Income from business/Profession

By
Prof. Augustin Amaladas
M.Com., AICWA.,PGDFM., B.Ed.

12/12/2007 1
 INCOME FROM HOUSE PROPERTY

House property for this purpose means :

Any building which has the characteristic
features of a building.
E.g.: residential building, cinema theatres etc.

12/12/2007 2
 INCOME FROM
HOUSE PROPERTY
Taxed on Notional Basis

12/12/2007 3
 Conditions for taxing income under the head
house property.
There should be a building or a land
appurtenant there to .
AND
The property should be owned by the assessee.

AND
Such building should not be used for own
business or profession.

12/12/2007 4
 Section 22(Charing Section)

The Annual Value of building or land

appurtenant thereto is chargeable to tax in the
hands of the owner provided the same is not
used for own business or profession.
E.g.: CASE 1: Mr. X lets out a HP to Mr. Y,
who intends to carry on his private business.
Income from HP.

12/12/2007 5
 CASE 2: Mr. X uses his property to carry on his
own private business. No income from HP.

12/12/2007 6
Exceptions to the rule that the rental income
is taxable under HP.
Income from sub letting Income from
OTHER SOURCES since the assessee is not
the owner.
Composite rent When a building has been let
out along with the furniture , then such letting
out is called composite letting.
As per sec 56(2) , when the rent is inseparable
income from other sources.

12/12/2007 7
As per CIT vs. SHAMBHU INVESTMENTS
PVT. LTD., (2003) (s.c) such inseparable
composite rent is taxable under the head HP.
At present Supreme Court decision has to be
followed.

12/12/2007 8
 Section 23( Annual Value)

Sec 23(1)(a)
AV = Rent at which the HP is
reasonably expected to be let out.

12/12/2007 9
 Sec 23( Annual Value)

Sec 23(1)(b)
If the house property is actually let out and
if rent received or receivable is higher than the
reasonable rent as per sec 23(1)(a), then such
rent received or receivable is taken as the
ANNUAL VALUE.

12/12/2007 10
 Sec 23( Annual Value)

Sec 23(1)(c)
If the property is actually let out and was
vacant during the year and rent received or
receivable is lesser due to vacancy then such
lower rent shall be the annual value.

12/12/2007 11
 Section 23( Annual Value)

Sec 23(2)
If a HP is self occupied .
OR
If a HP couldn't be occupied for reasons of
employment / profession elsewhere.
In such cases the AV= NIL.

12/12/2007 12
 Sec 23( Annual Value)

Sec 23(3)
Conditions for sec 23(2)-
Such HP shouldn't be let out during any part
of the year.
AND
No other income is derived from such
property.

12/12/2007 13
 Section 23( Annual Value)

Sec 23(4)
If the assessee owns more than one Sec
23(2) property then:
AV of one HP at the option of the assessee
is NIL.
AND
All the other HPs are Deemed Let Out
Property [DLOP] and annual value thereof is
decided as per sec 23.

12/12/2007 14
 Section 24 Deductions.

SEC 24(a)-Standard deductions @30% of NAV

only for let out property and deemed let out
property.
SEC 24(b)- interest on capital or loan borrowed
for ACR3 (acquisition ,construction, renewal
,repairs and reconstruction) in respect of
1. LOP/DLOP any amount is allowed
2. SOP Deductions is as follows:

12/12/2007 15
 SOP Deductions

- Normal deductions up to Rs
30000/-
- Special deduction up to Rs
150000/-

12/12/2007 16
 IMPORTANT NOTES

Interest deduction up to Rs 150000/-.It is available only

for acquisition and construction. Provided:
(a) The loan taken on / after 01-04-1999. &
construction completed within 3 years
from the end of the financial year in which loan is
borrowed.
(b) For claiming deductions interest
certificate & details of principal outstanding, interest
amount etc. Along with return of income.

12/12/2007 17
 Pre- Construction Period Interest

Allowed in five equal installments commencing from

the year of completion.

PCP means period commencing from the date of loan

or immediately preceding the March 31st of the year of
completion which ever is earlier.

12/12/2007 18
 Section 25( amounts not deductible)

Interest paid outside India without TDS or

Without having an arrangement for TDS in
India is disallowed.

12/12/2007 19
 Section 25A( Unrealized rent recovered)

UR recovered is taxed in the year of receipt

irrespective of whether assessee is the owner or
not of such property in the year of such receipt .
No deduction is allowed against this income.

12/12/2007 20
 Section 25B( Arrears of rent received)

It is taxable in the year of receipt irrespective of

whether assessee is the owner or not of such property
in the year of such receipt.
Deduction = 30%

12/12/2007 21
 Section 26( Property owned by Co- Owners)

Share of co-owners definite, ascertainable

respective share is taxable in the hands of the co owner.
Share of co-owners not definite, ascertainable
entire income is taxed as the income of AOP.

12/12/2007 22
 Important Points
Annual value of partly SO & partly vacant

Period based (i.e. 9 months Usage based (i.e. 75%

SOP & 3 months used as SOP & 25% as
vacant) = ANNUAL VALUE vacant) = ANNUAL VALUE
= NIL = 25% .

12/12/2007 23
 Important Points
Annual value of partly SO & partly LO

Period based (i.e. 9 months Usage based (i.e. 75% used as

SOP & 3 months LOP) SOP & 25% as LOP)

Treated as DLOP for

entire period.
AV of SOP NIL. AV of LOP to be
taken at 25%.

12/12/2007 24
 Presented by :
Anirudh Prasad-05A078.

Amrut .V.Katwa-05A077.

12/12/2007 25
 Charging Section[Sec.28]
Profits and gains of any profession/profession
Any compensation received related business
Income received from members of similar
profession
Any benefit or perquisites from business
/profession
Export incentives from government

12/12/2007 26
 Charging -Continue

Any interest, salary, bonus, commission or

remuneration received by a partner from firm.
Sum received(compensation) from other
company not to carry on any business for know
how, patent, copy right, trademark.
Profits and gains of managing agency

12/12/2007 27
 Meaning of business

Profit motive
Business and rendering services to others
Business cannot be carried on with oneself

12/12/2007 28
 Export incentives

Duty drawback import entitilement licences

Are taxable u/s 28-Business/profession

12/12/2007 29
 Business income not taxable u/s 28

1. Rental income in case of dealer in property

taxable under the head income from house
property[u/s22].
2. Dividend on shares in case of a dealer in
shares- taxed under income from other sources
[u/s 56].
3. winning from lotteries (lottery business) taxed
u/s 56-income from other sources.

12/12/2007 30
 Losses deductible from business
income
Loss due to natural calamity
Loss due to non acceptance of goods
Reduction in value of foreign currency which is
meant for purchase of stock.
Loss of cash/goods due to embezzelment,
burglary, forfeiture of deposits.
Loss of forgoing advance given by sugar
industries to formers due to monsoon failure

12/12/2007 31
 Loss not deductible from business
Loss due to destruction of Capital asset.
Loss on sale of investments held as investment.
Loss of advance to set up a business but business could
not be started.
Depreciation in value of foreign currency for capital
purpose
Anticipated future losses.
Loss of discontinued business
Loss from illegal business[T.A.Qureshiv.CIT(2006)SC]

12/12/2007 32
 Computation of assessable
profits/loss for tax
Net profit as per P/L Account
Add: Amount debited to P/L A/c in respect of
the following
Loss of earlier years
Capital losses
Personal expenses (such as drawings)
Income tax, surtax, wealth tax, gift tax, estate
duty[Direct taxes], tax penalty, penal interest,
fine.
12/12/2007 33
 Continues
Add: Charity and donation
Gifts and presents to others
All reserves/provisions such as tax provision,
Reserve for dividend, provision for bad debts
except provision for depreciation
All expenses related to other heads of income

12/12/2007 34
 Continues
Add: Expenses not deductible u/s 40 and 40A
Expenses debited to P/L A/C not admissible
u/s 30 to 40A
Add: Amount not credited to P/L A/c
Deemed income
Deduct :Income credited to P/L A/c but not
chargeable under other heads

12/12/2007 35
 Less:
Salary income( income from salary(u/s 15)
Continues

Rental incomeIncome from House property(u/s22)

Capital gain(u/s 45)
Dividend[ Income from other sources(56)]
Direct taxes refund such as Income tax, Wealth tax, estate
duty, surtax refunds
Bad debts, excise duty recovered not allowed as
expenditure preceding previous years
Deduct:
Expenses not debited to P/L A/c but allowed u/s 30 to 40A
Depreciation u/s 32

Income chargeable under income from

business/profession.

12/12/2007 36
 Specific deductions expressly
allowed u/s 30 to 37
1.Rent (Sec.30)
Repairs(including painting of a house )
Land revenue, local taxes and municipal taxes
Insurance against risk of damage or destruction
Not allowed: a) arrears of rent b) share of profit
instead of rent c.

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 Repairs and insurance of machinery,
plant and furniture(sec.31)
Revenue repair-allowed
Capital expenditure not allowed
Quantum of expenditure is not important

12/12/2007 38
 Depreciation Allowances(sec.32)
Conditions:
Asset must be owned by the assessee(Registration is not
important),full control over asset,right to retain the
possession and defend are characteristics of ownership.
Used or ready to use for business purpose
Used in the previous year
Both tangible and intangible assets
Right on occupancy on Lease property is entitled for
depreciation
If hirer purchaser has right over asset and hire seller will
loose all rights- Depreciation is allowed.

12/12/2007 39
 Depreciation-Continues
Insurance premium, repairs and other
expenditure incurred on leased business asset are
deductible in the hands of lessor.
If any asset is fully controlled such as lease the
capital expenditure incurred by lessee can
provide depreciation[32(1)(ii).

12/12/2007 40
 Lease property

Registered ownership is not necessary Sec. 53A

of the transfer of property Act.
If the assessee can be the co-owner to claim
depreciation
Any capital expenditure incurred by the person
who takes building can provide depreciation on
capital expenditure.
Rules of Accounting Standard (AS19) not
applicable for depreciation as per IT Act.

12/12/2007 41
 Hire purchase
Conditions:
Hire purchaser can provide depreciation if hire
purchaser has uninterrupted right over the asset.
The seller looses his right
Who can provide depreciation?
Hire purchaser.

12/12/2007 42
 Residential quarters
If used by the assessees employees
depreciation is allowed.

12/12/2007 43
 50% of rate of depreciation
If an asset acquired during the previous year.
Put into use or ready to use for less than 180 days.
Exceptions:1. Put into use for less than 180 days but ready
to use for more than 180 days full rate of depreciation
If asset purchased in the preceding year to current previous
year but put into use for less than 180 days during the
current previous year what is the rate of depreciation rate?
If an asset is not used at all-No depreciation not only for
first year but also for subsequent period

12/12/2007 44
 Full rate of depreciation.

Can depreciation be provided on intangible

assets such as know- how, patent rights, copy
right, trade mark, licences, franchises etc.
depreciation?

12/12/2007 45
 Meaning of Building and Plant
Building means: Super structure only. It does
not include site.
Plant : Includes ships, vehicle, books, technical
know-how report, scientific apparatus and
surgical equipment.
It does not include tea bushes or livestock or
building or furniture and fittings.
If assessee does not claim depreciation whether
is depreciation available?

12/12/2007 46
 Method of depreciation

Yes.

Block asset method.

What is block asset method?

Similar nature of asset having the

same rate of depreciation are
clubbed together.
12/12/2007 47
 100% depreciation?

1. Building acquired on or after September 1,

2002 forming part of water supply project
2. Pollution control equipments
3. waste control equipment
4.wooden parts used in artificial silk
manufacturing machine
5.cinimatograph films
6. Books

12/12/2007 48
 Commercial vehicle

If acquired and used

before 31,March 2002.
-Rate of depreciation is
50% .
12/12/2007 49
 calculation of depreciation
Block value in the beginning
Add:- Purchase of asset of the same block
Less:- Net sale value of the consideration
received/receivable in cash /cheque/draft if any
of the block of assets sold during the year

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 Continuation
Calculate depreciation of the balance amount.
If it reaches to Zero value no more depreciation
is allowed.
If net sale consideration exceeds the block it
amounts to short term capital gain.

12/12/2007 51
 continues
Once asset is depreciated the gain on
sale of block never be a long term gain
Index can not be used for the
calculation of capital gain.
If all assets of the assets sold out but
block continues it amounts to short
term capital loss.
12/12/2007 52
###Intangible assets

Depreciation is allowed at the

rate of 25%
Include: know- how, patent
rights, copy rights, trade mark,
licenses, franchises etc.

12/12/2007 53
 Imported Cars
Purchased between March 1, 1975 and
March 31, 2001 for hire for tourist- no
depreciation is allowed if used in India for
business purposes other than for hire for
tourist
Used outside india for business-alowed
For hire for tourist-allowed
After 31st March 2001- all purposes
depreciation is allowed
12/12/2007 54
 Change in the ownership in any part of the
year due to amalgamation , absorption or
demerger

Calculate depreciation for the

previous year as if no
amalgamation/re-organization
taken place
Apportion between the
companies on time basis.
12/12/2007 55
 ###Computation of additional
depreciation
Manufacture or production of any article
Purchased entirely new machinery Not used any part
of the world
Acquired and installed after March 31, 2005

Rate-20%
If used less than 180 days-Half of the rate
Excludes ships and aircrafts, used in the guest house,
or office road transport vehicles

12/12/2007 56
 Actual Cost
Total cost-subsidy
Includes: interest on money
borrowed before the asset is put
into use
Bank charges
Loading
Unloading
12/12/2007 57
 Actual cost-continues
Modification before first put into
use
Training of staff to operate the
machine
Other related expenses required
such as cold storage.
Traveling expenses to acquire the
asset
12/12/2007 58
 Un-absorbed depreciation
Deduct the depreciation of the
previous year from income from
business or profession
Deduct it from other heads of income
except salary
If not able to absorb-carry over to
subsequent assessment year (s) No
time limit.
12/12/2007 59
 Subsequent assessment years
Order of priority to set off:
1. current depreciation
2.Brought forward business losses
3. Un-absorbed depreciation

Note: Continuity of business is not relevant.

The same assessee only can carry forward

12/12/2007 60
 Depreciation on Straight Line
basis/WDV
Applicable to Power
units(generating and distribution
of power)
Assets acquired after 31st march
1997.

12/12/2007 61
 Terminal depreciation

If straight line depreciation method followed on

power generating units
sold after the use of such asset more than one
previous year
Terminal depreciation=WDV> Net
Sale consideration
Capital gain=Net sale>WDV
12/12/2007 62
 Tea, coffee and rubber development
account[Sec.33AB]
Deposit with NABARD or Deposit account of
tea, coffee or rubber Board
With in 6 months from the end of the previous
year or before the last date of filing of returns
whichever earlier
Exemption:
Amount deposited or 40% of profit whichever is less
Can amount be withdrawn?

12/12/2007 63
 withdrawal
Only for the purpose stated
If unutilised within the previous year it is treated as
income
If business closed or dissolved-treated as taxable profit
If death of the taxpayer/partition of HUF/liquidation
of company will not be treated as income
Purpose: installed in plant and machinery in low priority
sector or entitled to get 100% depreciation.
Maximum 8 years

12/12/2007 64
 Site restoration fund[sec.33ABA]
Production of Petroleum /Natural gas in India
Deposit with SBI/account opened as per
petrolem and Natural Gas Commission In a
scheme specified
Before the end of the previous year
Amount withdrawn should be used for low
priority sector/100% depreciated and utiled
within 8 years at the end of previous year.

12/12/2007 65
 ###Scientific research[Sec.35]
In house research
All Revenue expenditure and Capital expenditure related
to ones business during the current previous year or even

3*** preceding previous years allowed

[Except Land]
Even asset is not put into use it is allowed.
No depreciation is allowed on such capital asset
If such asset is sold what could be the consequences?

12/12/2007 66
 If scientific asset sold?

If not used for any other purpose:

***Sale or deduction already
allowed whichever is less taxed as
business profit.

Capital gain=Sale-Cost (index if

required)
12/12/2007 67
 Contribution to National laboratory
Including University, IIT

Weighted deduction= 1.25 times of

contribution can be treated as Expenditure.

***Even approval is withdrawn after the

payment to such institution the assesssee
who contributed can enjoy the benefit

12/12/2007 68
 Expenditure on Patent rights and
copy rights[35A]
Capital Expenditure incurred before 1st
April 1998
14 instalments
After 1st April 1998-Depreciation can be
claimed-25%
Revenue expenditure-Fully allowed
expenditure in the year such expenditure incurred.

12/12/2007 69
 Technical know how

Only depreciation

25% allowed
12/12/2007 70
 Amortisation of telecom license
fees[35ABB]
Conditions
Capital Expenditure
Acquiring any right to operate telecommunication
services
Incurred before or after commencement of Business
Mainly incurred to obtain license.
If conditions fulfilled claim can be done u/s 35ABB
otherwise u/s 37(1) as business expenditure.

12/12/2007 71
 Payment to associations and institution
for rural development program
Institutions approved before
st
1 March 1983
Deduction up to the amount
paid

12/12/2007 72
Amortisation of preliminary expenses
Indian Company or resident non corporate
assessee
Foreign company excluded
Legal charges on MOA, AOA,printing
of MOA, AOA,Registration fees,expenses
connected to issue of shares or debentures
Is there any limit?

12/12/2007 73
 Limit of preliminary expenses
Corporate assessee Non-Corporate assessee

5% of cost of project or 5% of the cost of the

5% of capital employed project

Whichever is More(dil
monge more)
Actual cost= costs incurred initially and additional
costs after commencement
Of business
12/12/2007 74
 Preliminary Exp. Continue
The value on the last day of the previous year in
which the business of the assessee commences.

Deduction: 1/5 of the qualifying

expenditure

12/12/2007 75
 Expenses on issue of
shares/Debentures
New company even Old industrial
company issue shares - u/s 35 D
Old company-- u/s 37(1) except issue of shares)
Old industrial company issue shares-35D
Non industrial company All expenses related to bonus
issue, issue of debentures or raising of long term or short
term loans
Note: old
non industrial company-
Expenditure related to issue of shares
can not be claimed
12/12/2007 76
Amortisation of expenditure incurred
for amalgamation[35DD]

Indian company
Deductions in five
successive installments

12/12/2007 77
 Amortisation of expenditure under voluntary
retirement scheme[35DDA]
Any assessee

Deduction 1/5 every year

Voluntary retirement scheme need not be
accordance with guidelines prescribed under
section 10(10C)

12/12/2007 78
 Amartisation of expenditure on development of
certain minerals[35E]

Indian companies and

Resident assessee
I/10 every year allowed

12/12/2007 79
 Insurance premium to protect the
asset or employees[36(1)(i)]

Allowed

Bonus to
employees[36(1)(ii)]

12/12/2007 80
 Interest on borrowed capital[36 (1)(iii)

Interest on own capital is not allowed.

12%
Interest paid by a firm to partner is deductible-
per annum Simple interest
Interest paid to wife and daughter- allowed
Interest before the asset is put into use to be
capitalised

12/12/2007 81
 Interest paid outside India without
deducting TDS

Not allowed

12/12/2007 82
 Discount on Zeeero coupon
Discount Bonds[36(1)(iiia)]
Issued after June 1, 2005
Minimum 10 years and Maximum 20 years
Deduction on pro rata basis.

12/12/2007 83
 ***Unpaid liabilities
Includes:
1. Local taxes, duty cess or fee under any law
2. Sum payable to employees such PF, Gratuity,
superannuation fund to employees, BONUS, OR
COMMISSION
3. Interest on loan borrowed from public financial
institution such as ICICI,IFCI, IDBI,LIC AND
UTI ONLY
DEDUCTION ALLOWED ON PAYMENT BASIS
OR ACCRUAL BASIS?

12/12/2007 84
 Payment/ Accrual?????
No payment- Not allowed

last
If depositedEVEN before the

date of filing of returns with

Proof for payment-fully
allowed(page 336)
12/12/2007 85
****Employees contribution towards staff welfare
scheme such as PF[36(1)(va)]
Amount received by employer-

Included with the

assessees Income
If Paid to the
employeess account???

12/12/2007 86
 If paid !!!!!
Due date ####as per the PF rules or
Gratuity rules Usually with in a month of
deduction from employees.

*****not as per IT rules

12/12/2007 87
 Written off of allowance for animals
[36(1)(vi)]

If died /useless
Used as capital asset
Allowed loss = Original cost- Carcasses
or ( sale of animals)

No depreciation is allowed
any time on animals

12/12/2007 88
 Bad debts [36(1)(vii)] !!!
If actual- allowed
Provision Never allowed

If recovered[41(4)]-----If earlier
allowed it is taxable
If earlier denied - not taxable

12/12/2007 89
Provision for Bad and doubtful debts to rural branches of
scheduled and non scheduled commercial
banks[36(1)(vii)]
bank and Institution bank
Non scheduled
Scheduled Financial Foreign
7.5% of income 5% 5%
10% of advances --- ---
made by rural
branchs

12/12/2007 90
 Transfer to SPECIAL RESERVE
[36(1)(viii)]
Long term (5 years or more) financial corporation/public
company/government company
Finance for industry/agriculture/infrastructure facilities in
India.
Deduction: Whichever is less
1. amount transferred to such account or
2. 40% of profit from business activities before such
deductions
3. 200% of paid up capital and reserve on the last day of
PY(- )amount in special reserve account in the beginning of
the PY

12/12/2007 91
 Family planning expenditure [36(1)(ix)]
For Company assessee
Revenue expenditure- Fully allowed

Capital Expenditure - 1/5 th every year

Non-corporate assessee can claim u/s
32(Depreciation on capital expenditure) and
37(1)(Revenue expenditure)

12/12/2007 92
 Advertisement Expenditure[37(2B)]

Advertisement In publication of political

party------Not allowed

All advertisements --Allowed

12/12/2007 93
 Expenses incurred by commission
agent from insurance UTI agents
etc.If commission less than 60,000
commission Adhoc deduction Max. deduction

1 2 3
LIC first year 50% of
commission
Renewal 15% OF THE
COMMISSION
commission 20,000
First & renewal
33 1/3%
Commission
Bonus
commission
12/12/2007
No deduction 94
 Contribution towards Exchange risk
Administration fund [36(1)(x)]
By Public financial
institution
Deductible upto the
assessment year 2007-08

12/12/2007 95
 Benefits to public financial
institutions

12/12/2007 96
 General deductions[37(1)]
It should not be a capital expenditure or
Not personal
Not prohibited by law such as fine, penalty
Not be an illegal expenditure

Can we see some of the expenditures allowed as

per various case laws?

12/12/2007 97
 Expenses allowed
*Litigation expenses to protect the trade or business
/asset/or to retain title of asset
*Legal expenses to receive loan

*Litigation expenses in restoring trade mark

***Legal expenses to alter the AOA in conformity with

the changes brought about
in the companies ACT
****Damages paid to workers/fulfil the contract
***Damages for breach of contract

12/12/2007 98
 Expenses allowed
**Contribution to the union formed to oppose the
nationalisation of assessees business
**Expenses incurred during festival
***Premium paid for loss of profit
*Professional tax paid
All maintenance expenditure
**Expenses incurred to register trade marks
*****Entertainment expenses
**Periodical payment for the use of goodwill

12/12/2007 99
 Expenses allowed-case laws
###Estimated probable liability for free maintenance
CIT vs Modi Olovetti ltd.(2004)
***Expenditure to car even it is huge[CIT vs
Mangalchand premchand& co.[2004]
**Repairs to maintain building taken on lease
[Sumitomo Corpn. India (p) ltd.
Expenditure on civil work on leased asset [Hero Honda
motors vs CIT
***Interest on delayed payment of Provident fund[CIT
vs Ishwari Khetan Sugar Mills (P0 ltd.(2004)

12/12/2007 100
 Important notes & controversial
issues
Expenditure to issue of shares fees paid to Registrar to
increase the authorised capital disallowed[Brook
Bond India ltd Vs CIT(SC)

Retrenchment compensation payable at the time of

partial closure of business Is deductible. But at
the time of closure of industry is not
deductible[CIT vs MGF India(2004)

12/12/2007 101
 Expenses allowed

****Expenditure to issue of
debentures
bonus shares allowed

12/12/2007 102
 Controversial Continues
***Foreign study expenses
incurred by the company even
though the employee is a
directors son-allowed [J.B
Advani& co Vs CIT](2005)

12/12/2007 103
 Controversial Continues
Medical expenses of wife employee
of cine actor-Allowed [Ajay Singh
Deol Vs CIT]
Payment on account of
membership fees for health club
and also paid membership fees for
an another club-Allowed [Sterlite
Industries (India) Vs CIT(2006)
12/12/2007 104
 Controversial- Continues
###Provision made for
contribution towards Provident
Fund maintained by Government
of Tamilnadu sent on deputation to
the assessee corporation-allowed[
CIT Vs Kattabomman Transport
Corporation Ltd.(2004)

12/12/2007 105
 Controversial Continues
***Interest on arrears of tax , sales tax
compensatory in nature and not penal
allowed(Lachmandas Vs CIT(SC)
(2002)
***Interest paid for late payment of
tax is disallowed. Even Income-tax
itself disallowed.
12/12/2007 106
 Disallowed Expenditure
*****Interest paid on borrowed funds
to pay Income tax is disallowed
Interest paid on installment of the
price of property
*****Expenditure to raise capital

***Expenditure on shifting of
registered office
12/12/2007 107
Penalty/fine /interest on penalty

*#*#*# Disallowed

12/12/2007 108
 Important question to be asked!!!

****Protecting Business
or protecting the title to
capital asset.
Capital Expenditure or
revenue expenditure
12/12/2007 109
 Expressly disallowed expenditures

Interest,Royalty, fees for technical

services payable outside India
***TAX TO BE DEDUCTED
AND PAID WITHIN 7 DAYS
FROM THE LAST DAY OF THE
MONTH IN WHICH TAX WAS
DEDUCTED OR
12/12/2007 110
 Expressly disallowed expenditures

AMOUNT PAID TO GOVERNMENT

IN THE FINANCIAL YEAR IF NOT
PAID WITHIN 7 DAYS FROM THE
LAST DAY OF THE MONTH.
Anything paid after the financial year and
after the expiry of 7 days FROM THE
LAST DAY OF THE MONTH -
deductible only in the year of payment.
12/12/2007 111
 Fringe benefit tax

Fringe benefit tax, Income tax,

wealth tax, securities transaction
tax- Not Taxable

12/12/2007 112
 Salary payable outside India without
TDS
Outside India both resident and non-resident
In India to NON-REDIDENT

NOT ALLOWED

12/12/2007 113
 Payment from provident fund

If TDS not done- Not allowed

12/12/2007 114
 Tax on perquisites paid by the
employer
Tax paid by employer- Not taxable to
employees
Perquisites paid- Not deductible to
employer
(Non monetary)

See illustration- para 82.1.8- page 328

12/12/2007 115
Payment to relatives[ Sec. 40A(2)]

Excess or
unreasonable -
disallowed
Relative: husband, wife, brother or sister or lineal
ascendant or descendant of that individual.
Substantial interest:- at least 20% of equity or 20%
profits of a concern at any time during the year
12/12/2007 116
Expenditure exceeding Rs. 20,000
Should be paid account payee crossed
cheque or account payee demand draft.
If not - 20% of such payment is
disallowed.
Note: on the same day any number of
cheques less than 20,000 each can be given
Partly cash, partly cheque without account
payee crossed cheque without exceeding
20,000 each.
12/12/2007 117
 Payment to unapproved gratuity by
employer

Not deductible
expenditure.
12/12/2007 118
 Recovery of earlier deductions

If recovered in the subsequent

assessment years it is taxable
even there is no business and
taxed in the hands of
recepient.
12/12/2007 119
 Undisclosed income
Cash credit[sec.68]
Undisclosed investment[sec.69]
Unexplained money [sec. 69A]
Amount of investments not fully disclosed
[sec.69B]
Unexplained expenditure [sec.69C]
Amount borrowed or repaid on hundi[sec.69D]
They are deemed income of the current previous
year.
12/12/2007 120
 Maintenance of books
compulsory[Sec.44AA]
Legal medical, engineering, architectural, accountancy,
Film artist technical consultancy, or interior decoration
and other notified profession [Specified professional]
If gross receipts exceed 1,50,000 in any of the three
years preceding the previous year.
Non-specified professional- Income exceed Rs.
1,20,000 and total gross receipts exceed 10,00,000
What are those books maintained?

12/12/2007 121
Specified Books to be maintained
Cash book
A Journal on mercantile basis
Ledger
Carbon copies of machine numbered bills
exceeding Rs. 25 issued by the person
Original bills if exceed Rs. 50. If bills are not
issued payment vouchers signed by the person

12/12/2007 122
 Medical practitioner
Additional books required:
Daily cash register showing date,
patients name, nature of
professional services rendered, fees
received and date of receipt
Stock register for medicines and
other consumable accessories .

12/12/2007 123
 Audit of Accounts[sec.44AB] if
crossed limit

Business-Gross receipts
/sales exceed 40 lakhs
Profession- gross receipts
exceed 10 lakhs
12/12/2007 124
 Audit compulsory with out any limit
of income/receipt
Person engaged in:
1. civil construction[44AD]- 8% of gross receipts
2.Business of plying, leasing or hiring trucks[44AE]-
Heavy vehicles Rs. 3500 pm (owned months), other
vehicles- 3150 pm (not owned more than 10 vehicles
any time during the previous year.-No expenditure is
deductible .
Retail traders[44AF]- 5% of turnover is considered as
income

12/12/2007 125
 Important points to solve problems
Bonus-before last date of filing
Depreciation- permitted as per income tax
Direct taxes-disallowed
Indirect taxes-allowed if paid before due date of filing
Capital expenditure-disallowed
Bad debts recovered-if allowed earlier taxable
Income from other heads such as salary, house
property etc-if included in the P/L /A/c deduct.

12/12/2007 126
 Points to solve problems

Outstanding statutory liability-

before due date to be paid
statutory penalty-disallowed

Contractual penalty-allowed

Personal expenditure-disallowed

12/12/2007 127
 Points to solve problems

Entertainment expenditure-fully
allowed
Maintenance of guest house-fully
allowed
Revenue advertisement including
gift to customers-fully allowed.
12/12/2007 128
 Points to solve problems
Capital expenditure on advertisement-
depreciation is allowed.
Amount paid for expenses beyond 20,000
without crossed a/c payee cheque or draft -
20% disallowed
Any expenditure incurred (traveling) out side
india allowed to the extent of RBIs permission

12/12/2007 129
 Points to solve problems

paidon borrowing-Not allowed

Expenditure to audit-allowed
Expenditure to prepare
accounts for IT allowed
interest

12/12/2007 130
 Points to solve problems
Interest on borrowing to pay direct tax such as
Income tax-disallowed
Copy right , technical know how, patent right-
amount paid disallowed but depreciation 25%
only allowed.
Employees contribution to PF- treated as
income
If such employees contribution is paid before
due date as per the PF act- allowed.

12/12/2007 131
 Points to solve problems
Capital expenditure on travelling-disallowed
Traveling expenditure to buy stock-allowed
Insurance to asset or employees-fully allowed
expenditure
Profit on sale of capital asset which is included
in the P/L /a/c- disallowed

12/12/2007 132
 Points to solve problems
Rent received from outsider other than
employee- credited to P/L A/c-
disallowed income-subtract from net
profit-Income from House property.
Any payment to
workers/Government-Before the last
date of filing returns is allowed
12/12/2007 133
 Points to solve problems
All reserves/provision except depreciation
provision-disallowed
Interest on own capital-disallowed
Direct taxes refund like It refund shown in P/L
A/C disallowed income= subtract from profit
Revenue repair to building , furniture even
leasehold allowed expenditure

12/12/2007 134
 Points to solve problems
Capital expenditure on family planning- 1/5 is
allowed
Loss of cash, goods-allowed.
Donation and charity-disallowed
Fringe benefit tax-disalowed
Expenditure on issue of shares-disallowed
;where as expenditure on issue of debentures,
arrangement of loan (borrowed capital)- allowed

12/12/2007 135
 Points to solve problems
Income from other heads-inadmissible income
Advance payment of tax, provision for tax,
income tax refund-disalloed
Life insurance premium of owner paid from
business-disallowed
Scientific Research (in house)-fully allowed
including capital expenditure
Family planning revenue expenditure-allowed

12/12/2007 136
 Points to solve problems

Unapproved statutory funds-

disallowed
Closing stock and opening stock to
be valued in the same manner

12/12/2007 137
 Profit and loss account
particulars Amount particulars Amount
Rupees Rupees
Salaries Gross profit 10,00,000
Rent and rates Interest on bonds
Office expenses Dividend received
Stock destroyed Rent
Depreciation Rent paid in advance
Discount Profit on sale of
Advertisement investment
Interest on loan discount
Scientific research expenses
Bad debts
RBD
Insurance on building
Insurance stock
12/12/2007 138
 Closing stock is 10% less than the actual value
Opening stock was over valued by 8%
Advance payment of tax

provision for tax

income tax refund

Loss of cash, goods
Capital expenditure on family planning
Loss of cash, goods
Donation and charity
Fringe benefit tax
Expenditure on issue of shares
expenditure on issue of debentures,
arrangement of loan on borrowed capital
Bonus paid on 2nd september
Copy right
technical know how
patent rights
Cash Amount paid for expenses 25000

12/12/2007 139
 Bad debts written off recovered (earlier
disallowed)
statutory penalty
Contractual penalty
Personal expenditure
Interest paid on borrowed funds to pay
Income tax
Interest paid on installment of the price of
property
Expenditure to raise capital
Expenditure on shifting of registered office
12/12/2007 140
ALTERNATIVE WORK IS REST
Learn every day

Everyone is good

No bad day. It depends upon our mind set

Enjoy whatever you do

THANK YOU
Two sides in a coin.
One is failure(50% )
Other is success(50%)

Happiness by giving but not receiving

12/12/2007 Accepting failure leads to success141
 Capital gains

By
Augustin Amaladas.Lourduswamy
M.Com.,AICWA.,B.Ed.,PGDFM

12/12/2007 142
 Capital Assets
Any stock-in-trade, consumable stores or raw materials held for the purpose
of his business or profession;
Personal effects, i.e., movable property (including wearing apparel and
furniture, excluding jewellery), held for personal use by the assessee or any
member of his family dependent on him.
Agricultural land in India, not being land situated in the following:-
In any area which is comprised within the jurisdiction of a municipality
(whether known as a municipality, municipal corporation, notified area
committee, town area committee, town committee, or by any other name) or
a cantonment board and, which has a population of not less than ten
thousand according to the last preceding census.
In any area within such distance, not being more than eight kilometers, from
the local limits of any municipality or cantonment board referred to in item

12/12/2007 143
 Capital assets
6.5 per cent Gold Bonds 1977, or 7 per cent
Gold Bonds 1980, National, Defence Gold
Bonds, 1980, issued by the Central
Government;
Special Bearer Bonds, 1991, issued by the
Central Government;
Gold Deposit Bonds issued under the Gold
Deposit Scheme, 1999 notified by the Central
Government.

12/12/2007 144
 transfer of house property

Under S 54, exempt from tax provided

The following conditions are satisfied
The house is a residential house is taxable under the head
"income form house property"
The house property, which may be self-occupied or let out,
is a long term capital asset (i.e. held for a period of more
than 36 months before sale or transfer.)
1+2 or 3
Invest upto capital gain in the same nature of asset
The house property, so purchased or constructed, has not
been transferred within a period of 3 years from the date of
purchase or construction.

12/12/2007 145
 consequences if a new house is
transferred within 3 years?

the amount of capital gain that arise, together

with the amount of capital gains exempted
earlier, will be chargeable to tax in the year of
the sale of the new house property.

12/12/2007 146
 If new house transferred?
The gain along with exempted gain is taxed as
short term

12/12/2007 147
 Short term capital gain

Computation of Short-term capital gain

1. Find out the full value of consideration

2. Deduct the following:

a. Expenditure incurred
wholly and exclusively
in connection with such
transfer.

b. Cost of acquisition.
c. Cost of improvement

3. From the resulting sum

deduct the exemption provided
by section 54B, 54D and 54G.

4. The balancing amount is the short-term capital gain.

12/12/2007 148
 Computation of Long-term capital gain
1. Find out the full value of consideration
2. Deduct the following:
a. Expenditure incurred wholly and exclusively in connection
with such transfer
b. Indexed Cost of acquisition
c. Indexed Cost of improvement.

3. From the resulting sum deduct the exemption provided by

section 54, 54B, 54D, 54EC,, 54F and 54G, and 54GA.

4. The balancing amount is the long-term capital gain.

12/12/2007 149
How IS long term capital gain taxed?
Flat rate-20%+Surcharge+Educational cess+ Secondary and
higher education cess.
Surcharge-10% if net income exceed Rs.10,00,000 for
individual,HUF,AOP,BOI

Educational cess-2 % on tax

Companies -10% if net income does not exceed 1 crore rupees. 2%
educational cess

For Assesment year 2008-09 secondary and higer education

cess-1% on( tax+surcharge)

12/12/2007 150
 Indexed cost of acquisition
Formula
Cost *Index of the year of sale/index of the year
of acquisition of the present owner

cost= cost of acquisition of the present owner

or
Cost of acquisition of the previous owner in
case of will or gift
12/12/2007 151
 indexed cost of acquisition?
S 48 defines "indexed cost of acquisition" as the amount, which bears to the
cost of acquisition the same proportion as Cost Inflation Index for the year,
in which the asset is transferred, bears to the Cost Inflation Index for the first
year in which the asset was held by the assessee or for the year beginning on
the 1st day of April, 1981, whichever is later.
The Cost Inflation Index, in relation to a previous year, means such Index as
the Central Government may, having regard to 75% of average rise in the
Consumer Price Index for urban non-manual employees for the immediately
preceding previous year to such previous year, by notification in the Official
Gazette.

12/12/2007 152
 tax shelter for avoiding capital gains
tax?
The Income Tax Act grants total/partial
exemption of capital gains under Sec.- 54, 54B,
54D, 54EC, 54F, 54G and 54H.

12/12/2007 153
 Under S 54
Under S 54, exempt from tax provided
The following conditions are satisfied
The house is a residential house is taxable under the head
"income form house property"
The house property, which may be self-occupied or let out,
is a long term capital asset (i.e. held for a period of more
than 36 months before sale or transfer.)
1+2 or 3
Invest upto capital gain in the same nature of asset
The house property, so purchased or constructed, has not
been transferred within a period of 3 years from the date of
purchase or construction.

12/12/2007 154
 Under S 54B
Individuals
agricultural land used for atleast for 2 years before
transfer
a. provided the assessee has purchased another land for
agricultural purpose within a period of 2 years from
the date of such transfer.
b. In the case of compulsory acquisition, It is exempted
from tax as per section 10(37) with effect from
assessment year 2005-06 onwards.

12/12/2007 155
 ***Capital gains exemted U/S 10
para 95.2
1. Capital gain on transfer of US 64[Section 10(36)]- both long
term and short term
2. Long term capital gain on transfer of BSE-500 Equity
Shares[10(36)]-long term
3.Compulsory acquisition of urban agriculture land[10(37)]-
longterm and short term.-individual and HUF.
4. Securities not chargeable to tax if covered under transaction
tax-such as mutual fund equity linked issued by domestic
companies.
5. Capital gain arising in the reconstruction or revival of power
generation business [10(41)]

12/12/2007 156
 Under S 54D,
a. capital gains, arising on compulsory acquisition of any land or
building forming part of an industrial undertaking, is exempt
from tax, provided such land or building was used by the
assessee for the purpose of the industrial undertaking for at
least 2 years preceding the date of compulsory acquisition and,
the assessee has, within a period of 3 years after that date,
purchased any other land or building or right in any other
land/ building or constructed any other building for the
purpose of shifting or reestablishing the said undertaking or
setting up another industrial undertaking.

12/12/2007 157
 Under S 54EC
where the capital gain arises from the transfer of
a long-term capital asset before the 1st day of
April, 2000, and the assessee has, at any time
within a period of six months after the date
of such transfer invested the whole or any part
of capital gains, in any of the assets,
Bonds in NHAI, Rural Electrification

12/12/2007 158
 Under S 54 F
where, in the case of an assessee being an individual or
a Hindu undivided family,
the capital gain arises from the transfer of any long-
term capital asset,
not being a residential house,
within a period of one year before
or two years after the date on which the transfer
took place purchased, or has within a period of
three years after that date constructed, a residential
house.

12/12/2007 159
 S 54 G Voluntary transfer of industry
The shifting of such industrial undertaking to
any area other than an urban area, and
the assessee has, within a period of 1 year
,before
or 3 years after the date on which the transfer
took place, purchased a new machinery or plant
for the purposes of business of the industrial
undertaking

12/12/2007 160
 Sec.54GA Shifting from urban to
Special Economic Zone
Industry
1year before or 3 years after transfer
New asset can not be transferred with in 3 years.

12/12/2007 161
 Special Cases
1.a capital asset is converted by the owner
thereof into (or is treated by him as) stock-in-
trade of a business that is carried on by him,
such conversion (or treatment) of the capital
asset shall also be treated as "transfer of the
asset" and hence chargeable to income tax

12/12/2007 162
 How is it computed?
Sec.45(2) Conversion amount to transfer in the
year of conversion.
But taxed in the year such stock is sold.
Capital gain=FMV on the date of conversion
into stock in trade cost(Index) of acquisition.
Business gain=sale-FMV

12/12/2007 163
 Transfer of personal asset to
partnership firm
Sec.45(3),(4):
It amounts to transfer in the year of transfer to
partnership firm.
Capital Gain=Amount entered in the books of
the firm-cost (Index).
If retransferred to partners:
Capital gain=FMV-Book value in the
partnership firm

12/12/2007 164
 Capital gain on self generated
assets(Sec.115F)
Like goodwill, tenancy right, route permit
Cost of acquisition is NIL
Cost of improvement is considered

Fair market value on 1stApril 1981 is

irrelevant

12/12/2007 165
 Bonus Shares
If alloted before 1981 cost of acquisition is
FMV on 1st April 1981.
If aquired after 1st April 1981 cost of acquisition
is NIL

12/12/2007 166
 Right shares
Cost of acquiring right shares =cost of
acquisition like any other assets

12/12/2007 167
S 54H relaxation of time due to delay
in compensation
, the period of acquiring the new asset under S
54, 54B, 54D, 54EC and 54F by the assessee or
the period for depositing or investing the
amount of capital gain shall be extended in
relation to such amount of compensation as is
not received on the date of transfer. The
extended period shall be reckoned from the
date of receipt of the amount of
compensation.

12/12/2007 168
Inherited by the assessee or gifted to the
assessee
the cost of acquisition of the asset for which the
previous owner acquired it, shall be deemed to
be the cost of acquisition of the asset as
increased by the cost of improvement of the
assets if any, incurred or borne by the previous
owner or the assessee as the case may be.

12/12/2007 169
 Amalgamation
cost of acquisition of the asset shall be deemed
to be the cost of acquisition to him of the
shares(s) in the amalgamating company.(old
company )

12/12/2007 170
 conversion of bonds or debentures,
debenture-stock
the cost of acquisition of the asset to the
assessee shall be deemed to be that part of the
cost of debenture, debenture- stock or deposit
certificates in relation to which such asset is
acquired by the assessee.

12/12/2007 171
 Demerger
The cost of acquisition of the shares in the
resulting company shall be the amount which
bears to the cost of acquisition of shares, held by
the assessee in the demerged company

12/12/2007 172
 Compensation for loss of capital
asset(Insurance claim)
It amounts to extinguishment of right
Sec.45(1A)

Taxable in the year of compensation

12/12/2007 173
 Compensation for revenue asset-
stock in trade
It amounts to revenue receipt u/s-28 from
business
Or income from other sources u/s 56

12/12/2007 174
 Buy back of shares
Sec.46A
Transfer in the year of buy back
Capital gain=consideration received minus cost
of acquisition(Index if long term)

12/12/2007 175
 Slump sale[50B]
Assets are not sold individually but collectively
Capital gain=Sale- Net worth
Net worth= Assetsliabilities appearing in the
books of accounts
No index

12/12/2007 176
 Advanced money received and forfeited
Negotiation failed advance money forfeited by the
current owner
Deduct from the original cost of acquisition
before calculating index cost of acquisition
Amount forfeited by the
previous owner is not
deductible

12/12/2007 177
 Computation of capital gain on land
and Building[50C]
Both for depreciable and non depreciable asset

Sale=The stamp duty valuation all

purposes
If disputed FMV if it is lower than Stamp duty
value.

12/12/2007 178
 No Index please!!!
Depreciated asset

Bonds[Debentures]

Short term assets

12/12/2007 179
 Personal effect

Only Movable assets used by the

assessee or by the family members

Not a capital asset-No capital

gain and will not be taxed under
any other heads

12/12/2007 180