603 - taxation laws

UNIT I
Important Definitions-Assessment year, Previous year, Person, Assesses, Concept of Income,
Agricultural Income, Exempted incomes, Residential status and Tax Liability

UNIT II
Heads of income-Income from Salaries: Basic, Bonus, Commission, HRA, RFA, Perks: Car (partly
personal and official use) servant, gardener, watchman, cook, Gratuity, pension, leave
encashment. Income from House Property, Profits and gains of a business or profession

UNIT III NOTE:- Exemptions are not mentioned

Capital Gains: Exemptions u/s54, 54B, 54D, 54EC, 54F, Income from other sources, Individual
Assessment: Deduction u/s 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G, 80U,
Computation of Total Income of individual.

UNIT IV
Set off and carry forward of losses, clubbing of income, Income tax authorities, types of
assessment.

Unit 1
Important Definitions, Concepts of Income
11th May 2020
The Income Tax law in India consists of the following components:
1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in
India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks
after the administration of Direct Tax. The CBDT is empowered to make rules for carrying
out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India presents the budget to
the parliament. Once the finance bill is approved by the parliament and get the clearance
from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need clarification
and that clarification usually in a form of circulars and notifications which has been issued
by the CBDT from time to time. It includes clarifying the doubts regarding the scope and
meaning of the provisions.
Types of Taxes
Taxes are levied by the government on the taxpayer. Taxes are broadly divided into two parts
namely, Direct Tax and Indirect Tax. Direct Tax is levied directly on the income of the person.
Income Tax and Wealth Tax are the part of Direct Tax. Whereas, in indirect taxes, the person who
pays the tax, shifts the burden to the person who consumes the goods or services. Before 2017
the Indirect Tax comprises of various taxes and duties like Service Tax, Sales Tax, Value Added
Tax, Customs Duty, Excise Duty and etc. From July 1st, 2017 all such Indirect Taxes are
submerged in one tax law which was named as ‘The Goods and Services Tax Act, 2017”.
Assessee
An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes
or any other sum of money, as defined under section 2 (7) of the Act. The expression ‘any other
sum of money’ includes other such obligations payable, for instance fine, interest, penalty and
other tax etc.
Assessment Year
“Assessment Year” means the year in which income of the previous year of an assessee is taxed.
The timed lap of assessment year is of twelve months beginning from the 1st April every year.
The period starts from 1st April of one year and ending on 31st March of next year. Broadly,
assessment year is defined under section 2 (9) of the Act.
Previous Year
Income earned during the year is taxable in the next year. The definition of “Previous Year” is
given under section 3 of the Act. Previous Year is the year in which income is earned. Previous
year is the financial year immediately preceding the relevant assessment year. From 1989-90
onwards, every taxpayer is obliged to follow financial year (i.e., April 1st of one year to March
31st of next year) as the previous year.
For a newly set up business or profession, the first previous year will start from the day from
which that business or profession has commenced, but the period of ending will remains same
(i.e., 31st March).
Heads of Income
As per Income tax, section 14 classifies income under five heads:
1. Income from salaries
2. Income from House Property
3. Profits and gains of business and profession
4. Capital Gains
5. Income from other sources
Tax Rates
The Income is taxed at the rates prescribed by the relevant Finance Act. The tax levied on the
basis of a slab system where different tax rates have been directed for the different slab. In India,
there are three categories of individual taxpayers:
1. An individual below the age of 60 years,
2. A senior citizen above the age of 60 years, but below the age of 80 years,
3. A super senior citizen above 80 years of age.
The tax slab varies according to the different persons.
Surcharge
The Surcharge is commonly known as Tax on Tax. It is an additional tax levied on the taxpayers
on a special group of people. It is an additional tax liability levied on the person having more
income than prescribed.
 Education Cess and Secondary Higher Education Cess
The amount of income tax shall be increased by an Education Cess on Income Tax by 2% and
Secondary and Higher Education Cess by 1% of the tax liability.

Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of every person”. To understand
the basic concept.It is very important to know the various other concepts.
Concept of Income
In common parlance, Income is known as a regular periodic return to a person from his activities.
However, the Income has broader classified in Income Tax law. The Income Tax Act, even take
consideration of income which has not arisen regularly and periodically. For instance, winning
from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per
income tax.
The Income includes income from:
Cash or Kind
Income in terms of Cash is not the only way to receive income, it can also be received in terms of
a kind. The calculation of income from kind is subject to different treatments in both Direct and
Indirect Tax. When the income is received in kind, its valuation will be made.
Legal or Illegal Income
A man of ordinary prudence may think that the illegal income may not be falling under the
concept of income, but income tax does not make any distinction between the income received
from a legal or illegal source. In CIT v. Piara Singh, the Supreme Court held that the loss of
business of smuggling shall be allowed for deduction under Income Tax. The rationale behind the
decision was that the smuggling activity is also regarded as a business. Therefore, the
confiscation of currency notes employed in smuggling activity is a loss which arises directly from
the carrying on of the business.
Temporary or Permanent
As per Income Tax Act, there is no distinction in computing income whether nature is temporary
or permanent.
Receipt basis or Accrual basis
Income arises either on receipt basis or accrual basis. It may accrue to a taxpayer without its
actual receipt. The income in some cases is deemed to accrue or arise to a person without its
actual accrual or receipt. Income accrues where the right to receive arises.
Gifts 
Gifts up to Rs. 50,000 received in Cash do not constitute tax liability. Gifts in kind having the fair
value maximum up to Rs. 50,000 is not liable to tax. However, the whole amount will be taxed if
the value exceeds the prescribed limit. Moreover, the treatment of valuation of the gift is
different in the different situation especially gifts received on occasion of marriage.
Lump sum or Instalments 
Income Tax does not make any distinction in computing income, whether it receive in lump sum
or instalment.
Moreover, the income is defined in Section 2(24) of the Act.
Person
Income tax is levied on the total income of the previous year of every person. In general terms,
the meaning of a person can be interpreted in a short term. Whereas, as per Section 2
(31), Person includes:
1. an individual,
2. a Hindu undivided family (HUF),
3. a company,
4. a firm,
5. an association of persons (AOP) or a body of individuals (BOI), whether incorporated or
not,
6. a local authority, and
7. every artificial juridical person (AJP), not falling within any of the preceding sub-clauses.
The definition of Person starts with the word includes, therefore, the list is inclusive, not
exhaustive.

Agricultural Income
The Income-tax Act, 1961 does not define what agricultural income is. Its definition is wide and
inclusive. It tells us which incomes are agricultural incomes. It covers the income of cultivators
and land-owners both. Under section 2(lA) of Income Tax Act 1961 : “agricultural income” means:
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes
(b) Any income derived from such land by:
● (i) Agriculture; or
● (ii)the performance b’ a cultivator or receiver of rent-in-kind, of any process ordinarily
employed by a cultivator or receiver of rent-in-kind to render the produce raised or
received by hun, fit to be taken to the market; or
● (iii)the sale by a cultivator or receiver of rent-in-kind in respect of which no process has
been performed other than a process described in the above paragraph
(c) Any income derived from any building and occupied by the receiver of rent or revenue of
such land, or occupied by the cultivator or the receiver of rent-in-kind of any land with respect of
which or the produce of which any process mentioned in (ii) and (iii) above is carried on,
provided the following two conditions are fulfilled:
● (A)The building is situated on or in the immediate vicinity of the land and is a building
which the cultivator or the receiver of rent-in-kind requires as dwelling house or as a
store-house or other out-building. The house must be needed by reason of its connection
with land
● (B)The land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by the officers of the Govt. as such.
Types Of Agricultural Income
1. Any income received as rent or revenue from agricultural land
Rent can very simply be defined as a payment in cash or in-kind which the owner of the land
receives from another person in consideration of a grant of a right to use land. When the owner
of land is not performing agricultural operations himself but gives his land on contract basis, any
amount received from the actual cultivator by the owner of the land shall be agricultural income.
Such rent may he in cash or in-kind, i.e., a share in the produce grown by the cultivator. 
2. Income derived from Agriculture
Income derived from land situated in India by applying agricultural operations shall be
agricultural income. If all the basic operations like preparation of land for sowing, planting,
watering, harvesting etc. are applied, any income resulting from such operations shall be
agricultural income. On the other hand, if grass, trees etc. have grown spontaneously or without
the aid of human skill, effort, labor etc., any income resulting from the sale of such grass, trees
or lease rent of such land shall not he agricultural income.
Agricultural income also includes income from orchards or from horticulture.
3. Any income accruing to the person by the performance of any process to render the
produce marketable
If, in the ordinary course, a process is to he employed by the cultivator himself or the landlord
who receives the produce as rent-in-kind, any income derived from such a process shall he
agricultural income. Such a process must be employed to render the produce fit for marketing.
The process may he manual or mechanical. It should be noted that the produce should not
change its original character in spite of the processing unless the produce cannot be sold in that
form or condition.
Following points are to he noted in this connection:
1. The process must him one which is ordinarily employed by the cultivator.
2. The process is employed to render the produce fit to be taken to the market.
3. The produce must retain its original character in spite of process unless the produce is
having no market if offered for sale in its original condition.
4. Any income received by the person by the sale of produce raised or received as rent-in-
kind
5. Income from buildings used for agriculture
Casual Income
Casual income means any receipts which are of a casual and non-recurring nature. For example,
income earned by way of winnings from lotteries, races including horse races, crossword
puzzles, etc.
Conditions:
1. No expenditure or allowance can be allowed from such income.
2. Deduction under Chapter VI-A is not allowable from such income.
3. Adjustment of unexhausted basic exemption limit is also not permitted against such
income.

Exempted incomes
Exempted incomes
11th May 2020
There are some incomes which do not form part of total income and thus, are also called as
income exempt from tax. Such exempted incomes are given under section 10 of the Income-tax
Act, 1961.
Some of those incomes are explained below:
Agricultural income [Sec. 10(1)]:
Agricultural income in India is totally exempt from tax. However, such income is to be aggregated
in case of certain assessees for the purpose of determining rate of tax on non-agricultural
income.
Receipts by a member from a HUF [Sec. 10(2)]:
Any sum received by an individual as a member of a Hindu Undivided Family either out of income
of the family or out of income of estate belonging to the family is exempt from tax.

Share of profit received by a partner from a firm [Sec. 10(2A)]:

In case of a person being a partner of a firm which is separately assessed as such, his/ her share
in the total income of the firm is exempt from tax.
Interest on Non-resident (External) Account [Sec. 10(4)]:
In the case of an individual who is not resident in India, any income by way of interest on money
standing to his credit in a Non-resident (External) account in any bank in India shall be exempt
from tax if certain conditions are satisfied.

Remuneration to persons who are not citizens of India [Sec. 10(6)]:

In case of an individual who is not a citizen of India, the following income shall be exempt from
tax:
● Remuneration received by diplomats, etc.
● Remuneration received by a foreign national as an employee of a foreign enterprise.
● Non-resident employed on a foreign ship.
● Remuneration of employee of foreign Government during his training in India.
Allowance or perquisites outside India [Sec. 10(7)]:
Any allowances or perquisites paid or allowed, as such, outside India by the Government to a
citizen of India, for rendering services outside India, are exempt.
Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec. 10(10BB)]:

Any payments made, under the above Act or any scheme made thereunder, shall be exempt from
tax in the hands of the recipient.
Exemption for compensation received or receivable on account of any disaster [Sec.
10(10BC)]:
Any amount received or receivable from the Central Government or a State Government or a
local authority by an individual or his legal heir by way of compensation on account of any
disaster shall be exempt from tax.
However, the exemption is not allowable in respect of amount received or receivable to the
extent such individual or his legal heir has been allowed a deduction under the Income-tax Act on
account of any loss or damage caused by such disaster.
Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]:
The tax actually paid by the employer on a perquisite provided to the employee [other than the
perquisite provided by way of monetary payment within the meaning of section 17(2)] shall be
exempt from tax in the hands of the employee.
Provident Fund [Sec. 10(11)]:
Any payment from a provident fund to which the Provident Fund Act, 1925 applies or from Public
Provident Fund set up by the Central Government shall be exempt from tax.  
Educational scholarships [Sec. 10(16)]:
Scholarships granted to meet the cost of education are exempt from tax. In order to avail the
exemption, it is not necessary that scholarship should be financed by the Government.
Daily allowances of Members of Parliament [Sec. 10(17)]:
The following incomes shall be exempt from tax in the hands of the persons specified:
● Daily allowance received by any person by reason of his membership of Parliament or of
any State Legislature or of any Committee thereof;
● Any allowance received by any person by reason of his membership of Parliament under
the Members of Parliament (Constituency Allowance) Rules, 1986;
● Any constituency allowance received by any person by reason of his membership of any
State Legislature under any Act or Rules made by that State Legislature.
Pension received by certain awardees/ any member of their family [Sec. 10(18)]:
Any income by way of pension/ family pension received by an individual or any member of his
family shall be exempt from tax if such individual has been in the service of Central/ State
Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or such
other gallantry award as may be notified.
Exemption of the family pension received by the family members of armed forces (including
para-military forces) personnel killed in action in certain circumstances [Sec. 10(19)]:
Where the death of a member of the armed forces (including para-military forces) of the Union
has occurred in the course of operational duties, in such circumstances and subject to such
conditions as may be prescribed, the family pension received by the widow or children or
nominated heirs, as the case may be, shall be exempt from tax.
Annual value of one palace of the ex-ruler [Sec. 10(19A)]:
The ‘annual value’ in respect of any one palace which is in occupation of an ex-ruler is exempt
from tax, provided such annual value was exempt before 28.12.1971 by virtue of any law or order
then prevailing.
Income of minor clubbed in the hands of a parent [Sec. 10(32)]:
Under section 64(1A), the income of a minor child is includible in the total income of the parent
under the circumstances mentioned therein, section 10(32) provides that such parent in whose
income the minor’s income is included shall be entitled to exemption to the extent such income
does not exceed of ` 1,500 in respect of each minor child, whose income is so includible. In other
words, the exemption shall be allowed to the extent of the income of each minor child included or
` 1,500 per child, whichever is less.
Capital gain on transfer of units of US-64 exempt if transfer takes place on or after 1-4-2002
[Sec. 10(33)]:
Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964
where the transfer of such asset takes place on or after 1-4-2002, shall be exempt from tax.
Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]:
Any dividend declared, paid or distributed by a domestic company shall be liable to dividend
distribution tax @ 15% plus surcharge @ 10% plus education cess @ 2% plus secondary and
higher education cess @ 1% of the amount so declared, distributed or paid. Hence, such
dividend received by the shareholders shall be exempt from tax in their hands.
Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]:
Like dividends, income received on units of UTI (now known as specified undertaking and
specified company) and Mutual Funds covered under section 10(23D) shall be exempt from tax
in the hands of the unit-holders.
Exemption of long-term capital gain arising from sale of shares and units [Sec. 10(38)]:
Any income arising from the transfer of a long-term capital asset, being an equity share in a
company or a unit of an equity oriented fund shall be exempt from tax provided:
● Such equity shares are sold through recognized stock exchange, whereas units of an
equity oriented fund may either be sold through the recognized stock exchange or may be
sold to the mutual fund.
● Such transaction is chargeable to securities transaction tax.
Exemption of amount received by an individual as loan under reverse mortgage scheme [Sec.
10(43)]:
Any amount received by an individual as a loan, either in lump sum or in instalment, in a
transaction of reverse mortgage referred to in section 47(xvi) shall be exempt from tax.
Residential Status and Tax Liability
11th May 2020
The residential status of a person is required to be determined for each assessment year in order
to determine the scope of total income. The basis of determination of residential status in
respect of each person is laid down under the provisions of section 6 which are analyzed
hereinafter.
Residential status of an Individual under Income Tax Act, 1961
Residential status of an individual for income-tax purposes depends on the physical stay of the
individual in India. Based on the period of stay in India in a given financial year, an individual may
be classified as:
● Resident
● Not ordinarily resident (NOR)
● Non-resident (NR).

Tests of residence under the act

1. An individual is a resident in India if he stays in India for:
 ● At least 182 days during a financial year
● At least 60 days during a financial year and 365 days or more during the 4 years preceding
that fiscal year.
Exceptions to the above:
● The 60-day period mentioned above will be substituted for 182 days in case of the
following persons:-
○ A citizen of India who leaves the country as a crew member of an Indian ship or for
the purposes of employment outside India
○ A Citizen of India or PIO who visits India in any previous year.
1. An individual is an NOR in India if:
● He is an NR in India in 9 of 10 financial years preceding the relevant fiscal year
● His stay in the 7 years preceding the relevant financial year is in the aggregate 729 days or
less.
2. An individual is an NR in India if:
● He does not satisfy any of the two conditions mentioned in A above.
Non-Resident Indian (NRI)
An NRI is defined as a citizen of India or a PIO who is not a resident.
Person of Indian Origin (PIO)
A person shall be deemed to be of Indian origin if he or either of his parents or grandparents
were born in an undivided India.
Residential Status of HUF: Sec 6(2)
A HUF is said to be resident in India when during that year control and management is situated
wholly or partly in India. In other words it will be non-resident in India if no part of the control and
management of affairs is situated in India.
Control and management lies at the place where decision regarding the affairs of the HUF are
taken.
A resident HUF is said to be resident and ordinarily resident in India if the karta of the HUF
satisfies both the following conditions:
1. He has been resident in India for at least 2 out of 10 previous years immediately preceding the
relevant previous year
And
2. He has been in India for 730 days or more during 7 previous years immediately preceding the
relevant previous year.
If the karta of HUF does not satisfy any or both of the above conditions, then HUF shall be
resident but not ordinarily resident in India.
Residential Status of Firms, AOP, BOI etc: Sec 6(2), 6(4)
A Firm, AOP, BOI etc is said to be resident in India when during that year control and
management is situated wholly or partly in India. In other words it will be non-resident in India if
no part of the control and management of affairs is situated in India.
Control and management lies at the place where decision regarding the affairs of the firms etc
are taken.
Residential Status of Companies: Sec 6(3)
Indian Company is always resident in India
Foreign Company is resident in India if control and management of its affairs is situated wholly in
India during relevant previous year i.e. if all the board meetings of the foreign company is held in
India, then it shall be resident, otherwise non-resident.
Relation between residential status and incidence of tax [Section 5]
Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the
place and time of accrual of receipt of income:
Indian Income and foreign income
Indian Income: Any of the following three is an Indian income:
i) If income is received (or deemed to be received) in India during the previous year and at the
same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year;
ii) If income is received (or deemed to be received) in India during the previous year but it
accrues (or arises) outside India during the previous year;
iii) If income is received outside India during the previous year but it accrues (or arises or is
deemed to accrue or arise) in India during the previous year;
Foreign income: If the following conditions are satisfied, then such income is foreign income:
i) Income is not received (or not deemed to be received) in India; and
ii)Income does not accrue or arise (or does not deemed to accrue or arise) in India.
The provisions of residential status are tabulated as below:

Whether income is Whether income Status of Income

received (or deemed accrues (or arises is
to be received) in deemed to accrue or
India during the arise) in India during
relevant years the relevant years.
Yes Yes Indian Income
Yes No Indian Income
No Yes Indian Income
No No Foreign Income
Incidence of tax for different taxpayers is as follows:
Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):

Resident and Resident but Non-resident

ordinarily not ordinarily
resident resident
Indian Income Taxable Taxable Taxable
Foreign Income
 Foreign Income
If it is business Taxable Taxable Not taxable
income and
business is
controlled
wholly or partly
in from India
If it is income Taxable Taxable Not taxable
from profession
which is set up
in India
If it is business Taxable Not taxable Not taxable
income and
business is
controlled from
outside India
If it is income Taxable Not taxable Not taxable
from profession
which is set up
outside India
Any other Taxable Not taxable Not taxable
foreign income
(like salary, rent,
interest etc.)
Any other taxpayer (like company, firm, co-operative society, association of persons, body of
individuals, etc):

Resident Non-resident
Indian Income Taxable Taxable
Foreign Income Taxable Not taxable
Conclusion:
Indian Income: Indian income is always taxable in India irrespective of the residential status of
the taxpayer;
Foreign Income: Foreign income is taxable in the hands of resident in case of a firm, co-
operative society, association of persons, body of individuals or resident and ordinarily resident
in case of individuals and HUFs in India. Foreign income is not taxable in the hands of non-
resident in India.
In the hands of resident but ordinarily resident taxpayer, foreign income is taxable only if it is
● Business income and business is controlled wholly or partly in from India; and
● Income from profession which is set up in India

UNIT 2
Heads of Income: Income from Salaries
11th May 2020
SECTION I: Understanding Your Payslip
1. Basic Salary
This is a fixed component in your paycheck and forms the basis of other portions of your salary,
hence the name. For instance, HRA is defined as a percentage (as per the company’s discretion)
of this basic salary. Your PF is deducted at 12% of your basic salary. It is usually a large portion
of your total salary.
2. House Rent Allowance
Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or
HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income tax
laws have prescribed a method for computing the HRA that can be claimed as an exemption.
Also do note that, if you receive HRA and don’t live on rent your HRA shall be fully taxable.
3. Leave Travel Allowance
Salaried employees can avail exemption for a trip within India under LTA. The exemption is only
for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your
spouse, children, and parents, but not with other relatives. This particular exemption is up to the
actual expenses, therefore unless you actually take the trip and incur these expenses, you
cannot claim it. Submit the bills to your employer to claim this exemption.
4. Bonus
The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be
its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your
performance during a period and is based on the company policy.
5. Employee Contribution to Provident Fund (PF)
Provident Fund or PF is a social security initiative by the Government of India. Both employer and
employee contribute a 12% equivalent of the employee’s basic salary every month toward
employee’s pension and provident fund. An interest of about 8.55% from FY 2017-18 (earlier it
was 8.65%) gets accrued on it. This is a retirement benefit that companies with over 20
employees must provide as per the EPF Act, 1952.

6. Standard Deduction
Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the
conveyance allowance and medical allowance. The employee can now claim a flat Rs. 50,000
(Prior to Budget 2019, it was Rs. 40,000) deduction from the total income, thereby reducing the
tax outgo.
7. Professional Tax
Professional tax or tax on employment is a tax levied by a state, just like income tax which is
levied by the central government. The maximum amount of professional tax that can be levied by
a state is Rs 2,500. It is usually deducted by the employer and deposited with the state
government. In your income tax return, professional tax is allowed as a deduction from your
salary income.
Broadly your CTC will include:
1. Salary received each month.
2. Retirement benefits such as PF and gratuity.
3. Non-monetary benefits such as an office cab service, medical insurance paid for by the
company, or free meals at the office, a phone provided to you and bills reimbursed by your
company.
Your take-home salary will include:
1. Gross salary received each month.
2. Minus allowable exemptions such as HRA, LTA, etc.
3. Minus income taxes payable (calculated after considering Section 80 deductions).
SECTION III: Retirement Benefits
1. Exemption of Leave Encashment
Check with your employer about their leave encashment policy. Some employers allow you to
carry forward some amount of leave days and allow you to encash them while others prefer that
you finish using them in the same year itself. The amount received as compensation for leave
days accumulated is referred to as leave encashment and it is taxable as salary.

Exemption of leave encashment from tax:

It is fully exempt for Central and State government employees. For non-government employees,
the least of the following three is exempt.
1. 10 months average salary preceding retirement or resignation (where average salary
includes basic and DA and excludes perquisites and allowances)
2. Leave encashment actually received. (this is further subject to a limit of Rs 3,00,000 for
retirements after 02.04.1998)
3. Amount equal to salary for the leave earned (where leave earned should not exceed 30
days for every year of service)
The amount chargeable to tax shall be the total leave encashment received minus exemption
calculated as above. This is added to your income from salary.
2. Relief Under Section 89(1)
You are allowed tax relief under Section 89(1), when you have received a portion of your salary in
arrears or in advance, or have received a family pension in arrears. Calculate the Tax Relief
Yourself
1. Calculate the tax payable on the total income, including additional salary in the year it is
received.
2. Calculate the tax payable on the total income, excluding additional salary in the year it is
received
3. Calculate the difference between Step 1 and Step 2
4. Calculate the tax payable on the total income of the year to which the arrears relate,
excluding arrears
5. Calculate the tax payable on the total income of the year to which the arrears relate,
including arrears
6. Calculate the difference between Step 4 and Step 5
7. The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.
Note that if the amount at Step 6 is more than the amount at Step 3, no relief shall be allowed.

3. Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received on voluntary retirement or separation is exempt from tax as per the
Section 10(10C). However, the following conditions must be fulfilled
1. Compensation received is towards voluntary retirement or separation
2. Maximum compensation received does not exceed Rs 5,00,000.
3. The recipient is an employee of an authority established under the Central or State Act,
local authority, university, IIT, state government or central government, notified institute of
management, or notified institute of importance throughout India or any state, PSU,
company or a cooperative society.
4. The receipts are in compliance with Rule 2BA.
No exemption can be claimed under this section for the same AY or any other if relief under
Section 89 has been taken by an employee for compensation of voluntary retirement or
separation or termination of services. 
Note: Exemption can only be claimed in the assessment year the compensation is received.
4. Pension
Pension is taxable under the head salaries in the income tax return. Pension is paid out
periodically on a monthly basis usually. You may also choose to take pension as a lump sum (also
called commuted pension) instead of a periodical payment. At the time of retirement, you may
choose to receive a certain percentage of your pension in advance.
Commuted and Uncommuted Pension Commuted pension or lump sum received may be exempt
in certain cases. For a government employee, commuted pension is fully exempt. Uncommuted
pension or any periodical payment of pension is fully taxable as salary.
5. Gratuity
Gratuity is a retirement benefit that employers provide for their employees. The employee is
entitled to receive gratuity when he completes five years of service at that company. It is,
however, only paid on retirement or resignation. Gratuity received on retirement or death by a
central, state or local government employee is fully exempt from tax for the employee or his
family. The tax treatment of your gratuity is different, depending on whether your employer is
covered by the Payment of Gratuity Act. Check with your company about its status, and then
proceed to calculate.
If your employer is covered by the Payment of Gratuity Act, then the least of the following three
is tax-exempt.
1. 15 days salary based on the salary last drawn for every completed year of service or part
thereof in excess of 6 months.
For simplicity sake, this is calculated as last drawn salary x number of years in employment x
15/26 (where last drawn salary is Basic salary and DA and number of years in service is rounded
off to the nearest full year)
2. Rs 20,00,000
3. Gratuity actually received
If your employer is not covered under the Payment of Gratuity Act, the least of the following
three is tax-exempt.
1. Half month’s salary for each completed year of service. While calculating completed years,
any fraction of a year shall be ignored.
SECTION IV: Basics of Income Tax
1. Income Chargeable to Tax
Your income is not equal to your salary. You could earn income from several other sources other
than your salary income. Your total income, according to the Income Tax Department, could be
from house property, profit or loss from selling stocks or from interest on a savings account or on
fixed deposits. All these numbers get added up to become your gross income.

Income from Salary All the money you receive while

rendering your job as a result of
an employment contract
Income from house property Income from house property you
own; property can be self-
occupied or rented out.
Income from other sources Income accrued from fixed
deposits and savings account
come under this head.
Income from capital gains Income earned from the sale of a
capital asset (mutual funds or
house property).
Income from business and Income/loss arising as a result of
profession carrying on a business or
 profession. Freelancers income
come under this head.
2. 2 Tax Rates
Add up all your income from the heads listed above. This is your gross total income. From your
gross total income, deductions under Section 80 are allowed to be claimed. The resulting
number is the income on which you have to pay tax.
3. TDS on Salary
TDS is tax deducted at source. Your employer deducts a portion of your salary every month and
pays it to the Income Tax Department on your behalf. Based on your total salary for the whole
year and your investments in tax-saving products, your employer determines how much TDS has
to be deducted from your salary each month.
For a salaried employee, TDS forms a major portion of an employee’s income tax payment. Your
employer will provide you with a TDS certificate called Form 16 typically around June or July
showing you how much tax was deducted each month.
Your bank may also deduct tax at source when you earn interest from a fixed deposit. The bank
deducts TDS at 10% on FDs usually. A 20% TDS is deducted when the bank does not have your
PAN information.
4. Form 16
Form 16 is a TDS certificate. Income Tax Department mandates all employers to deduct TDS on
salary and deposit it with the government. The Form 16 certificate contains details about the
salary you have earned during the year and the TDS amount deducted.
It has two parts: Part A with details about the employer and employee name, address, PAN and
TAN details and TDS deductions.
Part B includes details of salary paid, other incomes, deductions allowed, tax payable.
5. Form 26AS
Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is
provided by the Income Tax Department. It shows details of tax deducted on your behalf by
deductors, details on tax deposited by taxpayers and tax refund received in the financial year.
This form can be accessed from the IT Department’s website.
6. Deductions
The lower your taxable income, the lower taxes you ought to pay. So be sure to claim all the tax
deductions and benefits that apply to you. Section 80C of the Income Tax Act can reduce your
gross income by Rs 1.5 lakhs. There are a bunch of other deductions under Section 80 such as
80D, 80E, 80GG, 80U etc. that reduce your tax liability.

Income from House & Property

11th May 2020
Basics of House Property
A house property could be your home, an office, a shop, a building or some land attached to the
building like a parking lot. The Income Tax Act does not differentiate between a commercial and a
residential property. All types of properties are taxed under the head ‘income from house
property’ in the income tax return. An owner for the purpose of income tax is its legal owner,
someone who can exercise the rights of the owner in his own right and not on someone else’s
behalf.
When a property is used for the purpose of business or profession or for carrying out freelancing
work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair
and maintenance are allowed as business expenditure.
1. Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be
occupied by the taxpayer’s family parents and/or spouse and children. A vacant house property
is considered as self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer,
only one is considered and treated as a self-occupied property and the remaining are assumed
to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has
been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and
remaining house as let out for Income tax purposes.
2. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house
property for income tax purposes
3. Inherited Property
An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a
self-occupied one or a let out one based on its usage as discussed above.
Steps to Calculate Income from House Property
Here is how you compute your income from a house property:
1. Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-
occupied house is zero. For a let out property, it is the rent collected for a house on rent.
2. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of
property.
3. Determine Net Annual Value(NAV): Net Annual Value = Gross Annual Value – Property Tax
4. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction
from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting
and repairs can be claimed as tax relief beyond the 30% cap under this section.
5. Reduce home loan interest: Deduction under Section 24 is also available for interest paid
during the year on housing loan availed.
6. Determine Income from house property: The resulting value is your income from house
property. This is taxed at the slab rate applicable to you.
7. Loss from house property: When you own a self occupied house, since its GAV is Nil,
claiming the deduction on home loan interest will result in a loss from house property. This
loss can be adjusted against income from other heads.
Note: When a property is let out, its gross annual value is the rental value of the property. The
rental value must be higher than or equal to the reasonable rent of the property determined by
the municipality.

Profits and gains of a business or profession

11th May 2020
In view of Section 2(13), business includes any:
(a) Trade
(b) Commerce
(c) Manufacture
(d) Any adventure or concern in the nature of trade, commerce or manufacture. It covers every
facet of an occupation carried on by a person with a view to earning profit.
● The word “business” is one of large and indefinite import and connotes something which
occupies attention and labour of a person for the purpose of profit.
● Business arises out of commercial transactions between two or more persons. One cannot
enter into a business transaction with oneself.
As per section 2(36), profession includes vocation. As profits and gains of a business, profession
or vocation are chargeable to tax under the head “Profits and gains of business or profession”,
distinction between “business”, “profession” and “vocation” does not have any material
significance while computing taxable income. What does not amount to “profession” may amount
to “business” and what does not amount to “business” may amount to “vocation”.
1. Business Incomes Taxable under the head of ‘Profit and Gains of Business or
Profession’ (Section 28).
Under section 28, the following income is chargeable to tax under the head “Profits and gains of
business or profession”:
● Profits and gains of any business or profession;
● Any compensation or other payments due to or received by any person specified in section
28(ii);
● Income derived by a trade, professional or similar association from specific services
performed for its members;
● The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession;
● Any profit on transfer of the Duty Entitlement Pass Book Scheme;
● Any profit on the transfer of the duty free replenishment certificate;
● Export incentive available to exporters;
● Any interest, salary, bonus, commission or remuneration received by a partner from firm;
● Any sum received for not carrying out any activity in relation to any business or profession
or not to share any know-how, patent, copyright, trademark, etc.;
● 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 sum received under a Keyman insurance policy including bonus;
● any sum received (or receivable) in cash or kind, on account of any capital asset (other
 ●
than land or goodwill or financial instrument) being demolished, destroyed, discarded or
transferred, if the whole of the expenditure on such capital asset has been allowed as a
deduction under section 35AD;
● Income from speculative transaction.
2. Business Income Not Taxable under the head ‘Profit and Gains of Business or
Profession’
In the following cases, income from trading or business is not taxable under section 28, under
the head “Profits and gains of business or profession”:
Rental income in the case of Dealer in Property:
Rent of house property is taxable under section 22 under the head “Income from house
property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of rent
is engaged in the business of letting properties on rent.
Dividend on Shares in the case of a Dealer-in-Shares:
Dividends on shares are taxable under section 56(2)(i), under the head “Income from case of a
dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade or
the recipient of dividends is a dealer-in-shares. Dividend received from an Indian company is not
chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions).
Winnings from Lotteries, etc.
Winnings from lotteries, races, etc., are taxable under the head “Income from other sources” etc.
(even if derived as a regular business activity).
Interest received on Compensation or Enhanced Compensation:
Such interest is always taxable in the year of receipt under the head “Income from other sources”
(even if it pertains to a regular business activity). A deduction of 50 % is allowed and effectively
only 50 % of such interest is taxable under the head “Income from other sources”.
Profits derived from the aforesaid business activities are not taxable under section 28, under the
head “Profits and gains of business or profession”. Profits and gains of any other business are
taxable under section 28, unless such profits are exempt under sections 10 to 13A.
3. Mode of Taxation on Certain Incomes (Section 145B)
Section 145B has been inserted by the Finance Act, 2018. It is applicable from the assessment
year 2017-18 onwards. It provides mode of taxation of the following incomes:
1. Interest received by an assessee on compensation or on enhanced compensation, shall be
deemed to be the income of the year in which it is received (however, it is taxable under
section 56 under the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives shall be deemed to be
the income of the previous year in which reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or
concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed to be
the income of the previous year in which it is received, if not charged to income tax for any
earlier previous year.
4. Basic Principles for computing income Taxable under the head ‘Profit and Gains of
Business or Profession’
1. Business or profession carried on by the assessee:
Business or profession should be carried on by the assessee.
2. Business or profession should be carried on during the previous year:
Income from business or profession is chargeable to tax under this head only if the business or
profession is carried on by the assessee at any time during the previous year (not necessarily
throughout the previous year). There are a few exceptions to this rule.
3. Income of previous year is taxable during the following assessment year:
Income of business or profession carried on by the assessee during the previous year is
chargeable to tax in the next following assessment year. There are, however, certain exceptions
to this rule.
4. Tax incidence arises in respect of all businesses or professions:
Profits and gains of different businesses or professions carried on by the assessee are not
separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or
professions carried on by the assessee. If, therefore, an assessee earns profit in one business
and sustains loss in another business, income chargeable to tax is the net balance after setting
off loss against income. However, profits and losses of a speculative business are kept
separately.
5. Legal ownership vs. beneficial ownership:
Under section 28, it is not only the legal ownership but also the beneficial ownership that has to
be considered. The courts can go into the question of beneficial ownership and decide who
should be held liable for the tax after taking into account the question as to who is, in fact, in
receipt of the income which is going to be taxed.
6. Real profit vs. anticipated profit:
Anticipated or potential profits or losses, which may occur in future, are not considered for
arriving at taxable income of a previous year. This rule is, however, subject to one exception:
stock-in-trade may be valued on the basis of cost or market value, whichever is lower.
7. Real profit vs. Notional profit:
The profits which are taxed under section 28 are the real profits and not notional profits. For
instance, no person can make profit by trading with himself in another capacity.
8. Recovery of sum already allowed as deduction:
Any sum recovered by the assessee during the previous year in respect of an amount or
expenditure which was earlier allowed as deduction, is taxable as business income of the year in
which it is recovered.
9. Mode of book entries not relevant:
The mode or system of book-keeping cannot override the substantial character of a transaction.
10. illegal business:
The income-tax law is not concerned with the legality or illegality of a business or profession. It
can, therefore, be said that income of illegal business or profession is not exempt from tax.

UNIT 3
Income from Capital Gains
Income from Capital Gains
11th May 2020
Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This
gain or profit is considered as income and hence charged to tax in the year in which the transfer
of the capital asset takes place. This is called capital gains tax, which can be short-term or long-
term. Capital gains are not applicable when an asset is inherited because there is no sale, only a
transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be
applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an
inheritance or will.
Here are some examples of capital assets: land, building, house property, vehicles, patents,
trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in
relation to an Indian company. It also includes rights of management or control or any other legal
right.
The following are not considered capital asset:
1. Any stock, consumables or raw material, held for the purpose of business or profession
2. Personal goods such as clothes and furniture held for personal use
3. Agricultural land in rural India
4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980)
issued by the central government
5. Special bearer bonds (1991)
6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates
issued under the Gold Monetisation Scheme, 2015
Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a rural
area. Also, it should not fall within a distance (to be measured aerially) given below – (population
is as per the last census).

Distance Population
2 kms from local limit of If the population of the
municipality or cantonment board municipality/cantonment board is
more than 10,000 but not more
than 1 lakh
6 kms from local limit of If the population of the
municipality or cantonment board municipality/cantonment board is
more than 1 lakh but not more
than 10 lakh
8 kms from local limit of If the population of the
municipality or cantonment board municipality/cantonment board is
 more than 10 lakh
Types of Capital Assets
Short-term capital asset An asset which is held for a period of 36 months or less is a short-term
capital asset. The criteria of 36 months have been reduced to 24 months in the case of
immovable property being land, building, and house property, from FY 2017-18.
For instance, if you sell house property after holding it for a period of 24 months, any income
arising will be treated as long-term capital gain provided that property is sold after 31st March
2017.
Long-term capital asset An asset that is held for more than 36 months is a long-term capital
asset. The reduced period of the aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term
capital asset if held for more than 36 months as earlier.
Some assets are considered short-term capital assets when these are held for 12 months or less.
This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date
of purchase is). The assets are:
1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock
exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they are considered
as long-term capital asset. In case an asset is acquired by gift, will, succession or
inheritance, the period for which the asset was held by the previous owner is also included when
determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or
rights shares, the period of holding is counted from the date of allotment of bonus shares or
rights shares respectively.
Tax on Short-Term and Long-Term Capital Gains
Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.
Tax on short-term capital gain when securities transaction tax is not applicable: If securities
transaction tax is not applicable, the short-term capital gain is added to your income tax return
and the taxpayer is taxed according to his income tax slab.
Tax on short-term capital gain if securities transaction tax is applicable: If securities
transaction tax is applicable, the short-term capital gain is taxable at the rate of 15%.
Tax on Equity and Debt Mutual Funds
Gains made on the sale of debt funds and equity funds are treated differently. Funds that invest
heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.

Funds Effective 11 On or
July 2014 before 10
July 2014
 Short-Term Long-Term Short-Term Long-Term
Gains Gains Gains Gains
Debt Funds At tax slab At 20% with At tax slab 10% without
rates of the indexation rates of the indexation
individual individual or 20% with
indexation
whichever is
lower
Equity 15% Nil 15% Nil
Funds
Change in Tax Rules for Debt Mutual Funds
Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital
asset. It means that investors would have to remain invested in these funds for at least three
years to take the benefit of long-term capital gains tax. If redeemed within three years, the
capital gains will be added to one’s income and will be taxed as per one’s income tax slab.
Calculating Capital Gains
Capital gains are calculated differently for assets held for a longer period and for those held over
a shorter period.
Full value consideration The consideration received or to be received by the seller as a result of
transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no
consideration has been received.
Cost of acquisition The value for which the capital asset was acquired by the seller.
Cost of improvement Expenses of a capital nature incurred in making any additions or
alterations to the capital asset by the seller. Note that improvements made before April 1, 2001, is
never taken into consideration.
How to Calculate Short-Term Capital Gains?
1. Start with the full value of consideration
2. Deduct the following:
○ Expenditure incurred wholly and exclusively in connection with such transfer
○ Cost of acquisition
○ Cost of improvement
3. This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred exclusively for such
transfer Less cost of acquisition Less cost of improvement.
How to Calculate Long-Term Capital Gains?
1. Start with the full value of consideration
2. Deduct the following:
 ○ Expenditure incurred wholly and exclusively in connection with such transfer
○ Indexed cost of acquisition
○ Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F,
and 54B
4. This amount is a long-term capital gain
Long-term capital gain= Full value consideration
Less : Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement Less:expenses that can be deducted from full value for
consideration*
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or
transfer of the capital asset are allowed to be deducted. These are the expenses which are
necessary for the transfer to take place.)
As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented
fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover,
tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1
lakh in one financial year without the benefit of indexation.
In the case of sale of house property, these expenses are deductible from the total sale price:
1. Brokerage or commission paid for securing a purchaser
2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the
transfer has been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures
associated with the will and inheritance, obtaining succession certificate, costs of the
executor, may also be allowed in some cases.
In the case of sale of shares, you may be allowed to deduct these expenses:
1. Broker’s commission related to the shares sold
2. STT or securities transaction tax is not allowed as a deductible expense
Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost of
these services can be deducted. Note that expenses deducted from the sale price of assets for
calculating capital gains are not allowed as a deduction under any other head of the income tax
return, and these can be claimed only once.

Income from other sources

11th May 2020
Income from other sources is a residual category used to classify income that is not
classified taxed under any other head of income. Income from other sources must be calculated
by the taxpayer based on the mercantile system used by the taxpayer, i.e cash basis or accrual
basis. In this article, we look at income from other sources in detail along with list of allowed
deductions.
Items Classified as Income from Other Sources
Apart from income that cannot be classified under any other heads, there are certain types of
incomes which are always taxed under income from other sources. Such incomes are as under:
● Dividends are always taxed under income from other sources. However, dividends from
domestic company are normally exempt from tax, as the company declaring dividend pays
dividend distribution tax.
● Winnings from lotteries, crossword puzzles, races including horse races, card game and
other game of any sort, gambling or betting of any form is classified as income from other
sources.
● Interest received on compensation or on enhanced compensation is taxed under the head
“Income from other sources”.
● Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under
this head.
The following types of income can be classified as Income from Other Sources, if it is not
taxed under the head “Profits and gains of business or profession”:
● Any contribution to a fund for welfare of employees received by the employer.
● Income received by way of interest on securities.
● Income from letting out or hiring of plant, machinery or furniture.
● Income from letting out of plant, machinery or furniture along with building; both the
lettings are inseparable.
● Money received under a Keyman Insurance Policy including bonus.
Tax Deduction Allowed for Income from Other Sources
The following deductions can be claimed while computing income from other sources:
● Commission or remuneration for realizing dividends or interest on securities.
● Any sum received by an employer from employees as contribution towards any welfare
fund of such employees is first included as income of the employee, and if the employer
credits such sum to the employee’s account under the relevant fund on or before the due
date (of such fund), then such amount (i.e., employee’s contribution) is deductible from
the income of the employer.
● Current (not capital) repairs, insurance premium and depreciation in respect of plant,
machinery, furniture and buildings are deductible from rent income earned by letting out of
plant, machinery, furniture and building, which are chargeable to tax.
● A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available in case of
income in the nature of family pension (i.e., regular monthly amount payable by the
employer to the family members of the deceased employee).
● Deduction is available in respect of any other expenditure (not being in the nature of
capital expenditure) laid out or expended wholly and exclusively for the purpose of making
or earning such income during the relevant previous year.
Tax Deduction NOT Allowed
The following deductions cannot be claimed while computing income from other sources:
● Personal expenditure
 ● Interest chargeable and payable outside India on which tax has not been paid or deducted
at source.
● Amount paid which is taxable under the head “Salaries” and payable outside India on
which tax has not been paid or deducted at source.
● Sum paid on account of wealth-tax that is not deductible.
● Amount specified under section 40A is not deductible.

Individual Assessment of income tax

11th May 2020
Every assessee, who earns income in excess of the basic exemption limit in a Financial Year (FY),
must file a statement containing details of his income, deductions, and other related information.
This is called the Income Tax Return. Once you as a taxpayer file the income returns, the Income
Tax Department will process it. There are occasions where, based on set parameters by the
Central Board of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment.
The various forms of assessment are as follows:
1. Self Assessment
The assessee himself determines the income tax payable. The tax department has made
available various forms for filing income tax return. The assessee consolidates his income from
various sources and adjusts the same against losses or deductions or various exemptions if any,
available to him during the year. The total income of the assessee is then arrived at. The
assessee reduces the TDS and Advance Tax from that amount to determine the tax payable on
such income. Tax, if still payable by him, is called self assessment tax and must be paid by him
before he files his return of income. This process is known as Self Assessment.
2. Summary Assessment
It is a type of assessment without any human intervention. In this type of assessment, the
information submitted by the assessee in his return of income is cross-checked against the
information that the income tax department has access to. In the process, the reasonableness
and correctness of the return are verified by the department. The return gets processed online,
and adjustment for arithmetical errors, incorrect claims, disallowances etc are automatically
done. Example, credit for TDS claimed by the taxpayer is found to be higher than what is
available against his PAN as per department records. Making an adjustment in this regard can
increase the tax liability of the taxpayer.
After making the aforementioned adjustments, if the assessee is required to pay tax, he will be
sent an intimation under Section 143(1). The assessee must respond to this intimation
accordingly.
3. Regular Assessment
The income tax department authorizes the Assessing Officer or Income Tax authority, not below
the rank of an income tax officer, to conduct this assessment. The purpose is to ensure that the
assessee has neither understated his income or overstated any expense or loss or underpaid any
tax.
The CBDT has set certain parameters based on which a taxpayer’s case gets picked for a
scrutiny assessment.
● If an assessee is subject to a scrutiny assessment, the Department will send a notice well
in advance. However, such notice cannot be served after the expiry of 6 months from the
end of the Financial year, in which return is filed.
● The assessee will be asked to produce the books of accounts, and other evidence to
validate the income he has stated in his return. After verifying all the details available, the
assessing officer passes an order either confirming the return of income filed or makes
additions. This raises an income tax demand, which the assessee must respond to
accordingly.
4. Best Judgement Assessment
This assessment gets invoked in the following scenarios:
1. If the assessee fails to respond to a notice issued by the department instructing him to
produce certain information or books of accounts
2. If he/she fails to comply with a Special Audit ordered by the Income tax authorities
3. The assessee fails to file the return within due date or such extended time limit as allowed
by the CBDT
4. The assessee fails to comply with the terms as contained in the notice issued under
Summary Assessment
After providing the assessee with an opportunity of being heard, the assessing officer passes an
order based on all the relevant materials and evidence available to him. This is known as Best
Judgement Assessment.
5. Income Escaping Assessment
When the assessing officer has sufficient reasons to believe that any taxable income has
escaped assessment, he has the authority to assess or reassess the assessee’s income. The
time limit for issuing a notice to reopen an assessment is 4 years from the end of the relevant
Assessment Year. Some scenarios where reassessment gets triggered are given below.
1. The assessee has taxable income but has not yet filed his return.
2. The assessee, after filing the income tax return, is found to have either understated his
income or claimed excess allowances or deductions.
3. The assessee has failed to furnish reports on international transactions, where he is
required to do so.
Assessment, in the case of some taxpayers, could close quickly while for some, it could prove to
be quite gruelling. In case you are not comfortable dealing with income tax officers, it is
suggested that you take the help of a Chartered Accountant to help you with your case.

Assessment Procedure
11th May 2020
Assessment in income tax is estimation of total income and tax thereon either by assessee
himself or by income tax officer. Assessment is broadly covered in following types:
(1) Self-assessment u/s 140A
Every assessee before filing income tax return under various sections viz. 139, 142(1), 148 or
153A is supposed to find whether he is liable for any tax, interest or penalty.
For this purpose section 140A has been introduced in Income tax act.
Procedure of self-assessment is as follows:
Self-assessment calculation Summary:

Particulars Amount
Compute total income XX
Calculate tax payable XX
on total income
Add Edu. Cess +Surcharge XX
if any
Less Relief under section XX
89, 90, 91 & 90A
Less MAT credit under XX
115JAA or 115JD
Less TDS/TCS XX
Less Advance tax Paid, if XX
any
Add Interest u/s 234A, XX
234B, 234C
Amount Payable as XX
Self-Assessment u/s
140A
If any amount is payable under section 140A then amount so paid shall be adjusted against
interest payable first and then balance amount to be adjusted toward tax payable.
Enquiry before assessment: Secton 142
Section 142(1): for making assessment, the assessing officer may take any / all of the following
steps:
i) Notice u/s 142 (1) (i): this notice can be issued to assessee (only those who have not filed
return) requiring him to furnish return when no any return has been u/s 139(1) has been filed,
within the time allowed u/s 139(1) or before the end of the relevant assessment year.
ii) Notice u/s 142 (1) (ii): this notice can be issued to all assessees who filed return or not to
produce or cause to be produced such accounts or documents as the assessing officer may
require but shall not require the assesse to produce any accounts relating to period of more than
three years prior to the previous year along with accounts of previous year under assessment.
Example: suppose assessment for AY 2018-19 is to be made then accounts for last 3 years FY
2014-15, FY 2015-16, FY 2016-17 and previous year 2017-18 may be required by officer.
iii) Notice u/s 142 (1)(iii): this notice can be issued to ay assessee who has filed a return of
income of whose time to file return u/s 139(1) has been expired, to furnish, in writing and verified
in prescribed manner information in such form as he may require and he may also ask for a
statement of all assets and liabilities of the assessee for any number of previous year.
Enquiry from other u/s 142(2):
This section empowers assessing officer to collect information from sources other than assessee
in view of the provisions of sections 131, 133(6), 142(2).
Audit of accounts u/s 142(2A) to (2D): 
The assessing officer may, at any time at any stage of the assessment, direct the assesse to get
the accounts audited by a Chartered Accountant nominated by Chief Commissioner /
Commissioner of Income Tax, such a decision may be taken by assessing officer, if having regard
to the nature, volume, multiplicity of transactions, doubts about the correctness of accounts,
specialized nature of business activity and in the interest of revenue is of opinion that it is
necessary to do so.
Above direction of Audit can be given even if accounts are already audited under the income tax
Act or any other law.
Audit report instructed under this notice shall be submitted in Form 6B not later than 180 days
from the date of such direction.
Expenses of such Audit determined by Chief Commissioner / Commissioner shall be paid by
Central Govt.
Section 142(3): The assessing officer before using such information gathered u/s 142(2) and
142(2A) for any assessment shall give an opportunity of being heard to the assessee. However
no such opportunity is necessary when the assessment is made u/s 144.
Consequences of non-compliance of section 142(1) and section 142(2A):
a) Best judgement assessment u/s 144
b) Penalty u/s 271(1)(b) which has been fixed at Rs. 10000/-
c) Prosecution u/s 276D: rigorous imprisonment up to 1 year or fine from Rs. 4 to Rs. 10 per day
or both
d) Issue of warrant u/s 132 for search
(2) Summary Assessment u/s 143(1)
Where a return under section 139 or in response to notice under section 142 (1) is filed then u/s
143(1) this return is checked form the point of arithmetical accuracy and will not be scrutinized in
detail, in following way:
1) The total income or loss shall be computed after making the following adjustments, namely:
(i) Any arithmetical error in the return; or
(ii) An incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed
was furnished beyond the due date specified under sub-section (1) of section 139;
(iv) Disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return;
(v) Disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID
or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1)
of section 139; or
(vi) Addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in computing the total income in the return. However no adjustment shall be made
under this in relation to a return furnished for the assessment year commencing on or after the
1st day of April, 2018
However no such adjustments shall be made unless intimation is given to the assessee of such
adjustments either in writing or in electronic mode:
The response received from the assessee, if any, shall be considered before making any
adjustment, and in a case where no response is received within thirty days of the issue of such
intimation, such adjustments shall be made.
2 .The tax and interest, if any, shall be computed on the basis of the total income computed
under clause (a);
3. the sum payable by, or the amount of refund due to, the assessee shall be determined
after adjustment of the tax and interest and fee, if any, computed under clause (b) by any
tax deducted at source, any tax collected at source, any advance tax paid, any relief
allowable under an agreement under section 90 or section 90A, or any relief allowable
under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-
assessment and any amount paid otherwise by way of tax or interest and fee;
4. an intimation shall be prepared or generated and sent to the assessee specifying the sum
determined to be payable by, or the amount of refund due to, the assessee under clause
(c); and
5. the amount of refund due to the assessee in pursuance of the determination under clause
(c) shall be granted to the assessee.
An intimation u/s 143(1) shall also be sent if loss declared is adjusted but no any tax/interest/fee/
is payable by or no refund is due to him.
No intimation u/s 143(1) shall be sent after the expiry of one year from the end of the financial
year in which return is filed. In case of revised return (section 139(5)) the one year period shall
be counted from end of financial year in which return was revised.
(3) Scrutiny assessment u/s 143(3)
Scrutiny assessment u/s 143(3) is also known as regular assessment.
To initiate assessment u/s 143(3), assessing officer has to issue notice u/s 143(2), which can
only be issued in case where return u/s 139 or in response to section 142(1) has been filed by the
assessee. Means notice u/s 143(2) and assessment u/s 143(3) cannot be issued / done if no
return is filed.
Assessing officer, u/s 143(2), if consider it necessary or expedient to ensure that –
i) The assessee has not understated the income or
ii) Has not computed excessive loss or
iii) Has not under paid the tax in any manner shall require assessee to attend his office to
produce documents / evidences in support of return.
Note:
1. No notice u/s 143(2) shall be served on the assessee after the expiry of 6 months from the
end of financial year in which return is furnished.
Example: suppose return for FY 2016-17 was filed on 30/07/2017 then notice u/s 143(2) can be
issued on or before 30/09/2018
Suppose above return was revised on 24/05/2018 then notice u/s 143(2) can be issued on or
before 30/09/2019.
2. Fresh notice u/s 143(2) is requied to be issued if return is revised u/s 139(5).
3. Non-compliance of notice u/s 143(2) may result in ex parte, best judgement assessment u/
s 144 and may also attract penalty u/s 271(1)(b) which has been fixed at Rs. 10000/-.
Assessment u/s 143(3)
On the day specified in the notice issued under sub-section (2), or as soon afterwards as may
be, after hearing such evidence as the assessee may produce and such other evidence as the
Assessing Officer may require on specified points, and after taking into account all relevant
material which he has gathered, the Assessing Officer shall, by an order in writing, make an
assessment of the total income or loss of the assessee, and determine the sum payable by him
or refund of any amount due to him on the basis of such assessment.
No order of assessment/ reassessment under section 143(3) shall be made after the expiry of 21
months (18 months for A.Y. 2018-19 and 12 months wef A.Y. 2019-20) from the end of relevant
Assessment Year.
Example: Last date for assessment order u/s 143(2):
for FY 2015 -16 (AY 2016-17) – 31st Dec. 2018
for FY 2016 -17 (AY 2017-18) – 31st Dec. 2019
for FY 2017 -18 (AY 2018-19) – 30th Sep. 2020
for FY 2018 -19 (AY 2019-20) – 31st Mar. 2021
3.Where a reference has been made to Transfer Pricing Officer to determine Arm’s Length Price,
then no order of assessment/ reassessment under section 143(3) shall be made after the expiry
of 33 months(30 months for A.Y. 2018-19 and 24 months wef A.Y. 2019-20) from the end of
relevant Assessment Year.
(4) Best judgment assessment u/s 144
Where any person:
(a) Fails to make the return required u/s 139 (1) / 139(4) or 139(5) depending upon
circumstances, or
(b) Fails to comply with
(i) All the terms of a notice issued u/s 142(1) or
(ii) Directions issued under sub-section (2A) of that section], or
(c) Fails to comply with all the terms of a notice issued under sub-section (2) of section 143,
the Assessing Officer, after taking into account all relevant material which he has gathered, shall,
after giving the assessee an opportunity of being heard (not necessary in case where notice u/s
142(1) is already served), make the assessment of the total income or loss to the best of his
judgment and determine the sum payable by the assessee on the basis of such assessment:
Provided that such opportunity shall be given by the Assessing Officer by serving a notice
calling upon the assessee to show cause, on a date and time to be specified in the notice, why
the assessment should not be completed to the best of his judgment.
Note: The assessing officer under this section cannot assess income below the returned income
or cannot assess the loss higher than the returned income.
No order of assessment/ reassessment under section 144 shall be made after the expiry of 21
months(18 months for A.Y. 2018-19 and 12 months wef A.Y. 2019-20) from the end of relevant
Assessment Year.
Example: Last date for assessment order u/s 143(2):
for FY 2015 -16 (AY 2016-17) – 31st Dec. 2018
for FY 2016 -17 (AY 2017-18) – 31st Dec. 2019
for FY 2017 -18 (AY 2018-19) – 30th Sep. 2020
for FY 2018 -19 (AY 2019-20) – 31st Mar. 2021
Where a reference has been made to Transfer Pricing Officer to determine Arm’s Length Price,
then no order of assessment/reassessment under section 144 shall be made after the expiry of
33 months (30 months for A.Y. 2018-19 and 24 months wef A.Y. 2019-20) from the end of
relevant Assessment Year.

Situation Treatment
Assessing Officer has not Assessment is Void
provided opportunity of being
heard by servicing notice?
Assessing Officer has not Assessment is Void
provided opportunity of being
heard but notice under 142(1) was
already issued?
If assessment carried out after 2 Assessment is Void
years of completion of
assessment year
(5) Protective Assessment
Sometimes it may happens that one particular income is assessed in one more than one hand i.e.
one assessing officer is treating the some income in the hands of ‘A’ and same income might be
treated in the hands of ‘B’ by some different assessing officer. And some time same officer may
assess the same income in the hands of one person and also in the hands of a firm / family also.
It has been held by the Supreme Court in Lalji Haridas v. ITO, (43 ITR 387), that the officer may,
when in doubt, to safeguard the interest of revenue, assess it in more than one hand. But this
procedure is allowed at the level of assessment only and at higher level it is possible to give clear
findings as who is really liable to be assessed leaving the one and in such case department
should provide relief suo motu to one of them. (ITO vs. Bachu lal kapoor (1966) 60 ITR 74 (SC))
(6) Income escaping assessment u/s 147
Subject to provisions of section 148 to 153, if any assessing officer believes that any income,
chargeable to tax, has escaped assessment for any assessment year, he may:
a) assess or reassess such income which has escaped assessment;
b) recompute the loss or depreciation allowance or any other allowance as the case may be, for
the assessment year concerned i.e. the relevant assessment year
Deemed cases of escapement:
a) where no return has been filed and no assessment is done but his total income or total income
of any other person in respect of which he is assessable, exceeds the maximum amount which is
not chargeable to tax
b) where a return of income filed but no assessment is done and assessing officer noticed
understatement of income or excessive claim of loss, deduction, allowance or relief etc.
c)  where assessee fails to report international transactions u/s 92E
d) where assessment u/s 143(3) / 144 has been made but income chargeable to tax:
(i) has been under assessed; or
(ii) has been assessed at low rate; or
(iii)has been assessed with excessive relief; or
(iv) excessive loss or depreciation or other allowance has been computed
Note: if any case is pending under appeal / revision then that case cannot be opened under
section 147.
Notice u/s 148 (1)
Before making any assessment u/s 147, the assessing officer shall serve on the assesse a notice
requiring him to furnish a return of his income or income of any other person in respect of which
he is assessable during the previous year corresponding to the relevant assessment year with in
such period as may be specified in the notice.
Note:
i) even though notice u/s 139 or 142(1) have been issued, then also notice under section 148 is
must.
ii) return filed in response to notice u/s 148 (1) shall be treated as if the same is filed u/s 139 and
for making assessment u/s 147 read with section 143(3), assessing officer is required to issue
notice u/s 143(2) within a period of 6 months from the end of financial year in which such return
is filed by the assessee.
iii) As per section 148(2), assessing officer is required to record the reasons for issuing notice u/
s 148(1).
iv) However as per explanation 3 to section 147, reassessment can be done for an issue which is
not already recorded.
v) Separate notice u/s 148(1) is required for each assessment year for which income has
escaped.
Time limit and sanctions for issue of notice: section 149 /151
As per section 149(1) notice u/s 148(1) can be issued only:
a) within 4 years from the end of the relevant assessment year for any income escaping
assessment’ or
Example: for FY 2015 -16 notice u/s 148(1) can be issued on or before 31st March 2021.
b) within 6 years from the end of the relevant assessment in cases where the amount of income
escaping assessment is likely to be Rs. 1,00,000/- or more for that year, or
c) within 16 years from the end of the relevant assessment year if the income in relation to any
asset (including financial interest in any asset) located outside India, chargeable to tax, has
escaped assessment.
In clause b) and c) above notice can be issued only after getting sanction from Principle Chief
Commissioner or Chief Commissioner or Principle Commissioner or Commissioner.
Proviso to section 147
Where an assessment u/s 143(3) or 147 has already been made for relevant assessment year no
any action u/s 147 is possible after expiry of 4 year as mentioned in clause b) and c) above,
unless any income chargeable to tax has escaped assessment by reason of the failure on the
part of assessee. However above proviso do not apply in relation to income from asset located
outside India.
No time limit for issue of notice u/s 148 (1) in following situation:
If the notice u/s 148(1) is required to be issued to give effect to any finding or direction contained
in a passed by:
i) By any authority in any proceeding under this Act by way appeal or revision
ii) By a Court / Supreme Court / High Court
iii) CIT Appeal u/s 250, ITAT u/s 254, Commission u/s 263 or 264 of Income Tax Act

UNIT 4
Set off and Carry Forward of losses
11th May 2020
Set off of losses means adjusting the losses against the profit/income of that particular year.
Losses that are not set off against income in the same year, can be carried forward to the
subsequent years for set off against income of those years. A set-off could be:
1. An intra-head set-off
2. An inter-head set-off
1. Intra-head Set Off
The losses from one source of income can be set off against income from another source under
the same head of income.
For eg: Loss from Business A can be set off against profit from Business B where Business A is
one source and Business B is another source and the common head of income is “Business”.
Exceptions to an intra-head set off:
1. Losses from a Speculative business will only be set off against the profit of the speculative
business. One cannot adjust the losses of speculative business with the income from any
other business or profession.
 2. Loss from an activity of owning and maintaining race-horses will be set off only against the
profit from an activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains. Interestingly,
a short-term capital loss can be set off against long-term capital gain or short-term capital
gain.
4. Losses from a specified business will be set off only against profit of specified businesses.
But the losses from any other businesses or profession can be set off against profits from
the specified businesses.
2. Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against income from
other heads.
Eg. Loss from house property can be set off against salary income
Given below are few more such instances of an inter-head set off of losses:
1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of
income except income from salary.
One needs to also note that the following losses can’t be set off against any other head of
income:
1. Speculative Business loss
2. Specified business loss
3. Capital Losses
4. Losses from an activity of owning and maintaining race-horses
Carry forward of losses
After making the appropriate and permissible intra-head and inter-head adjustments, there could
still be unadjusted losses. These unadjusted losses can be carried forward to future years for
adjustments against income of these years. The rules as regards carry forward differ slightly for
different heads of income. These have been discussed here:
Losses from House Property:
● Can be carry forward up to next 8 assessment years from the assessment year in which
the loss was incurred
● Can be adjusted only against Income from house property
● Can be carried forward even if the return of income for the loss year is belatedly filed.
Losses from Non-speculative Business (regular business) loss:
● Can be carry forward up to next 8 assessment years from the assessment year in which
the loss was incurred
● Can be adjusted only against Income from business or profession
● Not necessary to continue the business at the time of set off in future years
● Cannot be carried forward if the return is not filed within the original due date.
Speculative Business Loss:
● Can be carry forward up to next 4 assessment years from the assessment year in which
the loss was incurred
 ● Can be adjusted only against Income from speculative business
● Cannot be carried forward if the return is not filed within the original due date.
● Not necessary to continue the business at the time of set off in future years
Specified Business Loss under 35AD:
● No time limit to carry forward the losses from the specified business under 35AD
● Not necessary to continue the business at the time of set off in future years
● Cannot be carried forward if the return is not filed within the original due date
● Can be adjusted only against Income from specified business under 35AD
Capital Losses:
● Can be carry forward up to next 8 assessment years from the assessment year in which
the loss was incurred
● Long-term capital losses can be adjusted only against long-term capital gains.
● Short-term capital losses can be set off against long-term capital gains as well as short-
term capital gains
● Cannot be carried forward if the return is not filed within the original due date
Losses from owning and maintaining race-horses:
● Can be carry forward up to next 4 assessment years from the assessment year in which
the loss was incurred
● Cannot be carried forward if the return is not filed within the original due date
● Can only be set off against income from owning and maintaining race-horses only
Points to note:
1. A taxpayer incurring a loss from a source, income from which is otherwise exempt from
tax, cannot set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from
lotteries, races, card games, betting etc.
Clubbing of Income
11th May 2020
‘Its all in the family’. It may seem ordinary to invest money for a non earning spouse by way of
fixed deposits, or other income earning assets or to set up bank accounts, mutual funds or other
investments for children to provide for their needs in future. Usually, you are only taxed for your
own income, but under certain special circumstances some incomes are ‘clubbed’ along with
your income and you may be liable to pay tax on such clubbed income.
The intention here is to make sure there is no tax that escapes, in case an individual is moving
assets or incomes in the family. In a situation where you have incurred a loss, such loss
(wherever allowed to be adjusted against an income) is also not allowed to be transferred to
anyone and will be ‘clubbed’ to your income.
In the case of Assets Transfer to Anyone
Transfer of Income: no transfer of assets: When you retain the ownership of an asset but
decide to transfer its income by doing an agreement or any other way, the Act will still consider
that income as your income and it will be added to your total income for taxation purposes.
Transfer of Asset: Which is revocable: When you transfer the ownership of an asset and make
such transfer revocable, income from such an asset will continue to be added to your income.
Clubbing of Spouse’s Income
Here are some situations when your spouse’s income will get clubbed to your income and you’ll
have to pay tax on it:
(1) Your spouse receives a salary from a company or a firm in which you have a substantial
interest, then such salary will be clubbed with your income. Substantial Interest means you alone
or with your relatives (husband, wife, brother, sister or your lineal ascendant or descendant) hold
equity or voting power of a company which is 20% or more. Or in case of a firm you are entitled
to 20% or more of the profits. Also, if both of your receive an income from such a firm or
company, it will get taxed in the hands of the person whose taxable income is higher. There is
one exception to this if your spouse receives the salary due to his/her application of technical or
professional knowledge & experience then such salary will be taxed in the hands of the person
receiving it and not clubbed.
(2) You transfer an asset to your spouse directly or indirectly without receiving adequate
consideration (does not include where asset is transferred as part of a divorce settlement)
income from this asset will be clubbed with your income. For example where the husband to
reduce his tax liability transfers an asset worth Rs 100,000 to his wife for Rs 25,000. 3/4th of the
income from this asset will be taxed in the hands of the husband. If he receives no consideration,
in that case the entire income from this asset will be clubbed with the husband’s income.
Although the clubbing provisions here exclude house property but in case you transfer a house
property to your wife and do not receive adequate consideration, as per the Act, you will still be
considered the ‘deemed owner’ and the income from the asset will be clubbed with your income.
(3) You transfer an asset to a person or an association of persons, directly or indirectly, without
adequate consideration, so that the benefit arises to your spouse either now or on a deferred
basis, income from such an asset will be clubbed with your income.
(4) Assume a situation where you provide money to your spouse (who is non working) and that
money is invested by the spouse and a certain income is generated (from such money that you
gave your spouse).The income that arises from such investment done by her can be clubbed to
your income. However, if your spouse reinvests the income portion and earns further income
then such income may not be clubbed with your taxable income.
Clubbing of Income of Minor Child (less than 18 years old)
(1) Some families make fixed deposits in the name of a minor child. Income of a minor is taxable
in the hands of the parent whose total income is higher (before including the minor’s income). If
the parents are divorced it is clubbed with the person who is maintaining the child. There is one
exception to this rule – if the minor has earned an income because of his own manual work, or
used his talent or specialized knowledge & experience OR in case of a minor who is disabled
(based on definition of disability in Section 80U) and earns an income, such income will not be
clubbed.
(2) When your minor child’s income is clubbed to your income exemption is available up to Rs
1500 for each such minor child. Which means if clubbed income is more than Rs 1500, Rs 1500 is
the maximum exemption, however if clubbed income is say Rs 800 (less than Rs 1500)
exemption is limited up to such lesser amount, Rs 800 in this case.
Clubbing of Income of a Major Child (18 or more than 18 years old)
You may be giving over some money to your major child (who may not be earning), in this case if
the major child invests that money any income from these investments will not be taxable in your
hands but will be taxed in the hands of the major child. So therefore, there will be no clubbing of
income in case of a major child.
Clubbing of Income of a Son’s Wife
You transfer an asset to your son’s wife directly or indirectly without receiving adequate
consideration income from this asset will be clubbed with your income. Or you transfer an asset
to a person or AOP, for the immediate or deferred benefit of your son’s wife, without adequate
consideration, directly or indirectly income from this asset will be clubbed with your income.
Assessment of Individual
Step 1: Compute the income of an individual under 5 heads of income on the basis of his
residential status.
Step 2: Income of any other person, if includible u/ss 60 to 64, will be included under respective
heads.
Step 3: Set off of the losses if permissible, while aggregating the income under 5 heads of
income.
Step 4: Carry forward and set off of the losses of past years, if permissible, from such income.
Step 5: The income computed under Steps 1 to 4 is known as Gross Total Income from which
deductions under sections 80C to 80U (Chapter VIA) will be allowed. However, no deduction
under these sections will be allowed from short-term capital gain covered under section 111A,
any long-term capital gain and winning of lotteries etc., though these incomes are part of gross
total income.
Step 6: The balance income after allowing the deductions is known as total income which will be
rounded off to the nearest Rs. 10.
Step 7: Compute tax on such Total Income at the prescribed rates of tax.
Step 8: Allow rebate of maximum Rs. 2,500 under section 87A in case of resident individual
having total income upto Rs. 3,50,000. For details see below.
Step 9: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and upto Rs. 1 crore and
15% of such income tax in case of an individual having a total income exceeding Rs. 1 crore.
Step 10: Add education cess @ 2% and SHEC @ 1% on the tax (including surcharge if
applicable).
Step 11: Allow relief under section 89, if any.
Step 12: Deduct the TDS, advance tax paid for the relevant assessment year and double taxation
relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded of
nearest ten rupees and must be paid as self-assessment tax before submitting the return of
income. 
Rebate of maximum Rs. 2,500 for resident individuals having total income up to Rs. 3,50,000
[Section 87A]
With a view to provide tax relief to the individual tax payers who are in lower income bracket, the
Act has provided rebate from the tax payable by an assessee, if the following condition and
satisfied:
● The assessee is an individual
● He is resident in India,
● His total income does not exceed Rs. 3,50,000.
Quantum of Rebate:
The rebate shall be equal to:
1. The amount of income-tax payable on the total income for any assessment year,
or
2. Rs. 2,500,
whichever is less.
Income Tax authorities and their powers
11th May 2020
Commissioner of Income Tax:
He is an important income tax authority which has executive and judicial powers. The central
board of revenue is the appointing authority for commissioner of income tax. Normally
commissioner is appointed as an incharge of a zone. He is responsible for the administration of
the area assigned to him. He is subordinate regional commissioner income tax.
Appointment of Income-Tax Authorities [Sec. 117]
1. Power of Central Government: The Central Government may appoint such persons as it
thinks fit to be income-tax authorities. It kept with itself the powers to appoint authorities
upto and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117 (1) ]
2. Power of the Board and Other Higher Authorities: Subject to the rules and orders of the
Central Government regulating the conditions of service of persons in public services and
posts, the Central Government may authorize the Board, or a Director-General, a Chief
Commissioner or a Director or a Commissioner to appoint income-tax authorities below
the rank of an Assistant Commissioner or Deputy Commissioner.  [ Sec. 117 (2) ]
3. Power to appoint Executive and Ministerial Staff: Subject to the rules and orders of the
Central Government regulating the conditions of service of persons in public services and
posts, an income-tax authority authorized in this behalf by the Board may appoint such
executive or ministerial staff as may be necessary to assist it in the execution of its
functions.
Control of Income: Tax Authorities [ Sec. 118 ]
The Board may, by notification in the Official Gazette, direct that any income-tax authority or
authorities specified in the notification shall be subordinate to such other income-tax authority or
authorities as may be specified in such notification.
Jurisdiction:
1. In a specific area which is assigned to him, he performs both the function judicial and
executive.
2. If specific area is not assigned then he performs his duties according the directions of
central board of revenue.
Function and powers of commissioner of income tax:
The commissioner exercises the power to control the staff of income tax department working in
his jurisdiction. He is also responsible for the efficiency of work in all respect in his zone.
Following are the important functions and powers of commissioner of income tax.
1. Determine The Jurisdiction:
He has the power to determine the jurisdiction and assign the work to subordinate inspecting
additional commissioners income tax and deputy commissioners.
2. Final Authority To Decide The Dispute:
Commissioner income tax is the final authority to decide the disputes if two subordinate income
tax authorities are not in agreement regarding their areas of juries diction or the assessment of a
person.
3. Transfer Of Jurisdiction:
He is empowered to transfer the jurisdiction from one income tax authority to another.
4. Revision Of Orders:
He may revise any other passed by his subordinates however these orders should not be
prejudicial to the assessee.
5. Power To With Held The Refund:
The commissioner of income tax is empowered to order that the refund must be with held if the
department wants to appeal against the refund.
6. Refer The Case To High Court:
If he is not satisfied with the decision of appalled tribunal, he can request the tribunal to refer the
case to high court provided that the decision involves the point of law.
7. Power To Compound Offence:
He may either before or after the institution of proceedings compound such offence where a
person has committed any offence under the income tax law.
8. Order To Person For Payment:
He may order a person who has committed an offence to pay the amount for which the offence
may not compound.
9. Power To Disqualify The Practitioners:
If he finds any practitioners qualify of misconduct, he may disqualify an income tax practitioner
to appear before any income tax authority.
10. Power To Amend His Orders:
To rectify any mistake from the record the commissioner income tax may amend his orders
passed by him.
11. Power To Receive Evidence:
The commissioner has the power to receive the evidence on affidavit.  For the examination of
witness he can issue the orders to commissioners.
12. Power To Demand Documents:
He can compel any person to produce his books of accounts or any other documents for
investigation. He can also enforce any person to attend his office and he can examine him.
13. Power to Extend the Petition Period:
He can extend the normal period for filling a revision petition, If he is satisfied about the cause of
delay.
14. Power to Decide the Revision Petitions:
Against the decision of his subordinates he entertains, hears and decides the revision petitions
of aggrieved assesses.
15. May Direct for Appeal:
The commissioner of income tax (Head quarter) may direct the deputy commissioner to appeal
to appellate tribunal against the decision made by the commissioner income tax (appeal).
16. Penalty:
If the notice has been issued to any taxpayer but he has failed to obey the notice. In this case
commissioner income tax may impose penalty on that person.
17. Best Judgement Assessment:
If any person fails to file the return of income tax with in due date then the commissioner can
make the best judgement of assessment.
18. Power of Recovery Of Tax:
The commissioner income tax can take various steps to recover the amount if any person fails to
pay the due tax.
19. Inventory of Articles:
If any article is not entered and it is found in the premises the commissioner can make inventory
of that article.
20. Provisional Assessment:
The commissioner income tax has the power to make the provisional assessment if any person
fails to file the return.
21. Notice for Tax:
The commissioner income tax can issue the notice to any person for filling the return or for the
collection of tax from the tax payer.
22. Retain The Documents:
The commissioner income tax is empowered to retain the important documents of the taxpayers
for the purpose of prosecutions.
23. Change The Method Of Accounting:
If any person wants to change his method of accounting, the commissioner income tax may allow
him to change.