Professional Documents
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Taxation Notes PDF
Taxation Notes PDF
Taxation Notes PDF
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 previous year is
taxed.
Previous Year (sec 3): The year in which the income is earned is called the previous year.
E.g.:
1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-2009.
The same would be taxable irrespective of the accounting year followed by the assessee.
In the aforesaid the year 2007-08 is the previous year and the year 2008-09 is the
assessment year.
2. The income of X comprises of only property income till March 10, 2006. On March 10,
2006 he starts a new business of computer hardware. From the date given below, find
out the taxable income of X or the assessment years 2005-06 to 2007-08.
Property income: Rs. 42,000/- every year.
Business income: Rs 10,000/- for the period ending 31 March 2006 and Rs.56000/-for
the period ending 31 march 2007.
What would be the taxable income of X for the AY 05-06, 06-07, 07-08?
Income earned during the previous year is taxed during the assessment year. Therefore a year is
an assessment year and previous year simultaneously. However in certain cases the income is
taxed in the year in which it is earned. The exceptions to the rule are as under:
1
Assessee [sec2 (7)]:
Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest is
payable under the act. It includes:
1. Every person in respect of whom any proceeding under the act has been taken for the
assessment of his income or loss or the amount of refund due to him.
2. any person who is deemed to be an assessee.(representative assessee)
3. an assessee in default ( advance tax and TDS not deducted)
Income Tax is an annual Tax charged at the tax rates applicable for the assessment year, which
are fixed by the annual finance act.
2
15. amt received under keyman insurance policy
16. amount exceeding 50,000 by way of gift
Rs Rs
Computation of total income:
Income from salaries --
Income from House properties --
profit and gains from business and profession --
Capital gains --
Income from other sources --
Gross Total Income --
Less: deductions u/s 80 C to 80 U
Net total Income (rounded off) --
Tax
Less: Prepaid taxes
( TDS, self assessment and Advance tax)
Tax Liability
3
Ch.2 RESIDENTIAL STATUS AND ITS TAX EFFECT
1. Individual
2. Hindu Undivided Family
3. A firm or an association of persons
4. a joint stock company
5. every other person
Residential status:
Ordinary
resident Resident in India
Resident
In India
Non-ordinary
resident
Residential status is to be determined for each previous year. A person can be a resident of two
countries at once. Whether a person is a resident or non-resident is a question of fact and its duty
of the assessee to place all relevant fact in front of the assessing officer
4
Residential status of individual (sec 6):
Basic conditions:
To be an Indian resident a person should satisfy atleast one of the two conditions as under:
Exceptions:
In the following two cases a person will be a resident if he satisfies only the first condition, the
second condition is not applicable.
1. In case of an Indian citizen who leaves India for the purpose of employment or as a
member of the crew of an Indian ship.
2. In the case of an Indian citizen or a person of Indian origin who comes on a visit to India
in the previous year.
Additional Conditions:
For a resident to be classified as an ordinary resident the following two additional conditions
should be fulfilled. In case any one of them is not fulfilled then the person will be under the
category of resident but not an ordinary resident.
1. He should be resident in India for at least 2 years out of the preceding 10 years.
2. He should be in India for at least 730 days out of the immediately preceding 7 years.
Eg:
X foreign citizen comes to India for the first time on March 20, 2006. On Sep 1,
2006 he leaves for Nepal on a business trip. He comes back on February 26,
2007. Determine the residential status of X for the AY 2007-08.
X left India for the first time on May 20, 2004. During the FY 2007-08, he comes
back to India on May 27 for a period of 53 days. Determine the residential status
for the AY 2008-09.
X a foreign citizen leaves India for the first time in the last 20 years on Nov20,
2004. During the calendar year 2005, he comes to India on Sep 1 for 30 days.
During the calendar year 2006, he does not visit India at all but come on January
16, 2007. Determine the residential status for the AY 07-08.
HUF is classified as a resident and non resident according to its control and management status.
Control and management means the de facto control and management and not just the right to
control and manage.
5
Control and mangt is wholly in India Resident Next table
Control and mangt is partly in India and partly Resident Next table
outside India
Add condition 1 Karta has been resident in India at least 2 out of 10 previous years
immediately preceding the relevant previous year.
Add condition 2 Karta has been present in India for a period of 730 days or more during
the 7 years immediately preceding the previous year.
If karta or manager of a resident HUF does not satisfy the above two conditions then it would be
treated as resident but not ordinary resident.
Eg:
X an individual, is resident but not ordinary resident in India for the AY 07-08. During the
previous year 06-07, the affair of X (HUF), whose Karta is X is partly managed from India
and partly from Nepal. Determine the residential status of X (HUF) for the financial year
07-08?
6
The term control and management refers to head and brain that directs the affair of policy,
finance, disposal of profits and vital things regarding the management of a company.
Incidence of tax on taxpayers depends on his residential status and also on the place and time of
accrual and receipt of his income.
Foreign Income
• Business is controlled
wholly or party from India Taxable in India Taxable in India Not taxable in India
• Income from profession set
up in India Not taxable in India
• Business is controlled from Taxable in India Taxable in India
outside India Not taxable in India
Not taxable in India
• Profession is set up
Taxable in India Not taxable in India Not taxable in India
outside India
Not taxable in India
• Any other foreign Income Taxable in India Not taxable in India
Taxable in India
7
Tax incidence on any other taxpayer (company, firm etc) as under:
8
9
Agriculture Income:
Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) the
expression Agriculture Income means:
1. Any rent or revenue derived from land, which is situated in India and is used for
agriculture purpose.
• Rent or revenue should be derived from land (may be in cash or kind).
• The land should be in India
• The land should be for agriculture purpose.
2. Any income derived from such land by agricultural operations including processing of
the agriculture produce, raised or received as rent-in- kind so as to render it fit for the
market or sale of such produce.
3. Income attributable to a farmhouse subject to certain conditions.
• The building should be occupied by a cultivator (as a landlord or tenant).
• He should be in immediate vicinity of agriculture land.
• The building is used as a dwelling house or as a store house or other out
building.
• The land is assessed to land revenue or local rates or alternatively the land is
situated outside “urban areas” i.e. any area which is comprised within the
municipality jurisdiction having a population of not less than 10,000 persons or
within 8 kms from the limits of any such municipality.
If the above conditions are satisfied then, income from a farm building is exempt from tax.
Eligibility:
Any undertaking which satisfy the following conditions is eligible to get deduction:
1. It must begin manufacture or production in free trade Zone
2. It should not be formed by splitting/ reconstruction of business.
3. It should not be formed by transfer of old machinery. (Second hand imported and 20%)
4. Sale consideration should be remitted to India in convertible foreign exchange.
5. Books of account should be audited
6. Return of income should be submitted on Time.
10
Amount of deduction
Export turnover-
Period of Deduction:
The assessee can claim deduction for a period of 10 consecutive assessment years beginning
with the assessment year relevant to the previous year in which the undertaking begins to
manufacture or produce.
The aforesaid deduction is not available to any undertaking from the assessment year 2010-11.
Special Provisions:
First 5 years-100% of profit derived from the export of such articles or things or computer
software. (First 5 consecutive years).
Next 3 years- a further deduction is available to the extent of 50% of the profit provided an
equivalent amount is created as Special Economic Zone re-investment Allowance Reserve.
Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The
trust should be one established in accordance with law and its objects should fall within the
definition of the term “ charitable purpose”.
Here the charitable purpose includes relief to the poor, education, medical relief and the
advancement of any other object of general utility.
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• If a voluntary contribution 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.
If the income applied to charitable or religious purposes, during the previous year fall short of
85% of the income derived during the year due to below mentioned reasons then the trust can us
the income as below:
Reason for less than 85% application of When the income can be spend
income
Income has not been received during the The year in which the income is received or the
previous year following subsequent year.
If the income is not applied during the extended time then the income will be taxable 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. Such income so accumulated will not form the income of the trust.
Forfeiture of exemption:
If the benefits of any amenities or services are derived by any specified persons as per section 13
then the exemption given to trust stand forfeited.
The following income do not qualify for exemption:
1. Income for private religious purposes only
2. Income for the benefit of particular religious community
3. Income for the benefit of interested persons
4. Funds not invested in specified securities/ deposits
Eg:
During the previous year 2006-07, a charitable trust gets the following income:
a. Voluntary contribution (with specific direction that they Rs
shall form part of the corpus of trust 12,90,000
b. Voluntary contribution (without specific direction) 18,30,000
c. Income from property held in trust
During the previous year 2006-07, the trust spends Rs. 8,90,000 for charitable purpose in India.
Besides it gives donation of Rs. 85,480/- to the charitable trusts. It sets apart Rs. 14,00,000 for
the purpose of construction of a charitable hospital up to March 31,2012.
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Ch.4 INCOME UNDER THE HEAD SALARIES
Meaning of salary
Rs. Rs.
Income from Salary --
Income by way of allowance --
Taxable value of perquisites -- --
Gross Salary
Less: deductions u/s 16 --
Entertainment Allowance --
Professional Tax --
Income from salaries ---
Leave Salary:
13
Leave Salary refers to the encashment of the leave standing to the credit of an employee either at
the time of his retirement/ or leaving his job or at any time during his service.
Tax treatment:
Leave encashment at the time of Non government Fully or partly exempted from
retirement / leaving the job employee tax in some cases.
Non government employee getting Leave encashment at the time of retirement / leaving the job:
In case of a non-govt employee including a local authority or public sector undertaking, leave
salary is exempt from tax on the basis of following:
1. Period of earned leave (in no. of months) to the credit of employee x Average Salary per
month. (cannot exceed more than 30 days in a year)
2. 10 x average monthly salary
(Avg monthly salary= basic salary+ dearness allowance+ commission on
turnover)
3. Amt specified by Govt. (300,000)
4. Leave encashment actually received
Eg:
1. Mr. Pradeepkumar retires on 1st July 2007 after serving 18yrs of service and receives Rs.
80,000 as amount of leave encashment for 15 months. His employer allows 45 days
leaves for every completed year of services. During service he has encashed leave for a
period of 12 months. Calculate the taxable amount of leave encashment if his salary
during 1/7/06 to 1/7/07 is Rs. 5000/- per month.
2. In case where the employee is not covered by the gratuity Act, 1972 then the years are
the completed years of service( any fraction is to be ignored).
Eg:
1) X, an employee of PQ Co. Ltd, receives Rs. 78,000 as gratuity. He is covered by the payment
of gratuity Act, 1972. He retires on December 12, 2006 after rendering services of 38 years
and 8 months. At the time of retirement his monthly basic salary and dearness allowance was
Rs.2,400/- and Rs. 800 respectively. Calculate the amount of exemption.
2) In the above example calculate the amount of exemption if X was not covered by the Gratuity
Act, 1972.
3) Mr. X retired on 1st April 2007 after serving for 30 years and 7 months. He was getting salary
Rs. 5,000/- pm from 1/1/2006 to 31/12/2006 and thereafter Rs. 5,200/- pm. He received DA
@ Rs. 1,000 pm (forming part of salary for computation of retirement benefits) and
2%commission on sales achieved by him. Turnover achieved by him during 10 months
(preceding the month in which he retired) Rs. 8,00,000. He received a gratuity of Rs.
1,56,000. Compute the exempted amount of gratuity.
Non-Government
Employee Gratuity is not received One-half of the pension,
which he is normally
entitled to receive, is
exempt from tax.
Uncommuted Pension is always chargeable to tax for both government and non-government
employee.
15
Eg:
1. X retires from a private company on 30th April 2007. He gets a pension of Rs. 24000/- per
month. Upto 30th June 2007. From 1st July 2007 onwards he gets two-third of his pension
commuted for Rs. 1,50,000/-. He was not in receipt of any gratuity at the time of
retirement. Compute the taxable amount of pension for the assessment year 2008-09.
2. Calculate the taxable pension of X for the AY 2008-09, in the above ex. if X was in receipt
of Gratuity as per gratuity Act 1972.
Pension Scheme for an employee joining Central Government on or after Jan 1, 2004:
Under the new scheme it is compulsory for an employee to contribute 10% of salary every month
towards their pension account and a matching contribution will be made by the government. Such
contribution will be deductible under u/s 80 CCD. When the pension is received out of the
aforesaid amount it will be taxable in the hands of recipient.
Allowances is generally defined as a fixed quantity of money or other substance given regularly in
addition to salary for the purpose of meeting some particular requirement connected with the
services rendered by the employee or as compensation for unusual conditions for that service.
It is fixed, predetermined and given irrespective of actual expenditure.
Salary means basic salary and includes dearness allowance and commission based on the fixed
percentage of turnover.
Eg:
Mr. X is employed in a company in Agra. He is getting a basic salary of Rs. 5000/- pm,
Dearness allowance @10% of basic pay, commission based on fixed percentage of
turnover Rs. 24,000/- pa. Actual rent paid by the assessee Rs. 2,500/- pm. Compute the
taxable amount of HRA.
Entertainment Allowance:
Entertainment Allowance is first included in the salary income and thereafter a deduction is given
on the following basis:
16
Status of Employee Exemption Amount
Government Least of the following is deductible:
Employee a) Rs. 5000
b) 20% of basic salary
c) actual amount of entertainment allowance
E.g.:
X, a government employee gets Rs. 40,000 per annum as basic pay. In addition, he receives Rs.
8,500 as entertainment allowance. His actual expenditure on entertainment for official purpose
however exceeds Rs. 9000/-. What would be the amount of deduction?
Special Allowances:
Hostel Expenditure This allowance is granted to an Exemption limited for Rs. 300/-
Allowance employee to meet the hostel per month per child limited to a
expenditure on is child maximum of two children.
17
Transport Allowance It is given to an employee to meet Exempted to the extent of Rs.
his expenditure for commuting 800/- per month
from his office to his residence.
Special Compensatory It includes any special allowance Amount exempt varies from Rs.
( Hill Areas) Allowance in the nature of special 300 per month to Rs. 7000 per
compensatory (hill areas) month.
allowance or high altitude
allowance or uncongenial climate
allowance or avalanche
allowance.
Underground allowance Underground allowance is Exemption limited to Rs.800 per
granted to an employee who is month.
working in uncongenial, unnatural
climate in underground mines.
Perquisites:
Perquisites can be defined as any casual emolument or benefit attached to an office or position in
addition to salary or wages. Therefore a perquisite to be taxable under the head salaries:
a. allowed by an employer to an employee
b. allowed during the continuance of his employment
c. directly dependent upon service
d. resulting in the nature of personal advantage to the employee
e. derived by virtue of employers authority
Taxability of perquisites:
18
Taxable Perquisites in the hands of the Exceptions
employee
Furnished/ unfurnished house without rent or at Exceptions are:
concessional rent A rent free house in a remote
area,
hotel accommodation in case of
transfer for not exceeding 15
days.
19
b) Private sector or other employees:
Value of the perquisite depends on salary of the employee and lease rent of the
accommodation.
SALARY:
For the purpose of valuation the salary includes
a) Basic salary
b) Dearness allowance, if terms of employment so provide
c) Bonus
d) Commission
e) Fees
f) All other taxable allowance (excluding amount not taxable)
g) Any monetary payment which is chargeable to Tax
Eg:
X, an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs), draws Rs. 300,000 basic
salary, Rs. 10,000 as dearness allowance(forming part of salary), and Rs. 5000 as commission .
Besides, the company provides a rent free accommodation in Ajmer. The house is owned by
company and has a fair rent of Rs. 50,000 p.a. Determine the taxable value of perquisite.
20
Accommodation in a hotel:
The perquisite is valued at the lower of the two amounts:
a) 24% of salary paid or payable for the period during which such accommodation is
provided in the previous year.
b) Actual charges paid or payable by the employer to the hotel.
Eg:
X received during the previous year ending March 31,2007, emolument consisting of basic pay:
Rs. 162,000: special allowance: Rs 17,000 and reimbursement of medical expenditure: Rs.
3800/-. His employer has also provided a rent-free furnished flat in Mumbai. Lease rent of the
unfurnished flat is Rs. 50,000. Some of the household appliance provided to X (with effect from
June1 ,2006) are owned by the employer ( cost price Rs. 36000). Employer pays Rs. 10,000 as
hire purchase charges for the three air conditioners installed. Compute the value of perquisite if:
a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flat
as per the Central Government rules.
b) X is the managing director of ABC(P) Ltd. What difference would it make if X was
provided a hotel accommodation through out the year (tariff being Rs. 120,000 per
annum)
The value of benefit to the employee (or any member of his household) resulting from the
provision by the employer for services of a sweeper, a gardener, a watchman or a personal
attendant, shall be the actual cost to the employer, that is, the total amount of the salary paid or
payable by the employer (or any other person on his behalf) for such services as reduced by the
amount paid by the employee for such services.
This perquisite is taxable in the hands of specified employees only provided the connection is in
the name of employer. If in the name of employee then the employer would be paying on behalf
of the employee and is taxable in all cases.
Cost to employer (A) Amount paid /payable by the Manufacturing cost per unit
employer to the outside incurred by the employer
agency
Sub: Amount recovered Recovery from the employee Recovery from the employee
from the employee (B)
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Valuation in respect of free education:
This perquisite is taxable in the hands of a specified employee only and only in those cases
where the educational institute is owned and maintained by the employer or where such
education facility is provided in any institute by reason of employee’s employment with the
employer. The valuation of the facility would be as under:
If the fee is paid by the employer for employees children then there is no exemption available for
both specified and non-specified employees. Similarly reimbursement of school fees is also
taxable in the hands of both specified and non-specified employees.
22
A. Find the cost to the 10% p.a of actual cost Amount of rent paid or payable
employer
B. Amount recovered Recovery from the employee Recovery from the employee
from the employee
Taxable Value of Balancing amount (if positive) Balancing amount (if positive)
perquisite (A-B)
Normal wear and tear for 50% for each 20% for each 10% for each
completed years for completed year by completed year by completed year of
which the asset was used reducing balance reducing balance actual cost.
by the employer for his method method
business. (B)
Amount recovered by the Paid by employee for Paid by employee for Paid by employee for
employee (C) acquiring such asset acquiring such asset acquiring such asset
Taxable Value Balancing amount (if Balancing amount (if Balancing amount (if
(A-B-C) positive) positive) positive)
Electronic Items refer to data storage and handling devices like computer, digital diaries and
printers. They do not include household appliances.
Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed in
excess of Rs. 15,000 is chargeable to tax. The following are the exemptions to the rule that is in
the following cases there is no monetary ceiling:
In employer hospital
government hospital
Expenditure in case of specified treatment
Health insurance premium
Medical facilities outside India
23
Leave travel concession:
The leave travel concession is exempted twice in a block of four years. And the exemption is
available to both Indian citizen and foreign citizen. Exemption is based on actual expenditure and
is available only in respect of fare. If the journey is performed by the circuitous route then the
amount of exemption is available in respect of the shortest route.
The exemption is available for the family meaning spouse and two children, parents, brothers and
sisters of individual who are mainly or wholly dependent on him.
Provident Fund:
Provident Fund scheme is a retirement benefit scheme. Under this scheme, stipulated sum of
money is deducted from the employee’s salary and an equal matching contribution is made by
the employer. The contribution is invested in gilt-edged securities and interest is earned thereon.
Thus the balance of provident fund consist of:
a) Employers contribution
b) Interest on employers contribution
c) Employees contribution
d) Interest on employees contribution
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Taxability of contribution to Provident fund.
Interest credited to Exempt from tax Exempt from tax up Exempt from tax
provident fund to 9.5%; excess of
interest over this is
taxable
Lump sum payment Exempt from tax Exempt from tax in Employees
at the time of some cases, when contribution
retirement not exempt provident exempt
fund will be treated Interest on
as unrecognized employee
provident fund contribution taxable
under income from
other sources
Employer’s
contribution and
interest thereon is
taxable under the
head income form
salaries.
Note:
1. Salary includes basic salary, dearness allowance/ dearness pay, if terms of employment so
provide and commission if received as fixed percentage of turnover achieved by employee.
2. The accumulated balance due and becoming payable to an employee participating in a
recognized provident fund will be excluded from his total Income in the following cases:
If he has rendered continuous service with his employer for a period of 5 years or more.
If the employee is not able to fulfill the conditions of such continues service due to his
service having been terminate by reason of his ill health or by reason of the contraction
or discontinuance of the employers business or any other reason beyond the control of
assessee.
If on the occasion of his retirement, the employee obtains employment, to the extent
the accumulated balance due is transferred to another recognized provident fund
maintained by such employer.
Eg:
25
For the previous year 2006-07, X submits the following information- Basic Salary: 120,000;
dearness allowance: 40,000 (46% forming part of salary for retirement benefits); commission:
6000 (i.e. 1% of turnover 600,000 achieved by him) and children education allowance for his 2
children Rs. 7200. The employer contributes Rs. 20,000 towards provident fund to which a
matching contribution is made by X. Interest credited in the provident fund account on March 15,
2007 @ 11%comes to 93,500. Income of X from other source is Rs. 86,000. Find the net income
of X for the assessment year 2007-08 if the provident fund is (a) statutory provident fund, (b)
recognized provident fund, (c) unrecognized provident fund.
Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect of
specified qualifying amount paid or deposited by the assesses in the previous year.
Practical Problems:
Mrs. X (age 51 years) is a part time college lecturer in Delhi. During the year 2006-07. she gets
basic salary of Rs. 12300 up to June 30,2006 and Rs. 12,700 afterwards. Besides she gets 30%
of Basic salary as house rent allowance, Rs. 1630 per month as dearness allowance (71% of it
forming part of salary for computation of retirement benefits and Rs. 500 per month as
conveyance allowance which is entirely for personal purpose. On July 10,2006 the employer
transfer a music system to Mrs. X on her completing 10 years of service( cost of music system
purchased on sep 1, 2005: 22470) for Rs. 7500. She is a member of statuary provident fund to
which both the employer and employee contributes @ 12% of basic salary. Apart from the
minimum contribution, she makes an additional contribution of Rs. 600 per month to the provident
fund. During the previous year 2006-07, Rs. 65698 is paid to her for checking answer sheet for
different universities. Determine the taxable income and tax liability on the assumption that she is
paying a rent of Rs. 4000/- per month.
X( age 26) is an employee of a cooperative society at Varanasi. During the previous year 2006-
07, he gets Rs. 6500 per month as basic salary, Rs, 800 per month as bonus and Rs. 450 per
month as dearness allowance( 32% is forming part of the salary for computation of retirement
benefits) and Rs. 200 per month as medical allowance ( medical expense is however more than
Rs 200 per month). He is a member of a recognized provident fund to which the employer
contributes 11,162 (X also makes a matching contribution). X gets an interest free loan
(repayable within 8 years) of Rs. 82,330 from the employer for purchasing a house. Besides he
gets Rs. 10,30,760 as interest on company deposits from a private sector undertaking. Determine
the taxable income and tax liability of X for the assessment year 2007-08.
This chapter deals with any income falling under the head income from house property.
26
3. he property should not be used by the owner for the purpose of any business or
profession carried on by him, the profit of which are chargeable to income tax.
All the above conditions should be satisfied for a property income to be made taxable under the
head income from house property.
Exceptions:
In the below mentioned cases rental income is not charged to Tax:
a. Income from farmhouse.
b. Annual value of ay one palace of any ex-ruler.
c. Property income of any local authority.
d. Property income of an approved scientific research association.
e. Property income of any educational institution and hospital
f. Property income of a trade union.
g. House property held for charitable purposes.
h. Property income of a political party
i. Property income used for own business or profession
j. One self occupied property.
27
Steps for determining the gross Annual Value:
E.g.:
(Rs. In thousand)
Particular B C D E F
A
Municipal valuation (a) 140 180 180 140 231 140
Fair rent (b) 145 185 185 145 262 150
Standard rent (c) 142 175 175 142 241 120
Annual rent if property is let out through the
year 06-07 (d) 168 168 168 168 252 96
Unrealized rent (e) 14 - 1 70 42 --
Period for which property remains vacant
Loss due to vacancy (f) 1 - ½ 3 5 10
7 - 14 42 105 80
The list of deductions u/s 24 is exhaustive that is no other deduction is allowed except whatever
are explicitly mentioned. The following two deductions are allowed:
28
1. Standard deduction
2. Interest on borrowed capital
Standard deduction:
30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
Interest on borrowed capital is allowed as deduction even in those cases when the annual value of the house
property is nil.
When more than one house is occupied by a person during the previous year for is residential
purpose, only one house is treated as self- occupied and all other houses will be deemed to be let
out.
In case of deemed to be let out the gross annual value is taken to be the higher of municipal
valuation or fair rent whichever is higher to the maximum of standard rent.
When a part of property is self-occupied and a part is let out or a house is self- occupied
for the part of year and let out for the part of the year:
29
In computing the income in the aforesaid situation the fair rent attributable to the self- occupied
period/ portion should be excluded in determining the annual value. Similarly the house tax and
interest in loan attributable to ®elf-occupied period/ portion should be ignored. It means the house
tax and interest on loan attributable to self-occupied portion/period cannot be deducted to arrive
at income from house property.
E.g.:
From the following information, compute the annual value of the house for AY 07-08
Problems:
1. From the information given below, find out the income under the head “ Income under the
house property” for the assessment year 2007-08 and 2008-09.
X (Rs) Y (Rs)
The above properties have been let out throughout the previous years 2006-07 and 2007-08.
Municipal taxes are paid at the rate of 20%.
30
Ch.6 Income under the head Business & Profession
This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have a
bearing on the computation of taxable income.
31
Meaning of term business:
The term business refers to any economic activity carried out with a view to earn profit. As per
section 2(13) term business is defined as “any trade, commerce, manufacture or any adventure in
the nature of trade, commerce or manufacture”. The definition covers every facet of an
occupation carried on by a person with a view to earn profit. The term business is a word of wide
import and in terms of fiscal statue it must be construed in a broad rather than in a restricted
sense.
Thus Production of goods from raw material, buying and selling of goods to make profits and
providing services to others are different form of business.
Profession and Vocation:
As per sec 2(36) profession includes vocation. The term profession is an occupation of requiring
purely intellectual skill or manual skill attained in special knowledge. While the term vocation
implies natural ability of a person for some work. The distinction between the term business,
profession or vocation is not important for the purpose of income tax.
Rent, rates taxes repairs and insurance for building (Sec 30):
Under this section following deductions are allowed for premises used for business or profession:
32
1. The rent of premises, the amount of repair (not being capital expenditure), if he has
undertaken to bear the cost of repair.
2. Any sum on account of land revenue, local rates or municipal taxes. **
3. Amount of any premium in respect of insurance against risk of damage or destruction of
the premises.
Depreciation allowance is limited to 50% of normal depreciation, if the following two conditions
are satisfied:
• Where an asset is acquired during the previous year
• It is used for the purpose of business or profession for less than 180 days during that
previous year.
If the above conditions are satisfied, the assessee would be entitled to 50% of normal
depreciation, even if the asset is used for a single day.
Depreciation Available:
Under the Indian Income Tax, one can claim depreciation on the following assets:
33
1. Find out the depreciated value at the beginning of the year as on 1st of April.
2. To this value add actual cost of the asset acquired during the year.
3. From the resultant year, deduct money received/ receivable (together with scrap value) in
respect of that asset which is sold, discarded, demolished or destroyed during that year.
4. The resulting amount is the written down value of the block for that year.
5. The amount of reduction under step 3 cannot exceed the value of asset computed under
step 1 and step 2.
Computation of depreciation
Depreciation is calculated at the prescribed rate on the written down value. However the following
exceptions are there for the aforesaid:
Exception 1: When the written down value of a block of assets is reduced to zero.
No depreciation is admissible where written down value has been reduced to zero, though the
block of assets does not cease to exist on the last day.
Ex:
X owns the following assets on April 1, 2006:
During the previous year 2006-07, the following assets are purchased by X:
Unabsorbed Depreciation:
When in the assessment of the assessee full effect cannot be given to depreciation allowance in
any previous year owing to there being no profit/ gain or there being insufficient profit/ gain, the
balance of depreciation allowance is called unabsorbed depreciation.
34
Step 1 Depreciation allowance of the previous year is first deductible from the income
under the head “Profit & gains from business and Profession”.
Step 2 If depreciation cannot be fully deducted under the head “Profit & gains from
business and Profession” because of inadequate or no profit, it is deductible from
income chargeable under the other head of income (except income from salary)
for the same assessment year.
Step 3 If depreciation allowance, is still unabsorbed then it can be carried forward to the
subsequent assessment year(s).
There is no time limit for the purpose of carrying forward of unabsorbed depreciation, it can be
carried forward for indefinite period.
The following priority order is to be followed when the unabsorbed depreciation is to be set off in
subsequent year:
a. Current depreciation
b. Brought forward business loss
c. Unabsorbed depreciation
For the above setoff continuity of the business is not necessary.
Ex:
X submits the following details
Previous years
2006-07 2007-08
Income from salaries 100,000 200,000
Business Profit (before depreciation) 16,000 18,000
Current depreciation 134,000 132,000
Income from other sources 10,000 80,000
Determine the taxable income of X for the assessment year 2007-08 and
2008-09.
Amount of deduction:
The least of following is allowed as deduction:
1. A sum equal to the amount deposited in the special account as discussed above.
2. 40% of profit of such business computed under the head “profit and gains of business
and profession” before making any deduction under section 33AB and also before
adjusting any bought forward losses.
The below points are also to be kept in mind:
1. When a deduction is claimed under this section, no deduction shall be allowed in respect
of such amount in any other year.
35
2. When a deduction is allowed and claimed under this section to an association of persons
or body of individuals no deduction shall be allowed to any member of the association or
body in respect of the same.
3. Any excess deposit in special account made during the previous year is not treated as
deposit in any other year.
Withdrawal of amount:
The amount standing to the credit of the special account may be withdrawn only in case of:
1. closure of business
2. dissolution of firm
3. death of an assessee
4. partition of HUF
5. liquidation of company
Amount of Deduction:
a) Sum equal to amount deposited in the special account.
b) 20% of the profit of the business as computed under the head profit and gains from
business and profession before this deduction.
Whichever is less is allowed as deduction.
The below points are also to be kept in mind:
1. When a deduction is claimed under this section, no deduction shall be allowed in respect
of such amount in any other year.
2. When a deduction is allowed and claimed under this section to an association of persons
or body of individuals no deduction shall be allowed to any member of the association or
body in respect of the same.
Withdrawal of amount:
The amount can be withdrawn only for the purpose specified in the scheme or deposit scheme.
36
8. Any new plant or machinery to be installed for setting up of a new unit to produce any article
included in eleventh schedule.
The quantum of deduction is an amount not exceeding 100% of the total income ( computed
before making any deduction under this section and u/s 80) as is debited to the profit and loss
account of the previous year in respect of which the deduction shall be allowed shall be
admissible.
The amount of deduction to be claimed must be transferred to a reserve account. The amount to
be credited to such reserve account must not exceed twice the amount of the paid up share
capital (excluding the amount capitalized from reserves) of the assessee company. In the year in
which the reserve exceeds this limit deduction u/s 33AC will be restricted to the amount which is
sufficient to reach this limit.
The amount credited to the reserve account shall be utilized by the assessee company before the
expiry of 8 succeeding previous yrs for
a. Acquiring a ship for the purpose of business of assessee.
b. Until the acquisition of a new ship, such reserve may be utilized for the business of the
assessee but not for distribution by way of dividends or profits or remittance outside India
as profits or for the creation of any asset outside India.
In case amount of reserve is not utilized in the aforesaid manner the amount of reserve shall be
treated in the following manner:
a. In case amount of reserve is utilized for a purpose other than as given above, the amount
so utilized for other purpose shall be deemed as profit of the previous year in which it is
so utilized.
b. In case amount of reserve is not utilized to acquire a ship within 8 exceeding previous,
the amount so unutilized shall be deemed as income of the previous year next following
the period of 8 succeeding previous years.
c. In case ship is acquired within succeeding previous years, it cannot be sold or otherwise
transferred for 8succeding previous years from the previous year in which it s acquired. In
case it is sold or transferred before the expiry of 8 succeeding previous years, the
amount of reserve utilized in acquiring the ship shall be deemed as profit of previous year
in which ship is sold or transferred.
Under this section amount deductible in respect of scientific research may be classified as under:
Expenditure on research carried on by Contribution to outsiders
assessee
1. Revenue expenditure 1. Contribution to an approved scientific
2. Capital expenditure research association.
3. Expenditure on an approved in-house 2. Payment to National Laboratory
research
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Pre-commencement period expense:
Any pre-commencement expenditure being revenue in nature (other than expenditure providing
perquisites to employee) incurred before the commencement of business on scientific research
related to the business are deductible in the previous year in which the business is commenced.
Amount of deduction
A sum equal to one-one half times of expenditure so incurred shall be allowed as deduction.
Carry forward and set off deficiency shall be done in the same manner as for the unabsorbed
depreciation.
The payment will be allowed as deduction in equal installment over the period for which the
license is valid. Any profit or loss on sale of telecom license is to be taken into consideration
while computing business income.
38
Payment to associations and institutions for carrying out rural development
programmes:
This section provides deduction of sums paid by assessee to:
1. Any association or institution which has its object for carrying out any program of
rural development approved.
2. Any association or institution which has its object the training of persons for
implementation of a rural development program.
3. The national fund for rural development set up by the government.
4. The national Urban Poverty Eradication Fund set up and notified by the government.
Qualifying Expenditure:
• Legal charges for drafting any agreement between the assessee any other person
relating to setting up of business of the assessee.
• Legal charges for drafting the memorandum and articles of association if the taxpayer is
a company.
• Printing expenses of the memorandum and article of association if the taxpayer is a
company.
• Registration fees of a company under the provisions of the company’s Act.
• Expenses in connection with the public issue of shares or debentures of a company,
underwriting commission, brokerage and charges for drafting, typing, printing and
advertising of the prospectus.
Maximum ceiling:
The aggregate expenditure cannot exceed the following-
Amount of deduction:
One fifth of the qualifying expenditure is allowable as deduction in each of the five successive
years beginning with the year in which the business commences.
39
1. Expenditure is incurred in any previous year by way of payment of any sum to an
employee in connection with his voluntary retirement.
2. Such expenditure is allowed as deduction in five equal installments beginning with the
year in which the expenditure was incurred.
Where the undertaking of an Indian company entitled to deduction for amortization of voluntary
retirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation or
demerger, the deduction for the remaining period shall be available to the resulting company.
Similar provisions are applicable in the case of succession of firm or proprietary concern.
However, in the year of transfer and subsequent years, no deduction will be available to the
amalgamating company, demerged company, firm or proprietary concern.
40
11. Bad Debt.
A bad debt is allowable as deduction subject to the following conditions:
• There must be a debt
• Debt must be incidental to the business or profession of the assessee.
• It must have been taken into account in computing assessable income.
• Debt must have been written off in the books of account of the assessee.
• Transfer to provision for bad and doubtful debts shall not be taken into account.
12. Transfer to Special reserve:
Under this section deduction is available to a financial corporation including a public and
government company which is engaged in providing the long term finance for industrial or
agriculture development.
Amount of Deduction:
• The amount transferred during the previous year to the special reserve account.
• 40% of the profits derived from the business activities.
• 200% of (paid up share capital and general reserve as on the last day of the
previous year) minus the balance of the special reserve account.
Whichever is lower of the above.
13. Family Planning Expenditure:
Any bona fide expenditure incurred by a company for the purpose of promoting family
planning among its employees, is allowable as deduction.
If the expenditure is of capital nature, one-fifth of such expenditure is allowable as
deduction for the previous year in which it was incurred and the balance in four equal
installments.
Any expenditure which could not be allowed as deduction due to inadequate profit shall
be set off and carried forward as unabsorbed depreciation.
14. Any amount paid by employer as premium under keyman’s insurance scheme is fully
allowed.
Advertising Expense
Deduction is not available in respect of expenditure incurred by an assessee on advertising in any
souvenir, brochure, tract, pamphlet or the like published by political party.
41
However if the tax is paid subsequently then the deduction is allowed in the year in which
it is paid.
2. Securities transaction tax
3. Fringe Benefit Tax
4. Income tax
5. Wealth Tax
6. Tax on non monetary perquisites paid by the employer.
The above expenses are deductible in the year in which the payment is made. However if
payment is made before the due date of filing of return then the deduction will be allowed in the
year in which the expense is incurred.
42
Similarly any bad debts allowed as deduction which was recovered subsequently will be
assessed as income to the extent of deduction allowed whether the business is in
existence or not.
4. Recovery after discontinuance of business or profession:
Where any business or profession is discontinued by reason of the retirement or death of
the person carrying on such business, any sum recovered after the discontinuance of the
business or profession will be deemed to be the income of the recipient and charged to
tax in the year of receipt.
Section 44 A
For the purpose of this section specified profession means a profession of medicine,
engineering, architecture, film artiest, accountancy, authorized representative, company
secretaries.
In the case of specified profession if the gross receipt from profession do not exceed Rs 1,50,000
no specified books have been prescribed and the assessee has to maintain such books to enable
the assessing officer to assess the income of the assessee.
In case of specified profession if the gross receipt from profession exceeds Rs 1,50,000
prescribed books like
a. Cash Book
b. Journal if accrual System of accounting is followed
c. Ledger
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d. Serially numbered receipt for any receipt exceeding Rs 25
e. Original bill and receipt for any payment exceeding Rs 50 to be maintained
In the case of non specified profession or business where the gross income do not exceed Rs
1,20,000 or gross receipt do not exceed Rs 10,00,000 no requirement for maintaining any books
of accounts
In the case of non specified profession or business where the income exceeds Rs 1,20,000 or
gross receipt exceeds Rs 10,00,000 such books which may enable the assessing offices to
compute the income should be maintained
Section 44 AB
A person covered under If such person claims that the profits and gains from the business
section 44AD, 44 AE, are lower than the profits and gains computed under this section
44AF, 44BB or 44BBB (irrespective of his turnover).
Taxpayer engaged in the business of plying, leasing or hiring trucks (Sec 44AE)
1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co-operative Society or
any other person who is engaged in the business of plying, hiring or leasing goods carriages.
The taxpayer owns not more than 10 goods carriage at any time during the previous year.
44
Type of goods Carriage Estimated Income
Heavy goods Vehicle Rs 3500 for every month (or part of a month) during which the
goods carriage is owned by the tax payer.
Other than heavy goods Rs 3250 for every month (or part of a month) during which the
Vehicle goods carriage is owned by the tax payer.
3. All deduction under section 32 to 38 including depreciation is deemed to have been already
allowed and no further deduction is allowed.
4. If he so assessed than he is not required to maintain books of accounts as per section 44 AA
and is also not required to get his books of accounts audited under section 44 AB.
5. A tax payer can declare his income to be lower than the deemed profit but than he has to
maintain books of accounts as per section 44 AA and is also required to get his books of
accounts audited under section 44 AB.
E.g.:
Sri Nebukumar is the proprietor of a business. His profit and loss account for the year ended
March 31, 2003 is as follows.
45
To Audit Fee 300
To Interest on Bank Loan 1,380
To provision for depreciation 2,500
To provision for Income Tax 3,900
To Net profit transferred to Capital 80,840
Total 161,640 161,640
Mr. X gives you the following particulars from his account for the year ended 31st March, 2003. All
items except (iii) have been debited to P & L A/c.
Particular Amount
(1) Net profit s per Profit and Loss A/c 200,000
46
Ch.7 INCOME UNDER THE HEAD CAPITAL GAIN
Any profit and gain arising on Transfer of a capital asset is chargeable under sec 45. Sec 46, 47
gives such transactions which are not considered as Transfer. While Sec 54, 54 B, 54 D, 54 EC,
54 F, 54 G, 54 GA & 54H gives the list of exemptions.
Capital gain’s gain tax liability arises only when the following conditions are satisfied:
• There should be a capital asset
• The capital asset is transferred by the assessee
• Such Transfer takes place during the previous year
• Any profit or gain arises as a result of transfer
• Such profit or gain is not exempt from tax under Sec 54, 54B, 54D, 54EC, 54F, 54G,
54GA.
Capital Assets:
A capital asset is defied to include property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible. The following assets are, however, excluded from the definition
of “Capital Assets”.
1. Any stock and Trade, consumable or raw material held for the purpose of Business or
profession.
2. Movable property including wearing apparels and furniture held for his personal use or for
the use of any member of is family.
3. Agricultural land in India, which is situated in rural area.
4. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or national defense Bonds, 1980 issued
by Central Government.
5. Special bearer bonds, 1991.
6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
Exception:
In the following cases an asset held for not more than 12 months is treated as short term capital
asset.
• Equity or preference share in a Company.
• Securities (like debentures, government securities)
• Units of UTI
• Units of a mutual fund specified under section 10(23D)
• Zero Coupon bonds
Transfer of Capital Assets:
Transfers in relation to capital assets include sale, exchange or relinquishment of asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law {Sec 2
(47)}.
47
5. Transfer of share of Indian Company held by a foreign company to another foreign
company in case of amalgamation.
6. Transfer of capital asset of a banking Company to another banking company n case of
amalgamation.
7. Transfer in a demerger of capital assets by the demerged company to the resulting
company.
8. Transfer of capital assets (being FCCB or GDR) by a non resident to another non
resident.
9. Transfer of agricultural land in India march 1, 1970.
10. Transfer of a capital asset (being work of art, manuscript, painting etc) to government /
university / national museum etc.
11. Transfer by way of conversion of bonds or debentures into shares.
12. Transfer by way of exchange of a capital asset being membership of a recognized stock
exchange for shares of a company.
13. Transfer of land by a sick Industrial Company which is managed by its workers Co-
operative.
14. Transfer of a capital asset by a firm to Company in case of conversion of firm into
Company.
15. Transfer of a capital asset, being a membership right held by a member of recognized
stick exchange in India.
16. Transfer of a capital asset to a Company in the case of conversion of preparatory
concern into a Company.
17. Transfer involved in a scheme of lending of securities.
Computation of Short Term Capital Gain Computation of Long Tern Capital Gain
• Find out full value of consideration • Find out full value of consideration
• Deduct the following • Deduct the following
Expenditure incurred wholly and Expenditure incurred wholly and
exclusively in connection with such exclusively in connection with such
transfer transfer
Cost of acquisition Index cost of acquisition
Cost of improvement Index cost of improvement
• From the resulting sun deduct the • From the resulting sum deduct the
exemption provided by section 54B, 54D, exemption provided by sections 54, 54B,
54G and 54GA 54D, 54EC, 54F, 54G, 54GA.
• The balancing amount is short term capital • The balancing amount is long term capital
gain. gain.
48
Cost of asset for the previous owner Sec 49(1):
The cost of previous owner is deemed to be the cost of acquisition to the assessee in cases
where capital asset becomes the property of assessee under any of the mode described below:
1. Acquisition of property in case of partial or total partition of HUF
2. Acquisition of property in case of gift or will
3. Acquisition of property in case of :
• Succession or inheritance
• Any distribution of assets on the dissolution of a firm, BOI or AOP
• Distribution of assets on the liquidation of a company
• Under a transfer of revocable trust or an irrevocable trust.
• Any transfer from a wholly owned subsidiary to its holding company or vice versa.
• Under any scheme of amalgamation.
The holding period of the previous owner is also counted for determining whether the amount is
short term or long term capital asset nut indexation will be allowed from the time when the asset
is acquired by the assessee.
In case of depreciable asset cost of acquisition is taken as the WDV at the end of the previous
year along with any expenses on transfer of the asset. Any such capital gain is treated as short
term capital gain.
E.g.:
1. From the following information compute the capital gains for the assessment yearv2008-
09
House I House II
49
Date of Purchase May 1976 Dec 1979
Cost of Acquisition 190,000 250,000
Cost of Add Construction in 1980 10,000 25,000
Fair market value on 1-4-1981 175,000 350,000
cost of add construction in 1993-94 48,800 73,200
Sale of property in 2006-07 1050,000 19,00,000
Cost inflation index are:
1981-82= 100
1993-94= 244
2006-07= 519
50
Period of holding bonus shares The period of holding shall be determined
from the date of allotment of bonus shares
(and not from the date of acquisition of original
shares)
Capital Gain arising form the transfer of the residential Property (Sec 54)
Exemptions under following conditions are met.
1. Only and individual and HUF can claim exemption under this section.
2. Exemption is available only if the capital asset which is transferred is a residential
house property, whose income is taxable under the head Income from house
property.
3. House property should be a long term Assets.
4. A new house property should be purchased / acquired within a specified time limit.
Particular Time limit
For purchasing a new residential property Within One year before or within 2 years after
date of Transfer of house property.
For constructing a new residential property The Construction should be Complete within 3
years from the date of Transfer of house
property.
5. Amount of Exemption:
The amount of capital gain generated on Transfer of Residential house
property.
The amount invested in purchasing or constructing new residential property,
Which ever is lower.
2. If the amount is not utilized for purchase / construction of the new property till the due
date of submission of Return of Income than it should be deposited in capital gain
deposit account scheme.
3. If the new residential property is transferred within a period of three years from the
date of acquisition or completion of construction the amount of assumption given
earlier will be taken back.
Example:
From the following information compute the capital gains liable to tax in the A.Y 2003-04.
(A) Cost of acquisition of residential house in 1983 -84 -384000
(B) Sale consideration on 2-06-2002 - 17,00,000
( C) Cost of Construction of the new residential house by - 300,000
The due date of filing the return for AY 2003-04
The cost of inflation Index in 1983-84 was 116 and 2002-03 it was 447.
Capital Gain arising form the transfer of Agricultural land (Sec 54B)
Exemption under this section are available if following provisions are met:
1. The tax payer is an individual
2. he transfers an agricultural land it may be a long term / short term capital assets
3. Agricultural land was used by the taxpayer or his parents for agricultural purpose for a
period of two years immediately preceding the date of Transfer.
4. The tax payer has purchased another land of agricultural purpose within a period of two
years from the date of transfer.
5. Land may be in urban or rural area.
6. Amount of exemption:
a. The amount of capital gain generated on Transfer of agricultural land.
b. The amount invested in purchasing a new agricultural land.
51
Which ever is lower.
2. If the amount is not utilized for purchase of the new agricultural land till the due date of
submission of Return of Income than it should be deposited in capital gain deposit
account scheme.
3. If the new agricultural land is transferred within a period of three years from the date of
acquisition the amount of exemption given earlier will be taken back.
Example:
Agricultural land purchased in 1984-85 for Rs 46500 is sold for Rs 380000 on 01-05-
2002. The assessee purchased another piece agricultural land on 1-08-2003 for Rs 70000 and
deposited Rs 30000 on 24-06-2003 in capital gain account scheme 1998.Calculate capital gain
chargeable to tax in to tax for AY 2003-04. The cost Inflation Index in 1984 – 85 was 125 and
2003-04 was 447.
Capital Gain under compulsory acquisition of land and building forming part of industrial
undertaking (section 54D)
Exemption under this section is available if following provisions are met:
1. The taxpayer may be an individual, HUF, Firm, Company or any other person
2. The asset may be short term / long term
3. Capital gain arises on transfer by way of compulsory acquisition of land or building which
forms a part of an industrial undertaking belonging to the taxpayer.
4. Such land or building was used by the assessee for the purpose of the industrial
undertaking for at least two years preceding the date of compulsory acquisition.
5. Assessee has purchased nay other land or building within a period of three years from
the date of receipt of compensation or constructed a building within such period.
6. Newly acquired land or building should be used for the purpose of shifting or
reestablishing the said undertaking or setting up another industrial undertaking.
7. Amount of Exemption:
a. The amount of capital gain generated on Transfer by way of Compulsory
acquisition of land or building.
b. The amount invested in new land of building.
Which ever is lower.
2. If the amount is not utilized for purchase / construction of the new land of building till the
due date of submission of Return of Income than it should be deposited in capital gain
deposit account scheme.
3. If the new land or building is transferred within a period of three years from the date of its
acquisition or completion of construction the amount of exemption given earlier under
section 54 D would be taken back.
52
4. If the specified asset is transferred / converted into money or any loan or advance is
taken on the security of specified asset within 3 year from the date of acquisition than the
exemption given will be charged to tax in the year in which it was so transferred /
converted into money or any loan or advance is taken
Capital Gain on transfer on a long term capital asset other than a house property (Sec 54
F):
Exemption under this section is available if following provisions are met:
1. Only and individual and HUF can claim exemption under this section.
2. Exemption is available only if the capital asset which is transferred is a long term capital
asset but other than a residential house property (e.g. a plot of land, gold, share etc)
3. A new house property should be purchased / acquired within a specified time limit.
Capital Gain on transfer of assets in cases of shifting of industrial undertaking from urban
area (Sec 54G):
To claim exemption under this section following conditions need to be fulfilled:
1. A capital asset used for the purpose of an industrial undertaking situated in an urban area is
transferred.
2. The transfer is effected in the course of, or in consequence of, the shifting of such industrial
undertaking to any area other than an urban area.
3. The assessee has within a period of one year before or 3 years after the date on which the
transfer took place:
a) Purchased a new machinery or plant for the purpose of business of the industrial
undertaking in the area to which the said undertaking has shifted.
b) Acquired building or land or constructed building for the purpose of his business in
the said area.
c) Shifted the original asset and transferred the establishment of such undertaking to
such area.
d) Incurred expenses on such other purposes as may be specified in a scheme framed
by the central government.
4. The amount of exemption is equal 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.
Whichever is lower.
5. If the amount is not utilized for purchase / construction /acquisition of the new asset till the
due date of submission of Return of Income than it should be deposited in capital gain
deposit account scheme.
6. If the new asset is transferred within a period of three years from the date of its
purchase/construction/acquisition the amount of exemption given earlier under section 54 G
would be taken back.
E.g.:
The following information is given by Mrs. X (26 years) and Mrs. Y (32 years) for the assessment
year 2007-08
Mrs. X Mrs. Y
(Rs) (Rs)
Sales consideration of equity shares 70,000 95,000
Indexed cost of acquisition of equity shares 380,000 145,000
Sales consideration of Gold
Indexed cost of acquisition of gold 800,000 600,000
Other income 60,000 40,000
PPF contribution 420,000 600,000
20,000 10,000
Find out the net income and tax liability of Mrs. X for the assessment year 2007-08 firstly on the
assumption that equity shares are transferred on October 31,2006outside a recognized stock
exchange and secondly on the assumption that equity shares are transferred on February
27,2007in the NSE.
54
Basis of charge:
Basis of Charge:
Interest on security is charged to tax on cash basis if the assessee maintains his books of
account on cash basis. It is taxable on due basis if the assessee maintains his books of account
on mercantile basis.
55
Interest on 7% Capital Investment Bonds in the hands of individual and HUF.
Interest received by a non resident Indian from notified Bonds.
Interest payable to any foreign bank performing central banking functions outside India.
Interest on deposit made by a retired government employee or an employee of a public
sector company out of money due to him on retirement.
Interest on securities held by welfare commissioner, Bhopal gas victim.
Interest on gold deposit bonds issued under the gold deposit Scheme, 1999.
Grossing up of Interest:
Gross Interest (i.e. net interest plus tax deducted at source) is taxable. Net Interest is grossed up
in the hands of recipient if tax is deducted at source by the payer.
Gross Interest = net interest x 100
100- Rate of TDS
Deduction u/s 80L: No deduction is available u/s 80L from the assessment year 2006-07.
Deductions Permissible:
The income is computed after making the following deductions:
1. Commission or remuneration for realizing dividend or interest on securities.
2. Standard deduction in case of family Pension to the tune of Rs. 15,000/- or 331/3 % whichever
is less.
3. Any other expense for earning income.
Specific Disallowances:
1. Personal Expenses
2. Interest and salary payable outside India on which TDS is not deducted
3. Wealth Tax
4. Amount specified by sec 40A
Ex:
56
X holds the following securities on April 1, 2006:
5% UP government loan (date of payment of interest: January 1) Rs.1000,000
6% Non listed debenture of ABC Ltd. (dates of payment of interest: June 11 and December 11
every year) Rs.40, 000.
8% debenture of PQR Ltd. (dates of payment of interest: June 1 and December 15 every year)
On December 1, 2006, X sells Rs. 25,000 8% debentures of PQR Ltd. Calculate the taxable
income of X for the assessment year 2007-08 on the assumption that his business income is
Rs.64,000 and he has received a gift of Rs.100,000 in foreign currency from a friend on
December 1, 2006on his marriage anniversary.
Generally a person is taxed in respect of his own income. In some cases, however, the income
tax deviates from this principle and a person is taxed under section 60 to 64, in respect of income
which legally belongs to some other person.
These sections have been introduced to counteract the practices of tax avoidance.
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3. The above transfer may be revocable or irrevocable.
If the above conditions are satisfied, the income from the asset would be taxable in the hands of
transferor.
Revocable transfer:
1. A transfer containing any provision for the re-transfer directly or indirectly of the whole or
any part of the income or assets to the transferor
2. A transfer which in anyway gives the transferor a right to re-assume power directly or
indirectly over the whole or any part of the income or assets.
When an individual is assessable in respect of income from asset transferred to son’s wife
(sec64 (1) (vi))
1. The taxpayer is an individual.
2. He/ she has transferred an asset after May 31, 1973
3. The asset is transferred to his/ her son’s wife.
4. The transfer may be direct/ indirect.
5. The asset is transferred otherwise than for adequate consideration.
6. The asset may be held by the transferee in the same form or in a different form.
If the above conditions are satisfied, any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset.
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If the above conditions are satisfied, then income from such asset to the extent of such benefit is
taxable in the hands of the taxpayer who has transferred the asset.
2. If the investment is in the nature of capital contribution as a partner in a firm the interest
received or receivable from the firm on such capital contribution will be included in the
income of the transferor. However the profit will not be included in the income of the
transferor.
In case the income of an individual includes the income of his or her minor child then such
individual is entitled to exception of Rs. 1500 in respect of each minor child as per section 10
(32).
Cross-transfer:
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When there is cross- transfer of assets (for instance A gifts to B’s wife and vice versa) then as per
the decision of Madras high court if the cross transfer are independent of each other and real, the
income must be included in the hands of the recipient. If two transfers are interconnected and are
parts of the same transaction adopted to avoid tax, then the transfer shall be regarded as an
indirect transfer by the transferor and it will fall within sec 64.
Amount of investment etc not fully disclosed in the books of account (Section 69B)
Any investment in bullion, jeweler or other valuable articles the value of which is not fully recorded
in books for which assessee do not give any satisfactory explanation will be treated as income of
the financial year for which it is found
E.g.:
The income of a family is as under: Rs.
1. Mr. Ram (from business) 250,000
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The amount for investment received from his father, grand father
and maternal uncle.
Discuss in whose hands the incomes are assessable and to what extent?
The process of setting off and carry forward of losses may be covered as under:
1. Inter source adjustment i.e. under the same head of income.
2. Inter- head adjustment in the same assessment year if a loss cannot be set off under step
1.
3. Carry forward of loss if the loss could not be set off under the above two steps.
Exceptions:
1. Loss from a speculation business can be set off only against profit from a speculation
business.
2. Long term capital loss can be set off only against long term capital gain.
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3. Loss from owing and maintain race horses can be set off only against income from such
business.
4. Loss cannot be setoff against winning from lotteries, crossword puzzles etc.
Exceptions:
1. Loss from a speculation business can be set off only against profit from a speculation
business.
2. Losses under the head capital gain cannot be set off against any income except income
under the head capital gain.
3. Long term capital loss can be set off only against long term capital gain.
4. Loss from owing and maintain race horses can be set off only against income from such
business.
5. Loss cannot be setoff against winning from lotteries, crossword puzzles etc.
6. Business losses cannot be set off against salary income.
Carry forward and set off business loss other than speculation loss:
1. Loss can be set off only against business income.
2. Loss can be carried forward by the person who incurred the loss.
3. Loss can be carried forward for 8 years.
4. Return of loss should be submitted in time prescribed.
5. Continuity of business not necessary.
6. The above limit of 8 years is not applicable on unabsorbed depreciation, capital
expenditure on scientific research and family planning expenditure.
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Carry forward and set off loss from owing and maintaining race horses:
1. Such loss can be carried forward only if the activity of owing and maintaining race horses
is carried on by the assessee in the previous year in which the brought forward loss is to
be setoff.
2. Loss can be carried forward for four assessment year immediately succeeding the
assessment year in which the loss was incurred.
E.g.:
Mr. Ram submits the following particulars of his income and loss for the assessment year 2003-
04:
1. Income from House Property 18000
2. Profit and gains from personal business 25000
3. Share of Profit from AOP (AOP has paid tax at
Maximum marginal rate) 10,000
4. Short term capital gain 8000
5. Long term capital gain on sale of building 17000
6. Long term capital loss on sale of shares 24000
Compute his gross total income and deal with the carried forward losses.
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