DEAR FRIENDS ,

The book entiled “ Income Tax , GST and Customs “ provides ex-haustive and complete
knowledge of Taxation with better analytical skills and reasoning. Because as a professional
student you have to study each subject in depth with adequate knowledge and analytical
skills .

The Main features of book are :-

• This edition has been revised in the light of amendments made by finance Act 2020.
• All the practical question of each chapter has been thoroughly solved according to recent
amendments of Income tax rules.
• Detailed explanatory working notes have been given for each solution.
• The Selection of the questions has been done in such a way that every student might be
able to solve any problem from easy to hard.
• I promise to give you my 100% in achieving success provided that you give your full
dedication.

“ I am grateful to My father Rajesh ji Satija and My Mother Rekha Satija for showering
their blessings and support .I am also grateful to my friends and office team especially
Chirag for encouraging me to write this Book and helping me in completing the book
on timely basis. I look forward to the comments, suggestions and criticisms from the
readers”

CA SURAJ SATIJA

MAIL AT = [email protected]

CA SURAJ SATIJA

SATIJACASURAJ

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 TAX LAW
DIRECT TAX
INDEX
SR.NO. CHAPTER PAGE NO.

1 BASIC CONCEPT OF TAX 1.1-1.27

2 RESIDENTIAL STATUS 2.1-2.20

3 INCOME UNDER THE HEAD SALARIES 3.1-3.34

PROFIT AND GAIN OF BUSINESS OR

4 4.1-4.55
PROFESSION

5 INCOME UNDER THE HEAD CAPITAL GAINS 5.1-5.49

6 INCOME FROM HOUSE PROPERTY 6.1-6.14

7 INCOME FROM OTHER SOURCES 7.1-7.23

8 CLUBBING PROVISIONS 8.1-8.8

SET OFF AND / OR CARRY FORWARD OF

9 9.1-9.5
LOSSES
DEDUCTIONS FROM GROSS TOTAL INCOME &
10 10.1-10.26
REBATE AND RELIEF
COMPUTATION OF TOTAL INCOME AND TAX
11 11.1-11.21
LIABILITY OF VARIOUS ENTITIES
CLASSIFICATION AND TAX INCIDENCE ON
12 12.1-12.21
COMPANIES
TAX DEDUCTION AT SOURCE ‘TDS’ & TAX
13 13.1-13.17
COLLECTION AT SOURCE ‘TCS’
14 ADVANCE TAX 14.1-14.5

15 RETURNS 15.1-15.18

ASSESSMENT, APPEALS & REVISION

16 -
[REFER MODULE FOR THE SAME]
 GOODS AND SERVICE TAX
INDEX
SR.NO. CHAPTER PAGE NO.

1 INTRODUCTION 1.1-1.17

2 CHARGE OF GST 2.1-2.11

3 SUPPLY 3.1-3.30

4 COMPOSITION SCHEME 4.1-4.13

5 TIME OF SUPPLY 5.1-5.13

6 VALUE OF SUPPLY 6.1-6.10

7 PLACE OF SUPPLY 7.1-7.8

8 REGISTRATION 8.1-8.20

9 RETURNS 9.1-9.6

10 PAYMENT OF TAX 10.1-10.11

11 INVOICE 11.1-11.18

12 INPUT TAX CREDIT 12.1-12.25

13 REFUND AND AUDITS 13.1-13.8

14 CUSTOMS ACT [REFER MODULE] -

 BASIC CONCEPT OF INCOME TAX
SSGURU CA SURAJ SATIJA
1. BASIC CONCEPTS OF INCOME TAX
WHAT IS TAX ?
 Tax is NOT “Compulsory Extortion of Money” by the government.
 It is the financial charge (fee) imposed by the Government on income,
commodity or activity.

WHY ARE TAXES LEVIED ?

 Taxes constitute the basic source of revenue to the Government which are
utilized for meeting the expenses of Government like defense, provision of
education, health-care, infrastructure facilities like roads, dams etc.

TAXATION SYSTEM IN INDIA

 In India, Constitution of India is the parent law. All other laws should be enacted
(made) without exceeding the framework of Constitution & subject to the norms
(T&C) laid down in it.
 Article 265 of Constitution provides that no tax shall be levied or collected
except by authority of law. Further, the law imposing the tax must not violate
any fundamental right.
 Constitution empowers Central Government (CG) & State Government to levy &
collect tax on Income.
 Parliament (Union) & SG are empowered to levy taxes by virtue of Article 246 of
Constitution.
 Entry 82 of Union List (List I to Seventh Schedule of Constitution) gives power to
Parliament to levy taxes on Income other than Agricultural Income.
 Seventh Schedule to Article 246 contains three lists which enumerate the
matters under which the Union & SGs have the authority to make laws for the
purpose of levy of taxes.
The following are the lists:
1) Union List: CG has exclusive power to make laws on the matters contained in
Union List.
2) State List: SG has exclusive power to make laws on matters contained in the
State List.
3) Concurrent List: Both CG & SG have power to make laws on matters contained in this list.
Particulars Direct Tax Indirect Tax
Levied on Income/wealth of the Price of Goods or
person Services
Examples Income tax, Tax on GST, Custom duty.
undisclosed foreign
Income or Assets.
Shifting of burden There is No Shifting of Tax burden is shifted to
burden. subsequent buyer /user.

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 Direct Taxes are  Thus whole burden
directly borne by falls on final
taxpayer consumer.
Time of Collection Collected on yearly basis Collected at the time of
sale/purchase of goods
or rendering of services.

COMPONENTS OF INCOME TAX LAWS

A. INCOME TAX ACT, 1961
 It came into force on 1st April, 1962. The act contains 298 sections & XIV schedules.
 A section may have sub-sections, clauses & sub-clauses.
 Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines “amalgamation”.
 Section 5 defining the scope of total income has two sub-sections (1) & (2).
 Sub-section (1) defines the scope of total income of a resident;
 Sub-section (2) defines the scope of total income of a non-resident.
 A Section may also have Provisos & Explanations.
 Proviso gives the exceptions to the provision contained in the respective by sub-section/clause.
(Proviso gives the cases where the provision contained in the respective section/sub-
section/clause would not apply or where the provision would apply with certain modification).
 Explanation gives clarification relating to the provision contained in that by sub-section/clause.
The Act (since it is Revenue-based Act) undergo changes every year with additions & deletions
brought by the Annual Finance Act passed by the parliament ACT.

B. ANNUAL FINANCE ACT

 Every year, Finance Minister Introduces the Finance Bill in Parliament’s Budget session .
 Part A of budget speech contains the proposed policies of government in the area .
 Part B of budget speech contains the detailed tax proposals.
 When the Finance Bill is passed by both the houses of the Parliament & gets the assent of the
President, it becomes the Finance Act which is incorporated in the Income- Tax Act.
 Amendments are made every year to the Act & other tax laws by the Finance Act.

C. NOTIFICATIONS
 Notifications are subordinate legislation issued by CG to give effect to the provisions of the Act.
 The CBDT is also empowered to make & amend rules by issuing notifications.
 They are binding on everyone. [ Assessee + Income Tax department]

D. INCOME TAX RULES

 The CBDT is empowered to make rules for proper administration of the ACT.
 Ex: Sec 32 states that depreciation will be allowed as deduction but the rates for computation of
depreciation are given by Rule 5.

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 Rules also have sub-rules, provisos and Explanations.
 The First Schedule to the Finance Act contains four parts which specify the rates of tax.
 Part I: Rate of Tax applicable for the current Assessment Year.
 Part II: Rate of TDS for the current Financial Year.
 Part III: Rate of Advance Tax & Rate of tax to be deducted from income u/h ‘Salaries’.
 Part IV: Rules for computing Net Agricultural Income.

E. CIRCULARS
 Circulars are issued by the CBDT to deal with certain specific problems & to clarify the doubts
regarding the scope & meaning of the provisions of the law.
 Circulars provide guidance to the Income Tax officers & Assesses.
 These circulars are binding on the department but not on the assessee.
 However assessee can take advantage of beneficial circulars.

F. CASE LAWS (JUDICIAL DECISIONS)

 It is not possible for the parliament to provide for all possible issues that may arise in the
implementation of any act. Hence the judiciary will hear the disputes between the assesses &
the Income tax Department & give its decisions.
 Supreme Court Decisions becomes Judicial Precedent (Law) & are binding on all the courts,
Appellate Tribunal, Income Tax Authorities & on assesses.
 High Court decisions are binding on the assesses & Income Tax Authorities which come under
its jurisdiction unless it is overruled by a higher authority (Supreme Court).
 Decision of a High Court cannot bind other High Court.

LEVY / CHARGE OF INCOME TAX [SECTION 4]

Income-tax is a tax levied on the total income of the Previous Year of every person (Section 4).
Procedure for Computation of total income of person for levy of income tax is as follows :

Step 1 - Determination of Residential Status

Step 2 - Classification of Income under 5 different heads

Step 3 - Computation of Income under each head.

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

Step 5 - Set-off or carry forward and set-off of losses.

Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5].

Step 7 - Deductions from Gross Total Income. [Payment based/Income

Based deductions].

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Step 8 - Total income [GTI – Deductions under Step 7].

Step 9 - Application of Rates of Tax on the total income.

Step 10 - Surcharge / Rebate u/s 87A.

Step 11 - Health & Education Cess on Income Tax.

Step 12 - Advance tax & TDS.

Step 13 - Tax Payable/Tax Refundable.

We will study all the above steps in details in the respective chapters

SOME IMPORTANT DEFINITIONS

 Terms defined in the Act: Section 2 gives definitions of various terms used in the Act. If a
particular definition is given in the Act itself, we will have to use that definition only.
 Terms not defined under the Act: If a particular definition is not given in the Act, reference is
to be made to the General Clauses Act or dictionaries, day to day meanings.

1. INDIA [SECTION 2(25A)]

 The term 'India' means –
 Territory of India as per Article 1 of the Constitution,
 Territorial Waters of India (TWI), seabed and subsoil underlying such waters,
 Continental Shelf,
 Exclusive Economic Zone
 Any other specified maritime zone & air space above its territory & TWI. Specified maritime
zone means the maritime zone as referred to in Territorial Waters, Continental Shelf, Exclusive
Economic Zone and other Maritime Zones Act, 1976.

2. ASSESSEE - [SECTION 2(7)]

 Any person by whom any tax or any other sum of money is payable under this Act.
 It includes –
a) Tax Payable: Every Person by whom any tax or any other sum of money is payable under this Act
whether or not any proceeding under this act has started against him.
b) Proceeding started: Any Person in respect of whom any proceeding under the act has been taken
whether or not any tax, interest or penalty is payable by him under this act. Proceeding may be
taken for/of –

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 Assessment of his income (or loss) sustained by him;
 Income (or loss) of any other person in respect of whom he is assessable;
 Refund due to him or to such other person.
 Assessment of Fringe Benefits.
c) Deemed Assessee: Sometimes, a person becomes assessable in respect of the income of some
other persons. In such a case, he may be deemed as an assessee.
d) Representative Assessee: Sometimes a person may be assessed for Income of another person.
Such person is known as representative assessee.
Ex: Legal Heir is assessable for the income of deceased person.
e) Assessee in default: Any person who does not deduct tax at source or after deducting tax, fails to
pay deducted tax to the government or who fails to pay advance tax is deemed to be assessee in
default u/s [201(1)]/218.

3. ASSESSMENT [SECTION 2(8)]

 This is the procedure by which the income of an assessee is determined by AO.
 It may be normal assessment or by way of reassessment of an income previously assessed.

4. PERSON [SECTION 2(31)]

AN INDIVIDUAL
Individual means only A Natural Human Being (Male/Female/Minor/Unsound Mind).
Note: Income of Minor & Person of unsound Mind → Assessed in hands of Manager/Guardian u/s
161(1).

COMPANY [SECTION 2(17)]

‘Company’ has a much wider meaning under Income Tax Act than Companies Act.
It means:
 Any Indian Company defined in section 2(26);
 Any Body Corporate incorporated under the foreign laws [Foreign company];
 Any institution, association or body (incorporated/not) whether indian or non-Indian,
 which is declared by general or special order of CBDT to be a company

A FIRM [SECTION 2(23)]

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 BASIC CONCEPT OF INCOME TAX
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 A firm includes a partnership firm (registered or not) & shall include a LLP.
 “Partnership firm” has same meanings as assigned to them in Indian Partnership Act.
 However, for IT purposes, a minor admitted to the benefits of existing partnership would also
be treated as partner. This is specified u/s 2(23) of the Act.
 Same Tax Treatment would be applicable for both General Partnerships & LLPs.

ASSOCIATION OF PERSONS (AOP)

 When two or more persons combine together for promotion of joint enterprise, they are
assessable as an AOP when they do not constitute a partnership legally.
 Conditions to form AOP: Persons must join in a common purpose, common action & their object
must be to produce Income, but they should not form a partnership.
 Co-heirs, co-donees joining together for common purpose would be chargeable as AOP.

BODY OF INDIVIDUALS (BOI)

Persons who merely receive the income jointly & who may be assessable in like manner & to the
same extent as the beneficiaries individually. (Ex: Executors/trustees).
 Co-Executors/Co-trustees are assessable as BOI since their title & interest are indivisible.
 Note: Tax is not payable by the assessee on share of Income received by him from BOI on which
the tax has already been paid by such BOI. [To avoid Double Taxation]

LOCAL AUTHORITY
Municipal committee, district board, Municipality, body of port commissioners etc. legally
entitled/entrusted by Government with control & management of Municipal/ local fund.
Note: Income of LA is taxable only if it is derived from the business of supply of commodity/service
(other than water & electricity) outside its own jurisdictional area. Income arising from supply of
water & electricity even outside its own jurisdictional areas → Exempt.
EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above categories)
 This is a residuary clause. If the assessee does not fall in any of the first six categories, he is
assessed under this clause.
Ex: An idol, or deity.

Q. What is the difference between AOP & BOI?

Answer: The difference between AOP & BOI is that whereas an association implies a voluntary
getting together for a definite purpose, a body of individuals would be just a body without an

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 BASIC CONCEPT OF INCOME TAX
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intention to get-together. Moreover, members of BOI can be individuals only but members of AOP
can be individual or non-individuals (i.e. artificial persons).

5. CLASSES OF COMPANIES
HINDU UNDIVIDED FAMILY
 HUF is not defined under IT Act. However, it is treated as separate entity under IT Act.
 As per Hindu Law, it consists of all males lineally descended from a common ancestor & includes
their wives & unmarried daughters.
 The Status in HUF is received by birth & not by operation of law.
 Even a single male member can have HUF (w.e.f 6/9/2005).
 Only Co-parceners have the right to Partition.
Coparceners → HUF may contain many members, but only members within 4 degrees including
KARTA are called co-parceners (including daughters w.e.f 6/9/2005).
Note: wife/ daughter-in-law cannot be co-parceners; however they can be members.
 Jain & Sikh undivided families would also be assessed as a HUF under IT Act. .

DOMESTIC COMPANY [SECTION 2(22A)]

 An Indian company or
 Any other company which has made prescribed arrangements for declaration & payment of
dividends within India payable out of the taxable Income in India.

6. PERSON HAVING SUBSTANTIAL INTEREST IN THE COMPANY [Section 2(32)]

 Any person who is the beneficial owner of shares (not being shares entitled to fixed rate of
dividend), whether participating in profit or not, carrying at least 20% of total voting power.

7. AVERAGE RATE OF TAX [SECTION 2(10)]

 Generally, the word ‘Income’ covers receipts in the shape of money or money’s worth which
arise with certain regularity.
 Average Rate of Tax = Amount of Income Tax calculated on Total Income using applicable slab
rate/Total Income

8. MAXIMUM MARGINAL RATE OF TAX [SECTION 2(29C)]

 Rate of Income Tax (including SC) applicable in relation to Highest Slab of Income specified in
the Finance Act of the relevant Previous Year, in the case of

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(i) An Individual, or (ii) An AOP /BOI.

INCOME & ITS CONSTITUENTS [SECTION 2(24)]

1) MEANING & DEFINITION OF INCOME
 Income is a periodical monetary return with some sort of regularity. However, all receipts do
not form the basis of taxation under the Act.
Income for the purpose of Income Tax Act includes:
[Each of these will be covered in respective chapter]

S. No. Income under Section 2(24) Head Of Income

1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions received by a trust/institution Generally exempt
created wholly or partly for charitable or religious purposes under Section 11 and
or by certain research association or universities and other 12
educational institutions or hospitals and other medical
institutions or an electoral trust.
4. The value of any perquisite or profit in lieu of salary taxable Salary
5. Any special allowance or benefit specifically granted to the Salary (Generally
assessee to meet expenses wholly, necessarily and exclusively exempt)
for the performance of the duties of an office or employment
of profit.
6. City Compensatory Allowance/ Dearness allowance : any Salary
allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for
the increased cost of living.
7. Benefit or Perquisite to a Director : The value of any Salary (if as per
benefit or perquisite, whether convertible into money or not, employment
obtained from a company by. (a) a director, or (b) a person agreement) else
having substantial interest in the company, or (c) a relative of under Other Sources
the director or of the person having substantial interest, and (if not in the terms of
any sum paid by any such company in respect of any employment
obligation which, but for such payment, would have been agreement)
payable by the director or other person aforesaid;

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8. Any Benefit or perquisite to a Representative Assessee Other Sources
: the value of any benefit or perquisite (whether convertible
into money or not) obtained by any representative assessee
under Section 160(1) (iii)/ (iv) or beneficiary, or any amount
paid by the representative assessee in respect of any
obligation which, but for such payment, would have been
payable by the beneficiary;
9. Deemed profits chargeable to tax under section 28 or section PGBP
41 or section 59
10. Capital Gain : any capital gains chargeable to tax under Capital Gains
Section 45; since the definition of income in Section 2(24) is
inclusive and not exhaustive capital gains chargeable under
Section 46(2) are also assessable as income.
11. Insurance Profit : The profits and gains of any Insurance PGBP
business carried on by a mutual insurance company or by a
co-operative society computed in accordance with the
provisions of Section 44 or any surplus taken to be such profits
and gains by virtue of the profits contained in the First
Schedule to the income-tax act
12. Banking income of a Co-operative Society : The profits and PGBP
gains of any business of banking (including) providing credit
facilities carried on by a cooperative society with its
members.
13. Winnings from Lottery : any winnings from lotteries, Other Sources
crossword puzzles, races, including horse-races, card-
games and games of any sort or from gambling or betting
of any form.
14. Employees Contribution Towards Provident Fund : any PGBP if not deposited
sum received by the assessee from his employees as by the assessee to the
contributions to any provident fund or superannuation specified fund
fund or any fund set-up under the provisions of the
employees State insurance act, 1948 (34 of 1948) or any
other fund for the welfare of such employees.
15. Amount Received under keyman Insurance Policy : any PGBP
sum received under a Keyman insurance Policy
including the sum allocated by way of bonus on such
policy. Keyman insurance Policy means a life insurance
policy taken by a person on the life of another person
who is or was the employee of the first mentioned person
or is or was connected with the business of the first
mentioned person in any manner whatsoever.

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16. Amount received for not carrying out any activity : any PGBP
sum referred to in Section 28(va), i.e. any sum, whether
received or receivable in cash or kind, under an
agreement for -
(i) not carrying out any activity in relation to any
business or profession; [amendment vide Finance act,
2016]
(ii) 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 provision for services
17. any sum referred to in clause (v) or (vi) of sub-section (2) Other sources
of section 56

18. Gift received for an amount exceeding Rs. 50,000 : any Other sources
sum of money or value of property referred to in clause
(vii) or clause (viia) of sub-section (2) of Section 56
19. any consideration received for issue of shares as exceeds Other sources
the fair market value of the shares referred in section
56(2)(viib).
20. amount received as an advance or otherwise in the Other sources
course of negotiation for transfer of a capital asset
referred to in clause (ix) of section 56(2).
21. any sum of money or value of property received without Other sources
consideration or for inadequate consideration as
referred to in clause (x) of Section 56(2)
22. any compensation or payment in connection with Other sources
termination of employment as referred under clause (xi)
of Section 56(2).
23. assistance in the form of a subsidy or grant or cash PGBP
incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the
Central Government or a State Government or any
authority or body or agency in cash or kind to the
assessee other than the subsidy or grant or
reimbursement which is taken into account for
determination of the actual cost of the asset in
accordance with the provisions of explanation 10 to
clause (1) of section 43.

2) REGULARITY OF INCOME
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 Income means periodical monetary return coming from definite source with some sort of
regularity.
 However, this does not mean that income which does not arise regularly will not be treated as
income for tax purposes. Ex: Winnings from lotteries, card games, etc. which do not arise from
definite source & do not have element of regularity are specifically included in Income under IT
Act.
 Even a single transaction can constitute business. Repetition of such transactions is not
necessary under Income Tax Act.
3) CASH/KIND
 The income received by the assessee need not be in the form of cash only.
 It may also be some other property or right which has monetary value.
 Wherever income is received in kind (like perquisites), then their value has to be found as per
the prescribed rules & this value shall be taken to be the income.
4) ILLEGAL/ TAINTED INCOME
 Income is income, though tainted. Thus, illegal Income is also taxed.
 For purposes of Income-tax, there is no difference between legal & tainted income.
Case Law: If smuggling activity can be regarded as a business, confiscation of currency notes by
customs authorities is a loss which is directly relatable to carrying of business & thus is permissible
as deduction
5) DISPUTED INCOME
 Any dispute regarding the title of the income cannot stop the assessment of the income in the
hands of the recipient.
 Thus, disputed income is taxable in the hands of recipient though there may be rival claims to
the income.
6) CONTINGENT INCOME
 A contingent income is not income. Until the contingency has happened, it cannot be assumed
that income has accrued or has arisen to the assessee.
7) PERSONAL GIFTS
 Gifts of personal nature do not constitute income upto Rs. 50,000 received in cash
 However, Gifts in kind having FMV > Rs. 50,000 is wholly taxable. [To be studied in IFOS].
8) COMPOSITE INCOME
 Income-tax is a tax on all incomes received by or arising to a taxpayer during a FY.
9) PIN MONEY
 Pin money received by a woman (Moneys given to a woman by her husband for running the
expenses of the kitchen) would not be income in the eyes of the law.
 Any property acquired using such money/savings is a Capital Asset of the lady.

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10) LUMPSUM RECEIPT
 Receipt in lumpsum or in instalments would not affect its taxability.
 Ex: If a person receives arrears of salary in a lump sum amount, it would still be his income.
11) INCOME MUST COME FROM OUTSIDE
 A person cannot earn income from himself
 In case of mutual activities, where some people contribute to the common fund & are entitled to
participate in the fund & a surplus arises which are distributed to the contributors of the fund,
such surplus cannot be called income.
12) RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE
HEADS Relevant Method of Accounting

Salaries (15- ▪ Taxable on due basis or on receipt basis whichever is earlier.

17) ▪ Method of accounting followed by the assessee is irrelevant

HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is

irrelevant.

PGBP PGBP Income is taxable as per method of accounting followed

(28-44DB) by assessee.
If assessee follows Accrual basis of accounting → Income taxed on
accrual basis. If assessee follows Cash basis of accounting → Income
taxed on Cash basis.
 Certain payments are allowable only on Payment basis. [Refer
PGBP]
Cap. Gain (45 Taxable in the PY in which the capital asset is transferred.
– 55A)  Method of accounting followed by the assessee is irrelevant.

IFOS (56 – 59) Same as PGBP.

13) CAPITAL & REVENUE RECEIPTS

Particular Capital Receipts Revenue Receipts

Meaning ▪ Receipt referable to fixed ▪ Receipt referable to

capital. circulating capital.
▪ Receipts towards substitution ▪ Any receipt toward
of source of income. substitution of Income.
▪ Amount received as ▪ Any compensation received
compensation for surrender of for the Loss of future profit.
any right of ownership

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Tax ▪ Not Taxable unless ▪ Taxable.
Treatment expressly provided. Ex: Profits arising from sale of
Ex: Profit from Sale of Capital Asset is Trading Asset is taxable as
chargeable to tax u/h Capital Gains Business Income
u/s 45.

Q. How to determine whether a receipt is a Revenue receipt or Capital receipt?

 If the Income-generating activity is within the normal dealing of the assessee → Revenue receipt.
 If the Income-generating activity is outside the normal dealing of the assessee (although
connected to business) → Capital receipt.
Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital Nature.
But Profit on sale of shares & securities held by a stock broker as SIT would be of Revenue Nature.
Note: Where profits arise from transactions which are outside the normal dealing of the assessee,
although connected with his business, taxability would depend upon the fact whether transactions
constitute trading activity for the Assessee.
CRUX: Only Revenue Receipt is taxable. Capital Receipts are normally Exempt. But certain capital
receipts which have been specifically included in the definition of “Income u/s 2(24) are taxable.
14) CAPITAL EXPENDITURE & REVENUE EXPENDITURE
Capital Expenditure Revenue Expenditure

1. Cost of acquisition & installation 1. Purchase price of a current Asset

charges of Fixed Asset. for resale or manufacture.

2. Incurred to increase operating 2. Incurred to maintain the asset.

capacity.
3. Expenditure incurred to free 3. Expenditure incurred to free
oneself form a Capital Liability oneself from a Revenue liability

4. Expenditure for acquisition of 4.Expenditure incurred for earning

source of Income income

Liquidated damages → Capital receipt. Amount received towards compensation for sterilization
of profit earning source is not in ordinary course of business.
Compensation on Termination of Agency → Capital receipt. Receipt of compensation on
termination of the agency business being the only source of income by the assessee. But if the
assessee has several agencies and one of them is terminated & compensation is received, the receipt
would be revenue receipt since taking agencies & exploiting the same for earning income is the
ordinary course of business & loss of one agency would be made good by taking another.

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Compensation received from the employer or from any person for premature termination of
the service contract is a capital receipt but is taxable as profit in lieu of salary u/s 17(3) or IFOS u/s
56(2)(xi), respectively .
Compensation received or receivable in connection with termination/modification of T&Cs of
any contract relating to its business shall be taxable as business income
15) APPLICATION OF INCOME VS DIVERSION OF INCOME
Application of Income Diversion of Income

 If assessee applies his  If there is an overriding charge on the source

income to discharge his of such income which diverts the income, it is
obligation called diversion of Income.
 after the income reaches  In case of diversion of income before it
in the hands of the reaches in the hands of the assessee,
assessee,  it cannot be treated as an income of the
 it would be an application assessee & thus NO TAX
(apportionment) of
income &
 this would result in
taxation of such
income in the hands of
the assesse
▪ Conditions: ▪ Conditions:
1. Income accrues to the 1. An overriding charge/title on income &
assessee 2. Income is diverted at source.
2. Income reaches the 3. Charge is on sources of income & not on the
assessee Receiver.
3. Income is applied to
discharge obligation (Self-
imposed/gratuitous)

CONCEPT OF FINANCIAL YEAR, PREVIOUS YEAR & ASSESSMENT YEAR

Financial Year.
▪ Financial year means a year starting on 1st April & ending on 31st March.
PY [Sec 3]
▪ FY in which the income is earned is called “Previous Year”.
▪ PY means the Financial Year immediately preceding the AY.
▪ PY 2020-21-will commence on 1.4.2020 & will end on 31.3.2021.
AY
[Sec 2(9)] ▪ The year in which income is assessed to tax is called
Assessment Year.
▪ AY 2021-22 will commence on 1.4.2021 & will end on 31.3.2022.
▪ Thus Income earned during PY 2020-21 will be assessed/taxed
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in AY 2021-22.

CRUX: PY → Year in which Income is earned; AY → Next year in which income is

taxed is AY.
Ex: A is running a business from 2003 onwards. Determine PY for AY 2021-22. [Ans:
PY = 1.4.2020 - 31.3.2021].

DUAL ROLE OF A FINANCIAL YEAR

▪ Each financial year is both Previous Year as well as Assessment Year.
▪ It is PY for income earned during that FY & AY for the income earned during the
preceding FY.
Financial PREVIOUS YEAR ASSESSMENT YEAR
year
2019-20 FY 2019-20 is PY for income FY 2020-21 is AY for incomes
received/accrued during 1 earned in PY 2019-20.
April 2019 to 31 March 2020

2020-21 FY 2020-21 is PY for income FY 2021-22 is AY for incomes

received/accrued during earned in PY 2020-21.
April 1, 2020 to March 31,
2021.

FIRST PREVIOUS YEAR FOR NEWLY SET-UP BUSINESS/PROFESSION DURING FY

 First PY = The period beginning from the date of setting up of the business or
from the date the new source came into existence & ending on the last day of
that FY (31st March).
 Therefore, first PY of a newly set-up business/ profession or a new source of
income will be either 12 months or less than 12 months. It can never exceed a
period of 12 months.

Note: The same provision will be applicable for the “New Source of Income.”

QUESTIONS
Q1. Mr. SS set up a new business on 24.2.2020, what will be the first PY for that
business?
Answer: From 24.02.2020 – 31.3.2021; PY 2020-21; AY 2021-22.
Q2. What will be the 2nd PY for his business?
Answer: PY 2021-22; AY 2022-23.

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UNIFORM PREVIOUS YEAR
 Assessees are required to follow Financial year as Previous Year uniformly for
every year. [From 1st April to 31st March]
 An Assessee may maintain books of account on calendar year basis but for
Income Tax purpose, his previous year will be financial year & not the calendar
year.

Ex: Mr. SS can maintain books of accounts on calendar year basis, but tax will be
levied on the basis of financial year only.
A/cing year Income as per Splitting of income as per FY Taxable Income
books of A/c.
JAN-MARCH APRIL –DEC
2018 60000 18000 42000 .

2019 70000 26000 44000 PY 18-19 & AY 19-20 =

68000(42000+26000)

2020 90000 21000 69000 PY 19-20 & AY 20-21 =

65000
(44000+21000)

CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN SAME YEAR

 General Rule: Income earned during any PY is assessed to tax in immediately
succeeding AY.
 However, in following circumstances, income is taxed in PY in which it is earned.
Thus AY & PY in these exceptional circumstances will be the same.
 These exceptions have been made to protect the interests of revenue.

FOLLOWING ARE THE EXCEPTIONS:

1. SHIPPING BUSINESS OF NON-RESIDENTS [SECTION 172]
 If a ship belonging to or chartered by NR carries
passengers/livestock/mail/goods shipped at a port in India,
 Such Ship is allowed to leave the port only when tax has been paid or satisfactory
arrangement has been made for payment thereof.
 Income = 7.5% of the freight paid/payable to the owner or his agent
whether in India or o/s India for such carriage.
 Such income is charged to tax in the same year in which it is earned.

2. PERSONS LEAVING INDIA [SECTION 174]

 Where it appears to AO that any individual may leave India during the current AY
or shortly after its expiry &

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 He has no present intention of returning to India,
Then Total Income of such individual for the period from the expiry of the
respective PY up to the probable date of his departure from India is chargeable to
tax in that AY
Ex: Suppose Mr. X is leaving India for USA on 10.6.2020 & it appears to AO that he
has no intention to return. Before leaving India, Mr. X will be required to pay tax on
the income earned during PY 2020-21 as well as the total income earned during the
period 1.4.2020 to 10.06.2021.

3. AOP/BOI/AJP FORMED FOR A PARTICULAR EVENT OR PURPOSE [SEC 174A]

 If AOP/BOI etc. is formed or established for a particular event or purpose &
 AO apprehends that AOP/BOI is likely to be dissolved in the same year or in next
 year,
 he can make assessment of the income upto date of dissolution as income of
relevant AY.

4. PERSONS LIKELY TO TRANSFER PROPERTY TO AVOID TAX [SECTION 175]

 During the current AY, if it appears to AO that a person is likely to charge, sell,
transfer, dispose any of his assets
 to avoid payment of any liability under this Act,
Total income of such person for the period from the expiry of PY to the date when
AO commences proceedings is chargeable to tax in that assessment year.

5. DISCONTINUED BUSINESS [SECTION 176]

 If any business or profession is discontinued in any AY,
 Income of the period from the expiry of the PY up to the date of such
discontinuance may,
 at the discretion of AO may be charged to tax in that assessment year.

Note: Section 176 is a Discretionary power. The Assessing Officer has the
discretion of applying it. AO may choose not to apply it & wait till the end of the
Assessment Year

VITAL STATISTICS AND LAYOUT

Contribution of Direct Taxes to Total Tax Revenue
(Rs. in crore)

Financial Year Direct Taxes Indirect Taxes Total Taxes Direct Tax As %
Of Total Taxes
2000-01 68305 119814 188119 36.31%

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2001-02 69198 117318 186516 37.10%
2002-03 83088 132608 215696 38.52%
2003-04 105088 148608 253696 41.42%
2004-05 132771 170936 303707 43.72%
2005-06 165216 199348 364564 45.32%
2006-07 230181 241538 471719 48.80%
2007-08 314330 279031 593361 52.97%
2008-09 333818 269433 603251 55.34%
2009-10 378063 243939 622002 60.78%
2010-11 445995 343716 789711 56.48%
2011-12 493987 390953 884940 55.82%
2012-13 558989 472915 1031904 54.17%
2013-14 638596 495347 1133943 56.32%
2014-15 695792 543215 1239007 56.16%
2015-16 741945 711885 1454180 51.03%
2016-17 849818 861515 1711333 49.66%
2017-18 1002037 915256 1918210 52.24%
2018-19* 1137685 939018 2076703 54.78%

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE

Particulars Amount (Rs.)

Income under the head :
+ income from Salaries XXX
+ income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ income from other sources XXX
Adjustment in respect of :
+ Clubbing of income XXX
– Set off and carry forward of losses (XXX)
= Gross Total Income xxx
– deductions under section 80C to 80U (or Chapter Via) (XXX)
= Total Income xxx

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TAX RATES FOR FY 2020-21 i.e. AY 2021-22

Calculation of tax on income
 tax rate depends upon the category of person
 amount of income
 residential status of person
 age of individual
 type of income
Components of tax are

Tax
Tax SHEC
Cess

Tax Rates for Different types of person depending upon various parameters :
1. For :
 resident individual of the age below 60 years
 Non-Residents individual
 Hindu undivided family
 association of Persons
 Body of individuals (other than Co-operative society)
 Artificial Juridical Person
Total Income (Rs.) Tax Rate Tax liability (Rs.)
upto 2,50,000 Nil Nil
2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500

2. Applicable for :
Resident individual of the age of 60 years or more but less than eighty years at any time during the
previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

upto 3,00,000 Nil Nil
3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000

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3. Applicable for :
Resident individual of the age of 80 years or more at anytime during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

upto 5,00,000 Nil Nil
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000
CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be
considered to have attained a particular age on 31st March, the day preceding the anniversary of
his birthday.
Therefore a resident individual, whose 60th / 80th birthday falls on 1st april, 2021 would be treated
as having attained the age of 60 years/80 years in the P. yr. 2020-21.

4. For firm and local authroties:

Types of person Tax Rates
i. Firms (including LLP) 30% of total Income
ii. Local authorities 30% of total Income

Good to know : Entity or individual other than a company whose adjusted total income
exceeds Rs.20 lakhs is liable to pay Alternate Minimum tax @ 18.5%.

5. FOR COMPANY
Domestic Company Assessment Year 2021-22
 Where it opted for Section 115BA 25%
 Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the
company is computed without claiming specified
deductions, incentives, exemptions and additional
depreciation available under the income-tax act.]
 Where it opted for Section 115BAB 15%
[this regime shall be available only for the manufacturing
companies incorporated in India on or after 01-10-2019.
Hence, old companies will not be able to take the benefit of
this section.]
 Where it has not opted for Section 115BAA and the 25%
total turnover or Gross receipts of the company in
the last previous year does not exceeds 400 crore

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rupees

 any other domestic company 30%

Foreign Company 40%

Good to know : A company is liable to pay MAT @ 15%.

6. For Co-operative Society :

Income Slabs Tax Rates
i. Where the taxable income does not exceed rs. 10% of the income
10,000/-
ii. Where the taxable income exceeds rs. 10,000/- Rs. 1,000/- + 20% of income in excess of
but does not exceed rs. 20,000/- Rs.
10,000/-
Where the taxable income exceeds rs. 20,000/- Rs. 3.000/- + 30% of the amount by
which the taxable income exceeds rs.
20,000/-

Surcharge
Surcharge is an additional tax imposed on certain cases. it is imposed over the basic tax rate
calculated on the income.
For example : Suppose total taxable income of an individual of 45 years is rs. 1,30,00,000, then
Base tax will be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500.
Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rate of surcharge prescribed
in the following manner :
Types of person Surcharge Rates
i. individuals, HUF, AOP, BOI if income exceeds rs. 50 lakhs but 10% of income
does not exceed rs. 1 crore tax
if income exceeds rs. 1 crore but does 15% of income
not exceed rs. 2 crore tax
if income exceeds rs. 2 crore but does 25% of income
not exceed rs. 5 crore tax
if total income exceeds rs. 5 crore 37% of income
tax
ii Firm / local authority / Co- if income exceeds rs. 1 crore 12% of income
operative Society tax
iii. domestic Companies* if income exceeds rs. 1 crore but does 7% of income tax
not exceed rs. 10 crores

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SSGURU CA SURAJ SATIJA
if income exceeds rs. 10 crore 12% of income
tax
iv. Companies other than a if income exceeds rs. 1 crore but does 2% of income tax
domestic company not exceed rs. 10 crores
if income exceeds rs. 10 crore 5% of income tax
*The rate of surcharge in case of a company opting for taxability under Section 115Baa or Section
115BaB shall be 10% irrespective of amount of total income.

Marginal Relief in Surcharge : When an assessee’s taxable income exceeds rs. 1 crore, he is
liable to pay Surcharge at prescribed rates mentioned above on income tax payable by him.
However, the amount of income tax and surcharge on total income shall not exceed the amount of
income that exceeds rs. 1 crore.
Example : Suppose Mr. ram an individual assessee of 42 years is having taxable income of rs.
1,00,01,000/-
1. income tax rs. 28,12,800
2. Surcharge @15% of Income Tax rs. 4,21,920
3. income tax on income of rs. 1 crore rs. 28,12,500
4. Maximum Surcharge payable (income over rs. 1 crore i.e. rs. rs. 1,000
1,000)
5. (income tax + Surcharge) payable rs. 28,13,500
Thus, in the above case, though the surcharge @15% is Rs. 421920. However, since the income of
Mr. Ram exceeds rs. 1 crore by just rs. 1,000, ram will be eligible for marginal relief and
maximum surcharge will be restricted to rs. 1,000 only.

CESS
 Governments resort to imposition of cess for meeting specific expenditure
 education Cess and Senior and Higher education Cess are additional levy on the basic tax
liability + surcharge, if applicable.
 Rate of Education Cess is 2%
 Rate of SHEC is 1%.
 Rate of Health Cess is 1%.

Special Tax Regime for Individual and HUFs [Section 115BAC)

The Finance act, 2020, has provided an option to individuals and HUF for payment of taxes at the
following reduced rates from assessment year 2021-22 and onwards:

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Total Income (Rs) Rate

up to 2,50,000 Nil
From 2,50,001 to 5,00,000 5%
From 5,00,001 to 7,50,000 10%
From 7,50,001 to 10,00,000 15%
From 10,00,001 to 12,50,000 20%
From 12,50,001 to 15,00,000 25%
above 15,00,000 30%

Surcharge: Surcharge is levied on the amount of income-tax at following rates if total income of an
assessee exceeds specified limits:
rs. 50 rs. 1 Crore to rs. 2 Crores to rs. 5 crores to exceeding rs.
lakhs to rs.2 Crores rs. 5 Crores rs. 10 Crores 10 Crores
rs. 1 Crore
10% 15% 25% 37% 37%
Note: Marginal relief is available from surcharge.
Health and Education Cess: Health and Education Cess is levied at the rate of 4% on the amount of
income-tax plus surcharge.
Alternate Minimum tax: The assessee opting for this scheme have been kept out of the purview
of alternate Minimum Tax (AMT). Further the provision relating to the computation, carry forward
and set off of AMT credit shall not apply to these assessees.
Conditions to be satisfied:
1. The option to pay tax at lower rates shall be available only if the total income of individual or
HUFs is computed without claiming following exemptions or deductions:
a) Leave travel concession [Section 10(5)]
b) House rent allowance [Section 10(13a)]
c) Official and personal allowances (other than those as may be prescribed) [Section 10(14)]
d) allowances to MPs/MLAs [Section 10(17)]
e) allowances for income of minor [Section 10(32)]
f) deduction for units established in Special economic Zones (SEZ) [Section 10aa];
g) Standard deduction [Section 16(ia)]
h) entertainment allowance [Section 16((ii)]
i) Professional tax [Section 16(iii)]

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SSGURU CA SURAJ SATIJA
j) interest on housing loan [Section 24(b)]
k) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];
l) Deduction for investment in new plant and machinery in notified backward areas [Section
32AD];
m) Deduction in respect of tea, coffee or rubber business [Section 33AB];
n) deduction in respect of business consisting of prospecting or extraction or production of
petroleum or natural gas in India [Section 33ABA];
o) Deduction for donation made to approved scientific research association, university college or
other institutes for doing scientific research which may or may not be related to business
[Section 35(1) (ii)];
p) Deduction for payment made to an Indian company for doing scientific research which may
or may not be related to business [Section 35(1)(iia)];
q) deduction for donation made to university, college, or other institution for doing research in
social science or statistical research [Section 35(1) (iii)];
r) Deduction for donation made for or expenditure on scientific research [Section 35(2AA)];
s) Deduction in respect of capital expenditure incurred in respect of certain specified businesses,
i.e., cold chain facility, warehousing facility, etc. [Section 35ad];
t) deduction for expenditure on agriculture extension project [Section 35CCC];
u) deduction for family Pension [Section 57(iia)]
v) Deduction in respect of certain incomes other than specified under Section 80JJAA, 80CCD(2)
and deduction under section 80la for unit located in iFSC [Part C of Chapter Vi-a].
2. total income of the assessee is calculated after claiming depreciation under section 32, other
than additional depreciation, and without adjusting brought forward losses and depreciation
from any earlier year (if such loss or depreciation pertains to any deduction under the aforesaid
sections). Further, loss under the head house property can’t be set off against other heads of
Income. Moreover, such loss and depreciation will not be carried forward.
3. if the assessee has any unabsorbed depreciation, relating to additional depreciation, which has
not been given full effect, the corresponding adjustment shall be made to WDV of the block of
assets in the prescribed manner.
4. in case the assessee has business or professional income, this option shall be exercised on or
before the due date for furnishing the returns of income.
5. Once the assessee has exercised the option for any previous year, it cannot be subsequently
withdrawn for the same or any other previous year. T he option once exercised for any
previous year can be withdrawn only once in subsequent previous year (other than the year in
which it was exercised) and thereafter, he shall never be eligible to exercise this option again
except where such person ceases to have any business income.

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6. if assessee does not have business or professional income, the option must be exercised along with
the return of income for every previous year. if an assessee, after opting for Section 115BaC,
claims any of prescribed deduction or allowance in any previous year, then the option to pay tax
at concessional rate shall become invalid for that year.

SPECIAL TAX REGIME APPLICABLE TO A CO-OPERATIVE SOCIETIES [SECTION 115BAD]

The Finance act, 2020 has inserted a new section 115Bad in income-tax act to provide an option to
the resident co-operative societies to get taxed at the rate of 22% plus 10% surcharge and 4% cess.
The resident co- operative societies have an option to opt for taxation under newly section 115Bad
of the act w.e.f. assessment year 2021-22. the option once exercised under this section cannot be
subsequently withdrawn for the same or any other previous year.
if the new regime of Section 115Bad is opted by a co-operative society, its income shall be
computed without providing for specified exemption, deduction or incentive available under the
Act. The societies opting for this section have been kept out of the purview of alternate Minimum
Tax (AMT). Further, the provision relating to computation, carry forward and set-off of AMT
credit shall not apply to these assessees.
The option to pay tax at lower rates shall be available only if the total income of cooperative society
is computed without claiming following exemptions or deductions:
a) deduction for units established in Special economic Zones (SEZ) [Section 10aa];
b) additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];
c) Deduction for investment in new plant and machinery in notified backward areas [Section
32AD];
d) Deduction in respect of tea, coffee or rubber business [Section 33AB];
e) deduction in respect of business consisting of prospecting or extraction or production of
petroleum or natural gas in India [Section 33ABA];
f) Deduction for donation made to approved scientific research association, university college or
other institutes for doing scientific research which may or may not be related to business
[Section 35(1) (ii)];
g) Deduction for payment made to an Indian company for doing scientific research which may or
may not be related to business [Section 35(1)(iia)];
h) deduction for donation made to university, college, or other institution for doing research in
social science or statistical research [Section 35(1) (iii)];
i) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research
which may or may not be related to business [Section 35(2aa)];
j) Deduction in respect of capital expenditure incurred in respect of certain specified businesses,
i.e., cold chain facility, warehousing facility, etc. [Section 35ad];
k) deduction for expenditure on agriculture extension project [Section 35CCC];

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l) Deduction in respect of certain incomes other than specified under Section 80JJAA [Part C of
Chapter Vi-a].
Where a co-operative society exercises option for availing benefit of lower tax rate under section
115BAD, it shall not be allowed to claim set-off of any brought forward losses or depreciation
attributable to any restricted exemption or deduction in the assessment year for which the option has
been exercised and for any subsequent assessment year.

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Rebate under section 87A
An assessee, being an individual resident in India, whose total income does not exceed Rs. 5,00,000
shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the
deductions under this Chapter) on his total income with which he is chargeable for any assessment
year, of an amount equal to 100% of such income-tax or an amount of Rs. 12,500, whichever is less.
Steps involved in calculation of Tax on Total Income

Particulars Amount Rs.

Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%;
Casual Income @ 30% and Short-term capital gains (on Securities transaction tax XXX
paid securities) @ 15%;
add : tax on Balance income @ Slab rate/Flat rate (as applicable) XXX
Total Tax xxx
XXX
add : Surcharge, if any
(XXX)
less : Marginal relief, if applicable
xxx
Tax including Surcharge XXX
Add : Education Cess @ 2% on tax including surcharge XXX
Add : SHEC @ 1% on tax including surcharge
Add : Health Cess @ 1% on tax including surcharge
xxx
(Combinedly Health and Education Cess on income tax is levied @ 4%)
XXX
Tax liability
add : interest under Section 234a/234B/234C xxx
Net tax liability
Less : Taxes paid by way of :
(XXX)
– Tax deducted at source (TDS)
(XXX)
– advance tax
– Self assessment tax (XXX)
– Double taxation relief (XXX)
Tax Payable/Refundable xxx

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SSGURU CA SURAJ SATIJA

2. RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME

Basics of Residential Status [RS]

1. Total income of an assessee cannot be computed unless we know residential status of the
assessee during the previous vear.

2. RS is determined for each category of person separately.

3. RS always determined for P.Y. because we have to determine the total income of the previous
year only.

4. It is calculated for every year because it may change year to year.

5. FA person can be resident of more than one country for any P.Y

6. Citizenship of a country and residential status of that country are different concept.

7. Onus of Proof

RESIDENTIAL STATUS IS DETERMINED FOR

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RESIDENTIAL STATUS OF INDIVIDUAL
DETERMINING RESIDENTIAL STATUS OF INDIVIDUAL (SEC 6(1))
Other assessee not covered in the 3 For 3 category of cases
categories
They would be treated as Resident if satisfy 1. Indian Citizen who leaves India in PY as a
any of following condition- ship crew member of an Indian ship or for
a) If they stay in India for 182 days or more the purpose of employment outside India
in PY - They would be treated as Resident if they
OR stay in India for 182 days or more in PY
b) Stays in India for 60 days in PY AND 365 2. Indian Citizen or Person of Indian Origin
days in 4 previous preceding years. who being outside India comes on a visit to
India in PY & total income (other than
foreign income) is 15lakh or less
- They would be treated as Resident if they
stay in India for 182 days or more in PY
3. Indian Citizen or Person of Indian Origin
who being outside India comes on a visit to
India in PY & total income (other than
foreign income) is exceeding 15lakh
- They would be treated as Resident if
satisfy any of following condition-
a) If they stay in India for 182 days or more
in PY OR
b) If the period of stay is 120 days or more
during the PY AND 365 days or more during
the 4yrs immediately preceding PY

IC / PIO having income exceeding 15L &

liability to tax in another country
NO Person treated as RNOR as per Sec
6(1A) & 6(6)
YES RS depends upon period of stay in
India when he visited India
- Upto 120 days - NR
- Exceeding 120 days but less than 182 days
& 365 days or more in 4 PPY - RNOR [6(1) &
6(6)]
- 182 days or more
- Sec 6(1) - Resident

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- Sec 6(6) - ROR or RNOR

Sec 6(1A) - Deemed Resident

Notwithstanding anything contained in Sec 6(1),

an individual, being citizen of India, having total income, other than the income from foreign
sources, exceeding 15,00,000 during the PY shall be deemed to be resident in India in that PY if he
is not liable to tax in any other country / territory by reason of his domicile / residence / any other
criteria of similar nature [FA'20]

As per Sec 6(6), If a person is deemed Resident as per Sec 6(1A) he shall deem to be RNOR.

Other Points :
 If a person is resident as per Sec 6(1), then Sec 6(1A) shall not apply.
 Sec 6(1A) does not apply to an individual who is not a citizen of India but a person of Indian
Origin

Person of Indian Origin

A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents,
was born in Undivided India. It may be noted that grandparents include both maternal and paternal
grand-parents.

Resident & Ordinarily Resident (ROR) :

An individual may become a ROR in India if he satisfy both the following conditions given u/s 6(1)
besides satisfying any one of the above mentioned conditions:

a) he is a resident in at least any two out of the ten PYs immediately preceding the relevant PY and

b) he has been in India for 730 days or more during the 7 PYs immediately preceding the relevant
PY.

Resident but Not Ordinarily Resident (RNOR) :

An individual is RNOR in any PY if-

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a) he has been a NR in India in 9/10 PYs preceding that year or

b) he has during the 7 PYs preceding that year been in India for a period of, or periods amounting
in all to, 729 days or less

c) a citizen of India, or a person of Indian origin, having total income, other than the income from
foreign sources, exceeding 15,00,000 during the PY who has been in India for a period or periods
amounting in all to 120 days or more but less than 182 days; or

d) a citizen of India who is deemed to be resident in India - clause (1a)

Explanation - “income from foreign sources” means income which accrues or arises outside India
(except income derived from a business controlled in or a profession set up in India.

Non - Resident :

If an individual does not satisfy any of the above basic condition then, he will be treated as Non-
resident. It must be noted that the fulfillment of any one of the above conditions (a) / (b) as
applicable will make an Individual resident in India for tax purposes. Further it is to be noted that
these conditions are alternative & not cumulative in their application.

Important Notes:

 The fact that an assessee is resident in India in respect of one year does not automatically mean
that he would be resident in the preceding or succeeding years as well. Consequently, the
residential status of the assessee should be determined for each year separately. this is in view
of the fact that a person resident in one year may become NR or RNOR in another year and vice
versa.
 The stay may be anywhere in India and for any length of time at each place in cases where the
stay in India is at more places than one, what is required is the total period of stay should not be
less than the number of days specified in each condition.
 While determining residential status, the day of leaving and returning to India should be
considered as a stay in India.
 Where the exact arrival and departure time is not available then the day he comes to India and
the day he leaves India is counted as stay in India.
 India means territory of India, its territorial waters, continental shelf, Exclusive Economic Zone
(upto 200 nautical miles) and airspace above its territory and territorial waters.

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Exception to the basic condition :

 Being a citizen of India who leaves India in any PY as a member of the crew of an Indian ship as
defined in sec 3(18) of the Merchant Shipping Act ,1958, or for the purposes of employment
outside India

Rule 126 Computation of period of stay in India in certain cases -

An Individual, being a citizen of India and a member of the crew of a ship, the period of stay in India
in respect of an eligible voyage shall not include the period beginning from the date of joining till
the date of signing off as mentioned in the Continuous Discharge Certificate under the Merchant
Shipping Act, 1958.
“eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers
or freight in international traffic where-

 for the voyage having originated from any port in India, has as its destination any port outside
India; &
 for the voyage having originated from any port outside India, has as its destination any port in
India.
 being citizen of India/ person of Indian origin within the meaning of expl. to sec 115C(e), who,
being outside India, comes on visit to India in any PY.

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Residential Status of HUF

Only Individual & HUF can be ROR/RNOR, other person can be Resident /NR.

Sec 6(2) - A HUF firm or other association of persons is said to be resident in India in any PY in
every case except where during that year the control & management of its affairs is situated wholly
outside India.

An HUF can be “not ordinarily resident’

If manager/karta has been a RINOR in india in the PY in accordance with the tests applicable to
individuals. Where, during the last ten years the kartas of the H.U-F had been different from one

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another, the total period of stay of successive kartas of the same family should be aggregated to
determine the residential status of the karta & consequently the HUF

In other words, if Karta of Resident HUF satisfies both the following additional conditions (as
applicable in case of individual) then resident HUF will be ROR, otherwise it will be RNOR.

Additional Conditions :

a) Karta of resident HUF should be resident in atleast 2/10 PY immediately preceding relevant PY.

b) Stay of Karta during 7 PY immediately preceding relevant PY should be 730 days or more.

RESIDENTIAL STATUS OF OTHER ASSESSEE

Sec 6(4) - Every other person is said to be resident in India in any previous year in every case,
except where during that year the control & management of his affairs is situated wholly outside
India.

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Sec 6(3) Residential status of companies

Sec 6(3) - A company is said to be a resident in India in any PY. if—

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

Explanation - For the purposes of this clause ‘place of effective management’ means a place where
key management and commercial decisions that are necessary for the conduct of business of an
entity as a whole are, in substance made.

Sec 5 Scope of Total Income & Tax Incidence

In order to understand relationship between residential status & Incidence

it is necessary to understand meaning if Indian & Foreign income.

Indian Income:

1. Received In India

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2. Deemed to be Received in India [ Sec & 8]
3. Accrued in India
4. Deemed to be accrued or arise in India [Sec]

Foreign Income

Income is not received or not deemed to be received in India.

Income which does not accrue or arise in India.

Remittance of Income

Approved mode - Exempt in India

Unapproved Mode - Taxable in India

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DEEMED TO RECEIVED OR ACCRUED

Deemed to be received in India [Sec.7] Accrued In India [Sec.9]

1. Contribution made by the employer to 1. Income out of Business connection.
RPF beyond 12% of the salary 2. Salary earned in India
Connection. [Upto 12% Exempt] (Refer 3. Salary from government to an Indian
Salary) citizen for services Rendered outside
2. Interest credited to Employee beyond India
9.5% p.a. (Ref Salary) 4. Dividend from Indian Co
3. Transfer from URPF to RPF 5. Income from Interest payable by
4. Contribution to pension fund u/s 80CCD specified person
(Refer Salary) 6. Income from royalty
7. Income from Technical services
8. Income from Property/Assets
9. Income from transfer of Capital Assets
situated In India
10. Gift by R to NR

Business Connection

1. Business Connection
2. Deemed Business Connection situated In India
3. Not a Business Connection

Meaning of “Income received or deemed to be received

All assessees are liable to tax in respect of the income received or deemed to be received by them in
India during the PY irrespective of-

(i) their residential status, and

(ii) the place of its accrual

Income is to be included in the total income of the assessee immediately on its actual or deemed
receipt. The receipt of income refers to only the first occasion when the recipient gets the money
under his control.

Therefore, when once an amount is received as income, remittance or transmission of that amount
from one place or person to another does not constitute receipt of income in the hands of the
subsequent recipient or at the place of subsequent receipt.

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Meaning of income ‘accruing’ and ‘arising’

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment of
the same. For e.g. salary for work done in December will accrue throughout the month, day to day,
but will become due on the salary bill being passed on 31st December or 1st January. Similarly, on
Government securities, interest payable on specified dates arise during the period of holding, day
to day, but will become due for payment on the specified dates.

It must be noted that income which has been taxed on accrual basis cannot be assessed again on
receipt basis, as it will amount to double taxation.
With a view to removing difficulties and clarifying doubts in the taxation of income, Explanation 1
to section 5 specifically provides that an item of income accruing or arising outside India shall not
be deemed to be received in India merely because it is taken into account in a balance sheet
prepared in India.
Further, Explanation 2 to section 5 makes it clear that once an item of income is included in the
assessee’s total income and subjected to tax on the ground of its accrual/ deemed accrual, it cannot
again be included in the person's total income and subjected to tax either in the same or in a
subsequent year on the ground of its receipt - whether actual or deemed.

Sec 9(1) - Income From Business Connection

The following incomes shall be deemed to accrue or arise in India :—

Sec 9(1)(i) - All income accruing or arising, whether directly or indirectly, through or from any
business connection in India, or through or from any property in India, or through or from any asset
/ source of income in India, or through the transfer of a capital asset situate in India.

Explanation 1 - Not a business connection

For the purposes of this clause -

(a) in-the-case-of-a-business in the case of a business other than the business having business
connection in India on account of significant economic presence [FA'20], of which all the operations
are not carried out in India,

(b) 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:
(c) 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

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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:

(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of India ;: or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or
(3) a company which does not have any shareholder who is a citizen of India or who is resident in
India,

no income shall be deemed to accrue or arise in India to such individual, firm or company through
or from operations which are confined to the shooting of any cinematograph film in India;

(e) in the case of a foreign company engaged in the business of mining of diamonds, no income shall
be deemed to accrue or arise in India to it through or from the activities which are confined to the
display of uncut and unassorted diamond in any special zone notified by the CG in the Official
Gazette in this behalf.

Explanation 2 - Meaning of business connection

For the removal of doubts, it is hereby declared that "business connection’ shall include any
business activity carried out through a person who, acting on behalf of the non-resident-
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-
resident or habitually concludes contracts or habitually plays the principal role leading to
conclusion of contracts by that non-resident and the contracts are—

(i) in the name of the non-resident: or

(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by
that non-resident or that non-resident has the right to use; or

(iii) for the provision of services by the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from
which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident
and other non-residents controlling, controlled by, or subject to the same common control, as that
non-resident:
Provided that such business connection shall not include any business activity carried out through
a broker, general commission agent or any other agent having an independent status, if such broker,

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general commission agent or any other agent having an independent status is acting in the ordinary
course of his business:

Provided further that where such broker, general commission agent or any other agent works
mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal
non-resident) or on behalf of such non-resident and other non-residents which are controlled by
the principal non-resident or have a controlling interest in the principal non-resident or are subject
to the same common control as the principal non-resident, he shall not be deemed to be a broker,
general commission agent or an agent of an independent status.

Explanation 2A - Deemed Business Connection - Significant Economic Presence - For the

removal of doubts, it is hereby declared that the significant economic presence of a non-resident in
India shall constitute ‘business connection’ in India and “significant economic presence’ for this
purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any
person in India including provision of download of data or software in India, if the aggregate of
payments arising from such transaction or transactions during the previous year exceeds such
amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such
number of users in India, as may be prescribed:

Provided that the transactions or activities shall constitute significant economic presence in India,
whether or not—

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or

activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.
[FA'20]

Explanation 3 - Where a business is carried on in India through a person referred to in clause (a)
or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the
operations carried out in India shall be deemed to accrue or arise in India.

Explanation 3A - For the removal of doubts, it is hereby declared that the income attributable to
the operations carried out in India, as referred to in Explanation 1, shall include income from—

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a) such advertisement which targets a customer who resides in India or a customer who accesses
the advertisement through internet protocol address located in India:
b) sale of data collected from a person who resides in India or from a person who uses internet
protocol address located in India; and
c) sale of goods or services using data collected from a person who resides in India or from a person
who uses internet protocol address located in India. Provided that the provisions contained in
this Explanation shall also apply to the income attributable to the transactions or activities
referred to in Explanation 2A. [FA'20]

Explanation 4 - For the removal of doubts, it is hereby clarified that the expression ‘through" shall
mean and include and shall be deemed to have always meant and included "by means of", “in
consequence of" or “by reason of’.

Explanation 5 - For the removal of doubts, it is hereby clarified that an asset or a capital asset being
any share or interest in a company or entity registered or incorporated outside India shall be
deemed to be and shall always be deemed to have been situated in India, if the share or interest
derives, directly or indirectly, its value substantially from the assets located in India:

Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is
held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional
Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year
commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:

Provided further that nothing contained in this Explanation shall apply to an asset or capital asset,
which is held by a non-resident by way of investment, directly or indirectly, in Category-I or
Category-II foreign portfolio investor under the Securities & Exchange Board of India (Foreign
Portfolio Investors) Regulations, 2014 prior to their repeal [FA'20], made under the Securities and
Exchange Board of India Act, 1992:
Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset,
which is held by a non-resident by way of investment, directly or indirectly, in Category-I foreign
portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors)
Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992. [FA'20]

Sec 9(1)(ii) - Salary Earned In India

Income which falls under the head "Salaries", if it is earned in India.

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Explanation - For the removal of doubts, it is hereby declared that the income of the nature referred
to in this clause payable for—

a) service rendered in India; and

b) 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,
shall be regarded as income earned in India;

Sec 9(1){iii) - Salary Earned Outside India

Income chargeable under the head "Salaries" payable by the Government

Sec 9(1)(iv) - Dividend From An Indian Company

A dividend paid by an Indian company outside India;

Sec 9(1)(v) - Interest payable

a) the Government : or
b) a person who is a resident, except where the interest is payable in respect of any debt incurred,
or moneys borrowed and used, for the purposes of a business or profession carried on by such
person outside India or for the purposes of making or earning any income from any source
outside India ; or
c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or
moneys borrowed and used, for the purposes of a business or profession carried on by such
person in India.

Explanation - For the purposes of this clause—

(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business
of banking, any interest payable by the permanent establishment in India of such non-resident to
the head office or any permanent establishment or any other part of such non-resident outside India
shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income
attributable to the permanent establishment in India and the permanent establishment in India
shall be deemed to be a person separate & independent of the non-resident person of which it is a
permanent establishment & the provisions of the Act relating to computation of total income,
determination of tax and collection and recovery shall apply accordingly;

(b) "permanent establishment" shall have the meaning assigned to it in clause (iiia) of section 92F:
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Sec 9(1)(vi) - Royalty

Income by way of royalty payable by—

a) the Government ; or
b) a person who is a resident, except where 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 such person outside India or for the purposes of making or earning any income from any
source outside India ; or
c) a person who is a non-resident, where 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
such person in India or for the purposes of making or earning any income from any source in
India:

Provided that nothing contained in this clause shall apply in relation to so much of the income by
way of royalty as consists of lump sum consideration for the transfer outside India of, or the
imparting of information outside India in respect of, any data, documentation, drawing or
specification relating to any patent, invention, model, design, secret formula or process or trade
mark or similar property, if such income is payable in pursuance of an agreement made before the
1st day of April, 1976, and the agreement is approved by the CG:

Provided further that nothing contained in this clause shall apply in relation to so much of the
income by way of royalty as consists of lump sum payment made by a person, who is a resident, for
the transfer of all or any rights (including the granting of a licence) in respect of computer software
supplied by a non-resident manufacturer along with a computer or computer-based equipment
under any scheme approved under the Policy on Computer Software Export, Software Development
and Training, 1986 of the GOI.

Explanation 1 - For the purposes of the first proviso, an agreement made on or after the 1st day of
April, 1976, shall be deemed to have been made before that date if the agreement is made in
accordance with proposals approved by the CG before that date; so, however, that, where the
recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed
to have been made before that date unless, before the expiry of the time allowed under sub-section
(1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the
return of income for the assessment year commencing on the ‘1st day of April, 1977, or the
assessment year in respect of which such income first becomes chargeable to tax under this Act,
whichever assessment year is later, the company exercises an option by furnishing a declaration in
writing to the Assessing Officer (such option being final for that assessment year and for every
subsequent assessment year) that the agreement may be regarded as an agreement made before
the 1st day of April, 1976.

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Explanation 2 - For the purposes of this clause, "royalty" means consideration (including any lump
sum consideration but excluding any consideration which would be the income of the recipient
chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention,
model, design, secret formula or process or trademark or similar property

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or
similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill ;

the use or right to use any industrial, commercial or scientific equipment but not including the
amounts referred to in section 44BB;
the transfer of all or any rights (including the granting of a licence) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in connection with television
or tapes for use in connection with radio broadcasting, but not including consideration for the sale,
distribution or exhibition of cinematographic films; or [FA'20] the rendering of any services in
connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

Explanation 3 - For the purposes of this clause, "computer software" means any computer
programme recorded on any disc, tape, perforated media or other information storage device and
includes any such programme or any customized electronic data.

Explanation 4 - For the removal of doubts, it is hereby clarified that the transfer of all or any rights
in respect of any right, property or information includes and has always included transfer of all or
any right for use or right to use a computer software (including granting of a licence) irrespective
of the medium through which such right is transferred.

Explanation 5 - For the removal of doubts, it is hereby clarified that the royalty includes and has
always included consideration in respect of any right, property or information, whether or not -

(a) the possession or control of such right, property or information is with the payer:

(b) such right, property or information is used directly by the payer;

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(c) the location of such right, property or information is in India.

Explanation 6 - For the removal of doubts, it is hereby clarified that the expression ‘process
includes and shall be deemed to have always included transmission by satellite (including up-
linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other
similar technology, whether or not such process is secret;

Sec 9(1)(vii) - Income by way of fees for technical services payable by—

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a
business or profession carried on by such person outside India or for the purposes of making or
earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect or services utilised in a
business or profession carried on by such person in India or for the purposes of making or earning
any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees
for technical services payable in pursuance of an agreement made before the 1st day of April, 1976,
and approved by the CG.

Explanation 1 - For the purposes of the foregoing proviso, an agreement made on or after the 1st
day of April, 1976, shall be deemed to have been made before that date if the agreement is made in
accordance with proposals approved by the CG before that date.

Explanation 2 - For the purposes of this clause, “fees for technical services’ means any
consideration (including any lump sum consideration) for the rendering of any managerial,
technical or consultancy services (including the provision of services of technical or other
personnel) but does not include consideration for any construction, assembly, mining or like project
undertaken by the recipient or consideration which would be income of the recipient chargeable
under the head "Salaries’:

Sec 9(1)(viii) - Income arising outside India, being any sum of money referred to in sub-clause
(xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in
India to a non-resident, not being a company, or to a foreign company.

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Sec 9(2) - Notwithstanding anything contained in sub-section (1), any pension payable outside
India to a person residing permanently outside India shall not be deemed to accrue or arise in India,
if the pension is payable to a person referred to in article 314 of the Constitution or to a person who,
having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of
a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after
the commencement of the Constitution as a Judge in India.

Explanation - For the removal of doubts, it is hereby declared that for the purposes of this section,
income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi)
or clause (vii) of sub-sec (1) and shall be included in total income of NR, whether or not—

(a) the non-resident has a residence or place of business or business connection in India; or

(b) the non-resident has rendered services in India.

Circular 13/2017

Salary accrued to NNR sea farer for service rendered outside India on a foreign going ship (with
Indian flag/not) shall be not included in Total Income nearly because the salary is credited in NRE
a/c with Indian Bank.

QUESTIONS

P1. Mr shubham, an Indian Citizen, is living in Mumbai since 1950, he left for China on July 1, 2015
and comes back on august 7, 2020. determine his residential status for the AY 21-22.

P2. Dr darpan, an Indian Citizen and a Professor in IIM, Lucknow, left India on September 15, 2020
for USA to take up Professors job in MIT, USA. Determine his residential status for the AY 2021-22.

P3. Mr sumit, an Indian citizen, leaves India on 22nd September, 2020 for the first time to work as
an Engineer in France. determine his residential status for AY 2021-22

P4. JOSH Lee, an Australian cricket player visits India for 100 days in every financial year. This has
been his practice for the past 10 financial years. Find out his residential status for the assessment
year

P5. SARKAR, a chartered accountant, is presently working in a firm in India. She has received an
offer for the post of Chief Financial Officer from a company at Singapore. As per the offer letter, she

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SSGURU CA SURAJ SATIJA
should join the company at any time between 1st September, 2020 and 31st October, 2020. She
approaches you for your advice on the following issues to mitigate her tax liability in India:

(i) Date by which she should leave India to join the company;

(ii) Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her
mother to meet requirement of her family

(iii) Period for which she should stay in India when she comes on leave.

P6. Mr federer, NR residing in Sweden received rent from Mr Nadal, NR in France in respect of
property taken in lease in Mumbai. As received outside India from INR, Federer claims that income
not chargeable to Tax in India.

P7. Mr Alok, Indian citizen & a member of crew of Singapore bound Indian ship engaged in carriage
of passengers in international traffic departing from Mumbai port on 6th June’20 From following
details for PY determine S of Mr Alok for AY assuming that his stay in India in the last 4 PY is 400
days & last seven previous years is 750 days:

Date entered into CDC 6th June 2020

Date entered into signing off the ship 9th Dec 2020. [N-16 RTP]

P8. Miss A paid a sum of 5000 USD to [B, a management consultant practicing in Colombo,
specializing in project financing. The payment was made in Colombo. [B is a Non-resident. The
consultancy is related to a project in India with possible Ceylonese collaboration. Is this payment
chargeable to tax in India in the hands of [B, since the services were used in India? [SM]

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3. INCOME UNDER THE HEAD OF SALARIES

CONDITION FOR CHARGING INCOME UNDER THE HEAD OF “SALARIES”

Income is taxable under the head ‘salaries’ only if there exists employer-employee relationship
between the payer and the payee.
IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:
1. Contract of Services (Salary) Vs Contract for services (PGBP)
2. Master servent relationship
3. Direct supervision and control of the employer.
4. It is distinct from principle-agent relationship.

Let’s examine the following cases, whether payments are chargeable under head salaries;
1) Director of a company: In the case of a Director of a company, employer – employee relationship
cannot be presumed but should be ascertained based on the service agreement, if any, executed or
the Articles of Association of the company.
2) MPs/MLAs: The CBDT has issued instructions that salaries of MPs and MLAs [Member of
legislative assemblies] is not chargeable under the head 'salaries' but it is chargeable under the head
'income from other sources' since there is no employer – employee relationship between them and
the Government.
3) Paper-setters/Examiners: Where a teacher of college receives remuneration for setting
question paper for examination or works as an invigilator in University then the remuneration
received by him will be taxable under the head ‘income from other sources’.
4) Judges: It was held that what the Judges receive is salary since there is employment as created
by the constitution of India.

BASIS OF CHARGE
The following Income shall be chargeable to income tax under the head “Salaries”
 Salary Due: Any Salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not.
 Advance Salary: Any salary paid or allowed to the assessee in the previous year by or on behalf
of an employer or a former employer though not due or before it became due to him
 Arrears of Salary: Any arrears of salary paid or allowed to assessee in the previous year by or
on behalf of an employer or a former employer, if not charged to income-tax for any earlier
previous year.

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Note:
1. Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
 advance salary is taxable; however, an advance against Salary is essentially a loan which will be
recovered later from the employee and therefore that isn’t taxable.
 Salary, if earned in india, is deemed to accrue / arise in india, even if it is paid outside india

SALARY [SECTION 17(1)]

Salary would include
a) Wages,

b) any Annuity or Pension,

c) any Gratuity,

d) any Fees, Commission, Perquisite or Profits in lieu of or in addition to any Salary or Wages,

e) any Advance of salary,

f) any payment received in respect of any period of leave not availed by him i.e. Leave Salary or leave
encashment,

g) the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable,
h) the aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognized provident fund to the extent it is taxable,

i) 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.

TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’

Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in the yr.
of receipt) it can’t be taxed again on the due basis (in the yr. in which it becomes due).

Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed earlier
on due basis).

Salary to Partners {Explanation 2 to Section 15}:

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Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as
business income and not as salary income.

Fees & Commission:

Fees & Commission paid to an employee are taxed as salary income.
Overtime Payment:
Overtime payment is a taxable salary income.
Annuity {Section 17(1) (ii)}:
Annuity received from present employer will be taxed as salary.
Bonus:
Bonus is taxed in the year of receipt , it is not taxed on due basis.
Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}:
Salaries, emoluments & pension paid by UNO to its officials are exempt from tax.
Full-time or part-time employment:
It does not matter whether the employee is a fulltime employee or a part-time one. Once the
relationship of employer and employee exists, the income is to be charged under the head “salaries”.

Foregoing of Salary:
Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to
income-tax. Such waiver is only an application and hence, chargeable to tax.

Surrender of Salary:
If an employee [Govt/PSU/Pvt] surrenders his salary to the Central Government under Section 2 of
the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered
would be exempt while computing his taxable income.

TDS on Salary:
As Per Section 192, every employer has to deduct Tax on the Taxable salary of his employee if such
salary is more than the basic exemption limit and handover the net salary which is after TDS, to the
employee. While calculating taxable Income of employee ‘Salary before TDS’ has to be taken and not
the net salary after TDS.

Salary Paid Tax-Free:

In this arrangement, the employer bears the burden of the tax on the salary of the employee. In such
a case, the income from salaries in the hands of the employee will consist of his salary income and
also the tax on this salary paid and bears by the employer.

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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.

Similarly, advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted with his salary over a specified
time period. It cannot be taxed as salary.

PLACE OF ACCRUAL OF SALARY

 Section 9(1)(ii) provides that salary earned in India is deemed to accrue or arise in India even
if it is paid outside India or it is paid or payable after the contract of employment in India comes
to an end.

[Pension paid abroad in respect of services rendered in India & leave salary paid abroad in
respect of leave earned in India is deemed to accrue or arise in India]

 Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India.

Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India,
for rendering service outside India is fully exempt.

Example: If an employee gets pension paid abroad in respect of services rendered in India, the
same will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave
earned in India is deemed to accrue or arise in India.

Example: A, a citizen of India is posted in the United States as our Ambassador. Obviously, he
renders his services outside India. He also receives his salary outside India. He is also a non-resident.
The same will be deemed to accrue or arise in India.

ALLOWANCES
Different types of allowances are given to employees by their employers. Generally allowances are
given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance etc. Under the Income-tax Act, allowance is taxable on due or receipt basis, whichever
is earlier.

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Note: If the assessee opted concessional tax slab under section 115BAC of the Income tax Act, 1961,
then assessee is not eligible to claim exemption from any allowances except:

1. Travelling Allowances
2. Daily Allowances
3. Conveyance Allowance
4. Transport Allowance (For blind, handicapped, deaf or dumb employee)

FULLY TAXABLE ALLOWANCES

1) City Compensatory Allowance:
City Compensatory Allowance is normally intended to compensate the employees for the higher
cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for
performing his duties in a particular place or under special circumstances.
2) Entertainment Allowance:
This allowance is given to employees to meet the expenses towards hospitality in receiving
customers etc. The Act gives a deduction towards entertainment allowance only to a Government
employee. The details of deduction permissible are discussed later on in this Unit.
3) Dearness Allowance:

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It is fully taxable allowance. It is of following 2 types:
 DA which is forming part of salary for computation of retiremental benefits as per the terms of
employment.
 DA which is NOT forming part of salary for computation of retiremental benefits as per the terms
of employment.

Note: If the Question is silent, it is to be assumed that DA is not forming part of salary.
4) Medical Allowance: It is a fully taxable allowance.
5) Lunch Allowances / Tiffin Allowances / Cash Allowance/ Deputation Allowance
6) Overtime Allowances / Servant Allowances / Warden Allowance / Family Allowance etc.

ALLOWANCES NOT FULLY TAXABLE

House Rent Allowance u/s 10(13A)
House Rent Allowance (HRA) received by any employee is exempt to the extent of least of the
following:
– 50% of Salary for Metro Cities (Delhi, Mumbai, Kolkata and Chennai), else 40% of Salary
– HRA actually received
– Rent paid minus 10% of Salary
Note: Salary for the purposes of HRA = Basic + DA (if forming part of salary/retirement benefit)+
Commission as a fixed % of Turnover

(a) If the employee receives HRA but does not incur any expenditure of Rent on residential
accommodation, then HRA received is fully taxable.

(b) Exemption is not available to an assessee who lives in his own house.

(c) The exemption shall be calculated on the basis of where the accommodation is situated.

(d) If Place of employment, Rent, HRA, Salary etc is the same for the whole year, then exemption
shall be calculated for the whole year.

(e) If there is a change in place, change in rent paid, Change in HRA or change in Basic Salary
structure during the previous year, then it shall be calculated on monthly/periodic basis.

(f) Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the Employee during the previous year.

(g) Salary means Salary on Due Basis.

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Question 1
Mr. A working in Delhi, receives the following amounts:
(a)Basic salary 6,000 PM
(b)DA Rs. 2,000 pm (50% is forming part of salary)
(c) Commission based on production 30,000 annually
(d)Commission based on Sales @ 2% on sales of 6,00,000 achieved by A
(e) HRA 5,000 pm (Rent of 4,500 p.m. paid in Delhi). Compute Total Income.
Question 2
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay 3,000 p.m.
(2) Dearness allowance (D.A.) 600 p.m.
(3) Commission 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) 500 p.m
(5) House rent allowance 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a rent of
1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for retirement benefits.

ALLOWANCES WHICH ARE EXEMPT IN CASE OF CERTAIN PERSONS

1) Allowances to a citizen of India, who is a Government employee, rendering services outside India.
[Section 10(7)]
2) Travelling Allowances to High Court judges
3) Sumptuary allowance to HC/SC judges & Serving member/Chairmen of UPSC.
4) Allowance received by an employee of UNO from his employer.

SPECIAL ALLOWANCES [SECTION 10(14)]

ALLOWANCES EXEMPT TO THE EXTENT ACTUALLY EXPENDED FOR THE OFFICIAL PURPOSES
[SECTION 10(14) (i)]
These allowances are given for official purposes and lower of the below two is the Exempted
amount:
I. Amount of Allowance Actually Received from the Employer; OR
II. Amount Spent for official purpose.

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SR. Nature Particulars

(a) Traveling Allowance To meet the cost of travel on tour or on transfers

(including any sum paid in connection
with transfer, packing and transportation of
personal effects on such transfer.
(b) Daily Allowance For ordinary daily charges on account of absence
from his normal place of duty on tour or journey

(c) Conveyance Allowance To meet the expenditure on local conveyance in

performance of official duties if free conveyance
is not provided by the employer
(d) Helper Allowance (Servant Granted to meet the expenditure incurred on a
Allowance is different) helper engaged for the duties.

(e) Academic/Research allowance Granted for encouraging academic research &

other professional pursuits.
(f) Uniform Allowance Granted to meet the expenditure incurred on the
purchase or maintenance of uniform for wears
during the performance of the employee

ALLOWANCES MEANT FOR PERSONAL EXPENSES EXEMPT TO THE EXTENT NOTIFIED BY

RULES [SECTION 10(14(ii)]
In these allowances, the actual amount spend by the assessee is not relevant.
Lower of the below two amount is Exempted amount:
I. Amount of Allowance Actually Received from the Employer OR
II. Limit specified in the Act

Allowances Exemption
Limit
Children education allowance up to rs. 100 per month per child up to a
maximum of 2 children is exempt
Hostel expenditure allowance up to rs. 300 per month per child up to a
maximum of 2 children is exempt
transport allowance granted to an employee Only rs. 3,200 per month for blind,
to meet expenditure on commuting between handicapped, deaf and dumb employees is
place of residence and place of duty. exempt
Consequent to introduction of Standard
deduction under section 16, exemption of
transport allowance of rs. 1600 P.M. is
withdrawn.

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allowance granted to an employee working in amount of exemption shall be lower of
any transport business to meet his personal following:
expenditure during his duty performed in the
course of running of such transport from one a) 70% of such allowance; or
place to another place provided employee is b) rs. 10,000 per month
not in receipt of daily allowance
(AMENDMENT) NOTE
Conveyance allowance granted to meet the exempt to the extent of expenditure incurred
expenditure on conveyance in performance of for official purposes
duties of an office
travelling allowance to meet the cost of exempt to the extent of expenditure incurred
travel on tour or on transfer for official purposes
daily allowance to meet the ordinary daily exempt to the extent of expenditure incurred
charges incurred by an employee on account for official purposes
of absence from his normal place of duty
Helper/assistant allowance exempt to the extent of expenditure incurred
for official purposes
research allowance granted for exempt to the extent of expenditure incurred
encouraging the academic research and other for official purposes
professional pursuits
uniform allowance exempt to the extent of expenditure incurred
for official purposes
Special compensatory allowance (Hilly areas) amount exempt from tax varies from rs. 300
(Subject to certain conditions and locations) to rs. 7,000 per month.
Border area, remote locality or disturbed amount exempt from tax varies from rs. 200
area or Difficult Area Allowance (Subject to to rs. 1,300 per month.
certain conditions and locations)
tribal area allowance in (a) Madhya Pradesh up to rs. 200 per month
(b) tamil Nadu (c) uttar Pradesh (d)
Karnataka (e) tripura (f) assam (g) West
Bengal (h) Bihar (i) Orissa

Compensatory Field area allowance. if this up to rs. 2,600 per month

exemption is taken, employee cannot claim
any exemption in respect of border area
allowance(Subject to certain conditions and
locations)
Compensatory Modified Area Allowance. If up to rs. 1,000 per month
this exemption is taken, employee cannot
claim any exemption in respect of border area
allowance(Subject to certain conditions and

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locations)
Counter insurgency allowance granted to up to rs. 3,900 per month
members of armed Forces operating in areas
away from their permanent locations. if this
exemption is taken, employee cannot claim
any exemption in respect of border area
allowance (Subject to certain conditions and
locations)
underground allowance to employees working up to rs. 800 per month
in uncongenial, unnatural climate in
underground mines
High altitude allowance granted to armed a) up to rs. 1,060 per month (for
forces operating in high altitude areas (Subject altitude of 9,000 to 15,000 feet)
to certain conditions and locations) b) up to rs. 1,600 per month (for altitude
above 15,000 feet)

NOTE :
Allowance allowed to transport employees working in any transport system [This allowance,
shall not be exempt if the employee opts to be taxed under section 115BAC]: If any fixed
allowance is given by the employer to the employee who is working in any transport system, to
meet his personal expenditure during his duty performed in the course of running of such transport
from one place to another, the amount of exemption shall be 70% of such allowance or Rs.10,000
p.m., whichever is less.
Exemption will be allowed to the transport employees only when they are not in receipt of daily
allowance. If they are in receipt of daily allowance, they can claim exemption under para 4.13a
clause (b) above.
Notification No. 38/2020, dated 26.6.2020
Notwithstanding anything contained in para 4.13a to para 4.13b above, an employee, being an
assessee, who has exercised option under section 115BAC(5) shall be entitled to exemption only in
respect of the following allowances:
(a) any allowance granted to meet the cost of travel on tour or on transfer;
(b) 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;
(c) any allowance granted to meet the expenditure incurred on conveyance in performance of duties
of an office or employment of profit:
Provided that free conveyance is not provided by the employer;

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(d) Transport allowance upto Rs.3,200 p.m. granted to an employee, who is blind or deaf and dumb
or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the
purpose of commuting between the place of his residence and the place of his duty.
Further, the exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5).
Note.—If the employee opts to be taxed under section 115BAC (i.e. new regime), he shall be entitled
to exemption of the above four allowances only.

Question 3
Mr. Srikant has two sons. He is in receipt of children education allowance of 150 p.m. for his elder
son and 70 p.m. for his younger son. Both his sons are going to school. He also receives the following
allowances:
Transport allowance: 1,000 p.m. (amount spent 600 p.m.) Tribal area allowance: 500 p.m. Compute
his taxable allowances.

Question 4
Mr. X receives Basic salary of 10,000 PM and DA of 4,000 PM. He retires on Oct 31st of the PY and
pension is fixed at 3,000 PM. He receives the following amounts as well:
(a)HRA 4,000 PM (he lives in his own house)
(b)Medical allowance 600 PM (Actual expenditure on medical treatment is more than 600 PM)
(c) Children Education allowance 250 PM per child for 3 children.
(d)Children hostel allowance 250 PM for 1 child.
(e)Travelling allowance 1,000 PM (60% spent on official duties)
(f) Transport allowance 900 PM (Actual expenditure 850 PM)
(g)Uniform allowance 1,000 PM

RETIREMENT BENEFITS
ANNUITY / PENSION
“Pension” may be defined as a periodic payment made especially by Government or a company or
other employers to the employee in consideration of past service payable after his retirement.
Pension is of two types: Commuted and Uncommuted

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Uncommuted Pension: Uncommuted pension refers to pension received periodically. It is fully
taxable in the hands of both government and non-government employees.
Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole
or part of the pension.
EMPLOYEES OF THE CENTRAL / STATE GOVERNMENT / LOCAL AUTHORITIES / STATUTORY
CORPORATION

Any commuted pension received is fully exempt from tax.

IN CASE OF OTHER EMPLOYEES:
Case I: If the Employee receives the Gratuity also:
Then Exemption = 1/3 * Full Commutable value of Pension.

Case II: If the Employee DOES NOT receive any Gratuity:

Then Exemption = 1/2 * Full Commutable value of Pension.
Here, Full Commutable value of Pension = Commuted Amount
% of Commutation

Question 5
Mr. Sagar retired on 1.10.2020 receiving 5,000 p.m. as pension. On 1.2.2020, he commuted 60% of
his pension and received 3,00,000 as commuted pension. You are required to compute his taxable
pension assuming:
a) He is a government employee.
b) He is a non-government employee, receiving gratuity of 5,00,000 at the time of retirement.
c) He is a non-government employee and is in receipt of no gratuity at the time of retirement.

Gratuity [Section 10(10)]

Any gratuity received by an Individual on his death or retirement is eligible for exemption u/s
10(10) as under –
IN CASE OF GOVT. EMPLOYEES (CG/SG), EMPLOYEE OF LOCAL AUTHORITY (BUT NOT
STATUTORY CORPORATION)
Gratuity received is FULLY EXEMPT
IN CASE OF OTHER EMPLOYEES

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(a) If covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-
(i) Actual Amount received
(ii) 20,00,000 (notified w.e.f. 29/03/2018)
(iii) 15 days * last drawn salary for each completed year of service or part thereof 26 in excess of 6
months

Note:

1. Salary means Basic Salary and Dearness Allowance (Whether or not forming part of retirement
benefit) on DUE BASIS

2. In case of SEASONAL ESTABLISHMENT – “15 days” will be replaced with “7 days”.

(b) If not covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-
(i) Actual amount received
(ii) 20,00,000 (notified on 08/03/2019 but effective from 29/03/2018)
(iii) Half month’s salary (based on last 10 months’ average salary immediately preceding the month
of retirement or death) for each completed year of service (fraction to be ignored)

Note:
1. Salary means Basic Salary and Dearness Allowance, if provided in the terms of employment for
retirement benefits, forming part of salary and commission which is expressed as a fixed percentage
of turnover achieved by the employee. [Basic Salary + DA (R) + Commission (Sales)] - [Gestetner
Duplicators Pvt. Ltd (SC)]

2. It should be on DUE BASIS.

3. Half Month Salary should be read as 15/30.

Note :
(i) If employee has received gratuity from any of his past employer, then the amount of gratuity
exempted earlier shall be reduced from Rs. 20,00,000.

(ii) If employee has not received gratuity from any of his past employer, then the period of past
employment shall also be considered for calculating years of service.

(iii) Gratuity received during the period of service is always taxable for all employees.

(iv) If Employee receives gratuity from two or more employers, then aggregate amount of gratuity
exempt from tax cannot exceed 20,00,000.

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(v) Exemption under this provision will be available only in case where employer employee
relationship exists.

Question 6
Mr. Ravi retired on 15.6.2020 after completion of 26 years 8 months of service and received gratuity
of 12,00,000. At the time of retirement his salary was:
Basic Salary: 6,000 p.m.
Dearness Allowance: 4,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was 12,00,000)
Bonus: 20,000 p.a.
Compute his taxable gratuity assuming:
(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.

Question 7
Mr. Hari retires on 15th October 2020, after serving 30 years and 7 months. He gets 3,80,000 as
gratuity. His salary details are given below:
FY 2020-19 Salary 16,000 pm D.A. 50% of salary. 40% forms part of retirement benefits.
FY 2019-20 Salary 15,000 pm D.A. 50% of salary. 40% forms part of retirement benefits
Determine his taxable gratuity in the following cases:
(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under Payment of Gratuity Act,
1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act, 1972
(iv) He retires from private sector, not covered by payment of Gratuity Act

LEAVE ENCASHMENT [SECTION 10(10AA)]

Leave encashment means getting salary equivalent to the number of leaves which were entitled to
an employee but not availed (i.e. earned). Leave Encashment taken during employment is fully

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taxable for all employees. Leave Encashment taken at the time of retirement is exempted as follows
:-

Leave Encashment Salary received by employees of the Government, is fully exempt from tax.
For the Non-Government employees, the Leave Encashment Salary so received is exempt from
tax to the extent of least of the following:

a) INR 3,00,000
b) Leave Salary actually received
c) 10 month’s Salary on the basis of average Salary drawn in the last 10 months
d) Cash Equivalent of Leave standing to the credit of the employee at the time of retirement / death,
based on last 10 month’s average salary drawn. Earned leave entitlement per year cannot exceed
30.

Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement
benefits) + Commission as a % of Turnover and number of days in the month to be taken at 30.

(1) Leave salary received during the period of service (i.e. during continuity of employment) is fully
taxable.

(2) Leave encashment on retirement by way of resignation will also be eligible for exemption.

(3) Where leave salary is received from two or more employers in the same year, then the aggregate
amount of leave salary exempt from tax cannot exceed 3,00,000.

(4) Where leave salary is received in any earlier year from a former employer and again received
from another employer in a later year, the limit of 3,00,000 will be reduced by the amount of leave
salary exempt earlier.

Question 8
Mr. G retired on 1.12.2020 after 20 years 10 months of service, receiving leave salary of 5,00,000.
Other details of his salary income are:

Basic Salary: 5,000 p.m. ( 1,000 was increased w.e.f. 1.4.20)

Dearness Allowance: 3,000 p.m. (60% of which is for retirement benefits)

Commission: 500 p.m.

Bonus: 1,000 p.m.

Leave availed during service: 480 days

He was entitled to 30 days leave every year. You are required to compute his taxable leave salary
assuming:

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(a)He is a government employee.

(b) He is a non-government employee

RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Any compensation received by a workman at the time of his retrenchment, under the Industrial
Disputes Act, 1947, shall be exempt to the extent of least of the following:

(i) Actual amount received;

(ii) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes Act, 1947 i.e.
15 / 26 day’s average pay [3 months basis] for every completed year of service or part thereof in
excess of 6 months;

(iii) 5,00,000.

[In case where the retrenchment scheme is approved by the Central government, the entire amount
is exempt.]

Note: Pay will include Basic Salary + D.A (Whether or not forming part of retirement benefit) etc.

Question 9
Mr. Agrawal 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 5,000
p.m. Compute his taxable retrenchment compensation.

PROFITS IN LIEU OF SALARY [SECTION 17(3)]

(a) TERMINAL COMPENSATION:
The amount of any compensation due to or received by employee from his employer or former
employer in connection with the termination of his employment or the modification of the terms
and conditions relating thereto. [Usually, such compensation is treated as a capital receipt.
However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as
salary.]

(b) PAYMENT FROM AN UNRECOGNIZED PROVIDENT FUND:

Any payment due / received by an assessee from unrecognized Provident Fund or other Fund to the
extent to which it does not consist of employee’s contributions or interest on such contributions.

(c) PAYMENT UNDER KEYMAN INSURANCE POLICY:

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Any payment due to or received by an assessee under a Keyman Insurance policy including the sum
allocated by way of bonus on such policy.

(d) ANY AMOUNT, WHETHER IN LUMPSUM OR OTHERWISE, DUE TO THE ASSESSEE OR

RECEIVED BY HIM, FROM ANY PERSON
i. before joining employment with that person, or
ii. after cessation of his employment with that person.
(e) ANY OTHER PAYMENT due to or received by an assessee from an employer or a former
employer or any fund [Other than the payments exempt under section 10]

PERQUISITES [SECTION 17(2)]

1) The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally
due by way of contract for services rendered.

2) Perquisite may be provided in cash or in kind.

3) Perquisite may arise in the course of employment or in the course of profession. If it arises from
a relationship of employer-employee, then the value of the perquisite is taxable as salary. However,
if it arises during the course of profession, the value of such perquisite is chargeable as profits and
gains of business or profession.

4) Perquisite will become taxable only if it has a legal origin.

5) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
(6) Perquisites taxable in the case of all employees
(7) Perquisites exempt from tax in the case of all employees
(8) Perquisites taxable only in the hands of specified employees.

TAXABILITY OF PERQUISITE
Section 17(2) of the Income Tax Act gives an inclusive definition of perquisite.

Perquisite includes:

i) VALUE OF RENT-FREE ACCOMMODATION [RFA] PROVIDED to the assessee by his employer

[Section 17(2)(i)].

ii) Value of CONCESSION IN RENT IN RESPECT OF ACCOMMODATION PROVIDED to the assessee

by his employer [Section 17(2)(ii)].

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iii) The value of any benefit or amenity GRANTED OR PROVIDED free of cost or at concessional rate
to SPECIFIED EMPLOYEES i.e.

a. by a company to an employee in which he is a director;

b. by a company to an employee being a person who has substantial interest in the company (i.e.
20% or more of the voting rights of the company);

c. by any employer (including a company) to an employee to whom the provisions of (a) & (b) do
not apply and whose income under the head ‘salaries’ (whether due from, or paid or allowed by,
one or more employers) exclusive of the value of all benefits or amenities not provided for by way
of monetary benefits exceeds 50,000 - Section 17(2)(iii);

[i.e. Salary for this purpose = Basic Salary + D.A. + Commission, whether payable monthly or
turnover based + Bonus + Fees + Advance Salary + Arrear Salary + Any other taxable payment + Any
taxable allowances + Any other monetary benefits – Deductions under section 16 (ia) / (ii) / (iii)]

Such benefits are:

1. Motor Car

2. Sweeper, Gardener, Watchman etc.

3. Gas, Electricity & Water

4. Free Education Facility

5. Free / Concessional Fare

iv) AMOUNT PAID by an employer in respect of any obligation which otherwise would have been
payable by the employee [Section 17(2)(iv)].

v) AMOUNT PAYABLE by an employer directly or indirectly to effect an assurance on the life of the
assessee or to effect a contract for an annuity, other than payment made to RPF or approved
superannuation fund - Section 17(2)(v).

a. However, there are schemes like group annuity scheme, employees state insurance scheme and
fidelity insurance scheme, under which insurance premium is paid by employer on behalf of the
employees. Such payments are not regarded as perquisite in view of the fact that the employees
have only an expectancy of the benefit in such schemes.

b. In Case employer has paid life insurance premium on behalf of the employee then it will be taxable
for the employee and further employee can claim deduction under section 80C from GTI

vi) The Value Of 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 – Section 17(2)(vi).

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vii) the amount of any CONTRIBUTION TO AN APPROVED SUPERANNUATION FUND by the
employer in respect of the assessee, to the extent it EXCEEDS 1,50,000 – Section 17(2)(vii).

viii) The value of any other fringe benefit or amenity as may be prescribed by the CBDT – Section
17(2)(viii). They are

a) Concessional or Interest Free Loan

b) Travelling, touring & accommodation other than LTC

c) Free Food & Beverage to employees during office hours

d) Gift to the employees

e) Credit Card expenses

f) Club Expenses

g) Use of Movable assets by the employees

h) Transfer of any Movable Assets to the employees

i) Value of any other benefit or amenity, service, right / privilege

EXEMPTED PERQUISITES

Following perquisites are exempted in hands of employee:

1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.

2. Food: Food provided by employer in working place upto Rs. 50 per meal. Remote area – full
exempt.
The exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5). [Notification No. 38/2020, dated 26.6.2020]
3. Recreational facilities:

Recreational facilities extended to a group of employees.

4. Goods sold to employee at concessional rate:

Goods manufactured by employer and sold by him to his employees at concessional (not free) rates.

5. Conveyance facility: Conveyance facility provided –

 to employees for journey between office and residence and vice versa.

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 to the judges of High Court and Supreme Court

6. Training: Amount spent on training of employees including boarding and lodging expenses of
the employees on such training.

7. Services rendered outside India: Any perquisite/allowances allowed outside India by the
Government to a citizen of India for rendering services outside India.

8.Contribution in some specified schemes

 Employer's contribution to staff group insurance scheme.

 Payment of annual premium by employer on personal accident policy affected by him in respect
of his employee.

9. Loans

 Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed 20,000.

 Interest free loan for medical treatment of the diseases specified in Rule 3A.

10. Medical facility A provision of medical facility at office is exempt.

11. Periodicals and journals: Periodicals and journals required for discharge of work.

12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf
of employee by the employer whether by way of direct payment or reimbursement.

13. Free education facility: Free education facility to the children of employee in an institution
owned or maintained by the employer provided cost of such facility does not exceed Rs.1000 per
month per child.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home
(provided ownership is not transferred to the employee).
15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to employee
after being used by the employer for 10 or more years.

16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest cost incurred.

17. Rent-free accommodation

 Rent-free official residence provided to a Judge of a High Court or the Supreme Court.

 Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union

Minister or a Leader of opposition in Parliament.

18. Accommodation: Accommodation provided –

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 on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.

 in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.

19. Tax on non-monetary perquisite paid by employer on behalf of employee.

20. Health club. Sports club facility

(A) Taxable Perquisites:

IN CASE OF GOVT. EMPLOYEES [CG/SG] : As per License Fee determined by Govt.

IN CASE OF NON – GOVT. EMPLOYEES:

(i) If Accommodation is not owned by Employer:
Value shall be the lower of
(i) Rent paid by the Employer OR
(ii) 15% of salary

(ii) If Accommodation is owned by Employer:

Value shall be
If population < 10 Lakhs: 7.5% of Salary
If 10 Lakhs < Population < 25 Lakhs: 10% of Salary
If Population > 25 Lakhs: 15% of Salary

If ACCOMODATION IS PROVIDED AT CONCESSIONAL RATE

then value = Value determine as above Less Rent actually paid by employee.

RENT FREE FURNISHED ACCOMMODATION

Value of unfurnished accommodation shall be calculated as above and shall be increased by value
of furnished accommodation, which is:
10% p.a. of the original COST OF FURNITURE if owned by employer and/or
The actual hire charges paid/payable, if hired from a third party

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Note: The valuation shall be reduced by any amount recovered from the employee.

SALARY FOR THE PURPOSE OF VALUATION OF ACCOMMODATION

Basic Salary + DA (Forming Part of Salary) + Bonus + Fees + Commission + All other Taxable
Allowance + Any monetary payment by employer to employee, by whatever name called
[Above does not include Perquisites (Monetary or Non-Monetary) and Employer’s contribution to
PF + Arrear Salary + Advance Salary]
Note:
1. Salary are to be considered on due basis for the relevant period for which accommodation is
provided.

2. If the employee receives salary from more than one employer, the aggregate of the salary received
from both the employers has to be taken into account for valuation of rent free accommodation

VALUATION OF ACCOMMODATION PROVIDED IN A HOTEL :

Where the accommodation is provided by the employer (Government or other employer) in a hotel,
the value of the perquisite will be lower of:
a. 24% OF SALARY paid or payable for the previous year OR
b. the actual charges paid or payable to such hotel for the period during which such accommodation
is provided.
The above value is reduced by the rent, if any, actually paid or payable by the employee.

Note:
The value of this perquisite will not be calculated if the employee is provided such accommodation
for a period not exceeding in aggregate 15 days on the transfer from one place to another.
FOR FIRST 90 DAYS - ANY ONE
Where on account of his transfer from one place to another, the employee 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 (as determined according to the above provisions) for a period not
exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodations in accordance with the valuation rules.

EXCEPTIONS:
However, none of the above valuation rules would be applicable to any accommodation provided to
an employee working at a mining site/onshore oil exploration site/project execution site/dam
site/power generation site/offshore site which:

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a. being of a temporary nature and is located at least 8 kms away from the local limits of any
municipality or cantonment board; or

b. is located in a remote area.

[Remote area means an area that is located at least 40 kms away from a town having a population
not exceeding 20,000 based on latest published all India census].

Question 10
Ramnath is employed with Mega Limited and is paid Basic Salary 15,000/ – p.m.; – 2,000/ – p.m. as
Commission; D.A not forming part of retirement benefits 1,250/ – p.m. and travel allowances of
1,000/ – p.m. Bonus paid during the year is 12,000/ – 60% of the travel allowance is not spent and
the balance is spent for office purpose.
Compute the taxable salary by also taking into account the fact that he is provided rent free
furnished accommodation where population is 15 lakhs. Original cost of furniture provided in the
house 30,000/ – (W.D.V. 6,000). Hire charges 450 pm for hired furniture provided.

Question 11

Mr. Ritesh is provided with an accommodation in Kolkata since April 2020. Salary 40,000 p.m. Cost
of furniture provided 80,000. On 1st October, 2020, following a promotion with a increase in Salary
by 15,000, he was transferred to Nagpur (population less than 25 lakhs but more than 10 lakhs),
and was also provided an accommodation there. Mr. Ritesh was allowed to retain the Kolkata
accommodation till March, 2021. Compute taxability.

MOTOR CARS – PERQUISITES VALUATION

Situation Use Tax treatment
Car owned and Official use Exempt
maintained by employer Private use 10% of cost or actual hire
charges
-) running and maint.
expenses
-) amount recoverable
Partly official partly private Taxable amount –
For below 1.6 ltr c.c. = 1800
pm
Above 1.6 ltr c.c. = 2400 pm
(nothing deductible on
account of amount
recovered.

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Car owned by employer Official use Exempt
and maintained by Private use 10% of cost or actual hire
employee charges
-) amount recoverable
Partly official partly private Taxable amount =
For below 1.6 ltr c.c. = 1800
pm
Above 1.6 ltr c.c. = 2400 pm
(nothing deductible on
account of amount
recovered.
Car owned and Nothing is taxable
maintained by employee
Car owned by employer Official use Nil
and maint. By employer Private use Amount of expenditure
Partly official partly private Actual expenditure
-) 1800pm/2400 pm
(depending on cc)
-) 900 pm if chaufer
Taxable amount
Any other automotive Official use Nil
owned by employer Private use Amount of expenditure
Partly official partly private Actual expenditure
Less : 900 p.m.
[greater deduction can be
allowed if records shows
expenses for official use]

PROVISION OF DOMESTIC SERVANTS (Sweeper, Gardener, watchman or a personal

attendant)

Servant Servant’s Value of perquisite Taxable in the hands of

salary paid by
appointed by

Employee Employee Nil Not applicable

Employee Employer Actual cost incurred by All employees

the Employer on the
servant

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Employer Employer Actual cost incurred by Specified employee
the Employer on the
servant

Employer Employee Nil Not applicable

Note :

1. Where the employee is paying any amount in respect of such servant facility, the amount so paid
shall be deducted from the value of perquisite determined above.

2. Domestic Servant Allowance given to an employee is always chargeable to tax.

QUESTION 12

Mr. E is employed with N Ltd. he also gets the services of sweeper and watchman. E has paid
employment tax of 1200. Determine his gross salary in the following cases:

1) His salary is 7,600 pm. Employer provides the services of sweeper and watchman. N Ltd. pays
them 600 pm and 500 pm;

2) His salary is 7,600 pm. Sweeper and watchman are engaged by Mr. E at the rates given in clause
(1) above but their wages are reimbursed by the employer;

3) His salary is 8,000 pm. Employer provides the services of sweeper and watchman at the above
rates but he recovers from Mr. E 200 pm and 300 pm respectively

SUPPLY OF GAS, ELECTRICITY OR WATER

Facility in the VALUE OF PERQUISITE Taxable in the hands
name of of
Provided from own from
Provided source outside
Employer Mfg. cost to the employer Amount paid to the Specified employees
supplier

Employee Mfg. cost to the employer Amount paid to the All employees
supplier

Note:
1. Where the employee is paying any amount in respect of such above facility, the amount so paid
shall be deducted from the value of perquisite determined above.

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2. Gas/Electricity/Water Allowance given to an employee is always fully chargeable to tax.

QUESTION 13

G Ltd. provides electricity to its employee, P. Annual consumption as per meter reading comes to
2,250 units. Determine the value of the perquisite in the following cases:

1) Electricity meter is in the name of P and the rate of electricity is 3 per unit

2) Electricity meter is in the name of G Ltd. the rate of electricity is 3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied to
public @ 2 per unit. However, it charges 30 paise per unit from employees.

FREE OR CONCESSIONAL EDUCATION FACILITY

The value of perquisite is determined as under:
Facility Value of perquisite Taxable
provided To in the
Provided in a school Provided in any other
owned by the school [Case 2] hands of
employer [Case 1]

Children [Any No.] Cost of such education in Cost of such education Specified
similar school*
employee
(There would be no
Perquisite if the cost of
education does not exceed
1,000 pm per child)

OTHER Cost of such education in Cost of such education Specified

HOUSEHOLD similar school incurred
employee
MEMBER

Note:
1) If the employee incurs the expenditure of school fees and the same is reimbursed by the
employer, then the entire amount of reimbursement so made, shall be fully taxable in the hands of
all employees.
2) Child includes step child as well as the adopted child of the employee.

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* If cost of education exceeds 1,000 p.m. then full amount is taxable. An alternate view possible is
that only the sum in excess of 1,000 per month is taxable.

VALUATION IN RESPECT OF FREE TRANSPORT

In case of employees of Taxable value
Railways / Airlines Nil
Any other transport Value at which such benefit is offered by the xx
employer to the public
undertaking
Less: Recovery from the employee xx

Travelling, Touring & Accommodation

Valuation of perquisite in respect of traveling, touring, accommodation and any other expenses paid
/ reimbursed by employer for any holiday availed by EMPLOYEE (OR ANY MEMBER OF
HOUSEHOLD) other than LTC (section 10(5) read with Rule 2B):

(a)Where such facility is maintained by the employer and available uniformly to all employees, then
value shall be:-
Expenditure incurred by the employer LESS Amount recovered from the employee.
(b)Where such facility is maintained by employer and not available uniformly to all employees, then
value shall be:-
Value at which such facilities are offered by other agencies to the public LESS Amount recovered
from the employee.
Notes:
(1) Where the employee is on official tour & the expenses are incurred in respect of any member of
his household accompanying him, the amount of expenditure so incurred in respect of such member
only shall be liable to be tax as perquisite.

(2) Where any official tour is extended as vacation, then expenses incurred in relation to such
extended period of stay or vacation, shall be treated as perquisite.

FREE LUNCH/REFRESHMENT/ BEVERAGES ETC

THE TAXABLE VALUE OF THIS PERQUISITE SHALL BE:
Cost incurred by the employer LESS Amount recovered from the employee

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However, facility in the following cases is exempt from Tax:
FREE FOOD AND NON-ALCOHOLIC BEVERAGES UPTO RS. 50 PER MEAL provided by employer,
> during working hours at office or business premises; or
> through paid voucher which are not transferable and usable only at eating joints; I Tea or snacks
provided during working hours; or

Free food and non-alcoholic beverages during working hours provided in a remote area or
an offshore installation.

Note:- Working hours includes extended office hours (like working on holiday, overtime etc).
The exemption provided in respect of free food and nonalcoholic beverage provided by such
employer through paid voucher shall not apply to an employee, being an assessee, who has
exercised option under section 115BAC(5). [Notification No. 38/2020, dated 26.6.2020]

GIFT, VOUCHER OR TOKEN

 The Value of any gift, or any voucher/ token made by employer to THE EMPLOYEE OR HIS
HOUSEHOLD MEMBER, in excess of 5,000, is fully taxable.
 If the value of such gift, voucher or token is below 5,000 in the aggregate during the previous
year, the value of perquisite shall be taken as NIL.
 The aforesaid exemption of 5,000 shall be denied in case of cash gift.

Note:
An alternate view possible is that only the sum in excess of 5,000 is taxable in view of the language
of Circular No. 15/2001 that such gifts upto 5,000 in the aggregate per annum would be exempt,
beyond which it would be taxed as perquisite. As per this view, the value of perquisite would be
difference between Gift Value & 5,000

CREDIT CARD
 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
add on card) provided by the employer or otherwise, paid for or reimbursed by the employer
shall be taken to be the value of perquisite chargeable to tax.
 Amount recovered from such employee will be reduced from the value determined.
 However, such expenses incurred wholly and exclusively for official purposes would not be
treated as a perquisite if it is supported by necessary documents.

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CLUB EXPENDITURE
 If employer reimburses or makes payment of any expenditure incurred in a club including the
amount of annual or periodical fee for the EMPLOYEE OR ANY MEMBER OF HOUSEHOLD, the
actual amount of such expenditure shall be the value of perquisite.
 Amount recovered from such employee will be reduced from the value determined. / Initial fee
paid for acquiring corporate membership is not a taxable perquisite
 No taxable perquisites in case health club, sports club and similar facilities provided uniformly
to all employees
 No taxable perquisite if the club expenditure is incurred wholly and exclusively for business
purposes.

USE OF EMPLOYER’S MOVABLE ASSETS

If the facility of usage of any movable asset (Except LAPTOP & Computers) is provided by employer
to EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD, the taxable value shall be:
- 10% P.A. OF THE ACTUAL COST of asset (if owned by the employer) or - Actual amount of hire
charges (if taken on hire by the employer)
Note:
1. Where the employee is paying any amount in respect of such asset, the amount so paid shall be
deducted from the value of perquisite determined above.
2. Member of household shall include- (a) Spouse; (b) Children and their spouses; (c) parents; and
(d) Servants and dependents.

TRANSFER OF ANY MOVABLE ASSET

If any movable asset is transferred by the employer to employee, then, taxable value of this
perquisite shall be:
Actual cost of the asset to the employer
Less: Dep. for every completed year of usage by employer
Less: The amount charged from the employee.
The following will be the rate and method of depreciation:
S.N. Asset Rate Method

Computer & electronic items 50% W.D.V.

[Not covering Household appliances]

Motor Car 20% W.D.V.

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Any other asset 10% Straight Line

SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE – Exempted

As per section 10(10CC), tax paid by employer on non-monetary perquisite income of employee
shall be exempt in the hands of employee
TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure in the
hands of the employer. Therefore, the tax so paid by the employer will not be deductible
expenditure in his hands.

Medical Facilities Provided by Employer [Proviso to Section 17(2)]

In the following cases, medical facilities/ reimbursement incurred for employee/his family member
are treated as tax FREE perquisites:-
I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.
II. Sum paid by the employer for any expenditure for medical treatment: > in any hospital
maintained by
o the Govt. or local authority or
o an approved hospital under CGHS or
> of prescribed diseases/ ailment in a hospital approved by CCIT. [Certificate is required]
III. Group Medical Insurance paid u/s 36(1)(ib).
IV. Medical Insurance paid u/s 80D.
V. Premium of Accidental Insurance Policy.
VI. Any other medical expenditure reimbursed to the extent of 15,000 in the Previous Year. This
exemption is not available from AY 19-20.

MEDICAL TREATMENT OUTSIDE INDIA:

The following expenditure incurred by employer on treatment of the employee/his family
members, outside India is also a tax-free perquisite:
1. EXPENSES ON MEDICAL TREATMENT OF THE EMPLOYEE OR ANY FAMILY MEMBER: Exempt
to the extent permitted by RBI.
2. EXPENSES ON STAY ABROAD OF THE PATIENT AND ONE ATTENDANT: Exempt to the extent
permitted by RBI

3. TRAVEL EXPENSES FOR ABROAD OF THE PATIENT AND ONE ATTENDANT:

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Travel expenses shall be wholly exempt if the employee’s GTI before including therein, the said
travel expenditure ≤ 2,00,000.
Notes
> Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
> Hospital includes a dispensary or a clinic or a nursing home.
> Fixed medical allowance – always taxable.

SECTION 7 – INCOME DEEMED TO BE RECEIVED

The following incomes shall be deemed to be received in India in the previous year:
I. Employer’s contribution to RPF in excess of 12% of the salary of the employee.
II. Interest credited to RPF balance in excess of 9.5% p.a.
III. The taxable transfer balance from URPF to RPF.
IV. Contribution made, by the any employer, to the account of an employee under a pension scheme
referred to in Sec. 80CCD.
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time
of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee
as his contribution towards the fund. The employer also generally contributes the same amount out
of his pocket, to the fund. The contribution of the employer and the employee are invested in
approved securities. Interest earned thereon is also credited to the account of the employee. Thus,
the credit balance in a provident fund account of an employee consists of the following:

a) Employee’s Contribution
b) Interest on Employee’s Contribution
c) Employer’s Contribution
d) Interest on Employer’s Contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs. The provident fund represents an
important source of small savings available to the Government. Hence, the Income-tax Act gives
certain deductions on savings in a provident fund account.

STATUTORY PROVIDENT FUND SPF

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government, railways,
semi-government institutions, local bodies, universities and all recognised educational institutions.

(i) PUBLIC PROVIDENT FUND [PPF]

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Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of the
fund is open to every individual though it is ideally suited to self employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An individual
may contribute to the fund on his own behalf as also on behalf of a minor of whom he is the guardian.

(ii) RECOGNISED PROVIDENT FUND [RPF]

Recognised provident fund means a provident fund recognised by the Commissioner of Income-tax
for the purposes of income-tax. A fund constituted under the Employees’s Provident Fund and
Miscellaneous Provisions Act, 1952 will also be a recognised Provident Fund.

(iii) UNRECOGNISED PROVIDENT FUND [UPF]

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.
THE TAX TREATMENT IS
Particulars SPF PPF RPF URPF
Employer’s Fully Exempt N.A. in excess of 12% of Not taxable at the
Contribution salary* is taxable time of
contribution

Ded. u/s 80C Available Available Available Not Available

(Employee’s
[500 – 150,000]
Cont)

Interest Fully Exempt Fully Exempt in excess of 9.5% p.a.

credited is taxable (Salary)
(IOS Head)
----

Amount Fully Exempt Fully Exempt Fully Exempt sub. to  Interest on

received on u/s. 10(11) u/s. 10(11) condition u/s. Employee’s
retirement, 10(12) Contribution is
death etc. taxable u/h. “IOS”
 Employer’s
Contribution and
interest. On such
Contribution is
fully taxable

The payment from R.P.F. balance is fully exempt from tax in following cases:
Accumulated balance in RPF payable to an employee (subject to certain following conditions).
Condition 1– Employee has rendered continuous service for a period of at least 5 years; or
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SSGURU CA SURAJ SATIJA
Condition 2–Where employee could not complete 5 years of service by reason of
- ill-health; or
- discontinuance of the employer’s business or
- other cause beyond the control of the employee.
In any other case, the payment from RPF is fully taxable in the manner given below:
(i) Interest on Employee’s contribution is fully taxable u/h Other Sources.
(ii) Employer’s contribution and Interest thereon is taxable as salary u/s 17(3).
Note: If employee gets transfer of balance of RPF with another employer who also maintains RPF,
then, the period of service under former employer shall also be included in calculating the period of
continuous service.

Question 14

Mr. A, working in ABC Pvt. Ltd., receiving Basic Salary of 9,000 P.M. retires from service on 31st dec
of the P.Y. He contributes 15% of salary to his URPF balance to which an equal amount is contributed
by the employer. On retirement he receives 1,00,000 from his URPF which consists of 60,000 as
total of Employee and Employer’s contribution and 40,000 as total interest. Compute TI if monthly
pension is fixed at 4,000 P.M.

DEDUCTIONS FROM SALARY

Standard Deduction [Section 16(ia)]
Standard deduction of Rs. 50,000 (fifty thousand) or the amount of the salary, whichever is less
w.e.f. Finance Act 2019 w.e.f. Assessment year 2020-21 [clause (ia) to section 16].

Entertainment Allowance [Section 16(ii)]

 Fully taxable
 First to be included in salary and then deduction to be made.
 In case of Government Employees, the deduction is available, which would be lower of:
 1/5th of Basic Salary Or
 INR 5000/- Or
 Actual Entertainment Allowance received

Profession Tax [Section 16(iii)] 

Allowed as a deduction when paid by the employee (recovered from salary) during the previous
year

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SSGURU CA SURAJ SATIJA
Note: The deduction u/s 16(ia), 16(ii), 16(iii) not available for assessee opted for section 115BAC]

Question 15
X is employed by A Ltd. (basic salary being 38,750 per month). Besides, he gets 3,000 per month as
entertainment allowance. He pays professional tax of 1,000. Find out the salary chargeable to tax.
Does it make any difference if the professional tax is paid by A Ltd.

Question 16

A furnishes the following particular for his remuneration from Delta Pvt. Ltd.

Basic salary 9,300 p.m.

Dearness Allowance (forming part of salary for retirement benefits) 4,500 p.m.

Entertainment Allowance 2,250 p.m.

He had paid 3,500 towards professional tax to State Government.

Compute his income from salary.

Question 17
Mr. Goyal receives the following emoluments during the previous year ending 31.03.2021
Basic pay 40,000
Dearness Allowance 15,000
Commission 10,000
Entertainment allowance 4,000
Professional tax paid 3,000 ( 2,000 was paid by his employer)
He has no other income. Determine the income from salary, if Mr. Goyal is a State Government
employee.

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SSGURU CA SURAJ SATIJA
4. INCOME UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR
PROFESSION”[SECTIONS 28 TO 44D]
Section Subject Matter

Section 28 Charging section for PGBP income

Section 30 Rent, rates, taxes, repairs and insurance for buildings
Section 31 Repairs and insurance of P&M and Furniture & Fixtures
Section 32 Depreciation, depreciation in case of power generating units,
depreciation in case of succession of business
Section 32(2) Treatment of unabsorbed depreciation
Section 32(1)(iia) Additional depreciation
Section 32AD Investment allowance for notified backward areas
Section 35 Expenditure on scientific research
Section 35AD Deduction for investment linked tax incentive for specified business

Section 35CCA Expenditure by way of payment to associations for rural development

programmes
Section 35CCC Expenditure on agricultural extension project
Section 35CCD Weighted Deduction for expenditure on skill development
Section 35D Amortization of certain preliminary expenses
Section 35DDA Amortization of expenditure incurred under VRS
Section 36(1)(i) Deduction for premium paid for insurance of stock-in-trade
Section 36(1)(ib) Deduction for health insurance premium paid for employees

Section 36(1)(iii) Interest on borrowed capital

Section 36(1)(iv), (iva) & Employer's contribution to recognised provident fund, pension
(v) scheme, approved gratuity fund/ superannuation fund
Section 36(1)(va) Employee's contribution to RPF, superannuation fund etc.

Section 36(1)(vii) Bad debts

Section 36(1)(ix) Expenditure on promoting family planning amongst employees

Section 36(1 )(xv) Securities transaction tax

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Section 36(1)(xvi) Commodities transaction tax
Section 37(1) General deductions
Section 37(2B) Advertisement In newspapers of political parties, etc
Section 38 Assets partly used for business purposes & partly for personal
purposes
Section 40(a)(i) Interest, royalty, FTS etc payable outside India/ payable to non-
resident
Section 40(a)(ia) Deduction of TDS in case of payments made to resident
Section 40(a)(iii) Deduction of TDS in case of salary payable outside India/ payable to
non-resident
Section 40A(2) Payment to relatives/related persons
Section 40A(3); Rule 6DD Payments exceeding Rs 10,000 to be made by account payee
cheque/account payee draft
Section 40A(7) Employer’s contribution to gratuity fund
Section 40A(9) Employer's contribution to various other funds
Section 40(b) Remuneration to partners
Section 41 Deemed profits chargeable to tax
Section 43(1) Actual cost
Section 43 B Certain expenses allowed on actual payment basis
Section 43CA Special provision for property dealers
Section 44AA, Rule 6F Compulsory maintenance of books of accounts
Section 44AB, Rule 6G Compulsory audit of accounts
Section 44AD Presumptive Taxation (General Provisions)
Section 44ADA Presumptive Taxation (Specified Profession)
Section 44AE Presumptive Taxation (Plying/Hiring/Leasing Goods Carriages)
Section 145 Method of Accounting

PROFITS & GAINS OF BUSINESS/PROFESSION

Section 28
CHARGING SECTION - INCOMES TAXABLE U/H BUSINESS/PROFESSION
As per Section 28, following incomes shall be chargeable u/h PGBP (the list is not exhaustive):

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
• Profits and gains of any business/profession
• Export incentives:
Exporters of goods/services are provided additional benefits as rewards for bringing foreign
currency within India. Such export incentives are taxable u/h PGBP.
EXAMPLEs:
 Profit on sale of import entitlement
 Prof it on sale of Duty Entitlement Pass Book ('DEPB') scheme
 Profit on sale of Duty Free Replenishment Certificate
 Cash compensatory support and duty drawback (under duty drawback, indirect taxes paid on
the input leg such as customs duty are refunded back to the assessee if he exports the final
products out of India)
• Value of any benefit or perquisite arising from any business/profession:
If a person carrying any business/profession receives any gift/perquisite from his clients, the value
of such gift/perquisite shall be considered to be the income of the person u/h ’profits and gains of
business/profession* whether such gift/perquisite is convertible into money or not.
EXAMPLE: A client is extremely happy with the work of his CA and apart from the agreed upon fees,
the client gives a wrist watch worth Rs 50,000 to the CA. The value of such watch shall be included
in the income of the CA u/h 'income from business/profession'.
• Any interest, salary, bonus, commission or remuneration, by whatever name called, received by a
partner of a firm from such firm to the extent allowed u/s 40(b).
• Non-compete fee received/receivable for not carrying on a business/profession:
 Any payment received by a person for not carrying out any particular business/profession for
a particular period or at a particular place is termed as non-compete fee and taxable as PGBP
income.
 Similarly, any sum received for not sharing any know-how, patent, copyright, trademark, license,
etc is also taxable as business income.
• Sum received under Keyman Insurance Policy:
 A person may take a life insurance policy for any of its employees or any other person who are
extremely crucial for his business. Such insurance policy is known as Keyman Insurance Policy.
 The premium paid by the person is allowed to be debited to P&L A/c.
 If any sum is received under such a policy by the assessee himself (ie the employer), such income
is taxable in his hands u/h PGBP. If such sum is received by the employee, such sum is taxable in
the hands of the employee u/h salary.
 If such sum is received by any other person, such sum is taxable in the hands of the other person
u/h other sources.

INCOME CHARGEABLE UNDER THIS HEAD [SECTION 28]

(i) The profits and gains of any business or profession carried on by the assessee at any time
during the previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
(ii) Any compensation or other payment due to or received by a person, at or in connection with
-
(a) Termination of his management or modification of the terms and conditions relating
thereto, in case the person is managing the whole or substantially the whole of the
affairs of an Indian company.
(b) Termination of his office or modification of the terms and conditions relating thereto,
in case the person is managing the whole or substantially the whole of the affairs in
India of any other company.
(c) Termination of agency or modification of the terms and conditions relating thereto, in
case the person is holding an agency in India for any part of the activities relating to the
business of any other person.
(d) Vesting in the Government or in any corporation owned and controlled by the
Government, under any law for the time being in force, of the management of any
property or business.
(e) Termination or the modification of the terms and conditions, of any contract relating to
his business
(iii) Income derived by a trade, professional or similar association from specific services
performed for its members.
(iv) In the case of an assessee carrying on export business, the following incentives –

(a) Profit on sale of import entitlements;

(b) Cash assistance against exports under any scheme of GoI;
(c) Customs duty or excise re-paid or repayable as drawback;
(d) Profit on transfer of Duty- Free Replenishment Certificate.
(v) Value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of profession.
(vi) Any interest, salary, bonus, commission or remuneration due to, or received by, a partner
of a firm from such firm (to the extent allowed as deduction in the hands of the firm).
(vii) Any sum, received or receivable, in cash or kind under an agreement for –
(a) not carrying out any activity in relation to any business or profession; or

(b) not sharing any know-how, patent, copyright, trademark, licence, franchise or any other
business of commercial right of similar nature or information or technique likely to assist
in the manufacture or processing of goods or provision of services.
(viii) Any sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
(ix) Fair market value of inventory as on date on which it is converted into or treated as a capital
asset.
(x) Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other
than land or goodwill or financial instrument) being demolished, destroyed, discarded or
transferred, in respect of which the whole of the expenditure had been allowed as
deduction under section 35AD.
Computation of income under the head “Profits and gains of business or profession”
The income referred to in section 28 has to be computed in accordance with the provisions
contained in sections 30 to 43D.

Section 145
METHOD OF ACCOUNTING
'Income u/h PGBP' and ’income u/h other sources' is computed by deducting the eligible expenses
from the gross revenue earned to arrive at the net income. Revenue and expenses can be
recognized in the books of accounts on either accrual basis or cash basis. Section 145 of the
Income Tax Act, 1961 allows an assessee to adopt either of these two methods on a consistent
basis.
Cash System • Receipts and payments are recorded in the year in which the amounts are
of received/paid irrespective of the year to which such payments/receipts relate.
Accounting • Under cash system of accounting, valuation of opening stock and closing
stock carries no relevance.
• Depreciation is allowed as an expense under cash system of accounting in the
manner and to the extent prescribed u/s 32 of the Income Tax Act, 1961.
Accrual * Under accrual system of accounting, receipts and payments are recorded in the
System of year in which they accrue irrespective of the fact when the same are received/paid.
Accounting « Valuation of opening stock and closing stock is an integral part of
(Mercantile accounting under mercantile system of book-keeping. The treatment of
System) undervaluation/overvaluation of opening stock and closing stock has been
provided in the table given below:
Particulars Opening Stock Closing Stock
Treatment in The undervalued amount is The undervalued amount is
case of to be deducted from the to be added to the current
undervaluation current year's profits year's profits
Treatment in The overvalued amount is to The overvalued amount is to
case of be added to the current be deducted from the
overvaluation year's profits current year's profits

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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• Certain expenses listed u/s 43B are allowed to be deducted only on actual
payment basis. Such expenses are not allowed to be debited on accrual basis.
Change in A method once adopted by the assessee should be applied by him
Method consistently. However, in certain situations, the assessee can change the
method of accounting if the change has been approved by the Assessing
Officer.
Different • If an assessee is carrying on more than one business, he can follow cash system
Methods for of accounting for one business and mercantile system of accounting for another
Different business.
Business • If an assessee has more than one source of income u/h ’income from other
sources', he can follow cash system of accounting for one source and mercantile
system of accounting for other sources.

Section 38
ASSETS PARTLY USED FOR BUSINESS AND PARTLY USED FOR PERSONAL PURPOSES
Where any asset has been used by the assessee partly for business purposes and partly for personal
purposes, expenditure is allowed only to the extent the asset has been used for business
purposes.
EXAMPLE: A motor car is used by Mr A for business purposes to the extent of 60% and balance 40%
for personal purposes. In this case, expenditure shall be allowed to be debited only to the extent of
60%.

Section 30
RENT, RATES, TAXES, REPAIR & INSURANCE OF BUILDINGS
The following expenses in respect of premises are allowed as deduction u/s 30. Such expenses are
allowed even if the assessee is not the owner of the premises provided such premises are used for
the purposes of business/profession:
 Rent charges paid by the tenant (where the building is owned by the assessee, notional rent in
respect of such building is not allowed to be deducted)
 Revenue expenses on repairs
 Insurance premium relating to the premises
 Municipal taxes, land revenues, local rate, etc (subject to provisions of Section 43B)
Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of
building.
Note: Capital expenditure on repairs incurred by the tenant is deemed as building in the
hands of the tenant on which depreciation is allowed to the tenant.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Section 31
REPAIRS AND INSURANCE OF PLANT & MACHINERY AND FURNITURE FIXTURES
The following expenses in respect of plant & machinery and furniture & fixtures are allowed as
deduction u/s 31 provided these assets are used for the purposes of business/profession. The
assessee need not be the owner of the assets:
 Revenue expenses on repairs
 Insurance premium relating to the asset
Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of the
asset.

Section 32
DEPRECIATION

Conditions • Generally, the asset on which depreciation is to be claimed must be owned by the
to'be Fulfilled assessee either individually or jointly with any other person (in case of joint
for Claiming ownership, each co-owner will get depreciation on his share of the asset);
Depreciation • The asset should be used for the purposes of business/profession; and
(Cumulative • A rate of depreciation must be prescribed under the Income Tax Act in respect of
Conditions) such asset (no deprecation can be claimed in respect of land owned by an assessee
and used for his business/profession as no rate of depreciation has been prescribed
for land under the Income Tax Act).
Assets on • Tangible Assets:
Which  Buildings (the amount of buildings should not include the cost of land)
Depreciation  Furniture and fittings
is Admissible  Plant & Machinery - As per Section 43(3), plant & machinery includes ships,
vehicles, books, scientific apparatus and surgical equipment used for the
purpose of the business or profession but does not include tea bushes, livestock,
buildings or furniture and fittings.
• Intangible Assets:
Intangible assets would include goodwill, know-how, patents, copyrights,
trademarks, licenses, franchises or any other commercial rights of similar nature.
Rates of • Tangible Assets:
Depreciation □ Buildings:
Residential building 5%
Commercial building including roads/bridges, etc 10%
Purely temporary erections such as wooden structures 40%
□ Furniture and Fittings: Furniture and fixtures are always depreciated @

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
10%
□ Plant 4 Machinery:
Plant 4 machinery other than those which are mentioned below 15%
(like machines, air-conditioner, generator)
Motor cars 15%
Motor buses, motor lorries and motor taxis used in a business of 30%
running them on hire
Computers including computer software 40%
Books (annual publications as well as other than annual 40%
publications)
Pollution control equipment 40%
• Intangible Assets:
The rate of depreciation for all intangible assets is 25%.
Manner of • Depreciation would be allowable to the owner even in respect of assets which are
Calculating actually worked or utilized by another person (such as lessee or licensee).
Depreciation • Under the Income Tax Act, depreciation is allowed only on WDV basis. Straight
under Income line method of depreciation is not allowed except in case of power generating
Tax Act companies.
• Depreciation is not calculated on the basis of value of individual assets; rather it
is allowed on the basis of 'block of assets’ concept. Block of assets refers to a group
of assets which belong to the similar class of assets and carry the same rate of
depreciation.
• Depreciation at full rate in some cases and at half rate in other cases:
Case I: If the asset has been put to use during the year of acquisition
(a) The asset has been put to use for 180 days or Depreciation shall be
more during the relevant previous year calculated at full rate
(b) The asset has been put to use for less than Depreciation shall be
180 days during the relevant previous year calculated at half rate
EXAMPLE: ABC Ltd has purchased one P&M for Rs 10,00,000 on 01.04.2020
but it was put to use on 01.07.2020. In this case, depreciation for PY 2020-
21shall be computed at the full rate of 15% and the depreciation amount
would be Rs 1,50,000.
EXAMPLE: If in the above EXAMPLE the asset was put to use on 01.12.2020.
depreciation for PY 2020-21shall be computed at 7.5% since the asset has
been put to use for less than 180 days and therefore the depreciation amount
would come out to Rs 75,000.

Case II: If the asset has been acquired during one previous year and has been
subsequently put to use during a different year

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Depreciation shall be calculated at the full rate in the year in which the asset
has been put to use. The number of days for which the asset has been put to
use during such year is irrelevant.
EXAMPLE: ABC Ltd has purchased one P&M for Rs 10,00,000 on 01.04.2020
but it was put to use on 31.03.2020. In this case, no depreciation shall be
allowed during PY 2020-21. However, depreciation for PY 2021-20 shall be
computed at the full rate of 15% even though the asset has been used for less
than 180 days and the depreciation amount for PY 2021-20 would come out
to Rs 1,50,000.

• Meaning of ‘PUT TO USE':

‘Put to use' means making an asset ready for use (ie installing an asset so that it is
ready to be used). Actual use of the asset is not necessary.
• Amount on which depreciation is to be calculated (Section 43(6)):
Opening WDV as on 1st April of the relevant PY XXXX
Add: Actual cost of assets purchased during the year XXXX
(Meaning of 'actual cost' is given u/s 43(1)}
Less: Sale value of assets sold/ Insurance claim in case of (XXXX)
assets
destroyed/ Scrap value in case of assets discarded
Value of block of assets for the purpose of charging XXXX
depreciation
Less: Depreciation for the relevant PY (XXXX)
Opening WDV as on 1st April of the next PY XXXX

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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• Special point in respect of asset used for less than 180 days:
 If any asset in the block has been put to use for less than 180 days during the
relevant PY, the actual cost of such asset shall be separated from the value of
block of assets for the purpose of charging depreciation'. Depreciation on the
actual cost so separated shall be charged at half rate. On the balance amount,
depreciation shall be charged at the full rate. (Refer Illustration 2 below)
 If the value of block of assets for the purpose of charging depreciation' is less
than the actual cost of the asset used for less than 180 days, depreciation shall
be charged at half rate on the entire 'value of block of assets for the purpose of
depreciation’. (Refer Illustration 3 below)
• Special Cases:
 If all assets in the block have been sold/destroyed/discarded and there still
remains some balance in the block, such balance would be treated as short term
capital loss as per Section 50 and no depreciation shall be allowed on such
balance. Further, such block would cease to exist with effect from next previous
year. (Refer Illustration 4 below)
 If there is negative balance in the block, such negative balance would be treated
as short term capital gains as per Section 50. The opening WDV of block of
assets for the next previous year shall be taken to be 'NIL'. (Refer Illustration 5
below)

Illustration 1:
Particulars Amount (Rs)
Written down value of Plants A, B, C as on 01.04.2020 50,00,000
Add: Plant D purchased and put to use on 01.06.2020 20,00,000
Less: Sale value of Plant A (10,00,000)
Value of block of assets for the purpose of charging 60,00,000
depreciation
* Less: Depreciation for PY 2020-21(15% of Rs 60L) (9,00,000)
Closing WDV of Plants B, C, D as on 31.03.2020 51,00,000
Illustration 2:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2020 50,00,000
Add: Plant D purchased on 01.06.2020 & put to use on 20,00,000
01.12.2020
Less: Sale value of Plant A (10,00,000)
Value of block of assets for the purpose of charging 60,00,000
depreciation

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Less: Depreciation for PY 2020-21(7.5% of Rs 20L and 15% (7,50,000)
of Rs 40L)
Closing WDV of Plants B, C, D as on 31.03.2020 52,50,000
Illustration 3:
Particulars Amount (Rs)
Written down value of Plants A, B, C as on 01.04.2020 50,00,000
Add: Plant D purchased on 01.06.2020 & put to use on 20,00,000
01.12.2020
Less- Sale value of Plant A (58,00,000)
Value of block of assets for the purpose of charging 12,00,000
depreciation
Less: Depreciation for PY 2020-21(7.5% of Rs 12L) (90,000)
Closing WDV of Plants B, C, D as on 31.03.2020 11,10,000
Illustration 4:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2020 50,00,000
Less: Sale value of Plants A, B, C (42,00,000)
Short term capital loss u/s 50 8,00,000
Depreciation for PY 2020-21(Block would cease to exist wef Nil
1.4.2020)
Illustration 5:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2020 50,00,000
Less- Sale value of Plant A (55,00,000)
Short term capital gain u/s 50 5,00,000
Depreciation for PY 2020-21 Nil
Opening WDV of Plants B, C as on 01.04.2020 Nil
1

Section 32(2)
TREATMENT OF 'UNABSORBED DEPRECIATION'

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Meaning of Assessee carrying business/profession are allowed to debit the depreciation
Unabsorbed expenditure while calculating their income u/h 'business/profession. However,
Depreciation such expenditure can be debited only to the extent income is available u/h
business/profession. The balance amount of depreciation that cannot be debited is
referred to as 'unabsorbed depreciation'.
EXAMPLE: PGBP income before debiting current year depreciation is Rs 1,00,000
and current year depreciation expenditure turns out to be Rs 1,60,000. In this case,
depreciation to the extent of Rs 1,00,000 would be debited to P&L A/c and balance
Rs 60,000 would be referred to as ‘unabsorbed depreciation 1.
Treatment • Unabsorbed depreciation of a particular year is allowed to be set-off in the same
of year against income under any other head except casual income.
Unabsorbed • If unabsorbed depreciation cannot be adjusted in the same year, it is allowed to be
Depreciation c/f for indefinite period of time (ie for an unlimited period) and in the subsequent
years, such unabsorbed depreciation shall be allowed to be set-off against any
income other than casual income.
• If any assessee has b/f business losses as well as b/f unabsorbed depreciation, a
rational taxpayer would first adjust business losses and unabsorbed depreciation
afterwards.
EXAMPLE: Mr X has business income of Rs 10,00,000 for PV 2020-21 and has b/f
business losses of Rs 8,00,000 and b/f unabsorbed depreciation for Rs 5,00,000
pertaining to past periods.
In this case, b/f business loss would be adjusted first and unabsorbed depreciation
would be adjusted subsequently to the extent of Rs 2,00,000. Unabsorbed
depreciation of Rs 3,00,000 would be carried forward to the next AY.

Section 32(1)(iia)
ADDITIONAL DEPRECIATION
Conditions to • Deduction is available to all assessees who are engaged in the business of:
be Fulfilled  manufacture or production of any article or thing; or
(Eligible  generation, transmission or distribution of electricity.
Assessee) • The assessee has purchased and installed 'new plant & machinery'.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
Meaning of ‘New plant & machinery' does not include:
'New Plant & • Second hand plant & machinery whether Indian or imported (ie plant &
Machinery' machinery should be brand new)
• Any plant & machinery installed in any office premises or any residential
accommodation like guest houses (ie plant & machinery should be installed at
factory)
• Any office appliances including computers or computer software
• Any vehicle
• Ship or aircraft
• Any plant & machinery, the actual cost of which is allowed to be debited to P&L
A/c
(ie plant & machinery for which deduction is claimed u/s 35, 35AD, etc)
Amount of Case I: If new plant & machinery has been put to use during the year of
Additional acquisition:
Depreciation (a) Put to use for 180 days or more: One-time additional depreciation is allowed
@ 20% of the actual cost of the plant & machinery.
(b) Put to use for less than 180 days: One-time additional depreciation is allowed
@ 10% of the actual cost of the plant & machinery. The balance 10% is allowed in
the next year.
Case II: If new plant & machinery has been acquired during one previous year
and has been subsequently put to use during a different year:
In such cases, one-time additional depreciation is allowed @ 20% of the actual
cost of the plant & machinery in the year in which the asset has been put to use.
The number of days for which the asset has been put to use during such year is
irrelevant.
Special • This special provision is applicable to all kinds of assessees provided all the
Provision for conditions listed below are fulfilled:
Units Set-up  The assessee sets up an undertaking/enterprise for manufacture or
in Certain production of any article or thing on or after April 1, 2015.
States  Such undertaking must be set up in any backward area (notified by the
Central Government) in Andhra Pradesh, Bihar, Telengana and West
Bengal.
 The assessee acquires and installs a new plant and machinery for the
purposes of such undertaking on or after April 1, 2015 but before April 1,
2020.
• If all the above conditions are fulfilled, the rate of additional depreciation shall
be taken to be 35% instead of 20%. Where the new plant & machinery has been
put to use for less than 180 days in the year of acquisition, additional depreciation
@ 17.5% shall be allowed in the first year and the balance 17.5% shall be allowed

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in the next year.

Points to be • The amount of additional depreciation is in addition to the normal

Noted depreciation.
• Further, the amount of additional depreciation is reduced from the actual cost of
the plant & machinery to arrive at its WDV value.

Section 32
DEPRECIATION IN CASE OF POWER GENERATING UNITS
Choice of • Assessee engaged in the business of generation or generation and distribution
WDV/ of power shall have the option to claim depreciation as per:
SLM  SLM method on each asset; or
 WDV method on block of assets
• Where the assessee has opted for ’SLM method on each asset', the following
points also need to be taken care of:
 Depreciation shall be calculated at half rate if the asset is put to use for less than
180 days in the year of acquisition.
 Additional depreciation shall not be available (ie additional depreciation is
available only where WDV method on block of assets is followed)
 Rates of depreciation shall be prescribed separately under the Income Tax Act.
Treatment Where the assessee has opted for ‘SLM method on each asset', tax treatment at the
in case of time of sale of asset shall be as follows:
Sale of • If the sale price of the asset is less than its WDV:
Asset The difference between the sale price and WDV shall be allowed to be debited to
the P&L A/c (such difference is referred to as ‘terminal depreciation').
• If the sale price of the asset is more than its WDV but sale price of the asset
does
not exceed the actual cost of the asset:
The difference between the sale price and WDV shall be taxable as income u/h PGBP
as per Section 41(2) (such income is referred to as ‘balancing charge').
• If the sale price of the asset is more than its WDV and sale price of the asset
also
exceeds the actual cost of the asset:
□ The difference between the actual cost of the asset and its WDV shall be taxable as
income u/h PGBP as per Section 41(2) (such income is called as 'balancing charge).
□ The difference between the sale price of the asset and its actual cost shall be
taxable as capital gains as per Section 50A.

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EXAMPLEs Tata Power Ltd is a power generating unit and the company has purchased one P&M
on 01.06.2015 for Rs 20 lakhs and the same was put to use on 01.12.2015. The
company has opted to follow SLM method and the rate of depreciation prescribed
under the Income Tax Act is 8.4%. In this case, the depreciation amount shall be:
 For PY 2017-18: 20,00,000 × 8.4% × 50% = Rs 84,000
 For PY 2018-19: 20,00,000 × 8.4% = Rs 1,68,000
 For PY 2019-20: 20,00,000 × 8.4% = Rs 1,68,000
Let's assume that this P&M has been sold on 01.11.2020. WDV of this P&M as on
01.04.2020 is Rs 15,80,000.
• Case 1: The plant has been sold for Rs 9,00,000: The difference of Rs 6,80,000 [Rs
15,80,000 (-) Rs 9,00,000] shall be debited to P& L A/c as terminal depreciation.
• Case 2: The plant has been sold for Rs 18,00,000: In this case, the difference of Rs
2,20,000 [Rs 18,00,000 (-) Rs 15,80,000] shall be termed as balancing charge and
would be deemed to be the PGBP income of the company u/s 41(2).
• Case 3: The plant has been sold for Rs 23,00,000: In this case. Rs 4.20,000 shall be
termed as balancing charge and would be deemed to be the PGBP income of the
company u/s 41(2). Rs 3,00,000 [Rs 23L - Rs 20L] would be treated as LTCG u/s 50A.

Section 32
DEPRECIATION IN CASE OF SUCCESSION OF BUSINESS
Situations • Amalgamation of companies;
Covered • Demerger of companies;
• Conversion of proprietary firm into a company (private/pubiic);
• Conversion of partnership firm into a company (private/pubiic);
• Conversion of private limited or unlisted public company into a LLP firm.
Treatment of If any of the above mentioned five situations has occurred during the previous
Depreciation year, depreciation shall be computed as if no such succession has taken place and
the total amount of depreciation shall be apportioned between the predecessor
and the successor in the ratio of the number of days the asset was used by each
one of them.
• Case I: Where the asset existed on the 1st day of the relevant previous year:
The total time period shall commence on 1st April of the PY & end on 31st March of
PY.
• Case II: Where the asset was put to use during the relevant previous year:
The total time period shall commence on the day when the asset was put to use
and end on 31st March of PY.

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Section 32AD
INVESTMENT ALLOWANCE FOR NOTIFIED BACKWARD AREAS
Conditions to • Benefit u/s 32AD is available to all kinds of assessees (corporate as well as
be Fulfilled non-corporate assessees).
(Eligible • The assessee sets up an undertaking/enterprise for manufacture or
Assessee) production of any article or thing on or after April 1, 2015.
• Such undertaking must be set up in any backward area (notified by the Central
Government) in Andhra Pradesh, Bihar, Telengana and West Bengal.
• The assessee acquires and installs a new plant and machinery’ for the purposes
of such undertaking on or after April 1, 2015 but before April 1, 2020.
Meaning of ‘New plant & machinery’ does not include:
‘New Plant & • Second hand plant & machinery whether Indian or imported (ie P&M should be
Machinery’ brand new)
• Any plant & machinery installed in any office premises or any residential
accommodation like guest houses (ie plant & machinery should be installed at
factory)
• Any office appliances including computers or computer software
• Any vehicle, ship or aircraft
• Any plant & machinery, the actual cost of which is allowed to be debited to P&L
A/c (ie plant & machinery for which deduction is claimed u/s 35, 35AD, etc)
Quantum of An investment allowance of 15% of the aggregate investment in ‘new plant &
Deduction machinery’ acquired and installed is available in the year in which such new
asset is installed.
Note: The amount of investment allowance shall not be reduced to arrive at
the WDV of the plant & machinery.
Lock-in • New P&M in respect of which investment allowance has been claimed u/s 32AD
Period of 5 must not be transferred for a period of 5 years from the date of its installation.
Years • If such plant & machinery is sold/transferred within a period of 5 years
deduction allowed earlier shall be deemed as PGBP income of the previous year
in which such plant & machinery has been sold/transferred.
Section 43(1) - Latest Amendment Introduced Vide The Finance Act, 2019
• Under the existing provisions of the Income Tax Act, 1961, revenue expenditure incurred in cash
exceeding certain monetary threshold is not allowed to be deducted as per Section 40A(3) except
in specified circumstances as referred to in Rule 6DD of the Income Tax Rules, 1962. However, there
is no corresponding provision elsewhere to disallow the capital expenditure incurred in cash.
• In order to discourage cash transactions even for capital expenditure, it is proposed to amend the
provisions of Section 43 to provide that where an assessee incurs any expenditure for acquisition
of any asset in respect which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of

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electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure
shall be ignored for the purposes of determination of actual cost of such asset.
• In other words, if in respect of any capital expenditure, payment or aggregate of payments
made to a person in a single day exceeds Rs 10,000, such expenditure shall be treated as a
part of actual cost of the asset only if such payment has been made by way of account payee
cheque, account payee draft or ECS through a bank account.
EXAMPLE (Covering Latest Amendment):
Mr X owns Plant A and Plant B on April 1, 2020 (depreciated value of the block is Rs 60,000; rate of
depreciation is 15%).
On June 20, 2020, he purchases Plant C for Rs 5,25,000 (Rs 1,95,000 is paid in cash; balance has
been paid by way of RTGS transfer). Plant C has been put to use on the same day and it is also to be
depreciated @ 15%. Calculate allowable depreciation for PY 2020-21.

Section 43(1)
ACTUAL COST
Meaning of Actual cost is the cost for which an asset is acquired by the assessee.
Actual Cost Note: Any part of the cost paid by any other person or any authority directly or
indirectly is not to be included.
EXAMPLE: Mr X has bought a machinery of Rs 10 lakhs. He has received a
government grant of Rs 3 lakhs for acquisition of the said asset and the balance
Rs 7 lakhs has been paid by him. In this case, actual cost u/s 43(1) shall be Rs 7
lakhs only.
Items to be Actual cost would include the following:
Included in • Expenses directly related to the acquisition of the asset;
Actual Cost • Expenses necessary to bring the asset to site and install it (such as carriage
inwards, charges related to loading and unloading of the asset, installation
charges, etc);
• Expenses incurred to put the asset in use (such as cost of making a support
structure for the asset);
• Interest on capital borrowed for the acquisition of asset commencing from
the date of borrowing till the date the asset was first put to use.
EXAMPLE: A loan was taken for purchase of machinery on April 1. 2020. The
asset was purchased on September 1, 2020 and was put to use on November 1,
2020. Interest from April 1, 2020 to October 31, 2020 shall be capitalized
whereas interest for the period from November 1, 2020 to March 31, 2020 shall
be treated as revenue expenditure.

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Assets Case (a): Buildings previously used for personal purposes subsequently
Initially Used used for the purposes of business/profession.
For Personal In such cases, actual cost shall be the actual cost of the building to the assessee as
Purposes reduced by an amount equal to the depreciation that would have been allowable
Subsequently had the building been used for the business/profession since the date of its
Used in acquisition. In other words, notional depreciation would be allowed
Business/ EXAMPLE: Mr A bought a residential building for the purposes of his residence
Profession on 01.11.2018 for Rs 20,00,000. The residential building was brought by him for
his professional use on 01.12.2020, when its market value was Rs 40,00,000. In
this case, the actual cost of the asset u/s 43(1) shall be computed as under:

Cost of residential building 20,00,000

Less: Notional depreciation @ 2.5% for PY 2018-19 (Less than (50,000)
180 days)
WDV as on 01.04.2019 19,50,000
Less: Notional depreciation @ 5% for PY 2019-20 (97,500)
Actual cost of residential building u/s 43(1) = WDV as on 18,52,500
01.04.2020
Depreciation for PY 2020-21@ 5% 92,625
Case (b): Any other asset (such as P&M. furniture, etc) previously used for
personal purposes subsequently used for the purposes of
business/profession. (Buildings)
In such cases, the cost of acquisition of the asset shall be treated as actual cost for
the purposes of Section 43(1). In other words, no notional depreciation shall
be allowed
EXAMPLE (May 2012 Exam): A car was purchased by Dr Soman for Rs 5,25,000
on 10.08.2014 for personal use. It was subsequently brought by him into
professional use on 01.07.2020, when its market value was Rs 2,50,000. In this
case, the actual cost of the car shall be Rs 5,25,000 and depreciation for PY 2020-
21shall come out to Rs 78,750 (ie 15% of Rs 5,25,000).

Section 43B
CERTAIN DEDUCTIONS ALLOWED ON ACUTAL PAYMENT BASIS
Applicability • Section 43B is applicable where the assessee maintains his books of accounts on
of Section 43 the basis of mercantile system of accounting (ie accrual basis).
B • Section 43B cannot apply in situations where the assessee follows cash basis of
accounting (because under cash accounting system, all expenses are allowed on
actual payment basis)

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Types of • Any sum payable by way of tax, duty, cess or fee (by whatever name called under
Expenses to any law for the time being in force);
be Allowed • Any sum payable to the Indian Railways for use of the Railway assets;
on Actual • Employer's contribution to provident fund, superannuation fund or any other fund
Payment for the welfare of the employees;
Basis Only • Bonus, commission or leave salary payable by the employer to his employees; and
• Interest on loan taken from:
□ a scheduled bank including a co-operative bank;
□ public financial institution (ie, ICICI, IFCI, IDBI, LTC, UTI, etc);
□ state financial corporation; or
□ state industrial investment corporation.
Last Date of • The above mentioned expenses can be paid till the last date of filing of return
Payment of income relating to the previous year in which the expenditure was incurred.
If the payment is so made, expenditure is allowed in the previous year itself.
• If the payment is made after the last date of filing of return of income,
expenditure is allowed in the year in which the payment was made.
EXAMPLE: XYZ Ltd has taken a loan from SBI on which interest of Rs 5,000 is payable
for PY 2020-21. If this interest was paid to SBI on or before 30.09.2020, such interest
would be allowed to be deducted in PY 2020-21itself. However, if this interest was
paid on or after 01.10.2020, such interest would be allowed to be deducted in the
previous year in which such payment was made.

Conversion Of Outstanding Interest Into A Fresh Loan/Advance

 Where an assessee has taken a loan from scheduled banks, public financial institution, state
financial corporation or state industrial investment corporation and such assessee is not able to
pay any outstanding interest, the lenders may restructure the loan and convert the outstanding
interest into a fresh loan/advance.
 Section 43B clarifies that the interest so converted and not "actually paid" shall not be deemed
as actual payment, and hence would not be allowed as deduction.
 The unpaid interest, whenever actually paid to the above specified banks/financial institutions,
will be in the nature of revenue expenditure deserving deduction in the computation of income.
Therefore, irrespective of the nomenclature, the deduction will be allowed in the previous year
in which the converted interest is actually paid.
 In other words, if outstanding interest is converted into a fresh loan/advance, no deduction shall
be allowed in the year of conversion. Deduction shall be allowed in the year in which such
converted interest has been actually paid.

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Section 35
EXPENDITURE ON SCIENTIFIC RESEARCH
PART 1: Scientific Research NOT Carried on by the Assessee - Deductibility of Donations
Donation Given to Purpose of Donation Deduction
Allowed
National laboratory, UT, university or a specified Carrying out scientific 150% of donation
person approved by the prescribed authority research under an approved given
{Section 35(2AA)} research programme
Approved research association, approved college, Carrying out scientific 150% of donation
approved university or approved institution research given
Approved research association, approved college, Carrying out social science 100% of donation
approved university or approved institution or statistical research given
An approved company registered in India and Carrying out scientific 100% of donation
having research & development as its main object research given
 Note 1: The person to whom donation is given can utilize the donation for the prescribed
research. There is no condition that such research should be related to the business of the
assessee.
 Note 2: Where the assessee is not carrying any business/profession, such donations are allowed
as deduction u/s 80GGA to the extent of 100% of the amount of donation.

PART 2: Scientific Research Carried on by the Assessee - Deductibility of Expenses

Provisions Where any assessee carries out any research of scientific nature related to the
Generally business carried on by him, expenses are deductible in the following manner:
Applicable Case (a) - Expenditure incurred BEFORE the commencement of business:

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• Capital Expenditure:
□ Capital expenditure (other than expenditure on acquisition of land) incurred
during three years immediately preceding the date of commencement of
business shall be allowed as an expense in the year in which the business
commences.
EXAMPLE: If an assessee commences his business on 15.12.2020. entire 100%
capital expenditure incurred during the period from 15.12.2016 to 14.12.2020 shall
be allowed as an expense during PY 2019-20.
□ Such capital expenditure can be incurred on acquisition of P&M, construction of
building, acquisition of vehicles, etc for the purpose of scientific research.
 Where any assessee has purchased any land A building, expenditure is
allowed only for the building portion and not for the land portion.
• Revenue Expenditure:
□ Following revenue expenditure incurred during three years immediately
preceding the date of commencement of business shall be allowed as an
expense in the year in which the business commences:
 Salary paid to employees engaged in scientific research (excluding
perquisites)
 Purchase of materials used in scientific research
□ Pre-commencement revenue expenditure is allowed only to the extent it has been
certified by the prescribed authority.
□ EXAMPLE: An assessee commences his business on 15.12.2020. revenue
expenditure incurred during the period from 15.12.2016 to 14.12.2020 was Rs 10
lakhs but the prescribed authority certified only Rs 8 lakhs. In this case, Rs 8 lakhs
shall be allowed as an expense during PY 2019-20. Any expenditure incurred prior
to 15.12.2016 shall not be allowed as deduction.
Case (b) - Expenditure incurred AFTER the commencement of business:
• Capital Expenditure:
□ 100% of the capital expenditure incurred by an assesses on scientific research in
relation to his business is allowed as an expense in the year in which the capital
expenditure is incurred by the assessee.
□ Capital expenditure incurred on acquisition of land is not allowable as deduction.
Where any assessee has purchased any land A building, expenditure is allowed only
for the building portion and not for the land portion.
* Revenue Expenditure:
Entire revenue expenditure incurred by an assessee on scientific research in relation
to his business is allowed as an expense in the year in which such expenditure is
incurred.
(Certification from prescribed authority not required)

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Special • This special provision applies only to those companies which are engaged in the
Provision business of bio-technology or in any business of manufacture or production of any
for Some article/thing other than those specified in the Eleventh Schedule. Following
Companies conditions are also required to be fulfilled:
[Section □ Research and development facility should be approved by a prescribed authority.
35(2AB)] □ The company has entered into an agreement with the prescribed authority for audit
of accounts maintained for such facility.
• Deduction for post-commencement expenditure:
Capital Expenditure Revenue Expenditure
 On land: Nil 150% of the expenditure incurred
 On building: 100% can be claimed as deduction
 On other assets: 150%
Special • Depreciation not allowed:
Points No depreciation can be claimed u/s 32 in respect of those assets for which deduction
has been claimed u/s 35.
• Treatment of unabsorbed capital expenditure on scientific research:
□ The rules for set-off & carry-forward of unabsorbed capital expenditure on
scientific research are similar to set-off & carry-forward of unabsorbed depreciation.
□ Unabsorbed capital expenditure on scientific research of a particular year is
allowed to be set-off in the same year against income under any other head except
casual income.
□ If unabsorbed capital expenditure on scientific research cannot be adjusted in the
same year, it is allowed to be carried forward for indefinite period of time (ie for an
unlimited period) and in the subsequent years, such unabsorbed expenditure shall
be allowed to be set off against any income other than casual income.

• Treatment of scientific research asset no longer used for scientific research:

Asset sold without using for the purposes of Asset transferred to any
any other business other business
 Section 41(3) shall apply. Least of the following The asset shall be added to
two amounts shall be taxable as PGBP income: the existing block of assets of
the other business.
- Sale price of asset; or
- Deduction allowed u/s 35
 Capital gains shall arise if the sale price exceeds
Actual cost of the asset so
the cost of the asset. Capital gains shall be long
transferred shall be taken to
term if the asset was sold after a period of 3
be ’NIL'.
years; otherwise capital gains shall be short-
term.

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Section 35AD
INVESTMENT LINKED TAX INCENTIVE FOR SPECIFIED BUSINESS
Business Section 35AD provides investment linked incentives to the following businesses:
Covered • Setting-up and operating a cold chain facility
• Setting-up and operating a warehousing facility for storage of agricultural produce
• Building and operating a hospital with minimum 100 beds for patients (the hospital
can
be located anywhere in India)
• Developing and building a housing project under a scheme for affordable housing
• Production of fertilizers in India
• Laying and operating a cross-country natural gas or crude oil or petroleum oil
pipeline for distribution, including storage facilities being an integral part of such
network.
• Building and operating, anywhere in India, a hotel of two star or above category
(Where an assessee has built a hotel and has subsequently outsourced the hotel
operations to any other person, the assessee would still be eligible for deduction u/s
35AO)
• Developing and building a housing project under a scheme for slum redevelopment
or rehabilitation
• Setting-up and operating an inland container depot or a container freight station
• Bee-keeping and production of honey/beeswax
• Setting-up and operating a warehousing facility for storage of sugar
• Laying and operating a slurry pipeline for transportation of iron ore
• Setting-up and operating a semi-conductor wafer fabrication manufacturing unit
• Developing or maintaining and operating or developing, maintaining and operating
a new infrastructure facility
Quantum Case (a) - Expenditure incurred AFTER the commencement of business:
of • Capital Expenditure:
Benefits □ On land, goodwill or financial instruments: Nil
u/s 35AD □ Other capital expenditure: 100% of the capital expenditure shall be allowed as
deduction in the year in which such capital expenditure has been incurred.
• Revenue Expenditure:
100% of the revenue expenditure shall be allowed as deduction in the year in which
such revenue expenditure has been incurred.
Case (b) - Expenditure incurred BEFORE the commencement of business:

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Expenditure incurred before the commencement of business shall be allowed as
deduction in the year in which the business commences to the extent of 100% of such
expenditure provided such expenditure has been capitalized in the books of accounts
on the date of commencement of business. However, expenditure on acquisition of
land, goodwill or financial instruments shall not be allowed.
Latest Amendment Introduced Vide The Finance Act. 2019
If payment or aggregate of payments made to a single person in a single day in respect
of a particular expenditure exceeds Rs 10,000, deduction shall be allowed for such
expenditure only if payment has been made by way of account payee cheque, account
payee draft or by use of electronic clearing system through a bank account. If payment
has been made by any other mode, deduction shall not be allowed in respect of such
expenditure.

Other • Meaning of ‘Infrastructure Facility':

Points To  A road including toll road, a bridge or a rail system;
Be Noted  A highway project including housing or other activities being an integral part of
the highway project;
 A water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system; and
 A port, airport, inland waterway, inland port or navigational channel in the sea.
• No other deduction possible:
If deduction has been allowed u/s 35AD, the assessee shall not be allowed any
deduction in respect of the specified business u/s 10AA, 80-1 A, 80-IAB, 80-IB, 80-IC,
80-ID, 80-IE, 80JJA, 80JJAA, 80QQB and 80RRB.
• Sale of asset for which deduction has been claimed u/s 35AD to be treated as
business income:
If any asset, in respect of which deduction has been allowed u/s 35AD, is sold,
destroyed, demolished etc, the amount received on its sale, disposal, etc shall be
treated as income of the assessee u/h ’income from business/profession'.
• Assets cannot be used for other purposes for 8 years:
□ The assets, the cost of which has been claimed as deduction u/s 35AD, must be used
for the specified business for a period of at least 8 years.
□ If such asset is used for any purpose other than the specified business within the
period of 8 years, the following amount shall be deemed to be the income of the
assessee u/h 'income from business/profession for the previous year in which the
asset has been so used.
Total deduction allowed u/s 35AD XXXX
Less: Amount of depreciation allowable u/s 32 (XXXX)

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Amount deemed as income u/h PGBP XXXX
EXAMPLE: Seduction claimed u/s 35AD on a capital asset is Rs 100 lakhs whereas
depreciation eligible on such asset u/s 32 is Rs 15 lakhs. In this case, an amount of Rs
85 lakhs would be deemed as the income of the assessee u/h 'income from
business/pro fess ion.
• Set-off & carry-forward of losses of a specified business covered u/s 35AD (Section
73A):
□ Intra-Head Adjustment: Losses of a business specified u/s 35AD are allowed to
be set-off only against the income of another business specified u/s 35AD.
□ Inter-Head Adjustment: Losses of a business specified u/s 35AD cannot be set-off
against income under any other head.
□ Carry Forward of Losses: Unadjusted losses of a business specified u/s 35AD are
allowed to be carried forward indefinitely for being set-off against the income of a
business specified u/s 35AD in future years.

Section 35D
AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES
Eligible • Benefit u/s 35D is available to the following persons:
Assessee □ An Indian company
□ Any non-corporate assessee provided he is resident in India(ie resident
individual, resident HUF, resident firm, etc)
In other words, benefit u/s 35D is not available to a foreign company or a non-
resident
• Deduction is available if the eligible assessee incurs any expenditure on specified
purposes in
the following manner:
□ In case of new business: Eligible expenditure should be incurred before the
commencement of business.
□ In case of existing business: Eligible expenditure should be incurred for
extension of existing business or setting up a new unit.
Eligible a) The following four types of expenses are allowed if the work is carried on by the
Expenditure assessee himself or by a concern approved by CBDT:
(ie Purposes □ Expenditure on preparation of feasibility report
For Which □ Expenditure on preparation of project report
Expenditure □ Conducting market survey any other survey necessary for the business of the
Should Be assessee;
Incurred) □ Engineering services relating to the business of the assessee.
b) Legal charges for drafting an agreement related to setting up the business.
c) The following expenditure in the case of a company:

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□ Legal charges for drafting of MOA & AOA and expenses incurred on their printing;
□ Registration fees of the company under the Companies Act;
□ Expenses incurred in connection with public issue of shares or debentures of the
company (like underwriting commission; brokerage; expenses related to drafting,
printing and advertisement of the prospectus, etc)
Quantum of
Deduction Assessee Maximum Deduction Period of Deduction
Indian Lower of the following two: Deduction is allowed in 5 equal
Company • Amount of eligible instalments in 5 years in the
expenditure following manner:
OR  In case of new business:
• 5% of cost of project or 5% The period of 5 years would start
of capital employed,
from the previous year in which the
whichever is higher business commences.
Resident Lower of the following two:
 In case of existing business:
Individual, • Amount of eligible
Resident expenditure The period of 5 years would start
Firm, etc OR from the previous year in which the
• 5% of cost of project extension of the undertaking is
completed or the new undertaking
commences operation.
EXAMPLE: XYZ Ltd has commenced a new business during PY 2020-21. Eligible
preliminary expenses are Rs 50,00,000. Cost of project & capital employed as on
31.03.2020 is 3 crore and 4 crore respectively.
In this case, total amount of deduction permissible u/s 35b would come out to Rs 20
lakhs. Deduction of Rs 4,00,000 shall be allowed annually starting from PY 2020-
21and ending with PY 2022-23.
Meaning of • “Cost of project" means the actual cost of fixed assets as on the last day of the
Certain previous year in which the business commences/the extension of the undertaking is
Terms completed or the new undertaking commences operation.
• “Capital employed' means the aggregate of issued share capital, debentures, long-
term borrowing as on the last day of the previous year in which the business
commences/the extension of the undertaking is completed or the new undertaking
commences operation.

Sections 35CCA, 35CCC, 35CCD & 35DDA

MISCELLANEOUS DEDUCTIONS

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Section 35CCA Where a person runs any business/profession, donations given to any notified
Donations To organization for the purpose of rural development shall be allowed as
Associations For deduction while computing income u/h business/profession. Donations
Rural given to Rural Development Fund or National Urban Poverty Eradication
Development Fund shall also be allowed as deduction.
Programmes Note: If the person is not carrying out any business/profession, such donations
would be allowed as deduction u/s 80GGA.
Section 35CCC Where an assessee incurs any expenditure (other than cost of any land or
Weighted building) on notified agricultural extension project, then he will be eligible
Deduction For to claim a weighted deduction of 150% of such expenditure.
Expenditure On
Agricultural
Extension
Project
Section 35CCD Where a company incurs any expenditure (not being expenditure in the
Weighted nature of cost of any land or building) on any notified skill development
Deduction For project, then such company can claim a weighted deduction of 150% of such
Expenditure For expenditure.
Skill
Development
Section 35DDA Section 35DDA allows an employer to debit the expenditure incurred in
Amortization Of connection with any voluntary retirement scheme implemented by the
Expenditure employer. Such amount would be allowed to be deducted in 5 years in 5
Under Voluntary equal annual instalments starting with the previous year in which such
Retirement amount was actually paid.
Scheme

Section 36
OTHER DEDUCTIONS RELATED TO BUSINESS/PROFESSION
Premium for Premium paid for insurance of stock or stores is allowed as deduction.
Insurance of Stock-In- Note: Insurance premium paid on life of owner/partner is a personal
Trade [36(1)(i)] expenditure and not allowed as deduction.
Premium for Mediclaim premium paid by any mode other than cash for insuring the
Insurance on Health health of the employees is allowed as deduction. Premium paid by an
of Employees employer for obtaining Keyman Insurance Policy is also allowed.
[36(1)(ib)]

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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Interest on Borrowed • Interest on loans taken for the purposes of business/profession is
Capital [36(1)(iii)] allowed as deduction.
• However, where loan is taken from scheduled banks, public financial
institution, state financial corporation or state industrial investment
corporation or any other person notified u/s 43B, deduction for interest
is available only if such interest has been actually paid till the last date of
filing of return of income.
• Interest on loan taken for the purpose of acquisition of an asset is
to be capitalized for the period commencing from the date of
borrowing till the date the asset was first put to use.
Note: Interest on capital to a proprietor is not allowed to be deducted.
EMPLOYER’S • Employer’s contribution to recognized Provident Fund, approved
Contribution to Gratuity Fund and approved Superannuation Fund is allowed as deduction
Recognized Provident provided such amount has been deposited till the last date of filing of
Fund, return of income (Section 43B). (The amount should be within the limits
Superannuation prescribed under the respective Acts)
Fund, Pension • Employer’s contribution to Notified Pension Scheme ('NPS')
Scheme, Gratuity referred to u/s 80CCD is allowed as deduction. Maximum amount
Fund [Section 36(1 admissible as deduction cannot exceed 10% of salary of employee.
X'v), (iva) &(v)] (Discussed in detail u/h 'salary')
EMPLOYEE'S • Any sum received by the employer as employee's contribution
Contribution to towards PF, superannuation fund or any other welfare fund is deemed to
Recognized Provident the business income of the employer u/s 2(24).
Fund, • When such amount is subsequently paid by the employer to the
Superannuation respective authorities, such amount is allowed as deduction u/s
Fund, etc [Section 36(1)(va) to the employer. The amount should be deposited on or before
36(1)(va)] the last date of filing of return of income. (Delhi HC's decision in the case
of AIMIL)
Bad Debts [Section * Bad debts are allowed to be deducted on actual basis if all the
36(1)(v i)]
, following conditions are satisfied:
 Debt must be incidental to the business/profession of the assessee;
 Debt must have been taken into account while computing the
assessable income of the assessee for current year or for prior years;
and
 Debt must have been written off in the books of accounts.
• Section 41(4): If a bad debt has been allowed as deduction u/s
36(1)(vii) and subsequently there is some recovery from such bad
debt, such recovered amount is deemed to be the income of the
assessee u/h PGBP for the year in which such amount is recovered.

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Such recovery shall be taxable irrespective of the fact whether the
assessee carries on any business/profession or not.

Family Planning • This deduction is available only to companies (Indian as well as

Expenditure [Section foreign).
36(1)(ix)] • Revenue expenditure is allowed fully. Capital expenditure is allowed in
five equal annual instalments starting with the previous year in which
such expenditure was incurred.
• Family planning expenditure (revenue as well as capital) is allowed to
be debited only to the extent profit is available u/h PGBP. Unabsorbed
family planning expenditure is set-off and c/f just like unabsorbed
depreciation.
Securities • If securities/commodities are held as investments:
Transaction Tax STT/CIT paid cannot be debited to the P&L A/c where the securities/
(STT) commodities are held as investments.
[Section 36(1 )(xv)]
Commodities • If securities/commodities are held as stock-in-trade:
Transaction Tax 'STT/CIT paid is allowed to be debited to the P&L A/c where the
(CIT) [Section securities/ commodities are held as stock-in-trade (ie the dealer has the
36(1)(xvi)] business of buying/selling such securities/commodities).

Section 37 - GENERAL DEDUCTION

Section 37: Section 37(1) is a residuary section. To avail deduction u/s 37, the following
Applicability conditions should be satisfied;
• The expenditure should not be of the nature described u/s 30 to 36.
• It should not be in the nature of capital expenditure.
• It should not be a personal expenditure of the assessee.
• It should be in respect of business carried on by the assessee. In other words, it
should be used wholly and exclusively for the purposes of such business.
• It should not be incurred for any purpose, which is an offence or is prohibited by
any law.
EXAMPLEs • Salary & wages to employees, commission to agents, printing & stationery,
telephone expense and other business related expenses.
• Expenditure in connection with entertainment/amusement of employees or
customers.
• Expenditure incurred on occasion of various festivals like Diwali, Holi, Karva
Chauth for employees or customers.
• Expenditure in connection with advertisement like advertisement in
newspapers, television or other media, payment to ad agency for making the

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advertisement, etc.
Section 37(2B) - Extremely Important
• No deduction is available for any expenditure incurred by assessee on
advertisement in any souvenir, pamphlet, publication or newspapers of any
political party.
Note: Such donation/expenditure is allowed as deduction u/s
80GGB/80GGC.
Deduction of various taxes, interest, penalty, etc shall be as follows:

Type of expenditure Direct Taxes (such as Indirect Taxes (such as

income tax, AIT, etc) GST, service tax, VAT,
etc)
Amount of tax Not allowed as it is the Allowed as it is a business
personal liability of the liability for the assessee
assessee
Interest paid/payable on Not Allowed Allowed
delayed payment of tax
Interest on loan taken for Not Allowed Allowed
payment of tax liability
Penalty for failure to Not Allowed Not Allowed (as it
comply with the applicable amounts to infraction of
law law)
Refund of tax already paid Not treated as income Treated as business
received by the assessee income
Interest on refund received Treated as income u/h Treated as business
other sources income
Litigation expenses Allowed Allowed
Filing returns and other Allowed Allowed
professional charges
Important Expenditure incurred by an assessee on Corporate Social Responsibility ('CSR')
Point activities as referred to in Section 135 of the Companies Act, 2013 CANNOT be
deducted.

Section 40A(2)
PAYMENT TO RELATED PERSON
Applicability Section 40A(2) applies where a person has incurred any revenue expenditure on
of Section goods, services or facilities and payment for the same is made to:
40A(2) • A related person; or

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• A person who has substantial interest in the business of the assessee.
Assessee Related Person
(ie Payer)
Individual Any relative of the individual specified u/s 2(41) (ie spouse,
brother, sister, lineal ascendant or lineal descendant of the
individual)
Firm Partners and their relatives [2(41)]
Company Directors and their relatives [2(41)]
Disallowance If the payment made for the expenditure specified above is excessive or
in case of unreasonable having regard to the Fair Market Value (FMV)of the goods,
Unreasonable services or facilities, that portion of the expenditure which is unreasonable or
Expenditure excessive shall be disallowed.
EXAMPLE: Mr A has taken a aodown on rent from his sister and has paid rent of
Rs 5 lakhs during PY 2020-21whereas the FMV of such rent was only Rs 4 lakhs.
In this case, an amount of Rs 1 lakh shall be disallowed u/s 40A(2).

Section 40A(7)
EMPLOYER'S CONTRIBUTION TO GRATUITY FUND
• Employer's contribution towards gratuity fund is allowed as deduction if:
□ The gratuity fund is an approved gratuity fund; and
□ Requirements of Section 43B have been complied with (ie, the amount has been actually
deposited on or before the last date of filing of ROI).
• Provision for payment of gratuity:
In general, no provision is allowed as deduction. However, provision for payment of gratuity is
allowed as deduction if both the conditions given below are fulfilled:
□ The gratuity fund is an approved gratuity fund; and
□ The provision has been made on the basis of actuarial valuation (ie the amount has not been
arrived randomly but on a systematic basis).

Section 40A(9)
EMPLOYER'S CONTRIBUTION TO VARIOUS FUNDS
No deduction shall be allowed in respect of any sum paid by an assessee towards setting up or
formation of or as contribution towards any fund except the following:
• Where such sum is required to be paid under any law in force; or
• Where such contribution is towards an approved gratuity fund; or
• Where such contribution is towards an approved superannuation fund; or
• Where such contribution is towards a recognized provident fund; or
• Where such contribution is towards a notified pension fund.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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Contribution to unapproved funds or any other staff welfare fund is not allowed as
deduction. However, staff welfare expenses are allowed as deduction.

Section 40A(3)
PAYMENTS EXCEEDING Rs 10,000 TO BE MADE BY ACCOUNT PAYEE CHEQUE/DRAFT
Applicability • Section 40A(3) applies where all the following conditions are satisfied:
of Section □ The assessee has incurred any revenue expenditure; and
40A(3) □ Payment or aggregate of payments made in a single day to a single person
inrespect of such expenditure exceeds Rs 10,000.
• If both the conditions specified above are fulfilled and payment has been made
otherwise than by way of account payee cheque or account payee draft or use of
electronic clearing system ('ECS') through a bank account, the amount of payment
shall be disallowed (ie not allowed to be deducted).
• In other words, this section requires that payment to a single person in a single
day for expenditure incurred should be made by an account payee cheque, account
payee draft or by using ECS through a bank account if the payment amount in a
single day exceeds Rs 10,000.
• Where the payment is being made to a transport operator carrying on the
business of plying, hiring or leasing goods carriages, the limit of Rs 10,000 shall be
taken as Rs 35,000.

ANY EXPENSE (+) SINGLE PERSON (+) TOTAL PAYMENT IN SINGLE DAY EXCEEDS Rs 10,000

Payment Exceeding Rs 10,000 Made After Claiming Deduction

• This special provision applies where all the following conditions are satisfied:
□ An expenditure has been allowed as deduction in earlier years on accrual basis;
□ Payment exceeding Rs 10,000 in respect of such expenditure is made in subsequent years; and
□ Such payment has been made otherwise than by way of account payee cheque or account payee
draft or by using ECS through a bank account.
• If all the above conditions are fulfilled, the payment so made shall be deemed be to the PGBP
income of the assessee for the year in which the payment has been so made.
EXAMPLE: Mr X has claimed a deduction of Rs 25,000 for rent expenses during PY 2019-20 on
accrual basis. Payment for this expenditure was made on 01/05/2020 in cash. The amount of Rs
25,000 shall be deemed to be the PGBP income of Mr X for PY 2020-21.

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Non- Section 40A(3) is not applicable in the following situations even though payment
applicability exceeding Rs 10,000 is made otherwise than by way of account payee cheque or
of Section account payee draft or by using ECS. These situations are given under Rule 6DD:
40A(3) in • Where payment is made to the Reserve Bank of India, State Bank of India or other
Certain banking institutions, LIC, UTI, Central Government, State Government, etc.
Situations - • Where payment is made in a village or a town which does not have any bank on
Rule 6DD of the date on which the payment is made and the person to whom payment is made
the Income ordinarily resides at such place or has his business/profession at such place.
Tax Rules, • Where payment is made by transferring funds from one bank account to the other
1962 or payment is being made by any credit card/debit card/letter of credit, etc.
• Where payment is made by way of account settlement (eg, Mr B owes Mr A, an
amount of Rs 50,000. Further Mr A has to make a payment of Rs 30,000 to Mr B for
purchase of raw material. Mr A adjusted the payment of Rs 30,000 against the
receivable appearing in the books of accounts).
• Where the payment is to be made on a particular day but banks are closed on that
day because of holiday or strike.
• Where products have been manufactured in a cottage industry without the aid of
power and the payment is being made to the producer of such products.
• Where the payment is made for the purchase of
□ agricultural or forest produce; or
□ the produce of animal husbandry or dairy or poultry farming; or
□ fish or fish products; or
□ the products of horticulture or apiculture, to the cultivator, grower or producer
of such articles, produce or products.
• Where payment is made to an employee on his retirement or payment is made to
his family member after the employee's death and payment is in connection with
gratuity or any other retirement benefit and the payment amount does not exceed
Rs 50,000.
• Any other situation given under Rule 6DD.
EXAMPLES FOR PRACTICE - Whether disallowance u/s 40A(3) will be attracted or not:
• Salary of Rs 24,000 paid to an employee by bearer cheque:
• Audit fees of Rs 38,000 paid to a Chartered Accountant by crossed cheque:
• Bill of stationery of Rs 54,000 paid in cash:
• Payment for purchase of generator in cash amounting to Rs 50,000, where the assessee is in the
business of trading in generators:
• Payment of Rs 15,000 in cash on 03/01/2020 against two bills for Rs 8,000 and Rs 7,000:
• Three payments of Rs 8,000 in cash on 03/01/2020 against a single bill of Rs 24,000:
• Three payments of Rs 8,000 in cash on three consecutive days against a single bill of Rs 24,000:
• Payment of Rs 12,000 by crossed cheque to his brother for purchase of raw-material which is

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excessive by Rs 4,000:
• Payment of sales tax in cash amounting to Rs 42,000:
• Payment to Mr X amounting to Rs 8,000 and to Mr Y Rs 33,000 by crossed cheque and cash
respectively for interest on loan taken for the business:
• Payment to PNB amounting to Rs 42,000 for interest on loan taken for the business. Payment has
been made by a bearer cheque:
• Bill of stationery of Rs 54,000 paid by cash on August 15, 2020:

DEDUCTIBILITY OF EXPENDITURE WHERE TDS HAS NOT BEEN DEDUCTED

Section 40(a)(i)
Interest, Royalty, FTS, etc Payable Outside India/Payable to Non-Resident
Applicability • The amount is paid/payable:
of Section □ to any person outside India; or
40(a)(i) - □ to a non-resident in India or a foreign company in India.
Conditions • The amount paid is in the nature of interest, royalty, fees for technical services
or any other sum. (salary)
• Such amount is chargeable to income tax in the hands of the recipient under the
Income Tax Act, 1961 and TDS is required to be deducted u/s 195 or any other
section.
When Interest, royalty, etc would be disallowed in the following two cases:
Disallowance • Case 1: Tax has not been deducted at source in the current year; or
is Applicable • Case 2: Tax has been deducted at source during the current year but has not been
deposited with the government till the last date of submission of return u/s
139(1).
Amount of The entire amount of interest, royalty, fees for technical services shall be
Disallowance disallowed in the current year if either of the above two cases gets attracted.
Reversal of The amount which is disallowed in the current year shall be allowed as deduction
Disallowance in the year in which tax deducted at source is deposited with the government by
the payer.
EXAMPLEs • XYZ Ltd has paid interest of Rs 50 lakhs outside India on 01.03.2020. Tax was
deducted to source on 15.03.2020 but the same was deposited with the
government on 30.09.2020. In this case, the interest would be allowed to be
deducted in PY 2020-21.
• If in the above EXAMPLE, TDS was deducted on 20.03.2020 and was deposited
with the government on 01.10.2020, the interest would be allowed to be deducted
in PY 2020-21.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was deposited
with the government on 01.06.2020, the interest would be allowed to be deducted
in PY 2020-21.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was deposited
with the government on 01.06.2020, the interest would be allowed to be deducted
in PY 2020-21.

Section 40(a)(iii)
Salary Payable Outside India/Payable to Non-Resident
Applicability • The amount is paid/payable:
of Section □ to any person outside India; or
40(a)(iii) -
□ to a non-resident in India.
Conditions • The amount paid is in the nature of salary. Such salary amount is chargeable to
income tax in the hands of the recipient under the Income Tax Act, 1961 and TDS is
required to be deducted under the Income Tax Act, 1961.
When The entire amount of salary would be disallowed if tax has not been deducted at
Disallowance source and tax has not been deposited with the government.
is Applicable
Reversal of If salary amount has been disallowed once, such amount would be treated as
Disallowance disallowed forever even if tax deducted at source is subsequently deposited with
the government by the payer.

Section 40(a)(ia) Payment to a Resident

Applicability • The amount is paid/payable to a person resident in India.
of Section • All types of payment on which tax is deductible u/s 192 to 194LBA are covered
40(a)(ia) - under the purview of Section 40(a)(ia).
Conditions
When • Case 1: Tax has not been deducted at source in the current year: or
Disallowance • Case 2: Tax has been deducted at source during the current year but has not
is Applicable been deposited with the government till the last date of submission of return
u/s 139(1).
Amount of 30% of the expenditure shall be disallowed in the current year if either of the
Disallowance above two cases gets attracted.
Reversal of The amount which is disallowed in the current year shall be allowed as
Disallowance deduction in the year in which tax deducted at source is deposited with the
government by the payer.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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EXAMPLEs • XYZ Ltd has paid interest of Rs 50 lakhs to a resident in India on 01.03.2020. Tax
was deducted to source on 15.03.2020 but the same was deposited with the
government on 30.09.2020. In this case, Rs 50 lakhs would be allowed to be
deducted in PY 2020-21.
• If in the above EXAMPLE, TDS was deducted on 20.03.2020 and was deposited
with the government on 01.10.2020, Rs 35 lakhs would be allowed to be deducted
in PY 2020-21and Rs 15 lakhs would be allowed to be deducted in PY 2020-21.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was deposited
with the government on 01.06.2020, Rs 35 lakhs would be allowed to be deducted
in PY 2020-21and Rs 15 lakhs would be allowed to be deducted in PY 2020-21.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was deposited
with the government on 01.06.2020, Rs 15 lakhs would be disallowed in PY 2020-
21even if the amount has been deposited before the due date of filing of return of
income. The amount of Rs 15 lakhs shall be allowed as deduction during PY 2020-
21.
Disallowance W'here tax has not been deducted at source, but the resident recipient has:
Not to be  paid the applicable tax after correctly computing his income; and
Done in  filed his return of income within the time limit prescribed u/s 139(1),
Certain the payer would not be treated as an assessee in default if he furnishes a certificate
Situations from a Chartered Accountant certifying the above position and disallowance
provisions would not be applicable in such cases.
(On the lines of Section 201 (1)}

Section 40(b)
REMUNERATION TO PARTNERS (Eg Salary, Interest on Capital/ etc)
Deductibility • Remuneration paid/payable by a firm to its partners are deductible only if the
of Such conditions mentioned under Section 184 & Section 40(b) are complied with.
Remuneration • One of the conditions require that there should exist a legal document which
- Conditions confirms the existence of a partnership firm (such as partnership deed). Such legal
document should give the firm the power to pay remuneration to its partners.
• A copy of such legal document is also required to be filed at the time of
submission of income tax return for the first time.
Quantum of
Deduction Type Of Payment To Maximum Permissible Deduction
Remuneration
Interest on capital Any partner Rate of interest shall be lower of the
(working partner as two:
well as sleeping - Rate specified in partnership deed;
partner) or

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
SSGURU CA SURAJ SATIJA
- 12% p.a.
(Calculation of interest on simple
interest basis)

Salary, bonus, Only working partner

commission or any (such remuneration Book Profits Maximum
other is not allowed to be Deduction
remuneration paid to a sleeping First Rs 90% of Book
partner) 3,00,000 (or in Profits or Rs
the case of a 1,50,000,
loss) whichever is
higher
Balance 60% of Book
Profits
EXAMPLE: If book profits are Rs
10,00,000, maximum salary, etc can
be Rs 6,90,000.

Calculation of Following adjustments should be made to the net profit u/h PGPB to arrive at book
Book Profits profits:
• Only income u/h PGPB is to be taken after including all incomes and deducting
all eligible expenses (ie, income after giving effect to the provisions of Sections 30
to 38)
• Interest on capital is allowed to be deducted only to the extent it is permitted u/s
40(b). Amount in excess of the permissible figure shall be added back
• Salary, bonus, commission, etc to partners are not to be deducted.
• Current year depreciation as well as unabsorbed depreciation of previous years
are allowed to be deducted (because such expenditure is covered under Sections
30 to 38)
• Brought forward business losses and Chapter VI-A deductions are not allowed to
be deducted (because such expenditure is not covered under Sections 30 to 38)
Points to be • Interest on loan is not covered within the scope of Section 40(b). However, it is
Noted allowed to be deducted if provided for in the partnership deed. The rate of interest
would also be specified in the partnership deed.
• Share of profit received by a partner from a partnership firm is exempt in the
hands of the partners u/s 10(2A).
• Interest on capital and salary, bonus, etc are considered to be the income of the
partners u/h PGBP to the extent they are allowed to be deducted u/s 40(b).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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AMOUNTS NOT DEDUCTIBLE

SECTION PARTICULARS
In the hands of any assessee
40(a)(i) Any interest, royalty, fees for technical services or other sum chargeable under the
Act, which is payable outside India or in India to a non corporate non-resident or to
a foreign company, on which tax deductible at source has not been deducted or
after deduction has not been paid on or before the due date specified under section
139(1).
However, if such tax has been deducted in any subsequent year or has been deducted in the
previous year but paid in the subsequent year after the due date specified under section
139(1), such sum shall be allowed as deduction in computing the income of the
previous year in which such tax is paid.
40(a)(ia) 30% of any sum payable to a resident on which tax is deductible at source under
Chapter XVII-B and such tax has not been deducted or, after deduction has not been
paid on or before the due date for filing of return of income under section 139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due date
specified under section 139(1), 30% of such sum shall be allowed as deduction in
computing the income of the previous year in which such tax is paid.

40(a)(ii) Any sum paid on account of income-tax

40(a)(iib) Any amount paid by way of royalty, licence fee, service fee, privilege fee, service
charge, or any other fee or charge, which is levied exclusively on, or any amount
appropriated, directly or indirectly, from a State Government undertaking, by the
State Government.
40(a)(iii) Any payment chargeable under the head “Salaries”, if it is payable outside India or
to a non-resident, if tax has not been paid thereon nor deducted therefrom

40(a)(v) Tax paid by the employer on non-monetary perquisites provided to its employees,
which is exempt under section 10(10CC) in the hands of the employee.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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In case of partnership firms or LLPs -
40(b) (i) Salary, bonus, commission or remuneration, by whatever name called,
paid to any partner who is not a working partner;
(ii) Payment of remuneration or interest to a working partner, which is
not –
 authorized by the partnership deed; or
 in accordance with the terms of the partnership deed.
(iii) Payment of remuneration or interest to a working partner
authorized by and in accordance with the terms of the partnership
deed, but relates to a period falling prior to
the date of such partnership and is not authorized by the earlier
partnership deed.
(iv) Payment of interest to any partner authorised by and in accordance with
the terms of the partnership deed and falling after the date of the
partnership deed to the extent of the excess of the amount calculated at
12% simple interest per annum.
(v) Payment of remuneration to a working partner which is authorized by
and in accordance with the partnership deed to the extent the aggregate
of such payment to working partners exceed the following limits -
(a) On the first 3,00,000 of the 1,50,000 or 90% of the book-
book-profit or in case of a profit, whichever is more.
loss
(b) On the balance of 60%
book-profit

Expenses or payments not deductible in certain circumstances

Section Particulars
40A(2) Any expenditure incurred in respect of which a payment is made to a related person or
entity, to the extent it is excessive or unreasonable by the Assessing Officer.
Few examples of related persons are as under:
Assessee Related Person
Individual Any relative of the individual

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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Firm Any partner of the firm or relative of such partner and the
member of the family or association
HUF or AOP Any member of the AOP or HUF or any relative of such
member
Company Director of the company or any relative of the director
Any assessee Any individual who has a substantial interest (20% or more
voting power or beneficial entitlement to 20% of profits) in
the business or profession of the assessee; or A relative of such
individual.

40A(3) Any expenditure, in respect of which a payment or aggregate of payments

made to a person in a single day otherwise than by account payee cheque or
account payee bank draft or ECS through bank account or through such other
prescribed electronic modes exceeds ` 10,000.
In case of payments made to transport operator for plying, hiring or leasing goods
carriages, an enhanced limit of ` 35,000 shall apply.
If the payment / payments exceed this limit, the entire expenditure would be
disallowed.
However, disallowance would not be attracted if the cases and circumstances in
which payment is made otherwise than by way of an account payee cheque or bank
draft are covered in Rule 6DD.
40A(3A) Where an expenditure has been allowed as deduction on accrual basis in any previous
year, and payment is made in a subsequent previous year otherwise than by account
payee cheque or account payee bank draft or ECS through bank account or through
such other prescribed electronic modes and such payment (or aggregate of
payments made to a person in a day is made in a subsequent previous year) is in excess of
the limits of ` 10,000/ ` 35,000 specified above, the payment/aggregate of
payments so made shall be deemed as profits and gains of the business or profession and
charged to tax as income of the subsequent previousyear.
However, the deeming provision will not apply in the cases and circumstances
covered in Rule 6DD.
40A(7) Provision for payment of gratuity to employees.
However, disallowance would not be attracted if provision is made for contribution to
approved gratuity fund or for payment of gratuity that has become payable during
the year.
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Section 41
DEEMED PROFITS CHARGEABLE TO TAX

The receipts under the following sections shall be taxable u/h PGBP whether or not the business
is in existence in the year of recovery.
Section 41(1) - Recovery against any deduction:
Recovery • This section applies if both the conditions listed below are fulfilled:
Against Any □ Any expenditure or loss or trading liability has been allowed as a deduction in
Deduction any previous year; and
□ Subsequently there is a recovery of such expenditure or loss or trading liability
either in cash or in any other manner (ie by way of remission of liability).
• The amount of recovery is chargeable to tax in the year of receipt whether the
business is in existence or not in the year of recovery.
EXAMPLE: ABC Ltd has paid sales tax of Rs 5,00,000 under protest durinq PY
2017-18. During PY 2020-21, the matter was finally decided by the Supreme Court
of India and the case was decided in favour of ABC Ltd and the amount was
refunded to ABC Ltd. The amount of Rs 5,00,000 shall be treated as an income of
ABC Ltd for PY 2020-21.
EXAMPLE: XYZ Ltd has recoqnized an expenditure of Rs 5,000 durinq PY 2019-
20 towards purchases of raw materials on credit. During PY 2020-21, the creditor
allows a rebate of Rs 500 at the time of payment and only Rs 4,500 is actually paid
to the creditor. The amount of Rs 500 shall be treated as income of XYZ Ltd for PY
2020-21.
Section 41(2) - Balancing Charqe:
Already • This provision applies only to companies which are engaged in generation or
Discussed generation and distribution of power which have opted to charge depreciation
on SLM basis.
• The difference between the WDV of the asset and its sale price is taxable u/h
PGBP as balancing charge if the asset is subject to depreciation on SLM basis.
• The excess of sale price over the actual cost of the asset is not treated as
balancing charge. Such excess amount is subject to capital gains.
Section 41(3) - Scientific research asset sold without using for the Purposes of any other
Already business:
Discussed Where any asset which has been used for scientific research is sold without using
for the purposes of any other business, least of the following shall be taxable as
PGBP income:
 Sale price of asset; or
 Deduction allowed u/s 35

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Note: Capital gains shall arise if the sale price exceeds the cost of the asset. Capital
gains shall be long term if the asset was sold after a period of 3 years; otherwise
capital gains shall be short-term.
Section 41(4) - Recovery of bad debts:
Recovery of Where any debt has been allowed as bad debts u/s 36(1)(vii) and subsequently
Bad Debts the assessee recovers any amount in respect of such bad debt, the amount of
(Already recovery shall be taxable in the year of recovery.
Discussed) EXAMPLE: ABC Ltd has sold some goods for Rs 1 lakh to Mr X on credit. The debt
has become bad during PY 2017-18 for which a deduction was allowed during PY
2017-18. However, during PY 2020-21, there is a recovery of Rs 5,000 from Mr
X's estate. In this case, Rs 5,000 shall be treated as business income of ABC Ltd
for PY 2020-21.

Section 43A
SPECIAL PROVISION FOR CHANGES IN THE RATE OF EXCHANGE OF FOREIGN CURRENCY
• Section 43A applies where an assessee has acquired any asset from outside India and has taken a
loan in foreign currency from outside India for purchasing this asset.
• Losses arising on principal repayments due to foreign exchange fluctuations shall be added to the
WDV of asset and depreciation shall be computed at the increased value in future years.
EXAMPLE: Mr X has purchased a machinery from USA costing US $1,00,000 and for purchasing this
machine, loan of an equivalent amount was taken from Bank of America, New York Branch. The
exchange rate prevailing on the date of purchase of machinery was $1 = Rs 65 and therefore, the
asset and loan were recorded at an amount of Rs 65,00,000 in the books of accounts. At the time of
principal repayment, the value of $1 increased to Rs 68 and therefore Rs 68,00,000 had to be paid
to acquire $1,00,000 and repay the principal amount. Loss of Rs 3,00,000 arising due to foreign
exchange fluctuations on account of principal repayments shall be added to the WDV of the asset as
per the provisions of Section 43A.
• Similarly, gains arising on principal repayments due to foreign exchange fluctuations shall be
reduced from the WDV of asset and depreciation shall be computed at the reduced value in future
years.

Section 43CA
SPECIAL PROVISION FOR PERSONS ENGAGED IN SALE/PURCHASE OF LAND OR BUILDING

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Section 43CA • This provision applies to persons who are engaged in the business of
- sale/purchase of land or building. In other words, this provision applies to a
Applicability property dealer for whom land or building forms part of stock-in-trade.
• If any land or building is sold by the property dealer and the sale consideration is
less than the SDV of such land or building, in such cases the SDV shall be deemed to
be the sale consideration. In other words, in case of property dealers, sale price to
be credited to P&L A/c shall be higher of the following:
□ Stamp Duty Value of land/building; or
□ Actual amount for which land/building has been transferred.
Special • This provision applies in case of agreement to sell land or building.
Provision for • If SDV of land/building as on the date of booking is less than the SDV of
Agreement to land/building as on the date of registration, the SDV as on the date of booking can
Sell Land/ be taken provided the booking amount has been received otherwise than in cash.
Building S.No Actual SDV on the Date of SDV on the Date of Sale Value
Consideration Booking/ Registration u/s 43CA
Agreement
1. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs Rs 250 lakhs
(Booking amount of (1/3/2020)
Rs 50 lakhs received
by cheque on
31/7/2020)
2. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs Rs 300 lakhs
(Booking amount of (1/3/2020)
Rs 50 lakhs received
in cash on
31/7/2020)
3. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs (Full Rs 300 lakhs
(31/7/2020) amount received on the
date of registration)

Section 44 AA - Latest Amendment Introduced Vide The Finance Act. 2019

(Increasing The Threshold Limit For Maintenance Of Books Of Accounts In Case Of
Individuals/HUF)
• The existing provisions of Section 44AA of the Income Tax Act, 1961 cast an obligation on every
person carrying on business or non-specified profession to maintain such books of accounts and
documents which would enable the Assessing Officer to compute his total income if any of the
following two conditions gets fulfilled:
 Annual turnover for any of the preceding three financial years exceeds Rs 10,00,000; or
 Annual PGBP income during any of the preceding three financial years exceeds Rs 1,20,000.

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• In order to reduce the compliance burden on individuals and HUF carrying on business or non-
specified profession, Section 44AA has amended the above stated law by increasing monetary limits
of annual turnover from Rs 10,00,000 to Rs 25,00,000 and annual PGBP income from Rs 1,20,000
to Rs 2,50,000.
• This amendment is applicable only in case of individuals and HUF. The other assessees would
continue to be governed by the old law. •
• In other words, with effect from PY 2020-21, individuals and HUF carrying on business or non-
specified profession shall be required to maintain such books of accounts and documents which
would enable the Assessing Officer to compute his total income if any of the following two
conditions gets fulfilled:
 Annual turnover for any of the preceding three financial years exceeds Rs 25,00,000; or
 Annual PGBP income during any of the preceding three financial years exceeds Rs 2,50,000.

COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS

Particulars Quantum of Income/Receipts/Turnover Type of Books of
Accounts to be
Maintained
Persons Gross receipts from such profession do not exceed Such books of accounts
Carrying on Rs 1,50,000 in ANY of the three years immediately as may enable the
Specified preceding the relevant previous year Assessing Officer to
Profession (In case of new profession, if gross receipts for first year compute the taxable
are not likely to exceed Rs 1,50,000) income of the assessee
Gross receipts from such profession are more than Books of accounts as
Rs 1,50,000 in ALL three years immediately prescribed under Rule
preceding the relevant previous year 6F
(In case of new profession, if gross receipts for first year
are likely to exceed Rs 1,50,000)
Persons Income from such business/profession does not No books to be
Carrying on exceed Rs 1.20,000 AND aross turnover from such maintained
Business/ business/ profession does not exceed Rs 10,00,000
Non- in ALL three years immediately preceding the
Specified relevant previous year
Profession (In case of new business/profession, if income for first
(General year is not likely to exceed Rs 1,20,000 and gross
Law - Not turnover for first year is not likely to exceed Rs
Applicable In 10,00,000)

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Case Of Income from such business/profession exceeds Rs Such books of accounts
Individuals 1,20,000 OR gross turnover from such as may enable the
& HUF) business/profession exceeds Rs 10,00,000 in ANY of Assessing Officer to
the three years immediately preceding the relevant compute the taxable
previous year income of the assessee
(In case of new business/profession, if income for first
year is likely to exceed Rs 1,20,000 or gross turnover for
first year is likely to exceed Rs 10,00,000)
• Specified Profession: Legal. medical, engineering. architectural, accountancv. technical
consultancy interior decoration, authorized representatives, film artists, company secretary,
information technology or any other profession as may be notified by CBDT.
• The books of accounts are to be kept and maintained for a period of at least 6 years from
the end of the relevant assessment year. Penalty of Rs 25,000 is payable u/s 271A in respect of
a failure to make the books of accounts or keep the books of accounts for the specified period of 6
years.
• Presumptive Taxation - Provisions for Maintenance of Books of Accounts:
 Section 44AD: If the provisions of Section 44AD( are applicable in case of an eligible assessee
∩nrl total income of the assessee exceeds the exemption limit (2.5L/3L/5L), such assessee
would be required to maintain proper books of accounts as specified u/s 44AA.
 Section 44ADA If income from specified profession is declared to be less than 50% of the grass
receipts and the total income of the assessee for the relevant previous year exceeds the
exemption limit (2.5L/3L/5L), the assessee would be required to maintain proper books of
accounts as specified u/s 44AA.
 Section 44AE: If the assessee has opted not to go for presumptive taxation because his income
as per the normal provisions is lower than his presumptive income, then such person is also
required to maintain books of accounts as specified u/s 44AA irrespective of the level of total
income.

Section 44AB; Rule 6G

COMPULSORY AUDIT OF BOOKS OF ACCOUNTS
In the following situations, Section 44AB requires an assessee to get his books of accounts
audited from a Chartered Accountant and submit the tax audit report along with his return of
income:
• Where a person carrying on business declares income as per actual basis (ie such person
doesn't opt for Section 44AD), audit of books of accounts is required if turnover from business
exceeds Rs 1 crore.
Amendment made by the Finance Act, 2020
Threshold limit of tax audit increased from Rs. 1 crore to Rs.5 crore in case of person carrying

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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on business subject to certain conditions being satisfied [Proviso to section 44AB(a)]
In order to reduce compliance burden on small and medium enterprises, the Finance Act, 2020 has
inserted the following proviso to increase the threshold limit for a person carrying on business
from Rs. 1 crore to Rs.5 crore in cases where,—
(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts
during the previous year, in cash, does not exceed 5% of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed 5% of the said payment.

• Where a person carrying on business has declared income on presumptive basis u/s 44AD
for earlier years and the provisions of Section 44AD(4) get triggered for current year,audit of
books of accounts is mandatory if his total income for the current year exceeds the exemption
limit (2.5L/3L/5L).
• Person Carrying on Profession:
Case 1: Gross receipts from Audit of books of accounts is mandatory irrespective of the
profession exceeds Rs 50 level of income/loss.
lakhs
Case 2: Gross receipts from a) If income is computed in accordance with the provisions of
profession don't exceed Rs 50 Section 44ADA (ie income declared is 50% or more of gross
lakhs receipts), audit of books of accounts is not required.
b) If income declared is less than the limit of 50% of gross
receipts as given u/s 44ADA and the total income of the person
for the relevant previous year exceeds the exemption limit
(2.5L/3L/5L), audit of books of accounts is mandatory.
• If requirements of Section 44AB are not fulfilled, penalty is payable u/s 271B. The amount of
1
penalty shall be 2 % of turnover/gross receipts subject to a maximum of Rs 1,50,000.

PRESUMPTIVE TAXATION - Section 44AE

PROFITS & GAINS OF BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES

Applicability This scheme is applicable to all assessees who are engaged in the business of
of Section 44 plying, hiring or leasing goods carriages. The eligible assessee should not own
AE more than 10 goods carriages in his name at any time during the year.
Income Goods Carriage Presumptive Income
Deemed as 1,000 per ton of gross vehicle weight during which such
Heavy goods
PGBP or unladen weight, as the case may be, vehicle is owned
vehicle
for every month or part of a month by the assessee for

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Other than heavy 7,500 for every month or part of a the previous year.
goods vehicle month
• Where a person declares his business income in accordance with the
provisions of this section, requirements relating to maintenance of books of
accounts and audit of books of accounts shall not apply.
• Option to show lower income is available but the assessee would be required to
maintain proper books of accounts as per Section 44 A A and get them audited
as per Section 44 A B. Further, the assessee can change the option on year-to-
year basis.
Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. However, a
of Other partnership firm can deduct salary and interest on capital payable to partners
Expenditure u/s 40(b).
• Moreover, current year depreciation as well as brought forward unabsorbed
depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive income.
(Section 72)
• Deductions u/s 80C-80U are ALLOWED to be deducted.

Illustration on Section 44AD(4)

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 AY
2020-21 to AY 2020-21:
Particulars AY 2020-21 AY 2020-21 AY 2020-21
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 10,00,000
% of gross receipts 8% 8% 5%
Offered income as per presumptive Yes Yes No
taxation scheme u/s 44AD
In the above case, Mr A, an eligible assessee, opts for presumptive taxation u/s 44AD for AY 2020-
21 and AY 2020-21 and offers income of Rs 14.40 lakhs and Rs 15.20 lakhs on gross receipts of Rs
1.80 crore and Rs 1.90 crore respectively. However, for AY 2020-21, he offers income of only Rs 10
lakhs on turnover of Rs 2 crore, which amounts to 5% of his gross receipts. He maintains books of
accounts u/s 44AA and gets the same audited u/s 44AB. Since he has not offered income in
accordance with the provisions of Section 44AD(1) for five consecutive assessment years after AY
2020-21, he will not be eligible to claim the benefit of Section 44AD for next five assessment years
succeeding AY 2020-21, ie from AY 2021-22 to AY 2025-26.

PRESUMPTIVE TAXATION - Section 44AD

SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINESS

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Applicability of • This scheme shall be applicable to a resident individual, resident HUF and resident
Section 44 AD partnership firm. The eligible assessee should carry on any business (excluding
business covered u/s 44AE) and the turnover of the business should not exceed Rs 2
crore.
• This scheme is not applicable to:
□ LLP firms, AOP/BOI and companies; or
□ A person whose turnover from business exceeds Rs 2 crore; or
□ A person carrying on specified profession (ie legal, medical, engineering,
accountancy, film artists, company secretary, etc): or
□ A person earning income in the nature of commission or brokerage; or
□ A person desirous of claiming deduction u/s 10AA, 80-IA, 80-IAB, 80-IB,
80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB and 80RRB.
Amount • GBP income shall be deemed to be 8% of gross turnover or any other higher sum as
Deemed as may be declared by the assessee (it would be deemed that all expenses allowable
PGBP Income u/s 30 to 38 have already been allowed).
* Where a person declares his business income in accordance with the provisions of this
section, requirements relating to maintenance of books of accounts and audit of books
of accounts shall not apply.
Latest Amendment Introduced Vide The Finance Act. 2019
 In order to promote digital transactions and to encourage small unorganized
business to accept digital payments, Section 44AD has been amended to reduce the
existing rate of deemed total income from 8% to 6% in respect of that portion of
the turnover which has been received by account payee cheque, account payee
draft or use of electronic clearing system through a bank account till the last date
of filing of return of income as specified u/s 139(1).
 However, the existing rate of deemed profit of 8% shall continue to apply in respect
of that portion of the turnover which has been received by any other mode.
Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. Further, a
of Other partnership firm is NOT ALLOWED to claim deduction of remuneration to partners as
Expenditure given u/s 40(b).
• Moreover, current year depreciation as well as brought forward unabsorbed
depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive income. (Section
72)
• Deductions u/s 80C-80U are ALLOWED to be deducted from presumptive income.
However, deductions u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA,
80QQB and 80RRB are not allowed.

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Section 44AD(4) - Introduced vide the Finance Act. 2016
• Where an eligible assessee declares profit for any year as per Section 44AD, he is required to declare
his profit for the next five years as per Section 44AD only.
• If an eligible assessee declares profit for any year as per Section 44AD and he doesn't declare profit for
any of the next five consecutive years in accordance with the provisions of Section 44AD, such assessee
cannot claim the benefit of Section 44AD for the next 5 years.
EXAMPLE: An eligible assessee claims the benefit of Section 44A0 for PY 2020-21and declares income
of Rs 8 lakhs on a turnover of Rs 1 crore. For PY 2020-21 & PY 2020-21, he again offers income in
accordance with the provisions of Section 44AD. However, for PY 2020-21, he offers income of Rs 6 lakhs
on a

Combined Analysis of Section 44AA, Section 44AB & Section 44ADA

Gross Receipts From Specified Gross Receipts From Specified Profession

Profession Exceeds Rs 50 Lakhs Does Not Exceed Rs 50 Lakhs

□ Presumptive taxation scheme

specified u/s 44ADA cannot be Income Declared ≥ Income Declared < 50%
opted 50% of Gross Receipts of Gross Receipts
□ Proper books of accounts to be
maintained as per Section 44AA
□ Maintenance of Case 1 - Total Income of
□ Audit of books of accounts
books accounts u/s Assessee
mandatory as per Section 44AB
44AA Exceeds Exemption Limit:
□ Audit of books of □ Maintenance of books of
accounts mandatory accounts u/s 44 A A
u/s 44AB □ Audit of books of accounts
mandatory u/s 44AB
Case 2 - Total Income of
Assessee
Does Not Exceed Exemption
Limit:
□ Maintenance of books of
accounts u/s 44AA
□ Audit of books of accounts
mandatory u/s 44AB
Amendment made by the Finance Act, 2020
Threshold limit of tax audit increased from Rs. 1 crore to Rs.5 crore in case of person carrying

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on business subject to certain conditions being satisfied [Proviso to section 44AB(a)]
In order to reduce compliance burden on small and medium enterprises, the Finance Act, 2020 has
inserted the following proviso to increase the threshold limit for a person carrying on business
from Rs. 1 crore to Rs.5 crore in cases where,—
(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts
during the previous year, in cash, does not exceed 5% of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed 5% of the said payment.

Illustration on Section 44ADA:

A partnership firm consisting of three partners X, Y, and Z is engaged in the profession of

accountancy.
Gross receipts of the profession for the year ended 31 st March 2020 amounts to Rs 48 lakhs.
The firm had business loss of Rs 50,000 and unabsorbed depreciation of Rs 1,50,000 carried
forward from Assessment Year 2021-22. The firm opts for presumptive taxation u/s 44AbA for
Assessment Year 2021-22. Compute the total income of the firm for Assessment Year 2020-21.
Solution:
Computation of PGBP income of the firm:

Particulars Amount (Rs)

Presumptive income u/s 44ADA (50% of Rs 48 lakhs) 24,00,000
Less: Brought forward loss u/s 72 (50,000)
Total Income 23,50,000
Working Notes:
• A partnership firm falls within the definition of "eligible assessee" u/s 44ADA. In this case, since
the gross receipts of the profession of the firm does not exceed Rs 50 lakhs, the firm is eligible to
opt for presumptive taxation u/s 44ADA. Hence, 50% of the gross receipts would be deemed to be
the PGBP income of the firm.
• As per Section 44ADA, all deductions allowable u/s 30 to 38 shall be deemed to have been allowed.
Accordingly, no deduction shall be allowed for unabsorbed depreciation since the same is
deductible u/s 32(2).
• Further, business loss of AY 2020-21 can be set-off against current year professional income as
per Section 72.

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• turnover of Rs 1.5 crore (ie less than 8%). Now, the assessee will not be allowed to claim the
benefit of Section 44A D from PY 2022-23 to PY 2026-27.
• If the provisions of Section 44AD(4) as discussed above are applicable in case of an eligible
assessee and total income of the assessee exceeds the exemption limit (2.5L/3L/5L), such
assessee would be required to maintain proper books of accounts as specified u/s 44AA and
get them audited u/s 44AB.
Liability to • Where an assessee has opted for the scheme of presumptive taxation given u/s
Pay 44AD and the advance tax liability is Rs 10,000 or more, such assessee is required to
Advance pay the entire
Tax  advance tax in one instalment on or before the 15th March of the relevant
previous year. (Four instalments)
• Interest u/s 234C shall be calculated only for the last instalment, Rate: 1% per
month; Time period: 1 month; Amount: Advance tax liability (-) tax actually paid till
15th March}
• Interest u/s 234B & 234A shall be calculated in the normal manner.

PRESUMPTIVE TAXATION - Section 44ADA SPECIAL PROVISION FOR COMPUTING PROFITS

AND GAINS OF PROFESSION

Applicability Section 44ADA shall apply if all the following conditions are satisfied:
of Section • The assessee is resident in India and he is engaged in a specified profession
44ADA (ie legal, medical, engineering, architectural, accountancy, technical consultancy,
interior decoration, authorized representatives, film artists, company secretary,
information technology or any other profession as may be notified by CBDT); and
• The total gross receipts from such specified profession does not exceed Rs 50
lakhs
Amount • PGBP income shall be deemed to be 50% of gross receipts or any other higher
Deemed as sum as may be declared by the assessee. It would be deemed that all expenses
PGBP allowable u/s 30 to 38 have already been allowed. Where a person declares
Income his business income in accordance with the provisions of this section,
requirements relating to maintenance of books of accounts and audit of books
of accounts shall not apply.
• Option to 5how Lower Income: If income from specified profession is declared
to be less than 50% of the gross receipts and the total income of the assessee
for the relevant year exceeds the exemption limit (2.5L/3L/5L), the assessee
would be required to maintain proper books of accounts as per Section 44AA and
get them audited as per Section 44AB. Further, the assessee can change the
option on year-to-year basis.

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Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. Further, a
of Other partnership firm is NOT ALLOWED to claim deduction of remuneration to partners
Expenditure as given u/s 40(b).
• Moreover, current year depreciation as well as brought forward unabsorbed
depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive income.
(Section 72)
• Deductions u/s 80C-80U are ALLOWED to be deducted.
Liability to • Where an assessee has opted for the scheme of presumptive taxation given u/s
Pay Advance 44ADA and the advance tax liability is Rs 10,000 or more, such assessee is required
Tax to pay the entire advance tax in one instalment on or before the 15 th March of
the relevant previous year. (Four instalments)
• Interest u/s 234C shall be calculated only for the last instalment, Rate: 1% per
month; Time period: 1 month; Amount: Advance tax liability (-) tax actually paid till
15th March)
• Interest u/s 234B & 234A shall be calculated in the normal manner.

Particulars Section 44AD Section 44ADA Section 44AE

(1) Eligible Resident individual, HUF or Resident An assessee owning
Assessee Partnership assessee not
Firm (but not LLP) engaged in any more than 10
Engaged in eligible profession goods
Business and who has specified u/s Carriages at
not claimed 4AA(1),namely, Any time
deduction under legal, medical, During the P.Y..
section 10AA or engineering,
Chapter VIA under “C architectural
– Deductions in profession or

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respect of certain accountancy or
incomes” technical
Non-applicability of section consultancy or
44AD in respect of the interior decoration
following persons: or notified
- A person carrying on profession
profession specified u/s (authorized
44AA(1); representative, film
- A person earning income in artist, company
the nature of commission or secretary, profession
brokerage; of information
- A person carrying on any technology)
agency business.
(2) Eligible business/ Any business, other than Any profession Business of plying,
profession business referred to in specified under hiring or leasing
section 44AE, whose total section 44AA(1), goods carriages
turnover/ gross receipts in whose total gross
the P.Y. ≤ ` 200 lakhs receipts ≤ ` 50 lakhs in
the relevant P.Y.
(3) Presumptive 8% of total turnover / sales / 50% of total gross For each heavy
income gross receipts or a sum receipts of such goods vehicle
higher than the aforesaid profession or a sum ` 1,000 per ton of
sum claimed to have been higher than the gross vehicle
earned by the assessee 6% of aforesaid sum weight or unladen
total turnover / gross claimed to have been weight, as the
receipts in respect of the earned by the case may be, for
amount of total assessee. every month or
turnover/sales/gross part of a month
receipts received by A/c and for other than
payee cheque/ bank heavy goods vehicle,
draft/ECS through a bank `7,500 per month or
account or through such part of a
other prescribed month during which
electronic modes during such vehicle is
the P.Y. or before due date of owned by the
filing of return u/s 139(1) assessee or an

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION
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in respect of that P.Y. amount claimed to
have been actually
earned from such
vehicle, whichever
is higher.
(4) Non- allowability Deductions allowable under sections 30 to 38 shall be deemed to have been
of deductions given full effect to and no further deduction shall be allowed
while computing
presumptive Even in case of a firm, salary Even in case of a firm, In case of a
income and interest paid to partners salary and interest firm, salary and
is not deductible. paid to partners is notinterest paid to
deductible. partners is
deductible subject
to the conditions
and limits specified in
section 40(b)
(5) Written down WDV of any asset of an eligible business/profession shall be deemed to have
value of asset been calculated as if the eligible assessee had claimed and had been
actually allowed depreciation for each of the relevant assessment years

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(6) Requirement of After declaring profits on If the assessee claims his If the assessee claims his
maintenance presumptive basis u/s 44AD, say, profits to be profits to be lower than
of books of for A.Y.2020-21, non- lower than the profits the profits computed by
account u/s 44AA declaration of profits on computed by applying the applying the
and presumptive basis for any of the 5 presumptive rate, he has presumptive rate, he has
audit u/s 44AB successive A.Y.s thereafter (i.e., to maintain books of to maintain books of
from A.Y.2021-22 to A.Y.2025-26), account and other account u/s 44AA(2) and
say, for documents u/s 44AA(1) get his accounts audited
A.Y. 2022-23, would disentitle the and get his accounts u/s 44AB.
assessee from claiming profits on audited u/s 44AB, if his
presumptive basis for five total income > basic
successive AYs subsequent to the exemption limit for that
AY relevant to the PY of such non- year.
declaration (i.e., from A.Y.2023-24
to A.Y.2027-28). In such a case, the
assessee would have to maintain
books of account and other
documents u/s 44AA(2) and get
his accounts audited u/s 44AB, if
his total income exceeds the basic
exemption limit in those years.

Note - If a person is not covered under presumptive tax provisions mentioned above, audit of books of
account u/s 44AB is mandatory, if, in a case where he carries on business, his total sales, turnover or gross
receipts in business > ` 1 crore in that P.Y. and in a case where he carries on profession, hisgross receipts
in profession > ` 50 lakh in that P.Y.

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 INCOME UNDER THE HEAD CAPITAL GAIN
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5. INCOME UNDER THE HEAD CAPITAL GAINS

Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains.
Section 45(1)
CHARGING SECTION FOR CAPITAL GAINS
LANGUAGE OF SECTION 45(1): Any profits or gains arising from the transfer of a capital asset
effected in the previous year, shall be chargeable to income tax under the head capital gains and
shall be deemed to be the income of the previous year in which the transfer took place unless such
capital gain is exempt u/s 54, 54B, 54D, 54EC, 54EE, 54F, SAG, 54GA or 54GB.
The requisites of a charge to income-tax, of capital gains under Section 45(1) are:
(i) There must be a capital asset.
(ii) The capital asset must have been transferred.
(iii) The transfer must have been effected in the previous year.
(iv) There must be a gain arising on such transfer of a capital asset.
(v) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54EE, 54ED, 54F,
54G, or 54GA

Section 2(14) - DEFINITION OF ‘CAPITAL ASSET’

GENERAL MEANING- Capital asset means property of any kind held by an assessee, whether or not
connected with his business or profession (such property can be movable, immovable, tangible,
intangible, etc). Eg: Shares & securities, land & building, etc. Property also includes any rights in
Indian company, including rights of management or control or any other rights whatsoever.
EXCLUSIONS: Following items shall NOT be treated as capital assets:
1. STOCK-IN-TRADE:
Any stock-in-trade, consumable stores or raw materials held by an assessee for the purposes of his
business or profession.
2. PERSONAL EFFECTS:
Personal effects refer to movable property held for the personal use of the assessee or any member
of his family dependent on him.

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Examples• Personal motor car, household furniture, electronic appliances meant for personal use,
etc. However, the following assets shall not be treated as personal effects even though these assets
are movable and are held by the assessee for personal use:
• Jewellery and bullion (jewellery includes ornaments of gold, silver, platinum or any other
precious metal; precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel);
• archaeological collections (relating to past/ancient times);
• drawings & paintings;
• sculptures; or
• any work of art.
Note: If items likes motor car, electronic appliances, etc are held for business purposes, they are
treated as capital assets.
Note: Silver utensils like thalis, katoris, tumblers, etc held for personal use were held to be personal
effects. Thus, no capital gains would arise on sale of such silver utensils (Benarshilal v CIT).
Note: Sale of silver coins, gold coins, silver bars, gold utensils, etc used for the purposes of
Mahalaxmi Pooja and other festivals was held to be liable to capital gains as such asset did not
qualify as personal effects (SC's judgement in the case of Maharaja Rana Hemant Singh v CIT).
3. RURAL AGRICULTURAL LAND IN INDIA:
• Agricultural land outside India: Always a capital asset whether situated in rural area or urban
area.
• Agricultural land in India: Capital asset only if situated in urban area. If situated in rural area,
such agricultural land shall not qualify as a capita! asset.
Meaning of 'Urban Area'
The following two points define the scope of urban area':
(i) any area situated within the local limits of a municipality/cantonment board having a population
of 10,000 or more;
(ii) agricultural land situated in any area within such distance, measured aerially, in relation to
the range of population as shown hereunder –
Population of the area as per the latest census Shortest aerial distance from the local
published before the commencement of relevant limits of the municipality/cantonment
PY
> 10,000 and ≤ 1,00,000 2 kilometers

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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
> 1,00,000 and ≤ 10,00,000 6 kilometers
> 10,00,000 8 kilometers

4. Gold Deposit Bonds issued under the Gold Deposit Scheme. 1999 or Deposit Certificates
issued under the Gold Monetisation Scheme. 2015 notified by the Central Government.
NOTE: Any security held by foreign institutional investor which has invested in such security in
accordance with the regulations made under the Securities and Exchange Board of India Act, 1992
would be treated as capital asset only so that any income arising from transfer of such security by a
Foreign Portfolio Investor (FPI) would be in the nature of capital gain.
The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India [2012] 204
Taxman 408 held that influence/persuasion of a parent company over its subsidiary could not be
construed as a right in the legal sense.
To supersede this ruling with retrospective effect from 1st April 1962, an Explanation has been
inserted to clarify that “property” includes and shall be deemed to have always included any rights
in or in relation to an Indian company, including rights of management or control or any other rights
whatsoever.

Shortest aerial Population according to the

distance from the last preceding census of
Is the land situated
local limits of a which the relevant figures
SR.NO. in this area a capital
municipality or have been published
Asset
cantonment board before the first day of the
refeered to in item (a) previous year.

(i) A 1 Km 9000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Section 2(47)
DEFINITION OF ‘TRANSFER’
Transfer, in relation to capita! asset, includes:
□ the sale, exchange or relinquishment of the asset;
□ the extinguishment of any rights therein (like forfeiture of shares, repayment in case of liquidation
of companies, etc);
□ the compulsory acquisition thereof under any law for the time being in force;
□ conversion of a capital asset into stock-in-trade;
□ the maturity or redemption of zero-coupon bonds (Section 2(48) defines a ‘zero coupon bond' to
mean a bond in respect of which no benefit is received before maturity or redemption and are
generally redeemable after a period of minimum 10 years and maximum 20 years. Such bonds are
generally issued by infrastructure capital company or infrastructure capital fund or any scheduled
bank or public sector companies notified by the Central Government};
□ Any transaction allowing possession of any immovable property to be taken or retained in
part performance of a contract of the nature referred to u/s 53A of the Transfer of Property
Act, 1882 (Section 53A covers cases where possession of the property has been handed to a
proposed buyer and consideration has been paid/promised to be paid by the proposed buyer to the
proposed seller but the property has not yet been registered in the name of the proposed buyer.
Handing over the possession in such cases shall also be regarded as transfer); and
□ Any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative
society, company, AOP, etc or in any other manner whatsoever) which has the effect of transferring,
or enabling the enjoyment of any immovable property permanently.
Example: Mr X enters into an agreement to sell his house property on 01.01.2020 to Mr Y for Rs
20,00,000. Mr X hands over the possession of house property to Mr Y on 15.02.2020. Mr Y makes
the payment of Rs 20,00,000 on 30.04.2020.
The house property is registered in the name of Mr Y on 30.06.2020. When has the transfer taken
place?

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Section 48 MODE OF COMPUTATION OF CAPITAL GAINS

Computation Computation of Short-Term Capital Gains |

Of Short-Term Full Value of Consideration (FVC) XXXX
Capital Gains
Less Expenditure incurred wholly and exclusively in connection (XXXX)
with transfer (like advertisement expenses, brokerage, legal
expenses, selling commission, etc)
Net Value of Consideration XXXX
Less: Cost of Acquisition (COA) (XXXX)
Less Cost of Improvement (COI) (XXXX)

Gross Short Term Capital Gains XXXX

Less: Exemption u/s 54B/54D (54/54EC/54EE/54F) (XXXX)
Taxable Short Term Capital Gains (’STCG’) XXXX
Fifth Proviso to Section 48 - STT Not Allowed as Deduction:
Securities Transaction Tax (’STT) paid on sale of shares/units shall not be reduce
from the sale proceeds and STT paid on purchase of shares/units shall not be added
to the cost of acquisition of shares/units held as capital assets.
Computation Computation of Long-Term Capital Gains
of Full Value of Consideration (FVC) XXXX
Long-Term Less. Expenditure incurred wholly and exclusively in connection (XXXX)
Capital Gains with transfer (like advertisement expenses, brokerage, legal
expenses, selling commission, etc)
Net Value of Consideration XXXX
Less: Indexed Cost of Acquisition (Indexed COA) (XXXX)
Less: Indexed Cost of Improvement (Indexed COI) (XXXX)
Gross Long Term Capital Gains XXXX
Less: Exemption u/s 54/54B/54D/54EC/54EE/54F (XXXX)
Taxable Long Term Capital Gains (‘LTCG’) XXXX

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Fifth Proviso to Section 48 - STT Not Allowed As Deduction: XXXX
Securities Transaction Tax (‘STT) paid on sale of shares/units shall not be
reduced from the sale proceeds and STT paid on purchase of shares/units
shall not be added to the cost of acquisition of shares/units held as capital
assets.

SHORT TERM AND LONG TERM ASSET

PERIOD OF HOLDING

STCA, if held for ≤ 12 month  Security (other than unit) listed in a recognized stock exchange
LTCA, if held for > 12 months
 Unit of equity-oriented fund/ unit of UTI

 Zero Coupon bond

STCA, if held for ≤ 24 month  Unlisted shares
LTCA, if held for > 24 months
 Land or building or both
STCA, if held for ≤ 36 month  Unit of debt-oriented fund
LTCA, if held for > 36 months
 Unlisted securities other than shares

 Other capital assets

Proviso to Section 48 - INDEXATION

While computing long-term capital gains, ‘indexed cost of acquisition' shall be taken instead of ’cost
of acquisition' and ‘indexed cost of improvement' shall be taken instead of ‘cost of improvement'.
Cost Inflation Index For The Year In Which The Asset Is
Indexed Transferred
Cost of
Cost of = ×
Acquisition Cost Inflation Index For The Year In Which The Asset Was Held
Acquisition By The Assessee OR For The Year Beginning On 01.04.2001,
Whichever Is Later

Cost Inflation Index For The Year In Which The Asset Is

Indexed Cost
Cost of Transferred
of = ×
Improvement Cost Inflation Index For The Year In Which The
Improvement
Improvement To The Asset Took Place

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 INCOME UNDER THE HEAD CAPITAL GAIN
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IMPORTANT POINT: As a general rule, benefit of indexation is not allowed in case of LT CG
arising from transfer of bonds or debentures issued by any company or government.
However, there are two exceptions to this general rule. In case of LT CG arising from transfer
of sovereign gold bonds and capital indexed bonds issued by government, benefit of
indexation is available.
INDEXATION TABLE
Financial Year CII Factor Financial Year CII Factor Financial Year CII Factor
2001-02 100 2007-08 129 2013-14 220
2002-03 105 2008-09 137 2014-15 240
2003-04 109 2009-10 148 2015-16 254
2004-05 113 2010-11 167 2016-17 264
2005-06 117 2011-12 184 2017-18 272
2006-07 122 2012-13 200 2018-19 280
2019-20 289 2020-21 301

Section 55 - COST OF ACQUISITION (‘COA’)

General • Case (a): Capital Asset Has Been Purchased:

Provision Date of Before 01.04.2001 On or After 01.04.2001
Purchase
Cost of Higher of the following two: Cost incurred by the
Acquisition assessee on the
 Cost incurred by the assessee on
purchase of capital asset
the purchase of capital asset; or
 FMV as on 01.04.2001
• Case (b): Capital Asset Has Been Self-Generated:
As per the decision of the Supreme Court in the case of B.C.Srinivasa Setty, cost of
acquisition of any self-generated capital asset other than thqse given under
Category 2 below shall be INDETERMINATE. Therefore, no capital gains would
arise in such cases. Examples: Sale of spontaneously grown trees, goodwill of
profession, etc
Special • CATEGORY 1: Shares/Securities:

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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
Cases Option to take FMV as on 01.04.2001 is available in respect of these capital assets.

Capital Asset Cost of Acquisition Period of Holding

Starts from the date of
Original Shares/
Purchase price purchase/ allotment of
Securities
shares/securities
 If allotted before 01.04.2001: Starts from the date of
Bonus Shares/ FMV
allotment of bonus
Securities
 Otherwise – NIL shares/securities

Renouncement of
Right to Subscribe NIL Short-term (Always)
Shares/Securities
Right Shares/
Securities Period of holding to start
Price actually paid under the right
from the date of allotment of
- Purchased by the issue right shares/securities
person to whom
right is issued
Price paid to the person who
Period of holding to start
- Purchased by the renounced the right and the
from the date of allotment of
person to whom amount paid to the company
right shares/securities
right is renounced under the right issue
• CATEGORY 2: Specified Capital Assets:
Option to take FMV as on 01.04.2001 is not available in respect of these capital
assets even if they are acquired before 01.04.2001.
Cost of Acquisition
Capital Asset Acquired Asset Self-Generated Asset
I
Goodwill of Business (Profession) Purchase Price NIL
Trademark/Brand Name associated with Purchase Price NIL
Business
Tenancy Rights Purchase Price NIL
Stage Carriage Permit (Route Permits) Purchase Price NIL
Loom Hours Purchase Price NIL

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Right to Carry on any Business/Profession Purchase Price NIL
Right to Manufacture, Produce or Process any Purchase Price NIL
Article or Thing

Section 55 - COST OF IMPROVEMENT

General Cost of improvement refers to any capital expenditure incurred by the assessee for
improving the capital asset. Eg - construction of additional floors, etc.
Meaning
Quantum • CATEGORY 1: Specified Capital Assets:
The cost of improvement of the following capital assets shall be taken to be NIL:
□ Goodwill of business;
□ Right to manufacture, produce or process any article or thing; and
□ Right to carry on any business/profession.
• CATEGORY 2: Other Capita! Assets:
Cost of improvement shall be the actual capital expenditure incurred by the assessee on
the improvement of the capital asset. However, cost of improvement incurred before
01.04.2001 shall be ignored in all cases.

Q1 :Mr Nagendra Kumar converts his capital asset acquired for an amount of INR 125000 in 2006-
07, into stock in trade in the FY 2017-18. He thereafter sells this asset for INR 10,00,000 in 2020-
21.
Please advise on the taxability.

Q2 :Mr Srinivasan, purchases 2000 equity shares in ABC Ltd., for INR 50 per share (Brokerage 1%),
in Feb 1997. He gets 200 Bonus shares in Sep 2000. He again gets 2200 bonus shares in Sep 2007.
FMV of the Shares on 1st Apr’01 was INR 125. In Jan’21, he sells all the shares for INR 500 per share
(Brokerage 2%). Compute the Capital Gains Tax in the hands of Srinivasan in FY 2020-21.
Q3 :M & sons, HUF, had purchased a land for INR 150,000 in 2002-03. In the PY 2006-07, a partition
takes place and the Coparcener, Mr. B, gets this plot, valued at INR 200,000. In PY 2007-08, he incurs
expenses of INR 250,000 on the plot towards fencing of the plot of land. Mr. B then sells this plot at
INR 15,00,000 in PY 2020-21. You are required to compute the capital gains for AY 2021-22.

Q4 :Mr. X purchases a property for INR 50000 on 3rd May 1975. The following expenses were
incurred by him:

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 INCOME UNDER THE HEAD CAPITAL GAIN
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o Improvement of property in 1998-99 INR 250,000
o Construction of two floors in 2002-03 INR 800,000
o Reconstruction and refurbishment of property in 2012-13 INR 15,00,000
FMV of property on 1st Apr’01 is 10,00,000. He sells the house on 9th Sep’20 for INR 80,00,000 and
incurs INR 250,000 on transfer. Compute the Capital Gains taxable in his hands in AY 2021-22.
COMPUTATION OF CAPITAL GAINS - SPECIAL CASES
Section 45(1A)
TAXABILITY OF INSURANCE COMPENSATION IN RE5EPCT OF CAPITAL ASSETS
Applicability Section 45(1A) applies if both the conditions listed below are fulfilled:
of Section
• Capital asset has been destroyed, damaged, etc on account of the following
45(1A)
reasons:
 Flood, typhoon, hurricane, cyclone, earthquake, etc; or
 Riot or civil disturbance; or
 Accidental fire or explosion; or
 Action by an enemy or action taken in combating an enemy (whether with or
without declaration of war).
• Money or any other asset has been received from an insurance company as
compensation under an insurance policy.
Full Value of The value of money/Fair Market Value of any other asset received shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of Capital gains shall be computed in the year in which the asset has been
Taxability of destroyed, damaged, etc but they shall be taxable in the year in which money
Capital Gains or any other asset has been received from the insurance company.

Section 45(2)
CONVERSION OF CAPITAL ASSETS INTO STOCK-IN-TRADE
Applicability Section 45(2) applies where an assessee converts his capital asset into
of Sec 45(2) stock-in-trade to be used by him for his business purposes.

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Full Value of The Fair Market Value of the asset as on the date of conversion shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of • Capital gains shall be computed in the year in which the capital asset has
Taxability of been converted into stock-in-trade but they shall be taxable in the year in
Capital Gains which such stock-in-trade has been sold by the assessee.
• The income arising from sale of stock-in-trade shall be taxable u/h PGBP.
Business Income = Sale Price (-) FMV of Asset on the Date of Conversion

Section 45(3)
TRANSFER OF CAPITAL ASSET BY PARTNER/MEMBER TO FIRM/AOP/BOI
Applicability • Section 45(3) applies where a partner/member transfers any capital asset
of Sec 45(3) to a firm/AOP/BOI as his capital contribution or otherwise. (Such
partner/member can be existing or new).
• Capital gains shall be computed in the hands of the partner/member
transferring the capital asset.
Full Value of The amount recorded in the books of accounts of the firm/AOP/BOI shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly. (FMV)
Year of Capital gains shall be taxable in the year in which the capital asset is transferred
Taxability by the partner/member to the firm/AOP/BOI.

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Section 45(4) - TRANSFER OF CAPITAL ASSET BY FIRM/AOP/BOI
TO PARTNER/MEMBER BY WAY OF DISTRIBUTION ON DISSOLUTION
Applicability • Section 45(4) applies in case of transfer of capital asset by a
of Sec 45(4) firm/AOP/BOI to its partner/member at the time of dissolution or otherwise.
• Capital gains shall be computed in the hands of the firm/AOP/BOI transferring
the capital asset to its partner/member.
Note: Provisions relatinq to capital gains do not apply where the firm/AOP/BOI
transfers any stock-in-trade to its partner/member on dissolution or otherwise.
Full Value of The Fair Market Value of the capital asset as on the date of transfer shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.
Year of Capital gains shall be taxable in the year in which the capital asset is transferred
Taxability by the firm/AOP/BOI to the partner/member.

Section 45(5)
TRANSFER OF CAPITAL ASSET BY WAY OF COMPULSORY ACQUSITION
Applicability Section 45(5) applies in the following two situations:
of Sec 45(5)
* Capital asset has been compulsorily acquired by the Government or any
other similar agency under any law; OR
* Transfer of capital asset has taken place and consideration for such transfer is
to be determined or approved by the Central Government or RBI.
Full Value of . ORIGINAL COMPENSATION:
Consideration
Capital gains shall be computed in the year in which the transfer has taken
(+)
place but the entire capital gains shall be taxable in the year in which the first
instalment of

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Year of the original compensation is received by the assessee. Cost of acquisition and cost
Taxability of of improvement shall be allowed to be deducted in the normal manner.
Capital Gains
• ENHANCED COMPENSATION:
□ If the assessee is not satisfied with the amount of compensation, he can file a
case for receiving enhanced compensation. Such enhanced compensation is
taxable in the year in which it is received by the assessee- The nature of capital
gains (LT/ST) would be same as in case of original compensation.
□ Where enhanced compensation has been received on the basis of an interim
order of the Court, the amount of enhanced compensation shall be taxable only
when the final order has been passed by the Court.
□ While computing capital gains on enhanced compensation, the assessee will be
allowed to deduct legal expenses incurred to earn the enhanced compensation.
Cost of acquisition and cost of improvement shall be taken as Nil.
□ If the original assessee has died at the time of receipt of enhanced
compensation, such enhanced compensation shall be taxable in the hands of the
legal heir.
□ Interest received on original/enhanced compensation is taxable u/h ‘income
from other sources’ in the year of receipt irrespective of the year to which it
pertains (Section 145A). 50% of such interest is allowed as deduction u/s 57.

Section 45(5A) - Latest Section Introduced Vide The Finance Act. 2017
• As per Section 45(1) of the Income Tax Act, 1961, capital gains are chargeable to tax in the year in
which transfer takes place except in certain cases. The definition of 'transfer' includes any
arrangement or transaction where any rights are handed over in execution of part performance of
contract, even though the iegal title has not been transferred. In such a scenario, execution of Joint
Development Agreement between the owner of immovable property and the developer triggers
capital gains tax liability in the hands of the owner in the year in which the possession of immovable
property is handed over to the developer for development of a project.
• With a view to minimise the genuine hardship which the owner of iand may face in paying capital
gains tax in the year of transfer, Section 45(5A) has been newly introduced so as to provide that
in case of an assessee being individual or HUF, who enters into a specified agreement for
development of a project, the capital gains shall be taxable in the previous year in which the
certificate of completion for the whole or part of the project is issued by the competent
authority.

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Section 45(5A)
TRANSFER OF CAPITAL ASSET UNDER JOINT DEVELOPMENT AGREEMENT
Applicability • Section 45(5A) applies where an individual/HUF owning land/building/both
of Sec 45(5A) enters into a registered agreement with a developer allowing the developer to
develop a real estate project on such land/building/both.
• As a consideration for receiving the right to develop the real estate project, the
developer shares a portion of land/building/both in the project with the
individual/HUF.
In some cases, the developer might also pay some additional consideration in
cash over and above the share in project.
Year of • Capital gains shall be computed in the hands of individual/HUF in the year in
Taxability of which the possession of immovable property is handed over to the developer for
Capital Gains development of a project.
• Capital gains so computed shall be considered as income of the previous year
in which the certificate of completion for the whole or part of the project is issued
by the competent authority.
Full Value of SDV of land/building/both in the project handed over by the developer to
Consideration individual/HUF as his share as on the date of issue of the aforementioned
completion certificate
(+)
Cash received by the individual/HUF from the developer, if any
Note: The full value of consideration adopted for calculating capital gains u/s
45(5 A) shall be deemed as the cost of acquisition of the share in the hands of
individual/HUF.
IMPORTANT NOTE: The beneficial provisions stated u/s 45(5A) shall not apply where the
assessee transfers his share in the project to any other person on or before the date of issue
of the aforementioned completion certificate. In such cases, capital gains would be taxable
in the year in which possession of immovable property is handed over to the developer for
development of project.

SPECIAL PROVISIONS RELATING TO COMPANIES

Section 46
Capital Gains on Distribution Of Assets By Companies In Liquidation

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Section 46 applies in case of distribution of assets by a company to its shareholders in the event of
its liquidation. The tax treatment of this transaction have been explained below:
• IN THE HANDS OF THE COMPANY: Distribution of assets by a company to its shareholders in the
event of its liquidation is not regarded as transfer and thus no capital gain arises in the hands of the
company.
• IN THE HANDS OF THE SHAREHOLDERS:
Capital gains shall be computed in the hands of the shareholders in the manner shown in the table
given below. For determining the period of holding, the period subsequent to the date on which the
company goes into liquidation shall not be considered.
Particulars Amount (Rs)
Sum of Money (+) FMV of Assets Received as on the Date of Distribution XXXX
Less: Deemed Dividend u/s 2(22)(c) (XXXX)
Full Value of Consideration for Calculation of Capital Gains XXXX
Less: Sellinq Expenses (if any) (XXXX)
Less: Cost of Acauisition/Indexed Cost of Acquisition (as the case may be) (XXXX)
Capital Gains (ST/LT) XXXX
Note: If an asset received by a shareholder from a company in the event of its liquidation is
subsequently sold by him, the FMV of the asset as on the date of distribution shall be taken as its
cost of acquisition.
Section 46A
Capital Gains In Case Of Buy-Back Of Shares, etc
• BUY-BACK OF LISTED SHARES:
Capital gains shall be computed in the hands of the shareholders as per the normal provisions.
• BUY-BACK OF UNLISTED SHARES (DETAILED DISCUSSION IN CA-FINAL):
 The company is liable to pay additional income tax on the amount of distributed income u/s
115QA @ 23.072% (20% plus 12% surcharge plus 3% cess). The manner of calculating
distributed income specified u/s 115QA shall be studied in detail at CA-Final Level.
 Since tax has been recovered from the company in the form of additional income tax, income
arising to the shareholders due to buy-back of unlisted shares shall be exempt in their hands u/s
10(34A).

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Taxability in the Buy-back of Listed Shares by Buy-back of Unlisted Shares by
hands of the Domestic Companies Domestic Companies
Company Not subject to tax in the hands of the Subject to additional income-tax @
company 23.072% in the hands of the company
Shareholders Income arising to shareholders taxable Income arising to shareholders exempt
as capital gains u/s 46A u/s 10(34A)

Section 47 (Most Important)

TRANSACTIONS NOT REGARDED AS ‘TRANSFER’
The following transactions shall not be regarded as "transfer and therefore no capital gains
would arise in the following circumstances: (the list is not exhaustive; only the portions relevant
for our syllabus have been included hereunder)
1. Any distribution of capital assets on the total or partial partition of a HUF;
2. Any transfer of capital asset under a gift or will or inheritance or under an irrevocable
trust;
3. Any transfer of a capital asset by a holding company to its subsidiary company or vice versa
provided the following two conditions are satisfied:
 100% shares of the subsidiary company are held by the holding company; and
 the transferee company is an Indian company.

Section 47A - Withdrawal of Exemption (Holding-Subsidiary Transaction):

• The above exemption will be withdrawn if before the expiry of 8 years from the date of transfer of
a capital asset:
a) the capital asset is converted into stock-in-trade by the transferee company; OR
b) the holding company ceases to hold 100% share capital of the subsidiary company.
• In the above two cases, the amount of capital gains exempt earlier shall be deemed to be the
income of the transferor company chargeable u/h ‘capital gains' of the year in which the original
transfer took place.
4. Any transfer of a capital asset by the amalgamating company to the amalgamated company in a
scheme of amalgamation provided the amalgamated company is an Indian company;
5. Any transfer of a capital asset by the demerged company to the resulting company in a scheme of
demerger provided the resulting company is an Indian company;

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6. Allotment of shares of the amalgamated company to a shareholder of the amalgamating company
in lieu of his shareholding in the amalgamating company provided the amalgamated company is an
Indian company;
7. Allotment of shares of the resulting company to a shareholder of the demerged company in lieu
of his shareholding in the demerged company provided the resulting company is an Indian
company;
8. Conversion of bonds, debentures, deposit certificates, etc of a company into shares or
debentures of that company;
9. Conversion of preference shares of a company into equity shares of that company;
10. Any transfer of any of the following capital assets to the Government, University, the National
Museum,
National Art Gallery, National Archives or any other public museum or institution notified by the
CG:
 work of art;
 archaeological, scientific or art collection;
 book;
 manuscript;
 drawing/painting/photograph; or
 print.

11. Any transfer of a capital asset in a transaction of reverse mortgage (meaning of reverse
mortgage has been given later in this chapter);
12. Transfer of sovereign gold bonds issued by RBI under Sovereign Gold Bonds Scheme,
2015 by an individual provided such transfer takes place by way of redemption (sale);
Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and Section 50
CASE 1: Gift Is Exempt In The Hands Of The Recipient (EX:-Inheritance, Related party) {ie No
Amount is Taxable u/s 56(2)(vii)/56(2)(x)}

Transferor Transferee

Any Person Any Person

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Any Sum of a) Shares or e)
Money Immovable Archaeological
By Cheque Property Securities; Collections
Or Cash
b) Jewellery f) Sculptures
c) Drawings g) Any Work
of Art
d) Paintings h) Bullion

Exempt Received Received for

Irrespectiv Consideration
Without
e of the Gift Less Than SDV of
Amount Consideration the Property

Received Received for

Consideration
Without
Less Than
Consideratio FMV of Capital
n Asset
SELLER: Capital
SELLER: Section
Gains Exempt
50C Shall Apply
u/s 47
SELLER: Capital SELLER: Capital
Gains Gains Taxable
BUYER:
Exempt u/s 47 (Section 50C)
BUYER: • Gift: Not Taxable
• Gift: Not Taxable • COA for New
Owner: Purchase BUYER:• Gift:
• COA for New Owner: BUYER: • Gift: Not Taxable •
Price
COA of Previous Not Taxable • COA for New
Owner • Period of COA for New Owner:Purchase
Holding of Owner: COA of Price
• Period of Holding of • Period
Previous Owner Previous Owner of Holding of
Previous Owner to be
NOT to be • Period of Previous Owner
Considered
Considered Holding of NOT' to be
• CIT v. Manjula Shah Previous Owner Considered• CIT
• CIT v. Manjula
Applicable to be v. Manjula Shah
Shah NOT
Applicable Considered • NOT Applicable

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CIT v. Manjula
Shah Applicable

POINTS TO BE NOTED:
 Redemption of debentures, zero coupon bond as well as preference shares is treated as
’transfer* and capital gains shall be computed in the hands of the holder of the security in
the normal manner.
 Section 47 applies where any capital asset is gifted by a person to any other person. The
gift has to be a pure gift (i.e no consideration should be involved at all).
 Where a capital asset has been sold for a value less than its FMV/SDV, capital gains shall
be computed and Section 47 shall not apply.
 In case of land or building or both, Section 5OC would apply where land or building or
both have been transferred for a value less than their respective SDV. Further, Section
50CA would apply where unlisted shares have been transferred for a value less than their
FMV.
 Where a person receives any ’property’ from any non-related person without
consideration (ie pure gift) or for inadequate consideration, provisions relating to
taxation of gifts as given u/s 56(2)(x)would apply. Section 56(2)(x) has been introduced
with effect from PY 2017-18. Till PY 2016-17, taxation of gifts was governed by Section
56(2)(vii) which was applicable only in case of individual/HUF.

SOVEREIGN GOLD BOND SCHEME, 2015

• Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold issued by
the RBI on behalf of Government of India. Investors have to pay the issue price in cash and the
quantity of gold for which the investor pays is protected, as he receives the ongoing market price at
the time of redemption/premature redemption.
• This scheme has been introduced by the Government of India to reduce the demand for physical
gold and thus reduce the foreign exchange outflow due to import of gold. The two-fold benefits of
this scheme are:
1. The gold bond would serve as a substitute for physical gold; and
2. The gold bond would provide security to the individual investor investing in gold for meeting
their social obligation.

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 INCOME UNDER THE HEAD CAPITAL GAIN
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• SGBs offer a superior alternative to holding gold in physical form. The risks and costs of storage
are eliminated. Investors are assured of the market value of gold at the time of maturity and
periodical interest. SGBs are free from issues like making charges and purity in the case of gold in
jewellery form. The bonds are held in the books of the RBI or in Demat form eliminating risk of loss
of scrip, etc.
• A fixed interest of 2.75% p.a. is payable on the amount of initial investment on semi-annual basis.
Such periodical interest is fully taxable in the hands of the investor.
• Redemption at the time of maturity:
If an individual investor doesn't sell SGBs during their prescribed duration and waits for
their redemption, capital gains arising to the individual investor on redemption of SGBs are
exempt from capital gains tax. Section 47 provides that such redemption shall not be treated
as a ‘transfer’ for the purposes of levy of capital gains tax.
• Sale before maturity (premature redemption):
If SGBs are transferred by an assessee to any other person before their maturity, such sale would
be liable to capital gains tax. However, benefit of indexation would be available in respect of long-
term capital gains arising from transfer of such SGBs.
Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and Section 50C
CASE 2: Gift Is Taxable In The Hands Of The Recipient {ie Gift Provisions Given u/s
56(2)(vii)/56(2)(x) Apply}
Transferor Transferee

Any Person Any Person

Any a) Shares or e) Any Work of

Sum of Immovable Art.
Money Property Securities; f)
By Aggregat Aggregat
Archaeological
Cheque eeeEEEE e
Or Cash b) Jewellery Collections
c) Drawings g) Sculptures
d) Paintings h) Bullion
Aggregat
Taxable Received Received for e
if Gift
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Amount Without Consideration
Exceeds Less Than Received for
Consideration Received
Rs Consideration
SDV of the Without Less Than
50,000
Property FMV of Capital
Consideration
Asset

SELLER: Capital
SELLER: Section
Gains Exempt
50C Shall Apply
u/s 47
SELLER:
SELLER: Capital Capital Gains
Gains Exempt u/s 47 Taxable
(Section 50C)
BUYER: BUYER:
• Gift: Taxable if • Gift: Taxable if BUYER:
SDV of Property Diff. b/w Purchase
Exceeds Rs Price &. SDV • Gift: Taxable if
50,000 Exceeds Rs 50,000 BUYER: Diff. b/w
Purchase Price
• COA for New • COA for New • Gift: Taxable if FMV
& FMV Exceeds
Owner: SDV of Owner: SDV of of Property Exceeds
Rs 50,000
Property Property Rs 50,000
• COA for New
• Period of • Period of • COA for New
Owner: FMV of
Holding of Holding of Owner: FMV of
Property
Previous Previous Owner Property
Owner NOT to NOT to be • Period of
• Period of Holding of
be Considered Considered Holding of
Previous Owner NOT
Previous Owner
• CIT v. Manjula • CIT v. Manjula to be Considered
NOT to be
Shah NOT Shah NOT • CIT v. Manjula Shah Considered
Applicable Applicable NOT Applicable
• CIT v. Manjula
Shah NOT
Applicable

Section 49 (Most Important)

ASCERTAINMENT OF COST OF ACQUISITION IN SPECIFIED CIRCUMSTANCES

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Nature of Transaction Cost of Acquisition to the Period of Holding (For
Assessee Determining Whether Capital
Asset is ST/LT)
Allotment of Shares in the Cost of acquisition of shares of the Period of holding would also
Amalgamated Company amalgamating company shall be include the time period for which
in a Scheme of treated as the cost of acquisition of the shares were held in the
Amalgamation shares of the amalgamated amalgamating company
company
Conversion of Cost of acquisition of debentures Period of holding would include
Debentures into Shares shall be treated as the cost of the time period for which
acquisition of shares debentures were held by the
assessee
Conversion of Preference Cost of acquisition of preference Period of holding would include
Shares into Equity Shares shares shall be treated as the cost of the time period for which
acquisition of equity shares. preference shares were held by
the assessee
Gift Transactions (Pure Gift /Inadequate Consideration) (+) Other Transactions Covered u/s 47
• Property Gifted is SDV/FMV of the property Period of holdinq would not
Taxable in the hands of considered for determining the include the period of holding of
Recipient u/s taxable amount of gift u/s the previous owner
56(2)(vii)/56(2)(x) 56(2)(vii)/56(2)(x) shall be taken
as cost of acquisition in the hands of
the new owner
• Other Transactions Cost of acquisition of previous Period of holding would also
Covered u/s 47 owner shall be taken as cost of include the period of holding of
acquisition in the hands of the new the previous owner
owner
Note 1: Previous owner means the last previous owner of the capital asset, who acquired it through
a mode of acquisition other than those covered u/s 47. In other words, previous owner means the
last previous owner who actually paid for the asset.
Note 2: Where the capital asset has been acquired by the previous owner before 01.04.2001, option
to take FMV of the capital asset as on 01.04.2001 shall be available.
Note 3: Cost of improvement incurred by the previous owner on or after 01.04.2001 shall also be
taken into consideration at the time of computation of capital gains in the hands of the new owner.
Note 4: Indexation in case of transactions covered u/s 47:

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• Cost of Improvement:
Proviso to Section 48 states that indexation in respect of cost of improvement shall apply from the
year in which improvement to the asset took place. Therefore, cost of improvement shall be indexed
from the year in which the expenditure was actually incurred by the previous owner or the new
owner. •
• Cost of Acquisition:
□ Proviso to Section 48 states that indexation in respect of cost of acquisition shall apply from the
year in which the asset was first held by the assessee.
□ However, in a recent decision given by the Bombay High Court in the case of CIT v Manjula Shah,
it was held that indexation in respect of cost of acquisition shall apply from the year in which the
capital asset was acquired by the previous owner as opposed to taking indexation from the year in
which the current owner acquires it.
□ ICSI’s / ICAI’s study material has solved the answer using both the approaches. For examination
purposes, we shall follow the judgement given by the Bombay High Court and justify our approach
with the help of a note to this effect.

Section 50 (Already Discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS
• Capital gains arising on sale of depreciable assets shall always be deemed to be short-term capital
gains irrespective of their period of holding (ie indexation benefit would not be available even if the
period of holding of such assets is more than 36 months).
• The manner of computation of capital gains in case of sale of depreciable assets has already been
discussed u/h PGBP. (To arrive at taxable capital gains, WDV of the block and expenses on transfer
shall be deducted from full value of consideration)

Section 50A (Already discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS OF ELECTRICITY COMPANIES
• Section 50A applies to assessees engaged in the generation or generation A distribution of
power if they have opted to charge depreciation as per SLM method. The excess of sale price
over the actual cost of the asset shall be treated as capital gains as per Section 50A.
Section 50B - CAPITAL GAINS IN CASE OF SLUMP SALE

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Meaning of Slump sale refers to sale of entire business of an undertaking as a whole for a
Slump Sale lumpsum consideration. In case of slump sale, the purchase consideration
should be arrived at without assigning individual values to individual assets
and individual liabilities.
Note: If the values of assets and liabilities have been determined individually only
for the purpose of payment of stamp duty, registration fees or other similar taxes,
such transaction would still be covered under the scope of ‘slump sale'.
Computation • Capital gains shall be taxable in the year in which the undertaking has been
of Capital sold.
Gains
The amount of capital gains shall be computed as follows:
Particulars Amount (Rs)
Price at which Undertaking has been sold XXXX
Less: Expenses in connection with sale of (XXXX)
Undertaking
Less: Net-Worth of the Undertaking (XXXX)
Capital Gains (ST/LT) XXXX
• Short-term capital gains would arise if the undertaking was owned by the
assessee for a period of 36 months or less.
• Long-term capital gains would arise if the undertaking was owned by the
assessee for a period exceeding 36 months. Benefit of indexation would not be
available in such cases.
How to Net Worth = Total Assets (-) Total Liabilities
Calculate Net-
• In case of depreciable assets, their WDV shall be taken into consideration
Worth of the
whereas for other non-depreciable assets, their book values shall be taken into
Undertaking
consideration.

• Revaluation of assets shall be completely ignored.

• Where the full cost of an asset has been allowed as deduction u/s 35AD, its value
shall be taken as NIL at the time of computation of net worth.
• All the liabilities payable shall be taken into consideration.
Q5 : Mohan is the proprietor of Photo Film Agencies which has 2 units, one for printing and the
other for binding. He transferred, by way of slump sale, one of the units (Unit 2) on 1st Apr’20,
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for a total consideration of INR 50,00,000. Expenses on sale were 0.5%. This unit was started in
the year 2012-13.

Appended below is the Balance Sheet:

Particulars Unit 1 Unit 2

Building 7,50,000 15,00,000
Machinery 5,00,000 10,00,000
Debtors 2,50,000 5,00,000
Other Assets 1,00,000 2,00,000
16,00,000 32,00,000
Capital 40,00,000
Revaluation Reserve 2,50,000
Bank Loan 3,50,000
Creditors 2,00,000
48,00,000
The Revaluation Reserve was created by upward revaluation of Buildings in Unit 2. Other Assets of
Unit 2 include, INR 100,000 of Patents acquired on 1st Jul’15, on which no depreciation has been
charged. 75% of Creditors and 25% of Bank Loan is for Unit 2. Compute the Capital Gains on the
slump sale for AY 2021-22.

Determination of Full Value of Consideration/SC

Value Of Consideration Received Value Of Consideration Received CAN

CANNOT Be Ascertained/Determined Be Ascertained/Determined

Any Of The Special Cases Mentioned On The

Section 50D shall apply and the FMV of Adjacent Page Is Applicable {Section 45(1A),
the asset transferred as on the date of 45(2), 45(3), 45(4), 45(5), 45(5A), 46(2)}
transfer shall be adopted as the full vaiue
of consideration
Determine the full value of consideration as per
the law stated under the applicable section

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Land/Building/Both Have Been Transferred
(Special Cases)

Section 50C shall apply and higher of sale price

and SDV shall be taken as full value of
consideration

Unlisted Shares Have Been Transferred

(Special Cases)

Section 50CA shall apply and higher of sale price

and FMV shall be taken as full value of
consideration

Asset Transferred Is Other Than Immovable

Property & Unlisted Shares (Special Cases)

No specific section applicable in this case. Actual

consideration received/receivable shall be
adopted as the full value of consideration

FULL VALUE OF CONSIDERATION ('FVC')

General Full Value of Consideration (FVC) refers to the whole amount
received/receivable by the transferor in connection with the transfer of a
Meaning
capital asset. In its general sense, FVC does not have any reference to the market
value of the capital asset.
Full Value of
Consideration
Relevant Mode of Transfer Deemed Full Value of
Section Consideration

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in Special 45(1A) Money/asset received from an Money/FMV of asset received as
Cases insurance company on damage, on the date of receipt
destruction, etc of a capital asset
45(2) Conversion of capital asset into FMV of the capital asset as on the
stock-in- trade date of conversion
45(3) Capital contribution in kind by a Amount recorded in the books of
partner or member into accounts of Firm/AOP/BOI to
Firm/AOP/BOI give effect to such capital
contribution
45(4) Distribution of capital asset to FMV of the capital asset as on the
partner or member on dissolution of date of dissolution
Firm/AOP/BOI
46(2) Money/asset received by the [{Money + FMV of asset as on the
shareholders of a company in the date of distribution} - {Amount
event of liquidation of the company deemed as dividend u/s
2(22)(c)}]

Section 50CA (Introduced Vide The Finance Act, 2017)

FULL VALUE OF CONSIDERATION IN CASE OF UNQUOTED SHARES
• Section 50CA has been made applicable with effect from PY 2017-18 in case of transfer of
unquoted shares (ie unlisted shares). Section 50CA is not applicable in case of transfer of listed
shares.
• Section 50CA provides that where the consideration received for transfer of unlisted shares
is less than their Fair Market Value ('FMV'), the FMV of such unlisted shares shall be deemed
as the full value of consideration for the purposes of computation of capital gains. The FMV of
unlisted shares shall be calculated in such manner as may be prescribed.
Illustration: Mr X transfers 1,000 shares in A Ltd on June 28, 2020 to Mr Y for a consideration of Rs
9,40,000 (FMV of shares as on the date of transfer is Rs 10 lakhs). These shares were purchased by
Mr X on July 19, 2019 for Rs 7 lakhs. Find out the tax consequences of the above transaction in the
following two cases:
• Case 1: Shares of A Ltd are not quoted on any stock exchange in India.
• Case 2: Shares of A Ltd are regularly quoted on B5E/NSE but Mr X has transferred the shares to
Mr Y privately and not through stock exchanges.

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COMPOSITE TRANSFER OF LAND & BUILDING:
• Land and building are treated as two separate assets under the Income Tax Act, however there
might be a case of composite transfer where both the assets are transferred simultaneously. In such
situations, it may be possible that the period of holding of land is more than the period of holding of
building.
• Transferor doesn't carry any business/profession:
Both land and building would be treated as long-term capital assets if their holding period is more
than 24 months. If their holding period doesn't exceed 24 months, they would be treated as short-
term capital assets.
• Transferor carries on business/profession:
 If depreciation is claimed on building, the building would always qualify as a short-term capital
asset irrespective of the period of its holding.
 Depreciation is not available in respect of land. Land would be treated as a long-term capital
asset if its holding period is more than 24 months. If its holding period doesn't exceed 24 months,
it would be treated as a short-term capital asset.

• How to attempt practical questions?

 If both land and building qualifies as long-term capita! assets, capital gains can be computed
combinedly where the cost of land can be taken as cost of acquisition and the cost of building
can be taken as cost of improvement. Same position can be adopted if both the assets qualify as
short-term capital assets.
 If land qualifies as long-term capital asset and building qualifies as short-term capital
asset, capital gains in respect of land and capital gains in respect of building should be
computed separately as per the decision of the Karnataka High Court in the case of CIT v.
C.R.Subramanian {(1999) 242 ITR 342}].

ADOPTION OF SDV IN CASE OF AGREEMENT TO SELL LAND/BUILDING/BOTH:

Section 43CA: Transfer of SDV on the date of agreement can be adopted if the advance
Land/Building/Both as amount has been received by any mode other than cash on
Stock-in-Trade or before the date of agreement.

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Section 50C: SDV on the date of agreement can be adopted if the advance
Transfer of amount has been received by account payee cheque or
Land/Building/Both as account payee draft or ECS through a bank account on or
Capital Asset before the date of agreement.

Illustration: SDV on the date of agreement = Rs 80 lakhs; and SDV on the date of registration = Rs
90 lakhs.
Cases Mode Of Receipt Of Advance SDV To Be Adopted u/s SDV To Be Adopted u/s
43CA 50C
Case 1 Booking amount has been
received in cash
Case 2 Booking amount has been
received by a bearer/crossed
cheque
Case 3 Booking amount has been
received by an account payee
cheque

Section 50D
FMV DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES
Where, on transfer of a capital asset, consideration received by an assessee is not ascertainable
or cannot be determined, then fair market value of the asset as on the date of transfer shall
be deemed as the full value of consideration received or accruing as a result of such transfer.

Section 50C
FULL VALUE OF CONSIDERATION IN CASE OF REAL ESTATE TRANSACTIONS
Section 50C makes a special provision for determining the full value of consideration in cases of
transfer of immovable property. it provides that where the consideration declared to be received or
accruing as a result of the transfer of land or building or both, is less than the value adopted or
assessed by any authority of a State Government (i.e. “stamp valuation authority”) for the purpose
of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be

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deemed to be the full value of the consideration, and capital gains shall be computed on the basis of
such consideration under Section 48 of the income-tax act. Provided that where the stamp duty
value does not exceed 110% of the consideration received or accruing as a result of the transfer, the
consideration so received or accruing as a result of the transfer shall, for the purposes of computing
profits and gains from transfer of such asset, be deemed to be the full value of the consideration.
(Amended by the Finance Act, 2020)
Rationalization of section 50C in case sale consideration is fixed under agreement executed prior to
the date of registration of immovable property.
– Section 50C of the act has been amended in line with section 43Ca to provide that where the date
of the agreement fixing the amount of consideration and the date of registration for the transfer
of the capital asset are not the same, the value adopted or assessed or assessable by the stamp
valuation authority on the date of agreement may be taken for the purposes of computing full
value of consideration for such transfer.
– it is further provided that this provision shall apply only in a case where the amount of
consideration referred to therein, or a part thereof, has been received by way of an account payee
cheque or account payee bank draft or by use of electronic clearing system through a bank
account or through such other prescribed electronic mode as may be prescribed on or before the
date of the agreement of transfer of such immovable property.
Reference to Valuation Officer: Where

– the assessee claims before an Assessing Officer that the value so adopted or assessed or
assessable by the authority for payment of stamp duty exceeds the fair market value of the
property as on the date of transfer and
– the value so adopted or assessed or assessable by such authority has not been disputed in any
appeal or revision or no reference has been made before any other authority, court or High Court,
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer as defined
in section 2(r) of the Wealth-tax act, 1957 [Section 50C(2)].
– Where the value ascertained by such Valuation Officer exceeds the value adopted or
assessed or assessable by the Stamp authority: the value adopted or assessed or assessable
shall be taken as the full value of the consideration received or accruing as a result of the transfer
[Section 50C(3)].

Reverse Mortgage [Transaction of Reverse Mortgage Exempt u/s 47]

• Regular Mortgage: The assessee mortgages his house with the bank for taking a loan, which will
be repaid by him along with applicable interest.

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• Reverse Mortgage:
□ Under reverse mortgage, an individual (generally a senior citizen) mortgages his house with a
bank under the relevant scheme and the bank agrees to pay him a specified value of the property in
lumpsum or installments. The borrowed money is not required to be repaid by the individual during
his lifetime.
□ On the death of the individual, the bank shall release the mortgaged property to his legal heirs if
they repay the principal amount along with the applicable interest. In case the legal heirs are unable
to repay the amount, the bank can sell the property and recover its dues.
□ Tax on capital gains arising on such sale shall be paid by the bank to the government and the
leftover balance (if any) shall be handed to the legal heirs of the individual.
□ As per Section 47, mortgage of property by the individual with the bank shall not be treated
as transfer and thus not liable to capital gains. Further, as per Section 10(43), any money
received by individual from the bank on mortgage of property in lumpsum or in installments
is exempt from tax.

MISCELLANEOUS TOPICS
Section 51 {Read Along with Section 56}: Forfeiture Of Advance Money
• General Meaning: A person initially enters into an agreement for sale of any capital asset and
receives the advance money from the proposed buyer but subsequently the proposed buyer refuses
to purchase the said capital asset and the proposed seller forfeits the advance money received.
• Treatment:
 Advance Money Received and Forfeited by the Assessee on or after 01.04.2014:

As per Section 56, the advance money so forfeited by the assessee is treated as the income of the
assessee u/h ’income from other sources'.
 Advance Money Received and Forfeited by the Assessee upto 31.03.2014:

Advance money so forfeited shall be reduced from the cost of acquisition of the capital asset while
computing gains when the capital asset is finally transferred or sold. In case of long-term capital
gains, indexation would be calculated on the cost so reduced.
Example: Mr A, a recently married individual, buys a house for Rs 10 lakhs on 01.07.2012. His wife
runs away with his neighbour shortly after moving into this house. He agrees to sell his house to Mr
B and an advance money of Rs 2 lakhs has been received by Mr A from Mr B on 01.10.2012. After
coming to know about the tragedy which happened with Mr A, Mr B cancels this deal and the
advance money is forfeited. Mr A ultimately sells the house to Mr C for Rs 13 lakhs on 01.06.2013.

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In this case, cost of acquisition shall be taken to be Rs 8 lakhs (Rs 10 lakhs - Rs 2 lakhs) and STCG of
Rs 5 lakhs would arise to Mr A.

CAPITAL GAINS EXEMPT UNDER SECTION 10

Section 10(37): Exemption From Capital Gains In Case Of Urban Agricultural Land
• Section 10(37) provides that capital gains arising on transfer of urban agricultural land are exempt
if all the following conditions are fulfilled:
□ Capital gains have been earned by an individual/HUF from the transfer of an agricultural land
situated in urban area.
□ The agricultural land is used for agricultural purposes by such individual or his parents or such
HUF for at least 2 years immediately preceding the date of transfer.
□ The transfer takes place by way of any of the two modes prescribed u/s 45(5):
1) Agricultural land has been compulsorily acquired by the Government or any other similar agency
under any law; OR
2) Consideration for transfer of agricultural land has been determined or approved by the Central
Government or RBI.
• Capitals gains computed with reference to original compensation as well as enhanced
compensation are exempt.
Further, both STCG as well as LTCG are exempt.
 Tax on long-term capital gains in case of specified securities [Section - 112A New section
Inserted by Finance Act of 2018](IMP)

Applicable on sale of equity share listed on a recognised Stock exchange or unit of equity-oriented
fund or unit of business trust, where such sale transaction is chargeable to securities transaction
tax (STT).
Prior to 01.04.2018 any LTCG on sale of such specified securities was exempt under Section 10(38).
This exemption has been withdrawn by the Finance Act, 2018 w.e.f. Assessment Year 2019-20 and
a new section 112A is introduced in the Income-tax Act.
As per this new section, where the total income of an assessee, includes any LTCG income [which
was earlier exempt under section 10(38) upto 31.03.2018] shall now be taxed at the rate of 10% on
such capital gains exceeding Rs. 1,00,000. The benefit of indexation shall not be allowed on such
LTCG. Deductions under Chapter VIA (section 80C to 80U) not to be allowed from such LTCG. Rebate
of tax under section 87A not to be allowed from the tax payable on such LTCG.

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The cost of acquisitions for computing LTCG in respect of a listed equity share acquired by the
assessee before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or

b) Lower of following :

(i) Fair market value of such shares as on January 31, 2018; or

(ii) Actual sales consideration accruing on its transfer

Note: The Fair market value of listed equity share shall mean its highest price quoted on the stock
exchange as on January 31, 2018.
Illustration: Mr. Raman is a salaried employee. In the month of January, 2014 he purchased 100 shares
of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold through BSE in
April, 2018 @ Rs. 2,600 per share. The highest price of X Ltd. share quoted on the stock exchange on
January 31, 2018 was Rs. 1,800 per share. What will be the nature of capital gain in this case?

TAXABILITY OF CAPITAL GAINS

Section 111 A: Tax on Short Term Capital Gains On Sale Of Equity Shares And Units Of Equity
Oriented Funds On Which STT Is Chargeable
• As per Section 111 A, short-term capital gains arising on sale of equity shares and units of equity-
oriented fund are taxable @ 15% if STT has been paid on sale of such shares/units. (STCG not
covered u/s 111A are taxable at normal rates applicable to the assessee).
• Deductions u/s 80C-80U are not allowed from STCG u/s 111 A. However, in case of resident
individuals and resident HUF, adjustment of deficiency is allowed from STCG u/s 111 A.
Section 112: Tax on Long Term Capital Gains
• Long-term capital gains other than those covered u/s 10(38) are taxable @ 20%.
• Deductions u/s 80C-80U are not allowed from LTCG. However, in case of resident individuals and
resident HUF, adjustment of deficiency is allowed from LTCG.
• In case of long-term capital gains arising from the transfer of following capital assets, the assessee
has the option to pay tax at the rate of 20% with indexation benefit or 10% without indexation
benefit:
 Listed shares (Listed-units)
 Listed securities (such as debentures, bonds, etc)
 Zero Coupon Bond

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(In case of bonds and debentures, benefit of indexation is not available. Accordingly, it is beneficial
for the assessee to pay tax @ 10% on LTCG arising on transfer of listed bonds and listed debentures.)

Adjustment of LTCG u/s 112, u/s 112A and STCG u/s111A against the basic exemption limit
Only a resident individual/HUF can adjust the basic exemption limit (i.e. Rs. 2,50,000 or 3,00,000 or
Rs. 5,00,000 limits) against LTCG U/s 112, U/s 112A and STCG U/s 111A. Thus a non-resident
individual/ HUF cannot adjust their basic exemption limit (Rs. 2,50,000) against such capital gains.
But such adjustment is possible only after making adjustment of other income first. In other words,
first other incomes are to be adjusted against the exemption limit and then the remaining limit (if
any) can be adjusted against LTCG U/s 112, U/s 112A and STCG U/s 111A.

CASE STUDY 1
Mr. Kapoor (age 67 years and resident) is a retired person earning total pension of Rs. 1,00,000. He
purchased gold in December, 2010 and sold the same in April, 2020. Taxable LTCG amounted to Rs.
2,80,000. What will be his tax liability for the A.Y. 2021-22?

Option 1 : assessee has not opted for Section 115BAC

Option 2 : assessee has opted for Section 115BAC

CASE STUDY 2

Mr. Gagan (age 69 years and non-resident) is a retired person earning total pension of Rs. 1,00,000
from indian employer. He purchased a piece of land in delhi in december, 2010 and sold the same
in april, 2020. Taxable LTCG amounted to Rs. 2,30,000. What will be his tax liability for the year
2020-21?
Option 1 : assessee has not opted for Section 115BAC

Option 2 : assessee has opted for Section 115BAC

CASE STUDY 3

Priyanka furnishes the following data for the PY ended 31st Mar’ 20.

– She had unlisted shares of XYZ Ltd., 100,000 in number, which she sold on 30th
Jun’20 for INR 750 per share.
– the above shares were acquired as under:
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– Gift from father: 50000 shares on 3rd May’ 99 (FMV on 1st apr’01 is INR 300)

– Bonus Shares on 21st Jun’ 09: 20000 shares

– Purchased 30000 shares on 1st Jan’11 @ INR 525 per share

Thereafter, she invested the proceeds to buy a residential house at INR 4,00,00,000 on 3rd May’21
and she was already owing a residential house prior to the purchase of this one.
you are required to compute the taxable capital gains.

Summary of Exemptions Available u/s 54, 54B, 54D, 54EC, 54EE & 54F
Particulars Section 54 Section 54B Section 54D Section Section Section 54F
54EC 54EE
Eligible • Individual • Individual Any Person Any Person Any Person • Individual
Assessee • HUF • HUF • HUF
Eligible CG Long-Term LT/ST LT/ST Long-Term Long-Term Long-Term
Any Long-
Any Long-
Term
Term Any Long-
Transfered. Residential Urban Capital
Capital Term Capital
HP Agricultural Land A Asset
Asset Asset except
Land Building
Residential
Eligible
HP
Asset 1 Residential LT Bonds
Notified
HP/ OR 2 R Agricultural Land A of NHAI,
Bonds of
H/P UPTO 2 Land Building RECL or
Specified Residential
Purchased CRORES (Urban/Rural) Any Other
Start-up HP
Notified
Fund
Bonds
Time Period • Purchase: 2 Years After 3 Years After 6 Months 6 Months • Purchase:
for Purchase the Date of the Date of After the After the
1 Year 1 Year Before;
of New Asset Transfer Receipt of Date of Date of
Before; or or
Compensation Transfer Transfer
2 Years After 2 Years After
the Date of the Date of
Transfer Transfer
• •
Construction: Construction:

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3 Years After 3 Years After
the Date of the Date of
Transfer Transfer
Amount of 100% 100% 100% 100% 100% Investment x
Exemption Investment Investment Investment Investment Investment LTCG Net
Allowed as Allowed as Allowed as Allowed as Allowed as Consideration
Exemption Exemption Exemption Exemption Exemption
(No (No Maximum (No Maximum (Max Rs 50 (Max Rs 50
Maximum Limit) Limit) Lakhs) Lakhs)
Limit)
Applicability Applicable Applicable Applicable Not Not Applicable
of CGAS Applicable Applicable
Withdrawal 3 Years Lock- 3 Years Lock- 3 Years Lock- 3 Years 3 Years 3 Years Lock-
of in Period; in Period; in Period; Lock-in Lock-in in Period;
Exemption Period; Period; Exemption
Exemption Exemption Exemption
Exemption Exemption Allowed
Allowed Allowed Allowed
Allowed Allowed Earlier
Earlier to be Earlier to be Earlier to be
Earlier Earlier Taxable as
Reduced Reduced from Reduced from
Taxable as Taxable as LTCG when
from COA COA when the COA when the
LTCG when LTCG when the New Asset
when the New Asset is New Asset is
the New the New is Tfd.
New Asset is Tfd. Tfd.
Asset is Asset is Tfd.
Tfd.
Tfd.

Section 54B: URBAN Section 54D: L&B transferred Section 54F: On the date of transfer,
AGRI.LAND trfd should should be used for the purposes the individual/HUF should not own
be used for agricultural of industrial undertaking for more than 1 Residential HP.
purposes for at least Exemption shall also be withdrawn in
at least 2 years immediately
last 2 years before the cases where any additional Residential
before the date of
transfer date by the HP is purchased (within a period of 1
individual himself (or transfer and the transfer of L&B year before and 2 years after) or
his parents) or HUF. should take place by way of constructed (within a period of 3
compulsory acquisition. years).

Section 54
EXEMPTION ON TRANSFER OF HOUSE PROPERTY USED FOR RESIDENCE

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Eligible Individual or HUF
Assessee
Nature of Asset • The asset transferred should be a residential house, the income from which is
Transferred & chargeable u/h 'income from house property'.
Period of its
• The residential house so transferred should be a long-term capital asset.
Holding
• Therefore, exemption u/s 54 is available in respect of long-term capital gains
arising from transfer of a residential house.
Qualifying The assessee should purchase/construct one residential /OR TWO Residential
Asset & Time houses in India at the option of the assessee, where capital gains do not
Limit for its exceed Rs.2 crores within the following time limits:
Acquisition
• In case of purchase: 1 year before or 2 years after the date of transfer
• In case of construction: 3 years after the date of transfer

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of long-term capital gains; or
• Amount invested in purchase/construction of one residential house
Capital Gains • The amount of capital gains, which is not utilized by the assessee for purchase/
Account construction of a new house till the due date of furnishing of ROI, should be
Scheme, 1988 deposited by him under Capital Gains Account Scheme till the last date of
furnishing ROI. If the amount is not so deposited, capital gains would become
taxable.
• The amount deposited in Capital Gains Account Scheme should be withdrawn
and utilized for the specified purpose within the prescribed time period.
Otherwise, the unutilized amount shall be considered to be LTCG of the previous
year in which such prescribed time period has expired.
Example: Mr A has transferred a Iong-term residential house on 01.10.2020. The
time limits for acquiring one residential house for availing exemption u/s 54
are:
 In case of purchase: 01.10.2019 to 30.09.2022
 In case of construction: 01.10.2020 to 30.09.2023

Let's suppose that 31.07.2021 is the due date of filing ROI for PY 2020-21 in Mr
A's case. If Mr A has not invested any amount till 31.07.2021 and he wants to
claim exemption u/s 54, he should deposit the amount in CGAS by 31.07.2021.

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If the amount deposited in CGAS is not utilized by 30.09.2023, the unutilized
amount shall be taxable as LTCG during PY 2023-24.
Withdrawal of • The new house so purchased/constructed should not be transferred for a
Exemption period of 3 years from the date of its purchase/construction.
• Otherwise, at the time of computation of capital gains on the transfer of the
new house, the cost of acquisition of the new house shall be reduced by the
amount of exemption allowed earlier u/s 54. Accordingly, the amount of capital
gains would increase.
Example: Mr A transferred a Long-term residential house on 01.10.2020. He
bouaht a new house for Rs 20 lakhs on 01.02.2021 and an exemption of Rs 15
lakhs was allowed to him u/s 54. The new house is transferred by Mr A on
01.05.2022 for Rs 45 lakhs. The COA of the new house shall be recomputed as
Rs 5 lakhs (20L - 15L). Accordingly, an amount of Rs 40 lakhs (45L - 5L) would
be taxable as STCG during PY 2022-23.

Note: Exemption can be claimed only in respect of one residential house property
purchased/constructed in India.
The Finance Act, 2019 has amended to extend the benefit of exemption in respect of
investment made by way of purchase or construction of two residential house properties in
India. This benefit can be exercised subject to the following conditions:
a. Benefit shall be available if the amount of long term capital gains does not exceed Rs. 2
crores.
b. This benefit is available once in a lifetime of the assesse for a particular assessment year
in relation to which this option is exercised.
If till the date of filing the return of income, the LTCG on such transfer of the house is not
utilised (in whole or in part) to purchase or construct another house, then the benefit of
exemption can be availed by depositing the unutilised amount into Capital Gains Deposit
Account Scheme (CGAS) with any scheduled bank.
If the amount deposited in the Capital Gains Account Scheme in respect of which the assessee
has claimed exemption under section 54 is not utilised within the specified period for
purchase/construction of the residential house, then the unutilised amount (for which
exemption is claimed) will be taxed as income by way of long- term capital gains of the year
in which the specified period of 2 years/3 years gets over.
If the new house is also transferred within 3 years from date of acquisition, the cost of new
house would be reduced by the capital gains exempted earlier under section 54.

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Illustration :
Mr. Khan purchased a residential house in the previous year 2005-06 for Rs. 2 crores. The house
property is sold for Rs. 10 crores in the previous year 2020-21 and the capital gain is invested in
two residential house properties worth Rs. 4 crores each. Can he claim the benefit of section 54 in
respect of both houses ?

Section 54 B
EXEMPTION ON TRANSFER OF URBAN AGRICULTURAL LAND
Eligible Individual or HUF
Assessee
Nature of• The asset transferred should be an urban agricultural land used by the
Asset assessee or his parents (in case of an individual) or HUF for agricultural
Transferred A purposes for a minimum period of 2 years immediately preceding its
Period of its transfer.
Holding • The urban agricultural land so transferred can be short-term/long-
term.
[Transfer of urban agricultural land is exempt in certain cases u/s 10(37)]
Qualifying The assessee should purchase another agricultural land (rural/urban)
Asset A Time within 2 years from the date of transfer of original agricultural land.
Limit for its Section 54H: Where an asset has been compulsorily acquired by the
Acquisition Government, the period of investment shall be computed with reference
to the date of receipt of compensation (date of compulsory acquisition).

Amount of Lower of the following two shall be available as exemption:

Exemption • Amount of capital gains; or
• Cost of new agricultural land
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal
manner.
Withdrawal of The new agricultural landshould not be transferred for a period of 3 years
Exemption from the date of its purchase. Otherwise, at the time of computation of
capital gains on thetransfer of new agricultural land, the cost of
acquisition ofsuch land shallbe reduced by the amount of exemption
allowed earlier u/s 54B.

Section 54D
EXEMPTION ON COMPULOSRY ACQUSITION OF LAND & BUILDING
Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee

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Nature of Asset • The asset should be land A building forming part of an industrial
Transferred A undertaking and the transfer should take place by way of compulsory
Period of its acquisition of such undertaking.
Holding
• Further, the land A building so transferred should be used for industrial
purposes for a minimum period of 2 years immediately preceding its
transfer.
• The land A building so transferred can be short-term/long-term.
Qualifying The assessee should invest the amount in new land A building to be used
Asset A Time in new industrial undertaking within 3 years from the date of receipt of
Limit for its compensation from the government.
Acquisition
Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of capital gains; or
• Cost of new land A building
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal
manner.
Withdrawal of The new land A building should not be transferred for a period of 3 years
Exemption from the date of its purchase. Otherwise, at the time of computation of
capital gains on the transfer of new land A building, the cost of acquisition
of land A building shall be reduced by the amount of exemption allowed
earlier u/s 54D.

Section 54 EC
EXEMPTION ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET
Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee
Nature of The asset transferred can be any type of long-term capital asset. In other words,
Asset LTCG from any capital asset are eligible for exemption u/s 54EC.
Transferred
Qualifying The assessee should invest the amount in long-term specified asset within a
Asset A Time period of 6 months from the date of transfer of original long-term capital asset.
Meanina of Iona-term specified asset: Bonds redeemable after 3 years issued by:

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Limit for its • National Highways Authority of India ('NHAI')
Acquisition
• Rural Electrification Corporation Limited (’RECL')
• Any other bond notified by the Central Government in this behalf.
Section 54H: Where an asset has been compulsorilv acquired by the Government,
the period of investment shall be computed with reference to the date of receipt
of compensation (date of compulsory acquisition).
Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of long-term capital gains; or
• Amount invested in long-term specified asset
However, maximum exemption available u/s 54EC per financial year is limited to
Rs 50 lakhs.
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.
Withdrawal of If the long-term specified asset is transferred or converted into money within 3
Exemption years from the date of its purchase, the amount of exemption allowed earlier u/s
54EC shall be deemed to be LTCG of the year in which such asset is transferred
or converted. (Converting long-term specified asset into money refers to a
situation where any loan or advance has been taken on the security of long-term
specified asset)

Section 54 EE (Introduced Vide The Finance Act, 2016)

EXEMPTION ON INVESTMENT IN NOTIFIED UNITS OF SPECIFIED FUND
Eligible All assessees (individual, HUF, firms, companies, etc)
Assessee
Nature of The asset transferred can be any type of long-term capital asset. In other words,
Asset LTCG from any capital asset are eligible for exemption u/s 54EE.
Transferred
Qualifying For promoting the start-up culture in India, the Government of India has launched
Asset A Time a ’Start-up India Action Plan' which envisages establishment of a fund to raise Rs
Limit for its 2,500 crores annually for four years to finance existing/upcoming start-ups. The
Acquisition assessee should invest the amount in notified units of such a fund which has been
set-up for financing start-ups. The investment should be made within a period of
6 months from the date of transfer of original long-term capital asset.

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Amount of Lower of the following two shall be available as exemption:
Exemption
• Amount of long-term capital gains; or
• Amount invested in notified units of specified fund
However, maximum exemption available u/s 54EE per financial year is limited to
Rs 50 lakhs.
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.
Withdrawal of If the notified units are transferred or converted into money within 3 years from
Exemption the date of their purchase, the amount of exemption allowed earlier u/s 54EE
shall be deemed to be LTCG of the year in which such asset is transferred or
converted.
(Converting notified units into money refers to a situation where any loan or
advance has been taken on the security of such units)

Section 54 F
EXEMPTION ON TRANSFER OF ANY CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE
Eligible Individual/HUF provided on the date of transfer of original asset, the
Assessee individual/HUF does not own more than one residential house.
Nature of Asset The asset transferred can be any type of long-term capital asset other than a
Transferred residential house.
Qualifying The assessee should purchase/construct one residential house in India within:
Asset A Time
• In case of purchase: 1 year before or 2 years after the date of transfer
Limit for its
Acquisition • In case of construction: 3 years after the date of transfer
Section 54H: Where an asset has been compulsorily acquired by the Government
the period of investment shall be computed with reference to the date of receipt
of compensation (date of-compulsory-acquisition).
Amount of Long-Term Investment in New Residential House
Exemption
Capital Gains × Net Consideration (Gross Consideration - Selling
Expenses)

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CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the normal manner.
In respect of unutilized amount, exemption proportionate to the unutilized
amount allowed earlier u/s 54F shall be considered to be LTCG of the year in
which such prescribed time period has expired.
Example: Mr A has transferred a Iong-term capital asset other than residential
house on 01.10.2020. The time limits for acquiring one residential house for
availing exemption u/s 54F are:
* In case of purchase: 01.10.2019 to 30.09.2022
* In case of construction: 01.10.2020 to 30.09.2023
Let's suppose that 31.07.2021 is the due date of filing ROI for PY 2018-19 in
Mr As case. If Mr A has not invested any amount till 31.07.2021 and he wants
to claim exemption u/s 54F, he should deposit the amount in CGAS by
31.07.2021.
If the amount deposited in CGAS is not utilized by 30.09.2023, the exemption
which is proportionate to the unutilized amount shall be taxable as LTCG
during PY 2023-24. Let us say amount deposited in CGAS was Rs 40L and
exemption allowed u/s 54F in respect of such deposit was Rs 24L and Rs 15L
was not utilized till the expiry of the prescribed period. Rs 9L (15L*24L/40L)
would be deemed as LTCG of PY 2023-24.
Withdrawal of • If the new residential house is transferred within 3 years from the date of
Exemption its purchase/construction, the amount of exemption allowed earlier u/s 54F
shall be deemed to be LTCG of the year in which the new residential house is
transferred.
• Exemption shall also be withdrawn where the assessee purchases/constructs
any additional residential house other than the new house
purchased/constructed within the following period. Exemption shall be
withdrawn in the year in which the new house is purchased/constructed:
 In case of purchase:

1 year before or 2 years after the date of transfer of original asset

 In case of construction:

3 years after the date of transfer of asset

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OTHER EXEMPTION NOT MUCH IMP
Exemption of capital gain on transfer of assets of shifting of industrial undertaking from
urban area to a Special Economic Zone [Section 54GA]
The exemption is available to all categories of assesses in respect of capital gain arising on the
transfer of fixed assets other than furniture and fittings of industrial undertaking effected in the
course of shifting of such industrial undertaking to any Special Economic Zone.
The conditions for claiming exemptions are as under:
(i) The transfer is effected in the course of or in consequence of shifting the undertaking from an
urban area to any Special Economic Zone. The special Economic Zone may be developed in any
urban area or any other area.

1. Any other area means an area not declared as an urban area.

2. ‘Urban Area’ means any such area within the limits of a municipal corporation of municipality, as
the Central Government may, having regard to the population, concentration of industries, need
for proper planning of the area and other relevant factors, by general or special order, declare
to be an urban area for the purposes of this sub-section.
3. “Special Economic Zone” means each Special Economic Zone notified under the proviso to Sub
section (4) of Section 3 and Sub-section (1) of Section 4 of the Special Economic Zone Act, 2005
(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.
[Section 2(za) of the Special Economic Act, 2005].
(ii) Asset transferred is machinery, plant, building, land or any right in building or land used for the
business of industrial undertaking in an urban area;
(iii) The capital gain arising on the asset transferred may be short-term or long-term capital gain.
Normally, it will be short-term capital gain because most of the assets of the industrial
undertaking will be depreciable assets;
(iv) The capital gain is utilized within 1year before or 3 years after the date of transfer for the
specified purpose.
Specified purpose includes the following:
(a) for purchase of new machinery or plant for the purpose of business of the Industrial
Undertaking in the Special Economic Zone to which the said undertaking is shifted;
(b) acquisition of building or land or construction of building for the purposes of the assessee’s
business in the Special Economic Zone;
(c) expenses on shifting of the old undertaking and its establishment to the Special Economic Zone;
and

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(d) incurring of expenditure on such other purposes as specified by the Central Government for
this purpose.

Capital Gain on Transfer of Residential House Property. If inserted in a new manufacturing

SME Company/Eligible Startup [Section 54GB]

Who can claim exemption An Individual or a Hindu undivided family.

Which specified asset is On transfer of a long term residential property (a house or a plot
eligible of land) if transfer takes place during April 1, 2012 and March
31, 2017. (in case of eligible start up, residential property can
be transferred up to March 31, 2021.

Which asset the taxpayer Equity shares of 25% of share capital or voting rights in an
“eligible company
should acquire to get
benefit of exemption
What is the time-limit for Equity shares in an “eligible company” should be acquired on or
before the due date of furnishing of return of income under
acquiring the new asst. section 139(1). The “eligible company” should utilize this
amount for the purchase of a “new asset” within one year from
the date of subscription in equity shares.
How much is exempt Investment in “new asset” by the eligible company net sale
consideration x capital gain. Exemption cannot exceed capital
gain.
It is possible to revokethe In the following cases, exemption will be taken back and the
amount of exemption (or proportionate exemption) given
exemption earlier under section 54 GB will become long-term capital gain
of the assessee (i.e. transferor of residential property). It shall
be taxable in the year in which the assessee or the eligible
company commits the following defaults-
1. If the equity shares in the eligible company are sold or
otherwise transferred by the assessee within 3 years from the
date of acquisition
2. If the “new asset” is sold or otherwise transferred by the eligible
company
within 3 years from the date of acquisition.

3. If the deposit account is not utilized fully or partly by the eligible

company for purchasing the new asset within 1 year from the
date of subscription in equity shares (by the assessee).

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 INCOME UNDER THE HEAD CAPITAL GAIN
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Extension of Time for Acquiring New Asset or Depositing or Investing Amount of Capital
Gain (Section 54H)
This section states 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 acquisition is not received by the
assessee on the date of such transfer, the period of acquiring the new asset by the assessee referred
to in Sections 54, 54B, 54D, 54EC and 54F or for depositing or investing the amount of capital gain
shall be extended. This extended period shall be reckoned from the date of receipt of such
compensation.

ANSWERS :

CASE STUDY 1

Solution : Computation of tax liability for the A.Yr. 2021-22 is as under :

Option 1 : Assessee has not opted for Section 115BAC
Gross Salary (pension income) rs. 1,00,000
less: Standard deduction u/s 16 (ia) rs. 50,000
income under the head Salary rs. 50,000
ltCG on sale gold rs. 2,80,000
total income rs. 3,30,000
Tax on LTCG U/s 112 on Rs. 30,000 @ 20%* Rs. 6,000
less : rebate as per section 87a rs. 6,000
tax after rebate Nil

* resident individual above 60 years but below 80 years of age has basic exemption limit of rs.
3,00,000. Which can be adjusted against LTCG of rs. 2,80,000 but after the adjustment of salary income of
rs. 50,000. Hence, the balance LTCG taxable will come to Rs. 30,000 @ 20%.
Option 2 : Assessee has opted for Section 115BAC
Computation of tax liability for the a/y is as under :

Gross Salary (pension income) rs. 1,00,000

less: Standard deduction u/s 16 (ia) N/a

income under the head Salary rs.1,00,000

ltCG on sale gold rs. 2,80,000
total income rs. 3,80,000
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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
Tax on LTCG U/s 112 on Rs. 1,30,000 @ 20%* Rs. 26,000
less : rebate as per section 87a rs. 12,500
tax after rebate rs. 13,500
Add: Health and Education Cess @4% on Rs. 13500 Rs. 540
tax liability rs. 13,940
* u/s 115BaC Basic exemption limit is 2,50,000 irrespective of age. unutilised exemption limit of
rs.2.50,000
– 1,00,000 i.e. rs. 1,50,000, can be adjusted against LTCG of rs. 2,80,000. Hence, the balance LTCG taxable
will come to Rs.1,30,000 @ 20%.

CASE STUDY 2
Solution : Option 1 : Assessee has not opted for Section 115BAC

Computation of tax liability for the a.yr. 2021-22 is as under :

Gross Salary (pension income) rs. 1,00,000
less: Standard deduction u/s 16 (ia) rs. 50,000
income under the head Salary rs. 50,000
ltCG on sale gold rs. 2,30,000
total income rs. 2,80,000
Tax on LTCG U/s 112 on Rs. 2,30,000 @ 20%* Rs. 46,000
less : rebate as per section 87a (Not available to non resident) Nil

tax after rebate rs.

46,000
Add : Health & education cess @ 4% Rs. 1,840
Net tax payable rs. 47,840
*Non-resident individual (of any age) has basic exemption limit of rs. 2,50,000. Which cannot be adjusted
against ltCG of rs. 2,30,000 but the same can be adjusted against salary income of rs. 50,000. Hence, the
whole amount of LTCG is taxable @ 20%.
Solution : Option 2 : Assessee has opted for Section 115BAC
Computation of tax liability for the a.yr. 2021-22 is as under :

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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
Gross Salary (pension income) rs. 1,00,000

less: Standard deduction u/s 16 (ia) N/a

income under the head Salary rs. 1,00,000

lTCG on sale gold rs. 2,30,000
total income rs. 3,30,000
Tax on LTCG U/s 112 on Rs. 2,30,000 @ 20%* Rs. 46,000
less : rebate as per section 87a (Not available to non-resident) Nil
tax after rebate rs. 46,000
Add : Health & education cess @ 4% Rs. 1840
Net tax payable rs. 47840
*Non-resident individual (of any age) has basic exemption limit of rs. 2,50,000. Which cannot be adjusted
against ltCG of rs. 2,30,000 but the same can be adjusted against salary income of rs. 1,00,000. Hence, the
whole amount of LTCG is taxable @ 20%.

CASE STUDY 3
Solution :

Particulars Number Rate per Amount Date

Share
Full Value of Consideration 1,00,000 750 7,50,00,000 30th Jun’20
less: indexed COa
Gift from father 50,000 300 4,51,50,000 3rd May’99
Bonus 20,000 0 - 21st Jun’09
Purchased 30,000 525 2,83,87,725 1st Jan’11
total indexed COa 7,35,37,725
ltCG 14,62,275
New residential House 4,00,00,000
ltCG exempt 7,79,880
taxable ltCG 6,82,395

Note:
a) the bonus shares were granted after 1st apr’01 and hence the cost of acquisition is Nil
b) For the shares gifted by her father prior to 1st apr’01, the FMV as on 1st apr’01 would be
considered as the Cost of acquisition

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 INCOME UNDER THE HEAD CAPITAL GAIN
SSGURU CA SURAJ SATIJA
c) indexed COA for the gifted shares therefore is 50000*300/100*301
d) indexed COA for the acquired shares therefore is 30000*525/167*301
e) In the case above the necessary conditions u/s 54F have been fulfilled and therefore she is entitled
to a proportionate exemption from LTCG (i.e. INR 4 Crores/INR 7.50 Crores * 14,62,275)

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 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
HOUSE PROPERTY
COMPUTATION OF INCOME FROM HOUSE PROPERTY

1. Gross annual value i.e. expected rent/actual rent received or Rs………..

receivable, whichever is higher

However, in case of vacancy, expected rent or actual rent received

or receivable, whichever is lower

2. Less:

(a) The amount of rent which could not be realized Rs………..

(b) Taxes actually paid and borne by owner to local authority Rs………..

Net annual value (NAY) Rs………..

3. Less: Deduction allowed u/s 24 Rs………..

(a) Standard deduction @ 30% of NAV Rs………..

(b) Interest on borrowed capital [Section 24(1)(vi)] Rs………..

Total Rs………..

4. Income Chargeable under the head Rs………..

"Income from House Property" (2-3)

Chargeability [Section 22]

The annual value of property consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner shall be subject to Income-tax under the head 'Income from house property'
after claiming deduction under section 24 provided such property, or any portion of such property
is not used by the assessee for the purposes of any business or profession, carried on by him, the
profits of which are chargeable to Income-tax.

Basis of Charge
The basis of calculating income from house property is the annual value. This is the inherent
capacity of the property to earn income. Income from house property is perhaps the only income
that is charged to tax on a notional basis. The charge is not because of the receipt of any income but
is on the inherent potential of house property to generate income. The annual value is the amount
for which the property might reasonably be expected to let from year to year. The method of
determination of annual value is discussed later in this chapter under paras 5.6 and 5.7.
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 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
Essential conditions for taxing income under this head
The following three conditions must be satisfied before the income of the property can be taxed
under the head "Income from House Property":
(i) The property must consist of buildings and lands appurtenant thereto,
(ii) The assessee must be the owner of such house property,
(iii) The property may be used for any purpose, but it should not be used by the owner for the
purpose of any business or profession carried on him, the profit of which are chargeable to tax. If
the property is used for own business or profession, it shall not be chargeable to tax.
(i) Property must consist of any buildings or lands appurtenant thereto: Although the Act has
used the word 'property' in section 22, but income of all types of properties are not taxable under
this head. The term 'property' has a very wide meaning but 'property' in sections 22 to 27 has not
been used in its wider sense or meaning. It is very much limited to a type defined by the language
of the section i.e. buildings or lands appurtenant thereto. In other words, there must be a house
property which must consist of buildings or land appurtenant thereto.
If any income is derived from vacant land then this income would not be taxed under the head
'house property' because there is no building. Such income shall, however, be taxed under the head
income from other sources or income from business depending upon the facts of the case.
(ii) Ownership of the property: The assessee must be the owner of such house property. Any
income derived from a property which is not owned by the assessee cannot be taxed under this
head e.g. X takes a house on rent of Rs.25,000 p.m. and sublets it to Y and receives a rent of Rs.30,000
p.m. for this house. The rent derived by X cannot be taxed under this head because X is not the owner
of the house. This income will be taxed either as business income or as income from other sources.
Ownership includes both free-hold and lease-hold rights and also includes deemed ownership.
Deemed ownership [Section 27]: As per section 27, the following persons though not the legal
owners of a property are deemed to be the owners for the purposes of sections 22 to 26:
• Transfer to a spouse [Section 27(i)]: If an individual transfers any house property to his or her
spouse otherwise than for adequate consideration, the transferor in that case is deemed to be the
owner of the property so transferred. This would, however, not cover cases where a property is
transferred to a spouse in connection with an agreement to live apart.
• Transfer to a minor child [Section 27(i)]: If an individual transfers any house property to his or
her minor child otherwise than for adequate consideration, the transferor in that case is deemed to
be the owner of the house property so transferred. This would, however, not cover cases where a
property is transferred to a minor married daughter.
Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a
house property out of such cash, the transferor shall not be treated as deemed owner of the house
property. Such transaction will however, attract clubbing provisions discussed under Chapter 9.
• Holder of an impartible estate [Section 27(ii)]: The holder of an impartible estate shall be
deemed to be the individual owner of all properties comprised in the estate. The impartible estate,
as the word itself suggests, is a property which is not legally divisible.
• Member of a Co-operative Society, etc. [Section 27(iii)]: A member of a co-operative society,
6.2
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
company or other association of persons to whom a building or part thereof is allotted or leased
under a House Building Scheme of a society/company/association, shall be deemed to be owner of
that building or part thereof allotted to him although the co-operative society/company/association
is the legal owner of that building.
• Person in possession of a property [Section 21(iiia)]: A person who is allowed to take or retain
the possession of any building or part thereof in part performance of a contract of the nature
referred to in section 53A of the Transfer of Property Act shall be deemed owner of that house
property. This would cover cases where the (a) possession of property has been handed over to the
buyer, (b) sale consideration has been paid or promised to be paid to the seller by the buyer, (c) sale
deed has not been executed in favour of the buyer, although certain other documents like power of
attorney/agreement to sell/will etc. have been executed. The buyer would be deemed to be the
owner of the property although it is not registered in his name.
• Person having right in a property for a period not less than 12 years [Section 27(iiib)]: A
person who acquires any right in or with respect to any building or part thereof, by virtue of any
transaction as is referred to in section 269UA(/) i.e. transfer by way of lease for not less than 12
years shall be deemed to be the owner of that building or part thereof. This will not cover the case
where any right by way of a lease is acquired from month to month basis or for a period not
exceeding one year.
(iii) Use of the House Property: For the purpose of charge under the head income from house
property, the crucial words are buildings or lands appurtenant thereto. The purpose for which the
building, etc. is being used is not material. Thus house property may be let by the assessee for
residential purposes or for any commercial purpose. The income derived from letting out of such
house property will always be taxable under this head. Even if it is the business of the assessee to
own and give houses on rent the annual value of the houses owned by him during the previous year
would be taxable as 'Income from house property'. The annual value of house property, though
belonging to a business, must be charged under this head and not under section 28, if the property
is not used by the assessee for the purposes of his business. It will remain so even if property is held
by the assessee as stock in trade of a business. House owning, however profitable, is neither trade
nor business for the purpose of the Act. However, the following are the exceptions to the above rule:
(A) The annual value of the house property/portion of the house property which is used for purpose
of the business or profession carried on by the assessee does not fall under this head, provided
profits of such business or profession are chargeable to income-tax.
If an assessee is running a hotel or paying guest accommodation in a building owned by him, income
from such building shall be taxable under the head business or profession. On the other hand, if such
hotel building itself has been let out, income from such hotel building shall be taxable under the
head house property.
(B) Where the property is let out to employees with the object of carrying on the business of the
assessee in an efficient manner, then the rental income shall be taxable as business income
(provided letting is not the main business but it is subservient/incidental to the main business)
because the letting out of the property is incidental to the main business of the assessee and in this
case deductions/allowances would have to be calculated as relating to profits/gains of business and
not as relating to house property.
Similarly, where the premises of the assessee are given to any Government agency for locating a
6.3
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
branch of a bank, police station, excise office, etc. for the purpose of running the business of the
assessee more efficiently, the rental income from such buildings would be taxable as business
income.
(C) Where the letting of the property is inseparable from letting of other assets like machinery,
furniture, etc. the entire income would be taxable as profit? or gains of business and profession or
income from other sources.

Cases of Composite Rent

In certain cases, the owner charges rent from the tenant not only on account of rent for the house
property but also on account of various facilities/services provided with the house. Such rent is
known as composite rent. The said composite rent can fall under 2 categories:
(a) composite rent on account of rent for the property and for various facilities/ services provided
alongwith the house like lift, gas, water, electricity, watch and ward, air conditioning etc. In this case
such composite rent should be split up and the portion of rent attributable to the letting of the
premises shall be assessable as "Income from House Property". The other portion of the composite
rent received for rendering facilities or services shall be assessable as "Income from Other Sources".
(b) composite rent on account of rent for the property and the hire charges of machinery, plant or
furniture belonging to the owner. In this case if the letting of the property is separable from the
letting of the other assets, then the portion of the rent attributable to the letting of the premises
shall be assessable as "Income from House Property" and the other portion of the composite rent
for letting other assets shall be assessable either as "Profits and Gains of Business or Profession" or
"Income from Other Sources". On the other hand, if the letting of the property is inseparable from
the letting of other assets like machinery, furniture, the entire income would be taxable as "Profits
and Gains of Business or Profession" or "Income from Other Sources".

When income from house property is not charged to tax

In the following cases income from property is not charged to tax:
(a) Farm house: Income from any building owned or occupied by an agriculturist or receiver of
rent/revenue of such land provided that the building is in the immediate vicinity of agricultural land
and is used as a dwelling house or as a store house or other out-building.
(b) Property held for charitable purposes: As per section 11, where the property is held for
charitable or religious purposes the income from such property is exempt from tax.
(c) House property used for own business/profession: It falls under the head 'Income from
business and profession' and although no income will be derived but deductions/allowances of such
property shall be allowed under that head.
(d) Self-occupied house: Annual value of two self-occupied house shall be taken as Nil
(e) House property of registered trade union/local authority: The income from property held by
a registered trade union/local authority is not taxable.
(f) Palace of ex-ruler: The annual value of any one palace in the occupation of an ex-ruler shall be

6.4
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
exempted from tax.

DETERMINATION OF ANNUAL VALUE

What is Annual Value?
As per section 23(1)(a) the annual value of any property shall be the sum for which the property
might reasonably be expected to be let from year to year. It may neither be the actual rent derived
nor the municipal valuation of the property. It is something like notional rent which could have been
derived, had the property been let. In determining the annual value there are four factors which are
normally taken into consideration. These are:
• Actual rent received or receivable: Actual rent received/receivable is an important factor in
determining the annual value of a property though this is not the only decisive factor. The actual
rent could be dependent upon various considerations. There could be circumstances where the
owner agrees to bear certain obligations of the tenant e.g. the water and electricity bills of the tenant
may be payable by the owner. In this case, the de facto rent (i.e. what should have been the actual
rent) will be calculated by reducing from the rent received/receivable the amount spent by the
owner on meeting the obligation of water and electricity bills of the tenant as we have to tax rent
from house property under this head and not the amount recovered for other services provided in
the nature of electricity and gas bills. On the other hand, if any obligation of water and electricity
bills of the owner is met by the tenant, the de facto rent will be computed by adding to the rent
received/receivable, the amount spent by the tenant in discharging the obligation of the landlord.
E.g. If the tenant who is in the business of selling gas cylinders, besides giving rent of Rs.5,000 p.m.
gives 5 gas cylinders every month free to the landlord and the value of each gas cylinder provided
free of cost is Rs.400, then de-facto rent shall be Rs.5,000 + Rs.2,000 (value of 5 gas cylinders) =
Rs.7,000 p.m.
It may, however, be observed that the municipal taxes of the house property are to be borne by the
occupier who in the case of let out property is the tenant. Therefore, if such municipal taxes are
borne by the tenant the rent received/receivable should not be increased to calculate de facto rent.
Further where repair expenses are borne by the tenant, the rent received/receivable should not be
increased to calculate de facto rent (i.e. what should have been the actual rent).
Any deposit received from the tenant for property is a capital receipt and thus, it cannot be treated
as income. Further while determining the actual rent, no notional interest on such deposit should
be considered.
• Municipal value: This is the value as determined by the municipal authorities for levying
municipal taxes on house property. Municipal authorities normally charge house tax/municipal
taxes on the basis of annual letting value of such house property, which is determined by it based
upon many considerations.
• Fair rent of the property: Fair rent is the rent which a similar property can fetch in the same or
similar locality, if it is let for a year.
• Standard rent: The standard rent is fixed under the Rent Control Act. If the standard rent has been
fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher
than the standard rent fixed under the Rent Control Act. Therefore, this is also an important factor

6.5
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
in determining the annual value.

Computation of annual value of a property [Section 23(1)]

The Income-tax Act has used the term 'Annual Value' only in this chapter. As per the Act the annual
value is the value after deduction of municipal taxes, if any, paid by the owner. But for sake of
convenience, the annual value may be determined in the following two steps:
Step I: Determine the gross annual value.
Step II: From the gross annual value computed in step I, deduct municipal tax actually paid by the
owner during the previous year.
The balance shall be the net annual value which, as per Income-tax Act is the annual value.
The annual value has to be determined for different categories of properties. These could be:
(A) House property which is let throughout the previous year.
(B) House property which is let and was vacant during the whole or any part of the previous year.
(C) House property which is part of the year let and part of the year self-occupied.
(D) House property which is self-occupied for residential purposes or could not actually be self
occupied owing to employment at any other place.
(A) House property which is let throughout the previous year
Step 1 : Determine the gross annual value'.
According to section 23(1), the annual value of any property shall be deemed to be—
(a) the sum for which the property might reasonably be expected to let from year to year (i.e.
expected rent); or
(b) where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable i.e. the actual rent.
It may be observed from the above that for calculating Gross Annual Value of the property which is
let, we have to first calculate expected rent as per clause (a) above and then compare the same
with the actual rent received or receivable as per clause (b). If the actual rent so received or
receivable as per clause (b) is more than the expected rent computed as per clause (a), the Gross
Annual Value shall be the actual rent so received or receivable. On the other hand if the actual rent
so received or receivable is less than the expected rent then the Gross Annual Value shall be
expected rent so computed.
In other words, the gross annual value of the house property let for the whole year shall be higher
of the following two:
(a) Expected rent;
(b) Actual rent received or receivable.
How to calculate expected rent: The higher of the following two is taken to be the expected rent:

6.6
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
(i) Municipal Valuation;
(ii) Fair Rental value.
However, the Supreme Court in Shiela Kaushish v CIT (1981) 131 ITR 435 (SC) and Amolak Ram
Khosla v CIT (1981) 131 ITR 589 (SC) held that where property let out is governed by the Rent
Control Acts, the standard rent fixed thereof (or even not fixed but provision thereof is applicable
to the area in which the property is situated) will have to be taken for determining the bona fide
annual value. From these judgments, it is clear that in case of the property governed by the Rent
Control Act, its annual value under section 23(1)(a) cannot exceed the standard rent (fixed or
determinable) under the Rent Control Act.
Although the expected rent as per section 23(1)(a) cannot exceed standard rent but it can be lower
than standard rent. [Balbir Singh (Dr.) v MC'D (1985) 152 ITR 388 (SC)].
To conclude: First step is to calculate the Gross Annual Value which will be higher of Municipal Value
or Fair Rental Value, but it cannot exceed the standard rent. However if the actual rent received or
receivable exceeds such amount then the actual rent so received/receivable shall be the Gross
Annual Value.

Step 2: Taxes levied by any local authority in respect of the property i.e. Municipal taxes (including
taxes levied for services) to be deducted: Municipal taxes, etc. levied by local authority are to be
deducted from the gross annual value calculated as above, if the following conditions are fulfilled:
(a) the municipal taxes have been borne by the owner, and
(b) these have been actually paid during the previous year.
Therefore deduction for municipal taxes, etc. levied by any local authority is allowed if they are
borne and actually paid by the owner. It must be noted that the taxes are allowed as deduction only
in the previous year in which these are paid. Municipal taxes, etc. due but not paid shall not be
allowed as deduction. However, municipal taxes, etc. paid during the previous year are allowable
even if they relate to past years or future years. The deduction of municipal taxes for future years
shall be allowed if the assessee follows cash system of accounting.
Even where the property is situated outside the country, taxes levied by local authority in that
country are deductible in deciding the annual value of the property. [CAT v R. Venugopala Reddiar
(1965) 58 ITR 439 (Mad)].
The value arrived at after deducting the municipal taxes, if any, may be referred to as the Net Annual
Value (Annual value as per Income-tax Act).
From such net annual value, deductions as permissible u/s 24(a) & (b) are allowed and the balance
is the income under the head 'Income from house property'.

(B) House property which is let and was vacant during the whole or part of the previous year:
According to section 23(1), the annual value of such house property shall be deemed to be:—
(a) the sum for which the property might reasonably be expected to let from year to year i.e. the
expected rent; or
6.7
 HOUSE PROPERTY
SSGURU CA SURAJ SATIJA
(b) where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable i.e. the actual rent; or
(c) where the property or any part of the property is let and was vacant during the whole or any
part of the previous year and owing to such vacancy the actual rent received or receivable by the
owner in respect thereof is less than the sum referred to in clause (a) the amount so received or
receivable i.e. the actual rent, if any:
From the perusal of the above, the following two situations may emerge
Situation 1: Where the property is let and was vacant for part of the year and the actual rent
received or receivable is more than the sum determined under clause (a) in spite of vacancy period.
(This situation falls under clause (b) above)
Situation 2: Where the property is let and was vacant for whole or part of the year and the actual
rent received or receivable owing to such vacancy is less than the sum determined under clause (a).
(This situation falls under clause (c) above)
The gross actual value in the above two cases shall be determined as under:
Situation 1: Where the property is let and was vacant for part of the year and the actual rent
received or receivable is more than the sum determined under clause (a) in spite of vacancy period.
In this case, clause (c) shall not be applicable as it will be applicable only when actual rent received
or receivable is less than the sum referred under clause (a). Hence the gross annual value in this
case shall be:
(1) the sum for which the property might reasonably be expected to let from year to year; or
(2) actual rent received or receivable,
whichever is higher.
Situation 2: Where the property is let and was vacant for whole or part of the year and the actual
rent received or receivable owing to such vacancy is less than the sum determined under clause (a).
The annual value of the property shall be determined under this situation if all the following 3
conditions are satisfied:
(1) The property is let;
(2) It was vacant during the whole or part of the previous year;
(3) Owing to such vacancy, the actual rent received or receivable is less than the value determined
under section 23(1)(a)
In this case, both clause (a) and clause (b) shall not be applicable but clause (c) shall be applicable
and the gross annual value shall be the actual rent received or receivable.

(C) House Property which is part of the year let and part of the year occupied for own
residence: Where a house property is, part of the year let and part of the year occupied for own
residence, its annual value shall be determined as per the provisions of section 23(1) relating to let
out property. In this case, the period of occupation of property for own residence shall be irrelevant
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and the annual value of such house property shall be determined as if it is let for part of the year.
Hence, the expected rent as per section 23(1)(a) shall be taken for full year but the actual rent
received or receivable shall be taken only for the period let and the gross annual value shall be
higher of these two.

Treatment of unrealised rent [Explanation to section 23(1)]

As per the Explanation, the actual rent received or receivable mentioned in section 23(1)(b) and (c)
shall not include the amount of rent which the owner cannot realise, subject to the rules made in
this behalf. In other words, unrealized rent, if any should be deducted from clause (b) or (c) of
section 23(1).
Rules for unrealised rent
The amount of rent which the owner cannot realise shall be equal to the amount of rent payable but
not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,—
(a) the tenancy is bona fide',
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Important Note
Explanation to section 23(1) mentioned above provides that unrealized rent should be deducted
from clause (b) or clause (c) of section 23(1) i.e. the actual rent received or receivable. It does not
provide that it should be deducted from clause (a) i.e. from expected rent. Thus problem will arise
when gross annual value is to be taken as expected rent instead of actual rent received or receivable
as the assessee in that case cannot take the deduction of unrealized rent.
However, in the income-tax return forms, unrealized rent has been shown as deduction from the
gross annual value (i.e. after taking expected rent or actual rent whichever is higher). It is therefore,
recommended that unrealized rent should be deducted after computation of gross annual value.
Similarly where a house is vacant for part of the year, section 23(1)(c) provides that gross annual
value is be taken as actual rent if the same is less than the expected rent. In this case also, unrealised
rent should be deducted after computation of gross annual value (i.e. the actual rent).

Deductions from income from house property [Section 24]

Income chargeable under the head "Income from house property" shall be computed after making
the following deductions, namely:—
(a) Standard deduction: From the net annual value computed, the assessee shall be allowed a
standard deduction of a sum equal to 30% of the net annual value.
(b) Interest on borrowed capital: Where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital
6.9
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is allowed as a deduction.
The amount of interest payable yearly should be calculated separately and claimed as a deduction
every year. It is immaterial whether the interest has been actually paid or not paid during the year.
[Circular No. 363, dated 24.6.1983].
Interest attributable to the period prior to completion of construction: It may so happen that money
is borrowed earlier and acquisition or completion of construction takes place in any subsequent
year. Meanwhile interest becomes payable. In such a case interest paid/payable for the period prior
to the previous year in which the property is acquired/constructed (as reduced by any part thereof
allowed as a deduction under any other provisions of the Income-tax Act) will be aggregated and
allowed in five successive financial years starting from the year in which the
acquisition/construction was completed.
Interest will be aggregated from the date of borrowing till the end of the previous year prior to the
previous year in which the house is completed and not till the date of completion of construction.
1. Where a fresh loan has been raised to repay the original loan if the second borrowing has really
been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the
interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi).
(Circular No. 28, dated 20.8.1969).
2. Interest on interest is not deductible. The assessee is entitled to deduct only the interest payable
by him on the capital borrowed, and not the additional interest which because of his failure to pay
the interest on the due date is considered as a part of the loan. [CIT v Saifuddin M. Moonum 1990
Tax LR 328 (Bom)].
3. Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as
deduction. [Circular No. 28, dated 20.8.1969].
4. The assessee shall be not allowed any other deduction on account of any expenses incurred in
relation to such house property.
5. The deduction in respect of a self occupied house has been discussed later in the Chapter.
Any interest paid on outstanding amount of interest, will not be allowed as deduction. [Shew Kissen
Shatter v CIT (1973) 89 ITR 61 (SC)].

Deductions provided under section 24 are exhaustive

The deductions under section 24 are exhaustive with the result that except the standard deduction
and interest on borrowed capital, no other deduction is allowed from net annual value.

Computation of Income of a property which is self-occupied for residential purposes or

which could not actually be self-occupied owing to employment [Section 23(2), (3) & (4)]
a) Where the annual value of such house shall be nil [Section 23(2)(a) & (b)]
Where the property consists of a house or part of a house which—
(a) is in the occupation of the owner for the purposes of his own residence; or

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SSGURU CA SURAJ SATIJA
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment,
business or profession carried on at any other place, he has to reside at that other place in a building
not belonging to him,
the annual value of such house or part of the house shall be taken to be nil.

b) Where the annual value of such house shall not be nil [Section 23(3)]
The annual value of self-occupied house shall not be nil:
(i) if such house or part of the house is actually let during the whole or any part of the previous year;
or (ii) any other benefit therefrom is derived by the owner from such house.
in the above cases, the annual value shall be determined as per provisions applicable for let out
properties i.e. under clause (a), (b) or (c) of section 23(1).

c) Where assessee has more than two houses for self-occupation [Section 23(4)]
if there are more than two residential houses, which are in the occupation of the owner for his
residential purposes then he may exercise an option to treat any two of the houses to be self-
occupied. The other house(s) will be deemed to be let out and the annual value of such house(s) will
be determined as per section 23(1)(a) i.e. the sum for which the property might reasonably be
expected to let from year to year.
In other words, the annual value of two self-occupied houses opted by the assessee can be taken as
nil.
The assessee in this case, should exercise his option in such a manner that his taxable income is the
minimum. Such option may be changed from year to year. However, if an assessee has a house
property which consists of two or more residential units and all such units are self-occupied, the
annual value of the entire house property shall be taken as nil as there is only one house property
though it has more than one residential units.
1. Annual value as per Income-tax is after deduction of municipal taxes, etc. paid, if any.
2. The benefit of exemption of two self-occupied houses is available only to an individual/HUF.
3. If the assessee lets out his house to his employer, which in turn allots the same to him, as rent free
accommodation, such house will not be treated as self occupied for the above purpose, because he
is not occupying his own house in the capacity of owner [D.R. Sunderraj v CIT (1980) 123 ITR 471
(AP)].

d) Deduction in respect of one or Two self-occupied houses where annual value is nil
Where annual value of one or two self-occupied house is nil, the assessee will not be entitled to the
standard deduction of 30%, as the annual value itself is nil. However, the assessee will be allowed
deduction on account of interest (including 1/5th of the accumulated interest of pre-construction
period) as under:—

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SSGURU CA SURAJ SATIJA
(a) Where the property is acquired or constructed with capital Actual interest payable subject to
borrowed on or after 1.4.1999 and such acquisition or maximum Rs.2,00,000 if certificate
construction is completed within 5 years of the end of the mentioned in point 2 in box given
financial year in which the capital was borrowed below is obtained

(b) In any other case, i.e., borrowed for repairs or renewal or Actual interest payable subject to
conditions mentioned in clause (a) are not satisfied maximum of Rs.30,000

Note.—Where the assessee has opted for two houses to be treated as self occupied, the deduction
of amount of interest given above shall in aggregate remain Rs.30,000 or Rs.2,00,000, as the case
may be, whether assessee has opted for one residential house or two residential houses to be self
occupied.
Thus the aggregate of the amount of deduction of interest in the case of first and second self
occupied house shall not exceed Rs.2,00,000.
Note.—W.e.f. A.Y. 2021-22, if an individual or HUF opts to be taxed under section 115BAC,
he/it shall not be entitled to deduction of the above interest of Rs.30,000 or Rs.2,00,000, as
the case may be.
1. It may be noted that the deduction of interest of Rs.30,000 is allowed for purpose of repair or
renewal or reconstruction of house property where as the deduction to the maximum of Rs.2,00,000
is allowed only for acquisition or construction of house property, subject to other conditions being
satisfied. Further, if conditions mentioned in para (a) are not satisfied i.e. capital is borrowed before
1.4.1999 or house is not completed within 5 years (3 years upto A.Y. 2016-17) of the end of the
financial year in which the capital is borrowed, deduction of interest shall be allowed to the
maximum of Rs.30,000.
2. For getting deduction of interest of maximum of Rs.2,00,000, it will be necessary to obtain a
certificate from the person to whom such interest is payable specifying the amount of interest
payable by the assessee for the purpose of acquisition/construction of the property or conversion
of the whole or any part of the capital borrowed which remains to be repaid as a new loan.
3. It may be observed that for let out/deemed to be let out property, the entire interest is allowed
as deduction
whereas in case of one or two self-occupied property the interest shall be allowed to the maximum
of Rs.30,000 or Rs.2,00,000 as the case may be.

Computation of income of house property which is partly let and partly self-occupied
In this case the annual value, deductions and the income of the part of the property which is let shall
be computed separately under the let out property and the income of the portion or the part of the
property which is self occupied shall be determined as per para 5.10 under the "self-occupied
property" category.
E.g. where one unit is let out and the other unit is self occupied, then the whole property cannot be
taken as a single unit. Municipal value or fair rent if not given separately, shall be apportioned
between the let out portion and self occupied portion on built up area basis.
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Similarly, where, in a building the ground floor is self-occupied and first floor is let out or vice-versa,
such a property shall not be treated as a single unit. Instead, income from first floor which is let shall
be computed separately as per let out provisions and the floor which is self-occupied shall be
computed separately as per self- occupied provisions. Municipal tax and interest shall also be
apportioned on the basis of built up/floor area space.

No notional income for house property held as stock-in-trade for a period upto two years
[Section 23(5)]
Where the property—
— consisting of any building or land appurtenant thereto is held as stock-in-trade:
and
— the property or any part of the property is not let during the whole or any part of the previous
year, the annual value of such property or part of the property shall be taken to be nil for the
period up to two years from the end of the financial year in which the certificate of completion
of construction of the property is obtained from the competent authority.
Example: R Ltd. a builder has constructed a house property, the construction of which was
completed on 15.12.2019. It has obtained a certificate of completion from the competent authority
on 6.5.2020. In this case, the annual value of the house property till 31.3.2023 shall be taken as nil
if it has not been let at all till that date. However, w.e.f. 1.4.2023, the notional annual value will have
to be computed if such house property which is forming part of stock-in-trade was not let during
the whole or any part of the previous year.

Interest when not deductible from "Income from House Property" [Section 25]
Interest on borrowed money which is payable outside India shall not be allowed as deduction u/s
24(b), unless the tax on the same has been paid or deducted at source and in respect of which there
is no person in India, who may be treated as agent of the recipient for such purpose.

Special provision for arrears of rent and unrealised rent received subsequently [Section
25A]
(1) Arrears of rent or unrealized rent received subsequently to be taxed under the head
"Income from House Property [Section 25A(1)]: The amount of—
— arrears of rent received from a tenant, or
— the unrealised rent realised subsequently from a tenant
by an assessee shall be deemed to be the income from house property in respect of the financial
year in which such rent is received or realised, and shall be included in the total income of the
assessee under the head “Income from house property", whether the assessee is the owner of the
property or not in that financial year.
(2) Standard deduction @ 30% to be allowed from such arrears of rent or unrealized rent

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SSGURU CA SURAJ SATIJA
[Section 25A(2)]: A sum equal to 30% of the arrears of rent or the unrealised rent referred to in
section 25A(1) shall be allowed as deduction.

Property owned by Co-owners [Section 26]

Sometimes the property consisting of buildings or the buildings and lands appurtenant thereto is
owned by two or more persons, who are known as co-owners. In such cases, if their respective
shares are definite and ascertainable, such persons shall not be assessed as an AOP in respect of
such property, but the share of each such person in the income from the property, as computed in
accordance with sections 22-25, shall be included in his total income as under:
(a) Where house property is self-occupied by each co-owner: Where the house property owned by
the co-owners is self occupied by each of the co-owner, the annual value of the property for each of
such co-owner shall be nil and each of the co-owner shall be entitled to the maximum deduction of
Rs.30,000/ 2,00,000 under section 24(b) on account of interest on borrowed money.
(b) Where the entire or part of the property is let: As regards, the property or part of the property
which is owned by co-owners is let out, the income from such property or part thereof shall be first
computed as if this property/part is owned by one owner and thereafter the income so computed
shall be apportioned amongst each co-owner as per their definite share.

Can Annual Value (Net Annual Value) be negative?

The Annual Value (NAV) can be negative only when the municipal taxes paid by the owner are more
than the gross annual value.

Can there be any loss under the head income from house property?
This brings us to the question as to whether there can be any loss under this head.
(i) In so far as income from one/two self-occupied property/(ies) is concerned, the annual value is
taken as nil. No deductions are allowed except for interest on borrowed funds up to a maximum of
Rs.30,000/2,00,000. Naturally, therefore, there may be a loss in respect of such property/(ies) up
to a maximum of Rs.30,000/2,00,000, as the case may be.
Note.—If the individual or HUF opts to be taxed under section 115BAC, he/it shall not be
allowed the deduction of interest of Rs.30,000/Rs.2,00,000, as the case may be.
(ii) In respect of any other type of house property, namely a house property which is fully let out or
part of the year let out, etc., there are no restrictions on deductions and therefore, there can be loss
under this head in respect of such properties due to municipal taxes as well as deductions. Similarly,
deductions under section 24 in case of property deemed to be let out, can be more than net annual
value.

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
OTHER SOURCES
Any income includible in the total income of an assessee, which cannot be included under any of the
first four heads of income, is chargeable under the head ‘IOS’.
Following conditions must be satisfied before an income can be taxed under the head “Other
Sources”:
a) There must be an income
b) Such income must not be exempted income
c) Such income must not be income falling under first four heads.
IOS Income may include: (list is not exhaustive)
a) Casual Income
b) Family Pension
c) Gift
d) Dividend Income
e) Premium amount (shares issued on premium)
f) Income from undisclosed sources
g) Income from Sub-Letting of a House Property
h) Director’s Sitting Fee
i) Remuneration received by MP/MLA
j) Interest on bank deposit / deposits with companies or on loan
k) Examiner-ship fee from non-employer
l) Rent from a vacant piece of plot of land
m) Agricultural Income from land situated outside India
n) Interest on Income Tax Refunds
o) Sum received from Keyman Insurance Policy
p) Compensation in connection with termination/modification of employment (if not taxable under
the head “Salaries”)
q) Advance money forfeited in the course of negotiation for transfer of a capital asset.
The following income is chargeable under the head “Income from other sources” only if such
income is not chargeable under the head “Profits and gains of business or profession”:

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
a) Income from letting out of plant, machinery or furniture.
b) Where letting out of buildings is inseparable from the letting out of plant, machinery or furniture,
the income from such letting.
c) Interest on Securities.
d) Any sum received by an employer-assessee from his employees as contributions to any provident
fund, superannuation fund or any other fund for the welfare of the employees.

CASUAL INCOME
1) Casual income includes income in the nature of winning from lotteries, crossword puzzles, horse
races (including camel race), card games and other games of any sort, gambling, betting etc.
2) Such winnings are chargeable to tax as per section 115BB. Section 115BB provides that above
casual income would be taxed at a flat rate of 30% [plus surcharge, if applicable, plus H&EC].
3) No expenditure or allowance can be allowed from such income.
4) Loss under other head or under the head of IOS is not allowed to be set off with casual income.
5) No Deduction under Chapter VI-A [Section 80C to 80U]
6) Adjustment of unexhausted basic exemption limit is also not permitted against such income.
7) Grossing up where earning given after TDS:
Income by way of winnings from lotteries / crossword puzzles / card game or other game of any
short exceeding ` 10,000/- and from Horse Races [Not a camel Races] exceeding ` 10,000 is subject
to TDS u/s 194B or 194BB. [TDS Rate is 30%, No change in rate for AY 2021-22]
Thus, it is included in total income of the assessee after being grossed up as follows:
Gross Winnings= [Net winnings × 100 / (100 - Rate of TDS)]
Notes:
a) Income derived from owning & maintaining racehorses is not a casual income and normal slab
rate will be applicable on such income.
b) Income of jockey: Income of jockey from such profession is not treated as winning from horse
races.
c) Winning from a motor car rally: Winning from a motor car rally is a return for skill and effort and
cannot be treated as casual income but taxable as normal income

SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
Any sum received under a Keyman insurance policy (including any bonus) is chargeable under the
head “IOS” if such income is not chargeable under the head “PGBP” or under the head “Salaries” i.e.
if such sum is received by any person [Family Members] other than the employer who took the
policy (PGBP Income) and the employee in whose name the policy was taken (Salary Income).
Note:
(i) If it is received by Employer: PGBP
(ii) If it is received by Employee: Salary
[Sum received under a Keyman insurance policy is not exempt under section 10(10D)]

INTEREST ON COMPENSATION OR ENHANCED COMPENSATION

As per section 145(1), income chargeable under the head “Profits and gains of business or
profession” or “Income from other sources”, shall be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee.
Section 145B(1) provides that notwithstanding anything contained in section 145(1), the interest
received by an assessee on compensation or on enhanced compensation shall be deemed to be his
income for the year in which it is received, irrespective of the method of accounting followed by the
assessee.
Section 56(2)(viii) provides that income by way of interest received on compensation or on
enhanced compensation referred to in section 145B(1) shall be assessed as “Income from other
sources” in the year in which it is received.
Interest received on compensation/enhanced compensation deemed to be income in the year
of receipt and taxable under the head “Income from Other Sources”.
Note: A fixed deduction of 50% of interest received will be allowed under section 57
irrespective of actual expenses.

Advance forfeited due to failure of negotiations for transfer of a capital asset to be taxable as
“Income from other sources” [Section 56(2)(ix)]
(For Detailed Discussion – Refer Capital Gain chapter)
1. Prior to A.Y. 2015-16, any advance retained or received in respect of a negotiation for transfer
which failed to materialise is reduced from the cost of acquisition of the asset or the written down
value or the fair market value of the asset, at the time of its transfer to compute the capital gains
arising therefrom as per section 51. In case the asset transferred is a long-term capital asset,
indexation benefit would be on the cost so reduced.

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
2. With effect from A.Y. 2015-16, section 56(2)(ix) provides for the taxability of any sum of money,
received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such
sum shall be chargeable to income-tax under the head ‘Income from other sources’, if such sum is
forfeited and the negotiations do not result in transfer of such capital asset.
3. In order to avoid double taxation of the advance received and retained, section 51 was amended
to provide that where any sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, has been included in the total income of the assessee for
any previous year, in accordance with section 56(2)(ix), such amount shall not be deducted from
the cost for which the asset was acquired or the written down value or the fair market value, as the
case may be, in computing the cost of acquisition.
4. It may be noted that advance received and forfeited upto 31.3.2014 has to be reduced from cost
of acquisition while computing capital gains, since such advance would not have been subject to tax
under section 56(2)(ix). Only the advance received and forfeited on or after 1.4.2014 would be
subject to tax under section 56(2)(ix). Hence, such advance would not be reduced from the cost of
acquisition for computing capital gains.

Compensation or any other payment received in connection with termination of his

employment [Section 56(2)(xi)]
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms and
conditions relating thereto shall be chargeable to tax under this head.

Taxability of Family Pension

1) Family pension means pension received by the family members of the deceased employee. It is
chargeable to tax under the head ‘Income from Other Sources’.
2) Deduction u/s 57: Least of the following is allowed as a deduction:
(a) 1/3rd of such income
(b) Statutory Limit: ` 15,000
Note: This Deduction would not be available in case of an employee, being an assessee, who
opts for the provisions of section 115BAC.
3) Exemptions:
(a) any income by way of—
i. pension received by an individual who has been in the service of the Central Government or State
Government and has been awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
such other gallantry award as the Central Government may, by notification in the Official Gazette,
specify in this behalf;
ii. family pension received by any member of the family of an individual referred to in subclause (i).
is exempt in full [Section 10(18].
(b) Family pension received by the widow or children or nominated heirs, as the case may be, of a
member of the armed forces (including para-military forces) of the Union, where the death of such
member has occurred in the course of operational duties, in such circumstances and subject to such
conditions, as may be prescribed; is exempt in full [Section 10(19)].

Lump sum payment made gratuitously or by way of compensation or otherwise to widow / legal heirs
of an employee, who dies while in service, will not be taxable under the Act. [CBDT Circular]
Ex-gratia payment received, by a person or his legal heir, from the Central / State Govt. / Local
Authority / Public Sector Undertaking, consequent upon injury to the person / death of a family
member, while on duty, will not be taxable under the Act. [CBDT Circular]

Taxability of Allowances to MLA/MP

A member of the Parliament or the State legislature is not treated as employee of the Government.
Payment received by them shall be taxable under the head “Income from other sources”.
However, Daily Allowances & Constituency Allowances to MLA & MP are exempt from tax u/s
10(17).
Note: This exemption would not be available in case of an Individual, being an assessee, who opts
for the provisions of section 115BAC.

METHOD OF ACCOUNTING [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in accordance
with the cash or mercantile system of accounting regularly employed by the assessee.

TAXABILITY OF INTEREST ON SECURITIES

Interest on securities may be taxed on Receipt basis or on Due basis, depending on the system of
accounting adopted by the assessee. If no system of accounting is followed, it will be taxable on
‘DUE’ basis.
LIABILITY FOR TAX: The person who owns the security on the due date of payment of interest is
liable for the entire interest even if he is not the owner for the entire period to which the
interest relates.

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INTEREST AFTER TDS: If interest is received after TDS, then such amount is required to be grossed
up to include in the total income. The interest is grossed up as follows:-
Gross Interest = [Net Interest × 100 / (100 – Rate of TDS)]
Note:
1. Rate of TDS (under Section 193) is 10%. However, rate is reduced to 7.5% between for the period
from 14th May, 2020 to 31st March, 2021 [Section 197B].
2. In case of Govt. Securities – Rate of TDS is NIL (refer TDS chapter also – Section 193)
a. No TDS upto ` 10,000 in case of interest from investment in 7.75 % GOI Saving (taxable
bonds) 2018
b. No TDS upto ` 10,000 in case of interest from investment in 8% Taxable Saving Bonds 2003
3. No TDS is deductible if debentures is issued by a widely held company if interest is paid /payable
to a Resident Individual/HUF by an account payee cheque & the aggregate amount of such interest
during the FY does not exceeds ` 5,000.

Section 10(15) – Interest on Securities (Exempted income)

1. Interest, premium on redemption or other payment on notified securities, bonds or certificates
Interest from Post Office Saving Bank Accounts is exempt to the extent of ` 3,500 in case of an
Individual Account and ` 7,000 in the case of Joint Account.
2. Interest in the hands of an individual and Hindu undivided family from Specified Relief Bonds
3. Interest on securities held by the Issue Department of the Central Bank of Ceylon (now known as
Central Bank of Sri Lanka);
4. Interest payable to any bank incorporated in a country outside India and authorised to perform
central banking functions in that country on any deposits made by it, with the approval of the RBI,
with any scheduled bank;
5. Interest payable on a loan advanced by the Nordic Investment Bank for an approved project;
6. Interest payable to the European Investment Bank for financial co-operation agreement;
7. Interest payable by public sector companies on certain specified bonds and debentures subject
to the conditions which the Central Government may specify by notification, including the condition
that the holder of such bonds or debentures registers his name and holding with that company;

Accordingly, the Central Government has specified tax free bonds issued by India Infrastructure
Company Ltd. and tax free, secured, redeemable, non-convertible Bonds of the Indian Railway Finance
Corporation Ltd. (IRFCL), National Highways Authority of India (NHAI), Rural Electrification
Corporation Ltd. (RECL), Housing and Urban Development Corporation Ltd. (HUDCL), Power Finance

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 INCOME FROM OTHER SOURCES
SSGURU CA SURAJ SATIJA
Corporation (PFC),Jawaharlal Nehru Port Trust, Dredging Corporation of India Limited, Ennore Port
Limited and The Indian Renewable Energy Development Agency Limited, the interest from which
would be exempt under this section.

8. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims OR deposits for the
benefit of the victims of the Bhopal gas leak disaster.
9. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015
10. Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.

“State Pooled Finance Entity” means such entity which is set up in accordance with the guidelines for
the Pooled Finance Development Scheme notified by the Central Government in the Ministry of Urban
Development.
Accordingly, the Central Government has specified the “Tax-free Pooled Finance Development Bonds”
under Pooled Finance Development Fund Scheme of Government of India, interest from which would
be exempt under section 10(15).

11. Interest received by a non-resident or a person who is not ordinarily resident, in India on a
deposit made on or after 1-4-2005 in an offshore banking unit referred in the Special Economic
Zones Act, 2005.
12. Interest payable to a non-resident by a unit located in an International Financial Services Centre
in respect of monies borrowed by it on or after 01-09-2019.

Interest from non-SLR Securities of Banks: Whether chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”? [Circular No. 18, dated
2.11.2015]
The issue addressed by this circular is whether in the case of banks, expenses relatable to
investment in non-SLR securities need to be disallowed under section 57(i), by considering interest
on non-SLR securities as “Income from other sources."
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to
income-tax under the head "Income from Other Sources", if the income is not chargeable to
income-tax under the head "Profits and Gains of Business and Profession".
The CBDT clarified that the investments made by a banking concern are part of the business of
banking. Therefore, the income arising from such investments is attributable to the business of
banking falling under the head "Profits and Gains of Business and Profession".

Interest income taxable under the head “Other Sources”:

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1. Interest from Tax Saving Bonds
 Investment in Notified Tax saving bonds is eligible for Deduction under Section 80C
2. Interest from Monthly Income Scheme of Post office
3. Interest from NSC
 Investment in NSC is eligible for deduction under Section 80C
 Accrued Interest from NSC is also eligible for deduction under Section 80C
4. Interest from Bank FD
 Investment in 5 Years notified FD is eligible for deduction under Section 80C
 Interest income is eligible for deduction under section 80TTB
5. Interest from Saving Bank Interest (any Bank)
 Such interest income is eligible for Deduction under Section 80TTA/80TTB

Section 10(4) – Interest Income from Non-Resident External Account

In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-
Resident (External) Account in any bank in India in accordance with the Foreign Exchange
Management Act, 1999, is exempt.
Provided such individual is a person resident outside India as per FEMA Act or is a person who has
been permitted by the Reserve Bank of India to maintain the aforesaid Account
Section 10(11) – Interest from PPF
Any payment (including interest income) from a Public Provident Fund is exempt. [Amount
deposited in PPF will qualify for deduction u/s 80C]
Section 10(11A) – Interest from SSA
Any payment including interest Income from account opened as per Sukanya Samriddhi Account
Rules 2014 is exempt from tax. [Amount deposited in SSA will qualify for deduction u/s 80C]

BOND WASHING TRANSACTIONS [Section 94]

A bond-washing transaction is a transaction where securities are sold some time before the due
date of interest and reacquired after the due date is over. This practice is adopted by persons in the
higher income group to avoid tax by transferring the securities to their relatives/friends in the
lower income group just before the due date of payment of interest.
In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of
securities. In order to discourage such practice, section 94(1) provides that where the owner of a

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security transfers the security just before the due date of interest and buys back the same
immediately after the due date and interest is received by the transferee, such interest income will
be deemed to be the income of the transferor and would be taxable in his hands.
NOTE: CONCEPT OF DIVIDEND STRIPPING & BONUS STRIPPING ARE COVERED IN CAPITAL
GAIN CHAPTER.

DEDUCTIONS ALLOWABLE [SECTION 57]

The income chargeable under the head “Income from other sources” shall be computed after making
the following deductions:
(i) In the case of dividend income or income in respect of units of a mutual fund (as specified in
Section 10(23D)] or income in respect of units of a specified company (as defined in Section 10(35):
Only Interest expenditure to earn such income is allowed as deduction subject to a maximum of
20% of such income included in the total income, without deduction under this section. [Added by
Finance Act 2020, w.e.f. AY 2021-22]
(ii) In the case of 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 such interest on behalf of the assessee.
(iii) Income consists of recovery from employees as contribution to any provident fund etc. in terms
of section 2(24)(x):
A deduction will be allowed in accordance with the provisions of section 36(1)(va) i.e., to the extent
the contribution is remitted before the due date under the respective Acts.
(iv) Where the income to be charged under this head is from letting on hire of machinery, plant and
furniture, with or without building:
The following items of deductions are allowable in the computation of such income:
a) the amount paid on account of any current repairs to the machinery, plant, furniture or building.
b) the amount of any premium paid in respect of insurance against risk of damage or destruction of
the machinery or plant, furniture or building.
c) the normal depreciation allowance in respect of the machinery, plant or furniture, due thereon.
(v) In the case of income in the nature of family pension:
A deduction of a sum equal to 33-1/3 per cent of such income or ` 15,000, whichever is less, is
allowable.
For the purposes of this deduction, “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.

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(vi) Any other expenditure not being in the nature of capital expenditure laid out or expended
wholly and exclusively for the purpose of making or earning such income.
(vii) In case of income by way of interest on compensation/ enhanced compensation received
chargeable to tax under section 56(2)(viii):
Deduction of 50% of such income. No deduction would be allowable under any other clause of
section 57 in respect of such income.

DEDUCTIONS NOT ALLOWABLE [SECTION 58]

Following expenditures shall not be deducted from any income under this head:
S. No. Deduction not allowable
1 Any personal expense of the assessee
2 Any interest chargeable to tax under the Act which is payable outside India on which
tax has not been paid or deducted at source.
3 Any payment chargeable to tax under the head “Salaries”, if it is payable outside India
unless tax has been paid thereon or deducted at source.
4 30% of expenditure in respect of sum which is payable to a resident on which tax is
deductible at source, if such tax has not been deducted OR after deduction has not
been paid on or before the due date of return specified in section 139(1) [Similar to
Section 40(a)(ia) - PGBP]
5 Any expenditure in respect of which a payment is made to a related person, to the
extent the same is considered excessive or unreasonable by the Assessing Officer,
having regard to the FMV. [Similar to Section 40A(2) - PGBP]
6 Any expenditure in respect of which a payment or aggregate payments exceeding `
10,000 is made to a person in a day otherwise than by account payee cheque or draft
or ECS through bank account or through such other prescribed electronic mode such
as credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay.
[Similar to Section 40A(3) - PGBP]
7 Any expenditure or allowance in connection with income by way of earnings from
lotteries, cross word puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature.
Above provision shall not apply in computing the income of an assessee, being the
owner of horses maintained by him for running in horse races, from the activity of
owning and maintaining such horses.
In respect of the activity of owning and maintaining race horses, expenses incurred
shall be allowed even in the absence of any stake money earned. Such loss shall be
allowed to be carried forward in accordance with the provisions of section 74A [Refer
set-off of loss chapter for Section 74A].

DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]

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The provisions of section 41(1) [Refer PGBP Chapter] are made applicable, so far as may be, to the
computation of income under this head, as they apply in computing the income of an assessee under
the head "Profits and gains of business or profession"
Accordingly, where –
a) An allowance or deduction has been allowed for any year in respect of loss, expenditure or trading
liability incurred by the assessee; and
b) Subsequently, any amount is obtained, as revocation of such loss, expenditure or remission of
liability, whether in cash or in any other manner, during any previous year,
- then such amount received or amount remitted shall be charged to tax.
Note: Above provision holds good even in case of succession or inheritance.

TAXABILITY OF GIFTS Section 56(2)(vii) - Taxability from 01.10.2009 to 31.03.2017: -

INDIVIDUAL/HUF
Section 56(2)(x) - Taxability from 01.04.2017: - ANY PERSON
Gift of any sum of money or property or transfer of property for inadequate consideration on or
after 1st April, 2017 to be subject to tax in the hands of Any Person as IOS subject to the following:
Nature of asset Particulars Taxable value
Money Without consideration The whole of aggregate amount if the same
exceeds ` 50,000.
Movable property Without consideration The aggregate Fair Market Value (FMV) of the
property, if it exceeds ` 50,000.
Movable property Inadequate The difference between the aggregate FMV and
consideration the consideration, if such difference exceeds `
50,000.
Immovable property Without consideration The Stamp Duty Value [SDV] of the property, if it
exceeds ` 50,000. [Each Property Separately]
Immovable property Inadequate The difference between the SDV and the
(amended by FA 20) consideration consideration, if such difference exceeds higher
of the following amount:
a) ` 50,000 or
b) 10% 5% of the consideration [Each Property
Separately]

Note:
1) Gift provisions will not be applicable if property is received as stock in trade, consumable stores
and raw materials.

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2) Sum of money may includes not only cash but also cheque, drafts, fixed deposits receipts or a NSC
(alternate view possible) since it represents a sum of money though not in cash.
3) For this purpose, “property” means the capital Asset of the assessee namely immovable property
being land or building or both, shares and securities, jewellery, archaeological collections, drawings,
paintings, sculptures or any work of art or bullion.
4) Stamp Duty Value means the value adopted by any authority for the purpose of payment of stamp
duty in respect of an immovable property.
5) If the Stamp Duty Value of immovable property is disputed by the assessee, the AO may refer the
valuation of such property to a Valuation Officer. In such a case, the provisions of section 50C shall,
as far as may be, apply for determining the value of such property. – CG Class
6) When date of agreement and date of registration are not same - Where the date of an agreement
fixing the value of consideration for the transfer of the asset and the date of registration of the
transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement
for transfer and not as on the date of registration for such transfer. However, this exception shall
apply only in those cases where amount of consideration (or a part thereof) for the transfer has
been paid by way of an account payee cheque or an account payee draft or by use of electronic
clearing system through a bank account or through such other electronic modes as may be
prescribed on or before the date of the agreement.
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT
(National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay as other
electronic modes of payment [CBDT Notification No. 8/2020 dated 29.01.2020].
Exceptions: However, any gift received from following ways would be outside the ambit of
Section 56(2)(x):
(1) from any relative; or
(2) on the occasion of the marriage of the individual; or
(3) under a will or by way of inheritance; or
(4) in contemplation of death of the payer or donor, as the case may be; or
(5) from any local authority; or
(6) from any fund or foundation or university or other educational institution or hospital or other
medical institution or any trust or institution referred to in section 10(23C); or
(7) by any fund or trust or institution or university or other educational institution or hospital or
other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via);
(8) from or by any trust or institution registered under section 12AA [Charitable or Religious Trust]

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(9) from an Individual by a Trust created or established solely for the benefit of relative of the
Individual.
(10) From HUF on Total/Partial Partition of HUF to members
(11) Asset received by Amalgamated Indian company from Amalgamating company
(12) From Holding Company to 100% Subsidiary Company or vice versa where transferee is an
Indian Company.
(13) Asset received by Indian Resulting Company from Demerged company in a demerger
(14) Any shares received by shareholders under Amalgamation/Demerger which is not regarded
as Transfer u/s 47.
(15) from such class of persons and subject to such conditions, as may be prescribed.

 For the purpose of this clause, the expression “RELATIVE” means

In Case of Individual:
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of the individual,
(iv) brother or sister of either of the parents of the individual,
(v) any lineal ascendant or descendant of the individual,
(vi) any lineal ascendant or descendant of the spouse of the individual, and
(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.
In Case of HUF: Any Member

Clubbing Provisions: As per Section 64(2), if a member of the HUF converts his separate property
into the property belonging to the family otherwise than for adequate consideration, the income
derived from the converted property shall be deemed to arise to the individual and not the
family.

TAXABILITY OF DIVIDEND INCOME – Amended from AY 2021-22

Basis of charge of dividend
Any income by way of dividends received from a company, whether domestic or foreign, is taxable
in the hands of shareholder at normal rates of tax.

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However, dividend distributed by a domestic company before 1.4.2020 and received by the
shareholders on or after 1.4.2020 and on which tax under section 115-O, if applicable, has been paid
would be exempt in the hands of the shareholders except dividend chargeable to tax u/s 115BBDA
(Provisions before amendment will be applicable in this situation).
[Upto F.Y. 2019-20 (AY 2020-21), domestic company was liable to pay additional income-tax u/s
115- O @15% [30%, in respect of deemed dividend u/s 2(22)(e)] on dividend distributed by it,
consequent to which dividend was exempt in the hands of shareholder u/s 10(34) except dividend
chargeable to tax u/s 115BBDA. Specified assessee, resident in India, was liable to pay tax @10%
on aggregate dividend received exceeding ` 10 lakhs u/s 115BBDA without any deduction of related
expenses – Position before amendment]
Section 10(34) – Clause 34 of Section 10
Upto AY 2020-21 From AY 2021-22 (as amended by Finance
Act 2020)
Any income by way of dividends referred to in Nothing contained in this clause shall apply to
section 115-O shall be exempt except income by any income by way of dividend received on or
way of dividend chargeable to tax in accordance after the 1st day of April, 2020 other than the
with the provisions of section 115BBDA; dividend on which tax under section 115-O and
section 115BBDA, wherever applicable, has
been paid;

Section 10(35) – Clause 35 of Section 10

Upto AY 2020-21 From AY 2021-22 (as amended by Finance
Act 2020)
Any income by way of income received in Nothing contained in this clause shall apply to
respect of the units of a Mutual Fund specified any income in respect of units received on or
under Section 10(23D) or income received in after the 1st day of April, 2020
respect of units of UTI shall be exempt.

Tax on Certain Dividends received from Domestic Com. [Sec 115BBDA]

[Withdrawn from AY 2021-22]
1. Notwithstanding anything contained in this Act, where the total income of a Specified Assessee,
resident in India includes any income in aggregate exceeding ten lakh rupees, by way of dividends
[except 2(22)(e)] declared, distributed or paid by a domestic company or companies on or before
31st day of March 2020 (Added by Finance Act 2020), then dividend in excess of ` 10,00,000 shall
be taxable at the rate of 10% (plus applicable surcharge & cess).
2. No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the
assessee under any provision of this Act in computing the income by way of dividends as referred
above.

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3. Specified Assessee means a person other than
(a) A Domestic Company
(b) A Trust/Institution registered under Section 12A or Section 12AA.
(c) A Fund/Institute/Trust/Any University/Other Educational Institution/Any Hospital/other
Medical Institution/Hospital/Medical Institution as referred in Section 10(23C)(iv)/(v)/(vi)/(via).

Tax on certain dividends distributed by domestic companies before 1.4.2020 but received
on or after 1.4.2020 [Section 115BBDA]
Any income by way of aggregate dividend in excess of ` 10 lakh distributed by domestic companies
before 1.4.2020 but received on or after 1.4.2020 shall be chargeable to tax in the case of specified
assessee who is resident in India, at the rate of 10% [further, increased by surcharge, if applicable
and health and education cess @4%].

SECTION 115-O - TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES

[Withdrawn from AY 2021-22]
Every Domestic Company, which has declared, distributed or paid any amount by way of dividends
(whether interim / otherwise) on or before the 31st Day of March 2020, whether out of current or
accumulated profits shall be charged to tax on Distributed Profits @ 20.56% [i.e. 15% (net of tax
basis) + SC @ 12% + 4% Cess], in addition to the income-tax chargeable in respect of the Total
Income of such a domestic company. In case of deemed divided u/s 2(22)(e), Tax Rate (DDT) is 30%
(without grossing up) + SC@12% + 4% cess.

Important Points: No Amendment in AY 2021-22

1) Dividend received from a Foreign Company is taxable in hands of shareholder at the normal tax
rates subject to Section 115BBD.
2) Dividends from cooperative society are Taxable in the hands of members.

TAXATION OF CERTAIN FOREIGN DIVIDEND @ 15% [Section 115BBD]

(No amendment in this Section for AY 2021-22)
1. Section 115BBD provides that where Total Income of an Indian Company includes any dividend
income received from a foreign specified company, then such dividends shall be taxable at the rate
of 15% (plus applicable surcharge and cess) on the gross amount of dividends.
2. No expenditure in respect of such dividends shall be allowable under the Act.

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3. Specified Foreign Company means a foreign company in which the Indian Company holds 26%
or more in nominal value of the equity share capital of the company.

SECTION 194 [TDS on Dividend payable to Resident Shareholders]

Amended w.e.f. AY 2021-22
1. Applicability of TDS under section 194
The principal officer of a domestic company is required to deduct tax on dividend distributed or
paid by it to its resident shareholders.
2. Rate of TDS
The rate of deduction of tax in respect of such dividend is 10%. Rate of TDS u/s 194 has been
reduced from 10% to 7.5% (i.e., ¾th of the specified rate) for the period from 14th May, 2020 to
31st March, 2021 [Section 197B].
3. Time of tax deduction at source
The deduction of tax has to be made before making any payment by any mode in respect of any
dividend or before making any distribution or payment to a resident shareholder of any amount
deemed as dividend under section 2(22)(a)/ (b)/(c)/(d)/(e).
4. Non-applicability of TDS under section194
i. No tax is to deducted in case of a shareholder, being an individual, where –
a. the dividend is paid by any mode other than cash; and
b. the amount of such dividend or aggregate of dividend distributed or paid or likely to be
distributed or paid during the financial year by the company to such shareholder does not exceed `
5,000.
ii. The TDS provisions will not apply to such dividend credited or paid to LIC, GIC, subsidiaries of
GIC or any other insurer provided the shares are owned by them, or they have full beneficial interest
in such shares

SECTION 194K [TDS on Income in respect of Units]

Inserted by Finance Act 2020 w.e.f. AY 2021-22
Applicability and rate of tax
Section 194K provides for deduction of tax at source @10% by any person responsible for paying
to a resident any income in respect of –
a. units of a Mutual fund

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b. units from Administrator of the specified undertaking
c. units from the specified company
Rate of TDS u/s 194K has been reduced from 10% to 7.5% (i.e., ¾th of the specified rate) for
the period from 14th May, 2020 to 31st March, 2021 [Section 197B].
Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the payee or at the
time of payment by any mode, whichever is earlier.
Non-applicability of section 194K
No tax is required to be deducted if –
a. the amount of such income or the aggregate of the amounts of such income credited or paid or
likely to be credited or paid during a financial year does not exceed ` 5,000; or
b. the income is of the nature of capital gains.

DEEMED DIVIDEND
a) Distribution of accumulated profits, entailing the release of company’s assets -
Any distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is dividend if it entails the release of all or any part of its assets.
For example, if accumulated profits are distributed in cash, it is dividend in the hands of the
shareholders.
Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing
the release of company’s assets, the market value of such shares on the date of such distribution is
deemed as dividend in the hands of the shareholder.
b) Distribution of debentures, deposit certificates to shareholders and bonus shares to
preference shareholders –
Any distribution of debentures / debenture-stock / deposit certificates etc. by a company to its
shareholders
OR
Any distribution of shares by way of bonus by a company to its preference shareholders shall be
deemed to be the dividend to the extent the company possesses accumulated profits whether
capitalized or not.
Note:

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(i) For the purpose of CG, the COA of above debenture in the hands of the shareholders shall be
taken to be NIL
(ii) Bonus shares given to equity shareholders are not treated as dividend.
c) Distribution on Liquidation:
Any distribution made by a company to the shareholders (equity only) on its liquidation shall be
deemed to be the dividend to the extent of accumulated profits of the company standing
immediately before its liquidation whether capitalized or not.
d) Distribution on Reduction of Capital :
Any Distribution by company to its shareholders (equity only) on reduction of its capital shall be
deemed to be the dividend to the extent to which company possesses accumulated profits whether
capitalized or not. Sec. 2(22)(d)
Example: A Ltd. Has issued bonus shares to its equity shareholders. Subsequently company has
reduced its share capital and refunded the amount so reduced to the shareholders. The amount so
received by the shareholders to the extent of accumulated profit (whether capitalized or not) will
be considered as dividend.
e) Advance or loan by a Closely Held Company to its Shareholder [Sec. 2(22)(e)] – 5 Marks
Any payment, by a closely held company, of any sum by way of loan or advance:
 to a shareholder, being the beneficial owner of shares holding not less than 10% of voting power,
OR
 to any concern, in which such a shareholder is a member/partner and in which he has a
substantial interest, OR
 to any persons on behalf of or for the individual benefit of such a shareholder,
shall be deemed to be the dividend to the extent to which the company possesses accumulated
profits.
Notes
1) Following conditions must be satisfied on the date on which loan/advance is given to the
shareholder/concern/any other person by a closely held company in order to attract section
2(22)(e):
(a) Beneficial owner of shares
(b) Holding 10% or more voting power
(c) Member/ Partner in concern
2) Where loan is given and accumulated profits exceeds the loan, then the entire loan will be deemed
as dividend. No consideration is to be given to the proportionate share of the assessee in the
accumulated profits.

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3) If any such loan was given to more than such shareholders, accumulated profits shall be reduced
by the amount of the loan given to the earlier shareholders.
4) Dividend shall not include any advance or loan made to a shareholder or a concern by a company
in the ordinary course of its business where the money lending is substantial part of the business of
the company.
5) Buy Back of Own Shares: Any payment made by a company on purchase of its own shares from a
shareholder is not a deemed dividend.
6) Any distribution of shares on demerger by the resulting companies to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged company), is
not a deemed dividend.
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public are
not substantially interested, of any sum by way of advance or loan to a shareholder who is the
beneficial owner of shares holding not less than 10% of the voting power, or to any concern in which
such shareholder is a member or a partner and in which he has a substantial interest or any payment
by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent
to which the company in either case possesses accumulated profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the nature
of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) and
such views have attained finality.
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that trade
advances, which are in the nature of commercial transactions, would not fall within the ambit of the
word 'advance' in section 2(22)(e) and therefore, the same would not to be treated as deemed
dividend.

Share premium in excess of the FMV to be treated as income [Section 56(2)(viib)]

1. Section 56(2)(viib) provides that where a company, not being a company in which the public are
substantially interested (i.e. Closely held Company), receives any consideration from issue of shares
in excess of the face value of such shares from any person being a resident, then consideration as
exceeds from FMV of the shares shall be chargeable to income tax under the head “IOS”
2. However, the above provision shall not apply where the consideration is received
a) by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund or
a specified fund, or

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b) by a company from a class or classes of persons as may be notified by the Central Government in
this behalf.
3. Fair market value of the shares shall be the higher of, the value as may be –
a) determined in accordance with the prescribed method; or
b) substantiated by the company to the satisfaction of the Assessing Officer, based on the value of
its assets on the date of issue of shares.
For the purpose of computation of FMV, the value of assets would include the value of intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature.

PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME

Unexplained Cash Credits [Sec. 68]
 The sum is found credited in the books of assessee.
 He offers no explanation about its nature and source OR the explanation offered is not
satisfactory in the opinion of AO
 The amount so credited is treated as the income of the Previous Year in which the same is found
credited.
Note:
Section 68 further provides that the nature and source of any sum credited, as share application
money, share capital, share premium etc., in the books of a closely held company shall be treated as
explained only if the source of funds is also explained by the assessee company in the hands of the
resident shareholder (other than SEBI regulated entity) and such explanation in the opinion of the
AO is found to be satisfactory.
Unexplained Investment [Sec. 69]
 The assessee made investments which are not recorded in the books of accounts
 He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
 The value of investment so made is treated as the income of the Previous Year in which the
investment is made.
Unexplained Money etc. [Sec. 69A]
 In search, the assessee was found to be owner of any money, bullion or jewellery or other valuable
article etc,

 Such money, bullion etc are not recorded in the books of accounts of the assessee

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 He offers no explanation about its nature and source of acquisition or the explanation offered is
not satisfactory.

 The value of such items shall be treated as the income of that previous year in which it is found .
Investment not fully disclosed [Sec. 69B]
 The assessee made investments or found to be owner of bullion, jewellery or other valuable
article, but has not fully recorded in his books of accounts.

 He offers no explanation about such excess amount or the explanation offered is not satisfactory.
 The excess value of the investment made shall be treated as the income of the Previous Year in
which the investment is made.
Unexplained Expenditure [Sec. 69C]

 The assessee has incurred expenditure during the financial year

 He offers no explanation about such expenditure or the explanation offered is not satisfactory.
 The amount of such expenditure shall be treated as income of the Previous Year in which it was
incurred.
Amount borrowed or repaid on Hundi other than by way of account payee cheque [Sec. 69D]
 Where any amount is borrowed on a hundi or any amount due thereon is repaid other than
through an account-payee cheque drawn on a bank,
 the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying for the PY in which the amount was borrowed or repaid, as the case may be.
 However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of such
amount.

Taxation of Cash Credit, Unexplained Money, Unexplained Investment etc. covered u/s 68,
69, 69A, 69B, 69C & 69D [Section 115BBE]
A. Section 115BBE has been inserted to tax the unexplained credits, money, investment,
expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C & 69D
Total Income of an assessee
a) includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C
or Section 69D and reflected in the return of income furnished under section 139; or

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b) determined by the Assessing Officer includes any income referred to in Section 68, Section
69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is not covered under
clause (a),
B. Tax Rate: 60% [plus surcharge (25%) and cess (4%) as applicable]
C. No deduction in respect of any expenditure or allowances or Set off of any loss shall be allowed
in computing above deemed income (point ‘a’ or ‘b’ above).
D. Benefit of Basic Exemption Limit is also not available while computing tax liability.

Case Study 1
Nikhil, a dealer in shares received from his friend Anshul, the following without any consideration:
 Cash Gift INR 100,000 on his birthday (14th April)
 Bullion, FMV INR 75,000 on his anniversary (22nd April)
 Plot of land at Gurgaon on 1st Jun’20, stamp duty value INR 750,000 on that date.
Advise on tax treatment.
Answer
a) Cash Gift is > INR 50000, therefore, the entire amount of INR 100,000 is chargeable to tax as
Income from Other Sources
b) Bullion received without consideration is taxable too in full as it is received without
consideration, therefore, the entire amount of INR 75000 is chargeable to tax as Income from Other
Sources
c) Plot of land received without consideration is taxable too in full as it is received without
consideration, therefore, the entire amount of INR 750,000 is chargeable to tax as Income from
Other Sources

Case Study 2
Nisha, on 1st Dec’20 took possession of a flat booked by her 2 years back, at INR 25,00,000. The
Stamp Duty of the flat on the date of possession was INR 40,00,000 and on the date of booking was
INR 29,00,000. She had paid INR 200,000 by account payee cheque, on date of booking. Advise tax
treatment.
Answer
It is to be noted that where the date of the agreement fixing the amount of consideration for the
transfer of immovable property and the date of registration are not the same, the stamp duty value
on the date of the agreement (in this case booking) may be taken. However, this exception shall

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apply only in a case where the amount of consideration referred to therein, or a part thereof, has
been paid by any mode other than cash on or before the date of the agreement for the transfer of
such immovable property.
Therefore, the difference between the Stamp Duty Value on date of booking (INR 29,00,000) and
the actual consideration (INR 25,00,000); i.e. INR 400,000 would be taxable under the head “Income
from Other Sources”.

Case Study 3
Discuss the taxability of the following transactions in the hands of the recipient.
1. An HUF received from the Karta’s niece, INR 80,000 in cash
2. Shruti, a member of her father’s HUF, transferred to the HUF a property without any
consideration. The Stamp Duty valuation was INR 12,00,000
3. Robin received from his friend 100 shares of INR 200 each and jewellery worth INR 55,000 (FMV)
from his nephew on the same day
4. An HUF gifted a Car to the Karta’s son, for brilliant performance in the board exams. The FMV of
Car was 10,00,000
Answer
1. Taxable: Sum of money received exceeding INR 50,000 without consideration from a non-
relative is taxable. Therefore INR 80000 is taxable as his niece, not being a member of the HUF is
not a relative of the HUF
2. Non-Taxable: Immovable property received without consideration from a relative is non-
taxable. Since Shruti is a member of the HUF, she is a relative of the HUF and hence the same is not
taxable
3. Taxable: In this case, the aggregate FMV of the property other than immovable property, received
without consideration exceeds INR 50000 (INR 75,000 actually for the shares & jewellery together).
Hence, the entire amount would be taxable
4. Non-taxable: Car is not a property for the purposes of Section 56 and hence the transaction is
non-taxable

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CLUBBING
INTRODUCTION
An assessee is taxable on the income earned by him but sometimes he is also made liable to tax for
the income earned by some other person. This happens when assessee tries to reduce his tax
liability by transferring his income/assets to some other person in a manner whereby his tax
liability falls on some other person. Income Tax Act 1961 has introduced the concept of clubbing of
income Whereby income is taxed for one though such income legally belongs to some other person.

INCOME TRANSFERRED WITHOUT TRANSFER OF ASSET: SECTION 60

 If an assessee owns an asset from which he derives some income and
 There is a transfer of such income without the transfer of ownership of such asset from which
income has been earned then such income shall be chargeable to tax as the income of transferor
and not as the income of transferee.
 It does not matter whether transfer is revocable or irrevocable

QUESTION 1 Mr. J is holder of Rs2,00,000 14% debentures of D Ltd from where he earns annual
interest Income of Rs28,000. Mr. J has transferred interest income of these debentures to his
brother Mr. A while retaining the ownership of such debentures. This interest income shall not be
taxable for Mr. A but shall be taxable for Mr. J

REVOCABLE TRANSFER OF ASSETS: SECTION 61

Income from asset transferred under revocable transfer shall be taxable in the hands of transferor.
As per Section 63 Revocable transfer means:
(1) If whole or any part of income or assets can be re-transferred to transferor.
(2) If transferor can re-assume power over the whole or any part of income of asset.
Section 62: However revocable transfer does not include any other transfer which is not revocable
during the lifetime of the transferee

QUESTION 2 Mr. J has transferred his house to his son Mr. S under the condition that Mr. S is owner
till the date of Diwali of 2021. This transfer where transferor has put a rights to invoke the transfer
the happening of an event which is a certain event is called revocable transfer. The Income from the

house any earned by Mr. S shall be taxable for Mr. J and not Taxable for Mr. S.

CLUBBING OF REMUNERATION OF SPOUSE: SECTION 64(1)(ii)

(1) An individual is chargeable to tax in respect of any salary, commission, fees or any other form of
remuneration received either in cash or in kind by the spouse from a concern in which the individual
has substantial interest.
(2) Such spouse should be employed in the concern without technical or professional skills or
experience
(3) This shall not be applicable if spouse earns income due to application of technical or professional
skills or experience.

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(4) If husband and wife both have substantial interest in the concern and both are in receipt of
remuneration from the concern, then the remuneration of both shall be clubbed in the hands of
spouse whose Total Income is greater, (excluding such salary Income).
(5) The salary income to be clubbed, shall computed first in the hands of receiver under the head of
salary and then it shall be included in the total income of the individual under same head. This
means that only taxable salary shall be clubbed.
(6) Substantial interest means
(a) In case of a company it means that individual along with relatives should hold 20% or more
of equity shares at any time during the previous year.
(b) In case of other concerns, it means that individual along with relatives should be entitled
to 20% or more of profits at any time during the previous year.
(7) Relative means spouse, brother or sister or any lineal ascendant or descendant of the individual

QUESTION 3 Mr. J is a partner in a partnership firm with 50% profit sharing ratio. His wife is
working in this partnership firm and is getting remuneration. Her remuneration does not match
her technical or professional knowledge or experience. This salary income earned by her shall be
taxable for Mr. J and not for her.

QUESTION 4 Mr. J is a shareholder of D Ltd. holding 35% of shares. His wife is employed in the
same company. She is getting the salary of Rs 25,000 pm, allowances of Rs 2,000 pm and pays the
professional tax of Rs 200 pm. Her salary does not match her qualifications or experience. Mr. J is
owner of shop from which he has earned Rs 50,000pm as rent. Municipal taxes paid by him are Rs
10,000pa. Both husband and wife have earned pa each as interest from debentures. Calculate their
total incomes for the AY 2021-2022 i.e. PY 2020-2021.
Solution: Calculation of salary income of Mrs. J for the AY 2021-2022 i.e. PY 2020-2021
Particulars Amount Amount in
Basic salary 25,000 x 12 3,00,000
Allowances 2,000 x 12 24,000
Gross salary 3,24000
Less: Deduction u/s 16(ia): Standard deduction 50,000
Less: Deduction u/s 16(iii): Professional tax paid 2,400
Taxable salary 2,71,600
Calculation of Taxable Income of Mr. J and Mrs. J for the AY 2021-2022 i.e PY 2020-2021

Particulars Calculation in Mr. J Mrs. J

Amount in Amount in
Rs Rs

Income under the head Clubbed as per Section 64(1)(ii) 2,71,600 NIL
salary

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Income under the head GAV 50,000 x 12 4,13,00
6,00,000
house property Less: Municipal Taxes paid 10,000
NAV 5,90,000
Less: deduction u/s 24(a) 1,77,000
Income 4,13,000

Income from other 2,00,000 2,00,000

sources
Taxable Income 8,84,600 2,00,000

CLUBBING OF INCOME FROM ASSETS TRANSFERRED TO SPOUSE: SECTION 64(1)(iv)

When an individual transfers any assets other than House Property to his/her spouse without any
consideration, then any income from such assets shall be deemed to be the income of transferor.
However, it shall not be applicable if
(1) Transfer is for adequate consideration OR
(2) Transfer is under an agreement to live apart OR
(3) If relationship of husband and wife does not exist either at time of transfer or at the time of
accrual of Income.
If transferred Asset is invested by spouse in
(1) Any business being done by transferee OR
(2) As a capital in a Partnership firm

Then the following amount shall be taxable as the Income of transferor and the balance amount
shall be taxable as the Income of transferee
Taxable Income earned x Amount invested out of Assets transferred on the first of PY
Total investment of transferee on the first day of the PY

QUESTION 5 Mrs. J starts with the business of boutique on 1/4/2018 by investing rs5,00,000 Mr. J
gifts her rs2,00,000 on 15/4/2020. Profits earned by her for the PY ending 31/3/2021 is rs70,000
and for the PY ending 31/3/2021 is 02,500. Calculate amount of the profits to be clubbed in hands
of Mr. J for the different AYs.
Solution: Calculation of the Income to be clubbed in the hands of Mr. J for the AY 2020-2021

Particulars AY 2020-2021 Amount in rs

Total investment of Mrs. J as on 1/4/PY 5,00,000
Amount of investment as on 1/4/PY out of gifted NIL
money
Profits earned 70,000
Profits Taxable for Mr. J 70,000 x NIL/5,00,000=NIL
Profits Taxable for Mrs. J (70,000 - NIL) =70,000

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Calculation of the Income to be clubbed in the hands of Mr. J for the AY 2021-2022
Particulars AY 2021-2022 Amount in rs
Total investment of Mrs. J as on 1/4/PY 7,70,000
Amount of investment as on 1/4/PY out of gifted 2,00,000
money
Profits earned 72,500
Profits Taxable for Mr. J 72,500 X 200,000/7,70,000 = 18,831
Profits Taxable for Mrs. J (72,500 - 18,831) =53,669

CLUBBING OF INCOME FROM ASSETS TRANSFERRED TO SON'S WIFE: SECTION 64(1)(vi)

If an individual transfers any asset to daughter-in-law (after 31/5/1973) without adequate
consideration, then Income from the Asset will be included in the Total Income of transferor. But
for clubbing to be effective, the relationship with daughter-in-law should exist both at the time of
accrual and at the time of clubbing.
CLUBBING OF INCOMES FROM ASSET TRANSFERRED FOR THE BENEFIT OF SPOUSE: SECTION
64(1)(vii)
Income from Asset transferred to any person or Association of Persons (AOP) for the benefit of
spouse without adequate consideration shall be included in the Total Income of transferor. It is not
necessary that Asset should be transferred to spouse itself

CLUBBING OF INCOME FROM ASSET TRANSFERRED FOR THE BENEFIT OF SON'S WIFE
SECTION 64(1)(viii)
Income from Asset transferred to any person or Association of Persons (AOP) for the benefit of son's
wife without adequate consideration shall be included in the Total Income of transferor. It is not
necessary that Asset should be transferred to daughter-in-law itself

CLUBBING OF INCOME OF MINOR CHILD: SECTION 64(1A)

(1) Income of minor child will be included in the total income of that parent whose total income is
greater (before including Income of child).
(2) If marriage of parents does not subsist, it shall be income of that parent who maintains the child.
(3) Where any such income is once included in the total income of either parent, any such income
arising in any succeeding year shall not be included in the total income of the other parent unless
the assessing officer (AO) is satisfied that it is necessary to do so.
(4) Clubbing of incomes of minor accruing till the date of attaining majority shall be done and not
thereafter. On and from the date of attaining majority the Incomes shall be taxed in the hands of
child himself.
(5) Brought forward loss of an individual assessee can be set off against the business income of
minor child which has been so clubbed under this section.
(6) Only net incomes shall be clubbed and that too under the same head of income.

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(7) Deductions of Section 80C to 80U shall be allowed till the aggregate of the income of minor child
and that of parent of a minor child.
(8) Minor shall not be allowed the deductions under Sections 80C to 80U on account of the income,
which have been clubbed in the hands of parent.
(9) In the following cases, income of minor shall not be clubbed:
(a) Child is suffering from any disability of the nature specified in Section 80U like physical
disability, totally blind etc.
(b) Income of child on account of manual work or activity involving skill, talent or specialized
knowledge etc.
(10) If Income of child is so included, the parent shall be entitled to an exemption in respect of each
minor child u/s 10(32) which shall be of the lower of:
(a) Rs1,500 pa per child
(b) Income of minor so included in income of parent.
Such exemption is available from the total income of the minor child that is included in the total
income of the assessee.
(11) Exemption to parent u/s 10(32) for Rs 1,500 shall be available if the clubbing of minor child's
income is done as per Section 64(1A). If income is added as per Section 27 of deemed
ownership, then exemption of Section 10(32) shall not be allowed.

INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED INTO HUF PROPERTY: SECTION

64(2)
(A) If following conditions are satisfied, then clubbing of Income shall be done in a manner given in
Para(B)
(a) An individual being a member of HUF converts his own property into the property of HUF
after 31/12/1969
(b) Such a property is a separate property of the individual.
(c) The conversion is done by throwing property into common stock of the family or
transferring to the family, whether directly or indirectly.
(d) Such conversion is made without adequate consideration

(B) Clubbing shall be done as follows:

(a) From the time of conversion till the time it is partitioned among members of HUF: The
Income from such converted property shall be clubbed in the hands of transferor.
(b) On the partition of the property amongst members of family the Income arising to such
individual and to his or spouse shall be clubbed in the Income of such individual.
(c) And the Incomes accruing to other members shall be included in their respective Incomes.

OTHER RELEVANT POINTS

Income from the accretion to the assets: Any Income arising to transferee from the accretion of
property or from accumulated Income of such property is not included in the total income of
transferor.
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Clubbing of loss: under the above provisions, if income of one person is to be clubbed in the hands
of another person, then in the case of loss, it shall also be clubbed.
Section 65: Under the above provisions, if income of one person is to be clubbed in the hands of
transferor, then tax on income from such assets can be demanded from the transferee. The same
provision is applicable in case of deemed owner u/s 27(i).
Clubbing of income from capital gains: Capital gains on sale of an asset transferred within the
meaning of the section 64 is also clubbed with the income of the transferor.
Cross transfers: In case of cross transfers also (e.g., A making gift of Rs50,000 to the wife of his
brother B for the purchase of a house by her and a simultaneous gift by B to A's minor son of shares
in a foreign company worth Rs50,000 owned by him), the income from the assets transferred would
be assessed in the hands of the deemed transferor if the transfers are so intimately connected as to
form part of a single transaction, and each transfer constitutes consideration for the other by being
mutual or otherwise. Thus, in the instant case, the transfers have been made by A and B to persons
who are not their spouse or minor child so as to circumvent the provisions of this section, showing
that such transfers constituted consideration for each other.
CIT v Keshavji Morarji [1967] 66 ITR 142: The Supreme Court, in this case, observed that if two
transactions are inter-connected and are parts of the same transaction in such a way that it can be
said that the circuitous method was adopted as a device to evade tax, the implication of clubbing
provisions would be attracted.
Accordingly, the income arising to Mrs. B from the house property should be included in the total
income of B and the dividend from shares transferred to A's minor son would be taxable in the
hands of A. This is because A and B are the indirect transferors to their minor child and spouse,
respectively, of income-yielding assets, so as to reduce their burden of taxation.
QUESTION 6 Mr. Vasudevan gifted a sum of Rs6,00,000 to his brother's wife on 14/6/2020. On
12/7/2020, his brother gifted a sum of Rs5,00,000 to Mr. Vasudevan's wife. The gifted amounts
were invested as fixed deposits in banks by Mrs. Vasudevan and wife of Mr. Vasudevan's brother
on 1/8/2020 at 9% pa interest. Discuss the consequences of the above in the hands of Mr.
Vasudevan and his brother.
Solution: In the given case, Mr. Vasudevan gifted a sum of Rs 6,00,000 to his brother's wife on
14/6/2020 and simultaneously, his brother gifted a sum of Rs 5,00,000 to Mr. Vasudevan's wife on
12/7/2020. The gifted amounts were invested as fixed deposits in banks by Mrs. Vasudevan and
his brother's wife. 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.
Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed deposits
would be included in the total income of Mr. Vasudevan and interest income arising in the hands of
his brother's wife would be taxable in the hands of Mr. Vasudevan's brother as per section 64(1), to
the extent of amount of cross transfers i.e. Rs5,00,000 This is because both Mr. Vasudevan and his

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brother are the indirect transferors of the income to their respective spouses with an intention to
reduce their burden of taxation. However, the interest income earned by his spouse on fixed deposit
of Rs5,00,000 alone would be included in the hands of Mr. Vasudevan's brother and not the interest
income on the entire fixed deposit of Rs6,00,000 since the cross transfer is only to the extent of
Rs5,00,000

Illustration 1 : Mr Sharma invests Rs 10 lakh in a fixed deposit (FD) at a bank, in his wife’s name.
Interest of Rs. 1 lakhs arises on this income. Mrs Sharma invests the interest on periodic basis and
interest for an amount of Rs. 5,000 arises on the interest deposited by her in bank. Analyze the
clubbing provisions and find out the taxability of interest accrued.
Illustration 2 : Red holds 40% of shares in a Company. Mrs. Red (a CS) is employed in the company
as a Company Secretary and is getting salary of Rs. 15,000 per month. Compute total income and
tax payable by Red and Mrs. Red for the Assessment Year 2020-21 assuming other income of Red
is Rs. 2,00,000 from a business and dividend income from company is Rs. 3,00,000.
Illustration 3: Mr. Amit is beneficially holding 21% equity shares of Essem Minerals Pvt. Ltd. Mrs.
Amit is employed as Manager (in accounts department) in Essem Minerals Pvt. Ltd. at a monthly
salary of Rs. 84,000. Mrs. Amit is not having any knowledge, experience or qualification in the field
of accountancy. Will the remuneration (i.e., salary) received by Mrs. Amit be clubbed with the
income of Mr. Amit?
Illustration 4: Mr. Kapoor gifted Rs. 8,40,000 to his wife. The said amount is invested by his wife
in debenture of a company. Will the income from the debenture purchased by Mrs. Kapoor from
gifted money be clubbed with the income of Mr. Kapoor?

Answer:
Illustration 1 :
Rs. 1 lakhs in the Now Interest income on FD will be clubbed with his (Mr. Sharma) income. Interest
of Rs. 5,000 aroused out of Investment made by Mrs. Sharma will be taxed as her own income.
Illustration 2 :
In the present case, Mrs. Red’s salary income will be taxable in her hands only as she is earning the
same through her professional qualification.
Computation of Total Income and Tax Liability for Assessment Year 2020-21

Particulars Mr. Red (Rs.) Mrs. Red (Rs.)

income from Salary Nil 1,80,000
income from Business 2,00,000 Nil
income from other sources: dividend income [exempt u/s Nil Nil

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10(34)]
Gross Total Income (or Total Income) 2,00,000 1,80,000
tax liability (as total income does not exceed ` 2,50,000): Nil Nil

Illustration 3:
In this situation, Mr. Amit is having substantial interest in Essem Minerals Pvt. Ltd. and
remuneration of Mrs. Amit is not justifiable (i.e., she is employed without any technical or
professional knowledge or experience) and, hence, salary received by Mrs. Amit from Essem
Minerals Pvt. Ltd. will be clubbed with the income of Mr. Amit and will be taxed in the hands of Mr.
Amit.

Illustration 4:
Rs. 8,40,000 is transferred to spouse. Fund is transferred via gift (i.e., without adequate
consideration) and, hence, the provisions of section 64(1)(iv)will be attracted. The provisions of
clubbing will apply even if the form of asset is changed by the transferee-spouse.
In this case asset transferred is money and, subsequently, the form of asset is changed to
debentures, hence, income from debentures acquired from money gifted by her husband will be
clubbed with the income of her husband. Thus, interest on debenture received by Mrs. Kapoor will
be clubbed with the income of Mr. Kapoor.

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SET OFF OF LOSSES AND CARRY FORWARD OF LOSSES
INTRA HEAD SET OFF: SECTION 70
Loss from one source of income can be set off against any income of other sources under the
same head of Income, but exceptions to this are:
1) Losses from the speculative business can be set off only against incomes of speculative business.
2) Losses from owning and maintaining race horses can be set only from income of owning and
maintaining race horses.
3) Loss of long-term capital asset is allowed to be set off against the income of long-term capital
asset only. But loss of short-term capital asset is allowed to be set off from income of long-term
capital asset or income of short-term capital asset.
4) No kind of loss can be set off against casual income.
5) No kind of loss is allowed to be set off from a source of income, the income of which is not taxed.
6) Loss from the specified business referred in Section 35AD can be set off from income of some
other specified business referred in Section 35AD

INTER HEAD SET OFF: SECTION 71

If there is a loss under one head of income and income under different heads of income, then
they are allowed to be set off but the exceptions are:
1) Losses from the speculation business can be set off only from such income.
2) Losses from owning and maintaining of race horses can be set off only from such income.
3) Loss under the head capital gains can be set off only from the income of capital gains.
4) No loss is allowed to be set off from a source, the income of which is not taxed.
5) As per Section 71(4) loss under the head PGBP cannot be set off from income under the head
salary. Similarly, unabsorbed depreciation cannot be set off from salary income.
6) As per Section 73A any loss computed in respect of the specified business mentioned in Section
35AD shall only be set off against profits and gains of any other specified business.
7) Section 71(3A) if assessee has incurred loss under the head of house property then such loss
can be set off from income from any other head. However maximum loss that can be set off has
been restricted to 2,00,000. Any loss exceeding 2,00,000 shall be carry forwarded.

MANDATORY FILING OF ITR TO DO CARRY FORWARD OF LOSSES: SECTION 80

After doing set off of loss, if assessee still has a loss then such loss of one financial year can be
carried forward to the next financial year only if the income tax return (ITR) has been filed as per
due dates mentioned u/s 139(1). If not, then the loss will not be allowed to be carried forward.
Income tax return (ITR) has to be filed on or before the due date mentioned u/s 139(1) in the
case of following losses:
1) Loss of business u/s 72
2) Loss of speculative business u/s 73
3) Loss of specified business as referred u/s 73A
4) Loss of capital gains u/s 74

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5) Loss of owning and maintaining race horses u/s 74A
However,
1) Loss of house property
2) Unabsorbed depreciation of business and profession
can be carried forward if income tax return (ITR) has not been filed as per section 139(1).

CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY: SECTION 71B
1) If there has been a loss under the head of house property, then such loss can be set off against
income of some other head. If there is no income under any other head, then loss can be carried
forward to the next year.
2) In next year, the brought forward loss of the preceding year can be set off only against income
from house property of that year.
3) If loss could not be set off, then such a loss can be carried forward for eight years following the
year when loss was first computed.
4) Loss of house property can be carried forward even if assessee has not filed ITR by the due date
as given in section 139(1).
5) There is no condition that an assessee should own the house for which the loss is to be carried
forward.

CARRY FORWARD AND SET OFF OF BUSINESS LOSSES: SECTION 72

1) Business loss other than speculation loss, which could not be set off during any year, shall be
carried forward to the next year and set off against income from PGBP of that year.
2) The term business loss will not include
(a) unabsorbed depreciation
(b) unabsorbed capital expenditure on scientific research and
(c) unabsorbed capital expenditure on family planning promotion
3) Loss shall be carried forward to the next year and set off against the income from business or
professions carried on by the assessee for that year. This business can be speculative or non-
speculative business.
4) This means that the loss of normal business can be set off from the speculation incomes but vice
a versa is not possible.
5) Loss of business can be set off from the incomes from the professions being carried on by the
assessee.
6) Loss can also be set off against an income, which arises due to business activity, but it is not
charged under the head of PGBP.
7) Business loss can be carried forward for eight years following the year when loss was first
computed
8) Business may or may not be continued for which the carry forward and set off is desired.

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9) Loss of business shall be allowed to be carried forward only if ITR has been filed as per the time
period mentioned in Section 139(1).
10)To have a carry forward and set off of loss of business, the assessee must be the same.

Priority of set off, when assessee has brought forward losses

1) Current year's depreciation, current year's capital expenditure on scientific research and
current year's capital expenditure on family planning.
2) Brought forward business loss.
3) Brought forward depreciation, brought forward capital expenditure on scientific research and
brought forward capital expenditure on family planning.

CARRY FORWARD AND SET OFF OF SPECULATION BUSINESS LOSSES: SECTION 73

1) Loss of a speculation business shall be set off only against the profits of another speculation
business.
2) The loss can be carried forward for four years following the year when loss was first computed.
3) In this case there is no condition that the same speculative business must be carried on.
4) To have carry forward and set off, the assessee must be the same and exceptions discussed above
shall also apply.
5) Loss shall be allowed to be carried forward and set off only if ITR has been filed as per the time
period mentioned u/s 139(1).

SPECULATIVE BUSINESS: SECTION 43(5): Means a business in which a contract for the purchase
or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery
or transfer of the commodity or scripts.
However, eligible transaction in respect of trading in commodity derivatives carried out
in a recognised association, which is chargeable to CTT (commodities transaction tax) shall
not be regarded as a speculative transaction.

EXPLANATION TO SECTION 73: In case of a company deriving its income mainly under the head
of PGBP (other than a company whose principal business is business of trading in shares or banking
or granting of loans and advances), any part of its business consisting of purchase or sale of shares
shall be deemed to be speculation business for the purpose of this section.
NOTE: In order to encourage participation in trading of agricultural commodity derivatives,
transactions which are not chargeable to CTT shall be treated as non-speculative transitions.

CARRY FORWARD AND SET OFF OF LOSS OF THE SPECIFIED BUSINESS MENTIONED UNDER
SECTION 35AD: SECTION 73A
1) Any loss in the specified business shall be set off only against profits of any other specified
business.

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2) The loss which cannot be set off will be carried forward for set off against profits from any
specified business in the following year.
3) Loss shall be carried forward for unlimited period of time.
4) Loss of the assessee on the account of specified business claiming deduction u/s 35AD would be
allowed to be set off against the profits of another specified business, whether or not the latter
is eligible for deduction u/s 35AD

CARRY FORWARD AND SET OFF OF LOSS UNDER CAPITAL GAINS: SECTION 74
1) Loss of long-term capital asset can be set off only against income of long term capital asset but
loss of short-term capital asset can be set off against income of long-term capital asset or income
of short-term capital asset u/s 70
2) The loss can be carried forward for eight years following the year when loss was first computed
3) Loss can be carried forward only if ITR has been filed as per time period mentioned u/s 139(1)

CARRY FORWARD AND SET OFF OF LOSS FROM THE ACTIVITY OF OWNING AND
MAINTAINING RACE HORSES: SECTION 74A
1) Loss from activity of owning and maintaining of race horses can be set off only from the income
of same activity
2) The loss can be carried forward for four years following the year when loss was first computed
3) The carry forward of loss is permissible only if the assessee continues the activity of owning
and maintaining of race horses. This is because loss cannot be set off from the income of any
other activity
4) Loss shall be allowed to be carried forward and set off only if ITR has been filed as per time
period mentioned u/s 139(1)

SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION: SECTION 32(2)

CIT v Virmani Industries (P.) Ltd. [1995] 83 Taxman 343 (SC): The Honorable Supreme
Court has set the following rules for set off and carry forward of unabsorbed depreciation
Step 1: Where there is current year's depreciation relating to a business it should be set off from the
profits the same business.
Step 2: If full depreciation cannot be set off under Step 1 such depreciation which could not be set
off would be known as unabsorbed depreciation and such unabsorbed depreciation shall be
set off against the profits of any business or from income of profession carried on by the
assessee during the current previous year.
Step 3: If still full depreciation cannot be set off under Step 2, then it can be set off from the incomes
of any other head of income, except from the income under the head salary and casual
incomes
Step 4: If full deprecation cannot be set off under Step 3, then it shall be carried forward to next
previous year.
Step 5: Add such unabsorbed depreciation to the amount of depreciation of such previous year in
which it has been brought forward. Brought forward depreciation shall be treated as part of
current year's depreciation. Now set off aggregated depreciation as per Steps 1-3.

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SSGURU CA SURAJ SATIJA
Step 6: Repeat Steps 1 to 5 without any time limits. This means that unabsorbed depreciation can
be carried forward for unlimited period of time.
However, Steps 5 and 6 are subject to the conditions of Section 72(1). This means that if there is
any brought forward loss of the business then it shall be set off in priority to such unabsorbed
depreciation.
Note: Business may or may not be carried on for which there is unabsorbed depreciation and
for which set off is claimed.

BROUGHT FORWARD LOSSES MUST BE SET OFF IN IMMEDIATELY SUCCEEDING YEAR

Losses which are carried forward must be set off against the income of the immediately
succeeding year/years in which income is available. If carry forward loss is not set off in the
immediately succeeding year in which income is available, then it cannot be set off in later year.

CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CERTAIN COMPANIES: SECTION 79
In case of a company in which public is not substantially interested (private company and closely
held companies), losses of prior previous year shall be allowed to be carried forward and set off
against income of current year only if:
1) On the last day of the PY in which losses were incurred; and
2) On the last day of the PY in which losses are to be carried forward and set off
at least 51% of the voting power were beneficially held by the same persons.
However, even if the said condition is not satisfied in case of an eligible start-up referred u/s 80-IAC,
losses of preceeding PYs shall be allowed to be carried forward and set off against the income of the
previous year if
a) all shareholders continue to hold their shareholding on 31/3/PY in the same manner as they
held shares during 31/3/preceding PY and
b) such loss has been incurred during the period of seven years beginning from the year in which
such company is incorporated.
However, the change because of the following transactions shall not be considered as a change in
the shareholding:
1) The death of a shareholder
2) Gift by a shareholder to his relative, and
3) Transfer of shares in Indian company which is a subsidiary of a foreign company as a result of
amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent
shareholders of amalgamating or demerged foreign company continue to be the shareholders of
the amalgamated or the resulting foreign company.
4) To a company where a change in the shareholding takes place in a previous year pursuant to a
resolution plan approved under the Insolvency and Bankruptcy Code, 2016
5) Where change in the share-holding takes place in the PY due to approved resolution plan under
Insolvency and Bankruptcy Code, 2016

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DEDUCTIONs FROM GROSS TOTAL INCOME
[Section 80C to 80U]
GENERAL FEATURES RELATING TO DEDUCTIONS UNDER CHAPTER VI-A:
1. Deductions to be made [Section 80A]
The Total Income of an assessee is to be computed after making deductions permissible under
sections 80C to 80U. But,
Aggregate Amount of Deductions ≤ Gross Total Income
2. No Double Deduction
Where any deduction is allowed to AOPs/BOIs (at Entity level), the same will not be allowed as
deduction while computing the income of the members of the AOPs/BOIs(in their Individual
Capacity).
3. No deduction u/s 10AA& u/s 80-IA to 80-RRB, if not claimed in the return of income
Where the assessee fails to make a claim in his return of income for any deduction u/s 10AA or
under any provision of sections 80-IA to 80-RRB, no deduction shall be allowed to him thereunder.
Further, Benefit of deduction from 80-IA to 80RRB will not be available if return is not filed within
due date of Section 139(1).
4. No deduction from certain Incomes: Examples (not an exhaustive list)
(a) Long Term Capital Gains referred u/s 112 [20% or 10% (in specified cases)] or u/s 112A, and
Short Term Capital gains referred u/s 111A [15%].
(b) Winnings from lotteries, races, etc. as referred to in Section 115BB [30%].
5. If Individual/HUF has opted for the provisions of Sec 115BAC (new section – Optional):
No Deduction under chapter VIA is available except
a. Employer’s contribution towards NPS under Section 80CCD(2)
b. Deduction under section 80JJAA
c. Deduction under Section 80LA (IFSC Units)

Profit-linked deductions provided under section 80-IA to 80-IE (80-IA, 80IAB, 80-IAC, 80-IB, 80-
IBA, 80-IC, 80-ID & 80-IE) , section 80JJA, 80LA, New Section 80M, 80P and 80PA have been excluded
from the scope of syllabus by way of Study Guidelines.
Amendment: Section 80EEA, Section 80JJAA are amended by Finance Act 2020 & Section 80G is
amended by “The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act,
2020 (TOLA, 2020).

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Deduction in respect of investment in specified assets [Section 80C]
Applicability: Individual or HUF
Maximum Qualifying Amount: ` 150,000
The following are the investments/contributions eligible for deduction –
Name of the investment / payment Payment made by the
Individual HUF

Subscription to NSC Self Any member

(including Interest Accrued thereon)
Note: Interest will first added as Income u/h IOS)
Tuition Fees (only) paid at the time of Admission or otherwise to any Maximum
university/college/educational institution in India for full time up to two
education. children NA
Contribution to Unit-Linked Insurance Plan (ULIP) of UTI Self, Spouse & Any member
Child
Contribution to Unit-Linked Insurance Plan (ULIP) of LIC-Mutual
Fund
Contribution to Units of Mutual Funds or UTI Self Any member

Contribution to Notified Annuity Plan of LIC or other approved Self Any member
insurer.
Life Insurance Premium on Life Policy or Endowment Policy Self, Spouse & Any member
Child
Maximum Amount of Deduction:

• 10% of Sum Assured in case of policy issued on or after April

1, 2012

[15% of sum assured in case of policy issued on or after April 1, 2013

on life of any person with disability (u/s 80U) or any person
suffering from specified disease (u/s 80DDB)]

• 20% of Sum Assured in case of policies issued before April 1, 2012.

Contribution towards
 Statutory Provident Fund/Recognized Provident Fund Self NA

 PPF – Minimum: ` 500 & Maximum: ` 150,000 Self, Spouse & Any member
Child
 Approved Superannuation Fund (ASF) Self NA

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 DEDUCTIONS FROM GTI
SSGURU CA SURAJ SATIJA
Contribution to Notified Pension Fund of Mutual fund or UTI Self NA
Term Deposit of 5 year or more with a scheduled bank; Self NA

Subscription to 5 year Time Deposit in an a/c under the Post Office; Self Any member

Subscription to an account under the Senior Citizens Saving Self Any member
Scheme;

Subscription to notified NABARD Bonds Self Any member

Any sum paid to any scheme of-

 PSU/PSC engaged in providing Long Term finance for
construction of residential houses in India Self Any member
 Housing board for the purpose of planning, development or
Self Any Member
improvement
Any payment towards the cost of purchase/construction of a
residential property where loan is taken from
Self Any Member
 Govt., bank, co-operative bank, LIC, NHB
 Assessee’s employer where such employer is public Co./public
sector Co./university/co-operative society
Note:

1. Income from such property should be chargeable to tax under the

head House Property.

2. Payment through installment under Self financing scheme is also

covered.

3. STAMP DUTY & REGISTRATION FEE PAID IS ALSO ELIGIBLE

Amount invested in
 Approved debentures/ equity shares in a public Co. engaged in
infrastructure facility; or Self Any Member

 Units of MF proceeds of which are utilized for the developing,

maintaining, etc., of a new infrastructure facility. Self Any Member

Amount deposited in Sukanya Samriddhi Account Scheme (No Self, Girl Child or Girl Child for
Deduction to HUF) whom Individual is a Legal
Guardian.

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SSGURU CA SURAJ SATIJA
Contribution to additional account under NPS Inserted by Finance Contribution by a Central
(No. 2) Act 2019 – W.e.f. AY 20-21 (No Deduction to HUF) Government employee to
additional account under
There are two types of NPS account i.e., Tier I and Tier II, to which an NPS (specified account)
individual can contribute. Section 80CCD provides deduction in referred to in section 80CCD
respect of contribution to individual pension account [Tier I account] for a fixed period of not less
under the NPS [referred to in section 20(2)(a) of the Pension Fund than 3 years and which is in
Regulatory and Development Authority Act, 2013 (PFRDA)] whereas accordance with the scheme
deduction under section 80C is allowable in respect of contribution by notified by the Central
Central Government employee to additional account [Tier II account] Government for this purpose
of NPS [referred to in section 20(3) of the PFRDA], which does not qualifies for deduction under
qualify for deduction under section 80CCD. section 80C.

Thus, Tier II account is the additional account under NPS, contribution It may be noted that only the
to which would qualify for deduction under section 80C only in the contribution to the
hands of a Central Government employee. additional account under
NPS will qualify for
deduction under section 80C.

Note: Child may be Dependent/Independent/Male/Female/Minor/Major/Married/Unmarried.

Amount paid on Life Insurance Policies – Exempt [Section 10(10D)]

1) As per section 10(10D), any sum received on maturity of life insurance policy (including bonus)
is not chargeable to tax.
2) Exemption is not available in respect of:
a) Any Sum received under Section 80DD
b) Any Sum received under a Keyman Insurance Policy
3) Exemption u/s 10(10D) for insurance policies issued on or after 1.4.2012 would only be available
for policies where the premium payable for any of the years during the term of the policy does not
exceed 10% of the actual capital sum assured (as against 20% upto 31.03.2012)
[If the premium payable during any PY for a policy issued on or after 1.4.2012 exceeds 10% of the
actual capital sum assured, the entire amount received under such policy shall be taxable.]
However, the above provision shall not apply to any sum received on the death of a person.
4) The limit of 10% has been increased to 15 per cent for insurance (if policy is issued on or after
1.4.2013) on the life of any person who is
a. a person with disability or a person with severe disability as referred to in section 80U; or

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SSGURU CA SURAJ SATIJA
b. suffering from disease or ailment as specified in the rules made under section 80DDB.

Contribution to certain pension funds [Section 80CCC]

1) Applicability: ANY INDIVIDUAL Maximum Limit: ` 150,000
2) Amount paid or deposited for any annuity plan of LIC/ Any other Insurer for receiving Pension
from the Pension Fund,
3) Taxable as Income on Withdrawal:
 Where any amount standing to the credit of the assessee in a PENSION FUND 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.

Deduction in respect of contribution to NPS of CG [Sec 80CCD]

(ATAL PENSION YOJNA IS ALSO ELIGIBLE FOR DEDUCTION U/S 80CCD)
1) Applicability: ANY INDIVIDUAL [Employed (CG or any other employer) or Self Employed]
2) Nature of Payment: Employee’s Contribution (including Self employed) as well as Employer
Contributions to New Pension Scheme [NPS]
3) Quantum of Deduction:
(A) In Case of Employment:
a. Contribution made by the employee or 10% of Salary whichever is lower [80CCD(1)] &
b. Contribution made by the employer or 10% of Salary (14% of salary, in case of contribution
made by the Central Government - NEW) whichever is lower [80CCD(2)]
(B) In Case of Self Employment: Contribution made or 20% of GTI, whichever is less [80CCD(1)]
4) The entire employer’s contribution would be included in the Salary of the employee.
However, deduction under section 80CCD would be restricted to 10% of salary.
5) “Salary” includes Dearness Allowance, if the terms of employment so provide, but excludes all
other allowances and perquisites. [Basic Salary + DA (R)]
6) 80CCD(1B) – An Individual is eligible for additional deduction of upto ` 50,000 in respect of
the whole of the amount paid or deposited under NPS, whether or not any deduction is allowed
under section 80CCD(1).

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7) Any amount received from Pension account shall be taxed as income in the year of receipt in the
hands of the assessee. However, amount received by nominee on the death of the assessee
shall not be taxable.
8) However, amount received on maturity will not be taxable if the same is used for
purchasing an annuity plan in the same previous year. Pension received from such annuity plan
will be taxable to assessee/nominee
9) Any payment from NPS to assessee on closure of account/scheme as referred in Section
80CCD, to the extent of 60% amount payable is Exempt. [Sec 10(12A)]
10) Any payment from NPS to an Employee on partial withdrawal made out of his account, to
the extent it does not exceed 25% of the amount of contributions made by him is Exempt.
[Section 10(12B)]

Limit on deductions under sections 80C, 80CCC & 80CCD [Section 80CCE]
This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD
(1) to ` 1,50,000 lakh.
Consequently, deduction to assessee in relation to employer’s contribution to pension
scheme shall be available over and above ` 1,50,000 lakh limit.
Further, Assessee’s contribution to CG Pension fund as per section 80CCD(1B) is also not
covered in limit specified in Section 80CCE.

Deduction in respect of Health insurance premium [Section 80D]

1. Applicability: INDIVIDUAL or HUF
2. Nature of payment:
(a) Premium towards Mediclaim Health Insurance Policy taken
a. In case of an Individual: In the name of Individual, Spouse, Parents and dependent children
b. In case of HUF: In the name of any Member
(b) In case of Senior Citizen, Medical expenditure incurred if no payment is made for health
insurance premium. (HUF – Any Member being Senior Citizen)
(c) Contribution to Central Government Health Scheme [CGHS] or other health scheme as
notified by CG is also eligible for deduction if it is taken in the name of Individual, Spouse or
Dependent Children.
(d) Any payment made by an individual on account of preventive health check up of self,
spouse, dependent children or parent(s) during the PY [maximum amount – 5,000 within
overall limit]

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SSGURU CA SURAJ SATIJA
3. Maximum Amount of Deduction:

4. Senior Citizen means an Individual + Resident in India +the age of 60 years or more
5. Payment shall be made
a. by any mode, including cash, in respect of any sum paid on account of preventive health
check up (maximum limit – ` 5,000);
b. by any mode, other than cash, in all other cases.
6. In case of single premium health insurance policies having cover of more than one year,
Deduction under section 80D shall be allowed on proportionate basis for the number of
years for which health insurance cover is provided, subject to the specified monetary limit.

Deduction in respect of maintenance including medical treatment of a dependent

disabled [Section 80DD]
1) Applicability: Resident INDIVIDUAL OR RESIDENT HUF.
2) Assessee must have a Dependent Disabled Relative:
Situation Relative Includes
In case of Individual Spouse, Children, Parents, Brothers & Sisters of the Individual

In case of HUF Any Member

1. Dependents means who is wholly or mainly dependent on the assessee and has not claimed
any deduction under section 80U in the computation of his income.

2. Disability includes Blindness, Low Vision, Hearing impairment, mental illness etc.

3) Nature of Expenditure on Such Relative: Assessee has

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SSGURU CA SURAJ SATIJA
 paid any amount 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 of LIC or any other insurer for the
maintenance of a dependant, being a person with disability, qualifies for deduction.
4) Quantum of Deduction:
Relative suffering with Disability ` 75,000
Relative suffering with Severe Disability [80% or more] ` 125,000
Tax Point: Deduction shall be irrespective of actual expenditure incurred.
5) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where the
condition of disability requires reassessment, a fresh certificate is required.
6) Where the Assessee has deposited any amount in annuity plan of LIC or UTI etc for the
benefit of disabled person and such person predeceases – than any amount received from such
annuity plan shall be deemed to be income of the assessee of the previous year in which such
amount is received by the assessee.

Deduction in the case of a Person with Disability [Section 80U]

1) ELIGIBLE ASSESSEE: Applicable to a RESIDENT INDIVIDUAL, who, at any time during the
previous year, is certified by the medical authority to be a person with disability (Blindness, Low
Vision, Hearing impairment etc.).
2) FIXED DEDUCTION: In case of
Person with Disability - ` 75,000
Person with severe disability - ` 1,25,000
[Irrespective of any expenditure]
3) Individuals also include persons suffering from autism, cerebral palsy and multiple
disabilities.
4) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where the
condition of disability requires reassessment, a fresh certificate is required.

Deduction in respect of medical treatment etc. [Section 80DDB]

1) Applicability: RESIDENT INDIVIDUAL & RESIDENT HUF
2) Nature of Expenditure: The assessee has actually paid any amount for the medical treatment
of such disease or ailment as may be specified in the rules made in this behalf by the Board [Specified
Disease – Rule 11DD] for
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Situation Relative Includes
In case of Individual Himself/Herself or for dependent relative being Spouse,
Children, Parents, Brothers & Sisters of that Individual

In case of HUF Any Member

Dependents means who is wholly or mainly dependent on the assessee for his support
and maintenance

3) Quantum of Deduction: Lower of the Two:

(a) Amount actually paid or
(b) ` 40,000 / In case of Senior Citizen – ` 100,000
4) Senior Citizen means an Individual + Resident in India + the age of 60 years or more
5) Certificate: No such deduction shall be allowed unless the assessee furnishes a certificate from
specialist working in a Government hospital
6) The final deduction under this section shall be reduced by the amount received, if any,
under insurance from an insurer, or reimbursed by an employer, for the medical treatment of
the assessee or the dependent. [Amount derived as above Less Insurance claim received]

Interest on loan taken for higher education [Section 80E]

1) Applicability: Individual
2) Nature of Payment: He has paid any interest on loan taken by him from any Financial
Institution or Approved Charitable Institution.
3) Purpose of Loan:
The loan must have been taken for the purpose of pursuing his/her own higher education or for
higher education of his or her relative. Relative means:
(a) Spouse or
(b) Children (Dependent or Independent) or
(c) the student for whom the individual is the legal guardian.
4) Quantum of Deduction: Amount of Interest paid during the PY
5) Maximum Permissible Period: 8 Assessment Years
Deduction is available for 8 Assessment years starting from the AY in which the assessee starts
paying the interest on loan OR until the interest is paid by the assessee in full, whichever is earlier.

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6) “Higher Education” means any course of study (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent.

Deduction in respect of interest on loan taken for residential house property [Sec.
80EE] w.e.f. AY 2017-18
 Conditions - The following conditions should be satisfied in order to claim deduction under
section 80EE –
1. The assessee is an Individual. He may be resident or non-resident.
2. He has taken a loan.
3. Loan is taken for acquisition of residential house property.
4. Loan is taken from Financial Institution (includes Banks/Housing finance Companies).
5. Loan has been sanctioned during April 1, 2016 and March 31, 2017.
6. The amount of loan sanctioned for residential house property does not exceed ` 35 lakh.
7. The value of residential house property does not exceed ` 50 lakh.
8. The assessee does not own any residential house property on the date of sanction of loan.

 Amount of Deduction:
Deduction will be available in respect of interest payable on the above loan or ` 50,000,
whichever is less.

 Double deduction not possible - If deduction is claimed under section 80EE, no deduction will
be allowed in respect of such income under any other provision of the Act for the same or any other
assessment year.

NO DEDUCTION FROM AY 18-19 IN RESPECT ON NEW LOAN

[If loan is sanctioned in PY 16-17 & above conditions are satisfied then assessee is eligible
for deduction in PY 17-18 or other succeeding years.]

Deduction in respect of interest payable on loan taken for acquisition of residential

house property [Section 80EEA]
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21 (Amended by Finance Act 2020)

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Eligible assessee: An individual who has taken a loan for acquisition of residential house property
from any financial institution. Interest payable on such loan would qualify for deduction under this
section.

Conditions: The conditions to be satisfied for availing this deduction are as follows –
1) the loan has been sanctioned by the financial institution during the period beginning on
the 1st day of April, 2019 and ending on the 31st day of March, 2020 March, 2021;
2) the stamp duty value of residential house property does not exceed 45 lakh rupees;
3) the assessee does not own any residential house property on the date of sanction of loan.
4) The individual is not eligible to claim deduction under section 80EE,

Period of benefit: The benefit of deduction under this section would be available from A.Y. 2020-
21 and subsequent assessment years till the repayment of loan continues.

Quantum of deduction: The maximum deduction allowable is ` 1,50,000.

The deduction of upto ` 1,50,000 under section 80EEA is over and above the deduction available
under section 24(b) in respect of interest payable on loan borrowed for acquisition of a residential
house property.
In respect of self-occupied house property, interest deduction under section 24(b) is restricted to `
2,00,000. In case of let out or deemed to be let out property, even though there is no limit under
section 24(b), section 71(3A) restricts the amount of loss from house property to be set-off against
any other head of income to ` 2,00,000. Accordingly, if interest payable in respect of acquisition of
eligible house property is more than ` 2,00,000, the excess can be claimed as deduction under
section 80EEA, subject to fulfilment of conditions.

No deduction under any other provision:

The interest allowed as deduction under section 80EEA will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Meaning of “Financial Institution”
 A banking company to which the Banking Regulation Act, 1949 applies; or
 Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949;
or
 A housing finance company.

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A public company formed or registered in India with the main object of carrying on the business of
providing long-term finance for construction or purchase of houses in India for residential
purposes.

Deduction in respect of interest payable on loan taken for purchase of electric vehicle
[Section 80EEB] Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21
Eligible Assessee: An Individual who has taken a loan for purchase of an electric vehicle from any
financial institution, Interest payable on such loan would qualify for deduction under this section.
Conditions:
 The assessee should be an individual.
 Loan should be taken for purchase of an electric vehicle
 loan has been sanctioned by the financial institution during the period beginning on the 1st day
of April, 2019 and ending on the 31st day of March, 2023.

Period of benefit: The benefit of deduction under this section would be available from A.Y.2020-
21 and subsequent assessment years till the repayment of loan continues.

Quantum of deduction: Interest payable, subject to a maximum of ` 1,50,000.

No deduction under any other provision:

The interest allowed as deduction under section 80EEB will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Financial institution
- A banking company to which the Banking Regulation Act, 1949 applies;
- Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949;
- Any deposit taking NBFC; or
- A systemically important non-deposit taking NBFC i.e., a NBFC which is not accepting or
holding public deposits and having total assets of not less than ` 500 crore as per the last audited
balance sheet and is registered with the RBI.
Electric Vehicle
A vehicle which is powered exclusively by an electric motor whose traction energy is supplied
exclusively by traction battery installed in the vehicle. The vehicle should have electric regenerative

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braking system, which during braking provides for the conversion of vehicle kinetic energy into
electrical energy.

Donation [Section 80G] Applicability: All assessee

Nature: Donation in Kind is not eligible.

No deduction shall be allowed u/s 80G in respect of donation exceeding ` 2,000 if paid in cash.

A. No ceiling limit for amount of donation and deduction of such donation

1) Deduction = 100% of donation 2) Deduction = 50% of

donation
1. The National Defence Fund 1. The Jawaharlal Nehru
2. Prime Minister’s National Relief Fund Memorial Fund
3. The National Foundation for Communal Harmony 2. Prime Minister’s
4. Approved University or educational institution of national Drought Relief Fund
eminence 3. Indira Gandhi Memorial
5. Maharashtra Chief Minister’s Earthquake Relief Fund Trust
6. Gujarat Relief Fund for earthquake victims 4. Rajiv Gandhi
7. Zila Saksharta Samiti Foundation
8. National Blood Transfusion Council
9. Any State Government Fund set up to provide medical relief to the
poor
10. The National illness Assistance Fund
11. The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief
Fund
12. National Sports Fund
13. National Cultural Fund
14. Fund for Technology Development and Application
15. National Trust for welfare of persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities
16. The National Children’s Fund
17. National Fund for Control of Drug Abuse
18. Swachh Bharat Kosh
19. Clean Ganga Fund [Point 18 & 19: Donation does not qualify for
deduction if it is a Part of CSR Expenses]
20. Prime Minister's Citizen Assistance and Relief in Emergency
Situations Fund (PM Cares Fund) [W.r.e.f. AY 2020-21]

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B. Deduction of some donation is subject to QUALIFYING AMOUNT [In aggregate]
3) 100% deduction shall be 4) 50% deduction shall be allowed subject to the
allowed subject to the qualifying qualifying amount if the donation are made-
amount if the donation are made  To Govt., or local authority, for charitable purpose
– except for promoting family planning;
 To Govt., or any approved  To Approved Charitable Institution u/s. 80G.
association / institution for  To any authority or corporation for the benefit of
promoting family planning; minority community.
 By company to the Indian  For renovation or for repair of any temple, mosque,
Olympic Association or Notified Gurudwara, church, or other place notified to be of historic
association / institution in India / archeological / artistic importance or as a place of public
for the development of worship of renown;
Infrastructure for sports & games  To housing development authority constituted in
or the sponsorship for sports & India.
games in India.

QUALIFYING AMOUNT: It means 10% of Adjusted GTI or the Donations given [in Aggregate]
whichever is less.
Adjusted GTI means:
Gross Total Income – LTCG – STCG u/s 111A – All deduction of Chapter VIA
except 80G – Few Sections related to Non-Residents/Foreign Companies

Deduction in respect of Rent paid [Section 80GG]

1) Applicability: In respect of RENT paid by an Individual.
2) The following conditions have to be satisfied for claiming deduction under section 80GG:
a) No House Rent Allowances [HRA] or No Rent Free Accommodation [RFA]: The assessee
should not be receiving any HRA exempt u/s 10(13A) and also should not be provided with RFA.
b) No House at Place of Employment:
The Individual or his spouse or his minor child or an HUF of which he is a member should not
own any accommodation at the place where he ordinarily resides or perform duties of his office or
employment or carries on his business or profession.
c) No Claim for the benefit of Self-occupied House Property:
Assessee should not treat any residential house situated at other places as Self-occupied Property
u/s 23 i.e. Annual Value = NIL.
d) Rent: The assessee must be paying rent for the Residential Accommodation occupied by him
for the purposes of his own residence.

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e) Proof of Rent Payment is required to file.
3) Quantum of deduction: Least of the following
a) Actual rent paid minus 10% of the Adjusted GTI, or
b) 25% of the Adjusted GTI, or
c) ` 5,000 p.m.

Adjusted GTI means Gross Total Income XXX

Less: LTCG u/s 112 or 112A (XXX)
Less: STCG u/s 111A (XXX)
Less: Deduction u/s 80C to 80U except 80GG (XXX)

DEDUCTION IN RESPECT OF ROYALTY INCOME ON BOOKS [Sec 80QQB]

1. ELIGIBLE ASSESSEE:
Resident individual being an author who’s GTI includes INCOME in the nature of
(a) Lump sum consideration for his interests in the copyright of any book being a work of literary,
artistic, scientific nature or
(b) Royalty or copyright fees in respect of such book.
2. Books shall not include brochures, guides, journal, diaries, commentaries, magazines,
newspapers, pamphlets, textbooks for schools / tracts & other publications of similar nature.
3. DEDUCTION: LOWER OF
a) 100% of such lump sum income [15% of the value of books in case of Royalty] (Less:
Related Expenses)
OR RESIDENT INDIVIDUAL BEING AUTHORS (Royalty Income)

b) ` 3,00,000

DEDUCTION IN RESPECT OF ROYALTY INCOME ON PATENTS [Sec 80RRB]

1. ELIGIBLE ASSESSEE:
RESIDENT Individual whose GTI includes Royalty Income from Patent.
2. The deduction shall not be available on
a. any capital sum received for sale of patent, which is chargeable u/h Capital Gains

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b. any consideration for sale of product manufactured with the use of the patented article
3. DEDUCTION: lower of
a. 100% of such income; or
b. ` 3,00,000

COMMON FOR 80QQB/80RRB BOTH

If income earned from foreign sources: Deduction is allowed to the extent the income is brought
into India in Convertible Foreign Exchange within 6 months from end of Previous Year or such
extended period as allowed by RBI / competent authority.
Claim in Return of Income: Mandatory for deduction

Deduction in respect of interest on deposits in saving accounts to the extent of `

10,000 [Section 80TTA]
1. Applicability: Individual or HUF (Other than senior citizen covered u/s 80TTB)
2. Maximum Qualifying Amount of deduction under section 80TTA: ` 10,000
3. GTI includes interest on deposits (not being time deposit) in a Saving Bank Account with
a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to
any partner/member as the case may be.

Deduction in respect of interest on deposits to the extent of ` 50,000 [Section 80TTB]

1. Applicability: Senior Citizen
2. Maximum Qualifying Amount of deduction under section 80TTB: ` 50,000
3. GTI includes interest on deposits with
a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to
any partner/member as the case may be.

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Note: Senior citizen who is eligible for deduction u/s 80TTB will not be able to claim deduction u/s
80TTA.

Deduction in respect of employment of new Workmen/Employees [Section 80JJAA]

1. Where the GTI of an assessee (any person) to whom section 44AB applies, includes any profits
and gains derived from business, a deduction of an amount equal to 30% of additional employee
cost incurred in the course of such business in the previous year shall be allowed, for 3 assessment
years including the assessment year relevant to the previous year in which such employment is
provided.
2. No deduction under sub-section (1) shall be allowed:
(a) if the business is formed by splitting up, or the reconstruction, of an existing business:
Provided that nothing contained in this clause shall apply in respect of a business which is formed
as a result of re-establishment, reconstruction or revival by the assessee of the business in the
circumstances and within the period specified in Section 33B;
(b) if the business is acquired by the assessee by way of transfer from any other person or as
a result of any business reorganisation;
(c) unless the assessee furnishes alongwith the return of income the report of the accountant the
report [Form No. 10DA] of the accountant, as defined in the Explanation below sub-section
(2) of section 288, before the specified date (date one month prior to the due date of
furnishing return under Section 139) referred to in section 44AB i.e. 30th Sept of the AY
(W.r.e.f. AY 2020-21) giving such particulars in the report as may be prescribed

NOTE:
A. "Additional Employee Cost" means total emoluments paid or payable to additional
employees employed during the previous year:
Provided that 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 total 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 account payee bank
draft or by use of electronic clearing system through a bank account or through any other
prescribed electronic mode;
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay as other electronic modes of payment [CBDT Notification No. 8/2020
dated 29.01.2020].

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Provided further that in the first year of a new business, emoluments paid or payable to
employees employed during that previous year shall be deemed to be the additional employee
cost;
B. "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 day of the preceding year, but does not include,-
(a) an employee whose total emoluments are more than ` 25,000 per month; or
(b) an employee for whom the entire contribution is paid by the Government under the
Employees' Pension Scheme; or
(c) an employee employed for a period of less than 240 days during the previous year (150 days
in case of Apparel, footwear or leather products); or
(d) an employee who does not participate in the recognised provident fund;
where an employee is employed during the previous year for a period of less than two
hundred and forty days or one hundred and fifty days, as the case may be, but is employed
for a period of two hundred and forty days or one hundred and fifty days, as the case may be,
in the immediately succeeding year, he shall be deemed to have been employed in the
succeeding year and the provisions of this section shall apply accordingly
C. "emoluments" means any sum paid or payable to an employee in lieu of his employment
by whatever name called, but does not include-
(a) any contribution paid or payable by the employer to any pension fund or provident fund or any
other fund for the benefit of the employee under any law for the time being in force; and
(b) any lump-sum payment paid or payable to an employee at the time of termination of his
service or superannuation or voluntary retirement, such as gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension and the like.
D. From A.Y. 2017-18, it is not necessary that the employee should qualify as a “workman”
under the Industrial Disputes Act, 1947 for the employer to avail benefit under section
80JJAA.

Illustration 1:
X a resident individual incurs Rs. 30,000 expenditure on his own treatment of a specified disease and Rs.
15,000 on medical treatment of his wife in a Government hospital. Rs. 2,000 is reimbursed by insurance
company for his wife and Rs. 5,000 are reimbursed by his employer for him. Compute the amount of
deduction under section 80DDB?

Illustration 2:

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1. If X, an individual incurs Rs. 1,80,000 expenditure on medical treatment of a specified disease for his
mother (65 years) in a hospital recognised by Chief Commissioner and Rs. 8,000 are reimbursed by insurance
company, what will be the amount of deduction available to him under section 80DDB?
(a) Rs. 92,000
(b) Rs. 72,000
(c) Rs. 1,80,000
(d) Any amount
2. If X, an individual incurs Rs. 1,80,000 expenditure on medical treatment of a specified disease for his grand
mother (85 years) in a hospital recognised by Chief Commissioner and Rs. 8,000 are reimbursed by insurance
company, what will be the amount of deduction available to him under section 80DDB?
(a) Rs. 60,000
(b) Rs. 1,80,000
(c) Rs. 92,000
(d) NIL

Illustration 3
Find out the amount of deduction under Section 80 EE for the assessment year 2021-22 where an individual
has applied for a loan for acquisition of house property on March 15, 2018 for Rs. 50 lakh and the loan is
sanctioned on May 10, 2018 for Rs. 40 lakh only. He does not own any other residential house property and
pays interest of Rs. 70,000 for previous year 2019-20.
(a) 70,000
(b) 50,000
(c) NIL
(d) 40,000
In the above case can he claim any deduction under section 24? What amount?
(a) Yes (Rs. 50,000)
(b) No
(c) Yes (Rs. 20,000)
(d) Yes ( Rs. 70,000)

Illustration 4
if Mr. ‘a’ had income against the following heads,
taxable salary income 40,000
income from house property 75,000

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income from other sources 20,000
interest on securities of DCM ltd. (Gross) 8,000
1,43,000
He made following payments:
Contribution to P.F. (recognised) 2,000
donation to the Prime Minister’s National relief Fund 2,500
donation to the indira Gandhi Memorial trust 4,000
donation to an approved association for promoting family planning 4,000
donation to approved charitable trust 10,000
Compute Mr. a’s taxable income for assessment year 2021-22.

IIIustration 5
If Mr. ‘A’ had income against the following heads,

Professional income 6,40,000

Income from STCG (covered under section 111A) 5,000

Income from LTCG 12,000
Income from other sources 10,000
Contribution to P.P.F. 70,000
Payment of Rent 84,000

Compute Mr. A’s taxable income for assessment year 2021-22.

ILLUSTRATION 6
1. deduction under Section 80-iB is available to:
(a) Charitable trust
(b) tour and travels
(c) industrial research
(d) Convention Centre
2. Which of the following gets 50% deduction on the profits and gains derived from its business for a period
of five consecutive years beginning from the initial assessment year in any place?
(a) Multiplex theatre
(b) Convention Centre
(c) Hospital
(d) Charitable trust

Illustration 7

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Mr. X receives royalty on books Rs. 1,00,000 at a rate of 18 percent and incurs Rs. 10, 000 as expenditure for earning royalty.
The books are covered under section 80QQB and royalty is received from abroad and Rs. 50,000 are remitted to India
till September 30, 2020. Determine deduction under section 80 QQB for the assessment year 2021-22.

Illustration 8
Mr. ram who is a person with disability submit the following information. Compute (a) the taxable income (b) the
tax Payable for the assessment year 2021-2022.
(i) Salary (per annum) 3,00,000
(ii) rent received 48,000
(iii) dividend from Co-operative Society 1,000
(iv) interest on Savings Bank deposits 18,000
(v) interest on Government securities 1,000
(vi) Winning from lotteries (gross) 5,000
(vii) NSC (Viii issue) purchased during the year 10,000
(viii) deposit under PPF Scheme 30,000

He earned a long-term capital gain of rs. 15,000 on sale of gold during the year

Illustration 9
Rahul who is a resident in india, is a person with disability. He provides the following particulars of his income for the
year ended 31.3.2021.
(a) Salary for working as a cable operator (per month) 18,000
(b) interest on government securities (gross) 45,000
(c) dividend from indian Company 5,000
(d) Honorarium from school of orphanage for giving his service 49,000

He has donated rs. 20,000 to the school for orphanage which is approved as a charitable institution and contributed
rs. 2,000 to Prime Minister National relief Fund. He has also paid rs.3,000 by credit card as premium of mediclaim
policy. His father is also a person with disability and is dependent on him for medical treatment and rehabilitation.
rahul spends rs. 8,000 during the year on him.
Compute the total income for the assessment year 2021-22, assuming he has deposited rs. 20,000 in Public Provident
Fund account.
Illustration 10
Following are the particulars of income of Mr. ram, who is 70 years old resident in india, for the assessment year
2021-22:
Gross total income rs. 8,10,040 which includes long-term capital gain of rs. 2,55,000, Short-term capital gain of rs.
88,000, interest income of rs. 12,000 from savings bank deposits with banks. Mr. ram invested in PPF rs. 1,40,000
and also paid a medical insurance premium rs. 31,000. Compute the total income of Mr. ram.

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ANSWER:
Illustration 1:
Solution: The amount of deduction under section 80DDB shall be lower of 1 and 2 below less
amount recovered from insurance company and employer.
1. 30,000 + 15,000 = 45,000
2. 40,000
Rs. 40,000 less (2,000+5,000) = 33,000
Hence, Rs. 33, 000 is the amount of deduction under section 80 DDB.

Illustration 4
Solution : His taxable income for assessment year 2021-22 will be computed as follows:
Net income from salary 40,000
income from house property 75,000
income from other sources 28,000
Gross total income 1,43,000
Less: deduction under Section 80C 2,000
Less: deduction permissible: donation under Section 80G 13,500
(as worked out below)
taxable income 1,27,500
income-tax on rs.1,27,500 Nil
Net tax payable (including Health & Education cess @ 4%) NIL
Note: under Section 80G the various items of donations will be dealt with as under:
1. Prime Minister’s National relief Fund deductible in full without any restrictions.
2. Donation to Indira Gandhi Memorial Trust is deductible to the extent of 50% of donation without any
restrictions.
3. Donation to approved family planning association is deductible in full so long as it is within the 10% limit
imposed by Section 80G(4).
4. Donation to an approved charitable trust is deductible to the tune of 50% so long as it is also within the
limit imposed by Section 80G(4).
Calculation of deduction under Section 80G:
Gross total income 1,43,000
Less : deduction under Sections 80C to 80u 2,000
adjusted gross total income 1,41,000

(i) donation on which qualifying limit is not applicable:

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(A) Allowed @ 100%
Prime Minister’s National relief Fund 2,500
(B) Allowed @ 50%
i. indira Gandhi Memorial trust (4000) 2,000
(ii) donation to which qualifying limit is applicable:
(1) For promotion of family planning 4,000
(2) Charitable trust 10,000
Limited to 10% of Adjusted Gross Total Income: 14,000
i.e. rs.14,100/- Since donation to family planning are lowest than maximum allowable.
therefore, allowable amount is (4,000 + 5,000) rs. 9,000/- 9,000
total deduction for Section 80G 13,500

Illustration 5
Solution : His taxable income for assessment year 2021-22 will be computed as follows:
Professional income 6,40,000

income from capital gains 17,000

income from other sources 10,000
Gross total income 6,67,000
Less : deduction under Section 80C 70,000

Less : deduction under Section 80GG 26,000

(as worked out below)

taxable income 571,000

Working Note:

least of the following is deductible under section 80GG

– 84,000 – (10% of 5,80,000) = 26,000

– 25% of 5,80,000 = 1,45,000.
– rs. 5,000 * 12 = 60,000

deduction under Section 80GG is lower of three above rs. 26,000.

adjusted total income = 6,67,000-17,000-70,000= 5,80,000.

Note: if the assessee opted to pay tax under section 115BaC, deduction under section 80C / 80GG is not
available.

Illustration 7

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Solution:

eligible income (before deducting expenditure incurred) is lower of

1. lump sum consideration Nil
2. Royalty not exceeding 15% (1,00,000/18) *15 83,334
3. income brought to india in convertible foreign exchange 50,000

eligible income rs. 50,000

expenditure incurred rs. 10,000
deduction under section 80 QQB rs. 40,000 (subject to a maximum of rs. 3, 00,000).

Illustration 8
Solution
(a) Computation of total income rs.
income from Basic Salary 3,00,000
Less : deduction under section 16(ia) – Standard deduction (50,000)
2,50,000
Income from house property
rent received 48,000
Less : Statutory Deduction @ 30% (14,400) 33,600
Capital Gains
long-term capital gains 15,000
Income from other sources
dividend from co-operative society 1,000
interest on saving bank deposits 18,000
interest on Government Securities 1,000
Winning from lotteries 5,000 25,000
Gross total income 3,23,600
Less : deduction under section 80C to 80u
(i) under section 80C rs. (10,000 + 30,000) (40000)
(ii) under section 80tta (10,000)
(iii) under section 80u (50,000) (1,00,000)
total income 2,23,600

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(B) Computation of tax on total income

Tax on winning from lotteries (30% of Rs.5,000) 1,500
Tax on long-term capital gains (20% of Rs.15,000) 3,000
Balance of total income rs.2,03,600 Nil
tax Payable, bring total income below rs. 2,50,000 Nil
Note: the solution has been made assuming the assessee has not opted to pay tax under section 115BaC of
the income tax act, 1961.

Illustration 9
Solution Computation of total income for the assessment year 2019-20
income from salary rs. rs.
Gross Salary 2,16,000
Less: deduction (Standard) 50,000 1,66,000
Income from other sources
interest on Government Securities 45,000
dividend from indian Company exempt
Honorarium 49,000 94,000
Gross total income 2,60,000
Less : deductions:
under section 80C 20,000
(ii) under section 80d 3,000
(iii) under section 80dd 75,000
(iv) under section 80u 75,000
(v) under section 80G
Prime Minister Relief Fund (100%of Rs. 2,000) 2,000
Orphanage School (50% of Rs. 8,700)
10% of 87,000 Rs. (2,60,000 - 1,73,000) 4,350 6,350 1,79,350
total income 80,650

Note: the solution has been made assuming the assessee has not opted to pay tax under section 115BaC of the income
tax act, 1961.

Illustration 10
Solution Computation of total income for the assessment year 2021-22
rs.

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Gross total income 8,10,040
Less: deductions:
under section 80C 1,40,000
undersection80d 31,000
undersection80tta 10,000
total income 6,29,040
Note: the solution has been made assuming the assessee has not opted to pay tax under section 115BaC of
the income tax act, 1961.

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COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF VARIOUS
ENTITIES
Computation of Tax Liability Sections Amount
1. Income from Salary Less : 15 to 17
deductions u/s 16
ia. Standard deduction of rs. 50,000 or Gross Salary, whichever is lower. XXX
ii. entertainment allowance
iii. Professional tax Paid
2. Income from House property 22 to 27
Less : deduction u/s 24 Standard
deduction XXX
interest on House Property loan
3. Income from Profits and gains from business and profession 28 to 44 XXX
Turnover/Receipts/Fees/Sales
Less : deductions u/s 30 to 37(1)
4. Income from Capital Gains 45 to 55a XXX
Full value of consideration
Less : Cost of acquisition/Cost of improvement/transfer expenses
Less : exemption u/s 54/54B/54ee etc
5. Income from Other Sources 56 to 59 XXX
Income u/s 56
Less : Deductions u/s 57
Add : Clubbing of income
Less : Set Off & Carry Forward Provisions’ under respective heads
Gross Total Income [GTI] xxx
Less : deductions under Chapter Via 80C to 80u ( XXX )
Total Income (Rounded off to nearest Rs.10 u/s 288A) xxx
Tax on Total Income XXX
Add : Surcharge on total tax (if applicable) XXX
Less : Rebate u/s 87A (XXX)
Add : 4% Health & Education Cess on [Total tax + Surcharge – Rebate] XXX
Net Tax Liability XXX

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
SSGURU CA SURAJ SATIJA
Less : (i). tdS (ii). advance tax (iii). relief u/s 89 (XXX)
Balance tax payable on Self Assessment u/s 140A XXX
Less : Self assessment tax paid XXX
Balance tax Nil

Comparison of Existing Tax System with new Optional Tax System for Individual & HUF
EXISTING SYSTEM OF TAX NEW SYSTEM OF TAX U/S 115BAC
exemption limit for three exemption limit are applicable Only one exemption limit of rs.2,50,000
incomes taxable at available irrespective of age/residential
1) 5,00,000 for super senior citizen
Slab rates status
(minimum 80 years & resident)
2) rs 3,00,000 for senior citizen
(minimum 60 years but less than 80
years & resident)
3) rs.2,50,000 for other individual
Slab rates 3 different slab rates One slab rate
0 – 2,50,000 : Nil 0 to 2,50,000 Nil
> 2,50,000 upto 5,00,000 : 5% > 2,50,000 to 5,00,000 : 5%
> 5,00,000 upto 10,00,000 : 20% > 5,00,000 to 7,50,000 : 10%
> 10,00,000 : 30% > 7,50,000 to10,00,000 : 15%
> 10,00,00 to12,50,000 : 20%
0 – 3,00,000 : Nil
>3,00,000 upto 5,00,000 : 5% > 12,50,00 to 15,00,000 : 25%
>5,00,000 upto 10,00,000 : 20% > 15,00,000 30%
> 10,00,000 : 30%

0 – 5,00,000 : Nil
> 5,00,000 upto 10,00,000 : 20%
> 10,00,000 : 30%

Special rates of taxes available available

e.g. section
115BB,112,112a etc.
rebate u/s 87a available available
Chapter Vi- a available Not available except 80CCd(2), 80JJaa
deductions
Surcharge Applicable (10%/15%/25%/37%) Applicable at same rates (10% / 15% / 25%
/ 37%)
Health & education 4% 4%
Cess

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
SSGURU CA SURAJ SATIJA
deductions and available Many deductions & exemptions not
exemptions available
Set off of C/F losses & available Not allowed if related to deductions &
depreciation, from exemptions not allowed u/s 115BaC
past p/y
Set off of current available allowed except losses of House Property
year losses
intimation Not required as old tax system available by assessee can opt for new tax system only if
default intimation given in prescribed manner
Provisions of AMT applicable Not applicable
u/s 115JC

Illustration 1:
Gross total income of Mr. X, a tax consultant based at Mumbai, is rs. 18,00,000 (income from profession rs.
17,00,000 and interest on bank deposit rs. 1,00,000). He pays rs. 3,00,000 as house rent. He deposits rs. 50,000 in
public provident fund. Compute his taxable income for the assessment year 2021-22.
Option 1 : Assessee has not opted for Section 115BAC

Option 2 : Assessee has opted for Section 115BAC

Answer :

Assessee has not opted for Section 115BAC

Computation of taxable Income of Mr. X for the A.Y. 2021-22

Particular Amount (Rs.)

Professional income – PGBP 17,00,000
interest on Bank deposit – Other sources 1,00,000
Gross total income 18,00,000
Less: deductions under Chapter VI-A
u/s 80C (PPF) 50,000
u/s 80 GG (Note-1) 60,000
(1,10,000)
Total Income 16,90,000
Note 1: deduction u/s 80GG is least of the following: a)
rs. 60,000 (i.e. rs. 5000 x 12 months)
b) Rs. 4,37,500 [25% of total income (Rs. 18,00,000- 50,000)]
c) Rs. 1,25,000 (Excess of rent paid over 10% of total income (Rs. 3,00,000- 1,75,000))

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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Assessee has opted for Section 115BAC

Computation of taxable Income of Mr. X for the A.Y. 2021-22

Particular Amount (Rs.)

Professional income – PGBP 17,00,000
interest on Bank deposit – Other sources 1,00,000
Gross total income 18,00,000
less: deductions under Chapter Vi-a Nil
total income 18,00,000
Note 1: deduction u/s 80C & 80GG not allowed

Illustration 2:
From the following profit and loss account of Vinay for the year ended 31st March, 2021, compute his total
income and tax liability for the assessment year 2021-22:
Particulars Amount Particulars Amount
Rs. Rs.
Interest on capital 12,000 Gross profit 5,10,000
insurance 2,000 Brokerage 30,000
Bad debts 30,000 Bad debts recovered 15,000
(earlier allowed as deduction)
depreciation 34,000 Sundry receipts 18,000
advance tax 25,000 interest on debentures
General expenses 12,000 (gross) [TDS rs. 4,000] 40,000
advertisement 5,000
Salary 85,000
(including salary to Vinay rs.20,000)
interest on loan 8,000
Net profit 4,00,000
Total 6,13,000 Total 6,13,000

additional information:
(i) the amount of depreciation allowable as per income-tax rules is rs. 42,000.
(ii) General expenses include rs.5,000 given as Health insurance Premium.
(iii) Vinay pays rs. 5,200 as premium on his own life insurance policy of rs. 50,000 issued in 2016-17.
(iv) loan was obtained for payment of income-tax.
Option 1 : Assessee has not opted for Section 115BAC

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
SSGURU CA SURAJ SATIJA
Option 2 : Assessee has opted for Section 115BAC
Solution :

Assessee has not opted for Section 115BAC

Solution

Particulars Amount (Rs.) Amount (Rs.)

(i) income from business
Net profit for the year 4,00,000
Add : expenses not allowed under income tax act but debited to
P & l a/C
interest on capital (Note 2) 12,000
depreciation as per books of a/c 34,000
advance tax 25,000
General expenses 5,000
Salary to Vinay 20,000
interest on loan (Note 2) 8,000 1,04,000
Less : income not related to business and profession but
Credited to P& la/c
interest on debentures 40,000
deductible expenses not debited to P&l account
depreciation as per income tax act 42,000 (82,000)
Profits and Gains of Business & Profession 4,22,000
(ii) income from other sources interest on debenture 40,000
Gross total income (i + ii) 4,62,000
less: deduction u/S 80C – 80u
(i) Premium on life insurance policy (u/s 80C)(Note 1) (5,000)
(ii) Health insurance Premium (u/s 80 d) (5,000)
total taxable income 4,52,000
Note

1. Under section 80C deduction of life insurance premium cannot exceed 10% of the sum assured.
2. under Section 36(1)(iii) interest paid on borrowed capital is allowed as a deduction. interest on own capital is
not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as a deduction.
Assessee has opted for Sec 115BAC

Solution

Particulars Amount (Rs.) Amount (Rs.)

(i) income from business
Net profit for the year 4,00,000
Add : expenses not allowed under income tax act but debited to
P&La/C

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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interest on capital (Note 2) 12,000
depreciation as per books of a/c 34,000
advance tax 25,000
General expenses 5,000
Salary to Vinay 20,000
interest on loan (Note 2) 8,000 1,04,000
Less : income not related to business and profession but
Credited to P& l a/c
interest on debentures 40,000
deductible expenses not debited to P&l account
depreciation as per income tax act (Working Note) 42,000 (82,000)
Profits and Gains of Business & Profession 4,22,000
(ii) income from other sources interest on debenture 40,000
Gross total income (i + ii) 4,62,000
less: deduction u/S 80C – 80u Nil
total taxable income 4,62,000

Note

1. deduction u/s 80C is not allowed under Sec 115BAC

2. under Section 36(1)(iii) interest paid on borrowed capital is allowed as a deduction. interest on own capital is
not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as a deduction.
3. depreciation u/s 115BaC is allowed except additional depreciation as per prescribed manner

TAXATION OF HINDU UNDIVIDED FAMILY

The term ‘Hindu undivided family’ has not been defined in the Income-tax Act but it is treated as a separate
entity or person under section 2(31) of the Income-tax Act, 1961 for the purpose of assessment under the
Act. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common
ancestor and includes their wives and unmarried daughters. Jain and Sikh families even though are not
governed by the Hindu Law, but they are treated as HUF under the Act. An HUF cannot be created under a
contract and is created automatically in a Hindu Family. Creation of a HUF is a God-gifted phenomenon since
birth of a child to a married Hindu, automatically creates a new HUF. It is not at all necessary that every HUF
must have joint property or family income. [R. Subramania Iyer v. CIT (1955) 28, ITR, 352]. However, to
become an assessee under the Income-tax Act, there must be ‘income-yielding’ joint property of the family.
A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence and may be assessable
as a unit distinct from the apex joint family even when the bigger HUF is in place [CIT v. Khanna (1963) 49
ITR 232].
The Supreme Court’s decision in the case of Surjit Lal Chhabra v. CIT (1975 101 ITR 776) has come to stay as
one of the leading case laws. The ratio laid down by the Supreme Court had been applied by the Andhra
Pradesh, Orissa and Madras High Courts, followed by Bombay, Patna, Madhya Pradesh and Delhi High Courts
and relied upon by the Punjab High Court. In the latest case, the Delhi High Court held in Commissioner of
Income-tax v. S.P. Chopra (1991, 191 ITR 455) that the income from the half share of the property had to be
treated as the individual income of the assessee under the personal law and not as income of the family. The

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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character of the property had to be determined in accordance with the personal law of the assessee and not
on the basis of how the property had been treated by the revenue in respect of earlier assessments.
A son conceived or in his mother’s womb is equal in many respects to a son actually in existence, viz.,
inheritance, partition, survivorship etc. But this doctrine does not apply to the Income-tax Act. Hence, a son
conceived is not treated a member of the H.U.F. for Income-tax purposes. [IS. Srinivasan v. C.I.T., (1966) 60,
ITR, p.36 (S.C.)].
Jain and Sikh undivided families are also treated as Hindu undivided families unless, under special
circumstances, the assessee claims not to be treated as such. If such claim is made, the assessee shall have to
prove that there is some such custom in his family on account of which it cannot be treated as a Hindu
undivided family.
A Hindu does not cease to be a Hindu merely because he declared for the purpose of the Special Marriage
Act, 1872, that he does not profess Hindu Religion. Such a Hindu does form an H.U.F. with his children from
such marriage. [CIT v. Partap Chand (1959), 36 ITR, 262]. Similarly, a Muslim family governed by the
Marumakkathayam law constitutes ‘Tarwad’ or ‘Thavazhi’ and falls within the definition of a H.U.F. [V.K.P.
Abdul Kadar Haji v. Ag. ITO (1967) 66, ITR, 173].
If a Hindu gets converted as a Christian, the family of such a person will not be a HUF. However a Hindu, along
with his son (by a christian wife) who has been brought up as a Hindu will be a HUF. [CWT v. R. Sridharan
(1976) 104, ITR, 436 (S.C.)].
A Hindu Joint Family consists of two types of members:

1. Coparceners: The lineal male descendants of a person up to the third generation of such person are known
as coparceners. The coparceners acquire, on birth, ownership in the ancestral properties of such ascendant
and have a right to claim partition of such property at any time. However, w.e.f. 9.9.2005 due to amendment
of Hindu Succession Act, the daughter of a coparcener shall by birth become a coparcener in her own right
in the same manner as the son. Hence, the daughter can also ask for partition.
2. Other members: Such members include wives of male members of the family and other male members.
Widow or widows of deceased male member or members. [Gowli Buddanna v. C.I.T. (1966) 60, ITR, p. 293
(S.C.)]
However, an unmarried coparcener who receives share on the partition of joint family properties, cannot
form a Hindu undivided family unless he marries. After his marriage, he can hold the property received from
family as joint family property consisting of himself and his wife. [C. Krishna Prasadv. C.I.T. (1974) 97, p. 493
(S.C.)].

The joint property of the HUF is managed through Karta: Property of the family is ordinarily managed by the
father or other senior member for the time being of the family. He is called Karta. However, the senior
member may give up his right of management and a junior member may be appointed as Karta with the
consent of all other members. [Narendra Kumar J. Modi v. CIT (1976) 105, ITR, 109 (S.C.)]. In the absence of
a male member in the family or when all male members are minors, a woman member can be treated as
manager of the family for income-tax purposes. [Smt. Champa Kumari Singhi v. Addl. Member of the Board
of Revenue (1962) 46, ITR, p. 81].

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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School of Hindu Law : According to Hindu Law, HUFs are governed by two schools viz. Mitakshara and
Dayabhaga.
Mitakshara School applies to whole of India except the states of West Bengal and Assam.

Dayabhaga school applies to the States of West Bengal and Assam. The difference between the two schools
is as under:
(i) Foundation: In the Mitakashara School, the foundation of a coparcenary is laid down when a child is born
to the Mitakshara father. Under the Dayabhaga school the foundation of a coparcenary is laid on the death of
the father leaving, as survivors, one or more sons.
(ii) Right to partition: A Mitakshara son, in whom the interest in family property is vested by birth, all along
possesses a right to demand partition. A Dayabhaga son, on the other hand acquires no interest in the family
property by birth and, consequently, has no right to demand partition of the HUF property from his father.
(iii) Quantum of share: Under Mitakshara Law, each coparcener takes as undefined share in the coparcenary
property. The share of the members decreases by birth in the family and increases upon death of a
coparcener. A Dayabhaga coparcener, on the other hand, always takes a defined share in the property left by
his deceased father. Thus, the heirs of a deceased governed by the Dayabhaga school do not constitute a HUF
automatically on the death of the deceased and cannot be assessed as a HUF unless they have by mutual
consent agreed to form a joint family.
(iv) Gift out of ancestral property: A Mitakshara Karta may make a gift of movable property of the family, out
of love and affection, within reasonable limits. He can also make a gift of immovable properties, within
reasonable limits for pious purposes; i.e., for charitable and religious purposes or to a daughter in fulfilment
of a nuptial promise etc. However, a gift to a stranger is void. On the contrary, a Dayabhaga father can alienate
ancestral property, both movable as well as immovable, by sale, gift, will or otherwise in the same way as he
can dispose of his separate property.
Position under Hindu Succession Act, 1956
This Act came into force on and from 17th June, 1956. It lays down a uniform and comprehensive system of
inheritance and applies to persons governed by the Mitakshara as well as the Dayabhaga Schools,
superseding and abrogating all previous law or customs or usage having the force of law.
Under this Act, the heirs of a male Hindu dying intestate on or after 17th June, 1956 are divided into three
classes. Class I heirs get the right to the deceased’s property simultaneously to the exclusion of all other
Classes of heirs. Class II relations succeed only if there is no class I relation and, the heirs in the first entry of
class II being preferred to heirs in the second entry, and so on, but heirs in any one entry taking in equal
shares amongst themselves.
The students should note that Section 4 of the Hindu Succession Act, 1956 clearly lays down that “save as
otherwise expressly provided in the Act, any text, rule or interpretation of Hindu Law or any custom or usage
as part of that law in force immediately before the commencement of the Act shall cease to have effect with
respect to any matter for which provision is made in the Act.” And, Section 8 of the Hindu Succession Act,
1956, lays down the scheme of succession to the property of a Hindu dying intestate. The schedule classifies
the heirs on which such property shall devolve.
The preferential heirs of class I are as under:

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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(1) Son (2) Daughter (3) Widow (4) Mother (5) Son/daughter/widow of a predeceased son (6) son/daughter
of a predeceased daughter (7) Son/daughter/ widow of a predeceased son of a predeceased son.
A son’s son is not mentioned as an heir under Class I of the schedule and, therefore, he cannot get any right
in the property of his grandfather under the provision. The right of a son’s son in his grandfather’s property
during the lifetime of his father which existed under the Hindu Law as in force before the Act, is not saved
expressly by the Act and, therefore the earlier interpretation of Hindu Law giving a right by birth in such
property ‘ceased to have effect’.
Therefore, the property which devolves on a Hindu on the death of his father intestate after coming into force
of the Hindu Succession Act, 1956, does not constitute H.U.F. property consisting of his own branch including
his sons. [Shri Vallabhdas Modani v. C.I.T. (1982) 138, ITR, p. 673].
The Allahabad High Court’s decision supra in the case of Shri Vallabhdas Modani v. Commissioner of
Incometax was followed by the Andhra Pradesh High Court (1983, 144 ITR 18) and later approved by the
Supreme Court in the case of Commissioner of Wealth-Tax v. Chander Sen (1986, 161 ITR 370) holding that
it is not possible to say that when a son inherits the property in the situation contemplated by the Hindu
Succession Act, 1956, he takes as Karta of his own undivided family.

COMPUTATION OF INCOME OF THE HUF

Income of the HUF is assessed as joint family income of HUF if there exists a coparcenership and joint
property of the family till partition is claimed by any of its coparceners.
Joint Property of the family consists of:
(i) ancestral property which a man inherits from any of his three immediate male ancestors, namely, father,
grandfather , great grandfather;
(ii) accretion thereto;
(iii) acquisition with joint funds; and
(iv) self-acquired property of any member thrown by him into the common stock to be treated as family
property. In the case of Pushpa Devi v. C.I.T. the Supreme Court has held that a Hindu female, not being a
coparcener, cannot blend her separate property with Joint family property. However, she can make a gift of
her property or sell the property to the family. [(1977) 109, ITR p. 730].
The gross total income of the family for the relevant previous year shall be computed under the relevant
heads (as per the provisions of the Income-tax Act) as it is computed for other assessee’s. Incomes exempt
under section 10 to 13A are exempt and deductions allowable under chapter VIA are to be provided.
However, in this connection the following points are worth noting:
(i) The holder, who is the senior most male member of the family, of a impartible estate is liable to tax on
income from that estate in his individual capacity though the estate belongs to HUF.
(ii) Conversion of self-acquired property into joint family property. Section 64(2) provides that where an
individual being a member of Hindu undivided family transfers his separate property after 31st December,
1969 to the family for the common benefit of the family, otherwise than for adequate consideration, such

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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property is known as converted property. The income derived from the converted property or any part
thereof shall be included in the total income of the transferor individual and not in the income of the family.
(iii) If the funds of a Hindu Undivided family are invested in a company or a firm, fees or remuneration
received by the member as a director, or a partner in the company or firm may be treated as income of the
family in case the fees or remuneration is earned essentially as a result of investment of funds. But, if the fees
or remuneration is earned essentially for services rendered by the member in his personal capacity, the
income shall constitute the personal income of the member.
(iv) Where a member of a HUF is a partner in a firm on behalf of the family and on partition of the property
of the family, the share in the firm is allotted to such a member, subsequent to such allotment when the firm
settles its accounts the whole income for that year would be the income of the individual member and no
part of the income would be added to the income of the family. [CIT v. Ashok Bhai Chiman Bhai (1965) 56,
ITR, 42 (S.C.)].
(v) The personal earning, including income from self acquired property of a member of the HUF, even though
he has sons, would not be included in the income of the family. Such income shall be assessed as income of
that individual. [Kalyanji Vithal Das v. CIT (1937) 5 ITR 90 (PC)].
(vi) Any sum paid by an HUF to a member of the family out of its income is not deductible in computing the
income of the family. However, such amount will not be included in the income of such individual whether
the family had paid tax on its income or not [Section 10(2)].
(vii) If any remuneration is paid by the Hindu Undivided family to the karta or any other member for services
rendered by him in conducting family’s business, the remuneration is deductible if remuneration is (a) paid
under a valid and bona fide agreement; (b) in the interest of, and expedient for, the business of family; and
(c) genuine and not excessive. Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC).

(viii) If salary is paid by the Hindu undivided family to its karta for looking after its interest in firms in which
it is partner through said karta, such salary is allowable as deduction - CIT v. Prakash Chand Agarwal [1982]
11 Taxman 55 (MP).
(ix) Income from ‘stridhan’ is not includible in the income of the family. Property derived by a woman from
her father or brother or husband or any other relative either before or after her marriage is known as
‘stridhan’.
(x) Under the Dayabhaga School of law, as stated in a preceding page, no son has any right in the ancestral
property during the lifetime of his father. If, therefore, the father does not have any brother as a coparcener,
income arising from ancestral property is taxable as his individual income.

Partition of a Hindu undivided family [Section 171]

‘Partition’ signifies division of property. In the cases of property capable of physical division, share of each
member is determined by making physical division thereof. It must be noted that a division of income
without physical division of property does not amount to partition. Where, however, the property is not
capable of physical division, partition implies such division as the property may admit.

Who is entitled to share on partition

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Though only coparceners can demand partition, once the partition takes effect, the following persons are
entitled to a share:
(a) all coparceners;

(b) a son in the womb of his mother at the time of partition;

(c) mother, who gets an equal share if the partition takes place among her sons after the death of her
husband; and
(d) wife, who gets a share equal to that of a son at the time of a partition between father and sons.

Assessment after partition (Section 171)

Section 171 applies to an HUF which is assessed as such. Therefore, if incase a family is not assessed as a
hindu undivided family this section does not apply. A joint family, once assessed as a HUF, continues to be
assessed as such till one or more coparceners claim partition. Such claim must be made by the coparceners
before the assessment of the income of the HUF for the relevant assessment year is completed. On the receipt
of such a claim, the Assessing Officer must make an inquiry after giving due notice to the members and record
a finding whether there has been a partition and, if so, the date of the partition. The income of the family from
the first day of the previous year to the date of partition is assessed as income of the HUF and from the next
date of the partition to the date of close of the previous year, as the individual income of the recipient-
members. If the recipient member forms another HUF along with his wife and son(s), the income of the
property which was subject to partition is chargeable to tax in the hands of the new H.U.F.

A partition of the HUF can be both total and partial

Where the entire joint family property is divided among all coparceners and the family ceases to exist as an
undivided family, the partition is total. A partial partition may be as regards: (a) the persons constituting the
joint family, or (b) the properties belonging to the joint family, or (c) both. In case of partial partition, some
coparceners continue as a joint family or some properties continue as a joint estate as against some
coparceners or properties which separate from HUF. The device of partial partition has been used as a
medium for reduction of proper tax liability. To curb such a practice, the Finance (No. 2) Act, 1980 inserted
Sub-section 9 in Section 171 which lays down that partial partitions of HUFs assessed as such (Union of India
vs MV Valliappan 1999 AIR SCW 2689), effected after 31st December 1978 will not be recognised for tax
purposes.
The provisions made by Sub-section (9) in Section 171 are as follows:

(i) In a case where a partial partition of a HUF has taken place after 31.12.1978, no claim of such partition
will be enquired into and the Assessing Officer will not record a finding as to whether there has been a
partition of the family property. Further, any finding regarding partial partition recorded under Section
171(3) will be null and void and of no legal effect.

(ii) Such family will continue to be assessed as if no such partial partition has taken place, i.e., the property
or source of income will be deemed to continue to belong to the Hindu undivided family and no member will
be deemed to have separated from the family.
(iii) Each member or group of members of such family will be jointly and severally liable for any tax, interest,
penalty, fine or other sum payable under the Act by the family, whether before or after such partition. The
several liability of any member or group of members of such family will be computed according to the portion

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of the joint family property allotted to him on such partial partition. This amendment has come into force
with effect from April 1, 1980 and has, accordingly, been applicable with effect from assessment year 1980-
81 and onwards.
Illustration 1 : Ram Manhar & Sons HUF, running Raghuveer Departmental Stores consists of Karta, his wife,
two sons and daughter. Both the sons who are having professional/technical qualifications as a Chartered
Accountant and as an Automobile Engineer started in partnership, a garage for the repairing of motor cars,
with a clear understanding that the technical side of the business be looked after by the Engineer while the
general administration and finance part be taken care by the Chartered Accountant. They had taken an
interest-free loan of Rs. 5,00,000 from the HUF for starting the venture. The business of garage resulted in a
net profit of Rs. 15,00,000 for the year ended 31.03.2021. The Assessing Officer proposes to assess the
income from the business of motor garage in the hands of HUF. Examine the validity of the proposition of the
Assessing Officer in the light of a decided case law.
Solution
The facts of the case are similar to that of the case of CIT v. Charan Dass Khanna & Sons (1980) 123 ITR 194,
where the Delhi High Court observed that if the investment made by the HUF in the business started by the
coparceners plays a minor role and it is primarily the personal efforts, specialized skill and enterprise of the
individual coparceners which resulted in setting up of a new business and earning of goods profits, then it
may not essentially be said that the income belongs to the HUF.
The Supreme Court has also supported this view in the case of K.S. Subbiah Pillai v. CIT (1999) 237 ITR 11
and held that where the remuneration and commission earned by the Karta were on account of the personal
qualifications and exertions and not on account of the investment of the family funds, such income cannot be
treated as income of the HUF.
Thus, in the given case, profits were earned primarily because of the specialized skills acquired by both the
partners in their respective fields and used in the business of motor garage. The initial capital taken from the
HUF as interest free loan, of course, has its role but it is nevertheless a minor one. Therefore, the income from
the business set up by the brothers is assessable in their individual hands and not as the income of the family.
Further, the proposition of the Assessing Officer to tax the profits of the business of motor garage earned by
the two sons in the hands of the HUF is not valid.

Alternate Minimum Tax (AMT) [Section 115JC]

The provisions of section 115JC are applicable to all assessees except companies where the regular income
tax payable for a previous year is less than the alternate minimum tax payable for such previous year then
the adjusted total income shall deemed to be the total income of that person for such previous year and it
shall be liable to pay income tax on such adjusted total income @ 18.5% plus Health and Education Cess @
4%.
12% surcharge if Adjusted Total income of the firm or LLP exceeds INR 1 crore plus 4% Health & Education
cess in all cases. In case of individual surcharge will be 10% if Adjusted Total income of the firm or LLP
exceeds INR 50 Lacs and 15% if it exceeds INR 1 crore and 25% if it exceeds INR 2 crores and 37% if it
exceeds INR 5 crores.

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It is further provided that the provisions of AMT under Chapter XII-BA shall only apply to an individual or a
Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not)
or an artificial juridical person if the adjusted total income of such person exceeds twenty lakh rupees.
However, AMT is levied @ 9% in case of a non-corporate assessee being a unit located in International
Financial Services Centre and deriving its income solely in convertible foreign exchange. Surcharge and cess
as applicable will also be levied. (Applicable from Assessment Year 2020-21)
The regular income tax payable shall be the income-tax payable for a previous year by a person other than a
company on his total income in accordance with the provisions of the Act other than the provisions of
Chapter XII-BA i. e section 115JC to 115JF.
Adjusted total income shall be the total income before giving effect to provisions of Chapter XII-BA as
increased by the deductions claimed under any section 80H to Section 80RRB (other than section 80P)
included in Chapter VI-A under the heading “C - Deductions in respect of certain incomes” and deduction
claimed under section 10AA. Further, total income shall be increased by the deduction claimed under section
35AD for purpose of computation of adjusted total income. The amount of depreciation allowable under
section 32, as if no deduction u/s 35 AD in respect of such assets was allowed, shall however, be reduced in
computing the adjusted total income.

Particulars (Rs.)
taxable income of the taxpayer XXXX
Add : amount of deduction claimed under section 80H to 80 RRB (except 80P) XXXX

Add : amount of deduction claimed under section 35AD (as reduced by the amount of XXXX
depreciation allowable in accordance with the provisions of section 32)

Add : amount of deduction claimed under section 10AA XXXX

adjusted total income XXXX

The provisions can be summarized as:
1. If regular income tax payable is more than or equal to the alternate minimum tax (18.5% plus Health and
Education cess @ 4% of adjusted total income), the regular income tax payable is the tax liability of the
assessee.
2. If regular income tax payable is less than the alternate minimum tax (18.5% plus Health and Education
cess @ 4% of adjusted total income), the adjusted total income is the deemed income of the assessee for that
year and alternate minimum tax is the tax liability.

However, it is also provided that the credit for tax (tax credit) paid by a person on account of AMT under
Chapter XII- BA shall be allowed to the extent of the excess of the AMT paid over the regular income-tax. This
tax credit shall be allowed to be carried forward up to the fifteen assessment year immediately succeeding
the assessment year for which such credit becomes allowable and set off against regular tax liability. In other
words, it shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the
AMT, to the extent of the excess of the regular income-tax over the AMT.

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The amount of AMT credit shall not be allowed to be carried forward to the subsequent year to the extent
such credit relates to the difference between the amounts of foreign tax credit (FTC) allowed against AMT
and FTC allowable against the tax computed under regular provisions of the Act.
Every person to which this section applies shall obtain a report, before the specified date referred to in
section 44AB, in such form as may be prescribed, from an accountant referred to in the Explanation below
sub-section (2) of section 288, certifying that the adjusted total income and the alternate minimum tax have
been computedin accordance with the provisions of this Chapter and furnish such report by that date.
[Inserted by Finance Act, 2020]

All other provisions of the Act, like advance tax, interest u/s 234A/B/C shall apply to assessee who is liable
to pay AMT.
The provisions of AMT shall not apply to a person who has exercised the option referred to in section 115BAC
or section 115BAD. [Finance Act, 2020]

Illustration
Mr. X, carrying on the business of operating a warehousing facility for storage of sugar, has a total income of
Rs. 80 lakh. In computing the total income, he had claimed deduction under section 35AD to the tune of Rs.
70lakh on investment in building (on 1.4.2019) for operating the warehousing facility for storage of sugar.
Compute his tax liability for A.Y. 2020-21. Show the calculations of Alternate minimum Tax also.
Option 1 : Assessee has not opted for Section 115BAC

Option 2 : Assessee has opted for Section 115BAC

Solution : Assessee has not opted for Section 115BAC
Computation of Tax payable by Mr. X for AY 2021-22

Computation of Normal Tax

Particulars Amount (Rs. in lakh)

tax liability under the normal provisions of the income-tax act, 1961 22.125
Add: Surcharge @ 10% of Total income > 50 lacs 2.2125
Add: Health and Education Cess @ 4% of 24.3375 0.9735
total tax liability 25.311

Computation of Alternate Minimum Tax

Particulars Amount (Rs. in lakh)

adjusted total income 80.00
add : deduction under section 35ad 70.00
less : depreciation under section 32 (7.00)
adjusted total income 143.00

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AMT @18.5% 26.46
Surcharge @ 15% (since adjusted total income> Rs. 100 lakh) 3.97
tax 30.43
Add: Health and Education Cess @ 4% 1.217
total tax liability 31.647
Since the regular income tax payable is less than the AMT payable, the adjusted total income of Rs. 143 lakhs
shall be deemed to be the total income of Mr. X and tax is payable @18.5% thereof plus surcharge @ 15%
and cess @4%. Therefore, tax liability is 31.647 lakhs.
However, Mr. X would be eligible for credit in 15 subsequent years to the extent of difference between the
AMT and Normal Tax i.e. Rs. 6.336 lakhs.
Option 2: Assessee opted for Section 115BAC
Computation of Tax payable by Mr. X for AY 2021-22
Computation of Normal Tax

Particulars Amount (Rs. in lakh)

tax liability under the normal provisions of the income-tax act, 1961 21.375
Add: Surcharge @ 10% of Total income > 50 lacs 2.1375
Add: Health and Education Cess @ 4% of 23.5125 0.9405
total tax liability 24.453
Alternate Minimum Tax is Not Applicable if assessee covered u/s 115BAC.

TAX EXEMPTIONS TO POLITICAL PARTIES (SECTION 13A)

‘Political party’ means an association or body of individual citizens of India registered with the Election
Commission of India as a political party and includes a political party deemed to be registered with that
Election Commission of India.
Political parties are liable to pay tax on their income and they are assessed as ‘An association of persons’.
However, the income derived by these parties as income by way of voluntary contributions, Income from
House Property; and Income from Other Sources or Capital Gains are exempt from subject to the following
conditions:
(i) the party keeps and maintains such books of account and other documents as would enable the Assessing
Officer to properly deduce the income;

(ii) in respect of each such voluntary contribution in excess of’ 20,000, the party keeps and maintains a record
of the contributions and names and addresses of the persons who have made such contribution; and
(iii) the accounts of the party are audited by a Chartered Accountant or other qualified accountant.
(iv) No donation of Rs. 2000 or more can be received by a Political Party otherwise than by an account payee
cheque/draft/ECS through a bank account or through electoral bonds. (w.e.f. AY 2018-19)

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Return of income under section 139(4B) should be filed by the Political Party on or before due date of filing
of return u/s 139(1), otherwise exemption under section 13A will not be given. (w.e.f. AY 2018-19)
The Chief Executive Officer of the political party is required to file a return of income if the total income
(computed under this Act without giving effect to the provisions of Section 13A) exceeds the maximum
amount which is not chargeable to income-tax. In this connection, the provisions of Section 139(1) shall
apply.

ELECTORAL TRUST
‘Electoral Trust’ means a trust so approved by the Board in accordance with the scheme made in this regard
by the Central Government.

Voluntary contributions received by an Electoral Trust (Section 13B)

Any voluntary contributions received by an electoral trust shall not be included in the total income of the
previous year of such electoral trust, if –
(a) such electoral trust distributes to any political party, registered under section 29A of the Representation
of the People Act, 1951, during the said previous year, ninety-five per cent of the aggregate donations
received by it during the said previous year along with the surplus, if any brought forward from any earlier
previous year; and

(b) such electoral trust functions in accordance with the rules made by the Central Government.

Tax Exemptions for Charitable Trusts and Institutions

Trust : Section 3 of the Indian Trusts Act defines a trust to mean “an obligation annexed to the ownership of
property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by
him for the benefit of another and the owner”.
Institution: An organisation with a constitution composed of a President, Vice-President, Secretary,
Committee Members and ordinary members, is known as an Institution. The activities of the institution
andits official are regulated by rules and bye-laws of the institution. A university or a Chamber of Commerce
is an Institution.

Charitable purpose: The term ‘charitable purpose’ has been defined in this Act in a wider sense than what
is commonly understood. According to Section 2(15) of the Act, it includes relief of the poor, education, yoga
medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest and advancement of any other object of general
public utility not involving the carrying on of any activity for profit.

In order to qualify for tax exemptions the charity must be of a public character, and the trust or institution
should not be created or established for the benefit of any particular religious community or caste, if the trust
or institution is established for the benefit of the member of a club or employees of a factory, it would not be
a public charitable trust. Vide Circular No. 395 dated Sept. 24, 1984 promotion of sports and games is
considered to be a charitable purpose within the meaning of Section 2(15). Accordingly an association or

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institution, engaged in the promotion of sports or games can claim exemption under Section 11, even if it is
not approved under Section 10(23).
Provided that the advancement of any other object of general public utility shall not be a charitable purpose,
if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of
rendering any service in relation to any trade, commerce or business, for a cess or fee or any other
consideration, irrespective of the nature of use or application, or retention, of the income from such activity,
unless –
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object
of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per
cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous
year;

Income not to be included in the Total Income

According to Section 11(1), the following items of income are not to be included in the total income of the
previous year of the assessee who is in receipt of the same:
(i) Income derived from property held under trust wholly for charitable or religious purposes:
Income derived from property held under trust wholly for charitable or religious purposes shall be exempt
to the extent to which such income is applied for such purposes in India and where any such income is
accumulated or set apart for application to such purposes in India, to the extent to which the income so
accumulated or set apart is not in excess of 15% of the income from such property.
(ii) Income derived from property held under trust in part only for charitable or religious purposes:
Income derived from property held under trust in part only for charitable or religious purposes shall be
exempt. This exemption would, however, be available only for trusts created before 1.4.1962. Further, where
any such income is finally set apart for application to such purposes in India, shall be exempt to the extent to
which the income so set apart is not in excess of 15% of the income from such property.

(iii) Income from property held under trust created on or after 1.4.1952: for a charitable purpose which
tends to promote international welfare in which India is interested shall be exempt to the extent to which
such income is applied for such charitable purposes outside India.
(iv) Income from property held under trust created before 1.4.1952 for charitable or religious purposes
shall be exempt to the extent to which such income is applied for such purposes outside India. This exemption
is, however, subject to the condition that the Central Board of Direct Taxes has, by a general or special order,
issued a direction in either of the above two cases that the income in question would not be included in the
total income of the person in receipt of such income.
(v) Income in the form of voluntary contributions made with a specific direction that they shall form part of
the corpus of the trust or institution shall be fully exempt.
Explanation :
In respect of items (i) and (ii) above:

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(1) In computing the 15% of the income which may be accumulated or set apart, any such voluntary
contributions as are referred to in Section 12 (dealt with later in this Chapter) shall be deemed to be part of
the income.
(2) If, in the previous year, the income applied to charitable or religious purposes in India falls short of 85%
of the income derived during that year from property held under trust, by any amount on account of (i) not
receiving the income during that year, or (ii) for any other reason, then:
(a) In case referred to in (i), so much of the income applied to such purpose in India during the previous year
in which the income is received or during the previous year immediately following as does not exceed the
said amount shall be deemed to be income applied to such purposes during the previous year in which the
income was derived; and the income so deemed to have been applied shall not be taken into account in
calculating the amount of income applied to such purposes during the previous year in which the income is
received or during the previous year immediately following, as the case may be.
(b) In case referred to in (ii), so much of the income applied to such purposes in India during the previous
year immediately following the previous year in which the income was derived as does not exceed the said
amount shall be deemed to be income applied to such purposes during the previous year in which the income
was derived; and the income so deemed to have been applied shall not be taken into account in calculating
the amount of income applied to such purposes during the previous year immediately following the previous
year in which the income was derived.
Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to
any other trust or institution registered under section 12AA, being contribution with a specific direction that
they shall form part of the corpus of the trust or institution, shall not be treated as application of income for
charitable or religious purposes. (w.e.f. AY 2018-19)
For the purposes of determining the amount of application of income, the provisions of section 40(a)(ia)
relating to 30% disallowance for non deduction of TDS and section 40A(3) and 40A(3A) relating to payment
exceeding Rs. 10,000, shall, mutatis mutandis, apply as they apply in computing the income chargeable under
the head “Profits and gains of business or profession”
Where any income as discussed in (a) and (b) above is not applied to charitable or religious purposes in India
within the prescribed time, then such income shall be deemed to be the income of the person in receipt
thereof:
(a) In case of not receiving the income: Such income shall be deemed to be the income of the previous year
immediately following the previous year in which the income was received.
(b) In any other case: Such income shall be deemed to be the income of the previous year immediately
following the previous year in which the income was derived [Clause (1B)].

Capital Gains [Section 11(1A)]

Asset held wholly for religious purposes or charitable purposes
Sometimes a capital asset held under trust wholly for charitable or religious purposes is transferred resulting
in a capital gain. The net consideration received on such transfer may be utilised wholly or in part in
acquiringanother capital asset to be so held wholly for religious or charitable purposes. In such cases the

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capital gains arising from the transfer shall be deemed to have been applied for charitable or religious
purposes to the extent stated herein below:
(i) Where the whole of the net consideration is utilised for acquiring the new capital assets, so much of the
capital gains.

(ii) Where only a part of the net consideration is utilised for acquiring the new capital asset, so much of the
capital gain as is equal to the amount by which the amount so utilised exceeds the cost of the transferred
asset.
Example 1 : A charitable trust had a capital asset the cost of which was Rs.80,000 and it sold the same for
Rs. 1,00,000. The whole of the consideration, i.e., Rs. 1,00,000 will be exempt from capital gains tax if a new
capital asset is bought for Rs. 1,00,000.
Example 2 : If a trust had a capital asset costing Rs.1,00,000 and sold the same for Rs. 1,50,000 and then
bought a capital asset for Rs. 1,30,000, then the working will be as follows:

Particulars Rs.
Sale proceeds of old asset 1,50,000
Cost of the old asset (1,00,000)
Capital gain 50,000
Cost of the new asset 1,30,000
Cost of the old asset (1,00,000)
Capital gain utilised is 30,000
Capital gain taxable is 20,000

Assets held partly for religious or charitable purposes

It is quite possible that a capital asset is held by a trust partly for religious or charitable purposes. Where
such a capital asset is transferred and the whole or any part of the net consideration is utilised for acquiring
another capital asset, the appropriate fraction of the capital gain arising from the transfer shall be deemed
to have been applied to charitable or religious purposes to the extent specified here under:
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the
appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any,
by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate
fraction of the cost of the transferred asset.

“Explanation” to Section 11(1A) provides:

‘Appropriate fraction’ means the fraction which represents the extent to which the income derived from the
capital asset transferred was immediately before such transfer applicable to charitable or religious purposes.

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‘Cost of the transferred asset’ means the aggregate of the cost of acquisition (as ascertained for the purposes
of Section 48 and 49 of the capital asset which is the subject of the transfer and the cost of any improvement
thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of Section 55.
‘Net consideration’ means the full value of the consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such
transfer.

Illustration A trust has a capital asset costing Rs. 2,00,000 and 1/2 of its income is utilised for charitable
purpose. It is sold for Rs. 3,50,000. If the trust buys another capital asset for Rs. 3,50,000 then appropriate
fraction of the capital gain deemed to have been applied for charitable purpose. Supposing that the trust buys
another asset for Rs. 2,90,000:

Particulars Rs.
Sale proceeds of Capital asset 3,50,000
Cost of the asset sold 2,00,000
Capital gain on transfer of capital asset 1,50,000
appropriate fraction i.e. 1/2 75,000
another asset purchased 2,90,000
appropriate fraction utilised (1/2 of rs. 2,90,000)= 1,45,000
appropriate fraction of the original capital asset
1/2 of rs. 2,00,000 (1,00,000)
Capital gain utilised 45,000
Capital gain not utilised 30,000

MCQ`S
1. Alternative Minimum Tax (AMT) is applicable if adjusted Total Income of individual, AOP, artificial juristic
person, Firm etc. exceeds:

a) 15 lakhs
b) 20 lakhs
c) 25 lakhs

d) 10 lakhs

2. Share in the profits of the firm is taxable in the hands of partner under the head:

a) Salary
b) Business & Profession

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 COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
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c) Income from other sources
d) Exempt from tax

3. Salary, fees, bonus received by a partner from the firm is Taxable in the hands of partner under the head:
a) Salary

b) Business & Profession

c) Income from other sources
d) Exempt from tax

4. Income earned from sale of Stridhan is taxable in the hands of:

a) HUF
b) Husband of such woman
c) Such woman herself
d) None of above

5. Personal earning including income from Self Acquired Property of a member of the HUF is included in
Income of:
a) HUF income
b) Son’s income
c) Individual’s income
d) None of these

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Classification and Tax Incidence on Companies
Corporate Taxation Rates

Domestic Company Assessment Year 2021-22

- Where it has opted for Section 115BA [other than those opted under 25%
section 115BAA and section 115BAB]
[this regime shall be available only for the manufacturing
companies incorporated in india on or after 01-03-2016.
- Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the company is
computed without claiming specified deductions, incentives,
exemptions and additional depreciation available under the income-
tax act.]
- Where it opted for Section 115BAB 15%
[this regime shall be available only for the manufacturing
companies incorporated in india on or after 01-10-2019. Hence, old
companies will not be able to take the benefit of this section.]
- Where it has not opted for Section 115BAA and the total turnover or 25%
Gross receipts of the company in the previous year 2018-2019 does
not exceeds 400 crore rupees
- any other domestic company 30%

Foreign Company 40%

Add:
a) Surcharge:
Domestic Company: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such
tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12%
of such tax, where total income exceeds ten crore rupees. However, the rate of surcharge in case of a company
opting for taxability under Section 115BAA or Section 115BAB shall be 10% irrespective of amount of total
income.
Foreign Company: The amount of income-tax shall be increased by a surcharge at the rate of 2% of such tax,
where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 5% of
such tax, where total income exceeds ten crore rupees.

Surcharge on Income tax in case of different companies is summarized as under:

Type of Company 10 Crores>Total Income> 1 Crore Total Income> 10 Crore

domestic Company 7% 12%
Foreign Company 2% 5%

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 CLASSIFICATION AND TAX INCIDENCE ON COMPANIES
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Company opting for taxability under Flat 10% irrespective of amount of total income
Section 115BAA / 115BAB
b) Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further
increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.

Section 115BA : Tax on Income of certain manufacturing Domestic Companies

Income-tax payable by domestic company, w.e.f. A/Y 17/18, shall, at its option, be computed @ 25%, if the
following conditions are satisfied:
(a) Company has been set-up & registered on or after 1/3/2016;
(b) Company is only engaged in business of manufacture/production of any article/thing and research in
relation to, or distribution of, such article or thing manufactured
(c) Total income of the company has been computed,—
(i) without any deduction
• u/s 10AA or

• u/s 32(1)(iia) or
• u/s 32AC or u/s 32AD or
• u/s 33AB or u/s 33ABA or
• u/s 35(1)(ii)(iia)(iii) or u/s 35(2AA)(2AB) or
• u/s 35AC or
• u/s 35AD or

• u/s 35CCC or
• u/s 35CCD or
• u/s 80C to 80U (profit based) other than u/s 80JJAA;

(ii) without set off of any loss c/f from any earlier A/Y if such loss is attributable to any of the deductions
referred to in sub-clause (i); and
(iii) depreciation u/s 32, other than clause (iia) of sub-section (1) of the said section, is determined in the
manner as may be prescribed.
The loss referred as above shall be deemed to have been already given full effect to and no further deduction
for such loss shall be allowed for any subsequent year.
Nothing contained in this section shall apply unless option is exercised in the prescribed manner on or before
due date u/s 139(1) for furnishing the first of returns of income which the person is required to furnish
under the provisions of this Act:

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Provided that once the option has been exercised for any p/y, it cannot be subsequently withdrawn for the
same or any other p/y.
Provided further that where the person exercises option u/s 115BAA, the option under this section may be
withdrawn.

Section 115BAA : Tax on income of certain Domestic Companies

The income-tax payable of domestic company, w.e.f. A/Y 20/21, shall, at option of such person, be computed
@22%, if the following conditions are satisfied, Provided that where the person fails to satisfy specified
conditions in any p/y, the option shall become invalid in respect of that p/y and subsequent years and other
provisions of the Act shall apply, as if the option had not been exercised for the p/y and subsequent years.

1. the total income of the company shall be computed:

(i) without any deduction
• u/s 10AA or
• u/s 32(1)(iia) or
• u/s 32AC or u/s 32AD or
• u/s 33AB or u/s 33ABA or

• u/s 35(1)(ii)(iia)(iii) or u/s 35(2AA)(2AB) or

• u/s 35AC or
• u/s 35AD or

• u/s 35CCC or
• u/s 35CCD or
• u/s 80C to 80U (profit based) other than u/s 80JJAA;

(ii) without set off of any loss c/f or depreciation from any earlier year, if such loss or depreciation is
attributable to any of above deductions
(iii) without set off of any loss or allowance for unabsorbed depreciation deemed u/s 72A, if such loss or
depreciation is attributable to any of the deductions referred to in clause (i); and (iv)
(iv) by claiming the depreciation, if any, u/s 32, except clause (iia) of sub-section (1) of the said section,
determined in such manner as may be prescribed.

The loss and depreciation referred to in clause (ii) and clause (iii) of sub-section (2) shall be deemed to have
been given full effect to and no further deduction for such loss or depreciation shall be allowed for any
subsequent year:
In case of a person, having Unit in International Financial Services Centre, u/s 80LA, which has exercised
option under sub-section (5), deduction under section 80LA shall be available to such Unit subject to
fulfilment of the conditions contained in the said section.

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Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed
manner on or before the due date specified u/s 139(1) for furnishing the returns of income for A/Y
commencing 20/21 and such option once exercised shall apply to subsequent assessment years:
Provided that in case of a person, where the option exercised by it under section 115BAB has been rendered
invalid due to violation of conditions contained u/s 115BAB(2), such person may exercise option under this
section:
Provided further that once the option has been exercised for any previous year, it cannot be subsequently
withdrawn for the same or any other previous year.

Section 115BAB : Tax on Income of new manufacturing domestic companies

Any domestic manufacturing company has an option to pay tax at 15%, subject to the following conditions:
1. any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or
section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of
sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or
section 35CCD or under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of
certain incomes” other than the provisions of section 80JJAA;
2. set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or
depreciation is attributable to any of the deductions referred to above;

3. set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or
depreciation is attributable to any of the deductions referred to above; and
4. by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section
(1) of the said section, determined in such manner as may be prescribed.
However, losses and depreciation would be deemed that full effect has already been given and no further
deduction shall be allowed for any subsequent years.
Such Company:-
1. Is incorporated on or after 1 October 2019, and commences production on or before 31 March 2023.
2. Is not formed by splitting up or reconstruction of business already in existence (exception provided for
undertaking formed as a result of reestablishment, reconstruction or revival of business referred to in section
33B of the Act).

3. Does not use any building previously used as a hotel or convention centre.
4. Is not engaged in any business other than the manufacture or production of an article or thing and research
in relation to or distribution of article or thing manufactured or produced by it.
The option needs to be exercised before the due date as per section 139(1) for furnishing the return of
income for any previous year starting from AY 2020-21 or subsequent assessment years. If once the option
is exercised cannot be withdrawn for the same or subsequent assessment years.

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Provisions similar to section 80IA(10) of the Act are made applicable for transactions between connected
parties which has the effect of producing more than ordinary profit that might be expected to arise.
Domestic transfer pricing provisions under section 92BA of the Act is being made applicable to such
transactions. The corresponding amendment has been made in section 92BA of the Act to consider such
transactions as specified domestic transactions in order to bring it within the ambit of transfer pricing
provisions.

MINIMUM ALTERNATE TAX (MAT)

Section 115J which was a special provision applicable to a company if its total income as computed under
the Income Tax Act was less than thirty per cent of its book profit was introduced with effect from 1.4.1988
but was discontinued with effect from 1.4.1991. It was revived as Section 115JA with effect from 1.4.1997 as
a provision deeming total income equal to 30% of book profit of companies referred to earlier. This provision
was also discontinued with effect from 1.4.2001 but was substituted by Section 115JB effective from the same
date. This provision imbibes the concept of Minimum Alternate Tax.
Hence, the new provisions of Section 115JB were inserted which are simpler in application.
According to this section, if the income tax payable by a company on its total income as computed under the
normal provisions of the Income Tax Act in respect of any previous year relevant to the assessment year, is
less than 15% of such book profit plus surcharge plus education cess then such book profit shall be treated
as total income of the company and the tax payable for the relevant previous year shall be deemed to be 15%
of such book profit. This non- absolute provision will override any other provision of the Income Tax Act.
Thus, where the Income-tax payable is less than 15% of Book Profit, such book profit will be deemed to be
total Income and Income Tax will be payable @ 15% on such Book Profit. [9% of book profits, in case of
the assessee is a unit located in an International Financial Services Centre and derives its income
solely in convertible foreign exchange]
Such company assessee has to prepare the Profit & Loss A/c in accordance with the provisions of Schedule
III of the Companies Act, 2013.
However, while preparing the annual accounts including profit and loss account –
(a) the accounting policies;

(b) the accounting standards followed for preparing such accounts including profit and loss accounts; and
(c) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss
account and laid before the company at its annual general meeting. But where the company has adopted or
adopts the “financial year”, which is different from the previous year under the Income Tax Act, (a), (b) and
(c) aforesaid shall correspond to the accounting policies, accounting standards and the method and rates for
calculating the depreciation which have been adopted for preparing such accounts including profit and loss
account for such financial year or part of such financial year falling within the relevant previous year.
As per section 115JB, every company is required to prepare its accounts as per Schedule III of the Companies
Act, 2013. However, as per the provisions of the Companies Act, certain companies, e.g. Insurance, Banking

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or Electricity Company, are allowed to prepare their profit and loss account in accordance with the
provisions specified in their regulatory Acts.
In order to align the provisions of Income-tax Act with the Companies Act, 2013, with effect from assessment
year 2013-14, section 115JB has been amended to provide that the companies which are not required to
prepare their profit and loss account in accordance with the Schedule III of the Companies Act, 2013, profit
and loss account prepared in accordance with the provisions of their regulatory Acts shall be taken as a basis
for computing the book profit under section 115JB.
From the above it can be observed that the provisions of MAT are applicable to every company whether
public or private and whether Indian or foreign. However MAT shall not apply to :
(i) any income arising to a company from life insurance business.
(ii) a person who has exercised the option referred to under sections 115BAA or 115BAB
(iii) any shipping income arising to a company liable to tonnage taxation.
(iv) a foreign company resident of a country with which India has an Double Taxation Avoidance Agreement
(DTAA) and such company does not have a permanent establishment in India.
(v) the foreign company is a resident of a country with which India does not have an agreement (DTAA) and
such company is not required to seek registration under any law for the time being in force relating to
companies.
(vi) a foreign company, whose total income comprises of profits and gains arising from business referred to
in section 44B, 44BB, 44BBA, or 44BBB and such income has been offered to tax at the rates specified in those
sections.

Due to applicability of Ind AS Section 115JB has been amended to calculate MAT in case of Ind AS compliant
companies. Following are steps for computation of book profit
Step 1 : Find out the net profit [before other comprehensive income (OCI)] as per statement of profit and
loss of the company.
Step 2 : Make adjustments which are given in existing provisions under section 115JB(2).

Step 3 : Make specific adjustments in the case of demerger as given by new sub-section 2B to section 115JB.
Step 4 : Make further adjustments pertaining to OCI items that will be permanently recorded in reserves (i.e.
never to be reclassified to the statement of profit and loss).

Detailed Discussion of Steps to Calculate Book Profit is as Under

Step 1 : Find out Net profit (before other comprehensive income) as shown in profit and loss account
(prepared in accordance with provisions of Schedule III of Companies Act, 2013.

Step 2 : Adjustments to be made to the Net Profit in Step 1 as given in existing provisions under Section
115JB (2) –
Following amounts shall be added; if debited to Profit and Loss account :

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(a) the amount of Income tax paid or payable, and the provision therefor;
The amount of income-tax shall include:

(i) any tax on distributed profits under Section 115O or on distributed income under section 115R; [DDT Not
applicable w.e.f. 1/4/2020 by Finance Act, 2020]
(ii) any interest charged under this Act; and
(iii) Surcharge
(1) Health and Education Cess [(Explanation 2 to section 115JB)].
The amount of income tax shall not include following taxes:
 STT, Banking cash transaction tax, gift tax, indirect taxes
 Interest, penalty, fine, surcharge, health and education cess on above taxes.

(b) the amounts carried to any reserves, by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained
liabilities, (i.e. unascertained liabilities); or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any incomes to which Section 10 or Section 11 or
Section 12 apply.
(fa) the amount or amounts of expenditure relatable to, income, being share of the assessees in the income
of an association of persons or body of individuals, on which no income-tax is payable in accordance with
the provisions of section 86; or
(fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessees,
being a foreign company, from, -

– the capital gains arising on transactions in securities; or

– the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter
XII (i.e. Section 115A to 115BBE)
if the income-tax payable thereon in accordance with the normal provisions of this Act, other than the
provisions governing MAT, is at a rate less than the rate specified in Section 115JB (1) i.e., 15%; or
(fc) – the amount representing notional loss on transfer of a capital asset, being share or a special purpose
vehicle to a business trust in exchange of units allotted by the trust referred to in section 47(xvii)
Or
– the amount representing notional loss resulting from any change in carrying amount of said units or
– the amount of loss on transfer of units referred to in clause (xvii) of section 47 whether or not it appears in
profit and loss account.

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(fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent
chargeable to tax under section 115BBF; or
(g) the amount of depreciation.

(h) the amount of deferred tax and provisions.

(i) the amount or amounts set aside as provision for diminution in the value of any asset e.g. provision
for bad and doubtful debts and provision for impairment losses.
(j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of
such asset if such profit is not credited to profit and loss account.

(k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking
into account the
– cost of the shares exchanged with units referred to in the said clause or
– the carrying amount of the shares at the time of exchange where such shares are carried at a value other
than the cost through profit or loss account, as the case may be.

Amounts to be deducted from Net profit mentioned in step 1 –

(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit
and loss account;
Provided that, where this section is applicable to assessees in any previous year, the amount withdrawn from
reserves created or provisions made in a previous year relevant to the assessment year commencing on or
after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year
has been increased by those reserves or provisions (out of which the said amount was withdrawn) under
this Explanation or Explanation below second proviso to Section 115JA, as the case may be; or

In other words, if amount is withdrawn from provisions/reserve not allowed as deduction earlier, it will not
be added (taxed) again; however, in any other case the withdrawal will be taxed.
(ii) the amount of income to which any of the provisions of Section 10 or Section 11 or Section 12 apply, if
any such amount is credited to the profit and loss account; or
(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on
account of revaluation of assets); or

(iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the
extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in Clause
(iia); or
(iic) the amount of income, being the share of the assessees in the income of an association of persons
or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86,
if any, such amount is credited to the profit and loss account; or
(iid) the amount of income accruing or arising to assessees, being a foreign company, from, -

(A) the capital gains arising on transactions in securities; or

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(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter
XII, (i.e. under section 115A to 115BBE)
if such income is credited to the profit and loss account and the income-tax payable thereon in accordance
with the normal provisions of this Act, other than the provisions of MAT, is at a rate less than the rate
specified in section 115JB (1) i.e., 15%; or

(iie) the amount representing, -

(A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust
in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or
(B) notional gain resulting from any change in carrying amount of said units; or

(C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the profit and loss
account; or
(iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into
account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of
the shares at the time of exchange where such shares are carried at a value other than the cost through profit
or loss account, as the case may be;
(iig) the amount of income by way of royalty in respect of patent chargeable to tax under section
115BBF; or
(iih) Aggregate amount of unabsorbed depreciation and loss brought forward in case of a –

• company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application
moved by the Central Government under section 241 of the Companies Act, 2013 has suspended the Board
of Directors of such company and has appointed new directors who are nominated by the Central
Government under section 242 of the said Act;
• the aggregate amount of unabsorbed depreciation and brought forward loss in case of a co against whom
an application for corporate insolvency resolution is admitted under the Insolvency and Bankruptcy Code,
2016
It may be noted that loss does not include depreciation.

A company would be a subsidiary of another company if such other company holds more than half in
the nominal value of equity share capital of the company.
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books
of account. For the purposes of this clause, the loss shall not include depreciation. Therefore, in a case where
an assessees has shown profit in a year, but after adjustment of depreciation it results profit or loss, no
adjustment in book profit is allowed; or (in case of a company other than company under going insolvency
proceedings under Insolvency and Bankruptcy Code, 2016)
(iv) the amount of profits of sick industrial company for the assessment year commencing on and from
the assessment year relevant to the previous year in which the said company has become a sick industrial
company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985
and ending with the assessment year during which the entire net worth of such company becomes equal to

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or exceeds the accumulated losses. “Net Worth” shall have the meaning assigned to it in Clause (ga) of Sub-
section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985.
(v) The amount of deferred tax, if any such amount is credited to the profit and loss account.

Computation of Book Profit for Ind AS compliant companies:

The Central Government has notified the Indian Accounting Standards (Ind AS) which are converged with
International Financial Reporting Standards (IFRS) and prescribed the Companies (Indian Accounting
Standards) Rules, 2015 which lay down the roadmap for implementation of these Ind AS.
As the book profit based on Ind AS compliant financial statements is likely to be different from the
book profit based on existing Indian GAAP, sub-sections (2A), (2B) and (2C) of section 115JB provides
the framework for computation of book profit for Ind AS compliant companies in the year of adoption
and thereafter.
MAT on Ind AS compliant financial statement [Section 115JB(2A)]
In case of a company whose financial statements are drawn up in compliance with the Indian
Accounting Standards (Ind ASs) specified in Annexure to the Companies (Indian Accounting
Standards) Rules, 2015, the following additional adjustments shall be done to the book profit as
computed above in point no. (iii) as per section 115JB(2) read with Explanation 1 –
(a) increased by all amounts credited to other comprehensive income in the statement of profit and loss
under the head “Items that will not be re-classified to profit or loss”;
(b) decreased by all amounts debited to other comprehensive income in the statement of profit and loss
under the head “Items that will not be re-classified to profit or loss”;
However, no adjustment shall be made where the amount credited or debited to other comprehensive
income under the head “Items that will not be re-classified to profit or loss”, in respect of –
(i) Revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian
Accounting Standards 38; or
(ii) Gains or losses from investments in equity instruments designated at fair value through other
comprehensive income in accordance with the Indian Accounting Standards 109. [First proviso to section
115JB(2A)]
However, the book profit of the previous year, in which such asset or investment is retired, disposed,
realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount
or the aggregate of the amounts as referred to in the first proviso for the previous year or any of the
preceding previous years and relatable to such asset or investment [Second proviso to section
115JB(2A)]

The OCI includes certain items that will permanently be recorded in reserves and hence never be reclassified
to statement of profit and loss included in computation of book Profit. Following items shall be included in
the book profits for the MAT purposes as explained under:

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1. Changes in revaluation surplus of Property, Plant or Equipment (PPI) and Intangible assets (Ind AS 16 and
38)
 Revaluation reserve credited or debited to OCI shall not be adjusted in the book profits in the year in
which it is debited or credited. [First proviso to section 115JB (2A)]
 It shall be included in the book profit in the year in which the Asset/Investment is retired, disposed,
realized or otherwise transferred. [Second Proviso to section 115JB(2A)]
2. Gains and losses from Investments in equity instruments designated at fair value through OCI (Ind AS 109)
 Gain or loss from such Investments debited/credited to OCI shall not be adjusted in book profits in the
year in which it is credited/debited. First proviso to section 115JB (2A)
 It shall be adjusted in book profits in the year in which investment is retired/disposed/realized. [Second
proviso to section 115JB (2A)]
3. Re-measurements of defined benefit plans (Ind AS 19) - It shall be adjusted in book profits every year
in which such re-measurement gain/loss arises.

4. Any other Item - It will be adjusted in book profits every year in which such profit/loss arises.
(c) Increased by amounts or aggregate of the amounts debited to the statement of profit and loss on
distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian
Accounting Standards 10;
(d) Decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on
distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian
Accounting Standards 10;
As per Appendix A of Ind AS 10 any distribution of non-cash assets to shareholders in case of demerger shall
be accounted at fair value and the difference between carrying value and fair value of such assets is adjusted
in profit and loss.

Reserves of such company are debited with fair value of assets to record distribution of “deemed dividend”
to shareholders. Since such difference between fair value and carrying amount is included in retained
earnings, therefore, such difference arising on demerger shall be excluded from book profits.
Sub-section (2B) states that in demerger, in the case of a resulting company, the property and the liabilities
of the undertaking or undertakings being received by it are recorded at values different from values
appearing in the books of account of the demerged company immediately before the demerger, any change
in such value shall be ignored for the purpose of computation of book profit of the resulting company under
this section.

MAT on first time adoption [Section 115JB(2C)]:

In case of Ind AS compliant company, the book profit of the year of convergence and each of the following
four previous years, shall be further increased or decreased, as the case may be, by one fifth of the transition
amount.
Note:
In the first year of adoption of Ind AS, the companies would prepare Ind AS financial statement for reporting
year with a comparative financial statement for immediately preceding year. As per Ind AS 101, a company

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would make all Ind AS adjustments on the opening date of the comparative financial year. The entity is also
required to present an equity reconciliation between previous Indian GAAP and Ind AS amounts, both on the
opening date of preceding year as well as on the closing date of the preceding year.
For the purposes of computation of book profits of the year of adoption and for adjustments, the amounts
adjusted as on the opening date of the first year of adoption shall be considered.

For example, companies which adopt Ind AS with effect from 1 April 2016 are required to prepare their
financial statements for the year 2016-17 as per the requirements of Ind AS. Such companies are also
required to prepare an opening balance sheet as of 1st April 2015 and restate the financial statements for
the comparative period 2015-16.
In such a case, the first time adoption adjustments as of 31 March 2016 shall be considered for computation
of MAT liability for previous year 2016-17 (Assessment year 2017-18) and thereafter.
Further, in this case, the five years period shall be previous years 2016-17, 2017-18, 2018-19, 2019-20 and
2020-21.

However, the book profit of the previous year in which the asset or investment referred to in sub clauses (B)
to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred shall be
increased or decreased, as the case may be, by the amount of the aggregate of the amounts referred to in the
said sub-clause relatable to such asset or investment: [First proviso to section 115JB(2C)]
Further, the book profit of the previous year in which the foreign operation referred to in sub clause (F) of
clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the
case may be, by the amount of the aggregate of the amounts referred to in the said sub-clause relatable to
such foreign operations. [Second proviso to sub-section (2C)]
Meaning of certain terms [Explanation to Section 115JB(2C)]
1. Year of convergence : the previous year within which the convergence date falls.

2. Convergence date : the first day of the first Indian Accounting Standards reporting period as defined in
the Ind AS 101.
3. Transition amount : the amount or aggregate of the amounts adjusted in other equity (excluding capital
reserve and securities premium reserve) on convergence date but not including the following:
(A) Amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence
date which shall be subsequently re-classified to the profit and loss;
(B) Revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian
Accounting Standards 38 adjusted on the convergence date;
(C) Gains or losses from investments in equity instruments designated at fair value through other
comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the
convergence date;
(D) Adjustments relating to items of property, plant and equipment and intangible assets recorded at fair
value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on
the convergence date;

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(E) Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value
as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the
convergence date; and
(F) Adjustments relating to cumulative translation differences of a foreign operation in accordance with
paragraph D13 of the Indian Accounting Standards 101 on the convergence date. [clause (iii)]

Transitional adjustments: Analysis

(i) The adjustments arising on account of transition to Ind AS from existing Indian GAAP is required to be
recorded directly in Other Equity at the date of transition to Ind AS. These adjustments has to be made in the
following manner:

(a) The book profit of the year of convergence and the following four previous years shall be increased or
decreased with the transitional adjustments recorded directly in Other Equity excluding capital reserve and
securities premium reserve and excluding the amounts referred in (A) to (F) (in the definition of Transition
Amount), on the convergence date.
(b) Those adjustments recorded in other comprehensive income referred in (A) above (in the definition of
Transition Amount) and which would subsequently be reclassified to the profit and loss, shall be included in
book profits in the year in which these are reclassified to the profit and loss, therefore these amounts are
excluded from the transition amount.
(c) Those adjustments recorded in other comprehensive income referred in (B) and (C) (in the definition of
Transition Amount) above and which would never be subsequently reclassified to the profit and loss shall
be included in book profits as specified hereunder:

i. Changes in revaluation surplus of Property, Plant or Equipment (PPI) and Intangible assets (Ind AS 16 and
38) – It shall be included in the book profit in the year in which the Asset/Investment is retired, disposed,
realized or otherwise transferred.
ii. Gains and losses from Investments in equity instruments designated at fair value through OCI (Ind AS 109)
– It shall be adjusted in book profits in the year in which investment is retired/disposed/ realized.
iii. Re-measurements of defined benefit plans (Ind AS 19) – It shall be adjusted in book profits equally over a
period of 5 years starting from the year of first time adoption of Ind AS.

iv. Any other Item – It shall be adjusted in book profits equally over a period of 5 years starting from the year
of first time adoption of Ind AS.
(d) The other adjustments referred in (D), (E) and (F) (in the definition of Transition Amount) above shall
be made in the following manner:
I. Property, Plant and Equipment (PPE) and intangible assets at fair value as deemed cost [referred
in (D) (in the definition of Transition Amount) above]
An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE or an
intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101. In such cases the treatment shall be as
under –

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• The existing provisions for computation of book profits under section 115JB of the Act provide that in case
of revaluation of assets, any impact on account of such revaluation shall be ignored for the purposes of
computation of book profits. Further, the adjustments in retained earnings on first time adoption with
respect to items of PPE and Intangible assets shall be ignored for the purposes of computation of book profits.
• Depreciation shall be computed ignoring the amount of aforesaid retained earnings adjustment.

Similarly, gain/loss on realization/ disposal/ retirement of such assets shall be computed ignoring the
aforesaid retained earnings adjustment.

II. Investments in subsidiaries, joint ventures and associates at fair value as deemed cost
[referred in (E) (in the definition of Transition Amount) above]
An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for investment in a subsidiary,
joint venture or associate in its separate financial statements as mentioned in paragraph D15 of Ind AS 101.
In such cases retained earnings adjustment shall be included in the book profit at the time of realisation of
such investment.

III. Cumulative translation differences [referred in (F) (in the definition of Transition
Amount) above]
• An entity may elect a choice whereby the cumulative translation differences for all foreign operations are
deemed to be zero at the date of transition to Ind AS. Further, the gain or loss on a subsequent disposal of
any foreign operation shall exclude translation differences that arose before the date of transition to Ind AS
and shall include only the translation differences after the date of transition.
• In such cases, to ensure that such Cumulative translation differences on the date of transition which have
been transferred to retained earnings, are taken into account, these shall be included in the book profits at
the time of disposal of foreign operations as mentioned in paragraph 48 of Ind AS 21.
(ii) All other adjustments to retained earnings (recorded as other equity) at the time of transition (including
for example, Decommissioning Liability, Asset retirement obligations, Foreign exchange capitalisation/
decapitalization, Borrowing costs adjustments etc.) shall be included in book profits, equally over a period
of five years starting from the year of first time adoption of Ind AS.
(iii) Section 115JB of the Act already provides for adjustments on account of deferred tax and its provision.
Any deferred tax adjustments recorded in Reserves and Surplus on account of transition to Ind AS shall also
be ignored.
The following points should also be noted in this context:
1. Losses and unabsorbed Depreciation allowed to be carried forward (Section 115JB (3))
Provisions of MAT under Section 115JB (1) shall not affect the determination of the amounts unabsorbed
depreciation under Section 32(2), business loss u/s 72(1), speculation loss u/s 73, capital loss u/s 74 and
loss u/s 74A in relation to the relevant previous year to be carried forward to the subsequent year or years.
In other words, these are allowed to be carried forward in usual manner.
2. Report from a Chartered Accountant to be submitted [Section 115JB (4)]
Every company to which this section applies, shall furnish a report in the prescribed form from a Chartered
Accountant as defined in the Explanation below Section 288(2), certifying that the book profit has been

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computed in accordance with the provisions of this section along with the return of income filed under
Section 139(1) or along with the return of income furnished in response to a notice Section 142(1)(i).
3. All other provisions to be applicable as usual [Section 115JB (5)]

Save as otherwise provided in this section, all other provisions of this Act shall apply to such companies, i.e.
all the provisions such as Advance tax, Interest under Section 234A, 234B and 234C, penalty etc shall also
apply to such companies.
4. Applicability of Provisions to SEZ enterprises and SEZ developers –
The provisions of this section are applicable to SEZ enterprises and SEZ Developers from AY 2012-13.

5. Rate of MAT in case of a unit located in International Financial Service Centre

Notwithstanding anything contained in Section 115JB (1), where the assessee referred to therein, is a unit
located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange, the rate of MAT shall be 9% instead of 15% of Book Profits.
6. Applicability of provisions of MAT applicable to foreign companies
Since ‘company’ defined u/s 2(17) includes any body corporate incorporated under the laws outside India,
so foreign companies are also liable to MAT in respect of their income in India.
However, foreign companies shall not liable u/s 115JB without physical presence.
The Authority for Advance Ruling (“AAR”) has delivered a ruling in the case of Timken India Ltd. In re (2005)
273 ITR 67 (AAR) where it holds that the provisions of section 115JB of the Income-tax Act, 1961 (“the Act”)
levying Minimum Alternate Tax (“MAT”) on the book profit of a Company would not apply to a Foreign
Company not having any physical presence in India. In this case, the AAR distinguished its earlier ruling of
1998 (234 ITR 828) wherein it had held that a foreign company would be subject to MAT provisions. The
critical factor for distinguishing was on the basis that in the earlier ruling the applicant had a project office
in India, which constituted a Permanent Establishment and was preparing its financial statements as
required under Indian Companies Act, 1956. In order to comply with the requirement of MAT provisions
regarding preparing Profit & Loss Account in accordance with the provisions of the Indian Companies Act, it
is essential that the foreign company should have a place of business within India.
Similar view has been upheld by AAR in the recent ruling of Praxair Pacific Ltd., In re [2010] 326 ITR 276
(AAR)

Further, in case of a foreign company any income chargeable at a rate lower than the rate specified in section
115JB shall be reduced from the book profits and the corresponding expenditure will be added back.
With a view to provide certainty in taxation of foreign companies, an amendment has been made vide Finance
Act, 2016 so as to provide that with effect from 01.04.2001, the provisions of section 115JB shall not be
applicable to a foreign company if –
 the assessee is a resident of a country or a specified territory with which India has an agreement referred
to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-
section (1) of section 90A and the assessees does not have a permanent establishment in India in
accordance with the provisions of such Agreement; or

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 the assessee is a resident of a country with which India does not have an agreement of the nature referred
above and the assessee is not required to seek registration under any law for the time being in force
relating to companies.
For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and
shall be deemed never to have been applicable to an assessee, being a foreign company, where its total
income comprises solely of profits and gains from business referred to in section 44B or section 44BB or
section 44BBAor section 44BBB and such income has been offered to tax at the rates specified in those
sections.

7. Whether Assessing officer has the power to examine correctness of net profit shown in profit and
loss Account [Apollo Tyres Ltd. V. CIT (2002) 255 ITR 273 (SC)]
The AO does not have the power to question correctness of P&L A/c prepared by assessee and certified by
the statutory auditors of the company as having been prepared in accordance with the provisions of Parts II
and III of Schedule VI to the Companies Act, 2013. The AO does not have the jurisdiction to go behind the net
profits shown in the P&L A/c except to the extent provided in the Explanation 1 to Section 115JB.
In the following cases Assessing officer has power to rework or rewrite the profit and loss account:
 Where the profit and loss account submitted is not as per Part II and III of Schedule VI of companies Act,
2013.
 Where accounting policies or accounting standards or rate of depreciation adopted are different from
those adopted for the profit and loss prepared for the AGM.

MAT CREDIT [SECTION 115JAA]

MAT Credit for taxes paid as per Section 115JB in earlier years (in which MAT liability was more than tax
liability as per normal provisions of the Act) is available in the Assessment year in which Tax payable on the
total income computed under the normal provisions of this Act is more than tax payable u/s 115JB for that
Assessment year.
MAT Credit to be set off in an AY = Regular Income tax - Minimum alternate tax
Credit of MAT in respect of tax excess paid under Section 115JB will be available and it can be carried forward
for 15 assessment years succeeding the assessment year in which the credit became allowable.

The amount of MAT credit shall not be allowed to be carried forward to the subsequent year to the extent
such credit relates to the difference between the amount of foreign tax credit (FTC) allowed against MAT and
FTC allowable against the tax computed under regular provisions of the Act.
In case of conversion of a company into LLP, MAT Credit available in the hands of company shall not be
allowed to LLP.
Illustration. Number of years for which credit of MAT excess paid under section 115JB can be carried
forward is –
(a) 7 Assessment years (b) 8 Assessment years

(c) 15 Assessment years (d) 9 Assessment years.

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 CLASSIFICATION AND TAX INCIDENCE ON COMPANIES
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Answer: (c) 15 Assessment years

Illustration
A domestic Company, ABC Ltd., furnishes the following particulars in respect of AY 2021-22 and solicits your
advice on the application of Section 115 JB. You are also required to compute the total income tax payable.

Particulars INR

Profits as per P&L Account as per Companies Act, 2013 1,95,00,000

this includes:

a) excess realized on sale of land held as investment 30,00,000

b) depreciation on SLM basis 1,00,00,000

c) Provision for losses of subsidiaries 60,00,000

depreciation allowable per income tax rules, 1962 1,50,00,000

STCG on sale of land mentioned above 40,00,000

B/f losses 50,00,000

unabsorbed depreciation 60,00,000

The Company has also represented to you that the excess realized on sale of land cannot form part of the
book profits u/s 115 JB. You will have to deal with the issue assuming that the Co. is not required to comply
with Ind. AS. The annual turnover of ABC Ltd. was INR 40 Crores.
Solution:

Computation of Total Income per Income Tax Act, 1961

Net Profit per P&L Account 1,95,00,000

less: excess realized on sale of land (treated separately) 30,00,000

1,65,00,000

add: depreciation on SLM Basis 1,00,00,000

Provisions for losses of subsidiaries 60,00,000

1,60,00,000

3,25,00,000

less: depreciation allowable per income tax act (1,50,00,000)

Business income 1,75,00,000

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 CLASSIFICATION AND TAX INCIDENCE ON COMPANIES
SSGURU CA SURAJ SATIJA
less: Set-off of B/f losses (50,00,000)

Net Business income 1,25,00,000

Capital Gains 40,00,000

total income 1,65,00,000

less: unabsorbed depreciation 60,00,000

Total Income per as Income Tax Act, 1961 1,05,00,000

Computation of Book Profit u/s 115JB

Net Profit per P&L Account 1,95,00,000

add: depreciation on SLM Basis 1,00,00,000

Provisions for losses of subsidiaries 60,00,000 1,60,00,000

3,55,00,000

less: depreciation 1,00,00,000

Business income 2,55,00,000

less: B/f Business loss as it’s less than unabsorbed depreciation 50,00,000

Book Profits 2,05,00,000

Note that the profit on sale of land held as investment is not

excluded from the P&L for purposes of computing the Book
Profits!
Note that the least of the B/f loss and the Unabsorbed
Depreciation is reduced to compute Book Profits

Income Tax Liability under Normal Provisions

Tax Liability @ 25% as the Turnover is < 400 Crores 26,25,000

add: Surcharge @ 7% as the Income is > 1 Cr. 1,83,750

total tax Payable 28,08,750

add: Health and Education Cess @ 4% 1,12,350

Total Income Tax Liability 29,21,100

Income Tax Liability per MAT Provisions

15% of Book Profits 30,75,000

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 CLASSIFICATION AND TAX INCIDENCE ON COMPANIES
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add: Surcharge @ 7% as the Income is > 1 Cr. 2,15,250

total tax Payable 32,90,250

add: Health and Education Cess @ 4% 1,31,610

Total Income Tax Liability 34,21,860

Note:
a) Since 15% of book profits exceeds the tax payable per Income Tax Act, 1961, the book profit would be
deemed to be the total income and the tax payable on such total income, which is INR 34,21,860 (rounded
off) would become the liability for AY 2021-22 for the Co.
b) With regards to the company’s representation, in respect of the capital gains, whether liable for book profit
tax u/s 115JB, it may be noted that since the excess realised on sale of land which was held as investment,
has been included in the net profit computed per Sch. III of the Companies Act, 2013, it shall form part of
Book Profits (Bombay HC Judgement in CIT vs. Veekay Lal Investment Co Pvt Ltd.)

MCQ`S
1. Tax credit in respect of MAT paid as per section 115JB will be allowed only in the previous year in which the
tax payable on the total income at the normal rate is –
(a) More than the tax payable under section 115JB
(b) Less than the tax payable under section 115JB
(c) Equal to the tax payable under section 115JB
(d) All of the above.
Answer: (a) More than the tax payable under section 115JB
2. Metro ltd., a domestic company, is assessed with a total income of rs. 11.25 crore. The surcharge payable by
the company shall be at the rate of –
(a) 2% (b) 5%
(c) 10% (d) 12%.
Answer: (d) 12%
3. Dividend received from domestic company will be included in the total income of the shareholder and will be
charged to tax at –
(a) 15 % (b) 18.5 %
(c) 30% (d) Normal slab rate of tax as applicable to assessee.
Answer: (d) Normal slab rate of tax as applicable to assessee
4. Provisions of Section 115JB are applicable in case of –
(a) Domestic companies only (b) Foreign companies only

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(c) all companies (d) Closely held companies.
Answer: (c) all companies.

5. For computing the Book Profit under section 115 JB, which of the following is not added back to the profits?
(a) Income-tax
(b) Provision for tax
(c) Dividend distribution tax u/S 115-O
(d) Securities transaction tax
Answer: (d) Securities transaction tax
6. Mr. Ganapathy a resident individual received Rs. 12 lakhs during the financial year 2020-21 by way of dividend
from domestic companies. The applicable rate of dividend distribution tax under Section 115-O on the dividend
declared shall be:
(a) 10.4% (b) 31.2%
(c) Nil (d) 15.60%
Answer: (c) Nil
7. A domestic company whose turnover for the previous year 2018-19 RS.420 crores; for previous year 2019-20
RS.380 crore and for previous year 2020-21 RS.120 crores. Its total income (computed) for the assessment year
2021-22 is RS.30 crores. The rate of income tax applicable for such company (without cess) is:
(a) 30% (b) 22%
(c) 15% (d) 25%
Answer: (d) 25%
8. Abc Pvt. Ltd. Has a business loss of RS.10 lakh. There is unexplained share application money to the tune of RS.25
lakh. The total income of the company will be :
(a) RS.15 lakh (b)RS.35 lakh
(c)RS.25 lakh (d) None of the above
Answer: (c)
9. Provisions of Minimum alternate tax (MAT) are applicable to the companies which are :

(i) Indian companies

(ii) Foreign companies in certain situations
(iii) LLP
(a) (i) and (iii) (b) (i) and (ii)
(c) all the three (d) None of the above
Answer: (b)
10. In order to be entitled to concessional rate of tax for dividend received from a foreign company, the indian company
should have the following minimum shareholding in such foreign company –
(a) 10% (b) 25%

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(c) 26% (d) 51%.
Answer: (c) 26%

11. An Indian company having 30% voting power in a foreign company received dividend of Rs. 10 lakh From the
foreign company. The dividend so received by the indian company is –
(a) Exempt (b) Taxable @ 15%
(c) Taxable at the regular rates (d) Taxable @ 20%.
Answer: (b) Taxable @ 15%.

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TAX DEDUCTED AT SOURCE

Section Nature of Threshold Payer Payee Rate of TDS Time of

payment Limit for deduction
deduction of
tax atsource
192 Salary Basic Any person Individual Average rate At the time
exemption responsible (Employee) of income-tax of
limit (` for paying any computed on payment10
2,50,000 /` income the basisof
3,00,000, chargeable the ratesin
as the case underthe force.
may be). head “Salaries
This is taken
care of in
computation
of the average
rate of
income-tax.
192A Premature Payment or Trustees of Individual 10% [In case At the time
withdrawal aggregate the EPF (Employee of failure to of
from payment ≥ ` Scheme or ) furnish PAN, payment
Employee 50,000 any TDS@
Provident authorised Maximum
Fund person under Marginal
the Scheme Rate]
193 Interest > ` 10,000 in a Any person Any resident 10% (7.5% At the time of
o F.Y., in case of responsible for the credit of such
nSecurities interest on for paying any period from income to the
8% Savings income by 14.5.2020 to account of the
(Taxable) way of 31.3.2021) payee or at the
Bonds, interest on time of
2003/7.75% securities payment,
Savings whichever is
(Taxable) earlier.
Bonds, 2018.

> ` 5,000 in a
F.Y., in case of
interest on
debentures
issued by a Co.
in which the
public are
substantially
interested,
paid or
credited to a

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 TDS-TCS
SSGURU CA SURAJ SATIJA
resident
individual or
HUF by an A/c
payee cheque.
> No
threshold
specified in
any other case.
194 Dividend > ` 5,000 in a The Principal Resident 10% (7.5% Before making
(including F.Y., in case of Officer of a shareholder for the any payment
dividends dividend paid domestic period from by any mode
o or credited to company 14.5.2020 to in respect of
n preference an individual 31.3.2021) any dividend
shares) shareholder by or before
any mode making any
other than cash distribution
> No or
threshold in Payment of
other cases dividend.
194A Interest other > ` 40,000 in a Any person Any Resident 10% (7.5% At the time of
than interest F.Y., in case of (other than an for the credit of such
on securities interest individual or period from income to the
credited or HUF whose 14.5.2020 to account of
paid by – total sales, 31.3.2021) the payee or at
(i) a banking gross receipts the time of
company; or turnover payment,
(ii) a co- from Business Whichever is
operative or profession earlier.
society do not exceed
engaged in ` 1 crore in
banking case of
business; and business or `
(iii) a post 50 lakhs in
office on any case of
deposit under profession
a notified during the
Scheme. immediately
In all the above preceding
cases, if payee F.Y.)
is a resident responsible
senior citizen, for paying
tax deduction interest other
limit is >` than
50,000. interest on
> ` 5,000 in a securities.
F.Y., in other
cases.

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 TDS-TCS
SSGURU CA SURAJ SATIJA
194B Winnings > ` 10,000 The person Any Person 30% At the time of
from any responsible payment
lottery, for paying
crossword income by
puzzle or card way of such
game or other winnings
game of any
sort
194BB Winnings > `10,000 Book Maker Any Person 30% At the time of
from horse or a person payment
race holding
licence for
horse racing
or for
arranging
for wagering
or
betting in any
race course.
194C Payments to Single sum Central/State Any Resident 1% (0.75%*) At the time of
Contractors credited or Govt.,Local contractor for of sum paid or credit of such
paid > ` 30,000 authority, carrying out credited, if the sum to the
(or) The Central/State any work payee is an account of the
aggregate of /Provincial (including Individual or contractor or
sums credited Corpn., supply of HUF at the time of
or paid to a company, labour) 2% (1.5%*) of payment,
contractor firm, trust, sum paid or whichever is
during the F.Y. registered credited, if the earlier.
> ` 1,00,000 society, co- payee is any
Individual/HU operative other person.
F need not society, * The rates of
deduct tax university 0.75% and
where sum is established 1.5% are for
credited or under the period
paid Central/State from
exclusively for /Provincial 14.5.2020 to
personal Act, declared 31.3.2021
purposes university
under the UGC
Act, Govt. of
Foreign State
or a foreign
enterprise,
individual/HU
F whose total
sales, gross
receipts or
turnover from
business or

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 TDS-TCS
SSGURU CA SURAJ SATIJA
profession
exceeds ` 1
crore in case
of business or
` 50 lakhs in
case of
profession
during the
immediately
preceding F.Y.
194D Insurance >15,000 in a Any person Any Resident 5% (3.75% At the time of
Commission financial year responsible for the credit of such
for paying period from income to the
any income by 14.5.2020 to account of the
way of 31.3.2021) payee or at the
remuneration time of
or reward for payment,
soliciting or whichever is
procuring earlier.
insurance
business
194DA Any sum ≥ 1,00,000 Any person Any resident 5% of the At the time of
under a Life (aggregate responsible amount of payment
Insurance amount of for paying any income
Policy payment to a sum under a comprised
payee in a LIP, including (3.75%for the
financial year) the sum period from
allocated by 14.5.2020 to
way of bonus 31.3.2021)
194E Payment to - Any person Non-resident 20.8% At the time of
non-resident responsible sportsman (including credit of such
sportsmen or for making the (including an health and income to the
sports payment athelete) or education account of the
associations entertainer cess@4%) payee or at the
of income who is not a time of
referred to in citizen of payment,
section India or non- whichever is
115BBA resident earlier.
sports
association or
institution
194EE Payment of ≥ ` 2,500 in a Any person Individual or 10% (7.5% At the time of
deposit under financial year responsible HUF for payment payment
National for paying to residents
Saving for the
Scheme period from
14.5.2020 to
31.3.2021)

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 TDS-TCS
SSGURU CA SURAJ SATIJA
194G Commission > 15,000 in a Any person Any person 5% (3.75% At the time of
on sale of financial year responsible stocking, for payment credit of such
lottery tickets for paying any distributing, to residents income to the
income by purchasing or for the account of the
way of selling lottery period from payee or at the
commission, tickets 14.5.2020 to time of
remuneration 31.3.2021) payment,
or prize (by whichever is
whatever earlier.
name called)
on lottery
tickets
194H Commission > 15,000 in a Any person Any resident 5% (3.75% At the time of
or brokerage financial year (other than an for the credit of such
Individual or period from income to the
HUF whose 14.5.2020 to account of the
total sales, 31.3.2021) payee or at the
gross receipts time of
or turnover payment,
from whichever is
business or earlier.
profession do
not exceed ` 1
crore in case
of business or
` 50 lakhs in
case of
profession
during the
immediately
preceding
F.Y.)
responsible
for paying
commission
or brokerage.

194-I Rent > 2,40,000 in a Any person Any resident For P & M or At the time of
financial year (other than an equipment- credit of such
individual or 2% (1.5%*) income to the
HUF whose account of the
total sales, For land or payee or at the
gross receipts building, land time of
or turnover appurtenant payment,
from to a building, whichever is
business or earlier.

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 TDS-TCS
SSGURU CA SURAJ SATIJA
profession furniture or
carried on by fittings -10%
him do not (7.5%*)
exceed ` 1 Note - The
crore in case rates of 1.5%
of business or and 7.5% are
` 50 lakhs in for the period
case of from
profession 14.5.2020 to
during the 31.3.2021
immediately
preceding
F.Y.)
responsible
for paying
rent.
194-IA Payment on ≥ 50 lakh Any person, Resident 1% (0.75% At the time of
transfer of (Consideration being a transferor for the credit of such
certain for transfer) transferee period from sum to the
immovable (other than a 14.5.2020 to account of the
property person 31.3.2021) transferor or
other than referred to at the time of
agricultural in section payment,
land 194LA whichever is
responsible earlier.
for paying
compensation
for
compulsory
acquisition of
immovable
property
other
than rural
agricultural
land)
194-IB Payment of > ` 50,000 for Individual/ Any Resident 5% (3.75% At the time of
rent by a month or HUF (other for the credit of rent,
certain part of a than period from for the last
individuals or month Individual/H 14.5.2020 to month of the
HUF UF whose 31.3.2021) previous year
total sales, or the last
gross receipts month of
or turnover tenancy, if the
from property is
business or vacated

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 TDS-TCS
SSGURU CA SURAJ SATIJA
profession during the
carried on by year, as the
him exceeds ` case may be,
1 crore in case to the account
of business or of the payee or
` 50 lakhs in at the time of
case of payment,
profession whichever is
during the earlier
immediately
preceding
F.Y.)
responsible
for paying
rent.
194-IC Payment No threshold Any person Any Resident 10% (7.5% At the time of
under specified. responsible for the credit of such
specified for paying any period from income to the
agreement sum by way of 14.5.2020 to account of the
referred to in consideration, 31.3.2021) payee or at the
section not being time of
45(5A) consideration payment,
in kind, under whichever is
a registered earlier.
agreement,
wherein L or B
or both are
handed over
by the owner
for
Development
of real estate
project, for
a
consideration,
being a share
in L or B or
both in such
project, with
payment of
part
consideration
in cash.
194J Fees for > ` 30,000 in a Any person, Any Resident 2% (1.5%*) - At the time of
professional financial year, other than an Payee credit of such
or technical for each individual or engaged only sum to the
services/ category of HUF; in the account of the
Royalty/ Non- income. However, in business of payee or at the
compete fees/ (However, this case of fees for operation of time of

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 TDS-TCS
SSGURU CA SURAJ SATIJA
Director’s limit does not professional call centre payment,
remuneration apply in case of or technical 2% (1.5%*)- whichever is
payment made services paid In case of fees earlier.
to director of a or credited, for technical
company). individual/HU services or
F, whose total royalty, where
sales, gross such royalty is
receipts or in the nature
turnover from of consider-
business or ation for
profession sale,
exceeds ` 1 distribution or
crore in case exhibition of
of business or cinemato-
` 50 lakhs in graphic films
case of 10% (7.5%*)
profession - Other
during the payments
immediately Note – The
preceding F.Y., rates would
is liable to be 1.5%,
deduct tax 1.5% and
u/s 194J, 7.5% for the
except where period from
fees for 14.5.2020 to
professional
31.3.2021
services is
credited or
paid
exclusively for
his personal
purposes.
194K Income on > ` 5,000 in a Any person Any resident 10% (7.5% At the time of
units other financial year responsible during the credit of such
than in the for paying any period from sum to the
nature of income in 14.5.2020 to account of the
capital gains respect of 31.3.2021) payee or at the
units of a time of
mutual payment,
fund/Adminis whichever is
trat or of the earlier.
specified
undertaking/
specified
company

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 TDS-TCS
SSGURU CA SURAJ SATIJA
194LA Compensation > ` 2,50,000 Any person Any Resident 10% (7.5% At the time of
on acquisition in a responsible during the payment
of certain financial yearfor paying any period from
immovable sum in the 14.5.2020 to
property nature of 31.3.2021)
other than compensation
agricultural or enhanced
land compensation
on
compulsory
acquisition
of immovable
property
194M - Payments to > ` 50,00,000 Individual or Any Resident 5% (3.75% At the time of
Contractors in a financial HUF other during the credit of such
- Commissio year than those period from sum to the
n or who are 14.5.2020 to account of the
brokerage required to 31.3.2021) payee or at the
- Fees for deduct tax at time of
professional source under payment,
services section 194C whichever is
or 194H or earlier.
194J
194N Cash > ` 1 crore - a banking Any person @2% of such At the time of
withdrawals company or sum payment of
any bank or such sum
banking In case the
institution recipient has
- a co- not filed ROI
operative for all the 3
society immediately
engaged in preceding
carrying on P.Y.s, for
the business which time
of limit u/s
banking or 139(1) has
- a post office expired, such
who is sum shall be
responsible the amt or
for agg. of amts,
paying any in cash >` 20
sum, being the lakh during
amount or the the P.Y.
aggregate of TDS
amounts, as - @2% of the
the case may sum, where
be, in cash cash
exceeding withdrawal
` 1 crore > ` 20 lakhs

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 TDS-TCS
SSGURU CA SURAJ SATIJA
during the but ≤ ` 1 crore
previous year, - @5% of sum,
to any where cash
person from withdrawal
one or more exceeds ` 1
accounts crore
maintained by
the recipient
194-O > ` 5 lakhs, E-commerce E-commerce 1% (0.75% At the time of
(w.e.f. being gross operator, who participant for the credit of such
1.10.20 amount of facilitates sale period upto sum to the
20) sales or service of goods or 31.3.2021) account of the
or both in a Provision of of gross payee or at the
financial year services of an amount of time of
to an e- e- commerce sale or payment,
commerce participant serviceor both whichever is
participant, through [In case of earlier.
being digital or failure to
individual or electronic furnish PAN,
HUF and such facility or Maximum
e- commerce platform TDS@5%]
participant has
furnished PAN
or Aadhar
number to the
e-commerce
operator
> No
threshold in
other cases
Notes –
(1) Section 206AA requires furnishing of PAN by the deductee to the deductor, failing which the
deductor has todeduct tax at the higher of the following rates, namely, -
(i) at the rate specified in the relevant provision of the Income-tax Act, 1961; or
(ii) at the rate or rates in force; or
(iii) at the rate of 20% and in case of section 194-O, 5%.
The threshold limit given in column (3) of the table is with respect to each payee.

SECTION 206CC [INSERTED VIDE FINANCE ACT, 2017 W.E.F. AY 2018-19]

The provisions of this section are as under-
Collectee shall furnish his PAN to the person responsible for collecting such tax at source. If PAN is
not intimated, tax shall be collected at twice the normal rate or at the rate of 10%, whichever is
higher.

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 TDS-TCS
SSGURU CA SURAJ SATIJA
i. Declaration filed under section 206(1A) shall not be valid unless the person filing the declaration
furnishes his PAN in such declaration.
ii. Lower tax collection certificate shall not be granted unless application in Form No. 13 by the
collectee contains his PAN.
iii. The collectee shall furnish his PAN to the collector and both shall indicate the same in all
correspondence, bills and vouchers exchanged between them.
iv. Where the PAN provided by the collectee is invalid or it does not belong to the collectee, it shall
be deemed that PAN has not been furnished to the collector.
These provisions are not applicable to a non resident who does not have any permanent
establishment in India.

Time limit for the payment of TDS to the Government

Sr. No. Month Non-Govt. Government Deductors

Deductors
1. april to 7th of the next • Same day in cases TDS deposited without
February month in which challan no. ITNS 281.
TDS is deducted • 7th of the next month in which TDS is
deducted in cases TDS deposited with
challan
2. March 30th April of • Same day in cases TDS deposited without
Next financial year challan no. ITNS 281.
• 7th of the next month in which TDS is
deducted in cases TDS deposited with
challan

Note: Any sum deducted u/s 194IA shall be paid to the credit of the central government within a
period of 30 days from the end of the month in which the deduction is made and shall be
accompanied by a challan-cum-statement in Form No. 26QB.
The Due date to submit Form 24G extended from 10 days of the end of the relevant month to
– 30th day of April where the statement relates to the month of March and
– 15 days from the end of relevant month
It is furnished electronically under digital signature or electronically along with the verification of
the statement.

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Issue of TDS Certificate
Every person deducting tax at source is required as per Section 203 to furnish a certificate to the
payee to the effect that tax has been deducted along with certain other particulars. This certificate
is usually called the TDS certificate. Even the banks deducting tax at the time of payment of pension
are required to issue such certificates. In case of employees receiving salary income including
pension, the certificate has to be issued in Form No.16. In all other cases, the TDS certificate is to be
issued in Form 16B. The certificate is to be issued in the deductor’s own stationery. However, there
is no obligation to issue TDS certificate in case of tax at source is not deducted /deductible by virtue
of claims of exemptions/ deductions.

Due Date for Issue of Certificate

FORM 16: 31 May of the Next Financial year in which tax is deducted.
FORM 16A: Within 15 days from due date for furnishing the statement of tax deducted under rule
31A

Quarter ended Due date of Form 16A

30th June 15th august
30th September 15th November
31st december 15th February
31st March 15th June
Form 16B: Within 15 days from due date for furnishing the challan cum statement in Form 26QB

Issue of Duplicate Certificate

Where the original TDS certificate is lost, the deductee can approach the deductor for issue of a
duplicate TDS certificate. The deductor may issue a duplicate certificate in Form No. 16 or Form 16A
as the case may be. However such a certificate has to be certified as duplicate by the deductor.
Further, the deductor may, at his option, use digital signatures to authenticate such certificates. In
case of issue of such certificates the deductor shall ensure that
a) The provisions of sub-rule (2) of Rule 31 regarding specification of TAN, PAN of deducteee book
identification number; Challan identification number; receipt number of relevant quarterly
statements etc. are complied with;
b) Once the certificate is digitally signed, the contents of the certificates are not amendable to
change; and
c) The certificates have a control number and a log of such certificates is maintained by the deductor.

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SSGURU CA SURAJ SATIJA
TDS Forms
Any person deducting any sum in accordance with the foregoing provisions of this Chapter shall pay
within the prescribed time, the sum so deducted to the credit of the Central Government or as the
Board directs. Further, quarterly TDS Return is required to be filed by the assessee who has
deducted the TDS. TDS Returns include fields like TAN No., TDS Payment, amount deducted, type of
payment, PAN No. etc.

Form No. Particulars

Form 24Q Statement for tax deducted at source from salaries
Form 26Q Statement for tax deducted at source on all payments except salaries
Form 27Q Statement for deduction of tax from interest, dividend, or any other sum
payable to non-residents
Form 27EQ Statement of collection of tax at source
Form 26QB For section 194IA separate return is not required, challan cum return to be filed
on Form 26QB to be deposited within a period of 30 days (w.e.f. 01.06.2016)
from the end of the month in which the deduction is made.
The quarterly return statements should be accompanied by a signed verification in Form No. 27A.
Form 27A is a control chart of quarterly TDS statements to be filed by deductors/collectors
alongwith quarterly statements. It is a summary of TDS returns which contains control totals of
‘amount paid’ and ‘income tax deducted at source’.

TDS Return
A return of TDS is a comprehensive statement containing details of payment made and taxes
deducted thereon along with other prescribed details. As per section 200(3) of the Act, the Due Date
for filing TDS Return (both online as well as physical) is as follows :

Quarter Due Date for Form Form 27Q Form 27EQ

24Q & Form 26Q
april to June 31st July 31st July 15th July
July to Sept 31st Oct 31st Oct 15th Oct
Oct to dec 31st Jan 31st Jan 15th Jan
Jan to March 31st May 31st May 15th May
Note: ‘Nil’ TDS return is not mandatory, however to facilitate the deductors and update data
government has provided a facility for declaring nil TDS return.
The statement may be furnished in any of the following manners namely:
a) Paper form

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b) Electronically, under digital signature in accordance with the procedures, formats and standards
specified under sub-rule (5) of Rule 31A.
c) Electronically, along with the verification of the statement in Form 27A or verified through an
electronic process in accordance with the procedures, formats and standards specified under sub-
rule (5) of Rule 31A.
It is to be noted that in case of the following quarterly, statements are to be delivered
electronically;
a) Every Government deductor,
b) Corporate deductor,
c) The deductor is a person required to get his accounts audited under sec. 44 AB in the immediately
preceding financial year or
d) The number of deductee’s records in a statement for any quarter of the financial year is twenty
or more;
Such quarterly statements are to be delivered electronically under digital signature or electronically
with verification of statement in form 27A or verified through an electronic process in accordance
with format and procedure specified in rule 31A(5). Further, a declaration in Form 27A is also to be
submitted in paper format. Quarterly statements are also to be filed by such deductors in electronic
format with the e-TDS Intermediary at any of the TIN Facilitation Centres, particulars of which are
available at www.incometaxindia.gov.in and at http://tin.nsdl.com
A person other than a deductor specified above may at his option deliver the quarterly statements
electronically in computer media as provided above. However, it is not mandatory for it to do so.
It is mandatory for the deductor to quote the following in quarterly statements :
• TAN
• PAN of the deductor (except where deductor is an office of the government)
• PAN of all the deductees
• Particulars of tax paid to the Central Government including Book Identification Number or Challan
Identification Number as the case may be.
• Particulars of amount paid or credited on which tax was not deducted in view of issue of certificate
of no deduction of tax u/s 197 by the assessing officer to the payee.

Refund of TDS
In case of excess deduction of tax at source, claim of refund of such excess TDS can be made by the
deductor. The excess amount is refundable as per procedure laid down for refund of TDS wherein

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SSGURU CA SURAJ SATIJA
the difference between the actual payment made by the deductor and the tax deductible at source,
will be treated as the excess payment made.
In case such excess payment is discovered by the deductor during the financial year concerned, the
present system permits credit of the excess payment in the quarterly statement of TDS of the next
quarter during the financial year. In case, the deduction of such excess amount is made beyond the
financial year concerned, such claim can be made to the Assessing Officer (TDS) concerned.
However, no claim of refund can be made after two years from the end of financial year in which tax
was deductible at source.

E-TDS Return
E-TDS return is a prepared in the form Nos. 24Q, 26Q or 27Q in electronic media as per prescribed
data structure either in a floppy or in a CD-ROM. The floppy or CD-ROM prepared should be
accompanied by Form No. 27A should be signed and verified in the prescribed manner.. As per
Section 206 of the Income Tax Act Corporate and Government deductors are compulsorily required
to file their TDS return through electronic media. However, for other deductros filing of e-TDS
return is optional and e-TDS return should be filed under Section 206 of the Income Tax Act in
accordance with a scheme dated 26th August, 2003 for electronic filing of TDS return vide CBDT
Circular No.8 dated 19.09.2003. The CBDT has appointed the Director General of Income Tax
(Systems) as e-filing administrator for the purpose of electronic filing of returns of TDS Scheme,
2003. CBDT has also appointed National Securities Depository Limited (NSDL) ase-TDS
intermediatory. E-TDS return can be filed at any of the TIN-FC opened by the e-TDS intermediatory
for this purpose. The due date for filing quarterly TDS return both electronic and conventional form
remains the same.

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SSGURU CA SURAJ SATIJA
Tax Collection at source [Section 206C]
(a) Sellers of certain goods are required to collect tax from the buyers at the specified rates. The specified
percentage for collection of tax atsource is as follows:
Percentage
From
From
14.5.2020
Nature of goods 1.4.2020 to
to
13.5.2020
31.3.2021
(%)
(%)
i. Alcoholic liquor for human
1 1
consumption
ii. Tendu leaves 5 3.75
iii.
Timber obtained under a forest lease 2.5 1.875
iv. Timber obtained by any mode other
2.5 1.875
than (iii)
v. Any other forest produce not being
2.5 1.875
timber or tendu leaves
vi. scrap 1 0.75
vii.Minerals, being coal or lignite or iron
1 0.75
ore
However, no collection of tax shall be made in the case of a resident buyer, if such buyer furnishes a
declaration in writing in duplicate to the effect that goods are to be utilised for the purpose of
manufacturing, processing or producing articles or things or for thepurposes of generation of power
and not for trading purposes
(b) Every person who grants a lease or a licence or enters into a contractor otherwise transfers any
right or interest in any
- parking lot or
- toll plaza or
- a mine or a quarry
to another person (other than a public sector company) for the use of such parking lot or toll plaza or
mine or quarry for the purposes of business. The tax shall be collected as provided, from the licensee
or lessee of any such licence, contract or lease of the specified nature, at the rate of 2% (1.5% during
the period between 14.5.2020 to 31.3.2021), at the time of debiting of the amount payable by the
licensee or lessee to his account or at the time of receipt of such amount from the licensee or lessee in
cash or by the issue of a cheque or draft or by any other mode, whichever is earlier

(c) Every person, being a seller, who receives any amount as consideration for sale of a motor vehicle of
the value exceeding ` 10 lakhs, shall, at the time of receipt of such amount, collect tax from the
buyer@1% (0.75% during the period between 14.5.2020 to 31.3.2021) of the sale consideration.

(d) Every person,

- being an authorized dealer, who receives amount under the Liberalised Remittance Scheme of the
RBI for overseas remittance from a buyer, being a person remitting such amount out of India,
- being seller of an overseas tour programme package who receives any amount from the buyer

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SSGURU CA SURAJ SATIJA
who purchases the package
has to collect tax at the rate of 5% of such amount at the time of debiting of the amount payable by the
buyer or at the time of receipt of such amount from the said buyer by any mode, whichever is earlier.

Rate of TCS in case of collection by an authorized dealer

S. Amount and purpose of remittance Rate ofTCS
No.
(i) (a) Where the amount is remitted for a purpose other than Nil (No tax to
purchase of overseas tour programme package; and be collectedat
(b) the amount or aggregate of the amounts being remitted source)
by a buyer is less than ` 7 lakhs in a financial year

(ii) (a) Where the amount is remitted for a purpose other than 5% of the amt
purchase of overseas tour programme package; and or agg.of amts
(b) the amount or aggregate of the amounts in excess of ` in excess of
7 lakhs is remitted by the buyer in a financial year ` 7 lakh
(iii) (a) where the amount being remitted out is a loan obtained 0.5% of theamt
from any financial institution, for the purpose of or agg.of amts
pursuing any education; and in excess of
(b) the amount or aggregate of the amounts in excess of ` ` 7 lakh
7 lakhs is remitted by the buyer in a financial year

Cases where no tax is to be collected

(i) No TCS by the authorized dealer on an amount in respect ofwhich the sum
has been collected by the seller
(ii) No TCS, if the buyer is liable to deduct tax at source under anyother provision
of the Act and has deducted such tax
(iii) No TCS, if the buyer is the Central Government, a State Government, an embassy,
a High Commission, a legation, a commission, a consulate, the trade
representation of a foreign State, a local authority or any other person notified by
the Central Government, subject to fulfillment of conditions stipulated
thereunder
(e) Every person, being a seller, who receives any amount as consideration for sale of goods of the value
exceeding ` 50 lakhs in a previous year, other than exported goods or goods covered in (a)/(c)/(d)], is
requiredto collect tax at source, at the time of receipt of such amount, @0.1% (0.075% during the period
between 14.5.2020 to 31.3.2021) of the sale consideration exceeding `50 lakhs.
However, tax is not required to be collected if the buyer is liable to deduct tax at source under any other
provision of the Act on the goods purchased by him from the seller and has deducted such tax.
In case of non-furnishing of PAN or Aadhar number by the buyer to the seller, tax is required to be
collected at the higher of –
(i) twice the rate specified in this sub-section; and
(ii) 1%.

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ADVANCE TAX
Advance Payment of Tax
Liability for payment of advance tax [Sections 207 & 208]
 Tax shall be payable in advance during any financial year in respect of the total income
(TI) of the assessee which would be chargeable to tax for the
A.Y. immediately following that financial year.
 Advance tax is payable during a financial year in every case where the amount of such tax
payable by the assessee during the year is ` 10,000 ormore.
 However, an individual resident in India of the age of 60 years or more at any time during
the previous year, who does not have any income chargeable under the head “Profits and
gains of business or profession” (PGBP), is not liable to pay advance tax.

Instalments of advance tax and due dates [Section 211]

Advance tax payment schedule for corporates and non-corporates (other than an
assessee computing profits on presumptive basis under section 44AD or section
44ADA) – Four instalments

Due date of instalment Amount payable

On or before 15th June Not less than 15% of advance tax liability.
On or before 15th Not less than 45% of advance tax liability (-)amount
September paid in earlier instalment.

On or before 15th Not less than 75% of advance tax liability (-)amount
December paid in earlier instalment or instalments.

On or before 15th March The whole amount of advance tax liability (-)amount paid
in earlier instalment or instalments.

Advance tax payment by assessees computing profits on presumptive basis under

section 44AD(1) or section 44ADA(1)
An eligible assessee, opting for computation of profits or gains of business or profession on
presumptive basis in respect of eligible business referred to in section 44AD(1) or in respect
of eligible profession referred to in section 44ADA(1), shall be required to pay advance tax of
the whole amount on or before 15th March of the F.Y.
However, any amount paid by way of advance tax on or before 31st March shallalso be treated
as advance tax paid during the F.Y. ending on that day.

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Interest for defaults in payment of advance tax [Section 234B]
(1) Interest under section 234B is attracted for non-payment of advance taxor
payment of advance tax of an amount less than 90% of assessed tax.

(2) The interest liability would be 1% per month or part of the month from 1st April
following the F.Y. upto the date of determination of total income under section
143(1) and where regular assessment is made, upto the date of such regular
assessment.

(3) Such interest is calculated on the amount of difference between theassessed

tax and the advance tax paid.

(4) “Assessed tax” means the tax on total income determined u/s 143(1)/under regular
assessment, as the case may be, less TDS & TCS, anyrelief of tax allowed u/s 89, any
tax credit allowed to be set off in accordance with the provisions of section 115JD.

(5) Where self-assessment tax is paid by the assessee under section 140A or otherwise,
interest shall be calculated upto the date of payment of such tax and reduced by the
interest, if any, paid under section 140A towards the interest chargeable under this
section.

Interest for deferment of advance tax [Section 234C]

(a) Manner of computation of interest u/s 234C for deferment of advance tax by
corporate and non-corporate assessees:
In case an assessee, other than an assessee who declares profits and gains in
accordance with the provisions of section 44AD(1) or section 44ADA(1),who is liable
to pay advance tax u/s 208 has failed to pay such tax or the advance tax paid by such
assessee on its current income on or before thedates specified in column (1) below
is less than the specified percentage [given in column (2) below] of tax due on
returned income, then simple interest@1% per month for the period specified in
column (4) on the amount of shortfall, as per column (3) is leviable u/s 234C.

Specified Specified Shortfall in advance tax Period

date %

(1) (2) (3) (4)

15th June 15% 15% of tax due on returned income(-) 3
advance tax paid up to 15th June months

15th 45% 45% of tax due on returned income (-) 3

September advance tax paid up to 15th September months

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SSGURU CA SURAJ SATIJA
15th 75% 75% of tax due on returned income (-) 3
December advance tax paid up to 15th December months

15th March 100% 100% of tax due on returnedincome (-) 1 month

advance tax paid up to 15th March

Note – However, if the advance tax paid by the assessee on the current income, on
or before 15th June or 15th September, is not less than 12% or 36% of the tax due
on the returned income, respectively, then, the assessee shall not be liable to pay any
interest on the amount of the shortfall on those dates.
Tax due on returned income = Tax chargeable on total income declared in the
return of income – TDS – TCS - any relief of tax allowed u/s 89 - anytax credit allowed
to be set off in accordance with the provisions of section115JD

(b) Computation of interest under section 234C in case of an assessee who

declares profits and gains in accordance with the provisions of section
44AD(1) or section 44ADA(1):
In case an assessee who declares profits and gains in accordance with theprovisions
of section 44AD(1) or section 44ADA(1), who is liable to pay advance tax u/s 208 has
failed to pay such tax or the advance tax paid bythe assessee on its current income
on or before 15th March is less thanthe tax due on the returned income, then, the
assessee shall be liable to pay simple interest at the rate of 1% on the amount of the
shortfall fromthe tax due on the returned income.

(c) Non-applicability of interest under section 234C in certain cases: Interest under
section 234C shall not be leviable in respect of any shortfallin payment of tax due
on returned income, where such shortfall is onaccount of under-estimate or
failure to estimate –
(i) the amount of capital gains;
(ii) income of nature referred to in section 2(24)(ix) i.e., winnings fromlotteries,
crossword puzzles etc.;
(iii) income under the head “Profits and gains of business or profession” in cases
where the income accrues or arises under the said head for the first time.

However, the assessee should have paid the whole of the amount of tax payable in
respect of such income referred to in (i), (ii) and (iii), as the case may be, had such
income been a part of the total income, as part of the remaining instalments of
advance tax which are due or where no such instalments are due, by 31st March of
the financial year.

Question 1
Mr. Jay having total income of ` 8,70,000, did not pay any advance tax during the previous
year 2020-21. He wishes to pay the whole of the tax, along with interest ifany, on filing
the return in the month of July, 2021. What is total tax which Mr. Jayhas to deposit as self-

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SSGURU CA SURAJ SATIJA
assessment tax along with interest, if he files the return on 29.07.2021? Assume that he does
not exercise the option under section 115BAC.
Answer
Obligation to pay advance tax arises in every case, where the advance tax payableis `
10,000 or more. As a consequence of such failure, assessee may be chargedwith interest
under section 234B and 234C.
In the given case, since Mr. Jay did not deposit any amount of advance tax during the
previous year, he will need to pay the total tax due on his income along with interest on
default of payment of advance tax (section 234B) and interest for deferment of advance tax
(section 234C) before filing of his return.
Total tax due on returned income of ` 8,70,000 is ` 89,960 [(20% of ` 3,70,000 +
` 12,500) + cess@4%]
Interest under section 234B
Interest under section 234B is attracted - a) When the assessee, who is liable to pay advance
tax has failed to pay such tax; or b) Where the advance tax paid by the assessee is less than
90% of the assessed tax.
Since, Mr. Jay did not pay any amount as advance tax, interest under section 234B at 1%per
month or part of the month will be levied beginning from 1st April of the followingyear i.e.
01.04.2021 till the time he deposits the whole tax under self-assessment.
Interest will be levied on tax liability of ` 89,900 (rounded off to nearest hundred, ignoring
fraction) at 1% for four months i.e. from 1st April to 29th July.
The interest under section 234B amount to ` 3,596
Interest under section 234C
Assessees, other than assessee who declares profits and gains in accordance with provision
of section 44AD(1) or section 44ADA(1), are liable to pay advance tax in4 installments
during the previous year. Section 234C is attracted, if the actual instalment paid by the
assessee is the less than the amount required to be paid by him on such instalments. The
interest shall be calculated at 1% per month or partof the month for short payment or
non-payment of each instalment.
In the given scenario, since Mr. Jay, did not deposit any amount as advance tax, the interest
under section 234C is calculated as under –

Date of Instalment Specified Amount due Period Interest

% of andunpaid @ 1%
estimate (roundedoff to
dtax nearest ` 100,
ignoring
fraction)
15th June 2020 15% 13,400 3 months 402
15th September 2020 45% 40,400 3 months 1,212
15th December 2020 75% 67,400 3 months 2,022

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SSGURU CA SURAJ SATIJA
15th March 2021 100% 89,900 1 month 899
Total interest under section 234C 4,535
Mr. Jay needs to pay ` 98,091 as total of tax and interest on or before filing of return in the
month of July, 2021.

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SSGURU CA SURAJ SATIJA
RETURNS

15.1
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SSGURU CA SURAJ SATIJA
Section Particulars
139(1) Assessees required to file return of income compulsorily
(i) Companies and firms (whether having profit or loss or nil income);
(ii) a person, being a resident other than not ordinarily resident, having any asset
(including any financial interest in any entity) located outside India held as a
beneficial owner or beneficiaryor who has a signing authority in any account
located outside India, whether or not having income chargeable to tax;
(iii) Individuals, HUF, AOPs or BOIs and artificial juridical persons whose total
income before giving effect to the provisions ofChapter VI-A and sections 54,
54B, 54D, 54EC or 54F exceedsthe basic exemption limit.
(iv) Any person who during the previous year –
- has deposited more than ` 1 crore in one or more current accounts
maintained with a banking company ora co-operative bank
- has incurred expenditure of more than ` 2 lakh for himself or any other
person for travel to a foreign country;
- has incurred expenditure of more than ` 1 lakh towards consumption of
electricity
- fulfils such other conditions as may be prescribed
Due date of filing return of income
31st October of the assessment year, in case the assessee is:
(i) a company;
(ii) a person (other than company) whose accounts are required to beaudited; or
(iii) a partner of a firm whose accounts are required to be audited. 31st July of
the assessment year, in case of any other assessee (otherthan assessees who are
required to furnish report under section 92E,
for whom the due date is 30th November of the assessment year).

234A Interest for default in furnishing return of income

Interest under section 234A is payable where an assessee furnishesthe return of
income after the due date or does not furnish the return of income.
Assessee shall be liable to pay simple interest @1% per month orpart of the
month for the period commencing from the date immediately following the due date
and ending on the following dates –
Circumstances Ending on the following dates
Where the return is the date of furnishing of the return
furnished after due date
Where no return is the date of completion of
furnished assessment
However, where the assessee has paid taxes in full on or before thedue date, interest
under section 234A is not leviable.

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SSGURU CA SURAJ SATIJA
234F Fee for default in furnishing return of income
Where a person who is required to furnish a return of income under section 139, fails
to do so within the prescribed time limit under section 139(1), he shall pay, by way
of fee, a sum of –
(I) ` 5,000, if the return is furnished on or before the 31stDecember of the
assessment year;
(II) ` 10,000 in any other case
However, if the total income of the person does not exceed ` 5lakhs, the fees
payable shall not exceed ` 1,000

139(3) Return of loss

An assessee can carry forward or set off his/its losses provided he/ithas filed
his/its return under section 139(3), within the due date specified under section
139(1).
Exceptions
Loss from house property and unabsorbed depreciation can be carried forward for
set-off even though return has not been filed before the due date.

139(4) Belated Return

A return of income for any previous year, which has not beenfurnished within
the time allowed u/s 139(1), may be furnished at any time before the:
(i) end of the relevant assessment year; or
(ii) completion of the assessment,
whichever is earlier.

139(5) Revised Return

If any omission or any wrong statement is discovered in a return furnished u/s
139(1) or belated return u/s 139(4), a revised returnmay be furnished by the
assessee at any time before the:
(i) end of the relevant assessment year; or
(ii) completion of assessment,whichever is earlier.
Thus, belated return can also be revised.

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SSGURU CA SURAJ SATIJA
139A Permanent Account Number (PAN)
Quoting of PAN is mandatory in all documents pertaining to the following prescribed
transactions :
(a) in all returns to, or correspondence with, any income-tax authority;
(b) in all challans for the payment of any sum due under the Act;
(c) in all documents pertaining to such transactions entered intoby him, as
may be prescribed by the CBDT in the interests of revenue. For example, sale
or purchase of a motor vehicle, payment in cash of an amount exceeding `
50,000 to a hotel against a bill or bills at any one time, etc.
Inter-changeability of PAN with the Aadhaar number
Every person who is required to furnish or intimate or quote his PAN may furnish or
intimate or quote his Aadhar Number in lieu of thePAN w.e.f. 1.9.2019 if he
- has not been allotted a PAN but possesses the Aadhar number
- has been allotted a PAN and has intimated his Aadhar numberto prescribed
authority in accordance with the requirement contained in section 139AA(2).
139AA Quoting of Aadhar Number
To be quoted by every person on or after 1.7.2017 in the applicationfor allotment
of PAN and in Return of Income
If a person does not have Aadhar Number, the Enrolment ID of Aadhar
application form issued to him at the time of enrolment shallbe quoted.
Every person who has been allotted PAN as on 1.7.2017 and who is eligible to obtain
Aadhar Number, shall intimate his Aadhar Numberto the prescribed authority on
or before 31.03.2021.

140A Self-Assessment
Where any tax is payable on the basis of any return required to befurnished
under section 139, after taking into account –
(i) the amount of tax, already paid,
(ii) the tax deducted or collected at source
(iii) any relief of tax claimed under section 89
(iv) any tax credit claimed to be set-off in accordance with theprovisions of
section 115JD; and
(v) any tax and interest payable as per the provisions ofsection 191(2)
the assessee shall be liable to pay such tax together with interestand fee payable
under any provision of this Act for any delay in furnishing the return or any default
or delay in payment of advancetax before furnishing the return.
Where the amount paid by the assessee under section 140A(1) falls short of the
aggregate of the tax, interest and fee as aforesaid, the amount so paid shall first be
adjusted towards the fee payable and thereafter, towards interest and the balance
shall be adjusted towards the tax payable.

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SSGURU CA SURAJ SATIJA

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 RETURNS
SSGURU CA SURAJ SATIJA
ILLUSTRATION

Explain with brief reasons whether the return of income can be revised undersection 139(5)
of the Income-tax Act, 1961 in the following cases:
(i) Belated return filed under section 139(4).
(ii) Return already revised once under section 139(5).
(iii) Return of loss filed under section 139(3).
SOLUTION:
Any person who has furnished a return under section 139(1) or 139(4) can file a revised return at
any time before the end of the relevant assessment year or before the completion of assessment,
whichever is earlier, if he discovers any omission or any wrong statement in the return filed earlier.
Accordingly,
(i) A belated return filed under section 139(4) can be revised.
(ii) A return revised earlier can be revised again as the first revised return replaces the original
return. Therefore, if the assessee discovers any omission or wrong statement in such a
revised return, he can furnish a second revised return within the prescribed time i.e. within
the end of the relevant assessment year or before the completion of assessment, whichever
is earlier. It implies that a return of income can be revised more than once within the
prescribed time.
(iii) A return of loss filed under section 139(3) is deemed to be return filed under section
139(1), and therefore, can be revised under section 139(5).

PERMANENT ACCOUNT NUMBER (PAN) [SECTION 139A]

(1) Sub-section (1) requires the following persons mentioned in column (2), who have not been allotted
a permanent account number (PAN), to apply to the Assessing Officer within the time specified in
column (3) for the allotment of a PAN –
(1) (2) (3)

Persons required to apply for PAN Time limit for making such
application (Rule 114)

(i) Every person, if his total income or the total On or before 31st May of the
income of any other person in respect of which assessment year for which such
he is assessable under the Act during any income is assessable
previous year exceeds the maximum amount
which is not chargeable to income-tax

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(ii) Every person carrying on any business or Before the end of that
profession whose total sales, turnover or gross financial year (previous year).
receipts are or is likelyto exceed `5 lakhs in any
previous year

(iii) Every person being a resident, other than an On or before 31st May of the
individual, which enters into a financial immediately following
transaction of an amount aggregating to ` financial year
2,50,000 or more in a financial year

(iv) Every person who is a managing director, On or before 31st May of the
director, partner, trustee, author, founder, immediately following
karta, chief executive officer, principal officer financial year in which the person
or office bearer of any person referred in (iii) referred in (iii) enters into
above or any person competent to act on behalf financial transaction specified
of such person referred in (iii) above therein.

Further, for widening the tax base, every person who has not been allotted a PAN and intends to enter into
such transaction as prescribed by the CBDT is also required to apply for PAN to the Assessing Officer.
(2) The Central Government is empowered to specify, by notification in the Official Gazette, any class or
classes of persons by whom tax is payable under the Act or any tax or duty is payable under any
other law for the time being is force. Such persons are required to apply within such time as may
be mentioned in that notification to the Assessing Officer for the allotment of a PAN [Sub-section
(1A)].
(3) For the purpose of collecting any information which may be useful for or relevant to the purposes of
the Act, the Central Government may notify any class or classes of persons, and such persons shall
within the prescribed time, apply to the Assessing Officer for allotment of a PAN [Sub-section
(1B)].
(4) The Assessing Officer, having regard to the nature of transactions as may be prescribed, may also allot
a PAN to any other person (whether any tax is payable by him or not) in the manner and in
accordance with the procedureas may be prescribed [Sub-section (2)].
(5) Any person, other than the persons mentioned in (1) or (4) above, may apply to the Assessing
Officer for the allotment of a PAN and the Assessing Officer shall allot a PAN to such person
immediately.
(6) Such PAN comprises of 10 alphanumeric characters.
(7) Quoting of PAN is mandatory in all documents pertaining to the following prescribed transactions:
(a) in all returns to, or correspondence with, any income-tax authority;
(b) in all challans for the payment of any sum due under the Act;
(c) in all documents pertaining to such transactions entered into by him,as may be prescribed
by the CBDT in the interests of revenue. In this connection, CBDT has notified the following
transactions vide Rule 114B, namely:

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S. Nature of transaction Value of transaction
No.
1. Sale or purchase of a motor vehicle orvehicle, All such transactions
as defined in the Motor
Vehicles Act, 1988 which requires registration by
a registering authority under that Act, other than
two wheeled vehicles.
2. Opening an account [other than a time- deposit All such transactions
referred to at Sl. No.12 and a Basic Savings Bank
Deposit Account] with a banking company or a co-
operative bank to which the Banking Regulation
Act, 1949 applies (including any bank or banking
institution referred to in section 51 of that Act).
3. Making an application to any banking company or All such transactions
a co-operative bank to which the Banking
Regulation Act, 1949, applies (including any bank
or banking institution referred to in section 51 of
that Act) or to any other company or institution,
for issue of a credit or debit card.
4. Opening of a demat account with a depository, All such transactions
participant, custodian of securities or any other
person registered under section 12(1A) of the
SEBI Act, 1992.
5. Payment to a hotel or Payment in cash of an amount
restaurant against a bill or bills at any exceeding
one time. ` 50,000.
6. Payment in connection with travel to any foreign Payment in cash of an amount
country or payment for purchase of any foreign exceeding
currency at any one time. ` 50,000.
7. Payment to a Mutual Fund for purchase of its units Amount exceeding
` 50,000.
8. Payment to a company or an institution for Amount exceeding
acquiring debentures or bonds issued by it. ` 50,000.
9. Payment to the Reserve Bank of India for Amount exceeding
acquiring bonds issued by it. ` 50,000.
10. Deposit with a banking company or a co-operative Cash deposits exceeding
bank to which the Banking Regulation Act, 1949, ` 50,000 during any one day.
applies (including any bank or banking institution
referred to in section 51 of that Act); or
post office
11. Purchase of bank drafts or pay orders or banker’s Payment in cash of an amount
cheques from a banking company or a co- exceeding
operative bank to which the Banking Regulation ` 50,000 during any one day.

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Act, 1949 applies (including any bank or banking
institution referred to in section 51 of that Act).
12. A time deposit with, - Amount exceeding
(i) a banking company or a co- operative bank to ` 50,000 or aggregating to more
which the Banking Regulation Act, 1949 than ` 5 lakh during a financial
applies (including any bank or banking year.
institution referred to in section 51 of that
Act);
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the
Companies Act, 2013; or
(iv) a non-banking financial company which holds
a certificate of registration under section 45-
IA of the Reserve Bank of India Act, 1934, to
hold or accept deposit from public.
13. Payment for one or more pre-paid payment Payment in cash or by way of a
instruments, as defined in the policy guidelines for bank draft or pay order or banker’s
issuance and operation of pre-paid payment cheque of an amount aggregating
instruments issued by Reserve Bank of India to more than ` 50,000 in a financial
year.
under the Payment and Settlement Systems Act,
2007, to a banking company or a co-operative
bank to which the Banking Regulation Act, 1949,
applies (including any bank or banking institution
referred to in section 51 of that Act) or to any
other company or institution.

14. Payment as life insurance premium to an insurer Amount aggregating to more than `
as defined in the Insurance Act, 1938. 50,000 in a financial year.
15. A contract for sale or purchase of securities (other Amount exceeding ` 1 lakh per
than shares) as defined in section 2(h) of the transaction
Securities Contracts (Regulation) Act, 1956.
16. Sale or purchase, by any person, of shares of a Amount exceeding ` 1 lakh per
company not listed in a recognised stock transaction.
exchange.
17. Sale or purchase of any immovable property. Amount exceeding ` 10 lakh or
valued by stamp valuation
authority referred to in section
50C at an amount exceeding ` 10
lakh
18. Sale or purchase, by any person, of goods or Amount exceeding ` 2 lakh per
services of any nature other than those specified transaction:
at Sl. No. 1 to 17 of this Table, if any.
However, a person is required to quote General Index Register Number tillsuch time PAN is allotted to him.
Minor to quote PAN of parent or guardian

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Where a person, entering into any transaction referred to in this rule, is aminor and who does not have any
income chargeable to income-tax, he shall quote the PAN of his father or mother or guardian, as the case
may be,in the document pertaining to the said transaction.
Declaration by a person not having PAN
Further, any person who does not have a PAN and who enters into any transaction specified in this rule, shall
make a declaration in Form No.60
giving therein the particulars of such transaction either in paper form or electronically under the electronic
verification code in accordance with the procedures, data structures, and standards specified by the Principal
Director General of Income-tax (Systems) or Director General of Income-tax (Systems).
Non-applicability of Rule 114B
The provisions of this rule shall not apply to the following class or classes of persons, namely:-
(i) the Central Government, the State Governments and the Consular Offices;
(ii) the non-residents referred to in section 2(30) in respect of the transactions other than a transaction
referred to at Sl. No. 1 or 2 or 4or 7 or 8 or 10 or 12 or 14 or 15 or 16 or 17 of the Table.
Meaning of certain phrases:

Phrase Inclusion
(1) Payment in Payment towards fare, or to a travel agent or a tour operator, or to
connection with an authorized person as defined in section 2(c) of the Foreign
travel Exchange ManagementAct, 1999

(2) Travel agent ortour A person who makes arrangements for air, surfaceor maritime
operator travel or provides services relating to accommodation, tours,
entertainment, passport, visa, foreign exchange, travel related
insurance or other travel related services either severally or in
package

(3) Time deposit Any deposit which is repayable on the expiry of afixed period.

(8) If there is a change in the address or in the name and nature of the businessof a person, on the basis
of which PAN was allotted to him, he should intimate such change to the Assessing Officer.
(9) Every person who receives any document relating to any transaction cited above shall ensure that the
PAN or General Index Register Number or the Aadhar number is duly quoted in the document.
(10) Intimation of PAN to person deducting or collecting tax at source
Every person who receives any amount from which tax has been deductedat source shall intimate his
PAN to the person responsible for deducting such tax [Sub-section (5A)].
Similarly, every buyer or licensee or lessee referred to in section 206C shall intimate his PAN to the person
responsible for collecting such tax [Sub- section (5C)]
(11) Quoting of PAN in certain documents

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Where any amount has been paid after deducting tax at source, the person deducting tax shall quote the
PAN of the person to whom the amount waspaid in the following documents:
(i) in the statement furnished under section 192(2C) giving particulars ofperquisites or profits in lieu
of salary provided to any employee;
(ii) in all certificates for tax deducted issued to the person to whompayment is made;
(iii) in all returns prepared and delivered or caused to be delivered to anyincome-tax authority in
accordance with the provisions of section 206;
(iv) in all statements prepared and delivered or caused to be delivered in accordance with the
provisions of section 200(3) [Sub-section (5B)].
Also, every person collecting tax in accordance with the provisions of section 206C shall quote PAN
of every buyer or licensee or lessee in the following documents:
(i) in all certificates issued for tax collected in accordance with the provisions of section 206C(5);
(ii) in all returns prepared and delivered or caused to be delivered to any income-tax authority in
accordance with the provisions of section 206C(5A)/(5B);
(iv) in all statements prepared and delivered or caused to be delivered in accordance with the provisions of
section 206C(3) [Sub-section (5D)].
(12) Requirement to intimate PAN and quote PAN not to apply to certain persons
The above sub-sections (5A) and (5B) shall not apply to a person who –
(i) does not have taxable income or
(ii) who is not required to obtain PAN
if such person furnishes a declaration under section 197A in the prescribed form and manner that the tax
on his estimated total income for that previous year will be nil.
(13) Inter-changeability of PAN with the Aadhaar number
Every person who is required to furnish or intimate or quote his PAN may furnish or intimate or quote his
Aadhar Number in lieu of the PAN, if he
- has not been allotted a PAN but possesses the Aadhar number
- has been allotted a PAN and has intimated his Aadhar number to prescribed authority in accordance
with the requirement contained in section 139AA(2).
PAN would be allotted in prescribed manner to a person who has not been allotted a PAN but possesses
Aadhar number.
Accordingly, the CBDT has, vide Notification No. 59/2019, dated 30.8.2019, provide that any person, who has
not been allotted a PAN but possesses the Aadhaar number and has furnished or intimated or quoted his
Aadhaar number in lieu of the PAN, shall be deemed to have applied for allotment of PAN and he shall not
be required to apply or submit any documents.
Further, any person, who has not been allotted a PAN but possesses theAadhaar number may apply for
allotment of the PAN under section 139A(1)/(1A)/(3) by intimating his Aadhaar number and he shall not
be required to apply or submit any documents.
(14) Quoting and authentication of PAN or Aadhar number
(a) Every person entering into such prescribed transactions is required to quote his PAN or Aadhar number,

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as the case may be, in the documents pertaining to such transactions and also authenticate such PAN
or Aadhar number in the prescribed manner.
(b) Every person receiving such document relating to transactions referred to in (a)has to ensure
that PAN or Aadhar number has beenduly quoted in such document and also ensure that such PAN
or Aadhar number is so authenticated.
(15) Power to make rules
The CBDT is empowered to make rules with regard to the following:
(a) the form and manner in which an application for PAN may be madeand the particulars to
be given therein;
(b) the categories of transactions in relation to which PAN or the General Index Register Number or
the Aadhar number, as the case may be, is required to be quoted on the related documents;
(c) the categories of documents pertaining to business or profession inwhich PAN or the General
Index Register Number or the Aadhar number, as the case may be, shall be quoted by every
person;
(d) the class or classes of persons to whom the provisions of this sectionshall not apply;
(e) the form and manner in which a person who has not been allotted aPAN or the General
Index Register Number shall make a declaration;
(f) the manner in which PAN or the General Index Register Number or the Aadhar number, as the
case may be, shall be quoted for transactionscited in (b) above;
(g) the time and manner in which such transactions cited in (b) above shall be intimated to the
prescribed authority.
(16) Meaning of certain terms
Term Meaning
(i) Aadhar number An identification number issued to an individual by the
Authority on receipt of the demographic information and
biometric information after verifying the information by
the authority. It includes any alternative virtual identity
generated by the Authority in the prescribed manner.

(ii) Authentication The process by which the PAN or Aadhar number along
with demographic information or biometric information of
an individual is submitted to the income-tax authority or
such other prescribed authority or agency for its
verification and such authority or agency verifies the
correctness, or the lack thereof, on the basis of
information available with it.

(iii) General Index A number given by Assessing Officer to an assessee in the

Register Number General Index Register maintained by him and containing
the designation and particulars of the ward or circle or
range of the Assessing Officer.

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QUOTING OF AADHAR NUMBER [SECTION 139AA]
(1) Mandatory quoting of Aadhar Number
Every person who is eligible to obtain Aadhar Number is required tomandatorily quote Aadhar
Number, on or after 1st July, 2017:
(a) in the application form for allotment of Permanent Account Number(PAN)
(b) in the return of income

Quoting of Aadhaar Number mandatory in returns filed on or after 1.4.2019 [Circular No. 6/2019
dated 31.03.2019]
As per section 139AA(1)(ii), with effect from 01.07.2017, every person who is eligible to obtain Aadhaar
number has to quote Aadhaar number in the return of income.
The Apex Court in a series of judgments has upheld the validity of section 139AA. Consequently, with effect
from 01.04.2019, the CBDT has clarified that it is mandatory to quote Aadhaar number while filing the
return of income unless specifically exempted as per any notification issued under section 139AA(3)
[detailed in point no. (5) in the next page]. Thus, returns being filed either electronically or manually
on or after 1.4.2019 cannot befiled without quoting the Aadhaar number.

(2) Mandatory quoting of Enrolment Id, where person does not have Aadhar Number
If a person does not have Aadhar Number, he is required to quote Enrolment ID of Aadhar application
form issued to him at the time of enrolment in the application form for allotment of Permanent Account
Number (PAN) or in the return of income furnished by him.
Enrolment ID means a 28 digit Enrolment Identification Number issued to a resident at the time of enrolment
(3) Intimation of Aadhar Number to prescribed Authority
Every person who has been allotted Permanent Account Number (PAN) ason 1st July, 2017, and who is
eligible to obtain Aadhar Number, shall intimate his Aadhar Number to prescribed authority on or
before 31st March, 2021.
Notwithstanding the last date of intimating/linking of Aadhaar Number with PAN being 31.3.2021, it is
clarified that w.e.f. 01.04.2019, it is mandatory to quote and link Aadhaar number while filing the return of
income, either manually or electronically, unless specifically exempted in cases detailed in point (5) below.
(4) Consequences of failure to intimate Aadhar Number
If a person fails to intimate the Aadhar Number, the permanent account Number (PAN) allotted to such
person shall be made inoperative after the date so notified in the prescribed manner.
Accordingly, Rule 114AAA specifies the manner of making permanent account number inoperative.

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Sub- Provision
Rule
(1) If a person, who has been allotted PAN as on 1st July, 2017 andis required
to intimate his Aadhaar number under section 139AA(2), has failed to intimate
the same on or before 31st March, 2021, the PAN of such person would
become inoperative immediately after the said date (i.e., after 31st March,
2021) for the purposes of furnishing, intimating or quoting under the Income-
tax Act, 1961.
(2) Accordingly, where a person, whose PAN has becomeinoperative, is required
to furnish, intimate or quote his PAN under the Act, it shall be deemed that he
has not furnished, intimated or quoted the PAN, as the case may be, in
accordance with the provisions of the Act. Consequently, he would be liable for
all the consequences under the Act for not furnishing, intimating or quoting the
PAN.
(3) Where such person who has not intimated his Aadhaar number on or before
31st March, 2021, intimates his Aadhar number under section 139AA(2) after
31st March, 2020, his PAN would become operative from the date of intimation
of Aadhaar number for the purposes of furnishing, intimating or quoting under
the Act. Accordingly, the consequences in sub-rule (2) would not be applicable
from such date of intimation.

(4) The Principal Director General of Income-tax (Systems) or Director General of

Income-tax (Systems) has to specify the formats and standards along with the
procedure for verifying the operational status of PAN under sub-rules (1) and
(2).

(5) Provision not to apply to certain persons or class of persons

The provisions of section 139AA relating to quoting of Aadhar Number would, however, not apply to
such person or class or classes of persons orany State or part of any State as may be notified by the
CentralGovernment.
Accordingly, the Central Government has, vide Notification No. 37/2017 dated 11.05.2017 effective from
01.07.2017, notified that the provisions of section 139AA relating to quoting of Aadhar Number would not
apply to an individual who does not possess the Aadhar number or Enrolment ID and is:
(i) residing in Assam, Jammu & Kashmir and Meghalaya;
(ii) a non-resident as per Income-tax Act, 1961;
(iii) of the age of 80 years or more at any time during the previous year;
(iv) not a citizen of India

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PERSONS AUTHORISED TO VERIFY RETURNOF INCOME [SECTION 140]
This section specifies the persons who are authorized to verify the return ofincome under section 139.
Assessee Circumstance Authorised Persons
1. Individual (i) In circumstances not covered - the individual himself
under (ii), (iii) & (iv)
below
(ii) where he is absent - the individual himself; or
from India - any person dulyauthorised
by him in this behalf
holding a valid power of
attorney 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 - any other person
attending to his affairs competent to act on his
behalf
(iv) where, for any other reason, it - any person dulyauthorised by
is not possible for the indi- him in this behalf holding a
vidual to verify thereturn valid power of attorney
from the individual (Such
power of attorney should
be attached to the returnof
income)
2. Hindu (i) in circumstances not - the karta
Undivided covered under (ii) and
Family (iii) below
(ii) where the karta is - any other adult
absent from India member of the HUF
(iii) where the karta is mentally - any other adult
incapacitated from member of the HUF
attending to his affairs

3. Company (i) in circumstances not - the managing directorof

covered under (ii) to the company
(vi) below

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(ii)
(a) where for any unavoidable
reasonsuch managing any director of the
director is not able toverify company or
the return; or any other person as may
(b) where there is no managing be prescribed for this
director purpose

(iii) where the company isnot a person who holds a valid power
resident in India of attorney from such company to
do so (such power of attorney
should be attached to the
return).

(iv)
(a) Where the company isbeing - Liquidator
wound up (whether under
the orders of a court or
otherwise); or
(b) where any person has been - Liquidator
appointed as thereceiver of
any assets of the company
(v) Where the - the principal officer of
management of the the company
company has been taken
over by the Central
Government or any State
Government under any law
(vi) Where an application for - insolvency professional
corporate insolvency appointed by such
resolution process has been Adjudicating Authority
admitted by the
Adjudicating Authority
under the Insolvency and
Bankruptcy Code, 2016.
4. Firm (i) in circumstances not - the managing partnerof
covered under (ii) below the firm
(ii)
(a) where for any unavoidable - any partner of the firm,
reason such managing not being a minor
partner is not able to verify
the return; or - any partner of the firm,
(b) where there is no managing not being a minor
partner.

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5. LLP (i) in circumstances not - Designated partner
covered under (ii) below

(ii)
(a) where for any unavoidable
reasonsuch designated any partner of the LLP or
partner is not able to verify any other person as may be
the return; or prescribed forthis purpose
(b) where there is no
designated partner.

6. Local - - the principal officer

authority
7. Political - - the chief executive officer of
party 2 such party (whether he is
known as secretary or by
any other designation)

8. Any other - - any member of the association

association or the principal officer of
such association

9. Any other - - that person or some other

person person competent to act on
his behalf.

MCQ`S.
1. Mr. Anil who is a non-resident in India during the previous year has paid consultancy fees of Rs.
50 lakhs to X Ltd, a non-resident foreign company in connection to a project / liaison office in India.
Under which section Mr. Anil is required to deduct tax at source on the above payment?
a) Section 194J of the Income tax Act, 1961
b) Section 195 of the Income tax Act, 1961
c) No TDS is required to be deducted
d) None of the above
Answer: (b)
2. Interest on deferment of advance tax is levied under section:
a) Section 234A of the Income tax act, 1961

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b) Section 234B of the Income tax act, 1961
c) Section 234C of the Income tax act, 1961
d) Section 201A of the Income tax act, 1961
Answer: (c)
3. The TDS Certificate issued by an employer to his employees in case of salary income is
a) Form 16
b) Form 26
c) Form 26A
d) Form 26Q
Answer: (a)
4. Quoting of PAN is compulsory in which of the following cases:
a) Deposit exceeding Rs. 50,000 in Post Office Savings Bank
b) Payments to hotels of bills of Rs. 50,000 at any one time
c) Both “A” and “B”
d) None of the above
Answer: (a)
5. For making a TAN Application online, a person shall file his application in Form No.
a) 49A
b) 49C
c) 49B
d) 49D
Answer: (c)

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GST IN INDIA – AN INTRODUCTION
> Under indirect taxes, the incidence of taxes is borne
by the consumers who ultimately consume goods or INTRODUCTION
Services while the immediate liability to pay may Fall
upon another person such as a provider of service Or In any welfare state, it is the prime
manufacturer/seller of goods. responsibility of the government to fulfil
the increasing developmental needs of the
> Indirect taxes are regressive in nature because they counter and its people by way of public
are not based on the principle of ability to pay. All the expenditure. India, being a developing
Consumers, including the economically challenged economy, has been striving to fulfil the
bear the brunt of indirect taxes equally. obligations of a welfare state with its
limited resources with levy of revenue.
PRE-GST SCENARIO IN INDIA:
Before the introduction of GST in India, the major Prior to the introduction of GST in INDIA ,
indirect taxes applicable in Indian were: A number of indirect taxes were levied in
India such as excise duty , customs duty ,
> EXCISE DUTY: Tax on manufacture of goods service tax , VAT/CST ,entertainment tax ,
entry tax , etc .
> SERVICE TAX: Tax on provision of services
> CUSTOMS DUTY: Tax on import/export of goods However, indirect taxation in India has
witnesses a paradigm shift with effect from
> State-Level VAT: Tax on intra-state sale of goods July 1, 2017 with usherance into a unified
indirect tax regime wherein a largenumber
> Central Sales Tax: Tax on intra-state sale of goods
of central and state indirect taxes have
been amalgamated into a GST .
To understand the indirect taxes structure prevailing in India prior to introduction of GST, it is
important to analyse certain provisions incorporated in the Constitution of India which govern the
levy and Collection of all kinds of taxes in India.

CONSTITUTION FRAMEWORK (PRE-GST SCENARIO):

> INDIA has a three-tier federal structure, comprising:

 the Union Government;

 the State Government; and

 the Local Government.

The power to levy taxes and duties is distributed among the three tiers of Governments, in
accordance with the provisions of the Indian Constitution.
> The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts containing
12 Schedules. Power to levy and collect taxes (whether direct or indirect) emerges from the

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constitution of India. Any tax law which is not in conformity with the constitution is ultra vires
the constitution and is illegal and void.
> Thus, a study of the basic provisions of the constitution is essential for understanding the genesis
of the various taxes being imposed in India. The significant provisions of the Constitution relating
to taxation are:

 ARTICLE 265:
Article 265 of the constitution of India prohibits arbitrary collection of tax. It starts that “no tax
shall be levied or collected except by authority of law”. The term “authority of law” means that
tax proposed to be levied must be within the legislative competence of the Legislature imposing the
tax.

 ARTICLE 245:
Article 245 provides that the parliament may make laws for the whole or any part of territory of
India, and the Legislature of a state may make laws for the whole or any part of the State.
 ARTICLE 246:
Articles 246 bifurcates the power of levying taxes between the Union Government and the State
Government. Seventh Schedule to the constitution of India contains three lists which
enumerate the matters under which the union government and the State Government have
the authority to make laws.

THREE LISTS GIVEN UNDER 7TH SCEDULE TO THE CONSTITUTION OF INDIA:

 Entries 82 to 92C of List I (ie Union List) enumerate the subjects where the Central Government
has the power to levy taxes.
 Entries 45 to 63 of List II (ie Union List) enumerate the subjects where the State Government have
the power to levy taxes.
 The Concurrent List does not contain any matter related to taxation. In other words, the Union and
the states have no concurrent power of taxation.

The Central Government (i.e. the parliament of India) has a further power to make any law of any
part of India not comprised in a State even if such matter is included in the State List. This power
assumes importance in case of Union Territories where there is no State Government.

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RELEVANT ENTRIES OF UNION LIST AND STATE LIST (PRE- GST):

UNION LIST (LIST I) STATE LIST (LIST II)

Customs Duties State Level VAT

Entry 83: Duties of customs including Entry 54: Taxes on intro-state sale or
export duties purchase of goods (excluding
newspapers)

Central Excise Duties State Excise Duties

Entry 84: Duties of excise on tobacco and Entry 51: Duties of excise on alcoholic
other good manufactured or produced in
India liquors for human consumption,
opium, Indian hemp and other
> Except alcoholic liquors for human narcotic drugs and narcotics.
consumption, opium, Indian hemp and The entry does not include duties of
other narcotic drugs and narcotics. excise on medicinal and toilet
preparations containing
> But including medicinal and toilet alcohol/opium/Indian hemp/ narcotic
preparations containing alcohol/ drugs/narcotics.
opium/ Indian hemp/narcotic
drugs/narcotics.

Central Sales Tax

Entry 92A: Taxes on sale or purchase of

goods
(other than newspapers) taking placein the
course of inter-state trade or commerce.

Service Tax

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Entry 97: Any other matter not enumerated
in List II or List III including any tax not
mentioned in either of those Lists.

DEFICIENCIES IN EARLIER INDIRECT TAXES REGIME

> The earlier indirect taxes framework in India suffered from various shortcomings. Although
CENVAT (ie excise duty) and State-Level VAT were essentially value added taxes, set-off of one
against the credit of another was not possible as CENVAT was a central levy and State-Level VAT
was a State levy. Moreover, CENVAT was applicable only at manufacturing level and not at
distribution levels .
> Despite the introduction of the principles of value added taxation system in India (in the form of
CENVAT at the central level and in the form of State VAT at the state level), its application remained
piecemeal and fragmented. Businesses continued to face multiple difficulties because of the
shortcomings of the indirect tax mechanism prevailing in India:
 No integration of VAT on goods with tax on services/manufacture.
 Continued imposition of Central Sales Tax (CST), which was non-creditable, leading to cascading
effect thereby adding to the cost of goods.
 Problems relating to distinguishing between goods and services had been a major cause of concern
as the distinction between the two was often blurred.
 Non-inclusion of several State and local levies in State VAT such as luxury tax, entertainment tax,
etc.
 Cascading effect of taxes as CENVAT on the goods remains included in the value of goods taxed
under State VAT.

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GST- A CURE FOR ILLS OF EXISTING INDIRECT TAX REGIME
> Before we proceed with the finer nuances of Indian GST, let us first understand the basic concept
of GST.
 VALUE ADDED TAX:
GST is a value added tax levied on manufacture, sale and consumption of goods and services.

 CONTINUOUS CHAIN OF TAX CREDITS:

GST offers comprehensive and continuous chain of tax credits from the producer's point/service
provider's point upto the retailer's level/consumer’s level, thereby taxing only the value added at
each stage of supply chain.

 BURDEN BORNE BY FINAL CONSUMER:

The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods and/or
services and can set-off this credit against the GST payable on the supply of goods and services to
be made by him. Thus, only the final consumers bear the GST charged by the last supplier in the
supply chain, with set-off benefits at all the previous stages.

 NO CASCADING OF TAXES: Since, only the value added at each stage is taxed under GST, there is
no tax on tax or cascading of taxes under GST system. GST does not differentiate between goods and
services and thus, the two are taxed at a single rate.
> India has adopted a dual GST which is imposed concurrently by the Centre and States. In the GST
regime, the major indirect taxes have been subsumed within the ambit of GST. The erstwhile

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concepts of manufacture or sale of goods or rendering of services are no longer applicable since tax
is now levied on "supply of goods and/or services".

> Introduction of GST at both centre and state levels

has intergrated taxes on goods and services for the
purpose of set-off relief and ensure that both the
cascading effects of CENVAT and service tax are
removed and a continuous chain set-off from the
original producer's point/service provider's point up
to the retailer's level/consumer's level is established.

BENEFITS OF GOODS SERVICES TAX

GST is a win-win Situation for the entire country. It brings benefits to all the stakeholders of
industry, government and the consumer, It is expected that with the introduction of GST in India,
the cost of goods and services will go down, thus giving a boost to the country and making the
products and services globally competitive. The significant benefits of GST are as follows:

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 CREATION OF UNIFIED NATIONAL MARKET:
GST aims to make India a common market with common tax rates and procedures and remove the
economic barriers thus paving the way for an integrated economy at the national level.
 MITIGATION OF ILL EFFECTS OF CASCADING:
By subsuming most of the central and state taxes into a single tax and by allowing a set-off of prior
stage taxes for the transactions across the entire value chain, it would mitigate the ill effects of
cascading, improve competitiveness and improve liquidity of the business.

 ELIMINATION OF MULTIPLE TAXES AND DOUBLE TAXATION:

GST will subsume majority of existing indirect tax levies at both central and state level into one tax.
This will make doing business easier and will also tackle the highly disputed issues relating to
double taxation of a transaction as both goods and services.

 BOOST TO 'MAKE IN INDIA' INITIATIVE:

GST will give a major boost to the 'Make in India' initiative of the government of India by making
goods and services produced in India competitive in the national as well as international market.
 BUOYANCY TO THE GOVERNMENT REVENUE:
GST is expected to bring buoyancy to the government revenue by widening the tax base and
improving the taxpayer compliance.

GOODS AND SERVICES TAX

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GENESIS OF GOODS & SERVICES TAX
 The idea of a country-wide GST was first mooted by Kelkar Task Force in 2004. The Task Force
strongly recommended fully integrated GST on national basis.
 Subsequently, the then Union Finance Minister, Dr P. Chidambaram, while presenting Union
Budget for FY 2007-08 announced that GST would be introduced in India from April 1, 2010.
Since then, GST missed several deadlines and continued to be shrouded by the clouds of
uncertainty.
 The talks of ushering in GST gained momentum in 2014 when the NDA Government tabled the
Constitution (122" Amendment) Bill, 2014 on GST in the Parliament on 19th December 2014.
The Lok Sabha passed the Bill on 6th May 2015 and Rajya Sabha on 3rd August 2016.
 Once the Bill was ratified by more than 50% of states, the Constitution (122' Amendment) Bill
received the assent of the President on 8th September 2016 and became Constitution (101'
Amendment) Act, 2016 which paved the way for introduction of GST in India.

CONSTITUTION (101st AMENDMENT) ACT, 2016

NEED FOR CONSTITUTIONAL AMENDMENT:
Introduction of GST required amendment in the Constitution of India so as to enable integration of
central excise duty including additional duties of customs, State VAT and certain state specific taxes
and service tax levied by the Centre into a comprehensive Goods and Services Tax and to empower
both Centre and States to levy and collect it. Consequently, Constitution (101st Amendment) Act
was passed.

SIGNIFICANT AMENDMENTS MADE BY CONSTITUTION AMENDMENT ACT:

 ARTICLE 246A - POWER TO MAKE GST LAWS:
 Power to levy GST originates from Article 246A of the Constitution. Article 246A has an over-riding
effect over Article 246 of the Constitution.
 'Goods and Services Tax' has been defined under Article 366(12A) of the Constitution of India to
mean any tax on supply of goods, or services or both except taxes on supply of alcoholic liquor for
human consumption. Consequently, GST can be levied on supply of all goods and services except
alcoholic liquor for human consumption.
 Where supply of goods and/or services takes place in the course of inter-state trade or commerce,
the Parliament of India shall have the exclusive power to make laws with respect to &ST on such
supplies.
 Where supply of goods and/or services takes place in the course of intro-state trade or commerce,
the Parliament of India as well as the Legislature of every State shall have the power to make laws
with respect to GST on such supplies.

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 In other words, Article 246A grants power to Central and State Governments to make laws with
respect to &ST imposed by Centre or such State. However, the Central Government has the TION --
exclusive power to make laws with respect to GST in case of inter-state supply.
 However, in respect of -the following goods, GST shall apply from a date to be recommended by
the 65T Council:
 Petroleum crude;
 High speed diesel;
 Motor spirit (commonly known as petrol);
 Natural gas; and
 Aviation turbine fuel.

ARTICLE 269A: LEVY AND COLLECTION OF GST ON INTER-STATE SUPPLY

 Article 269A stipulates that GST on supplies in the course of inter-state trade or commerce shall
be levied and collected by the Government of India and such tax shall be apportioned between the
Union and the States in the manner as may be provided by the Parliament of India through a law
made on the recommendations of GST Council
 In addition to above, import of goods and/or services into India will also be deemed to be supply
of goods and/or services in the course of inter-state trade or commerce. This will give power to
Central Government to levy IGST on the import transactions which were earlier subject to
countervailing duty under the Customs Tariff Act, 1975.

RELEVANT ENTRIES OF UNION LIST AND STATE LIST (POST-65T):

UNION LIST (LIST I) STATE LIST (LIST II)
Customs Duties State Excise Duties
Entry 83: Duties of customs including export Entry 51: Duties of excise on alcoholic liquors
duties for human consumption, opium, Indian hemp
and other narcotic drugs and narcotics.
Central Excise Duties The entry does not include duties of excise on
Entry 84: Duties of excise on the following medicinal and toilet preparations containing
goods manufactured or produced in India: alcohol/opium/Indian hemp / narcotic drugs
> Petroleum crude; /narcotics.
> High speed diesel
> Motor spirit (ie petrol); State Level VAT
> Natural gas Entry 54: Taxes on intro-state sale of the
> Aviation turbine fuel; and following goods:
> Tobacco and tobacco products. > Petroleum crude;
> High speed diesel;
Central Sales Tax > Motor spirit (ie petrol);

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Entry 92A: Taxes on sale or purchase of goods > Natural gas;
(other than newspapers) taking place in the > Aviation turbine fuel;
course of inter- state trade or commerce) > Alcoholic liquor for human consumption.

Illustration (Computation of GST Liability - RTP May 2018 Attempt)

Tirupati Traders, a registered supplier of goods, pays GST. (CGST & SGST or IGST, as the case may
be) under regular scheme. It has furnished the following particulars for a tax period:
PARTICULARS AMOUNT (RS)
Value of intra-state supply of goods 12,000
Value of intra-state purchase of goods 10,000
Compute the net GST payable by Tirupati Traders during the given tax period assuming that there
is no opening balance of input tax credit (ITC). Make suitable assumptions wherever required.
NOTES:
 Rates of COST, SOST and IGST are 9%, 9% and 18% respectively.

 Both inward and outward supplies are exclusive of taxes, wherever applicable.
 All the conditions necessary for availing the input tax credit have been fulfilled.

ILLUSTRATION
Govind, a registered supplier, is engaged in providing services in the neighbouring states from his
registered office in Mumbai. He has furnished the following details in respect of the inward and
outward supplies made F during a tax period:
PARTICULARS AMOUNT (RS)
Inter-state supply of services 1,80,000
Receipt of goods and services within the state 1,00,000
Both inward and outward supplies are exclusive of taxes, wherever applicable. All the conditions
necessary for availing the input tax credit have been fulfilled. Assume the rates of taxes to be as
under:

Particulars Rate
CGST 9%
SGST 9%
IGST 18%

GOODS & SERVICES TAX (COMPENSATION TO STATES) ACT

The Goods and Services Tax (Compensation to States) Act, 2017 provides for a mechanism to
compensate states for a period of 5 years On account of loss of revenue which may arise due to
implementation of GST. The following are some of the important takeaways from this Act:

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 FY 2015-16 shall be taken as the base year and 14% p.a. shall be taken as the growth rate of
revenue for the purpose of calculating compensation amount payable to the states.
 A cess to be levied over and above normal &ST (named as &ST Compensation Cess) on notified
goods to compensate states for 5 years on account of revenue loss suffered by them. The
proceeds of such cess will be utilized to compensate states that warrant payment of
compensation.
> Some of the goods which have been notified for levy of GST Compensation Cess are:
 Pan Masala;
 Aerated water;
 Tobacco & tobacco products;
 Motor vehicles;
 COAL ,ETC .
> 50% of the remaining amount unutilized in the fund at the end of the fifth year will be transferred
to the Centre and the balance 50% would be distributed amongst the State and Union Territories in
the ratio of total revenues from SGST/UTGST of the fifth year.
> GST Compensation Cess shall be levied on supplies of the above-mentioned goods irrespective of
the fact whether supply is an intro-state supply or an inter-state supply.
> GST Compensation Cess is not leviable on supplies made by a person who has opted for
composition levy.
> ITC of GST Compensation Cess can be utilized only for payment of GST Compensation Cess.

GOODS & SERVICES TAX COUNCIL ('GST COUNCIL') (Article 279A of the Constitution of India)
COMPOSITION OF GST COUNCIL:
Article 279A of the Constitution of India empowers the President to constitute a joint forum of
Centre and States namely, Goods & Services Tax Council (GST Council).
Composition of GST Council has been discussed below:
> Union Finance Minister - Chairperson of GST
Council;
> Union Minister of State in charge of Revenue or
Finance Member of GST Council; and
> Ministers in charge of Finance/Taxation or any
other Minister nominated by States/Union
Territories With State Legislature - Members of
GST Council,

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SCOPE OF WORK OF GST COUNCIL:
GST Council shall make recommendations on the following aspects:
> Taxes, cesses and surcharges levied by the Centre, the States and the local bodies which may be
subsumed under GST.

Illustration (IGST Mechanism)

Mr X, located in Rajasthan, purchases goods worth Rs 20,000 locally from a vendor in Rajasthan.
The goods so purchased by Mr X are sold by him for Rs 30,000 to Mr Y, located in Punjab. Mr Y
further sells these goods locally to a customer in Punjab for Rs 50,000.
Compute the GST payable at all stages. Also make a statement showing revenue earned by Central
& State Governments. You may assume the rates of CGST, SGST and IGST to be 9%, 9% and 18%
respectively.
> Goods/services which may be subjected to or exempted from GST;
> Date on which GST shall be levied on petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas and aviation turbine fuel;
> Threshold limit of turnover below which goods/services may be exempted from GST;
> Tax rates on various goods/services:
> Special provisions with respect to North-East States, J&K, Himachal Pradesh and Uttarakhand, and
> Any other matter relating to 65T, as the Council may decide.

DECISIONS OF GST COUNCIL:

> Every decision of the GST Council shall be taken by majority of not less than 3/4' of the weighted
votes of the members present and voting.
> The vote of the Central Government shall have a weightage of 1 /3"' of the votes cast and the votes
of all the State & government token together shall have a weightage of 2/3rd of the total votes cast
in that meeting.
QUORUM FOR MEETINGS OF GST COUNCIL:
The quorum at the various meetings shall be constituted by one half of the total number of members
of the GST Council present and voting.

FRAMEWORK OF GST AS INTRODUCED IN INDIA

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> DUAL GST:
GST has been implemented in India on a dual structure basis, ie the Centre and the States have
concurrent powers to levy, collect and administer GST. GST extends to the whole of India including
the state of Jammu and Kashmir.
> CGST /SGST / UTGST / IGST:
 GST is a destination-based tax applicable on all transactions involving supply of goods and services
for a consideration subject to exceptions thereof.
 In case of intra-state supplies of taxable goods and/or services, the following taxes are leviable:

 Central Goods and Services Tax (‘CGST’) levied by central Government;

 State Goods and Services Tax (‘SGST’) levied by State Government/Union Territories with State
Legislatures; and
 Union Territory Goods and Service Tax (‘UTGST’) levied in case of Union Territories without State
Legislatures.
 Inter-state supplies of taxable goods and/or services are subject to Integrated Goods and Services
Tax (IGST). IGST is approximately the sum total of CGST and SGST/UTGST and is levied by the
Central Government on all inter-state supplies.

LEGISLATIVE FRAMEWORK
There are total 35 GST Acts in India:

 1 - The Central Goods and Services Tax Act. 2017 for levying CGST:
 31 - State Goods and Services Tax Act, 2017 for levying SGST;

 Tax Act, 2017 for levying CGST'; Act, 2017 for levying SGST-;

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CHARGE OF GST
> Power to levy any tax is drawn from the Constitution of India.
Introduction of GST necessitated the amendment of Constitution of India to enable integration of
central excise duty including additional duties of customs, State VAT and certain state specific taxes
and service tax levied by the Central Government into a comprehensive Goods Services Tax.
> The very basis for the charge of tax in any taxing statute is the taxable event, ie the point of time
at which the levy of tax gets attracted. Under the erstwhile indirect taxes regime, each indirect tax
levy had a separate taxable event (such as manufacture in case of excise, provision of services in
case of service tax, sale of goods in case of VAT/CST, etc). Under the GST regime, the taxable event
is supply of goods and/or services. The scope of the word 'supply' has been discussed in detail in
the next chapter.

EXTENT OF CGST ACT / SGST ACT / UTG5T ACT / IGST ACT

> Central Goods and Services Tax Act, 2017 extends to the whole of India including the State of J&K.
> Integrated Goods and Services Tax Act, 2017 extends to the whole of India including the State of
J&K.
> State GST law of the respective State/Union Territory with State Legislature (ie Delhi and
Puducherry) extends to the whole of that State/Union Territory.
> Union Territory Goods and Services Tax Act, 2017 extends to the following Union Territories of
India where there is no State Legislature:

 the Andaman and Nicobar Islands;

 the Lakshadweep Islands;

 Dadra and Nagar Haveli;

 Daman and Diu; and

 Chandigarh.

INTRODUCTION
In order to understand the scope of any taxation law, the first and the foremost step is a careful
analysis of the charging section. Section 9 of CGST Act prescribes the charge of CGST on all intra-
state supplies of taxable goods and/or services whereas Section 5 of IGST Act prescribes the charge
of IGST on all interstate supplies of taxable goods and/or services.

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Along with CGST, SG5T/UTGST is also chargeable on all intra-state supplies of taxable goods and/or
services. However, analysis of any state specific law never forms a part of any academic curriculum.
The basis for classifying any supply as intra-state supply or inter-state supply is articulated u/s 7 &
8 of IGST Act, which have been discussed adequately in this chapter.
Section 9(1): Subject to the provision of sub-section (2), there shall be levied a tax the central goods
and services tax on all intra-state supplies of goods or services or both, except on the supply of
alcoholic liquor for human consumption, on the value determined under Section 15 and at such
rates, not exceeding twenty per cent, as may be notified by the Government on the
recommendations of the Council and collected in such manner as may be prescribed and shall be
paid by the taxable person.
Section 9(2): The central tax on the supply of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel Shall be levied with effect from
such date as may be notified by the Government on the recommendations of the Council.
Section 9(3): The government may, on the recommendations of the Council, by notification, specify
categories of supply of goods or services or both, the tax on which shall be paid on reverse charge
basis by the recipients of such goods or services or both and all the provisions of this Act shall apply
to such recipients as if he is the person liable for the paying the tax in relation to supply of such
goods or services or both.
Section 9(4): The government may, on the recommendations of the Council, by notification, specify
a class of registered persons who shall, in respect of supply of specified categories of goods or
services or both received from an unregistered supplier, pay the tax on reverse charge basis as the
recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to
such recipient as if he is the person liable for paying the tax in relation to such supply of goods or
services or both.
Section 9(5): The Government may, on the recommendations of the Council, by notification, specify
categories of services the tax on intra-state supplies of which shall be paid by the electronic
commerce operator if such services are supplied through it, and all the provisions of this Act shall
apply to such electronic commerce operator as if he is the supplier liable for paying the tax in
relation to the supply of such services.
Provided that where an electronic commerce operator does not have a physical presence in the
taxable territory, any person representing such electronic commerce operator for any purpose in
the taxable territory shall be liable to pay tax.
Provided further that where an electronic commerce operator does not have a physical presence in
the taxable territory and also he does not have a representative in the said territory such as
electronic commerce operator shall appoint a person in the taxable territory for the purpose of
paying tax and such person shall be liable to pay tax.

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LEVY & COLLECTION OF CGST/ IGST (Sections 9(1) & 9(2) of CGST Act (+) SECTIONS (1) &
5(2) OF IGST ACT)
LEVY OF CGST / SGST UTGST /IGST:
> Central Goods and Services Tax (CGST) shall be
levied on all intra-state supplies of goods or
services or both.
> State Goods and Services Tax (SGST) is levied on
those intra-state supplies of goods or services or
both where the transaction takes place within a
State/Union Territory with State Legislature.
Union Territory Goods and Services Tax (UTGST) is levied on those intra-state supplies of goods or
services where the transaction takes place within a Union Territory without State Legislature
> Integrated Goods and Services Tax (IGST) shall be levied on all inter-state supplies of goods or
services or both

MEANING OF INTRA-STATE SUPPLY (Section 8 of IGST Act}

Where the location of the supplier and the place of supply of goods or services are in the same
State/Union Territory, the supply is treated as intra-state supply of goods or services.
MEANING OF INTER-STATE SUPPLY (Section 7 of IGST Act)
 Where the location of the supplier and the place of supply of goods or services are in:

 two different States; or

 two different Union Territories; or
 a State and a Union Territory, the supply is treated as inter-state supply of goods or services.

 Section 7 of IGST provides that the following supplies shall be deemed as inter-state supplies:

 Supply of goods or services imported into the territory of India;

 Supply of goods or services when the supplier is located in India and the place of supply is outside
India; and Supply of goods or services to or by a SEZ Developer/ SEZ Unit.

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LEVY & COLLECTION OF IGST {SECTION 5 OF IGST ACT}
 Section 5(1):Subject to the provisions of sub-section (2), there shall be levied a tax called the
integrated goods and services tax on all inter-state of goods or services or both; except on the supply
of alcoholic liquor for human consumption, on the value determined under section 15 of central
Goods and Services Tax Act and at such rates, not exceeding forty per cent, as may be notified by the
Government on the recommendations of the Council and collected in such manner as may be
prescribed and shall be paid by the taxable person.
Provided that the integrated tax on goods imported into India shall be levied and collected with the
provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said
Act at the point when duties of customs are levied on the said goods under section 12 of the Customs
1962.
 Section 5 (2): The integrated tax on the supply of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from
such date as may be notified by the Government on the recommendations of the Council.
 Section 5 (3): The Government may, on the recommendations of the Council, by notification,
specify categories of supply of goods or services or both, the tax on which shall be paid on reverse
charge basis by the recipient of such goods or services or both and all the provisions of this Act shall
apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such
goods or services or both.
 Section 5(4): The Government may, on the recommendations of the Council, by notification,
specify a class of registered persons who shall, in respect of supply of specified categories of goods
or services or both received from an unregistered supplier, pay the tax on reverse charge basis as
the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply
to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or
services or both.
 Section 5(5): The government may, on the recommendations of the Council, by notification,
specify categories of services, the tax on inter-state supplies of which shall be paid by the electronic
commerce operator if such services are supplied through it, and all the provisions of this Act shall
apply to such electronic commerce operator as if he is the supplier liable for paying the tax in
relation to the supply of such services.
Provided that where an electronic commerce operator does not have a physical presence in the
taxable territory, any person representing such electronic commerce operator for any purpose in
the taxable territory shall be liable to pay tax.
Provided further that where an electronic commerce operator does not have a physical presence in
the taxable territory and also does not have a representative in the said territory, such electronic
commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and
such person shall be liable to pay tax.

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GOODS PERMANENTLY EXCLUDED FROM THE PURVIEW OF GST LAW:

Supply of alcoholic liquor for human consumption is outside the purview of CGST as well as IGST
law.
GOODS TEMPORARILY EXCLUDED FROM THE PURVIEW OF GST LAW
(To Be Taxed Under GST At A Later Point of Time):
 Presently, CG5T/SGST/UTG5T/IG5T is not applicable on the supply of the following items:
 Petroleum crude;
 High-speed diesel;
 Motor spirit (commonly known as petrol);
 Natural gas; and
 Aviation turbine fuel.
 The above-mentioned products shall be brought under the ambit of GST law with effect from
such date as may be notified by the Government on the recommendations of the GST Council.
VALUE FOR LEVY OF CGST/IGST: Transaction Value u/s 15 of CGST Act
RATES OF CGST/IGST:
 IGST is approximately the sum total of CGST and SGST/UTGST. Maximum rate of CGST is 20%
whereas maximum rate of IGST is 40%.
 Multi-tier rate structure has been introduced under GST. The following are the different types
of GST rates which are applicable presently {These rates are the sum total of CGST (+)
SGST/UTGST in case of intro-state supplies}:
 0% (Exempted Supplies)
 5%
 12%
 18%
 28%
Note: GST rate of 0.25% has been prescribed for supply of raw/unprocessed precious stones. GST
rate of 3% has been prescribed for supply of gold, gold jewellery, precious metals, etc.

REVERSE CHARGE ON NOTIFIED GOODS/SERVICES

{Section 9(3) of CGST Act (+) Section 5(3) of IGST Act)
 Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like
imports and other notified supplies, the liability may be cast on the recipient under the reverse
charge mechanism. Reverse charge means the liability to pay tax is on the recipient of supply of

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goods or services instead of the supplier of such goods or services in respect of notified categories
of supply. There are two type of reverse charge scenarios provided in GST law:
 First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by
Section 9(3) of CGST Act and Section 5(3) of IGST Act.
 The second scenario is covered by Section 9(4) of CGST Act and Section 5(4) of IGST Act where
specified supplies by any unregistered person to a registered person are covered.
Section 9(3) of CGST Act and Section 5(3) of IGST Act empowers the Government to notify, on the
recommendations of the G5T Council, specific categories of supply of goods or services or both, the
tax on which shall be paid on reverse charge basis by the recipient of such supply and all the
provisions of GST law shall apply to such recipient as if he is the person liable for paying tax in
relation to the supply of such goods or services or both.

SUPPLIES OF SERVICES UNDER REVERSE CHARGE MECHANISM (AS NOTIFIED):

In exercise of the powers conferred u/s 9(3) of CGST Act and 5(3) of IGST Act, the following
transactions have been notified from time to time where GST will be payable by the recipient of
services under reverse charge:

S.NO. Description of Supply Of Services Supplier of Services Recipient of

Services
1 Sponsorship services Any person Any body-corporate
or partnership firm
located in the taxable
territory
2 Services supplied by a director of a A director of a A company or a
company or a body-corporate to the company or a body- corporate
said company or the body-corporate body-corporate located in the taxable
territory
3 Services supplied by an insurance An insurance agent Any person carrying
agent to any person carrying on on insurance
insurance business business located in
the taxable territory
4 Services supplied by a recovery A recovery agent A banking company
agent to a banking company or a or a financial
financial institution or a NBFC institution
or a NBFC located in
the taxable territory
5 Supply of services by an author, Author or music Publisher, music
music composer, photographer, composer, company, producer
artist or the like by way of transfer photographer, artist, or the like located in
or permitting the use or enjoyment or the like the taxable territory
of a copyright relating to original
literary, dramatic, musical or
artistic works to a

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publisher, music company,
producer or the like

6 Supply of services by the members Members of Reserve Bank of India

of Overseeing Committee to Overseeing
Reserve Bank of India Committee
constituted by the
Reserve Bank of
INDIA
7 GTA Services Goods Transport Any of the following
Agency which has not persons located in
paid CGST @ 6% taxable territory:
> Factory
> Co-operative
society
> Person registered
under GST law
> Body-corporate
> Partnership firm
> Casual taxable
person
8 Legal services An individual Any business entity
advocate, including located in the taxable
a senior advocate or territory
a firm of advocates
9 Services supplied by an arbitral Arbitral tribunal Any business entity
tribunal to a business entity located in the taxable
territory
10 Any service supplied by CG/SG/ Central Government, Any business entity
Union Territory/Local Authority to a State Government, located in the taxable
business entity excluding: Union Territory or territory
> renting of immovable property; Local Authority
> services by the Department of
Posts by way of speed post,
express parcel post, life
insurance and agency services
provided to a person other
than CG/SG/Union Territory
or Local Authority;
> Services in relation to an
aircraft or a vessel, inside or
outside the precincts of a port
or an airport; and
> Transport of goods or

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11 Services supplied by CG/SG/ Union Central Government, Any person
Territory/Local Authority by way State Government, registered under
of renting of immovable property to Union Territory or GST law
any person registered under GST Local Authority
law
12 Any service supplied by any person Any person located in Any located in taxable
who is located in a non-taxable non-taxable territory territory
territory to any person located in
taxable territory
13 Services supplied by a person A person located in a Importer located in
located in non-taxable territory by non-taxable territory the taxable territory
way of
14 Services supplied by Individual Individual Direct A banking company
Direct Selling Agents (DSAs) Selling Agents (DSAs) or a NBFC located in
the
15 Services provided by a business A business facilitator A banking company
facilitator to a banking company located in the taxable

16 Services provided by an agent of A agent of business A business

business correspondent to business correspondent correspondent
located

State the person liable to pay GST in the following independent cases provided the recipient
is located in the taxable territory:
a) Services provided by an arbitral tribunal to any business entity.
b) Sponsorship services provided by a company to an individual.
c)Services by way of renting of immovable property provided by CG to a business entity registered
under GST law.
Answer
a)GST on services provided or agreed to be provided by an arbitral tribunal to any business entity
located in the taxable territory is payable under reverse charge. Therefore, in the given case, GST is
payable by the recipient, i.e. the business entity.
b) GST on sponsorship services provided by any person to any body-corporate or partnership firm
located in the taxable territory is payable under reverse charge. Since services have been provided
to on individuals, reverse charge provisions will not apply. Thus, G5T is payable under forward
charge by the supplier (i.e. the company).

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c)GST on services by way of renting of immovable property provided by Central Government, State
Government, Union Territory, or local authority to any person registered under GST law is payable
under reverse charge. Thus, reverse charge provisions will get attracted and the recipient would be
liable to pay GST.

SUPPLIES OF GOODS UNDER REVERSE CHARGE MECHANISM (AS NOTIFIED):

In exercise of the powers conferred u/s 9(3) of CGST Act and 5(3) of IGST Act, the following
transactions have been notified from time to time where GST will be payable by the recipient of
goods under reverse charge. However, ICAI has excluded this topic for examination purposes and
the same has been incorporated in the book just for the sake of knowledge of the students.
S NO. Description Of Supply Of Goods Supplier Of Goods Recipient Of Goods
1 Agriculturist Any Registered
> Unshelled/Unpeeled Cashew Nuts Person
> Bidi Wrapper Leaves (Tendu)
> Tobacco Leaves
> Raw Cotton
2 Supply of Lottery State Government, Lottery Distributor
Union Territory or or Selling Agent
Any Local Authority
3 Silk Yarn Any person Who Any Registered
Manufactures Silk Person
Yarn Form Raw Silk
or Silk Worn
Cocoons For
Supply of Silk Yarn
4 Used Vehicles; Old & Used Goods; Central Any
Seized & Confiscated Goods; Waste Government, State Registered
& Scrap Government, person
Union Territory
Or
Any Local Authority

REVERSE CHARGE ON SUPPLIES BY UNREGISTERED PERSONS

{Section 9(4) of CGST Act (+) Section 5(4) of IGST Act}
> The initial version of Section 9(4) of CGST Act and Section 5(4) of IGST Act which was drafted at
the time of introduction of GST law provided that where a supply of taxable goods or services or
both is made by an unregistered person to a registered person, tax on such transaction shall be paid
by the registered recipient on reverse charge basis and all the provisions of GST law shall apply to
such recipient as if he is the person liable for paying tax in relation to the supply of such goods or
services or both. Accordingly, as per the initially introduced law, whenever a registered person
procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis.

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> However, to minimize inconvenience in case of low value transactions, supply of taxable goods or
services or both by an unregistered supplier to a registered person were exempted from GST
provided the aggregate value of such supplies of goods and/or services received by a registered
person from any or all the unregistered suppliers does not exceed Rs 5,000 in a day. This benefit
was available since the introduction of GST on intra-state supplies as well as inter-state supplies.
For giving effect to this benefit, separate notifications were issued under CGST Act as well as IGST
Act.
> With the introduction of GST, it became very apparent that the above-mentioned provisions casted
a lot of burden on registered persons because a lot of their suppliers had not got themselves
registered under GST law. After considering numerous representations filed by the industry and
trade, the GST Council, in its 22nd meeting held on 6th October 2017, decided to suspend the reverse
charge mechanism u/s 9(4) of CGST Act and 5(4) of IGST Act.
> However, in order to reduce the scope of this provision and finally make it effective, an
amendment has been carried out recently. The objective behind this is to empower the Central
Government to notify classes of registered persons to pay the tax on reverse charge basis in respect
of receipt of supplies of certain specified categories of goods or services or both from unregistered
suppliers.

TAXATION OF ELECTRONIC COMMERCE OPERATORS

{Section 9(5) of CGST Act (+) Section 5(5) of IGST Act)
INTRODUCTION:
> Electronic Commerce Operators ('ECO') display products as well as services on their electronic
portal which are actually supplied by some other person to the consumer. The consumers buy such
goods/services through these portals.
> On placing the order for a particular product/service, the actual supplier supplies the selected
product/service to the consumer. The price/consideration for the product/service is collected by
the ECO from the consumer and passed on to the actual supplier after the deduction of commission
by the ECO.

LIABILITY OF ECO TO PAY GST:

> The Government may notify specific categories of services, on the recommendations of the GST
Council, the tax on which shall be paid by the ECO if such services are supplied through it.
> The following services have been notified by the Government in this regard and thus in case of the
following notified services, the provisions of GST law shall apply to such ECO as if he is the supplier
liable for paying tax in relation to the supply of such services:

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> Services by way of transportation of passengers by a radio -taxi, motorcab, maxicab and motor
cycle; and
> Services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites or
other commercial places meant for residential or lodging purposes, except where the person
supplying such service through Electronic Commerce Operator is liable for registration u/s 22(1)
of CGST Act.
> Services by way of house-keeping such as plumbing, carpentering, etc except where the person
supplying such service through Electronic Commerce Operator is liable for registration u/s 22(1)
of CGST Act.

PERSON LIABLE TO PAY GST FOR ABOVE SPECIFIED SERVICES WHEN SUPPLIED THROUGH
ECO:
> If the Electronic Commerce Operator is located in India, tax is to be paid by the Electronic
Commerce Operator.
> If the Electronic Commerce Operator does not have any physical presence in the taxable territory,
tax is to be paid by the Electronic Commerce Operator's representative located in the taxable
territory.
> If the Electronic Commerce Operator neither has physical presence nor any representative in the
taxable territory, the Electronic Commerce Operator would be required to appoint a person in India
who would discharge tax liability on its behalf.

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SUPPLY UNDER GST
 The incidence of tax is the foundation stone of any taxation system. It determines the point at
which tax would be levied (ie, the taxable event). The earlier framework of taxable event
across various areas of indirect taxes was subject to varying interpretations resulting in
endless litigation since decades.
 Broadly, the controversies related to issues like whether a particular process amounted to
manufacture or not, whether a particular transaction was sale of goods or rendering of
services, etc. The GST laws resolve these issues by laying down one comprehensive taxable
event, ie 'supply of goods or services or both'.
 GST law, by levying tax on the 'supply of goods and/or services', departs from the historically
understood concepts of 'taxable event' under the erstwhile indirect tax laws (ie sale under
state VAT lows, manufacture under excise laws and provisioning of service under service tax
laws).
 For a better understanding of this topic, it is imperative to understand the meaning of a few
important terms which have been explained in the ensuing paragraphs.

INTRODUCTION

The concept of 'supply' is the key stone of the GST architecture. In the GST regime, the entire value
of supply of goods and/or services is taxed in an integrated manner, unlike the earlier indirect
taxes, which were charged independently either on manufacture or sale of goods, or on rendering
of services.

Supply has been defined in an inclusive manner to include all forms of supply of goods or services
or both such as sale, transfer, barter, exchange, license or disposal made or agreed to be made for
consideration in the course or furtherance of business.

Sections 7 & 8 of CGST Act read along with Schedules I, II & III given under the said Act explain the
meaning and scope of supply, By virtue of Section 20 of IGST Act, these provisions have also been
made applicable for IGST law.

MEANING OF 'GOODS' (Section 2(52) of CGST Act):

'Goods' means every kind of movable property other than money and securities but includes:

 Actionable claim;

 Growing crops, grass and things attached to/forming part of the land which are agreed to be
severed before supply or under a contract of supply.

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MEANING OF 'SERVICES' Section 2 (102) of CGST Act:

 The expression 'services' has been defined to mean anything other than goods, money and
securities.

 The expression 'services' includes activities relating to the use of money or its conversion of money
by cash or by any other mode, from one form, currency or denomination to another form,
currency or denomination for which a separate consideration is charged. It has been further
provided that the expression 'services' would also include facilitating or arranging transaction in
securities.

MEANING OF 'CONSIDERATION' Section 2 (31) of CGST Act}

 The scope of the word 'consideration' in relation to the supply of goods or services or both would
include.

 any payment made or to be made, whether in money or otherwise, by the recipient or by any
other person; and

 the monetary value of any act or forbearance by the recipient or by any other person.

 Any subsidy given by Central Government or State Government shall not be treated as a part of
consideration.

 A deposit given in respect of supply of goods or services or both shall not be considered as
payment made for such supply unless the supplier applies the deposit as consideration for the
said supply.

MEANING OF 'MONEY' (Section 2(75) of CGST Act):

 Money means Indian legal tender or any foreign currency, cheque, promissory note, bill of
exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic
remittance or any other instrument recognised by the Reserve Bank of India when used as a
consideration to settle an obligation or exchange with Indian legal tender of another
denomination.

 However, money shall not include any currency that is held for its numismatic value.

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MEANING OF 'BUSINESS' {Section 2(17) of CGST Act): Business includes:

a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar
activity, whether or not it is for a pecuniary benefit;

b) Any activity or transaction in connection with or incidental or ancillary to (a) above;

c) Any activity or transaction in the nature of (a) above, whether or not there is volume,
frequency, continuity or regularity of such transaction;
d) Supply or acquisition of goods including capital assets and services in connection with
commencement or closure of business;

e) Provision by a club, association, society, or any such body (for a subscription or any other
consideration of the facilities or benefits to its members, as the case may be;

f) Admission, for a consideration, of persons to any premises;

g) Services supplied by a person as the holder of an office which has been accepted by him in the
course or furtherance of his trade, profession or vocation;
h) Activities of a race club including by way of totalisator or a licence to book maker or activities of
a licenses book maker in such club; and

i) Any activity or transaction undertaken by the Central Government, a State Government or any
local authority in which they are engaged as public authorities.

MEANING OF 'PERSON' (Section 2(84) of CGST Act):

Person includes:

 An individual (i.e. a natural human being);

 A Hindu Undivided Family ('HUF') (The meaning of HUF has not been given under the tax laws.
As per the Hindu law, it means a family which consists of all persons lineally descended from a
common ancestor including their wives and daughters. Married daughters are no longer treated
as a member of HUF after they get married in other families);
 a firm;
 a limited liability partnership firm;
 a company;
 a trust;
 a body-corporate incorporated by or under the laws of a country outside India;
 an association of persons (AOP), whether incorporated or not (an AOP refers to a situation
where two or more persons join hands to carry on any business);
 a body of individuals (BOI), whether incorporated or not (a BOI is similar to AOP; however, all
the participants of BOI are only individuals whereas in case of AOP, one or more participant is
a non-individual);
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 government (Central Government as well as State Government);
 a local authority (ie, panchayat, municipality, cantonment board, etc); and
 a co-operative society registered under any law relating to cooperative societies;
 a society as defined under the Societies Registration Act, 1860;
 a corporation established by/under any Central, State or Provincial Act or Government
company as defined u/s 2(45) of Companies Act, 2013;
 every artificial juridical person not covered above (artificial juridical persons are entities
which are not natural persons but are separate entities in the eyes of law. Though they may not
be sued directly in a court of law, but they can be sued through persons managing them.
Examples are universities, ICAI, ICSI, etc);

MEANING OF RELATED PERSONS (Explanation to Section 15 of CGST Act)

Persons shall be deemed to be 'related persons' if:

 such persons are officers or directors of one another's businesses;

 such persons are legally recognised partners in business;
 such persons are employer & employee;
 a third person directly or indirectly owns, controls or holds 25% or more of the outstanding
voting stock or shares of both of them;
 one of them directly or indirectly controls the other;
 both of them are directly or indirectly controlled by a third person;
 together they directly or indirectly control a third person;
 they are members of the same family; or one of them is the sole agent, sole distributor or sole
concessionaire of the other

SCOPE OF SUPPLY {SECTION 7 OF CGST ACT}

 Section 7(1): For the purpose of this Act, the expression “supply” includes:

a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence,
rental, lease or disposal made or agreed to be made for consideration by a person in the course
or furtherance of business;

b) Import of services for a consideration whether or not in the Course or furtherance of business;
and

c) The activities specified in schedule I, made or agreed to be made without a consideration.

 Section 7(1A): Where certain activities or transactions, constitute a supply in accordance with
the provisions of sub-section (1), they shall be treated either as supply of goods or supply of
services as referred to in Schedule II

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 Section 7(2); Notwithstanding anything contained in sub-section (1),

a) Activities or transactions specified in schedule III; or

b) such activities or transactions undertaken by the Central Government, a State Government or

any local authority in which they are engaged as public authorities, as may be notified by the
Government on the recommendations of the Council, Shall be treated neither as a supply of
goods nor a supply of services

 Section 7(3): Subject to the provisions of sub-sections (1), (1A) and (2), the Government may,
on the recommendations of the Council, specify, by notification, the transactions that are to be
treated as:

a) a supply of goods and not as a supply of services; or

b) a supply of services and not as a supply of goods.

OVERVIEW OF SUPPLY:

INCLUSIONS EXCLUSIONS

„ Supply for Consideration in Course or Activities to Be Treated Neither As Supply Of

Furtherance of Business (Section 7(1) (a)} Goods Nor Supply Of Services {Section 7(2) +
Schedule III}

„ Importation of Services for Consideration

`Whether Or Not in Course or Furtherance of

Business {Section 7(1) (b)}

„ Supply Without Consideration {Section

7(1)(c) + Schedule I}

„ Activities to Be Treated As Supply Of Goods

Or Supply Of Services {Section 7(1A) +

Schedule II}

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SUPPLY FOR CONSIDERATION IN COURSE OR FURTHERANCE OF BUSINESS {Section 7(1) (a)
of CGST Act)

Section 7(1) (a) of CGST Act provides that a supply of goods/services should be carried out for
consideration in the course or furtherance of business,

MODES OF SUPPLY:

> Section 7(1)(a) of CGST Act includes all forms of supply of goods or services or both such as sale,
transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for
consideration in the course or furtherance of business

> Sale and Transfer:

Earlier, VAT was levied by State Governments on sale of goods within their respective states
wherein 'sale' was defined to mean transfer of property in goods for consideration Under CGST
Act, sale has been treated as a form of supply leviable to GST,

> Barter and Exchange:

 Barter transactions involve only exchange of goods or services whereas exchange may cover a
situation where the goods are partly paid for in goods and partly in money.
 When there is a barter of goods or services, same activity constitutes supply as well as
consideration. By making a specific inclusion in the definition of supply, all barters and exchanges
have been made liable to GST.

> Licence, Lease, Rental etc:

 Licences, leases and rentals of goods were earlier treated as services where the goods were
transferred without transfer of right to use (effective possession and control over the goods)
and were treated as sales where the goods were transferred with transfer of right to use.

TAXABILITY OF ART WORKS SENT BY ARTISTS TO GALLERIES FOR EXHIBITION:

 Artists gives their art works to galleries where it is exhibited for supply However, no
consideration flows from the gallery to the artist when the art works are sent to the gallery
for exhibition and therefore, the same is not a supply
 It is only when a buyer selects a particular art work displayed at the gallery, that the actual
supply takes place and applicable GST would be payable at the time of such supply.
Illustration

State the necessary elements for a supply to be chargeable to GST.

Answer

The fallowing elements are required to be satisfied for a supply to be chargeable to GST:

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> The activity involves supply of goods or services or both;

> The supply is for a consideration unless otherwise specifically provided for;

> the supply is made in the course or furtherance of business;

> the supply is a taxable supply; and

> the supply is made by a taxable person,

 Under the GST regime, such licences, leases and rentals of goods with or without transfer of
right to use are covered under the scope of 'supply of services' because there is no transfer of
title in such supplies. Such transactions are specifically treated as 'supply of services' under
Schedule II of CGST Act.

CONSIDERATION:

 One of the essential conditions for the supply of goods and/or services to fall within the ambit
of GST is that the supply should have been made for a consideration.

 However, consideration does not always mean money. It covers anything which might be
possibly done, given or made in exchange for something else.

 Further, consideration need not always flow from the recipient of the supply. It can also be
made by a third person.

IN THE COURSE OR FURTHERANCE OF BUSINESS:

> GST is essentially a tax on only commercial transactions. Hence, only those supplies which are
made in the course or furtherance of business qualify as 'supply' under GST.

> Resultantly, any supplies made by an individual in his personal capacity do not come under the
ambit of GST unless they fall within the definition of business.

> Example: Rishabh buys a car for his personal use and after a year sells it to a car dealer. Sale of
car by Rishabh to car dealer is not a supply under CGST Act because supply is not made by
Rishabh in the course or furtherance of business.

> Example: Radhika sold her old gold bangles and earrings to 'Bhola Jewellers'. Sale of old gold
jewellery by an individual to a jeweller will not constitute supply as the same cannot be said to be
in the course or furtherance of business of the individual.

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> In order to understand the term 'in the course or furtherance of business', we need to
understand the term 'business'. Business has been defined u/s 2(17) of CGST Act to include, inter-
alia, any trade, commerce, manufacture, profession, vocation etc whether or not undertaken for a
monetary benefit. Business also includes any activity or transaction which is incidental or
ancillary to the afore-mentioned listed activities.

IMPORT OF SERVICES FOR CONSIDERATION {Section 7(1)(b) of CGST Act)

> Section 7(1)(b) of CGST Act expands the scope of the term 'supply' by including importation of
services for a consideration within its ambit irrespective of the fact whether such importation is in
the course or furtherance of business or not

> Section 7(1) (b) of CGST Act (ie importation of services for consideration) is the only exception
to the condition of supply being in the course or furtherance of business.

Example: Mr M, a proprietor, has received designing services for his house from an architect
located in New York at an agreed consideration of US $5,000. The import of services by Mr M shall
be treated as a supply u/s 7(1) (b) of CGST Act even though it is not in the course of or furtherance
of business.

Illustration (RTP May 2018 Attempt)

Sahab Sales, an air-conditioner dealer in Janakpuri, Delhi, needs 4 air-conditioners for his newly
constructed house in safdarjung Enclave. Therefore, he transfers 4 air-conditioners (on which ITC
has already been availed by it) from its stock for the said purpose. Examine whether the said
activity amounts to supply u/s 7 of CGST Act, 2017.

Further, a janakpuri resident, Aakash, approached Sahab Soles. He sold an air-conditioner to Sahab
Sales for Rs 5,000. Aakash had bought the said air-conditioner six months before for his residence.
Does sale of the air-conditioner by Aakash to Sahab Sales amount to supply u/s 7 of CG5T Act,
2017?

Illustration

Modest Ltd, registered in Delhi, dealing in supply of electronic items transferred some of its stock
to its another unit located in Haryana (inter-state transfer). Whether such self-supplies are taxable
under GST?

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SUPPLY WITHOUT CONSIDERATION - DEEMED SUPPLY {Section 7(1)(c) of CGST Act (+)
Schedule I of CGST ACT}

As a general rule, for an activity to qualify as supply, the some should have been provided for
consideration. However, Section 7(1)(c) of CGST Act read along with Schedule I of CGST Act lists
down the following four cases where existence of consideration is not a pre-requisite for an
activity to qualify as supply:

1. PERMANENT TRANSFER/DISPOSAL OF BUSINESS ASSETS:

 Transfer/disposal of business assets by an entity on permanent basis without consideration

shall be regarded as supply if input tax credit has been availed on procurement of such assets.
 This clause is wide enough to cover transfer of business assets from holding to subsidiary
company or vice versa without consideration.
 Example: Donation of old laptops to charitable schools by XYZ & Co at the time of purchase of
new laptops will qualify as supply provided input tax credit has been availed by XYZ & Co on
such laptops.
 Example: A cloth retailer gives clothes from his business stock to his friend free of cost. In this
case, transfer of business stock would amount to supply if he had claimed input tax credit on
his procurement of such business stock.

2. SUPPLY BETWEEN RELATED PERSONS / DISTINCT PERSONS:

Transactions involving supply of goods/services/both without consideration between related

persons or distinct persons as specified u/s 25 of CGST Act will qualify as supply provided such
supply has been made in the course or furtherance of business.

(The meaning of 'related persons' has been discussed earlier in this topic whereas the concept of
'distinct persons' has been discussed in detail under 'Chapter 9 - Registration`)

TAXABILITY OF STOCK TRANSFERS / BRANCH TRANSFERS:

 Under the earlier law, no tax was applicable on stock transfers/branch transfers since such
transaction do not involve transfer of property in goods. However, under the GST regime, stock
transfers/branch transfers between different locations (with separate GST registrations) of
same legal entity will qualify as 'supply'.

Example: Raghubir Fabrics transfers 1,000 shirts from his factory located in Lucknow to his retail
showroom in Delhi so that the same can be sold from there. The factory and retail showroom of
Raghubir Fabrics are registered in the states where they are located. Although no consideration is
charged, supply of goods from factory to retail showroom constitutes supply.

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PARA 3 OF SCHEDULE I -SUPPLY OF GOODS BETWEEN PRINCIPAL & AGENT:

 Section 7(1)(c) of CGST Act read along with Schedule I of CGST Act lists down four cases
where existence of consideration is not a pre-requisite for an activity to qualify as supply.

 In other crucial point is whether or not the agent as the authority to pass or receive the
title of the goods on behalf of the principal.

Where the invoice for further supply is being issued by the agent in his name then, any provision
of goods from the principal to the agent would fall within the ambit of Para 3 of Schedule I would
be regarded as 'supply'.

Where the invoice is issued by the agent to the customer in the name of the principal, such agent
does not fall within the ambit of Para 3 of Schedule I and thus the transaction would not be
regarded as 'supply'.

 Similarly, where the goods being procured by the agent on behalf of the principal are invoiced
in the name of the agent, then further provision of the said goods by the agent to the principal
would be covered by Para 3 of Schedule I.
 The above clarification can be understood with the help of following examples:

Example: Mr A appoints Mr B to procure certain goods from the market. Mr B identifies various
suppliers who can provide the goods as desired by Mr A, and asks the supplier (Mr C) to send the
goods and issue the i invoice directly to Mr A. In this scenario, Mr B is only acting as the
procurement agent, and has in no way involved himself in the supply or receipt of the goods.
Hence, in accordance with the provisions of this Act, Mr B is not an agent of Mr A for supply of
goods in terms of Para 3 of Schedule I.

Example: M/s XYZ, a banking company, appoints Mr B (auctioneer) to auction certain goods. The
auctioneer arranges for the auction and identifies the potential bidders. The highest bid i sold to
the highest bidder by M/s XYZ. The invoice for the supply of the goods is issued by M/S XYZ to the
successful bidder. In this scenario, the auctioneer is merely providing the auctioneering services
with no role played in the supply of the goods. Even in this scenario, Mr B is no agent of M/s XYZ
for the supply of goods in terms of Para 3 of Schedule I.

Example: Mr A, an artist, appoints M/s B (auctioneer) to auction his painting. B arranges for the
auction and identifies the potential bidders. The highest bid is accepted and the painting sold to
the highest bidders the invoice for the supply of the painting issued by M/s B on the behalf of Mr A
but in his own name and the painting is delivered to the successful bidder. In this scenario, M/s B
is not merely providing auctioneering services, but is also supplying the painting on behalf of Mr A
to the bidder, and has the Schedule I. authority to transfer the title of the painting on behalf of Mr
A. This scenario is covered under Para 3 of Schedule I.

 Para 3 of Schedule I provides that supply of goods by a principal to his agent, without

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consideration, when agent undertakes to supply such goods on behalf of the principal is
considered as supply. Similarly, Supply of goods by an agent to his principal, without
consideration, where the agent undertakes to receive such goods on behalf of the principal is
also considered as supply.

 In order to determine whether a particular principal-agent relationship falls within the ambit
of Para 3 of Schedule I, the deciding factor is whether the invoice for the further supply of
goods on principal is being issued by the agent or not.

EMPLOYER-EMPLOYEE TRANSACTIONS:

 The definition of 'related persons' covers employer-employee relationship within its scope.
Accordingly, all employer-employee transactions should be regarded as supply irrespective of
the fact whether consideration is involved or not.
 However, Schedule I of CGST Act provides that gifts given by an employer to an employee shall
not be treated as supply if the amounts of gifts given during a financial year does not exceed Rs
50,000. However, gifts exceeding Rs 50,000 shall be subject to GST.

 Moreover, Schedule III of CGST Act clearly states that services provided by an employee to the
employer in the course of or in relation to his employment shall not be treated as supply of
services. Therefore, any kinds of benefits given by an employer to his employee in terms of
contractual agreement entered into between the employer and the employee will not be
subject to GST.

 Example: Where an employer provides free housing to his employee, when the same is provided
in terms of the contract between the employer and employee and is part and parcel of the
employee's remuneration package, no GST implications should arise on such free housing.

SUPPLY OF GOODS BETWEEN PRINCIPAL & AGENT:

Supply of goods by a principal to his agent, without consideration, where the agent undertakes to
supply such goods on behalf of the principal is considered as supply. Similarly, supply of goods by
an agent to his principal, without consideration, where the agent undertakes to receive such goods
on behalf of the principal is also considered as supply.

Example: ABC Manufacturers Ltd engages Raghav & Sons as an agent to sell goods on its behalf.
For this purpose, ABC Manufacturers Ltd has supplied the goods to Raghav & Sons. Supply of
goods by ABC Manufacturers Ltd to Raghav & Sons will qualify as supply even though no
consideration has been recovered from Raghav & Sons.

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IMPORT OF SERVICES FROM RELATED PERSONS LOCATED OUTSIDE INDIA:

Import of services by a person from a related person or from any of his establishments located
outside India in the course or furtherance of business shall be treated as supply irrespective of the
presence of consideration.

Example: ABC Associates received legal consultancy services from its head office located in
Malaysia. The head office has rendered such services free of cost to its branch office. Since ABC
Associates and the branch office are related persons, services received by ABC Associates will
qualify as supply even though the head office has not charged anything from it.

Example: Sumit, a proprietor registered in Delhi, has sought architect services from his brother
located in US, with respect to his newly constructed house in Delhi. Although services have been
received by Sumit without consideration from a related person, the transaction will still not
qualify as supply since the same has not been received in the course or furtherance of business.

TAXABILITY OF TENANCY RIGHT/PAGADI UNDER GST:

 In Pagadi system, the tenant acquires tenancy rights in the property against payment of tenancy
premium (pagadi) The landlord may be owner of the property, but the possession of the same
lies with the tenant. The tenant Pays' periodic rent to the landlord as long as he occupies the
property. The tenant also usually has the option to sell the tenancy right of the said property
and in such a case has to share a percentage of the proceeds with the land, as laid down in their
tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy owner of
premium to get the property vacated. Such properties in Maharashtra are governed by
Maharashtra Rent C Act, 1999.

 Pagadi system, ie transfer of tenancy rights against tenancy premium, is prevalent in some
states. The activity of transfer of tenancy right against consideration (ie, tenancy premium) is
squarely covered under supply of service liable to GST. It is a form of lease or renting of
property and such activity has been specifically declared to be a service as per Schedule II of
CGST Act.

 Although stamp duty and registration charges have been levied on such transfer of tenancy
rights, it shall be still subject to GST since merely because a transaction/supply involves
execution of documents which may require registration and payment of registration fee and
stamp duty, it would not preclude them from the 'scope of supply' and from payment of GST.

 To sum up, transfer of tenancy rights to a new tenant against consideration in the form of
tenancy premium is taxable. Further, services provided by outgoing tenant by way of

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surrendering the tenancy rights against consideration in the form of a portion of tenancy
premium is liable to GST.

Illustration:

State Government has exclusive power to notify a transaction to be supply of goods or services.
Discuss the correctness of the statement.

Answer:

The said statement is not correct. State Government can notify a transaction to be supply of goods
or services but only on the recommendations of the GST Council. Further, Central Government or
State Government, both on the recommendations of the GST Council, can notify an activity to be
the supply of goods and not supply of services or supply of services and not supply of goods or
neither a supply of goods nor a supply of services.

Illustration:

ABC Consultancy, registered in Mumbai, supplies technical consultancy services to its clients. It
has been providing technical services to XY Ltd, Mumbai since past two years. Consideration is
settled by XY Ltd assignment-wise. XY Ltd paid Ps 45 lakhs to ABC Consultancy on 10th January
2018 on ABC Consultancy agreeing to not provide similar technical services to any other business
entity in India or abroad for a period of 8 years. ABC Consultancy is of the view that Rs 45 lakhs is
not chargeable to GST.

You are required to examine whether the view taken by ABC Consultancy is valid in law.

ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS/SERVICES {Section 7(1 A) of CGST Act

(+) Schedule II of CGST Act)

 Section 7(1A) of CGST Act read along with Schedule II of CGST Act enlists various
matters/transactions which are to be treated as supply of either goods or services,
 The matters listed under Schedule II are primarily those which had been entangled in litigation
in the earlier regime owing to their complex nature and susceptibility to double taxation.

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Schedule II
ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

S . Provision Whether goods Analysis

No. or service
1(a) Any transfer of the title in Supply of goods Example:
goods
When the goods are stolen, title of
goods shall pass to insurance
company. It would be treated as
supply.
1(b) Any transfer of right in goods Supply of Service Transfer of right to use goods
or of undivided share in without transfer of title is supply of
goods without the transfer of service.
title thereof
1(c) Any transfer of title in goods Supply of goods Example:
under an agreement which Financial lease/Hire purchase
stipulates that property in transaction would amount to supply
goods shall pass at a future of goods under the GST.
date upon payment of full
consideration
2(a) Any lease, tenancy, easement, Supply of Service Example:
license to occupy land Land used for circus, entertainment
and parking purposes;
2(b) Any lease or letting out of Supply of Service Leasing of building for
the building including a commercial purpose shall amount
commercial, industrial or to supply of service.
residential complex for
business or commerce,
either wholly or partly
3 Any treatment or process Supply of Service Example:
which is applied to another Job work shall be treated as
person’s goods supply of service.

4(a) Transfer or Disposed of Supply of goods

business assets whether or
not for a consideration.

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4 (b) Change of use of goods: From Supply of Service Example:
business to personal use, A computer, company car, when
whether or not for a put to non-business use would be
covered.
consideration.
4(c) Where any person ceases to Supply of goods In other words, when running
be a taxable person, any business is transfer to
goods forming part of the representative, it shall not
amount to supply of goods.
assets of any business unless
–
(a) the business is
transferred as a going
concern to another
person; or
(b) the business is
carried on by a
personal
representative who is
deemed to be a
taxable person.
5(a) Renting of immovable Supply of Service
property

5{b) Construction of a complex, Supply of Service

building, civil structure or a
part thereof, including a
complex or building No refund of unutilized input tax
credit shall be allowed under sub-
intended for sale to a buyer,
section (3) of section 54 of the
wholly or partly, except said Central Goods and Services
where the entire Tax Act, in case of supply of
consideration has been services specified in sub-item (b)
received after issuance of of item 5 of Schedule II of the
completion certificate, Central Goods and Services Tax
Act. [Notification No. 15/2017-
where required, by the
Cenrtal Tax (Rate)]
competent authority or after
its first occupation,
whichever is earlier.

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5(c) Temporary transfer or Supply of Service Example:
permitting the use or Permitting the use of patent,
enjoyment of any copyright, trademark shall
intellectual property right amount to service.

5(d) Development, design, Supply of Service Example:

programming, Software would amount to supply
customization, adaptation, of service.
upgradation, enhancement,
implementation of
information technology
software
5(e) Agreeing to the obligation to Supply of Service Example:
refrain from an act, or to Mr. Ram request to Mr. Shyam not
tolerate an act or a situation, to teach a particular subject in
or to do an act; particular area for 5 years. Shyam
agree with the terms and
condition against a consideration
of Rs. 5,00,000.
The same would amount to supply
of service by Shyam and would
attract GST.
5(f) Transfer of the right to use Supply of Service Renting of goods i.e. movable
any goods for any purpose property shall amount to supply
of service.
Example:
Renting of coffee machine,
generator etc.
6 The following composite Supply of Service Example:
supplies shall be treated as a Both, pure labour contracts and
supply of services, namely:– works contracts involving
transfer of property are service
(a) works contract as under the GST law.
defined in clause (119) Example:
of section 2; and Restaurant and outdoor catering
are service under GST law.
(b) supply, by way of or as
part of, or in any other
manner whatsoever, of
goods, being food or any
other article for human
consumption or any

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drink (other than
alcoholic liquor for
human consumption),
where such supply or
service is for cash,
deferred payment or
other valuable
consideration.
7 Supply of goods by any Supply of goods
unincorporated association
or body of persons to a
member thereof

The activities listed in Schedule II shall be treated either as supply of goods or supply of services
provided the basic conditions for an activity to be construed as supply as laid down in Section 7(1)
are fulfilled.

IMPORTANT CLARIFICATION of CBIC on issues related to taxability of ‘tenancy rights’ under

GST.
(i) Whether transfer of tenancy rights to an incoming tenant, consideration for which is in form
of tenancy premium, shall attract GST when stamp duty and registration charges is levied
on the said premium, if yes what would be the applicable rate?
(ii) Further, in case of transfer of tenancy rights, a part of the consideration for such transfer
accrues to the outgoing tenant, whether such supplies will also attract GST.
The transfer of tenancy rights against tenancy premium which is also known as “pagadi system” is
prevalent in some States. In this system the tenant acquires, tenancy rights in the property against
payment of tenancy premium (pagadi). The landlord may be owner of the property but the
possession of the same lies with the tenant. The tenant pays periodic rent to the landlord as long
as he occupies the property. The tenant also usually has the option to sell the tenancy right of the
said property and in such a case has to share a percentage of the proceed with owner of land, as
laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing
tenancy premium to get the property vacated. Such properties in Maharashtra are governed by
Maharashtra Rent Control Act, 1999.
As per section 9(1) of the CGST Act there shall be levied central tax on the intra-State supplies of
services. The scope of supply includes all forms of supply of goods and services or both such as sale,

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transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business and also includes the activities
specified in Schedule II. The activity of transfer of tenancy right against consideration in the form
of tenancy premium is a supply of service liable to GST. It is a form of lease or renting of property
and such activity is specifically declared to be a service in para 2 of Schedule II i.e. any lease,
tenancy, easement, licence to occupy land is a supply of services.
The contention that stamp duty and registration charges is levied on such transfers of tenancy
rights, and such transaction thus should not be subjected to GST, is not relevant. Merely because a
transaction or a supply involves execution of documents which may require registration and
payment of registration fee and stamp duty, would not preclude them from the scope of supply of
goods and services and from payment of GST. The transfer of tenancy rights cannot be treated as
sale of land or building declared as neither a supply of goods nor of services in para 5 of Schedule III
to CGST Act, 2017. Thus a consideration for the said activity shall attract levy of GST.
To sum up, the activity of transfer of ‘tenancy rights’ is squarely covered under the scope of supply
and taxable per se. Transfer of tenancy rights to a new tenant against consideration in the form of
tenancy premium is taxable. However, renting of residential dwelling for use as a residence is
exempt [Sl. No. 12 of notification No. 12/2017-Central Tax (Rate)]. Hence, grant of tenancy rights
in a residential dwelling for use as residence dwelling against tenancy premium or periodic rent or
both is exempt. As regards services provided by outgoing tenant by way of surrendering the
tenancy rights against consideration in the form of a portion of tenancy premium is liable to GST.
[Circular No. 44/18/2018-CGST, dated 2-5-2018]

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Schedule III
ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF
GOODS NOR A SUPPLY OF SERVICES

Schedule III to CGST Act, 2017 lists down the following activities which shall be treated neither as
supply of goods nor supply of services.

For example, as per Schedule III, the services by an employee to an employer are not chargeable to
GST, and the gifts made by employer to any employee up to INR 50,000 in any Financial Year shall
not be treated as supply, however if more than INR 50,000 shall be subject to GST.

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S. Provision Analysis with examples
No.
1 Services by an employee to the employer in the Gift exceeding Rs. 50,000 given by
course of or in relation to his employment. employer to employee, not mention
in employment term, shall be
taxable as per Schedule I
2 Services by any court or Tribunal established
under any law for the time being in force.
3 (a) the functions performed by the Members Example:
of Parliament, Members of State Judge of Supreme Court of India is a
Legislature, Members of Panchayats, constitutional post, remuneration
received by them shall not subject to
Members of Municipalities and Members
GST.
of other local authorities;
Example:
(b) the duties performed by any person who CBDT is body established by CG.
holds any post in pursuance of the Chairman / Member / Director (who
provisions of the Constitution in that are not employees) of these body
capacity; or shall be out of GST,

(c) the duties performed by any person as a

Chairperson or a Member or a Director in
a body established by the Central
Government or a State Government or
local authority and who is not deemed as
an employee before the commencement
of this clause.
4 Services of funeral, burial, crematorium or Not liable for tax.
mortuary including transportation of the
deceased.
5 Sale of land and, subject to clause (b) of It is subject to stamp duty.
paragraph 5 of Schedule II, sale of building.
6 Actionable claims, other than lottery, betting and Lottery, betting and gambling are
gambling. subject to GST.

Actionable claim [Sec. 2(1)] shall have the same

meaning as assigned to it in section 3 of the
Transfer of Property Act, 1882.
7 Supply of goods from a place in the non-taxable Commonly called as ‘third country
territory to another place in the non-taxable exports’, this category of transaction
has been specially included in
territory without such goods entering into India.
Schedule III w.e.f. 1.2.2019.

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The effect is that the supply of goods
consigned directly from a place in
the non-taxable territory to a place in
the non-taxable territory without
such goods touching the Indian
shores shall not be treated as
‘supply’, thus not leviable to tax.
Example: Define Engineering Ltd,
Mumbai, a registered person, orders
5 Generator sets from Laymen
Fabricators, Germany for supply to a
customer in Bangladesh. The goods
are billed by Laymen Fabricators,
Germany to Define Engineering Ltd
but consigned directly to the
customer of Define Engineering Ltd
in Bangladesh. Define Engineering
Ltd finally billed such generator sets
to its customer in Bangladesh. In
this situation, the billing made by
Define Engineering Ltd to its
customer in Bangladesh shall not be
considered as supply in terms of
Section 7 of the CGST Act as the
goods have not entered India.
8(a) Supply of warehoused goods to any person Supply of goods lying in a customs
before clearance for home consumption; bonded warehouse has been treated
as neither supply of goods nor
supply of service. This entry has
been inserted in Schedule III w.e.f
1.2.2018.
However, IGST shall continue to be
leviable at the time of clearance of
goods from the warehouse for home
consumption.
Example : Lydo Limited imported
Chocolates and filed into bond
bill of entry for storage of chocolates
in customs bonded warehouse. While
the goods were still in warehouse,
Lydo Ltd sold such chocolates to
Mydo Ltd. Finally, Mydo Ltd filed ex-
bond bill of entry and cleared such
chocolates for home consumption. In
this situation, the sale transaction

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between Lydo Ltd and Mydo Ltd is
not treated as a supply thus not
liable to GST.
8(b) Supply of goods by the consignee to any other This entry has been inserted in
person, by endorsement of documents of title to Schedule III w.e.f 1.2.2018 to take
High Sea Sale transaction out of the
the goods, after the goods have been dispatched
purview of ‘supply’ as per Section 7
from the port of origin located outside India but CGST Act.
before clearance for home consumption.

Example: Loreal Ltd. Imported a

consignment of Lipsticks from Italy.
Before the clearance of such
consignment for home consumption,
Loreal Ltd sold the imported
Lipsticks to L Mart Ltd. by endorsing
the Bill of Lading. The sale
transaction between Loreal Ltd and L
Mart Ltd shall not be considered as
‘supply’, thus not chargeable to tax.

Illustration 1: A dealer sells a washing machine for Rs 30,000 to earn a profit. Does it qualify as a
supply.
Ans: Yes it qualifies as supply because as per Section 7(1)(a) of CGST Act, 2017, Supply includes all
forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental,
lease or disposal made or agreed to be made for a consideration by a person in the course or
furtherance of business. Hence, in the above case it will be treated as supply and liable to GST.
Illustration 2: Mr. Ram (an unregistered person) wants to do MBA abroad. He takes Education
consultancy services from a UK based consultant for Rs 10,000. Does it qualify as a supply?
Ans: Yes, it qualifies as supply, because as per Section 7(1)(b) of CGST Act, 2017, Supply includes
import of services for a consideration whether or not in the course or furtherance of business.
Hence, in the above case it will be treated as supply.

Illustration 3: ABC Ltd. a manufacturing company scraps old plant and machinery due to
renovation of manufacturing facility. The company has taken input tax credit on plant and
machinery so scrapped without consideration. Does it qualify as a supply?
Ans: As per Section 7(1)(c) read with Schedule I of CGST Act, 2017, Permanent transfer or disposal
of business assets where input tax credit has been availed shall be treated as supply even made

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without consideration. Hence scrapping of old plant and machinery without consideration shall
qualify as supply since input tax credit has been availed by XYZ &Co.
Illustration 4: Big Ltd. provides management technical services without consideration to Small
Ltd in which Big Ltd. has controlling rights. These technical services have been provided for
benefit of entire group. Does it qualify as a supply?
Ans: As per Section 7(1) (c) read with Schedule I of CGST Act, 2017, Supply of goods or services
between related persons is treated as supply even if it is without consideration. As per
Explanation to Section 15 of CGST Act, 2017, persons shall be deemed to be “related persons” if
“one of them directly or indirectly controls the other”. Since Big Ltd. has controlling rights of Small
Ltd., they will be treated as related person and the said transaction will qualify as supply.
Illustration 5: American Express Pvt. Ltd. makes gifts to an employee worth Rs 75,000 during
the year. Do such gifts qualify as a supply? Would your answer be different if gifts of Rs 45,000
have been given to employee?
Ans: As per Section 7(1) (c) read with Schedule I of CGST Act, 2017, supply of goods or services
between related persons is treated as supply even if it is without consideration. As per
Explanation to Section 15 of CGST Act, 2017, persons shall be deemed to be “related persons” if
such persons are employer and employee. Thus, gifts to employee worth Rs 75,000 will qualify
as supply and such supply would be leviable to GST.
If gifts of Rs 45,000 is given instead of Rs 75,000, the same will not qualify as supply since it has been
specifically provided that gifts not exceeding Rs 50,000 in value in a financial year by an employer
to an employee shall not be treated as supply of goods or services or both.
Illustration 6: Honda Motors Ltd. engages DD Motors as an agent to sell motorcycle on its behalf.
For the purpose, Honda Motors Ltd. has supplied 500 cars to the showroom of DD Motors located
in Punjab. Does it qualify as supply?
Ans: As per Section 7(1) (c) read with Schedule I of CGST Act, 2017, Supply of goods by a principal to
his agent where the agent undertakes to supply such goods on behalf of the principal shall be
treated as supply even if made without consideration. In view of the same Supply of motorcycles by
Honda Motors Ltd. to DD Motors will qualify as supply.
Illustration 7: Raheja Builders (a registered taxable person) receives architectural design supplied
by a foreign architect to design a residential complex to be built in Faridabad for a consideration of
Rs 1 crore. Does it qualify as supply?
Ans: As per Section 7(1) (b) of CGST Act, 2017, Importation of services for a consideration
whether or not in the course or furtherance of business is covered under supply. In the above case
it will be treated as supply and will be liable to GST.

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Illustration 8: State whether the following supplies would be treated as supply of goods or
supply of services as per Schedule II of the CGST Act:

(a) Renting of immovable property

(b) Goods forming part of business assets are transferred or disposed of by/under
directions of person carrying on the business, whether or not for consideration.
(c) Transfer of right in goods without transfer of title in goods.
(d) Transfer of title in goods under an agreement which stipulates that property shall
pass at a future date.
Ans: (a) Supply of services

(b) Supply of goods

(c) Supply of services
(d) Supply of goods

Illustration 9: Determine whether the following supplies amount to composite supplies:

(a) A hotel provides 4 days-3 nights package wherein the facility of breakfast and dinner
is provided alongwith the room accommodation.
(b) A toothpaste company has offered the scheme of free toothbrush alongwith the
toothpaste.
Ans: Under composite supply, two or more taxable supplies of goods or services or both, or
any combination thereof, are naturally bundled and supplied in conjunction with each other, in
the ordinary course of business, one of which is a principal supply [Section 2(30) of the CGST
Act]. In view of the same,

(a) since, supply of breakfast and dinner with the accommodation in the hotel are
naturally bundled, said supplies qualify as ‘composite supply’.
(b) since supply of toothbrush alongwith the toothpaste are not naturally bundled, said
supplies do not qualify as ‘composite supply’.

ADDITIONAL DISCUSSION ON AGENT AND PRINCIPAL RELATIONSHIP UNDER

SCHEDULE I

Principal – Agent [Para 3. of Schedule I]

In order to determine whether a particular principal- agent relationship falls within the ambit
of the Para 3. of Schedule I as discussed above or not, the deciding factor is whether the
invoice for the further supply of goods on behalf of the principal is being issued by the

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agent or not? In other words, the crucial point is whether or not the agent has the authority to
pass or receive the title of the goods on behalf of the principal.
 Where the invoice for further supply is being issued by the agent in his name then,
any provision of goods from the principal to the agent would fall within the fold of Para 3.
above.
 However, where the invoice is issued by the agent to the customer in the name of the
principal, such agent shall not fall within the ambit of Para 3. above.
 Similarly, where the goods being procured by the agent on behalf of the principal are
invoiced in the name of the agent then further provision of the said goods by the agent
to the principal would be covered by Para 3. above [Circular No. 57/31/2018 GST dated
04.09.2018].

The above clarification can be understood with the help of following scenario based
examples:

1) Anmol appoints Bholu to procure certain goods from the market. Bholu identifies various
suppliers who can provide the goods as desired by Anmol, and asks the supplier (Golu) to send
the goods and issue the invoice directly to Anmol.
In this scenario, Bholu is only acting as the procurement agent, and has in no way involved
himself in the supply or receipt of the goods. Hence, in accordance with the provisions of this
Act, Bholu is not an agent of Anmol for supply of goods in terms of Para 3. of Schedule I.

2) M/s Tintin, a banking company, appoints Mandaar (auctioneer) to auction certain goods. The
auctioneer arranges for the auction and identifies the potential bidders.
The highest bid is accepted and the goods are sold to the highest bidder by M/s Tintin. The
invoice for the supply of the goods is issued by M/s Tintin to the successful bidder.

In this scenario, the auctioneer is merely providing the auctioneering services with no role
played in the supply of the goods. Even in this scenario, Mandaar is not an agent of M/s Tintin
for the supply of goods in terms of Para 3. of Schedule I.

3) Gautam, an artist, appoints Gambhir (auctioneer) to auction his painting. Gambhir arranges for
the auction and identifies the potential bidders. The highest bid is accepted and the painting is
sold to the highest bidder.
The invoice for the supply of the painting is issued by Gambhir on the behalf of Gautam but in
his own name and the painting is delivered to the successful bidder.

In this scenario, Gambhir is not merely providing auctioneering services, but is also supplying
the painting on behalf of Gautam to the bidder, and has the authority to transfer the title of
the painting on behalf of Gautam. This scenario is covered under Para 3. of Schedule I.

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4) A C&F agent or commission agent takes possession of the goods from the principal and issues
the invoice in his own name. In such cases, the C&F commission agent is an agent of the
principal for the supply of goods in terms of Para 3. of Schedule I. The disclosure or non-
disclosure of the name of the principal is immaterial in such situations.

Deemed Supply

Principal supplies goods Agent

supplies goods on behalf of principal and

issues invoice to customer in his own name
Third person

Third Person Agent

Deemed Supply
Agent receives goods on
behalf of principal and supplies
receives invoice in his own goods to
name principal

Principal

CLARIFICATION ON SALES PROMOTION SCHEMES

SALE : A number of sales promotion schemes are commonly employed by the businesses to
increase sales volume or to encourage the use or trial of a product or service so that new
customers get attracted towards their products. For instance, certain sections of trade and
industry, such as, pharmaceutical companies often provide drug samples to their stockists,
dealers, medical practitioners, etc., or sometimes, companies announce offers like ‘Buy One, Get
One free’ - buy one soap and get one soap free or get one tooth brush free along with the
purchase of tooth paste.

As we have already seen that as per section 7(1)(a), the goods or services which are supplied
free of cost (without any consideration) shall not be treated as “supply” except in case of
activities mentioned in Schedule I of the CGST Act. In view of the same, few sales promotion
schemes have been examined as under:
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FREE SAMPLES AND GIFTS : Samples which are supplied free of cost, without any
consideration, do not qualify as “supply” under GST19, except where the activity falls within
the ambit of Schedule I of the CGST Act.

BUY ONE GET ONE FREE OFFER: It may appear at first glance that in case of offers like “Buy
One, Get One Free”, one item is being “supplied free of cost” without any consideration. In
fact, it is not an individual supply of free goods, but a case of two or more individual supplies
where a single price is being charged for the entire supply. It can at best be treated as supplying
two goods for the price of one.
Taxability of such supply will be dependent upon as to whether the supply is a composite supply
or a mixed supply and the rate of tax shall be determined accordingly – Concept of composite
and mixed supply has been discussed subsequently in this chapter.

[Circular 92/11/2019 GST dated 07.03.2019]

TAXABILITY OF COMPOSITE AND MIXED SUPPLIES {Section 8 of CGST Act}

 GST is payable on supply of goods/services at the rates notified by the government for the
respective goods/services. Determination of applicable rate of tax poses no problem if the
supply is of individual goods/individual services which are clearly identifiable.
 However, some of the supplies are a combination of goods/combination of
services/combination of both goods and services wherein each individual component of
such supplies may attract a different rate of tax.
 In such cases, determination of the applicable rate of tax to be levied on such supplies may
be a challenge. To address this problem, the GST law categorizes such supplies into
composite supplies and mixed supplies, thereby providing certainty in respect of tax
treatment under GST for such supplies.

PART 1: COMPOSITE SUPPLIES

MEANING OF 'COMPOSITE SUPPLY’ {Section 2(30) of CGST Act}:

A transaction of supply is said to be a 'composite supply' if all the following conditions are
fulfilled:

 Such transaction comprises of two or more taxable supplies of goods /services / both or any
combination thereof;
 Various supplies involved in the transaction are naturally bundled and supplied in conjunction
with each other in the ordinary course of business; and
 Out of all supplies, one of the supplies should be a principal supply.

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In other words, in a composite supply, goods or services or both are bundled owing to natural
necessities. The elements in a composite supply are dependent on the 'principal supply'.

MEANING OF PRINCIPAL SUPPLY {Section 2(90) of CGST Act}:

Principal supply refers to the predominant element of a composite supply for which other
supplies forming part of such composite supply play an ancillary role.

DETERMINATION OF TAX LIABILITY OF COMPOSITE SUPPLIES: A composite supply

comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply
of such principal supply.

Example: Suvarna Manufacturers entered into a contract with XYZ Ltd for supply of readymade
shirts packed in designer boxes at XYZ Ltd.’s outlet. Further, Suvarna Manufacturers would also get
them insured during transit. In this case, supply of goods, packing materials, transport & insurance
is a composite supply wherein supply of goods is principal supply.

Example: When a consumer buys a television set and he also gets warranty and a maintenance
contract with the TV, this supply is a composite supply. In this example, supply of television is the
principal supply whereas warranty and maintenance services are ancillary.

Example: A travel ticket from Mumbai to Delhi may include services of food being served on
board, free insurance and use of airport lounge. In this case, transport of passengers constitutes
the pre-dominant element of composite supply and is treated as the principal supply and all other
supplies are ancillary.

GUIDELINES TO ASCERTAIN WHETHER SUPPLIES ARE NATURALLY BUNDLED IN THE

ORDINARY COURSE OF BUSINESS:

Determination of the fact whether supplies of individual goods/services are bundled in the
ordinary course of business or not would depend upon the normal or frequent practices followed
in the area of business to which such supplies relate. Such normal and frequent practices adopted
in a business can be ascertained from several indicators some of which are listed below:

PERCEPTION OF CONSUMERS/RECIPIENTS OF SUPPLY:

If large number of recipients of such bundle of supplies reasonably expects such services to be
provided as a package, then such a package could be treated as naturally bundled in the ordinary
course of business.

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PERCEPTION OF SUPPLIERS:

Where a majority of suppliers in a particular area of business provide similar bundle of supplies,
such supplies are to be treated as naturally bundled in the ordinary course of business.

Example: Catering on board during the course of transportation of passengers by air is a bundle
offered by a majority of airlines.

NATURE OF SUPPLIES:

Nature of individual supplies in a bundle of supplies also helps in determining whether supplies
are bundled in the ordinary course of business or not. If the nature of supplies is such that one of
the supplies is the main supply and the other supplies combined with such supply are in the
nature of incidental or ancillary supplies which help in better enjoyment of the main supply, the
entire bundle of supplies shall be regarded as naturally bundled in the ordinary course of
business.

Example: Services of stay in hotels is often combined with a service or laundering of 3-4 items of
clothing free of cost per day. Such service is an ancillary service to the provision of main service of
hotel accommodation and the resultant package would be treated as services naturally bundled in
the ordinary course of business.

OTHER ILLUSTRATIVE INDICATORS:

Other illustrative indicators, not determinative but indicative of bundling of services in the
ordinary course of business, are:

 There is a single price or the customer pays the same amount, no matter how much package
they actually receive or use;
 The elements are normally advertised as a package;
 The different elements are not available separately;
 The different elements are integral to one overall supply. If one or more is removed, the nature
of the supply would be affected, etc.

CONCLUSION:

A thumb rule cannot be laid down to determine whether a service is naturally bundled in the
ordinary course of business or not. Each case has to be individually examined in the backdrop of
several factors some of which are outlined above. The above principles can be adopted to
determine whether a particular supply constitutes a composite supply under G5T and if so what
constitutes the principal supply so as to determine the right classification and rate of tax of such
composite supply.

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PART 2: MIXED SUPPLIES

MEANING OF 'MIXED SUPPLY' {Section 2 (74) of CGST Act}:

 A transaction involving two or more individual supplies of goods/ services/both or any
combination thereof, made in conjunction with each other for a single price is said to be a
'mixed supply' if the individual supplies are independent of each other and are not naturally
bundled.
 In other words, where a transaction consists of supplies which are not naturally bundled in the
ordinary course of business. then such transaction does not qualify as a 'composite supply' and
should therefore be regarded as a 'mixed supply'.

DETERMINATION OF TAX LIABILITY OF MIXED SUPPLIES:

A mixed supply comprising of two or more supplies shall be treated as supply of that particular
supply which attracts highest rate of tax.

Example: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits,
aerated drinks and fruit juices when supplied for a single price is a mixed supply if the package
has been customized on the basis of customer's preferences. Since each of these items can be
supplied separately and its supply is not dependent on any other, the supply of the entire package
shall be regarded as a mixed supply.

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COMPOSITION SCHEME
COMPOSITION SCHEME
Section 10 of the CGST Act, 2017 contains the provisions regarding composition levy. The objective
of the scheme is to bring about simplicity and to reduce compliance cost for the small taxpayers.
Small tax payers, who have an annual turnover of less than Rs. 1.5 crore (applicable from 1st April
2019 onwards) in the preceding Financial Year (FY) are eligible to opt for this scheme i.e.,
Composition Levy.
For the states namely (i) Arunachal Pradesh (ii) Manipur, (iii) Meghalaya, (iv) Mizoram, (v)
Nagaland, (vi) Sikkim, (vii) Tripura, (viii) Uttarakhand aggregate turnover limit shall be Rs. 75 lakh.
The aggregate turnover would include value of all outward supplies i.e.:
i) Taxable supplies
ii) Exempt supplies
iii) Zero-rated supplies (i.e. Exports)
iv) Inter-state supplies
of persons having the same PAN be computed on all India basis but excludes
1. CGST/SGST/UTGST/IGST/Cess,
2. Value of inward supplies on which tax is payable under reverse charge
The Reverse Charge Mechanism supplies are not included here, as these would be added to the
turnover of the unregistered supplier.
Conditions & Restrictions
1) The supplier who opts for Composition Levy cannot raise tax invoice
2) Therefore, they need not collect any tax on supply
3) Hence, the recipient of such supplies can’t claim any Input Tax Credit (ITC) on supplies from such
suppliers who have opted for Composition Levy
4) Similarly, even they themselves cannot claim any ITC on the inward taxable supplies
5) A person opting for the scheme shall mention on the invoices issued that he has opted for such
scheme
6) He shall also mention “composition taxable person” on every notice board displayed at the place
of business
7) The following cannot opt for composition levy:
a. Supplier of services save as provided in section 10(1)

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b. Supplier of goods which are not leviable to tax
c. Supplier of Inter-state outward supplies of goods[There is no restriction on composition supplier
to receive inter-State inward supplies of goods as also to make inter-State inward and outward
supply of services]
d. Person supplying goods through an electronic commerce operator who is required to collect tax
at source under section 52
e. Manufacturers of ice-cream, pan masala and tobacco
f. casual taxable person and non-resident taxable person

Rates
The tax rate prescribed for different categories of registered persons under the scheme is as follows:
S. REGISTERED PERSON CGST RATE SGST RATE TOTAL
NO. TAX
RATE
1. Manufacturers (other than 0.5% of the 0.5% of the 1%
manufacturers of goods as may be turnover in turnover in
notified by the Government i.e. ice the State / the
cream, pan masala and tabacco)
union State/union
territory territory
2. Restaurant Services i.e., suppliers of 2.5% of the 2.5% of the 5%
food/ drink for human consumption turnover in turnover in
(other than alcoholic liquour for human the the
consumption) State/union State/union
territory territory
3. traders or any other supplier eligible 0.5% of the 0.5% of the 1%
for composition levy turnover of turnover of
TAXABLE TAXABLE
supplies of supplies of
goods and goods and
services in the services in the
State or union State or union
territory territory

Turnover in case of traders has been defined as ‘Turnover of taxable supplies of goods and services’.
Thus, for traders, exempted supplies would not be added in the turnover for the purpose of levy of
1% Composition levy.

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Benefit for marginal supply of services along with the supply of goods or restaurant services.
Fundamentally, the composition scheme can be availed in respect of goods and only one service
namely, restaurant service. However, there are cases where a manufacturer/ trader is also engaged
in supply of services other than restaurant service though the percentage of such supply of services
is very small as compared to the supplies of goods. There may also be cases where a restaurant
service provider is also engaged in supplying a small percentage of other services.
With a view to enable such taxpayers to avail of the benefit of composition scheme, second proviso
to section 10(1) permits marginal supply of services [other than restaurant services] for a specified
value along with the supply of goods and/or restaurant service, as the case may be. This specified
value is the value not exceeding:
(a) 10% of the turnover in a State/Union territory in the preceding financial year
Or
(b) Rs. 5 Lacs whichever is higher.
For example: Mr. Ram is engaged in supply of goods. His aggregate turnover in preceding FY is Rs.
80 lakh. Since his aggregate turnover in the preceding FY does not exceed Rs. 1.5 crore, he is eligible
for composition scheme in current FY. Further, in current FY, he can supply services [other than
restaurant services] upto a value not exceeding:
(a) 10% of Rs. 80 Lacs i.e. Rs. 8 Lacs
Or
(b) Rs. 5 Lacs
whichever is higher. Thus, he can supply services upto a value of Rs. 8 lakh in current FY. If the
value of services supplied exceeds Rs. 8 lakh, he becomes ineligible for the composition scheme and
has to opt out of the composition scheme
New scheme of composition: Section 10(2A)
As we have already seen that primarily, the composition scheme is available in respect of goods and
only one service namely, restaurant service. Further with the supply of goods and/or restaurant
service. However, a person engaged exclusively in supply of services other than restaurant service
is not eligible for the composition scheme.
In order to provide benefit to such suppliers, a scheme to pay tax at the concessional rate has been
formulated primarily for small service providers like salon stylist, tailors etc. who are not otherwise
eligible for composition scheme.
Sec 10(2A) : Composition scheme for service providers
Notwithstanding anything to the contrary contained in this Act, but subject to the provisions of sub-
sections (3) and (4) of section 9, a registered person, not eligible to opt to pay tax under sub-section
(1) and sub-section (2), whose aggregate turnover in the preceding financial year did not exceed

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fifty lakh rupees, may opt to pay, in lieu of the tax payable by him under sub-section (1) of section
9, an amount of tax calculated at such rate as may beprescribed, but not exceeding three per cent.
of the turnover in State or turnover in Union territory, if he is not—
(a) engaged in making any supply of goods or services which are not leviable to tax under this Act;
Under composition scheme, restriction is only on supply of goods not leviable to tax;
(b) engaged in making any inter-State outward supplies of goods or services; Under composition
scheme the restriction is only on making inter-State outward supply of goods and not on inter-State
outward supply of services;
(c) engaged in making any supply of goods or services through an electronic commerce operator
who is required to collect tax at source under section 52;
(d) a manufacturer of such goods or supplier of such services as may be notified by the Government
on the recommendations of the Council; and
(e) a casual taxable person or a non-resident taxable person:
Provided that where more than one registered person are having the same Permanent Account
Number issued under the Income-tax Act, 1961 , the registered person shall not be eligible to opt
for the scheme under this sub-section unless all such registered persons opt to pay tax under this
sub-section.”;
In computing aggregate turnover in order to determine eligibility of a registered person to pay tax
under any of the composition schemes , the expression “aggregate turnover” shall include the value
of supplies made by such person from the 1st day of April of a financial year up to the date when he
becomes liable for registration under this Act, but shall not include the value of exempt supply of
services provided by way of extending deposits, loans or advances in so far as the consideration is
represented by way of interest or discount.
For the purposes of determining the tax payable by a person under this section, the expression
“turnover in State or turnover in Union territory” shall not include the value of following supplies,
namely supplies from the first day of April of a financial year up to the date when such person
becomes liable for registration under this Act; and exempt supply of services provided by way of
extending deposits, loans or advances in so far as the consideration is represented by way of interest
or discount.’
The GST under Composition Scheme is not collected from the recipients / customers; this is simply
a facility for hassle free compliance under GST. The composition levy if opted is applicable under
one PAN, and then it is applicable for all businesses under that PAN, or none. This implies, that it is
not allowed for some businesses under normal levy and some under composition levy.
Once the turnover breaches the threshold, the composition levy is switched off and the normal levy
is applicable.
Illustration 1

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P, a trader who has a revenue of INR 50,00,000 inclusive of GST @ 5% has purchases amounting to
INR 40,00,000 (GST @ 5% extra). Book-keeping and GST compliance costs are INR 250,000 and
other administrative costs are INR 50,000. He now wants to swITCh to Composition Levy. You are
requested to advise in your capacity as a GST consultant.

Normal Levy Composition Levy

revenue 50,00,000 revenue 50,00,000
less: GST 2,38,095 less: GST Nil
Net revenue 47,61,905 Net revenue 50,00,000
less: Purchases 40,00,000 less : Purchases 42,00,000
Book Keeping 2,50,000 Book Keeping 1,00,000
Other Costs 50,000 Other Costs 50,000
GST liability 50,000

Profit 4,61,905 Profit 6,00,000

Payable 2,38,095 GST Liability 50,000
ITC 2,00,000 (1% of Turnover)
GST Liability 38,095
Cash Flow 4,23,810 Cash Flow 6,00,000

Notes:
1. GST liability wouldn’t exist if he opts for composition levy and the trader can now charge the full
amount which he was charging inclusive of GST earlier
2. For normal levy, the GST included in sales is 50,00,000 * 5 / 105
3. The ITC is available in case of normal levy and not composition levy
4. Hence, the taxes (input) are a part of purchase costs and the output is @ 1% of the turnover in
case of Composition Levy
Since the book keeping costs are substantially lower in case of composition levy, the profits and
cash flows are higher and hence the trader should be advised to switch to Composition Levy.

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Composition Rules [Chapter II, CGST Rules, 2017]
Chapter II of Central Goods & Services Tax Rules, 2017 specify Composition Rules which lay down
the conditions and restrictions of composition levy. The person exercising the option to pay tax
under section 10 shall comply with the following conditions, namely :

Intimation for composition levy [Rule 3]

(1) Any person who has been granted registration on a provisional basis under clause (b) of sub-
rule (1) of rule 24 and who opts to pay tax under section 10, shall electronically file an intimation
in FORM GST CMP-01, duly signed or verified through electronic verification code, on the common
portal, either directly or through a Facilitation Centre notified by the Commissioner, prior to the
appointed day, but not later than thirty days after the said day, or such further period as may be
extended by the Commissioner in this behalf:

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Provided that where the intimation in FORM GST CMP-01 is filed after the appointed day, the
registered person shall not collect any tax from the appointed day but shall issue bill of supply for
supplies made after the said day.
(2) Any person who applies for registration under sub-rule (1) of rule 8 may give an option to pay
tax under section 10 in Part B of FORM GST REG-01, which shall be considered as an intimation to
pay tax under the said section.
(3) Any registered person who opts to pay tax under section 10 shall electronically file an intimation
in FORM GST CMP-02, duly signed or verified through electronic verification code, on the common
portal, either directlyor through a Facilitation Centre notified by the Commissioner, prior to the
commencement of the financial year for which the option to pay tax under the aforesaid section is
exercised and shall furnish the statement in FORM GST ITC-03 in accordance with the provisions
of sub-rule (4) of rule 44 within a period of (60) sixty days from the commencement of the relevant
financial year.
(3A) Notwithstanding anything contained in sub-rules (1), (2) and (3), a person who has been
granted registration on a provisional basis under rule 24 or who has been granted certificate of
registration under sub-rule (1) of rule 10 may opt to pay tax under section 10 with effect from the
first day of the month immediately succeeding the month in which he files an intimation in FORM
GST CMP-02, on the common portal either directly or through a Facilitation Centre notified by the
Commissioner, on or before the 31st day of March, 2018, and shall furnish the statement in FORM
GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of one
hundred and eighty days from the day on which such person commences to pay tax under section
10:
Provided that the said persons shall not be allowed to furnish the declaration in FORM GST TRAN-
1 after the statement in FORM GST ITC-03 has been furnished.
(4) Any person who files an intimation under sub-rule (1) to pay tax under section 10 shall furnish
the details of stock, including the inward supply of goods received from unregistered persons, held
by him on the day preceding the date from which he opts to pay tax under the said section,
electronically, in FORM GST CMP03, on the common portal, either directly or through a Facilitation
Centre notified by the Commissioner, within a period of 180 days from the date on which the option
for composition levy is exercised or within such further period as may be extended by the
Commissioner in this behalf.
(5) Any intimation under sub-rule (1) or sub-rule (3) or sub-rule (3A) in respect of any place of
business in any State or Union territory shall be deemed to be an intimation in respect of all other
places of business registered on the same Permanent Account Number.
Effective date for composition levy [Rule 4]
(1) The option to pay tax under section 10 shall be effective from the beginning of the financial year,
where the intimation is filed under sub-rule (3) of rule 3 and the appointed day where the
intimation is filed under sub-rule (1) of the said rule.

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(2) The intimation under sub-rule (2) of rule 3, shall be considered only after the grant of
registration to the applicant and his option to pay tax under section 10 shall be effective from the
date fixed under sub-rule (2) or
(3) of rule 10.
Validity of composition levy [Rule 6]
(1)The option exercised by a registered person to pay tax under section 10 shall remain valid so
long as he satisfies all the conditions mentioned in the said section and under these rules.
(2) The person referred to in sub-rule (1) shall be liable to pay tax under sub-section (1) of section
9 from the day he ceases to satisfy any of the conditions mentioned in section 10 or the provisions
of this Chapter and shall issue tax invoice for every taxable supply made thereafter and he shall also
file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of the
occurrence of such event.
(3) The registered person who intends to withdraw from the composition scheme shall, before the
date of such withdrawal, file an application in FORM GST CMP04, duly signed or verified through
electronic verification code, electronically on the common portal.
(4) Where the proper officer has reasons to believe that the registered person was not eligible to
pay tax under section 10 or has contravened the provisions of the Act or provisions of this Chapter,
he may issue a notice to such person in FORM GST CMP-05 to show cause within fifteen days of the
receipt of such notice as to why the option to pay tax under section 10 shall not be denied.
(5) Upon receipt of the reply to the show cause notice issued under sub-rule (4) from the registered
person in FORM GST CMP-06, the proper officer shall issue an order in FORM GST CMP-07within a
period of thirty days of the receipt of such reply, either accepting the reply, or denying the option to
pay tax under section 10 from the date of the option or from the date of the event concerning such
contravention, as the case may be.
(6) Every person who has furnished an intimation under sub-rule (2) or filed an application for
withdrawal under sub-rule (3) or a person in respect of whom an order of withdrawal of option has
been passed in FORM GST CMP-07 under subrule (5), may electronically furnish at the common
portal, either directly or through a Facilitation Centre notified by the Commissioner, a statement in
FORM GST ITC01 containing details of the stock of inputs and inputs contained in semi-finished or
finished goods held in stock by him on the date on which the option is withdrawn or denied, within
a period of thirty days from the date from which the option is withdrawn or from the date of the
order passed in FORM GST CMP-07, as the case may be.
(7) Any intimation or application for withdrawal under sub-rule (2) or (3) or denial of the option to
pay tax under section 10 in accordance with sub-rule (5) in respect of any place of business in any
State or Union territory, shall be deemed to be an intimation in respect of all other places of business
registered on the same Permanent Account Number.

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List of Forms related to Composition Scheme
Chapter II of Central Goods & Services Tax Rules, 2017 specify Composition Rules which lay down
the forms to be submitted by a person opting to be a Composition Dealer under Section 10 of the
Act. The following is the list of forms specified in relation to a Composition Dealer.

S. No. Form No. Description Due date

1. GST CMP-01 intimation to pay tax under Prior to appointed date or
section 10 (Only for persons within 30 days of the appointed
registered under the existing law date or such further period as
migrating on the appointed day) may be extended by the
Commissioner in this behalf.
2. GST CMP-02 intimation to pay tax under Prior to commencement of
section 10 (For persons registered financial year for which the
scheme is opted for
under the act)
3. GST CMP-03 intimation of details of stock and Within 90 days of exercise of
inward supplies from option
unregistered person
4. GST CMP-04 intimation/application for Within 7days of occurrence of
withdrawal from composition event
scheme
5. GST CMP-05 Show cause notice on On contravention
contravention of rules or act by
proper officer
6. GST CMP-06 reply to the notice to show cause Within 15 days from service of
such Notice
7. GST CMP-07 Order for acceptance / rejection of Within 30 days
reply to show cause notice

Liability to pay GST

The liability to pay GST would depend on the mechanism the transaction aligns to, as under:
a) Forward Charge Mechanism
Forward charge or direct charge is the mechanism where the supplier of goods/services is liable to
pay tax. For instance, if a Company Secretary provided a service to his client, the service tax will be
payable by the Company Secretary. Here the supplier is registered under GST, he issues a tax
invoice, collects the GST and pays it to the Government.
b) Reverse Charge Mechanism
Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like
imports and other notified supplies, the liability may be cast on the recipient under the reverse
charge mechanism. Reverse Charge means the liability to pay tax is on the recipient of supply of
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goods or services instead of the supplier of such goods or services in respect of notified categories
of supply. Here the supplier is not registered under GST, hence, he cannot issue a tax invoice, and
therefore the recipient pays the GST on the supply on behalf of the supplier, directly to the
Government.
It must be noted although, that Input Tax Credit can be availed in both the above scenarios, subject
to the fulfilment of conditions for availing Input Tax Credit.
In case of E-commerce, the E-commerce operators, who are mandatorily required to register with
GST, collect tax at source at a specified percentage and pay the same to the Government.

EXEMPTIONS UNDER GOODS & SERVICES TAX

Governments offer exemptions which are based on goods and services consumed by low income
people, people living in disadvantaged regions and so on. Central Government has the power to
grant exemption on goods and / or services in the public interest generally or by special order.
General exemption is granted by notification and is available to all persons. It may be absolute or
conditional. Such exemption may be total or partial.
Specific, also known as ad hoc exemption is granted to persons under circumstances of an
exceptional nature by a special order communicated to the party seeking exemption. Example:
charitable, educational, scientific, research, defence purpose etc.
Central Government also has the power to interpret by an explanation the provisions of the
notification or order at a later date but within one year which has retrospective effect.

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Power to grant exemption from tax [Section 11 of CGST Act, 2017]

(1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on
the recommendations of the Council, by notification, exempt generally, either absolutely or subject
to such conditions as may be specified therein, goods or services or both of any specified description
from the whole or any part of the tax leviable thereon with effect from such date as may be specified
in such notification.
(2) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on
the recommendations of the Council, by special order in each case, under circumstances of an
exceptional nature to be stated in such order, exempt from payment of tax any goods or services or
both on which tax is leviable.
(3) The Government may, if it considers necessary or expedient so to do for the purpose of clarifying
the scope or applicability of any notification issued under sub-section (1) or order issued under sub-
section (2), insert an explanation in such notification or order, as the case may be, by notification at
any time within one year of issue of the notification under sub-section (1) or order under sub-
section (2), and every such explanation shall have effect as if it had always been the part of the first
such notification or order, as the case may be.
Explanation. – For the purposes of this section, where an exemption in respect of any goods or
services or both from the whole or part of the tax leviable thereon has been granted absolutely, the
registered person supplying such goods or services or both shall not collect the tax, in excess of the
effective rate, on such supply of goods or services or both.
Distinctions between General Exemption and Specific (Special Order) Exemption

GENERAL EXEMPTION SECTION 11(1) EXEMPTION BY SPECIAL ORDER SECTION

11(2)
This is granted by a notification this is granted by a special order
This is goods/ services specific. Any supplier This is person specific and purpose specific.
supplying these notified goods or services can The goods are generally chargeable but
exempted in special circumstances and hence
enjoy the exemption
not available to all persons generally
it may be absolute or conditional. if absolute, No such distinction
the supplier has to avail it and he can collect
tax only at effective rates.
it may be partial or total it is always total

Both the exemptions are granted in the public interest and both can be explained within one year
of issue by the government. All the exemptions are based on the recommendations of the GST
Council.

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Section 6 of the IGST Act, 2017 also contains similar provisions and exemption of IGST is granted
on interstate supply.

Exemptions under GST

Exempt supply has been defined as supply of any goods / services / both, which attract a NIL rate
of tax, or which may be wholly exempt from tax, and therefore includes non-taxable supplies.
Essential goods / services, have been exempted, some of the key ones are:
a) Unbranded atta / besan / maida
b) Milk
c) Eggs
d) Curd
e) Fresh vegetables
f) Health care &
g) Education
h) Services by the Government (except Post Office, transport of goods / passengers etc.)
i) Services by RBI
j) Services by ESIC / EPFO
k) Services by IRDA, SEBI

Difference between Nil Rated, Exempt, Zero Rated and Non-GST supplies

Supply Name Description

Zero rated exports
Supplies made to SEZ or SEZ developers.
Nil rated Supplies that have a declared rate of 0% GST.
example: Salt, grains, jaggery etc.
exempt Supplies are taxable but do not attract GST and for which ITC cannot
be claimed.
Example: Fresh milk, Fresh fruits, Curd, Bread etc.

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Non-GST These supplies do not come under the purview of GST law.
Example: alcohol for human consumption, Petrol etc.

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TIME OF SUPPLY

TIME OF SUPPLY WHERE TAX IS PAYABLE UNDER FORWARD CHARGE

TIME OF SUPPLY OF GOODS [SECTION TIME OF SUPPLY OF SERVICES [SECTION
12(2)] 13(2)]

Earliest of the following: (a) Invoice issued within the time period
(a) Date of issue of invoice by the supplier or prescribed under section 31
the last date on which he is required Earliest of thefollowing:
under section 31, to issue the invoice with
respect to the supply  Date of issue of invoice by the supplier
 Date of receipt of payment (entering the payment
(b) Date on which the supplier receives the
in books of account or crediting of payment in
payment (entering the payment in books of
bank account, whichever is earlier)
account or crediting of payment in bank
account, whichever is earlier) with respect to the (b) Invoice not issued within the time
supply period prescribed under section 31
No GST on advances received for supply of Earliest of thefollowing:
goods: In case of supply of goods by a registered  Date of provision of service
person (excluding composition supplier), GST is to be paid  Date of receipt of payment (entering the payment
on the outward supply of goods on the date of issue of in books of account or crediting of payment in
invoice or the last date on which invoice ought to have bank account, whichever is earlier)
been issued in terms of section 31 [Notification
No. 66/2017 CT dated 15.11.2017]. (C)When the above events are
unascertainable
 date on which the receipient shows the
receipt of services in his books of
accounts

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GENERAL TIME LIMIT FOR RAISING INVOICES
Supply of goods [Section 31(1)] Supply of services [Section 31(2)]

Before or at the time of,- Before or after the provision of

(a) removal of goods for supply to the service
recipient, where the supply but within 30 days [45 days in case of
involves movement of goods,or insurance companies/banking and
financial institutions including NBFCs]
(b) delivery of goods or making
available thereof to the from the date of supply of services
recipient, in any othercase

TIME OF SUPPLY WHERE TAX IS PAYABLE UNDER REVERSE CHARGE

Time of supply of goods [Section Time of supply of services

12(3)] [Section 13(3)]

Earliest of the following: Earliest of the following:

(a) Date of receipt of goods, or (a) Date of payment as entered in the
(b) Date of payment as entered in the books of account of the recipient or
books of account of the recipient or the date on which the payment is
the date on which the payment is debited from his bank account,
debited from his bank account, whichever is earlier, or
whicheveris earlier, or (b) 61st day from the date of issue of
(c) 31st day from the date of issue invoice by the supplier
of invoice by the supplier

Where the above events are not ascertainable, the time of supply shall be
the dateof entry in the booksof account of the recipient of supply

- Import of service from associated

enterprise Date of entry in the
books of account of the recipient or
the date of payment, whichever is
earlier

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TIME OF SUPPLY OF VOUCHERS EXCHANGEABLE FOR GOODS AND SERVICES
Supply of vouchers exchangeable for goods and services [Sections 12(4) and 13(4)]

(a) Supply of goods or services is identifiable at the time of issue of voucher

Date of issue of the voucher
(b) Other cases
Date of redemption of the voucher

TIME OF SUPPLY OF GOODS AND SERVICES IN RESIDUAL CASES

Supply of goods and services in residual cases [Sections 12(5) and 13(5)]

(a) Where a periodical return is required to be filed

Due date of filing such return
(b) Other cases
Date of payment of tax

TIME OF SUPPLY FOR ADDITION IN VALUE BY WAY OF INTEREST/ LATE

FEE/PENALTY FOR DELAYED PAYMENT OF CONSIDERATION

Time of Supply: Date on which the supplier receives such addition in

value

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The provisions relating to time of supply of goods as contained in section 12

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provisions relating to time of supply of services as contained in section 13 are summarised
in the diagram given below

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Time of Supply in case of change in rate of tax [Section 14 of CGST Act, 2017]

Section 14 of the CGST Act, 2017 defines the time of supply, where there is a change in the
rate of tax in respect of goods or services or both.

Section 14(a): In case the goods or services or both have been supplied before the change in rate
of tax, the time of supply can be determined as follows:
1) where the invoice for the same has been issued and the payment is also received after the
change in rate of tax, the time of supply shall be the date of receipt of payment or the date of
issue of invoice, whichever is earlier; or
2) where the invoice has been issued prior to the change in rate of tax but payment is received
after the change in rate of tax, the time of supply shall be the date of issue of invoice; or
3) where the payment has been received before the change in rate of tax, but the invoice for the
same is issued after the change in rate of tax, the time of supply shall be the date of receipt of
payment.
Section 14(b): In case the goods or services or both have been supplied after the change in rate of
tax, the time of supply can be determined as follows:

1) where the payment is received after the change in rate of tax but the invoice has been issued
prior to the change in rate of tax, the time of supply shall be the date of receipt of payment;
or
2) where the invoice has been issued and payment is received before the change in rate of tax,
the time of supply shall be the date of receipt of payment or date of issue of invoice,
whichever is earlier; or
3) where the invoice has been issued after the change in rate of tax but the payment is received
before the change in rate of tax, the time of supply shall be the date of issue of invoice:
Provided that the date of receipt of payment shall be the date of credit in the bank account if
such credit in the bank account is after four working days from the date of change in the rate of
tax.
ILLUSTRATION Supply was made on 10th May, 2018. From the following particulars, find out the
rate of GST applicable.
Event Date of event Rate applicable
Change of rate 31st May, 2018 Rate changed from 18% to
Issue of Invoice 5th June, 2018 12%
12%
Payment received 6th July, 2018 12%
Applicable rate is 12%. i.e. which is applicable on earlier of the two events, date of invoice and
date of receipt of payment which in this case would be 5th June, 2018.

Illustration
Supply was made on 10th May, 2018. From the following particulars, find out the rate of GST
applicable.
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Answer: Applicable rate is 18%. i.e. date of invoice i.e. 5th June, 2018 because it is earlier than the
date of receipt of payment.
Event Date of event Rate applicable
Change of rate 30th June, 2018 Rate changed from 18% to
Issue of Invoice 5th June, 2018 12%
18%
Payment received 6th July, 2018 12%
Note: When supply is made before change in rate, the principle of ‘whichever is earlier’ is
followed. Similarly, where supply is made after the change in rate, ‘whichever is later’ principle is
followed

FORWARD CHARGE MECHANISM

Illustration
ABC Ltd. supplied goods to XYZ Ltd., under a contract for the goods to be delivered to the factory
of XYZ Ltd *Date of payment not to be considered – notification no. 66/2017 CT DATED
15.11.2017

The goods were removed from the factory of ABC Ltd. on 9th September, 2018 and the goods
were delivered to the factory of XYZ on 15th September, 2018.
The invoice was issued on 18th September, 2018 and the payment was credited to ABC’s a/c on
20th October, 2018 although the entry in the books was made on 19th September, 2018 when
the cheque was received.
Please advise on the time of supply.
In the above case, the dates are as under:
 Date of issue of invoice: 18th September, 2018
 Due date for issue of invoice: 9th September, 2018 (as the supply involved movement of
goods)
 Date of receipt of payment: 19th September, 2018 (earlier of the entry in the books and the
credit in the bank a/c) [Date of payment not to be considered - Notification No. 66/2017 - CT
dated 15.11.2017]
Hence, the time of supply will be the earliest of the above dates, i.e., 9th September, 2018.
Illustration
A supplier delivers consignments of bricks on a continuous supply basis to various contractors.
With respect to one of the supplies, the following details are available:

Invoice Date Statement of Account Receipt of Payment Time of Supply

(Due Date) Date
1st November 5th November 1st November 1st November
11th December 5th December 11th December 5th December
1st January 5th January 1st January 1st January

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Illustration
X Ltd. receives payment of INR 100,000 in advance while the invoice was issued for INR 99,000.
Advise the treatment on the excess payment.
In this case, the INR 1000/- for which the invoice would be subsequently issued, the time of supply
can be taken to be the date of the issue of the next invoice, for this amount, even though the
payment was received earlier.

Reverse Charge Mechanism

Illustration
Mr.A, an agriculturist supplies raw cotton (under reverse charge) to Mr. B who manufactures
cotton shirts.
The date wise turnout of events is given below:
01.04.2019- Mr.B approaches Mr.A and places an order for 1 ton of cotton
10.05.2019- Mr.B receives the goods
15.05.2019- Mr.A issues an invoice
20.05.2019- Mr.B makes a payment by cheque and accordingly records it in his books of accounts.
25.05.2019- The payment gets debited from Mr.B’ s bank account
In this case, the time of supply shall be the earlier of the following dates:
a. the date of receipt of goods i.e. 10.05.2019
b. the date of payment as recorded in the books of Mr. B i.e. 20.05.2019 or the date when the
payment gets debited in the books of the recipient i.e. 25.05.2019 whichever is earlier c. the
date immediately following thirty days from the date of issue of invoice, i.e.
15.05.2019+30days+1day=15.06.2019
Therefore, the time of supply will be 10.05.2019.

Vouchers
Illustration
ABC Ltd., enters in to an arrangement with “Hush Puppies”, buys the vouchers, these vouchers
were issued on 14th December, 2018. The Company then distributes these vouchers with
denomination INR 4,000/- to all its employees on 24th December, 2018 valid until 31st January,
2019, so that they can use these vouchers for buying shoes of their choice. The employees make
the most of it and redeem these vouchers on the New Year’s, i.e., on 1st January, 2019.
In this case, the supply is identifiable at the point of issue of the voucher and hence the time of
supply would be construed as 14th December, 2018.

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Illustration
Nisha buys a voucher from Shoppers Stop for INR 10,000 and gifts it to Tarun on 14th February.
The voucher was valid until 29th February. Tarun redeems the vouchers at the nearby Shoppers
Stop store on 29th February.
In this case, the supply was not identifiable at the point of issue of the voucher as Tarun was open
to purchase anything from Shoppers’ Stop, therefore the time of supply would be construed as the
date of redemption of the voucher, that is 29th February.
All other instances
In all other instances, the time of supply as per Section 12(5) is fixed as under:
a) Due-date for filing periodic returns or
b) In other cases, the date of payment of GST

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Q1. Determine the time of supply in the following cases assuming that GST is payable under
reverse charge:

S. Date of payment by the recipient for Date of issue of invoice by

No. supply of services the supplier of services
(1) (2)
(i) August 10 June 29
(ii) August 10 June 1
(iii) Part payment made on June 30 and June 29
balance amount paid on September 1
(iv) Payment is entered in the books of June 1
account on June 28 and debited in
recipient’s bank account on June 30
(v) Payment is entered in the books of June 29
account on June 30 and debited in
recipient’s bank account on June 26

Q2. An order is placed on Ram & Co. on 18th August for supply of a consignment of customized
shoes. Ram & Co. gets the consignment ready and informs the customer and issues the invoice on
2nd December. The customer collects the consignment from the premises of Ram & Co. on 7th
December and electronically transfers the payment on the same date, which is entered in the
accounts on the next day, 8th December.
What is the time of supply of the shoes for the purpose of payment of tax?

ANSWERS:
(1) DO YOURSELF.
(2) As per Notification No. 66/2017 CT dated 15.11.2017, a registered person (excluding
composition supplier) has to pay GST on the outward supply of goods at the time of supply as specified in section
12(2)(a), i.e. date of issue of invoice or the last date on which invoice ought to have been issued in terms of
section 31.
In this case, the invoice is issued before the removal of the goods and is thus, within the time limit prescribed under
section 31(1). Therefore, the time of supply for the purpose of payment of tax is the date of issue of invoice, which is
2nd December.

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Time of Supply in case of change in rate of tax [Section 14 of CGST Act, 2017]
Section 14 of the CGST Act, 2017 defines the time of supply, where there is a change in the rate of
tax in respect of goods or services or both.
Section 14(a): In case the goods or services or both have been supplied before the change in rate
of tax, the time of supply can be determined as follows:
1) where the invoice for the same has been issued and the payment is also received after the change
in rate of tax, the time of supply shall be the date of receipt of payment or the date of issue of invoice,
whichever is earlier; or
2) where the invoice has been issued prior to the change in rate of tax but payment is received after
the change in rate of tax, the time of supply shall be the date of issue of invoice; or
3) where the payment has been received before the change in rate of tax, but the invoice for the
same is issued after the change in rate of tax, the time of supply shall be the date of receipt of
payment.

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Section 14(b): In case the goods or services or both have been supplied after the change in rate of
tax, the time of supply can be determined as follows:
1) where the payment is received after the change in rate of tax but the invoice has been issued
prior to the change in rate of tax, the time of supply shall be the date of receipt of payment; or
2) where the invoice has been issued and payment is received before the change in rate of tax, the
time of supply shall be the date of receipt of payment or date of issue of invoice, whichever is earlier;
or
3) where the invoice has been issued after the change in rate of tax but the payment is received
before the change in rate of tax, the time of supply shall be the date of issue of invoice:
Provided that the date of receipt of payment shall be the date of credit in the bank account if such
credit in the bank account is after four working days from the date of change in the rate of tax.
In case the goods or services or both have been supplied after the change in rate of tax, the time of
supply can be determined as follows

Illustration 1
Supply was made on 10th May, 2018. From the following particulars, find out the rate of GST
applicable.

Event Date of event Rate applicable

Change of rate 31st May, 2019 Rate changed from 18% to 12%
issue of invoice 5th June, 2019 12%
Payment received 6th July, 2019 12%

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Applicable rate is 12%. i.e. which is applicable on earlier of the two events, date of invoice and date
of receipt of payment which in this case would be 5th June, 2019.
Illustration 2
Supply was made on 10th May, 2019. From the following particulars, find out the rate of GST
applicable.

Event Date of event Rate applicable

Change of rate 30th June, 2019 Rate changed from 18% to
12%
issue of invoice 5th June, 2019 18%
Payment received 6th July, 2019 12%
Answer: Applicable rate is 18%. i.e. date of invoice i.e. 5th June, 2019 because it is earlier than the
date of receipt of payment.
Note: When supply is made before change in rate, the principle of ‘whichever is earlier’ is followed.
Similarly, where supply is made after the change in rate, ‘whichever is later’ principle is followed.

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VALUE OF SUPPLY
VALUE OF Taxable SUPPLY [SECTION 15 of CGST Act, 2017]
Students must have understood the concept of supply, place of supply and time of supply. Once, it
is established that the underlying transaction constitutes supply in terms of Section 7 of the CGST
Act, a person is liable to pay tax unless the transaction is exempted. Whether to pay
CGST+SGST/UTGST or IGST, is determined by the place of supply. When to pay the tax is determined
by the time of supply. Upon reaching this stage, it is essential to know the quantum of tax to be paid.
Value of supply and rate of applicable tax are pre-requisites to calculate the tax liability. In this
section, we will study the facets of Valuation, transaction value, inclusions and exclusions there
from.
Section 15 of the CGST Act when read in conjunction with Chapter IV: Determination of Value of
Supply of the CGST rules, states that the value of taxable supply under GST is the transaction value.
Transaction value is defined as the price actually paid or payable for the said supply of goods or
services or both, where the supplier and the recipient of the supply are not related, and the price is
the sole consideration for the supply. [Section 15(1)]
Section 15 is equally applicable to interstate supplies under IGST.

Inclusions in determination of Value of Supply [Section 15(2)]

(a) any taxes, duties, cess, fees and charges levied under any law for the time being in force other
than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act
and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
(b) any amount that the supplier is liable to pay in relation to such supply but which has been
incurred by the recipient of the supply and not included in the price actually paid or payable for the
goods or services or both;
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient
of a supply and any amount charged for anything done by the supplier in respect of the supply of
goods or services or both at the time of, or before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and
(e) subsidies directly linked to the price excluding subsidies provided by the Central Government
and State Governments

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Explanation.– For the purposes of this sub-section, the amount of subsidy shall be included in the
value of supply of the supplier who receives the subsidy.

Exclusions in determination of Value of Supply [Section 15(3)]

(a) Any discount which is given before or at the time of the supply if such discount has been duly
recorded in the invoice issued in respect of such supply; and
(b) any discount given after the supply has been affected, if –
(i) such discount was known and agreed at the time of supply, that is, established in terms of an
agreement entered into at or before the time of such supply and specifically linked to relevant
invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier
has been reversed by the recipient of the supply.
Where the value of the supply of goods or services or both cannot be determined under sub-section
(1), the same shall be determined in such manner as may be prescribed. [Section 15(4)]
Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies
as may be notified by the Government on the recommendations of the Council shall be determined
in such manner as may be prescribed. [Section 15(5)]
For the purposes of this Act persons shall be deemed to be “related persons” if–
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognized partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the
outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly
or indirectly control a third person; or
(viii) they are members of the same family;
The term “person” also includes legal persons and persons who are associated in the business of
one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever
described, of the other, shall be deemed to be related

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Transaction where one of the currencies exchanged is Indian Rupees

On 10th May, Mr. Doshi converted USD $ 100 into ` 6,400 @ ` 64 per USD through Eastern
Money Changers. RBI reference rate on 10th May for US $ is ` 65 per US $. The value of
supply in this case is (` 65 – ` 64)* $ 100 = ` 100 and GST will be levied on this amount.
If the RBI reference rate is not available, then 1% of ` 6,400 i.e., ` 64 will be the value of
supply of service.

Transaction where neither of the currencies exchanged is Indian Rupees

US $ 9,000 are converted into UK £ 4,500. RBI reference rate at that time for US $ is `63 per
US dollar and for UK £ is ` 82 per UK Pound. In this case, neither of the currencies
exchanged is Indian Rupee.

Hence, in the given case, value of taxable service would be 1% of the lower of the
following:-

(a) US dollar converted into Indian rupees = $ 9,000 × ` 63 = ` 5,67,000

(b) UK pound converted into Indian rupees = £ 4,500 × ` 82 = ` 3,69,000
Value of taxable service = 1% of ` 3,69,000 = ` 3,690

PROBLEM :

Mr. X, a money changer, has exchanged US $ 10,000 to Indian rupees @ ` 64 per US $. Mr. X
wants to value the supply in accordance with rule 32(2)(b) of CGST Rules.

Determine the value of supply made by Mr. X.

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VALUATION RULES

RUL 27: Consideration

RULE 28: Supply between
not wholly in money
distinct/ related persons,
Value shall be either of other than agent RULE 29: Supply
the following in the made/received
Value shall be either of the through an agent Value
given order:
following in the given order: shall be either of the
 open market value following in the given
 open market value
 total of consideration order:
 value of supplies of like
in money + amount
kind and quality
equal to the  open market value or
 value as per rule 30 or 31
consideration not in 90% of price charged
in that order.
money by recipient to his
 Option to supplier to value
 value of supplies of like unrelated customer for
goods sold as such by
kind and quality supplies of like kind
recipient = Value= 90% of
 consideration in money and quality;
price charged by recipient to
+ money value of non-  value as per rule 30 or
its unrelated customer
monetary 31 in that order.
 Recipient eligible for ITC =
consideration
invoice value = open market
computed as per rule
value (taxable value)
30 or 31 in that order.

RULE 31A: Value of supply of lottery, chance to win

in betting/ gambling/ horse racing in race club RULE 30: Value based on cost Value
shall be 110% of cost of
Lottery run by State Govts. - 100/112 of the face value production/acquisition/ provision of
of ticket OR 100/112 of the price as notified in the goods or services
Official Gazette by the organising State, whichever is
higher.

Lottery authorised by State Govts. - 100/128 of the face

value of ticket OR 100/128 of the price as notified in the RULE 31: Residual method (Best
Official Gazette by the organising State, whichever is Judgement Method) Value shall be
higher determined using reasonable means
consistent with the principles and
Actionable claim in form of chance to win in betting, general provisions of section 15 &
gambling or horse racing in a race club - 100% of the face valuation rules. For services, rule 31
value of the bet or the amount paid into the totalisator can be adopted before rule 30.
Lottery run by State Governments - Lottery not allowed
to be sold in any State other than the organizing State;
Lottery authorised by State Governments - Lottery
authorised to be sold in State(s) other than the
organising State also
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VALUATION RULES
RULE 32: Value of in respect of certain specific supplies

= Purchase/sale of foreign currency: 1st method-Value = [Buying/Selling rate - RBI

reference rate at that time] x total units of currency. If no RBI reference rate, value = 1% of
INR received/provided. If the currencies exchanged are not in INR, value = lesser of the 2
amounts that would have been received by converting any of currencies into INR at RBI
reference rate OR 2nd method

Currency Value
Upto `1,00,000 1% or `250 whichever is higher
From `1,0001 to 10,00,000 `1,000 + 0.5%

From `10,00,001 `5,500 + 0.1% subject to maximum of `60,000

Booking of tickets by air travel agent: Value = 5% of basic fare for domestic bookings
and 10% of the basic fare for international bookings.

= Life insurance business: If amount allocated for investment is intimated - Value = Gross
premium less amount allocated for investment; Single premium annuity policies where
amount allocated for investment is not intimated - Value = 10% of single premium; Other
cases – Value = 25% of premium in 1st year and 12.5% of premium in subsequent years;
Policy only towards risk cover – Value = Entire premium

= Buying & selling of second hand goods: Value = Selling price – Buying price (ignore if
value is negative); Purchase value of goods repossessed from unregistered borrower =
Purchase price- 5% per quarter or part thereof from date of purchase till the date of disposal
by the person making repossession

= Coupon/voucher: Value = money value of supplies redeemable against such voucher/

coupon

= Notified services between distinct persons without consideration: Value = Nil, if ITC is
available

RULE 33: Supply as a pure agent

Costs incurred by the supplier as a pure agent of recipient shall be excluded from value

RULE 34: Rate of exchange for determination of value

Goods = Rate notified by CBEC under Customs Act on the date of time of supply of such goods;
CA SURAJ SATIJA SSGURU VALUE OF SUPPLY
Services = Rate as per GAAP on the date of time of supply of such services

Rule 35: Value inclusive of taxes

Where value of supply is inclusive of CGST, SGST/UTGST or IGST, the tax amount is
calculated by making back calculations. Tax amount = (Value inclusive of GST x GST rate in
% of IGST or CGST, SGST/UTGST)/100 + sum of applicable GST rates in %)

RULE 29 – VALUE OF SUPPLY OF GOODS OR RECEIVED THROUGH AN AGENT

Example of clause (a) Mr. A supplies goods to his agent and the agent is supplying goods
of like kind and quality in subsequent supplies at a price of ` 1,000 per unit on the day of
the supply.

Mr. A also supplies goods to an unrelated customer at the price of ` 950 per unit on the day
of the supply. The value of the supply made by Mr. A to agent shall be ` 950 per unit or
where he exercises the option, the value shall be 90% of ` 1,000 i.e., ` 900 per unit.
CA SURAJ SATIJA SSGURU PLACE OF SUPPLY

PLACE OF SUPPLY

SUPPLY IN TERRITORIAL WATERS [SECTION 9 IGST ACT, 2017]

Notwithstanding anything contained in this Act, –
(a) where the location of the supplier is in the territorial waters, the location of such
supplier; or
(b) where the place of supply is in the territorial waters, the place of supply,
shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory
where the nearest point of the appropriate baseline is located.
The expression territorial waters have not been defined under the GST law. It should be
understood as the area upto 12 nautical miles from base line of sea coast into the sea.
Note: 1 nautical mile = 1.853 Km
If the supplier is in territorial waters, the location of supplier or if the supply is in territorial
waters, the place of supplies shall be taken as the coastal state or Union Territory closest to
the base line.
Example 1: Suppose there is a supply from the territorial waters where the supplier is
located and the nearest base line is at Kandla, Gujarat state, then the place of supply is said
to be in Gujarat.
Example 2: Some goods were supplied to a fishing trawler located in territorial waters
near Yanam, a part of Union Territory of Puducherry. Since the nearest base line is at
Yanam, place of supply shall be the Union Territory of Puducherry. If the supplier is located
in Puducherry, it shall be an intra-state supply. If the supplier is located in Chennai, it is an
interstate supply.

PLACE OF SUPPLY :
As such, the expression ‘place of supply’ has not been defined in Act, however, the collective
reading of various provision makes us understand the purpose and relevance thereof in the
GST law. The prime purpose of place of supply is to determine whether a supply is intra-
state or inter-state and consequentially to determine whether IGST to be charged or
CGST+SGST or UTGST to be charged. It is also relevant for the to determine which state/
Union Territory will get the tax revenue.

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PLACE OF SUPPLY OF GOODS [SECTION 10 OF IGST ACT, 2017]

Section 10 prescribes the provisions for determining the place of supply of goods in
domestic transactions. The five rules, each covering a unique scenario, are as under:
SITUATION PLACE OF SUPPLY OF GOODS
A Supply involves movement of Termination of goods for delivery (Illustration 1)
goods
B Delivery on the direction of Principal place of business of third party (Illustration
third 2)
party
C Does not involve movement of Location of goods at the time of delivery (Illustration
goods 3)
D Installation/ assembly Place of assembly or installation (Illustration 4)
E Supply on board a conveyance Location where goods are taken on board (Illustration
5)

Where place of supply cannot be determined, it is determined as per Rules.

Illustration 1
Mr. X of Mumbai sells refrigerators to M/s Y of Ahmedabad.
The place of supply would be Gujarat. Since the location of supplier (Maharashtra) and the
place of supply (Gujarat) are in different states, IGST would be charged, being inter-state
supply.

Illustration 2
A having registered place of business at Pune, placed an order on B Ltd. in New Delhi, for
delivering a parcel to C who was at Nasik.
In this case, the place of supply would be Maharashtra [for transaction between B Ltd. and A].
Since the location of supplier (New Delhi) and place of supply (Maharashtra) are different,
IGST would be charged.
However, the place of supply for a second leg of the transaction i.e. between A and C Ltd.
would be determined under Scenario ‘A’, which shall be Maharashtra, considering that the
movement of goods terminates at Nasik. Here, since the location of supplier (Pune/
Maharashtra) and place of supply (Nasik/ Maharashtra) are in the same state, CGST + SGST
would be charged.

Illustration 3
Srinivasan from Bangalore travelled to Chennai for a vacation and purchased a laptop from
Croma at Chennai.
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CA SURAJ SATIJA SSGURU PLACE OF SUPPLY

In this case, the place of supply would be Tamil Nadu and since the location of supplier and
place of supply are same, CGST + SGST would be charged, being an intra-state supply.

Illustration 4
Surya Narayan from Jamshedpur ordered a machine to be installed in his factory at
Jamshedpur. The supplier, from Kolkata, sourced the parts from various states across the
country after which the machine was successfully installed at his factory at Jamshedpur.
In this case, the place of supply would be Jamshedpur (Jharkhand). Since the location of the
supplier (West Bengal) and the place of supply (Jharkhand) are different, IGST would be
charged.

Illustration 5
Howrah – New Delhi Rajdhani Express supplies food which was taken on board at
Mugalsarai in Uttar Pradesh. The place of supply of food for a transaction between the
supplier of food and the railways would be Uttar Pradesh.
However, the place of supply of food for a transaction between railways and the passengers
would be determined under Section 12 of the IGST Act as such supply would be treated as
ancillary to the supply of passenger transportation service.

PLACE OF SUPPLY IN CASE OF IMPORT/ EXPORT [SECTION 11 OF IGST

ACT, 2017]
In case of import of goods, place of supply is location of importer
In case of export of goods , place of supply is the location outside India.

PLACE OF SUPPLY OF SERVICES [SECTION 12 & 13 OF IGST ACT, 2017]

Section 12: Where both Supplier and Recipient are located in India
SERVICES PLACE OF
SUPPLY
Recent is Recipient is Unregistered
Registered
Section 12(2): General Location of Recipient location of recipient if address on
Principle records exists or
location of supplier, in other cases

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Section 12(3): Place of supply would be the location where the immovable
Exception/Special cases – property is situated.
a) Directly related to If the immovable property is located at more than one state,
immovable property value shall be taken proportionately as per contract or as per
Rules.
(b) Lodging accommodation

(c) Accommodation for

functions
(d) Ancillary services to the
above
Section 12(4): Beauty Place of performance of service
parlor, fitness, restaurant and
catering services plastic
cosmetic surgery etc.
Section 12(5): Training & Location of recipient Location of performance
Performance Appraisal
Section 12(6): Place where the event is held or where the park or such place
Admission to cultural, is located
artistic, sporting, educational,
entertainme
nt, amusement event etc. and
ancillary services
Section 12(7): Location of such – Location of event
person.
(a) Organization of events – Location of recipient if the event is
above including conferences, held outside India
fair exhibition etc.
(b) Ancillary Services, or
assigning of sponsorship of
such events
If the event is held in more than one state or union territory,
place of supply shall be determined for respective value
assigned to each state or union territory on proportionate
basis.

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CA SURAJ SATIJA SSGURU PLACE OF SUPPLY

SERVICES STATUS OF RECIPIENT

Registered Unregistered
Section 12(8): Transport of Location of recipient Location where goods are handed
goods, including Courier/mail over for transportation.
where the transportation of goods is to a place outside India,
the place of supply shall be the place of destination of such
goods
Section 12(9): Location of recipient Place where the passenger embarks
Transportation of passengers on (gets into) the conveyance for a
continuous journey.
Section 12(10): On board a Location of first, scheduled point of departure of that
conveyance while in transit. conveyance for
Conveyance may be a ship, the journey.
air craft, train, vehicle etc.
Section 12(12): Banking & Location of recipient if address exists on records of supplier
Financial services and Stock or else, location of supplier.
broking services
Section 12(13): Location of recipient Location of recipient of services as on
Insurance services the records of the supplier.
Section 12(11):
Telecommunication services
including data transfer,
broad casting, cable TV
services etc.
(a) fixed telecom line Place of fixing/installation
(b) post paid mobile, internet Billing address of recipient
services
(c) Prepaid through agent Address of Agent, place of payment/sale of voucher coupon
etc.
(d) In other cases Address of recipient as per records. If address is not available,
place of supplier of services
Where leased circuit is installed in more than one state/ union territory, place of supply shall
be determined for respective value assigned to each state or union territory on proportionate
basis as per contract.

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Analysis
1. Mr. A is a Company Secretary registered at Mumbai and travels to Bangalore for business
purpose and stays at a hotel there.
In this case, the place of supply would be Bangalore/ Karnataka i.e. place of immovable
property.
2. XYZ Consultants (registered at Bangalore) provides training to its client’s employees at
Mumbai. The clients are registered at Chennai.
In this case, if the client (recipient) is registered, the place of supply would be the
location of recipient, that is Chennai (Tamil Nadu) and consequently IGST would be
charged as the location of Supplier (State of Karnataka) and the Place of Supply (State of
Tamil Nadu) are different. (Training & Performance Appraisal Services)
3. In the above example, if the client was unregistered, the place of supply would have
been Mumbai / Maharashtra and again IGST would be charged. (Training &
Performance Appraisal Services)
4. Radha is a resident of Mumbai and travelled to Bangalore for a vacation and booked
tickets for an event at the water park.
In this case, the place of supply would be Bangalore/ Karnataka (Admission to events).
5. Mr. X based in Ahmedabad, solicits the services of an event management company
based in New Delhi, for his daughter’s marriage. They plan for a destination wedding at
a palace in Udaipur.
In this case, if Mr. X is registered, the place of supply would be Ahmedabad (Gujarat)
and IGST would be charged, but if he is unregistered the place of supply would be
Udaipur (Rajasthan) and IGST would be charged.
6. Nagendra Kumar is relocating from Bangalore to Chennai and calls for packers and
movers for packing and relocation and shipping of household effects.
In this case the place of supply would be Bangalore (transportation services). Assuming
the packers are also from Bangalore, CGST + SGST would be applicable.
7. Tarun books a round trip for AHM – PNQ – BLR – PNQ – AHM, with a stopover at
Bangalore. The tickets are booked with a Bangalore based airline.
In this case, this would be treated as a continuous journey with a stopover. For the first
leg, the place of supply would be Ahmedabad and since the Location of Supplier (BLR)
and the Place of Supply (AHM) are different, IGST would be charged. For the second
leg of the journey, the place of supply would be Bangalore, and since the Location of
Supplier (BLR) and the place of supply are same, CGST + IGST would be charged.
(Passenger Transportation Services).

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CA SURAJ SATIJA SSGURU PLACE OF SUPPLY

8. Nikhil, from Kolkata, gets a job at Mumbai and he gets a landline connection done at
Mumbai.
In this case, the place of supply would be Mumbai. If he would have taken a post-paid
connection, and provided the Billing Address of Kolkata, the place of supply would
have been Kolkata.
9. Priya, an unregistered person, from New Delhi, has an account with a Bank at New
Delhi. She is on a vacation in Nainital, and visits a bank for getting a Demand Draft
made.
In this case, since the address of the recipient will be available in the records of the
supplier, the place of supply would be New Delhi.
In case she went to a branch at Nainital for availing currency exchange services which isn’t
linked to her account in New Delhi, the address of the recipient would not be available in the
records of the supplier, and hence the place of supply would be Nainital.

SECTION 13 – WHERE LOCATION OF SUPPLIER OR LOCATION OF

RECIPIENT IS OUTSIDE INDIA
Section 13(2) General scenario [where the situation does not fall in any of the cases
spelt in Section 13(3) to Section 13(12) - Location of recipient. However, place of supply
shall be the location of supplier, if location of recipient is not available

Section 13(3)
• Where, service is in relation to goods required to be made physically available to
the supplier - Location of actual performance
• Where, service is in relation to an individual and requires physical presence of such
individual – Location of actual performance
• Where the service in relation to goods is provided from a remote location
through electronic means – Location where the goods are actually situated.
Section 13(4) Services in relation to Immovable Property: Location of such property

Section 13(5) Admission to/organization of events etc.: Location of event

Section 13(6) Services covered under Section 13(3), Section 13(4) and Section 13(5)
provided at multiple locations and one or more location falls in taxable territory -
Location falling in taxable territory

Section 13(7) Multi locations involving more than one State/UT: Proportional to value
in each State/UT

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CA SURAJ SATIJA SSGURU PLACE OF SUPPLY

Section 13(8) Banking, intermediary services and Hiring of means of transport

including Yatch but excluding aircraft or vessel - Location of supplier

Section 13(9) Goods transport other than mail/courier: Destination of Goods

Section 13(10) Passenger transport services: Location of embarkment

Section 13(11) Services on board a conveyance: First scheduled point of departure

Section 13 (12) on line info, database etc.: Location of recipient

In case of advertisements over internet, the advertisement service shall be deemed to have
been provided all over India. Thus, the value of such service will be apportioned amongst all
States and UTs, of India. The amount attributable to the value of advertisement service
disseminated in a State/UT shall be calculated on the basis of the internet subscribers in
such State/UT.

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REGISTRATION UNDER GST
CONCEPT OF TAXABLE PERSON [SECTION 2(107)]
Under GST law, the concept of taxableperson is significant since
tax on supplies of goods and/or services, is to be paid by a
taxable person. So, let us understand the concept of taxable
person. As per

section 2(107) of the CGST Act, taxable person means a person who is registered
or liable to be registered under section 22 or section 24 [These sections have been discussed in
detail subsequently in this Chapter].
Thus, even an unregistered person who is liable to be registered is a taxable person. Similarly, a
person not liable to be registered, but has taken voluntary registration and got himself registered
is also a taxable person.

In the subsequent paras, we will see when does a person becomes liable to get registered, what is
the procedure for getting registered under GST and how to get the registration application
amended, when can registration be cancelled and when the cancellation of the registration by the
Department be revoked.
Following sections of Chapter VI – Registration of the CGST Act shall be discussed in this chapter
to understand the registration provisions:

PERSONS LIABLE FOR REGISTRATION [SECTION 22]

(i) Threshold limit for registration
 Every supplier of goods or services or both is required to obtainregistration

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 in the State or the Union territory from where he makes the taxablesupply
 if his aggregate turnover exceeds specified threshold limit in a FY.

Aggregate Turnover
Before, we study what is the applicable threshold limit for various
States/ UTs, let us first understand the concept of aggregate
turnover.
Aggregate turnover is a crucial parameter for deciding the eligibility
of a supplier to avail the benefit of threshold exemption from
registration, eligibility for composition scheme [Discussed in Chapter
3 – Charge of GST].
‘Turnover’ in common parlance is the totalvolume of business. The
term ‘aggregate turnover’ as defined under section 2(6) of the
CGST Act has been presentedin the diagrammatic form as follows:

Section 2(6) [definition of ‘aggregate turnover’ as given above] read with explanation (i) to section
22 has been analysed as follows:
(A) Aggregate turnover to exclude inward supplies on which tax is payable under reverse
charge: It may be noted that the inward supplies on which recipient is required to pay tax
under Reverse Charge Mechanism (RCM) do not form part of the ‘aggregate turnover’. The
law stipulates certain supplies like, Goods Transport Agency services, legal services,
sponsorship services, to name a few,where the recipient of service is made to pay the tax
– Discussed indetail in Chapter 3 – Charge of tax. The value of such supplies wouldnot
form part of the ‘aggregate turnover’ of recipient of such supplies.

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Raghubir Private Ltd. pays GST on sitting fees paid to its directors for the services rendered by
them, under reverse- charge. Value of services provided by the directors to Raghubir Private
Ltd. will form part of the aggregate turnover of thedirectors and not of Raghubir Private Ltd.
(B) Aggregate turnover excludes the element of CGST, SGST, UTGST, and IGST and
compensation cess.
(C) Aggregate turnover to include total turnover of all branchesunder same PAN
Aggregate turnover is calculated by taking together the value inrespect of the activities carried
out on all-India basis.
A dealer ‘X’ has two offices – one in Delhi and another in Haryana. In order to determine whether
‘X’ is liable for registration, turnover of both the offices would be taken into account and only if
the same exceeds the applicable threshold limit, X isliable for registration.

(D) Value of exported goods/services, exempted goods/services, inter-State supplies between

distinct persons having same PAN, to be included in aggregate turnover.
Madhur Oils, Punjab, is engaged in supplying machine oil as well as petrol. Supply of petrol is not
leviable to GST, but supply of machine oil is taxable. In order to determine whether Madhur
Oils is liable for registration, turnover of both non-taxable as well as taxable supplies would be
taken into accountand if the same exceeds the applicable threshold limit, Madhur Oils is liable for
registration.

(E) Aggregate turnover to include all supplies made by the taxableperson, whether on his own
account or made on behalf of all his principals.
Mohini Enterprises has appointed M/s Bestfords & Associates as its agent. M/s Bestfords
& Associates makes supply of goods on its own account as well as on behalf of Mohini Enterprises.
All the supplies of goods made by M/s Bestfords & Associates as agent of Mohini Enterprises as
well as on its own account will be included in theaggregate turnover of M/s Bestfords & Associates.
(F) ‘Aggregate turnover’ Vs. ‘Turnover in a State’: The aggregate turnover is different from
turnover in a State. The former is used for determining the threshold limit for registration and
eligibility for composition scheme [Discussed in Chapter 3 – Charge of GST].However, once a
person is eligible for composition levy, the amount payable under composition levy would
be calculated as a specified %of ‘turnover in the State/UT’.

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Applicable threshold limit
The threshold limit prescribed under section 22(1) is ` 20 lakh in a FY, i.e.every supplier,
whose aggregate turnover in a financial year exceeds ` 20lakh, is liable to be registered under
GST in the State/ Union territory from where he makes the taxable supply of goods and/or services.
However, the limit of ` 20 lakh will be reduced to ` 10 lakh if the person is carrying out business in
SPECIAL CATEGORY STATES. As per Article 279A(4)(g)of the Constitution, there are 11 Special
Category States, namely, States of Arunachal Pradesh, Assam, Jammu and Kashmir2, Manipur,
Meghalaya,Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. However, as
per the explanation (iii) to section 22, for the purposes of registration, only Mizoram, Tripura, Manipur
and Nagaland are Special Category States. Therefore, the threshold limit ` 10 lakh is applicable for
Mizoram, Tripura, Manipur and Nagaland.

Government is empowered to enhance the threshold limit of ` 20 lakh upto ` 40 lakh for a
supplier engaged exclusively in the supply of goods, at the request of a State and on the
recommendations of theCouncil. This shall be subject to such conditions and limitations, as
may be notified.
For the purposes of section 22(1), a person shall be considered to beengaged exclusively in the
supply of goods even if he is engaged in exempt supply of services provided by way of
extending deposits, loans or advances in so far as the consideration is represented by way of
interest or discount.
Further, Notification No. 10/2019 CT dated 07.03.2019 exempts any person who is engaged in
exclusive supply of goods and whose aggregate turnover in the financial year does not
exceed ` 40 lakh, from registration requirement.
Exceptions to this exemption are as follows:
(a) Persons required to take compulsory registration under section 24 ofthe CGST Act.
(b) Persons engaged in making supplies of ice cream and other edible ice, whether or not
containing cocoa [2105 00 00], Pan masala [2106 90 20] and all goods of Chapter 24, i.e.
Tobacco and manufactured tobacco substitutes.
(c) Persons engaged in making intra-State supplies in the States of Arunachal Pradesh,
Uttarakhand, Meghalaya, Sikkim, Telangana,Puducherry and Special Category States as per
section 22 [Nagaland,

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Mizoram, Manipur, Tripura]. Inter-State supplies of goods are nevertheless liable to
compulsory registration and are already coveredin exception (a) above.
(d) Person who has opted for voluntary registration or such registered persons who intend to
continue with their registration under the CGST Act.
In view the above discussion, the registration requirements under GST canbe summarised as
follows:

Threshold limit for persons

engaged
exclusively in exclusively in
supply of goods supply of
services/ both
goods &
services

States/UTs other Puducherry ` 20 lakh `20 Lakh

than Special
Category States Telangana ` 20 lakh `20 Lakh
Others ` 40 lakh `20 Lakh
Special Special Manipur ` 10 lakh `10 Lakh
Category Category
States/ States as Mizoram ` 10 lakh `10 Lakh
UTs as per per Nagaland ` 10 lakh `10 Lakh
Constitu section 22
tion Tripura ` 10 lakh `10 Lakh

Other Jammu and ` 40 lakh `20 Lakh

States/U Kashmir
Ts
Assam ` 40 lakh `20 Lakh
Himachal ` 40 lakh `20 Lakh
Pradesh
Arunachal `20 Lakh `20 Lakh
Pradesh
Meghalaya ` 20 Lakh ` 20 Lakh

Sikkim ` 20 Lakh ` 20 Lakh

Uttarakhand ` 20 Lakh ` 20 Lakh

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**persons engaged exclusively in intra-State supply of goods

(5) Prithiviraj of Assam is exclusively engaged in intra-State supply of shoes. His aggregate
turnover in the current financial year is` 22 lakh. In view of the discussion in the above paras, the
applicable threshold limit for registration for Prithviraj in the given case is ` 40 lakh. Thus, he is not
liable to get registered under GST.
If in above example, all other things remaining the same, Prithiviraj is exclusively engaged in
supply of pan masala instead of shoes, he will not be eligible for higher threshold limit of ` 40 lakh
and the applicable threshold limit for registration in that given case will be ` 20 lakh. Thus,
Prithiviraj will be liable to get registered under GST.
If instead of pan masala, Prithiviraj is exclusively engaged in supply of taxable services, the
applicable threshold limit for registration will still be ` 20 lakh. Thus, Prithiviraj will be liable to get
registered under GST.
Further, if Prithiviraj is engaged in supply of both taxable goods and services, the applicable
threshold limit for registration will be ` 20 lakh only. Thus, Prithiviraj will be liable to get registered
under GST.

(6) Shivaji of Telangana is exclusively engaged in intra-State supply of toys. Its aggregate turnover
in the current financial year is ` 22 lakh. Since Shivaji is making taxable supplies from Telangana,
he will
not be eligible for higher threshold limit available in case of exclusive supply of goods. The
applicable threshold limit for registration for Shivaji in the given case is `20 lakh. Thus, he is liable
to get registered under GST.
If in above example, all other things remaining the same, Shivaji is exclusively engaged in supply of
taxable services instead of toys, the applicable threshold limit for registration will still be ` 20 lakh.
Thus, Shivaji will be liable to get registered under GST.
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Further, if Shivaji is engaged in supply of both taxable goods and services, the applicable threshold
limit for registration will be ` 20 lakh only. Thus, Shivaji will be liable to get registered under GST.

(7) Ashoka of Manipur is exclusively engaged in intra-State supply of paper. Its aggregate
turnover in the current financial year is` 12 lakh. Since Ashoka is making taxable supplies from
Manipur which is a Special Category State, the applicable threshold limit for registration for Ashoka
in the given case is ` 10 lakh. Thus, he is liable to get registered under GST.
If in above example, all other things remaining the same, Ashoka is exclusively engaged in supply
of taxable services instead of paper, the applicable threshold limit for registration will still be ` 10
lakh. Thus, Ashoka will be liable to get registered under GST.
Further, if Ashoka is engaged in supply of both taxable goods and services, the applicable threshold
limit for registration in that given case will be ` 10 lakh only. Thus, Ashoka will be liable to get
registered under GST.

(8) Raghav of Assam is exclusively engaged in intra-State supply of readymade garments. Its
turnover in the current FY from Assam showroom is ` 28 lakh. It has another showroom in
Tripura with a turnover of ` 11 lakh in the current FY. Since Raghav is engaged in supplying
garments from a Special Category State as per section 22, the applicable threshold limit for
him gets reduced to ` 10 lakh. Further, Raghav is liable to get registered under GST in both Assam
and Tripura on his aggregate turnover crossing the threshold limit of `10 lakh.

(ii) Registration required only for a place of business from where taxable supply takes
place
A person is required to obtain registration with respect to his each place of business in India from
where a taxable supply has taken place. However, a supplier is not liable to obtain registration in a
State/UT from where he makes an exempt/non-taxable supply.
Further, the threshold limit of a person having places of business in morethan one State/UT
in India gets reduced to ` 10 lakh only when such person makes taxable supplies of goods or
services or both from any of the Special Category States as per section 22. However, in case he
makes exempt/non-taxable supply from a Special Category State and taxable supplies from a
State other than Special Category State, the threshold limitshall not be so reduced.
(9) Uday Enterprises is engaged in supply of taxable goods inMaharashtra. It also supplies alcoholic
liquor for human consumption from Nagaland. Its turnover in the current financial year is `34
lakh in Maharashtra and `8 lakh in Nagaland.
Since Uday Enterprises is exclusively engaged in making taxable supplies of goods from
Maharashtra, the applicable threshold limit for obtaining registration is ` 40 lakh. However, the
threshold limit will not be reduced to ` 10 lakh in this case, as supply of alcoholic liquor for human
consumption from Nagaland (one of the Special Category States) are non-taxable supplies3.

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In the given case, since the aggregate turnover of Uday Enterprises exceeds theapplicable threshold
limit of ` 40 lakh, it is liable to obtain registration. It will obtain registration in Maharashtra, but is
not required to obtain registration in Nagaland as he is not making any taxable supplies from said
State.

(iii) Person liable for registration in case of transfer of business

Where a business is transferred, whether on account of succession/any other
reason [including transfer/change inthe ownership of business due to death of
the sole proprietor4], to another person as a going concern, the
transferee/successor, is to be registered with effect from the date of such
transfer/succession. Where the business is transferred, pursuant to sanctionof
a scheme/ arrangement for amalgamation/ de-merger of two or morecompanies,
pursuant to an order of a High Court/Tribunal, the transferee isto be registered
with effect from the date on which the Registrar of Companies issues a certificate
of incorporation giving effect to such order.

COMPULSORY REGISTRATION IN CERTAIN CASES[SECTION 24]

As we have seen above that a supplier is liable to be registered under GSTin the State/ Union
territory from where he makes the taxable supply of goods and/or services only if his aggregate
turnover in a financial year exceeds the applicable threshold limit. However, there are certain
cases wherein a supplier is mandatorily required to obtain registration irrespective of the
quantum of his aggregate turnover. In other words, these are thecases wherein a supplier is
compulsorily required to obtain registration even though his aggregate turnover does not exceed
the applicable threshold limit.
However, certain exemptions from registration have also been provided under section 23. These
exceptions have been incorporated briefly at the relevant places in the discussion under this
heading in order to provide a holistic picture. The exceptions have also been explained in detail
in thenext heading 6. Persons not liable for registration.
The category of persons requiring compulsory registration under GST have been enlisted below:
1) Persons making any inter-State taxable supply. However, threshold limit of ` 20 lakh (` 10 lakh
in case of Special Category States of Mizoram, Tripura, Manipur and Nagaland) is available in case
of inter-State supply of taxable services and of notified handicraft goods.
2) Casual taxable persons (CTP) making taxable supply. However, threshold limit of ` 20 lakh (`
10 lakh in case of Special Category States of Mizoram, Tripura, Manipur and Nagaland) is
available in case of CTP who is making inter-State taxable supplies of notified handicraft goods
and availing the benefit of exemption from registration as mentioned in point (i) above.
3) Persons who are required to pay tax under reverse charge on inward supplies received.
However, persons engaged exclusively in making outward supplies, tax on which is liable to be
paid on reverse charge basis are exempt from registration.
4) Non-resident taxable persons (NRTP) making taxable supply.

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5) E-commerce:
(i) Every ECO (Electronic Commerce Operator) who is required to collect tax at source under
section 52, ECO means any personwho owns, operates or manages digital or electronic
facility or platform for electronic commerce.
(ii) Persons who supply goods and/or services, other than supplies specified under section 9(5),
through such ECO who is required to collect tax at source under section 52. However,
thresholdlimit of ` 20 lakh (` 10 lakh in case of Special Category States of Mizoram, Tripura,
Manipur and Nagaland) is available in case of suppliers supplying services through ECO.
(6) Persons who are required to deduct tax under section 51, whether ornot separately
registered under this Act.
(7) Persons who make taxable supply of goods or services or both onbehalf of other taxable
persons whether as an agent or otherwise.
(8) Input Service Distributor, whether or not separately registered under this Act.
(9) Every person supplying online information and data base access or retrieval (OIDAR) services
from a place outside India to a person inIndia, other than a registered person5;
(10) Persons who are required to pay tax under reverse charge under section 9(5) and
(11) such other person or class of persons as may be notified by the Government on the
recommendations of the Council.

PERSONS NOT LIABLE FOR REGISTRATION[SECTION 23]

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PROBLEM: Examine whether the liability to register compulsorily under section 24 arises in
each of the independent cases mentioned below:
1) Meenu, a supplier in Maharashtra, is exclusively engaged in supply of potatoes produced out
of cultivation of her own land, within Maharashtra and also outside Maharashtra.
2) Jinu Oils, Gujarat, is engaged in supplying machine oil as well as petrol. Further, it provides
services of refining of oil to customers. Total turnover of supply of machine oil is ` 10 lakh,
supply of petrol is ` 5 lakh and supply of services is ` 6 lakh.
3) Tilu is working as an agent, he is supplying taxable goods as an agent of Tiku (who is registered
taxable person) and its aggregate turnover does not exceed ` 20 lakh during the financial
year.
ANSWER
(1) Section 24 of the CGST Act provides that persons making any inter-Statetaxable supply of
goods are required to obtain registration compulsorily under GST laws irrespective of the
quantum of aggregate turnover.
However, as per section 23, an agriculturist, to the extent of supply of produce out of cultivation
of land, is not liable to registration.
Meenu is exclusively engaged in cultivation and supply of potatoes. Thus,she is not liable to
registration irrespective of the fact that she is engaged in making inter-State supply of goods.
Further, Meenu will not be liable to registration, in the given case, even if her turnover exceeds
the threshold limit.
(2) Section 24 of the CGST Act specifies the categories of persons who are required to be
mandatorily registered under GST irrespective of the quantum of their aggregate turnover.
In the given case, Jinu Oils does not fall in any of the specified categories. Therefore, it is not
required to obtain registration compulsorily under GST.
However, as per section 22 read with Notification No. 10/2019 CT dated 07.03.2019, a supplier is
liable to be registered in the State/Union territoryfrom where he makes a taxable supply of goods
and/or services, if his aggregate turnover in a financial year exceeds the threshold limit. The
threshold limit for a person making supply of both goods and services is `10 lakh for the States
of Mizoram, Tripura, Manipur and Nagaland and ` 20 lakh for the rest of India. Thus, the applicable
threshold limit for the State of Gujarat is ` 20 lakh for supply of both goods and services. Further,
aggregate turnover includes exempted turnover of goods or services.
Accordingly, Jinu Oils is liable obtain registration since its aggregateturnover [` 21 lakh (including
turnover of exempt supply of petrol)] exceedsthe threshold limit of ` 20 lakh.
(3) Section 24 of the CGST Act provides that persons who make taxable supplyof goods and/or
services on behalf of other taxable persons whether as an agent or otherwise are required to
obtain registration compulsorily underGST laws irrespective of the quantum of aggregate
turnover.
Therefore, Tilu will be mandatorily required to obtain registration.

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AMENDMENTS MADE VIDE THE FINANCE (NO. 2) ACT, 2020
The Finance Act, 2020 has become effective from 27.03.2020. However, most of the amendments
made in the CGST Act and IGST Act vide the Finance Act, 2020 would become effective only from a
date to be notified by the Central Government in the Official Gazette. Such a notification has not been
issued till the time this Study Material is being released for printing. Therefore, the applicability or
otherwise of such amendments for May 2021 and/or November 2021 examinations shall be
announced by the ICAI only after such notification is issued by the Central Government.
In the table given below, the existing provisions 24 relating to sections 29 and 30 are compared with
the provisions as amended by the Finance Act, 2020.
Once the announcement for applicability of such amendments for examination(s) is made by
the ICAI, students should read the provisions given hereunder in place of the related
provisions discussed in the Chapter.
Existing provisions Provisions as amended by Remarks
the Finance Act, 2020

Section 29(1) Section 29(1) Section 29(1)(c) is

“The proper officer may, “The proper officer being amended to
either on his own motion may,either on his own enable the proper
……………….where: motion officer to cancelthe
(c) the taxable person, ……………….where: registration of a
other than the person (c) the taxable person is no person who has
registered under sub- longer liable to be registered taken voluntary
section (3) of section 25, is under section 22 or section registration under
no longer liable to be 24 or intends to optout of the section 25(3) and
registered under section registration voluntarily wants to optoutfrom
22 or section 24.” made under sub-section (3) the registration so
of section25.” taken.

Section 30(1) Section 30(1) Proviso to section

Subject to such conditions Subject to such conditions 30(1) is being
………………………cancellatio ………………………cancellation substituted so as to
n order. order. empower the
Provided that the jurisdictional tax
Provided that such period
registered person whowas authorities to
may, on sufficient cause
served notice under sub- being shown, and for reasons extend the period
section (2) of section to be recorded in writing, be provided to file an
29 in the manner as extended,— by the application for
provided in clause (c) or Additional Commissioner
clause (d) of sub-section cancellation of
or the Joint Commissioner,
(1) of section 169 and who as the case may be, for a registration.
could not reply to the said period not exceeding thirty
notice, thereby resulting in days;
cancellation of his by the Commissioner, for a
registration certificate and further period not exceeding
is hence unable to file thirty days, beyond the
application for revocation period specified in clause
of cancellation of

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registration under sub- (a).”
section (1) of section 30 of
the Act, against such order
passed up to 31-3- 2019,
shall be allowed to file
application for revocation
of cancellation of the
registration not later than
22-7-2019.

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RETURNS
(i) Modes of filing returns
All the returns are to be filed online.

GSTN portal (www.gst.gov.in)

Modes of filing
return

Offline utilities provided by GSTN

GST Suvidha Providers (GSPs)

(ii) List of Returns/Statements under GST

Return / Periodicity/ Who Files? Date for filing
Statement Description
GSTR-1 Monthly Person registered Due date prescribed inthe
statement of under regular scheme Act is 10th day of thenext
outward with annual month. However,
supplies of aggregate turnover presently, the same is
goods and/or greater than ` 1.5 crore being extended to 11thday
services (including a casual of the next month.
taxableperson)

Quarterly Person registered 13th day of the month

statement of under regular scheme succeeding the quarterhas
outward with annual been notified as the due
supplies of aggregate turnover up date for the recent
goods and/or to ` 1.5 crore quarters
services (including a casual
taxable person)

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GSTR-3B Monthly Person registered Annual turnover ≥ ` 5crore
return under regular in previousfinancial year -
scheme including 20th ofthe month.
casual taxable Annual turnover < ` 5crore
person in previousfinancial year -
22nd or 24th of the month
depending upon the State
or Union Territory in
which they areregistered.
Presently, the staggered
filing has been provided
for tax periods till March
2021.

GSTR-4 Return for a Registered person 30th April of the next

financial year paying tax under financial year
composition scheme
GSTR-5 Monthly Registered non- 20th day of the nextmonth
return resident taxpayer or within 7 days after
expiry of registration,
whicheveris earlier
GSTR-9 Annual return Registered person 31st December of thenext
other than an ISD, tax financial year
deductor / tax
collector, casual
taxable person and a
non-residenttaxpayer
GSTR-10 Final return Taxable person Within three months of
whose registration the date of cancellation or
has been date of order of
surrendered or cancellation, whicheveris
cancelled later.

GSTR-11 Details of Persons who have -

inward been issued a Unique
supplies Identity Number
(UIN)

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(iii) Due date of payment of tax

(iv) ANNUAL RETURN

(v) REVISION OF RETURNS

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(vi) LATE FEE FOR DELAY IN FILING OF RETURNS

What are the contents of GSTR-1?

GST is a destination-based consumption tax. Hence, the tax revenue is transferred to the
State which is the place of supply 2 of the particular transaction. Since, the place of supply is
crucial for determining the share of every State in the tax revenue, GSTR-1 also captures
information relating to place of supply.

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What kind of details of outward supplies are required to befurnished in GSTR-1?

Indication of HSN details

The minimum number of digits of HSN code that a filer has to upload depend on his turnover in the
last year. Notification No. 12/2017 CT 28.06.2017, which has been issued in this regard, provides
as under:
Position till 31.03.2021

Annual turnover in the preceding Number of Digits of HSN

financial year Code
Upto ` 1.5 core Nil
More than ` 1.5 crore and upto ` 5 crore 2
More than ` 5 crore 4

The turnovers of Yellow Lemon Pvt. Ltd., Red Pepper Pvt. Ltd. and Blue Berry Pvt. Ltd. in the
previous financial year are ` 1.5 crore, ` 4.8 crore and ` 5 crore respectively. While Yellow Lemon
Pvt. Ltd. is not required to upload HSN code of the goods sold, Red Pepper Pvt. Ltd. and Blue Berry
Pvt. Ltd. have to upload 2 digits of HSN code of goods sold by them. This will be the position till
31.03.2021.

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HSN or HS (Harmonized Commodity Description and Coding System) is a standardized
system of nomenclature of different goods developed by World Customs Organization,
which is accepted globally. HSN uses 6-digits uniform codes to classify different goods. India
uses eight-digits codes for more specific and precise classification.

Position from 01.04.2021

It may be noted that Notification No. 12/2017 CT 28.06.2017 has been amended to provide that
effective 01.04.2021, the HSN would be disclosed as under3:

The turnovers of Yellow Lemon Pvt. Ltd., Red Pepper Pvt. Ltd. andBlue Berry Pvt. Ltd. in the
previous financial year are ` 1.5 crore, ` 4.8crore and ` 6 crore respectively. While Yellow
Lemon Pvt. Ltd. and
Red Pepper Pvt. Ltd. will be required to upload 4 digits of HSN code of the goods sold to
registered persons, uploading of 4 digits HSN code will be optional for the two companies
when the goods are sold to unregistered persons. Blue Berry Pvt. Ltd. will have to upload 6
digits of HSN code of goods sold by it. This will be the position from 01.04.2021.

3 Since this amendment will be effective from 01.04.2021, the same will be applicable for December
2021 examinations. For June 2021 examinations, the position effective till 31.03.2021 as given in
preceding table is applicable.

What are the contents of GSTR-3B?

CONTENTS OF GSTR-3B
BASIC DETAILS OTHER DETAILS RELATING TO SUPPLIES
 GSTIN • Summarised details of outward supplies and inward supplies
liable to reverse charge
 Legal name of the • Summarised details of inter-State supplies made to
registered person unregistered persons, composition taxable persons and UIN
holders
 Year and Month
• Eligible and ineligible ITC
• Values of exempt, nil-rated and non-GST inward supplies
• Payment of tax
• TDS/TCS credit

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PAYMENT OF TAX
ELECTRONIC CASH LEDGER [SECTION 49(1), (3), (6), (10) & (11)READ WITH RULE 87 OF
CGST RULES]
The Electronic Cash Ledger contains a summary of all the deposits/payments madeby a tax payer.
Electronic Cash Ledger is maintained on the GST Portal.
Any deposit made towards payment of tax, interest, penalty, late fee or any other amount will be
credited to the electronic cash ledger. Any debit to the electronic cash ledger represents payment
therefrom towards tax, interest, penalty, late feeor any other amount.
The deposit in the electronic cash ledger shall be made through any of thefollowing modes,
namely:-
(i) Internet Banking through authorised banks;
(ii) Credit card or Debit card through the authorised bank;
(iii) National Electronic Fund Transfer or Real Time Gross Settlement from anybank; or
(iv) Over the Counter payment through authorized banks for deposits up to tenthousand rupees
per challan per tax period, by cash, cheque or demand draft:

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It may be noted that the restriction for deposit up to ten thousand rupees per challan in case of an
Over the Counter payment will not apply to deposit to be made by –
(i) Government Departments or any other deposit to be made by personsas may be notified
by the Commissioner in this behalf;
(ii) Proper officer or any other officer authorised to recover outstandingdues from any person,
whether registered or not, including recovery made through attachment or sale of movable
or immovable properties;
(iii) Proper officer or any other officer authorised for the amounts collected by way of cash,
cheque or demand draft during any investigation or enforcement activity or any ad hoc
deposit.

PAYMENT OF CHALLAN
What is CPIN, CIN, BRN and E-FPB?
CPIN stands for Common portal Identification Number. It is created for every Challan
successfully generated by the taxpayer. It is a 14-digit unique number to identify the challan.
CPIN remains valid for a period of 15 days.
CIN or Challan Identification Number is generated by the banks, once payment in lieu of a
generated Challan is successful. It is a 17-digit numberthat is 14-digit CPIN plus 3-digit Bank
Code.
CIN is generated by the authorized banks/Reserve Bank of India (RBI) when payment is actually
received by such authorized banks or RBI and creditedin the relevant Government account held with
them. It is an indication that the payment has been realized and credited to the appropriate
Government account. CIN is communicated by the authorized bank to taxpayer as well as to GSTN.
BRN or Bank Reference Number is the transaction number given by the bank for a payment
against a Challan
E-FPB stands for Electronic Focal Point Branch. These are branches of authorized banks which
are authorized to collect payment of GST. Each authorized bank will nominate only one branch
as its E-FPB for PAN Indiatransaction.

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The E-FPB will have to open accounts under each major head for all governments. Any amount
received by such E-FPB towards GST will be credited to the appropriate account held by such
E-FPB. For NEFT/RTGS Transactions, RBI will act as E-FPB.
Are manual Challans applicable as allowed earlier under the VAT regimes?
Manual or physical Challans are not allowed under the GST regime. It is mandatory to generate
Challans online on the GST Portal.
How many types of Challans are prescribed for various taxes and paymentsto be paid
under the GST regime?
There is single Challan prescribed for all taxes, fees, penalty, interest, and other payments to
be made under the GST regime.

Other Aspects relating to Challan

Any person, or a person on his behalf, can generate a challan in prescribed formon the common
portal and enter the details of the amount to be deposited by him towards tax, interest,
penalty, fees or any other amount.
E- challan validity is for 15 days. The commission for making Validity of
payment through e-challan has to be borneby the person challan-15 days
making the payment.
Any unregistered person has to make payment on the basis of temporary identification number
generated through common portal.
The mandate form obtained after making NEFT/RTGS payment has to besubmitted in the Bank.
The validity of the mandate form is 15 days.
On successful credit of amount in the concerned (Central/State) Government Account
maintained in the authorized bank, a Challan Identification Number (CIN) will be generated
by the collecting bank which will be indicated in the challan.
On receipt of the CIN from the collecting bank, the said amount is credited intothe electronic
cash ledger of the person on whose behalf the deposit is made and the common portal will
generate a receipt to this effect.
If CIN is not generated even after making payment and submission of mandate form or when
after generation, it has not been reflected in the common portal, the person making the deposit
or the person on whose behalf the deposit has been made, can make a representation in
prescribed form i.e. FORM GST PMT- 07 through the common portal or e-gateway through
which the payment has been made.
Date of credit into the treasury of the State Government/Central Government isdeemed to be
the date of debit in the electronic cash ledger and not the actual date of deposit of amount in
the electronic cash ledger of the taxable person.
In case any discrepancy is noticed in electronic cash ledger, the registered person shall
communicate the same to the officer exercising jurisdiction in the matter, through the common
portal in prescribed form.

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Manner of utilization of amount reflected in Electronic Cash Ledger
Sub-section 3 of section 49 of the CGST Act lays down the following:
The amount reflected in the electronic cash ledger may be used for making any paymenttowards tax,
interest, penalty, fee, or any other amount in the prescribed manner.
In the e-ledger, information is kept minor head-wise for each major head. The ledger is displayed
major head-wise i.e., IGST, CGST, SGST/UTGST, and CESS. Each major headis divided into five minor
heads: Tax, Interest, Penalty, Fee, and Others.
A registered taxpayer can make cash deposits in the recognized Banks through the prescribed
modes to the Electronic Cash Ledger using any of the Online or Offline modes permitted by the GST
Portal. The Cash deposits can be used for making payment(s) like tax liability, interest, penalties,
fee, and others.

New sub-sections (10) and (11) inserted in section 49 of the CGST Act, 2017 w.e.f 01.01.2020
vide Finance Act, 2019 provides a facility to the registered person to transfer an amount from one
(major/minor) head to another (major/minor) head in the electronic cash ledger.
The amount available in the electronic cash ledger can be utilised for payment of any liability for
the major and minor heads. For instance, if the registered person has made a deposit of tax
erroneously i.e. by virtue of human error, under a particular head instead of a specific head, the
same can be transferred to the respective intended head vide Form GST PMT-09.
This Form can be used either for
(i) transfer of erroneous deposits under any minor head of a major head to any other minor head
of same or other major heads or
(ii) for any of the amounts already lying unutilised under any of the minor heads in Electronic
Cash ledger.
For instance, a registered person has deposited a sum of ` 1,000 under thehead of “Interest”
column of CGST & ` 1,000 under the head of “Interest” column of SGST, instead of the head “Fee”.
Such amount can be transferred using Form GST PMT-09 for making a transfer to the head “Fee”.
The said transfer is required using the above Form, because when the Registered person has to
make the remittance of Tax/Interest/Penalty/ Fee/ Other amount at a stage “Offset Liabilities” in
any of the GST Returns/ Forms for Tax payments through Electronic Cash Ledger, adequate
amount should be available underthe respective head of account.

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Prior to the above amendment, the Registered person has to claim a refund of such erroneous
deposit or unutilized amounts using the prescribed Form and make a fresh deposit of tax for
utilization under the appropriate head
The new section 53A provides for transfer of amount between Centre and States consequential to
amendment in section 49 of the CGST Act allowing transfer of an amount from one head to another
head in the electronic cash ledger of the registered person.
ILLUSTRATION 1
M/s. Daksha Enterprises has made a cash deposit of ` 10,000 under minor head 'tax'of major head
'SGST’. It has a liability of ` 2,000 for minor head "Interest" under the major head "SGST".
State whether M/s. Daksha Enterprises can utilise the amount available for paymentof interest.
ANSWER
The Registered person is allowed to transfer the amount available under any minor head of a major
head to any of the minor head of the same or other major head as per Section 49(10) of the CGST
Act vide Form PMT-09.
Therefore, in the given case, amount of ` 10,000 available under minor head ‘tax’of major head
‘SGST’ can be utilised for payment of liability of ` 2,000 under minor head ‘interest’ of the same
major head, after making a due transfer entry usingForm GST PMT-09 from the minor head of
‘tax’ to ‘interest’.

B. ELECTRONIC CREDIT LEDGER [SECTION 49(2),(4)&(5), SECTION 49A, SECTION 49B READ
WITH RULE 86, RULE 86A AND RULE 88A OF CGST RULES]
Sub-section (2) of section 49 of the CGST Act provides that the self-assessed input tax credit (ITC)
by a registered person shall be credited to its Electronic Credit Ledger

Non-utilisation of ITC for tax liability under reverse charge mechanism

The amount available in the electronic credit ledger may be used for makingany payment towards
output tax under CGST or IGST. It is pertinent to note that “output tax” in relation to a taxable
person, means the tax chargeable under this Act on taxable supply of goods and/or services made
by him or by his agent but excludes tax payable by him on reverse charge basis. Thus, ITC cannot
be utilised for tax payable under reverse charge mechanism.

Manner of utilisation of ITC [Combined reading of section 49(5), 49A,49B, rule 88A
and Circular No. 98/17/2019 GST dated 23.04.2019]2
IGST CGST SGST/UTGST

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IGST (1) (2) [refer1(i)] (2) [refer1(i)]
CGST (2) (1) Not allowed
[refer 2 & 3(i)] [refer 2 & 3]
SGST/ UTGST (2) Not allowed (1)
[refer 2& 4(i)] [refer 2 & 4]
1. Available IGST credit in the credit ledger should first be utilized towards payment of IGST.
i. Remaining amount if any, can be utilized towards the payment of CGST and SGST/UTGST in
any order and in any proportion, i.e. ITC of IGST can be utilized either against CGST or SGST.
2. Entire ITC of IGST is to be fully utilised first before the ITC of CGST or SGST/UTGST can be
utilized.
3. Available CGST Credit in the credit ledger shall first be utilized for payment of CGST.
i. Remaining amount if any, will be utilized for payment of IGST
4. Available SGST /UTGST credit in the credit ledger shall first be utilizedfor payment of
SGST/UTGST.
i. Remaining amount if any, will be utilized for payment of IGST, onlywhen credit of CGST is
not available for payment of IGST

CGST credit cannot be utilized for payment of SGST/UTGST.

Similarly, SGST/UTGST credit cannot be utilized for payment of CGST.

Conditions of use of amount available in electronic credit ledger [Rule 86A]

In case the Commissioner or an officer authorised by him in this behalf, not below the rank of an
Assistant Commissioner, has reasons to believe that ITC available in the electronic credit ledger has
been fraudulently availed or is ineligible, he may prohibit use of ITC for discharge of any liability
under section 49 or for claim of any refund of any unutilised amount. [Such provisions have been
discussed in detail in Chapter 6: Input Tax Credit under Heading : How ITC is Utilized.]
Common Points for Electronic Cash & Credit Ledger
 Where a person has claimed refund of any amount from the electronic cash or credit ledger,
the said amount shall be debited to the electronic cash or credit ledger.
 If the refund so claimed is rejected, either fully or partly, the amount debited earlier, to the extent
of rejection, shall be credited to the electronic cash or creditledger by the proper officer by an
order made in prescribed form
ELECTRONIC LIABILITY REGISTER [SECTION 49(7), (8) & (9) READWITH RULE 85 OF CGST
RULES]
Sub-section (7) of section 49 enumerates about the third kind of ledger [Autoupdated on common
portal] viz. ElectronicLiability Register. While the terms “Electronic Cash Ledger” and “Electronic

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Credit Ledger” are defined in the Act, the term “Electronic Liability Register” is not defined. The
Section lays down that all liabilities of a taxable person will be maintainedin a separate register.
Order of discharge of tax and other dues
Sub-section (8) prescribes the chronological order in which the liability of a taxable person has to
be discharged:
self -assessed tax and other dues for the previous tax periods have tobe discharged first.
the self -assessed tax and other dues for the current period have to be discharged next.
Once these two steps are exhausted, thereafter any other amount payable including demand
determined under section 73 or section74 to be discharged. In other words, the liability
if any, arising out of demand notice and adjudication proceedings comes last. This sequence
has to be mandatorily followed.
The expression “other dues” referred above mean interest, penalty, fee or any other amount payable
under the Act or the rules made there under.
Presumption that incidence of tax is passed on
Sub-section (9) of Section 49 contains a deeming clause. This part of the section provides that when
a taxable person has paid the GST under thecorresponding Act, the taxable person is deemed to
have passed on the incidence of such payment of tax to the recipient of such goods and /or services.
Thus, if tax has been paid under the CGST Act, 2017 then the taxable person is deemed to have
passed on the incidence of such payment of CGSTto the recipient. This is subject to the contrary
being proved. Onus to establish that incidence of tax has not been passed on to the recipient,
becomes relevant in case of Section 54 dealt with “Refund of Tax”
Chapter IX of CGST Rules provide the following:
(I) Debit to electronic liability register:
all amounts payable towards tax, interest, late fee and any other amount as per return filed;
all amounts payable towards tax, interest, penalty and any other amount determined in a
proceeding by an Assessing authority or asascertained by the taxable person;
interest payable under Section 50.
any interest amount that may accrue from time to time.

Debit to Electronic Credit/Cash ledger:

Debit to Electronic Credit Ledger and Debit to Electronic Cash Ledger and Credit to
Credit to Electronic Liability Register Electronic LiabilityRegister

Payment of all the liabilities of aregistered Payment of all the liabilities of a registered
person as per his return subject to section person as per his return subject to section 49 or
49 or section 49A or section 49B. section 49Aor section 49B.

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Payment of TDS deducted under section 51,
TCS deducted by e- commerce operator under
section 52, amount payable under reverse
charge basis, amount payable undersection 10,
amount payable towardspayment of interest,
penalty, fee or any other amount under the
Act.

How do the new payment systems benefit the taxpayer and the CommercialTax Department?
No more queues and waiting for making payments as payments can bemade online 24 X 7.
Instant online receipts for payments made online.
Tax Consultants can make payments on behalf of the clients.
Single Challan form to be created online, replacing the three or four copyChallan.
Revenue will come earlier into the Government Treasury as compared tothe old system.
Greater transparency.
Online payments made after 8 pm will be credited to the taxpayer’saccount on the same
day.

INTEREST ON DELAYED PAYMENT OF TAX [SECTION 50]

The tax dues which are not paid within the stipulated time are liable to interest payment. This
mechanism is automatic in nature by virtue of the provisions laid under any tax laws. On similar
lines, section 50 of the CGST Act, 2017 provides for applicability of interest for default in payment
of taxes within the stipulated time. Under GST law, a registered person, can make the payment of
tax through electronic credit ledger or electronic cash ledger in terms of section 49 of CGST Act,
2017. Usually, the balance in electronic credit ledgeris exhausted first before utilizing the balance
available in the electronic cash ledger. This practice is adopted for a better working capital
management.
In case a registered person does not have sufficient amount available in electronic credit ledger to
pay the tax dues for a particular tax period. Also,the registered person does not have sufficient
money for making deposit of balance tax amount in electronic cash ledger. In such a situation, GST
common portal doesn’t have a mechanism to allow a registered person to make part payment of
taxes.
If the law maker demands tax dues along with interest on the gross payments
i.e. tax paid through electronic cash ledger and credit ledger, it may be an unhealthy practice from
business perspective. To counter such recoverymechanism, a proviso has been inserted under
Section 50 to provide that whena registered person has paid his taxes through a return specified

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under Section 39 of CGST Act, 2017 belatedly, interest shall be applicable only on the net taxes paid
through electronic cash ledger and not on the gross taxes paid for such tax period
Proviso to sub -section(1) has been inserted vide Section 100 of Finance Act, 2019and effect of such
insertion has been given effect from 01.09.2020. However, corresponding retrospective
amendment in CGST Act, 2017 is yet to be brought inby the suitable legislation. However, CBIC has
issued F. No. CBEC- 20/01/08/2019-GST dated: 18th September, 2020 for giving instructions to the
filed formations for giving effect to 39th GST Council decision of collecting interestunder Section 50(1)
only on the net tax liability paid through cash w.e.f. 01.07.2017. Accordingly, Interest if any payable
by the registered person for delayin remittance of taxes beyond the stipulated due date on account of
delay in filingof return under section 39, shall be demanded only on the net cash liability of taxes
and not on the gross tax liability
When interest is payable?
Interest is payable in case of delay in payment of tax, in full or in part within the prescribed period.
Rate of interest
The rate of interest shall be notified by the Government on the basis of recommendation of the
Council. However, such rate to be notified shall not exceed18% in case of belated payment of tax i.e.
on failure to pay tax (or part of tax)to the Government’s account. [Notification No. 13/2017 CT
dated 28.06.2017has notified the rate of interest as 18% per annum].
Computation of period for calculation of interest
The period of interest will be from the date following the due date of payment to the actual date of
payment of tax.
Other relevant points relating to interest
The term “tax” here means the tax payable under the Act or Rules madethereunder.
The payment of interest in case of belated payment of tax should bemade voluntarily i.e.
even without a demand.
The interest payable under this section shall be debited to the ElectronicLiability Register.
The liability for interest can be settled by adjustment with balance inElectronic Cash
Ledger but not with balance in electronic credit ledger.
Note: Since the provisions of section 42(10) and 43(10) of the CGST Act are practically not in
operation, the provisions relating to interest payment under section 50(3) have notbeen discussed.

ILLUSTRATION 2 Mr. Alok, a registered supplier of taxable goods, filed GSTR 3B for the month of
January, 2020 on 15thApril, 2020. The prescribed due date to file the said GSTR3B was
20thFebruary, 2020. The amount of net GST payable, in Cash i.e. Electronic Cash Ledger on supplies
made by him for the said month worked out to be ` 36,500 which was paid on 15thApril, 2020. Briefly
explain the related provisions and compute the amount of interest payable under the CGST Act,
2017 by Mr. Alok. Ignore the effectof leap year, if applicable in this case.

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ANSWER
Interest is payable in case of delayed payment of tax @ 18% per annum from thedate
following the due date of payment to the actual date of payment of tax.
Thus, the amount of interest payable by Mr. Alok is as under:-
Period of delay = 21st February, 2020 to 15th April, 2020 = 54 days
Hence, amount of interest = ` 36,500 x 18% x 54/365 = ` 972

ILLUSTRATION 3
M/s ABC Ltd., have filed their GSTR3B for the month of July, 2020 within thedue date prescribed
under Section 39 i.e. 20.08.2020. Post filing of the return,the registered person has noticed during
September 2020 that tax dues for the month of July, 2020 have been short paid for ` 40,000. M/s
ABC Ltd., has paid the above shortfall of ` 40,000, through GSTR3B of September 2020, filed on
20.10.2020 [payment through Cash ledger - ` 30,000 and Credit ledger ` 10,000]. Examine the
Interest payable under the CGST Act, 2017.
What would be your answer if, GSTR3B for the month of July 2020 has beenfiled belatedly on
20.10.2020 and the self-assessed tax of ` 40,000/- has been paid on 20.10.2020 [payment through
electronic cash ledger - ` 30,000 and electronic credit ledger ` 10,000]
Notes:
 There exists adequate balance in Electronic Cash & Credit ledger as on31.07.2020 for
the above short fall
 No other supply has been made nor tax payable for the month of July,2020 other than `
40,000/- missed out to be paid on forward charge basis
 Ignore the effect of leap year, if applicable in this case.
ANSWER
Interest is payable under Section 50 of the CGST Act, 2017 in case of delayed payment of tax @ 18%
per annum from the date following the due date of payment to the actual date of payment of tax.
As per proviso to sub-section (1) of Section 50, interest is payable on the nettax liability paid in
cash, only if the return to be filed for a tax period under Section 39, has been filed after the due
date to furnish such return.
In the above scenario, M/s ABC Ltd., has defaulted in making the payment for ` 40,000 on self-
assessment basis in the return for the month of July, 2020. Accordingly, interest is payable on the
gross liability and proviso of sub- section 50(1) shall not be applicable.
Thus, the amount of interest payable by M/s ABC Ltd., is as under:-

Period of delay = 21st August, 2020 to 20th October, 2020 = 60 days

Hence, amount of interest = ` 40,000 x 18% x 60/365 = ` 1,184

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Alternatively, if M/s ABC Ltd., have filed the return for the month of July,2020 on 20.10.2020,
beyond the stipulated due date of 20.08.2020 and if the self- assessed tax for July, 2020 has been
paid on 20.10.2020, Interest under proviso to Section 50(1) shall be payable on the tax paid
through Electronic Cash Ledger only.
Hence Interest is payable from 21st August 2020 till 20th October 2020 = 60days
Amount of Interest = ` 30,000 x 18% x 60/365 = ` 888

5. TRANSFER OF INPUT TAX CREDIT [SECTION 53 OFCGST ACT & SECTION 18 OF

IGST ACT]
If the amount of CGST is utilised towards dues of IGST then, in terms of section 53of the CGST
Act, there shall be reduction in the amount of CGST, equal to the credit so utilized, and the Central
Government shall transfer such amount equivalent tothe amount so reduced in CGST account to
the IGST account.
Similarly, if the amount of IGST is utilised towards dues of CGST/UTGST then, in termsof section 18
of the IGST Act, there shall be reduction in the amount of IGST, equal to the credit so utilized, and
the Central Government shall transfer such amount equivalent to the amount so reduced in IGST
account to the CGST/UTGST account.
However, if the amount of IGST is utilised towards dues of SGST then, in terms of section 18 of the
IGST Act, there shall be reduction in the amount of IGST, equal to the credit so utilized, and will be
apportioned to the appropriate State Government and the Central Government shall transfer the
amount so apportioned to the account of the respective State Government.

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TAX INVOICE
TAX INVOICE [SECTION 31]
The provisions relating to Tax Invoice are provided under section 31 of the CGST Act aswell as
Chapter-VI: Tax Invoice, Credit and Debit Notes of Central Goods and Services (CGST) Rules, 2017.
The provisions contained in these rules have been incorporated at the relevant places.
There is no format prescribed for the Tax Invoice. prescribed as mandatory fields.

TAX INVOICE ISSUED BY A SUPPLIER OF TAXABLE GOODS/ TAXABLE SERVICES

A tax invoice shall be issued by a registered person supplying taxable goodsor taxable services
or both. Such tax invoice shall show the prescribed particulars.
(i) Time limit for issuance of invoice [Sections 31(1), (2), (4) & (5) readwith rule 47]
The time for issuing an invoice would depend on the nature of
supply viz. whether it is a supply of goods or supply of services.
A registered person supplying taxable goods shall issuea tax
invoice, before or at the time of removal of goods (where supply
involves movement of goods) or in any other case, before or at
the time of delivery or making available thereof to the recipient.
The Government may, on the recommendations of the
Council, by notification, specify the categories of goods or
supplies in respect of which a tax invoice shall be issued,
within such time and in such manner as may be
prescribed.
In case of supply of taxable services, tax invoice may be issued before orafter
the provision of services, but within the specified period. Government may notify the
categories of services in respect of which any otherdocument issued in relation
to supply shall be deemed to be a tax invoice ortax invoice may not be issued.
In case of taxable In case of taxable supply of services
supply of goods

Invoice shall be issued Invoice shall be issued before or after the provision
before or at the time of service, but within a period of 30 days* from the
of,— date of supply of service.
*45 days in case of an insurer or banking company or
(a) removal of goods for financial institution, including a non- banking
supply to the financial company (NBFC)
recipient, where the
supply involves
movement of goods; or

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(b) delivery of goods or An insurer or a banking company or a financial
making available institution, including NBFC, or a telecom operator, or
thereof to the any other class of supplier of services as may be
recipient, in any other notified by the Government, making taxable
supplies of services between distinct persons as
case. specified in section 25
May issue the invoice

Before or at the time such supplier records the same

in his books of account or before the expiry of the
quarter during which the supply was made
In case of continuous In case of continuous supply of services
supply of goods

Where successive Where the invoice shall be

statements of issued
accounts / successive
payments are involved, the
invoice shall be issued
before/at the time
(a) due date of payment is on or before the due date
each such statement is
issued or each such ascertainable from the of payment
payment is received. contract

(b) due date of payment before or at thetime

is notascertainable from when the supplier of
thecontract service receives the
payment

(c) payment is linked to the on or before the date of

completion of anevent completion of that event.

Ritu Manufacturers, Delhi supplies goods to Prakhar Electronics, Haryana.The goods were
removed from its factory in Delhi on 23rd September. Ritu Manufacturers needs to issue a tax
invoice on or before 23rd September.

Katyani Security Services Ltd. provides security services to Royal Jewellers for their Jewellery
Exhibition to be organized on 5thOctober. Katyani Security Services Ltd. needs to issue a tax
invoice within 30 days of supply of security services, i.e. on or before 4th November.

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(ii) Where supply of services ceases before its completion [Section 31(6)]
In a case where the supply of services ceases under a contract before the
completion of the supply, the invoice shall be issued at the time when
the supply ceases and such invoice shall be issued to the extent of the
supply made before such cessation.

(iii) Goods sent on sale or return basis [Section 31(7)]

Where the goods being sent or taken on approval for sale or return areremoved before the supply
takes place, the invoice shall be issued:
(i) before/at the time of supply
or
(ii) 6 months from the date of removal
whichever is earlier.

(iv) Particulars of a tax invoice [Sections 31(1) & (2) read with rule 46]
As discussed earlier, there is no format prescribed for an invoice, but rules make it mandatory for
an invoice to have the following fields (only applicable fields are to be filled):

Name, address and GSTIN of the supplier;

A consecutive serial number not exceeding 16 characters, in oneor multiple

series, containing alphabets/numerals/special characters hyphen or dash and
slash, and any combinationthereof, unique for a FY;

Date of its issue;

If recipient is registered - Name, address and GSTIN or UIN ofrecipient

If recipient is unregisteredand Particulars of invoice

value of supply is

` 50,000 or more Name and address of the recipient and the

address of delivery, along with the name of
State and its code

less than ` 50,000 unregistered recipient may stillrequest the

aforesaid details to be recorded in the tax
invoice

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HSN code for goods or services;

Description of goods or services;

Quantity in case of goods and unit or Unique Quantity Codethereof;

Total value of supply of goods or services or both;

Taxable value of supply of goods or services or both taking into account

discount or abatement, if any;

Rate of tax (central tax, State tax, integrated tax, Union territorytax or cess);

Amount of tax charged in respect of taxable goods or services(central tax, State

tax, integrated tax, Union territory tax or cess);

Place of supply along with the name of State, in case of a supplyin the course
of inter-State trade or commerce;

Address of delivery where the same is different from the place ofsupply;

Whether the tax is payable on reverse charge basis; and

Signature or digital signature of the supplier or his authorized representative

(not required in case of issuance of an electronic invoice in accordance with the
provisions of the Information Technology (IT) Act, 2000).
Quick Response code, having embedded Invoice Reference Number (IRN) in it, in
case e-invoice has been issued

(v) Number of HSN digits required on tax invoice and class of registered person not
required to mention HSN [Rule 46]
Board may, on the recommendations of the Council, by notification, specify:
(i) the number of digits of Harmonised System of Nomenclature (HSN) code for goods or
services that a class of registered persons shall be required to mention; or
(ii) a class of supply of goods or services for which specified numberof digits of HSN
code shall be required to be mentioned by allregistered taxpayers; and
(iii) the class of registered persons that would not be required to mention the HSN code for
goods or services.
This provision is also applicable to Bill of Supply [The concept of Bill of Supplyis discussed in
subsequent paras].

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In view of above powers, following has been notified vide Notification No.12/2017 CT dated
28.06.2017 as amended:
Position effective till 31.03.2021

S.No. Annual Turnover (AT) in the Number of Digits of HSN

preceding FY Code
1. AT ≤` 1.5 crores Nil

2. 5 crores ≥AT >` 1.5 crores 2

3. 4
AT >` 5 crores

Position with effect from 01.04.2021

S.No. Annual Turnover (AT) in the Number of Digits of HSN

preceding FY Code

1. AT ≤` 5 crores For B2B supply - 4

For B2C supply – 4
(optional)*
2. AT >` 5 crores For B2B supply and B2C
supply – 6

*As mentioned above, a registered person having aggregate turnover up to ` 5 crores in the
previous financial year has been exempted from the requirement of mentioning the HSN
Code in the manner specified in above table in a tax invoice issued by him under the said
rules in respect of supplies made to unregistered persons.
(vi) Manner of issuing the invoice [Sections 31(1) & (2) read with rule 48]

In case of taxable supply of goods In case of taxable supply of

services
Invoice shall be prepared in Invoice shall be prepared in
TRIPLICATE DUPLICATE

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The serial number of invoices issued during a tax period shall be furnished electronically
[through the Common Portal – www.gst.gov.in], in FORM GSTR-1 [Details of outward
Supplies of goods or services].

Key points from aforesaid discussion have been summarized as follows:

1. All GST taxpayers are free to design their own Tax Invoice Format.
2. The law requires that only certain fields as mandatory fields in the Tax Invoice. The same have
been listed under heading (iv) above. The mandatory fields have also been circled in the
following Sample Tax Invoice.
3. The time period for issuance of invoice is different for goods and services. For goods, it is any
time before or at its delivery and for services, it is within 30 days from the date of supply of
services.
4. In order to keep the compliance burden low for the small taxpayers, taxpayers with annual
turnover of `1.5 crores need not mention the HSN code of the goods in the invoices.

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Sample Tax Invoice

E-invoicing

The GST Council approved the proposal to introduce electronic-invoice (hereinafter called
as e-invoice) in a phased manner in its 37 th meeting held on 20th September, 2019.
Accordingly, steps have been taken to introduce 'e-
invoicing' for reporting of business to business
(B2B) invoices to GST System, beginning from 1st
January 2020 on voluntary basis. With effect
from 1 October, 2020, there is a switch from
st

voluntary to mandatory e-invoicing for certain

notified category of taxpayers4.

4 A relaxation has been provided to these notified category of taxpayers till 31.10.2020 vide
Notification No. 73/2020 dated 01.10.2020. In respect of invoices raised by them between
1.10.2020 and 31.10.2020, they are permitted to upload these invoices on e-invoicing portal within
30 days from the date of invoice.

Electronic invoicing is a system in which all Business to Business invoices are electronically
uploaded and authenticated by the designated portal. Previously invoices generated by different
software looked similar to humans, but computer system can’t understand it fully though the
business users can understand them. E-invoicing has done away with this shortcoming. GST e-
invoice is the introduction of the digital invoice for goods and services provided by the business
firm generated at the government GST portal. The concept of GST e-invoice generation system is
launched for reduction in GST evasion. Registered person whose Aggregate Turnover in a financial

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SSGURU CA SURAJ SATIJA
year exceeds Rs. 500 crores shall prepare electronic invoice and same will be mandatory from 1st
October, 2020.
Notification No. 13/2019 C.T. dated 13.12.2019 has been issued so as to insert sub-rule (4), (5) and
(6) in Rule 48 of the CGST Rules, w.e.f 1.4.2020, to provide for issuance of e invoices by certain
category of persons. Such newly introduced provisions are briefed as under.
• Rule 48(4) The invoice shall be prepared by such class of registered persons as may be notified by
the Government, on the recommendations of the Council, by including such particulars contained in
FORM GST INV-01 after obtaining an Invoice Reference Number by uploading information
contained therein on the Common Goods and Services Tax Electronic Portal in such manner and
subject to such conditions and restrictions as may be specified in the notification.
• Rule 48(5) Every invoice issued by a person to whom sub-rule (4) applies in any manner other
than the manner specified in the said sub-rule shall not be treated as an invoice.
• Rule 48(6) The provisions of sub-rules (1) and (2) shall not apply to an invoice prepared in the
manner specified in sub-rule (4).
• Vide Notification No. 70/2019-CT dated 13.12.2019, the Government has notified registered
person, whose aggregate turnover in a financial year exceeds one hundred crore rupees, as a class
of registered person who shall prepare invoice in terms of sub-rule (4) of rule 48 of the said rules
in respect of supply of goods or services or both to a registered person.
• Vide Notification No. 69/2019-CT dated 13.12.2019, the Government has further issued
Notifications so as to notify the portals where e-invoices in terms of sub-rule (4) of rule 48 shall be
prepared. List of portals are as below;
(i) www.einvoice1.gst.gov.in;
(ii) www.einvoice2.gst.gov.in;
(iii) www.einvoice3.gst.gov.in;
(iv) www.einvoice4.gst.gov.in;
(v) www.einvoice5.gst.gov.in;
(vi) www.einvoice6.gst.gov.in;
(vii) www.einvoice7.gst.gov.in;
(viii) www.einvoice8.gst.gov.in;
(ix) www.einvoice9.gst.gov.in;
(x) www.einvoice10.gst.gov.in.

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REVISED INVOICE

CONSOLIDATED TAX INVOICE

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BILL OF SUPPLY

RECEIPT VOUCHER

REFUND VOUCHER

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INVOICE AND PAYMENT VOUCHERS TO BE ISSUED BY RECIPIENT OF SUPPLY LIABLE TO PAY
TAX UNDER REVERSE CHARGE

PAYMENT VOUCHER

INVOICE

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CREDIT NOTES

DEBIT NOTES

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E-WAY BILL

Meaning of e-waybill E-way bill is an electronic document generated on the GST

and why is it required? portal evidencing movement of goods.
Section 68 mandates that the Government may require the
person in charge of a conveyance carrying any consignment of
goods of value exceeding such amount as may be specified to
carry with him such documents and such devices as may be
prescribed. Rule 138 prescribes e-way bill as the document to be
carried for the consignment of goods in certain prescribed cases.

When is required to E-way Bill is mandatory in case of movement of goods of

consignment value exceeding ` 50,000.
be generated?
Movement should be:
(i) in relation to a supply; or
(ii) for reasons other than supply; or
(iii) due to inward supply from an unregisteredperson,
Registered person causing movement of goods shall furnish the
information relating to the said goods in Part A of Form GST
EWB-01 before commencement of such movement.

Exceptions to minimum consignment value of

` 50,000
 Inter-State transfer of goods by principal to job-worker
 State transfer of handicraft goods by a personexempted
from obtaining registration
Who causesmovement If supplier is registered and undertakes to transport the goods,
of goods? movement of goods is caused by the supplier. If recipient
arranges transport, movement would be caused by him.
If goods are supplied by an unregistered supplier to a
registered known recipient, movement shall be caused by
such recipient.

Part A: to be furnished by the Part B: to be furnished by the

Information to be
registered person**who is person who is transporting
furnished in e-waybill
causing movementof goods. the goods.

**However, information in Part-A may be furnished:

 by the transporter if so authorised or
 by the e-commerce operator/courier agency, where the
goods are supplied through them.

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Who can generate the e- E-way bill is to be generated by the registered consignor or
way bill? consignee (if the transportation is being done in own/hired
conveyance or by railways by air or by vessel) or the
transporter (if the goods are handed over to a transporter for
transportation by road). Where neither the consignor nor
consignee generates the e- way bill and the value of goods is
more than
` 50,000/- it shall be the responsibility of the transporter to
generate it.

Other points  Goods transported by railways shall be delivered only on

production of e-way bill.
 E-way bill can be generated even if consignmentvalue is less
than `50,000.

Details of conveyance In case of intra-State movement of goods upto 50 kmdistance:

may notbe furnished  from place of business (PoB) of consignor to PoB of
in Part-B transporter for further transportation or
 from PoB of transporter finally to PoB of theconsignee.

In such cases, the transporter or generator of the e-way bill shall

Transfer of goods to
update the new vehicle number in Part B of the EWB before such
another conveyance
transfer and further movement of goods.

Consolidated E-way After e-way bill has been generated, where multiple
Bill in case of road consignments are intended to be transported in one
transport conveyance, the transporter may indicate the serial number of
e-way bills generated in respect of each such consignment
electronically on the common portal and a consolidated e-way
bill in Form GST EWB-02 may be generated by him on the said
common portal prior to themovement of goods.
Where the consignor/consignee has not generated the e-way bill
in Form GST EWB-01 and the aggregate of the consignment value
of goods carried in the conveyance is more than ` 50,000, the
transporter shall generate individual Form GST EWB-01 on the
basis of invoice or billof supply or delivery challan and may also
generate a consolidated e-way bill in Form GST EWB-02 prior to
themovement of goods [This provision is not yet effective].

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E-way bill can be cancelled if either goods are not transported or
Cancellation of e-
are not transported as per the detailsfurnished in the e-way bill.
way bill
The e-way bill can be cancelled within 24 hours from the time of
generation.

Validity period of e-way Sl. Distance within Validity period from

bill/consolidated e- way No. country relevant date
bill
1. Upto 100 Km One day in cases other than
Over Dimensional Cargo or
multimodal shipment in
which at least one leg
involves transport by ship

2. For every 100km or One additional day in cases

partthereof other than Over
thereafter Dimensional Cargo or
multimodal shipment in
which at least one leg
involves transport by ship

3. Upto 20 Km One day in case of Over

Dimensional Cargo or
multimodal shipment in
which at least one leg
involves transport by ship

4. One additional day in case

For every 20 km or
of Over Dimensional Cargo
part there of or multimodal shipment
thereafter in which at least one leg
involves transport by ship

Acceptance/rejection of e- The person causing movement of goods shall generate the e-

way bill way bill specifying the details of other person as a recipient
who can communicate the acceptance or rejection of such
consignment specified in the e-way bill. If the acceptance or
rejection is not communicated within72 hours from the time
of generation of e-way Bill or the time of delivery of goods
whichever is earlier, it will be deemed that he has accepted
the details.

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Is e-way bill required E-way bill is not required to be generated in certain specified
cases. [Discussed in detail earlier in this chapter]
in all cases?

Documents/ devicesto  invoice or bill of supply or delivery challan

be carried by a
 copy of the e-way bill in physical form or the e-way bill
person-in-charge of a number in electronic form or mapped to a RFID** embedded
conveyance on to the conveyance

Verification of Commissioner or an officer empowered by him in this behalf

documents and may authorise the proper officer to intercept any conveyance to
conveyances verify the e-way bill or the e-way billnumber in physical form
for all inter-State and intra-Statemovement of goods.
Physical verification of a specific conveyance can also be carried
out by any officer, on receipt of specific information on evasion
of tax, after obtaining necessary approval of the Commissioner or
an officer authorised byhim in this behalf.

Inspection and A summary report of every inspection of goods in transit shall

verification of goods be recorded online on the common portal by the proper officer
within 24 hours of inspection and the final report shall be
recorded within 3 days of such inspection.
Once physical verification of goods being transported on any
conveyance has been done during transit at oneplace within the
State or in any other State, no further physical verification of the
said conveyance shall be carried out again in the State, unless a
specific information relating to evasion of tax is made available
subsequently. Where a vehicle has been intercepted and detained
for a period exceeding 30 minutes, the transporter may upload
the said information in on the common portal.

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Restriction on No person (including a consignor, consignee, transporter, an e-
furnishing of commerce operator or a courier agency) shall not be allowed to
information in Part A furnish the information in Part A of Form GST EWB-01 in
of Form GST EWB- 01 respect of following registered persons, whether as a supplier
or a recipient:
(i) A composition supplier has not furnished the statement for
payment of self-assessed tax for 2 consecutive quarters, or
(ii) A person paying tax under regular scheme has not
furnished the returns for 2 consecutive months, or
(iii) A person paying tax under regular scheme has not furnished
GSTR-1 for any 2 months or quarters, as the case may be.
However, Commissioner (jurisdictional commissioner) may, on
sufficient cause being shown and for reasons to be recorded in
writing, allow furnishing of the said information in Part A of
Form GST EWB-01, subject to prescribed conditions and
restrictions. .

Accounts AND Records

Accounts and other Records [Section 35]
Assessment in GST is substantially focused around self-assessment. Every taxpayer thereby is
expected to self-assess the liability, file the returns and pay the tax by the 20th of the following
month. The authenticity and completeness of the same is subject to audits, inspection and that casts
a responsibility upon the taxpayer to maintain the necessary accounts and records.
Every registered person is expected to maintain the necessary accounts and records at the principal
place of business and these records could be electronic or manual.
Place of maintenance
Section 35 of Central Goods & Services Tax Act, 2017 states that every registered person shall
maintain books of accounts at his principal place of business and where more than one place of
business is specified in the certificate of registration, at every such place of business too.
Nature of records
Section 35 of Central Goods & Services Tax Act, 2017 mandates that the following records must be
maintained:
• Production Records
o Raw Materials
o WIP

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o Finished Goods
• Inward supplies
• Outward supplies
• Taxes Paid
• ITC availed
• Output tax liabilities
Also, the CGST Rules, 2017 prescribes the following records:
• Goods / services imported
• Supplies attracting payment of taxes under reverse charge mechanism along with all ancillary and
related documents
• Names and addresses of persons he has received the goods / services
• Names and addresses of persons to whom he has supplied the goods / services

Audit requirements
Section 35(5) of Central Goods & Services Tax Act, 2017 also mandates that every registered person
must get his accounts audited by a Chartered Accountant or a Cost Accountant if his aggregate
turnover during a Financial Year exceeds Rs. 2 Crores.
Such person has the additional responsibility of furnishing along with the annual return:
• Audited annual accounts and
• Reconciliation statement duly certified which reconciles the value of supplies declared in the
Annual Return with the Annual Audited Financial Statements
Provided that every registered person whose aggregate turnover during the financial year 2018-
2019 exceeds five crore rupees shall get his accounts audited as specified under sub-section (5) of
section 35 and he shall furnish a copy of audited annual accounts and a reconciliation statement,
duly certified, in FORM GSTR-9C for the financial year 2018-2019, electronically through the
common portal either directly or through a Facilitation Centre notified by the Commissioner.
(inserted vide notification number 16/2020 dt 23.03.2020)
Provided that nothing contained in this sub-section shall apply to any department of the Central
Government or a State Government or a local authority, whose books of account are subject to audit
by the Comptroller and Auditor-General of India or an auditor appointed for auditing the accounts
of local authorities under any law for the time being in force.

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INPUT TAX CREDIT
INTRODUCTION
Taxes paid on inward supply of inputs, capital goods and services are called input taxes. These may
be Integrated GST, Central GST, State GST or Union Territory GST. Taxes paid under reverse charge
mechanism are also input taxes.
The credit of the above taxes is called input tax credit, that is, the taxes paid on inputs are available
as a set off against the taxes payable on outward taxable supplies.
CGST Act, 2017 contains the provisions relating to Input Tax Credit (ITC), its availment, utilization
and conditions and restrictions attached therewith.
Definitions of input tax and input tax credit:
Section 2(62) “input tax” in relation to a registered person, means the Central tax, State tax,
Integrated tax or Union Territory tax charged on any supply of goods or services or both made to
him and includes –
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated
Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective
State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union
Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy;
Section 2(63) “input tax credit” means the credit of input tax;
Input Tax Credit (ITC) is considered as a cornerstone of GST. In the previous tax regime, there was
non- availability of credit at various points in supply chain, leading to a cascading effect of tax i.e.,
tax on tax and therefore increasing the cost of goods and services. This flaw has been removed under
GST and a seamless flow of credit throughout the value chain is therefore available consequently
doing away with the cascading effect of taxes.
To avail the benefit of ITC, it is required that the person availing such benefit is registered under
GST. An unregistered person is not eligible to take the benefit of ITC. Section 155, of the CGST Act,
2017 states that where any person claims that he is eligible for input tax credit under this Act, the
burden of proving such claim shall lie on such person.

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Section 49(5) of the CGST Act, 2017 provides for utilization of ITC in Electronic credit ledger for
payment of GST.
REGULATORY FRAMEWORK
1. Central Goods and Services Act, 2017

Section Deals with

Section 2(62) input tax
Section 2(63) input tax Credit
Section 2(61) input Service distributor
Section 2(68) Job Work
Section 16 eligibility and Conditions for taking ITC
Section 17 apportionment of Credit and Blocked Credits
Section 18 availability of Credit in special circumstances
Section 19 taking input tax Credit in respect of inputs and Capital Goods sent for Job Work
Section 20 Manner of distribution of credit by input Service distributor
Section 21 Manner of recovery of credit distributed in excess
Section 39 Furnishing of returns
Section 41 Claim of input tax credit and provisional acceptance thereof
Section 49 Payment of tax, interest, penalty and other amounts
Section 49 a utilisation of input tax credit subject to certain conditions
Section 49 B Order of utilisation of input tax credit

ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT [Section 16]
(1) Every registered person shall,
 subject to such conditions and restrictions as may be prescribed and, in the manner, as specified
in section 49,
 be entitled to take credit of input tax charged on,
 any supply of goods or services or both to him,
 which are used or intended to be used in the course or furtherance of his business, and
 the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the
credit of any input tax in respect of any supply of goods or services or both to him unless,
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act,
or such other tax paying documents as may be prescribed;
ITC can be availed on the basis of any of the following documents:
i) Invoice issued by the supplier of goods and/or services
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ii) Invoice issued by the recipient receiving goods and/or services from unregistered supplier along
with proof of payment of tax, in case of reverse charge
iii) Debit note issued by the supplier
iv) Bill of entry or similar document prescribed under the Customs Act, 1962
v) Revised invoice
vi) Document issued by the input service distributor
The documents basis which ITC is being taken should contain at least the following details:

 Amount of tax charged

 Description of goods or services

 Total value of supply of goods and/or services

 GSTIN of the supplier and recipient

 Place of supply in case of inter-State supply

The documents basis which ITC is being taken should have all the relevant particulars as prescribed
in rule 46 of the CGST Rules.
The documents basis which ITC is being taken should have all the relevant particulars as prescribed
in rule 46 of the CGST Rules.
(b) he has received the goods or services or both.
To be eligible for ITC he must be in possession of a tax invoice or debit note issued by a supplier
registered under this Act, or such other tax paying documents and received the goods or services or
both.
The registered person need not receive the goods himself. It is sufficient even if the goods are
delivered to some other person on his direction.
Similarly, services may also be provided to a third party by the service provider (supplier) on the
direction of the service recipient (registered person). In this case also, though the service recipient
(registered person) does not receive the service, by virtue of explanation to section 16(2)(b) it is
deemed that the registered person (service recipient) has received the service.
In other words, service provided to any person on the direction of and on account of the registered
person, is deemed to have been received by such registered person. So, ITC will be available to the
registered person, on whose direction the services are provided to a third person.
Explanation. – For the purposes of this clause, it shall be deemed that the registered person has
received the goods or, as the case may be, services –

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(i) where the goods are delivered by the supplier to a recipient or any other person on the
direction of such registered person, whether acting as an agent or otherwise, before or
during movement of goods, either by way of transfer of documents of title to goods or
otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on
account of such registered person.
(c) subject to the provisions of section 41 or 43A, the tax charged in respect of such supply has been
actually paid to the Government, either in cash or through utilization of input tax credit admissible
in respect of the said supply; and
(d) he has furnished the return under section 39:
ITC in case of goods received in lots or instalments:
Provided that where the goods against an invoice
 are received in lots or instalments,
 the registered person shall be entitled to take credit upon receipt of the last lot or instalment.
Failure to pay tax within stipulated time
Provided further that where a recipient :
 fails to pay to the supplier of goods or services or both, other than the supplies on which tax is
payable on reverse charge basis,
 the amount towards the value of supply along with tax payable thereon
 within a period of one hundred and eighty days from the date of issue of invoice by the supplier,
 an amount equal to the input tax credit availed by the recipient shall be added to his output tax
liability, along with interest thereon, in such manner as may be prescribed. Interest will be paid
@ 18% from the date of availing credit till the date when the amount added to the output tax
liability is paid.
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made
by him of the amount towards the value of supply of goods or services or both along with tax payable
thereon. In case part-payment has been made, proportionate credit would be allowed.
Exceptions
This condition of payment of value of supply plus tax within 180 days does not apply in the following
situations:
(a) Supplies on which tax is payable under reverse charge
(b) Deemed supplies without consideration
(c) Additions made to the value of supplies on account of supplier’s liability, in relation to such
supplies, being incurred by the recipient of the supply

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Under situations given in points (b) & (c), the value of supply is deemed to have been paid.
Depereciation claimed on Tax Component, ITC not allowed
(3) Where the registered person has claimed depreciation on the tax component of the cost of
capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input
tax credit on the said tax component shall not be allowed. Thus, in respect of the tax paid on such
items, dual benefit cannot be claimed under Income-tax Act, 1961 and GST laws simultaneously.
Due date to claim ITC
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit
note for supply of goods or services or both after
 the due date of furnishing of the return under section 39 for the month of September following
the end of financial year to which such invoice or invoice relating to such debit note pertains or
 date of filing of the relevant annual return
whichever is earlier.
Provided that the registered person shall be entitled to take input tax credit after the due date of
furnishing of the return under section 39 for the month of September, 2018 till the due date of
furnishing of the return under the said section for the month of March, 2019 in respect of any invoice
or invoice relating to such debit note for supply of goods or services or both made during the
financial year 2017-18, the details of which have been uploaded by the supplier under sub-section
(1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for
the month of March, 2019.
Exception:
The time limit u/s 16(4) does not apply to claim for re-availing of credit that had been reversed
earlier.
Every registered person is eligible to take credit of GST charged to him for his inward supply of
goods/ services if he uses such supplies in the course or furtherance of his business.
Such credit is called input tax credit and the same is to be credited to his electronic credit ledger.
Payment of tax and filing of return is also necessary to claim ITC. However, Section 41 allows ITC
on provisional basis.
Note: In a financial year, the return for September is to be filed by 20th of October under Section 39
of CGST Act, 2017.

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Illustration 1
Mr. A orders 30000 tonnes of goods which are to be delivered by the supplier via 3 lots of 10000
each. The lots are sent under a single invoice with the first lot and the payment is made by the
recipient for Value of Supply plus GST and the supplier has also deposited the tax with the
Government.
The 3 lots are supplied in May, June and July 2019. The ITC is available to Mr. A only after the receipt
of the 3rd lot. The reason is simple, one of the conditions to avail ITC is the receipt of goods which
is completed only after the last lot is delivered.
Illustration 2
For an Invoice dated 31st July 2019, the same pertains to the financial year 2019-20.
Hence the return for month of September following the end of the financial year to which such
invoice relates is due on 20th October, 2020.
Let’s say that the annual return is filed on 12th August, 2020.
The ITC therefore needs to be claimed within 12th August, 2020, which is the earlier of the two
dates.
Unmatched credit capped at 10%:
Rule 36(4) has been inserted vide notification 49/2019-CT dated 9 Oct 2019 and it applies to all
returns filed after 9 Oct 2019, that is, to Sept returns as well. This sub-rule states that (i) eligible
credits appearing in GSTR 2A will be allowed (total credits minus ineligible credits under 17(2),
17(5), etc.) and (ii) additional unmatched ad hoc credit of 20 per cent of the eligible credits.

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Experts explain the concern of trade is not entirely wrong but equally forceful are arguments in
support of the Government’s position in view of the differences in the language of DVAT Act and
CGST Act. However, for the present, 120 per cent of eligible credits appearing in GSTR 2A after
excluding ineligible credits will be allowed. And any claim of higher amount of credit could come in
for scrutiny under section 61 with possibility of demand to reverse such excess amounts.
GST Council in its 38th Meeting on 18th December 2019 has further restricted ITC for
invoices which have not been uploaded by suppliers to 10% of eligible credit available in
respect of invoices or debit notes reflected in FORM GSTR-2A.
Restricting credit to only those amounts appearing in GSTR 2A is NOT in the only way to establish
condition precedent in section 16(2)(c) and absence from GSTR 2A is NOT an indicator of non-
payment of tax by respective supplier. Question remains whether such a rule is an acceptable
solution, perhaps not. But the Government seems determined but its enforcement should not be
against bona fide claims without allowing for the statutory time under section 37 to pass before
taking returns for scrutiny.

Apportionment of credit and blocked credits [Section 17]

Goods and Services Tax aims at providing seamless flow of credit throughout the supply chain.
However, below is a list of few situations as mentioned in section 17 of Central GST Act, 2017 where
input tax credit will not be available:
Apportionment of ITC [Sub-sections (1) and (2) of section 17 read with rule 42 and rule 43 of CGST
Rules]
(1) Where the goods or services or both are used by the registered person partly for the purpose
of any business and partly for other purposes, the amount of credit shall be restricted to so much
of the input tax as is attributable to the purposes of his business.
(2) Where the goods or services or both are used by the registered person partly for effecting
taxable supplies including zero-rated supplies under this Act or under the Integrated Goods
and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount
of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies
including zero-rated supplies
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and
shall include supplies on which the recipient is liable to pay tax on reverse charge basis,
transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale
of building.
Explanation. – For the purposes of this sub-section, the expression ‘‘value of exempt supply’’
shall not include the value of activities or transactions specified in Schedule III, except those
specified in paragraph 5 of the said Schedule. i.e. sale of land & sale of building. Therefore, while in

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all other items of Schedule III, I.T.C. will not be required to be reversed. However, in case of sale of
land and building, I.T.C. will need to be reversed.
(4) A banking company or a financial institution including a non-banking financial company,
engaged in supplying services by way of accepting deposits, extending loans or advances shall have
the option to either comply with the provisions of sub-section (2), or avail of, every month, an
amount equal to 50 % of the eligible input tax credit on inputs, capital goods and input services in
that month and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn during the remaining part of the
financial year:
Provided further that the restriction of 50% shall not apply to the tax paid on supplies made by one
registered person to another registered person having the same Permanent Account Number.
Input Tax Credit is available only on those goods and services used for business. Exports and
supplies to SEZ fall under the category of zero-rated supplies. ITC is available on zero rated supplies
and taxable supplies but not on exempt supplies.

Note : The value of exempt supply shall be such as may be prescribed, and shall include supplies on
which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of
land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

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In Point (3), the option once exercised shall not be withdrawn during the remaining part of the
financial year.
In Point (3), the restriction of 50% shall not apply to the tax paid on supplies made by one registered
person to another registered person having the same Permanent Account Number.
Illustration 3
Input X is used to produce and supply output Y which is exempt. No ITC is available on input X
because it was used for exempt supply.
In the above example if the output Y is exported or supplied to an SEZ unit, ITC is available on Input
X as the out-ward supply is zero rated.

Blocked Credits [Section 17(5)]

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section
18, input tax credit shall not be available in respect of the following, namely:
(a) Motor vehicles and other conveyances and related services (insurance, servicing and
repair and maintenance)
Motor vehicles for transportation of persons having approved seating capacity of not more than
thirteen persons (including the driver), except when they are used for making the following taxable
supplies, namely:–
(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles;
(aa) vessels and aircraft except when they are used –
(i) for making the following taxable supplies, namely: –
(A) further supply of such vessels or aircraft; or
(B) transportation of passengers; or
(C) imparting training on navigating such vessels; or
(D) imparting training on flying such aircraft;
(ii) for transportation of goods;
(ab) the following supply of goods or services or both:—
services of general insurance, servicing, repair and maintenance in so far as they relate to motor
vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

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Provided that the input tax credit in respect of such services shall be available –
(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for
the purposes specified therein;
(ii) where received by a taxable person engaged –
(I) in the manufacture of such motor vehicles, vessels or aircraft; or
(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft
insured by him;
(b) the following supply of goods or services or both –
Food & beverages, outdoor catering, health services and other services
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic
surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or
clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available
where an inward supply of such goods or services or both is used by a registered person for making
an outward taxable supply of the same category of goods or services or both or as an element of a
taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre; and
(iii) travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available,
where it is obligatory for an employer to provide the same to its employees under any law for the
time being in force.
Works contract services for construction of immovable property [Clause (c) of section 17(5)]
(c) works contract services when supplied for construction of an immovable property (other than
plant and machinery) except where it is an input service for further supply of works contract
service;
Self-construction of immovable property [Clause (d) of section 17(5)]
(d) goods or services or both received by a taxable person for construction of an immovable
property (other than plant or machinery) on his own account including when such goods or
services or both are used in the course or furtherance of business.
Explanation. – For the purposes of clauses (c) and (d), the expression “construction” includes re-
construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the
said immovable property;
(e) goods or services or both on which tax has been paid under section 10; (Composition Supply
Scheme)

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(f) goods or services or both received by a non-resident taxable person except on goods imported
by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
However, where the activity of distribution of gifts or free samples falls within the scope of “supply”
on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible
to avail the ITC.
ITC in the hands of the supplier in respect of sales promotional schemes
Circular No. 92/11/2019 GST dated 28.03.2019 has clarified the entitlement of ITC in the hands of
supplier in respect of various sales promotional schemes as under :
A. Samples and free gifts
Samples which are supplied free of cost, without any consideration, do not qualify as “supply” under
GST, except where the activity falls within the ambit of Schedule I of the CGST Act.
ITC shall not be available to the supplier on the inputs, input services and capital goods to the extent
they are used in relation to the gifts or free samples distributed without any consideration.
However, where the activity of distribution of gifts or free samples falls within the scope of “supply”
on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible
to avail the ITC.
B. Buy one get one free offer
This is not an individual supply of free goods, but a case of two or more individual supplies where a
single price is being charged for the entire supply. It can at best be treated as supplying two goods
for the price of one.
Taxability of such supply will be dependent upon as to whether the supply is a composite supply or
a mixed supply and the rate of tax shall be determined as per the provisions of section 8.
ITC shall be available to the supplier for the inputs, input services and capital goods used in relation
to supply of goods or services or both as part of such offers.
C. Discounts including ‘Buy more, save more’ offers
Discounts offered by the suppliers to customers (including staggered discount under “Buy more,
save more” scheme and post supply / volume discounts established before or at the time of supply)
shall be excluded to determine the value of supply provided they satisfy the parameters laid down
in sub- section (3) of section 15, including the reversal of ITC by the recipient of the supply as is
attributable to the discount on the basis of document (s) issued by the supplier.
However, the supplier shall be entitled to avail the ITC for such inputs, input services and capital
goods used in relation to the supply of goods or services or both on such discounts.

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A. Secondary discounts
These are the discounts which are not known at the time of supply or are offered after the supply is
already over. Such discounts shall not be excluded while determining the value of supply. There is
no impact on availability or otherwise of ITC in the hands of supplier in this case.
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130. (Recovery Sections)
Section 17(6) The Government may prescribe the manner in which the credit referred to in sub-
sections (1) and (2) may be attributed.
Explanation. – For the purposes of this Chapter and Chapter VI, the expression “plant and
machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural
support that are used for making outward supply of goods or services or both and includes such
foundation and structural supports but excludes
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises
Explanation – As per section 2(28) of the Motor Vehicles Act, 1988, “motor vehicle” or “vehicle”
means any mechanically propelled vehicle adapted for use upon roads whether the power of
propulsion is transmitted thereto from an external or internal source and includes a chassis to
which a body has not been attached and a trailer; but does not include a vehicle running upon fixed
rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises
or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five
cubic centimetres.
Availability of Input Tax Credit in Special Cases [Section 18]
This section deals with eligibility of credit in special cases.

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(1) Subject to such conditions and restrictions as may be prescribed –
(a) a person who has applied for registration under this Act within thirty days from the date on
which he becomes liable to registration and has been granted such registration shall be entitled to
take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the day immediately preceding the date from which he becomes
liable to pay tax under the provisions of this Act;
(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take
credit ofinput tax in respect of inputs held in stock and inputs contained in semi-finished or finished
goods held in stock on the day immediately preceding the date of grant of registration;
(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit
of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods
held in stock and on capital goods on the day immediately preceding the date from which he
becomes liable to pay tax under section 9: Provided that the credit on capital goods shall be reduced
by such percentage points as may be prescribed;
(d) where an exempt supply of goods or services or both by a registered person becomes a taxable
supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and
inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply
and on capital goods exclusively used for such exempt supply on the day immediately preceding the
date from which such supply becomes taxable:
Provided that the credit on capital goods shall be reduced by such percentage points as may be
prescribed.
Time Limit to claim ITC
(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect
of any supply of goods or services or both to him after the expiry of one year from the date of issue
of tax invoice relating to such supply.
Note: Here, the maximum time limit for availing ITC is one year. Invoices more than one year old
are not eligible for taking credit.
ITC in case of sale, merger, demerger, amalgamation, lease or transfer of the business
(3) Where there is a change in the constitution of a registered person on account of sale, merger,
demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer
of liabilities, or due to the death of the sole proprietor, the said registered person shall be allowed
to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold,
merged, demerged, amalgamated, leased or transferred business in such manner as may be
prescribed.
Reversal of ITC on switching to composition levy or exit from tax-paying status [Section 18(4)
read with rule 44 of CGST Rules]

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(4) Where any registered person who has availed of input tax credit opts to pay tax under section
10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an
amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the
credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished
goods held in stock and on capital goods, reduced by such percentage points as may be prescribed,
on the day immediately preceding the date of exercising of such option or, as the case may be, the
date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his
electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall
be calculated in such manner as may be prescribed.
Amount payable on supply of capital goods or plant and machinery on which ITC has been
taken [Section 18(6) read with rule 40(2) & rule 44(6) of CGST Rules]
(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been
taken, the registered person shall pay an amount.
 equal to the input tax credit taken on the said capital goods or plant and machinery reduced
by 5% per quarter of a year or part thereof from the date of issue of invoice for such goods
[i.e., ITC pertaining to remaining useful life of the capital goods (in quarters)]* OR
 the tax on the transaction value of such capital goods or plant and machinery determined
under section 15,
whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the
taxable person may pay tax on the transaction value of such goods determined under section 15.
The table below summarizes the entitlement of Input Tax Credit (ITC):

Case Persons eligible Goods entitled as on Conditions

1. Person who has applied for He can claim the ITC on ITC must be availed
registration within 30 days inputs held in the form of within 1 year from the
from the date on which he raw Materials / WIP/ date of issue of tax
invoice by the supplier
becomes liable to registration, Finished Goods as on the day
and has been granted such immediately preceding the
registration date from which he becomes
liable to pay tax

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2. Person who isn’t liable to He can claim the ITC on ITC must be availed
register per se, but obtains inputs held in the form of within
voluntary registration raw Materials/ WIP/ 1 year from the date of
Finished Goods as on the day issue of tax invoice by
immediately preceding the the supplier
date of registration
3. registered person who He can claim the ITC on ITC on Capital Goods
ceases to be under inputs held in the form of will be reduced by 5%
composition levy and raw Materials/ WIP / per quarter of year /
switches to the regular Finished Goods & Capital part thereof of usage
scheme Goods as on the day from the date of
immediately preceding the invoice.
date from which he becomes
liable to pay tax under the
regular scheme
4. registered person whose He can claim the ITC on inputs ITC on Capital Goods
exempt supplies become held in the form of raw will be reduced by 5%
taxable Materials/WIP/ Finished per quarter of year /
Goods & Capital Goods part thereof of usage
relatable to such exempt from the date of
supply as on the day invoice.
immediately preceding the
date from which the supply
becomes taxable

Illustration 4
Mr. B becomes liable to pay tax on 1st August and has obtained registration on 17th August.
He will hence be entitled to take ITC effective 31st July on inputs (Raw Materials/Finished Goods &
Capital Work in Process); except on Capital Goods.
It must be noted that if the application is not made within 30 days, then he will be able to claim ITC
effective the date of grant of such registration.
Illustration 5
Mr. Z applies for voluntary registration on 1st September and is granted such registration on 9th
September.
He will hence be entitled to take ITC effective 8th September on inputs (Raw Material/Work in
Process/Finsihed Goods); except on Capital Goods.
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Illustration 6
Mr. C acquired a Capital Asset on 1st April, 2018 and used it for production of exempt supplies only.
Now, in November 2019, his supplies become taxable. The cost of the asset was INR 250,000 and
GST 18% was charged on it.
Hence the ITC applicable is INR 250,000*18%, which is INR 45,000.
Now, number of quarters of usage that have elapsed between April 2018 to November 2019 are:
seven.
Hence, there would be a reduction of 5% per quarter for 7 quarters, that is 35%.
Therefore, ITC available would be as under.

total ITC 45000

less: redn for 7 15750
quarters
Net ITC available 29250
Note that this ITC would be available from the date immediately preceding the date from which the
supply becomes taxable.
Rule 40(2) of CGST RULES, 2017, states that the amount of credit shall be calculated by reducing the
input tax @ 5% for every quarter or part thereof. It shall be calculated from the date of issue of
invoice for the capital goods
Illustration 7
X Ltd. purchased a machine for Rs. 100,000 and brought it on 1.8.2019 and paid 12% IGST. He
availed input tax credit and used the capital goods in his business. On 5.11.2020 he resold it as
second-hand machine for 65,000. Find out the amount of tax payable/ ITC reversible in the above
case.

input tax 12000

Less: 5% per quarter of usage 3600
Net ITC available 8400
transaction Value 65000
Tax on Transaction Value 7800
Notes:
 6 quarters have elapsed and therefore 6*5%, that is 30% would be the reduction for usage
 Tax on Transaction Value @ GST would be computed and compared to the Net ITC available
 The higher of the two would be payable for disposal of Capital Goods
 If the supply is intrastate, it should be payable in two equal parts (4200) to Centre and the
concerned State (that is CGST + SGST).
 If it is an interstate supply, Rs. 8,400 is payable as IGST.
 An invoice has to be issued to the recipient with the details of tax amount.

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Transfer of ITC on account of change in constitution of registered person [Section 18(3) read
with rule 41 of CGST Rules]
In case of sale, merger, demerger, amalgamation, transfer or change in ownership of business etc.,
the ITC that remains unutilized in the electronic credit ledger of the registered person can be
transferred to the new entity, provided there is a specific provision for transfer of liabilities in such
change of constitution. Circular No. 96/15/2019 GST dated 28.03.2019 has clarified that transfer or
change in the ownership of business includes transfer or change in the ownership due to death of
the sole proprietor. In the case of demerger, ITC will be apportioned in the ratio of the value of assets
of the new units as specified in the demerger scheme. Here, “value of assets” means the value of the
entire assets of the business irrespective of whether ITC has been availed thereon or not.
The registered person should furnish the details of change in constitution on the common portal
and submit a certificate from practicing Chartered Account/Cost Accountant certifying that the
change in constitution has been done with a specific provision for transfer of liabilities. Upon
acceptance of such details by the transferee on the common portal, the unutilized ITC gets credited
to his electronic credit ledger. The transferee should record the inputs and capital goods so
transferred in his books of account.
Transfer of ITC on obtaining separate registrations for multiple places of business within a
State/ Union Territory [Rule 41A of CGST Rules]
Section 25 enables a taxpayer to obtain separate registrations for multiple places of business in a
State/ Union territory The registered person (transferor), having separate registrations for multiple
places of business within a State/Union Territory, can transfer the unutilised ITC (wholly or partly)
lying in his electronic credit ledger to any or all of the newly registered place(s) of business in the
ratio of the value of assets held by them at the time of registration. Here, the ‘value of assets’ means
the value of the entire assets of the business irrespective of whether ITC has been availed thereon
or not.
 The registered person should furnish the prescribed details on the common portal within a
period of 30 days from obtaining such separate registrations. Upon acceptance of such details
by the newly registered person (transferee) on the common portal, the unutilised ITC gets
credited to his electronic credit ledger.

GOODS SENT TO JOB WORKER

A large number of industries depend upon outside support for completing manufacturing activity.
Section 2(68): “Job Work” means any treatment or process undertaken by a person on goods
belonging to another registered person and the expression “job worker” shall be construed
accordingly.
The person who undertakes the job of treatment or process for another person is called job worker.
The owner of the goods who engages the job worker is called Principal. Inputs and capital goods can

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be sent to a job worker and the Principal can avail ITC on them. The goods can be sent directly from
the job worker’s place without bringing them to the premises of the Principal.
Inputs should be brought back to the Principal OR alternatively sold from the job worker’s premises
on behalf of the Principal:
• within one year in case of normal goods
• and within 3 years in case of capital goods
The period of 1 year and 3 years may, on sufficient cause being shown, be extended by the
commissioner for a further period not exceeding 1 year and 2 years respectively.
If the goods are not sold / brought back within the stipulated time, the supply between the Principal
and the job worker is treated as “deemed supply” and tax is payable thereon by the Principal.
Moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work need not be brought
within 3 years’ time (Capital Goods excludes moulds and dies, jigs and fixtures, or tools.)
Section 143 of CGST Act, 2017 states that a Principal under intimation and subject to such conditions
as may be prescribed can send inputs or capital goods to a job worker without payment of tax for
further process or treatment and from there subsequently to another job worker(s) and shall either
bring back such inputs/capital goods after completion of job work or otherwise, within 1 year/3
years of their being sent out, or supply such inputs/capital goods after completion of job work or
otherwise within 1 year / 3 years of their being sent out, from the place of business of a job worker
on payment of tax within India or with or without payment of tax for export.
Provided that the principal shall not supply the goods from the place of business of a job worker in
accordance with the provisions of this clause unless the said principal declares the place of business
of the job worker as his additional place of business except in a case –
(i) where the job worker is registered under section 25; or
(ii) where the principal is engaged in the supply of such goods as may be notified by the
Commissioner.
“Provided further that the period of one year and three years may, on sufficient cause being shown,
be extended by the Commissioner for a further period not exceeding one year and two years
respectively.”
The responsibility for keeping proper accounts for the inputs or capital goods shall lie with the
Principal.
Any waste and scrap generated during the job work may be supplied by the job worker directly
from his place of business on payment of tax, if such job worker is registered, or by the Principal, if
the job worker is not registered.
For the purposes of job work, input includes intermediate goods arising from any treatment or
process carried out on the inputs by the Principal or the job worker.

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Taking ITC in respect of inputs and capital goods sent for job work [Section 19]
Section 19 of the CGST Act, 2017 states that the Principal shall, subject to such conditions and
restrictions as may be prescribed, be allowed input tax credit on inputs sent to a job worker for job
work.
Although Section 16 of the CGST Act, 2017 specifically states that ITC will be provided only when
goods are actually received, but under Job work this condition is exempted and ITC can be availed
even if inputs or capital goods are directly sent to the job worker without being first brought to the
place of business of Principal.
Taking ITC in respect of inputs and capital goods sent on job work:
(1) The Principal shall, subject to such conditions and restrictions as may be prescribed, be allowed
input tax credit on inputs sent to a job worker for job work.
(2) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, the Principal
shall be entitled to take credit of input tax on inputs even if the inputs are directly sent to a job
worker for job work without being first brought to his place of business.
(3) Where the normal goods sent for job work are not received back by the principal after
completion of job work or otherwise or are not supplied from the place of business of the job worker
in accordance with clause (a) or clause (b) of sub-section (1) of section 143 within one year of being
sent out, it shall be deemed that such inputs had been supplied by the principal to the job worker
on the day when the said inputs were sent out:
Provided that where the inputs are sent directly to a job worker, the period of one year shall
be counted from the date of receipt of inputs by the job worker.
(4) The principal shall, subject to such conditions and restrictions as may be prescribed, be allowed
input tax credit on capital goods sent to a job worker for job work.
(5) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, the principal
shall be entitled to take credit of input tax on capital goods even if the capital goods are directly sent
to a job worker for job work without being first brought to his place of business.
(6) Where the capital goods sent for job work are not received back by the principal within a period
of three years of being sent out, it shall be deemed that such capital goods had been supplied by the
principal to the job worker on the day when the said capital goods were sent out. Provided that
where the capital goods are sent directly to a job worker, the period of three years shall be counted
from the date of receipt of capital goods by the job worker.
(7) Nothing contained in sub-section (3) or sub-section (6) shall apply to moulds and dies, jigs and
fixtures, or tools sent out to a job worker for job work.
Explanation. –For the purpose of this section, “principal” means the person referred to in section
143.

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Essentially, it’s imperative to note that the Principal can claim ITC in Inputs / Capital Goods and can
send these to the Job Worker for further processing without payment of GST under the cover of a
prescribed challan but where these are not either sold by the job worker OR returned by the job
worker within 1 Or 3 Years as above, then the supply between them is construed as Deemed Supply
and tax with interest has to be discharged by the supplier.

Input Tax Credit Rules Rule

36: Documentary requirements and conditions for claiming input tax credit
(1) The input tax credit shall be availed by a registered person, including the Input Service
Distributor, on the basis of any of the following documents, namely, -
(a) an invoice issued by the supplier of goods or services or both in accordance with the provisions
of section 31;
(b) an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31,
subject to the payment of tax;
(c) a debit note issued by a supplier in accordance with the provisions of section 34;
(d) a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made
thereunder for the assessment of integrated tax on imports;
(e) an Input Service Distributor invoice or Input Service Distributor credit note or any document
issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule 54.
(2) Input tax credit shall be availed by a registered person only if all the applicable particulars as
specified in the provisions of Chapter VI are contained in the said document, and the relevant
information, as contained in the said document, is furnished in Form GSTR-2 by such person.
Provided that if the said document does not contain all the specified particulars but contains the
details of the amount of tax charged, description of goods or services, total value of supply of goods
or services or both, GSTIN of the supplier and recipient and place of supply in case of inter-State
supply, input tax credit may be availed by such registered person.
(3) No input tax credit shall be availed by a registered person in respect of any tax that has been
paid in pursuance of any order where any demand has been confirmed on account of any fraud,
willful misstatement or suppression of facts.

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Illustration 8
ABC Ltd., sends T Shirts to it’s job workers for fixing the collar, in batches and a batch was sent on
14th July, 2017. The collars were fixed and the T-shirts were sent back to the Principal on 31st May,
2019.
In this case, since the goods were not returned to the Principal by the job worker after completion
of the work within one year of it being sent back, the supply between the principal and the job
worker would be a deemed supply, and hence tax would be need to be paid along with applicable
interest.
Also, in such a case, when the goods are returned by the job worker to the Principal, that again
would be construed as a separate supply.
INPUT SERVICE DISTRIBUTOR
A company may have a number of units and the GST paid by it on input services received can be
distributed to the beneficiary units on the basis of their previous year turnover. The office of the
company which distributes the credit is called input service distributor.
Section 2(61): “Input Service Distributor” means an office of the supplier of goods or services or
both which receives tax invoices issued under Section 31 towards the receipt of input services and
issues a prescribed document for the purposes of distributing the credit of central tax, State tax,
integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or
services or both having the same Permanent Account Number as that of the said office
Manner of distribution of credit by Input Service Distributor [Section 20]

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(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated
tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the
amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions,
namely: –
(a) the credit can be distributed to the recipients of credit against a document containing such
details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for
distribution
(c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed
only to that recipient;
(d) the credit of tax paid on input services attributable to more than one recipient of credit shall be
distributed amongst such recipients to whom the input service is attributable and such distribution
shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such
recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom
such input service is attributable and which are operational in the current year, during the said
relevant period;
(e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed
amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a
State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate
of the turnover of all recipients and which are operational in the current year, during the said
relevant period.
Explanation. – For the purposes of this section, – (a) the “relevant period” shall be –
(i) if the recipients of credit have turnover in their States or Union territories in the financial year
preceding the year during which credit is to be distributed, the said financial year; or
(ii) if some or all recipients of the credit do not have any turnover in their States or Union territories
in the financial year preceding the year during which the credit is to be distributed, the last quarter
for which details of such turnover of all the recipients are available, previous to the month during
which credit is to be distributed;
(b) the expression “recipient of credit” means the supplier of goods or services or both having the
same Permanent Account Number as that of the Input Service Distributor;
(c) the term ‘‘turnover’’, in relation to any registered person engaged in the supply of taxable goods
as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of
any duty or tax levied under entries 84 and 92A of List I of the Seventh Schedule to the Constitution
and entries 51 and 54 of List II of the said Schedule.

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Manner of recovery of credit distributed in excess [Section 21]
Where the Input Service Distributor distributes the credit in contravention of the provisions
contained in section 20 resulting in excess distribution of credit to one or more recipients of credit,
the excess credit so distributed shall be recovered from such recipients along with interest, and the
provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for
determination of amount to be recovered.
Utilization of ITC
Input Tax Credit (ITC) is credited to a person’s electronic credit ledger. The person may use this to
pay his output tax liability.
Section 49A
Utilisation of input tax credit subject to certain conditions
Notwithstanding anything contained in section 49, the input tax credit on account of central tax,
State tax or Union territory tax shall be utilised towards payment of integrated tax, central tax, State
tax or Union territory tax, as the case may be, only after the input tax credit available on account of
integrated tax has first been utilised fully towards such payment.
Section 49B
Order of utilisation of input tax credit
Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and
clause (f) of sub- section (5) of section 49, the Government may, on the recommendations of the
Council, prescribe the order and manner of utilisation of the input tax credit on account of
integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of
any such tax.
Chapter IX: Payment of Tax of the CGST Rules
Rule 88A: Order of utilization of input tax credit
Input tax credit on account of integrated tax shall first be utilised towards payment of integrated
tax, and the amount remaining, if any, may be utilised towards the payment of central tax and State
tax or Union territory tax, as the case may be, in any order.
Provided that the input tax credit on account of central tax, State tax or Union territory tax shall be
utilised towards payment of integrated tax, central tax, State tax or Union territory tax, as the case
may be, only after the input tax credit available on account of integrated tax has first been utilised
fully.
Order of utilization of input tax credit is as under:

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Input tax credit Output liability on Output liability on Output liability on
on account of account of account of Central account of State tax/
Integrated tax tax Union Territory tax
Integrated tax (I) (II) – in any order and in any proportion
(iii) input tax credit on account of integrated tax to be completed exhausted mandatorily
Central tax (V) (IV) Not
permitted
State tax/ Union (VII) Not permitted (VI)
Territory tax
Therefore, it is clear that there is no offset available between the CGST and the SGST.
Computation of GST Liability
Every registered person is required to compute his tax liability on a monthly basis by setting off the
Input Tax Credit(ITC) against the Outward Tax Liability. If there is any balance tax liability the same
is required to be paid to the government.
For the calculation of GST, the taxpayer should know the GST rate applicable to various categories.
Example : If a goods or services is sold at Rs. 1,000 and the GST rate applicable is 12%, then the net
price calculated will be = 1,000+ (1,000X(12/100)) = 1,000+120 = Rs 1,120
There are 3 ledgers prescribed by the government that is required to be maintained by every tax
payer –
1. Electronic Liability Ledger
The electronic liability register specified under sub-section (7) of section 49 shall be maintained in
FORM GST PMT-01
This ledger records all liabilities of a taxable person including:
 The tax, interest, late fees, or any other amount payable per the return furnished by the taxpayer
or per any proceedings
 The tax and interest payable arising out of any mismatch of ITC or output tax liability
 Any interest that may accrue from time to time
 The reversal of ITC or interest
Taxpayers should settle their liabilities in the following order:
 Self-assessed tax and other dues, such as interest, penalty, fees, or any other amount relating to
previous tax period returns
 Self-assessed tax and other dues relating to the current tax period return
 Any other amount payable under the act/rules (liability arising out of demand notice,
proceedings, etc.)

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2. Electronic Cash Ledger
The electronic liability register specified under sub-section (7) of section 49 shall be maintained in
FORM GST PMT-05
Any amount paid by the taxpayer will be reflected in the electronic cash ledger. The amount
available in this ledger may be used for making any payment towards tax, interest, penalty, fees, or
any other amount due under the act/rules in the time and manner prescribed. (It is reiterated that
any credit in the electronic credit ledger can be utilized only for payment of output tax.)
To initiate a payment, taxpayers should generate a challan online using form GST PMT-06, which
will be valid for a period of 15 days. Payment can then be remitted through any of the following
modes:
 Internet banking (authorized banks only)
 Credit or debit card (authorized banks only)
 National Electronic Fund Transfer (NEFT) or real-time gross settlement (RTGS) (any bank,
authorized or unauthorized)
 Over-the-counter (OTC) payment (authorized banks only) for deposits up to ten thousand
rupees per challan and per tax period by cash, cheque or demand draft
The taxpayer is responsible for any commission due on the payment.
The payment date shall be recorded as the date the payment is credited to the appropriate
government account.

3. Electronic credit ledger

The electronic liability register specified under section 49 shall be maintained in FORM GST PMT-
02
Every claim of Input Tax Credit self-assessed by the taxpayer shall be credited to this ledger. The
amount available in this ledger may be used for payment towards output tax only. Under no
circumstance can an entry be made directly in the electronic credit ledger.
This ledger may include the following:
 ITC on inward supplies from registered taxpayers
 ITC available based on distribution from input services distributor (ISD)
 ITC on input of stock held/semi-finished goods or finished goods held in stock on the day
immediately preceding the date on which the taxpayer became liable to pay tax, provided he
applies for registration within 30 days of becoming liable
 Permissible ITC on inputs held in stock and inputs contained in semi-finished or finished goods
held in stock on the day of conversion from composition scheme to regular tax scheme
 ITC eligible on a payment made on a reverse charge basis.

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REFUND AND AUDITS
REFUNDS
Refund refers to an amount that is due to the tax payer from the tax administration.
Refund of tax [Section 54]
According to section 54 of the CGST Act, 2017, any person claiming refund of any tax and interest,
if any, paid on such tax or any other amount paid by him, may make an application before the expiry
of two years from the relevant date. If there is any balance in the electronic cash ledger or electronic
credit ledger after payment of tax, interest, penalty, fee or any other amount payable may claim such
refund in the return furnished under section 39.
A specialised agency of the United Nations Organisation or any Multilateral Financial Institution and
Organisation notified under the United Nations (Privileges and Immunities) Act, 1947, Consulate or
Embassy of foreign countries or any other person or class of persons, as notified under Section 55,
entitled to a refund of tax paid by it on inward supplies of goods or services or both, may make an
application for such refund, in such form and manner as may be prescribed, before the expiry of six
months from the last day of the quarter in which such supply was received.
However, vide Notification No. 20/2018-C.T., dated 28-3-2018, in exercise of the powers conferred
by section 148 of the said Act, the Central Government, has allowed the persons notified under
Section 55 to file refund application before the expiry of eighteen months from the last date of the
quarter in which such supply was received.

Refund of unutilised input tax credit

Section 54(3) of CGST Act, 2017 states that, subject to the provisions of section 54(10), a registered
person may claim refund of any unutilised input tax credit at the end of any tax period, subject to
provisions under the section in the following cases :
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate
of tax on output supplies (other than nil rated or fully exempt supplies)
However, refund of unutilized input tax redit shall not be allowed in the following cases :
(i) where the goods exported out of India are subjected to export duty:
(ii) if the supplier of goods or services or both avails of drawback in respect of central tax or claims
refund of the integrated tax paid on such supplies.
Section 54(4), (5) & (7) mandate that after receipt of the application or declaration as the case may
be, if the proper officer is satisfied that the whole or part of the amount claimed as refund is
refundable, he may make an order within sixty days from the date of receipt of application and the

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amount so determined shall be credited to the Consumer Welfare Fund. However, the refundable
amount shall, instead of being credited to the Fund, be paid to the applicant, if such amount is
relatable to –
a. refund of tax paid on export of goods or services or both or on inputs or input services used
in making such export;
b. refund of unutilised input tax credit under sub-section (3);
c. refund of tax paid on a supply which is not provided, either wholly or partially, and for which
invoice has not been issued, or where a refund voucher has been issued;
d. refund of tax in pursuance of section 77;
e. the tax and interest, if any, or any other amount paid by the applicant, if he had not passed on
the incidence of such tax and interest to any other person; or
f. the tax or interest borne by such other class of applicants as the Government may, on the
recommendations of the Council, by notification, specify.
Refund of taxes to the retail outlets established in departure area of an international Airport
beyond immigration counters making tax free supply to an outgoing international tourist
(Rule 95A of CGST Rules)
Retail outlet established in departure area of an international airport, beyond the immigration
counters, supplying indigenous goods to an outgoing international tourist who is leaving India shall
be eligible to claim refund of tax paid by it on inward supply of such goods. The refund of tax paid
by the said retail outlet shall be available if-
(a) the inward supplies of goods were received by the said retail outlet from a registered person
against a tax invoice;
(b) the said goods were supplied by the said retail outlet to an outgoing international tourist
against foreign exchange without charging any tax;
(c) name and Goods and Services Tax Identification Number of the retail outlet is mentioned in
the tax invoice for the inward supply; and
(d) such other restrictions or conditions, as may be specified, are satisfied

Interest on delayed refunds [Section 56]

Section 56 of the CGST Act, 2017 states that if any tax ordered to be refunded under section 54 is
not refunded within sixty days from the date of receipt of application interest at such rate not
exceeding six per cent as may be specified in the notification issued by the Government on the
recommendations of the Council shall be payable in respect of such refund from the date

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immediately after the expiry of sixty days from the date of receipt of application under the said sub-
section till the date of refund of such tax.
Where any claim of refund arises from an order passed by an adjudicating authority or Appellate
Authority or Appellate Tribunal or court which has attained finality and the same is not refunded
within sixty days from the date of receipt of application filed consequent to such order, interest at
such rate not exceeding nine per cent as may be notified by the Government on the
recommendations of the Council shall be payable in respect of such refund from the date
immediately after the expiry of sixty days from the date of receipt of application till the date of
refund. Where any order of refund is made by an Appellate Authority, Appellate Tribunal or any
court against an order of the proper officer under subsection (5) of section 54, the order passed by
the Appellate Authority, Appellate Tribunal or by the court shall be deemed to be an order passed
under the said sub-section (5). However, the refundable amount shall, instead of being credited to
the Fund, be paid to the applicant, if such amount is relatable to –
a. refund of tax paid on export of goods or services or both or on inputs or input services used in
making such export;
b. refund of unutilised input tax credit under sub-section (3);
c. refund of tax paid on a supply which is not provided, either wholly or partially, and for which
invoice has not been issued, or where a refund voucher has been issued;
d. refund of tax in pursuance of section 77;
e. the tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the
incidence of such tax and interest to any other person; or
f. the tax or interest borne by such other class of applicants as the Government may, on the
recommendations of the Council, by notification, specify.

Refund of taxes to the retail outlets established in departure area of an international Airport
beyond immigration counters making tax free supply to an outgoing international tourist
(Rule 95A of CGST Rules)
Retail outlet established in departure area of an international airport, beyond the immigration
counters, supplying indigenous goods to an outgoing international tourist who is leaving India shall
be eligible to claim refund of tax paid by it on inward supply of such goods. The refund of tax paid
by the said retail outlet shall be available if-
(a) the inward supplies of goods were received by the said retail outlet from a registered person
against a tax invoice;
(b) the said goods were supplied by the said retail outlet to an outgoing international tourist against
foreign exchange without charging any tax;

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(c) name and Goods and Services Tax Identification Number of the retail outlet is mentioned in the
tax invoice for the inward supply; and
(d) such other restrictions or conditions, as may be specified, are satisfied.

Time limit
Any person claiming a refund of tax / interest / may make an application before expiry of 2 years
from the “Relevant Date”. However, a person claiming a refund of unutilised ITC in case of zero rated
supplies, or accumulated ITC in case of inverted duty structures may do so at the end of any tax
period.

Relevant Date
• Where goods are exported by air / sea
o Date on which the vessel leaves India
• When goods are exported by land
o Date on which the goods pass the frontiers
• When refund of unutilised ITC in case of zero rated supplies, or accumulated ITC in case of inverted
duty structures is claimed
o End of the Financial Year in which such claim for refund arises
• In case of refund arising out of finalisation of provisional assessment

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o Date of adjustment of tax after the final assessment
• Any other case
o Date of payment of tax

Application for Refund

Section 54 states that any person claiming a refund may file an application in form GST-RFD-01
electronically through the GST portal.
In case of advance tax deposits made by a casual taxable person OR a non-resident taxable person,
the same shall be refunded only when such person has, in respect of the entire period for which the
certificate of registration granted was in force, filed all the returns under Section 39. Also, the
advance tax so paid, after adjusting any liability shall be claimed in the last return so filed.

Documentation and Declaration

The refund application must be accompanied with the necessary documentation. Additionally,
where the amount of refund claimed doesn’t exceed INR 200,000, the refund application must be
accompanied with a declaration that the incidence of tax has not been passed on to any other person
and that therefore there wouldn’t be unjust enrichment.
However, where the amount of refund claimed is greater than INR 200,000, a certificate as a part of
Form GST-RFD-01 by a Chartered Accountant or a Cost Accountant to the effect that there is no
unjust enrichment and that the tax incidence has not been passed on to any other person, would be
required to be submitted along with the refund application.

Refund Amount
Rule 89 (4) states that in the case of zero-rated supply of goods or services or both without payment
of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of
section 16 of the Integrated Goods and Services Tax Act, 2017, refund of input tax credit shall be
granted as per the formula mentioned thereby.
Rule 89(5) states that in case of inverted duty structure supplies of goods / services / both; refund
of tax would be granted proportionately, i.e., as per the formula mentioned therein.

Refund Order
The refund order should be made by the proper officer within 60 days from date of receipt of
application, which is complete in all respects.

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Where the proper officer is satisfied that amount so refundable is payable to an applicant, he shall
make an order in form GST-RFD-06 and the same will then be credited to the account of the
applicant.
Where the proper officer is satisfied that amount so refundable is not payable to any applicant per
se, he shall make an order in form GST-RFD-06 and the same will then be credited to the Consumer
Welfare Fund.

Interest
Where any tax ordered to be refunded under Section 54, is not refunded to the applicant within 60
days from the date of receipt of application, interest shall be payable to the applicant at the rate of
6% p.a. and the same shall be payable immediately on expiry of 60 days and until the date of refund.
Also, where the refund arises out of an appeal, and the same is not refunded within 60 days from
date of receipt of application, interest shall be payable at the rate of 9% p.a., and the same shall be
payable immediately on expiry of 60 days and until the date of refund.

AUDIT
Audit under Goods & Services Tax can be of two types, as discussed under.
General Audit [Section 65]
Section 65 of Central Goods & Services Tax Act, 2017 states that the Commissioner or any officer so
authorised by him, by way of a general or specific order, may undertake the audit of any registered
person, at the place of business of such registered person or in their office for a Financial Year or
multiples thereof.

Timelines
A notice of 15 days is required to be given prior to the conduct of the audit, by the proper officer,
where it is decided to undertake the audit of a registered person. Commencement of audit would
mean later of:
o Date on which the accounts / records that have been called for inspection / verification, have been
made available to them
o The actual institution of the audit at the place of business of tax payer
The audit is required to be completed within 3 months from the date of commencement of such
audit. This period is extendable for another 6 months (maximum) by the Commissioner
Procedure

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The proper officer so authorised to conduct the audit, shall with the assistance of the team members
assigned to him, verify all the necessary accounts / books / records.
During the course of the audit, the authorised officer may require the registered person, to facilitate
the verification of accounts / books / records or to provide such information / details, as the
authorities may require for a complete and timely conduct of audit.
The proper officer will then inform the registered person of the discrepancies noticed, and his audit
observations to which the registered person will respond to with his factual details, and post which
the audit findings will be finalised after evaluation of these responses to the observations.
Finalisation
The proper officer shall within 30 days, informs the registered person, whose accounts and records
are being audited, about the findings.
Special Audit [Section 66]
Section 66 of Central Goods & Services Tax Act, 2017 states that where any officer not below the
rank of Assistant Commissioner having regard to the complexity of the case and in the interest of
revenue, is of the opinion that the liability has not been correctly declared or the Input Tax Credit is
availed in excess, he may, with prior approval from Commissioner, issue a direction to the registered
person to get his accounts / records audited by a Chartered Accountant / Cost Accountant, as
nominated by the Commissioner.
Timelines
The Chartered Accountant / Cost Accountant as nominated by the Commissioner shall submit an
audit report duly signed and certified by himself, within 90 days from the date of commencement
of such audit, to the Assistant Commissioner. This period is extendable for another 90 days
(maximum) by the Assistant Commissioner on reasonable and sufficient grounds upon application.

Procedure
The expenses of the audit / examination and the remuneration to the Chartered Accountant / Cost
Accountant shall be determined and paid by Commissioner.

Finalisation
The proper officer will then inform the registered person of the discrepancies noticed, and his audit
findings of special audit. Where the special audit results in detection of tax not paid / short paid /
credit availed in excess, the process of demand / recovery under Section 73, 74 of Central Goods &
Services Tax Act, 2017, will be initiated.

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Thus, Audit under Goods & Services Tax may be summarised as under:

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