Paper-xi-Income Tax Law and Practice - 2024-11-06t075059.124

PERIYAR INSTITUTE OF DISTANCE EDUCATION
(PRIDE)
PERIYAR UNIVERSITY
SALEM - 636 011.
B.COM.
THIRD YEAR
PAPER – XI : INCOME TAX LAW AND PRACTICE
1
Prepared by :
M. Natarajan
Asso. Professor of Commerce
Salem Sowdeswari College
Salem.
2
B.Com.
THIRD YEAR
PAPER – XI : INCOME TAX LAW AND PRACTICE
Rates of Tax for Assessment Year 2009-10
1 UNIT - I
Chapter 1 Basic Concepts

Chapter 2 Basis of Charge
2 UNIT - II
Chapter 1 Income from Salary

Chapter 2 Income from House Property
3 UNIT - III
Chapter 1 Profits and Gains of Business or Profession

Chapter 2 Capital Gains
4 UNIT - IV
Chapter 1 Income from Other Sources

Chapter 2 Aggregation of Income
Chapter 3 Set off and Carry Forward of Losses
Chapter 4 Deductions from Gross Total Income
Chapter 5 Computation of Total Income
(Individual, HUF and Firm (FAPF)
3
5 UNIT - V
Chapter 1 Income Tax Authorities

Chapter 2 Assessment Procedure
Chapter 3 Appeals and Penalties
Chapter 4 Deduction of Tax at Source (TDS)
and Advance Payment of Tax
RATE OF TAX
FOR ASSESSMENT YEAR 2009-10
For individuals(other than females and senior citizens), HUF, AOP,

I. BOI
and Artificial Person
If total Income is up to Rs.1,50,000 NIL
10% of income exceeding

If total Income exceeds Rs.1,50,000 Rs.1,50,000
but does not exceed Rs.3,00,000
Rs.15,000 + 20% of income

It total income exceeds Rs.3,00,000 exceeding
but does not exceed Rs.5,00,000 Rs.3,00,000

Rs.5,00,000
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II. For Female Assessee (below the Age of 65 Years)
If total Income is up to Rs.1,80,000 NIL



Rs.5,00,000
III. For Senior Citizen Assessee

If total Income is up to Rs.
2,25,000 NIL

Rs. 7,500 + 20% of income


Rs.5,00,000
5
SURCHARGE
For Individuals
a) It is to be levied only if total income exceeds Rs.10,00,000
b) Rate of surcharge is 10% of tax
c) The total amount of income tax and surcharge on total income

exceeding
Rs.10,00,000 cannot exceed the amount payable as income tax on
a total
income of Rs.10,00,000 by more than the income that exceeds
Rs.10,00,000.
Principle of marginal relief shall
apply.
EDUCATION CESS
It is to be levied @ 2% of tax and surcharge, it any, for all persons
irrespective
income plus Secondary and Higher Education cess @ 1% of tax and
surcharge, if any
SPECIAL RATES
For short term capital gain on shares which are subject to Security
Transaction Tax (STT) 15%
For long term capital gains 20%
For casual incomes (Lotteries, races, puzzles etc,) 30%
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B.Com.
THIRD YEAR
INCOME TAX LAW AND PRACTICE
UNIT – I
CHAPTER – I
BASIC CONCEPTS
1.1. Introduction
One of the important sources of revenue of the Government is tax.
Taxation plays a vital role in mobilizing resources which are used for the
collective benefit of the public. Indian taxation structure provides for two types
of taxes namely direct taxes and indirect taxes. The income tax, wealth tax and
gift tax are direct taxes whereas sales tax and excise duty are indirect taxes.
1.2. Tax History
The income tax was introduced in India for the first time in 1860 by the
British rulers. In 1886 the first Income-Tax Act was passed and it remained in
force up to 1918. Then in the year 1918 another Act was passed but it was
replaced by Income-Tax Act, 1922, which remained in existence till 31st March
1961. The present Act, the Income-Tax Act 1961 came into force with effect
from 1st April 1962 and has been amended by several amending Acts since
1961. It is a comprehensive Act consisting of several sections, sub-sections,
schedules, rules and sub-rules and is supported by other Acts and rules.
1.3 Assessee [Section 2(7)]
An assessee is a person by whom any tax or any other sum of money is
payable under the Income-Tax Act,1961 and includes,
(i) a person in respect of whom any proceeding has been taken for the
assessment of
a. his own income or any other person’s income;
b. his own loss or another person's loss and;
c. any amount of refund due to him or to such other person.
From the above definition the assessees can be classified into three types.
(a) Ordinary assessee (b) Deemed assessee or Representative assessee
and (c) Assessee-in-default.
a) Ordinary Assessee
An ordinary assessee is one who has to pay any tax, penalty or interest
to the income tax department or who is eligible for any refund of tax.
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(b) Deemed or Representative Assessee
A deemed or representative assessee is one who is not only liable for
his own income or loss but also liable for the income or loss of other persons to
whom he acts as a representative (e.g.) guardian of a minor or lunatic, agent of
a non-resident etc.
(c) Assessee-in-default
A person is said to be an assessee-in-dafault if he fails to fulfil his
statutory obligations. For example, if an employer who has to deduct tax at
source fails to do so or deducts tax but does not deposit in the Government
treasury, then he is known as assessee-in-default.
1.4. Person [Section 2(31)]
Person includes,
(I) Individual
It refers to human beings whether male or female, minor or major.
(ii) A Hindu Undivided Family
It is a relationship formed due to the operation of Hindu Law, The Manager of
HUF is called ‘Karta’ and its other members are called coparceners.
(iii) A Firm
It is an entity which comes into existence as a result of partnership agreement.
(iv) A Company
It is an artificial person created under Indian companies Act,
1956 or any other law.
(v) An Association of persons or Body of Individuals (AOP or BOI).
When persons combine together to do some business jointly, they are
assessable as an association of persons. An AOP can have firms, companies,
associations and corporations as its members. A Body of individuals can have
only individuals as its members.
(vi) Local Authority
Panchayat, Municipality, Corporation etc., come under local authority,
(vii) Artificial Juridical person
Public Corporations established under Special Act of legislature,
universities etc., are examples of this category.
1.5 Previous Year (Section 3)
Previous year (PY) is the financial year preceding the assessment year.
It is the year in which the income is earned by the assessee which is assessed to
tax in the assessment year. If the assessment year is 2009-2010, then the
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previous year should be 2008-09, starting on 1st April 2008 and ending on 31st
March 2009.
The current previous year is 2008-09 (01.04.2008 to 31.03.2009)
From the assessment year (AY) 1989-90 onwards, all assessees are
required to follow a uniform PY i.e. 1st April to 31st March. But in case of a
newly formed business or a newly created source of income, the first PY will
start from the date of setting up of business or the day on which such source of
income comes into existence and will end on 31st March next following.
Example :
If a business is started on 1st October 2008,.then the previous year will
be 1.10.2008 to 31.3.2009.
Normally the income of the previous year is assessed to tax in the
relevant assessment year. But there are certain exceptions to it, wherein the
income of a previous year is taxed in the same year in which it is earned. These
exceptions are:
1. Income of Non-Resident shipping companies (if they do not have agents
in India) (Section 172).
2. Income of persons leaving India temporarily or permanently (Section
174),
3. Income of AOP or BOI or Artificial Juridical person formed or
established for a limited period (Section, 174A) .
4. Income of a person who is likely to transfer his assets to avoid tax
[Section 175)
5. Income of a discontinued business (Section 176).
1.6. Assessment Year [Sect ion 2 (9)]
Assessment year means the period of 12 months commencing on the 1st
day of April every year and ending on 31stday of March of the next year. It
is the financial year of Government of India during which the income of a
person relating to the relevant previous year is assessed to tax. The current
assessment year starts with 1st April 2009 and ends with 31st March 2010.
Assessement year is 2009-2010.
Illustration 1
An assessee has income from various sources. Find out the previous years
of such incomes which shall be taxable in the assessment year 2009-10.
(i) Salary Income for job joined on 10th September 2008
(ii) A business maintains its accounts on Diwali to Diwali basis
(iii) A person wins a lottery prize during 2008-2009.
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(iv) A new business is set up on 1.7.2008.
Solution :
Determination of previous years for the assessment year 2009-10
Income
Previous Year
(i) Salary income for job joined on 10th September
2008 10.9.2008 to
31.3.2009
(ii) A business maintains its accounts on Diwali 2008
Diwali to Diwali basis to 31.3.2009
(iii) A person wins a lottery prize during 1.4.2008 to
2008-2009 31.3.2009
(iv) A new business is set up on 1.7.2008 1.7.2008 to
31.3.2009
1.7 Income [Section 2(24)]

The Income-Tax Act does not define the term ‘Income'. It says certain
receipts which are included under the term income. Income simply means
something which comes in, The dictionary meaning of the term income is
periodical receipts from one's business land, work, investment etc., It includes
the value of benefits and perquisites. As per section 2(24) of the Act, the term
income includes:
i) Profits and gains
ii) Dividend
iii) Voluntary contributions received by a trust/fund/institution
created wholly or partly for charitable/religious purpose or by a
scientific research association or by any university or any
educational institution or hospital.
iv) The value of any perquisite or profit in lieu of salary
v) Any allowance given to the assessee
vi) Any special allowance or benefit granted to meet the expenses
in the performance of duties of an office
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vii) Any sum received by the assessee as his employer's contribution to
any provident fund or superannuation fund.
viii) Any sum chargeable to tax u/s 28
ix) Any capital gain chargeable u/s 45
x) Any winnings from lotteries, crossword puzzles, races including
horse races, card games and other games, gambling or betting
xi) Value of any benefit obtained by a representative assessee.
xii) Value of any benefit or perquisite obtained from a company either by
a director or by a person having substantial interest in the company
or by a relative of the director or of such person.
xiii) Insurance profit computed u/s 44
xiv) Any sum chargeable to tax under clauses (ii) and (iii) of sections 28
or 41 or 59.
xv) Any sum received under key man insurance policy including bonus.
Features of Income
The following features help one to understand the concept of income.
1. Income must come from a definite source.
2. It must come from out side ,
3. Income may be received in cash or in kind
4. Income arises either on receipt basis or on accrual basis,
5. Income earned may be temporary or permanent
6. Income Tax Law does not make any distinction between legal income and
illegal income. Both are taxable.
7. Diversion of income is not taxable but it is application of income (if after
collecting income, it is distributed) it is taxable.
8. In case there is any dispute regarding title of the income, the recipient will
be taxed.
9. Any amount received due to devaluation of currency is taxable income.
10. Income whether received in lump sum or in instalments, both are taxable.
11. Gifts received in cash or cheque from a person other than a relative shall be
deemed as income. But gifts up to Rs.50,000 shall be exempted.
12. Income includes loss also.
13. Income should be real and not fictional.
14. Pin money (Pocket money) received by housewife is not income.
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1.8 Gross Total Income
Section 14 of the Income-Tax Act, 1961 deals with Gross Total Income,
It means the aggregate of incomes computed under the following five heads.
i) Income under the head "Salary".
ii) Income under the head "House property".
iii) Income under the head "Profits and Gains of Business or
Profession".
iv) Income under the head "Capital Gains" .
v) Income under the head "Other Sources".
After aggregating income under various heads, losses are adjusted and
the resultant amount is called “Gross Total Income".
1.9 Total Income
According to section 2(45) "Total Income" means the total amount of
income referred to in section 5, computed in the manner laid down in the
Act. The excess of gross total income after allowing deductions u/s 80 is known
as total income. It is calculated as follows.
Rs.
Gross Total Income : xxx
Less : Deduction u/s 80 : xxx
Total Income xxx
1.10. Exempted Incomes
The following incomes are exempt from tax under section
10 and so they are not included in the gross total income of the
assessee.
(1) Agricultural Income [Section 10(1)]
Agricultural Income from land situated in India is fully exempted from
tax.
(2) Receipts by a member of Hindu Undivided Family (HUF)
[Section 10(2) ]
Any sum received by an individual as a member of Hindu Uundivided
Family, either out of income of the family or out of income of any
impartible estate belonging to the family is exempt from tax.
(3) Share of profit from partnership firm [Section 10(2A)]
Share of profit received by partners from a firm, assessed as firm is not
taxable in the hands of partners.
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(4) Interest paid to Non-Residents [Section 10 (4), (4B)]
The following interest incomes are exempt from tax.
(a) Any income of non-resident by way of interest on securities or
bonds notified by the Central Government including income by
way of premium on redemption of such bonds provided they were
issued before 1.6.2002.
(b) Any interest income standing to the credit in a Non-Resident
(External) Account in any bank in India, provided the amount of
interest was paid or credited before 1.4.2005.
(c) Interest from notified savings certificates (i.e. NSC VI and VII
issues) if issued before 1.6.2002. This exemption is available in
case of person of Indian citizen or of Indian origin who is a non-
resident.
(5) Leave Travel concession to an Indian Citizen [Section 10(5) ]
a) In case journey is performed by air - the leave travel concession
shall be exempted up to an amount not exceeding the air
economy fair of the National carrier by the shortest route
possible.
b) In case journey is performed by any other mode - it shall be
exempted up to an amount not exceeding the air conditioned
first class rail fare by the shortest route.
6. Certain Incomes received by an individual who is not a
citizen of India [section 10(6)]
(i) Remuneration [Section 10 (6)(ii)]
The remuneration received by an ambassador or other officials of the
Embassy, High commission or Legation of a foreign state in India is
exempt from tax if corresponding Indian officials in that country enjoy
a similar exemption.
(ii) Remuneration received from foreign enterprises [10 (6) (vi) ]
The remuneration received by a foreign national as an employee of a
foreign enterprise for services rendered by him during his stay in India
is totally exempt from tax provided:
a. The foreign enterprise is not engaged in any business or trade in India.
b. His stay in India does not exceed 90 days in such previous year and
c. Such remuneration is not liable to be deducted from the income of the
employee
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(iii) Employment on a foreign ship [10 (6) (viii) ]
Salary received or receivable by a non-resident foreign national for
services rendered as a crew of a ship is exempt from tax provided his
total stay in India does not exceed 90 days during the previous year.
(iv) Remuneration received by an employee of foreign Government
[Section 10(6)(xi)]
Such remuneration is fully exempted if he is taking training in India in
1. an institution owned by the Govt. 2. any company wholly or partly
owned by the Central or State Govt. and any subsidiary company of the
above company 3 .any corporation and 4. any society which is wholly
financed by Central or State Govt.
7. Tax paid by the Government or Indian concern on behalf of foreign
companies in respect of certain incomes [Section 10 (6A) ]
If a foreign company derives income by way of royalty or fees for
technical services rendered from Government or Indian company in pursuance
of an agreement then the tax payable on such income by the Government or the
company is fully exempt from tax.
8. Tax paid on behalf of foreign companies or non-residents
[Section 1O (6B)]
The amount of tax paid by the Government or an Indian company on
behalf of a non-resident (not being a company) or a foreign company in respect
of the income (other than mentioned in [Section 10 (6A)]shall be fully exempt.
9. Income of a foreign company [Section 10(6C)
Any income derived by a foreign company by way of royalty or fees for
technical services rendered under an agreement for providing services in or
outside India in projects concerned with security in India shall be fully
exempted.
10. Allowances and perquisites received by employees of the
Government serving outside India [Section [10 (7) ]
Any allowance or perquisite paid by the Government to its employees who
are Indian citizens, for services rendered outside is fully exempt from tax.
11. Income of a foreign Government employee under Co-operative
Technical Assistance Programme [Section 10(8) ]
The income of an employee serving in India in connection with
cooperative technical assistance programme according to an agreement entered
into by the Indian Government and the foreign Government is exempt from tax.
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12. Income of a consultant [ Section 10 (8A) ]
Any remuneration or fees received by consultant who is not a citizen of
India or if citizen but is not ordinarily resident or non resident out of funds
made available on international organisation under technical assistance grant
agreement between such organisation and the foreign Government and any
other income accruing or arising to him outside India shall be fully exempted if
he pays tax in that foreign country.
13. Income of Employees of consultant [Section 10 (8B)]
Income of employees of consultant referred u/s 10 (8A) is also exempt
from tax.
14. Income of any member of the family of individuals working in India
under Co-operative Technical Assistance Programme [Section 10(9)]
Any family member of an employee accompanying him to India enjoys
tax exemption in respect of foreign income or an income which is not deemed
to accrue or arise in India, if the family member is paying tax to the foreign
Government.
15. Gratuity (Section 10 (1O)]
(A) Government employees
Any death - cum - retirement gratuity received by an employee of
Central/State Government or local Authority or Defence service or statutory
corporation is fully exempt.
(B) Non - Government employees
(i) Gratuity received under payment of Gratuity Act - shall be exempted
up to the least of the following.
(a) 15 days salary (7 days in case of employees working in seasonal factories)
for each completed year of service or part thereof in excess of six months
on the basis of last salary drawn;
(b) Notified limit Rs.3,50,000;
(c) Actual Gratuity received;
(ii) For other Non-Government employees
Gratuity is exempted up to the least of the following
(a) Statutory limit Rs.3,50,000;
(b) ½ month's average salary for each completed year of service;
(c) Actual Gratuity received.
Note : (i) Average salary means salary received during 10 months
preceding the month in which death or retirement occurs.
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(ii) Salary includes Basic pay + D.A. if it enters into pay for service
benefits + D.P.
16. Commuted value of pension received [Section 1O (l0A)]
(a) Full value of commuted pension received is exempted if it is received
from the Government, a local authority or a statutory corporation.
(b) Any amount received on commutation of pension by a Non-Government
employee is exempted up to:
(i) ⅓ of the pension if the employee receives gratuity along with pension
(ii) ½ of the pension if the employee does not receive gratuity.
17. Amount received as leave encashment on retirement [Section
10(10AA)]
(a) for Central and State Govt. employees - fully exempted
(b) for other employees – exempted up to the least of the following
(i) Actual amount received ;
(ii) 10 months average salary;
(iii) Cash equivalent of leave salary at credit at the time of retirement; and
(iv) Notified limit of Rs.3,00,000 .
18. Retrenchment compensation paid to workmen as defined in
Industrial Disputes Act 1947. Retrenchment compensation received by
workman shall be exempted up to the least of the following:
(i) Amount calculated according to Industrial Disputes Act,1947 or
(ii) Rs.5,00,000 whichever is less.
19. Payment received under Bhopal Gas leak Disaster (Processing of
claims) Act 1985. [Section 10(1OBB)]
Amount received is fully exempted.
20. Voluntary retirement payment [Section 10 (1OC) ]
Any payment received or receivable by an employee at the time of
voluntary retirement shall be exempted up to
(i) Actual amount received;
(ii) Rs.5,00,000;
(iii) 3 month's salary for each completed year of service; and
(iv) Salary last drawn multiplied by number of months of service left over
whichever is less.
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21. Income by way of tax on perks [Section 10 (10CC)]
Income by way of tax paid by employer on value of perks given to
employees shall be exempted.
22. Any sum received under a life insurance policy [(Section 10(10D)]
Any sum received under a life insurance policy including bonus shall be
fully exempted.
23. Payment from Statutory Public and Recognised Provident Funds
and Superannuation Fund [Sections 10 (11) (12) (13)]
The amount withdrawn from statutory, public provident fund and
superannuation fund is exempted and from R.P.F. it is exempted to the extent
provided in rule 8 of part A of the fourth schedule.
24. House Rent Allowance [Section 10 (13A)]
Any amount received as HRA by an employee who is living in a rented
house is exempted up to the least of the following three limits.
i) Actual HRA received;
ii) Excess of rent paid over 10% of salary;
iii) 40% or 50% (if accommodation is situated in Bombay, Delhi, Calcutta
and Madras) of salary.
25. Any allowance given for meeting business expenditure
(Section 10 (14)]
Any special allowance granted to meet the expenses wholly, necessarily
and exclusively incurred to perform the duties of an office is exempted from
tax.
Apart from the above incomes, exemption is provided under section 10
for other incomes also under the sub-sections (15) to (42).
Questions
1. Define: i) Assessee, ii) Person, iii) Assessment Year.
2. What is previous year? Under what circumstances income of a person can be
assessed in the same year in which it is earned?
3. Explain the concept of income and give its features.
4. Give ten examples of incomes which are totally exempt from income-tax.
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UNIT - I
CHAPTER - 2
BASIS OF CHARGE
2.1. Residential Status
According to the provisions of Income Tax Act, 1961 the total
income of a person depends upon his residential status which is determined
each year and the status may change from year to year. Section 5 of the Act
divides the assessable persons into three types.
(i) Ordinary Resident (ii) Resident but not Ordinarily Resident (iii) Non-
Resident
2.1.1. Residential Status of an Individual
Residential status of an individual (Section 6)
Resident [(Section 6(1)] Non-Resident [Section 2 (30)]
Ordinary Resident Not Ordinarily Resident [Section6(6)]

There are two basic conditions and two additional conditions which
should be applied to find out the status of an individual. The following table
will clearly show the method of calculating the residential status.
Rules and Regulations
Basic Conditions Additional Conditions
1. A Stay of 182 days or more during 1. He should be resident in India at least
the relevant previous year 2 out of10 previous years
or immediately preceding the current
2. A stay of 60 days or more during previous year
the relevant previous year and 365 and
days or more during 4 previous 2. A stay of 730 days or more during
years immediately preceding the 7 previous years immediately
relevant previous year. preceding the relevant previous
year
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Note :
 In case an Indian citizen, who goes abroad in the previous year for
employment which is approved by Central Government or as a
member of crew of an Indian ship, 60 days have been replaced by
182 days.
 In case of Indian citizen or of Indian origin who stays abroad, comes
on a visit to India during the previous year, 60 days should be taken
as 182 days
a) Resident (ordinary Resident) - who satisfies any one of the two basic
conditions and both the additional conditions.
b) Resident but not ordinary Resident - who satisfies any one of the two
basic conditions but does not satisfy one or none of the additional
conditions.
c) Non-Resident - who does not satisfy any of the basic conditions.
ILLUSTRATIONS
Illustration 1
Mr. Raghu an Indian citizen goes to London for employment pproved by
the Government during the previous year 2008-2009 on 1st September 2008. He
was never out of India before. Find out his residential status.
Solution
Determination of Residential Status of Mr. Raghu
Relevant previous year 1.4.2008 - 31.3.2009
Stay in India during the previous year.
From 1.4.2008 to 31.8.2008 = April (30) + May (31) +
June (30) + July (31) +
August (31) + September (1)= 154 days
Since Mr. Raghu is an Indian citizen who goes abroad for
employment, he should stay in India for a minimum period of 182 days during
the1 previous year to become a resident. But he was in India for 154 days only.
Hence, his status is that of 'Non-Resident'.
Illustration 2
Ascertain the residential status in the following cases for the Assessment
- Year 2009-2010.
i) Mr. A is a citizen of India. He left for USA on 18th April 2008 and could
not return to India till the end of the year 2008-2009
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ii) Mr. B left for Australia on 10th March 2006 after having lived in India for
20 years. He returned to India on 10th September 2008.
iii) Mr. C is a citizen of India. He left on 15th May 2008 for London for
higher studies. He came back to India on 25th May 2009. He maintained
a dwelling place in India during his absence.
SOLUTION
Determination of Residential Status of Mr. A, Mr.B and Mr.C for the
Assessment Year 2009-10.
i) Mr. A stayed in India for 18 days during the previous year 2008-2009
(from 1st April 2008 to 18th April 2008). As he did not stay in India during
the year for the required number of days his residential status shall be
'Non-Resident'.
ii) Stay in India
During 2008-2009 From 10th September 2008 to 31st March 2009 = 203
days.
During the previous year 2008-09, Mr. B stayed in India for 203 days.
Hence he is resident u/s 6 (1) (a) and he is ordinary resident u/s 6(6) as he was
resident for more than 2 previous years out of 10 previous years preceding the
relevant previous year and stayed in India for more than 730 days out of 7
previous years preceding the relevant previous year.
Status of Mr.B during the earlier previous years
2007-08 NIL - Non Resident
2006-07 NIL - Non Resident
2005-06 343 days - Resident
2004-05 365days - Resident
iii) During the previous year 2008-09, Mr. C stayed in India for 45 days only
2003-04
(from 1.4.2008 365 days
to 15.5.2008). - Residentduring the previous year
He is Non-Resident
2008-09 as he does not fulfil any of the two conditions of section 6(1).
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2.1.2 Residential Status of HUF
Residential status of HUF[Section 6 (2)]
Resident Non-Resident [Section 2(30)]
Ordinary Not Ordinarily

Resident [Section 6(2)] Resident [Section 6(6)(b)]
Ordinary Resident
A HUF is said to be resident if the control and management of the
affairs of the family is situated wholly or partially in India during the relevant
previous year.
Not Ordinarily Resident (NOR)
This status is allowed only to HUF apart from individuals. A HUF shall
be NOR if its Karta fulfils the two additional conditions given u/s 6(6) for an
individual.
1. He should be resident in India at least 2 out of 10 previous years
immediately preceding the current previous year and
2. A stay of 730 days or more during 7 previous years immediately preceding
the relevant previous year.
Non-Resident:
If control or management of HUF is situated wholly outside India, it is
said to be Non-Resident.
2.1.3 Residential status of a firms, AOP, BOI and every other person
[section 6 (2) and 6 (4)]
Resident
In case of firm / AOP / BOI and every other person, which has its control
and management wholly or partially in India during the relevant previous year
is Resident.
Non-Resident
If the control and management is situated wholly outside India, then the
status of the above persons is that of Non-Resident.
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2.1.4 Residential status of a Company [Section 6 (3)]
Resident [Section 6(3)]
A Company is resident in India if,
(i) It is an India Company or
(ii) during the previous year, control and management of its affairs
is situated wholly in India,
Non-Resident [Section 2(30)]
A company whose control and management is situated wholly or partially
outside India will be a non-resident company.
2.2 Scope of Total Income
The tax is levied on total income of a person. The total income is based
upon the residential status of an assessee. Section 5 provides the scope of total
income which varies on the basis of status.
(i) Scope of total income of a ‘Resident' [Section 5(1) ]
(a) Income received or deemed to be received in India during the relevant
accounting year. The place and date of accrual is immaterial.
(b) Income which accrues or arises or is deemed to accrue or arise in India
during the relevant accounting year irrespective of the date and place of
its receipt.
(c) Income accruing during the relevant accounting year outside India
whether it is brought or not in India during the year.
Scope of Income = Indian Income + Foreign Income
(ii) Scope of total income of 'Not Ordinarily Resident' [Section 5(1)]
accounting year. The date and place of accrual is immaterial.
during the relevant accounting year irrespective of the date and place of
its receipt.
(c) Income accruing or deemed to accrue or deemed to be received outside
India during the relevant accounting year from a business set up in India
and controlled from India.
Scope of income = Indian Income + One particular type of Foreign
Income.
(iii) Scope of total income of 'Non-Resident' [Section 5(2) ]
accounting year. The date and place of accrual is immaterial.
22
during the relevant accounting year irrespective of the date and place of its
receipt.
Scope of Income = India Income
CHART
SUMMERISED CHART
Different Types of Status
Different kinds of Incomes Not

Non-
Resident Ordinarily
Resident
Resident
1 Income received or deemed to be
received in India. It is immaterial
Taxable Taxable Taxable
whether it is earned in India or in a
foreign country
2 Income earned in India whether
received, paid in India or outside Taxable Taxable Taxable
India
3 Income earned and received
outside India from a business
controlled or profession set up in Taxable Taxable Not
India. Income may or may not be
remitted to India
4 Income earned or received
outside India from a business
Taxable Not Not
controlled or profession set-up
outside India
outside India from any other
Taxable Not Not
source (Except income under
point 3)
Outside India in the years
Not Not Not
Preceding the previous year in
question and it the same is
23
remitted to India during the current
previous year
Illustration 3
The following are the details of income of Shri Varma
1. Share of income from a joint venture in India Rs.10,000
2. Dividend Rs. 1,000
3. Income from Agriculture in Pakistan Rs.20,000
4. Salary received in India Rs.9,800(computed) but the services for the
same were rendered in Iran.
5. Income from business (controlled from India) in Pakistan Rs.10,000
and the income is remitted to India.
6. Income earned and received in Pakistan from bank deposits Rs.5,000
7. Income accrued in India but received in Iran Rs.10,000. Compute
Mr. Varma’s taxable income if he is (i) a Resident, (ii) a Not
Ordinarily Resident, or (iii) a Non-Resident.
Solution
Computation of Total Income of Mr.Varma
N.O. Resi Non-Resi

Resi dent
dent dent
Rs
Rs. Rs.
(a) Income received in India [5 (1) (a) ]
Share of income from joint venture in India 10,000 10,000 10,000
Dividend - Exempted u/s 10 — - -
fiii) Salary for services rendered outside 9,800 9,800 9,800
(b) Income
India accrued in India [5 (I) (b) ] Income 10,000 10,000 10,000
accrued in India but received in Iran
(c) Income accrued & received outside India 20,000 - -

Income from agriculture in Pakistan
Income from a business in Pakistan 10,000 10,000 -
(controlled from India)
Bank deposits income in Pakistan 5,000 - -
Total Income 64,800 39,800 29,800
24
Illustration 4
Following are the incomes of Sri Rathanam for the previous year 2008-2009.
Rs
(i) Profit from business in Bangalore 10,000
(ii) Income accrued in India but received in Japan 4,000
(iii) Profit from business in Canada but received in India 5,000
(iv) Income from house property in Karachi received in 4,000
Bombay
(v) Profit from business established in England and 20,000

deposited there, the business being controlled from
India.
(vi) Income from house property in America and deposited 2,000
there
(vii) Past untaxed income brought into India during the 10,000
previous year
Compute the total income of Shri Rathnam for the Assessment Year
2009-10, if he is (a) Resident (b) N.O.R. or (c) Non-Resident.
SOLUTION
Computation of Total Income of Sh. Rathnam for the Assessment year
2009-10.
SI. Resident Rs. NOR Non-
Income
No. Rs. Resident
Rs.
Profit from Business in Bangalore -
(i) 10,000 10,000 10,000
accrued in India
Income accrued in India, received in 4,000 4,000 4,000

(ii)
Japan ^£0^ V*1 3r w<u
Profit from Business in Canada but

(iii) 5,000 5,000 5,000
received in India
Income from House Property

(iv) 4,000 4,000 4,000
in Karachi but received in India.
25
Profit from business in England
(v) 20,000 20,000 ----
controlled from India.
(vi) Income from house property in 2000 ---- ----

America -accrued and received outside
India.
(vii) Past untaxed Income (not taxable) ---- ---- ----
Total Income 45,000 43,000 23,000
Illustration 5
The following are the incomes of Shri Krishna for the previous year 2008-
2009.
Rs.
(i) Profit from business in Dharwar 7,000
(ii) Income accrued in India but received in Italy 6,000
(iii) Profit from .business in England received in India 5,000
fiv) Income from House property in Africa received in India 4,000
(v) Profit from business established in Iran and deposited in a 3,000
bank there, the business being controlled from India.
(vi) Income from house property in Pakistan and deposited in a 2,000
bank there
(vii) Past untaxed foreign income brought into India during this 1,000
previous year
Compute the total income of Shri Krishna for the Assessment Year
2009 -2010 if he is :
(a) Ordinary Resident.
(b) Not Ordinarily Resident .
(c) Non-resident.
26
Solution
Computation of Total Income of Shri Krishna for the Asessment Year 2009-10
SI. Income Resident NOR Non-
No. Rs. Rs Resident
Rs.
I. Income received or deemed to be
received in India
(a) Profit from business in England but 5,000 5,000 5,000
received in India
(b) Income from house property in Africa 4,000 4,000 4,000
but received in India.
II. Income accruing or arising in India
(a) Profit from business in Dharwar 7,000 7,000 7,000
(b) Income accrued in India but received 6,000 6,000 6,000
in Italy
III. Income accruing outside India and
received outside India
(a) Profit from business in Iran but 3,000 3,000 ----
controlled from India
(b) Profit from House Property in 2,000 ---- ----
Pakistan
IV. Past untaxed income brought into
-----
India during relevant previous year ----- ----
(Exempted in all three cases)
Total Income 27,000 25,000 22,000
27
QUESTIONS
1. What are the different categories of assessees according to their
residential status? How would you determine the status of an individual?
2. Explain the conditions laid down for determining the residential status of
a firm and a company
3. What is the scope of total income of a person under the Income-Tax Act
1961?
4. Mr Lara, a British National, comes to India for the first time during 2003-
04. During the financial years 2004-05, 2005-06, 2006-07,2007-08 and
2008-09 he was in India for 55 days, 60 days, 80 days, 160 days and 70
days respectively. Determine his residential status for the Assessement
Year 2009-10. [Answer : Non-Resident]
5. From the following details calculate the total income of Mrs. Kamala,
ifshe is a) Ordinary Resident, b) Not Ordinarily Resident and c) Non-
Resident.
i) Dividend from Indian Company Rs.2,00,000
ii) Dividend from a foreign company Rs.2,50,000
iii) Income from business in Manchester but controlled from India
Rs.2,00,000
iv) Income from business in India but controlled from Bangaladesh
Rs.5,00,000
v) Income accrued in Iraq Rs.5,00,000, 1/5th received in India
(Answer : For OR, 14,50,000, For NOR Rs.10,50,000 For NR Rs.8,50,000)
28
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29
UNIT - II
Chapter-1
Income from Salary
1.1 Introduction
Tax is calculated on the total income of an assessee relating to the
relevant previous year. Section 5 of the Income-Tax act 1961 provides the basis
for the computation of total income which in turn depends upon the residential
status of an assessee. The first head of income chargeable to tax is “Income
from Salary”. Sections 15, 16 and 17 of the Act deal with the salary income
1.2 Head Salaries Defined
According to section 15, the following incomes are chargeable to tax under
the head salaries.
a) Any salary due from an employer or a former employer to an
assessee in the previous year whether paid or not;
b) Any advance salary received though not due; and
c) Any arrears of salary received if not charged to tax in the earlier
previous years.
1.3 Definition of the word ‘Salary’[Section 17(1)]
The term salary includes,
1. wages
2. any annuity or pension
3. any gratuity
4. any fees, commission, perquisites or profit in lieu of salary or in
addition to salary or wages
5. any advance salary
6. leave encashment or salary in lieu of leave
7. the annual accretion to the balance at the credit of an employee’s
recognized provident fund to the extent chargeable to tax, and
8. the taxable portion of transferred balance from unrecognized
provident fund to recognized provident fund.
1.4 Characteristics/Features of Salary
1. Employer, Employee relationship
If any income is to be taxed under the head ‘Salaries’, there should exist
the employer and employee relationship (Payer and Payee). Employer may be
an individual, firm, company, Government, Corporation and local authority.
30
The relationship of master and servant is the only test to establish the
relationship of employer and employee.
2. Salary from more than one employer
Any amount of salary received or receivable during the previous year
from one or more than one employer/source shall be taxable under this head.
3. Salary from present, past or prospective employer
Any salary received or due from the above employers is also taxable.
4. Salary received as Member of Parliament, MLA’s and MLC’s
Basic salary received by a Member of Parliament/MLA/MLC is not
taxable under the head salaries. It is taxable as Income from Other Sources.
5. Tax free Salary
Sometimes the employee receives tax-free salary, in the sense; the
employer pays full salary and also pays tax on such salary to the Income-tax
department. In such cases, income under the head salary is calculated taking
into account the amount of salary received by the assessee and the amount of
tax paid by the employer.
6. Receipts from persons other than employer
Any benefit or perquisite received by a person from persons other than
the employer would be taxable under the head ‘Income from Other Sources’.
7. Place of accrual of salary income
Salary accrues at the place where the services are rendered. But the
following are the two exceptions to this rule:
a) Pension payable to a person who has gone to foreign country for
permanent settlement is not deemed to arise in India.
b) Salary paid to Government servant, who is a citizen of India, for
rendering services outside India is deemed to accrue or arise in
India.
8. Salary received by a partner
Any salary, fee, commission or remuneration received by a working
partner from a firm assessed as firm is not taxable under the head ‘Salaries’ but
under the head ‘Profits and Gains’.
9. Payments received by legal heirs
Any compensation or gracious payment made to the widow or legal
heirs of a deceased employee is not taxable under the head salary.
31
10. Payment made after cessation of employment
Any payment made by an employer to his employee after the cessation
of the employment is taxable under the head salaries.
11. Advance salary received
In case salary is received in advance by an employee in the previous
year which is actually not due in that year, it shall be taxable in the year of
receipt.
12. Arrears of salary received
If an employee receives any arrears of salary in the previous year but
which relates to earlier previous years it is also taxable as salary income in the
year of receipt.
1.5 Computation of Salary Income
The following format can help a person to compute income under the
head salary.
Basic Items:
1. Basic Salary/Pay xxx
2. Advance salary and Arrears of salary xxx
3. Commission on turnover/profit xxx
4. Bonus[Gratuitous/Statutory] xxx
5. Fees xxx
Allowances:
1. Fully exempted allowances NIL
2. Fully taxable allowances xxx
3. Partially taxable allowances xxx xxx
Perquisites:
1. Taxable for all employees xxx
2. Taxable for specified employees only xxx
3. Exempted for all employees NIL xxx
Other Items:
1. Gratuity xxx
2. Pension xxx
3. Leave encashment xxx
4. Provident fund xxx
Gross Salary xxx
32
Deductions u/s 16:
(ii) Entertainment allowance xxx
(iii) Professional/Employment tax xxx xxx
-------
Income from Salary xxx
-------
1.6 Allowances [Section 17(3)]
Allowance is a fixed amount given regularly along with salary to an
employee to meet certain expenditures. They are divided into three
types.
1. Fully Exempted Allowances.
2. Fully Taxable Allowances.
3. Partially Taxable Allowances.
Chart Showing Different Kinds of Allowances
Fully Exempted Fully Taxable Partially Taxable
1. Foreign allowance 1 Dearness allowance /

(to Govt. servant Pay /Cost of living 1. House rent
for services outside allowance/Interim allowance
India) relief
2. Sumptuary
2 City/Capital
allowance to High 2. Entertainment
compensatory
court/Supreme Court allowance
allowance
Judges
3. Out-of-pocket or
Outfit allowance for 3. Project allowance 3. Hill allowance
NCC officers
4. Tribal
4. Allowance to 4. Fixed medical
area/Scheduled
employees of UNO allowance
area allowance
5.Tiffin allowance 5. Educational
allowance
6 Servant allowance 6. Traveling
allowance/transfer
allowance
7 Non-practicing
7. Hostel allowance
allowance
33
8 Warden ship 8 Conveyance
allowance allowance
9 Deputation/Substitute 9 Academic research
allowance allowance
10 Overtime allowance 10.Washing allowance
11 Marriage allowance 11.Helper allowance
12 Family allowance 12.Daily allowance
13 Lunch allowance 13.Uniform allowance
14 Dinner/Refreshment 14.Allowance for
allowance transport employees
15 Special allowance 15.Transport allowance
16 Holiday Trip 16.Underground
allowance allowance
17 Petrol allowance 17.High altitude
allowance
18. Highly active field
area allowance
19.Island duty
allowance
a. Fully Exempted Allowances
Fully exempted allowances should be ignored while computing salary income.
Fully Taxable Allowances
While calculating income from salary, fully taxable allowances should be
taken into account.
Dearness Allowance (D.A)/Additional Dearness Allowance/Dearness Pay
(D.P)/Interim Relief.
D.A is given to an employee to meet the increased cost of living. It may
be of two types. 1. D.A which enters into service/retirement benefits and
2.Which does not enter into service or retirement benefits. D.A which enters
into service or retirement benefits is taken into account while calculating
exemption for house rent allowance, recognized provident fund and gratuity.
But D.P always forms part of salary.
b. City/Capital compensatory Allowance - these are fully taxable.
c. Lunch/Tiffin/Marriage/Family/Deputation/Wardenship/Project/Over
time/Fixed medical allowance/Petrol allowance - these allowances are
also fully taxable.
34
d. Non-Practicing Allowance
This allowance is given to those doctors who are in Govt. service and
not allowed to do private practice. It is a fully taxable allowance.
1. Partially Taxable Allowances
These allowances are neither fully taxable nor fully exempted. Partially
taxable allowances include:
a. House Rent Allowance (HRA)
1. Employees living in rented houses:
Employees, who are receiving this allowance to meet the expenditure
on payment of rent in respect of the house occupied by them, can claim
exemption under section 10(13A) read with Rule 2A. Exemption can be
claimed up to the least of the following three items.
(i) Actual house rent allowance received;
(ii) Excess of rent paid over 10% of salary;
(iii) 50% of salary if the accommodation is at Bombay, Delhi,
Calcutta and Madras, and 40% of salary in case of all other
places.
Taxable HRA = Actual HRA received – Exempted HRA
Note: Salary=Basic Salary + D.A(Enters) + D.P + Commission on turnover.
2. Employees living in own houses or living in houses for which they are
not paying any rent:
For them, HRA received is fully taxable.
3. HRA received by judges of High Court/Supreme Court:
HRA received by them is fully exempted from tax.
Illustration 1
Mr. Anand is working in Chennai. He gets Rs.10,000 per month as salary,
Rs.6,250 as D.A which enters into pay and Rs.4,500 as HRA. He paid a rent
of Rs.5,000 per month. Find out the taxable portion of HRA.
Solution
Computation of Taxable HRA of Mr. Anand
Rs. Rs.
Actual HRA received 54,000
Less: Exempted u/s 10(13A)
(i) Actual HRA received (4500*12) 54,000
(ii)Excess of rent paid over 10% of salary
35
Rent paid (5000*12) Rs.60,000
Less 10% of salary
(Basic + D.A)
(10000*12) + (6,250*12)]
=1,95,000*(10/100) Rs.19,500 40,500
(iii) 50% of salary (Chennai) 97,500
Exempted HRA 40,500
------------
Taxable HRA 13,500
-------------
b. Entertainment Allowance (EA)
If entertainment allowance is received, it should be taken at gross value while
calculating gross salary. But a deduction u/s 16(ii) up to the least of the
following three limits can be claimed by a Government employee (both
Central/State).
i) Actual EA received;
ii) Statutory limit Rs.5000;
iii) 1/5th of Basic salary only.
Illustration 2
Mr.X, a Government employee gets Rs.1,20,000 per annum as basic pay,
Rs.68,000 as DA and Rs.45,000 as HRA. In addition, he receives Rs.30,000 as
EA. Calculate the amount of EA which can be claimed as deduction.
Solution
Computation of deductible EA of Mr.X
Rs.
1. Actual EA received 30,000
2. Statutory limit 5,000
3. 1/5th of basic pay (1/5 x 1,20,000) 24,000
Deduction u/s 16 (ii) is the least of the above three limits = 5,000
c. Allowances covered u/s 10 (14)
i) Helper Allowance/ Uniform Allowance/ Academic Research Allowance/
Conveyance Allowance/ Traveling, Transfer or Daily Allowance. These
allowances are exempted up to the actual amount spent.
ii) Any special allowance in the nature of Composite Hill Compensatory
Allowance / High Altitude Allowance / Uncongenial Climate Allowance /
36
Snow Bound Area Allowance / Avalanche Allowance Exemption
allowed up to Rs.300 pm. to Rs.7,000 pm.
iii) Any Special Compensatory Allowance in the nature of Border Area
Allowance Remote Area Allowance/Difficult Area Allowance/Disturbed
Area Allowance .
Exemption allowed up to Rs.200 pm. to Rs.1,300 pm.
iv) Compensatory Field Area Allowance
Exemption allowed up to Rs.2,600 pm.
v) Compensatory Modified Field Area Allowance
vi) Counter Insurgency Allowance/Compensatory Field Area Allowance
vii) Highly Active Field Area Allowance
viii) Underground Allowance given to coal mine workers.
Exemption allowed up to Rs.800 pm.
ix), Island Duty Allowance given to Armed Forces posted in Andaman and
Nicobar and Lakshdweep group of islands.
x) Transport Allowance
Any allowance given with effect from 1-8-1997 under the name of
Transport Allowance whether Govt. or private shall be exempted up to
Rs.800 pm. Excess, if any shall be taxable. But in case of handicapped
with disability of lower extremities or blind employee, it shall be
exempted up to Rs.1,600 pm.
xi) Tribal Area Allowance
This allowance is exempted up to Rs.200 pm. in the States of Madhya
Pradesh, Tamilnadu, Uttar Pradesh, Karnataka, Tripura, Assam, West
Bengal, Bihar and Orissa;
xii) Running Flight Allowance
It is granted to an employee of transport system. It is exempted up to
70% of such allowance or Rs.6,000 pm. whichever is less.
xiii) Children’s Education Allowance
It is exempted up to Rs.100 pm. per child for two children only.
xiv) Hostel Expenditure Allowance
37
Exempted up to Rs.300 pm. per child for two children only.
xv) Any Special Allowance
Any Special Allowance in the nature of counter insurgency allowance
given to the Members of Armed Forces operating in areas away from
their permanent locations for a period of more than 30 days shall be
exempted up to Rs.1,300 p.m.
1.7 Perquisites (Perks)
The term “Perquisites” means any amenity or benefit attached to an
office or position in addition to salary or wage. Perquisites may be given in
cash or in kind.
Types of perquisites[17(2)]
A. Perks exempted for all employees;
B. Perks taxable for all employees;
C. Perks taxable for specified employees; and
D. Perks which are exempted for employees but are taxable for employer
under Fringe Benefit Tax.
A. Perks exempted for all employees
1.Free medical facilities or reimbursement of medical facilities:
a) Full amount is exempted if treatment was taken from a hospital maintained
by Employer, or from a hospital maintained by Central, State Govt; local
authority or a hospital which is approved by Chief Commissioner of Income
Tax,
b) In case treatment is taken from a private hospital the benefit is exempted up
to Rs15,000. Excess if any is taxable.
c) If medical treatment is taken from outside India then the amount of expenses
paid or reimbursed by the employer is exempted up to the amount permitted by
Reserve Bank of India.
2. Free refreshments during office hours.
3. Free recreational facilities.
4. Provision of telephone whether basic or cellular exclusively for
office use.
5. Free meals provided in remote area or at offshore area.
6. Free education, training, refresher course for employees.
7. Leave travel concession.
8. Free ration to armed forces.
9. Perquisites allowed by Govt. to its employees posted abroad.
38
10. Rent free house given to an officer of parliament, a Union Minister,
and leader of opposition party.
11. Free conveyance provided to employees for office use
12. Free residence and conveyance facilities to judges of Supreme/High
Court.
13. Any amount contributed by employer towards pension or deferred
annuity scheme.
14. Employer’s contribution to staff group insurance scheme.
15. Computers, laptops given to an employee for official/personal use.
16. Transfer of a movable property [computer, car or electronic items]
more than 10years old without consideration.
17. Accident insurance premium paid by employer for his own benefit.
18. Interest free loan or loan at concessional rate of interest taken by
employee from employer if the amount of loan does not exceed
Rs.20,000 or loan is taken for medical treatment.
19. Value of any shares or debentures given free of cost or at
concessional rate to employees under stock option scheme.
20. Tax on perks paid by employer.
21. Rent free accommodation given in remote or offshore areas.
B Perks Taxable for all employees.
1. Rent Free House
a. Unfurnished House (owned by the employer)
i) Govt. Employees : The value of house is rent fixed at (licence fee)by the
government for such house.
ii) For Other Employees : The value of house is to be calculated in the
following manner.
i) in cities having a population of more than 25 lakhs - 15% of Salary
ii) in cities having population exceeding 10 lakhs but - 10% of Salary
not exceeding 25 lakhs
iii) in cities and towns the population of 10 lakhs or
less than 10 laksh -7.5% of Salary
b) Unfurnished House (Hired by the employer)
Value of rent free house is 15% of Salary or Actual rent paid by the employer
whichever is less.
39
c) If Hotel Accomodation is provided ( for more than 15 days on transfer
from one place to another)
Value of rent free accommodation is equal to 24% of salary (for the
period for which the accommodation is provided in hotel) or actual bill paid by
the employee whichever is less
d) Furnished House
In case, furniture is provided by the employer along with the house,
10% of cost of furniture is to be added with the value of unfurnished house. If
furniture is hired by the employer and provided free of cost to employee, then
actual hire charges are to be added.
Meaning of Salary : Salary includes
1. Basic salary, pay or wages
2. Dearness pay, dearness allowance if it enters into service benefits
3. Commission
4. Bonus
5. Fees
6. Value of all taxable allowances
7. Any other monetary payments, by whatever name called
8. Leave encashment of salary
Illustration 3
Mr X has furnished the following particulars.
i) Salary at Rs.10,000 p.m.
ii) Dearness Allowances (enters into pay) at Rs.500 p.m.
iii) Bonus Rs.8,400
iv) Entertainment Allowance Rs.600 p.m.
v) Cost of furnishing Rs.20,000
Calculate the value of rent free house if:
Case 1. Mr X is a Govt. employee and the rent of house fixed by the Govt. is
Rs.300 p.m.
Case 2. Mr. X is working in a private limited company (population below 10
lakhs) and Fair Rental Value of the house hired by the employer is Rs.3,000
p.m. He is also provided with hired refrigerator whose hire charges of Rs.600
p.m. are paid by the employer
Case 3. Mr. X is working in a private sector at Delhi (population above 25
lakhs) and rental value of the house not owned by employer is Rs. 3,000 p.m.
40
Solution
Calculation of value of rent free house
Case 1. Government Employee
The perquisite value of rent free house is the rent fixed by the Govt. for such
house.
Rs.
Rent fixed at Rs.300 p.m. (300 x 12) 3,600
Add : 10% of cost of furniture (20,000 x 10/100) 2,000
5,600
Case 2. Non-Govt. employee (city having population below 10 lakhs)
Value of rent free house hired by the employer
Perquisite value is 15% of salary or actual rent paid whichever is less
Salary of employee Rs.
Basic Salary (10,000 x 12) 1,20,000
Dearness allowance (500 x 12) 6,000
Entertainment allowance (600 x 12) 7,200
Bonus 8,400
1,41,600
15% of Salary (1,41,600 x 15/100) 21,240

Actual rent paid (3,000 x 12) 36,000
Whichever is less is perquisite value 21,240
of rent free unfurnished house
Add : 10% of cost of furnishings (20,000 x 10/100) 2,000

Actual hire charges of refrigerator (600 x 12) 7,200
Value of rent free furnished house 30,440
Case 3 : Non-Govt. employee (city having population above 25 lakhs)
Value of rent free house is 15% of salary or actual rent paid whichever is
less
Salary Rs.
Basic Salary ( 10,000 x 12) 1,20,000
Dearness allowance(500 x 12) 6,000
Bonus 8,400
Entertainment allowance (600x 12) 7,200
1,41,600
15% of Salary 21,240
Rent paid by the employer (3,000 x 12) 36,000
41
Whichever is less is the perquisite value of furnished house 21,240
Add : 10% Cost of furnishing (20,000 x 10/100) 2,000
Value of rent free furnished house 23,240
2. Concessional accommodation
If an employer has given a house to his employee but charges a part of
rent from the employee it is known as concessional rent accommodation. The
perquisite value of concessional rent accommodation is equal to value of rent
free accommodation (as calculated above)less the rent paid by the employee
for the house.
Value of rent free accommodation = xxx
Less : Rent paid by employee or charged by the employer = xxx
Value of concessional rent accommodation = xxx
3. Obligation of employee met by employer
If any of the following payments are made by employer on behalf of
employee, they are fully taxable.
a) Gas and electricity bills, children’s education bills issued in the name of
employee but paid by employer – actual expenses met by employer are
taxable. Reimbursement of tuition fee of children is also fully taxable
b) Income-tax, Professional tax of employee paid by the employer – actual
amount paid is taxable
c) Salary of domestic servants employed by employee but paid by employer
– actual amount paid is taxable
4. Life Insurance premium
Life insurance premium paid by employer on behalf of employee or any
member of his family on the Life Insurance Policy taken by the employee
including Unit Linked Insurance Premium (ULIP) if any, is fully taxable. But
accident insurance premium paid by employer for his own benefit is not
taxable.
5. Any other benefit given by employer
Any other benefit given by employer to meet his personal needs is fully
taxable on actual cost basis less any amount paid by employee.
C. Perks Taxable in Specified cases only
The following perks are taxable in the case of specified employees only.
A specified employee is one a) who is director of the company; or b) who has
substantial interest in the affairs of the company (holding at least 20% of equity
capital); or his monetary salary received in case is more than Rs.50,000 p.a.
42
1. Free domestic servants
If employer provides the free service of a sweeper, a gardener, a
watchman and a personal attendant, the taxable value of this perquisite shall be
the salary paid by the employer to these servants. In case any amount is paid by
the employee for these services, then the value of perquisite shall be reduced by
such amount.
2. Free supply of gas, electricity, water supply
In case employer has purchased gas, electricity, water from out side
agency, the taxable value of this perk shall be the amount paid by employer to
the out side agency. But if the employer provides these services from own
source, the value of perquisite is equal to the actual cost of these services to
employer
3. Free education to employee’s children.
If education is provided by employer in his own institution, then
taxable value of such education is calculated by deducting Rs.1,000 per month
per child from the cost of education in a similar institution.
4. In case of any other bill issued on the name of employer for personal
expenses of employee paid by employer is taxable.
D. Perks exempted for employees but taxable for employer under Fringe
Benefit Tax
The value of following benefits are not taxable in the hands of an
employee but taxable in the hands of employer.
1. Free or concessional tickets provided by the employer for personal journeys
of an employee or his family members.
2. Employer’s contribution to approved superannuation fund
3. Expenditure incurred by employer on sale’s promotion, employee’s welfare,
conveyance, boarding and lodging facilities, for providing car, use of phone by
employee and club facilities etc.,
1.8 Profits in lieu of salary
According Section 17(3), ‘profits in lieu of salary’ include,
i) the amount of compensation due to or received by an assessee from his
present or former employer at or in connection with a) termination of
employment or b) modification of the terms and conditions by employer.
ii) any payment due or received by the assessee from his present or former
employer or from provident fund or any other fund or any amount received
under keyman insurance policy including bonus.
43
iii) any amount due to or received whether in lump sum or otherwise by the
assessee either before his joining any employment with that person or after
cessation of his employment with that person.
1.9 Payments Exempted u/s 10
1. Leave Travel Concession [Section 10(5)]
Any amount received by an employee from the employer for proceeding
on leave any where in India or leaving to any place in India after retirement is
exempted up to the extent of an amount subject to rules and regulations framed
by the Central Government. But the exemption cannot exceed the actual
expenditure incurred on such travel and any amount given by employer to meet
incidental expenses is fully taxable.
Exemption limit
a) In case journey is performed by air – up to an amount not exceeding the air
economy fair of the National Carrier by the shortest route.
b) In case journey is performed by any mode other than by air – up to an
amount not exceeding air conditioned first class rail fare by the shortest route.
c) i) In case train route is not available – if recognised public transport system
exists, then exemption is allowed to an amount equal to first class or deluxe
class fare.
ii) If no recognised public transport system exists - exemption up to first class
train fare.
2. Perquisites and Allowances paid by Government to its employees posted
outside India [Section 10(7)]
Any perquisite or allowance given by Government to its employees who
are posted out side India is fully exempted from tax.
3. Gratuity [Section 10(10)]
Gratuity is a retirement benefit. It is paid at the time of retirement or
cessation of employment based on the service. For tax treatment, the employees
are divided into two types. a. Government employees b. Non-Government
employees.
1) Government Employees
Any death cum retirement gratuity received by employees of
Central/State Government or Local Authorities or Statutory Corporations or
employees working in Defence Services are fully exempted from tax.
44
2) Non-Government Employees
i) Employees covered under Payment of Gratuity Act 1972.
Any gratuity received by an employee who is covered by payment of
Gratuity Act 1972 is exempted up to the lease of the following.
1. Actual gratuity received
2. Notified limit Rs.3,50,000
3. 15 days salary for each completed year of service or fraction thereof in
excess of six months (7 days for employees working in seasonal factories).
Note: 1. Salary = Basic + DA.(whether enters or not)
2. Total number of days in a month is to be taken as 26.
Taxable Gratuity = Gratuity Received – Gratuity Exempted
ii) Other Employees
All other employees who receive gratuity can claim exemption up to the
least of the following.
1. Actual gratuity received;
2. Notified limit Rs.3,50,000;
3. ½ months average salary for every completed year of service
(Fraction of service to be ignored).
Note: 1. Average Salary = Last 10 months average salary immediately
preceding the month of retirement.
2. Salary = Basic Salary +DA (if it enters)+DP + Fixed % of commission
on turn over
4. Pension
It is a periodical payment received by the employee after his retirement. There
are two types of pension. 1. Uncommuted pension 2. Commuted pension.
1. Uncommuted pension or Monthly pension
It is a periodical payment received by the employee after the date of
retirement. It is the balance which he gets after commutation. The uncommuted
or monthly pension received by any employee whether Govt. or Non-Govt. is
fully taxable.
2. Commuted Pension
It is a lump sum amount received at the time of retirement and is a one
time payment. Commuted value of pension received by Government employees
(both Central and State), employees of Local Authorities, Statutory
Corporations, Public Sector Undertaking and Judges of Supreme Court/ High
Court is fully exempted from tax.
45
In case of other employees it is exempted up to the following amount.
a) If the employee receives pension along with gratuity - ⅓ of the full value of
pension is exempted
b) If the employee receives pension without gratuity, then ½ of the pension is
exempted.
5. Leave Encashment [Section 10 (10AA)]
1. Encashment of leave during service: If an employee encashes leave while
in service ,it is fully taxable in the year in which it is encashed.
2. Encashment of leave at the time of retirement or on leaving the service
a) If a Govt. employee (Central/State) receives any amount as cash
equivalent of leave salary to his credit at the time of retirement or on leaving
the service it is fully exempted from tax.
b) If the amount is received by any other employee, it is exempted up to
the least of the following amounts:
i) Actual amount received;
ii) 10 months average salary (average salary means average of
salary drawn by the employee during 10 months preceding the
date of retirement or on leaving the service);
iii) Notified limit Rs. 3,00 000
iv) Cash equivalent of leave salary to his credit at the time of
retirement / leaving the service.
3. In case the amount is give to legal heirs of the deceased employee, it
is fully exempted in his/her hands.
Note : 1. Salary means Basic Pay + D.A. (if it enters) + D.P. + Commission on
turn over.
2. Leave entitlement standing to the credit of the employee is to be taken
as 30 days for each completed year of service.
6. Compensation received on termination of employment [Section 10(10B)]
If an employee gets retrenchment compensation under the provisions of
Industrial Dispute Act, such compensation is exempted up to the least of the
following amounts.
i) Notified limit Rs.5,00,000;
ii) Actual amount received;
iii) Amount calculated under Industrial Dispute Act
46
7. Any amount received on Voluntary Retirement [Section 10(10C)]
a) If any payment is made to employees of public sector
undertakings/company/any authority established under Central, State or
Provincial Act/ local authority, co-operative society/any university/IIT/the
Central Govt./any State Govt., under a voluntary retirement scheme approved
by CIT, it is fully exempted.
b) If payment is made to other employees, it is exempted up to the least
of the following:
i) Notified limit Rs.5,00,000;
ii) 3 Months Salary for every one year of service;
iii) Actual amount received;
iv) Salary for number of months remaining service (it is to be
counted from the month of voluntary retirement to the month of actual
retirement.
Note : 1. Salary means Basic Pay + D.A. (if it enters) + D.P. +
Commission on turn over.
1.10 Deductions - Section 16
The income chargeable under the head ‘Salaries’ shall be computed
after making the following deductions from gross salary.
i) Entertainment Allowance - Section 16 (ii)
This deduction is available only in the case of Government employees and not
in the case of other employees. Deduction of entertainment allowance is
allowed up to the least of the following three limits.
a) a monetary limit of Rs.5000
b) 1/5 of basic salary and
c) Actual entertainment allowance received during the relevant
previous year.
ii) Professional Tax or Tax on Employment - Section 16 (iii)
Deduction is allowed in respect of any sum paid by an assessee on
account of tax on employment. In case, if the professional tax is paid by the
employer on behalf of the employee, the amount so paid should be included in
the Gross salary as a perquisite and then deduction u/s 16(iii) can be claimed.
1.11 Provident fund (PF)
In order to encourage saving habit among employees, provident fund
scheme was introduced. As per the scheme, a fixed amount is deducted from
the employee’s salary as his contribution to PF. The employer also contributes
the same amount to the fund. Interest on the PF balance is also credited to
47
employees PF account. Total amount (employee’s own contribution,
employer’s contribution + interest on the accumulated balance) is paid to the
employee on his retirement or on leaving the job. In case of death, it is paid to
his legal heirs.
Types of provident fund
1. Statutory Provident (SPF)
It is set up by the Government. Employees who are working in government
departments, local authorities, semi-Government concerns such as railways,
universities and educational institutions contribute towards the fund.
2. Recognised Provident Fund (RPF)
Contributions made to provident fund by employees of private sector concerns
which is recognised by the commissioner of Income Tax is called Recognised
Provident fund.
3. Unrecognised Provident Fund (URPF)
If the fund set up by the private sector concerns is not recognized by the
commissioner of Income-Tax, it is called unrecognised provident fund.
4. Public Provident Fund (PPF)
It is established for the benefit of general public to mobilise personal savings.
Any one can (whether salaried employee or self-employed person) open
account at state Bank of India (SBI) or its subsidiaries. The minimum amount
of contribution is Rs.500 and maximum is Rs.70,000 a year.
Taxability of PF
SPF RPF URPF PPF
1. Employee’s Full Full amount No Full amount

own amount qualifies to deduction qualities for
contribution qualifies deduction deduction
for u/s 80C u/s 8oC
deduction
u/s 80C
2. Employer’s Fully Up to 12% of Fully Not
contribution exempted employee’s exempted Applicable.
salary is There is no
exempted employers
balance contribution.
if any
48
received is
taxable.
3. Interest Fully Exempted up Fully Full
credited to exempted to 9.5% rate exempted exempted
PF of interest
4 Lump sum Fully If he retires When fund Fully

received on exempted after 5 years is closed exempted
retirement fully and amount
or on
exempted. credited is
termination
If he retires received.
within 5
years on his a) Interest
own accord. on
a) Interest on employee’s
employee’s own
own contribution
contribution is taxable
Up to the under the
head Income
exempted
from other
limit is
sources.
taxable.
b)Employer’s
contribution
b)Employer’s
and interest
contribution
on such
and interest
contribution
there on
are taxable
up to the
under the
limit
head salary.
exempted is
taxable under
the head
salary.
Note : Salary includes Basic Salary DA (if enters into service benefit, DP and
commission as turnover.
49
1.12 Deductions u/s 80C
Deductions u/s 80C shall be allowed only to an Individual and Hindu
Undivided Family.
Qualifying Amount (Q.A) for deduction u/s 80C
The amount saved or deposited in various approved saving schemes
qualify for deduction under sections 80C, 80CC, 80CCD and the maximum
amount of deduction allowed is Rs.1,00,000 p.a. Deductions u/s 80C include,
i) Employee/assessee’s own contribution to Statutory Provident
Fund/Recognised Provident Fund /Public Provident Fund/
Superannuation Fund – fully qualifies.
ii) LIC premium paid by employer or employee on the LIC policy
taken on the life of the employee, his spouse, children – actual
premium paid or 20% of sum assured whichever is less
qualifies.
iii) Amount deducted out of the salary of Govt. employee towards
deferred annuity – amount deducted or 20% of salary whichever
is less qualifies.
iv) Payment made towards Group Insurance – fully qualifies
v) Deposits made in Unit Linked Insurance Plan (ULIP) – fully
qualifies
vi) Amount invested in NSC – VIII issue, NSS 1992 – fully
qualifies
vii) Amount paid to LIC under Jeevan Dhara, Jeevan Akshay
policies- fully qualifies
viii) Any payment made to effect or to keep in force a contract of
deferred annuity - fully qualifies
ix) Amount invested in notified Pension Funds set up by Mutual
Funds or UTI – fully qualifies
x) Amount deposited with National Housing Bank (NHB) as
subscription to Home Loan Account Scheme or contributed to
any notified Pension Fund of NHB – fully qualifies
xi) Amount deposited with any authority engaged in Housing
Development or Town or Rural Development – fully qualifies
xii) Any subscription in deposit scheme of Central Government –
fully qualifies
xiii) Term Deposit with banks of not less than five years as per any
Central Government Scheme – fully qualifies.
50
xiv) Amount deposited in Equity Linked Savings Scheme – fully
qualifies
xv) Repayment of housing loan (loan not from friends or relatives)-
fully qualifies
xvi) Payment of tuition fees – it is allowed as deduction provided full
time education is given in India. The amount of deduction is
equal to the actual tuition fees paid for two children only.
xvii) Amount paid as subscription to equity shares or debentures
notified by CBDT-fully qualifies
xviii) Amount paid as subscription to units of Mutual Funds notified
by CBDT fully qualifies
xix) Investments in notified bonds issued by NABARD – fully
qualifies
xx) Five year deposits in Post Office Time Deposit and Senior
Citizen’s Savings Scheme – fully qualifies.
But if the amount is withdrawn before the expiry of five years, the
amount so withdrawn shall be deemed to be the income of the year in which it
is withdrawn
Illustration 4
Mr. X a resident of Mumbai receives Rs.72000 per annum as salary,
Rs.48,000 per annum as DA (which does not form part of salary) and 2%
commission on turnover of Rs. 1,00,000 achieved. During the previous year he
receives Rs.18,000 per annum towards HRA for which he pays Rs.4,000 per
month as rent. Calculate taxable HRA.
Solution
Calculation of Taxable HRA
Rs.
HRA received 18,000
Less Exempted u/s 10(13B) up to the least of the following
1. Actual HRA received 18,000
2. Excess of rent paid over 10% of salary
Rent paid (4000 x 12) 48,000
Less 10% of salary
(Basic salary + commission)
Rs.72,000 + (1,00,000 x 2/100) 7400 40,600
74000x 10/100
51
3. 50% of salary (74,000 x 50/100) 37,000
Exempted HRA 18,000
Taxable HRA Nil
Illustration 5
(a) Mr. Basu was an employee of Ray and Nath, after 42 years of service
retired on 28.2.2009. He was drawing a monthly salary (due on 1st of
every month) of Rs.5,000 in 2005, Rs.5,500 in 2006 and Rs.6,000 from
1.1..2008 onwards. On retirement he received a gratuity of Rs.
1,26,000. Determine the taxable amount of gratuity.
(b) Krishna was an employee of a public sector undertaking and retired
voluntarily from his service on 31.10.2008, when he was paid
Rs.4,00,000 under a scheme approved by the Central Govt. State
whether it is taxable or exempted.
(c) Mr.Rama was working with a Public Limited Company. He voluntarily
retired from the service of the company on 30.11.2008 after 24 years of
service. His employer paid him Rs.4,60,000 as lump sum amount. His
normal date of retirement is 31.12.2010. His salary at the time of
retirement was Rs.16,000. Find out amount exempted u/s 10 (10C).
(d) Mr Arun, a, State Govt. servant gets absorbed on 1.6.2008 in a public
sector undertaking. He exercise his option to receive a lump sum in lieu
of payment of pension and commutes I/3rd of his pension rights for
Rs.2,40,000 which he received on 30.11.2008. Is this receipt taxable, if
so to what extent?
Solution
(a) Determination of taxable gratuity of Mr Basu (Non Govt. Employee)
Rs.
Actual gratuity received 1,26 000
Less Exempted
Average salary : Rs.
Salary for 10 months due on
1.5.2008 to 1.2.2009 = @ 6,000 x 10 = 60,000/10 = 6,000
Limits :
(i) Notified limit 3,50,000
(ii) Half Month’s average salary for each completed
Year of service 6,000 x ½ x 42 1,26,000
(iii) Actual Received 1,26,000 1,26,000
52
-----------
Taxable gratuity Nil
------------
(b) Any amount received by a public sector employee on voluntary
retirement under a scheme approved by Central Govt. is fully exempted
u/s 10 (10C).
(c ) Calculation of exempted amount u/s 10 (10C)
It shall be exempted up to least of following :
Rs.
(i) Notified Limit 5,00,000
(ii) 3 month’s salary for every one year of service
(24x3x16000) 11,52,000
(iii) Salary for number of months of balance service
(25 x 16,000) 4,00,000
(iv) Actual amount received 4,60,000
Least of above is Rs.4,00,000 which is fully exempted.
(d) Commuted value of pension received by a State Govt. employee
is fully exempted u/s 10(10A)
Illustration 6
The following are the particular of the Income of Shri Arvind for the previous
year ending on 31st March,2009.
(i) Salary Rs. 12,000 per month
(ii) Contribution to recognised P.F. Rs. 1,610 per month
(iii) Employer contributes the same amount as the employee contributes
towards P.F.
(iv) Dearness Allowance Rs.300 p.m. It is not considered for computation
of his retirement.
(v) Interest credited to P.F. @ 13% is Rs. 13,000
(vi) Contribution to Public Provident Fund is Rs.9,000
(vii) Bonus Rs.3,000
(viii) His ration bill of Rs.2,000 p.m. is paid by employer
(ix) Premium of life policy is Rs. 12,000 on a policy of Rs. 1,00,000
(x) Deposited Rs.4,800 in equity linked saving scheme (ELSS)
(xi) Repayment to House Building Loan taken from HDFC Rs.20,500
during the year.
Find out taxable income of Shri Arvind for the assessment year 2009-10
53
Solution
Computation of Taxable salary Income of Shri. Arvind for the Assessment
Year 2009-10
Rs.
Salary (12,000 x 12) 1,44,000
D.A. (300 x 12) 3,600
Employer’s Contribution to R.P.F. (1,610x12) 19,320
Less exempted -12% of 1,44,000 17,280
——— 2,040
Interest credited to R.P.F. Balance @ 13% 13,000
Less exempted @ 9.5% (13,000x9.5/13) 9,500
——— 3,500
Ration Bill paid by employer 24,000
Bonus 3,000
-------------
Gross Salary Income 1,80,140
Less :
Deduction u/s 80C: Q.A.
i) Own contribution to R.P.F. 19,320

(ii) Amount deposited in PPF 9,000
(iii) Life Insurance Premium 12,000
(iv) Amount deposited in ELSS 4,800
(v) Repayment of House Building Loan 20,500
Qualifying Amount 65,62O
-------------
Taxable Salary Income 1,14,520
--------------
54
Illustration 7
1 Salary received 71,800
2 Income-tax deducted at source 1,200
3 Own contribution to R.P.F deducted from salary 8,000
4 Dearness allowance 50% of salary
5 Employer’s contribution to RPF 8,000
6 Interest on accumulated balance of RPF @9.5% 2,400
7 He is provided with a furnished free quarters for
residential
purpose in Calcutta owned by his employer, the fair rent
of
which is Rs.4,000 p.m. Cost of furnishing is Rs.45,000.
Gardeners salary of Rs.3,000 is paid by employer.
Population
of Calcutta is above 25 lakhs.
8 He is provided with a car of 1.5 Lt capacity by his
employer for
both personal and official use and expenses of
maintaining
and running the car with chaffeur are borne by employer
9 He has two life insurance policies; one on his own life
for a
policy value of Rs.80,000 on which annual premium
paid by
his employer is Rs.8,200; and the other on the life his
wife for a
policy value of Rs.20,000 on which premium paid by
him is
Rs.1,800
55
Calculate taxable salary income
SOLUTION:
Computation of Income under the head salary: Rs. Rs.
Salary received 71,800
Add: Income Tax deducted at source 1,200
Own contribution to RPF 8,000
81,000
Dearness allowance @ 50% Salary 40,500
Perquisite value of car (exempted) Nil
Value of rent free accommodation in Calcutta

Salary for this purpose = 81,000
15% of Salary (81,000 x 15/100) 12,150
Add 10% of cost of furnishings
(45,000 x 10/100) 4,500
16,650
Life Insurance premium paid by
employer 8,200
Employers contribution to RPF 8,000
Less ; Exempted up to 12% of
Employees salary (81,000 x 12/100) 9,720 Nil
Interest credited to RPF @ 9.5% 2,400

Less Exempted up to 9.5% 2,400 Nil
Salary income 1,46,350
56
Illustration 8
From the following calculate gross salary:
Basic salary 25,000 p.m
Bonus 15,000
DA ( entering into service benefits) 12,500 p.m
CCA 1,000 p.m
Project allowance 1,500 p.m
Medical allowance 200 p.m
Non-practicing allowance 300 p.m
Proctor allowance 400 p.m
Family allowance 500 p.m
HRA 5,000 p.m
EA 2,000 p.m
The employee pays a rent of Rs.7,250 p.m. He works in M Ltd situated in

Bhopal
He has achieved a turnover of Rs.1,50,000, out of which he is entitled to a
commission of 7.25%.
SOLUTION:
Computation of Gross Salary

Rs. Rs.
Basic Salary (25,000 x 12) 3,00,000
Bonus 15,000
DA (12,500 x 12) 1,50,000
CCA (1000 x 12) 12,000
Project Allowance (1,500 x 12) 18,000
Medical Allowance (200 x 12) 2,400
57
Non-practicing allowance (300 x 12) 3,600
Proctor allowance (400 x 12) 4,800
Family allowance (500 x 12) 6,000
HRA (5,000 x 12) 60,000
Less: Exempted 40,912
19,088
Entertainment allowance (2000 x 12) 24,000
Commission on turnover (1,50,000 x 7.25/100) 10,875
Gross Salary 5,65,763

Workings : Calculation of Exempted HRA.
1. Actual HRA received 60,000
2. Excess of rent paid over 10% of salary.
Rent paid 7250 x 12 = 87,000
Less 10% of salary = 46,088 40,912 least
3. 40% of salary 4,60,875 x 40/100 1,84,350
Exempted HRA 40,912
Illustration 9
From the following particulars calculate salary income of Mr Krisha working in
united Ltd in Andhra for the Assessment Year 2009-10
Rs.
Basic Salary 6,250 p.m
DA (forming part of salary) 3,000 p.m
Bonus 6,000
HRA 4,150 p.m (rent paid Rs.3,250 p.m.)
Academic Research Allowance 700 p.m (actual amount spent Rs.400
p.m)
Conveyance Allowance 350 p.m
Education Allowance 150 p.m (per child for 3 children)
58
Transport Allowance 900 p.m (for traveling between place of
duty and residence)
He is provided with a motor car of 1600 cc along with a chauffeur. The

employer
pays Rs.2,000 towards income tax. Employer and the employee contribute
13.75%
towards RPF. Interest @ 12% is credited for Rs.12,000.
Solution
Computation of salary Income of Mr. Krishna for the Assessment
year 2009-2010.
Rs. Rs.
Basic salary (6250 x 12) 75,000
DA (Enters) (3000 x 12) 36,000
CA (600 x 12) 7,200
Bonus 6,000
HRA received (4150x12) 49,800
Less exempted 27,900
21,900
Academic research allowance(700 x 12) 8,400
Less Exempted (Actual amount spent (400 x 12) 4,800
3,600
Conveyance allowance (350 x 12) 4,200
Less : Exempted full amount assumed to be spent 4,200
Nil
Education allowance (150x12x3) 5,400
Less Exempted (100 x 12 x 2) 2,400
3,000
Transport allowance (900 x 12) 10,800
Less Exempted (800 x 12) 9,600
1,200
Motor car (Taxable in the hands of employer) Nil
Income tax paid by the employer
(Obligation of employee - fully taxable) 2,000
Employer’s contribution to RPF
at 13.75% (1,11,000x13.75/100) 15,276
Less Exempted up to 12% of employee’s salary
59
(1,11,000 x 12/100) 13,332
1,944
Interest credited to RPF at 12% 12,000
Less : Exempted up to 9.5% (12000/12x9.5%) 9,500
------------ 2,500
-----------
Gross Salary 1,60,344

Less Deduction u/s 16
16 (ii) Entertainment allowance Nil
16 (iii) Professional Tax Nil Nil
Taxable Salary Income 1,60,344
Illustration
Mr Zakaria, staying at Chennai, receives Rs.12,500 monthly as basic salary,
Rs.1,500 as D.A. provided in terms of employment and 4% as commission on
turnover achieved by him. He is paid an house rent allowance of Rs.1,800 p.m.
The turnover achieved by him for the year is Rs.15 lakhs. House rent paid by
him is Rs.2,500 p.m. he received advance salary Rs.50,000/- in March 2009
relating to the period April to July 2009. determine the taxable quantum of
house rent allowance.
SOLUTION
Computation of taxable House Rent Allowance of Mr Zakaria
Actual House Rent allowance (1,800 x 12) 21,600
Exempt u/s.10(13A) to the extent of least of
Less :
the
following:
1. Excess of rent paid over 10% of the
salary
(30,000 - 22,800) 7,200
2. 50% of salary 1,14,000
3 Actual HRA received 21,600
7,200
Taxable HRA 14,400
60
Note 1 Though advance Salary is taxable in A.Y. 2009-10 on receipt basis, it
should not be considered in computing Salary for the purpose of calculating
exemption u/s10(13A)
2. Salary includes Basic Pay Rs.12,500 x 12 = 1,50,000
DA- Rs 1,500 x 12 = 18,000
3. Commission - 15,00,000 x 4/100) = 60.000
QUESTIONS
1. What Constitutes ‘Salary’?
2. Explain the features of salary.
3. What is a perquisite?
4. Briefly explain the perquisites taxable for specified employees only.
5. Explain various types of provident funds.
6. What are the deductions available under section 16, while calculating
income from salary?
7. Calculate Gross salary of Mr. Dilip, a government employee,
employed in Mumbai with the following emoluments.
Basic salary Rs. 16,000 per month
DA Rs. 6,000 per month(forming part)
CCA Rs. 1,400 per month
Deputation allowance Rs. 400 per month
Family allowance Rs. 650 per month
Holiday Trip allowance Rs. 250 per month
HRA Rs. 1,900 (Rs.2,000 per month paid as
rent)
EA Rs. 600 per month
Conveyance allowance Rs. 500 per month (actual amount
spent Rs.4,500)
Academic Research Allowance Rs. 1,000 per month (actual amount
spent Rs.2,500)
(Answer : Rs. 3,27,900)
61
8. From the following calculate Income from salary of Mr. Dave working in
Coimbatore, Tamilnadu in a private company.
Basic Salary Rs. 12,500 p.m
D.A Rs. 8,000 p.m
CCA Rs. 1,200 p.m
Special allowance Rs. 600 p.m
Servant allowance Rs. 250 p.m
Deputation allowance Rs. 100 p.m
Overtime allowance Rs. 650 p.m
Fixed Medical allowance Rs. 50 p.m
HRA Rs. 4,000 p.m
Tribal area allowance Rs.400 p.m. (Actual amount spent Rs.200 p.m.)
Conveyance allowance Rs.6,000 p.m.(Actual amount spent Rs.4,800
p.m)
20% of total DA does not enter into service benefits. He pays a rent of Rs.2,150
p.m. for the house where he resides. Apart from the above mentioned, he was
paid Rs.3,400 as bonus. He gets Rs.250 p.m. towards EA.
(Answer : Rs. 3,35,080)
62
UNIT - II
CHAPTER - 2
INCOME FROM HOUSE PROPERTY
2.1 Introduction
Sections 22 to 26 of the Income-Tax Act 1961 deals with house property
income. The income from houses, buildings, godowns and bungalows is
taxed under this head. The income charged under this head is the notional
income (not real) or the annual value of the property. According to section 22
of the Act, the annual value of the property consists of any building and the
land attached to the immediate vicinity of the building which is assessed to tax
and the assessee must be the owner of the property.
2.2. Points to be kept in mind while calculating income from House
Property.
1. Any Building or Land Appurtenant thereto
Income from any building or land situated in the vicinity of building
is taxable under this head. The term building includes residential
houses, office buildings, docks, warehouses and any structure having a roof.
2. Annual value
The term 'Annual value' is very important because it is the annual
value which is considered for computing income under this head and not the
rent received.
3. The Assessee should be the owner of the property
It is only the owner (may be legal or beneficial) of the house property
who can be taxed under this head of income.
4. Property should not be used for assessee's business or
profession
If the building is used by the assessee for his own business or
profession then income of such building should be taxed under the head profits
and gains of business or profession and not under the head income from house
property.
5. Dispute about ownership :
In case there is any dispute regarding the ownership of property, then
the person who receives rent is taxed till the dispute about ownership is settled
6. Income from sub-letting of house property
If a person hires a building and lets out full or part of the hired building
to some other person, it is called sub-letting. The income from sub-letting is
63
taxable under the head ‘Income from Other Sources' and not under the head
"House Property"
Illustration 1
Mr. A. had taken a building at a monthly rent of Rs.4000/- He has
sublet 50% of the building to Mr.B at Rs.2500 p.m. He incurred Rs.6,000 on
repairs and maintenance of the building, Calculate income from sub-letting
Solution
Income from Sub-letting (Income from Other Sources)
Rs. Rs.
Rent Received from Mr. B for the Sublet area at
Rs.2500 p.m. (2500 x 12) 30,000
Less: Expenses incurred (for sub-let portion)
Rent for 50% of the building - 4000 x
50/100 - 2000/month (2000 x 12) 24,000
Repairs & maintenance Expenses
full building 6,000
For Let out portion - 6000 x 50/100 3,000 27,000
Income from Sub-letting 3,000
7. Letting of building along with assets

If a building is let out along with furniture, plant, machinery and other
facilities, then income from such letting should be taxed as under.
(a) If income from building and income from other assets are
separable.
Income from building - Taxed as Income from House property
Income from other assets - Taxed as Income from Other Sources.
(b) If income from building and income from other assets are not separable.
Income from building and :Taxed as Income from Other Sources
Income from other assets
Note : If letting is the business of the assesee, then the income from
such letting is taxable under the head 'Business or Profession’.
8. Income from Hotel business / paying guest accommodation
If a person owns a building in the nature of a hotel, and lets it out to
another person for carrying hotel business / paying guest accommodation, then
the income from such building is taxable under the head income from ‘House
64
Property’
2.3. Exempted incomes from House property
Under section 10 of the Income Tax Act 1961, the following incomes
from house property are exempted from tax.
(1) Agricultural house property situated in the immediate vicinity of
agricultural land and used for agricultural purposes
(2) House property held for charitable purpose.
(3) Self occupied house but remains vacant due to employment elsewhere
(4) House used by the assessee for his own business or profession
(5) House property owned by a registered trade union.
(6) One self occupied house
(7) One house property owned by Ex-rulers of Indian states
(8) House property held by local authorities, scientific research institutions,
political parties, educational institutions and hospitals or medical institutions
2.4. Annual value :
According to section 23(1) of the Income Tax Act, Annual value means
"the sum for which the property might reasonably be expected to let from year
to year". The annual value of house property depends upon the prevailing local
conditions, the demand for the house, its municipal valuation, fair rental value
and the standard rent.
2.5. Meaning of Different Types of Rental values :
(1) Actual Rent :
It is the rent actually received by the owner of the house property from
the let out property.
(2) Real Rental value (RRV):
It is the difference between actual rent received and the cost of
common facilities provided for the houses such as lift and pump maintenance,
salary of common gardener, and electricity bill borne by the owner and
included in the rent.
(3) Municipal Rental Value (MRV) :
It is the value fixed for the house by the local authorities such as corporation,
municipality etc.,
(4) Fair Rental value (FRV):
It is the rent prevailing for similar type of house in the same or similar
type of locality.
65
(5) Standard Rent (SR):
It is the rent fixed under the Rent control Act.
(6) Expected Rental value (ERV):
The expected rental value shall be determined as under.
A. In case Standard Rent (SR) is not applicable. Compare
(i) Municipal Rental Value
(ii) Fair Rental Value and
(iii) Actual Rent received
Whichever is higher is the Expected Rental Value.
B. In case Standard Rent is applicable
Step :1 Compare
(i) Municipal Value and
(ii) Fair Rental Value
Take the higher value.
Step :2 Compare
(i) The Higher value (as per step 1) and
(ii) Standard Rent
Take the lesser value that is the Expected Rental Value.
Illustration 2
From the following figures, calculate the Expected Rental Value in each case
separately.
Rental value Case A Case B
Rs. Rs.
MRV 45,000 45,000
FRY 60,000 60,000
Standard Rent ------ 55,000
Solution
Calculation of Expected Rental Value
Case A : Standard Rent is not applicable.
Rs.
MRV 45,000
FRV 60,000
Whichever is higher is the Expected Rental Value (ERV) 60,000
66
Case B Standard Rent is not applicable.
Step 1 Rs.
MRV 45,000
FRV 60,000
Whichever is higher is taken 60,000
Step : 2 Higher value 60,000
Standard Rent 55,000
Whichever is less is the Expected
Rental Value (ERV)
55,000
2.6. Determination of Annual Value (Gross Annual Value or
Annual Rental Value)
A. Let out House property
1. House property is actually let out for full year and there is no
vacancy or unrealised rent.
Step :1 Compare
MRV with FRV
Whichever is higher is taken.
Step : 2 Compare Higher value (as per step1)
with Standard Rent
Whichever is less is the Expected Rental Value (ERV)
Step : 3 Compare
ERV with
Actual Rent Received
Whichever is higher is the Gross Annual value or Annual Rental value
(ARV) of the house property.
Illustration 3
Calculate ARV from the following in each case separately.
Rental Values A B C
Rs Rs Rs
MRV 60,000 48,000 36,000
FRV 75,000 60,000 45,000
Real Rent 69,000 54,000 40,000
Standard Rent Not applicable 72,000 42,000
67
Solution
Determination of Annual Rental Value
Case A: Since there is no standard rent applicable for the house, highest of the
following three values should be the Annual Rental Value of the house.
Rs
MRV 60,000
FRV 75,000
Real Rent 69,000
Whichever is higher is the ARV 75,000
Case B: Standard Rent is applicable
Step:1
MRV 48,000
FRV 60,000
Whichever is higher taken 60,000
Step:2
Higher Value 60,000
Whichever is less is the Expected Rental Value(ERV) 60,000
Step:3
ERV 60,000
Real Rent or Actual Rent 54,000
Whichever is higher is the Annual Rental Value(ARV) 60,000
Case C : Standard Rent is applicable
Step : 1 Rs.
MRV 36,000
FRV 45,000
Step : 2
Higher value 45,000
Whichever is less is ERV 42,000
Step : 3
ERV 42,000
Real Rent or Actual Rent 40,000
Whichever is higher is the ARV 42,000
68
2. House Property is let out and there is vacancy :
a) If House property was vacant for full year, the ARV is taken as NIL.
b) If house property was vacant for part of the year, then ARV is
calculated as under:
Step : 1
Compare MRV with FRV, take the higher value
Step : 2
Compare the higher value with Standard Rent, take the lesser
value which is the ERV
Step : 3
Compare Actual Rent for full year with ERV, take the Higher value
Step : 4
Deduct loss due to vacancy, balance is the ARV.
Illustration 4
Calculate ARV from the particulars given below.
MRV Rs.60,000 per annum
FRV Rs.66,000 per annum
Actual rent Rs. 7,000 per month
Standard Rent Rs.69,000 per annum
a) If house was vacant for full year during the previous year 2008-09
b) If house was vacant for two months during the previous year2008-09.
Solution
Computation of ARV
a) As the house property was vacant for full year its ARV is NIL
(b) Computation of ARV Rs
Step : 1 MRV 60,000
FRV 66,000
Whichever is higher 66,000
Step : 2 Higher Value 66,000
Whichever is less ERV 66,000
Step : 3 Actual Rent for full year
(Rs.7000 x 12) 84,000
ERV 66,000
69
Step : 4 Higher value 84,000 ----

Less Loss due to vacancy (Rs.7000 x 2) 14,000 ----
Annual Rental Value 70,000
3. House Property is let out and there is unrealised rent

Step : 1 Compare MRV, FRV take the Higher value
Step : 2 Compare the Higher value with Standard Rent, Take
the lesser value which is the ERV
Step : 3 Deduct unrealised rent from Actual Rent and
compare it with ERV, whichever is higher is the ARV.
Illustration 5
Calculate ARV from the particulars given below :
Actual Rent Rs. 5,000 p.m.

FRV Rs.60,000 p.m.
MRV Rs.55,000 p.m.
Standard Rent Rs.64,000 p.m.
During the previous year 2008-09 the assessee could not realise rent for two
months.
Solution
calculation of ARV
Step :1
Rs.
MRV 55,000
FRV 60,000
Step : 2
Higher Value 60,000
Step :3
ERV 60,000
Actual Rent for full year unealised Rent
70
(5000 x 12 ) 60000 - (5,000x 2 ) 10,000 50,000
whichever is higher is the ARV 60,000
4. If house property is let out for part of the year because it is either
purchased or constructed during the previous year 2008-09.
In such case, all rental values (MRV, FRV, Standard Rent and Actual Rent)
for that period for which the house property is in use is to be taken and
compared to determine the ARV.
B. Determination of ARV for Self Occupied House property
(1) Only one House under own occupation.
Annual value should be taken as NIL.
(2) More than one house under own occupation.
Annual value of one house (at the option of the assessee) is taken as
NIL and other houses are deemed to be let out.
(3) House property consists of various independent units and one is
under own occupation and others are let out.
Annual value of one unit is taken as NIL and other units are treated
as let out.
(4) If house property is partly let out and partly self- occupied.
(a) If units are inseparable, it is treated as one house and no
benefit of self- occupation is allowed.
(b) If units are separable - Annual value of self- occupied unit is
taken as NIL. Others are treated as let out.
5. House Property is let out for part of the year and self-occupied for part
of the year
Whole property is treated as let out house property. But actual rent is
taken only for number of months, the house property is actually let out.
6. House property used for own business or profession
Net Annual value is taken as NIL
2.7 Net Annual Value
Net Annual Value is calculated by deducting the amount of Municipal / Local
taxes (such as sanitation cess, sewerage tax, conservancy cess etc.,) levied by
local authorities and paid by the owner from the Gross Annual Value or the
Annual Rental value. No deduction is allowed for any tax paid by the tenant.
Computation of Net Annual Value
Rs
Gross Annual Value (ARV) xxx
71
Less. Municipal tax / Local tax
Paid by the owner xxx
-----------
Net Annual value xxx
-----------
Illustration 6
Mr. X is the owner of a house which is let-out at a monthly rent of Rs.500. The
municipal taxes for the house amount to Rs.600. Compute the Net Annual
value of the house, if
i) The municipal taxes are paid by Mr. X and
ii) 50% of the taxes are paid by the tenant.
Solution
Determination of Net Annual value
Case i Annual Rental value or Gross Rs
Annual value (Rs.500 x 12) 6,000
Less. Municipal taxes paid by the owner Mr. X 600
-----------
Net Annual Value 5,400
-----------
Case ii
Annual Rental value or Gross Annual value 6,000
Less Municipal taxes paid by Mr. X (50%) 300
50% of 600
-----------
Net Annual value 5,700
-----------
Note:
Since MRV and FRV are not available, Annual Rental Value is the amount of
Actual Rent received by Mr. X.
2.8 Deductions from House property u/s 24.
A. Self - Occupied House whose net annual value is taken as NIL
(i) Loan taken for repair or alteration or renovation of the house.
Actual interest paid or payable on loan during the previous year or Rs.30,000
p. a. whichever is less is allowed as deduction.
72
(ii) Loan taken for acquisition or construction of the house
(a) House is completed or loan is taken before 1.4.99.
Interest on such loan is allowed up to actual interest paid or payable
during the previous year + 1/5th of preconstruction interest or Rs. 30,000 p.a.
whichever is less.
(b) House is completed on or after 1.4.1999 and loan is
taken on or after 1.4.1999.
Interest is allowed as deduction up to actual interest paid or payable
during the previous year + I/5th of pre-construction interest or Rs. 1,50,000 p.a.
whichever is less.
Note: Pre-construction interest means interest for the period prior to the
completion of house. It is allowed to be deducted over a period of 5 years
starting from the year of completion of the house.
B. Let out House Property
In case of let out house properties, two deductions are allowed.
(i) Standard Deduction - A standard deduction of 30% of net annual
value (NAV) is allowed as deduction every year irrespective of the
expenditure.
(ii) Interest on loan taken to repair, renovate or purchase the house is
fully allowed as deduction including pre-construction interest. But
interest on mortgage and interest on delayed payment of interest are
not allowed.
2.9. Treatment of unrealised rent recovered (from Assessment Year 2002–
03 onwards)
It is deemed to be the income of the year in which it is recovered.
2.10 Arrears of rent received :
During the previous year, any arrears of rent of earlier previous years
are recovered, these are deemed as income from house property after allowing
30% as standard deduction.
2.11 Property owned by co-owners
If share of co-owners is determinate, the income of such house property
is calculated as one house and income is divided amongst the co-owners. But
relief can be claimed u/s 23 (2)
2.12 Loss from House property
The loss from house property can be set off from income under any
head in the same previous year. If any loss remains unadjusted, it can be carried
73
forward for 8 succeeding previous years and set off from income under the
head 'House property only'.
2.13 Negative Annual value
This situation arises when municipal taxes actually paid by the owner
are more than the Annual Rental Value. In such case, only one deduction of
interest on loan is allowed as per rules.
2.14 Deemed to be let-out Treated as let out house property
Illustration 7 Mr. Aanand owns a house property at cochin. It consists of 3
independent units and information about the property is given below:
Unit : 1 Own residence (self- occupied)
Unit ; 2 Let out
Unit : 3 Own business
Rs.
MRV of the house 1,20,000 p.a.
FRV of the house 1,32,000 p.a.
Standard Rent 1,08,000 p.a.
Unrealised Rent for 3 months
Rent 3,500 p.m.
Repairs 10,000
Insurance 2,000
Municipal Taxes 14,400
Interest on money borrowed for the construction
of the property 96,000
Date of completion 1.11.2003
Compute income from House property.
Solution
Computation of Income from House Property
Unit I : own residence
Rs
NAV for self-occupied unit NIL
Less Deduction - only one deduction of interest
on loan is allowed.
96,000 x 1/3 = Rs.32,000 or Rs. 1,50,000 32,000
whichever is less
Loss from self occupied unit 32,000
74
-32,000
Unit 2 : Let out
Rs.
MRV 1,20,000 x ⅓ 40,000
FRV 1,32,000 x ⅓ 44,000
Standard Rent 108000 x ⅓ 36,000

ERV 36,000
Actual Rent Rs.3,500/Month
(3,500 x 12= 42,000 - unrealised rent
& rent for 3 months (3500 x 3) (10,500) 31,500
Whichever is higher is ARV or Gross

Annual value 36,000
Less : Municipal taxes (14,400 x ⅓) 4,800
-------------
Net Annual value 31,200
Deductions u/s 24
Standard deduction - 30% of NAV
31,200x30/100 9,360
Interest on loan 96,000 x ⅓ 32,000
Loss from let out unit 41,360
-10,160
Unit ; 3 Used for own Business :
Annual value is taken as NIL NIL
---------
Loss under the head house property
42,160
Note : It is assumed that all the 3 units are independent units.
75
Illustration 8
From the particulars given below for two self occupied houses advise the
owner as to which house he should choose as self-occupied for the
assessment year 2008-2009.
Particulars House A House B
Rs. Rs.
Municipal Rental Value 24,000 p.a 30,000 p.a.
Municipal Taxes (50% paid) 2,000 p.a. 3,000 p.a.
Ground Rent 500 p.a 1,000 p.a
Fire Insurance Premium paid 1,000 p.a. 2,000 p.a
Interest on loan taken to construct
the house 15,000 p.a 18,000 p.a
Other Income 1,00,000 p.a.
SOLUTION
Option I House 'A' Self occupied and House 'B' deemed to be let
Rs. Rs.
House A – Self-occupied :
Annual Value is taken as NIL
Less Interest on Loan 15,000
Loss from Self-occupied house -15,000
House B - Deemed to be let out
M.R.V. 30,000
Less Municipal Taxes 1,500
-----------
Net Annual .Value 28,500
Deductions u/s 24 :
Standard Deduction :30% of NAV 8,550
Interest on Loan 18,000
26,550
Income from let out house -------------
1,950
-----------
Loss under the head House Property -13,050
76
Option II : House 'B' Self-occupied and House 'A' deemed to be let
House B - Self occupied Rs. Rs.
Annual value is taken as NIL
Less Interest on loan 18,000
Loss from S.O. House -18,000
House A- Deemed to be let:
M.R.V. 24,000
Less M.Taxes 1,000
-----------
N.A.V. 23,000
Deductions u/s 24 :
Standard Deduction : 30% of NAV 6,900
------------- 21,900
Income from let out House 1,100
------------
Loss under the head 'House Property' -16.900
-------------
To exercise the option to choose a self-occupied house, total income shall have
to be computed.
ption I Option II
Loss from House Property -13,050 - 16,900
Other Income 1,00,000 1,00,000
Total Income 86,950 83,100
From tax point of view option II should be exercised i.e. House 'B' as self
occupied and House 'A' as let out as he will have to pay less tax on total income
of Rs.83,100.
77
Illustration 9
Following are the particulars of house properties of Mr.S. for the previous
year 2008-09. Compute his income from house properties
House I House II
Construction Started on 31-03-1997 10-02-1995
Construction completed on 31-03-1998 01-06-1996
. Rs.
Rs.
Actual Rental Value 60,000 40,000
Municipal Valuation 50,000 36,000
Standard Rent 45,000 ----
Fair Rental Value 48,000 54,000
Municipal Tax 2,500 3,600
Interest on money
borrowed
to renovate the building 6,200 ----
Vacancy Period 2Months ----
Rent collection Charges 4,300 1,600
Both the above houses were let out for residential purposes. Insurance
premium of House I and Ground Rent or House II are still outstanding. The
tenant paid the municipal taxes of House II.
78
SOLUTION
Determination of Income from House Property
House A House B
(Let out) (Let out)
Rs. Rs. Rs. Rs.
Municipal valuation 50,000 36,000
Fair Rental value 48,000 54,000
Whichever is higher is 50,000 54,000
Standard Rent 45,000 N.A.
Whichever is less is ERV 45,000 54,000
Actual Rent 60,000 42,000
Whichever is higher is ARV 60,000 54,000
Less loss due to vacancy 10,000 ----
Annual Rental Value 50,000 54,000
Less Municipal Taxes 2,500 ----
Net Annual Value 47,500 54,000
Dedications u/s 24
(a) Standard deduction @ 30% 14,250 16,200
(b) Interest on money borrowed 6,200 20,450 - 16,200
Income from house property 27,050 37,800
Aggregate income from house A and house B (Rs.27,050+37,800) =

64850
Illustration 10
From the particulars given below compute income from house
property which consists of two independent units having ⅓ rd and ⅔ rd
area :
Date of Completion 1-11-2003
Municipal Rental Value Rs.96,000
Fair Rental Value Rs.84,000
Self-occupied ⅔rd portion
Let-out 1/3 portion from 1.4.2008 to
31.8.2008 @ Rs.7,200 p.m.
and self occupied from 1.9.2008 onwards.
79
Municipal Taxes Rs.6,000 p.a.
Fire Insurance Premium Rs.2,000 p.a.
Ground Rent Rs.4,000 p.a.
Interest on Loan Rs.7,500 p.a
Solution
Computation of House Property Income
As each portion is an independent unit, the income shall be computed
in the following manner :
A. ⅔ rd House (Unit-I) under own occupation Rs. Rs.
Net Annual value NIL
Deduction regarding interest on loan taken
(⅔ rd ofRs.7,500) 5,000
Loss from self-occupied unit (-) 5,000
B. ⅓ rd House (Unit-2) let out (No benefit of self-occupation)
MRV (96,000 x 1/3) 32,000
Actual rent received (for the period it is
actually let out) 36,000
FRV (⅓ ofRs.84,000)
rd
28,000
Whichever is higher is ARV 36,000
Less: Municipal taxes ((⅓ rd of Rs.6,000) 2,000
Deductions u/s 24 Rs.

Standard Deduction : 30% of NAV 10,200
Interest on loan(l/3''d of Rs.7,500) 2,500 12,700
Income from let out unit 21,300
Income from house property 16,300
Illustration 11
Mr. A owns 2 houses and both are used for own residence. The relevant
details for the previous year 2008-2009 are as follows.
Rs. Rs.
Municipal Valuation 24,000 42,000
Fair rent 34,000 36,000
80
Standard rent 30,000 45,000
Municipal taxes paid 6,000 8,000
Repairs 12,000 4,000
Insurance premium 12,000 6,000
Interest on loan (borrowed

12,000 60,000
on 31.3.1999)
You are requested to advise Mr.A. about treating one of the above
properties as self-occupied and the other as deemed to be let out in a
manner beneficial to him.
Solution
Computation of Income from House Property
Option I
House I - Self occupied
NAV NIL
Less Interest on loan borrowed on
31.3.1999- Actual interest Rs. 12000 or
Rs.30,000 (if borrowed before 1.4.1999)
Whichever is less 12,000
Loss from self occupied house - 12,000
House II - Deemed to be let out
Rs. Rs.
Municipal Value 42,000
Fair Rent 36,000
Standard rent 45,000
that is the Gross annual value 42,000
Less Municipal taxes paid 8,000
Net annual value 34,000
Less: Deductions U/s 24
Standard Deduction - 30% of
NAV 34000 x 30/100 = 10,200
Interest Loan (No limit
81
for let out or deemed
to be let out houses 60,000 70,200
Loss from Let out house - 36,200
Loss from House Property - 48,200
Option II
House-I Deemed to be let out
Rs. Rs.
Municipal Value 24,000
Fair Rent 34,000
Standard rent 30,000
Whichever is less is ARV
or GAV (Because both are self
occupied and there is no rent) 30,000
Less Municipal taxes paid 6,000
Net annual value 24,000

Less: Deductions U/s 24
Standard Deduction - Rs.
30% of Net Annual value
24,000 x 30/100 = 7,200
Interest on Loan 12,000 19,200
Income from House – I 4,800
House-II Self occupied
NAV NIL
Less- Deduction - only one deduction
i.e. Interest on Loan Actual interest
of Rs,60,000 or Rs.30,000 whichever is less 30,000 - 30,000
Loss from House property - 25,200
82
Suggestion
It is beneficial for Mr.A to treat House I as self-Occupied and treat House-II as
deemed to be let out because full amount of interest on loan of house-II can be
claimed as deduction. Hence Option I is beneficial
QUESTIONS
1. What do you mean by Annual Value?
Explain the fixation of Gross Annual Value.
2. Explain the deductions allowable u/s 24.
3. Mr. Dass owns a house at Vijay Nagar and submits the following particulars:
Rent received 1,75,000
Standard Rent 1,60,000
Municipal Valuation 1,70,000
Fair Rental Value 1,72,000
Municipal Taxes
12% of Municipal Rental Value + 2% of Municipal taxes as Sanitation
Surcharge
Compute Net Annual Value
(Answer : Rs.1,54,192)
4. Mr A, the owner of two houses, occupies one for his own residence and
the other he lets to a tenant at a monthly rent of Rs.500. The Municipal
Valuation of the house occupied is Rs.2,600 and of the other is Rs.5,200.
The Municipal Taxes of the two amounted to Rs.600. The other expenses in
respect of the two houses are as follows:
Rs.
Insurance Premium (for both houses) 1,200
Annual charge in respect of the house occupied 300
Ground rent for the house let 100
Repairs of the house occupied 700
Interest on loan taken to repair the two houses 400
Mr A also had income from other sources amounting to Rs.20,000 during
the year. Calculate Mr. A’s income from house property and total income.
(Answer : Rs.3,520 and Rs.23,520 )
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UNIT - III
CHAPTER 1
Profits and Gains of Business or Profession
1.1 Introduction
Profits & Gains of business or profession is dealt under sections 28 to
44 Income Tax Act 1961. This head is the major source of revenue to the
Government. Rules, regulations and methods of calculation under this head are
dealt in this chapter.
1.2 Meaning of the terms Business, Profession, and Vocation
Business
Business means any economic activity carried on for earning profit.
Section 2(3) has defined the term as "any trade, commerce, manufacture or any
adventure or concern in the nature of trade, commerce and manufacture".
It is not compulsory that transactions should be continuous and
permanent in nature. Any transaction with a motive of selling at profit is
included under this section.
Profession
Profession refers to those activities which requires purely intellectual
skills or manual skill controlled by the intellectual skill, Eg, Doctors, Lawyers,
Engineers, Auditors etc. Under section 2 (36) profession includes vocation.
Vocation
Vocation simply means natural ability of a person for some particular
work and he earns his livelihood from such ability. The practice of a religion is
vocation. Other examples- Journalist, Musician etc.
The terms Business, Profession or Vocation are treated in the same
sense for calculation of Income.
1.3 Charging provision [Section 28]
The incomes which are chargeable to income tax are
1. Business or professional income- Tax is chargeable to the person who
carries on business during the previous year. Only the owners of the business is
to be charged and he can carry the business through a manager or an agent or a
servant.
2. Compensation
i) Compensation or other payment received by any person in
connection with the termination of the management or the
modification of the terms and conditions of the
management of an Indian Company or a Company in India.
85
ii) Compensation received in connection with the termination of
the agency or the modification of the terms and conditions of
the agency.
iii) Compensation received by any person from the Government or
from the Government controlled company in connection with
vesting in the Government of the management of any property
or business.
3. Profit on sale of licence.
4. Cash assistance against exports under any scheme of the Govt. of India.
5. Any duty of customs or excise repaid or repayable.
6. Value of benefit or perquisite.
7. Remuneration and interest received by a partner from a firm.
8. Any amount received under agreement for not to carry on business.
9. Speculation Business - Transaction is periodically or ultimately settled
otherwise than by the actual delivery. This business shall be deemed to be
separate from any other business.
10. Profit earned from an illegal business but expenses are not allowed as
deduction
1.4 Deductions allowed - General Principles
Sections 30 to 37 of Income- Tax Act provide for the deductions to be
allowed for computing profit under the head business or profession. But this
list is not the final list, any other expenditure incurred for earning profit shall
be allowed as deduction.
i) Any expenditure made by a prudent man for his business shall be
allowed as deduction.
ii) Only those expenses which are not prohibited is allowed as
deduction
iii) Expenditure incurred prior to setting up of business cannot be
allowed as deduction
iv) Deduction is to be made from the business for which the expenses
were made.
v) The expenditure of a discontinued business cannot be charged from
the existing business. In case of a single transaction all expenses
whether incurred in that accounting year or earlier to that are allowed
as deduction
vii) Only expenses are allowed and the loss is not allowed as deduction
viii) Capital expenditure is not allowed
86
ix) Provisions and reserves are not allowed as deduction.
x) If any amount previously allowed as deduction is recovered will be
taxable in the year in which it is so recovered.
1.5 Specific Deductions from Sections 30 to 35
Section 30:
Rent, Rates, repairs and insurance for building used for the purpose of
assessee's business. If the business premises is owned by the sole proprietor, no
rent will be allowed as deduction, because the landlord cannot be a tenant also.
Section 31
Repairs and Insurance of machinery, plant and furniture used for the
business of the assessee is allowed as deduction. Repairs should not be of
capital nature.
Section 32
Depreciation of fixed assets calculated as per section 32 is allowed as
deduction.
Section 35
Expenditure incurred in the Field of Scientific Research is allowed as
deduction. Both revenue and capital expenses are allowed as deduction, but the
cost of land must be excluded.
Expenses such as purchase of material for research, salary paid to
workers engaged in research and other like expenses will be allowed as
deduction even it is incurred within three years immediately preceding the
commencement of his business. It will be allowed only if the research
laboratory is set up in his own business premises and the research is connected
with his business.
Similarly capital expenditure incurred within three years immediately
preceding the commencement of his business shall be deemed to have been
incurred in the current previous year and is allowed as deduction.
No depreciation shall be allowed as whole cost of the fixed asset shall
be allowed as deduction.
Amount given to a college, university, approved scientific research
association, National laboratory, Indian Institute of Technology, and A
specified person is entitled to a weighted deduction @ 125% of the amount
contributed. Any money contributed to a company engaged in the scientific
research and approved for this purpose is eligible for a weighted deduction @
125% of the amount contributed.
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Research carried on by the company may or may not be related to
Donor assessee's business.
Illustration 1
Discuss the admissibility of following items :
(i) Amount spent on acquisition of land for setting up of research
laboratory Rs.2,00,000.
(ii) Expenditure on construction of building for such laboratory-
Rs.3, 50,000.
(iii) A Limited Company gives Rs.80,000 to an approved National
Laboratory for carrying out research in an approved field of
research.
(iv) Amount of salary paid to staff engaged in research.
(a) Rs.60,000 piad before 1.4.2008 i.e., date of commencement
of business. Research was relating to assessee's own field of
business.
(b) Rs.42,000 paid as salary to staff engaged in such research
during 2008-09
(v) A computer costing Rs. 1,60, 000 was purchased with the object
of using it for research but on acquisition it was found that it can't
be used for research. Nevertheless it was installed in the business
office.
(vi) Mr. X gave Rs.60,000 to University of Bangalore for carrying out
research in an approved field of research and it is not related with
assessee's business.
Solution
(i) Expenditure incurred to acquire land for research is disallowed
u/s35(2)
(ii) Capital expenditure incurred on construction of building i.e. Rs.
3,50,000 is fully allowed u/s 35 (2). In case any amount remains
unadjusted, it can be carried forward till it is fully adjusted from
income under any head.
(iii) Amount given by a company to an approved National Laboratory for
carrying out research in an approved programme will qualify for a
weighted deduction at 125% and so is eligible for a deduction of
Rs.80,000 + 20,000 =Rs. 1,00,000.
(iv) (a) Rs.60,000 paid as salary to staff engaged in research is fully
allowed during previous year 2008-09, u/s 35 (1). Any expenditure
88
incurred during 3 years prior to year of commencement is deemed to
have been spent in the year in which the business commences,
provided research relates to assessee's own field of business,
(b) Salary of Rs.42,000 paid during 2008-09 is fully allowed u/s
35(1).
(v) The cost of computer can not be debited as capital expenditure on
research. But it will be treated as business asset as it was not used
for research and will qualify for depreciation u/s 32.
(vi) Any amount given to a university for carrying out research in an
approved field of research is eligible for a weighted deduction of
125% of amount given. Research may or may not be related with
assessee's business. Hence deduction allowed will be Rs.75,000.
Section 35A
Expenditure incurred on the acquisition patent rights or copy rights,
know-how, trademarks licences and other commercial rights shall be eligible
only for a claim of depreciation at 25%.
Section 35 AB
Expenditure on in-house research in Bio-Technology, drugs, computers
is eligible for a weighted deduction @ 150%. But this deduction shall be
allowed only to a company assesee.
In case profit is insufficient to absorb full amount of capital expenditure
then the same shall be allowed to be set off out of income of any other head
except salary income and if any part still remains unadjusted the same shall be
allowed to be carried forward and set off in future years.
Section 35 ABB
Expenditure for obtaining licence as well as to acquire licence to
operate telecommunication services will be allowed in appropriate fraction.
Appropriate fraction = Actual payment made x 1/ Number of previous
years for which the fee is paid
Section 35 AC
Expenditure on eligible projects or schemes shall be allowed as
deduction if the amount is to be given to a : (a) Public sector company or (b)
Local authority : or (c) An institution : or (d) An association which is approved
by the National Committee constituted by the Central Government.
Section 35 CC, 35 CCA and 35 CCB
Any amount given to an institution or association
(1) Whose object is to undertake any programme of rural development.
89
(2) Whose object is training of persons for rural development
(3) Any amount give Rural Development Fund set up and notified by
the Central Government, and
(4) The National Poverty Eradication Fund set up and notified by the
Central Government is allowed as deduction
Section 35 D
Amortization of certain preliminary Expenses: The allowable
preliminary expenses is divided into five instalments and the assessee shall be
allowed a deduction at an amount equal to one instalment (1/5) for each of the
five successive previous years. The maximum amount eligible for deduction as
preliminary expenses shall not exceed 5% of the cost of project in the case of
the individual assessee and 5% of 'capital employed' in the case of company
assessee.
Section 35 DD
Any expenditure incurred by a company on demerger or amalgamation
can be written off I/5th every year in 5 successive previous years.
Section 35 DDA
Any expenditure by way of payment of any sum on voluntary
retirement, I/5th of such amount will be allowed as deduction every year.
Section 35 E
Any expenditure relating to prospecting for, extraction or production of
any mineral shall be allowed as deduction equal to 1/10 of such amount. But
expenses of capital nature like plant, machinery etc., and cost of the site of the
source of any mineral and the cost of acquisition of the deposits of minerals
will not be allowed as deduction.
1.6 Other Deductions - Section 36
(1) Insurance premium paid against damage of stocks or stores.
(2) Insurance premium for cattle paid by a Federal Milk Co- operative
Society
(3) Insurance Premium for employees
(4) Bonus or Commission
(5) Interest on borrowed capital
(6) Discount on zero coupon Bonds
(7) Contribution to Provident and Superannuation Fund
(8) Contribution to Gratuity Fund
(9) Employee's contribution towards staff welfare scheme
90
(10) Loss of animal's if they are used otherwise as stock-in-trade
(11) Bad debts
(12) Reserve for bad debts of Banks, Financial Institutions and Industrial
Investment Corporation etc.
(13) Special Reserve created and maintained by Financial Corporations.
(14) Expenditure on family planning is allowed as deduction only to the
company assessee.
(15) Contribution made by a public financial institution to credit
guarantee trust fund for small industries.
1.7 General Deductions - Section 37
1. Entertainment Expenditure
2. Advertisement Expenditure
3. Expenses on Travel
4. Expenses on Guest Houses and Holiday Homes
5. Commission earned by the agents of Life Insurance Corporation, Unit Trust
of India, Post office or Mutual Funds.
Out of this commission, an ad-hoc deduction is allowed in the following
manner.
(A) If amount of commission exceeds Rs.60,000 in a previous year no
ad-hoc deduction is allowed.
(B) If amount of commission does not exceed Rs.60,000 in the previous
year.
(i) For agents of UTI, Post Office, and Mutual Funds an ad-hoc
deduction of 50% of such commission is allowed
(ii) For agents of LIC...
(a) If separate figures of first year and renewal commission are
available, an ad-hoc deduction of 50% of first year’s commission
and 15% of renewal commission subject to a maximum of
Rs.20,000/- is allowed.
b) If separate figures are not available - 33 1/3 % of commission
subject to a maximum of Rs.20,000 is allowed.
c) Out of bonus commission no ad-hoc deduction is to be allowed.
6. Legal expenses
7. Expenses incurred on raising loans
The following are some of the examples of expenses allowable as deduction u/s
37
91
1. All expenses and payments made for purchasing of raw materials,
manufacture and sale of goods.
2. All expenses in the nature of advertisement to push up sales and not
covered u/s 37(3)
3. Sales-tax and expenses incurred in relation to sales tax appeal.
4. Day-to-day expenses to carry on business.
5. Some subscription to be paid compulsorily and to protect the business
interests.
6. Reasonable expenses incurred on Diwali/Puja or other Festivals etc.
7. Reasonable expenses incurred at the time of Mahurat, Dewali, etc., But
no monetary ceiling has been fixed by Board.
8. Royalty paid in connection with the use of trade marks, patents,
copyrights, etc.
9. Commission paid to procure orders.
10. Compensation paid to an agent in connection with the termination or
modifications in the terms and conditions of his agency.
11. Installation expenses of new telephone and payment made under 'Own
Your Telephone' (O.Y.T.) scheme.
12. Expenses incurred to oppose the threatened nationalisation of the
business.
13. Legal expenses incurred to claim damages or compensation in case of
non-fulfilment of a contract.
14. Pension, gratuity and any other voluntary payment given to the
employees.
15. Gifts given to the employees but such gifts should not fall in the
category of perquisites.
16. Bonus paid on the basis of an industrial award.
17. Any compensation paid to an employee on the termination of his service
and also compensation paid to a managing agent on the termination of
his agency.
18. Insurance premium paid to get insurance of employees against injury,
accident while working and also any compensation paid to employees
due to such injury or accident. Payment received from insurance
company, if any, shall be treated as taxable income and credited to P &
L A/c.
19. Expenses incurred on employees welfare activities.
92
20. Embezzlement by an employee during the normal course of the
business.
21. Any payment given by the assessee to business rivals agreeing not to
compete with the assessee.
22. Any compensation payable in the usual course of business including
compensation paid as a result of negligence of the assessee or his
employees.
23. Any expenditure incurred or compensation paid in lieu of getting the
termination of disadvantageous trade contract or liability.
24. Penalty payable for delay in the execution of an order and even penalty
payable for delay in the payment of sales tax shall be treated as usual
business expenditure.
25. Any amount spent to make necessary alterations in the memorandum of
association and articles of association.
26. Any expenditure incurred on alterations and modifications made on
premises got on lease provided the expenses are necessary for the
proper utilisation of the premises.
27. Interest paid or payable on delayed payment of cash. This type of
payment is not considered as penalty.
28. Amount spent or payable to the Govt. in case of short-fall in the export
target.
29. Amount spent to preserve and protect business assets, interest and
reputation.
30. Amount paid to the landlord under a compromise to withdraw an
eviction suit.
1.8 Losses incidental to business:
There are certain losses, which do occur in the usual or normal working
of any business enterprises. To find out the real profits of the business, such
losses are to be taken into consideration. Only such losses are allowed to be
debited which are incidental to the carrying on of the business and which have
occurred in the usual course of the conduct of business. The loss must be real
one and not expected. Such loss must be of revenue nature. While computing
profit under this head capital receipts or capital losses are not taken into
consideration. Any loss, which is of accidental or exceptional nature is also not
allowed to be debited.
Following losses have been held to be business losses and can be debited to P
& L Account :
93
Illustrations of losses which are treated as business losses :
i) Loss by theft and embezzlement by employee.
ii) Loss of cash due to robbery while being carried by cashier for
disbursement.
iii) Loss of cash by dacoity in case of a banking company,
iv) Brokerage, commission and stamp duty incurred on rent deed for
hiring office premises.
v) Loss due to accidental fire in stock-in-trade,
vi) Loss caused by white ants,
vii) Loss caused due to theft of pledged goods
viii) Loss on sale of securities held by assessee as a trading asset.
ix) Loss due to fire of hired machinery.
x) Loss of stock-in-trade due to enemy action
xi) Loss of stock due to natural calamities.
xii) Loss due to fluctuations in the rate of foreign currency
(xii Loss due to breach of contract.
(xiv) Loss due to failure or insolvency of assessee's bank.
(xv) Loss due to forfeiture of security deposit
(xvi) Loss due to non-acceptance of delivery of goods.
Illustrations of losses which are not treated as business losses
i) Any loss which is not incidental to carrying on the business such as
withdrawal of cash from bank by a forged cheque and then if cash is
misappropriated by the employee.
ii) Loss incurred on transfer of business assets.
iii) Loss incurred due to sale of shares or securities held by the assessee
as investments.
(iv) Loss incurred due to closure of business
(v) Loss suffered due to infringement of any law of the land.
(vi) Any loss which the assessee is likely to suffer in future years
(vii) Any loss which does not belong to the current previous year i.e. past
losses
Expenses on civil defence measures to be treated as revenue expenditure.
94
1.9 Expenses Expressly Disallowed - Section 40
In the case of any assessee u/s 40 (a)
(1) Deduction of Tax at Source : Any interest, commission or
brokerage, fees for professional services or fees for technical services
payable, (a) outside India; (b) in India to a non-resident not being a
company or to a foreign company, on which tax is deductible at source
but has not been deducted or has not been paid to the Government, it shall
not be allowed to be debited.
(2) expenditure on Fringe Benefit Tax is not allowed as deduction.
(3) Any Tax levied on the profits or gain is not allowed as deduction. But the
amount spend on Income Tax Appeal etc., is allowed to be debited.
(4) Wealth tax levied on business assets only is allowed as deduction
(5) Salary payable outside India will be allowed as deduction only if tax is
deducted at source.
(b) In the case of any Firm u/s 40 (b)
(1) The payment of salary, bonus, commission or remuneration will be
allowed as deduction, only to the working partner which is authorised in
the partnership deed.
(2) The payment of interest to any partner which is authorised by the
partnership deed will be allowed as deduction up to 12%.
(3) The payment of remuneration to all working partners is allowed up to
limits as laid down u/s 44AA
1.10 The following expenses and losses are not allowed as
deduction :
(i) Drawings, private or personal expenses of the proprietors, partners etc.,
(ii) Any expenditure in the nature of capital expenditure
(iii) The amount paid as charity and presents. However, subscription is
allowed
(iv) Any provision or reserve except the special reserve of the approved
financial corporations.
(v) Past losses (i.e. loss of the past previous years) charged to profit and
loss account,
(vi) Income-tax, Wealth-tax and any other tax which is imposed on
income.
(vii) Any other expenditure which was incurred not necessarily,
wholly and exclusively for the purpose of the business or profession of
the assessee.
95
(viii) Any provision for bad debts, taxation etc.,
(ix) Depreciation in excess of the admissible amount under the provisions of
the Income-tax Act.
1.11 Disallowing of certain expenses under certain circumstances Section
40A
(i) Payment to relatives :
Payments made or to be made to the persons (relatives) or associate
concerns of the assessee may be disallowed, if in the opinion of the assessing
officer, such payments are considered to be excessive or unreasonable. Such
excess payment will be disallowed.
(ii) Payment exceeding Rs.20,000
To check the misutilisation of cash and to ensure that the payments
are made to genuine persons section 40A(3) was introduced. Under this clause
all payments exceeding Rs.20,000 are to be made only through a crossed
cheque or a crossed bank draft. If payment is made otherwise 100% of such
amount is to be disallowed.
1.12 Deemed Profits - Section 41
1. Deductions allowed earlier but recovered later on shall be deemed to be
profits and gains of business or profession in the year of receipt.
2. Balancing charge: In case any building, plant and machinery or furniture
owned by assessee is sold, demolished, destroyed or discarded during the
year and on which depreciation has been claimed by the assessee on
straight line method, the excess of amount realised over W.D.V. shall be
deemed as business profit but it shall not exceed depreciation allowed on
such asset.
3. Profit on sale of assets used for scientific research: Capital asset used for
scientific research and is sold without having been used for any other
purpose, excess amount (Sale price + deduction allowed earlier) over the
capital cost is taxable as deemed income of the year in which sale was
effected.
4. Bad debts allowed earlier but recovered later on shall be deemed profits
of the year in which they are recovered.
5. Amount withdrawn from special reserve shall be deemed as income
under the head. ‘Profit & Gains’ of the year in which the amount is
withdrawn. Any loss of a business incurred during the year in which it
was ceased to exist and which could not be set off against any other
income of that previous year shall be set off against the deemed incomes.
96
1.13 Valuation of stock
The correct valuation of stock is an important factor to arrive at the
correct profits. An assessee may adopt any of the following methods to value
the stock, (i) at cost price (ii) at market price (iii) at cost or market price
whichever is less. Once one method is adopted, the same is to be continued
from year to year and the asseessee cannot change the method of valuation to
suit his own purpose.
To remove the over-valuation or under-valuation of opening and closing
stock the following formula is used :
Overvaluation= value of stock x 100/ 100+(rate of over valuation)
under-valuation = value of stock x 100/100- (rate of under valuation)
If, Opening stock is under –Valued - profit is reduced by the amount. Opening
stock is over-valued -profit is increased by the amount. Closing stock is under-
valued-profit is increased by the amount. Closing stock is over-valued - profit
is decreased by the amount.
Different systems of accounting
1.14 There are two methods of Accounting. They are:
1. Cash system of accounting and
2. Mercantile system of accounting
1. Cash system of Accounting
Under this system all those receipts and payments, which are actually
collected and spent during the current previous year are considered irrespective
of the year to which they belong. 'Due' is not considered under this system.
2. Mercantile system of Accounting
Under this system all those receipts and payments which are paid or
due in the financial year will be considered to calculate net profit.
1.15 Deduction of certain payments only if actually paid - Section 43 B
Any payment of sales tax, employer's contribution to any provident
fund, superannuation fund or gratuity fund, or any other fund for the welfare of
employee, will be allowed only in computing the income of that previous year
in which such sum is actually paid by him. In case a deduction has already been
claimed on accrual basis in any earlier previous year, it will not be allowed
again in the year in which it is actually paid.
These Payments are
(a) any sum payable by the assessee by way of sales tax, duty, cess or fee by
whatever name called, under any law for the time being in force.
97
b) any sum payable by the assessee as an employer, by way of contribution
to any provident fund, or superannuation fund or gratuity fund or any
other fund for the welfare of employees.
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, i.e.
bonus or commission payable to employees.
(d) any sum payable by assessee as interest on any loan or borrowing from
any public financial institution or a State Financial Corporation or a State
Industrial Investment Corporation in accordance with the terms and
conditions governing such loans or borrowings.
Deduction regarding these payments shall be allowed if such payments are
actually made before filing of return u/s. 139(1).
(e) any sum payable by the assessee as interest on any term loan from a
scheduled bank in accordance with the terms and conditions of the
agreement governing such loan.
(f) Any amount payable by the assessee as an employer in lieu of any leave
at the credit of employee shall be allowed to be debited only if it is made
in accordance with the provisions of section 43B. In case deduction for
the above mentioned amount has already been claimed in any previous
year the same will not be considered for the deduction in the year in
which it is actually paid. [Section 43B Explanation 3B]. U/s 43B
(provisions) the above payments shall be allowed in the following
manner
(i) If these payments, as mentioned above, are actually paid by the end of
previous year i.e. 31st March, such payment shall be fully allowed.
(ii) If payments [as mentioned above at (b)] of provident fund or employees'
state insurance contribution is paid before due date prescribed under P.P.
Act or E.S.I. Corporation Act, such payment shall be fully allowed. In
case these payments are made after due date, these shall never be
allowed.
(iii) If payment [as mentioned at (a), (c), (d) and (e) above] are paid after 31st
March but before prescribed date of filing of return, it shall be allowed to
be debited in the year to which these payments belong. If it is paid after
prescribed date, the payment shall be allowed to be debited in the year in
which payment is made.
(iv) In case payments as mentioned above are made by cheque, the proof of
their encashment must be submitted within 15 days from due date /
prescribed date.
98
Illustration 2:
State the previous year during which the following expenses can be
debited:
(a) Sales tax relating to previous year 2008-09 Rs.20,000. Out of this amount
Rs. 10,000 was paid on 5.4.2009, Rs.5,000 on 15.7.2009 and Rs.5,000 on
1.12.2009. Date of filing of return is 31.7.2009.
(b) Bonus of Rs. 1,40,000 relating to the previous year 2008-09 was payable to
employees in December 2008 but was distributed in instalments on 1.12.2008
Rs.50,000 on 1.6.2009 Rs.50,000 and balance of Rs.40,000 was paid on
1.11.2009. The date of filing of return is 31.7.2009.
(3) The provident fund deducted by employer out of employee's salary for
March 2009 amounting to Rs.29,400 was paid to commissioner of Provident
Fund by cheque on 15.4.2009 but cheque was encashed on 2.5.2009. Due date
was 15.4.2009.
Solution
(a) U/s.43 B any amount of sales tax paid during the year or before due date for
filing of return is allowed to be debited in the same year to which it relates. As
such amount Rs.10,000 paid on 5.4.2009 and Rs.5,000 paid on 15.7.2009 can
be debited during the previous year 2008-2009. But amount of Rs.5,000 paid
on 1.12.2009 i.e. after due date of filing of return i.e.31.7.2009 can be debited
during the previous year 2009-10 only.
(b) As per above, the amount of Rs.50,000 paid on 1.12.2008 and Rs.50,000
paid on 1.6.2009 can be debited during 2008-09 but amount of Rs.40,000
paid on 1.11.2009 i.e. after due date of filing of return i.e. 31.7.2009 cannot
be debited during 2008-2009. It can be debited during the previous year
2009-10 only.
(c) Payment of provident fund of Rs.29,400 by cheque can not be debited
during the previous year 2008-2009 as cheque was not enchased within 15
days from due date.
CHART SHOWING COMPUTATION FOR PROFITS AND GAINS OF
BUSINESS OR PROFESSION
Computation of Business profits :
Balance as per P and L A/c Profit Amou

(+)Lo nt Rs.
ss (-)
I. Add expenses claimed but not allowed under the
Act.
99
(i) All provisions and reserves (Reserve for bad debts/
-
Depreciation / Income Tax etc) except creation of
reserve by financial corporations u/s36
(ii) All taxes (i.e., Income Tax, Advance Income Tax,

-
Wealth Tax etc. ) except Sales Tax, Excise duty
and Local taxes of premises used for business
(iii) Rent paid to self -

(iv) All capital expenses except on scientific research -
(v) All capital losses -

(vi) All charities and donations -
(vii) All expenses relating to other heads of income -
(e.g. Taxes on house property etc.,)
(viii) Cultivation expenses -
(ix) Any interest on capital unless the amount is borrowed -
(x) All personal expenses (Drawing etc.) -

(xi) Any depreciation if wrongly debited -
(xii) Gifts and presents (Non-advertisement) -
(xiii) Any type of fine or penalty -
(xiv) Any payment to a partner (In case of firms only by -
way of salary, interest, bonus, commission or
remuneration excess over prescribed limits)
(XV) Any salary or interest payable outside India unless tax -
is deducted at source or is paid according to the law
(xvi) Past losses (i.e. loss of the past years) -
(xvii) Any other expenditure which is not incurred according -

to the provisions of law
(xviii) Salary paid to self or any other member of family for -
casual help
(xix) Personal life insurance premiums -
(XX) Any amount invested in savings such as NSS, -
NSC, PPF etc.,
100
(xxi) Rent for residential portion -
(xxii) Speculation loss -
(xxiii) Bad Debt still recoverable -
(xxiv) Legal expenses on criminal case; or a personal -
case of employee
(xxv) Legal expenses on acquiring an asset - 1
(xxvi) Legal expenses on curing title of asset -
(xxvii) Loss by theft from residence -
(xxviii) Expenses on illegal business -
(xxix) Employer's contribution to unrecognized -
provident fund
(xxx) Difference in trial balance -
(xxxi) Difference due to under crediting of stock -
(xxxii) Cost of Patent rights being capital expenditure -
(xxxiii) Cost of Technical know-how being capital expenditure
(xxxiv) Preliminary expenses being capital expenses

Total of these items is added in the profit or is adjusted
out of the loss
A
II. Deduct (out of the amount arrived at (A) above) any

expenditure which is allowable under the Act, but has not been
debited to P and L A/c :
(i) Actual bad debts (not charged in P and L A/c) -
(ii) Depreciation (-do-) -
(iii) Any other expenditure incurred according to provision -

of law
(iv) Difference due to under debiting of stock (-)
Total of these is deducted from (A) above and we get (B)
101
III. Deduct out of the amount arrived at (B) above any income which
is either exempt or not taxable under this head:
(a) Incomes exempted from tax
(i) Post office saving bank interest
(ii) Agricultural receipts
(iii) Gifts from relatives
(iv) Income tax refund
(v) Bad debt recovered-disallowed earlier
(vi) Life Insurance Maturity Amount
(vii) Any capital receipt
(viii) Withdrawal from PPF
(b) Incomes taxable under other heads
(i) Part-time salary
(ii) Interest on Securities
(iii) Rent from House property Let
(iv) Capital gains
(v) Dividend, Bank interest, winnings from
Lotteries, race course etc.,
Total of these is deducted from (B) above and we get taxable profit from the
business.
Add : Income from any other business (Legal or illegal) to get income taxable
under the head Profits & Gains of Business or Profession.
Computation of Professional Income
The above-mentioned method is not suitable to compute professional income
because professional persons usually do not prepare profit and loss account.
They prepare Income and Expenditure Account or Receipts and Payment
Account. To compute the professional income, it is easier to take professional
receipts of the previous year and deduct out of these the professional expenses
incurred during that year. The following illustration can help a person to
compute the professional income of an assesee.
In case of Doctor or Medical Practitioner
Professional Receipts Amo Amt
(i) Consultation fees unt
-
(ii) Operation fees -
(iii) Visiting fees -
102
(iv) Sale of medicines -
(v) Gift from patients -
(because these are received as token of gratitude -
for professional services rendered)
(vi) Value of any perquisite received by such person -
(vii) Examiner's fees -

(viii) Nursing home receipts -
(ix) Any other professional receipt -
Total Receipts
Less : Professional Expenses
(i) Dispensary Expenses (i.e. rent, light, water charges, -
salary to staff, telephone expenses etc.)
(ii) Cost of Medicines

(a) If accounts are maintained on cash basis : Cost of -
actual medicines purchased during in previous year
(b) If accounts are maintained on mercantile basis :

Opening stock+New purchase-Closing stock
(iii) Depreciation on Surgical Equipment and X-ray -

Machines, etc., at prescribed rates
(iv) Cost of books for professional purposes -
(v) Motor car expenses : depreciation relating to professional -

work
(vi) Expenditure incurred to increase professional knowledge -
(vii) Nursing home expenses -
(viii) Any other expenditure incurred during the year - -

Professional Income --- ----
Professional Income In case of Chartered Accountant —

—
Professional Receipts Amo Amt
(i) Audit fees unt
-
(ii) Income from accountancy work -
103
(iii) Institute fees -
(iv) Examiner's fees -
(v) Gifts from clients, if any -
(vi) Consultancy Services -
(vii) Any other receipt -
— —
Total Professional Receipts

Less : Professional Expenditure
(i) Office expenses -
(ii) Institute expenses -
(iii) Cost of books -
(iv) Motor car expenses relating to professional work -
(v) Membership fees -

(vi) Depreciation on office equipment, car or scooter etc., -
(vii) Any other expenditure incurred to increase professional -

knowledge
(viii) Stipend to trainees -
(ix) Subscriptions -
(x) Dep. on office furniture -
Total professional expenses (-)

Professional Income -
Income of a Lawyer or an Advocate
Professional Receipts
(i) Practicing fees -
(ii) Legal fees -
(iii) Special commission -
(iv) Presents from clients -
104
(v) Examiner's fees -
(vi) Any other receipt -
---- -----
Total professional Receipts -
Less Professional Expenses
(i) Office expenses -
(ii) Salary of staff, if any -
(iii) Cost of books for professional purpose -
(iv) Depreciation of office equipment -
(v) Expenditure incurred to increase -
(vi) professional
Subscription knowledge -
(vii) Purchase of stamp paper and court fee -
(viii) Traveling expenses -
Total professional Expenses (-) -----
-----
Professional Income -----
-----
1.16 Depreciation
The Income Tax Act 1961 does not define the term "Depreciation". It is
very important item to calculate the income under the head Profit and Gains of
Business or Profession. Depreciation simply refers to decrease in value of asset
due to passage of time, wear and tear etc.,
Reason for allowing Depreciation:
1. To arrive at real business profit.
2. To determine the book value of an asset in a given period of time.
3. To know the real position of assets in order to arrange for its
replacements or renewal.
Conditions for Depreciation
1. Assets should be owned by the assessee.
2. Assets should be used for the purpose of business or profession.
3. Assets should be used during the current previous year.
4. No depreciation in the year of sale of asset is charged.
105
5. Depreciation is allowed on the basis of written down value of the asset.
But in case of assets engaged in generation or generation and
distribution of power, the assessee can opt for straight line method.
6. Full particulars of the asset, must be furnished to the A.O.
Types of Assets
There are two types of assets.
1. Tangible assets
2. Intangible assets.
1. Assets like plant, machinery, furniture, building and electrical / electronic
items are tangible assets.
2. Assets like patents, know-how, trade marks, franchises, and other business or
commercial rights are intangible assets. Any asset, which cannot be seen and
touched come under this category.
Block of assets
Block of assets refers to those assets, which comes under the same
category with the same rate of depreciation.
Example
10% Block – Assets Rate of Depreciation
Non-Residential Building 10%
Furniture and Fittings 10%
Actual Cost
Depreciation is calculated on actual cost of assets. Actual cost means
cost of assets actually met by the assessee. Under Section 43(1) actual cost
means actual cost of the asset to the assessee reduced by that portion which has
been met directly or indirectly by any other person or authority. For example,
subsidy or incentive received to purchase the asset.
In case any part of the cost is met by consumers (e.g. cost of service
lines of an electricity supply company met partly by consumers) the actual cost
shall be the cost of asset less amount paid by consumers.
Assets acquired by way of gift or inheritance:
The actual cost as reduced by the depreciation till the date of transfer as
if it was only one asset of the block is the actual cost.
Transfer of asset to reduce tax liability and re-acquired. If it was satisfied
that the main purpose is to reduce tax liability, the assessing Officer will
determine the actual cost and with regard to re-acquisition the actual cost to the
assessee shall be,
106
(1) actual cost as reduced by any depreciation claimed up to 31.3.88 and
(2) any depreciation claimed on such asset after 3.1.88 as if it was only
one asset of the block.
OR
the actual price at which asset is reacquired which ever is less.
Illustration 3
Mr. Gupta who is running a factory since 2004, purchased a machine on
30.11.2007 for Rs.2,00,000 and spent Rs.24,000 on its installation. It was used
for his own business till 1.5.2008 on which date he sold it for Rs.1,20,000. He
repurchased it on 1.10.2008 for Rs.3,20,000. Determine the actual cost and
depreciation admissible for the year ending 31.3.2009. Rate of depreciation is
15% in the previous year 2007-08 2008-09.
Solution Computation of depreciation:
Rs.
P & M 25% Block
Actual cost of P& M M on 30.11.2007 2,00,000
Add: Expenses on installation
24,000
--------------
Cost on 31.3.2008 2,24,000
Rs.
Depreciation @ 15% for half year
(2,24,000 x 15% x ½) 16,800
Additional depreciation
@ 10% (i.e. for half year) 22,400
------------ 39,200
------------
WDV on 1.4.2008 1,84,800
The sale made by Mr. Gupta is to be ignored
as it was made with intention of charging higher
depreciation. As such cost u/s 43(i) exp. 3
on 31.3.09 shall be same as WDV on 1.4.2008 27,720
-------------
Depreciation on 31.3.2009 @ 15% 1,57,080
WDV on 1.4.2009 --------------
107
Actual cost to include certain expenses
1. Cost paid for acquiring the asset.
2. Cost of installation
3. Expenses on insurance, freight, loading and unloading
4. Expenses on modifications and repairs incurred before the actual use of
asset
5. Expenses on salaries, rent, lighting etc., relating to the period before
production.
6. Interest paid in connection with purchase of asset and bank charges
Methods to calculate Depreciation
1. Block of Assets Depreciation is charged on block of assets and not on
individual assets
2. Depreciation is calculated on written Down value on Actual cost.
3. Full Depreciation is allowed if asset is installed and used for 180 or
more than 180 days and half year's depreciation is allowed if installed
and used for less than 180 days.
4. If asset was acquired in any previous year earlier to the current previous
year, but is put to use during the current previous year, the condition of
180 days shall not be applicable. It shall be eligible for full year's
depreciation even if used for less than 180 days.
5. Depreciation is only a book entry which is passed on the last day of the
year. If any assets are sold during the year, such assets will not be with
the business, so depreciation cannot be charged on the assets which are
not in existence at that time.
Chart for calculation of Depreciation:
Written down value of assets as on 1.4.2009 xxx
Add cost at asset purchased during the year xxx
---------
Less money received in respect of the asset which is sold,
discarded, demolished or destroyed during the current xxx
previous year ---------
Value on which depreciation should be calculated xxx
---------
Additional Depreciation (sec 32 (1) (iiA)]
With effect from assessment year 2006-07 an additional depreciation @ 20%
of actual cost of P & M is allowed if following conditions are fulfiled :
108
(a) The assessee is engaged in the business of manufacture or production of
any article or thing or goods.
(b) In case any new plant and machinery is acquired and installed on or after
1.4.2005, it shall qualify for additional/initial depreciation. In case new
plant and machinery is acquired before 1.4.2005, but installed on or after
1.4.2005, then additional depreciation is not available.
(c) It is allowed in addition to normal depreciation and shall be taken into
consideration for calculating written down value.
(d) To claim additional depreciation @ 20% of actual cost the condition of
use for 180 days during the relevant previous year shall be applicable for
this depreciation also. If used for less than 180 days additional
depreciation shall also be allowed @ 10% (i.e. for half year)
(e) The plant and machinery is new and it has not been used earlier either in
India or outside India.
(f) The plant and machinery is not eligible to be written off @ 100% of its
actual cost in any one previous year.
(g) The plant and machinery is not in the nature of office appliances or road
transport vehicles.
(h) The return of income must be accompanied by the details of plant and
machinery and expansion of installed capacity.
The return of income must be accompanied by a report by the chartered
accountant that the deduction has been correctly claimed.
Additional depreciation is not allowed in case of following assets
(i) Ships and aircrafts
(ii) Old plant and machinery used either in India or outside India by any other
person.
(iii) Any plant and machinery installed in office premises, residential
accommodation and guest house.
(iv) Office appliances or road transport vehicles
(v) Any other plant and machinery the whole of cost of which is going to be
debited to his profit and loss account by way of depreciation or otherwise
in any one previous year.
Illustration 4:
The following is the Profit and Loss A/c of Robert on the basis of which
compute his gross total income for the Assessment Year 2009-10:
109
Rs. Rs.
Salaries and Wages 12,000 Gross Profits 48,200
Rent, Rates and Taxes 3,200 Rent from house Property 6,000
Trade Expenses 1,450 Dividend from an Indian 2,400
Co
Advertisement 950
Household expenses 3,500
Discount and Rebate 1,250
Postage and Stationery 275
Fire Insurance Premium 300
(Let out house property)
Reserve for Bad Debts 1,000
L.I.C Premium 1,000
Donation to an approved 1,000
school
Income-Tax 3,300
Repairs (House Property) 500
Audit Fees 300
Loss of Stock-in-trade 1,000
Depreciation 1,000
Interest on Capital 200
Net Profit 24,375
56,600 56,600
Additional information:
(1) Depreciation allowable is
Rs.500
110
(2) He owns another house which is self-occupied and for which he has paid
Rs.12,000 as interest on loan taken for its repairs.
SOLUTION
Computation of Business Income for the Assessment Year 2009-10

Rs. Rs.
Net Profit as per P & L A/c 24,375
Household expenses 3,500
Fire insurance Premium of House 300
Reserve for bad debts 1,000
Life Insurance Premium 1,000
Donations 1,000
Income Tax 3,300
Repairs of house property 500
Depreciation 1,000
Interest on Capital 200
11,800
36,175
Less: Incomes credited but not treated under this head:
Rent from house Property 6,000
Dividend from an Indian Company 2,400
8,400
27,775
Less: Allowable business expenses:
Depreciation 500
Business Income 27,275
Rs.
111
House property:
A.Let out - ARV 6,000
Less Standard Deduction: 30% of 1,800
NAV
B. Self-occupied - ARV NIL
Loss -12,000
Loss from House Property -7,800
Income from other sources
Dividend [Exempted] NIL
Gross Total Income 19,475
Illustration 5
From the following Profit and Loss Account of Sri Rama a sole trader ompute
his Business Income for the Assessment year 2009-10
Rs. Rs.
To General expenses 18,000 By Gross Profit 89,000

To Staff Salaries 7,000 By Bad Debts recovered 1,000
To Bad Debts 3,000 By Income-tax refund 4,500
To Depreciation 4,000 By Dividend on Shares 8,000
To Advertisement 5,000 By Dividend on units 5,000
of UTII
To Income-tax Appeal 11,000
To Fire Insurance Premium 2,000
on Stock
To Donation to National 7,000
Defence Fund
To Patents purchased 10,500
To Audit Fees 1,000
112
To Provisions for doubtful 3,800
debts
To Life Insurance Premium 5,200
To Net Profit 30,000
1,07,500 1,07,500
Other Informations:
(i) Patents are purchased in the previous year.
(ii) Bad Debts recovered is allowed earlier
(iii) Depreciation on assets other than patents is Rs.4,800
SOLUTION
Computation of Business Income of Sri Rama
Rs.
Rs.
Net profit as per P & L A/c 30,000
Add: Inadmissible deductions:
Depreciation 4,000
Donation to N.D.F 7,000
Patents purchased 10,500
Provision for doubtful debts 3,800
Life insurance premium 5,200
30,500
60,500
Less: Incomes credited but not treated under this head
Income tax refund 4,500
Dividend on shares 8,000
Dividend on units of UTI 5,000
17,500
43,000
113
Less: Allowable business deductions:
Depreciation 4,800
Dep. on Patent rights [25% of 10,500] 2,625
7,425
Business Income 35,575
Illustration 6:
Ram Prasad is a registered medical practitioner. He has prepared the following
Income and Expenditure Account for the year ending 31st March 2009. You are
required to prepare a statement showing his income from profession:
Income and Expenditure Account
Rs. Rs.
Household Expenses 20,000 Consultation Fees 10,000
Car purchased 30,000 Visiting Fees 20,000
Traveling Expenses 4,000 Gains on Race (gross) 10,000
(personal)
Charity & Donations 1,000 Share in sale proceeds of an
Income Tax 2,000 ancestral house 34,000
Salaries 8,000 Profit on sale of securites 6,000
Gift to daughter 7,000 Dividend on units (gross) 5,000
Establishment Expenses 1,000 Interest on P.O Savings Bank 600
Surgical Equipment 4,000 Gifts from Father-in-law 2,000
Books 2,000 Bad Debts recovered (Not
Life Insurance Premium 2,000 allowed in earlier year)
Wealth-Tax 1,000 2,000
Interest on Capital 1,000 Interest on Fixed Deposit 1,300
Surplus 7,900
90,900 90,900
114
Rate of Depreciation allowable on car is 15% and surgical equipment is at
15%. In case of books for profession the ate of depreciation is 60%
Rs. Rs.
Preofssional Receipts
Consultation Fees 10,000
Visiting Fees 20,000
30,000
Less: Professional Expenses
Depreciation on car ( 30,000 x 15/100) 4,500
Salaries 8,000
Establishment expenses 1,000
Depreciation on surgical equipment
(4,000 x 15/100) 600
Depreciation on books
(2,000 x 60/100) 1,200
15,300
Professional Income 14,700
Illustration 7:
Mr Kedambi an advocate, furnishes the following receipts and payment for the
year 2008-09
Receipts and Payments A/c
Rs. Rs.
To Balance b/d 6,540 By Rent 2,400

To Legal Fees 84,400 By Telephone 3,000
To Salary (as a part -time By Salaries 2,400
law lecturer) 3,600
115
To Interest on debentures (Not- 2,700 By Subscription to 240
listed) law Journal
To Gifts from clients 10,000 By Traveling 560
To Rent 6,000 By Office expenses 600
To Interest on foreign security 8,000 By Purchase of stamp
To Refund of Company 2,000 paper and court 1,600
Deposits fee
stamps
By Interest on loan 870
By Donation to a 5,000
school
By Income Tax paid 8,420
By Municipal Tax 600
By LIC premium 6,000
By Wealth Tax 1,600
By Balance c/d 89,950
1,23,240 1,23,240
(a) The loan was borrowed for constructing his residential house. Its rental
value is Rs.300 per month.
(b) School is recognized for I.T purposes
(c) Gifts from clients include Rs.2,000 received from his father. Compute the
professional income.
SOLUTION
Computation of Professional Gain

Rs. Rs.
Professional Receipts
Legal fees 84,400
Gifts from clients [10,000 - 2,000 8,000
116
(from his father)]
92,400
Less : Professional Expenses
Rent 2,400
Telephone 3,000
Salaries 2,400
Subscription to law journals 240
Traveling 560
Office Expenses 600
Purchase of stamp paper & fee 1,600
10,800
Professional Gain 81,600
QUESTIONS
1. What do you understand by the terms ‘Business’ and ‘Profession’?
2. Briefly explain the admissible deductions under sections 30-35
3. What are deemed profits u/s 41?
4. Write in brief the new method of charging depreciation.
5. From the following particulars, compute the business income of
Mr. R. Swamy.
Rs. Rs.
To Salaries 90,000 By Gross Profit 3,50,000
" Rent and Taxes 20,000 " Dividend 4,000
" Service Charges 4,000 " Bad debts recovered
" Legal expenses 5,000 (allowed earlier) 4,400
" Reserve for Income-tax 6,000 " Interest from Post
" Depreciation 12,000 Office Savings Bank 1,200
" Expenses on acquisition
of patent rights 56,000
" Office expenses 42,000
117
" Contributions to R.P.F 12,000
" Bad Debts 4,500
" Donations to N.D.F 2,500
" Net Profit 1,05,600
Total 3,59,600 Total 3,59,600

Notes : 1. Legal expenses include Rs.2,000 incurred by assessee for
defending a case for damages for breach of contract which was
decided in favour of assessee.
2. Depreciation of the year on assets other than patent rights is
Rs.16,900.
3. Contribution to RPF due on 31-3-2009 – Rs.2,000
(Answer Rs.1,48,000)
6. From the following statement, compute the income from profession of
Dr. Murali, if accounts are maintained on mercantile system:
Rs. Rs.
To Dispensary rent 36,000 By Visiting fees 45,000
" Electricity and " Consultation fees 1,25,000
water charges 6,000 " Sale of medicines 72,000
" Telephone expenses 6,000 " Dividends 5,000
" Salary to nurse and
compounder 36,000
" Dep. on surgical
equipment 6,000
" Purchase of medicines 36,000
" Dep. On X-ray Machine 4,000
" Income Tax 5,500
" Donation to Rama
Krishna Mission 4,000
" Motor Car expenses 9,600
118
" Dep.on Car 4,800
" Net Income 93,100
Total 2,47,000 Total 2,47,000
Note : 1. Electricity and water charges include domestic bill of Rs.2,500.

2. Half of motor car expenses are for professional use.
3. Telephone expenses include 40% for personal use.
4. Opening stock of medicines was Rs.6,000 and closing stock
was Rs.4,000
(Answer Rs.1,07,700)
119
UNIT - III
CHAPTER - 2
CAPITAL GAINS
2.1. INTRODUCTION
Any profits or gains arising from the transfer of capital assets
effected during the previous year is chargeable to tax under the head
‘Capital Gains’ and shall be deemed to be the income of the previous
year in which such transfer takes place. Sections 45 to 54 deal with
transfer of capital assets . It is chargeable to tax subject to the
exemptions provided under section 54, 54 B ,54 D, 54 EC, and 54G.
Section 45 insists on the following aspects.
1. The transaction must involve a Capital Asset.
2. There must be a transfer of Capital Asset by the assessee
during the previous year.
3. There must be a profit or gain arising out of the transfer
and
4. The profit or gain is not exempt from tax.
2.2.Meaning of Various Terms
Capital Asset 2(14):
Section 2(14) defines capital assets as “Property of any kind held
by an assessee whether or not connected with his business or
Profession”. It includes all types of properties, whether movable or
immovable, tangible or intangible, fixed or floating. Such asset may
represent not only actual ownership but also any right in relation to any
property which is capable of being transferred. Example. Goodwill, the
lease - hold rights , right to subscribe for shares etc.
Capital Assets
Includes Exclude
1.Property of any kind 1.Stock-in Trade
2.Whether connected with business or profession 2. Personal Effect
3.Rural Agriculture
Land in India, When
the population is Less
120
than 10,000
4.6 ½%,7%Gold
Bonds 1977
5.National Defence
Gold Bonds 1980
6.Special Bearer
Bonds 1991
7. Gold Deposit Bonds
1999
Jewellery [Section 2(14)(ii)]
The capital gain on transfer of jewellery is fully taxable. Jewellery
includes
1. Ornaments made of gold, silver or platinum or any other precious metal
or any alloy containing one or more such precious metals.
a. Whether or not containing any precious /semi precious stone and
b. Whether or not worked or sewn into any wearing apparel
2. Precious or semi precious stones.
a. Whether or not set in any furniture or utensils or other article or
b. Whether or not worked or sewn into any wearing apparel
2.3.Short –term / Long –term Capital Assets and Short term/Long - term
Capital gains or loss
Short –term Capital Assets [Section 2(42-A)]:
Capital Assets held by an assessee for not more than 36 months
immediately preceding the date of transfer are treated as short –term Capital
Assets. In the case of shares held in a company, the period has been reduced to
12 months. Any gain /loss on transfer of short –term Capital Assets is called is
short Capital gain or loss.
Long- Term Capital Assets.[Section 2(42-B)]
The Assets which are held by the assessee for a period exceeding 36
months immediately preceding the date of transfer are, called ‘Long –Term
Capital Assets’. Any loss or gain accruing to the assessee on such assets shall
be known as long –term capital gain or loss.
2.4.Transfer of a Capital Asset [Section 2(47)]
Transfer in relation to a capital asset includes:
(i) The sale , exchange or relinquishment of the asset: or
121
(ii) The extinguishment of any rights therein :or
(iii) The compulsory acquisition thereof under any law: or
(iv) Conversion of capital asset into Stock –in trade: or
(v) The possession of any immovable property to be taken or retained in
part performance of a contract u/s 53A of the transfer of property
Act 1982: or
(vi) Transactions, which have the effect of transferring or enabling the
enjoyment of immovable property.
2.5. Transaction not regarded as Transfer [Section 47]
The following transactions are not regarded as transfers and any gain
arising from such transactions is not taxable under the head “Capital Gains”.
1. Transfer of a capital asset in total or partial partition of a HUF.
2. Transfer of a capital asset by way of gift or under a will or an irrevocable
trust.
3. Transfer of a capital asset by a holding company to its subsidiary
company or vice versa.
4. Transfer of a capital asset in the scheme of amalgamation, if the
amalgamated company is an Indian company.
5. Transfer of shares held in Indian company, in a scheme of amalgamation
between two foreign companies.
6. Transfer of a capital asset, in a demerger, by the demerged company to
the resulting company (an Indian company)
7. Transfer of shares by the share holder of a demerged company in a
scheme of demerger in consideration of the shares transferred or issued
by the resulting company.
8. Transfer of a capital asset, being a share or shares held by in an Indian
company by the demerged foreign company to the resulting foreign
company.
9. Transfer of a capital asset, being shares held by the share holder of the
amalgamating company in lieu of the shares issued by the amalgamated
company
10. Transfer of a capital asset, being bonds and global depository receipts
made out side India by a non resident to another non resident.
11. Transfer of capital asset, being any work of art, archeological or
scientific or art collection, any book, manuscript, painting, drawing etc.,
to the Government or University or notified Museums, Art Gallery or
approved institutions.
122
12. Conversion of debentures, debenture stock, deposit certificates of a
company into shares or debentures of that company.
13. Transfer of a capital asset being membership of a recognised stock
exchange by a person to a company in exchange of shares allotted shall
not be regarded as transfer.
14. Transfer of land of a sick industrial company under the scheme
sanctioned as per rules.
15. Transfer of a capital asset or intangible asset by a firm to a company as a
result of succession.
16. Transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government.
17. In case there is transfer due to lending of securities by its holder under an
agreement with a borrower and as per the guide lines issued SEBI, or by
RBI shall not be deemed as transfer.
2.6. Deemed Capital Gain [Section 47A]
In case an asset is transferred from a parent company to a subsidiary
company or from a subsidiary company to a parent company [Section 47 (iv)
or(v) ] and
(a) Such capital asset is converted by the transferee company into or is
treated by it as stock –in- trade before the expiry of a period of 8 years
from the date of transfer , or
(b) The parent company or its nominees cease to hold the 100% of share
capital of subsidiary company before the expiry of a period of 8 years
from the date of transfer, the capital gain which was exempted u/s 47
will become taxable as deemed capital gain of the year in which such
transfer took place.
(c) In case there is breach of any of the condition prescribed for exemption
of capital gain on succession of a firm or a sole proprietary concern u/s
47(xiii) and(xiv),the amount of gain arising from such transfer shall be
deemed to be the gain taxable in the hands of successor company in the
previous year in which such breach of condition takes place .[Section
47A(3)]
(d) With effect from assessment year 1998-99 the transferor who has
transferred its membership of a recognised stock exchange and has
received shares as consideration , such shares cannot be transferred for a
period of three years from the date of transfer of membership, the
amount of exemption claimed under section 47 shall be deemed as
income chargeable to tax under the head capital gains.[Section 47A(2)].
123
2.7. Method of Computing Capital Gain [Section 48].
1. For all assessees and all assets except shares and debentures owned by a
non –resident
(a) Short –term capital gain shall be computed by deducting, out of full value of
consideration, the following amounts :
(i) expenditure incurred wholly and exclusively in connection with
such transfer;
(ii) the cost of acquisition of the asset ; and
(iii) the cost of any improvement thereto .
(b) Long –term capital gain shall be computed by deducting, out of full value of
consideration, the following amounts:
(i) expenditure incurred wholly and exclusively in connection with
such transfer;
(ii) the indexed cost of acquisition ; and
(iii) the indexed cost of any improvement thereto .
(c) Where capital asset being shares , debentures or warrants as referred in
Section 47(iii) are transferred under a gift or irrevocable trust the market value
on the date of transfer shall be deemed to be the full value of consideration
received or accruing as a result of transfer.
Expenses disallowed u/s Section 48
Any amount paid on account of Security Transaction Tax shall not be
allowed to be deducted u/s 48.
For the above purposes:
A. ‘Indexed cost of acquisition’ means an amount which bears to the cost
of acquisition the same proportion as Cost Inflation Index for the first
year in which asset was held by the assessee or for the year beginning
on the 1st day of April 1981, whichever is later.
B. “Indexed cost of any improvement” , means the amount which bears the
cost of improvement the same proportion as cost Inflation Index for the
year in which the asset is sold bears to the cost Inflation Index for the
year in which improvement to the asset took place
C. “Cost Inflation Index”, in relation to a previous year, means such index
as the Central Government may , having regard to seventy five per cent
of average rise in the Consumer Price Index for urban non-manual
employees for the immediately preceding previous year to such
previous year, by notification in the Official Gazette, specify ,in this
behalf
124
Vide notification issued u/s 48 the Central Govt .has notified the
following Cost Inflation Index(C.I.I.):
Sl. No Financial Year Cost Inflation Index(C.I.I.)
1. 1981-82 100
2. 1982-83 109
3. 1983-84 116
4. 1984-85 125
5. 1985-86 133
6. 1986-87 140
7. 1987-88 150
8. 1988-89 161
9. 1989-90 172
10. 1990-91 182
11. 1991-92 199
12. 1992-93 223
13. 1993-94 244
14. 1994-95 259
15. 1995-96 281
16. 1996-97 305
17. 1997-98 331
18. 1998-99 351
19. 1999-00 389
20. 2000-01 406
21. 2001-02 426
22. 2002-03 447
23. 2003-04 463
24. 2004-05 480
25. 2005-06 497
26. 2006-07 519
27. 2007-08 551
28. 2008-09 582
There will be no indexing of cost for bonds and debentures. But Cost of
Capital Index Bonds shall be indexed.
125
INDEXING AT A GLANCE U/S 48(iii)
Situation Indexing
1. Short term Capital assets No indexing
2. Repurchase of units acquired u/s 80 No indexing
CCB
3. Bonds and Debentures except No indexing with effect from
capital indexed bonds assessment year 1998-89
4 A. Long term capital asset acquired Actual cost or FMV on 1-4-81
before 1-4-81 under gift, will , (whichever is more)×C.I.I. of the year
partition of H.U.F. inheritance i.e. of sale /C.I.I. of 1981-82 i.e. 100
u/s 49(1)
4. B. Cost of improvement incurred Cost of improvement ×C.I.I of the
after 1-4-81 on above mentioned
year of sale/C.I.I. of the year of
assets. improvement
Actual cost ×C.I.I of the year of sale/
5. Long term capital assets acquired C.I.I of the year of acquisition
on or after1-4-81 (not under any of
the modes mentioned in 4 above)
Cost of improvement incurred after Cost of improvement ×C.I.I. of the
1-4-81 year of sale /C.I.I of the year of
improvement
6. Long term capital asset acquired

by present seller under section 49 Actual cost or FMV on 1-4-81
(1) after 1-4-81 but was acquired (whichever is more )×C.I.I. of the year
by previous owner before 1-4-81. of sale / C.I.I of the year in which
present seller became its owner
C.I.I.=Cost Inflation Index.
Illustration 1:
Cost of acquisition in 1982-83 Rs 1,20,000. Find out the indexed cost if
sold in 2008 -09.
(C.I.I. for 1982-83 is 109 and 2008-09 is 582)
Solution
Computation of Indexed Cost
Cost in 1982-83 = Rs 1,20,000
Indexed cost in 2008-09 =Rs 1,20,000×582/109
Inflated cost =Rs 6,40,734
126
2.8.Cost of Acquisition
a. Cost of bonus shares
Cost of Bonus Shares acquired after1-4-1981 shall be taken as Nil
Illustration 2: Mr .X , an investor in shares ,held 10,000 shares of Rs 10 each
in M Itd. On 1st March 1994, he was allotted 10,000 bonus shares of Rs 10
each. The cost of the original shares was Rs 12each. During the Previous year,
in March 2008, he sold 5000 bonus shares at Rs 15 per share. Compute the
Capital Gain for the Assessment Year 2008-09.
Solution
Computation of Capital Gain on Bonus Shares
Rs
Sale Consideration of 5000shares at Rs 15 per share 75,000
Less: Cost of transfer Nil
Net consideration 75,000
Less: Cost of acquisition Nil
Long-term Capital Gain 75,000
Note : Cost of bonus acquired after 01-04-1981 shall be taken as nil
b. Cost of acquisition of Right Shares.
Right Shares
Original shares Right entitlement

Amount actually paid for acquiring shares (Renounced)
Cost of acquisition -Nil
Right shares Right entitlement

Cost of acquisition is actual amount paid by tax payer (Renounced)
Cost of acquisition shall be
purchase price paid to
Renounce+ cost amount paid to
the company for right shares
127
c. Cost of Conversion of Capital assets into trading assets or stock –in-
trade
When a capital asset is converted into trading asset, then the cost of the
capital asset which is so converted may be taken as the market value on the
date of such conversion
d. Assets on which depreciation has been claimed [Section 50]
Depreciable Assets
Transfer of one or more assets Transfer of all the assets with in the block
in the block of assets [Sec 50(1)] and the block ceases to exist [Sec 50(2)]
The excess over the W.D.V. and The excess over the W.D.V. and the
the cost of transfer is short –term Capital cost of transfer shall be deemed to be
Gain and if it is less, that will be W.D.V. short –term Capital Gain and if it is
less that will be short –term capital
loss
e. Treatment of advance money received and forfeited[Section 51]
Advance money forfeited by current owner transferring a capital asset will
be reduced from the cost to find out cost of acquisition .
Advance money forfeited by any other previous owner will not be reduced
while calculating cost of acquisition.
Illustration 3:Mr .Gopal sold a house on 1-9-2008 for Rs 7,00,000. This house
was inherited by him during 1981-82 from his father who had constructed it in
1971-72 for Rs 50,000. Mr. Gopal spent Rs 50,000 on renovation of the house
in 1986-87. Fair market value of he house as on 1-4-1981 was Rs 1,50,000
This house was under negotiation for sale in may,1990 and he received Rs
80,000 as advance money. The contract could not materialise and the advance
money was forfeited. Compute the amount of Capital Gain assuming that he
does not qualify for any exemption
[C.I.I. for 1981-82:100, 1986-87:140, 1990-91:182 & 2008-09:582]
128
Solution
Computation Of Capital Gain (Assessment Year 2009-10)
Rs Rs
Sale Price on 1-9-2008 7,00,000
Less: Cost of acquisition 1,50,000
Less: Advance money forfeited 80,000
Net Cost 70,000
Indexed Cost [70,000×582/100] 4,07,400
Indexed Cost of improvement [50,000×580/140] 2,07,857 6,15,257
Long Term Capital Gain 84,743
Illustration 4 Mr .X purchased a piece of land for 5,00,000 during the
previous year 1997-98. In 1999-2000 he agreed to sell it to Mr. Y for Rs
9,00,000 and accepted an advance money of Rs 50,000. Mr. Y however failed
to honour his promise and could not get the sale deed executed in his favour
within stipulated time. As a result the advance money was forfeited by Mr. X.
Now –
(a) Mr. X has sold this land during 2008-09 for Rs 25,00,000. Determine
the amount of capital gain chargeable to tax in the hands of Mr. X.
(b) Suppose Mr. X transferred this land to Mr. Z under a gift deed during
2002-03 and land is sold by Mr. Z for Rs 25,00,000 during 2008-09,
calculate capital gain in the hands of Mr.Z
[C.I.I. for 1997-98 is 331, for 1999-2000 is 389, 20002-2003 is 447 and for
2008-09 is 582]
Solution
(a) Calculation of Taxable Capital Gain of Mr. X for A.Y. 2008-09
Rs. Rs.
Full value of consideration 25,00,000
Less: Expenses on transfer Nil
Net consideration 25,00,000
Less: (i) Indexed cost of acquisition
Cost in 1997-98 5,00,000
Less: advance forfeited 50,000
4,50,000
4,50,000×582/331 = 7,91,239
129
(ii)Indexed cost of improvement Nil 7,91,239
Taxable LTCG 17,08,761
(b) Calculation of Taxable Capital Gain of Mr. Z for A.Y 2008-09

Full value of consideration 25,00,000
Less: Expenses on transfer Nil
Less: (i)Indexed cost of acquisition
Cost to previous year owner Rs 5,00,000
P.Y of receipt of gift 2002-03
5,00,000×582/447 6,51,007
(ii)Indexed cost of improvement Nil 6,51,007
Taxable Long Term Capital Gain 18,48,993

Note: Advance money forfeited by previous owner (i.e. Mr .X) is not to be
reduced from cost of acquisition for present owner (i.e. Mr. Z).
f. Slump Sale[Section 50B]
Slump Sale means transfer of one or more undertakings as a result of the
sale for a lump sum consideration without values being assigned to the
individual assets.
1. Capital Gain arising from Slump Sale of Capital Asset held by the
assessee for more than 36 months is Long –term Capital Gain otherwise
it will be treated as Short –term Capital Gain.
2. Indexed cost of acquisition is not used.
3. Net worth of the undertaking transferred shall be deemed to be
the cost of acquisition = Value of Total Assets -Value of Liabilities.
4. Any change on account of revaluation of assets shall not be considered.
g. Cost of acquisition of goodwill [Section 55(2)(a)]
In case goodwill was purchased, the cost shall be the price paid but in
case it was not purchased the cost is taken as Nil.
h. Adoption of Fair Market Value [Section 55(2)(b)2(c)]
(i) Where the asset became the property of the assessee before 1st April 1981, it
will mean the cost of acquisition of the asset to the assessee or the fair market
130
value of the asset on 1st April 1981, a the option of the assessee. Assesses
should adopt whichever of the two is higher.
(ii) Where the capital asset becomes the property of the assessee under any of
the modes given in section 49, the assessee is given the option to adopt , either
the cost of the asset to the previous owner or its fair market value as on 1-4-
1981, whichever is higher.
2.9 Exemptions in Respect of Capital Gains
The capital gain arising on transfer of certain capital assets has been
exempted from tax. These specific exemptions can broadly be classified into
the following two categories.
A. Capital Gains exempted U/S 10
B. Capital Gains exempted U/S 54
A. Capital Gains Exempted U/S 10
1. Income from sale of shares in certain cases[Section 10 (36)]
Any income arising from the transfer of a long –term capital asset, being
an eligible equity shares in a company purchased on or after the 1st day of
March, 2003and before the 1st day of March 2004 and held for a period of
twelve months or more shall be fully exempted.
Capital gain on compulsory acquisition of urban Agricultural land
[Section 10 (37)]
In the case of an assessee, being an individual or a Hindu undivided
family, any income chargeable under the head “Capital Gains” arising from the
transfer of agricultural land, shall be exempted where:
(i) Such land is situated in any urban area as specified u/s 2(14)(iii) (a)
or (b) i.e. land which is situated within the Municipal limits or
within 8 Kms.of city limits ,if so notified;
(ii) Such land during the period of two years immediately preceding the
date of transfer, was being used for agricultural purposes by such
Hindu Undivided Family or individual, or a parent of his:
(iii) Such transfer is by way of compulsory acquisition under any law, or
a transfer the consideration for which is determined or approved by
the Central Government or the Reserve Bank of India;
(iv) Such income has arisen from the compensation or consideration for
such transfer received by such assessee on or after the 1st day of
April, 2004
131
For the purpose of this clause, the expression , compensation or
consideration includes the compensation or consideration enhanced or further
enhanced by any court, tribunal or other authority
2. Exemption of long term capital gain [Section 10 (38)]
Any income arising from the transfer of a long- term capital asset, being
securities, and the transaction of sale of such securities is entered into in a
recognised stock exchange in India on or after the date on which Security
Transaction Tax comes into force shall be fully exempted. The Security
Transaction Tax has come into force with effect from 1-10-2004
For the purposes of this clauses:
(a) “securities” shall have the meaning assigned to it in clause,(h) of section
2 of the Securities Contracts (Regulation)Act, 1956 (42) of 1956)
(b) “recognised stock exchange” shall have the meaning assigned to it in
clause (f) of section 2 of the Securities Contracts (Regulation) Act,
1956 (42 of 1956)
3. Income from transfer of asset of an undertaking engaged in the
business of generation, transmission or distribution of power[Section
10(40)]
Income from transfer of capital asset of an undertaking engaged in the
business of generation, transmission or distribution of power where such
transfer takes place on or before 31-3-2006 and transfer is made to the Indian
company as notified u/s 80 IA.
Note :It is important to note that the above provisions exempting above capital
gains do not require the assessee to invest the sale proceeds or capital gain in
any new asset as in the case of exemptions prescribed u/s 54.
B. Exempted Capital Gains U/S 54
Section 54 provides for exemptions in respect of long term capital gain
arising on transfer of capital assets. In order to claim these exemptions the
assessee is required to invest either net consideration or capital gain in certain
specified assets.
1. Capital Gain on transfer of long-term residential house property
[Section 54]
(i) Applicable only in case of individual &HUF
(ii) Transfer must be a residential house property or land appurtenant
thereto
(iii) The reinvestment must be in another residential house property
within one year before or two years after the sale of the house or
132
(iv) Construction of new residential house within three years after the
sale of the house.
(v) The amount of capital gain so invested shall be exempted from tax
(vi) The new asset must be held for three years from the date of
acquisition or construction
(vii) If the new house is sold with in 3 years from the date of purchase or
construction, the previously exempted capital gain will be taxable
along with the capital gain on the sale of such house, if any. In the
event of loss on sale of new house, it shall be adjusted out of old
exempted capital gain.
(viii) The unutilised amount before the due date of filing return shall be
kept in Capital Gain Account Scheme of a Nationalised bank and
(ix) The amount should be utilised with in 2 years or 3 years as the case
may be, otherwise it shall be treated as the long- term capital gain of
the previous year
Illustration 5
Compute the taxable capital gain from particulars given below :
(i) Net consideration of a residential house Rs 15,00,000 (2-6-
2008)[C.I.I.:582]
(ii) Cost of acquisition of this house Rs3,00,000 (1-5-87)[C.I.I.:150]
(iii) New house acquired on 1-9-2008 for Rs2,50,000
Solution
Computation of Capital Gain
Rs.
Less: Indexed cost (3,00,000×582/150) 11,64,000
Long –term capital gain 3,36,000
Less: Exempted u/s 54(1) – cost of new house 2,50,000
Taxable Capital Gain 86,000
2. Capital Gain on transfer of Self –Cultivated Agricultural Land in urban
areas [Section 54B]
(i) Applicable only in the case of individual assessee.
(ii) Transfer of Agricultural Land used by him or by his parents for two
years immediately prior to the date of transfer of agricultural land.
(iii) The amount to be invested shall be in Agricultural Land within a
period of two years from the date of such transfer.
133
(iv) The new land purchased should not be transferred within a period of
3 years from the date of purchase.
(v) The unutilised amount shall be kept in Capital Gain Account
Scheme of a Nationalised Bank and must be utilised within the
prescribed period.
3. Capital Gain on Compulsory Acquisition of Land &Buildings [Section
54D]
(i) Applicable for all assessees.
(ii) The asset transferred must be land and buildings used by industrial
undertaking for two years before the date of transfer.
(iii) Land &Building or any right in land &building should be
compulsorily acquired under any law.
(iv) The assessee must have constructed a building or purchased another
piece of land by investing capital gain arising on the transfer of the
asset within a period of 3 years from the date of such transfer
(v) The land &building acquired by re- investing capital gain must be
for the purposes of shifting or re-establishing the said undertaking or
setting up another industrial undertaking.
(vi) The unutilised amount shall be kept in Capital Gain Account
Scheme of a Nationalised Bank and must be utilised within the
prescribed period. Otherwise the exempted gain will be again
taxable.
4. Capital Gain on transfer of any long term Capital Asset [Section 54 EC]
(i) The exemption is applicable for all assessees.
(ii) The asset transferred must be any long –term Capital Asset.
(iii) The capital gain must be re-invested in Long –term specified asset.
‘Long- term Specified Asset’ shall mean any bond redeemable after three years
and issued by the National Highway Authority of India or by Rural
Electrification Corporation Limited.
(iv) The time limit for investment shall be six months from the date of
transfer.
(v) The new asset must be held for three years from the date of
acquisition.
(vi) If the new asset is sold with in the holding period, the long-term
Capital Gain exempted shall be deemed to be income of the assessee
in the previous year in which it is sold.
134
Illustration 6
Mr. Ravi sold a plot of land at Jaipur on 1-6-2008 [C.I.I..=582]for Rs
12,40,000. He paid Rs 40,000 as selling expenses. The plot was received by
him on the death of his father on 15-3-85 [C.I.I.=125]. His father had acquired
it on 1-4-1980 for Rs1,00,000and its F.M.V. on 1-4-1981 was Rs 1,40,000.
On 1-10-2008 he invested Rs 3,00,000 in bonds issued by Rural
Electrification Corp. Limited notified u/s 54EC and Rs2,00,000 on 1-3-2009 in
Bonds of National Highway Authority of India.
Compute his Taxable Capital Gain
Solution
Computation of Taxable Capital Gain
Rs. Rs
Long Term Capital Asset
Sale price of plot as on 1-6-2008 12,40,000
Less expenses on sale 40,000
Less Indexed Cost [1,40,000×582/125] 6,51,840
Long Term Capital Gain 5,48,160
Less Exemption u/s 54EC
Amount invested in bonds of Rural Electrification Corp. Ltd 3,00,000
Less exemption u/s 54EC:Investment in Bonds of
National Highway Authority
Not allowed as investment was made after a period of more
than 6 months i.e. on 1-3-2009 NIL 3,00,000
Taxable Long Term Capital Gain 2,48,160
Note : The F.M.V has been indexed with the index of the year in which son
inherited the house.
Assessee is not allowed to transfer the Bonds of Rural Electrification
Corp.or take a loan against these bonds or is also not allowed to convert these
bonds into money upto 3 years from the date of investment in these bonds.
5. Exemption of capital gain on transfer of long-term capital assets in case
of investment in Residential House [Section 54F]
(i) Applicable only to individual and HUF
(ii) Transfer of any long –term capital asset (other than the
residential house the income of which is taxable under the head
135
“Income from House Property”) and constructs a residential
house within 3 years after the sale or purchases another
residential house within one year before or two years after the
sale
(iii) On the date of transfer, the assessee should not own more than
one residential house property.
(iv) The amount of exemption shall be
Long –term Capital Gain × Investment
Net consideration
(v) The unutilised amount shall be kept in the Capital Gain Account
Scheme and the prescribed rules shall be followed.
(vi) The holding period of the new asset shall be three years from the
date of acquisition or construction.
(vii) If the new asset is sold within the holding period, the long-term
Capital Gain exempted shall be again taxable in the year of
transfer.
Illustration 7
Mr .A submits the following particulars about sale of asset during the year
2008-09
Jewellery Plot Gold
Rs Rs Rs
Sale price 4,00,000 12,24,000 3,00,000
Expenses on sale NIL 24,000 NIL
Cost of acquisition 70,000 2,50,000 1,00,000
Year of acquisition 1987-88 1984-85 1999-2000
C.I.I. 150 125 389
He has purchased a house for Rs 12,00,000 on 1-3-2009. Calculate the
amount of taxable capital gain if C.I.I. for 2008-09 is 582
Solution
Calculation of Taxable Capital Gain
Jewellery Plot Gold
Rs Rs Rs
Sale price 4,00,000 12,24,000 3,00,000
Less Expenses on sale NIL 24,000 NIL
Net consideration 4,00,000 12,00,000 3,00,000
136
Less indexed cost [70,000 ×582/150] 2,71,600
[2,50,000x582/125] 11,64,000
[1,00,000 x 582/389] 1,49,619
Long term capital gain 1,28,400 36,000 1,50,386
Percentage of LTCG to net consideration
Jewellery Plot Gold
32.1% 3% 50.13%
As it will be beneficial for him to claim
exemption u/s 54F by claiming it first from gold,
then from jewellery and finally from plot.
Gold. Investment 3,00,000
Net consideration 3,00,000 1,50,386
Jewellery. Investment 4,00,000 1,28,400
Plot. Investment 5,00,000
[36,000× 5,00,000/12,00,000] 15,000
Taxable long term capital gain NIL 21,000 Nil
6. Capital Gain on shifting of industrial undertaking from urban areas to

non- urban areas [Section 54G
(i) It is applicable for all assesses.
(ii) The asset transferred shall be land &building. Plant and machinery
used by industrial undertaking and shifting of such undertaking
from urban area to non- urban area.
(iii) The asset shall be a long –term Capital Asset .
(iv) The new asset to be purchased shall be land, building, plant
&machinery for Industrial undertaking in non –urban area or to
meet its expenses of shifting.
(v) The amount of Capital Gain invested is exempted
(vi) The time limit for investment shall be within one year prior to the
date of transfer or within three years after the date of transfer .
(vii) The unutilised amount shall be kept in Capital Gain Account
Scheme.
137
(viii) The holding period of the new shall be three years from the date of
acquisition.
7. Exemption of Capital Gain on transfer of assets in case of shifting of
Industrial Undertaking from an urban area to any Special Economic
Zone(SEZ)[Section 54GA]
This exemption has been introduced to encourage industrial undertaking
situated in an urban area to a Special Economic Zone
(i) Applicable to all assesees.
(ii) There is a transfer of assets like land and building or any right in
land and building, plant & machinery of an industrial undertaking
situated in an urban area
(iii) Transfer has been made with the intention of shifting of an
industrial undertaking from an urban area to a special Economic
Zone.
(iv) Industrial unit in an Economic Zone must be set up within a period
of one year before or after the date on which such transfer took
place.
(v) New assets acquired by investing the Capital Gain should not be
transferred within 3 years from the date of their purchase. If
transferred, exempted Capital Gain is taxable in the year of transfer.
(vi) Amount of Capital Gain re-invested on the purchase of new asset is
exempted.
8. Investment of compensation received [Section 54H]
In case there is transfer of asset due to compulsory acquisition under
any law and the amount of compensation awarded for such acquisition is not
received by the assessee on the date of such transfer, the period or periods
available for depositing or investing the amount under any of the sections
54,54B,54D,54EA,54EC and 54F, in relation to such compensation shall be
reckoned from the date of receipt of such compensation.
9. Receipt of enhanced compensation
Enhanced compensation is taxable in the year in which such
compensation is received and if the assessee wants to avail exemption u/s 54,
54 B, 54D, 54EC, 54F, etc. The time limits shall be determined from the date
and year of receipt of enhanced compensation.
2.10 Treatment of Capital Loss [Section 74]
Set off. Short term capital loss can be set off from either Short Term Capital
Gain or Long Term Capital Gain.
138
Long term capital loss can be set off only from Long Term Capital Gain.
Carry forward. Unadjusted capital losses are carried forward for 8 succeeding
previous years to be set off in following manner:
(a) Short term capital loss can be set off from either Short Term Capital
Gain or Long Term Capital Gain .
(b) Long Term Capital Loss can be set off only from Long Term Capital
Gain.
(c) Loss on transfer of long term equity shares (subject to STT). Long term
capital gain on transfer of shares (which are subject to STT) is
exempted u/s 10(38) and so loss on transfer of long term shares cannot
be set off against any other term capital gain and hence such a loss is
ignored.
2.11Tax on Capital Gains
a. Total income shall be divided into three parts:
(i) Short term capital gain on shares (which are subject to
Securities Transactions Tax);
(ii) Long term capital gain on all assets except on shares (which
are subject to Securities Transactions Tax which is fully
exempted u/s 10 (37);
(iii) Balance of total income
b. On short term capital gain on shares(which are subject to Securities
Transactions Tax); Income Tax shall be levied at 15% of such gain u/s
111A;
c. On long term capital gain on all assets (except on which are subject to
Securities Transactions Tax which is fully exempted u/s 10 (38)) tax
shall be levied at 20% of such gain u/s 112:
d. On the balance of total income tax is to be calculated at scheduled
rates.
e. In case the balance of total income is less than the exempted limit of
Rs.1,50,000 the difference between actual balance and Rs.1,50,000
shall be adjusted from short term capital gain if there is no long term
capital gain and if there is long term capital gain, it shall be adjusted
from such long term capital gain and the balance of capital gain shall
be taxed at the prescribed rate as per above.
f. Deductions u/s 80C to 80U are also not admissible out of short /long
term capital gain.
139
Illustration 9
Compute the tax liability of Mr. Raj from the particulars given below:
Rs
Business income (+)1,50,000
Loss from self occupied house (-) 30,000
Short term capital gain from Jewellery ; (+) 8,000
Short term capital gain from shares which are subject to
Security Transaction Tax (+) 65,000
Solution
Computation of Tax Liability of Mr. Raj for the Assessment Year 2009-10
House property Rs Rs
Loss from self occupied house (-) 30,000
Profits and gains :
Business income (+)1,50,000
Capital gains:
Short term capital gain from Jewellery; (+) 8,000
Short term capital gain from shares which are
Subject to Security Transaction Tax (+) 65,000 (+) 73,000
Gross total income : (+)1,93,000
Deduction u/s 80 C to 80U NIL
Total Income (+)1,93,000
Computation of tax liability
Income other than Short term capital gain from shares
which are subject to Security Transaction Tax
[1,93,000-65,000] 1,28,000
To exempt Rs 1,50,000balance from STCG 22,000 NIL
On short term capital gain from shares which are subject to
Security Transaction Tax[65,000-22,000]=43,000 @15% 6,450
Add education cess @ 2% of this tax 129
Secondary and Higher education cess @ 1% of tax 65 194
Tax payable 6,644
Total payable rounded off to Rs 6,640
Questions
1. Define the term ‘Capital Gain ‘?
140
2. What are Capital Assets?
3. How will you determine cost of acquisition ?
4. Discuss exemptions provided u/s 54 and u/s 54F?
5. From the following particulars , compute the total income of Shriram
for the assessment year 2009-10
Rs
(i) Machinery purchased in 1999 at a cost of 5,00,000
Depreciation allowed from 1-1-1999 to 31-3-2008 3,00,000
Sale Price of Machinery on 30-6-2008 7,00,000
(ii) Sale Price of Commercial Building purchased in 1983-84
(C.I.I. :116) at the cost of Rs 20,000 and cost of improvements
Made in 1985-86 (C.I.I.:133) Rs 20,000 1,80,000
(iii)Business income 1,00,000
Cost inflation index for 2008-09 is 582
[Answer :STCG Rs 5,00,000 long term capital gain 52,136 Total income
6,52,136]
6. Rs
(i) Sale price of Jewellery in Oct .2008(C.I.I. :582) 20,00,000
(ii) Cost of acquisition in 1983-84 (C.I.I.:116) 3,00,000
(iii) Amount invested in construction of new house upto 31-7-2009
4,00,000
(iv) Amount deposited in Capital Gain Account Scheme for completing the
construction of house (deposited on 27-6-2009) 12,00,000 Compute the taxable
capital gain assuming that he does not own any other house. Compute deemed
capital gain if he is able to invest Rs 10,00,000 out of amount deposited in
Capital Gain Account Scheme?
[Answer : Exemption u/s 54F Rs 98,966; u/s 54(4) Rs 2,96,897; Taxable
Capital Gain Rs 98,965, Deemed L.T.C.G. Rs 49,483]
141
NOTES
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142
UNIT - IV
CHAPTER - 1
INCOME FROM OTHER SOURCES
1.1.Introduction
The fifth and the last head of income is “Income from Other Sources”,
Under section 56, every kind of income, which forms part of total income
under Income Tax Act and which is not chargeable to tax under any of the first
four heads is chargeable to tax under this head. The incomes chargeable to tax
under this head are divided into two types.
1. General incomes
2. Specific incomes.
1.2 General Incomes [Section 56 (1)]
1. Income earned by the owner of a coal mine from rent or royalties
2. Income by way of granting licences to brick-makers, to erect brickkilns
upon the land of the assessee.
3. Remuneration and gratuity received by a director of a company.
4. Income received by an assessee from a person other than his employer
5. Interest on loans, deposits and current accounts.
6. Income received by a professional man as a university examiner.
7. Income from sub-letting a house.
8. Tips received by a waiter or taxi-driver
9. Family pension received by legal heirs of deceased employer.
10. Deemed incomes.
11. Income of other persons to be included in the income of the individual.
12. Income of a non- journalist from writing articles.
13. Amount withdrawn from NSS up to the amount of deduction claimed
u/s 80 CCA
14. Income from agricultural land situated outside India.
15. Remuneration for lectures delivered outside India.
16. Agency commission received from LIC, UTI, Postal savings & mutual
fund by an agent, if it is not his regular business.
17. Commission received by a director of a company for standing as
guarantor or under writer of shares.
18. Any annuity or pension received from LIC or other insurer U/S 80CC.
143
1.3.Specific Incomes [Section 56 (2)]
1. Dividend
Dividend can be received on equity or preference shares of a company,
units of UTI or shares of a co-operative society. Treatment of dividend for tax
purpose is given below.
1. Dividend declared or distributed by an Indian company or UTI or
Mutual Fund is fully exempted with effect from 01.04.2003.
2. Bonus shares allotted to preference shareholders shall be deemed as
dividend and their market value shall be fully taxable.
3. In case loan is taken by a person who has substantial interest in a
private limited company whose business is not money lending, such
loan is deemed as advance dividend up to the accumulated reserves
of the company and is fully taxable. If such loan is adjusted against
future dividend, it will not be taxable.
4. Dividend received from a co-operative society is fully taxable.
2. Winnings from lotteries, crossword puzzles, races including horse races,
card games, gambling or betting, etc (casual incomes)
(a). in case of income from above sources, tax is to be deducted at
source at 30% by the issuing authority provided
(i) If the prize amount exceeds incase of winnings form lotteries,
crossword puzzles and card games and T.V games shows Rs.5000
and in case of races including horse races Rs.2500. It is only the
gross amount which is to be charged to tax. In case the amount of
prize is ‘Net’, Received’ or ‘after deduction of tax’ it has to be
grossed up by using the following formula.
Net 100
100- tax deducted at source.
Note: No expenditure is allowed as deduction out of these incomes.
(ii) Income from the activity of Maintenance of Horses for race

purposes.
Income from the above activity is taxable under the head ‘Income from
Other Sources’. Loss from such activity (Loss will arise if the stake money that
is prize money received is less than the expenses on maintenance of horses for
race purpose) can be set off only from such activity and not from any other
income. The loss if any remains unadjusted can be carried forward for 4
144
succeeding previous years to be set off only from income of same
activity.
3. Amount deducted by employer from employee’s salary.
Any amount deducted by an employer in any previous year (not carrying
on business or profession) as Income – tax, provident fund, ESI fund etc
shall be treated as income of the employer of that year.
4. Gifts received (in cash).
The aggregate value of gifts from all non - relatives received by an
individual or HUF on or after 1-4-2006, if exceeds Rs50,000 in any previous
year is taxable as income of the previous year in which it is received.
But gifts received in kind are fully exempted.
5. Income from letting of plant, machinery or furniture.
If an assessee owns plant, machinery, furniture etc. and it is let out
to some other person, the rent so received by an assessee shall be
chargeable to tax under this head provided letting of plant, machinery,
furniture is not the business of the assessee. If the assessee does letting
of assets as business, the rent received shall be chargeable to tax under
the head ‘ Profits and Gains of Business or Profession’.
6. Income from letting of plant, machinery or furniture with building.
Generally, the rent from letting of building is taxable under the
head ‘Income from House Property’. But when an assessee lets out plant,
machinery or furniture which is inseparable from building, the whole
amount of rent received shall be taxable under this head ‘Income From
Other Sources’ provided letting is not the business of the assessee.
7. Any amount received under keyman insurance policy.
Any amount received by an assessee from the above policy
including bonus is taxable under this head if not taxable under the head
‘Profits and Gains of Business or Profession’ or under the head
‘Salaries’.
8.Interest on securities.
1.Meaning of security
It is a document acknowledging the debt taken by a specific
authority from the general public. It may be named as a ‘Debt’, ’Loan’,
’Paper’, ’Debenture’, ’Security’ or ‘Certificate’. It contains face value of
security date of maturity, rate of interest, date and place of payment of
interest etc. IT is secured , transferable and may be issued by the Central
or state Government ,a local authority or a company or a Statutory
Corporation.
145
2. Taxability of Interest
Any interest which accrues to a person during the previous year is
added in his gross total income, it is taxable on due basis and interest
accrues on the name of that person on whose name securities stand on
the date of accrual of interest.
3. Deduction of Tax at Source (Section 193)
Before making payment of interest on securities it is in duty of the
issuing authority to deduct tax on such interest payable at the prescribed
rates and deposit the same in the Government Treasury on behalf of the
security holder . The security – holder’s account is credited with the
amount of tax deducted and will be adjusted while paying tax on the
total income.
However tax is not deducted at source in the case of following securities
i) Interest payable on 4 1/4 % National Defence Bonds, 1972 where the
bonds are held by an individual, not being a non-resident , or
(ia) 4 1/4 % National Defence Loan, 1968, or 4 ¾ % National Defence
Loan, 1972, provided the interest is payable to an individual, or
(ib) Interest payable on National Development Bonds.
(iia) 7-years National Savings Certificates (Fourth Issue)
(iib) Debentures issued by any co-operative society or any other institution
notified by the Central Government: or
(iii) 6 ½ % Gold Bonds, 1977 or 7% Gold Bonds, 1980, where the bonds
are held by an individual, not being a non-resident and the holder
thereof makes a declaration in writing before, the person responsible for
paying the interest that the total nominal value of Gold Bonds held by
him did not exceed Rs. 10,000 at any time during the period to which
the interest relates; or
(iv) No tax will be deducted at source from any security issued by Central
Government, or a State Government.
(v) No tax will be deducted at source if interest on term deposit with a
bank does not exceed Rs. 5,000 in a previous year.
4. No deduction of tax at source in case of interest on debentures
(Section 193( v) )
The issuing authority should not deduct any tax at source on
interest on debentures if,
i. Debentures are issued by a company in which public are
substantially interested.
146
ii. Interest is paid to a resident debenture-holder.
iii. Debentures are listed on a recognized stock exchange.
iv. Interest is paid in account payee cheque and
v. The total amount of interest payable in any previous year does
not exceed Rs2500
Rate of TDS (Assessment Year 2009-2010)
Company and
Individual, HUF,AOP, BOI
firms
When there is Where there is Where there is
No surcharge + surcharge @ Surcharge
Education cess 10 % + [Rate of
3% of tax Education surcharge
cess 3% of tax 10% of tax +
& Surcharge Education
cess 3% of
tax &
Surcharge]
Income A/Y 2009-10 A/Y 2009-10 A/Y 2009-10
(a) Dividend on shares NIL NIL NIL
referred to u/s 1150
(b) interest on units of UTI NIL NIL NIL
and Mutual Funds
(c) Bank interest [if 10.3% 11.33% 11.33%
amount of interest exceeds
Rs.5,000]
(d)Interest on securities NIL NIL NIL
issued by:Central or State
Government
Local authority or statutory 10.3% 11.33% 11.33%
corporation
Company : Listed 10.3% 11.33% 11.33%
securities 20.6% 22.66% 22.66%
Unlisted
securities
(e) winnings from 30.9% 33.99% 33.99%
147
Lotteries, Races, Puzzles,
Card game, TV game
shows
5. Types of securities
Securities may be divided into three types.
A. Exempted from tax
B. Tax free securities
C. Less tax securities
A. Exempted from tax
Interest on the following securities is exempted from tax but they
are no longer in existence. These are,
i. National Plan Certificates
ii. National Defense Bonds.
iii. Treasury Saving Deposit Certificates and
iv. Special Bearer Bonds 1991.
Apart from this interest on the following bonds issued by
Public Sector Companies \ undertakings is also exempted
(i) 10% Secured Redeemable NTPC Bonds, 1986 (1st Series)
(ii) 10% Secured Redeemable Non- convertible Bonds issued by
Mahanagar Telephone Nigam Limited.
(iii) 10% Secured Redeemable Non –convertible Bonds issued by
Indian Railway Finance Corp. Limited.
(iv) 9% Secured Redeemable Non- convertible Bonds 1987 (B
Series) issued by National Hydro-electric Power Corp.Limited.
(v) 9% Secured Redeemable Non-convertible Bonds issued by
Indian Railway Finance Corp.Limited.
(vi) 9% (tax –free) Secured Redeemable Bonds issued by Power
Finance Corp. Limited
(vii) 10% (tax-free) Secured Redeemable Non-convertible Bonds
issued by Indian Telephone Industries Limited.
(viii) 10 Years-9% (tax-free) Secured Redeemable Non-convertible
NTPC Bonds-IV issue (private placement)
(ix) 10 Years -9% (tax-free) Secured Redeemable Non-convertible
PFC Bonds –II Series (private placement) issued by Power
Finance Corp.
148
(x) 10 Years-9% (tax-free) Secured Redeemable Non-convertible
REC Bonds, issued by Rural Electrification Corp. Limited.
(xi) 10 Years -9% (tax-free) Secured Redeemable Non- convertible
Bonds,(C Series) issued by Neyveli Lignite Corp. Limited.
(xii) 7% Capital Investment Bonds
(xiii) 6.5%, 8%, 9% or 10% National Relief Bonds.
B. Tax Free Securities
a) Tax free commercial (non – government) securities
The securities issued by a Local Authority, a Statutory Corporation
or a Company in the form of debentures or bonds are called tax- free
commercial (Non – Government) securities. Actually, these are not tax -
free, tax is paid by the issuing authority on behalf of he security holder.
Therefore the security holder is liable to tax not only for the interest he
is to receive but also the amount of tax which is deposited in the
Government Treasury on his behalf . The actual amount of interest
received by the holder is the net interest . It is only the gross interest
which is to be considered while computing income under this head .
Gross interest can be calculated in the following manner.
Gross Interest = Net interest × 100
100-tax deducted at source
Note:
If face value of security and rate of interest are given in the problem,
first calculate the amount of interest by multiplying face value with rate
of interest . The amount so arrived is the net interest which is to be
grossed up by using the above formula.
b). Tax free Govt. Securities:- These securities are no longer in existence.
c). Less Tax Securities:-
These are the most common form of securities. Before making payment of
interest, the issuing authority has to deduct tax at the prescribed rates. The
assessee is to pay tax on the gross amount of interest. If it is given as interest
received or net amount of interest or interest after deduction of tax such interest
is to be grossed up
Gross Interest = Net Interest X 100
100-Rate of TDS
When the face value of security and the rate of interest or given, it will
directly give the gross interest (Face value of security x rate of interest)
149
1.4 Deductions [Section 57]
The following deductions are allowed while computing income under the head
Income from Other Sources.
1. In case of dividend and interest on Securities.
Any amount spent by way of commission or remuneration to a banker
or any other person as collection charges for realizing the dividend or interest
on securities is allowed as deduction
2. In case of letting of plant, machinery or furniture with or without
building
The following deductions shall be allowed from the income earned by letting
of plant machinery or furniture with or without building
i. Current repairs of plant, machinery, furniture and building
ii. Insurance premium paid on these assets.
iii. Depreciation on plant, machinery and furniture. Depreciation in respect
of building will be allowed only if the assessee is the owner of the
building.
3. Deduction in respect of employee’s contribution to staff welfare schemes
Any amount received by employer from his/her employees as their
contribution to provident fund, E.S.I fund or super annuation fund is deemed
as income of the employer if not taxable under the head “ Profits and Gains of
Business or Profession”. But, in case employer deposits the amount so received
before the prescribed due date, such amount is allowed as deduction.
4. Standard deduction out of family pension
Family pension is the amount which is regularly payable by the
employer to the legal heirs of the deceased employee. For such income, a
deduction equal to 33 1 % of such pension or Rs. 15,000 whichever is less is
3
allowed.
5. Deduction from royalty income received (other than those writing for
films)
Actual expenses incurred can be claimed as deduction.
6. Deduction from any other income
Any expenditure which is spent solely in the relevant previous year to
earn any income chargeable to tax under this head is allowed as deduction. But
such expenditure should not be in the nature of personal or capital expenditure.
150
1.5 Expressly Disallowed Amounts (Section 58)
The following expenses are not allowed to be deducted from such
incomes.
i. Personal expenses of the assessee,
ii. Any interest chargeable under this Act which is payable outside India
on which tax has not been paid or deducted at source.
iii. No deduction is allowed in respect of any expenditure incurred for
earning /receiving casual incomes.
iv. Any payment made in cash to relatives and associates may be
disallowed under section 58 (2)
1.6 Profits Chargeable to Tax [Section 59]
Any amount received or benefit derived in respect of any expenditure
incurred or loss or trading liability allowed as deduction in any earlier previous
year, shall be deemed as income in the year in which the amount is received or
the benefit is accrued.
1.7Bond washing Transaction [Section 94]
It refers to selling of securities to another person (may be a friend or
relative) just before the due date of interest or dividend in order to avoid tax
and acquiring the same securities back after the due date of interest or
dividend. If a person makes a transaction with the intention of avoiding tax,
then interest or dividend received by the transferee will be deemed as in come
of the transferor and will be included in the total income of the transferor.
1.8 Methods of Accounting [Section 145]
Income chargeable under the head “ Income from Other Sources” shall be
computed in accordance with i) Cash system of accounting or ii) Mercantile
system of accounting or iii) Hybrid system of accounting, regularly employed
by the assessee. The accounting system once adopted cannot be changed
without the prior approval of Income Tax authorities.
i. Cash System
Under this system, all cash and credit transactions are recorded in which
actual receipts and actual payments of business occur. No account is
maintained for outstanding, prepaid and accrued incomes or payments.
ii. Mercantile system
In this system, all cash and credit transactions are taken into account for
computing the profit or loss of the business.
151
iii. Hybrid System
Under this system, some transactions are recorded in cash system and
some transactions under mercantile system depending upon the option of the
assessee.
Illustration 1.
Sri.Kumar furnishes the following particulars of incomes for the
previous year 2008-09, Compute his total income.
Rs.
i) Dividend on Equity shares (Gross) - 600
ii) Dividend on preference shares - 3200
iii) Income from letting on hire of building
and machinery-Composite lease - 17000
iv) Interest on bank deposits - 2500
v) Directors sitting fees - 1200
vi) Ground rent - 600
vii) Income from undisclosed sources - 10000
viii)Income from lotteries (gross) - 10000
The following deductions are claimed by him.
a) Collection charges of dividend Rs. 20
b) Allowable depreciation on
building and machinery Rs. 4,000
c) Fire insurance premium on
building and machinery Rs. 100
Solution
Computation of income from other sources of Sri Kumar for
the Assessment Year 2009-10
General Incomes 56(1) Rs Rs
Interest on bank deposits 2500
Directors sitting fees 1200
Ground Rent 600
Income from undisclosed sources 10,000 14,300
1. Specific Incomes 56(2)
Dividend on Equity shares (Exempted) Nil
Dividend on preference shares (Exempted) Nil
152
Income from letting of building
& Machinery- Composite lease - 17,000
Less. Expenses incurred on building &machinery
Allowable depreciation - 4,000
Fire insurance premium - 100 4,100
12,900
Income from Lottries (Gross) 10,000 22,900
Income from Other Sources 37,200
Note :- Since dividend declared by an Indian company is exempted from tax,

collection charges of dividend is not an allowable deduction.
Illustration -2
Mr. X has the following incomes during the year ending 31.3.2009
Rs.
1. Dividend declared by M.Co. on 31.03.2008 6,000
2. Dividend declared by Z. Co. on 31.03.2009 9,000
3. Interim dividend received on 01.05.2008 3,000
4. He won gold worth Rs. 10,000,000 from Punjab State Lottery
5. During March 2009 he earned Rs. 1,00,000 as prize money on
horse races. These horses are owned by him and expenditure incurred
on maintenance of these horses amounted to Rs. 1,60,000.
Compute income from other sources for the assessment year 2009-10.
Solution. Computation of Income from Other Sources
Dividend Rs.
a) Declared by M.Co. on 31.03.2008 (Not income of 2008-09) Nil
b) Declared by Z. Co. on 31.03.2009 – Exempted Nil
c) Interim Dividend received on 01.05.08- Exempted Nil
Winnings from Lottery
Gold from Punjab State Lottery 10,00,000
Prize money of race horse 1,00,000
Less: expenses on maintenance of these horses 1,60,000
Loss : to be carried forward 60,000 Nil
Income from Other Sources 10,00,000
153
Illustration :3
Harikrishnan, a resident individual, submits the following particulars of
income for the previous year ending March 31, 2009.
Dividend from REC International Ltd Rs. 4800. Dividend declared on
16.05.2008 by Sundaram Finance Ltd. Rs. 27000, interest paid on capital
borrowed for the purpose of investment in shares of Sundaram Finance Ltd.Rs.
4,200.Collection Charges in respect of dividend Rs. 50.
Winnings from lottery: net amount Rs. 69,100, Tax deducted at source
Rs. 30,900, winnings from card games: Rs. 23,500. Interest on securities issued
by the Government of Singapore Rs. 20,570.
Determine the income chargeable under the head “Income from Other
Sources” for the assessment year 2009-10.
Solution.
Computation of Income from Other Sources
Rs Rs
I. General incomes 56(1)
Interest on securities issued by
Govt. of Singapore 20,570
II. Specific incomes 56(2)
(i) Dividend
(a) R.E.C. international Ltd – Exempted Nil
(b) Sundaram Finance Ltd - Exempted Nil
Cross dividend Nil
Less expenses -- .
(a). Interest on loan-Not allowed
(b). Collection charge-Not allowed Nil
Nil
(ii) Winning from lottery : Net 69,100
Add TDS 30,900
1,00,000
(ii) Winning from card games 23,500
Gross winnings 1,23,500
Income from Other Sources 1,44,070
154
Note:
Since dividend from an Indian Company is not taxable in the hands of its
shareholders, interest paid/payable on borrowed money to buy shares is also not
deductible.
Illustration : 4
Mr. Sivanand has following investments in the previous year ended 31st March
2009.
(i) Rs.11,000, 10% karnataka State Govt. Loan.
(ii) Rs. 30,000, 13..5% debentures of Lohia Machine Tools Ltd. (Listed)
(iii) Rs. 35,000, 11% Securities of Sugar Mill Company (not Listed)
(iv) Rs. 31,760, 10% Tax free commercial Securities
(v) Rs. 3,580, received as interest on Tamilnadu Govt. Securities
(vi) Rs. 3,573, received as interest on the Securities of a Paper Mill
Company (not Listed)
(vii) Rs. 4,485, received as interest on Securities of Textile company
(Listed).
During the previous year 2008-09 . He purchased Rs. 50,000, 7% Capital
investment Bonds on 1st Oct 2008. For this purpose he borrowed Rs. 30,000
from bank at 15% p.a. Interest on all Securities is payable on 30 june 31st Dec.
The bank charged 1½ commission on net realization of interest as collection
charges.
He was also a director in a company from which he received Rs. 3,000, as
directors fees. His other incomes are :
1. Winnings from lottery Rs. 25,000
2. Income from Agriculture in Srilanka Rs. 10,000
3. Winnings from horse race Rs. 15,000
4. Interest on post office Savings Bank Account Rs. 2,000.
Find out his taxable Income from Other Sources for the Assessment
Year 2009-10.
155
Solution:
Computation of Income from Other
Sources of Mr. Shivanand for the Assessment Year 2009-10
General Incomes u/s 56(1) Rs. Rs.

Directors fees 3000
Income from agricultural land in Sri Lanka 10,000
Interest on post office savings Bank Account Nil
(Exempted) 13,000
Specific incomes u/s 56(2)
Winnings from Lottery 25,000
winning from horse race 15,000
40,000
Interest on Securities
Gross interest TDS Amount Net interest
Rs. (Rate and Amount) Rs Rs.
1. Karnataka state Govt.
Loan (11000 X 1,100 - - 1,100
2. Debentures of lohia
Machine tools (Listed) 4,050 (10.3) 417 3,633
(30,000 X )
3. Securities of Sugar mill
(less tax Security ) 3,850 (20.6) 793 3,057
4. Tax free commercial
Securities
31760 X =3,176
Grossed up value-
3176 X 4,000 (20.6) 824 3176
(Not Listed)
5. Tamil Nadu Govt. 3,580 - - 3580
Securities
6. Securities of Paper
Mill Company
156
( Not listed)
Grossed up value
Received X
3576 X 4,500 (20.6) 927 3573
7. Securities of Textile
Company (Listed)
(less tax)
Received- 4485
Grossed up value
4485 X
4485 X 5,000 (10.3) 515 4485
26,080 3476 22604
Gross interest 26080

Less. Deduction – collection charges
1 ½ % on Net interest realized
22,604 X 339 25,741

Note :
Interest on 7% capital investment Bond is exempted from tax. So interest
paid on money borrowed for the purchase of capital investment bond is not an
allowable deduction.
Illustration-5
Rs
Mr. Rama rao furnishes the following particulars of his income
1. Dividend from U.T.I on unit 1964 scheme Rs. 17,000
2. Dividends (gross) from Tea Company 60% of the income of company is
agricultural income Rs. 3,000
3. Interim dividend @ 10 % on share holding Rs. 15,000 in a textile Mill. It
was declared and paid on 25 .2.2009 Rs. 1,500
4. Dividend from a foreign company in Germany. Tax deducted at
source has not been paid by the company to the Government of India
Rs. 4,000.
157
5. Interest on term deposits with bank (Net) Rs.10,764
6. Director’s fees Rs. 2,000
7. Income from letting out of machinery, plant etc., after cessation of
businessRs.30,000
8. Royalties from mining Rs.10,000
9. Monthly Rent Received by sub-letting a house.
(The house was got on rent @ rupees 200 P.M. in year 1991)
1,000
Expenses incurred on house- repairs Rs. 3,000 & others Rs.1000)
10. Winnings from lotteries Rs.25,000
He claims the following expenses :
i. Collection charges for U.T.I dividend Rs. 300
ii Interest on money borrowed to purchase shares of textile mill.
Rs.10,000
iii Depreciation and other expenses in respect of plant & Machinery
Rs. 5,000
Solution :
Computation of Income from Other Sources of Mr. Rama Rao
for the Assessment Year 2009-10
General incomes u/s 56 (1) Rs Rs.
Directors fees 2,000
Royalty from mining 10,000
Interest on term Deposit with
Bank (Net) Rs.10, 764
Gross interest - 10764 X 100
100-10.3 (TDS)
10,764 X 12,000
Income from sub-letting
Rent Received by subletting at
Rs. 1000/month (1000 X 12 ) 12,000
Less. Expenses incurred
1. Rent paid for the
House at Rs.200 / month
200 X 12 - 2,400
158
2. Repairs - 3,000
3. Others - 1,000 6400 5600 29,600
Specific Incomes u/s 56(2)
Dividend from U.T.I (Exempted) NIL
Dividend from Tea Company (Exempted) NIL
Interim Dividend from
a textile mill ( Exempted) NIL
Dividend from foreign company 4000
Dividend from letting of
Machinery plant etc 30,000
Less:depreciation and others
expenses intespect of P/M 5,000 25000
Winnings from lotteris 25000 54,000
Note: Collection charges for UTI dividend and interest on money borrowed for
purchase of shares of textile mill are not allowed as deductions.
QUESTIONS
1. What are general and specific incomes chargeable to tax under the head
income from other sources ?
2. Enumerate the items of deductions allowable in computing income from
other sources.
3. List out the items for which no tax is deducted at source.
4. What is a bond washing transaction?
5. Compute Income from Other Sources of Mr. Hari for the Assessment Year
2009-10.
a) 8% Rs. 50,000 debentures of PQR Ltd;
b) Interim dividend 3,000
c) Dividend from a company 4,000
d) Directors fees 18,000
e) Salary from his employer at Rs. 4000per month 48,000
f) Income from sub-letting 3,000
g) Rent received from vacant land 4,800
h) Interest on fixed deposit (gross) 6,000
i) 5% Rs. 60, 000 U.P. Government loan
(Answer- Rs. 38,800)
159
6. Comupte Mr. Anand’s Income from Other Sources form the following
particulars
Rs.
i Winnings from card games 21,550
ii Dividend (Gross) 6,800
iii Dividend (Net) 8,000
iv Receipts from letting of plant and Machinery 25,000
v Insurance premium in respect of plant and Machinery 500
vi Repairs on plant & machinery 2,500
vii Depreciation allowed on plant and machinery 7,000
viii Bank charges in respect of collection of dividends 250
(Answer- Rs.36,550)
160
UNIT - IV
CHAPTER - 2
Aggregation Of Income
According to sections 60- 69, the following incomes are also

included whilecomputing the total income of an assessee.
i. Income of the other persons to be included in the income of
individual (Sections 60 to 64)
ii. Income received from firm assessed as firm and Association
of persons (Sections 66 and 67)
iii. Deemed incomes (Sections 68 and 69)
2.1.Incomes of the other persons to be included in assessee’s total
income (Sections 60- 64)
a) Meaning of transfer
Transfer means any settlement ,trust, covenant agreement or
arrangement.
b)Transfer of income where there is no transfer of assets (Section
60)
If an assessee transfers to another person some income but
without transferring the asset producing that income, such income shall be
treated as the income of the transferor and included in his total income.
c) Revocable transfer of assets (Section 61)
If a transfer gives the transferor the right. (1) for the re- transfer
directly or indirectly of the whole or any part of the income or assets
or (2) to re-assume power directly or indirectly over the whole or any
part of the assets or income.
All incomes arising from revocable transfer of assets shall be
chargeable to income tax as the income of the transferor.
d)Irrevocable transfer for a specified period (Section 62)
If a transfer falls under any of the following categories it is called
irrevocable transfer and any income arising from such transfer shall be
regarded as income of the transferee.
i. By way of trust which is not revocable during the life time of the
beneficiary or
ii. In the case of any other transfer, not revocable during the life
time of the transferee, or
161
iii. Transfer made before 1.4.1961, not revocable for a period exceeding
six years.
Provided the transferor derives no direct or indirect benefit from
such income.
e) Remuneration of spouse from a concern (Section 64 (1) (ii))
Any income arising to spouse by way of salary, fee,
commission or any other form of remuneration whether in kind or in
cash from a concern in which such individual has substantial interest
(having at least 20% voting power in the company or entitled to at least
20% of profit in case of firm), shall be considered as income of such
individual.
If the spouse earns income from the concern by applying his
professional or technical skill and knowledge, then such income shall not
be included in he income of the individual .Spouse means husband or
wife.
f) Income of spouse from assets transferred (Section 64(i))
Any income earned by a spouse from an asset transferred without
adequate consideration is treated as the income of the individual (transferor).
But if the spouse purchases assets from her savings or if the spouse received
assets before her marriage, then income from such assets shall be considered
as his \her income.
If the spouse purchases an asset from the income of the transferred
asset, any income from the asset purchased shall not be included in the
income of the transferor.
g)Income from assets transferred to son’s wife without adequate
consideration(Section 64 (1) (vi) )
If an individual transfers an asset after 1.06.1973 to his daughter-
in-law without adequate consideration, then income from such transfer shall
be regarded as the income of the transferor.
h)Assets transferred for the benefit of the spouse or for the benefit
of son’s wife (Section 64 (1) (vii) and (viii) )
If an individual transfers an asset to any person(s) without
adequate consideration, but the income from such transfer is for the
immediate or deferred benefit of his\her spouse or son’s wife, then such
income is to be treated as the income of the individual.
162
(i) Investment of assets transferred without adequate consideration in
business (Section 64(1))
If the spouse (transferee) invests the asset(s) in business, then a
proportionate amount of income as calculated below is included in the
income of the individual (transferor).
i)In any business but not in the form of capital as a partner in a
firm.
Business income X
ii) In the form capital in a firm

Interest × Amount invested from the asset
Total capital invested in the firm by the transferee.
j) Income of minor child (Section 64(1A) )
Any income arising to minor child shall be clubbed with the
income of that parent whose other income is higher. If parents are not
living together, then the income is to be clubbed with the income of that
parent who maintains the minor child.
It is important that if minor’s income is included in the income of
one of the parents, then without the approval of the assessing officer it
shall not be included in the income of the other parent.
If the minor child earns any income by doing manual work or by
applying his specialised knowledge, skill or experience, then such income
shall not be included in the income of the parent.
If the income of a minor is included in the income of the parent ,
that parent can claim exemption u/s 10(32)to the extent of the income so
clubbed or Rs1500 per child whichever is less.
Income of a minor child who is suffering from any of the
disabilities specified u/s 80U,shall not be clubbed.
k)Transfer of self - acquired property to HUF (Section 64(2))
U/S 64(2) where an individual converts his individual or self
acquired property into joint family property without/ inadequate
consideration, then any income derived from the converted property shall
be deemed to arise to the individual and not to the family. But if the
property of family is partitioned then income accruing to spouse and or
minor child from the converted property on partition shall be included in
the income of the individual.
163
l) Benami Transactions
The income from benami transaction shall be taxable in the hands
of the real person and hence the benamider is not taxed for the income
arising from such transactions.
M) Income received from AOP (Section 67A)
In the aggregation process the share of income received by a
person as a member of association of persons is included in total income
but it is tax free.
2.2 Deemed Incomes
i) Cash Credits (Section 68)
Where any sum is found credited in the books of accounts
maintained by an assessee for any previous year and the assessee offers
no explanation about the nature or source thereof or the explanation
offered by him is not satisfactory in the opinion of the assessing officer
,the sum so credited may be charged to income- tax as the income of the
assessee of that previous year and is treated as income from undisclosed
sources. Such cash credits may be treated either as business profits (if
assessee belongs to business community) or income from other sources.
ii) Unexplained Investments (Section 69)
If any investment made by the assessee in the previous year is not
recorded in the books of accounts and the assessee fails to furnish any
satisfactory explanation regarding the sources or if the assessing officer is
not satisfied with the explanation offered by the assessee, the value of
such unexplained investment may be deemed to be the income of the
assessee.
iii) Unexplained Money etc(Section 69A)
If the assessee is found to be the owner of any bullion, money,
jewellery or other valuable articles not recorded in the books of accounts
of the assessee and if the assessee does not furnish any explanation about
either acquisition or if his explanation is not satisfactory to the assessing
officer , then such valuable items may be deemed to be the income of the
assessee.
iv) Account of Investment, etc. not fully disclosed in the Books of
Accounts (Section 69B)
If the actual amount spent on the acquisition of certain
investments, jewellery, valuable articles etc. is more than what is shown
in the books of accounts and if the assessee does not furnish any
explanation or with his explanation, the assessing officer is not satisfied,
164
the excess amount (difference between actual amount spent and the
amount recorded) may be deemed to be the income of the assessee.
v) Unexplained Expenditure (Section 69C)
Where in any financial year, the assessee has incurred any expenditure
and he offers no explanation about the source of such expenditure or part
thereof or the explanation given is not satisfactory to the assessing officer,
the amount covered by such expenditure or part thereof may be deemed to
be the income of the assessee.
vi) Payment of Hundi Money in Cash(Section 69(1) )
If the assessee has borrowed any money on ‘hundi ’ or repaid on
‘hundi’ otherwise than in account payee cheque drawn upon a bank, then
the amount borrowed or repaid shall be deemed to be income of the
assessee. Amount repaid shall include the amount of interest also.
Questions
1. Under what circumstances income of other persons can be included in
the income of the assessee under Income- Tax, Act 1961.
2. What are deemed incomes ?
165
UNIT - IV
CHAPTER - 3
SET –OFF AND CARRY FORWARD OF LOSSES (Sections 70-79)
3.1. Set-off loss within the same head of income.
Income –tax is levied on the total income of the assessee. Total income
is calculated by aggregating income under different heads. The assessee
may have income from different sources falling under one head. So the
income under one head is computed by adding together the incomes from
different sources which fall under the same head. According to section
70, the loss of one source can be adjusted against the income of another
source falling under the same head . A loss which could not be set off
within the same head of income shall be allowed to be set off out of
income from any other head in the same year.
3.2.Important points to be borne in mind in case of set off losses in
the current previous year outside the head (Inter –Head Set Off)
1. There will be no loss under the head salary.
2. Loss from house property can be set off against income under any
other head.
3. Loss from business (non-speculative) can be set off from income
from house property, capital gains and income from other sources
and speculative business income.
4. Loss from speculative business cannot be set –off from any other
income except income from speculative business.
5. Short –term capital loss can be set –off against long term or short –
term capital gain. But long –term capital loss can be set –off only
from long -term capital gain.
6. Loss from owning and maintaining horses for race purpose can be
set –off only from income from the same activity i.e. owning and
maintaining of race horses.
3.3. Carry –forward and set -off of losses.
The concept of carry forward and set-off of losses will arise only
when any loss can not be adjusted in a particular previous year. If a loss
cannot be adjusted either within the head or other heads in the previous
year, then that part of loss which remains unadjusted will be taken to the
next previous year / years to get it adjusted. This is known as carry forward
and set-off of losses. For any loss to be carried forward and set –off, filing
of return of loss is compulsory.
166
3.4.Points to be kept in mind in case of carry forward and set- off of
losses.
1. The question of carry forward and set –off of loss will not arise
in the head salary because there will be no loss under the head
salary.
2. Loss from house property can be carried forward for a period of 8
subsequent previous years and set –off only from income from
house property.
3. Non – speculative business loss which was not adjusted during the
previous year can be carried forward for 8 previous years and
should be set –off only from income from business or profession. It
is not necessary that loss should belong to the same business.
Continuity of business is not necessary.
4. Speculative business loss can be carried forward for a period of 4
years and set –off from income from speculative business.
5. Long –term capital loss can be carried forward for a period of 8
years and set- off only from long -term capital gain .
6. Short –term capital loss can be carried forward for 8 years and set-
off from both long term and short –term capital gain.
7. Loss from owning and maintaining horses for race purpose can be
carried forward for 4 years and set –off only against income from
the same activity.
8. Any depreciation which remains unadjusted (called unabsorbed
depreciation ) as there is no income or less income in the relevant
previous year, it can be carried forward till it is fully adjusted from
any income during the succeeding previous years.
3.5.Order in which current and brought forward losses are to be
adjusted
Out of profits of the current previous year, the losses and expenses
will be adjusted in the following manner.
1. Current depreciation
2. Current expenditure on scientific research
3. Current loss of another business
4. Brought forward business losses of earlier previous years (oldest
loss to be adjusted first)
5. Brought forward unabsorbed depreciation
6. Brought forward expenditure on scientific research
167
Illustration 1
From the following particulars of income or loss of an individual
under various heads of income, set off losses and find out the income.
Rs
Income from house property A 5,000
Loss from house property B (-) 8,000
Income from interest on securities 20,000
Loss from cycle business (-)20,000
Profit from speculation business 20,000
Loss from short -term capital asset (-) 6,000
Long –term capital loss (-)25,000
Long -term capital gain 21,000
Solution
Computation of Total Income
House property income
Rs Rs
Income from house property A 5,000
Loss from house property B (-)8,000
Loss from house property (-) 3,000
Can be set off against income from any other head -3,000
Business income
Profit from speculation business 20,000
Loss from cycle business (-) 20,000
Income from business
NIL
Capital gains
Long term capital gain 21,000
Long term capital loss (-)25,000
Long -term capital loss to be carried forward (-) 4,000
Short -term capital loss to be carried forward (-) 6,000
NIL
Income from other sources, interest on securities 20,000
168
Illustration 2.
From the particulars given below compute total income of Mr.Ram
for the Assessment Year 2009-2010
1. Loss from house property (-) 8,000
2. Short -term capital gain from sale of shares 95,000
3. Long - term capital loss (-) 85,000
4. Interest on government securities 18,000
5 Unabsorbed depreciation of discontinued business
brought forward from 2001-2002 35,000
Solution
Computation of Total Income
House property income Rs
Loss from house property (-) 8,000
Capital gain
Long-term capital loss to be carried forward (-)85,000
Short –term capital gain from other sources (+) 95,000
Income from Other Sources
Interest on Government securities (+) 18,000
Brought forward Unabsorbed depreciation can be
set off against any income (-) 35,000
Gross total income 70,000
Questions
1. Explain the provisions of Income-Tax Act, 1961 regarding set-off and carry
forward and set-off of losses.
2. Miss.Priya submits the following informations of her incomes and losses for
the year ending 31.3.2009
Rs
1) Salary income (computed) 24,000
2) Income from house property:
House A (income) 10,000
House B (loss) 40,000
House C (self-occupied)loss 28,000
3) Income from business:
Cloth business (profit) 10,000
169
Hardware business (loss) 12,000
Speculation (profit) 12,000
Speculation (loss) 17,000
4) Capital gains:
Short-term (gain) 8,000
Short-term (loss) 24,000
Long-term (gain) 8,000
5) Other Sources:
Income from betting 12,000
Loss from card games 6,000
Income from card games 9,000
Interest on securities (gross) 8,000
Compute Miss. Priya’s gross total income. (Answer: Rs 21,000)
170
UNIT - IV
CHAPTER - 4
Deductions from Gross Total Income
Gross Total Income refers to the sum total of various heads of
income such as salary, house property, profits and gains of business or
profession, capital gains and income from other sources. In computing the
total taxable income of an assessee certain deductions under sections
80Cto 80 U are allowed from Gross Total Income. These deductions are
divided into two categories .
A. Deductions in respect of certain payments.
B. Deductions in respect of certain incomes.
CHART SHOWING COMPUTATION OF DEDUCTIONS UNDER
SECTION 80 OUT OF
GROSS TOTAL INCOME
A.DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
SECTIO DEDUCTION WHO CAN QUALIFYING PERIO RATE
N CLAIM AMOUNT D
1. 80C Refer salary

Income
2. 80CCC Pension fund Individual Any amount Every Actual
of LIC or paid to LIC year amount paid
other insurer under pension or
fund set up u/s Rs10,000.p.a
10 (23AB) which ever
is less
3.80CCD
Employees of
Every
central
year
government Amount Amount
contributed by contributed
employee by employee
joining on or or employer
after 1-1- (each)or
4.80CCE Restriction 2004and 10%of salary
amount whichever is
Every
contributed by less
year
central Govt.
.i.e. employer
towards
pension fund
5.80D Health Individual
171
Insurance &HUF The aggregate
amount of Every
deduction under year
section 80C,
section 80CCC
6.80DD Medically -do- and Actual
handicapped (resident) section80CCD amount paid
dependent and shall not in any or
deposit with case, exceed Rs.15,000wh
Every
LIC or UTI one lakh rupees ichever is
year
less [for
senior
Amount paid to
citizen limit
G.I.C. or other
is Rs.20,000]
insurer for
7.80DDB Individual & health
Expenses on Rs.50,000
HUF insurance
treatment p.a. but for
(mediclaim)
severe
disability
Every Rs. 75,000
Any amount year p.a.
spent on
training,
treatment or
rehabilitation
and making a
deposit with
L.I.C. or U.T.I.
Rs 40,000 p.
under a scheme
a or actual
8.80E Individual only to provide
Interest on expenditure
annuity to a
loan taken for w. e is less
mentally
higher .For senior
retarded or
education citizen Rs
physically
60,000 or
handicapped
For actual
dependent.
initial + expenditure
All assesses 7 years w. e. is less.
Expenditure Amount of
9.80G
Donations to incurred on deduction to
approved funds treatment of be reduced
and institutions self dependent by amount
member of of insurance
family or on cliam
any member received.
HUF who is Q. A
suffering from a
notified disease.
172
100% Actual
100% amount of
interest paid
100%
100%
100%
Amount of
interest paid 100%
against loan
taken for his 100%
own, spouse,
100%
children higher 100%
education. Loan
must be taken 100%
100%
from any
financial 100%
institution or
approved
institution 100%
100%
Donation 100%
A. No limit
donations:
100%
1. To P.M. 100%
National
Relief Fund 100%
100%
2. To Africa
Fund 100%
3. To Armenia
Earthquake 100%
Relief Fund 100%
4. To University
100%
or institution
of National
Eminence (so 100%
notified) 100%
100%
5. To National 100%
Foundation 100%
for communal
100%
harmony 100%
100%
6. To the Chief
Minister’s
173
Earthquake 100%
Relief Fund,
Maharashtra
100%
7. To zila
100%
Saksharta
Samiti 100%
8. To National 100%
Blood 100%
Transfusion
Council or 100%
State Blood
100%
Transfusion
Council
9. To any fund
set up by the
State 100%
Government
100%
to provide
medical relief
to poor
10. To Army
Central 100%
Welfare
Fund,India
n Naval 100%
Benovelont 100%
Fund or Air
Force 100%
Central
100%
Welfare
Fund 100%
11. To National 100%
Illness
Assistance
Fund
Actual 100%
12. To Andhra total of
Chief 1 to 8 or
Minister’s 50%
10% of
Cyclone gross 50%
Relief Fund tax -
13. To Chief able 50%
Minister income
Relief Fund whichev
50%
or er is
Lieutenant less is 50%
Governor Q. A.
174
Relief Fund
14. National Out of Q.A.
Sports 100%of
Fund donation for
15. National F. P. +by a
Cultural company to
Fund I. O. A and
balance Q.
16. Technology
A.
Developme
nt and
Application
Fund
17. To national
Defence
Fund
18. Any fund
set up by
the State 50%
Governmen
t of Gujarat
exclusively
for
providing
relief to the
victims of
earthquake
in Gujarat
19. Any sum
paid by the
assessee
during the
period
Individuals beginning
10.80GG Payment of on the 26th
house rent in day of
certain cases January
only 2001 and
ending on
30th day of
September
2001 to any
trust,
All such
Donation given institution
11.80GG assesses except Every
for rural or fund to
A those who have year
development which this
any income or
programme or section
loss under the
applies for
175
scientific head profits providing
research and gains of relief to the
business or victims of
profession earthquake
in Gujarat
20. To the
National
Trust for Every
Welfare of year in
persons which
(a)Rs. 2000
with autism such
p.m.
, cerebral amount
palsy is given (b) Rent
,mental Paid-10%of
retardation Adj. G.T.I
and (c)25% of
multiple Adj.G.T.I.
disabilities which ever
21. To P.M.. is less
National
Drought
Relief Fund
22. To National
Actual
Children
expenditure
Fund
is fully
23. To allowed
Jawaharlal
Nehru
Memorial
Fund
24. To Indira
Gandhi
Memorial
Trust
Indian
25. To Rajiv
company
Gandhi
Foundation
B.With limit
Any person donations
other than local 1. To State Govt.
12.80GG Deduction for authority or
2. To Local
B amount given artificial
Authority
to a political juridical person
party 3. To
Educational
Institution
176
13.80GG Deduction for 4. To Charitable
C amount given Institution
to a political 5. To Sports
party Institution
Every
6. To a year
corporation
set up to
protect the
interest of
minorities Every
7. To an year
authority
constituted for
development
of housing
and planning
of cities and
towns
8. To a place of
art , public
worship or 100%of
historical donation
importance
(so notified)
9. To an
institution or
association 100% of
engaged in donation
promotion of
family
planning in
India
10. Any sum
paid by the
assessee
being a
company in
the previous
year as
donation to
the Indian
Olympic
Association
or any other
institution as
notified by
the central
177
government
u/s
10(23)for
i)the
development of
infrastructure
for sports and
games in India
;or
ii)the
sponsorship of
sports and
games in India
G. tax. I = G.
T. I.–(long
term capital
gain + all other
deductions u/s
80+ rebateable
income ,if any)
Rebateable
income =share
of income from
AOP provided
total income of
such AOP
exceeds the
exempted limit
i.e Rs
100000and its
income is not
taxable at
MMR
He is living in
rented house He
does not have a
self occupied
house any
where in India
and in that town
on his own
name or on the
name of any
member of his
family or HUF
178
He is not
getting any
HRA
i. Donation given
to institution or
association
engaged in
scientific
research and
approved for
the purpose
ii. Donation
given to
institution or
association
engaged in
approved rural
development
programme or
conservation of
natural
resources or
afforestation
iii. Donation
given to
institution
engaged in
training of
persons for
rural
development
programme
iv. Any amount
given to a Rural
Development
Fund (from 1-4-
83 onwards)
v. Any amount
given to fund
for afforestation
vi. Any amount
given by
assessee to a
university,
college or other
179
institution (so
notified) for
research in
social science
or statistical
research
vii. Any amount
paid by
assessee to
public sector
company or a
local authority
or to an
institution or
association
approved by the
National
Committee for
carrying out
any eligible
project or
scheme
viii. Fund set up
for eradication
of poverty.
Any donation
given to a
political party
Any donation
given to a
political party
180
B. DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
14.801A Deduction for All assessees Infrastructural 100% of

profits from facility, profit for 10
infrastructural Telecommuni consecutive
undertakings cation, assessment
Industrial years
Parks, Cross
country
natural gas
distribution
network
15.801A All assesses 10

B previous
100% profits
year out
of first 15
Developers of previous
special years
economic
All assesses zones
Deduction for
16.801B
profits from 25% (for all
industrial but)30%
undertaking, ship -do- (only co’s) of
or hotel profits from
(a)(i)Industrial such unit for
Only for
undertaking 10 yrs.
Indian
companies set up after 1-
only for 4-91 but
indian before 31-3-95
companies (ii)industrial
only for undertaking From
indian set up in 1-4-2001
companies industrially onwards
backward
areas during 100% for
1-10-94 to 31- first 5 years
3-99 30% (25% in
(iii)Industrial case of non-
undertaking company
set up in small assesses) for
scale sector next 5 years
during 1-4-91 30% of
to 31-3-2000 profits from
shipping
181
(iv)Profits business for
from an 10 years.50%
undertaking of profits
engaged in the from such
integrated hotel for 10
business of years.(In all
handling the above
storage and cases
transportation deduction is
of foodgrains to be allowed
[section for 12 years
80IB(11a)] to a Co-op.
(b)ship Society)
17.80IC Deduction for acquired after

setting up 1-4-91 but
All assesses
industrial before 31-3-95
undertaking in (c)business of
special states hotel set up in
rural areas,
hilly areas or
places of
pilgrimage
during 1-4-90
to 31-3-94 or
between 1-4- 100% for 10
97 to 31-3- assessment
2001 years
(d)Business of
hotel set up
any where in
India during
1-4-91 to 31-
3-95 100% for 5
assessment
years 30%
for
companies(2
(a)producing 5% for
any article not others)therea
included in fter
13th schedule,
industry set up
in the state of
100% for 10
Sikkim during
asessment
23-12-2003 to
years
31-3-2012
(b)producing
182
any article not
included in
13th schedule,
100% for 5
industry set up
asessment
in the state of
years
Himachal and
Uttranchal
during 7-1- Every
2003 to 31-3- year in
18.80JJ Profits and gains
2012 which 100% for 5
A of bio-waste All persons
(c)producing such assessment
any article not income is years 30%
included in included for
13th schedule, companies
industry set up (25% for
in the north- others)therea
eastern states fter
Any industrial during 24-12- For 3
19.80JJ undertaking 1997 to 31-3- years
Co.assessees
A which creates 2007
new jobs 100% for 10
(d)producing
assessment
any article
years
included in
Deduction for 14th schedule
income of Indian industry set up
20.80LA offshore fund scheduled in the state of
bank Sikkim during
23-12-2002 to
31-3-2012
Income from (e)producing Every 100% of such
21.80p cooperative Co-op year income
any article not
societies society
included in
13th schedule
industry set up
in the state of
Himachal and
uttranchal
during 7-1-
2003 to 31-3- 30% of
2012 additional
(f)producing wages
any article not
included in
13th schedule
industry set up
in the north-
eastern states 100%for 5
183
during 24-12- assesment
1997 to 31-3- years 50%for
2007 next 5
assessment
years
Every
Profits from year
business of 100%of such
collecting, profits
processing or
treating of
bio-waste to
produce bio- Every
gas pallets for year
fuel,
generation of
power.
Every
year
-do-
22.80Q Authors of books Banking Rs 50,000(in

QB of artistics, income from case of
Individuals
scientific nature offshore consumer co-
banking unit Every op society Rs
in special year 1,00,000)are
Patentees economic allowed as
23.80RR zone deduction
Resident
B individual
Medically Profits of co- 100%of such
handicapped or op society income
mentally retarted from Every
24.80U Resident
assesses (a)banking year
individual
business
Every 100%of such
(b)cottage
year income
industry
(c)marketing
of agricultural 100% of
products amount of
interest on
(d)agricultural
securities or
implements ,
property
seeds ,
income
livestock etc
184
(e)processing
(f)Collective
disposal of
labour
(g)fishing and
other allied
activities Actual
royalty
(h)business of
income or Rs
supplying
3,00,000 w.e
milk, fruits
.is less
,oil seeds or
vegetables (w.
E. From 1-4-
88)to govt. Actual
Institution or royalty
statutory income or
corporation Rs3,00,000
Profits of a w.e. is less
coop society
from any other Rs 50,000 p.a
activity. but in case of
servere
Income from disability
interest or Rs75,000
dividend from
any other coop
society
Income from
letting of
godowns
Income of a
society from
transport
business and
manufacturing
business with
the aid of
power
provided
G.T.I. does
not exceed
Rs20,000
Royalty from
writing of
185
certain books
Royalty from
developing
patents
If assessee is
blind or
medically
handicapped
and produces
a medical
certificate
ILLUSTRATION 1.
Compute the total income of Mr. Jai from the following particulars for the
Assessment Year 2009-10
1. Income from house property (computed ) 30,600
2. Business income 40,000
3. Dividend from co- operative society (gross) 250
4. Capital gain – Long term 900
5. He paid Rs 14,000as LIC premium on his own life on a policy of
Rs1,00,000
6. He gave Rs 10,000as donation to a charitable institution approved
under section 80G
7. During the year he deposited Rs10,000 in equity linked saving
scheme notified u/s 80C
8. He deposited Rs 6,250 in NSS1992
9. Interest accrued on National Saving Certificate VIII issue
purchased in November 2007 for Rs 15,000 is Rs. 1,130.
186
Solution
Computation of Total Income of Mr. Jai for the Assessment Year 2009-10
RS
Business income 40,000
Capital gain-Long-term 900
Income from other sources
Dividend from co-operative society 250
Interest on NSC VIII issue 1,130 1,380
Gross total income 72,880
Less. Deductions u/s 80C
LIC premium (actual premium or
20% of policy value whichever is less) 14,000
Amount deposited in NSS1992 6250
Interest on NSC VIII issue 1130
Deposits made in equity linked saving scheme 10,000
31,380
(ii) u/s 80G-Donations
Q.A-Actual Donation of Rs 10,000 10% of gross total income
whichever is less Gross Total Income Rs-72,880
Less: Deduction u/s 80C 31,380
Long term capital gain 900 32,280
40600
10% of Gross Total Income = 40600 X 10 = 4060
100
Lesser amount = 4060
Rate of deduction is 50% of the qualifying amount
= 4,060 X 50 = 2,030 33,410
100
Total Taxable Income = 39,470
187
Questions
1. What do you understand by the qualifying amount u/s 80G?
2. Discuss briefly the provisions of Income Tax Act regarding deductions to be
made in computing the total income of an assessee in respect of certain
incomes
3. The following are the particulars of income of Mr Balu for the assessment
year 2009-10
Rs.
1 Income from house property (computed) 61,200
2 Business Income 80,000
3 Dividend (Gross) from a co-operative 500
society
4 Long term capital gain:
a) from Land 1,000
b) from Jewellery 800
5 He paid Rs.28,000 as LIC premium on his own life on a policy of
Rs.2,00,000
6 He gave Rs.20,000 as donation to a charitable institution approved
under Section 80G
7 During the year he deposited Rs.10,000 in Equity Linked Saving
Scheme, notified u/s 80C
8 He deposited Rs.12,500 in NSS 1992
9 Interest accrued on NSC VIII issue purchased in Nov,2007 for
Rs.30,000 is Rs.2,260
Compute his total income
(Answer : Rs.88,440)
188
UNIT - IV
CHAPTER - 5
Computation of Total Income (Individual HUF and Firm(FAPF)
5.1. Computation of total income of individual
5.1.1 The following incomes are included in the total income of an
individual.
1. Income earned by the individual himself,
2. Share of income from Association of Persons, and
3. Income of other persons u/s 60-65
5.1.2 Computation of tax liability
After computing the total income, the tax liability of the assessee is to
be calculated. Computation of tax liability involves the following steps.
1. Round off total income to the nearest multiple of Rs.10/-
2. Divide the total income into four parts.
a. For Long-term capital gain-calculate tax at the rate of 20%
b. For Short-term capital gain-on shares subject to Security
Transaction Tax(STT) - calculate tax at the rate of 15%
c. For Winnings from lotteries, puzzles races, card games and
gambling and betting-calculate tax at 30%
d. Balance is total income which will be rounded off- for the
balance calculate tax at the scheduled rates.
3. Add the taxes calculated as per step 2.
4. Calculate surcharge in the following manner and add it with the
amount of tax
a. If total income of the individual does not exceed Rs.10,00,000
NIL
b. If total income exceeds RS.10,00,000 10%
5. On the tax and surcharge calculated above, add
i) Education Cess at 2% of tax and surcharge if any.
ii) Secondary and Higher Education Cess at 1% of tax and
surcharge if any.
6. Allow rebate u/s 86 (if assessee receives any income from
AOP)and relief u/s 89(1) (for arrears of salary received during
the previous year)
189
7. Balance is the tax payable which will be rounded off to the
nearest multiple of Rs.10.
8. From the tax payable, deduct the amount of tax deducted at
source and advance tax if any paid by the assessee. The balance
is the net tax payable by the assessee.
Illustration 1
From the following particulars, calculate the taxable income, tax and
deduction
available u/s 80 for the assessment year 2009-10
Rs.
Salary per month 6,000
Dearness Allowance per month 1,600
House Rent Allowance per month 1,000
(Rent paid Rs.1,500 per month)
House property is let out on a monthly rent of Rs.2,000. The annual value
of the
house property is Rs.30,000. Municipal Tax paid is Rs.1,800 for the whole
year.
Interest payable on capital borrowed for the construction of the house is
Rs.6,000.
Repayment of house building loans taken from friends is Rs.5,000 and
from
LIC is Rs.3,000.
Interest on Savings Bank a/c 7,000

Dividend on Shares of UTI 3,000
Interest on PPF a/c 2,000
Interest of Govt. securities 7,000
LIC premium 6,000
Contribution to PPF 6,000
190
Deposits under NSS 1992 10,000
Interest accrued on NSC VIII issue 4,000
Solution
(a) Computation of Taxable Income for the Assessment Year 2009-10
1. Income from salary. Rs./-
Salary at Rs./6,000/month (6000×12) 72,000
DA-Rs.1600/(1600×12) 19,200
House Rent Allowance received Rs.1000/-month (1000×12)12000
Less. Exempted u/s 10 (13A) up to
the least of the following) Rs.
1. Actual HRA received 12000
2. Excess of rent paid over
10% of salary rent paid (1500×12) 18,000
less 10% of salary
72000×10/100= 7200 10,800
3..50% of salary (Calcutta) 36,000
Taxable HRA 1,200
Salary income 92,400
2. Income from house property Rs.
Annual income (fair rent) 30,000
Actual rent (2000×12) 24,000
Whichever is higher is Gross Annual Value 30,000
Less Municipal tax paid (by the owner) 1,800
Net Annual Value(NAV) 28,200
Less Deductions
1.Standard deduction 30% of NAV-28200×30/100= 8460
2.Interest on money borrowed for the
construction of the house 6,000 14,460 13,740
3. Income from other sources
Interest on savings bank A/C 7,000
UTI dividend (exempted ) NIL
Interest on PPF (exempted) NIL
191
Interest on Government Securities 7,000
Interest accrued on NSC VIII issue 4,000 18,000
Gross Total Income 1, 24,140
Less Deductions U/S 80C
LIC premium 6,000
Contribution to public provident fund (PPF) 6,000
Deposits under NSS 1992 10,000
Interest accrued on NSC VIII issue 4,000
Repayment of housing loan 3,000 29,000
Total Taxable Income 95,140
Computation of tax liability for individuals (other than female)
For total income up to Rs 1,50,000, rate of tax is nil . Since the
total income of the assessee is only Rs 95,400 his tax liability is nil
Note : Repayment of loan taken from friends is not allowed as deduction
U/S 80 C
5. 2. Computation of Total income of Hindu Undivided Family
Hindu undivided family means a group of persons lineally
descendent from a common ancestor and includes their wives , sons and
unmarried daughters . It is a relationship created due to the operation of
Hindu law . The manager of HUF is called ‘karta’ and its members are
called ‘coperceners’.
5.2.1. Assessment of Hindu Undivided Family
The Hindu Undivided Family is a separate unit of assessment and
is taxable through its member or karta. The following rules are to be
observed while making the assessment of Hindu Undivided Family:
1. Once a family is accorded the status of Hindu Undivided Family, it
shall continue to enjoy this status till partition takes and I.T.O
accepts the partition u/s 171
2. The share of income received by a member of H.U.F from the
income of family is not to be included in his individual income
being exempted in the hands of the coparcencer of H.U.F even
though the family may not have paid the tax on such income .
3. The income received by a member from an asset which was
previously owned by him but has been put into common pool of
H.U.F shall remain as his individual income.
192
4. Salary paid out of the fund of H.U.F to a member is allowed as
the legitimate expenditure of the H.U.F if the member has rendered
some service to the H.U.F .
5. A member can carry on any business in his own name and the
income from such business shall be included in his individual total
income. It is immaterial that the funds were provided by H.U.F.
6. Jain and Sikh families are also treated as Hindu Undivided
Families.
7. A gift of property to the wife out of the family property is a
bonafide transfer and as such income from such property shall
belong to the wife.
8. On the death of the manager the succeeding manager –not the
member of family or wife shall be his legal representative.
9. In case any H.U.F. holds shares in a company and any loan is
advanced to members of H.U.F. it will not be deemed as dividend
u/s2(22)(e) because individual members are not shareholders of that
company.
5.2.2 Partition of Hindu Undivided Family (Section 171)
Total partition : It means a physical partition of the family. But mere
division of the income from the family property without division of
property shall not be considered as a partition.
If a joint family has come to an end , in fact in law but no
physical division of the property has taken place the family will be
deemed to continue as Hindu Undivided Family.
Partial partition :Where the joint family continues but only some
properties are partitioned by physical division and other properties
continue to be owned by Hindu Undivided Family ,H.U.F shall be
assessable for the income of the properties still owned by it.
5.2. 3. Assessment on partition
In case I.T.O is satisfied that the partition has taken place during
the previous year and records his findings to this effect in such an event
the total income to the H.U.F up to the date of partition shall be
assessed in the hands of H.U.F as if no partition has taken place. Each
member of the family shall be liable jointly and severally for the tax
liability of H.U.F
Impartible estate: In certain cases a person holds some property
which is family property but is still not divisible among other members. the
income from such property belongs absolutely to the person who holds it
193
. the income from such property shall not be included in the total income
of H.U.F. It will be included in the total income individual who holds
property.
5.2.4. Income not treated as family income
1. Income earned by a member of H.U.F in his individual capacity
with his own efforts shall be his individual income
2. Income of the father from property other than ancestral inherited
property shall be his individual income and not the income of
H.U.F.
3. Income from impartible estate shall be the income of individual
who holds it
4. Income from a business carried on by a member of H.U.F in his
individual capacity is assessable in his hands. It is immaterial
whether the capital for business was provided by the family
5. Income received by a member of H.U.F for acting as director of
company in his individual capacity and when he is not representing
H.U.F is individual income
6. On the death of father if there is sole surviving male member he
will not constitute H.U.F. Instead he will be assessable as
individual.
7. Income received by a member of H.U.F by way of profits from firm
in which he is partner in his individual capacity shall be his own
income.
5.2.5. Individual income or family income
In case karta of H.U.F derives some salary , commission etc from
company, firm etc .in which the funds of he family were invested, such
remuneration received shall be taxed in the hands of H.U.F and not in
the individual capacity of the Karta. However in case the circumstances of
the case state that the remuneration received was for services rendered by
him and there was no real and sufficient connection between the
investment of family funds and the remuneration paid to manager , the
remuneration received by the Karta shall be assessed as individual income
of Karta and not that of H.U.F.
194
Illustration 1
The following details of income have been supplied by Karta of
H.U.F. You are required to compute the total income and tax of H.U.F It
has deposited Rs 10,000 in PPF.
Rs
1. Profit from business 1,62,000
2. Salary received by a member of H.U.F 8,000
3. Directors fee received by Karta 6,000
4. Rental value of the property let 12,000
5. Municipal taxes 600
6. Bank interest 450
7. Long-term capital gain from the transfer of building 9,500
8. Long- term capital gains from the transfer of investments 10,000
9. Donation to a college which is an approved institution 4,000
10. Profit from an AOP (1/4th share) 10,000
Solution
Computation of Total Income of H.U.F for the Assessment Year
2009-10
Rs. Rs.
Income from House Property:
Annual Rental Value 12,000

Less : Municipal Taxes 600
Standard Deduction : 30% on NAV 3,420
7,980
Income from Business:
Business Profit 1,62,000
Capital Gains:
Long-term Capital Gains from buildings 9,500
195
Long-term Capital Gains from investments 10,000
19,500
Deductions:
U/S 80C: Amount deposited in PPF 10,000
U/S 80G: donations Q.A. - Rs.4,000
Rate of deduction - 50% 2,000
12,000
Total Income 1,77,930
Computation of Tax
On LTCG Rs.19,500 @ 20% 3,900
On other income (1,77,930 - 19,500)=
1,58,430
On Rs.1,50,000 Nil
Balance 8,430 @ 10% 843
843
Add: On the balance Education Cess @ 2% of
tax (4,743 x 2%=95 95
Secondary and Higher Education Cess
@ 1% of tax (4,743 x 1%=47 47
142
Tax payable 4,885
Tax payable (rounded off) 4,890
5.3. Computation of Total Income of Firm Assessed as (FAPF)
5.3.1.Definition of partnership
Section 4 of the Indian Partnership Act has defined the word
‘Partnership’ as “the relation between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all”.
From this definition the following points emerge:
196
a) That partnership is an association of two or more persons.
b) There must be an agreement entered into by all persons.
c) The agreement is to carry on some business or profession.
d) The business to be carried on by all or by any one of them
acting on behalf of all and for the benefit of all.
e) The agreement is to share the profits and losses of business or
profession.
5.3.2. Partnership Firm
The term ‘firm’ means the entity which comes into existence as a
result of partnership agreement.
The firms have been given a separate status with separate rate of
tax. Share of income received by partners is not to be added in their
individual income and as such it is exempted.
5.3.3. Types of Firms
A firm which fulfils the following conditions prescribed U/S 184 is
assessed as partnership firm.(FAPF)
i. It has submitted its partnership deed (Instrument of Partnership);
ii. Such deed must show the respective share of each partner;
iii. It is duly signed by all partners except a minor partner;
iv. The deed is to be submitted along with its first return;
v. In case there is any change in the profit sharing ratio, a revised
deed must be submitted
vi. The firm should not have been assessed to tax U/S144 i.e., best
judgement assessment
5.3.4 Book Profit
‘Book Profit’ means the net profit of the firm calculated after taking
into account all provisions provided in section 28 to 44D. While calculating
book profit, following points are to be kept in mind
i. First of all find out the profits as given in the Profit and Loss
account.
ii. Deduct all other incomes credited to P&L A/C but are to be
treated under other heads of incomes.
iii. Add all payments or remuneration like salary, commission etc.,
given to all partners of the firm if already debited to P&L A/C.
iv. Add interest on capital given to all partners in excess of 12%.
197
5.3.5 .Computation of Firm’s Business Income(PFAF)
Adjustment of Net Profit as per Profit & Loss account of the firm:
(a) While calculating firms business profit the provisions as given u/s 28
to 44 are applicable.
(b) Section 40(b) lays down following rules regarding payment of salary,
commission, or remuneration to working partners and interest on
capital to all partners . These rules are
i. Any payment of salary ,commission, or remuneration paid to a
partner who is not a working partner ,is disallowed.
ii. Any remuneration paid to a working partner who is not authorised
by or which is not in accordance with terms of partnership deed
(instrument of partnership)is disallowed .
iii. Any interest paid to partners according to terms of partnership
deed is allowed provide rate of interest does not exceed 12%.
Excess is disallowed.
iv. Any interest paid to partner, who is not authorised by or not in
accordance with partnership deed is disallowed.
v. In case interest or remuneration is paid to a partner and is
authorised by partnership deed but relates to the period prior to the
date of such deed and it was also not authorised by any earlier
deed, it shall be disallowed.
In case any payment for remuneration is made to one or more
working partners during the previous year, it is allowed up to limits
given below. Excess is disallowed.
Limits on payment of remuneration to partners [Section 40(b)]
1. In case of professional firms (as defined u/s 44 AA) Amount allowed
a) On the first Rs 1,00,000 of the book profit 90% of book profit
b) On the next Rs1,00,000 of the book profit 60% of book profit
c) On the balance of the book profit 40%of book profit
2. In case of any other firms:
a) On the first Rs 75,000 of the book profit 90% of book profit
b) On the next Rs 75000 of the book profit 60% of book profit
c) On the balance of the book profit 40% of book profit
Certain explanation
1. In case an individual is partner in a representative capacity for
the benefit of another person such partner is called partner in
198
representative capacity and the other person is called person so
represented.
2. Any interest paid to partner in representative capacity shall be
subject to aforesaid limits but any interest paid to him in his
individual capacity(as creditor)shall not be subject to above
mentioned limits.
3. Any interest paid to an individual (who is neither partner in
representative capacity nor in personal capacity)and he on behalf or
for the benefit of any other person receives such interest, it shall not be
subject to the aforesaid limits.
4. The term Book Profit means the net profit as shown in the
Profit & Loss Account for the relevant previous year computed
according to provisions given u/s 28 to 44 of the Act and after
adding back the full amount of remuneration given to partners (as
referred to in limits above)
5. The term working partner means an individual who is actively
engaged in conducting the affairs of the business or profession of
the firm of which he is a partner.
5.3.6. Computation of Total Income of a Firm
1. Income is computed headwise. Firm cannot have salary income.
2. It cannot have self-occupied house. Income from let out house
property is computed in the same manner as already studied under
the head ‘house property’
3. Profits and gains-same as stated earlier.
4. Income under the head capital gains computed in same manner
but with no exemption u/s 54, 54B and 54F.
5. Income from other sources is computed in the same manner - as
stated earlier.
6. Carry forward and set off of losses is done in the same manner.
7. Deduction out of Gross Total Income : A firm can claim the
following deductions.
u/s 80G for donation
u/s 80 GGA for contribution to certain funds
u/s 80GGC for donation to political parties
u/s 80IA for infrastructure projects
u/s 80IAB for setting up special economic zones
u/s 80IB for new industrial undertakings
199
u/s 80IC for setting up industry in backward states
u/s 80JJA for use of bio -waste
A firm is not allowed any other deduction.
5.3.7 Computation of Firm’s Tax for Assessment Year 2009-10
a) It pay’s tax at flat rate of 30% with no exemption limit.
b) On long term capital gain - rate of tax is 20%.
c) On short term capital gain on securities covered under STT –rate
of tax is15%
d) On winnings from lotteries, crossword puzzle, races .card games,
gambling and betting-rate of tax is 30%.
e) Surcharge is added @ 10% of tax as calculated above provided
total income of the firm exceeds Rs 1 crore
f) It is further increased by education cess @ 2% of tax and
surcharge plus secondary and higher education cess at 1% of tax
and surcharge if any.
5.3.8 Treatment of Share of Income from Firm
It is fully exempted from tax u/s 10(2A) and as such is not
added in individual income of partners.
5.3.9 Treatment of Remuneration and Interest received from Firm
Following amounts shall be added in the individual income of
partners under the head profits and gains:
a) Interest paid by firm to partners shall not be added in individual
income of partners if it has been disallowed to firm as it was
paid without its being mentioned in deed. Interest paid by firm to
partners shall be fully added in individual income of partners if it
is has been fully allowed to firm and it was paid as it was
mentioned in deed and rate of interest was up to 12%. In case
partnership deed allows interest which is more than 12% then
only 12% is allowed and excess will be added back in the profit
of the firm if already debited to the P&L A/C.
b) Remuneration paid to partners and allowed to firm shall be added
in individual income of partners in following manner
i) If it is fully allowed it shall be fully added in partner’s
individual income.
ii) If it was allowed up to restricted amount as per above,
amount to be added shall be
200
Actual Remuneration of a partner
Restricted remuneration =
Total Remuneration of all partners
Illustration 1
The Profit and Loss Account of a firm in which the partners X,YandZ
share profits and losses in the ratio of 5:4:1 respectively discloses profit
of Rs. 80,525 for accounting year ending 31st match 2009
Debits Rs Credits
Rs
Donation to national Capital gain on sale of
Defence fund 11,000 scrap machinery 5,000
Salary to partners Interest on debentures after
X 15,000 deduction of tax at source Rs5,100 19,000
Y 19,000 Interest on securities (gross) 3,500
Z 22,000 56,000
Commission to X 6,000
Office rent(paid toY) 12,000
Compute the total income of the firm for the assessment year
2009-10. The firm has submitted certified copy of instrument of
partnership along with return for payment of salary ,commission to
working partners X , Y and Z as per above.
Solution
Computation of Business Profit of the Firm
Rs Rs
Net profit as per P& LA/c 80,525
Add: Inadmissible expenses
Donation to NDF 11,000
Salary to partners 56,000
Commission to X 6,000 73,000
1,53,525
Less: Incomes not taxable under this head
Profit on sale of scrap (STC gain): 5,000
Interest on debentures 19,900
Interest on securities 3,500 28,400
Book Profit 1,25,125
201
Less : Expenses allowed u/s 40 (b)
Actual salary to partners 56,000
Commission to partners 6,000 62,000
OR
90% of book profit up to Rs 75,000 +
60% of 50,125(i.e.67,500+30,075) 97,575
Whichever is less 62,000
Firm’s Business Profit 63,125
Computation of Firm’s Total Income
Business income 63,125
Capital gain (short term ) 5,000
Other sources:
Interest on debentures (19,500+5,100) 25,000
Interest on securities 3,500 28,500
Deduction u/s 80G: Donation to NDF Rs 11,000
Q.A Rs 11,000 rate 100% 11,000
Total Income 85,625
Rounded off to 85,630
Illustration 2
A firm with X,Y and Z as equal partners of whom Mr.Z is the working
partner submits the following particulars for the Assessment Year 2009-10
a. Profit form business after allowing the following deduction 50,000
1.Penalty paid under the Customs Act 33,000
2. Salary to M/s X,Y and Z (Rs 30,000+30000+72,000) 1,32,000
b.Other incomes and expenses of the firm in the previous year were as follows
1. Interest on securities (gross) 15,000
2. Income from house property 9,000
3. Interest on debenture bonds 30,000
4. Winning from lotteries 15,000
5. Donation to National Defence Fund 20,000
6. Donation to political party 10,000
Compute the Gross Total Income of the firm and appropriate it among
the partners
202
Solution
Computation of Gross Total Income of the firm for the Assessment
Year 2009-10
1 .Business income Rs Rs
Net profit 50,000
Add: Inadmissible expenses
Penalty 33,000
Salary to X, Y and Z 1,32,000 1,65,000
2,15,000
Less: Allowable remuneration u/s 40 (b) 72,000
Business income 1,43,000
2.Income from house property 9,000
3.Income from other sources
Interest on securities(gross) 15,000
Interest on debenture bonds 30,000
Winnings from lotteries 15,000 60,000
Gross Total Income 2,12,000
Appropriation of Gross Total Income
Since X,Y and Z are equal partners Rs 2,12,000 is to be shared equally
between them
X`s share = 2,12,000 1/3 =70667
Y`s share = 2,12,000 1/3 =70,667
Z`s share= 2,12,000 1/3= 70,667
Workings
Calculation of allowable remuneration u/s 40(b)
Book Profit Rs (50,000+33,000+1,32,000)= 2,15,000
For first Rs .75,000 @ 90% 67,500
For next Rs.75,000 @ 60% 45,000
For the balance Rs.65,[email protected]% 26,000
1,38,500
or
Remuneration of working partner - Z 72,000
Whichever is less is treated as allowable remuneration
203
Questions
1. Mr Vinodh is the manager of a limited company. He draws a salary of
Rs.14,000 per month. His other incomes are
1. Interest on fixed deposits with banks Rs.10,800
2. Winnings from lottery Rs.60,000
3. Dividend from Indian company Rs.3,600
4. Long term capital gain from the sale of his residential house, occupied for
the last 20 years Rs.1,15,000. He purchased another house for his residence
for Rs.1,05,000 within four months of the transfer of his residential house.
5. Short term capital loss Rs.10,000
6. Long term capital loss from gold brought forward from the assessment
year 2007-08 Rs.20,000.
The following deductions are claimed:
1. LIC premium (policy for Rs.1,00,000) Rs.12,500
2. Donation to Punjab University Rs.10,000
3. Education of his children Rs.4,500
Compute his total income and tax paid for the assessment year 2009-10
(Answer : Rs.2,16,300, Rs.19,190)
2. The following particulars have been submitted by Mr. X in the capacity of
Karta of a HUF for assessment purpose:
a. Profit from family’s business, Rs.20,000 after charging an amount of
Rs.3,000 given as salary to Karta’s brother who has been actively
participating in it.
b. Salary Income of Karta’s another brother who is a manager in a bank
Rs.11,000
c. Director’s fees received by Karta Rs.5,000 (HUF holds 20% shares in this
company)
d. Bank interest Rs.400 (Gross)
e. Long term capital gain from the transfer of building Rs.2,800
f. Long term capital gain from the transfer of investments Rs.18,000
g. Donation to a college which is an approved institution Rs.6,000
h. Rental value of the property let Rs.15,000, Municipal Tax paid in respect
of the house Rs.1,500. Interest on loan taken for repair of the house is
Rs.1,800
You are required to calculate the total income of the family for the
assessment year 2009-10.
204
(Answer : Rs. 52,197)
3. The total income of M/s XYZ & Co., a firm, was Rs.2,00,000 before
charging the following:
Salary to
Partner X - Rs. 48,000
Partner Y - Rs. 24,000
Commission to Z - Rs. 32,000
Interest @ 15%
to X - Rs.24,500
to Y - Rs.16,000
The partnership deed (whose certified copy has been submitted along
with return) provides for payment of salary and commission to partners X,Y &
Z who are working partners. Interest at 15% has also been included in the deed.
Calculate firm’s business income and partner’s income taxable under the head
profits and gains.
(Answer : X’s income Rs.67,600, Y’s income Rs.36,800 and Z’s income
Rs.32,000)
4. What is book profit?
UNIT - IV
CHAPTER - 4
Deductions from Gross Total Income
Gross Total Income refers to the sum total of various heads of
income such as salary, house property, profits and gains of business or
profession, capital gains and income from other sources. In computing the
total taxable income of an assessee certain deductions under sections
80Cto 80 U are allowed from Gross Total Income. These deductions are
divided into two categories .
A. Deductions in respect of certain payments.
B. Deductions in respect of certain incomes.
205
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206
UNIT - V
CHAPTER - 1
INCOME TAX AUTHORITIES
Section 116 of the Income-Tax Act, 1961 provides for the
administrative and judicial authorities for the efficient administration of the
income tax department. The income tax authorities under this section include:
1. The Central Board of Direct Taxes.
2. Director General of Income- tax / Chief Commissioner of Income-tax
3. Directors of Income - tax/Commissioners of Income-tax/ Commissioner
of income-tax (Appeals)
4. Additional Directors of Income-tax or Additional Commissioner of
Income-tax or Additional Commissioner of Income-tax (Appeals)
5. Joint Director of Income-tax / Joint Commissioner of Income-tax.
6. Deputy Directors of Income-tax / Deputy Commissioners of Income-tax
/ Deputy Commissioner of Income-tax (Appeals)
7. Assistant Directors of Income tax / Assistant Commissioners of Income-
tax
8. Income-tax officers.
9. Tax Recovery officers
10. Inspectors of income-tax.
1.1 Central Board of Direct Taxes(C.B.D.T)
The highest authority in the administrative set up of income-tax
department is the central board of Direct taxes. The board functions under the
control of Ministry of Finance, Government of India. The members of the
board are appointed by the Central Government.
Powers of Central Board of Direct Taxes.
The board performs the functions of administration, supervision and
control of entire income –tax department in India. All the sub authorities have
to follow the orders and direction issued by the Board. The following are the
powers of C. B.D.T.
1. It has the power to issue orders and directions to other income tax
authorities for proper administration of the Act.
2. It may declare any organization as a company
3. It has the power to determine the jurisdiction of various authorities.
4. It may authorize Director General or Director to perform the powers of
any of the income- tax authorities.
207
5. It may appoint income-tax authorities below the rank of Assistant
Commissioner.
6. It may empower Director of General or Chief Commissioner or
Commissioner to authorise Deputy Commissioner or Deputy Director to
exercise the powers of assessing officer.
7. It may authorise any of the authorities to exercise its powers
concurrently with any other authority.
8. It is empowered to make rules regarding the maintenance of accounts
and documents required under section 44AA.
9. It is empowered to issue general or special circulars or orders which are
necessary for the proper and efficient management of the work of
assessment and collection of revenue
10. It is also empowered to relax any of the requirements specified in the
case of aggregation of income, carry forward and set off of losses or
claiming deduction u/s 80.
1.2 Director General / Chief Commissioner of Income-Tax
They are appointed by the central by the Central Government. The
jurisdiction of these authorities are determined by the C.B.D.T and they have to
perform the functions assigned by the C.B.D.T. The following are the powers
of the above authorities.
1. They are empowered to authorise a Deputy Commissioner to exercise
the powers of an Assessing officer.
2. They may appoint income-tax authorities below the rank of assistant
commissioner.
3. They have the power to transfer a case form one Assessing Officer
subordinate to
To him to another but after giving a reasonable opportunity to the assessee.
4. The director general may exercise the power of Assessing Officer if he
has reason to suspect that any income has been concealed or is likely
to be concealed
5. The director is empowered to issue instructions to the assessing officers.
6. He has the powers to make any inquiry or investigation in case of
concealment of income welcome by the assessee.
7. He can exercise such power which are vested in a court under the code
of civil procedure 1908
208
1.3 Commissioner/Directors/Additional Commissioner /Additional
Directors of Income- Tax
These authorities are appointed by the Central Government. The
jurisdiction and functions of the above authorities are determined by the
C.B.D.T. The following are their powers.
1. A commissioner may exercise the powers of an Assessing Officer.
2. He has the power to transfer any case from one or more Assessing
Officers subordinate to him to any other Assessing Officer or Officers.
3. He has the power to grant approval for an order issued by the A.O.
asking a non-company assessee to get its accounts audited by a
Chartered Accountant.
4. He has the power to grant approval for reopening of an assessment
beyond the time limit of 4 years.
5. He has the power to revise an order passed by the Assessing Officer.
6. He may direct the Assessing Officer to Appeal to Appellate Tribunal
against the order passed by Commissioner (Appeals).
1.4 Joint Commissioners / Joint Directors of Income- tax
They are appointed by the Central Government and the area of
operation and functions to be performed by these authorities are specified by
the C.B.D.T. They have the following powers.
1. They are empowered to accord sanction to levy additional income tax
on private limited companies
2. They may exercise the powers of Assessing Officers.
3. They have the power to cancel the registration of a firm
4. They have the power to issue instructions to Assessing Officer to revise
an order issued by income tax officer.
1.5 Assessing officer (Deputy Commissioner / Assistant Commissioner /
income-Tax Officer)
The Assessing Officer is the most important authority in the
organizationalstructureof Income- tax department . He initiates assessment
proceedings and makes the assessment. He has the power to collect tax. He
shall exercise the following powers:
1. Power of civil court.
The Assessing officer shall have the same power of the court in the
followingmatters:
i) Discovery and Inspection
209
ii)Enforcing the attendance of any person and examining him under
oath;
iii) Compelling a person to produce books of accounts and other
documents; and
iv) Issuing orders.
2. Power of Search and Seizure.
He has the power of searching any building, place, vessel, vehicle or
aircraft and seize books of accounts other documents, money or other valuable
articles. The assets so seized shall be applied towards the recovery of existing
and estimated tax liability of the assessee.
3. Power of Assessment
1. He has the power to make regular assessment, best judgment
assessment and to reopen an assessment.
2. He has the power to reopen an assessment in case of income has
escaped assessment.
3. He has the power to treat a person as an agent.
4. He has the power to assess a person who leaves India during any
previous year.
4. Power to call for information
The Assessing Officer can ask any person to furnish information relating
to any matter and to furnish statements of accounts.
5. Power of survey:
The Assessing Officer may enter any place where business or profession
is carried on and ask a person to submit the necessary information regarding
any expenditure.
6. Power to Inspect Registers of Companies
He may inspect and if necessary, take copies of any register of members,
debenture holders, mortgagees of company or of any entry in such register.
6. Income Tax Inspector
He is appointed by Chief Commissioner or Commissioner of Income-
Tax and is subordinate to Assessing Officer. He normally assists the Assessing
Officer in the performance of his duties and performs other functions entrusted
to him.
Questions
1. Mention the income tax authorities constituted by the Act.
2. What are the powers of Central Board of Direct taxes?
3. Briefly explain the powers of income tax officer?
210
UNIT - V
CHAPTER - 2
ASSESSMENT PROCEDURE
The process of assessing the income returned by the assessee and
determining the tax payable by him can be described as assessment. It therefore
includes the whole procedure laid down in the Act of imposing liability on the
tax payer. Computation of total income of an assessee can be done only when
he has furnished particulars of his income. So, filing of return of income is the
first step in the assessment procedure.
A . FILING OF RETURNS
a) Filing of return [Section 139(1)]
According to Section 139(1),
i). Every person being a company or firm; or
ii) Every person other than a company or a firm, if his total income or
the total income of any other person in respect of which he is assessable
to tax during the previous year exceed the maximum amount which is
not chargeable to income tax shall furnish a return of income within the
due dates stipulated here under .
Due Dates of Filing of Return
ASSESSEE DUE DATES
In case of a person being;
i) Company 30th September
ii) a person whose accounts are required to be audited of
under this Act or under any other law; relevant
iii) working partner of a firm whose accounts are assessment
year required to be audited
b). In case of any other assessee 31st July of relevant assessment year.
b) Filing of return by employees with his employer (Section139(1A))
Any employee who has filed a return of income to his employer shall be
deemed to have filed a return of income u/s 139 (1)
c) Filing of return in electronic form (Section 139(1B))
Any person may at his option file return in electronic form such as floppy,
diskette, CD-ROM or any other computer readable media.
2. Return of loss [ (Section 139(3)]
211
In case a person suffers a loss in any previous year and he intends to
carry forward the loss u/s 72, 73, 74 and 74 A of the Act,. he has to voluntarily
file a return of loss in the prescribed form.
3. Belated return [Section 139(4)]
Any person who has not furnished with in the time allowed u/s 139(1)
or within the time allowed by the notice issued u/s 142 (1) can file a return for
any previous year at any time before one year from the end of the relevant
assessment year or before the assessment is completed, whichever is earlier.
4. Revised return (Section 139 (5)
Any person who has furnished a return u/s139(1) or in pursuance of a
notice issued u/s 142 (1) can file a revised return if the assessee discovers any
omission or any wrong statement in the return filed earlier. Such revised return
can be filed at any time before the expiry of one year from the end of the
relevant assessment year or before completion of the assessment whichever is
earlier.
5. Defective return [ Section 139 (9) ]
A return of income can be regarded as defective by the Assessing
officer under the following circumstances:
a) Annexures, statements and columns in the return of income relating
to computation of income have not been duly filled;
b) Return of income has not been accompanied by
i. Statement showing computation of tax on returned income
ii. Proof of tax, if any, claimed to have been deducted at source
iii. Report of audit obtained under section 44AB or copy of such
report together with proof of furnishing the report on earlier
date;
c) Where regular books of accounts are maintained by the assessee,
the copies of manufacturing / Trading account Profit and Loss
account, Income and expenditure account or any similar account
and Balance Sheet have not been furnished. Similarly, where no
copies of personal account of the proprietor, partner or member of
AOP/ BOI have been filed;
d) If accounts are audited, copies of audited statement of accounts and
auditors report have not been filed (including cost audit report, if
any ); and
e) Where regular books are maintained, a statement indicating the
amount of turnover or gross receipts, gross profit, net profit,
212
expenses and the basis on which such amounts have been computed
and particulars about sundry debtors, creditors, stock-in-trade and
cash balance at the end of the previous year have not been filed.
6.Permanent Account Number (PAN) [Section 139A]
The following persons are required to apply for and obtain Permanent
Account Number from the Assessing Officer.
a) any person whose total income exceeds the maximum exempted limit in
any previous year;
b) any person who is assessable for other persons income if that persons
income exceeds the maximum exempted limit;
c) any person carrying on business / profession whose turnover or gross
receipts are likely to exceed Rs,.5,00,000 in any previous yea;.
d) any person who is required to furnish a return of income u/s139 (4A);
and
e) an employer who is required to furnish return of income u/s 115 WD.
Apart from these, the Assessing Officer may allot permanent account
number to any other person by whom tax is payable under this Act. When a
person has been allotted a permanent account number, then he shall quote the
number in all his returns, challans for the payment of amount due under this
Act and correspondence with the income- tax authorities.
B.Types of Assessment
The following are the different types of Assessment.
1. Self-Assessment [Section 140A]
2. Regular Assessment [Section 143]
3. Best Judgement Assessment [Sections 144 and 145 (2)]
4. Income Escaping Assessment or Reassessment.
1. Self- Assessment [Section 140 A]
Before filing the return of income to the income-tax department, an
assessee is required to make his own assessment. It is obligatory on the part of
the assessee to determine his total income for the relevant previous year and the
amount of tax payable and interest if any, payable for any delay in furnishing
the return or any default or delay in payment of advance tax before furnishing
the return. After determining the tax and interest if any, he has to pay the same
after deducting the tax already deducted at source. The tax so paid shall be
adjusted towards the tax liability as ascertained on regular assessment.
The return which is to be filed should also accompany the proof of
payment of such tax and interest. In case, the assessee fails to pay whole or any
213
part of such tax or interest or both, he shall be deemed to be assessee in default
in respect of the amount not paid by paid by the assessee.
2. Regular Assessment (Section 143)
An assessment made u/s 143 is known as Regular Assessment. It can
either be:
i) On the basis of return filed by the assessee (Section 143(1)
(a)) or
ii) On the basis of enquiry (Sections 143(2) and 143 (3))
i) On the basis of return filed.
In case assessee has filed any return u/s 139 or in response to
notice u/s 142 (1) and:
i) If any tax or interest is found due on the basis of such return
after adjusting the tax and / or interest already paid by the
assessee, an intimation shall be sent to the assessee specifying
the sum so payable by him. Such intimation shall be deemed to
be a notice of demand issued u/s 156.
ii) If any refund is due on the basis of such return , it shall be
granted to the assessee and an intimation to this effect shall
be sent to the assessee. If no sum is payable by the assessee
or no refund is due to him, the acknowledgement of the
return by the income –tax department shall be deemed to be
the intimation under this section.
ii) On the basis of enquiry
If the assessing officer has reason to believe that the assessee has
either understated his income or computed excessive loss or has paid
less amount of tax, a notice can be served on the assessee to produce
evidence . The assessing officer after hearing the evidence or after
inspecting the document, pass necessary orders in writing .After such orders
the amount of tax may be determined and demand notice/ refund may
be issued.
3. Best Judgement Assessment
Best judgement assessment is also known as ‘Ex –parte‘ assessment.
This type of assessment is made when the assessee does not co-operative
with the Assessing Officer, and the Assessing Officer, in the absence of
sufficient information, proceeds with the assessment according to the best
of his ability, knowledge, judgement, guess work etc. The idea of this type
of assessment is not to punish the assessee for his non- co- operation ,but
to make the assessment on the basis of information and materials
214
gathered by the Assessing Officer . The Assessing Officer should be
honest in making the assessment.
The best judgement assessment is of two types:
a) Compulsory best judgement assessment.
b) Discretionary best judgment assessment.
a) Compulsory Best Judgment Assessment
An assessment made u/s 144 is known as compulsory best
judgement assessment. It shall be made, if any person :
i) fails to file a return u/s 139(1) or a return or a revised
return u/s 139(4) and 139(5); or
ii) fails to comply with all the terms of a notice issued u/s 142
(1); or
iii) fails to comply with the directions issued u/s 142(2A); or
iv) having made a return, fails to comply with all the terms of
notice issued u/s 143(2).
While making assessment under this section, the Assessing
Officer has to provide an opportunity to the assessee by giving a notice
to show cause (s). But it shall not be necessary to provide an opportunity
of being heard in case where a notice u/s 142(1) has been issued
before making the assessment under this section.
Consequences
The following are the consequences of best judgement assessment.
1. The assessee becomes liable for penalties and prosecution.
2. When the assessee files an application of appeal against the best
judgement assessment, he cannot bring on record any new facts
before the appellate authorities.
Remedies
When a best judgement assessment is made against the assessee,
he has two remedies against such assessment.
1. he can file an application with the Assessing Officer for the
cancellation of the best judgment assessment , if
1. he has sufficient reason for non-filing of return u/s 139, or
2. he did not receive the notice issued u/s 142 (1) and u/s 143 (2),
or
3. he did not have reasonable opportunity to comply with the
notice issued u/s [142 (1) and 143 (2)].
215
If the Assessing Officer is satisfied with the reasons given by the
assessee, he must cancel the best judgement assessment.
2. He can file an appeal against such assessment with the higher
authority [Deputy Commissioner (Appeals)].
b)Discretionary Best Judgment Assessment
Section 145(3) empowers the Assessing Officer to make a discretionary
best judgement assessment. This type of assessment may be made:
i) if the assessing officer is not satisfied about the correctness
or the completeness of the accounts of the assessee, or
ii) where no method of accounting has been regularly employed
by the assessee.
Under these circumstances, it is up to the discretion of the
Assessing Officer whether to make a best judgement assessment or a
regular assessment. If this type of assessment is made and tax is
determined, the assessee has no option but to file an appeal with the
higher authority against such assessment.
4. Income Escaping Assessment or Reassessment [Section 147]
If the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year, he
may assesss or reassess such income. He may also assess or reassess any
other income chargeable tax which has escaped assessment and which
comes to his notice subsequently in the course of making assessment or re-
compute the loss or the depreciation allowance or any other allowance
for the assessment year concerned.
Deemed Cases of Income Escaped Assessment.
The following are the deemed cases of income which has escaped
assessment.
1. Assesse’s total taxable income or the total income of any person
in respect of which he is assessable exceeds the maximum
exempted limit but the assessee has not filed a return of income.
2. The assessee has filed the return of his income but no assessment
has been made and the assessing officer has noticed that,
a) the assessee has understated his income, or
b) has claimed excessive loss, deduction, allowance, relief in his return.
3. The assessing officer has made an assessment , but he has found
that,
216
a) income chargeable to tax has been under-assessed or
assessed at low a rate, or
b) excessive relief has been claimed, or
c) excessive loss or depreciation allowance has been computed.
Before making the assessment or reassessment or recomputation
u/s 147, the AO should serve on the assessee a notice requiring him to
furnish a return of income, within a period of not less than 30 days as
may be specified in the notice.
Questions
1. What is the time limit for filing of return?
2. Write notes on :
1. Self Assessment
2. Income Escaping Assessment
3. Regular Assessment.
3. What is Best Judgment Assessment? On what grounds can a Best
Judgement Assessment be cancelled ?
217
UNIT - V
CHAPTER - 3
APPEALS AND PENALTIES
3.1 Appeals
The Income - Tax Act 1961, provides an opportunity in the form of
appeal to the asessee who is affected by the orders issued by different
income tax authorities.
a) Appeal to the Commissioner (Appeals)[Section 246 (2)]
Any assessee aggrieved by any of the following orders may appeal
to the commissioner (Appeals) against such order:
1. An order passed by a Joint Commissioner u/s 115 VP (3) (ii) or
an order making him liable to tax but where he denies his
liability or an order of assessment made u/s 143(3) or 144 ,115
WE (3) or 115WF or 115WG;
2. An order of assessment, reassessment or recomputation of income
u/s 147 or 150 or 153 A;
3. An order u/s 154 or 155 by which his tax liability is enhanced
or refund is reduced ;
4. An order issued u/s 163 regarding treating a person as agent; u/s
170(2) regarding assessment on succession; u/s 171 regarding
partition of H.U.F;
5. An order of penalty made u/s 221, 227 ,271 A,271B,271BB,
271IFB, 272 AA, 272 BB, etc.
Appeal must be made in prescribed form and verified in the
prescribed manner. Under section 250(1) the Commissioner (Appeals) or
D.C (A) shall fix a day and place for hearing of the appeal and give
notice of the same to he appellant and to the I.T.O concerned.
In disposing of the appeal, the commissioner (Appeals) has the
following powers:
i) to confirm, reduce, enhance the tax liability;
ii) to confirm, cancel, enhance or reduce the penalty ; and
iii) to pass such orders as he thinks fit.
All these should be done only after giving the appellant an
opportunity of being heard.
218
b) Appeal to Appellate Tribunal (Section 252)
The tribunal shall be constituted by the Central Government and
shall consist of as many judicial and accountant members as it thinks fit
.It shall discharge such functions and exercise such powers as are
conferred on the Appellate Tribunal by the Act.
The following matters may be referred to the Appellate tribunal on
an appeal by the assessee :
a) an order passed by Deputy Commissioner (Appeals) (before 1-10-
1998)or Commissioner (Appeals) relating to:
i) rectification of mistake u/s 154; or
ii) decision given on an appeal u/s 250;or
iii) order of penalty u/s 271, or 271A or 272A ;or
b) an order passed by Commissioner u/s 263 under revisions; or
c) an order passed by a Chief Commissioner or a Director General
or a Director u/s 272A.
d) an order passed by an Assessing Officer u/s 115 VZC(1).
The Assessing Officer can file an appeal on directions from
Commissioner to the Appellate Tribunal only when the Deputy
Commissioner (Appeals) decides a point against the authorities in an appeal
or in an order under section 159. The appeal can be filed under this
section within 30 days only.
b. Powers of the Appellate Tribunal[Section 254]
Section 254 (1) empowers the Appellate Tribunal to pass such orders,
of course after giving both the parties to the appeal an opportunity of
being heard , which it thinks just in relation to the matters that arise in
the appeal.
c. Direct Appeal to High Court from 01.10.1998 [Section 260A]
1. An appeal shall lie to the High Court against the decision of the
Appellate Tribunal . The appeal will be admitted only if High Court
is satisfied that the case involves a substantial question of law.
2. The appeal can be made within 120 days from the day on which
order against which appeal is being made , was communicated to
the assessee. It must be accompanied by a fee of Rs.10,000, if
appeal is filed by the assessee. The appeal shall precisely state the
substantial question of law.
219
3. If High Court is satisfied that a substantial question of law is
involved in any case, it shall formulate such question of law.
4. The High Court will decide the question of law and deliver the
judgment.
5. The appeal shall be heard by a bench of at least two judges and
shall decided in accordance with their opinion or their majority.
6. The Assessing Officer shall give effect to the judgment of the
High Court on the basis of certified copy of the judgment.
d). Appeal to Supreme Court [Section 261]
1.An appeal to Supreme Court can be made:
a. against the judgment of the High Court on reference made u/s 256.
b. against the order of High Court made u/s 254 before 1-10-98, or
c. against the judgment in appeal made to High Court u/s 254 after 1-10-
98,provided it is a certified by the High Court to be a fit case for
appeal to Supreme Court.
2. U/S 262 (1) the appeal will be heard in same manner as is applicable
in appeals against the decrees of High Court.
3. The cost of appeal shall be at the discretion of Supreme Court . If the
Supreme Court varies the judgment of the High Court, effect shall be
given to the judgment of Supreme Court in the same manner as given u/s
260.
3.2 PENALTIES
The Income Tax Act 1961 prescribes various types of penalties
in the event of defaults under the Act. These are :
1. For failure to pay tax [Section 221 (1)]. If the assessee on whom
notice of demand has been served fails to pay the specified amount of
tax, he shall be liable to a penalty which shall not exceed the amount of
tax due.
2. For failure to pay tax on self – assessment [Section 234 A and B]. If
the assessee fails to pay the amount of tax on the basis of self-
assessment he will be liable to a penalty @1% of the tax due on self
assessment of each month of default.
3. For non –compliance with notice under section 115WD(2) or
115WD(2) or 142(1) or 143(2) [Section 271(1)(b)]. Such person shall pay
by way of penalty equal to a sum which shall not be less than Rs 1,000
220
of each failure but which shall not exceed Rs 10,000 for each failure. Such
penalty shall be in addition to any tax payable by him in this regard.
4. For concealment of income [Section 271 (1) (c)]. Where any person
has concealed the particulars of his income or has furnished inaccurate
particulars of such income he will be liable to a penalty. The minimum
penalty livable for concealment has been fixed at not less than 100% but
not exceeding 300% of the amount of tax sought to be evaded by
reason of concealment of income. Such penalty shall be in addition to
tax if any payable.
5. For concealment of particulars of fringe benefits [Section 271(1)(c)].
In case an employer has concealed the particulars relating to fringe
benefits or has furnished inaccurate particulars of such fringe benefits ; a
penalty of minimum of100% and maximum of 300% of tax sought to
be evaded by such employer shall be levied.
6. For failure to keep maintain or retain books of accounts
documents etc [Section 271 A]. If any person fails to keep and maintain
books or documents, as required by section 44AA he will be liable to a
penalty of not less than Rs 25,000.
7. For failure to maintain information or documents about
international transaction [Section 271 AA ]. Where any person fails to
keep and maintain any document or information regarding international
transaction as covered u/s 92E, the Assessing Officer or Commissioner
[Appeals ] may ask such person to pay a penalty of Rs 25,000.
8. Failure to get accounts audited [Section 271 B]. If any person fails
to get his accounts audited in respect of any previous year or years, the
Assessing Officer may direct that such person shall pay a penalty equal
to one –half (1/2) per cent of the total sales, turnover or gross receipts in
business or of the gross receipts in profession or Rs 1,00,000 whichever
is less.
9. Failure to furnish report u/s 92E [Section 271 BA]. In case a person
fails to furnish a report as required u/s 92 E, he may be asked to pay a
penalty of Rs 1,00,000.
10. For failure to subscribe to the eligible issue of capital [Section
271BB]. In case any mutual fund or U.T.I. fail to subscribe to the
eligible issue within the period of 6 months, it may be directed to pay by
way of penalty, a sum equal to 20% of such amount.
11. Penalty for failure to deduct tax at source [Section 271 C]. If any
person fails to deduct the whole or any part of the tax as required by or
221
under the provisions of the Act, or fails to pay whole or any part of tax
deducted at source ; he shall be liable to pay a penalty which shall be a
sum equal to the amount of the tax which he failed to deduct or pay as
required .
12. Penalty for the failure to collect tax at source [Section 271 CA]. If
any person fails to collect the whole or any part of the as requires by
or under the provision of this Act, then , such person shall be liable to pay,
by way of penalty, a sum equal to the amount of tax which such person
failed to collect.
13. Penalty for failure to comply with the provision regarding
accepting of loans etc.[Section 271 D]. If a person takes or accepts takes
or accepts any loan or deposit exceeding Rs 20,000 except through
crossed payee’s cheque or draft, he shall be liable to pay penalty equal to
the amount of the loan or deposit so taken or accepted.
14. Penalty for failure to comply with the provisions of sec. 269T [Section
271E]. If a person repays any deposit exceeding Rs20,000 otherwise than
by crossed cheque or draft , he shall be liable to pay penalty equal to the
amount of the deposit so repaid.
15. Penalty for non filing of return [section 271F]. In case a person has
not filed a return of income , he shall be liable to a penalty of Rs 5,000.
16. Penalty for failure to furnish annual information return [Section
271FA]. If a person who is required to furnish an annual information
return, fails to furnish such return within the time prescribed, such person
shall pay a penalty of Rs 100 per day of default.
17. For failure of furnish return of fringe benefits [Section 271 FB]. If
an employer who is required to file a return of fringe benefits u/s 115
WD(1), but fails to file such return within the prescribed time, the
Assessing Officer shall levy a penalty of 100 rupees for every day of
default.
18. Failure to furnish information or documents about international
transaction [Section 271G]. If a person who has entered into an international
transaction, fails to furnish information or documents as required u/s 92D,
the Assessing Officer or Commissioner [Appeals] may ask such person to
pay a penalty of 2% of the value of such transaction .
19. Penalty on failure to answer questions or sign statements etc.[Section
272A] In such cases a penalty of Rs10,000 for each default is imposed.
The following are the defaults.
222
a) A person who is legally bound to state the truth regarding subject
to his assessment refuses to answer any question put to him by an
income –tax authority; or
b) A person who is legally required to sign any statement made by
him refuses to sign; or
c) A person to whom summons are issued to produce books of
account or other evidence or to attend personally to give evidence,
at certain place and time , fails to do so.
20. Failure to comply with certain notices or to furnish certain
returns, statements or to allow inspection [Section 272 A (2)].
If a person fails to comply with the notices served under section
94(6) , 176(3) or fails submit statement or return u/s 133,206,206A,206C,
he is liable to pay a penalty of Rs 100 for every day of fault.
21. For failure to comply with the provisions of Section 133B.
The new section 272 AA provides for penalty for failure to
comply with the provisions of section 133B regarding entry of income
tax authorities in any buildings etc. The penalty for non- compliance may
extend up to Rs 1,000. Before levying any penalty the assessee must be
given an opportunity of being heard.
22. Failure to comply with the provisions of section 139 A i. e. PAN
[Section 272B]
a) In case a person fails to comply with the provision of section 139 A
i.e. to obtain PAN , the Assessing Officer may direct him to pay of
Rs 10,000.
b) In case assessee quotes a false or incorrect permanent account number
on any document and which he knows that it is false or incorrect ,
the Assessing Officer may direct him to pay a penalty of Rs 10,000.
23. For failure to comply with provision of section 203A (section 272
BB).
If a person fails to comply with the provision of section 203A i.e.
to apply for Tax Deducted at Source Account Number, the Assessing
Officer shall impose a penalty which may be equal to Rs 10,000.
24. Failure to comply with the provision of section 206 CA i.e. Tax
Collection Account Number [Section 272BBB].
In case a person fails to comply with the provision of section
206CA i.e. to obtain Tax Collection Account Number, the Assessing
Officer may direct him to pay a penalty of Rs 10,000.
223
Questions
1. State various orders against which an appeal can be made.
2. Write a short note on reference of a case a) to High Court b) to
Supreme Court by an assessee.
3. What are the different penalties which can be imposed under
Income –Tax Act?
224
UNIT - V
CHAPTER - 4
DEDUCTION OF TAX AT SOURCE (TDS) AND ADVANCE
PAYMENT OF TAX
There are three ways of collecting tax . These are,
i) Deduction of tax at source ;
ii) Advance tax ; and
iii) Tax on assessment.
4. 1 Deduction of tax at source
Any person responsible for paying any income by way of
salaries, interest on securities, interest other than interest on securities,
dividends, winnings from lotteries, crossword puzzles and horse race etc.,
has to deduct tax at source.
1. Salaries [Section 192]
U/S 192 (1) any person responsible for paying any income
chargeable under the head ‘Salaries’ shall at the time of payment, deduct
tax at source on the amount payable at the prescribed rate. The employer
must deduct tax at source from salary of his employees whose income for
a previous year exceeds the maximum exempted limit. The person
responsible for making such deduction must deposit the tax in the
Government treasury within the specified period.
2. Interest on securities [Section 193] [Refer Income from Other
Sources]
3. Dividend [Section 194 ]
No tax shall be deducted at source in respect of dividends
declared and distributed by an Indian company which is referred to in
section 115-0
4. Interest (other than interest on Securities) [Section 194 –A]
Any person , not being an individual or a H.U.F who is
responsible for paying to a resident any interest other than interest on
securities shall at the time of credit of such income to the account of
payee or at the time of payment in cash or by cheque or draft, deduct
income tax at 10% for non- corporate persons and at 20% for domestic
companies provided the amount of interest exceeds Rs 5,000
Tax at source shall not be deducted from the amount of interest
payable to a person [not being a company or a registered firm] in case
such person furnishes : a)affidavit, or b) a statement in writing declaring
225
that his estimated total income assessable is less than the minimum
liable to tax . Tax at source is also not deductible when such interest is
payable to
i) any banking company or any co-operative society doing
banking business.
ii) any financial corporation set up under Central, State or
Provincial Act, LIC of india , UTI, any company or co-
operative society engaged in insurance business, deposits
[except time deposit] with bank, any other institution,
association or body so notified by the Central Government ,
Zero Coupon Bond issued by a infrastructure company or a
public sector company on or after 1 st June 2005.
5. Interest on bank deposits [Section 194A]
If any interest paid or credited by a banking company or co-
operative society engaged in banking business on term deposits exceeds
Rs 5,000,tax shall be deducted at source @ 10%.
6. Winnings from lottery or crossword puzzle [section 194 B]
Tax is to be deducted at source at 30% from any income by way
of winnings from lottery, crossword puzzle, card game, or game of any
sort in case the prize amount exceeds Rs 5,000. In case winning is
wholly in kind or partly in cash and partly in kind and the amount of
cash winning is not sufficient to meet TDS liability, the person
responsible for making such payment must ensure that full tax has been
paid before paying the prize money.
7. Winnings from horse races [Section 194BB]
Any person who is responsible for paying any income by way of
winnings from horse race exceeding Rs 2,500, shall at the time of payment,
deduct tax at 30%.
8. Payment to Contractors [Section 194 C]
For any payment made in pursuance of any contract for
consideration of more than Rs 20,000 or aggregate of payments during
the year exceeds Rs 50,000 to any resident contractor for carrying out
any work including supply of labour, tax shall be deducted at source at
the rate of 2% [for advertisement contracts -1%] . Section 194C is
applicable in case of contract between contractor and a) the Central or
State Government / any local authority / any company/ any statutory
corporation / any co- operative society / any trust/ university/ firm/ any
society registered under the Societies Act / any Housing Board.
226
Under section 194(2) if a contractor [not being an individual or
H.UF] makes any payment in pursuance of any contract or supply of
labour to any sub –contractor, the tax to be deducted at source is1%.
9. Insurance commission [Section 194 D]
Any person paying any income by way of insurance commission
to a resident shall deduct tax at source at the rate of 20% [in case of
companies] and 10% [in case of others] if the amount of commission
exceeds Rs 5,000.
10. Payment to non- resident sportsmen or Non- Resident Sports
Association [Section 194 E]
Where any income is payable to a non- resident sportsman who is
not a citizen of india or a non- resident sports association , the person
making such payment shall deduct tax at 10%.
11. Payment in respect of deposits under National Savings Scheme
[Section 194EE]
Any person responsible for making any payment to any person
for deposits made in NSS and has claimed deduction u/s 80CCA, shall
deduct tax at 20% provided such payment exceeds Rs 2,500.
12. Repayment of units of mutual fund covered u/s 80 CCB [194 F]
At the time of repayment of units of UTI or mutual fund on
which deduction u/s 80CCB was claimed, a tax at 20% shall be deducted
at source.
13. Commission etc on sale of lottery tickets [Section 194 G]
Any person, paying any income by way of commission,
remuneration or prize to a person who has been skocking, distributing,
purchasing or selling lottery tickets shall deduct tax at 10% while
making payment if such income exceeds Rs 1,000 at any time. In case
an assessee files an application to Assessing Officer that tax may be
deducted at a lower rate, and the Assessing Officer may issue a
certificate allowing deduction of tax at source at lower rate and such
certificate shall remain valid till it is cancelled by the Assessing Officer.
14. Commission or brokerage [Section 194H]
A tax at 10% will be deducted at source when any payment is
made by a person who is not an individual or H.U.F to a resident
assessee by way of commission [not insurance commission ] or brokerage
provided such payment exceeds Rs 2,500.
227
15. Income from rent [Section 194 I]
Any person, other than individual or H.U.F paying any amount by
way of rent to a resident assessee, shall deduct tax at 15% if payment is
to be made to individual or H.U.F and 20 % in all other cases provided
the amount of rent exceeds Rs 1,20,000. The rate of TDS shall be 10%
for the use of any machinery or plant or equipment.
16. Fee for professional or technical services [Section 194 ]
Any person , paying any income by way of fees for professional
or technical services or by way of royalty to any resident assessee has
to deduct tax at 10% if such sum exceeds Rs 20,000 in a year .
17. Sums paid to non- residents [section 195]
Any person responsible for paying any interest not being ‘Interest
on Securities’ or any other sum except salaries to a non -resident not
being a company or to a foreign company shall at the time of payment
deduct income tax at the rates prescribed for the previous year.
18. Interest or dividend or other sums payable to Government RBI
or Corporations established by or under Aentral Act and a Mutual
Fund specified under section 10(23D)
No tax shall be deducted at source .
19. Interest on bonds or global depository receipts [Section 196]
Tax at 10% will be deducted with effect from the assessment
year 2002-03 on interest or dividend on global depository receipts.
20. Credit for tax deducted [Section 199]
Any deduction of tax made in accordance with the above sections
is deemed to have been paid on behalf of the assessee and he is given
credit for it in his regular assessment.
21. Duty of person deducting tax [Section 200]
Any person deducting any tax at source shall pay within the
prescribed time, the sum so deducted to the credit of the Central
Government or as the Board directs.
4.2 ADVANCE PAYMENT OF TAX OR PAY AS YOU EARN
Tax shall be payable in advance during any financial year in
accordance with the provisions of sections 208 to 219 (both inclusive) in
respect of the total income (current income ) of the assessee which would
be chargeable to tax for the assessment year immediately following the
financial year. [Section 207]
228
4.2.1 Liability to pay advance tax [Section 208]
Advance tax shall be payable during a financial year in every
case where the amount of such tax payable by the assesse during that
year ,as computed in accordance with the provisions of this Act, is Rs
5,000 or more(with effect from 1-10-1996).
4.2.2 Computation of advance tax [Section 209]
i) Calculation of advance tax payable u/s 209 (1), or (2) or
(5) or (6)
Assessee shall first estimate his income and tax shall be
calculated on such income at current rates.
ii) Calculation of advance tax payable u/s 209(3)
Assessing officer, while making an order u/s 210(3) asking an
assessee to pay advance tax ,shall take into consideration the total
income of the latest previous year on which regular assessment has been
made or the total income returned by assessee in his latest return
whichever is higher, as current income and on which tax shall be
calculated at rates applicable in that financial year.
iii) Assessee having agricultural income [Section 209 (2)]
For calculation of advance tax, the agricultural incomes shall be
integrated with current income if the Finance Act of such financial year
so provides.
4.2.3 Payment of advance tax [Section 210]
i) Voluntary payment of advance tax [Section 210 (1)]
It is the duty of every assessee whether or not assessed
previously to tax, to deposit the amount of advance on or before each of
the due dates specified in section 211, in equal instalments.
ii) Increase or decrease in advance tax [Section 210(2)]
Assessee is authorised to increase to decrease the amount of each
instalment of advance taX in accordance with his estimate of his current
income.
iii) Power of Assessing Officer [Section 210 (3)]
In case Assessing Officer is of the opinion that an assessee has
already been assessed by way of regular assessment in respect of his
income and has not deposited the advance tax during the financial year,
he may order such assesse to deposit the advance tax calculated in the
manner specified in section 209(2).
229
iv) Amendment of order issued u/s 210(3) [Section 210(4)]
In case assessing officer finds that assessee has filed a return u/s
139 (1) or 142 (1) or a regular assessment is made, for a previous year later
than that referred in point (iii) above ,he may make an amended order
asking the assessee to deposit the amount of advance tax calculated on
the basis of total income returned in such return or assessed on regular
assessment.
v) Assessee to intimate for reduction /increase in advance tax
[Section 210(5)]
In case an assessee is served with a notice u/s 210 (4) asking him
to deposit amount of advance tax and in his estimation the advance tax
payable on current income would be less than the amount so required to
be deposited, he may intimate to the Assessing Officer to that effect and
deposit that percentage of advance tax based on his own estimates. Same
rule is applicable, if in his estimation, assessee finds that his current
income shall be more than the income taken into consideration by the
Assessing Officer and tax shall be paid in accordance with advance tax
calculated on such estimated total income [Section 210 (6)].
4.2.4 Instalments of advance tax and due dates [Section 211]
According to Section 211, advance tax shall be payable by all
assessees who are liable to pay tax in three instalments in case of non-
company assessees and in four instalments in case of company assessees
on the following dates during the previous year , namely :
TABLE
A. For Company Assessee
Due date of instalment Amount payable
i) On or before 15th June Not less than 15% of such advance tax.
ii) On or before 15th September Not less than 45% of such advance tax
less any amount paid in the 1st
instalment
iii) On or before 15th December
Not less than 75% of such advance tax
less any amount paid in 1st and 2nd
instalments
iv) On or before 15th March
Whole of amount of advance tax less
amount deposited in earlier instalments.
230
B. For all Other Assessees
Due date of intalment Amount payable
i) On or before the 15th September Not less than 30% of such advance tax
Not less than 60% of such advance tax
ii) On or before the 15th December as reduced by amount paid in earlier
instalment
Whole amount of such tax as reduced
by the amount, if any, paid in earlier
iii) On or before the 15th March
instalment or instalments.
In case any amount of tax is deposited before 31st March, such tax
shall also be treated as advance tax paid during the financial year ending
on that day.
4.2.5 Interest payable by Government [Section 214]
Under section 214, in case any assessee pays advance tax more than
the amount of assessed tax determined on regular assessment, the Central
Government, shall pay simple interest @ 15% to such assessee on the
above said excess payment of advance tax.
4.2.6 Interest payable by assessee[Section 215]
When an assessee makes an estimate of his income himself and
pays advance tax accordingly, the assessee has to pay simple interest
@15% in case his estimate turns out to be too low and advance tax paid
is less than 75% of assessed tax (in case of companies 83 1/3% of
assessed tax). (calculated according to regular assessment).
4.2.7 Interest payable by assessee in case of underestimate [Section
216]
Under section 216, where the Assessing Officer finds that any
assessee has:
i) underestimated the advance tax payable by him and thereby
reduced the amount payable in either of the first two
instalments;
ii) that he has wrongly deferred the payment of advance tax on a
part of his income,
he may direct the assessee to pay simple interest @ 15% on the
difference between the amount paid in each instalment and the amount
which should have been paid.
231
4.2.8 Interest payable when no estimate is made [Section 217]
Section 217 (1) provides that where a person is not previously
assessed and if he fails to submit the estimate of his income as required,
simple interest @ 15% shall be charged from him.
4.2.9 Interest on deferment of advance tax [Section 234 C]
In case an assessee who is liable to pay advance tax u/s 208 has failed:
i) to pay advance tax ; or
ii) to pay required percentage of advance tax by fixed dates; he
shall be liable to pay interest 1% per month of the short fall
for a period of 3 months on the amount of short fall of the
advance tax.
4.2.10 Assessee deemed to be in default [Section 218]
In case the assessee fails to deposit the amount of instalment of
advance tax which he is required to pay under the orders of Assessing
Officer on the due date on which such instalment was due , such assessee
shall be deemed to be assessee in default in respect of such instalment or
instalments.
4.2.11 Credit of advance tax [Section 219]
Any sum other than a penalty or interest paid by or recovered
from an assessee as advance tax, shall be treated as a payment of tax in
respect of the income period which would be the previous year for an
assessment year next following the financial year in which it was payable
and credit therefore, shall be given to the assessee in the regular
assessment.
Questions
1. What is tax deducted at source and give its importance ?
2. Explain in brief the provisions of Income-Tax Law relating to
‘Advance Payment of Tax’?
3. What are the provisions relating to deduction of tax at source
from income chargeable under the head ‘Salaries’ and income from
‘Dividends’?
232
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Paper-xi-Income Tax Law and Practice - 2024-11-06t075059.124

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PERIYAR INSTITUTE OF DISTANCE EDUCATION

Rates of Tax for Assessment Year 2009-10

Chapter 1 Basic Concepts

Chapter 1 Income from Salary

Chapter 1 Profits and Gains of Business or Profession

Chapter 1 Income from Other Sources

Chapter 1 Income Tax Authorities

FOR ASSESSMENT YEAR 2009-10

For individuals(other than females and senior citizens), HUF, AOP,

If total Income is up to Rs.1,50,000 NIL

10% of income exceeding

Rs.15,000 + 20% of income

Rs.55,000 + 30% of income

If total Income is up to Rs.1,80,000 NIL

10% of income exceeding

Rs.12,000 + 20% of income

Rs.52,000 + 30% of income

III. For Senior Citizen Assessee

10% of income exceeding

Rs. 7,500 + 20% of income

Rs.47,500 + 30% of income

b) Rate of surcharge is 10% of tax

c) The total amount of income tax and surcharge on total income

For long term capital gains 20%

For casual incomes (Lotteries, races, puzzles etc,) 30%

1.7 Income [Section 2(24)]

Resident [(Section 6(1)] Non-Resident [Section 2 (30)]

Ordinary Resident Not Ordinarily Resident [Section6(6)]

2006-07 NIL - Non Resident

2005-06 343 days - Resident

2004-05 365days - Resident

Resident Non-Resident [Section 2(30)]

Ordinary Not Ordinarily

Different kinds of Incomes Not

N.O. Resi Non-Resi

(c) Income accrued & received outside India 20,000 - -

(v) Profit from business established in England and 20,000

Income accrued in India, received in 4,000 4,000 4,000

Profit from Business in Canada but

Income from House Property

(vi) Income from house property in 2000 ---- ----

Total Income 45,000 43,000 23,000

Total Income 27,000 25,000 22,000

1. Foreign allowance 1 Dearness allowance /

15% of Salary (1,41,600 x 15/100) 21,240

Add : 10% of cost of furnishings (20,000 x 10/100) 2,000

SPF RPF URPF PPF

1. Employee’s Full Full amount No Full amount

4 Lump sum Fully If he retires When fund Fully

(iii) Actual Received 1,26,000 1,26,000

i) Own contribution to R.P.F. 19,320

Value of rent free accommodation in Calcutta

Interest credited to RPF @ 9.5% 2,400

Salary income 1,46,350

The employee pays a rent of Rs.7,250 p.m. He works in M Ltd situated in

Computation of Gross Salary

Gross Salary 5,65,763

He is provided with a motor car of 1600 cc along with a chauffeur. The

Gross Salary 1,60,344

Taxable Salary Income 1,60,344