Ch.

1 BASIC CONCEPTS
Financial Year: The year starting from April 1 and ending on March 31 of the next year is known
as a financial year.
Assessment Year: AY is a financial year in which the income earned during the preious year is
taxed.
!reious Year "sec 3#: The year in which the income is earned is called the preious year.
$.g.:
1. %ncome earned &y 'Y( )td in the year *++,-*++. will &e taxed in the year *++.-*++/.
The same would &e taxa&le irrespectie of the accounting year followed &y the assessee.
%n the aforesaid the year *++,-+. is the preious year and the year *++.-+/ is the
assessment year.
*. The income of ' comprises of only property income till March 1+0 *++1. 2n March 1+0
*++1 he starts a new &usiness of computer hardware. From the date gien &elow0 find
out the taxa&le income of ' or the assessment years *++3-+1 to *++,-+..
!roperty income: 4s. 5*0+++6- eery year.
7usiness income: 4s 1+0+++6- for the period ending 31 March *++1 and 4s.31+++6-for
the period ending 31 march *++,.
8hat would &e the taxa&le income of ' for the AY +3-+10 +1-+,0 +,-+.9
%ncome earned during the preious year is taxed during the assessment year. Therefore a year is
an assessment year and preious year simultaneously. :oweer in certain cases the income is
taxed in the year in which it is earned. The exceptions to the rule are as under:
1. %ncome of non-resident from shipping. "sec1,*#
*. %ncome of persons leaing %ndia either permanently or for long period of time "sec1,5#
3. %ncome of &odies formed for short duration. "sec1,5A#
5. %ncome of persons trying to alienate his assets with iew to aoiding payment of his tax.
"sec 1,3#
3. income of discontinued &usiness."sec1,1#
;!erson ;sec *"31#:
The term persons include:
a# an indiidual
&# a :indu undiided family
c# a company
d# a firm
e# an association of persons and a &ody of indiiduals whether incorporated or not
f# a local authority
g# $ery artificial <urisdictional person not falling under any of the preceding category.
The aforesaid is an inclusie list and the last category coers all those that do not fall in any of the
preceding classification.
Assessee =sec* ",#>:
1
Assessee means a person &y whom any tax or any other sum of money "i.e. penalty or interest is
paya&le under the act. %t includes:
1. $ery person in respect of whom any proceeding under the act has &een taken for the
assessment of his income or loss or the amount of refund due to him.
*. any person who is deemed to &e an assessee."representatie assessee#
3. an assessee in default " adance tax and T?@ not deducted#
Overview of tax on income:
%ncome Tax is an annual Tax charged at the tax rates applica&le for the assessment year0 which
are fixed &y the annual finance act.
7asic concept of %ncome:
1. 4egular and definite source
*. ?ifferent form of income "cash6kind#
3. 4eceipt 6s accrual
5. %llegal income
3. ?isputed title
1. 4elief or reim&ursement of expense is not income
,. ?iersion of income &y oer riding title 6s application of income
.. @urplus from mutual actiity not an income.
/. Temporary or permanent income
1+. tax free income
11. 4eceipt on account of dhrmada0 gaushala etc is not an income.
1*. dealuation of currency
13. %ncome includes loss.
15. Appropriation of payment &etween capital and interest.
13. same income cannot &e taxed twice
11. income should &e real and not fictional
1,. charge on person
1.. Award receipt &y sports man
1/. reenue receipts 6s capital receipts
*+. oluntary payment
*1. priAe of winning
$xtended meaning of income sec *"*5#:
1. profits and gains
*. ?iidend: diidend declared &y domestic company is taxa&le in the hands of company
and not shareholders
3. Boluntary contri&ution receied &y trust.
5. !erCuisites in the hands of employee
3. Any special allowance and &enefits
1. Dity compensatory allowance
,. 7enefits or perCuisites of director
.. 7enefit or perCuisites to a representatie assessee
/. Any sum chargea&le u6s *.0 51 and 3/
1+. Dapital gains
11. %nsurance profit
1*. &anking income of a cooperatie society
13. winning from lottery
15. employees contri&ution towards proided fund
13. amt receied under keyman insurance policy
11. amount exceeding 3+0+++ &y way of gift
2
Gross total income
As per section 150 the income is computed under fie heads:
4s 4s
Com!tation of total income:
%ncome from salaries
%ncome from :ouse properties
profit and gains from &usiness and profession
Dapital gains
%ncome from other sources
Eross Total %ncome
)ess: deductions u6s .+ D to .+ F
Get total %ncome "rounded off#
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Com!tation of Tax "ia#ilit$:
Tax on total income
)ess: re&ate u6s ..$
7alance
Add: surcharge
Total
Add: education cess
Tax
)ess: !repaid taxes
" T?@0 self assessment and Adance tax#
Tax )ia&ility
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4ounding off total %ncome:
The total income is to &e rounded off to the nearest multiple of ten rupees.
3
Ch.% &ESI'ENTIA" STAT(S AN' ITS TA) E**ECT
?ifferent Taxa&le $ntity:
1. %ndiidual
*. :indu Fndiided Family
3. A firm or an association of persons
5. a <oint stock company
3. eery other person
4esidential status:
1. 4esident and ordinary resident in %ndia
*. 4esident &ut not ordinary resident in %ndia
3. Gon-resident in %ndia.
?ifferent residential @tatus for different Taxa&le entity:
Category
Individual/ Hindu undivided Family Firm/association of persons,
joint stock company and every
other person.
Category 1
2rdinary
resident
4esident
%n %ndia
Gon-ordinary
resident
4esident in %ndia
Category 2 Gon resident in %ndia Gon resident in %ndia
4esidential status is to &e determined for each preious year. A person can &e a resident of two
countries at once. 8hether a person is a resident or non-resident is a Cuestion of fact and its duty
of the assessee to place all releant fact in front of the assessing officer
4
4esidential status of indiidual "sec 1#:
7asic conditions:
To &e an %ndian resident a person should satisfy atleast one of the two conditions as under:
1. :e is in %ndia in the preious year for a period of 1.* days or more.
*. :e is in %ndia for 1+ days or more during the preious year and 313 days or more during
5 years immediately preceding the preious year.
$xceptions:
%n the following two cases a person will &e a resident if he satisfies only the first condition0 the
second condition is not applica&le.
1. %n case of an %ndian citiAen who leaes %ndia for the purpose of employment or as a
mem&er of the crew of an %ndian ship.
*. %n the case of an %ndian citiAen or a person of %ndian origin who comes on a isit to %ndia
in the preious year.
Additional Donditions:
For a resident to &e classified as an ordinary resident the following two additional conditions
should &e fulfilled. %n case any one of them is not fulfilled then the person will &e under the
category of resident &ut not an ordinary resident.
1. :e should &e resident in %ndia for at least * years out of the preceding 1+ years.
*. :e should &e in %ndia for at least ,3+ days out of the immediately preceding , years.
$g:
' foreign citiAen comes to %ndia for the first time on March *+0 *++1. 2n @ep 10
*++1 he leaes for Gepal on a &usiness trip. :e comes &ack on Fe&ruary *10
*++,. ?etermine the residential status of ' for the AY *++,-+..
' left %ndia for the first time on May *+0 *++5. ?uring the FY *++,-+.0 he comes
&ack to %ndia on May *, for a period of 33 days. ?etermine the residential status
for the AY *++.-+/.
' a foreign citiAen leaes %ndia for the first time in the last *+ years on Go*+0
*++5. ?uring the calendar year *++30 he comes to %ndia on @ep 1 for 3+ days.
?uring the calendar year *++10 he does not isit %ndia at all &ut come on Hanuary
110 *++,. ?etermine the residential status for the AY +,-+..

4esidential @tatus of a :indu undiided Family sec 1"*#:
:FF is classified as a resident and non resident according to its control and management status.
Dontrol and management means the de facto control and management and not <ust the right to
control and manage.
lace of control
!esidential status
of H"F
#rdinary resident
or not
5
Dontrol and mangt is wholly in %ndia
4esident
Gext ta&le
Dontrol and mangt is wholly outside %ndia Gon-resident --
Dontrol and mangt is partly in %ndia and partly
outside %ndia
4esident Gext ta&le
Dondition for &eing ordinary resident:
$dd condition 1 Iarta has &een resident in %ndia at least * out of 1+ preious years
immediately preceding the releant preious year.
$dd condition 2 Iarta has &een present in %ndia for a period of ,3+ days or more during
the , years immediately preceding the preious year.
%f karta or manager of a resident :FF does not satisfy the a&oe two conditions then it would &e
treated as resident &ut not ordinary resident.
$g:
' an indiidual0 is resident &ut not ordinary resident in %ndia for the AY +,-+.. ?uring the
preious year +1-+,0 the affair of ' ":FF#0 whose Iarta is ' is partly managed from %ndia
and partly from Gepal. ?etermine the residential status of ' ":FF# for the financial year
+,-+.9
4esidential status of firm and association of persons: sec1 "*#
lace of control !esidential
status
Dontrol and management of the affairs of a firm6association of persons
is-
8holly in %ndia
8holly outside %ndia
!artly in %ndia and !artly outside %ndia
4esident
Gon-resident
4esident
4esidential status of a company sec 1"3#:
lace of control !esidential status
Indian Company #ther company
Dontrol and management of the affairs of the
company is situated-
8holly in %ndia
8holly outside %ndia
!artly in %ndia and !artly outside %ndia
4esident
4esident
4esident
4esident
Gon resident
Gon resident
6
The term control and management refers to head and &rain that directs the affair of policy0
finance0 disposal of profits and ital things regarding the management of a company.
4esidential status of eery other person sec 1"5#:
lace of control !esidential status
Dontrol and management of his affairs are situated-
8holly in %ndia
8holly outside %ndia
!artly in %ndia and !artly outside %ndia
4esident
Gon- resident
4esident
Inci+ence of Tax for +ifferent Taxa$ers:
%ncidence of tax on taxpayers depends on his residential status and also on the place and time of
accrual and receipt of his income.
Tax inci+ence on In+ivi+!al an+ ,(* is as !n+er:
4esident and
ordinary resident
4esident &ut not
ordinary resident
Gon resident
%ndian %ncome
Foreign %ncome
7usiness is controlled
wholly or party from %ndia
%ncome from profession set
up in %ndia
7usiness is controlled from
outside %ndia
!rofession is set up
outside %ndia
Any other foreign %ncome
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
Taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
Got taxa&le in %ndia
7
Tax inci+ence on an$ other taxa$er -coman$. firm etc/ as !n+er:
4esident in %ndia Gon- resident in %ndia
%ndian %ncome
Foreign income
Taxa&le in %ndia
Taxa&le in %ndia
Taxa&le in %ndia
Got Taxa&le in %ndia
Ch0. Income that is exemt from Tax
8
9
A1ric!lt!re Income:
Agriculture income is exempt from tax &y irtue of sec 1+"1#. 7y irtue of sec *"1A# the
expression Agriculture %ncome means:
1. Any rent or reenue deried from land0 which is situated in %ndia and is used for
agriculture purpose.
4ent or reenue should &e deried from land "may &e in cash or kind#.
The land should &e in %ndia
The land should &e for agriculture purpose.
*. Any income deried from such land &y agricultural operations including processing of
the agriculture produce0 raised or receied as rent-in- kind so as to render it fit for the
market or sale of such produce.
3. %ncome attri&uta&le to a farmhouse su&<ect to certain conditions.
The &uilding should &e occupied &y a cultiator "as a landlord or tenant#.
:e should &e in immediate icinity of agriculture land.
The &uilding is used as a dwelling house or as a store house or other out
&uilding.
The land is assessed to land reenue or local rates or alternatiely the land is
situated outside ;ur&an areasJ i.e. any area which is comprised within the
municipality <urisdiction haing a population of not less than 1+0+++ persons or
within . kms from the limits of any such municipality.
%f the a&oe conditions are satisfied then0 income from a farm &uilding is exempt from tax.
$griculture income is included for ta% rate purposes only.
Secial Provisions in resect for newl$ esta#lishe+ !n+erta2in1 Sec 13-A/:
$ligi&ility:
Any undertaking which satisfy the following conditions is eligi&le to get deduction:
1. %t must &egin manufacture or production in free trade (one
*. %t should not &e formed &y splitting6 reconstruction of &usiness.
3. %t should not &e formed &y transfer of old machinery. "@econd hand imported and *+K#
5. @ale consideration should &e remitted to %ndia in conerti&le foreign exchange.
3. 7ooks of account should &e audited
1. 4eturn of income should &e su&mitted on Time.
10
Amount of deduction
The deduction under sec 1+A is as under:
!rofit of the &usiness x $xport turnoer .
of the undertaking Total turnoer of the &usiness carried on &y the
undertaking
$xport turnoer-
%t means the consideration in respect of export &y the undertaking of articles or things or
computer software receied in or &ought in %ndia &y the assessee in conerti&le foreign exchange
within the prescri&ed period.
!eriod of ?eduction:
The assessee can claim deduction for a period of 1+ consecutie assessment years &eginning
with the assessment year releant to the preious year in which the undertaking &egins to
manufacture or produce.
The aforesaid deduction is not aaila&le to any undertaking from the assessment year *+1+-11.
@pecial !roisions:
%ncase of an undertaking0 which &egins to manufacture or produce things or computer software
&etween 1April *++* to March 31 *++3 in any special economic Aone0 is aaila&le as follows for
1+ assessment years:
First 3 years-1++K of profit deried from the export of such articles or things or computer
software. "First 3 consecutie years#.
Gext * years- 3+K of such profits and gains in deducti&le.
Gext 3 years- a further deduction is aaila&le to the extent of 3+K of the profit proided an
eCuialent amount is created as @pecial $conomic (one re-inestment Allowance 4esere.
Charita#le an+ &eli1io!s tr!sts an+ instit!tions:
%ncome of a charita&le trust is exempt according to the proisions of section 110 1* and 13. The
trust should &e one esta&lished in accordance with law and its o&<ects should fall within the
definition of the term ; charita&le purposeJ.
:ere the charita&le purpose includes relief to the poor0 education0 medical relief and the
adancement of any other o&<ect of general utility.
%ncome of the trust:
%ncome means the real income0 which has &een receied &y the assessee.
The amount deducted as tax at source cannot &e considered as income for this purpose.
?epreciation should &e allowed while computing income for this purpose.
Boluntary contri&ution or donations are deemed to &e a part of income deried from
property held under trust.
11
%f a oluntary contri&ution is made with a specific direction than it shall form a part of the
corpus of the trust and not deemed as the income of the trust.
Application of the income of the trust:
%f the income applied to charita&le or religious purposes0 during the preious year fall short of
.3K of the income deried during the year due to &elow mentioned reasons then the trust can us
the income as &elow:
4eason for less than .3K application of
income
8hen the income can &e spend
%ncome has not &een receied during the
preious year
Any other reason
The year in which the income is receied or the
following su&seCuent year.
?uring the preious year immediately following
the year in which the income is deried.
%f the income is not applied during the extended time then the income will &e taxa&le in the next
year.
Accumulation of income:
The trust or institution may accumulate or set apart either the whole or part of its income for future
application for such purposes. @uch income so accumulated will not form the income of the trust.
Forfeiture of exemption:
%f the &enefits of any amenities or serices are deried &y any specified persons as per section 13
then the exemption gien to trust stand forfeited.
The following income do not Cualify for exemption:
1. %ncome for priate religious purposes only
*. %ncome for the &enefit of particular religious community
3. %ncome for the &enefit of interested persons
5. Funds not inested in specified securities6 deposits
$g:
?uring the preious year *++1-+,0 a charita&le trust gets the following income:
a. Boluntary contri&ution "with specific direction that they 4s
shall form part of the corpus of trust 1*0/+0+++
&. Boluntary contri&ution "without specific direction#
1.03+0+++
c. %ncome from property held in trust
?uring the preious year *++1-+,0 the trust spends 4s. .0/+0+++ for charita&le purpose in %ndia.
7esides it gies donation of 4s. .305.+6- to the charita&le trusts. %t sets apart 4s. 150++0+++ for
the purpose of construction of a charita&le hospital up to March 310*+1*.

12
Ch.4 INCO5E (N'E& T,E ,EA' SA"A&IES
5eanin1 of salar$
1. 4elationship of an employer and employee
*. @alary and wages not conceptually different
3. @alary can &e from more than one source
5. %t can &e in cash or kind
Salar$ Sec 16-1/:
@alary under 1,"1#0 is defined to include the following:
1. wages
*. any annuity or pension
3. any gratuity
5. any fees0 commission0 perCuisites0 or profits in lieu of or in addition to any salary or
wages.
3. any adance on salary
1. any payment receied &y an employee in respect of any period of leae not aailed &y
him.
,. the portion of the annual accretion in any preious year to the &alance at the credit of an
employee participating in a recogniAed proident fund to the extent it is taxa&le.
.. the contri&ution made &y the central goernment to the account of an employee under a
pension scheme.
Basis of Char1e Sec 17:
1. Any salary due from an employer whether actually receied or not.
*. Any salary receied in the preious year whether actually due or not.
3. Any arrears of salary paid or allowed to him in the preious year &y or on &ehalf of an
employer0 if not charged to income tax for any preious year.
Com!tation of income from Salar$:
%ncome from @alary
%ncome &y way of allowance
Taxa&le alue of perCuisites
Eross @alary
)ess: deductions u6s 11
$ntertainment Allowance
!rofessional Tax
%ncome from salaries
4s. 4s.
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13
"eave Salar$:
)eae @alary refers to the encashment of the leae standing to the credit of an employee either at
the time of his retirement6 or leaing his <o& or at any time during his serice.
Tax treatment:
&ature of 'eave encashment (tatus of employee )hether it is ta%a*le
)eae encashment during continuity
of employment
Eoernment6 non
goernment employee
Dhargea&le to Tax
)eae encashment at the time of
retirement 6 leaing the <o&
Eoernment employee Fully exempted
)eae encashment at the time of
retirement 6 leaing the <o&
Gon goernment
employee
Fully or partly exempted from
tax in some cases.
Gon goernment employee getting )eae encashment at the time of retirement 6 leaing the <o&:
%n case of a non-got employee including a local authority or pu&lic sector undertaking0 leae
salary is exempt from tax on the &asis of following:
1. !eriod of earned leae "in no. of months# to the credit of employee x Aerage @alary per
month. "cannot exceed more than 3+ days in a year#
*. 1+ x aerage monthly salary
"Ag monthly salaryL &asic salaryM dearness allowanceM commission on
turnoer#
3. Amt specified &y Eot. "3++0+++#
5. )eae encashment actually receied
Gote: Any part of the year is to &e ignored.
$g:
1. Mr. !radeepkumar retires on 1
st
Huly *++, after sering 1.yrs of serice and receies 4s.
.+0+++ as amount of leae encashment for 13 months. :is employer allows 53 days
leaes for eery completed year of serices. ?uring serice he has encashed leae for a
period of 1* months. Dalculate the taxa&le amount of leae encashment if his salary
during 16,6+1 to 16,6+, is 4s. 3+++6- per month.
Grat!it$ Sec 13-13/:
Eratuity is a retirement &enefit and is generally paya&le at the time of cessation of employment
and on the &asis of duration of serice.
(tatus of employee +a% treatment
Eoernment $mployee Fully exempted from Tax
Gon goernment employee coered
&y the payment of Eratuity Act0 1/,*
$xempted to the )east of the following:
303+0+++6-
Eratuity actually receied
13 days last drawn salary x length of
serice6*1
Gon goernment employee not
coered &y the payment of Eratuity
Act0 1/,*
$xempted to the )east of the following:
303+0+++6-
Eratuity actually receied
:alf-month aerage salary for each
completed year of serice.
14
Tax treatment of gratuity:
Gote:
1. %n case where the employee is coered &y gratuity Act0 1/,* then the year is to &e
rounded off to the nearest whole. "a&oe 1 months the year to &e rounded off to one.#
*. %n case where the employee is not coered &y the gratuity Act0 1/,* then the years are
the completed years of serice" any fraction is to &e ignored#.
$g:
1# '0 an employee of !N Do. )td0 receies 4s. ,.0+++ as gratuity. :e is coered &y
the payment of gratuity Act0 1/,*. :e retires on ?ecem&er 1*0 *++1 after rendering serices
of 3. years and . months. At the time of retirement his monthly &asic salary and dearness
allowance was 4s.*05++6- and 4s. .++ respectiely. Dalculate the amount of exemption.
*# %n the a&oe example calculate the amount of exemption if ' was not coered &y
the Eratuity Act0 1/,*.
3# Mr. ' retired on 1
st
April *++, after sering for 3+ years and , months. :e was
getting salary 4s. 30+++6- pm from 1616*++1 to 3161*6*++1 and thereafter 4s. 30*++6- pm. :e
receied ?A O 4s. 10+++ pm "forming part of salary for computation of retirement &enefits#
and *Kcommission on sales achieed &y him. Turnoer achieed &y him during 1+ months
"preceding the month in which he retired# 4s. .0++0+++. :e receied a gratuity of 4s.
10310+++. Dompute the exempted amount of gratuity.
Pension Sec 16-1/-ii/:
Fncommuted !ension: !eriodical payment of pension.
Dommuted !ension: )ump sum payment in lieu of periodical payment.
Taxa&ility of commuted pension:
Fncommuted !ension is always chargea&le to tax for &oth goernment and non-goernment
employee.
(tatus of employee ,ratuity received/ not
received
-%emption
Eoernment $mployee Eratuity may or may not &e
receied
$xempted from Tax
Gon-Eoernment
$mployee
Eratuity is receied 2ne-third of the pension0
which he is normally
entitled to receie0 is
exempt from tax.
Eratuity is not receied 2ne-half of the pension0
which he is normally
entitled to receie0 is
exempt from tax.
15
$g:
1. ' retires from a priate company on 3+
th
April *++,. :e gets a pension of 4s. *5+++6- per
month. Fpto 3+
th
Hune *++,. From 1
st
Huly *++, onwards he gets two-third of his pension
commuted for 4s. 103+0+++6-. :e was not in receipt of any gratuity at the time of
retirement. Dompute the taxa&le amount of pension for the assessment year *++.-+/.
*. Dalculate the taxa&le pension of ' for the AY *++.-+/0 in the a&oe ex. if ' was in receipt
of Eratuity as per gratuity Act 1/,*.
Pension Scheme for an emlo$ee 8oinin1 Central Government on or after 9an 1. %334:
Fnder the new scheme it is compulsory for an employee to contri&ute 1+K of salary eery month
towards their pension account and a matching contri&ution will &e made &y the goernment. @uch
contri&ution will &e deducti&le under u6s .+ DD?. 8hen the pension is receied out of the
aforesaid amount it will &e taxa&le in the hands of recipient.
'ifferent form of Allowances:
Allowances is generally defined as a fixed Cuantity of money or other su&stance gien regularly in
addition to salary for the purpose of meeting some particular reCuirement connected with the
serices rendered &y the employee or as compensation for unusual conditions for that serice.
%t is fixed0 predetermined and gien irrespectie of actual expenditure.
,o!se rent Allowance:
The least of the following amount would &e taxa&le:
1. An amount eCual to 3+K of the salary0 where the residential house is situated at Mum&ai0
Iolkatta0 ?elhi or Dhennai and an amount eCual to 5+K of salary where residential house
is situated at any other place.
*. :ouse 4ent Allowance receied &y the employee.
3. The excess of rent paid oer 1+K of the salary.
@alary means &asic salary and includes dearness allowance and commission &ased on the fixed
percentage of turnoer.
$g:
Mr. ' is employed in a company in Agra. :e is getting a &asic salary of 4s. 3+++6- pm0
?earness allowance O1+K of &asic pay0 commission &ased on fixed percentage of
turnoer 4s. *50+++6- pa. Actual rent paid &y the assessee 4s. *03++6- pm. Dompute the
taxa&le amount of :4A.
Entertainment Allowance:
$ntertainment Allowance is first included in the salary income and thereafter a deduction is gien
on the following &asis:
(tatus of -mployee -%emption $mount
Eoernment
$mployee
)east of the following is deducti&le:
a# 4s. 3+++
&# *+K of &asic salary
c# actual amount of entertainment allowance
16
Gon-goernment employee $ntertainment allowance is not deducti&le
$.g.:
'0 a goernment employee gets 4s. 5+0+++ per annum as &asic pay. %n addition0 he receies 4s.
.03++ as entertainment allowance. :is actual expenditure on entertainment for official purpose
howeer exceeds 4s. /+++6-. 8hat would &e the amount of deduction9
Secial Allowances:
8hen exemption depends upon actual expenditure &y the employee:
%n these &elow mentioned cases the amount of expenditure is the least of the
Amount of allowance
The amount utiliAed pertaining to allowance
)ist of the allowances is as under:
1. Traeling Allowance6 transfer allowance
*. Doneyance allowance
3. ?aily allowance
5. :elper allowance
3. 4esearch Allowance
1. Fniform Allowance
8hen exemption does not depend upon the expenditure:
These allowances are exempt to the least of the following:
Amount of allowance
PAmount specified in rule *77
Name of allowance Nature of allowance Exemption
Tri&al Area6 scheduled
area allowance
This allowance if gien in Madhya
!radesh0 Tamil Gaidu0 Fttar
!radesh0 Iarnatka0 Tripura0
Assam0 8est 7engal0 7ihar0
2rrisa.
4s. *++ pm
Dhildren $ducation
Allowance
Eien for children education $xemption limited for 4s. 1++6-
per month per child limited to a
maximum of two children.
:ostel $xpenditure
Allowance
This allowance is granted to an
employee to meet the hostel
expenditure on is child
$xemption limited for 4s. 3++6-
per month per child limited to a
maximum of two children.
Transport Allowance %t is gien to an employee to meet
his expenditure for commuting
from his office to his residence.
$xempted to the extent of 4s.
.++6- per month
@pecial Dompensatory
" :ill Areas# Allowance
%t includes any special allowance
in the nature of special
compensatory "hill areas#
allowance or high altitude
allowance or uncongenial climate
Amount exempt aries from 4s.
3++ per month to 4s. ,+++ per
month.
17
allowance or aalanche
allowance.
Fnderground allowance Fnderground allowance is
granted to an employee who is
working in uncongenial0 unnatural
climate in underground mines.
$xemption limited to 4s..++ per
month.
Per:!isites:
!erCuisites can &e defined as any casual emolument or &enefit attached to an office or position in
addition to salary or wages. Therefore a perCuisite to &e taxa&le under the head salaries:
a. allowed &y an employer to an employee
&. allowed during the continuance of his employment
c. directly dependent upon serice
d. resulting in the nature of personal adantage to the employee
e. deried &y irtue of employers authority
!erCuisites: @ec 1,"*#
The term perCuisite is defined to include the following:
1. The alue of rent Qfree accommodation proided to the assessee &y his employer.
*. The alue of any concession in rent for accommodation proided &y the employee
3. Balue of any &enefit or amenity granted or proided free of cost or at concessional rate
in any of the &elow cases:
a# &y a company to an employee who is a director thereof
&# &y a company to an employee0 haing an su&stantial interest in the company
c# any person not included in any of the a&oe two categories haing a cash salary of
more than 3+0+++6-
5. any sum paid &y the employer in respect of any o&ligation which &ut for such payment
would hae &een paya&le &y the assessee
3. any sum paya&le &y the employer0 to effect an assurance on the life of the assessee or to
effect a contract for an annuity
1. the alue of any other fringe &enefits or amenity as may &e prescri&ed.
Taxa&ility of perCuisites:
8hen it is an o&ligation of $mployee:
%f the employer meets an o&ligation of an employee then the perCuisite is always chargea&le to
tax.
%f the employer0 pays any &ills which are in the name of employee0 then they are taxa&le in the
hands of employee.
8hen not an o&ligation of employee:
%n any other case0 where it is not an o&ligation of an employee0 the &elow ta&le list all perCuisites
which are taxa&le in the hands of the employee0 4emaining perCuisites are not taxa&le in
employees hands regardless of the expenditure incurred &y the employer.
Taxable Perquisites in the hands of the
employee
Exceptions
18
Furnished6 unfurnished house without rent or at
concessional rent
$xceptions are:
A rent free house in a remote
area,
hotel accommodation in case of
transfer for not exceeding 15
das!
@erices of a sweeper0 gardener0 watchman or
personal attendant
Taxa&le in the hands of @pecified
person only
@upply of gas0 electricity or water for household
purpose
Taxa&le in the hands of @pecified
person only
$ducation Facility to employeeRs family mem&ers Taxa&le in the hands of @pecified
person only
)eae trael Doncession $xempted if it is gien twice in a &lock
of four years.
Amount paya&le &y an employer directly or
indirectly to effect an assurance on the life of
employee or to effect a contract of an annuity
Any contri&ution to recogniAed
proident fund or super annuation
fund is exempted.
%nterest free or concessional loan Following are exempted:
"oan not exceeding 20,000,
"oan for medical treatment
!roiding use of moa&le asset !roiding use of computer6 laptop or
motor car
Transfer of moa&le asset Gone
Medical expenditure reim&ursement in excess of
4s. 130+++
Following are exempted:
#n em$loer% go&t hos$ital
'x$enditure in case of s$ecified
treatment
(ealth insurance $remium
)edical facilities outside #ndia
@pecified6 Gon specified $mployee:
The following are specified employees:
a# An employee who is a director
&# An employee0 haing a su&stantial interest in the company: *+K or more oting
power in the employer-company.
c# any person not included in any of the a&oe two categories haing a salary
"excluding the alue of all &enefits6 amenities not proided &y way of monetary
payment# of more than 3+0+++6-.
;al!ation of rent<free !nf!rnishe+ accommo+ation:
a# Dentral and @tate Eoernment $mployees:
The alue of such accommodation proided to employee is eCual to the license fee0
which would hae &een determined &y the central or state goernment.
&# !riate sector or other employees:
Balue of the perCuisite depends on salary of the employee and lease rent of the
accommodation.
19
opulation of city as per
2..1 census /here
accommodation is provided
)here the accommodation is
o/ned *y the employer
)here the
accommodation is taken
on lease or rent *y the
employer
$xceeding *3 lakhs 13K of salary in respect of
the period for which the
accommodation is occupied
&y the employee
)ower of amount of lease
rent paid6 paya&le or 13K
of the salary
$xceeding 1+ )akhs &ut not
exceeding *3 lakhs
1+K of salary in respect of
the period for which the
accommodation is occupied
&y the employee
)ower of amount of lease
rent paid6 paya&le or 13K
of the salary
Any other ,.3K of salary in respect of
the period for which the
accommodation is occupied
&y the employee
)ower of amount of lease
rent paid6 paya&le or 13K
of the salary
@A)A4Y:
For the purpose of aluation the salary includes
a# 7asic salary
&# ?earness allowance0 if terms of employment so proide
c# 7onus
d# Dommission
e# Fees
f# All other taxa&le allowance "excluding amount not taxa&le#
g# Any monetary payment which is chargea&le to Tax
$g:
'0 an employee of A7D"!# )td is posted in A<mer" population 1. )akhs#0 draws 4s. 3++0+++ &asic
salary0 4s. 1+0+++ as dearness allowance"forming part of salary#0 and 4s. 3+++ as commission .
7esides0 the company proides a rent free accommodation in A<mer. The house is owned &y
company and has a fair rent of 4s. 3+0+++ p.a. ?etermine the taxa&le alue of perCuisite.
;al!ation of rent<free f!rnishe+ accommo+ation:
Accommodation is not in a hotel:
a# Find out the alue of the perCuisite on the assumption that the accommodation is
unfurnished.
&# Baluation of furniture is done:
1+K per annum of the original cost of the furniture if the furniture is owned &y the
employer
actual hire charges paya&le0 if furniture is hired &y the employer.
Accommodation in a hotel:
The perCuisite is alued at the lower of the two amounts:
20
a# *5K of salary paid or paya&le for the period during which such accommodation is
proided in the preious year.
&# Actual charges paid or paya&le &y the employer to the hotel.
$g:
' receied during the preious year ending March 310*++,0 emolument consisting of &asic pay:
4s. 11*0+++: special allowance: 4s 1,0+++ and reim&ursement of medical expenditure: 4s.
3.++6-. :is employer has also proided a rent-free furnished flat in Mum&ai. )ease rent of the
unfurnished flat is 4s. 3+0+++. @ome of the household appliance proided to ' "with effect from
Hune1 0*++1# are owned &y the employer " cost price 4s. 31+++#. $mployer pays 4s. 1+0+++ as
hire purchase charges for the three air conditioners installed. Dompute the alue of perCuisite if:
a# ' is a @ecretary in the ministry of )aw and 4s. 5+++ is the license fee of unfurnished flat
as per the Dentral Eoernment rules.
&# ' is the managing director of A7D"!# )td. 8hat difference would it make if ' was
proided a hotel accommodation through out the year "tariff &eing 4s. 1*+0+++ per
annum#
;al!ation rovi+e+ at concessional rent:
The &elow rules will apply for furnished as well as unfurnished accommodation:
Find out the alue of perCuisites on the assumption that no rent is charged &y the
employer.
From the alue so arried deduct the rent charged &y the employer from the employee.
;al!ation of er:!isite in resect of free +omestic servant :
The alue of &enefit to the employee "or any mem&er of his household# resulting from the
proision &y the employer for serices of a sweeper0 a gardener0 a watchman or a personal
attendant0 shall &e the actual cost to the employer0 that is0 the total amount of the salary paid or
paya&le &y the employer "or any other person on his &ehalf# for such serices as reduced &y the
amount paid &y the employee for such serices.
;al!ation of er:!isite in resect of 1as. electricit$ or water rovi+e+ free of cost :
This perCuisite is taxa&le in the hands of specified employees only proided the connection is in
the name of employer. %f in the name of employee then the employer would &e paying on &ehalf
of the employee and is taxa&le in all cases.
0ode of valuation If purchased from outside If supplied *y the employer
from o/n sources
Dost to employer "A# Amount paid 6paya&le &y the
employer to the outside
agency
Manufacturing cost per unit
incurred &y the employer
@u&: Amount recoered
from the employee "7#
4ecoery from the employee 4ecoery from the employee
Taxa&le Balue of
perCuisite "A-7#
7alancing amount 7alancing amount
21
;al!ation in resect of free e+!cation:
This perCuisite is taxa&le in the hands of a specified employee only and only in those cases
where the educational institute is owned and maintained &y the employer or where such
education facility is proided in any institute &y reason of employeeRs employment with the
employer. The aluation of the facility would &e as under:
1ifferent (ituations $mount chargea*le to ta%
8here the education facility is proided to
employees children
8here the cost6 alue of &enefit
does not exceed 4s. 1+++ per child
per month
8here such amount exceeds 4s.
1+++6-
8here education facility is proided to other
mem&ers of the household
G%)
Dost of education in a similar instituted in a
similar locality Q 4s 1+++ Q amount recoered
&y employee
Dost of education in a similar instituted in a
similar locality Q amount recoered &y employee
%f the fee is paid &y the employer for employees children then there is no exemption aaila&le for
&oth specified and non-specified employees. @imilarly reim&ursement of school fees is also
taxa&le in the hands of &oth specified and non-specified employees.
;al!ation in resect of rovi+in1 !se of mova#le assets:
The alue of &enefit to the employee resulting from the use &y the employee "or any mem&er of
his household# of any moa&le asset "other than car0 computer and laptop# &elonging to the
employer shall &e determined at 1+K per annum of the actual cost of such asset. %t is taxa&le in
the hands of all employees i.e. specified and non specified. The taxa&le amount shall &e reduced
&y the amount0 if any0 recoered &y the employee.
0ode of 2aluation er3uisite in respect of mova*le asset
#/ned *y employee +aken on hire *y employee
A. Find the cost to the
employer
1+K p.a of actual cost Amount of rent paid or paya&le
22
7. Amount recoered
from the employee
4ecoery from the employee 4ecoery from the employee
Taxa&le Balue of
perCuisite "A-7#
7alancing amount "if positie# 7alancing amount "if positie#
;al!ation in resect of Transfer of mova#le Asset:
The aluation will &e done as follows:
0ode of 2aluation er3uisite in respect of sale of mova*le assets to employee
-lectronic Items/
computers
0otor car $ny other asset
Find out the cost to the
employer "A#
Actual cost to the
employer
Actual cost to the
employer
Actual cost to the
employer
Gormal wear and tear for
completed years for
which the asset was used
&y the employer for his
&usiness. "7#
3+K for each
completed year &y
reducing &alance
method
*+K for each
completed year &y
reducing &alance
method
1+K for each
completed year of
actual cost.
Amount recoered &y the
employee "D#
!aid &y employee for
acCuiring such asset
!aid &y employee for
acCuiring such asset
!aid &y employee for
acCuiring such asset
Taxa&le Balue
"A-7-D#
7alancing amount "if
positie#
7alancing amount "if
positie#
7alancing amount "if
positie#
$lectronic %tems refer to data storage and handling deices like computer0 digital diaries and
printers. They do not include household appliances.
;al!ation of 5e+ical *acilities:
Fixed medical Allowance is always chargea&le to tax. 7ut Medical expenditure reim&ursed in
excess of 4s. 130+++ is chargea&le to tax. The following are the exemptions to the rule that is in
the following cases there is no monetary ceiling:
%n employer hospital
goernment hospital
$xpenditure in case of specified treatment
:ealth insurance premium
Medical facilities outside %ndia
Foreign Medical Facility:
For medical treatment outside of the employee or any mem&er of the employee shall &e excluded
to the extent it is permitted &y the 4esere 7ank of %ndia.
:oweer the cost of trael of the employee6 any mem&er of his family and his one attendant shall
&e excluded only for those employee whose gross total income excluding such traeling
expenditure does not exceed 4s. *++0+++6-.
"eave travel concession:
23
The leae trael concession is exempted twice in a &lock of four years. And the exemption is
aaila&le to &oth %ndian citiAen and foreign citiAen. $xemption is &ased on actual expenditure and
is aaila&le only in respect of fare. %f the <ourney is performed &y the circuitous route then the
amount of exemption is aaila&le in respect of the shortest route.
The exemption is aaila&le for the family meaning spouse and two children0 parents0 &rothers and
sisters of indiidual who are mainly or wholly dependent on him.
Any other Facility proided to employee:
Any other facility or perCuisite like car0 lunch0 refreshment0 traeling0 touring gift0 credit cards0
clu&s etc proided to employee is not taxa&le in the hands of employee.
Permissi#le +e+!ction from Salar$ Income:
The following deductions are permitted from the head %ncome form salaries :
1. $ntertainment Allowance
As discussed earlier the entertainment allowance is first included in the salary and then
allowed as deduction.
*. !rofessional Tax
!rofessional Tax also known as tax on employment is allowed as deduction in the year in
which it is paid. %f the employer pays the professional tax0 it is first included in the salary
of the employee as a perCuisite as it is an o&ligation of the employee and then allowed as
deduction from the gross salary.
Provi+ent *!n+:
!roident Fund scheme is a retirement &enefit scheme. Fnder this scheme0 stipulated sum of
money is deducted from the employeeRs salary and an eCual matching contri&ution is made &y
the employer. The contri&ution is inested in gilt-edged securities and interest is earned thereon.
Thus the &alance of proident fund consist of:
a# $mployers contri&ution
&# %nterest on employers contri&ution
c# $mployees contri&ution
d# %nterest on employees contri&ution
=in+s of Provi+ent *!n+:
$mployees proident fund ca &e diided into three
a# @tatuary !roident Fund:
%t is set up under the proisions of !roident Fund Act0 1/,*. This fund is maintained &y
the Eoernment0 semi goernment organiAation0 local authority0 railway0 uniersity and
recogniAed educational institutions.
&# 4ecogniAed !roident Fund:
A proident fund to which the proident Fund Act01/,* applies is a recogniAed proident
fund. This fund is recogniAed &y the commissioner of %ncome Tax.
c# FnrecogniAed !roident Fund:
%f the commissioner of %ncome Tax does not recogniAe a proident fund then it will &e
under the category of unrecogniAed proident fund.
!u&lic !roident Fund:
The central goernment has esta&lished a pu&lic proident fund with a iew to &enefit the general
pu&lic and mo&iliAe saing. Any person whether salaried or self employed can inest in the same.
Taxa&ility of contri&ution to !roident fund.
24
(tatutory provident
Fund
!ecogni4ed
rovident Fund
"nrecogni4ed
rovident Fund
$mployers
contri&ution to
proident fund
$xempt from tax $xempt upto1*K of
salary. $xcess is
taxa&le
$xempt from tax
?eductions u6s .+D
on employees
contri&ution
Aaila&le Aaila&le Got Aaila&le
%nterest credited to
proident fund
$xempt from tax $xempt from tax up
to /.3KS excess of
interest oer this is
taxa&le
$xempt from tax
)ump sum payment
at the time of
retirement
$xempt from tax $xempt from tax in
some cases0 when
not exempt proident
fund will &e treated
as unrecogniAed
proident fund
'm$loees
contri*ution exem$t
#nterest on
em$loee
contri*ution taxa*le
under income from
other sources
'm$loer+s
contri*ution and
interest thereon is
taxa*le under the
head income form
salaries!
Gote:
1. @alary includes &asic salary0 dearness allowance6 dearness pay0 if terms of
employment so proide and commission if receied as fixed percentage of turnoer
achieed &y employee.
*. The accumulated &alance due and &ecoming paya&le to an employee
participating in a recogniAed proident fund will &e excluded from his total %ncome in the
following cases:
%f he has rendered continuous serice with his employer for a period of 3
years or more.
%f the employee is not a&le to fulfill the conditions of such continues
serice due to his serice haing &een terminate &y reason of his ill health or &y reason
of the contraction or discontinuance of the employers &usiness or any other reason
&eyond the control of assessee.
%f on the occasion of his retirement0 the employee o&tains employment0
to the extent the accumulated &alance due is transferred to another recogniAed proident
fund maintained &y such employer.
$g:
25
For the preious year *++1-+,0 ' su&mits the following information- 7asic @alary: 1*+0+++S
dearness allowance: 5+0+++ "51K forming part of salary for retirement &enefits#S commission:
1+++ "i.e. 1K of turnoer 1++0+++ achieed &y him# and children education allowance for his *
children 4s. ,*++. The employer contri&utes 4s. *+0+++ towards proident fund to which a
matching contri&ution is made &y '. %nterest credited in the proident fund account on March 130
*++, O 11Kcomes to /303++. %ncome of ' from other source is 4s. .10+++. Find the net income
of ' for the assessment year *++,-+. if the proident fund is "a# statutory proident fund0 "&#
recogniAed proident fund0 "c# unrecogniAed proident fund.
'e+!ction !>s ?3C:
@ection .+D is introduced from assessment year *++1-+, and it proides deduction in respect of
specified Cualifying amount paid or deposited &y the assesses in the preious year.
?eduction would &e aaila&le from gross total income
%t is aaila&le for :indu undiided family and indiiduals
?eduction is aaila&le on the &asis of specified Cualifying inestment6 contri&ution6
deposit6 payment made &y the assessee during the preious year.
Maximum amount deducti&le is 4s. 1++0+++ under sec .+D0 .+DDD and .+ DD?.
Practical Problems:
Mrs. ' "age 31 years# is a part time college lecturer in ?elhi. ?uring the year *++1-+,. she gets
&asic salary of 4s. 1*3++ up to Hune 3+0*++1 and 4s. 1*0,++ afterwards. 7esides she gets 3+K
of 7asic salary as house rent allowance0 4s. 113+ per month as dearness allowance ",1K of it
forming part of salary for computation of retirement &enefits and 4s. 3++ per month as
coneyance allowance which is entirely for personal purpose. 2n Huly 1+0*++1 the employer
transfer a music system to Mrs. ' on her completing 1+ years of serice" cost of music system
purchased on sep 10 *++3: **5,+# for 4s. ,3++. @he is a mem&er of statuary proident fund to
which &oth the employer and employee contri&utes O 1*K of &asic salary. Apart from the
minimum contri&ution0 she makes an additional contri&ution of 4s. 1++ per month to the proident
fund. ?uring the preious year *++1-+,0 4s. 131/. is paid to her for checking answer sheet for
different uniersities. ?etermine the taxa&le income and tax lia&ility on the assumption that she is
paying a rent of 4s. 5+++6- per month.
'" age *1# is an employee of a cooperatie society at Baranasi. ?uring the preious year *++1-
+,0 he gets 4s. 13++ per month as &asic salary0 4s0 .++ per month as &onus and 4s. 53+ per
month as dearness allowance" 3*K is forming part of the salary for computation of retirement
&enefits# and 4s. *++ per month as medical allowance " medical expense is howeer more than
4s *++ per month#. :e is a mem&er of a recogniAed proident fund to which the employer
contri&utes 11011* "' also makes a matching contri&ution#. ' gets an interest free loan
"repaya&le within . years# of 4s. .*033+ from the employer for purchasing a house. 7esides he
gets 4s. 1+03+0,1+ as interest on company deposits from a priate sector undertaking. ?etermine
the taxa&le income and tax lia&ility of ' for the assessment year *++,-+..
Ch.7 INCO5E *&O5 ,O(SE P&OPE&T@
This chapter deals with any income falling under the head income from house property.
Basis of Char1e -Sec %%/
%ncome is taxa&le under this head ;%ncome from :ouse propertyJ if the following three conditions
are satisfied:
1. The property should consist of any &uilding or land appurtenant thereto.
*. The assessee should &e the owner of the property
26
3. he property should not &e used &y the owner for the purpose of any &usiness or
profession carried on &y him0 the profit of which are chargea&le to income tax.
All the a&oe conditions should &e satisfied for a property income to &e made taxa&le under the
head income from house property.
$xceptions:
%n the &elow mentioned cases rental income is not charged to Tax:
a. %ncome from farmhouse.
&. Annual alue of ay one palace of any ex-ruler.
c. !roperty income of any local authority.
d. !roperty income of an approed scientific research association.
e. !roperty income of any educational institution and hospital
f. !roperty income of a trade union.
g. :ouse property held for charita&le purposes.
h. !roperty income of a political party
i. !roperty income used for own &usiness or profession
<. 2ne self occupied property.
7asis of computing income for a let out house property:
%ncome under the head house !roperty 4s.
Eross Annual Balue
)ess Municipal Taxes
Get Annual Balue
)ess: ?eduction u6s *5
, @tandard ?eduction
, %nterest on &orrowed capital
%ncome under the head house property
-----
-----
----
----
----
----
Gross Ann!al ;al!e: Sec %0-1/
Tax under the head income from house property is a tax on the inherent capacity of the &uilding
to yield income and not a tax on rent. The standard selection of the measure of the income is the
annual alue.
Eross annual alue depends upon the following factors:
a# Municipal Baluation
&# Fair rent
c# @tandard rent
d# Annual 4ent "i.e. rent for the preious year or that part of the preious year when the
property is aaila&le for letting out and there is no acancy and unrealiAed rent#
e# FnrealiAed rent
f# )oss of rent &ecause of acancy
g# Actual rent receied6 receia&le "d-e-f#
27
@teps for determining the gross Annual Balue:
.1 ?etermine the reasona&le expected rent as a# or &# whicheer is higher. %f the amount so
determined is higher then the amount in c# limit the amount to c#.
.* %f Annual rent less unrealiAed rent is higher then the amount specified under step 1 then
Annual rent less unrealiAed rent is su&stituted for the alue in step 1.
.3 %n case of acancy the gross annual alue so determined is ad<usted for the period for
which the house is occupied.
E.g.:
5!s. In thousand6
Particular
A
B C E !
Municipal aluation "a#
Fair rent "&#
@tandard rent "c#
Annual rent if property is let out through the
year +1-+, "d#
FnrealiAed rent "e#
!eriod for which property remains acant
)oss due to acancy "f#
15+
153
15*
11.
15
1
,
1.+
1.3
1,3
11.
-
-
-
1.+
1.3
1,3
11.
1
T
15
15+
153
15*
11.
,+
3
5*
*31
*1*
*51
*3*
5*
3
1+3
15+
13+
1*+
/1
--
1+
.+
8hen unrealiAed rent shall &e excluded:
FnrealiAed rent shall &e excluded from rent receied6 receia&le only if the following conditions
are satisfied:
1. The tenancy is &ona fide.
*. The defaulting tenant has acated0 or steps hae &een taken to compel him to acate the
property.
3. The defaulting tenant is not in occupation of any other property of the assessee.
5. The assessee has taken all reasona&le steps to institute legal proceedings for the
recoery of the unpaid rent or satisfies the assessing officer that legal proceeding would
&e useless.
?educt municipal taxes:
From the gross annual alue municipal taxes hae to &e deducted to arrie at net annual alue.
Municipal alue are deducti&le only if
1. these taxes are &orne &y the owner.
*. are actually paid &y him during the preious year.
'e+!ctions !>s %4:
The list of deductions u6s *5 is exhaustie that is no other deduction is allowed except whateer
are explicitly mentioned. The following two deductions are allowed:
28
1. @tandard deduction
*. %nterest on &orrowed capital
@tandard deduction:
3+K of net annual alue is deducti&le irrespectie of any expenditure incurred &y the taxpayer.
%nterest on &orrowed capital:
%nterest on &orrowed capital is allowa&le as deduction0 if capital is &orrowed for the purpose of
purchase0 construction0 repair0 renewa&le or reconstruction of the house property.
Interest of pre7construction period:
%nterest of pre-construction period is allowed as deduction in fie eCual installments.
Interest of the current period:
a. Dapital is &orrowed on or after April 10 1///:
%nterest on &orrowed capital is allowed as deduction to the extent of 4s. 13+0+++6-
proided the loan is taken for the acCuisition or construction of the property. :oweer the
loan is taken for the any other purpose "e.g. 4econstruction0 repair etc# the maximum
amount deducti&le is 4s. 3+0+++.
&. Dapital is &orrowed &efore April 10 1///:
The interest on &orrowed capital is allowed as deduction up to 4s. 3+0+++6-
#nterest on *orro-ed ca$ital is allo-ed as deduction e&en in those cases -hen the annual &alue of the house
$ro$ert is nil!
Taxa#le income from self<occ!ie+ roert$:
8hen the property consist of:
a. Any house which is occupied for own &usiness
&. 2ne house which is self occupied
c. A house property which is not actually occupied &y the owner owing to employment or
&usiness6 profession0 carried on at any other place.
%n the aforementioned cases the annual alue of the house property shall &e taken as nil.
Ahen more than one roert$ is occ!ie+ for resi+ential !rose:
8hen more than one house is occupied &y a person during the preious year for is residential
purpose0 only one house is treated as self- occupied and all other houses will &e deemed to &e let
out.
%n case of deemed to &e let out the gross annual alue is taken to &e the higher of municipal
aluation or fair rent whicheer is higher to the maximum of standard rent.
Ahen a art of roert$ is self<occ!ie+ an+ a art is let o!t or a ho!se is self< occ!ie+
for the art of $ear an+ let o!t for the art of the $ear:
29
%n computing the income in the aforesaid situation the fair rent attri&uta&le to the self- occupied
period6 portion should &e excluded in determining the annual alue. @imilarly the house tax and
interest in loan attri&uta&le to Uelf-occupied period6 portion should &e ignored. %t means the house
tax and interest on loan attri&uta&le to self-occupied portion6period cannot &e deducted to arrie
at income from house property.
$.g.:
From the following information0 compute the annual alue of the house for AY +,-+.
Municipal Balue- 4s. /+0+++
Municipal taxes paid- 4s. *+0+++
:ouse was occupied for the first six months and for remaining six months it was let out O 4s.
.+++ p.m.
@pecial proisions when unrealiAed rent is recoered su&seCuently:
8hen a deduction has &een allowed to the assessee for any unrealiAed rent during the preious
year and realiAed su&seCuently then that amount shall &e deemed to &e the income of the
preious year and shall &e chargea&le to tax under the head ;income from house propertyJ as per
the proisions of the act whether the assessee is an owner of that property or not.
!ro&lems:
1. From the information gien &elow0 find out the income under the head ; %ncome under the
house propertyJ for the assessment year *++,-+. and *++.-+/.
' "4s# Y "4s#
Municipal aluation
Fair rent
@tandard rent
Annual rent
FnrealiAed rent for the preious year *++1-+,
FnrealiAed rent for the preious year *++,-+V
FnrealiAed rent of *++1-+, realiAed during *++,-+.
%nterest on &orrowed capital
1S+0+++
1.30+++
1,+0W++
*110+++
3+0+++
G%)
*.0+++
310+++
1/+0+++
1/30+++
1,+0+++
1,30+++
3+0+++
Gil
*.0+++
31+++
The a&oe properties hae &een let out throughout the preious years *++1-+, and *++,-+..
Municipal taxes are paid at the rate of *+K.
30
Ch.B Income !n+er the hea+ B!siness C Profession
This head is coered &y sec *. to sec 55?. This chapter deals with proisions which hae a
&earing on the computation of taxa&le income.
Basis of char1e -sec %?/:
The following income is chargea&le to tax under the head ;!rofit and gains from &usiness and
professionJ:
1. !rofit and gain of any &usiness and profession
*. any compensation or other payment due or receied &y any person specified in sec *."ii#
any compensation receied on termination of a managing agency of a foreign
company
any compensation receied on termination of a managing agency of a %ndian
company
Any compensation receied on termination of any agency or modification of
terms of agency.
Any compensation receied from goernment or a corporation on taking oer of
management of property or &usiness.
*. %ncome deried &y a trade0 professional or similar association from specific serices
performed for its mem&ers.
3. The alue of any &enefit or perCuisites0 whether conerti&le into any money or not0 arising
from the &usiness or the exercise of any profession.
5. !rofit on sale of license "export6 import license#
3. Dash assistance "su&sidy receied &y any person against exports under any scheme of
goernment
1. Any draw&ack of any duty of customs or excise.
,. Any interest0 salary0 &onus0 commission or remuneration receied &y a partner from firm.
.. Any sum receied for not carrying out any actiity in relation to any &usiness or not to
share any know-how0 patents0 copyrights0 trademarks etc.
/. income from a speculatie transaction
1+. !rofits from an illegal &usiness.
31
Meaning of term &usiness:
The term &usiness refers to any economic actiity carried out with a iew to earn profit. As per
section *"13# term &usiness is defined as ;any trade0 commerce0 manufacture or any adenture in
the nature of trade0 commerce or manufactureJ. The definition coers eery facet of an
occupation carried on &y a person with a iew to earn profit. The term &usiness is a word of wide
import and in terms of fiscal statue it must &e construed in a &road rather than in a restricted
sense.
Thus !roduction of goods from raw material0 &uying and selling of goods to make profits and
proiding serices to others are different form of &usiness.
!rofession and Bocation:
As per sec *"31# profession includes ocation. The term profession is an occupation of reCuiring
purely intellectual skill or manual skill attained in special knowledge. 8hile the term ocation
implies natural a&ility of a person for some work. The distinction &etween the term &usiness0
profession or ocation is not important for the purpose of income tax.
Basic Princiles for arrivin1 at #!siness Income:
2ne has to keep in mind the following general principles for arriing at &usiness income:
1. 7usiness or profession should &e carried on &y assessee.
*. 7usiness or profession should &e carried on during the preious year.
3. %ncome of the preious year is taxa&le during the following assessment year.
5. Tax incidence arises in respect of all &usiness or profession.
3. )egal ownership 6s &eneficial ownership.
1. 4eal profit 6s anticipated profit
,. 4ecoery of sum already allowed as deduction.
.. Mode of &ook entries not releant.
)oses incidental to &usiness:
Eeneral commercial principles hae to &e kept in iew while determining the real and true profits
of a &usiness and profession. Dapital receipts are not taxa&le. !rofits can only arise out of the
trading receipts and only the profit element of such receipt can &e made taxa&le.
7usiness losses can &e allowed as deduction if the following conditions are satisfied:
1. )osses are reenue in nature.
*. )osses should &e incurred during the preious year.
3. )osses should &e incidental to the &usiness and profession carried on &y assessee.
5. %t should not &e notional or fictitious
3. %t should hae &een actually incurred and not merely anticipated to incur in future.
1. There should not &e any direct or indirect restriction under the act against the deducti&ility
of such loss.
"pecific deductions under the #ct :
@ection 3+ to 3, coer expenses which are expressly allowed as deduction while computing
&usiness income0 section 5+0 5+A and 537 coer expenses which are not deducti&le.
&ent. rates taxes reairs an+ ins!rance for #!il+in1 -Sec 03/:
Fnder this section following deductions are allowed for premises used for &usiness or profession:
32
1. The rent of premises0 the amount of repair "not &eing capital expenditure#0 if he has
undertaken to &ear the cost of repair.
*. Any sum on account of land reenue0 local rates or municipal taxes. XX
3. Amount of any premium in respect of insurance against risk of damage or destruction of
the premises.
XX The amount is deducti&le as per the proision of sec 537.
&eairs an+ ins!rance of machiner$. lant an+ f!rnit!re -sec01/:
The expenditure incurred on current repair "not &eing capital expenditure# and insurance in
respect of plant0 machinery and furniture used for &usiness purpose is allowed as deduction u6s
31.
'ereciation Allowance -Sec 0%/
%n order to aail depreciation u6s 3*0 the following conditions need to &e satisfied:
1. Asset must &e owned &y the assessee.
*. %t must &e used for the purpose of &usiness or profession
3. %t should &e used for the releant preious year
5. ?epreciation is aaila&le on tangi&le as well as intangi&le asset.
Fse of the asset in the preious year:
The asset in respect of which depreciation is claimed must hae &een used for the purpose of the
&usiness. Gormal depreciation "i.e. full year depreciation# is aaila&le if an asset is used is put to
use at least for sometime during the preious year.
?epreciation allowance is limited to 3+K of normal depreciation0 if the following two conditions
are satisfied:
8here an asset is acCuired during the preious year
%t is used for the purpose of &usiness or profession for less than 1.+ days during that
preious year.
%f the a&oe conditions are satisfied0 the assessee would &e entitled to 3+K of normal
depreciation0 een if the asset is used for a single day.
?epreciation Aaila&le:
Fnder the %ndian %ncome Tax0 one can claim depreciation on the following assets:
Tangi&le Asset 7uilding0 !lant0 machinery or furniture
%ntangi&le Assets acCuired after March 310
1//.
Inow-how0 patents0 copyrights0 trade marks0
licenses0 franchise0 or any other &usiness or
commercial rights of similar nature.
8lock of $ssets sec 251169
The term &lock of assets means a group of assets falling within a class of assets comprising of:
Tangi&le assets0 &eing &uilding0 machinery0 plant or furniture
%ntangi&le assets0 &eing know-how0 patents0 copyrights0 trade marks0 licenses0 franchise0
or any other &usiness or commercial rights of similar nature
%n respect of which the same percentage of depreciation is prescri&ed.
)ritten do/n 2alue sec :;5<69
8ritten down alue for the year is determined as under:
33
1. Find out the depreciated alue at the &eginning of the year as on 1
st
of April.
*. To this alue add actual cost of the asset acCuired during the year.
3. From the resultant year0 deduct money receied6 receia&le "together with scrap alue# in
respect of that asset which is sold0 discarded0 demolished or destroyed during that year.
5. The resulting amount is the written down alue of the &lock for that year.
3. The amount of reduction under step 3 cannot exceed the alue of asset computed under
step 1 and step *.
Computation of depreciation
?epreciation is calculated at the prescri&ed rate on the written down alue. :oweer the following
exceptions are there for the aforesaid:

-%ception 19 )hen the /ritten do/n value of a *lock of assets is reduced to 4ero.
Go depreciation is admissi&le where written down alue has &een reduced to Aero0 though the
&lock of assets does not cease to exist on the last day.
-%ception 29 If the *lock of asset ceases to e%ist
%f a &lock of assets ceases to exist or if all assets of the &lock hae &een transferred and the
&lock of assets is empty on the last day of the preious year0 no depreciation is admissi&le in
such case.
$x:
' owns the following assets on April 10 *++1:
Assets 8ritten down alue on
April 10 *++1
"4s.#
4ate of depreciation "K#
Furniture
7uilding
!lant and Machinery
!lant and Machinery
!lant and Machinery
*+01,+
/++03++
*1+0+++
15++0+++
*+30+++
1+
1+
*+
13
5+
?uring the preious year *++1-+,0 the following assets are purchased &y ':
?ate of
!urchase
?ate when the asset
is put to use Asset
Dost
4s.
4ate of
depreciation "K#
161+6*++1
*+6+16*++1
3+6116*++1
161*6*++1
/61+6*++1
**6+16*++1
161*6*++1
1+61*6*+1
Trade Mark
!lant
Furniture
7ooks for
professional
use
130+++
1/+0+++
15+0+++
*,++
*3
5+
13
1++
?etermine the amount of depreciation for the assessment year *++,-+..
(na#sor#e+ 'ereciation:
8hen in the assessment of the assessee full effect cannot &e gien to depreciation allowance in
any preious year owing to there &eing no profit6 gain or there &eing insufficient profit6 gain0 the
&alance of depreciation allowance is called una&sor&ed depreciation.
@teps for dealing with una&sor&ed depreciation:
34
@tep 1 ?epreciation allowance of the preious year is first deducti&le from the income
under the head ;!rofit Y gains from &usiness and !rofessionJ.
@tep * %f depreciation cannot &e fully deducted under the head ;!rofit Y gains from
&usiness and !rofessionJ &ecause of inadeCuate or no profit0 it is deducti&le from
income chargea&le under the other head of income "except income from salary#
for the same assessment year.
@tep 3 %f depreciation allowance0 is still una&sor&ed then it can &e carried forward to the
su&seCuent assessment year"s#.
There is no time limit for the purpose of carrying forward of una&sor&ed depreciation0 it can &e
carried forward for indefinite period.
The following priority order is to &e followed when the una&sor&ed depreciation is to &e set off in
su&seCuent year:
a. Durrent depreciation
&. 7rought forward &usiness loss
c. Fna&sor&ed depreciation
For the a&oe setoff continuity of the &usiness is not necessary.
$x:
' su&mits the following details
!reious years
*++1-+, *++,-+.
%ncome from salaries
7usiness !rofit "&efore depreciation#
Durrent depreciation
%ncome from other sources
1++0+++
110+++
1350+++
1+0+++
*++0+++
1.0+++
13*0+++
.+0+++
?etermine the taxa&le income of ' for the assessment year *++,-+. and
*++.-+/.
Tea> coffee> r!##er +eveloment acco!nt -Sec00AB/
To claim the deduction under this section the following conditions need to &e satisfied:
1. The assessee must &e engaged in tea0 coffee or ru&&er plantation.
*. %t must make a deposit in special Account opened with GA7A4?" Gational &ank for
Agriculture and rural deelopment#
3. The amount has to &e deposited within 1 months from the end of the preious year or
&efore the due date of furnishing the return of income0 whicheer is earlier.
5. The accounts of the assessee should &e audited.
Amount of deduction:
The least of following is allowed as deduction:
1. A sum eCual to the amount deposited in the special account as discussed a&oe.
*. 5+K of profit of such &usiness computed under the head ;profit and gains of &usiness
and professionJ &efore making any deduction under section 33A7 and also &efore
ad<usting any &ought forward losses.
The &elow points are also to &e kept in mind:
1. 8hen a deduction is claimed under this section0 no deduction shall &e allowed in respect
of such amount in any other year.
35
*. 8hen a deduction is allowed and claimed under this section to an association of persons
or &ody of indiiduals no deduction shall &e allowed to any mem&er of the association or
&ody in respect of the same.
3. Any excess deposit in special account made during the preious year is not treated as
deposit in any other year.
8ithdrawal of amount:
The amount standing to the credit of the special account may &e withdrawn only in case of:
1. closure of &usiness
*. dissolution of firm
3. death of an assessee
5. partition of :FF
3. liCuidation of company
Amount cannot &e utiliAed for certain purpose:
Go deduction can &e claimed in respect of any amount utiliAed for the purpose of
1. Any machinery or plant installed in the residential houses or a guest house.
*. Any office appliances except computer
3. Any plant or machinery whose full cost is allowed to &e de&ited to !Y ) account.
5. Any new plant or machinery to &e installed for setting up of a new unit to produce any article
included in eleenth schedule.
Site restoration f!n+ -Sec 00ABA/:
An assessee can claim deduction u6s 33A7A if he satisfies following conditions:
1. The assessee must &e engaged in production of petroleum6 natural gas in %ndia.
*. The assessee has an agreement with the agreement with the central goernment.
3. %t must make a deposit in special account to &e opened with @7% or deposited in an
account named site restoration fund to &e opened in accordance with Eoernment of
%ndia with the ministry of !etroleum.
5. The deposit should &e made within specified time limit i.e. &efore the end of preious
year.
3. The accounts of assessee should &e audited.
Amount of ?eduction:
a# @um eCual to amount deposited in the special account.
&# *+K of the profit of the &usiness as computed under the head profit and gains from
&usiness and profession &efore this deduction.
8hicheer is less is allowed as deduction.
The &elow points are also to &e kept in mind:
1. 8hen a deduction is claimed under this section0 no deduction shall &e allowed in respect
of such amount in any other year.
*. 8hen a deduction is allowed and claimed under this section to an association of persons
or &ody of indiiduals no deduction shall &e allowed to any mem&er of the association or
&ody in respect of the same.
8ithdrawal of amount:
The amount can &e withdrawn only for the purpose specified in the scheme or deposit scheme.
Amount cannot &e utiliAed for certain purpose:
Go deduction can &e claimed in respect of any amount utiliAed for the purpose of
3. Any machinery or plant installed in the residential houses or a guest house.
1. Any office appliances except computer
,. Any plant or machinery whose full cost is allowed to &e de&ited to !Y ) account.
36
.. Any new plant or machinery to &e installed for setting up of a new unit to produce any article
included in eleenth schedule.
&eserve for shiin1 #!siness -Sec 00AC/:
Go deduction under section 33AD is aaila&le from the assessment year *++3-+1.
The Cuantum of deduction is an amount not exceeding 1++K of the total income " computed
&efore making any deduction under this section and u6s .+# as is de&ited to the profit and loss
account of the preious year in respect of which the deduction shall &e allowed shall &e
admissi&le.
The amount of deduction to &e claimed must &e transferred to a resere account. The amount to
&e credited to such resere account must not exceed twice the amount of the paid up share
capital "excluding the amount capitaliAed from reseres# of the assessee company. %n the year in
which the resere exceeds this limit deduction u6s 33AD will &e restricted to the amount which is
sufficient to reach this limit.
The amount credited to the resere account shall &e utiliAed &y the assessee company &efore the
expiry of . succeeding preious yrs for
a. AcCuiring a ship for the purpose of &usiness of assessee.
&. Fntil the acCuisition of a new ship0 such resere may &e utiliAed for the &usiness of the
assessee &ut not for distri&ution &y way of diidends or profits or remittance outside %ndia
as profits or for the creation of any asset outside %ndia.
%n case amount of resere is not utiliAed in the aforesaid manner the amount of resere shall &e
treated in the following manner:
a. %n case amount of resere is utiliAed for a purpose other than as gien a&oe0 the amount
so utiliAed for other purpose shall &e deemed as profit of the preious year in which it is
so utiliAed.
&. %n case amount of resere is not utiliAed to acCuire a ship within . exceeding preious0
the amount so unutiliAed shall &e deemed as income of the preious year next following
the period of . succeeding preious years.
c. %n case ship is acCuired within succeeding preious years0 it cannot &e sold or otherwise
transferred for .succeding preious years from the preious year in which it s acCuired. %n
case it is sold or transferred &efore the expiry of . succeeding preious years0 the
amount of resere utiliAed in acCuiring the ship shall &e deemed as profit of preious year
in which ship is sold or transferred.
Exen+it!re on Scientific &esearch -Sec 07/:
@cientific research means any actiities for the extension of knowledge in the fields of natural or
applied science including agriculture0 animal hus&andry or fisheries.
Fnder this section amount deducti&le in respect of scientific research may &e classified as under:
$xpenditure on research carried on &y
assessee
Dontri&ution to outsiders
1. 4eenue expenditure
*. Dapital expenditure
3. $xpenditure on an approed in-house
research
1. Dontri&ution to an approed
scientific research association.
*. !ayment to Gational )a&oratory
4eenue expenditure incurred &y assessee:
4eenue expenditure incurred &y assessee himself on scientific research0 a deduction is allowed
only if the research is related to the &usiness.
37
!re-commencement period expense:
Any pre-commencement expenditure &eing reenue in nature "other than expenditure proiding
perCuisites to employee# incurred &efore the commencement of &usiness on scientific research
related to the &usiness are deducti&le in the preious year in which the &usiness is commenced.
Dapital expenditure incurred &y assessee himself:
8here the assessee incurs any expenditure of a capital nature on scientific research related to
his &usiness0 the whole of such expenditure incurred in any preious year is allowa&le as
deduction for that year. The deduction is aaila&le een if the releant asset is not put to use for
research and deelopment in that particular year.
The aforesaid deduction is not aaila&le in respect of capital expenditure incurred on the
acCuisition of any land. And no depreciation is allowa&le on such capital asset.
$xpenditure on approed in-house research:
A weighted deduction is allowed in respect of expenditure on in-house research and deelopment
expense incurred &y the assessee. :oweer the following points need to &e kept in iew:
1. The taxpayer is a company
*. %t is engaged in the &usiness of &io-technology or in the &usiness of manufacture or
production of articles or things notified &y the &oard.
3. The research and deelopment facility is approed &y the prescri&ed authority and
sufficient proision for audit is done for the accounts maintained &y the facility.
Amount of deduction
A sum eCual to one-one half times of expenditure so incurred shall &e allowed as deduction.
Darry forward and set off deficiency shall &e done in the same manner as for the una&sor&ed
depreciation.
Dontri&ution made to outsiders:
8here the assessee does not himself carry on scientific research &ut makes contri&utions to
other institutions for this purpose0 a weighted deduction is allowed.
The amount of deduction is eCual to one and one fourth times of any sum paid to a scientific
research association or to a uniersity0 college or other institution or to a national la&oratory.
@cientific research carried on a&oe may or may not &e related to the &usiness of the assessee.
AmortiDation of telecom license fees -sec 07ABB/:
?eduction under this section is aaila&le if the following conditions are satisfied:
1. The expenditure is capital in nature.
*. %t is incurred for acCuiring any right to operate telecommunication serices.
3. The expenditure is incurred either &efore the commencement of &usiness or thereafter at
any time during any preious year.
5. The payment for the a&oe has &een actually made to o&tain license.
The payment will &e allowed as deduction in eCual installment oer the period for which the
license is alid. Any profit or loss on sale of telecom license is to &e taken into consideration
while computing &usiness income.
Exen+it!re on eli1i#le ro+!ct or scheme Sec. 07AC:
?eduction is aaila&le under this section for promoting social and economic welfare.
Any taxpayer can claim deduction &y making a payment of any sum to a pu&lic sector
company or a local authority or to an association or institution approed &y a national
committee for carrying out eligi&le pro<ect or scheme.
A company can also directly incur expenditure in respect of eligi&le pro<ect and claim the
same as deduction.
38
Pa$ment to associations an+ instit!tions for carr$in1 o!t r!ral +eveloment
ro1rammes:
This section proides deduction of sums paid &y assessee to:
1. Any association or institution which has its o&<ect for carrying out any program of
rural deelopment approed.
*. Any association or institution which has its o&<ect the training of persons for
implementation of a rural deelopment program.
3. The national fund for rural deelopment set up &y the goernment.
5. The national Fr&an !oerty $radication Fund set up and notified &y the goernment.
AmortiDation of reliminar$ exenses -Sec07'/:
Those expenses which are incurred &efore commencement of &usiness for setting up any
undertaking or &usiness are termed as preliminary expenditure.
?eduction under this section is aaila&le to an %ndian company or a resident non corporate
assessee.
Nualifying $xpenditure:
)egal charges for drafting any agreement &etween the assessee any other person
relating to setting up of &usiness of the assessee.
)egal charges for drafting the memorandum and articles of association if the taxpayer is
a company.
!rinting expenses of the memorandum and article of association if the taxpayer is a
company.
4egistration fees of a company under the proisions of the companyRs Act.
$xpenses in connection with the pu&lic issue of shares or de&entures of a company0
underwriting commission0 &rokerage and charges for drafting0 typing0 printing and
adertising of the prospectus.
Maximum ceiling:
The aggregate expenditure cannot exceed the following-
In the case of corporate $ssessee In the case of non7corporate $ssessee
3K of cost of pro<ect
3K of capital employed0 whicheer
is more
3K of the cost of pro<ect.
Dost of !ro<ect means the actual cost of fixed assets which are shown in the &ooks of assessee
as on the last day of the preious year in which the &usiness of the assessee commences.
Amount of deduction:
2ne fifth of the Cualifying expenditure is allowa&le as deduction in each of the fie successie
years &eginning with the year in which the &usiness commences.
AmortiDation of exen+it!re in the case of amal1amation > +emer1er -Sec 07''/
The proisions of the section are as under:
1. The taxpayer is an %ndian company.
*. The expenditure is incurred for the purpose of amalgamation or demerger.
3. The expenditure is allowed as deduction in fie successie years in fie eCual
installments.
5. The first installment is deducti&le in the year in which amalgamation or demerger takes
place.
AmortiDation of exen+it!re !n+er vol!ntar$ retirement scheme -Sec 07 ''A/
39
1. $xpenditure is incurred in any preious year &y way of payment of any sum to an
employee in connection with his oluntary retirement.
*. @uch expenditure is allowed as deduction in fie eCual installments &eginning with the
year in which the expenditure was incurred.
8here the undertaking of an %ndian company entitled to deduction for amortiAation of oluntary
retirement expenses is transferred &efore the expiry of 3 years in a scheme of amalgamation or
demerger0 the deduction for the remaining period shall &e aaila&le to the resulting company.
@imilar proisions are applica&le in the case of succession of firm or proprietary concern.
:oweer0 in the year of transfer and su&seCuent years0 no deduction will &e aaila&le to the
amalgamating company0 demerged company0 firm or proprietary concern.
Amortisation of Exen+it!re on rosectin1 etc for certain minerals -Sec07E/:
This section proides for the amortisation of expenditure incurred wholly and exclusiely on any
operation relating to prospecting for the minerals or group of associated minerals or on the
deelopment of a mine or other natural deposit of any such minerals or group of associated
minerals as specified in the seenth schedule.
The expenditure which is incurred during the 5 years prior to the commercial production is
allowed as deduction in 1+ eCual installments oer a period of 1+ years.
%n case where the installment of amortiAed expenditure relating to a gien year cannot &e wholly
a&sor&ed &y the profit against which the amortisation is to &e allowed0 the una&sor&ed amount is
to &e carried forward to the su&seCuent year. @uch carry forward is permitted till the tenth year
from the commercial production after which it will lapse.
Other +e+!ctions -Sec 0B/:
The following deductions are proided under this section:
1. %nsurance premium:
The amount of any premium paid in respect of insurance of stock or stores used for the
purpose of &usiness or profession is allowed as deduction.
*. %nsurance premium &y federal milk cooperatie society:
%nsurance on the life of cattle owned &y the mem&ers are allowed as deduction.
3. !remium on the health of employee
%nsurance premium paid on the health of employee is allowa&le as deduction.
5. 7onus or commission to employee
Any &onus or commission paid to employee is allowa&le as deduction on payment &asis
and the amount gien should not &e otherwise paya&le as profit or diidend.
3. %nterest on &orrowed capital
%f the money is &orrowed for the purpose of &usiness or profession then the interest
thereon is allowed as deduction.
1. ?iscount on Aero coupon &onds
?iscount on Aero coupon &onds "&eing the difference &etween the amount receied and
amount paya&le on the redemption6 maturity of &onds# is allowed as deduction on pro-
rata &asis oer the life of &ond.
These are issued &y any infrastructure capital company or a pu&lic sector company on or
after Hune 10 *++3.
,. $mployer contri&ution to !roident Fund and @uperannuation fund:
The deduction is allowed as per the limits laid down for the same.
.. Dontri&ution towards approed gratuity fund.
/. $mployees contri&ution towards staff welfare scheme
Any sum receied from employee towards contri&ution for !roident fund or staff welfare
scheme is allowed as deduction proided it is paid on or &efore date.
1+. 8rite off allowance for animals
!roided the animals are used for &usiness or profession then loss on sale. Theft or
death is allowed as deduction.
40
11. 7ad ?e&t.
A &ad de&t is allowa&le as deduction su&<ect to the following conditions:
There must &e a de&t
?e&t must &e incidental to the &usiness or profession of the assessee.
%t must hae &een taken into account in computing assessa&le income.
?e&t must hae &een written off in the &ooks of account of the assessee.
Transfer to proision for &ad and dou&tful de&ts shall not &e taken into account.
1*. Transfer to @pecial resere:
Fnder this section deduction is aaila&le to a financial corporation including a pu&lic and
goernment company which is engaged in proiding the long term finance for industrial or
agriculture deelopment.
Amount of ?eduction:
The amount transferred during the preious year to the special resere account.
5+K of the profits deried from the &usiness actiities.
*++K of "paid up share capital and general resere as on the last day of the
preious year# minus the &alance of the special resere account.
8hicheer is lower of the a&oe.
13. Family !lanning $xpenditure:
Any &ona fide expenditure incurred &y a company for the purpose of promoting family
planning among its employees0 is allowa&le as deduction.
%f the expenditure is of capital nature0 one-fifth of such expenditure is allowa&le as
deduction for the preious year in which it was incurred and the &alance in four eCual
installments.
Any expenditure which could not &e allowed as deduction due to inadeCuate profit shall
&e set off and carried forward as una&sor&ed depreciation.
15. Any amount paid &y employer as premium under keymanRs insurance scheme is fully
allowed.
Adertising $xpense
?eduction is not aaila&le in respect of expenditure incurred &y an assessee on adertising in any
souenir0 &rochure0 tract0 pamphlet or the like pu&lished &y political party.
General 'e+!ction -Sec06/
This is a residuary section in order to claim deduction under this sectionS the following conditions
need to &e satisfied:
1. The expenditure should not &e in the nature prescri&ed &y section 3+ to 31.
*. %t should not &e in the nature of capital expenditure.
3. %t should not &e personal expenditure of the assessee.
5. %t should hae &een incurred in the preious year.
3. %t should hae &een incurred with respect to the &usiness carried on &y the assessee.
1. %t should hae &een expended wholly and exclusiely for the purpose of &usiness.
,. %t should not hae &een incurred for any purpose which is an offence or prohi&ited &y law.
"pecific disallowances under the #ct:
The following expenses gien &y sections 5+05+A and 537 are expressly disallowed under the
act.

Amo!nt not +e+!cti#le !n+er sec 43
The following amounts are not deducti&le from the income as per this section:
1. Any sum paid for which T?@ was deducti&le &ut was not deducted or was deducted &ut
paid to the goernment within the preious year or in su&seCuent year within the
prescri&ed time.
41
:oweer if the tax is paid su&seCuently then the deduction is allowed in the year in which
it is paid.
*. @ecurities transaction tax
3. Fringe 7enefit Tax
5. %ncome tax
3. 8ealth Tax
1. Tax on non monetary perCuisites paid &y the employer.
Amo!nt not +e+!cti#le !n+er sec 43A
1. Any payment made &y an assessee to a relatie or a person haing su&stantial interest in
the company is disallowed to the extent it is excessie or unreasona&le.
:ence if the expenditure is excessie or unreasona&le haing regard to the fair market
alue of the goods0 serices0 facilities etc0 then the excessie portion shall &e disallowed.
*. Amounts not deducti&le in respect of the expenditure exceeding 4s.*+0+++6-
%f an assessee makes any payment in respect of any expenditure for an amount
exceeding 4s. *+0+++6- &y way of cash or &y a &earer cheCue then *+K of the said
payment will &e disallowed as deduction.
:oweer0 in some cases payment in excess of 4s. *+0+++6- is allowed as deduction like
when the payment is to goernment or &ank0 or in a place where no &anking facility exist0
payment made for agriculture produce0 horticulture or animal hus&andry etc.
3. Amount not deducti&le in respect of contri&utions to non-statuary funds.

Amo!nt not +e+!cti#le !n+er -sec 40B/
The following expenses are allowed as deduction only on payment &asis:
1. any sum paya&le &y way of tax0 cess0 duty or fees
*. Any sum paya&le &y an employer &y way of contri&ution to proident fund or
superannuation fund or any other fund for the welfare of employee.
3. Any sum paya&le as &onus or commission to employee for serice rendered.
5. Any sum paya&le as interest on any loan or &orrowing from a pu&lic financial institution or
a state financial corporation or a state industrial inestment corporation.
3. %nterest on any loan or adance taken from a scheduled &ank including co-operatie
&ank.
1. Any sum paya&le &y an employer in lieu of leae at the credit of his employee.
The a&oe expenses are deducti&le in the year in which the payment is made. :oweer if
payment is made &efore the due date of filing of return then the deduction will &e allowed in the
year in which the expense is incurred.
eemed profits and their chargeability:
The following receipts are chargea&le to tax as &usiness income:
1. !ecovery against deduction
%n any earlier years a deduction was allowed to the taxpayer in respect of loss of
expenditure or against trading lia&ility incurred &y the assessee will &e taxa&le in the
current year if he has o&tained a refund of such trading lia&ility whether the concerned
&usiness is &eing carried on or not.
2. (ale of assets used for scientific use9
8here any capital asset used in scientific research is sold without haing &een used for
other purposes and the sale proceeds to the extent of deduction earlier allowed u6s33 will
&e chargea&le to tax as profits from &usiness and profession whether the &usiness for
which the deduction was allowed is in existence or not.
3. !ecovery of 8ad 1e*ts :
42
@imilarly any &ad de&ts allowed as deduction which was recoered su&seCuently will &e
assessed as income to the extent of deduction allowed whether the &usiness is in
existence or not.
:. !ecovery after discontinuance of *usiness or profession9
8here any &usiness or profession is discontinued &y reason of the retirement or death of
the person carrying on such &usiness0 any sum recoered after the discontinuance of the
&usiness or profession will &e deemed to &e the income of the recipient and charged to
tax in the year of receipt.
Taxability of undisclosed $ncome % $n&estment:
1. Cash Cre+it -Section B?: /
Fnder the section 1. unexplained cash credit in the &ooks of the assessee for which the
assessee is una&le to offer any explanation or if the explanation offered is not to the
satisfaction of the assessing officer0 the same will &e treated as income of the preious year
in which such credit appears in the &ooks of accounts of assessee.
%. (nexlaine+ Investment -Section BE: /
Fnder section 1/ unexplained inestment for which the assessee is not a&le to offer
satisfactory explanation or which is not recorded in the &ooks of the assess will &e deemed
to the income of the assessee in the financial year.
0. (nexlaine+ mone$ -Section BEA/:
Any unexplained money0 &ullion or <ewellery which is not recorded in the &ooks of assessee
for which the assessee is not a&le to offer explanation to the satisfaction of assessing
officer will &e treated as the income of the assessee in the financial year in which the
assessee is found to &e the owner of the same.
4. amo!nt of investment etc not f!ll$ +isclose+ in the #oo2s of acco!nt -Section BEB/
Any inestment in &ullion0 <ewellery or other alua&le articles the alue of which is not fully
recorded in &ooks for which assessee do not gie any satisfactory explanation will &e
treated as income of the financial year for which it is found
7. (nexlaine+ Exen+it!re -Section BEC/:
Any unexplained expenditure in any financial year for which the assessee offers no
satisfactory explanation a&out the source is taxa&le as income in the financial year where
such unexplained expenditure is incurred.
B. Amo!nt #orrowe+ or reai+ on h!n+i -Section BE'/:
Money &orrowed &y hundi and repayment of it otherwise through an account payee
cheCue or &ank draft will &e treated as income in the preious year in which such &orrowing
or repayment is made otherwise than through account payee cheCue.
Section 44 A
For the purpose of this section specified profession means a profession of medicine0
engineering0 architecture0 film artiest0 accountancy0 authoriAed representatie0 company
secretaries.
%n the case of specified profession if the gross receipt from profession do not exceed 4s 103+0+++
no specified &ooks hae &een prescri&ed and the assessee has to maintain such &ooks to ena&le
the assessing officer to assess the income of the assessee.
%n case of specified profession if the gross receipt from profession exceeds 4s 103+0+++
prescri&ed &ooks like
a. Dash 7ook
&. Hournal if accrual @ystem of accounting is followed
c. )edger
43
d. @erially num&ered receipt for any receipt exceeding 4s *3
e. 2riginal &ill and receipt for any payment exceeding 4s 3+ to &e maintained
%n the case of non specified profession or &usiness where the gross income do not exceed 4s
10*+0+++ or gross receipt do not exceed 4s 1+0++0+++ no reCuirement for maintaining any &ooks
of accounts
%n the case of non specified profession or &usiness where the income exceeds 4s 10*+0+++ or
gross receipt exceeds 4s 1+0++0+++ such &ooks which may ena&le the assessing offices to
compute the income should &e maintained
Section 44 AB
Following person are reCuired to get their accounts Audited
ifferent Tax payers 'hen they are co&ered by the pro&isions of compulsory audit
under section ((#B.
A person carrying on
&usiness
A person carrying on
profession
%f the total sales0 turnoer or gross receipt in &usiness for the
preious year"s# releant to the assessment year exceed or
exceeds 4s 5+ )akhs.
%f his gross receipt in profession for the preious year"s# releant to
the assessment year exceeds 4s 1+ )akhs.
A person coered under
section 55A?0 55 A$0
55AF0 5577 or 55777
%f such person claims that the profits and gains from the &usiness
are lower than the profits and gains computed under this section
"irrespectie of his turnoer#.
"pecial Pro&isions for computing income on estimated basis
Taxa$ers en1a1e+ in the #!siness of civil constr!ction -Sec44A'/
1. Any Taxpayer who is an indiidual0 :FF0 A2!0 72%0 firm0 Dompany0 Do-
operatie @ociety or any other person who is engaged in the &usiness of ciil construction
or supply of la&or for ciil construction work is coered under the section.
*. Any person whose gross receipt from 7usiness does not exceed 4s 5+
)ac.
3. %ncome from a&oe mentioned &usiness is estimated at .K of the gross
receipt and all deduction under section 3* to 3. including depreciation is deemed to hae
&een already allowed and no further deduction is allowed.
5. %f he so assessed than he is not reCuired to maintain &ooks of accounts
as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under
section 55 A7.
3. A tax payer can declare his income to &e lower than the deemed profit
&ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to
get his &ooks of accounts audited under section 55 A7.
Taxa$er en1a1e+ in the #!siness of l$in1. leasin1 or hirin1 tr!c2s -Sec 44AE/
1. Any Taxpayer who is an indiidual0 :FF0 A2!0 72%0 firm0 Dompany0 Do-
operatie @ociety or any other person who is engaged in the &usiness of plying0 hiring or
leasing goods carriages. The taxpayer owns not more than 1+ goods carriage at any time
during the preious year.
44
*. %ncome from a&oe mentioned &usiness is calculated as &elow:
Type of goods Darriage $stimated %ncome
:eay goods Behicle 4s 33++ for eery month "or part of a month# during which the
goods carriage is owned &y the tax payer.
2ther than heay goods
Behicle
4s 3*3+ for eery month "or part of a month# during which the
goods carriage is owned &y the tax payer.
3. All deduction under section 3* to 3. including depreciation is deemed to
hae &een already allowed and no further deduction is allowed.
5. %f he so assessed than he is not reCuired to maintain &ooks of accounts
as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under
section 55 A7.
3. A tax payer can declare his income to &e lower than the deemed profit
&ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to
get his &ooks of accounts audited under section 55 A7.
Taxa$ers en1a1e+ in the #!siness of retail tra+ers -Sec44A*/
1. Any Taxpayer who is an indiidual0 :FF0 A2!0 72%0 firm0 Dompany0 Do-
operatie @ociety or any other person who is engaged in the &usiness of retail trade of any
goods or merchandise is coered under the section.
*. Any person whose gross receipt from 7usiness does not exceed 4s 5+
)ac.
3. %ncome from a&oe mentioned &usiness is estimated at 3K of the gross
receipt and all deduction under section 3* to 3. including depreciation is deemed to hae
&een already allowed and no further deduction is allowed.
5. %f he so assessed than he is not reCuired to maintain &ooks of accounts
as per section 55 AA and is also not reCuired to get his &ooks of accounts audited under
section 55 A7.
3. A tax payer can declare his income to &e lower than the deemed profit
&ut than he has to maintain &ooks of accounts as per section 55 AA and is also reCuired to
get his &ooks of accounts audited under section 55 A7.
$.g.:
@ri Ge&ukumar is the proprietor of a &usiness. :is profit and loss account for the year ended
March 310 *++3 is as follows.
Partic!lars Amo!nt Partic!lars Amo!nt
To esta&lishment 50.++ 7y Eross profit 103+0.5+
To 4ent0 rates and taxes *0/++ 7y %nterest on got securities 305++
To Eeneral charges ,3+ 7y 4ent from house property 305++
To :ousehold expenses 310,3+
To Dommission 103++
To discount and allowance 53+
To proision for &ad de&ts 10*++
To !ostage and telegrams *,+
To )aw Dharges 53+
To adertisement 133+
To Eifts and !resents 13+
To Fire %nsurance !remium "for
goods#
31+
To @ale Tax 1053+
To 4epairs and renewals "not for
&usiness premises#
5.+
45
To )oss on sale of motor car "used
for priate purpose#
10.++
To life %nsurance !remium on life
of his grandson
10,/+
To 8ealth tax ,5+
To %nterest on Dapital 33+
To Audit Fee 3++
To %nterest on 7ank )oan 103.+
To proision for depreciation *03++
To proision for %ncome Tax 30/++
To Get profit transferred to Dapital .+0.5+
Total 111015+ 111015+
Following further information is gien:
"a# Actual 7ad de&ts written off during the year amount to 4s 33+.
"&# Amount of income tax actually paid during the year is 4s 50*++.
"c# Adertisement expenses include 4s 33+ spent on special adertisement campaign to open a
new shop in the market.
"d# ?epreciation allowa&le is 4s 10,++ as per %ncome Tax 4ules.
"e# )aw Dharges are in connection with a Trademark.
"f# @ri Ge&ukumar carries on his &usiness from rented premises0 half of which is used as his
residence. 4ent0 rates and taxes include 4s *05++ paid as rent of the premises during the
year.
Dompute the 7usiness %ncome of @ri Ge&ukumar. 8orking notes are to form part of your answer.
Mr. ' gies you the following particulars from his account for the year ended 31
st
March0 *++3. All
items except "iii# hae &een de&ited to ! Y ) A6c.
Partic!lar Amo!nt
"1# Get profit s per !rofit and )oss A6c *++0+++
"*# Dontri&ution to un recogniAed proident fund 5+0+++
"3# )ump sum consideration paid during 1//,-/. 1*+0+++
For acCuiring know Q how0 nothing has &een deducted
To ! Y ) account this year on this account
"5# !roision for %ncome Tax and 8ealth Tax 3+0+++
"3# Adertisement expenses "This includes 4s 50+++ on
Adertisement in a souenir pu&lished &y a political party# *+0+++
"1# !roision for excise duty 3+0+++
",# Amount paid to am&edkar uniersity for research in 1+0+++
@ocial science. The research does not relate to the &usiness of assessee.
".# :oliday home $xpenses 330+++
"/# !remium paid to the general insurance corporation 1+0+++
2f %ndia &y cheCue for the %nsurance of health of employees
"1+# !enalty imposed &y costumes authority for &reach of law *30+++
46
"11# %nterest on late payment of sale tax 10+++
Dompute income from 7usiness
Dh., %GD2M$ FG?$4 T:$ :$A? DA!%TA) EA%G
Any profit and gain arising on Transfer of a capital asset is chargea&le under sec 53. @ec 510 5,
gies such transactions which are not considered as Transfer. 8hile @ec 350 35 70 35 ?0 35 $D0
35 F0 35 E0 35 EA Y 35: gies the list of exemptions.
Basis of char1e sec 47:
Dapital gainRs gain tax lia&ility arises only when the following conditions are satisfied:
There should &e a capital asset
The capital asset is transferred &y the assessee
@uch Transfer takes place during the preious year
Any profit or gain arises as a result of transfer
@uch profit or gain is not exempt from tax under @ec 350 3570 35?0 35$D0 35F0 35E0
35EA.
Caital Assets:
A capital asset is defied to include property of any kind0 whether fixed or circulating0 moa&le or
immoa&le0 tangi&le or intangi&le. The following assets are0 howeer0 excluded from the definition
of ;Dapital AssetsJ.
1. Any stock and Trade0 consuma&le or raw material held for the purpose of 7usiness or
profession.
*. Moa&le property including wearing apparels and furniture held for his personal use or for
the use of any mem&er of is family.
3. Agricultural land in %ndia0 which is situated in rural area.
5. 1.3K Eold 7onds0 1/,, or ,K Eold 7onds0 1/.+ or national defense 7onds0 1/.+ issued
&y Dentral Eoernment.
3. @pecial &earer &onds0 1//1.
1. Eold ?eposit 7onds issued under Eold ?eposit @cheme0 1///.
Short term > "on1 Term Caital Asset:
@hort Term capital assets means a capital asset held &y an assessee for not more than 31
months immediately prior to its date of Transfer. Any asset which is held &y assessee for more
than 31 month is known as )ong Term Dapital Asset.
$xception:
%n the following cases an asset held for not more than 1* months is treated as short term capital
asset.
$Cuity or preference share in a Dompany.
@ecurities "like de&entures0 goernment securities#
Fnits of FT%
Fnits of a mutual fund specified under section 1+"*3?#
(ero Doupon &onds
Transfer of Caital Assets:
Transfers in relation to capital assets include sale0 exchange or relinCuishment of asset or the
extinguishment of any rights therein or the compulsory acCuisition thereof under any law Z@ec *
"5,#[.
47
Following transactions are not regarded as Transfer:
1. ?istri&ution of capital assets at the time of liCuidation of a Dompany.
*. ?istri&ution of assets at the partition of :FF.
3. Transfer of a capital asset under a gift or will or under an irreoca&le trust.
5. Transfer of a capital asset &y a Dompany to its 1++K su&sidiary.
3. Transfer of share of %ndian Dompany held &y a foreign company to another foreign
company in case of amalgamation.
1. Transfer of capital asset of a &anking Dompany to another &anking company n case of
amalgamation.
,. Transfer in a demerger of capital assets &y the demerged company to the resulting
company.
.. Transfer of capital assets "&eing FDD7 or E?4# &y a non resident to another non
resident.
/. Transfer of agricultural land in %ndia march 10 1/,+.
1+. Transfer of a capital asset "&eing work of art0 manuscript0 painting etc# to goernment 6
uniersity 6 national museum etc.
11. Transfer &y way of conersion of &onds or de&entures into shares.
1*. Transfer &y way of exchange of a capital asset &eing mem&ership of a recogniAed stock
exchange for shares of a company.
13. Transfer of land &y a sick %ndustrial Dompany which is managed &y its workers Do-
operatie.
15. Transfer of a capital asset &y a firm to Dompany in case of conersion of firm into
Dompany.
13. Transfer of a capital asset0 &eing a mem&ership right held &y a mem&er of recogniAed
stick exchange in %ndia.
11. Transfer of a capital asset to a Dompany in the case of conersion of preparatory
concern into a Dompany.
1,. Transfer inoled in a scheme of lending of securities.
5o+e of com!tation of caital 1ains -Sec4?/:
Computation of (hort +erm Capital ,ain Computation of 'ong +ern Capital ,ain
Find out full alue of consideration
?educt the following
$xpenditure incurred wholly and
exclusiely in connection with such
transfer
Dost of acCuisition
Dost of improement
From the resulting sun deduct the
exemption proided &y section 3570 35?0
35E and 35EA
The &alancing amount is short term capital
Find out full alue of consideration
?educt the following
$xpenditure incurred wholly and
exclusiely in connection with such
transfer
%ndex cost of acCuisition
%ndex cost of improement
From the resulting sum deduct the
exemption proided &y sections 350 3570
35?0 35$D0 35F0 35E0 35EA.
The &alancing amount is long term capital
48
gain. gain.
Cost of Ac:!isition -Sec 4E/:
Dost of AcCuisition of an asset is the alue for which it was acCuired &y the assessee. $xpenses
in the capital nature for completing the title for the property are included in the cost of acCuisition.
Dost of asset for the preious owner @ec 5/"1#:
The cost of preious owner is deemed to &e the cost of acCuisition to the assessee in cases
where capital asset &ecomes the property of assessee under any of the mode descri&ed &elow:
1. AcCuisition of property in case of partial or total partition of :FF
*. AcCuisition of property in case of gift or will
3. AcCuisition of property in case of :
@uccession or inheritance
Any distri&ution of assets on the dissolution of a firm0 72% or A2!
?istri&ution of assets on the liCuidation of a company
Fnder a transfer of reoca&le trust or an irreoca&le trust.
Any transfer from a wholly owned su&sidiary to its holding company or ice ersa.
Fnder any scheme of amalgamation.
The holding period of the preious owner is also counted for determining whether the amount is
short term or long term capital asset nut indexation will &e allowed from the time when the asset
is acCuired &y the assessee.
Dost of AcCuisition &eing the fair market alue as on April10 1/.1:
%n the following cases0 the assessee may take at his option0 either actual cost or the fair market
alue of the asset " other than a deprecia&le asset# as on April 10 1/.1 as cost of acCuisition:
a# 8here the capital asset &ecame the property of the assessee &efore April 10 1/.1.
&# 8here the capital asset &ecame the property of the assessee &y any mode referred to in
sec 5/"1# and the property was originally acCuired &efore Aril 10 1/.1.
%n case of deprecia&le asset cost of acCuisition is taken as the 8?B at the end of the preious
year along with any expenses on transfer of the asset. Any such capital gain is treated as short
term capital gain.
'etermination of in+exe+ cost of Ac:!isition> in+exe+ cost of imrovement:
%ndexed Dost of AcCuisitionL
Dost of AcCuisition x Dost inflation index for the year in
Dost inflation index for the year in which the asset is sold6 transferred
which the asset is acCuired61/.+-.1
%ndexed cost of improementL
Dost of improement incurred x Dost inflation index for the year in
Dost inflation index for the year in which which the asset is sold6 transferred
the improement took place
$.g.:
1. From the following information compute the capital gains for the assessment year*++.-
+/

)ouse $ )ouse $$
49
?ate of !urchase
Dost of AcCuisition
Dost of Add Donstruction in 1/.+
Fair market alue on 1-5-1/.1
cost of add construction in 1//3-/5
@ale of property in *++1-+,
May 1/,1
1/+0+++
1+0+++
1,30+++
5.0.++
1+3+0+++
?ec 1/,/
*3+0+++
*30+++
33+0+++
,30*++
1/0++0+++
Dost inflation index are:
1/.1-.*L 1++
1//3-/5L *55
*++1-+,L 31/
' )td owns the following assets:
Fnits of FT% :ouse !roperty
Dost of AcCuisition 15+0+++ ,+0+++
?ate of AcCuisition March1+0 *++5 March 1+0 *++5
These capital assets "no depreciation is claimed# are transferred &y ' )td to its wholly owned
su&sidiary company @ )td on April 10 *++3. 2n Huly ,0 *++1 these assets are transferred &y @ ltd
for a consideration of 4s. 53+03++ "i.e. units 4s.*13,++0 house property 4s.*350.++#. Dompute
the capital gain chargea&le to tax in the case of @ )td for the assessment year *++,-+..
Dapital Eain in case of conersion of capital asset into stock in trade:
The fair market alue of the capital asset on the date on which it was conerted or treated as
stock in trade shall &e deemed to &e full alue of the consideration receied or accruing as a
result of the transfer of the capital asset.
Transfer of capital asset &y a !artner to a firm:
%n case an asset is transferred &y a partner to a firm then the capital gain is chargea&le to tax in
the preious year in which such transfer takes place and the amount recorded in the &ooks of
account of the firm as the alue of asset shall &e taken as full alue of consideration receied as
a result of such transfer.
?istri&ution of capital asset on dissolution:
%n case a firm is dissoled and the asset is gien6sold to a partner than the capital gain will &e
calculated as taxa&le in the hands of firm and it is taxa&le as income in the year it is transferred.
For computing capital gain the fair market alue is taken of the asset is taken as the full alue of
consideration.
Dapital gain in case of self generated assets:
%f any self generated assets like goodwill or right to carry on &usiness0 tenancy right route permit
etc is sold then the cost of acCuisition is taken as nil. 2nly the cost of transfer is allowed as
deduction.
Dapital Eain on transfer of 7onus share:
ifferent "ituations "pecial Pro&isions
Dost of AcCuisition of &onus shares allotted
&efore April 10 1/.1
Fair market alue on April10 1/.1 is taken as
cost of acCuisition
Dost of AcCuisition of &onus shares allotted
on or after April 10 1/.1
Dost of AcCuisition is taken as (ero
50
!eriod of holding &onus shares The period of holding shall &e determined
from the date of allotment of &onus shares
"and not from the date of acCuisition of original
shares#
C#P$T#* +#$N, E-E.PT$/N"
Caital Gain arisin1 form the transfer of the resi+ential Proert$ -Sec 74/
$xemptions under following conditions are met.
1. 2nly and indiidual and :FF can claim exemption under this section.
*. $xemption is aaila&le only if the capital asset which is transferred is a residential
house property0 whose income is taxa&le under the head %ncome from house
property.
3. :ouse property should &e a long term Assets.
5. A new house property should &e purchased 6 acCuired within a specified time limit.
!articular Time limit
For purchasing a new residential property
For constructing a new residential property
8ithin 2ne year &efore or within * years after
date of Transfer of house property.
The Donstruction should &e Domplete within 3
years from the date of Transfer of house
property.
3. Amount of $xemption:
The amount of capital gain generated on Transfer of 4esidential house
property.
The amount inested in purchasing or constructing new residential property0
8hich eer is lower.
*. %f the amount is not utiliAed for purchase 6 construction of the new property till the due
date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain
deposit account scheme.
3. %f the new residential property is transferred within a period of three years from the
date of acCuisition or completion of construction the amount of assumption gien
earlier will &e taken &ack.
$xample:
From the following information compute the capital gains lia&le to tax in the A.Y *++3-+5.
"A# Dost of acCuisition of residential house in 1/.3 -.5 -3.5+++
"7# @ale consideration on *-+1-*++* - 1,0++0+++
" D# Dost of Donstruction of the new residential house &y - 3++0+++
The due date of filing the return for AY *++3-+5
The cost of inflation %ndex in 1/.3-.5 was 111 and *++*-+3 it was 55,.
Caital Gain arisin1 form the transfer of A1ric!lt!ral lan+ -Sec 74B/
$xemption under this section are aaila&le if following proisions are met:
1. The tax payer is an indiidual
*. he transfers an agricultural land it may &e a long term 6 short term capital assets
3. Agricultural land was used &y the taxpayer or his parents for agricultural purpose for a
period of two years immediately preceding the date of Transfer.
5. The tax payer has purchased another land of agricultural purpose within a period of two
years from the date of transfer.
3. )and may &e in ur&an or rural area.
1. Amount of exemption:
a. The amount of capital gain generated on Transfer of agricultural land.
&. The amount inested in purchasing a new agricultural land.
51
8hich eer is lower.
*. %f the amount is not utiliAed for purchase of the new agricultural land till the due date of
su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit
account scheme.
3. %f the new agricultural land is transferred within a period of three years from the date of
acCuisition the amount of exemption gien earlier will &e taken &ack.
$xample:
Agricultural land purchased in 1/.5-.3 for 4s 513++ is sold for 4s 3.++++ on +1-+3-
*++*. The assessee purchased another piece agricultural land on 1-+.-*++3 for 4s ,++++ and
deposited 4s 3++++ on *5-+1-*++3 in capital gain account scheme 1//..Dalculate capital gain
chargea&le to tax in to tax for AY *++3-+5. The cost %nflation %ndex in 1/.5 Q .3 was 1*3 and
*++3-+5 was 55,.
Caital Gain !n+er com!lsor$ ac:!isition of lan+ an+ #!il+in1 formin1 art of in+!strial
!n+erta2in1 -section 74'/
$xemption under this section is aaila&le if following proisions are met:
1. The taxpayer may &e an indiidual0 :FF0 Firm0 Dompany or any other person
*. The asset may &e short term 6 long term
3. Dapital gain arises on transfer &y way of compulsory acCuisition of land or &uilding which
forms a part of an industrial undertaking &elonging to the taxpayer.
5. @uch land or &uilding was used &y the assessee for the purpose of the industrial
undertaking for at least two years preceding the date of compulsory acCuisition.
3. Assessee has purchased nay other land or &uilding within a period of three years from
the date of receipt of compensation or constructed a &uilding within such period.
1. Gewly acCuired land or &uilding should &e used for the purpose of shifting or
reesta&lishing the said undertaking or setting up another industrial undertaking.
,. Amount of $xemption:
a. The amount of capital gain generated on Transfer &y way of Dompulsory
acCuisition of land or &uilding.
&. The amount inested in new land of &uilding.
8hich eer is lower.
*. %f the amount is not utiliAed for purchase 6 construction of the new land of &uilding till the
due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain
deposit account scheme.
3. %f the new land or &uilding is transferred within a period of three years from the date of its
acCuisition or completion of construction the amount of exemption gien earlier under
section 35 ? would &e taken &ack.
Caital Gain not to #e char1e+ on investment in certain #on+s -sec 74 EC/
The salient features of section are as under:
1. The taxpayer may &e an indiidual0 Firm0 Dompany or any other person
*. A long term capital asset is transferred &y an assessee during the preious year.
3. 8ithin six month from the date of transfer of the assets the assessee should inest the
whole or any part of the capital gain in long term specified assets.
5. from the assessment year *++1-+, this specified assets are any &onds redeema&le after
three years issued after march 310 *++1 &y
Gational highway authority of %ndia
4ural $lectrification Dorporation )td.
3. Amount of $xemption:
i. The amount of capital gain generated on Transfer of capital asset.
ii. The amount inested in specified asset as discussed a&oe.
8hich eer is lower.
*. The cost of specified assets shall not &e eligi&le under section .. and deduction under
section .+D.
3. The inestment made on or after +1-+5-*++, can not exceed 4s 3+ lacs.
52
5. %f the specified asset is transferred 6 conerted into money or any loan or adance is
taken on the security of specified asset within 3 year from the date of acCuisition than the
exemption gien will &e charged to tax in the year in which it was so transferred 6
conerted into money or any loan or adance is taken
Caital Gain on transfer on a lon1 term caital asset other than a ho!se roert$ -Sec 74
*/:
$xemption under this section is aaila&le if following proisions are met:
1. 2nly and indiidual and :FF can claim exemption under this section.
*. $xemption is aaila&le only if the capital asset which is transferred is a long term capital
asset &ut other than a residential house property "e.g. a plot of land0 gold0 share etc#
3. A new house property should &e purchased 6 acCuired within a specified time limit.
!articular Time limit
For purchasing a new house
For constructing a new house
8ithin 2ne year &efore or within * years after date of
Transfer of original asset.
The Donstruction should &e Domplete within 3 years
from the date of Transfer of house property.
5. The exemption is aaila&le only if on the date of transfer of the original asset0 the
taxpayer does not own more than one residential house other than the new house.
3. Amount of exemption will &e calculated as under:
Dost of new house x Dapital gain
Get sales consideration
1. %f the amount is not utiliAed for purchase 6 construction of the new property till the due
date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain deposit
account scheme.
,. %f the new residential property is transferred within a period of three years from the date
of acCuisition or completion of construction the amount of assumption gien earlier will &e
taken &ack.
.. %f the assessee purchases a new house0 within a period of two years of the date of
transfer of original asset0 or construct within a period of 3 years of the transfer of such
asset0 a residential house other than the new house then the exemption will &e
withdrawn.
Caital Gain on transfer of assets in cases of shiftin1 of in+!strial !n+erta2in1 from !r#an
area -Sec 74G/:
To claim exemption under this section following conditions need to &e fulfilled:
1. A capital asset used for the purpose of an industrial undertaking situated in an ur&an area is
transferred.
*. The transfer is effected in the course of0 or in conseCuence of0 the shifting of such industrial
undertaking to any area other than an ur&an area.
3. The assessee has within a period of one year &efore or 3 years after the date on which the
transfer took place:
a# !urchased a new machinery or plant for the purpose of &usiness of the industrial
undertaking in the area to which the said undertaking has shifted.
&# AcCuired &uilding or land or constructed &uilding for the purpose of his &usiness in
the said area.
c# @hifted the original asset and transferred the esta&lishment of such undertaking to
such area.
d# %ncurred expenses on such other purposes as may &e specified in a scheme framed
&y the central goernment.
5. The amount of exemption is eCual to-
53
The amount of capital gain generated on transfer of capital assets in case of shifting
of an industrial undertaking
The cost and expenses incurred in relation to all or any of the purposes mentioned in
point 3.
8hicheer is lower.
3. %f the amount is not utiliAed for purchase 6 construction 6acCuisition of the new asset till the
due date of su&mission of 4eturn of %ncome than it should &e deposited in capital gain
deposit account scheme.
1. %f the new asset is transferred within a period of three years from the date of its
purchase6construction6acCuisition the amount of exemption gien earlier under section 35 E
would &e taken &ack.
$.g.:
The following information is gien &y Mrs. ' "*1 years# and Mrs. Y "3* years# for the assessment
year *++,-+.
Mrs. '
"4s#
Mrs. Y
"4s#
@ales consideration of eCuity shares
%ndexed cost of acCuisition of eCuity shares
@ales consideration of Eold
%ndexed cost of acCuisition of gold
2ther income
!!F contri&ution
,+0+++
3.+0+++
.++0+++
1+0+++
5*+0+++
*+0+++
/30+++
1530+++
1++0+++
5+0+++
1++0+++
1+0+++
Find out the net income and tax lia&ility of Mrs. ' for the assessment year *++,-+. firstly on the
assumption that eCuity shares are transferred on 2cto&er 310*++1outside a recogniAed stock
exchange and secondly on the assumption that eCuity shares are transferred on Fe&ruary
*,0*++,in the G@$.
Ch.8 Income from other sources
;%ncome from other sourcesJ is the last head of income specified under sec 15. @ection 31 gies
the scope of income chargea&le under this headS section 3, and 3. specifies the &asis of
computation of such income. 7esides this the chapter deals with all the proisions of the act
which hae a &earing on the computation of income taxa&le as income from other sources.
54
Basis of charge:
@pecial !roisions @ec31 "*#:
The following incomes are always chargea&le under the head %ncome from other sources:
1. diidend
*. Any winning from lotteries0 crossword puAAles0 races including horse races0
card games and other games of any sort or from gam&ling or &etting of any form or nature
whatsoeer.
3. Any sum receied &y the assessee from his employees as contri&ution to any
staff welfare scheme.
5. %nterest on securities.
3. %ncome from machinery. !lant or furniture let out on hire.
1. 8here any sum of money receied during a preious year without
consideration &y an indiidual or a :FF from any person or persons exceed 4s. 3+0+++0 the
whole of such sum.
Eeneral !roisions @ec31 "1#:
%ncome from other sources is the last and residual head of income. A source of income which
does not fall under any of the other four heads of income is to &e computed and &rought to
charge under section 31.
For e.g.: income from su&letting0 interest on &ank deposit and loans0 interest on royalty0 directors
fees0 ground rent0 agricultural income from outside %ndia etc.
Dividend and its taxability :
Any diidend declared0 distri&uted or paid &y a company to its shareholders is chargea&le to
taxed under the head ;%ncome from other sourcesJ irrespectie of the fact whether the shares are
held &y the assessee as inestment or stock in trade.
%f diidends are distri&uted after March 310 *++3:
For diidend declared &y a domestic company any diidend declared and distri&uted or paid after
March 310 *++30 then it is not taxa&le in the hands of shareholders. 2n such diidends the
company declaring diidend will pay diidend tax under section 1132.
%f a loan or adance gien is deemed as diidend under sec *"**# "e# then such loan or adance
is taxa&le u6s31 a diidend in the hands of recipient. :oweer the a&oe exemption is not
applica&le in the hands of non-domestic company and conseCuently0 such diidend is chargea&le
to tax in the hands of recipient.
Interest on securities Sec 56(2) (id):
%ncome &y way of interest on security is taxa&le under the head ;%ncome from other sourcesJ0 if
the same is not taxa&le as &usiness income under section *..
%nterest on securities sec *"*.7#:
%nterest on securities means:
1. interest on any security of the central goernment or state goernment
*. %nterest on de&entures or other securities for money issued &y or on &ehalf of
a local authority or a company or a corporation.
7asis of Dharge:
%nterest on security is charged to tax on cash &asis if the assessee maintains his &ooks of
account on cash &asis. %t is taxa&le on due &asis if the assessee maintains his &ooks of account
on mercantile &asis.
%nterest exempt from Tax:
55
%nterest on the following is exempt from Tax:
%nterest on notified securities0 &onds or certificates.
%nterest on ,K Dapital %nestment 7onds in the hands of indiidual and :FF.
%nterest receied &y a non resident %ndian from notified 7onds.
%nterest paya&le to any foreign &ank performing central &anking functions outside %ndia.
%nterest on deposit made &y a retired goernment employee or an employee of a pu&lic
sector company out of money due to him on retirement.
%nterest on securities held &y welfare commissioner0 7hopal gas ictim.
%nterest on gold deposit &onds issued under the gold deposit @cheme0 1///.
Grossing u of Interest:
Eross %nterest "i.e. net interest plus tax deducted at source# is taxa&le. Get %nterest is grossed up
in the hands of recipient if tax is deducted at source &y the payer.
Eross %nterest L net interest x 1++
1++- 4ate of T?@
?eduction u6s .+): Go deduction is aaila&le u6s .+) from the assessment year *++1-+,.
!voidance of "ax (Sec #$)
%nterest on security does not accrue from day to day &ut on certain fixed dates. %f0 on the ee of
due date of payment of interest0 a person transfers security to another person and reacCuires the
same or similar securities after interest has &een receied &y the transferee. The transferor would
&e a&le to eade tax in respect of such tax. To stop such malpractice the &elow two sections are
introduced.
72G? 8A@:%GE T4AG@ADT%2G "@ec /5 "1##
A transaction which consist of selling securities some time &efore the due date and acCuiring the
same6 similar after the due date of interest is oer is called 7ond washing transaction. This is
done generally &y the high income class assessee to eade the tax while transferring securities to
low income class assessee on the ee of getting the interest as interest is charged in the hands
of legal owner of securities on the due date of payment of interest.
To preent this sec /5"1# proides that when such transaction takes place then the income will &e
included in the hands or transferor and not of the transferee.
@A)$@ DFM %GT$4$@T @ec "/5 "*##
%f an assessee haing &eneficial interest in securities during the preious year sells them in such
a way that either no income is receied or income receied is less than the sum he would hae
receied if interest had accrued from day to day0 then income from such security for such year
would &e deemed as income of such person.
Deductions %er&issible:
The income is computed after making the following deductions:
1. Dommission or remuneration for realiAing diidend or interest on securities.
*. @tandard deduction in case of family !ension to the tune of 4s. 130+++6- or 33163 K whicheer
is less.
3. Any other expense for earning income.
Seci'c Disallo(ances:
1. !ersonal $xpenses
*. %nterest and salary paya&le outside %ndia on which T?@ is not deducted
3. 8ealth Tax
5. Amount specified &y sec 5+A
56
$x:
' holds the following securities on April 10 *++1:
3K F! goernment loan "date of payment of interest: Hanuary 1# 4s.1+++0+++
1K Gon listed de&enture of A7D )td. "dates of payment of interest: Hune 11 and ?ecem&er 11
eery year# 4s.5+0 +++.
.K de&enture of !N4 )td. "dates of payment of interest: Hune 1 and ?ecem&er 13 eery year#
2n ?ecem&er 10 *++10 ' sells 4s. *30+++ .K de&entures of !N4 )td. Dalculate the taxa&le
income of ' for the assessment year *++,-+. on the assumption that his &usiness income is
4s.150+++ and he has receied a gift of 4s.1++0+++ in foreign currency from a friend on
?ecem&er 10 *++1on his marriage anniersary.
Chater E: Cl!##in1 of income
Eenerally a person is taxed in respect of his own income. %n some cases0 howeer0 the income
tax deiates from this principle and a person is taxed under section 1+ to 150 in respect of income
which legally &elongs to some other person.
These sections hae &een introduced to counteract the practices of tax aoidance.
Transfer of Income witho!t transfer of asset -sec B3/:
@ection 1+ is applica&le if following conditions are satisfied:
57
1. The taxpayer owns an asset which is not transferred &y him.
*. The income from such asset is transferred &y him to any other person.
3. The a&oe transfer may &e reoca&le or irreoca&le.
%f the a&oe conditions are satisfied0 the income from the asset would &e taxa&le in the hands of
transferor.
&evoca#le Transfer of Asset -Section B1/
7y irtue of section 110 if an asset is transferred under a reoca&le transfer0 income from such
asset is taxa&le in the hands of the transferor.
4eoca&le transfer:
1. A transfer containing any proision for the re-transfer directly or indirectly of the whole or
any part of the income or assets to the transferor
*. A transfer which in anyway gies the transferor a right to re-assume power directly or
indirectly oer the whole or any part of the income or assets.
Ahen an in+ivi+!al is assessa#le in resect of rem!neration of so!se:
The proisions of section 15 are gien &elow:
1. The taxpayer is an indiidual and has a su&stantial interest in a concern.
*. @pouse of the taxpayer is employed in the a&oe mentioned concern...
3. @pouse is employed in the concern without any professional or technical knowledge or
experience.
5. %f the aforementioned conditions are satisfied then salary income of the spouse will &e
taxa&le in the hands of the taxpayer.
Ahen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to so!se
-secB4 -1/ - i& //
The following conditions should &e satisfied:
1. The taxpayer is an indiidual.
*. :e6 she hae transferred an asset "other than a house property#.
3. The asset is transferred to his6 her spouse.
5. The transfer may &e direct6 indirect.
3. The asset is transferred otherwise than
For adeCuate consideration.
%n connection with an agreement to lie apart.
1. The asset may &e held &y the transferee- spouse in the same form or in a different form.
%f the a&oe conditions are satisfied0 any income from such asset shall &e deemed to &e the
income of the taxpayer who has transferred the asset.
Ahen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to sonFs wife
-secB4 -1/ - &i //
1. The taxpayer is an indiidual.
*. :e6 she has transferred an asset after May 310 1/,3
3. The asset is transferred to his6 her sonRs wife.
5. The transfer may &e direct6 indirect.
3. The asset is transferred otherwise than for adeCuate consideration.
1. The asset may &e held &y the transferee in the same form or in a different form.
%f the a&oe conditions are satisfied0 any income from such asset shall &e deemed to &e the
income of the taxpayer who has transferred the asset.
Ahen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to a erson
for the #enefit of so!se -secB4 -1/ - &ii //
1. The taxpayer is an indiidual.
*. :e6 she has transferred an asset.
3. The transfer may &e direct6 indirect.
5. The asset is transferred to a person or an association of persons.
58
3. %t is transferred for the immediate or deferred &enefit of his6 her spouse.
1. The transfer is without adeCuate consideration.
%f the a&oe conditions are satisfied0 then income from such asset to the extent of such &enefit is
taxa&le in the hands of the taxpayer who has transferred the asset.
Ahen an in+ivi+!al is assessa#le in resect of income from asset transferre+ to a erson
for the #enefit of sonFs wife -secB4 -1/ - &iii //
1. The taxpayer is an indiidual.
*. :e6 she has transferred an asset after May 310 1/,3.
3. The transfer may &e direct6 indirect.
5. The asset is transferred to a person or an association of persons.
3. %t is transferred for the immediate or deferred &enefit of his6 her sonRs wife.
1. The transfer is without adeCuate consideration.
%f the a&oe conditions are satisfied0 then income from such asset to the extent of such &enefit is
taxa&le in the hands of the taxpayer who has transferred the asset.
Aroriation when transferre+ asset is investe+ in a #!siness:
An asset "whether in cash or kind# is transferred to a spouse or to a sonRs wife directly or
indirectly without adeCuate consideration and such asset is inested in the &usiness. Then the
amount of income that will &e clu&&ed in the hands of the transferor will &e as under:
1. %f the amount is inested in the &usiness &ut as a capital contri&ution in the partnership
firm the amount shall &e calculated as under:
Balue of the assets transferred &y
Transferor on the first day of !Y x the profit share of transferee
Total inestment on the 1
st
day from &usiness
2f !Y &y transferee
*. %f the inestment is in the nature of capital contri&ution as a partner in a firm the interest
receied or receia&le from the firm on such capital contri&ution will &e included in the
income of the transferor. :oweer the profit will not &e included in the income of the
transferor.
Income of a minor chil+ -Sec B4 -1A//:
All income which arises or accrues to the minor child shall &e clu&&ed in the hands of his parents.
Dlu&&ing in the hands of parent:
1. The income of the minor will &e included in the income of that parent whose total income
is greater.
*. 8here the marriage of the parent does not su&sist0 the income of minor will &e included
in the income of that parent who maintains the minor child in the releant preious year.
8hen clu&&ing is not attracted:
1. %ncome of a minor child "from all sources# suffering from any physical disa&ility.
*. %ncome of a minor child on account of any manual work.
3. %ncome of a minor child on account of any actiity inoling application of his skill0 talent
or specialiAed knowledge and experience.
%n case the income of an indiidual includes the income of his or her minor child then such
indiidual is entitled to exception of 4s. 13++ in respect of each minor child as per section 1+
"3*#.
59
Cross<transfer:
8hen there is cross- transfer of assets "for instance A gifts to 7Rs wife and ice ersa# then as per
the decision of Madras high court if the cross transfer are independent of each other and real0 the
income must &e included in the hands of the recipient. %f two transfers are interconnected and are
parts of the same transaction adopted to aoid tax0 then the transfer shall &e regarded as an
indirect transfer &y the transferor and it will fall within sec 15.
Income from converte+ roert$ -SecB4 -%//:
8here an indiidual &eing a mem&er of :FF transfers is separate property after ?ecem&er 1/1/
to the family for common &enefit of the family0 otherwise than an adeCuate consideration0 such
property is known as conerted property. The income deried from the conerted property will &e
included in the hands of indiidual and not in the hands of the family.
Cash Cre+it -Section B?/:
Fnder the section 1. unexplained cash credit in the &ooks of the assessee for which the
assessee is una&le to offer any explanation or if the explanation offered is not to the satisfaction
of the assessing officer0 the same will &e treated as income of the preious year in which such
credit appears in the &ooks of accounts of assessee.
(nexlaine+ Investment -Section BE/:
Fnder section 1/ unexplained inestment for which the assessee is not a&le to offer satisfactory
explanation or which is not recorded in the &ooks of the assess will &e deemed to the income of
the assessee in the financial year.
(nexlaine+ mone$ -Section BEA/:
Any unexplained money0 &ullion or <eweler which is not recorded in the &ooks of assessee for
which the assessee is not a&le to offer explanation to the satisfaction of assessing officer will &e
treated as the income of the assessee in the financial year in which the assessee is found to &e
the owner of the same.
Amo!nt of investment etc not f!ll$ +isclose+ in the #oo2s of acco!nt -Section BEB/
Any inestment in &ullion0 <eweler or other alua&le articles the alue of which is not fully recorded
in &ooks for which assessee do not gie any satisfactory explanation will &e treated as income of
the financial year for which it is found
(nexlaine+ Exen+it!re -Section BEC/:
Any unexplained expenditure in any financial year for which the assessee offers no satisfactory
explanation a&out the source is taxa&le as income in the financial year where such unexplained
expenditure is incurred.
Amo!nt #orrowe+ or reai+ on h!n+i -Section BE'/:
Money &orrowed &y hundi and repayment of it otherwise through an account payee cheCue or
&ank draft will &e treated as income in the preious year in which such &orrowing or repayment is
made otherwise than through account payee cheCue.
$.g.:
The income of a family is as under: 4s.
1. Mr. 4am "from &usiness# *3+0+++
*. Mrs. 4am " salary from a school computed# 15+0+++
3. Minor son " from interest from a company#
the amount for inestment receied from grand father 1+0+++
5. Minor son Y "from acting in films# 1+0+++
3. Minor daughter ( " from lottery#
The lottery ticket was gifted to her &y her maternal uncle 10+++
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1. %ncome of mentally handicapped minor child 4s. 5+0+++.
The amount for inestment receied from his father0 grand father
and maternal uncle.
?iscuss in whose hands the incomes are assessa&le and to what extent9
Chater 13. SET O** AN' CA&&@ *O&AA&'
Tax is leied on assessee total income. To calculate total income0 loss under any source or head
of income is to &e ad<usted. @ec ,+ -.+ deal with arious proisions regarding set off and carry
forward of profit and losses.
The process of setting off and carry forward of losses may &e coered as under:
1. %nter source ad<ustment i.e. under the same head of income.
*. %nter- head ad<ustment in the same assessment year if a loss cannot &e set off under step
1.
3. Darry forward of loss if the loss could not &e set off under the a&oe two steps.
Inter<so!rce a+8!stment -sec.63/
%f the net result for any assessment year0 in respect of any source under any head of income0 is a
loss0 the assessee is entitled to hae the amount of such loss set off against his income form
income under any other source under the same head of income for the same assessment year.
$xceptions:
1. )oss from a speculation &usiness can &e set off only against profit from a speculation
&usiness.
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*. )ong term capital loss can &e set off only against long term capital gain.
3. )oss from owing and maintain race horses can &e set off only against income from such
&usiness.
5. )oss cannot &e setoff against winning from lotteries0 crossword puAAles etc.
Inter< hea+ A+8!stment:
8here the net result of computation made for assessment year in respect of any head of income
is a loss0 the same can &e set off against the income from other heads.
$xceptions:
1. )oss from a speculation &usiness can &e set off only against profit from a speculation
&usiness.
*. )osses under the head capital gain cannot &e set off against any income except income
under the head capital gain.
3. )ong term capital loss can &e set off only against long term capital gain.
5. )oss from owing and maintain race horses can &e set off only against income from such
&usiness.
3. )oss cannot &e setoff against winning from lotteries0 crossword puAAles etc.
1. 7usiness losses cannot &e set off against salary income.
Carr$ forwar+ of losses:
Fnder the act following losses can &e carried forward:
1. )osses under the head income from house property.
*. )oss under the head ;!rofit and gains of &usiness and professionJ
3. )oss under the head capital gain
5. )oss from the actiity of owing and maintaining race horses.
2ther remaining losses cannot &e carried forward.
Darry forward and set off &usiness loss other than speculation loss:
1. )oss can &e set off only against &usiness income.
*. )oss can &e carried forward &y the person who incurred the loss.
3. )oss can &e carried forward for . years.
5. 4eturn of loss should &e su&mitted in time prescri&ed.
3. Dontinuity of &usiness not necessary.
1. The a&oe limit of . years is not applica&le on una&sor&ed depreciation0 capital
expenditure on scientific research and family planning expenditure.
Darry forward and set off speculation loss:
A @peculation transaction is that transaction in which a contract for the purchase or sale of any
commodity0 including stocks shares0 is periodically settled0 otherwise than &y actual deliery or
transfer of the commodity or scrip.
1. )oss can &e set off only against speculation income.
*. )oss can &e carried forward &y the person who incurred the loss.
3. )oss can &e carried forward for 5 years " up to assessment year *++3-+1 . yrs#
5. 4eturn of loss should &e su&mitted in time prescri&ed.
3. Dontinuity of &usiness not necessary.
1. The a&oe limit of . years is not applica&le on una&sor&ed depreciation0 capital
expenditure on scientific research and family planning expenditure.
Darry forward and set off capital loss:
1. )ong term capital loss can &e set off only against income of long term capital gain.
*. @hort term capital loss can &e set off against short-term or long term capital gain.
3. @uch loss can &e carried forward for eight assessment years immediately succeeding the
assessment year in which the loss was first computed.
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Darry forward and set off loss from owing and maintaining race horses:
1. @uch loss can &e carried forward only if the actiity of owing and maintaining race horses
is carried on &y the assessee in the preious year in which the &rought forward loss is to
&e setoff.
*. )oss can &e carried forward for four assessment year immediately succeeding the
assessment year in which the loss was incurred.
Darry forward and set off loss from house property:
%f the assessee incurs any loss under the said head and such loss could &e setoff during the
assessment year0 then the loss can &e carried forward and set off in su&seCuent preious year
su&<ect to a limit of . assessment years against income from house property.
)oss on sale of shares0 securities or units:
%n case a person is haing securities as stock in trade and has &ought forward &usiness loss
under the head profit and gains from &usiness such loss can &e ad<usted from interest on
securities.
$.g.:
Mr. 4am su&mits the following particulars of his income and loss for the assessment year *++3-
+5:
1. %ncome from :ouse !roperty 1.+++
*. !rofit and gains from personal &usiness *3+++
3. @hare of !rofit from A2! "A2! has paid tax at
Maximum marginal rate# 1+0+++
5. @hort term capital gain .+++
3. )ong term capital gain on sale of &uilding 1,+++
1. )ong term capital loss on sale of shares *5+++
The following items hae &een &ought forward:
7usiness loss AY *++*-+3 3++++
)oss from house property
, )oss on account of interest 1//.-// 1,+++
, )oss on account of interest *++*-+3 *1+++
Dompute his gross total income and deal with the carried forward losses.
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