1

CHAPTER – 1 COMPUTATION OF TAX LIABILITY

Tax rates for Assessment Year 2023-24:
Up to Rs.2,50,000 : Nil
Rs.2,50,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.12,500
Above Rs.10,00,000 : 30% plus Rs.1,12,500

Tax rates for RESIDENT SENIOR CITIZEN for Assessment Year 2023-24:
Up to Rs.3,00,000 : Nil
Rs.3,00,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.10,00,000 : 20% plus Rs.10,000
Above Rs.10,00,000 : 30% plus Rs.1,10,000

Note: In case of a non-resident senior citizen, basic exemption is restricted to Rs.2,50,000.

Tax Rates for RESIDENT SUPER SENIOR CITIZEN for Assessment Year 2023-24:
Up to Rs.5,00,000 : Nil
Rs.5,00,000 to Rs.10,00,000 : 20%
Above Rs.10,00,000 : 30% plus Rs.1,00,000

Note: In case of a non-resident very senior citizen, basic exemption is restricted to Rs.2,50,000.

Important points:
 Total income and tax should be rounded off to the nearest ten rupee.

 A maximum rebate of Rs.12,500 under section 87A for RESIDENT INDIVIDUALS in case
TAXABLE INCOME does not exceed Rs.5,00,000 during the previous year.

 A SURCHARGE of 10% in case taxable income exceeds Rupees Fifty lakhs

 A SURCHARGE of 15% in case taxable income exceeds Rupees ONE CRORE
 A higher SURCHARGE of 25% in case taxable income exceeds Rupees TWO CRORES
 A higher SURCHARGE of 37% in case taxable income exceeds Rupees FIVE CRORES

 HEALTH & EDUCATION CESS of 4% to be charged. Cess is to be calculated on the total tax
including surcharge.

 MAXIMUM MARGINAL TAX RATE: 42.744% (30% + 37% + 4%)

 SENIOR CITIZEN: An Individual who has attained the age of 60 years or more

 VERY SENIOR CITIZEN: An Individual who has attained the age of 80 years or more
 2

 “Marginal relief” is available in case taxable income exceeds Rupees FIFTY LAKHS but
does not exceed Rs.51,95,900 (Rs.51,95,520 in the case of a senior citizen and
Rs.51,94,030 in the case of a very senior citizen).

 “Marginal relief” is also available in case taxable income exceeds Rupees ONE CRORE but
does not exceed Rs.1,02,14,700 (Rs.1,02,14,500 in the case of a senior citizen and
Rs.1,02,13,740 in the case of a very senior citizen).

 “Marginal Relief” is also available in case taxable income exceeds Rs.2 crores but does
not exceed Rs.2,09,30,000.

 “Marginal Relief” is also available in case taxable income exceeds Rs.5 crores but does
not exceed Rs.5,30,17,830.

 A person born on 1st April would be considered to have attained a particular age on 31 st
March, the day preceding the anniversary of his birthday. CBDT Circular

(e.g. A person born on 1st April, 1943 would be considered to have attained 80 years on 31 st
March, 2023 and shall be treated as “Very Senior Citizen” for P.Y.2022-23).

 If basic exemption is not fully exhausted against slab rate income, the unexhausted
exemption can be adjusted against incomes taxable at special rates. This benefit is not
available for a non-resident individual.

 In addition to basic exemption of Rs.2,50,000; long-term capital gain on sale of listed

shares through the stock exchange shall be taxed at a special rate of 10% u.s.112A after
availing an exemption of Rs.1,00,000.

 Incomes taxed at special rates:

Long term capital gains (all capital assets except listed shares): 20% u.s.112
Long term capital gain on sale of listed shares above Rs.1 lakh: 10% u.s.112A
Short term capital gain on sale of listed shares: 15% u.s.111A
Casual Incomes (e.g. winnings from lottery): 30% u.s.115BB

 Alternative Minimum Tax (AMT):

Individuals who claim deduction u.s.10AA or u.s.35AD or deduction u.s.80JJAA or
u.s.80QQB to u.s.80RRB are subject to AMT. AMT is payable @ 18.5% of adjusted total
income.

 Unexplained cash credit or unexplained investments or unexplained expenditure shall be

taxed @ 60% plus surcharge @ 25% and cess @ 4% (effective rate 78%).
 3

Important:
Higher surcharge of 25% and 37% does not apply:
a) for any long-term capital gain;
b) short-term capital gain on sale of listed shares u.s.111A; and
c) on dividend income.

Thereby, higher surcharge applicable on other income (e.g. salary, hp, business income) is as
follows:
If total income after excluding (a, b, c) given above:
a. Is above Rs.2 crores: 25%
b. Above 5 crores: 37%

1. Find out the tax liability in each case separately of Mr.X (age 30) if his total income for the
previous year 2022-23 (Assessment Year 2023-24) is as follows:-

 Rs.2,10,000 Rs.3,50,000 Rs.5,00,000

 Rs.9,99,995 Rs.50,00,000 Rs.1,00,00,000

Ignore provisions of Section 115BAC.

2. Mr.D (age 45) is a businessman. His income for the previous year 2022-23 (Assessment Year
2023-24) is as follows: Compute his tax liability in each case separately:-

a) Rs.1,80,00,000 b) Rs.4,10,00,000 c) Rs.9,10,00,000

Ignore provisions of Section 115BAC.

3. Find out tax liability in each case separately of Mr.Y (a resident senior citizen) if his total income
for the previous year 2022-23 (Assessment Year 2023-24) is:-

 Rs.2,90,000 Rs.5,00,000 Rs.10,00,000

 Rs.70,00,000 Rs.1,40,00,000 Rs.3,50,00,000

Ignore provisions of Section 115BAC.

4. Mr.A is a senior citizen and a resident for the previous year 2022-23. His taxable income for the
previous year 2022-23 is Rs.5,00,000. Compute his tax liability. What will be your answer if he
had been a non-resident for the relevant previous year. Ignore provisions of Section 115BAC.
 4

5. Find out the tax liability in each case separately of Mr.R (a resident) (born on 01.04.1943) if his
total income for the previous year 2022-23 (Assessment Year 2023-24) is:-

 Rs.3,00,000 Rs.5,00,000 Rs.10,00,000

 Rs.1,00,00,000 Rs.4,10,00,000

Ignore the provisions of Section 115BAC.

6. Compute tax liability in each separately of Mr.B (a resident) (age 40 years) if his taxable income for
the previous year ending 31st March 2023 (Assessment Year 2023-24) is:

 Rs.50,00,100 Rs.50,10,000 Rs.51,00,000

 Rs.1,01,00,000 Rs.2,01,00,000 Rs.5,01,00,000

Ignore the provisions of Section 115BAC.

7. Mr.Agarwal aged 40 years and a resident in India, has a total income of Rs.4,50,00,000, comprising
long-term capital gain taxable u.s.112 of Rs.55,00,000; short term capital gain taxable u.s.111A of
Rs.65,00,000 and other income of Rs.3,30,00,000. Compute his tax liability for AY 2023-24. Assume
Mr.Agarwal has not opted for the provisions of Section 115BAC.

8. Mr.Sharma aged 62 years and a resident in India, has a total income of Rs.2,30,00,000, comprising
long-term capital gain taxable u.s.112 of Rs.52,00,000; short term capital gain taxable u.s.111A of
Rs.64,00,000 and other income of Rs.1,14,00,000. Compute his tax liability for AY 2023-24. Assume
Mr.Sharma has not opted for the provisions of Section 115BAC.

9. Mr.X, a resident, declares the following incomes for the previous year 2022-23:
a) Income from other sources of Rs.2,00,000; and
b) Long-term capital gain on sale of listed shares through the stock exchange Rs.5,00,000.

Compute tax liability for Assessment Year 2023-24. Ignore the provisions of Section 115BAC.

Additional Problems:
1. What is section 111A and section 112A of the IT Act?
Short-term capital gain on sale of listed shares through the stock exchange is taxed at 15% u.s.111A

Long-term capital gain on sale of listed shares through the stock exchange is taxed at 10% u.s.112A
after claiming exemption of Rs.1 lac.

The above gains are not subject to higher surcharge of 25% and 37% respectively.
 5

2. Mr.X an individual furnishes the following for the previous year 2022-23. He wants to know the
applicable surcharge rate on his income:

Case A: Other income Rs.60,00,000

LTCG u.s.112A Rs.51,00,000
STCG u.s.111A Rs.60,00,000
Total Income Rs.1,71,00,000

Case B: Other income Rs.2,50,00,000

LTCG u.s.112A Rs.3,01,00,000
STCG u.s.111A Rs.1,00,00,000
Total Income Rs.6,51,00,000

Important terms:

Previous Year: Section 3: & Assessment Year: Section 2(9):

Income earned in a year is taxable in the next year. The year in which income is earned is known
as previous year and the next year in which income is assessed is known as the Assessment Year.
For students appearing for the coming examination, the relevant previous year is 2022-23 and
relevant assessment year is 2023-24.

Assessee:
"assessee" means a person by whom income-tax is payable under this Act, and includes every
person in respect of whom any proceeding under this Act has been taken for assessment of his
income or of the amount of refund due to him

Heads of Income:
5 heads of income. Salaries, house property, business or profession, capital gains and other
sources

Gross Total Income:

“Gross total income” means the aggregate income earned from all the heads before allowing
deductions under Chapter VIA of the Income-tax Act.

Total Income:
“Total Income” is the income on which tax is payable by the assessee. It is computed after
allowing deductions under Chapter VIA of the Income-tax Act.

Tax Rates vary for different assesses:

Tax rates vary for different category of assesses. For firms it is 30% flat rate. For companies the
applicable tax rates can be 15% or 22% or 25% or 30% or 40%. Similarly surcharge rates are
also different for different assesses.
 6

Exemptions:
Incomes that are not included while computing total income of an assessee are called exempted
incomes. Exempted incomes are given u.s.10 of the Income Tax Act. E.g. Agricultural income is
exempt from tax u.s.10(1).

Deductions:
Incomes that are included while computing total income of an assessee and later allowed as
deduction. E.g. Deductions under chapter VIA of the Act such as section 80QQB or section TTA.

I. COMPUTATION OF GROSS TOTAL INCOME & TOTAL INCOME OF AN ASSESSEE:

Income from salaries xxx

Income from house property xxx
Profits and gains of business or profession xxx
Capital gains xxx
Income from other sources xxx
Gross Total Income xxx
Less: Deductions under section 80C to 80U xxx
Total Income xxx

II. COMPUTATION OF TAX LIABILITY:

Tax on total income xxx
Add: Surcharge (if applicable) xxx
xxx
Add: Health and education cess xxx
Total tax xxx
Less: TDS & TCS xxx
Less: Advance tax xxx
xxx
Add: Interest u.s.234A, 234B & 234C xxx
Add: Late fee (for delay in filing return of income) xxx
xxx
Less: Self-assessment tax paid xxx
Final tax payable nil

Problem for practice:

10. Mr.Dinesh aged 35 years and a resident in India, has a total income of Rs.4,80,000, comprising of
long term capital gain taxable under section 112. Compute his tax liability for AY 2023-24.
 7

11. Mr.X, a resident, furnishes the following information for the previous year ending 31 st March,
2023: His total income is Rs.10 lacs. Compute his tax liability if:

a) Total income consists of income by way of salary and income from other sources only; or
b) Total income includes income only by way of long term capital gain on sale of listed
shares through stock exchange; or
c) Total income includes income only by way of winning from a TV contest.

Section 115BAC: NEW TAX REGIME:

Income tax rates for Individuals (optional) (new scheme & reduced rates)
Effective AY 2021-22 there are two alternative personal income tax regimes available for
Individuals and HUFs. Such Individual and HUF taxpayers can either continue with the old
regime or choose to shift to new regime. The new income tax regime is completely optional and
every Individual or HUF can decide basis what is beneficial for them.

Old regime is essentially the existing income tax rates with all the available deductions from
income tax. New regime aims to tax income at lower rates with fewer deductions.

Net tax rates for Assessment Year 2023-24 u.s.115BAC:

Up to Rs.2,50,000 : Nil
Rs.2,50,000 to Rs.5,00,000 : 5%
Rs.5,00,000 to Rs.7,50,000 : 10% plus Rs.12,500
Rs.7,50,000 to Rs.10,00,000 : 15% plus Rs.37,500
Rs.10,00,000 to Rs.12,50,000 : 20% plus Rs.75,000
Rs.12,50,000 to Rs.15,00,000 : 25% plus Rs.1,25,000
Above Rs.15,00,000 : 30% plus Rs.1,87,500

Important: The above tax rates are same for all individuals irrespective of their age (senior
citizen / super senior citizen / general category)

Surcharge rates:
Surcharge rates shall be the same as discussed earlier (10%, 15%, 25% and 37%).

Rebate u.s.87A:
A maximum rebate of Rs.12,500 under section 87A for resident individuals in case taxable
income does not exceed Rs.5,00,000 during the previous year.

Cess:
HEALTH & EDUCATION CESS of 4% to be charged.
 8

Important: Exemptions or deductions not available:

The option to pay tax at lower rates shall be available only if the total income of an assessee
is computed without claiming specified exemptions or deductions.

Exemptions & Deductions not available under the new scheme:

House Rent Allowance
Leave Travel Allowance
Conveyance or Travelling Allowance
Helper Allowance
Relocation Allowance
Children Education Allowance
Children Hostel Allowance
Tribal Area Allowance
Transport Allowance for employees working in transport system
Free lunch provided to employees not exceeding Rs.50 per meal
Daily allowance received by MP / MLA
Standard deduction
Entertainment allowance
Professional tax
Interest on housing loan u.s.24 in respect of a self-occupied property
Additional depreciation, Section 35, Section 35AD
Deduction from family pension
Income of minor child u.s.10(32)
Set-off of bfd losses, if such loss is attributable to the above deductions
HP loss cannot be set off against any other head of income
Exemption u.s.10AA
Chapter VIA deductions (except 80CCD (2) & 80JJAA)

Frequency of choosing between old and new income tax regime:

A. Individuals or HUF not having business income:

Will have the option every year (e.g. A salaried employee has the choice every year)

B. Individuals or HUF having business income:

One time choice between old and new tax regime. If for any year option to shift to new
income tax regime is exercised, such choice would be applicable for subsequent years also.

Such individuals and HUF also have one time exit opportunity from the new income tax
regime, after they have opted for the same. If the individual or HUF has chosen the option
to shift to new income tax regime, they will get one chance in subsequent years to switch
back to old income tax regime. However the Individual or HUF will not be able to choose
the new income tax regime again.
 9

Example of old tax regime and new tax regime:

Mr.X furnishes the following details for the previous year ended 31.03.2023:
Basic pay Rs.1,00,000 p.m.; HRA Rs.40,000 p.m. (hra exempt is Rs.30,000 p.m.); children education
allowance Rs.12,400 for two children (amount exempt is Rs.2400); Leave Travel Concession
Rs.30,000 (amount exempt is Rs.25,000); Professional tax paid Rs.2,500.

He owns a house in his native place occupied by his parents. Interest on home loan paid during the
year is Rs.2,00,000.
Interest on savings account with SBI Rs.15,000.
Interest on fixed deposit in the name of his minor son with a bank Rs.21,500

Deduction in respect of Section 80C Rs.1,50,000

Deduction in respect of Section 80D Rs.25,000
Deduction in respect of Section 80CCD(2) Rs.50,000
Deduction in respect of Section 80TTA Rs.10,000

Compute his total income and tax liability for A.Y.2023-24 as per the old regime. What will be your
answer if he has opted for the new tax regime.

Answer:

As per the old regime:

Income from salary:

Basic pay 12,00,000
HRA 480000
(-) Exempt 360000 1,20,000
Education allowance 12400
(-) Exempt 2400 10,000
LTC 30000
(-) Exempt 25000 5000
Gross Salary 13,35,000
Less: Standard deduction 50,000
Less: Professional tax 2,500
Income from salary 12,82,500

Income from house property:

Annual Value nil
(-) Section 24
Interest on home loan (max dedn) 200000
Loss from house property 200000

Income from other sources:

Interest on savings account 15000
Interest on fixed deposit 21500
Less: Section 10(32) 1500 20000
35000
 10

Computation of total income:

Income from salary 1282500
Income from house property (200000)
Income from other sources 35000
Gross total income 1117500
Less: Section 80C 150000
Less: Section 80CCD (2) 50000
Less: Section 80D 25000
Less: Section 80TTA 10000
Total Income 882500

Computation of tax liability:

Tax on total income: (882500-500000)*20% + 12500 = 89000
Add: Cess @ 4% 3560
92560

As per the new regime:

Total income as per the old regime 882500

Add: HRA exemption 360000
Add: LTA exemption 25000
Add: Education allowance 2400
Add: Std deduction 50000
Add: Professional tax 2500
Add: Interest on housing loan 200000
Add: Section 10(32) exemption 1500
Add: Section 80C 150000
Add: Section 80D 25000
Add: Section 80TTA 10000
Total Income as per new regime 1708900

Computation of tax liability:

Tax on total income (1708900-1500000) x 30% + 187500 250170
Add: Cess @ 4% 10067
Tax liability 260177 or Rs.260180

Conclusion:
In the above case, it is suggested to the assessee not to opt for new tax regime and continue with the
old tax regime.

1. Compute tax liability of an assessee under the new tax regime u.s.115BAC in the following cases if
total income for the previous year ending 31st March, 2023 is as follows:

Rs.4,00,000; Rs.7,00,000; Rs.10,00,000; Rs.12,00,000

Rs.14,00,000; Rs.15,00,000; Rs.20,00,000
 11

CHAPTER – 2 AGRICULTURAL INCOME

Agricultural Income:
 Income should be derived from land
 Land should be situated in India
 Land should be used for agricultural purposes

Treatment of agricultural income for tax purposes:

Agricultural Income is exempt from tax under section 10 (1). However, agricultural income is
integrated to non-agricultural income for rate purposes.

Step 1: Integrate both agricultural income and non-agricultural income if possible.

Step 2: Compute tax on the integrated income.
Step 3: Compute tax on agricultural income after adding basic exemption to it.
Step 4: Step 2 minus step 3.

note: Integration is possible only if agricultural income exceeds Rs.5,000 and non-agricultural
income exceeds basic exemption limit.

note: The purpose of integration is that assessee pays more tax on his other income by way of
increase in the slab rate.

note: Integration is not applicable in cases where incomes are taxed at special rates.

Income from: Rule Agricultural Non-agricultural

income income
Growing and manufacturing
tea in India 8 60% 40%

Growing rubber plants and

manufacturing latex in India 7A 65% 35%

Coffee grown and

cured in India 7B (1) 75% 25%

Coffee grown, cured, roasted

and grounded in India 7B (1A) 60% 40%

Few examples of agricultural income:

Income derived from the sale of seeds
Income from growing of flowers and creepers
Rent received from land used for grazing of cattle required for agricultural activities
Income from growing of bamboo
 12

Few examples of Non-agricultural income:

Income from purchase and sale of standing crops
Income from breeding of livestock
Income from poultry farming
Income from fisheries
Income from dairy farming

Whether income from nursery constitutes agricultural income?

Yes, Income derived from saplings or seedlings grown in a nursery would be deemed to be
agricultural income, whether or not the basic operations were carried out on land.

Problems:
1. For the previous year ending March 31, 2023, non-agricultural income of X (age: 32 years) is
Rs.2,40,000, whereas agricultural income is Rs.18,00,000. Is he liable to pay income tax?

2. Mr.X, a resident, has provided the following particulars of his income for previous year 22-23:
Income from salary (computed) Rs.2,80,000; Income from house property (computed)
Rs.2,50,000; Agricultural income from a land in Jaipur Rs.4,80,000; Expenses incurred for
earning agricultural income Rs.1,70,000. Determine his tax liability assuming his age is: a) 45
years or b) 70 years.

3. Mr.A, aged 60 years, is engaged in the business of roasting and grounding of coffee, derives
income Rs.10 lakhs during the financial year 2022-23. Compute his tax liability assuming he has
no other income.

4. Mr.B earned Rs.20,00,000 from sale of coffee grown and cured (processed) by him. He claims the
entire income as agricultural income, hence exempt from tax. Is he correct?

5. Mr.C manufactures latex from the rubber plants grown by him in India. These are then sold in
the market for Rs.30 lacs. The cost of growing rubber plants is Rs.10 lacs and that of
manufacturing latex is Rs.8 lacs. Compute his total income.

6. Mr.A, a resident aged 25 years, manufactures tea from the tea plants grown by him in India.
These are then sold in the Indian market for Rs.40 lakhs. The cost of growing tea plants was
Rs.15 lakhs and the cost of manufacturing tea was Rs.10 lakhs. Compute his tax liability for the
Assessment Year 2023-24.
 13

7. Mr.R had estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery
wherein he grows plants and sells. For the previous year ending 31.03.2023, he furnishes the
following particulars of his sources of income from estates and sale of plants. You are requested
to compute the taxable income for the Assessment Year 2023-24:

 Manufacture of Rubber Rs.5,00,000

 Manufacture of Coffee grown and cured Rs.3,50,000
 Manufacture of Tea Rs.7,00,000
 Sale of plants through nursery Rs.1,00,000

8. Mr.K grows paddy and uses the same for the purpose of manufacturing rice in his own Rice Mill.
The cost of cultivation of 40% paddy produce is Rs.7,00,000 which is sold for Rs.15,00,000; and
the cost of cultivation of balance 60% paddy is Rs.12,00,000 and the market value of such paddy
is Rs.24,00,000. To manufacture the rice, he incurred Rs.2,00,000 in the manufacturing process
on the balance (60%) paddy. The rice was sold for Rs.30,00,000. Compute the business income
and agricultural income of Mr.K.

9. Miss Vivitha, a resident and ordinary resident, has derived the following incomes from various
operations (relating to plantations and estates owned by her) during the year ended 31.03.2023:

 Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling:
Rs.3,00,000
 Income from sale of coffee grown and cured in Yercaud, Tamil Nadu: Rs.1,00,000
 Income from sale of coffee grown, cured, roasted and grounded, in Colombo. Sale
consideration was received at Chennai: Rs.2,50,000
 Income from sale of tea grown and manufactured in Shimla Rs.4,00,000
 Income from sapling and seedling grown in a nursery at Cochin: Rs.80,000
(basic operations were not carried out by her on land)

You are required to compute the business income and agricultural income of Miss Vivitha for the
Assessment Year 2023-24.

Problems for practice

10. Taxable Income of Mr.S as computed under Income-tax Act, for the assessment year 2023-24 is
Rs.10,00,000. Compute tax payable by Mr.S assuming that he has agricultural income of:

(a) Nil; (b) Rs.5,000; and (c) Rs.7,50,000.

11. Mr.A, a resident individual, aged 61 years, earned agricultural income of Rs.7,00,000 during the
previous year 22-23. Compute his tax liability assuming that he has non-agricultural income of:
(a) Rs.3,00,000; (b) Rs.5,00,000.
 14

12. X Ltd. grows sugarcane to manufacture sugar. Data for 2022-23 is as follows:
Cost of cultivation of sugarcane Rs.4,00,000
Market value of sugarcane when sugarcane is transferred to the factory Rs.9,00,000
Other manufacturing cost Rs.6,00,000
Sales turnover of sugar Rs.17,00,000
Compute taxable income of X Ltd.

13. Mr.P (aged 25 years) is engaged in growing and manufacturing tea in India. His profit for the
previous year 2022-23 amounts to Rs.10,00,000 which includes profit of Rs.2,00,000 from sale of
green leaves plucked in his own garden. He has no other income during the year. Compute the
total income and total tax payable by Mr.P.

14. Discuss with brief reasons, whether rent received for letting out agricultural land for a movie
shooting and amounts received from sale of seedlings in a nursery adjacent to the agricultural
lands owned by an assessee can be regarded as agricultural income, as per provisions of the
Income-tax Act, 1961.

15. State with brief reasons whether the following are agricultural income either in whole or in part:

i. Purchase of standing sugarcane crop by Mr.A for Rs.2 lakhs and after cutting the canes,
selling them for Rs.2,50,000.
ii. Income from milk dairy run by Mr.R in his agricultural lands Rs.50,000
iii. Income from sale of plants Rs.1,00,000 earned by Mr.J who maintains a nursery
iv. Income from sale of rubber Rs.3,20,000 realised by Mr.T who owns rubber estate and
cultivates rubber.
v. Income from gracing of cattles allowed in the land owned by Mr.B Rs.60,000.

Answers:
14. Land is not used for agricultural purposes. Therefore, rent received for letting out agricultural
land for a movie shooting is NOT agricultural income.

Amount received from sale of saplings or seedlings in a nursery is to be treated as agricultural

income, whether or not the basic operations were carried out on land.

15. a. No basic operations (agricultural activities) were carried out on the land.
To be treated as business income.
b. Business income
c. Agricultural income
d. Agricultural income (65%) and Business income (35%)
e. Agricultural income
f. Agricultural income
 15

CHAPTER – 3 RESIDENTIAL STATUS

An Individual can be either:
a. Resident in India; (or)
b. Non-resident in India

A resident is an individual who satisfies any one of the basic conditions mentioned below:

BASIC CONDITIONS ~ Section 6(1):

1. One should stay in India at least for 182 days during the relevant previous year;
(OR)
2. One should stay in India at least for 60 days during the relevant previous year AND
at least for 365 days during 4 preceding previous years.

A resident individual can further be classified into:

a. Resident and ordinary resident; (or)
b. Resident but not ordinary resident

ADDITIONAL CONDITIONS ~ Section 6(6):

1. One should stay in India at least for 730 days during 7 preceding previous years.
(AND)
2. One should be a resident at least for 2 years out of 10 preceding previous years.

Important points:
a. If both the additional conditions are satisfied then he is an ordinary resident or else
not ordinary resident.

b. Basic condition 2 does not apply for an Indian citizen who leaves India for the purpose
of employment or one who works as a crew member of an Indian ship.

c. Basic condition 2 does not apply for an Indian citizen or a person of Indian origin who
comes to India for the purpose of a visit. (refer point ‘d’ below for recent amendment).

d. Basic condition 2 shall be 120 days instead of 60 days in case of an Indian citizen or a
person of Indian origin who comes to India for a visit and his total income excluding
income from foreign sources during the relevant previous year exceeds Rs.15 lacs. If
this condition is satisfied, he shall be treated as resident. However, additional
conditions are not applicable in this case, hence he shall be treated as resident but not
ordinary resident.

e. “Income from foreign sources”: means income which accrues or arises outside
India (except income derived from a business controlled in or a profession set up in
India) and which is not deemed to accrue or arise in India.
f. Deemed Resident u.s.6(1A): An Indian citizen having total income, other than
income from foreign sources, exceed Rs.15 lakhs during the relevant previous year
shall be deemed to be a resident in India in that previous year, if he is not liable to tax
 16

in any other country. However, additional conditions are not applicable in this case,
hence he shall be treated as resident but not ordinary resident.

Important: Deemed Resident u.s.6(1A) is only for Indian citizens and not applicable
for persons of Indian origin.

When section 6(1A) is applicable: If basic conditions 1 & 2 are not satisfied then
this section is applicable. “Deemed Resident” shall always be a resident but not
ordinary resident.

Order in which the provisions can be applied in case of Indian citizen or Indian origin:

Step 1: Basic condition 1 (182 days): If satisfied - Resident;

If not satisfied - Test basic condition 2

Step 2: Basic condition 2 (120 days): If satisfied - Resident;

If not satisfied - Test deemed resident

Step 3: Deemed Resident: If satisfied - Deemed Resident

(only for Indian citizens) If not satisfied - Non-resident

g. Official tours abroad in connection with employment in India shall not be regarded as
employment outside India.

h. A person is deemed to be of Indian origin if he, or either of his parents or any of his
grandparents, were born in undivided India.

i. Place of stay or the purpose of stay is not relevant. Stay need not be continuous.

j. Time and hour of leaving and arrival is relevant. If clear information is not given then the
day he enters India and the day he leaves India should be taken into account.

Residential Status of a Hindu Undivided Family:

▪ If control and management of affairs is wholly or partly situated in India: Resident
▪ If control and management of affairs is wholly situated outside India: Non-resident

Note: Ordinary resident or not-ordinary resident depends upon the stay of “Karta” (i.e. additional
conditions mentioned above).

Residential status of firm:

▪ If control and management of affairs is wholly or partly situated in India: Resident
▪ If control and management of affairs is wholly situated outside India: Non-resident

Residential status of a company:

 17

Domestic company: Always resident irrespective of place of control and management

Foreign company: A foreign company would be resident in India in any previous year,
if its place of effective management (POEM), in that year, is in India.

“POEM” means a place where KEY MANAGEMENT AND COMMERCIAL DECISIONS that are
necessary for the conduct of the business of an entity as a whole are, in substance made.

Note: A partnership firm, or a company can never be “ordinary” or “not ordinary resident”.

Problems on foreign nationals (6 problems):

1. X, a foreign national (not being a person of Indian origin), comes to India for the first time on
April 15, 2018. During the financial years 18-19, 19-20, 20-21, 21-22 and 22-23 he was in
India for 130 days, 80 days, 13 days, 210 days and 75 days respectively. Determine his
residential status for the assessment year 2023-24.

2. Mr.D, a non-resident, residing in US since 1991, came back to India on 01.04.2021 for
permanent settlement. What will be his residential status for assessment year 2023-24?

3. Mr.X, an Australian Cricketer has been coming to India for 90 days every year since 2006-07.
Determine his residential status for the assessment year 2023-24. Would your answer differ
if he had come to India for: a) 100 days or b) 110 days every year?

4. During the previous year 22-23, X, a foreign national (not being a person of Indian origin),
visits India for 64 days. Determine his residential status for the assessment year 2023-24 on
the basis of the following information:

➢ During 18-19, X is present in India for 365 days.

➢ During 16-17 and 17-18, X was in India for 40 and 365 days respectively.
➢ Mrs.X is non-resident in India for the assessment year 2023-24.

5. X is a foreign citizen. During the financial year 22-23, he comes to India for 85 days.
Determine his residential status for the assessment year 2023-24 on the assumption that
during financial years 2008-09 to 21-22 he was present in India as follows:

08-09: 85 days 13-14: 180 days 18-19: 305 days

09-10: 310 days 14-15: 360 days 19-20: 65 days
10-11: 6 days 15-16: 16 days 20-21: 10 days
11-12: 5 days 16-17: 360 days 21-22: 126 days
12-13: 65 days 17-18: 181 days
 18

6. X, a foreign national came to India from U.K. for the first time on 2nd of October, 2021. He
returned to his home country after staying in India up to 28th of September, 2022. Will he be
a resident in India for the assessment years 2022-23 and 2023-24.

Problems on Indian Citizens and Persons of Indian Origin (8 problems):

7. Mr.R an Indian Citizen left India for the first time on 28.09.2022 for employment in Germany.
Determine the residential status of Mr.R for the A.Y. 2023-24. b) Will your answer be
different if he had gone on a leisure trip?

8. Mr.G was born in Lahore in 1946. He has been staying in England since 1973. He came to
visit India on 4.10.2022 and returns on 30.3.2023. Determine his residential status for
A.Y.23-24 assuming that his taxable income other than income from foreign sources does not
exceed Rs.15 lakhs during the previous year 2022-23.

9. What will be your answer to sum no.8 if Mr.G had taxable income other than income from
foreign sources exceeding Rs.15 lakhs during the previous year 22-23 and his stay in India
during last four years immediately preceding the previous year 22-23 exceeded 365 days.

10. Mr.G was born in England in 1966. His father was born in America in 1936. Mr.G’s
grandfather was born in Lahore in 1916. Will Mr.G be a resident in India if he visits India for
180 days during the previous year 22-23 assuming that his taxable income other than income
from foreign sources does not exceed Rs.15 lakhs during the previous year 2022-23.

11. Mr.R, a citizen of India, has been carrying on a profession in Dubai (UAE), where he is not
liable to pay any income tax. His taxable Indian income for the previous year 2022-23 is
Rs.12,00,000 and he also earned Rs.5,00,000 from exercising the profession in Dubai. The
profession is set up in India. Besides, the professional income, he has earned Rs.10,00,000 in
Dubai. Determine his residential status, if during the previous year 2022-23 he has:
a. visited India for 110 days
b. not visited India
c. visited India for 190 days and assume additional conditions are satisfied
d. visited India for 122 days and in the four preceding previous years immediately
preceding the previous year 2022-23, he was in India for 300 days
e. visited India for 122 days and in the four preceding previous years immediately
preceding the previous year 2022-23, he was in India for 400 days

What will be your answer if his Indian income was Rs.9,00,000 instead of Rs.12,00,000.

12. Mr.R, a citizen of India, is carrying on profession in Singapore which is set up in India. He
visited India during the previous year 2022-23 for 145 days. Determine his residential status
if he has earned the following incomes during the p.y. 2022-23:
 19

a. Taxable Indian income – Rs.8,00,000

b. Income from profession in Singapore – Rs.10,00,000
c. Other income earned in Singapore – Rs.9,00,000
d. R is liable to pay tax in Singapore.
e. Assume Mr.R had stayed in India for 412 days during 4 preceding previous years

What will be your answer if R visited India for 115 days.

13. Mr.R (an Indian citizen), is living in USA since 1985. He comes to India to meet his parents on
01.06.2022 and leaves India for USA on:

Case I: 30th September, 2022

Case II: 30th November, 2022

He has the following incomes:

Incomes arising in India Rs.6,00,000

Income received abroad but deemed to

accrue or arise in India as per section 9 Rs.7,00,000

Incomes arising in USA and not deemed to

accrue or arise in India Rs.40,00,000

Income arising in USA from a business

controlled from India Rs.10,00,000

Comment on the residential status of Mr.R. Assume his stay in India exceeds 365 days in 4
preceding previous years. Further, also compute the taxable income in the hands of Mr.R for
the assessment year 2023-24.
14. Brett Lee, an Australian Cricketer has been coming to India for 100 days in every financial
year. This has been in practice for the past 10 financial years. Determine his residential
status for the assessment year 2023-24.

Would your answer change if the above facts relate to Srinath, an Indian citizen who resides
in Australia and represents the Australian cricket team?

What would be your answer if Srinath had visited India for 120 days instead of 100 days
every year, including previous year 2022-23?

Residential status of HUF (2 problems)

15. X, an individual, is a resident but not ordinary resident in India for the A.Y.2023-24 (previous
year 2022-23). During the previous year 2022-23, the affairs of X (HUF), a Hindu undivided
family whose karta is X since 1980, are partly managed from Chennai and partly from
Singapore. Determine the residential status of X (HUF) for the assessment year 2023-24.
 20

16. The business of a HUF is transacted from Australia and all the policy decisions are taken
there. Mr. E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y.2022-
23 after 15 years. He comes to India on 01.04.2022 and leaves for Australia on 1.12.2022.
Determine the residential status of Mr.E and the HUF for A.Y.2023-24.

1. INDIAN CITIZEN AS A CREW MEMBER OF A FOREIGN BOUND SHIP:

In case of foreign bound ships where the destination of the voyage is outside India, there is
uncertainty regarding the manner and the basis of determining the period of stay in India for
an Indian citizen, being a crew member.

According to Rule 126, in case of an individual, being a citizen of India and a member of the
crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not
include the following period:

Period commencing from Period ending on

the date entered into the Continuous Discharge AND the date entered into the Continuous
Certificate in respect of joining the ship by the Discharge Certificate in respect of
signing said individual for the eligible voyage off by that individual from the
ship in respect of such voyage.
MEANING OF CERTAIN TERMS:

a. CONTINUOUS DISCHARGE CERTIFICATE:

This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge
Certificate-cum Seafarer’s Identity Document) Rules, 2001 made under the Merchant
Shipping Act, 1958.

b. ELIGIBLE VOYAGE:
A voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where:

i. For the voyage having originated from any port in India, has as its destination any port
outside India; and

ii. For the voyage having originated from any port outside India, has as its destination
any port in India.

17. Mr.X an Indian citizen and a member of the crew of a Singapore bound Indian ship engaged in
carriage of passengers in international traffic departing from Chennai port on 6th June, 2022.
From the following details for the previous year 2022-23, determine the residential status of
Mr.X for A.Y.2023-24, assuming that his stay in India in the last 4 previous years (preceding
P.Y.2022-23) is 400 days and last seven previous years (preceding P.Y.2022-23) is 750 days.

Particulars Date
Date entered into the Continuous Discharge Certificate in 6th June, 2022
respect of joining the ship by Mr.X
 21

Date entered into the Continuous Discharge Certificate in 9th December,

2022
respect of singing off the ship by Mr.X

Answer:
No. of days during the previous year 2022-23 365
Less: No. of days to be excluded from 6.6.2022 to 9.12.2022 187
Therefore, no. of days of stay in India 178

Basic condition one: Stay for at least 182 days during the previous year: Not satisfied
Basic condition two: Does not apply for an Indian citizen who works as a crew
member of a Ship.

Note: Voyage is undertaken by an Indian ship engaged in the carriage of passengers in

international traffic, originating from a port in India and having its destination at a port
outside India. Hence, the voyage is an eligible voyage.

Hence, assesse Mr.X is a non-resident for A.Y.2023-24.

18. During the last four years preceding the financial year 2022-23, Mr.D, a citizen of India, was
present in India for 430 days. During the last seven previous years preceding the previous
year 2022-23, he was present in India for 830 days.

Mr.D is a member of the crew of a Dubai bound Indian ship, carrying passengers in the
international waters, which left Kochi port in Kerala on 12th August, 2022.

Following details are made available to you for the previous year 2022-23:

Particulars Date
Date entered into the Continuous Discharge Certificate in 12th August, 2022
respect of joining the ship by Mr.D

Date entered into the Continuous Discharge Certificate in 21st January, 2023
respect of singing off the ship by Mr.D

In May, 2022 he had gone out of India to Singapore and Malaysia on a private tour for a
continuous period of 29 days. You are required to determine residential status of Mr.D for
the previous year 2022-23.

Answer:
No. of days during the previous year 2022-23 365
Less: No. of days to be excluded from 12.8.2022 to 21.01.2023 163
 22

202
Less: Private tour to Singapore and Malaysia (did not stay in India) 29
Therefore, no. of days of stay in India 173

Basic condition one: Stay for at least 182 days during the previous year: Not satisfied
Basic condition two: Does not apply for an Indian citizen who works as a crew
member of a Ship.

Note: Voyage is undertaken by an Indian ship engaged in the carriage of passengers in

international traffic, originating from a port in India and having its destination at a port
outside India. Hence, the voyage is an eligible voyage.

Hence assesse Mr.X is a non-resident for A.Y.2023-24.

 23

Answers to problems in residential status:

8. Mr.G was born in undivided India. He is a person of Indian origin. Basic condition 2 does not apply
for an Indian citizen or a person of Indian origin if he comes to India for a visit.

During the previous year 22-23, Mr.X, had stayed in India for 178 days (28+30+31+31+28+30)

Basic condition 1: Not satisfied

Basic condition 2: Not applicable, as his taxable income other than income from foreign
sources during the p.y. 22-23 does not exceed Rs.15 lacs

Hence he is a non-resident for A.Y.2023-24.

9. Mr.G’s grand-father was born in undivided India. Hence, Mr.G is a person of Indian origin. Basic
condition 2 does not apply for an Indian citizen or a person of Indian origin if he comes to India for
a visit.

During the previous year 22-23, Mr.X, had stayed in India for 180 days

Basic condition 1: Not satisfied

Basic condition 2: Not applicable as his taxable income other than income from foreign sources
during the p.y. 22-23 does not exceed Rs.15 lacs

Hence he is a non-resident for A.Y.2023-24.

10. Taxable income other than income from foreign sources is Rs.17,50,000 (Rs.8 lacs + Rs.11 lacs –
Rs.1.50 lacs u.s.80C).

Basic condition 1: not satisfied

Basic condition 2: applicable and satisfied (120 days during the previous year 2022-23 and also
stay for > 365 days during 4 preceding previous years)

Mr.X is a resident but not ordinary resident for A.Y.2023-24. (additional conditions not applicable)

11. Taxable Income in India: 1200000

Add: Income from profession in Dubai set up in India 500000
Taxable Income other than income from foreign sources 1700000

Case A: Visited India for 110 days:

Basic condition 1 (182 days condition) as per section 6(1): Not satisfied
Basic condition 2 (120 days condition) as per section 6(1): Not satisfied (TI > 15 lacs)

Mr.R (Indian Citizen), has total income other than income from foreign sources exceeding Rs.15
lakhs during the previous year 22-23 and he is not liable to pay tax in Dubai. Hence, he shall be
deemed to be a resident as per section 6(1A). Additional conditions are not applicable in his case,
hence RNOR for A.Y.23-24.
 24

Case B: Not visited India during the previous year:

Basic condition 1 (182 days condition) as per section 6(1): Not satisfied
Basic condition 2 (120 days condition) as per section 6(1): Not satisfied (TI > 15 lacs)

Mr.R is an Indian Citizen. His total income other than income from foreign sources exceeded Rs.15
lacs during the previous year. He is not liable to pay tax in Dubai (UAE). Though, he has not visited
India during the previous year 22-23, he will still be deemed as resident but not ordinary resident.

Case C: Visited India for 190 days:

Basic condition 1 (182 days condition) as per section 6(1): Satisfied.
Hence, he is a resident. Additional conditions are also satisfied. Hence ROR for AY 2023-24.

Case D: Visited India for 122 days:

Basic condition 1 (182 days condition) as per section 6(1): Not satisfied.
Basic condition 2 (120 days condition) as per section 6(1): Not satisfied (his stay during the four
preceding previous years does not exceed 365 days).

However, Mr.R (an Indian citizen), shall be deemed as resident u.s.6(1A) as his total income
excluding income from foreign sources exceeds Rs.15 lakhs and he is not liable to pay tax in Dubai.
Additional conditions are not applicable in this case, hence RNOR for A.Y.23-24.

Case E: Visited India for 122 days:

Basic condition 1 (182 days condition) as per section 6(1): Not satisfied.
Basic condition 2 (120 days condition) as per section 6(1): Satisfied (his stay during the four years
preceding the previous year 22-23 exceeds 365 days). Hence, Mr.R is a Resident. However,
additional conditions are not applicable in his case, hence Mr.R is a RNOR.

12. Taxable Indian income 800000

Income from profession in Singapore set up in India 1000000
Taxable Income excluding income from foreign sources 1800000

If he visits India for 145 days being an Indian citizen:

Basic condition 1 as per section 6(1): Not satisfied
Basic condition 2 (120 days condition): Applicable and satisfied (Taxable Income > 15 lakhs)

Mr.R had stayed in India for 412 days during 4 preceding previous years, hence, Mr.R shall be
treated as a resident. However, additional conditions are not applicable in his case, hence, Mr.R is a
Resident but not ordinary resident for A.Y.23-24.

If he visits India for 115 days being an Indian citizen:

Basic condition 1 as per section 6(1): Not satisfied
Basic condition 2 as per section 6(1): Not satisfied (stay < 120 days) (Taxable Income > 15 lakhs)
Section 6(1A) is not applicable as Mr.R is required to pay tax in Singapore. Hence, he cannot be
deemed as a resident for A.Y.23-24. Hence, he is a non-resident.
 25

13. Case I: Leaves India on 30th September, 2022

Taxable Indian Income for the p.y. 22-23

Income arising in India 600000

Income deemed to accrue or arise in India 700000
Income from business controlled from India 1000000
2300000 > 15 lacs

Mr.R, has stayed in India for 122 days during the previous year 22-23 (30+31+31+30). His taxable
income in India during the previous year excluding income from foreign sources exceeds Rs.15 lacs.

Basic condition 1 (182 days): Not satisfied

Basic condition 2 (120 days): Applicable and satisfied (his stay in India during the 4 preceding
previous years is 365 days or more)

Hence, Mr.R is a resident. However, additional conditions are not applicable in this case, hence he is
a resident but not ordinary resident for A.Y.23-24.

Computation of Total Income of Mr.R for A.Y.23-24

Income arising in India 600000
Income deemed to accrue or arise in India 700000
Income from business controlled from India 1000000
2300000

Case II: Leaves India on 30th November, 2022:

Mr.R, has stayed in India for 183 days during the previous year 22-23 (30+31+31+30+31+30). He
is a resident as basic condition 1 is satisfied u.s.6(1). Assuming that additional conditions are
satisfied by Mr.R, he shall be treated as resident and ordinary resident for A.Y.23-24.

Computation of Total Income of Mr.R for A.Y.23-24

Income arising in India 600000
Income deemed to accrue or arise in India 700000
Income earned in USA 4000000
Income from business controlled from India 1000000
6300000

14. Brett Lee an Australian Cricketer:

During the p.y. 22-23, Mr.Brett Lee has stayed in India for 100 and during 4 preceding previous
years he has stayed for 400 days. Basic condition 2 is satisfied. Hence, he is a resident. During the
7 preceding previous years, Mr.Brett Lee had stayed in India only for 700 days. Additional
conditions are not satisfied. Hence, he is a resident but not ordinary resident for AY.23-24.

If the above facts relate to Srinath (an Indian Citizen) – 100 days:
Basic condition 1 (182 days): Not satisfied
Basic condition 2 (60 days): Not applicable (assuming TI does not exceed Rs.15 lacs)

Hence, Mr.Srinath is a non-resident for A.Y.23-24.

 26

If the above facts relate to Srinath (an Indian Citizen) – 120 days:
Basic condition 1 (182 days): Not satisfied
Basic condition 2 (120 days): Applicable and satisfied (assuming TI > 15 lacs)

He stays in India for 120 days during the p.y.22-23 and also for 480 days during 4 preceding
previous years, he is a resident. Additional conditions are not applicable in this case. Hence,
Mr.Srinath is a resident but not ordinary resident for A.Y.23-24. It is assumed that his taxable
income in India excluding income from foreign sources exceed Rs.15 lacs during the previous year.

If it is assumed that his total income excluding income from foreign sources during the previous
year does not exceed Rs.15 lacs, he shall be a non-resident for A.Y.23-24.

15. The affairs (control and management) of HUF are partly controlled from India during the previous
year 2022-23. Hence, huf is regarded as resident. Mr.X (karta) does not satisfy additional
conditions. Therefore, huf is a resident but not ordinary resident for A.Y.2023-24.

16. Residential Status of Mr.E:

Mr.E had stayed in India for 245 days during the previous year 2022-23. He is a resident. However,
additional conditions are not satisfied, hence Mr.E is a resident but not ordinary resident for A.Y.
2023-24.

Residential Status of HUF:

Control and Management of HUF is wholly outside India during the previous year 2022-23. Hence,
HUF is regarded as non-resident for A.Y.2023-24.
 27

CHAPTER – 4 INCIDENCE OF TAXATION

ROR RNOR NR
• Income earned and received in India Taxable Taxable Taxable

• Income earned in India but received outside

India Taxable Taxable Taxable

• Income earned outside India but received in

India Taxable Taxable Taxable

• Income earned and received outside India Taxable Not taxable Not taxable

• Income earned outside India from a business

controlled from India or from a profession
set-up in India Taxable Taxable Not taxable

• Past untaxed profits brought into India Not taxable Not taxable Not Taxable

Interest or Royalty or Fees for technical services received by a NON-RESIDENT: Is it taxable?

If paid by Government of India Always deemed to accrue or arise in India, hence taxable
to a non-resident:

If paid by any other person Such interest or royalty or fees shall be deemed to accrue or arise
to a non-resident: in India only if the loan borrowed or patents or services are utilised
for the purpose of business in India

1. X furnishes the following particulars of his income earned during the previous year:
Interest on German Development bonds (40% is received in India) Rs.60,000
Income from agriculture in Nepal, received there but later Rs.50,000 is remitted to India Rs.1,81,000
Income from property in Canada received outside India Rs.86,000
Income from business in Australia controlled from Delhi (Rs.15,000 is received in India) Rs.65,000
Dividend paid by a foreign company but received in India on 3.8.2022 Rs.46,500
Past untaxed profit of 21-22 brought to India in 22-23 Rs.10,00,000
Profits from a business in Chennai and managed from outside India Rs.27,000
Profits on sale of a building in India but received in Sri Lanka Rs.14,00,000
Pension from a former employer in India, received in Bangladesh Rs.86,000 (computed)
Gift in foreign currency from a friend received in India Rs.80,000

Compute gross total income of X, if he is: a) Ordinary resident;

b) Not ordinary resident;
c) Non-resident
 28

2. From the following particulars of income furnished by Mr.A pertaining to the year ended
31.03.2023, compute the total income for the assessment year 2023-24, if he is:

i. Resident and ordinary resident;

ii. Resident but not ordinary resident;
iii. Non-resident

a. Short term capital gain on sale of shares in India Company received in Germany Rs.15,000
b. Dividend from a Japanese Company received in Japan Rs.10,000
c. Income from property in London deposited in a bank in London, later on remitted to India
through approved banking channels Rs.75,000
d. Dividend from TCS Ltd., an Indian Company Rs.6,000
e. Agricultural income from lands in Gujarat Rs.25,000

3. Mr.Ramesh & Mr.Suresh are brothers and they earned the following incomes during the financial
year 2022-23. Mr.Ramesh settled in Canada in the year 1999 and Mr.Suresh settled in Delhi.
Compute the gross total income for the assessment year 2023-24.

Particulars Mr.Ramesh Mr.Suresh

Interest on Canada Development Bonds (only 50%
of interest received in India) 35,000 40,000

Profit from a business in Nagpur, but managed

directly from London 1,00,000 1,40,000

Short term capital gain on sale of shares of an

Indian company received in India 60,000 90,000

Fees for technical services rendered in India,

but received in Canada 1,00,000 nil

Income from a business in Chennai 80,000 70,000

Dividend from British company received in London 28,000 20,000

Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000

Agricultural income from a land situated in A.P. 55,000 45,000

Rent received from house property at Bhopal 1,00,000 60,000

 29

4. Mr.David, a Government employee serving in the Ministry of External Affairs, left India for the
first time on 31.03.2022 due to his transfer to High Commission of Canada. He did not visit India
any time during the P.Y. 2022-23. He has received the following incomes for the year 2022-23:

Salary (computed) Rs.40,00,000

Foreign Allowance Rs.4,00,000
Interest on fixed deposit from bank in India (gross) Rs.1,00,000
Income from agriculture in Nepal Rs.2,00,000
Income from house property in Nepal (computed) Rs.2,50,000

Compute his gross total income for A.Y.2023-24.

5. State whether the following transactions attract income-tax in India in the hands of recipients:

a. Salary paid by Central Government to Mr.John, a citizen of India Rs.65,00,000 (computed)

for the services rendered outside India.

b. Interest on moneys borrowed from outside India Rs.5,00,000 paid to a non-resident for
the purpose of business within India say, at Chennai.

c. Interest on post office savings bank interest Rs.19,000 received by Mr.R (age 46 years)

d. Royalty paid by a resident to a non-resident in respect of a business carried on outside

India.

e. Legal charges of Rs.5,00,000 paid to a lawyer of United Kingdom who visited India to
represent a case at the Delhi High Court.

6. Explain with reasons whether the following transactions attract income-tax in India in the hands
of recipients:

a. Salary paid to Mr.David, a citizen of India Rs.45,00,000 (computed) by the Central

Government for the services rendered in Canada

b. Legal charges of Rs.7,50,000 paid to Mr.Johnson, a lawyer of London, who visited India to
represent a case at the Supreme Court

c. Royalty paid to Rajeev, a non-resident by Mr.Mukesh, a resident for a business carried on

in Sri Lanka.

d. Interest paid Rs.1,00,000, on money borrowed from Mr.France (a non-resident), by Mr.B,

a non-resident, for the business at Bangalore.
 30

7. Mr.S, a citizen of India, is Joint Secretary in the Ministry of Finance, Government of India. On
15.03.2022, he is transferred as High Commission of Australia. He did not visit India any time
during the P.Y. 2022-23. He has received the following incomes for the financial year 2022-23:

Salary from Government of India (computed) Rs.50,00,000

Foreign Allowance from Government of India Rs.6,00,000
Rent of a house situated at London (received in London) Rs.3,60,000
Interest accrued on NSC during the year 22-23 Rs.45,000

Compute his gross total income for A.Y.2023-24.

8. Miss Vivitha paid a sum of 5000 USD to Mr.Khan, a management consultant practicing in
Colombo, specializing in project financing. The payment was made in Colombo. Mr.Khan is a
non-resident. The consultancy is related to a project in India with possible Ceylonese
collaboration. Is this payment chargeable to tax in India in the hands of Mr.Khan, since the
services were used in India?

Hint: Since the services were utilized in India, the payment received by Mr.Khan, a non-resident, in
Colombo is chargeable to tax in his hands in India, as it is deemed to accrue or arise in India.

9. Compute total income in the hands of an individual aged 35 years, being a resident and ordinary
resident, resident but not ordinary resident, and non-resident for A.Y. 2023-24:–

Particulars Amount
(Rs.)
Interest on UK Development Bonds, 50% of interest received in India 10,000
Income from a business in Chennai (50% is received in India) 20,000
Short term capital gains on sale of shares of an Indian company received in 20,000
London
Dividend from British company received in London 5,000
Long term capital gains on sale of plant at Germany, 50% of profits are received in 40,000
India
Income earned from business in Germany which is controlled from Delhi 70,000
(Rs.40,000 is received in India)
Profits from a business in Delhi but managed entirely from London 15,000
Income from house property in London deposited in a Bank at London, brought to
India (computed) 50,000
Interest on debentures in an Indian company received in London 12,000
Fees for technical services rendered in India but received in London 8,000
Profits from a business in Mumbai managed from London 26,000
Income from property situated in Nepal received there (computed) 16,000
Past foreign untaxed income brought to India during the previous year 5,000
 31

Income from agricultural land in Nepal, received there and then brought to India 18,000
Income from profession in Kenya which was set up in India, received there but
spent in India 5,000
Gift received on the occasion of his wedding 20,000
Interest on savings bank deposit in State Bank of India 12,000
Income from a business in Russia, controlled from Russia 20,000
Dividend from Reliance Petroleum Limited, an Indian Company 5,000
Agricultural income from a land in Rajasthan 15,000

10. Miss B, a Chinese National, got married to Mr.Yash of India in Beijing on 3 rd February, 2022 and
came to India for the first time on 14.02.2022. She left for China on 11.08.2022. She returned to
India again on 20.02.2023.

She received the following gifts from her relatives and friends during 01.04.2022 to 31.03.2023
in India:

- From parents of husband Rs.7,10,000

- From married sister of husband Rs.2,00,000
- From two very close friends of her husband, Rs.1,41,000 and Rs.1,21,000: Rs.2,62,000

a) Determine her residential status and compute the total income chargeable to tax along with
the amount of tax payable on such income for the Assessment Year 2023-24.

b) Will your answer change if she had returned to India again on 20.01.2023 instead of
20.02.2023?

11. Mrs.R, aged 62 years, was born and brought up in New Delhi. She got married in Russia in 1998
and settled there since then. Since her marriage, she visits India for 60 days each year during her
summer break. The following are the details of her income for the previous year ended
31.03.2023:

Pension received from Russian Government Rs.6,50,000

Long term capital gain on sale of land in Delhi (computed) Rs.3,00,000
Short term capital gain on sale of shares of Indian listed
companies in respect of which STT was paid (computed) Rs.60,000
Premium paid to Russian Life Insurance Corporation at Russia Rs.75,000
Rent received in respect of house at Delhi Rs.90,000

You are required to ascertain the residential status of Mrs.R and compute her total income and
tax liability in India for Assessment Year 2023-24.
 Answers to chapter “Incidence of Taxation” 32

Ordinary Not ordinary Non-resident

Resident resident
1. Income earned outside India; but 40%
is received in India 60,000 24,000 24,000

Income earned outside India and

received outside India 1,81,000 nil nil

Income earned outside India and

received outside India 86,000 nil nil

Income earned outside India from a

business controlled from India;
Rs.15,000 is received in India 65,000 65,000 15,000

Income earned outside India but

received in India 46,500 46,500 46,500

Past untaxed foreign income not taxable not taxable not taxable
Income earned in India 27,000 27,000 27,000
Income earned in India 14,00,000 14,00,000 14,00,000
Income earned in India 86,000 86,000 86,000
Income received in India 80,000 80,000 80,000

Gross total income 20,31,500 17,28,500 16,78,500

Ordinary Not ordinary Non-resident

Resident resident

2. Income earned in India 15,000 15,000 15,000

Income earned and received outside India 10,000 nil nil
Income earned and received outside India 75,000 nil nil
Dividend from domestic company 6,000 6,000 6,000
Agricultural income in India exempt exempt exempt

Total Income 1,06,000 21,000 21,000

 Answers to chapter “Incidence of Taxation” 33

Ramesh Suresh
(non-resident) (ordinary resident)
3. Income earned outside India but partly
received in India 17,500 40,000

Income from a business in India 1,00,000 1,40,000

Income earned in India 60,000 90,000
Fees for services rendered in India 1,00,000 nil

Income earned in India 80,000 70,000

Income earned and received outside India nil 20,000
Interest on savings a/c in India 7,000 12,000
Agricultural income in India exempt exempt
Income from house property in India 70,000 42,000 (after 30% ded)

Gross total income 4,34,500 4,14,000

Less: Section 80TTA (int on savings a/c) 7,000 10,000
Total Income 4,27,500 4,04,000

4. Mr.David is a non-resident for A.Y.2023-24 as he did not visit India during the previous year 2022-23.

Non-resident
Salary paid by Govt of India is deemed to
accrue or arise in India 40,00,000
Foreign allowance exempt u.s.10(7) – refer “Salaries”
Income earned in India 1,00,000
Income earned outside India Not taxable (assumed to be received outside India)
Income earned outside India Not taxable (assumed to be received outside India)

Total Income 41,00,000

5.
a. Salary paid to Mr.John by Central Government for services rendered outside India is deemed to
accrue or arise in India and hence taxable in the hands of Mr.John

b. Interest paid on money borrowed for the purpose of business in India is deemed to accrue or arise
in India and hence taxable in the hands of non-resident.

c. Royalty paid to a non-resident for the purpose of a business outside India is NOT deemed to
accrue or arise in India, not taxable

d. Legal charges received to represent a case at the Delhi High Court is deemed to accrue or arise in
India and hence taxable.
 Answers to chapter “Incidence of Taxation” 34

6. Salary paid by Govt of India to Mr.David, an Indian Citizen for services rendered outside India is deemed
to accrue or arise in India and therefore taxable in the hands of David.

Legal charges received to represent a case at the Supreme Court is deemed to accrue or arise in India
and hence taxable.

Royalty paid to a non-resident for the purpose of a business outside India is NOT deemed to accrue or
arise in India, not taxable

Interest paid to a non-resident (Mr.France) on money borrowed for the purpose of business in India is
deemed to accrue or arise in India and hence taxable in the hands of recipient.

7. Mr.S is a non-resident for A.Y.2023-24 as he did not visit India during the previous year 2022-23.

Non-resident
Salary paid by Govt of India is deemed to
accrue or arise in India 50,00,000
Foreign allowance exempt u.s.10(7) – refer “Salaries”
Income earned & received outside India Not taxable
Income earned in India 45,000

Total Income 50,45,000

 35

MCQs and Case Scenarios:

1. The tax liability of Mr.Saral, who attained the age of 60 years on 01.04.2023 and does not opt for
the provisions of section 115BAC for the P.Y. 2022-23, on the total income of Rs.5,60,000,
comprising of salary income and interest on fixed deposits, would be:-

(a) Rs.9,880
(b) Rs.22,880
(c) Rs.25,480
(d) Nil

2. If Anirudh, a citizen of India, has stayed in India in the P.Y. 2022-23 for 181 days, and he is non-
resident in 9 out of 10 years immediately preceding the current previous year and he has stayed in
India for 365 days in all in the 4 years immediately preceding the current previous year and 420
days in all in the 7 years immediately preceding the current previous year, his residential status
for the A.Y. 2023-24 would be -

(a) Resident and ordinarily resident

(b) Resident but not ordinarily resident
(c) Non-resident
(d) Deemed resident but not ordinarily resident

3. Mr.Ajay is a recently qualified doctor. He joined a reputed hospital in Delhi on 01.01.2023. He

earned total income of Rs.3,40,000 till 31.03.2023. His employer advised him to claim rebate u/s.
87A while filing return of income for A.Y. 2023-24. He approached his father, a tax professional, to
enquire regarding what is rebate u/s 87A of the Act. What would have his father told him?

(i) An individual who is resident in India and whose total income does not exceed Rs.5,00,000 is
entitled to claim rebate under section 87A.

(ii) An individual who is resident in India and whose total income does not exceed Rs.3,50,000 is
entitled to claim rebate under section 87A.

(iii) Maximum rebate allowable under section 87A is Rs.5,000.

(iv) Rebate under section 87A is available in the form of exemption from total income.

(v) Maximum rebate allowable under section 87A is Rs.12,500.

(vi) Rebate under section 87A is available in the form of deduction from basic tax liability.

Choose the correct option from the following:

(a) (ii), (iii), (vi)
(b) (i), (v), (vi)
(c) (ii), (iii), (iv)
(d) (i), (iv), (v)
 36

4. Raman, a citizen of India, was employed in HLL. He resigned on 27.09.2022. He received a salary of
Rs.40,000 p.m. from 01.04.2022 to 27.09.2022 from HLL. Thereafter he left for Dubai for the first
time on 01.10.2022 and got salary of rupee equivalent of Rs.80,000 p.m. from 1.10.2022 to
31.03.2023 in Dubai. His salary for October to December 2022 was credited in his Dubai bank
account and the salary for January to March 2023 was credited in his Mumbai account directly. He
is liable to tax in respect of:

(a) Income received in India from HLL;

(b) Income received in India and Dubai;
(c) Income received in India from HLL and income directly credited in India;
(d) Income received in Dubai.

5. Aashish earns the following income during the P.Y. 2022-23:

• Interest on U.K. Development Bonds (1/4th being received in India): Rs.4,00,000
• Capital gain on sale of a building located in India but received in Holland: Rs.6,00,000
If Aashish is a resident but not ordinarily resident in India, then what will be amount of income
chargeable to tax in India for A.Y. 2023-24?

(a) Rs.7,00,000
(b) Rs.10,00,000
(c) Rs.6,00,000
(d) Rs.1,00,000

6. Mr.Sumit is an Indian citizen and a member of the crew of an America bound Indian ship engaged
in carriage of freight in international traffic departing from Chennai on 25th April, 2022. From the
following details for the P.Y. 2022-23, What would be the residential status of Mr.Sumit for A.Y.
2023-24, assuming that his stay in India in the last 4 previous years preceding P.Y. 2022-23 is 365
days and last seven previous years preceding P.Y. 2022-23 is 730 days?

• Date entered in the Continuous Discharge Certificate in respect of joining the ship by Mr. Sumit:
25th April, 2022
• Date entered in the Continuous Discharge Certificate in respect of signing off the ship by
Mr.Sumit: 24th October, 2022.

Mr.Sumit has been filing his income tax return in India as a Resident for the preceding 2 previous
years.

(a) Resident and ordinarily resident

(b) Resident but not-ordinarily resident
(c) Non-resident
(d) Deemed resident but not-ordinarily resident

7. Mr.Square, an Indian citizen, currently resides in Dubai. He came to India on a visit and his total
stay in India during the F.Y. 2022-23 was 135 days. He is not liable to pay any tax in Dubai.
Following is his details of stay in India in the preceding previous years:
 37

Financial Year Days of Stay in India

2021-22 100
2020-21 125
2019-20 106
2018-19 83
2017-18 78
2016-17 37
2015-16 40

What shall be his residential status for the P.Y. 2022-23 if his income (other than income from
foreign sources) is Rs.10 lakhs?

(a) Resident but Not Ordinary Resident (RNOR)

(b) Resident and Ordinary Resident
(c) Non-resident
(d) Deemed Resident but not ordinarily resident

8. Dividend income from Australian company received in Australia in the year 2021, brought to India
during the previous year 2022-23 is taxable in the A.Y.2023-24 in the case of –
(a) resident and ordinarily resident only
(b) both resident and ordinarily resident and resident but not ordinarily resident
(c) non-resident
(d) None of the above

9. Mr. Ramesh, a citizen of India, is employed in the Indian embassy in Australia. He is a non-resident
for A.Y. 2023-24. He received salary and allowances in the Australia from the Government of India
for the year ended 31.03.2023 for services rendered by him in Australia. In addition, he was
allowed perquisites by the Government. Which of the following statements are correct?

(a) Salary, allowances and perquisites received outside India are not taxable in the hands of Mr.
Ramesh, since he is non-resident.
(b) Salary, allowances and perquisites received outside India by Mr. Ramesh are taxable in India since
they are deemed to accrue or arise in India.
(c) Salary received by Mr. Ramesh is taxable in India but allowances and perquisites are exempt.
(d) Salary received by Mr. Ramesh is exempt in India but allowances and perquisites are taxable.

10. Mr.Nishant, a resident but not ordinarily resident for the previous year 2021-22 and resident and
ordinarily resident for the previous year 2022-23 has received rent from property in Canada
amounting to Rs.1,00,000 during the P.Y. 2021-22 in a bank in Canada. During the financial year
2022-23, he remitted this amount to India through approved banking channels. Is such rent
taxable in India, and if so, how much and in which year?

(a) Yes; Rs.70,000 was taxable in India during the previous year 2021-22.
(b) Yes; Rs.1,00,000 was taxable in India during the previous year 2021-22.
(c) Yes; Rs.70,000 was taxable in India during the previous year 2022-23.
(d) No; such rent is not taxable in India either during the p.y. 2021-22 or during the p.y. 2022-23.
 38

11. Who among the following will qualify as non-resident for the previous year 2022-23?
- Mr. Joey, an Italian designer came on visit to India to explore Indian handloom on 03.09.2022 and
left on 15.12.2022. For past four years, he visited India for fashion shows and stayed in India for
100 days each year.

- Mr. Sanjay born and settled in Canada, visits India each year for three months to meet his parents
and grandparents, born in India in 1946, living in Mumbai. His Indian income is Rs.15,20,000.

- Mr. Chang, a Korean scientist left India to his home country for fixed employment there. He stayed
in India for study and research in medicines from 01.01.2018 till 01.07.2022.

Choose the correct answer:

(a) Mr. Joey and Mr. Chang
(b) Mr. Sanjay
(c) Mr. Sanjay and Mr. Chang
(d) Mr. Chang

12. Which of the following statements is/are true in respect of taxability of agricultural income under
the Income-tax Act, 1961?

(i) Any income derived from saplings or seedlings grown in a nursery is agricultural income
exempt from tax u/s 10(1).

(ii) 60% of dividend received from shares held in a tea company is agricultural income exempt
from tax u/s 10(1).

(iii) While computing income tax liability of an assessee aged 50 years, agricultural income is
required to be added to total income only if net agricultural income for the P.Y. exceeds Rs.5,000
and the total income (including net agricultural income) exceeds Rs.2,50,000.

(iv) While computing income tax liability of an assessee aged 50 years, agricultural income is
required to be added to total income only if net agricultural income for the P.Y. exceeds Rs.5,000
and the total income (excluding net agricultural income) exceeds Rs.2,50,000.

Choose the correct answer:

(a) (i) and (iii)
(b) (ii) and (iii)
(c) (i) and (iv)
(d) (i), (ii) and (iv)

13. If Mr. Y’s total income for A.Y. 2023-24 is Rs.52 Lakhs, surcharge is payable at the rate of:-
(a) 15%
(b) 12%
(c) 10%
(d) 2%
 39

14. Unexhausted basic exemption limit of a resident individual can be adjusted against –

(a) only LTCG taxable @20% u/s 112

(b) only STCG taxable @15% u/s 111A
(c) both (a) and (b)
(d) casual income taxable @30% u/s 115BB

15. Unexhausted basic exemption limit of a non-resident individual can be adjusted against –

(a) only LTCG taxable @20% u/s 112

(b) only STCG taxable @15% u/s 111A
(c) both (a) and (b)
(d) neither (a) nor (b)

16. During the P.Y.2022-23, Mr. Ranjit has short-term capital gains of Rs.95 lakhs taxable under
section 111A, long-term capital gains of Rs.110 lakhs taxable under section 112A and business
income of Rs.90 lakhs. Which of the following statements is correct?

(a) Surcharge @ 25% is leviable on income-tax computed on total income of Rs.2.95 crore, since total
income exceeds Rs.2 crore.

(b) Surcharge @15% is leviable on income-tax computed on total income of Rs.2.95 crore.

(c) Surcharge @15% is leviable in respect of income-tax computed on capital gains of Rs.2.05 crore; in
respect of business income, surcharge is leviable @ 25%, since total income exceeds Rs.2 crore.

(d) Surcharge @ 15% is leviable in respect of income-tax computed on capital gains of Rs.2.05 crore;
surcharge @ 10% is leviable on income-tax computed on business income, since the same exceeds Rs.50
lakhs but is less than Rs.1 crore.

Case Scenarios

17. Mr. Kishan is engaged in the following activities on agricultural land situated in India, total area of
land is 5 acres.

Activity A: He grows saplings or seedlings in a nursery spreading over on one acre land, the sale
proceeds of which is Rs.5,00,000. Cost of plantation is Rs.1,40,000. Basic operations are not performed
for growing saplings or seedlings.

Activity B: He grows cotton on 3 acres land. 40% of cotton produce is sold for Rs.4,00,000, the cost
of cultivation of which is Rs.2,25,000. The cost of cultivation of balance 60% cotton is Rs.3,37,500
and the market value of the same is Rs.6,00,000, which is used for the purpose of manufacturing
yarn. After incurring manufacturing expenses of Rs.1,00,000, yarn is sold for Rs.8,50,000.
 40

Activity C: Land measuring 1 acres is let out to Mr. Ramesh on monthly rental of Rs.15,000 which is
used by Mr. Ramesh as follows:
- 50% of land is used for agricultural purpose
- 50% of land is used for non-agricultural purpose.

Based on the facts of the case scenario given above, choose the most appropriate answer to the
following questions:

1. What amount of income arising from activity A would constitute agricultural income in the hands of Mr.
Kishan?

(a) Rs.5,00,000
(b) Nil
(c) Rs.3,60,000
(d) Rs.1,40,000

2. What amount of income from activity B with respect to sale of cotton would constitute agricultural income
or/and business income in the hands of Mr. Kishan?

(a) Rs.1,75,000 as agricultural income

(b) Rs.1,75,000 as business income
(c) Rs.1,75,000 as agricultural income and Rs.2,62,500 as business income
(d) Rs.4,00,000 as agricultural income

3. What amount of the income from activity B with respect to sale of yarn constitute agricultural income
or/and business income in the hands of Mr. Kishan?

(a) Rs.1,50,000 as agricultural income

(b) Rs.2,62,500 as agricultural income and Rs.1,50,000 as business income
(c) Rs.3,37,500 as agricultural income and Rs.1,50,000 as business income
(d) Rs.4,12,500 as business income

4. What amount of income arising from activity C constitute agricultural income or otherwise in the hands
of Mr.Kishan?

(a) Whole amount of Rs.1,80,000 would be agricultural income

(b) Whole amount of Rs.1,80,000 would be business income.
(c) Rs.90,000 would be agricultural income and Rs.63,000 is chargeable to tax as income from HP
(d) Rs.90,000 would be agricultural income and Rs.90,000 is chargeable under the head IFOS

5. Compute the GTI of Mr.Kishan for the P.Y. 2022-23, assuming he has no other source of income.

(a) Rs.2,40,000
(b) Rs.3,30,000
(c) Rs.5,02,500
(d) Rs.2,13,000
 41

CHAPTER – 5 INCOME UNDER THE HEAD “SALARIES”

1. Salary:
▪ Salary falls due on the last day of each month; or
▪ Salary falls due on the first day of next month

2. Dearness Allowance
▪ forming part of salary
▪ not forming part of salary

3. Commission:
▪ Fixed % commission on sales achieved by the employee
▪ Commission other than sales commission

4. Advance Salary:
▪ Taxable on “receipt” basis

5. Arrears of Salary:
▪ Taxable on “due” basis. If not taxed on ‘due’ basis then it is taxed on ‘receipt’ basis

6. Allowances:
▪ Can be only in the form of monetary payment
▪ Fixed in nature

Different forms of allowances:

▪ Exemption based on actual expenditure (e.g. HRA)
▪ Exemption not based on actual expenditure (e.g. education allowance)
▪ Fully taxable allowances (e.g. lunch allowance)

i) Exemption based on actual expenditure:

a) House Rent Allowance:

▪ 40% of salary (50% in case of metros)
▪ Actual HRA received
▪ Rent paid (-) 10% of salary
whichever is less is exempt from tax

note: Salary = Basic + Dearness allowance (forming) + Sales commission

note: If the employee lives in his own house or in a house without paying any rent then H.R.A.
received is fully taxable.

note: No exemption if employee opts for section 115BAC

 42

b) Travelling / Conveyance / Uniform / Helper Allowance:

▪ Official Purpose: Exempt

ii) Exemption of allowances not based on actual expenditure:

a) Entertainment Allowance for Government employees:

▪ Maximum limit: Rs.5,000
▪ Actual amount received
▪ 20% of Basic
whichever is less is allowed as deduction u.s.16(ii)

note: Exemption is not based on actual expenditure incurred.

note: No exemption for non-Government employees

b) Children’s education allowance:

Amount exempt is Rs.100 per month per child subject to a maximum of two children.

c) Children’s hostel allowance:

Amount exempt is Rs.300 per month per child subject to a maximum of two children.

d) Tribal area allowance:

Amount exempt is Rs.200 per month.

e) Transport allowance (allowance for commuting between residence to office and back):
For disabled employees: Amount exempt is Rs.3,200 p.m.
For others: Fully taxable

f) Transport Allowance granted to employees working in any transport system to meet his
personal expenses while on duty: Amount exempt: 70% of allowance received or Rs.10,000
p.m. whichever is less.

iii) Fully taxable allowances: All other allowances like medical, telephone, transport, city
compensatory allowance, special, lunch, tiffin, marriage, servant, gas-electricity-water,
overtime, are fully taxable without any exemption.

note: Allowances paid by the Government of India to an Indian citizen for rendering service
outside India is fully exempt from tax. Section 10 (7).

Problems on Basics:
1. Discuss the head of income under which the following receipts are assessed to tax.
a. Salary received by a working partner
b. Pension received by the family members after the death of the employee
c. Salary received by MP/MLA
 43

2. Mr.X draws Rs.80,000 p.m. as salary up to 31.08.2022. From 1.9.2022, his salary was increased
to Rs.1,00,000 p.m. Calculate his salary for the previous year 22-23 if it falls due on:
a) last day of each month; b) first day of next month

3. Mr.A receives Rs.7,20,000 p.a. as net salary in hand. Employer had deducted Rs.36,000 as
employees contribution to provident fund, Rs.42,000 as income tax deducted at source and Rs.2,000
as professional tax. During the year, employer had deducted Rs.40,000 towards the recovery of
house building advance taken by Mr.A. What will be his actual salary earned?

4. X joins the service in the grade of 30,000--4,000--42,000--5,000--72,000 on 1.6.2017. Compute his

basic salary for the previous year 2022-23.

Problems On House Rent Allowance:

5. X, who resides in Chennai, gets Rs.3,00,000 p.a. as basic salary. He receives Rs.50,000 p.a. as
house rent allowance. Rent paid by him is Rs.40,000 p.a. Find out the taxable amount of HRA.

6. X, a resident of Bangalore, receives Rs.8,00,000 p.a. as basic, Rs.80,000 p.a. as dearness allowance
(forming part of salary) and 10% commission on sales made by him (sales made by X during the
previous year is Rs.12,00,000) and Rs.7,500 p.m. as house rent allowance. He, however, pays
Rs.8,000 p.m. as house rent. Determine the quantum of house rent allowance exempt from tax.

7. Mr.Mohit is employed with XY Ltd., on a basic of Rs.10,000 p.m. He is also entitled to dearness
allowance @ 100% of basic salary, 50% of which is included in salary as per terms of employment.
The company gives him house rent allowance of Rs.6,000 p.m. which was increased to Rs.7,000 p.m.
with effect from 01.01.2023. He also got an increment of Rs.1,000 p.m. in his basic salary with effect
from 1.02.2023.

Rent paid by him during the previous year 2022-23 is as under:

April and May 2022 - Nil, as he stayed with his parents
June to October, 2022 - Rs.6,000 p.m. for an accommodation in Bangalore
November, 2022 to March, 2023 - Rs.8,000 p.m. for an accommodation in Chennai

Compute his income from salary for assessment year 2023-24.

Problems On Allowances:
8. X, a Government employee, gets Rs.4,00,000 p.a. as basic pay. In addition, he receives Rs.72,000 as
entertainment allowance. His actual expenditure on entertainment for official purposes, however,
exceeds Rs.72,000. Calculate taxable amount of entertainment allowance. What would be your
answer if he is a non-government employee.
 44

9. Mr.X of J Ltd. received the following during the f.y. 22-23: Compute his Income from salary.
Basic Rs.30,000 p.m.; D.A. (forming part of salary) Rs.10,000 p.m.; Bonus one month salary
including D.A.; Entertainment Allowance Rs.1,000 p.m.; Education allowance for his 3 children
Rs.75 p.m. per child; Medical allowance Rs.1,000 p.m.; Transport Allowance Rs.2,500 p.m.; Lunch
allowance Rs.600 p.m. Telephone allowance Rs.600 p.m. Salary arrears relating to previous year
2019-20 Rs.18,000 was received in September 2022 (this amount was not taxed earlier).

10. X a pilot in Indigo Airlines received Rs.25,000 p.m. as transport allowance to meet his personal
expenses while on duty. Calculate the taxable amount of allowance received.

11. Mr.A, an Indian citizen and a non-resident, is posted in the Indian High Commission at Nairobi
during the Previous Year 2022-23. His emoluments consist of Basic Pay of Rs.4,00,000 per month
and overseas allowance of Rs.50,000 p.m. Besides, he is entitled to & fro journey (air-fare) to India
and also use Government’s car at Nairobi. Compute his Income from Salary.

12. Mr.Srikant has two sons. He is in receipt of children education allowance of Rs.150 p.m. for his
elder son and Rs.70 p.m. for his younger son. Both his sons are going to school. He also receives the
following allowances:

a. Transport allowance Rs.1,800 p.m.

b. Tribal area allowance Rs.500 p.m.

Compute his taxable allowances.

 45

PERQUISITES
▪ Benefits attached to a job
▪ May be in cash (monetary) or in kind (non-monetary)

Classification of Perks:
▪ Tax free perks;
▪ Taxable perks
✓ Perks taxable for both specified and non-specified employees
✓ Perks taxable for specified employees only.

Classification --- I: Tax-free perks (or) Exempted perks

▪ Medical bills reimbursed (refer provisions on medical facilities)
▪ Telephone bills reimbursed
▪ Leave travel concession
▪ Free refreshments during office hours
▪ Free lunch provided during office hours up to a maximum of Rs.50 per meal
▪ Use of employer’s laptops and computers
▪ Interest-free loans or concessional loans taken for medical treatment
▪ Interest-free loans or concessional loans where the loan amount does not exceed Rs.20,000.
▪ Gift in kind if the value of the gift does not exceed Rs.5,000
▪ Medical insurance premium paid by employer on the health of employees
▪ Privilege passes granted by Indian Railways to its employees
▪ Perks provided by Government of India to its employees posted abroad u.s.10 (7)
▪ Free education facility in a school owned/maintained by the employer for employee’s children
▪ Tax paid by the employer on non-monetary perquisites

Specified employee:
▪ A Director-employee
▪ An employee who owns 20% equity shares in the employer-company; (i.e. having substantial
interest)
▪ An employee whose monetary emoluments exceed Rs.50,000 after deductions u.s.16.

Classification --- II: Perks taxable for both specified and non-specified employees:
a. Rent-free accommodation
b. Any obligation of employee met by the employer
c. Fringe benefits

Classification --- II: a) Rent free accommodation:

Unfurnished accommodation
Furnished accommodation
Accommodation provided at concessional rent
 46

For Government employees:

The taxable value of RFA in the case of a Government employee is as per Government rules.

For Non-Government employees:

The taxable value of rent-free accommodation for other employees (semi-Government or non-
Government employees) is determined as under:

Population of the City House owned by House leased by

employer employer
Less than 10 lakhs 7.5% of salary 15% of salary or lease rent
(w.e.l) is taxable
More than 10 lakhs but less 10% of salary As above
than 25 lakhs
More than 25 lakhs 15% of salary As above

Salary: Basic + D.A. (forming) + Commission (any) + Bonus + Fees + All taxable allowances to the
extent taxable

Accommodation provided in a REMOTE AREA or in an OFFSHORE INSTALLATION is exempt.

Accommodation provided in a HOTEL on account of TRANSFER of an employee from one place to

another place:
• fully exempt if the period of stay does not exceed 15 days
• if accommodation is provided for a period exceeding 15 days then the taxable value
will be 24% of salary for such period or actual hotel charges (whichever is less)

Rent free accommodation with furniture being provided:

If the employer owns the furniture then 10% of cost of furniture is taxable
Actual hire charges will be taxable if the furniture is hired by the employer.

note: Written down value of the furniture is not relevant.

note: “Furniture” includes radio sets, television sets, refrigerators, air-conditioners and other
household appliances.

Classification --- II: b) Any obligation of employee met by the employer:

▪ Servant engaged by employee but salary paid or reimbursed by employer
▪ Gas, electricity, water bills of employee but paid or reimbursed by employer
▪ Education expenditure of the employee’s children paid or reimbursed by employer
▪ Car owned by employee but expenses met by employer
▪ Professional tax paid by employer on behalf of employee
 47

Classification --- II: c) Fringe benefits:

▪ Interest-free loans or loans at concessional rate of interest
▪ Use of moveable assets belonging to the employer
▪ Transfer of moveable assets belonging to the employer
▪ Gift from employer
▪ Credit card facility
▪ Club facility
▪ Travelling, touring, accommodation facility provided to the employee

Fringe Benefit 1: Interest-free loans or loans at concessional rate of interest

If the lending rate of the employer is less than the SBI rate, the
difference would be taxable. Interest will be calculated on the
OUTSTANDING BALANCE AT THE END OF EACH MONTH.

note: The above provision does not apply if the:

• loan is taken for medical treatment in respect of diseases specified in rule 3A; or
• loan amount does not exceed Rs.20,000 in aggregate (petty loans).

Fringe Benefit 2: Use of moveable assets by the employee belonging to the employer
Computers and laptops: Exempt
Any other asset: 10% p.a. of cost is taxable

Fringe Benefit 3: Transfer of moveable assets by the employer to his employee

Computers & its related
electronic items: Cost (-) depreciation @ 50% on w.d.v. method
Cars: Cost (-) depreciation @ 20% on w.d.v. method
Any other asset: Cost (-) depreciation @ 10% on straight line method.

note: Depreciation is to be calculated on basis of “completed year”.

note: Amount if any recovered from the employee shall have to be adjusted.
note: Transfer of assets (other than computer & car) which have been used by the employer for
more than ten years are exempt from tax.

Fringe Benefit 4: Free Gift:

a. Received in cash: Fully taxable
b. Received in kind: If the value of gift is less than Rs.5,000 : Fully exempt
If the value of gift exceeds Rs.5,000 : Fully taxable

Fringe Benefit 5: Credit card facility:

a. Official use: Exempt
b. Private use: Fully taxable
 48

Fringe Benefit 6: Club facility:

a. Official use: Exempt
b. Private use: Fully taxable

Facility on sports or health club will be fully exempt

Fringe Benefit 7: Travelling, touring and accommodation facility:

a. Official tour: Exempt from tax
b. Personal purpose: Fully taxable

Classification --- III: Perks taxable for specified employees only

▪ Servant facility
▪ Gas, Electricity, Water facility
▪ Education facility
▪ Car facility

Gas, Electricity or Water facility:

• From employer’s own source: Manufacturing cost per unit is taxable
• If purchased from outside agency: Fully taxable

note: If gas, electricity or water bills are in the name of employee and if they are paid by employer
then it is taxable for both specified and non-specified employees.

Servant facility:
▪ Any servant (gardener, sweeper, watchman, cook) provided by employer to his employee
is fully taxable in the hands of a specified employee.

▪ But if these servants are employed by employee and if they are paid or reimbursed by
employer then it is taxable for both specified and non-specified employees.

Education Facility:

Particulars School owned/maintained by Any other school

Employer
• For children: Fully exempt if cost of education Fully taxable
does not exceed Rs.1,000 p.m.

Fully taxable if cost of education

exceeds Rs.1,000 p.m.
 49

• Any household member: Fully taxable Fully taxable

• Taxable for: Both
Specified Employee only

Note: Scholarships given to meet the cost of education is fully exempt from tax u.s.10 (16)

Provision of medical facilities:

a) Medical allowance: Fully taxable
b) Medical facility in a hospital maintained by employer: Exempt
c) Hospitals recognized by I.T. authorities (e.g. Public Hospitals): Exempt from tax
d) Medical reimbursement for treatment in a Private Hospital: Fully taxable
e) Medical insurance premium paid on the health of employees: Exempt from tax

f) Medical expenses incurred outside India:

a. Treatment expenses: Exempt to the extent permitted by RBI
b. Stay expenses: Exempt to the extent permitted by RBI
c. Travel expenses: Exempt if Gross Total Income does not exceed Rs.2 lakhs.

“Family” means the individual, spouse, children, dependant parents and dependent brothers and
sisters of the individual.

Leave Travel Concession:

LTC is exempt to the extent the amount is spent on travel to any place in India.
This exemption is available twice in a block of 4 calendar years (current block is 2022 to 2025).
Exemption is available to the extent of economy fare by air.
If the journey is performed by rail then first-class AC fare is exempt from tax.
Exemption is available in respect of shortest route.

Deductions from Gross Salary:

Standard deduction u/s.16(ia):
A deduction of Rs.50,000 or the amount of salary, whichever is less

Entertainment allowance u/s.16 (ii):

This deduction is available only for Government employees. E.A. received is first included while
computing salary and then least of the provision is allowed as deduction.

Professional tax or employment tax under section 16 (iii):

Professional tax paid by employee is allowed as deduction u.s.16 (iii). If it is paid by employer on
behalf of employee then it is taxed as perk and the same amount is allowed as deduction.
 50

Provision relating to provident fund:

Particulars Statutory PF Recognised PF Unrecognised PF
Employers contribution Exempt Above 12% of Exempt
salary is taxable

Interest on provident fund Exempt Above 9.5% of Exempt

contribution is taxable

Employees contribution Qualifies for Qualifies for Does not qualify

deduction u.s.80C deduction u.s.80C for deduction

Lumpsum received after

retirement Exempt Exempt (***)

Salary means basic + D.A. (forming) + Sales Commission

(***) Employers contribution and interest thereon is taxable under the head salary.

Interest on employee’s contribution is taxable under the head “Income from other sources”.

Problems On Rent-free Accommodation:

13. X an employee of ABC (P) Ltd., posted at Chennai (population > 25 lakhs), draws Rs.8,00,000 p.a. as
basic, Rs.5,00,000 p.a. as dearness allowance (forming) and Rs.3,00,000 p.a. as commission. Besides,
the company provides a rent-free unfurnished accommodation in Chennai. The house is owned by
the company. Determine the taxable value of the perk.

14. X, a Director-employee of a private company, draws Rs.80,000 p.m. as basic. D.A. (forming)
Rs.82,000 p.a.; Bonus 30% of basic; Commission Rs.3,000 p.m.; Transport allowance Rs.2,000 p.m.
for commuting between office and residence; Tribal area allowance Rs.12,400 and rent free house
(lease rent paid by the employer Rs.15,000 p.m.). The company recovers Rs.2,000 p.m. from his
salary for providing accommodation facility. Compute Income from salary.

15. A is working as a General Manager of a company. Particulars are given below:

Basic Rs.60,000 p.m.; Bonus Rs.40,000 p.a.; Conveyance allowance (70% official use) Rs.2,000 p.m.;
Medical allowance Rs.2,000 p.m. He has been provided with a rent free house in a city whose
population exceeds 10 lakhs but does not exceed 25 lakhs. Compute the taxable value of RFA if the
house is owned by the employer. What would be your answer if the house is taken on lease by the
employer at Rs.10,000 p.m.

16. Mr.R furnishes the following: Basic salary Rs.12,000 p.m.; Dearness allowance (40% of which
forms part of salary for retirement benefits) Rs.1,000 p.m.; Lunch allowance Rs.200 p.m.; Medical
allowance Rs.500 p.m.; City compensatory allowance Rs.300 p.m.; Children education allowance
Rs.230 p.m. per child for 2 children.
 51

He is provided with a rent-free accommodation in Delhi. The cost of the furniture is Rs.1,00,000 and
two air-conditioners, which have been taken on hire by the employer, have also been provided in
the accommodation. The hire charges of each air conditioner is Rs.2,000 p.a. Compute the value of
the rent-free accommodation if the accommodation is provided by:

a. The Government and the value of the accommodation as per Govt. Rules is Rs.2,500 p.m.
b. Canara Bank and the accommodation has been taken on lease by the Bank at Rs.10,000 p.m.
c. XYZ Ltd. and the accommodation has been taken on rent by the company at Rs.10,000 p.m.

17. Mr.S was provided an accommodation in a hotel by his employer for 22 days before providing him a
rent free accommodation. The hotel charges paid Rs.33,000 of which Rs.5,000 was recovered from
the employee. Salary for the purpose of accommodation for the period of 22 days is Rs.66,000.
Compute the taxable perquisite of accommodation.

Interest free loan or loans at concessional rate of interest.

18. X Ltd. has advanced an interest free loan of Rs.5,00,000 to Mr.G for purchase of car on 01.09.2022.
Mr.G has been regularly repaying the loan in instalments of Rs.20,000 p.m. at the end of each month.
Compute the value of perquisite on account of interest assuming the interest charged by SBI is 10%
p.a. What will be your answer if Mr.G repays loan on 1st of next month instead of end of each month.

Free Gas, Electricity and Water:

19. Find out the value of the perquisite in respect of gas in the cases given below:

X is employed by a gas supply company to whom free gas (manufacturing cost Rs.6,000) is supplied by
the employer.
Y is employed by A ltd. which supplies free gas to Y. Gas bills are issued in the name of A ltd. Rs.10,000.
Z is employed by B ltd. which supplies free gas to Z. Gas bills are issued in the name of Z Rs.15,000.

Assuming that X, Y and Z are “specified employees” and gas is used only for household consumption; find
out the value of the perquisite.

Use of moveable assets by the employee belonging to the employer:

20. Find out the taxable value of the perk in the following cases:

X is given a laptop by the employer-company for using it for office and private purpose (ownership
is not transferred). Cost of the laptop to the employer Rs.50,000.
On 1.10.2022, the company gives its music system to Y for domestic use. Ownership is not
transferred. Cost of music system to the employer is Rs.85,000.
Free use of employer’s DVD player from 1.4.2022. Cost to the employer Rs.25,000
On 1.09.2022, the company purchases a fridge for Rs.90,000 for the kitchen of X. Ownership is not
transferred.
 52

Sale of assets by the employer to his employee:

21. On 10.3.2023, a Company sells imported furniture to X for Rs.90,000 (the furniture was purchased
by the company on 30.6.2018 for Rs.4,10,000 and since then it was used for business purposes).

On 01.03.2023, a Company purchases a music system for Rs.35,000 and the same is sold on the
same day to X for Rs.20,000.

On 10.3.2023, the employer sells a computer to X for Rs.6,000 (it was purchased for Rs.60,000 on
10.4.2020, and up till its transfer to X, it was used by the employer for business purpose).

On 10.3.2023, the employer sells a Car for Rs.2,00,000 (it was purchased by the company for
business purposes on 10.4.2019 for Rs.6,00,000).

Problem on Servant facility

22. Mr.X and Mr.Y are working for Gama Ltd. As per salary fixation norms, the following perquisites
were offered:

i. For Mr.X, who engaged a domestic servant for Rs.4,000 per month, his employer reimbursed
the entire salary paid to the domestic servant i.e. Rs.4,000 per month.

ii. For Mr.Y, he was provided with a domestic servant @ Rs.4,000 per month as part of
remuneration package.

You are required to comment on the taxability of the above in the hands of Mr.X and Mr.Y,
who are not specified employees.

Problem on Leave Travel Concession:

23. Mr.R went to Simla on a holiday on 15.11.2022 with his wife and three children (one son – age 6
years; twin daughters – age 3 years). They went by aeroplane (economy class) and the total cost of
tickets met by his employer was Rs.58,000 (Rs.43,000 for adults and Rs.15,000 for the three minor
children). Compute the taxable amount of LTC.

Will the answer be different if, among his three children, the twins are 6 years and son 3 years old?

Deductions from Gross Salary:

24. Mr.G receives the following emoluments during the previous year ending 31.03.2023:
Basic pay Rs.4,00,000; Dearness Allowance Rs.15,000; Commission Rs.10,000; Entertainment
Allowance Rs.4,000; Medical expenses reimbursed for treatment in a public hospital Rs.25,000;
Professional tax paid Rs.3,000 (Rs.2,000 was paid by his employer). Determine Income from
Salary for A.Y.2023-24 if Mr.G is a State Government employee.
 53

Problem on medical facilities:

25. Mrs.X is a tax consultant in A Ltd. (salary being Rs.1,76,000 p.a.). A Ltd. makes the following
expenses for medical treatment of her husband outside India during the previous year 2022-23:

Amount incurred Out of which

by A Ltd. permitted by RBI
Cost of medical treatment of X outside India Rs.6,90,000 Rs.6,30,000
Cost of stay abroad of X and Mrs.X Rs.3,70,000 Rs.3,60,000
Cost of travel of X and Mrs.X Rs.1,40,000

Find out the taxable value of the medical facility chargeable to tax in the hands of Mrs.X for the
assessment year 2023-24 on the assumption that:
(a) Mrs.X does not have any other income or
(b) has interest on fixed deposit with SBI is Rs.10,000.

26. Compute the taxable value of the perquisite in respect of medical facilities received by Mr.G
from his employer during the previous year 2022-23:

− Medical Insurance Premium for insuring health of Mr.G Rs.7,000

− Treatment of Mr.G by his family doctor Rs.5,000
− Treatment of Mrs.G in a Government hospital Rs.25,000
− Treatment of Mr.G’s grandfather in a private clinic Rs.12,000
− Treatment of Mr.G’s mother (68 years and dependant) by family doctor Rs.8,000
− Treatment of Mr.G’s sister (dependant) in a nursing home Rs.3,000
− Treatment of Mr.G’s brother (independent) Rs.6,000
− Treatment of Mr.G’s father (75 years and dependant) abroad Rs.50,000
− Expenses of staying abroad of the patient Rs.30,000
− Limit specified by RBI Rs.75,000

Problem on shares allotted to employees under ESOP:

27. AB Co. Ltd allotted 1000 sweat equity shares to Mr.R in June 2022. The shares were allotted at
Rs.600 per share as against the fair market value of Rs.900 per share on the date of exercise of
option by Mr.R. The fair market value was computed in accordance with the method prescribed
under the Act.

i. What is the perquisite value of sweat equity shares allotted to Mr.R?

ii. In the case of subsequent sale of those shares by Mr.R, what would be the cost of acquisition of
those shares?
 54

Problems on car facility:

28. X is provided with 2 cars to be used for official and personal work and the following information is
available from the companies’ records:
18 h.p. car 10 h.p. car
Cost of the car Rs.24,00,000 Rs.4,00,000
Running and maintenance Rs.1,30,000 Rs.36,000
Salary of driver Rs.2,40,000 Rs.1,20,000

29. X has been provided with the benefit of a car by his employer. Compute the perquisite value
of the car for the assessment year 2023-24 in the following situations assuming X is a
specified employee.

a. X has been provided with a car (1200 cc) owned by the employer, cost of the car is Rs.12,00,000.
The expenditure incurred by the company on maintenance of the car are – petrol Rs.90,000;
driver’s salary Rs.84,000 and maintenance Rs.10,000. The car can be used by X partly for official
and partly for private purposes.

b. Assume in situation (a) that the car is used only for private purposes.

c. A car (1800 cc) is owned by the employer (cost of the car being Rs.15,00,000). X an employee,
can use it partly for official purposes and partly for private purposes. Expenses for private
purposes are, however, incurred by X.

d. Assume in situation (c) that the car can be used only for private purposes.

e. X owns a car (1400 cc). He uses it partly for official purposes and partly for private purposes.
During the previous year 22-23, he incurs a sum of Rs.50,000 on running and maintenance of
car. Besides, he has engaged a driver (salary Rs.84,000). The employer reimburses the entire
expenditure of Rs.1,34,000. Log book of the car is not maintained.

f. Assume in situation (e) that the log book of the car is maintained and 90% of the expenditure is
for official use and 10% for private use.

g. A car (1700 cc) is owned by the employer. All expenses (Rs.56,000) are incurred by the
employer. The employer maintains log book of the car. X, an employee, uses the car only for
official purposes. The employer gives a certificate that the car is used only for official purposes.
 55

CAR facility:

Particulars Car owned by employee Car owned by employer Car owned by employer
but running &maintenance but running &maintenance and running & maintenance
met by employer met by employee also met by employer

Official purposes Exempt from tax Exempt from tax Exempt from tax

Private purpose Fully taxable Fully taxable Fully taxable

(R & M expenses) (10% of cost or (R&M expenses
Hire charges) and 10% of cost)

Both purposes If log-book is not maintained:

Actual expenditure Small car: 600 p.m. Small car: 1,800 p.m.
(-) 1,800 p.m. or Big car: 900 p.m. Big car: 2,400 p.m.
2,400 p.m. (taxable amount) (taxable amount)

If log- book is maintained:

Apply the ratio

Rs.900 p.m. exempt for driver Rs.900 p.m. taxable for driver Rs.900 p.m. taxable for driver
if engaged by employee if provided by employer if provided by employer

Note: Cubic Capacity of the car up to 16 h.p. (small car). More than 16 h.p. (big car)

Note: If more than one car is provided then according to the choice of the employee, one car will be treated as if used for both office and
private use and the rest of the cars will be treated as if used for private purposes only. In other words, one car will enjoy
concessional rate (Rs.1,800 p.m./Rs.2,400 p.m.) and other cars will be fully taxed.
 56

Problems in computation of Salary Income:

30. X receives the following emoluments during the previous year:

Basic pay Rs.12,00,000; Commission (50% of basic) Rs.6,00,000; Entertainment allowance
Rs.60,000. X contributes Rs.1,50,000 towards provident fund (employer makes matching
contribution). Interest credited in the provident fund account @ 10.5% is Rs.63,000. Income of X
from other sources Rs.4,00,000. Compute his total income if:

a. X is a Government employee and the provident fund is SPF.

b. X is an employee of ABC Ltd. and the provident fund is RPF.
c. X is an employee of PQR Pvt Ltd. and the provident fund is URPF.

31. Mrs.X is offered an employment by PQR Ltd. at a basic salary of Rs.40,000 p.m. Other
allowances according to rules of the company are: dearness allowance 20% of basic pay (not
considered for retirement benefits), bonus Rs.1,08,000; Transport allowance Rs.12,000 to meet the
cost of transportation between residence to office and back.

The company gives Mrs.X an option either to take a rent-free unfurnished accommodation at
Bangalore for which the company would directly bear the rent of Rs.25,000 p.m. or to accept a
house rent allowance of Rs.25,000 p.m. and find out own accommodation. If Mrs.X opts for house
rent allowance, she will have to pay Rs.25,000 p.m. for an unfurnished house.

Which one of the two options should be opted by Mrs.X in order to minimise her tax bill?

32. Mr.X is employed with AB Ltd. on a monthly salary of Rs.25,000 and an entertainment allowance
and commission of Rs.1,000 p.m. each. The company provides him with the following benefits:

a. A company owned accommodation is provided to him in Delhi. Furniture costing Rs.2,40,000

was provided on 01.08.2022.

b. A personal loan of Rs.5,00,000 on 01.07.2022 on which it charges interest @ 6.75% p.a. The
entire loan is still outstanding. (Assume SBI rate of interest to be 12.75% p.a.)

c. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for Rs.60,000 on 01.05.2019. The motor cycle was finally sold to
him on 01.08.2022 for Rs.30,000.

d. Professional tax paid by Mr.X is Rs.2,000. Compute the income from salary of Mr.X for
A.Y.2023-24 assuming Mr.X has not opted for the provisions of section 115BAC.
 57

33. X Ltd., provided the following perquisites to its employee Mr.Y for the P.Y.2022-23:

a. Accomodation taken on lease by X Ltd., for Rs.15,000 p.m. Rs.5,000 p.m. is recovered from the
salary of Mr.Y.

b. Furniture, for which the hire charges paid by X Ltd., is Rs.3,000 p.m. No amount is recovered
from the employee in respect of the same.

c. A 12 hp car which is owned by X Ltd., and given to Mr.Y to be used both for official and
personal purposes. All running expenses are fully met by the employer. He is also provided
with a chauffeur.

d. A gift voucher of Rs.10,000 on his birthday.

Compute the value of perquisites chargeable to tax for the A.Y.2023-24, assuming his salary
for perquisite valuation to be Rs.10 lakh.

34. Mr.X, is working with True Care Hospitals (P) Ltd. He gives the list of perquisites provided by the
employer to him for the entire financial year 2022-23:

His son had undergone a medical treatment in True Care Hospitals (P) Ltd. free of cost. The hospital
would have charged a sum of Rs.60,000 for a similar treatment to unrelated patients.

Domestic servant was provided at the residence of X. Salary of domestic servant is Rs.3,000 per
month. The servant was engaged by him and the salary is reimbursed by the company. In case, the
company has employed the domestic servant, what is the value of perquisite?

Free education was provided to his two children A and B in a school maintained and owned by the
company. The cost of such education for A is computed at Rs.900 per month and for B at Rs.1,200
per month. No amount was recovered by the company for such education facility from X.

The employer has provided movable assets such as television, refrigerator and air-conditioner at
the residence of X. The actual cost of such assets provided to the employee is Rs.1,10,000.

A gift voucher worth Rs.10,000 was given on the occasion of his marriage anniversary. It is given by
the company to all employees above certain grade.

Telephone provided at the residence of Mr.X and the bill aggregating to Rs.25,000 paid by the
employer.

Housing loan @ 6% p.a. Amount outstanding on 01.04.2022 is Rs.6 lakhs. Mr.X pays Rs.12,000 p.m.
towards principal, on 5th of each month. SBI rate of interest is 10% p.a.

State the taxability of the above said perquisites and compute the total value of taxable perquisites.
 58

35. Mr.B, employed as Production Manager in Beta Ltd., furnishes you the following information for the
year ended 31.03.2023:

Basic salary up to 31.10.2022 Rs.50,000 p.m.

Basic salary from 01.11.2022 Rs.60,000 p.m.
Note: Salary is due and paid on the last day of every month.

Dearness allowance (not considered for retirement benefits) @ 40% of basic salary.

Bonus equal to one-month salary. Paid in October 2022 on basic salary plus dearness allowance
applicable for that month.

Contribution of employer towards RPF account of the employee @ 16% of basic salary.

Professional tax paid Rs.2,500 of which Rs.2,000 was paid by the employer.

Facility of laptop and computer was provided to Mr.B for both official and personal use. Cost of
laptop Rs.45,000 and computer Rs.35,000 were acquired by the company on 01.12.2022.

Motor car owned by the employer (cubic capacity of engine exceeds 1.6 litres) provided to the
employee from 01.11.2022 meant for both official and personal use. Repair and running expenses
of Rs.45,000 from 01.11.2022 to 31.03.2023, were fully met by the employer. The motor car was
self-driven by the employee.

Leave travel concession given to employee, his wife and three children (one daughter aged 7 and
twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer Rs.30,000 for
adults and Rs.45,000 for three children. Mr.B is eligible for availing exemption this year to the
extent it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr.B for the assessment year 2023-24.

36. Mr.Harish, aged 52 years, is the Production Manager of XYZ Ltd., from the following details, compute
the taxable income for the assessment year 2023-24.

Basic salary Rs.50,000 p.m.

Dearness allowance 40% of basic salary

Transport allowance (for commuting between Rs.3,800 per month

place of residence and office)

Motor car running and maintenance charges fully Rs.60,000

paid by employer (The motor car is owned by the
company and driven by the employee. The engine
cubic capacity is above 1.6 litres. The motor car is
used for both purposes by the employee.)
 59

Expenditure on accommodation in hotels while touring

on official duties met by the employer Rs.80,000

Loan from recognized provident fund (maintained by the Rs.60,000

Employer)

Lunch provided by the employer during office hours.

Cost to the employer (assume 300 working days) Rs.24,000

Computer (cost Rs.35,000) kept by the employer in the

residence of Mr.Harish from 1.06.2022.

37. From the following details, compute salary chargeable to tax for the A.Y.2023-24:

Mr.X is a regular employee of Rama & Co., in Chennai. He was appointed on 1.1.2022 in the scale of
20,000-1,000-30,000. He is paid 10% D.A. (forming part of salary for retirement benefits) & Bonus
equivalent to one month pay based on salary of March every year. He contributes 15% of his pay
and D.A. towards recognized provident fund and the company contributes the same amount.

He is provided free housing facility which has been taken on rent by the company at Rs.10,000 per
month. He is also provided with following facilities:

a. Facility of laptop costing Rs.50,000.

b. Company reimbursed the medical treatment bill of his brother of Rs.25,000, who is
dependent on him.

c. The monthly salary of Rs.1,000 of a house keeper is reimbursed by the company.

d. A gift voucher of Rs.10,000 on the occasion of his marriage anniversary.

e. Conveyance allowance of Rs.1,000 per month is given by the company towards actual
reimbursement for official purposes.

f. He is provided personal accident policy for which premium of Rs.5,000 is paid by the
company.

g. He is getting telephone allowance @ Rs.500 p.m.

h. Company pays medical insurance premium of his family of Rs.10,000.

 60

38. Mr.Vignesh, Finance Manager, of KLM Ltd., Mumbai, furnishes the following particulars for the
financial year 2022-23:

a. Salary Rs.46,000 per month.

b. Value of medical facility in a hospital maintained by the company Rs.7,000.

c. Rent free accommodation owned by the company.

d. Housing loan of Rs.6,00,000 given on 01.04.2022 at the interest rate of 6% p.a. (No
repayment made during the year). The rate of interest charged by the State Bank of India as
on 01.04.2022 in respect of housing loan is 10%.

e. Gifts in kind made by the company on the occasion of wedding anniversary of Mr.Vignesh
Rs.4,750.

f. A wooden table and 4 chairs were provided to Mr.Vignesh at his residence (dining table).
This was purchased on 1.05.2019 for Rs.60,000 and sold to Mr.Vignesh on 01.08.2022 for
Rs.30,000.

g. Personal purchases through credit card provided by the company amounting to Rs.10,000
was paid by the company. No amount was recovered from Mr.Vignesh.

h. An ambassador car which was purchased by the company on 16.07.2019 for Rs.2,50,000 was
sold to the assesse on 14.07.2022 for Rs.80,000.

Compute the taxable income of Mr.Vignesh for A.Y. 2023-24.

39. Mr.N, a salaried employee, furnishes the following details for the financial year 2022-23:

Basic salary 6,00,000

Dearness allowance 3,20,000
Commission 50,000
Entertainment allowance 7,500

Medical expenses reimbursed by the employer 21,000

Professional tax (of this, 50% paid by the employer) 7,000

Health insurance premium paid by the employer 9,000

Gift voucher given by the employer on his birthday 12,000
Life insurance premium of Mr.N paid by employer 34,000

Laptop provided for use at home. Actual cost of laptop 30,000

(children of the assesse are also using the laptop)
 61

Employer company owns a Tata Nano car, which was

provided to the assesse, both for official and personal
use. No driver was provided. (Engine cubic capacity
less than 1.6 litres)

Annual credit card fees paid by employer (Credit card

is not exclusively used for official purposes, details of
usage are not available) 2,000

You are required to compute the income chargeable under the head Salaries for the A.Y.2023-24.

40. Ms.Nandini, a resident individual, aged 48 years, is an assistant manager of Dye Hard Ltd. She was
appointed on 10 June, 2020 at a salary of Rs.32,000 per month During the previous year 2022-23,
she received the following amounts from her employer.

Dearness allowance (10% of basic pay which forms part of salary for retirement benefits).

Bonus for the previous year 2021-22 amounting to Rs.32,000 was received on 1st October, 2022.

Fixed medical allowance of Rs.20,000 for meeting medical expenditure.

She was also reimbursed the medical bill of her father-in-law dependent on her amounting to
Rs.3,000.

Ms.Nandini was provided:

a laptop both for official and personal use. Laptop was acquired by the company on 1 st June, 2022
at Rs.50,000.

a domestic servant at a monthly salary of Rs.1,000 which was reimbursed by her employer.

Dye Hard Ltd. allotted 500 equity shares in the month of December 2022 @ Rs.150 per share
against the fair market value of Rs.250 per share on the date of exercise of option by Ms.Nandini.
The fair market value was computed in accordance with the method prescribed under the Act.

Professional tax Rs. 2,500 (out of which Rs. 1,800 was paid by the employer).

Compute the total Income of Ms.Nandini for the assessment year 2023-24. (Assume that Ms.Nandini
pays tax on the receipt basis).
 62

41. Mr.Honey is working with a domestic company having a production unit in the U.S.A. for last 15
years. He has been regularly visiting India for export promotion of company's product. He has been
staying in India for at least 184 days every year.

He submits the following information:

Salary received outside India (for 6 months) ₹ 50,000 p.m.
Salary received in India (for 6 months) ₹ 50,000 p.m.

He has been given rent free accommodation in U.S.A. for which company pays 15,000 p.m. as rent,
but when he comes to India, he stays in the guest house of the company. During this period he is
given free lunch facility. During the previous year, company incurred an expenditure of ₹ 48,000 on
this facility.

He has been provided a car of 2000 cc capacity in U.S.A. which is used by him for both office and
private purposes. The actual cost of the car is ₹ 8,00,000. But when he is in India, the car is used by
the members of his family only for personal purpose. The monthly expenditure of car is ₹ 5,000.

His elder son is studying in India for which his employer spends 12,000 per year whereas his
younger son is studying in U.S.A. and stays in a hostel for which Mr.Honey gets ₹ 3,000 p.m. as
combined allowance.

The company has taken an accident insurance policy and a life insurance policy. During the
previous year, the company paid premium of ₹ 5,000 and ₹ 10,000, respectively. Compute Mr.
Honey's taxable income from salary for the Assessment Year 2023-24.

42. Mr. Joseph a resident aged 33 years is a State Government employee at Bangalore. He has the
following receipts from his employer:

a) Basic pay Rs.60,000 p.m.

b) DA (forms part of retirement benefits) Rs.6,000 p.m.
c) Entertainment allowances Rs.500 p.m.
d) House rent Allowance Rs.15,000 p.m.
e) Motor car for official and also for personal use (cubic capacity
of engine does not exceed 1.6 litres and expenses are met by the employer)

He provides the following information also:

He had paid a rent of Rs.16,000 p.m. for his accommodation at Bangalore.
He contributes Rs.5,000 towards recognized provident fund on 15.03.2024.
Due to COVID-19, work at home facility was allowed by Karnataka Government w.e.f. 01.10.2022.
He went back to Cochin and vacated the house at Bangalore and also motor car.
Professional tax paid – Rs.2,000 (50% was paid by employer)

Compute income chargeable to tax under the head “income from salary” for A.Y. 2023-24.
 63

MCQs and Case scenarios:

1. Mr. Ramesh, a citizen of India, is employed in the Indian embassy in Australia. He is a non-resident for A.Y.
2023-24. He received salary and allowances in Australia from the Government of India for the year ended
31.03.2023 for services rendered by him in Australia. In addition, he was allowed perquisites by the
Government. Which of the following statements are correct?

(a) Salary, allowances and perquisites received outside India are not taxable in the hands of Mr. Ramesh, since
he is non-resident.
(b) Salary, allowances and perquisites received outside India by Mr.Ramesh are taxable in India since they are
deemed to accrue or arise in India.
(c) Salary received by Mr.Ramesh is taxable in India but allowances and perquisites are exempt.
(d) Salary received by Mr.Ramesh is exempt in India but allowances and perquisites are taxable

2. Anirudh stays in New Delhi. His basic salary is Rs.10,000 p.m., D.A. (60% of which forms part of pay) is
Rs.6,000 p.m., HRA is Rs.5,000 p.m. and he is entitled to a commission of 1% on the turnover achieved by
him. Anirudh pays a rent of Rs.5,500 p.m. The turnover achieved by him during the current year is Rs.12
lakhs. The amount of HRA exempt under section 10(13A) is:–

(a) Rs.48,480
(b) Rs.45,600
(c) Rs.49,680
(d) Rs.46,800

3. Anand is provided with furniture to the value of Rs.70,000 along with house from February, 2022. The actual
hire charges paid by his employer for hire of furniture is Rs.5,000 p.a. The value of furniture to be included
along with value of unfurnished house for A.Y.2023-24 is:-

(a) Rs.5,000
(b) Rs.7,000
(c) Rs.10,500
(d) Rs.14,000

4. Mr.Kashyap received basic salary of Rs.20,000 p.m. from his employer. He also received children education
allowance of Rs.3,000 for three children and transport allowance of Rs.1,800 p.m. Assume he is not opting
to pay tax under section 115BAC. The amount of salary chargeable to tax for P.Y. 2022-23 is –

(a) Rs.2,62,600
(b) Rs.2,12,600
(c) Rs.2,11,600
(d) Rs.2,12,200

5. Mr.Jagat is an employee in accounts department of Bharat Ltd., a cellular company operating in the regions
of eastern India. It is engaged in manufacturing of cellular devices. During F.Y. 2022-23, following
transactions were undertaken by Mr.Jagat:

(i) He attended a seminar on “Perquisite Valuation”. Seminar fees of Rs.12,500 was paid by Bharat Ltd.

(ii) Tuition fees of Mr.Himanshu (son of Mr.Jagat) paid to private coaching classes (not having any tie-up
with Bharat Ltd.) was reimbursed by Bharat Ltd. Amount of fees was Rs.25,000.
 64

(iii) Ms.Sapna (daughter of Mr.Jagat) studies in DPS Public School (owned and maintained by Bharat Ltd.).
Tuition fees paid for Ms.Sapna was Rs.750 per month by Mr.Jagat. Cost of education in similar institution is
Rs.5,250 per month.

What shall be the amount chargeable to tax under the head “Salaries” in hands of Mr.Jagat for A.Y. 2023-24?
(a) Rs.25,000
(b) Rs.37,500
(c) Rs.66,500
(d) Rs.79,000

Case Scenarios:

6. Mr.Rajesh Sharma, aged 54 years, an Indian citizen, is working as Assistant Manager in ABC India Ltd. He is
getting basic salary of Rs.58,000 per month. He used to travel frequently out of India for his office work. He
left India from Delhi Airport on 5th October, 2022 and returned to India on 2nd April, 2023. For previous year
2021-22, following information are relevant;

(a) Dearness Allowance - 10% of Basic Pay (considered for retirement purposes)

(b) Bonus - Rs.98,000

(c) Medical allowance paid during P.Y. 2022-23 amounting to Rs.60,000

(d) He was also reimbursed medical bill of his mother amounting to Rs.15,000.

(e) He was also transferred a laptop by company for Rs.15,000 on 31st December, 2022. The laptop was
acquired by company on 1st October, 2019 for Rs.1,00,000. Company was charging depreciation at 31.666%
assuming useful life of laptop as 3 years.

(f) He was also reimbursed salary of house servant of Rs.4,000 per month.

(g) Professional Tax paid by employer amounting to Rs.2,400.

(h) 400 equity shares allotted by ABC India Ltd. at the rate of Rs.250 per share against fair market value of
share of Rs.350 on the date of exercise of option.

(i) Short-term capital gain on sale of shares of listed company on which STT is paid Rs.94,000.

(j) Mr. Rajesh does not opt to pay tax under section 115BAC.

Based on the facts of the case scenario given above, choose the most appropriate answer to the following
questions:

1. What is Mr.Rajesh Sharma’s residential status for the A.Y. 2023-24?

(a) Resident but can’t determine resident and ordinarily resident or resident but not ordinarily resident, from the
given information
(b) Non-Resident
(c) Resident but not ordinarily resident
(d) Resident and ordinarily resident
 65

2. What are his taxable perquisites for A.Y. 2023-24?

(a) Rs.55,000
(b) Rs.90,400
(c) Rs.1,05,400
(d) Rs.1,03,000

3. What is the income chargeable under the head “Salaries” in the hands of Mr.Rajesh Sharma for A.Y. 2023-24?
(a) Rs.9,76,600
(b) Rs.9,86,600
(c) Rs.9,71,600
(d) Rs.9,61,600

4. The total tax liability of Mr.Rajesh Sharma for A.Y. 2023-24 is:
(a) Rs.1,26,800
(b) Rs.1,40,710
(c) Rs.1,12,130
(d) Rs.1,39,960

5. Assume for the purpose of this question only, that Mr.Rajesh was found owner of Rs.5 lakh worth jewellery acquired
in F.Y. 2022-23, of which he could not provide any satisfactory explanation about source of income. What would be
the tax liability (without considering surcharge and health and education cess, if any) of Mr.Rajesh Sharma towards
such unexplained expenditure:
(a) Rs.1,00,000
(b) Rs.1,50,000
(c) Rs.3,00,000
(d) Rs.3,90,000

7. Mr.Hardik (age 45 years) is appointed as senior executive officer in Sky India Limited, Mumbai on 01.02.2022
in the scale of Rs.35,000-3500-65,000. He is paid dearness allowance @ 40% of salary forming part of
retirement benefits.

He is given rent free unfurnished accommodation on 01.5.2022 which he occupied only from 01.10.2022. The
company pays lease rent of Rs.5,000 p.m.

He has been provided a car of above 1.6 litres capacity which is used by him for private purposes only. The
actual cost of the car is Rs.8,00,000. The monthly expenditure of car is Rs.5,000, which is fully met by the
employer. Car is owned by his employer.

He pays lumpsum premium of Rs.1,20,000 towards health insurance for self and his wife (age 43 years) for
48 months on 01.10.2022 by account payee cheque. He also contributes Rs.1,50,000 towards PPF. Mr. Hardik
is interested to opt for concessional tax regime available under section 115BAC.

Based on the facts of the case scenario given above, choose the most appropriate answer to the following questions:

1. What would be the value of rent-free accommodation chargeable to tax in the hands of Mr.Hardik?
(a) Rs.44,835
(b) Rs.44,100
(c) Rs.45,570
(d) Rs.30,000
 66

2. What amount of health insurance premium paid during the previous year 2022-23 by Mr.Hardik can be claimed as
deduction while computing total income, if he does not opt to pay tax under section 115BAC?
(a) Rs.30,000
(b) Rs.15,000
(c) Rs.24,000
(d) Rs.25,000

3. What would be perquisite value of car chargeable to tax in the hands of Mr.Hardik?
(a) Rs.28,800
(b) Rs.21,600
(c) Rs.60,000
(d) Rs.1,40,000

4. What would you advise to Mr. Hardik to opt to pay tax under section 115BAC?
(a) Yes, Mr. Hardik can opt for section 115BAC, since in such case his tax liability would be Rs.22,760, being
lower than the tax liability under normal provisions of the Act
(b) Yes, Mr. Hardik can opt for concessional tax regime, since in such case his tax liability would be Rs.17,560
being lower than the tax liability under normal provisions of the Act.
(c) No, Mr.Hardik should not opt, since as per normal provisions of the Act, his tax liability would be Rs.32,510,
being lower than the tax liability under section 115BAC
(d) No, Mr.Hardik should not opt, since as per normal provisions of the Act, his tax liability would be Rs.22,110,
being lower than the tax liability under section 115BAC.
 67

CHAPTER – 6 SALARIES – PART II

PROVIDENT FUND:

Lump sum received after retirement:

Statutory Provident Fund: Exempt from tax

Recognized Provident Fund: Exempt from tax

Unrecognized Provident Fund: Employer’s contribution and interest thereon is taxable

under “salaries”

Interest on employee’s contribution is taxable under the

head “other sources”
GRATUITY:

Gratuity received by a Government employee is fully exempt from tax.

Gratuity received by a non-Government employee:

a. Employees covered by Payment of Gratuity Act, 1972:

▪ Maximum limit Rs.20,00,000

▪ Actual amount received
▪ 15/26 (x) last drawn salary (x) every completed year of service (rounded off)

whichever is less is exempt from tax

note: Salary = Basic + D.A. (any)

b. Employees not covered by Payment of Gratuity Act, 1972:

▪ Maximum limit Rs.20,00,000

▪ Actual amount received
▪ 1/2 (x) Average Salary (x) every completed year of service (ignore fraction)

whichever is less is exempt from tax

note: Salary = Basic + D.A. (forming) + Sales Commission

note: Average salary means: Last ten months salary excluding the month of retirement
10

note: If gratuity is received from more than one employer then the maximum limit of Rs.20,00,000
will be reduced to the extent of exemption previously availed.
 68

LEAVE SALARY OR LEAVE ENCASHMENT:

Leave salary received while in service is fully taxable for both Government and non-Government
employees

Leave salary received after retirement by a:

a) Government employee: Exempt from tax

b) Non-Government employee:
▪ Maximum limit: Rs.3,00,000
▪ Actual amount received:
▪ 10 months’ average salary:
▪ Leave at the credit of employee (x) Average salary

whichever is less is exempt from tax

note: Salary = Basic + D.A. (forming) + Sales Commission

note: Any fraction of a year is to be ignored
note: LEAVE SHOULD NOT EXCEED ONE MONTH FOR EVERY COMPLETED YEAR OF SERVICE.

PENSION:

Uncommuted Pension (monthly pension):

Uncommuted pension is fully taxable for both Government and non-Government employees.

Commuted Pension (lump sum pension):

For Government employees: Fully exempt from tax

For non-Government employees:

a. If he receives gratuity also: One-third of full value of commuted pension is exempt.
b. If he does not receive gratuity: One-half of full value of commuted pension is exempt.

VRS COMPENSATION:

• Maximum limit: Rs.5,00,000

• Compensation received: Rs.xxx
• Last drawn salary (x) 3 (x) No. of years of service (ignore fraction) Rs.xxx
• Last drawn salary (x) Balance of no. of months of service left Rs.xxx

whichever is less is exempt from tax

Note: Salary means Basic + D.A. (forming) + Sales commission

 69

RETRENCHMENT COMPENSATION:
a. Received in accordance with any scheme, which is approved by the Central Government,
fully exempt from tax.

b. If received under any other scheme:

▪ Maximum limit Rs.5,00,000
▪ Actual amount received xxx
▪ Amount determined under the Industrial Disputes Act, 1947 xxx
(whichever is less is exempt from tax)

Note: Amount determined under the Industrial Disputes Act, 1947:

15/26 (x) Average salary (x) No of years of service (rounded off)
Average salary means: Average of last 3 months
Salary = Basic + DA (any)

1. Mr.A retires from service on December 31, 2022, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2022-23:

Basic pay @ Rs.16,000 per month for 9 months Rs.1,44,000

D.A. (50% forms part of retirement benefits) Rs.8,000 p.m. for 9 months Rs.72,000

Lumpsum payment received from the Unrecognised Provident Fund Rs.6,00,000. Out of the amount
received from the provident fund, the employer’s share was Rs.2,20,000 and the interest thereon
Rs.50,000. The employees share was Rs.2,70,000 and the interest thereon Rs.60,000. What is the
taxable portion of the amount received from the unrecognized provident fund in the hands of Mr.A
for the assessment year 2023-24?

2. X, an employee of the Central Government, receives Rs.6,00,000 as gratuity at the time of his
retirement on 11.10.2022 under the New Pension Code. Is gratuity fully exempt from tax?

3. Mr.Ravi retired on 15.6.2022 after completion of 26 years 8 months of service and received gratuity
of Rs.15,00,000. At the time of retirement, his salary was:

Basic Salary: Rs.50,000 p.m.

Dearness Allowance: Rs.10,000 p.m. (60% of which is for retirement benefits)
Commission: 1% of turnover (turnover in the last 12 months was Rs.1,20,00,000)
Bonus: Rs.25,000 p.a.

Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.
 70

4. Mr.S, an Accounts Manager, has retired from JK Ltd. on 15.01.2023 after rendering services for 30
years and 7 months. His salary is Rs.25,000 p.m. up to 30.09.2022 and Rs.27,000 p.m. thereafter.
He also gets Rs.2,000 p.m. as D.A. (55% of it is part of salary for computing retirement benefits). He
is not covered by the Payment of Gratuity Act, 1972. He has received Rs.8,00,000 as gratuity from
the employer company. Calculate taxable gratuity.

5. X, is working with two companies. He retires from A Co. in 2014 and receives Rs.92,000 as gratuity
out of which Rs.50,000 was exempt. He also retires from B Co. in December 2022 after 28 years and
8 months of service and receives Rs.2,90,000 as death-cum-retirement gratuity.

His average basic from B Co. for the preceding 10 months ended on November 30, 2022 is Rs.18,200
p.m. He has received Rs.1,000 p.m. as D.A. (80% forming) and 6% commission on turnover
achieved by him. Turnover achieved by him during 10 months ending on November 30, 2022 is
Rs.2,00,000. Compute the amount of gratuity exempt from tax.

6. R is the Sales Manager. He is paid salary @ Rs.8,000 p.m. from 1.4.2022. D.A. Rs.4,000 p.m. (50%
forming). He retires on 10.02.2023. He is paid 2% commission on sales. Sales effected by him
during the preceding 10 months ended on 31.01.2023 amounted to Rs.4,00,000. He is entitled for
1.5 months earned leave for every year of service, ignoring part of the year. He retires after 20
years and 7 months. He has availed 18 months leave while in service. The leave encashment is
allowed @ Rs.8,000 p.m. Compute taxable amount of leave salary.

7. Mr.Gupta retired on 1.12.2022 after 20 years 10 months of service, receiving leave salary of Rs.
5,00,000. Other details of his salary income are:

Basic Salary: Rs.5,000 p.m. (Rs.1,000 was increased w.e.f. 1.4.2022)

Dearness Allowance: Rs.3,000 p.m. (60% of which is for retirement benefits)
Commission: Rs.500 p.m.
Bonus: Rs.1,000 p.m.
Leave availed during service: 480 days
He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:

(a) He is a Government employee.
(b) He is a non-Government employee.

8. Mr.Sagar retired on 1.10.2022 is receiving a pension of Rs.5,000 p.m. On 1.2.2023, he commuted

60% of his pension and received Rs.3,24,000 as commuted pension. Compute the taxable amount
of pension in the following cases assuming:

• He is a Government employee
• He is a non-government employee who did not get gratuity
• He is a non-government employee who got gratuity at the time of retirement.
 71

9. Mr.A retired on 1.4.2022 from B Co. Ltd. He was entitled to a pension of Rs.20,000 p.m. At the time
of retirement he got 75% of the pension commuted and received Rs.6,75,000 as commuted pension.

Compute the taxable portion of the commuted pension if:

a) he is also entitled to gratuity
b) he is not entitled to gratuity.

10. Mr.Dutta received voluntary retirement compensation of Rs.7,00,000 after 30 years 4 months of
service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing
basic salary Rs.20,000 p.m.; Dearness allowance (which forms part of pay) Rs.5,000 p.m. Compute
his taxable voluntary retirement compensation, assuming that he does not claim any relief u.s.89.

11. X, an employee of a private sector transport company, based at Nagpur and covered by Payment of
Gratuity Act, retires on 31.12.2022 after service of 33 years and 7 months. At the time of retirement
his employer pays Rs.2,26,538 as gratuity and Rs.3,50,000 as accumulated balance of recognised
provident fund. He is also entitled for a pension of Rs.3,000 p.m. He gets 70% of pension
commuted for Rs.84,000 on 1.2.2023.

Basic Rs.81,000 (9000 x 9); bonus Rs.3,600; medical allowance Rs.22,000; house rent allowance
Rs.3,600 (400 x 9) rent paid by him Rs.13,200 (1,100 x 12); employer’s contribution to R.P.F.
Rs.11,000.

As per the terms of employment, X and his family members can use deluxe buses operated by the
employer (value of the facility enjoyed by X and family during the previous year is Rs.12,000).
Compute his salary income assuming that he has paid Rs.2,000 as professional tax.

12. Mr.X retired from the services of M/s.Y Ltd on 31.01.2023, after completing service of 30 years and
one month. He had joined the company on 01.01.1993 at the age of 30 years and received the
following on his retirement:

i. Gratuity Rs.6,00,000. He was covered under the Payment of Gratuity Act, 1972

ii. Leave encashment of Rs.3,30,000 for 330 days leave balance in his account. He was credited
30 days leave for each completed year of service.

iii. As per the scheme of the company, he was offered a car which was purchased on 30.01.2020
by the company for Rs.5,00,000. Company has recovered Rs.2,00,000 from him for the car.
Company depreciates the vehicles at the rate of 15% on SLM.

iv. An amount of Rs.3,00,000 as commutation of pension of 2/3rd of his pension commuted.

v. Company presented him a gift voucher worth Rs.6,000 on his retirement

 72

vi. His colleagues also gifted him a television (LCD) worth Rs.50,000 from their own
contribution.

Following are the other particulars:

a. He has drawn a basic salary of Rs.20,000 and 50% dearness allowance per month for the
period from 01.04.2022 to 31.01.2023.

b. Received pension of Rs.5,000 per month for the period 01.02.2023 to 31.03.2023 after
commutation of pension.

Compute his gross total income from the above for Assessment Year 2023-24.

13. Mr.M was retrenched from service of ABC Limited. He received retrenchment compensation
amounting to Rs.8,75,000. Amount of compensation determined under the Industrial Disputes Act,
1947 is Rs.4,80,000. The scheme of retrenchment is not approved by the Central Government.
Compute the taxable retrenchment compensation.

14. Mr.Swaraj has provided the following particulars for the year ended 31-03-2023:

He retired on 31-12-2022 at the age of 58, after putting in 25 years and 9 months of service, from a
private company at Delhi.

He was paid a salary of Rs.25,000 p.m. and house rent allowance of Rs.6,000 p.m. He paid rent of
Rs.6,500 p.m. during his tenure of service.

On retirement, he was paid a gratuity of Rs.3,50,000. He was covered by the Payment of Gratuity
Act, 1972. He had not received any other gratuity at any point of time earlier, other than this
gratuity.

He had accumulated leave of 15 days per annum during the period of his service; this was encashed
by him at the time of his retirement. A sum of Rs.3,15,000 was received by him in this regard.
Employer allowed 30 days leave per annum.

The company presented him with a gift voucher of Rs.5,000 on his retirement. His colleagues also
gifted him a mobile phone worth Rs.50,000 from their own contribution.

You are requested to compute his income from salary for the assessment year 2023-24.
 73

CHAPTER – 7 INCOME FROM HOUSE PROPERTY

1. Chargeability – Section 22:
• The assessee should be the owner of the house (owner includes deemed owner)
• There should be a building or land connected with building
• The building should not be occupied by the assessee for his own business

2. Self-occupied property -- format:

Annual Value Nil
Less: Deductions under section 24
Interest on borrowed capital xxx
-----
Loss from self occupied property (xxx)
-----

note: The maximum amount deductible on account of interest on loan is Rs.30,000.

note: However, if the loan is borrowed on or after 1.4.99 for PURCHASE or CONSTRUCTION and the
house is purchased or constructed within 5 years from the end of the relevant previous year
during which the loan was borrowed then Rs.2,00,000 (instead of Rs.30,000) shall be allowed
as deduction.

note: The above deduction is not available under section 115BAC

3. Let-out property -- format:

Gross Annual Value xxx
Less: Municipal taxes xxx
------
Net Annual Value xxx
Less: Deductions under section 24:
Standard deduction xxx
Interest on borrowed capital xxx
-----
Income from let out property xxx
-----

Determination of Gross Annual Value:

1. Municipal Valuation (rental value fixed by municipal authorities)
2. Fair Rent (market rent)
3. Rent receivable (rent charged by the owner)
4. Standard Rent (rent fixed under the Rent Control Act)

note: If 1, 2 and 3 are given then Gross Annual Value is the highest among the three.
 74

If Standard Rent is also given then:

Step 1: Find out the maximum of 1, 2 and 3.
Step 2: Find out the maximum of 3 and 4.
Step 3: Gross Annual Value is the least of the two calculated above.

Unrealised Rent: A default made by the tenant in the payment of rent is unrealised rent.

Conditions to be satisfied (Rule 4):

a. The tenancy is bona-fide (genuine and real);
b. Reasonable steps should be taken by the assessee making the tenant vacate the property;
c. The defaulting tenant should not occupy any other property of the assessee;
d. The assessee has taken legal steps for its recovery.

note: RECOVERY OF URR. (to the extent it was allowed earlier) is treated as income of the year
in which it is recovered. Such recovery is taxed under this head irrespective of the fact
whether the assessee owns the house or not. Any amount spent on such recovery is
ignored. Standard deduction is allowed @ 30%. Section 25A

note: RENTAL ARREARS received by the assessee shall be taxed after allowing standard
deduction of 30% under the head “Income from house property”. Section 25A

Unrealised rent recovered Arrears of rent received

a. Taxable in the year in which the loss is Taxable in the year in which the arrears
recovered is received

b. Taxable (under IFHP) whether the Taxable (under IFHP) whether the
assessee owns the house or not assessee owns the house or not

c. Standard deduction @ 30% is allowed Standard deduction @ 30% is allowed

Where a let-out house remains vacant during a part of the previous year
Step 1: Compute gross annual value as if the house is let out for whole year.
Step 2: Reduce vacancy loss from the gross annual value computed in step 1.

Municipal taxes: Municipal taxes including water tax and sewage tax actually paid by the
owner during the previous year is allowed as deduction. Municipal tax paid
by the tenant is not allowed as deduction.
 75

DEDUCTIONS UNDER SECTION 24:

1. STANDARD DEDUCTION: Compulsory deduction allowed @ 30% of net annual value.

2. INTEREST ON BORROWED CAPITAL:

a. Any interest paid or payable on loan borrowed for the purpose of purchase, construction,
reconstruction, renewal, repairs of house property is allowed as deduction.

b. The maximum amount of deduction allowed is Rs.2,00,000 in case of a self occupied

property (in certain cases Rs.30,000). No such limit is fixed for a let out property.

c. Any interest paid out of India without TDS. shall not be allowed as deduction.

d. Interest paid may relate to: i) post-construction period; or ii) pre-construction period.

i. Interest paid during the post construction period is fully allowed as deduction in the
respective years.

ii. Interest paid up to the date of completion or up to the date of repayment of loan
(whichever is earlier) is pre-construction interest. Such interest is allowed in FIVE
equal installments from the year of completion.

note: If date of completion of construction is earlier then pre-construction period is

restricted to 31st March of the preceding year.

note: If date of repayment of loan is earlier then pre-construction period is up to the date of
repayment.

e. Where a fresh loan has been taken to repay the original loan, interest paid on the second
loan is also allowable as deduction.

f. Interest on loan borrowed from a friend or a relative is allowed as deduction u.s.24.

However, principal repayment of loans borrowed from friend or relative does not qualify
for deduction u.s.80 C.

g. Interest paid on delay in payment of original interest due (penalty) is not deductible.
 76

PARTLY SELF-OCCUPIED AND PARTLY-LET OUT:

Case A: Where a house is let for some part of the year and self-occupied for the
remaining part of the year.

“ANNUAL VALUE” IS COMPUTED AS IF THE HOUSE IS LET OUT FOR THE WHOLE YEAR.
for eg: X owns a house. Municipal valuation Rs.60,000 p.a.; Fair rent Rs.72,000 p.a.; The house is
let out for Rs.7,000 p.m. for 8 months and for the remaining period it remained self-occupied.
What will be the gross annual value of the property? What would be the answer if the house is
let for Rs.10,000 p.m. instead of Rs.7,000?

A. Municipal valuation Rs.60,000 p.a.

Fair rent Rs.72,000 p.a.
Rent received Rs.56,000 (7,000 x 8) (ignore self-occupied period)

Gross Annual Value in this case would be Rs.72,000 (i.e. whichever is higher)

B. In the second case GAV. would be Rs.80,000 (i.e. higher of 60,000; 72,000 and Rs.80,000)

Case B: Where a house consists of more than one unit:

Each unit is treated separately. (i.e. a self-occupied unit like a separate self-occupied
property and a let-out unit similar to a separate let-out property).

OTHER PROVISIONS:
a. Composite Rent:
Where the landlord receives rent for other amenities in addition to house rent then such a
rent is known as composite rent. In such a situation, house rent is to be separated from the
total (composite) rent and is assessed to tax under the head “IFHP”. Rent received for
providing other amenities shall be assessed under the head “IFOS”.

b. Deemed to be let out property – Annual value of two houses can be ‘NIL’:
Where the assessee owns more than two houses for self-occupation, then annual value of any
two houses according to his choice shall be NIL and the remaining properties shall be deemed
as let out.

c. Property owned by co-owners:

Where a house owned by joint owners is self-occupied by each of the co-owner, the annual
value of the property will be nil and each co-owner shall be entitled to a deduction of
Rs.30,000 or Rs.2,00,000 as the case may be on account of interest on borrowed capital.

Where the house owned by co-owners is let out, the income shall be computed as if the
property is owned by one owner and thereafter the income so computed shall be divided
amongst each co-owner as per their respective share.
 77

Problems:
1. In the following cases, state the head of income under which the receipt is to be assessed
and comment.

a. X lets out his property to Y. Y sublets it. How is sub-letting receipt to be assessed in the
hands of Y.

b. Y has built a house on a leasehold land. He has let out the property and claims the rental
income to be assessed under the head “Income from other sources”. Is he correct?

c. Z uses his property for his own business. Can he claim depreciation?

d. Income from a vacant land is taxable under the head ……………………………

e. Rent received from employees for letting out residential quarters is taxable under the head
………………………

f. Rental income from properties held as stock-in-trade is taxed under the head …………………

2. X owns a house. It is self-occupied. Municipal valuation is Rs.2,00,000, whereas Fair rent is

Rs.3,00,000 and Standard rent under the Rent Control Act is Rs.2,75,000. The following expenses are
incurred by Mr.X: Repairs Rs.20,000; Municipal tax Rs.7,000; Insurance Rs.2,000;

Interest on borrowed capital to construct the property Rs.2,25,000; Interest on capital borrowed by
mortgaging the property for daughter’s marriage Rs.50,000 (in either case capital is borrowed after
April 1, 1999). Income of X from Salary (computed) Rs.12,00,000. Find out his net income.

3. Choose the correct answer with reference to the provisions of the Income-tax Act, 1961:
The ceiling limit of deduction under section 24 in respect of interest on loan taken on 01.04.2009
for repairs of a self-occupied house is:

a. Rs.30,000 per annum

b. Rs.2,00,000 per annum
c. No limit
d. 30% of NAV

4. R owns six houses in Chennai, details of which are as follows, compute GAV.

Particulars I II III IV V VI
Municipal valuation 20,000 24,000 56,000 42,000 48,000 45,000
Fair rental value 24,000 24,000 40,000 42,000 50,000 50,000
Rent received or receivable 18,000 36,000 48,000 36,000 54,000 56,000
Standard rent ** 42,000 50,000 30,000 ** 48,000
 78

5. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 60,000 60,000 60,000 1,12,000
Fair rent 68,000 68,000 68,000 1,17,000
Actual rent (before adjusting unrealised rent) 66,000 66,000 72,000 1,20,000
Standard rent 62,000 62,000 70,000 1,15,000
Unrealised rent (conditions of Rule 4 satisfied) 2,000 6,000 5,000 50,000

6. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 60,000 60,000 60,000 1,12,000
Fair rent 68,000 68,000 68,000 1,17,000
Actual rent (per annum) 60,000 66,000 72,000 1,20,000
Standard rent 62,000 62,000 70,000 1,15,000
Vacancy period (in months) 1 2 3 4

7. Compute Gross Annual Value in the following cases:

A B C D
Municipal value 1,40,000 1,40,000 1,40,000 1,40,000
Fair rent 1,45,000 1,45,000 1,45,000 1,45,000
Actual rent (before adjusting urr.) 1,68,000 1,68,000 1,68,000 1,68,000
Standard rent 1,42,000 1,42,000 1,50,000 1,42,000
Unrealized rent (Rule 4 satisfied) 14,000 42,000 42,000 70,000
Vacancy period (in months) 1 1 1 3

8. X owns 3 houses in Delhi, details of which are as under: Compute net annual value.

Particulars House I House II House III

Municipal value 1,20,000 72,000 60,000
Fair rent 1,50,000 75,000 75,000
Rent per unit p.a. 70,000 84,000 21,000
Standard rent 1,30,000 80,000 72,000
No. of residential units 2 1 3
Municipal taxes Rs.12,000 Rs.8,000 for last Rs.60,000 (includes
(due but not year paid in this Rs.45,000 which
paid) year & Rs.9,000 of relates to last three
current year is due years paid now)
 79

9. Mr.A has a property whose municipal valuation is Rs.1,30,000 p.a. The fair rent is Rs.1,10,000
p.a. and the standard rent fixed by the Rent Control Act is Rs.1,20,000 p.a. The property was let
out for a rent of Rs.11,000 p.m. throughout the previous year. Unrealised rent was Rs.11,000 and
all the conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @ 10% of
municipal valuation. Interest on borrowed capital was Rs.40,000 for the year. Compute income
from house property.

10. Mr.G has a property whose municipal valuation is Rs.2,50,000 p.a. The fair rent is Rs.2,00,000
p.a. and the standard rent under the Rent Control Act is Rs.2,10,000 p.a. The property was let out
for a rent of Rs.20,000 p.m. However, the tenant vacated the property on 31.01.2023. Unrealised
rent was Rs.20,000 and all the conditions prescribed by Rule 4 are satisfied. He paid municipal
taxes @ 8% of municipal valuation. Interest on borrowed capital was Rs.65,000 for the year.
Compute income from house property.

11. For the assessment year 23-24, X submits the following information:

House I House II
Municipal valuation 1,80,000 3,60,000
Standard rent 1,50,000 3,00,000
Actual Rent 2,40,000 6,00,000

Municipal taxes – paid 20,000 30,000

Municipal taxes – outstanding 10,000 15,000

Interest on money borrowed – paid 60,000 20,000

Interest on money borrowed – outstanding 1,00,000 60,000
Housing loan principal repaid to bank 50,000 30,000

Nature of occupation Let out for Let out for

residence business

Compute Income from house property.

Property held by co-owners:

12. Ganesh and Rajesh are co-owners of a self-occupied property. They own 50% share each. The
interest paid by each co-owner during the previous year on loan (taken for acquisition of
property during the year 2004) is Rs.2,05,000. The amount of allowable deduction in respect of
each co-owner is:

a) Rs.2,05,000 c) Rs.2,00,000
b) Rs.1,02,500 d) Rs.1,00,000
 80

13. Mr.Raman is a co-owner of a house property alongwith his brother:

Municipal value of the property Rs.1,60,000

Fair rent Rs.1,50,000
Standard Rent Rs.1,70,000
Rent received Rs.15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the
bank is Rs.25,000 has been paid. Interest on the unpaid interest is Rs.450. To repay this loan,
Raman and his brother have taken a fresh loan and interest charged on this loan is Rs.5,000. The
municipal taxes of Rs.5,100 have been paid by the tenant.

Compute income from house property in the hands of Mr.Raman for the A.Y.2023-24.

14. Ms.Aparna co-owns a residential house property in Calcutta along with her sister Ms.Dimple,
where her sister's family resides. Both of them have equal share in the property and the same is
used by them for self-occupation. Interest is payable in respect of loan of Rs.50,00,000 @ 10%
taken on 1.4.2021 for acquisition of such property. In addition, Ms.Aparna owns a flat in Pune in
which she and her parents reside. She has taken a loan of Rs.3,00,000 @ 12% on 1.10.2021 for
repairs of this flat. Compute the deduction which would be available to Ms.Aparna and Ms.
Dimple under section 24(b) for A.Y.2023-24.

15. Two brothers Arun and Bimal are co-owners of a house property with equal share. The house
was constructed during the financial year 1998-99. The property consists of eight identical units
and is situated at Cochin.

During the financial year 2022-23, each co-owner occupied one unit for residence and the
balance of six units were let out at a rent of Rs.12,000 per month per unit. The municipal value
of the house property is Rs.9,00,000 and the municipal taxes are 20% of municipal value, which
were paid during the year. One of the let out properties remained vacant for 4 months.

The other expenses were as follows:

Repairs Rs.40,000; Insurance paid Rs.15,000; Interest payable on loan Rs.3,00,000

Arun could not occupy his unit for six months as he was transferred to Chennai. He does not own
any other house.

Compute the income under the head “Income from House Property” of two brothers for the
assessment year 2023-24.
 81

Problems on Interest computation on borrowed capital:

16. Identify pre-construction period from the following information given below:

Date of borrowing Date of completion Date of repayment

a. 1.4.2020 1.4.2021 1.4.2035
b. 1.4.2019 1.4.2021 1.4.2034
c. 1.4.2016 31.8.2019 1.4.2031
d. 1.4.2017 31.10.2019 1.4.2032
e. 1.8.2018 1.12.2020 1.4.2028
f. 1.4.2019 31.12.2019 1.4.2034

17. Mr.R took a loan of Rs.15 lakhs @ 12% p.a. on 1.7.2020 for constructing a house. The
construction of the house was completed on 19.10.2022. Compute for A.Y. 2023-24 the amount
of interest deductible in computing the income from house property if the house is: (i) let out;
(ii) self-occupied.

18. The assessee took a loan of Rs.6,00,000 on 1.4.2019 from a bank for construction of a house on a
land he owns in Chennai. The loan carries an interest @ 10% p.a. The construction is
completed on 15.6.2021. The entire loan was repaid on 30.11.2025. Compute interest
allowable for the previous year 2021-22.

19. Poorna has one house property at Bangalore. She stays with her family in the house. The rent
of similar property in the neighbourhood is Rs.25,000 p.m. The municipal valuation is Rs.23,000
p.m. Municipal taxes paid is Rs.8,000.

The house construction began in April 2016 with a loan of Rs.20,00,000 taken from SBI Housing
Finance Ltd. @ 9% p.a. on 01.04.2016. The construction was completed on 30.11.2018. The
accumulated interest up to 31.3.2018 is Rs.3,60,000. During the previous year 2022-23, Poorna
paid Rs.2,40,000 which included Rs.1,80,000 as interest. There was no principal repayment
prior to this date. Compute income from house property for A.Y. 2023-24.

Problems on Deemed to be let out property

20. Mr.R has three houses for self-occupation. What would be the tax treatment for A.Y.23-24 in respect of
income from house property?

(a) One house, at the option of Mr.R, would be treated as self-occupied. The other two houses would
be deemed to be let out.
(b) Two houses, at the option of Mr.R, would be treated as self-occupied. The other house would be
deemed to be let out.
(c) One house, at the option of Assessing Officer, would be treated as self-occupied. The other two
houses would be deemed to be let out.
(d) Two houses, at the option of Assessing Officer, would be treated as self-occupied. The other house
would be deemed to be let out.
 82

21. Mr.Manas owns two house properties one at Bombay, wherein his family resides and the other
at Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in a rented
house. For acquisition of house property at Bombay, he has taken a loan of Rs.30 lakh @ 10%
p.a. on 1.4.2021. He has not repaid any amount so far. In respect of house at Delhi, he has taken
a loan of Rs.5 lakh @ 11% p.a. on 1.10.2021 towards repairs. Compute the deduction which
would be available to him u.s.24(b) for A.Y.2023-24 in respect of interest payable on such loan.

22. Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the P.Y.
2022-23 are as under:

Particulars House I House II House III

Municipal valuation p.a. Rs.3,00,000 Rs.3,60,000 Rs.3,30,000
Fair rent p.a. Rs.3,75,000 Rs.2,75,000 Rs.3,80,000
Standard rent p.a. Rs.3,50,000 Rs.3,70,000 Rs.3,75,000

Date of completion/purchase 31.3.1999 31.3.2002 01.4.2015

Municipal taxes paid during the year 12% 8% 6%

Interest on money borrowed for repair

of property during the current year - 55,000

Interest for current year on money

borrowed in July 2015 for purchase 1,75,000
of property

Compute Income from house property and suggest which houses should be opted to be assessed
as self-occupied so that his tax liability is minimum.

Problem on recovery of Unrealised rent:

23. Mr.X received Rs.90,000 in May, 2022 towards recovery of unrealized rent, which was deducted
from actual rent during the P.Y.2020-21 for determining annual value. Legal expenses incurred
in relation to unrealized rent is Rs.20,000. The amount taxable u.s.25A for A.Y.2023-24 would
be:
a) Rs.70,000 c) Rs.90,000
b) Rs.63,000 d) Rs.49,000

Problem on arrears of rent collected:

24. Mr.Anand sold his residential house property in March, 2022. In June, 2022, he recovered rent of
Rs.10,000 from Mr.Gaurav, to whom he had let out his house for two years from April 2016 to
March 2018. He could not realise two months rent of Rs.20,000 from him and to that extent his
actual rent was reduced while computing income from house property for A.Y.2018-19.
 83

Further, he had let out his property from April, 2018 to February, 2022 to Mr. Satish. In April,
2020, he had increased the rent from Rs.12,000 to Rs.15,000 per month and the same was a
subject matter of dispute. In September, 2022, the matter was finally settled and Mr.Anand
received Rs.69,000 as arrears of rent for the period April 2020 to February, 2022. Would the
recovery of unrealised rent and arrears of rent be taxable in the hands of Mr.Anand, and if so in
which year?

Problem on property held in a foreign country:

25. Mrs.R, a citizen of the USA., is a resident and ordinary resident in India during the financial year
2022-23. She owns a house property at Los Angeles, USA., which is used as her residence. The
annual value of the house is $20,000. The value of one USD may be taken as Rs.75.

She took ownership and possession of a flat in Chennai on 01.07.2022, which is used for self
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.03.2023. The municipal valuation is Rs.3,84,000 p.a. and fair rent is Rs.4,20,000 p.a.

She paid the following to Corporation of Chennai:

Property tax & sewage tax amounting to Rs.18,000

She took a loan from Standard Chartered Bank for purchasing this flat in June 2019. Interest on
loan was as under:

Period prior to 01.04.2022 Rs.49,200

01.04.2022 to 30.06.2022 Rs.50,800
01.07.2022 to 31.03.2023 Rs.1,31,300

She had a house property in Bangalore, which was sold in March, 2019. In respect of this house,
she received arrears of rent of Rs.60,000 in March, 2023. This amount has not been charged to
tax earlier. Compute Income from house property, exercising the most beneficial option
available.

Problems on partly self-occupied and partly let-out

26. X owns a property at Chennai (Municipal valuation Rs.1,64,000 p.a.; Fair rent Rs.2,16,000 p.a.;
Standard rent Rs.1,80,000 p.a.). The house is let out up to 31.01.2023 (monthly rent being
Rs.14,000). From 01.02.2023 the property is self-occupied for own residential purposes.

Expenses incurred by X are: Municipal tax Rs.6,000 (actually paid); Repairs Rs.2,000; Interest on
capital borrowed (date of borrowing 10.6.98) for acquiring the property: Rs.1,23,000. Compute
income from house property.
 84

27. Smt.Rajalakshmi owns a house property at Adyar in Chennai. The municipal value of the property is
Rs.5,00,000, fair rent is Rs.4,20,000 and standard rent is Rs.4,80,000. The property was let-out for
Rs.50,000 p.m. up to December 2022. Thereafter, the tenant vacated the property and
Smt.Rajalakshmi used the house for self-occupation. Rent for the months of November and
December 2022 could not be realised in spite of the owner’s efforts. All the conditions prescribed
under Rule 4 are satisfied.

She paid municipal taxes @ 12% during the year. She had paid interest of Rs.25,000 during the year
for amount borrowed for repairs for the house property. Compute her income from house property
for the A.Y.2023-24.

Problems on Part of the house is let out and the other part is self-occupied
28. Prem owns a house in Chennai. During the previous year 2022-23, 2/3rd portion of the house was
self occupied and 1/3rd portion was let out for residential purposes at a rent of Rs.8,000 p.m.
Municipal value of the property is Rs.3,00,000 p.a., fair rent is Rs.2,70,000 p.a. and standard rent is
Rs.3,30,000 p.a. He paid municipal taxes @ 10% of municipal value during the previous year.

A loan of Rs.25,00,000 was taken by him during the year 2018 for acquiring the property. Interest on
loan paid during the previous year 2022-23 was Rs.1,20,000. Compute IFHP.

29. X owns a residential house property. It has two equal residential units--Unit I and Unit 2. While
Unit I is self-occupied by X for his residential purpose, Unit 2 is let (rent being Rs.6,000 p.m., rent
of 2 months could not be recovered).

Municipal value of the property is Rs.1,30,000 p.a., Standard rent is Rs.1,25,000 p.a. and fair rent
is Rs.1,40,000 p.a. Municipal tax is imposed @ 12% which is paid by X. Other expenses being
repairs Rs.9,000; insurance Rs.600; interest on capital borrowed during 1998 for constructing
the property Rs.63,000. Compute his taxable income assuming his income from other
sources is Rs.10,00,000.

30. Mr.A and B constructed their houses on a piece of land purchased by them at New Delhi. The
built up area of each house was 1,000 sq. ft. ground floor and an equal area in the first floor. A
started construction on 01.04.2021 and completed on 01.04.2022. B started the construction on
01.04.2021 and completed the construction on 30.06.2022.

A occupied the entire house on 01.04.2022. B occupied the ground floor on 01.07.2022 and let
out the first floor for a rent of Rs.15,000 per month. However, the tenant vacated the house on
31.12.2022 and B occupied the entire house during the period 01.01.2023 to 31.03.2023.

Following are the other information:

i. Fair rental value of each unit

(ground floor/first floor) Rs.1,00,000 per annum
 85

ii. Municipal value of each unit

(ground floor/first floor) Rs.72,000 per annum

iii. Municipal taxes paid by A-Rs.8,000

B-Rs.8,000

iv. Repair and maintenance charges paid by A-Rs.28,000

B-Rs.30,000

A has availed a housing loan of Rs.20 lakhs @ 12% p.a. on 01.04.2021. B has availed a housing
loan of Rs.12 lakhs @ 10% p.a. on 01.07.2021. No repayment was made by either of them till
31.03.2023. Compute IFHP for A and B for the previous year 2022-23 (A.Y.2023-24)

Additional Problems:
31. Mr.X owns one residential house in Mumbai. The house is having two identical units. First unit
of the house is self-occupied by Mr.X and another unit is rented for Rs.8,000 p.m. The rented unit
was vacant for 2 months during the year. The particulars of the house for the previous year
2022-23 are as under:

Standard rent Rs.1,62,000 p.a. Municipal valuation Rs.1,90,000 p.a.

Fair rent Rs.1,85,000 p.a. Municipal tax (paid by Mr.X) 15% of M.V.
Light and water charges Rs.500 p.m. Interest on borrowed capital Rs.1,500 p.m.
Lease money Rs.1,200 p.a. Insurance charges Rs.3,000 p.a.
Repairs Rs.12,000 p.a.

32. Mr.Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are
Rs.96,000, Rs.1,26,000 and Rs.1,08,000 (per annum), respectively. During the financial year
2022-23, one-third of the portion of the house was let out for residential purpose at a monthly
rent of Rs.5,000. The remaining two-third portion was self-occupied. Municipal tax @ 11% of
municipal value was paid during the year.

The construction of the house began in June, 2015 and was completed on 31.5.2018. Vikas took a
loan of Rs.1,00,000 on 1.7.2015 for the construction of building. He paid interest on loan @ 12%
per annum and every month such interest was paid. Compute IFHP.

33. Mr.Ganesh owns a commercial building whose construction got completed in June 2018. He took
a loan of Rs.15,00,000 from his friend on 01.08.2017 and had been paying interest calculated at
15% p.a. He is eligible for pre-construction interest as deduction as per the provisions of
Income-tax Act.

Mr.Ganesh has let out the commercial building at a rent of Rs.40,000 p.m. during the financial
year 2022-23. He paid municipal tax of Rs.18,000 each for the f.y. 2021-22 and 2022-23 on
01.05.2022 and on 05.04.2023 respectively. Compute “IFHP” of Mr.Ganesh for A.Y.2023-24.
 86

34. Mr.Aditya, is a resident but not ordinarily resident in India for the A.Y.2023-24. He owns two
houses, one in Dubai and the other in Mumbai. The house in Dubai is let out there at a rent of
DHS 20,000 p.m. (1 DHS = INR 18). The entire rent is received in India. He paid property tax of
DHS 2,500 and sewerage tax DHS 1,500 there, for the financial year 2022-23.

The house in Mumbai is self-occupied. He had taken a loan of Rs.25,00,000 to construct the
house on 1st June, 2019 @ 12%. The construction was completed on 31st May, 2021 and he
occupied the house on 1st June, 2021. The entire loan is outstanding as on 31st March, 2023.
Property tax paid in respect of the second house is Rs.2,400 for the financial year 2022-23.
Compute the income chargeable under the head “IFHP” for A.Y.2023-24. DHS = Dirhams

35. Mr.Nitin completed construction of a residential house on 01.04.2022.

Interest paid on loans borrowed for the purpose of construction during the 30 months prior to
completion was 60,000. The house was let out on a monthly rent of 18,000.

Annual corporation tax paid is 35,000. Interest paid during the year is 25,000;
Amount spent on repairs is 6,000 The property was vacant for 4 months.

Annual letting value as per corporation records is Rs.1,50,000. Fire insurance premium paid
3,000 p.a. He owns another house in Kerala. In respect of this house, he had received arrears of
rent of 36,000 during the year, which had not been charged to tax in the earlier year. Compute
the income from “Income from House Property” for the Assessment Year 23-24.

36. Mr.Ramesh constructed a big house (construction completed in previous year 2010-11) with 3
independent units. Unit-1 (50% of floor area) is let out for residential purpose at Rs.15,000 p.m.
A sum of Rs.3,000 could not be collected from the tenant and a notice to vacate the unit was
given to the tenant. No other property of Mr.Ramesh is occupied by the tenant. Unit-1 remains
vacant for 2 months when it is not put to any use. Unit-2 (25% of the floor area) is used by Mr.
Ramesh for the purpose of his business, while Unit 3 (the remaining 25%) is utilized for the
purpose of his residence. Other particulars of the house are as follows:

• Municipal valuation – Rs.1,88,000

• Fair rent – Rs.2,48,000
• Standard rent under the Rent Control Act – Rs.2,28,000
• Municipal taxes – Rs.20,000 and
• Interest on capital borrowed for the construction of the property – Rs.60,000, ground rent
Rs.6,000, repairs – Rs.5,000 and fire insurance premium paid – Rs.60,000.
• Income of Ramesh from the business is Rs.1,40,000 (without debiting house rent and other
incidental expenditure).

Determine the taxable income of Mr. Ramesh for the assessment year 2023-24 if he does not opt
to be taxed under section 115BAC.
 87

37. Mr.Ravi, a resident and ordinarily resident in India, owns a let out house property having
different flats in Kanpur which has municipal value of Rs.27,00,000 and standard rent of Rs.
29,80,000. Market rent of similar property is Rs.30,00,000. Annual rent was Rs.40,00,000 which
includes Rs.10,00,000 pertaining to different amenities provided in the building. One flat in the
property (annual rent is Rs.2,40,000) remains vacant for 4 months during the previous year. He
has incurred following expenses in respect of aforesaid property:

Municipal taxes of Rs.4,00,000 for the financial year 2022-23 (10% rebate is obtained for
payment before due date). Arrears of municipal tax of financial year 2021-22 paid during the
year of Rs.1,40,000 which includes interest on arrears of Rs.25,000.

Lift maintenance expenses of Rs.2,40,000 which includes a payment of Rs.30,000 which is made
in cash. Salary of Rs.88,000 paid to staff for collecting house rent and other charges.

Compute the total income of Mr. Ravi for the assessment year 2023-24 assuming that Mr.
Ravi has not opted for the provisions under section 115BAC.

CASE SCENARIOS:
38. For the assessment year 2023-24, Mr.Sonu submits the following information:

Particulars Building at Building at

Chennai (Rs.) Kochi (Rs.)
Municipal valuation 35,000 80,000
Standard Rent 36,000 70,000
Fair Rent 31,000 82,000
Rent received 38,000 68,000
Municipal taxes paid by tenant Mr.Ramu for building at Chennai and
paid by Mr.Sonu for building at Kochi. 3,000 4,000
Repairs paid by tenant Mr.Ramu for Chennai building and Mr.Sonu
paid for Kochi buildings 500 18,000
Land revenue paid 2,000 16,000
Insurance premium paid 500 2,000
Interest on loan borrowed for payment of municipal tax 200 400
Nature of occupation Let out for Let out for
residence business
Date of completion of construction 1.4.1996 1.7.2008

Mr.Sonu is constructing one more building in Mumbai during the previous year. Mr.Raju, a film director,
took on rent the building under construction in Mumbai at Rs 5,000 per month for his film shooting. The
construction of the said building would be completed by April 2023. Mr.Sonu is a real estate developer
and letting out properties is not the business of Mr.Sonu.

Based on the facts of the case scenario given above, choose the most appropriate answer to the following
questions:
 88

1. Which of the building’s income is chargeable to tax under the head “Income from house property” in the
hands of Mr.Sonu?
(a) Building at Chennai only
(b) Building at Kochi only
(c) Both buildings at Chennai and Kochi
(d) All the three buildings at Chennai, Kochi and Mumbai

2. Which of the following payments/expenditure is allowable as deduction while computing income under
the head “Income from house property” incurred in respect of the building at Chennai and Kochi?
(a) Municipal taxes paid by Mr.Sonu and Mr.Ramu
(b) Municipal tax, land revenue, insurance premium, interest on loan borrowed for payment of
Municipal tax paid by Mr.Sonu
(c) Only municipal tax paid by Mr.Sonu
(d) Both Municipal tax and repairs paid by Mr.Sonu

3. Under which head of income, the amount received from Mr.Raju would be chargeable to tax?
(a) Income from house property
(b) Profits and gains from business or profession
(c) Income from other sources
(d) Income from house property or Income from other sources, at the option of Mr. Sonu

4. What is the amount chargeable to tax under the Income from house property in the hands of Mr.Sonu for
the P.Y. 2022-23?
(a) Rs.72,800
(b) Rs.81,200
(c) Rs.1,14,800
(d) Rs.70,700

39. Mr.Ganesha (a salaried person) has three houses. One in Thane (Maharashtra), second in Jaipur
(Rajasthan) and third in Ratlam (Madhya Pradesh). Details of the flats/houses are as follows:

- Thane flat: 3 BHK flat purchased in April, 2004 for Rs.90 lakhs. Afterwards, interior work done
in 2007 of Rs.15 lakhs. Mr.Ganesha took loan of Rs.65 Lakhs for purchase of this flat in 2001 and
settled full loan in 2020.

- Jaipur house: Purchased in July, 2020 of Rs.63.21 lakhs and interior work done in September,
2021 of Rs.15.85 lakhs. Loan taken for purchase of this house of Rs.15 lakhs in June, 2020. As per
interest certificate, he paid Rs.12,00,500 and Rs.43,500 towards principal and interest,
respectively.

- Ratlam house: Purchased in December 2021 for Rs.70 lakhs (stamp duty value of Rs.65 lakhs).
For acquiring this house, he took loan of Rs.40 lakhs from Canara Bank. Loan was sanctioned on
1.8.2021. He pays EMI of Rs.38,100 per month. As per interest certificate, for the previous year
2022-23, he paid Rs.60,900 and Rs.3,96,300 towards principal and interest, respectively.

Mr.Ganesha is working in WinDoor Exports Pvt Ltd, Mumbai and self-occupied Thane flat. He earned
salary of Rs.22,50,350 for the previous year 2022-23.
 89

Particulars Thane House Jaipur House Ratlam House

(Apr-22 to Dec-22)
Municipal Taxes paid 18,574 8,090 6,909
Municipal value (p.m.) 30,500 6,800 7,200
Fair Rent (p.m.) 33,000 7,000 7,500
Standard Rent (p.m.) 32,000 8,000 7,300

Other details are as follows:

a) He has sold Jaipur house on 5th January, 2023 for Rs.94 lakhs and invested Rs.15 lakh in RECL
bonds issued by the Central Government on 10th August 2023.

b) He has no other income from any source for the P.Y. 2022-23.
c) He has given Ratlam house on rent for F.Y. 2022-23 to Mr.Pratap on a monthly rent of Rs.8,500.

d) He has given Jaipur house on rent for the period of April, 2022 to June, 2022 to Mrs.Madhura on
monthly rent of Rs.7,100 and vacant for remaining period from July, 2022 to December, 2022.

e) Mr.Ganesha would not like to opt concessional tax rates available under section 115BAC.
f) Cost inflation index (CII) for the F.Y. 2020-21 is 301; 2021-22: 317; F.Y. 2022-23: 331.

Based on the facts of the case scenario given above, choose the most appropriate answer to the following
questions:

1. What would be Net Annual Value of each house for the previous year 2022-23?
a) Thane – Nil; Jaipur – Rs.13,210; Ratlam – Rs.95,091
b) Thane – Nil; Jaipur – Rs.54,910; Ratlam – Rs.95,091
c) Thane – Nil; Jaipur – Rs.21,300; Ratlam – Rs.1,02,000
d) Thane – Nil; Jaipur – Rs.13,210; Ratlam – Rs.80,691

2. What would be income/loss under the head “IFHP” in the hands of Mr.Ganesha?
a) Loss of Rs.1,67,689
b) Loss of Rs.2,86,236
c) Loss of Rs.3,20,489
d) Loss of Rs.3,63,989

3. How much amount will be carried forward as loss from HP for the subsequent AY 2023-24?
a) Rs.3,63,989
b) Rs.1,63,989
c) Rs.2,00,000
d) Rs.1,50,000

4. What would the amount of capital gains chargeable to tax during the previous year 2022-23?
a) Short-term capital gains of 15,00,000
b) Long-term capital gains of Rs.23,35,000
c) Long-term capital gain of Rs.7,94,000
d) Long-term capital gain of Rs.Nil

since he is eligible for deduction u/s 54EC in respect of amount invested in RECL bonds issued by Central
Government.
 90

5. What would be the gross total income of Mr.Ganesha for the A.Y. 2023-24?
a) Rs.27,94,350
b) Rs.26,23,070
c) Rs.26,19,920
d) Rs.43,85,350

40. Ananya Gupta, a citizen of India, lives with her family in New York since the year 2000. She visited
India from 21st March, 2022 to 28thSeptember, 2022 to take care of her ailing mother. In the last
four years, she has been visiting India for 100 days every year to be with her mother. She owns an
apartment at New York, which is used as her residence. The expected rent of the house is $ 32,000
p.a. The value of one USD ($) may be taken as Rs.75. Municipal taxes paid in New York in January,
2023 are $ 2,000.

She took ownership and possession of her house in New Delhi on 25th March, 2022, for self-
occupation, while she is in India. The municipal valuation is 4,20,000 p.a. and the fair rent is
Rs.4,50,000 p.a. She paid property tax of Rs.22,000 to Delhi Municipal Corporation on 21st March,
2023. She had taken a loan of Rs.16 lakhs @ 10% p.a. from IDBI Bank on 1st April, 2018 for
constructing this house and the construction got completed on 20th March, 2022. No amount has
been paid towards principal repayment so far. The house is vacant for the rest of the year i.e., from
October 2022 to March 2023.

She had a house property in Mumbai, which was sold on 28th March, 2022. In respect of this house,
she received arrears of rent of Rs.3,00,000 on 4th February, 2023. This amount has not been charged
to tax earlier.

She does not have any income under any other source in India during previous year in 2022-23.
Ananya Gupta does not want to opt for the new tax regime u.s.115BAC for A.Y. 2023-24.

Based on the facts of the case scenario given above, choose the most appropriate answer to the
following questions:

1. What would be the residential status of Ananya Gupta for A.Y.2023-24?

(a) Resident and ordinarily resident
(b) Resident but not ordinarily resident
(c) Deemed resident but not ordinarily resident in India
(d) Non-resident

2. Ms. Ananya Gupta can claim benefit of “Nil” Annual Value under section 23(2) in respect of:-
(a) Her Delhi house
(b) Her New York house, since it is more beneficial; her Delhi house will be deemed to be let out
and expected rent would be the annual value.
(c) Her Delhi house alone; her New York house will be deemed to be let out and expected rent
would be the annual value.
(d) Both her Delhi house and New York house, since benefit of Nil Annual value u/s 23(2) is
available in respect of two house properties.
 91

3. What is the income chargeable under the head “Income from house property” of Ananya Gupta for
A.Y. 2023-24?
(a) Rs.15,65,000
(b) Rs.3,09,600
(c) Rs.1,00,000
(d) Rs.10,000

4. Assuming that, for the purpose of this question alone, Ananya Gupta has let out her flat in New York
during the six months (April to September) when she is in India, for a sum of $ 6,000 p.m. Such rent
was received in a bank account in New York and then remitted to India through approved banking
channels. What would be the IFHP chargeable to tax in her hands in India for A.Y. 2023-24?
(a) Rs.10,000
(b) Rs.17,85,000
(c) Rs.17,95,000
(d) Rs.18,85,000

Property held as STOCK-IN-TRADE (in the case of a realestate developer) and remains
vacant for whole year. Can Annual Value be Nil?

The ANNUAL VALUE of properties held as stock-in-trade can be ‘Nil’ for a period of two years
from the end of the financial year in which certificate of completion of construction of the
property is obtained from the competent authority.

41. Ram Builders & Developers is the sole-proprietorship concern of Mr.Ram. The main business of the
concern is the construction, development and sale of residential and commercial units.

Ram Builders & Developers developed a project named Luxuria Heaven, which has both residential
and commercial units with its own funds. It obtained certificate of completion for the said project
with effect from 31.03.2022. Ram sold majority of its residential units and commercial units in the
F.Y. 2022-23. However, around 30 residential units and 15 commercial units were held by him as
stock in trade as on 31.3.2023.

During this period, there was a slump in the real estate sector. In order to earn some income from
these units, Ram incidentally lets out some of the units held as stock-in-trade. The details of units
constructed, sold and held as stock-in-trade are given hereunder:

Particulars Total Units Units Units held Units let Units Actual
constructed sold as stock-in-trade out vacant rent per
as on 31.3.2022 during during unit per
[(2) – (3)] P.Y.2022- the month [in
23 out whole of respect of
of P.Y.2022- let out
(4) 23 units
[(4) – (5)] mentioned
in (5)]

(1) (2) (3) (4) (5) (6) (7)

 92

Residential 100 70 30 10 20 10,000 pm.

Units
Commercial 40 25 15 5 10 18,000 p.m.
Units
140 95 45 15 30

Out of the residential units sold, 5 residential units were sold to his friend, Mr.Gaurav, who is also a
real estate developer, on 15.2.2023, for Rs.20 lakhs each. The stamp duty value on the date of sale
was Rs.23 lakhs each. However, the agreement of sale was entered into on 1.11.2022, on which the
date the stamp duty value was Rs.22 lakhs. Mr. Ram received Rs.1 lakh by way of account payee bank
draft on 1.11.20212 from Mr.Gaurav.

Based on the facts of the case scenario given above, choose the most appropriate answer to the
following questions:

1. While computing the total income of Mr. Ram, the income from residential and commercial units let
out during the P.Y.2022-23 will be taxed under head:
(a) Income from house property
(b) Profits and gains of business or profession
(c) Income from let out residential units will be taxed under the head “IFHP” and income from let
out commercial units will be taxed under the head “business or profession”
(d) Income from other source.

2. What would be the tax treatment of vacant residential and commercial units held as stock in trade as
on 31.3.2023?
(a) The vacant residential units would be deemed to be let out and expected rent would be
deemed as the annual value chargeable to tax under the head “IFHP” for A.Y. 2023-24.
(b) The vacant units, both residential and commercial, would be deemed to be let out and
expected rent would be deemed as the annual value chargeable to tax under the head “IFHP”
for A.Y. 2023-24.
(c) The annual value of both vacant residential and commercial units would be Nil for A.Y.2023-
24. Hence, no income is chargeable for such units under the head “IFHP” for A.Y. 2023-24.
(d) Vacant units held as stock-in-trade can never be deemed as let out at any point of time

3. What would be the full value of consideration in respect of sale of units to Mr.Gaurav for the purpose
of computing profits and gains from transfer of units?
(a) Rs.1,00,00,000
(b) Rs.1,15,00,000
(c) Rs.1,10,00,000
(d) Rs.99,00,000

4. Assume that Rs.1 lakh was paid in cash by Mr.Gaurav to Mr.Ram on 1.11.2022 instead of by way of
account payee bank draft, what would be the income chargeable u.s.56(2)(x) in the hands of Mr.
Gaurav?
(a) Rs.15 lakh
(b) Rs.10 lakh
(c) Nil, since the stamp duty value is within the permissible deviation limit
(d) Nil, since section 56(2)(x) is not applicable in this case
 93

CHAPTER – 8 PROFITS & GAINS OF BUSINESS OR PROFESSION

Format to compute business income of an assessee:

Net Profit as per profit and loss account xxx

Add: Disallowances (if debited) xxx

Less: Incomes considered separately (if credited) xxx

Less: Depreciation as per Income tax rules xxx

INCOME FROM BUSINESS xxx

Few items of disallowances while computing business income:

• All provisions and reserves (e.g. provision for bad and doubtful debts)
• Income tax

• Notional items debited to profit and loss account such as:

▪ Salary drawn by the proprietor;
▪ Interest charged by the proprietor on his own capital

• All capital expenditure (purchase of an asset) and capital losses (loss on sale of an asset)

• Charities and donations

• All personal expenses (household expenses) of the assessee including drawings

• Fine or Penalty paid for violation or contravention of any law

• Expenditure on CSR activities

• Failure to deduct tax at source on payments made to residents shall be disallowed to the
extent of 30% of such expenditure

• Any payment exceeding Rs.10,000 by way of cash or bearer cheque (limit is Rs.35,000 in
case of payment to a transport operator plying trucks)

• Any payment made to a relative which is found to be excessive or unreasonable to the

assessing officer

Few items of Allowances:

• Repairs, fire insurance premium paid on the assets used for business
• Bad debts
• Advertisement expenditure (except advertisement in the souvenir of a political party)
• Printing, postage and stationery, telephone expenses, travelling expenses
 94

• Interest on capital borrowed for the purpose of investment in business

• Audit fees
• Loss of stock-in-trade
• Employer’s contribution to recognized provident fund and other approved funds
• Contribution to Research Institutions for the purpose of approved research
• Any tax payable to the Government (e.g. GST, customs duty, municipal tax); bonus or
gratuity to employees; interest on loan borrowed from banks; shall be allowed only on
“payment” basis. Payment should be made before the “due date” of filing return of income.

Section 37(1): General deduction:

An expenditure shall be allowed under section 37(1), provided:

• It is not in the nature of expenditure described under section 30 to 36;

• It is not in the nature of capital expenditure;
• It is not a personal expenditure of the assesse;
• It should have been spent wholly and exclusively for the purpose of business / profession;
• It should not be incurred for any purpose which is an offence or is prohibited by any law
• It is not an expenditure incurred by the assesse on CSR activities

Depreciation on tangible assets and intangible assets:

i. Asset acquired during the previous year and put to use for less than 180 days:
50% of the normal depreciation is allowed.

ii. Asset acquired during the previous year and put to use for more than 180 days:
Full depreciation is allowed.

Important: Where an asset is purchased by way of cash payment exceeding Rs.10,000;

depreciation shall NOT be allowed.

Important: Individuals are required to deduct tax at source on payments made only if their
turnover/sales during the immediately preceding financial year (2021-22) has exceeded Rs.1
crore in case of business (or) gross receipts has exceeded Rs.50 lakhs in case of profession.

Important: “Business income” is computed as per the method of accounting followed by the
assessee. (Mercantile system or Cash system). Under ‘Mercantile’ system, expenditure is
allowed on ‘due’ basis. However, certain expenses covered by section 43B shall be allowed as
deduction only on ‘payment’ basis even though assessee follows ‘Mercantile’ system for
accounting the expenditure.
 95

1. The following items are debited to P and L A/c. of an assesse for the year ended 31.03.2023. State
whether these items are admissible or inadmissible while computing income from business.

a. Single payment for an expenditure exceeding Rs.10,000 in cash or bearer cheque

b. Payment of rent exceeding the limit without Tds.
c. Donation to PM Citizen Assistance and Relief in Emergency Situations Fund (PM Cares Fund)
d. Salary includes Rs.2,00,000 paid to his brother which is unreasonable to the extent of Rs.25,000.
e. Purchase of computer for office use through on-line payment
f. Income tax paid
g. Provision for bad and doubtful debts, provision for gratuity
h. Loss on sale of machinery
i. Contribution to an approved research institute for the purpose of scientific research
j. Expenses on Corporate Social Responsibility activities
k. Fine paid for violation of provisions of any law
l. Household expenses
m. Bonus payable to employees due on 31.03.2023 was not paid before ‘due date’ of filing IT return

2. The following is the Profit and Loss Account of Mr.A for the year ended 31.3.2023:

Telephone expenses 6,200 Gross profit 7,07,500

Advertisement 24,000 Dividend from domestic companies 14,000
General expenses 16,000 Income from house property 25,000
Office rent 22,000 Bad debts recovered
Drawings 24,000 (allowed earlier as deduction) 12,000
Interest on bank loan 16,000 Agricultural Income 30,000
Interest on own capital 7,000 Gold coins received from father 10,000
Travelling expenses 5,000
Depreciation 15,000
Bonus (due on 31.03.2023) 56,000
Car purchased 72,000
Expenses on car (petrol) 12,000
Donations to PM Cares Fund 22,000
Provision for bad debts 6,000
Net profit 4,95,300

• Advertisement relates to a bill for which payment was made by bearer cheque.
• General expenses include a personal expenditure of Rs.4,000
• Depreciation allowable under section 32 on all assets including car is Rs.10,000.
• Interest on bank loan was not paid till 31.7.2023 being the due date of filing return of income.
• Bonus to employees was paid on 30.6.2023 and due date of filing return is 31.7.2023.
• Car was used only for business purposes.
• Compute business income of Mr.A.
 96

3. The following is the Profit and Loss Account of Mr.B for the year ended 31.3.2023:

General expenses 30,000 Gross Profit 4,60,000

Fire insurance prm on stock 4,000 Bad debts recovered
Bad debts 10,000 (disallowed earlier by A. O.) 4,000
Advance Income tax paid 15,000 Interest on Govt. securities 4,000
Salaries 1,50,000 Interest on Income tax refund 3,000
Audit fees 7,500 Interest on savings account with SBI 6,000
Interest on own capital 2,000 LIC maturity amount received 42,000
Income tax 25,000 Interest on PPF account 8,000
Depreciation 20,000
Household expenses 40,000
Municipal tax on office building 15,000
Advertisement 20,000
Car expenses (50% personal use) 15,000
Net profit 1,73,500

• General expenses include Rs.14,000 paid as compensation to an old employee whose services
were terminated in the interest of the business and Rs.10,000 by way of help to a poor student.
• Depreciation calculated according to the rates (section 32) comes to Rs.29,000.
• Municipal tax was paid on 18.5.2023. Due date of filing return is 31.7.2023.
• Salaries include salary drawn by the proprietor himself Rs.60,000
• Expenditure on advertisement was spent in a souvenir published by a political party.
• Compute Business Income of Mr.B.

4. The following is the Profit and Loss Account of Mr.C for the year ending 31.3.2023:

Opening stock 3,60,000 Sales 2,29,00,000

Purchases 2,10,00,000 Closing stock 4,50,000
Salaries and wages 11,20,000
Rent and rates 40,000
Household expenses 1,18,000
Commission (tds not deducted) 50,000
Income tax 42,000
Advertisement 10,000
Postage and telegrams 4,000
Interest on own capital 6,000
Reserve for future losses 5,000
Depreciation on machinery 10,000
Net profit 5,85,000

• Both opening and closing stock have been consistently valued at 10% below cost price.
• Depreciation according to the Income-tax Rules works out to Rs.5,000.
• Turnover of Mr.C for the preceding financial year 2021-22 was Rs.225 lakhs.
• Sales include a sum of Rs.50,000 representing goods withdrawn for the use of his family
members. These goods were purchased at a cost of Rs.60,000.
 97

5. Following is the profit and loss account of Mr.X for the year ending March 31, 2023:-

Repairs to building 1,81,000 Gross Profit 6,01,000

Paid to IIT, for an approved Income-tax refund 8,100
scientific research programme 1,00,000 Interest on company deposit 6,400
Interest 1,10,000
Travelling 1,34,500
Net Profit 90,000

The following additional information is given:

• Repairs to building includes Rs.1,00,000 being cost of building a new room.

• Interest payment includes Rs.50,000 on which TDS has not been deducted and penalty for
contravention of GST Rules of Rs.24,000.

• Assume turnover of Mr.X for the P.Y. 21-22 has exceeded Rs.100 lakhs.

Compute Income from business of Mr.X for A.Y.2023-24 ignoring depreciation.

6. Mr.D, an Indian Resident aged 38 years, carries on his own business. He has prepared the
following Profit and Loss account for the year ending March 31, 2023:-

To Salary 48,000 Gross profit 4,30,400

To Advertisement 24,000 Cash gift on the occasion
To Sundry expenses 54,500 of marriage 1,20,000
To Fire insurance (Rs.10,000 Interest on debentures
relates to house property) 30,000 (listed) (net of taxes) 5,400
To Income-tax 27,000
To Household expenses 42,500
To Depreciation (allowable) 23,800
To Contribution to a University
approved u.s.35(1)(ii) 1,00,000
To Municipal taxes on h.p. 36,000
To Printing and stationery 12,000
To Repairs and maintenance 24,000
To Net Profit 1,34,000
------------ ------------

Other information:
a. Mr.D owns a house property which is being used by him for the following purposes:
- 25% of the property for own business
- 25% of the property for self-residence
- 50% let out for residential purpose

b. Rent received from 50% let out portion during the year was Rs.1,65,000.

c. Compute Gross Total Income of Mr.D.

 98

7. Dr.G, a resident individual at Madurai, aged 50 years is running a clinic. His income and
expenditure account for the year ending March 31st 2023 is as under:

Expenditure Income
To Medicine consumed 48,40,000 By Consultation & medical charges 61,00,000
To Staff salary 4,25,000 By Income-tax refund (principal
To Clinic consumables 1,55,000 Rs.15,000; interest Rs.1,500) 16,500
To Rent paid 1,20,000 By Dividend (gross) 27,000
To Administrative exps 3,00,000 By Winning from lottery (net of tds) 35,000
To Donation to IIT for By Rent received 54,000
programmes in By Interest on savings account with SBI 7,000
scientific research 1,00,000
To Net Profit 2,92,500
----------- -------------

a. Rent paid includes Rs.36,000 paid by cheque towards rent for his residence.

b. Clinic equipments are:

01.04.2022 Opening WDV Rs.4,50,000
09.02.2023 Acquired (cost) Rs.1,00,000 (online payment)

c. Rent received relates to property let out at Madurai. Gross Annual Value Rs.54,000. The
municipal tax of Rs.9,000, paid in January 2023 has been included in “administrative
expenses”.

From the above, compute Gross Total Income of Dr.G.

8. R furnishes you the following information:

Income and Expenditure Account for the year ended 31-3-2023

To Medicines consumed 52,42,000 By Fee receipts 58,47,000

To Staff salary 1,65,000 By Rent 27,000
To Hospital consumables 47,500 By Dividend from Indian Co. 9,000
To Rent paid 60,000
To Administrative expenses 1,23,000
To Net income 2,46,000

Rent paid includes the rent for his residential accommodation of Rs.30,000 (paid by cheque).

Medicines consumed include medicines (cost) Rs.10,000 used for R’s family.

Hospital equipments (eligible for depreciation @ 15%)

1.04.2022 Opening WDV Rs.5,00,000
7.12.2022 Acquired (cost) Rs.2,00,000 (payment through NEFT)
 99

Rent received relates to a property situated at Mysore (Gross Annual Value). The municipal tax of
Rs.2,000 paid in December, 2022 has been included in the “administrative expenses”.

He received Rs.25,000 p.m. as salary from a Hospital. This has not been included in the “fee
receipts” credited to income and expenditure account.

Compute R’s gross total income for the year ended 31.3.2023.

9. X carries on his own business. An ANALYSIS of his profit and loss for the year ending March
31, 2023 reveals the following: Compute the total income of Mr.X for the A.Y. 2023-24.

Net Profit is Rs.11,20,000

The following incomes are credited in the profit and loss account:
a. Dividend from domestic companies Rs.22,000 (gross)
b. Interest on debentures Rs.17,500 (gross)
c. Winning from races Rs.15,000 (gross)

It is found that some stocks are omitted to be included in both the opening and closing stocks,
the value of which are – opening stock: Rs.8,000 and closing stock Rs.12,000

Rs.1,00,000 debited to P&L account being contribution to a University approved and notified
u.s.35(1)(ii) for the purpose of scientific research.

Salary includes Rs.20,000 paid to his brother which is unreasonable to the extent of Rs.2,500.

Advertisement expenses include 15 gift packets of dry fruits costing Rs.2,000 per packet
presented to important customers.

Total expenses on car is Rs.78,000. The car is used both for business and personal purposes.
3/4th is for business purposes.

Miscellaneous expenses included Rs.30,000 paid to A & Co., a goods transport operator, in cash
on January 31, 2023 for distribution of the company’s product to the warehouses.

Depreciation debited in the books is Rs.55,000. Depreciation allowable as per IT rules Rs.50,000

Drawings Rs.10,000 and Investment in NSC Rs.15,000.

 100

10. Ms.Purvi, aged 55 years, is a CA. in practice. She maintains her accounts on cash basis. Her
Income and Expenditure account for the year ended March 31, 2023 reads as follows:

Expenditure (₹) Income (₹) (₹)

Salary to staff 45,50,000 Fees earned:
Stipend to articled Audit 47,88,000
assistants 37,000 Taxation services 5,40,300
Incentive to Consultancy 2,70,000 55,98,300
articled assistants 3,000
Office rent 24,000 Dividend on shares from
Printing and Indian companies (Gross) 10,524
stationery 22,000 Income from UTI 7,600
Meeting, seminar
and conference 31,600 Honorarium received from
Purchase of car 80,000 various institutions for
Repair, valuation of answer papers 15,800
maintenance and
petrol of car 4,000 Rent received from residential
Travelling expenses 35,000 flat let out 85,600
Municipal tax paid
in respect of h.p. 3,000
Net profit 9,28,224

17,17,824 17,17,824

Other Information:
i. Allowable rate of depreciation on motor car is 15%.

ii. Value of benefits (LED TV) received from clients during the course of profession is ₹ 40,000

iii. Incentives to articled assistants represent amount paid to two articled assistants for
passing IPCC Examination at first attempt.

iv. Repairs & maintenance of car include ₹ 2,000 for the period from 1.10.2022 to 30.09.2023.

v. Salary includes ₹ 30,000 to a computer specialist in cash for assisting Ms.Purvi in one
professional assignment.
 101

11. Mr.Rajiv aged 50 years, a resident individual and practicing Chartered Accountant furnishes you the
RECEIPTS AND PAYMENTS ACCOUNT for the financial year 2022-23.

Receipts and Payments Account

Receipts ₹ Payments ₹
Opening balance (1.4.2022) Staff salary, bonus and stipend to articled
Cash on hand and at bank 12,000 clerks 51,50,000

Fee from professional Other administrative expenses 48,000

services 59,38,000 Office rent 30,000
Rent 60,000 Housing loan repaid to SBI (includes
Motor car loan from Canara interest of ₹ 88,000) 1,88,000
Bank (@ 9% p.a.) 2,50,000
Life insurance premium 24,000
Motor car (acquired in Jan. 2023)
(payment through a/c payee cheque) 4,25,000

Medical insurance premium 18,000

Books bought (annual publications)

(payment through debit card) 20,000

Computer acquired on 1.11.2022 (for

professional use) (credit card) 30,000

Domestic drawings 2,72,000

Public provident fund subscription 20,000
Motor car maintenance 10,000

Closing balance (31.3.2023)

Cash on hand and at bank 25,000
62,60,000 62,60,000

1. He occupies 50% of the building for own residence and let out the balance for residential use
of monthly rent of ₹ 5,000. The building was constructed during the year 1997-98

2. Motor car was put to use both for official and personal purpose. One–fifth of the motor car
use is for personal purpose. No car loan interest was paid during the year

3. The written down value of assets as on 1-4-2022 are given below:

Furniture & fittings ₹ 60,000
Plant & Machinery ₹ 80,000
(air-conditioners, photocopies, etc)
Computers ₹ 50,000

Note: Mr.Rajiv follows regularly the cash system of accounting. Compute the total income of
Mr.Rajiv for the assessment year 2023-24.
 102

BUSINESS OR PROFESSION – A DISCUSSION ON IMPORTANT SECTIONS

SECTION 44 AA: COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS

1. Who are required to maintain books of accounts?
Professionals notified by CBDT and others on fulfillment of certain conditions

2. Professionals notified by CBDT?

Specified Professionals include: Legal, medical, engineering or architectural profession, or
accountancy or technical consultancy or interior decoration or any other profession notified by
CBDT (notified profession includes: authorized representative, film artist, company secretary
and information technology)

3. When are Professionals required to maintain books as per Rule 6F?

Books are required to be maintained as per Rule 6F:
If GROSS RECEIPTS from such profession exceed Rs.1,50,000 in all the three years
immediately preceding the previous year (OR) is likely to exceed Rs.1,50,000 during the
current previous year if the profession is newly setup.

4. What are the books that are prescribed under Rule 6F?

Books that are prescribed under Rule 6F are:

• Cash book;
• Journal (if books are maintained on mercantile basis);
• Ledger;
• Carbon copies of bills issued for an amount exceeding Rs.25;
• Original bills / vouchers in respect of an expenditure exceeding Rs.50

In case where a person is carrying on medical profession: In addition to the above books he
has to maintain
• a daily case register and
• an inventory register

5. Place at which and period for which the books are to be kept and maintained:
Place where the person is carrying on the profession or at the principal place of his profession
in case where there is more than one place. The books of account and documents are required
to be maintained for a minimum of 6 years from the end of the relevant assessment year.

6. When other assessees (business) are required to maintain books?

Where TURNOVER or GROSS RECEIPTS exceeds Rs.10,00,000 in ANY one year out of the
three years immediately preceding the previous year; or is likely to exceed Rs.10,00,000
during the current previous year in case of newly setup business; (OR)
 103

Where INCOME FROM SUCH BUSINESS exceeds Rs.1,20,000 in ANY one year out of the three
years immediately preceding the previous year; or is likely to exceed Rs.1,20,000 during the
current previous year in case of newly setup business.

Important: However, in the case of Individuals and HUF, the above “turnover” limit is
Rs.25,00,000 and “income” limit is Rs.2,50,000.

7. Books that are required to be maintained by others?

“SUCH BOOKS OF ACCOUNT AND DOCUMENTS” as would enable the A.O. to compute the total
income of the assessee.

1. Vinod is a person carrying on profession as film artist. His gross receipts from profession are:

Financial year 2019-20 Rs.1,15,000

Financial year 2020-21 Rs.1,80,000
Financial year 2021-22 Rs.2,10,000

What is his obligation regarding maintenance of books of accounts for assessment year 2023-24
(financial year 2022-23) under section 44AA of Income-tax Act, 1961? (sum no.15 page: 4.277)

2. A person carrying specified profession will have to maintain books of account prescribed by Rule
6F of the Income Tax Rules, 1962, if gross receipts are more than Rs.1,50,000 for:-

a. All preceding 5 years c. Any of the preceding 5 years

b. All preceding 3 years d. Any of the preceding 3 years

SECTION 44 AB: COMPULSORY TAX AUDIT

1. When is Tax Audit Compulsory?

An assessee carrying on Business: If his total sales, turnover or gross receipts from such
business during the previous year exceed Rs.1 crore.

If cash receipts does not exceed 5% of total receipts and

if cash payments does not exceed 5% of total payments
then audit is compulsory only if turnover exceeds Rs.10
crores during the year.

An assessee carrying on Profession: If his gross receipts from such profession exceed
Rs.50,00,000 during the previous year.
 104

Assessee covered u.s.44AD or 44ADA: Where a person who is covered u.s.44AD or u.s.44ADA,
but claims that income from such business or
profession is lower than the presumptive rate and his
total income exceeds basic exemption.

Assessee covered u.s.44AE, etc.: Where a person who is covered by Section 44 AE and
claims that income from such business is lower than the
presumptive rate.

2. Time limit for completion of audit and filing of audit report.

Audit shall be completed and audit report shall be filed on or before the “specified date” which
shall be the date one month prior to the “due date” of filing return of income. “Due date” for filing
return of income shall be 31st October and hence “specified date” shall be 30th September.

3. What is required to be furnished?

Tax Audit Report has to be furnished duly signed and verified by a C.A.
Form 3CA and 3CD for assesses subject to audit under any other law (e.g. companies)
Form 3CB and 3CD for assesses not subject to audit under any other law (e.g. individuals, firms)

PRESUMPTIVE INCOME SCHEME:

SECTION 44 AD: INCOME ON PRESUMPTIVE BASIS IN THE CASE OF A
RESIDENT-ASSESSEE ENGAGED IN ANY BUSINESS:

1. Eligibility: Individuals, HUF and Firms having a gross turnover not

exceeding Rs.2 crores (Rs.200 lakhs)

2. How is income estimated: Income is computed @ 8% of turnover or a higher

percentage as claimed by the assesse

Income is computed @ 6% of turnover if the gross

receipts or turnover is received by way of account
payee cheque (or by account payee bank draft or by use
of electronic clearing system) during the previous year
or before due date of filing return of income

3. Advantages of this scheme: No need to maintain books of accounts

No need for tax audit
Advance tax (whole amount – one instalment) should be
paid on or before 15th March.
 105

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been
allowed. However, bfd business losses from earlier
assessment years can be set-off.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of account and gets them audited if total income
exceeds basic exemption.

6. Important condition: An assessee who declares income as per section 44AD

for any previous year has to offer income as such for
five consecutive years. If this condition is violated, the
assessee shall not be eligible for this scheme for next 5
Assessment Years.

Example: For the assessment years 2020-21, 2021-22 and 2022-23, the assessee claims the
benefit of presumptive income u/s.44AD. For A.Y.2023-24, he offers a lower income. In this case,
he will not be eligible to claim the benefit of this section for the next five assessment years starting
from A.Y.2024-25. Such assessee, if his total income is above the basic exemption, shall maintain
books and get them audited.

7. Due dates for filing I.T. return: If the assessee opts for presumptive scheme then audit
is not required, therefore 31st July will be the due date.

If the assessee does not opt for presumptive scheme

then audit is required and therefore 31st October.

8. Who cannot avail this scheme:

• A person carrying on any profession notified u.s.44AA
• A person earning income in the nature of commission or brokerage
• A person carrying on any agency business
• A person engaged in plying of goods carriages
• LLPs & Company-assessee

1. Mr.N engaged in the business of automobiles has a turnover of Rs.1,50,00,000 from such business
during the previous year 22-23.

• Is Mr.N eligible for presumptive income scheme u.s.44AD?

• Compute the profits from the business, if he opts for Section 44 AD.
• In case the total turnover is received by way of account payee cheque or through ECS
during the previous year, what shall be the income?
• Mr.N wants to know by what date he is required to pay advance tax.
• What will be his due date for filing his income tax return?
 106

2. Mr.Praveen engaged in retail trade, reports a turnover of Rs.1,98,50,000 for the financial year
2022-23. His income from the said business as per books of account is computed at Rs.13,20,000.
Retail trade is the only source of his income. A.Y.22-23 was the first year for which he declared his
business income in accordance with the provisions of presumptive taxation u.s.44AD.

• Is Mr.Praveen eligible to opt for presumptive income scheme for the AY 2023-24?
• If so, determine his income from retail trade as per the applicable presumptive provision
assuming that whole of the turnover represents cash receipts.
• In case he does not opt for presumptive income scheme, what are his obligations.
• What is the due date for filing his return of income under both the options?
(sum no.16 page: 4.288)

3. Zing Zang is an individual, manufacturing a product. He has turnover of Rs.98,50,000 which is

inclusive of amount of Rs.25 lakhs received through electronic clearing system. The accounts are
not properly maintained and you have advised him to pay tax u.s.44AD of the Act. On how much
income he will pay tax for A.Y.2023-24: (A) Rs.7,88,000 (B) Rs.7,38,000 (c) Manufacturers not
allowed u.s.44AD (D) Rs.5,91,000.

4. Mr.A, engaged in retail business, has made a turnover of Rs.1,75,00,000 during the previous year
2022-23. Out of the total turnover, amount received by cash till the due date of filing tax return is
Rs.1,00,00,000 and amount received through electronic clearing system till the due date of filing
tax return is Rs.50,00,000. Compute his income as per section 44AD of the Income-tax Act.

5. Real Builders (a partnership firm) admitted income u.s.44AD up to the assessment year 2022-23
resorted to determination of income as per regular provisions by getting the books of account
audited for the assessment year 2023-24. The assessee firm cannot revert to presumptive
provisions contained in section 44AD up to the assessment year ………………………………..

(A) 2028-29 (B) 2029-30 (C) Indefinitely (D) 2024-25

6. AB & Co. a partnership firm engaged in the manufacturing business has a gross receipt of
Rs.59,00,000 from such business. The partnership deed provides for payment of salary of
Rs.20,000 p.m. to each of the partners i.e. A & B. The firm uses machinery for the purpose of its
business and the WDV of the machinery as on 01.04.2021 is Rs.2,00,000. The machinery is eligible
for depreciation @ 15%. Compute the profits from the business for the A.Y.2023-24, if the firm
opts for the scheme u.s.44AD and has received the following amount by account payee cheques:

a. Rs.25,00,000 till 31.03.2023

b. Rs.6,00,000 between 31.03.2023 and 31.07.2023
c. Rs.5,00,000 after 31.07.2023
 107

SECTION 44 ADA: PRESUMPTIVE INCOME SCHEME FOR RESIDENT

PERSONS ENGAGED IN SPECIFIED PROFESSION:

1. Eligibility: Professionals notified (resident) under section 44AA.

having gross receipts not exceeding Rs.50 lakhs.

2. Presumptive income: 50% of gross receipts or a higher % as claimed in the

tax return by the assessee

3. Advantages of this scheme: Not required to maintain books of accounts

Audit not required
Advance tax (whole amount – one instalment) should be
paid on or before 15th March

4. Eligibility of further deductions: No deductions u.s.30 to 38 can be claimed. All expenses

including depreciation are deemed to have been allowed.

5. Is it possible to declare income Yes, assessee can declare income at a rate lower than
lower than presumptive rate: the presumptive rate provided, the assessee maintains
books of accounts and gets them audited if total income
exceeds basic exemption limit.

1. Mr.Roy, a Doctor by profession has earned gross receipts of Rs.48 lakhs from such profession during
the previous year 2022-23. His does not maintain any books of account. Mr.Roy wants to offer
income as per the presumptive income scheme u.s.44ADA. Also state the due date for payment of
advance tax and due date for filing his return of income.

SECTION 44 AE: BUSINESS OF PLYING, HIRING OR LEASING

OF GOODS CARRIAGES

1. Eligible for this scheme: An assessee who owns not more than 10 trucks at any
time during the previous year. Assessee can be an
Individual, Huf, Firm or a Company.

2. How is income computed: A. Heavy goods vehicle:

Rs.1,000 per ton per month or part of a month

B. Other than heavy goods vehicle:

Rs.7,500 p.m. or part of a month

Important: Heavy Goods Vehicle means the gross vehicle weight of which exceeds 12,000 kilograms
 108

3. Eligibility of further deductions: No further deductions are allowed. All expenses

including depreciation are deemed to have been allowed.
However, salary and interest paid by a firm to its partners
shall be allowed subject to limits u.s.40(b).

4. Is it possible to declare income Yes the assessee can declare income at a rate lower than
at a lower rate: the presumptive income provided, the assessee
maintains books of accounts and gets them audited.

1. Mr.X commenced the business of operating goods vehicles on 1.4.2022. He purchased the
following vehicles during the P.Y.2022-23. Compute his income u.s.44AE for A.Y.2023-24.

Gross Vehicle Weight Number Date of purchase

(in kilograms)
7,000 2 10.04.2022
6,500 1 15.03.2023
10,000 3 16.07.2022
11,000 1 02.01.2023
15,000 2 29.08.2022
15,000 1 23.02.2023

Would your answer change if the goods vehicles purchased in April, 2022 were put to use only in
July, 2022? (sum no.17; page 4.289)

2. Mr.Prakash is in the business of operating goods vehicles. As on 01.04.2022, he had the following
vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f. y. 2022-23
A 8500 2.4.2021 yes
B 13000 15.05.2021 yes
C 12000 4.08.2021 no (as under repairs)

During P.Y.2022-23, he purchased the following vehicles:

Vehicle Gross vehicle Date of Put to use during

weight (in kgs) purchase f.y. 2022-23
D 11000 30.04.2022 10.05.2022
E 15000 15.05.2022 18.05.2022

Compute his income under section 44AE for A.Y.2023-24.

 109

3. M/s.MN & Co. a partnership firm is engaged in the business of plying and hiring goods vehicles. It
owns following vehicles as on 1st April 2022:

Gross vehicle weight (in kgs.) Number of vehicles

7000 2
9000 2
12000 3
15000 2

It purchased a vehicle weighing 15000 kg on 6th June, 2022 which was put to use only on 10th July,
2022. Net profits of the firm [after claiming partners remuneration of Rs.1,50,000 and within the
limits prescribed under section 40(b)] from the above business as per books of accounts amounted to
Rs.6,50,000. The firm has declared its income for the Assessment Year 2023-24 in accordance with the
provisions of presumptive income under section 44AE.

i. Compute the income of the firm if it opts for the provisions of section 44AE for the Assessment
Year 2023-24.
ii. If the firm wants to claim its income as per books of accounts for the Assessment Year 2023-24,
what are its obligations under the Income-tax Act 1961?
iii. What is the due date for filing its return of income under both the options?

Additional Problem on Section 44AB:

State whether Tax Audit is applicable in the following cases:

Case Sale/ In cash Other than Total % of cash receipts/

purchase cash payments to total
receipts/ payments

A Sales 1,00,000 89,00,000 90,00,000 1.11%

Purchases 10,00,000 1,60,00,000 1,70,00,000 5.88%

B Sales 25,00,000 1,25,00,000 1,50,00,000 16.67%

Purchases nil 1,25,00,000 1,25,00,000 0%

C Sales nil 4,00,00,000 4,00,00,000 0%

Purchases 1,00,00,000 2,50,00,000 3,50,00,000 28.57%

D Sales 50,00,000 4,30,00,000 4,80,00,000 10.42%

Purchases 1,00,00,000 2,50,00,000 3,50,00,000 33.33%

E Sales 40,00,000 9,35,00,000 9,75,00,000 4.10%

Purchases 35,00,000 9,10,00,000 9,45,00,000 3.70%
 110

F Sales nil 1,25,00,000 1,50,00,000 16.67%

Misc receipts 25,00,000
Purchases nil 1,00,00,000 1,00,00,000 0%

G Sales nil 2,00,00,000 2,00,00,000 0%

Purchases nil 1,00,00,000 1,50,00,000 33.33%
Other payts 50,00,000

H Sales 0 15,00,00,000 15,00,00,000 0%

Purchases 0 12,00,00,000 12,00,00,000 0%
 111

SECTION 40 (b): REMUNERATION AND INTEREST TO PARTNERS:

1. Maximum remuneration allowed u/s.40 (b) is as follows:

On first Rs.3,00,000 of book profit: 90% of book profit or Rs.1,50,000 (weh.)
On the balance of book profit: 60% of book profit

“BOOK-PROFIT” is computed after adjusting all admissible expenses, depreciation

including unabsorbed depreciation (if any) and interest on capital to the extent allowed
except remuneration.

Remuneration should be paid only to working partner.

Remuneration should be authorized by the partnership deed.

2. Interest on capital to partners will be allowed subject to a maximum of 12% p.a.

Interest can be paid to any partner but should be authorized by the partnership deed.

Salary received by partners & interest on capital (to the extent allowed in the hands of the
firm) shall be taxed in the hands of the partners under the head “business or profession”.

The firm pays tax on its total income and therefore, share of profit received by each partner
is EXEMPT from tax u.s.10(2A).

1. The profit and loss account of ABC & Co. (a firm of chartered accountants & LLP) for the year
ended 31st March, 2023 is given below:

Expenses 3,00,000 Receipts from clients and audit fees 14,36,000

Depreciation 60,000 Dividend from companies 45,000

Remuneration to partners
Partner X 4,20,000
Partner Y 2,80,000

Interest to partners
Partner X @ 15% 60,000
Partner Y @ 15% 45,000

Net profit 3,16,000

Other information:
a) Depreciation as per IT Rules is Rs.52,000.
b) Payment to partners (remuneration and interest) are authorized by the deed
c) Other incomes of the partners: X: Rs.12,00,000 and Y: Rs.8,00,000

Compute total income of the firm and its partners clearly indicating the tax treatment of partner’s
salary, interest on capital and share of profit received in their hands.
 112

2. Salary received by a working partner is taxable in the hands of the partner under the head
………………………

3. Share of profit received by a partner is exempt u.s………………. of the IT Act.

4. In case of loss suffered by a partnership firm, amount of deduction admissible for remuneration of
working partners is:
A. Rs.50,000 B. Rs.75,000 C. Rs.1,00,000 D. Rs.1,50,000

5. A firm has paid Rs.7,50,000 as remuneration to its partners for the previous year 2022-23, in
accordance with its partnership deed and it has a book profit of Rs.10,00,000. What is the
remuneration allowable as deduction? (sum no.12 page: 4.254)

6. Profit of a partnership firm is Rs.4,00,000 after charging interest on capital at 20% of its total
capital of Rs.8,00,000. How much remuneration is allowable under section 40(b) to its partners?

7. Rao and Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000
before deduction of the following items:

a. Salary of Rs.20,000 each per month payable to working partners of the firm (as authorized
by the deed of partnership)
b. Depreciation on plant and machinery computed under section 32: Rs.1,50,000
c. Interest on capital @ 15% p.a. (as per the deed of partnership). The amount of capital
eligible for interest Rs.5,00,000.

Compute book-profit u.s.40(b) and allowable working partner salary for the A.Y. 2023-24.
(sum no.13 page: 4.255)
 113

SECTION 40A(3): PAYMENT EXCEEDING Rs.10,000 BY WAY OF CASH

Any payment exceeding Rs.10,000 by way of cash or bearer cheque or crossed cheque will be fully
disallowed. Payment should be made only by an account payee cheque or by an account payee
bank draft or use of ECS through a bank account or through other prescribed electronic modes.

Payment exceeding Rs.10,000 in aggregate in a day made to a person against an expenditure shall
also be disallowed.

The limit of Rs.10,000 has been increased to Rs.35,000 in the case of payment made to transport
operators for plying, hiring or leasing goods carriages.

Deduction allowed on ‘due’ basis in one year for which cash payment is made in a subsequent year:
Any payment by cash exceeding Rs.10,000 for which deduction was already allowed on “due
basis”, the payment so made in any subsequent year shall be deemed as income in the year in
which such payment is made.

Cases where payment can exceed Rs.10,000 by way of cash: Rule 6DD Exceptions

1. Payment made to Banks, LIC

2. Payment made to Government which is required to be made in legal tender

3. Payment through the banking system, i.e. use of credit card or debit card or use of ECS, etc.
4. Payment by book entry (adjustment in accounts)

5. Payment made for purchase of agricultural or forest produce or produce of animal husbandry
or dairy or poultry farming or fish or fish products to the cultivator, grower or producer.

6. Payment is made for the purchase of products manufactured or processed without the aid of
power in a cottage industry, to the producer of such products;

7. Payment to a person in a village not served by any bank

8. Payment made on a day where banks were closed either on account of holiday or strike (removed)

9. Payment of terminal or retirement benefits (e.g. gratuity) provided such payment < Rs.50,000

10. Where the payment is made by way of salary to an employee after tds and when such employee
is temporarily posted for a continuous period of 15 days or more in a place other than his
normal place of duty or on a ship; and does not maintain any bank account at such place or ship.
 114

Note: Section 40A (3) is attracted where: bill amount should exceed Rs.10,000 and payment
should also exceed Rs.10,000 at a time.

Other prescribed electronic modes: Credit card, debit card, net banking, IMPS (Immediate Payment
Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Fund Transfer) and BHIM
(Bharat Interface for Money) Aadhar Pay

1. An assessee has incurred an expenditure of Rs.14,000 for purchase of raw material from Mr.B. He
makes separate payments of Rs.3,000; Rs.5,000 and Rs.6,000 all by cash in a single day. Advice
whether the above are admissible.

2. A bill is raised for an expenditure of Rs.32,000.

Cash payment is made as follows:

1.10.2022 5,000
2.10.2022 5,000
3.10.2022 5,000
4.10.2022 5,000
5.10.2022 12,000 What will be the amount of disallowance under section 40A (3)

3. Bill raised for Rs.65,000 by a transporter for hiring of trucks for carriage of goods. Payments
made to him in cash as under: What would be the amount of disallowance?

1.12.2022 38,000
2.12.2022 12,000
3.12.2022 15,000

4. When a cash payment of Rs.15,000 is made on 10.11.2022 towards purchase of raw material
effected in the earlier year, i.e., on 5.2.2022, the amount liable for disallowance would be…………

a. Nil c. 20% of such payment

b. 100% of payment d. 30% of such payment

5. Patel, a textile dealer, purchases goods worth Rs.65,000 from Anand and made the payments:
i. Rs.12,000 by account payee cheque on 5.6.2022
ii. Rs.8,000 by cash on 16.08.2022
iii. Rs.15,000 by bearer cheque on 7.11.2022; and
iv. Rs.30,000 by ECS on 21.03.2023.

The amount of expenditure not allowable as per provisions of section 40A(3) would be …………
 115

6. The following are details of Mr.X, state whether the following payments are admissible or not?

• Payment of Rs.50,000 by using credit card for fire insurance

• Purchase of oil seeds of Rs.15,000 in cash from a farmer on a banking day
• X purchases goods in cash for Rs.14,000 from R, a villager and makes payment to R in his
village where no banking facility is available.
• Purchase of stock amounting to Rs.27,000 due for payment on the day when the banks were
closed due to floods in Bangalore during September, 2022.
• Payment of Rs.12,000 and Rs.13,000 in cash on 03.12.2022 and 10.12.2022 respectively for
purchase of crabs, lobster & squid to Mr.R, a fisherman and Mr.K, a middleman for these
products respectively.
• On 30.09.2022 Rs.50000 cash paid (half yearly closing for bank; a bank holiday)

7. U/s.40A(3) which of the following payment for an expenditure incurred would not be admissible
as deduction from business income:-

a. Rs.15,000 paid in cash to a transporter

b. Rs.5,000 paid in cash to a dealer in the morning and Rs.5,000 paid in cash to the same
dealer in the evening
c. Rs.40,000 sent through NEFT to the bank account of the dealer for goods purchased
d. Rs.19,000 paid through bearer cheque to the dealer for goods purchased

8. Mr.Sandeep, a sales executive stationed at HO at Delhi, was on official tour to Bangalore from
31.05.2022 to 18.06.2022 for business development. The company has paid Mr.Sandeep’s salary
in cash, from its local office at Bangalore for the month of May, 2022 (payable on 1st June)
amounting to Rs.75,000 (net of TDS), as Sandeep has no bank account at Bangalore. This was
included in the amount of “salary” debited to P and L A/c.

Answer: Where the payment is made by way of salary to an employee after tds and when such employee is
temporarily posted for a continuous period of 15 days or more in a place other than his normal place of
duty & does not maintain any bank account at such place. EXPENDITURE SHALL BE ALLOWED – Rule 6DD
 116

SECTION 35 D: AMORTISATION OF PRELIMINARY EXPENSES:

To whom allowed: Indian companies and resident non-corporate assessees

Purpose: Expenses incurred for establishment of business concerns;

Expenses in connection with expansion of an existing business

Meaning: Expenditure in connection with preparation of feasibility report,

project report, conducting market survey, engineering services, legal
charges for drafting and printing of memorandum and articles of
association, registration fees, expenses incurred on issue of shares or
debentures, underwriting commission, brokerage and expenditure on
printing and advertising of prospectus.

Amount of deduction: FIVE equal installments

Amount that qualifies for deduction:

A. Non-corporate assessee: Actual preliminary expenses (or) 5% of cost of project

whichever is less will qualify

B. Indian Company: Actual preliminary expenses

(or)
5% of (cost of project or capital employed)
at the option of the assessee
(whichever is less will qualify)

“Cost of project” means cost of fixed assets as on the last day of the previous year in which the business
commences.

“Capital employed” means the aggregate of share capital, debentures and long term borrowings as on the
last day of the previous year in which the business commences.

1. J Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the following
expenditure in connection with the new unit:

Preparation of project report Rs.1,00,000

Market survey expenses Rs.1,00,000
Legal and other charges for issue of additional
capital required for the new unit Rs.1,00,000

Cost of the project Rs.30,00,000

Capital employed in the new unit Rs.40,00,000

What is the deduction admissible to the company under section 35 D.

 117

2. X Ltd. is incorporated in Bangalore on September 6, 2022. It commences production on March 15,

2023. The following expenses are incurred by the company before commencement of business:

• expenses on incorporation, issue of shares, etc. Rs.92,000

• preparation of feasibility report, project report and market survey expenses Rs.1,40,000

Determine the amount of deduction under section 35 D with the help of the following:

Cost of fixed assets Rs.55,00,000

Share capital Rs.40,00,000
Debentures Rs.12,00,000
Long-term borrowing from a financial institution Rs.8,00,000

SECTION 40 (a) (ia): Payment to residents without tds:

Any payment made to a RESIDENT shall be disallowed to the extent of 30% of the expenditure if:

DEFAULT ONE: Failure to deduct tax at source before the end of the previous year; or

DEFAULT TWO: Tax has been deducted at source before the end of the previous year but
not paid before the due date of filing ROI.

Note: Once the expenditure gets disallowed, the same shall be allowed as deduction only in the year
in which the tax is paid to the Government.

Note: No disallowance shall be made if the following conditions are satisfied:

a. The resident payee has taken into account such receipts in computing his total income;
b. The resident payee has paid tax due on such income;
c. The resident payee has filed his return of income within the due date; and
d. The payer (assessee) furnishes a certificate to this effect from a Chartered Accountant

Note: In case of an Individual-assessee (e.g. Mr.X), tds provisions shall apply only if the turnover has
exceeded Rs.100 lacs during the immediately preceding previous year.

1. State whether disallowance u/s.40 (a) (ia) is attracted in the following cases:

▪ X Ltd pays a sum of Rs.7,20,000 as rent of office building during the previous year 2022-23.
No tax is deducted at source.

▪ K Ltd pays salary Rs.10,00,000 to an employee after deduction of tax at source. However,
tax was not deposited by K Ltd with the Government before 31.10.2023.
 118

▪ A consultancy fees of Rs.40,000 is credited by Y Ltd to the account of payee on 01.10.2022

without deduction of tax at source. Tax is not deducted up to 31.03.2023. Tax is deducted
on 05.04.2023 and deposited on 05.05.2023.

▪ Interest of Rs.80,000 on company deposit is credited by Z Ltd to the account of payee on

10.12.2022. Tax is deducted on the same day. Tax is deposited with the Government
through internet banking on 10.08.2023. Due date of filing return of income is 31.10.2023.

2. Varun Ltd paid fees for technical services of Rs.6 lakhs, omitted to deduct tax at source and such
omission continued till the ‘due date’ for filing the return of income specified in Section 139(1).
The amount of expenditure liable for disallowance would be ………………………

3. Andhra Traders a partnership firm paid Rs.80,000 as contract charges to AKP & Co (firm). No tax
was deducted at source for the above said payment. The amount liable for disallowance
u.s.40(a)(ia) for the A.Y.2023-24 is………………………….

4. Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2023 without deduction of tax at source. What would be the consequence of non-deduction of tax
at source by Delta Ltd. on these amounts during the financial year 2022-23, assuming that the
resident payees in all the cases mentioned below, have not paid the tax, if any, which was required
to be deducted by Delta Ltd.?

Particulars Amount
• Salary to its employees (credited and paid in March, 2023) Rs.12,00,000
• Directors’ remuneration (credited in March, 2023 and paid in
April, 2023) Rs.28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April,
2023 at the time of payment and remitted the same in July, 2023? (sum no.10 page: 4.248)

Answer:

Salary to employees:
Liability to deduct tax only at the time of payment. Salary is paid in the month of March, 2023. Tax is
required to be deducted at source. Since the company has not deducted tax, 30% of the expenditure shall
be disallowed. Amount of disallowance Rs.3,60,000.

Directors’ remuneration:
Liability to deduct tax arises at the time of payment or credit of such remuneration (whichever is earlier).
Remuneration is credited in the month of March, 2023. Tax is required to be deducted at source. Since the
company has not deducted tax, 30% of the expenditure shall be disallowed. Amount of disallowance
Rs.8,400.

If Delta Ltd. had deducted tax on directors’ remuneration and remitted the same in April, 2023, the
expenditure that was disallowed Rs.8,400 during the previous year 22-23, shall be allowed as deduction
while computing business income of Previous Year 23-24.
 119

SECTION 43CA: SALE OF IMMOVABLE PROPERTY FOR INADEQUATE

CONSIDERATION
Land or Building held as stock in trade:
Where the actual sale price of land or building is less than the stamp duty value (guideline value),
SDV shall be deemed to be the full value of the consideration.

However, from A.Y.21-22: If SDV exceeds 110% of actual sale price, then stamp duty value shall
be taken as the full value of consideration. Gap cannot be more than 10%. If gap is > 10% then
SDV shall be taken as full value of consideration.

Situation 1 Situation 2 Situation 3

Stamp duty value 25 lacs 22 lacs 29.4 lacs
Actual sale price 20 lacs 20 lacs 28 lacs
% of SDV to actual sale price 125% > 110% 110% = 110% 105% < 110%
Full value of consideration SDV Actual sale price Actual sale price

SDV on the date of agreement and SDV on the date of registration are not same:
Normally, stamp duty value on the date of registration/sale shall be considered. However, stamp
duty value as on the date of the agreement can be opted by the assessee:

if advance or down payment has been received by way of an account payee cheque or account
payee bank draft or use of ECS on or before the date of the agreement.

Other prescribed electronic modes: Credit card, debit card, net banking, IMPS (Immediate Payment
Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Fund Transfer) and BHIM
(Bharat Interface for Money) Aadhar Pay

1. R Ltd. a developer of real estate, sold a residential house property to Mr.S for Rs.40,00,000 on
15.11.2022, whereas its stamp duty value is Rs.48,00,000. The cost of the residential property is
Rs.36,00,000. Compute the business income of R Ltd.

2. Mr.Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is
a dealer in automobile spare parts, for Rs.90 lakh on 1.1.2023, when the stamp duty value was
Rs.150 lakh.

The agreement was, however, entered into on 1.9.2022 when the stamp duty value was Rs.140
lakh. Mr.Hari had received a down payment of Rs.15 lakh by A/c payee bank draft from Rajesh on
the date of agreement.

Discuss the tax implications in the hands of Hari assuming that Mr.Hari had purchased the
building for Rs.75 lakh on 12th July, 2021.
 120

SECTION 43 B: DEDUCTION ONLY ON “PAYMENT” BASIS

Irrespective of the method of accounting, the following items of expenditure shall be allowed as
deduction only on “PAYMENT” basis.

a) Any sum payable to Government by way of tax, duty or cess

b) Employer’s contribution towards provident fund, approved gratuity fund
c) Bonus or commission or leave salary payable to employees
d) Interest on loans borrowed from any bank or public financial institution or from “deposit
taking NBFCs” or from “systemically important non-deposit taking NBFCs”
e) Any sum payable to the Indian Railways for the use of Railway assets.

Note: Payment should be made before the “due date” of filing return of income. If payment is made
after the “due date”, then deduction shall be allowed only in the year of payment.

Note: Any amount due by way of interest on loan, is subsequently converted by the bank, etc. into a
fresh loan, the interest so converted shall not be deemed as ‘actual payment’ and no deduction
is allowed.

Note: “Deposit taking NBFC” means a non-banking financial company which is accepting or holding
public deposits and is registered with the RBI.

Note: “Systemically important non-deposit taking NBFC” means a NBFC which is not accepting or
holding public deposits and having total assets of not less than five hundred crore rupees as per
the last audited Balance Sheet and is registered with RBI.

1. X Ltd is a manufacturing company. P & L A/c for the year ending 31.03.2023 is given below:

Sales tax 50,000 Sales 25,00,000

Other expenses 14,15,000
Net Profit 5,45,000

Out of sales tax of Rs.50,000 only Rs.47,000 is paid. The payment is made as follows:
a) Rs.40,000 on 02.12.2022
b) Rs.4,000 on 05.10.2023
c) Rs.3,000 on 02.12.2023

Return of income is submitted on 10.12.2023.

During the previous year 22-23, the following payments are made in respect of expenses pertaining to
earlier years:
• Bonus to employees pertaining to the previous year 20-21 is paid on 30.04.2022 Rs.15,000
• Customs duty pertaining to the previous year 20-21 is paid on 01.12.2022 Rs.25,000
• Electricity bill payable to TNEB pertaining to previous year 20-21 is paid on 03.05.2022 Rs.35,000
• Interest on bank loan pertaining to the previous year 21-22 is paid on 20.05.2022 Rs.40,000

These payments do not pertain to the previous year 22-23. Consequently, these are not recorded in the
profit and loss account. Compute net income of X Ltd.
 121

2. Saraswathi Ltd made provision of Rs.12 lakhs for bonus payable for the year ended 31.03.2023. It
paid Rs.7 lakhs on 31.07.2023; Rs.3 lakhs on 31.10.2023 and Rs.2 lakhs on 15.12.2023. The
amount eligible for deduction u.s.43B would be …………………..

3. Appu Ltd contributed Rs.8,70,000 towards provident fund of its employees. It actually remitted
Rs.5,00,000 up to 31st March and Rs.2,50,000 up to the due date for filing the return specified in
section 139(1). The amount liable for disallowance would be……………………

4. Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation and
Indian Bank and has not paid interest as detailed hereunder:-

i. Andhra Pradesh State Financial Corporation (P.Y.2021-22 & 2022-23) 15,00,000

ii. Indian Bank (P.Y.2022-23) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2022-
23, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments.

During the year ended 31.03.2023, Hari paid 5 installments to APSFC and 3 installments to Indian
Bank. Hari claimed the entire interest of Rs.45,00,000 as an expenditure while computing the
income from business.

Discuss whether his claim is valid and if not what is the amount of interest, if any,
allowable. (sum no.14 page: 4.269)

Answer: Conversion of unpaid interest in to a fresh loan cannot be treated as “actual payment” for the
purpose of section 43B. Deduction shall be allowed only in the year in which the converted loan is actually
paid. Hence the claim made by Mr.Hari is not valid.

Deduction shall be allowed to the extent of installments paid by Mr.Hari.

Deduction for A.Y.23-24 is computed as shown below:

APSFC (15 lacs / 60 x 5) 1,25,000

Indian bank (30 lacs / 60 x 3) 1,50,000
Amount allowed as deduction 2,75,000
 122

SECTION 35 AD: TAX INCENTIVES FOR SPECIFIED BUSINESS:

1. List of Specified Business:

a) Setting-up and operating a cold chain facility

b) Setting-up and operating a warehousing facility for storing agricultural produce

c) Laying and operating pipeline network for distribution including storage of:
i. natural gas; ii. crude; iii. petroleum

d) Building and operating, anywhere in India, a hospital with at least 100 beds for patients

e) Building and operating, anywhere in India, a hotel of two star or above category

f) Developing and building a housing project under a scheme for Slum Redevelopment or
Rehabilitation framed by the Central or State Government.

g) Developing and building a housing project under a scheme for affordable housing framed by
the Central Government or State Government.

h) Production of fertilizer in India

i) Setting up and operating an Inland Container Depot or a Container Freight Station notified
under the Customs Act, 1962.

j) Bee-keeping and production of honey and beeswax.

k) Setting up and operating a warehousing facility for storage of sugar.

l) Laying and operating a slurry pipeline for the transportation of iron ore

m) Setting up and operating a semiconductor wafer fabrication manufacturing unit.

n) Developing or maintaining and operating or developing, maintaining and operating a new

infrastructure facility.

II. AMOUNT OF DEDUCTION:

100% of any expenditure of CAPITAL NATURE shall be allowed as deduction.

However, any expenditure incurred prior to commencement of operations, such expenditure shall
be allowed in the year of commencement of such operations provided such expenditure is capitalized
in the books of account as on the date of commencement of operations.

Note: No deduction for expenditure incurred on LAND, GOODWILL OR FINANCIAL INSTRUMENT.

 123

Note: Any capital expenditure in respect of which payment exceeding Rs.10,000 made by
cash/bearer cheque would not be eligible for deduction.

Note: Assessee cannot claim any deduction u.s. 10AA or under chapter VI A under the heading “C.-
Deductions in respect of certain incomes” for the year or any other AY.

Note: Loss from a specified business can be set-off only against income from another specified
business.

Note: Where an assessee builds a star hotel and, subsequently, while CONTINUING TO OWN the
hotel, TRANSFERS THE OPERATION thereof to another person (say under an outsourcing
arrangement), the assessee shall be deemed to be carrying on the specified business and is
eligible for section 35AD benefit.

1. R Ltd. constructed a building and started operating a hotel of 3 star category w.e.f. 01.04.2022.
The company incurred the following expenditure in this connection:

a. Capital expenditure (including cost of land Rs.50 lakhs) incurred during December, 2021 to
March 2022 which were capitalized in the books of account as on 31.03.2022
Rs.1,10,00,000

b. Capital expenditure incurred during the previous year 2022-23 (it includes Rs.20 lakhs
paid for goodwill) Rs.1,40,00,000

Compute the deduction available under section 35AD in the A.Y.2023-24.

Answer:

Amount of deduction u.s.35AD for A.Y. 23-24 is computed as follows:

A. Expenditure incurred prior to commencement of operations

and capitalized in books of account excluding land Rs.60 lakhs

B. Capital expenditure incurred during the previous year 2022-23

excluding payment for goodwill Rs.120 lakhs
Amount of deduction u.s.35AD Rs.180 lakhs
 124

2. Mr.Suraj, commenced operations of the business of a new three-star hotel in Chennai on

April 1, 2022. He incurred capital expenditure of Rs.50 lakhs during the period January
2022 to March 2022 exclusively for the above business and capitalized the same in his
books of account as on 01.04.2022.

Further, during the previous year 2022-23, he incurred a capital expenditure of Rs.2 crore
(out of which Rs.1.5 crore was for acquisition of land) exclusively for the above business.

Compute the income under the head “Profits and Gains of business or profession” for the
assessment year 2023-24, assuming that he has fulfilled all the conditions specified for
claim of deduction under section 35AD and opted for claiming deduction under section
35AD and he has not claimed any deduction under Chapter VI-A under the head “C -
Deductions in respect of certain incomes”.

The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the assessment year 2023-24 is Rs.25 lakhs.

Assume that he also has another existing business of running a four-star hotel in
Coimbatore, which commenced operations fifteen years back, the profits from which are
Rs.120 lakhs for assessment year 2023-24. Also, assume that expenditure incurred were
paid by account payee cheque or use of ECS. Assume that Mr.S has not opted for Section
115BAC provisions. (sum no.7 page: 4.227)

Answer:

Computation of profits and gains of business or profession for A.Y.2023-24

A. Profit from the existing business of running a hotel in Coimbatore 120 lakhs

B. New three-star hotel in Chennai:

Profit before claiming deduction u.s.35AD 25 lakhs
Less: Deduction u.s.35AD (see note below) 100 lakhs 75 lakhs

Income from business after set-off of losses of specified business

against profits of another specified business 45 lakhs

Note: Deduction u.s.35AD in respect of the new hotel:

Expenditure incurred prior to commencement of business
and capitalized in the books of account 50 lakhs

Capital expenditure incurred during the previous year 22-23

excluding land 50 lakhs

Amount of deduction u.s.35AD for A.Y.2023-24 100 lakhs

 125

Asset shall be used only for Specified Business:

Any asset in respect of which a deduction is claimed and allowed shall be used only for the
specified business for a period of 8 years beginning with the previous year in which such
asset is acquired.

If the above condition is violated:

In case the asset is used for a purpose other than the specified business within the period of
8 years, the total amount of deduction so claimed and allowed as reduced by the amount of
depreciation u.s.32 shall be deemed to be the income under the head “Profits and gains of
business or profession” of the previous year in which the asset is so used.

3. Mr.Arnav is a proprietor having two units – Unit A carries on specified business of setting
up and operating a warehousing facility for storage of sugar; Unit B carries on non-
specified business of operating a warehousing facility for storage of edible oil.

Unit A commenced operations on 1.4.2021 and it claimed deduction of Rs.100 lacs incurred
on purchase of two buildings for Rs.50 lacs each (for operating a warehousing facility for
storage of sugar) under section 35AD for A.Y.2022-23. However, in February, 2023, Unit A
transferred one of its buildings to Unit B. Examine the tax implications of such transfer in
the hands of Mr.Arnav. (sum no.8 page: 4.230)

Answer:
Since the capital asset, in respect of which deduction of Rs.50 lacs was claimed u.s.35AD, has been
transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in
the previous year 22-23, the tax implication is as under:

Deduction allowed u.s.35AD for A.Y.2022-23 50 lakhs

Less: Depreciation allowable u.s.32 for A.Y.2022-23 (50 lacs x 10%) 5 lakhs
Balance to be treated as income 45 lakhs

Mr.Arnav can claim depreciation on the building transferred to unit B for A.Y.2023-24. The actual
cost of the building would be:

Actual cost to the assessee 50 lakhs

Less: Depreciation allowable u.s.32 for A.Y.22-23 (10% of 50 lacs) 5 lakhs
Actual cost of the building for claiming depreciation for A.Y.23-24 45 lakhs

4. DAS Pvt Ltd. fulfilling all the conditions as being specified in section 35AD of the Income Tax Act,
1961 has incurred capital expenditure of Rs.30 lakhs on purchase of land, Rs.80 lakhs (Rs.75 lakhs
by cheque and Rs.5 lakhs in cash) on construction of building and Rs.10 lakhs on the plant and
machinery during the previous year 2022-23 for setting up and operating a warehouse for the
storage of sugar. The warehouse became operational on 01st March, 2023. The amount of
deduction which the company can claim for such capital expenditure as per section 35AD in AY.
2023-24 shall be …………………..
 126

SECTION 35: EXPENDITURE ON SCIENTIFIC RESEARCH:

Scientific research may be carried on:
a. by the assessee himself in his business (in-house research); or
b. by making payment to outside agencies engaged in scientific research work

A. Revenue expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure shall be allowed as deduction

Revenue expenditure incurred BEFORE COMMENCEMENT OF BUSINESS on:

a. salary to employees excluding perquisites; and
b. purchase of raw materials used in scientific research

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business. Deduction is allowed to the extent these are
approved by the prescribed authority.

B. Capital Expenditure related to the business of the assessee (in-house research):

For all assessees: 100% of such expenditure (excluding land) shall be allowed as
deduction

Capital expenditure (excluding land) incurred BEFORE COMMENCEMENT OF BUSINESS

shall be fully allowed as deduction but not exceeding three years immediately preceding
the date of commencement of business.

Note: Since entire cost is allowed as deduction, depreciation is not allowed.

C. Contribution to RESEARCH ASSOCIATIONS engaged in research activities:

Contribution made to Type of research % of deduction

Research Association Scientific Research 100

National Laboratory, Programmes in 100

University or IIT. scientific research

Company (registered in Scientific research 100

India and having research
as its main object)

Research Association Social science or

Statistical research 100
 127

Note: A ‘research association’ can be a university or a college or any other institution

approved by prescribed authority.

Note: The Research carried on by the Institution need not be related to the business of the
assessee.

1. XYZ Ltd. has contributed the following amounts to various research institutions. The research
carried on by the institutions are not related to the business of the assesse (XYZ Ltd). Compute
the amount of deduction u.s.35.

a. The company pays Rs.80,000 to the Indian Agricultural Research Institute, being an
approved research institution for the purpose of carrying out scientific research in
natural science.

b. The company also pays Rs.70,000 to the IIM, Ahmedabad, being an approved institute for
the purpose of carrying out research in social or statistical science.

c. The company also pays Rs.46,000 to an approved National Laboratory for carrying out
programmes of scientific research.

2. Where the assessee does not himself carry on scientific research but makes contributions to an
approved university, college or institution, to be used for scientific research related or
unrelated to the business of assessee, then the amount of deduction from income of business
shall be allowed on such contribution to the extent of ………….%

3. Mr.A furnishes the following particulars for the previous year 2022-23. Compute the deduction
allowable under section 35 for A.Y.2023-24, while computing his income under the head
“business or profession”.

a. Amount paid to notified approved Indian Institute of Science, Bangalore, for Scientific
Research Rs.1,00,000

b. Amount paid to IIT, Delhi for an approved scientific research programme Rs.2,50,000

c. Amount paid to X Ltd., a company registered in India which has as its main object of
scientific research, as is approved by the prescribed authority Rs.4,00,000

d. Expenditure incurred on in-house research and development facility as approved by the

prescribed authority:
• Revenue expenditure on scientific research Rs.3,00,000
• Capital expenditure (including cost of acquisition of land
Rs.5,00,000)on scientific research Rs.7,50,000

(sum no.5 page: 4.220)

 128

SALE OF AN ASSET USED FOR SCIENTIFIC RESEARCH:

A. Sold without having been used for other purposes:

The sale price to the extent of deduction allowed u.s.35 shall be treated as business
income & the sale price in excess of business income shall be treated as capital gains

B. Brought into business use after having been used for research:
The actual cost of such asset shall be taken as nil. Hence, no depreciation is allowed.

4. Where an asset used for scientific research for more than three years is sold without having
been used for other purposes, then the sale proceeds to the extent of the cost of the asset
already allowed as deduction u.s.35 in the past shall be treated as:

a. Business income c. Long-term capital gain

b. Short-term capital gain d. Exempted income

5. An asset was purchased for Rs.6,00,000 on 17.11.2021 for conducting scientific research
and the deduction was claimed under section 35 of the Income-tax Act, 1961. This asset
was sold on 05.09.2022 for a consideration of Rs.8,00,000. Discuss the tax treatment.

6. Mr.X acquires an asset in the year 2017-18 for the use for scientific research for ₹ 2,75,000.
He claimed deduction under section 35(1)(iv) in the previous year 2017-18. The asset was
brought into use for the business of Mr.X in the P.Y.2022-23, after the research was
completed. The actual cost of the asset to be included in the block of assets is -

(a) Nil
(b) Market value of the asset on the date of transfer to business
(c) Rs.2,75,000 less notional depreciation u.s.32 upto the date of transfer
(d) Actual cost of the asset i.e., Rs.275000
 129

OTHER SECTIONS IN BUSINESS INCOME:

Section 35DDA: Expenditure incurred on VRS

Section 36(1)(iii): Interest on borrowed capital
Section 36(1)(iiia): Discount on zero coupon bonds
Section 36(1)(iva): Employer’s contribution to notified pension scheme

Section 36(1)(va): Employee’s contribution to provident fund

Section 36(1)(vii): Bad debts
Section 36(1)(ix): Family planning expenditure
Section 36(1)(xv): Securities transaction tax

Section 36(1)(xvi): Commodities transaction tax

Section 37(1): General deduction
Section 40(a)(i): Payment to a non-resident without tds
Section 40(a)(v): Tax on non-monetary perks paid by employer
Section 41: Profits chargeable to tax (Deemed income)

Section 35 DDA: Expenditure incurred on VRS:

Where an assessee incurs an expenditure in any previous year in respect of the above, such
expenditure is deductible in FIVE equal installments from the year in which the PAYMENT is
made.

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

Interest on capital borrowed for acquiring a capital asset:

Interest paid up to the date the asset is first put to use shall be capitalized and added to the
cost of the asset. Interest paid after the asset is put to use is an admissible expenditure.

Section 36(1)(iiia): Discount on zero coupon bond:

Amount of deduction: Allowed over the maturity period of such bond (pro rata basis)

‘Discount’ means the difference between the maturity amount and amount received on issue
of such bonds by the infrastructure capital company.

A zero-coupon bond is a debt security that doesn't pay interest but is traded at a deep discount,
rendering profit at maturity when the bond is redeemed. Zero-coupon bond holders gain on the
difference between what they pay for the bond and the amount they will receive at maturity.
 130

Section 36 (1) (iva): Employer’s contribution to notified pension scheme:

Amount of deduction: 10% of salary of employees

Note: Excess contribution made by the employer shall be disallowed

while computing business income u.s.40A(9)

Note: Salary = Basic + dearness allowance (forming)

Section 36 (1) (va): Employees’ contribution towards provident fund:

Amount recovered towards PF: First treated as INCOME in the hands of the Employer

At the time of deposit by the The same shall be allowed as deduction while computing
Employer before “due date”: business income of the assessee.

For this purpose “due date” means the date by which the employer is required to deposit such
contribution under the Provident Fund Act. (15 days from the end of the month)

Section 36 (1) (xv): Securities Transaction Tax

STT shall be allowed as deduction like any other business expenditure only if:
a. Securities are held as stock-in-trade; and
b. Profit on sale of such securities is taxed as business income

Section 36 (1) (xvi): Commodities Transaction Tax

Commodities transaction tax (CTT) shall be allowed as deduction while computing income
from the business of purchase and sale of commodities in a commodities exchange.

Section 36 (1) (vii): Bad debts:

The following conditions are to be satisfied for claiming deduction:

a. There must be a debt

b. The debt must be incidental to the business of the assessee
c. The debt must have been taken into account while computing the income of the assessee.
d. Debt must be written off in the books of account of the assessee

Note: It is not necessary for the assessee to establish that the debt, has become irrecoverable. SC
Note: Condition ‘c’ is not applicable for an assessee engaged in money-lending business.
 131

Section 37(1): GENERAL DEDUCTION

1. The following conditions are to be fulfilled for the allowability of an expenditure: -

• The expenditure should not be covered by any of the section between 30 to 36;
• Should have been spent wholly and exclusively for the purpose of business;
• Should not be in the nature of personal expenditure of the assesse;
• Should not be in the nature of a capital expenditure

Explanation 1:
• Should not be incurred for any purpose which is an offence or prohibited by law.

Explanation 2:
• It is not an expenditure incurred by the assessee on CSR activities (corporate social
responsibility) referred to in section 135 of the Companies Act, 2013.

2. No deduction for an expenditure incurred on advertisement in any souvenir, brochure,

tract, pamphlet, etc. published by a political party – Section 37(2B)

Section 40 (a) (i): Payment made to a non-resident without tds

Failure to deduct tax at source on payment made to a non-resident:

Entire (100%) expenditure shall be disallowed. The same shall be allowed only in the year in
which such tax is remitted to the Government.

Section 40 (a) (v): Tax on non-monetary perks paid by employer

Tax treatment: In the hands of the employer: Expenditure shall be disallowed

In the hands of the employee: Tax free perk

Section 36 (1) (ix): Family Planning Expenditure

To whom available: Only for company-assessee

Amount of deduction: Revenue expenditure is fully allowed

Capital expenditure is allowed in five equal installments
 132

Section 41: Deemed Income

Where any deduction was allowed in respect of a loss or expenditure or trade liability for any
year and subsequently during any previous year the assessee or successor of the business:

has obtained any amount in respect of such loss or expenditure or some benefit in respect
of such trade liability by way of remission or cessation thereof,

the amount obtained or the value of benefit accrued shall be deemed to be income.

PROBLEMS:

Section 35DDA: Expenditure on VRS comepensation:

1. X Co. Ltd paid Rs.120 lakhs as compensation as per approved Voluntary Retirement Scheme
(VRS) during the financial year 2022-23. How much is deductible under section 35DDA for the
assessment year 2023-24?

2. Under section 35DDA, amortization of expenditure incurred under eligible voluntary

retirement scheme at the retirement alone, can be done. State whether true or false.

Answer:
The statement is false. Amortization of expenditure under VRS can be done only in the year in
which the payment is made.

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

3. X Ltd., purchased a machinery on 01.04.2022 for Rs.10 lakhs by availing a 80% loan facility
from Bank. This machinery was put to use on 01.01.2023 into effective production. The
interest on loan works out to 10% p.a. Advise X Ltd, on the treatment of interest payments
made on this loan.

4. Swan Pvt Ltd acquired machinery for Rs.5,75,000 which included GST of Rs.75,000 eligible for
input tax credit. It borrowed Rs.3,00,000 from a bank for purchase of the said machine.
Interest on the bank loan up to the date of usage of machine was ascertained as Rs.25,000. The
machine was put to use from 15th September, 2022. Assume the rate of depreciation at 15%.
The eligible amount of depreciation will be ………………

Section 36(1)(iiia): Discount on zero coupon bond:

5. On 01.10.2022, an infrastructure financing company issued zero coupon bonds aggregating
Rs.10,00,000. The maturity date and maturity value of the bonds are 30.09.2032 and
Rs.20,80,000 respectively. Determine the amount of discount to be allowed as deduction for
the A.Y. 2023-24 and 2024-25.
 133

Section 36(1)(iva): Employer contribution to Notified Pension Scheme:

6. X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness allowance is 40% of basic salary and it forms part of
pay of the employees.

Compute the amount of deduction allowable u.s. 36(1)(iva), if the basic salary of the employees
aggregate to Rs.10,00,000. Would disallowance u.s. 40A(9) be attracted, and if so, to what
extent? (sum no.9 pg.4.237)

Section 36(1)(va): Employee’s contribution to Provident Fund:

7. The profit and loss account of Mr.X for the year ending March 31, 2023 is as follows:

Cost of goods sold 75,000 Sale proceeds of goods 2,30,000

Salary to employees 99,000
Other expenses 10,000
Net profit 46,000

The salary of Rs.99,000 comprises Rs.9,000 as employee’s contribution towards recognized

provident fund. Out of Rs.9,000, Rs.6,000 is credited in the employees’ provident fund within
“due date” and Rs.3,000 is credited after “due date”. Compute net income of X.

8. Employees contribution to EPF of Rs.3 lakhs recovered from their salaries for the month of
March 2023 and shown in the balance sheet under the head sundry creditors was remitted on
31.05.2023. Discuss the admissibility.

Section 36(1)(vii): Bad debts:

9. Malick & Co engaged in trading activity could not recover Rs.5 lakhs from a customer. It
claimed the entire amount as bad debt by writing off in the books of account. The aggregate
sale made during the year to the party amounts to Rs.30 lakhs. The amount eligible for
deduction by way of bad debt is:

a. Nil c. Rs.5 lakhs

b. Rs.3 lakhs d. Rs.60,000

10. It is a condition precedent to write off in the books of account, the amount due from debtor to
claim deduction for bad debt. State whether the statement is true or false.

Answer: The statement is true. Bad debts shall be allowed as deduction while computing
business income only if it is written off in the books of account of the assessee.
 134

Section 37(1): General Deduction:

11. Discuss the admissibility of the following expenses:

a. Expenses on Corporate Social Responsibility activities
b. Expenditure on advertisement in a souvenir published by a Political Party
c. Fine paid for violation of provisions of GST Act
d. Printing & stationery, telephone expenses and electricity charges
e. Purchase of computer for office use
f. Household expenses

12. Sakshita Pvt Ltd., has spent a sum of Rs.30 lakhs towards meeting its Corporate Social
Responsibility (CSR) obligation. The amount of deduction available while computing the
business income is Rs………………..

Section 36(1)(xv): Securities Transaction Tax

13. State with reasons, whether the following statement is true or false:
For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.

Section 36(1) (ix); Family Planning Expenditure:

14. When ABC Ltd incurred Rs.10 lakhs in financial year 2022-23 as capital expenditure for the
purpose of family planning amongst the employees, the expenditure allowable for the
A.Y.2023-24 would be:……………..

Section 41: Deemed Income:

15. Mr.G, a businessman, paid sales tax of Rs.1,50,000 in financial year 2018-19 and the entire
amount was allowed as deduction. In October 2018, he died and the business was continued to
be carried on by his wife Ms.S. In March 2023, she is refunded Rs.60,000 by the Commercial
taxes department being the excess of sales tax paid by her husband. Assessing Officer wants to
treat the amounts as taxable. Is he correct in doing so?

Answer:
Yes. The Assessing Officer is correct in treating the sum of Rs.60,000 as taxable income in the case
of Ms.S as the provisions of Section 41(1) apply even to the successor of the business.
 135

16. Raju succeeded to the business of his father Ramu consequent to demise of Ramu on
01.02.2023. Raju recovered Rs.30,000 due from a customer which was written off by late
Ramu as bad debt and allowed in the A.Y.2020-21. The amount recovered is:

a. Exempt from tax

b. Fully taxable as business income
c. Rs.15,000 being 50% taxable as business income
d. To be set off against current year bad debts

Trade liability allowed as deduction earlier; now partial waiver (remission):

17. Sundry creditors include an amount of ₹ 10 lakhs payable to A & Co, towards supply of raw
materials, which remained unpaid due to quality issues. An agreement has been made on
31.03.2022, to settle the amount at a discount of 75% of the outstanding. The amount waived is
credited to Profit and Loss account. Is the amount credited to Profit and Loss account chargeable
to tax?

Answer:
Remission or cessation of trade liability: Rs.7,50,000 to be treated as deemed income under section
41(1), hence taxable.

Loss allowed as deduction earlier; now recovered:

18. Mr.X was forced to shut-down his furniture business in the year 2020 as his accountant
absconded with cash of Rs.5 lakhs and was fully allowed in that year. Rs.4 lakhs was received as
insurance compensation on 31.03.2023 for the cash theft. Is the amount received subject to tax?

Answer:
Rs.4 lacs received from the insurance company is now taxable as deemed income u.s.41.

Loss allowed as deduction earlier; now recovered:

19. Sameer sold goods worth Rs.50,000 at credit on 1st April, 2021. However, he has written off
Rs.10,000 as bad debts and claimed deduction for the same during the year 2021-22. On 10th
October, 2022, the defaulting debtor made payment of Rs.45,000. The taxable amount of bad
debts recovered for the year 2022-23 would be:………………
 136

ADDITIONAL PROBLEMS:

1. Mr.Bhushan, engaged in manufacture of chemicals, furnishes his Manufacturing, Trading

and Profit & Loss Account for the year ended 31st March, 2023 as under:

To Opening stock 3,40,000 By Sales 2,14,00,000

To Purchases 2,00,20,000 By Closing stock 19,00,000
To Manufacturing expenses 10,40,000
To Gross Profit 19,00,000
1,33,00,000 1,33,00,000

To Salary 4,30,000 By Gross Profit 19,00,000

To Bonus 80,000 By Discount 25,000
To Bank term loan interest 90,000 By Agricultural Income 1,50,000
To Factory rent 1,20,000 By Dividend from
To Office rent 2,70,000 Indian Companies 75,000
To Administration expenses 3,30,000
To Net Profit 8,30,000 ______
21,50,000 21,50,000

Additional Information:

i. The total turnover of Mr.Bhushan for the financial year 2021-22was Rs.232 lakhs.

ii. Salary includes Rs.1,80,000 paid to his daughter. The excess payment considering her
qualification and experience is ascertained as Rs.40,000.

iii. Factory rent was paid to his brother. Similar portions are let out to others by him for
a rent of Rs.96,000 per annum.

iv. No tax was deducted at source from the office rent paid during the year.

v. Purchases include Rs.70,000 paid by cash to an agriculturist for purchase of grains

being raw material.

vi. Depreciation allowable u.s.32 of the Income-tax Act, 1961 amounts to Rs.45,000 for
assets held as on 01.04.2022. During the year, a machinery costing Rs.5,00,000 was
acquired on 01.07.2022 and was put to use from 15.10.2022.

vii. Administration expenses include commission paid to a purchase agent of Rs.12,000 for
which no tax was deducted at source.
 137

viii. The following expenses debited above were not paid till 31.03.2023 and up to the 'due
date' for filing the return specified in section 139(1):

I. Term loan interest of Rs.35,000;

II. Demurrages to Indian Railways for using their clearing yard beyond stipulated
hours (disputed by the assessee), forming part of manufacturing expenses
Rs.30,000.

Compute the income of Mr.Bhushan chargeable under the head "Profits and gains of
business or profession" for A.Y. 2023-24. Ignore provisions of Section 115 BAC.

2. Mr.R is engaged in manufacture of electronic spares which are used in computers. His
aggregate turnover for the year ended 31.03.2023 was Rs.1,71,00,000. His profit as per
profit and loss account extracted from the books is Rs.12,45,000. His sale proceeds were
realized as under:

Up to the end of From 01.04.2023 and up to the ‘due date’

previous year of filing return u.s.139(1)
Sales realized in cash 40,00,000 73,00,000

Sales realized through

banking channel 11,00,000 26,00,000

Other information:

Current year depreciation u.s.32 allowable Rs.2,75,000

Cash payment made exceeding Rs.10,000 per day and the aggregate payment for the year
in such manner Rs.4,11,000

Interest on term loan debited in profit and loss account of the assessee for the year ended
31.03.2023 Rs.1,05,000. Amount actually up to 31.03.2023 Rs.15,000 and amount paid
from 01.04.2023 and up to the 'due date' for filing the return u.s. 139(1) Rs.40,000.

He has brought forward business loss of the A.Y.2019-20 of Rs.1,40,000 and unabsorbed
depreciation of Rs.50,000 of A.Y. 2022-23

Compute his income from business for the assessment year 2023-24 under section 44AD
and as per regular provisions. Ignore provisions of Section 115 BAC.
 138

3. Mr.Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss
Account for the year ended 31st March, 2023:

Trading and Profit and Loss Account for the year ended 31.03.2023

To Opening stock 90,000 By Sales 1,12,11,500

To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross profit 3,03,600 By Gross profit b/d 3,03,600
To Salary 60,000 By Income from UTI 2,400
To Rent and rates 36,000
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing and stationery 23,200
To Postage and telegram 1,640
To Loss on sale of shares 8,100
To Other general expenses 7,060
To Net Profit 50,000

Additional information:

a. It was found that some stocks were omitted to be included in both the opening and closing
stock, the values of which were:

Opening stock Rs.9,000

Closing stock Rs.18,000

b. Salary includes Rs.10,000 paid to his brother, which is unreasonable to the extent of
Rs.2,000

c. The whole amount of printing and stationery was paid in cash by way of one-time payment.

d. Rent and rates includes GST liability of Rs.3,400 paid on 07.04.2023.

e. The depreciation provided in P&L A/c. was based on the following:

The w.d.v. of plant and machinery is Rs.4,20,000 as on 01.04.2022. A new plant falling
under the same block of depreciation was brought on 01.07.2022 for Rs.70,000. Two old
plants were sold on 01.10.2022 for Rs.50,000.

f. Other general expenses include Rs.2,000 paid as donation to a Public Charitable Trust.

You are required to compute the profits and gains of Mr.Sivam under presumptive taxation
under section 44AD and profits and gains as per the normal provisions of the Act. Assume
that the whole of the turnover is received by account payee cheque or use of electronic
clearing system through bank account during the previous year. (Sum no.7; page no.4.328)
 139

4. Mrs.M, a resident individual, aged 63 years is a qualified medical practitioner. She runs her own
clinic. Income & Expenditure A/c. of Mrs.M for the year ending 31.03.2023 is as under:

Expenditure Income
To Salary to staff 1,20,000 By Consultation fees 12,00,000
To Administrative exp 2,90,000 By Salary received from
To Conveyance expenses 24,000 True Care Hospitals 1,80,000
To Power & fuel 24,000 By Rental income from
To Interest on housing loan 1,00,000 house property 78,000
To Interest on education loan By Dividend from
for son 26,000 foreign companies 10,000
To Amount paid to scientific
research association
approved u.s.35 25,000
To Net profit 8,59,000

She is working part-time with True Care Hospitals (P) Ltd. Her salary details are as under:
Basic pay Rs.13,000 p.m.; Transport allowance Rs.2,000 p.m. Further, during p.y. 22-23, her son
had undergone a medical treatment in True Care Hospitals (P) Ltd. free of cost. The hospital
would have charged a sum of Rs.60,000 for a similar treatment to unrelated patients.

She owns a residential house. Ground floor of the house is self-occupied by her while first floor
has been rented out since 01.10.2022. The reconstruction of the house was started on
01.04.2022 and was completed on 30.09.2022. The monthly rent is Rs.10,000. The tenant also
pays Rs.3,000 p.m. as power back-up charges. She took a housing loan of Rs.12 lakhs on
01.04.2022. Interest on housing loan for the period 01.04.2022 to 30.09.2022 was Rs.60,000
and for the period 01.10.2022 to 31.03.2023 was Rs.40,000. During the year, she also paid
municipal taxes for the f.y. 2021-22 Rs.5,000 and for f.y. 2022-23 Rs.5,000.

Other information:
a. Conveyance expenses include a sum of Rs.12,000 incurred for conveyance from house to True
Care Hospitals (P) Ltd. and vice-versa in relation to her employment.

b. Power & fuel expenses include a sum of Rs.6,000 incurred for generator fuel for providing
power back-up to the tenant.

c. Administrative expenses include a sum of Rs.10,000 paid as municipal taxes for her house.

d. Clinic equipments details are:

Opening w.d.v. of clinic equipments as on 01.04.2022 was Rs.1,00,000 and fresh purchase made
on 28.08.2022 is Rs.25,000 which was paid in cash.

e. She availed a loan of Rs.8,00,000 from bank for higher education of her son. She repaid
principal of Rs.50,000 and interest of Rs.26,000 during p.y. 2022-23.

You are required to compute her net taxable income and net tax liability for the A.Y.2023-24.
Ignore provisions of Section 115 BAC.
 140

5. Mr.Murari, a resident individual, provides consultancy services in the field of accountancy. His
income and expenditure account for the year ended 31st March, 2023 is as follows:

Expenditure Income
To Salary 3,00,000 By Consultancy fees 8,00,000
To Motor car expenses 58,000 By Share of profit from HUF 25,000
To Depreciation 47,500 By Interest on savings
To Medical expenses 70,000 bank deposits 15,000
To Purchase of computer 80,000 By Interest on income
To Bonus 10,000 tax refund 8,000
To General expenses 55,000
To Administrative expenses 75,000
To Excess of income over
expenditure 1,52,500

The following other information relates to the financial year 2022-23:

a. Salary includes a payment of Rs.12,000 p.m. to his brother-in-law who is in-charge of the
marketing department. However, in comparison to similar business, the reasonable salary of a
marketing supervisor is Rs.10,000 p.m.

b. Written down value of the assets as on 01.04.2022 are as follows:

Motor car (40% used for personal use) Rs.2,00,000
Furniture and fittings Rs.50,000

c. Medical expenses includes:

a. Family planning expenditure Rs.15,000 incurred for the employees which was revenue in
nature.
b. Medical expenses for his father Rs.35,000 (father’s age is 65 years)

d. The computer was purchased on 5th June, 2022 on credit. The total invoice was paid in the
following manner:
a. Rs.18,000 paid in cash as down payment on the date of purchase.
b. Remaining amount was paid through account payee cheque on 10th August, 2022

e. Bonus due on 31.03.2023 was paid before the due date of filing IT return.

f. General expenses include commission payment of Rs.22,000 to Mr.Sridhar for the promotion of
business on 17th September, 2022 without deduction of tax at source.

g. Compute total income of the assesse for assessment year 2023-24.

Hint: “relative” means husband, wife, brother or sister or any lineal ascendant or descendant of that
individual. Section 2 (41)
 141

6. Mr.Querashi is a businessman. During the year ended 31-03-2023, he was engaged in the
business of Hypermarket and Supermarket. He maintains proper books of accounts for both
businesses in Mercantile system. Sales from Hypermarket achieved a turnover of Rs.75
lakhs and all receipts were in cash. However, Supermarket business is through online and
entire receipts of Rs.50 lakhs during the year were received online in his bank account. The
expenses were incurred in the ratio 65:35

Following additional information is furnished:

Rs.
To Salary 10,00,000
To Repairs on building 1,81,000
To Interest 1,10,000
To Travelling 1,30,550
To Depreciation 8,12,000
To Net profit 3,93,950

a) In addition to the above, repairs of Rs.1,00,000 was incurred for building a new room
which was debited to P &L A/c.

b) Depreciation as per Income-tax Act, 1961 is Rs.7,17,000.

c) Rs.75,000 was paid in cash on 30-09-2022 to Mrs.Ann, accountant for the preparation
of the accounts for the year ended 31-03-2022 and adjusted under the head “expenses
payable” account.

d) He was forced to shut-down his furniture business in the year 2020 as his accountant
absconded with cash Rs.5 lakhs and was fully allowed in that year. Unabsorbed
business loss of furniture business is Rs.3 lakhs. Rs.4 lakhs was received as insurance
compensation on 31-03-2023 for the cash theft.

e) Mr.Querashi wants to declare income under “presumptive income” basis.

Compute the income chargeable under the head “profits and gains of business or
profession” of Mr.Querashi under presumptive income scheme under section 44AD and his
total income for the year ended 31-3-2023.
 142

7. State with reasons, the allowability of the following expenses incurred by Mr.Manav, a
wholesale dealer of commodities, under the Income Tax Act, 1961 while computing Profits
& Gains from business or profession for the Assessment Year 2023-24:

a. Construction of school building in compliance with CSR activities amounting to

Rs.5,60,000

b. Purchase of building for the purpose of specified business of setting up and operating
a warehousing facility for storage of food grains amounting to Rs.4,50,000

c. Interest on loan paid to Mr.X (a resident) Rs.50,000 on which tax has not been
deducted. The sales for the previous year 2021-22 is Rs.202 lakhs.

d. Commodity transaction tax paid Rs.20,000 on sale of bullion. Sum no.3; page no.4.321

8. During the financial year 2022-23, the following payments/expenditure were made/
incurred by Mr.Yuvan Raja, a resident individual (whose turnover during the year ended
31.3.2022 was Rs.99 lacs):

a. Interest of Rs.45,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;

b. Rs.10,00,000 was paid as salary to a resident individual without deduction of tax at

source;

c. Commission of Rs.16,000 was paid to Mr.Vidyasagar on 2.12.2022 without deduction

of tax at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of
the IT Act, 1961 assuming that the payees in all the cases mentioned above, have not paid
the tax, if any, which was required to be deducted by Mr.Raja? (Sum no.11; page no.4.250)
 143

9. Mr.Vidyasagar, is a partner in Oscar Musicals & Co., a partnership firm. He also runs a wholesale
business in medical products. The following details are for the year ended 31.3.2023:

S.I. No Particulars ₹ ₹
i. Interest on capital received from Oscar Musicals & Co., at 15% 1,50,000

ii. Interest from bank on fixed deposit (net of tds ₹ 5,000) 45,000

iii. Income–tax refund received relating to A.Y.2022-23 including interest

of ₹ 2,300 34,500

iv. Net profit from wholesale business 5,60,000

Amounts debited include the following:

Deprecation as per books 34,000
Motor car expenses 40,000

Municipal taxes for the shop 7,000

(for two half years; payment for one half year made on 12.11.2022 and
for the other on 14.11.2023)

Salary to manager by way of a single cash payment 21,000

The WDV of the assets (as on 1.4.2022) used in above wholesale

business is as under:
Computers 1,20,000
Motor car (20% used for personal use) 3,20,000

Compute the total income of the assessee for the A.Y. 2023-24. The computation should show the
proper heads of income. Also compute the WDV of the different blocks of assets as on 31.3.2023.
 144

10. Mr.Shivansh, a resident and ordinarily resident, age 61 years, is engaged in the business of
manufacturing of motor parts. He is subject to tax audit under section 44AB of Income Tax
Act, 1961. He has provided following information:

Profit & Loss account for the year ended 31st March, 2023

To Administrative expenses 4,30,000 By Gross Profit 58,30,000

To Salaries & wages 20,00,000 By Profit on sale of asset of
To Interest on loans 7,50,000 scientific research 2,00,000
To Depreciation 6,17,000 By Winning from lottery 31,500
To Professional fees 2,70,000 (net of tds @ 30%)
To Rent, rates & tax 2,80,000
To Travelling & conveyance 1,40,000
To Net Profit 15,74,500

Explanatory information:
Opening and closing stock of finished goods were undervalued by 10%. Opening stock of
Rs.4,50,000 and Closing stock of Rs.5,58,000 was shown.

Salaries & wages include following items:

(a) Contributed 20% of basic salary to National Pension Scheme referred to section
80CCD regarding salary paid to an employee Mr.Ganesh who has withdrawn basic
salary of Rs.3,00,000 and DA is 40% of basic. 50% of DA forms part of salary.

(b) Some of the employees opted for retirement under the voluntary retirement
scheme; a sum of Rs.2,40,000 was paid to them on 1st January, 2023.

Interest on loan includes interest paid @ 15% p.a. on loan of Rs.12,00,000 which was taken
from SBI on 01.05.2022 for purchase of new electric car of Rs.15,00,000. The car is used
for personal purpose.

Depreciation allowable as per Income Tax Rules, 1962 is Rs.4,50,000 but during the
calculation of such depreciation following addition was not considered:
Motor car purchased for Rs.3,00,000 for supply of finished goods to dealers on 25.08.2022.

An asset was purchased for Rs.6,00,000 on 17.11.2021 for conducting scientific research
and the deduction was claimed under section 35 of the Income-tax Act, 1961. This asset
was sold on 05.09.2022 for a consideration of Rs.8,00,000.

You are required to compute business income of the assesse for AY. 2023-24.
 145

11. Mr.Krishna (aged 65 years), a furniture manufacturer, reported a profit of Rs.5,64,44,700

for the previous year 2022-23 after debiting/crediting the following items:

Debits:
• Rs.20,000 paid to a Gurudwara registered u/s.80 G of the Income-tax Act, in cash
where no cheques are accepted.

• Rs.48,000 contributed to a university approved and notified u/s.35(1)(ii) to be used

for scientific research.

• Interest paid Rs.1,67,000 on loan taken for purchase of E-vehicle on 15.05.2022

from a bank. The E-vehicle was purchased for the personal use of his wife.

• His firm has purchased timber under a forest lease of Rs.20,00,000 for the purpose
of business.

Credits:
• Income of Rs.4,00,000 from royalty on patent registered under the Patent Act
received from different resident clients. No TDS was needed to be deducted by any
of the clients.

• He received Rs.3,00,000 from a debtor which was written off as bad in the year
2018-19. Amount due from the debtor (which was written off as bad) was Rs.
5,00,000, out of which tax officer had only allowed Rs.3,00,000 as deduction in
computing the total income for assessment year 2019-20.

• He sold some furniture to his brother for Rs.7,00,000. The fair market value of such
furniture was Rs.9,00,000.

Other information:
▪ Depreciation in books of accounts is computed by applying the rates prescribed
under the Income tax laws.

▪ Mr.Krishna purchased a new car of Rs.12,00,000 on 1st September, 2022 and the
same was put to use in the business on the same day. No depreciation for the same
has been taken on car in the books of account.

You are required to compute business income of the assesse for AY. 2023-24.
 146

12. Mr.Ashish, a resident, aged 43 years, provides professional services in the field of interior
decoration. His Income & Expenditure A/c for the year ended 31st March, 2023 is as under:

Expenditure Rs. Income Rs.

To Employees’ Remuneration 13,66,000 By Consultancy Charges 58,80,000
To Administrative Exp. 3,14,000 By Interest on PPF Account 60,000
To General Expenses 75,000 By Int on savings bank a/c 20,000
To Electricity Expenses 65,000 By Interest on NSC VIII Issue 21,000
To Medical Expenses 80,000
To Purchase of Furniture 48,000
To Depreciation 90,000
To Net Income 39,43,000

The following other information relates to financial year 2022-23:

The expenses on Employees' Remuneration includes:

(a) Family Planning expenditure of Rs.20,000 incurred for the employees which was
revenue in nature. The same was paid through account payee cheque.

(b) Payment of salary of Rs.25,000 p.m. to sister-in-law of Mr.Ashish, who was in-charge of
the Accounts & Receivables department. However, in comparison to similar work
profile, the reasonable salary at market rates is Rs.20,000 p.m.

Amount received by Mr.Ashish as Employees' Contribution to EPF for the month of February,
2023 – Rs.10,000 was deposited after the due date under the relevant Act relating to EPF.

Medical Expenses of Rs.80,000 as appearing in the Income & Expenditure was expensed for the
treatment of father of Mr.Ashish.

General expenses as appearing in the Income & Expenditure A/c, includes a sum of Rs.25,000
paid to Ms.Anjaleen on 5th January, 2023 as commission for securing work from new clients.
This payment was made to her without deduction of tax at source.

Written down value of the depreciable assets as on 1st April, 2022 were as follows:
Professional Books Rs.90,000
Computers Rs.35,000

The new furniture as appearing in the Income & Expenditure A/c was purchased on 31st
August, 2022 and was put to use on the same day. The payment was made as under:
a) Rs.18,000 paid in cash at the time of purchase of new furniture on 31.08.2022;
b) Rs.19,000 paid by a/c payee cheque on 05.09.2022 as balance cost of new furniture;
c) Rs.11,000 paid in cash on 31.08.2022 to the transporter as freight charges for the new
furniture.

Mr.Ashish purchased a car on 02.04.2021 for Rs.3,35,000 for personal use. However on
30.04.2022 he brought the said car for use in his profession. The fair market value of the car as
on 30.04.2022 was Rs.2,50,000.
 147

The Gross Professional Receipts of Mr.Ashish for P.Y. 2020-21 was Rs.52,00,000.

You are required to compute income from profession of the assesse for AY. 2023-24.

13. Mr.Jayaprakash, aged about 40 years, is an authorized wholesale distributor of Fertilizers Ltd.
dealing with fertilizers and other agricultural products. Given below is his Trading and Profit &
Loss account for the previous year 2022-23.

Trading and Profit and Loss Account

To Opening stock 24,21,000 By Sales 3,12,50,100
To Purchases 2,28,00,500 By Closing stock 26,00,100
To Direct expenses 4,12,040
To Freight inward 2,92,000
To Gross Profit 79,24,660 --------------

To Salaries and wages 17,12,000 By Gross Profit 79,24,660

To General expenses 3,65,000 By Dividend received 17,20,000
To Rates and taxes 2,20,000 By Interest received on
To Interest paid on late FDs (net of tax) 1,08,000
filing of GST 2,845 By Rent received 7,20,000
To Income-tax paid 3,45,000 By Income-tax refund 18,000
To Interest paid to NBFC 1,20,000
To Depreciation 1,82,000
To Net Profit 75,43,815 ------------

The following additional information is provided by him:

Closing stock of previous year was undervalued by Rs.45,000.

Rates and taxes include Rs.1,000 paid towards late filing of his IT return for Assessment Year
2022-23 under section 234F of Income-tax Act.

Salaries include Rs.25,000 paid on single day by way of cash to his accountant.

Interest paid on loan of Rs.10,00,000 taken from a Non-Banking Finance company. Out of the
loan, amount of Rs.2 lakhs was used for personal purpose and the balance was used for
business purpose. No TDS was deducted while repaying the loan.

General expenses include Advertisement expense of Rs.20,000 paid by cheque towards an

advertisement in a souvenir published by local political party.

Depreciation charged is as per Income-tax Rules, however, it does not include depreciation on a
new Maruti Van purchased on 23rd September 2021 for his business use. The cost of the
vehicle is Rs.2,10,000.

Turnover for the year ending 31.03.2021 was Rs.3.08 crores.

 148

CHAPTER – 9 INCOME UNDER THE HEAD “CAPITAL GAINS”

CAPITAL GAINS: Any GAIN arising from TRANSFER of a CAPITAL ASSET shall be chargeable
to tax in the previous year in which TRANSFER TOOK PLACE.

CAPITAL ASSET - Section 2 (14):

“Capital asset” means:-

a. property of any kind held by an assessee, whether or not connected with his business or
profession;

b. Securities held by a Foreign Institutional Investor (FIIs).

c. Any unit linked insurance policy (ULIP) issued on or after 01.02.2021 (from A.Y.22-23 -
discussed later)

ASSETS NOT REGARDED AS CAPITAL ASSETS:

a. Stock-in-trade held by an assessee for the purposes of his business;

b. Personal effects (excluding jewellery; immovable property; paintings; drawings;

archaeological collections; sculptures and any work of art)

c. Agricultural land in rural area in India

d. Gold Deposit Bonds, 1999 or deposit certificates issued under Gold Monetisation
Scheme, 2015 notified by the Central Government

MEANING OF RURAL AGRICULTURAL LAND:

a. If situated within municipality limits and having a population of less than 10,000;

b. If situated outside the limits of a municipality:

Shortest aerial distance from the local Population according to the last
limits of a municipality preceding census

Up to 2 kms from the local limits < 10,000

Above 2 kms and up to 6 kms < 1,00,000
Above 6 kms and up to 8 kms < 10,00,000
Above 8 kms Rural Area (not a capital asset)
 149

TRANSACTIONS REGARDED AS TRANSFER:

• Sale
• Exchange
• Relinquishment
• Extinguishment of rights
• Compulsory acquisition under any law
• Conversion of capital asset into stock-in-trade
• Maturity or redemption of a zero-coupon bond

TRANSACTIONS NOT REGARDED AS TRANSFER:

• Gift, Will, Inheritance

• Distribution of assets by a HUF. to its members in kind at the time of partition

• Distribution of assets by a company to its shareholders at the time of liquidation

• Transfer of capital assets by a holding company to its wholly owned Indian subsidiary company
• Transfer of capital assets by a wholly owned subsidiary company to its Indian holding company

• Any transfer in the scheme of amalgamation

• Any transfer in the scheme of demerger

• Transfer of capital asset in the case of conversion of proprietary concern or firm into a company
• Transfer in the case of conversion of a company into a limited liability partnership

• Conversion of bonds or debentures of in to shares or debentures.

• Conversion of preference shares into equity shares of that company

• Transfer of asset under notified reverse mortgage scheme

• Transfer of Sovereign Gold Bond Scheme by way of redemption

TYPES OF CAPITAL ASSETS:

a. Short term capital asset
b. Long term capital asset

MEANING OF LONG TERM CAPITAL ASSET:

Any capital asset held for more than 36 months is a long-term capital asset. Any capital asset
held for less than or equal to 36 months is a short-term capital asset.

However the period of holding is 12 months in the case of the following assets:
a) a security including listed shares
b) a unit of an equity oriented mutual fund (36 months for debt oriented mutual fund)
c) a zero coupon bond

Note: In the case of IMMOVABLE PROPERTY (being land or building) & UNLISTED SHARES
the period of holding (POH) is 24 months.
 150

Important: Any capital asset acquired by way of gift, will, inheritance, etc. the period of holding
by the previous owner shall also be taken into consideration.

Important: Any asset on which depreciation is claimed by the assessee, such asset shall always be
a short-term capital asset irrespective of period of holding.

Difference between short term and long term capital gain:

Particulars Short term Long term

Tax rate Normal rates Flat rate of 20% or 10%
Deductions under chapter VIA Available Not available
Indexation benefit Not available Available
Sec.54, 54B, 54EC, 54EE, 54F Not available Available

Computation of short-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Cost of acquisition xxx
Less: Cost of improvement xxx
Short-term capital gains xxx

Computation of long-term capital gains:

Sale consideration xxx
Less: Selling expenses xxx
Net consideration xxx
Less: Indexed cost of acquisition xxx
Less: Indexed cost of improvement xxx
Long-term capital gains xxx

Year Index Year Index Year Index Year Index

01-02 100 02-03 105 03-04 109 04-05 113
05-06 117 06-07 122 07-08 129 08-09 137
09-10 148 10-11 167 11-12 184 12-13 200
13-14 220 14-15 240 15-16 254 16-17 264
17-18 272 18-19 280 19-20 289 20-21 301
21-22 317

22-23: 331
 151

Meaning of Indexed Cost of Acquisition:

COST
Indexed cost = --------------------------------------------------------------- x Index of the year of transfer
2001-02 (or) the first year of the current
assessee who held the asset
(whichever is later)

Indexation: However, the Courts have held that indexed cost of acquisition has to be computed
with reference to the year in which the previous owner first held the asset and not the year in
which the current assessee became the owner of the asset.

Meaning of the term “COST”:

a. If the asset was acquired before 1.4.2001:

Purchase price (or) fair market value as on 1.4.2001
shall be the cost according to the choice of the assessee.

Note: However, in case of land or building, f.m.v. as on 01.04.2001 shall not exceed the stamp
duty value, wherever available, as on 01.04.2001.

b. If the asset was acquired on or after 1.4.2001:

Purchase price shall be the cost.

Meaning of indexed cost of improvement:

Any improvements before 1.4.2001 shall be ignored. In other words improvements on or after
1.4.2001 is to be considered for indexation.

COST OF IMPROVEMENT
ICOI = -------------------------------------------------------- x Index of the year of transfer
Index of the year during which
improvement took place

Problems: Meaning of Capital Asset:

1. State whether the following are capital assets are not:
Property held by a dealer in property; Gold held by a jeweller; Personal car and air conditioner;
Residential house for personal use; Personal mobile phone; Loose diamonds; Gold and silver
coins used for puja; Furniture held for personal use; Furniture in the office of a chartered
accountant; Shares held by a dealer in shares; Goodwill of a business (self-generated); Paintings
and drawings; Statue of Lord Ganesh (sculpture); Securities held by FII as stock in trade.
 152

2. Miss D (an actress), has furnished the following details:

Sale proceeds on sale of BMW car for Rs.90,00,000 which was used exclusively for personal
purposes. This car was acquired for Rs.50,00,000.
Sale proceeds of Benz car used for her profession was sold for Rs.40,00,000. The w.d.v. of the
car as on 01.04.2022 was Rs.30 lakhs.
Sale of personal jewels made of platinum and paintings for Rs.1 crore which were acquired for
25 lakhs.

3. Mrs.X an individual resident woman wanted to know whether income tax is attracted on sale of
gold and jewellery gifted to her by her parents on the occasion of her marriage in the year 2006
which was purchased at a total cost of Rs.18,00,000?

4. State whether the agricultural land mentioned below is a capital asset or not:

S. no. Area Distance Population

from the local limits Answer
1. A 1 km 9,000 Not a CA
2. B 1.5 kms 12,000 CA
3. C 2 kms 11,00,000 CA
4. D 3 kms 80,000 Not a CA
5. E 4 kms 3,00,000 CA
6. F 5 kms 12,00,000 CA
7. G 6 kms 8,000 Not a CA
8. H 7 kms 4,00,000 Not a CA
9. I 8 kms 10,50,000 CA
10. J 9 kms 15,00,000 Not a CA

Short term or Long term Capital Assets (period of holding):

5. State whether the asset is short term or long term in the following cases:
X purchases a residential house on 10.3.2020 and sells it on 16.02.2023.
X purchases a land on 10.3.2021 and sells it on 26.12.2022.

Y purchases listed shares in an Indian Company on 10.3.2021 and sells it on 6.6.2022.

R purchases shares in an unlisted company on 10.03.2021 and sells these shares on 20.11.2022

Z acquires units of an equity oriented mutual fund on 7.7.2021 and transfers it on 10.7.2022.
Zero coupon bonds of Eligible Corporation, held for 14 months

Mr.X purchased a house in 2006-07 and gifted it to his son Mr.Y on 1.11.2022 and Mr.Y sells it to
Mr.Z on 23.01.2023.

X Ltd. sells plant and machinery (entire block) in 2022-23 after using the asset for 5 years.
 153

Computation of Short Term Capital Gain:

6. X is a HUF. The family acquires a residential house at Chennai for Rs.62,75,000 on 1.4.2022. The
family undergoes complete partition on 1.11.2022 and the residential house is allotted to Y, a
member of the family. Y sells the house on 15.01.2023 for Rs.65,00,000. Expenses in connection
with sale is Rs.75,000. Compute taxable capital gains in the hands of Y.

Computation of Long Term Capital Gain:

7. Mr.A purchased a house property in 1992 for Rs.5,00,000. He sells the house in December 2022.
The fair market value of the house as on 1.4.2001 was Rs.18,30,000. Compute the indexed cost of
acquisition.

What would be your answer if:

Mr.A gifts the house to Mr.B, his son in April 2006 and Mr.B sells the house in December 2022. What
will be the indexed cost of acquisition in the hands of Mr.B. (CII: 2006-07: 122)

Government acquired the house from Mr.A in December 2021 but the compensation was paid in
December 2021. What will be the indexed cost of acquisition? (CII: 2021-22: 317)

8. X purchased a piece of land on 04.01.1995 for Rs.12,00,000. This land was sold by him on
15.12.2022 for Rs.70,00,000. The fair market value of the land as on 1.4.2001 was Rs.18,00,000.
Expenses on transfer were 2% of the sale price. Compute the capital gains.

9. X acquired the property in the year 2004-05 for Rs.4,75,000 and paid Rs.26,000 as registration
charges. X died on 15.9.2010 and the property was transferred to his son Y through inheritance.
The market value of the property as on 15.9.2010 was Rs.25,00,000. Y sold this property on
31.10.2022 for Rs.45,00,000. Compute capital gains. Also compute capital gains on the basis of
ruling given in Bombay and Delhi High Courts. (CII: 2004-05: 113 and 2010-11: 167)

10. X acquired land in 77-78 for Rs.2,00,000 and gifted it to his major son Y on 1.6.89, when the market
value of the land was Rs.2,50,000. Stamp Duty Value as on 01.04.2001 is Rs.16,00,000. The fair
market value of that land as on 1.4.2001 was Rs.18,00,000. Y sold the land on 15.01.2023 for
Rs.61,00,000. Expenses in connection with transfer Rs.1,00,000. Compute capital gains.
(CII: 2019-20: 289)

11. Mr.C purchases a house property for Rs.1,06,000 on 15.5.1975. The following expenses are incurred
by him for making additions:

Cost of construction of the first floor in 82-83: Rs.3,10,000

Cost of construction of the second floor in 02-03: Rs.7,35,000
Reconstruction of the house in 12-13: Rs.5,50,000

FMV. of the property on 1.4.2001 is Rs.8,50,000. The house is sold by Mr.C on 10.01.2023 for
Rs.75,00,000 (expenses incurred on transfer Rs.2,00,000). (CII: 2002-03: 105 & 2012-13: 200)
 154

12. R acquired land on 6.7.1998 for Rs.3,20,000. He constructed ground floor in the previous year
2004-05. Cost of construction was Rs.5,65,000. He further spends Rs.2,58,000 in the
construction of first floor which was completed in the previous year 2007-08. The entire house
property was sold on 04.02.2023 for Rs.73,00,000. Fair market value of the land as on
01.04.2001 was Rs.6,00,000. Compute capital gains. (CII: 2004-05: 113 & 2007-08: 129)

13. Mr.A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident.

The value of stock lost (total damaged) was Rs.6,50,000. Certain portion of the machinery could
be salvaged. The opening WDV of the block as on 1.4.2022 was Rs.10,80,000.

During the process of safeguarding machinery and in the fire fighting operations, Mr.A lost his
gold chain and a diamond ring, which he had purchased in April, 2004 for Rs.84,750. The market
value of these two items as on the date of fire accident was Rs.3,00,000.

Mr.A received the following amounts from the insurance company:

a. Towards loss of stock Rs.4,80,000

b. Towards damage of machinery Rs.6,00,000
c. Towards gold chain and diamond ring Rs.3,00,000

You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961. (CII: 2004-05: 113) (sum no.4 pg. no.4.449)
 155

SECTION 54: Transfer of a residential house and purchase or construction of a

residential house:

Exemption under this section is available for Individuals and HUF only
The house transferred should be a residential house
The residential house transferred should be a long-term capital asset
A residential house should be purchased or constructed on or before the due date of filing ROI.

Amount of exemption: Amount invested is exempted from tax.

Where the amount of capital gains exceeds Rs.2 crores:

Exemption can be availed in respect of ONE residential house purchased or constructed in India

Where the amount of capital gains does not exceed Rs.2 crores (once in a life time):
Exemption can be availed in respect of TWO residential houses purchased or constructed in India.
This exemption is available to the assessee once in a life time.

Scheme of deposit: If the new house is not purchased or constructed before the “due date” then the
same can be deposited under Capital Gain Account Scheme for claiming exemption.

Extension of time limit if deposit is made: The new house/houses should be purchased one year
before or two years after the date of transfer (three years for construction).

Withdrawal of exemption: The new residential house should not be transferred within a period of
three years from the date of its purchase or construction. If transferred, the exemption previously
granted shall be reduced from the cost of acquisition for computing capital gains.

Note: The unutilized deposit amount in the capital gain account scheme, in the case of an assessee,
who dies before the expiry of the two/three years stipulated period, cannot be taxed in the hands of
the deceased or the legal heirs.

SECTION 54 B: Transfer of an Agricultural land and purchase of an agricultural land

The agricultural land transferred should be a capital asset first (i.e. situated in urban area)
This section is available to Individuals and HUF only
The agricultural land must be used by the assessee or by his parents or HUF for agricultural purposes
at least for two years immediately preceding the date of transfer.

Exemption is available for both short term and long term capital gains.
The agricultural land (urban or rural) should be purchased within two years from the date of
transfer.

Exemption, Scheme of deposit and withdrawal of exemption are same as per Section 54.
 156

Where an urban agricultural land is compulsorily acquired under any Law and compensation is
determined or approved by the Central Government or by RBI, the capital gain on such acquisition is
fully exempt u/s.10 (37).

SECTION 54 D: Transfer (on account of compulsory acquisition) of any land or building

used for industrial purposes and purchase of land or building for
industrial purposes.

This section is available to all assesses

The land or building should have been used for industrial purposes by the assessee at least for two
years immediately preceding the date of transfer.

The industrial land or building can be either a short term or a long term capital asset.
The new industrial land or building should be purchased within 3 years from the date of receipt of
compensation.

Amount of exemption, Scheme of deposit, Withdrawal of exemption are same as per section 54.

SECTION 54 EC: Transfer of land or building and investment in a “Specified Asset”

This section is available to all assessees.

The land or building transferred should be a long-term capital asset.
The assessee should invest in a “specified asset” within 6 months from the date of transfer.

Specified asset means bonds redeemable after 5 years issued by the National Highways Authority of
India (NHAI) or by the Rural Electrification Corporation Ltd (REC) or any other bond notified by the
Central Government.
The assessee should not transfer or convert or avail loan or advance on the security of such bonds
within a period of 5 years from the date of acquisition of such bonds.
Amount of exemption: Rs.50 lakhs (or) amount invested within 6 months (whichever is less)

SECTION 54 EE: Transfer of any Capital Asset and investment in notified units of
specified fund:

OBJECTIVE: TO RAISE MONEY TO FINANCE NEW START-UPS

This section is available to all assessees.

The asset transferred should be a long-term capital asset.
The assessee should invest within a period of 6 months from the date of transfer.
The above units should not be transferred or converted into money within a period of three years.
Amount of exemption: Rs.50,00,000 (or) Amount invested (whichever is less)
 157

SECTION 54 F: Transfer of any capital asset (other than a residential house) but
purchase/construction of a residential house.

This section is available for Individual and HUF only

The capital asset transferred should be a long-term capital asset
A new residential house should be purchased in INDIA within one year before or two years after
from the date of transfer (3 years for construction)
The assessee should not own more than one residential house on the date of transfer

Amount of exemption:
a. If entire net consideration is invested, entire capital gain is exempt from tax

b. If part of net consideration is invested then amount exempt is:

Amount invested
---------------------------- (x) LTCG (before exemption)
Net consideration

Withdrawal of exemption:
a) If the new residential house is transferred within a period of three years; or
b) The assessee should not purchase or construct another house within the stipulated period.

14. Problems on Section 54:

Mr.R sold his residential house on 27.12.2022 which has resulted in a long-term capital gain of
Rs.1,50,00,000. For claiming exemption u.s.54, he purchases two residential houses in Chennai
for Rs.60,00,000 each within the time allowed. Compute taxable capital gains if has exercised
his option to claim exemption for two houses.

What will be your answer in the above case if the sale had resulted in a long-term capital gain of
Rs.2,25,00,000?

15. Determine the amount of exemption u/s.54 and taxable capital gains:
X sells a residential house in Agra for 73,00,000 on 23.12.2022 which was purchased by him on
20.4.2005 for Rs.10,53,000. Selling expenses in this connection Rs.25,000. On 16.03.2023, he
purchases a house in Chennai for Rs.50,00,000.

On 18.11.2023, X sells the house in Chennai for Rs.53,00,000. Can he also claim exemption under
section 54 in respect of transaction ii. (CII: 05-06: 117)

16. X sold a residential house on 15.01.2023 for a consideration of Rs.99,74,000. Transfer expenses
incurred amounted to Rs.24,000. The said residential house was purchased on 05.06.1998 for
Rs.15,20,000 (FMV as on 01.04.2001 Rs.17,60,000). The due date for furnishing return of income is
July 31, 2023. Stamp Duty Value as on 01.04.2001 is not available. Compute capital gains for
Assessment Year 2023-24 if:
 158

Case a. he invests Rs.40,00,000 for purchase of a new house on 15.07.2023.

Case b. he purchased land for construction of a house on 12.10.2022 for Rs.15,00,000 and
deposited Rs.20,00,000 in the Capital Gain Account Scheme on 20.07.2023 and a further
sum of Rs.10,00,000 on 30.11.2023.

Problems on Section 54B:

17. R purchased an agricultural land in 2004-05 for Rs.6,78,000. The land was being used for
agricultural purposes by him. This land is sold by him on 02.02.2023 for Rs.35,00,000. He has
spent Rs.8,50,000 for acquiring an agricultural land on 21.07.2023 and has deposited
Rs.6,00,000 under the Capital Gains Account Scheme on 31.07.2023.

Out of the amount deposited, he withdrew Rs.5,70,000 for purchasing agricultural land on
15.01.2025. Compute taxable amount of capital gains for assessment years 2023-24; 2024-25;
2025-26 and 2026-27; if:

A. The agricultural land which was sold is urban agricultural land;

B. The agricultural land which was sold is rural agricultural land (CII: 04-05: 113)

18. X is in possession of agricultural land situated within urban limits, which is used for agricultural
purposes during the preceding 3 years by his father. On 10.01.2023 this land was compulsorily
acquired by the Government of India on a compensation fixed and paid by it for Rs.10,00,000.
Advise X as to the tax consequences, assuming that the entire amount is invested in purchase of
shares.

Problems on Section 54EC:

19. On 02.01.2023, X sells land for Rs.90,00,000 (cost of acquisition on 10.3.2003: Rs.12,60,000).
On 5.02.2023, he acquires bonds of National Highway Authority of India (investment being
Rs.35,00,000). Again on 03.05.2023 he further invested Rs.25,00,000 in these bonds. Find out
the amount of exemption under section 54 EC and taxable capital gains. (CII: 02-03: 105)

20. R acquired a land on 15.12.2008 for Rs.5,48,000 which was sold on 15.11.2022 for
Rs.24,20,000. Expenses of transfer were Rs.20,000. He invests Rs.10,00,000 in the bonds of
Rural Electrification Corporation Ltd on 16.04.2023. Compute capital gains for the A.Y.2023-24.

State the period for which the bonds should be held by the assessee. What will be the
consequences if such bonds are sold within the specified period? What will be the
consequences if R takes a loan against the security of such bonds? (CII: 08-09: 137)
 159

Problems on Section 54F:

21. X sells jewellery on 10.7.2022 for Rs.42,50,000 (cost on 15.6.2004 Rs.6,78,000 and selling
expenses Rs.50,000). On 10.7.2022, he owns one residential house property. To get
the benefit of exemption under section 54F, X deposits on 30.5.2023 Rs.33,60,000 in
Capital Gains Deposit Scheme. By withdrawing from the Deposit Account he purchases a
residential house property at Delhi on 16.12.2023 for Rs.30,24,000. (CII: 04-05: 113)

Ascertain:--
• the amount of capital gain chargeable to tax for the assessment year 2023-24;
• tax treatment of the unutilized amount;
• when can he withdraw the unutilized amount; and
• what X has to do to ensure that the exemption under section 54 F is never taken back.

Section 54 & Section 54F:

22. Anish owns a residential house which is self-occupied and also a house plot. He sells the house
on 28.2.2023 and the house plot on 04.03.2023 for Rs.18 lacs and Rs.15.60 lacs, respectively.
The house was purchased on 17.10.2002 for Rs.4.2 lacs and the plot on 26.12.2006 for Rs.3.66
lacs. Anish has purchased a new residential house on 03.05.2023 for Rs.10 lacs. Compute
"Capital Gain" for the A.Y. 2023-24. Cost inflation indices for the financial year 2002-2003,
2006-2007 and 2022-23 are 105, 122 and 331 respectively.

Problems on Section 54D:

23. Mr.S, a resident, is engaged in the business of manufacturing of motor parts. A plot of industrial
land which was used by him for business purpose for last 10 years was compulsorily acquired
by Central Government on 07.05.2022. The compensation of Rs.14,00,000 was received on
27.02.2023. Such property was purchased by him on 08.08.2006 for Rs.2,44,000. He purchased
another plot of industrial land on 21.04.2023 for Rs.6,00,000. Compute taxable capital gains.
CII: PY 06-07: 122.

SECTION 54 H: Extension of time limit under compulsory acquisition cases:

Under compulsory acquisition cases, the time limit for the purpose of acquiring a new asset to
avail exemption under section 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of
receipt of such compensation and not from the date of transfer.
 160

CAPITAL GAINS – PART III:

TREATMENT OF ADVANCE MONEY RECEIVED AND FORFEITED:
Any advance money received by the assessee shall be taxable under the head “Income from
other sources” if:

a) such advance is forfeited; and

b) the negotiations did not result in transfer of such capital asset

Provision before 01.04.2014: Advance money received and forfeited shall be reduced from the
cost and the reduced cost is considered for indexation.

SECTION 50 C: IN THE CASE OF IMMOVABLE PROPERTY:

Sale consideration is taken as the STAMP DUTY VALUE or the ACTUAL SALE PRICE whichever
is higher. Where the stamp duty value does not exceed 110% of the actual sale price, then actual
sale price shall be deemed to be the full value of consideration.

SDV on the date of agreement and on the date of registration are not same:
Ordinarily, SDV on the date of registration should be considered. However, SDV on the date of
the agreement can be opted only in a case where the amount of consideration, or part thereof,
has been paid by way of an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account or through any other prescribed electronic
modes, on or before the date of the agreement.

In case of dispute on the part of the assessee:

In case of dispute, the assessee can request the A.O. to refer the matter to the Valuation Officer.

e.g. case I case II case III

Actual sale price 25,00,000 25,00,000 25,00,000
Stamp duty value 32,00,000 32,00,000 32,00,000
Value determined by Valuation Officer 22,00,000 28,00,000 35,00,000

As per Section 50C (sale consideration) 25,00,000 28,00,000 32,00,000

SECTION 50 B: COMPUTATION OF CAPITAL GAIN IN THE CASE OF SLUMP SALE

‘Slump Sale’ means the 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 and liabilities.

a) “Fair market value” of capital assets as on the date of transfer, shall be deemed to be the
full value of consideration received for computing capital gains.
b) Cost of acquisition and cost of improvement shall be the “NET WORTH” of the undertaking
c) NET WORTH means value of total assets minus value of total liabilities of the “DIVISION”
d) Any change in the value of assets on account of revaluation shall be ignored
 161

e) In case of depreciable assets, written down value (as per I.T. Act) shall be considered
f) In case of non-depreciable assets, book value shall be considered
g) Net worth cannot be negative
h) Short term or Long term depends upon the period for which the undertaking is owned and
held by the assessee.

i) Indexation benefit is not available

j) A report of a C.A. in Form No.3CEA showing the amount of net worth should be furnished

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET IN TO STOCK-IN-TRADE:

Conversion of capital asset into stock-in-trade amounts to transfer.

I. Computation of capital gain on conversion:

Fair Market Value on the date of conversion xxx
Less: Indexed cost of acquisition xxx
Long term capital gain xxx

The above capital gains are taxed only in the year in which the stock-in-trade is sold.

II. Computation of business income on sale of stock-in-trade:

Sale proceeds of stock in trade xxx
Less: Cost of stock-in-trade (being f.m.v. on the date of conversion) xxx
Income from Business xxx

MEANING OF ‘REVERSE MORTGAGE’:

A senior citizen who owns a house but not having regular source of income can mortgage his
property with a bank. The bank in turn pays him periodic installments or lump sum amount to
the senior citizen. The borrower can continue to stay in the house and as well as receive regular
income from the bank.

The borrower is not required to pay the principal as well as the interest to the bank during his
life time. The bank will recover the loan along with the interest by selling the house after the
death of the borrower. However, before selling the property, the legal heirs are given an option
to repay the loan along with interest and get the mortgaged property released.

Tax treatment:
Mortgage of a property in a transaction of reverse mortgage under a scheme notified by Central
Government shall not be regarded as ‘transfer’. Therefore, no capital gains tax. The periodic
installments or lump sum received by the senior citizen is exempt from tax u.s.10 (43).
 162

COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

Under compulsory acquisition cases, capital gains are taxable in the year of receipt of
compensation by the assessee. However, if compensation is received based on an INTERIM
ORDER of a court, tribunal or other authority, such compensation shall be deemed to be income
of the previous year in which the FINAL ORDER of such court, tribunal or other authority is made.

RECEIPT OF INSURANCE CLAIMS FOR DAMAGE OF CAPITAL ASSETS:

“Damage or Destruction” of a capital asset will be treated as transfer (extinguishment) provided
the asset is insured and compensation is received. Such gains are taxed in the year during which
the compensation is received from the “Insurer”.

The damage or destruction is as a result of a) flood, typhoon, hurricane, cyclone, earthquake; b)

riot or civil disturbance; or c) accidental fire or explosion; or d) action by an enemy.

SELF-GENERATED ASSETS:
Self-generated assets include:
a. Goodwill of a business/profession;
b. tenancy rights,
c. route permits,
d. loom hours,
e. the right to manufacture, produce and process any article or thing, a trade mark or brand
name associated with a business and
f. a right to carry on any business or profession. (Section 55)

The cost of the above self-generated assets is “Nil”. Even if the aforesaid assets were acquired
before April 1, 2001, the option of adopting the fair market value on the said date is not available.
The entire sale consideration shall be treated as “capital gains”.

RULE: CAPITAL GAINS ARE TAXED IN THE YEAR IN WHICH TRANSFER TOOK PLACE.

Exceptions to the above rule:

a. Conversion of Capital Asset in to Stock in trade
b. Compulsory Acquisition under any law
c. Extinguishment (destroyed) of a capital asset and Insurance compensation is received
d. In the case of Joint Development Agreement
e. ULIP receipts

Section 50CA: Capital gains in the case of UNQUOTED SHARES:

The full value of consideration shall be the higher of the following:
• Actual consideration received; or
• FMV of shares as per valuation rules prescribed by the CBDT
 163

JOINT DEVELOPMENT AGREEMENTS – Section 45(5A):

Where the capital gains arises to an Individual or HUF from the transfer of land or building or both,
under a specified agreement, shall be chargeable to tax in the year in which certificate of
completion for whole or part of the project is issued by the competent authority.

The full value of consideration received shall be the aggregate of:

(i) his share of stamp duty value in the project as on the date of issue of certificate of completion;
(ii) consideration received in cash, if any.

“Specified agreement” means a registered agreement in which a person owning land or building or
both, agrees to allow other person to develop a real estate project on such land, in consideration of a
share, being land or building or both in such project, whether with or without payment of part of the
consideration in cash.

Advance money received and forfeited before or after 01.04.2014:

24. Mr.A received an advance of Rs.50,000 on 1.12.2022 against the sale of his house. However, due to
non-payment of instalment in time, the contract was cancelled and the amount of Rs.50,000 was
forfeited. Discuss the taxability or otherwise in the hands of recipient Mr.A.

25. Mr.Suman received an advance of Rs.3 lakhs on 12.11.2022 to transfer his residential house property.
Since the transfer was not effected during the previous year due to failure in negotiations, he
deducted the advance money forfeited from the cost of acquisition of the property. State whether the
treatment is correct by Mr.Suman.

Problems on Section 50C:

26. Mr.T inherited a house in Jaipur under will of his father in May, 2003. The house was purchased
by his father in January, 2000 for Rs.2,50,000. He invested an amount of Rs.7,02,000 in
construction of one more floor in this house in June, 2005. The house was sold by him in
November, 2022 for Rs.37,50,000.

The valuation adopted by the registration authorities for charge of stamp duty was Rs.47,25,000
which was not contested by the buyer, but as per assessee’s request, the Assessing Officer made a
reference to Valuation Officer. The value determined by the Valuation Officer was Rs.50,00,000.

Brokerage @ 1% of sale consideration was paid by Mr.T to Mr.S. The fair market value as on
01.04.2001 was Rs.3,27,000. You are required to compute the amount of capital gain chargeable
to tax for A.Y.2023-24. (CII: 2003-04: 109; 2005-06: 117)
 164

Stamp Duty Value on the DOA and Stamp duty value on the DOR:
27. Mr.S entered into an agreement with Mr.D to sell his residential house located at Kanpur on
16.08.2022 for Rs.1,50,00,000. The sale proceeds was to be paid in the following manner:

i. 20% through account payee bank draft on the date of agreement;

ii. 60% on the date of the possession of the property;
iii. Balance after the completion of the registration of the title of the property.

Mr.D was handed over the possession of the property on 15.12.2022 and the registration
process was completed on 14.01.2023. He paid the sale proceeds as per the sale agreement.
The value determined by the stamp duty authority:-

a) on 16.08.2022 was Rs.170 lakhs;

b) on 15.12.2022 was Rs.171 lakhs; and
c) on 14.01.2023 was Rs.171.50 lakhs.

Mr.S had acquired the property on 01.04.2001 for Rs.30,00,000. After recovering the sale
proceeds from Mr.D, he purchased two residential house properties, one in Kanpur for
Rs.20,00,000 on 24.03.2023 and another in Delhi for Rs.35,00,000 on 28.05.2023. Compute
capital gains for A.Y.2023-24.

28. Mr.Shiva purchased a house property on February 15, 1979 for ₹ 3,24,000. In addition, he has also
paid stamp duty charges @ 10% on the stamp duty value of ₹ 3,50,000.

In April, 2007, Mr.Shiva entered into an agreement with Mr.Mohan for sale of such property for ₹
14,35,000 and received an amount of ₹ 1,11,000 as advance. However, the sale consideration did not
materialize and Mr.Shiva forfeited the advance.

In May 2014, he again entered into an agreement for sale of said house for ₹ 20,25,000 to
Ms.Deepshikha and received ₹ 1,51,000 as advance. However, as Ms.Deepshikha did not pay the
balance amount, Mr.Shiva forfeited the advance. In August, 2014, Mr.Shiva constructed the first floor
by incurring a cost of ₹ 3,90,000.

On November 15, 2022, Mr.Shiva entered into an agreement with Mr.Manish for sale of such house
for ₹ 30,50,000 and received an amount of ₹ 1,50,000 as advance through an account payee cheque.
Mr.Manish paid the balance entire sum and Mr.Shiva transferred the house to Mr.Manish on February
20, 2023. Mr.Shiva has paid the brokerage @ 1% of sale consideration to the broker.

On April 1, 2001, fair market value of the house property was ₹ 11,85,000 and Stamp duty value was
₹ 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15th November,
2022 was ₹ 39,00,000 and on 20th February, 2023 was ₹ 41,00,000. Compute the capital gains in the
hands of Mr.Shiva for A.Y.2023-24.

CII for F.Y. 2001-02: 100; F.Y. 2007-08: 129; F.Y. 2014-15: 240; F.Y. 2022-23: 331
 165

29. Mrs.Yuvika bought a vacant land for ₹ 80 lakhs in May 2004. Registration and other expenses
were 10% of the cost of land. She constructed a residential building on the said land for ₹ 100
lakhs during the financial year 2006-07.

She entered into an agreement for sale of the above said residential house with Mr.Johar (not a
relative) in April 2015. The sale consideration was fixed at ₹ 700 lakhs and on 23.4.2015,
Mrs.Yuvika received ₹ 20 lakhs as advance in cash by executing an agreement. However, due to
failure on part of Mr.Johar, the said negotiation could not materialise and hence, the said
amount of advance was forfeited by Mrs.Yuvika.

Mrs.Yuvika, again entered into an agreement on 01.08.2022 for sale of this house at ₹ 810 lakhs.
She received ₹ 80 lakhs as advance by RTGS. The stamp duty value on the date of agreement
was ₹ 890 lakhs. The sale deed was executed and registered on 14.01.2023 for the agreed
consideration. However, the State stamp valuation authority had revised the values, hence, the
value of property for stamp duty purposes was ₹ 900 lakhs. Mrs.Yuvika paid 1% as brokerage
on sale consideration received.

Subsequent to sale, Mrs.Yuvika made following investments:

Acquired two residential houses at Delhi for ₹ 130 lakhs and ₹ 50 lakhs on 31.01.2023 and
15.05.2023.

Acquired a residential house at UK for ₹ 180 lakhs on 23.03.2023.

Subscribed to NHAI capital gains bond (approved under section 54EC) for ₹50 lakhs on
29.03.2023 and for ₹ 40 lakhs on 12.05.2023.

Compute the income chargeable under the head 'Capital Gains' of Mrs.Yuvika for A.Y.2023-24
The choice of exemption must be in the manner most beneficial to the assessee.

Cost Inflation Index: F.Y. 2004-05 - 113; F.Y. 2006-07 - 122; F.Y. 2022-23 - 331.

Conversion of capital asset in to stock in trade:

30. Mr.Aarav converts his plot of land purchased in July, 2003 for Rs.76,300 into stock-in-trade on
31st March, 2022. The fair market value as on 31.03.2022 was Rs.3,00,000. The stock-in-trade
was sold for Rs.3,25,000 in the month of January, 2023. Compute taxable income, if any, and if
so, under what head of income and for which assessment year.

Cost inflation index: F.Y.03-04: 109; F.Y.21-22: 317

31. Mrs.Harshita purchased a land at a cost of Rs.34,88,000 in the financial year 2003-04 and held
the same as her capital asset till 20th March, 2022. She started her real estate business on 21st
March, 2022 and converted the said land into stock-in-trade of her business on the said date,
when the fair market value of the land was Rs.210 lakhs.
 166

She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
Rs.10 lakhs. Construction was completed in February, 2023. She sold 10 flats at Rs.30,00,000
per flat in March, 2023. The remaining 5 flats were held as stock on 31st March, 2023.

She invested Rs.50 lakhs in bonds issued by NHAI on 31st March, 2023 and another Rs.50 lakhs
in bonds of REC Ltd in April, 2023. Compute capital gains & business income for assessment
year 2023-24 indicating clearly the reasons for treatment for each item.

(Cost inflation Index: 2003-04: 109; 2021-22: 317) (sum no.3; page no.4.447)

Problem on Reverse Mortgage:

32. Mr.Suresh (senior citizen) received Rs.25,00,000 on 23.01.2023 on transfer of his residential
building in a transaction of reverse mortgage under a scheme notified by the Central
Government. The building was acquired in March 2002 for Rs.8,00,000. Is the amount received
on reverse mortgage chargeable to tax under the head ‘Capital Gains’?

Answer:
Mortgage of property with a bank under reverse mortgage scheme notified by the Central
Government shall not be regarded as transfer. Hence, amount received by Mr.Suresh under RMS is
not chargeable to tax.

Note: Amount received under RMS from a bank either in lumpsum or in installments is exempt
from tax under section 10(43) of the Income-tax Act.

33. Mr.Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr.Abhishek
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse
mortgage transaction? (sum no.6; page no.4.369)

Answer:
Mortgage of property with a bank under reverse mortgage scheme notified by the Central
Government shall not be regarded as transfer. Hence, amount received by Mr.Abhishek under RMS
is not chargeable to tax.

Note: Amount received RMS from the bank either in lumpsum or in installments is exempt from tax
under section 10(43) of the Income-tax Act.

Note: However, capital gain tax would be attracted only at the stage of alienation (surrender) of
the mortgaged property for the purposes of recovering the loan.
 167

34. Mrs.M, an individual aged 68 years, mortgaged her residential property, purchased for
Rs.3,15,000 on 01.10.2002, with a bank, under a notified reverse mortgage scheme and was
sanctioned a loan of Rs.20 lakhs. As per the said scheme, she was receiving the loan amount in
equal monthly installments of Rs.30,000 per month from the bank.

Mrs.M was not able to repay the loan on maturity and in lieu of settlement of the loan,
surrenders the residential property to the bank. Bank sold the property for Rs.25 lakhs on
22.02.2023. She had no other income during the year. Discuss the tax consequences and
compute tax for A.Y.2023-24. (CII: 2002-03: 105)

Answer:
Mortgage of property with a bank under reverse mortgage scheme notified by the Central Government shall
not be regarded as transfer. Hence amount received by Mrs.M under RMS is not chargeable to tax.

Note: Amount received under RMS from the bank either in lumpsum or in installments is exempt from tax
under section 10(43) of the Income-tax Act. Hence, amount received by Mrs.M Rs.30,000 p.m. from the bank
is exempt under section 10(43).

Note: However, capital gain tax would be attracted only at the stage of alienation (surrender) of the
mortgaged property for the purposes of recovering the loan.

Computation of capital gain in the hands of Mrs.M on sale of property by the Bank

Sale consideration 25,00,000

Less: Indexed cost of acquisition 9,93,000 (315000 / 105 x 331)
Taxable Long-term capital gain 15,07,000

Tax on total income: (15,07,000 – 3,00,000)*20% + 4% cess: Rs.2,51,060 (rounded off)

Computation of capital gain in the case of slump sale (Section 50 B)

35. The Balance Sheet of LMN Ltd as on 30th November 2022, being the date on which Unit N has
been transferred by way of slump sale is given hereunder:

BALANCE SHEET AS ON 30.11.2022

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up capital 1,700 Fixed Assets:
Reserves 620 Unit L 150
Unit M 150
Unit N 550
Liabilities
Unit L 40 Other assets
Unit M 110 Unit L 520
Unit N 90 Unit M 800
Unit N 390
TOTAL 2,560 TOTAL 2,560
 168

• Using the information given below, calculate the capital gain arising on slump sale of Unit N:

• Slump sale consideration Rs.850 lakhs. Fair market value of the assets as on the date of transfer
is Rs.880 lakhs.

• Fixed assets of Unit N includes land which was purchased at Rs.60 lakhs in the year 2008 and
revalued at Rs.90 lakhs as on 31.03.2022.

• Fixed assets of Unit N reflected at Rs.460 lakhs (Rs.550 lakhs less land value of Rs.90 lakhs) is the
written down value of depreciable assets as per books. However, the written down value of
these assets under section 43 (6) of the Income-tax Act is Rs.410 lakhs.

• Other assets of Unit N shown at Rs.390 lakhs represent book value of non-depreciable assets.

• Unit N is in existence since July, 2008

• CII may be taken as 133 for 2008-09 and 331 for 2022-23

36. PQR Ltd has two units – one engaged in manufacture of computer hardware and the other
involved in developing software. As a restructuring drive, the company has decided to sell its
software unit as a going concern by way of slump sale for Rs.335 lakhs to a new company called S
Ltd, in which it holds 74% equity shares. Fair market value of the assets as on the date of
transfer is Rs.385 lakhs.

The balance sheet of PQR Ltd as on 31st March 2023, being the date on which software unit has
been transferred, is given hereunder:

BALANCE SHEET AS ON 31.03.2023

Liabilities Rs. in lakhs Assets Rs. in lakhs

Paid up share capital 300 Fixed Assets:
General Reserve 150 Hardware unit 170
Share premium 50 Software unit 200
Revaluation Reserve 120 Debtors
Current liabilities Hardware unit 140
Hardware unit 40 Software unit 110
Software unit 90 Inventories
Hardware unit 95
Software unit 35
Total 750 Total 750
 169

Following additional information is furnished by the management:

a. The software unit is in existence since May, 2011

b. Fixed assets of software unit include land which was purchased at Rs.40 lakhs in the year 2011
was revalued at Rs.60 lakhs as on 31st March, 2023

c. Fixed assets of software unit reflected at Rs.140 lakhs (Rs.200 lakhs minus land value Rs.60
lakhs) is written down value of depreciable assets as per books of account. However, the written
down value of these assets under section 43 (6) of the Income-tax Act is Rs.90 lakhs.

Ascertain the capital gain, which would arise from slump sale to the company.

37. Mr.A is a proprietor of Akash Enterprises having 2 units. He transferred on 01.04.2022 his Unit 1
by way of slump sale for a total consideration of Rs.25 lakhs. The fair market value of the unit on
01.04.2022 is Rs.30 lacs. Unit 1 was started in the year 2005-06. The expenses incurred for this
transfer were Rs.28,000. His Balance Sheet as on 31.03.2022 is as under:

Liabilities Total Assets Unit 1 Unit 2 Total

Own capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve Machinery 3,00,000 1,00,000 4,00,000
(for building of unit 1) 3,00,000 Debtors 1,00,000 40,000 1,40,000
Bank Loan (70% for unit 1) 2,00,000 Other assets 1,50,000 60,000 2,10,000
Creditors (25% for unit 1) 1,50,000

Other information:
a. Revaluation reserve is created by revising upward the value of the building of Unit 1.

b. No individual value of any asset is considered in the transfer deed

c. Other assets of Unit 1 include patents acquired on 01.07.2020 for Rs.50,000 on which no
depreciation has been charged. Compute the capital gain for the assessment year 2023-24.

Answer:

Computation of capital gains on slump sale of Unit 1 for A.Y.2023-24:

Slump sale consideration of Unit 1 30,00,000

Less: Selling expenses 28,000
Net consideration 29,72,000
Less: Net worth (see note below) 12,50,625
Long-term capital gain 17,21,375
 170

Working notes:

Net worth of Unit 1:

Building (excluding Rs.3 lakhs on account of revaluation) 9,00,000
Machinery 3,00,000
Debtors 1,00,000
Other assets (1,50,000 – 50,000) 1,00,000
Patent (see note below) 28,125
14,28,125
Less: Creditors (25% of Rs.1,50,000) 37,500
Bank loan (70% of Rs.2,00,000) 1,40,000
Net worth of Unit 1 12,50,625

Written down value of patents as on 01.04.2022:

Cost as on 01.07.2020 50,000
Less: Depreciation @ 25% for financial year 2020-21 12,500
WDV as on 01.04.2021 37,500
Less: Depreciation @ 25% for financial year 2021-22 9,375
WDV as on 01.04.2022 28,125

Capital gain in case of JOINT DEVELOPMENT AGREEMENT – Section 45(5A):

38. Mr.X purchased a residential plot on 01.01.1998 for Rs.50,00,000. FMV of plot as on 01.04.2001
is Rs.65,00,000. Alpha Builders enter into a Development Agreement with Mr.X on 01.05.2022
on the following terms and conditions:

a. Mr.X will hand over the possession of plot to Alpha Builders on 01.05.2022
b. Alpha Builders will pay a cheque of Rs.60 lakhs to Mr.X on 01.05.2022.
c. Alpha Builders will construct 10 residential units on the plot of land will give 6 units to
Mr.X. The 10 units shall be completed by 30.06.2024 and that date 6 units will be
handed over to Mr.X

d. The stamp duty value of plot on 01.05.2022 is Rs.2 crores

e. The stamp duty value of each flat on 30.06.2024 is Rs.45 lakhs

CASE I: The project completion certificate is issued by competent authority on 30.06.2024.

6 units are handed over to Mr.X on 30.06.2024.

CASE II: The project completion certificate is issued by competent authority on 30.04.2025
and on that date the stamp duty value of each flat is Rs.50 lakhs. 6 units are handed
over to Mr.X on 30.04.2025.

Answer:
There is a ‘Transfer’ on 01.05.2022 in hands of Mr.X since he has given the possession of residential plot
to the builder under a Development Agreement.
 171

However, the capital gains shall not be taxable in previous year 22-23 but shall be taxable in the previous
year in which certificate of completion is issued by competent authority (i.e. PY 24-25).

The above section is applicable since assessee is an individual

The holding pe riod of residential plot shall be taken from 01.01.1998 to 30.04.2022. i.e. long term

Sale consideration = SDV on the date of issue of completion certificate of his share in land/building in
project plus consideration received in cash.

CASE I: Assessment Year 2025-26

Sale consideration (SDV of 6 flats on 30.06.2024 + cash received) 3,30,00,000
Less: Indexed cost of acquisition (65 lakhs / 100 * 331) 2,15,15,000
LTCG 1,14,85,000

CASE II: Assessment Year 2026-27

Sale consideration (SDV of 6 flats on 30.04.2025 + cash received) 3,60,00,000
Less: Indexed cost of acquisition (65 lakhs / 100 * 331) 2,15,15,000
LTCG 1,44,85,000

39. Ms.Mishika has entered into an agreement with M/s CVM Build Limited on 25.04.2018 in which
she agrees to allow such Company to develop a shopping mall on land owned by her in New
Delhi. She purchased such land on 05.05.2009 in Rs.15,00,000. In consideration, M/s CVM Build
Limited will provide 20% share in shopping mall to Mishika.

The certificate of completion of shopping mall was issued by authority as on 26.12.2022. On such
date, Stamp duty value of shopping mall was Rs.4,14,00,000. Subsequently on 18.03.2023, she
sold her 15% share shopping mall to Mr. Ketav in consideration of Rs.65,00,000.

She has also purchased a house on 09.05.2022 in consideration of Rs.46,00,000 and occupied for
own residence. Punjab National Bank has sanctioned a loan of Rs.35,50,000 (80% of stamp
value) at the interest rate of 12% per annum on 01.05.2022 and disbursement was made on
01.06.2022. She does not own any other residential house on the date of sanction of loan.

Principal amount of Rs.1,30,000 was paid during the financial year 2022-23.
Cost Inflation Indices: 2022-23: 331, 2009-10: 148

Compute total income of Ms. Mishika for the assessment year 2023-24 assuming that she has not
opted provisions under section 115BAC.
 172

Answer:

I. Income from house property:

Self-occupied property:
Annual value nil
Less: Section 24
Interest on borrowed capital 200000
Loss from house property 200000

Note: Interest on loan Rs.3,55,000 (35,50,000 x 12% x 10/12)

II. Capital Gains:

PY 22-23:
Though transfer took place during the p.y. 2018-19; capital gains are taxed in the year in
which completion certificate is issued by the competent authority (i.e. p.y. 2022-23)

Stamp duty value of 20% share (4,14,00,000 x 20%) 82,80,000

Less: Indexed cost of acqsn (14.80 lacs / 148 x 331) 33,10,000
Long term capital gain before exemption 49,70,000
Less: Exemption u.s.54F (46 lacs /82.8 x 49.7) 27,61,111
Taxable Long-term capital gain 22,08,882

On sale of 15% share in shopping mall:

Sale consideration 65,00,000
Less: Cost of acquisition (4,14,00,000 x 15%) 62,10,000
Taxable STCG 2,90,000

III. Computation of Total Income:

Long term capital gain 22,08,882
Less: Loss from SOP (2,00,000) 20,08,882

Short term capital gain 2,90,000

Gross Total Income 22,98,882
Less: Chapter VIA
Section 80C (registration charges) 1,30,000
Total Income 20,68,882

40. State whether the following statement is true or false:

Where capital gain arises to an individual from the transfer of capital asset, being immovable property
under a joint development agreement, the capital gain is chargeable to tax in the previous year in which
the certificate of completion for whole or part of the project is issued by the competent authority.
 173

COMPULSORY ACQUISITION – YEAR OF TAXABILITY:

41. Mr.A owns a land which was compulsorily acquired by NHAI on 10.01.2022 and he was
compensated for a sum of Rs.1 crore on 25.02.2022. The market value of the said property as on
the date of compulsory acquisition is Rs.2.5 crore. Mr.A filed a suit against NHAI challenging the
quantum of compensation.

On 26.07.2022, court passed an interim order granting an additional compensation of Rs.1.25

crores and the same was received on 27.07.2022. However, the final order of the court was made
on 20.04.2023 confirming the interim order. Determine the year of chargeability.

Solution: Taxable in the year in which the Court passes the FINAL order:
Year of chargeability of original compensation shall be the year in which such compensation
was received. Accordingly, Rs.1 crore shall be chargeable in the A.Y.2022-23.

Enhanced compensation received in pursuance of an interim order shall not be chargeable to

tax in the year in which it is received. Such enhanced compensation shall be chargeable in the
year in which the final order of the court is passed.

In the given case, though the interim order was passed in the financial year 2022-23, the year of
chargeability shall be P.Y.2023-24, being the year in which court has passed the final order.
Thus, Rs.1.25 crores shall be chargeable to tax only in the A.Y.2024-25.
CAPITAL GAINS ON BUYBACK OF SHARES – SECTION 46A

In the hands of the company (both listed & unlisted):

As per section 115-QA, the company shall pay tax @ 23.296% (20% + 12% + 4%) within 14 days
on distributed income which shall be calculated as under:

Distributed income = Buyback price – Issue price

In the hands of the shareholder:

The amount received by shareholders on buyback of listed or unlisted shares shall be exempt
u.s.10(34A). No tax treatment in the hands of the shareholders.

42. Avimanyu, a resident individual held 25% equity shares in FMC Ltd., an Indian company. The
company's paid up share capital as on 31st March, 2022 was Rs.10 lakhs divided into 1 lakh
equity shares of ₹ 10 each issued at a premium of ₹ 20 each. The shares were allotted to the
shareholders on 1st October, 2012.

The company had gone for buyback of 30% of its shares on 30th April, 2022 as per the provisions
of the Companies Act, 2013. The company paid ₹60 per share on buy back. Explain and compute
the tax effect in the hands of FMC Ltd. and Avimanyu.
 174

Transfer of capital asset by a partner to the firm as capital contribution:

Where a person transfers a capital asset to a firm by way of capital contribution, capital gain
arising from such transfer will be chargeable to tax as income of the previous year in which such
transfer took place.

Full value of consideration: For this purpose, the value of consideration will be the AMOUNT
RECORDED IN THE BOOKS OF ACCOUNTS of the firm.

43. B joined Avtar & Co. as a partner on 1st June, 2022. He contributed his vacant land to the firm as his
capital which was recorded in the books of the firm at Rs.5 lakhs. The land was inherited by B from
his father in April 2010 and the fair market value on that date was Rs.2 lacs. The land was originally
acquired by his father in August, 2005 for Rs.1 lakh. The fair market value on 1 st June, 2022 was
Rs.10 lacs. The full value of consideration received as a result of transfer of land by B as capital
would be taken as:

a) Rs.1 lakh
b) Rs.2 lakhs
c) Rs.5 lakhs
d) Rs.10 lakhs

MCQs:
1. Under section 54EC, capital gains on transfer of land or building or both are exempted if invested in the
bonds issued by NHAI & RECL or another notified bond-

(a) Within a period of 6 months after the date of such transfer

(b) Within a period of 6 months from the end of the relevant previous year
(c) Within a period of 6 months from the end of the previous year or the due date for filing the return
of income under section 139(1), whichever is earlier
(d) At any time before the end of the relevant previous year.

2. Mr.A (aged 45 years) sold an agricultural land for Rs.52 lakhs on 04.10.2022 acquired at a cost of Rs.49.25
lakhs on 13.09.2021 situated at 7 kms from the jurisdiction of municipality having population of 4,00,000
and also sold another agricultural land for Rs.53 lakhs on 12.12.2022 acquired at a cost of Rs.46 lakhs on
15.02.2021 situated at 1.5 kms from the jurisdiction of municipality having population of 12,000. What
would be the amount of capital gain chargeable to tax in the hands of Mr.A for the assessment year 2023-
24? Cost inflation index for F.Y. 2019-20:289; 2020-21: 301; 2022-23: 331.

(a) Short-term capital gain of Rs.9.75 lakhs

(b) Short-term capital gain of Rs.7 lakhs
(c) Long-term capital gain of Rs.4,12,500
(d) Long-term capital gain of Rs.5,29,196

3. Mr. A is the owner of residential house which was purchased on 1st September, 2016 for Rs.10,56,000. He
sold the said house on 4th September, 2022 for Rs.19,00,000. Valuation as per stamp valuation
authorities was Rs.45,00,000. He invested Rs.19,00,000 in NHAI Bonds on 21st March, 2023. The Cost
Inflation index for - F.Y. 2016-17: 264
 175

4. Chirag entered into an agreement for sale of his house property located at Jaipur to Yash on 1 st August,
2022 for a total sale consideration of Rs.95 lakhs. Yash paid an amount of Rs.20 lakhs by account payee
cheque to Chirag on 1st August, 2022 and balance was agreed to be paid at the time of registration of the
Conveyance Deed which could only be executed by Chirag on 1st September, 2022. The Stamp Valuation
Authority determined the value of the house property on the date of registration of deed at Rs.140 lakhs.
However, the value determined by the Stamp Valuation Authority of the house on the date of agreement
(1st August, 2022) was Rs.110 lakhs. The sale value for the purpose of computing the capital gains of the
property for A.Y.2023-24 to be taken by Chirag shall be:
a) Rs.95 lakhs
b) Rs.110 lakhs
c) Rs.140 lakhs
d) Rs.120 lakhs

5. In a scheme of buy back of shares, XYZ Ltd., a listed company, paid Rs.6 lakhs to a shareholder X on
12.03.2023. The buy-back was through recognized stock exchange. The sum of Rs.6 lakhs received by X
who had bought these shares 2 years back will be:
a) Taxable in full
b) Fully exempt u.s.10(34A)
c) Taxable @ 20%
d) Taxable at normal rate of tax

6. Mr.X has 2000 equity shares of MNO Pvt Ltd. On 21.10.2022, MNO Pvt Ltd has bought back 50% shares
from its shareholders amounting to Rs.13,50,000 which were issued for Rs.5,70,000 which include
Rs.1,15,000 towards premium. What shall be the tax payable by MNO Pvt Ltd on buy back of its shares?
a) Rs.2,08,500
b) Rs.1,81,710
c) Rs.3,14,496
d) Rs.1,62,240

7. Mr.R purchased a car for his personal use for Rs.25 lakhs in April 2020 and sold the same for Rs.28 lakhs
in July 2022. The taxable capital gains would be:
a) Nil
b) Rs.3 lacs
c) Rs.28 lacs
d) Rs.3 lacs subject to indexation

8. Long-term capital gains on sale of a long-term capital asset in October, 2022 is Rs.105. The assesse
invested Rs.50 lakhs in REC bonds in March, 2023 and Rs.55 lakhs in NHAI bonds in May, 2023. The
amount of exemption eligible under section 54EC is:

a) Nil
b) Rs.50 lakhs
c) Rs.55 lakhs
d) Rs.105 lakhs