PREFACE

In the curricular structure introduced by this University for students of Post Graduate
degree programme, the opportunity to pursue Post Graduate course in Subjects
introduced by this University is equally available to all learners. Instead of being
guided by any presumption about ability level, it would perhaps stand to reason if
receptivity of a learner is judged in the course of the learning process. That would
be entirely in keeping with the objectives of open education which does not believe
in artificial differentiation.
Keeping this in view, study materials of the Post Graduate level in different
subjects are being prepared on the basis of a well laid-out syllabus. The course
structure combines the best elements in the approved syllabi of Central and State
Universities in respective subjects. It has been so designed as to be upgradable with
the addition of new information as well as results of fresh thinking and analysis.
The accepted methodology of distance education has been followed in the
preparation of these study materials. Co-operation in every form of experienced
scholars is indispensable for a work of this kind. We, therefore, owe an enormous
debt of gratitude to everyone whose tireless efforts went into the writing, editing and
devising of a proper lay-out of the materials. Practically speaking, their role amounts
to an involvement in invisible teaching. For, whoever makes use of these study
materials would virtually derive the benefit of learning under their collective care
without each being seen by the other.
The more a learner would seriously pursue these study materials the easier it will
be for him or her to reach out to larger horizons of a subject. Care has also been
taken to make the language lucid and presentation attractive so that it may be rated
as quality self-learning materials. If anything remains still obscure or difficult to
follow, arrangements are there to come to terms with them through the counselling
sessions regularly available at the network of study centres set up by the University.
Needless to add, a great part of these efforts is still experimental-in fact, pioneering
in certain areas. Naturally, there is every possibility of some lapse or deficiency here
and there. However, these do admit of rectification and further improvement in due
course. On the whole, therefore, these study materials are expected to evoke wider
appreciation the more they receive serious attention of all concerned.

Professor (Dr.) Subha Sankar Sarkar

Vice-Chancellor
 Revised Edition : November, 2018

Printed in accordance with the regulations of the

Distance Education Bureau of the University Grants Commission.
 Post Graduate : Commerce
[M. Com.]

Paper-5
Modules-1 & 2
Direct & Indirect Taxation

: Course Writing :
Module 1- Prof. Madan Mohan Maji
Module 2- Unit 1 to 5 Dr. Avijit Sikdar
Unit 6 Prof. Madan Mohan Maji

: Course Revision & Editing :

Dr. Anirban Ghosh
Professor of Commerce

ISBN : 978-93-82112-03-7

Notification
All rights reserved. No part of this study material may be reproduced in any form
without permission in writing from Netaji Subhas Open University.
Mohan Kumar Chattopadhyay
Registrar
 Netaji Subhas Post Graduate : Commerce
Open University M.Com-5

Module
1
Unit 1 ˆ Taxation of Business Income 7–18
Unit 2 ˆ Deductions from Gross Total Income 19–39
Unit 3 ˆ Set off and Carry Forward of Losses 40–53
Unit 4 ˆ Minimum Alternative Tax 54–61
Unit 5 ˆ Clubbing of Income 62–72
Unit 6 ˆ Assessment Procedure & Advance Payment 73–88

Module
2
Unit 1 ˆ GST in India : Levy and Collection 89-100
Unit 2 ˆ Concept of Supply under GST 101-157
Unit 3 ˆ Composition Levy 158-164
Unit 4 ˆ Exemption under GST and Reverse Charge 165-172
Mechanism (RCM)
Unit 5 ˆ Input Tax Credit and Returns under GST 173-188
Unit 6 ˆ Customs Duties 189-202
Unit - 1 ˆ Taxation of Business Income
Structure
1.0 Introduction
1.1 Income chargeable under the head “Profits and Gains of
Business or Profession”
1.1.1 Export Incentives
1.2 Deemed Profit (Sec. 41)
1.3 Expenditure on Scientific Research (Sec. 35)
1.4 Amortization of telecom licence fees (Sec. 35ABB)
1.5 Deduction in respect of expenditure on specified business (Sec. 35AD)
1.6 Expenditure on payment to association/institution for carrying out Rural
Development Programmes (Sec. 35CCA)
1.7 Deduction on expenditure for skill development (Sec. 35CCD)
1.8 Amortization of Preliminary Expenditure (Sec. 35D)
1.9 Exercises

1.0 Introduction
Sections 28 to 44D of the Income-tax Act contains provisions regarding chargeability
and computation of profits and gains of business or profession. As per Section 2(13)
of the Income-tax Act, business includes any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture. This definition
of business is not exhaustive; it covers every facet of an occupation carried on by a
person with a view to earning profits. The term “business” is a word of wide import
and in fiscal statutes it must be construed in a broad rather than a restricted sense.
It may be used in different connotations. Business connotes some real, substantial and
systematic or organized course or activity or conduct with a set purpose. Control and
profit motive are two crucial tests. Risk, uncertainty, foresightedness to visualize the
imponderables and capacity to overcome the unforeseen hurdles are essential requisites
for business activities.
Profession refers to those human activities the object of which is to earn a living
and which are guided by one’s intellectual skill and special knowledge. Profession
includes vocation as per Section 2(36). The world vocation is analogous to ‘calling’
meaning the way in which a man passes his life. Many vocations may fall within the
7
ordinary and accepted use of the word ‘profession’, for instances as those of tax
experts, accountants, engineers and so forth. A doctor who practices independently is
chargeable to tax in respect of his professional income under this head.
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’.

1.1 Income chargeable under the Head “Profits and Gains

of Business or Profession”
Income chargeable under the head “Profits and gains of business or profession” is
dealt with in Section 28 whereby the following incomes are included :
1. Any profits and gains of any business or profession.
2. Any compensation or other payments due to or received by any person specified
by sec. 28(ii).
3. Income derived by a trade or profession or similar association from specific
services performed for its members [Sec. 28(iii)].
4. Profit on sale of a licence granted under Imports (Control), Order, 1955 made
under the Imports & Exports (Control) Act, 1947.
5. Cash assistance (by whatever the name called) received/receivable by any
person against exports under any scheme of the government. [see 28(iii)]
6. Any duty of customs/excise repaid or repayable as drawback to any person
against exports under the Customs and Excise Duties Drawback Rules, 1971.
7. Any profit on transfer of Duty Entitlement Pass Book (DEPB) Scheme.
8. Any profit on the transfer of the Duty Free Replenishment Certificate.
9. Value of any benefits or perquisites arising from a business or the exercise of
a profession.
10. Interest, salary, bonus, commission or remuneration due to or received by a
partner of a firm from such a firm.
11. Any sum received under a Keyman Insurance Policy Including the sum by
way of bonus of such policy.
12. Income from speculative transactions.

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1.1.1 Export Incentives
Export incentives mean
(i) Profit on sale of import licences granted under Imports (Control) Order on
account of exports.
(ii) Cash assistance received or receivable against export.
(iii) Duty drawbacks of Customs and Central Excise duties.
(iv) Any profit on the transfer of the Duty Entitlement Pass Book Scheme being
the Duty Remission Scheme under the export and import policy.
(v) Any profit on the transfer of the Duty Free Replenishment Certificate.

1.2 Deemed Profit

Deemed profit is chargeable to tax as business income [Sec. 41 and 176(3A) &
(4)].
By virtue of Section 41, the receipts are chargeable to tax as business income
notwithstanding that the business or profession to which the receipts related ceased
to be in existence in the year in which they are received :
(1) Recovery against any deduction [Section 41 (1)]
Where any allowance or deduction has been made in the assessment of any
year in respect of loss, expenditure or trading liability and subsequently,
during the pervious year, any amount is received by the assessee, whether in
cash or in any manner whatsoever, in respect of such loss or expenditure, or
some benefit for such trading liability by way of remission or cessation thereof,
the amount obtained by him or by virtue of benefit accruing to him is chargeable
to tax as business income.
Recovery by the Successor in business or profession : W.e.f. the assessment
year 1993-94 the section provides that where the assessee to whom the
trading liability may have been allowed in his business either because of
amalgamation of two companies or on account of the constitution of a new
firm or the business is continued by some other person when the assessee
ceases to carry on the business, then the person succeeding will be chargeable
to tax on any amount received in relation to which deduction or allowance
has been made. This provision has been extended (from the assessment year
2000-01 onwards) in the case of demerger in respect of resulting company.

9
(2) Balancing charge [Section 41 (2)]
Balancing charge (i.e. surplus on transfer) in the case of power unit, sub-
section (2) has been inserted in section 41 to provide for the manner of
calculation of the amount which shall be chargeable to income-tax as income
of the business of the previous year in which the money payable for building,
machinery, plant or furniture of a power unit is sold, discarded, demolished
or destroyed. The money payable in respect of such building, machinery, plant
or furniture, as the case may be, together with the amount of scrap value, if
any exceeds the written down value, so much of the excess as does not
exceed the difference between the actual cost and the written down value
shall be chargeable to income-tax as income of the business of the previous
year in which the money payable for the building, machinery, plant or furniture
became due. Where the money payable in respect of the building, machinery,
plant or furniture became due in a previous year in which the business for the
purpose of which the building, machinery, plant or furniture was being used,
is no longer in existence, the above provision shall apply as if the business is
in existence in the previous year.
(3) Sale of assets used for Scientific research [Section 41(3)]
When any capital asset used in scientific research is sold without having been
used for other purposes and the sale proceeds, together with the amount of
deduction allowed under Sec. 35, exceeds the amount of the capital expenditure,
such surplus or the amount of deduction allowed, whichever is lower, is
chargeable to tax as business income in the year in which the sale took place.
(4) Recovery of Bad Debt [Section 41 (4)]
Where any bad debt has been allowed as deduction under section 36(1)(vii) and
the amount subsequently recovered on such debt is greater than the difference
between the debt and the deduction allowed, the excess realization is chargeable
to tax as business income of the year in which the debt is recovered.
(5) Amount withdrawn from special reserve (Section 41 (4A)]
Where any amount is withdrawn from any reserve created under section
36(viii), it will be chargeable to tax in the year in which the amount is
withdrawn, regardless of the fact whether the business is in existence in that
year or not
(6) Recovery in case of discontinued business or profession [Section 176
(3A) & (4)]
Another instance of deemed profit is given in section 176(3A) and (4). Under
this section, where any business/profession is discontinued by reason of the

10
 retirement or death of the person carrying on such business/profession, any
sum received after discontinuance of business/profession is deemed to be the
income of recipient and charged to tax in the year of receipt.

1.3 Expenditure on Scientific Research [Sec. 35]

The term “scientific research” means “any activities for the extension of knowledge
in the fields of natural or applied sciences including agriculture, animal husbandry or
fisheries”.
If any dispute arises as to whether any activity constitutes scientific research or any
asset is being used for scientific research, the Central Broad of Direct Taxes will refer
the questions to the prescribed authority.
Expenditure on Seientific Research

Inhouse Research Contribution to outsiders

(u/s 35(1) (ii) u/s 35(1) (ii)

Revenue [u/s 35(1)] Capital [u/s 35(2)]

100% deduction 100% deduction

Revenue expenditure incurred by an assessee who himself carries on scientific

research [Sec. 35(1)]—Where the assessee himself carries on scientific research and
incurs revenue expenditure during the previous year, deduction is allowed for such
expenditure only if the research relates to the business.
Capital expenditure incurred by an assessee who himself carries on scientific
research [Sec. 35(2)]—Where the assessee incurs any expenditure of a capital nature
on scientific research related to his business, the whole of such expenditure incurred
in any previous year is allowable as deduction for that previous year.
The three ingredients necessary to be satisfied for allowance under section 35 are
: (i) that the expenditure has been incurred during the year; (ii) that it is of capital
nature; and (iii) that it is on scientific research.
Pre-commencement period expenses—Where any capital expenditure has been
incurred on scientific research related to business before the commencement of the
business, the aggregate of such expenditure, incurred within the three years immediately
preceding the commencement of the business, is deductible in the previous year in
which the business in commenced [Explanation to section 35(2)(ia)] and is, accordingly,
deductible during the year in which business is commenced.
11
 Pre-commencement period expenses—Revenue expenses (other than expenditure
on providing perquisites to employees) incurred before the commencement of business
(but within three years immediately before commencement of business) on scientific
research related to the business is deductible in the previous year in which business is
commenced. However, the deduction is limited to the extent it is certified by the
prescribed authority.
Contribution made to outside [Sec. 35(1)]—Where the assessee does not himself
carry on scientific research but makes contributions to the following institutions for
this purpose, a weighted deduction is allowed. The amount of deduction is equal to
one and one-fourth times of any sum paid to a scientific research association or to
a university, college or other institution—
a. the payment is made to an approved scientific research association which
has, as its object, undertaking of scientific research related or unrelated to
the business of assessee [sec. 35(1)(ii)]; Amount of deduction 150% for the
assessment year 2018-19 to 2020-21
b. the payment is made to an approved university, college or institution for the
use of scientific research related or unrelated to the business of assessee [sec.
35(1)(ii)]; Weighted deduction - 150% of the actual payment for the assessment
year 2018-19 to 2020-21
c. the payment is made to an approved university, college or institution for the
use of research in social sciences or statistical research related or unrelated
to the business of the assessee [sec. 35(1)(iii)]. Deduction 100% of the actual
cost for the assessment year 2018-19 to 2020-21.
Tax treatment when asset is sold—If the asset is sold without having been used
for other purposes, sale proceeds or deduction allowed, whichever is less, is chargeable
to tax as business income of the previous year in which the sale took place [section
41(3)]. The excess of sale proceeds over deduction allowed is, however, chargeable
to tax as capital gains according to the provisions of section 45.
Depreciation not admissible—Deduction by way of depreciation is not admissible
in respect of an asset used in scientific research either in the year in which capital
expenditure is incurred or in a subsequent year.
Contribution to National Laboratory [Sec. 35(2AA)]—The provisions of section
35(2AA) are given below—

12
 Conditions—The following conditions should be satisfied—
Condition one The payment is made to—
a. National Laboratory; or
b. University; or
c. Indian Institute of Technology; or
d. Specified person as approved by the prescribed
authority.
Condition two The above payment is made under a specific direction
that it should be used by the aforesaid person for
undertaking a scientific research programme approved
by the prescribed authority.
Amount of deduction– If the aforesaid conditions are satisfied the taxpayer is
eligible for weighted deduction which is equal to 150% of actual payment from the
assessment year 2018-19 to 2020-21.
Such contribution which is eligible for weighted deduction is not eligible for any
other deduction under the Act.
Expenditure on in-house research and development facility [Sec. 35(2AB)]—
Section 35(2AB) provides for a weighted deduction of 200% in respect of expenditure
on in-house research and development facility subject to the following—
z Conditions : One has to satisfy the following conditions—
1. The taxpayer is a company.
2. It is engaged in the business of bio-technology or in the business of manufacture
or production of any drugs, pharmaceuticals, electronic equipments, computers,
telecommunication equipments, chemicals or any other article or thing notified
by the Board [i.e., manufacture or production of helicopter or aircraft or
computer software or automobiles (including automobiles components)].
3. It incurs an expenditure on scientific research and such expenditure is of
capital nature or revenue nature (not being expenditure in the nature of cost
of any land and building). The expenditure on scientific research in relation
to drugs and pharmaceuticals shall include expenditure incurred on clinical
drug trial, regulatory approval and filing an application for a patent.
4. On the application of the company in Form No. 3CK, the research and
development facility is approved by the prescribed authority (i.e., Secretary,
Department of Scientific and Industrial Research).

13
 5. The tax payer has entered into an agreement with the prescribed authority for
cooperation in such research and development facility and for audit of the
accounts maintained for the facility. Amount of deduction u/s 35 (2AB) =
150% of the actual amount for the assement year 2018-19 to 2020-2021.
Consequences in the case of amalgamation [See 35(5)]—In pursuance of an
agreement of amalgamation if the amalgamating company transfers to amalgamated
company, which is an Indian company, any asset representing capital expenditure on
scientific research, provisions of section 35 would apply to the amalgamated company
as they would have applied to the amalgamating company if the latter had not transferred
the asset.

1.4 Amortization of telecom licence fees (Sec. 35ABB)

Where any capital expenditure is incurred by the assessee for acquiring any right
to operate telecommunication service deduction will be allowed subject to the following
conditions:
i) The expenditure is capital in nature.
ii) It is incured for acquiring any right to operate telecommunication Services.
iii) The expenditure is incurred either before the commencement of business or
there after at any time during any previous year.
iv) The payment has actually been made.
If the above conditions are fulfilled, the assessee can claim deduction u/s 35 ABB
as follows–
The payment will be allowed as deduction in equal instalments over the period
starting from the year in which such payment has been made and ending in the year
in which the licence cames to an end. The deduction will be allowed for the previous
year relevant to the previous year in which the licence fee is actually paid.
Where a deduction for any previous year is claimed and allowed under section
35ABB, then no deduction of the same expenditure shall be allowed u/s 32 for the
same previous year or any subsequent previous year.

14
1.5 Deduction in respect of expenditure on specified
business [Sec. 35AD]
Deduction under Section 35AD shall be allowed to the assessee who is carrying
on any of the following specified business:
i) setting up and operating a cold chain facility;
ii) setting up and operating a warehousing facility for storage of agricultural
produce;
iii) laying and operating a cross-country natural gas or crude or pertoleum oil
pipeline network for distribution, including storage facilities being an integral
part of such network;
iv) the business of building and operating anywhere in India, a hotel of two-star
or above category, as classified by the Central Government;
v) building and operating anywhere in India, a hospital with at least 100 beds for
patients;
vi) developing and building a housing project under a scheme for slum development
or rehabilitation framed by the Central Government or a State Government,
as the case may be, and notified by the Board in this behalf in accordance
with the guidelines as may be prescribed;
vii) developing and building a housing project under a scheme for affordable
housing framed by the Central Government or a State Government, as the
case may be, and notified by the Board in this behalf in accordance with the
guidlines as may be prescribed; and
viii) production of fertiliser in India.
Amount of deduction : 100% deduction shall be allowed and account of any
expenditure of capital in nature incurred wholly and exclusively for the purpose of the
above specified business carried on by such assessee during the previous year in which
such expenditure is incurred by him.
Expenditure incured prior to commencement of operation to be allowed in the
year of commencement of operation : The expenditure incurred, wholly and exclusively,
for the purposes of any specified business, shall be allowed as deduction during the
previous year in which he commences operations of his specified business, if–
a) the expenditure is incurred prior to the commencement of its operations; and
b) the amount is capitalized in the books of account of the assessee on the date
of commencement of its operations.

15
 Conditions to be satisfied : This section applies to the specified business which
fulfils all the following conditions :
i) it is not set up by splitting uup, or the reconstruction, of a business already
in existence;
ii) it is not set up by the transfer to the specified business of machinery or plant
previously used for any purpose;
iii) where the business is of laying and operating a cross country natural gas or
crude or petroleum oil pipelines network it should satisfy the following
conditions also:
a) it is owned by an Indian or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any
Central or State Act;
b) it has been approved by the Notified Petroleum and Natural Gas Regulatory
Board;
c) it has made such proportion of its total pipeline capacity avaliable for use
on common carrier basis by any person other than the assessee or an
associated person as prescribed by the Petroleum and Natural Gas
Regulatory Board; and
d) any other condition as may be prescribed.

1.6 Expenditure on payment to association/institution for

carrying out Rural Development Programmes [Sec.
35CCA]
Any assessee carrying on business or profession can claim a deduction of the
expenditure incurred by way of payment to:
(i) an association or institution, which has its object of any rural development
approved by the prescribed authority.
(ii) an association or institution engaged in training of persons for implementing
rural development programmes.
(iii) National Fund for rural development set up by the Central Government.
(iv) National Urban Poverty Eradication Fund set up and notified by the Central
Government.

16
1.7 Deduction on expenditure for skill development [Sec.
35 CCD]
The section 35 CCD provides that where a company incurs any expenditure (not
being the cost of land/ building) on any notified skill development project, such
company can claim a weighted deduction of 150% of such expenditure.
If the company claims a deduction on such expenditure u/s 35 CCD, it cannot claim
deduction under any other provisions of the Income Tax Act for the same expenditure.

1.8 Amortization of preliminary expenditure [Sec. 35D]

Deduction under section 35D is available in the case of Indian company or a
resident non corporate assessee certain preliminary expenses. A foreign company even
if it is resident in India, cannot claim any deduction under this section.
Time and purpose of preliminary expenses-Expenses incurred at the following
two stages are qualified for deduction under this section—
When expenses are incurred Why expenses are incurred
1. Before commencement of business For seting up any undertaking or
business
2. After commencement of business In connection with extension of an
industrial undertaking or in connection
with setting up a new industrial unit.
Examples of preliminary expenditure in respect of which the deduction is available:
i) expenditure incurred prior to the commencement of the business.
ii) preparation of a feasibility report;
iii) preparation of a project report;
iv) legal charges for drafting any agreement between the assessee and other
persons;
v) preparation of Memorandum of and Articles of Association;
vi) Fees for registration;
vi) expenditure in connection with the issue of shares, or debentures, underwriting
commission, printing of prospectus etc.
Note : Deduction under section 35D is not available in respect of expenditure
incurred after commencement of business if such expenditure is incurred in connection
with extension of or setting up a non-industrial undertaking.
17
 Maximum ceiling : the aggregate expenditure cannot exceed the following :
In the case of corporate assessee in the case of non-corporate assessee
a. 5% of the cost of the project, or 5% of the cost of the project
b. 5% of capital employed,
whichever is more of (a) & (b)
Cost of the project : It means the actual cost of fixed assets, viz land, building,
leasehold property, plant & Machinery, furniture etc. Which are shown in the books
of the assessee as on the last day of the previous year in which the business is
commenced.
Amount of deduction : One-fifth of the qualifying expenditure is allowable as
deduction in each of the five successive years beginning with the year in which business
commences, or as the case may be, the previous year in which the extension of the
industrial undertaking is completed or the new industrial unit commences production or
operation.
Consequences in the case of amalgamation or demarger : The benefit of
amortization of preliminary expenditure under this section are ordinarily available only
to the assessee who incurred the expenditure. The benefit is however, not lost in a
case where the undertaking of an Indian company which is entitled to amortization
is transferred to another Indian company in a scheme of amalgamation or demarger
within the 5-year period of amortization. In that event, the deduction in respect of
previous year in which the amalgamation or demarger takes place and the following
previous year within the 5-year period, will be allowed to the amalgamated company
or resulting company and not the amalgamating company or demarged company.

1.9 Exercises
1. What do you mean by ‘Business’?
2. What is ‘Profession’?
3. What is ‘Deemed profit’? Is it taxable?
4. Discuss the incomes which are taxable under the head ‘Profits and Gains of
business or profession,
5. Write short notes on the following :
a. Expenditure on ‘Scientific research’
b. Expenditure for skill development
c. Amortization of ‘Preliminary expenses’

18
Unit - 2 ˆ Deductions from Gross Total Income
Structure
2.0 Introduction
2.1 Deduction in respect of Profits and Gains from Industrial Undertaking or
Enterprises engaged in Infrastructure Development etc. [Sec. 80-IA]
2.1.1 Infrastructure facility
2.1.2 Telecommunication services
2.1.3 Industrial parks
2.1.4 Power generation/distribution
2.2 Deduction in respect of Profits and Gains by an Undertaking or Enterprise
engaged in development of Special Economic Zone (Sec. 80-IAB)
2.3 Deduction in respect of Profits and Gains from certain Industrial
Undertakings other than Infrastructure Development Undertakings [Sec.
80-IB]
2.3.1 Industrial Undertaking
2.3.2 Operation of ship
2.3.3 Hotel industry
2.3.4 Companies engaged in industrial research [Sec. 80-IB(8)/8A]
2.3.5 Mineral oils
2.3.6 Developing and building housing projects
2.3.7 Undertaking engaged in the business of processing, preservation
and packaging of fruits or vegetables or integrated handling, storage
and transportation of food grains
2.3.8 Multiplex theatres
2.3.9 Convention centre
2.3.10 Operating and maintaining a hospital in a rural area
2.3.11 Hospital located in certain areas.
2.4 Deduction in respect of certain Undertakings or Enterprises in certain
Special Category States [See. 80-IC]
2.5 Deduction in respect of profits and gains from business of hotels and
convention centres in specified area (See 80-ID)

19
2.6 Deduction in resepct of Porfits and Gains from the business of collecting
and processing of bio-degradable waste [Sec. 80JJA]
2.7 Deduction in respect of employment of new workmen [Sec. 80JJAA]
2.8 Exercises

2.0 Introduction
Certain deductions are available under sections 80CCC to 80U for some specified
assessees. The provisions of sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID & 80-IE
are included in the syllabus and discussed in detail as under.

2.1 Deduction in respect of Profits and Gains from

Industrial Undertaking or Enterprises engaged in
Infrastructure Development etc. [Sec. 80-IA]
Deduction under section 80-IA is available only to the following undertakings :
a. provision of infrastructure facility;
b. telecommunication services;
c. industrial parks; and
d. power generation, transmission and distribution.

2.1.1 Infrastructure facility

The provisions of section 80-IA is applicable to an undertaking providing
infrastructure facility are given below :
Conditions—An undertaking providing infrastructure facility must satisfy the
following conditions :
a. It should provide infrastructure facility—The enterprise must carry on the
business of (a) developing, or (b) maintaining and operating, or (c) developing,
operating and maintaining any infrastructure facility.
Meaning of ‘‘infrastructure facility’’—The Finance Act 2001, has modified
definition “infrastructure facility”. Under the modified version the term
“infrastructure facility” means—
(i) a road including toll road, a bridge or a rail system;

20
 (ii) a highway project including housing or other activities being an integral
part of the highway project;
(iii) a water supply project, water treatment system, irrigation project,
sanitation and sewage system or solid waste management system; and
(iv) a port, airport, inland waterway or inland port or navigational channel
in the sea
b. Owned by an Indian company—The enterprise is owned by a company
registered in India or by a consortium of such companies or by an authority
or a board or a corporation or any other body established under any central
or state Act.
c. Agreement—The enterprise has entered into an agreement with the Central
Government or a State Government or a local authority or any other statutory
body for developing, maintaining and operating a new infrastructure facility
d. Commencement—the enterprise starts operating and maintaining the
infrastructure facility on or after 1st April, 2017.
Amount of deduction—If all the aforesaid conditions are satisfied, then 100% of
the profit is deductible for the first 10 consecutive assessment years out of fifteen
years. The deduction commences from the initial assessment year.
However the benefit of deductions is available only for 10 consecutive assessment
years falling within a period of fifteenth assessment year beginning with the assessment
year in which an assessee begins operating and maintaining infrastructure facility.
What is initial assessment year—Initial assessment year for this purpose means the
assessment year specified by the assessee at his option to be the initial year not falling
beyond the fifteenth assessment year in which the enterprise begins operating and
maintaining the infrastructure facility.
Audit report—The deduction under section 80-IA or 80-IB is admissible only if
the accounts of the undertaking have been audited by a chartered accountant and the
audit report duly signed and verified by such accountant is furnished along with the
return of income (Form No. 10CCB).

2.1.2 Telecommunication services

An industrial undertaking which provides telecommunication services can claim
deduction under section 80-IA.
Conditions—The following conditions should be satisfied :

21
 Condition 1 It should be a new undertaking
Condition 2 It should not be formed by transfer of old plant and machinery
Condition 3 The activity should commence during the specified period given below
An undertaking engaged in providing telecommunication services which starts
providing telecommunication services (whether basic or cellular, including radio paging,
domestic satellite service, network of trunking, broad-band network and internet
services) at any time after March 31, 1995 but before March 31, 2005 is eligible for
deduction under section 80-IA. “Domestic satellite” for this purpose means a satellite
owned and operated by an Indian company for providing telecommunication service.
Amount of deduction—If all the aforesaid conditions are satisfied, then deduction
is available under section 80-IA as follows—
% of profit deductible Period of deduction commencing from
the initial assessment year
100 First 5 years
30 Next 5 years

2.1.3 Industrial parks

An undertaking which develops and operates industrial parks or special economic
zone must satisfy the following conditions in order to avail the benefit of section
80-IA—
Condition 1 It develops, develops and operates or maintains and operates an
industrial park or a special economic zone (notified for this purpose
in accordance with any scheme framed and notified by the Central
Government).
Condition 2 The industrial park must start operating during April 1, 2006 and
March 31,2011 and it should be notified under the Industrial Park
Scheme, 2008 or the special economic zone must start operaring
during April, 1997 March 31, 2005.

Amount of deduction—If all the aforesaid conditions are satisfied, 100 per cent
of profit is deductible for 10 years commencing from initial assessment year.

22
2.1.4 Power generation/distribution
An industrial undertaking which generates/distributes power can claim deduction
under section 80-IA.
Condition—The following condition should be satisfied :
Condition 1 It should be a new undertaking
Condition 2 It should not be formed by transfer of old plant and machinery
Condition 3 The activity should commence during the specified period
It should be a new undertaking—The industrial undertaking is not formed by
splitting up, or the reconstruction, of a business already in existence.
Exception one—This condition will not apply where the business is re-established,
reconstructed or revived by the same assessee after the business of any industrial
undertaking carried on by him in India is discontinued due to extensive damage to,
or destruction of, any building, machinery, plant or furniture owned by the assessee
(and used for the purpose of such business) as a direct result of (i) flood, typhoon,
hurricane, cyclone, earthquake or other convulsion of nature, or (ii) riot or civil
disturbance, or (iii) accidental fire of explosion, or (iv) action by any enemy or action
taken in combating an enemy (whether with or without a declaration of war).
It should not be formed by transfer of machinery or plant previously used for
any purpose—It is not formed by a transfer to a new business of machinery and plant
previously used for any purpose.
Exceptions—In the cases given below the aforesaid rule is not applicable—
i) 20 per cent old machinery is permitted – If the value of the old plant and
machinery does not exceed 20 per cent of the total value of the machinery or plant
used in the business, this condition is deemed to have been satisfied.
ii) Second-hand imported machinery is treated as new—Any machinery or plant
which was used outside India by any person other than the assessee shall not be
regarded as machinery or plant previously used for any purpose, if the following
conditions are fulfilled :
a) Such machinery or plant was not, at any time previous to the date of the
installation by the assessee, used in India.
b) Such machinery or plant is imported into India from any country outside India.
c) No deduction on account of depreciation in respect of such machinery or
plant has been allowed or is allowable under the Act in computing the total
income of any person for any period prior to the date of the installation of
the machinery or plant by the assessee.
23
 Commencement—The undertaking is set up in any part of India for the generation
or generation and distribution of power and it begins the operation at any time during
April 1, 1993 and March 31, 2017. Alternately, it starts transmission or distribution
by laying a network of new transmission or distribution lines at any time between
April 1, 1999 and March 31, 2017.
Alternatively, it undertakes substantial renovation and modernisation of the existing
transmission or distribution lines at any time during the period commencing on April
1, 2004 and ending on March 31, 2017. The term “substantial renovation and
modernisation” has been defined to mean an increase in the book value of plant and
machinery by 50 percent as compared to book value of such plant and machinery on
April 1, 2004.
Amount of deduction—If all the aforesaid conditions are satisfied, 100 per cent
of profit is deductible for 10 consecutive assessment years commencing from initial
assessment year.

2.2 Deductions in respect of Profits and Gains by an

Undertaking or Enterprise engaged in development of
Special Economic Zone [Sec. 80-IAB]
The developers of special econonic zone can avail deduction u/s 80-IAB from the
assessment year 2006-07.
Conditions-The following conditions should be satisfied—
1. he taxpayer is a developer of a special economic zone.
2. The gross total income of the taxpayer includes profits and gains derived by an
undertaking from any busines of developing a special economic zone.
3. Such special economic zone is notified on or after April 1, 2005 and the
development of special econmic zone should begin on or before March 31, 2017.
4. The books of the account of the taxpayer are audited.
Deduction under section 80-IAB is not available unless it is claimed in the return
of income. Moreover, return of income should be submitted on or before the due date
of submission of return of income given by section 139(1).
Amount of deduction-If the above conditions are satisfied, the taxpayer can claim
100 per cent deduction in respect of the aforesaid profit. However, no deduction
under this section will be available to a developer where the development of the
special economic zone begins on or after April 1, 2017.

24
 Period of Deduction-The aforesaid deduction is available for 10 consecutive
assessment years. The deduction may be claimed, at the option of the taxpayer, for
any 10 consecutive assessment years out of 15 years beginning from the year in which
the special economic zone has been notified by the Central Government.
Transfer of undertaking-If a taxpayer who develops a special economic zone on
or after April 1, 2005 (‘‘transferor’’) transfers the operation/ maintenance of such
zone to another developer (‘‘transferee’’), then deduction shall be allowed to the
transferee for the remaining period of 10 years as if the operation and maintenance
were not so transferred. Similar rule will be applicable in the case of amalgamation
or demerger of an Indian company which had developed a special economic zone with
another Indian company.
Where any amount of profits and gains is claimed and allowed as deduction under
section 80-IAB for any assessment year, deduction to the extent of such profits and
gains shall not be allowed under section 80HH to 80RRB and shall in no case exceeds
profits and gains of such eligible business.

2.3 Deduction in respect of Profits and Gains from certain

Industrial Undertakings other than Infrastructure
Development Undertakings [Sec. 80-IB]
Deduction under section 80-IB is available to different industrial undertakings as
follows :-
a. business of an industrial undertaking;
b. operation of ship;
c. hotels;
d. industrial research;
e. production of mineral oil;
f. developing and building housing project;
g. undertaking engaged in the integrated handling, storage and transportation of
food grains;
h. multiplex theatres;
i. convention centre;
j. Operating & maintaining a hospital in rural area (w.e.f. Ay 2005-06);
k. Hosptial located in certain areas.

25
2.3.1 Industrial Undertaking
The provisions of a section 80-IB as applicable to an industrial undertaking is
certain condition are.
Conditions—To claim deduction under section 80-IB an industrial undertaking
(i.e. an undertaking which is mainly engaged in the business of generation or distribution
of electricity or any other form of power or in the construction of ships or in the
manufacture or processing of goods or in mining) must satisfy the following conditions :
1. It should be a new undertaking : The industrial undertaking is not formed
by splitting up or the reconstruction of a business already in existence. However,
if new industrial undertaking is set up in an old building deduction shall be
admissible as this section provides for new undertaking and does not provide
for new building.
Exception : The aforesaid condition of new undertaking is not applicable
where the business is re-established, reconstructed or revived by the same
assessee after the business of any industrial undertaking carried on by him in
India is discontinued due to expensive damage to, or destruction of, any
building, machinery, plant or furniture owned by the assessee (and used for
the purpose of such business) as a direct result of flood, typhoon, hurricane,
cyclone, earthquake or other convulsion or action by any enemy or action
taken in combating an enemy (where with or without a declaration of war.
2. It should not be formed by transfer of machinery or plant previously
used for any purpose : It is not formed by a transfer to a new business of
machinery and plant previously used for any purpose.
Two exceptions—In the two cases given below, the aforesaid rule is not
applicable.
(i) 20% old machinery is permitted—If the value of the transferred assets
does not exceed 20% of the total value of the machinery or plant used in
the business of machinery and plant previously used for any purpose.
(ii) Second hand imported machinery is treated as new : Any machinery or
plant which was used outside India by any person other than the assessee,
if the following conditions are fulfilled :
(a) Such machinery or plant was not at any time used in India.
(b) No deduction on account of depreciation in respect of such machinery
or plant has been allowed or is allowable under the Act in computing
the total income of any person for any period prior to the date of the
installation of the machinery or plant by the assessee.

26
 3. It should not manufacture or produce articles specified in the eleventh
schedule : It manufactures or produces any articles or things (not being an
article or thing specified in the list in the Eleventh schedule) or operates cold
storage plant in any part of India.
4. It must start manufacturing within the time period : It begins to
manufacture or produce articles or thing or to operate cold storage plant or
plants within a specified time limit as prescribed by the Central Government.
5. It should employ 10/20 workers : In case where the industrial undertaking
manufactures or produces articles or thing the undertaking employs 10 or more
workers in a manufacturing process carried on with the aid of power or employs 20
or more workers in a manufacturing process carried on without the aid of power.
6. Amount of Deduction: An indisutrial undertaking can claim deduction at the
rates given below
Small scale Industrial Industrial Industrial Cold chain Any other
industrial undertaking undertaking undertaking facility for
undertaking (including (including (including agricultural
cold storage) cold storage) cold storage) produce
set up in an set up in set up in [see Note 1]
industrial Category A Category B
backward notified notified
State [Eighth backward backward
Shedule] district district
1. Nature of Any Any [see other than other than Cold chain Other than those
article to be Note 2] those given those given in facility for given in Eleventh
produced in Eleventh Eleventh agricultual schedule]
Schedule Schedule produce
2. Time limit Between April Between April Between Oc- Between Oc- April 1, Between April 1
for commence- 1, 1991 and 1, 1993 and tober 1,1994 tober 1,1994 1999 and 1991 and March
ment of pro- March 31, March 31, and March 31, and March 31, March 31, 31, 1995
ducton or 2002 2004 (March 2004 2004 2004
operation 31,2012 for an
3. Amount of industrial
deduction undertaking
(period of in the State of
deduction Jammu and
commences Kashmir)
form initial
assessment
year)
3.1 Owned by 30% for first 100% for first 100% for first 100% for first 100% for first 30% for fist 10
a company 10 years 5 years and 5 years and 3 years and 3 years and years
30% for next 30% for next 30% for next 30% for next
5 years 5 years 5 years 5 years
3.2 Owned by 25% for first 100% for first 100% for first 100% for first 100% for first 25% for first
a cooperative 12 years 5 years and 5 years and 3 years and 5 years and 12 yerars
society 25% for next 25% for next 25% for next 25% for next
7 years 7 years 7 years 7 years
3.3 Owned by 25% for first 100% for first 100% for first 100% for first 100% for first 25% for first
and other 10 years 5 years and 5 years and 3 years and 5 years and 10 yerars
person 25% for next 25% for next 25% for next 25% for next
5 years 5 years 5 years 5 years

27
2.3.2 Operation of ship
No deduction is available.

2.3.3 Hotel industry

No deduction is available w.e.f. the assessent year 2011-12.

2.3.4 Companies engaged in industrial research [Sec. 80-IB(8)/8A]

Section 80-IB is applicable if the following conditions are fulfilled—
Condition 1 The taxpayer is a company registered in India.
Condition 2 Such company has scientific and industrial research and
development as its main object.
Condition 3 It is for the time being approved by the prescribed authority (i.e.,
Secretary, Department of Scientific and Industrial Research).

Amount of deduction—If all the aforesaid conditions are satisfied, the following
is deductible—
If the company is approved If the company is approved by the
by the prescribed authority at prescribed authority after March 31,
any time before April 1, 1999 2000 but before April 1, 2007
Amount of 100 per cent of profit from 100 per cent of profit from
deduction such business such business
Period of 5 years beginning with the 10 years beginning with the initial
deduction initial assessment year assessment year

2.3.5 Mineral oils

One should satisfy the following conditions—

i) It should be a new undertaking.
ii) It should not be formed by transfer of machinery or plant previously used for
any purpose.
iii) It should commence commercial production as follows—

28
 Commencing production Refining of mineral oil
of mineral oil
Undertaking located in Before April 1, —
North-Eastern Region 1997
Undertaking located After March After September
any where in India 31, 1997 but 30, 1998 but before
before April 2,2017 April 1, 02012

iv) It should employ 10/20 workers.

North-Eastern Region comprises of the Sates of Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.
Amount of deduction—100 per cent of the profit is deductible for the first 7
years commencing with the year in which the undertaking commences commercial
production of mineral oil or refining of mineral oil.
2.3.6 Developing and building housing projects
An undertaking engaged in developing and building housing projects shall be eligible
to claim deduction under section 80-IB subject to the following :
Condition 1 The project should be approved by the local authority before March
31, 2008.
Condition 2 The size of the plot of land is a minimum of one acre.
Condition 3 The undertaking commences development and construction of the
housing project after September 30, 1998 and it should complete
construction within 4 years from the end of the financial year in
which the housing project is first approved or before April 1,
2008, whichever is later.
Condition 4 The built-up area of the shops and other commercial establishments
included in the housing project shall not exceed 5 per cent of the
aggregate built-up area of the housing project or 2,000 sq. ft.,
whichever is less.
Condition 5 The built-up area of each residential unit should be subject to the
following maximum limit—

29
 Place where residential unit is Minimum size of the plot of land
situated should be one acre and the maximum
built-up area of each residential unit
should be as given below—
Within the cities of Delhi
and Mumbai 1,000 sq. ft.
Within 25 kilometers from the
local limits of Delhi and Mumbai 1,000 sq. ft.
At any other place 1,500 sq. ft.

Amount of deduction—If all the aforesaid conditions are satisfied 100 per cent
of the profit derived in any previous year relevant to any assessment year from such
housing project is deductible.

2.3.7 Undertaking engaged in the business of processing, preservation

and packaging of fruits or vegetables or integrated handling, storage
and transportation of food grains
Under section 80-IB(11A) deduction is available in the case of an undertaking
deriving profit from the integrated business of handling, storage and transportation of
food grains, if the undertaking begins to operate such business after March 31, 2001.
The tax incentive has been extended to an undertaking engaged in the business of
processing, preservation and packaging of fruits or vegetables. The business of
processing, presenation and packaging of meat and meat poultry or portty or marine
or dairy products should commence on or after 31.3.2009.
Amount of deduction—The amount of deduction is given below :
Enterprises % of profit Period of deduction commencing
from the initial
assessment year (i.e., the
year in which the undertaking
begins the business)
Owned by a company 100 First 5 years
30 Next 5 years
Owned by any other person 100 First 5 years
25 Next 5 years

30
2.3.8 Multiplex theatres
Presently, no deduction is available

2.3.9 Convention centre

Presently, no deduction is available

2.3.10 Operating and maintaining a hospital in a rural area

To claim the deduction the following conditions should be satisfied—
Condition 1 The assessee owns an undertaking deriving profits from the business
of operating and maintaining a hospital in a rural area.
Condition 2 Such hospital is constructed at any time during October 1, 2004
and ending on March 31, 2008. For this purpose a hospital shall
be deemed to have been constructed on the date on which a
completion certificate in respect of such construction is issued by
the concerned local authority.
Condition 3 The hospital has at least 100 beds for patients.
Condition 4 The construction of the hospital is in accordance with the
regulations, for the time being in force, of the local authority.
Condition 5 The assessee furnishes audit report along with the return of income.

Amount of deduction—If the above conditions are satisfied, 100 per cent of the
profits and gains of such business is deductible for a period of 5 consecutive assessment
years, beginning with the initial assessment year (i.e., the assessment year relevant to
the previous year in which the undertaking begins to provide medical services).

2.3.11 Hospitals located in certain areas [Sec. 80-IB (11C)]

With a view to encouraging investment in hiopials in non-metrocities, sub-sectino
(11C) has been inserted in section 80-IB with effect from the assessment year 2009-10.
Condition–The benefit of deduction is available, if the following condition are
satisfied—

31
1. Location The hospital islocarted anywhere in India, other than
excluded area. The excluded area shall mean (or in other
words, the hospital should not be located in) an are
comprising the urban agglomerationis of Greater Mumbai,
Delhi, Kolkata, Chenai, Hyderabad, Bangalore and
Ahmedabad, the districts of Faridabad, Gurgaon, Gaziabad,
Gautam Budh Nagar and Gandhinagar and the city of
Secunderbad, The area comprising an urban agglomeration
shall be the area included in such urban agglomeration on
the basis of the 2001 census.
2. Construction The hospital is constructed at any time during April 1, 2008
and March 31, 2013, For this purpose, a hospital shall be
deemed to have been construced on the date on which a
completion certificate in respect of such construction is
issued by the local authority concerned.
3. Commencement The hospital should start functioning at any time during
April 1, 2008 and March 31, 2013.
4. Number of beds The hospital has at least 100 beds for patients.
5. Municipal bye-laws The construction of the hospital is in accordance with the
regulation or bye-laws of the local authority.
Deduction-If the above conditions are satisfied, 100 per cent of the profits and
gains derived from the business of hospital shall be deductible for a period of 5
assessment years, beginning ith the inital assessment year. Deduction should be
claimed in the return of income and return of income should be submitted on or
before the due date of submission of return of income.

2.3 Deduction in respect of certain Undertakings or Enterprises

in certain Special Category States [Sec. 80-IC]
Conditions—The assessee has to satisfy the following conditions to claim deduction
under section 80-IC—
1. Not formed by splitting up or reconstruction of existing business—The
industrial undertaking is not formed by splitting up, or the reconstruction, of
a business already in existence.
Exception—The aforesaid condition of “new undertaking” is not applicable
where the business is re-established, reconstructed or revived by the same
assessee after the business of any industrial of, any building, machinery, plant
or furniture owned by the assessee after the business of any industrial
32
 undertaking carried on by him in India is discontinued due to extensive damage
to, or destruction of, any building, machinery, plant or furniture owned by the
assessee (and used for the purpose of such business) as a direct result of (i)
flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature,
or (ii) riot or civil disturbance, or (iii) accidental fire or explosion, or (iv)
action by any enemy or action taken in combating an enemy (where with or
without a declaration of war).
2. Not formed by transfer of old plant and machines—
3. Industrial undertaking should be set up in certain special category of
states—The industrial undertaking should be set up in states given in column
1 of the table given in below. Moreover, it should be in a specified area [see
column 3 of the table.
4. Manufacture/production of specified goods—The industrial undertaking
should manufacture/produce specified goods/articles [see columns (3) and (4)
of the table given below].
5. Commencement—The industrial undertaking must begin to manufacture or
produce article or thing within the time-limit given in column (2) of the table
given hereunder. In case of an existing unit, substantial expansion should take
place during the time-limit given in column (2) of the table.
6. Audit—The books of account of the taxpayer should be audited and the audit
report in Form 10CCB should be submitted along with the return of income.
Amount of deduction—If the aforesaid conditions are satisfied, the deduction is
available under section 80-IC as follows—
State in Time limit for Nature of Nature of Amount
Which the commencement articles to be article to be deductible
industrial of production produced if produced if
undertaking or industrial industrial
is set up substantial undertaking undertaking
expansion is set up is set up
(or completes (or completes
substantial substantial
expansion) in expansion) in
the industrial any area
zone of the of the
relevant State relevant
given in State
section
80-IC2 (a)

33
 (1) (2) (3) (4) (5)
Sikkim December 23, Any article Any article 100% of
2002 to but other than given in profit and
March 31, those given in Fourteenth gains of the
2012 the Thirteenth Schedule industrial
Schedule [part B] undertaking
[part A] for 10 years
commencing
from the
initial
assessment
year
Himachal January 7, Any article Any article 100% of the
Pradesh or 2003 to but other than given in profit and
Uttaranchal March 31, those given Fourteenth gains of the
2012 in the Schedule industrial
Thirteenth [part C] undertaking for
Schedule the first 5
[part B] years
commencing
with the initial
assessment
year and 25%
(30% in the
case of a
company) for
the next 5
years
North-Eastern December 24, Any article Any article 100% of
States [i.e., 1997 to March but other than given in profit and
Arunachal 31, 2007 those given in Fourteenth gain of
Pradesh, the Thirteenth Schedule industrial
Assam, Schedue [part A] undertaking
Manipur, for 10 years
Meghalaya, commencing
Mizoram, from the
Nagaland and initial
Tripura] assessment
year

34
 Any article can be produced as Thirteenth Schedule has not provided negative list
for North-Eastern Status.
What is substantial expansion–For the aforesaid purpose substantial expansion
is calculated as under–
1. Find out the book value of plant and machinery (before depreciation) as on
the first day of the previous year in which substantial expansion is taken.
2. Find out the amount of investment in plant and machinery during the previous
year.
3. Find out (2) ÷ (1)
If the proportion computed under (3) (supra) is 50 per cent or more, then it is
taken as substantial expansion.
Industrial zones given under section 80-IC(2)– If an industrial undertaking has
begun or begins to manufacture or produce any article or thing (not being any article
or thing specified in the Thirteenth Schedule), or manufactures or produces anyarticle
or thing (not being any article or thing specified in the Thirteenth Schedule) and
undertakes substantial expansion during the period given in column 2 of the table
(supra), then such industrial undertaking should be in the following industrial zones
notified by the Board for the relevant State–
a. Export Processing Zone; or
b. Integrated Infrastructure Development Centre; or
c. Industrial Growth Centre; or
d. Industrial Estate; or
e. Industrial Park; or
f. Software Technology Park; or
g. Industrial Area; or
h. Theme Park
These areas shall be notified by the Board in accordance with the notified scheme
of the Central Government.
Period of deduction not to exceed 10 years—No deduction shall be allowed to
any undertaking or enterprise under section 80-IC, where the total period of deduction
inclusive of the period of deduction under this section or under section 80- IB(4) or
under section 10C, as the case may, exceeds 10 assessment years.
Initial assessment year—“Initial assessment year” means the assessment year
relevant to the previous year, in which the undertaking or the enterprise begins to
manufacture to produce articles or things, or commences operation or completes
substantial expansion.
35
 Double deduction not allowed—In computing the total income of the assessee,
no deduction shall be allowed under sections 80CCC to 80U or section 10A or 10B,
in relation to the profits and gains of the undertaking or enterprise.

2.4 Deduction in respect of profits and gains from business

of hotels and convention centres in specified area (Sec.
80-ID)
Deduction under this section is allowed to an assessee whose gross total incom-
includes any profit or gain derived from–
a) the business of hotel located in the National Capital Territory of Delhi and the
districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad, if such
hotel is constructed and has started or starts functioning at any time during
the period beginning on 1.4.2007 and ending on 31.7.2010; or
b) the business of building, owning and operating a convention centre, located
in the Natiional Capital ‘territory of Delhi and the districts of Faridabad,
Gurgaer Gautam Budh Nagar and Ghaziabad, if such convention centre is
constructed at any time during the period beginning on 1.4.2007 and ending
on 31.7.2010.
c) the business of hotel located in the specified district having a World Heritage
Site, if such hotel is constructed and has started or starts or starts functioning
at any time during the period beginning on 1.4.2008 and ending on 31.3.2013.
The above business is hereinafter referred to as the eligible business.
Condition : To claim deduction under Section 80-ID, an assessee must fulfil the
following conditions—
(i) It should be a new undertaking. The business is not formed by splitting up
or the reconstruction of a business already in existence.
(ii) The business is not formed by the transfer to a new business of a building
previously used as a hotel or a convention centre as the case may be.
(iii) The business is not formed by the transfer to a new business of plant or
machinery previously used for any purpose.
However, there is an exception. (See page 23)
(iv) Audit report in prescribed form is required.
Amount of deduction : 100% of the profit derived from such business for 5
consecutive assessment years beginning from the initial assessment year.

36
2.6 Deduction in respect of profits and gains from business
of collecting and processing of bio-degradable waste
[Section 80JJA]
Where the gross total income of an assessee includes any profits and gains derived
from the business of collecting and processing or treating of bio-degradable waste
for :
i) generating power, or
ii) producing, bio-fertilizers, bio-pesticides or other biological agents, or
iii) producing bio-gas, or
iv) making pellets or briquettes for fuel, or
v) organic manure,
a deduction under section 80JJA shall be alowed.
Quantum of deduction : The whole of such profits or gains shall be allowed as
a deduction for a period of five consecutive assessment years beginning with the
assessment year relevant to the previous year in which such business commences.
Subsidiary received by the assessec from the Agriculture Department of the State
against sale of biofertilizser manufactured by the assessee is an income devied from
the assesses business and shall be included in business means for the purpose allowing
deduction u/s 80JJAA.

2.7 Deduction in respect of employment of new workmen

[Sec. 80JJAA]
Deduction under this section is allowed only to an Indian company.
Where the Gross Total Income of an Indian company includeds any profits and
gains derived from any industrial undertaking engaged in the manufacture or production
of article or thing, a deduction under this section shal be allowed in respect of
employment of new workmen if certain conditions are satisfied.
Conditions :
i) The industrial undertaking is not formed by splitting up or reconstruction of
an existing industrial undertaking or amalgamation with another industrial
undertaking
ii) The company employs new regular workmen in the previous year.

37
 iii) The company should furnish, alongwith the return of income, the report of
a Chartered Accounant in Form No. 10DA giving such particulars in the
report as may be prescribed.
Quantum of deduction : Deduction shall be allowed of an amount equal to 30%
of the additional wages / employee cost of the new regular workmen employed by the
assessee in the previous year.
Period of deduction : Deductrion shall be allowed for 3 assessment years, including
the assessment year relevant to the the previous year in which such employment is
provided.
‘‘Additional employee’’ means an employee who has been employed during the
previous year and whose employment has the effect of increasing the total number of
employees employed by the employer as on the last day of the preceding year, but
does not include—
i) an employee whose total emoluments are more than Rs. 25,000 per month;
or
ii) an employee for whom the entire contribution is paid by the Government
under the Employees’ Pension Scheme notified in accordance with the
provisions of the Employees’ Provident Funds and Miscellaneus Provisions
Act, 1952;
iii) an employee employed for a period of less than 240 days [150 days, if the
assessee is engaged in the business of manufacturing of apparel or footwear
or leather products from the assessment year 2019-20] during the previous
year; or
iv) an employee who does not participate in the recognised provident fund.

2.8 Exercises
1. What are the provisions for deduction under section 80-IA in respect of
profits and gains from industrial undertakings or enterprises engaged in the
infrastructure development ?
2. What do you mean by industrial undertakings other than infrastructure
development undertakings ? Who are eligible for deduction under section 80-
IB? What conditions are to be fulfilled for claiming deduction under this
section ?
3. What are the conditions to be fulfilled by the following industrial undertaking
or enterprises to avail deduction u/s 80-IA? Also state the amount of deduction
available for each of them.
38
 (a) Telecommunication services
(b) Industrial parks
(c) Power generation, transmission and distribution or substantial renovation
and moderation of existing distribution lines.
4. State the conditions to be fulfilled by specified hotels in specified areas and
also by non-specified hotels to avail deduction u/s 80-IB.
5. When can developing and building housing projects claim deduction u/s 80-
IB?
6. State the conditions to be satisfied of the following to avail deduction u/s 80-
IB? Also state the amount of deduction available in each case.
(a) Industrial research.
(b) Operating and maintaining of hospital in rural area.
7. What do you understand by ‘Initial Assessment Year in connection with
deduction u/s 80-IA and 80-IB?
8. What are the provisions for deduction u/s 80-IC in respect of profits and
gains of certain undertakings in certain special category of states ?
9. What do you understand by substantial expansion and what are industrial
zone given u/s 80-IC ?
10. State the provisions of section 80JJAA.

39
Unit - 3 ˆ Set-off and Carry Forward of Losses
Structure
3.0 Introduction
3.1 Inter-Source Adjustment [Sec. 70]
3.2 Inter-Head Adjustment [Sec. 71]
3.3 Carry forward of loss
3.3.1 Carry forward and set-off of losses other than speculation loss
[Sec. 72]
3.3.2 Carry forward and set-off of speculation loss [Sec. 73]
3.3.3 Carry forward and set-off of capital loss [Sec. 74]
3.3.4 Carry forward and set-off of loss from activity of owning and
maintaining race horces [Sec. 74A]
3.3.5 Carry forward and set-off loss from house property [Sec. 71B]
3.3.6 Period of carry forward of losses
3.3.7 Loss from purchase and sale of securities [Sec. 94(7)]
3.3.8 Carry forward and set-off of loss and depreciation [Sec. 72A]
3.4 Exercises

3.0 Introduction
Simple way of computation of total income is to lump together all the various
sources of income falling under one head and then all heads are pooled. Where the
net result of any source is loss, it can be set off against profits from another source
of income under the same head. In case the net result after pooling all heads of
income is a loss it can be carried forward to next year. The provisions regarding set
off etc. are discussed in this unit.
The process of setting off losses and their carry forward may be covered in the
following steps :
Step 1 : Inter-source adjustment under the same head of income.
Step 2 : Inter-head adjustment in the same assessment year if a loss cannot be set
off fully or partly under Step 1.
Step 3 : Carry forward of loss only if a loss cannot be set-off fully or partly
under step 1 & 2.

40
3.1 Inter-Source Adjustment [Sec. 70]
If an assessee has loss from one source falling under a head, he is entitled to have
the amount of such loss set off against the profits of another source under the same
head of income.
For example, if there is a loss from business A, it can be set off against the profits
of business B. However, to the aforesaid, the following are exceptions :
a. Loss from one speculation business can be set off against the profits of
another speculation business only.
b. Loss incurred in the business of owning and maintaining race horses cannot
be set off against any income except the profit from such business.
c. By virtue of section 58(4) a loss can not be set off against the income from
winning from lotteries, crossword puzzles, races including horse races, card
game and other games of any sort, from gambling, or betting of any form or
nature. Any losses other than the above can be set off against any other
income within the same head of income.
Again, any loss can be set-off against any other income within the same head of
income, e.g.—
a. Loss from house property can be set off against income from any other house
property;
b. Non-speculative business loss can be set off both from speculative and non-
speculative business profits;
c. Short-term capital loss can be set off against any capital gain (whether long-
term or short-term);
d. Under the head “Income from other sources” loss from any activity (other
than the business of owning and maintaining race horses) can be set off
against any income but other than winning form lottery, crossword puzzles,
etc.
Speculative business : According to section 43(5), ‘‘speculative transaction’’ means
a transaction in which a contract for the purchase or sale of any commodity, including
stock and shares, is periodically (or ultimately) settled, otherwise than by the actual
delivery or transfer of the commodity or scrips.
In other words, if there is a contract for purchase/sale of an article (not being
share, stock or commodity) it would not be a speculative transaction.
If a contract for purchase/ sale of share, stock or commodity is ultimately settled
otherwise than by actual delivery or transfer of commodity, it would be speculative
41
trnasction, even if at the time of entering into the contract there was no intention to
gamble. On the other hand, if actual delivery of commodity takes place, the transaction
would be a nonspeculative transaction, even if it is highly specultative otherwise.

3.2 Inter-Head Adjustment [Sec. 71]

Where the net result from one head of income is a loss, it can be set off against
the income from any other head. For instance, a business loss which can not be set
off against the profit under the same head, can be set off against the income from any
other head of income. To the above rule the following are the exceptions :
a. Speculative business loss cannot be set off against any other income;
b. Losses from the business of owning and maintaining race horses can not be
set off against any other income.
c. Losses under the head “capital gains” cannot be set off against the income of
any other head;
d. Profits from winnings from lottery, crossword puzzles, horse races, gambling,
betting etc. will never be available to set off losses from any head [Sec.
58(4)].
e. With effect from the assement year 2018-19, the section 71(3A) provides that
set-off of losses under the head income from house property against any other
head of income shall be restricted to Rs. 2 lakh for any assessment year.

3.3 Carry Forward of Loss

If a loss cannot be set off either under the same head or under different heads
because of absence or inadequacy of income of the same year, it can be carried
forward and set off against the income of the subsequent year.
Under the Act, the following unabsorbed losses can be carried forward up to 8
assessment year :
1. Loss under the head “Income from house property”
2. Loss under the head “profits and gains from business or profession”—
(speculative or non-speculative).
3. Loss under the head “capital gains” (both long-term and short-term).
4. Loss under the head “income from other sources” representing loss from the
activity of owning and maintaining race horses can only be carried forward
for 4 assessment years. Other losses cannot be carried forward.
42
3.3.1 Carry Forward and set-off of Losses other than Speculation Loss
[Sec. 72]
The following are the provisions regarding the carry forward and set off of business
losses :
Such loss can be set off only against business income – Loss under the head
“Profits and gains from business or profession” can be carried forward and set off
against the income of any business or profession (including speculative business profits)
in a subsequent year (not necessarily the same business in which loss has been incurred).
For this purpose, business profits would include such business profits which are
assessable under the heads other than ‘‘profits and gains from business or profession”.
e.g. where shares are held by an assessee as part of his trading assets, dividends on
such shares would form a part of business income and consequently the current
dividend will be available to set off his brought forward business losses from earlier
years. Secondly, the interest on short term deposits, Debentures etc., would also form
a part of business profits for the purpose of setting off brought forward business
losses provided they are maintained as stock-in-trade.
Continuity—from the assessment year 2000-01 brought forward business loss can be
carried forward even if there is no continuity of the business in which the loss occurred.
The loss can be carried forward and set off against the profits of the assessee who
incurred the loss.
This rule has the following exceptions :
a. Accumulated business loss of an amalgamating company u/s 72A.
b. Accumulated business loss of demerged company.
c. Accumulated business loss of a proprietary concern or a firm when its business
is taken over by a company by satisfying the conditions of section 47(xiii)/(xiv).
d. Loss of business acquired by inheritance u/s 78.
The business loss can be carried forward for 8 assessment years :
Exception : 1. Sec. 33B—The unabsorbed loss of the undertaking which is
discontinued in the circumstances stated in Sec. 33B, including the past business
losses of the undertaking brought forward from earlier years, is eligible for being
carried forward and set off against profits of re-established, re-constructed or revived
business up to a period of 8 years, reckoned from the year in which the business was
re-established, re-constructed or revived by the assessee.
Exception : 2. Sec. 41(5)—The second exception to the rule that business or
profession loss can be carried forward only for 8 years is given by Sec. 41(5). This
exception is applicable if the following conditions are fulfilled :

43
 a. Loss of such business or profession pertaining to the year in which it is
discontinued could not be set off against any other income of that year;
b. The business is discontinued;
c. Such business is not speculative business; and
d. After discontinuation of such business or profession, there is a receipt which
is deemed as business income u/s 41(1), (3), (4), or (5).
Return of loss should be filed under Sec. 139(3)[S. 80]; A loss cannot be carried
forward unless it is determined in pursuance of a return filed within the time limit
allowed u/s, 139(3), i.e., the time allowed u/s 139(1). In other words, if an assessee
fails to file his return of loss on or before the due date of furnishing return as per
section 139(1), then by virtue of section 80 the following losses (of the year in which
the default is made) cannot be carried forward.
a. Loss of speculative or non-speculative business (not being unabsorbed
depreciation).
b. Short or long term capital loss; and
c. Loss (not being unabsorbed depreciation) from activity of owning or
maintaining race horses.
In case where profits are not sufficient to absorb brought forward losses, current
depreciation and current business losses, the same should be deducted in the following
order :
(i) Current depreciation [32(1)]
(ii) Current scientific research expenditure [Sec. 35(1)]
(iii) Brought forward business losses [72(1)]
(iv) Unabsorbed family planning expenditure [36(1)(ix)]
(v) Unabsorbed depreciation [32(2)]
(vi) Unabsorbed scientific research capital expenditure [35(4)]
(vii) Unabsorbed development allowance [Sec. 33A(2) (ii)]
Loss from a source which is not taxable cannot be carried forward.
3.3.2 Carry forward and set-off of speculation loss [Sec. 73]
Loss of any speculation business can be set off only against the profits of another
speculative business in the year in which it is incurred. However, if such loss cannot
be set off for insufficiency of the said profit, it can be carried forward for 4 assessment
years to be set off against speculative income only. There is no necessity of the
continuity of the business.

44
3.3.3 Carry forward and set-off of capital loss [Sec. 74]
Where the net result of computation under the head ‘capital gains’ is a loss, such
loss shall be carried forward to the following assessment year. The short term capital
loss can be set off against any income under the head capital gain (long-term or short-
term). But long-term capital loss can be set off only against long-term capital gain.
Both the long term and short term capital loss can be carried forward for 8 assessment
years.
3.3.4 Carry forward and set off of loss from activity of owning and
maintaining of race horses [Sec. 74A]
Losses incurred by owner of race horses in the activity of owning and maintaining
race horses can be set off only against income, if any, from the activity of owning and
maintaining race horses in the same assessment year, such unabsorbed loss can be
carried forward for four subsequent assessment years and set off only against income
from activity of owning and maintaining race horses.
3.3.5 Carry forward and set off of loss from house property [Sec. 71B]
This section provides that where the assessee incurs any loss under the head
‘income from house property’ and such loss is not fully adjusted under other heads
of income in the same assessment year, then the balance loss shall be allowed to be
carried forward and set off in subsequent years only for 8 assessment years against
income from house property only.
3.3.6 Period of carry forward of losses
(i) Business loss → 8 assessment years.
(ii) Speculation loss → 4 assessment years.
(iii) Capital loss → 8 assessment years.
(iv) Loss from owning & maintaining race horses → 4 assessment years.
(v) House property loss → 8 assessment years.
3.3.7 Loss from purchase and sale of securities [Sec. 94(7)]
This section inserted from assessment year 2002-03, is applicable if the following
conditions are satisfied :
1. Any person buys or acquires any securities, shares, or units within a period
of 3 months before the record date as may be fixed by concerned authority/
company, Unit Trust, etc.

45
 2. Such person sells or transfers such securities, shares or units within a period
of 3 months after such date.
3. The dividend or income on such securities, shares or units received or receivable
by such person is exempt.
Record date : Record date means such a date as may be fixed by a company / a
mutual fund /UTI for the purpose of entitlement of the holder of the securities/ share/
units to receive dividend.
3.3.8 Carry forward and set-off of accumulated loss and unabsorbed
depreciation in amalgamated or demerger etc. [Sec. 72A]
If the following conditions are satisfied, then the accumulated loss and the unabsorbed
depreciation of the amalgamating company shall be deemed to be loss/ depreciation of
the amalgamated company for the previous year in which the amalgamation is effected—
1. Condition one – There is an amalgamation of a company owning industrial
undertaking, ship or a hotel with another company; or a banking company
with SBI or any subsidiary of SBI. For this purpose, an industrial undertaking
is an undertaking engaged in the manufacture or processing of goods, or the
manufacture of computer software or the business of generation or distribution
of electricity or any other form of power or mining or the construction of
ships, aircrafts or rail systems, the business of providing telecommunication
services whether basic or cellular, including radio paging, domestic satellite
service, network of trunking, broadband network and internet services.
2. Condition two – The amalgamating company has been engaged in the business,
in which the accumulated loss occurred or depreciation remains unabsorbed,
for 3 or more years.
3. Condition three – The amalgamating company has held continuously as on
the date of the amalgamation at least three-fourths of the book value of fixed
assets held by it two years prior to the date of amalgamation.
4. Condition four – The amalgamated company continues to hold at least three-
fourths in the book value of fixed assets of the amalgamating company which
is acquired as a result of amalgamation for five years from the effective date
of amalgamation.
5. Condition five – The amalgamated company continues the business of the
amalgamating company.
6. Condition six – The amalgamated company, which has acquired an industrial
undertaking of the amalgamating company by way of amalgamation, shall
achieve the level of production of at least 50 per cent of the installed capacity

46
 of the said undertaking before the end of 4 years from the date of amalgamation
and continue to maintain the said minimum level of production till the end of
5 years from the date of amalgamation.
However, the Central Government, on an application made by the amalgamated
company may relax this condition.
7. Condition seven – The amalgamated company shall furnish to the Assessing
Officer a certificate in Form No. 62, duly verified by an accountant, with
reference to the books of account and other documents showing particulars
of production, along with the return of income for the assessment year relevant
to the previous year during which the prescribed level of production is achieved
and for subsequent assessment years relevant to the previous years falling
within 5 years from the date of amalgamation.
Consequences when the above conditions are satisfied—If the above conditions
are satisfied, then accumulated business loss and unabsorbed depreciation of the
amalgamating company shall be deemed to be loss and depreciation of the amalgamated
company for the previous year in which amalgamation is effected.
Consequences when the above conditions are not satisfied after adjusting
loss/depreciation—In case the above specified conditions are not fulfilled, then that
part of brought forward of loss and unabsorbed depreciation which has been set off
by the amalgamated company shall be treated as the income of the amalgamated
company for the year in which the failure to fulfil the conditions occurs.
Example 1 :
XY Ltd. wants to amalgamate with PQ Ltd. on June 30, 2018. You are required
to find out the tax implication in respect of the following losses/allowances of XY
Ltd. in the assessments of XY Ltd. (i.e., amalgamating company) and PQ Ltd. (i.e.,
amalgamated company).
Unabsorbed depreciation allowance of the previous year 2012-13 : Rs. 36,000;
brought forward business loss of the previous year 2014-15 : Rs. 10,00,000; unabsorbed
scientific research expenditure : Rs. 11,000; bad debts : Rs. 15,000; capital gain
arising on transfer of assets to PQ Ltd. : Rs. 2,50,000 and brought forward capital
loss Rs. 40,000. Also discuss whether PQ Ltd. can claim deduction under section 80-
IA or 80-IB in respect of industrial undertaking taken over from XY Ltd.
The following table highlights the tax implications in respect of various items given
in the problem on the assumption that assets are transferred in a scheme of amalgamation
which satisfies the provisions of section 2(IB).

47
 AMALGAMATIONS CO.
Losses/allowances Tax implication in the hands of
of XY Ltd. before
amalgamation PQ Ltd. XY Ltd.
Unabsorbed If amalgamation satisfies the As XY Ltd. ceased to exist
depreciation of conditions of section 72A it is after amalgamation, it is not
2012-13 : deductible, otherwise it is not entitled for deduction.
Rs. 36,000 deductible
Brought forward If amalgamation satisfies XY Ltd., cannot carry it
business loss of conditions of section 72A forward, as it has ceased
2014-15 : it can be to exist after
Rs. 10,00,000 set-off and carried forward by amalgamation.
PQ Ltd.; otherwise such right
is not available.
Unabsorbed Allowed subject to conditions It cannot be carried forward, as
scientific research of section 35 XY Ltd. has ceased to exist.
expenses :
Rs. 11,000
Bad debts. : Allowed It is not allowed as deduction as
Rs. 15,000 XY Ltd. ceased to exist after
amalgamation.
Capital gain : It is not taxable in the hands of It is not taxable, as transfer of
Rs. 2,50,000 PQ Ltd. It, however, assets assets in a scheme of amalgama-
acquired in the scheme of tion to an Indian cmpany does
amalgamation are sold by PQ Ltd., not amount to ‘transfer’ for the
of computing capital gain would purpose of charging tax on
be cost to XY Ltd. (indirectly capital gains.
Rs. 2,50,000 will merge in
capital gain arising at the time
of sale of assets by PQ Ltd.)
Brought forward It cannot be set-off and carried It cannot be carried forward by
capital loss : forward by PQ Ltd. XY Ltd., as it ceased to exist
Rs. 40,000 after amalgamation.

Note : As benefit of deduction under section 80-IA or 80-IB is attached to the

undertaking (and not to the assessee), deduction under these sections would be available
to PQ Ltd. even if the industrial undertakings are taken over from XY Ltd.

48
Example 2 :
X a resident individual, submits the following information for the assessment year
2017-18.
Business A Rs.
Loss of the year 2016-17 (–) 48,000
Brought forward loss of the year 2015-16 (–) 39,000
Business B
Profit of year 2016-17 1,56,000
Business C (previous year ends on March 31 business
discontinued on April 10, 2016)
Profit of the period from April, 2016 to April 10, 2016 Nil
Brought forward loss of 2016-17 (–) 39,700
Business D (previous year ends on March 31, business
discontinued on March 31, 2016)
Brought forward loss of 2016-17 (–) 40,000
Income from other sources
Loss from the activity of owning and maintaining
Camels for races (–) 9,000
Dividend on units of UTI held as investment 75,000
Interest on debentures held as investments 90,000
Long-term capital loss on sale of shares (–) 1,49,000
Income from house property 57,600
Determine the net income of X for the assessment year 2017-18
Also calculate the amount of loss which can be carried forward for being set off
in the next assessment year.
Answer :
Business income/loss of the assessment year 2017-18
Loss of business A for the year 2016-17 (–) 48,000
Profit of business B for the year 2016-17 1,56,000
Profit of Business C for the period April 1, 2016 to April 10, 2016 Nil
Loss from the activity of owning and maintaining
Camels for races (–) 9,000
Current business profit 99,000
Less, Brought forward loss of Business A, Business C and
Business D [i.e., (Rs. 39,000 + Rs. 39,700 + Rs. 40,000)
subject to the maximum or Rs. 99,000] 99,000
Business income Nil

49
 Computation of net income for the assessment year 2017-18
Income for house property 57,600
Profit and gains of business or profession Nil
Income from other sources
Interest on debentures 90,000
Dividend on units of UTI Nil
Gross total income 1,47,600
Less deduction under section 80L Nil
Net income 1,47,600
Notes : 1. Though business D was not in existence at any time during the previous
year 2016-17, yet the brought forward of business loss of year 2016-
17 can be set off against the income of the assessment year 2017-18.
2. Loss under the head “capital gains” can be carried forward to the next
year for set off against long-term capital gain.
3. The unadjusted brought forward business loss and depreciation (i.e.,
Rs. 19,700) can be carried forward.
Example 3 :
X Ltd. is proposed to be merged with Y Ltd. The following are the particulars of
the former company.
Rs.
Unabsorbed business losses 2,40,00,000
(Non speculative)
Unabsorbed depreciation 5,00,00,000
Unabsorbed Investment allowance 90,00,000
Discuss which of the benefits can be availed of by Y Ltd. and also advise the latter
on the condition to be fulfilled to claim such benefit.
Answer :
As there is no clear indication in the given problem whether the merger of the two
companies satisfies the conditions as laid down u/s 2(1A) and 72A, the answer to the
said question can be made under the following three situations :
(a) If the merger is not ‘amalgamation’ within the meaning of Sec. 2(1B); or
(b) If the merger is ‘amalgamation’ within the meaning of Sec. 2(1B) but it does
not satisfy the conditions of Sec. 72A; or
(c) If the merger satisfies conditions of Sec. 2(1B) as well as Sec. 72A.

50
 Under the aforesaid situations, the position regarding the set off of the unabsorbed
losses and allowances by Y Ltd. will be as under :

Whether Y Ltd. can set-off unabsorbed loss/allowance of X Ltd.

Situation (a) Situation (b) Situation (c)
Unabsorbed Business loss of No No Yes
Rs. 2,40,00,000
Unabsorbed depreciation of No No Yes
Rs. 5,00,00,000
Unabsorbed Investment No Yes Yes
allowance of Rs. 9,00,00,000
(It is allowed before the expiry
of 8 years from the end of the
previous year in which asset
in acquired/installed)

From the above chart, it is clear that all unabsorbed losses/allowances can be set
off if the merger satisfies requirement of section 72A. In other words, in order to
enjoy the benefit of set off unabsorbed losses and allowance the business of Y Ltd.
may be taken over by X Ltd. In that case all unabsorbed losses and allowance can
be set off by X Ltd. even if the merger does not satisfy the conditions of section 2(IB)
& 72A.
Example 4 :
A Ltd. which has accumulated loss of Rs. 8,00,000 and unabsorbed depreciation
of Rs. 5,00,000 wants to reorganize its business by way of amalgamating with B Ltd.
which is engaged in the same line of production but having a smaller capital and has
an efficient management setup and more modern machinery. B Ltd. is agreeable to
alternative courses available to the companies for effecting the merger. Advise them
as to the best course of action.
Solution :
There are three alternative for merger available to A Ltd. and B Ltd. which are :
(i) Merger of A Ltd. into B Ltd. whereby A Ltd. goes out of existence; (ii) Merger
of B Ltd. in A Ltd., whereby B Ltd. goes out of existence; and (iii) Merger of A Ltd.
and B Ltd. into a new company, say, C Ltd. is formed and both A Ltd., B Ltd. go
out of existence.

51
 All the above mentioned three mergers can takes place under one of the following
situations—
(a) If the merger is not amalgamation within the meaning of section 2(IB).
(b) If the merger is an amalgamation within the meaning of section 2(IB), though
it does not satisfy the provisions of section 72A.
(c) If the merger satisfies conditions of section 2(IB) and 72A.
Under the aforesaid situations the set off of accumulated loss of Rs. 5,00,000 and
unabsorbed depreciation of Rs. 3,00,000 possible in the following cases :
Whether set-off of unabsorbed
loss/depreciation allowance possible
Situation (a) Situation (b) Situation (c)
(i) Merger of A Ltd. into B Ltd. No No Yes
(A Ltd. goes out of existence
after merger)
(ii) Merge of B Ltd. into A Ltd. Yes Yes Yes
(B Ltd. goes out of existence
(iii) Merger of A Ltd. and B Ltd. No No Yes
into C Ltd. (A Ltd. and B Ltd.
go out of existence. C Ltd.
is formed as a new company)
To conclude it can be said that if the conditions of section 72A are satisfied any
of the three alternatives for merger can be adopted, as in all the cases the loss can
be set off by the amalgamated company. If, however, conditions of section 72A are
not satisfied alternative (ii) (i.e., merger of B Ltd. into A Ltd.) should be adopted as
in this case A Ltd. would be able to carry forward and set off loss/depreciation even
the merger does not fulfil the requirement of section 2(IB).
Example 5 :
From the following information, compute the taxatile income :
Case I Case II
Longtem capital gain/loss 1,70,000 (–) 3,00,000
Short term capital gain/loss – 50,000 1,10,000
Business income/loss (–) 80,000 (–) 90,000

52
 Solution : Case I Case II
Capital gain :
Longterm Cap gain/loss 1,70,000 (–) 3,00,000
(not possible to set off)
Short term Cap gain/loss (–) 50,000 1,10,000
Cap gain after set off 1,20,000 1,10,000
Set off of business loss (–) 80000 (–) 90,000
Total Income 40,000 20,000
In case II, long term capital loss will be carried forwarded for 8 assessment years.

3.4 Exercises
1. What is understood by inter-source and inter-head adjustments ?
2. Discuss the provisions of the Income-tax Act relating to set off of loss against
income under the same source and same heads in the same assessment year.
3. What is meant by loss on transfer of short-term capital asset and long-term
capital asset? Can a loss arising on transfer of long-term capital asset be set
off against income on transfer of short-term capital asset ?
4. Is it permissible to set off and carry forward the business loss ? If yes, what
are the provisions in this respect ? Explain.
5. State the circumstances under which a loss under the head ‘income from
other sources’ can be carried forward and set off.
6. State the conditions which an amalgameted company is required to fulfil u/s
72A for set off and carry forward of losses of an industrial undertaking
acquired in a scheme of amalgamation.

53
Unit - 4 ˆ Minimum Alternative Tax
Structure
4.0 Introduction
4.1 Book Profit : How to Determine ?
4.1.1 Assessing Officer’s Power to alter net Profit
4.1.2 Adjustments to Net Profit to convert it into Book Profit
4.2 Minimum Income and Tax Rate
4.3 Calculation for MAT and tax liability
4.4 Credit in respect of MAT
4.5 Report from a Chartered Accountant
4.4.1 Scheme of Tax Credit
4.4.2 Carry Forward and set off of Tax Credit
4.6. Loss which can be Carried Forward
4.7 Exercises

4.0 Introduction
In order to boost up corporate tax collection and to prevent the prosperous
companies from converting themselves into zero-tax companies, the then Union
Government inserted Sec. 115JA to Income Tax Act, 1961 through the Finance Bill
(No. 2), 1996. The section came into effect from 1st April, 1997 (i.e., Assessment
year 1997-98). The said tax is termed as Minimum Alternate Tax (MAT).
Minimum Alternate Tax (MAT) was introduced for those companies that make
huge profits and pay devidend to their shareholders but pay no/minimal tax under the
normal prossion of the Income Tax Act, by taking advantage of the various deductions,
allowances and incentives allowed under the Act. But with the introduction of MAT
provision, the companies have to pay a fixed percentage of their profit as minimum
alternate tax, the MAT provision is applicable u/s 115JB to all companies including
foreign companies.
The intruduction of MAT provision u/s 115JB ensures that no company can avoid
paying taxes for their income. As they have different provision for allowable expenses
and deductions under both the Companies Act and Income Tax Act, the primary

54
objective behind the introduction of MAT is to collect taxes from the zero tax
companies.
Zero tax companies are companies who show higher profit computed under the
Companies Act and pay dividend to their shareholders but do not pay taxes.
Presently, a company shall be liablle to pay higher of tax computed under general
provision of Income Tax Act and tax computed u/s 115JB.

4.1 Book Profit—How to Determine [Sec. 115JB]

Net profit as per profit and loss account (after adjustment) is book profit.
4.1.1 Assessing Officer’s power to alter net profit
Only in the following two cases, the Assessing Officer can rewrite the profit and
loss account—
If profit and loss account is not prepared according to the Companies Act—
If it is discovered that the profit and loss account is not drawn up in accordance with
the provisions of Parts II and III of the Sixth Schdule to the Companies Act, the
Assessing Officer can recalculate the net profit. In a case where there is not allegation
of fraud or misrepresentation but only a difference of opinion as to the question
whether a particular amount should be properly shown in the profit and loss account
or in the balance sheet, the provisions of section 115JB do not empower the Assessing
Officer to disturb the profit as shown by the assessee.
If accounting policies, accounting standards or rates or method of depreciation
are different—According to the first provision to section 115JB(2) the accounting
policies, the accounting standards adopted for preparing such accounts, the method
and rates of depreciation which have been adopted for preparation of the profit and
loss account laid before the annual general meeting, should be followed while preparing
profit and loss account for the purpose of computing book profit under section
115JB.
Some companies follow an accounting year under the Companies Act which is
different from financial year (i.e., previous year ending March 31) under the Incometax
Act. These companies generally prepare two sets of accounts—one for the Companies
Act and another for the Income-tax Act. Different accounting policies/ standards, and
method or rate of depreciation are adopted in two sets of account so that higher profit
is reported to shareholders and lower profit if disclosed to tax authorities.

55
 To curb the aforesaid practice, it has been provided that accounting policies,
accounting standards, depreciation method and rates of depreciation for two sets of
account shall be the same. In case it is not so, the Assessing Officer can recalculate
net profit after adopting the same accounting policies, accounting standards and
depreciation method and rates which have been adopted for reporting profit to
shareholders.

4.1.2 Adjustments to net profit to convert it into Book Profit

Net profit as shown in profit and loss account shall be adjusted as follows—
(a) Positive adjustments :
Net profit as shown in profit and loss account (prepared in accordance with the
provisions of Parts II and III of the Sixth Schedule to the Companies Act) is to be
increased by the following amounts if debited to the profit and loss account :
a. The amount of income-tax paid or payable, and the provisions therefor; or
b. The amounts carried to any reserves, by whatever name called (but other than
reserve created under section 33AC); or
c. The amount set aside to provisions made for meeting liabilities, other than
ascertained liabilities; or
d. The amount by way of provision for losses of subsidiary companies; or
e. The amount of dividends paid or proposed; or
f. The amount of expenditure relatable to any income to which section 10 or
10A or 10B or 11 or 12 apply.
g. Amount of depreciation.
h. Amount of deferred tax and provisions therefor and the amount set aside as
provision for diminution in the value of the assets.
i. Amount standing in revaluation reserve relating to revalued asset on the
retirement or dissposal of such asset.
(b) Negative adjustments :
Net profit as shown in the profit and loss statement (prepared in accordance with
the provisions of Part II of the Schedule III to the Companies Act) is to be reduced
by the following amounts :

56
 a. The amount withdrawn from reserves or provisions, if any such amount is
credited to the profit and loss statement; or
b. The amount of income to which any of the provisions of section 10 or 10A,
10B or 11 or 12 apply, if any such amount is credited to the profit and loss
statement; or
c. Depreciation (other than of revaluation of assets) debited to profit and loss
statement.
d. Amount withdrawn from revaluation reserve credited to statement of profit
& loss to the extent it does not exceed the amount of depreciation on account
of revaluation of assets.
e. The amount of (i) loss brought forward before depreciation or (ii) unabsorbed
depreciation, whichever is less, as per books of account [“loss” for this
purpose does not include depreciation and, therefore, in a case where an
assessee has shown profit in a year, but after adjustment of depreciation, it
results in loss, no adjustment in book profit is allowed]; or
f. The amount of profit of sick industrial company for the assessment year
commencing from the assessment year relevant to the previous year in which
the said company has become a sick industrial company under section 17(1)
of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending
with the assessment year during which the entire net worth (i.e., paid-up
capital plus free reserves) of such company becomes equal to or exceeds the
accumulated losses.
z Reserves credited to profit and loss statement—
The amount withdrawn from reserves and credited to profit and loss account shall
be reduced as follows :
a. The amount withdrawn from any reserve created before April 1, 1997 otherwise
than by way of a debit to the profit and loss statement, shall not be reduced
from the book profits; and
b. The amount withdrawn from any reserves or provisions created on or after
April 1, 1997, which are credited to the profit and loss statement, shall not
be reduced from the book profits, unless the book profits were increased by
the amount transferred to such reserves or provisions in the year of creation
of such reserves (out of which the said amount was withdrawn).

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 z Brought forward loss/depreciation
Section 115JB provides that in computing book profit, the amount of loss, brought-
forward or unabsorbed depreciation, whichever is less as per books of account, shall
be reduced from net profit. Where a company does not have both brought one of the
two figures is nil. However, recently, in the case of CIT v. Kartar Bus Services Ltd.
[2002] 74IIJ 324 the Tribunal (Amritsar bench) has held that if there is no brought
forward loss, the unabsorbed depreciation will be allowed as a deduction.

4.2 Minimum Income and Tax Rate

In the case of a company if tax payable as computed under normal provisions (i.e.,
all provisions ignoring section 115JB) is lower than the amount given below, then
book profit is taken as taxable income and the amount given below is taken as tax
payable by the company—

Income-tax Surcharge Education & Total

(as a percen- (as a percen- SHEC cess (as (as a percen-
tage of book tage of book a percentage of tage of book
profit) profit) book profit) @3% profit)
@ 7% (2+1)%
Domestic company 18.5 1.295 0.59385 20.388

If the book profit exceeds Rs. 1 crore and 10 crore, the surcharge @ 7% and @
12% to be added respectively.

4.3 Calculation for MAT and tax liability

Every company registered under the Companies Act is required to compute the tax
liability in following ways i.e. they are required to calculate the tax liability under both
the provisions viz. normal provision and MAT provision. The companies like banking
campanies and insurance companies are not covered under MAT provision.

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 Under normal provision under MAT provision

Step-I : To find out taxable income Step-I : To find out Book profit
under normal provision
Step-II : To find out income tax @ Step-II : To find out tax @ 18.5%
@ 30% of taxable income of book profit
Step-III : To add surcharge @ 5% Step-III : To add surcharge @ 5% if
if net income exceeds Rs. 1 crore book profit exceeds Rs 1 crore.
Step-IV : To find out the total of Step-IV : To find out the total of
step II & step-III step II & step III
Step-V :To add educational cess Step V : To add educational cess
with step-IV [EC @ 2% and with step-IV [EC@ 2% and
SHEC-@ 1%] SHEC @ 1%]
Step VI : To deduct rebate if any Step VI : To find out step (IV +V)
⇒B
Step VII : To find out step (IV+V)
– step VI ⇒ A

The company is liable to pay the tax which is higher between A and B i.e. if the
tax liabiality under MAT provision is higher, the company has to pay the amount of
B in the relevant previous year. If tax computed at A is more than (or equal to) the
tax computed under the privision of MAT will not apply.

4.4 Credit in respect of MAT

Section 115JAA provides that where tax is paid in any assessment year in relation
to the income under section 115JB, a tax credit shall be allowed in subscequent years.
The amount of tax paid u/s 115JB is allowed to be carried toward to the extent of
the MAT paid in excess of the regular tax and can be set off against tax payable upto
fifteenth assessment year immediately succeeding the assessment year in which tax
credit becomes allowable under the provision of section 115JAA (for the assessment
year 2018-19).
4.4.1 Scheme of tax credit
When applicable—One can find out the amount of tax credit under section 115JAA
under the following steps :
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 1. Find out total income of the company (ignoring the provisions of section
115JB).
2. Find out 18.5 per cent of book profit (as per provisions of section 115JB)
under section 115JAA if total income (as computed under step 1) is equal to
or more than 18.5 per cent of book profit.
3. Find out tax on (1) (supra).
4. Find out tax on (2) (supra).
5. The amount of tax credit is equal to the tax paid under setp 4 as reduced by
the tax computed under setp 3.

4.4.2 Carry Forward and set off of Tax Credit

The amount of tax credit under section 115JAA shall be carried forward and set
off subject to the following propositions :
1. No interest is payable in respect of tax credit.
2. Tax credit shall be allowed to be set off in a future year in which tax becomes
payable on the total income computed in accordance with the provisions
other than section 115JA or 115JB.
3. Set off in respect of brought forward tax credit will be allowed for any
assessment year to the extent of tax computed on total income (ignoring
section 115JB);
4. Carry forward shall not be allowed beyond the fifteenth assessmant year
immediately succeeding the assessment year in which tax credit becomes
allowable.
5. There is no other condition to claim the benefit of set off of tax credit. For
instance, there is no provisions for submission of return of income within the
time limit prescribed by section 139, or for payment of tax in time. Tax credit
is allowed even if tax was paid late. Moreover, there is no provision that the
Assessing Officer should determine the tax credit which shall be carried
forward.

4.5 Report from a Chartered Accountant

Every company to which section 115JB applies, shall furnish a report (in Form No.
29B) from a chartered accountant certifying that the book profit has been computed
in accordance with the provisions of section 115JB. The report should be submitted
along with the return of income.

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4.6 Loss which can be Carried Forward
In respect of the relevant previous year, the amouns determined under the provisions
of section 32(2), or section 73(1) (i) or section 73 or section 74 or section 74A(3),
shall be allowed to be carried forward to the subsequent year or years.

4.7 Exercises
1. What are the objectives of imposing Minimum Alternate Tax ?
2. How do you determine “Book Profit” for the purpose of imposing MAT ?
3. What are the provisions regarding credit in respect of MAT ?
4. Discuss how tax credit can be carried forward and set off.

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Unit - 5 ˆ Clubbing of Income
Structure
5.0 Introduction
5.1 Transfer of Income where there is no Transfer of Assets [Sec. 60]
5.2 Revocable Transfer of Assets [Sec. 61]
5.2.1 Transfer deemed to be Revocable [Sec. 63]
5.2.2 Transfer held to be Irrevocable Transfers
5.3 Remuneration of Spouse [Sec. 64(1)(ii)]
5.4 Income from Assets Transferred to Spouse [Sec. 64(1)(iv)]
5.5 Income from Assets transferred to Son’s Wife [Sec. 64(1)(vi)]
5.6 Income from Assets transferred to a person for the benefit of Spouse
[Sec. 64(vii)]
5.7 Income from Assets transferred to a person for the benefit of Son’s Wife
[Sec. 64(1)(viii)]
5.8 Income of a Minor Child [Sec. 64(1A)]
5.9 Conversion of Self-acquired Property into Joint Family Property and
Subsequent Partition [Sec. 64(2)]
5.10 Exercises

5.0 Introduction
Income tax is levied at a steeply progressive rate and persons in the higher income
brackets pay tax at a much higher rate than those in the lower brackets. By transfer,
and legal arrangements which have the effect of diverting part of a person’s normal
income to someone else; it is thus possible to reduce the tax incidence. In order to
counteract such steps certain special provisions have been made in the Act. Sections
60 to 64 of the Income-tax Act, 1961, contain such provisions which are discussed
below.

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5.1 Transfer of Income where there is no Transfer of Assets
[Sec. 60]
If any person transfers his income without transferring the ownership of the assets
from which the income arises, the same will be taxable in the hands of the transferor
without considering that the transfer is revocable or irrevocable or under a settlement,
trust, agreement or arrangement.
Provisions illustrated—X owns 4,000, 14 per cent debentures of A Ltd. of Rs.
100 each (annual interest being Rs. 56,000). On April 1, 2018, he transfers interest
income to Y, his friend, without transferring the ownership of these debentures. Although
during 2018-19 interest of Rs. 56,000 will be received by Y, it is taxable in the hands
of X, as he has transferred income without transferring the ownership of the asset.

5.2 Revocable Transfer of Assets [Sec. 61]

All income arising to any person by virtue of revocable transfer of assets is chargeable
to tax as the income of the transferor. For this purpose, transfer may include a
settlement, agreement or arrangement.
Revocable transfer means the tansferor of asset assumes a right to re-acquire asset
or income from such an asset, either whole or in parts at any time in future, during
the life time of transferee [sec. 63]
5.2.1 Transfer Deemed to be Revocable
1. It contains any provision for re-transfer directly or indirectly of the whole or
any part of the income of assets of the transferor.
2. If it gives in any way the transferor a right to resume power directly or
indirectly over the whole or part of the income or assets.
3. In case the transfer is not revocable during the life of the transferor the
transfer will not be deemed to be a revocable transfer at all.
The clear object of section 61 is that the assessee should not be allowed to avoid
taxation by entering into colorable trust deeds by which in reality the income remains
his own, although in name or on paper the income may be shown to be of someone else.
5.2.2 Transfer held to be Irrevocable Transfers
The following are held to be irrevocable transfers :
1. Where by a registered deed Mr. Ram dedicated certain assets in favour of a
temple and, while continuing to manage the assets as savarakar of the temple.

63
 Ram also borrowed money from temple fund, it was held that in the absence
of any evidence to show that the aforesaid deed was not genuine, the deed
has to be held as genuine and valid and irrevocable in the hands of Ram. [CIT
vs. Sriram Chandraji Maharaj Ka Mandir (19830 (MD)].
2. The words ‘right to resume power’ must mean that such a power is lawfully
given under the trust deed itself. Thus where the assessee created an irrevocable
trust and, as trustee he had power to develop and improve that trust properly
and, a supplemental deed, he increased the trustee’s remuneration, it was held
that such powers would not amount to power to resume control.
Over the trust, so as to make trust revocable, and to include the trust income
[CIT vs. Gopalmrishna Kone (Mad)].
3. Where the assessee settler had created a trust for the benefit of his minor
children and had appointed herself, her husband and other persons as lifetime
trustees and the trust deed empowered the trustees to invest the trust property
in such manner as they in their absolute and uncontrolled discretion thought
fit, irrespective of the instructions imposed by the Indians Trusts Act, 1882
and the assessee had obtained loan from the said trust free of interest, it was
held that the trust was not revocable under section 63 [Leela Nathus, CIT
(1981) (Cal)].
Share of a spouse in a firm : From assessment year 1993-94 and onwards, where
husband and wife are partners in the same firm the share of income of any spouse will
not be included in the total income of the other spouse u/s 64(v)(i).

5.3 Remuneration of Spouse [Sec. 64(1) (ii)

In computing the total income of an individual, such income as arises directly or
indirectly to the spouse of the individual by way of salary, remuneration etc. in cash
or in kind from a concern in which such individual and one or more of his relatives
as defined u/s 2(41) has a substantial interest (that is, not less than 20% of the voting
power in case where the concern is a company and in any other case not less than
20% of profits of the concern) will be included in the total income of such individual.
However, where both the husband and wife have substantial interest and both are
in receipt of remuneration from such concern, remuneration from such concern will
be included in the total income of the husband or wife, as the case may, whose total
income excluding such remuneration is greater.

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 However, where the spouse possesses technical or professional qualification and
the income is solely attributable to the application of his/her technical or professional
knowledge and experience, the provision of Sec. 64(1)(ii) shall not apply.
Professional qualification means fitness to do or undertake and occupation or
vocation requiring intellectual skill or requiring manual skill as controlled by intellectual
skill which is such that a person should be able to take out a living there from
independently though the salary does not cease to be product of professional skill
merely because particular employment is accepted.
Technical qualification may take within its fold every thing connected with
specialization in particular subject, be it science, technology or commerce or business
management.

5.4 Income from Assets transferred to Spouse [Sec. 64(1)(iv)]

Where an asset (other than house property) is transferred by an individual to his
or her spouse directly or indirectly otherwise than for adequate consideration or in
connection with an agreement to live apart any income from such asset will be
deemed to be the income of the transferor. For example, the husband gifted shares of
a company to his wife. The dividend income received by his wife on such shares is
includible in the income of the husband.
However, this section is not applicable in the following cases :
1. If assets are transferred before marriage.
2. If assets are transferred for adequate consideration.
3. If assets are transferred in connection with an agreement to live apart.
4. If on the date of accrual of income, the transferee is not spouse of the
transferor.
5. If the property is transferred by the Karta of HUF, gifting coparcenary property
to his wife [L. Hriday Marain vs. ITO (SC)].
6. If the property is acquired by the spouse out of the pin money (i.e., an
allowance given to the wife by her husband for her dress and usual household
expenses) [R. B. N. J. Naidu vs. CIT (Nag.)].
It is to be noted that the relationship of husband and wife should subsist both at
the time of transfer of asset and also at the time of accrual of income therefrom.
Therefore, any income derived by a concubine from an asset transferred to her by her
keeper cannot be clubbed in the income of the keeper.

65
 It is also to be noted that the clubbing will arise when the transfer of asset from
one spouse to another is without equate consideration. Love and affection do not
constitute adequate consideration.
When the assets transferred directly or indirectly by an individual to his spouse
without adequate consideration are invested by the transferee-spouse in his/her business,
income arising from business to the transferee-spouse is to be apportioned in the ratio
of the value of transferred assets to the total investment of the transfereespouse in the
business on the first day of the previous year. The proportionate amount of income
relating to the value of transferred asset without adequate consideration is includible
in the income of the transferee-spouse.
The provision of Sec. 64(1)(iv) does not apply when the transfer of an asset in
connection with the agreement to live apart, there is a transfer of building, the income
of which is computed under the head ‘Income from house property’ even though the
transfer is made without adequate consideration. In the case of house property the
transfer itself is disregarded, because, there will be no income to be clubbed if the
house is not let out to a third party by the transferee and also because the notional
annual value is taken to be nil.
Therefore, the transferor of such a property is deemed to be the owner of it so that
he may be taxed in the usual manner and usual amount.
Any income arising from the pin-money to the wife cannot be clubbed with the
income of the husband because such sum arises out of saving by the wife from the
money given to her for her personal expenses and household expenses. Such sum
would be the separate property of wife.

5.5 Income from Assets transferred to Son’s Wife [Sec.

64(1)(vi)]
If an individual directly or indirectly, transfer assets after May 31, 1973 without
adequate consideration to son’s wife, income aurising from such assets will be included
in the total income of the transferor.
As the date of transfer is material, it should be noted that in case of movable
property the transfer is complete when property is delivered to the transferee. In case
of immovable property the transfer will be complete when the deed is registered with
the competent authority.

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5.6 Income from Assets transferred to a Person for the
benefit of the Spouse of the transferor [Sec. 64(vii)]
Where an asset is transferred by an individual, directly or indirectly, without any
adequate consideration, to a person or an association of persons for the immediate or
deferred benefits of his or her spouse, income arising from the transferred assets will
be included in the total income of the transferor to the extent of such benefit. If no
income or benefit accrues to or derived by wife directly or indirectly, out of the
property transferred by the individual, then the non-existent income or benefit cannot
be included in the total income of the individual. For instance, X transfers a house
property without any adequate consideration to a trust with the specific condition that
out of the rental income, Rs. 6,000 per month will be paid by the trust to Mrs. X,
though received by Mrs. X from the trust, will be included in the income of X.

5.7 Income from Assets transferred to a person for the

benefit of Son’s Wife [Sec. 64(1)(viii)]
Any income which arises directly or indirectly to any person or association of
persons from assets transferred directly or indirectly on or after 1.6.1973 otherwise
than for adequate consideration to the person or association of persons by an individual,
to the extent to which income from such assets for immediate or deferred benefit of
his son’s wife, will be clubbed in the hands of the transferor.

5.8 Income of a Minor Child [Sec. 64(1A)]

Under section 64(1A), all income accruing or arising to minor child shall be included
in the total income of the parent except the following :
a. Income accruing or arising to a minor child on account of any manual work
done by him; or
b. Income accruing or arising to minor child on account of any activity involving
application of his skill, talent or specified knowledge or experience.
The income of the minor child shall be included :
a. where the marriage of his parents subsists, with the income of that parent
whose total income (excluding minor’s income) is greater; or

67
 b. where the marriage of his parents does not subsists, with the income of that
parent who maintains the minor child in the previous year.
Where any such income is once included in the total income of either parent, any
such income arising in any succeeding year shall not be included in the total income
of the other parent, unless the Assessing Officer is satisfied, after giving that parent
an opportunity of being heard, that it is necessary to do so.
Income not excedding Rs. 1,500 in respect of minor child, whose income is to be
included is exempt under section 10(32).
Note : ‘Child’ in relation to an individual includes a step child and adopted child
of that individual. [Sec. 2(15B)].

5.9 Conversion of Self-acquired Property into Joint Family

Property and Subsequent Partition [Sec. 64(2)]
The following transactions are covered by section 64(2) :
a. Where an individual (being a member of a HUF) converts (after Dec. 31,
1969) his self-acquired property into property belonging to the family through
to the act of impressing such peoperty with the character of joint family
property or throws such property into common stock of the family;
or
b. When such an individual transfers his self-acquired property, directly or
indirectly, to the family otherwise than for adequate consideration.
For the purpose of Sec. 64(2), property includes any interest in property, movable
or immovable, the proceeds of the sale thereof and any money or investment for the
time being representing the proceeds of sale thereof and where the property is converted
into any other property by any method, such other property.
Clubbing of income before partition : Income from the converted property or
property transferred for less than adequate consideration is chargeable to tax in the
hands of the transferor (before partition of the family).
Clubbing of income after partition : If the property converted or transferred by
an individual is subsequently transferred amongst the members of the family, the
income derived from such converted property, as is received by the spouse of the
transferee will be included in the income of the transferor.

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 Where the income from converted property is included in the total income of the
individual, such income is to be excluded from the total income of the family.
Example 1 :
A is a member of a HUF, consisting of himself, Mrs. A, B and C (major sons of
A) and D (minor son of A). On 1 April, 2018, A converted his separate property,
yielding an income of Rs. 1,60,000 per annum into joint family property. For the
assessment year 2018-19 the share of A(1/5) and the income of the converted property
viz, 3/5th of Rs. 1,60,000 or Rs. 96,000 is includible in the total income of Mr. A if
there be partition. But if there is no partition, the entire income from such a property
would be includible in the total income of Mr. A Where income referred to above is
included in the total income of the converting member, it will be excluded from the
total income of the family or as the case may be, of the spouse or minor son of the
converting member.
z Income from accretion to assets :
In the abovementioned cases the income arising to the transferee from the property
transferred is taxable in the hands of the transferor. However, income arising to the
transferee from accretion of such income invested by the transferee is not includible
in the total income of the transferor. Thus, if Mr. A transfers Rs. 80,000 to his wife
without any adequate consideration and Mrs. A deposits the money in a bank, interest
received from the bank on such deposits is taxable in the hands of Mr. A. If, however,
Mrs. A purchases shares in a company from accumulated interest, the dividend from
share received by Mrs. A will be taxable in her hands and will not be clubbed with
the income of Mr. A.
z Clubbing of negative income :
Under section 64, the income of a specified person is liable to the included in the
total income of the individual in the circumstances mentioned above. For the purposes
of including income of specified person in the income of the individual, the word
‘income’ includes loss.
Head of income under which the clubbed income will be included—Under the
above provisions income of an individual includes income of other persons. In such
a case a problem arises as how the income be computed and under which head such
income will be chargeable to tax. In this respect the following procedure should be
adopted.
Step one : First compute the income in the hands of the actual recipient as if the
actual recipient of income is taxable under the relevant head of income.

69
 Step two : After computing the income under the relevant head of income in the
hands of actual recipient, it will be clubbed under the same head of income in the
hands of other person.
Step three : Gross total income of person in whose hands the income is clubbed
shall be calculated as if it is his own income. Provisions of set off and carry forward
of losses would be applicable as if it is applicable in any other case.
Step four : Deductions under sections 80CCC to 80U will be given to the person
in whose hands income is clubbed within the overall ceiling provided in these sections.
No separate deduction is available to the actual recipient of income. Rebate under
section 88, 88B, 88C, 88D, 88E will be given as if these rebates are available in any
other case.
z Cross transfer :
If two or more transfers are inter-connected and are parts of the same transaction
in such a way that it can be said that circuitous method has been adopted as a device
to evade implications of the provisions of section 64, the case will fall within the
section. The question of inter-connection between two transfers being parts of the
same transactions and being a device to evade the implication if these provisions are
question of fact to be decided in such case by looking at the evidence on record.
Example 2 :
A made a gift of Rs. 50,000 to the wife of his brother B for the purchase of a house
by her and immediately B transferred certain shares of the value of Rs. 50,000 owned
by him to A’s minor son. During the year ending March 31, 2018 the chargeable
income from house property was Rs. 5,000 while the amount of dividend paid on the
shares was Rs. 3,000. State with reason how and in whose hands these two items of
income will be taxed.
Answer :
It is a clear case of cross transfer. Though there is no direct transfer of assets by
A to his minor son and by B to his wife with transaction appears to be indirect transfer
or cross transfer arranged to by-pass the provisions of section 64(1). The Supreme
Court in CIT vs. Kothari (1963), observed that cross transfers which are so intimately
connected as to form parts of a single transaction are covered by Sec. 64(1) although
the transaction may not be mutual, i.e., in the technical sense each transaction may
not constitute consideration for others. Therefore, income arising to Mrs. B will be
taxed in the hands of B. Income arising to son of A will be taxable in the hands of
A or Mrs. A after excluding the exempted amount or Rs. 1,500 as provided u/s
64(1A).
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 z Recovery of tax (Sec. 65) :
Under sections 60-64, incomes belonging to other persons are included in the total
income of the assessee. In such cases, by virtue of section 65, the actual recipient of
income is liable on service of notice of demand, to pay the tax assessed in respect of
income included in the income of other persons.
The Assessing Officer may recover the tax either from the person assessed or from
such other persons to whom the income actually belongs. The Assessing Officer may
serve notice of demand on such persons of the proportionate amout of tax attributable
to such income beneficially held by him. Whereas asset is jointly held by more than
one person, they are jointly and severally liable to pay tax.
Example 3 :
Mr. A, married individual, is carrying on a timber business. He owns a house
property wholly let out to tenants and yielding an income of Rs. 60,000 per annum.
He transfers the house property to his wife, Mrs. A as a gift. He has filed a return
of Rs. 90,000 as his business income for the assessment year 2018-19. He is assessed
on the total income of Rs. 1,50,000 including the income from house property,
transfer being disregarded. Tax liability stands at Rs. 19,000. The concerned Assessing
Officer has the following options for recovery of tax :
a. He may recover the entire amount of tax, i.e., Rs. 19,000 from Mr. A; or
b. He may recover the amount of tax partly from Mr. A and partly from his wife
as under.
Mr. A : Rs. 11,400 [i.e., Rs. 90,000 × (19,000 ÷ 1,50,000)]
Mrs. A : Rs. 7,600 [Rs. 60,000 × (19,000 ÷ 1,50,000)]

5.10 Exercises
1. Under what circumstances income of other persons can be included in the
total income of the assesses under the Income-tax Act ?
2. Explain the provisions of the Income-tax Act relating to transfer of self
acquired property into the common hotchpots of the family.
3. X gifted to his wife 100 shares of a company on which she received 150
shares from the company. She sold all the shares. Discuss whether the gain
on such sale can be included in the assessment of X. If so, determine the
extent to which such gain can be clubbed with X’s income.

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4. In consideration of promise to marry, X transferred to Y 10,000 shares of
Indian Steamships Ltd. on May 1, 2017. X married Y on July 1, 2017 and
during the previous year ended March 31, 2018 relevant assessment year
2018-19, Y received dividend on the said shares amounting to Rs. 40,000.
While assessing X, the Assessing Officer contends that the dividend income
of Rs. 40,000 received by Y is includible in his assessment. Examine the
validity of the contention.
5. Mr. Basu is employed in a public limited company on salary of Rs. 10,000
p.m. Mrs. Basu has been holding its equity shares aggregating in all to more
than 20% right from the beginning of childhood days. The A.O. is convinced
that Mr. Basu is getting such salary genuinely. However, he is of the opinion
that salary received by Mr. Basu has to be included in the total income of
Mrs. Basu. Discuss.

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Unit - 6 ˆ Assessment Procedure & Advance
Payment of Tax
Structure
6.0 Introduction
6.1 Return of Income
6.1.1 Voluntary Return
6.1.2 Obligatory Filing of Return
6.1.3 Return of Loss
6.1.4 Belated Return
6.1.5 Revised Return
6.1.6 Return Form
6.2 Kinds of Assessment under the Income Tax Act, 1961
6.2.1 Self Assessment
6.2.2 Regular Assessment
6.2.3 Best Judgement Assessment
6.2.4 Income Escaping Assessment or reassessment
6.3 Issue of Notice
6.4 Advance Payment of Tax
6.4.1 Condition of Liability to Pay Advance Tax [Sec. 208]
6.4.2 Computation of Advance Tax (u/s 209)
6.4.3 Advance Tax Payment under different situations [Sec. 210]
6.4.4 Installment of Advance Tax and Due Dates [Sec. 211]
6.4.5 Payment of Advance Tax in case of capital gains/casual income
6.5 Exercises
6.6 References

6.0 Introduction
The word ‘assessment’ is used in the Income Tax Act at different places with
different connotations. It is used to mean computation of income, or the determination
of the amount of tax payable or the procedure laid down in the Act for imposing
liability upon the tax payer. Assessment procedure comprises of four stages : the first

73
stage consists in either the assessee on his own, filling a return of his total income,
as also the total income of any other person in respect of whom he is assessable, or
asked by the Assessing Officer to do so within the specified period. The second stage
is concerned with computation of taxable income of the assessee. The third stage
consists of determination of the amount of tax payable by him on the basis of such
computation. The last stage is the making of the assessment order and issue of notice
of demand specifying the sum, if any, payable by the assessee. Assessment includes
reassessment and re-computation.

6.1 Return of Income

6.1.1 Voluntary Return

Every person, if his total income or the total income of any other person in respect
of which he is assessable under this Act during the previous year exceeding the
maximum amount which is not chargeable to income tax, shall on or before the due
date, furnish a return of his income or income of such other person in the prescribed
form and verified in prescribed manner and setting forth such other particulars as may
be prescribed. The section 139(1) applies to all persons whether they are residents or
non-residents. A return in order to be valid must comply with the prescribed conditions.

6.1.2 Obligatory filing of return when income is lower than exemption

limit proviso to Sec. 139(3)
A person whose income is below exemption limit and is residing in a specified area
shall submit his return of income in Form No. 2C if he fulfils any one of the following
conditions at any time during the previous year :
a. Ownership or lease of a motor vehicle; w.e.f. 1.6.1996; motor vehicle will not
include a two wheeled motor vehicle; or
b. Occupation of any category or categories of immovable property as may be
specified by the Board by notification whether by way of ownership or tenancy
or otherwise; or
c. Foreign travel; or
d. Subscription of a cellular telephone (not being WLL); or
e. Holder of a credit card (not being an “add-on” card issued by a bank or
institution); or

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 f. Member of a club where entrance fees charged is Rs. 25,000 or more.
Moreover, travel to any country shall not include travel to neighboring countries
and places of pilgrimage as may be notified by a Board and the above provisions
shall not apply to such persons as are notified by the Board. The Government
has specified that the above provisions shall not apply in case of non-resident.
Moreover, an individual who at least 65 years of age and not engaged in any
business or profession is not subject to condition (b) & (d).
Time limit for furnishing return of income : The return of income must be filed
in a prescribed manner, on or before the due date mentioned as below :

Different situations of return Due date of submission

1. Where the assessee is a company : 30th November
1.1 Where the company is required to
funish a report in terms No- 3CEB u/s
92E pertaining to international transaction
1.2 Any other Company 30th September
2. Where the assessee is person other than company :
2.1. Where accounts of the assessee are
required to be audited under any law 30th September
2.2. Where the assessee is a working 30th September
partner in a firm whose accounts are
required to be audited under any law
2.3. In any other case 31st July

Note : Where the last day for filing return of income or loss is a day on which the
office is closed the assessee can file the return on the next day afterwards on which
the office is open and, in such cases, the return will be considered to have been filed
within the specified time limit.

6.1.3 Return of loss [Sec. 139(3)]

A return of loss can also be filed within the dates mentioned above. The following
losses cannot be carried forward if the return of loss is not submitted in time—

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 a. Business loss (speculative or otherwise);
b. Capital loss; and
c. Loss from activity of owning and maintaining race-horses.
6.1.4 Belated return
If the assessee has not filed a return of income u/s 139(1) or in response to
notice u/s 142(1), he may furnish the return at any time before the expiry of one year
from the end of relevant assessment year or before the completion of assessment,
whichever is earlier.
6.1.5 Revised return [Sec. 139(5)]
If any person having furnished a return u/s 139(1) or in response to a notice u/s
142(1) discovers any omission or any wrong statement therein, he may furnish a
revised return at any time before the expiry of one year from the end of the relevant
assessment year or before the completion of assessment, whichever is earlier.
Defective return [Sec. 139(9)] : A return of income shall be regarded as defective
unless all the conditions laid down in section 139(9) are fulfilled. [Learners are
required to go through a text book for this purpose]
Where the Assessing Officer (AO) considers that the return of income furnished by
the assessee is defective, he may intimate the defect to the assessee for rectifying the
same within 15 days from the date of such intimation or within such further period
which he may grant, or application made in this behalf. If the defect is not rectified
within the period allowed, the return filed will be treated as invalid and the assessee
will render himself liable to the resultant consequences such as experts assessment,
interest for non-submission of a valid return.
Where the tax-payer rectifies the defect after the expiry of the period of 15 days
or the extended period, but before the assessment is made, the Assessing Officer has
been empowered to condone the delay and treat the return as a valid return.

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 6.1.6 Return form - The forms are given below–
New ITR From Subject
ITR-I (i.e., SAHAJ) For individuals having income from salary/one house property
(not being brought forward loss from previous years)/income
from other sources (not being winning from lottery and
income from race horses)
ITR-2 For individuals and HUFs not having business/ professional
income
ITR-3 For individuals/HUFs being partners in firms and not carrying
out business or profession under any proprietorship
ITR-4 For individuals and HUFs having income from a proprietary
business or profession
ITR-4S (i.e., Sugam) For individuals/HUFs deriving business income and such
income is computed in accordance with special provisions
referred to in sections 44AD and 44AE
ITR-5 For firms, AOPs and BOIs or any other person (no being
individual of HUF or company
ITR-6 For companies other than companies claiming exempition
under section 11
ITR-7 For persons including companies required to furnish return
under section 139(4A)/(4B)/(4C)/(4D)/(4E)/(4F)
ITR-V Acknowledgement [Where the date of the return of income
in Forms ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, and ITR-6]

6.2 Kinds of Assessments under the Income Tax Act, 1961

6.2.1 Self-assessment [u/s 140A]

Where any tax is payable on the basis of any return required to be furnished u/s
139 or 148 or as the case may be after taking into account the advance payment of
tax, if any already paid under any provision of this Act, the assessee shall be liable
to pay such tax. He shall pay it together with interest payable under the provisions
of this Act for delay in furnishing the return or any default or delay in payment of
advance tax. The tax and interest, etc. will be paid before furnishing the return shall
77
be accompanied by proof of the payment of such to tax and interest, the amount paid
shall first be adjusted towards tax payable.
For failure to pay the self-assessment tax, the assessee would be deemed to be in
default u/s 140(3) and recovery proceedings would be initiated against him. However,
there is no provision to levy penalty for such default under the substituted section
140A(3).

6.2.2 Regular assessment (Sec. 143)

Regular assessment is done by the Assessing Officer (AO) on the basis of return
of income filed by the assessee or on the basis of further evidence etc. collected by
the AO or submitted by the assessee. In a case where the assessee has not submitted
return of income or where the AO desires to obtain some documents etc. in support
of the return filed u/s 139, there is a provision to make enquiry before assessment u/
s 142.
z Enquiry before assessment (Sec. 142)
For the purpose of making an assessment, the AO serves on any person who has
made a return u/s 139(1), a notice requiring him on a date specified therein.
(i) where such person has not made a return within the time allowed u/s 139(1),
to furnish return of this income of any other person in respect of which he
is assessable under this Act, in prescribed form and verified in the prescribed
manner and setting forth such other particulars as may be prescribed, or
(ii) to produce or cause to be produced such accounts or documents as the AO
may require; or
(iii) to furnish in writing and verified in the prescribed manner, information in such
form and on such points or matters (including a statement of all assets and
liabilities of the assessee, where included in accounts or not), as the AO may
require.
z Summary assessment
On the basis of return Sec. 143(1)(a) without calling the assessee : w.e.f. assessment
year 1989-90, the requirements of passing an assessment order in all cases where
returns filed are dispensed with.
(i) If any tax or interest is found due on the basis of such return, after adjustment
of any tax deducted at source, and advance tax paid and any amount paid

78
 otherwise by way of tax or interest, then without prejudice to sub-section (2),
an intimation shall be sent to the assessee specifying the sum as payable and
such intimation shall be deemed to be a notice of demand issued u/s 156 and
all the provisions of the Act shall apply accordingly.
(ii) If any refund is due on the basis of such return, it shall be granted to the
assessee.
Adjustment (Proviso-2); the department may make certain adjustment in returned
income or loss. These adjustments are :
a. Any arithmetical errors in the return, accounts or documents, accompanying
it shall be rectified.
b. Any loss carried forward, deduction, allowance or relief which is prima facie
admissible but which has not been claimed in the return should be allowed,
and
c. Any loss carried forward, deduction, allowance or relief claimed in the return
which is prima facie inadmissible shall be disallowed. Provided further that
where adjustments are so made an intimation shall be sent to the assessee,
notwithstanding that no tax or interest is found due from him after making
the said adjustments.
Provided also that an intimation for any tax or interest due under this clause cannot
be sent after the expiry of two years from the end of the assessment year in which
income was first assessable.
z Regular assessment after calling the assessee [Sec. 143(2)]
Where a return has been filed u/s 139 or in response to a notice u/s 142(1). The
AO shall, if he considers it necessary or expedient to verify the correctness or
completeness of the return and to ensure that the income has not been understated
or the loss declared is excessive or the tax has not been underpaid, serve on the
assessee a notice either to attend his office or to produce on a date specified any
evidence on which the assessee may rely in support of the return.
A proviso to this sub-section provides that no notice under this sub-section shall
be served on the assessee after the expiry of twelve months from the end of the month
in which the return is furnished.
z Regular assessment after hearing u/s 143(3)
On the day specified in the notice issued u/s 143(2) or as soon afterwards as may
be, after hearing such evidence as the assessee may produce and such other evidence
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as the AO may require on specified points, and after taking into account all relevant
materials which he has gathered, the AO shall, by an order, in writing, make as
assessment of total income or loss of the assessee, and determine the sum payable by
him on the basis of such assessment. He will determine the sum payable by the
assessee or refund of any amount due to him.

6.2.3 Best judgement assessment [Sec. 144]

A best judgement assessment is an assessment by the AO to the best of his judgement
and after taking into account all relevant materials which he has gathered. In the
scheme of such assessment, the AO may take assistance from the accounts maintained
by the assessee and also rely on the information gathered by him as also the surrounding
circumstances of the case.
An assessment to the best of judgement is a quasi-judicial process. Any quasi
judicial process requires an opportunity of being heard before decision is awarded.
Such opportunity shall be given by the AO 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 judgement. It shall, however,
not be necessary to give such opportunity in a case where notice u/s 142(1) has been
issued prior to the making of assessment under this section.
z Principle of best judgement assessment : In making the best judgement
assessment, the AO should not be influenced by a desire to punish the assessee for
the default, however, culpable such default might be. He must not act dishonestly or
vindictively or capriciously because he must exercise judgement in this matter. He
must make what he honestly believes to be a fair estimate of the proper figure of
assessment. There might be guesswork in the matter, but it should be a honest
guesswork.
z Conditions for ex-parte assessment/best judgement assessment : Such
assessment is made in the following circumstances :
(i) failure to file a return of income u/s 139(1) or 139(4) or 139(5) of the Act;
or
(ii) failure to comply with all the terms of a notice u/s 142(1), or failure to
comply with directions issued u/s 142(2A); or
(iii) having filed the return of income, the assessee fails to comply with the terms
of a notice u/s 143(2); or

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 (iv) if the AO is not satisfied about the correctness or completeness of accounts
of the assessee, or if no method of accounting has been regularly employed
by the assessee.
In case of best Judgement assessment, an assessee has right to file an appeal u/s
246 or to make an application for revision u/s 264 to the Commissioner.
One should note that refund can’t be granted u/s 144.

6.2.4 Income escaping assessment or reassessment [Sec. 147]

An income is said to have escaped assessment when it has not been charged to tax
in the original assessment year to which it rightly belongs, it is immaterial that the
income was charged to tax in some assessment year. The concept of income escaping
assessment is wide enough to cover a claim of deduction wrongly allowed. The
expression ‘escaped assessment’ is not restricted to these cases only which have not
come to the notice of the AO at all but the AO erroneously decided that the income
was not assessable. Thus the term ‘escaped assessment’ includes both non-assessment
as well as under-assessment. When a person, though liable to be taxed, has not been
assessed to tax, there is escapement. The reasons of escapement may range from the
stupidity of an officer to the cupidity of the assessee.
z Income escaping assessment :
If the AO has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year he may assess or reassess such income subject to
the provision of section 148 to 153. He may also assess or reassess any other income
chargeable to tax which has escaped assessment and which comes to his notice
subsequently in the course of the proceedings under this section. He may recompute
the loss or depreciation allowance or any other allowance, as the case may be, for the
assessment year concerned (hereafter referred to as relevant assessment year).
Limitation : If an assessment has been made for the assessment year u/s 143(3)
or u/s 147, no action shall be taken u/s 147 after the expiry of 4 years from the end
of relevant assessment year, unless the income has escaped assessment due to the
failure on the part of the assessee to file a return u/s 139 or in response to a notice
u/s 142(1) or 148 or to disclose fully and truly all material facts necessary for his
assessment.
Disclosure : Production before the AO of Accounts Books or other evidence from
which material evidence could, with due diligence, have been discovered within the
meaning of the foregoing proviso.

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 z Cases of income escaping assessment :
Explanation 2 section 147 clarifies that the following shall also be deemed to be
cases of income escaping assessment :
a. Where no return of income has been furnished by the assessee although his
total income or the total income of any other person in respect of which he
is assessable during the previous year exceeded the maximum amount which
is not chargeable to income tax.
b. Where a return of income has been furnished by the assessee but no assessment
has been made and it is noticed by the AO that the assessee has understated
his income or has claimed excessive loss deduction, allowance or relief in the
return.
c. Where as assessment has been made but the following have occurred :
(i) income chargeable to tax has been under-assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance under this Act has been computed.

6.3 Issue of Notice u/s 148

Before making assessment or reassessment or recompilation u/s 147, the AO shall
serve on assessee a notice requiring him to furnish within such period, not being less
than thirty days, as may be specified in the notice, a return of his income or the
income of any person in respect of whom he is assessable during the previous year
corresponding to the relevant assessment year.
It will be in the prescribed form verified in the prescribed manner and set forth
such other particulars as may be prescribed. The provision of this Act shall, so far as
may be, apply accordingly as if such return were a return required to be furnished u/
s 139.

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 z Time limit and sanction of issue of notice [Section 149/151 applicable
w.e.f. 1-6.2001.

Sl. No. Upto 4 years from the end Beyond 4 years but upto 6
of relevant Assessment years from the end of the
year relevant assessment year
1. Where an assessment (i) Notice can be issued for (i) Notice can be issued only
order has been passed whatever be the amount if the income which has
under section 143(3) of income which has escaped assessment is
or 147. escaped assessment. likely to be Rs. 1,00,000
or more for that year.
(ii)Notice can be issued only (ii) Notice can be issued only
be an assessing officer by assessing officer of the
of the rank of an Assistant rank of an Assistant
Commissioner or Deputy Commissioner or Deputy
Commissioner Commissioner.
(iii) It can be issued by the AO (iii) Notice can be issued only
below the rank AC/DC if if the Chief Commissioner
the Joint Commissioner or Commissioner is
is satisfied on the reasons satisfied on the reasons
recorded by the AO that recorded by the AO that
it is fit case for issue of it is fit case for issue of
such Notice. such Notice.
2. Where no asst. order (i) Any AO can issue notice (i) Any AO can issue notice
has been passed under u/s 148 himself. u/s 148.
Sec. 143(3)/147
(ii)Notice can be issued (i) Notice can be issued only
whatever be the amount if the income which has
of income which has escaped assessment is
escaped assessment. likely to be Rs. 1,00,000
or more for that year.
(iii) Notice can be issued only
by the AO below the rank
of Joint Commissioner
if the JC is satisfied that
it is a fit case for issue of
such notice.

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 z Circumstances where time limit given under section 149(1) is not relevant :
(i) Issue of notice after 4 years if assessment is made u/s 143(3)/147 [proviso
to section 147 and explanation 1 to section 147] :
Where an assessment u/s 147/143(3) has already been made for the relevant
assessment year, no action u/s 147 is possible after the expiry of 4 years from the end
of the relevant assessment year unless any income chargeable to tax escaped assessment
by reason of the failure on the part of the assessee to :
a. make a return u/s 139 or in response to a notice u/s 142(1)/148; or
b. disclose fully and truly all material facts necessary for the assessment for that
assessment year.
Production before the AO account books or other evidence from which material
evidence, could, with due diligence have been discovered by the AO will not necessarily
amount to disclosure of material facts.
(ii) Agent of a non-resident [Sec. 149(3)] :
If the person on whom a notice u/s 148 to be served is a person treated as the
agent of a non-resident u/s 163 and the assessment, reassessment or recompilation to
be made in pursuance of the notice is to be made on him as the agent of such
nonresident, the notice shall not be issued after the expiry of a period of two years
from the end of relevant assessment year.
However, notice to the non-resident can be issued as per the normal period prescribed
u/s 149 even after finding that notice to the agent is time-barred u/s 149(3) and hence
invalid.
z Sanction for issue of notice Sec. 151(1) : In a case where an assessment u/s
143(3) or 147 has been made for the relevant assessment year, no notice shall be
issued u/s 148 by an AO who is below the rank of Assistant Commissioner, unless the
Deputy Commissioner is satisfied or reasons recorded by such AO that it is a fit case
for issue of such notice. This is required under the provision of Sec. 149(2).

6.4 Advance Payment of Tax

Although the income of a previous year of the assessee is taxable in the immediately
following assessment year the assessee has to pay advance tax during the financial
year preceeding the assessment year on the basis of his own computation of income.
The scheme of advance tax-payment is also known as ‘pay tax as you earn’ scheme.

84
Under this scheme every income (including capital gains, winnings from lotteries,
crosswords, puzzles, etc.) is liable to payment of advance tax with effect from the
assessment year 1989-90. Tax will be payable in advance during any financial year, in
accordance with the provisions of sections 208 to 211, in respect of the total income
of the assessee which would be chargeable to tax for assessment year immediately
following the financial year, such income referred to as current year income for this
purpose.

6.4.1 Condition of liability to pay advance tax [sec. 208]

Advance tax shall be payable during a financial year in every case where the
amount of such tax payable by the assessee during the year, as computed in accordance
with provisions of this unit, is Rs. 10,000 or more.

6.4.2 Computation of Advance Tax (u/s 209)

The amount of advance tax payable by an assessee in the financial year as his/ her
own accord as per section 210(1)/210(2)/210(5)/210(6) on the estimated current
income will be computed as follows—
First, Estimate the current income of the Financial year for which the advance tax
is payable.
Second, Compute tax as such estimated income at the rate of tax applicable to the
relevant financial year.
Third, Add surcharge, Educational Cess & Secondary & Higher Education Charge.
Fourth, Allow relief if any, u/s 89, 90, 90A & 91.
Fifth, Deduct the TDS NL.
Sixth, the balance will be the amount of advance Tax to be paid.

6.4.3 Advance tax payment under different situations [Sec. 210]

The amount of advance tax payable by an assessee for the financial year shall be
computed as follows :
a. Where the calculation is made by the assessee for the purposes of payment
of making an order u/s 210(1), (2), (5) or (6), he will be required to estimates
the current income and income tax thereon at the rates in force in the financial
year. From the tax so calculated, Tax deducted at source will be deducted.

85
 Calculation can be made on similar way in the case of upward and downward
revision of current income.
b. Where the calculation is made by the AO for the purpose of making an order
u/s 210(3), higher of the following will form the basis of calculation of
advance tax :
(i) The total income of the latest previous year in respect of which he has
been assessed by way of regular assessment; or
(ii) The total income returned by the assessee in any return of income
furnished by him for any subsequent previous year.
Tax on current income at the rates in force during the financial year less tax
deducted at source will be amount of advance tax payable.
c. Where the calculation is made by the AO for the purpose of making an
amendment under u/s 210(4), the computation will be in respect of the total
income subsequently returned or assessed which has been made on the basis
of amendment by the AO. The tax calculated at the rates in force in the
financial year shall be reduced by the mount deductible or collectible at
source out of the income which has been taken into account in the computation
of current income.
d. Payment of advance tax by the assessee of his own accord or in pursuance
of an order of AO Sec. 210(1) : Any person who is liable to pay advance tax
u/s 208 shall, of his own accord, compute and pay the specified instalments
of advance tax. The due dates and the appropriate percentage of each instalment
of advance tax have been stated in section 211. The current income is calculated
in the manner laid down in Sec. 209 above.
z Assessee to furnish his estimates [Sec. 210(5)] :
Sub-section 5 enables the assessee to furnish his own estimate of current income
in order to reduce the amount of advance tax determined by the AO under sub-section
(3) or (4) above. Such intimation shall be sent in prescribed form. (Form 28A).
z In case of higher estimate [Sec. 210(6)] :
Where the amount of advance tax on current income as per assessee’s own estimate
is likely to be higher than what has been determined under sub-section (3) or (4), his
estimate under sub-section (5) above, the assessee shall pay higher tax in accordance
with his own calculation of advance tax.

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6.4.4 Instalment of advance tax and due dates [Sec. 211]
In the case of non-company assessee, advance tax has to be paid in three instalments.
However, in the case of a company assessee, advance tax is payable in four instalments.
The relevant due dates are given below :

In the case of In the case of

A corporate assessee A non-corporate assessee
On or before June 15 of Upto 15% of advance tax
the previous year payable
On or before Sept. 15 of Upto 45% of advance tax Upto 30% of advance tax
the previous year payable payable
On or before Dec. 15 of Upto 75% of advance tax Upto 60% of advance tax
the previous year payable payable
On or before March 15 Upto 100% of advance Upto 100% of advance tax
of the previous year tax payable payable

Notes :
1. Any payment of advance tax made before 31st March shall also be treated as
advance tax paid during financial year.
2. If advance tax paid is less than 90% of the assessed tax (i.e., total tax
computed less tax deducted at source), liability to interest u/s 234B @ 1%
p.m. arises.
3. Shortfall in payment of instalments of advance tax due on 15–9 and 15–12
attracts liability to interest @ 1% p.m. u/s 234C.

6.4.5 Payment of advance tax in case of capital gains/casual income

The advance tax is payable on all types of income, including capital gains and
winning of lotteries, crossword puzzles etc. However, it is not possible for an assessee
to estimate his capital gains or winnings from lotteries etc. which are generally
unexpected. Therefore, in such cases, it is provided that by any such income arises
after the due date of any instalment, then the entire amount of tax payable (after
deduction of tax at source, if any) as such capital gain or casual income should be
paid in remainning instalments of advance tax which are due or where no such
instalment is due, by 31st March of the relevant financial year. It the entire amount
of tax payable is so paid, then no interest on late payment will be leviable.

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6.5 Exercises
1. (a) What are prescribed due dates for filing return of income for different
types of assessee ?
(b) What are the types of assessments allowed under the Income-tax Act ?
2. What are the circumstances under which an AO may make a Best Judgement
Assessment ? What are the principles to be followed in making BJA? What
are the remedies open to the assessee to get such assessment modified or
cancelled?
3. (a) What do you understand by ‘Summary Assessment’ ?
(b) What do you understand by the expression ‘income escaping assessment
? What are the cases when income is said to have escaped assessment? What
are the time limits for re-opening an assessment, as stipulated in section 149
& 151?
(c) What adjustment can be made by an Assessing Officer while making
regular assessment under section 143(1) ?
4. Discuss the provisions relating to advance payment of tax.
5. (a) When is an assessee required to send an estimate of his current year’s
income?
(b) What are the dates prescribed and appropriate percentage for payment of
instalments of advance tax ?
6. Discuss the provisions of section 210 for payment of advance tax under
different situations.

6.6 References
1. Taxmann’s-Income-tax Act, 1961
2. Income Tax—Bhagawati Prasad.
3. Taxmann’s Direct Taxes—Laws & practice.
4. Systematic Approach to Income Tax–Ahuja & Gupta.

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