurance from an insurer on account of damage to, or de-
struction of, any capital asset, as a result of —
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or
without a declaration of war),
then, any profits or gains arising from receipt of such money or other assets
shall be chargeable to income-tax under the head “Capital gains” and shall
be deemed to be the income of such person of the previous year in which
such money or other asset was received and for the purposes of section 48,
value of any money or the fair market value of other assets on the date of
such receipt shall be deemed to be the full value of the consideration received
or accruing as a result of the transfer of such capital asset.[Sec.45(1A)].
Notes:
* The events of ‘theft’ & normal accident are not covered by above section
45(1A) and therefore in those situations the judgment of supreme court in
the case of Vania silk mills (P) Ltd v/s C.I.T will apply and insurance
indemnification will not be taxable in the hands of the recipient.
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Sale consideration in case of transfer of immovable property [sec 50C]
This section applies to transfer of land or building or both held as capital asset.
(a) If land / building is transferred for a consideration which is lower than the value
adopted or assessed or "assessable" by the State Government authority for
payment of stamp duty, then such assessed value has to be considered as the
sale consideration.
(b) If the assessee claims that the stamp duty value is more than the fair market value
and the stamp duty value has not been disputed, the A.O. may refer the valuation
to the Departmental Valuation Officer.
* If the Departmental valuation officer's valuation is less than the stamp duty
valuation, but more than that declared by the assessee, then adopt the
Departmental Valuation Officer's valuation.
* If the Departmental valuation officer's valuation is more than the stamp duty
valuation, then adopt the stamp duty valuation.
For the purposes of this section, the expression "assessable" means the price which
the stamp valuation authority would have adopted or assessed, if it were referred to
such authority for the purposes of the payment of stamp duty.
Notes:
* Even if the assesse transferee has not gone to stamp duty authorities, the
assessing officer has the means to take the stamp duty valuation, if
necessary.
* If such immovable property is sold as stock in trade by a real estate agent,
then the provisions of section 43CA will apply which is similar to section
50C.
* Basically these provisions are introduced to check the wrong practice of
officially taking less money (by cheque etc) and taking the balance amount
in cash (i.e. black money or unaccounted for money).
Section 50CA Special provision for full value of consideration for transfer of
share other than quoted share.
Where the consideration received or accruing as a result of the transfer by an assessee
of a capital asset, being share of a company other than a quoted share, is less than the
fair market value of such share determined in such manner as may be prescribed, the
value so determined shall, for the purposes of section 48, be deemed to be the full value
of consideration received or accruing as a result of such transfer.
Explanation.—For the purposes of this section, “quoted share” means the share quoted
on any recognised stock exchange with regularity from time to time, where the quotation
of such share is based on current transaction made in the ordinary course of business.’.
Detailed explanation regarding ‘Expenditure on transfer’
It includes all the expenditure by assessee (seller i.e. transferer) to effect the transfer like:-
(i) Brokerage and commission paid for securing a purchaser
(ii) Cost of stamp duty paid
(iii) Registration fees
(iv) Travelling expenses incurred in connection with transfer
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(v) Ligitation expenses incurred to get enhanced compensation
Notes:
* If the buyer incurres such expenses [(i) to(iv)] above , it will be added to the
cost of acquisition of the asset.
* Expenses which are allowed in other heads as a deduction, such as Income
from business or profession or Income from other sources cannot be allowed
as transfer expenses.
* Vague expenses (e.g. medical expenses incurred because of deterioration of
health caused in connection with an asset sale) are not allowed as a deduction.
* Securities Transaction Tax (S.T.T) paid by the assessee seller, is not allowed
as a deduction as transfer expenses.
(It is allowed as a business deduction u/s 36(1)(xv) if securities are sold as stock
in trade via stock exchange)
Detailed explanation regarding cost of acquisition
Cost of acquisition is the value of an asset for which it was acquired by the assessee. Ex-
penses of capital nature for completing or acquiring the title to the property are includable in
the cost of acquisition.
It includes the following :
- Interest on loan taken for acquisition of asset from the date the loan is taken till the
date of acquisition of asset.
- Litigation expenses incurred for compelling the company to register the shares in
the name of the assessee would be of capital nature, forming part of cost of acqui-
sition of the shares.
- Expenses for suits for amending articles of association are of capital in nature
and form part of cost of shares.
- Ground rent paid cannot be cost of acquisition, since they are revenue in nature
i.e. a period’s cost.
(A) COST OF ACQUISITION TO ASSESSEE - BEING COST TO THE PREVIOUS
OWNER: [SEC. 49(1)]
(1) Any distribution of asset in kind on the total or partial partition of a
H.U.F. [Sec.47(i)].
- Cost to the H.U.F. at the time of partition.
(2) Any distribution of asset in kind on the dissolution of the firm, body of
individuals, association of persons if such dissolution took place
PRIOR TO 1.4.87 (i.e. A.Y. 88-89) [Section 47(ii)]
[Sec. 47(ii) was valid upto P.Y. 86-87 / A.Y. 87-88].
- Cost to the firm, B.O.I, A.O.P. at the time of dissolution.
(3) Any transfer of asset under a gift, will, or an irrevocable trust. [Sec. 47(iii)].
- Cost to the transferrer .
(4) Any transfer of asset u/s 47(xiii), 47(xiiib) & 47 (xiv) - cost to the transferor.
(5) Any acquisition of property, by a Hindu undivided family where one of
its members has converted his self acquired property into joint family
property after 31.12.1969.
- Cost to the transferor.
Where the previous owner has acquired the property in the afore-
said manner, the "previous owner" of the property means the last pre-
vious owner who acquired the property by means other than those
discussed above.
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(B) (i) COST OF ACQUISITION WHEN DEBENTURES ARE CONVERTED INTO
SHARES OR BONDS INTO DEBENTURES :
Any transfer by way of conversion of debentures or deposit certificate into shares
or conversion of deposit certificate into debentures of that company will not be
regarded as a taxable transfer [Because of Sec. 47(x)].
For computing capital gains on the sale of such converted shares or debentures
(as the case may be), the cost of acquisition of the old debentures, debenture -
stock, bonds or deposit certificate which has been appropriated towards the
shares or debentures, shall be the cost of acquisition of such converted shares
or debentures. [Sec. 49(2A)]
(ii) SHARES /DEBENTURES GOT AS A PERQUISITE- Section 49(2AA) men-
tions that where the capital gain arises from the transfer of specified secu-
rity or sweat equity shares referred to in section 17(2)(vi), the cost of acqui-
sition of such security or shares shall be the fair market value which has
been taken into account for the purposes of the said section 17(2)(vi).
(iii) Cost of Equity Shares = Cost of Preference shares (conversion of
preference shares x equity shares) [Sec. 49 (2AE)].
(C) COST OF ACQUISITION IN THE CASE OF :
- Depreciable assets under block method :
Under the system of providing deprecation on block of assets, written down
value of any block of assets may be reduced to nil for any of the following
two situations.
(1) Situation 1 : [Sec. 50(1) ] If the sale consideration of any one or more
assets, but not all assets, exceeds the opening W.D.V + Value of as-
sets acquired during the previous year + expenditure in connection with
such transfer; this excess amount shall be deemed to be ALWAYS
SHORT-TERM CAPITAL GAINS.
(Here the cost of acquisition would be the sum total of opening W.D.V.
+ acquisition during the previous year).
(2) Situation 2 : [Sec. 50(2)] Here the block cease to exist because all
the assets in that block are sold during the previous year. The cost of
acquisition in such a case shall be the aggregate of the following :
(a) Opening W.D.V. at the beginning of the previous year.
(b) Actual Cost of any asset, falling within that block, acquired by
the assessee during the previous year.
Here there are 2 possibilities :-
(i) If the sale consideration of all the assets in the block, exceeds the cost of
acquisition above and expenditure of transfer, such excess is chargeable to
tax as SHORT TERM CAPITAL GAIN.
(ii) If the sale consideration of all the assets in the block falls short of the cost of
acquisition above and expenditure of transfer, such short fall is SHORT TERM
CAPITAL LOSS.
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(D) Cost of acquisition in the computation of capital gains in case of slump
sale [Sec. 50B].
(1) Any profits or gains arising from the slump sale effected in the previous
year shall be chargeable to income-tax as capital gains arising from the
transfer of long-term capital assets and shall be deemed to be the income
of the previous year in which the transfer took place:
Provided that any profits or gains arising from the transfer under the slump sale
of any capital asset being one or more undertaking or division owned and
held by an assessee for not more than thirty-six months immediately preceding
the date of its transfer shall be deemed to be the capital gains arising from the
transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way
of such sale, the “Net worth” of the undertaking or the division, as the case may
be, shall be deemed to be the cost of acquisition and the cost of improvement
for the purposes of sections 48 and 49.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed
form along with the return of income, a report of an accountant indicating the
computation of the net worth of the undertaking or division, as the case may
be, and certifying that the net worth of the undertaking or division, as the
case may be, has been correctly arrived at in accordance with the provisions
of this section.
No Indexation Benefit will be allowed.
Net worth shall be the aggregate value of total assets of the undertaking or
division (- depreciable assets - WDV - capital asset in respect of which the
whole of the expenditure has been allowed or is allowable as a deduction
under section 35AD - NIL ; - in the case of other assets, the book value of
such assets) as reduced by the value of liabilities of such undertaking or
division as appearing in its books of account ignoring any revaluation of
assets, if already done.
Notes:
* The entire department or division of an organization is sold to an
outsider under “as is where is” condition (i.e. transfer of a part of
business as a going concern; lock, stock and barrel) for a lump sum
price without values being assigned to the individual assets and
liabilities in such sale.
* The buyer uses the department or division as an organization or factory
and the combination of various assets (building, machinery plant etc.)
enables him to do so.
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(E) COST OF ACQUISITION IN THE CASE OF ADVANCE MONEY RECEIVED [Sec. 51] :
Where the capital asset was, on any previous occasion, subject to negotiations for
its transfer, any advance or other money received and forfeited by the assessee
in respect of such negotiation, is to be deducted from the cost for which the asset
was acquired.
W.E.F. p.y. 2014-15, if any sum of money received as advance or otherwise in the course of
negotiations for transfer of capital asset has been forfeited by the assessee , the amount
forfeited shall be taxable under the head "Income from other sources " u/s 56 for the assesee
and hence such amount shall not be reduced as per Sec 51 for determing C.O.A of the
capital asset .
Notes: FOR ADVANCE MONEY FORFEITED PRIOR TO 1- 4-14 :
* Any advance money forfeited “by assessee “(i.e. the seller / transferer) has
to be deducted from the cost of acquisition and then the net cost (if positive)
will be indexed, if long term capital asset.
* Any advance money received and forfeited by the previous owner is not
considered in the hands of the assessee and the cost of acquisition of the
previous owner (before forfeiting) will become the cost of acquisition for the
assessee u/s 49(1).
* Such advance money forfeited by previous owner (before 1.4.2014) is not
taxable under any provisions of income tax in the hands of the previous owner.
(F) OPTION TO SUBSTITUTE THE FAIR MARKET VALUE AS ON 1. 4. 01 AS THE
COST OF ACQUISITION IN CASE THE CAPITAL ASSET, NOT BEING
DEPRECIABLE ASSET AND SELF GENERATED ASSET, IS ACQUIRED BY
THE ASSESSEE PRIOR TO 1.4.01 [Sec. 55(2)] :
The assessee has the option to take either the original cost of acquisition or the
fair market value of the asset as on 1 .4. 01 as the cost of acquisition, whichever is
favourable for him. Please note that no such option is available in respect of
depreciable assets / self generated assets.
Such option is also available to the assessee if he has acquired the capital asset
in any mode referred to in Sec. 49(1) and capital asset in question, became the
property of the previous owner before 1.4.01.
Note:
* Option not available for depreciable asset, since the identity of the asset
gets lost in the common hotch pot of the block under the block method of
depreciation.
* Option not available for self-generated asset because the cost of acquisition
is taken at ‘Nil’
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(G) COST OF ACQUISITION IN THE CASE OF BONUS SHARES AND RIGHT
SHARES OFFER.
(i) Bonus Shares :
* Cost of acquisition of bonus share allotted on or after 1-4-01 will be
taken to be NIL.
* If bonus shares were allotted prior to 1-4-01, the cost of bonus shares
would be the F.M.V as at 1-4-01.
The period of holding shall commence from the date of allotment of such bonus
shares till the date of its sale.
(ii) ’Right shares offer’
Right shares offer is a capital asset u/s 2(14)
Right shares offer and subsequent renouncement of it by the assesssee, the
cost of acquisition would be deemed to be NIL.
Thus the amount received by the original share holder by selling his rights
entitlement will be short term capital gains in his hands, since the cost of
acquisition is taken at NIL.
Note:
* If the shareholder invests money himself in the rights offer, then the
rights offer, which is a capital asset u/s 2(14), gets converted into
another asset i.e. ‘Right shares’.
(H) COST OF ACQUISITION OF GOODWILL OF A BUSINESS, OR A TRADE MARK
OR BRAND NAME ASSOCIATED WITH A BUSINESS OR RIGHT TO MANU-
FACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT
TO CARRY ON ANY BUSINESS.
If the capital asset which was purchased ;the cost paid for purchasing the capital asset
shall be the cost of acquisition.
Goodwill, right to manufacture, produce or process any article or thing or the right
to carry on any business or profession will be treated as capital assets, despite
they being self-generated.
In case of a self generated asset, since no cost of acquisition is incurred, while
computing capital gains, the cost of acquisition shall be taken at Nil. In other words
the sale consideration shall be the capital gains.
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CAPITAL GAINS
Goodwill exchanged by partners of a professional firm is not taxable at all.
Detailed explanation regarding cost of improvement
- Cost of improvement includes all the expenditure of capital nature in making any
addition to the capital asset which increases the value of the capital asset
(e.g.,constructing a first floor on an existing bungalow).
- Improvement cost incurred on or after 1.4.81 by previous owner and / or the
assessee will be considered only, since up to 31.3.81 the effects of improvement,
if any, would be absorbed in the F.M.V option u/s 55(2)
* If assessee acquired asset prior to 1-4-81(by way of purchase or u/s 49(1)
situations), then any improvement cost incurred by assesse only on or after
1.4.81, will be considered only.
* If assessee acquired asset on or after 1-4-81 under section 49(1)
situations, then any improvement cost incurred by previous owner and
/ or assessee on or after 1-4-81, will be considered only.
- Cost of improvement is not allowed towards goodwill, right to manufacture,
produce or process any article or thing and right to carry on business or
profession.
- If any capital expenditure incurred on or after 1-4-81 is already allowed as a deduction
under Income from business or profession, then it will not be considered.
- The holding period of improvement by itself is not considered, if the original
capital asset is long term,the improvement is long term, since improvement
is not a separate capital asset.
- Indexation on improvement cost
Any improvement done on or after 1-4-81 by the previous owner or the
assessee will be considered only and it will be divided by the index factor
of the year in which the improvement took place and multiplied by the
index factor of year of sale.
COMPUTATION OF CAPITAL GAINS IN CERTAIN SPECIAL SITUATIONS:
��� Computation of capital gain in the case of compulsory acquisition of an
asset [Sec. 45(5)].
1. Initial Compensation awarded or determined or approved on compulsory acqui-
sition of property shall be deemed to be the sale consideration and capital gains
shall be computed pertaining to the previous year in which the initial compensa-
tion or the first instalment thereof is received. Full cost of acquisition is to be
reduced from the total initial compensation in computing the aforesaid capital
gains. (Indexing to be done till the year of transfer only).
2. In case of any enhanced compensation is received subsequently, it is taken
as sale consideration and only transfer expenses i.e. litigation expenses
incurred to get enhanced compensation is allowed as a deduction. The excess
of enhanced compensation over transfer expenses, is taxable as capital
gains (short term or long term, depending upon the holding period prior to
its compulsory acquisition, by the assessee).
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CAPITAL GAINS
3. If the compensation is received by any other person, e.g. legal heir on death
of the assessee, it is taxable as income of the recipient.
4. In case the initial compensation or the enhanced compensation is
subsequently reduced by any court, Tribunal or other authority, after
assessment of capital gains, such assessed capital gain of that year shall
be recomputed by taking the compensation or consideration as so reduced
by such court, Tribunal or other authority to be the full value of consideration.
5. W.E.F. p.y. 2014-15 , any compensation received in pursuance of an interim
order of a Court , Tribunal or authority shall be deemed to be taxable in the
p.y. in which the final order of such Court , Tribunal or authority is made.
� Computation of capital gains in the case of non-resident.
1. Capital gain in case of non-resident arising on sale or transfer of listed shares /
debentures / securities in an Indian company shall be computed by converting
the cost of acquisition, expenditure in connection with such transfer and the full
value of the consideration received or accruing as a result of the transfer of the
capital asset into the same foreign currency as was initially utilised in the pur-
chase of the shares or debentures. The capital gains so computed in such a for-
eign currency shall be reconverted into Indian Currency (Rupees) by the telegraphic
transfer, BUYING RATE of such currency, as on the date of transfer of the capital asset.
2. No relief in terms of INDEXATION will be available in the aforesaid computation.
3. For the aforesaid purpose, telegraphic transfer buying / selling rate in relation to
a foreign currency is rate of exchange adopted by the State Bank of India for pur-
chasing or selling such currency where such currency, is made available by that
bank through telegraphic transfer.
4. If the long term capital gain arises on transfer of unlisted securities or shares of a
company in which the public are not substantially interested [i.e. private limited
company] to the non-resident, then it shall be taxable at a flat rate of 10% without
indexation and without conversion and reconversion into foreign currency / Indian currency.
5. For other long term capital gains, the tax rate will be flat 20% after indexation.
CAPITAL GAINS ON PURCHASE BY COMPANY OF ITS OWN SHARES OR
OTHER SPECIFIED SECURITIES [Sec. 46A].
Where a shareholder or a holder of other specified securities receives any
consideration from any company for purchase of its own shares or other specified
securities held by such shareholder or holder of other specified securities then,
subject to the provisions of section 48, the difference between the cost of
acquisition and the value of consideration received by the shareholder or the
holder of other specified securities, as the case may be shall be deemed to be
the capital gains arising to such shareholder or the holder of other specified
securities, as the case may be, in the year in which such shares or other specified
securities were purchased by the company.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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Sec. 54 Profit on Sale of House Property
Assessee entitled to claim exemption individual or HUF
Nature of asset transferred Residential House Property (covered by Sec.22)
Nature of gain LTCG
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
Nature of asset to be acquired One residential house in India (either purchase and / or construct)
Amount to be invested LTCG arising on transfer of the original asset
Time for making the investment If purchased – within 1 year before or 2 years from the date of transfer of original asset. If constructed – within 3 years from the date of transfer.
Capital gain account scheme 1988 If the amount is not utilized by the assessee up to the due date of ROI u/s 139, it can be deposited in the said account with any specified bank or institution, before the due date of furnishing such return.
Non utilization of amount from the deposit account
The unutilized amount shall be charged as Capital Gain of the PY in which the period of 3 years from the date of the transfer of the original asset expires.
Lock in period of the new asset The new house cannot be transferred up to a period of 3 years from the date of acquisition or construction, as the case may be.
Withdrawal of exemption if new asset is transferred within lock in period
The cost of new asset shall be reduced by the amount of exemption claimed.
Notes :
1. The unutilized deposit amount in the Capital Gains Account Scheme, 1988 in the case of an individual who dies before the expiry of the stipulated period under sections 54, 54B, 54D, 54F and 54G cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilized portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them. [Circular No.743, dated 6-5-1996]
2. The cost of the land is an integral part of the cost of the residential house, whether purchased or built.
Sec 54B Capital gain on transfer of land used for agricultural purposes
Assessee entitled to claim exemption Individual or HUF
Nature of Asset transferred Land used for agricultural purposes by the individual himself or by any of his parents, or by HUF for at least 2 years preceding the date of transfer
nature of gain LTCG or STCG
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 178 :
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
nature of asset to be acquired: Any land for being used for agricultural purposes
amount to be invested Capital gain arising on transfer of the original land
time for making the investment Within 2 years from the date of transfer
capital gain account scheme 1988 Applicable
non utilization of amount from the deposit account
The unutilized amount shall be charged as Capital Gain of the previous year in which the period 2 years from the date of the transfer of the original asset expires
lock in period of the new asset The new land cannot be transferred up to a period of 3 years from the date of acquisition
withdrawal of exemption if new asset is transferred within lock in period
For the purpose of computing capital gain arising from the transfer of the new asset, the cost shall be reduced by the amount of exemption claimed in respect of investment in such new asset
Sec. 54D Capital gain on compulsory acquisition of lands and buildings
Assessee entitled to claim exemption Any assessee
nature of asset transferred Land or building forming part of an industrial undertaking, used by the assessee for business purposes for at least 2 years preceding the date of transfer
nature of gain LTCG or STCG
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
nature of asset to be acquired any land or building or any right in land or building or construction of any building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking.
Amount to be invested capital gain arising on transfer of the original land and / or building
Time for making the investment Within a period of three years from the date of receipt of compensation
Capital gain account scheme 1988 Applicable
Non utilization of amount from the deposit account
If the amount deposited is not utilized wholly or partly for the purchase / construction of the land / building within the period specified, then the amount not so utilized shall be charged as Capital Gain of the previous year in which the period of 3 years from the date of receipt of compensation expires.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 179 :
Lock in period of the new asset The new land / building cannot be transferred up to a period of 3 years from the date of acquisition
Withdrawal of exemption if new asset is transferred within lock in period
For the purpose of computing capital gain arising from the transfer of the new asset, the cost shall be reduced by the amount of exemption claimed in respect of investment in such new asset.
Sec. 54EC capital gain not to be charged on investment in certain bonds
Assessment entitled to claim exemption
any Assessee
Nature of asset transferred any capital asset
Nature of gain long term capital gain (LTCG)
If the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
Nature of asset to be acquired Bonds redeemable after three years, issued by NHAI or RECL or any bond notified by central government .
Amount to be invested LTCG arising on transfer of the original asset. (maximum investment in the PY of transfer + next P Y Rs.50 lakhs pa)
Time for making the investment Within 6 months from the date of transfer of the original asset.
Capital gain account scheme 1988 not applicable
Lock in period of the new asset the bonds cannot be transferred or converted into money up to a period of 3 years from the date of acquisition.
Withdrawal of exemption if new asset is transferred within lock in period
the amount of exemption allowed in respect of such investment shall be deemed to be the long term capital gains of the previous year in which the specified asset is transferred or converted into money.
Sec. 54F capital gain on transfer of certain capital assets not to be charged in case of investment in residential house
Assessee entitled to claim exemption individual or HUF
Nature of asset transferred any asset other than a residential house
Nature of gain long term capital gain (LTCG)
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
Nature of asset to be acquired one Residential House in India (either purchase or construct)
Amount to be invested net sale consideration of the original asset
Time for making the investment if purchased – within 1 year before or 2 years from the date of transfer of original asset. If constructed – within 3 years from the date of transfer.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 180 :
Capital gain account scheme 1988 applicable
Non utilization of amount from the deposit account
if the amount deposited is not utilized wholly or partly for the purchase or construction of the new house within the period specified, then (the un-utilized amount * LTCG / NSC) shall be charged as long term capital gain of the previous year in which the period of 3 years from the date of the transfer of the original asset expires
Lock in period of the new asset the new house cannot be transferred up to a period of 3 years from the date of acquisition or construction, as the case may be
Withdrawal of exemption if new asset is transferred within lock in period
the amount of exemption allowed in respect of such investment (LTCG * investment / NSC) shall be deemed to be the long term capital gains of the previous year in which the specified asset is transferred or sold.
Restriction on number of hoses no exemption shall be allowed under this section, if the assessee, -
(i) Owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) Purchases any residential house, other than the new asset, within a period of 2 year after the date of transfer of the original asset; or
(iii) Construct any residential house, other than the new asset, within a period of 3 year after the date of transfer of the original asset; or
Withdrawal of exemption on acquisition / construction of second house
where the assessee purchases, within the period of 2 years after the date of the transfer of the original asset, or constructs, within the period of 3 years after such date, any residential house, (the income from which is chargeable under the head “Income from house property”), other than the new asset, the amount of exemption allowed under this section shall be deemed to be Long Term Capital Gains of the previous year in which such residential house is purchased or constructed.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 181 :
Sec. 54G Exemption of capital gains on transfer of assets in case of shifting of industrial undertaking from urban area to rural area.
Assessee entitled to claim exemption any assessee
Nature of asset transferred capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking to any rural area.
Nature of gain long term or short term capital gain (LTCG or STCG)
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the following :
Nature of asset to be acquired (i) Purchase new machinery or plant for the purposes of industrial undertaking;
(ii) Acquire building or land or construct building for the purposes of industrial undertaking;
Amount to be invested capital gain arising on transfer of the original land, building, plant or machinery.
Time for making the investment within a period of 1 year or before or 3 years after the date of transfer
Capital gain account scheme 1988 applicable
Non utilization of amount from the deposit account
if the amount deposited is not utilized wholly or partly for the purchase / construction of the land, building, plant or machinery within the period specified, then the amount not so utilized shall be charged as capital gain of the previous year in which the period of 3 years from the date of receipt of compensation expires.
Lock in period of the new asset the new land, building, plant or machinery cannot be transferred up to a period of 3 years from the date of acquisition
Withdrawal of exemption if new asset is transferred within lock in period
for the purpose of computing capital gain arising from the transfer of the new asset, the cost shall be reduced by the amount of exemption claimed in respect of investment in such new asset
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 182 :
Sec. 54GA Exemption of capital gains on transfer of assets in cases of shifting
of industrial undertaking from urban area to any Special Economic Zone
Assessee entitled to claim exemption any assessee
Nature of asset transferred capital asset, being machinery or plant
or building or land or any rights in
building or land used for the purposes of
the business of an industrial undertaking
situate in an urban area, effected in the
course of, or in consequence of, the
shifting of such industrial undertaking to
any Special Economic Zone.
Nature of gain long term or short term capital gain
(LTCG or STCG)
if the aforesaid conditions are satisfied, exemption shall be allowed subject to the
following :
Nature of asset to be acquired : a) Purchase machinery or plant for the
purposes of business of the
industrial undertaking in the Special
Economic Zone to which the said
undertaking is shifted;
b) Acquire building or land or construct
building for the purposes of his
business in the Special Economic
Zone;
c) Shift the original asset and transfer
the establishment of such
undertaking to the Special Economic
Zone; and
d) Incur expenses on such other
purposes as may be specified in a
scheme framed by the Central
Government for the purposes of this
section,
Amount to be invested capital gain arising on transfer of the
original land, building, plant or
machinery.
Time for making the investment within a period of 1 year or before or 3
years after the date of transfer
Capital gain account scheme 1988 applicable
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 183 :
Non utilization of amount from the
deposit account
if the amount deposited is not utilized
wholly or partly for the aforesaid
purposes within the period specified,
then the amount not so utilized shall be
charged as capital gain of the previous
year in which the period of 3 years from
the date of transfer expires
Lock in period of the new asset the new land, building, plant or
machinery cannot be transferred up to a
period of 3 years from the date of
acquisition.
Withdrawal of exemption if new asset
is transferred within lock in period
for the purpose of computing capital gain
arising from the transfer of the new
asset, the cost shall be reduced by the
amount of exemption claimed in respect
of investment in such new asset.
Sec. 54 EE Exemption of capital gains on investment in certain mutual funds :
• Objective:
For incentivising the start-up ecosystem in India, the 'start-up India Action Plan'
envisages establishment of a Fund of Funds which intends to raise ` 2,500
crores annually for four years to finance the start-ups.
• Exemption of LTCG invested in units of specified fund:
In order to achieve this objective, new section 54EE has been inserted to provide
exemption from capital gains tax if the long term capital gains proceeds are
invested by an assessee in units issued before 1st April, 2019 of such fund, as
may be notified by the Central Government in this behalf. The lower of the
capital gains or the amount so invested would be exempt under section 54EE.
Quantum of Exemption:
Case Amount exempted
If amount invested in notified units of specified
fund ≥ Capital gains Entire capital gains is exempt
If amount invested in notified units of specified
fund < Capital gains Capital gains to the extent of cost of amount
invested in notified units is exempt
• Time limit for investment:
The investment has to be made within 6 months after the date of transfer.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 184 :
• Ceiling limit for investment in units of the specified fund:
The maximum investment in units of the specified fund in any financial year is `
50 lakh. Further, the investment made by an assessee in the units of specified
fund out of capital gains arising from the transfer of one or more capital assets,
cannot exceed ` 50 lakh, whether the investment is made in the same financial
year or subsequent financial year or partly in the same financial year and partly
in the subsequent financial year.
• Consequence of transfer of units before 3 years:
Where the units are transferred at any time within a period of three years from
its acquisition, the capital gains, to the extent exempt earlier, would be
chargeable as capital gains in the year of transfer.
• Deemed transfer of notified units:
Further, if the assessee takes any loan or advance on the security of such
units, he shall be deemed to have transferred such units on the date on which
such loan or advance is taken.
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CAPITAL GAINS
Sec.54GB : Transfer of residential property [house / plot of land] and investment in
equity shares of an eligible company.
I. Available to : Individual & HUF (referred to as "the assessee")
II. What is to be invested : Net Sale Consideration [Sale consideration –
Transfer expenses]
III. Qualifying asset (long term or both) : Long term
IV. Time Limit for Purchase: Subscription to equity shares before the due
date of filing return of income u/s 139(1) applicable for the assessee.
V. Time Limit for Completion of Construction: N.A.
VI. Case of Non utilization : L.T.C.G.
VII. Case of Misutilisation : Residential Property : LTCG,
Equity Shares : Both,
“New Asset” : STCG
VIII. Special conditions :
1. The Company should be incorporated in the relevant P.Y. till the
due date of filing return of income u/s 139(1) for that relevant P.Y.
The company is engaged in business of manufacture of article or
thing and qualifies to be a “Small or Medium enterprise”.
2. The share capital/ voting rights of the assessee in this company
after subscription to these shares should exceed 50%.
3. The “new asset” should be purchased by the company within one year
from the date of subscription in equity shares by the assessee.
4. The equity shares of the company as well as the new asset
acquired by the company should be retained for a period of five
years from the date of their respective acquisition, else the
provision of misutilisation would be attracted.
IX. Remarks :
1. (a) If the amount invested in acquisition of “new asset” by the
company is less than the net sale consideration then :
(b) If the amount invested in acquisition of “new asset” by the
company is equal to or more than the net sale consideration,
the Gross LTCG is fully exempt from tax u/s 54GB.
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CAPITAL GAINS
2. Case of non-utilisation
Exemption allowed
Taxable LTCG = u/s 54 GB
x unutilized amount
Total investment i.e. cost in the deposit scheme
of new asset + amount of deposit
This amount shall be taxable for the assessee in the year in
which the period of 1 year from the date of subscription in
equity shares expires.
3. Case of Misutilisation
In case of misutilisation, the amount of LTCG, which was exempt
earlier for the assessee, shall be taxable as LTCG for the assessee
in the year of misutilisation and the capital gain arising on the
transfer of equity shares (for the assessee) and / or "new asset" (for
the company) shall also be taxable in the year of misutilisation.
4. " New Asset" means new plant and Machinery which satisfies all the
conditions for claim of additional depreciation u/s 32. In the case of
eligible start-up, it also includes computers and computer software.
5. This exemption does not apply to any transfer of residential property
made after 31-3-2017. For eligible start-ups, this section shall apply
upto 31-3-2019
6. "Eligible business" means a business which includes innovation,
development, deployment or commercialisation of new products,
processes, or services driven by technology or intellectual property.
7. "Eligible start up" Means a company incorporated on or after 1.4.2016
but before 1.4.2019 and the turnover in any P.Y. between 2016-17 to
2020-21 does not exceed ` ` ` ` 25 crores.
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CAPITAL GAINS
CAPITAL GAINS ACCOUNT SCHEME
If the investment in the new asset has not been made by the assessee upto the date of
filing of return of income for that P.Y., the assessee shall transfer the capital gain to a
special bank account as per this scheme on or before the date of filing return of income.
The amount so transferred to the special bank account shall be considered as “cost of
the new asset” for calculation of exemption.
The amount in the special bank account should be utilized by the assessee for investing in the
new asset after the date of filing return but upto the time limit specified in the section.
If any amount remains unused in the special bank account, it is termed as a case of
“non-utilization” and the unutilized amount shall be taxable as capital gain in the year in
which the time limit of the section expires.
Any interest accrued on the amount deposited in the special bank account shall be taxable for
the assessee as “Income from Other Sources.”
EXTENSION OF TIME LIMIT FOR ACQUIRING NEW ASSET. [Sec. 54 H]
Section 54 H been inserted to provide that where the transfer of the original asset is by way of
compulsory acquisition under any law and the amount of compensation awarded for such acquisi-
tion is not received by the assessee on the date of such transfer, the period of acquiring the new
asset under section 54, 54B [Compulsory Acquisition by State Government] 54D, 54 EC and 54F
by the assessee or the period for depositing or investing the amount of capital gain shall be ex-
tended in relation to such amount of compensation as is not received on the date of transfer. The
extended period shall be reckoned from the date of receipt of the amount of compensation.
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CAPITAL GAINS
Q. 1. X had bought a car in 2010 for `̀̀̀ 85,000 and used it for business purposes. He
sold the car in March, 2018 for `̀̀̀55,000 after deducting depreciation of `̀̀̀50,000
claimed by him,has he made a short term capital gain of `̀̀̀20,000?
Q. 2. X owns Gold Deposit Certificates, 2015 worth `̀̀̀25 lakhs. Y owns shares of Hindustan
lever whose market price is `̀̀̀25 lakhs. X & Y swap their investments, since the transfer
of property does not result in any gain, nothing is taxable in the hands of X & Y.
Q. 3. Discuss the tax rates applicable in the following cases
Sr. Capital Asset STCG LTCG
1 Property
2 Listed Debentures
3 Unlisted equity shares
4 Listed preference shares
5 Zero Coupon Bonds
6 Listed shares of a company relinquished
on liquidation
7 Unlisted debentures of a company
8 Urban Agricultural Land
9 Listed equity shares of a company sold
through BSE.
10 Units of equity oriented mutual fund sold
through BSE.
11 Units of debt oriented mutual fund sold
through BSE.
12 Bonus equity shares of a listed company
allotted on
21-9-2009 and sold on 16-2-2018 outside BSE
13 Gold Bonds
Q. 4. X acquires a capital asset on April 1, 2007 for `̀̀̀ 40,000. he converts the capital asset
into stock-in-trade on April 1, 2009 (fair market value on the day of conversion 1,62,000).
The stock-in-trade is sold by X on March 10, 2018 for ̀̀̀̀ 5,86,000. Determine the amount
of chargeable profit.
Q. 5. X intends to sell his house property to Y. The consideration is fixed at `̀̀̀10 lakhs
and the possession is given to Y. Half the consideration has already paid by by Y
and the balance is to be paid shortly. However no sale deed has been executed till
31.03.2018. Nevertheless, for purposes of Sec.45, X has transferred the property.
Is this statement correct?
CLASS WORK PROBLEMS
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CAPITAL GAINS
Q. 6. On 29th August, 2003, G acquired 500 shares of `̀̀̀100 each for `̀̀̀ 60,000 in Blue Ltd.
On 23rd March, 2017, the company by resolution went in to voluntary liquidation. G
received `̀̀̀1,90,000 in May, 2017 as final settlement from the company. There were no
accumulated profits with the company immediately before liquidation. Decide the
taxability of the receipt in the hands of G.
Q. 7. Ramdev HUF is partitioned in 03-04 and assets distributed to both Ram & Dev
equally properties worth `̀̀̀50 lakhs each, the properties had been acquired by HUF
in 1961 at `̀̀̀1 lakh (fmv.1.4.01 - 25,00,000). Ram sells off his property in March,
2018 for `̀̀̀ 2 crore.Calculate the amount of Capital Gains chargeable to tax in the
hands of H.U.F. and Ram.
Q. 8. X and Y are two partners of a firm : A Co. On June 1, 2017 B joins the firm and brings listed
shares in a company as his capital contribution. Fair market value of these shares (listed)
on June 1, 2017 is `̀̀̀1,86,000, whereas amount credited in B's account in the firm is
`̀̀̀ 2,20,000. Assuming that cost of acquisition in 2007-2008 of these shares is `̀̀̀ 45,000,
find out the amount of chargeable capital gain for the assessment year 2018-19.
Q. 9. A Co. (a firm which deals in chemical goods and has partners: X, Y and Z) acquires
gold on May 10,2004 for `̀̀̀ 40,000. This is taken over at the time of dissolution by Y on
March 31, 2018. Though on March 31st, 2018 its market value is `̀̀̀ 5,60,000, agreed
value as per dissolution deed is `̀̀̀ 6,00,000. Determine the amount of capital gain
chargeable to tax for the assessment year 2018-19.
Q. 10.X purchases debentures in A Ltd. on January 1, 2005 for `̀̀̀ 20,000. He gifts these
debentures to his friend Y, on June 10, 2005 (fair market value on June 10, 2005.
`̀̀̀33,000). Y dies on March 13, 2007 and as per his will, debentures are
transferred to his son Z (Fair market value on March 13.2007, `̀̀̀ 40,000). Z sell
these debentures on June 10, 2017 for `̀̀̀ 86,000. Determine the amount of capital
gain arising to X, Y and Z from the aforesaid transactions.
Q. 11. X gets shares from his employer - ABC Ltd., under ESOP (whose market value at
acquisition was `̀̀̀ 3,00,000) for `̀̀̀ 80,000 on 4.4.2017.
X sells such shares on 7.1.18 for `̀̀̀ 7,00,000, when its FMV was 9,00,000. Com-
pute effects. Describe the changes if :
Such shares were gifted on 7.1.18.
Such shares were given by way will in P.Y. 17-18.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
CAPITAL GAINS
Q. 12.X, a non-resident, remits US $ 40,000 to India on April 4, 2007. This amount is
partly utilised in purchasing the following assets on April 10, 2007.
Assets Quantity Amount
`̀̀̀
Silver 10 Kg. 30,000
Listed shares in an Indian Company 2,000 24,000
(Sold privately)
X transfers these assets on May 10, 2017 for total consideration of `̀̀̀16,00,000
(silver : `̀̀̀ 3,70,000; shares : `̀̀̀ 12,30,000) transfer expenses incurred for shares
`̀̀̀ 22,000/-. Find out the amount of capital gains chargeable to tax for the
assessment year 2018-2019, on the assumption that telegraphic transfer buying /
selling rate of US dollar adopted by State Bank of India is as follows:
Buying Selling
(1 US $) (1 US $)
` `` `` `` `
April 10, 2007 27.50 28.10
May 10, 2017 48.30 49.10
Q. 13.X had purchased convertible debenture of Essar Gujarat in March, 2007 at `̀̀̀100
per debenture. The debenture were converted to 2 equity shares in April, 2016.
The market price in April, 2016 was `̀̀̀80 per share. The shares were sold in June,
2017 at `̀̀̀120 per share. Compute Capital Gains.
Q. 14. K had purchased 100 shares of ICICI Bank in March, 2003 at ̀̀̀̀ 200 per share. He gets a
bonus in March, 2006 in the ratio of 1 : 1 and again in March, 2007 in ratio of 1 : 1. He sells
off 300 shares in June, 2017 at `̀̀̀1,200 per share. Securities transaction tax is not
attracted.Compute Capital Gains.
Q. 15.Mr. P holds 500 shares of ABC Ltd., which were allotted to him on 22.4.2005 @
`̀̀̀30 per share. On 22nd July, 2017 ABC Ltd., made right issue to the existing share-
holders at the rate of one share for every five shares held @ `̀̀̀100 per share. Mr. P,
instead of exercising his right to obtain right shares, has exercised his right of
renouncement by renouncing the said right entitlement in favour of Mr. Q @ `̀̀̀70
per right share entitlement on 4th August, 2017.
Determine the nature and acquisition of capital gain, if any, taxable in the hands of
Mr. P. What is the C.O.A. of the shares for Mr. Q?
Q. 16.X purchases a property on April 1, 1995 for `95,000. He enters into agreement for
sale of the property to A on November 1, 2005 and receives `10,000 as advance.
A could not, however keep his promise and advance of `10,000 given by him is
forfeited by X. Later on he gifts the property to his friend Y on May 15, 2007. The
following expenses are incurred by X and Y for renewal of the property :
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CAPITAL GAINS
Cost ( `̀̀̀)
Addition of two rooms by X during 1999-2000 25,000
Addition of first floor by X during 2004-05 40,000
Addition of second floor by Y during 2009-10 1,25,000
Fair market value of the property on April 1, 2001 is `1,15,000.
Y enters into an agreement to sell the property for `12,50,000 to B on April 1, 2011
after receiving an advance of ` 50,000. B could not pay the balance within the
stipulated time of two months and Y forfeits the advance ` 50,000 as per
agreement with B. Y ultimately finds a buyer in C to whom property is transferred
for ` 73,75,000 on December 1, 2017. The Valuation adopted by the registration
authorities for charge of stamp duty was `76,50,000 which was not contested by
the buyer, but as per the assessee's request, the Assessing Officer made a
reference to valuation officer. The value adopted by valuation officer was
`75,62,000/- Brokerage at 1% of sale consideration was paid by Mr. Y to Mr. H.
Compute the capital gain chargeable to tax in the hands of Y.
Q. 17. Mr. A is proprietor of Chirag Enterprises having 2 units. He transferred on 1.4.2017 his unit
1 by way of slump sale for a total consideration of ̀̀̀̀ 25 Lacs. The expenses incurred for this
transfer were ̀̀̀̀ 28,000/-. His Balance Sheet as on 31.3.2017 is as under :
Liabilities Total Assets Unit 1 Unit 2 Total
` ` ` `` ` ` `` ` ` `` ` ` `
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
(for building of Unit 1) Debtors 1,00,000 40,000 1,40,000
Bank Loan 2,00,000 Other Assets 1,50,000 60,000 2,10,000
(70% for Unit I)
Trade Creditors 1,50,000
(25% for Unit 1)
TOTAL 21,50,000 TOTAL 17,50,000 4,00,000 21,50,000
Other Information :
(i) Revaluation reserve is created by revising upward the value of the building
of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit I include patents acquired on 1.7.2015 for `̀̀̀50,000/- on
which no depreciation has been charged. (Depreciation rate 25%).
Compute the capital gain for the assessment year 2018-2019.
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CAPITAL GAINS
Q. 18.The Government of Kerala acquires a commercial building owned by X Ltd. on
March 10,2006. X Ltd. receives first instalment of `̀̀̀ 4,20,000 of the initial
compensation of `̀̀̀14,00,000 on September 25, 2009 (cost of acquisition on May
5, 2002 `̀̀̀ 6,70,000). On appeal of X Ltd. the Kerala high court increased the
compensation to `̀̀̀ 26,25,000. The additional compensation `̀̀̀12,25,000 is
received by X Ltd. on May 6, 2017, X Ltd. incurred litigation expenses of `̀̀̀1,15,000
to get the enhanced compensation. Find out the capital gain chargeable to the tax
for the assessment year 2006-07, 2010-2011 and 2018-2019.
Q. 19.Mr. Malik owns a factory building on which he had been claiming depreciation for
the past few years. It is the only asset in the block. The factory building and land
appurtenant thereto were sold during the year. The following details are available.
`̀̀̀
Building completed in September, 2005 for 10,00,000
Land appurtenant thereto purchased in April, 2003 for 12,00,000
Advance received from a prospective buyer for land in May, 2004, 50,000
forfeited in favour of assessee, as negotiations failed
WDV of the building block as on 1.4.2017 8,74,800
Sale value of factory building in November 2017 8,00,000
Sale value of appurtenant land 46,00,000
The assessee is ready to invest in long - term specified assets under section 54EC,
within specified time in order to bring the tax liability to NIL.
Compute the amount of taxable capital gain for the assessment year 2018-19 and the
amount to be invested under section 54EC for availing the maximum exemption.
Q. 20.Mr. Subash Nagre had purchased a plot of land in Aug. 1999 for `̀̀̀12,00,000/-.
This land was sold by him on 19 June 2017 for `̀̀̀47,00,000/-. On sale of this land,
he had to pay brokerage of 1.5% of the sale consideration. The stamp valuation
authority assessed the value of the land at `̀̀̀51,00,000 which was neither disputed
by the buyer nor by him.
On 6th Oct. 2017, he incorporated a private limited company in which he held
70.14% of the total equity share capital. These shares were purchased by him by
utilizing the net sale consideration from sale of land. The shares were allotted on
17 Dec. 2017 to all the shareholders.
The private limited company is engaged in manufacturing fertilizers. It purchased
new machinery worth `̀̀̀40,00,000 by utilizing the share money received from
Mr. Nagre. The machinery was purchased and put to use on 29th January, 2018.
Compute the amount of exemption under section 54GB available to Mr. Nagre for
A.Y. 2018-2019.
Describe the effects if –
1. The equity shares are sold by him on 31 Jan 2019; or
2. The machinery is sold by the company on 20th June, 2025.
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CAPITAL GAINS
Q. 21.Mr. A is an individual carrying on business. His stock and machinery were
damaged and destroyed in a fire accident in December, 2017.
The value of stock lost (total damaged) was `̀̀̀ 6,50,000. Certain portion of the
machinery could be salvaged. The opening WDV of the block as on 1.4.2017 was
`̀̀̀ 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations,
Mr. A lost his gold chain and a diamond ring, which he had purchased in April,
2008 for `̀̀̀1,20,000. The market value of these two items as on the date of fire
accident was `̀̀̀ 4,00,000.
Mr. A received the following amounts from the insurance company :
(i) Towards loss of stock `̀̀̀ 4,80,000
(ii) Towards damage of machinery `̀̀̀ 6,00,000
(iii) Towards gold chain and diamond ring `̀̀̀ 4,00,000
You are requested to briefly comment on the tax treatment of the above three items
under the provisions of the Income - tax Act, 1961.
Q. 22.Mr. ‘X’ furnishes the following data for the previous year ending 31.3.2018:
(a) Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.2017,
at `500 for each share.
(b) The above shares of 10,000 were acquired by ‘X’ in the following manner:
(i) Received as gift from his father on 1.6.2000 (5,000 shares) the fair
market value on 1.4.2001 `50 per share.
(ii) Bonus shares received from AB Ltd. on 21.7.2005 (2,000 shares).
(iii) Purchased on 1.2.2004 at the price of ̀ 125 per share (3,000 shares).
(c) Purchased one residential house at `37 lakhs, on 1.5.2018 from the sale
proceeds of shares.
(d) ‘X’ is already owning a residential house, even before the purchase of above
house.
You are required to compute the taxable capital gain. He has no other source of
income chargeable to tax.
Q.23.Mr. Ayush Goenka owns two houses at Amritsar and Pune. He transfers the
following long term assets during P.Y. 2017-2018:
Residential Gold Silver
property at Pune
Date of sale 10.4.2017 20.4.2017 24.4.2017
Sale consideration 10,00,000 8,00,000 6,00,000
Indexed cost of acquisition 4,00,000 7,00,000 2,50,000
No transfer expenses were incurred for any sale. Mr. Ayush purchases the
following assets:
(i) Residential property at Mumbai for Rs. 7,00,000 on October 11, 2017.
(ii) Bonds of National Highways Authority of India for Rs. 2,50,000 on 27th
September 2017.
Compute the amount of capital gains chargeable to tax for A.Y. 2018-19.
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CAPITAL GAINS
Ans. 1. Assuming that the motor car is the only asset in the block, on sale of the motor
car, the block ceases to exist. The capital gain arising in this situation is always
short term even if the asset has been actually held for more than 36 months. This is
because once an asset enters the block; it loses its identity, individuality and
personality in the block. All calculations are made on the basis of “value” of the
block and such value keeps on changing every year (due to depreciation). This
implies that the value has been held for less than 36 months (1 year) and
accordingly the gain or loss shall be always be treated as short term
Ans. 2.True for Mr. X but False for Mr. Y, Gold Deposit Certificates 2015 are not consid-
ered as “capital asset” u/s. 2(14) and hence any profit arising on exchange of the Gold
Bonds is not taxable for Mr. X.
Shares of Hindustan Lever are capital assets as per Section 2(14) and Exchange is a
method of Transfer as per Section 2(47). Capital gain shall be taxable for Mr. Y.
Ans.5.False, Sec 53A of transfer of property Act would be attracted if all the conditions
Mentioned below are satisfied.
(i) There should be a contract for consideration in writing
(ii) The transferee has obtained possession of the property
(iii) The transferee has performed or agreed to perform his part of the contract.
In the given case the sale deed has not been executed till 31st March, 2017. This
implies that the contract for sale is not “in writing” and therefore it cannot be treated as
a transfer u/s 2(47). Therefore, capital gains is not taxable in P.Y. 2016-17. As and
when Mr X and Mr Y execute the contract, capital gain will be taxable for Mr X in that year.
Ans.9.When a partnership firm distributes a capital asset to the partner (on dissolution or
otherwise), the F.M.V. of the capital asset on the date of transfer shall be taken as Full
Value of consideration for the firm. The taxable capital gain for the firm is as follows:
Particulars `̀̀̀
Full value of consideration 5,60,000
Less: Indexed Cost of Acquisition
(LTCA as h.p. > 36 months from May. 2004 to Mar. 2018)
(40,000 x )
Taxable LTCG
CLASS WORK SOLUTIONS
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CAPITAL GAINS
Ans. 12. Mr. X
Computation of Capital Gains for A.Y. 2017-18
a) Silver
Full Value of Consideration 3,70,000
Less : Indexed Cost of Acquisition
(LTCA as hp > 36m from 10-4-2007 to 10-5-2017)
30,000 x
LTCG taxable u/s 112
Tax @ 20% =
b) Listed Shares in an Indian Company $
Full Value of Consideration
12,30,000 ÷ 48.30 + 49.10 25,256.67
2
Less : Cost of Acquisition
(LTCA as hp > 12m from 10.4.2007 to 10.5.2017)
24,000 ÷ 27.50 + 28.10 (863.31)
2
Less : Expenditure in Connection with Transfer
22,000 ÷ 48,30 + 49.10 (451.75)
2
LTCG 23,941.61
LTCG (in INR) = LTCG (in $) x Buying Rate on 10-5-16
= $ 23,941.61 x `̀̀̀ 48.30 / $
= `̀̀̀ 11,56,380/-
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CAPITAL GAINS
Ans. 14. False.
March 2003 Shares purchased @ `̀̀̀ 200/ share 100 shares
March 2006 Bonus 1 : 1 100 shares
200 shares
March 2007 Bonus 1 : 1 200 shares
Total 400 shares
June 2017 Sale of shares @ `̀̀̀ 1,200/- share (300 shares)
Balance 100 shares
FIFO method
In this case, the 100 original shares purchased in March 2003, 100 bonus shares
allotted in March 2006 and 100 bonus shares allotted in March, 2007 have been
sold in June 2017. The LTCG on 100 original shares is exempt from tax
u/s. 10(36). The LTCG on 200 bonus shares is taxable as follows :
Taxable LTCG = 200 bonus shares x (`̀̀̀ 1,200 -- NIL) = `̀̀̀ 2,40,000/-
Tax u/s. 112 under option 2 = `̀̀̀ 2,40,000 x 10% = `̀̀̀ 24,000/-
LIFO method
In this case, all the bonus shares allotted in March 2006 and March 2007
have been sold in June 2017. The LTCG is taxable as follows:
Taxable LTCG = 300 bonus shares x (`̀̀̀ 1,200 -- NIL) = `̀̀̀ 3,60,000/-
Tax u/s. 112 under option 2 = `̀̀̀ 3,60,000 x 10% = `̀̀̀ 36,000/-
Ans. 15. When Mr. P renounces the right entitlement in favour of Mr. Q, it results into
“relinquishment of the asset” for Mr. P. The capital gain for Mr. P and the
cost of acquisition for Mr. Q are calculated as follows :
Particulars `̀̀̀
Full value of consideration
(100 right share entitlement x ̀̀̀̀ 70/ entitlement) 7,000
Less:Cost of Acquisition
(STCA as h.p. < 12 months from 22-7-2017 to 4-8-2017)
COA of right renounced NIL
Taxable STCG 7,000
C.O.A. for Mr. Q
Cost of the share (paid to ABC Ltd.) `̀̀̀ 100/ share
Add: Cost of the Right (paid to Mr. P) `̀̀̀ 70/ share
`̀̀̀ 170/ share
X Number of shares 100 shares
C.O.A. of the shares `̀̀̀ 17,000
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CAPITAL GAINS
Ans.18. P.Y. 2005-2006, A.Y. 2006-2007
Nothing shall be taxable for X Ltd. as this is the year of compulsory
acquisition. Capital gain shall be taxable in the year in which the initial
compensation (or any installment) is received for the first time.
P.Y. 2009-2010, A.Y. 2010—2011
Particulars `̀̀̀
Full value of consideration
(Always Initial compensation AWARDED/ DETERMINED) 14,00,000
Less: Indexed Cost of Acquisition
(L.T.C.A. as h.p. > 36 months from 5-5-1992 to 10-3-1998)
6,70,000 x
TAXABLE LTCG u/s. 112 @ 20%
P.Y. 2017-2018, A.Y. 2018—2019
Particulars `̀̀̀
Full value of consideration
(Always Enhanced compensation awarded) 12,25,000
Less: Indexed Cost of Acquisition NIL
Less: Indexed Cost of Improvement NIL
Less: Transfer expenses
Litigation expenses (1,15,000)
TAXABLE LTCG u/s. 112 @ 20% 11,10,000
Ans.17. Mr. A
Computation of Capital Gains for A.Y. 2018-2019
Particulars `̀̀̀
Full Value of Consideration 25,00,000
Less: Expenditure in connection with transfer (28,000)
Less: Cost of Acquisition (W.N.) (12,50,625)
TAXABLE STCG/LTCG 12,21,375
W.N. Cost of Acquisition- Net Worth of Unit 1
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CAPITAL GAINS
Particulars ` `` `` `` `
Assets related to Unit 1
- Building (excluding revaluation reserve) 9,00,000
- Machinery 3,00,000
- Debtors 1,00,000
- Other Assets (excluding Patents) 1,00,000
- Patents (See working below) 28,125 14,28,125
Less: Liabilities related to Unit 1
- Bank Loan (2,00,000 x 70%) 1,40,000
- Trade Creditors (1,50,000 x 25%) 37,500 (1,77,500)
NET WORTH 12,50,625
Patents – WDV on 1-4-2017 (Depreciation rate 25%)
Actual Cost on 1-7-2015 50,000
Less: Depreciation u/s. 32 for
- P.Y. 2015-2016 (50,000 x 25%) 12,500
- P.Y. 2016-2017 [(50,000-12,500) x 25%] 9,375 (21,875)
W.D.V. on 1-4-2017 28,125
Ans.19. Mr. Malik
Computation of capital gains for A.Y. 2018-2019
i. Building- Depreciable asset
Particulars `̀̀̀
Full value of consideration 8,00,000
Less: Cost of Acquisition
BLOCK CEASES TO EXIST- Sec 50(2)
Opening WDV 8,74,800
Add: Additions to the block during the year NIL (8,74,800)
STCL (74,800)
ii. Land- Non Depreciable asset
Particulars `̀̀̀
Full value of consideration 46,00,000
Less: Indexed Cost of Acquisition
(L.T.C.A. as h.p.> 36 months from April
2000 to Nov 2016)
Cost (as incurred) 12,00,000
Less:Advance money forfeited (Sec 51) (50,000)
COA eligible for indexation 11,50,000
11,50,000 x
Gross LTCG
Less: Exemption u/s 54EC Note
Taxable LTCG
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CAPITAL GAINS
Note: Investment required in Bonds- Section 54EC
Gross LTCG on Land
Less: STCL on Building, set off
Exemption required
Investment in bonds
(rounded to multiples of `̀̀̀ 1,000 as face value of the Bond is `̀̀̀ 1,000)
Ans.20. i. Sale of equity shares on 31st January 2019
If the equity shares are sold on 31.1.2019, it implies that the shares
have not been retained for 5 years from the date of their acquisition
(Misutilization). Accordingly, the LTCG on sale of land which was
claimed exempt u/s. 54GB in P.Y. 2017-18 shall now become taxable
in P.Y. 2018-2019. Additionally, the STCG on sale of equity shares
shall also be taxable for the assessee in P.Y. 2018-2019.
ii. Sale of Machinery on 20th June 2025
If the machinery is sold on 20-6-2025, the provisions of misutilization
are not applicable as the machinery has been retained by the
company for 5 years from the date of its acquisition. The exemption
u/s. 54GB shall not be withdrawn for the assessee.
On sale of the machinery by the company in P.Y. 2025-2026, if the block
of machinery turns negative or the block ceases to exist, the STCG on the
machinery shall be taxable for the company. If the block continues to exist
after the sale, the profit or loss on sale of this individual machinery shall
not be recognized separately as per the block system of depreciation
(Section 32). The profit or loss on sale of this individual machine shall be
absorbed in the calculation of the block.
Ans.21. The tax treatment of the various insurance claims received by Mr. A are as follows :-
(i) Towards Stock
The amount received as insurance claim towards loss of stock is taxable
under the head “Profits and Gains of Business or Profession”u/s 28.
The value of stock lost by fire will be allowed as a deduction u/s 37(1) while
computing business income.
(ii) Towards Machinery
Full value of consideration [Amount received u/s 45(1A)] 6,00,000
Less : Cost of acquisition u/s 50(2)
(Block ceases to exist)
Opening WDV 10,80,000
Add : Additions during the year NIL (10,80,000)
S.T.C.L. (4,80,000)
(iii) Towards gold chain and diamond ring
Full value of consideration 4,00,000
Less : Indexed cost of acquisition
L.T.C.A. as h.p. > 36 months
from April 2007 to December 2017
1,20,000 x
L.T.C.G. u/s 112
Note : S.T.C.L. shall be set off against L.T.C.G. and the balance S.T.C.L. shall be carried
forward for maximum 8 assessment years.
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CAPITAL GAINS
Ans.22. Computation of taxable capital gain of Mr. ‘X’ for A.Y. 2018-19
Particulars ` `` `` `` `
Sale consideration received on sale of 10,000 shares @ `̀̀̀ 500 each 50,00,000
Less : Indexed cost acquisition
(a) 5,000 shares received as gift from father on 1.6.2000
Indexed cost rs 5,000 x 50 x
(b) 2,000 bonus shares received from AB Ltd Nil
Bonus shares are acquired on 21.7.2005 (i.e. after the year
2000 when the original shares were purchased). Hence,
the cost is Nil
(c) 3000 shares purchased on 1.2.2004 @ `̀̀̀125 per share.
The indexed cost is 3000 x 125 x
G.L.T.C.G.
Less : Exemption under section 54F(See Note below)
37,00,000 x
50,00,000
Taxable long term capital gain
Note :
Exemption under section 54F can be availed by the assessee subject to
fulfillment of the following conditions :
(a) The assesse should not own more than one residential house on the
date of transfer of the long –term capital asset ;
(b) The assessee should purchase a residential house within a period of
1 year before or 2 years after the date of transfer or construct a
residential house within a period of 3 years after the date of transfer
of the long-term capital asset.
In this case, the assessee has fulfilled the two conditions mentioned above.
Therefore, he is entitled to exemption under section 54F.
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CAPITAL GAINS
Ans. 23.
Nil 1,41,667
Working for exemption u/s. 54F
The exemption u/s. 54F can be claimed for LTCG on Gold as well as Silver. The ratio of
Gross LTCG to Net Sale Consideration is 12.5% in case of Gold [1,00,000 / 8,00,000] and
is 58.33% in case of Silver [3,50,000 / 6,00,000]. Hence the balance cost of the house
property at Mumbai Rs. 1,00,000 (after claiming exemption under section 54) should be
utilised for claiming exemption under section 54F for LTCG on Silver in order to claim
higher exemption and reduce tax liability.
The exemption under section 54EC for bonds of NHAI Rs. 2,50,000 can be claimed for
LTCG on Gold as well as Silver. The LTCG on Gold is fully exempt by investment into these
bonds and the balance cost of NHAI bonds of Rs. 1,50,000 has been utilised for claiming
exemption in case of LTCG on Silver.
It may be noted that any other option of claiming exemptions under sections 54EC and 54F
shall result into higher tax liability than the option described above.
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INCOME FROM OTHER SOURCES
INCOME FROM OTHER SOURCES
SECTION DESCRIPTION
56 Charging section
*56(1) General Incomes charging section
*56(2) Specific eleven incomes charging section
57 Deductions permissible in the Computation of Income from other sources
58 Specific disallowances
59 Subsequent recovery of expenses previously allowed u/s 57, such
subsequently recovery is fully taxable. [Similar to section 41(1)].
CHARGING SECTION 56 :
GENERAL INCOMES TAXABLE U/S 56 (1):
Section 56(1) specifies that if an income is not taxable under the first four heads of in-
come, it should be brought to tax under the head Income from Other sources, provided
the income is not exempt. One can describe these as general incomes from other sources.
Few of them under certain broad classification:-
* The return on investment type:
- Interest on loans (If it is not an Income from business)
- Income from royalty (if it is not an income from business / profession)
Agriculture Income from a place outside India (Not exempt u/s 10(I), since
not from India)
- Rent of plot of land (vacant land)
- Ground rent (Rent of land on which house property is constructed)
- Annuity payable under a will, contract, trust deed (excluding annuity payable
by employer, which is chargeable under the head “salaries”)
- Interest on employee’s contribution to unrecognized Provident Fund.
- Annuity payable to the lender of a trademark.
* Income which do not have employer- employee relationship:
- Director’s fees (of non employee directors)
- Directors commission for standing as a guarantor to bankers / underwriting shares
of new company.
- Examinations fees received by a teacher from a non-employer (college professor
getting remuneration from university)
- Salaries payable to a Member of Parliament (MP) or Member of Legislative
Assembly (MLA).
- Gratuities paid to director who is not an employee of the company.
- Pension received under a family pension scheme, by a non- employee i.e.
spouse of the deceased employee.
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INCOME FROM OTHER SOURCES
* OTHER TYPES:
- Income from subletting (provided tenant is not deemed owner u/s 27).
Since there is no ownership of property .
- Income from racing establishments such as income from activity of
owning and maintaining race horses:
Actually it is a business income (computed at stake money received (-)
expenses u/s 57) and not casual winnings, but taxable under Income from
other sources, since it promotes gambling.
SPECIFIC INCOMES TAXABLE ONLY UNDER INCOME FROM OTHER
SOURCES U/S 56(2)
Section 56 (2) specifies eleven incomes & puts a compulsion that these incomes
must be included in the head Income from Other Sources, even though they may
have certain features of Income from House Property & Income from Business.
These specific incomes are:
(1) Dividend income
Dividend on shares held as investment or as stock in trade (in which case it is
basically business income in nature) such dividend income is always taxable
under Income from other sources as per the Income tax Act.
(2) Interest on securities (if held as investment and not as stock in trade, because in
that case income is taxable under Income from business & profession).
(3) Winning from lottery, crossword puzzles, card game or any other sort of gambling.
“Lottery" includes winnings from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever, under any scheme or arrangement by
whatever name called "Card game and other game of any sort" includes any game
show, an entertainment programme on television or electronic mode, in which
people compete to win prizes or any other similar game.
(4) Hire charges of plant, machinery and furniture, if let out as idle capacity.
(5) Letting out of building alongwith plant and machinery as idle capacity.
(6) Any sum received under "Keyman insurance policy" including sum allocated by
way of bonus on such policy [if not taxable u/s 17(3) in the hands of employee
under Income from salary or not taxable u/s 28 in the hands of employer].
(7) Any sum received by the assessee from his employees as contribution to
any staff welfare scheme [i.e. Employer does not have income taxable under
business or profession and has income taxable under Income from house
property / Income from other sources / capital gains ; and such employer collects
from employees their contribution towards provident fund, gratuity fund etc. Such
amount collected is considered as income in the hands of employer u/s 56 (just
like section 28) and when the employer deposits the amount collected in the
relevant fund on or before the fund's due date, it is allowed as a deduction u/s 57
in the hands of the employer [just like section 36(1)(va)].
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(8) Any interest on compensation or enhanced compensation received on compulsory
acquisition (as compensation for loss of opportunity because of delay in payment).
The assessee is entitled to claim deduction u/s 57 at 50% of the amount of
interest received.
Note : Compensation amount or enhanced compensation amount will be
taxable under capital gains , here only interest received is taxable.
(9) Gifts received by an any preson will not be taxable in relation to any sum
of money or any property received :
(a) ���� From any relative :Where relative means :
* For Individual :
(i) Spouse of the individual
(ii) brother or sister of the individual including their
spouses,
(iii) brother or sister of the spouse of the individual
including their spouses,
(iv) brother or sister of either of the parents of the
individual including their spouses,
(v) any lineal ascendant or descendant of the indi-
vidual including their spouses,
(vi) any lineal ascendant or descendant of the spouse
of the individual including their spouses,
* For HUF:
Any member of the family
(b) ���� On the occasion of marriage of the individual
(c) ���� Under a will or by way of inheritance
(d) ���� In contemplation of death of the payer or donor (i.e. a gift of
personal property by a person expecting to die soon due to ill
health or age)
(e) ���� From any local authority, covered under section 10(20)
(f) ���� From any fund, foundation, university, other educational institu-
tion, hospital, medical institution, any trust or institution referred
to in section 10(23C).
(g) ���� From a charitable institute registered under section 12AA.
If the gift is not falling in the above exceptions, then it is
taxable here if not taxable under other heads of Income.
(A) When an any person receives in any previous year, from any person
or persons –
(i) Any sum of money without consideration, the aggregate value
of which exceeds ̀ ̀ ̀ ̀ 50,000/- the total amount received is taxable
under this head (and not the excess over `̀̀̀ 50,000 /-).
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(ii) Any immovable property of land or building or both
(a) Received without consideration :
The entire stamp duty value of the property is taxable under
this head if such stamp duty value exceeds `̀̀̀ 50,000.
Note: For each property gifted the limit of `̀̀̀ 50,000 is
applicable.
(b) Receivable for inadequate consideration
If received for inadequate consideration where the
difference between stamp duty value and amount paid
exceeds `̀̀̀ 50,000 per gift of immovable property, the
entire difference is taxable.
Note:
* If such difference is less than or equal to `̀̀̀ 50,000 per
gift of immovable property, then nothing is taxable under
these provisions.
* In the case of immovable property if the stamp duty value
is disputed by the assessee as mentioned u/s 50C, the
Assessing Officer may refer the valuation of such prop-
erty to a Valuation Officer as per section 50C.
(iii) Any movable property of :
- Shares and securities
- Jewellery
- Archeological collections
- Drawings
- Paintings
- Sculptures
- Any work of art
- bullion
(a) Received without consideration
If the aggregate fair market value of such property
exceeds `̀̀̀ 50,000 in the relevant previous year, the
whole of the aggregate fair market value of the
property is taxable under this head.
(b) Received for inadequate consideration
If the difference between the aggregate fair market value
of the property and the aggregate consideration paid for
the property exceeds `̀̀̀ 50,000/-, the entire differences
is taxable under this head.
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(10) When a closely held company (i.e. Private limited) receives in any
previous year, from any resident person any consideration for issue of shares
that exceeds the face value of such shares, the difference between the
aggregate consideration received and the fair market value of the shares
shall be taxable under this head.
(11) Any sum of money received as an advance or otherwise in the course of
Negotiations for transfer of a capital asset, if,- (a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset.”.
Dividend income [Section 8]
Dividend
Notes :
1. Indian company is brought to tax on behalf of the shareholders u/s 115-0 therefore
exempt in the hands of the shareholders u/s 10(34) for interim, final & deemed
dividend u/s 2(22) (a) to u/s 2(22)(d).
The shareholder is brought to tax for deemed dividend u/s 2(22)(e) only.
2. Dividend received from a foreign company or a co-operative society is taxable in
the hands of the shareholders u/s 56 i.e. INCOME FROM OTHER SOURCES as
R.O.I. (Return on Investment).
Deemed Dividend
It is a method by which the Income tax Act attempts to plug the loop holes in the Act, or to
check the practice of departing from the natural and ordinary term of “interim dividend”
and “final dividend”, so as to ensure that Government is not deprived of the taxes by way
of any alluring activity which cannot be otherwise brought into the tax net in the ordinary
course.
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Deemed Dividend is taxable to the extent of “Distribution“ or “accumulated profits“
whichever is less. It is essential to know the meaning of accumulated profits (i.e.
the shareholders’ funds).
* Accumulated Profits :
On the basis of different judicial decisions, the following conclusions can be
drawn in respect of accumulated profits :
1. Accumulated profits include all profits of a company upto the date of
distribution or payment. In the case of liquidation of company,
however, it includes all profits upto the date of liquidation.
2. Accumulated profits are computed on the basis of commercial profits and
not on the incomes calculated by assessing officers (except concealed
incomes detected by them).
3. W hi le calculat ing "Accumulated pro f i ts " an al lowance for
depreciation at the rates provided by the Income-tax Act itself has to
be made by way of deduction.
4. Accumulated profits include tax-free income e.g. agricultural income.
However, receipts of capital nature are included in accumulated profits
only if such receipts are chargeable to tax under the head "Capital gains."
5. Accumulated profits include general reserve.
Provisions for taxation and dividends do not form part of accumulated
reserve.
6. Subsidy from government on the basis of investment in capital assets
cannot be treated as accumulated profits.
In Income tax deemed dividend is defined u/s 2(22) as follows:
(a) Distribution of accumulated profits which results into release of all or
any part of the assets of the company (prior to liquidation) to its
shareholders [sec. 2(22)(a)].
(b) (i) Any distribution to the extent of the accumulated profits in the
form of debentures, debenture-stock, deposit certificates in any
form with or without interest to its shareholders. [Sec. 2(22)(b)].
(ii) Any bonus shares to preference shareholders [Sec. 2(22)(b)].
Notes:
If bonus shares of equity shares are issued out of accumulated profits,
then not taxable on receipts of such shares, since such shares will not
be redeemed over the life time of the company.
(c) Any distribution to shareholders on the liquidation of the company to the
extent of distribution attributable to accumulated profits [Sec. 2(22)(c)].
(d) Any distribution on reduction of share capital to the extent the company
possesses accumulated profits [Sec. 2(22)(d)].
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(e) Distribution of accumulated profits excluding capitalized profits (i.e. bonus
shares) by way of advance or loan by a private limited (not being a money
lending or banking company), to its registered shareholder holding at least
10% of the equity capital beneficially on or after 1-6-87.
* The loan amount given to the registered share holder or to any other person
by the private limited company on behalf of, or for the individual benefit of
the registered shareholder, or the accumulated profits as at the date of
loan, whichever is less, is taxable as deemed dividend u/s 2(22)(e) in the
hands of the registered shareholder.
* If loan / advance is given to a concern (firm / company / AOP/ BOP) in which a
registered shareholder (beneficially holding at least 10% of the equity capital) of
the loan giving company, has substantial interest (i.e. 20% or more in the loan receiving
concern), then such a payment is taxable as deemed dividend in the hands of the
registered shareholder u/s 2(22)(e) and not the loan receiving concern.
Deemed Dividend provisions are not applicable u/s 2(22)(e) in the following cases:
(a) Any loans or advance given to the shareholders in the ordinary course of
money lending business .
(b) Any dividend payable to a registered share holder is adjusted against the
outstanding loan [which was considered as deemed dividend in the hands
of the registered shareholder u/s 2(22)(e)], instead of paying it to the
registered shareholder .
Note :
* Such dividend adjusted will not be taxable u/s 115-O (D.D.T) in the hands of
the company.
* Repayment of loan is not considered in the deemed dividend provisions
u/s 2(22) (e).
* If the accumulated profits are say 20 lakhs and one of the registered share
holder “A” beneficially holding at least 10% or more in the voting powers –
takes a loan of 15 lakhs , then entire 15 lakhs is considered as deemed
dividend in the hands of the registered shareholder “A”. Subsequently a
similar registered shareholder “B” takes a loan of 8 lakhs, then deemed
dividend taxable in his hands will be only the remaining accumulated profits
of 5 lakhs u/s 2(22)(e). Subsequently a similar registered shareholder “C”
takes a loan of 4 lakhs , nothing is taxable in his hands u/s 2(22)(e), since
there is no accumulated profit left for taxability.
Now if a company after above, actually distributes “interim” or “final” dividend
out of accumulated profits, nothing would be taxable in its hands u/s 115-0 i.e.
D.D.T in the hands of the company, since such accumulated profits are already
taxed as deemed dividend u/s 2(22)(e) in the hands of the shareholder.
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INCOME FROM OTHER SOURCES
DEDUCTIONS PERMISSIBLE FROM INCOME FROM OTHER SOURCES u/s. 57
(1) Commission or remuneration for realising dividend or interest on
securities : Any reasonable sum paid by way of commission or remuneration to
a banker or any other person for the purpose of realising dividends, other than
dividends referred to in section 115-O or interest on securities on behalf of the
assessee is deductible.
(2) Deduction in respect of employees contribution towards staff welfare schemes :
Deduction in respect of any sum received by a tax payer as contribution from his
employees towards any welfare fund of such employees is allowable only if such sum is
credited by the tax payer to the employees account in the relevant fund on or before the
due date of the fund under the provisions of any law or terms of contract of service or
otherwise. [Similar to sec 36(1)(va)].
(3) Repairs, depreciation in the case of letting out of plant, machinery,
furniture, building : In the case of income chargeable under section 56, the fol-
lowing expenses are deductible :
(a) Current repairs & Insurance premium for building (similar to Sec. 30).
(b) Repairs and insurance of machinery, plant and furniture (similar to sec.31).
(c) Depreciation (similar to sec.32) allowed as wear & tear.
(4) Standard deduction in the case of family pension : In the case of income in the
nature of family pension, the amount deductible is `̀̀̀15,000 or 1/3 of such income, which-
ever is less.
For this purpose "Family pension" means a regular monthly amount payable by the
employer to a person belonging to the family of an employee, in the event of his
death.
(5) In the case of interest received on compensation or on enhanced compen-
sation - a deduction of a sum equal to 50% of such interest income will be allowed
and no other deduction shall be allowed towards the same.
(6) Any other expenses for earning income : Any other expenditure is deductible
under section 57 if the following five basic conditions are satisfied :
(a) The expenditure must be laid out or expended wholly and exclusively
for the purpose of making or earning the income ;
(b) The expenditure must not be in the nature of capital expenditure ;
(c) It must not be in the nature of personal expenses of the assessee ;
(d) It must be laid out or expended in the relevant previous year and not
in any prior or subsequent year ;
(e) It must not be prohibited by law.
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Commissioner of Income tax v Rajendra Prasad Moody (1978)
The Supreme Court held that the expenditure incurred for the purpose of
earning the income shall be allowed as a deduction, even if the source of in-
come has not yielded any income during the previous year. This principle can be
applied only for the expenditure incurred in earning "taxable" income. If the
income is exempt from tax [e.g. dividend income u/s 10(34) and 10(35)],
expenditure incurred towards such exempt income cannot be allowed as a deduction.
What are specific disallowances u/s 58 -The following amounts are not deductible while
computing income under the head "Income from other sources":
(a) Personal Expenses are not deductible.
(b) Interest : Any interest chargeable under the Act which is payable outside India on
which tax has not been deducted at source is not deduct [similar to sec 40(a)].
(c) Salary : Any payment of salaries outside India is not deductible if tax has not
been paid or deducted therefrom [similar to sec 40(a)].
(d) Direct Tax: Any sum paid on account of income -tax / wealth -tax is not deductible,
since they are “application of income “[similar to sec 40(a)].
(e) Amount specified by section 40A: Any amount specified by sections :
* Section 40A(2) - Payment to relatives in excess of market value of goods
or services received.
* Section 40A(3) - Payment in excess of `̀̀̀ 10,000 by cash / bearer cheque
etc. in relation to deduction claimed .
* Section 40A(7) - Contribution to unapproved gratuity fund of employees
* Section 40A - Contribution to unrecognized provident fund of employees
(9,10,11) is not deductible while calculating income under the head
"income from other sources“.
(f) Expenditure in respect of winnings from lottery etc. While computing the afore-
said incomes the following are not deductible :
1. Expenses covered by section 57.
2. Losses cannot be set off under sections 70, 71, 71B, 72,32(2), 73, 73A, 74
and 74A against the aforesaid incomes.
3. No deduction is permissible under sections 80C to 80U (though winnings from
lotteries, etc., form part of gross total income).
4. It is directly taxable @ flat rate 30% u/s. 115BB (TDS is done u/s194B
and 194BB).
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However, the following are deductible.
(a) exemption under section 10(32), i.e. minors income of casual winnings
or `̀̀̀ 1,500, whichever is less.
(b) amount deductible from lottery prize etc. for the benefit of the
Government / agency conducting the lotteries. (Like contribution for
social welfare), since such an amount deducted from casual winnings
has not been received by the assessee.
Income taxable u/s 59: Any subsequent recovery of expenses by assessee in current
year , which were allowed to him as a deduction in the earlier previous year u/s 57, such
subsequent recovery is taxable u/s 59 in the current year because it is reversal of an
expenditure previously allowed by way of considering it income. This is similar to section 41(1).
Other Aspects :
Section 115BBD: Tax on dividends received from foreign companies
(1) When an Indian company receives dividends declared, distributed or paid
by a "specified foreign company", such dividend income shall be taxable in the
hands of the Indian company at the rate of 15% of such dividends.
(2) No deduction of any expenditure shall be allowed to the Indian company under any
provision of the Income tax Act.
(3) (i) Dividend shall have the same meaning under section 2(22)(a) to (d).
(ii) A "specified foreign company" means a foreign company in which them
Indian company holds 26% or more in nominal value of the equity share
capital of the company.
Section 115BBDA: Tax on dividends received from domestic companies
1) Dividends declared by domestic companies u/s 2(22)(a) to 2(22)(d) are covered
by the provisions of D.D.T. u/s 115-0. The basic rate of D.D.T is 15%. This
creates inequality amongst different shareholders as those who earn high
dividend income are being subjected to tax at 15%. If such dividend would have
been taxed for the shareholder, it would been taxed at 30%
2) To remove such inequality, section 115BBDA has been introduced from P.Y.
2016-17, A.Y. 2017-18. If a shareholder, being specified assessee receives
dividends covered by section 2(22)(a) to section 2(22)(d) exceeding Rs. 10 lakhs,
then such dividend shall also be taxable for the shareholder at the rate of 10%.
3) No deduction in respect of expenditure, allowance or set off of losses shall be
allowed from such dividend. This income tax is in addition to the D.D.T. pay-
able by domestic company on such dividend.
4) It is worthwhile to note that this section does not apply to dividend u/s 2(22)(e).
Therefore the rate of tax for dividend u/s 2(22)(e) shall be the normal tax rates
applicable.
Specified assessee means a person other than
domestic company,
institution or trust, university, hospital claiming exemptions under sec.10(23C).
Trust registered under sec. 12A & 12AA.
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INCOME FROM OTHER SOURCES
Method of Accounting
Regarding Dividend Income, the Method of Accounting is irrelevant. Every assessee has
to follow section 8. Final dividend is taxable in the financial year of declaration whereas
interim dividend is taxable in the financial year of receipt.
Computation of any other income depends on the method of accounting.
1) If Mercantile method is followed income should be computed considering income
receivable and expense payable.
2) If Cash method is followed, income should be computed considering only actual
income received & actual expenses paid.
3) If no method is decided by the taxpayer, he is supposed to follow mercantile
method.
(A) Income from composite letting of building, machinery, plant or furniture
as idle capacity let out.
If an assessee lets on hire machinery, plant or furniture and also building
and letting of building is inseparable from letting of machinery, plant or
furniture, income from such letting is taxable as income from other sources,
if the same is not chargeable to tax under the head "Profits and gains of
business or profession", i.e. let out of idle capacity.
This rule is applicable even if the sum receivable for the two lettings is fixed separately.
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INCOME FROM OTHER SOURCES
Q. 1. Mr. X has received the following gifts payments in the previous year 2017-18,
select the taxable amount / not taxable from them.
Amt. recd. Gift / Amount received fromTaxable / Remarks
Non - taxable/
`̀̀̀ 30,000 Gift from Cousin brother
`̀̀̀ 25,500 Gift from Sister's son
`̀̀̀ 40,000 Gift from Sister
`̀̀̀ 25,800 Gift from Sister's daughter's husband
`̀̀̀ 15,000 Gift from Wife's sister's daughter
`̀̀̀ 30,000 Gift from Maternal uncle
`̀̀̀ 10,000 Gift from Grand father
`̀̀̀ 50,000 Gift from Wife's sister's husband
`̀̀̀ 26,000 Gift from Wife's sister's husband's mother
`̀̀̀ 35,000 Gift from Brother of grand father
`̀̀̀ 2,00,000 Gift on the occasion of marriage
`̀̀̀ 60,000 Of concession on the acquisition of capital asset
i.e. immovable property from a friend in relation to
its market value
`̀̀̀ 4,00,000 Worth of jewellery received as gift from a friend
Q. 2. If Mr. A purchased house in year 1 for `̀̀̀ 8,00,000 and transferred /sold the same in
3 independent situations as under.
1. - sold the same for `̀̀̀22,00,000 in year 3.
2. - gifted the same in year 2 to a ‘relative‘ when its F.M.V. was `̀̀̀15,00,000.
Subsequently the relative sold it for `̀̀̀ 22,00,000 in year 3.
3. - gifted the same in year 2 to a ‘friend’ when its F.M.V. was `̀̀̀15,00,000
subsequently the friend sold it for `̀̀̀22,00,000 in year 3.
Compute effects of all 3 situations.
Q. 3. PQR private Ltd. a closely held company, involved in the manufacture of goods,
has given the following independent loans to registered shareholders holding
atleast 10% in the voting powers of PQR private Ltd. beneficially :
(1) To MR. A of `̀̀̀15,00,000 when the general reserve & current profits were
`̀̀̀16,00,000 and `̀̀̀ 8,00,000 respectively.
(2) To MR. B of `̀̀̀ 26,00,000 when the general Reserve & current profi t were
`̀̀̀16,00,000 and `̀̀̀ 8,00,000 respectively.
(3) To XYZ bros. of `̀̀̀ 15,00,000 in which Mr. A share holder of PQR (P) Ltd., is
substantially interested i.e. having 20% or more in the profit sharing in the
loan receiving f i rm, when the general reserve was `̀̀̀18,00,000 of
PQR (P) Ltd..
(4) PQR (P) Ltd. has a general reserve of `̀̀̀15,00,000, and the company has given
a loan of `̀̀̀12,00,000 on 5.5.16 to Mr. A & `̀̀̀ 10,00,000 to MR. B on 6.6.16.
Compute the deemed dividend taxable u/s 2(22)(e) in each of the independent situations.
CLASS WORK PROBLEMS
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INCOME FROM OTHER SOURCES
Q. 4. Ronak Industries Private Limited (RIPL), incorporated in India, gives you the
following details regarding P.Y. 2017-18. Compute income tax payable.
(a) It has invested in shares of Microsoft Ltd., a foreign company, to the extent
of 30% of total equity share capital of the foreign company.
Microsoft Ltd. declared an interim dividend and RIPL received `̀̀̀1,20,000/-
on 28.2.2018. Collection charges incurred `̀̀̀ 5,000 and interest on loan to
purchase above shares `̀̀̀ 40,000/-.
(b) It also received dividend from Nissan Inc. Ltd., another foreign company, of
`̀̀̀ 65,000. The shareholding of RIPL in this foreign company is 15%. Collection
charges `̀̀̀ 1,300 and interest on loan to purchase above shares `̀̀̀ 20,000/-.
(c) Dividend from shares of Reliance Industries Ltd. `̀̀̀ 60,000/-.
(d) Its income from business computed as per I.T. provisions is `̀̀̀ 95,00,000/-
and income from house property (computed) is `̀̀̀ 30,00,000/-.
(e) It issued 50,000 equity shares of face value of `̀̀̀ 10 per share at a premium
of `̀̀̀ 60 per share to various resident persons. The fair market value of the
share as per prescribed rule is `̀̀̀ 50 per share.
Q. 5. Dr. Eknath is a Professor of Taxation and is a resident of India. He submits before
you the following detail for computing his income under the head 'Income from
other sources' for the assessment year 2018-2019 :
1. He is a author of a text book of a school which fetched him a gross royalty of
`̀̀̀ 1,50,000. He claims the following deductions from this amount:
(a) Salary to a clerk who collects for him necessary data and goes through
the final proofreading `̀̀̀ 5,000.
(b) Purchased books worth `̀̀̀ 4,000 in connection with the revision of the book.
(c) Telephone expenses of `̀̀̀ 2,000 attributed to the publication and sale
of his book and other matters in connection with the printing of the
new edition of the book.
2. He borrowed `̀̀̀ 24,00,000 on 1.4.2017 from a Bank @ 18% p.a. He invested
the money in the purchase of plot of land meant to be let out on hire. During
the year, no rental income was received from the land. He, however, claimed
that the interest paid to the bank must be allowed as an expense.
3. He lives in a rented house paying rent of `̀̀̀10,000 p.m. The house is too big
for his family. Hence he has sub - let one - third portion of the house on a rent
of `̀̀̀ 7,000 p.m. Dr. Eknath has undertaken the liability of paying municipal
taxes of `̀̀̀ 5,400 on the whole house and also the current repair of the whole
house amounting to `̀̀̀ 6,000.
4. He gets a family pension of `̀̀̀12,500 p.m. He is an examiner of a number of
Universities. This source gave him a remuneration of `̀̀̀ 24,000.
5. He owns race horses, the expenses on their maintenance are `̀̀̀ 1,20,000. He has
earned stake money of `̀̀̀ 9,00,000 when one of the horses stood first in the race.
6. He has received dividend of `̀̀̀ 40,000 from mutual fund notified u/s 10(23D)
and dividend from co-operative society `̀̀̀ 10,000/-.
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INCOME FROM OTHER SOURCES
Q. 6. Mr. Chaturvedi, R & OR, gives following information regarding his income in
P.Y. 2017-2018.
(A) Dividend Income Details
(1) He has earned a dividend of `̀̀̀1,20,000 from Britney Ltd., Canada &
he has recorded fo llowing expenses to earn this div idend :
(Equity Shareholding = 35%)
Interest on loan taken to invest in above shares sent abroad without TDS ` ` ` ` 60,000
Interest on loan (taken to invest in above shares) paid in India by cash `̀̀̀ 70,000
Collection Charges to realise dividend warrants `̀̀̀ 140
(It is Final dividend declared in AGM held on 1 March 2017 at Torronto but
received on 10 April 2017. Chaturvedi follows Cash System of accounting
regarding dividend incomes).
(2) Dividend from Shares in Saraswat Co-op Bank (held as stock-in-trade)
`̀̀̀ 15,000.
(3) He has taken a loan from Kalasangam Private Limited in which he is 15%
equity shareholder. The loan amount is `̀̀̀ 6,00,000 & accumulated prof-
its of the company are `̀̀̀ 45,60,000.
(B) Interest Income details :
(a) Interest earned on Govt. Bonds `̀̀̀ 1,23,000 (held as stock in trade)
(b) Interest on Income tax refund `̀̀̀ 2,000 & income tax refund `̀̀̀ 20,000.
(C) Other Income details :
(i) Winning from Lottery `̀̀̀ 70,000 Net (Tax deducted at Source `̀̀̀ 30,000)
(He claims the cost of lottery tickets `̀̀̀ 20,000 as expenses)
(ii) He has received `̀̀̀12,00,000 on assignment & immediate surrender
of Key man Insurance Policy. (On resignation as head of Sales Department).
(iii) He received `̀̀̀ 5,000 on his birthday from each of his eleven friends
and a diamond ring of `̀̀̀ 5,00,000/- from his wife.
You are required to calculate Income from Other Sources for Assessment
Year 2018-2019.
Q. 7.What is the priority of set off of minimum exemption limit applicable against N.T.T.I ?
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
INCOME FROM OTHER SOURCES
Ans.3. (1) This is deemed dividend u/s 2(22)(e) in the hands of Mr. A,a
registered shareholder, holding atleast 10% in the voting powers ben-
eficially, of `̀̀̀ 15,00,000, since the accumulated profits are more than
`̀̀̀ 15,00,000. i.e `̀̀̀ 24,00,000.
(2) This is deemed dividend in the hands of Mr. B a registered shareholder,
holding atleast 10% in the voting powers beneficially, u/s 2(22)(e) of
`̀̀̀ 24,00,000, since the accumulated profits are 24,00,000, thus restricted
to such an extent, even though the loan amount is `̀̀̀ 26,00,000.
(3) This is deemed dividend of `̀̀̀ 15,00,000 in the hands of Mr. A
u/s 2(22)(e), since Mr. A is a registered shareholder of PQR(P) Ltd.
holding atleast 10% in the voting powers beneficial ly, and is
substantially interested in the loan receiving organization. This is so
because the accumulated profits of PQR(P) Ltd. is `̀̀̀ 18,00,000.
(4) Deemed Dividend of `̀̀̀ 12,00,000 in the hands of Mr. A, a registered
shareholder, holding atleast 10% in the voting powers beneficially, on
5.5.2015, since the accumulated profits at this moment of time are
`̀̀̀ 15,00,000.
(5) Deemed Dividend of `̀̀̀ 3,00,000 in the hands of Mr. B a registered
shareholder, holding atleast 10% in the voting powers beneficially, on
6.6.2015 although the loan amount is `̀̀̀10,00,000, since the
accumulated profits that remains now as at 6.6.2015 is `̀̀̀ 3,00,000
( `̀̀̀15,00,000 total `̀̀̀12,00,000 taken for A).
Ans.4. Ronak Industries Private Limited
Computation of Total Income and tax liability for A.Y. 2018-2019
Particulars `̀̀̀
Income from House Property 30,00,000
Income from Business 95,00,000
Income from Other Sources (W.N.) 11,63,700
GROSS TOTAL INCOME (G.T.I.) 1,36,63,700
Less: Deductions u/s. 80C to 80U NIL
NET TAXABLE TOTAL INCOME (N.T.T.I.) 1,36,63,700
TAX LIABILITY
Basic Tax on:
- Dividend u/s. 115BBD `̀̀̀ 1,20,000 @ 15% 18,000
- Other income `̀̀̀ 1,35,43,700 (balancing figure) @ 30% 40,63,110 40,81,110
Add: Surcharge @ 7% of basic tax 2,85,678
Total 43,66,788
Add: Education cess @ 3% 1,31,004
TAX PAYABLE 44,97,792
CLASSWORK SOLUTION
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INCOME FROM OTHER SOURCES
W.N. Income from Other Sources
Particulars ` `` `` `` `
Dividend from shares of :
- Microsoft Ltd. (Note) 1,20,000
- Nissan Inc Ltd. 65,000
Less: Expenses u/s. 57
(a) Collection charges (1,300)
(b) Interest on loan (20,000) 43,700
- Reliance Industries Ltd., exempt u/s. 10 (34) NIL
Issue of equity shares to residents at premium
[(10 + 60)/ share – 50/ share] x 50,000 shares 10,00,000
INCOME FROM OTHER SOURCES 11,63,700
Note: The dividend received from Microsoft Ltd. (foreign company) by R.I.P.L.
(Indian Company) is covered by the provision of Sec. 115BBD and hence it shall
be taxable at 15% without allowing any deduction for expenses incurred.
Ans. 5. Dr. Eknath
Computation of Income from Other Sources for A.Y. 2018-2019
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INCOME FROM OTHER SOURCES
Ans.7.The basic exemption limit applicable shall be first applied towards incomes other
than capital gains and casual winnings (i.e. normal incomes taxable as per slab
rates). The normal income in excess of basic exemption limit shall be taxable as
per slab rates. Capital gains and Casual winnings shall be taxable as per the ap-
plicable special rate.
When the normal incomes (taxable as per slab rates) is less than the basic ex-
emption limit applicable, the difference between the normal income and exemp-
tion limit is called as "Unabsorbed Exemption Limit." Such unabsorbed limit shall
be adjusted towards STCG u/s. 111A or LTCG u/s. 112, whichever has a higher tax
rate. The balance capital gains shall be taxed as per the applicable special rate.
Such unabsorbed exemption limit cannot be adjusted against casual winnings.
Casual winnings shall be fully taxable at the rate of 30%.
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INTRODUCTION :
Generally, an assessee is taxed in respect of his own income. In some cases, however, the Income-tax Act deviates from this principle and the assessee may be taxed in respect of income which legally belongs to some other person. Provisions incorporated in sections 60 to 65 deal with cases where taxpayers make an attempt to reduce their tax liability by transferring their assets in favour of their family members or by arranging their sources of income in such a manner that tax incidence falls on others, whereas benefit of income, directly or indirectly, is derived by them. In order to counteract these practices of tax avoidance, necessary provisions have been made in sections 60 to 65 to tax the incomes in the hands of an individual, even though such incomes belong to other persons. This is called as clubbing of income.
SECTION 60 - TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET
Section 60 is applicable if the following conditions are satisfied —
Condition 1 The taxpayer owns an asset.
Condition 2 The ownership of asset is not transferred by him.
Condition 3 The income from the asset is transferred to any person under a settlement, trust, covenant, agreement or arrangement.
Condition 4 The above transfer of income may be revocable or irrevocable.
Condition 5 The above transfer may be effected at any time (maybe before the commencement of the Income-tax Act or after the commencement of the Act, i.e., before or on or after April 1,1962).
If the above conditions are satisfied, the income from the asset would be received by the transferee but it shall be clubbed in the hands of the transferor i.e. it will be included in the taxable income of the transferor.
Example
X owns land, he transfers rental income to Y, his friend, without transferring the ownership of this land. Although, during P.Y. 2016-17, rent of Rs. 96,000 is received by Y, it is taxable in the hands of X, as he has transferred income without transferring the ownership of the asset.
SECTION 61 - REVOCABLE TRANSFER OF ASSETS
If an asset is transferred under a “revocable transfer”, income from such asset is taxable in the hands of the transferor. In case of a revocable transfer, the ownership of the asset is transferred to the transferee, but the transfer is cancellable at any time by the transferor. Since the asset is with the transferee, the income from the asset will be received by the transferee during the previous year. However, such income shall be clubbed in the hands of the transferor.
It may be noted that the income is taxable for the transferor as and when the power to revoke arises, even if the power to revoke has not been exercised by the transferor.
SECTION 62 - IRREVOCABLE TRANSFER OF ASSETS FOR A SPECIFIED PERIOD
In the following cases, the transfer of assets shall be treated as irrevocable for the period mentioned therein (called as “specified period”). In other words, the power to
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revoke or cancel the transfer arises to the transferor only after the specified period is over. The cases covered are as follows- (a) The transfer of asset is made before 1st April 1961 and is irrevocable for a
period of atleast 6 years. (b) The transfer of asset is irrevocable during the lifetime of the transferee. (c) The transfer of asset is made to a trust and is irrevocable during the lifetime of
the beneficiary/ beneficiaries.
In the above cases, the transferor should not derive any direct or indirect benefit from the income from the asset during the specified period.
During the specified period, the income from the asset shall be taxable for the transferee. After the specified period is over, the income from the asset shall be clubbed with the transferor.
Sr. No.
Situation Tax implication
1 X transfers a house property to a trust for the benefit of A and B. However, X has a right to revoke the trust during the lifetime of A and/or B.
In this case, the house property is transferred under a trust and it is revocable during the lifetime of the beneficiary. It is a revocable transfer and income arising from the house property is taxable in the hands of X.
2 X transfers a house property to A. X has a right to revoke the transfer after the death of A.
In this case, the house property is transferred to a person and it is irrevocable during the lifetime of transferee. Income arising from the house property is taxable in the hands of A during his lifetime and after death of A, income shall be taxable for X.
3 X transfers debentures to A in PY 2010-2011. X has a right to revoke the transfer after 10 years.
In this case, the debentures are transferred to a person and it is not irrevocable during the lifetime of transferee. It is revocable after a fixed period. Since the given case does not get covered by section 62, it is regarded as a “revocable transfer” and income arising from the debentures is taxable in the hands of X as per section 61.
4 X transfers an asset to Y on January 1, 1960. It is revocable on or before June 6, 1965. It is a revocable transfer.
In this case, the asset is transferred before April 1, 1961 but it is revocable within six years. Income arising from the asset is taxable in the hands of X.
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5 X transfers an asset to Y on April 1, 1958. It is revocable on or after March 31, 2018.
It is an irrevocable transfer as the transfer was made before 1-4-1961 and is irrevocable for atleast 6 years (in this case, 60 years). Income arising from the asset upto 31st March 2018 is taxable in the hands of Y. Thereafter the income will be taxable for X, even if the power to revoke has not been exercised.
6 X transfers an asset to Z. Under the terms of transfer, on or after April 1, 2014, he has a right to utilize the income of the asset for his benefit. However, he has not exercised this right as yet.
If the transfer contains any provision to re-transfer the asset (or income therefrom) to the transferor directly or indirectly, wholly or partly, such a transfer cannot be regarded as an irrevocable transfer u/s. 62. It will be considered as a “revocable transfer” u/s. 61. On or after April 1, 2014, income of the asset would be taxable in the hands of X, even if he has not exercised the aforesaid right.
WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF REMUNERATION OF SPOUSE [SEC. 64(1)(ii)]
Section 64(1)(ii) is applicable if the following conditions are satisfied —
Condition 1 The taxpayer is an individual.
Condition 2 He/she has a substantial interest in a concern.
Condition 3 Spouse of the taxpayer (i.e., husband/ wife of the taxpayer) is deriving salary, fees, commission or remuneration from the above-mentioned concern.
Condition 4 Spouse does not possess any technical or professional knowledge or experience.
If the aforesaid conditions are satisfied, then salary, fees, commission or remuneration of the spouse will be clubbed in the hands of the taxpayer.
Example
X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification to justify the remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X.
Other points : One has to keep in view the following points —
(a) Meaning of Substantial Interest: An individual has a “substantial interest” in any of the following two situations —
(i) In the case of a company - If the individual beneficially holds (individually or along with his relatives) atleast 20 per cent of voting power in the company at any time during the previous year.
(ii) In the case of a concern other than company - If an individual is entitled to atleast 20 per cent share in profit in the concern (individually or along with his relatives) at any time during the previous year.
(b) Relative- Relative, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
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(c) Concern: The expression “concern” covers both business concern and professional concern and both proprietary and non-proprietary concerns.
(d) If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being heard.
TWO WAY CLUBBING: When both husband and wife have substantial interest in a concern, both are in receipt of the remuneration from such concern and such remuneration is received without any technical and professional qualification, then both the remunerations will be clubbed in the hands of husband or wife whose total income, excluding such remuneration, is greater.
Question: X holds 30 per cent equity share capital in Y Ltd. Mrs. X is employed by Y Ltd. (salary being Rs. 1,40,000 per month) as general manager (finance). She does not have any professional qualification to justify the remuneration. Ascertain in whose hands salary income is chargeable to tax. Does it make any difference if Mrs. X was employed by Y Ltd. even prior to her marriage?
Solution: In this case, X has substantial interest in Y Ltd. where Mrs. X is employed. Mrs. X does not have any professional qualification to justify the remuneration of Rs. 1,40,000 per month. Her salary income of Rs. 16,80,000 (i.e., Rs. 1,40,000 x 12) will be taxable in the hands of X. It does not make any difference even if Mrs. X was employed by Y Ltd. prior to her marriage.
WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1)(iv)]
The following conditions should be satisfied —
Condition 1 The taxpayer is an individual.
Condition 2 He/she has transferred an asset (other than a house property).
Condition 3 The asset is transferred to his/her spouse for no consideration or inadequate consideration.
Condition 4 The transfer may be direct or indirect.
If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the individual who is the transferor of the asset.
It is irrelevant whether the asset is held by the transferee-spouse in the same form or in a different form. For instance, where cash is gifted by an assessee to his wife and the wife purchases debentures using such cash, interest income is included in the assessee’s total income.
Example
X transfers 100 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X.
The income from asset transferred must be calculated in the same way as it would be if the asset has not been transferred. Exemptions, deductions or tax incentives in respect of such income shall be allowed to the transferor and only the net income shall be clubbed.
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ANALYSIS OF CONDITIONS
Condition 1 - Asset is transferred by an individual : This provision of clubbing is applicable if the transferor is an individual (i.e., husband or wife). If the transferor is a person other than an individual then the above provisions are not applicable.
Condition 2 - An asset other than a house property is transferred : To attract this section, an asset other than a house property should be transferred. If a house property is transferred for no or inadequate consideration, then the transferor is “deemed” as owner of the property under section 27.
Condition 3 - Relationship of husband and wife: The relationship of husband and wife should subsist both at the time of transfer of asset and at the time when income is accrued (generally at the end of the previous year). It means that transfer of asset before marriage is outside the scope of this section.
For instance, X transfers 1,000 debentures of IFCI without consideration to his fiancee Miss Y on April 10, 2014. Interest income from these debentures will not be taxable in the hands of X even after their marriage.
Similarly, if transferor-spouse dies, the income, although continued to be enjoyed by the transferee, cannot be included in the income of deceased transferor’s heir, as a widow or widower is not a spouse.
Condition 4 - Transfer includes “indirect” transfer: If two or more transfers are inter-connected and are parts of the same transaction, the aforesaid rule of clubbing is applicable.
For instance, if X gifts or cross transfers Rs.10,000 to Mrs. A and A gifts property worth Rs.10,000 to Mrs. X, the transaction would be indirect transfer without consideration by X to Mrs. X and by A to Mrs. A. The clubbing provisions shall apply in the same manner in which they would have applied in case of direct transfer.
If an individual transfers an asset without consideration to his wife who sells it at a profit, capital gain arising to wife on sale of asset is chargeable to tax in the hands of the individual.
CLUBBING WHEN TRANSFERRED ASSET IS INVESTED IN A BUSINESS: An asset (maybe in cash or kind) is transferred by individual to his/her spouse (directly or indirectly) for no or inadequate consideration. The spouse invests the asset in a business. The amount of income that will be clubbed in the hands of the individual will be determined as follows —
Step one Find out total investment of transferee-spouse in the business on the first day of the previous year.
Step two Find out the amount invested by the transferee-spouse in the said business out of the assets transferred to him/her for no or inadequate consideration by the individual on the first day of the previous year.
Step three Find out the taxable income (exempt income is not included) of the transferee-spouse from the business. If the transferee-spouse becomes a partner of a firm by investing the aforesaid asset then only interest income from the firm is considered under Step three. Share of profit from the firm is not considered under Step three as it is exempt under section 10(2A).
Step four The amount which shall be included in the hands of transferor is determined as follows — Step three x Step two ÷ Step one.
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When clubbing is not applicable : On the basis of the aforesaid discussion and judicial pronouncements, section 64(1)(iv) is not applicable in the following cases and the income will be taxable for the spouse:
� If assets are transferred before marriage.
� If assets are transferred for adequate consideration.
� If assets are transferred in connection with an agreement to live apart.
� If on the date of accrual of income, transferee is not spouse of the transferor.
� If asset is acquired by the spouse out of pin money
� Income arising from accretions to transferred assets. If an assessee gifts debentures of a company to the spouse and, subsequently, the company issues bonus debentures to the spouse, interest on bonus debentures will not be includible in the hands of the assessee under section 64(1)(iv) as there is no transfer of bonus debentures by the assessee to the spouse.
WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64(1)(vi)]
One has to satisfy the following conditions —
Condition 1 The taxpayer is an individual.
Condition 2 He/she has transferred an asset.
Condition 3 The asset is transferred to his/her son’s wife for no consideration or inadequate consideration.
Condition 4 The transfer may be direct or indirect.
If the above conditions are satisfied, then income from the asset is included in the income of the taxpayer who has transferred the asset.
WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64(1)(vii)]
One has to satisfy the following conditions—
Condition 1 The taxpayer is an individual.
Condition 2 He/she has transferred an asset.
Condition 3 The transfer may be direct or indirect.
Condition 4 The asset is transferred to a person or an association of persons for no or inadequate consideration.
Condition 5 It is transferred for the immediate or deferred benefit of his/her spouse.
If the aforesaid conditions are satisfied then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64(1)(viii)]
One has to satisfy the following conditions —
Condition 1 The taxpayer is an individual.
Condition 2 The asset is transferred to any person or an association of persons for no or inadequate consideration..
Condition 3 Transfer may be direct or indirect.
Condition 4 The asset is transferred for the immediate or deferred benefit of his/her son’s wife.
If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the income of the taxpayer who has transferred the asset.
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WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME OF HIS MINOR CHILD [SEC. 64(1A)]
All income which arises or accrues to the minor child shall be clubbed in the income of his parent.
Clubbing in the hands of father or mother: The income of minor will be included in the income of that parent whose total income [excluding the income includible under section 64(1A)] is greater.
The following points should be noted —
1. A is minor child of X and Mrs. X. During P.Y. 2017-18, income of A is Rs. 2,500 (this is the first income of A during his life time). During P.Y. 2017-18 income of X is higher than that of Mrs. X. Consequently, income of A will be included in the income of X for P.Y. 2017-18. In the subsequent years (during the minority of A), income of A will be included in the income of X, even if income of Mrs. X is higher than that of X in any of the subsequent years. However, there is one exception. If in the subsequent year, the Assessing Officer wants to include the income of minor child A in the hands of Mrs. X, it can be done only if it is necessary to do so and that too after giving an opportunity of being heard to Mrs. X.
2. Where the marriage of the parents does not subsist, the income of minor will be includible in the income of that parent who maintains the minor child in the relevant previous year.
When clubbing is not attracted: In the cases given below, clubbing provisions of section 64(1A) are not applicable —
1. Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U is not subject to clubbing provision given above.
2. Income of minor child on account of any manual work.
3. Income of minor child on account of any activity involving application of his skill, talent or specialized knowledge and experience.
Exemption under section 10(32): In case the income of an individual includes an income of his or her minor child in terms of section 64(1A), such individual shall be entitled to a maximum exemption of Rs. 1,500 in respect of each minor child.
SECTION 65 – POWER OF ASSESSING OFFICER TO RECOVER TAX FROM TRANSFEREE
The Assessing Officer has the power for the recovery of tax from the person to whom the income actually accrued if the Assessing Officer so desires.
General Rule of computation for clubbing of income u/s. 60 to 64
First compute the income in the hands of the actual recipient under the relevant head of income as if the actual recipient of income is liable to pay tax. All the deductions, exemptions, reliefs, allowances etc shall be allowed as per Income Tax Act. The net income shall be included under the same head of income in the hands of other person.
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CLUBBING OF INCOME
Q. 1. Mrs. G holds 7% equity shares in B Ltd., where her married sister, Mrs. N also
holds 14% equity shares. Mr. G is employed with B Ltd., without holding technical
professional qualification. The particulars of their income for the Previous Year
2017-2018 are given as follows:
Income of Income of
Mr. G Mrs. G
`̀̀̀ `̀̀̀
(i) Gross Salary from B Ltd. 2,02,000 ----
(ii) Dividend from B Ltd. --- 6,000
(iii) Income from House Property 90,000 ----
Q.2. The following are the particulars of income earned by Mr. Chandrapal and his
family members :
Particulars `̀̀̀
(i) Income from Chandrapal’s profession 2,50,000
(ii) Mrs. Chandrapal’s salary as primary teacher 1,06,000
(iii) Minor son Arav (interest on fixed deposits with a bank which
were gifted to him by his uncle) 12,000
(iv) Arav also has income by way winnings from lottery (gross) 2,20,000
(v) Minor daughter Pallavi’s earnings from sports 1,05,000
(vi) Cash gift received by minor married daughter Garima
from friend of Mrs. Chandrapal 55,000
(vii) Income of minor son Arvind, who suffers from disability
specified in section 80U 1,20,000
Discuss the tax implications in the hands of Mr. Chandrapal and Mrs. Chandrapal.
Q.3. Mr. Ramesh gifted a sum of 5 lacs to his brother ’s minor son on 16-4-2017. On
18-4-2017, his brother gifted debentures worth 6 lacs to Mrs. Ramesh. Son of
Mr. Ramesh’s brother invested the amount in fixed deposit with Bank of in India
9% p.a. interest and Mrs. Ramesh received interest of 45,000 on debentures
received by her.
Discuss the implications under the provisions of the Income-tax Act. 1961.
Q. 4. R held 12% shares in a private limited company. He gifted all the shares to his
wife, Mrs. R on 1.11.2011. Mrs. R obtained a loan of 2,17,000 on 4.11.2017 from
the company when the accumulated profits were 1,16,000.What are the tax
implications of the above transactions?
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CLUBBING OF INCOME
Q. 5. A Proprietary Business was started by Smt. Rani in the year 2010. As on 1.4.2016
her capital in business was 3,00,000.
Her husband gifted 2,00,000, on 10.4.2016, which amount she invested in her
business on the same date. She earned profits from her proprietary business for
the Financial Year 2016-17 1,50,000 and Financial Year 2017-18 3,90,000.
Compute the income to be clubbed in the hands of Rani's husband for the
A.Y. 2018-2019 with reasons.
Q. 6. Mr. Ram gifted 20,00,000 to his wife. She purchased a house worth 50,00,000.
The source of funds were :
(i) 20,00,000 gift from her husband.
(ii) 10,00,000 personal assets.
(iii) 20,00,000 loan from a private party on interest of 10% p.a.
She rented the building at 80,000 per month. After payment of the Interest on
Loan, she invested surplus amount of rental income with a merchant, which yielded
an interest income of 70,000.
The Assessing Officer wants to add the rental income and interest income in the
income of her husband. Is the Assessing Officer justified in his action?
Q. 7. Divya is born on 7.6.2003. Her betrothal took place on 5.3.2017. On the said day she
received cash gifts of 50,000 each from her father, father's mother, father's father,
mother, mother's mother, and mother's father. All the six relatives made similar gifts on
the day of marriage i.e., on 1.4.2017. The amount so received is deposited in a private
limited company in which her husband has substantial interest. For the year ending
31.3.2018, the company has paid her interest @ 14% i.e. 84,000.
Discuss how this income will be assessed to income-tax.
Q. 8. Mr. & Mrs. X own the following house properties
Place owner M.V Rent pm M.T paid Occupancy
Mumbai X 2,00,000 20,000 40,000 Let out
Panvel X 1,50,000 N A 12000 SOP
Thana Mrs. X 2,20,000 N A 20,000 Mrs. X Parents SOP
Bengaluru Mrs. X 1,80,000 21,000 22,000 Let out
Note: Thane house owned by Mrs X is gifted by Mr. X in the year 05-06, Whereas
Bengaluru house is acquired by cash gifted by Mr. X in the year 07-08.The Interest
on loan for Thana house is `̀̀̀1,20,000 and for Panvel house is `̀̀̀2,60,000/-.
Compute Income from house property in the hands of Mr. X and Mrs. X.
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CLUBBING OF INCOME
Q. 9. On 21-3-2017 Mr. Janak gifted to his wife Mrs.Thilagam 200 listed shares, which had
been bought by him on 19.4.2013 at `̀̀̀ 2,000 per share. On 1.6.2017, bonus shares
were allotted in the ratio of 1 : 1. All these shares were sold by Mrs.Thilagam as under:
Date of sale Manner of sale No. of Net sales
shares Value ( `̀̀̀)
21-5-2017 Sold in recognized stock exchange, STT paid 100 2,20,000
21-7-2017 Private sale, to an outsider All bonus 1,250
shares per share
28-2-2018 Private sale, to her friend Mrs. Hema 100 1,70,000
(Market value on this date was `̀̀̀ 2,40,000)
Briefly state the income tax consequences in respect of the sale of the shares by
Mrs.Thilagam, showing clearly the person in whose hands the same is chargeable, the
quantum and the head of income in respect of the above transactions. Detailed
computation is not required.
Net Sales value represents the amount credited after all taxes, levies, brokerage,
etc.,and the same may be adopted for computing capital gains.
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CLUBBING OF INCOME
Ans.1. Computation of Total Income of Mr. G & Mrs. G for the A.Y. 2018-2019.
Particulars Mr. G `̀̀̀ Mrs. G `̀̀̀
Gross Salary 2,02,000
Taxable Salary to be included in the total income of ---- 2,02,000
Mrs G [Sec. 64 (i) (iii)]
Add : Income from House Property 90,000
Add: Income from Other Sources : Dividends to
Mrs.G, but exempt under Sec. 10(34) ---- ----
Total Income 90,000 2,02,000
Note :
1. In the Instant case, Mrs. G along with his sister, holds substantial in B Ltd, and
Mr. G does not hold professional qualification. Accordingly, remuneration of Mr.
G has been included in the total income of Mrs. G.
2. If the requisite conditions of clubbing are satisfied, clubbing provision will apply
even if their application results into lower incidence of tax.
Ans. 2.
As per the provisions of section 64(1A), in case the marriage of the parents subsist,
the income of a minor child shall be clubbed in the hands of the parent whose total
income, excluding the income of the minor child to be clubbed, is greater. In this prob-
lem, it has been assumed that the marriage of Mr. Chandrapal and Mrs. Chandrapal
subsists.
However, in case the income arises to the minor child on account of any manual work
done by the child or as a result of any activity involving application of skill, talent, spe-
cialized knowledge or experience of the child, then, the same shall not be clubbed in
the hands of the parent.
Further, the income of minor child suffering from disability of the nature specified under
section 80U shall also not be included in the hands of parents.
Tax implications
(i) Income of `̀̀̀ 2,50,000 from Mr. Chandrapal’s profession shall be taxable in the
hands of Mr. chandrapal under the head ‘Profits and gains of business or
profession’.
(ii) Salary of `̀̀̀1,06,000 received by Mrs. Chandrapal as a Primary teacher shall be
taxable as ‘Salaries’ in the hands of Mrs. Chandrapal.
(iii) Income from fixed deposit of `̀̀̀ 12,000 arising to the minor son Arav, shall be
clubbed in the hand of the father, Mr. Chandrapal as “Income from other sources”.
since Mr. Chandrapal’s income is greater than the income of his wife before
including the income of the minor child.
As per section 10(32), income of a minor child which is includible in the income of
the parent shall be exempt to the extent of `̀̀̀ 1,500 per child. The balance income
would be clubbed in the hand of the parent as “ Income from other sources”.
Therefore, `̀̀̀ 10,500 would be clubbed in the hands of Mr.Chandrapal.
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CLUBBING OF INCOME
(iv) income of `̀̀̀ 2,20,000 arising to minor son Aray from lottery shall be included in
the hands of Mr. Chandrapal as “Income from other sources”’ since Mr.
Chandrapal’s income is greater than the income of his wife before including the
income of minor child.
Note – Mr. Chandrapal can reduce the tax deducted at source from such lottery
income while computing his net tax liability.
(v) Income of `̀̀̀ 1,05,000 arising to the minor daughter Pallavi from sports shall not
be included in the hands of the parent, since such income has arisen to the mi-
nor daughter on account of an activity involving application of her skill.
(vi) The clubbing provisions are attracted even in respect of income of minor mar-
ried daughter. As per section 56(2)(vii), cash gifts received from any person/
persons exceeding `̀̀̀ 50,000 during the year in aggregate is taxable. Since the
cash gift in this case exceeds `̀̀̀ 50,000, the amount of `̀̀̀ 55,000 shall be tax-
able under section 56(2)(vii). This amount shall be clubbed in the hands of Mr.
Chandrapal and exemption under section 10(32) of `̀̀̀ 1,500 per child shall be
allowed in his hands.
(vii) Income of minor son Arvind, who suffers from disability specified under section
80U, shall not be included in the hands of either of his parents.
Ans.3. In the given case, Mr. Ramesh gifted a sum of `̀̀̀ 5 lacs to his brother’s minor son on
16-4-2017 and simultaneously, his brother gifted debentures worth `̀̀̀ 6 lacs to Mr.
Ramesh’s wife on 18-4-2017. Mr. Ramesh’s brother’s minor son invested the gifted
amount of ̀ 5 lacs in fixed deposit with Bank of India.
These transfers are in the nature of cross transfers. Accordingly, the income from the
assets transferred would be assessed in the hands of the deemed transferor because
the transfers are so intimately connected to form part of a single transaction and each
transfer constitutes consideration for the other by being mutual or otherwise.
As per section 64(1A), all income of a minor child is includible in the hand of the parent,
whose total income, before including minor’s income is higher. Accordingly, the inter-
est income arising to Mr. Ramesh’s brother’s son from fixed deposits would be
included in the total income of Mr. Ramesh’s brother, assuming that Mr. Ramesh’s broth-
er’s total income is higher than his wife’s total income, before including minor’s
income. Mr. Ramesh’s brother can claim exemption of `̀̀̀ 1,500 under section 10(32).
Interest on debentures arising in the hands of Mrs. Ramesh would be taxable in the
hands of Mr. Ramesh as per section 64(1)(iv).
This is because both Mr. Ramesh and his brother are the indirect transferors of the
income to their spouse and minor son, respectively, with an intention to reduce their
burden of taxation.
In the hands of Mr. Ramesh Interest received by his spouse on debentures of `̀̀̀5 lacs
alone would be included and not the entire interest income on the debentures of ` ` ` ` 6
lacs, since the cross transfer is only to the extent of `̀̀̀ 5 lacs.
Hence, only proportional interest (i.e., 5/6th of interest on debentures received) `̀̀̀ 37,500
would be includible in the hand of Mr. Ramesh.
The provisions of section 56(2)(vii) are not attracted in respect of sum of money transferred
of value of debentures transferred, since in both the cases, the transfer is from a relative.
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CLUBBING OF INCOME
Ans.4. Gift of shares by Mr. R to Mrs. R is a non-taxable transfer for Mr.R. The
shares received are not taxable for Mrs. R too as they are received from
a "relative" [spouse of individual].
The loan obtained from the private limited company would be taxable as
dividend u/s 2(22)(e) since all the conditions are fulfilled. However, since
the shares have been gifted, such dividend income will be clubbed in the
hands of Mr. R u/s 64(1)(iv) of ` ` ` ` 1,16,000.
Ans. 5. There will be no clubbing of income in the hands of Rani’s husband for
P.Y. 2016-2017 since the gift amount has been invested by Smt. Rani in the
business during P.Y. 2016-17 and not on the first day of the year. The
entire profit of `̀̀̀ 1,50,000 shall be taxable for Smt. Rani.
The profit for P.Y. 2017-2018 shall be clubbed in the hands of Rani’s
husband u/s. 64(1)(iv) as follows:
Total investment in business on 1-4-2017
Opening Balance on 1-4-2016 3,00,000
Add: Gift amount invested in business on 10-4-2016 2,00,000
Add: Profit for P.Y. 2016-2017 1,50,000
Closing Balance on 31-3-2017 i.e. Balance on 1-4-2017 6,50,000
Amount to be clubbed =
Gift amount invested in business on the first day of P.Y. x Taxable Profits
Total investment in business on the first day of P.Y.
= ` ` ` ` 2,00,000
x `̀̀̀ 3,90,000 = `̀̀̀ 1,20,000`̀̀̀ 6,50,000
Amount taxable for Smt. Rani= `̀̀̀ 3,90,000 – `̀̀̀ 1,20,000 = `̀̀̀ 2,70,000/-
Ans.6. Mr. Ram has gifted cash which was subsequently utilized to purchase a house
property. So the provision of deemed owner shall not apply. The rent income
from the property shall be clubbed in the hands of Mr. Ram u/s. 64(1)(iv).
The interest income is generated out of investment of surplus rent income. This
implies that interest is “Income on already clubbed Income” and accordingly
cannot be clubbed in the hands of Mr. Ram. The interest shall be taxable for Mrs. Ram.
Ans. 7. Such interest income will be clubbed u/s 64(1A) in that parent’s hands whose
income prior to such clubbing is higher, after allowing exemption u/s 10(32)
of 1,500 or the income clubbed (whichever is least).
Even if the amount is invested in an organisation in which her husband is
substantially interested, the clubbing provisions u/s 64(1)(ii) will not be
attracted as interest is not remuneration but return on investment. The
amount invested by Divya is not gifted by her husband and hence,
clubbing u/s. 64(1)(iv) is also not attracted. All income of the minor,
including minor married daughter, is clubbed with the parent u/s 64(1A).
After attaining majority, such interest income will be taxable in the hands of Divya.
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CLUBBING OF INCOME
Ans. 9. The Shares gifted by Mr Janak on 21st March 2017 is a non-taxable transfer
for him. The shares received as a gift shall not be taxable in the hands of Mrs
Janak as the gift is received from relative.
The shares sold on 21st May 2017 are long term capital asset (after
including the holding period of the previous owner). Since the shares are sold
via recognised stock exchange the long term capital gain is exempt under
section 10(38). As the gain is exempt the question of clubbing doesn’t arise.
Bonus shares represent accretion to the assets and hence capital gains on
transfer of bonus share shall not be clubbed, it shall be taxable in the hands
of Mrs Thilagam.
Computation of Income from Capital Gains in the hands of Mrs
Thilagam For Assessment year 2018-2019
Particulars `̀̀̀
Full value of Consideration 1,25,000
Less: Cost of acquisition (Nil)
(STCA as the holding period is less than 12months
i.e. 1.6.2017 to 21.07.2017)
Short term Capital gain 1,25,000
The Shares sold on 28.02.2018 are long term capital asset (after including
the holding period of the previous owner). Since the share are sold privately
exemption under section 10(38) is not available. The capital gains or loss on
transfer of shares shall be clubbed in the hands of Mr Janak as per section
64(1)(iv)
Computation of Income from Capital Gains
Particulars `̀̀̀
Full value of Consideration 1,70,000
Less: Indexed Cost of acquisition (Nil)
(LTCA as the holding period is more than 12months
i.e. 19.04.2013 to 28.02.2018)
Long term Capital gain
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WHAT IS THE MODE OF SET OFF AND CARRY FORWARD
The process of setting off of losses and their carry forward may be covered in the following
steps:
Step 1 : Inter-source adjustment under the same head of income.
Step 2 : Inter-head adjustment in the same assessment year. Step 2 is applied only if a
loss cannot be set off under step 1.
Step 3 : Carry forward of a loss. Step 3 is applied only if a loss cannot be set off under
Steps 1 and 2.
Inter source adjustment (Sec. 70):
General rule – If the net result for any assessment year, in respect of any source under
any head of income, is a loss, the assessee is entitled to have the amount of such loss
set off against his income from any other source under the same head of income for the
same assessment year.
Exceptions
���� Loss from speculation business : Loss in a speculation business can be set off only
against the profits in a speculation business.
Note:
* Loss from non-speculation business can be set off against other non-speculation
business profits and if not fully set off, then it can be set off against speculation
business profits also.
* Loss from a specified business – Any loss, computed in respect of any specified
business referred to in section 35 AD, shall not be set off except against profits and
gains, if any other specified business.
���� Loss from the activity of owning and maintaining race horses - Loss incurred in
the business of owning and maintaining race horses cannot be set off against income,
if any, from any other source, except, income from such business in the future.
Note:
* Although it is a business income, but it is taxable under income from sources,
since it promotes gambling.
� Loss cannot be set off against winnings from lotteries,crossword puzzles,
etc.- As per section 58 a loss cannot be set off against winnings from lotteries,
crossword puzzles, races including horse races, card game and other games of
any sort or from gambling or betting of any form or nature.
� Long - term capital loss can be set off only against long - term capital gains
i.e. it cannot be set off against short term capital gains.
Note :
* Short term capital loss can be set off against any other short term capital
gains as first priority and if not fully set off, then set off against long term
capital gains if any.
SET OFF & CARRY FORWARD OF LOSSES
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INTER-HEAD ADJUSTMENT – HOW MADE [SEC. 71]
General rule – Where the net result of computation made for any assessment year in
respect of any head of income is a loss, the same can be set off against the income from
other heads.
Provisions illustrated – X has two non-speculative businesses – Business A and Busi-
ness B. Besides he has income from house property. The result of the three sources of
income is given below –
Business income Property income
` `
Business A (-) 2,90,000
Business B 70,000
Income from house property 5,10,000
Total (-) 2,20,000 5,10,000
In this case, business loss of Rs. 2,20,000 can be adjusted against property income of
Rs. 5,10,000. Consequently, the property income is reduced to Rs. 2,90,000. It may be
noted that X does not have any option to set off (or not to set off) the business loss
against property income.
Exceptions- The following are the exceptions to the aforesaid rule—
���� Loss in a speculation business - Loss in a speculation business cannot be set
off against any other income.
���� Loss in a business specified under section 35AD - Loss, computed in respect
of any specified business referred to in section 35AD cannot be set off against
any other income.
���� Loss under the head "Capital gains" - Losses under the head "Capital gains"
cannot be set off against any income except income under the head "Capital gains".
���� Loss from the activity of earning and maintaining race horses - Losses from
the activity of owning and maintaining race horses cannot be set off against any
other income.
���� Business loss cannot be set off against salary income' - Loss from business
or profession (including depredation) cannot be set off against income under the
head "Salaries".
���� Loss cannot be set off against winnings lotteries, etc. - By virtue of section
58(4) a loss cannot be set off against winnings from lotteries, crossword puzzles,
races (including horse races), card games and other games of any sort or from
gambling or betting of any form or nature.
���� Loss from house property cannot be set off more than 2 lakhs against any other
head of income
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Sec. 71B :Carry forward and set off of loss from house property
Loss to the extent not set off u/s 70 & 71, is allowed to be carried forward for set off against
future income from house property only, for a maximum of 8 assessment years immediately
after the end of the relevant assessment year in which the loss was suffered.
Sec. 72 : Carry forward and set off of non-speculation business losses :
Non-speculation business loss to the extent not set off u/s 70 &71, is allowed to be carried
forward for set off against the profits and gains of any business (non-speculation as well as
speculation) and not necessarily the same business income of the future. If not fully set off,
then against any ‘business income’ taxable under other heads such as:-
* Income from house property (where it is the business of owning and letting out
residential houses)
* Income from other sources
- Income from other activity of owning & maintaining race horses.
- Dividend on foreign company shares or co-operative society shares held
as stock in trade.
Even if the business to which such loss relates is discontinued, yet the loss is entitled to be
carried forward for a maximum period of 8 assessment years from the end of
assessment year of loss, failing which the unabsorbed loss is lost i.e. not allowed to be
carried forward
Unabsorbed depreciation under sec. 32(2): Unabsorbed depreciation allowance
(U.A.D.) will be set off and carried forward as follows :
(1) Normally entitled depreciation is allowed as a deduction to the maximum extent of
available profits prior to claiming depreciation, but after claiming all other
deductions, i.e. to the maximum extent to bring the profits to NIL.
A person cannot create a loss or cannot increase an already existing cash loss, by
claiming depreciation.
The portion of depreciation which could not be allowed as a deduction is known as
unabsorbed depreciation (i.e. U.A.D).
(2) Such U.A.D can be set off u/s 70 against any business income (non-speculation
or speculation)
(3) If not fully set off u/s 70 as above, then the unabsorbed portion can be set off u/s 71
against any another income of the assessee for the same year except salary and
casual winnings.
(4) U.A.D. (after sec 70 & 71) will be carried forward u/s 32(2) to be set off against
any income (except casual winnings & salaries) till it is fully set off, i.e. without
any time limit, even if the business to which such U.A.D. relates, is no longer
in existence in the year of set off.
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However the priority of set off of U.A.D. in the subsequent years against subsequent
year’s income from business or profession would be :
* 1st priority to current depreciation of the subsequent year.
* 2nd priority to subsequent year’s any other business loss u/s 70
* 3rd priority to any other head’s loss u/s 71 (i.e. loss under The head “income from
house property“ or “income from other sources” which remains unabsorbed after
applying section 70 provisions) of the subsequent year.
* 4th priority to brought forward business loss u/s 72 within the time limit of 8 years.
* If still some positive income remains after above set off, under subsequent year’s
income from business , then the 5 th priority to unabsorbed depreciation and the
amount not set off can be set off against any other positive income of subsequent
year except income from salaries & casual winnings.
Sec. 73 : Loss in speculation business.
(1) This section allows such loss to be set off only against profit and gains of any other
such speculation business of the same previous year, under sec. 70.
(2) Unabsorbed speculation business loss will be carried forward and set off against
speculation business profit of subsequent year u/s. 73.
(3) Thus, speculative business loss cannot be set off against any other head of Income.
(4) It is allowed to be carried forward and set off for a period of 4 years from the end
of assessment year of loss.
The business in which speculation loss is incurred may be discontinued in the rel-
evant year of set off.
Sec.73A : Losses in specified business u/s 35AD
���� Any loss, computed in respect of any specified business referred to in section
35AD shall not be set off except against profits and gains, if any, of any other
specified business. In case of Hotel and Hospital business, such loss can be set
off against the profit of another specified business, whether OR NOT the latter is
eligible for deduction u/s. 35AD.
���� If any loss remains unabsorbed as above, it shall be carried forward and set off
against any income of any specified business of the next assessment year / years
till it is fully set off, without any time limit.
Sec. 74 : Loss under the head Capital Gains :
This section permits loss under the head capital gains to be carried forward and set off
against Income under the head Capital Gains of subsequent year as under:
(i) ���� Unabsorbed short term capital losses can be carried forward and set off
against short term or long term capital gains.
���� Unabsorbed long term capital loss can be carried forward and set off against
long - term capital gains only.
(ii) Thus loss under capital gains cannot be set off against any other head of income.
(iii) Carry forward is allowed for a maximum of 8 years from the end of assessment year of loss
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Sec. 74 A. : Loss from the activity of owning and maintaining horses for racing :
(a) This section permits it to be carried forward in the subsequent years.
(b) It cannot be adjusted against any other head of income in the same year.
(c) In the subsequent years it can be set off only against the income of the same activity.
(d) Such carry forward is allowed only for period of 4 years from the end of
assessment year of loss.
Sec 78: Change in constitution of partnership firm and its effect on carry forward
of losses:
When there is retirement or death of a partner (outgoing partner) in a P.Y., the partnership
firm shall NOT be allowed to carry forward and set off losses proportionate to the share
of the outgoing partner.
This restriction does not apply to Unabsorbed Depreciation u/s. 32(2) i.e. U.A.D. shall
be carried forward and set off FULLY without any reduction.
Sec 80: Submission of return of losses
According to this section carry forward and set off of only “Assessed Loss” will be
allowed (and not the “returned loss” as per the return of income).
It is compulsory to file return of income u/s 139(3) in case of a loss
[u/s 139(3) filing of ‘return of income ‘on or before the due date as specified u/s 139(1):-
* 30/9 of assessment year if audit is compulsory
* 30/11 of assessment year if there is an international transaction
31/7 of assessment year in any other case].
However in the case of the following, the loss will be allowed to be carried forward and
set off, even if the return is not filed on or before its due date :-
- House property loss u/s 71B
- U.A.D u/s 32(2)
- Specified business loss u/s 73A
Measures to Curb dividend stripping u/s 94(7).
If a person buys securities or units within a period of 3 months prior to the record date
and subsequently sells or transfers such securities or units within a period of 3 months
(for securities) or 9 months (for units) after the record date, the person may suffer a short
term capital loss (STCL) on sale of securities or units. Such securities or units generate
dividend income which is exempt u/s. 10(34) or 10(35).
In such a case, the STCL, to the extent of dividend income, shall not be allowed to be set off
u/s. 70 (Inter Source Adjustment) or carried forward u/s. 74.
"Record date" means a date fixed by the company or mutual fund for declaration of divi-
dend. If a person is the holder of securities or units on the record date, he shall be enti-
tled to receive the dividend income.
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Short term against short term or long term, but long term only against long term.
# Yes, only against any other specified business income, with the exception
hotel and hospital specified business .
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Q. 1. Compute the GTI of Mr. Madhavan for the Assessment year 2018-19 from the
following particulars :
(i) Net house property income as computed under the head 'Income from
House Property' `̀̀̀ 2,70,000
(ii) Income from business before adjusting the following ` ` ` ` 90,000
(a) Carried forward business loss of A.Y. 2016-17 `̀̀̀ 1,70,000
(b) Current depreciation `̀̀̀ 30,000
(c) Carried forward unabsorbed depreciation of earlier years `̀̀̀ 1,40,000
(iii) Short - term capital gains - Jewellery `̀̀̀ 1,60,000
(iv) Long - term capital loss - Shares ` ` ` ` 40,000
(v) Long - term capital gains - Debentures ` ` ` ` 2,00,000
(vi) Dividend on shares of a co-operative society held as stock in trade ` ` ` ` 10,000
(vii) Dividend on shares held as investment from a foreign company carrying
on agricultural operation `̀̀̀ 12,000
(viii) Income from growing and manufacturing coffee (cured and roasted) `̀̀̀ 1,00,000
Q. 2. Mr. Yeshwant submits the following information for the financial year ending 31st
March, 2018 He desires that you should (a) compute the gross total income and
(b) ascertain the amount of losses that can be carried forward :
(I) He has two houses : `̀̀̀
(a) House No. I - Computed income 36,000
(b) House No. II - Current year loss 10,000
(c) Brought forward loss of assessment year 2013- 14 of second house 30,000
(II) He has three proprietary businesses :
(a) Textile business :
(i) Discontinued from 31st October, 2017 current year loss 25,000
(ii) Brought forward business loss of the assessment year 2012-13 80,000
(b) Chemical business :
(i) Discontinued from 1st March, 2017 hence no profits / loss in current year NIL
(ii) Bad debts allowed in earlier years recovered during this year 30,000
(iii) Carried forward business loss for the assessment year 2017-18 20,000
(c) Leather business :
Profit for the current year 70,000
(III) Capital Gains
(i) Short - term capital gains 20,000
(ii) Long - term capital loss 15,000
CLASS WORK PROBLEMS
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Q. 3. The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57,
relating to the year ended 31-3-2018 :
`̀̀̀
Income from salaries 2,20,000
Loss from House property 1,90,000
Loss from cloth business 2,40,000
Income from speculation business 30,000
Loss from specified business covered by section 35AD 20,000
Long-term capital gains from sale of listed shares in recognized
stock exchange (STT paid) 1,10,000
Long term capital gains on sale of urban land 2,50,000
Loss from card games 32,000
Income from betting 45,000
Life Insurance Premium paid 1,20,000
Compute the total income and show the items eligible for carry forward.
Q. 4. X purchases on 10.5.2017 1,000 equity shares of `̀̀̀ 10 each in A Ltd. @ `̀̀̀ 55.55.
On 20.10.2017 he transfers 800 shares @ `̀̀̀ 37/- per share and remaining 200
shares are transferred on 20.12.2017 @ `̀̀̀ 20 per share. A Ltd., declares 50%
dividend on record date 3.8.2017. During previous year 2017-18, X has
long - term capital gains of `̀̀̀ 76,000.
Compute the loss to be disallowed u/s 94(7) and net changeable long - term capital gains.
Q. 5. M/s. Vivitha & Co., a partnership firm, with four partners A, B, C and D having
equal shares, furnishes the following details, summarized from the valid returns of
income filed by it :
Assessment year Item eligible for carry forward and set off
2016 - 17 : Unabsorbed business loss `̀̀̀ 1,20,000
2017 - 18 : Unabsorbed business loss `̀̀̀ 1,90,000
2017 - 18 : Unabsorbed depreciation `̀̀̀ 1,20,000
2017 - 18 : Unabsorbed long - term Capital Loss :
- from shares `̀̀̀ 1,10,000
- from building `̀̀̀ 1,90,000
C who was a partner during the last three years, retired from the firm with effect from 1.4.2017.
The summarized results of the firm for the assessment year 2018 - 19 are as under :
`̀̀̀
Income from house property 70,000
Income from business
Speculation 2,20,000
Non - speculation (-) 50,000
Capital gains
Short - term (from sale of shares) 40,000
Long - term (from sale of building) 2,10,000
Income from other sources 60,000
Briefly discuss, how the items brought forward from earlier years can be set off in
the hands of the firm for the assessment year 2018-19, in the manner most
beneficial to the assessee. Also show the items to be carried forward.
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Ans. 4. Mr. X
Computation of capital gains for A.Y. 2018-2019
(a) 800 shares
Particulars `̀̀̀
Full value of consideration (800 shares x `̀̀̀37/ share) 29,600
Less: Cost of Acquisition (800 shares x `̀̀̀ 55.55/share)
(STCA as h.p. < 12 months from 10-5-17to 20-10-17) (44,440)
STCL (14,840)
Less: Loss to be disallowed u/s 94(7): LEAST OF
STCL 14,840
or
Dividend (800 shares x `̀̀̀ 5 / share) 4,000 4,000
STCL, eligible for carry forward and set off (10,840)
(b) 200 shares
Particulars `̀̀̀
Full value of consideration (200 shares x `̀̀̀ 20/ share) 4,000
Less: Cost of Acquisition (200 shares x `̀̀̀ 55.55/ share)
(STCA as h.p. < 12 months from 10-5-2017 to 20-12-2017) (11,110)
STCL (7,110)
Less: Loss to be disallowed u/s 94(7) N.A.
STCL, eligible for carry forward and set off (7,110)
Capital Gains for A.Y. 2018-2019:
L.T.C.G. (as given) `̀̀̀ 76,000
Less: Set off u/s. 70 of STCL on
(a) 800 shares `̀̀̀ 10,840
(b) 200 shares `̀̀̀ 7,110 (`̀̀̀ 17,950)
TAXABLE L.T.C.G. `̀̀̀ 58,050
Ans. 5. M/s. Vivitha & Co.
Statement showing losses eligible for set off and carry forward
as per Sec 78 for A.Y. 2018-19
A.Y. of Loss Particulars Total Loss C’s share Eligible
(1/4th) Loss
2016-17 Business Loss 1,20,000 30,000 90,000
2017-18 Business Loss 1,90,000 47,500 1,42,500
2017-18 Unabsorbed Depreciation (Sec 78 N.A.) 1,20,000 NIL 1,20,000
2017-18 L.T.C.L.- shares 1,10,000 27,500 82,500
2017-18 L.T.C.L.- building 1,90,000 47,500 1,42,500
CLASS WORK SOLUTIONS
: 242 :
J. K. SHAH CLASSES INTER C.A.- DIRECT TAXES
Computation of Total Income for A.Y. 2018-19
Particulars ` ` `` ` `` ` `` ` `
Income from House Property 70,000
Income from Business
Speculation profit 2,20,000
Less : Non speculation losses, set off u/s. 70
- Inter Source Adjustment (50,000)
Net 1,70,000
Less : Set off of b/f Business loss of A.Y. 2016-17 u/s. 72
- Eligible Loss set off (90,000)
Net 80,000
Less: Set off of b/f Business loss of A.Y. 2017-18 u/s. 72 (80,000) NIL
- Eligible Loss b/f (1,42,500)
- Set off possible 80,000
C/f loss u/s 72 upto to Max. A.Y. 2025 - 26 (62,500)
Capital Gains
L.T.C.G. 2,10,000
Less: Set off of b/f L.T.C.L. – shares of A.Y. 2017-18 u/s. 74
- Eligible LTCL set off (82,500)
Net 1,27,500
Less: Set off of b/f L.T.C.L. – building of A.Y. 2017-18 u/s. 74 (1,27,500)
NIL
- Eligible LTCL b/f (1,42,500)
- Set off possible 1,27,500
L.T.C.L. c/f u/s upto Max. A.Y. 2025-26 to be set off against
future L. T. C.G. only (15,000)
S.T.C.G. 40,000 40,000
Income from Other Sources 60,000
Total 1,70,000
Less: Set off of b/f U.A.D. of A.Y. 2017-18 u/s. 32(2)
- Eligible U.A.D. fully set off (1,20,000)
TAXABLE INCOME 50,000
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 243 :
DEDUCTION IN RESPECT OF CERTAIN DONATIONS FOR SCIENTIFIC RESEARCH
OR RURAL DEVELOPMENT [SECTION 80GGA]
Who can claim deduction – An assessee (other than an assessee whose gross total in-
come includes income chargeable under the head “ Profits and gains of business or profes-
sion) can claim deduction under section 80GGA.
What is the qualifying expenditure – Donation should be given to an approved research
association, university, college or other institution to be used for scientific research. A contri-
bution can also be given for the purpose of eligible project under section 35AC or for the
purpose of notified National Fund For rural development or notified National Urban Poverty
Eradication Fund.
Amount of deduction – 100% for the aforesaid donation is deductible. Donation can be
given in cash or by cheque or draft. However, no deduction shall be allowed under section
80GGA in respect of a cash contribution exceeding ̀ 10,000.
DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN TO POLITICAL PARTIES OR
ELECTORAL TRUST - TO WHAT EXTENT DEDCUTIBLE [SECS. 80 GGB AND 80GGC]
While computing the total income of an assessee (including an Indian company), any sum
contributed uring previous year to any political party or electoral trust shall qualify for deduc-
tion.
However, the deduction is not available to a local authority and every artificial juridical person
wholly or partly unded by lire Government).
DEDUCTTON IN RESPECT OF EMPLOYMENT OF NEW EMPLOYEES [SEC. 80JJAA]
The provisions of section 80JJAA (as substituted with effect from the assessment year 2017-
18) are given below-
Conditions - One has to satisfy the following conditions -
1. The assessee has income from business and is subject to tax audit under section
44AB.
2. The business of the assessee is not formed by splitting up, or the reconstruction, of an
existing business.
However, this condition is not applicable in respect of a business which is formed as a result
of the re-establishment, reconstruction or revival by the assessee of the business of any such
undertaking as referred to section 33B.
Business is not acquired by the assessee by way of transfer from any other person or as a
result of any business organisation.
DEDUCTIONS FROM GROSS TOTALINCOME - CHAPTER - VIA (PART II)
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 244 :
Amount of deduction - If the above conditions are satisfied, an amount equivalent to 30
per cent of additional employee cost (incurred in the course of such business in the
previous year) is deductible under section 80JJAA three assessment years including the
assessment year relevant to the previous year in which such employment provided. Books
of account should be audited and report of audit should be submitted along with the
return income. Deduction should be claimed in the return of income (otherwise deduction
is not available). The wing points should be noted ,
1. Additional employee cost" means total emoluments paid or payable to additional
employees employed r.ng the previous year.
2. In the case of an existing business, the additional employee cost shall be nil, if—
(a) there is no increase in the number of employees from the toted number of
employees employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or ac-
count payee bank draft or by use of electronic clearing system through a
hank account.
3. In the first year of a new business, emoluments paid or payable to employees em-
ployed during that previous LT shall be deemed to be the additional employee
cost.
4. “Additional employee" means an employee who has been employed during the
previous year and whose employment has the effect of increasing the total number
of employees employed by the employer as on the last of the preceding year, but
does not include, —
(a) an employee whose total emoluments are more than Rs. 25,000 per month;
or
(b) an employee for whom the entire contribution is paid by the Government
under the Employees' Pension Scheme notified in accordance with the pro-
visions of the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952;
(c) an employee employed for a period of less than 240 days’!' during the pre-
vious year; or
(d) an employee who does not participate in the recognised provident fund.
5. "Emoluments" mean any sum paid or payable to an employee in lieu of his em-
ployment by whatei called, but does not inc lude employer's contribution to pen-
sion fund/provident fund/any other fun benefit of employee under any law. Further,
it does not include lump sum payment at the time of ten of service, or superannua-
tion or voluntary retirement, such as gratuity, severance pay, leave enca voluntary
retrenchment benefits, commutation of pension, and the like.
6. The provisions of old section 80JJAA shall apply to an assessee who is eligible to
claim any deductio section 80JJAA for the assessment year 2016-17 (or any ear-
lier assessment year).
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 245 :
Deduction in respect of royalty income of authors - To what extent available
[Sec.80QQB]
The provisions of section 80QQB are given below —
Conditions - The following conditions should be satisfied —
���� Resident individual - The taxpayer is an individual resident in India. He may be an
Indian citizen at citizen. He may be resident and ordinarily resident or resident but
not ordinarily resident. But he s a non-resident in India.
���� Author or joint author -He is an author or joint author.
���� Literary work - The book authored by him is work of literary, artistic or scientific nature.
However, shall not include brochures, commentaries, diaries, guides, journals, maga-
zines, newspapers, pam books for schools, tracts and other publications of similar
nature, by whatever name called.
���� Income includes royalty - The gross total income of the taxpayer includes the following—
a. royalty or copyright fees (payable in lump sum or o then vise) in respect of afore-
said book (it also advance payment which is not returnable); and
b. lump sum consideration for transfer (or grant) of any interest in the copyright of
the book.
���� Furnishing of Form No. 10CCD - The taxpayer shall have to obtain a certificate in Form
No. 10CCD person responsible for paying the income and furnish it along with the
return*.
���� Return of income - Deduction under section 80QQB is not available unless it is claimed
in the return of income.
Amount of deduction - If the aforesaid conditions are satisfied, then the amount of de-
duction
a. Rs. 3,00,000; or
b. income from royalty as stated above,
whichever is lower.
Other points - One should also keep in view the following points—
���� Remittance from abroad - Where the eligible income is earned outside India, the de-
duction shall be allowed so much of the income earned in foreign exchange, which is
brought in India within 6 months from the end of previous year (or within extended
period as permitted by RBI or competent authority). Moreover, dedcution not be al-
lowed unless the taxpayer furnishes* a certificate in Form No. 1011.
���� Rate of royalty not to exceed 15 per cent - Where the income by way of royalty (or the
copyright fee), is not lump sum consideration (in lieu of all rights of the assessee in the
book) so much of the income (before allow expenses attributable to such income) as is
in excess of 15 per cent of the value of such books sold during: previous year, shall be
ignored.
���� double deduction not available - Whore a deduction under section 80QQB, for any
previous year has been claimed allowed, no deduction in respect of such income shall
be allowed under any other provision of the Act in any assessment year.
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 246 :
DEDUCTION IN RESPECT OF ROYALTY ON PATENTS - TO WHAT EXTENT AVAIL-
ABLE [SEC. 80RRB]
The provisions of section 80RRB are given below —
Conditions - The following conditions should be satisfied in order to claim deduction under
section 80RRB--
���� Individual - The taxpayer is an individual (may be an Indian citizen or foreign citizen).
���� Resident in India -He is resident in India (he may be ordinarily resident or not ordinar-
ily resident but deduction under section 80RRB is not available if he is non-resident).
���� Owner/co-owner of patent - He is a patentee (he maybe a co-owner of patent). Pat-
entee means the person (being the true and first inventor of the invention), whose name
is entered on the patent register as the patentee, in accordance with the Patents Act, 1970.
���� Royalty from patent -He is in receipt of any income by way of royalty in respect
of patent, which is registered - under the Patent Act after March 31,2003. It in-
cludes advance royalty which is not returnable. However, it does not include any
consideration for sale of product manufactured with the use of patented process
or of the patented article per se for commercial use. Further, any consideration,
which is chargeable under the head
“Capital gains” is not royalty.
���� Furnish Form No. 10CCE - The assessee shall have to furnish a certificate in
Form No. 10CCE, duly signed by the prescribed authority [i.e., die controller un-
der section 1(b) of the Patents Act] along with the return of income.
���� Return of income - Deduction under section 80RRB is not available unless it is
claimed in the return of income.
Amount of deduction - If the aforesaid conditions are satisfied,then the amount of de-
duction is —
(a) Rs. 3,00,000; or
(b) income from "royalty" as stated above,
whichever is lower.
Other points - One should also keep in view the following points—
���� Royalty from foreign sources - Where any income is earned from sources outside
India on which the deduction r der this section is claimed, only so much of the
income shall be considered, as is brought into India by, (or on behalf of) the asses-
see in convertible foreign exchange within a period of 6 months from the end of the
previous i (or within such further period as RBI may allow in this behalf).
Where any income is earned from sources outside India, a certificate* certifying
that the deduction has bed correctly claimed in accordance with the provision of
this section (in Form No. 10H), is required.
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 247 :
���� Subsequent revocation of patent - In case the patent is subsequently revoked by
the Controller or the High Court or the name of the assessee is subsequently
excluded from the patents register as patentee in respect of that patent, the de-
duction relatable to royalty income in respect of the period for which the paten-
tee's claim wasm1 valid, shall be withdrawn. For this purpose, the assessment
may be rectified within a period of 4 years from ‘is* end of the previous year in
which such order is passed by High Court or Controller.
���� Double deduction not possible - Where a deduction for any previous year has been
claimed and allowed undo section 80RRB in respect of any income referred to
above, no deduction in respect of such income shall be allowed, under any other
provision of lire Act in any assessment year)
SECTION : 80GG - Deduction in respect of rent paid.
ALLOWED TO : Individual
DEDUCTION : Least of : 1. Rent Paid (-)10% of A.T.I
2. 25% of A.T.I.
3. 5,000 p.m.
CONDITIONS : 1. Assessee should not have claimed exemption u/s 10(13A) or
receiving any H.R.A.
2. Assessee or his spouse or minor child or his H.U.F. should not
own any residential accommodation at the place of work where
he ordinarily resides or performs duties.
3. Assessee should not claim exemption u/s 23(2)(a) or 23(4)(a) in
respect of any other residential accommodation at any other place.
REMARKS : A.T. I. =Adjusted Total Income which is G.T.I. (-) All other deductions u/s 80
except 80GG, long term capital gains and short - term capital gains
u/s 111A.
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 248 :
SECTION 80 G --DEDUCTION FOR DONATIONSThis deduction is applicable to all types of assessees.
1 ) Donations given in Kind/by goods e.g.Donations byornaments,books,utensils,foodgrains,cloth,building,animals etc
2 ) Donations given to Individuals ,families & unregistered organisations3 ) Donations sent to Foreign organisations/Foreign govt (except 18 & 19)
4 ) Any donation promised but not supported by cash payment is not eligible for deduction.(Receipt is must)
5) No deduction shall be allowed under this section for any donation exceeding `̀̀̀ 2,000 unless such sum
Eligible Donations (cash donations matching with the list)Donations actually paid by cash /cheque by assessee to the following funds , institutions etc will be eligiblefor deduction :
OTHER POINTS
1 Donations listed under 1to 24 are unlimited category donations because any amount can be donated.2 Donations listed under 25to31 are limited category donations because total amount should not exceed
10% of Adjusted Gross Total Income (AGTI).3. AGTI means
Gross Total Income XXXLess : Long term capital Gain -XXXLess : Deductions U/s 80C to 80U - XXX
AGTI XXX
4. Donations listed under1to 4 & 27 to 31 are eligible for 50 % deduction.
5 . Donations listed under 5 to 24 & 25 -26are eligible for 100% deduction.
1) Jawaharlal Nehru Memorial Fund
2) Indira Gandhi Memorial Trust3) Rajiv Gandhi Foundation
4) Prime Minister’s Drought Relief Fund
5. National Children’s Fund6 . National Defence Fund set up by the Central Gov-
ernment
7 . Prime Minister’s National Relief Fund8 . National Blood Transfusion Council and State Coun-
cil for Blood Transfusion.
9 . National Trust for welfare of persons withAutism,Cerebralplasi,MentalRetardation,Multiple Disabilites
10 . National Sports Fund / National Cultural Fund
1 1 . National Illness Assistance Fund1 2 . National Foundation for Communal Harmony1 3 . Cheif Minister’s Earthquake Relief Fund/Gujarat
Chief Minister’s Earthquake Relief Fund1 4 . Andhra. Pradesh Chief Minister’s Cyclone Relief
Fund15 . State Fund for the medical relief of the POOR1 6 . Chief Minister’s Relief Fund or Lieutenant
Governor’s Relief Fund1 7 . Zila Saksharta Samiti1 8 . Prime Minister’s Armenia Earthquake Relief Fund1 9 . Africa Fund (Public Contributions of India)20. An Approved university/educational institute of
National Popularity/Eminence2 1 . Army Central Welfare Fund// the Indian Naval/
Navy BenevolentFund/Airforce Central WelfareFund /Kargil Fund
2 2 . Swachh Bharat Kosh2 3 . Clean Ganga Fund (amount donated by resident
only)2 4 . National fund for control of drug abuse
25.Donations for family planning given to
� Central Government
�State Government
� Local Government/Municiplity
�Approved Organisation/Association /Hospital.
26.Donations to Indian Olympic Association/or anynotified association for sports infrastructure
development (only companies are eligible)
27 . Donation to an authority established for TOWNPLANNNG /housing development/( e.g MHADA)
28. Donation , for repair & renovation ,given to noti-fied TEMPLE, mosque, gurdwara, church, his-toric place,archeological place
29. Donation given for charitable purposes to:
� APPROVED SCHOOLS,colleges,educational insti-
tutions (not nationally eminent)
� Universities approved by Income tax authorities but
not by UGC (not covered by 20 above)
� Approved trusts,organisations,associations
� Approved Hostel,old age homes,library,hospitals etc
� Approved Funds & Foundations
30. Donation given for charitable purposes to
� Central Government
� State Government
� Local Government/Municipality
31.
MINORITY Community
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 249 :
Q. 1. Mr. X has a G.T.I. of `̀̀̀ 4,50,000, which includes LTCG under section 112 `̀̀̀ 3,00,000
and he makes the following payments during previous year 2017-18 :
Mediclaim insurance premium paid for himself and wife, by cheque `̀̀̀ 7,000
Donation to approved charitable institution `̀̀̀ 16,000
Rent paid per month and fulfils the condition of section 80GG `̀̀̀ 3,000
Calculate the deduction u/s 80G & 80GG.
Q. 2. Determine the amount deductible under section 80QQB in the following cases
pertaining to the assessment year 2018-19.
Q. 3. Mr Pradeep Bhushan donated as follows through account payee cheque in 2017-18 :
Prime Minister’s National Relief Fund 82,000
Africa (Public Contributions - India) Fund 22,000
University of Newyork, approveed by IETS, USA 30,000
Andhra Pradesh Chief Minister’s Cyclone Relief Fund (paid in cash) 54,000
Balaji Trust of Tirupati for renovation 1,03,000
BMC to be utilised for the purpose of promoting family planning 15,000
Indian Olympic Association 6,000
National Blood Transfusion Council and State Council for Blood Transfusion. 1,15,000
National Defence Fund set up by the Central Government 80,000
Prime Minister's Drought Relief Fund 13,000
Zila Saksharta Samiti (paid through debit card) 24,000
Lieutenant Governor’s Relief Fund Pondicherry 11,000
Swach Bharat Kosh 10,000
Jawaharlal Nehru Memorial Fund 27,000
Indian National Congress 2,000
National Fund for Rural Development (paid in cash) 7,000
CLASS WORK PROBLEMS
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 250 :
Other Information :
1. He has salary income of `̀̀̀ 6,00,000 and long term capital gain on sale of a
commercial property `̀̀̀ 11,00,000/-.
2. He has invested in fixed deposits of various banks on which interest accrued during
the year amounts to `̀̀̀ 30,000/-. Interest on saving bank account `̀̀̀ 6,500/-
3. He has deposited `̀̀̀ 60,000 in Public Provident Fund and has incurred an
expenditure of `̀̀̀ 15,000 on disabled brother (fully blind) dependant on him.
4. Interest on education loan for son’s MBA course `̀̀̀ 80,000/-. He has paid
medical insurance premium of `̀̀̀ 27,000 in cheque for himself and his wife.
Compute total income and tax payable.
Q. 4. Mr. Manjesh, resident senior citizen, aged 62 years, gives the following inforomation
regarding his income in P.Y. 2017-18. Calculate income tax payable.
(1) He sold a commercial property on 16.08.2017 for `̀̀̀ 25,00,000/-. This
property was acquired by him on 27.04.2001 for `̀̀̀ 7,00,000. Brokerage paid
on sale was 1.5% of sale consideration.
(2) He also sold an urban land for `̀̀̀ 16,00,000 on 09.09.2017. This land was
purchased 3 months ago for `̀̀̀ 12,50,000/- Brokerage on sale 1%.
(3) He has paid medical insurance premium for himself `̀̀̀ 7,000, for wife `̀̀̀ 5,000 by
account payee cheque and for his elder son `̀̀̀ 6,000. His elder son is employed
in a company at a salary of `̀̀̀ 6,00,000 p.a. He has also paid `̀̀̀ 6,000 in cash on
account of preventive health check-up of himself and wife.
(4) Deposit under Senior Citizen saving scheme, 2004, `̀̀̀ 20,000/-. Deposit with
SBI for 6 years `̀̀̀ 50,000/-.
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 251 :
Ans. 3 Mr. Pradeep Bhushan
Computation of total income and tax liability for A.Y. 2018-2019
Particulars ` `` `` `` `
Income from Salary 6,00,000
Capital Gains
L.T.C.G. on sale of commercial property, taxable u/s. 112 @ 20% 11,00,000
Income from Other Sources
Interest on Bank F.D. 30,000
Interest on savings bank account 6,500 36,500
GROSS TOTAL INCOME (G.T.I.) 17,36,500
Less:Deductions u/s. 80C to 80U
u/s. 80C: Contribution to PPF 60,000
u/s. 80D: Mediclaim premium paid (27,000 or max 25,000) 25,000
u/s. 80DD: Maintenance of dependant (note) 1,25,000
u/s. 80E: Interest on loan for higher education 80,000
u/s. 80GGA: Contribution to National Fund for Rural Development 7,000
u/s. 80GGC: Donation to political party 2,000
u/s. 80G: Donation to specified funds/ organisaitions (W.N. 1) 3,88,050
u/s. 80TTA: Interest on savings bank accounts 6,500
Total Deductions u/s. 80C to 80U (I) 6,93,550
GTI available (excluding L.T.C.G.) (II) 6,36,500
Deductions allowable (I or II, whichever is less) (6,36,500)
NET TAXABLE TOTAL INCOME (N.T.T.I.) 11,00,000
TAX LIABILITY
Basic tax (W.N. 2) 1,70,000
Add: Education cess @ 3% 5,100
TAX PAYABLE 1,75,100
CLASSWORK SOLUTION
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 252 :
W.N. 1 Deduction u/s. 80G
Category Donations made Donations eligible % Deduction
Unlimited -100% 3,44,000 3,44,000 100 3,44,000
Unlimited -50% 40,000 40,000 50 20,000
Limited -100% 15,000 15,000 100 15,000
Limited -50% 1,03,000 18,100 50 9,050
3,88,050
A.T.I. = 17,36,500 – 11,00,000 - 60,000 - 25,000 - 1,25,000 - 80,000 -7,000- 2,000
- 6,500 = 3,31,000
Total donations made to Limited category (15,000 + 1,03,000) 1,18,000
OR
10% of A.T.I. of `̀̀̀ 3,31,000 33,100
Whichever is less
Eligible amount = `̀̀̀ 33,100
100% Category 50% Category
`̀̀̀ 15,000 `̀̀̀ 18,100 (Balancing figure)
W.N. 2: Basic tax
N.T.T.I. (consisting of LTCG only) `̀̀̀11,00,000
Less: basic exemption limit, remaining fully unabsorbed ( `̀̀̀ 2,50,000)
Taxable L.T.C.G. `̀̀̀ 8,50,000
x Tax rate u/s. 112 20%
Basic tax payable `̀̀̀ 1,70,000
Note: It has been assumed that the disabled brother does not claim deduction
u/s. 80U and therefore Mr. Pradeep Bhushan is entitled to deduction u/s. 80DD.
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 253 :
Ans.4. Mr. Manjesh
Computation of Total Income and tax liability for A.Y. 2018-2019
Particulars ` `` `` `` `
Capital Gains, which becomes G.T.I.
- LTCG (W.N. 1)
- STCG (W.N. 2) 3,34,000
Less: Deductions u/s. 80C to 80U
u/s. 80C: Deposit with:-
(a) Senior Citizen Savings Scheme, 2004 20,000
(b) SBI for 6 years (within the overall limit of Sec 80C of ̀̀̀̀ 1,50,000) 50,000 (70,000)
u/s. 80D: Mediclaim insurance premium paid for :-
(a) Self 7,000
(b) Spouse 5,000
(c) Elder Son N.A.
(d) Preventive health check up [Maximum] 5,000 (17,000)
(within the overall limit of Sec 80D of `̀̀̀ 30,000)
NET TAXABLE TOTAL INCOME (N.T.T.I.)
TAX LIABILITY
Basic Tax (W.N. 3)
Add: Education cess @ 3%
TAX PAYABLE
W.N.1 L.T.C.G
Particulars `̀̀̀
Full value of consideration 25,00,000
Less: Transfer expenses: Brokerage= 1.5% x `̀̀̀ 25,00,000 (37,500)
Less: Indexed Cost of Acquisition
(LTCA as h.p. > 36 months from 27.4.2001 to 16.8.2017)
(7,00,000 )
LTCG, taxable u/s. 112 @ 20%
W.N.2 S.T.C.G
Full value of consideration 16,00,000
Less: Transfer expenses: Brokerage= 1% x `̀̀̀ 16,00,000 (16,000)
Less: Cost of Acquisition(STCA as h.p. < 36 months from
10.6.2017 to 9.9.2017 i.e. 3 months) (12,50,000)
J.K. SHAH CLASSES INTER C.A.- DIRECT TAXES
: 254 :
W.N.3: Basic tax
N.T.T.I. 8,60,908
Less: L.T.C.G. (6,13,908)
Normal Income 2,47,000
Less: Basic Exemption Limit applicable (3,00,000)
UNABSORBED Exemption Limit 53,000
L.T.C.G 6,13,908
Less: Unabsorbed Exemption Limit (53,000)
Taxable L.T.C.G. 5,60,908
X Tax rate u/s. 112 20%
Basic tax payable 1,12,182
: 255 :
J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
ASSESSMENT PROCEDURE
ASSESSMENT PROCEDURE
SECTION - WISE INTRODUCTION AND BRIEF PARTICULARS OF
ASSESSMENT PROCEDURE
Types of Assessments :
Note 1 – Summary Assessment
Assessment is completed on the basis of return submitted by the assessee. Assessing
Officer can make the following adjustments to the total Income declared in the return of
Income:
1. Any arithmetical error
2. Any incorrect claim
An Intimation under section 143(1) should not be sent after expiry of 1 year from the end
of Financial year in which return is filed
Note 2 – Regular assessment
Assessing officer will issue a notice to assessee under section 143(2) to take the case in
scrutiny. Such notice shall be served on the assessee within 6 months from the end of
financial year in which return is filed. After hearing such evidence as the assessee may
produce and after taking into account all relevant material which assessing officer has
gathered, he shall pass an order under section 143(3) determining the sum payable or
refundable to the assessee.
Note 3 – Best Judgement assessment
Assessing officer after considering all materials which he has gathered is under an obli-
gation to make assessment of total income or loss to the best of his judgement in some
cases
1. If person fails to respond to a notice under section 142(1) (for Filing ROI)
2. If Person fails to respond to a scrutiny notice under section 143(2).
SECTION : 139(1) - Due dates for filing voluntary returns
PARTICULARS :
(a) Every company or a firm shall furnish on or before the due date the return in respect of
its income or loss in every previous year.
(b) Every person, being an individual or a HUF or an A.O.P. or a B.O.I. or an artificial
juridical person, if his total income or the total income of any other person in respect of
which he is assessable under this Act during the previous year, without giving effect to
the provisions of Section 10(38) or Section 10A or Section 10B or Section 10BA or
Chapter VI-A, exceeded the maximum amount which is not chargeable to income tax
shall, on or before the due date, furnish a return of his income or the income of such
other person during the previous year, in the prescribed form and verified in the pre-
scribed manner and setting forth such other particulars as may be prescribed.
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Provided that a person, being resident and ordinarily resident, who is not required
to furnish a return under this sub-section (i.e. GTI ���� Basic Exemption Limit) and
who during the previous year has any asset (including any financial interest in any
entity) located outside India or any signing authority in any account located outside
India; such a person shall furnish on or before the due date, a return in respect of
his income or loss for the previous year in such form and verified in such manner
and setting forth such other particulars as may be prescribed.
Explanation : In this sub-section, “Due date” means :
(a) Where the assessee has entered into an international transaction
dur ing the previous year, the 30th day of November of the
assessment year.
(b) where the assessee [ not covered by point (a) above] is -
(i) a company; or
(ii) a person (other than a company) whose accounts are required to be au-
dited under this Act or under any other law for the time being in force ; or
(iii) a working partner of a firm whose accounts are required to be audited
under this Act or under any other law for the time being in force,
the 30th day of September of the assessment year ;
(c) in the case of any other assessee, the 31st day of July of the assessment year.
SECTION : 139(3) - Return of Loss
PARTICULARS :
If any person who has sustained a loss in any previous year under the head “Profits and
Gains of business or profession” (including losses of specified businesses) or under the
head “Capital Gains” or under "Activity of owning and maintaining Race Horses" and
claims that the loss or any part thereof should be c/f in the relevant sections, he has to
submit his return as per Sec. 139(1) i.e. on or before the due dates or else the loss might
not be allowed to be carried forward.
Section 139(3) shall not apply to loss under the head "Income from House Property" and
Unabsorbed Depreciation
SECTION : 139(4) - Belated return i.e. return furnished after the due date
PARTICULARS :
Any person who has not furnished a return within the time allowed to him under Sec.
139(1) or within the time allowed under a notice u/s. 142(1)(i) may furnish the return
for any previous year at any time before the end of the relevant assessment year
OR before completion of the assessment, whichever is earlier. However he will
be liable to interest u/s. 234A.
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SECTION : 139(4A) - Return of income of charitable trusts and institutions
PARTICULARS :
Every person in receipt of income derived from property held under trust or other
legal obligation wholly for charitable or religious purposes or in part only for such
purposes, or of income being voluntary contributions, shall, if the total income in re-
spect of which he is assessable as a representative assessee (the total income for
this purpose being computed under this act without giving effect to the provisions
of section 11 and 12) exceeds the minimum exemption limit , furnish return of such
Income of the previous year, as per section 139(1).
SECTION : 139(4B) - Return of income of political parties
PARTICULARS :
The chief executive officer of every political party shall, if the total income in respect
of which the political party is assessable (total income for this purpose being com-
puted under this Act without giving effect to section 13A) exceeds the minimum ex-
emption limit, furnish a return of such income of the previous year as per section
139(1).
SECTION : 139(4C) -Return by certain assessees whose income is exempt u/s.10
PARTICULARS :
Institution covered u/s. 10 i.e. Scientific research association u/s10(21), news agency
u/s 10(22B), professional institutes u/s 10(23A), Khadi institution u/s.10(23B), any
university, educational institution etc. u/s.10(23C), trade union u/s10(24), any body or
authority or Board or Trust or Commission u/s 10(46), infrastructure debt fund u/s
10(47) whose total income, without giving effect of sec.10, exceeds the minimum
exemption limit, must file a return u/s 139(1).
SECTION : 139(5) -Revised return i.e. submitting a fresh return subsequent to
discovery of any error in the original return
PARTICULARS :
If any person, having furnished a return u/s.139(1) or u/s 139(4) or in pursuance of a
notice issued u/s. 142(1)(i), discovers any omission or any wrong statement therein,
he may furnish a revised return at any time before the expiry of one year from the
end of the relevant assessment year OR before completion of the assessment,
whichever is earlier.
SECTION : 139(9) - Defective return
PARTICULARS :
When a return could be considered as defective :-
a) the annexures, statements and columns in the return of income relating to computation
of income chargeable under each head of income are not duly filled in, or
b) computation of tax is not accompanying the return, or
c) where tax audit is compulsory, no tax audit report u/s. 44AB is submitted along
with the return, or
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d) the return is not accompanied by proof of T. D. S. or T. C.S. (Certificate), advance tax
payment (Challans) and tax on self-assessment (Challans) claimed to have been paid.
Provided that where the return is not accompanied by proof of the tax, if any,
claimed to have been deducted or collected at source, the return shall not be
regarded as defective if :
a) A certificate for tax deducted or collected was not furnished u/s 203 or u/s
206C to the person furnishing the return of income.
b) Such certificate is produced within a period of two years from the end of
the relevant assessment year, or
e) where regular books of account are maintained by the assessee, the return is not
accompanied by copies of Manufacturing account, Trading account, Profit and Loss
account as the case may be, Income and Expenditure account or any other similar
account and Balance Sheet alongwith the personal account of the proprietor, (in
case of proprietary business) the personal accounts of partners / members (in
case of firm / AOP / BOI) respectively, or
f) where the accounts of the assessee have been audited, the return is not
accompanied by copies of audited P & L & Balance Sheet and the auditor’s re-
port, or
g) where the regular books of accounts are not maintained by the assessee, the re-
turn is not accompanied by a statement indicating the amounts of turnover or, as
the case may be, gross receipts, gross profit, expenses and net profit of the busi-
ness or profession and the basis on which such amounts of total sundry debtors,
sundry creditors, stock in trade and cash balance at the end of the previous year are computed.
Where the A.O. considers that the return of income furnished by the assessee is
defective, he may intimate the defect to the assessee and give him an opportunity
to rectify the defect within a period of 15 days from the date of service of such
intimation, or within such extended time as he may think proper.
If the defect is not rectified within the above period, the return would be treated as
invalid and it would be assumed that the assessee had failed to furnish the return.
Provided that where the assessee rectifies the defect after the expiry of the said
period of 15 days or the further period allowed, but before the assessment is made,
the A.O. may condone the delay and treat the return as a valid return.
SECTION : 139A - Permanent Account Number [ P.A.N.]
PARTICULARS :
Every person, if his total income or if he is assessable in respect of some other person’s income, if
that other person’s income exceeds the tax free limit must apply to A.O. for the allotment of P.A.N.
within the prescribed time (i.e. upto 31st May of the assessment year).
In case the person is carrying on a business whose total sales, turnover or gross receipts
are likely to exceed `̀̀̀ 5,00,000 in an accounting year or who is required to furnish a return
u/s. 139(4A) (if the person already has a P.A.N, need not apply again) and has not been
allotted P.A.N, he must apply for it within the prescribed time i.e. before the end of the
previous year as per Rule 114.
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The Central Government may, by notification in the Official Gazette, specify any class
or classes of persons by whom tax is payable under this Act or any tax or duty is
payable under any other law for the time being in force (including importers and
exporters whether any tax is payable by them or not) and such persons shall, within
such time as mentioned in that notification, apply to the Assessing Officer for the
allotment of a P.A.N.
The Central Government may, for the purpose of collecting any information which may be
useful or relevant to the purposes of this Act, by notification in the Official Gazette, specify,
any class or classes of persons who shall apply to the Assessing Officer for the allotment
of the P.A.N. and such persons shall, within such time as mentioned in that notification,
apply to the Assessing Officer for the same.
The Assessing Officer having regard to the nature of the transactions as may be
prescribed, may also allot a P.A.N, to any other person (whether any tax is payable
by him or not) in accordance with the prescribed procedure .
The following transactions have been prescribed :
(a) Purchase and Sale of Immovable Property valued at `̀̀̀ 5 lacs or more
(b) Purchase and sale of Motor Vehicles (other than two wheeled vehicles)
(c) Transactions in securities exceeding `̀̀̀ 1,00,000
(d) Opening a new bank account (in case of minor, PAN of parent / guardian is required).
(e) Fixed Deposit of more than 50,000
(f) Application of allotment of telephone connection (including cellular phone)
(g) Payment to hotels exceeding `̀̀̀ 25,000/- at any one time.
(h) Deposit exceeding `̀̀̀ 50,000 in any account with Post Office Savings Bank.
(i) Cash payment for purchase of bank drafts or pay orders or bankers cheque from a
banking company for an amount aggregating `̀̀̀ 50,000 or more during any one day.
(j) Cash deposits aggregating `̀̀̀ 50,000 or more with a banking company during any
one day.
(k) Cash payment exceeding `̀̀̀ 25,000 in connection with travel to any foreign
country at any one time.
(l) Making an application to any bank or banking institution or company or any
institution for issue of a credit card.
(m) Making an application to any mutual fund for purchase of its units for an amount
of `̀̀̀ 50,000 or more.
(n) Making an application to a company for acquiring shares for an amount of
`̀̀̀ 50,000 or more.
(o) Making an application to a company or institution for acquiring debentures for
an amount of `̀̀̀ 50,000 or more.
(p) Making an application to Reserve Bank of India for acquiring its bonds for an
amount of `̀̀̀ 50,000 or more.
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Every buyer or licensee or lessee referred to section 206C shall intimate his P.A.N.
to the person responsible for collecting tax referred to in that section.
The assessee should quote G.I.R. (General Index Register) number till such time
P. A.N. is not allotted to such assessee.
Once a P.A.N. i s a l lo t ted , such number must be quoted in a l l returns,
correspondence with Income-tax authorities, challans for payment and in all
documents prescribed by the Board.
He must intimate the A. O. about any change in the address, name or nature of busi-
ness carried on by him. W.E.F 1.6.2001 it is compulsory for every person
receiving any sum, income, or amount from which T.D.S has been deducted, to
intimate his P. A. Number to the person responsible for deducting T.D.S. The person
who has deducted T.D.S. / T.C.S., shall also quote the above P. A. N. in all
statements, certificates, statements & returns filed by him.
If a person without reasonable cause, fails to apply for the allotment of P.A.N. within
the prescribed time or fails to quote it on the relevant document, the A.O. shall
impose a penalty of a sum which shall be minimum of `̀̀̀ 500 and maximum of `̀̀̀ 10,000
u/s. 272 A.
SECTION : 140 - Return under section 139, by whom to be signed.
Persons authorized to verify the Return of Income [Section 140]
Assessee Circumstance Authorised Persons
1. Individual (i) In circumstances not covered the individual himself
under (ii), (iii) & (iv) below
(ii) where he is absent from India - the individual himself or
- any person duly authorised
by him in this behalf holding a
valid power of attornery from the
individual (Such power of attorney
should be attached to the return
of income)
(iii) where he is mentally - his guardian; or
incapacitated from attending to
- any other person competent to
his affairs.
act on his behalf
(iv) where, for any other reason, it - any person duly authorised by
is not possible for the individual to him in this behalf holding a valid
verify the return power of attorney from the
individual (Such power of attorney
should be attached to the return
of income)
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2. Hindu (i) in circumstances not covered - the karta
Undivided under (ii) and (iii) below
Family (ii) where the karta is absent from - any other adult member of the
India HUF
(iii) where the karta is mentally - any other adult member of the
incapacitated from attending to HUF
his affairs
3. Company (i) in circumstances not covered - the managing directors of the
under (ii) to (v) below company
(ii) (a) where for any unavoidable - any director of the company
reason such managing directors
is not able to verify the return; or
(b)where there is no managing - any director of the company
director
(iii) where the company is not - a person who holds a valid
resident in India power of attorney from such
company to do so (such power of
attorney should be attached to the
return.)
(iv) (a) Where the company is - Liquidator
being wound up (whether under the
orders of a court or otherwise); or
(b) Where any person has been - Liquidator
appointed as the receiver of any
assets of the company.
(v) Where the management of the - the principal officer of the
company has been taken over by company
the Central Government or any
State Government under any law
4. Firm (i) in circumstances not covered - the managing partner of the firm
under (ii) below
(ii) (a) where for any unavoidable - any partner of the firm, not
reason such managing partner is being a minor
not able to verify the return or
(b) where there is no managing - any partner of the firm, not
partner. being a minor
5. Local authority ---- - the principal officer
6. Political party ---- - the chief executive officer of
[referred to in - such party (whether he is known
section 139 as secretary or by any other
(4B] designation)
7. Any other ---- - any member of the association
association or the principal officer of such
association
8. Any other ---- - that person or some other
person person competent to act on his
behalf.
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SECTION : 140 A - Self Assessment
PARTICULARS :
Any amount of tax which is payable on the basis of return u/s 139 or in response to
notice u/s 142(1)(i) [including any interest payable by the assessee] after deducting
the amount of any tax already paid or deducted or collected at source, any relief of tax
claimed u/s 90 or 91 on account of tax paid in a country outside India, any relief of tax
claimed u/s 90A on account of tax paid in any specified territory outside India and any
tax credit claimed to be set - off as per section 115JD, must be paid before the filing
of the return, and proof of such payment must be attached with the return.
Where any amount paid u/s. 140A falls short of tax and interest actually payable by the
assessee, the amount paid u/s. 140A shall first be adjusted towards interest and balance
shall be adjusted towards tax. If the assessee does not pay any part of tax and interest as
provided above, he will be deemed to be an assessee in default.
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PRACTICAL PROBLEMS ON RETURN OF INCOME & ASSESSMENT PROCEDURE
Q. 1. Following information is given regarding certain persons.
`̀̀̀ `̀̀̀
`̀̀̀
`̀̀̀
`̀̀̀
`̀̀̀
`̀̀̀
Discuss whether the above persons are required to submit return of income for the
assessment year 2018-19 (if yes, indicate due date for furnishing the return).
Q. 2. Discuss the correctness or otherwise of the following :
1. Mr. Pinakin having business loss of `̀̀̀ 1,20,000 (after providing for depreciation of
`̀̀̀ 80,000) furnishes his return of income on 5.8.2018 (turnover for 2017-18 `̀̀̀ 100
lacs). He wants to carry forward `̀̀̀ 1,20,000.
2. Mr. Anil has furnished his return of income for the assessment year 2018-19 on
31st March, 2019. The assessment was completed on the basis of such return
on 10th May, 2020.
3. Mr. Quadro has furnished his return of income for the assessment year
2018-19 on 11th April, 2020. The assessment was completed on the basis of
such return on 8th May, 2020.
4. Mr. Siddhu didn't f ile any return of income for the assessment year
2018-19 and his assessment for that year was completed on 31st
December, 2018. He furnishes return of income u/s 139(4) on 18.1.2019.
5. Mr. Chinumama having loss from other sources of `̀̀̀ 10,000 furnishes his return on
30.7.2018. He wants to carry forward such loss for set off in subsequent years.
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Q. 3. Which of the following returns can be revised u/s 139(5).
(a) Return of loss filed under section 139(3) .
(b) Return filed by a trust u/s 139(4A) or a Political party u/s 139(4B) or Association
u/s 139(4C) .
(c) Return filed within the time extended by CBDT under section 119 .
(d) A Revised Return filed under section 139(5) .
(e) Defective return filed u/s 139(9) .
Q. 4. State whether filing of income-tax return is mandatory for the assessment year 2018-19
in respect of the following cases:
(i) Research association eligible for exemption under section 10(21) having total
income of `̀̀̀ 3,10,000
(ii) Registered trade union eligible for exemption under section 10(24) having fol-
lowing incomes:
Income from house property (computed) `̀̀̀ 60,000
Income from other sources (computed) `̀̀̀ 40,000
(iii) A charitable trust registered under section 12AA, having total income of
`̀̀̀ 2,60,000.
(iv) A Limited Liability Partnership (LLP) with business loss of `̀̀̀ 1,30,000.
Q. 5. Mr. Vineet submits his return of income on 12-09-2018 for A.Y 2018-19 consisting of
income under the head salaries, “Income from house property” and bank interest. On
21-01-2019, he realized that he had not claimed deduction under section 80TTA in
respect of his interest income on the Savings Bank Account. He wants to revise his
return of income, since one year has not elapsed from the end of the relevant assess-
ment year. Discuss.
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Ans. 2.
1. Mr. Pinakin can carry forward unabsorbed depreciation of `̀̀̀ 80,000 as Section
139(3) does not apply to unabsorbed depreciation.
The due date for filing the return of income for Mr. Pinakin u/s. 139(1) for A.Y.
2018-2018 is 31st July 2018 (since the turnover for P.Y. 2017-18 is exactly
`̀̀̀ 1 crore, tax audit u/s. 44AB is not applicable). The ROI has been filed on
5.8.2018 i.e. after the due date u/s. 139(1). Accordingly, he cannot carry forward
business loss of `̀̀̀ 40,000/-
2. The last date for filing a belated return for A.Y. 2018-19 u/s. 139(4) is as follows:-
End of the assessment year 31-3-2019
OR
Completion of Assessment 10-5-2020
Whichever is earlier
In the given case, since the ROI has been filed on 31-3-2019, it is a valid
belated return.
3. The last date for filing a belated return for A.Y. 2018-19 u/s. 139(4) is 31-3-2019
(same as point 2 above). Since the ROI has been filed on 11-4-2020, it is an
invalid belated return.
4. The last date for filing a belated return for A.Y. 2018-19 u/s. 139(4) is 31-3-2019
or 31-12-2018, whichever is earlier i.e. 31-12-2018. Since the ROI has been
filed on 18-1-2019, it is an invalid belated return.
The assessment performed by the Income tax department in this case is Best
Judgment Assessment since the ROI was filed by the assessee after comple-
tion of the assessment. In other words, at the time of performing assessment,
there was no ROI filed by the assessee.
5. If the loss of `̀̀̀ 10,000 is from the activity of owning and maintaining race horses,
then the assessee will be allowed to carry forward such loss (as per Section
74A) since the ROI was filed before the applicable due date.
However, if this loss is any “Other Loss” i.e. not from the activity of owning and
maintaining race horses, there is no section in the Income tax Act, 1961 which
allows or authorizes the carry forward of such loss. Thus the assessee will not be
allowed to carry forward such loss, irrespective of the date of filing ROI.
Ans. 3.
(a) A return of loss filed u/s. 139(3) implies that the return has been filed as per
Section 139(1) and hence it can be revised under section 139(5)
(b) A trust [Section 139(4A)], a political party [Section 139(4B)] or an association
[Section 139(4C)] enjoy exemption from income tax but are required to file their
return of income as per Section 139(1) if their income (before exemption)
exceeds the basic exemption limit of `̀̀̀ 2,50,000. If the return is filed as above, it
implies that the return can be revised u/s. 139(5).
CLASS WORK SOLUTIONS
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(c) If the return of income for an assessment year has been filed within the extended
time limit specified by C.B.D.T., it implies that the return of income for that year
is as per Section 139(1) and hence it can be revised u/s. 139(5).
(d) A revised return replaces the original return filed as per Section 139(1). The
fact that a revised return has been filed implies that the original return was filed
by the assessee as per Section 139(1). Thus a revised return can also be re-
vised within the time limit allowed by Section 139(5).
(e) A return of income is termed as a defective return if some information or data is
missing in the return. Examples- submitting computation of income but not com-
putation of tax, not submitting Final Accounts along with ROI, not submitting proof
of tax paid (TDS certificate, tax challans etc).
If a defective return is filed by the assessee, the Assessing Officer informs the
assessee of the defect and allows a time limit of 15 days for rectifying the de-
fect. If the defect is rectified by the assessee, the return of income shall be treated
as a return filed u/s. 139(1). Accordingly, such a return can be revised u/s. 139(5).
If the defect is not rectified by the assessee, the return of income is an incom-
plete return and cannot be treated as a return filed u/s. 139(1). Accordingly, such
a return cannot be revised u/s. 139(5).
Ans. 4.(i) As per section 139(4C), a research association referred to in section 10(21)
must file its return of income within the due date under section 139(1) if its total
income, without giving effect to the provisions of section 10, exceeds the maxi-
mum amount which is not chargeable to income-tax.
Since the total income of the research association exceeds the basic exemp-
tion limit of ` ` ` ` 2,50,000, it has to file its return of income for the A.Y.2018-19.
(ii) As per section 139(4C), a registered trade union referred to in section 10(24)
must file its return of income if the total income exceeds the basic exemption
limit without giving effect to the provisions of section 10.
Since the total income of the trade union is less than the basic exemption limit of
` ` ` ` 2,50,000, it need not file its return of income for the A.Y. 2018-19.
(iii) As per section 139(4A), a charitable trust registered under section 12AA must
file its return of income, if its total income computed as per the provisions of the
Income-tax Act, 1961, without giving effect to the provisions of sections 11 and
12, exceeds the maximum amount which is not chargeable to income-tax. Since
the total income of the charitable trust exceeds ` ` ` ` 2,50,000, it has to file its return
of income for the A.Y. 2018-19.
(iv) As per third proviso to section 139(1), every company or firm shall furnish on or
before the due date the return in respect of its income or loss in every previous
year. Since LLP is included in the definition of “firm” under the Income-tax Act,
1961, it has to file its return mandatorily, even though it has incurred a loss.
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Ans. 5. Since Mr. Vineet has income only under the heads “Salaries”, “Income from house
property” and “Income from other sources”, he does not fall under the category of
a person whose accounts are required to be audited under the Income-tax Act,
1961 or any other law in force.
Therefore, the due date of filing return for A.Y.2018-19 under section 139(1), in
his case, is 31st July, 2018. Since Mr. Vineet had submitted his return only on
12.9.2018, the said return is a belated return under section 139(4).
As per section 139(5), a return furnished under section 139(1) or a belated re-
turn u/s 139(4) can be revised. Thus, a belated return under section 139(4) can
also be revised. Therefore, Mr. Vineet can revise the return of income filed by
him under section 139(4), to claim deduction under section 80TTA, since the
time limit of one year from the end of the relevant assessment year has not
elapsed.
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ADVANCE TAX & INTEREST
ADVANCE TAX
Sec. 207 - Liability of Payment of advance tax
(1) Under the provisions of advance tax, tax is payable in advance during the previous
year itself in which the current income is earned, although it will be assessed and
chargeable to tax in the assessment year.
(2) Advance tax is not payable by a resident individual of age 60 years or more in
the relevant P.Y. who does not have any income under the head "Profits and
Gains of Business or Profession."
Sec. 208 - Advance tax is payable in a previous year / financial year as per the
provisions if the amount of advance tax is ì ì ì ì 10,000/- or more.
Sec. 209 - Calculation of advance tax by assessee
Step 1 : Estimate the entire current income inclusive of long - term short - term
capital gains, casual winnings and consider agriculture income as well
for rate of tax purposes.
Step 2 : Compute the basic tax on above
Step 3 : Add surcharge if applicable and education cess
Step 4 : Give relief u/s. 89 if applicable
Step 5 : Deduct the TDS / TCS actually deducted/collected.
Step 6 : The balance amount if it is ì ì ì ì 10,000 or more is the advance tax payable
as per section 211.
In other words, if tax was deductible but not deducted by the payer, the receiver shall
have to pay advance tax towards such income.
Sec. 210(1) - Every person who is liable to pay advance tax, shall do so whether or not
he was subjected to regular assessment earlier.
Sec. 210(2) - He may adjust the remaining advance tax instalments by way of increase
or reduction in them, should the need arise.
Sec. 211 : Instalment of advance tax and due dates
On or Before
ADVANCE TAX & INTEREST
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
ADVANCE TAX & INTEREST
For an eligible assessee covered by Section 44AD [Presumptive Taxation], the above
installments shall not apply and the assessee can pay the whole amount of advance tax on
or before 15th March of the previous year.
Any amount paid after 15th of March but before of 31st March of the relevant previous year
shall be considered as advance tax payment only, but shall be liable to interest.
If on the last day for payment of any instalment of advance tax the bank is closed, the
assessee should make the payment on the immediately following working day and the
interest leviable u/s. 234B & 234C will not be charged.
INTEREST
Sec. 234A - Interest when return is furnished after the due date.
Rate of Interest : 1% per month and part of a month is considered one full month.
Period of Interest : Commencing from the date immediately following the due
date of filing the return till :
� the date of actually filing the return
� date of completion of assessment u/s. 144 (best
judgement assessment), if no return is filed.
Amount on which interest : Assessed tax (-) Advance tax (-) TDS / TCS
shall be calculated but not tax paid u/s. 140A, i.e. after 31st of March
For calculating interest element paid u/s. 234A
in the total tax + interest payment u/s. 140A,
returned tax shall be considered.
Rule 119A : Any fraction beyond the nearest multiple of ì ì ì ì 100/- will be
ignored in the calculation of interest payable or receivable by
the assessee.
Sec. 234B - Interest on default of payment of advance - tax payable.
� Either no advance tax is paid or paid less than 90% of assessed tax.
� If no advance tax is paid then interest is payable on assessed tax @ 1% per month
for every month or part of a month which is considered as a full month, starting from
the 1st day of April of the assessment year till the date of determination of income
under summary assessment - u/s. 143(1) or regular assessment - u/s. 143(3).
� If advance tax is paid then as above except that assessed tax will be reduced by
the advance tax so paid.
� Rule 119A to be considered.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
ADVANCE TAX & INTEREST
Sec. 234C - Interest on deferment of advance tax
� When assessee does not pay advance tax or underestimates instalments of
advance tax.
For all assessees except assessee covered by Sec 44AD :
(1) 15% Returned tax - TDS / TCS Advance tax x
1 x 3 months
paid till 15th June. 100
��� ��% Returned tax - TDS / TCS Advance tax x
1 x 3 months
paid till 15th Sept. 100
rate of interest
(3) 75% Returned tax - TDS / TCS Advance tax x
1 x 3 months
paid till 15th Dec. 100
��� 100% Returned tax - TDS / TCS Advance tax x
1 x 1 month
paid till 15th March 100
���� For an asseessee covered by section 44AD, interest will be calculated only for
the instalment of March as follows :
100% Returned tax - TDS / TCS Advance tax x
1 x 1 month
paid till 15th March 100
���� Rule 119A to be considered.
���� Interest provisions are not attracted if the shortfall in the payment of advance tax
is due to underestimation or non - estimation of capital gains or casual winnings,
and the assessee has paid the entire tax payable in respect of such income, as
part of remaining instalments of advance tax which are due or if no instalment is
due, then such tax is paid before the end of the financial year.
���� Interest provisions shall also not be attracted if income arises under the head
"Business or Profession" for the FIRST TIME.
���� If the advance tax paid by the assessee on or before 15th June is atleast 12% of
the returned tax or if the advance tax paid on or before 15th September is atleast
36% of returned tax, then no interest shall be charged on the shortfall on those
dates.
Sec. 234D - Interest on excess refund
If excess refund is granted at the time of summary assessment, in relation to either
lesser refund or no refund on regular assessment.
Rate of Interest : 0.5% per month or part of a month
Period of Interest : Date of grant of refund under summary assessment to the
date of completion of regular assessment.
Calculated on : Full refund or excess refund amount as the case may be.
Sec. 244A - Interest payable to assessee on refund
��� If the refund arises due to TDS or TCS or advance tax, interest shall be payable
to the assessee @ 0.5% per month or part of a month for the period -
(a) From 1st April of the A.Y. to date of receiving refund, if the R.O.I for that
P.Y. has been furnished on or before the due date u/s 139(1); or
(b) in any other case, from the date of furnishing R.O.I. to the date of receiv-
ing refund.
(2) If the refund arises due to any self assessment tax paid u/s 140A, the period
shall begin from the date of furnishing R.O.I. or date of payment of tax, whichever
is later.
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J. K. SHAH CLASSES INTER C.A. - DIRECT TAXES
ADVANCE TAX & INTEREST
Q. 1. Mr. S during the financial year 2017-18 aged 48 years pays the following instalments of
advance tax :
15.9.2017 21,000
15.12.2017 14,000
16.3.2018 12,300
The regular assessment for the A.Y. 2018-19 is completed on 10.3.2019 and income
determined by the Assessing Officer without any addition is ì ì ì ì 6,97,200. He is also
entitled to tax credit of ì ì ì ì 9,476 on account of TDS.
Find out the amount of interest payable under section 234B & 234C.
Q. 2. Compute the advance tax payable by Ms. Shraddha from the following estimated
income submitted for the financial year 2017-2018
Income from Salary 5,80,000
Rent from house property (per annum) 3,60,000
Interest on government securities 25,000
Interest on saving bank deposit 3,000
Receipt from lottery (net) (TDS @ 30%) 14,000
Agriculture Income 90,000
Contribution to PPF 60,000
Tax Deducted at source by the employer on salary 37,080
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: 272 :
SEC 192. SALARY
Person responsible to deduct tax
All Assesses who are employers (resident as well as non-
resident)
Rate of deduction of tax
Average of income-tax computed on the basis of the rates in force for the financial year (Part III of Schedule I of the Finance Act) in which the payment is made, on the estimated income of the assessee under the head salary.
The employer shall, for the purposes of estimating income of the employee or computing tax deductible, obtain from the assessee the evidence or proof or particulars of prescribed claims (including claim for set-off of loss) under the provisions of the Act in such form and manners as may be prescribed.
Exemption limit Basic exemption available to the assessee
Time for deduction of tax
At the time of payment i.e. as and when salary is paid
Time for deposit of TDS
Refer to Table A
Deduction of tax at lower rate or non-deduction of tax
Application in Form No.13 shall be made to the AO. Certificate in the prescribed form shall be issued by the AO to the Assessee.
Inclusion of income / loss from other heads
The employer shall include the income from any other head on a declaration filed by the employee, but shall not consider loss under any other head except “House Property”. However, such inclusion of other income shall not in any case have the effect of reducing the tax deductible on salary income.
Payment of tax by employer on non-monetary perquisites Sec.192(1A)
The employer may, at his opinion, pay income tax on the whole or part of perquisites provided by way of non-monetary payments. Such tax may be determined at the average of income tax computed on the income chargeable under the head ‘Salaries’, including the non-monetary payments. The tax so payable shall be construed as if it were a tax deductible at source.
PAYMENT OF ACCUMULATED BALANCE FROM PROVIDENT FUND :- SEC 192A [inserted by FA 2015 w-e-f 1-6-15
Person responsible to deduct tax
The trustee of the Payment of Employees’ Provident Fund Scheme, 1952
Category of payee Employee
Circumstance In a case where the accumulated balance due to an employee participating in a recognized provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable.
CHAPTER NO. 15 TAX DEDUCTION AND COLLECTION AT SOURCE
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: 273 :
Rate of deduction of tax
10%. If PAN is not provided then MMR (34.608%)
No TDS The payment is < Rs.50,000/-
Time for deduction of tax
At the time of payment
Time for deposit of TDS
Refer to Table A
Payees declaration for non-deduction of tax
Declaration in Form 15G [seniors (age > 60) – form 15H] by an Assessee in duplicate. Once copy of such form is to be delivered to income tax department on or before 7
th of the
following month in which declaration is furnished.
INTEREST ON SECURITIES :- SEC. 193
Person responsible for tax deduction
Central or State Government, Local Authority, Company or Corporation established under the Central or State Act
Category of payee and Rate of deduction of tax
Resident Non-corporate Assessee and Domestic Company : @ 10%
Time for deduction of tax
At the time of credit or payment whichever is earlier. It includes credit to “Interest payable account” or “suspense account”.
Time for deposit of TDS
Refer to Table A
Deduction at lower rate or no deduction.
Application in Form No.13 shall be made to the AO.
Certificate in the prescribed form shall be issued by the AO to the Assessee.
Non-deduction of tax Declaration in Form No.15G [seniors (age > 60) – form 15H) by an Assessee other than Company or Firm in duplicate. One copy of such form is to be delivered to income tax department on or before 7th of the month following the month in which declaration is furnished.
Interest on which no tax is deducted at source
i) Any interest payable on National Development Bonds; or
ii) Any interest payable on notified debentures, issued by any institution or authority, or any public sector company, or any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank)
iii) Any interest payable on any security of the Central Government or a State Government [excluding interest > Rs.10,000/- payable on 8% Savings (Taxable) Bonds,2003];
iv) Any interest payable to an individual or HUF, who is resident in India, on listed debentures issued by a company in which the public are substantially interested, if –
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 274 :
(a) The interest is paid by the company by an account payee cheque; and
(b) The aggregate amount of interest paid or likely to be paid during the FY does not exceed Rs.5,000/-
v) Any interest payable to the LIC, on any securities owned by it or in which it has full beneficial interest, or
vi) Any interest payable to the GIC, or to any of its 4 subsidiary companies, on any securities owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest; or
vii) Any interest payable to any other insurer on any securities owned by it or in which it has full beneficial interest.
viii) Any interest payable on any security issued by a company, where such security is in dematerialized form and is listed on a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made there under.
DIVIDENDS :- SEC. 194
The principal officer of a domestic company shall, before making any payment in cash
or before issuing any cheque or warrant in respect of any dividend or before making any
distribution or payment to a shareholder, who is resident in India, of any dividend within
the meaning of section 2(22)(e), deduct from the amount of such dividend, income-tax
@10%.
Exceptions : No such deduction shall be made in the following cases:-
In case of a shareholder, being an individual if –
a. The dividend is paid by the company by an account payee cheque; and
b. The amount of such dividend or, as the case may be, the aggregate of the
amounts of such dividend distributed or paid or likely to be distributed or paid
during the financial year by the company to the shareholder, does not exceed
Rs.2,500/-
INTEREST OTHER THAN “INTEREST ON SECURITIES”:- SEC.194A
Person responsible for tax deduciton
a) All persons other than individual and HUF, and b) Individual and HUF who are required to get their
accounts audited u/s 44AB (a) or (b), in the preceding FY.
Category of payee Any resident in India
Rate of deduction of tax
Non-corporate Assesses or Domestic companies @10%
No TDS i) Where the aggregate of interest credited or paid or likely to be credited or paid during the FY does not exceed – a) Rs.10,000/- in case of interest paid by banking
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 275 :
company, co-operative bank or post office on notified deposit schemes, and
b) Rs.5,000/- in any other case Provided that in respect of the income credited or paid in respect of – (a) Time deposits with a banking company; or (b) Time deposits with a co-operative bank; (c) Deposits with a public company providing long-term
finance for construction or purchase of residential houses in India and which is eligible for deduction under section 36(1)(viii), The aforesaid amount shall be computed with reference to a branch;
Provided further that the amount referred to in the first proviso shall be computed with reference to the total income credited or paid by the banking company or the co-operative society or the public company (and not branch wise), where such banking company or the co-operative society or the public company has adopted core banking solutions [inserted by FA 2015 w-e-f 1-6-15] “TIME DEPOSITS” means deposits including recurring deposits repayable on the expiry of fixed periods
ii) Interest credited or paid to –a) Any banking company, or any co-operative bank
(including a co-operative land mortgage bank), or b) Any financial corporation established by or under a
Central, State or Provincial Act, or c) The Life Insurance Corporation of India, or d) The Unit Trust of India, or e) Any company or co-operative society carrying on the
business of insurance, or f) Notified institution, association or body or class of
institutions, associations or bodies; iii) Interest credited or paid by a firm to a partner of the firm;iv) To such income credited or paid by a co-operative
society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society. [Amended by FA 2015 w-e-f 1-6-15]Explanation – For the purposes of this clause, “co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949)
v) Interest credited or paid by the Central Government under any provision of this Act or, or the Estate Duty Act, 1953, or the Wealth-tax Act, 1957;
vi) Interest paid or payable by an infrastructure capital
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 276 :
company or infrastructure capital fund or a public sector company or scheduled bank in relation to a zero coupon bond issued on or after 1st June, 2005.
Time for deduction of tax
At the time of credit or payment whichever is earlier. It
includes credit to a suspense account
Time for deposit of TDS
Refer to Table A
Deduction of tax at lower rate or non-deduction of tax
Application in Form No.13 shall be made to the AO. Certificate in the prescribed form shall be issued by the AO to the Assessee.
Payees declaration for non-deduction of tax
Declaration shall be furnished in Form 15G [seniors (age > 60) – form 15H] by an Assessee other than Company of Firm in duplicate. One copy of such form is to be delivered to INCOME TAX DEPARTMENT on or before 7th of the following month in which declaration is furnished.
WINNINGS FROM LOTTERY OR CROSSWORD PUZZLE : SEC 194B
Person responsible to deduct tax
Any person paying the sum
Category of payee Any assessee
Rate of deduction of tax
30%
Winning in kind Person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.
No TDS The payment =< Rs.10,000/-
Time for deduction of tax
At the time of payment. Where prize money is in kind, before releasing the prize, the payer should ensure that tax has been paid in respect of the winnings.
Time for deposit of TDS
Refer to Table A
WINNINGS FROM HORSE RACE :- SEC 194BB
Person responsible to deduct tax
Any person being a licensed bookmaker
Category of payee All Assesses
Rate of deduction of tax
30%
No TDS The payment =< Rs.10,000/-
Time for deduction of tax
At the time of payment
Time for deposit of TDS
Refer to Table A
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PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS:- SEC. 194C
Person responsible to
deduct tax
a) The Central Government of any state Government; or b) Any local authority; or c) Any corporation established by or under a Central, State or
Provincial Act; or d) Any company; or e) Any co-operative society; or f) Any authority, constituted in India by or under any law,
engaged either for the purpose dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
g) Any society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India; or
h) Any trust; or i) Any university established or incorporated by or under a
Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
j) Any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
k) Any firm; or l) Any person, being an individual or a Hindu undivided family or
an association of persons or a body of individuals, if such person – A. Does not fall under any of the preceding sub-clauses; and B. Is liable to audit of accounts under clause (a) or clause (b)
of section 44AB during the preceding financial year; Exception for individual and HUF : Contract of personal nature
Nature of payment
Payment of any sum to any resident or contractor for carrying out any work including supply of labour for carrying out any work in pursuance of any contract, including –
a) Advertising b) Broadcasting and telecasting including production of
programs for such broadcasting or telecasting c) Carriage of goods and passengers by any mode of
transport other than by railways d) Catering e) Manufacturing or supplying a product according to the
requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.
f)
Category of payee Any person
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 278 :
Rate of deduction
of tax
Payment to an individual or HUF – 1%
Payment to any other person – 2%
Where any sum is paid or credited for carrying out any work
mentioned in sub-clause (e), above, tax shall be deducted at
source –
i) On the invoice value excluding the value of material, if
such value is mentioned separately in the invoice; or
ii) On the whole of the invoice, if the value of material is not
mentioned separately in the invoice
No TDS
a) Contracts the consideration for which does not exceed
Rs.30,000/- or
b) Aggregate of the sums credited or paid or likely to be credited
or paid during the FY does not exceed Rs.1,00,000/-, or
c) Payment to a contractor during the course of business of
plying, hiring or leasing goods carriages, not owning more
than 10 goods carriages anytime during the PY and who
furnishes his PAN to the payer. [Amended by FA 2015 we-f
1-6-15]
Time for
deduction of tax
At the time of credit or payment whichever is earlier (including
Cr to suspense a/c)
Time for deposit
of TDS
Refer to Table A
Deduction at
lower or nil rate
Application in Form No.13 shall be made to the AO
INSURANCE COMMISSION – SEC.194D
Person responsible to
deduct tax
Insurance companies
Category of payee Resident Assessee
Rate of deduction of
tax
Non Corporate Assessee -5% and Domestic Company –
10%
Exemption limit Payment in aggregate =, Rs.15,000/- during FY
Time for deduction of
tax
At the time of credit or payment whichever is earlier
Time for deposit of
TDS
Deduction of tax at
lower / nil rate
Application in form No.13 shall be made to the Assessing
Officer Certificate in the prescribed form shall be issued by
the AO.
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PAYMENT FROM LIFE INSURANCE POLICY – SEC.194 DA
[Inserted by FA 2014]
Person responsible to deduct tax
Insurance Companes
Category of payee Resident Assessee
Rate of deduction of tax
1% of payment including bonus
Exemption Amount which is exempt u/s 10(10D), or Aggregate amounts of payments in a FY < 1,00,000/-
Payee declaration for non-deduction of tax
Declaration shall be furnished in Form 15G [seniors (age > 60) – form 15H] by an Assessee other than company or Firm in duplicate. One copy of such form is to be delivered to INCOME TAX DEPARTMENT on or before 7th of the
following month in which declaration is furnished.
PAYMENTS TO NON-RESIDENT SPORTSMEN OR SPORTS ASSOCIAITONS. SEC.
194E
Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete), or an entertainer, who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a chque or draft or by any other mode, whichever is earlier, deduct income-tax thereon @20%.
COMMISSION, ETC., ON SALE OF LOTTERY TICKETS – SEC.194G
Any person who is responsible for paying to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount > Rs.15,000/- shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon @5%
COMMISSION OR BROKERAGE – SEC. 194H
Person responsible to deduct tax
a) All persons other than individual and HUF, and b) Individual and HUF who are required to get their
accounts audited u/s 44AB (a) or (b), in the preceding FY
Category of payee Any person
Nature of payment Commission or Brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 280 :
relating to any asset, valuable article or thing, not being securities. Exception: Commission or Brokerage payable by BSNL or MTNL to their public call office franchisees.
Rate of deduction of tax
5%
No TDS Aggregate payment =, Rs.15,000/- during the FY
Time for deduction of tax
At the time of payment of credit whichever is earlier, including credit to a suspense account
Time for deposit of TDS
Refer to Table A
Deduction of tax at lower / nil rate
Application in Form No. 13 shall be made to the AO. Certificate in the prescribed form shall be issued by the AO.
RENT – SEC. 194-I
Person responsible to deduct tax
a) All persons other than individual and HUF, and b) Individual and HUF who are required to get their
accounts audited u/s 44AB in the preceding FY
Category of payee Any person being resident in India
Nature of payment Rent means any payment, by whatever name called, under nay lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any, -
i. Land; or ii. Building (including factory building); or iii. Land appurtenant to a building (including factory
buildings); or iv. Machinery; or v. Plant; or vi. Equipment; or vii. Furniture; or viii. Fittings, Whether or not any or all of the above are owned by the payee;
Rate of deduction of tax
a) Machinery, plant or equipment - @2%b) Land or building (including factory building) or land
appurtenant to a building (including factory building) or furniture or fittings - @10%
No TDS i. Aggregate amount of rent paid or credited < Rs.1,80,000/- during the FY, or the payee is the
government or local authority.
Time for deduction of tax
At the time of payment or credit whichever is earlier, including credit to suspense account
Time for deposit of TDS
Refer to table A
Deduction of tax at lower nil / rate
Application in Form No.13 shall be made to the Assessing Officer Certificate in the prescribed form shall be issued by the AO to the Assessee.
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RENT SECTION 194 IB
(1) Any person, being an individual or a Hindu undivided family (other than those
referred to in the second proviso to section 194-I), responsible for paying to a
resident any income by way of rent exceeding fifty thousand rupees for a month or
part of a month during the previous year, shall deduct an amount equal to five per
cent of such income as income-tax thereon.
(2) The income-tax referred to in sub-section (1) shall be deducted on such income at
the time of credit of rent, for the last month of the previous year or the last month
of tenancy, if the property is vacated during the year, as the case may be, to the
account of the payee or at the time of payment thereof in cash or by issue of a
cheque or draft or by any other mode, whichever is earlier.
(3) The provisions of section 203A shall not apply to a person required to deduct tax in
accordance with the provisions of this section.
(4) In a case where the tax is required to be deducted as per the provisions of section
206AA, such deduction shall not exceed the amount of rent payable for the last
month of the previous year or the last month of the tenancy, as the case may be.
Explanation.—For the purposes of this section, “rent” means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.’.
PAYMENT ON TRANSFER OF CERTAIN IMMOVABLE PROPERTY OTHER THAN AGRICULTURAL LAND:- SEC. 194IA
Person responsible to deduct tax
Any person being a transferee and responsible to pay the consideration
Category of payee Any person 9transferor) being resident in India
Nature of payment Consideration for transfer of immovable property being land (other than rural agricultural land in India) or building or part of a building.
Rate of deduction of tax
1% of consideration
No TDS Consideration < Rs.50 lakhs
Time for deduction of tax
at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier
Time for deposit of TDS
Compulsory electronic payment within 7 days of the following month
TAN and PAN Numbers?
Deductor is not required to have TAN number. However, he must obtain PAN of the Deductee. Otherwise tax will have to be deducted @20% instead of 1%. Section 206AA will apply in such case.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
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FEES FOR PROFESSIONAL OR TECHNICAL SERVICES :- SEC.194J
Person responsible to deduct tax
c) All persons other than individual and HUF, and d) Individual and HUF who are required to get their
accounts audited u/s 44AB in the preceding FY
Category of payee Any person
Nature of payment (a) “Professional Services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;
(b) “Fees for technical services” shall have the same
meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9
(c) any remuneration or fees or commission by whatever name called, other than those which tax is deduction u/s 192, to a director of a company, or
(d) royalty, or (e) any sum referred to in clause (va) of section 28
Rate of deduction 10% (in case payee engaged only in the business of operation of call center = 2%)
No TDS i. Aggregate of payments =< Rs.30,000/- during the FYii. Payment in respect of services for personal purpose
of individual or any member of Hindu undivided family
Time for deduction of tax
At the time of payment or credit whichever is earlier, including credit to suspense account
Time for deposit of TDS
Refer to table A
Deduction of tax at lower nil / rate
Application in Form No.13 shall be made to the Assessing Officer for obtaining the certificate in the prescribed form.
PAYMENT OF COMPENSATION ON ACQUISITION OF CERTAIN IMMOVABLE PROPERTY : SEC. 194LA
Person responsible to deduct tax
Any person responsible for payment of compensation
Category of payee Any resident person
Nature of payment Compensation or the enhanced compensation or the consideration or the enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any immovable property (other than agricultural land)
Rate of deduction 10% of such compensation
No TDS Where the aggregate amount of such payments during the FY =< Rs.2,50,000/-
Time for deduction At the time of payment in cash or by cheque or draft or by any other mode
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OTHER SUMS. SEC. 195.
Payment in respect of which tax is to be deducted
Payment to a Non-Resident or a Foreign Company of: � Any interest (other than covered by 194LC) including
interest on securities; or � Any other sum chargeable to income tax in India, not beign
salaries
Time for deduction At the time of payment or credit to the account of payee, whichever is earlier, including credit to interest payable account or suspense account
Time for deposit Refer Table A
Certificate of TDS Form 16A, refer Table C
Quarterly Statements Form No. 26Q. refer table B for time
Deduction of tax at lower / nil rate
Application in Form No. 15C/15D shall be made to the AO
TAX DEDUCTED IS INCOME RECEIVED SEC.198.
All sums deducted in accordance with the provisions of the foregoing provisions of this
Chapter shall, for the purpose of computing the income of an assessee, be deemed to
be income received.
Provided that the sum being the tax paid, u/s.192(1A) shall not be deemed to be income
received.
CREDIT FOR TAX DEDUCTED SEC.199.
1) Any deduction made in accordance with the foregoing provisions of this Chapter and
paid to the Central Government shall be treated as a payment of tax on behalf of the
person from whose income the deduction was made, or of the owner of the security,
or of the depositor or of the owner of property or of the unit-holder, or of the
shareholder, as the case may be.
2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central
Government shall be treated as the tax paid on behalf of the person in respect of
whose income such payment of tax has been made.
DUTY OF PERSON DEDUCTING TAX SEC.200.
1) Any person deducting any sum shall pay such sum within the prescribed time, to the
credit of the Central Government or as the Board directs.
2) Any person being an employer, referred to u/s 192(1A) shall pay, within the
prescribed time, the tax to the credit of the Central Government or as the Board
directs
2A) in case of an office of the Government, where the sum deducted in accordance with
the foregoing provisions of this Chapter or tax referred to in sub-section (1A) of section
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 284 :
192 has been paid to the credit of the Central Government without the production of a
challan, the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing
and Disbursing Officer or any other person, by whatever name called, who is
responsible for crediting such sum or tax to the credit of the Central Government, shall
delivery or cause to be delivered to the prescribed income-tax authority, or to the person
authorized by such authority, a statement in such form, verified in such manner, setting
for the such particulars and within such time as may be prescribed. [Inserted by FA 15]
3) Any person deducting any sum in accordance with the foregoing provisions of this
Chapter or, as the case may be, any person being an employer referred to in sub-
section (1A) of Section 192 shall, after paying the tax deducted to the credit of the
Central Government within the prescribed time, prepare such statements for such
period as may be prescribed, and deliver or cause to be delivered to the prescribed
income-tax authority or the person authorized by such authority such statement in
such form and verified in such manner and setting forth such particulars and within
such time as may be prescribed.
Provided that the person may also deliver to the prescribed authority a correction
statement for rectification of any mistake or to add, delete or update the information
furnished in the statement delivered under this sub-section in such form and verified
in such manner as may be specified by the authority.
Table A : Due date for deposit of TDS or TCS Amount :- Sec.192(1A)
SI. No. Deductor Cases Due Date for TDS
Due Date for TCS
1
Government
Tax paid without production of an income-tax challan
Same day Same Day
2 Tax paid accompanied by an income-tax challan
7 days from end of month
7 days from end of month
3 Any other person
Deduction made in the months of April to Feb
7 days from end of month
7 days from end of month
4 If income is credited or paid in the month of March
30th April 7 days from end of month
Failure to deduct / collect or pay tax at source (Sec. 201 and 206C)
If any person liable to deduct / collect tax at source fails to collect or fails to pay it to the
Department then the following consequences arise :-
* Interest - The defaulter shall be liable to pay simple interest u/s 201(1A) as under :
(i) at 1% p.m. or part thereof on the amount of tax not deducted from the date the tax
was deductible to the date the tax was actually deducted.
AND
(ii) at 1.5% p.m. or part thereof on the amount of tax deducted but not paid from the
date the tax was actually deducted to the date the tax was actually paid.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 285 :
In case TDS is not deducted by the payer but as per section 191, tax is paid by the
resident receipient on such income, then interest will be levied for the period from the
date tax was deductible to the date of filing return of income by the receipient. The rate
of interest will be 1% p.m. or part thereof.
* Penalty - Levy of penalty equal to the amount of TDS / TCS not deducted /
collected u/s. 271C & u/s. 271CA.
* Rigorous imprisonment - Rigorous imprisonment for a term not less than 3 months
but extending upto 7 years, with fine for failure to pay to the credit of the Central
Government the tax deducted / collected at source, u/s. 276B.
Penalty and rigorous imprisonment can be waived if the defaulter proves that there
was reasonable cause for such failure.
REQUIREMENT TO FURNISH PERMANENT ACCOUNT NUMBER :- SEC 206AA
1) Any person entitled to receive any sum or income or amount, on which tax is
deductible shall furnish his PAN to the person responsible for deducting such tax,
failing which tax shall be deducted at the higher of the following rates, namely:-
(i) At the rate specified in the relevant provision of this Act; or
(ii) At the rate or rates in force; or
(iii) At the rate of 20%
2) Form 15G shall not be valid unless the person furnishes his PAN in such declaration
3) In case any declaration becomes invalid under sub-section (2), the deductor shall
deduct the tax at source in accordance with sub-section (1)
4) No certificate shall be granted on the basis of form 13 unless the application
contains the PAN of the applicant
5) The deductee shall furnish his PAN to the deductor and both shall indicate the same
in all the correspondence, bills, vouchers and other documents which are sent to
each other.
6) Where the PAN provided to the deductor is invalid or does not belong to the
deductee. It shall be deemed that the deductee has not furnished his PAN to the
deductor and the provisions of sub-section (1) shall apply accordingly.
7) The provisions of this section shall not apply in respect of payment of interest on
long-term bonds as referred to in section 194LC, to a foreign company or any
other non-resident person.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 286 :
Tax Collection at Source
PROFITS AND GAINS FROM THE BUSINESS OF TRADING IN ALCOHOLIC LIQUOR, FOREST PRODUCE, SCRAP, ETC.:- SEC 206C
1) Every seller shall, at the time of debiting of the amount payable to the account of the
buyer or at the time of receipt of such amount whichever is earlier, collect from the
buyer of following goods, a sum equal to the specified percentage of such amount
as income-tax.
Table
SI.No.
Nature of Goods Percentage
Category A: Sale of the following
i. Alcoholic liquor for human consumption 1%
ii. Tendu leaves 5%
iii. Timber obtained under a forest lease 2.5%
iv. Timber obtained by nay mode other than under a forest lease
2.5%
v. Any other forest produce not being timber or tendu leaves
2.5%
vi. Scrap 1%
vii. Minerals, being coal or lignite or iron ore 1%
Category B: Grant of Lease/License of the following
i. Parking lot 2%
ii. Toll plaza 2%
iii. Mining and quarrying 2%
Category C: Sale of the following where any amount of consideration is received in Cash.
i. Bullion > 2,00,000/- 1%
ii. Jewellery > Rs.5,00,000/- 1%
Category D: Sale of the following whether payment is received by Cheque or by any mode
i. Motor Vehicle of the value exceeding Rs. 10 Lakh 1%
(1A) Exception: No collection of tax shall be made in the case of a resident buyer, if he
furnishes to the person responsible for collecting tax, a declaration in duplicate in Form
27C to the effect that the goods are to be utilized for the purpose of manufacturing,
processing or producing articles or things or for the purposes of generation of power
and not for trading purposes.
(1B) The Seller shall deliver to the CCIT or CIT one copy of such declaration on or
before the 7th day of the month next following the month in which the declaration is
furnished to him.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 287 :
(1C) Every lessor of parking lot, toll plaza or mine or quary, shall at the time of debiting of the amount payable to the account of lessee or at the time of receipt of such amount from lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect a sum equal to the prescribed percentage, of such amount as income-tax.
Explanation : - “mining and quarrying” shall not include mining and quarrying of mineral oil (including petroleum and natural gas) (1D) Every seller, who receives any consideration in cash for sale of –
� Bullion > 2,00,000/- or
� Jewellery > Rs.5,00,000/-Shall, at the time of receipt of such amount in cash, collect from the buyer, a sum = 1% of sale consideration as income tax.
Time for deposit of Tax collected at source – same as TDS Time for issue of TCS certificate – same as TDS Time for filling quarterly statement in form 27Q – same as TDS In case of an office of the Government, where the amount collected has been paid to the credit of the Central Government without the production of a challan, the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer or any other person, by whatever name called, who is responsible for crediting such tax to the credit of the Central Government, shall deliver or cause to be delivered to the prescribed income-tax authority, or to the person authorized by such authority, a statement in such form, verified in such manner, setting forth such particulars and within such time as may be prescribed.
Assessee in default – same as TDS Exception : Provided that any person, other than referred to in sub-section (1D), shall not be deemed to be an assessee in default in respect of such tax if such buyer or license or lessee –
i) Has furnished his ROI u/s 139; ii) Has taken into account such amount for computing his income; and iii) Has paid the tax due on such income
And the person furnishes a certificate to this effect from CA in prescribed form:
Interest on Delay in deposit of TCS : simple interest @ 1% per month or part
thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid, and such interest shall be paid before furnishing the quarterly statement.
Provided that in case any person, other than referred to in sub-section (1D), who is not deemed to be an assessee in default, the interest shall be payable from the date on which such tax was collectible to the date of furnishing of return of income by such buyer or license or lessee.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 288 :
Lesser or no collection of Tax at source : Where the AO is satisfied that the total income of the buyer or lessee justifies the collection of the tax at any lower rate than the relevant rate, he shall, on an application [form 13] made by the buyer or lessee in this behalf, give to him a certificate for collection of tax at such lower rate.
Explanation – For the purposes of this section, -
(a) “Buyer” with respect to – (i) Sub-section (1) means a person who obtains in any sale, by way of auction,
tender or any other mode, goods of the nature specified in the Table in sub-section (1) or the right to receive any such goods but does not include, - (B) a public sector company, the Central Government, a State Government, and an embassy, a High Commission, legation, commission, consulate and the trade representation, of a foreign State and a club; or (C) a buyer in the retail sale of such goods purchased by him for personal consumption,
(ii) sub-section (1D) means a person who obtains in any sale, goods of the nature specified in the said sub-seciton
(b) “Scrap” means a waste and scrap from the manufacture or mechanical working of
materials, which is definitely not usable as such because of breakage, cutting up, wear and other reasons;
(c) “Seller” means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or nay company or firm or co-operative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) are sold.
Other Sections
Bar against direct demand on assessee – sec 205
Where the tax deductible at source under the provisions of section 192 to 196D, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.
Where the payer, who has deducted tax at source, has not paid tax to the credit of the CG only such payer can be considered as an assessee in default in respect of the amount so deducted and the department cannot recover the amount from the payee.
Tax deducted is income received [Section 198] (1) All sums deducted in accordance with the foregoing provisions shall, for the
purpose of computing the income of an assessee, be deemed to be income received.
(2) However, the tax paid by an employer under sub-section (1A) of section 192 on nonmonetary perquisites provided to the employees, shall not be deemed to be income received by the assessee.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAX
: 289 :
Credit for tax deducted at source [Section 199]
(1) Tax deducted at source in accordance with the above provisions and paid to the
credit of the Central Government shall be treated as payment of tax on behalf of
the-
(i) person from whose income the deduction was made; or
(ii) owner of the security; or
(iii) depositor; or
(iv) owner of property; or
(v) unit-holder; or
(vi) shareholder.
(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central
Government, shall be treated as the tax paid on behalf of the person in respect of
whose income, such payment of tax has been made.
(3) The CBDT is empowered to frame rules for the purpose of giving credit in respect
of tax deducted or tax paid under Chapter XVII. The CBDT also has the power to
make rules for giving credit to a person other than the persons mentioned in (1)
and (2) above. Further, the CBDT can specify the assessment year for which such
credit may be given.
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J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 304 :
Q. 1.R, who is carrying on a business whose accounts have been subject to tax audit regularly, submits his profit & loss account for the year ending 31.3.2018.
`̀̀̀ `̀̀̀
Office expenses 25,600 Gross profit 5,23,600
Audit fees 32,000 Sundry receipt 11,000Legal expenses 18,000 Customs duties recovered
from the government (Earlier not allowed as deduction) 22,000
Depreciation on machinery 24,000
Salary to staff 84,000
Bonus to staff 45,000 Bad debts recovered (earlier allowed as deduction) 6,000Contribution to an approved
gratuity fund 24,000
Outstanding liability in respect of excise duty
24,000 Gift from son 30,000
Real payable to railways 1,20,000General expenses 36,000Net Profit 1,60,000
5,92,600 5,92,600
Other relevant particulars :
1. Bonus payable to employees according to the payment of Bonus Act, 1965, comes to `40,000.
2. Depreciation on machinery shown in the Profit and Loss Account is calculated according to the income-tax provisions.
3. General expenses include payment of ` 12,000 to an approved and notified education institute for the purpose of carrying on research in social sciences. The research is, however, not related to the business of the assesse.
4. During the previous year 2017-18 R also makes a capital expenditure of ` 25,000 for the purpose of carrying on a scientific research related to his business. This expenditure is, however, not recorded in the Profit and Loss Account.
5. Outstanding liability in respect of excise duty is paid as follows: ` 5,000 on 11.4.2018 ` 3,000 on 5.5.2018 ` 6,000 on 30.6.2018 and the balance on 10.11.2018.
6. Audit fee of 32,000 was credited on 31.3.2018. No tax has been deducted at source.
7. Outstanding liability in respect of rent payable to railways is paid as follows: ` 90,000 on 15.6.2018 and the balance on 14.12.2018.
Compute his income from business for the assessment year 2018-19. Assume the due date of filing return of income is 30th September.
Solution:
Computation of total income:
`̀̀̀ `̀̀̀
Net Profit 1,60,000
Less : Items credit to P & L A/c but not treated as income:
Customer duties recovered
Gift from son 22,000
30,000 52,000
1,08,000
CHAPTER NO. 17 HOMEWORK PROBLEMS
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 305 :
Add : (1) Expenses disallowed: Outstanding liability for excise duty not paid before filing the return (30.9.2017) disallowed u/s 43B (24,000 – 14,000)
10,000
(2) Outstanding liability of rent payable to railway not paid before filing the return i.e. 30.9.2017 disallowed u/s 43B
30,000
(3) 30% Audit fee as tax has not been deducted at source (Section 40(a) (ia)
9,600 49,600
1,57,000
Less:(i) Capital expenditure incurred on scientific research related to business but not debited to P & L A/c
25,000
(ii) 25% extra deduction for donation to education institute for research in social sciences.
3,000 28,000
Business income being total income. 1,29,000
Q. 2. Shri Batra is the owner of a small manufacturing unit. He gives you the following details drawn from his books of account for the year 2017-18. 1. Computed net profit, after charging the following items, ` 27,500
2. Provisions and reserves debited to Profit and Loss Account. ` ` ` `
(i) Provision for doubtful debts 15,000 (ii) Depreciation reserve 20,000
3. Household expenses ` 46,000.
4. Donations to Prime Minister National Relief Fund `10,000; Other charitable donations ` 20,000.
5. Account payee cheques issued for purchases 60,000. 6. Audit fee charged ` 20,000, including expenses on income-tax assessment
` 15,000.
7. Patents purchased for ` 70,000 during the previous year on 5.7.2017.
8. Incomes credited to Profit and Loss Account were: (i) Bank interest on F.D. ` 5,000.
(ii) Interest on Post-Office Savings Bank Account ` 3,000
(iii) Interest on UTI units ` 2,000.
9. Opening stock is valued at cost plus 10% basis, whereas closing stock was valued at cost minus 10% basis. Opening stock valued was ` 66,000; Closing stock valued was ` 72,000.
Compute the net Business Income for the assessment year 2018-19
Solution
`̀̀̀ `̀̀̀
Computed net profit
Add : (A) Inadmissible items, debited to Profit & Loss A/c
27,500
(1) Provision for doubtful debts 15,000
(2) Depreciation reserve 20,000
(3) Household expenses 46,000
(4) Donations (allowed from GTI) 30,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 306 :
(5) Patents (for separate consideration) 70,000 1,81,000 2,08,500
(B) Difference on account of valuation of opening and closing stock
14,000
2,22,500 Less : Items credited to Profit and Loss A/c but not being income from business (5,000 + 3,000 + 2,000)
10,000
2,12,500
Less : Depreciation on patents @ 25% on 70,000 17,500 1,95,000 Notes : If opening stock is taken on cost, valuation should be
60,000
If closing stock is taken on cost, valuation should be 80,000 If these valuation are taken, the profit will increase by 14,000
Q. 3.From the following profit & Loss Account of Mr. Vinay Jain ascertain his income from business and Gross Total Income for the assessment year 2018-19.
`̀̀̀ `̀̀̀
To salary (including proprietor’s salary)
45,000 By gross profit By bad debt recovered
1,22,000
To general expenses 5,000 (No allowed earlier by Assessing Officer due to lack of evidence)
2,000
To advertisement 3,000 By rent received 3,000To interest on proprietor’s capital
2,000 By interest on fixed deposit in a bank
1,000
To provision for bad debts 2,000To Fire Insurance Premium (on house property)
100
To depreciation 4,000To reserve for VAT 10,000
To advance income-tax 9,500
To donation to Central Library 1,000
To corporation-tax on house property
500
To motor car expenses 1,000To stationery 1,900Net profit 38,500
1,28,000 1,28,000
Other information
1. General expenses include ` 300 given to a poor student to enable him to pursue his studies.
2. Depreciation is in excess by ` 1,500.
3. Motor car expenses include ` 300 for personal purpose.
4. Central library is an approved institution.
5. The proprietor draws ` 500 p.m. by way of salary.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
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Solution:
`̀̀̀ `̀̀̀
Profit as per Profit and Loss A/c 38,500Add : Inadmissible expenses:
(i) Charity to poor student 300(ii) Excess depreciation 1,500
(iii) Out of Motor Car expenses 300(iv) Donation to Central Library (Allowed from GTI) 1,000
(v) Proprietor/s salary 6,000(vi) Interest on proprietors capital 2,000(vii) Provision for bad debts 2,000
(viii) Insurance of house property 100(ix) Reserve for VAT 10,000
(x) Advance income-tax 9,500
(xi) Corporation tax on house property 500 33,200
71,700
Less : Items credited to Profit and Loss A/c but not to be treated as income, or taxable under other heads (i) Bad debts recovered 2,000(ii) Rent received 3,000
(iii) Interest on fixed deposit in a bank 1,000 6,000
Income from business 65,700
Income from House Property Rent received Less: Municipal taxes 3,000 500
Less : Standard deduction @ 30% 2,500Income from other sources 750 1,750
Interest on fixed deposit in a bank 1,000
Gross total income 68,450
Q. 4. Dr. J.L. Gupta is a renowned medical practitioner who maintains books of account on cash basis. The following is the receipts and payments A/c for the financial year 2017-18.
`̀̀̀ `̀̀̀
Balance brought forward 44,000 Rent of clinic 2017-18 10,24,800
Consultation fees 2015-17 5,000
2018-19 51,200
2017-18 51,35,000 Water & Electricity Bills 2,000Visiting fees 30,000 Purchase of professional
books 40,000
Loan from bank 1,25,000 Household expenses 47,800Sale of medicines 60,000 Collection charges for
dividend income 100
Gifts and presents 5,000Royalties for articles published in various journals
6,000 Motor car purchased 1,30,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 308 :
Dividend 10,000 Surgical equipment purchased
24,800
Income-tax 7,000
Audit fee 53,000Interest on Government Securities
7000 Salary to staff 15,15,000
Life Insurance Premium 15,000Gift to son 5,000Interest on loan 11,000
Car expenses 15,000Purchase of medicines 40,000Balance c/d 24,45,300
54,27,000 54,27,000
Compute his income from profession for the assessment year 2018-19 after taking into account the following information:
1. Books worth ` 25,000 were purchased on 15.5.2017, which were annual publications and the balance on 5.2.2018 which were books other than annual publication.
2. Car was purchased on 1.1.2018 and the surgical equipment on 4.9.2017. 3. It is estimated that 1/3 of the use of car is for his personal use. 4. Gifts and presents include ` 2,000 from patients in appreciation of his medical
service and ` 3,000 received as birthday gifts.
5. Opening and closing stock of medicines amounted to ` 10,000 and ` 6,000 respectively.
Solution :
`̀̀̀ `̀̀̀ `̀̀̀
Gross receipts (a) Consultation fee (` 5,00 +51,35,000) 51,40,000
(b) Visiting fee 30,000
(c) Sale of medicines 60,000(d) Gifts from patients 2,000 52,32,000
Less : Expenses (1) Rent of clinic 10,24,800 + 51,200 10,76,000
(2) Water and electricity bill 2,000(3) Depreciation on professional books On 25,000 – 100% 25,000
on 15,000 – 30% 4,500 29,500
(4) Depreciation on surgical equipment 15% on 24,800
3,720
(5) Depreciation on car 15 1 2
1,30,00100 2 3
x x x� �� �� �
6,500
(6) Medicine consumed - Purchased 40,000- Decrease in stock 4,000
44,000(7) Salary to staff 15,15,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 309 :
(8) Interest on loan 11,000
(9) Car expenses 115000
2x
� �� �� �
10,000
(10) Audit fee 53,000 27,50,720
Income from profession 24,81,280
Royalty for articles and interest on government securities are textile under the head ‘income from other sources’. Note : - Books which are annual publications are eligible for depreciation @ 100% whereas books other than annual publication are eligible for depreciation @60%. In the above case, since the books which were not annual publication were purchased on 5.2.2017, depreciation shall be charged @ 50% of 60% i.e. @ 30%.
Q. 5. M/s. ABC Ltd. filed a return of income for assessment year 2018-19 declaring an income of ` 3,25,000. The return is accompanied by the profit and Loss account as under:
`̀̀̀ `̀̀̀
To salaries, bonus and office expenses
1,00,000 By gross profit 5,70,000
To interest on loan 40,000 By interest on bank deposits 12,000To interest for delayed payment of VAT
20,000 By dividend from UTI 18,000
To interest on delayed payment of income-tax
5,000 By dividend from foreign companies
9,000
To income-tax paid 45,000 By income-tax refund 15,000By customs draw bank 1,50,000
To interest on loan for purchase of shares of Indian companies
5,000 By VAT refund (earlier not allowed as deduction)
5,000
Interest on loan for payment of income-tax
5,000 By interest from income- tax department
5,000
To road construction expenses 50,000To entertainment expenses 12,000To income-tax proceeding expenses
2,000
To penalty levied by customs 5,000To provision for income-tax 50,000To contribution to recognised provident fund
40,000
To reserve for bad debts 44,000
To depreciation 36,000To net profit 3,25,000
7,84,000 7,84,000
The profit and loss account has following notes. 1. ` 7,500 on account of bonus remained unpaid at the end of the year.
2. Last instalment of contribution to Provident Fund of 2,000 has been paid before the date of filing return of income but after the date as per Provident Fund Act.
3. Depreciation allowable as per the Income-tax Rules is 33,000. There is no other information available with the return of income. Compute business income of the company for assessment year 2018-19.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 310 :
Solution
`̀̀̀ `̀̀̀
Profits as per Profit and Loss A/c Add: Inadmissible expenses
3,25,000
(1) Interest on delayed payment of income-tax 5,000(2) Income-tax paid 45,000
(3) Interest on loan for purchase of units 5,000(4) Interest on loan for payment of income-tax 50,000
(5) Road construction expenses 5,000(6) Penalty levied by customs 50,000(7) Provision for income-tax 44,000
(8) Reserve for bad debts 3,000(9) Excessive depreciation 7,500 2,19,500
(10) Unpaid bonus – 43B 5,44,500
Less: Items credited to Profit and Loss A/c, not treated as Income/Taxable under other heads
(1) Interest on Bank Deposits 12,000(2) Dividend from UTI 18,000(3) Dividend from Foreign Companies 9,000(4) Income-tax refund 15,000
(5) VAT refund 5,000(6) Interest from Income Tax Department (taxable under other sources)
5,000 64,000
4,80,500Less: Depreciation on road construction @ 10% assuming put to use for 180 days or more.
5,000
Income from business 4,75,000
Q. 6. Mr. Bharat is a registered medical practitioner. He keeps his books on cash basis, and his summarised cash account for the year ended 31.3.2018 is as under:
`̀̀̀ `̀̀̀
Balance b/d 2,24,000 Cost of medicines 10,000Loan from bank for private purpose
3,000 Surgical equipment’s 4,000
Sale of medicines 25,250 Motor car 2,20,000Consultation fees 50,55,000 Car expenses 6,000
Visiting fees 5,24,000 Salaries 20,31,600Interest on Govt. securities 4,500 Rent of dispensary 5,51,600Rent from property (not subject to local taxes)
3,600 General expenses 20,300
Personal expenses 11,600Life insurance premium 3,000
Interest on loan from bank
300
Insurance of property 200Telephone expenses 33,000Balance c/d 29,47,750
58,39,350 58,39,350
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 311 :
Compute his income from profession for the assessment year 2018-19 taking into account the following further information: (i) 1/4th of motor car expenses are in respect of his personal use. (ii) Depreciation allowable on car is 15% and surgical equipment is 15%. Both the assets
were purchased in December, 2016.
(iii) Opening stock and closing stock of medicines was 20,000 and 12,000.
Solution
`̀̀̀ `̀̀̀
Gross receipts from profession (1) Sale of medicines 25,250(2) Consultation fees 50,55,000
(3) Visiting fees 5,24,000
56,04,250
Less: Allowable expenses
(1) Cost of medicine (10,000 + 20,000 – 12,000) 18,000
(2) Depreciation on surgical equipment’s
15 14,000
100 2x x
� �� �� �
300
(3) Depreciation on motor car 15 1 3
2,20,000100 2 4x x x
� �� �� �
12,375
(4) Car expenses 3
6,0004x
� �� �� �
4,500
(5) Salaries 20,31,600(6) Rent of dispensary 5,51,600
(7) General expense 20,300(8) Telephone expenses 33,000 26,71,675
Income from profession 29,32,575
Q. 7. R who does not want to opt for presumptive income under section 44AD furnishes the following Trading. Profit and Loss Account for the previous year ending 31.3.2018.
`̀̀̀ `̀̀̀
To Stock 2,40,000 By Sales 79,76,900To Purchases 72,60,000 By Stock 4,60,000To Freight and duty 50,000To Manufacturing wages 1,20,000
To Rent, rates and taxes 45,000
`̀̀̀ `̀̀̀
To Depreciation 48,000
To Gross Profit 6,73,900 84,36,900 84,36,900
To Office salaries 66,000 By Gross profit b/d 6,73,900To Interest on capital 12,000 By Rent of staff quarters 19,000To Bad debts 9,000 By Refund of income tax
penalty 1,100
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 312 :
To Income-tax 11,000 By Sale price of an old machinery
25,000
To Expenses of income-tax proceedings
16,000 Recovery of bad debts, not allowed to be deducted in earlier years.
6,000
To Diwali expenses 3,000 By Sundry receipts 35,000To Legal expenses 6,000To Medical expenses of the proprietor in the Govt. Hospital
11,000
To Staff welfare expenses 4,000To Repairs of staff quarters 11,000
To Telephone expenses 15,000To Bonus payable to employees 30,000Provision for taxes:
To VAT and excise duty 40,000To Municipal taxes for staff quarters
14,000
To General reserve 11,000To Entertainment expenses 11,000
To Net profit 4,90,000
7,60,000 7,60,000
You are required to compute the taxable profits from business after taking the following into consideration:
(i) Purchases include a purchase of ` 28,000. Whose payment was made by a crossed cheque.
(ii) Office salaries include ` 18,000 paid to the proprietor of the business.
(iii) Diwali expenses include gifts of 1,500 made to relatives. (iv) The written down value of the block consisting of machinery as on 1.4.2016 is
80,000. (v) The written down value of the block consisting of factory building as on 1.4.2016
1,20,000. An addition was made to building on 1.8.2017 at a cost of company paid 41,000 as insurance compensation.
(vi) VAT and excise, duty, amounting to 30,000 was paid on 25.6.2018
(vii) Municipal tax were due on 31.3.2018
Solution :
Computation of taxable income from business
`̀̀̀ `̀̀̀ `̀̀̀
Profit as per P & L A/c
Add: Inadmissible, etc.
4,90,000
1. Depreciation considered separately 48,0002. Interest on capital 12,0003. Income-tax 11,0004. Medical expenses of proprietor 11,000
5. Bonus payable: Deductible on actual payment u/s 43B 30,0006. (i) Provision for sales-tax and excise duty 40,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 313 :
Less : Paid before the due date of furnishing the return u/s 43B
30,000 10,000
(ii) Municipal taxes for staff quarters deductible on actual payment u/s 43B
14,000
7. General reserve 11,0008. Payment regarding purchase of more than 20,000 by crossed cheque hence, 100% of 28,000 disallowed [Section 40A (3)]
28,000
9. Proprietors salary 18,00010. Diwali expenses to the extent of gifts to relatives 1,500 1,94,500
6,84,500
Less : Items not being business income: 1. Refund of income-tax penalty 1,1002. Sale price of machinery 25,000
3. Recovery of bad debts not allowed 6,000 32,1006,52,400
Less : Admissible deductions:
Depreciation 20,150
Business Income 6,32,250
Q. 8. The following is the Receipts and Payments Account of a medical practitioner for the year ending 31.3.2018.
Receipts `̀̀̀ Payments `̀̀̀
Balance b/f 1,60,000 Clinic rent 24,000Visiting fees 1,40,000 Staff salaries 1,20,000Consultation fees 1,60,000 Rent and taxes 6,000
Sale of medicines 40,000 Electricity and water 7,000Operation theatre rent 25,000 Purchase of medical books 20,100Interest on fixed deposit with bank (gross)
13,000 Purchase of surgical equipment’s
40,000
Dividends from UTI 10,000 Motor car expense Sale of surgical equipment 36,000 Medical association
membership 4,000
Life insurance premium 10,000Audit fees 14,000Staff welfare expenses 3,000
Diwali expenses 2,000Entertainment expenses 8,400Medicines purchased 26,000Balance c/d 2,75,500
5,84,000 5,84,000
Additional Information :
1. A cash payment of 15,000 was given to him by a patient in appreciation of his medical service but was not accounted for in the books of account.
2. ¼th of motor-car expenses relate to his personal use, depreciation on motor car allowable under the Income-tax Act IS 9,000 for professional use.
3. Audit fees include income-tax appeal expenses of 12,000.
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 314 :
4. The rate of depreciation on surgical equipment is 15%. The written down value of the equipment’s brought forward from earlier year was 26,000. He sold equipments for 36,000 during the current year. The new surgical equipments were purchased on 1.11.2017.
5. His taxable income from house properties was 3,00,000. 6. Opening and closing stock of medicines were 10,000 & 15,000 respectively.
Compute his income from the assessment year 2017-18 assuming that - (a) he does not want to opt for presumptive scheme u/s 44 ADA...
(b) he has opted for presumptive scheme u/s 44ADA
Solution (a)
`̀̀̀ `̀̀̀
Visiting & consultation fees (1,40,000 + 1,60,000) 3,00,000Sale of medicines and operation theatre rent (40,000 + 25,000)
65,000
Cash receipts from patient 15,000
3,80,000
Less: Expense:
Rent 24,000Salary 1,20,000Electricity and water 7,000Rent/taxes 6,000Books depreciation @ 100% (assuming annual publication)
20,100
Association membership fees 4,000Audit fees 14,000Staff welfare expenses 3,000
Diwali expenses 2,000Depreciation on car 9,000Depreciation on equipments 2,250
Entertainment expenses 8,400Cost of medicines… (10,000 + 26,000 – 15,000) 21,000
Motor-card expenses (i.e. 24,000 – ¼ th of 24,000) 18,000 2,58,750
Income from profession 1,21,250Income from house property 3,00,000
Income from other sources (interest on FDR) 13,000
Gross total income 4,34,250Less: Deduction u/s 80C (LIP) 10,000
Total income 4,24,250
Computation of depreciation on equipments WDV as on beginning of the year 26,000Add : Cost of equipment purchased 40,000Less: Sale proceeds of equipment 66,000
36,000
30,000
Depreciation @ 7.5% as used for less than 180 days 2,250
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 315 :
Solution (b)
Income from profession
50% of gross receipts from profession i.e. 50% of 3,80,000 1,90,000
Income from house property 3,00,000
Income from other sources (interest on FDR) 13,000
Gross total income 5,03,000
Less : Deduction u/s 80C (LIP) 10,000
Total income 4,93,000
Written down value of equipment as on 1.4.2018 after deemed depreciation 2,250
Q. 9. R, furnishes the following particulars for the assessment year 2018-19
Profit and Loss Account for the year ending 31.3.2018
`̀̀̀ `̀̀̀
Salary to staff 3,60,000 Gross profit 6,69,000Interest on loan 40,000 Rent of flats given to
officers 24,000
Expenditure for promotion of family planning amongst employees
14,000 Sundry receipts 7,000
Sales-tax 24,000 Interest on fixed deposits with bank (gross)
15,000
Telephone expenses 15,000 Capital gains on sale of Long-term investment
6,000
Gratuity paid 24,000Reserve for future losses 20,000Reserve for bad debts 12,000
Reserve for payment of advance income-tax
17,000
Car expenses 20,000Depreciation 30,000Office expenses 2,000
Provident Fund 10,000Municipal taxes for flats given to officers
24,000
Sundry expenses 46,000Net profit 63,000
7,21,000 7,21,000
Following additional information is also available :
(a) Expenditure on family planning includes capital expenditure of 10,000.
(b) Debts to the tune of 10,000 have actually become bad during the year. (c) Sundry expenses include 12,000 being printing charges paid to a relative of the proprietor; payment is considered reasonable to the extent of 9,000 only. (d) 22,000 out of sundry expenses relate to cash payment for purchasing miscellaneous items.
(e) Written down value of various fixed assets is as under on the opening day:
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`̀̀̀
Machinery 42,000
Motor car 18,750
Furniture 12,000
(f) As per balance sheet following balances appear on the liabilities side
`̀̀̀
(i) Sales tax payable amount 7,000
(ii) Contribution to employees provident fund payable 2,000
(g) It is learnt that letting out of residential flats to employees is subservient and incidental to the main business of the company.
(h) Sundry receipt include an amount of 4,000 being dividend received from another Indian Company.
Determine the business income of company for the assessment year 2018-19
Solution
`̀̀̀ `̀̀̀ `̀̀̀
Net profit as per P & L A/c 63,000
Less : (1) Dividend include in sundry receipts 4,000
(2) Interest on Bank Deposits to be considered separately
15,000
(3) Capital gain to be considered separately 6,000 25,000
38,000
Add : 1. Capital expenditure and revenue expenditure on family planning
14,000
2. Reserve for future losses, being inadmissible
20,000
3. Reserve for bad debts 12,000
Less : Debts which actually became bad 10,000
2,000
4. Reserve for payment of advance income tax, being inadmissible
17,000
5. Depreciation to be considered separately 30,000
6. Out of sundry expenses the following disallowance are made
(i) Printing charges paid to a relative of the Proprietor disallowed u/s 40A (2) Being excessive and unreasonable (`̀̀̀12,000 – 9,000)
3,000
(ii) 100% of payment ` ` ` ` 22,000 for purchasing miscellaneous items is disallowed u/s 40A(3) as the payment has been made otherwise than by a account payee cheque or account payee bank draft
22,000
7. The following amounts are added u/s 43B as the payments have not actually been made Sales tax
7,000
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: 317 :
Contribution to employees P.F. 2,000 9,000 1,17,000
1,55,000Less: Depreciation as worked out below :
Machinery WDV 42,000 @ 15%
6,3000
Motor WDV ` ` ` ` 18,750 @ 15% 2,813
Furniture WDV `̀̀̀ 12,000 10 % 1,200 10,313
Business income 1,44,687
Expenditure in family planning, whether capital or revenue, is allowed to a company assesse.
Q. 10.Sunil is salaried employed in New Delhi. He got the following emoluments from his employer during the previous year ended 31.3.2018.
`̀̀̀
Basic Salary 3,00,000
Bonus 40,000
Commission 36,000
House Rent Allowance 48,000
Employer’s contributed equal amount to the RPF. 48,000
Sunil has also contributed equal amount to the RPF. He owns a house property which is used by him for his own residence. Municipal valuation of the house property is ` ` ` ` 1,80,000, whereas the standard rent under the Rent Control Act is ` ` ` ` 1,20,000. He paid the following expenses in respect of the house property.
(i) Municipal taxes ` ` ` ` 30,000 and (ii) repairs ` ` ` ` 20,000.
Besides, he has received ` ` ` ` 35,000 as dividend (gross) from an Indian company.
(ii) During the previous year 2017-18, he made the payment of insurance premium on own life policy taken on 1.4.2016 (sum assured ` ` ` ` 1,00,000) ` ` ` ` 21,000.
Determine the total income of Mr. Sunil for the assessment year 2018-19.
Solution:
`̀̀̀ `̀̀̀
Income from Salary 3,00,000Basic Salary 40,000Bonus 36,000Commission 48,000House Rent Allowance
Employer’s contribution to PPF 48,000
Less: Exempt to the extent of 12% of salary 36,000 12,000
Gross Salary 4,36,000Less : Deduction Nil 4,36,000
Income from house property NilIncome from other sources (dividend) Exempt
Gross Total Income 4,36,000Less: Deduction u/s 80C – RPF 48,000 + 10,000 (LIP)
58,000
Total Income 3,78,000
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Q. 11.Following is the Profit and Loss A/c of R for the year ended 31.3.2018
`̀̀̀ `̀̀̀
To Salary 1,05,000 By Gross profit 3,98,200To Travelling expenses 30,000 By Dividend from Indian Co 8,500
To Rent and taxes 6,000 By Discount 1,500To Interest on capital 6,000 By Share of profit from a
partnership firm 22,500
To Depreciation 30,000To Administrative expenses 20,000
To Income tax 50,000To Net profit 1,83,700
4,30,700 4,30,700
The following information is available :
(i) Salary include ` ` ` ` 15,000 paid to Mrs. R as supervisor of quality control department. Till February, 2017 she was employed in S Ltd. in similar post for the last 10 years on a salary of ` ` ` ` 1,500 per month. She does not have any other income.
(ii) Included in the administrative expenses ` ` ` ` 2,000 paid to the trade association for advertisement in souvenir published by it.
(iii) Depreciation allowable as per I.T. law is ` ` ` ` 45,000.
(iv) Included in the drawings of Mr. R ` ` ` ` 2,000 interest on loan, paid to LIC on the security of his life-insurance policy. Loan was utilised for repair of machinery.
(v) Birthday gifts received by his minor son include cash ` ` ` ` 20,000 which was deposited with a nationalised bank. Interest accrued up to 31.3.2018 amounted to ` ` ` ` 2,5000.
(vi) During the year ended 31.3.2018 R paid ` ` ` ` 10,000 towards medical insurance premium of himself, his wife and minor son.
(vii) Included in the drawings of R as goods taken from the business of ` ` ` ` 6,000; the cost of the goods is ` ` ` ` 7,500 and market price is ` ` ` ` 9,000.
Compute the taxable income of R for the assessment year 2018-19.
Solution
Computation of Taxable income of R
(For the assessment year 2018-19)
Income from business `̀̀̀ `̀̀̀
Net profit as per profit & loss account 1,83,700
Less : Share of profit from partnership firm exempt u/s 10(2A)
22,500
Income from dividend from Indian company 8,500 31,000
1,52,700
Add: Expenses disallowed
(i) Interest on capital (being, personal) 6,000
(ii) Depreciation to be treated separately 30,000
(ii) Income – tax 50,000
(iii) Goods taken for personal use (` ` ` ` 7,500 – 6,000)
1,500 87,500
2,40,200
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Less : Expenses allowable
(i) Depreciation allowable as per I.T. law 45,000
(ii) Interest on loan from LIC being for business 2,000 47,000
Income from the other sources
Income of minor child 2,500
Less: Exempted u/s 10(32) 1,500
1,000
Dividend from an Indian company Exempt 1,000
Gross total income 1,94,200
Less: Deduction under Chapter VIA
U/s 80C Nil
U/s 80D (medical insurance premium) 10,000 10,000
Taxable income 1,84,200
Q.12.From the following information compute the total income of Mr. Batra for the assessment year 2018-19
(a) Salary ` ` ` ` 12,000 p.m.
(b) Bonus equal to 2 months’ Basic Salary.
(c) House rent allowance @ ` ` ` ` 5,000 per month. The actual rent paid by him was ` ` ` `
4,500 per month. He resides in Delhi. (d) Employer and employee contributed to a Recognised Provident Fund @ 12.5%
of the salary. (e) Provided with a 1.6 ltr. Engine capacity car for office and personal purposes,
expenses borne by the employer. (f) Income from dividend 800. (g) Interest from Saving Bank Account ` ` ` ` 22,500.
(h) Life insurance premium paid ` ` ` ` 3,000 on a policy of ` ` ` ` 35,000.
Solution Income from salary `̀̀̀ `̀̀̀
Salary 1,44,000 Bonus 24,000 Employers Contribution to P.F. (in excess of 12%) 720
HRA 20,400 Car (` ` ` ` 1,800 x 12) 21,600
Gross Salary 2,10,720Less: Deduction Nil 2,10,720
Income from other sources
Dividend Exempt
Interest on saving bank account 22,500 22,500
Gross total income 2,33,220
Less: (i) Deduction u/s 80C (RPF – ` ` ` ` 18,000 + LIP – ` ` ` `
3,000) 21,000
(ii) Deduction u/s 80TTA 10,000 31,000
2,02,220
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Q. 13.Following is the Profit and Loss A/c of R for the year ended 31.3.2018.
`̀̀̀ `̀̀̀
To Salary 1,05,000 By Gross profit 6,98,200
To Travelling expenses 30,000 By Dividend from Indian Co 8,500
To Rent and taxes 6,000 By Discount 1,500
To Interest on capital 6,000 By Share of profit from a partnership firm
22,500
To Depreciation 30,000
To Administrative expenses 20,000
To Income tax 50,000
To Net profit 4,83,700
7,30,700 7,30,700
The following information is available: (i) Salary include ` ` ` ` 15,000 paid to Mrs. R as supervisor of quality control department.
Till February 2019 she was employed in S Ltd. in similar post of the last 10 years on a salary of ` ` ` ` 1,500 per month. She does not have any other income.
(ii) R had gone on a foreign tour for 15 days in connection with his business. He spent 3 days visiting tourist sports. The total expense in this connection was ` ` ` ` 20.000 which was within RBI norms.
(iii) Included in the administrative expenses ` ` ` ` 2.000 paid to the trade association for advertisement in souvenir published by it.
(iv) Depreciation allowable as per I.T. law is ` ` ` ` 45.000
(v) Included in the drawings of Mr. R ` ` ` ` 2,000 interest on loan, paid to L.I.C. on the security of his life-insurance policy. Loan was utilised for repair of machinery.
(vi) Birthday gifts received by his minor son include cash ` ` ` ` 20,000 which was deposited in saving bank with a nationalised bank. Interest accrued up to 31.3.2017 amounted to `̀̀̀ 16,500.
(vii) P. the brother of R. is suffering from heart disease. As P has no income, R take care of the medical expenses of his brother P. which amounted to `̀̀̀ 18,000.
(viii) During the year ended 31.3.2017, R paid `̀̀̀ 10,000 towards medical insurance premium of himself, his wife and minor son.
(ix) Included in the drawings of R as goods taken from the business of ` ` ` ` 6,000; the cost of the goods is ` ` ` ` 7,500 and market price is ` ` ` ` 9.000.
Compute the taxable income of R for the assessment year 2018 - 19 [ICWAI-JUNE 1999]
Solution
Computation of Taxable income of R from the assessment year 2018- 19
Income from business `̀̀̀ `̀̀̀
Net profit as per profit & loss account 4,83,700Less : Share of profit from partnership firm exempt u/s
10(2A) 22,500
Income from dividend from Indian company 8,500 31,000
4,52,700
Add: Expenses disallowed (i) Travelling expenses for foreign trip to the extent not in connection with business (3/15 x 20,000)
4,000
(ii) Interest on capital (being personal) 6,000
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(iii) Depreciation to be treated separately 30,000 (iv) Income-tax 50,000
(v) Goods taken for personal use (` ` ` ` 7,500 – 6,000) 1,500 91,500
5,44,200
Less: Expenses allowable (i) Depreciation allowable as per I.T. law 45,000
(ii) Interest on loan from L.I.C. being for business 2,000 47,000
4,97,200
Income from other sources
Income of minor child 16,500Less: Exempted u/s 10(32) 1,500 Dividend 15,000 15,000
Gross total income Exempt 5,12,200
Less: Deduction under Chapter VIA
U/s 80D (medical insurance premium) 10,000 U/s 80TTA 10,000 20,000
Taxable income 4,92,200
Note :- Heart disease is not a specified disease under section 80DDB, hence no deduction shall be allowed.
Q. 14. Problems on computation of taxable – X (age: 30 years) is a salaried employee in Bombay, lie gets the following emoluments from his employer during the previous year ending March 31, 2018.
Rs.
Basic salary 4,80,000Bonus 1,30,000Commission (fixed) 1,48,000House rent allowance 1,20,000Employer’s contribution towards recognised provident fund 62,400
During the previous year 2017-18, the employer has provided a laptop computer for using it for official and private purpose. Ownership is not transferred. Further the employer provides club facility for official use. He owns a house property which is used in/ him for his own residence. Municipal valuation of the house property is Rs. 1,30,000; whereas the standard rent under the Rent Control Act is Rs. 1,20,000. He makes the following expenditures in respect of house property : municipal taxes : Rs. 13,000; repairs : Rs. 11,000; interest on capital borrowed to pay municipal tax : Rs. 3,150; and insurance : Rs. 1,600. Besides, he has received Rs. 1,19,000 as interest from deposits in savings bank account. He has received different gifts from A Rs. 25,000 on October 1, 2017 and from B Rs. 26,000 on March 1, 2018. During the previous year 2017-18, he makes the following expenditure and investments:
Rs.
Contribution towards recognised provident fund 1,40,000Payment of insurance premium on own life policy (sum assured in 2006 : R$. 60,000)
14,000
Donation to the National Defence Fund 3,200
Determine the net income of X for the assessment year 2018-19.
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Solution:
Income from salary [see Note 1] 8,82,800 Income from house property (sec Note 2] Nil
Income from other sources : Bank interest on deposits in savings account 1,19,000
Gift received on October 1, 2017 and gift received on March 1, 2017 [Rs. 25,000+ Rs. 26,000; as the aggregate amount exceeds Rs. 50,000, it is taxable] 51,000
Gross total income 10,52,800
Less: Deductions under section 80C to 80U Under section 80C [Contribution to RPF and insurance premium]
1,50,000
Under section 80G in respect of donation to the National Defence Fund (i.e., 100% of Rs. 3,200)
3,200
Under section 80TTA in respect of interest on deposits in savings bank account
10,000
Net income 8,89,600
Notes:1. COMPUTATION OF INCOME FROM SALARY
Basic salary 4,80,000 Bonus 1,30,000
Commission 1,48,000 House rent allowance : Rs. 1,20,000 Less: Exempt from tax [see para 42.1] being the least of :
(a) Rs. 2,40,000 (being 50% of salary, i.e. Rs. 4,80,000); (b) Rs. 1,20,000 (being the house rent allowance); or (c) Nil, being excess of rent paid (i.e. Nil) minus 10% of salary. Nil, being the least, is exempt from tax.
Amount taxable 1,20,000Employer's contribution in excess of 12% of salary (i.e., Rs. 62,400-Rs. 57,600)
4,800
Gross salary 8,82,800Less: Standard deduction - Income from salary 8,82,800
The perquisites in respect of use of computer and club facility are not chargeable to tax.
2. COMPUTATION OF INCOME FROM HOUSE PROPERTY - Since house is used for the purpose of own residence, nothing would be chargeable to tax under section 23(2)(a). Interest on capital borrowed to pay municipal tax is not deductible.
Q.15.195-P8 Compute the taxable income and tax liability of X (40 years) for the assessment year 2018-19.
Rs.
Net income from chemical trading business 8,00,000
Long-term capital gain on transfer of debentures (if computed without indexation)
6,00,000
Long-term capital gain on transfer of listed debentures (computed after indexation) (X wants to pay tax at the rate of 20 per cent of Rs.
2,50,000
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: 323 :
2,50,000 and not at the rate of 10 per cent of Rs. 6,00,000)
Share of income from HUF in which he is a member 82,000
Winning from horse races (net of IDS of 30 per cent) 70,000
Interest on bank fixed deposits:
- Deposit in Ins own name 1,17,000
- In the name of minor son 1,450
- In the name of minor daughter 8,000
Rs.
- In the name of major unmarried daughter 70,000
Expenditure incurred for the medical treatment of his 67 years old elder brother [dependent of X, being a person with disability]
8,000
Repayment of loan taken for part-time studies of major daughter for graduate course in management (loan is taken from a notified charitable institute).
6,90,000
Payment of interest from the aforesaid loan 76,000
Donation to the aforesaid notified charitable institute 5,000
Brought forward loss of a discontinued business pertaining to the assessment year 2014-15.
26,000
Purchase of a work of art on November 1,2017 from a friend for Rs. 1,15,000 (market value is, however, Rs. 1,70,000)
1,15,000
Deposit in public provident fund accountant purchase of NSC IX issue 1,63,000
Solution :
Rs.
Computation of income of x
Income from chemical trading business 80,00,000
Less: Brought forward loss of a discontinued business (-)26,000 7,74,000
Long-term capital gains (indexation is not available in the case of debentures)
6,00,000
Income from other sources
- Winning from horse races [Rs. 70,000 ÷ (1 - 03)] 1,00,000
- Interest on bank deposit (own) 1,17,000
- Interest on bank deposit [minor son (Rs. 1,450 – Rs. 1,450)]
Nil
- Interest on bank deposit [minor daughter (Rs. 8,000 – Rs. 1,500)]
6,500
- Purchase of work of art (Rs. 1,70,000 – Rs. 1,15,000) 55,000 2,78,500
Gross total income 16,52,500
Less: Deduction
Under section 80C
Under section 80C 1,50,000
Under section 80E 75,000
Under section 80G (50% of Rs. 5,000) 76,000
Net income 2,500 3,03,500
Tax on net income 13,49,000
Income-tax (10% of Rs. 6,00,000 + 30% of Rs. 1,00,000 + normal tax on the balance) ÷
1,44,800
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: 324 :
Add: Education cess 2,896
Add: Secondary and higher education cess 1,448
Tax liability (rounded off) 1,49,140
Notes :
1. In the case of transfer of quoted securities, one has an option to pay tax @ 10% if the benefit of indexation is not taken. I However, indexation benefit is never available in the case of debentures (whether quoted or not). In this problem taxable long-term capital gain will be Rs. 6,00,001). X has an option to pay tax at the rate of 10% or 20%.
2. Interest income of major daughter is taxable in the hands of daughter. 3. Repayment of loan taken of higher studies, is not deductible.
4. Purchase of work of art for inadequate consideration is taxable under section 56(2)(vii).
Q.16. Mrs. X (30 years) owns a business. Net profit of the business of the year ending March 31,2017 as per auditor’s certificate to Rs. 19,40,000. Salary debited to profit and loss account includes a payment by an account payee cheque of Rs,9,6000 to her brother to who is employed by Mrs. X to look after marketing department. However, no other businessman will pay more than Rs. 1,40,000 as salary to her brother. Profit and loss account also includes an agricultural income of Rs. 4,00,000.
On November 1,2017, Mrs. X purchased 500 equity shares of A Ltd. at the rate of Rs.400 per share from a friend. 7mv of shares is Rs. 1700 pershare.
Other incomes –
1. Mrs. X borrowed Rs. 3,00,000 in the year and invested it in units of quoted mutual funds. None of the mutual funds declared a dividend in the year. She paid an interest of Rs. 35,000 on the loan taken by him.
2. Dividend on other units purchased, received in the year was Rs. 46,000.
3. Interest on fixed deposits with banks was Rs. 8,000. 4. Interest on bank deposit in the name of her dependent mother was Rs. 20,000.
Deposit was made by her mother out of gifts received from relatives. 5. Minor son of Mrs. X has received birthday gift of Rs. 65,000 from family friends
on November 1, 2017. This amount is deposited in a bank fixed deposit at interest rate of 6 per cent per annum.
Find out the net income and tax liability of Mrs. X for the assessment year 2018-19 on the assumption that she deposited Rs.1,10,000 in a fixed deposit with SRI for claiming deduction under section 80C.
Solution :
Rs. Rs.
Business income 19,40,000
Add: Excess payment to brother (Rs. 9,60,000 - Rs. 1,40,000)
8,20,000
Less: Agriculture income (-) 4,00,000 23,60,000
Income from other sources
Purchase of equity shares [Rs. 1,700 – Rs. 400) x 500 shares]
6,50,000
Dividend on units (exempt) Nil
Bank interest 8,000
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: 325 :
Interest on deposit of dependent mother (not taxable as income of Mrs. X)
Nil
Birthday gift received by minor son of Mrs. X (Rs. 65,000 – Rs. 1,500)
63,500
Interest income of minor son (6% of Rs. 65,000 x 5 ÷ 12) 1,625 7,23,125
Gross total income 30,83,125
Less: Deduction under section 80C 1,10,000
Net income (rounded off) 29,73,130
Tax liability of Mrs. X will be calculated as under -
None agricultural income 29,73,130
Agricultural income 4,00,000
Total 33,73,130
Tax on total 8,36,939
Less: Tax on Rs. 6,50,000 (i.e. agricultural income of Rs. 4,00,000 + exemption limit of Rs, 2,50,000)
55,000
Balance 7,81,939
Add: Education cess 15,639
Add: Secondary and higher education cess 7,819
Tax liability (rounded off) 8,05,400
Q.17. During the previous year 2017-18 X (39 years) is employed by a private sector company. He gets Rs. 45,000 per month as basic salary, Rs. 15,000 per month as dearness allowance (30 per cent is considered for calculation of provident fund), tiffin allowance of Rs. 1,000 per month, medical allowance of Rs. 1,500 per month. Besides he gets a fixed commission of Rs. 5,000 per month. The employer company has provided a watchman at the residence of X (company bears salary of Rs. 4,000 per month out of which Rs. 1,000 per month is recovered from X). The company provides a car (l200 cc) for personal and official use of X (the entire expenditure on salary and driver of approximately from X.) Rs. 76,000 is incurred by the company along with hire charges of car of Rs. 18,000, only a sum of Rs. 9,000 is recovered for providing car from X). The employer-company contributes 15 per cent of "salary" towards recognized provident fund. A matching contribution is made by X. However, with effect from January 1,2018 X makes an additional contribution of Rs. 4,000 per month. Interest of Rs. 74,000 is credited m provident fund account at the rate of 10 per cent on October 1, 2017. Income of X from other sources is Rs. 1,74,240. Find out net income of X for the assessment year 2018-19.
Solution : Computation of income of X –
Rs.
Basic salary (Rs. 45,000 x 12) 5,40,000
Dearness allowance (Rs. 15,000 x 12) 1,80,000
Tiffin allowance (Rs. 1,000 x 12) 12,000
Fixed medical allowance (Rs. 1,500 x 12) (in the case of fixed medical allowance no exemption is available)
18,000
Fixed commission (Rs. 5,000 x 12) 60,000
Watchman [(Rs. 4,000 - Rs. 1,000) x 12] 36,000
Car [(Rs. 1,800 + Rs. 900) x 12, amount recovered is not deductible] 32,400
Employer's contribution towards recognized provident fund in excess of 17,820
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: 326 :
12% of salary [3% of (Rs. 5,40,000 50% of Rs. 1,80,000)]
Credit of interest in provident fund (Rs. 74,000 x 0.5 ÷ 10) 3,700
Gross salary 8,99,920
Income from other sources 1,74,240
Gross total income 10,74,160
Less: Deduction under section 80C [15% of (Rs. 5,40,000 + 30% of Rs. 1,80,000) + (Rs. 4,000 x 3)]
1,01,100
Net income 9,73,060
Q.18. A (40 years) is a government employee posted at cochin. He joined the Central Government on 1st February 2013. For the Previous year 2017-2018, he gives the following information –
1. Basic Salary Rs 3,15,000 2. Allowances from Government chargeable to tax – Rs 80,000 3. Government’s contribution towards National Pension scheme – Rs 32,700
4. Contribution of Mr A towards NPS – 35,000 5. Gift received by A’s minor son on his birthday from friends – Rs 45,000 (A’s
minor son has not received any other gift during the previous year) 6. Minor daughter of A gets a painting on her birthday from a family friend. FMV of
the painting isRs 8,36,500. (A’s minor daughter has not received any other gift during the previous year)
7. A deposits Rs 6,000 in SBI fixed account for the purpose of availing of deduction under section 80C.
8. A contributes Rs 1,50,000 in an approved annuity plan of LIC for the purpose of claiming deduction under section 80CCC.
9. A has taken a loan for the education of his nephew who is dependent on him. The loan has been taken for the purpose of pursuing MBBS course. Interest on such loan for the year 2017-2018 is Rs 32,000. However , he has actually paid only Rs 13,500. Besides, he has paid Rs 72,00 on account of repayment of loan.
Determine the amount of net income of Mr A for the assessment year 2018 -2019.
Solution :
Computation of Income of Mr A
Particulars Rs Rs
Basic Salary Allowances
Government contribution towards NPS
3,15,00080,000
32,700 4,27,700
Income from other sources ( income of minor daughter 8,36,500 – Rs 1500 (exemption under section 10(32)) 8,35,000
Gross total Income 12,62,700
Less :Deductions Under section 80C(FD with SBI)
Under section 80CCC (annuity deposit of LIC) Under section 80CCD(1) (A’s contribution to NPS upto 10% of salary) Total deductible under section 80C, 80CCC and 80CCD(1) (maximum 1,50,000)
6,000
1,05,00031,500
1,42,500 1,42,500
Under section 80CCD (1B) (A’s contribution not covered
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: 327 :
under 80CCD (1) subject to maximum 50,000) 3,500
Under section 80CCD(2) (employer’s contribution towards Salary upto 10% of Salary)
31,500
Under section 80E 13,500
Net Taxable Total Income 10,71,700
Note – Minor son of A has received a gift of Rs 45,000. As it is not more than Rs 50,000, it is not income in the hands of minor son. When income of minor son is zero, nothing shall be taxable in the hand of A.
Q. 19. From the following details and information, compute the total income of X for the assessment year 2018-2019
Profit and loss account for the year ending March 31, 2017
Rs Rs
Staff Salaries, bonus etc
Drawings for household expenses Life insurance premia paid Contribution to PPF Depreciation on assets used in business Advertisement expenses Printing and Stationery
Interest on loan
Net Income for the year
6,30,000
4,00,000
65,00010,000
90,00025,00030,00040,000
15,81,00028,71,000
Trading profits
Rent from portion let
Interest on FD with banks Income on units from UTI Gold coins received on Diwali 2017 from a family friend Y
22,60,000
4,80,000
70,00015,000
46,000
28,71,000
Additional Information – 1. Interest was on a loan of Rs 4,00,000 taken in June 2017, for the purposes of
buying shares of a public limited company. The company did not declare any dividends after purchase of shares by X.
2. Depreciation available for income tax purposes is Rs 1,10,000 3. Value of gold coins given in the profit and loss account is cost of gold coins
purchased by Y in 2004. However, the FMV of these coins on Diwali 2017 and March 31, 2018 is Rs 1,40,000 and Rs 1,55,000 respectively.
Solution :
Computation of income of X for the assessment year 2018-19
Rs Rs
Income from house property 3,36,000
Profits and gains from business and profession 14,65,000
Income from other sources - Interest on FD
- Units (exempt) - Gift in Kind (MV on the date of gift is considered)
70,000
Nil1,40,000 2,10,000
Gross Total Income Less: Deduction under section 80C (65,000 + 10,000)
Net Income
20,11,00075,000
19,36,000
J.K.SHAH CLASSES INTER C.A. – DIRECT TAXES
: 328 :
Computation of Income under the head Income from house property
Gross annual value Less: Municipal taxes
Net annual value Less: Standard deduction
Income from house property
4,80,000Nil
4,80,0001,44,000
3,36,000
Computation of Income under the head Income from business
Net profit as per profit and loss account
Add: Drawings
Life Insurance premium Contribution to PPF Interest on loan
Less: Depreciation Rent Interest on deposits
Income from units
Gold coins Business Income
15,81,000
4,00,000
65,00010,00040,000
20,0004,80,000
70,000
15,000
46,00014,65,000