KAMKUS COLLEGE OF LAW

LL.B.IIND SEM
LAW OF TAXATION
CODE(K-2006)

UNIT-I

IMPORTANT QUESTION ANSWERS

1. Explain about the History of Taxation of India. Why are Taxes Imposed?
Ans.

Introduction

• Tax is a mandatory liability for every citizen of the country.

• There are two types of tax in India i.e. direct and indirect.
• Taxation in India is rooted from the period of Manu Smriti and Arthasastra. Present
Indian tax system is based on this ancient tax system which was based on the theory of
maximum social welfare.

It is a matter of general belief that taxes on income and wealth are of recent origin but there
is enough evidence to show that taxes on income in some form or the other were levied even
in primitive and ancient communities.
The origin of the word “Tax” is from “Taxation” which means an estimate.
• These were levied either on the sale and purchase of merchandise or livestock and were
collected in a haphazard manner from time to time. Nearly 2000 years ago, there went out
a decree from Ceaser Augustus that all the world should be taxed.
• In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis
of turnover and sometimes on occupations. For many centuries, revenue from taxes went
to the Monarch.
• In Northern England, taxes were levied on land and on moveable property such as the
Saladin title in 1188.
• Later on, these were supplemented by introduction of poll taxes, and indirect taxes
known as “Ancient Customs” which were duties on wool, leather and hides.
• These levies and taxes in various forms and on various commodities and professions
were imposed to meet the needs of the Governments to meet their military and civil
expenditure and not only to ensure safety to the subjects but also to meet the common

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needs of the citizens like maintenance of roads, administration of justice and such other
functions of the State.

• In India, the system of direct taxation as it is known today, has been in force in one form
or another even from ancient times.
• There are references both in Manu Smriti and Arthasastra to a variety of tax measures.
Manu, the ancient sage and law-giver stated that the king could levy taxes, according to
Sastras.
• The wise sage advised that taxes should be related to the income and expenditure of the
subject. He, however, cautioned the king against excessive taxation and stated that both
extremes should be avoided namely either complete absence of taxes or exorbitant
taxation.
• According to him, the king should arrange the collection of taxes in such a manner that
the subjects did not feel the pinch of paying taxes.
• He laid down that traders and artisans should pay 1/5th of their profits in silver and gold,
while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending
upon their circumstances.
• The detailed analysis given by Manu on the subject clearly shows the existence of a
well-planned taxation system, even in ancient times.
• Not only this, taxes were also levied on various classes of people like actors, dancers,
singers and even dancing girls.
• Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by
rendering personal service.
"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws
moisture from the Earth to give it back a thousand fold" –

By Kalidas in Raghuvansh eulogizing KING DALIP.

¾ According to Manu Smriti, the king should arrange the collection of taxes in such a
manner that the tax payer did not feel the pinch of paying taxes.
¾ He laid down that traders and artisans should pay 1/5th of their profits in silver and [gold,
while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending
upon their circumstances.
¾ Kautilya has also described in great detail the system of tax administration in the
Mauryan Empire. It is remarkable that the present day tax system is in many ways similar
to the system of taxation in vogue about 2300 years ago.

Kautilya's concept of taxation emphasized equity and justice in taxation. The affluent had to
pay higher taxes as compared to the poor.

Brief History of Income Tax in India:

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• In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order
to meet the losses sustained by the Government on account of the Military Mutiny of
1857.
• In 1918, a new income tax was passed and again it was replaced by another new act
which was passed in 1922.
• This Act remained in force up to the assessment year 1961-62 with numerous
amendments.

In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
¾ The Income Tax Act 1961 has been brought into force with 1 April 1962.
¾ It applies to the whole of India and Sikkim (including Jammu and Kashmir).
¾ Since 1962 several amendments of far-reaching nature have been made in the Income
Tax Act by the Union Budget every year.

Income Tax Timeline in India

¾ 1860 Introduced for the first time for a period of five years to cover the 1857 mutiny expenses. It
was abolished in 1873.
¾ 1877 The tax system was revived as a result of the Great Famine of 1876.
¾ 1886 Introduced as Act II of 1886. It laid down the basic scheme of income tax that continues till
the present day.
¾ 1918 Introduced as Act VII of 1918. It had features like aggregation of income from various
sources for the determination of the rate, classification of income under six heads and application
of the Act to all income that accrued or arose or was received in India from whatever source in
British India.
¾ 1922 On the recommendations of the All-India Income Tax Committee, the father of the present
act was introduced. The central government was vested with the power to administer the tax.
¾ 1961 The Act came into force from 1 April 1962, it extended to the whole of India.
¾ 1997 Establishment of the Tax Reform Committee under the chairmanship of Dr. Raja J.
Chelliah.
¾ It was followed by restructuring the income tax with parameters like lower taxes, fewer slabs,
higher execptions, etc.
¾ 2003 The Kelkar Task Force, which was followed by outsourcing of PAN/TAN, exemption of
dividend income, compensated by levy of the dividend distributed tax to be paid by the company.

Reasons of Taxes Imposed

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Everybody is obliged by law to pay taxes. Total Tax money goes to government exchequer.
Appointed government decides that how are taxes being spent and how the budget is organized.

Tax payment is not optional; an individual has to pay tax if his/her incoming is coming under
the income tax slab. It is a duty of every citizen to pay taxes. More collection of tax allows the
government to launch more and more welfare schemes.

2. What is Income? What are casual incomes? What is its tax treatment under
the income tax act?
Ans. Income:
9 The definition of Income as per section 2 (24) is inclusive but not exhaustive of
below mentioned items:
• Any illegal income arising to the assessee
• Any income that is received at irregular intervals
• Any Taxable income that have been received from a source outside India
• Any benefit that can be measured in money
• Any subsidy or relief or reimbursement
• Gift the value of which exceed INR 50,000 without any consideration by an
individual or HUF.
• Any prize
• Causal incomes like winning from lotteries or horse race gambling etc.

Casual income is a non recurring income that is not likely to occur again in a year. It is an
income which is earned by chance. Such income is neither anticipated nor provided for in any
agreement.
Such incomes are received at uncertain times.
If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable
under the head Income from other Sources. The income will be taxable at the flat rate of

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30%which after adding cess will amount to 30.9%.Incomes from falling sources come under this
category:

• Lottery
• Game Show or any entertainment program on television or electronic mode
• Crossword Puzzle
• Gambling or betting
• Races including Horse races.

TDS Applicability

¾ If the Prize money exceeds Rs 10, 000, then the winner will receive the prize money after
the deduction of TDS @30.9%.
¾ it does not matter whether the income of the winner is taxable or not.
¾ The prize distributor is liable to deduct tax at the time of payment.
¾ In the case of winnings from horse races, TDS will be applicable if the amount exceeds
Rs 5,000.

No Deduction/Expenditure is allowed from such Income

• No deduction u/s sec 80C or 80D or any other deduction/allowance is allowed from such
income.
The Benefit of basic exemption limit and income tax slab rate is also not applicable to this
income.
• The entire amount received will be taxable at the flat rate of 30.9%.
• For instance, Rahul has won the prize money of Rs 3 lakhs from a game show and he has
an interest income of Rs 5 lakhs p.a.
• Then the tax liability would be calculated as per following:
• Tax on Rs 3 lakhs @ 30.9%
• Tax on Rs 5 lakhs as per income tax slab rates after claiming the relevant deductions.

Prize Money received in Kind

¾ If the prizes are given in Kind say a car, then prize distributor shall ensure before
releasing the prize that tax has been paid.
¾ Tax is paid as per the market value of the prize given.
¾ The prize distributor can either recover from the winner or he himself can bear the burden
of tax.

¾ For instance, Suman has won an Alto car in a contest whose market value is Rs 4 lakhs,
then tax @ 30.9% which is Rs 1, 23,600 must be paid before giving the car to the winner.

¾ In cases where prize is given both in cash and Kind, then the total tax should be
calculated on the cash portion of the prize and on market value of the prize given in kind.

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And the tax amount should be deducted while giving the cash portion of the prize to the
winner. But if the cash prize is not sufficient to cover the total tax liability, then either the
winner or prize distributor should pay the deficit.

(Short Answer Questions)

3. What is TAX? Explain Different Kind of Tax?

Ans.
Introduction:
Tax
a compulsory contribution to state revenue, levied by the government on workers'
income and business profits, or added to the cost of some goods, services, and
transactions.
A fee charged ("levied") by a government on a product, income, or activity.
If tax is levied directly on personal or corporate income, then it is a direct tax.
If tax is levied on the price of a good or service, then it is called an indirect tax.

The purpose of taxation is to finance government expenditure.

One of the most important uses of taxes is to finance public goods and services, such as
street lighting and street cleaning.
Since public goods and services do not allow a non-payer to be excluded, or
allow exclusion by a consumer, there cannot be a market in the good or service, and so they
need to be provided by the government or a quasi-government agency, which tend to
finance themselves largely through taxes.

Different kind of Tax

¾ Income Tax holds its importance for it is the money which tends to support the running of
our government.
¾ It is one of the major sources of revenue for the government and thus is inevitable to not
to impose it on the income earned or utilized in the country.
¾ It helps meet the funds required to develop the country and other defense related needs of
a nation.

There are basically two kinds of taxes – Direct Tax and Indirect Tax.

Direct Tax Indirect Tax.

Direct Tax is tax that is paid by an individual or any other person on the basis of his
Income.

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9 It is a form of tax that is directly paid by the person to the government, i.e., the
liability to pay the tax and the burden of tax falls on the same person.

Types of Direct Taxes

9 Personal Income Tax : The Personal Income Tax is levied by the central
government and is managed by the Central Board of Direct taxes according to the
Income Tax Act.
9 Corporate Income Taxes : The central government levies taxes on business
organizations and companies on their transactions that are done worldwide. For non
resident organizations, tax is charged on the business transactions with Indian
sources. A tax of 35 % and an additional surcharge of 2.5 % are levied on the
domestic organizations. For foreign business organizations, the basic tax rate is
around 40 % with 2.5 % extra surcharge is charged. An education cess of 2 % is also
charged.
9 Capital Gains Tax : The central government levies taxes on the capital gains from
the sale of assets. Long-term Capital Gains Tax is charged if the capital assets remain
for three years and also if the securities and shares are a part of any recognized stock
exchange in India.
9 Long term capital gains are taxed at 20 % while 10 % tax is charged on the short
term capital gains.

Indirect taxes are the types of taxes where the person depositing the tax with
government and the person actually having been burdened by the tax are different.
9 Generally these taxes are included in the prices of the goods or services which are
provided to the people and then such taxes are deposited by the person collecting the
same from their customers. GST is one of the most popular type of indirect tax.

Types of Indirect Taxes

• Customs Duty : The government formulated the Customs Duty under the
Customs Act 1962 and Customs Tariff Act of 1975. Usually, the tax is levied on
goods that are imported to the country. An additional educational cess is also
charged. In case of industrial goods, the customs duty has been decreased to
15%.
• Service Tax : In most cases, 10 % service tax is levied on different kinds of
services in the country. The tax exemption limit has been raised from Rs.400, 000
to Rs.800, 000 for the small service providers.
• Excise Duty : Excise duty is charged by the government of India under the
Central Excise act of 1944 and the Central Excise Tariff Act of 1985. A basic tax
of 16% excise duty is charged and extra excise duty of around 8 % is also charged
in case of precious items. An educational cess of around 2 % is also charged along
with the basic tax rates.

4. What are the five heads of income under Income Tax Act?

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Ans. Incomes earned by you during the year are divided into five heads under the I-Tax Act.

Various Heads for Income under Income Tax Act 1961:

Every income arising to any person will always be classified under one of the following headers
provided by the Act: -
1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources

1. Income for salary include wages, annuity, pension, gratuity, fees, commission,
profits, Leave encashment, annual accretion and transferred balance in recognized
Provident Fund
(PF) and contribution to employees pension account.

2. Rental Income from properties owned by a person other than those which are occupied
by him are charged as income from house property.
If property is vacant then a notional income is included under this head.

3. Income from business or profession includes profit/loss from a business entity or a

profession, any interest, salary or bonus to a partner of a firm.

4. Income from capital gains includes long term capital gains and short term capital gains
on sale of any capital assets.

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5. Income from other sources includes interest on bank deposits and securities, dividend,
royalty income, winning on lotteries and races and gifts received among others.

5. Discuss the nature and characteristics of taxes

Ans. Nature and Characteristics of Taxes
Meaning of Taxation
Taxation is the inherent power of the state, acting through the legislature, to impose and collect
revenues to support the government and its recognized objects.
Simply stated, taxation is the power of the State to collect revenues for public purpose.
Purpose of Taxation
Primary Purpose - is to provide funds or property with which the government discharges its
appropriate functions for the protection and general welfare of its citizens.
Non Revenue Objectives
Aside from purely financing government operational expenditures, taxation is also utilized as a
tool to carry out the national objective of social and economic development.
1. To strengthen anemic enterprises by granting them tax exemptions or other conditions or
incentives for growth;
2. To protect local industries against foreign competition by increasing local import taxes;
3. As a bargaining tool in trade negotiations with other countries;
4. To counter the effects of inflation or depression;
5. To reduce inequalities in the distribution of wealth;
6. To promote science and invention, finance educational activities or maintain and improve
the efficiency of local police forces;
7. To implement police power and promote general welfare.
Meaning of Taxes
Taxes are enforced proportional contributions from persons and property levied by the
lawmaking body of the state by virtue of its sovereignty for the support of the government and
all public needs.
Tax in a general sense, is any contribution imposed by the government upon individuals for the
use and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise,
subsidy, aid, supply or other name. Tax, in its essential characteristics, is not a debt.
Essential characteristics of tax
1. it is an enforced contribution
2. it is generally payable in money.
3. It is proportionate in character, usually based on the ability to pay.

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4. it is levied on persons and property within the jurisdiction of the state.

5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the
law making body or congress
6. it is levied for public purpose
7. it is commonly required to be paid a regular intervals.

(Very Short answer questions)

6. What is the differentiate between Tax, Cess and fee.

Ans. Key Difference: A tax is a fee that is levied on a product, income, or activity.
Cess is basically just another word for tax.
A tax is nothing more than a fee that the people are required to pay.
9 A tax is commonly levied on a product, income, or activity.
9 There are two main types of taxes: direct tax and indirect tax.

Direct Tax Indirect Tax

In India, cess is any tax that is earmarked for a particular use, for example,
irrigation-cess, educational-cess, etc.

9 Cess is tax on tax for special purpose. Likes education, health, emergency(Govt).
9 Cess is also a tax levied by the government from its subjects to meet specified
expenses or for specific purposes.
9 Eg. Education cess , petroleum cess, cess on Income tax etc.

Fee is charged for giving a license, certificate, permission and is charged from a
person desirous of taking License, certificate and/or permission and retained by the
department giving such permission. There is no share of center and/or state from the fee
collected.

9 Fees means the charge or rate levied by the government from people who use such
services provided by the government.
9 e.g. Toll on roads and bridges, registration fee, court fee etc

9 Fees is a charge for a service.(service provider)

Comparison between Tax and Cess:

Tax Cess

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Type of Fee Tax

A mandatory fee charged by a Technically, is just another word for

Definition government on a product, tax. The term might be used in regard
income, or activity. to a specific type of tax.

To generate revenue for the

Purpose To generate revenue for the government
government

Direct Tax – tax levied directly

on personal or corporate income
Usually used in regard to Local tax
Types
and/or Land and Property tax.
Indirect Tax – tax levied on the
price of a good or service

The term is still frequently used in a

few countries including Britain,
The word is used all over the
Ireland, to indicate a local tax,
Usage world and in all manners to
Scotland, to indicate a land tax, and
refer to any type of tax.
India, applied as a suffix to a indicate a
category of tax such as ‘property-cess'.

TAX AND FEE

• Tax is a compulsory exaction of money by public authority for public purposes
enforceable by law and is not payment for services rendered.
• Fee may be generally defined to be a charge for a special service rendered to individuals
by some governmental agency.
• As far as fee is concerned, it is distinguishable from tax.
• The distinction between “tax” and “fee” lies primarily in the fact that a tax is levied as a
part of common burden while a fee is paid for a special benefit or privilege.
• Fees confer a special capacity although the special advantage as for example, in the case
of registration fee for documents or marriage license is secondary to the primary motive
or regulation in the public interest.
• Public interest seems to be at the basis of all impositions, but in a fee it is some special
benefit, which the individual receives.
• It is the special benefit accruing to the individual, which is the reason for payment in the
case of fees.
• In the case of a tax, the particular advantage if it exists at all, is an incidental result of
State action.

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• Unless the fee is earmarked or specified for rendering services to the payee, it would
amount to a tax and not a fee.

TAX AND CESS

• In India, where it is still in widespread use, it is supposed to be a tax on tax or a surcharge
which is applied to a specific commodity or service and the monies that are raised are
also meant to meet some specified objective.

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Unit - 02

Section –A
(Detailed Answer Questions)

1. What are the different categories into which the assessee are divided with
regard to residence?
Or
“The incidence of Income tax depends upon the residential status of an
assessee.”Discuss in detail.
Ans. All Taxable entities are divided in the following categories for the purpose of determining
Residential Status :

a. an individual
b. a Hindu Undivided Family ( HUF)
c. a Firm or an Association of Person (AOP)
d. a joint stock company ; and
e. every other person
Tax is levied on total income of assessee. Under the provisions of Income Tax Act,
1961 the total income on each person is based upon his Residential Status.
Sec. 6 of the Act divides the assessable persons into Three Categories :

Resident Resident but Not ordinarily Resident

Non-Resident.

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The concept of Residential Status has nothing to do with nationality or domestic of a person. An
Indian, who is a citizen of India can be non-resident for Income Tax purposes, whereas an
American who is a citizen of America can be Resident of India for Income Tax purposes.
Residential Status of a person depends upon the territorial connections of the person with this
country , i.e. for how many days he has physically stayed in India.

The Residential Status of different types of persons is determined differently . Similarly, the
Residential Status of the Assessee is to be determined each year with reference to the “Previous
Year”. The Residential Status of the Assessee may change from Year to Year. What is essential
is the Status during the Previous year and not in the assessment year.

RESIDENTIAL STATUS OF AN ‘INDIVIDUAL’

An individual may be …
(a) Resident and ordinarily Resident in India
(b) Resident and not-ordinarily Resident in India;
(c) non-resident in India.

(a). Resident and Ordinary Resident [ Section 6 (1), 6(6)(a) ]

To determine the Residential Status of an Individual, [Section 6 (1)] prescribes Two Test. An
individual who fulfils any one of the following Two Tests is called Resident under the provisions
of this Act. These Tests are :

Test No. 1. Stay in India for 182 days or more.

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If an individual has to become Resend of India during any previous year, his / her personal stay
in India during that year is a must although the number of days of stay differs in the two tests. It
means that if an individual does not stay in India at all in any previous year , he cannot be
Resident of India in that year. Stay in India means that the individual should have stayed in India
territory and anywhere ( cities, villages, hills, even Indian territory waters ) for such number of
days.

The period of 182 days need not be at a stretch. But physical presence for an aggregate of 182
days in the relevant previous is enough. The Status of Resident is not linked with any particular
place or town or house.

The onus to prove the number of days of stay in India lies on the assessee. It is for him to prove,
if he desires to be taxed as non-resident or not ordinarily resident.

Test No. 2. Presence for 365 days during the Four preceding Previous Year and 60 days or
more in that relevant Previous Year.

A person may be frequent visitor to India. In his case, the residential status will be determined on
the basis of his presence in India for 365 days in four years immediately preceding the relevant
Previous year. Along with this his presence for 60 days during the relevant previous year is
another essential conditions to be fulfilled. The purpose, object or reason of visit to and stay in
India has nothing to do with the determination of residential status.

Explanations:

For Indian Citizen going abroad on a Job or as a member of crew of an Indian ship
[Explanation (a) ]

In case of Indian citizen who is going outside Indian for a Job and his contact for such
employment outside India has been approved by the Central Government or he is a member of
crew of an Indian Ship, Test (a) U/s 6(1) remains same but in Test (b) words ‘60 days’ have been
replaced to 182 days.

For Indian Citizens and Persons of Indian Origin [Explanation (b) ]

For such person Test (a) remains the same but in Test (b) ) words ‘60 days’ have been replaced
to 182 days.

( A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand
parents was born in India or undivided India .)

(b) Resident but Not-Ordinarily Resident [ Section 6(6) ]

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An individual who is resident u/s 6(1) can claim the beneficial status of N.O.R. if he can prove
that :
(a) He was non resident in India for 9 previous years out of 10 previous years preceding
the relevant previous year.
OR
(b) He was in India for a period or periods aggregating in all to 729 days or less during
seven previous years preceeding the relevant previous year.
An individual who is Resident u/s 6(1) can be subdivided into two categories :
(i) Ordinary Resident ; or

(ii) Not ordinarily Resident

Residential Status OF ‘H.U.F.’ , ‘FIRM’ , ‘ A.O.P.’

Section 6(2) of the Act provides that status of these persons shall be determined as per Tests
given below:

1. Resident [ Section 6(2) ]

9 It means that if a H.U.F. , FIRM, AOP is

controlled from India even partially it will be Resident assessee.
9 The Control and management of affairs
refers to the controlling and directing power, the Head and the Brain. It means that
decision making power for vital affairs is situated in India. The control and management
means de facto control and management and not merely the right to control or manage.
9 In case of a Firm, it is said that the control
and management of firm is saturated at a place where partners meet to decide the affairs
of the firm. If such place is outside India , it will be said that the control and management
is outside India.

2. Non- Resident [ Section 2(30) ]

9 A H.U.F. , FIRM, AOP shall be

Non-Resident if the control and management affairs is situated wholly outside India.

3. Not Ordinarily Resident [ Section 6(6)b ]

H.U.F. will be ‘Not Ordinarily Resident’ if :

9 its manager (Karta) has not been resident

in India in 9 out of 10 previous year preceding the relevant accounting year ; or

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9 the manage had not , during the 7

previous year preceding the relevant accounting year been present in India for a period or
periods amounting in all to 730 days.

While determining the Residential Status of a Firm or HUF Is should be noted that Residential
Status of Partners or co-parceners of a HUF is of immaterial consideration. What is important to
note is that from where the business is being controlled. There may be a situation where all the
partners of a Firm are Resident in India but even then that Firm may be Non-Resident if its full
control and management lies outside India.

Residential Status Of A ‘COMPANY’ [Section 6(3)]

An Indian Company is always Resident in India. A foreign Company is resident in India, only if,
during the previous year , control and management of its affairs is situated wholly in India.
Conversely, a Foreign Company is treated as Non-Resident if, during the previous year, Control
and Management of its affairs is either wholly or partially situated out of India.

An Indian Company
A Compnay other than an Indian Company
Control and Management of the affairs of a company is situated : -
• Wholly in India
• Wholly outside India
• Partly in Indian and partly outside India

Section – B
(Short Answer Questions)

2. What is Agriculture Income? Discuss the essential features and kinds of

agricultural income?
Ans. In India, agricultural income refers to income earned or revenue derived from sources that
include farming land, buildings on or identified with an agricultural land and commercial
produce from a horticultural land. Agricultural income is defined under section 2(1A) of
the Income Tax Act, 1961.

Agricultural Income Tax Treatment/Taxability : Agricultural income is not taxable

under Section 10 (1) of the Income Tax Act as it is not counted as a part of an individual's
total income. However, the state government can levy tax on agricultural income if the
amount exceeds Rs.5,000 per year.

Examples of Agricultural Income

The following are some of the examples of agricultural income:

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• Income derived from sale of replanted trees.

• Income from sale of seeds.
• Rent received for agricultural land.
• Income from growing flowers and creepers.
• Profits received from a partner from a firm engaged in agricultural produce or activities.
• Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

Examples of Non-Agricultural Income

The following are some of the examples of non-agricultural income:

• Income from poultry farming.
• Income from bee hiving.
• Any dividend that an organization pays from its agriculture income.
• Income from the sale of spontaneously grown trees.
• Income from dairy farming.
• Income from salt produced after the land has flooded with sea water.
• Purchase of standing crop.
• Royalty income from mines.
• Income from butter and cheese making.
• Receipts from TV serial shooting in farm house.

Is Agricultural Income Taxable?

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted
from taxation. The central government cannot levy tax on the agricultural income
received. However, agricultural income is considered for rate purposes while assessing the
income tax liability if the following two conditions are met:
• Net agricultural income is greater than Rs. 5,000/- for previous year.
• Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs.
2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60
years of age).

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their
agricultural land and use the sale proceeds to acquire another agricultural land. To claim
tax benefit under Section 54B of the Income Tax Act, the following conditions will have
to be satisfied:
• This benefit can only be claimed by an individual or a HUF
• The agricultural land should be used by the individual or his or her parents for
agricultural purpose for at least two years immediately preceding the date on which the
exchange of land occurred. In case of HUF, the land should be used by any member of
HUF.
• The taxpayer should purchase another agricultural land within two years from the date of
selling the old land. In case it is an incident of compulsory acquisition, the period of
acquiring new agricultural land will be assessed from the date of receipt of compensation.

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It must be noted that under Section 10(37), capital gain shall not be chargeable to tax if
agricultural land is compulsorily acquired under any law, and the consideration of which
is approved by the central government or banking regulator and received on or after
01-04-2004.

Types of Agriculture income

On the basis of definition of agricultural income given above, it can be classified into
five broad categories. These types of agricultural incomes are :

1. Any income received as rent or revenue from agricultural land

Rent can very simply be defined as a payment in cash or in-kind which the owner of
the land receives from another person in consideration of a grant of a right to use land.
When the owner of land is not performing agricultural operations himself but gives his
land on contract basis, any amount received from the actual cultivator by the owner of the
land shall be agricultural income. Such rent may he in cash or in-kind, i.e., a share in the
produce grown by the cultivator.

The Privy Council decided in a case [C.I.T. vs. Karnakshya Narian Singh (1948) I.T.R.
395] that interest on arrears of rent payable in respect of agricultural land cannot be
agricultural income, because it is neither ‘rent’ nor ‘revenue derived from land’.

The word revenue is used in a very broad sense of return, yield or income and not
only in a narrow sense of land revenue [C. I. T. v. Kamakshya Narain Singh]. This term
embraces income other than rent and that is why mutation fees received from the tenants
on their getting occupancy holdings and fees paid by the tenants at the time of renewal of
their lease, are revenue derived from land and as such exempted from tax.

In the above mentioned case the Privy Council has clearly laid down that revenue is
derived from land only if the land is immediate and effective source of the revenue and
not the secondary and indirect source. So any income or revenue which is indirectly
derived from land cannot be presumed to he the agricultural income. This point is further
clarified by the Supreme Court in a case Bacha Guzdar v. C.I.T. that dividend paid by a
company to its shareholders out of its agricultural income is not an income derived from
land since the immediate and effective source of dividend income to the shareholder is the
shareholding in the company and not the land.

2. Income derived from Agriculture

Income derived from land situated in India by applying agricultural operations shall
be agricultural income. If all the basic operations like preparation of land for sowing,
planting, watering, harvesting etc. are applied, any income resulting from such operations
shall be agricultural income. On the other hand, if grass, trees etc. have grown
spontaneously or without the aid of human skill, effort, labour etc., any income resulting

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from the sale of such grass, trees or lease rent of such land shall not he agricultural
income.
Agricultural income also includes income from orchards or from horticulture.
It is further to he noted that if a particular income is derived from land but without
applying agricultural operations, such an income although derived from land cannot
become agricultural income and so any income having remote connection with land
cannot he called as agricultural income. Income from poultry and dairy farming, fisheries,
mining, stone quarries, breeding and rearing of livestock, all these incomes although
remotely linked with land but cannot he called agricultural incomes because of the
absence of important characteristics of agricultural income, i.e., cultivation of land.
Income which is in the nature of by-products of agricultural land such as selling of
milk, the pasturing of cattle etc. can safely he included in agricultural income provided the
endeavour is agricultural and it is reasonably connected with land used for agricultural
purposes [Beohar Singh vs. CIT. 16 I.T.R. 433, 443].

3. Any income accruing to the person by the performance of any process to

render the produce marketable
If, in the ordinary course, a process is to he employed by the cultivator himself or the
landlord who receives the produce as rent-in-kind, any income derived from such a
process shall he agricultural income. Such a process must be employed to render the
produce fit for marketing. The process may he manual or mechanical. It should be noted
that the produce should not change its original character in spite of the processing unless
the produce cannot be sold in that form or condition.

Following points are to he noted in this connection :

1. The process must he one which is ordinarily employed by the cultivator.
2. The process is employed to render the produce fit to be taken to the market.
3. The produce must retain its original character in spite of process unless the produce is
having no market if offered for sale in its original condition.
This can further he elaborated with following examples
1. Unginned cotton can be sold in its original form and if any profit is attributable to the
ginning operation, such a profit shall not be agricultural income as ginning operation is
not a must to render the produce fit to be taken to the market [Sheolal Ramlal v. C.I.T. 4
I.T.C. 375].
2. Tahacco leaves need to be dried to make them suitable for the market and thus profit
earned by selling dried tobacco shall be agricultural income. [C.LT. v. Katragadda
Madhusudhana Rao 12 I.T.R. 1]
3. Drying and curing of coffee after picking beans, husking of paddy, conversion of latex
into sole crepe or smoked sheets. [c.I.T v. Woodlands State Ltd. (1965) 58 I.TR. 612] etc.
are otner examples of processes carried on to make the produce marketable.
4. Any income received by the person by the sale of produce raised or received as
rent-in-kind

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Any income derived by any person by the sale of agricultural produce raised by him
or received as rent-in-kind shall also be agricultural income. Sometimes such person puts
some extra effort by selling the produce through his own shop, any extra profit raised due
to shopping activities shall not he agricultural income.

4. Income from buildings used for agriculture

Any income derived from a building used for agricultural operations shall be
agricultural income provided
1. The building from where the income is received, is in the immediate vicinity of the land
and is occupied by the owner, or by the cultivator or by the receiver of rent-in-kind.
2. Building is used as a dwelling house or a store house or other out-building.
3. The cultivator or the receiver of the rent-in-kind, by reason of his connection with the
land, is in need of the house as a dwelling house or as a house to store the goods required for
agricultural operations.
4. The land if assessed to land revenue in India or is subject to a local rate assessed and
collected by officers of the Govt. and in case the land is not assessed to land revenue or to local
rate, it should not be situated within the urban areas.

3. What is Relationship between residential status and incidence of tax as per

Sec. 5 of Income tax Act?
Ans. Relationship between residential status and incidence of tax (Sec. 5):
Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the
place and time of accrual or receipt of income.
Meaning of “Indian Income”:
Any of the following three is an Indian income:
If income is received (or deemed to be received) in India during the previous year and at
the same time it accrues or arises (or is deemed to accrue or arise) in India during the previous
year.
If income is received (or deemed to be received) in India during the previous year but it
accures or arises (or is deemed to accure or arise) outside India during the previous year.
If income is received outside India during the previous year but it accrues or arises (or is
deemd to accrue or arise) in India during the previous year.
Meaning of “Foreign Income”:
If the following two conditions are satisfied, then such income is “foreign income” –
Income is not received (or not deemed to be received) in India and
Income does not accrue or arise (or is deemed to accrue or arise) in India.
Conclusions regarding taxability:
Indian Income: Indian income is always taxable in India irrespective of the residential
status of the taxpayer.

Foreign Income: Foreign income is taxable in the hands of resident (in case of a firm, an
association of persons, a joint stock company and every other person) or resident and ordinarily
resident (in case of an individual and a Hindu Undivided Family) in India. Foreign income is not
taxable in the hands of non-resident in India.

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In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only in
any of the following two situations –
If it is business income and business is controlled wholly or partly from India, or
If it is professional income and profession is set up in India.

In any other case (like salary, rent, interest etc.), foreign income is not taxable in the hands of
resident but not ordinarily resident taxpayers.

4. Case 1: 
Mr. A comes to India for the first time on January 11, 2010 for a period of 40 days.
Determine his residential status for the assessment year 2011-12.
Solution:
Since Mr. A comes to India in the previous year 2010-11 for a period of only 40 days, he does
not satisfy any of the basic condition laid down in section 6(1). He is, therefore, non-resident in
India for the assessment year 2011-12.
Case 2:
Mrs. A, an Indian citizen, leaves India, for the first time, on September 10, 2010, for the
purpose of employment outside India. Determine her residential status for the assessment
year 2011-12.
Solution:
For an Indian citizen who leaves India during the previous year for the purpose of employment
outside India, only basic condition number one i.e., the assessee must be present in India for 182
days, is applicable.
Since she was present in India for the previous year 2010-11 for only 163 days
(30+31+30+31+31+10), she will be treated as non-resident in India for the assessment year
2011-12.
Case 3:
X left India for the first time on November 21, 2007. During the financial year 2010-11, he
came to India once on May 20 for a period of 46 days. Determine his residential status for
the assessment year 2011-12.
Solution:
He was present in India for a period of only 46 days during the previous year 2010-11 and thus,
he does not satisfy any of the basic conditions.
So, he would be treated as non-resident for the assessment year 2011-12.
Case 4:

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Z, an American tourist, comes to India for the first time on June 17, 2010. He leaves India
on September 29, 2010. Determine his residential status for the assessment year 2011-12.
Does it make any difference if he comes to India on a business trip or if he is an Indian
citizen?
Solution:
Previous year 2010-11: 105 [14+31+31+29]
Previous year 2009-10: Nil
Previous year 2008-09: Nil
and so on ……
He is non-resident for the assessment year 2011-12 as he does not satisfy any of the basic
condition. It does not make any difference if he comes on a business trip to India.
Further, it does not make any difference if he is an Indian citizen as far as the answer of
non-resident is concerned. But there is a difference in application of basic conditions as an Indian
citizen who comes on a visit to India during the previous has the option of only one basic
condition of 182 days to become a resident.

Section-C
(Very Short answer questions)

5. Write a short note on the following:

1. Assessment year
2. Previous year
3. Assessee
4. Income
5. Person
6. Business

1. Assessment year

• The financial year (FY) is the year in which you earn an income.
• The assessment year (AY) is the year following the FY in which the income is evaluated.
• Every financial year and assessment year starts on the 1st of April and ends on the 31st of
March.
• As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the
term “assessment year” means the period of twelve months commencing on the 1st day of April
every year.

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• Therefore, basically the Assessment year is considered to be a 12 months period starting

from April 1, during which an assessee is required to file the return of income (ITR) for the
previous year and the ITO has to initiate assessment proceedings for such returned income and
tax thereon.
• Since Income Tax is on income of a financial/ previous year or period, so tax filings and
assessment can start thereafter. Probably, that’s why it’s called assessment year period.
• For example, Assessment Year 2017-18 is a period of 12 months starting from 1 Apr.
2017 and ending with 31 Mar. 2018.

2. Previous year

• Previous year is a period in respect of which a person has to pay tax.

• In income tax act the previous year is a period of 12 months beginning from April 1 to
March 31.
• Assessment year is a 12 months period following the previous year during which the
assessee has to file his return of income.
• As per S.2(34) of Income Tax Act, 1961, unless the context otherwise requires, the term
“previous year” means the previous year as defined in section 3. In view of above, we need to
visit Section 3 of Income Tax Act, 1961, which defines the term previous year as under:
• ‘For the purposes of this Act, the term “previous year” means the financial year
immediately preceding the assessment year. Provided that, in the case of a business or profession
newly set up, or a source of income newly coming into existence, in the said financial year, the
previous year shall be the period beginning with the date of setting up of the business or
profession or, as the case may be, the date on which the source of income newly comes into
existence and ending with the said financial year.’
• Therefore, basically the Previous Year indicates the year/ period prior to another.
• Under Income Tax, the returns are filed by assessee after end of the year/ period during
which earnings are made and that period is called previous year/ financial year. However, when
such earnings are subjected to assessment/ review by ITO in the subsequent period/ year, the
same is called assessment year/ period.
• For example, previous year corresponding to assessment year 2017-18 means the
preceding financial year, i.e. 2016-17 (1 Apr. 2016 to 31 Mar. 2017), however the previous year
will begin from a later date in the case of new business/ source of income. In case a new business
is set-up on 1 Oct. 2016, then previous year will be 1 Oct. 2016 to 31 Mar. 2017, which is a part
of financial year 2016-17.

3. Person
• An assessee is any individual who is liable to pay taxes to the government against any
kind of income earned or any losses incurred by him for a particular assessment year.
• Each and every person who has been taxed in the previous years for income earned by
him is treated as an Assessee under the Income Tax Act, 1961.

Person includes :

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• an Individual;
• a Hindu Undivided Family (HUF) ;
• a Company;
• a Firm
• an association of persons or a body of individuals, whether incorporated or not;
• a local authority; and
• every artificial juridical person not falling within any of the preceding sub-clauses.
• Association of Persons or Body of Individuals or a Local authority or Artificial Juridical
Persons shall be deemed to be a person whether or not, such persons are formed or established or
incorporated with the object of deriving profits or gains or income.
Assessee
As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires, the term
“assessee” means a person by whom any tax or any other sum of money is payable under this
Act, and includes-
• every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits or of the income of any other person in
respect of which he is assessable, or of the loss sustained by him or by such other person, or of
the amount of refund due to him or to such other person;
• every person who is deemed to be an assessee under any provision of this Act;
• every person who is deemed to be an assessee in default under any provision of this Act.
From above definition, we can construe that normally the term ‘Assessee’ is considered as one
who is supposed to pay tax under the Income Tax Act.
Income
The definition of Income as per section 2 (24) is inclusive but not exhaustive of below
mentioned items:
• Any illegal income arising to the assessee
• Any income that is received at irregular intervals
• Any Taxable income that have been received from a source outside India
• Any benefit that can be measured in money
• Any subsidy or relief or reimbursement
• Gift the value of which exceed INR 50,000 without any consideration by an individual or
HUF.
• Any prize
• Causal incomes like winning from lotteries or horse race gambling etc.

Business income
In brief, Business includes any trade, commerce and manufacturing of goods with a
purpose of making profit within the permissible laws of country.
Profession It includes services p
rovided by the professionally qualified or technically qualified person according to their
qualification.
Income from Business/Profession: means any income which is shown in profit and loss
account after considering all allowed expenditures.

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• INCOME CHARGEABLE UNDER BUSINESS/PROFESSION

The following are few examples of incomes which are chargeable under this head:-
1. Normal Profit from general activities as per profit and loss account of business entity.
2. Profit from speculation business should be kept separate from business income and
shown separately.
3. Any profit other than regular activities of a business should be shown as casual income
and will be shown under “income from other sources” head.
4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty
drawback of custom or excise.
5. The value of any benefits whether convertible into money or no from business/profession
activities.
6. Any interest, salary, commission etc. received by the partner of a firm will be treated as
business/professional income in hand of partner. However, the share of profit from
partnership firm is exempt in hand of partner.
7. Amount recovered on account of bad debts which were already adjusted in profit in
earlier years etc.

• EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION

All the expenses relating to business and profession are allowed against income.
Following are few examples of expenditures which are allowed against income:-
• Rent rates and insurance of building.
• Payment for know-how, patents, copy rights, trade mark, licenses.
• Depreciation on fixed assets.
• Payment for professional services.
• Expenditures on scientific research for business purposes.
• Preliminary Expenses in case of Limited companies.
• Salary, bonus, commission to employees.

6. Whether all the Agriculture Products come under the tax exemption?
Ans. Any preparing done on Agricultural create to make it marketable is a piece of agricultural
operations and such sum recuperated will be dealt with as agriculture income only.
Say for instance threshing of wheat, mustard, and so forth is a piece of agriculture
operations and the sum recuperated will be dealt with as farming salary just regardless of
preparing happens on the land itself or some other place.
Be that as it may, in specific cases like on account of tea, coffee, sugar stick where a
noteworthy preparing (change of exceptional nature of the item) is being done, at that
point some piece of the handled deliver (tea, coffee, and sugar) is taxed as non-farming
pay and rest is absolved as rural salary.

7. How to file Agriculture Income Tax? How it is computed?

Ans. Although Agriculture income is completely excluded from tax, the Finance Act, 1973,
introduced a scheme whereby agriculture income is incorporated with non-horticultural

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pay on account of non-corporate assessees who are at risk to pay tax at indicated section
rates. The procedure for money impose calculation for such surveys is as per the
following:
• Income tax is first ascertained on the net horticultural salary in addition to the assessee’s
aggregate pay from non-farming sources.
• The tax is then ascertained on the fundamental exception section expanded by the
assessee’s net agrarian pay.
• The contrast amongst (a) and (b) is the measure of expense payable by the assessee.
NOTE-The previously mentioned procedure of calculation is, be that as it may, took
after just if the assessee’s non-horticultural pay is an abundance of the essential
exclusion section.

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Unit - 03

Section –A
(Detailed Answer Questions)

1. What is meant by Salary? How to compute taxable salary?

Ans. Definition of Word 'Salary' [Sec. 17(1)]
According to Section 17(1) salary includes the following amounts received by an employee from 
his employer, during the previous year
1. Wages;
2. any annuity or pension; (Family pension received by heirs of an employee is taxable
under income from other sources);
3. any gratuity;
4. any fees, commission, perquisites or profits in lieu of or in addition to any salary or
wages;
5. any advance of salary;
6. any payment received by an employee in respect of any period of leave not availed of by
him; (Leave encashment or salary in lieu of leave);
7. the annual accretion to the balance at the credit of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of
part A of the Fourth Schedule; and
8. the aggregate of all sums that are comprised in the transferred balance as referred to in
sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax, under
sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognised
provident fund to recognised provident fund.
9. the contribution made by the Central Government or any other employer in the previous
year, to the account of an employee under a pension scheme referred to in Section
8OCCD.
The above definition of word ‘salary’ U/s 17(1) includes the above mentioned items. These can
be explained in following manner
1. Wages—any amount received by a person for work done or job rendered is called wages.
It may be received under the name of ‘Pay’, ‘Basic Pay’, ‘Salary’, ‘Basic salary’ or
‘Remuneration’. It may be for actual work or leave salary or actually received or due
during the relevant previous year. Salary in lieu of Notice. It is fully taxable uls 15 if
received during the relevent previous year.

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2. Any Annuity or Pension—Any amount received by employee from past employer after
attaining the age of retirement or superannuation is fully taxable. It may be received
direct as pension or out of a superannuation fund created by employer; in both cases it is
taxable.
3. Any Gratuity—Any sum received by employee from his past employer as a token of
gratitude for services rendered in past is called gratuity. This amount is exempted upto
certain limits given u/s 10(10) and it is dealt with in this very chapter at a later stage.
4. Any Fee—any amount received from employer under the name of fee is also fully
taxable.
• Any Commission—any commissions given by employer to employee is fully taxable.
Any commission received by a director for standing guarantee for repayment of loan, and
if he is not employee of the company, shall be taxable under “Income from other
sources”. In case commission is given to an employee and it is paid as a fixed percentage
of turnover achieved by such employee, such commission shall also be treated as part of
the salary for all practical purposes. [Gestener Duplicators (P) Ltd. vs. C.I. T. (1979) SC).
• Any Bonus—Bonus is fully taxable under the head ‘Salaries’ on receipt basis. In case
arrears of bonus are received in a previous year, these are fully taxable. Bonus can be of
two types :
o Statutory Bonus—It is received under some legal or contractual obligation and is
fully taxable.
o Gratuitous Bonus—It is a casual benefit and is taxable as a receipt from
employer and having no other implication.
• Any Perquisite—Any benefit or amenity allowed by employer to employee. These are
explained in detail later in this chapter u/s 17(2).
• Any Profit in lieu of or in addition to salary—any cash payment received by employee
from employer is called profit in lieu of salary and these are explained later in this
chapter u/s 17(3).
5. Any salary in lieu of leave received during service is fully taxable.
6. Any advance salary—In case an assessee receives some salary in advance in a
previous year and which was actually not due in that year shall be taxable in the year of
receipt. It does not include any loan or advance taken from employer.

Section-15 : List of Incomes Taxable under ‘SALARY’ :

Under Section 15, the following incomes are chargeable to Income-tax under the head ‘Salaries’;
1. any salary due from an employer or a former employer to an assessee in the previous
year whether paid or not;

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2. any salary paid or allowed to him in the previous year by or on behalf of an employer or
a former employer though not due or before it becomes due to him;
3. any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer if not charged to income-tax for any earlier previous year.
Under the provisions of this section the amount of salary due in the year, amount of advance
salary received and the amount of arrears of salary received during the year from the present or
past employer are to be included in this head.
In the explanation attached to section 15, it has been clearly mentioned that for the removal of
doubts, it is hereby declared that where any salary paid in advance is included in the total income
of any person for any previous year it shall not be included again in the total income of the
person when the salary becomes due.
The important rule is that income once taxed cannot be taxed again, so any salary paid in
advance (if taxed in a previous year when the advance salary was received) will not be included
again in the total income of the person when the salary becomes due. Advance salary does not
include loans, e.g., loan to purchase a car or a scooter or for building a house etc.
Any salary, bonus, commission or remuneration, by whatever name called due to or received by
a partner of a firm from firm shall not be regarded as salary for the purposes of this section.
Computation of "Salary" Income [Section 15-17]
Salary income of an employee is to be computed in accordance with the provisions laid down in
sections 15, 16 and 17. Section 15, as discussed earlier gives the scope of this head and tells us
that which incomes shall form part of this head. Section 16 gives deductions to be allowed out of
incomes taxable under this head. Section 17(1) defines the word ‘salary’ as mentioned in section
15. Section 17(2) and 17(3) further define the terms ‘Perquisites’ and “profits in lieu of salary”.
These can be depicted in the form of chart given below :

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Important Points / Characteristics for Computing Salary Income

For any payment to be made taxable under the head ‘Salaries’ it must fulfill the following
characteristics. In case any receipt is not covered under any of these features it will not come
under this head

1. Relationship of Employer and Employee

For a payment to fall under the head ‘Salaries’ the relationship of employer and emplqyee must
exist between payee and the receiver of the salary. The employer may be a Government,\. a
Local authority, a company or any other public body or an Association or H.U.F. or even an
individual. Every kind of payment to every kind of servant, public or private, however high or
low placed he may be, is covered under the provisions of this Act. Even the remuneration
payable to an employee of a foreign Govt. falls within this section. Even servant is an employee,
but an agent may or may not be employee. A detailing agent of a selling concern is its employee
whereas the person holding an agency to sell the goods of such a concern will not be employee.
The relationship of master and servant is the only test to establish the relationship of employer
and employee. A director of a company, though holding an office, is not an. employee unless it is
so provided in the independent contract, or the Articles of Association of the company provide
for such a relationship.

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[Ram Prashad v. C.I. T. (86 1. T.R. 122, 127 (S. C.)]

2. Salary from more than one Employer

Any amount of salary received or due from one or more than one employer/source shall be
taxable under this head. Such situation may arise when an employee is working with two
employers simultaneously or has worked with one employer and later on serves with another
employer after leaving service with, first employer, salary from both the employers shall be
taxable under this head.

3. Salary from Present, Past or Prospective Employer

Salary received or due from present, past or future employer is also taxable under this head.

4. Tax Free Salary

Sometimes, the employer allows an employee to draw tax-free salary, e.g., the employer pays
full salary to the employee and also pays tax on this directly to the department. The employee’s
assessment is to be made not on the amount of salary he is drawing but on gross
amount i.e., salary drawn plus the tax paid by the employer.

5. Salary Received as Member of Parliament

Salary received by a member of Parliament is not taxable under the head ‘Salaries’. It is taxable
as income from other sources’. Any allowance received by them is fully exempted from tax.

6. Receipts from Persons other than Employer

Perquisites or benefits or any other remuneration received from persons other than the
employer, would be taxable not under the head ‘Salaries’ but under the head ‘income from other
sources’ even if they accrue to the employee by reason of his employment or while he was
discharging his normal duties, e.g., amount received by a professor of a college for acting as an
examiner in a university.

For example, Dr. Dhir is an employee of a leading physician of Delhi. In one case, the patient’s
life was saved because of the hard work and intelligence of Dr. Dhir. The patient, therefore,
gives 5,000 to Dr. Dhir in appreciation of his services. The amount in this case is not chargeable
as ‘salary’ but constitutes income from other sources.

7. Place of Accrual of Salary Income

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Salary accrues at that place where the services are rendered. If the services are rendered in India,
the salary accrues in India and if the services are rendered outside India, the salary accrues
outside India. Thus, if a person employed in India goes on leave to England and gets his leave
salary there, the salary is said to accrue in India and not in England, because it is paid for
services rendered in India. Pension paid in a foreign country for services rendered in India, will
be Indian income, as it is paid for the services rendered in India although in the past. On the
other hand, if any person is employed in India and transferred to its branch in England, the salary
received by him in England is not Indian income, but it is income arising in England as the
service is rendered in England. Followings are the two exceptions to this rule

1. A pension payable outside India to a person who has gone to foreign country for
permanent settlement is not deemed to arise in India, if pension is payable to a person
appointed by the Secretary of State or to a person who was appointed before 15th August
1947, as a judge of the Federal Court or of a High Court and who continued to serve on
or after the commencement of the Constitution as a judge in India. This is a special
concession granted to certain officials of Government, who were employees before
independence but continued to serve after this.

2. The Govt. of India employs Indian citizens for services to be rendered in foreign
countries and salary paid outside India is deemed to accrue or arise in India. This
provision helps in taxing the salaries received by Government servants posted abroad.
But under Section 10(7) the allowances and perquisites paid or allowed by the
Government outside India are to be excluded from total income.

8. Deductions made by the Employer

If, an employer makes certain deductions out of the salary payable to an employee, amount so
deducted is deemed to be received by the employee and the amount so deducted is also taken as
application of income by the employee. Some important types of deductions made by the
employer are as follows :

1. Deductions made to recover the loan advanced by the employer.

2. Employee’s contribution towards the provident fund, income-tax and profession tax.
3. Deduction made to pay the premium on life insurance policy of the employee.
4. Any other deduction for which the employee has authorised the employer.
In case an employee receives his salary after certain deductions made by employer on account of
profession tax, contribution to provident fund, tax deducted at source, the ‘salary’ will not be the
net amount received, rather it will be the gross salary due to the employee.

9. Salary or Pension received by UNO Employees

It is fully exempted as per circular No. 293 Dt. 10-2-81.

1. 
  

10. Salary received by a teacherlresearcher from a SAARC member State

Exempted upto 2 years.

11. Salary as Partner

Any salary, commission or remuneration received by a working partner from a firm assessed as
firm shall not be taxable under the head ‘Salaries’. It is taxable under the head Profits & Gains.

12. Payments received by Legal Heirs of a Deceased Employee

Any ex-gratia payment or compensation given to widow or legal heirs of an employee who dies
during service is not taxable as salary income but family pension received is taxable under ‘other
sources’.

13. Payment made after Cessation of Employment

Payment made by an employer to his employee after the cessation of his employment is also
taxable under the head ‘Salaries’. It is taxable under this head because it represents remuneration
for services rendered in the past.

14. Voluntary foregoing : Application of Salary

Voluntary foregoing of salary by an employee is simply an application of income by him and,

therefore, any voluntary foregoing of salary is taxable when it is due, whether paid or not
(Section 15). The salary which is voluntarily foregone must be actually due in the name of the
employee. Voluntary foregoing is different from voluntary surrender of salaries which is
exempted from tax.

15. Previous year for Salaries

The previous year for the income under the head ‘Salaries’ shall always be financial year of the
Government of India (i.e., April to March).

16. Taxability of salary on due or receipt, whichever is earlier basis

U/s 15(a) salary is taxable on due basis whether received or not. Salary becomes due after doing
work and in India it is due on monthly basis. Every employee gets salary on completion of a
month. As per our financial system the year starts on 1St April and ends on 31st March. As such
first salary for the month of April becomes due on 1st day of next month. But in some cases
salary becomes due

on the last day of the month and salary for the month of April shall be due on 30th April. This
results into following two situations :

1. 
  

1. If salary is due on 1 st. day of the month, during the financial year 2013-14 first salary
shall be due on 1st April 2013 and it shall be for the month of March 2013 and last salary
shall be due on 1st March 2014 for the month of February 2014.

2. If salary is due on the last day of the month, during the financial year 2013-14 first salary
shall be due on 30th April 2013 and it shall be for the month of April 2013 and last salary
shall be due on 31st March 2014 for the month of March 2014.

17. Salary Grade / Pay Scale

In some organisations like Government offices, Banks, Post Offices, Railways, Universities,
Colleges etc. salary to employees is paid as per pay scales or salary grades. The pay sc,les fixes
the starting salary of an employee and also the annual increment in future years of employment.

The annual increment is granted to employee after completion of one full year of service e.g. if
an employee joins his service/job on 1st September 2010, he will be granted 1st annual
increment w.e.f. 1st September 2011.

Example of Grade/Pay Scale

8,000-300-11,000
12,000-500-20,000

The amount mentioned in between two big amounts is known as annual increment i.e. the salary
of employee will increase by this amount on the completion of every 12 month of his job.

Example. Mr. A joined his job on 1st September 2009 in the grade of 12,000-500-20,000. Find
out his salary for the previous year 2013-14.

18. Advance salary received

In case an assessee receives some salary in advance in a previous year which was actually not
due in that year, it shall be taxable in the year of receipt. In case, any loan or advance is taken it
is not treated as advance salary.

19. Arrears of salary received

Any amount of salary received from present or past employer during relevant previous year and
which relates to some earlier previous years, is treated as arrears of salary. It is taxable in the
year in which received and not the year to which it belongs. [C.I.T. v. Gajapathy Naidu (1964)
58 I.T.R., 114 (S.C.)]. In case assessee has to pay tax at a rate higher than that at which he would
have paid, had these arrears been received in the year to which they belong, assessee can apply to
Income-tax Officer for relief u/s 89(1) (Refer to Chapter 2 of part III of this book).

1. 
  

20. Salary in Lieu of notice

To terminate the services of an employee it is essential to serve a notice as per service

agreement. In case it is desired to relieve the employee immediately, he is given salary in lieu of
such notice period. Such amount is fully taxable under the head ‘salaries’ on receipt basis.

2. What is Perquisite? State provisions of Income Tax Act relating to those perquisites
which are taxable in case of specified employee?

Ans. “Perquisite” may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages. In essence, these are usually non-cash benefits given by
an employer to employees in addition to cash salary or wages.

Taxability Of Perquisites for Computing Salary Income

TAXABILITY OF PERQUISITES

(A) Exempted for All Employees (B) Taxable for All Employees (C) Taxable for
Specified Employees
Only

1. Free medical facilities as given 1. Rent free house. 1. Car, or any

u/s 17(2) (Proviso) (see details on other
next pages). 2. Concessional Rent House. automotive
conveyance.
3. Obligation of employee met by
2. Free refreshments during employer. 2. Services of
working hours.
domestic
4. Any amount of life insurance
servants
3. Free recreational facilities. premium paid by employer on
including
the life of employee during the
sweeper,
previous year.
4. Provision of telephone whether watch-man,
basic or cellular exclusively for 5. Value of specified security or gardner,
official use. sweat equity shares allotted or personal
transferred. attendent
5. Free meals provided in remote provided by
area or at offshore installation are 6. Contribution to approved employer.
fully exempted. superannuation fund of the
employee in excess of Rs. 3. Gas, water and
1,00,000. electricity
6. Free education, training or facility.
7. Other fringe benefits

1. 
  

refresher course for employees. 8. Interest free or concessional 4. Education

loan. facility for
7. Leave Travel Concession if children.
given twice in a block of 4 years. 9. Travelling, Touring,
Accommodation. 5. Free transport
8. Free ration received by allowed by
10. Food or beverages facility. employer
members of armed forces.
engaged in
11. Gift or Voucher or Token
transport
9. Perquisites allowed by facility.
business.
Government to its employees
posted abroad. 12. Credit card facility.
13. Club facility.
10. Rent free house given to an
officer of Parliament, a Union 14. Use of movable assets.
Minister, and leader of
15. Transfer of movable assets.
Opposition in Parliament.

11. Free residence and

Conveyance facilities to Judges of
Supreme Court and High Court.

12. Free conveyance provided by

employer to employee for going
to or coming from place of
employment.

13. Any amount contributed by

employer towards pension or
deferred annuity scheme.

14. Employer’s contribution to

staff group insurance scheme.

15. Computers, laptops givn to

[not transferred] an employee for
official/personal use.

16. Transfer of a moveable asset

[computer, car or electronic
items] more than 10 years old
without consideration.

1. 
  

17. Accident insurance premium

paid by employer for his own
benefit.

18. Interest free loan or loan at

concessional rate of interest taken
by employee from employer if
amount of loan does not exceed
Rs. 20,000 or loan is taken for
medical treatment.

19. Value of any shares or

debentures given free of cost or at
concessional rate to employees
under stock option scheme
approved by the Central Govt.

20. Tax on perks paid by

employer.

21. Rent free accommodation

given in remote or offshore areas.

CATEGORIES & TYPES OF PERKS

Perks can be divided into three categories
• Perks exempted for all employees
• Perks taxable for all employees
• Perks taxable only for specified employees.

Section – B
(Short Answer Questions)

3. How to calculate income tax on your salary?

Ans.

1. 
  

• The submission of your income tax returns is mandatory according to tax laws. You can
calculate your taxable income from salary by gathering your pay slips and adding the various
emoluments and bonuses and deducting the exempted parts.

• Every year people submit their Income Declarations form and submit the documents that
are required. But, not so many know how income tax is calculated.

• A persons income that exceeds the maximum amount, is charged income tax at the rate
set by the Income Tax department. It is also based on the residential status of the taxpayer.
• The Income Tax Department brings in revenue to the Government. Indian income is
always taxable in India. Foreign income is not taxable for a non-resident but is taxable for the
resident.

Every year people submit their Income Declarations form and submit the documents that are
required. But, not so many know how income tax is calculated. A persons income that exceeds
the maximum amount, is charged income tax at the rate set by the Income Tax department. It is
also based on the residential status of the taxpayer.
The Income Tax Department brings in revenue to the Government. Indian income is always
taxable in India. Foreign income is not taxable for a non-resident but is taxable for the resident.

Income tax is the tax you pay on your income. Income Tax is levied on a person who was in
India for 182 days during the previous tax year or the person who was in India for at least 60
days during the previous tax year and for at least 365 days during the preceding 4 years will be
taxed.
A persons total income is divided into 5 heads of income. They are:
• Income from salaries
• Income from house property
• Profit and gains of business or profession
• Capital gains
• Income from other sources
Salary includes wages, pension, gratuity, fees, commission, perquisites, provident fund
contribution, leave encashment, Central Governments contribution to pension and compensation
received for a service.

1. 
  

Calculate Taxable Income on Salary

It is essential to gather all the details required to file your income tax returns before computing
your taxable income on salary. You will then have to calculate your total taxable income,
followed by the calculation of final tax refundable or payable. To calculate the final tax, you will
have to use the applicable tax rates before subtracting taxes already paid through advance tax or
TCS/TDS from the tax amount due.
The income tax regulations allow individuals to derive income from five sources, viz. Income
from Salary, Income from Business or Property, Income from Capital Gains, Income from House
Property, and Income from Other Sources. Each income derived by an individual must fall under
one of the aforementioned categories.
Following is the procedure for the calculation of taxable income on salary:
1. Gather your salary slips along with Form 16 for the current fiscal year and add every
emolument such as basic salary, HRA, TA, DA, DA on TA, and other reimbursements
and allowances that are mentioned in your Form 16 (Part B) and salary slips.
2. The bonus received during the financial year must be added for the income that is being
calculated.
3. The total is your gross salary, from which you will have to deduct the exempted portion
of House Rent Allowance, Transport Allowance (for which the maximum exemption is
Rs.19,200 per year), Medical reimbursement (for which the maximum exemption is
Rs.15,000), and all other reimbursements provided the actual bills in respect of the
expenses incurred.
4. The result is your net income from salary.
Once your net income has been calculated, the following tax slabs will be applicable:
For individuals who are under 60 years of age:

Secondary
Education and Higher
Net Income Income Tax Rate
Cess Education
Cess

Up to Rs.2.5 lakhs Nil Nil Nil

2% of
Rs.2.5 lakhs to Rs.5 5% of (Total income – Rs.2.5 1% of
income
lakhs lakhs) income tax
tax

Rs.5 lakhs to Rs.10 Rs.25,000 + 20% of (Total income 2% of 1% of

lakhs – Rs.5 lakhs) income income tax

1. 
  

Secondary
Education and Higher
Net Income Income Tax Rate
Cess Education
Cess
tax

2% of
Rs.1,12,500 + 30% of (Total 1% of
Above Rs.10 lakhs income
income – Rs.10 lakhs) income tax
tax

For individuals who are between 60 and 80 years of age:

Secondary
Education and Higher
Net Income Income Tax Rates
Cess Education
Cess

Up to Rs.3 lakhs NIL Nil Nil

2% of
1% of
Rs.3 lakhs to Rs.5 lakhs 5% of (Total Income – Rs.3 lakhs) income
income tax
tax

2% of
Rs.5 lakhs to Rs.10 Rs.10,000 + 20% of (Total income 1% of
income
lakhs – Rs.5 lakhs) income tax
tax

2% of
Rs.1,10,000 + 30% of (Total 1% of
Above Rs.10 lakhs income
income – Rs.10 lakhs) income tax
tax

For individuals who are above 80 years of age:

Secondary
and Higher
Net Income Income Tax Rate Education Cess
Education
Cess

Up to Rs.5 lakhs Nil Nil Nil

1. 
  

Secondary
and Higher
Net Income Income Tax Rate Education Cess
Education
Cess

Rs.5 lakhs to Rs.10 20% of (Total Income – Rs.5 2% of income 1% of

lakhs lakhs) tax income tax

Rs.1 lakh + 30% of (Total 2% of income 1% of

Above Rs.10 lakhs
income – Rs.10 lakhs) tax income tax

What is Salary Income?

• Salary is the remuneration paid by the employer to the employee for the services rendered
for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the
annual salary.
Salary includes:
• Basic Salary or the fixed component of salary as per the terms of employment.
• Fees, Commission and Bonus that the employee gets from the employer
• Allowances that the employer pays the employee to meet his personal expenses.
Allowances are taxed either fully, partially or are exempt.
• Fully taxable allowances are:
Dearness allowance paid to the employees to meet expenses due to inflation.
City Compensatory allowance paid to those who move to big metros like Mumbai,
Delhi, Chennai, where the standard of living is higher.
• Overtime allowance paid to the employee who works over the prescribed hours.
• Deputation allowance and servant allowance.

Partly taxable allowances are:

• House Rent Allowance: If the employee stays in his own house then the allowance is
fully taxable. The allowance exemption is the least of
• The actual house rent allowance
• If he pays additional rent above 10% of his salary
• If the rent is equal to 50% of his salary (metros) or 40% (other areas).
• Entertainment allowance (except for Central and State Government employees).
• Special allowances like uniform, travel, research allowance etc.
• Special allowance to meet personal expenses like childrens education allowance,
children hostel allowance etc.

Fully exempt allowances are:

• Foreign allowance given to employees posted abroad.

1. 
  

• Allowances of High Court and Supreme Court Judges.

• United Nations Organisation employees allowances.

Perquisites are payments received by employees over their salaries. They are not reimbursement
of expenses. Some perquisites are taxable for all employees, they are:
• Rent free accommodation
• Concession in accommodation rent
• Interest free loans
• Movable assets
• Club fee payments
• Educational expenses
• Insurance premium paid on behalf of employees
Some are taxable only to specific employees like directors or those who have
substantial
interest in the organisation, they are taxed for:
• Free gas, electricity etc. for domestic purpose
• Concessional educational expenses
• Concessional transport facility
• Payment made to gardener, sweeper and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax
are:
• Medical benefits
• Leave travel concession
• Health Insurance Premium
• Car, laptop etc. for personal use.
• Staff Welfare Scheme

Retirement benefits are given to employees during their period of service or during
retirement.
• Pension is given either on a monthly basis or in a lump sum. The tax is treated depending
on the category of the employee.
• Gratuity is given as appreciation of past performance which is received at the time of
retirement and is exempt to a certain limit.
• Leave salaries tax depends on the category of the employee. The employee may make
use of the leave or encash it.
• Provident fund is contributed by both employee and employer on a monthly basis. At
the retirement, employee gets the amount along with interest. Tax treatment is based on
the type of provident fund maintained by the employer.

Taxes for salaried individuals

The Budget of 2018 has seen some much anticipated changes being ushered in by the Finance
Minister, Arun Jaitley along with the Indian Government. Be that as it may, Arun Jaitley has not
touched the existing Income slabs and rates nor has he affected Section 80C, with regard to

1. 
  

raising the basic exemption limit for taxpayers. People falling into the salaried category might
have been disappointed at the start but new advancements are sure to change the game for them.
With the proposal to re-establish the Rs.40,000 standard deduction, the Government has
efficiently negated the transport allowance and medical expenses from the earlier tax rules. This
deduction will henceforth act as an extra income exemption of the amount of Rs.5800.
Let us illustrate this with an example:

Details  Up until AY 2018‐19 AY 2019‐20 onwards 

Gross Income in Rs.  Rs.5,00,000 Rs.5,00,000

Transport Allowance 
Rs.19,200  N/A 
Deduction 

Medical Allowance Deduction  Rs.15,000 N/A

Standard Deduction  N/A Rs.40,000

Net Income  Rs.4,65,800 Rs.4,60,000

Computation of the Net Salary of an Employee:

Particulars  Amount (In Rs.)

Add:   

1.Basic Salary   

2.Fees, Commission and Bonus   

3.Allowances   

4.Perquisites   

1. 
  

Particulars  Amount (In Rs.)

5.Retirement Benefits   

   ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Gross Salary  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Less: Deductions from Salary   

1.Entertainment Allowance   

2.Professional Tax   

   ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Net Salary  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Section-C
(Very Short answer questions)

4. Write a short note on the following:

1. Encashment of earned Leave
2. Gratuity
3.Pension
4. Compensation on Retrenchment

Ans.
1. Encashment of earned Leave

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89 if applicable
may be claimed for the same.
(ii) Any payment by way of leave encashment received by Central & State Govt. employees at
the time of retirement in respect of the period of earned leave at credit is fully exempt.
(iii) In case of other employees, the exemption is to be limited to the least of following:

1. 
  

(a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30
days for every year of actual service)
(b) 10 months average salary
(c) Leave encashment actually received. This is further subject to a limit of Rs 3,00,000 for
retirements after 02.04.1998.
(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave
standing to the credit of such employee at the time of death is not taxable.
Provisions in a systematic manner –
1. In the case of continuity of services.

Government/Non-Government Leave encashment It is chargeable to tax.

employee during Continuity of However relief can be
employment taken under section 89
As per Income Tax Act, 1961 u/s 10(10AA)
2. Leave encashment at the time of retirement / leaving job

Government Leave encashment at the It is fully exempt from tax under

employee time of retirement section 10(10AA)(i)
/ leaving job

Non-Government Leave encashment at the It is fully or partially exempt from

employee time of retirement / tax in some cases under section
leaving job 10(10AA)(ii)

Second being accumulated leaves enchased by a non govt. employee on his/ her retirement
whereof the complicated part of calculation of exempted leave salary is calculated
as LEAST of the following:

1. Cash equivalent of unavailed leave calculated on the basis of maximum 30

days leave for every year of actual service rendered.

2. 10 × Average monthly salary.

3. The amount specified by the Government i.e., Rs. 3,00,000 /-;

4. Leave encashment actually received at the time of retirement.

1. 
  

How to find out Average monthly salary?

Salary, for this purpose, means basic salary and includes dearness Allowance if terms of
employment so provide. It also includes commission based upon fixed percentage of turnover
achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be
calculated on the basis of average salary drawn during the period of 10 months ending on the
date of retirement.
Leave encashment taxable amount = Actual encashment received – Exempted u/s 10(10AA)
given above

2. Gratuity

Gratuity refers to an amount of money which an employer pays to his employee in return for
services offered by him to the company. However, only those employees who have been
employed in the company for five years or more than five years are given gratuity. You may
perceive gratuity like gratitude expressed by the company towards their employees for their
services. It is governed by the Payment of Gratuity Act 1972.

In order to receive gratuity, you need to fit the following eligibility criteria:
1. You should be eligible for superannuation
2. You should have retired from the job
3. You should have resigned after remaining employed for 5 years with the company
4. In case of your death, or if you become disabled on account of sickness or accident
What is the formula for calculating amount of Gratuity?

The amount of gratuity can be calculated using the following formula

Gratuity = n*b*15/26
Where n = tenure of service completed in the company
b = last drawn basic salary + dearness allowance
Imagine that you worked with XYZ company for a period of 15 years. Your last drawn basic
salary along with dearness allowance was Rs 30000. Hence,
The amount of gratuity = 15*30000*15/26 = Rs 2,59,615
Two points need to be noted here:
As per the Gratuity Act, the amount of gratuity cannot be more than Rs 10 lakh. Any excesses
would be treated as ex-gratia
If the last few months in the last year of employment are more than 6 months, then it will be
rounded to next number. Suppose your tenure of service is 16 years 7 months, then you
receive gratuity for 17 years. Otherwise for 16 years if it happens to be 16 years 4 months

What are the taxation rules for Gratuity?

The tax treatment of gratuity depends on the nature of the employee who is in receipt of
gratuity. There are 3 major categories in this

1. 
  

The government employee who is eligible for gratuity The amount of gratuity received by any
government employee (whether central/state/local authority) will be exempt from income tax.
Any other eligible employee whose employer is covered under Payment of Gratuity Act In
this case, last drawn salary of only fifteen days will be exempt from income tax.
Any other eligible employee whose employer is not covered under Payment of Gratuity Act

Here, the least of the following 3 amounts will be exempt from income tax:
a.Rs 10 lakh
b.The actual amount of gratuity received
c.Half month’s salary for every year of employment that the employee has completed with the
employer.

3.Pension
Pension is taxable under the head salaries in your Income Tax Return. Usually, pension is paid
out periodically, on a monthly basis,
However, you may also choose to take pension as a lump sum (also called commuted pension)
instead of a periodical payment.
Let’s first understand commuted pension by way of an example. At the time of retirement,
you may choose to receive a certain percentage of your pension in advance. Such pension
received in advance is called commuted pension. For e.g. – At the age of 60, you decide to
receive 10% of your monthly pension in advance of the next 10 years of Rs 10,000.
This will be paid to you as a lump sum. Therefore, 10% of Rs 1000x12x10 = Rs 1,20,000 is
your commuted pension. You will continue to receive Rs 9,000 (your un-commuted pension)
for the next 10 years until you are 70 and post 70 years of age, you will be paid your full
pension of Rs 10,000.

2. Taxability of Commuted and Uncommuted Pension

• Uncommuted pension or any periodical payment of pension is fully taxable as salary. In

the above case Rs, 9,000 received by you is fully taxable. Rs 10,000 starting at the age of
70 yrs are fully taxable as well.
• Commuted pension or lump sum received may be exempt in certain cases. For a
government employee, commuted pension is fully exempt. For a non-government
employee, it is partially exempt. If Gratuity is also received with pension – 1/3rd of the
amount of pension that would have been received if 100% of the pension was commuted,
is exempt from commuted pension and remaining is taxed as salary. And in case only
pension is received, gratuity is not received – ½ of the amount of pension that would have
been received if 100% of the pension was commuted is exempt.

1. 
  

3. Pension received by a family member

Pension received by a family member is taxed under income from other sources in your
Income Tax Return. If this pension is commuted or is a lump sum payment it is not taxable.
Uncommuted pension received by a family member is exempt to a certain extent. Rs 15,000
or 1/3rd of the uncommuted pension received -whichever is less is exempt from tax.

For Example – If a family member receives pension of Rs 1,00,000 the exemption available is
least of – Rs 15,000 or Rs 33,333 (1/3rd of Rs 1,00,000). Thus the taxable family pension will
be Rs 100000 – Rs 15000 = Rs 85,000
4. Compensation on Retrenchment
Retrenchment is the termination of an employee by an employer for reasons other than a
punishment meted out by disciplinary action. Employees terminated in such a manner are
financially compensated by the employer. This kind of compensation is known as
retrenchment compensation. This article strives to educate the reader on some of the key
aspects of the compensation.
Eligibility for the Compensation
An employee will be considered eligible for retrenchment compensation on the
satisfaction of the following conditions:
• The employee must be a workman.
• The employee must have offered continuous service for a period of 240 days in
the previous 12 months, which will be calculated as a year of continuous service.

Continuous Service
Continuous service means performance of service without any interruptions. It may be
noted that sickness, authorized leave, legal strikes, lock-outs and work-stoppages (where
the worker is not at fault) cannot be considered as interruption of service. The retrenched
employee must be provided with 15 days of average pay for a year of continuous service
or any part thereof in excess of six months.
Average Pay
As already observed, an employee must be provided with 15 days of average pay for a
year of continuous service or any part thereof. He must be compensated in the manner as
described below:
1. If the workman is being paid on a monthly basis – on the basis of three calendar
months.
2. If the workman is being paid on a weekly basis – on the basis of four completed
weeks.
3. If the workman is being paid on a daily basis – On the basis of the last 12 working
days.
Components of Calculation
Retrenchment compensation must be calculated considering the allowances such as basic
wages, dearness allowance, all allowances for attendance, house rent, conveyance etc.

1. 
  

In addition to it, value of housing provided and value of amenities provided along with
housing should be considered.

Taxability
Least of the following will be exempt from tax:
• The amount of average pay provided to the employee
• Rs 5,00,000
• The actual amount received
If compensation exceeds the above limits, it will be treated as salary or profit in lieu of
salary. However, compensations of such nature will incur relief in accordance with the
regulations of the Income-Tax Act.

2. What Is Marginal Relief And How It Is Computed?

Ans. The concept of marginal relief is designed to provide relaxation from levy of surcharge to a
taxpayer where the total income exceeds marginally above Rs. 1 crore or Rs. 10 crore, as the
case may be.
Thus, while computing surcharge, in case of taxpayers (i.e.
Individuals/HUF/AOP/BOI/artificial juridical person) having total income of more than Rs. 1
crore, marginal relief shall be available in such a manner that the net amount payable as
income-tax and surcharge shall not exceed the total amount Source

5. What are the Deductions under Income from Salary?

Ans.
Deductions on Income from Salary:
The following deductions are available on the income from salary:
• Entertainment tax is allowed as deductions for the State and Central Government
employees. The amount is the least of either Rs.5,000, entertainment allowance received
by the employee or 20% of the basic salary.
• Professional Tax is the tax on employment which is deducted from the income every
month. It is imposed at the state level for every salaried individual.

Unit - 04

Section –A
(Detailed Answer Questions)

1. What is the meaning of “taxable Profits from Business or Profession? Which

incomes are taxable under this head?
Ans. Business: In brief, Business includes any trade, commerce and manufacturing of goods
with a purpose of making profit within the permissible laws of country.

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Profession: It includes services provided by the professionally qualified or

technically qualified person according to their qualification.

Income from Business/Profession: means any income which is shown in profit

and loss account after considering all allowed expenditures.

• Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also
subjected to taxation.
• The term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d) any
adventure or concern in the nature of trade, commerce or manufacture.
• The term "profession" implies professed attainments in special knowledge as
distinguished from mere skill; "special knowledge" which is "to be acquired only after
patient study and application".
• The words 'profits and gains' are defined as the surplus by which the receipts from the
business or profession exceed the expenditure necessary for the purpose of earning those
receipts. These words should be understood to include losses also, so that in one sense
'profit and gains' represent plus income while 'losses' represent minus income.

INCOME CHARGEABLE UNDER BUSINESS/PROFESSION

The following are few examples of incomes which are chargeable under this head:-
1. Normal Profit from general activities as per profit and loss account of business entity.
2. Profit from speculation business should be kept separate from business income and
shown separately.
3. Any profit other than regular activities of a business should be shown as casual income
and will be shown under “income from other sources” head.
4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty
drawback of custom or excise.
5. The value of any benefits whether convertible into money or no from business/profession
activities.
6. Any interest, salary, commission etc. received by the partner of a firm will be treated as
business/professional income in hand of partner. However, the share of profit from
partnership firm is exempt in hand of partner.
7. Amount recovered on account of bad debts which were already adjusted in profit in
earlier years etc.
8. The following types of income are chargeable to tax under the heads profits and gains of
business or profession:-
9. Profits and gains of any business or profession
10. Any compensation or other payments due to or received by any person specified
in section 28 of the Act

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11. Income derived by a trade, profession or similar association from specific services
performed for its members
12. Profit on sale of import entitlement licences, incentives by way of cash compensatory
support and drawback of duty
13. The value of any benefit or perquisite, whether converted into money or not, arising from
business
14. Any interest, salary, bonus, commission, or remuneration received by a partner of a firm,
from such a firm
15. Any sum whether received or receivable in cash or kind, under an agreement for not
carrying out any activity in relation to any business or not to share any know-how, patent,
copyright, franchise, or any other business or commercial right of similar nature or
technique likely to assist in the manufacture or processing of good
16. Any sum received under a keyman insurance policy
17. Income from speculative transactions.
18. In the following cases, income from trading or business is not taxable under the head
"profits and gains of business or profession":-
19. Rent of house property is taxable under the head " Income from house property". Even if
the property constitutes stock in trade of recipient of rent or the recipient of rent is
engaged in the business of letting properties on rent.
20. Deemed dividends on shares are taxable under the head "Income from other sources".
21. Winnings from lotteries, races etc. are taxable under the head "Income from other
sources".
22. Profits and gains of any other business are taxable, unless such profits are subjected to
exemption.
23. General principals governing the computation of taxable income under the head "profits
and gains of business or profession:-
24. Business or profession should be carried on by the assessee. It is not the ownership of
business which is important , but it is the person carrying on a business or profession,
who is chargeable to tax.
25. Income from business or profession is chargeable to tax under this head only if the
business or profession is carried on by the assessee at any time during the previous year.
This income is taxable during the following assessment year.
26. Profits and gains of different business or profession carried on by the assessee are not
separately chargeable to tax i.e. tax incidence arises on aggregate income from all
businesses or professions carried on by the assessee. But, profits and loss of a speculative
business are kept separately.
27. It is not only the legal ownership but also the beneficial ownership that has to be
considered.

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28. Profits made by an assessee in winding up of a business or profession are not taxable, as
no business is carried on in that case. However, such profits may be taxable as capital
gains or as business income, if the process of winding up is such as to involve the
carrying on of a trade.
29. Taxable profit is the profit accrued or arising in the accounting year. Anticipated or
potential profits or losses, which may occur in future, are not considered for arriving at
taxable income. Also, the profits, which are taxable, are the real profits and not notional
profits. Real profits from the commercial point of view, mean a gain to the person
carrying on the business and not profits from narrow, technical or legalistic point of view.
30. The yield of income by a commercial asset is the profit of the business irrespective of the
manner in which that asset is exploited by the owner of the business.
31. Any sum recovered by the assessee during the previous year, in respect of an amount or
expenditure which was earlier allowed as deduction, is taxable as business income of the
year in which it is recovered.
32. Modes of book entries are generally not determinative of the question whether the
assessee has earned any profit or loss.
33. The Income tax act is not concerned with the legality or illegality of business or
profession. Hence, income of illegal business or profession is not exempt from tax.

2. What are the expenses and payments disallowed while computing income from
business and profession?
Ans. While computing the profit and gains from business or profession, there are certain
expenditures which are disallowed.
This means that the income tax department does not allow the benefit of such
expenditures and the assesses are required to pay taxes on such expenditures by adding it
back to the net profits.

EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION 
All the expenses relating to business and profession are allowed against income.
Following are few examples of expenditures which are allowed against income:-
• Rent rates and insurance of building.
• Payment for know-how, patents, copy rights, trade mark, licenses.
• Depreciation on fixed assets.
• Payment for professional services.
• Expenditures on scientific research for business purposes.
• Preliminary Expenses in case of Limited companies.
• Salary, bonus, commission to employees.
• Salary, interest and remuneration to working partners subject to certain conditions.
• Communication expenses.
• Traveling and conveyance expenses.

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• Membership fees etc.

• Advertisement expenses in respect of promotion of business products.
• Discount allowed to customers.
• Interest on loans (Whether Private of Institutional).
• Bank Charges/Bank Commission expenses.
• Entertainment/Business Promotion expenses
• Staff Welfare expenses.
• Festival Expenses.
• Printing and stationery expenses
• Postage expenses.
• All other expenses relating to business/profession

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual
basis at the date of finalization accounts.

EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY

Following expenses will be allowed if these expenses have been paid before or on due date or
before filing of income tax return:-
1. Any tax, duty, cess or fees by whatever name called.
2. Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of
employees.
3. Bonus or commission or leave encashment payable to employees.
4. Interest on loan from public financial institutions, state financial corporation or from
scheduled bank.

EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME

1. Expenditure on any type of advertisement of political party.
2. Any interest, royalty, fees for technical services or other sums chargeable under this act,
which is payable outside India or in India to non-resident or a foreign company on which
tax has not been deducted or after deduction, not deposited in prescribed time.
3. Any interest, commission, rent, royalty, professional or technical fees paid or payable to
any resident of India or payment to contractor or sub-contractor on which TDS is
not deducted, or if deducted then not deposited before the due date of filing the return.
4. Any tax calculated on the basis of profit of business.
5. Any amount of Wealth Tax paid.
6. Any payment of salaries payable outside India or to a non-resident on which tax is not
deducted.
7. Any tax actually paid by an employer on any income by way of perquisites, on behalf of
the employee.
8. Any remuneration paid to non working partner.
9. Any remuneration paid to working partner other than specified in agreement or as per the
specified limits by income tax act.
10. Any interest to partner if not specified in agreement and not more than 12%.

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11. Any payment in cash exceeding Rs.20000/= till financial year 2016-17 and with effect
from 01.04.17, the limit of cash payments will be Rs.10000/= and (Rs.35000/= in case
of payment made for plying, hiring or leasing goods carriages) except when payments are
made under circumstance specified in Rule 6DD of Indian income tax act.
12. Where a deduction has been claimed on accrual basis during an assessment year and the
payment is made in a subsequent year, and the payment or aggregate of payments made
to a person in a day otherwise than by way of an account payee cheque/DD, exceeds
Rs.20000/= (Rs.35000/= in case of goods carriages), such payments shall be deemed as
profit of the assessee for the year in which the payment is made.
13. Any provision for the payment of gratuity to the employees.
14. Any personal expenditures.
15. Expenses on defending in any proceedings for breach of any law relating to sales tax etc.
16. With effect from 01.04.17, any payment for a capital expenditure made otherwise than by
an account payee cheque/draft/RTGS/ECS debit card or credit card, exceeding
Rs.10000/= shall neither be deductible nor eligible for depreciation under section 32.

Notes:
• Restriction on acceptance of loans or accept a deposits of Rs.20000/= or more from any
other person except by an account payee cheque/draft. This restriction shall not apply if
the loan or deposit is taken or accepted from government, bank, post office, co-operative
bank, government undertaking etc. With effect from 01.04.17, cash should no be
accepted as loan more than Rs.10000/= in a single day from a single person.
• Restriction on repayment of loans or deposits: No person can repay loan along with
interest except by way of account payee cheque/draft if the amount is Rs.20000/= or
more. With effect from 01.04.17, cash should no be paid more than Rs.10000/= in a
single day to a single person to repay the loan amount.

RESTRICTION ON RECEIPT OF CASH IN EXCESS OF RS.2 LAKH BY ANY

PERSON
Any person who receives Rs. two lakh or more in cash from a person in a day or in respect of a
single transaction or in respect of transaction relating to one event, will attract a penalty equal to
the amount accepted. For example, Mr. A receives Rs.250000/= in cash from Mr. B in respect of
sale of his car. In this case, Mr. A has to pay penalty for Rs.250000/= i.e equal to the amount he
received in cash.

Section – B
(Short Answer Questions)

3. What do you mean by the term Depreciation as per Sec 32? Which assests are
subjects to depreciation? What are the conditions which have to be fulfilled
for allowing deduction of depreciation?

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Ans. Depreciation under Income Tax Act is the decline in the real value of a tangible asset
because of consumption, wear and tear or obsolescence.
The concept of depreciation is used for the purpose of writing off the cost of an asset
against profit over its life.
Depreciation under Income Tax Act is charged against income and there are different
methods of calculating it like straight line method or written down value method. The
Income-tax Act recognizes WDV method of depreciating asset except for undertaking
engaged in generation or generation and distribution of power. To read about additional
depreciation visit Additional Depreciation Under Income Tax Act

Block Of Assets- Concept

Block of assets is a group of assets falling within a class of assets comprising –
• Tangible assets, being building, machinery, plant or furniture,
• Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature
Conditions For Claiming Depreciation
1. The assets must be owned, wholly or partly, by the assessee.
2. The asset should be actually used for the purpose of business or profession of the
assessee. If the assets are not used exclusively for the business of the assessee but for
other purposes as well, depreciation allowable would be proportionate to the use of
business purpose.
3. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned
by each co-owner.
4. Depreciation is not allowable on the cost of land.
5. Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have
been allowed irrespective of a claim made in the profit & loss account or not.
6. Where the asset is not exclusively used for the purpose of business or profession, the
depreciation shall be allowed proportionately with regards to such usage of assets
(section 38).
Where the above conditions are not fulfilled, depreciation shall not be allowed.
Section 32(1) of the Act provides that depreciation is to be computed at the prescribed
percentage on the written down value of the asset which in turn is calculated with
reference to the actual cost of the assets. In the context of computing depreciation, it is
important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’.

Written Down Value- Meaning

WDV under the Income Tax Act means:
1. Where the asset is acquired in the previous year the actual cost of the asset shall be
treated as WDV.
2. Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred
less depreciation actually allowed under the Act.
Depreciation Allowed

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• For all assessees other than Power Sector — Depreciation is calculated on written down
the value of “Block of Assets”, except for Power Sector, at rates prescribed.
• For Power Sector Assessees — In case of an undertaking engaged in generation or
generation and distribution of power, the depreciation will be allowed on actual cost (i.e.
on straight-line method) at the rates prescribed. Such undertaking, however, has an option
to claim depreciation on Written Down Value method at the rates provided in New
Appendix I if the assessee exercises such option before the due date of filing the return.
Depreciation allowable to predecessor and successor company in case of amalgamation
or demerger shall not exceed the amount of depreciation that would have been allowed as
if there was no such succession and the depreciation so computed shall be divided
between the amalgamating and amalgamated company or demerged and resulting
company on the basis of number of days the assets were used by such companies.
Accounting standard on a lease issued by ICAI requires capitalization of the assets by
the lessees in the financial lease transaction. In such leases, the lessee can exercise the
rights of the owner in his own right and hence depreciation is available to the lessee.

RATES OF DEPRECIATION (%

(I) Buildings:

(a) Buildings which are used mainly for residential purposes except for hotels and 5
Boarding House

(b) Buildings which are not used mainly for residential purposes and other than 10
mentioned in a & c

(c) Buildings acquired on or after 1-9-2002 for installing P&M forming part of water 40
supply project; or water treatment system and put to use for the purpose of
providing infrastructure facilities u/s. 80-IA(4)(i) of the Act

(d) Purely temporary erections such as wooden structures 40

Note:
“Buildings” include roads, bridges, culverts, wells and tube wells.
A building shall be deemed to be a building used mainly for residential purposes if the
built-up floor area thereof used for residential purposes is not less than sixty-six
and two-thirds percent of its total built-up floor area and shall include any such
buildings in the factory premises.
Water treatment system includes a system for desalination, demineralization, and
purification of water.

(II) Furniture and fittings including electrical fittings 10

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Electrical fittings include electrical wiring, switches, sockets, other fitting and fans,
etc.

(III) Machinery and plant:

Plant has been held to include :
Movable partitions
Sanitary & pipeline fitting
Ceiling and pedestal fans
Wells
Hospital
However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture, and fittings.

1) Machinery & plant other than those covered by sub-items 2, 3 and 8 below: 15
Machinery and plant includes pipes needed for delivery from the source of supply of
raw water to the plant and from the plant to the storage facility

2) Motor-cars (other than those used in the business of running them on hire) acquired 15
or put to use on or after 1st April 1990

3) (i) Aeroplane-Aeroengines 40

(ii) Motor buses, Motor lorries, and Motor used in a business of running them on hire 30

(iii) Commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and is 40
put to use before 1-4-1999 for the purposes of business or profession

(iv) New commercial vehicles acquired on or after 1-10-1998 but before 1-4-1999 and 40
is put to use before 1-4-1999 in replacement of condemned vehicles of over 15
years of age for the purpose of business or profession

(v) New commercial vehicles acquired on or after 1-4-1999 but before 1-4-2000 in 40
replacement of condemned vehicles of over 15 years of age and is put to use
before 1-4-2000 for the purpose of business or profession

(vi) New commercial vehicles acquired on or after 1-4-2001 but before 1-4-2002 and 40
is put to use before 1-4-2002 for the purpose of business or profession

(vii)New Commercial vehicles acquired on or after 1-1-2009 but before 1-10-2009 40

and put to use before 1-10-2009 for the purpose of business or profession
“Commercial vehicle” means — heavy goods vehicle, heavy passenger motor vehicle,
light motor vehicle, medium goods vehicle, and medium passenger motor
vehicle.
It does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”.

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(viii) Moulds used in rubber and plastic goods factories 30

(ix) Air pollution control equipment 40

(x) Water pollution control equipment 40

(xi) Solid waste control equipment 40

(xii) Machinery and plant used in semiconductor industry 30

(xiii) Lifesaving medical equipment 40

(xiv) Any new plant and machinery installed in or after the P.Y. pertaining to A.Y. 40
1988-89 for manufacture of articles or things by using any technology or
know-how developed or an article invented in a laboratory owned by a public
sector company, Government, recognized University subject to specified
conditions (See Rule 5(2))

4) Containers made of glass or plastic used as refills 40

5) Computers (including computer software) 40

“Computer Software” means any computer programme recorded on any disc, tape,
perforated media or other information storage device.

6) Machinery and plants used in weaving, processing and garment sector of textile 40
industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is
put to use before 1-4-2004

7) Machinery and plant acquired and installed on or after the 1-9-2002 in a water 40
supply project or a water treatment system and which is put to use for the
purpose of business of providing infrastructure facility under 80-IA(4)(i)

8) For other items of Plant & Machinery refer to Rule 5 App. 1 40

9) (i) Books owned by assessees carrying on a profession 40

Annual publications 40
Other books

(ii) Books owned by assessees carrying on business in running lending libraries 40

(IV) Ships 20
“Speedboat” means a motorboat driven by a high-speed internal combustion engine
capable of propelling the boat at a speed exceeding 24 kilometers per hour in
still water and so designed that when running at a speed, it will plane, i.e., its

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bow will rise from the water.

(V) Intangible Assets 25

Know-how patents, copyrights, trademarks, licenses, franchises or any other business
or commercial rights of similar nature acquired on or after 1-4-1998.

Example for Depreciation calculation

In 2017-18 Company purchased the following assets –
Asset Name Purchase Amt. Date of Purchase Depreciation
Rate

Machine 1 500000 14-Apr 15%

Furniture 20000 15-Aug 10%

Car 300000 25-Dec 15%

Machine 2 40000 26-Jan 15%

Depreciation will be computed as follows:
Name of asset Block 1 Block 2 Block 3

Machine – 15% Furniture – 10% Car -15%

Opening Value 0 0 0

Add-
Purchases (>or = 180 days) 500000 20000
Purchase (<180 days) 40000 300000

Less-
Sold during the year 0 0 0

Closing value of block before 540000 20000 300000

depreciation

Depreciation 78000 2000 22500

(500000*15%+ (20000*10%) (300000*1

40000*15%*1 5%*
/2) 1/2)

Closing WDV after 462000 18000 277500

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depreciation
Methods of Depreciation Calculation
Methods of Depreciation and useful life of depreciable assets may vary for assets of
different types and different industries and may vary for accounting and taxation purposes
also. Most commonly employed methods of depreciation are Straight Line Method and
Written down Value Method. One of the basic differences in income tax depreciation
calculation and companies act depreciation other than rates of depreciation is a method of
calculation.
Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):
• Straight Line Method
• Written Down Value Method
Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):
1. Straight Line Method
2. Written Down Value Method
3. Unit of Production Method
Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
1. Written Down Value Method (Block wise)
2. Straight Line Method for Power Generating Units

Analysis of AS-22 with reference to Depreciation-

Deferred Tax is the tax effects of Timing Difference. The whole concept of deferred
tax is depending on timing difference.
Accounting income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income tax expense or adding income tax saving.
Taxable income (tax loss) is the amount of the income (loss) for a period, determined
in accordance with the tax laws, based upon which income tax payable (recoverable) is
determined.
As per AS-22 Timing differences are the differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in one or more
subsequent periods.
Example: – An asset is purchased of Rs.1,00,000 having a useful life of 5 years and allowed
100% depreciation under Income Tax Act. Profit before depreciation is Rs.2,00000.
Rs. 20,000 (100,000/5) is allowed as depreciation while computing the accounting
income and Rs.1,00,000 is allowed as full depreciation in the year of purchase while computing
the taxable income.
Hence,
Accounting Income is Rs.1,80,000 (2,00,000-20,000)
Taxable Income is Rs.1,00,000 (2,00,000-1,00,000)
Hence, the difference between Accounting Income and Taxable Income is created in this year
and shall be created in a subsequent year (by the balance depreciation of Rs.
80,000=1,00,000-20,000) because in subsequent years, while computing the accounting income
the entity shall deduct the depreciation of Rs. 20,000 but nil depreciation shall be allowed while
computing the taxable income. This is called timing difference.

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4. How will you compute Taxable Profits of the head “Business or Profession”?
Ans.
Calculating the taxable income arising from gains from Business/ Profession might be a
challenging task.
In case, the business or professional set up is not on a big scale and does not involve complex
transactions, then income from Business/Profession can be computed by the assessee
himself/herself but in most cases, it is beneficial to take the advice of an expert( like a chartered
accountant) to do this.
There several provisions under the Income Tax Act which deal with the allowance/disallowances
of various expenditures and incomes. Other concepts like AMT, Book Profits, and Presumptive
incomes are also applicable while computing gains from a Business/Profession.

For a simple business, the assessee can compute his taxable business income in the following
manner:
*Take the Net Profit mentioned in the Books of Accounts as the base value.
* Add back all the deductions that are disallowed under the income tax act (Refer Section 37, 14)
which you have already availed in the P&L account maintained as a part of books of accounts.
* Subtract the expenditures that are allowed as per the provisions of income tax laws (Refer
section 32, 35, 36).
It is always better to take the help of a chartered accountant, as the calculations tend to
change with each case. Income from Other Sources
* All the incomes that cannot be classified in the heads of income mentioned above will be
considered as income from other sources.
It generally consists of Interest Income, Dividend income, Gifts (where taxable) etc. These
figures are to be collected by categorizing all the credit entries in your savings account
passbook/statements. In case of accrued income such as interest earned on cumulative fixed
deposits which will not reflect in your savings account as credit entries, you can obtain interest
certificates from the institution where you have placed the FD. You will need interest certificates
only in case tax has not been deducted at source from the accrued income because in case of
TDS a TDS certificate will be issued to you.
* Saving account credit entries (except inter-account transfers) are to be categorized under the
above mentioned five heads of income. In this manner, compute your annual income from other
sources like Interest income, Dividend income, family pension, Lottery income, income from
race horses etc.
Interest income typically includes interest from fixed deposits, recurring deposits, savings
accounts, bonds, debentures etc. Dividend income typically comes from mutual fund schemes
where you have opted for the dividend option and equity shares. Most people would have only
these two kinds of income from other sources.
* Subtract the deductions available under Income Tax act for which you are eligible.

Set Off of Current year losses and set off of brought forward losses. After computing income
under each head of income, you might see losses reflecting under some heads of income. The

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income tax laws allow the assessee to set off the losses under one head of income from income
under the same head or other heads of income too.

However, there are certain restrictions on set off of losses such as: ..
* The loss from business can't be set off from income from salary.
* Long term capital losses can't be set off against any other head of income.
(However, LTCL for FY 18-19 and onwards can be set off against LTCG)
* Short term capital losses can be set off against any other short term capital gains as well as
long term capital gains, but not against any other head of income
* Losses from owning and maintaining race horses can't be set off against any other head of
income.

Even if there are no losses under any head in the current year, then also any losses which could
not be set off in earlier years and have been brought forward by the assessee can be set off from
the current year income of the same head in which the loss was incurred. Any unsettled loss can
be carried forward to the next year. There are multiple conditions attached to carry forward and
set off of losses so it is advisable to consult an expert in this matter.

5.As per Profit & Loss Account of M/s XYZ Limited as on 31.03.17, the amount
of net profit is Rs.5,50,560/=. Following information also available with profit
and loss account:-
1. Rs. 20000/= paid as Advance Income Tax had been debited to profit and
loss account.
2. Rs.10000/= spent for printing of brochures of a political party were also
shown in profit and loss account.
3. Amount or provident fund for Rs.55000/= did not deposit till the date of
filing of return.
Compute the taxable income of M/s XYZ Limited.
Solution
COMPUTATION OF TOTAL INCOME

PARTICULARS AMOUNT
(IN RUPEES)

Net Profit as per Profit and Loss Account 550560

Add: Amount of Advance Income Tax 20000

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Add: Expenses Incurred for Political Parties 10000

Add: Provident Fund not deposited till filing of return 55000

NET TAXABLE INCOME 635560

Clarification:
1. Payment of advance tax is not expenditure.
2. Expenses for political parties are not allowed as business expenditure.
3. Provident fund must be deposited before filing of income tax returns otherwise it will not
be allowed as business expenditure.

Section-C
(Very Short answer questions)
6. Write a note on Unabsorbed Depreciation.
Ans. Unabsorbed depreciation - Its the amount of depreciation which the assessee could not
claim as expenditure in his profit and loss account due to lack of sufficient credit in the credit
side of p&l account or other expenses..
• Such loss in p&l account due to the excess depreciation is called unabsorbed
depreciation. such depreciation can be set off against any head of income in the current year
and the balance
• not setoff can be carried forward for any number of years.
• Treatment of current year depreciation:
a. claim deduction of current year depreciation from the business to which it relates.
b. Deficiency in a. can be setoff against profits and gains of any other business of the
assessee. c. Deficiency in b. can be set off against any other head of income of current
previous year
c. Deficiency in c. is "unabsorbed depreciation" for the current previous year.
• The unabsorbed depreciation has same treatment as business loss which is carried
forward - for accounting purpose.

7. Write a short note on Deemed Incomes.

Ans. Deemed Income means Income which is actually not earned or received by Asseessee but
Income Tax Act consider such as Income deemed to be received in India.
Deemed Income on basis of Certain Past allowances of Deduction but Received
Subsequently
As per sec 59 of Income Tax Act where assessee had claimed any Deduction or
allowance in any previous years but in current financial year Asseessee Received any amount of
allowance or Deduction shall be deemed to be Income of Asseessee under Head Income from
Other Sources in Current Financial Year. Where Assessee had incurred any liability in past but

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get remission of Such liability in current Financial Year shall be Deemed to be Income of
Asseessee under Head Income from Other Sources in Current Financial Year.
As per Sec 59 of Income Tax Act where Asseessee had claimed any Deduction or
allowance in any previous years but successor of Asseessee had received any amount of such
allowances or Deduction I'm current financial year than Such allowances shall be deemed to be
Income of Such successor in current financial year under Head Income from Other Sources.
Where Asseessee had incurred any liability in past but successor of Asseessee get remission of
such liability than such remission shall be deemed to be Income of Successor under Head
Income from Other Sources in Current Financial Year.
Deemed Income for Non Satisfactory Explanation for Cash Credit
As per Sec 68 of Income Tax Act where any amount credited in the books of
accounts of Asseessee for any previous years and Asseessee unable justify such transactions with
proper explanation to assessing officer shall be deemed be Income of Asseessee under Head
Income from Other Sources in Current Financial Year. If Assessee had recorded any purchase
made by Asseessee on credit in books of accounts of any previous years fails to prove identity of
Creditor than such credit purchase shall be deemed to be Income of Asseessee under Head
Income from Other Sources in Current Financial Year.

Deemed Income on Basis of Purchase of Shares from Unexplained Source of

Fund
As per sec 68 of Income Tax Act where any Company other than Company in which
Public is Interested credit any sum of money against Share Application Money or Share
Capital or Securities Premium or any other etc. And company fails to satisfy the
assessing officer that any amount credited to asseessee is resident of India and source of
fund from such shares purchase than sum Credited shall be deemed to be Income of
Asseessee in whose Account money is credited under Head Income from Other Sources
in Current Financial Year.

8.What is Tax Deducted at Source?

Ans. To collect tax efficiently and quickly, the Income Tax department of the Government of
India has introduced a system called TDS (tax deducted at source). Using TDS, tax can be
deducted/collected at source of income.
TDS is an indirect method of collecting tax by the government.
It ensures a regular source of revenue for the government by ensuring the tax is
collected as income is earned and not when a taxpayer files returns at the end of the year.
Any authorized person/institution on whom the responsibility of collecting tax is entrusted
collects tax and pays it to the government on behalf of an individual payer.
In return, the individual taxpayer gets a TDS certificate stating that the tax has been paid
on his/her behalf.

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Thus, tax is deducted at source and is forwarded to the government on behalf of the payer.
This provision of deduction of tax at source is applicable to several payments such as
salary, commission, interest on fixed deposits, brokerage, professional fees, contract
payments, and royalty etc.
Benefits of Tax Deductions:
There are a number of benefits associated with tax deduction which include:
•Tax deductions help you reduce an amount from your taxable income and save tax. When
you claim an income tax deduction, it reduces the amount of your income that is subject to
tax.
•Reduced taxable income helps you save and invest money in other areas.
•Tax deduction first reduces the income subject to the highest tax brackets. So, you can
claim deduction for the amounts spent in tuition fees, medical expenses, and charitable
contributions.
Income tax return is mandatory and you cannot completely avoid paying tax.
But with proper planning, you can reduce your taxable income.

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UNIT-5

1. What is meant by the term “Income from other sources” under Income – Tax Act?
Name some items which can be included under the head “Income from other sources”.
Ans.
Any income which does not fall under any other head of income i.e. Income from
business/profession, Income from salary, capital gains and house property then it will be
called as income from other sources. Following are few examples of income which are
treated as income from other sources as per Indian income tax act:-
•Any amount received as rent from plant, machinery, furniture let on hire.
•Any income from crossword puzzles, horse races, game, card games, television game,
shows and other entertainment programmes in which people win prizes and lottery etc.
•Rent from sub-letting.
•Dividend except which is exempt u/s 10 of Indian income tax act.`
•Any contributions received by the employer from his employee and if that amount is not
shown as business income then it will be treated as income from other sources.
•Interest received from banks on saving bank accounts.
•Interest from Post Office Saving Accounts.
•Interest from Monthly Income Scheme from Post Office.
•Pension received from Life Insurance Corporation under LIC pension scheme.
•Interest from recurring deposit accounts from bank or post offices.
•Interest received from banks on fixed deposits.
•Interest received from banks on accounts other than saving bank accounts and fixed
deposit accounts.
•Interest received against personal loans.
•Interest received from bonds/debentures.
•Any amount received under Keyman Insurance Policy, which is not taxable under the
head of Income from salaries or Income from business/profession.
•Any Cash gift or sum of money, received from any person without consideration
exceeding Rs.50000/= during a financial year subject to certain exemption under gift tax
act.

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•Interest received on compensation.

•Interest received on refund of any tax amount from tax authorities.
•Withdrawal under NSS 1987 including interest.
•Interest and premium received on redemption of debentures.
•Fees from tuition and examinations fees etc. received by an individual who is not
engaged in a profession.
•Royalty received.
•Any income received by beneficiary of a trust.
•Amount of Interest accrued on National Saving Certificate, National Saving Scheme
Account, Kisan Vikas Patra etc.
•Any income from agricultural land which situated outside India.
•Any amount received as Family Pension by a family member of the deceased from the
employer will be treated as income from other sources in hand of the member who
receives the money.
•Any casual income.
•Income received as insurance commission.
•Rent received from plot of land and ground rent.
•Any income received from any undisclosed sources.
•Salary received by Members of Parliament.
•Income received from letting out the space for display of hoardings.
•Income received on share application money.
•Interest received on debenture application money.
•Interest on tax refunds.

PERMISSIBLE DEDUCTIONS AGAINST INCOME FROM OTHER SOURCES

Following expenditures are allowed as deductions under Indian income tax act against the
income from other sources:-
•In case of Income from letting out of furniture, machinery and plant etc then the
following expenses will be allowed as deduction:-
•Any amount spent on repair and maintenance of plant, machinery and furniture.

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•Any amount paid as insurance premium against the risk of damages of machine, plant
and furniture.
•Any amount of depreciation allowed as per Indian income tax act.
•In case of family pension, a deduction of one third of such income or Rs.15000/= , which
ever is less.
•Any other expenditure other than capital expenditures, incurred for making such
earnings.
•Any expenses or allowance in connection with owning or maintaining the race horses.
EXPENSES NOT TO BE DEDUCTED FROM INCOME FROM OTHER SOURCES
•Following expenses can not be allowed against income from other sources:-
•Any personal expenses of the income tax payee.
•Any interest paid outside India if no tax has been deducted at source.
•Any amount of salary paid outside India if no tax has been deducted at source against that
salary.
•Any amount paid as wealth tax.
•Any expenditure exceeding Rs.10000/= [Rs.20000/= for F.Y.2016-17] (Rs.35000/= in
case transportation) paid in cash. It means any expenditure made exceeding above limit
must be paid by account payee cheque or demand draft.
•Any expenses in connection with lotteries, crossword puzzles, card games and gambling
etc.

Section – B
(Short Answer Questions)

3. What is meant by Securities? Explain the various kinds of Securities?

Ans. Securities include shares of corporate. stock or mutual funds, corporation or
government issued bonds, stock options or other options, limited partnership units, and
various other formal investment instruments .
Securities are negotiable financial instruments issued by a company or
government that give ownership rights, debt rights, or rights to buy, sell, or trade an
option.

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A security is a tradable financial asset. The term commonly refers to any form of
financial.
There are many different securities that you can invest your money in. They're
usually divided into two categories. Equity securities grant you partial ownership of a
company. Debt securities are considered loans to companies or entities of the government.
Here's a quick refresher on some of the most popular security investments.
Stocks
Stocks are the best known equity security. You're purchasing an ownership
interest in a company when you buy stock. You're entitled to a portion of the company
profits and sometimes shareholder voting rights.
Stock prices can fluctuate greatly. Investors try to buy stock when the price is
low and sell it when the price is high. Stock has a higher investment risk than most other
securities. There's no guarantee that you won't lose money. However, stock usually has the
potential for the greatest returns.
Most stock is considered common stock. Preferred stock normally offers
dividends but not voting rights. Common stockholders also have greater potential for
higher returns.
Corporate Bonds
A corporate bond is a debt instrument issued by a company. It's a loan to the
company when you invest in a bond. You're entitled to receive interest each year on the
loan until it's paid off.
Bonds are safer and more stable than stocks. You're guaranteed a steady income
from bonds. However, bondholders aren't entitled to dividends or voting rights. In
addition, stockholders have potential for greater returns in the long run.
Government Bonds
Government bonds are issued by the United States federal government. The
most common are Treasury bonds. They're issued to help finance the national debt.
Government bonds have very low investment risk. In fact, they're virtually
risk-free since they're guaranteed by the United States government. However, the potential
return is lower than stocks and corporate bonds.
Municipal Bonds
Municipal bonds are debt securities from state and local government entities.
These local entities include counties, cities, towns, and school districts. The interest
income you earn on municipal bonds is usually exempt from federal income taxes. It may
also be exempt from state and local income taxes if you live where the bonds are issued.
However, the interest rate is usually lower than corporate bonds.

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Mutual Funds
A mutual fund is made up of a variety of securities. It may focus on stocks,
bonds, or a collection of both. Your money is usually pooled with other investors. An
investment company chooses the securities and manages the mutual fund. This diversity
helps decrease investment risk.
Stock Options
A stock option is the right to buy or sell a stock at a certain price for a period of
time. A call is the right to buy the stock. A put is the right to sell the stock. Stock options
can be used to help reduce your investment risk.
Futures Options
A futures contract is an agreement to sell a specific commodity at a future date
for an agreed upon price. A futures option is the right to buy or sell a futures contract at a
certain price for a specific period of time. Many investors use futures options to try to
reduce investment risk.

4. Explain the meaning and features of Casual Income?

Ans. Casual income is a non recurring income that is not likely to occur again.
It is an income which is earned by chance. Such income is neither anticipated nor
provided for in any agreement. Income received from gambling , betting , lotteries , card
games ,Puzzle games ..etc is called casual income .
The income will be taxable at the flat rate of 30.9% If the Prize money exceeds
Rs 10, 000, then the winner will receive the prize money after the deduction of TDS @
30.9%.
As per section 2(24) (ix) Casual income means any winning from lotteries , races
including horse races ,cross word puzzles , card games or any other game of any sort or
from betting or gambling of any form or nature whatsoever
Lotteries includes winning from prizes by draw of lots or by chance
Card games or other game of any sort includes any game show , an entertainment
programme on television or electric mode in which people compete to win prizes
Casual income Shall be taxable at the rate of 30% under section 115BB under
the head income from other sources
It will be included in the gross total income & total income but while computing tax
liability it shall be separated from total income.

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Casual income is a non recurring income that is not likely to occur again in a year. It is an
income which is earned by chance. Such income is neither anticipated nor provided for in
any agreement. Such incomes are received at uncertain times.
If you receive money from winning the lottery, Online/TV game shows etc., it will be
taxable under the head Income from other Sources. The income will be taxable at the flat
rate of 30%which after adding cess will amount to 30.9%.Incomes from falling sources
come under this category:
•Lottery
•Game Show or any entertainment programon television or electronic mode
•Crossword Puzzle
•Gambling or betting
•Races including Horse races.
TDS Applicability
If the Prize money exceeds Rs 10, 000, then the winner will receive the prize money after
the deduction of TDS @30.9%. it doesnot matter whether the income of the winner is
taxable or not. The prize distributor is liable to deduct tax at the time of payment. In the
case of winnings from horse races, TDS will be applicable if the amount exceeds Rs
5,000.
No Deduction/Expenditure is allowed from such Income
No deduction u/s sec 80C or 80D or any other deduction/allowance is allowed from such
income. The Benefit of basic exemption limit and income tax slab rate is also not
applicableto this income. The entire amount received will be taxable at the flat rate of
30.9%.
For instance, Rahul has won the prize money of Rs 3 lakhs from a game show and he has
an interest income of Rs 5 lakhs p.a .Then the tax liability would be calculated as per
following:
Tax on Rs 3 lakhs @ 30.9%
Tax on Rs 5 lakhs as per income tax slab rates after claiming the relevant deductions.
Prize Money received in Kind
If the prizes are given in Kind say a car, then prize distributor shall ensure before releasing
the prize that tax has been paid. Tax is paid as per the market value of the prize given. The
prize distributor can either recover from the winner or he himself can bear the burden of
tax.

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For instance, Suman has won an Alto car in a contest whose market value is Rs 4 lakhs,
then tax @ 30.9% which is Rs 1, 23,600 must be paid before giving the car to the winner.
In cases where prize is given both in cash and Kind, then the total tax should be calculated
on the cash portion of the prize and on market value of the prize given in kind. And the tax
amount should be deducted while giving the cash portion of the prize to the winner. But if
the cash prize is not sufficient to cover the total tax liability, then either the winner or
prize distributor should pay the deficit.
Section-C
(Very Short answer questions)

5. What is meant by long-term capital asset? How do I calculate long-term

capital gain?
Ans. Long-term capital assets are those that have been held by an individual for over three years
immediately after the date on which they were transferred.
However, with regard to assets such as shares (preference or equity) that are listed on a
prominent stock exchange in the country, units of UTI, listed securities such as
government securities and debentures, zero coupon bonds, and units of equity oriented
mutual funds, the holding period will be one year instead of three.
1The holding period for unlisted shares in companies is two years. Starting from FY
2017-18, the holding period of immovable property is two years.
In order to calculate long-term capital gains from a particular asset, you will have to take
the overall value of consideration (the asset’s sales consideration) and subtract from it the
expenditure incurred fully and exclusively with regard to the transfer of a capital asset
(commission, brokerage, etc.).
The figure that you get from this calculation is called the net sale consideration, from
which you will have to subtract the indexed cost of acquisition and the indexed cost of
improvement, if any, and you will get the long-term capital gain amount.

6. What is meant by short-term capital assets? How do I calculate short-term

capital gain?
Ans. Short-term capital assets are those that have been held by an individual for less than three
years after the date on which they were transferred. However, for certain assets such as
shares (preference or equity) that are listed on a prominent stock exchange in the country,
units of UTI, listed securities such as government securities and debentures, zero coupon
bonds, and units of equity oriented mutual funds, the holding period will be one year
instead of three. The holding period for unlisted shares in companies is two years. Starting
from FY 2017-18, the holding period of immovable property is two years.
To calculate short-term capital gain, you will have to take the overall value of
consideration (the asset’s sales consideration) and subtract from it the expenditure
incurred fully and exclusively with regard to the transfer of a capital asset (commission,
brokerage, etc.). The figure that you get from this calculation is called the net sale

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consideration, from which you will have to subtract the cost of acquisition and the cost of
improvement and you will get the short-term capital gain amount.

7. Write a short note on Capital Gain Account Scheme, 1998.

Ans. Capital Gains Account Scheme was introduced in 1988 by Central Government. As
mentioned above, time limit available to the depositor for re-investment and avail the
exemption, in many cases is longer than the due date to file the return of income. In such
cases, taxpayer is given an option of depositing such unutilised capital gains in ‘Capital
Gains Account’ introduced under Capital Gains Account Scheme. Any capital gain
invested in Capital gains account scheme will be eligible for capital gain exemption as it
would in case of re-investment.

Category of taxpayer having capital gains who is eligible to invest in CGAS from
Section 54 to 54F of the Income-tax Act, 1961 “Act”, is provided below:
Section Capital gains made on Category of
Number person

54 Sale of residential house Individual or

HUF

54B Sale of land used for agricultural purpose Individual or

HUF

54D Compulsory acquisition of land and building Any taxpayer

54E Sale of any long term capital asset Any taxpayer

54EC Sale of long term capital asset being land or building or Any taxpayer
both

54F Sale of any long term capital asset not being residential Individual or
property HUF

54G Transfer of asset (machinery, plant or building, land or Any taxpayer

right in land or building) in case of shifting of industrial
undertaking from urban area

54GA Transfer of asset (machinery, plant or building, land or Any taxpayer

right in land or building) in case of shifting of industrial
undertaking from urban area to Special Economic Zone

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54GB Transfer of residential property Any taxpayer

Procedure to open capital gains account and manner of deposit

• Capital Gains account can be opened by making an application in duplicate in Form A
• Documents such as PAN, proof of address, photograph would be required
• Deposit can be made by any mode such as cash, cheque, demand draft etc. In case of
deposits via cheque or DD, date of deposit will be date on which cheque or DD is
received in the deposit office subject to its realisation
• Deposit can be made either in lump sum or installments
• Separate applications shall be made for availing exemption under different sections and
separate capital gains accounts shall be opened

8. Compute the income from other sources of Mr. X as per the details given
below for Financial Year 2016-17:-
Interest received on debentures 15000/=
Interest received from taxable bonds 20000/=
Interest received from Public Provident Fund 30000/=
Dividend received from mutual funds 10000/=
Interest received on Fix Deposits With Bank 12000/=
Accrued Interest on Kisan Vikas Patra 8000/=
Accrued Interest on National Saving Certificates 5000/=
Interest received on Income Tax refund 4000/=
Gift received from a friend 60000/=
Winning from Television Shows 100000/=

Solution:
INCOME FROM OTHER SOURCES
Interest received on debentures 15000/=
Interest received from taxable bonds 20000/=

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Interest received from Public Provident Fund (Exempted) 30000/= 0

Dividend on Mutual Fund (Exempted) 10000/= 0
Interest received on Fix Deposits with Bank 12000/=
Accrued Interest on Kisan Vikas Patra 8000/=
Accrued Interest on National Saving Certificates 5000/=
Interest on Income Tax Refund 4000/=
Gift received from a friend (exempted if amount is 50000/= or less) 60000/=
Winning from Television shows 100000/=
TAXABLE INCOME FROM OTHER SOURCES 224000/=
Clarification:- Since the gift received during the year is more than Rs.50000/=
that is why it will be included in taxable income from other sourced.

9. Mr. Raja purchased a piece of land in May, 2004 for Rs. 84,000 and sold the
same in April, 2017 for Rs. 10,10,000 (brokerage Rs. 10,000). What will be
the taxable capital gain in the hands of Mr. Raja?

Ans. Computation of capital gain will be as follows :

Particulars Rs.

Full value of consideration (i.e., Sales consideration of asset) 10,10,000

Less: Expenditure incurred wholly and exclusively in connection with 10,000

transfer of capital asset (brokerage)

Net sale consideration 10,00,000

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Less: Indexed cost of acquisition (*) 2,02,195

Less: Indexed cost of improvement, if any Nil

Long-Term Capital Gains 7,97,805

(*) The cost inflation index notified for the year 2004‐05 is 113 and for the year 2017‐18 is 272. Hence, 
the indexed cost of acquisition, i.e., the inflated cost of acquisition will be computed as follows: 

Cost of acquisition × Cost inflation index of the year of transfer of capital asset 

Cost inflation index of the year of acquisition 

Rs. 84,000 × 272 = Rs. 2,02,195 

113 

                  Long‐term capital gains arising on account of sale of equity shares listed in a recognised stock 
exchange, i.e., LTCG exempt under section 10(38) [Up to Assessment year 2018‐19 

1.