mf0003 taxation

8/3/2019 MF0003 Taxation

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MR0003-Unit-01-Basic Concepts

Unit 1 Basic Concepts

1.1 Introduction

Learning objectives:

1.2 Tax Planning and Management

· Tax avoidance

· Tax evasion

· Tax planning

· Tax management

1.3 Terminology

1.4 Agricultural Income

1.5 Residence and Tax Liability

1.6 Scope of total income

1.7 Tax incidence in brief

1.8 Illustrations on incidence of tax

1.9 Total taxable income: how it is computed: tax liability

1.10 Summary

1.11 Terminal Questions

1.12 Answers to TQs

1.1 Introduction

The theory of taxation depends upon the definition of the term ―tax‖. According to Seligman, ‗Atax is a compulsory contribution from the person to the Govt. to defray the expenses incurred in

the common interest of all, without reference to special benefits conferred‘.

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Bastable defines a tax as‘ a compulsory contribution of the wealth of person or body of persons

for the service of the public powers‘.

The Indian Taxation Enquiry Committee adopted the definition as ‗taxes are compulsory

contributions made by the members of a community to the governing body of the same towards

the common expenditure without any guarantee of a definite measured service in return‘.

The above definitions emphasize certain common features of tax such as:

1. It is a compulsory levy.2. Its proceeds are utilized for the common purpose.

3. The extent of the levy does not depend upon the benefits derived from state expenditure

by the tax payer.

4. Its object is to raise revenue to the state


· After studying this unit, you will be able to know:

· The difference between tax evasion and tax avoidance

· Basic concepts of taxation

· Terminologies

· Concept of agricultural income and concept of total income

1.2 Tax Planning and Management

The goal of the tax payers is to minimize his tax liability. To achieve this goal the following

three methods are commonly used by him:

1. Tax avoidance

2. Tax evasion

3. Tax planning

· Tax avoidance

Tax avoidance can be defined as the art of dodging tax without breaking the law. Objective of tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that

although it is within the four corners of the taxation laws but the advantage is taken by findingout loopholes in the laws. but where the main purpose is to defer, reduce or completely avoid the

tax payable under the law.

· Tax evasion



In the tax evasion, facts are deliberately misrepresented and tax liability is understated by

employing the following means:

a) concealment of income;

b) Inflation of expenses;

c) Falsification of accounts

d) violation of rules

These devices are unethical. Evasion, once proved, not only attracts heavy penalties but may alsolead to prosecution.

· Tax planning

Tax Planning is an arrangement of one‘s financial affairs in such a way without violating thelegal provisions of the Act. Full advantage is taken of all exemptions, deductions, rebates, reliefsetc. permitted under the Act, reducing the burden of taxation to the least.

The aim of tax planning is to minimise the incidence of tax. It is a guide in decision making. Itlooks at future benefits arising out of present actions.

· Tax management:

Tax management refers to the compliance with the statutory provisions of law. Tax planning isoptional, tax management is mandatory. It covers a wider field like maintenance of accounts,

filling of return, payment of taxes, TDS, timely payment of advance tax, etc., poor taxmanagement may lead to levy of interest, penalty, prosecution, etc.

Difference between tax planning and tax evasion

Tax planning Tax evasion

Objective is to reduce the tax liability Objective is to avoid the tax liability by

misrepresentation of facts and

falsification of accounts.

It works within the permissible rangeof the Act

It is achieved by violation of the act

Tax planning is a legal right Tax evasion is a legal offence which may

lead to penalty and prosecution.

Tax planning accelerates development

of the economy of a country bygenerating funds for investment in

desired sectors

Tax evasion retards the development of

economy and accelerate the developmentof parallel economy



Difference between tax avoidance and tax evasion

Tax avoidance Tax evasion

The objective is to minimising the taxliability by finding the loop holes in

the act

Objective is to avoid the tax liability bymisrepresentation of facts and falsification

of accounts.

2) Tax avoidance takes into accountsvarious gaps of law

Tax evasion involves use of unfair means

3) Tax avoidance is lawful butinvolves the element of mala fide

intention

Tax evasion is unlawful

4) Tax avoidance is planning beforethe actual liability for tax comes into

existence

Tax evasion involves avoidance of payment of tax after the liability of tax has

arisen

Difference between tax planning and tax management

Tax planning Tax management

Tax planning a wider term andincludes tax management

Tax management is narrow term and isthe first step towards tax planning.

Objective is to reduce the tax liability It emphasizes on compliance of legalformalities for minimisation of tax

It is optional Tax management is essential for every

person.

Tax planning helps in decisionmaking

Tax management helps in complying theconditions for effective decision making

Tax planning helps to claim variousbenefits of tax

Tax management involves maintenance of accounts in prescribed for, filing of return,

payment of tax, etc.

Tax planning involves comparison of

various alternatives before selecting

the best one.

Tax management involves maintenance of

accounts in prescribed form, filing of

return, payment of tax, etc.

Tax planning looks at future befits Tax management relates to past present

Who is liable to pay income tax?

Every person, whose taxable income for the previous financial year exceeds the minimum

taxable limit, is liable to pay to the Central Government the income tax during the current

financial year on the income of the previous financial year at the rates in force during the currentfinancial year.

1.3 Terminologies



Income [Sec 2 (24)]

In general sense ―It means any monitory receipt either in cash or in kind (Should be

quantifiable), may be real or notional, regular or casual or legal or illegal or own‘s own or

somebody else‘s from a definite source. These sources may be Income from salary, H.P,

Business or profession, other sources or Capital Gains‖ excluding anything in the nature of amere windfall.

Assesses [Sec. 2(7)] An Assesses means a person:

(i) Who is liable to pay any tax; or

(ii) Who is liable to pay any other sum of money under this Act. (Ex: interest, penalty, etc.); or

(iii) In respect of whom any proceeding under this act has been taken for the assessment of his

income; or

(iv) In respect of whom any proceeding under this act has been taken for the assessment of the

income of any other person in respect of which he is assessable; or

(vii) Who is deemed to be an assesses under any provision of this Act; or

(viii) Who is deemed to be an assesses in default under any provision of this Act.

Deemed Assesses: A person, who is deemed to be assesses for some other person, is called

deemed assesses

Assesses in Default: When a person responsible for doing any work under the Act, fails to do so,he is termed an ‗Assesses in Default‘.

For Ex: If a person while making any payment to other person, is liable to deduct income tax

thereon at source, does not deduct income tax therefrom, or having deducted at it, does not

deposit it in the Government treasury, he will be treated as an ‗Assesses in Default‘ for thatincome tax.

Assessment [Sec 2 (8)] It is a process of computing taxable income of the assesses, calculating

tax on such taxable income and imposing tax liability on the assesses

Assessment Year [Sec. 2 (9)]: Assessment Year means the period of twelve monthscommencing on the first day of April every year and ending on 31st March of next year. This

period is fixed by law and never changes. An assesses is liable to pay tax on the income of the

previous year during the next following assessment year.

Person [Sec. 2 (31)]

‗Person‘ includes the following:



(i) An Individual: means a natural person or human being,

(ii) A Hindu Undivided Family (H.U.F)

(iii) A Company

(iv) A Firm: It means a partnership firm; which is defined under the partnership Act.

(v) An Association of Person (A.O.P): It means two or more persons joining for a commonpurpose for the purpose of earning income.

(vi) Body of Individuals (B.O.I)

(vii) A Local Authority: It includes Municipality, Municipal Corporation, District Board

(viii) Every artificial Juridical Person, not falling within any of the preceding sub – classes: An

Idol or Deity, university.

Gross Total Income [Sec 80B (5)] It is the Total income computed in accordance with the

provisions of the income tax Act, before making deductions under sections 80C to 80U

Total Income: [Sec 2 (45)] It means amount left after making the deductions under sections 80C

to 80U

Previous Year [Sec 3]: Previous year is a period of twelve months, immediately preceding the

Assessment Year. Or any financial year immediately preceding the Assessment Year

Exceptions to the general rule of year

Income earned in any year will be assessed in its following year. This is called general rule of

Previous Year, However in the following cases the assessee is liable to be assessed to tax in the

same year in which he earns the income:

(i) Income of non – resident from shipping business [Sec 172]

(ii) Income of persons leaving India either permanently or for a long period of time [Sec 174]

(iii) Income of bodies formed for short duration [174A]

(iv) Transfer of property to avoid tax [175]

(v) Income of a discontinued business or profession [176]

Self Assessment Questions I

1) Mr. Suresh is a partner of a firm. He is assessable as —————— .



2) For previous year 2008-09, assessment year is —————– .

3) Indian Income Tax Act was passed in ———— -.

4) Income of discontinued business in the year 2008-09 is taxable in the year

Casual Income: Any receipts, which is of a casual, and non-recurring in nature is called casualincome i.e., it is that income the receipt of which is accidental and without any stipulation and is

in the nature of an unexpected windfall.

Heads of Income [Sec 14]

All taxable income of an assessee fall under any of the following five heads of income. Those

incomes, which do not find place under the first four heads and are taxable fall under the fifth

head of income.

1. Salaries [Sections 15 to 17]2. Income from House Property [Sections 22 to 27]

3. Profits and Gains of Business or Profession [Sections 28 to 44]4. Capital Gains [Sections 45 to 55] and

5. Income from Other Sources [Sections 56 to 59].

Rates of Tax for an Individual

Note: Surcharge: In all the above cases, If total income exceeds Rs. 10,00,000 – @ 10%

Education cess: On the amount of Income Tax + Surcharge – @ 3%

(Primary education cess at 2% + Secondary and Higher education cess at 1%)

1.4 Agricultural Income (Sec. 2(1A)

Agricultural income is totally exempt from liability to income tax. However, agricultural income

is factor in determining the tax on the non-agricultural income of an Individual, Hindu undivided

family, Association of persons and Body of individuals whose total income (excludingagricultural income) exceeds the minimum taxable limit and the agricultural income exceeds Rs.

5,000.

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It is necessary to understand clearly the meaning of the term agricultural income which can be

done with the help of the following chart:

(A) (i) And (ii) Rent or revenue derived from land situated in India. When one person grants to

another a right to use his land situated in India for agricultural purposes; the former receives

from the latter rent or revenue in consideration of such user. Such rent or revenue is treated as

agricultural income.

(i) Used for agricultural purposes. It means cultivation of a field, tilling of the land, watering it,

sowing of the seeds, planting and similar operations on the land.

(B) (i) Income derived from such land by agricultural operations.

(ii) Income derived from such land by the performance of any process ordinarily employed by a

cultivator to render the produce raised by him fit to be taken to market. The process employed incuring of coffee, flue curing of tobacco, ginning of cotton, etc., is such a process.

(iii) Income derived from such land by a sale by a cultivator or receiver of rent-in-kind theproduce raised or received by him.

(C) Income from farm house. The income from a farm house is treated as agricultural income if the following conditions are satisfied

(i) It is situated on or in the immediate vicinity of the agricultural land;

(ii) The building is, by reason of his connection with the land, used as dwelling house or a store-house or an out-house by the cultivator or receiver of rent-in-kind;

(iii) The land is either assessed to land revenue in India or is subject to local rate assessed andcollected by the officers of the government, or alternatively;

(iv) If the land is situated in ‗non-urban‘ area, i.e., an area which though, is within municipalityor cantonment board jurisdiction, has a population of less than 10,000; or is beyond a notified

distance (maximum 8 kilometer) from the local limits of any such municipality; or cantonment

board.

However, the income derived from any building or land [mentioned in (C)] arising from the use

of such building or land for any purpose (including letting form residential purpose or for the




purpose of any business or profession) other than agricultural [mentioned in (A) or (B)] shall not

be agricultural income.

Examples of Agricultural Incomes:

(i) Income from growing flowers and creepers.

(ii) Rent from agricultural land.

(iii) Profit on sale of standing crops or produce after harvest by the cultivating owner or tenant of

agricultural land.

(iv) Income from leasing out agricultural land for grazing cattle required for agricultural

purposes.

(v) Interest on capital received by a partner from his firm engaged in agricultural operations.

(vi) Conversion of latex into smoked sheets.

(vii) Rent from agricultural land received from sub-tenants by the mortgagee in possession.

(viii) Income from sale of mulberry leaves grown on agricultural land.

(ix) Compensation received from an insurance company for damages caused by hailstorm or

floods to the tea plantations.

(x) Income from conversion of timber into planking.

Examples of Non-Agricultural Incomes

The following incomes are a not derived from land used for agricultural purposes hence they arenon-agricultural incomes:

(i) Income from markets;

(ii) Income from stone quarries;

(iii) Income from mining royalties;

(iv) Income from land used for storing agricultural produce;

(v) Income from supply of water for irrigation purposes (e.g., income from supply of water forirrigation from a tube-well, as it does not involve any agricultural operation);

(vi) Income from self-grown grass, trees or bamboos;



(vii) Income from fisheries;

(viii) Income from the sale of earth for brick-making;

(ix) Remuneration received as manager of an agricultural farm;

(x) Dividend from a company engaged in agriculture;

(xi) Income of the buyer of a ripe crop;

(xii) Income from dairy farm, poultry farming, etc.; and

(xiii) Income from interest on arrears of rent of agricultural land.

When the individual has net agricultural income exceeding Rs. 5,000, in addition to the non-agricultural income exceeding the exemption limit (Rs, 1,35,000 for women assesses, 1,85,000

for senior citizens, Rs. 1,00,000 for other individual), agricultural income is included in theincome only for rate of tax.

1.5 Residence and Tax Liability

The scope of total income of an assessee is determined with reference to his residence in India in

the previous year (Sec. 5). It is immaterial what type of resident an assessee is during theassessment year. Residence and citizenship are two different things. The incidence of tax has

nothing to do with citizenship. An Indian may be non-resident and a foreigner may be resident

for income tax purposes. The residence of a person may change from year to year but citizenship

cannot be changed every year.

Different Types of Residents

On the basis of residence, the assessees are divided into three categories, viz.:

a. Persons who are resident in India, Popularly known as ‗ordinarily resident‘.

b. Persons who are ‗not ordinarily resident in India‘.

c. Persons who are ‗non-resident‘.

Residential status of Individuals

Resident (Ordinarily Resident). Sec. 6 (1) and 6 (6) (a)

Basic Conditions: Sec. 6 (1):

An individual is said to be resident in India in any previous year if he satisfies any one of thefollowing basic conditions:



(a) He is in India in the previous year for a period of 182 days or more, or

(b) He has been in India for at least 365 days during the four years proceeding the previous year

and is in India for at least 60 days during the previous year.

Exceptions to the above rules of 60 days stay in India

(i) An individual who is a citizen of India and leaves India in any previous year for the purpose

of employment or as a member of the crew of an Indian ship must have stayed in India for at

least 182 days during the previous year instead of 60 days.

(ii) If any citizen of India or a foreign national of Indian origin, who is living outside India,comes on a visit of India in the previous year, he must have stayed in India for at least 182 days

during the previous year instead of 60 days.

In other words, in the case of an individual covered by the above two exceptions only condition

(a) is to be satisfied to become a resident in India and condition (b) has no significance at all.

Note:

1. It means that a non-resident Indian will not lose his non-residential status even if he visitsIndia and stays here up to 181 days in a previous year.

2. For calculating number of days stay in India, days of entry and exit should be included in theperiod of stay in India.

‗Indian origin‘ means that either he or either of his parents or any of his grandparents was born in

undivided India. Further, ‗comes on a visit to India in the previous year‘ means that he maycome to India for any purpose. Whatsoever, it may be business purpose or personal purpose of

any nature or he may come to meet his relations or he may come for a pleasure trip also.

Stay in India for 182 days or more during the previous year. It is not at all necessary that he

should stay at a stretch for 182 days. His total stay for at least 182 days may be with gaps. It isalso not necessary that the entire stay should be at one place. It may be at different places in

India.

Stay in India for at least 365 days during the four years preceding the previous year and for at

least 60 days or 182 days, as the case may be, during the previous year

Here again, it not necessary that he should stay during the previous year in India at a stretch for

60 days or 182 days, as the case may be, or the entire stay need not be at one place only.

Additional Conditions: Sec. 6 (6) (a):

In fact, in order that an individual may become ordinarily resident in India, he is to satisfy both

the following conditions besides satisfying any one of the above mentioned basic conditions:



(i) He has been resident in India in at least two out of the ten previous years preceding the

relevant previous year, and

(ii) He has been in India for at least 730 days in all during the seven previous years proceeding

the relevant previous year.

In condition (i) resident of two years out of ten years preceding the previous year means that theassessee must have satisfied at least one of the basic conditions for two years out of ten years

preceding the previous year.

In condition (ii) the assessee must be physically present in India for at least 730 days during the

seven previous years preceding the relevant previous year.

Resident but not ordinarily resident: Sec. 6(1), 6 (6) (a)

An individual who satisfies at least one of the basic conditions laid down in Sec. 6 (1), but does

not satisfy the two additional conditions of Sec. 6 (6) (a), is treated as ‗a resident but notordinarily resident‘.

Non-resident:

An individual is a non-resident in India if he satisfies none of the basic conditions. In the case of

non-resident, additional conditions are not relevant.

Residential Status of Hindu Individed Family, Firm or Association of Persons

Resident:

A Hindu Undivided family, firm or association of persons are residents in India in any previous

year if the control and management of its affairs is situated wholly or partly in India during therelevant previous year. i.e., even if a part of their control and management is situated in India

during the previous year, they will be called resident in India.

A resident H.U.F. will be ordinarily resident only when its kartha satisfies both the additional

conditions of ordinarily resident as an individual.

Not Ordinarily Resident:

Firm and Association of persons cannot be ‗not ordinarily resident‘. A Hindu Undivided Familyis ―not ordinarily resident‖ in India, if, its Karta or manager (as an individual) is not ordinarily

resident in India.

In this connection it is important to note that where during the last ten years preceding the

previous year the managers of Karta of H.U.F. had been different from one another, the totalperiod of stay of successive kartas of the Family should be aggregated to determine the

residential status of the Karta and consequently it‘s H.U.F.



Non-Resident:

All the three types of assessees (i.e., H.U.F., Firm of A.O.P.) are non-resident‘ only when the

control management of their affairs is situated wholly outside India.

Self Assessment Questions II

1) A Ltd. Company cannot be a ————— -.

2) Income from poultry farming is an agricultural Income.: True/ false

3) To become a Resident but ordinarily Resident, an individual must satisfy the conditions laiddown in ————— , in addition to the conditions laid down in —–

4) Income from house property is ———— in the hands of a Non resident.

Residential Status of Companies

Resident. A company is said to be resident in India in any previous year, if,

(i) It is an Indian company; or

(ii) During that year, the control and management of its affairs is situated wholly in India.

A company may be resident here even though its entire trading operations are carried on abroad.

If the management and control is situated wholly in India, the company is resident here.

Normally, control and management of a company‘s affairs is situated at the place where

meetings of its board of directors are held.

Not Ordinarily Resident. A company is never an ‗not ordinarily resident‘.

Non-resident. If a company does not satisfy both the aforesaid conditions of residence, it is said

to be a ‗non-resident‘ company. It means neither the company is an Indian Company nor thecontrol nor management of its affairs is situated wholly in India.

1.6 Scope of total income or incidence of tax

Incidence of Tax: It refers to chargeability of incomes based on the residential status of the

assessee and also on the place and time of accrual or receipt of income.

Factors of incidence:

1. Residential Status

2. Place



3. Time of accrual or receipt of income

Received: It means the receipt of the income on the first occasion Deemed to be received: It

means that the income has not been actually received, but it is deemed to be received under the

Income Tax Act.

Accrue or Arise: Right to receive the income as against receipt of income. Deemed to accrue orarise: Means the income has actually not accrued or arisen in India but it is deemed to accrue or

arisen in India under the income tax act.

1.7 Tax Incidence in Brief

The following table highlights the tax incidence in brief

Incomes Whether Taxable or Not

OrdinarilyResident Not Ordinarily Resident Non-Resident

(1) Income Received in Indiawhether accrued or arisen in Indiaor outside India.

Yes Yes Yes

(2) Income deemed to be receivedin India whether accrued or arisen

in India or outside India.

Yes Yes Yes

(3) Income accruing or arising in

India whether received in India or

outside India

Yes Yes Yes

(4) Income deemed to accrue or

arise in India whether received in

India or outside India

Yes Yes Yes

(5) Income received and accruedor arisen outside India from a

business controlled from or a

profession set-up in India.

Yes Yes No

(6) Income received and accrued

or arisen outside India from abusiness controlled from or a

profession set-up outside India.

Yes No No

(7) Income received and accruedor arisen outside India from any

other source.

Yes No No

(8) Income accrued or arisen and

received outside India in earlier

years but later on remitted to Indiaduring the previous year.

No. No No

1.8 illustrations on Incidence of tax



1. The following are the incomes of Mr. Arunachal for the previous year 2008-09;

1) Income from agriculture in Bangladesh Rs. 10,000

2) Income from salary received in India for the services rendered in England Rs. 9,000

3) Income from business carried in India Rs. 8,000

4) Income from business in Ceylon but controlled from India Rs. 7,000, but deposited in a bank there.

5) Income from hotel business in Paris Rs. 6,000

6) Income from business in Bombay, managed from London Rs. 5,000

7) Income from assets in Dubai, received in India Rs.4,000

8 Income accrued in Chennai, but received in London Rs. 3,000

9) Interest on U.K. Govt. securities Rs. 2,000, Rs. 1,000 received in India

10) Past untaxed foreign income brought in to India Rs. 1,000

Compute the total income of Mr. Arunachal for the assessment year 2009-10, if he is:

a) Resident but ordinarily resident

b) Resident but not ordinarily resident

c) Non resident

Solution

Computation of total income of Mr. Arunachal for the assessment year 2008-09

Resident

Rs.

Not

Ordinarily

Resident Rs.

Non

resident

Rs.Income from agriculture in Bangladesh 10,000 ——– ——–

Salary for services rendered in England 9,000 9,000 9,000

Income from business in India 8,000 8,000 8,000

Income from business in Ceylon,

controlled from India

7,000 7,000 —— -

Income from hotel business in Paris 6,000 ——– ——–



Income from business in Bombay 5,000 5,000 5,000

Income from assets in Dubai, received inIndia

4,000 4,000 4,000

Income accrued in Chennai received inLondon

3,000 3,000 3,000

Interest on U.K Govt. securities, receivedin India

2,000 1,000 1,000

Past untaxed income brought in to India ––– ––– –––

Total income taxable 54,000 37,000 30,000

Illustration 2

Mr. Sumantha furnishes the following particulars of his income earned during the previous year

relevant to the assessment year 2008-09.

Solution 2

Resident and

ordinarily

resident

Rs.

Resident but

not

ordinarilyresident

Rs

Non-

resident

Rs.

Interest on German Development Bonds:Two fifths is taxable on receipt basis 24,000 24,000 24,000

Three-fifths is taxable in the case of resident andordinarily resident on accrual basis

36,000 – –

Income from agriculture in Bangladesh:

Income accrued and received outside India 1,81,000 – –

Income from property in Canada received outside India




Income accruing and arising outside India 86,000 – –

Income earned from a business in Kampala, Controlledfrom Delhi:

Rs. 15,000 is taxable on receipt basis 15,000 15,000 15,000

Balance is not taxable in the case of non-resident 50,000 50,000 –

Dividend paid by a foreign company:Income received in India 46,500 46,500 46,500

Past untaxed profit brought to India

Not an income of the previous year 2005-06 relevant for

the assessment year2009-10 hence not taxable

Profits from a business in Madras and managed from

outside India:

Income accrued in India 27,000 27,000 27,000

Profit on sale of a building in India but received in Sri

Lanka

Income deemed to accrue or arise in India 14,80,000 14,80,000 14,80,000Pension from an Indian former employer received inRangoon:

Income deemed to accrue or arise in India 36,000 36,000 36,000

Gift from a friend

Now it is taken as an income 80,000 80,000 80,000

Gross Total Income 20,61,500 17,58,500 17,08,500

Illustration 3

Following are the taxable income of Sri Ratnakar for the previous year

2008-09

Compute Sri Ratnakar‘s total income for the assessment year 2009-10, if he is (i) Resident, (ii)Not Ordinarily resident, (iii) Non-resident

Solution 3




Computation of Total Income of Sri Ratnakar for the assessment year

2008-09

Rs. Rs. Rs..

1 Income from salary accrued and received in

India

20,000 20,000 20,000

2. Profit from hotel business in London 30,000 – –

3. Dividend declared in Perth but received in

India

4,000 4,000 4,000

4. Income from transfer of a long term capital

situated in India

20,000 20,000 20,000

5. Interest on debentures of a company at

London, received in India

6,000 6,000 6,000

6. Interest received from nonresident for a

business in India

5,000 5,000 5,000

7. Royalty received in London, for technical

services in London

20,000 – –

8. Fees from Indian company, deposited directly

in bank account in India

30,000 30,000 30,000

Total Income 1,35,000 85,000 85,000

1.9 Total taxable income: how it is computed: tax liability

Statement of Total Income for the Assessment Year (Previous Year)

Note: No deduction under Chapter VIA is available for Short Term Capital Gain covered U/S111A, any LTCG etc. and on casual income though these incomes are part of GTI

Computation of Tax Liability

Particulars Amount

1. Casual income (lotteries, winnings form races) at 30%2. LTCG at 20%

3. Other income at applicable rate

XXXXXX

XXXXXX

XXXXXX




Income tax on net income

Less: Rebate u/s 80 E

XXXXXX

XXXXXX

Balance

Add: Surcharge at 10% (if applicable)

XXXXXX

XXXXXXTax + Surcharge

Add: Education cess (@ 2% on tax and 1% SHEC on Tax & surcharge)

XXXXXX

XXXXXX

Gross tax due from the assessee

Less: Pre-paid taxes (tax on self assessment,

TDS, tax paid in advance)

XXXXXX

XXXXXX

Tax liability (rounded off nearest ten Rupees) XXXXXX

1.10 Summary

This chapter has given the idea about the basic aspects of income tax in India. The agriculture isthe main source of living to Indians. Hence the income is not taxed in India under Income Tax

Act. Yet in some cases the agricultural income is included for determining the rate of tax. The

incidence of tax also varies according to residential status of an assessee.


1. What do you mean by tax evasion and tax avoidance?

2. What is previous year? What are the exceptions to the general rule that income of the previousyear is taxed in the assessment year?

3. Discuss briefly the scope of total income of a person who is resident in India.

4. What are the agricultural incomes? How it is treated for the computation of tax?

5. How is the total taxable income of an assessee arrived at?

SAQ I

1. Individual.

2. 2009-10

3. 1961

4. 2008-09



SAQ II

1. Not ordinarily Resident

2. False

3. 6(1),6(6)

4. Not taxable

1.12 Answers to TQs

1. Refer to Section 1.2





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MF0003-Unit-02-Deductions from Gross

Total Income

Unit 2 Deductions from Gross Total Income

and Exempted Incomes

Structure:

2.1 Introduction

Objectives

2.2 Deductions u/s 80C

2.3 Deduction in Respect of Medical Insurance Premium (sec 80D)







2.4 Deduction in Respect of Interest on Loan taken for Higher Education (Sec 80E)

2.5 Deduction in Respect of Donations to certain funds & Charitable Institutions

(Sec 80G)

2.6 Deduction in Respect of Profits and Gains from Industrial Undertaking Engaged inInfrastructure Development (Sec 80I)

2.7 Deduction in Respect of Profits and Gains from Business of Collecting and Processing of

Bio-Degradable Waste (Sec 80JJA)

2.8 Deduction in Respect of Certain Incomes of Offshore Banking Units (Sec 80LA)

2.9 Deductions in the Case of a Person with Disability (Sec 80U)

Self assessment question

2.10 Exemptions: Tax-Free Incomes

2.11 Exemptions U/S 10A, 10AAA, 10B

2.12 Rebate U/S 88E

2.13 Summary

2.14 Terminal Question

2.15 Answers to SAQ and TQ

2.1 Introduction

After computing the income under each head separately, the incomes of the various heads areadded together. The total of incomes of the various heads is called Gross Total Income. From the

gross total income, certain allowable deductions are made. The purpose of these deductions is to

encourage savings, industrialization and to assist tax payers in meeting their essentialexpenditures.

The resulting balance is the total income of the assessee.

The deductions from gross total income are allowed :

(i) In respect of certain investments and payments made by the assessee and

(ii) In respect of certain incomes received by the assessee



The deductions from gross total income are provided in Sections 80CCC to 80U. i.e., under

Chapter VI-A of the income-Tax Act of 1961.

As per Section 80A of the Income-tax Act, the aggregate (i.e., total) amount of various

deductions from gross total income allowed in Section 80 CCC to 80U should not exceed the

gross total income. (i.e. G.T.I. after excluding long-term capital gains, short term capital gainstaxable u/s 111A, winnings from lotteries, races etc.)


After reading this chapter you will learn:

· Various deductions allowable under the Act.

· To prepare proper tax plans.

· To claim exemptions given under the Act.

· Various tax concessions available for the entrepreneurs.

2.2. Deductions u/s 80C

Deductions under Section 80C: Deductions in respect of certain investments made or certainpayments, deposits made

Eligible assessee: An Individual and HUF

Quantum of Exemption: Rs. 1, 00,000 or Amount invested or Payment made, whichever isless.

Conditions: The maximum amount of exemptions under Sections 80C, 80CCC and 80CCD

should not exceed Rs. 1, 00,000

Eligible Investments, Contributions and Payments

Life Insurance Premium: Premium paid for insurance on his own life or on the life of hiswife or her daughter, or his or her child (minor or major) of any status including married

daughter.

1. Condition: The qualifying amount of any premium or other payment made on an

insurance policy shall not exceed 20% of the actual capital sum assured.

2. Payment made for a contract of deferred annuity

3. Deduction from the salary payable to a government servant by the government –



securing to him a deferred annuity (should not exceed 1/5 th of salary)

4. Contribution to the Statutory Provident Fund, Public Provident Fund or to a RecognisedProvident Fund and to an Approved Superannuating Fund.

5. Purchase National Savings Certificates VIII Issue (Interest accrued on VIII Issue isdeemed to have been re-invested)

6. Contributions towards Unit Linked Insurance Plan, (ULIP) of the UTI and of LICMutual Fund (notified)

7. Any sum paid annuity plan of LIC or any other insurer

8. Subscription to any notified units of any Mutual Fund or UTI

9. Contribution to any pension fund set-up by any Mutual Fund or by the UTI

10. Subscription to Home Loan Account or contribution to pension fund set-up by the

National Housing Bank.

11. Any subscriptions to any scheme PSU engaged in Long term financing of acquisitions

and constructions of residential houses

12. Tuition fees paid other than donations for full time education (max: two children)

13. Any payment made towards any loan taken to meet the cost of purchase or construction

of a new residential house

14. Amount invested in approved debentures and equity shares of PSUs engaged in

infrastructure facilities including power sectors or subscription of Units of MFs proceeds of

which are invested in infrastructure facilities

Deduction in respect of contribution to certain Pension Funds (80CCC)

Eligible assessee: Individual

It is allowed in respect of any amount paid or deposited in the P. Y. for an annuity plan of LIC or

any other insurer (approved by IRDA) for receiving pension

Deductible amount: the amount so paid or Rs.1, 00,000, whichever is less

The contribution made by the central government to the account of an employee under a

pension scheme referred to in Section 80CCD

Section 80CCD is applicable if the following conditions are satisfied




He is employed by the central Government on or after 1 – 1 – 2004

Amount should be deposited any amount in his account under a pension scheme notified by the

central Government during the P. Y.10% of employee‘s contribution (to the extent of Basic Pay+ D. A. given in terms of employment) to the above scheme is deductible 10% of Contributionby the Central Government to the above scheme is deductible in the year in which the

contribution is made Note: In both the cases the contribution amount should not exceed 10% of

salary

2.3 Deduction in respect of Medical Insurance Premium [Sec 80D]

Eligible assessee: Individual and HUF.

Deductible amount: the maximum deductible amount is Rs.10, 000, or actual amount paid

whichever is less (In case of senior citizen it is Rs. 15,000)

Certain conditions:

(i) Premium must be paid by cheque (Cash not allowed)

(ii) The medical insurance scheme of GIC (Ex: Mediclaim Policy) or any other scheme approved

by the Central Government or IRDA

(iii) Insurance on his health or on the health of his spouse or parents or dependant children.

Deduction in respect of maintenance including Medical treatment of a, handicappedDependant (Sec. 80DD)

Eligible assessee: Resident individual and HUF

Quantum of Deduction: For disability fixed sum of Rs. 50,000 irrespective of the amount

incurred or deposited further in case of a dependent with severe disability (80% disability or

more) the deduction shall be Rs. 75,000.

Note: If deduction u/s 80U is claimed no deduction is available under section 80DD

Deduction in respect of MedicalTreatment, etc. (Sec. 80DDB)

Eligible assessee: Individual and HUF

Deductible amount: i) Amount paid or Rs. 40,000, whichever is less (ii) Where the payment is inrelation to a senior citizen the deduction shall be amount paid or Rs. 60,000, whichever is less.



Note: However, the deduction shall be reduced by the amount received, if any, by under an

insurance from an insurer or reimbursed by the employer for the medical treatment of personmentioned in this section.

Specified diseases: Neurological diseases, cancer, AIDS, chronic renal failure, Hemophilia etc

2.4 Deduction in respect of interest of loan taken for Higher Education (Sec. 80E)


An individual is entitled to a deduction of amount paid by him in previous year by way of

repayment of loan (including interest) taken by‘ from any financial institution or an approvedcharitable institution for t purpose of pursuing his higher education Conditions:

(i) The repayment should be done out of his income chargeable to tax.

(ii) The deduction will be allowed for the previous year in which the assessee starts repaying theloan.

The deduction is available for a maximum period of 8 years till the loan together with inter

thereon is fully paid (whichever is earlier) by the assessee.

Only interest is allowed not repayment of any installments

2.5 Deduction in respect of donations to certain Funds, Charitable institution, etc. (Sec.

80G)

Eligible assessee: All Assesses

(A) No limit donations where deduction is allowed @ 100% are as under:

(1) The National Defense Fund;

(2) The Prime Minister‘s National Relief Fund;




(3) The Prime Minister‘s Armenia Earthquake Relief Fund;

(4) The Africa (Public Contributions-India) Fund;

(5) The National Foundation for Communal Harmony;

(6) A University or Educational Institution of national eminence (approved)

(7) The Maharashtra Chief Minister‘s Relief Fund

(8) Zila Saksharta Samitis constituted in any district

(9) The National Blood Transfusion Council

(10) Any Fund set-up by State Govt. to provide medical relief to the poor

(11)The Central Welfare Fund of the Army and Air Force and the Indian Naval BenevolentFund

(12) The Andhra Pradesh Chief Minister‘s Cyclone Relief Fund

(13) The National illness Assistance Fund

(14) The Chief Minister‘s Relief Fund or the Lt. Governor‘s Relief Fund

(15) National Sports Fund

(16) National Cultural Fund

(17)The Fund for Technology Development and Application set-up by the Central

Government; or

(18)Any fund set-up by the State Government of Gujarat exclusively for providing relief to

the victims of earthquake in Gujarat

(19)The National Trust for welfare of persons with Autism, Cerebral Palsy, Mental

Retardation and Multiple Disabilities.

(B) No limit donations where deduction is allowed @ 50% are as under:

(1) Jawahar Lal Nehru Memorial Fund;

(2) Prime Minister‘s Drought Relief Fund;

(3) National Children‘s Fund;



(4) Indira Gandhi Memorial Trust;

(5) Rajiv Gandhi Foundation

(C) With limit donations where deduction is allowed @ 100% of qualifying amount

are as under:

(l) The Government or to any local authority, approved association or institution as for the

purpose of promoting family planning.

(2) Sums paid by a company to the Indian Olympic Association or any other Associationfor sponsorship of sports and games in India.

D) With limit donations where deduction is allowed @ 50% of qualifying:

l) The Government or any local authority to be utilized for any charitable purpose

2) Any authority constituted in India for providing housing accommodation or for the

purpose of planning development or improvement of cities, towns and villages or for both

3) Any authority created under any law exclusively for the purpose of satisfying the need of (I) Housing accommodation (II) Planning, development and improvement of cities, towns

and villages

4) Any corporation established by the Govt for promoting the interests of the members of a

minority community; or

5) The sums paid for the renovation or repair of any temple, mosque, gurudwara, church or

any other place which is notified by the Central Government in the Official Gazette to be of

historic, archaeological or artistic importance or to be a place of public worship of renownthroughout any State or States.

How to ascertain Adjusted Gross Total Income

GTI xxx

Less: LTCG xx

All Deductions u/s 80C to 80U (except 80G) xx

Exempted Income included in GTI xx

Income referred u/s 115A to 115AD xx xx_

Adjusted Gross Total Income xxx

Conditions for allowing deduction under this section:



i) Donations should be in cash, not in kind.

ii) Donation should not be given for the benefit of any particular religion, class, creed,

community, etc. Donation given for the benefit of scheduled castes, scheduled tribes, backward

class or women o children are not for any particular religious community or caste.

Deduction in respect of Rent Paid [80GG]

Eligible assessee: Individual and HUF

An employee who is not in receipt of house Rent Allowance (H R A) from his employer during

the previous year or an individual who is a self employed

Least of the following amounts shall be allowed

(i) Excess of rent paid over 10% of Total Income;

(ii) 25% of Total Income; or

(iii) Rs. 2,000 p.m.

The total income for this purpose means Gross Total Income minus the deductions allowable u/s

80C to 80U (except u/s 80GG)

Deductions for scientific research or Rural development [80GGA]

Eligible Assessee: All Assessees

Deductible amount: 100% of such donation.

Deductions in respect of contributions given by any person to political parties: 80GGB

Only to a company – entire amount is exempt from tax

Deductions in respect of contributions given by any person to political parties: 80GGC

Available to all assessees other than a local authority and any authority or organisation or person

funded by the government – entire amount is exempt from tax

2.6 Deduction in respect of profits and gains from Industrial Undertaking engaged in

infrastructure development [Sec 80- IA]

Deduction under section 80-IA is available only to the following undertakings:

Case 1 Provision of infrastructure facility



Case 2

Case 3

Case 4

Case 5

Telecommunication services

Industrial Parks

Power generation, transmission and distribution or substantial

renovation and modernisation of existing distribution lines

Undertaking set up for reconstruction of a power unit.

An undertaking providing infrastructure facility must satisfy the following conditions-

Conditions 1

Conditions 2

Condition 3

Condition 4

Condition 5

It should provide infrastructure facility

It should be owned by an Indian company

There should be an agreement which the central

Government

It should start operation on or after April 1, 1995

Return of income should be submitted on or before

due date of Submission of return of income

Particulars AMOUNT OF DEDUCTION

1. Provision of infrastructure facility 100 per cent of the profit is deductible for the

first 10 years.

2. Telecommunication services

Assessee- enterprises % of profit deductible Period of deduction

commencing from

the initial assessmentyear

Owned by a company or any

other person

100

30

First 5 years

Next 5 years

3. Industrial parks / Special

economic Zone

100 per cent of profit is

deductible for 10 years

commencing from initialassessment year.

4. Power generation / distribution

100 per cent of profit isdeductible for 10 years

commencing from initial

assessment year.



Deductions in respect of profits and gains by an undertaking or enterprise engaged in

development of Special Economic Zone [Section 80- IAB]

The following conditions should be satisfied-

1.

The taxpayer is a developer of special economic zone2. The gross total income of the taxpayer includes profits and gains derived by anundertaking from any business of developing a special economic zone.

3. Such special economic zone is notified

Amount of deduction- If the above conditions are satisfied, the taxpayer can claim 100 per cent

deduction in respect of the aforesaid profit.

Period of Deduction- The aforesaid deduction is available for 10 consecutive assessment years.

The deduction may be claimed, at the option of the taxpayer, for any 10 consecutive assessment

years out of 15 year beginning from the year in which the special economic zone has been

notified by the central Government.

Deduction in respect of profits and gains from certain industrial undertakings other than

infrastructure development undertakings- [Sec. 80-IB]

Case 1 Business of an industrial undertaking

Case 2 Operation of ship

Case 3 Hotels

Case 4 Industrial research

Case 5 Production of mineral oilCase 6 Developing and building housing projects

Case 7 Business of processing, preservation and packaging of fruits or vegetables

or integrated handling, storage and transportation of food grains units

Case 8 Multiplex theatres

Case 9 Convention centre

Case 10 Operating and maintaining a hospital in rural area

Case 1: Business of an industrial undertaking

Amount of Deduction:

Assessee SSI Industrial Unit or

Cold Storage in

Backward State

Same in

Backward

District

Cold Chain for

Agri goods

Any Other

Company 25% for fist

12 years

100% for first 5 years

and 25% for next 7years

Same Same 25% for first

12 years



Any otherPerson

25% for first10 years

100% for first 5 yearsand 25% for next 5

years

Same Same 25% for first10 years

2. Operation of ship – 30 percent of the profit is deductible for the first 10 years.

3. Hotel –

Assessee % of profit deductible Period of deduction

in a notified area

Any other hotel

50

30

First 10 years

First 10 years

4. Engaged in Indusial Research

approved by the prescribed

authority at any time beforeApril 1, 1999

If the company is approved

by the prescribed authorityafter March 31, 200 but

before April 1, 2007

Amount of deduction

Period of deduction

100 per cent of profit from

such business

5 years beginning with the

initial assessment year

100 per cent of profit from

such business

10 years beginning with the

initial assessment year

5. Production of mineral oil: Amount of deduction- 100 per cent of the profit is deductible forthe first 7 years

6. Developing and building housing projects - If all the aforesaid conditions are satisfied 100per cent of the profit derived in any previous year relevant to any assessment year from such

housing project is deductible.

7. Business of processing, preservation and packaging of fruits or vegetables or integrated

handling, storage and transportation of food grains units

Amount of Deduction- The amount of deduction is given below :

Enterprises % of profit deductible PeriodOwned by a company

Owned by any other person

100

30

100

25

First 5 years

Next 5 years

First 5 years

Next 5 years



8. Multiplex theatres- 50 per cent of the profits and gains derived from the business is

deductible from the assessment year 2003-04 for a period of 5 consecutive years beginning fromthe initial year.

9. Convention centre-50 per cent of the profits and gains derived from the business is deductible

from the assessment year 2003-04 for a period of 5 consecutive years beginning from the initialyear.

10. Operating and maintaining a hospital in a rural area- 100 per cent of the profits and gains

of such business is deductible for a period of 5 consecutive assessment years,

Deduction in respect of profits and gains of certain undertaking in certain special category

of States- How to find out [Sec. 80-IC]

Amount of deduction

State in which the industrial

Undertaking is set up

Amount deductible

Sikkim 100% of profit and gains of the industrial for

10 years commencing from the initial

assessment year

Himachal Pradesh or uttaranchal 100% of the profit and gains of the industrial

undertaking for the first 5 years commencing

with the initial assessment year and 25%(30% in the case of a company) for the next 5

years

North-Eastern State [i.e., Arunachal pradesh ,Assam,Manipur, Meghalaya, Mizoram,

Nagaland and Tripura]

100% of profit and gains of industrialundertaking for 10 years commencing from

the initial assessment year

2.7 Deduction in respect of profits and gains from the business of collecting and processing

of bio-degradable waste [Sec. 80JJA]

Amount of deduction- The whole of the profits and gains of the above activities shall be

deductible for a period of five consecutive assessment years beginning with the assessment year

relevant to the previous year in which such business commences.

Deduction in respect of employment of new workmen [Sec 80JJAA]

The following conditions should be satisfied to avail deduction under section 80JJAA

Condition 1 The taxpayer is an Indian company.



Condition 2 Income of the taxpayer includes any profits and gains derived from anyIndustrial undertaking engaged in the manufacture or production of

article or thing.

Condition 3 The industrial undertaking is not formed by splitting up or

reconstruction of an existing undertaking or amalgamation with another

industrial undertaking.Condition 4 The assessee furnishes along with the return of income the report of a

chartered accountant in Form No. 10 DA.

Quantum of Deductions: 30% of the additional wages paid to the new regular workmen

employed by the assessee during the P Y for a maximum period of three years

Here workmen does not include

(i) a casual workmen (i) contract labour and (iii) any workmen recruited for less than 30 days

2.8 Deduction in respect of certain incomes of offshore banking units Sec 80LA:

Available to a schedule Bank or Foreign Bank performing offshore banking services in SEZ

Quantum of Exemption: 100% of such income for 5 A Years

2.9 Deductions in the case of a Person with Disability (Sec. 80U)

Eligible Assessee: A resident individual,

Quantum of deduction: Flat Rate of Rs. 50,000. In case of severe disability deduction shall be

allowed Rs. 75,000.

Note: If deduction u/s 80DD is claimed no deduction is allowable under this section.


1. The amount invested in P.O.NSC VIII issue qualifies for deduction under section

80C (true/false)

2. Repayment of bank loan borrowed for construction of the house does not qualify for deduction

u/s 80C (true/false)

3. Donation to National Children‘s Fund fully qualifies u/s 80G (true/false)

4. The gross qualifying amount under section 80C is ————— .

5. 80 DDB deals with ———— .



6. A person with severe disability is given deduction u/s 80U which is equal to Rs. —–

2.10 Exemptions: Tax-Free Incomes

An assessee need not pay tax on all his incomes. Some of his incomes are exempt from tax. Such

incomes are called incomes exempt from tax or tax-free incomes. Tax-free incomes are coveredby Section 10 of the Income-tax Act.

The various incomes exempt from income-tax are:

Sec. 10 (1): .Agricultural income is exempt from income-tax. In some cases agricultural income

is taken into consideration to find out tax on non- agricultural income.

Sec.10 (2): any sum received by a member of the Hindu undivided family either out of the

income of the H.U.F. or out of the income of the estate belonging to the H.U.F. is fully exempt

from income-tax. Such receipts are not taxable in the hands of an individual member, even if

they have not been taxed in the hands of the H.U.F.

Sec.10 (2A): The share of income of a partner in the total income of the firm, which is separatelyassessed to tax, is fully exempt from tax.

Sec. 10(5 ): Leave travel concessions.

Sec. 10 (7): Any allowance paid or allowed outside India by the Govt. to an Indian citizen forrendering service outside India is wholly exempt from tax.

Sec. 10 (10): Gratuity: See Unit 3

Sec. 10 (10A), 10 (AA): Pension and leave salary: See Unit 3

Sec. 10 (10B): Retrenchment compensation; See unit 3

Sec. 10 (10C): Compensation received at the time of voluntary retirement: See unit 3

Sec. 10 (10CC): Tax on perquisite paid by the employer:

Sec. 10 (10D): Amount paid by life insurance companies:

Sec. 10 (11), (12), (13): payment from provident fund, superannuation fund: See unit 3.

Sec. 10 (13A): House rent allowance: See unit 3

Sec. 10(14): Special allowance; See unit 3

Sec. 10 (15): Interest on securities. See unit: 7



Sec. 10 (16): Educational scholarships:

Sec. 10 (17): Daily allowance to Members of Parliament

Sec. 10 (17A): Scientific and artistic work awards instituted by the Central Government or by

any State Government are exempt from Income-tax.

Sec. 10 (18), (19): i) Pension received by an individual who has been in the service of the

Central or State Government and has been awarded ―Param Vir Chakra‖ or ―Maha Vir Chakra‖

or ―Vir Chakra‖ or such other gallantry award as the Central Government may, by notification inthe official gazette, specify in this behalf, and ii) family pension received by any member of the

family of such individual, will be exempt from tax .

Sec 10 (31): Subsidy received by an assessee engaged in the business of growing and

manufacturing rubber, coffee, cardamom or such other plantation crops as may be notified by the

Central Government is exempt from tax, provided the subsidy is received from the concerned

Board, it (i.e., the subsidy) is used for re plantation or replacement of rubber plants, coffee plantsor cardamom plants or for rejuvenation or consolidation of areas, and the assessee furnishes to

the assessing officer, along with the return of income, a certificate from the concerned Board

stating the amount of subsidy received during the previous year.

Sec. 10 (32): Income of minor child included in the income of individual is exempted up to Rs.

1,500 in respect of each such minor child or income of such minor child whichever is lower.

Sec.10 (33): Capital gains on the transfer of US64

Sec. 10 (34), (35): Income by way of dividends from domestic company or any income from the

units of Unit Trust of India, and the income received from the units of mutual funds specifiedunder Section 10 (23D) of the Income-tax Act are exempt from tax.

Sec. 10 (37): Capital gain on compulsory acquisition of urban agricultural land: only toindividuals and HUFs., provided such agricultural land was used by the assessee (or by his

parents) for agricultural purposes during 2 years immediately prior to transfer.

Sec. 10 (38): Long term capital gains on transfer of listed equity shares/ units covered by

securities transaction tax.

2.11 Exemptions U/s 10A, 10AAA, 10B

Newly established Under takings in Free trade zone: Electronic hardware technology park orsoftware technology park, special economic zone Sec. 10A

Subject to the fulfillment of certain conditions the profits and gains calculated as below is

allowed to be deducted from his total income for a period of 10 consecutive assessment years

beginning with the assessment year relevant to the previous year in which the undertaking begins

to manufacture or produce such articles or things or computer software.



Newly established units in Special Economic Zone: Sec. 10AA

Income from export of articles or thing or from services from such unit is deducted to the

following extent, subject to the fulfillment of certain conditions.

100% of the profit is deductible for a period of five assessment years, 50% for next five

assessment years.

Newly established 100% export oriented undertakings: Sec. 10B

Undertakings approved by the Board, is eligible for the deduction for a period of 10 consecutive

assessment years beginning with the assessment year relevant to the previous year in which the

undertaking begins to manufacture or produce such articles.

The profit eligible for deduction is calculated as per deduction computed u/s 10A (previous para)

2.12 Rebate u/s 88 E

Rebate of income tax in respect of securities Transaction Tax:

Tax paid on taxable securities transactions; or tax payable on income from taxable securitiestransactions at an average rate of tax, whichever is lower is allowed as a rebate and shall be

deducted from the amount of income tax.

2.13 Summary

Various deductions are available for savings, certain expenses, certain sources of incomes. Allthese savings, investments, incomes subject to certain conditions, can be claimed by the assessee

as deductions and see that his taxable total income is reduced hence his tax liability also.


2.15 Answers to SAQs and TQs

SAQ’s

1) True


http://resources.smude.edu.in/slm/wp-content/uploads/2009/08/clip-image0064.gif










2) False

3) True

4) 1, 00,000

5) Deduction in respect to Medical Treatment

6) Rs. 75,000

TQs

1) Refer 2.2

2) Refer 2.5

3) Refer 2.4

4) Refer 2.11



.

MF0003-Unit-03-Income from Salaries Unit 3 Income from Salaries

Structure:

3.1 Introduction

Objectives

3.2 Chargeability

3.3 Basis of charge of salary income

· Salary [Sec. 17(1)

3.4 Different Forms of salaries

· Advance salary





· Arrear salary

· Fees and commission

· Bonus

· Death Cum Retirement gratuity

· Leave salary of encashment of earned leave

· Compensation for retrenchment

· Tax paid by the4 employer on the value of perquisites [sec 10(10CC)]

· Salary and Pension from UNO

3.5 Allowances

3.6 Perquisites

Self Assessment Question

3.7 Who are specified employees?

3.8 Profits in Lieu of Salary

3.9 Deductions from cross income from salary

3.10 Provident Fund

3.11 Summary



3.1 Introduction

Major number of assessees is from salaried class. Though they receive their dues in the form of cash or in kind, much of the receipts and value received in kind are not taken for tax purpose.

Hence it necessary to understand the meaning of salary and its chargeability.

Any remuneration paid by an employer to his employee in consideration of his services in called

salary. It also includes monetary value of those benefits and facilities provided by the employerwhich are taxable.



Objectives:

· After studying this unit you will be able to understand the concept of salary income

· The various concepts involved in computation of taxable salary

· The relevance of provident fund in savings

· The application of bargaining techniques with the employer

Under Section 15, the following incomes are taxable under the head ‘Salaries’:

(a) The salary due from an employer or former employer to an assessee in the previous year,

whether paid or not;

(b) The salary paid or allowed to him in the previous year by or on behalf of an employer or a

former employer though not due or before it becomes due to him; eg. Advance Salary

(c) Any arrears of salary paid or allowed to him in the previous year by or on behalf of an

employer or a former employer, if not charged to income tax for any earlier previous year.

Tax planning hints

While fixing the salary to his employee, the employer has to keep two factors in his mind. First

factor, make sure that the compensation payable to the employee must be a deductible

expenditure while computing the income from business or profession of the employer. On otherhand, make sure even the package received by the employee is taxable in their hand at lesser

rates to reduce their overall tax liability i.e., focus should be reduction of their tax liability and tomaximise their take home salary.

3.2 Chargeability

Any Remuneration paid by an employer to his employee in consideration of his services is called

salary. It includes monetary values of those benefits and facilities provided by the employer,

which are taxable

3.3 Basis of charge of salary income

Income is chargeable under this head on due basis or receipt basis whichever is earlier

· Salary [Sec. 17(1)

Salary includes;

· Wages; bonus; fees; commission



· any annuity or pension;

· any gratuity;

· taxable allowances;

· value of perquisites

· profit in lieu of salary;

· any advance of salary; but not loan for purchasing a car, cycle, scooter or a house; etc

· any arrears of salary;

· Employer‘s contribution to Recognised Provident fund account of employee in excess of 12%

of the employee‘s salary and interest credited during the year on provident fund in excess of

9.5%.

· The contribution made by the Central Government in the previous year, to the account of an

employee (who joins on or after 1.1.2004), under a pension scheme.

Tax Planning: Where employee takes salary in advance, it is added in the salary income of the

previous year in which it is taken. This increases tax liability of the employee. Hence, instead of advance salary, a loan may be taken from employer. (Loan is not added in the salary income for

tax purpose. Even interest free loan or interest on concessional loan is tax free, if the amount of

loan in aggregate does not exceed Rs. 20,000 during the previous year.)

3.4 Different Forms of salaries

=>Advance Salary Advance salary is taxable on receipt basis, in the year, which it is drawn.

=>Arrear Salary It is taxable on receipt basis, if the same has not been subjected to tax earlieron due basis.

=>Fees and Commission

This is paid by an employer to his employee for doing any extra work (not over time) other than

the job assigned to him as an employee. It will be included under the head salaries in

computation income of the employee.

=>Bonus: It is taxable as salary in the year of receipt, if it has not been taxed earlier on due

basis.

=>Death cum Retirement Gratuity

Death cum Retirement Gratuity [Sec.17 (1) iii]



Tax planning: If an employee is due for retirement shortly, it is better to go for commutation of

pension as per the above stated rules. Because pension (un-commuted) received by all employees

(govt. and non govt.) during their life time is included in the salary income and chargeable to tax.

=>Leave Salary or Encashment of earned leave Cash equivalent of leave salary payable to an

employee of the central and the sate government in respect of the earned leave at his credit at thetime of his retirement whether on superannuation or otherwise (e.g. by resigning), is exempt

from tax.

The least of the following is exempt from tax:

Particulars Amount












1. Maximum of 10 month‘s salary on the basis of theaverage salary drawn by the employee during 10

months preceding his retirement on superannuation

or otherwise2. Average salary x Approved Period Maximum or

Statutory limit3. Amount actually received

xxx

xxx

Rs. 3,00,000

xxx

Approved period: Earned leave entitlement cannot exceed 30 days for every year of actualservice

Salary: Basic pay + Dearness Allowance (given in terms of employment) + Commission

achieved on fixed percentage of turnover

Tax Planning

If a Govt. employee is due for retirement shortly, it is better for him not to encash his salary

while he is in service. This is because he can avoid paying tax on leave encashment which he

receives at the time of retirement. Even an employee in private service gets exemption for amajor part of the amount received as leave encashment. In this connection employee should also

consider the loss of interest on the amount which is not taking to save tax.

=>Compensation for Retrenchment [Sec10 (10B)]

Any compensation received by a workman under Industrial Disputes Act, 1947; at the timeretrenchment is exempt from the tax to the extent of the least of the following:

Particulars Amount

1. An amount calculated in accordance

with Sec 25F(b) of the industrial

dispute act 1947; or2. Statutory Limit (as the central

government notified in this behalf)

3. Actual amount of compensationreceived by the employee

XXX

5,00,000

XXX

Receipts of employees on voluntary retirement [Sec10 (10C)]


Particulars Amount

1. Three months salary X Each completed year of

service

XXX



2. Salary at the time of retirement X the balance of months of service left before the date of his

retirement

3. Actual Amount received4. Max Statutory limit

XXX

XXX

5,00,000

Note: Salary means Basic pay + DA in terms of employment + Commission achieved fixedpercentage of turnover achieved by the employee

Note: It applies to an employee who has completed ten years of service or completed 40 years of

age (not applicable to P. S. U employees)

Tax planning

The voluntary retirement can be postponed to the beginning of the next year, to see that taxable

income from salary (actual salary is less or nil) is restricted to the compensation.

=>Tax paid by the employer on the value of perquisites [Sec 10(10CC)]

The amount of tax actually paid by an employer, at his option, on non-monitory perquisites on

behalf of an employee, is not taxable in the hands of the employee and it shall not be treated asan allowable expenditure in the hands of the employee.

=> Salary and pension from U N O

It is totally exempt in India. Even pension received by widows/ children of former U N O

employees is exempt from tax

3.5 Allowances

Under Section 15 of the IT Act all allowances are taxable on ‗receipt or due basis‘ whichever is

earlier

From the IT point of view, there are three types of such allowances, which are as under:

I. Taxable Allowances

1. Dearness Allowance or Dearness Pay2. Medical Allowance

3. Tiffin Allowance

4. Servant Allowance5. Non-Practicing Allowance

6. Hill Allowance

7. Warden Allowance/ Procter Allowance8. Deputation Allowance



9. Over-time Allowance

10. Other Allowance

Ex: Family All, Project All, Marriage All, Rural All, C. C. A, Telephone All, Health All,

Holiday All, Special Qualification All, Dinner All etc.

II. Allowances exempt up to specified limit

1. H. R. A

2. Entertainment Allowance

3. Special Allowances notified u/s 10 (14) (ii)

(a) Travelling Allowance

(b) Daily Allowance

(c) Conveyance Allowance

(d) Helper allowance

(e) Academic Allowance

(f) Uniform Allowance

1. Special Allowances exempt u/s 10 (14) (ii)

(a) Allowances to an employee working in any transport system

(b) Children Education Allow

(c) Children Hostel Allowance

(d) Transport Allowance

(e) High Altitude Allowance

III. Fully exempted allowances

1. Foreign Allowance given to government employees posted abroad

2. Sumptuary Allowances to Supreme and High Court Judges

3. Allowances from U. N. O

IV Allowances Exempted up to Specified Limit



1. House Rent Allowance (H. R. A): [Sec 10(13A)

An allowance granted to an assessee by an employer to meet expenditure incurred on payment of

rent in respect of residential accommodation occupied by him is exempt from tax to a certain

extent:

Note: In case of employee is living in his own house and is getting H. R. A, or living in a house

for which he is not paying any rent, full amount of H. R. A receivable is taxable.

In this rule:

(i) Salary means: Basic Pay + D.A (given in terms of Employment) + Commission achieved on

fixed percentage of turnover achieved

2. Entertainment Allowance {Sec 16 (ii)]

First the entertainment allowance is included in the salary and thereafter a deduction is allowedin accordance with the following rules:

(a) In the case of a Government employee:


(i) Actual E.A. received

(ii) 1/5th of Salary, or

(iii) Rs. 5,000.

(A) Those are exclusively to be incurred in the performance of the duties of his office [Sec

10 (14) (i)]

Special allowances which are granted to meet the expenses wholly, necessarily and exclusivelyincurred in the performance of the duties of an office will be exempt from tax, to the extent to




which such expenses are actually incurred for that performance and notified by the central

government

The following special allowances have been notified by the central government u/s 10 (14) (i) (a)

Travelling Allowance

Daily Allowance, Conveyance Allowance, Helper Allowance, Academic Allowance andUniform Allowance

B) Special Allowances to meet the personal expenses [Sec10 (14) (ii)]:

1. Any allowances granted to an employee working in any transport system :

Any such allowances given to an employee working in a transport system to meet his personal

expenses during his duty performed in the course of running of such transport from one place to

another is exempt in the whole of India

Up to – 70% of such Allowance or

Rs. 6.000/ month

Whichever is less.

2. Children Education Allowance: Is exempt in the whole of India @ Rs. 100/ month per child

to a maximum of two children

3. Children Hostel Allowance: Is exempt in the whole of India @ Rs. 300/ month to a

maximum of two children

4. Transport Allowance: Given to compensate them for the cost incurred on account of

commuting between the place of residence and the place of duty, will be exempt subject to a

maximum of Rs. 800/month. However, if the employee is blind or orthopaedically handicapped

with disability of lower extremities, the transport allowance is exempt up to Rs. 1,600/month.

5. High Altitude Allowance:

(a) For Altitude below 9,000 feet – Nil

(b) For Altitude of 9,000 – 15, 000 feet – It is exempt up to Rs. 1060/month

(c) For Altitude above 15,000 feet – It is exempt up to Rs. 1,600/month

3.6 Perquisites

The term ‗perquisite‘ means any benefit, attached to an office or position in addition to salary or

wages. It may be given in cash or in kind. if it is given in kind it is measured in terms of money



and added to find out employee‘s salary for tax purpose. The perquisites are taxable under the

head salary only if they are (a) allowed by an employer to an employee; (b) allowed during thecontinuance of employment; (c) directly dependent on service; (d) resulting in the nature of

personal advantage to the employee.

Perquisites received from a person other than employer, are taxable under the head ‗profits andgains of business or profession‘ or ‗income from other sources‘.

Perquisites as defined in the Act [Sec. 17 (2)]

(1) Rent free accommodation [Sec 17(2) (i)]

(2) Accommodation at concessional rent [Sec 17(2) (ii)]

(3) Perquisites taxable only under specified cases [Sec 17 (2) (iii)]

(4) Employee‘s obligation met by the employer [Sec 17(2) (iv)]

(5) Any sum payable by the employer, weather directly or through a fund other than a recognised

provident fund or an approved superannuation fund or Deposit Linked Insurance Fund, to effect

an insurance on the life of employee or in respect of a contract for an annuity on the life of theemployee [Sec 17(2) (v)]

(6) Notified Fringe benefits [Sec 17(2) (vi)],

In terms of provisions of [Sec 17(2) (vi)], the value of the following benefits or amenities shall

be included in the income of an employee:

(a) Interest free or concessional loan

(b) Use of any movable asset

(c) Transfer of any movable Asset

Perquisites taxable in case of all employees

A) The value of residential accommodation provided to the assessee by his employer.

Central and state govt. employees: The value of perquisite is equal to the licence fee whichwould have been determined by the govt. in accordance with the rules framed by the govt. forallotment of houses to its employees.

Other Employees: Employees in private sector

(a) Accommodation owned by employer.



(i) Provided in cities having population exceeding 25 lakh as per 2001 census: The value taxable

shall be 15% of employee‘s salary.

(ii) 10% of salary in cities having population exceeding ten lakh but not exceeding 25 lakh as per

2001 census.

(iii) Provided in other cities The value taxable is equal to 7.5% of salary in respect of the periodduring which the accommodation was occupied by the employee during the previous year.

(b) Accommodation is taken on lease or on rent employer: Actual amount of lease rent paid orpayable by the employer or 15% of salary, whichever is lower, will be the value of

accommodation and taxable

Where the accommodation is furnished (in both cases) 10% of the cost of furniture shall be

added to the above value. If the furniture is hired by the employer the hire charges payable for

the furniture will be taken into account.

From the above value, any amount is paid or payable by the employee during the previous year

shall be reduced and the balance shall be the value of perquisite.

For the purpose of valuation of rent free accommodation or accommodation at concessional rent,

the salary means and includes:

a) basic salary;

b) dearness allowance/pay, if terms of employment so provide;

c) bonus;

d) commission;

e) fees;

f) all other taxable allowances (excluding amount not taxable);

g) any monetary payment which is chargeable to tax (by whatever name called)

For this purpose salary does not include the following:

a) dearness allowance/pay, if not taken into account while calculating retirement benefits likeP/F., gratuity, etc or if the term of employment does not so provide;

b) employer‘s contribution to provident fund account of employee and interest there on;

c) all allowances which are exempt from tax;



d) the value of perquisites under sec. 17 (2)

Payments of gas, electricity, water and income tax bills are not taken into consideration. Leave

encashment of salary pertaining to the current year is taken into consideration.

Tax Planning

When an employee is given the option as above, he will choose that alternative which reduces

his taxable salary income.

(B) Any sum paid by the employer in respect of any obligation which, but for such

payment, would have been payable by the assessee 17 (2) iv)

Given below are some examples of such obligations:

a) payment by the employer of the employee‘s club or hotel bills provided that they are not

connected with the employer‘s business;

b) payment by the employer of any loan due on his employee;

c) payment by the employer of education expenses of the children of his employees;

d) payment by the employer of the salary of the domestic servant of an employee meant for hispersonal use and employed by the employee;

e) income tax paid by the employer in respect of the salary of his employee;

f) legal expenses incurred by the employer to save or defend the employee;

However, tax paid by employer on value of perquisites (not provided for by way of monetary

payment) shall be exempt u/s 10(10CC);

B) Any sum payable by the employer, whether directly or through a fund, other than a

recognized provident fund or an approved superannuation fund or a Deposit-linked Insurance

Fund, to effect an insurance on the life of the employee or in respect of a contract for an annuityon the life of the employee.

C) In term of provisions of Sec. 17(2)(vi), the value of the following benefits or amenities shall

be included in the income of an employee;

a) Interest-free or concessional loan;

b) Use of or transfer Movable asset to an employee or any member of his household;

Self Assessment Questions



1) Value of rent free accommodation is taxable u/s ————– .

2) Medical facility provided to assessee and his family members in the hospital maintained by

the employer is ———— -. (taxable/not taxable)

3) Amount spent for providing free education facilities to and training of, employees is ——— —– . (taxable/not taxable)

4) Every individual can subs to PPF any amount being not less than ———— -& more than ——

—— in year

3.7 Who are specified employees?

The following are specified employees:

An employee, who is a director in the employer company OR

An employee who has substantial interest in the employer concern (if he is a beneficial owner of equity shares carrying 20% or more equity voting power in the employer concern) OR

Employee drawing in excess of Rs. 50,000(Salary exclusive of all benefits or amenities notprovided by way of monetary payments). Monetary benefits which are not taxable under sec. 10,

deduction on account of entertainment allowance are excluded.

Given below are some examples of free or confessional benefit/s amenities provided by the

employer to his employee, the value of which shall be included in the salary income of the

specified employee;

(i) Gas, electric energy and water, connections in the name of employer and bills are paid by

employer

(ii) Sweeper, watchman, gardener and personal attendant, paid by employer

(iii) Education facility to the members of employee‘s household bills in the name of employee

but paid by employer.

Tax-free Perquisites:

The value of the following perquisites shall not be included in the salary income of anyemployee:

i) Medical benefits

Fixed medical allowance is always taxable.



If bills are in the name of an employee and the employer makes payment, then it is taxable in the

hands of all employees, whether specified or not.

Medical facilities in the hospitals etc. maintained by the employer are tax free.

Medical bills incurred or reimbursed by the employer for the treatment in hospitals etc.maintained by Govt. or local authority or any approved hospitals is not chargeable in the handsof any employee.

Medical bills incurred or reimbursed by the employer fir the treatment in private hospitals etc.are tax free up to Rs. 15,000 in aggregate per year.

Medical facilities outside India for the treatment of employee or any member of the family of

such employee are also tax free provided the expenditure shall be permitted by R.B.I.

Cost on travel of employee/any member of his family and one attendant who accompanies the

patient in connection with the treatment outside India shall also be tax free provided, theem ployee‘s gross total income before including the expenditure on traveling does not exceed Rs.

2,00,000.

Medical bills incurred or reimbursed by the employer for the treatment of prescribed diseases,

approved by the chief commissioner are also tax free

Medical insurance premium paid or reimbursed by the employer is tax free.

ii) Tea or snacks or free food or beverages provided in office or factory (work place) or through

paid vouchers which are not transferable and usable only at eating joints.

iii) Facility of motor car(s)

iv) Residential accommodation provided at remote area.

v) Facility of club or health club and similar facilities.

vi) Expenses on telephones including mobile phone.

vii) Employer‘s contribution of Staff Group Insurance Scheme

viii) Scholarships to employees or their children paid by the employer.

ix) The facility of conveyance provided by the employer from residence to place of employment

and vice-versa.

x) Refresher courses, etc. If the employer pays fees for an employee taking refresher courses or

management course in order to enable, the employee to perform his services more efficiently.

Such expenses are treated as scholarship.



xi) Free Rations to Armed Personnel. The value of free rations given to the armed forces

personnel.

xii) Facility of guest house or holiday home

xiii) Welfare expenses

xiv) Entertainment expenses

xv) Free or confessional ticket provided by the employer (engaged in the business of transport)

for private journeys of the employee or his family members.

xvi) Perquisites to Government Employees posted abroad. Any perquisites allowed outside India

by the Government of India to a citizen of India for rendering service outside India. This

exemption is not available to non-government employees and also to those who are not citizens

of India.

xvii) Rent-free house and conveyance facility provided to High Court and Supreme Court Judges

xviii) The value of rent-free furnished residence provided to a Minister, specified officers of

Parliament or a Leader of the Opposition in Parliament.

xix) Gifts in Kind.

xx) Laptops and computers provided by the employer for personal use of employee or any

member of his household.

xxi) Interest-free or confessional loan, if the amount of loan in aggregate does not exceed Rs.20,000 during the previous year.

xxii) Transfer without consideration to an employee of a movable asset (other than computers

electronic items and car) by the employer after using it for a period of ten years or more.

xxiii) Periodicals and journals required for discharge of work.

xxiv) Leave travel concession u/s. 10(5).

xxv) Issue of share etc., free of cost or at a confessional price under employee‘s Stock Option

Plan- The value of any benefit provided by a company free of cost at a confessional rate to itsemployees by way of allotment of shares, debentures or warrants directly or indirectly, under the

Employees‘ Stock Option Plan or Scheme offered to employees in accordance with theguidelines issued by the Central Government.

xxvi) Where loans are made available for medical treatment in respect of diseases specified inRule 3A (e.g., cancer, tuberculosis, AIDS, etc) The value shall be taken as nil. However, the



exemption shall not apply to so much of the loan as has been reimbursed to the employee under

any medical insurance scheme.

3.8 Profits in Lieu of Salary

Profits in lieu of salary include the following:

1. The amount of any compensation due to or received by an assessee from his employer or

former employer in connection with the termination of his employment or the modification of the

terms and conditions relating thereto.

2. Any payment due to or received by an assessee from an employer or a former employer.Where an employer gives to his employee any sum by way of personal gift and not in

appreciation of his service, it is not taxable in the hands of the employee.

3. Any payment made from unrecognized provident fund or other fund will be included only to

the extent of employer‘s contributions and interest thereon. Interest on employee‘s owncontribution is also taxa ble but it will be taxed under the head. ‗Income from Other Sources‘ and

not as salary income.

4. Any payment received under a Keyman Insurance Policy including the amount of bonus

Exceptions:

Payments made under clauses (10), (10A), (10B), (10C) (11), (12), (13), (3A) of section 10 will

not be included in profits in lieu of salary.

3.9 Deductions from Gross income from salary: Sec. 16

Taxable income from salary is calculated after making following deductions:

i) Entertainment allowance: only to govt. employee: disused in allowances

ii) Professional tax or tax on employment levied by a state and paid during the year Sec. 16 (iii)

3.10 Provident Fund

The word ‗Provident‘ means to provide for the future, hence this fund is to provide for the future.

This fund is created by an amount deducted from the salary of the employee every month at acertain rate. The employer also makes his own contribution to this fund. These contributions are

invested to earn interest, which is also credited to the employee‘s provident fund account. Whenan employee retires from his service, he receives this amount in lump-sum along with interest on

it and is a great help to him at that time. If unfortunately, the employee dies during the tenure of

his service, the amount of this fund is received by his wife and children or legal heirs, which is of great help to them.



Provident funds are of four kinds:

i) Statutory Provident Fund,

ii) Recognised Provident Fund

iii) Unrecognized Provident Fund,

iv) Public Provident Fund

Statutory Provident Fund. It is that Provident fund to which the Indian Provident Fund Act,

1925 applies. Generally, this Provident Fund is maintained by Government or Semi-Governmentoffices, like local authorities, universities, other recognised educational institutions, statutory

corporations and nationalized banks, etc.,

Recognized Provident Fund. It is a fund to which the Provident Fund Act, 1952, applies. Under

this scheme, any person who employs 20 or more employees is under an obligation to register hisfirm or organisation under the provident Fund Act, 1952, and start a provident fund scheme for

the employees in his organization. It is after 3 years of its establishment, that the registrationshould be done under this Act. There is one more alternative also. The funds which are not

established under E.P.F. Act of 1952 have to be expressly recognised by the Chief Commissioner

or Commissioner of Income Tax. The Chief Commissioner or Commissioner recognises thisfund only when he is satisfied that this fund fulfils certain conditions set-out in the Income Tax

Act of 1961. Generally this fund is maintained by scheduled banks, factories and several

business houses. Thus, thius fund is maintained by private sector organizations.

Unrecognized Provident Fund: It is that provident fund which is neither statutory nor

recognised. Any institution or organization can maintain this fund. It is approved by the P.F.commissioner but not by the commissioner of income tax.

Public Provident Fund: The Public Provident Fund Scheme was started from Ist July, 1968,under the provision of PPF Act, 1968. Every individual (including a salaried employee) can

subscribe to this fund any amount being not les than Rs. 500 and not more than Rs.70, 000 in

year. He can also deposit money in installments which cannot exceed 12 in a year. An individualcan open a public provident fund account either on his own behalf or on behalf of a minor of

whom he is the guardian. However, an individual can open only one account in his own name.

An account under this scheme can be opened at a branch of the State Bank of India or its

subsidiaries or at a branch of any of the nationalized banks authorized for this purpose by the

Central Government.

A withdrawal is permissible every year from the seventh financial year of the date of opening theaccount, of an amount not exceeding 50% of the balance at the end of the 4th preceding year or

year immediately preceding the year of the withdrawal, whichever is lower, less the amount of

loan if any.PF scheme allows the assessee to withdraw the entire amount at his credit, afteradjustment of the dues if any to government, on completion of 15 years after the end of the year

in which the account is opened.



The first loan can be taken in the third financial year, up to 25% of the amount at the credit at the

end of the first financial year. This facility can be availed only before the expiry of 5 years fromthe end of the year in which the initial subscription was made. The loan is repayable either in

lump sum or in convenient installments.

The account can be transferred to any other accounts office.

The interest credited to the fund and amount standing to the credit of subscribers are exempted

from income tax and wealth tax respectively.

Nomination facility is available. NRI are not permitted to open account under this scheme.

Amount which is included in the salary income:

Statutory Provident Fund Recognised Provident Fund Unrecognised Provident

Fund

When a person is amember of this provident

fund: (i) his own

contributions to this fundare included in his total

income,

(ii) employer‘s contributionand interest on provident

fund is neither included in

the employee‘s total

income nor it is taxable.

When a person is a member of this fund: (i) his own

contribution to this fund,

(ii) employer‘s contribution in

excess of 12% of the

employee‘s salary, and (iii)interest on provident fund in

excess of 9.5% are included in

employee‘s total income i.e.,

employer‘s contribution to the

extent of 12% of the salary andinterest on provident fund uptothe prescribed rate; is neither

included in the total income of

the employee nor it is taxable.

When a person is memberof this fund his own

contributions to this fund

are included in his totalincome but the employer‘scontribution and interest on

provident fund is notincluded in his total income

from year to year.

Maximum amount qualifying for deduction

Contribution to S.P.F. or R.P.F by the employee qualifies up to

Rs. 1,00,000. Employee‘s contribution to U.R.P.F. never qualifies.

Tax Planning:

PPF is an ideal scheme of saving. The amount of deposit attracts ―80 C‖ deduction. The interestis also tax free. The asessee can open an account for 15 years and see that account is in life.

During 13th

, 14th

, 15th

year he can deposit and claim maximum deduction, and withdraw entirebalance on completion of 15 years of account opening. Even during the 15 years, he can avail

loan and deposit the same in PPF account. By this, he can reduce the tax liability substantially.



Those with their income of more than

Rs. 2,50,000 get tax benefit of 30%, while they are paying marginal interest on loan.

3.11 Summary

This chapter has given the total idea as to the meaning of salary and what are all included in themeaning of taxable salary. Knowledge about taxable and tax free allowances, the valuation of perquisites helps the salaried assessees to make bargain with their employers. Even they can plan

their savings in such way to reduce their salary income.


1) What are the taxable allowances taxable?

2) Who are specified employees?

3) What are the deductions available from gross salary income?

4) Discuss the provisions relating to Public Provident Fund.


SAQ’s

1) U/s 17(2)

2) Not taxable

3) Not taxable

4) Rs. 500, Rs. 70,000

TQ’s

1) Refer 3.5

2) Refer 3.6

3) Refer 3.9

4) Refer 3.10





.

MF0003-Unit-04-Income from House

Property Unit 4 Income from House Property

Structure

4.1 Introduction

Objectives

4.2 Chargeability (Sec22)

· Basis of Charge

4.3 Annual Value (Sec 23)

· Gross Annual Value

· Unrealized rent

· Determination of GAV

· Municipal Value

4.4 Deductions form of Annual Value


4.5 Buildings self occupied for Residential Purposes

4.6 Loss from house property

4.7 Computation of income from House Property

4.8 Summary


4.10 Answers to SAQs & TQs

4.1 Introduction







This head covers the assessees who are the owners of house properties. The property income i.e.,

the rental receipts are taxed under this head, considering the expenses incurred to earn thesource. The following gives the meaning and requirements to be fulfilled for including the

income under the head ‗income from house property‘.

Under Sec. 22, the annual value of a property, consisting of any buildings or land attachedthereto is chargeable to tax in the hands of assessee owner, provided it is not used for the purpose

of assessee‘s business or profession. Thus:

a) Income from subletting is not taxable under this head

b) Income from vacant land is taxable under income from other sources.

c) Annual value of property used by the owner for his own business or profession is not

chargeable to tax

d) If the assessee lets out the building or staff quarters to the employees of business whoseresidence there is necessity for the efficient conduct of business, the rent collected from such

employees is assessable as income from business and not as an income from house property.

e) If a building is let out to authorities for locating bank, post office, police station, etc., income

from such building will be assessable as income from business and not as income from houseproperty, provided the dominant purpose of letting out the building is to enable the assessee to

carry on his business more efficiently and smoothly.

f) Where the assessee hires machinery, plant or furniture belonging to him and also buildings for

a composite rent and if the rent of the buildings is inseparable from the rent of the said

machinery, plant or the furniture, the income from such letting is not chargeable to income taxunder the head ‗Income from house property but is taxable under the head ‗Business or

Profession‘, if such letting is his business or under ‗income from other sources‘.

g) Paying guest accommodation. It is assessable as business income.

Objectives:

· After studying this unit you will be able to compute income from house property.

· You will understand the benefit of taking loan to construct a house and tax benefit that can be

availed of.

· The balanced approach of constructing a house or to live in a rented house.

· You also understand how the loss from house property is treated for tax purpose.

4.2 Chargeability Sec (22)



The property: Rental income is taxable under the head income form house property if the

following conditions are fulfilled:

Condition 1 There must be Building and lands appurtenant thereto;

Condition 2 The assessee must be the owner of such property;

Condition 3 Which is not used for the purpose of assessee‘s Business and Profession?

Note 1: Land, which is not appurtenant to any building, is taxable under the head ‗Income fromother Sources‘.

Note 2: income from subletting, temporary hutments in the vacant land are not included in

buildings. Any rental income from such hutments is taxable under the head ―Income from Other

Sources‖.

Note 3: The Following are the exceptions to the general rule that the Income from House

Property is taxable under the head Income from House Property:

(a) Building and staff quarters let out to employees.

(b) If building is let out to the government authorities for locating bank, post office and police

station where the dominant motive is to run business efficiently.

(c) Composite letting of building with others.

(d) Paying guest accommodation

Given by a club to its members

=>Basis of Charge

Under the head ‗Income from Hose Property‘ the basis of charge is the annual value of

property and not on its annual rental value. Again it is computed on the basis of nature of

occupation. On the basis of nature of occupation ―Income of House Property‖ can be classifiedas follows:

1. Let out property.

2. Self-occupied.

3. Deemed to be let out property.

4. Partly let out and partly self occupied property.

Part of the period self occupied and Part of the period let out

Part of the total portion self occupied and part of the total portion let out.



4.3 Annual Value [Sec 23]

(a) It means the sum for which the building might reasonably be expected to be let out from year

to year. Or

=>Gross Annual Value:

It refers to the value of the property for any year, before giving any deductions. Computation of

Gross Annual Value.

Generally the GAV can be determined on the basis of the following factors:

(i) Actual Rental Income: It refers to the rent actually charged by the owner for the property for

the entire year.

(ii) Municipal Valuation: It refers to the value of the property according to the Municipal

authorities for collection of taxes.

(iii) Fair Rent: It refers to a rent feted by a similar property in the same locality

(iv) Standard rent where rent control Act is applicable.

Remember:

(i) The last three statements are also called as Notional rents.

(ii) Reasonable expected rent couldn‘t exceed the standard rent.

=>Unrealised Rent: It means the rent not realized by the owner from the tenant. Unrealised rentshall be excluded from rent received if the following conditions are fulfilled:

(a)The tenancy is bonafide;

(b)The defaulting tenant has vacated the property or steps have been taken to compel him tovacate the property;

(c)The defaulting tenant is not in occupation of any other property of the assessee;

(d)The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings are useless.

=>Determination of GAV

Case I (when there is no unrealised rent and no vacancy period)



FRV

MV

xxx

xxx

Whichever is higher

Compare standard rent

xxx

xxxWhichever is lower (Notional Rent)

Actual Rent

xxx

xxx

Whichever is higher (GAV) xxx

Case II when there is an unrealised rent

FRV

MV

xxx

xxx

Whichever is higher


xxx

xxx

Whichever is lower (Notional Rent)

Actual Rent – unrealised rent

xxx

xxx

Whichever is higher (GAV) xxx

Case II when there is an unrealised rent and vacancy period)

FRV

MV

xxx

xxx

Whichever is higher


xxx

xxx

Whichever is lower (Notional Rent)

Actual Rent – unrealised rent

xxx

xxx

Whichever is higher

Less : Vacancy period

xxx

xxxGAV xxx

Illustrations on computation of GAV

1. Calculate Notional Rent from the following data:



Particulars A B C

Municipal Value 60,000 60,000 60,000

F. R. V. 56,000 56,000 56,000

Standard Rent N. A. 45,000 55,000

Solution

Particulars A B C

Municipal Value

F. R. V.

60,000

56,000

60,000

56,000

60,000

56,000

Whichever is higher

Standard Rent

60,000

N. A.

60,000

45,000

60,000

55,000

Whichever is lower 60,000 45,000 55,000

Notional Rent 60,000 45,000 55,000

N.A*= standard rent is not applicable (hence ignored)




























=>Municipal Taxes

It refers to tax levied on the property by municipal authorities or any local authorities includingservices taxes. They are deductible only if:

(a) These taxes are borne by the owner and

(b) Actually paid by him during the previous year (not due) i.e., if they are not paid by theassessee they are not deductible

Municipal Taxes paid by the assessee are deducible from the GAV of the property. The balance

after making deduction is called Net Annual Value of the property.

Particulars Amount

Gross Annual Value

Less: Municipal Taxes Paid by the

assessee

Net Annual Value

xxx

xxx

xx

Note: Net Annual Value cannot be negative i.e., deductions for municipal taxes paid must berestricted to GAV.

4.4 Deductions from Annual Value: Sec. 24

Let out houses:

The income chargeable under the head ‗Income from House Property‘ (in case of let-out house)

shall be computed after making the following deductions from its annual value:

1) A sum equal to 30% of annual values standard deduction for expenses (except interest).

2) Interest on loan taken in respect of house property. Interest on loan taken for the purpose of

purchasing, constructing, reconstructing or repairing the house property is allowable as adeduction on accrual basis.




Interest for pre-acquisition or pre-construction period. Interest payable in respect of funds

borrowed for the acquisition or construction of house property and pertaining to the period priorto the previous year in which such property has been acquired or constructed shall be deducted in

five equal annual installments commencing from the previous year in which the house was

acquired or constructed. The amount of interest shall not include any amount of such interest

allowed as a deduction under any other provision of the Act.

The interest for the previous year prior to the current year, which is to be deducted in five equalannual installments, shall be deducted in addition to the interest of the current year.

The ―pre-construction period‖ means the period commencing on the date of borrowing andending on – (a) March 31 immediately prior to the date of completion of construction/date of

acquisition or (b) Date of repayment of loan, whichever is earlier.


1) Income from subletting is taxable under the head ————– .

2) The rental value is Rs. 5,000 p.m. Municipal value is Rs. 50,000 p.a. The standard rent is Rs.55,000. The gross annual value is Rs. ———– .

3) ———– % of net annual value is deductible irrespective of any expenditure incurred by theassessee u/s ———– .

4) The interest of pre-construction period is deductible in —— equal installments.

4.5 Buildings self-occupied for residential purposes

The building self-occupied by the owner (an individual or HUF) for residential purposes can be

arrived as under:

House or part of a house occupied by the owner for full previous year for the purposes of his

own residence Sec. 23(2)(a): Where the property consists of one house in the occupation of theowner for his own residence, the annual value of such house shall be taken to be NIL

Deduction from Annual Value: Interest on borrowed capital. Sec. 24(b)

Interest on borrowed capital (of the current year and pre- construction period) is deductible.

However, it is subject to a maximum ceiling given below:

(a) Where such property has been acquired, constructed, repaired, renewed or reconstructed with

borrowed capital, the maximum limit for deduction of interest shall be Rs. 30,000.

(b) Where such house property is constructed/acquired with capital borrowed after 31.3.1999, thededuction on account of interest shall be allowed up to Rs. 1,50,000. The acquisition or



construction should be completed within three years from the end of the financial year in which

capital was borrowed.

Tax Planning

Those who are staying in rented premises can think of availing loan from banks or approvedinstitutions. They have the pleasure of staying in their own house. Not bothering to pay monthlyrent, they can reduce their taxable income substantially. Even their disposable income may not

decrease, since they need not pay monthly rent. Even the effective rate of interest may be

reduced, because of tax saving caused by the interest payment (or due). (of course this requires

detailed calculations.)

House self-occupied for part of previous year, let out for part of previous year [Sec. 23(2)(b)]

House self-occupied for part of the previous year and let-out for part of the previous year: Sec.

23(3): The annual value of the house shall NOT be nil. Such a house will be treated as let-out

house annual value will be determined u/s 23(1)

More than one house in the occupation of the owner [Sec. 23(4)

Where the owner of the houses occupies more than one house for his residence for full previous

year, except one (at his option), all other houses are deemed as let out. The income(s) of deemedlet out house(s) shall be computed in the usual manner.

The following points will be considered:

The question of house remaining vacant or unrealized rent will not arise.

The municipal tax paid can be claimed.

The expected rent will be the gross annual value.

Full amount of interest on loan for acquisition, construction etc. will be allowed.

4.6 Loss from house property

If the aggregate deductions under section 24 exceed the annual value, there will be a loss from

that property. This loss can be set off against income from any other property. If loss can not be

wholly set off against the income from any other house property, the balance can be set off against income under any other head in the same year. The balance if any not so set off in the

same year, can be carried for eight assessment years to be set off against income from house

property only.

Illustration



Mr. Sunil is the owner of following house properties in Shimoga (Karnataka), particulars in

respect of which for the year ended 31.3.2009 are as below:

I house II house III house

Rs. Rs. Rs.

1. Actual rent for twelve months 9,000 1,800 Dwelling House2. Standard rent 7,000 2,000 –

3. Municipal valuation 8,400 1,800 35,600

4.Total municipal tax 840 180 3,200

5. Municipal tax paid by Mr. Sunil 840 90 –

6. Municipal tax paid by tenant – 90 –

7. Repairs 1,000 500 2,000

8. Vacancy period 1 Month – –

9. Interest on loan for repairing house 300 600 12,000

Unrelised rent allowed in the A.Y. 2005-06 recovered

during the year for the Ist house Rs. 4,000.

Compute his income from house property for the A.Y.

2009-10.

Solution

Computation of Income from House Property for the A.Y. 2009-10

I houseII house

III house self

occupied

house Rs. Rs. Rs.

(i) Municipal Value 8,400 1,800 –

(ii) Standard rent 7,000 2,000 –

(a) Expected rent (i) or (ii) whichever is less 7,000 1,800 –

(b) Actual rent

(9,000-750)

8,250

1,800 –

G.A.V. (a) or (b) whichever is greater 8,250 1,800 –

Less: Municipal tax paid by owner (-) 840 (-) 90 –

Annual Value 7,410 1,710 – Less: 30% of A.V. (-) 2,223 (-) 513 –

Interest (-) 300 (-) 600 (-) 12,000

Income/Loss (a) 4,887 (b) 597 (c)-12,000

Unrealised rent recovered (d) 4,000

Income from House Property (a+b+d+c) = Rs.2, 516

(Loss).



Illustration

Mr. Pandey, owner of three houses in Chennai, Furnished the following information Compute his

income from House Property for the Assessment year 2009-10.

House No. 1Let out Rs.

House No. 2Self-occupied

Rs.

House No. 3Self-Occupied

Rs.

Standard rent

Under Rent Control Act

36,000 63,500 –

Gross Municipal Value 34,000 56,500 30,000

Rent received Actual 37,500 – –

Fair Rent 45,000 67,500 45,000

Repairs 2,000 Nil 3,000

Municipal Tax (10% on

Municipal value

40% due fully paid fully paid

Interest paid for

construction of house

2,000 4,000 3,000

Brokerage for arranging

loan

500 1,000 750

Vacancy period 2 months 6 months 6 months

Collection charges 3,000 – –

Recovery of unrealised rent

(allowed as deduction in

A.Y. 2005-06)

5,000 – –

Fire Insurance premium 1,000 (due) 1,500 1,000

Solution:

Computation of Income from House Property for the Assessment Year 2009-10

Let Out House: Rs. Rs.

Gross Annual Value – 37,500

Less: Municipal tax 60%

Of Rs. 3,400

2,040

Annual Value 35,460

Less: 30% of A.V. 10,638

Interest 2,000 12,638

22,822

Add: Recovery of Unrealised rent (No deduction

is allowed)

5,000

Income from Let-out House (a) 27,822



Self- 0ccupied houses

Self Deemed

Occupied Let Out

Rs. Rs.

Gross Annual Value Nil 45,000

Less: Municipal tax 3,000

42,000

Less: 30% 0f A.V ( – )12,600

Interest ( – ) 4,000 ( – ) 3,000

( – ) 4,000 26,400

Income from self-occupied houses 22,400.( 26,400-4,000)

Income from House Property Rs. 50,222 (22,400+27,822)

Illustration

Mrs..Bhavya owns four houses the details of which are as under

I II III IV

Annual Municipal value 10,000 8,000 12,000 15,000

Fair Rental value 12,000 15,000 10,000 12,000

Rent received 15,000 14,400 Self Self

Standard rent 13,600 18,000 15,000 10,000

Municipal taxes paid 800 600 Nil 1200

Municipal taxes due – – 1000 –

Repairs NIL 12000 4000 6000

For the construction of IV house, she had borrowed Rs. 80,000 at 15% p.a. on 1.1.2003. Thehouse was completed on 1.8.2006. This loan is not cleared. Compute her income from house

property.

Solution

1. It is beneficial to treat III house as self occupied as its Gross Annual Value (SR) is high. IV

house is treated as deemed to be let out.

2. Interest for pre-construction period (1-1-2003 to 31.3.06) is Rs. 39000 (80,000 x 15/100 x

39/12). It is claimed as deduction in five equal installments (39,000/5=7800) in subsequent 5

previous years (2006-07 onwards).

4.7 Computation of income from House property



Illustration

Compute income from house from property form the following particulars:

I II III IV

Rs. Rs. Rs. Rs.

Municipal Value 30,000 15,000 12,000 12,000

Fair Rental Value 28,000 21,000 18,000 20,000

Rent received 27,000 16,000 15,400 17,000

Standard rent 32,000 18,000 21,000 18,000

Vacancy period 3 months

Repairs 10,000 12,000 6,000 14,000

Municipal taxes:

Paid 3,000 1,500 –

Due – – 1,200 1,600

The assessee had borrowed on 1.8.2002 Rs. 2,50,000 at 12% for the construction of the III house

which was completed on 31.10.2005. As on 1.4.2008 Rs. 2, 00,000 was outstanding. In respect

of the IV house one month rent was unrealized. The claim was genuine and satisfied theconditions; and the rent received was for 10 months

Solution

Working note: Pre-construction period is from 1.8.2002 to 31.3.2005 i.e., 32 months (8+12+12)

interest for PCP = 2,50,000×12/100/x32/12 = Rs. 80,000 1/5 of Rs. 80,000 = Rs. 16,000 allowedfor 5 years (2005-06 to 2009-10 previous years)




Computation of income from House Property for the assessment year 2009-10

Illustration

Mr. Seetharam owns a residential house property. It has two equal residential units – Unit 1 and

2. While Unit 1 is self-occupied by Seetharam for his residential purpose, Unit 2 is let out (rent

being Rs. 6,000 per month, rent of 2 months could not be recovered). Municipal value of theproperty is Rs. 1,30,000, standard rent is Rs.1,25,000 and the fair rent is Rs. 1,40,000, Municipal

tax is imposed @ 12% which is paid by Seetharam. Other for the previous year 2008-09 being

repairs;: Rs. 250, insurance: Rs. 600, interest on capital (borrowed during 1999) for constructingthe property; Rs. 63,000.

Find the income of Mr. Seetharam for the assessment year 2009-10 on the assumption that

income of Seetharam from other sources is Rs. 1,80,000

Solution:

4.8 Summary







This chapter has given the understanding about chargeability of income from house property.

Even the self occupied house is not free from tax, if the assessee reserves more than one housefor self occupation. Assessee can think of purchasing or to construct a house by availing loan

from approved institution, there by reduce his tax liability. (caused by the interest payment

allowed as deduction)


1) How do you calculate the annual value of let out houses?

2) How the loss from house property is treated while calculating the gross total income?

3) What deductions are permissible u/s 24 while calculating income from house property?

4) How do you calculate the taxable income from self occupied house property?

5) Find out GAV from the following details:

A B C

Municipal Value 8,000 16,000 18,000

Fair rent 10,000 18,000 14,000

Standard rent 12,000 20,000 15,000

Rent per month 1,000 1,600 1,200

Vacancy period 1 2 4

6. Mr. Suresh owns a house at Bangalore. While its municipal value is

Rs. 18,000, the fair rental value is 24,000 per annum. He resided in the house up to 31 st July andthen let it out for residential purposes on 1st August at Rs. 2,500 p.m. During the year following

expenses were incurred by him: Municipal taxes Rs. 6,000, Repairs Rs. 5,000.

Mr. Suresh borrowed a sum of Rs. 30,000 @ 15% p.a. on 1-4-2003 for the construction of the

house which was completed on 1-8-2005. Nothing was repaid on loan account so for. Find out

his income from house property.

4.10 Answer to SAQ & TQ

SAQ I:

1. Income from other sources.

2. Rs. 60,000

3. Thirty, 24

4. Five



Terminal Questions:

1. Refer to section 4.3




5. Ans: A: Rs. 11,000 B: Rs. 16,000 C: Rs. 10,200

6. Rs. 6,300; Hints: Pre construct



.

MF0003-Unit-05-Profits and Gains of

Business or Profession

Unit 5 Profits and Gains of Business or Profession

Structure:

5.1 Introduction

Objectives

5.2 General principles

5.3 Adjustments to P&L account

5.4 Alternative method

5.5 Specific deductions

Self assessment Questions I

5.6 Other deductions

5.7 General deductions







5.8 Expenses expressly disallowed

5.9 Expenses not deductible

Self assessment questions II

5.10 Deductions allowable only on actual payment

5.11 Depreciation

· Block of assets

· Methods of depreciation

· Additional depreciation

· Rates of Depreciation

· Unabsorbed depreciation

Self assessment Questions III

5.12 Summary



5.1 Introduction

Meaning of Business Sec. 2(13)

Business means and includes any trade, commerce or manufacture or any adventure or concern

in the nature of trade, commerce or manufacture. It is not necessary that there should be a seriesof transactions in a business and that it should be carried on permanently. Even profit of an

isolated transaction is also taxable under this head, provided that it is a venture in the nature of business or trade. In this connection, it is important that the intention of purchase or manufacture

should be to sell at a profit

Meaning of Profession or vocation. Sec.2 (36)

Profession means the activities for earning livelihood which require intellectual skill or manualskill, e.g., the work of a lawyer, doctor, auditor, engineer and so on, are in the nature of

profession. Profession includes vocation. Vocation means activates which are performed in order

to earn livelihood, e.g., brokerage, insurance agency, music, dancing etc. As the rules for the



assessment of business, profession or vocation are the same, there is no importance of making

any distinction between them for income tax purposes.

Learning Objectives:

After studying this unit you will be able to:

· Understand the meaning of business, profession.

· Know various deductions admissible under the Act.

· The rates and method of depreciation followed for tax purposes

· Compute the business or professional income for tax purpose.

5.2 General Principles:

General Principles Followed in the Assessment of Profits and Gains of Business or Profession

1. Business or Profession carried on by the assessee. Tax is chargeable from the person whocarries on the business or profession. The essential requirement is that he should be entitled to

carry on the business.

2. Tax is chargeable on the aggregate income from all businesses or professions carried on by an

assessee. The profits and gains of different business or professions carried on by an assessee are

not taxable separately; but tax is chargeable under one head on the aggregate income from allbusinesses or professions carried on by the assessee. The essence of this rule is that, if in a year

he earns profit in one business and sustains loss in the other, he can set-off his loss of onebusiness against the profits of the other, and the balance of amount shall be income of the

assessee under this head.

3. Profits and Losses of speculation business are kept separate. if there is a loss in a speculation

business it can be set-off only against profits of speculation business and not against profits of any other business.

4. No tax is payable on anticipated or notional profits.

5. Tax is payable on the income of every business or profession whether legal or illegal.

Expenses concerned with illegal business are to be allowed as deduction out of the incomeearned from illegal business. However, penalties levied for violation of law and expenses

incurred in defense of criminal proceedings are not allowed.

6. General commercial principles to be kept in view while determining the real profits of a

business.



7. Sums previously allowed as deduction are taxable, if recovered during the previous year e.g.

bad debts recovered, disallowed earlier.

8. Only those expenses and losses are allowed as deductions which were incurred or sustained

during the relevant previous year.

9. These losses and expenses should be incidental to the operation of the business. Only theexpenses incurred in connection with the business of the assessee are allowed as deductions.

10. If a business has been discontinued before the commencement of the previous year, itsexpenses cannot be allowed as deduction against the income of any other running business of the

assessee.

11.There are some essential expenses though neither expressly allowed nor disallowed, but are

deductible while computing the profits of business or profession on the basis of general

commercial principles provided these are not expenses or losses of a capital nature or personal

nature.

12. Any expenditure incurred in consideration of commercial expediency is allowed asdeduction.

13. Deduction can be made from the income of that business only for which the expenses wereincurred. The expenses of one business cannot be charged against the income of any other

business.

14. The value of any benefit or perquisite, whether convertible into money or not, arising from

business or exercise of a profession is taxed under this head.

5.3 Adjustment to Profit and Loss Account prepared by the assessee

The Profit and Loss account prepared by the assessee may not be correct from the income tax

point of view, because:

· several such expenses are charged to it may be wholly or partly inadmissible under the Income

Tax Act,

· some admissible expenses might be omitted from it,

· some taxable incomes may not be credited to it, and

· Some such incomes might be credited which are either neither taxable under the head ‗Profits

and Gains of Business or Profession‘ or nor taxable at all. Hence, this profit and loss account hasto be adjusted from the income tax point of view, so that the profit taxable under the head

―Business or Profession‘ is determined correctly.

The following are the rules for adjustment of the Profit and Loss Account:



i. Those expenses or losses which are charged to Profit and Loss Account but are not allowed

under the Income Tax Act, should be added to the profit, as shown by the Profit and lossAccount prepared by the assessee. If any expense is partly disallowed, only the disallowed part

of it shall be added to the profit.

ii. If any admissible expenses are omitted from Profit and Loss Account, they should be deductedfrom the above profit.

iii. If some taxable incomes are omitted from the Profit and Loss Account they should be added

to the above profit.

iv. If some such incomes have been credited to the Profit and Loss Account which are either not

taxable under the head ‗Business or Profession‘ or are not taxable at all, they should be deducted

from the above profits.

5.4 Alternative method

Second Method of Computing the taxable profits or losses of business or profession. In this

method a fresh profit and loss account or income and expenditure account is prepared todetermine the profit or loss. The format of this method may be as under:

(1) All taxable incomes under this head which relate to the previous year are aggregated.

(2) All admissible expenses under this head which relate to the previous year concerned

(3) Deduct admissible business losses

(4) The balance will be taxable profits or losses of business or profession.

Second method is generally used in case of professions

5.5 Specific Deductions

Expenses in respect of business premises (Sec. 30)

The following deduction is allowed in respect of rent, rates, taxes repairs and insurance for

premises used for the purpose of the business or profession.

(a) Where the premises are occupied by the assessee:

(i) as a tenant, rent paid for such premises: and further if he has undertaken to bear the cost of

repairs to the premises, the amount paid on account of such repairs;

(ii) As a landlord, the amount paid by him on account of current repairs to the premises. Current

repairs are those repairs which are done to maintain the building.



Any sum paid on account of land revenue, local taxes or municipal taxes.

(b) The amount of any premium paid in respect of insurance against risk of damage or

destruction of the premises.

Repairs and insurance of machinery, plant and furniture (Sec. 31).

In respect of repairs and insurance of machinery, plant and furniture used for the purposes of the

business or profession the following deductions are allowable:

The amount of any premium paid in respect of insurance against risk of damage of destruction of

these assets.

Depreciation allowance: Sec. 32 Discussed separately

Expenditure on Scientific Research (Sec. 35)

The following deductions shall be allowed in respect of expenditure on scientific research.

Revenue expenditure incurred by the assessee himself [Sec. 35(1)(i)].

Where the assessee himself carries on scientific research in relation to his own business any

revenue expenditure made by the assessee on scientific research during the previous year shall beallowed in full.

Further, any such expenditure incurred during the three years immediately preceding thecommencement of the business on:

(1) Payment of salary to an employee engaged in such scientific research or

(2) On the purchase of materials used in such scientific research;

The aggregate of the expenditure so incurred shall be deemed to have been incurred in the

previous year in which the business commenced and shall be deductible in that previous year.

Contribution made to outsiders

Sums paid for Scientific Research to an approved Scientific Research Association or a

University, College or other Institution [Sec.35 (1)(ii)]. If the assessee himself does not carry onthe scientific research; but contributes any sum to an approved scientific research association orto an approved university, college or other institution to be used for scientific research it is

allowed as a deduction 125% of the amount so paid, whether it is related or unrelated to the

business of the assessee.



Capital Expenditure on Scientific Research incurred by the assessee himself: Any expenditure of

a capital nature on scientific research related to the business carried on by the assessee is allowedin full for the relevant previous year.

No deduction shall be admissible in respect of any expenditure on the acquisition of any land

after 29

th

February, 1984.

If any capital expenditure has been incurred during the three years immediately preceding the

commencement of the business the aggregate of the expenditure so incurred shall be deemed to

have been incurred in the previous year in which the business commenced.

Depreciation on Capital Expenditure: If any deduction is allowed in respect of any capital

expenditure on scientific research, no deduction for depreciation will be allowed in respect of

that asset.

Expenditure on in-house research: only to company assesses engaged in biotech,

pharmaceuticals, computer, telecommunication, chemicals etc.

A weighted deduction of an amount equal to one and one- half times of expenditure incurred bya company on in-house research and development facility shall be allowed.

It is, however, not admissible if expenditure is incurred on land or building;

Admissibility of expenditure on eligible project or scheme: Sec. 35AC a deduction is allowedfor an eligible project for promoting social and economic welfare or upliftment of the public.

Payment to associations & institutions for carrying out Rural Development Programmes is

fully allowed: Sec. 35CCA

Amortization of preliminary expenses: Sec. 35D Expenditure in connection with preparationof feasibility report, project report, market survey, expenses on issue of shares and debentures

etc.: One fifth of the qualifying amount is allowed in each of five successive years beginning

with the year in which the business commences or the extension of the undertaking is completed.

The qualifying amount cannot exceed:

5% of the cost of the project or 5% of capital employed whichever is less in case of corporate

assesses, 5% of cost of project in case of non-corporate assesses.

Expenditure on voluntary retirement (Sec. 35 DDA).

Where an assessee pays any sum to an employee in any previous year in connection with hisvoluntary retirement, he shall be allowed a deduction of 20% of such expenditure for each of five

successive previous years beginning with the year in which the expenditure was incurred.

Self assessment Questions I



Answer the following statements whether true or false:

1) Sums paid for social and scientific research to an approved university etc., is allowed to the

extent of 125% 0f sums paid.

2) Capital expenditure on scientific research incurred by the assessee is not allowed to bededucted.

3) Sums previously allowed as deduction are taxable if recovered during the previous year.

4) Income of illegal business or profession is not taxable

5.6 Other Deductions: Under section 36:

The following other deductions are permissible while computing profits of business orprofession.

· Insurance Premium, The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purpose of business or profession, is

allowed as deduction.

· Insurance premium for Cattle paid by a federal milk co-operative society. The amount of any

premium paid by a federal milk co-operative society on the life of the cattle owned by a member

of a primary milk co-operative society affiliated to the federal milk co-operative society isallowed as deduction.

· Premia for insurance on health of employees

· Bonus or Commission to employees for services rendered .

· Interest on borrowed capital.

· Contribution to Provident Fund, Approved Gratuity Fund, Employee‘s Contribution toProvident Fund

· Bad debts.

· Expenditure on family planning. Any expenditure incurred by a company for the purpose of

promoting family planning amongst its employees is allowed as a deduction. If such expenditureis of a capital nature it shall be allowed as a deduction in five equal annual installments

commencing from the previous year in which the expenditure is incurred.

· Banking cash transaction tax( applicable from assessment year 2006-07)

5.7 General deduction [Sec. 37(1)



It is a residuary section:

Under section 37(1), the following conditions should be fulfilled, in order that a particular item

of expenditure may be deductible under this head:

· The expenditure should not be of the nature described in section 30 to 36.

· It should be in respect of a business or profession carried on by the assessee and the profits and

gains of which are to be computed and assessed.

· It should not be in the nature of personal expenses of the assessee

· It should have been paid out or expended wholly and exclusively for the purpose of such

business or profession.

· It should not be in the nature of capital expenditure

· It should relate to the previous year concerned

The following are the few examples of admissible general deduction under sec 37:

1) Expenses incurred in the purchase, manufacture and sale of goods.

2) General expenses incurred in the day to day running to the business.

3) Expenses incurred in defending a case for damages for breach of contract.

4) Amount of sales-tax paid and expenses incurred in connection with sales-tax proceedingsincluding appeals.

5) Compensation paid to an undesirable employee for the retrenchment of his services or to adirector to get rid of his services.

6) Contribution made to provident fund maintained for the benefit of employees under an Actand with the previous approval of a state Government may not be allowable u/s 36(1)(iv) but

allowable u/s 37(1).

7) Commission, etc. paid for securing orders for the business.

Compensation paid to employees in connection with injury sustained by them or accident metby them while on duty.

9) Royalties paid in connection with mines.

10) Insurance premium paid under a policy insuring its employees against injury or againstliability for compensation in respect of accident to its workmen.



11) Reasonable expenses incurred on the occasion of Dussehra, Diwali, commencement of the

business, etc.

12) Compulsory subscription or a subscription given to an association in the interest of the

business.

13) Legal expenses incurred in connection with the business or profession.

14) Legal expenses incurred by a director of a company in defending a suit brought against him

to challenge the validity of his election as a director; as it is incurred to save his income from thesource.

15) Interest on unpaid purchase price of any business assets purchased by an assessee and put to

use will be allowed.

16) Expenditure incurred to oppose nationalization or to prevent extinction of business.

17) Under executive instructions, cost of installing new telephone.

18) Normal advertisment expenditure incurred to maintain the sales.

19) Penalty paid by the assessee for saving from confiscation the good which he purchased from

a third party without knowing that they had been illegally imported.

20) Amount paid by a director of a company in liquidation for compounding misfeasance

proceeding started against him by the liquidator.

21) Welfare expenditure incurred by the assessee.

22) Payment of excise duty.

23) Guarantee fee paid to he Government for loan obtained for purchase of machinery.

24) Expenditure incurred in connection with alterations made in the Memorandum or Articles of

Association of a company if therse alterations are warranted by the changes made in CompaniesAct.

25) If an asseessee stand ss surety for the debt of another and it is usual in this trade to guarantee

debts, any payment made as a result of such guarantee may be allowed as a business losss.

26) Professional tax levied by local authorities the payment of which is a necessary condition for

the carrying on the business within the area of a local authority.

27) Rebate granted by co-operative stores to their members on the value of the purchases made

by them.



28) The interest payable on arrear of cess is in the nature of compensation paid to the

Government of delay in the payment of cess and not as penalty, hence it is deductible. Similarly,interest paid for delay in payment of municipal taxes is also allowable as deduction.

29) Amount spent by an assessee in purchasing loom hours is deductible as revenue expenditure.

30) Amount paid as damages to the Government Department for delay in the execution of contracts was held to be allowable deduction, if the delay was inherent in the nature of business

carried on by the assessee.

31) Annual listing fee paid to Stock Exchange by public limited company is allowable.

32) Interest levied for failure to pay installment of the assets purchased on hire-purchase basis is

allowable.

33) Expenditure incurred on inauguration ceremony is allowable.

34) Expenditure incurred on foreign tour of director for purposes of expansion of business of the

managed company is allowable.

35) Wife of chairman-cum-managing director accompanying him for fulfilling social aspects.Expenses incurred on foreign tour of wife are deductible.

36) Liability to pay debenture premium is to be spread over the years between date of issue anddate of redemption.

37) Payment towards Flat Day Fund is deductible.

38) Cash shortage found in business at the end of the day.

39) Deposit made under ‗own your telephone‘ scheme.

40) Expenses in connection with income tax, sales tax proceedings

5.8 Expenses Expressly Disallowed

The following expenses are expressly disallowed by the Act while computing income chargeable

under the head‘ profits and gains of business or profession‘.

Expenditure on advertisement in any souvenir, etc. published by a political party in the case anyassessee

(i) Payments outside India. Royalty, fees for technical services, etc. which tax is deductible at notbeen paid during the previous year or in prescribed time. shall not be allowed as a deduction.



(ii) Payments to residents. any interest, commission or brokerage, fees for professional services

or feeds for technical and such tax has not been deducted or, after deduction.

· Any sum paid on account of securities transaction tax.

· Any sum paid on account of fringe benefit tax .

· Wealth tax. chargeable under Wealth Tax Act.

· Tax on Profits and Gains. Any sum paid on account of any tax levied on the profits and gains of

any business or profession

· Salaries Payable outside India or to a non-resident, if tax has not been paid thereon nor

deducted at source.

· Payment to P.F., etc. Any payment to a provident or other funds shall not be allowed as a

deduction unless it is ensured that tax shall be deducted at source from any payment made fromthe fund provided it is chargeable to tax

· Tax on perquisites of employee.

5.9 Expenses not deductible in certain circumstances

· Excessive payments. of an expenditure to a relative it to be excessive or unreasonable to be

disallowed.

· Payments in cash: Any expenditure in respect of which payment is made exceeding Rs. 20,000

otherwise that by a crossed cheque drawn on a bank or by crossed bank draft will be disallowedto the extent of 20%.Further, the limit of Rs. 20,000 applies to the payment made to a party at a

time and not the aggregate of the payments made to a party in the course of a day.

· No deduction shall be allowed in respect of any sum paid by the assessee as an employer

towards the setting up of, or as contribution to, any unapproved fund.

· Drawings of proprietor or partners.

· Personal expenses of the proprietor for partners.

· Capital expenditure.

· Any provision or transfer to reserve except transfer to reserves as provided in the Act.

· Amounts paid as charity or presents.

· Past losses charged to Profit & Loss Account.



· Any expenditure not incurred wholly and exclusively for the purposes of the business or

profession.

· Income tax, wealth tax and other taxes on income

· Expenditure incurred to buy off competition, e.g., a sum paid by a company to a retiringdirector or a managing agent in consideration of their agreement not to complete with thecompany.

· Penalties paid by the assessee for infringement of law.

· Payments made by an assessee in the nature of sharing the profits to the sole selling agentsunder an agreement are not deductible.

· Contribution to a political party where there is no direct relationship between contribution and

the business of the assessee.

· Insurance premia paid by a firm on life insurance policies of its partners

· Expenditure incurred in violating of another statute.

· Gift made on occasion of marriages in the families of friends and others with whom assessee

has business dealing cannot qualify as business expenditure even on grounds of commercial

expediency.


State whether following expenses are deductible:

1) Drawings of proprietor.

2) Past losses charged to P/L account

3) Professional tax levied by local authorities, the payment of which is necessary condition for

the carrying on the business within the area of a local authority

4) Reasonable expenses on Dussehra, Diwali etc.

5.10 Deduction Allowable only on Actual Payment

The following deductions are allowable only on actual payment: Sec. 43B:

If the tax payer maintains books of accounts on mercantile basis, following expenses aredeductible on accrual basis, provided the payment is actually made on or before the due date

of submission of return of income.



(a) Any sum payable by the assessee by way of tax, duty, cess or fee

(b) Any sum payable by him as an employer by way of contribution to any provident fund,

superannuation fund or gratuity fund or any other fund for the welfare of employees.

(c) Any sum payable to an employee as bonus or commission for services rendered, where suchsum would not have been payable to him as profit or dividends if it had not been paid as bonus orcommission.

(d) Any sum payable by the assessee as interest on any loan or borrowings from any PublicFinancial Institution or a State Financial Corporation or a State Industrial Investment

Corporation.

(e) Any sum payable by the assessee as interest on any loan or borrowing from any Public

Financial Institution or a State Financial Corporation or a State Industrial Investment

Corporation

(f) Any sum payable by the assessee as interest to a scheduled bank on any loan or advance from

a scheduled bank.

(g) Any sum payable by the assessee in lieu of earned leave.

If the amount is paid after the due date of furnishing the return, the deduction will be allowed in

the year of payment.

5.11 Depreciation

Depreciation means a diminution in the value of assets due to wear and tear, obsolescence etc.caused by their use over a period of time. Its cost is spread over its life by charging depreciation

every year against the profits of business.

Assets eligible for depreciation:

A. Tangible assets: (i) Building, (ii) Machinery or Plant, and (iii) Furniture.

B. Intangible assets: (i) Patents, (iii) Copyrights, (iv) Trademarks,

(v) Licenses, (vi) Franchises, (vii) any other business or commercial rights of similar nature.

Other assets such as investments, goodwill, etc., do not qualify for depreciation allowance

Building means only the superstructure and does not include the land on which it is constructed,as the land does not depreciate by use. Building includes roads, bridges, culverts, wells and tube

wells. The term ‗plant‘ includes ships, vehicles, books scientific apparatus etc.

Conditions for allowance of depreciation:



(i) Asset should be owned, wholly or partly by the assessee

(ii) It should be used for the purpose of the assessee‘s business or profession.

(iii) Depreciation is allowed on the block of assets:

=>Block of Assets

The term ‗Block of Assets‘ means a group of assets falling within a class of assets comprising:

-tangible assets, being building, machinery, plant or furniture,

-intangible assets, being know-how, patents, copyrights, trademarks, licenses,

Franchises or any other business or commercial rights of similar nature, acquired on or after1.4.1998, in respect of which the same percentage of depreciation is prescribed.

=> Methods of Depreciation:

(i) In the case of assets of an undertaking engaged in generation or generation and distribution of power, depreciation may be claimed at the prescribed rates on the actual cost thereof, i.e., on the

basis of Straight Line Method.

(ii) in any other case on any block of assets at the prescribed rates on the written-down value of

such block of assets.

Assets acquired and put to use during the previous year:

In the case of an asset acquired and put to use in the business during the previous year, only 50%of the normal depreciation will be allowed if it is used in the business for less than 180 days

during the previous year.

Tax Planning: As for as possible, the assessee should purchase and put to use the net asset on

which depreciation is allowed upto 2nd October in the previous year. This will entitle to him full

depreciation for the relevant previous year.

Meaning of Written down Value of an asset

Written-down value’ means:

(a) in the case of asset acquired in the previous year the actual cost to the assessee; and

(b) In the case of assets acquired before the previous year, the actual cost to the assessee lessdepreciation actually allowed to him.



The amount of unabsorbed depreciation carried forward is treated as depreciation actually

allowed‘.

(c) Depreciation is calculated on the block of asset instead of individual assets. In the case of any

block of assets, the written-down value shall be computed as under:

(i) The aggregate of the W.D.V. of all the assets falling within a ‗block‘ which were acquiredduring the previous year.

(ii) Add to it the actual cost of any asset falling in that block which was acquired during theprevious year.

(iii) The sum arrived at in (ii) shall be reduced by the moneys receivable together with scrap

value in regard to any asset falling within that block which is sold, discarded, demolished or

destroyed during the previous year. The amount of such reduction cannot exceed the amount

arrived at as per (ii) above. If it exceeds the written-down value will be taken as nil.

(iv) The balance under (iii) shall be the W.D.V. for computation of depreciation for that previous

year.

If the full block of the assets is transferred and the monies payable is less than the W.D.V. under

(iii), the loss shall be treated as short term capital loss. When the money payable in respect of afull block of assets or its part is more than written down value under (iii), the excess shall be

treated as short term capital gains.

=>Additional depreciation on plant or machinery (I.e. 2006-07)

On new plant or machinery (other than ships and aircraft), which has been acquired and installedafter 31.3.2005, by an assessee engaged in business of manufacture or production of any article

or thing, additional depreciation shall be allowed @ 20% @ 10% if the asset is put to use for less

than 180 days in the year in which it is acquired) of the actual cost of it:

However, the deduction shall not be allowed in respect of:

(a) any machinery or plant which, before its installation by the assessee, was used either within

or outside India by any other person; or

(b) any machinery or plant installed in any office premises or any residential accommodation,

including accommodation in the nature of a guest house; or

(c) any office appliances or road transport vehicles or

(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction

(whether by way of depreciation of otherwise) in computing the income chargeable under the

head ―Profit and gains of business or profession‖ of any one previous year .



=>Rates of Depreciation

Rates of Depreciation on Written-down Value Method

I. Building Rates % of

W.D.V.A. Buildings which are used mainly for residential purposes

except hotels and boarding houses

5

B. Building other than those used mainly for residential purposes 10

C. Building acquired after 31.8.2002 for installing machineryand plant forming part of water supply project or water treatment

system and which is put to use for the purposes of business of

providing infrastructure facilities

100

D. Purely temporary erections such as wooden structure 100

II. Furniture and Fittings:

Furniture and fittings including electrical fittings 10

‗Electric-fittings‘ include electrical wiring, switches, sockets,other fittings and fans etc.

III. Machinery and Plant:

A General Rate applicable to all machinery or plant

Other than certain specified machines and plants

15

B. Special Rate:

1. Motor Buses, motor lorries and motor taxies used in a

business of running them on hire

30

2. Motor-cars (other than those used in a business of running

them on hire) acquire or put to use on or after Ist April, 1990

15

(3) Energy Saving Devices 80

(4) Machinery relating to environment protection and pollution

control

100

(5) Books for professional purposes: 100

(i) Books being annual publications 100

(ii) Other books 60

6. Books owned by assessee carrying on business in running

lending libraries

100

7. Containers made of glass or plastic used in refills 50

8. Computers including computer software 60

9. Plant and machinery acquired and installed after 31.8.2002 in

a water supply project or a water treatment system and which isput to use for the purpose of business of providing infrastructure

facility

100



IV. Ships:

1. Ocean-going ships 20

2. Vessels ordinarily operating on inland water not being speedboats

20

3. Vessels ordinarily operating on inland waters being speedboats

20

Intangible Assets

Know-how, patents, copyrights, trademarks, licenses, franchises

or any other business or commercial rights of similar nature

w.e.f. A.Y. 1999-2000).

25

=>Unabsorbed Depreciation

Depreciation allowance for a particular previous year is first deductible from the profits andgains of the business or profession. If the profits and gains of the same business or profession are

insufficient for this purpose, the balance of the amount of current depreciation allowance is

deductible from the profits of any other business or profession of the assessee. If the profits of any other business or profession are also unable to absorb the whole amount of depreciation

allowance, the balance of such allowance which remains unabsorbed can be set-off against any

other taxable income of the same year. If still, the whole amount of current depreciationallowance is not deductible on account of the insufficiency of the other taxable income, the

remaining unabsorbed amount is called ―Unabsorbed Depreciation‖.

If unabsorbed depreciation cannot be wholly set-off, the amount of depreciation not set-off shall

be carried forward to the following assessment year.

The unabsorbed depreciation shall be added to the depreciation allowance for the following

previous year or for the succeeding previous years till such time it is fully deducted. In other

words the unabsorbed depreciation shall be treated as part of the current year‘s depreciation.

Illustration

The following are the particulars of the assets of a limited company as on Ist April, 2008;

Actual cost W.D.V. on

1.4.2008

Rate of Dep.

Buildings:

Ananth

Bhagvan

10,00,000

16,00,000

8,10,000

15,04,800

10%

5%



The company sold the following assets during the financial year 2008-09

Buildings:

Ananth

Bhagvan

Rs.

9,00,000

19,00,000

Date of Sale

15.3.2009

1.7.2008

Plants Machinery:

Rathna

Queen

4,50,000

5,00,000

1.9.2008

1.2.2009

Compute the written-down value and the amount of depreciation for the Assessment year 2009-10. Assessee is entitled to additional depreciation on machinery on which depreciation is

allowable @ 15%.

Solution:

Computation of W.D.V. and Depreciation allowance

I Block-Building (Rate of Depreciation 10%)

II Block – Building (Rate of Depreciation 5%) Rs

Written-down value of Bhagvan on 1.4.2008 15,04,800

Add: Cost of Building Chandra acquired during the year on1.5.2008

3,00,000

Less: Sale consideration of Building Bhagvan sold during theyear (not to exceed Rs. 18,04,800)

18,04,800

18,04,800







Balance

Since the sale consideration exceeds the W.D.V. in the II block,the excess Rs. (19,00,000 less 18,04,800) 95,200 will be the short

term capital gain taxable under section 50 (1)

NIL

III Block-Plant & Machinery (Rate of Depreciation 15%) Rs.

Aggregate amount of W.D.V. of Plant & Machinery Prikrithi andRathna

6,37,500

Add: Cost of Plant & Machinery Shanthi acquired during the yearon 1.12.2008

3,00,000

9,37,500

Less: Sale consideration of Plant & Machinery Rathna sold duringthe year

4,50,000

W.D.V. for A.Y. 2009-10 4,87,500

Less: (i) Depreciation n Rs. 1,87,500 @ 15% 28,125

(i) Depreciation on Rs. 3,00,000 @ 7.5% (one-

half normal depreciation as the machinery is acquired

and used in the business for less than 180 days

during the Previous Year) 22,500

(III) Additional depreciation on Rs. 3,00,000 @ 10% 30,000 80,625

Balance 4,06,875

IV Block-Plant & Machinery (Rate of Depreciation 40%)

Tax planning

Capital assets may be purchased even on the last day to claim 50% of normal depreciation.Business assets if are to be purchased during Sept. or Oct., one may see that it is used for a

minimum period of 180 days to claim full depreciation allowance. Since no depreciation on the

assets sold during the previous year is allowed, the sale of the asset may be postponed to thebeginning of the next year.




Illustration

The following is the profit and loss account of the United Plastic for the

P.Y. 2008-09

Rs. Rs.

To Op. Stock 30,000 By Sales 6,10,000

― Purchases 1,59,000 ― Dividends (Gross) 6,000

― Wages and Salaries 50,000 ― Rent from staff quarters

7,000

― Rent 20,000 ― Interest on Govt.

Securities

50,000

― Reserve for bad

debts

10,000 Closing. Stock 25,000

Advertisement 5,000 Income from Smuggling 10,000

Depreciation on

Machinery

5,000 ― Dividend from Foreign

Co. (net)

2,000

― Wealth tax 7,000

― Interest

* Reserve for IT

7,000

7,000

― Sales Tax 15,000

― Insurance 2,000

― Donation 25,000

― Loss on sale of oldTypewriters

3,000

― Computer 45,000

― Staff Welfare Fund 40,000

― Net Profit 2,80,000

7,10,000 7,10,000

You are required to compute taxable income for the assessment year 2009-10 after taking intoaccount the following information:-

a) Both opening and closing stocks are undervalued by 10%



b) Bad debts amounted to Rs. 2000

c) Purchases include Rs. 25,000 paid in cash.

d) Traced embezzlement by an employee in business Rs. 3,000

e) Allowable depreciation amounted to Rs. 4,000, excluding computer.

f) Interest of Rs. 7,000 includes interest on loan taken to buy shares:Rs. 3,000

g) Donations charged above paid in cash are deductible u/s 80 G.

Solution

Computation of Business income for the assessment year 2009-10

Statement showing Total Income for the assessment year 2009-10

Note: Payment exceeding Rs. 20,000 in cash is completely disallowed

Loss on sale of typewriter cannot be set off against other incomes.

Depreciation on computers is allowed at 60%







Dividend from foreign companies is taxable without grossing up

Illustration

Mr. Shantharam (age: 66 years), a resident individual, furnishes the following particulars

relevant for the assessment year 2009-10:

Profit and Loss Account for the year ending March 31, 2009

Rs. Rs.

Salary to staff 34,000 Gross profit 1,86,000

General expenses 48,000 Commission and

discount

2,17,200

Bad debts written off 15,000 Sundry receipts 43,000

Reserve for losses 2,000 Short-term profit on

sale of investment

31,000

Fire insurance premium(office premises)

3,700

Advertisement 2,400

Add: Outstanding 1,600

4,000

Interest on X‘s capital 3,500

interest on bank loan 500

Interest on bank loan 14,500

Expenditure on acquisition

of a patent right acquiredand put to use on June

30,2006

17,000

Lump sum consideration

for acquiring know-how on

March 3,2007

60,000

Depreciation on plant andmachinery

28,000

Provision for outstanding

sales tax and excise duty

13,000

Net Profit 2,34,000

4,77,200 4,77,200



Other information:

1. Depreciation on plant and machinery according to income-tax provision comes to Rs. 29,700.

2. Salary to staff includes payment Rs. 8,000 to a relative which is unreasonable to the extent of

Rs. 3,000

3. General expenses include (a) expenditure Rs. 4,800, incurred by Shantharam on training of his

employees, (b) commission of Rs. 10,000 for securing a business order, and (c) compensation of

Rs. 6,000 paid to an employee while terminating his service in the business interest.

4. Out of outstanding sales tax and excise duty, Rs. 3,000 is paid on July 10,2009 and Rs. 8,000is paid on October 3, 2009. The balance is not paid as yet. Due date of filling return of income is

July 31,2009.

5. Income of Shantharm from company deposit is Rs. 12,000, which is not shown in the above

Profit and Loss Account.

Determine the taxable income and tax liability of Shantharam for the assessment year 2009-10.

Solution:

Notes:

· Expenditure on training of employees is a deductible expenditure Likewise, commission forsecuring a business order is deductible.

· Advertisement expenditure (being expenditure of revenue nature) is fully deductible under

section 37(1).

· Compensation payable for terminating service of an employee is deductible.




· It is assumed that the evidence of payment of sales tax on July 10,2007 is submitted along with

return of income

Illustration

Mr. Nagaraja (age: 26 years), a leading tax consultant, who maintains books of account on cashbasis furnishes the following particulars of income and expenditure for the assessment year2009-10.

Receipt and Payment Account for the year ending March 31, 2009.

Rs. Rs.

Balance brought down 12,400 Purchase of a typewriter 6,000

Fees from clients: Car expenses 18,000

2009-10 2,30,500 Office Expenses 40,000

2008-09 11,500 Salary to staff:

2010-11 13,000 of 2009-10 32,000

Presents from clients 24,000 of 2010-11 11,000

Interest-free loan from aclient

Expenses in respect of let outproperty

for purchase of a car 2,38,000 municipal tax: 2,000

Winnings from lottery 46,000 repairs: 1,000

insurance 3,000

6,000

Interest from UTI (received

on September 11,2008)

12,000

Car purchased on December

10,2008

2,40,000

Rent of a let out property 60,000 Repairs of office 12,000

Share of income from a

firm

15,000 Interest on loan 10,000

Income-tax payment 2,000

Life insurance premium 8,000

Balance carried down 2,77,400

6,62,400 6,62,400



Car is party used for official purposes (40%) and partly for private purposes (60%)

Determine the taxable income and tax liability of X for the assessment year 2009-10.

Solution:

Note: As books of account are maintained on the basis of cash system, income is taxable on

―receipt‖ basis and expenditure are deductible on ―payment‖ basis.

Illustration

From the Profit and Loss Account of Sriram (age : 31 years) for the year ending March 31, 2009,ascertain his total income and tax liability for the assessment year 2009-10.

Rs. Rs.

General expenses 13,400 Gross profits 3,15,500

Bad debts 22,000 Commission 8,600

Advance tax 21,000 Brokerage 37,000

Insurance 600 Sundry Receipts 2,500

Salary to staff 26,000 Bad debt recovered (earlier

allowed as deduction

11,000

Salary to Sriram 32,000 Interest on debentures (i.e.

net amount Rs. 22,450 +

tax deducted at source: Rs.2,550)

25,000

Interest on overdraft 4,000 Interest on deposit with acompany

13,000

Interest on loan to MrsSriram

42,000 (non-trade) (net interest :Rs. 11,674 + tax deducted

at source: Rs. 1,326)




Interest on Capital of Sriram

23,000

Depreciation 48,000

Advertisement

expenditure

7,000

Contribution to

employees recognisedprovident fund

13,000

Net profit 1,60,600

4,12,600 4,12,600

Other information:

1. The amount of depreciation allowable is Rs. 37,300 as per the income-tax Rules. It includesdepreciation on permanent sign board.

2. Advertisement expenditure includes Rs. 3,000, being cost of permanent sign board fixed on

office premises.

3. Income of Rs. 4,500, accrued during the previous year, is not recorded in the profit and Loss

Account.

4. Sriram pays Rs. 6,000 as premium on own life insurance policy

Rs. 70,000.

5. General expenses include (a) Rs.500 given to Mrs. Sriram for arranging a party in honor of a

friend who has recently come from Canada (b)

Rs. 1,000 being contribution to a political party.

6. Loan was taken from Mrs. Sriram for payment of arrears of income-tax.

7. Interest on debentures is paid to Sriram on December 31, 2008.

Solution

Rs. Rs.

Net profit as per Profit & Loss Account 1,60,000

Add: Inadmissible expenses:



Expenses for arranging personal party 500

Contribution to a political party 1,000

Advance tax 21,000

Salary to Sriram 32,000

Interest on capital to Sriram 23,000

Interest on loan taken for payment of income-tax 42,000

Capital expenditure on advertisement 3,000

Excess depreciation (i.e. Rs.48,000-Rs. 37,300) 10,700 1,33,200

2,93,800

Add: Income not recorded in the Profit and Loss Account 4,500

Less: income credited to the Profit and Loss Account but

not chargeable under the head ―profit and gains of

business or profession‖.

Interest on debentures 25,000

Interest on company deposit 13,000 38,000

Business Income 2,60,300

COMPUTATION OF NET INCOME OF SRIRAM

Profit and gains of business or profession 2,60,300

Income from other sources (interest on debentures and

company deposit)

38,000

Gross total income 2,98,300

Less: Deductions under section 80C (payment of

insurance premium)

6,000

Deduction under section 80GGC (being contribution to apolitical party)

1,000 7,000

Net Income 2,91,300

Tax on net income 14,130

Add: Surcharge Nil

Tax and surcharge 14,130



Add: Education cess (2% of tax and surcharge) + SHECat 1% of tax and surcharge

424

Tax 14,554

Less: Pre-paid tax (i.e., advance tax + tax deducted at

source) (21,000 + 2,550 + 1,326 )

24,876

Tax refund 10,322

Note: Expenditure on sales tax proceeding is allowable

Self Assessment Questions III

1) Payment of Rs. 50,000 for purchase of materials in Bombay made in cash is deductible only tothe extent of Rs. ————– .

2) Excise duty of the year 2006-07 paid on 23rd

April 2009 is deductible in the assessment year ——–

3) Sales tax liability of 2008-09 paid on 23rd April 2009 is deductible in the assessment year — —— .

4) Depreciation for the asset purchased on 23 rd Dec. 2008 is allowed to the extent of ————–

during the previous year 2008-09

5.12 Summary

Business or profession head is the biggest source of revenue to the Govt. The admissibility of expenditure as deduction is generally governed by the general principles. Hence there are

chances of claiming personal expenses as business expenses, outstanding dues as expenses paid

during the year. Hence restrictions are placed for some expenditure, allowed to be deducted onpayment basis only. This unit briefly explains as to how a business or professional income can be

calculated for tax purposes, in the light of income tax provisions.

5.13 Terminal questions

1. Mr. Vikas is a practicing accountant. He also took 40 lectures in a college at Rs. 100 per

lecture. His receipts and payments a/c is given bellow:

Rs. Rs.

To bal b/d 9,500 By Office expenses 25,000

― Audit Fees 1,60,000 ― Municipal taxes 500

― Remuneration for lectures

4,000 ― Personal expenses 5,000

― Examiner‘s fees 1,500 ― Membership fees 500



― Interest on securities 1,550 ― LI Premium 2,000

― Rent from LOP 3,000 ― Scooter Purchased 24,500

― Royalty on a book 5,000 ― Scoter expenses 12,000

― Balance c/d 1,15,050

1,84,550 1,84,550

a) Office expenses include Rs. 500 paid as typing charges for preparing manuscript of his book.

b) ½ of the scooter expenses relate to personal use.

c) Scooter being P & M, depreciation is allowed @ 15%.

d) Interest of securities includes Rs. 774 being interest on Tax Free Government Securities.

Compute his total income.

2. What are the expressly disallowed expenses while computing income under the head‘ profits

and gains from business or profession?

3. State with reasons whether the following are admissible as deductions in the case of business:

a) Wealth tax, b)income tax, c)expenses in connection with income tax proceedings, d) advance

income tax paid, e) sales tax.

4. Write a note on: Block of the assets, additional depreciation, and unabsorbed depreciation.


SAQ I

1. True

2. False

3. True

4. False

SAQ II

1. Not allowed

2. Not allowed



3. Deductible

4. Deductible

SAQ III

1. NIL

2. 2009-10

3. 2009-10

4. 50% of normal depreciation

Terminal Questions:

1. Hints: 80C 2,000; 80 QQB:4,500; Int. on securities: 1,550-775=775×100/79.6=974; lectures

income and examiners fees treated professional income.

(Ans.: Income from house property: Rs. 1,750; Prof. income Rs. 1,32,662; other sources Rs.

5,474; TTI: Rs. 1,31,636)


3. a) not allowed b) not allowed c) allowed d) not allowed

e) allowed

4. Refer to sections 5.11.1, 5.11.3, and 5.11.5



. MF0003-Unit 6 Capital Gains

Unit 6 Capital Gains

Structure:

6.1 Introduction

Objectives






6.2 Elements of capital gains

· Capital Assets

6.3 Basis of charges


6.4 Computation of Capital Gain

6.5 Cost of acquisition

6.6 Cost of Improvement

6.7 Capital Gains Exempt from Tax


6.8 Tax on ST gains

6.9 Tax on LT gains

6.10 Summary


6.12 Answers to SAQ & TQ

6.1 Introduction

Income under the Head Capital Gains

This head deals with the sale or transfer of capital assets, and the treatment of capital gain or loss

for tax purposes. The profits or gains arising from the transfer of a capital asset during the previous year is chargeable to tax under the head ‗Capital Gains‘ .The re-investment of capital

gain or sales proceeds and exemptions are also dealt under this chapter.

Learning Objectives

· After studying this unit, you will be able to:

· Understand the concept of capital gains.

· Understand how capital gains tax can be avoided by claiming exemptions.

· Understand the concept of income from other sources



6.2 Elements of capital gains

The essential elements of capital gains are:

(A) Capital Asset

(B) Transfer of Capital Asset

(C) Computation of Capital Gain.

=>Capital Asset

Capital asset means property of any kind held by an assessee, whether connected with his

business, profession or not. Capital asset may be movable or immovable, tangible or intangible,

fixed or floating. Capital asset includes goodwill, leasehold right, jewellery, shares, amanufacturing licensee. etc. Business undertaking is a capital asset. Gains on transfer of business

undertaking are assessable as Capital gains.

However, the term capital asset does not include the following:

(i) Any stocks-in-trade, consumable stores or raw materials held for the purposes of his businessor profession.

(ii) Personal effects, e.g., movable property (including wearing clothes and furniture but

excluding jeweler) held for personal use by the assessee or any member of his family dependent

on him. Thus, a car or any other vehicle, refrigerator, television or V.C.R. or other electrical

appliances are included in this.

(iii) Agricultural land in India, provided it is not situated:

(a) within the limits of any municipality or a cantonment board, having a population of 10,000 or

more or

(b) in areas lying within a distance not exceeding 8 kilo metre from the local limits of such

municipalities or cantonment boards.

(iv) 6 ½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980,

issued by the Central Government.

(v) Special Bearer Bonds, 1991.

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 2000 notified by the Central

Government.

6.3 Basis of charges



Capital Gain will be chargeable on the basis of period for which the capital Asset is held by the

Assessee.

On the basis of period for which Assets are held by the Assessee the Assets can be classified into

2 categories.

1. Short-term Capital Asset:

A Capital Asset held by an Assessee for not more than 36 months immediately preceding the

date of its transfer is known as Short Term Capital Asset.

And the Gains arising from the transfer of STCA is called Short Term Capital Gain.

Exceptions: In the following circumstances/cases an Asset held for not more than 12 months is

treated as STCA.

1. Equity/ Preference shares in a company (May or May not be listed)

2. Securities (Debentures/ Government Securities) (Should be listed in a

Recognised stock exchange)

3. Units of U.T.I. (May or May not be quoted)

4. Units of Mutual Fund notified under 10(23D) (May or May not be quoted)

5. Zero Coupons Bonds

In the Aforesaid cases, if the asset is held for more than 12 months immediately to its transfer,then it is known as L.T.C.A.

2. Long-term Capital Asset (LTCA)

It means a capital Asset held by an Assessee for more than 36 months immediately preceding thedate of transfer. Capital Gain arising from the transfer of LTCA is called LTCG.

In the above said 4 exceptions (1) (2) (3) &(4)

LTCG will mean ―1to4‖ held by the assessee for more than 12 months.

Therefore we have two types of Capital Gain

1. S.T.C.G gains arising on the transfer of STCA

2. L.T.C.G gains arising on the transfer on LTCA




1. The capital gain is chargeable to tax under section ————— .

2. The agricultural land outside India is ————– capital asset (a, not a)

3. Short term capital assets mean a capital asset held by the assessee for not more than —— ,immediately prior to its transfer.

4. Cost Inflation index for the year 2008-09 is ——– .

6.4 Computation of Capital Gains

Formats and Provisions:

Short-term Capital Gain [STCG] sec 48(1)

Long term Capital Gain [LTCG] Sec 48

Note: Transfer expenses: Expd incurred wholly or exclusively in connection with such transfer.

Exception: The provisions relating to indexed cost of acquisition and indexed cost of

improvement will not apply to the long-term capital gains arising from the transfer of long-term

capital asset being bonds or debentures. However, the benefit of indexation will be available onindexed bonds issued by the Government.

Calculation of Indexed Cost of Acquisition:







Case I: When the Asset is acquired by the Assessee before 1-4-1981.

Actual cost of Acquisition.

Or

Fair Market Value as on 1-4-1981. Whichever is Higher.

i.e., Whichever is Higher x Index for the year of transfer (551)

100

Indexed cost of Improvement:

Cost of improvement incurred on or after 1-4-1981 x index for the year of transfer (551)

Index for the year of improvementCase II: When the Asset is acquired by the Assessee on or after 1-4-1981

Indexed cost of acquisition can be computed as follows:

Actual cost of acquisition x Index for the year of transfer (551)

Index cost for the year of acquisition

Indexed cost of Improvement:

Actual Cost of improvement x index for the year of transfer (551)

Index for the year of improvement

Case III: When the asset is acquired by the assessee under a transaction mentioned under

section 49 (1), before 1-4-1981 and previous owner also acquired the property before 1-4-

1981

(1) Indexed cost of acquisition:

Actual cost of Acquisition to previous owner.

Or

Fair Market Value as on 1-4-1981. – Whichever is Higher.


100



(2) Indexed cost of Improvement:



Case IV: When the asset is acquired by the assessee on or after 1-4-1981 after transactionunder section 49 (1) and acquired by the previous owner before 1-4-1981

(1) Indexed cost of acquisition:

Actual cost of Acquisition to previous owner.

Or

Fair Market Value as on 1-4-1981. – Whichever is Higher.


Index for the year in which the assessee acquired the asset




Case V: When the asset is acquired by the assessee on or after 1-4-1981 as per transaction

mentioned under section 49 (1) and the previous owner has also acquired it on or after 1-4-

1981

(1) Indexed Cost of acquisition

Actual cost of acquisition to the Previous Owner x Index for the year of transfer (551)

Index cost for the year in which the assessee acquired the asset


Actual Cost of improvement x index for the year of transfer (551)


‘Cost inflation index’ (CII) in relation to P.Y. means the index as the Central Government may,

having regard to 75% of the average rise in the consumer price index for urban non-manual

employees for the immediate preceding previous year, notify in this behalf.

The Government has notified the following ‘Cost Inflation Index’.



Sl.No. Financial

Year Cost

Inflation

Index

Sl. No. Financial

Year Cost

Inflation

Index

1 1981-82 100 15 1995-96 281

2 1982-83 109 16 1996-97 305

3 1983-84 116 17 1997-98 3314 1984-85 125 18 1998-99 351

5 1985-86 133 19 1999-2000 389

6 1986-87 140 20 2000-01 406

7 1987-88 150 21 2001-02 426

8 1988-89 161 22 2002-03 447

9 1989-90 172 23 2003-04 463

10 1990-91 182 24 2004-05 480

11 1991-92 199 25 2005-06 497

12 1992-93 223 26 2006-07 519

13 1993-94 244 27 2007-08 55114 1994-95 259 28 2008-09 582

Capital gains in case of depreciable assets on which depreciation in allowed on the basis of

written-down method: Sec.50:

The capital gains on depreciable assets shall be computed as under:

(i) Find out the written-down value on the first day of the previous year of all those depreciableassets on which the depreciation is allowed at the same rate . All such assets are known as ‗block of assets‘

(ii) If any new asset of the same block is purchased during the previous year, the cost of such

asset should be included in (i).

(iii) If any asset is sold out of such block during the previous year, the net consideration should

be deducted form the balance under (ii)

(iv) On the balance under (iii) compute the depreciation at the prescribed rate and deduct it from

the balance under (iii)

(v) The balance under (iv) shall be the written-down value of the ‗block of assets ‗ for the next

year.

It means that if the net consideration of an asset out of block is less than the balance under (ii),

there would be no capital gain. If the net consideration of an assets is more than the balanceunder (ii) (the value of all assets in the block), the excess shall be deemed to be short term capital

gain. If all the assets of the block are sold in the previous year & the net consideration is less

than balance under (ii), the loss shall be deemed to be the short term capital loss.



Full value of Consideration: Sec 48

Full value means the whole price without any deduction whatsoever and it does not refer to the

adequacy of the price bargained for. Where agreed consideration is not paid fully in the previous

year, the entire consideration stated in the agreement of sale would be regarded as forming the

full value of consideration and capital gains would have to be calculated on that basis. Theacceptance of lesser price than the agreed consideration in the later year would not affect this

matter.

6.5 Cost of Acquisition

Cost of acquisition of an asset is the value for which it is acquired by the assessee. It means that

whatever cost incurred for getting an asset plus all expenses incurred to acquire it is the cost of

acquisition. Interest paid on money borrowed for the purchase of a capital asset would constitutepart of the cost of acquisition, provided such interest has not been deducted under any other

provision. However, in the following cases the above meaning of cost of acquisition does not

hold good and cost of acquisition is taken as a notional figure.

(1) Cost to the previous owner deemed to be the cost of acquisition. If the asset is acquired by an

assessee in the following circumstances the cost of acquisition of the asset shall be deemed to bethe cost for which the previous owner of the property acquired it. It will be increased by the cost

of any improvement of the assets incurred by the previous owner or the assessee.

Circumstances when cost to previous owner is taken as cost of acquisition of asset: Sec.

49(1)

On any distribution of asset on the total or partial partition of a Hindu undivided family;

Or under gift or will;

Or by succession, inheritance or devolution;

Or on any distribution of assets on the liquidation of a company;

Or under a transfer to a revocable or an irrevocable trust;

Or on transfer by a parent company to its Indian subsidiary company which is wholly owned by

the parent company;

Or on the transfer by a subsidiary company to its Indian holding company which owns the whole

of the share capital of the subsidiary company;

Or on the transfer of capital asset by the amalgamating company to the amalgamated company if

the amalgamated company is an Indian company; or on transfer of shares of an Indian company

by amalgamated foreign company to the amalgamated foreign company;



Or when any of the members of a H.U.F. converts his self-acquired property into H.U.F.

property. (The cost of the property to the H.U.F. will be taken as the cost of the property to theindividual converting the property).

Cost of acquisition of a Capital asset acquired before 1.4.1981.

Where capital asset became the property of the assessee before Ist April 1981, the cost of acquisition of the asset may, at the option of the assessee, be taken to be any one of the

following:

(i) The cost of the asset to the assessee; or

(ii) The fair market value of the asset on Ist April 1981.

Cost of acquisition of an asset acquired by the previous owner before Ist April 1981 by any

mode u/s 49(1)

If the capital asset (other than asset on which depreciation has been allowed) became the

property of the assessee by any of the modes specified in section 49(1) and the capital assetbecame the property of the previous owner before Ist April, 1981, the cost of acquisition of the

asset may, at the option of the assessee, be taken to be any one of the following:

(i) the cost of acquisition of the asset to the previous owner; or

(ii) the fair market value of the asset on 1st April, 1981

6.6 Cost of improvement: Cost of any improvement:

(i) in relation to a capital asset being goodwill of a business or a right to manufacture, produce or

process any articles or thing or right to carry on any business shall be taken to be nil; and

(ii) in relation to any other capital asset:

(a) where the capital asset become the property of the previous owner or the assessee before Ist

April, 1981, it means all expenditure of a capital nature incurred in making any additions oralternations to the capital asset on or after Ist April, 1981 by the previous owner or the assessee;

and

(b) in any other case, it means all expenditure of a capital nature incurred in making anyadditions or alternations to the capital asset by the assessee after it became his property.

In any case such expenditure incurred prior to Ist April, 1981 shall not be considered as cost of

improvement and will be ignored. It will not be added to the cost of acquisition whether the

assessee opts for fair market value on Ist April, 1981 to be his cost of acquisition or he opts hisactual cost to be the cost of acquisition. In case of an asset being acquired on or after Ist April,



1981 also, it is only the capital cost incurred on additions and alterations on or after Ist April,

1981 that will be added to the cost to arrive at the cost of acquisition.

6.7 Capital gains exempt from tax

Capital gains arising on the transfer of property used for residence: (Sec. 54). Any capitalgain arising on the transfer to a house or land appurtenant thereto is exempt subject to thefollowing conditions:

(i)The building is owned by an individual or Hindu Undivided Family.

(ii)Such property was being used as residential hose.

(iii)The income of such house property is chargeable under the head ―income from House

Property‘.

(iv)The exemption will be available only in relation to a house property which had been held bythe tax-payer for a period exceeding 36 months before transfer.

(v)The assessee has, within a period of one year before or two year after the date of transfer

purchased a residential house; or he has within a period of three years after date of transfer

constructed a residential house. Here the term ‗constructed ‗means completed.

Where a part of capital gain is appropriated towards purchase of a plot and part towardsconstruction of residential house thereon, the aggregate cost shall be considered for exemption

us/ 54 provided the acquisition of plot and the construction thereon are completed within the

aforesaid period.

Where assessee is starts construction of a new building before sale but completes it after the sale

of old building, the assessee is entitled to exemption.

Quantum of Exemption

(i) The capital gains arising from the transfer of such residential house or the cost of new

residential house purchased or constructed within the specified period whichever is lower is

exempted. Or it means if the whole capital gain is re-invested in the cost of new house it is fullyexempt from tax. If only a part of it is re-invested, the balance of it is chargeable to tax. Where

the amount of capital gain is spent partly on purchase of house property and partly on further

construction of it, exemption is available in respect of both the amounts.

(ii) Where the amount of capital gain is not utilised by the assessee for acquisition of new house

before the due date of furnishing the return of income u/s. 139, it shall be deposited by him on orbefore the due date of furnishing the return of income in an account opened under the Capital

Gains Account Scheme, 1988 with specified bank authorized by the Central Government in

accordance with the Scheme. The amount already utilised for re-investment together with the

amount of deposits shall be deemed to be the cost of the new house.



Withdrawal of exemption and Tax and Sale of new house

The new house (purchased or constructed) should not be transferred within a period of three

years of its purchase or construction. If it is transferred within three years the exemption given

earlier will be withdrawn and the old exempted capital gains and new capital gains (if any)

arising on the transfer of the new residential house, shall be chargeable to tax as short termcapital gain of the previous year in which the new residential house is transferred.

If instead of a capital gain, there is a capital loss on the transfer of the new residential house it

shall be deducted from the exempted capital gain of the old house and the balance, if any, shall

be capital gain of the previous year in which the new house is transferred.

Tax on unutilized amount

If the amount deposited is not utilized fully for acquiring the new house within the period

stipulated (i.e., 3 years from the date of transfer of original house) the amount not so utilized

shall be treated as the long-term capital gain of the previous year in which the period specifiedexpires. The tax-payer shall be entitled to withdraw such amount in accordance with the scheme.

Effect of Capital Gains Account Scheme

The effect of the new scheme for deposits is that if the assessee cannot utilise the capital gain foracquisition of new house on or before the due date for furnishing the return of income, he may

deposit it under this scheme up to the aforesaid date in order to avail this exemption. After such

deposit he must utilize the deposit for acquiring the new house with 3 years from the date of

transfer of the old house.

Capital gain arising from the transfer or agricultural land (sec. 54B).

Any capital gain arising on the transfer of agricultural land situated in an urban area is exempt

subject to the following conditions:

(i)The agricultural land is owned by an individual.

(ii)The agricultural land was, in the two years immediately preceding the date of transfer, being

used either by the assessee or his parent (as owner or otherwise) for agricultural purposes.

(iii)The assessee has purchased within a period of two years from the date of transfer (and not

before sale) any other land for agricultural purposes.

Quantum of exemption

(i) The capital gain arising from the transfer of such agricultural land or the amount invested in

the purchase of the new agricultural land within two years from the date of transfer whichever is

lower is exempted. It means, if the whole capital gain is reinvested it is fully exempt from tax. If only a part of it is reinvested the balance of it is chargeable to tax.



(ii) If the amount of capital gain is not utilised by the assessee for acquisition of new agricultural

land before due date for furnishing the return of income, it shall be deposited by him on or beforethe due date of furnishing the return of income in an account opened under the Capital Gains

Account Scheme, 1988 and utilised in accordance with the scheme. The amount already utilised

for re-investment together with the amount of deposits shall be exempt from tax.

Withdrawal of exemption and tax on sale of new land

If this new land is transferred within 3 years of its purchase the exemption given earlier will be

withdrawn and the capital gain arising from the transfer of the new land together with exempted

capital gain of the old land shall be the chargeable as short term capital gain of the previous yearin which the new land is transferred.

Tax on unutilized amount

If the amount deposited is not fully utilised for acquiring the new agricultural land within two

years, the amount not so utilised shall be treated as the capital gain ( long term or short termdepending on the original capital gain) of the previous years in which the period of two years

from the date of transfer of the original agricultural and expires. Further, the tax-payer will be

entitled to withdraw such amount in accordance with the scheme.

Effect of Capital Gains Account Scheme.

The effect of the new scheme for deposits is that, if the assessee cannot utilise the capital gain for

acquisition of new agricultural land on or before the due date for furnishing the return of income

he may deposit it under this scheme up to the due date for furnishing the return of income inorder to avail this exemption. After such deposit he must utilise the deposit for acquiring new

agricultural land within 2 years from the date of transfer of the old agricultural land.

W.e.f. A.Y. 2005-06, capital gain on transfer to agricultural and situated in urban area shall be

exempt if the following conditions are satisfied. Sec 10(37)

(i) The owner of the agricultural land is an individual or a HUF.

(ii) It was, in the two years immediately preceding the date of transfer, being used by the HUF or

individual or his parent.

(iii) The transfer of land is by way of compulsory acquisition under any law, or a transfer the

consideration for which is determined by the Central Government or the R.B.I.

Capital gain arising from transfer of long-term capital assets invested in long term

specified asset (Sec. 54EC). Where an assessee transfers a long-term capital asset and invests the

capital gain in the specified, the assessee shall be entitled to exemption as per the followingconditions:

(i) The new asset should be purchased within 6 months from the date of transfer of original asset.



(ii) The amount of exemption shall be the amount of capital gain, or the amount invested in long-

term specified asset whichever is lower.

(iii) Where the new asset is sold or transferred or converted into money or any loan/advance is

taken on security of specified assets within 3 years from the date of acquisition, the exempted

amount of capital gain shall be chargeable to as long-term capital gain of the previous year inwhich the new asset is transferred.

(iv) Where the assessee has claimed exemption in respect of new asset under this section on such

cost he will not be entitled to deduction under Sec. 80 C

(v) Long term specified asset shall mean bonds which are

(i) redeemable after 3 years

(ii) issued by National Highways Authority of India or

(iii) the Rural Electrification Corporation Ltd.

Exemption from tax on long term capital gains on investment of consideration in

Residential house: Sec. 54F Long term capital gains are exempt under this section if thefollowing conditions are satisfied:

(i) The assessee is either an individual or a Hindu Undivided Family.

(ii) The assessee has transferred a long-term capital asset which is not a residential house.

(iii) The assessee does not own more than one residential house on the date of transfer of originalassets other than as mentioned in (iv) below.

(iv) The tax-payer purchases within a year before or within two years after the date on which the

transfer took place or constructs within a period of 3 years after the date of transfer a residential

house. Construction means completion. .

(v) The income from newly acquired residential house is chargeable under the head ‗Income

from House Property‘.

(vi) He should also not purchase within a period of two year after the date of transfer of the

original asset or constructs within a period of three years after the aforesaid date any residentialhouse other than the house stated in (iv) above.

Quantum of exemption

If the above conditions are satisfied, the capital gain arising from the transfer will be treated in aconcessional manner as under:



1. If the cost of the new house that has been purchased or constructed is more than the net

consideration in respect of the capital asset transferred (i.e. the original asset) the entire capitalgain arising from the transfer will be exempt from tax

2. If the cost of new house is less than the net consideration in respect of the asset transferred, the

exemption from long-term capital gain will be granted proportionately on the basis of investmentof new consideration either for purchase or construction of tee residential house.

3. If the amount of net consideration is not fully utilised for the purpose of purchase or

construction of the new residential house as aforesaid, and if the utilized part of net consideration

is deposited by the assessee in Capital Gains Account Scheme on or before the due date forfurnishing the return of income and utilised in accordance with the scheme, the aggregate of the

cost of new house and the amount so deposited shall be deemed to be the cost of the new

residential house and exemption will be granted accordingly

Withdrawal of exemption and tax on sale of new asset

The exemption shall be withdrawn in the following circumstances:

(i) Where the assessee purchases or constructs any other residential house [other than the new

asset mentioned in (iv) above] within the aforesaid period of two years/three years, the

exemption under this provision, if allowed, shall stand forfeited and shall be deemed to be long-

term capital gain of the previous year in which such residential house is purchased orconstructed.

(ii) If a tax payer transfers the newly acquired residential house (i.e., new asset) within threeyears of its purchase or construction, then the amount of capital gain exempted on the transfer of

the original asset shall be deemed to be the long-term capital gain of the year in which the newasset is transferred.

(iii) If the amount deposited is not utilized wholly or partly for the purchase or construction of

the new asset within the specified period specified, then, the amount not so utilized shall betreated as the long term capital gain of the previous year in which the specified period of three

years from the date of transfer of original asset expires and the assessee is entitled to withdraw

the amount.


1. Capital gains arising on transfer of the land used for agriculture is exempted u/s ——

2. Cost of improvement incurred by the assessee before April1. 1981 is —— -. (Indexed/ignored)

3. Capital gains are exempt from tax, if the capital gain is invested in specified assets (u/s 54 EC)within ——— -.

4. Tax on long term capital gain is ——— .



6.8 Tax on ST gains

Tax on Short-term capital gains on transfer of equity shares in a company or units of an equity

oriented fund (Sec. IIIA)

Where the total income of an assessee includes the short-terrm capital gains arising from thetransfer of equity shares in a company or units of an equity oriented fund, on such short-termcapital gains tax will be charged @ 10%+Surcharge (if applicable) +Education cess @2% +

SHEC at 1% on the amount of income tax and surcharge if the following conditions are satisfied.

(i) The equity shares in a company or units of an equity oriented fund are short-term capital

asset.

(ii) Such transactions are chargeable to Securities Transactions Tax.

In respect of income other than aforesaid short-term capital gains, income tax shall be charged as

per the normal provisions of the Act, assuming the other income only to be the total income.

Other Provisions

(i) Where the total income (excluding aforesaid short-term capital gains) of a resident individualand resident H.U.F. is less than the maximum amount which is not chargeable to income tax,

then from the total income (including aforesaid short-term capital gains) the maximum amount

which is not chargeable to income tax shall be deducted and on the balance tax shall be chargedat the aforesaid rate.

(ii) No deduction under section 80C to 80U will be allowed in respect of aforesaid short-term

capital gains

6.9 Tax on Long-term Capital Gains

Long term capital gains on the transfer of equity shares of a company or unit of equity oriented

fund is exempt under section 10(38), if security transaction tax has been paid on such

transfer.

The tax on long-term capital gains is to be charged at the following rates:

(1) In case of an individual or a Hindu undivided family who are resident in India – @ 20%.

Where the total income (excluding long-term capital gains) of a resident individual and resident

H.U.F. is less than the maximum amount which is not chargeable to income tax then, from the

total income (including long-term capital gains) the maximum amount which is not chargeable toincome tax shall be deducted and on the balance, tax shall be charged @ 20%.

(2) In case of a domestic company, non resident (not being a company, in any other case of a

resident – @20%.



Tax on LTCG on transfer of listed securities or units of the U.T.I. or a mutual fund specified in

Sec. 10(23D) (or zero coupon bonds – w.e.f. A.Y. 2006-07) shall be charged.

(i) @10% of LTCG computed without indexing the cost of acquisition; or

(ii) @ 20% of LTCG computed after indexing the cost of acquisition, whichever is less.

Education cess. On the amount of income tax and surcharge, education cess shall be levied @2%

No deduction under section 80C to 80U will be allowed in respect of L.T.C.G.

Tax Planning:

The exemption of capital gains requires the re-investment of capital gains in certain assets such

as residential buildings, agricultural land, notified bonds etc., One can claim exemption in thesame previous year either by re-investment of capital gains, or net sales proceeds or postpone the

payment of capital gain tax by depositing the amount in capital gains deposit scheme, before thedue date of filing return of income tax.

Even in the case of shares, of listed companies held in physical form, he can reduce his tax

liability (from normal rate to 10% only in case of short term assets) or avoid tax (in case of longterm shares) by dematerializing shares and selling through stock exchange, paying security

transaction tax.

Even in dematerialized shares, tax liability is reduced or avoided if they are sold through stock

exchange, paying STT. If such shares are sold off market trade, such concession is not available.

Illustration

Mr. Dinakar. Purchased a house in 1967 for Rs. 1, 00,000. He died leaving the property to hisson by will in 1988. However he had incurred the following amounts on improvement in the

house:

Renovation in 1969 Rs. 45,000

Adding two bathrooms in 1974 Rs. 65,000

Fixing teak panels on walls in 1988-89 Rs. 40,250

His son E sold the house in October 2008 for Rs. 25,00,000. Calculate capital gains accruing to E

assuming that the market value of the house under question is Rs. 4,00,000 as on 1.4.1981 and heinvests Rs. 2,00,000 in 3 years bonds within 6 months. CII 1988-89: 161, 2008-09: 582.

Solution



Since the FMV as on 1.4.81 (Rs.4,00,000) is higher than the original cost (Rs. 1,00,000). it is

beneficial for the assessee to treat FMV as COA.

Computation of capital gains for the assessment year 2009-10

(Note: to ascertain the cost of acquisition by indexation, the year in which the assessee received

the property should be taken at the denominator i. e., 1988-89)

Illustration

Mr. Suryakantha sold the following properties during the previous year 2008-09.

(i) Jewellery costing Rs. 75,000 purchased on 6th

Jan. 2006, sold forRs. 1, 00,000 in Dec. 2008.

(ii) House at Mangalore let out for residence, sold on 30.11.08 for Rs.10, 00,000. It was inheritedby him in 1974 and its FMV on 1.4.81 was Rs. 1, 60,000. His father had acquired it for Rs. 1,

00,000 in 1970. He purchased another house in 2009 for Rs. 3, 00,000.

(iii) Household furniture costing Rs. 18,000 in Oct. 1998, sold for Rs. 25,000 on July 2008.

(iv) Agricultural land in Mysore sold for Rs. 5, 25,000. It had cost him Rs. 85,000 in Dec. 1990.

He purchased agricultural land for Rs. 1, 20,000 in July 2009.

Compute his taxable capital gains. C11 for 1981-82: 100; 1990-91: 182: 1998-99:351: 1999-

2000: 389; 2008-09: 582.

Solution

Computation of Taxable Capital Gains for the assessment year 2009-10

Illustration







Ramanath purchases a house property for Rs. 26,000 on May 10, 1962. He gets the first floor of

the house constructed in 1967-68 by spending Rs. 40,000. He dies on September 12,1978. Theproperty is transferred to Mrs. Ramanath by his will, Mrs. Ramanath spends Rs. 30,000 and Rs.

26,700 during 1979-80 and 1985-86 respectively for renewals/reconstruction of the property.

Mrs. Ramanath sells the house property for Rs. 11,50,000 on March 15, 2009 (brokerage paid by

Mrs. Ramanath is Rs. 11,500). The fair market value of the house of April 1,1981 is Rs.1,60,000.

Compute the capital gain for the assessment year 2009-10

CII for 1981-82; 100, 1985-86:133, 2008-09: 582

Solution:

Computation of capital gain for the assessment year 2009-10

Note:

indexed cost of acquisition

Cost to the previous owner 26,000

Fair market value on April 1, 1981 1,60,000

Cost inflation index for 1981-82 100


Indexed cost of acquisition

(i.e., Rs. 1,60,000 X 585 / 100) 9,31,200

Indexed cost of improvement

Cost of improvement incurred prior to April 1, 1981

(not considered) –

Cost of improvement incurred in 1985-85 26,700






Indexed cost of improvement

(i.e., Rs. 26,700 X 582/133) 1,16,838

Illustration

Lakshmana sells the following long term capital assets on January 11, 2009.

The due date of filing return of income for the assessment year 2009-10 is July 31, 2009. For

claiming exemption u/s 54 and 54EC, Lakshmana purchases the following assets:-

Assets Date of

Acquisition

Amount

Rs.

Land for constructing

A residential house

2nd

April, 2009 1,00,000

Bank deposit (for constructing house) 5th Aug. 2009 50,000

Bonds of Rural Electrification

Corporation (redeemable on 5th

July 2011

5th July 2009 7,50,000

Bonds of National Highway Authority

Of India( redemption on 10th Aug. 2015)

10th July. 2009 3,05,000

Find out the taxable capital gain for the assessment year 2009-10

Solution

House property

Rs.

Gold

Rs.

Silver

Rs.

Diamonds

Rs.

Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200

Less: Expenses on

transfer

10,000 81,000 6,000 32,000

Net sale consideration 3,80,000 7,29,000 2,90,000 6,08,200




Less: Indexed cost of acquisition

70,000 1,15,000 1,78,000 4,30,000

Long term capital gain 3,10,000 6,14,000 1,12,000 1,78,200

Exemption U/s 54 1,00,000 Nil Nil Nil

Exemption u/s 54 EC 2,10,000 6,14,000 1,12,000 1,19,000

Capital gain chargeableto tax

Nil Nil Nil 59,200

Notes: Since the due date of filing return is 31st

July, 2009, deposit made on 5th

Aug. 2009 is notconsidered. Land acquired for constructing is considered for Sec.54,

Exemption u/s 54 EC is Rs. 10,55,000 (7,50,000 +3,05,000) being amount invested in bonds

eligible)

6.10 Summary

Though the assessee sells various types of assets, gains on the transfer of all the assets are notchargeable to tax. Even the capital gains are also calculated with reference to cost inflationindex. This unit gives an idea as to how an assessee can reduce his taxable from capital gains by

the reinvestment of capital gains/ net sales proceeds in certain asset within the time mentioned in

the Act.


1) Distinguish between ‗short term capital gain‘ and ‗long term capital gain‘.

2) Discuss the procedure for computation of capital gains.

3) Discuss the exemptions provided by sections 54 and 54 F

4) What do you mean by cost inflation index?


SAQ I

1. 45

2. a capital asset

3. 36 months.

4. 582

SAQ II



1. 54 B

2. ignored

3. six months

4. 20%

TQ:







.

MF0003-Unit-07-Income from Other Sources

Unit 7 Income from Other Sources

Structure

7.1 Introduction

Objectives

7.2 Incomes chargeable under this head

7.3 Interests on Securities

7.4 Kinds of Securities

7.5 Bond Washing Transactions

7.6 Deduction of tax at source






7.7 Deductions not permissible

7.8 Summary



7.1 Introduction

This is the last and residuary head of income. Any income which is taxable under the Act but

does not find place under any of the first four heads of income (i.e. Salaries, House Property,Business and Capital Gains) will be assessable under this residuary head ‗Income from other

Sources‘.


After studying this unit you will be able to understand:

· The meaning of income from other sources

· Provisions relating to taxation of interest, and various other incomes

· Compute various other sources of incomes

· Allowable deductions permitted from other incomes.

7.2 Incomes chargeable under this head

Incomes chargeable under this head of income [Sec. 56(2)].

The following incomes shall be chargeable to income tax under the head ‗Income Other Sources‘:

Income from winnings from lotteries, crossword puzzles, races including horse races, card games

and other games of any short or from gambling or betting of any form or nature whatsoever.

Any sum received by the assessee from his employees as contributions to any provident fund or

superannuating fund or any fund set-up under Employees‘ State Insurance Act, 1948 or any other fund for the welfare of such employees, provided that it is not chargeable under the head ‗ Profitsand Gains of Business or Profession‘.

Income by way of interest on securities, if the income is not chargeable to income tax under the

head ‗Profits and Gains of Business or Profession‘.



Income from machinery, plant or furniture belonging to the assessee and let on hire if the income

is not chargeable to income tax under the head ‗Profits and Gains of Business or Profession‘.

Income of an assessee from letting on hire machinery, plant or furniture belonging to him and

also buildings, and the letting of the buildings is inseparable from the letting of the said

machinery, plant or furniture, if it is not chargeable to income tax under the head ―profits andGains of Business or Profession‘. Income received under a Keyman insurance policy including

bonus on such policy if such income is not chargeable to income tax under the head ‗Profit and

Gains of Business or Profession‘ or under the head ‗Salaries‘.

Dividend on Shares in Foreign Companies:

Any fees or commission received by an employee from a person other than his employer.

· All interest including interest on securities.

· Income of a tenant from subletting.

· Director‘s fees. Rent of land not appurtenant to buildings. Agricultural income from landsituated outside India.

· Income from markets, ferries, fisheries etc.

· Income from leasehold properties.

· Remunerations for writing articles in Journals.

· Income from undisclosed sources (unexplained investments, unexplained money, unexplainedexpenditure etc.).

· Interest on employees own contribution to URPF.

· Casual income.

· Salary of M.P, M.L.A., M.L.C.

Interest received on securities of co-operative society. Family pension received by the widow

and heirs of deceased employee (Standard deduction permissible in respect of family pension is

Rs. 15,000 or 1/3 of such pension whichever is less)

Director‘s Commission for underwriting shares of a new company, Insurance Commission not

chargeable under the head ‗business or profession‘.

Any sum of money exceeding Rs. 25,000 (Rs. 50,000 on or after

01-04-2006) received without consideration by an individual or a HUF from any person, the

whole of such sum is taxable under this head.



But it does not apply to any sum of money received:

(a) from a relative; or

(b) under a will or by way of inheritance; or

(c) on the occasion of the marriage of the individual; or

(d) in contemplation of death of the payer

For this purpose relative means:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual; and of the spouse also

(vi) spouse of the person referred to in (i) to (v)

Illustration On marriage anniversary of Mr. Ramesh on 8.2.2008, relatives and family friends made the

following gifts to the couple:

1) Cousin of Mr. Ramesh gifted a diamond ring to Mrs. Ramesh valued at Rs. 55,000.

2) Cousin of Mrs. Ramesh gifted Rs. 61,000 to Mr. Ramesh

3) Maternal uncle of Mr. Ramesh gifted Rs. 51,000 to Mrs. Ramesh

4) Father-in-law and mother-in-law of Mr. Ramesh gifted Rs.50,000 each to him.

5) Father and Mother of Mr.Ramesh gifted Rs. 1,00,000 each to Mrs. Ramesh

6) Mr. A., a family friend gifted Mrs. Ramesh Rs. 11,000

7) Mr. B. a family friend gifted Mrs. Ramesh Rs. 81,000

Sister-in-law (sister of Mrs. Ramesh) gifted. Rs. 61,000 to Mr. Ramesh

9) Sister-in-law (Brother‘s wife to Mr. Ramesh) Gifted Rs. 90,000 to

Mrs. Ramesh



10) Son of Mrs. Ramesh gifted Rs. 91,000 to his mother

Explain which gifts are liable to be included in the income of Mr. Ramesh and Mrs. Ramesh.

Solution:

Gifts Liable to Tax

1. Gift No. 1 is in kind and not in cash, hence, exempt,

2. Gift No. 2 exceed Rs. 50,000, hence, includible in the income of Mr. Ramesh.

3. Gift No. 6 does not exceed Rs. 50,000, hence, not includible in income

4. Gift No. 7 exceeds Rs. 50,000, hence, includible in the income of Mrs. Ramesh

5. Gift Nos. 3,4,5,8,9 and 10 are from relatives, hence not includible in income

(Cousin is not included in ―relative‖)

7.3 Interests on Securities

The following amounts due to an assessee in the previous year shall be chargeable to income tax

as interest on securities:

(i) interest on any security of the Central or State Governments;

(ii) Interest on debentures or other securities issued by a local authority;

(iii) Interest on debentures issued by a company (whether Indian or foreign); and

(iv) Interest on debentures or other securities issued by a Statutory Corporation.

Basic of Charge

Interest on securities does not accrue from day to day but becomes due on certain fixed dates

only, which are mentioned on the securities. Interest on securities is chargeable to tax on the

basis of accounting method (cash or mercantile) followed by the assessee. However, where no

method of accounting is regularly employed by the assessee, the income from interest onsecurities shall be chargeable to tax as the income of the previous year in which it becomes due

though it may be received later. Where the assessee adopts cash system of accounting the interest

will be taxed on receipt basis.

Cum interest or Ex-interest Transaction



When securities are bought or sold between the two interest dates, the transaction is either cum-

interest or ex-interest. Whatever be the nature of the transaction, the rule is that interest onsecurities is regarded as wholly the income of the person who happens to be the owner at the

time when the interest becomes due, irrespective of whether he was the owner throughout the

period of which the interest is paid or not, and also whether the transaction has been cum-interest

or ex-interest.

7.4 Kinds of Securities

Securities are of four types:

(i) Tax-free Government Securities. These securities are those, the interest on which is fully

exempt from tax under section 10(15). Interest on such securities is neither included in total

income nor it is taxed.

(ii) Government Securities: Such securities are issued either by the Central Government or a

State Government. These are taxable securities. but no tax is deducted at source on suchsecurities. Hence, the interest on such securities will not be grossed up. The amount received or

due as the case may be shall be included in the total income.

(iii) Tax-free Commercial Securities. These are issued by a local authority or statutory

corporation or a company, in the form of debentures or bonds. Really speaking their interest not

tax-free, because tax due on this interest is payable by the company, or local authority orcorporation concerned. These are called tax-free, because the assessee has not to pay tax on it

from his own pocket. The tax paid by the company (10.2% in case of listed securities, 20.4% in

case of unlisted securities) on this interest is deemed to have been paid on behalf of the assessee,hence the amount of tax paid on any interest due to an asseessee added to his interest income. i.e,

the interest due to an assessee is grossed up and then this grossed up amount is included in histotal income. The amount of tax paid by the company on this interest is deducted from the total

tax payable by the assessee. For example, if a company has issued 10% Tax-free Debentures, thedebenture-holder will receive the entire amount of interest calculated at 10% but the amount to

be included in the total income of the debenture holder will be the amount actually received by

him as interest plus income tax thereon paid by the company.

(iv) Less-Tax Commercial Securities. These may be called ―Taxable Securities‖. In the case of

these securities, income tax is deducted at source on the amount of interest calculated at thepercentage stated on the securities and balance of the amount of interest left after deduction of

the aforesaid income tax is paid to the security-holder. (The rate of tax deducted at source is 10.2

% in case of listed securities, 20.4% in case of unlisted securities) If the rate percent of interest is

given it is not grossed up as it is already the gross amount of interest, and income tax is to bededucted there from. If in the case of these securities, the net amount of interest received is

given, it has got to be grossed up. In any case, it is the gross amount of interest that is included in

the total income of an assessee.

The following are the rules for grossing up interest on securities:



(1) If the rate of interest is given: only the interest on tax-free commercial securities is grossed

up and interest on all other securities is not grossed up.

(2) Interest on tax-free commercial securities is always grossed up, whether its rate per cent is

given or the amount received is given.

(3) Interest on less tax securities is grossed up when the amount received is given.

7.5 Bond Washing Transactions

It is a device to avoid tax by high income group of assessees by transferring securities to low-

income class of assessees on the eve of the due date of interest. Generally interest on securities ispayable half-yearly or yearly and these dates are fixed. As the whole amount of interest is

regarded as the income of the person who happens to be the owner at the time when the interest

becomes due, some tactful persons transfer their securities a few days before the due date of

interest, to some of their friends or relatives, and re transfer them back a few days after the

expiry of the due date of interest.

Thus, they do not remain the owner of the securities on the due date of interest and they are notrequired to pay tax on this income from interest on securities. They transfer their securities to

such persons whose total income including the income from interest on securities either does not

exceed the minimum taxable limit or if it exceeds that limit it is lesser than that of the transferor

so that either no tax will be payable on the interest or it will be payable at the lower rate.

Thus, the transferor escapes tax completely or partly and transferee also does not pay tax on it as

his income is below the minimum taxable limit; and if the transferee‘s income exceeds theminimum taxable limit, he will pay tax al lower rate of tax, which is, in fact, secretly paid by the

transferor on behalf of the transferee. Thus by this device, the I T Department suffers loss of revenue. In order to prevent this device of avoiding tax, it has been provided that the AssessingOfficer can include such an income from interest on securities in the total income of the person

who is actually the owner of the securities and who wants to escape tax by adopting the device.

In connection with such transactions the Assessing Officer has the power to enforce the assessee

to furnish the required information.

7.6 Deduction of Tax at Source

The person responsible for paying income by way of ‗Interest on Securities‘ shall, at the time of

payment, deduct income tax ‗at the rate in force‘ on the amount of the interest payable.

The words ‗at the rate in force‘ mean the rate or rates specified for the purpose of deduction bythe finance Act of the year in which such deduction is required to be made. Aforesaid deducted

tax is deposited in the Government Treasury on behalf of the security-holder and hence the

person responsible for paying this interest has to issue a certificate to the security-holderregarding the deduction of tax at source so that the security-holder may claim the credit for it in

his individual assessments.



Tax shall not be deducted at source from interest payable on:

4 1/4% National Defence Bonds, or 41/4% National Defence Loan where Bonds or Loan are

held by an individual; National Development Bonds; 7-Years National Savings Certificates

(Fourth Issue); Debentures issued by any co-operative society or a public sector company or any

authority or any other institution notified by the Central Govt. 6½ Gold Bonds, 1977. 7%% GoldBonds, 1980; any security of the Central Government of a State Govt. Debentures issued by a

company in which the public are substantially interested if such debentures are listed on arecognised stock exchange in India, provided that the interest is paid to a resident individual by

an account payee cheque and the aggregate amount of interest payable does not exceed Rs.

2,500.

It should be clearly understood that the taxable income from interest on securities is (i) Interest

received by the security-holder plus (ii) the amount of I. T. deducted at source or paid by the

authority responsible for paying the interest, directly into the government treasury on behalf of the security-holder.


1. Tax will be deducted at source from interest on unlisted commercial securities at — -

2. __________is a device to avoid tax by high income group of assesses by transferring

securities to low income class of assesses on the eve of due date of interest.

3. Money received in excess of Rs. ————– from a person other than a relative is taxable in

the hands of individual recipient.

4. Dividend from Indian companies is ————– (taxable/ not taxable)

5. Standard deduction in case of family pension is ————— -.

7.7 Deductions not permissible

The following amounts shall not be deductible in computing income under the head ‗Other

Sources‘:

1) Any personal expenses of the assessee.

2) Any interest chargeable under this Act, which is payable outside India and has been paidwithout deduction of tax at source or without paying tax thereon.

3) Any sum paid on account of wealth tax.

4) Payment to relatives and associates if the Assessing Officer considers it excessive orunreasonable.



5) Expenses or losses in connection with income from lottery, crossword puzzles, races including

horse races, cards games, gambling or betting of any nature, shall not be deductible in computingthe said income.

6) Expenses incurred in relation to exempted incomes.

7.8 Summary

This unit gives you an idea that though income chargeable under income from other sources is

not fully discussed, all incomes are chargeable to tax unless otherwise expressed as not taxable.This head is residuary head and covers all incomes not taxed under first four heads of income.


1. Enumerate at least 10 items which can be included under the head ‗income from other

sources‘.

2. What are the various deductions not permissible while computing income from other sources?

3. What do you mean by ‗ Bond washing Transactions‘?

4. What are the different kinds of Securities?


SAQ’s

1 ) 20.6 %

2) Bond washing transaction

3) Rs. 25,000

4) Not taxable

5) Rs. 15,000 (or) 1/3 of such Pension whichever is less

TQ’s

1) Refer 7.2

2) Refer 7.6

3) Refer 7.5

4) Refer 7.4





.

MF0003-Unit-08-Set off and Carry Forward

of Losses

Unit 8 Set off and Carry Forward of Losses

Structure

8.1 Introduction

Objectives

8.2 Provisions relating to set off of losses

· Intra head set off

· Inter head set off


8.3 Carry forward and set off of losses

8.4 Summary



8.1 Introduction

Income-tax is tax imposed on the total taxable income of an assessee from all the heads of

income. As such it is quite proper that the loss under one head of income is set off against theincome from another head of income, and the total taxable income of the assessed is computed.

Meaning of Set-off of Losses

Set-off of losses means setting-off of losses under one source of income against income from

another source of income of the same head of income, and the setting-off off losses under onehead of income against the income under another head of income of the same assessment year.








After studying this unit you will be able to know:

· How a loss in any of the sources or head can be set off and carried forward.

· What are the losses which cannot be set off and carried forward.

· How the c/f losses are set off against the income of succeeding assessment years.

· Time limit upto which losses can be c/f for set off.

8.2 Provisions Relating to Set-off of Losses

The various provisions of the Income-tax Act of 1961 regarding set-off of losses are:

=>Intra head set off

Set-off of losses under one source of income against income under another source of income

under the same head (or inter-source adjustment of incomes) (section 70 of the Income-tax Act):

When an assessee has two or more source of income less than one head (i.e., the same head); he

can set off the loss in one source of income against the income from another source of incomeunder the same head in the same assessment year. For instance. loss from one house property can

be set of against the income from another house property. Similarly, the loss from hardware

business can be set of against the income from timber business. So also the loss from one capitalasset (i.e, capital loss) can be set off against the profit from another capital asset (i.e, capital

gains).

However, there are certain exceptions to this general rule, they are:

a) Speculation loss cannot be set off against the profit from non-speculation business.Speculation loss can be set off only against profit from another speculation business. In this

context, it may be noted that, though loss from speculation business, cannot be set off against the

profit from non-speculation business, the loss from non-speculation business can be set off against the profit from speculation business.

b) Loss from the activity of owning and maintaining race horses can be set off only against the

profit from owning and maintaining race horses, and not against any other income under the head‗Income from other sources‘.

c) Long-term capital loss can be set off only against long term capital gains. It cannot be set off

against short-term capital gains.

d) Loss cannot be set off against winnings from lotteries, cross word puzzles, etc.



=>Inter head set off

Set-off of loss under the head of income against income from another head of income (Section

71)

Loss under one head of income can be set off against the income under another head of income.However, there are certain exceptions to this general rule. They are:

a) Speculation loss cannot be set off against the income from any other head of income. (As

stated earlier, speculation loss can be set off only against the profit from another speculationbusiness).

b) Loss from business or profession cannot be set off against income under the head ‗salaries‘.

c) Losses from cross word puzzles, lotteries, gambling, card games races including horse races,

etc. cannot be set off either against the income from the same source or against the income under

any other head of income. This is because each of these specified sources is regarded as separatefrom others (i.e., other sources).

d) Capital loss can be set off only against capital gains. It cannot be set off against the income

from any other head of income.


1. Loss in a speculation business can be set of against ——————– .

2. Income from business can not be set off against ———— -.

3. Long term capital loss ———— against short term capital gains.

4. Short-term capital loss ———— against long term capital gains.

5. Speculation loss can be carried forward for ———— from assessment year 2006-07.

6. Carried forward business loss ——— - set off against income from any other heads.

8.3 Carry Forward of Losses

Meaning of Carry Forward of Losses:

When it is not possible for an assessee to set off the losses during an assessment year against his

incomes during the same assessment year in which they are computed, he can carry forward such

unabsorbed losses for set off against his incomes in the succeeding assessment years. Such aprocess is known as ‗carry forward and set-off of losses‘

Provisions relating to Carry forward and set-off losses:



It must be noted that only the following losses can be carried forwarded for set-off in the

succeeding years.

· Loss under the head ―Income from House Property‖.

· Loss on non-speculative business

· Loss on speculative business

· Capital loss (short-term as well as long-term)

· Loss from the activity of owning and maintaining race horses.

The losses from house property (Sec 71B) can be carried forward loss for set off in subsequent

years subject to a limit of 8 assessment years against income from house property

Carry forward and set-off of losses from business (Section 72 of the Income-tax Act):

Losses from business (other than speculation business), which could not be set off against the

other incomes of the assessee during the same previous year can be carried forward to the

subsequent years for set-off. The loss cannot be carried forward for more than eight assessmentyears.

In the like manner speculation loss can be carried forward for set off against speculation income

for four assessment years.( Sec. 73)

The capital loss can be carried forward for set off against income from capital gains for eight

assessment years. (Sec. 74)

Loss from the activity of owning and maintaining race horses can be carried forward for set off

for four assessment years. (Sec. 74A)

Unabsorbed business loss carried forward for set off should be set off before setting off

unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed

capital expenditure on family planning.

However, the carried forward business loss can be set off only after current year‘s depreciation,

current years‘ capital expenditure on scientific research and current year‘s capital expenditure on

family planning.

Illustration:

Govinda submits the following information of the net incomes and losses for the year ended 31st

March, 2009. Discuss the set off provisions.

Rs.



1 Salary income 24,000

2 Income from house property

House A (Income)

House B (Loss)

10,000

30,000

3 Income from business: Cloth business (profit)

Hardware Business (loss)

Speculation (Profit)

Speculation (Loss)

10,000

12,000

12,000

17,000

4 Capital Gains:

Short-term (gain)

Short-term (loss)

Long-term (gain)

8,000

24,000

8,000

5. Other source: Income from betting

Loss from card games

Income fro card games

Interest on Government securities

12,000

6,000

9,000

8,000

6. Unabsorbed depreciation

Compute his total income

5,000

Notes:

1. Loss from House ‗B‘ has to be set off against income from House ‗A‘: The balance of losses

from house property ‗B‘ can be set off against the income from other heads.

2. Loss from hardware business can be set off against income from cloth business, and thebalance off loss from hardware business (12,000 – 10,000) Rs. 2,000 can be set off against the

other incomes of the assessee.

3. Speculation loss can be set off only against the speculation profit. The amount of speculation

loss, which could not be set off against speculation profit, cannot be set off against the other

incomes of the assessee. It can be only be carried forward for set-off against speculation profit inthe future.



4. The short-term capital loss can be set off against the total of short-term and long-term capital

gains. The balance of short-term capital loss cannot be set off against the other income of theassessee. It has to be only carried forward for set off against capital gains in the future.

5. Loss from card games, crossword puzzles, betting, etc. cannot be set off against any income,

even against profit from card games, crossword puzzles, betting, etc.

Illustration

Mr. Sudhama an individual submits the following information relevant for the assessment year2009-10.

Solution

Note:

· Loss on maintenance of race horses can be set off only against income from the business of

owning and maintaining race horses. In the absence of such income, it cannot be set off.







However, it can be carried forward to next year for claiming set off against income from such

business.

· The house property loss can be set off against salary income and / or interest on securities. It

cannot be set off against income from card games.

· Business loss (non-speculative) can be set off against interest on securities. It cannot be set off against salary income and income from card games.

8.4 Summary

Since assessee is required to pay tax on total taxable income which means aggregate of incomestaxable under five heads if income. This head has given the idea as to how an assessee can set off

and carry forward the losses incurred in any of the head if incomes.


1. Explain the provisions regarding carry forward and set off of losses.

2. Explain the provisions regarding inter head set off.


SAQ

1. Income from speculation only,

2. income from salary

3. can not be

4. can be

5. four

6. can not be

Terminal Questions:

1. Refer to section 8.2 & 8.3






.

MF0003-Unit-09-Assessment of Individuals

and Computation of Tax-Deduction of Tax atsource

Unit 9 Assessment of Individuals and Computation of Tax-Deduction of Tax at source

Structure:

91 Introduction

Objectives

9.2 Assessment Procedure

9.3 Rates of taxes


· Deduction of tax at source

9.4 Permanent account Number


9.5 Illustrations

9.6 Summary



9.1 Introduction

An individual has to pay tax on his total income calculated under different heads. In addition

income of other persons is also included in his total income. This is to avoid shifting legally an

income, which in fact belongs to him, to some other persons. To counteract such practices,

special provisions relating to clubbing of incomes have been made in sections 60 to 65.










After studying this unit, you will be able to:

· Understand the concept of total income of an individual, computation of gross and net income

tax liability of individuals.

· Rates of taxes prevailing for the assessment year

· Understand as to how to claim various deductions.

· Analyze the tax treatment of agricultural income.

9.2 Assessment Procedure

It refers to procedure of imposing the liability upon the tax-payer to pay the Income Tax.

U/S 139 (1) every person, if his total income or total income of any other person in respect of

which he is assessable, has exceeded the exemptible limit, shall on or before the due date, furnishreturn of income in the prescribed form. It has to be submitted ITO of the area.

Due date of filing return of Income: Relevant AY

Return of Loss:

If a person who has sustained loss u/s 28 or u/s 45 claims to carry forward the same, he should

furnish with in the due date, a return of loss in the prescribed form, if the return of loss is notfiled, the loss cannot be carried forward.

Belated Return of Income:

If person has not furnished a return with in the time limit he may furnish the same for any

previous year at any time before the expiry of one year from the end of relevant assessment yearor before the completion of assessment whichever is earlier. But he is liable for penal interest.

Revised Return:

Any person having furnished the return discovers any wrong statement therein, he may furnish a

revised return at any time before the assessment is completed or before the expiry of one yearfrom the end of the relevant year, whichever is earlier. But if an assessee deliberately files a false

return, he will be liable to be imprisoned u/s 277 and he will not be condoned by filing a revised

return.




Return by whom to be signed?

The Return shall be signed and verified by an individual, Karta (in case of HUF), M.D. or

Secretary (in case of Company), Managing Partner in case of firm or any responsible persons

competent to act.

Defective return of Income:

When the A.O. considers that the return of income furnished by the assessee is defective, he may

intimate the defect to the assessee and give him an opportunity to rectify the defect within asperiod of 15 days from the date of such intimation. On application by the assessee the A.O. may

extend the period of 15 days.

9.3 Rates of Taxes

After computing the total income, tax is computed according to the rates prescribed by the

Finance Act which is passed annually by the Parliament.

The following are the rates of tax applicable to the individuals for the assessment year 2007-08.

(For detail refer Unit 2: Sub heading Rates of Tax for an Individual)

Marginal relief:

Where the total income exceeds Rs. 10, 00,000, the amount of tax including the surcharge on the

excess of income over Rs. 10,00,000 shall not exceed the amount of income exceeds Rs.

10,00,000. Marginal relief shall not be allowed regarding education cess.

Tax on winnings from lotteries, cross word puzzles, race including horse races,( not being

income from the activity of owning and maintaining race horses) or card games or other game of any sort or from gambling or betting.: On such income tax is levied @ 30%.


1. The minimum tax free limit for a senior citizen lady is ————– .

2. On a taxable income of Mr. Udaya, aged 40 years, Rs. 2,50,000 the tax payable is ———–

3. Permanent Account Number contains —— alphanumeric numbers.

4. The rate of deduction of tax at source on the bank interest exceeding Rs. 5.000 is ——– .

5. The date of filing return of tax for individuals is ————– .

· Deduction of tax at source:



To avoid cases of tax evasion, the IT act has made provisions to collect tax at source on accrual

of income. Under this scheme, persons responsible for making payment of income covered bythe scheme are responsible to deduct tax at source and deposit the same to the government

treasury with in the stipulated time. The recipient of income gets only net income, but is liable to

tax on the gross amount. The amount deducted at source is adjusted against is final tax liability.

Salaried persons At regular rates

Interest on Debentures & Bonds 10%over Rs.2,500

Interest on FD in Banks & Housing finance

companies

10% over Rs.5000

Interest on other than interest on securities 10% over Rs.5000

Insurance commission to agents (individuals) 10% over Rs.5000

Winning from lotteries/Cross-word/games Shows 30% over Rs.5000

Winnings from horse Races 30% over Rs.2500

Payments to contractors (per Contract) 2% over Rs.20,000

Payment of rent to individuals /HUF 15% over Rs. 1,20,000Payment of rent to other than individuals/HUF 20% over Rs. 1,20,000

Fees for professional or technical services 5% over Rs. 20,000

In above cases surcharge and education cess and S&HEC is applicable

9.4 Permanent Account Number

Quoting of the permanent account number (PAN) has been made mandatory by the Income Tax

Department in many instances. An assessee needs to mention his PAN is issued in the form of a

laminated card.

A person has to apply in Form 49A to the Assessing Officer having jurisdiction to assess the

applicant. In order to improve PAN related services, the Dept. has authorised UTI InvestorServices Ltd (UTIISL) to manage IT PAN Services Centres in all cities or towns where there is

an income tax office, and National Securities Depository Limited (NSDL) to dispense PAN

services.

The main advantages of having a PAN include, convenience to locate the assessing officer, fasterassessment, processing of refunds, ensuring tax compliance, credit for payment of taxes, and

control over unregulated and undisclosed transactions.

The application form should be filled in carefully and completely giving specified information,including name of the assessee, father‘s name, address, date of birth, sources of income, etc.

9.5 Illustrations

Illustration



From the following information compute the tax payable by Miss Shilpa Shetty for the

assessment year 2009-10

Rs.

1. Income from House property (computed) 80,0002. Interest on govt. securities 10,000

3. Long term capital gains 50,000

4, Income from business 2,20,000

5. Agricultural income 1,00,000

6. Purchased N.S.C. VIII issue 30,000

7. Deposited in PPF 40,000

8. Subscription to eligible issue of capital 35,000

Solution

Computation of tax payable for the assessment year 2009-10

Rs.

Income from house property 80,000

Income from business 2,20,000

Short term capital gains (LTCG considered separately) -

Income from other sources

Interest on Govt. securities

10,000

Other Gross total income 3,10,000Less: deductions u/s 80C

Maximum Rs. 1,00,000

(NSC + PPF + Eligible issue of capital)

1,00,000

Total income other than LTCG 2,10,000

Add: LTCG

Add: Agricultural income

50,000

1,00,000

Aggregate income 3,60,000



Illustration

Find out the tax liability for the assessment year 2009-10 in the cases of resident individualsgiven below:

Name of taxpayer Ganesh Suresh Mrs.

Lakshmi

Mrs.

Reshma

Age of the taxpayer during the previousyear 2008-09 65 years 60 years 68 years 50 years

Rs. Rs. Rs. Rs.

Income from business – – 30,000 –

Income from profession 90,000 80,000 – 10,10,000

Salary income and other income 2,00,000 86,000 1,20,000 2,20,000

Contribution towards National Savings

Certificate VIII issue

80,000 90,000 10,000 65,000

Public Provident Fund 2,000 2,000 2,000 6,000

Investment in notified infrastructuresector

– 5,000 1,000 33,000

Solution

Computation of income and tax thereon

Gross total income 2,90,000 1,66,000 1,50,000 12,30,000

Less: Deduction under section 80C [see

Note]

82,000 97,000 13,000 1,00,000

Net Income 2,08,000 69,000 1,37,000 11,30,000

Tax on net income 5,800 Nil Nil 2,41,000

Add: Surcharge (surcharge is

applicable if net income exceeds Rs. 10lakh)

Nil Nil Nil 24,100

Tax (c) 5,800 Nil Nil 2,65,100Add: Education cess [3% of (c)] 174 Nil Nil 7,953

Tax payable 5,974 Nil Nil 2,73,053

Note: Deduction under section 80C

Gross qualifying amount

NSC VIII issue 80,000 90,000 10,000 65,000

PPF 2,000 2,000 2,000 6,000




Investment in infrastructure sector – 5,000 1,000 33,000

Total 82,000 97,000 13,000 1,04,000

Net qualifying amount 82,000 97,000 13,000 1,00,000

Illustration

From the following details compute the tax payable:

Profit from share trading Rs. 10,000

Securities transaction tax paid 5,000

Other income 2,00,000

Solution

Illustration

In the following cases find out the tax liability.

a) Total income Rs. 1,40,000 inclusive of agricultural income of Rs. 90,000

b) Total income Rs. 1,80,000, Agricultural income Rs. 4,900

c) Total income Rs. 12,00,000, agricultural income Rs. 15,000

Solution

a) No tax is payable as non agricultural income is less than Rs. 1,00,000

b) Tax on Rs. 1,80,000 amounts to Rs. 3,000 plus education cess @ 3% on Rs. 3,000, Rs. 90.

Total tax payable is Rs. 3,090. Agricultural income is not clubbed since it is less than Rs. 5,000

Illustration







The following particulars are submitted for calculation net tax liability:

Rs.

Income from house property (computed) 68,000

Agricultural income 25,000

Long term capital gains 50,000

Lottery winnings (Net) 34,700

Life insurance premium paid 10,000

Business Income (computed) 1,00,000

Solution

Illustration

From the following details, compute the tax liability of Salman Khan for the assessment year

2009-10

Rs.

Salary for 12 months 1,04,000Income from house property (computed) 20,000

Long term capital gains 40,000

Short term capital loss 10,000

Dividend from Indian Company 8,000

Income from mutual funds 12,000

Personal agricultural income 20,000




B/F agricultural loss 25,000

Insurance premium paid on policy for Rs.60,000 13,000

Donations to National Children‘s fund 10,000

Contribution to P.P.F. 30,000

Contribution to URPF 3,000

Solution

Computation of total Income for the assessment year 2009-10

C/F agricultural loss shall be set off against current year agricultural income.

Loss shall be ignored; hence net agricultural income is NIL

Tax liability

Since the net income of the assessee is lesser than the minimum taxable limit i.e., Rs. 1,50,000

the entire income shall be exempt from tax

Note: Life policy premium qualified only up to 20% of sum assured.

(60,000 @ 20%= 12,000)

Contribution to URPF never qualifies for 80C

9.6 Summary

A brief idea about the tax rates applicable to individuals is given. Even the computation of net

tax liability with the knowledge of TDS is also given. This unit also highlighted the necessity of PAN for various transactions.


1. Briefly understand the assessment procedure.

2. When PAN is compulsory?




3. Give ten instances where tax is deducted at source.

4. How the following incomes are treated in the assessment of an individual who is ‗resident and

ordinarily resident‘.

a) Share of profits from the firm

b) Share of income from a HUF

5. What is the minimum tax free limit for the following individuals?

Mrs. Vanaja, aged 68 years.

Miss. Shilpa shetty, aged 23 years

Mr. Narayana Murthy, aged 66 years.

Mr. Gururaja, aged 40 years.

6. Calculate the tax payable by an individual on the following taxable incomes:

Rs. 85,000

Rs. 1,65,000

Rs. 3,58,000

Rs. 11,00,000

Rs. 1,75,000 which includes an agriculture income of Rs.20,000

Rs. 1,45,000 which includes long term capital gain of Rs.30,000

Rs. 1,45,000 which includes long term capital gain of Rs.50,000

9.8 Answer to SAQ & TQ

SAQ I

1) Rs. 2,25,000

2) Rs. 10,300

3) Ten

4) 10.3%



5) 31st

July of the assessment year

TQ:

1) Refer to section 9.4





6) Refer to illustrations 9.7



.

MF0003-Unit-10-Assessment of Companies

Unit 10 Assessment of Companies

Structure:

10.1 Introduction

Objectives

10.2 Important points on assessment of companies

10.3 Computation of tax on company

10.4 Book profit

Self Assessment Questions

10.5 Summary







10.1 Introduction

A company means:

i) any Indian company, or

ii) any body corporate incorporated under the law of a foreign country, or

iii) any institution, association or body which was assessable or was assessed as a company forany assessment year up to 1970-71, or

iv) Any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of CBDT to be a company.

Public Sector Company

It means any corporation established by or under any Central or State Act. or a GovernmentCompany as defined in section 617 of the Companies Act, 1956.

Domestic Company

Domestic company means an Indian Company or any other company which in respect of its

income liable to tax under this Act, has made the prescribed arrangements for the declaration andpayment, within India, of the dividends payable out of such income.

Foreign Company

A foreign company is a company which is neither an Indian Company nor has made theprescribed arrangements for the declaration and payment of dividends within India.

Sec. 25 Company

It is a company formed to promote art, charity, commerce, religion or any other useful object,

nor for profits, and which intends to apply its profit, if any or other income towards the further

improvement of such objects and prohibits the payment of any dividend to its members.


After studying this unit you will be able to understand;

· The meaning of company

· The tax structure of the company

· The book Profit



· Tax liability of the company

10.2 Important Points Regarding the Assessment of Companies

· A company is liable to pay income tax on its total income, howsoever, small it may be. There is

no exemption limit.

· Income tax is payable on a company‘s total income at a flat rate. However, different types of companies pay tax at different rates and on different types of incomes, the rates of taxes are also

different.

· If the tax payable by a company is less than 10% (+ surcharge, if any and education cess) of itsbook profits, it is liable to pay tax 10% (+ surcharge, if any and education cess) of its book

profits.

10.3 Computation of Tax on Companies

Assessment of Companies

Computation of Total Income of a company

Computation of Tax Liability of a Company




Therefore tax liability of the company is (A) or (B) whichever is more

Tax Rates PercentageSTCG on equity/ units of Equity Oriented funds where STT is applicable

For A Y 2008-09

For A Y 2009-10

Tax on LTCG

Tax on casual Income

Tax on Any other income:

a) Domestic Company

b) Foreign company

Surcharge: at 10% for domestic companies and at 2.5% for foreign

company (if the income is likely to exceed Rs. 1 crore)

For the above ( Tax + surcharge) add: 3% Education cess (always)

10

15

20

30

30

40

Special provisions for payment of tax by certain companies or Minimum Alternative Tax(w.e.f. A.Y. 2001-02)

Where in the case of company the income-tax payable on its total income in respect of any

previous year relevant to assessment year is less than 10% (plus surcharge, if any + Education

cess) of its book profit, such book-profit shall be deemed to be the total income and the taxpayable on such total income shall be the amount of income-tax @ 10% (plus surcharge, if any +

Education cess) of such book profit.




MAT (see 115 JB): under this tax payable by a company for any A.Y. cannot be less than 10% of

book profit

How to compute tax as Provisions of MAT:

(A) Find out Normal Tax Liability (ignoring MAT)

(B) MAT

1. Find out Book Profit

2. Find out MAT Tax at 10%

If (A) is more MAT is not applicable

If (B) is more MAT is applicable

Points to be kept in mind while computing the profit

The profit and loss account shall be prepared in accordance with the provisions of Parts II and IIIof Schedule VI to the Companies Act, 1956.

Other Provisions:

i. The company shall furnish a report of Chartered Accountant in the prescribed form certifying

that the book profit has been computed in accordance with the provisions of this section. Thereport shall be furnished along with the return of income.


1. Expand MAT.

2. Companies for the promotion of commerce, art, science etc., are known as ——— .

3. Fringe benefit tax is ———– as deduction while computing the income of the company.

Illustration

From the following information compute the tax liability of X & Co, keeping in view theprovisions of MAT u/s. 115JB for the assessment year 2009-10.

Profit and Loss Account

Rs. Rs.

To Expenses relating toBusiness

4,50,000 By long-term capitalGain

1,00,000



To Income tax paid 20,000 By Sale 7,00,000

To General reserve 40,000

To Provisions for

Contingent liability

40,000

To Proposed dividend. 1,00,000

To Balance C/d. 1,50,0008,00,000 8,00,000

2. B/F loss as per books of account Rs. 1,00,000

1. B/F depreciation as per books of account Rs. 80,000

2. B/F. loss under the head capital gains (Computed as per Income Tax Act) Rs. 60,000

3. B/F unabsorbed depreciation Rs. 3,00,000 for A.Y. 2007-08.

Solution

Computation of Tax on Total Income for the A. Y. 2009-10

Rs. Rs.

Profits and per P. & L. A/c. 1,50,000

Add: Expenses disallowed:

Income tax paid 20,000

General reserve 40,000

Provision for contingent liability 40,000

Proposed dividends 1,00,000 2,00,000

3,50,000Less: Income taxable under the head capital gains 1,00,000

Business Income 2,50,000

Statement of Total Income

Business income 2,50,000

Less: B/F unabsorbed depreciation 2,50,000

Income from business Nil

Capital Gains 1,00,000 – 60,000 40,000

Less: B/F. unabsorbed depreciation 40,000 Nil

Total Income Nil

Note: B/F loss under the head capital gains c/f.next year = Rs. 60,000 – 50,000 = Rs. 10,000

Computation of Book Profit and Tax Payable u/s115JB or Minimum Alternative Tax

Income as per P. & L. A/c. 1,50,000

Add: Disallowed items:



Income tax paid 20,000

Transferred General reserve 40,000

Provision for contingent liability 40,000

Proposed dividends 1,00,000 2,00,000

3,50,000

Less: B/F. loss as per books of account or B/F

depreciation as per books of account (WIL)

80,000

Book Profit Rs. 2,70,000

Tax on book-profit @ 10% 27,000

Add: Surcharge @ 10% Nil

Add: Education cess @ 2%

S& HEC @ 1%

540

270

Tax Liability as per MAT 27,810

Tax payable. Tax on total income Nil or tax on book-profit Rs. 27,810, whichever is more.Hence, tax payable Rs. 27,810.

Illustration

Surya Ltd. is engaged in the business of manufacture of garments. The following profit and loss

account of the company is given for the year ended 31St

March, 2009.

Rs. Rs.

Salareis and Wages 2,00,000 Gross Profit 28,00,000

Entertainment expenditure 20,000 Agricultural

Income

6,00,000

Travelling Expenses 25,000 Rent from let out

property

1,00,000

Incoem Tax 2,50,000 Transfer from

General Reserve

50,000

Wealth Tax 10,000

Outstanding custom Duty 15,000

Provision for unascertained liability 60,000

Proposed dividend 50,000

Provision for loss of subsidiarycompany

20,000

Repairs of let out property 30,000

Municipal Tax on let out property 20,000

Agriculture expenses 2,50,000

Fines and Penalties 5,000

R.B.D. 15,000



Depreciation 4,00,000

Other Expenses 2,00,000

Net Profit 19,80,000

35,50,000 35,50,000

Additional information:

1. Excise duty of 2005-06 paid duringthe year 2008-09 is Rs. 65,000

However, this is not debited to profit

and loss account given above.

2. Depreciation allowable as per

Income Tax Rules is Rs. 4,60,000

3. The export sales of the company is

Rs. 6,00,000. This stands credited to

Trading Account. But out this Rs.5,00,000 is remitted to India in

convertible foreign exchange within

specified time limit. The total sales of the company are Rs. 30,00,000.

4. The following losses are to be setoff:

For

Tax

Purposes

For

Accounting

Purposes

Rs. Rs.

Brought forward

Business loss of 2004-05

Unabsorbed depreciation

11,00,000

–

9,00,000

3,00,000

You are required to compute

a. The book profit as per section 115JB

b. Total income of the company and

c. The tax liability of the company for

the assessment year 2009-10.

Solution



Computation of Total Income for the Assessment Year 2009-10:



Income Tax 2,50,000

Wealth Tax 10,000Outstanding custom duty 15,000

Provision for liability 60,000


Provision for loss of subsidiary comapnay 20,000

Repairs of let out property 30,000

Municipal Tax 20,000

Agricultural expenses 2,50,000

Fines and Penalites 5,000

R. Bad debt 15,000

Depreciation 4,00,000(a) 31,05,000

Less: Disallowed items/deductions:

Agricultural Income 6,00,000

Rent from property 1,00,000

Transfer from reserve 50,000


Excise duty paid 65,000

(b) 12,75,000

Business Income (a-b) 18,30,000

B/F Loss 11,00,000Income from House Property: (c) 7,30,000

G.A.V. (Rent) 1,00,000

Less: Tax paid 20,000

Annual Value 80,000

Less: 30% of A.V. 24,000

Income from House Property (d) 56,000

Gross Total income (C+D) 7,86,000

Deduction Nil

Computation of Tax Liability 7,86,000

Tax on Rs. 7,86,000 @ 30% 2,35,800Add: Surcharge @ 10% (if applicable) Nil

Add: Education cess @2% on Tax + Surcharge

S & HEC @ 1%

4,716

2,358

Total tax Liability 2,42,874

Computation of Book Profit u/s. 115JB




Add: Disallowed items

Income Tax 2,50,000

Unascertained Liability 60,000


Agricultural expenses 2,50,000

Reserve for Bad debts 15,000

Provision for loss of subsidiary company 20,000

(a) 26,25,000

Less: Disallowed items/deductions:

Agricultural Income 6,00,000

General reserve 50,000

Unabsorbed depreciation or B/f Business loss whichever is less 3,00,000

(b) 9,50,000

Book Profit (a – b) 26,25,000 – 9,50,000 16,75,000

Computation of Tax Liability

Tax on Book Profit @ 10% 1,67,500

Add: Surcharge @10% (if applicable) Nil

1,67,500

Add: Education cess @2% on tax + Surcharge

S & HEC @ 1% on tax + Surcharge

3,350

1,675

Tax Liability 1,72,525

Tax payable. Tax on total income Rs. 2, 42,874 or tax on book-profit

Rs. 1, 72,525, whichever is more. Hence, tax payable Rs. 2, 42,874

Illustration

Sahara Ltd. is engaged in the business of manufacture of goods in India for domestic market. The

P/L account for the year is as follows:

Rs. Rs.

Cost of goods sold 13,78,100 Sales 42,70,500

Office expenses 1,30,000 Rent of quarters given

to workers

60,000

Salary to employees 12,80,000 Rent of commercial

property given on rentto a foreign bank

1,30,000

Expenditure on scientific 84,000 Sale proceeds of goldnot being stock-in trade

2,60,000

Bad debts 10,000 Amount charged frompersons using guest

10,000



house of company

Entertainment expenses 57,000

Advertisement

expenditure

2,27,000

Travelling expness 3,20,000

Interest 82,000Income and wealth taxes 1,16,400

Sales tax, excise duty andcustoms duty

1,76,000

Municipal tax of quartersgiven to workers

16,000

Municipal tax of comm.

property

12,000

Repairs of workers‘quarters

12,000

Repairs of comm.property given on rent

7,000

Repairs of factory 10,000

Insurance 36,000

Land revenue: workers

quarters

2,000

Land revenue: comm.

building

6,000


Other expenses 1,10,710

Net profit 4,72,290

47,30,500 47,30,500

Other Information:

1. Cost of goods sold includes the following:

a. Goods of Rs. 3,80,000 purchased on May 10 of PY from B. Ltd. in which Mrs. X holds 70%

equity. (Mr. X holds 25% share capital in Sahara Ltd.) The market price of these goods is Rs. 2,86,000 (out of Rs. 3,80,000, 30,000 is paid in cash).

b. Goods purchased from Y Ltd Rs. 90,000, paid by bearer cheque.

2. Out of salary to employees Rs. 12,80,000

a. Rs. 30,000 is employee‘s contribution of RPF Rs. 17,500 of which is credited in theemployees‘ a/c in the relevant fund before due date.

b. Rs. 28,600 is bonus paid, on October 13, of AY.



c. Rs. 36,000 is commission, paid on Nov. 10 of AY.

d. Rs. 40,000 paid outside India, without TDS.

e. Rs. 6,100 capital expenditure for promoting family planning among employees.

3. Expenditure on scientific research includes Rs. 30,000 being cost of land and Rs. 16,000 paidto National Laboratory.

4. Advertisement expenses include:

a. Rs. 16,000 on advertisement in a newspaper of a political party.

b. Rs. 11,400 begin capital expenditure on advertisement;

c. Rs. 22,000 paid in cash;

d. Rs. 7,000 paid to a concern in which X has substantial interest (excessive to the extent of Rs.2,400).

e. Out of interest (Rs. 82,000) Rs. 60,000 is payable outside India (no TDS so for)_ and Rs.

15,000 is payable to IDBI (paid in Nov. 6 of AY)

f. Taxes debited to P/L a/c include:

a. sales tax, excise duty: Rs. 1,70,000 in March of PY Rs. 6,000 in November of A.Y.

b. Municipal taxes (workers quarters ) on 30 June of AY

c. Municipal taxes (commercial bldg) on 30 June of AY

5. Out of of insurance of Rs. 36,000, Rs. 6,000 is fire insurance on workers quarters paid on 10 th

April of AY and Rs. 4,000 on commercial building paid on 10th

April of AY.

6. Land revenue (Rs. 8,000) is paid Sept. 10 of AY.

7. Indexed COA of gold Rs. 2, 41,000

Solution

Computation of the Total Income

Computation of Business Income

Net Profit as per P/L a/c 4,72,290




1. Excess Cost of goods from B ltd 94,000

2. Payment by bearer cheque (20%) 18,000

3. Income-tax wealth tax 1,16,400

4. Municipal tax of property 12,000

5. Repairs of property 7,000

6. Land revenue of property 6,000

7. Employee‘s contribution to RPF (30,000-17,500) 12,500

8. Commission paid after due date 36,000

9. Salary paid without TDS 40,000

10. Family planning exps. (4/5) 4,880

11. Cost of land 30,000

12. Payment to National Laboratory 16,000

13. Ad. Expenditure in newspaper 16,000

14.Capital exp. on Advertisement 11,400

15. Advertisement paid in cash (20%) 4,400

16. Excessive payment to a concern 2,400

17. Interest without TDS 60,000

18. Payment to IDBI after Oct 31, 15,000

19. Taxes paid after Oct 31 6,000

20. Fire insurance on property 4,000 5,11,980

9,84,270

Less: Payment to National Lab (125%) 20,000

Less: 1. Rent of commercial property 1,30,000

2. Sale Proceeds of goods 2,60,000 4,10,000

Income from Business 5,74,270

Statement of Total Income

Sec 22: Rent from comm. property 1,30,000

less: municipal taxes paid NIL

Annual Value 1,30,000

less: Std. Dedn. 30% 39,000 91,000

Sec. 28: Business Income 5,74,270

Sec. 45: Long term capital gains (2,60,000 – 2,41,000)

19,000

Sec. 56: Other incomes Nil

Gross Total income 6,84,270

Deduction u/s 80 Nil

Total Income 6,84,270

Notes:



1. Excessive payment by a person having substantial interest or his relative to a concern in which

such person of his relative having substantial interest is disallowed (Rs. 30,000 is included in theabove amount).

2. Capital expenditure on land for scientific research is disallowed,

3. Contribution received on RPF from employees is treated as income; if it is credited to theconcerned RPF a/c on or before the due date then the deduction is allowed.

4. Commission paid to employees after 31st

Oct. of AY is disallowed.

5. Payment of salary outside India without TDS is disallowed.

6. Capital expenditure on family planning is to be amortized over 5; years.

7. Advertisement in newspaper owned by a political party is disallowed.

8. Rent received from worker‘s quarters is treated as business income. Hence the expensesincurred in that connection such as repairs municipal taxes, land revenue insurance (though paid

after 31st

March but before due date of filing returns (i.e., 31st

October) is allowed.

9. Since the payment to IDBI is made after due date (31st October) it is disallowed)

10. Sales tax etc paid after due date (Rs. 6000) is disallowed.

11. Municipal taxes and fire insurance on workers quarters paid before due date of filing returnsin allowed.

12. Municipal taxes, land revenue and fire insurance on commercial property is not allowed asdeduction as they have not been paid during the PY.

13. For a company assessee due date for filing the returns is 31st

October.

10.5 Summary

The limited companies in India were not paying taxes, making best use of deduction u/s 80 in

respect of incomes from industries in small scale sector, backward areas, specified industries

etc., In view of this minimum alternate tax was introduced, making all the company to pay tax on

normal income or tax at 10% on book profit calculated, whichever is higher.


1. How is tax liability of a company is computed.

2. What do you mean by book profit?



3. How do you calculate book profit.

4. When book profit is calculated and taken into consideration?


SAQ I

1. Minimum Alternate Tax.

2. Section 25 companies.

3. not allowed

TQ:

1. Refer to section 10.3 and 10.4



4. Refer to 10.3



.

MR0003-Unit-11-Fringe Benefits and Service

Tax

Unit 11 Fringe Benefits and Service Tax

Structure:

11.1 Introduction

Objectives

11.2 Fringe Benefits

11.3 Provisions








11.4 Charging provisions

11.5 Value of Fringe benefits


11.6 Summary



15.1 Introduction

The employer provides to his employee certain perquisites or fringe benefits. At present, some of the perquisites are taxable in the hands of employees, while certain perquisites (which are

collectively enjoyed by the employees) are neither taxable in the hands of the employees nor inthe hands of the employer. Where the benefit are fully attributable to the employee, they aretaxed in the hands of employee. In cases, where attribution of the personal benefit poses

problems, or for some reasons, it is not feasible to tax the benefits in the hands of employee, a

separate tax known as ‗fringe benefit tax,‘ shall be levied on the employer on the value of suchbenefits provided or deemed to have been provided to the employees.

Fringe benefit tax has been introduced with effect from assessment year 2006-07 by the FinanceAct 2005.


After studying this unit you will be able to understand:

· The meaning of fringe benefits and services which are taxed.

· The various fringe benefits and their valuation fort the purpose of tax.

· The services that are taxed and their valuation for the purpose of tax

15.2 Fringe benefits: 115WB

‗Fringe benefit‘s mean benefits, any consideration for employment provided by way of:

―any privilege, service, facility or amenity, directly or indirectly, provided by an employer,

whether by way of reimbursement or otherwise, to his employees (including employee or

employees)‖.

However, the privilege, service, facility or amenity does not include perquisites in respect of

which tax is paid or payable by the employee.



15.3 Provisions

The main provisions of this chapter are as under:

Employer (Sec. 115W) For the purpose of FBT, the term employer means-

AOP or BOI, whether incorporated or not; a firm; a company; a local authority; and everyartificial juridical person, not falling within any one of the preceding items

Who is not liable to pay FBT

An individual; or Hindu undivided family; or a person whose income is exempt u/s 10(23C); or aperson who is registered u/s 12AA; or a political party a person who is not an employer; or a

person who has no employee based in India.

15.4 Charging Provisions

Charge of fringe benefits tax: (115 WA)

The employer shall be liable to pay fringe benefit tax @ 30% plus surcharge, if any, plus

education cess @ 2% + S & HEC at 1% on the value of fringe benefits. The fringe benefit taxshall be payable by the employer even where he is not liable to pay tax on his total income. Any

sum paid on account of fringe benefit tax shall not be allowed as a deduction in computing the

income.

15.5 Value of fringe benefits (115 WC):

Value of fringe benefits (115 WC): ValueAny free or confessional ticket provided by the employer for

private journeys of the employees or their family members.

100%

Any contribution by the employer to an approved

Superannuating fund for employees.

100% of the amount

in excess of Rs. 1lakh for each

employee

Any security or sweat equity shares 100% of the Fair

market value –

amount recovered

from the employee

Expenses on Entertainment 20%Provision for hospitality 20%

Expenses on Conference.

(Other than fee for participation by employee in any conference)

20%

Expenses on sales promotion including publicity. 20%



(Other than expenditure in any form in any print or electronicmedia, or transport system. expenditure on press conference,

business convention, fair, exhibition. Advt. by way of signs, art of

work, banners, expenditure by way of payment to advt. agency forthe above purposes.)

Expense on Employee‘s welfare, expenses on Conveyance,

Tour and Travel (including Foreign Travel).

Employer in the business of Construction, pharmaceutical

production, computer software

In any other case

20%

5%

20%

Motor Cars

Motor cars- Employer in business of carriage of passengers or

goods

20%

nil

Guest House 20%

Telephone including mobile phone (other than leased telephonelines, fixed telephone allowance to employees)

20%

Festival Celebrations 20%

Gifts 50%

Scholarships 50%

Use of health club and similar facilities 50%

Use any other club facilities 50%

Tour travel and foreign travel 5%

Illustration

A firm is engaged in the manufacture of computer software. It incurred the following expenses

during previous year 2008-09. Compute the fringe benefits tax payable for the assessment year2009-10.

Rs.

1. Salary to staff. 20,00,000

2. Contribution to an approved superannuation fund

for employees 2,00,000

3. Rent paid regarding houses provided to Staff 3,00,000

4. Expenses on motor cars including depreciation (used



Self Assessment Questions I:

1. Fringe benefit tax was introduced with effect from ————— .

2. Fringe benefit tax liability is calculated at the rate of ————–

(+ SC (if applicable)+EC).

3. Fringe benefits are valued as per section ———–

4. The value of scholarship for FBT is ——— .

5. An individual is ——— - employer for the purpose of FBT

15.7 Summary

All the employers are liable to pay fringe benefit tax. Fringe benefit tax paid will not be deducted

while computing income from business. The value of fringe benefit for the purpose of tax variesfrom one benefit to another.

Service tax is administered by the Central Excise Department. In some cases CENVAT credit is

available for service tax paid. The mode of valuation of services for tax purpose varies fromservice to service. Every year more and more services are added to the list of taxable services.


1. What are various fringe benefits taxable?

2. How fringe benefits are valued?

3. What are the services which are exempt from tax?

4. Explain the following services:

a) Advertising agencies

B) Out door catering services.


SAQ I

1. Assessment year 2006-07

2. 30 per cent

3. 115 WC



4. 50 per cent

5. not an

TQ:



3. Refer to section 15.6.2

4. Refer to section 15.6.7

References:

Direct Taxes : Law & Practice – Dr. H. C. Melhotra and S. P. Goyal

Indirect Taxes : Dr. H. C. Mehrotra and Agarwal

Income Tax : Dr. Vinod K. Singhania and Dr. Monica Singhania

mf0003 taxation

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