MCOM Direct Tax Laws 01 (1) - Merged-Min
MCOM Direct Tax Laws 01 (1) - Merged-Min
MCOM Direct Tax Laws 01 (1) - Merged-Min
Names of Sub-Units
Direct and Indirect Tax , Constitutional Validity of taxes, Administration of Tax Laws, Sources of
Income Tax Law in India, Basic Principles of Charging Income Tax Section- 4, Assessment Year
Section 2 (9), Previous Year Section 3,Assesses Section 2(7), Person Section 2(31), Income Section 2(24),
Heads of Income Section 14, Gross Total Income Section 80B(5), Rounding off of total Income - Section
288A, Rounding off of tax- Section 288B, Capital Receipt and Revenue Receipts- The distinction and
implication, Basis of Charge and Scope of total Income, Diversion and Application of Income.
Overview
This unit describes the direct and indirect tax, the constitutional validity of taxes and administration
of tax laws. Also, this unit explains the sources of income tax law in India and basic principles of
charging income tax section-4. Further, this unit discusses the assessment year section 2(9) with
the previous year’s section 3. This unit elaborates on person section 2(31), income section 2(24) and
Heads of Income Section 14. It also describes gross total in income section 80B (5), rounding off of total
income- section 288A and rounding off of tax- section 288B. In the end, this unit explains capital receipt
and revenue receipts - the distinction and implication, basis of charge and scope of total income and
diversion and application of income.
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Direct Tax Laws
Learning Objectives
Learning Outcomes
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1.1 INTRODUCTION
The 16th Amendment, passed by Congress on July 2, 1909 and ratified on February 3, 1913, is widely
credited with establishing the individual income tax. Its history, on the other hand, goes back even
further.
Governments in almost every country around the world levy compulsory levies on individuals or entities,
which is known as taxation. Taxation is primarily used to raise revenue for government expenditures,
but it can also be used for other purposes.
India’s tax system is divided into direct and indirect taxes. While direct taxes are levied on taxable
income earned by individuals and corporations, assesses are responsible for depositing taxes.
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Following are some of the most significant direct taxes imposed in India:
Income tax: Income tax is imposed on individuals who fall into various tax brackets based on their
earnings or revenue and they are required to file an income tax return each year, after which they
must either pay the tax or be eligible for a tax refund.
Estate Tax: Estate tax also known as inheritance tax is a tax levied on a person’s estate or the total
value of money and property left behind after they die.
Wealth Tax: A wealth tax is a tax levied on the value of a person’s assets.
Estate and wealth taxes, on the other hand, have been repealed.
Direct taxes do have some benefits for a country’s social and economic development. Let’s discuss these
benefits.
It reduces inflation: When there is monetary inflation, the government frequently raises the tax
rate, which reduces demand for goods and services, causing inflation to condense as a result of
lower demand.
It enables social and economic balance: The government has well-defined tax slabs and exemptions
in place based on each individual’s earnings and overall economic situation to balance out income
inequalities.
There are several of drawbacks to direct taxes. However, the lengthy procedures of filing tax returns are
a taxing task in and of themselves.
Indirect Tax
Indirect tax is a government tax levied on goods and services rather than an individual’s income, profit
or revenue and it can be shifted from one taxpayer to another. Previously, paying an indirect tax meant
paying more than the actual cost of a product or service. In addition, taxpayers were subjected to a slew
of indirect taxes.
The Goods and Services Tax (GST) is one of India’s existing indirect taxes. Many indirect tax laws have
been absorbed into it.
The Goods and Services Tax or GST, was implemented on July 1st, 2017 to replace the country’s various
indirect taxes. Due to this the other taxes that used to be levied previously no longer exist. It has done
away with the tax’s cascading effect.
Service tax, state excise duty, countervailing duty, additional excise duty and special additional customs
duties are all included in the GST at the state level.
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Direct Tax Laws
Verification of a tax return or claim for credit, rebate or refund; investigation, assessment, determination,
litigation or collection of a person’s tax liability; investigation or prosecution of a tax-related crime; or
enforcement of a tax statute are all examples of tax administration.
Responsibilities
Inland tax regulations are written, revised and interpreted.
National tax administrations and local tax administrations plan, direct, supervise and evaluate the
levy and collection of national tax.
Directing, supervising and evaluating all levels of tax administration’s anti-corruption efforts
Auditing major cases of tax evasion, as well as supervising and evaluating audit performance at all
levels of the tax administration
Tax administration, as well as tax information, planning and evaluation
Encouragement of tax-related education and public awareness campaigns
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This is due to the fact that it was due in March. Similarly, if your company paid you in advance for April
and May in the month of March, it will be taxed again in March. As a result, salary income will be taxed
on a due or received basis, whichever comes first.
In layman’s terms, this category contains the rental income from the homes.
The following is a list of the income that is taxed under this heading:
Profits made during the assessment year by the assesses
Profits from an organisation’s revenue
Profits from the selling of a specific license
Cash received as a result of an individual’s export under a government program
Profit, income or bonus earned as a result of a business collaboration
Benefits gained as a result of working for a company
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Direct Tax Laws
Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital assets.
As a result, anytime you sell a capital asset and profit. This is considered your income and it will be taxed
under the Capital Gains heading. Rental income is taxed as “Income from House Property,” but if the
property is sold and profit is made, then it will be taxed as “capital gain.”
Applicable exemptions and deductions should be taken into account when calculating income under
different headings. If there is any provision for clubbing, this should be taken into account. Yearly losses
should be carried forward and losses from previous years should be deducted. Gross Total Income refers
to the income after such adjustments. Then you should claim a deduction under Chapter VIA. The total
taxable income is the amount on which tax is calculated at the prescribed rate. TDS and Advance Tax
paid will be deducted from the tax computed. If applicable, interest will be charged under sections 234A,
234B and 234C. The total tax will be rounded up to the nearest ten rupees multiple.
If your tax liability exceeds your prepaid taxes, you’ll have to pay the difference in self-assessment tax. If
the amount of prepaid taxes is greater than the actual tax liability, a refund should be requested.
In India, the government keeps track of its finances for a year, from April 1 to March 31. As a result, it is
referred to as the financial year. The Internal Revenue Service has similarly chosen the same year for
its assessment method.
The Assessment year is the fiscal year of the Government of India during which a person’s income from
the previous year is assessed for taxation. Every individual who is subject to taxation under this Act is
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required to file a return of income by the specified deadlines. Officials and officers from the Internal
Revenue Service process these returns. Assessment is the term for this type of processing. This is where
the assesse’s income is scrutinised and validated.
An assessment order is issued when the tax is calculated and compared to the amount paid. The
assessment year is the year in which the entire procedure is completed.
If the prior year is regarded to be 2020-21, the previous year will begin on April 1, 2020 and end on March
31, 2021. And the previous/financial year’s evaluation year will be 2021-22, i.e., from April 1, 2021, to
March 31, 2022.
In the same way, if the assessment year was 2020-21, the previous/financial year would have been
2019-20.
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Direct Tax Laws
interest to deduct tax at source and deposit the cash collected in the government treasury. Assesses-
in-default occurs when a person fails to deduct tax at the source or deducts tax but does not deposit
it in the treasury.
Note: A company that meets the requirements of section 184. A business does not meet the
requirements of Section 184.
Association of Persons or Body of Individuals: Co-operative societies, MARKFED, NAFED and other
organisations are examples of such organisations. When individuals come together to carry on a
joint venture but do not meet the legal definition of partnership, they are assessed as an association
of persons. An association of people is more than just a group of people who get paid together. To
achieve a common goal, such as earning money, there must be a common purpose and common
action. Firms, companies, associations and individuals can all be members of an AOP.
Non-individuals cannot be members of a body of individuals (BOI). A body of individuals can only be
made up of natural human beings. Whether a group is AOP or BOI is a question of fact that must be
decided on a case-by-case basis.
Local authorities: It includes municipalities, panchayats, cantonment boards and port trusts,
among others.
Person of Artificial Judgment: Artificial Juridical Persons are a type of public corporation created
by a special act of the legislature and a body with its legal personality.
Every artificial juridical person: not falling within any of the preceding sub-clauses.
Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons:
shall be deemed to be a person whether or not, such persons are formed or established or incorporated
with the object of deriving profits or gains or income.
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It is never stated that “Income” only refers to monetary gain. It includes the value of Perquisites and
Benefits.
The term “income” refers to both the amount received and the amount saved by using the property
himself. Anything that can be converted into money can be considered a source of income accrual.
“Income comprises”:
Profits and Gains: For example, a businessman’s profits are taxable as “Income.”
Dividend: A “dividend” declared/paid by a company to its shareholders, for example, is taxable as
“income” in the hands of the shareholders.
Voluntary contributions received by a Trust: Voluntary contributions received by a Trust are
included in its income. This rule applies in the following situations.
A trust established entirely or partially for charitable or religious purposes receives such a
contribution; or
A scientific research association receives such a contribution; or
Any fund or institution established for charitable purposes receives such a contribution; or
Any university, other educational institution or hospital can receive such a contribution.
According to the above-mentioned Section 14 for the computation of Income Tax in India, the five
primary heads of income are:
1. Income from Salary: This heading essentially involves any remuneration received by an individual
in exchange for services rendered under a contract of employment. Basic pay, advance salaries,
pensions, commissions, gratuities, perquisites and a yearly bonus are all included in a salary. The
crucial thing to remember is that salary is taxable on a due or received basis, depending on which
comes first. Allow me to illustrate this with an example. If you get paid in April 2020 for the month
of March 2020, it will still be taxable in the prior fiscal year 2019-20.
This is because it was due in March. Similarly, if your company paid you in advance for April and
May in the month of March, will be taxed again in March. As a result, salary income will be taxed on
a due or received basis, whichever comes first.
2. Income from House Property: Sections 22 to 27 of the Income Tax Act of 1961 deal with the income
tax computation of a person’s total standard income from his or her home or land.
In layman’s terms, this category contains the rental income from the homes.
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Direct Tax Laws
3. Income from Profits and Gains of Business or Profession: The income produced through the profits
of a business or profession will be attributed to the income tax computation of total income. The
difference between the revenue collected and the expenses will be charged.
The following is a list of the income that is taxed under this heading:
Profits made during the assessment year by the assesses
Profits from an organisation’s revenue
Profits from the selling of a specific license
Cash received as a result of an individual’s export under a government program
Profit, income or bonus earned as a result of a business collaboration
Benefits gained as a result of working for a company
4. Income from Capital Gains: Profits or gains obtained by an assessee from the sale or transfer of a
capital assets kept as an investment are referred to as capital gains.
Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital
assets. As a result, anytime you sell a capital asset and profit. This is considered your income and
it will be taxed under the Capital Gains heading. Rental income is taxed as “Income from House
Property,” but if the property is sold and profit is made, then it will be taxed as “capital gain”.
5. Income from Other Sources: This category includes interest from bank deposits, lottery prizes, card
games, gambling and other sports awards. These earnings are taxable and are ascribed under
Section 56(2) of the Income Tax Act.
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It is the amount that must be disclosed when filing an income tax return. Deductions under Chapter VI
A must be subtracted from GTI to arrive at the taxable or total income.
Gross Total Income does not include when computing gross total income, one must add all of their
earnings together without deducting any tax-saving investments made under Sections 80C to 80U of
the Income Tax Act of 1961.
If the total figure’s last digit is less than 5, the total should be reduced to the next lower number which is
a multiple of ` 10. This rounding off income should only be done on the total income, not on the income
under each of the various headings. This means that if your total income is ` 12,98,465.50, you should
round it up to ` 12,98,470.
1.16 CAPITAL RECEIPT AND A REVENUE RECEIPT- THE DISTINCTION AND IMPLICATION
During the business, two types of receipts are generated. The money brought into the business from
non-operating sources such as proceeds from the sale of long-term assets, capital brought in by the
proprietor, sum received as a loan or from debenture holders and so on is referred to as capital receipts.
The non-recurring income received by the company is referred to as capital receipts. Rather than being
part of the operating activities, they are part of the financing and investing activities. Capital receipts
either reduce or increase an asset or liability. The following sources can be used to generate receipts:
Shares issued
Debt instruments such as debentures issued
A bank or financial institution provides a loan
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Revenue Receipts are receipts that are generated as a result of the company’s core operations. These
receipts are a regular part of business operations, which is why they appear so frequently. However, the
benefit can only be enjoyed during the current accounting year because the effect is temporary. All of
the operations that bring cash into the business are included in the income received from day-to-day
business activities, such as:
Revenue generated from inventory sales
Services provided
Creditors or suppliers have given you a discount
Interest has been received
Dividend remuneration is a type of remuneration that is received in the form of a dividend
Rent received
Capital receipts differ from revenue receipts in that the former has no impact on the financial year’s
profit or loss, whereas the latter is offset against the period’s revenue expenses.
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of each person is determined by his Residential Status under the provisions of the Income Tax Act of
1961.
The assessee’s total income is taxed. The total income of each person is determined by his Residential
Status under the provisions of the Income Tax Act of 1961.
Section 56(1) states that income of any kind that is not excluded from total income under this Act is
chargeable to income tax under the heading “Income from Other Sources” if it is not chargeable to
income tax under any of the first four heads listed in Section 14.
Scope
1. Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which—
a. Is received or is deemed to be received in India in such year by or on behalf of such person; or
b. Accrues or arises or is deemed to accrue or arise to him in India during such year; or
c. Accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-
section (6) * of section 6, the income which accrues or arises to him outside India shall not be so
included unless it is derived from a business controlled in or a profession set up in India.
2. Subject to the provisions of this Act, the total income of any previous year of a person who is a non-
resident includes all income from whatever source derived which—
a. Is received or is deemed to be received in India in such year by or on behalf of such person; or
b. Accrues or arises or is deemed to accrue or arise to him in India during such year.
The process of diverting income before it is earned by the assessee is known as diversion of income.
Because the income is diverted to someone else before being earned by the assessee, it is excluded from
the assessee’s total income. There is an overriding title of any other person on such income in the event
of income diversion.
For example, if XYZ is a partnership firm and their deed specifies that 20% of any profits they are likely
to earn will be distributed to X’s mother, as well as the wives of Y and Z. This is a classic case of income
diversion. The rationale is that the deed mentioning the above-mentioned provision has an overriding
right to the money and is a requirement for the firm to continue. As a result, it isn’t taxable.
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It is a diversion of income if a third party becomes entitled to receive a sum of money due to the assesses
obligation, but it is not a diversion but rather an application of income if an obligation to pay to a
third party arises after the income is received. Many people try to divert their income to avoid paying
taxes. For instance, diverting income to the wife and children. Such tax avoidance is not tolerated by the
courts. In some cases, taxes are combined (sections 60-65). Transferring income without transferring
assets, income derived from revocable asset transfers, spouse income and minor income can all be
grouped together.
Taxation is primarily used to raise revenue for government expenditures, but it can also be used for
other purposes.
Direct and indirect taxes are important for the welfare of the Economy.
Article 265 to article 289 of the Constitution refers to taxation provisions.
No tax shall be levied or collected unless authorised by law and the right to levy taxes must be
exercised by the legislature.
A tax administration’s job is to collect all owed taxes in a fair and efficient manner, with minimal
costs to both taxpayers and the tax administration.
The basis of a charge of an income tells us how much of a person’s income is subject to taxation.
1.20 GLOSSARY
Case Objective
This case aims to show the computation of rental income in the case of income tax.
This case will help us in finding out how is rental income added to the owner’s income tax return?
Adi rented out his Mumbai apartment for 35,000 rupees per month. He has to file tax returns for the
year. Adi needs to find out how much he owes the Income Tax Department.
Let us know the other expenses linked with the house during the year.
In November, Adi paid 25,000/- rupees in property taxes and spent 8,000/- rupees on repairs and 30,000/-
rupees on the payment of electricity bills. Adi also paid an interest of 2,20,000/- rupees on the money
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which he had borrowed for building the house. Since He has rented the property the entire interest on
the home loan can be claimed as a deduction.
He must determine the Gross Annual Value (GAV) of the property. It is important for calculating the
income earned from house property.
For rented property, the annual rent collected must be higher than or equal to the reasonable rent of the
property as founded by the municipality.
The municipality in the case of Adi has calculated the reasonable rent of ` 32,000/-
Therefore, GAV= ` 4,20,000/-
Deduct the property tax payment for finding the net annual value.
As per the Income Tax Act Section 24, the Act allows Adi to claim a standard deduction of 30 per cent on
the net annual value. Adi home loan interest is also fully deductible.
Note:
Expenses on repairs and electricity are not allowed to be deducted.
If Adi was getting rental income from more than one house property; he would have to calculate for each one
of them individually in the same manner as above.
Source: https://cleartax.in/house-property/case-study-aditya-the-landlord
Questions
1. Summarise the Income Tax Act.
(Hint: Salary, business or profession, house property, capital gains and other sources are all covered
by the Income Tax Act of 1961.)
2. What is rental Income?
(Hint: the amount received in lieu of renting out or letting out the property)
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Discuss with your professor how income tax is computed in Western countries?
16
Basic concept of Income Tax
Unit – 01
CA. Prashant Bharadwaj
Assessment Year and Previous Year
• The period of 12 months commencing on the 1st day of April
every year is known as the Assessment Year as defined u/s
2(9). An Assessment Year is a financial year which immediately
succeeds the relevant Previous Year. For instance Assessment
Year 2022-23 the relevant Previous Year is 2021-22.
• The Financial Year in which the income is earned is referred to
as the Previous Year. Section 3 read with section 2 (34) defines
previous year to mean the financial year immediately preceding
the Assessment Year.
Person – Sec 2(31)
Person includes:
• An Individual
• A Hindu Undivided Family
• A Company
• A Firm
• An Association of Persons or a Body of individuals, whether incorporated
or not.
• A Local Authority; and
• Every artificial juridical person, not falling within any of the preceding sub-
clauses.
Assessee – Sec 2(7)
Assessee means a person by whom any tax or any other sum of
money is payable under this Act and it includes :
• Every person in respect of whom any proceeding has been initiated
under the Act for the assessment of his income, loss or refund or the
income, loss or refund of any other person in respect of which he is
assessable.
• A person who is deemed to be an assessee under any provisions of
the Act.
• A person who is deemed to be an assessee in default under any
provisions of the Act.
Income – Sec 2(24)
• Profits and gains of business or profession.
• Dividend
• Voluntary contributions received by Charitable or Religious Trust or
Institutions or Association or University or Hospitals or Electoral Trusts.
• Value of any perquisite or profit in lieu of Salary taxable u/s 17 and Special
Allowance or Benefit specifically granted personal expenses or performance
of duties.
• Export incentives.
• Any interest, salary, bonus, commission or remuneration earned by a partner
of a firm from such firm.
• Any capital gains chargeable u/s 45.
• Winnings from lotteries, crossword puzzles, races including horse races, card
games and other games from gambling or betting of any form or nature.
Income – Sec 2(24)
• Any sum received by assessee from his employee towards welfare fund contributions, such as
Provident fund or superannuation fund.
• Any sum received under keyman insurance policy including sum allocated by way of bonus on such
policy.
• Any sum of money or moveable or immovable property received as gifts as stipulated in sec 56(2).
• Any consideration received for issue of shares exceeding the fair market value of shares referred u/s
56(2)(viib).
• Any sum of money received as an advance or otherwise in the course of negotiations for a transfer of
a capital asset, if such sum is forfeited and the negotiations do not result in transfer of such capital
asset.
• Assistance by way of subsidy/grant/cash incentive/duty drawback by whatever name called by Central
Government or State Government or any authority given to the assessee. (Note: Subsidy or grant
which is taken for determination of Actual Cost of Asset under section 43 (1) shall not be treated as
income. Similarly, subsidy or grant by Central Government, for the purpose of corpus of a trust or
Institution established by Central Government or State Government, shall not be treated as Income).
• Any sum of money or property received by any person, referred in clause (x) of sub-section (2) of
section 56, including gift to a non-resident / foreign company (on or after 5th July 2019).
• Conversion of stock-in-trade into a capital asset.
• Compensation on termination of employment or modification of terms of employment.
Heads of income
1. Income from salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
Note – Taxable income under the above 5 heads is called gross
total income after considering clubbing of income and set off of
losses, if any.
Rounding off
• Section 288A – Total income shall be rounded off to nearest Rs
10.
• Section 288B – The final Tax Liability shall be rounded off to
nearest Rs. 10.
UNIT
Names of Sub-Units
Overview
This unit begins by explaining meaning of residential status, its types. Further, it discuses types of
income and its tax lability, meaning of incidence lawand its scope, determine the residential status of
each person.
Learning Objectives
Learning Outcomes
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2.1 INTRODUCTION
Residential status refers to a person’s status in relation to how long they have lived in India over the
previous five years. A taxpayer’s income tax liability is determined by his or her residence status
during the financial year and the four years prior to the financial year. In addition, when filing income
tax returns, the taxpayer must declare the appropriate residency status. The Income Tax Act divides
taxpayers into three categories based on their residence status:
1. Resident but not ordinarily resident
2. Resident
3. Non-resident
Each of the above categories of taxpayers has a different taxability. Let us look at how a taxpayer
becomes a resident, an RNOR, or an NR before we get into taxability.
a. Resident: If a taxpayer meets one of the following two criteria, he is considered an Indian resident
1. Stay in India for a year is 182 days or more, or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in
the relevant financial year.
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If a citizen or person of Indian origin leaves India for employment during a fiscal year, then he will
only be considered a resident of India if he stays in India for 182 days or more. These individuals are
permitted to stay in India for a period of time that is greater than 60 days but less than 182 days.
These individuals are permitted to stay in India for a period of time that is greater than 60 days but
less than 182 days. For those whose total income (other than foreign sources) exceeds ` 15 lakh, the
period is reduced to 120 days or more beginning in the financial year 2020-21.
An individual who is a citizen of India and is not liable to tax in any other country will be deemed
to be a resident of India beginning in FY 2020-21. Only if his total income (other than from foreign
sources) exceeds ` 15 lakh and he has no tax liability in other countries or territories due to his
domicile or residence, or any other similar criteria, is he considered to be a resident.
b. Resident but Not Ordinarily Resident: If a person meets the residency requirements, the next step
is to determine whether he or she is a Resident and Ordinarily Resident (ROR) or a Resident but Not
Ordinarily Resident (RNOR). If he meets both of the following criteria, he will be a ROR:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment
outside India during the year will be considered a resident and ordinarily resident if he spends at
least 182 days in India. This condition, however, will only apply if his total income (excluding foreign
sources) exceeds ` 15 lakh. A citizen of India who is deemed to be a resident in India will also be a
resident and ordinarily resident in India (as of FY 2020-21).
c. Non-Resident: An individual satisfying neither of the conditions stated in (a) or (b) above would be
an NR for the year.
Taxability
A resident will be taxed in India on his global income, which includes both income earned in India and
income earned outside India.
NR and RNOR: In India, their tax liability is limited to the income they earn there. They do not have to
pay any taxes in India on their foreign earnings. Also, keep in mind that in the event of double taxation
of income, where the same income is taxed both in India and abroad, one can use the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other country to avoid paying
taxes twice.
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3. A person’s residential status should be determined each year, as it is possible that his or her
residential status will change in the following year.
4. If an assessee is resident in India for any source of income in the previous year relevant to the
assessment year, he is deemed to be resident in India for all other sources of income in the previous
year relevant to the assessment year.
5. For any given year, a person may have been a resident of more than one country.
6. There is a distinction between residential status and citizenship. In the previous year, a person could
have been an Indian national/citizen but not an Indian resident or vice versa.
The determination of residential status is critical because a resident who is an ordinary resident must
pay tax on all of his worldwide income, even if he is eligible for DTAA benefits, whereas a non-resident
or resident who is not an ordinary resident (RNOR) must pay tax only on income derived from India,
received or earned in India.
For income tax purposes, understand about your residency status in India. It differs between an
individual and a corporation.
1. Individual: An individual’s residential status is determined by the number of days spent in India.
2. Company: In any other case, residential status is determined by the place of incorporation (in the
case of a company) and the place of control and management.
The purpose of determining a person’s residential status is to determine the tax liability on the total
income earned by that person in a fiscal year.
If a HUF’s control and management of its affairs was entirely outside India during the previous year, it
is said to be non-resident in India.
In other words, if no part of the control and management of its affairs is located in India, it will be
considered non-resident in India.
The decisions made regarding the HUF’s affairs are referred to as control and management. Control
and management are located at the location where the HUF’s business decisions are made.
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Once the HUF has established residency in India, it must be determined whether it is:
Resident in India and ordinarily resident there; or
Resident in India, but not ordinarily resident.
If the HUF’s karta meets both of the following conditions, the HUF is said to be resident and ordinarily
resident in India.
a. He (Karta) must have lived in the United States for at least two of the ten years immediately preceding
the relevant previous year; and
b. He must have spent at least 730 days in India in the seven years preceding the relevant previous
year.
If the HUF’s manager (Karta) does not meet anyone, or both, of the conditions listed in clauses (a) and
(b) above during the relevant previous year, the HUF is said to be resident but not ordinarily resident in
India.
The residential status of HUF’s ‘Karta’ for the relevant previous year has no bearing on whether HUF is a
Resident or not. However, Karta’s status in the preceding years is relevant in determining whether HUF
is ordinarily resident in India or not.
Except for individuals and HUF, everyone else is either a resident or a non-resident. They are not to be
divided into two categories: ordinarily resident and not ordinarily resident.
A person’s residential status must be determined in order for their income to be taxed. The Income Tax
Act originated this phrase, which has nothing to do with a person’s country or citizenship. Each year, the
assessee’s residence status is determined using the ‘prior year.’ In one year, a person may be a resident
and, in the following, a non-resident. The residential status of the assessment year is immaterial.
The state in which a company is registered determines its residential status. Section 6(3) lays out the
following requirements in this regard.[Section 6(3)] Resident A company is said to be resident in India
in any previous year if:
a. it is an Indian company; OR
b. its place of effective management is in India at any time during that year. A location where critical
management and commercial decisions necessary for an entity’s overall functioning are made is
referred to as a “place of effective management.”
[Sec. 6(3)(ii)] Foreign Company having turnover more than `50 crores in the previous year
For foreign company, the phrase ‘place of effective management’ (POEM) is used to determine the
domicile of a corporation created in another country. Almost all of India’s tax treaties recognise the
concept of ‘place of effective management’ for determining a company’s residence as a tie-breaker rule
for avoiding double taxation. Each case’s POEM will be assessed based on the facts and circumstances.
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Furthermore, an entity may have several management locations, but only one effective management
location at any given moment. POEM must be determined on a year-to-year basis since “residential
status” must be determined each year. The process of determining POEM would be primarily based on
whether or not the company is actively engaged in business outside of India.
The Central Board of Direct Tax (CBDT) issued a set of guiding principles in the form of a circular dated
24-01-2017 [Circular No. 06 of 2017] to provide a comprehensive and clear understanding of the concept
of POEM for a company.
The CBDT’s ‘Place of Effective Management’ guidelines, issued via Circular No. 6/2017, dated 24-01-2017,
do not apply to a foreign company with a turnover or gross receipts of Rs. 50 crores or less in a fiscal
year.
[Sec. 6(3)(iii)] Foreign Company having turnover less than `50 crores in the previous year.
A company whose turnover is less than 50 cr. Rupees in the previous year is always treated as non-
resident in India -Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose
annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment
year 2017-18 onwards.
When a firm, AOP, or other entity is said to be resident in India in any previous year unless the control
and management of its affairs is located entirely outside of India during that year.
The control and management of a firm is in the hands of the partners, so if the partners regularly meet
in India to discuss the firm’s affairs, the firm is said to be resident in India.
Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.
To put it another way, if you’re a Non-Resident, you shouldn’t have any control or management in India.
A juridical person is a non-human legal entity that is not a single natural person but rather an
organisation recognised by law as a legal person, such as a corporation, government agency or non-
governmental organisation (NGO), university. A juridical person, also known as an artificial person,
juridical entity, juridic person, juristic person, or legal person, has certain duties and rights that are
outlined in relevant laws.
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We cannot calculate an assessee’s total income unless we know where he lived in India the previous year.
The assessee can be one of the following, depending on their residence status:
A person who lives in India; or
Non-Resident in India
Individuals and HUFs, on the other hand, cannot simply be called Indian residents. If a person lives in
India, then he will be one of the following:
If you are a resident and ordinarily resident in India; or
If you are non- resident and ordinarily resident in India
Other categories of people must be either Indian residents or non-Indian residents. In their case, there
is no distinction between ordinarily resident and not ordinarily resident.
(a) any income which is received or (b) any income which accrues (c) any income which accrues or
is deemed to be received in India in or arises or is deemed to accrue arises outside India during the
the relevant previous year by or on or arise in India during the relevant previous year.
behalf of such person; relevant previous year;
B. In the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF
only) [Section 5(1) and its proviso]:
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The following incomes from whatever source derived form part of Total Income in the case of
resident but not ordinarily resident in India:
(a) any income which is received (b) any income which accrues (c) any income which accrues or arises
or is deemed to be received in or arises or is deemed to to him outside India during the relevant
India in the relevant previous accrue or arise to him during previous year if it is derived from a
year by or on behalf of such the relevant previous year; business controlled in or a profession
person; set up in India.
(a) any income which is received or is deemed to be (b) any income which accrues or arises or is
received in India during the relevant previous year by deemed to accrue or arise to him in India during
or on behalf of such person; the relevant previous year.
In all three cases above, income described in items (a) and (b) must be included in total income of all
three categories of assessees in the same way. The income described in item (c), i.e., income earned or
arising outside of India, is as follows:
i. If the assessee is not a resident of India, it is not included in the total income.
ii. Only if it is derived from a business controlled in India or a profession set up in India is it included in
the total income of a resident but not ordinarily resident in India.
If an assessee has various incomes both inside and outside India, the tax incidence is likely to be higher
in the case of a resident and ordinarily resident in India, a little lower in the case of a resident but not
ordinarily resident in India, and the lowest in the case of a non-resident in India.
The provisions regarding incidence of tax above may be summarised in the following table:
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The term “receipts” refers to the first receipt: The term “receipt of income” refers to the first time the
money is placed in the recipient’s possession. Any remittance or transmission of an amount received as
income to another location does not constitute receipt within the meaning of this clause at that location.
This principle is important in determining the year of receipt, as well as determining the taxation
incidence where the income is solely dependent on receipt.
Non-residents, for example, do not have their foreign income assessed unless it is actually received in
India. In their case, unless the money is received as income from an outside source when it arrives in
India, it will not be considered an income receipt. If a non-resident received moneys as income or exempt
income outside of India (in a previous year or during the previous year) and transferred the funds into
India during the accounting year, the moneys will not be considered income in the eyes of the law.
Even if actual receipt is not made, the following incomes are deemed to bereceived in India in the
previous year:
1. Contribution by the employer to the recognised provident fund of more than 12% of the employee’s
salary.
2. Interest is credited to the employee’s RPF at a rate of more than 9.5 percent per year.
3. The contribution made by the Central Government or any other employer to an employee’s account
under a notified contributory pension scheme referred to in Section 80CCD in the previous year.
4. The Tax Officer adds the amount to the employee’s account if the employee has an old provident
fund that was not recognised previously but is now recognised. If the old funds had been recognised
earlier, they would have been taxed sooner. As a result, it is now taxable as income deemed to be
received.
The person is also deemed to have received tax deducted at source. The company’s dividend is considered
received in the year in which it is declared, distributed or paid. The previous year’s income is also
considered when calculating the interim dividend.
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Direct Tax Laws
Within the ambit of tax liability, Indian Income Tax Laws cover residents, non-residents and residential
but non-ordinary residents’ taxpayers. The Act also imposes a tax liability on foreign companies’ and
non-resident Indians’ income to the extent that it is sourced within India.
It is important to note that Sections 9 and 5 of the Act are inter-twined, hence a thorough understanding
of Section 5 is required first.
Residential status
According to the Income Tax Act of 1961, a taxpayer’s residence status can be one of the following:
A. Resident: To be a resident of India, the taxpayer must meet one of the following two requirements:
a. Has spent at least 182 days in India in the previous year
OR
b. Have spent at least 365 days in India in the previous four years
And
In the relevant financial year, spends at least 60 days in India.
B. Resident but not Ordinarily Resident: If a person meets both of the following criteria, he falls into
this category:
a. He has spent at least two of the previous ten years as a “Resident of India.”
AND
b. Has spent at least 730 days in India in the previous seven years.
C. Non-Resident of India: Indians who are not citizens of the United States (NRI)
If the taxpayer does not meet any of the above conditions of Resident or Resident Non-Ordinarily
Resident, he is said to have the residential status of an NRI.
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The Income Tax Act’s Section 9 is a deeming provision. In a few circumstances, it specifies a certain
income that is deemed or supposed to accrue or arise in India. Non-residents’ income cannot be taxed in
India unless it falls within the four corners of the Income Tax Act, Section 5 read with Section 9.
Certain incomes are deemed to have arisen in India for tax purposes under Section 9(1). Even if it accrues
or arises outside of India, certain income is said to have been incurred in India.
Foreign companies and NRIs’ business income is taxed in India to the extent that it accrues or arises:
through a business connection in India
through any asset located within India
through any source of income within India
Section 9(2) of the Income Tax Act defines deemed income as income incurred or arising in India for
taxation purposes
Any profit made by non-residents from such a connection is said to have been made within India and is
taxable under the Income Tax Act of 1961.
a. Income from assets or property located in India: Any income earned from any property located
in India, whether movable, immovable, tangible, or intangible, is considered incurred within India
for tax purposes.Mr. X, for example, resides in Beijing. He receives a royalty for a book that was
published in India. Such royalties are taxable in India because they are deemed to have accrued in
India, regardless of whether they are received in or outside of India.
Income arising from the transfer of capital assets located in India is said to have incurred in India if
the asset is located in India, regardless of the transferor’s or transferee’s residential status.
b. Salary earned for services performed in India: Any income earned as a salary for services
performed in India, regardless of whether the salary is paid within or outside the country.
c. Salary earned for services rendered outside India: Any Indian citizen’s salary paid by the Indian
government for services rendered outside India is considered to have been incurred in India.
d. Interest Income: In India, any interest received from the following is taxable in the hands of the
recipient:
Except when the interest is paid in connection with money borrowed for use in a business or
profession outside India, by the Government, or
by Indian residents.
By NRIs, as long as the interest is related to the money borrowed for use in a business or
profession carried on in India.
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e. Royalty income: Any royalty paid by any of the following is taxable in India in the hands of the
recipient of such income:
Unless the royalty is paid in connection with the right or information used in a business or
profession located outside India, it is paid by the government, or
by an Indian resident.
By NRIs, as long as the royalty is in connection with a right or information that is used in a
business or profession conducted in India.
f. Fee Paid for technical service: Fees paid for rendering technical services are taxable in the hands of
the recipient of such income in India if paid by one of the following:
by the government
Unless the service is provided in connection with a business or profession that is based outside
of India.
By NRIs, provided that the service is used in connection with a business or profession conducted
in India.
g. Distribution of Profits: If the entire business operations are not confined within India and are
conducted globally, only that portion of the total operation that is attributable to the operations
conducted in India is deemed to be accrued in India and taxable within India under Section 9(1)(I).
For example, in any business operation, different countries are responsible for manufacturing and
selling. Manufacturing, for example, takes place in India, and the goods produced are exported.
Profit attributable to selling operations is deemed not to accrue in India in this case.
In the event that the income from operations carried out in India cannot be determined, Rule 10 of
the Income Tax Rules, 1962, takes precedence. As per the following rule:
Assessing Officers determine a percentage of total turnover that has accrued or arisen in India
after considering the facts and circumstances.
OR
Any amount that has the same proportion of total profit as the total receipts of the business.
OR
Any other method that the Assessing Officer deems appropriate.
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A HUF is said to be resident in India in any previous year unless the control and management of its
affairs is located entirely outside of India during that year.
When a firm, AOP, or other entity is said to be resident in India in any previous year unless the
control and management of its affairs is located entirely outside of India during that year.
Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.
A local authority is an organisation that is formally in charge of all public services and facilities in
each area.
2.12 GLOSSARY
Domicile: It refers to a place where a person resides with an intention of living their permanently
Ambit: The range or area of something
Intertwined: It means connected together and difficult to separate
Possession: When a person is owing or controlling something
Case Objective
The objective of this case study is to determine whether the income generated in India considered to
be taxable or not?
Ramesh was born in India in 1976 and moved to the U.K. for further studies after doing graduation from
India. He completed his studies in the U.K. and started doing a job. After some years he came to India
but stayed only for 3 months in India. He used to do this every year. Along with job he started a business
with a company in India. In the first year of his business where he supplied goods to a company which
is situated in India he made a profit of ` 3 lakhs. He was taxed by the Income tax authorities in India but
he argued and refused to pay the tax.
Question
1. Discuss whether he should be taxable? Why?
(Hint: Any profit made by non-residents from such a connection is said to have been made within
India and is taxable under the Income Tax Act of 1961. Refer Section 2.10.)
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https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Residential-Status/Meaning-of-
Residential-Status.html
https://taxguru.in/income-tax/residential-status-individuals-income-tax-act-1961.html
Compare and contrast the tax systems in India and the UK.
14
Residential Status of various
Persons
Unit – 02
CA. Prashant Bharadwaj
Residential Status of Individuals – Sec 6(1)
An individual is said to be resident in India in any previous year if
he fulfills any one of the following two basic conditions:
• He is in India, in the previous year for a total period of 182 days
or more.
OR
• He is in India for a total period of 60 days or more during the
previous year AND 365 days or more during 4 years preceding
the previous year.
Note: The day on which he enters India, as well as the day on
which he leaves India, shall be considered as stay in India.
Resident and Ordinarily Resident – Sec 6(6)
In addition to fulfilling the above basic conditions, any individual if he
fulfills both of the following conditions he will be treated as ordinarily
resident in India, in the previous year:
• He has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year;
AND
• He has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
Note: An individual who satisfies one or more basic conditions as per
section 6(1), but does not satisfy the two additional conditions laid down
in section 6(6) [as above], is treated as resident but not ordinarily
resident in India.
Residential Status of HUF – Sec 6(2)
• A Hindu Undivided Family is said to be resident in India if the control and
management of its business affairs is situated wholly or partly in India.
• A Hindu Undivided Family is non-resident in India if the Control and
management of its business affairs is situated wholly outside India.
• If the control and management of the business affairs of the Hindu Undivided
Family is situated wholly or partly in India and if the manager (Karta) satisfies
the conditions of section 6(6), then the Hindu Undivided Family is considered
as “Ordinarily Resident”.
• If the control and management of the business affairs of the Hindu Undivided
Family is situated wholly or partly in India and if the manager (Karta) fails to
satisfy any of the conditions of section 6(6), then the Hindu Undivided Family
is considered as “Not Ordinarily Resident”.
Residential Status of Companies – Sec 6(3)
The following types of companies are considered resident in India:
• Indian company.
• Any other company whose turnover/gross receipts in the previous
year is more than Rs. 50 Crore and the place of effective
management is situated wholly in India.
In any other case the company shall be considered non-resident.
Note: Place of effective management means a place where key
management decision and commercial decision that are necessary for
the conduct of the business entity as a whole are, in substance made.
Residential Status of Firm or AOP – Sec 6(4)
A Firm, Association Of Persons and every other person is
considered as resident if the control and management is situated
wholly or partly in India. If the control and management is
situated wholly outside India, such firm, Association Of Persons
or any other person is considered as non-resident.
Scope of Total Income – Sec 5
PARTICULARS RESIDENT & RESIDENT & NON-
ORDINARILY NOT- RESIDENT.
RESIDENT. ORDINARILY
RESIDENT.
Names of Sub-Units
Steps Involved in Calculation of Tax Liability, Income Tax Rates and Slabs, For Individuals, For HUF/
AOP/BOI/AJP, For a Company, For Partnership Firm/LLP/Local Authority, For a Co-operative Society,
Rebate u/s 87A, Surcharge, Cess, Marginal Relief, Special Rates of Tax (Section 112, 112A, 111A, 15BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF, 115BBG).
Overview
The unit begins by describing the steps involved in the calculation of tax liability followed by listing
the rates and slabs of income tax for different classes of assessees, such as individuals, HUF, AOP,
BOI, AJP, company, partnership firm, LLP, local authority and co-operative societies. Thereafter, the
chapter discusses the concepts of rebate u/s 87A, surcharge, cess and marginal relief. The last section
of this unit lists and briefly explains the special rates of tax under Sections 112, 112A, 111A, 15BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF and 115BBG.
Learning Objectives
Learning Outcomes
https://www.incometaxindia.gov.in/Tutorials/2%20Tax%20Rates.pdf
3.1 INTRODUCTION
You have already learned that the first step in the process of determining the income tax liability of an
assessee is to determine its residential status. After this step, the next step is to determine the taxable
income of the assessee. Thereafter, the total tax is calculated on the taxable income of the assessee
using the corresponding rates of tax. For each assessment year, the Finance Ministry issues the rates
applicable for different categories of assessees falling into different slabs of income.
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Tax slab rates for resident senior citizens aged above 60 years but below 80 years are shown in Table 3:
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Tax slab rates for resident super senior citizens aged 80 years and above are shown in Table 4:
Note: It must be noted that the basic exemption limit or the maximum amount not chargeable to tax for
individuals, senior citizens and super senior citizens is `2,50,000; `3,00,000; and `5,00,000, respectively.
A. Domestic Company
i. Total turnover or gross receipts during the PY 2018-19 does not exceed `400 crore 25%
ii. Any other case 30%
The above income tax rates are as prescribed by the Finance Act, 2021. However, in respect of certain
types of income, such as long-term capital gains under Section 112 or 112A, some specific rates are
prescribed by the Income Tax Act, 1961, as the case may be. These rates are discussed along with the
relevant sections at appropriate places.
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3.5 SURCHARGE
The rates of surcharge for different assessees are listed in Table 7:
Rate of Surcharge
Assessee
(as % of income tax)
A. Individual/HUF/AOP/BOI/AJP
i Total income ≤ `50 lakh Nil
ii. Total income > `50 lakh but ≤ `1 crore 10%
iii. Total income > `1 crore lakh but ≤ `2 crore 15%
iv. Total income > `2 crore lakh but ≤ `5 crore 25%
v. Total income > `5 crore 37%
B. Firm/Limited Liability Partnership/Local Authority/Co-operative society
i. Total income ≤ `1 crore Nil
ii. Total income > `1 crore 12%
C. Domestic company
i. Total income ≤ `1 crore Nil
ii. Total income > `1 crore but ≤ `10 crore 7%
iii. Total income > `10 crore 12%
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Rate of Surcharge
Assessee
(as % of income tax)
D. Foreign company
i. Total income ≤ `1 crore Nil
ii. Total income >`1 crore but ≤ `10 crore 2%
iii. Total income >`10 crore 5%
It must be noted that the companies that opt for taxability under Section 115BAA or Section 115BAB will
be charged a surcharge at a rate of 10% irrespective of the amount of total income.
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C. Companies
Companies can claim marginal relief if their total income exceeds ` 1 crore.
Case 1: Total income > `1 crore but ≤ `10 crores
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Illustration 1: For the Assessment Year 2020-21, calculate the tax liability of Ms. Shikha who received a
total income of ` 51,20,000.
Solution: Calculation for Shikha’s tax liability for the A.Y. 2020-21 is as follows:
Total 13,48,500
Add: Surcharge (@10%) 1,34,850
D. Tax Payable (Tax payable before surcharge + Effective Surcharge) = 13,48,500 + 84,000 1,432,500
3.7 CESS
Health and Education cess is an additional surcharge computed on income tax as increased by
surcharge and as reduced by rebate if any. It is computed on total income tax (i.e., income tax and
effective surcharge, if applicable) after allowing for rebate under Section 87A. Health and education
cess is levied @ 4% on income tax plus surcharge if any. Net income tax payable is arrived at after the
tax is increased by health and education cess.
In the case of every assessee, the amount of tax after adding surcharge shall be increased by health and
education cess at the rate of 4%.
3.8 SPECIAL RATES OF TAX (SECTION 112, 112A, 111A, 115BBD, 115BBDA, 115BBC, 115BA,
115BAA, 115BAB,115BB,115BBE, 115BBF, 115BBG)
Section Nature of Income Rate of Tax
111A Short-term capital gains from transfer of securities units on which Securities 15%
Transaction Tax has been charged
112/112A Long-term capital gains 20%/10%
Long-term Capital Gain covered by the provision to Section 112 10%
(Listed Bond/ Debenture)
On Long-term Capital Gain (Listed Share/Unit) Exempt up to
1 lakh. Excess
taxable @10%
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115BB Winnings from lotteries, crossword puzzles, races including horse races, card 30%
games and other games of any sort or gambling or betting of any form or nature
whatsoever.
115BBE Unexplained amounts treated as income under sections 68, 69, 69A, 69B, 69C 60%
and 69D of the Act will be taxable @60% without granting any deduction of
expenditure or allowance there against. The benefit of threshold exemption and
lower slab rates for individuals and HUFs will not be available to such amounts.
No set off of any loss against Section 68,69,69B,69C and 69D.
115BBDA Income by way of dividends over ` 10 Lacs in the hands of a person other than 10%
i. a domestic company or
ii. a fund or institution or trust or any university or other educational institu-
tion or any hospital or other medical institution referred to in sub- clause (iv)
or sub-clause (via) of clause (23C) of section 10; or
iii. a trust or institution registered u/s 12A or 12AA who is resident in India
Further, the taxation of dividend income in excess ` 10 lacs shall be on gross
basis, i.e., no deduction in respect of any expenditure or allowance or set-off
of loss shall be allowed to the assessee in computing the income by way of
dividends.
115BBF Income by way of royalty in respect of a patent developed and registered in India 10%
in respect of a person who is resident in India. No deduction in respect of any
expenditure or allowance or set-off of loss shall be allowed to the assessee in
computing the said income
115BBD Dividend received by a domestic company from a foreign company in which such 15%
domestic company has 26% or more equity shareholding
115BBC If any person receives income by way of anonymous donation received an excess 30%
of the higher of the following: (a) 5% of total donation received or (b) ` One lakh
115BA Domestic companies’ setup and registered on or after 01/03/2016 and engaged in 25%
the business of manufacturing or production of any article or things
115BAA Domestic company where it opted for Section 115BAA. This benefit shall be 22%
available when the total income of the company is computed without claiming
specified deductions, incentives, exemptions and additional depreciation
available under the Income-tax Act.
115BAB Domestic company where it opted for Section 115BAB. This regime shall be 15%
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.
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Note that where a domestic company has not opted for Section 115BAA and the Total Turnover or Gross
receipts of the company in the last previous year does not exceed 400 crore rupees; tax applicable is 25%.
For any other domestic company, the tax rate is 30%.
For each assessment year, the Finance Ministry issues the rates applicable for different categories
of assessees falling into different slabs of income.
The rates at which the income tax is to be levied on income chargeable to tax for Assessment Year
2021-2022 are mentioned in Section 2 and Part I of the First Schedule to Finance Act, 2021.
Different tax rates have been furnished for several sections of taxpayers and varied sources of
income. Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOP), Body of
Individuals (BOI) or Artificial Juridical Person (AJP) are taxed as per different income tax rates.
The basic exemption limit or the maximum amount not chargeable to tax for individuals, senior
citizens and super senior citizens is `2,50,000; `3,00,000; and `5,00,000, respectively.
A tax rebate is allowed to resident individuals under Section 87A. If the total income of resident
individuals does not exceed `5,00,000 during the previous year, a tax rebate of `12,500 or 100% of
total income tax, whichever is less, is allowed to them.
The concept of marginal relief has been designed to provide relaxation to taxpayers from levy of
surcharge if their total income exceeds marginally above ` 50 lakh or ` 1 crore or ` 2 crores or ` 5
crores.
Health and Education cess is an additional surcharge computed on income tax as increased by
surcharge and as reduced by rebate if any. It is computed on total income tax (i.e., income tax and
effective surcharge, if applicable) after allowing for rebate under Section 87A. Health and education
cess is levied @ 4% on income tax plus surcharge if any.
Special Rates of Tax are applicable to different assessees as per sections 112, 112A, 111A, 115BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF and 115BBG.
3.10 GLOSSARY
Assessee: A person who pays tax under the provisions of the Income Tax Act, 1961
Rebate: A form of deduction available to resident individuals from their tax liability
Tax slab: The incomes of different assessees are categorised into different groups and each such
group is known as a Tax Slab
3.11 CASE STUDY: WHY DOES THE GOVERNMENT GIVE REBATES BUT DOESN’T
ENHANCE THE EXEMPTION LIMIT?
Case Objective
This case study highlights the reason why government give rebates but doesn’t enhance the exemption
limit.
In the interim budget of 2019, the government increased the rebate available under Section 87A from `
3,500 to ` 12,500. As a result, the taxable income of up to ` 5 lakh became tax-free in the hands of small
taxpayers. For this, the government did not require raising the basic exemption limit.
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It has been observed that successive governments usually keep on adjusting the rebate available u/s
87A but they seldom try to raise the exemption limits. The main reason that the governments do not
increase the exemption limits, and prefer tweaking rebates available is that rebates spur consumption
but increasing exemption limits may impact the tax collections especially from higher tax brackets.
The government needs to maintain and try to increase tax compliance because the percentage of people
who file income tax is extremely low as compared to a population of 1.2 billion. As of 2019, the number
of Income Tax Returns filed in India was only 6.85 crores. Out of these 6.85 crores, two crores did not pay
any tax. The people who filed zero-ITRs had to file the ITR even though their tax liability was nil was due
to multiple reasons, such as gross income above the basic exemption limit, but occurs no tax liability
as a result of deductions available or to claim a refund for the Tax Deducted at Source (TDS) even when
taxable income was well within the exemption limit.
All the governments irrespective of their political affiliations have worked on broadening taxpayers’
base. For making policy related decisions and for various statistical calculations, the government
requires gathering data on the economy as early as possible. For this, the government makes efforts to
convince the taxpayers to file their income tax returns earlier.
To discourage late ITR filing, the government has also made a provision for charging late filing fees if
ITR is filed beyond the due date. Government is extremely considerate about timely data collection. If the
government raises the basic exemption limit (current `2,50,000), various taxpayers would be excluded
from the tax network due to which the government would lose hold of a lot of data.
As mentioned earlier, various persons need to file their ITR even if their tax liability is zero and as their
taxable income is just below ` 5 lakh. This helps the government access more data.
Another reason due to which governments change rebates but do not change the basic exemption
limit is to ensure savings for small taxpayers without losing a lot of tax revenue. For the growth of any
economy, the people must spend money or the consumption must be increased. The government needs
to ensure that people spend and at the same time it does not lose taxes. The rationale behind allowing
rebates under Section 87A is that only the small taxpayers should be able to save tax whereas others
pay as per their tax rates. It is relevant to note that the government is well-aware that money saved by
middle-class taxpayers is spent and the money saved by higher income groups is kept safe.
Not raising the basic exemption limit also helps the government in curbing unaccounted money. The
government also encourages more and more people to file ITR so that it can gain access to records of
earnings and assets of such persons. However, if the exemption limit is increased (say from `2,50,000
to ` 5,00,000); a lot of people who file ITR will be excluded from the tax bracket. And, such people can
always claim that they have generated assets and capital by saving their income when their income
was not taxable. This can lead to the generation and use of black money.
Source: https://www.dnaindia.com/personal-finance/report-why-government-gives-rebates-and-doesn-t-enhance-exemption-limit-2749339
Questions
1. What is the major reason that Why government gives rebates and doesn’t enhance the exemption
limit?
(Hint: Rebates spur consumption but increasing exemption limits may impact the tax collections
especially from higher tax brackets.)
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https://cleartax.in/s/marginal-relief-surcharge
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https://www.finwealthcare.com/2020/12/section-115ba-115baa-115bab-of-income-tax.html
29
Income Tax Slab and
Rates of Tax
Unit – 03
CA. Prashant Bharadwaj
Slab rates for AY 2022-23
Slab rates for INDIVIDUALS (Both Men and Women (Resident)
less than 60 years / non-resident (any age)/Hindu Undivided
Family/Association Of Persons /Body Of Individuals /Artificial
Juridical Persons:
INCOME (per annum) RATE OF
TAX.
Income up to Rs.250,000/- (Basic Exemption Limit) NIL
Above Rs.250,000/- to Rs.500,000/- 5%
Above Rs.500,000/- to Rs.10,00,000/- 20%
Above Rs. 10,00,000/- 30%
Slab rates for resident individuals – AY 2022-23
Slab rates for RESIDENT INDIVIDUALS aged 60 years or more but
less than 80 years (at any-time in the previous year)
INCOME (per annum) RATE OF TAX.
Names of Sub-Units
Introduction to income from salaries, meaning of salary, computation of salary income, analysis
of deductions from salary, analysis of provident fund tax treatment, concept of allowances and
computation of salary income.
Overview
This unit begins by meaning of income from salaries, it discusses the classification of different forms of
salary for computation of income under the head. The unit analysis the provident fund tax treatment.
Analysis of special allowances and analysis of important points for computing salary income.
Learning Objectives
Learning Outcomes
4.1 INTRODUCTION
For the purpose of taxation, the term ‘salary’ has been defined under Section 17(1) of the Income Tax
Act, 1961. In addition, important concepts, such as employer-employee relationship, arrears of salary,
allowances, gratuity and the taxability of different types of perquisites, have been discussed at length.
Perquisites have been defined under Section 17(2) of the Income Tax Act, 1961. The concept of profits in
lieu of salary under Section 17(3) has also been described. Section 16 of the Act describes deductions
that may be made from the overall income generated from salary. These include deductions against
entertainment allowance and professional tax. The chapter also discusses the taxability of various
components of the provident fund. The last section of the chapter presents illustrations that will help you
in working out problems which demand calculating the value of income from salaries for an individual
assessee.
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(viii) the contribution made by the Central Government or any other employer in the previous year to the
account of an employee under a pensionscheme referred to in section 80CCD.
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For charging tax under income from salary, following points must be remembered:
Income from salary becomes chargeable to tax either on ‘due basis’ or on ‘receipt basis’, whichever
is earlier.
Employee-employer relationship must exist between the payer and payee in order to tax the income
under this head.
Where salary is assessed in the year of payment or in the year when it becomes due, the same cannot
be subjected to tax subsequently in the year when it gets due or paid, as the case may be.
It should be noted that in case any receipt is not covered under any of these features, it will not come
under the head Salaries.
Calculation of Income from salary
Particulars Amount
Basic Salary —
Add: —
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Particulars Amount
1. Fees, Commission and Bonus —
2. Allowances —
3. Prerequisites —
4. Retirement Benefits —
5. Fees, Commission and Bonus —
Gross Salary —
Net Salary —
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4.4 ALLOWANCES
An allowance refers to a fixed amount of money given periodically in addition to the salary. These
allowances are generally taxable and are to be included in gross salary unless specific exemption is
provided in respect of such allowance. For the purpose of tax treatment, we divide these allowances into
three categories:
Fully taxable cash allowances
Fully exempt cash allowances
HRA
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5. Non-practicing Allowance: It is generally given to those medical doctors who are in government
service and they are banned from doing private practice. It is to compensate them for this ban. It is
fully taxable.
6. Hill Allowance: It is given to employees working in hilly areas on account of high cost of living in
hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 meters
height from sea level.
7. Warden Allowance and Proctor Allowance: These allowances are given in educational institutions
for working as Warden of the hostel and/or working as Proctor in the institution. These allowances
are fully taxable.
8. Deputation Allowance: An employee is given a deputation allowance when an employee is sent from
his permanent place of service to some other place or institution or organisation on deputation for
a temporary period. It is fully taxable.
9. Overtime Allowance: An overtime allowance is given an employee works for extra hours over and
above his normal hours of duty. It is fully taxable.
10. Other Allowances: Other allowances such as Family allowance, Project allowance, Marriage
allowance, City Compensatory allowance, Dinner allowance and Telephone allowance. These are
fully taxable.
4.4.3 HRA
House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given
by an employer to an employee to meet the cost of renting an accommodation. Section 10(13A) of the
Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption,
the following basic conditions should be met:
Assessee should be staying in a rented accommodation.
The house should not be owned by him or his spouse.
Assessee should be paying the rent.
Exemption limit in HRA: Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary.
Here, Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of
turnover achieved by an employee. Most private sector companies don’t have the last two components
in the salary package.
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An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and
is in receipt of HRA from his employer. In order to claim the deduction, an employee must actually pay
rent for the house which he occupies.
The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible
and the entire amount of HRA received is subject to tax.
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Helper Allowance: Provided to cover expenditure incurred on a helper hired for performance of
duties of an office or employment of profit. This allowance is exempt from Income Tax while saving
is taxable.
4.5.1 Perquisites
Perquisites refer to payments received by employees over their salaries and are not the reimbursement
of expenses. Some perquisites are taxable for all employees, they are:
Rent free accommodation
Concession in accommodation rent
Interest free loans
Movable assets
Club fee payments
Educational expenses
Insurance premium paid on behalf of employees
Some perquisites are taxable only to specific employees like directors or those who have substantial
interest in the organisation, they are taxed for:
Free gas and electricity for domestic purpose
Concessional educational expenses
Concessional transport facility
Payment made to gardener, sweeper and attendant.
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such payment does not consist of contributions by the employee or interest on such employee’s
contribution.
In other words, total employer’s contribution till date and interest on such employer’s contribution
would both be taxable. Employer’s contribution and interest thereon and interest on the employee’s
contribution are not taxed during the period of employment. When the accumulated balance of such
a fund is paid to the employee either on retirement or on termination of service, the untaxed portion,
i.e., the employer’s contribution and interest thereon is taxed as ‘profit in lieu of salary’. The interest
on employee’s contribution is taxed as ‘Income from other sources’.
3. Payment under Keyman Insurance Policy: Any payment due to or received by an employee, under
a Keyman Insurance Policy including the sum allocated by way of bonus on such policy, will also be
regarded as profit in lieu of salary.
4. Any amount due or received before joining or after cessation of employment: Any amounts due to
or received, whether in lump sum or otherwise by any assessee from any person—
A. before his joining any employment with that person; or
B. after cessation of his employment with that person.
5. Any other sum received by the employee from the employer: All other payments made by an
employer to an employee, would be brought under the head “Profits in lieu of salary”. This is a
comprehensive provision by virtue of which all payments made by an employer to an employee
whether made in pursuance of a legal obligation or voluntarily are brought under profit in lieu of
salary.
However, the following receipts, will not be termed as ‘profits in lieu of salary’ to the extent they
are exempt under section 10.
i. Death-cum-retirement gratuity — Section 10(10)
ii. Commuted value of pension — Section 10(10A)
iii. Retrenchment compensation received by a workman — Section 10(10B)
iv. Payment received from a statutory provident fund — Section 10(11)
v. Payment received from recognised provident fund — Section 10(12)
vi. Any payment from an approved superannuation fund as per section 10(13)
vii. House rent allowance exempt under section 10(13A)
In short, except for the terminal and other payments specifically exempted under clauses (10) to (13A)
of section 10, all other payments received by an employee from an employer or former employer are
liable to tax under this head.
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Provident fund is contributed by both employee and employer on a monthly basis. At the retirement,
employee gets the amount along with interest. Tax treatment is based on the type of provident fund
maintained by the employer.
4.5.4 Deductions
Section 16 of the Act is related to deductions from salaries. According to this section, the income
chargeable under the head ‘Salaries’ shall be computed after making certain deductions from gross
salary which are as follows:
Section 16(i) – Standard Deduction
Section 16(ii) – Entertainment Allowance
Section 16(iii) – Professional Tax
As per Section 15 of the Income Tax Act, 1961, income chargeable to tax under the head ‘salaries’
includes any salary due to an employee, any salary paid or allowed to an assessee in the previous
year, and any arrears of salary paid or allowed to the employee in the previous year.
Salary income becomes chargeable to tax either on ‘due basis’ or on ‘receipt basis’, whichever is
earlier.
Before the income of an assessee is charged under the head ‘salaries’, it must be ensured that there
exists an employer-employee relationship between the receiver and the payer.
Gratuity refers to a payment that is made in appreciation of an employee’s past services rendered
by him/her to the employer.
It can be received either by the employee himself at the time of his
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4.7 GLOSSARY
Encashment: An exchange of a tangible or intangible item, such as cheques and leaves for a sum of
money
Keyman: A person whose service has a significant effect on the profitability of the company is known
as a keyman
Legal hier: A person, whether male or female, who is entitled to receive and inherit the entire
property of a person who dies without declaring a will
Retrench: A practice of reducing the employee strength
Substantial interest: A person or assessee is said to have substantial interest in a company who
holds more than 20% of shares or controls more than 20% of board of directors
4.8 CASE STUDY: TAXABILITY OF GRATUITY OF MR. RISHI BASED ON THE NATURE
OF HIS EMPLOYMENT
Case Objective
This Case Study discusses the provisions relating to the exemption of gratuity.
The amount of gratuity received by an employee during the Previous Year 2021-2022 becomes taxable
in the Assessment Year 2021-2022 on the basis of his nature of employment. Gratuity is a voluntary
payment made by employers for the appreciation of services rendered by his employees.
1972, gives statutory recognition to the payment of the gratuity. Mr. Rishi retired on 14th June, 2020
after completely serving a period of 26 years and 8 months of his service. He received a gratuity
Dearness allowance was ` 4,000 per month, of which 60% was meant for retirement benefits as per the
terms of employment. Also, he was eligible to a commission @ 1% of turnover (turnover
Under the Income Tax Act, 1961, any gratuity received during the tenure of service is fully taxable. The
amount of exemption is available in respect of gratuity received at the time of retirement/death of an
employee differs under three situations.
Section 10(10)(i): Employees of Central Government/Local Authority employees/Members of Civil
Services – The death cum retirement gratuity is fully exempt.
Section 10(10)(ii): Employees covered by the Payment of Gratuity Act, 1972 – The death cum
retirement gratuity is exempt to the extent of least of the following:
1. `20 lacs
2. The actual amount of gratuity received
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3. 15 days’ salary for every completed year or part thereof in excess of 6 months (based on last
drawn salary) Salary, in this case, means (Basic Salary + Dearness Allowance) and the number of
days in a month are taken as 26.
Section 10(10)(iii): Employees not covered by the Payment of Gratuity Act, 1972 – The death cum
retirement gratuity is exempt to the extent of least of the following:
1. `x 20 lacs
2. The actual amount of gratuity received
3. Half month’s salary for every completed year of service
(Based on an average of past 10 months’ salary) Salary, in this case, means (Basic Salary + Dearness
Allowance forming part of retirement benefits + Commission as a % of turnover)
Taxable Gratuity -
If Mr. Rishi is a private sector employee covered by Payment of Gratuity Act Amount in `
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(ii) 1,86,923
Least of the following:
1. ` 7,00,000
2. ` 20,00,000
3. ` {(8,000 + 4,000) × 15/26 × 27} = ` 1,86,923
If Mr. Rishi is a private sector employee not covered by Payment of Gratuity Act Amount in `
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(iii) 1,48,200
Least of the following:
1. ` 7,00,000
2. ` 20,00,000
3. = ` 1,48,200
10
800 10 4,000 60% 10 1% 12,00,000
15 12
26
30 10
Taxable Gratuity 551,800
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https://resource.cdn.icai.org/65964bos53217cp4u1.pdf
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Discus with your team about the Provident Fund Tax Treatment in income tax.
15
Income from Salary
Unit – 04
CA. Prashant Bharadwaj
Basis of Charge / Chargeability section (Sec 15)
Salary for this purpose - Basic salary + Dearness Allowance [if forms part of retirement
benefits] + current year bonus + commission + any fees + all taxable allowance.
However, salary does not include allowances which are exempt from tax, value of
any perquisites and lump sum payments received at the time of retirement &
employer’s contribution to Provident Fund.
Valuation of Rent Free Accommodation
Valuation of rent free furnished accommodation:
Step 1: find out the cost -Nil- 10% of actual cost Actual hire charges paid
to the employer or payable
Names of Sub-Units
Introduction to income from house property, meaning of house property, computation of income from
house property, analysis of charges under the head IFHP, analysis of standard deduction (section 24a),
concept of recovery of unrealised rent vs receipt of arrear of rent (section 25a), co-owner (section 26),
deemed owner (section 27)
Overview
This unit begins by explaining the meaning of income from house property, it discusses the classification
of different forms of charges under the head IFHP. The unit analyses the standard deduction (section
24a), analysis of deemed owner (section 27) as well as analysis of the recovery of unrealised rent vs
receipt of arrear of rent (section 25a).
Learning Objectives
Learning Outcomes
5.1 INTRODUCTION
The provisions for computation of Income from house property are covered under sections 22 to 27.
This unit deals with the provisions for computation of Income from house property. Section 22 is the
charging section that identifies the basis of charge wherein the annual value is prescribed as the basis
for computation of Income from House Property. Therefore, the process of computation of “Income
from House Property” starts with the determination of the annual value of the property. The concept
of annual value and the method of determination is laid down in section 23. The admissible deductions
available from house property are mentioned in section 24.
At the end of this unit, you will learn the conditions to be satisfied for income to be chargeable under this
head, how to determine the annual value of different types of house properties, admissible deductions
and inadmissible deductions from annual value, the tax treatment of unrealised rent, who are deemed
owners, what is meant by co-ownership and what is its tax treatment, etc.
Income from house property is one of the important heads of income under the Income Tax Act. The tax
payers have been, in particular, keen to know about the exemptions and deductions available to them on
repayment of interest and principal of the loan obtained to purchase the house property, if that house
property is let out or self-occupied. The amount of interest on borrowed capital of the current year is
available under the head house property further repayment of principal is available under section 80C
to individuals and Hindu Undivided Families.
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case of non-residential buildings, carparking spaces, drying grounds or playgrounds shall be the
lands appurtenant to buildings.
Tax is charged from the owner of the buildings and land appurtenant thereto: Where the recipient
of the income from house property is not the owner of the building, the income is not chargeable
under this head but the head ‘Income from Business or Other Sources’. For example, the income to a
lessee from sub-letting a house or income to a mortgagee from house property mortgaged to him is
not chargeable under the head.
Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Less: Municipal taxes (paid by the owner during the previous year) B
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If the property is used for own business or profession, it shall not be chargeable to tax. If the assessee is
engaged in the business of letting out of the property on rent, the income earned would be taxable as his
business income. It should be noted that if the house property is held by an assessee as stock-in-trade of
his business, then also the annual value of such house property shall be charged under the head ‘Income
from house property’.
The process of computation of income from house property is explained in the following Table:
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Municipal Value (MV): Municipal value refers to the value determined by local municipal authorities
based on which it collects municipal taxes.
Fair Rent of a Property (FR): Fair rent of a property refers to the amount of money that can be
expected to be received in a year by letting a property of similar size in the same locality.
Standard Rent (SR): Standard rent refers to the rent that is fixed under the Rent Control Act, 1958.
Under this Act, the maximum rent has been prescribed for all the localities.
According to the Act, the annual value of a property is the value received after the deduction of municipal
taxes (if any) paid by the owner. At a broader level, the annual value of the property may be determined
in just two steps as shown in the following Figure
The net annual value obtained after deducting municipal taxes is considered to be the annual value
of the house property for all purposes related to the Income Tax Act. The Gross Annual Value (GAV) is
determined by following the steps mentioned in the following Table:
Step 1 Compare Fair Rental Value with Municipal Value, whichever is higher
Step 2 Compare Standard Rent with Step 1 value. The lower of the two is the Expected Rent
Step 3 Compare Expected Rent and Actual Rent
If Actual Rent > Expected Rent, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to the vacancy of the property, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to any other reason, Expected Rent is the GAV
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should be calculated and claimed as a deduction. It is immaterial whether the interest has been paid
during the year or not.
However, there should be a clear link between the borrowal and the construction or purchase, etc., of
the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed
as a deduction.
The following points are to be kept in mind while claiming a deduction on account of interest on borrowed
capital:
In case the property is let out, the entire amount of interest accrued during the year is deductible.
The borrowals may be for construction/acquisition or repairs/renewals.
A fresh loan may be raised exclusively to repay the original loan taken for purchase or construction,
etc., of the property. In such a case also, the interest on the fresh loan will be allowable.
Interest payable on interest will not be allowed.
Brokerage or commission paid to arrange a loan for house construction will not be allowed.
When interest is payable outside India, no deduction will be allowed unless the tax is deducted at
source or someone in India is treated as an agent of the non-resident.
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Example:
Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the P.Y. 2020-21
are as under:
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Compute Ganesh’s income from house property for A.Y.2021-22 and suggest which houses should be opted
by Ganesh to be assessed as self-occupied so that his tax liabilityisminimized.
Solution:
Let us first calculate the income from each house property assuming that they are deemed to be let out.
Computation of income from house property of Ganesh for the A.Y. 2021-22
Particulars Amount in `
Ganesh can opt to treat any two of the above house properties as self-occupied.
OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Self-occupied) (interest deduction restricted to ` 30,000) (30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640
OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shallbe–
Particulars Amount in `
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
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Particulars Amount in `
House III (Self-occupied) (1,75,000)
Income from house property 1,840
OPTION 3 (House II and III – self-occupied and House I – deemed to be let out)
If House II and III are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (interest deductionrestricted to ` 30,000) (30,000) (2,00,000)
House III (Self-occupied) (1,75,000) 19,800
Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self- occupied and House
II as deemed to be let out. His income from house property would be ` 1,840 for the A.Y. 2021-22.
(VI) HOUSE PROPERTY, A PORTION LET OUT AND A PORTION SELF- OCCUPIED
The owner of house property (in whose name the property stands) is considered as the assessee for
taxation.
If an individual has given his house property on rent or lease and derives any income from it, it is
termed as ‘income from house property’.
For taxing an income under the head ‘Income from House Property’, three conditions must be
fulfilled, which are as follows:
The property must consist of buildings and lands appurtenant thereto.
The assessee must be the owner of such house property.
The property may be used for any purpose, such as renting or letting-out, but it should not be used
by the owner for any business or profession carried on by him, the profit of which is taxable. If the
property is used for own business or profession, it shall not be taxable.
A deemed owner is an individual who does not have the property registered in his name but is liable
to pay tax for the income received from house property as per Section 27 of the Income Tax Act.
The annual value of the property is based on the actual rent received by the owner or the amount
expected to be received by him/ her [Actual rent received or receivable (ARR)].
At a broader level, the annual value of the property may be determined in just two steps:
Step I: Determine the gross annual value of house property; and
Step II: Deduct municipal taxes paid by the owner in the previous year from the gross annual value
calculated in Step I.
For the income chargeable under the head ‘Income from House Property’, there are only two
deductions, namely standard deduction and interest on borrowed capital.
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5.11 GLOSSARY
Actual rent: Actual rent received/receivable is a vital cause in establishing the annual value of a
property
Deemed owner: A deemed owner is an individual who does not have the property registered in his
name, but is liable to pay tax for the income received from house property as per Section 27 of the
Income Tax Act
Notional basis: Notional basis of calculating annual value means that the house property is taxed
not based on actual income or rent received from the house property, but based on the potential of
the house property to generate income
Standard rent: The standard rent is set under the Rent Control Act. If the standard rent has been
set for any property under the Rent Control Act, the proprietor cannot be projected to obtain a rent
higher than the standard rent set under the Rent Control Act
Case Objective
This Case Study discusses the tax issues related to the income from the house property of Swapnil.
Mr. Swapnil, a Delhi-based IT professional, owns a flat in South Delhi. He is planning to purchase another
property in North Delhi. He is considering the following options:
Let it out on rent
Use it as a residence for himself or his family
Keep it vacant/unoccupied
Use it as a holiday home
Each of these alternatives has its tax implications. Therefore, it becomes important for Swapnil to
understand the tax implication for each option by the Income Tax Act, 1961 before deciding what he
should do with his new property. The tax implications for the above alternatives are as follows:
If the new property is let out on rent: In this situation, the rent received from the property will be
taxed. For example, if Swapnil is getting a rent of ` 10,000 per month from his property, he will have
to pay tax for his annual rental income, i.e., ` 1,20,000 after tax deductions including municipal
taxes, standard deductions and interest (if any).
If the new property is used as a residence for his family: In this situation, Swapnil will have the
alternative to select any one property for living purposes. The other property will be deemed to be
rented out and the estimated annual rent will be considered taxable.
If the new property remains vacant: In this case, the property will be deemed to be rented out. The
estimated annual rent will be considered as the taxable value.
If the new property is used as a holiday home: The advantage of the self-occupied home will not be
applied in this case. So, the estimated annual rent will be considered as the taxable value.
As per Section 23(2) of the Income Tax Act, 1961, whether a house property is self-occupied for own
residency or unoccupied throughout the previous year, the annual value shall be taken as Nil unless any
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other benefit is derived by the owner from such house property. However, this benefit of exemption can
be claimed by any individual or HUF for two self-occupied properties.
Furthermore, by applying Section 23(4), if the assessee owns more than two self-occupied house
properties, then the income of such self-occupied house property shall be taken to be nil at the option of
the owner. The remaining self-occupied properties shall be treated as let out properties for taxation and
their expected rents shall be taken as Gross Annual Values.
Thus, it can be observed that Swapnil cannot generate income from both the properties as he has to
consider one of them as rented or self-occupied. He may claim the benefit of Nil Annual Value only in
respect of one house property at his option.
Questions
1. List the deductions that will have to be borne by Swapnil from the rental income of his property.
(Hint: Municipal taxes, standard deductions and interest, etc.)
2. Explain the computation of income from ‘self-occupied property’ as per the provisions of the Income
Tax Act.
(Hint: Refer to Section 23(2) and 23(4))
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Discuss the more sources of income which comes in income from house property.
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Income from House Property
Unit – 05
CA. Prashant Bharadwaj
Charging Section or Basis of charge – Sec 22
• The annual value of property comprising of building or land
appurtenant there to, of which the assesse is the owner is chargeable
to tax under the head “Income from House Property”.
• The annual value of the building or a portion or the building occupied
by the assesse for the purpose of business or profession carried on by
him, is not chargeable to tax under this head.
• It should be specifically noted that the annual value of the building /
property is taxable under this head but not the rental income. No doubt,
the rental income is considered for determination of annual value but
fair rent plays an important role in case of let out property in
determination of annual value.
Let out Property – Sec 23(1)
Below is the format to determine taxable income from house
property:
Particulars Amount(Rs.) Amount(Rs.)
Names of Sub-Units
Introduction to income from capital gain, meaning of capital asset, computation of income from capital
gain, analysis of transfer of a capital asset, analysis of cost inflation index, concept of exemption
(section 54), computation of capital gains (section 48).
Overview
This unit begins by meaning of income from capital gain, it discusses the computation of income
from capital gain. the unit analysis the cost inflation index. It also analysis the concept of exemption
(section 54), analysis the computation of capital gains (section 48).
Learning Objectives
Learning Outcomes
6.1 INTRODUCTION
When a person buys a property for a lower price and then subsequently sells it at a higher price, he
makes a gain. The gain on sale of a capital asset is called capital gain. It should be noted that this gain
is not a regular income like salary, or house rent rather it is a one-time gain. In other words, the capital
gain is not recurring, i.e., not occur again and again periodically. Loss is the opposite of gain; therefore,
there can be a loss under the head capital gain. The term capital loss cannot be used as it is incorrect.
Capital loss means the loss on account of destruction or damage of capital asset. Thus, whenever there
is a loss on sale of any capital asset it will be termed as loss under the head capital gain.
The provisions for computation of Income from capital gains are covered under sections 45 to 55. Section
2(14) defines the term capital gain and section 45, the charging section lays down basis of change for
taxability of capital gain or loss arises on transfer of capital asset.
Taxability of capital gain depends upon the nature of capital gain arises, i.e., short term capital gain or
long-term capital gain. The type of capital gain depends upon the period for which the capital asset is
held. The taxability of capital gain shall satisfy the conditions like there should be capital asset, the asset
is transferred by the assessee, such transfer takes place during the previous year, etc. To give relief to
the assessee, the concept of exemption introduced under different sections.
Under the Income Tax Act, 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 deemed to
be the income of the previous year in which the transfer took place unless such capital gain is exempted
under the prescribed exemptions. ‘Capital gains’ means any profit or gains arising from the transfer of
a capital asset.
If any capital asset is sold or transferred, the profits arising out of such sale are taxable as capital gains
in the year in which the transfer takes place. Capital gains refer to the difference between the price at
which the capital asset was acquired and the price at which the same asset was sold. In technical terms,
capital gain is the difference between the cost of acquisition and the fair market value on the date of
sale or transfer of asset.
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(b) Any securities held by a Foreign Institutional Investor (FII)which has invested in such securities in
accordance with the regulations made under the Securities and Exchange Board of India (SEBI) Act,
1992.
It should be noted that in case these assets are held for a period above 12 months, they will be considered
as long-term capital assets.
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The definition of transfer is inclusive; thus, the transfer includes only above said five ways. In other
words, transfer can take place only on these five ways. If there is any other way where an asset is given
to other such as by way of gift, inheritance etc. it will not be termed as transfer.
Short-term capital assets (Section 48) Long-term capital assets (Section 48)
Full value of consideration Full value of consideration
Less : Cost of acquisition of asset Less : Indexed cost of acquisition
Less : Cost of improvement Less : Indexed cost of improvement
Less : Expenditure incurred wholly and exclusively Less : Expenditure incurred whollly and exclusively in
in connection with such transfer connection with such transfer
Less : Excemptions provided under section 54, 54EC, 54E
and 54B
Resulting figure is short-term capital gain Resulting figure is long-term capital gain
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For example, Mr. X purchased shares worth ` 1000 on September 30, 2017 and disposed them off on
December 31, 2020 for ` 1200. The stock value was ` 1100 as on 31st January, 2020. Out of the capital
gains realised by Mr. X, ` 200 (1200–1000), ` 100 (1100–1000) is not taxable.
The remainder of the capital gain of `100 would be taxed at the rate of 10 percent without the benefit
of indexation. Section 50 of the Income Tax Act gives the provisions for computation of capital gains
arising from depreciable assets. Accordingly, in case a taxpayer has transferred a capital asset forming
part of a block of assets (building, machinery, etc.) on which depreciation has been allowed under the
Income Tax Act, the income arising from such capital asset shall be considered as short-term capital
gain. Short-term capital gain or loss from sale of depreciable asset shall be realised only in the following
two conditions:
(a) When, on the last day of the previous year, Written Down Value (WDV) of the block of asset is zero.
(b) When, on the last day of the previous year, block ceases to exist.
Section 48 of the Act provides that the income chargeable under the head ‘capital gains’ shall be computed
by deducting from the full value of consideration received or accruing as a result of the transfer of the
capital asset the following amounts, namely (as applicable from the assessment year 1993–94):
1. The expenditure incurred wholly and exclusively in connection with such transfer;
2. The cost of acquisition of the capital asset and the cost of any improvement thereto.
However, in the case of an assessee who is a non-resident, capital gains arising from the transfer of a
capital asset, being shares in, or debentures of, an Indian company shall be computed by converting the
cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and
the full value of the consideration received or accruing as a result of the transfer of the capital asset into
the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the
capital gains so computed in such foreign currency shall be reconverted into Indian currency.
Further, the above manner of computation of capital gains shall be applicable in respect of capital
gains accruing or arising from every re-investment thereafter in, and sale of, shares in, or debentures
of, an Indian Company. Where long-term capital gain arises from the transfer of a long-term capital
asset (other than capital gain arising to a non-resident from the transfer of shares in or debentures of
an Indian company), such long-term capital gains will be computed by deducting from the full value of
consideration, the expenditure incurred in connection with the transfer, the ‘indexed cost of acquisition’
and ‘indexed cost of improvement’.
The Finance Act, 1997 has with effect from 1.4.1998 denied the benefit of indexation of cost of bonds and
debentures other than indexed bonds issued by the government.
Provided also that where shares, debentures or warrants referred to in the proviso to Clause (iii) of
Section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such
transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer
for the purposes of this section. For this purpose:
1. “Foreign currency” and “Indian currency” have the meanings respectively assigned thereto in
Section 2 of the Foreign Exchange Management Act, 1999, and
2. The conversion of Indian currency into foreign currency and the re-conversion of foreign currency
into Indian currency shall be at the rate of exchange prescribed in that behalf;
3. Indexed cost of acquisition’ means an amount which bears to the cost of acquisition the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost
Inflation Index for the first year in which the asset was held by the assessee or for the year beginning
on the 1st day of April 1981 whichever is later;
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4. Indexed cost of any improvement’ means an amount which bears to the cost of improvement the
same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the
Cost Inflation Index for the year in which the improvement to the asset took place; and
5. ‘Cost inflation index’, in relation to a previous year, means such Index as the Central Government
may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban
non-manual employees for the immediately preceding previous year to such previous year, by
notification in the Official Gazette, specify in this behalf.
Commission paid to a broker for effecting sale of the asset falls under (1) above. Similarly, expenditure
incurred on litigation for getting enhanced compensation is expenditure wholly and exclusively incurred
in connection with transfer of the capital asset and is deductible. However, litigation expenses incurred
for having the shares registered in his name are part of the cost of acquisition and that incurred for
gaining better voting rights is cost of improvement. Section 48 of the Act does not an Assessing Officer
from taking into amount sale consideration stated in the deed or actual consideration received by the
assessee whichever is higher.
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Exemptions under Section 54EC: Exemption under Section 54EC is applicable to all gains arising
from the transfer of any long-term capital asset that was held or put to use for more than 24 months.
The maximum quantum of the exemption amount is ` 50,00,000 in the year of transfer and in the
subsequent financial year and the proceeds should be invested within the period of 6 months from
the date of transfer in bonds issued by NHAI or RECL or PFCL or IRFCL. The new asset should be held
for 5 years. If any of the given conditions is violated, then the capital gain which was exempted will
be taxed as LTCG in the previous year in which the asset was transferred.
Illustration: Mukesh acquired shares of Genesis Ltd. on 10.10.1998 for ` 2,00,000. He later sold
these shares on 1.7.2015 for ` 10,00,000. He invests ` 1,00,000 in the bonds of Rural Electrification
Corporation Ltd. on 1.10.2015. What will be the consequences if Mukesh takes a loan against the
security of such bonds?
Solution: If any loan is taken against the security of such bonds, it will be treated as if it is converted
into money as such capital gain which was exempt earlier on such bonds shall be treated as long-
term capital gain of the previous year, in which such loan is taken against the security of such bonds.
Exemptions under Section 54F: Section 54F is applicable when an assessee constructs a residential
property within 3 years of sales or purchases a residential property within 1 year before sale or 2
years after the sale of the asset. This is only available to individuals and HUF. The assessee claiming
this exemption should not have more than one residential property. Furthermore, the asset sold
may be any asset, but the asset acquired must be a residential property.
Exemptions under Section 54G: Section 54G is only applicable to industrial undertakings. The
exemption is granted for capital gain arising from the transfer of capital assets in the case of
shifting of industrial undertaking from an urban area. This exemption is available for purchases
made within one year before the transfer or 3 years after the transfer.
Exemptions under Section 54GA: Section 54GA is only applicable to capital gains arising from the
transfer of assets in cases of shifting of an industrial undertaking to any special economic zone
(SEZ) whether it is developed in an urban area or any other area. This exemption is available for
purchases made within 1 year before the transfer or 3 years after the transfer.
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As per Notification No. So 3266(E) [No. 63/2019 (F.No. 370142/11/2019-TPL)], Dated 12-9-2019, following
table should be used for the Cost Inflation Index:
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The tax liability for long-term capital gains is charged at 20 per cent.
Tax liability will be 20 percent of 54,00,000 = ` 1,08,000.
Under Section 45(1) of the Income Tax Act, any profits or gains arising from the transfer of a capital
asset effected in the previous year, unless otherwise provided in Section 54, will 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.
A capital asset is defined to include property of any kind held by an assessee, whether connected
with their business or profession or not connected with their business or profession.
Capital assets are considered as short-term in case they are held for a period of not more than 36
months from the date of transfer. However, the period of holding should be less than 12 months in
the case of shares (equity and preference).
A long-term asset is one that is held for more than 36 months. However, from financial year 2017-
18, this criterion has been revised to 24 months in the case of immovable property, such as land,
building and house property.
The period of holding refers to the time during which an assessee holds on to a given capital asset.
Any profits or gains arising from the transfer of a capital asset effected in the previous year unless
otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, will be chargeable
to income tax under the head ‘Capital Gains’, and shall be considered as the income of the previous
year in which the transfer of the capital asset took place.
Full value of consideration refers to the amount received/receivable by the transferor with respect
to the transfer of a capital asset, which may be received in cash or kind.
6.6 GLOSSARY
Foreign Institutional Investor (FII): An institution registered as FIIs under Section 2 (f) of the SEBI
(FII) Regulations 1995, incorporated outside India which offers investment in securities in India
Speculative business: A transaction defined in Section 43(5) of Income Tax Act, 1961 in which a
contract for the purchase or sale of any commodity, including stocks and shares, is periodically
settled other than by the actual delivery or transfer of the commodity
Stock-in-trade: The tools, merchandise or supplies that an organisation or professionals use to
carry out their business
Written Down Value (WDV): The value of an asset derived after accounting for depreciation
Case Objective
This Case Study discusses the capital gains of an individual.
Mr. Chugh, a businessman, purchased a house property on 1.5.1978 for ` 1,12,000. He incurred the
following expenses for making some additions and alterations to the house property:
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The fair market value of the property as on 1.4.2001 is ` 9,40,000. This house property was sold by Mr.
Chugh on 11.8.2018 for ` 77,00,000 after incurring expenses of ` 40,000 on the transfer.
The capital gains on such transfer are calculated as follows:
Computation of Capital Gains of Mr. Chugh from the sale of house property for the Assessment Year
2021-2022.
The capital gains on the sale of house property by Mr. Chugh would be taxable @20% in the Assessment
Year 2021-2022.
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Questions
1. What are the rates of income tax chargeable on long-term capital gains?
(Hint: Refer to Sections 112A and 112).
2. How is the cost of acquisition computed if the asset is acquired from a previous owner?
(Hint: Cost to the previous owner or fair market value as on 1.4.2001, at the option of the assessee).
urban non-manual employees (mainly requiring mental efforts) for the preceding year. Refer to
Section Cost Inflation Index
5. For proper tax computation, it is important for a taxpayer to understand the concept of a period of
holding of a capital asset. This is because the tax treatment of capital gains and losses on short- and
long-term capital assets is different. Period of holding refers to the time during which an assessee
holds on to a given capital asset. It is the elapsed time between the initial date of purchase of a
capital asset and the date on which it was sold. Refer to Section Capital Asset
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Capital Gains
Unit – 06
CA. Prashant Bharadwaj
Charging Sec or Basis of Charge – Sec 45
Any profits or gains’ arising from transfer of a capital asset is
chargeable to tax under this head.
Cost Inflation Index for base year 2001-02 or first year in which the
asset was held by assessee, whichever is later.
• The option for ascertaining Indexed cost of acquisition relating to
fair market value on 01/04/2001 is applicable only if it was
acquired prior to 2001.
Indexed cost of improvement
Names of Sub-Units
Basis of Charge (Section 28), Specific Deduction (Section 30-36), General Deduction (Section 37), Specific
Disallowances, Compulsory Maintenance of Books of Accounts (Section 44AA), Compulsory Audit of
Books of Accounts (Section 44 AB), Presumptive Scheme of Taxation
Overview
The unit explains the Basis of Charge (Section 28), Specific Deduction (Section 30-36), General Deduction
(Section 37), Specific Disallowances, Compulsory Maintenance of Books of Accounts (Section 44AA),
Compulsory Audit of Books of Accounts (Section 44 AB), Presumptive Scheme of Taxation.
Learning Objectives
Learning Outcomes
7.1 INTRODUCTION
Profits and gains of business or profession are an important part of the total income of an assessee.
This is one of the most important heads of tax collection and, therefore, it is necessary to understand the
terminologies used under various heads.
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Speculation Business
If speculative transactions are carried on by the assessee, which constitute a business, then such
business has to be considered as a distinct and separate business for the purpose of computation of
income under the head ‘Profits and Gains of Business or Profession’. Here, a for sale or purchase of
commodities including shares and stocks is periodically and ultimately settled through modes other
than actual delivery or transfer of such commodities or shares.
Moreover, in case where both speculative and non-speculative transactions are carried out by the
assessee on a composite basis, it is imperative to determine the income or loss from such speculative
business and non-speculative business separately and distinctly.
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DEDUCTION FOR DEPRECIATION INCLUDING the CONCEPT OF BLOCK OF ASSETS (SECTION 32)
Section 32 of the Act relates to the deductions in respect of depreciation or diminution or exhaustion in
the value of certain capital assets. Depreciation refers to a decrease in the value of an asset as a result
of normal wear and tear or due to obsolescence. In other words, depreciation means depletion in real
value of assets over a period of time.
As per the Act, there are two methods for calculating the value of depreciation. They are the Straight Line
Method (SLM) and the Written Down Value (WDV) Method. Depreciation can be charged as a percentage
of the value of asset by either of the above two methods. The WDV method is used for depreciation
calculations under the income tax barring the power generation and distribution companies which use
the SL method.
Depreciation under Section 32(1) is mandatory. It means that even if the assessee does not claim
deduction in respect of depreciation, it will still be allowed while calculating the total income of the
assessee. In such a case, the assessing officer must allow depreciation as per the law.
For a thorough understanding of depreciation and its computation,you must be aware of the following
concepts:
(A) Conditions for claiming depreciation
(B) Block of assets [Section 2(11)]
(C) Actual cost [Section 43(1)]
(D) Written Down Value (WDV) [Section 43(6)]
(E) Rates of depreciation [Appendix I (Rule 5)]
(F) Types of depreciation
(G) Unabsorbed depreciation [Sec. 32(2)]
Section 35 provides for deduction in respect of any expenditure of scientific research incurred by the
assessee in relation to his business or profession. Various amounts of deductions allowed under Section
35 are discussed in Table 2:
Nature of
Payment eligible for deduction Deduction allowed
Expenditure
Inhouse Scientific Inhouse scientific research expenditure of 100% of the expenditure is allowed as
Research revenue nature is incurred by the assessee deduction
related to his business
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Nature of
Payment eligible for deduction Deduction allowed
Expenditure
Inhouse scientific research expenditure of 100% of the expenditure is allowed
capital nature is incurred by the assessee as deduction (except expenditure on
related to his business acquisition of land and building)
Expenditure on an approved inhouse 150% of the expenditure is allowed
research and development facility incurred as deduction (except expenditure on
by a company engaged in the business of bio- acquisition of land and building)
technology or manufacturing/production of
an article other than those specified in the
Eleventh Schedule
Contribution to Amount paid by the assessee to an approved 100% of the expenditure is allowed as
Outsiders Indian company for the purpose of scientific deduction
research
Amount paid by the assessee to a notified 100% of the expenditure is allowed as
approved college/research association/ deduction
university/other institutions for the
purpose of social science or statistical
research
Amount paid by the assessee to a notified 150% of the expenditure is allowed as
approved college/ research association/ deduction
university/other institutions for the
purpose of scientific research
Amount paid by the assessee to an approved 150% of the expenditure is allowed as
National Laboratory/IIT/university/other deduction
specified persons for the purpose of scientific
research undertaken under a prescribed
programme
36(1) (i) Insurance premium paid against risk of Whole amount is allowable
damage and destruction of stocks or stores
of the business or profession
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36(1) (ii) Any sum paid by an employer by way of Whole amount is allowable subject to Section
bonus or commission to employees 43B. However, such amount should not have
been otherwise payable as profits or dividends
if it had not been paid as bonus or commission
36(1) (iii) Interest payment on borrowed capital for Whole amount is allowable. However, interest
the purpose of business or profession paid on capital borrowed for acquisition of an
asset for the period beginning from the date of
borrowing of capital to the date on which the
asset was first put to use is not allowed as a
deduction
36(1) (iv) Employer’s contribution by the assessee to Whole amount is allowable subject to Section
Recognised 43B
Provident Fund or approved
superannuation fund
36(1) (v) Bad debts written off as irrecoverable in Whole amount is allowable subject to following
the accounts of the assessee conditions:
1. Debt is incidental to the business of the
assessee
2. It has been taken into account while
computing the business income or represents
money lent in the ordinary business of
banking or money lending
3. It has been written off in the books
Expenditure incurred by an assessee on the activities relating to corporate social responsibility referred
to in Section 135 of The Companies Act, 2013 shall not be deemed to be an expenditure incurred by the
assessee for the purposes of the business or profession.
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Section 40(ba) – Disallowance in case of Association of Persons (AOP) or Body of Individuals (BOI)
While computing the business income of AOP or BOI, any interest, salary, commission, remuneration or
bonus paid by AOP or BOI to its members shall not be allowed as a deduction.
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Under Sections 28 to 44DB of the Income Tax Act, 1961, we will discuss the chargeability of profits
and gains of business or profession and the scope of income under this head.
Profits and gains of business or profession are an important part of the total income of an assessee.
This is one of the most important heads of tax collection and, therefore, it is necessary to understand
the terminologies used under various head.
Value of benefits or perquisites arising from business or profession, whether such perquisites are
convertible into money or not.
Speculative transactions are carried on by the assessee, which constitute a business, then such
business has to be considered as a distinct and separate business for the purpose of computation of
income under the head ‘Profits and Gains of Business or Profession’.
An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs,
taxes and insurance for buildings, provided the buildings are used for the purpose of business or
profession. However, no expenditure is allowed as a deduction if the expenditure is of capital nature.
Depreciation refers to a decrease in the value of an asset as a result of normal wear and tear or due
to obsolescence. In other words, depreciation means depletion in real value of assets over a period
of time.
Depreciation can be charged as a percentage of the value of asset by either of the above two methods.
There are certain provisions under the Income Tax Act which hinder an assessee from claiming
deduction of expenses while computing his income from business or profession if certain prescribed
conditions are not fulfilled.
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7.10 GLOSSARY
Profits and gains: Any profits and gains arising from any business or profession carried on by the
assessee during the previous year.
Export incentives: An assessee carrying on an export business, such as profit on sale of import
entitlements, customs or excise duty repayable as a drawback, cash assistance against exports, and
profit on transfer of duty-free replenishment certificate
Speculative transactions: These are carried on by the assessee, which constitute a business, then
such business has to be considered as a distinct and separate business for the purpose of computation
of income under the head ‘Profits and Gains of Business or Profession’
Section 32 of the Act: Deductions in respect of depreciation or diminution or exhaustion in the value
of certain capital assets
Depreciation: A decrease in the value of an asset as a result of normal wear and tear or due to
obsolescence.
Case Objective
This Case Study discusses the income earned by Mohan from other sources.
Mohan is asalaried personnel and works for acompany which provides services to different organisations
in different capacities. He earns a lot from dividends of his past investments. Apart from this, he earns
from gambling, lotteries, betting and horse races. This means that his income from other sources is very
high.
Following are the details of the income of Mohan from other sources:
1. He earns ` 8 lakhs from job.
2. He gets `3 lakhs as rent from his property.
3. He earns around ` 9 lakhs as dividends.
4. He won a lottery and earned around ` 3 lakhs.
5. He won ` 3 lakhs by winning a bet in horse race.
6. He received a gift from his father which is an envelope and carries around ` 50,000.
7. He received ` 24,000 as gift from his friends on his birthday.
8. His grandfather gifted him ` 2,52,000.
9. He received ` 35,000 as gift on his marriage anniversary.
10. He earned ` 47,000 from interest earned from securities.
Questions
1. Ascertain the total amount of gifts charged to tax.
(Hint: Exclude salary, house property, dividend exempt under Section 10(34), gifts received from
relatives, lottery income, horse race income, and interest income. The remaining value of gifts, if
aggregate value exceeds ` 50,000)
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2. Out of the total income stated above, which income will come under the head ‘Income from Other
Sources’?
(Hint: Value of taxable gifts, lottery)
3. What is the profession of Mohan?
(Hint: Mohan is a salaried personnel and works for a company)
4. What is the role of the company where Mohan works?
(Hint: It provides services to other organisations in different capacities.)
5. Apart from salary, which is the predominant source of income for Mohan?
(Hint: From dividends of his past investments.)
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than actual delivery or transfer of such commodities or shares. Refer to Section Basis of Charge
(Section 28)
3. An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs,
taxes and insurance for buildings, provided the buildings are used for the purpose of business or
profession. However, no expenditure is allowed as a deduction if the expenditure is of capital nature.
Refer to Section Specific Deduction (Section 30-36)
4. Cases where additional depreciation is not allowed:
Ships and aircraft
Second-hand machinery (machinery used earlier by other persons within or outside India)
Any machinery installed in an office or residence including the guest house
Any office appliances or road transport vehicles
Any plant or machinery over which 100% depreciation is allowed
https://resource.cdn.icai.org/65966bos53217cp4u3.pdf
Using the Internet, find out the share contributed by businesses/professions towards the national
income of India. Include only the latest relevant data.
12
Profits and Gains of
Business or Profession
Unit – 07
CA. Prashant Bharadwaj
BASIS OF CHARGE OR CHARGING SECTION [SEC 28]
• Profits or gains from any business/profession carried on by assesse.
• In case of export business it shall also include duty drawbacks, cash compensatory support, profit on
sale of EXIM scripts or import entitlements.
• Value of benefit earned during the course of business & incidental to such business provided there is
a nexus between the receipt & business.
• Any interest, salary, bonus, commission or remuneration received by a partner from partnership firm is
taxable under this head (to the extent admissible u/s 40(b) in the hands of firm).
• Any sum received under keyman insurance policy including sum allocated by way of bonus on such
policy.
• The fair market value of inventory as on the date on which it is converted into or treated as a capital
asset, determined in the prescribed manner.
• Any compensation due or received by any person (by whatever name called) at or in connection with
the termination or modifications of the terms and conditions of any contract relating to business or
profession, shall be chargeable to tax under this head.
• Income of illegal business is also chargeable under this head.
• Any sum received or receivable from sale of a capital asset which has been discarded, demolished,
destroyed or transferred for which deduction was allowed u/s 35AD.
DEDUCTION OF EXPENSES RELATED TO BUSINESS PREMISES
[SEC 30] & EXPENSES RELATING TO BUSINESS ASSETS [SEC 31]
• In case of tenant the rent paid & repairs undertaken are deductible.
• In case of owner municipal taxes, insurance premium, current repairs
etc., is deductible.
• With respect to business assets, all revenue expenses like Insurance
premiums, current repairs, rent or hire charges etc., are admissible
expenses [Sec 31]
DEPRECIATION [SECTION 32]:-
• Assesse must be the owner of the asset & such asset must be used in the
business or profession of the assesse in the previous year. However, as
exceptions to the rule that the assesse must be the owner of the asset :-
• In case of a hire purchase transaction, the full cash price of the asset shall be
capitalized to claim depreciation & the excess amount payable shall be claimed as hire
charges during the contract period.
• Where the assesse is a tenant in occupation of business premises & incurs a capital
expenditure then the depreciation can be claimed on such amount being the value of the
building.
•Where an asset has been acquired during the previous year & put to use for less than 180
days during the previous year, then only 50% of the prescribed rate of depreciation shall be
allowable.
•The term ‘put to use’ refers to active or passive use i.e., if an asset is capable of being used it
is still considered as put to use.
•The main categories of assets eligible for depreciation are building, furniture & fittings,
machinery & plant, and intangible assets.
•If any asset is partly used for business and partly for personal purpose only proportionate
depreciation can be claimed. In other words, the proportion of usage towards personal
purposes shall be disallowed and the proportion of usage towards business / profession
purposes only shall be admissible [Section 38].
DEPRECIATION [SECTION 32]:-
• No depreciation is allowed to the extent of sale proceeds in case of asset sold
during the year.
• Block of asset means group of assets falling within a class of assets AND
having the same prescribed rate of depreciation (excluding goodwill).
• Actual Cost includes purchase cost + expenses incurred in acquiring the asset
like loading, unloading, freight, insurance etc., + installation charges like
technician fees etc., + interest on loan borrowed to acquire an asset up to the
date of commencement of business (-) any subsidy or grant. Any tax, duty or
Cess paid for which credit is available, will not form part of cost of asset.
• In case an assessee incurs any expenditure for acquisition of any asset where
the total payment is made to a person on a single day otherwise than by an
account payee cheque or draft or through prescribed electronic mode, exceed
Rs. 10,000, then such payment shall be ignored for the purpose of
determination of actual cost of such asset. Hence, depreciation on the same is
not allowed under section 32.
DEPRECIATION [SECTION 32]:-
• Computation of Written Down Value (for each block of assets) is as below
PARTICULARS AMOUNT (Rs.)
Names of Sub-Units
Incomes Taxable under the head Income from Other Sources, Incomes Taxable under this head if
not taxable under PGBP. Taxation of Dividends, Casual Income Section 56(2) (ib), Interest Received
on Securities Section 56 (2)(id), Gross up Concept, Taxation of Gift Section 56 (2)(x), Interest on
Compensation for Compulsory Acquisition of L&B [Section 56 (viii)], Permissible Deductions under
IFOS (Section 57), Inadmissible Deductions from IFOS (Section 58)
Overview
The chapter will begin by explaining about incomes taxable under the head income from other sources
along with incomes taxable under this head if not taxable under PGBP. The chapter will also shed
light on taxation of Gift Section 56 (2)(x). Towards the end, the chapter will shed light on permissible
deductions under IFOS (Section 57) and inadmissible deductions from IFOS (Section 58).
Learning Objectives
Learning Outcomes
8.1 INTRODUCTION
Income chargeable under Income-tax Act, which does not specifically come under scope for assessment
under any of the heads discussed earlier, must be charged to tax as “income from other sources”. This
head is thus a residuary head of income under which income can be computed only after deciding
whether the particular item of income is otherwise assessable under any of the first four heads.
In addition to the taxation of income not covered by the other heads, Section 56(2) specifically provides
certain items of incomes as being chargeable to tax under the head in every case. The provisions for
computation of income from other sources are covered under Sections 56 to 59.
While section 56 defines the scope of income chargeable under this head, Sections 57 and 58specify the
basis of computation of such income.
8.2 INCOMES TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES
Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’. Under
Section 56 (1) of the Act, income of every kind which is not to be excluded from the total income shall be
chargeable to income tax under the head ‘Income from Other Sources’, if it is not charged to income tax
under any other head of income which includes incomes from salaries, house property, capital gains,
and business and profession. Income from other sources is a residuary head of income, i.e., income
which is not taxable under any other head will be taxable under this particular head.
Section 56(2) specifically provides certain items of incomes as being chargeable to tax under the head in
every case. Such incomes are as follows:
Dividends [Section 56(2)(i)]: Current profit would be part of accumulated profits but subsidiary on
capital account cannot be treated as accumulated profits.
Keyman Insurance policy: Amount received under a Keyman insurance Policy, including bonus on each
Policy, if it is not taxable under any other head of income.
Winnings from lotteries [Section 56(2)(ib)]: Any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort or from gambling or betting of any
form or nature
Following incomes shall be specifically charged to tax under the head ‘Income from other sources’:
Dividend Income {Section 56(2)(i)}: Dividends are chargeable to tax under the head ‘Income from Other
Sources’. The tax ability or otherwise of dividend income received by a shareholder is based upon the
provisions explained in Table 1:
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8.2.1 INCOMES TAXABLE UNDER THIS HEAD IF NOT TAXABLE UNDER PGBP
The provisions of this section apply only in the case of a property which is of the nature of capital asset
in the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of
the recipient. Hence, only transfer of capital assets, whether without consideration or for inadequate
consideration, is covered under the provisions of this Section.
The below-mentioned incomes shall be taxable under the head ‘Income from Other Sources’ if and only
if they are not taxable under the head ‘Profits and Gains of Business or Profession’:
Sums received by employees from their employers as contributions to provident funds,
superannuation funds, or other employee welfare funds.
Income received from letting out of the plant, machinery or furniture on hire, whether with or
without building
Interest on securities
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The following incomes must be classified under Profits and Gains of Business, even when a business was
not conducted by the assessee during the past financial year:
Recovery against any loss, expenditure or trading liability earlier allowed as a deduction.
Balancing charge in case of electricity companies.
Sale of a capital asset which was used for scientific research.
Recovery against bad debts.
Any amount which is withdrawn from a Special Reserve.
Receipt of discontinued business in the case of assessees who are making use of a cash system of
accounting.
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or Profession”. 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. Interest on money
borrowed for investment in securities can be claimed as a deduction.
For example, during the previous year the assessee withdrew a fixed deposit before maturity and had
to refund ` 3,500 to the bank. The amount withdrawn was invested in shares. It was held byKarnataka
High Court under the earlier regime that the amount paid to the Bank was anexpenditure laid out wholly
and exclusively for the purpose of earning the dividendincome and deduction thereof while computing
income from dividend is in order.
Interest received on Securities Section 56 (2)(Id), infers to:
Interest on any security of the Central Government or a State Government;
Interest on debentures or other securities for money issued by, or on behalf of a local authority or a
company or a corporation established by Central, State or Provincial Act.
Securities may be divided into following categories:
Securities issued by Central/State Governments;
Debentures/bonds issued by a local authority;
Debenture/bonds issued by companies;
Debenture/bonds issued by a corporation established by a Central, State or Provincial Act i.e.
autonomous and statutory corporations.
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Taxation of Gift Section 56(2)(x) is applicable only when gifts are received by Individual and Hindu
Undivided Family. Donor or Donee may be Resident or non Resident. Taxation of Gift Section 56 (2)(x)
states that:
If aggregate value is less than 50000 than nothing will be taxable. If value exceeds 50,000, the
whole amount will be taxable.
Where any person receives, in any preceding year, from any person or persons any property
apart from immovable property without consideration, the aggregate fair market value of which
supersedes fifty thousand rupees, the whole of the aggregate fair market value of such property will
be taxable in the hands of receiver.
The income under the head ‘Income from Other Sources’ is calculated after making the deductions as
given in Table 2:
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Income chargeable under Income-tax Act, which does not specifically come under scope for
assessment under any of the heads discussed earlier, must be charged to tax as “income from other
sources”.
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In addition to the taxation of income not covered by the other heads, Section 56(2) specifically
provides certain items of incomes as being chargeable to tax under the head in every case.
While section 56 defines the scope of income chargeable under this head, Sections 57 and 58 specify
the basis of computation of such income.
Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’.
Under Section 56 (1) of the Act, income of every kind which is not to be excluded from the total
income shall be chargeable to income tax under the head ‘Income from Other Sources’,
Dividends [Section 56(2)(i)]: Current profit would be part of accumulated profits but subsidiary on
capital account cannot be treated as accumulated profits.
Keyman Insurance policy: Amount received under a Keyman insurance Policy, including bonus on
each Policy, if it is not taxable under any other head of income.
Section 2(22)(d) distribution made by a company to its shareholders on reduction of its share capital
is deemed as a dividend in the hands of the shareholder to the extent of accumulated profits of the
company.
The provisions of this section apply only in case of a property which is of the nature of capital asset in
the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of the
recipient. Hence, only transfer of capital assets, whether without consideration or for inadequate
consideration, is covered under the provisions of this Section.
Casual income refers to any income earned by way of winnings from lotteries, races including horse
races, crossword puzzles, betting, gambling, card games, such other games, etc.
Interest received on Securities Section 56 (2)(Id), is chargeable under the head “income from other
sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of
Business or Profession”.
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. Interest on money borrowed for
investment in securities can be claimed as a deduction.
8.12 GLOSSARY
Assessee: An individual who is liable to pay taxes for himself/ herself or on behalf of somebody else.
Dividends: An amount of money paid on a regular basis by a company to its shareholders out of its
profits
Fair market value: An estimate of the market value of a property on the basis of a willing,
knowledgeable and unpressured buyer
Hindu Undivided Family (HUF): A family including all people lineally descended from a common
ancestor, which includes wives and unmarried daughters
Immovable property: An immovable object or an item of property that cannot be moved without
altering or destroying it
Case Objective
This Case Study discusses the computation of deductions under Chapter VI-A.
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During the previous year 2020-2021, Mr XY, a resident individual aged 63 years, has earned an income
of 1,48,000 from his business/profession and gross lottery income of 1,10,000. The interest earned by
him on fixed deposits with banks was 55,000. He had also made an investment of 1,50,000 in the Public
Provident Fund account during the year.
Mr XY seeks help from his tax accountant to determine the amount of total deduction eligible under
Chapter VI-A for computation of total income for tax purposes. The tax accountant computes deductions
as follows:
The maximum deduction allowed under Section 80C is 1,50,000of sums paid or deposited to recognised
funds. The deduction allowed under Section 80TTB to resident senior citizens is the amount of actual
interest earned on bank deposits or 50,000,whichever is lower.
Although the eligible value for deduction amounts to 2,00,000however, deductions under Chapter VI-A
cannot be more than the gross total income exclusive of long-term capital gains under
Section 112/112A, short-term capital gains under Section 111A,and lottery winnings.
Thus, the amount of maximum permissible deductions under
Chapter VI-A = 3,13,000 – 1,10,000 = 2,03,000
The taxable income of Mr XY for the previous year 2020-2021amounts to 1,10,000. Since his total
income falls within the basic exemption limit of 3,00,000, he does not fall within the tax bracket for the
Assessment Year 2021-2022.
Questions
1. Which sums are eligible for claiming a deduction under Section 80C?
(Hint: Contribution to specific funds, Refer to Section 80C)
2. Who are eligible for claiming a deduction under Section 80TTB?
(Hint: Resident senior citizens, Refer to Section 80TTB)
3. What is the taxable amount in the aforesaid study?
(Hint: The amount of maximum permissible deductions under Chapter VI-A is = `3,13,000 – `1,10,000
= 2,03,000)
4. What is the amount of interest received from bank by Mr. XY?
(Hint: The interest earned by him on fixed deposits with banks was `55,000.)
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https://resource.cdn.icai.org/65968bos53217cp4u5.pdf
Read all the sub-sections of Section 56 and make a brief presentation on various sums chargeable to
tax under the head ‘Incomefrom Other Sources’.
11
Income from Other Sources
Unit – 08
CA. Prashant Bharadwaj
Charging Section / Basis of Charge (section 56)
• Dividend income. It also includes dividend covered u/s 2 (22) (a to e) [Deemed Dividend].
• Any casual income i.e., any winnings from lotteries, crosswords, puzzles, races including
horse races, card games and other games of any sort or from gambling, betting of any form
or nature.
• Any sum received under keyman insurance policy.
• Agricultural income from a place outside India.
• Interest on compensation or enhanced compensation received during the year.
• Any sum of money or moveable or immovable property, received by any person from any
person during the Previous Year without consideration or for inadequate consideration,
where such sum of money or property or inadequacy exceeds Rs. 50,000. [sec 56(2)(x)].
Note – The movable / Immovable property must be capital asset.
• Advance money received and such advance is forfeited, such amount shall be taxed under
this head with effect from 01/04/2014.
• Any compensation or other payment due to or received by any person, by whatever name
called in connection with the termination of his employment or modification of the terms and
conditions thereto, shall be chargeable to tax under this head.
• Any other income chargeable but not falling under any other head of Income.
Exceptions to gift received
In the following cases, taxability does not arise even if the gift received
is more than Rs. 50,000:-
• From any relative (on any occasion)
• On occasion of marriage of Individual (from anyone including friends)
Note – Relative for this purpose means
In case of individual, Spouse, Brother or sister, Brother or sister of
spouse, any lineal ascendant or descendant of individual or spouse.
In case of Hindu Undivided Family any member of Hindu Undivided
Family.
Taxability of Casual Income – (Section 115BB)
Where the total income of an assessee includes casual income, the tax
shall be chargeable at flat 30% on such income plus surcharge and cess
as applicable. Taxability under this section is subject to the following:
• No expenditure or allowance can be allowed against such income.
• No deduction under chapter VI A shall be allowed.
• No benefit of carry forward and set off of loss / unabsorbed depreciation
is available against such casual income.
• Even the benefit of basic exemption limit is denied as the casual income
is subject to tax at flat rate.
• Rebate under section 87A is available to casual income.
Admissible Expenses (section 57)
• Expenditure incurred from realization of dividend income or interest income etc.
However, No deduction shall be allowed in case of dividend income or income from
Mutual Funds other than interest expenditure up to a maximum of 20% of such
income.
• Any expenses incurred for the purpose earning the income is deductible, except
casual income u/s 115BB.
• In case of income earned by way of lease rentals on letting out of plant or machinery,
furniture etc., then repairs, insurance, depreciation etc., are deductible.
• In case of family pension a sum equal to 331/3 % of pension or Rs. 15,000 pa.
whichever is less, shall be allowed as deduction. However, in case the individual opts
of alternative tax regime u/s 115BAC, then this deduction is not available.
• In case of activity of owning and maintaining race horses, the expenses incurred are
deductible.
• In case of interest received on compensation or on enhanced compensation, a
deduction of flat 50% of such interest shall be allowed and no other expenditure shall
be allowed.
Inadmissible Expenses (Section 58)
• Personal expenses and capital expenses.[Section 58(1)(a)(i)]
• Wealth tax.
• Interest and salary payable outside India, if tax has not been paid or
deducted at source.[Section 58(1)(a)(ii)]
• Deduction in respect of casual income(s). [Section 58(4)]
• Expenses in the nature described u/s 40(a) (ia) [payment for which
TDS provisions have not been complied with].
• Cash payments in excess of Rs. 10,000 or Rs. 35,000 as the case may
be.
Note: When there is an income net of TDS, such income must be
grossed up and TDS amount be considered at the time of computing the
tax liability.
UNIT
Names of Sub-Units
Specified Investment (Section 80C) Pension Fund of Insurance Co. (Section 80 CCC) Contribution to New
Pension Scheme (Section 80CCD) Health Insurance (Section 80D) Medical Treatment of Handicapped
Dependent Relative (Section 80 DD Treatment of Disease (Section 80DDB) Interest on Education Loan
(Section 80 E) EE Interest on Housing Loan (Section 80) EA Interest on Electric Vehicle Loan (Section 80)
Donation (Section 80G) Deduction for Interest (Section 80TTA/80TTB)
Overview
The unit begins by shedding light on Specified Investment (Section 80C), Pension Fund of Insurance Co.
(Section 80 CCC), Contribution to New Pension Scheme (Section 80CCD) and Health Insurance (Section
80D). The unit will also delve into Treatment of Disease (Section 80DDB), Interest on Education Loan
(Section 80 E) EE Interest on Housing Loan (Section 80), EA Interest on Electric Vehicle Loan (Section
80), Donation (Section 80G) and Deduction for Interest (Section 80TTA/80TTB)
Learning Objectives
Learning Outcomes
9.1 INTRODUCTION
In a previous financial year, whatever income you earn under the five income heads is summed up to
arrive at the Gross Taxable Income, which is chargeable to income tax. However, to compute the net
taxable income of an assessee, certain deductions are applicable on which income tax is not chargeable.
Tax deductions help an assessee reduce his or her taxable income and decrease the overall tax liability
to save taxes. The amount of deduction, however, varies with the type of tax deduction claimed by an
assessee.
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Deduction under Section 80CCD can be availed by an individual assessee in respect of contribution
made to the Central Government Pension Scheme.
Eligible
Conditions for Claiming Deduction Amount of Permissible deduction from GTI
Assessee
Individual Deduction is available to an individual For salaried assessees, the deduction allowed under
assessee who is employed by the Central Section 80CCD (1) is the amount of employee’s
employed by Government on or after 01.01.2004 contribution made which is restricted to 10% of
the Central or any other employer or any other salary. In addition, the deduction of employer’s
Government assessee and who has contributed, contribution is restricted to 10% of salary under
or employed deposit or payment of any amount to Section 80CCD(2). For other assessees, the deduction
any other his account under the notified pension allowed under Section 80CCD(1) is the amount of
employer or scheme of the Central Government, employee’s contribution made which is restricted to
self-employed such as National Pension Scheme 20% of GTI.
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Under Section 80CCD(1B), a further additional deduction of up to `50,000 shall be available to all
assessees.
Any
Amount of Permissible Deduction
individual or Conditions for Claiming Deduction
from GTI
HUF
Any individual Medical health insurance premium paid otherwise The amount of deduction is limited to
or HUF than by cash for keeping in force insurance on the the maximum of `25,000. However,
health of self, spouse and dependent children in case in case the individual or spouse or
of an individual (or family member of HUF in case member of HUF is a senior citizen,
the assessee is an HUF). the maximum amount deductible is
AND/OR `50,000.
Any contribution made by an individual otherwise
than by way of cash to CGHS or such other scheme
as may be notified by the Central Government is also
eligible for deduction.
Individual Medical health insurance premium paid otherwise The amount of further deduction in
then by way of cash to keep in force a medical addition to above is limited to the
insurance for the health of the parents, whether they maximum of ` 25,000. However, in
are dependent on the individual or not. case either or both of the parents are
senior citizens, the maximum amount
a deductible is `50,000.
Individual or Any medical expenditure incurred otherwise by way The amount of deduction is limited to
HUF of cash on the health of the individual or his family the maximum of ` 50,000.
member or parents or member of HUF, provided such
a person is a senior citizen and no other amount has
been incurred to give effect to the insurance policy
on the health of such person.
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Eligible
Conditions for Claiming Deduction Amount of Permissible Deduction from GTI
Assessee
Resident The deduction from GTI shall be In the case of normal disability of dependent,
individual or available to the assessee who has made the amount of deduction allowed is ` 75,000.
HUF expenditure in relation to a medical In case of severe disability of dependent (i.e.,
treatment (including nursing), training 80% or more disability), the amount of deduc-
and rehabilitation of a dependent having tion allowed is `1,25,000.
a disability; or who has deposited any
the sum on this behalf under a scheme The assessee is allowed to claim a flat deduction of
framed by LIC/ other insurers/approved ` 75,000/` 1,25,000 as the case may be, irrespective
specified company for maintenance of the of the amount actually spent by the assessee.
dependent disabled.
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The term ‘disability’ is defined in harmony with conditions laid down under the Persons with Disability
(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, and includes persons
suffering from autism, cerebral palsy and multiple disabilities.
Taxpayers who have dependents with specified diseases can claim deduction under Section 80DDB on
their income tax return.
Deduction under section 80DDB is allowed for medical treatment of a dependant who is suffering from
a specified disease can be claimed by following:
Can be claimed by an Individual or HUF
Allowed to Resident Indians
When a taxpayer has spent money on treatment of the dependant
Dependant shall mean spouse, children, parents and siblings
In case the dependant is insured and some payment is also received from an insurer or reimbursed
from an employer, such insurance or reimbursement received shall be subtracted from the deduction.
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this section is `50,000 during a financial year. The amount can be claimed over and beyond the deduction
of Section 24 and Section 80C, which are `2,00,000 and `1,50,000, respectively.
The deduction under this section is available only to individuals. This deduction is not available to any
other taxpayer. Thus, if you are a HUF, AOP, Partnership firm, company, or any other kind of taxpayer,
you cannot claim any benefit under this section.
A deduction for interest payments up to `1,50,000 is available under Section 80EEA. This deduction is
over and above the deduction of `2 lakh for interest payments available under Section 24 of the Income
Tax Act.
Therefore, taxpayers can claim a total deduction of `3,50,000 for interest on a home loan, if they meet
the conditions of section 80EEA
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To be able to claim this deduction the following details have to be submitted in your Income Tax Return:
Name of the Donee
PAN of the Donee
Address of the Donee
Amount of Contribution
Deduction under Section 80TTB is available to individuals aged 60 years or more during the previous
year, who have an interest income on deposits with banks.
The eligibility and conditions for claiming deductions under this section are as discussed in Table 8:
Eligible Assessee Conditions for Claiming Deduction Amount of Permissible Deduction from
Gross Total income
Individual senior Deduction is available to an individual (of age The amount of deduction allowed is the
citizen 60 years or more), who earns interest income lower of the following:
from deposits with a banking company, a co- Actual interest, or
operative society bank, or a post office. The
deposits for this purpose, may include time `50,000
deposits.
Deduction under Section 80C is allowed to an individual or an HUF for making certain payments
or contributions in respect of life insurance premium, specified term deposits, provident fund,
etc.
Deduction is available in respect of some specified investments made by an individual or an HUF
during the previous year.
Deduction under Section 80CCC is available to an individual in respect of contribution made to an
approved annuity plan of LIC or certain pension funds.
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The large part of Indian citizens is uncovered under health insurance and rely on their
savings or borrowing in times of medical emergencies. The government stimulates its
nationals to be covered under medical insurance and even offers tax deductions on it under Section
80D.
The deduction benefit is extended not only for a health insurance plan for oneself but one can also
reap the benefit of buying the policy to cover spouse or dependent children or parent.
Deduction under Section 80D is liable to an individual or an HUF concerning paying of medical
health insurance premium for self or a family member.
if any amount has been incurred by any mode including cash payment on account of preventive
health-check up of the assessee himself, spouse, dependent children and parents, an amount of
deduction equivalent to ` 5,000 is allowed. However, the said deduction is within and subject to the
aggregate limit of deduction of ` 25,000/` 50,000, as the case may be.
Section 80DDB of the Income Tax Act stipulates tax deductions for individuals and HUF in respect
of medical expenses incurred for the treatment of certain diseases or health ailments. This section
elucidates medical costs incurred on the treatment of specific diseases or illnesses, which should not
be confused with the premium amount paid to buy a health insurance policy, covering such diseases
or ailments.
The term ‘disability’ is defined in harmony with conditions laid down under the Persons with
Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, and includes
persons suffering from autism, cerebral palsy and multiple disabilities.
For interest on education loan Section 80E, a financial institution means a banking company to
which the Banking Regulation Act, 1949 applies or any other financial institution as may be notified
by the Central Government in the Official Gazette in this behalf.
The deduction under this section is available only to individuals. This deduction is not available to
any other taxpayer. Thus, if you are a HUF, AOP, Partnership firm, a company, or any other kind of
taxpayer, you cannot claim any benefit under this section.
9.14 GLOSSARY
Assessee: An individual that is liable to pay taxes for himself/herself or on behalf of somebody else
Gross Total Income (GTI): An individual’s total pays before accounting for taxes or other deductions
Health Insurance Premium: The sum of money that an individual pay towards an insurance policy
to cover health care issues
Resident Individual: An individual who is domiciled in this state, even though absent for temporary
or transitory purposes, and every individual who, for an aggregate of more than six months, both
maintains a permanent place of abode within this state and who is present in this state
Case Objective
This Case Study discusses the computation of deductions computation of total income of Neelam and
Helen.
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Neelam and Helen are two sisters born and brought up in Delhi. While Neelam is settled in Australia
after her marriage in 1981, Helen is settled in Delhi. Both of them, being aged below 60 years, earn the
following incomes during the previous year ended 31st March 2021:
The taxable income and total tax liability of Neelam and Helen for the Assessment Year 2021-2022 are
computed as follows:
41,300 21,700
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41,000 27,000
Deduction under Section 80D
Premium paid on Mediclaim policy - 24,000
- 24,000
Total deduction under Chapter VI-A is restricted to Gross Total Income 41,000 32,700
exclusive of long-term and short-term capital gains
4,700
Long-term capital gains are subject to tax at a flat rate of 20% under Section 112. Short-term capital
gains on the sale of shares in respect of which STT (Securities Transaction Tax) has been paid are subject
to tax @15% under Section 111A.
In case the basic exemption limit of ` 2,50,000 is not exhausted against other income, the benefit of
utilising/deducting the unexhausted basic exemption limit against/from long-term and short-term
capital gains are available to resident individuals only. Therefore, Neelam cannot utilise the basic
exemption limit against capital gains. Also, the rebate under Section 87A can be availed only by resident
individuals whose total income is up to ` 5,00,000.
Questions
1. Can non-residents adjust the unexhausted basic exemption limit from tax payable on capital gains?
(Hint: No; Refer to Sections 111A, 112 and 112A)
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2. Discuss the provisions relating to the rebate under income tax law.
(Hint: Refer to Section 87)
3. Why cannot Neelam utilise the basic exemption limit against capital gains?
(Hint: basic exemption limit of ` 2,50,000 is not exhausted against other income, etc.)
4. What is the rate for Long-term capital gains?
(Hint: Long-term capital gains are subject to tax at a flat rate of 20% under Section 112)
https://resource.cdn.icai.org/65971bos53217cp7.pdf
Interview a taxpayer in your neighbourhood and calculate his/her applicable deductions as per
Section 80U for the current assessment year.
13
Deductions under chapter VI-A
Unit – 09
CA. Prashant Bharadwaj
Deduction in respect of Life Insurance Premium, contribution to
provident fund, etc – Sec 80C
• Sec 80-C is applicable only to individuals or Hindu Undivided Family.
• Actual life insurance premium paid up to 20% of the sum assured, if the policy is issued on or
before 31-03-2012. However, 10% deduction if the policy is issued on or after 01/04/2012.
However, if the policy is issued on or after 01-04-2013, the deduction shall be up to 15% of
the sum assured (for policy referred under section 80DDB and 80U), shall be allowed as
deduction, if policy is in the name of self, spouse and children
• Employee’s contribution to recognized provident fund or superannuation fund or contribution
to Public Provident Fund also qualifies for deduction under this section.
• Investments in National Savings Certificate or deferred annuity plan.
• Subscriptions to any units of mutual funds.
• Term deposits for a period not less than 5 years with a scheduled bank or post office.
• Principal repayment of housing loan. Lock-in-period is 5 years from the end of FY in which
the construction completed or possession obtained.
• Tuition fees for maximum two children for full time course in India.
• Maximum deduction is Rs. 150,000 under this section.
Contribution to Pension Scheme - Section 80 CCC
• This section is applicable only to individuals.
• Contribution to annuity plan (excluding bonus or interest
credited of LIC) or any other insurer approved by IRDA
(Insurance Regulatory Development Authority) qualifies for
deduction under this section.
• If the assessee or the nominee surrenders the annuity before
maturity, the surrender value including bonus and interest shall
be taxable in the year of receipt in the hands of assessee or
nominee.
• Amount qualifying for deduction under this section will not be
eligible for deduction under section 80C.
Contribution to Pension Scheme of Central Government – Sec 80CCD
• This section is applicable only to individual assessees.
• Where an individual has contributed any amount under a pension scheme
notified by central government, shall be allowed as deduction under this
section for both employer and employee contribution.
• The amount so contributed during the previous year can be claimed as
deduction subject to the following limits:
• In case individual deriving salary income the deduction limit is 10 % of salary (basic + DA
if forming part of retirement benefits).
• In case the individual is deriving other income (other than salary) the deduction limit is
20% of Gross Total Income.
•An additional deduction is provided in respect of whole of the amount paid or deposited by
individual assessee or Rs. 50,000, whichever is lower, under National Pension Scheme
(NPS). (This is in addition to overall limit of Rs. 150,000).
•Any amount contributed by the employer to the pension scheme shall also be eligible for
deduction up to a maximum of 14% of salary in case of Central Government employer and
maximum 10% of salary in case of other employer’s. [Section 80CCD(2)]. This deduction is
also available even if the individual opts for alternative tax regime u/s 115BAC.
Limit of deduction under sections 80C, 80CCC & 80CCD -
SEC 80CCE
The maximum limit of deduction that can be claimed by the assessee
under section 80C, 80CCC & 80CCD is 1,50,000 in aggregate. However,
employer contribution to pension fund is out of purview of section 80CCE.
Medical Insurance Premium - Section 80D
• This section is applicable to individuals and Hindu undivided family. (Family
means spouse and dependent children of Assessee).
• Premium paid or contribution made to medical insurance scheme approved by
central government or contribution to central government health scheme (Not
applicable to HUF) or any other insurer approved by IRDA and in case of
individual any amount paid up to Rs. 5,000 towards preventive health check-up of
assessee (not applicable to HUF) or his family or medical expenditure for Senior
citizen (60 years or more), is deductible in this section.
• The maximum limit of deduction is Rs.25,000 per annum. However, if the
insurance is on the health of a senior citizen Rs.50,000 shall be maximum limit of
deduction.
• The mode of payment of medical insurance premium, medical expenditure on
very senior citizen and contribution should be in other than cash. In case of
preventive health checkup payment can be made in any mode including cash.
• . If assessee pays medical insurance premium on the health of his parents
additional limit of Rs.25,000 per annum can be allowed as deduction. In case the
parents are senior citizens additional limit is enhanced Rs.50,000 per annum.
Maintenance including medical treatment of a dependent with
disability - Section 80DD
• This section is applicable to resident individual and resident Hindu Undivided Family.
• Deduction allowable is in respect of Medical expenditure including nursing, training
and rehabilitation of a dependent with disability.
• Amount paid or deposited by the assessee under any scheme of LIC or any other
insurer approved by the board for maintenance of dependent with disability will also
qualifies for deduction under this section.
• Flat deduction of Rs. 75,000 shall be allowed as deduction. Irrespective of actual
expenditure or deposit made. However, if the dependent is with severe disability
(80% or above) the deduction shall be Rs. 125,000 (flat deduction).
• Dependent means spouse, children, parents, brothers and sisters of individual, in
case of HUF any member of the family.
• In case the disabled dependent pre deceases the individual the amount deposited
shall be deemed to be income of the assessee in the year in which such amount
received.
• Depended should not claim deduction u/s 80U.
Medical treatment for Certain Specified Diseases – Sec 80DDB
• This section is applicable to resident individual and resident Hindu Undivided
Family.
• Deduction can be claimed by assessee towards medical treatment of specified
diseases on self or on dependent of individual and for Hindu Undivided Family
any member of the family.
• The deductions shall be allowed for actual medical expenses or Rs.40,000,
whichever is lower and in case of a senior citizen (60 years and above but less
than 80 years) and very senior citizen (80 years and above) the deductions
shall be, actual expenses or Rs.100,000, whichever is lower.
• The amount of deduction shall be reduced by the amount received from the
insurance company or reimbursed by the employer.
• Deduction shall be allowed only if the prescription for such medical treatment
is obtained from a neurologist or an oncologist or a hematologist or an
immunologist or a specialist as notified. (Rule 11DD)
Interest on Education Loan - Section 80E
• This section is applicable only to individuals.
• Amount paid towards interest on education loan can be claimed as
deduction under this section.
• Higher education may be pursued by the assessee himself or by spouse
and his children or to a student where assessee is the legal guardian.
• The deductions shall be allowed from the initial year in which the
commencement of interest takes place and is allowed for immediate
succeeding 7 AY’s or till the interest paid in full, whichever is earlier.
Interest on loan for purchase of Electric Vehicle - Sec 80EEB
• This section is applicable for individuals only.
• The loan has been taken for the purpose of purchase of an electric vehicle.
• Loan is to be taken from a financial institution only.
• The loan is sanctioned between 01/04/2019 and 31/03/2023.
• The deduction is available in respect of interest payable on the above loan or
Rs. 150,000, whichever is lower.
• If the interest is claimed as deduction under this section, then such interest is
not again deductible under any other provisions of the Act for the same or any
Assessment Year.
• Such vehicle shall not be capitalized u/s 43(1) and depreciation u/s 32 is also
not available.
Donations to certain Funds, Charitable institutions etc – Sec 80G
• This section is applicable to all assessees.
• The eligibility of donations under different categories are as follows:
• Category-1 = 100% allowed as deduction without any limit
• Category-2 = 50% allowed as deduction without any limit
• Category-3 = 100% allowed as deduction restricted to 10 % of Adjusted Gross
Total Income
• Category-4 = 50% allowed as deduction restricted to 10 % of Adjusted Gross Total
Income
•Donations eligible for category-2 = (50% without any limit)
•Jawaharlal Nehru Memorial Fund.
•Indira Gandhi Memorial Trust.
•Rajiv Gandhi Foundation.
•Prime Minister Drought Relief Fund
Donations to certain Funds, Charitable institutions etc – Sec 80G
• Donations eligible for Category-3 = (100% allowed as deduction restricted to
10 % of Adjusted Gross Total Income)
• Contribution by the company to Indian Olympic Association or any other Indian
Association Or Institution for development of sports and games or sponsorship for sports
and games notified by Central Government.
• Contribution to government, local authority or approved institution or association for
promotion of family planning.
•Donations eligible for category-4 = (50 % deduction restricted to 10 % of Gross Total Income)
•Renovation to notified temples, mosques, church’s, gurudwara or any other place of national importance.
•Donation to government or local authority to be utilized for charitable purpose other than the purpose of
family planning.
•Any corporation established by government for promoting interest of schedule caste, scheduled tribe or
backward classes.(if donation is given for promotion of any other particular community, then no deduction
u/s 80G is available).
•Any authority setup for providing housing accommodation or town planning.
•Approved public trust or institutions.
Donations to certain Funds, Charitable institutions etc – Sec 80G
• Donations eligible for category - 1 (100% deduction, no limit) (only
examples which are important)
• National Defense Fund.
• Prime Minister National Relief Fund.
• National Children's Fund.
• National Trust for welfare of persons with Autism.
• Gujrat fund for earthquake victims.
• Swachh Bharath Kosh.
• Clean Ganga Fund (only for resident assessee)
• National Fund for Control of Drug Abuse
Deduction in respect of interest on deposits in Savings Bank
account - Section 80TTA
Names of Sub-Units
Section - 70, 71, 71B to 74A, Rules to Carry Forward & Set off Past Year Losses, Section 72 Business loss
set off, Section 73 Speculation loss
Overview
The unit begins by explaining the concept of set-off and carry forward of losses. Thereafter, the unit
discusses inter source adjustment of losses, inter head adjustment of losses and set-off of brought
forward losses. Towards the end, a summary of provisions of set-off and carry forward of losses is
given in a tabular form.
Learning Objectives
Learning Outcomes
10.1 INTRODUCTION
Specific provisions have been made in the IT Act, 1961, for the setoff and carry forward of losses. Set-off
refers to the adjustment of losses against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then
such losses are carried forward for the next assessment year for adjustment against the eligible profits
of that year. The maximum period for which different losses can be carried forward for set-off has been
given in the Act.
10.2 RULES TO CARRY FORWARD & SET OFF PAST YEAR LOSSES
Set-off of loss means that a particular amount of loss is equated and negated by an equal amount of
profit. Carry forward of loss means that if instead of profit an assessee incurs losses and they are not
being set-off by profits, they can be carried forward to the next assessment year where they can be set-off
against the allowable profits. Set-off of losses refers to the adjustment of losses incurred by an assessee
against the profit of that financial year. Losses can be carried forward to subsequent assessment years
in case there are no adequate profits in the given financial year.
Regarding the set-off and carry forward of loss, the following points must be remembered:
Loss from a source of income that is exempted from tax cannot be set-off against any other income
which is taxable. For example, loss on the grounds of agricultural activity (which is exempted from
tax) cannot be adjusted against profit or income from any other taxable source of income.
In any year, if a taxpayer has incurred a loss from any source under a particular head of income,
then, the taxpayer may adjust such loss against income from any other source falling under the
same head of income. This process of adjustment of a loss from a source under a particular head of
income against income from some other source under the same head of income is called an intra-
head adjustment. For example, if an assessee runs two businesses X and Y, then loss from business
X can be set-off against profits from business Y.
After making intra-head adjustments (if any); the next step is to make inter-head adjustments. If
in any year, the taxpayer has incurred loss under one head of income and is having income under
other heads of income, then he can adjust the loss from one head against income from the other
head. For example, loss under the head of house property can be adjusted against salary income.
At times, some part of the loss may remain even after making intra-head and inter-head adjustments.
In such cases, the unadjusted loss can be carried forward to the next year for adjustment against
subsequent years’ income. This is called carry forward of loss. Different heads of income have
different provisions to carry forward of loss.
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Provisions under the income tax law in relation to carry forward and set-off of loss from house
property:
If the loss from house property is not fully adjusted in the same year in which the loss was incurred, then
such loss can be carried forward to the next year. However, such loss can only be adjusted against the
head of income from house property in the subsequent years. It means that in the subsequent years, the
inter-head adjustment would not be allowed. Such an amount of loss can be carried forward for eight
years succeeding the year in which the loss occurred.
According to the Income Tax Act, 1961, an individual taxpayer may set-off and carry forward the income
losses incurred by him/her to the coming years. The provisions of set-off and carry forward of income
losses have been made to divide the tax burden of the assessee in the case of losses.
10.2.2 Inter Head Adjustment of Losses and Set-off of Brought Forward Losses
The other method of carrying forward or set-off of losses is through inter-head adjustment. As per
Section 71 of the Income Tax Act, 1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed to adjust the loss from one head
against income from other heads. Some examples are as follows:
House property income losses: House property income losses can be set-off against profits from
other heads. Such loss can be adjusted against salary income, business income, income from capital
gain, and income from other sources except for casual income.
Non-speculative business losses: Non-speculative business losses can be set-off under any other
head except income from salary.
The losses incurred in the following cases cannot be set-off under inter-head adjustments:
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining racehorses
Even after the taxpayer has made intra-head or inter-head adjustments, it may be the case that the
losses continue to remain unadjusted. Such unadjusted loss can be carried forward to the subsequent
year for adjustment against the income from that subsequent year.
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The Act lays down different provisions for carrying forward losses under different heads of income,
which are as follows:
House property income losses: As per Section 71(B) of the Income Tax Act, 1961, an assessee can carry
forward losses incurred under the head house property up to eight years immediately succeeding
the assessment year in which the loss has been incurred. It can be adjusted only against house
property income loss. In this case, the assessee can file the deferred return.
Non-speculative business losses: As per Section 72 of the Income Tax Act, 1961, an assessee can carry
forward non-speculative business loss up to eight years immediately succeeding the assessment
year in which the loss has been incurred. He/she must file an Income Tax Return (ITR) within the due
date prescribed under Section 139 (1) of the Income Tax Act, 1961. The loss can be set-off only against
business income.
Speculative business losses: Section 73 of the Act specifies that losses in speculative businesses can
be carried forward up to four years immediately succeeding the assessment year in which the loss
has been incurred. An assessee must file the ITR within the due date prescribed to carry forward the
losses from speculative business. Such loss can be adjusted only against income from speculation
business.
Specified business loss: According to Section 73A of the Income Tax Act, 1961, losses in specified
business can be carried forward subject to the following conditions:
Loss in respect of any specified business referred to in section 35AD shall not be set-off except
against profits and gains, if any, of any other specified business.
If the loss in specified business has not been wholly set-off, so much of the loss as is not so set-off
or the whole loss where the assessee has no income from any other specified business shall be
carried forward to the next assessment year. It shall be set-off against profits and gains, if any,
of any specified business, carried on by him assessable for that assessment year.
Capital gain losses: If a taxpayer is unable to set-off the capital loss in the given financial year, both
long-term loss and short term loss can be carried forward immediately for eight assessment years.
Brought forward losses or unabsorbed depreciation: In the case where a company suffers a loss
before claiming depreciation, then the entire amount of depreciation is unabsorbed depreciation.
However, if the company suffers a loss as a result of the depreciation amount, then the business loss
would be considered as nil and the balance of depreciation amount will be unabsorbed depreciation.
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Section 73A Loss from Inter-source: Can be set-off only Brought forward loss of one assessment
specified against income from any other year can be carried forward to the
business specified business under Section 35AD following any no. of assessment years
under Section Inter-head: Cannot be set-off against to be set-off against income from any
35AD income under any other head specified business
Section 74 Long-term Inter-source: Can be set-off only Brought forward loss of one assessment
capital loss against long-term capital gain year can be carried forward to the
Inter-head: Cannot be set-off against following eight assessment years to be
income under any other head set-off against long-term capital gain
Section 74 Short-term Inter-source: Can be set-off against Brought forward loss of one assessment
capital loss both short-term capital gain or long- year can be carried forward to the
term capital gain following eight assessment years to be
Inter-head: Cannot be set-off against set-off against long-term capital gain
income under any other head or short-term capital gain
Section 74A Loss from the Inter-source: Can be set-off only Brought forward loss of one assessment
activity of against income from such activity year can be carried forward to the
owning and Inter-head: Cannot be set-off against following four assessment years to be
maintaining income under any other head set-off against income from the activity
race horses of owing and maintaining race horses
Section 32(2) Unabsorbed Inter-source: Can be set-off against Brought forward loss of one assessment
depreciation income from any business year can be carried forward to the
Inter-head: Can be set-off against following any no. of assessment years
income under any other head except to be set-off against income from any
salary head other than salaries
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Let us discuss some illustrations to understand the concept of set-off and carry forward.
Illustration 1: Mr. Mukherjee submits the following particulars of his income for the A.Y. 2021-2022. Find
his gross total income setting off and carrying forward losses.
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Capital gains (STCG ` 26,000 + LTCG ` 4,000 – B/F short term capital loss ` 12,000) (B/F long- 18,000
term capital loss cannot be set-off, on account of expiry of time limit of 8 years)
Income from other sources (winnings in card game, B/F loss cannot be set-off) 8,000
Gross Total Income 50,600
Illustration 2: From the following particulars regarding income, compute the total income of Ms. Mehak
for the A.Y. 2021-2022:
Salary ` 9,000 p.m.
House A (let out) ` 40,000; House B (let out) ` (20,000); House C (Self-occupied) ` (50,000)
Business A ` 2,00,000; Business B ` (2,50,000), Business C (shares speculation) ` 30,000; Business D
(commodity speculation) ` (40,000)
STCG ` 30,000; short-term capital loss ` 40,000
LTCG ` 1,00,000
Profits from card games (gross) ` 50,000; Loss from horse races ` 30,000
Winnings from lottery ` 70,000
Solution: Computation of gross total income of Ms. Mehak for A.Y. 2021-2022:
* Loss from house property can be set-off against salary income and loss from general business can be
set-off against income from other sources.
If the loss from house property is not fully adjusted in the same year in which the loss was incurred,
then such loss can be carried forward to the next year.
As per Section 70 of the Income Tax Act, 1961, if the assessee has incurred losses under a certain
income head, then he/she is permitted to adjust these losses from any other income source under
the same head. This is referred to as intra-head adjustment.
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The other method of carrying forward or set-off of losses is through inter-head adjustments. As per
Section 71 of the Income Tax Act, 1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed to adjust the loss from one head
against income from other heads.
The losses incurred in the following cases cannot be set-off under inter-head adjustments:
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining racehorses
10.4 GLOSSARY
Inter-head adjustments: After the intra-head adjustments, the taxpayers can set-off remaining
losses against income from other heads
Intra-head adjustments: Losses from one source of income can be set-off against income from
another source under the same head of income
Set-off of loss: The adjustment of losses from one head against the income, profits or gains of any
other head of income during the assessment year
Case Objective
This Caselet discusses the provisions of set-off and carry forward of losses while computing the Gross
Total Income of an assessee.
Sections 70 to 74 of the Income Tax Act, 1961, deal with set-off and carry forward of losses. Mr. Einy had
the following business incomes/losses for the Assessment Year 2021-2022:
Speculation business losses can be set-off only against speculation business profits. However, losses
from other businesses can be set-off against speculation business gains and gains under other heads of
income except for salaries. Losses from speculation business can be carried forward for four assessment
years for set-off against income from speculation business. Other unabsorbed business losses can be
carried forward for 8 assessment years for set-off against profits and gains from business or profession.
A long-term capital loss can be set-off against long-term capital gain only. However, a short-term
capital loss can be set-off against both long-term and short-term capital gains. Also, capital gains/
losses cannot be set-off from any other head of income. Both long-term and short-term capital losses
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can be carried forward for eight assessment years for set-off against long-term and long-term/short-
term gains, respectively.
The taxable income of Mr. Einy for the Assessment Year 2021-2022 will be as follows:
Since long-term capital loss (`28,000) can be set-off only against long-term capital gains, it shall be
carried forward to the next assessment year.
Questions
1. What do Sections 70 to 74 of the Income Tax Act, 1961 deal with?
(Hint: Set-off and carry forward of losses)
2. How can losses from other businesses be set-off?
(Hint: Against speculation business gains and gains under other heads of income except for salaries)
3. For how many assessment years losses from speculation business can be carried forward?
(Hint: Losses from speculation business can be carried forward for four assessment years for set-off
against income from speculation business.)
https://resource.cdn.icai.org/62005bos50392cp6.pdf
Prepare a list of losses incurred by an assessee which cannot be setoff under inter-head adjustments.
10
Set off and Carry Forward of Losses
Unit – 10
CA. Prashant Bharadwaj
Set-off under the same head or Intra Head adjustment (sec 70)
Exceptions for intra head adjustment: (It means that the losses below can
be set off only with such income)
• Speculation Loss.
• Loss from Specified Business u/s 35AD.
• Long Term Capital Loss.
• Loss from activity of owning and maintaining race horses.
• Any loss from a source which is fully exempt from tax and loss from
casual income shall not be eligible for set off or carry forward.
Set-off with other heads or Inter Head adjustment (Sec 71)
Exceptions for inter head adjustment:
• Loss under the head ‘Profits and Gains of Business or Profession’
against salary income.
• Loss from speculative business.
• Loss from specified business u/s 35AD.
• Loss under capital gains.
• Loss from activity of owning and maintaining race horses.
• Loss from a House Property can be set off against any income.
However, such loss shall not exceed Rs. 200,000. (Section 71(3A))
Note: Casual income cannot be used to set off any loss.
Carry forward and set off loss from house
Property (Sec 71B)
• It can be carried forward and set off only with income from house
property.
• It can be carried forward for 8 assessment years.
Carry forward and set off of business loss (Section 72)
• It can be carried forward and set off against same head.
• It can be carried forward for 8 assessment years.
• Carry forward and set off is available to assessee who incurred loss. However, the
exceptions being inheritance, amalgamation, and conversion etc., for which fresh
period of 8 years is available.
The order of set of losses is as below:
• CY depreciation – Sec 32(1)
• CY capital expenditure on scientific research and CY expenditure on family
planning to such allowed – Sec 35(4) and Sec 36(1)(ix)
• Brought forward losses from business or profession – Sec 72(1)
• Unabsorbed depreciation – Sec 32(2)
• Unabsorbed capital expenditure on scientific research – Sec 35(4)
• Unabsorbed capital expenditure on family planning – Sec 36(1)(ix)
Carry forward and set off of speculation loss (Section 73)
• It can be carried forward and set off only against such income.
• It can be carried forward for 4 assessment years.
Carry forward and set off of loss from capital gains
(Section 74)
• It can be carried forward and set off against income under the head
capital gains.
• Short Term Capital Loss can be set off against short term or long
term capital gains.
• Long term capital loss can be set off only against long term capital
gains.
• Both long term and short term loss can be carried forward for 8
assessment years.
Carry forward and set off of loss from activity of owning
and maintaining of race horses (Section 74A)
• It can be carried forward and set off only against such income.
• It can be carried forward for 4 years.
Other Points
• Unabsorbed depreciation can be set off against any head,
except income from salaries and can be carried forward for
indefinite period. [Section 32(2)].
• Loss from a source which is exempt cannot be set off with
taxable income.
• Loss returns shall be filed within the due date mentioned under
section 139(1) to claim the benefit of carry forward of losses.
(Sec 80)[Exception for carry forward of loss from house
property and unabsorbed depreciation].
UNIT
11 Assessment Procedure
Names of Sub-Units
Normal Return – Section 139(1), Loss Return – Section 139(3), Belated Return – Section 139(4), Revised
Return – Section 139(5), Defective Return – Section 139(9), Verification of Return – Section 140, Aadhar
Number – Section139AA, PAN – Section 139A, TRP – Section 139B, Self-Assessment Tax – Section 140A,
Inquiry Before Assessment – Section 142(1), Special Audit – Section142(2A), Estimation of Value of
Assets by Valuation Officer – Section 142A, Best Judgement Assessment – Section 144, Discretionary
Best Judgement Assessment – Section 145(3), Income Escaping Assessment – Section 147, Rectification
of Mistake – Section 154, Demand Notice – Section 156
Overview
This unit describes the Normal Return – Section 139(1), Loss Return – Section 139(3) and Belated Return
– Section 139(4). It also explains the Revised Return – Section 139(5), Defective Return – Section 139(9)
and Verification of Return – Section 140. Further, it elaborates the Aadhar Number – Section139AA,
PAN – Section 139A and TRP – Section 139B. Also, it elaborates the Self-Assessment Tax – Section
140A, Inquiry Before Assessment – Section 142(1) and Special Audit – Section142(2A). Towards the end,
it examines the Estimation of Value of Assets by Valuation Officer – Section 142A, Best Judgement
Assessment – Section 144, Discretionary Best Judgement Assessment – Section 145(3), Income Escaping
Assessment – Section 147, Rectification of Mistake – Section 154, and Demand Notice – Section 156.
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Learning Objectives
Learning Outcomes
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Perform the Rectification of Mistake – Section 154 and Demand Notice – Section 156
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11.1 INTRODUCTION
Every assessee, who earns income beyond the basic exemption limit in a financial year, should file a
statement with details of his/her income, deductions, and other related information. This is known as
the Income Tax Return (ITR).
Once a person or firm comes into the taxpayer bracket or file the income returns, the Income Tax
Department will process it. There are occasions where on the basis of the set parameters by the CBDT
i.e. Central Board of Direct Taxes, the return of an assessee gets picked for an assessment.
It must be noted that the time limit to re-open income tax assessment cases has been decreased to 3
years. Earlier it was 6 years. Also, in serious tax evasion, the assessment can be reopened until 10 years,
only when concealment of income is above 50 lakh rupees.
Such income tax return must be filed on or before the due date, in the prescribed form verified in the
prescribed manner, and include any other information that may be required.
The mandatory and voluntary filing of income tax returns is discussed in this section. The situations in
which ITR filing is required are listed below.
Anyone whose total income exceeds the income tax exemption limit is required to file an ITR by the
deadline.
Any company whether public, private, domestic, or foreign, which is located or doing business in India.
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Individuals or entities are not required to file an ITR in a variety of circumstances. In such cases, their
tax returns are treated as voluntary returns that are valid tax returns.
31st of July
This deadline can be extended by the ITR department but only until August 31. This due date applies to
all tax examiners who are not required to perform a tax audit. It applies to
Salaried employees
Self-employed or professional employees
Freelancers
Consultants.
30th of September
Individuals and entities whose accounting books are audited must file ITR by September 30 th of each
assessment year. This deadline may be extended at the discretion of the Indian government. This
deadline also applies to a business entity, a self-employed person or professional, a working partner
employed by a firm, or a consultant who requires an audit.
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However, if a loss is incurred under the heading House Property, it can be carried forward even if
the income tax return is filed late.
However, if the loss is to be set-off against other income earned in the same year, the off-set is
allowed if the ITR is filed after due date is passed.
If the taxpayer has filed a return of loss in response to a notice under Section 142(1), the loss can
only be carried forward if it is a loss from house property. In this case, however, the unabsorbed
depreciation can be carried forward.
Although the loss for the current year cannot be carried forward unless the return of loss is submitted
before the due date, the loss for previous years can be carried forward if the return of loss for those
year(s) was submitted before the due date and the loss was assessed.
In the event of a loss, there are several advantages to filing an income tax return.
Advantage of filing ITR in the event of a loss is that the loss can be carried forward to future years and
offset against incomes which are arising in future years. This will lower future years’ taxable income,
lowering the amount of tax due in subsequent years.
As a result, even if you have a loss, it is highly recommended that you file income tax returns.
If a return is filed after the due date for filing an income tax return, the following consequences will
apply. These rules apply even if a late return is filed within the timeframe specified:
1. Under section 234A, the assessee will be liable for penal interest.
2. Under section 234F, the assessee is liable for a late filing fee.
3. The late filing fee under section 234F is ` 5,000 (if ITR is filed after the due date but before December
31 of the assessment year) or ` 10,000 (if the return is filed after the due date but before December
31 of the assessment year) (if return is furnished after December 31 of the assessment year).
4. If the tax payer’s total income doesn’t exceed ` 500000, then in that circumstance, the late fee cannot
be more than ` 1,000.
5. A few losses cannot be carried forward if the return of loss is submitted after the deadline. However,
if a return is filed late and a claim for carry forward of losses is made, the CBDT has the authority
under section 119(2) to excuse the delay.
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6. Deductions under sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE are not available if the return is
filed after the due date. Also, non-availability of exemptions under 10A and 10B sections.
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Within 15 days or extended time, if the defect is not corrected or rectified then the return will be
invalid, and the consequences will be the same as if the assessee had not filed a return at all. The
Assessing Officer may forgive the delay and treat the return as a valid return if the assessee corrects
the defect after 15 days, or the extended time, but before the assessment is completed.
2. In the following situations, a return of income is considered defective:
a. The Return Form has not been properly completed:
Complete all items on the income-tax return form (ITR-1 to ITR-7) in the order listed on the form.
If any schedule of the relevant form does not apply to an assessee, the score should be “.... NA...”
across the board. If something isn’t applicable, put a “NA” next to it. Write 0 to represent a nil
figure “NONE. There should be no blank columns or rows in your spreadsheet.” Otherwise, the
return could be considered faulty or even void.
Return of Income without Self-Assessment Tax - Section 139(9) states that a return of income is
considered defective unless the tax, plus interest, if any, due under section 140A has been paid on
or before the due date. From the assessment year 2017-18, this provision has been amended by the
Finance Act of 2016. Following this change, a valid return will no longer be considered defective
if self-assessment tax and interest due under section 140A are not paid on or before the due date.
3. Defective or incomplete ITRs because of the annexures, statements, and accounts, and others:
Proof of pre-paid taxes, few statements, reports, accounts, and other items must accompany
the ITR under section 139(9), or the return will be deemed defective. With new income tax return
forms, however, no certificate, report, computation, or final accounts can be attached. Similarly,
proof of pre-paid taxes (such as tax deducted/collected at source, advance payment of tax, and self-
assessment tax) cannot be attached. As a result, the assessee should keep these certificates, reports,
computations, final accounts, and proof of pre-paid taxes on hand. These may be provided whenever
the Assessing Officer wishes to examine them, whether in the course of assessment proceedings or
not. Non-compliance with this requirement will not result in a deficient return of income.
Thus ITR verification has to be made within 120 days period of filing it either physically or electronically.
The ITR filing procedure is complete only if the verification part is too complete as can be analysed from
the above paragraph:
Step 1: On IT department’s e-filing portal select “e-verify return” under the Quick Links section.
Step 2: Assessee’s PAN, assessment year and acknowledgement number generated upon e-filing needs
to be entered.
Step 3: The web page that follows will have the uploaded return details displayed. Henceforth, ITR
verification process can be commenced by tapping on e- verify on this page.
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Step 4: An EVC i.e. electronic verification code has to be generated using one out of several ways being
displayed.
Step 6: Thereafter, we will get “Return successfully e-verified” message along with a transaction ID. The
green button will aid us in our record’s access.
An EVC being a 10 digit alphanumeric code is compulsory for e-verification process which if not completed
within the maximum time i.e. 120 days from filing proves as invalid. Separate EVC’s are required in case
of an original and a revised return. It can be generated through either of various methods listed below:
1. Online banking
Step 1: Log in to your online banking a/c.
Step 2: We will find an Income tax filing tab on the home page.
Step 3: Navigate to the IRS website and select the e-verify option.
Step 4: On the e-filing web page, go to the “My Account” tab and generate EVC.
Step 5: It will be send to the registered phone number and e-mail address.
Step 6: Your return can be verified now with this code available with you.
2. Using a Bank’s ATM
Step 1: At Bank’s ATM do the debit card swiping.
Step 2: Generate PIN for e-filing option has to be selected from the menu displayed.
Step 3: EVC will be sent to your registered mobile phone number.
Step 4: On the IRS e-filing website, select “e-verify using a bank ATM.”
Step 5: Finish the verification process by entering your EVC.
3. Bank Account Number
Step 1: On the e-fiing portal of IT department, under Quick Links select the e-verify return option.
Step 2: Assessee’s PAN along with A.Y and acknowledgement number generated upon filing of return
have to be entered.
Step 3: E-verify option has to be selected in the displayed menu.
Step 4: Choose option 3 “Generate EVC using Bank Account Number” from the list of EVC generation
methods displayed.
Step 5: To allow you to do pre validation of your bank a/c, there will be a screen appearing.
Step 6: Do bank selection entering alongside IFSC code and phone number. Then in the displayed
menu, select “prevalidate”.
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Step 7: Post your bank a/c’s prevalidation web page would appear as follows. In the displayed menu,
choose “Yes” to receive EVC in SMS form.
Step 8: Upon entering of EVC your return will be e-verified. We can download the attachment upon
successful e verification for our record purpose.
4. Account Number (Demat)
Step 1: Log in to your e-filing account with IRS.
Step 2: In the dashboard view, select the “profile Settings” tab.
Step 3: Select “Prevalidate your demat account” from the displayed menu, and the web page that
appears will appear.
Step 4: Upon entering fields like Depository Type (NSDL/CDSL), DP ID, Client ID, Mobile Number, and
Email ID Click the “Prevalidate” button
Step 5: Now click yes to receive EVC on your registered mobile number.
Step 6: We can download the attachment for our record purpose on e-verifying successfully.
5. One-Time Password (OTP) for Aadhaar
Step 1: Aadhar and PAN linking is required.
Step 2: On e-filing website, ‘e-verify using Aadhar OTP” option is selected.
Step 3: OTP will be sent to registered mobile number.
Step 4: Enter OTP for e- verification which is valid for 10 minutes only.
Step 5: Attachment can be downloaded upon successful e- verification.
Physical verification of ITR: a step-by-step guide
Step 1: Sign in to e-filing portal of IT department.
Step 2: Go to “View Returns/Forms.” And you will find e-filed returns etc.
Step 3: Choose the ITR-V/ Acknowledgement.to download ITR-V.
Step 4: Password is needed to open this form that is your PAN in small letters and date of birth, being
entered at on go as explained below.
If your PAN number is ABCDE12345 and your date of birth is 01/02/1983 (dd/mm/yyyyy), the password
will be “abcde1234501021983.”
Step 5: It has to be signed with blue ink.
Step 6: Not later than 4 months of filing ITR, ITR V has to be dispatched at the below mentioned
address:
Centralised Processing Centre, Income Tax Department,
Bengaluru, Karnataka 560500
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1. Persons who are eligible to quote Aadhaar number (Category A) [Section 139AA(1)]:
On or after 1.7.2017, everyone who is eligible for an Aadhaar number must quote their Aadhaar
number—
in the PAN allocation application form (Permanent Account Number;)
in the income return:
Where an individual doesn’t have the Aadhaar number, the Enrolment ID of Aadhaar application
form issued to that individual at enrolment time shall be quoted in the application for a PAN or, as
the case may be, in the details of the return of income given by him or her.
2. Eligible Person to Inform Aadhaar Number (Category B) [Section 139AA(2)]:
On or before a date to be notified by the Central Government in the Official Gazette, every person who
has been assigned a permanent account number as of 1.7.2017 and is eligible to obtain an Aadhaar
number shall intimate his Aadhaar number to such authority in such form and manner as may be
prescribed.
However, if the Aadhaar number is not provided, the permanent account number allotted to the
person is deemed invalid, and the other provisions of this Act apply, as if the person had not applied
for a permanent account number.
When Section 139AA’s provisions doesn’t apply to certain individuals or states [Section 139AA (3)]:
This section doesn’t apply to individual, class, or classes of persons, or any State or part of a State,
as the Central Government may notify in the Official Gazette (see Notification No. 37/2017).
Notification No. 37/2017 was issued on May 11th, 2017.
The Central Government hereby notifies that, in exercise of the powers conferred by sub-section (3)
of section 139AA of the Income-tax Act, 1961 (43 of 1961), the provisions of section 139AA shall not
apply to an individual who does not have an Aadhaar number or an Enrolment ID and is:—
Residing in Assam, J&K, and Meghalaya
A non-resident under the 1961 Income Tax Act
A person whose age is 80 or older at any point during the previous year;
Not a citizen of India.
The 1st of July 2017, will be the effective date of this notification.
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139A PAN
PAN stands for Permanent Account Number. The provisions under the Section 139A, Income Tax Act,
(Rule 114) deals with application for and acquisition of a PAN.
The Information Technology Department has made quoting the Permanent Account Number (PAN)
mandatory in many cases. An assessee must include his PAN in his/her return.
A person must submit a Form 49A application to the Assessing Office with jurisdiction over the applicant.
UTI Investor Services Ltd. has been given permission by the Department to improve PAN-related
services. ( UTISIL) will be in charge of managing IT PAN Services Centres in all cities and towns with an
Income Tax Office, and National Securities Depository Limited (NSDL) will be in charge of dispensing
PAN services. The main benefits of having a PAN include the ability to locate the Assessing Officer more
easily, faster assessments, refund processing, tax compliance, credit for tax payments, and control over
unregulated and undisclosed dealings.
It is important to fill the PAN application completely and accurately by writing required information
which includes the assessee name, father’s name, address, birth date, sources of income, and so on.
If your income more than the exemption limit or your turnover more than ` 5,00,000 , you must file a
tax return.
Before the end of the accounting year in which the gross turnover or receipts exceed the maximum
amount chargeable to tax, or before May 31 of the assessment year in which the income exceeds the
maximum amount chargeable to tax, Rupees 5,00,000, an application for a PAN should be submitted.
Trust for Charitable Purposes: A charitable trust that is required to file a return of income under
section 139(4A) is required to obtain a PAN.
Financial transaction of at least ` 2,50,000 or more
With effect from April 1, 2018, any resident person (other than an individual) who enters into a
financial transaction of ` 2,50,000 or more during a financial year (as well as the managing director,
director, partner, trustee, author, founder, karta, chief executive officer, principal officer, or office
bearer of such person, or any person competent to act on behalf of such person) must obtain a PAN.
The central government has designated a person: The Central Government has the authority to
notify (for the purpose of collecting any information) anyone who wishes to apply for a PAN. The
Central Government has notified the following individuals for this purpose, and these individuals
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must apply for a PAN with the Assessing Officer: exporters/importers, assessees under central
excise/service tax/sales tax.
Allotment by his own Assessing Officer: Aside from the aforementioned situations, the Assessing
Officer has the authority to assign a PAN to any other person who owes tax. Any other person can
apply for a PAN.
In the following cases, any person who has not been assigned a permanent account number must apply
to the Assessing Officer for a permanent account number within the time period specified:
If during any previous year, his total income, or the total income of any other person for whom he is
assessable under this Act exceeded the maximum amount not subject to income tax; or
If he is engaged in any business or profession with total sales, turnover, or gross receipts of ` 5,00,000
or more in any previous year; or
He must file a return of income, also known as a return of trust and charitable institutions, under
section 139(4A).
4. Application for Allotment of Permanent Account Number (PAN) [Rule 114(1) & (2)]
1. Form for application [Rule 114(1)]: Form No. 49A or 49AA, as the case may be, must be used to
apply for a permanent account number under section 139A(1), section 139A(1A), section 139A(2), or
section 139A(3).
Provided, however, that an applicant may apply for a permanent account number through a
common application form notified by the Central Government in the Official Gazette, and that the
Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems)
shall specify the classes of persons, forms, and formats, as well as the procedure for safe and secure
transmission of such forms and formats in relation to furnishing of a permanent account number.
2. Who should make the application [Rule 114(2)]: An application pursuant to rule 114(1) must
be filed,—
If the Chief Commissioner or Commissioner has delegated the function of assigning a permanent
account number under section 139A to a specific Assessing Officer, to that Assessing Officer
Otherwise, to the Assessing Officer who has jurisdiction over the applicant’s assessment.
139B TRP
A Tax Return Preparer (TRP) is a person who has been trained by the Income Tax Department to assist
taxpayers in the preparation and filing of their income tax returns. It is extremely difficult for the
average person to file an ITR.
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(Tax return preparer)These are government-authorised special agents who are trained to file tax
returns.
TRP can only file I.T.R. for cases that are not audited.
a. C.A.
c. Any officer of a Schedule Bank with which the Assessee has a current account.
The following is a brief list of the key responsibilities of a Tax Return Preparer:
Creating a taxpayer’s income tax return.
Submitting the completed tax return to the appropriate Assessing Officer or concerned agency after
it has been verified by the resource centre.
Obtaining a copy of the IT department’s acknowledgement on behalf of the taxpayer. This document
serves as proof of tax return submission.
On or before the 7th of each month, submit a statement of particulars to the Resource Centre.
Keeping detailed records of all tax returns prepared by them during the current and previous
assessment years.
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When you file your income tax return under section 139 (1) or when you do not file your income tax
return under section 139 (1) and the time limit for filing such return has passed, a notice under section
142(1) can be issued.
The Assessing Officer, on the other hand, may not demand the production of any accounts dating back
more than three years from the previous year.
The Income Tax Department has issued a notice under section 142(1) for:
1. Income Tax Return Filing: You can get a notice under section 142(1) requesting you do file ITR, if
you have not filed your return within the particular time frame or before the end of the relevant
assessment year.
2. Creating specialised reports and documents: By way of Notice u/s 142, your Assessing Officer (AO)
may ask you to produce specific accounts and documents after you’ve filed your income tax return
(1). You might be asked to produce your purchase books, sales books, or proofs of any deductions
you’ve taken, for example.
3. Any other information, notes, or calculations that the AO requests: The Assessing Officer may
require you to provide information, notes, or workings on specific points as requested by him in
writing and in the prescribed manner, which may or may not form part of the books of accounts. A
statement of your assets and liabilities, for example. The Joint Commissioner must, however, give
his or her approval first.
It’s worth noting that a special audit can be ordered even if the accounts have already been audited
under other laws.
When the Assessing Officer fails to understand the complexity of the accounts during any proceeding,
a special audit is conducted. The Chief Commissioner of Income Tax can issue a notice for a special
audit to be conducted by a chartered accountant with the prior approval of the Chief Commissioner of
Income Tax.
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The auditor’s fees would be determined by the chief commissioner or commissioner, and if the taxpayer
did not pay them, he would be considered in default, and the fees would be recovered from him in
accordance with the Act’s sections 220 to 232. The audit must be completed within the specified time
frame or within such additional time as the assessing officer may determine. The period will be extended
if the taxpayer refuses to cooperate with the auditor.
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Only after the assessee has been given the opportunity to be heard can a best judgement assessment
be made.
Before making a Best Judgement Assessment, the assessee must be given an opportunity.
Only after giving the assessee an opportunity to be heard by giving notice to the assessee to show cause
why the assessment should not be completed under section 144 can the best judgement assessment be
made. However, if a notice under section 142(1) has already been issued prior to making an assessment
under this section, such notice will not be required.
Section 145(3) empowers the Assessing Officer to reject account books that are untrustworthy, false,
incorrect, or incomplete. The Assessing Officer has the authority to reject the books of account for the
following reasons and make the assessment in accordance with section 144:
a. He isn’t satisfied with the assessee’s accounts because they aren’t correct or complete.
b. Although the assessee’s accounts are correct and complete to the Assessing Officer’s satisfaction,
the method of accounting used is such that profits cannot be correctly calculated, in the Assessing
Officer’s opinion.
c. When the assessee’s accounting method isn’t followed on a regular basis, or when the assessee’s
method of accounting isn’t followed at all,
d. Where income has not been computed in accordance with the notified standards under
section 145(2)”
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a. where the assessee has not provided a return of income and no assessment has been made
despite the fact that:
His total earnings; or
The total income of any other person for whom he is assessable under this Act during the
preceding year exceeded the maximum amount not subject to income tax;
If the Assessing Officer wishes to take action after the four-year period has passed and the
original assessment was completed under section 143(1) or 144, the Assessing Officer may do so.
b. where the assessee has provided a return of income but has not made an assessment (scrutiny/
best judgement assessment) and the Assessing Officer notices that the assessee:
Has understated his or her earnings; or
Has claimed in the return an excessive loss, deduction, allowance, or relief.
c. (ba) the assessee has failed to file a report under section 92E in respect of any international
transaction for which he was required to do so.
d. whether a return of income has been furnished or not has been assessed under section 143(3) or
144, but:
Or taxable income has been under-assessed; or
Income that is taxable has been assessed at a rate that is too low; or
The Income Tax Act has provided excessive relief to income that is subject to tax; or
The income-tax act’s excessive loss or depreciation allowance, as well as any other allowance,
has been computed.
e. (ca) income tax return hasn’t been filed or if filed, AO on receipt of information or documentation
from income tax authority prescribed therein has arrived at a conclusion that either income of
the assessee is above the exempted amount, or he has misstated the income or wrongly claimed
any loss or deduction etc.
f. when a person’s assets (including financial interests in any entity) are discovered to be located
outside of India.
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c. Amend any intimation sent under section 200A(1) [section 200A deals with the processing of tax
deducted at source statements, also known as TDS returns].
d. make any necessary changes to any intimation under section 206CB.
(*) A TDS statement is processed under section 200A after any arithmetic errors, as well as any incorrect
claims, have been corrected. Similarly, the Finance Act of 2015 adds a new section 206CB to address
TCS statement processing. The taxpayer is entitled to a hearing if his or her tax liability or refund is
increased or reduced as a result of a mistake being corrected.
If the order is the subject of an appeal or revision, the Assessing Officer cannot correct any matter
decided in the appeal or revision. To put it another way, if an order is the subject of an appeal, the
Assessing Officer can only correct the issues that the appeal does not resolve.
Power to do rectification
The income-tax authority has the authority to correct the error on its own. The taxpayer can notify the
income-tax authority of the error by filing an application to correct the error.
If the Commissioner (Appeals) issues an order, the Commissioner (Appeals) can correct any errors that
the Assessing Officer or the taxpayer have brought to his or her attention.
Rectification order cannot be issued after expiry of four years since the financial year in which the
rectification was sought to be made has ended. The period of 4 year commences on the order date that
needs correction, not the original order’s one. Consequentially, if any revision is made to an order, setting
aside or a modification otherwise, 4 years period commences on new order’s date. The amendment
should be made to the order or claim allowance be refused, for which a period of six months has been
given on receiving rectification’s request.
The taxpayer should keep the following points in mind before filing any rectification application.
The taxpayer should carefully review the order against which the rectification application will be
filed.
While the taxpayer may believe that the order issued by the Income-tax Department contains an
error, the taxpayer’s calculations may be incorrect, and the CPC may have corrected these errors.
For example, the taxpayer may have computed incorrect interest on the income tax return but
correct interest on the intimation.
To avoid having to use rectification in the situations described above, the taxpayer should examine
the order and confirm that any intimation errors are present.
If he notices a mistake in the order, he should file an application for rectification under section 154.
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He should also verify that the error is obvious from the records and does not require further
explanation, elaboration, or investigation. A taxpayer can correct a mistake by submitting an online
application. Before submitting an online application for rectification, the taxpayer should review
the rectification procedure at https i/incometaxindiaefiling.gov.in/.
Any amendment or rectification that increases the taxpayer’s (or deductor’s) liability must be made
only after the authority has given the taxpayer (or deductor) notice of its intention to do so and
given the taxpayer (or deductor) a reasonable opportunity to be heard.
If the assessee or 12[the deductor or collector under sub-section (1) of section 143, sub-section (1) of
section 200A, or sub-section (1) of section 206CB] is found to be liable for any sum, the intimation under
those sub-sections shall be deemed to be a notice of demand for the purposes of this section.
Every assessee, who earns income beyond the basic exemption limit in a financial year, should file a
statement with details of his/her income, deductions, and other related information. This is known
as the Income Tax Return (ITR).
Every person, according to Section 139(1), must:
a. being a corporation or a business; or
b. If I his total income or (ii) the total income of any other person in respect of whom he is assessable
under the Income-tax Act exceeded the maximum amount not chargeable to income-tax during
the previous year, he is a person other than a company or a firm.
Shall, provide a return of his or her earnings.
Section 139(3) of the Income Tax Act governs the filing of income tax returns in cases of loss,
which states that if a taxpayer has incurred a loss in the previous year, he is not required to file
an income tax return for that year.
A revised ITR can be filed before the end of the relevant assessment year or the assessment’s
completion, whichever comes first.
A return of loss filed under section 139(3), 139(4A), 139(4B), 139(4C), or 139(4D), is treated the same as
a return filed under section 139 (1).
Return filed under section 139(1) is one that is filed within the period extended under section 119, i.e.
one that is extended by the CBDT beyond the due date specified in section 139(1) (1).
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When a revised return is filed, the original return must be considered withdrawn and replaced by
the revised return. Thus, if a return filed under section 139(1) declares income but is later revised to
declare a loss, the loss can be carried forward because the revised return will replace the original
return that was filed on time.
If the Assessing Officer believes the assessee’s return of income is incorrect, he may notify him of
the error and give him 15 days to correct it. On the assessee’s application, the Assessing Officer may
extend the time limit.
ITR that has been filed and uploaded needs to be validated, which if not done will make it null and
void which further would result in belated return filing and penalty, interest pay out.
ITR verification has to be made within 120 days period of filing it either physically or electronically.
PAN stands for Permanent Account Number.
The provisions under the Section 139A, Income Tax Act, (Rule 114) deals with application for and
acquisition of a PAN.
The Information Technology Department has made quoting the Permanent Account Number (PAN)
mandatory in many cases. An assessee must include his PAN in his return.
A Tax Return Preparer (TRP) is a person who has been trained by the Income Tax Department to
assist taxpayers in the preparation and filing of their income tax returns. It is extremely difficult for
the average person to file an ITR.
The Section 142(1) tax notice is the notice that is usually served after the return has been filed to
request additional information and documents from the assessee and to assess a specific case. This
notice can also be used to force him to file his return if he hasn’t already done so.
11.21 GLOSSARY
Tax Return Preparer (TRP): It refers to a person who has been trained by the Income Tax Department
to assist taxpayers in the preparation and filing of their income tax returns.
Assessing Officer: It refers to a Valuation Officer to estimate the value, including fair market value,
of any asset, property, or investment to assess or reassess and submit a copy of the report to him.
Tax notice: It is the notice that is usually served after the return has been filed to request additional
information and documents from the assessee and to assess a specific case.
PAN: It stands for Permanent Account Number.
Case Objective
The aim of this case is to describe the return file and assessed.
Different situations under which return may be filed and assessment completed
1. Let’s say Mr B is a salaried employee and has filed his return of income for Accounting Year 2021-22
on 10 July 2021. Now, what would follow on IT department’s part.
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As Mr B has filed his ITR within the due date, assessment proceedings will start. If tax computed by
the department on his income is exactly matching with that furnished in his ITR, regular assessment
will be done and an assessment order u/s 143(1) will be issued to Mr B stating the amount of refund
due, if any.
2. Let’s say Mr B is a salaried employee and has filed his return of income for Accounting Year 2019-20
on 15.10 July 2019. What would be the consequences of this.
The only thing that would change on assessee’s part would be that he will need to pay interest and
penalty amount as applicable for late filing of return. IT department’s action will remain same as
stated in the above paragraph, other things being equal too.
3. Mr B carrying on a trading business fails to get his accounts audited for accounting year 2019-20 in
spite of being eligible to do so. What would follow on IT department’s end?
It is one of the criteria’s which qualifies for action to be taken on part of AO in the form of making
Best judgement assessment.
Hence, necessary action would be taken on department’s part and assessment u/s 144 would be
made after giving an opportunity of being heard to the assessee.
4 Mr B carrying on a trading business has furnished his return of income for accounting year 2019-20
on 20.10.2019. The assessment has been made u/s 143(3).AO has further reasons to believe regarding
the inaccuracy of accounts furnished by the assessee .What would follow on IT department’s part.
The AO has the right to initiate proceedings u/s 147 Income escaping assessment if he reasons to
believe that particulars and information furnished by the assessee are inaccurate and incomplete
and necessary consequences would then follow.
Questions
1. Define ITR.
(Hint: Every assessee, who earns income beyond the basic exemption limit in a financial year, should
file a statement with details of his/her income, deductions, and other related information)
2. Who is assessing officer?
(Hint: Valuation Officer to estimate the value, including fair market value, of any asset, property, or
investment to assess or reassess and submit a copy of the report to him)
https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Return-Of-Income/Defective-or-
Incomplete-Return-Section-139-9.html
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these-precautions-to-avoid-mistakes-168743
24
Assessment Procedure
Unit – 11
CA. Prashant Bharadwaj
Due date for filing of Return of Income – Sec 139(1)
• Every Person being a company or a firm or any other person whose
income is assessable to tax exceeds the minimum amount in the
Previous Year before giving the effect of deduction under Chapter VI A,
shall file Return of Income.
• Any person other than a company or a firm, if his total income is below
the basic exemption limit before claiming exemption under section 10,
then such assessee should file the return of income. Also, if the Capital
Gains before claiming exemptions under sections 54, 54B, 54D, 54EC,
54F, 54G, 54GA or 54GB, exceeds the basic exemption limit, shall file
the returns mandatorily before the due date.
Due date for filing of Return of Income – Sec 139(1)
• Any person (other than a company or a firm) who is not required to
furnish the return of income under any provisions of section 139(1), shall
be obligated to file the return of income and who during the previous
year:
• Has deposited a total amount exceeding Rs. 1 Crore in one or more current
account(s) in a bank or co-operative bank; or
• Has incurred expenditure of an total amount exceeding Rs. 2 Lakhs for himself or
any other person for travel to a foreign country; or
• Has incurred expenditure of an total amount exceeding Rs. 1 Lakh towards
consumption of electricity;
• Fulfills such other conditions as may be prescribed.
Due date for filing of Return of Income – Sec 139(1)
• Due Date of Filing of Return of Income is as below:
• Assessee including partners or spouse of partner of firm (governed by Portuguese Civil
Code ie., Sec 5A of the Act) who is required to furnish Transfer Pricing Report u/s 92E,
the due date is 30th November of Relevant Assessment Year.
• Company (other than ‘a’ above), other Person whose accounts required to be audited
u/s 44AB and working partner or spouse of partner of firm (governed by Portuguese Civil
Code ie., Sec 5A of the Act) whose books are required to be audited, the due date is 31st
October of Relevant Assessment Year. However, the audit report has to be furnished by
30th September of relevant assessment year.
• For other assesses, the due date of filing of return of Income is 31 st July of Relevant
Assessment Year.
• In case of Resident & Ordinarily Resident, who is not required to furnish a
return, shall be mandated to file the return if he has: (i) any asset (including
financial interest in any entity) located outside India; or (ii) signing authority in
any account located outside India. Such person shall furnish, on or before the
due date, a return in respect of his income or loss
Loss Returns – Sec 139(3)
• Any person who has sustained loss in any previous year and claims
that such loss should be carried forward under Section 72 (Business
Loss), Section 73 (Speculation loss), Section 73A (Loss from Specified
Business), Section 74 (Loss under capital gains) or Section 74A (loss
from activity of owning and maintaining race horses), shall furnish a
return of loss within the time allowed u/s. 139(1). Any return so filed
shall be treated as a return filed u/s 139(1) and all the provisions of the
Act shall apply accordingly. Section 80 states that unless loss return is
filed within the due date stipulated u/s. 139(3) and loss is determined in
pursuance of that return, such loss cannot be carried forward.
Belated Returns – Sec 139(4)
• Any person who has not furnished a return: (a) On or before the
time allowed u/s. 139(1); or (b) Within the time allowed by the
notice issued u/s. 142(1), can file a belated return.
• A time limit up to 31st December of relevant assessment year or
before the completion of assessment, whichever is earlier for
filing such belated return.
Revised Return – Sec 139(5)
• When assessee has furnished a return u/s. 139(1) or return filed
u/s 139(4) or in pursuance of any notice issued u/s 142(1), can
file a revised return if assessee discovers any omission or any
wrong statement in the return filed earlier.
• The time limit for filing revise return is, within 31st December of
relevant assessment year or before completion of assessment,
whichever is earlier.
• A Revised return can be revised any number of times within the
time limit allowed u/s 139(5).
Defective Returns – Sec 139(9)
• A Return can be regarded as defective by the Assessing Officer under the
following situations:
• Annexure, statements and columns in the Return have not been filled.
• A Return of Income is not accompanied with Statement of Computation or Proof of TDS/
TCS not attached or proof of advanced tax paid not attached etc.,
• Tax Audit report not attached.
• The Assessing Officer may intimate such defects to the assessee. Assessee
shall rectify such defects within 15 days of service of notice of defect or within
such extended time limit allowed by the assessing officer.
• If assessee fails to rectify the defects pointed out by assessing officer within
the time prescribed, the assessing officer shall treat such defective returns as
invalid returns and proceed as if the assessee has failed to file the return
Verification of Returns – Sec 140
SL Assessee Verified by
No
1. Individual Himself
When absent from India; mentally incapacitated; for any other reason he is His guardian or any other person competent to act on his behalf duly
not able to sign. authorized by him.
2. HUF Karta
Where Karta is absent from India or is mentally incapacitated. Any other adult member of the family.
3. Company Managing Director
Where M.D is unable to sign or where there is no M.D. Any other director.
When company is not resident in India Any person who holds a valid Power of Attorney from the company.
2. Failure to comply with all the terms of a notice issued requiring the assessee to – 142(1) Need not be given (since
a) file a return or produce accounts etc. or furnish information called for notice was already issued)
142(2A)
b) get the accounts audited and furnish the audit report To be given
c) ensure his attendance or produce evidence supporting the return filed 143(2) To be given
3. Where the income is not computed in accordance with the notified ‘Income
Computation and Disclosure Standards’ 145(3) To be given
Income escaping assessment – Sec 147
• If the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year he
may assess or reassess such income or re-compute the loss or
depreciation allowance or any other allowance for that assessment year.
• Once the assessment has been re-opened, any other income which has
escaped assessment and which comes to the knowledge of the
Assessing Officer subsequently in the course of the proceeding u/s 147,
can also be included in the assessment.
• The Assessing Officer may assess or reassess such income which is
chargeable to tax and escaped assessment other than the income
involving matters which are subject matter of any appeal or revision
UNIT
Names of Sub-Units
Section 192 – TDS on Salary, Section 192A – TDS on EPS, Section 193 – TDS on Interest on Securities,
Section 194B/194BB – TDS on Winnings, Section 194C – TDS on Contract, Section 194D – TDS on
Insurance Commission, Section 194DA – LIP Maturity, Section 194E – NR Sports Person Entertainer,
Section 194H – TDS on Commission, Section 194I – TDS on Rent, Section 194IA – TDS on Immovable
Property, Section 200A – Processing of TDS Returns, Section 206C – TCS
Overview
This unit explain the Section 192 – TDS on Salary and Section 192A – TDS on EPS. It elaborates the
Section 193 – TDS on Interest on Securities, Section 194B/194BB – TDS on Winnings and Section 194C
– TDS on Contract. Further, it describes in detail about Section 194D – TDS on Insurance Commission,
Section 194DA – LIP Maturity and Section 194E – NR Sports Person Entertainer. Towards the end, it
examines the Section 194H – TDS on Commission, Section 194I – TDS on Rent, Section 194IA – TDS on
Immovable Property, Section 200A – Processing of TDS Returns and Section 206C – TCS.
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Learning Objectives
Learning Outcomes
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12.1 INTRODUCTION
TDS stands for Tax Deducted at Source. It refers to a specified amount that is deducted by the employer
from the monthly salary at the source based on the assumption that the employee has a taxable income.
TDS can be deducted by banks or any other financial institutions on interest earned periodically. TDS
is a part of income tax and a source of income for the government which assists it in collecting taxes
swiftly and efficiently and using it for the country’s development. Let us understand the difference
between TDS and income tax.
Income tax is paid on the yearly income with tax being calculated for that particular financial year. TDS
is subtracted at the time of salary payment (or on interest on investments) either monthly or quarterly.
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Tax payer directly pays the income tax after determining the annual liability owed. TDS is indirect as
the tax liability is determined and TDS payment is done by a third party like an employer or a financial
institution—to the government.
Tax deducted at source (TDS) on salary is dealt with in Section 192 of the Income Tax Act of 1961. TDS will
be deducted from your pay by your employer. Your employer’s salary is classified as ‘Income’ under the
heading ‘Salary,’ and your employer is responsible for deducting TDS on your estimated income for the
relevant financial year at the normal income tax rates applicable to you. TDS deducted under Section
192 is reflected in Form 16, which is issued to the employee by the employer.
All of these employers must deduct TDS on a monthly basis and deposit it with the government within
a certain time frames. The deduction of tax at source requires an employer-employee relationship,
according to section 192 of the Income Tax Act. The status of the employer, such as HUF, firm or
corporation, has no bearing on the deduction of tax at the source under this section. Furthermore, when
calculating and deducting TDS, the number of employees employed by the employer has no bearing.
TDS is deducted at the time of actual payment of salary, not during the accrual of salary, as to required
by Section 192. This means that if your employer pays your salary in advance or arrears, the tax will be
deducted. If your estimated salary is less than the basic exemption limit, there will be no tax due and no
TDS will be deducted.
The table 1 below shows the basic exemption limit for not having to deduct TDS based on age:
Table 1: Basic Exemption Limit for not Having to Deduct Tds Based on Age:
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First, the employer calculates the salary of the employee for the current fiscal year. Basic pay, dearness
allowance, perquisites granted by the employer, other allowances granted by the employer such as
HRA, LTA, meal coupons, etc., EPF contributions, bonus, commissions, gratuity, salary from previous
employer, if any and so on should all be included.
The employer then calculates exemptions under Section 10 of the Income Tax Act in the next step.
Exemptions may apply to benefits such as HRA, travel expenses, uniform expenses and children’s
education allowances, among others. Reduce the amount of professional tax paid, the entertainment
allowance and the ` 50,000 standard deductions.
The employer subtracts the exemption from the gross monthly income, leaving the net amount as
taxable salary income.
If the employee has provided information on other sources of income, such as rental income from a home
or bank deposits, such amounts should be added to the net taxable salary. Furthermore, interest paid
on housing loans is deducted from house property income; however, if there is no income from house
property, a negative figure will appear under the heading ‘income from house property.’ The calculated
figure will be the employee’s gross total income after adding or subtracting the said amounts.
The employer now reduces the investments for the year that fall under Chapter VI-A of the Income Tax
Act, as reported by the employees in their investment declaration. PPF, employee’s provident fund, ELSS
mutual funds, NSC and Sukanya Samridhi account amounts may be included in the declaration. Income
expenditures such as home loan repayment, life insurance premiums, NSC, Sukanya Samridhi account
and so on may also be included. Similarly, the employer permits deductions under other sections such
as Sections 80D, 80G and so on.
Note:
If an employee wishes to switch to a new tax regime, he or she must notify the employer each year in
order to exercise the option. In addition, the employer may deduct his or her own income tax under
the new tax regime. Furthermore, if an employee has declared to calculate income tax under the new
tax regime, the Income Tax Act does not allow the 70 specified exemptions and deductions that were
available under the old tax regime. As a result, the employer will calculate the net taxable income
according to the employee’s chosen income tax regime.
A TDS rate is not specified in Section 192. TDS will be deducted based on the taxpayer’s income tax slab
and rates for the fiscal year in which the salary is paid.
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In most cases, the employer calculates the tax at the start of the fiscal year. TDS is calculated by dividing
the employee’s estimated tax liability for the fiscal year by the number of months he worked for the
particular employer.
However, if the employee does not have a PAN, TDS will be deducted at a rate of 20% plus 4% cess.
The employer adjusts any excess or deficit resulting from a previous deduction by increasing or
decreasing the number of subsequent deductions during the same fiscal year. If an advance tax payment
was made by the employee, the TDS calculation can be adjusted accordingly. The employee must inform
the employer of the situation.
If you work for two or more employers at the same time, you can provide information about your salary
and TDS to any of them using Form 12B. Once your employer has all of your information, he or she will
be responsible for calculating your gross salary and deducting TDS.
After that, if you resign and go to work for a different company, you can provide your previous employer
with information from Form 12B. This employer will take into account your previous salary and deduct
TDS for the remainder of the financial year.
If you choose not to provide information about other sources of income, each employer will deduct TDS
only from the salary he pays you.
TDS Declarations
You must receive Form 16 from your employer, which contains information about your salary, including
the amount paid and taxes deducted. This can be supplemented with Form 12BA, which details perquisites
and profits in lieu of salary.
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In the Employees’ Provident Fund Scheme, 1952, trustees or anyone else authorised to make payments
to employees under the scheme, must deduct tax.
b. When Should Section 192A TDS Be Withheld?
At payment’s incidence.
c. Is this amount eligible for a tax deduction?
In a condition when a person has not worked for 5 years in continuation, tax is deducted from the
accumulated lump sum payment (except the cases of termination because of ill health, contraction
or discontinuance of business, cessation of employment etc.) RPF is exempt in the hands of the
employee if he resigns before the end of the 5-year period but joins another employer with a
recognised provident fund and the money in the current employer’s provident fund is transferred to
the new employer.
d. A tax deduction will be made on the portion of the lump sum payment that is includible in the
employee’s total income.
The interest of the employer’s It is included in the taxable salary. TDS is not applicable.
contribution
The interest of the employee’s It’s taxable under “Income from Other TDS will be deducted.
contribution Sources” category
The tax is not deductible when the taxable component of a lump sum payment is less than ` 50,000.
Tax is deducted at a rate of 10% of the taxable portion of the lump sum payment. If an employee fails to
provide a PAN, tax will be deducted at the highest marginal rate.
No tax deduction will be made if the income recipient submits a written declaration in duplicate in the
prescribed form [Form No. 15G/15H].
In addition, since there is no employer-employee relationship, any interest paid on the accumulated
balance that is not withdrawn after retirement must be deducted as per section 194A.
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Section 193 of the Income Tax Act requires anyone paying interest on securities to a resident to deduct
TDS. As a result, section 193 does not apply to the payment of securities interest to a non-resident.
TDS is deducted at a rate of 10% by the deductor. In the event that the payee fails to provide his Permanent
Account Number (PAN), the Deductor will be liable to deduct TDS at the maximum marginal rate. The
Deductor must deduct TDS on interest on securities at the earlier of the following events:
When the income is credited to the payee’s account; or when the income is credited to the payee’s
account.
When making a payment by cash, check, draft\ or any other method.
According to section 193 of the Income Tax Act, the Deductor who deducts TDS on interest on securities
must deposit the deducted TDS within 7 days of the next month in which the TDS is deducted. Furthermore,
the TDS for the month of March must be deposited by April 30th.
TDS certificate issuance – A deductor who is required to deduct TDS under section 193 of the Income Tax
Act must issue a TDS certificate in Form 16A within the following time limit:
1. April - June – August 15th
2. July – September –November 15th
3. October - December – February 15th
4. January – March –June 15th
The Deductor who is required to deduct tax under section 193 of the Income Tax Act must file a quarterly
return in Form 26Q by the deadlines listed below:
1. April to June – 31st July
2. July to September – 31st October
3. October to December – 31st January
4. January to March – 31st May
Except in the following two cases, there is no TDS exemption limit specified under section 193:
In the case of debentures issued by listed companies, the limit is ` 5000, provided the amount is
given by an account payee cheque.
The limit for saving (taxable) bonds with an interest rate of 8% is ` 10,000.
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Anyone responsible for paying another person any income from horse race winnings in excess of
` 10,000 (` 5,000 until 31.05.2016) must deduct income tax at the current rates. Any person here refers to
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a bookmaker or a person to whom the government has issued a licence under any current law for horse
racing on any race course or for arranging wagering or betting in any race course.
Section 194C states that any person responsible for paying a sum to a resident contractor for the
contractor’s performance of any work (including the supply of labour) in accordance with a contract
between the contractor and the following:
The Government of India or any Government of State
Any local Government
Central, State or Provisional Act established Any corporation.
A company established under the Companies Act.
Society established under the Co-operative societies act 1912
An authority set up under Indian laws which has the objective of looking after citizens’ housing
needs and development and promotion of housing sector
A company set up under Society Registration Act, 1980 or equivalent law in India’s part
A trust fund established under Indian laws
Any university established under Indian laws or the being granted the same recognition
Partnership or proprietorship firm or a LLP.
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When the provisions of Income Tax Act Section 194C are invoked, the Deductor is required to deduct.
However, if the PAN is not provided, the Deductor is obligated to deduct TDS at the maximum marginal
rate of 20%.
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Table 3: Section 194D’s provisions regarding Tax Deducted at Source (TDS) from the Insurance
Commission [Section 194D]:
Taxpayer? Insurance commission’s payer
Recipient? Resident of India
Scope of payments Insurance Commission
Incidence of tax deduction? Earlier of payment being made or credit to payee.
Exemption limit Upto 15,000 (considered for whole year)
TDS Rate Payee being a person(resident) not being a company 5%
Company incorporated under Indian Laws 10%
Any TDS waiver? AO has to be submitted with Form 13 to obtain lower or no deduction certificate..
2. Deductor?
Payer of below listed sums to a resident:
Reward or remuneration, whether in the form of a commission or otherwise— for the purpose of
soliciting or obtaining insurance business or for the continuation, renewal or revival of insurance
policies
3. Is there a tax deduction?
When commission income is credited to the payee’s account or the payment of such sums in cash,
by check or draft or by any other means, whichever comes first
4. Rate of TDS under Section 194D for the Financial Year 2021-22
Note:
The above rates will not be subject to a surcharge, education cess or SHEC. As a result, the basic rate of tax will
be deducted at the point of sale.
TDS will be applied at a rate of 20% in all cases if the deductee does not provide a PAN.
Section 194D applies to all payments made to a resident, regardless of whether they are made by an
individual, a corporation or another type of entity. Under these provisions, the deduction of tax at source
is not limited to insurance commissions paid only to individuals.
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The deduction of tax at source is not limited to insurance commissions paid only to individuals under
these provisions.
An individual who receives a commission can apply to the Assessing Officer for a certificate authorising
the payer not to deduct any tax or to deduct tax at a lower rate by submitting Form 13 to the Assessing
Officer. According to Section 206AA(4), no certificate under Section 197 for non-deduction or a lower
rate of deduction will be issued unless the application also includes the applicant’s PAN
TDS certificates will be sent to the deductee/recipient, summarising the insurance commission payments
and the TDS owed. The following are the deadlines for receiving TDS certificates:
The deadline for collecting and depositing tax deducted from insurance agent commissions is the 7th of
the following month.
Table 4: Shows Time Limit for Issuing Certificate for Different Periods
The due date for TDS returns for Q1 and Q2 of FY 2020-21 was extended to 31st March 2021. Accordingly,
the due date to issue TDS certificates was 15th April 2021.
194DA Section
Unless the amount is included in total income under clause (10D) of Section 10, any payment made to
a resident Indian upon the maturity of a life insurance policy, including the bonus is subject to a tax
deduction at source.
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Section 194DA allows anyone who makes a payment to a resident Indian upon the maturity of a life
insurance policy to deduct the applicable taxes at source.
TDS Rate
On the ‘income portion’ of the payment, the tax must be deducted at a rate of 5%. From May 14, 2020
to March 31, 2021) (3.75 percent). TDS will only be applied to the amount that exceeds the total of the
insured’s premiums.
There is no need to deduct taxes if the total amount owed is less than ` 1 lakh.
consider Mr. X who received ` 7 lakh as a maturity payment from his life insurance policy. Mr. X has paid
a total of ` 2 lakh in premiums over the course of the policy’s ten-year term.
The maturity amount in this case exceeds ` 1 lakh. As a result, the maturity proceeds will be paid after
a 5% TDS deduction.
The TDS, in this case, would be ` 25,000. (5 percent on ` 5 lakh). Mr. V will receive ` 6,75,000 after
deductions.
(An amendment to the TDS on insurance policy proceeds is proposed in the 2019 Union Budget.)
If the deductee fails to submit the PAN number, the TDS rate will increase to 20%.
TDS certificates will be sent to the deductee/recipient, summarising the insurance commission payments
and the TDS owed.
Any sum received under the LIC policy, including the amount of the bonus, is exempted under section
10 (10D).
Unless the above-mentioned conditions are met, there is no limit to the amount of money that can be
claimed as an exemption under section 10(10D).
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Note:
A tax deduction at a lower rate than the one listed above is not allowed under Section 194E.
The TDS rate will include any applicable surcharge + Education Cess + SHEC in the case of a non-resident.
The DTAA has no bearing on the obligation to deduct under section 194E.
Nowhere in Section 194E does it state that income in the hands of the recipient must be taxed in India. This is
a requirement under Section 195, not Section 194E.
Sections 115BBA and 194E do not apply to payments to umpires and referees. Section 194J covers payments
to resident umpires, while payments to non-resident umpires are subject to tax deduction under section 195
if they are taxable in India in the hands of non-resident umpires.
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194H-TDS on Commission
Any person who is responsible for paying a resident, commission or brokerage is required to deduct TDS
under this section.
If an insurance commission is payable under section 194D, that commission is not covered by this section.
Individuals and HUF who are subject to section 44AB must also deduct TDS. Individuals and HUFs with
a business turnover of more than ` 10000000 or gross receipts from professions exceeding ` 5000000
will be required to deduct TDS starting in FY 2020-21.
TDS is deductible under section 195 and not under this section if the commission or brokerage is paid to
a non-resident.
Deduction Period
TDS must be deducted at the time of payment or credited to the payee’s account, whichever comes first.
If the amount is credited to a suspense account or any other account, it is considered credited to the
account of the payee and TDS must be deducted at the time of credit.
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Clearing fees.
Debit or credit card transactions between the merchant establishment and the acquirer bank are
subject to a commission.
What Does Commission/Brokerage Mean?
Any payment received or receivable (not being commission or brokerage under section 194D) by a
person acting on behalf of another person is a considered commission or brokerage.
for services provided (that aren’t professional) or
for any services rendered in connection with the purchase or sale of goods, or
any transaction involving any asset, valuable article or thing that is not a security.
As a result, property agents who work as agents in the purchase, sale or rental of real estate are also
covered by this section.
Professional services are not included in the services received, according to the section. Legal, accounting,
technical and interior design services are among the professional services included in its scope. Any
payment whether direct or indirect, receivable or received by a person acting on behalf of another
person, is known as commission or brokerage.
If service tax is levied, TDS must be deducted only from the amount payable as brokerage or commission
and is not deductible on the amount of service tax. Circular No. 1/2014. Although no separate notification
for GST has been issued, the concept remains the same, so no TDS will be deducted on GST amounts.
TDS on rent is covered by section 194I of the income tax code. It requires TDS deduction from persons
(other than individuals/HUFs) who make rental payments to resident Indians in excess of a certain
amount, i.e., ` 2,40,000 per year. House rent, machine rent, building rent, office rent, furniture rent and
other types of rent are all included in this section.
Any person (who is not an Individual/HUF) who pays rent to another resident is required to deduct TDS
under section 194I. However, if the Individual/HUF is subject to audit under Section 44AB (a) and (b), he
or she must deduct TDS under this section.
Any payment made under a lease, sublease, tenancy or any agreement for the use of the following is
referred to as rent:
Land
Building (including factory building)
Machinery
Plant
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Equipment
Furniture
Fittings
When the total amount of rent paid to a payee (i.e., receiver) in a financial year does not exceed 180000.
For the 2019-20 fiscal year, this limit has been raised to 240000. Where the rent is paid to a business trust
(which owns the asset) that is a real estate investment trust as defined by section 10 of the Income Tax
Act (23FCA).
The amount paid as a warehousing charge is subject to TDS under section 194I.
If the amount given as a security deposit to the owner of an asset is refundable, it is not subject to TDS
under section 194I. When that ‘deposit’ is applied against rent, however, it is subject to TDS under section
194I.
Under this section, any payment made for the rental of a business centre is subject to TDS.
When a hotel room is booked on a regular basis (i.e., under an agreement), the payment is subject to
TDS under this section.
However, no TDS will be levied if the payment is made by an employee or individual (who represents the
company) and later reimbursed. TDS will be levied if such an individual is subject to audit under section
44AB.
Section 194IA
Various clauses related to Tax Deducted at Source (TDS) payments are found in Section 194 of the
Income Tax Act. TDS on consideration on transfer of immovable properties by a resident transferor was
introduced by the Finance Act of 2013, which added a new section 194-IA. Section 194-IA of the Income-
Tax Act requires a buyer to deduct and pay 1% of the transaction cost as TDS if the property is worth
more than ` 50 lakhs.
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TDS must be deducted by any person (Buyer or Transferee) who enters into an agreement with a resident
for the transfer of immovable property (land, building or both, but not agricultural land).
When and how much will the TDS be applied to the property sale?
The tax deduction is calculated at a rate of 1%. In addition, the time for deducting taxes is earlier.
The credit of income to the payee’s (receiver’s) account or
Payment in full (in cash, cheque, draft or other modes)
That is to say, in these cases, the seller is only entitled to the net amount.
Things to Keep in Mind When Filing a TDS Claim Under Section 194IA
Buyers of properties worth more than ` 50 lakhs are required to deduct and pay TDS to the government.
The responsibility for deducting and submitting TDS falls on the buyers, not the sellers. The buyer will be
held liable to the authorities in the event of any misappropriation. Form 26QB must be completed by
buyers to credit the TDS. If there are multiple buyers or sellers in the transaction, each participant
must fill out a separate form.
Mr. Y’s TDS deduction of ` 50,000 must be deposited with the government in challan Form 26QB within
7 days of the following month (TDS on Property).
Where a deductor has deducted any sum and has made a statement of TDS or a correction statement
under section 200, such statement shall be processed as follows.
a. After making the following adjustments, the amounts deductible under this Chapter are computed:
i. any arithmetic error in the statement; or (ii) any grammatical error in the statement
ii. a claim that is false, as evidenced by any information in the statement;
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b. any interest is calculated on the basis of the deductible sums as computed in the statement;
c. the fee, if any, is calculated in accordance with section 234E;
d. after adjusting the amount computed under clauses (b) and (c) against any amount paid under
section 200, section 201 or section 234E and any amount paid otherwise by way of tax, interest or fee,
the sum payable by or the amount of refund due to, the deductor shall be determined;
e. an intimation shall be prepared or generated and sent to the deductor mentioning the sum
determined to be payable by or the amount of refund due to, him under
f. the deductor gets the amount of refund due to him for the determination made under clause (d):
Provided, however, that no notification under this section shall be sent after one year has passed since
the end of the financial year in which the statement was filed.
Explanation: For the purposes of this section, “an incorrect claim apparent from any information in the
statement” means a claim made on the basis of a statement entry.
i. of an item that contradicts another entry of the same or another item in the same statement;
ii. in the case of a rate of tax deducted at the source that does not comply with the provisions of this
Act.
(2) For the purpose of processing statements under sub-section (1), the Board may devise a scheme for
the centralised processing of tax deducted at source statements to determine the tax payable by or the
refund due to, the deductor as quickly as possible.
206C TCS
The gains and profits related to alcohol, forest produce, scrap and other items are addressed in Section
206C of the Income Tax Act of 1961. The percentage of tax to be collected by the seller on specified goods
is set forth in Section 206C.
Unlike TDS, the seller must present the tax collected to the government for income tax purposes. Taxes
must be collected under Section 206C when the buyer pays or when the funds are debited from the
buyer’s account, whichever comes first.
Sellers are required to collect TCS from buyers under Section 206C TCS rules. This section now has an
exception. If a resident of India purchases goods for the purpose of manufacturing or producing other
items rather than trading, the goods are exempt from taxation under section 206C of the Income Tax
Act.
After closing the sale, buyers must file a declaration and provide a copy to the commissioner of income
tax within seven days of the month’s end.
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Table 6: Shows the Specifics of the Goods That are Covered by Section 206C TCS:
Section 44AB makes tax audits mandatory to prevent tax evasion. This also applies to the Section 206C
limit. Keep the following in mind when it comes to the Section 206C limit:
Sellers must deposit tax collected with the government under Section 206C. The seller could be an
individual or a HUF with a previous financial year’s turnover of more than ` 1 Crore or ` 50 Lakhs.
If a person’s gross receipts or turnover exceed ` 50 lakhs in a year, he or she must have his books
audited, according to section 44AB. In addition, any business owner with gross receipts or turnover
of more than ` 1 Crore during the year must have his books audited under section 44AB. This limit
has now been raised to ` 5 crores.
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Auditors use Form 3CB for taxpayers who operate a business or profession but are not required to
have their books audited under any law other than income tax. This form will be accompanied by a
declaration of form 3CD, just like form 3CA.
Form 3CD: This form contains a detailed report on the audit process, as well as the taxpayer who
will be audited.
Non-residents and foreign companies should fill out Form 3CE. Section 44AB of the Income Tax Act
applies to non-residents who receive royalties or technical fees from the Indian government or a
company in India.
Section 206C Amendments
Section 206C of the Income Tax Act has been changed. The following is a list of the changes:
TCS was given new provisions under section 206C(1H) of the Income Tax Act by Finance Act 2020.
The following are some of the key points of this section 206c amendment:
Sellers are only required to deduct TCS at 1% if the sales value of goods exceeds ` 50 lakhs during
a financial year, according to the new Section 206C provisions.
This is a one-time payment of ` 50 lakhs per buyer per fiscal year.
Only sellers with a gross turnover of more than ` 10 crore in the year prior to the year in which
sales were made are affected by the Section 206C amendment.
This does not include the export and import of goods and goods specified in Section 206C, Section
206C(1F) and Section 206C(1G).
If the buyer is a Central government, State government, Local authority, High Commission,
Embassy, Consulate or any representative thereof, TCS will not be deducted.
Finally, if the buyer has deducted TDS on the goods under any other legal provision, the seller is
not required to deduct TCS.
The threshold limit for income tax audit has been raised from ` 10000000 to ` 50000000 for
anyone running a business. This will be allowed as long as the cash receipts and cash payments
do not exceed 5% of the total receipts or payments in the applicable year.
In the budget, Section 206CCA was introduced, which covers increased tax collection penalties
for non-filing of IT` The TCS will be higher of the following, according to this section:
Twice the rate set forth in the relevant Act provision or At a 5% rate
TDS stands for Tax Deducted at Source. It refers to a specified amount that is deducted by the
employer from the monthly salary at the source based on the assumption that the employee has a
taxable income.
Income tax is paid on the yearly income with tax being calculated for that particular financial year.
TDS is subtracted at the time of salary payment (or on interest on investments) either monthly or
quarterly.
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Tax deducted at source (TDS) on salary is dealt with in Section 192 of the Income Tax Act of 1961.
TDS deducted under Section 192 is reflected in Form 16, which is issued to the employee by the
employer.
TDS is deducted at the time of actual payment of salary, not during the accrual of salary, as required
by Section 192. This means that if your employer pays your salary in advance or arrears, the tax will
be deducted.
A TDS rate is not specified in Section 192. TDS will be deducted based on the taxpayer’s income tax
slab and rates for the fiscal year in which the salary is paid.
Section 192A is concerned with the TDS on the withdrawals of the PF i.e., Provident Fund.
TDS rate as defined by Section 192A, Tax is deducted at a rate of 10% of the taxable portion of
the lump sum payment. If an employee fails to provide a PAN, tax will be deducted at the highest
marginal rate.
According to section 193 of the Income Tax Act, the Deductor who deducts TDS on interest on
securities must deposit the deducted TDS within 7 days of the next month in which the TDS is
deducted. Furthermore, the TDS for the month of March must be deposited by April 30th.
The Section 194B and Section 194BB are concerned with TDS on winnings from lottery or crossword
puzzles and TDS on winning from horse races, respectively.
Section 194DA allows anyone who makes a payment to a resident Indian upon the maturity of a life
insurance policy to deduct the applicable taxes at the source.
Any payment received or receivable (not being commission or brokerage under section 194D) by a
person acting on behalf of another person is considered commission or brokerage.
12.16 GLOSSARY
Tax Deducted at Source (TDS): It refers to a specified amount which is deducted by the employer
from the monthly salary at the source based on the assumption that the employee has a taxable
income
TAN: It refers to the Tax Deduction and Collection Account Number which is a unique 10 digits alpha
numeric number allotted to deductor/collector of TDS
Deductor: It refers to a person who is required to deduct tax under section 193 of the Income Tax Act
Circumstances requiring the tax to be deducted at source so the compliance obligation can be fulfilled
are:
1. Mr. Z estimated salary income for the financial year 2020 is ` 4 lacs. Compute the tax that has to be
deducted by his employer from his salary payment.
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Note :
For the sake of simplicity it is assumed that Z doesn’t makes any investment in the f.y
2. ABC private Ltd. has executed a computer networking assignment for another MNC. It is being paid
a sum of ` 5 lacs being half of the amount contracted for. Compute the TDS applicable on it.
2% TDS is required to be deducted on ` 5 lacs i.e., ` 10000 and this amount have to be deposited by 7th
of next month.
Questions
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https://www.incometaxindia.gov.in/booklets%20%20pamphlets/tds-on-salaries.pdf
24
Advance Tax and TDS
Unit – 12
CA. Prashant Bharadwaj
Tax Deduction at Source (TDS)
Tax deduction at source is the responsibility of the person who
meets the expenditure (payer), which becomes the taxable
income in the hands of the recipient (Payee). Tax deduction at
source has to be done either on booking of expenses or at the
time of payment, whichever is earlier. Such tax which is deducted
at source must be remitted to the account of Central Government
within the due date prescribed under section 200.
TDS Provisions
Section Payer Type of payment/income Type of payee Rate of tax to be
deducted
192 Any person Salary Individual Employee As per the slab rates for
individuals
192A Trustees of Recognised Provident Fund or any Premature withdrawal from Recognised Individual Employee 10% (No PAN – Maximum
authorised person to make payment of Provident Fund in excess of Rs. 50,000 marginal rate)
accumulated balance from Recognised
Provident Fund.
193 Any person Interest on securities more than Rs. 5,000; Any person resident 10%
(Rs. 10,000 for 8% savings (taxable) Bonds, of India
2003 and 7.75% Savings (Taxable) Bonds,
2018)
194 The Principal officer of a Domestic company Dividend more than Rs. 5,000 Resident share 10%
holder
194A * Any person other than individual or Hindu Any interest other than interest on securities Any resident 10%
Undivided Family more than Rs. 5,000.
(Rs. 40,000 in case of banking companies,
co-operative society, Post office. Amount
extended to Rs. 50,000 for Senior Citizens)
194B Any person Winning from lottery or crossword puzzle or Any person 30%
card game and other game of any sort
exceeding Rs. 10,000
194BB Book maker or person holding a license for Winnings from horse race exceeding Rs. Any person 30%
horse racing, wagering betting in any race Rs. 10,000
course
TDS Provisions
Sectio Payer Type of payment/income Type of payee Rate of tax to be deducted
n
194C * Central or state Govt. Local authority, capital/state or Any payment in pursuance of any Any resident contractor for In the case of individual, Hindu
provincial corporation, company co-operative society, contract for consideration of more than carrying out any work Undivided Family payees - 1%
housing board, trust or university, firm, any foreign Rs. 30,000 (or) aggregate of payments including supply of labour For other payees – 2%
government or a foreign enterprise or any association during the year exceeds Rs. 100,000
or body established outside India.
Note: TDS u/s 194C is not applicable to individual or HUF of personal contracts.
194D Any person Insurance commission exceeding Rs. Any resident person (e.g. 5% (In case of domestic
Rs. 15,000 insurance agents) company 10%)
194DA Any person Life Insurance policy, including bonus Any resident 5% on net income
exceeding Rs. 100,000
194E Any person Income for participation in any game or Any non-resident sportsman 20% (in addition, applicable
sport in India; income by way of or entertainer who is not a surcharge and Health and
remuneration for articles on sports etc. citizen of India Education Cess)
194 E Any person Guaranteed sum in relation to any game Any non-resident association 20% (in addition, applicable
or sort played in India. or institution. surcharge and Health and
Education Cess)
TDS Provisions
Sec. Payer Type of payment/income Type of payee Rate of tax to be deducted
194 H * Any person other than Commission or brokerage exceeding Rs. 15,000 Any resident 5%
Individual or Hindu
Undivided Family
194I * Any person other than Rent exceeding Rs. 240,000 per annum. Any resident a) Rent for plant, machinery or
Individual or Hindu equipment 2%.
Undivided Family b) Rent for land, building or both,
furniture or fittings 10%
194 – IA Any person Consideration for the transfer of immovable property Any resident 1%
(other than agriculture land) Rs. 50 lakhs or more
(other than compulsory acquisition) (from 01/09/2019,
consideration shall include all charges of nature of club
membership fee, parking fee, electricity or water facility
fee, maintenance fee etc)
194 J * Any person Fees for professional or technical services, royalty, Any resident 2% in case payee is engaged in
non-compete fee etc. Exceeding Rs. 30,000 each in a business of operation of call centre or
year. in case of royalty in the nature of sale,
Company Any remuneration, fees or commission to a director. distribution or exhibition of
cinematographic films. In other cases
TDS rate is 10%.
Other points on TDS
• * - An individual or Hindu Undivided Family shall deduct tax at
source in the current year, only if they are covered under tax
audit under section 44AB in the immediate preceding year.
• Note: As per section 206AA, the payee shall furnish his PAN to
the payer. In case the payee does not furnish his PAN to the
payer, then the payer shall deduct tax at source @ 20% or the
rate prescribed in the respective section, whichever is higher.
Tax Collection at Source (TCS)
• It is income tax collected by the seller from the purchaser on
sale of certain items like alcoholic liquor for human
consumption, scrap, bullion or jewellery etc. Tax shall be
collected at the time of debiting the amount to the account of
the buyer or at the time of receipt of amount, whichever is
earlier.
• For Example, if Mr. X buys scrap from Mr. Y for Rs. 1,000, Mr. X
would be liable to pay Rs. 1,010 to Mr. Y as TCS rate is 1% on
scrap. Mr. Y has to remit the Tax Collected amount of Rs. 10 to
the Government within the due date prescribed under section
200.
Due date to remit TDS / TCS amount (Section 200)
• For TDS / TCS done till the month of Feb – Due date to remit is
by 7th of Next month.
• For TDS / TCS done for the month of Mar – Due date to remit is
by 30th April.
UNIT
Names of Sub-Units
When Mergers are Not Regarded as Amalgamation, When Merger are Regarded as Amalgamation,
Taxation of Shareholders, Taxation of Amalgamating Company, Taxation of Amalgamated Company,
Section 72A(1), Section 72AA, What is Demerger?, Section 49(2C), Taxation of Resulting Company,
Apportionment of Depreciation, Taxation of Demerged Company
Overview
In this unit, mergers are discussed as either amalgamations or not amalgamations. Further the unit
explains the taxation of shareholders, the taxation of an amalgamating company and the taxation of
an amalgamated company. The unit also covers the Sections 72 A(1) and 72AA. This unit elaborates the
meaning of demerger and Section 49(2c). Towards the end, you will study the taxation of a resulting
company, apportionment of depreciation and the taxation of a demerged company.
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Learning Objectives
Learning Outcomes
https://carajput.com/learn/merger-and-amalgamation-under-companies-act-2013-by-national-
company-law-tribunal-nclt-.html
https://www.wirc-icai.org/images/material/WIRC -Presentation-on-Introduction-to-
Amalgamtion.pdf
13.1 INTRODUCTION
Merger is the consolidation of two or more than two entities. When a merger is done, the assets and
liabilities are transferred from one entity to other.
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Mergers are of many types namely such as horizontal, vertical and conglomerate.
Amalgamation refers to the joining of companies for forming a new company. Amalgamation can be
done in two ways:
When two or more companies join to form a new company
When there is an absorption or blending of one by the other
Absorption is when one powerful company takes control over the weaker company. Amalgamation is
done between 2 or more entities engaged in the same line of activity or have some synergy in their
operations. It can also be initiated when the entities wants to join hands for diversification or expansion
of services.
An amalgamation is when two or more companies merge to form a new entity. Because neither of the
companies involved survives as a legal entity, amalgamation differs from a merger. Instead, a completely
new entity is created to hold both companies’ assets and liabilities. Amalgamation is a common strategy
used by businesses for a variety of reasons, including:
Gaining a competitive advantage
Increasing company efficiency by combining them into one
Business increase
Creating Synergy
Large-scale production economies
The asset and liability of the companies involved in the process are obviously impacted by the merger of
two or more companies. As with assets and liabilities, shareholders go through changes.
The plan is then sent to market regulators and the court for approval after the board members of the
companies reach an agreement.
These approvals from various authorities take their time and, once completed, result in the creation
of a new entity. The transferor company’s shareholders would then receive shares from the new entity.
Following that, all assets and liabilities are handled.
The absorption of one company by another, which is larger in size, is referred to as a merger. Mergers
serve a variety of purposes, including expanding customer bases, expanding into new markets, reducing
headwinds such as competition and launching new products.
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All of the assets and liabilities of the merging company are transferred to the merged company. Similarly,
the old company’s shareholders receive ownership and shares in the new entity.
Companies use inorganic growth as a business strategy to grow. Amalgamation and mergers are the
two most common inorganic growth tools used by businesses. The terms amalgamation and merger are
frequently used interchangeably by people. Both terms are commonly used in the business world when
it comes to takeovers. However, there are several distinctions between the two in terms of business
and accounting. It is important to know the difference between Amalgamation and Merger in order to
fully comprehend the two terms and their applications. The following are the key distinctions between
amalgamation and merger in terms of their various aspects:
1. Meaning:
When two companies with similar lines of business merge, they usually want to expand into new
markets or acquire new customers.
Amalgamation occurs when a larger company buys a smaller company or when a company
buys multiple companies.
2. Types:
Horizontal, vertical, co-generic and reverse mergers are the most common.
Amalgamation could occur as a result of a purchase or as a result of a merger.
3. New entity formation:
A merger occurs when one company acquires control of another. As a result, the acquiring
company may keep its name.
In amalgamation, the larger and acquiring company survives the merger and retains its identity.
The smaller company, on the other hand, goes out of business.
4. Initiator:
When it comes to mergers, the initiative usually comes from the acquirer, who wants the deal to
go through.
Amalgamation, on the other hand, requires both parties’ consent.
5. The number of businesses involved:
A minimum of two companies are involved in the merger, one of which is an existing company,
and the other is the target company.
Amalgamation requires at least three companies, one of which is the amalgamated company,
and the others are the merging companies.
6. Companies of various sizes:
In a merger, the absorbing company is usually larger in terms of size and operations.
The target companies in an amalgamation are typically of similar size.
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Note: Mergers take place more frequently in the business world than amalgamations. Occidental
Petroleum and Anadarko Petroleum, AbbVie and Allergan and Bristol-Myers Squibb and Celgene are
among the year’s most significant mergers. Even though mergers are less common, the new company
that emerges from them is usually large and powerful. For example, Arcelor, the world’s largest steel
company, was formed through a merger.
Both amalgamations and mergers are effective tools for corporate restructuring. In fact, one could
argue that amalgamation is a type of merger. Alternatively, all amalgamations may be mergers, but
this does not imply that all mergers are amalgamations. Depending on the nature of their business,
company structure, objective and macro business environment, the company can choose between the
two.
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Due to the result of amalgamation, shareholders who hold less than 90% of the face value of the
transferor entity’s equity shares (other than equity shares already held therein, immediately prior
to the amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee entity.
The transferee entity fully discharges the consideration for the amalgamation because of those
equity shareholders of the transferor entity that were ready to become equity shareholders of the
transferee company by issuing equity shares in the transferee company, except that cash may be
paid in respect of any fractional shares.
The transferor company’s business is intended to be continued by the transferee company after the
merger.
Except to ensure uniformity of accounting policies, no adjustment to the book values of the transferor
company’s assets and liabilities is intended when they are incorporated in the financial statements
of the transferee company. If any of the preceding conditions are not met. It would be considered a
merger rather than an amalgamation.
The above are just a few of the many tax breaks available to the aforementioned types of taxpayers
as a result of M&A transactions. Wherever applicable, appropriate inputs are given in the following
discussions in case of specific requirements relating to acquisitions by foreign entities.
It should be noted that only domestic companies can be amalgamated when an Indian target entity is
sought to be acquired by a foreign entity. As a result, the foreign acquirer must establish a local Special
Purpose Vehicle (SPV) in India to carry out the amalgamation with the Indian company, and the SPV
also benefits from the Act’s tax benefits on amalgamation, which are conditional on the amalgamated
company being an Indian company.
The amalgamating company’s shareholders will be subject to capital gains tax. When shareholders of
an acquired corporation sell their shares as part of a merger or acquisition, they can receive a variety
of payment options. These receipts could be taxable or non-taxable. If they are taxable, the shareholders
must pay capital gains taxes on the difference between their cost basis and their gain. The issue of
whether allotment of shares, debentures or cash payments to the merging company’s shareholders
triggers capital gains liability is debatable.
According to one viewpoint, this leads to the exchange of shares in the merging company for shares
in the merged company. As a result, it would be subject to capital gains tax. The opposing argument
is that there can be no capital gains tax liability because there is no exchange of shares because the
transactions are effectively two separate transactions.
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This procedure necessitates the shareholders’ surrender of their shares in the amalgamating company.
It’s crucial to figure out whether this is a transfer subject to capital gains tax under Section 2(47) of the
Internal Revenue Code. According to judicial precedents, including recent Supreme Court decisions, this
transaction did not result in a “transfer” as defined by Section 2 of the Act (47).
It has been ruled out by the highest court in CIT vs. Mrs. Grace Collis and Others as regards inclusion
of right extinguishment by a shareholder in an amalgamating company which is alike to rights
extinguishment in any capital assets, both being considered distinct and independent in nature.
As a result, upon the amalgamation of the amalgamating company with the amalgamated company,
the shareholders’ rights in the capital asset, i.e. the shares, are extinguished, and this constitutes a
transfer under Section 2(47) of the ITA.
If the following conditions are met, the provisions of Section 45 relating to capital gains will not apply to
any transfer by a shareholder when a shareholder in the scheme of amalgamation transfers his shares
in the amalgamating company.
a. He receives shares in the amalgamated company in exchange for the transfer and
b. The amalgamated company is an Indian company.
The question is whether a shareholder receiving shares in the amalgamated company is subject to
capital gains tax if the conditions specified in Section 47(vii) are not met or if the conditions are not
met. There would be no such tax unless the amalgamation involved a transfer within the meaning of
Section 2 (47)
Even if Section 47(vii) of the Act did not exist, a shareholder would not be required to pay capital
gains tax because an amalgamation does not involve the exchange or relinquishment of assets, the
amalgamation of any right therein, or the compulsory acquisition under any law. It also does not
involve any exchange in the legal sense of the word. The terms “exchange” and “relinquishment” are
not defined in the Act. As a result, there is no ‘exchange’ in a merger. The merger does not necessitate the
relinquishment of an asset because relinquishment presupposes the asset’s continued existence. As held
in CIT vs. Rasik Lal manek Lal amalgamation does not entail an exchange or relinquishment of shares
by the amalgamating company.
If the amalgamated company is an Indian company, there will be no capital gains tax on the transfer
of a capital asset by the amalgamating company to the amalgamated company in the scheme of
amalgamation.
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Profits or gains arising from the transfer of capital assets are subject to capital gains tax. The income
will be calculated using the transfer consideration. In other words, capital gains cannot occur if there
is no consideration. In the event of a merger, the properties and liabilities of the merging company are
transferred to the merged company under a court-approved scheme.
The cash, equity shares, and other forms of compensation for such vesting go directly to the shareholders.
As a result, there would be no capital gains in the hands of the company because it would not receive
any consideration.
In case when the amalgamated entity is an Indian entity, there will be no capital gains tax on the
transfer of a capital asset by the amalgamating company to the amalgamated company as per the
scheme of amalgamation. In case of a foreign amalgamating entity, it is exempted from capital gains
tax when the entity transfers a capital asset, such as shares in an Indian company.
If the following conditions (given below) are met, there will be no capital gain on the transfer of shares
held in an Indian company by the amalgamating foreign company to the amalgamated foreign company
in a scheme of amalgamation:
a. At least 25% of the shareholders of the merging foreign company remain shareholders of the merged
foreign company and
b. In the country where the amalgamating company is incorporated, such a transfer is not subject
to capital gains tax. In line with this strategy, the Revenue Authority recently issued notices to a
number of companies that had recently engaged in transactions.
Shares Exchange/Sale
i. Pursuant to amalgamation: By receiving shares in lieu of their existing shareholding, shareholders
of the target company would become shareholders of the amalgamated company. Such an exchange
is referred to as a “transfer.” Such an exchange is not considered to be a transfer as per IT Act 1961
where the same is for allotment of shares in the amalgamated Indian company.
Interestingly, any cash or other benefit given in exchange for the shares, whether fully or partially
would result in taxable capital gains.
ii. Post amalgamation: Capital gains tax calculation after amalgamation on disposal of an
amalgamated company
Shares: This section considers a scenario in which the amalgamating company’s shareholders,
having acquired shares in the amalgamated company as a result of the amalgamation, now decide
to sell those shares. As a result, when these shareholders sell their shares in the amalgamated
company, the cost of acquisition will be the cost of their shares in the amalgamating company when
computing the capital gains that will accrue to them as a result of the sale. In addition, the holding
period for determining long-term or short-term gains would begin on the date the shares in the
merging company were acquired by the shareholders.
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If the amalgamating company transfers any block assets to the amalgamated company, which is an
Indian company, the actual cost of the block of assets in the case of the amalgamated company shall be
the written value of the block of assets as in the case of the amalgamating company for the immediate
proceedings, less the amount of depreciation actually allowed in relation to the said previous year.
However, unabsorbed depreciation in the hands of the amalgamating company is not to be reduced as
depreciation actually allowed because the amalgamating company would cease to exist as a result of
the merger and thus could not carry forward such unabsorbed depreciation.
Carry forward and set off unabsorbed depreciation and accumulated losses
M&A is frequently used by businesses to gain the benefit of carrying forward and offsetting operating
losses or claiming a tax credit. The acquirer must continue to operate the company’s pre-acquisition
business, according to the terms of the agreement. The amalgamated company can claim the
amalgamating company’s unabsorbed losses and unabsorbed depreciation. Aside from the asset values
for depreciation purposes discussed above, the following should be noted:
In most cases, an amalgamation takes place during the course of a fiscal year. Depreciation is allowed
on a pro-rata basis to both the merging and amalgamated companies in proportion to the number of
days the assets are used.
Section 72 A(1) stated that if a company owning an industrial undertaking or a ship merged with another
company and the Central Government, on the recommendation of the specified authority, was satisfied
that the conditions set forth in this regard were met, the Central Government would make a declaration
to that effect, and the amalgamating company’s accumulated loss on unabsorbed depreciation
allowance would be deemed to be the losers.
[Section 72A(1), (2) and (3)]: Carry-forward and set-off of accumulated business losses and unabsorbed
depreciation in the event of ‘Amalgamation’
An amalgamating company’s business loss may be carried forward and set off in the hands of the
amalgamated company for a new eight-year period if certain conditions in Section 72A are met.
Similarly, an amalgamating company’s unabsorbed depreciation may be carried forward and set off in
the hands of the amalgamated company. It can be carried on indefinitely and set off in the hands of an
amalgamated corporation.
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Where a banking company has been amalgamated with any other banking institution under a scheme
sanctioned and brought into force by the Central Government under Sub-section (7) of Section 45 of
the Banking Regulation Act, 1949, notwithstanding anything contained in sub-clauses I to (ii) of clause
(1B) of Section 2 or Section 72A (10 of 1949). The accumulated loss and unabsorbed depreciation of such
banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation
of such banking company for the previous year in which the scheme of amalgamation was enacted,
and the provisions of this Act relating to set-off and carry forward of loss and depreciation allowance
applies in line with above.
There are several types of demergers. The following are some examples:
Spinoff: A division or a line of business of a conglomerate company may become a separate entity in
some cases. This type of demerger is known as a spinoff. For example, company A used to do business
in two areas: logistics and hospitality. A spinoff occurs when company A decides to separate all of its
logistics operations into a separate entity.
It’s worth noting that both companies would be legal entities in their own right. As a result, A would
continue to exist while a new company, B, would emerge.
As a result of the separation of concerns, the parent company would not be dissolved.
Split: A conglomerate may want to split its businesses into separate companies in other cases. This
is known as a split. For example, if company A decides to split into two new companies, B and C, to
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separate its hospitality and logistics businesses, this is referred to as a split. It’s worth noting that in
this scenario, company A would cease to exist.
Equity carve out: In some cases, company A may decide to sell its logistics division to a third party.
As a result, it may sell a portion of a subsidiary company’s equity to a third party or a strategic
investor. An equity carve out is the term for this type of transaction. There are two noteworthy
aspects of this transaction. To begin with, spin-offs and splits are not the same as selling to a third
party. As a result, an equity carve-out generates cash, whereas spinoffs and splits do not. Second, A
is the same legal entity in this case. The carved-out unit B becomes a subsidiary of another company,
rather than remaining an independent unit under the parent company’s umbrella.
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To summarise, demergers are a sound business strategy. They can be used to both unlock value and
streamline a company’s operations.
Demerger disadvantages
For starters, demergers can be costly because they must be carefully structured to avoid tax liability.
You’ll have to budget for the cost of professional legal and accounting advice. Second, there may be
inherent economies of scale in the group that are reduced when it is split up into new entities. The cost
of loans and production may rise, and suppliers may be less willing to trade with a new company on
favourable terms. Inevitably, the transaction and any loss of synergy that results will have an impact
on productivity.
The cost of acquisition of shares in the resulting company, according to Section 49(2C) of the IT Act,
shall be the amount that bears the same proportion to the cost of acquisition of shares held by the
shareholder in the demerged company as the net book value of the assets transferred in a demerger
bear to the net worth of the demerged company.
As a result, shareholders should apportion their pre-demerger cost of acquisition of Company’s shares
in the following manner in order to determine the post-demerger cost of acquisition of equity shares in
the Company under the IT Act:
Cost of acquisition of the Cost of acquisition of share Net book value of the assets
transferred in a demerger
share in the resulting held by the assessee in the Net worth of the demerged company
company demerged company immediately before demerger
Here net worth is demerged company’s aggregate of paid-up share capital and general reserves as per
the account’s books before demerger.
If the shares of the resulting company are later transferred, the period during which the shares were
held in the demerged company must also be taken into account when determining the nature of the
capital gain [Section 2(42A)].
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transferred from the demerged organisation to the resulting organisation in a demerger, and the
resulting organisation is an Indian organisation, the transaction is not considered a transfer for the
purpose of capital gains tax.
Section 47(vi) (d) states that if the resulting organisation issues or transfers shares to the shareholders
of the demerged organisation in a demerger scheme, and the transfer is made in consideration
of the undertaking’s demerger, the transaction is not considered a transfer for capital gains tax
purposes.
According to Clause (v) of Section 2(22) of the Income Tax Act of 1961, a deemed dividend has no
impact on the issue of shares by the resulting organisation. When shares are distributed to the
shareholders of the demerged organisation as a result of a demerger by the resulting organisation
(whether or not there is a capital reduction in the deemed organisation), they are excluded from the
definition of the dividend.
Section 72A (4) of the Income Tax Act of 1961 provides for the benefit of set-off and carry-forward of
unabsorbed loss and depreciation in the case of a demerger. This provision is advantageous in the
event that a demerger has chosen to reorganise the business. This type of demerger should only be
conducted for legitimate business reasons.
In the event of a company’s succession of a firm or proprietary concern, or in the event of a company’s
amalgamation or demerger, depreciation shall be allowed as follows:
The total amount of depreciation allowed to both the company and the successor shall not exceed
the amount if no such succession or conversion occurred.
Depreciation will be shared between the predecessor and the successor in proportion to the number
of days the assets were used.
Section 32 proviso states that total deduction for depreciation with regard to tangible assets such
as plant & machinery, furniture or building and intangible assets such as know how, patents,
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copyrights, trademarks, franchises, licences or any other right being in similar nature available in
succession to the predecessor and the successor referred to in relevant clause of Section 47 or 170
or to the amalgamating company and the newly formed company in an amalgamation or to the
company being demerged and newly formed company in a demerger, as the case may be, is not to
be more in any previous year than the one calculated at rates prescribed, had the restructuring not
taken place and it shall be apportioned amongst these entities in the ratio of number of days for
which assets have been put to use by them.
Similar to amalgamation, the Act states that any transfer or issue of shares by the resulting company to
the shareholders of the de-merged company in consideration of the demerger is exempt from taxation
in the hands of the shareholders under the head capital gains.
The cost of acquiring shares in the resulting company shall be the amount that bears the same proportion
to the cost of acquiring shares held by the shareholder in the de-merged company as the net book value
of the undertaking bears to the net worth of the demerged company immediately before such demerger.
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A minimum of two companies are involved in the merger, one of which is an existing company and
the other is the target company.
Amalgamation requires at least three companies, one of which is the amalgamated company and
the others are the merging companies.
In a merger, the existing company retains its assets and liabilities while also absorbing the assets
and liabilities of the other.
The assets and liabilities of the merging companies are transferred to the newly formed entity
through amalgamation.
When a shareholder of an amalgamating company transfers shares held in the amalgamating
company in exchange for allotment of shares in the amalgamated company in the scheme of
amalgamation, the transfer of shares is not treated as a transfer under Section 47(vii) of the Act,
and the shareholder of the amalgamating company does not receive any capital gain.
The amalgamating company’s shareholders will be subject to capital gains tax. When shareholders
of an acquired corporation sell their shares as part of a merger or acquisition, they can receive a
variety of payment options. These receipts could be taxable or non-taxable.
Amalgamating Company receives tax breaks any transfer of capital assets by an amalgamating
company to an Indian amalgamated company in the scheme of amalgamation is not treated as a
transfer under Section 47(vi) of the Act, and thus no capital gain tax is imposed on the amalgamating
company.
Section 72A under Chapter VI of the Act governed provisions relating to carry forward and set off of
accumulated loss and unabsorbed depreciation.
The transfer of a firm’s business undertakings to another company is known as a demerger. The
demerged company is the source company, i.e. the corporation whose assets are being transferred.
13.15 GLOSSARY
Absorption: It is when one powerful company takes control over the weaker company
Amalgamation: It is done between 2 or more entities engaged in the same line of activity or have
some synergy in their operations
Amalgamated company: It means a company that comes into existence as a result of an
amalgamation as specified in Section 282
Unabsorbed depreciation: It refers to the portion of the amalgamating banking company’s
depreciation allowance that is still available and would have been available if the amalgamation
had not occurred
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ZEEL and SPNI (Now, it is known as Culver Max entertainment) are India’s two biggest media
conglomerates. They both took the steps towards a multibillion-dollar merger. The board of directors of
Zee gave approval to the merger between the two companies, i.e., ZEEL and SPNI. The merger agreement
has the power to make India’s largest newly created media company.
The proposed merger of Zee and Culver Max Entertainment has been permitted by the Bombay Stock
Exchange, i.e., BSE and National Stock Exchange (NSE), Zee Entertainment said in one of the statement.
As per Zee, The approval from the stock exchanges marks a firm and positive step in the overall merger
process.
In this April, SPNI changed its corporate name to Culver Max Entertainment but it continued to us the
old television channels and other digital properties and Sony’s brand name. Both the media companies
signed an agreement (definitive) to merge Zee into Sony and combine their linear TV networks, digital
assets, production operations and programme libraries. This merger would create the second-largest
entertainment network, after Disney-Star in India, analysts had said back then.
The merged company would retain Zee’s stock market listing, though Sony would give large cash
injection and control a majority shareholding of close to 51 per cent.
Zee’s Punit Goenka would be leading the Managing Director and Chief Executive Officer. Sony group will
nominate the majority of the board of directors and would include the existing MD and CEO, N P Singh.
Questions
1. Summarise the case study.
(Hint: ZEEL and SPNI (Now it is known as Culver Max entertainment) are India’s two biggest media
conglomerates.)
2. What are the advantages of merger?
(Hint: large cash injection and control a majority shareholding.)
aspects:
Meaning:
When two companies with similar lines of business merge, they usually want to expand into
new markets or acquire new customers.
Amalgamation occurs when a larger company buys a smaller company or when a company
buys multiple companies.
Types:
Horizontal, vertical, co-generic, and reverse mergers are the most common.
Amalgamation could occur as a result of a purchase or as a result of a merger.
New entity formation:
A merger occurs when one company acquires control of another. As a result, the acquiring
company may keep its name.
In amalgamation, the larger and acquiring company survives the merger and retains its
identity. The smaller company, on the other hand, goes out of business.
Refer to Section When Mergers are not regarded as Amalgamation
2. When a shareholder of an amalgamating company transfers shares held in the amalgamating
company in exchange for allotment of shares in the amalgamated company in the scheme of
amalgamation, the transfer of shares is not treated as a transfer under Section 47(vii) of the Act,
and the shareholder of the amalgamating company does not receive any capital gain.
The above are just a few of the many tax breaks available to the aforementioned types of taxpayers
as a result of M&A transactions. Wherever applicable, appropriate inputs are given in the following
discussions in case of specific requirements relating to acquisitions by foreign entities.
It should be noted that only domestic companies can be amalgamated when an Indian target entity
is sought to be acquired by a foreign entity. As a result, the foreign acquirer must establish a local
Special Purpose Vehicle (SPV) in India to carry out the amalgamation with the Indian company, and
the SPV also benefits from the Act’s tax benefits on amalgamation, which are conditional on the
amalgamated company being an Indian company. Refer to Section Taxation of Shareholders
3. Implications of capital gains taxes for the merging (transferor) company
If the amalgamated company is an Indian company, there will be no capital gains tax on the transfer
of a capital asset by the amalgamating company to the amalgamated company in the scheme of
amalgamation. Profits or gains arising from the transfer of capital assets are subject to capital
gains tax. The income will be calculated using the transfer consideration. In other words,
capitalgains cannot occur if there is no consideration. In the event of a merger, the properties and
liabilities of the merging company are transferred to the merged company under a court-approved
scheme.
The cash, equity shares, and other forms of compensation for such vesting go directly to the
shareholders. As a result, there would be no capital gains in the hands of the company because it
would not receive any consideration. Refer to Section Taxation of Amalgamating Company
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http://www.differencebetween.net/business/difference-between-merger-and-amalgamation/#ix-
zz7e5D2OvQe
https://taxguru.in/income-tax/note-tax-implication-amalgamation.html
18
Tax Implication on
Amalgamation and Demerger
Unit – 13
CA. Prashant Bharadwaj
Definition of Amalgamation - Sec 2(1B)
The Income Tax Act 1961, defines amalgamation as merger of one or more
companies with another company or with another company, or the merger of
two or more companies to form one company in such manner that:
• All the properties of the amalgamating company or companies immediately
before the amalgamation, become the properties of the amalgamated
company by virtue of the amalgamation.
• All the liabilities of the amalgamating company or companies immediately
before the amalgamation, become the liabilities of the amalgamated company
by virtue of the amalgamation.
• Shareholders holding not less than 75% in value of the shares in the
amalgamating company or companies (other than shares already held before
amalgamation), become the shareholders of the amalgamated company.
Tax concessions to amalgamating company
• No Capital Gain tax on transfer of capital assets to Indian Company – By virtue of
section 47(vi), any transfer of capital asset in the scheme of amalgamation, by
amalgamating company to the Indian amalgamated company shall not be regarded
as transfer and hence no capital gain tax on such transfer.
• No capital gains on transfer of shares held in Indian company by the amalgamating
Foreign company - Where a foreign amalgamating company transfers its investment
in shares or shares held in Indian Company, by the amalgamated foreign company,
in a scheme of amalgamation, it shall not be regarded as transfer by virtue of section
47(via), if the following conditions are fulfilled:
• Atleast 25% of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company, and
• Such transfer does not attract tax on capital gains in the country in which the amalgamating
company is incorporated.
• No capital gain tax on transfer of capital asset by a banking institution – Where in a
scheme of amalgamation, a banking company transfers any capital asset to a
banking institution sanctioned and brought into force by Central Government under
section 45(7) of the Banking Regulation Act 1949, then such transfer shall not be
regarded as transfer under section 47(viaa).
Tax concessions to amalgamated company
• Apportionment of depreciation between amalgamating and amalgamated
company (Section 32) -In case of amalgamation or succession of business
depreciation shall be allowed to the predecessor & successor in proportion to
the period of owning the asset. The aggregate amount of depreciation shall not
exceed the total depreciation deductible, if there was no change in ownership.
• Capital expenditure on Scientific Research (Section 35) – Where in a scheme
of amalgamation, the amalgamating company sells or otherwise transfers to
the amalgamated Indian company any asset representing expenditure of a
capital nature on scientific research then, the amalgamating company shall not
be allowed as deduction but however, the deduction can be claimed by the
such amalgamated Indian company.
Note – However, if the amalgamated Indian company in some later years sells
such asset on which deduction was claimed, then the same shall be taxable u/s
41.
Tax concessions to amalgamated company
• Expenditure on telecommunication licence (Section 35ABB) – The unamortised
capital expenditure on the licence shall be written off by the amalgamated company
in the same manner as in the case of amalgamating company for the remaining
number of years. However, if the licence is transferred in some later years the gain
or loss shall be treated accordingly in the hands of amalgamated company.
Note – The similar treatment is applicable for expenditure on spectrum rights u/s
35ABA.
• Amortization of preliminary expenses (Section 35D) – The deduction towards the
preliminary expenses is spread over 5 years from the year of incorporation.
However, if amalgamation takes place within such period of deduction, then for the
unexpired period the amalgamating company can claim the deduction.
• Amortization of amalgamation expenditure (Section 35DD) - The deduction towards
the amalgamation expenses is spread over 5 years from the year of incorporation.
However, if amalgamation takes place within such period of deduction, then for the
unexpired period the amalgamated company can claim the deduction.
Tax concessions to amalgamated company
• Amortization of expenditure incurred towards voluntary retirement scheme
(Section 35DDA) - The deduction towards the voluntary retirement scheme is
spread over 5 years from the year of payment. However, if amalgamation
takes place within such period of deduction, then for the unexpired period the
amalgamated company can claim the deduction.
• Expenditure on prospecting minerals (Section 35E) – Where the undertaking
of an Indian company which is entitled to the deduction under section 35E (1),
before the expiry of ten years, to another Indian company in a scheme of
amalgamation then, for the unexpired period the amalgamated company can
claim the deduction.
• Capital expenditure on promotion of family planning (Section 36(1)) –
Companies are allowed to write off the capital expenditure on promotion of
family planning in India in five equal instalments. However, if amalgamation
takes place within such period of deduction, then for the unexpired period the
amalgamated company can claim the deduction.
Tax concessions to amalgamated company
• Provisions relating to carry forward and set off of accumulated loss and
unabsorbed depreciation (Section 72A, 72AA and 72AB) -
The accumulated losses can be carried forward up to a maximum of 8 years.
However, within such period, in case amalgamation takes place, then the
amalgamated company can carry forward the losses for the unexpired period.
Also, the unabsorbed depreciation shall be eligible to carry forward and set off
from the year of amalgamation, until it is absorbed by the amalgamated
company. However, for the above prescribed conditions must be satisfied.
• Deduction under sections 80-IAB, 80-IB, 80-IC, 80-IE etc – Where an
undertaking claiming any income based deductions referred under sections
80-IAB, 80-IB, 80-IC, 80-IE etc., is transferred in a scheme of amalgamation
then, the deduction shall be available to the amalgamated company for the
unexpired period as if no such amalgamation has taken place.
Tax concessions to shareholders of amalgamating company
• Exemption from capital gains on transfer of shares – Where a
shareholder of amalgamating company transfer his such share(s) in a
scheme of amalgamation, then such transfer shall not be regarded as
transfer by virtue of section 47(vii) if the following conditions are fulfilled:
• The transfer is made in consideration of the allotment to him of any share(s) in the
amalgamated company; and
• The amalgamated company is an Indian company.
• The cost of acquisition of shares received under transfer as above
– The cost of acquisition of the shares allotted in amalgamated company
shall remain the same as for the shares held in amalgamating company.
DEMERGER -SEC 2(19AA)
“Demerger” in relation to companies means the transfer, pursuant to a scheme of arrangement under the
Companies Act, by a demerged company of its one or more undertakings to any resulting company in
such a manner that:
• All the property of the undertaking, being transferred by the demerged company, immediately before
the demerger, becomes the property of the resulting company by virtue of the demerger;
• All the liabilities relatable to the undertaking being transferred by the demerged company, immediately
before the demerger, become the liabilities of the resulting company by virtue of the demerger;
• The property and the liabilities of the undertaking(s) being transferred by the demerged company are
transferred at values appearing in its books of account immediately before the demerger.
• The resulting company issues, in consideration of the demerger, its shares to the shareholders of the
demerged company on a proportionate basis except where the resulting company itself is a
shareholder of the demerged company;
• The shareholders holding not less than 75% in value of the shares in the demerged company (other
than shares held therein immediately before the demerger, or by a nominee for, the resulting company
or, its subsidiary) become shareholders of the resulting company or companies by virtue of the
demerger, otherwise than as a result of the acquisition of the property or assets of the demerged
company or any undertaking thereof by the resulting company;
• The transfer of the undertaking is on a going concern basis;
• The demerger is in accordance with the conditions, if any, notified u/s 72A (5) by the Central
Government in this behalf.
UNIT
Names of Sub-Units
Section 269SS – Taking Cash Loan, Section 269ST – Modes of Undertaking Transactions, Section 269T –
Repayment of Cash Loan, Section 269SU – Acceptance of Payment Through Electronic Modes, Section
68 – Cash Credit, Section 69 – Unexplained Investment, Section 69A – Unexplained Money, Section 69B
– Investment not Fully Disclosed, Section 69C – Unexplained Expenditure and Section 69D – Amount
Borrowed and Repaid on Hundi
Overview
This unit describes Section 269SS – Taking Cash Loan and Section 269ST – Modes of Undertaking
Transactions. Further, it explains Section 269T – Repayment of Cash Loan, Section 269SU – Acceptance
of Payment through Electronic Modes and Section 68 – Cash Credit. Also, it elaborates Section 69 –
Unexplained Investment, Section 69A – Unexplained Money and Section 69B – Investment not Fully
Disclosed. Towards the end, it explains Section 69C – Unexplained Expenditure and Section 69D –
Amount borrowed and repaid on Hundi.
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Learning Objectives
Learning Outcomes
https://icmai.in/TaxationPortal/upload/DT/Article/4.pdf
ht t ps : //w w w. inc o me tax i ndia. g ov. in/p a g es /a c ts /inc o m e-ta x-act .
aspx?key=section+269ss&key=section+269ss
14.1 INTRODUCTION
Financial stability is very important for leading a good life. Many families or institutions have a hard
time fulfilling their monetary needs. Whether business or family or individual, we all experience money
crunch at some point in our life. Hence, we seek loans and accept deposits. Section 269SS of the Income
Tax Act imposes restrictions on taking loans or deposits.
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This unit covers various sections related to cash loans, deposits and advances. This unit first explains
Section 269SS, which deals with cash payments and loan and deposit repayment. The purpose of this
section is to combat black money. One of the major issues causing economic disparities in India is tax
evasion. False cash transactions result in unaccounted money, which raises the risk of tax evasion.
During raids, Income Tax Authorities discover hidden and unaccounted cash. Previously, the perpetrator
would get away by claiming that the money was a loan or deposit from friends or relatives. Furthermore,
individuals seeking tax evasion would engage in fraudulent transactions involving the payment and
repayment of loans and deposits in cash.
To combat the growing number of cash transactions that are leading to the accumulation of black
money, the 269SS was enacted, which limits these cash payments.
According to Section 269SS, no loan or deposit or specific sum may be taken or accepted from any other
person unless it is in the form of an account payee’s cheque or account payee’s bank draft if:
a. The amount of such loan or deposit or the aggregate amount of such loan and deposit is unpaid on
the date of taking or accepting such loan or deposit or
b. On the date of taking loan or accepting deposit, any loan or deposit taken or accepted earlier by
such person from the depositor is still unpaid and the amount or
c. The total or aggregate sum mentioned in the clause:
i. In addition to the sum or total amount mentioned in clause
ii. A sum of at least `20,000:
As a result, no loan or deposit of more than `20,000 can be accepted unless it is in the form of an account
payee cheque or account payee draft. The `20,000 limit applies even if any loan or deposit previously
taken or accepted by such person from such depositor remains unpaid on the date of taking or accepting
such loan or deposit and such unpaid amount, together with the loan or deposit to be accepted, exceeds
the aforesaid limit. Consider the following scenario: Mr. X has a credit balance of `19000 on a loan from
Mr. Y. In this case, unless he uses an account payee cheque or account payee bank draft, Mr. X cannot
borrow more than `999 from Mr. Y.
In summary, a person cannot accept a cash loan or deposit of `20,000 or more from another person in
a single day.
The following are the specified modes of accepting loans, deposits or specified sums under income
tax rules:
1. Account payee cheque/bank draft,
2. Electronic Clearing System (ECS) through a bank account; or
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3. Net Banking;
4. Credit Card;
5. Debit Card;
6. RTGS;
7. NEFT;
8. BHIM,
9. IMPS; and
10. UPI.
The assessing officer has the authority to levy a penalty of 100% of the loan or deposit amount. The
penalty applies to accepting loans and cash deposits in excess of the prescribed limit. As a result, the
receiver must ensure that the provisions of Section 269SS are followed when accepting payments.
However, if the person can show that the transactions were made for a legitimate reason and with no
malicious intent, he or she may not be punished. According to Section 271D of the Income Tax Act 1961,
if a loan or deposit is accepted in violation of Section 269SS, the Joint Commissioner may levy a penalty
equal to the amount of the loan or deposit taken or accepted.
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In clause 31 of Form 3CD, the tax auditor must report transactions that have been affected by Sections
269SS. Both parties must report the transactions (payer and receiver).
Following the introduction of this section, NBFCs and HFCs sent various representations as to whether
the limit of `2 lakh applied to a single loan repayment instalment or the entire amount owed.
If you are repaying a loan to an NBFC or an HFC, one instalment of loan repayment will be considered a
single transaction, according to the IRS.
The payment can be made in cash if the single loan instalment is less than `2 lakh. All loan instalments
must be paid separately to determine whether the `2 lakh limit applies.
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If a person receives any sum in violation of section 269ST, he shall be liable to pay a sum equal to the
amount of such receipt as a penalty. The Joint Commissioner will impose any penalty imposed under
subsection (1).
For example: Suppose X has a loan of `30000 owed to Y. Then X cannot repay such a loan to Y in cash.
In a nutshell, if the loan or deposit is worth `20,000 or more, the person cannot repay it in cash.
Section 271E of the Income Tax Act, 1961, provides that if a loan or deposit is repaid in violation of the
provisions of Section 269T, the Joint Commissioner may levy a penalty equal to the amount of such loan
or deposit repaid.
According to Section 273B of the Income Tax Act of 1961, if an individual fails to comply with the provisions
of section 269T due to reasonable cause, no penalty is imposed. The following are the reasonable causes
as determined by judicial decisions:
Receiving or Repaying a Partner’s Amount: If one of the partners invests cash capital in the
organisation or withdraws `20,000 or more, the provisions of section 269T are not applicable
because the capital is not considered a deposit or a loan.
Section 271D does not carry any penalties: When Income is accessed from the Deposit: There is no
penalty for income deposited.
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Amount Paid by the Partner to the Firm or Vice Versa: There is no penalty for the amount paid by
the firm to the partner or vice versa.
Section 269T Penalty Does Not Apply to Repayment or Acceptance by Journal Entry: ‘Deposits or
loans’ do not include repayment or acceptance via Journal Entry. As a result, under section 269T of
the Income Tax Act of 1961, this type of payment is not subject to any penalties.
Any genuine transaction made in an emergency is not subject to penalty: Cash used to meet
emergency needs are also not subject to penalty.
Those transactions which are influenced by the provisions of Sections 269T in clause 31 of Form
3CD must be reported by the tax auditor. The transactions must be reported by both parties (payer
and receiver).
The government has prescribed certain payment modes for establishments and various entities whose
total sales, turnover or gross receipts from business is more than `50 crore in the previous year. The
Finance (No. 2) Act of 2019 added a new section 269SU to the Code of Federal Regulations and published
Rule 119AA, which defines payment acceptance modes.
269SU Section
Section 269SU mandates that anyone conducting business provide the ability to accept payments via
specified electronic methods. These prescribed modes will be in addition to any other electronic payment
methods that the person already offers to customers.
When a person’s total sales, turnover or gross receipts from a business exceed `50 crore in the
previous year, he or she is subject to Section 269SU. The section came into effect on November 1, 2019.
If the sales, turnover or gross receipts for the financial year ended 31 March 2019 exceed `50 crore, the
section applies.
An e-payment system or electronic mode of payment refers to the way of conducting business or paying
for goods and services via an electronic medium rather than cheque or cash. E-payment system is also
known as the online payment system. Credit and debit cards are the most common online payment
methods. Alternative payment methods, such as bank transfers, electronic wallets, smart cards and so
on, are also available.
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Rule 119AA came into effect on January 1, 2020. As a result, beginning January 1, 2020, anyone subject
to the provisions of section 269SU must make the payment methods specified in Rule 119AA available to
their customers.
Note:
Circular No. 12/2020 clarified that the provisions of section 269SU of the Act do not apply to a specified
person who only conducts B2B transactions (i.e., no transactions with retail customers/consumers) if at
least 95 percent of all amounts received during the previous year, including amounts received for sales,
turnover or gross receipts, are received in a form other than cash.
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b. An assessee that is entirely export-oriented (i.e., no domestic sales) and thus receives all payments
through traditional banking channels; and
c. A Permanent Establishment is a foreign company that operates in India (PE).
The unexplained cash credit is addressed in Section 68 of the Income Tax Act. This section declares:
If any amount of money is found credited in the assessee’s books,
The assessee must satisfactorily explain the nature and source of the sum so credited to the AO
(Assessing Officer) and demonstrate that the sum in question is not his income.
If he does not provide an explanation or if the explanation provided is not satisfactory in the opinion
of the AO, the assessee’s income may be charged.
Provision for Corporate Taxpayers: Any sum of money credited as the share application money,
share capital, share premium or any other amount, by whatever name called in the books of such
company shall be deemed unsatisfactory unless the person in whose name credit is recorded in the
books of such company explains to the satisfaction of the Assessing Officer.
As a result, the Company must first establish the identity of the person whose name appears in the
books and then satisfy the assessing officer as to the source and nature of the person whose name
appears in the books. The only exception to this rule is when the credit is recorded in the books of a
VC (venture capital fund) or a venture capital company as defined in Section 10. (23FB).
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What are the Tax Implications of an Unexplained Credit Under Section 68?
Section 115BBE states that in the case when the assessee has included unexplained cash credits and
mentioned them in his return of income, he must make the payment of 60 per cent tax on such
income (In all cases, an additional 25% surcharge on the tax amount plus a 4% cess). [78 per cent is
the effective rate].
Section 115BBE also states that if an assessing officer discovers unexplained cash credits, the assessee
must pay 60% tax on the income (In all cases, there is a 25% surcharge on the tax plus a 4% cess)
Section 271AAC imposes a penalty of 10% of the tax due, calculated according to Section 115BBE. If
the assessee has included such income in his or her return of income and paid tax on or before the
end of the previous year, no penalty will be imposed. [84 percent effective rate]
Under section 68, no expenditures or deductions will be allowed from such deemed income.
Furthermore, losses cannot be offset against such deemed income.
If such income is included in the return of income filed under section 139, the effective rate is 78 percent.
Section 271AAC imposes a penalty of 10% of the tax due under section 115BBE if such income is not
reported on the return of income filed under section 139. In this case, the effective rate will be 84 percent.
When an assessee makes investments in the financial year immediately preceding the assessment year
that are not recorded in his books of account, if any, for any source of income and the assessee offers
no explanation about the nature and source of the investments or the assessee’s explanation is not, in
the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the
assessee’s income for that financial year:
Rate of Tax: Section 69 does not specify the scope or duration of AO’s discretionary power to treat
the investment as income if the investor-assessee has not adequately explained it. As a result, the
Assessing Officer must value the reasonable explanations and evidence presented to him regarding
the nature and source of investment and he cannot make the addition solely on assumptions,
conjectures or without supporting evidence. If the assessee’s total income includes income referred
to in Section 69 and reflected in the return of income furnished under Section 139 or is determined by
the Assessing Officer and includes any income referred to in Section 69, income tax is calculated at
60% under Section 115BBE. The current 60 percent tax rate will be increased by a 25% surcharge and
a 10% penalty, bringing the total tax rate to 85.80% (Cess is not included.) In computing the assessee’s
income referred to in clause (a) of sub-section (1) of Section 115BBE, no deduction in respect of any
expenditure or allowance [or set - off of any loss] shall be allowed.
Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE
of the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section
115BBE will be imposed. If such income is disclosed in the income tax return and tax on it is paid
under Section 115BBE on or before the end of the previous year, there will be no penalty.
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Amount of Investments, etc., not Fully Disclosed in Books of Account [Section 69B]
Section-69 B: If assessee makes any investments or owns any bullion, jewellery or other valuable
article in a financial year and AO forms a contrary opinion that is he believes that the correct
value in respect of these items is not appearing in accounts books maintained for any purpose and
assessee doesn’t offer any explanation or is not able to satisfy the AO with same if offered regarding
the inaccurate amount, the amount found to be excess in this respect is considered as his income
for that financial year.
Rate of Tax: Income tax is calculated at 60% under Section 115BBE if the assessee’s total income
includes income referred to in Section 69 A and reflected in the return of income furnished under
Section 139 or is determined by the Assessing Officer and includes any income referred to in Section
69A . The 60 percent tax rate will be increased by a 25% surcharge and a 10% penalty, bringing the
total tax rate to 85.80% (including cess). There will be no deduction in respect of any expenditure or
allowance [or set off of any loss] shall be allowed in computing the assessee’s income referred to in
clause (a) of sub-section (1) of Section 115BBE.
Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE
of the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section
115BBE will be imposed. No penalty will be imposed if such income is disclosed in the income
return and tax on such income is paid under Section 115BBE on or before the end of the relevant
previous year.
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According to Section 269 SS of Income tax Act, No person shall accept any loan or deposit in a
single day from another person in any form other than account payee cheque or bank draft, if the
aggregate amount involved is more than `20,000.
The following are the specified modes of accepting loans, deposits or specified sums under income
tax rules:
Account payee cheque/bank draft,
Electronic Clearing System (ECS) through a bank account; or
Net Banking;
Credit Card;
Debit Card;
RTGS;
NEFT;
BHIM,
IMPS; and
UPI.
Penalty for violating Section 269SS: The assessing officer has the authority to levy a penalty of 100%
of the loan or deposit amount. The penalty applies to accepting loans and cash deposits in excess of
the prescribed limit.
To combat black money and tax fraud in the economy, the government enacted Section 269ST. It
makes it illegal for anyone to receive more than `2 lakh in cash.
To promote the cashless economy and the use of digital payment methods, the government enacted
Section 269SU of the Income Tax Act. In addition to other electronic modes, Section 269SU prescribes
accepting payment through certain electronic modes.
When a person’s total sales, turnover or gross receipts from a business exceed `50 crore in the
previous year, he or she is subject to Section 269SU.
An e-payment system or electronic mode of payment refers to the way of conducting business or
paying for goods and services via an electronic medium rather than cheque or cash.
The National Payments Corporation of India (NPCI) conceptualised and launched RuPay in March
26, 2012. It was established to realise the Reserve Bank of India’s (RBI) vision of a domestic, open and
multilateral payments system.
The unexplained cash credit is addressed in Section 68 of the Income Tax Act. This section declares:
If any amount of money is found credited in the assessee’s books,
The assessee must satisfactorily explain the nature and source of the sum so credited to the AO
(Assessing Officer) and demonstrate that the sum in question is not his income.
If he does not provide an explanation or if the explanation provided is not satisfactory in the
opinion of the AO, the assessee’s income may be charged.
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Section 69 is the Income Tax department’s weapon for detecting tax evasion in the form of hidden
or illegal investments made by the assessee that are not recorded in the assessee’s accounts books.
As per Section-69 A, If any money, bullion, jewellery or other valuable article is lying with assessee
in ownership form in any financial year which is not so recorded in the accounts books if at all he
maintains for any income source and he is unable to explain the source from which he acquired these
items or he offers an unsatisfactory explanation to the AO, then such money’s, bullion’s, jewellery’s
or other valuable article’s value shall be considered his income for that year.
14.13 gLOSSARY
Assessing Officer: A person appointed by the Income-tax department who has the jurisdiction
(rights) to make an assessment of an assessee, who is liable under the Income-tax Act
Unexplained investment: Any investment in any financial year which has not been recorded in the
books of accounts and you are unable to explain the source as well as the nature of such investments
RuPay: Established to realise the Reserve Bank of India’s (RBI) vision of a domestic, open and
multilateral payments system
Bharat QR: A mobile payment solution that connects people to businesses
Bharat Interface for Money (BHIM): A payment application (app in short) that uses the Unified
Payments Interface to make simple, easy and quick transactions (UPI)
The aim of this case study is to describe the case of Sumati Dayal.
In the case of Sumati Dayal, the apex court i.e., Supreme Court held in favour of the tax department i.e.,
Commission of Income Tax after taking into consideration all facts and circumstances. The Apex court
reached the conclusion that the propositions of the taxpayer defied human probabilities.
Following are the relevant facts and events and the SC Ruling:
1. This ruling is related to Assessment Year (AY) 1971-72 and 1972-73.
2. The assessee i.e., Sumati Dayal was a dealer (in art pieces, antiques).
3. By the way of race winning in Jackpots and Treble events in races at Treble events in different cities,
the assessee received more than INR 3 lakh annually.
4. Assessee claimed that such amount is not taxable but A.O i.e., Assessing officer treated the amounts
as ‘Income from other Sources’ and levied tax thereon.
Following are a few peculiar facts that are listed in the ruling are:
a. Assessee had presented evidence that is an affidavit which stated that she had no previous
experience in races as she has begun going for races only at the end of the year 1969.
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b. As per Assessee, she claimed to have won more than INR 3 lakh in a year on 13 occasions out of
which 10 were jackpots winning and 3 were treble events. In the other year, the assessee won INR
1 lakh approximately on jackpot winnings.
c. On the very first day of the races, the assessee won a jackpot.
d. As per assessee, she worked out the combination based on her husband’s advice and she added
a few horses of her own although she admitted that she did not understand anything about the
performance of these horses before the December of 1969.
e. Assessee’s books of accounts did not present drawings commensurate with the amounts that
would be needed to buy the tickets for participating in the races and concerned events.
f. The winning amounts were credited in the capital account of the assessee, however, there were
no debits for losses incurred on races and ticket amount.
g. It was strange that winning from races became taxable from 1972 and the assessee gave up the
activity in the same year.
h. When this case was presented before the settlement commission, the assessee offered to agree to
a reasonable addition towards inadequate drawings if the settlement commission were to come
to hold in her favour on the merits of the case.
5. On the basis of the above findings, the assessing authorities with the Settlement Commission
observed that “A Jackpot is a stake of 5 events in a single day and one can believe a regular and
experienced punter clearing a Jackpot occasionally but the claim of the appellant to have won a
number of Jackpots in three or four seasons not merely at one place but three different centres,
namely, Madras, Bangalore and Hyderabad appear, prima facie, to be wild and contrary to the
statistical theories and experience of the frequencies and probabilities.”
The Settlement Commission stated that the claim of winnings in races was false and what was passed
off as such winnings represented the appellant’s taxable income from some undisclosed sources.
The Supreme Court also agreed with the Settlement Commission saying that after considering the
surrounding circumstances and applying the test of human probabilities the Commission had rightly
concluded that the assessee’s claim about the amount being her winnings from races was not genuine.
Source: http://www.lexsite.com/services/network/settlement/case245D4a.shtml
Questions
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if any, provided by him is not satisfactory in the opinion of the Assessing Officer, the amount covered
by such expenditure or part thereof, as the case may be, may be deemed to be the assessee’s income
for that financial year. The provision to section 69C states that, notwithstanding anything else in the
Act, such unexplained expenditure that is deemed to be the assessee’s income will not be allowed as a
deduction under any head of income. Refer to Section Section 69C-Unexplained Expenditure
https://cleartax.in/s/section-269ss-269t
https://taxguru.in/income-tax/restrictions-loans-deposits-advances-section-269ss-section-269t.
html
Discuss the tax treatment of cash credit, unexplained investments, unexplained money and
unexplained expenditure of the Income Tax Act, 1961.
17
Cash Loan, Deposits and
Advances
Unit – 14
CA. Prashant Bharadwaj
Mode of taking or accepting certain loans or deposits of specified
sum – Sec 269SS
No person shall take or accept from any other person (called as depositor), any loan or
deposit or any specified sum otherwise than by an account payee cheque or draft or by
use of electronic clearing system through a bank account or through such other
electronic modes as maybe prescribed if:
a) The amount of such loan or deposit or specified sum or the aggregate amount of
such loan, deposit and specified sum is Rs. 20,000 or more; or
b) On the date of taking or accepting such loan or deposit or specified sum, taken or
accepted earlier by such person from the depositor is remaining unpaid (whether
repayment has fallen due or not), the amount or the aggregate amount remaining
unpaid is Rs. 20,000 or more; or
c) The amount or the aggregate amount referred in (a) together with the amount or
the aggregate amount referred in (b) is Rs. 20,000 or more.
Note – Specified sum means any sum of money receivable, whether as advance or
otherwise, in relation to transfer of an immovable property, whether or not the transfer
takes place.
Exceptions to Sec 269SS
The provisions of Sec 269SS shall not apply to any loan or deposit or specified
sum taken or accepted from or any loan or deposit or specified sum taken or
accepted by:
• Government
• Any banking company
• Post office savings bank
• Co-operative bank
• Any corporation established by Central, State or Provincial Act
• Any government company
• Such other institution or body or class of institutions, associations or bodies
which the Central Government may notify.
• Also this section does not apply where loan or deposit or specified sum is
taken or accepted are where both persons having agriculture income and
neither of them has any taxable income.
Mode of repayment of certain loans and deposits – Sec 269T
No branch of a banking company or a co-operative bank and no other company or co-
operative society an no firm or other person shall repay any loan or deposit made with
it or any specified advance received by it otherwise than by an account payee cheque
or draft drawn in the name of person who has made the loan or deposit or paid the
specified advance, or by use or electronic clearing system through a bank account or
through such other electronic modes as may be prescribed if:
• The amount of loan or deposit or specified advance together with the interest, if
payable thereon is Rs. 20,000 or more; or
• The aggregate amount of the loans or deposits held by such person with the branch
of the banking company or co-operative bank or as the case maybe, the other
company or co-operative society or the firm or other person either in his own name or
jointly with any other person on the date of such repayment together with interest if
any, payable is Rs. 20,000 or more; or
• The aggregate amount of the specified advances received by such person either in
his own name or jointly with any other person on the date of such repayment
together with the interest if any, payable on such specified advances is Rs. 20,000 or
more.
Acceptance of payments through electronic modes – Sec 269SU
Every person carrying on business, whose total sales, turnover or gross
receipts, exceeds Rs. 50 crores during the immediately previous year,
shall provide facility for accepting payment through prescribed electronic
modes, in addition to the facillity for other electronic modes of payment.
This is a step towards ‘Cashless economy’ and to crub the black money
transactions.
For this section the prescribed modes are:
• Debit card powered by Rupay
• Unified Payment Interface (UPI) (BHIM-UPI)
• Unified Payment Interface Quick Response code (UPI QR Code)
Cash Credits – Sec 68
• Where any sum is found credited in the books of an assessee
maintained for any PY and he offers no explanation about the nature and
source thereof, or the explanation offered is not satisfactory in the
opinion of Assessing Officer (AO), the sum so credited may be charged
as income of that assessee in that PY.
• Where the assessee is a closely held company and the sum credited
consists of share application money, share capital or share premium or
any such money by whatever name called, any explanation offered by
such company shall not be deemed to be satisfactory unless the person
(being a resident) in whose name such credit is recorded in the books of
such company also offers an explanation to the satisfaction of the AO
about the nature and source of such sum.
Unexplained Investment – Sec 69
Where in the FY relevant to an AY, the assessee has made
investments which are not recorded in the books of account if
any, maintained by him and the assessee offers no explanation
or the explanation offered is not satisfactory, in the opinion of AO,
about the nature and source of investments then, the value of
investments may be deemed to be income of the assessee for
such FY.
Unexplained money etc – Sec 69A
Where in any FY the assessee is found to be the owner of any
money, bullion, jewellery or other value article, which are not
recorded in the books of accounts if any, maintained by assessee
for any source of income and the assessee offers no explanation
or the explanation offered is not satisfactory, in the opinion of AO,
about the nature and source of acquisition of the same, then
such money and value of assets shall be deemed to be the
income of the assessee for such FY.
Amounts of Investments etc not fully disclosed in books – Sec 69B
15 Assessment of Companies
Names of Sub-Units
Section 115JB – Special Provision for Payment of Tax by Certain Companies, MAT Calculation,
Computation of Book Profit, Section 115JAA – MAT Credit Adjustments to be Made to Profit as Per
Statement of Profit and Loss to Arrive at Book Profit
Overview
This unit describes Section 115JB – Special Provision for Payment of Tax by Certain Companies. It
explains MAT Calculation and Computation of Book Profit. Towards the end, it discusses Section
115JAA – MAT Credit Adjustments to be made to Profit as per Statement of Profit and Loss to arrive at
Book Profit.
Learning Objectives
Learning Outcomes
https://www.hostbooks.com/in/income-tax-act-1961/section-115jb-special-provision-payment- tax-
certain-companies/
https://taxguru.in/income-tax/minimum-alternate-tax-mat-115jb-income-tax-act-1961.html
15.1 INTRODUCTION
Taxpayers need to submit the income details to the Income-tax Department. When taxpayer files return
of income, at that time these details are to be furnished. After filing up the return starts the processing
of the return of income by the Income Tax Department. This department checks the correctness of
the details. This process of assessing the return of income by the Income-Tax department is known as
“Assessment”. Assessment also includes re-assessment and best judgment assessment under section 144.
There are 4 major assessments under the Income Tax law given below:
Assessment under section 143(1) is a preliminary assessment and is referred to as Summary
assessment without calling the assessee.
Assessment under section 143(3) is a detailed assessment to confirm the correctness and genuineness
of the claims, deductions, etc., made by the taxpayer and is referred to as scrutiny assessment.
Assessment under section 144 is an assessment carried out as per the best judgment of the AO based
on all relevant material he has gathered.
Assessment under section 147 is an income escaping assessment.
15.2 SECTION 115JB – SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES
MAT is an abbreviation for Minimum Alternate Tax. It is a tax imposed by section 115JB of the Income Tax
Act of 1961. In the AY 1988-89, a MAT was introduced for the first time. . It was later repealed by the Finance
Act of 1990 and reintroduced by the Finance (No. 2) Act of 1996, wef1-4-1997. The government introduces
the concept of MAT to target companies that earn large profits and pay dividends to their shareholders
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while paying no or little tax to the government by taking advantage of various exemptions, deductions
and benefits under the Income Tax Act. It was enacted in response to an increase in the number of zero-
tax corporations. Companies that have higher profits and pay dividends to their shareholders but do
not pay taxes to the government are considered zero tax companies. The government has initiated MAT
in order to regularise such tax payers.
In other words, MAT is a method of requiring businesses to pay a minimum amount of tax based on
their book profits. It is an indirect tax that corporations must pay. The MAT is calculated as 18.5% of the
book profits.
Tax is calculated in accordance with the standard provisions of the Income Tax Act (30 percent tax rate
plus 3 percent education cess plus surcharge, if applicable). Tax is calculated in accordance with the MAT
provisions of the Income Tax Act (18.5 % tax rate plus 3 % education cess plus surcharge, if applicable).
For fiscal year 2019-20, tax payable is calculated at 15% of book profit plus applicable cess and surcharge.
The main goal of MAT is to ensure that any company with significant profits and the ability to pay taxes
does not avoid paying income tax under section 115JB of the income tax act.
MAT’s Applicability
Only corporate companies are eligible for MAT. Individuals, HUF’s, partnership firms and other non-
corporate entities are not eligible for MAT. MAT is also payable by foreign companies with income
sources in India. It does not apply to businesses in the infrastructure and power sectors. MAT also
excludes income from charitable activities and free trade zones.
There is a distinction between two types of profits: regular profit and book profit:
The profit computed using the provisions of tax laws is known as regular profit. Book profit, on the
other hand, is calculated using Schedule VI of the Companies Act, 1956.
The rate of depreciation differs according to the Tax Law and the Companies Act.
Real income is computed under tax laws, but deductions for provisions and reserves are allowed
under the Companies Act, resulting in the computation of conservation income rather than real
income.
Various incentives and deductions from profits, such as deductions under Sections 80IA and 80IB,
were made possible by tax laws. This is not the case when it comes to calculating Book Profit under
the Companies Act.
1. The use of MAT (Minimum Alternate Tax) for the payment of taxes by certain businesses [Section
115JB]
Taxes cannot be less than 18.5 percent of book profit in any assessment year:
When the income-tax payable on a company’s total income as computed under the Income-tax Act
for the previous year relevant to the assessment year 2012-13 or thereafter is less than 18.5 percent
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of its book profit, the assessee’s total income (book profit) is deemed to be its total income and the
tax payable by the assessee on such total income (book profit) is the amount of the income-tax at the
rate of 18.5 percent.
Thus, in the case of a corporation, the higher of the two amounts is to be paid in income tax:
If any income included in the company’s total income is taxable at special rates, tax on total
income is computed in accordance with the normal provisions of the Act by charging applicable
normal rates and special rates if any income included in the company’s total income is taxable
at special rates.
18.5 % of the profit from the book.(15 % from financial year 2019-2020)
2. MAT rate will be 9 per cent not 18.5 % when the unit is located in an International Financial
Services Centre [Section 115JB (7)].
Section 115JB (1) provisions will give same effect had 18.5% been replaced by 9% for the assessee
being a unit having its location in International Financial Services Centre and earns income in non-
Indian currency which can be converted .
3. The provisions of Section-115JB will not apply in some cases.
The provisions of section 115JB do not apply in the following situations:
a. Any income a company receives or generates from the life insurance business described in
section 115B [Section 115JB (5A)]
b. Domestic corporations that have chosen Section 115BAA or Section 115BAB tax regimes
c. Tonnage taxation applies to the income of a shipping company
d. A foreign company (incorporated outside India)
The assessee is a resident of a country or specified territory with which India has an agreement
referred to in section 90(1), or the Central Government has adopted any agreement referred to in
section 90A(1) and the assessee does not have a permanent establishment in India in accordance
with such agreement’s provisions; or
The assessee is a resident of a country with which India does not have an agreement of the type
mentioned in clause I and the assessee is not required to register under any current company law.
With effect from AY 2020-21, MAT is equal to 15% of Book profits (Plus applicable Surcharge and cess).
Normal Tax Liability: Tax computed in accordance with the normal provisions of the Income-tax
Law, i.e., by applying the relevant tax rate to the company’s taxable income.
Minimum Alternate Tax (MAT): A tax calculated at 15% (previously 18.5%) on book profit plus cess
and surcharge.
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Calculation of ‘Book Profits’ for MAT (Maximum Alternate Tax) Purposes (Section 115JB)
After making certain adjustments to the profit as shown in the profit and loss statement, the ‘book
profit’ is calculated. The following steps can be used to make these adjustments:
i. Evaluating the Officer’s Ability to Alter Net Profit: Only in the following two circumstances can the
Assessing Officer rewrite the Profit and Loss Account:
You will be fined if your profit and loss account is not prepared in accordance with the Companies
Act.
AO can recalculate the profits subject to he is being finding that P&L statement is not made as
per relevant statute. AO cannot alter the profits if he is only differing in opinion with assessee
as regards inclusion of an item or amount in Profit and Loss or balance Sheet and no fraud or
misrepresentation is alleged against him.
If Accounting Policies, Accounting Standards, Rates, or Method of Depreciation are Different –
The first provision to section 115JB(2) states that the accounting policies, accounting standards,
method and rates of depreciation used in preparing the profit and loss account laid before the
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annual general meeting should be followed when preparing the profit and loss account for the
purpose of computing book value.
Under the Companies Act, some businesses have a different accounting year than they do under the
Income-tax Act (i.e., the previous (i.e., the fiscal year ended March 31). Typically, these businesses prepare
two sets of financial statements: one for the Companies Act and another for the Income-tax Act.
Different accounting policies/standards, as well as a different method or rate of depreciation,
are used in two sets of accounts to report higher profits to shareholders and lower profits to tax
authorities.
The second provision to section 115JB(2) was added to prevent this practise by ensuring that
accounting policies, accounting standards, depreciation method and depreciation rates for two sets
of accounts are the same. If this is not the case, the Assessing Officer can recalculate net profit using
the same accounting policies, accounting standards, depreciation method and rates as when profit
was reported to shareholders.
ii. Convert Net Profit to Book Profit by adjusting Net Profit
a. Positive Adjustment: Amount to be Added Back to Profit and Loss Account if Debt to Profit and
Loss Account:
1. Income tax paid or to be paid, as well as provisions Amounts carried to any reserves, by
whatever name called
2. Income tax, interest under the Income Tax Act and dividends derived from it
3. Amount or amounts set aside for liabilities other than ascertained liabilities in order to meet
provisions for meeting liabilities.
4. Amount set aside as a reserve for losses incurred by subsidiary companies
5. Dividends paid or proposed (amount or amounts)
6. Amount of expenditure relating to certain incomes (if such income is not subject to minimum
alternate tax)
7. (For the 2007-08 assessment year), the amount of Depreciation
8. The amount of deferred tax and the provisions for it, as well as the amount or amounts set
aside as a provision for asset depreciation.
9. Amount held in the revaluation reserve for a revalued asset at the time of retirement or
disposal.
10. In the case of units referred to in section 47, the amount of income/loss (xvii)
b. Negative Adjustments - Net Profit Deduction:
1. If any money is taken out of reserves or provisions, it is credited to the profit and loss account.
2. Tax-free income includes:
a. Section 10(38) exempt long-term capital gain for the assessment years 2005-06 and 2006-07;
b. Up to the assessment year 2004-05, income was exempt under section 10(23G);
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Mat Provisions Provide a Tax Credit for Tax Paid On Deemed Income (Section 115jAA)
It states that if tax is paid in any assessment year on deemed income under MAT Provisions against Tax
Liability under section 115JB, a Tax Credit is allowed in subsequent years.
Section 115JAA provides that if a company pays any amount of tax under section 115JB(1) for any
assessment year beginning on or after 1.4.2006, the difference between the tax paid under section 115JB
and the amount of tax payable by the company on its total income computed in accordance with the
other provisions of the Act is allowed credit for the taxes so paid for such assessment year.
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Furthermore, if the amount of tax credit allowed against the tax payable under the provisions of sub-
section (1) of section 115JB in respect of any income tax paid in any country or specified territory outside
India under sections 90, 90A, or 91 more than the amount of such tax credit admissible against the tax
payable by the assessee on its income in accordance with the other provisions of this Act, then, when
computing the amount of credit under this section, the amount of credit allowed under this section,
[Section 115JAA’s second provision]
The tax credited amount can be carried forward and set off in a year when the tax is due on the total
income calculated as per regular provisions. However, no carry forward shall be allowed beyond the 15th
assessment years (The 10th assessment year up to and including the 2017-18 assessment year) immediately
succeeds the assessment year in which the tax credit becomes allowable. The difference between the tax
on total income and the tax that would have been payable under section 115JB for that assessment year
is allowed as a set off for the brought forward tax credit in any assessment year. Prior to 2006-07, there
will be no credit given for MAT paid in any assessment year. In other words, MAT credit will be allowed
only for the previous year in which the tax payable on total income under normal provisions of the
Income Tax Act exceeds the tax payable under section 115JB and only to the extent that:
Taxable on total income under the Act’s regular provisions – Taxable on total income under section
115JB = MAT credit to be allowed.
According to current income tax rules, there is a carry forward mechanism for the minimum alternate
tax credit. MAT credit is currently available in assessment years where the normal tax liability exceeds
the MAT liability. Note that the maximum amount of MAT credit you can claim is limited to the difference
between your normal tax liability and your MAT liability for the year in question.
If a company, XYZ Ltd, has taxable income of `6000000 and book profits of `10000000 for the fiscal year
2015-16 under normal provisions of the Income Tax Act. The higher of the two would then be the tax
payable:
As a result, the company’s tax liability would be `18, 50,000. (Higher of the two)
Credit for MAT: 1850000-1800000 = `50000
XYZ Ltd has taxable income of `30 lakhs and book profits of `75 lakhs for the fiscal year 2019-20, according
to the normal provisions of the Income Tax Act.
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This tax credit may be carried forward for 15 Assessment Years after the assessment year in which it
became allowable.
This will be in effect beginning with the fiscal year 2018-19. MAT could previously only be carried forward
for ten years.
This credit would be carried forward to the fiscal year 2016-17 of XYZ Ltd.
TAX CREDIT SET CHANGES: MAT Credit adjustments or set-offs can be challenging at times; let us
illustrate with an example.
Assessment Tax Tax Actual Tax Cash Tax Credit Tax Credit
Year Payable Payable as payable Outflow Available Set off/
under MAT per normal u/s 115JAA adjusted
provisions
2013-14 9,00,000 6,00,000 9,00,000 9,00,000 3,00,000 -
2014-15 10,00,000 8,00,000 10,00,000 10,00,000 2,00,000 -
2015-16 11,00,000 7,50,000 11,00,000 11,00,000 3,50,000 -
2016-17 8,00,000 10,00,000 10,00,000 8,00,000* - 2,00,000
2017-18 6,00,000 10,50,000 10,50,000 6,00,000* - 4,50,000
The difference is calculated using the MAT credit from the previous year.
This MAT credit set off is only available if the tax payable under normal provisions exceeds the tax
payable under MAT and only to the extent of the difference. This credit is only available for 15 years and
will expire if it is still available after that time.
When taxpayer files return of income at that time these details are to be furnished. After filing
up the return starts the processing of the return of income by the Income Tax Department. This
department checks the correctness of the details. This process of assessing the return of income by
the Income-Tax department is known as “Assessment”.
Assessment also includes re-assessment and best judgment assessment under section 144.
MAT is an abbreviation for Minimum Alternate Tax. It is a tax imposed by section 115JB of the Income
Tax Act of 1961.
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15.7 GLOSSARY
Case Objective
This case aims to explain the provisions related to computation of MAT and it’s carried forward and
set off.
Background
ABC Energy Ltd. has a tax liability of `18,80,000 under the normal provisions of the Income-tax Act for
the financial year 2022-23 and a liability of `18,40,000. It has brought forward `200,000 in MAT credit.
Problem
Is the company able to change the MAT credit? If yes, how much and what will be the company’s tax
liability after the MAT credit is adjusted?
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Solution
In the year in which the company’s liability under normal provisions exceeds the MAT liability, the MAT
credit can be adjusted. The liability under the normal provisions of the Income-tax Act in this case is
`18,80,000, while the liability under the MAT provisions is `18,40,000. The company can adjust the MAT
credit because liability under normal provisions is greater than liability under MAT provisions.
The set off for brought forward MAT credit will be allowed in the following year(s) to the extent of
the difference between the tax on total income under normal provisions and the liability under MAT
provisions. As a result, after deducting the MAT credit, the company’s liability cannot be less than its
MAT liability. In this case, the MAT liability is `18,40,000 and the liability of the company cannot be less
than `18,40,000 after claiming set off of the MAT credit. As a result, the company can claim only `40,000
of the `2,00,000 credit and the remaining `1,60,000 credit can be carried forward to future years.
Questions
1. Describe MAT.
(Hint: Ensure that any company with significant profits and the ability to pay taxes does not avoid
paying income tax under section 115JB of the income tax act)
2. What is the mechanism for MAT credit carry forward?
(Hint: According to current income tax rules, there is a carry forward mechanism for the minimum
alternate tax credit)
1. There is a distinction between two types of profits: regular profit and book profit.
The profit computed using the provisions of tax laws is known as regular profit. Book profit, on the
other hand, is calculated using Schedule VI of the Companies Act, 1956.
Refer to Section Section 115JB – Special Provision for Payment of Tax by Certain Companies
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2. Only corporate companies are eligible for MAT. Individuals, HUF’s, partnership firms, and other non-
corporate entities are not eligible for MAT. MAT is also payable by foreign companies with income
sources in India. It does not apply to businesses in the infrastructure and power sectors. MAT also
excludes income from charitable activities and free trade zones. Refer to Section Section 115JB –
Special Provision for Payment of Tax by Certain Companies
3. The following is a method for calculating book profit:
Step 1: Determine net profit [before other comprehensive income (OCI)] from the company’s
profit and loss statement.
Step 2: Adjust Net Profit to Convert it to Book Profit, as described in Explanation 1 of section
115JB (2)
Refer to Section Computation of Book Profit
4. Taxpayers need to submit the income details to the Income-tax Department. When taxpayer files
return of income at that time these details are to be furnished. After filing up the return starts
the processing of the return of income by the Income Tax Department. This department checks
the correctness of the details. This process of assessing the return of income by the Income-Tax
department is known as “Assessment”. Assessment also includes re-assessment and best judgment
assessment under section 144. Refer to Section Introduction
https://www.incometaxindia.gov.in/tutorials/10.mat-and-amt.pdf
https://tax2win.in/guide/minimum-alternative-tax
12
Assessment of Companies
Unit – 15
CA. Prashant Bharadwaj
Minimum Alternate Tax – Sec 115JB
• The provisions of this chapter applies only to company assessees. The objective of this Section 115JB is to
ensure collection of minimum amount of tax in the case of companies which have book profits but having
no or less taxable income.
• In every assessment year, two parallel computations are made by every company. One, computation of
total income as per the normal provisions of the Act and the other is computation of book profit as per
section 115JB.
• Tax payable shall be higher of Tax on total income as computed under the normal provisions of the Act or
15% of the book profit as computed u/s 115JB.
Note: In case of a company being a unit located in International Financial Services Center which derives its
income solely in convertible foreign exchange, then the minimum alternate tax rate shall be 9% instead of
15%.
• If tax payable is 15% / 9%, of the book profit, being higher tax than the tax under the normal provisions,
then such books profit as computed shall be deemed to be the income of the company for that year and
minimum alternate tax shall be payable accordingly.
• Surcharge at 7% in case of domestic company and 2% in case of foreign company shall be levied if the
total income exceeds Rs. 1 Crore but does not exceed Rs. 10 Crores. However, if the total income exceeds
Rs. 10 Crores, then the applicable surcharge shall be 12% and 5% in case of domestic and foreign
company respectively. Health and education cess @ 4% shall be added on total income tax and applicable
surcharge.
• The amount so paid as the minimum alternate tax (in excess of tax computed under the normal provisions
of the Act) shall be available to the credit of the company to be set off u/s 115JAA within a period of 15
years immediately succeeding the AY in which the credit was allowable.
Computation of book profits u/s 115JB
• For the purpose of computation of book profit u/s.115JB, every
company assessee shall prepare its profit and loss account for the
relevant previous year in accordance with the provisions of
Schedule III of Companies Act 2013. However, in the case of
banking company, insurance company or any company engaged in
the generation or supply of electricity, or any other class of
company (as referred to in Section 129 the Companies Act), shall
prepare its profit and loss account for the relevant previous year in
accordance with the provisions of the Act governing such company.
Additions to profit as per books
• The amount of income-tax paid or payable, and the provision thereof.
The amount of income tax includes any interest; surcharge; health and
education cess.
• The amount carried to any reserves, by whatever name called.
• The amount provided to meet unascertained liabilities.
• The amount by way of provision for losses of subsidiary companies.
• The amount of dividends paid or proposed.
• The amount of expenditure relatable to any income exempt by virtue of
sections 10; or 11; or 12.
• The amount of expenditure relatable to the share of profit from
Association of Persons or Body of Individuals, which is not chargeable
to tax as per section 86.
Additions to profit as per books
• In case of a foreign company, the amount of expenditure relating to the capital
gains arising on transaction in securities or the interest, royalty or fee for
technical services chargeable to tax at the rates specified u/s 110 to Sec
115BBE.
Note: The above adjustments contemplated above, shall be made only if the
income is taxable under general provisions of the Act at a rate less than 15%.
• The amount of expenditure relatable to income by way of royalty in respect of
patent chargeable to tax u/s 115BBF.
• The amount of depreciation.
• The amount of deferred tax and the provision thereof.
• The amount set aside as provision for diminution in the value of any asset.
• The amount of standing in revaluation reserve relating to revalued asset on the
retirement or disposal of such asset (if not credited to profit and loss account).
Deductions from profit as per books
• The amount withdrawn from any reserve or provision, if book profit of such
year has been increased by those reserve or provision.
• The amount of income exempt from tax by virtue of sections 10; or 11; or 12.
• The amount of depreciation debited to the profit and loss account (excluding
the depreciation on account of revaluation of assets).
• 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.
• The amount of income being share of profit from an Association of Persons or
Body of Individuals which is not chargeable to tax as per section 86.
• In case of a foreign company, the amount of income from capital gain arising
on transaction in securities or interest, royalty or fee for technical service
taxable at rates specified u/s 110 to section 115BBE. The amount of income
by way of royalty in respect of patent chargeable u/s 115BBF.
Deductions from profit as per books
• The amount of loss brought forward or unabsorbed depreciation,
whichever is less as per books of account (for this purpose the loss shall
not include depreciation).
• The amount of profits of sick industrial company for the years
commencing from the year in which the said company has become a
sick industrial company under the relevant Act and ending with the year
in which the entire net worth of such company becomes equal to or
exceeds the accumulated losses.
• The amount of deferred tax credited to profit and loss account.
Credit for tax paid under MAT – Sec.115JAA
• Where any amount of tax is paid u/s.115JB in excess of the tax payable under
the normal provisions, such excess shall be treated as credit (MAT Credit)
available to the assessee company.
• The amount of such credit shall be carried forward to the subsequent years
and set off against the excess of tax payable under the normal provisions over
the tax payable under sec. 115JB. It can be so carried forward and set off
within the period of 15 years immediately succeeding the assessment year in
which the tax credit is determined. If in the subsequent 15 years, the company
continues to pay minimum alternate tax and the credit is not set off, it shall
lapse.
• Where the amount of tax payable is reduced or increased as a result of an
order passed, the amount of tax credit allowed u/s. 115JAA shall also be
increased or reduced accordingly.
• No interest shall be payable to the company on the MAT credit available.
• In case of conversion of a private company or unlisted public company into
limited liability partnership (LLP), MAT credit shall not be available to the
successor LLP – Sec. 115JAA(7).