INCOME TAX - II

[ASSESSMENT YEAR 2017 -18]

Dr. P. V. RAM ANARAO

M.Com., Ph.D
Professor and Principal
K.GR Institute of Technology and Management O.U. Hyderabad (T.S.)

Dr. A. SUDHAKAR
M.Com., M.Phil., Ph.D
Professor
, Department of Commerce & Former Registrar
Dr. B. R. Ambedkar Open University, Hyderabad (T4S.)

Dr. S. Krishnaiah Goud

M.Com., M.Phil., Ph.D
Principal
Anniebesanr Wumen's Degree College, Kothapet, Hyderabad (T.S.)

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Second Edition : 2005
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 Preface to the Fourteenth Edition

The Income Tax Act, 1961 has been one of the most voluminous and cumbersome
of the enactments available in India. It has numerous sections, Sub-sections and
provisions making it difficult for the taxpayer to understand and digest the
implications thereof. Perhaps, this is the only Act that is subject to a lot of
amendments as a sequel to presentation of budget by the Finance Minister to
recommend changes in the Act. Indeed, this makes it a herculean task for not only
the tax payer but equally for the academics, policy makers, researchers, and the
people responsible for raising resources required for initiation and sustaining the
tempo of developmental activities in the country. Interestingly, there is adichotomy
between the tax payers and tax collectors in terms of their interests.The tax payer
always loves to reduce the tax burden while the tax authorities like to increase the
revenue flow into the exchequer in the form of taxes.
The present book is a result of constant reading, continuous updating and
classroom teaching of three senior teachers. Sincere efforts have been made to
make a lucid presentation of the subject matter paving the way for brevity with
clarity.
Steps have been taken to build teacher into the text by following self instructional
methodology and adopting a user friendly approach to facilitate learning with
comfort. Enough care has been taken to avoid factual, contextual and linguistic
bloomers. However, the possibility of certain errors unconsciously finding place
in the text is not totally ruled out as this book is organized into five units and nine
lessons with numerous illustrations and exercises. The subject matter of this book
is discussed in accordance with the provisions of the Finance Act, 2016.
It is a matter of great satisfaction to us that the first thirteen editions of the
present book were well received bv both teachers and students. Encouraged by
overwhelming response, we are pleased to place the fourteenth thoroughly revised
and updated edition of the book in the hands of teachers and students. Every effort
has been made to remove all the shortcomings of the 13th edition. It is hoped that
the present book will prove to be a more useful text book on the subject.
The present book Income Tax-11 has been prepared in accordance with the
latest common core syllabus for the students of B.Com course (4th Semester) of all
the universities of Telanuana State.
 In revising and updating of this edition, we have received valuable assistance
and guidance from our close friends and readers. It is our utmost duty to acknowledge
the academic support provided by them especially by Prof. H. Venkateshwarlu and
Prof. P. Pumshotham Rao, Osman ia University for their active support and valuable
suggestions in order to make the new edition more meaningful.
The authors would like to thank Sliri Vishwanath, Aurora Col lege; Mrs. Brinda,
St. Joseph College, Mr. T.Mohan Rao, Pragathi Mahavidyalaya; and Dr. K.
Someswar Rao, Principal, Badruka College of Commerce, Hyderabad for their
keen interest in the improvement of quality of the book. We also thank Mr. V. Ravi
and Prem Raj, Principal I laindavi College, for their help in revising the text. We
also thank P. Narsing Rao. Former Principal, SAP Degree college Vikarabad. We
are thankful to Mr. P. V. Naresh for his untiring efforts to bring out this book in its
present format.
We sincerely request all the readers especially the students and teachers to send
their critical comments and suggestions to facilitate a better version in future.
We look forward for your continued cooperation and support.

— A uthors
 Contents

I niti
U
Capital Gains

Lesson 1 : Capital Gains 1.3-1.28

Lesson 2 : Procedure of Computation of Capital Gains 1.29-1.59

UnitU
Income from Other Sources

Lesson 1 : General and Specific Income 2.3-2.26

Unit III
Clubbing and Aggregation of Income

Lesson 1 : Income of Other Persons Included in the Total Income 3.1-3.13

Lesson 2 : Provision of se-off and Carry Forward of Losses 3.14-3.38
Lesson 3 : Deductions from Gross total Income 3.39-3.80

Unit IV
Assessment of Individuals

Lesson 1 : Computation of Tax Liability 4.3-4.25

U nity
Assessment Procedure

Lesson 1 : Returns of Income and Assessment Procedure 5.3-5.16

Lesson 2 : Types of Assessment 5.17-5.23
Capital Gains
 1
Capital Gains

'Capital Gains’ is the fourth head of income. Under this head of income, we study
the computation and taxability of gains arising from the sale or transfer of capital
assets. For the first time this income was made chargeable to tax in 1947-48. This
charge was abolished from 1-4-1948. But it was revived from the assessment year
1957-58 and has continued since then. The taxability of income under this head
depends upon the following factors:
1. Capital asset,
2. Nature of capital asset, and
3. Sale or transfer of capital asset
Basis of Charge [Section 45]
Any profit or gain arising on the transfer of a capital asset [Sec. 2(14)] is charge­
able to tax under the head ‘Capital Gains’ in the previous year in which the transfer
took place (Sec. 45), if it is not eligible for exemption under Sections 54, 54B, 54D,
54EC, 54EF, 54F, 54G, 54GA and 54GB Incidence of tax on capital gains, however,
depends upon whether the capital gain is short-term capital gain or long-term capital
gain [Sec. 2(42 A)].
Thus, the essential elements of capital gains are given below:
1. There should be a capital asset.
2. There should be transfer or sale of capita! asset.
3. Transfer or sale should have taken place during the previous year.
4. There must be profit or gain on such transfer, which will be known as capital
gain.
5. Such capital gains should not be exempt u/s 5 4 ,54B, 54D, 54EC, 54EF 54F,
54G54GA and 54GB
If the above conditions are satisfied, the capital gain shall arise and taxed in the
assessment year relevant to the previous year in which the capital asset is trans­
ferred. However, the following points should be considered:
1. In some cases capital gain is taxable ill a year other than the year in which
the capital asset is transferred. Example : (1) Conversion of capital asset
into stock-in-trade [45(2)], (2) Compulsory acquisition of an asset [45(5)].

[ 1 .3 }
1.4 Inco m e Tax— II (2017-18

2. In some cases capital gain arises even if there is no transfer of capital ass
Example : gain on insurance money received when asset is destroyed by fire.
Explanation : The Supreme Court in Marybong and Kyel tea Industries Ltd. Vs
C1T (1991) 191 ITR 647 gave a Judgment on capital gains on receipt of compensa
tion from insurance company for damages or destruction etc., of capital asset. I
was held that, since there was no transfer involved in destruction etc., and therefon
any compensation received will not be subject to capital gains tax. In order to tak<
care of such contingency, sub-section 1A to section 45 has been inserted whicl
makes such gains taxable. The new sub-section provides that profit and gains aris
ing from the receipts of an insurance claim on account o f damage to or destructioi
of capital asset as a result of flood, typhoon, hurricane, earthquake or other convul
sions of nature, riot or civil disturbance, accidental fire or explosion and enemj
action with or without declaration of war shall be deemed to be capital gains for thf
purposes of section 48 in the year of receipt.

W hat is Included in and Excluded from Capital Asset? Definition of

Capital A sset [Section 2(14)]
‘Capital asset’ is defined to include a) Property of any kind held by an assessee,
whether or not connected with his business or profession, b) any securities held by
a Foreign Institutional Investor for which has invested in such securities in accor
dance with the regulations made under SEB1 Act, 1992. Capital asset may be mov­
able or immovable, tangible or intangible, fixed or floating. However, the term capi­
tal asset does not include the following:
1. Any stock-in trade consumable stores or raw material held for the purpose
of business or profession.
2. Personal effects of the assessee i.e., astfcles which are used for personal
use by the assessee or by his family members e.g., furniture, TV, refrigerator,
musical instruments, motor cars, scooters etc.
Note : An exception to the above rule is Jewellery. The term Jewellery includes ornaments
made o f gold, silver, platinum or any other precious metal, gold and silver coins used foi
religious worship of deities. These ornaments are not considered as the items of personal use.
3. Agricultural land in India, other than that which is situated in urban areas.
N o te : To classify a land as an agricultural land, the following conditions are to be satisfied:!
(a) The lands should not be situated in Municipal area or in Cantonment Board area,
(b) The population of such area must be less than 10,000; and
(c) The area is not notified by the Government for the urbanization purpose.
(0 Profit on sale or transfer of agricultural land situated on an urban area is to be
treated as capital gain.
(//) Profit on transfer of agricultural land in a rural area is not a capital gain.
4. Any item kept as stock-in-trade or consumable raw materials by a business
i.e., raw material kept for manufacturing purpose.
5. (a) 6 1/2 per cent Gold Bonds, 1977
Capital G ains 1.5
(.b) 7 per cent Gold Bonds, 1980
(c) National Defence Gold Bonds, 1980 issued by the Central Government.
6. Special Bearer Bonds, 19 9 1
7. Gold Deposit Bonds issued under Gold Deposit Scheme 1999 (inserted from
l-4-2000)
Deemed Capital Assets

The following assets have been held to be capital assets (Deemed to be capital assets):
1. The goodwill of a business is a capital asset and any excess realized over its
book value would be a capital gain chargeable to tax.
2. Share of a partner in a firm.
3. Right to subscribe for shares.
4. Partner’s share in a firm.
5. Leasehold in mines and licensed to manufacture an item.
6. Dealership rights.
7. Right of tenancy under Tenancy Act.
8. Route permit.
9. Industrial licence acquired for a price.
10. Foreign currency.
11. A business undertaking.
Types of Capital Assets

For computing capital gains, assets have been divided into two categories :
1. Short-term capital asset, and
2. Long-term capital asset.
SHORT-TERM CAPITALASSET [Section 2(42A)]

Short-term asset means a capital asset held by an assessee for not more than 36
onths immediately prior to its date of transfer. However, in the following cases, an
set held for not more than 12 months is treated as short-term capital a sse t:
1. Equity or preference shares in a company (listed) 12 months.+
2. Equity or oreference shares in a company (unlisted) 24 months+
3. Securities (e.g.. debentures, Government securities)+
(listed in a recognized stock exchange in India) 12 months+
4. Units of UTI (whether quoted or not) 12 months+
5. Units of Equity Oriented Mutual Fund specified u/s 10+
(23D), (whether quoted or not) 12 months+
6. Zero coupon Bonds (listed or unlisted) 12months+
7. Units of Debt oriented Mutual Funds (listed or unlisted) 36 months+
1.6 In co m e Tax— II (2017-18)

C a p ita l Ga
Rate of Tax for short-term Capital gain : The rate of tax in respect of short term
capital gain from transfer o f shares and units o f mutual funds which suf­ LONG-1
fered STT is increased from 10% to 15% plus applicable surcharge and Educa­
tional Cess - Sec. 111 A. Long-terir
Section 115 AD deals with the rate of tax in respect of income of Foreign institu­ asset. In oi
tional investors. 12 month;
term capit
In case of FII, any short term capital gain from transfer of shares and units of
mutual funds which suffered STT is increased from 10% to 15% plus applicable W hy are
surcharge and educational cess.
The tax in
Period o f H olding gain is sh
The period for which any capital asset is held by the assessee is upon the total lower rate
period for which asset was held by previous owner and the present owner. Example levied at s
: Mr. X acquired an asset on 1st January 1999 and gifted to his son Y on 31 st Dec., Long-tern
2001. Y sold it on 31 st Dec., 2016. The transfer from X to Y is not to be regarded as assesses, i
transfer u/s 47( 111) and it is a long-term capital asset as it was held by Mr. X and Y ever, long
together for more than 36 months. income si;
2,50,000)
Period o f H olding under Different Situations if his tota
income O'
Situation Relevant Date
Illustrati
1. Shares held in a company on liquidation. (a) X is
2. Property acquired in any mode i.e., Exclude the period subsequent to the
capi
by way of gift, will etc. date of liquidation.
taxi
3. Shares in Indian amalgamated com­ Include the holding period of previous
(b) the
pany acquired under a scheme of owner also.
X is
amalgamation. Include the holding period of shares in gain
4. Shares in an Indian ‘Resulting com­ the amalgamating company by the as­ Solution
pany’acquired in the case of demerger. sessee. (a) As tl
5. Shares/securities purchased through Include the holding period of shares in he is
stock exchanges. the demerged company by the asses­ (b) capii
6. S h ares/secu rities transferred see. Tota
through stock exchange. Date of purchase by broker. 2,5C
7. Shares/securities directed by pur­ Date of broker’s note (provided shares rate
chase from the holder. are actually delivered).
8. Bonus shares. Date of contract of sale. T
9. Rights shares. Date of allotment. L
10. Date of purchase/sale of shares/ se­ Date of offer made by the company
T
curities purchased in several lots at The First-In First-Out (FIFO) method a
different points of time but del ivery taken shall be adopted.
in one lot and subsequently sold in parts. C
c
Capital G ains 1.7

LONG-TERM CAPITALASSET [Section 2 (29A)]

Long-term capital asset means a capital asset which is not a short-term capital
asset. In other words, if the asset is held by the assessee for more than 36 months or
12 months in the case of shares/securities, such an asset shall be treated as long­
term capital asset.

Why are the capital assets divided into short/long-term assets?

The tax incidence under the head “capital gains” depends upon whether the capital
gain is short-term or long-term. Long-term capital gain is generally taxable at a
lower rate. Short-term capital gains are included in the assessee’s income and tax is
levied at specified rates.
Long-term capital gains are taxed at a flat rate of 20% in the hands of all types of
assesses, except to Non-Resident Indians, who are taxed at a flat rate 10%. How­
ever, long-term capital gains are to be included in the total income to determine the
income slab. If the total income of the assessee is less than exempted limit (i.e., Rs.
2,50,000) on account of “long-term capital gains”, he need not have to pay tax. But
if his total income exceeds the exempted limit then he has to pay tax on excess
income over the exempted limit at a flat rate of 20%.

Illustration : 1
(a) X is an assessee whose total income is Rs. 99,000 consisting of long-term
capital gains Rs. 20,000 and short-term capital gains Rs. 5,000. Compute the
tax liability for
(b) the relevant assessment year.
X is an assessee whose total income is Rs. 2,90,000 consisting of long-term capital
gains Rs. 25,000 and short-term capital gains Rs. 5,000. Compute the tax liability.
Solution
{a) As the assessee’s income does not exceed the basic exemption limit of Rs. 2,50,000
he is not required to pay any tax even though his income comprises of long-term
(6) capital gains.
Total taxable income ofX is Rs. 2,90,000. It is exceeding the exemption limit of Rs.
2,50,000. Hence long-term capital gains amount should be separated and a fixed
rate of tax i.e. 20% should be levied.
Calculation of Tax Liability
Rs.
Total taxable income 2,90,000
Less : Long-term capital gains 25,000
2,65,000
Tax on Rs. 2,65,000 (including short-term capital gains)
at slab rates :

On first Rs. 2 ,5 0 ,0 0 0 : Tax Nil

On next Rs. 15,000 : Tax @ 10% 1500
1500
1.8 In co m e Tax— II (20 17 -18)
Capit

Tax on long-term capital gains Rs. N o te :

20% fixed rate on Rs. 25,000 : 5,000
Total Tax Liability
Tax at slab rates 1,500 Typ<
Tax on long-term capital gains (fixed rate) 5,000
6,500 Then
Less : Rebate u/s 87A 5000
1,500 2.
Add : Education cess @ 2% + 1% 45
‘L
Tax Payable 1,545long-'
Illustration : 2 ‘S
short-
State giving reasons, whether the asset is short-term or long-term in the cases
U/
given below:
in the
1. ‘A’ purchases house property on March 1,2014 and transfers it on May 31,2016. and sf
2. ‘B’ purchases shares in Indian company on March 1, 2014 and transfers it place.
on May 31, 2016.
3. ‘C’ acquires units of a mutual fund on July 31,2015 and transfers these units 2.
on August 31,2016.
4. ‘D’ purchases diamonds on July 31,2013 and gifts the same to his friend ‘C’ ^ R A i
on Feb. 25, 2014, ‘C ’ transfers the asset on Oct. 20, 2016.
5. ‘E’ purchases shares in a company through an NSE broker (date of purchase 1. In c
by the broker: Nov. 21,2015; the company transfers shares in the name of Under
‘E’ on Jan. 5, 2016). These shares are transferre/tfby ‘E’ on Dec. 20, 2016. capital
Solution (a)
Tax A sse t M inim um p e rio d P eriodM f- ■ Short-term
o r long-term
(b)
payer to becom e long­ holding
term capital asset (c)
A House property 36 months + March 1, 2014 to Short-term (d)
May 31, 2016 (e)
= 27 months
B Shares 12 months + March 1, 2014 to Long-term
May 31, 2016
= 27 months 00
C Units of Mutual 12 months + July 31, 2015 to Long-term
Fund Aug 31, 2016
= 13 months
D Diamonds 36 months + July 31,2013 to Feb, 25, 2014
Feb. 26, 2014 to Oct., 2016
= 38 months 20
Sxp/ai
days
E Shares 12 months + Nov. 21, 2015 to Long-term 0 Ii
Dec. 20, 2016 or
= 12 months 29
to
days
th
Capital G ain s 1.9
Note : If an asset is acquired by gift, will etc. :
(a) The period of holding of the previous owner and present owner should also be taken.
(b) In the case of shares, the purchase date by the broker should be taken as the date of acquisition.

Types o f Capital Gains

There are two types of Capital Gains :

1. Long-term capital gains [2(29B)], and
2. Short-term capital gains [2(42B)]
‘Long-term capital gains’ means capital gains arising from the transfer of a
long-term capital asset.
‘Short-term capital gains’ means capital gains arising from the transfer of
short-term capital asset.
U/S 45 (1) any profit or gains arising from the transfer of capital asset effected
inthe previous year shall be chargeable to income tax under the head ‘Capital gains’
and shall be deemed to be the income of the previous year in which the transfer took
place. The above said definition can be split into two important parts :
1. Income arising from the transfer of capital asset, and
2. Transfer effected in the previous year and it becomes imperative to study
both parts in detail.
| TRANSFER OF A CAPITAL ASSET

1. Income Arising from the Transfer of Capital Asset

Under Section 2 (47) of Income Tax Act, 1961, the term ‘transfer’ in relation to a
capital asset includes:
(a) Sale, exchange or relinquishment of a capital asset; or
(b) Extinguishment of any rights therein; or
(c) Compulsory acquisition thereof under any law; or
(<d) Conversion of a capital asset into stock-in-trade; or
(e) Any transaction involving the allowing of possession of any immovable
property to be taken or retained in part performance of a contract of the
nature referred to in section 53 A of the Transfer of Property Act, 1882; Or
if) Any transaction whether by way of acquiring shares in or by way of becoming
a member of a co-operative society, company or other asso ciatio n o f
persons or by way of any arrangement or agreement or in any other manner
which has the effect of transferring or enabling the enjoyment of any
immovable property.
Explanation
(/) Immovable Property : Immovable property means any land or any building
orpart of building and includes, where any land or any building or part of a building is
to be transferred together with any machinery, plant, furniture, fittings or other
things, such machinery, plant, furniture, fittings or other things also.
' . ■ .

1.10 Income Tax—II (2017-18)

(if) Sale : The Transfer of Property Act 1882, defines “sale” as a transfer of
ownership in exchange for a price paid or promised or part-paid and part-
promised. Section 4(3) of the Sale of Goods Act states that “where under a
contract o f sale, the property in the goods is transferred from the seller to the
buyer, the contract is called a sale” (sale includes an action to sale also).
(Hi) Exchange : According to section 188 of the Transfer of Property Act, 1882,
exchange takes place when two persons mutually transfer the ownership of
one thing for the ownership of another. E.g., Building worth Rs. 3,00,000 is given
to a limited company by ‘X’ and to receive shares to its equivalent value.
(iv) Relinquishm ent: The word ‘relinquishment’ means to withdraw or retreat
from; abandon; to desist from; to give over possession or control of.
Relinquishment implies that the person ceases to own the asset concerned by
some act on his part. The property continues to exist, but the interest of the
owner therein is either given up or abandoned. In other words, voluntary
surrendering of the ownership of an asset in favour of another e.g. transfer of
building by a partner to the firm in which he is a partner.
(v) Extinguishment : It means the right of ownership comes to an end by the
operation of any law e.g., the insurance company takes over the damaged
asset after paying the insurance amount.
(v/) Compulsory acquisition: Compulsory acquisition occurs when the Government
acquires the asset of the assessee in the public interest. E.g. lands acquired
by Railways for laying the rail tracks.
As mentioned earlier in the definition of transfer, the word ‘transfer’ represents
the sale, exchange or relinquishment of the assets. The ownership of the asset has
to change to make a transfer complete. Eric L Kohler has defined transfer as “the passagf
of property usually with title or of services from one person to another person”. Th<
asset may be transferred under free-will or under compulsion. The scheme of capi
tal gain taxation includes both the types of transfer viz., voluntary or involuntary. It is
immaterial whether the assets are transferred by the owner himself or on his behal!
by some other person. E.g., Assets of the firm under dissolution are sold by at
official receiver under the order of court and if there is a capital gain, the firm undei
dissolution will have to pay tax on such capital gain. Further by an agreement, if a transfers
is allowed to take the possession without paying the price, i.e., the seller has no
received the consideration even then this transaction is deemed to be a transfer.
If a Housing Society or Housing Development Authority allots a house to it
members, the consideration may not be received fully, but the possession might havt
been transferred, then it is treated as transfer.

2. Transfer Affected in the Previous Year

The capital gain is deemed to be the income of the previous year in which the
Transfer takes place. As such any capital gain should be assessed in the assessmei
year relevant to the previous year in which transfer took place.
Capital Gains 1.11
3. Date of Transfer [Section 2 (47)]
A transfer does not take place merely because an agreement has been entered into
or consideration is paid thereunder in whole or in part. The words “effected in the
previous year in section 45 denote that the title in the property has passed from the
transferer to transferee. No transfer can be said to be effected till all the formalities
for transferring the title to the transferee are completed.
4. Deemed Transfer [Section 45 (2)]
Incaseacapital asset is converted into stock-in-trade, or is treated as stock-in trade by the
assessee it will be deemed to have been transferred. The difference between mar­
ket value and the cost price shall be taxable as capital gain under this head.
5. Transfer o f Capital Assets by a person to firm, AOP or body o f indi­
viduals [Section 45(3)]
When a person transfers his capital asset to a firm, AOP or body of individuals in
which he is or becomes partner or member by contributing capital or otherwise,
profit or gain from such transfer shall be chargeable to tax as his income of the
previous year in which such transfer takes place and for computation of capital gain,
the amount recorded in the books of firms, AOP or body of individuals as the value
of capital asset shall be deemed as full consideration for transferor. This provision
has come into effect from 1-4-88 ie assessment year 1988-89.
The amount recorded in the books of firm, BOI or AOP, shall become sale price.
The cost at which it was acquired by the person shall be treated as cost of acquisition.

6. Transfer o f Capital Assets on dissolution o f firm , AOP or body o f

individuals [Section 45 (4)]
When an asset is transferred by way of distribution on the dissolution of firm, AOP
or body of individuals, the profit or gain arising from such transfer, shall be charge­
able to tax as the income of the firm, AOP or body of individuals, of the previous
year in which such transfer take place.
For computing capital gains the Fair Market value on the date of transfer shall be
deemed to be the full value of the consideration received or accruing as a result of
the transfer. Tliis provision has come into effect from 1-4-88 i.e., assessment year 1988-89.
The amount recorded in the books of firm, BOI or AOP shall be cost of the asset
and the fair market value on the date of transfer to the person shall be treated as sale price.

7. Enhancem ent o f Com pensation on com pulsory acquisition o f Assets

[Section 45 (5)]
In case of compulsory acquisition of assets if the consideration is determined or is
approved by Central Govt, or the k e :“rve Bank of India and later on such consider­
ation is enhanced by the Court or Tribunal, the capital Gain shall be treated in the
following manner:
1.12 In co m e Tax— II (20 17 -18)

(a) The capital gain arising due to such acquisition shall be taxable in the previous
year in which transfer takes place.
(b) The enhanced compensation or consideration shall be chargeable to tax under
the head “ Capital Gains” of the previous year in which such amount is received
by the assessee (or by any other person, if original transferor has died).
(c) With effect from 1-4-2004 in case an asset is taken over under compulsory
acquisition and assessment has been made on the basis of original compensation
or enhanced compensation and later on such compensation is reduced by any
authority, the assessment shall be rectified by taking the reduced compensation
C#
[ Section 45(5)].
se<
8. Taxability o f Interim Com pensation in case o f com pulsory W1
acquisition [Provision to Section 45 (5)] [w ef A.Y 2015-16] an:
enc
Where any amount of compensation is received in pursuance of an interim order of cap
the court, Tribunal or any other authority, such compensation shall b deemed to be pur
income chargeable under capital gain head in the previous year in which final order
of high court, tribunal or any other authority is made. Ca]
exc
9. Sale o f units purchased for deduction u/s 80CCB [45(6)] Wit
con1
The difference between the repurchase price of the units purchased for deduction
as a
u/s 80 CCB and the capital value of such units shall be deemed to be the capital gain
arising to the assessee in the previous year in which swell repurchase take place. Furl
o ftt
Capital value of such units means any amount invested by the assessee in the units corr
eligible for deduction u/s 80CCB.
Trai
D istribution o f Assets by a com pany in liquidation Fam
Kart;
Under section 46(1) if a company distributes its assets among its shareholders on In th
account o f its liquidation, such distributions shall not be regarded as transfer in the o f as
hands of the company u/s 46(2) if a shareholder received any money or assets from
(ii)
the company, he shall be liable to tax on the excess of fair market value or sale
(iii)
proceeds (if sold) of such assets on the date of distribution over the cost of fair market
value or sale proceeds (if sold) of such assets on the date of distribution over the
cost o f acquisition of shares held by assessee and such an amount which is assess­
able under the dividend clause e.g. if a person receives some assets from a com­
pany in liquidation whose fair market value is Rs. 50,000. The assessee held 300 shares
!iv)
which he had purchased for Rs. 125 each. The value of assets distributed included
a sum o f Rs. 10,000 taxable as dividend. In this case the capital gain shall be:
 Capital Gains 1 .1 3

Rs.
F.M.V 50,000
Cost of acquisition o f : Rs.
(a) 300 shares @ Rs 125 each = 37,500
(b) Amount taxable as dividend = 10,000

47,500

2,500

Capital gain on purchase by a com pany o f its own shares or other

securities [Section 46 A]
Where the shares or any other specified security is purchased back by a company
an some consideration is received by the holder of such share or security, the differ­
ence between such consideration and cost as indexed u/s 48, shall be deemed to be
capital gain of the previous year in which such shares or specified securities are
purchased back by the company.

Capital gains on transfer in the context o f foreign currency

exchangeable bonds (FCEB)
With a view to providing a level playing field to PCEB, has been provided that the
conversation of PCEB into shares or debentures of any company shall not be treated
as a “transfer”. - _____
_Further section 49 (2A) has been substituted to provide that the cost of acquisition
ofthe shares received upon conversation of the bond shall be the price at which the
corresponding bond was acquired.
Transactions not Regarded as ‘Transfer’ [Section-47]
Family. But this provision will not be applicable if the assets ofthe HUF are sold by
Kartaand cash is realised and after that the cash is distributed among the members.
In this case HUF shall have to pay tax on any gain which has accrued to it on sale
of assets.
(ii) Omitted.
(iii) Any transfer of assets under a gift or will or an irrevocable trust.
This clause shall not be applicable to transfer under a gift or irrevocable
trust of a capital asset being shares, debentures or warrants allotted by a
company directly or indirectly to its employees under the Employees’ Stock
Option or stock purchase scheme.
(iv) Any transfer of capital assets by a company to its subsidiary company, if
(a) The parent company or its nominees hold the whole o f share capital of
the subsidiary, and
 C apits

1.14 In co m e Tax— II (2017-18)

(b) The subsidiary company is an Indian company.

(v) Any transfer o f capital assets by a subsidiary company to the holding

(viia)
company, if
(a) The whole o f the share capital o f the subsidiary company is held by the
holding company, and
(b) The holding company is an Indian company.
The Finance Act 1988 has added an explanation according to which the (v>i0
provisions o f points (iv) and (v) above shall not be applicable if an (ix) .
asset is converted into stock-in-trade. This provision is applicable from 29th <
Feb. 1988. I
(vi) Any transfer in a scheme o f amalgamation o f a capital asset by the
amalgamating company to the amalgamated company if the amalgamated i
company is an Indian company. i
(via) Any transfer in a scheme of amalgamation, of a capital asset being a share or (x) ,
shares held in an Indian Company, by the amalgamating foreign company to <
the amalgamated foreign company provided t
(a) At least 25% of shareholders of the amalgamating foreign company continue to remair (xa) /
shareholders of the amalgamated foreign company; and
(b) Such transfer does not attract tax on capital gains in the country in which amalgamating ,
company is incoiporated j ' '
(viaa) Any transfer, in a scheme of amalgamation of a banking company with a (
(
banking institution sanctioned and brought into force by the Central Governmem
l
under sub-section (7) of section 45 of the Banking Regulation Act, 1949 of a
capital asset by the banking company to the banking institution. )
1
For the purposes of this clause,
r
(i) “banking company” shall have the same meaning assigned to it in section 5(c) of th
Banking Regulation Act, 1949 F
(ii) “banking institution” shall have the same meaning assigned to it in section 45(15) o (xii) /
the Banking Regulation Act, 1949. a
(vib) Transfer of assets on demerger C
(a) Any transfer of a capital asset owned by a demerged company to the resulting India C
company under a scheme of demerger [Section 47(vib)] { p
(b) In case demerger of foreign companies is taking place and capital asset in the nature c
shares of an Indian company held by such demerged company are transferred to resultin
foreign company, it shall not be regarded as transfer if v
(i) The shareholders holding not less than 3/4th in value of shares remain shareholda e
of the resulting company; and (xiii) V
(ii) There is no taxon such capital gain in the country in which such foreign demergt y
company is incorporated. [Section 47(vic)]
(c) Any transfer of shares by the resulting company (under the scheme of demerger),.,
such transfer is made in consideration of demerger.
(vii) Any transfer by a shareholder in a scheme of amalgamation o f share (
shares held by him in the amalgamating company, if
Capital G ains 1 .1 5

(a) The transfer is made in consideration of the allotment to him of any share or shares in
the amalgamating company, and
(b) The amalgamated company is an Indian company.
(viia) Any transfer of a capital asset being bonds or Global Depository Receipts
referred to in sec. 115 AC(1) (units purchased in foreign currency) shall not be
regarded as transfer, if such transfer is made outside India by a non-resident
to another non-resident.
(viii) Any transfer of agricultural land in India affected before 1st of March 1970.
(ix) Any transfer of a capital asset, being any work of art, archaeological, scientific
or art collection, book, manuscript drawing, painting, photograph or print to
the Government, or a university, or the National Museum, National Art Gallery,
National Archives or any such other public museum, or institution as may be
notified by the Central Government in Official Gazette to be of national
importance or to be of renown throughout any State or States.
(x) Any transfer by way of conversion of bonds, debentures, debenture stock or
deposit certificates in any form, of a company into shares or debentures of
that company.
(xa) Any transfer by way o f conversion of Bonds (as referred in Section 1
15AC(l)(a)) into shares or debentures of any company.
(xi) Any transfer made on or before the 31 st day of December 1998 by a person
(not being a company)_of a capital asset being membership of a stock exchange
of a recognised stock exchange to a company in exchange o f shares allotted
by that company to the transfer. These shares cannot be transferred for 3
years.
The expression “membership of a recognised stock exchange” means the
membership of a stock exchange in India which is recognised under the
provisions o f the Securities Contract (Regulation) Act, 1956 (42 of 1956).
(xii) Any transfer of a capital asset, being land of a sick industrial company, under
a scheme prepared and sanctioned under section 18 of the Sick Industrial
Companies (Special Provisions) Act 1985 (1 of 1986) where such industrial
company i« being managed by its workers’ co-operative.
Provided that such transfer is made during the period commencing from the
previous year in which such has become a sick industrial company and ending
with the previous year in which the entire networth of such company becomes
equal to or exceeds the accumulated losses.
(xiii) When capital or intangible asset owned by a firm is transferred to a company
which has succeeded the firm, it shall not be regarded as transfer if
(a) all the assets and liabilities of the firm existing on the date of succession are taken over
by the company,
(b) all the partners of the firm become shareholders of the company in same proportion in
which their capitals existed on the date of succession.
1.16 In co m e Tax— II (2017-18)
C

(c) the partners do not receive any other benefit except allotment of shares in such (
company, and
(d) the shareholding of all the partners of the firm in the succeeding company is not less [ E
than 50% of voting power on the date of succession and remains so for 5 succeeding
years. C
(xiiia) With effect from 1-4-2004 any transfer of a capital asset being a membership s<
right held by a member of a recognised stock exchange in India for acquisition S£
of shares and trading or clearing rights acquired by such member in that ac
recognised stock exchange in accordance with a scheme for demutualisation, [ tit
corporatisation which is approved by the Securities and Exchange Board of ex
India. [Section 47(xiiia)]
of
(xiiib) Any transfer of a capital asset or intangible asset by a private company or
unlisted public company to a limited liability partnership (LLP) or any transfer
of a share or shares held in the company by a shareholder as a result of
conversion of the company into limited liability partnership under the provisions
of section 56 or 57 of Limited Liability Partnership Act, 2008, shall not be
regarded as transfer on fulfilment of the following conditions :
• All the assets and liabilities of the company immediately before the conversion become
the assets and liability of the limited liability partnership;
• All the shareholders of the company immediately before the conversion become the
partner of the limited liability partnership (LLP) and their capital distribution and
profit sharing ratio in the LLP are in the same proportion as their shareholding in the
company on the date of conversion;
• The shareholders of the company do not receive any consideration or benefit, directly
or indirectly, in any form or manner, other than by way of share in profit and capital
contribution in LLP;
• The aggregate of the profit sharing ratio of the shareholders of the company in the Not
LLP shall not be less than 50% at any time during Jhe period of 5 years from the date
of conversion;
In th
• The total sales, turnover or gross receipts in business of the company in any of the
three previous years preceding the previous year in which the conversion takes place Cost
does not exceed 60 lath; and (J) No amount is paid, either directly or indirectly, to any
partner out of balance of accumulated profits standing in the accounts of the company
certa
on the date of conversion for a period 3 years from the date of conversion. the ci
(xiv) When any capital or intangible asset owned by a sole proprietary concern is (0
transferred to a company which has succeeded the sole proprietary concern,
it shall not be regarded as transfer if
(a) all the assets and liabilities of the sole proprietary concern existing on the date of
succession are taken over by the company,
(ii)
(b) shareholding of the sole proprietor in the company is not less than 50% of voting
power on the date of succession and remains so for 5 succeeding years, and (Hi) i
(c) the sole proprietor does not receive any other benefit except allotment of shares in t
such company. \
(xv) In case there is transfer due to lending of securities by its holder under an Note : I
agreement with the borrower and as per guidelines issued by Securities acquisiti
Exchange Board o f India, or by R.B.I. it shall not be deemed as transfer.
Capital G ains 1.17
(xvi) Any transfer of a capital asset in a transaction of reverse rfiortgage under a
scheme made and notified by Central Government
Determination of Cost of Acquisition [Under Sections 49, 51 and 55]

Cost of acquisition of an asset is the value for which it was acquired by the asses-
see. Cost of acquisition means total o f all the expenses incurred by the as-
sessee on acquiring the asset. In other words, it is the value for which it was
acquired by the assessee. Expenses of capital nature for completing or acquiring the
title to the property are included in the cost of acquisition. However, the following
expenses are not to be considered as capital expenses and not includible in the cost
ofacquisition:
1. Ground rent.
2. Estate duty paid in respect of inherited property. Conversely, the following
expenses are the capital expenses and shall be included in the cost of
acquisition:
(i) Interest on money borrowed to purchase the asset.
(ii) In case of joint stock company, expenses for suits for amending articles of
Association.
3. Litigation expenses incurred for compelling the company to register the shares
in the name of the assessee.
4. In the case of amalgamation value of shares allotted by the transferee
company shall be taken as the sale price and the original value of the shares
shall be considered as the cost of acquisition.
Notional Cost o f Acquisition

In the cases given below the cost of acquisition is taken as a notional figure :
Cost to the previous owner [Sec. 49(f)]: If the assessee has acquired an asset by
certain specified modes such as gift, will, partition, inheritance, amalgamation etc.
the cost to the previous owner shall be adopted as the cost of acquisition.
(0 assets acq u ire by the previous owner before 1-4-81 : Cost of acquisition is
the cost o f capital asset to the previous owner or Fair Market Value of the
asset on 1-4-81, whichever is higher.
(ii) assets acquired by the previous owner on or after 1-4-81 : Cost of capital
asset to the previous owner.
(Hi) If the cost o f the previous owner cannot be ascertained, the fair market value
of the asset on the date on which the asset became the property of the assessee
will be taken as tlie cost of acquisition.
Note : If the assessee has acquired the asset by any other mode, then the cost incurred by him for the
acquisition of the asset shall be adopted as the cost of acquisition.
1.18 In co m e Tax— 11(2017-18)
Capi
Cost o f acquisition being the fair m arket value as on April 1, 1981
Con
[Sec. 55(2)]: If the asset is acquired by the assessee before 1-4-81, cost of capital
asset to the assessee or Fair Market Value (FMV) o f the asset as on 1-4-81
whichever is higher shall be taken as the cost of acquisition.
If the asset is acquired after 1-4-81, cost of capital asset to the assessee shall be
taken as the cost of acquisition.
Cost o f a cq u isitio n when d eb en tu res are con verted into shares
[Sec. 49(2A)]: In case of conversion o f bonds, debentures, debentures stock, or
deposit certificates of a company into shares or debentures o f that company shall Li

not be regarded a transfer giving rise to any capital gains. But on the sale o f such
converted shares or debentures the capital gain shall be computed.
The following points shall be considered in the case of conversion of debentures Note:
into shares:
Cost
1. Cost o f debentures shall be taken as cost of acquisition of shares.
In the
2. Period must be observed for determining the long-term or short-term capital in arr
gains. the si
3. Indexation must be taken from the date of conversion. share
Illustration : 3 n iu s
D was allotted 2000 convertible debentures in E Ltd. at a cost o f 200 per ‘A’ L
debenture on June, 1997. As per terms of allotment E Ltd. converts 60 per cent amalj
portion o f each debenture into 2 equity shares o f face value o f Rs. 10 in share
June, 1998. On July 10, 2016, D transfers 4000 equity shares in E Ltd. at 300 per share:
share and 2000 debentures of non-convertible portioi^ at Rs. 350 per debenture.
Fii
Find out the amount of capital gains for the assessment year 2017-18 (1997-98
Index 331,2016-17 Index 1125). Solui

Solution c
c
After conversion, D holds the following shares & securities : C(
Rs.
Note :
4.000 Equity shares at Rs.6 per share 2.40.000 cost
period c
(60% o f coverable debentures)
Indexati
2.000 Debentures at Rs. 80 per debenture
(40% o f noncoverable debentures) 1.60.000 cost C o st i
4,00,000 cost
Original investment 2,000 convertible debenture at The cc
Rs. 200 per share = Rs.4,00,000 any pa
60% conversion = Rs. 4,00,000 x 60% = Rs. 2,40,000 term/h
Remaining 40% non-convertible portion : Rs 4,00,000 x 40% = Rs. 1,60,000. shares
then th
shares
Capital G a in s 1.19
Computation of Capital Gains of Mr. D for the Assessment Year 2017-18
Shares Debentures
Rs. Rs
Sale consideration
Rs. 4000 x 300 Share value 12,00,000 7,00,000
Rs. 2000 x 350 Debenture value
Rs. 2,40,000 x
Less: Indexed cost of acquisition 1125 8,15,710 1,60,000
331
3,84,290 5,40,000
Note: Debentures need not be indexed.

Cost of Shares in Case of Amalgamation [Section 49(2)]

In the case of shares issued by an amalgamation company in lieu of the shares held
in amalgamating company, in a scheme of amalgamation, the cost of acquisition of
the shares held in amalgamating company shall be the cost of acquisition of the
shares so allotted by the amalgamating company.

Illustration : 4
‘A’ Ltd., an Indian company, takes over the business of B Ltd. in a scheme of
amalgamation. C has purchased 100 shares in B Ltd. in the year 2001 for Rs. 50 per
share. As per the scheme of amalgamation C got 50 shares in A Ltd. in lieu of 100
shares in B Ltd.
Find the cost of acquisition per share.
Solution
C purchased 100 shares in B Ltd. at Rs. 50 per share = Rs. 5,000
C got an allotment of 50 shares in A Ltd. in lieu of 100 shares = Rs. 5000
Cost of acquisition for 50 shares would be = Rs. 100 per share.
Note : To find out whether or not shares in amalgamated company are long-term capital assets, the
period of holding shall be considered from the date of acquisition of shares in the amalgamating company.
Indexation should be taken from the date of allotment of shares in the amalgamated company.

Cost o f Acquisition o f Bonus Shares and Rights Shares

The cost of acquisition of Bonus shares, which are allotted to the assessee without
any payment are to be taken as nil. The period for treating such shares as short-
term/long-term capital asset is to be calculated from the date of allotment of bonus
shares to the date of transfer. If bonus shares are sold/transferred within one year,
then the gain on such shares will be treated as short-term capital gain. If the bonus
shares are transferred after one year from the date of allotment then the gain on
1.20 In co m e Tax— II (2017-18) Capital Gains

transfer is treated as long-term capital gain. The cost of acquisition for bonus shares Notes : 1. B<
and original shares is to be calculated as given below: ofholdin
2. Cost of a
(a) If the bonus shares are allotted The FMV of the bonus shares held by tl
before 1-4-81 on 1-4-81 is the cost of acquisition cost or F!
(b) If the bonus shares are allotted The cost of acquisition of bonus C ost o f Acquis
after 1-4-81 shares is NIL Shares exclusive
(c) If the original shares are allotted Highest value of the following two the first issue a
before 1-4-81 amounts shall be taken as the cost concessional rati
of acquisition Cost o f acquisitii
(i) actual cost of the shares 1. The cost of (
(ii) FMV as on 1.4.1981
(d) If the original shares are allowed Actual amount paid for acquiring the
after 1-4-81 shares shall be treated as the cost of 2. Rights share
(/) Actual an
acquisition.
(ii) FMV as
Note : Indexation should be done for long-term assets only.
3. Rights shan
Illustration : 5
4. If the right t
Mr. Murali Manohar purchases 10,000 equity shares of Tata Steels Ltd. at Rs. 100 per share in favour of
on 1st April 1975. He was allotted 200 bonus shares on 31 st March 1980. During the previous
year relevant to the current assessment year, he sold 500 equity shares and 200 bonus 5. If the assess
shares at Rs. 2000 per share. FMV on 1-4-81 was Rs. 160 per share. Compute capital gains. renounceme
Solution from the orij
Illustration : 6
Computation of Mr. Murali Manohar’s Income from Capital
Mr. X was allotte
Gains for the Assessment Year 2017-18
In the year 1993-
the year 2016-17
Rs. Rs. subscribed for 20
Original Shares On 15th March 1
penses amounted
Sale consideration (500 x Rs. 2000) 10,00,000 sessment year if ti
9 4 : 244., 201 1-12
Less: Indexed cost of acquisition = 500 x 160 x 1175 9,00,000 1,00,000,
100 Solution J
Bonus Shares 1. Original shares i
Sale conside
Sale consideration (200 x Rs. 2000) 4,00,000 Less : SelHI
Netcc
Less: Indexed cost of acquisition = 200 x 160 x ' 125 3,60,000 40,000, Less : Inde.xe
100
Rs. 40001
Long-term Capital Gain 1,40,000
Capital Gains 1.21
Notes : 1. Bonus shares and Rights shares are long term capital assets (Period
of holding is more than 12 months)
2. Cost of acquisition of Bonus shares and Rights shares: Both shares were
held by the assessee, before 1-4-81 hence cost of acquisition would be actual
cost or FMV whichever is higher.
Cost of Acquisition o f Rights Shares
Shares exclusively offered by companies to the original shareholders subsequent to
the first issue are called rights shares. Generally such shares are offered at a
concessional rate.
Cost of acquisition in different situations will be as follows:
1. The cost of original shares : Equal to amount paid subsequently
for such shares or amount paid to
purchase such shares.
2. Rights shares acquired before 1-4-81 : Higher of the following two amounts:
(/) Actual amount paid.
(/;) FMV as on 1-4-81
3. Rights shares acquired after 1-4-81 Equal to the amount paid by the
assessee
4. If the right to subscribe is renounced : Cost of rights is nil if consideration
in favour of other persons received from other persons shall be
treated as short-term capital gain.
5. If the assessee bought/got the : Purchase price paid to renouncer of
renouncement on rights shares rights entitlement (+) amount paid
from the original rights holder to the company.
Illustration : 6
Mr. X was allotted 4000 sharesofRs. 10 each of a Ltd. company in 1975 atRs. 13.
In the year 1993-94, he was allotted 200 rights shares at Rs. 10 each at par. During
the year 2016-17 he was offered 500 rights shares at Rs 15 by the company. He
subscribed for 200 and the balance he renounced in favour of Mr. Y for Rs. 7000.
On 15th March 2017. He sold all the shares at Rs.200 per share and selling ex­
penses amounted Rs. 0.50 per share. Compute the capital gain for the current as­
sessment year if the FMV of the shares on 1-4-81 was Rs. 15 per share (CI1 1993-
94:244., 2011-12 CII = 785,1981- 82 = 100,2016-17 CII = 1125)
Solution
1. Original shares Rs.
Sale consideration : Rs. 4000 x 200 8,00,000
Less : Selling expenses : Rs. 4000 x 0.50 2,000
Net consideration 7,98,000
Less : Indexed cost of acquisition:
Rs. 4000 x 15 =Rs. 60,000 x 1125
100 6,75,000
Long-term Capital Gain 1,23,000
1.22 Inco m e Tax— II (2017-18) Capita

2. Rights shares acquired in 1993-94 Solui

Sale consideration Rs. 200 x 200 40,000
Com
Less : Selling expenses Rs. 200 x 0.50 100
Net Consideration 39,900
Less: Indexed cost of acquisition
= Rs. 200 x 10 x 1125 9221
244 Sale <
Long-term Capital Gain 30,679 Less:
3. Rights shares acquired in Rs. 2016-17
Sale consideration Rs. 200 x 200 40,000
Less:
Less : Selling expenses Rs. 200 x 0.50 100
39.900
Less : Cost Rs. 200 x 15 3000
Short-term Capital Gain 36.900
4. Renouncing the right shares
Consideration received 7.000
Less : Cost of acquisition Nil Workin
Short-term Capital Gain 7.000
1. (
Notes:
1. Cost of acquisition of original shares : Shares were acquired before 1-4-
81. So the cost of acquisition is higher of the following two amounts : Convr
(a) Actual cost Rs. 4000 x 13 = Rs. 52,000
(b) FMV on 1-4-81, Rs. 4000 x 15 = Rs. 60,000 2. I
2. Right shares acquired second time in 2016-17 : The shares are held by c
the assessee for less than one year, hence it is a short-term capital gain. 3. S
3. Renouncing the rights : Consideration received^fpom Y Rs. 7,000 should
be treated as short-term capital gain and cost of acquisition shall be Nil. 4. I
Conversion o f D ebentures into Shares
Conversion of debentures into shares of a company is not regarded as transfer. C apit
Hence, capital gain arising from conversion is not to be considered. But if these
Sectioi
shares are transferred later on, profit on such transfer will be taken as income from
capital gain. On the date of transfer, the following points are to be considered: compa
known
(/) Determine the period of holding for computing long-term or short-term capital
receive
gain. Period of holding is to be calculated from the date of allotment of shares.
acquisi
(if) Cost inflation index shall be used for long-term capital asset i.e., more than 12
month period for shares.
Illustr
(Hi) Cost of acquisition of shares is equal to the cost o f debentures.
Illustration : 7 On Jur
12,000
Mr. Satish purchased 10% 600 debentures of Rs. 100 each at Rs 96 on 20th January 1996,
2016 fc
The-tompany converted 50% of the holding into equity shares of Rs. 10 each. These
shares were sold at Rs. 90 each on 10th Oct. 2016. Compute income from capital the assi
gain for the assessment year 2017-18 (CI1 for 1995-96 is 281; for 2016-17 is 1125).
Capital Gains 1 .2 3

Solution
Computation of Mr. Satish’s Income from Capital Gains for the Assessment
Year 2017-18

Rs.
Sale consideration (Rs. 3000 x 90) 2,70,000
Less: Selling expenses —
Net consideration 2,70,000
Less: Indexed cost of acquisition
Rs 57,600 x 50 =Rs. 28,800 x 1125 1,15,302
100 281
Long-term Capital Gain 1,54,698

WorkingNotes:
1. 600 Debentures of Rs. 100 each purchases at Rs. 96 = Rs. 57,600 Face value
= Rs 600 ' 100= Rs. 60,000

Convresion part of debentures into shares 50% = Rs. 60,000 * 50— = Rs. 30,000.

2. No. of shares allotted = part of the share capital which was collected for
debenture = 3,000 shares
3. Sale price is given i.e. = Rs. 3000 x 90 = Rs. 2,70,000
cn Rs.28,800x 1125 „
4. Indexed cost of acquisition Rs. 57,600 x — = ------- — ------- -R s . 1,15,302
100 281

Capital Gains on B uy-back o f Shares and Securities [Section 46 A]

Section 46 A has been inserted with effect from the assessment year 2000-01. If a
company purchases its own shares from a shareholder then such transaction is
known as buy back. The amount paid by the company is taken as consideration
received and the difference between the consideration received and indexed cost of
acquisition is known as capital gain.

Illustration : 8
On June 6, 1984, Mr. Sethuram purchased 1000 shares in Reddy Labs for Rs.
12,000 under a scheme of buy back. Reddy labs purchased these shares on Oct. 10,
2016 for a consideration of Rs. 4,00,000. Find out the income chargeable to tax for
the assessment year 2016-17 (C1I for 1984-85 is 125; 2016-17 is 1125).
1.24 Income Tax— II (2017-18)

Solution
Computation of Mr. Sethuram’s Income from Capital Gains
for the Assessment Year 2017-18

Rs.
Sale consideration 4,00,000 II
Rs.l 2.000 x 1125
Less : Indexed cost of acquisition 125 1,08,000

Long-term Capital Gain 2,92,000

Capita! Gain on Transfer of Shares/Securities by an Employer to the Employee

under Stock Option or Equity Plan [(Section 49(2AA)|
If shares are allotted by the employer company to the employee as a perquisite at concessional
rates, difference between market value and the original cost of such shares should
be chargeable to tax during the previous year of 1999-2000 If this allotment of shares are
made in any other year (other than 1999-2000) they are not chargeable to tax.
If the employee transfers/sells/gifts the above allotted shares to the third parties
they are chargeable to tax under the head capital gains. Fair Market Value (FMV)
of such shares shall be considered as cost of acquisition.

Cost of Acquisition in case of Depreciable Asset [Section 50] 10

Depreciable assets such as Plant & Machinery, Building and Furniture etc., owned Rs
by the assessee and used in the business, the profit on transfer o f such assets will f for
always be treated as short-term capital gain, and the period of holding such assets So
should not be considered.
In the case o f block of assets, depreciation u/s 32 can be claimed on the WDV as
computed u/s 43(6) provided the following requirements are fulfilled on the last day:
of the previous year : Bl

(a) There must be atleast one asset in the block.

(b) There must be some value for the block on which prescribed percentage
rate can be applied if the above two conditions are not satisfied, the provisions
of Sec 32 cease to apply and automatically the provision of Sec 50 become
applicable resulting in short-term capital gain/loss.
Calculation of Cost of Acquisition of Depreciable Assets
1. When there is only one asset: Explanation : X, an assessee purchases plant
and machinery worth Rs. 10,00,000,tlie. Written Down Value (WDV) at the
beginning of the previous year is Rs. 8,00,000 and the same is sold for Rs.
11,00,000 during the previous year. In this case, short-term capital gains on
transfer shall be Rs. 3,00,000, the period of holding should not be considered
and depreciation for the period is also not calculated.
Capital Gains 1.25
2. When there is a block of assets and the entire block of assets is sold o u t:
Deduct the opening balance of assets i.e. WDV o f the respective assets at
the beginning and the purchase of new assets with cost prices from the net
consideration of such assets. If the resulting figure is positive then it is a short-term
capital gain and if it is negative figure then it is short-term capital loss.
Illustration : 9
Plant No Year of Purchase WDV as on 1-4-2016 Rate of Depreciation
1 1999-2000 1,00,000 15%
2 1999-2000 2,00,000 40%
3 1999-2000 2,50,000 15%
4 2005-06 1,50,000 15%
5 2005-06 3,00,000 40%
During the previous year the following plant & machinery were purchased :

Plant No Cost of the plant Rate of Depreciation

6 4,00,000 40%
7 2,80,000 15%
8 1,00,000 40%

On 1st January, 2017, the entire plant & machinery is sold out for 15,00,000 and
10,00,000 respectively for 15% rate block and 40% rate block; sales expenses are
Rs. 20,000 and 10,000 respectively. Calculate the amount of short-term capital gains
for the two block o f assets.
Solution
Computation of Mr. X’s Income from Capital Gains
for the Assessment Year 2017-18

Plant & Machinery - with 15% rate of Depreciation Rs.

Sale consideration 15,00,000
Less: Selling expenses 20,000
Net Consideration 14,80,000
Less: Opening balance or WDV on 1-4-16 and purchases
during the previous year 2016-17
Opening Balances: Rs.
Plant No. 1 1,00,000
3 2,50,000
4 1,50,000

Purchases:
Plant No. 7 2,80,000 7,80,000
Short-term Capital Gain 7,00,000
W i„. o r

1.26 -II (2017-18) Capital

Block I I : Plant & Machinery - with 40% rate of Depreciation : Notes

Sale consideration 10,00,000 1. G
Less : Selling expenses 10,000 2. A
Net Consideration 9,90,000 th
Less : Opening balance or WDV on 1-4-16 and purchases nc
during the previous year 2016-17
ye
Opening Balances:
m,
Plant No. 2 2,00,0000
ne
„ , 5 3,00,000
Purchases : sc
Plant No 6 4,00,000 th<
Plant No 8 1,00,000 10, 00,000
Illustrati
Short-term Capital Loss ( - ) 10,000
The foil
Note : During the previous year any depreciable asset is sold out, depreciation Calculat
should not be calculated. 2017-18.
3. When there is a block of assets and only a part of the assets in the block
were sold o u t: When part cif the assets in the block were sold out and if the WDV on
net consideration is more than the book value of the assets then such excess Purchase i
amount is treated as capital gain. Sale of3 n
If the book value or WDV is more thap the net consideration, the difference will Selling ex
be taken as written down value at the end and on the closing balance depreciation at S o lu tio i
the prescribed rate should be calculated. lienee, there is no capital gain.
As the be
Illustration : 10 term capi
15% on tli
Mr. Babloo owns 3 machines whose written down value )4ar, on 1-4-2016 is Rs.j
is worked
5.00. 000 with 15% rate of depreciation. During the previous year 2 more machines
were acquired for a price of Rs. 2,00,000 with an estimated scrap value of Rs.
Opening b:
50.000. After 10 years on 1st July, 2016, two of the old machines were sold for Rs.
A d d : Purcl
9.00. 000, selling expenses : Rs. 20,000. Find out the capital gain for the assessment
year 2017-18.
Less : Sale
Computation of Mr. Babloo’s Income from Capital
Gain for the Assessment Year 2017-18
Depreciat
Rs. Rs. o f new ma
Sale consideration o f two machines 9,00,000
depreciatic
Less: Sales expenses 20,000
Net consideration 8,80,000
Depreciatii
Less: Opening balance or (WDV on 1-4-2016) 5.00. 000 Depreciatic
Less: Purchases made during the previous year 2.00. 000 7,00,000 T<
Short-term Capital Gain 1,80,000 W
Capital Gains 1.27
Notes:
1. Gain on transfer of depreciable assets is a short-term capital gain.
2. Assessee was owning 3 machines and purchased 2 more machines. Out of
these assets, 2 old assets were sold out. It means still he has one old and two
new machines. As there is no closing balance remain ing in this block for the assessment
year 2016-17, no depreciation need be calculated though there were two
machines which are in operation. At the time of future sale of these 3 assets,
net consideration will be treated an income as short-term capital gain. Estimated
scrap value is not to be considered. If scrap realises during the previous year
then it is to be deducted from the book value of the assets in the block.
Rlustration: 11
The following are the particulars of Plant and Machinery owned by Narotham.
Calculate capital gain and depreciation, if any (with 15% depreciation) for the A.Y.
2017-18.
Rs.
WDV on 1-4-2016 (5 machines) 14,00,000
Purchase of one machine on 1-1-2017 6,00,000
Sale of 3 mach ines on 1-1-2017 5,00,000
Selling expenses 50,000
Solution
As the book value of assets is more than the net consideration, there is no short­
term capital gain or loss. Hence, depreciation should be calculated at the rate of
15%on the WDV at the end of the relevant previous year. Accordingly, the problem
is worked out as under:
Rs.
Opening balance or (WDV on 1-4-2016) 14,00,000
Add: Purchases 6,00,000
20,00,000
Less: Sale of the asset (i.e., net: Rs. 5,00,000 - Rs. 50.000) 4,50,000
WDV on 31-3-2017 15,50,000
Depreciation : Total WDV on 31-3-2017 is Rs. 15,50,000 which includes purchase
of new machine worth Rs. 6,00,000 and it is used for less than 6 months. Hence,
depreciation on the new machine should be 50% of the normal depreciation.
Rs.
Depreciation on old machines WDV = Rs.9,50,000 x 15% = 1,42,500
Depreciation on new machines = 50% of Rs.6,00,000 x 15% = 45,000
Total depreciation on WDV of Rs. 15,50,000 = 1,87,500
WDV on 1-4-2017 = (Rs. 15,50,0 0 0 -R s. 1,87,500) = 13,62,500
1.28 Inco m e Tax— II (2017-18)

Questions
1. What is meant by capital gains? How is it computed?
2. Distinguish between short-term capital gain and long-term capital gain.
3. How do you define cost of acquisition? Describe the provisions relating
thereto under various conditions.
4. Discuss the exemption u/s 54 to 54G.
5. Write short notes on the following:
(/) Fair Market Value (FMV) under capital gains
(ii) Self generated assets
(;'/'/) Cost of acquisition
(;'v) Indexation
(v) Transfer Compu
6. Explain indexation of cost of acquisition and cost of improvement. How do
Computi
you compute indexed cost of acquisition ? viz. shon
7. Define the term ‘transfer’. Also describe transactions whiih are excluded o f short-
from the term transfer. from the
8. Discuss the cases when fair market value as on April 1^ 1981 can be adopted Shor
in place of cost of acquisition while computing the amount o f capital gains. amounts
(9 I
c
(//) <
(Hi) <
Long
o f sale cc
(9 I
00 i
m i
Met!
A.

Full ’
Less

Less

Less
 2
Procedure for Computation of
Capital Gains

Computation o f Capital Gains [Section 48]

Computation of capital gain depends upon the nature of capital asset transferred
viz. short-term capital asset or long-term capital asset. Capital gain arising on transfer
of short-term capital asset is known as short-term capital gain while the gain arising
from the transfer of long-term capital asset is known as long-term capital gain.
Short term capital gain or loss shall be computed by deducting the following
amounts from the full value of sale consideration :
(0 Expenses incurred in connection with the transfer or sale of asset (i.e.,
selling expenses),
(/'/) Cost of acquisition of asset, and
(///) Cost of improvement of the asset.
Long-term capital gain or loss shall be computed by deducting out of full value
of sale consideration the following amounts :
(/) Expenses included in connection with the transfer or sale of asset (i.e.,
sale expenses),
(h) Indexed cost of acquisition of the asset, and
(iii) Indexed cost of improvement of the asset.
Method of computation of short-term and long-term capital gain is as follows:
A. Com putation o f Short-term Capital Gains of
Mr.............. for the A.Y. 2017-18
Full value of sale consideration XXX

Less : Transfer expenses XXX

Net sale consideration XXX

Less : (/) cost of acquisition XXX

(//) cost of improvement XXX XXX

Short-term capital gain XXX

Less : Exemption u/s 54B, 54D, 54G, 54GA, XXX

Taxable STCG XXX

[1.29]
1.30 In co m e Tax— 11(2017-18) P ro c e d u re fi

Full value of sale consideration XXX Indexe

Situath
Less : sale expenses XXX
1981, Indei
Net sale consideration XXX

Less : (/) indexed cost of acquisition XXX Fair Mar

April 1,1'
(n) indexed cost of improvement XXX XXX

Long-term capital gain XXX

Cost inflatioi
Less : exemption u/s, 54, 54B, 54D, 54EC ,, 54F,
54G & 54GA/54GB XXX Situation
Co
Taxable long-term capital gains XXX

CII f(
To compute long-term capital gain or loss, cost of acquisition and cost of tl
improvement of the asset needs indexing, i.e., indexed cost of acquisition and indexed Situatio,
cost of improvement should be calculated with reference to cost inflation index which 1981 and th
is notified by the Central Government in the Official/Gazette. 1981, Indexi
“Indexed cost of acquisition” means an amount which bears to the cost of Fair Mar
acquisition in the same proportion as Cost Inflation Index for the year in which the on April 1, 1
asset transferred bears to the cost inflation index for the first year in which the to previous c
asset was held by the assessee or for the year beginning 1-4-1981, whichever is
later. CII for th
“Indexed cost of improvement” means the amount which bears to the cost Situation
of improvement the same proportion as cost inflation index for the year in which 1981 butitwi
the asset is transferred bears to the cost inflation index for the year in which the cost ofacqui
improvement to the asset took place. * Fair Marl
“Cost inflation index” means such index as the Central Government may on April I, IS
having regard to 75% of average rise in the consumer price index for urban non- to previous o
manual employees for the immediately preceding previous year to such previous
year by notification in the official gazette specify in this behalf. CII forth

INDEXATION asset was fir

Situation
As has been discussed earlier indexation is required in the case of computation ol
1981 and it w;
long term capital gain/loss. This is applied under two situations :
Indexed cost <
(a) Computation of indexed cost of acquisition, and
Actual C(
(b) Computation of indexed cost of improvement.
the previc
(A) Computation of Indexed Cost of Acquisition
Indexed cost of acquisition means that it is the cost of acquisition which has t( CII for th<
be indexed. This process covers three things i.e. (/) cost o f acquisition, (//) asset was
CII of the year during which the asset has been transferred, and {in') CI1 of?
the year during which the asset was first held by the assessee.
Procedure for C o m pu ta tion o f C a pita l G ains 1.31
Indexed cost of acquisition can be discussed under the following situations :
Situation 1 : Where capital asset is acquired by an assessee before April 1,
1981, Indexed cost of acquisition will be determined as under:

Fair Market Value of the Asset on

April 1, 1981 or Cost o f acquisition,
whichever is more
------------------------------------------------- x CII for the year in which the asset is transferred
Cost inflation Index for 1981-82 i.e. 100

Situation 2: Where Capital asset is acquired by an assessee after April 1,1981 :

Cost o f Acquisition
------------------------------------------------ x CII for the year in which the asset is transferred
CII for the year in which
the asset is acquired
Situation 3 : Where Capital asset is acquired by the assessee before April 1,
1981 and the same is originally acquired by the previous owner prior to April 1,
1981, Indexed cost of acquisition will be determined as under:
Fair Market Value of the asset
on April 1, 1981 or cost of acquisition
to previous owner, whichever is more
------------------------------------------------ x CII for the year in which the asset is transferred
CII for the year 1981 (i.e. 100)
Situation 4 : Where capital asset is acquired by the assessee on or after April 1,
1981 but it was originally acquired by the previous owner before April, 1981. Indexed
cost of acquisition will be determined as under:
Fair Market Value of the asset
on April 1, 1981 or cost o f acquisition
to previous owner, whichever is more
------------------------------------------------ x CII for the year in which asset is transferred
CII for the year in which the

asset was first held by the assessee

Situation 5 : Where capital asset is acquired by the assessee on or after April 1,
1981 and it was originally acquired by the previous owner on or after April 1, 1981.
Indexed cost of acquisition is computed as under:
Actual Cost o f acquisition to

the previous owner

CII for the year in which asset is transferred
CII for the year in which the
asset was first held by the assessee
1.32 In co m e Tax— 11(2017-18) Procedi

(B) Computation of indexed cost of improvement 4.

Indexed cost o f improvement will be determined as under :
Situation 1 : Where cost of improvement incurred by the assessee and the previous
owner before April 1, 1981, it shall be totally ignored. Expenditure incurred on
improvement of a capital asset before April 1,1981 is always taken as zero. Full Vs
Situation 2 : Cost of improvement in relation to capital asset incurred by the The ex
assessee and the previous owner will be indexed as u n d er: transfei
Cost o f improvement incurred by
meanin
the Assessee Sal
x C l 1 for the year in w hich asset is transferred. Ext
C l 1 for the year in which the exchanj
improvement took place
Coi
Note : If cost of improvement incurred in more than one year, all such costs capital a
o f improvement are to be indexed separately while calculating capital gains. previou!
The Central Government has notified the cost inflation index for the purpose o f long-term Tra
? gain as fo llo w s: the bool<
Financial 1981-82 82-83 83-84 84-85 85-86 86-87 87-88 88-89 89-90 90-91 Shai
year
cost inflation
‘Employ
100 109 116 125 133 140 150 161 172 182
Index by the en
Financial 1991-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99- 2000- the full v
year 2000 2001
cost inflation 199 223 244 259 381 305 331 35! 389 406 Expense
Index
Financial 2001-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 whether^
year expenses
cost inflation 426 447 463 480 497 519 551 582 632 711
Index
Financial 2011-12 12-13 13-14 14-15 15-16 16-17 COMPUTE
year
cost inflation 785 852 939 1024 1081 1125
A self ge
Index considera
period of
Note : The year 1981-82 is taken as the base year for which the index is categorie:
taken as 100. 1. Ass
With effect from the assessment year 1998-99, the provision o f indexing u/s 48 transfi
(а ) Gi
will not be applicable on transfer of long-term capital gain arising from transfer of
tl
long-term bonds or debentures except on capital indexed bonds issued by the
e
Government. Indexation is not available for the following long-term assets:
(б )
1. Bond or debentures other than capital indexed bonds issued by the tc
Government, c<
2. Shares or debentures of an Indian company acquired by utilising convertable (C) Ri
foreign exchange, ai
m
3. Depreciable assets,
Procedure for C o m pu ta tion o f C a pita l G ain s 1.3 3

4. Undertaking/division/transferred by way of slump sale as covered by Sec. 50 B,

5. GDRs purchased in foreign currency as given inSec. 115AC, 155ACA—/and
6. Securities as given in Section 115 AD.

Full Value of Consideration [Section 48]

The expression ‘Full Value’ means the whole price without any deduction the
transferer receives in lieu of the asset he sells to the buyer. The following is the
meaning of full value of consideration in different cases :
Sale : Sale price actually received or receivable.
Exchange of assets : Fair market value of the asset given away on the date of
exchange.
Conversion of capital asset into stock-in trade : Fair market value o f the
capital asset on the date of conversion (the notional capital gain will be taxed in the
previous year in which such stock-in trade is actually sold).
Transfer of assets by a partner to the firm : Value of assets as recorded in
the books of the firm.
Shares, debentures, warrants are allotted by a company to employees under
‘Employees Stock Option Plan’ and such shares, debentures or warrants are transferred
bythe employee by way of gift: Market value on the ate of gift shall be deemed to be
the full value of consideration received as a result of transfer.
Expenses on Transfer : Expenses on transfer include any expenses incurred
whether directly or indirectly for the purpose of sale or transfer, e.g. advertisement
expenses, brokerage, stamp duty, registration fee, legal expenses etc.

COMPUTATION OFCAP1TALGAIN IN CASE OFSELFCENERATED ASSETS

A self generated asset is one which doesn’t cost anything to the assessee. Sale
consideration of these assets shall be treated as capital gain depending upon the
period of holding of such assets. These assets are classified into the following two
categories:
1. Assets chargeable to tax on transfer or sale : Assets chargeable to tax on
transfer include the following:
(a) Goodwill of a business : Cost of acquisition and cost o f improvement of
these assets (Goodwill) are to be taken as nil. Sale consideration minus
expenses of transfer is chargeable to tax as capital gain.
(b) Tenancy rights, route permits and loom hours : The cost of acquisition is
to be taken as nil. Cost of improvement actuals are allowed as deduction in
computing capital gain.
(c) Right to manufacture, produce or process any article : The cost of
acquisition or cost of improvement should be taken as nil. Sale consideration
minus sale expenses are chargeable to tax as capital gain.
1.34 In co m e Tax— II (2017-18)
P ro c e d u r

( d) Trade marks or Brand names : The cost of acquisition of such assets isl
to be taken as nil, but the cost o f improvement is allowed as deduction e w pi
while computing the capital gain. I or trans
2. Assets not chargeable to tax on transfer: Self generated goodwill of profession,) not be d
inventions and new formulae patented by scientists etc., are the examples of these) “Income
assets. Profit or gain derived from the transfer o f these assets is not taxable under\lllustrat,
the Act. The aforesaid rule is applicable only to self generated assets. If these
Ram;
assets are purchased and later on sold, the capital gain arising from the sale is liable
March 2(
to tax.
considera
COMPUTATION OF CAPITAL GAINS IN CASE OF LAND terms of i
AND BUILDINGS [Section 50C] agreemen
advance r
Conditions:
in the sti
1. There is a transfer of land or building or both. The asset may be long-term,
capital asset or short-term capital asset. It may be depreciable or non-|* se<Iuei
depreciable asset. e ^aic* ‘
C C p q q I' m «

2. The sale consideration is less than the value adopted or assessed by any
authority o f a State Government for the purpose of stamp duty. (B) W
If the above conditions are satisfied, the value adopted by the stamp dutyof 15-5-2
authority shall be taken as full value of consideration for the purpose of computatioiinstead of
of capital gains. Solution:
Where the assessee claims that the value adopted or assessed for stamp duty
purposes exceeds the fair market value, and he has not disputed the same in an; |
appeal or revision or reference before any court, the Assessing Officer may refe
the valuation of the relevant asset to a Valuation Officer,_And then the Assessing Sal
Officer shall take the value determined by the Valuation Officer or the value adoptei Lei
for stamp duty purposes, whichever is less. bro
Full value of Consideration where consideration is not
ascertainable [Section 50D) Nei
If Consideration received or accruing as a result o f the transfer o f a capital ass< Les
by an assessee in not ascertainable or can’t be determined, then for the purpose < 02
computing income as Capital Gains, the Fair Market Value (FMV) o f the said assi
Sho
on the date o f transfer shall be deemed to be the full value o f consideration receive (as i
or acuring as a result o f such transfer. mo
Treatment of Advance Money received and forfeited (Section 51) /
'Vote : RS.
If seller of assets forfeits any advance money received by him then the amount s <jedu
forfeited shall be deducted from the cost of acquisitions / FMV/WDV as the ca;
may be for computing cost of acquisition. Amount forfeited before 1-4-1981 is als
deductable. Amount forfeited by the previous owner is not to be deducted. Mom
forfeited in excess o f cost of acquisition is to be treated as Capital receipt and
not taxable. .----- -
8) Procedure fo r C o m p u ta tio n o f C a pita l G ain s 1 .3 5

is
Anew provision is inserted from the A.Y. 2015-16 for forfeiture of Advance received
3n
for transfer of capital asset. According to this rule, advance money received should
>n, not be deducted from the cost but to be taxed under a separate head called as
ise “Income from other Sources”.
ler Illustration : 1
:se
Ramakanth purchased a house in Hyderabad on 16-12-2011 for Rs. 1200,000. In
ble
March 2013 he entered into an agreement to sell the property to Laxmikanth for a
consideration of Rs. 20,00,000 and received an advance of Rs. 2,00,000. As per the
terms of the agreement, the balance payment was to be made within 30 days of the
agreement. If the intending purchaser does not make the payment within 30 days, the
advance money would be forfeited. As Laxmikanth could not make the payment with
in the stipulated time, the amount of Rs. 2,00,000 was forfeited by Ramakanth.
:rm
Subsequently on 15-5-2015, Ramakanth sold the house of Manikanta for Rs. 25,00,000.
ion-
He paid 2% brokerage on sale of the house. Compute the Capital Gains for the
Assessment year 2016-17.
any
(B) What will be your answer if Ramakanth sold the house on 15-5-2016 instead
luty of 15-5-2015 and Rs. 2,00,000 was forfeited during the previous year 2016-17
tion instead of within 30 days.
Solution:
duty
any Assessment Year 2016-2017 Assessment Year 2017-18
•efer
ising Sale Consideration 25,00,000 25,00,000
ipted Less : Sale expenses
brokerage 2% 50,000 Less : Sale Expenses 50,000
brokerage 2%
Net Consideration 24,50,000 Net Consideration 24,50,000
asset Less : Cost of acquisition
>se of (12,00,000 - 200000 10,00,000 Cost of acquisition 1200000
asset
Shortterm Capital Gains 14,50,000 Short term Capital Gains 12,50,000
eived (as the holding period is less than 36
months''

Note : Rs. 2,00,000 Forfeited amount is Note : Rs. 2,00,000 Forfeited

unt so deducted from the cost o f acquisition amount should not be
ecase deducted from the cost of
is also acquisition. As per the new
rule, it should be treated as
doney
the income from other
and is
sources" U/s 56 (2) (ix)
1.36 Income Tax—II (2017-18)

Illustration
Rajesh acquired a house property in Hyderabad on 4-1-1979 for Rs 2,40,000. He
forfeited Rs. 15,000 on the said asset on 21 -10-1980. Rajesh again forfeitesRs. 25,000
on the said asset on 16-71998. The asset is finally sold by Rajesh on 15-2-2015 for
Rs. 55,00,000. The fair market value of the asset as on 14-4-1981 was Rs. 5,00,00i
Compute the capital Gain for the A. Y. 2016-2017.
(B) What will be your answer if Rs. 25,000 is forfeited by Rajesh on 16-
2016 instead of 16-7-1998 and the house property is sold on 12-8-2016 instead
15-5-2015.
Solution
Assessment Year 2016-2017 Assessment Year 2017-18
Sale Consideration 55,00,000 Sale Consideration 55,00,000
Less: Sale Expenses NIL
Less : Sale expenses NIL Net Consideration 55,00,000
Net Consideration 55,00,000
Less : Indexed Cost of acquisition Less : Indexed Cost of acquisition
{500000-(15000+ 25,000)} (5,00000 - 15000) -
1081 485000x1125
= 460000 x ------ 4972600 -------.............. 5456250
100 100

Long term Capital Gain 5,27,400 Long term Capital Gain 43750

Note : Rs. 25000 forfeited by Rajesh shall be taxable under the head “incor
from other sources”. ^
EXEMPTIONS
While computing capital gains, Income Tax Act 1961 has made elaborai
arrangements for exemptions under section 54 in order to facilitate tax benefits!
the assesses. The main objective is to encourage investors to hold the asset
longer periods in order to curtail the velocity of the money ultimately helping
regulating inflation in the economy.
Capital gains are entitled to claim the exemptions under various sections name
54, 54B, 54D, 54F, 54EC, 54ED, 54G and 54 GA.
(a) Long-term capital gains are eligible to claim the following exemptions (Secti
54, 54B, 54D, 54F, 54EC, 54G, 54 GA, 54GB
(b) Short-term capital gains are eligible to claim the following exemptions (Seel
:
54B, 54D, 54Q 54G A ).
Procedure for C o m p u ta tio n o f C apital G ains 1.37
1. Capital Gains Arising from the Transfer of Residential
House Property [Section 54]
According to section 54, capital gain arising from the transfer of a residential house
property is exempted from long-term capital gain on satisfying the following conditions:
(a) Who can claim exemption u/s 54? : Individual and Hindu Undivided Family can
claim exemption.
(b) The transferred residential house must be a long-term capital asset.
(c) The assessee has purchased a residential house from the sale proceeds of the
old residential house within a period of one year before the transfer orwithin
two years after the date of transfer or has constructed a residential house
property within a period of three years after the date of transfer.
(id) The house property constructed or purchased should not be transferred within
a period of 3 years from the date of purchase or construction.
According to Section 54, the exemption is given if the house is used for
residential purpose or let out for residential purpose. Also, the assessee can
purchase any number of new houses. If the assessee constructs another floor
on the existing structure then also he can claim the exemption.
N ote: If such transfer has taken place within 3 years, the amount of exemption allowed earlier
will be reduced from the cost of new house and the gain will be treated as short-term
capital gain.
(e) If the amount of capital gain is not utilised for purpose of purchase or for
construction of new residential house before the due date o f filling the return
of incomes,’the Amount can be deposited in any branch of public sector bank in
accordance with the “Capital Gains Account Scheme”. The amount so deposited
will be given as exemption if part of the amount is spent for construction and
part amount is deposited with the bank in the stipulated period. The amount
spent for construction and the amount deposited - both will be allowed as
exemption.
(/) Amount of exemption : the exemption is the least of the following (i) Cost of
new house, or (») construction of the new house or (iii) Capital gain amount.
(g) The benefit o f exemption is not available if the new house was constructed
before the sale of the old house.
(h) Where the assessee passes away during the stipulated period, the exemption
would be available to the legal representatives.
Illustration : 3
Mr.Ramlal sold his residential house for Rs. 14,29,070, the cost of which was Rs. 2,00,000
when purchased in 1989-90 (01.172). After selling the house, within one year he has
undertaken the construction o f house (Rs. 1,50,000) and the amount deposited in a
Nationalised Bank under capital gain scheme Rs. 1,00,000 before filing the return. Compute
his income from capital gain for the assessment year 2017-18 (C II1125).
1.38 Inco m e Tax— II (20 17 -18)
Procedure for C
Solution
Solution
Computation of Mr. Ramlal's Income from Capital
Gain for the Assessment Year 2017-18 Co

Rs. R s. A. Assessm
S a le A m o u n t 1 4 ,2 9 ,0 7 0
L e s s : sa le s e x p e n se s N il

N e t S a le s C o n s id e r a tio n 1 4 ,2 9 ,0 7 0 S a le c o n sid e r
, , J J , ... Rs. 2,00,000 x 1125 L ess : S a le ex
Less : In d e x e d c o s t ot a c q u is itio n = 1303140
172
C a p ita l G a in 120930 L ess : In d ex et
Less : e x e m p tio n u /s 5 4 :
(a) A m o u n t s p e n t o n c o n s tru c tio n 1 ,5 0 ,0 0 0 R am Rs. 50.
(b) A m o u n t d e p o s ite d in c a p ita l a c c o u n t s c h e m e 1 ,0 0 ,0 0 0 2 ,5 0 ,0 0 0

Taxable Capital Loss 129070 C a p ita l gai

L ess : E x e m p t
Illustration : 4 Ta
R a m & S h y a m g iv e y o u th e f o llo w in g in f o rm a tio n o n r e s id e n tia l h o u s e p r o p e r ty in N ote : As the asses
H y d e ra b a d : exemption <
Ram Shyam capital gains
D a te o f sa le Ju n e 1 0 ,2 0 1 6 S e p te m b e r 1 ,2 0 1 6
B. (Assessm e
D a te o f p u r c h a s e O c to b e r 1, 1989 A p ril 3 0 , 1984
C o s t o f a c q u is itio n R s. 5 0 ,0 0 0 R s. 9 0 ,0 0 0
S a le c o n s id e r a tio n R s. 2 0 ,0 0 ,0 0 0 R s. 1 8 ,5 0 ,0 0 0
S a le s e x p e n s e s R s. 10,000 R s. 6 ,0 0 0 .” S a le c o n s id
N e w h o u s e s p u r c h a s e d in D e lh i D e c e m b e r 1 ,2 0 1 6 J a n u a r y 4 ,2 0 1 7 Less : C o s t
C o s t o f a c q u is itio n R s. 2 ,0 0 ,0 0 0 R s. 4 0 ,0 0 ,0 0 0 C o s t o f new
S a le c o n s id e r a tio n R s. 2 ,9 0 ,0 0 0 R s. 1 5 ,0 0 ,0 0 0 c la im e d c e r
D a te o f tr a n s f e r A p ril 3 0 ,2 0 1 8 M a y 3 1 ,2 0 1 8 R am
Shyam
Find out capital gain chargeable to tax in the hands o f Ram & Shyam for different assessment
S
years, i.e. 2017-18 & 2018-19. CII for the years 1984-85 = 125. 1989-90= 172, 2016-17 = 1125

2. Exemption fc
for agricultui
Exemption u/<
capital gains if sa
another agricultun
1• The asset is tr
2. Agricultural la
or his parents i
o f sale.
3. The gain from tf
agricultural land
Procedure for C o m p u ta tio n o f C a pita l G ain s 1.39
Solution
Computation of Income from Capital Gains of Ram and Shyam
A. Assessment Year 2017-18

Ram Shyam
R s. Rs.
Sale c o n s id e ra tio n 2 0 ,0 0 ,0 0 0 1 8 ,5 0 ,0 0 0
Less: S a le ex p enses 1 0 ,0 0 0 6 ,0 0 0
N e t C o n s id e r a tio n 1 9 ,9 0 ,0 0 0 1 8 ,4 4 ,0 0 0
Less ^ In d e x e d c o s t o f a c q u is itio n

Ram Rs. 5 0 ,0 0 0 x 1125 Shyam R s. 9 0 ,0 0 0 x 1125 3 ,2 7 ,0 3 5 8 ,1 0 ,0 0 0

172 125

C a p ita l g a in 1662965 1 0 ,3 4 ,0 0 0
Less : E x e m p tio n U /S 5 4 2 ,0 0 ,0 0 0 1 0 ,0 0 ,0 0 0

Taxable Long-term Capital Gains 1462965 3 4 ,0 0 0

Note : As the assessees have sold the above said houses in Delhi within a period of 3 years, the
exemption claimed earlier can be put to tax in the year o f sale o f new house as short-term
capital gains.

B. (Assessment Year 2018-19)

Ram Shyam
Rs. Rs.
S a le c o n s id e r a tio n 2 ,9 0 ,0 0 0 1 5 ,0 0 ,0 0 0
Less : C o s t o f a c q u is itio n :
C ost o f n e w ly p u r c h a s e d h o u s e c o s t - e x e m p tio n
cla im e d c e r tif ic a tio n
R am Rs. 2 ,0 0 ,0 0 0 - R s . 2 ,0 0 ,0 0 0 N il
S hyam R s. 1 0 ,0 0 ,0 0 0 - R s. 1 0 ,0 0 ,0 0 0 N il
Short-term capital gains 2 ,9 0 ,0 0 0 1 5 ,0 0 ,0 0 0

2. Exemption for Capital Gain on transfer of land used

for agricultural purposes [Section 54B]
Exemption u/s 54B is applicable to both long-term capital gains and short-term
capital gains if sale proceeds of agricultural land is re-invested for purchase of
another agricultural land subject to the following conditions:
1. The asset is transferred by an Individual or HUF.
2. Agricultural land so transferred must have been cultivated either by the assessee
or his parents at least for a period of two years immediately preceding the date
of sale.
3. T he g a in fro m th e s a le o f a g r ic u ltu r a l la n d m u s t b e r e - in v e s te d f o r th e p u r c h a s e o f n e w
a g ric u ltu ra l la n d w ith in a p e r i o d o f 2 y e a r s fro m th e d a te o f s a le /tra n s f e r.
1.40 In c o m e T ax— II (2 0 1 7 -1 8 ) Proceduri

4 The land purchased should not be transferred within a period o f 3 years from Solution
the date o f pu'cnase.
Note:
If such transfer has taken place, the amount o f exemption allowed earlier is deducted from
1. F o r t
the cost o f new agricultural land, and it will always be a short-term capital gain.
5. If the amount of capital gain is not utilised for purchase of new agricultural land
before the date o f filing the return of income, the amount can be deposited in i
any branch of public sector bank under capital gain account scheme, and the j
amount so deposited will be given exemption.
6 . Amount of exemption :The exemption u/s 54B is least o f the following two
amounts:
(a) Cost of the new agricultural land.
( b) Capital gain amount.
F o rth
Illustration : 5 Con:
Less
M r. N a n d a is h o ld i n g th e a g r ic u ltu r a l la n d in D e lh i s in c e 1 9 7 0 . T h e F M V o n 1 .4 .8 1 is a t
R s. 5 0 ,0 0 0 . O n 3 r d J a n u a r y , 2 0 1 7 , h e s o ld th e la n d f o r R s. 1 5 ,0 0 ,0 0 0 a n d p a id b r o k e r a g e for
Less
s e llin g th e la n d s R s. 1 0 ,0 0 0 . O n F e b ., 2 0 1 7 , h e e n te r e d in to a n a g r e e m e n t to b u y
a g r ic u ltu r a l la n d in a v illa g e a n d p a id R s. 5 0 ,0 0 0 a s a d v a n c e , a n d o n th e s a m e d a y h e
d e p o s ite d R s. 1 0 ,0 0 0 in a n a tio n a lis e d b a n k u n d e r c a p ita l g a in s c h e m e . C o m p u te c a p ita l
g a in fo r th e c u r r e n t a s s e s s m e n t y e a r. (C l I fo r th e y e a r 2 0 1 6 - 1 7 = 1 1 2 5 ).

Solution
Computation of Mr. Nanda’s Income from Capital Note : A grici
Gain for the Assessment Year2017-18 n o t a cap ital

R s.
3. Capitt
S a le c o n s id e r a tio n 1 5 ,0 0 ,0 0 0
Less: S e llin g expenses 10,000 formii
N e t C o n s id e r a tio n 1 4 ,9 0 ,0 0 0 Capita
R s 5 0 ,0 0 0 * 1125
Less : In d e x e d c o s t o f a c q u is itio n = 5 ,6 2 ,5 0 0 under the li
100
C a p ita l G a in 927500
shall be ex<
Less : E x e m p t e d u /s 5 4 B a d v a n c e + d e p o s it 6 0 ,0 0 0 & buildings

Taxable Capital Gain 867500

1. The tra
least tv
Illustration : 6 2 . The gai
O n 3 0 th A p ril 2 0 1 6 , M r. H ari so ld a g ric u ltu ra l la n d w ith in th e M u n ic ip a l lim its o f D e lh i for land/bu
R s. 1 ,5 5 ,2 8 ,3 7 3 a n d s e llin g e x p e n s e s w e re R s. 3 8 ,6 0 5 . H e p u rc h a s e d th is la n d fo r a p ric e of 3. The ne\
R s. 2 0 ,0 0 ,0 0 0 d u rin g th e p re v io u s y e a r 1 9 8 9 - 9 0 ( 0 1 = 172). O n 15th J u n e , 2 0 1 6 , he purchased
from th<
a p ie c e o f a g ric u ltu ra l la n d situ a te d in V izag to w n m u n ic ip a l lim its fo r R s. 2 0 ,0 0 ,0 0 0 a n d in ^
If the ne
R a id u rg V illa g e fo r R s. 1 0 ,0 0 ,0 0 0 . O n 3 1 s t D e c e m b e r, 2 0 1 6 , h e so ld th e s e la n d s fo r a p ric e of
R s. 3 0 ,0 0 ,0 0 0 a n d R s. 1 2 ,0 0 ,0 0 0 re s p e c tiv e ly . C o m p u te c a p ita l g a in fo r th e a s s e s s m e n t year
o fsu c h :
2 0 1 7 -1 8 (C II fo r th e y e a r 2 0 1 6 -1 7 is 1125). earlier a
5. The schi
 I)
Procedure fo r C o m p u ta tio n o f C apital G ain s 1.41
Solution
Computation of Mr. Hari’s Income from Capital Gains
for the Assessment Year 2017-18_______________________
Rs.
1. F o r the la n d situ a te d in D elhi c ity
S ale c o n s id e ra tio n 1 ,5 5 ,2 8 ,3 7 3
nd Less : S a le expenses 3 8 ,6 0 5
in N e t C o n s id e ra tio n 1 ,5 4 ,8 9 7 6 8
the
Rs. 20,00,000 x 1125
Less : In d e x e d c o st o f a c q u is itio n = 1 ,3 0 ,8 1 ,3 9 5
172
wo
L o n g -te rm c a p ita l gain 2 4 ,0 8 ,3 7 3
Less : E x e m p tio n u /s 5 4 B 20 ,00,000
Taxable Long-term Capital Gain 4 ,0 8 ,3 ,7 3
2. F o r th e la n d s itu a te d in V iz a g
C o n s id e ra tio n re c e iv e d 3 0 .0 0 . 0 0 0
Less : S e llin g expenses N il
at N e t c o n s id e ra tio n 3 0 .0 0 . 000
>e fo r
Less : C o s t o f a c q u is itio n

P u r c h a s e p r ic e 2 0 ,0 0 ,0 0 0
)ital (-) e x e m p tio n c la im e d e a rlie r u/s 5 4 B 2 0 ,0 0 ,0 0 0 N il

I __________________Short-term Capita! Gain______ _ 30,00,000

Note: A gricultural lan d in R aidurg V illage is an agricultural land situated in rural areas. H ence it is
not a capital asset. T h erefore, the p ro fit on sale o f such land is not a capital gain.

Rs. 3. Capital Gain on Compulsory Acquisition of Land and Buildings

10,000
.0,000 forming Part of an Industrial Undertaking [Section 54D]
90.000 Capital gain either short-term or long-term from the compulsory acquisition
62,500 under the law of any land and buildings forming part of an industrial undertakings
shall be exempt if it is reinvested in the purchase and construction of another land
927500
&buildings pertaining to industrial undertaking subject to the following conditions :
60.000
1. The transferred asset is used by the assessee for industrial undertaking for at
867500
least two years preceding the date of transfer.
2. The gain must have been invested for the purchase or construction of another
'D elhi fo r land/building within a period of 3 years after the date of its compulsory acquisition.
a price o f 3. The new land or building should not be transferred within a period of 3 years
purchased from the date of its acquisition.
000 and in 4. If the new asset is transferred within a period of 3 years the cost of acquisition
r a price o f
of such an asset shall be reduced by the amount of capital gain exempt u/s 54D
isment y e a r
earlier and it will be a short-term capital gain.
5. The scheme of deposit (Capital Gain Account Scheme 1998) is applicable.
1.42 Income Tax— 11(2017-18)

Amount of exemption : Exemption u/s 54D is the least of the following two
amounts : (a) Cost of the new land or building, or ( b) Capital gain amount.

Illustration : 7
M r. X o w n s a b u il d in g w h ic h is u s e d fo r p r o d u c i n g e le c tr o n i c g o o d s . H e p u r c h a s e d th e
b u ild in g f o r R s. 2 ,0 0 ,0 0 0 in 1 9 8 2 -8 3 . D u r in g th e p r e v io u s y e a r r e l e v a n t to th e c u r r e n t
a s s e s s m e n t y e a r th r o u g h a n o r d e r th e G o v e r n m e n t h a s a c q u ir e d th i s b u il d in g a n d p a id
R s. 2 8 ,0 0 ,0 0 0 a s c o m p e n s a tio n . I m m e d ia te ly h e a c q u ir e d a p ie c e o f la n d f o r R s. 3 ,0 0 ,0 0 0
a n d s p e n t R s . 2 ,0 0 ,0 0 0 o n c o n s t r u c ti o n a n d d e p o s i te d R s. 1 ,0 0 ,0 0 0 in th e p u b li c s e c t o r
b a n k u n d e r c a p ita l g a in s c h e m e . C o m p u te c a p ita l g a in , i f c o s t in f la tio n in d e x f o r 1 9 8 2 -8 3
is 109 a n d fo r 2 0 1 6 -1 7 it is 1125 Solution
Computation of Mr. X’s Income from Capital Gain
for the Assessment Year 2017-18

■
C o m p e n s a tio n re c e iv e d 2 8 ,0 0 ,0 0 0
L e s s : S e llin g e x p e n s e s ______ Nil I
N e t C o n s id e r a tio n 2 8 ,0 0 ,0 0 0 :
Rs 2 ,0 0 ,0 0 0 x 1125
Less : I n d e x e d c o s t o f a c q u is itio n = 2 0 ,6 4 ,2 2 0 [
109
L o n g - te r m c a p ita l g a in 7 ,3 5 ,7 8 0
Less : Exemption U/S 54D :
Rs. 3 ,0 0 ,0 0 0 + R s. 2 ,0 0 ,0 0 0 + R s. 1,00,000 6 , 00,000
Taxable Long-term Capital Gain 1 ,3 5 ,7 8 0

4. Long-term Capital Gains on transfer of any ^apital asset—

Investment in Specified Assets (bonds) [Section 54EC]
If any long-term asset is transferred during the previous year, the assessee can
claim exemption from the capital gain on satisfying the following conditions :
1. A lo n g te r m c a p ita l a s s e t is t r a n s f e r r e d b y a n a s s e s s e e ( w h o m a y b e a n In d iv id u a l,
H U F , F ir m , C o m p a n y o r a n y O th e r P e r s o n ) d u r i n g th e p r e v i o u s y e a r.
2. The asset is transferred on or after 1-4-2000.
3. Within 6 months from the date of transfer o f the asset, the assessee should
invest the whole or any part of capital gain in long term specified assets.
“Long term specified assets” means the bond redeemable after 3 years of its
issue namely NABARD and National Highways Authority of India bonds,
Rural Electrisation Corporation Ltd. bonds o f2001. National Housing Bank
or Small Industries Development Bank of in India bonds of 2002.
4. If the specified asset is transferred or converted into money or loan is taken
against the bonds then the exemption given earlier gets cancelled and exemption
claimed earlier will be taken as long term capital gains of the previous year in
which the long term specified asset is transferred or converted.
 Procedure for C o m pu ta tion o f C a pita l G ains 1.43
5. The specified asset (bond) should be held for a minimum period o f 3 years.
6. No rebate is available u/s 88.
Exemption : (a) If the capital gain is invested fully, the capital gain is
exempted fully, i.e. the exemption of least of the following two amounts :
(/) Actual amount invested, or
(//) Capital gain amount.
Note : A fte r g iv in g th is e x e m p tio n th e r e c a n n o t b e a n y lo s s u n d e r th is h e a d .
If part o f th e c a p ita l g a in is in v e s te d , a c tu a l a m o u n t in v e s te d s h a ll b e g iv e n a s e x e m p tio n .

Illustration : 8

Xpurchased a b u ild in g fo r R s. 3 ,0 0 ,0 0 0 o n A u g u s t 3 1 , 1 9 8 8 .O n 1st O c to b e r, 1 9 9 2 ,h e s p e n t

Rs. 80,000 to a d d 3 m o re ro o m s . D u rin g th e p re v io u s y e a r r e le v a n t to th e c u r r e n t a s s e s s m e n t
year, b u ild in g w a s s o ld o u t f o r R s. 2 5 ,2 6 ,6 6 0 . H e in v e s te d R s. 2 ,0 0 ,0 0 0 in th e s p e c if ie d
bonds w ithin 3 m o n th s fro m th e d a te o f tra n s fe r. (C II fo r 1 9 8 8 -8 9 is 1 6 1 ; f o r 1 9 9 2 -9 3 is 2 2 3 ;
for2016-17 is 1 1 2 5 ). C o m p u te th e in c o m e fro m c a p ita l g a in .
Solution
Computation of Mr. X’s Income from Capital
Gain for the Assessment Year 2017-18

R s. R s.
Sale c o n sid e ra tio n 2 5 ,2 6 ,6 6 0
N il
Less: S e llin g e x p e n s e s
N e t C o n s id e r a tio n 2 5 ,2 6 ,6 6 0

Less: In d e x e d c o s t o f a c q u is itio n = R s. 3 ,0 0 ,0 0 0 x 1125 = 2096273

161

less: Indexed m stnf improvements; = Rs. 80,000 x 11 25 4 ,0 3 ,5 8 7 2499860

C a p ita l G a in 223 26800

Less : E x e m p tio n u/s 5 4 E C (R s . 2 0 0 ,0 0 0 o r L T C G w .e .l) 26800

Taxable Long-term Capital Gain N il

5. Capital Gain on Transfer of Certain Listed Securities

or Units, Invested in Specified Equity Shares ( Section 54 ED]
A new Section 54 ED has been inserted from the assessment year 2002-03.
Exemption for long-term capital gains is no more available U/s. 54 ED. However,
in relation to long-term capital gains arisen on account of transfers effected before
1-4-2006, for which exemption U/s. 54ED is allowed.
6. Long Term Capital Gain from Other Assets Other than
Residential House and Purchasing or Constructing
Residential house [ Section 54 F]
1.44 In co m e Tax— II (2017-18) Proce
A c c o r d in g to s e c tio n 5 4 F , c a p ita l g a in a r is in g fr o m th e t r a n s f e r o f o th e r a s s e ts , Solut
i.e ., o t h e r t h a n r e s i d e n t i a l h o u s e , e x e m p t i o n s h a l l b e g i v e n o n s a t i s f y i n g t h e f o l l o w i n g
c o n d itio n s :
1. U n d e r s e c tio n 5 4 F , o n ly an in d iv id u a l o r a H U F c a n c la im e x e m p tio n . Sale c
2. T h e t r a n s f e r r e d a s s e t is a l o n g t e r m a s s e t o t h e r t h a n t h e r e s i d e n t i a l h o u s e .
Less :
3. T h e a s s e s s e e h a s p u rc h a s e d w ith in o n e y e a r b e fo r e th e d a te o f tr a n s f e r o r 2
y e a rs a f te r th e d a te o f tr a n s f e r o r c o n s tru c te d w ith in 3 y e a rs a f te r th e d a te o f
Less:
tr a n s f e r a re s id e n tia l h o u s e b y in v e s tin g th e e n tir e n e t s a le c o n s id e r a tio n . W h e re
a p a r t o f t h e n e t s a l e c o n s i d e r a t i o n is i n v e s t e d , it w i l l b e e x e m p t p r o p o r t i o n a t e l y .

_ . . . A m o u n t in v e s te d
P r o p o r t i o n a t e e x e m p t i o n = L o n g t e r m c a p i t a l g a in x ---------------------------------------
N e t s a le c o n s id e r a tio n
Less :
4. T h e a s s e s s e e s h o u ld n o t o w n m o re th a n o n e r e s id e n tia l h o u s e o n th e d a te o f
tr a n s f e r o f o r ig in a l a s s e t.
5. T h e n e w h o u s e m u s t b e h e ld b y th e a s s e s s e e a t le a s t f o r a p e r io d o f 3 y e a rs .
6. T h e a s s e s s e e d o e s n o t p u rc h a s e w ith in a p e rio d o f 1 y e a r o r c o n s tr u c t w ith in a
p e rio d o f 3 y e a r s a n y r e s id e n tia l h o u s e o th e r th a n th e n e w a s s e t, o th e r w is e
e x e m p t i o n g i v e n u / s 5 4 F e a r l i e r s h a l l b e t r e a t e d a s l o n g t e r m c a p i t a l g a i n o f th e
p r e v i o u s y e a r in w h i c h t h e s e c o n d h o u s e is b o u g h t o r c o n s t r u c t e d .
7. T h e s c h e m e o f d e p o s i t ( c a p i t a l g a i n a c c o u n t s s c h e m e 1 9 8 8 ) is a p p l i c a b l e . T h e
a m o u n t d e p o s i t e d in t h e b a n k m u s t b e u t i l i s e d w i t h i n t h e s t i p u l a t e d p e r i o d (3
y e a r s ) . I f n o t, th e p r o p o r tio n a t e a m o u n t c a lc u la te d a s u n d e r s h a ll b e tr e a te d as
7. Ca
c a p i t a l g a i n o f t h e p r e v i o u s y e a r in w h i c h t h e p e r i o d o f 3 y e a r s f r o m t h e d a t e o f
tr a n s f e r o f th e o rig in a l a s s e t e x p ir e s . Ur
T h e p r o p o r t i o n a t e a m o u n t s h a l l b e d e t e r m i n e d a s u n jjle r : Ci
A m o u n t o f g a in e x e m p t e d u /s 5 4 F x A m o u n t u n u tilis e d asset 1

A m o u n t d e p o s ite d ta x su l
1. Sh
8. C o n s e q u e n t l y , w h e r e t h e n e w h o u s e is t r a n s f e r r e d w i t h i n a p e r i o d o f 3 y e a r s o f
2. Th
it s p u r c h a s e o r c o n s t r u c t i o n ,
(a) C a p i t a l g a in w h ic h a r is e s o n th e tr a n s f e r o f th e h o u s e w ill b e ta k e n a s s h o rt (a.
te r m c a p ita l g a in . (b,
( b) C a p i t a l g a i n w h i c h w a s e x e m p t u n d e r s e c t i o n 5 4 F s h a l l b e t r e a t e d a s lo n g (c)
t e r m c a p i t a g a in f o r t h e y e a r in w h i c h th e n e w h o u s e is t r a n s f e r r e d .
(d

Illustration : 9 3. Su

M r. X s o ld h is J e w e lle r y f o r R s. 1 5 ,0 0 ,0 0 0 a n d s e llin g e x p e n s e s a m o u n te d to R s. 1 0 ,0 0 0 . T h e p ri

c o s t o f a c q u is it io n in 1 9 8 9 -9 0 is R s. 2 ,0 0 ,0 0 0 . W ith in o n e y e a r h e h a s u n d e r ta k e n th e 4. Th

c o n s tr u c tio n o f h o u s e a n d th e a m o u n t s p e n t u p to th e d a te o f f ilin g th e IT R e tu rn is R s. 5. Th

1 ,5 0 ,0 0 0 a n d a m o u n t d e p o s ite d in a N a tio n a l H o u s in g B a n k w a s R s. 1 ,0 0 ,0 0 0 . C a lc u la te th e spc

c a p ita l g a in f o r th e A s s e s s m e n t y e a r 2 0 1 7 -1 8 (C l 1 fo r 1 9 8 9 -9 0 = 172 a n d 2 0 1 6 - 1 7 it is 1125). Ex
(
Procedure for C o m pu ta tion o f C a pita l G ains

Solution Computation of Mr. X's Income from Capital

R s.
Sale consideration 1 5 ,0 0 ,0 0 0
Less: Sales e x p e n s e s 1% o f s a le p ric e 1 0 ,0 0 0
N e t C o n s id e ra tio n 1 4 ,9 0 ,0 0 0
Rs. 2,00,000x1125
Less: Indexed cost o f acquisition = 1308140
172

C a p ita l G a in
: E x e m p tio n u /s 5 4 F
As th e n e t c o n s id e ra tio n is m o re th a n th e n e w
c o n stru c tio n c o s t arid th e d e p o s ite d , th e fo llo w in g
fo rm u la s h o u ld b e u se d .
C a p ita l gain x C o s t o f th e n e w w o rk
E x e m p te d c a p ita l g a in =
N e t c o n s id e ra tio n

R s 181860 x Rs, 2 ,5 0 ,0 0 0
Rs. 14,90,000

Income from Capital Gain

1. Capital Gain on Shifting of Industrial Undertaking from

Urban Area to Non-urban Area [Section 54G]
Capital gain arising either short-term or long-term from the transfer of capital
asset like plant & machinery, land and buildings or any right therein is exempt from
taxsubject to the following conditions :
1. Shifting of industrial undertaking from urban area to non-urban area.
2. The capital gain amount can be utilised for
{a) Purchase of new land or building.
{b) Constructing a building for the business purpose.
(c) Purchase of new machinery or plant.
(d) Depositing the money in the bank under capital gain scheme 1988 before
filing the return of income.
Such purchase, or construction or shifting expenses incurred within one year
prior to the date of transfer.
The specified new assets should not be transferred for a period of 3 years.
The Bank deposit amount should be utilised fully forthe said purpose within the
specified time limit (3 years), otherwise it will be treated as capital gain income.
Exemption u/s 54G : Exemption is least of the following :
(a) Actual amount investedjn new assets and shifting expenses.
^ (b) Cnpitnl piiiin irnffTfiTf
1.46 Inco m e Tax— II (2017-18)
Procedure fo r (

N o te : If the assessee transfers the asset within 3 years or fails to utilise the amount deposited in the Unit of L
bank within the stipulated period, the exemption allowed earlier will be treated as taxable gain arising oi
income in the year o f transfer o f the new asset or after the expiry date in the case of deposit fully exempt f
in the bank. Securities Trai
: Finance (No.
Exemption o f capital gain on transfer o f assets o f shifting o f industrial
the value of all
undertakings from urban area to any special economic zone (Section 54GA) an equity-orien
Where any capital gain (short term or long term) arising from the transfer of a capital be collected by
asset being land or building or plant or machinery or any rights used forthe purpose off sale of units of
business of an industrial undertaking situated in an urban area, effected in the course! seller. The tax s
of or in consequence of shifting of such industrial undertaking to any special Economic! The tax shall c
Zone whether developed in any Urban area or any other area shall be exempt to the In respect <
extent, such capital gain is invested for the specified purpose within 1 year before or the long-term c.
3 years after the date of its transfer. shall be subjec
In other words the exemption is available to all categories of assessees in Long-term
respect of capital gain arising on the transfer of fixed asset except furniture and exempt from ta
fittings.
Exemption o f Capital Gain on transfer or Residential House property and Tax Computat
investment in Equaity Shares of Small and Medium Enterprises (SME) segment If the capital as
company in manufacturing sector [Section 54GB] Section 54 GB has been inserted funds and the 1
to exempt longterm capital gains on sale of Residential Property (house or plot of capital gain is n
land) owned by an individual or any HUF in case of re-investment o f sale) 2 options (whic
consideration in the earnty shares of an eligible company being a newly incorporated
SME Company engaged in the manufacturing sector for the purchase of new Plant Opt
and Machinery. 1. Find out sale
■M
.*
Quantum of exemption under Section 54 GB : If full amount of Net sale
2. Deduct index*
consideration is invested then Full exemption is allowed. But if full amount of Net Sale
consideration is not invested then exemption shall be calculated as follows : 3. The balancing
capital gain.
LTCG x investment in equity shares
4. 20% (plus ed
Net sale consideration amount of tax

8. Extension of Time for Acquiring New Assets or Depositing

Amount of Capital Gain [Section 54H]
Illustration : 10
In case o f compulsory acquisition of any capital asset under any law, if the Mr. Raghuveersof
receipt of compensation is delayed, the time limit for acquiring the new asset acquired by him ii
commences not from the date of acquisition but from the date o f receipt of payable thereon for
compensation.
Listed Shares Acquired during 1-3-2003 to 28-2-2004 : Any long-term
capital gain arising on transfer of eligible equity shares of a company acquired on
or after 1-3-2003 but before 1-3-2004 and held for 12 months or more, shall be fullyj
exempt from tax [Sec. 10 (36)].
 7-18)
Procedure for C o m pu ta tion o f C a pita l G ains 1.47

in the
Unit of Unit Scheme 1964 Transferred on or after 1-4-2002 : Any capital
ixable gain arising on transfer of units of Unit Scheme 1964 on or after 1-4-2002 shall be
eposit fully exempt from tax.
Securities Transactions Tax in placeof Capital Gains Tax on Transfer of Securities
: Finance (No. 2} Bill, 2004 proposes to levy Securities Transaction Tax @ 0.125% on
strial the value of all transactions of purchase/sale of equity shares in a company or units of
4GA) anequity-oriented mutual fund, on a recognised stock exchange in India. The tax shall
rapital be collected by the stock exchange and deposited into the Govt.'treasury. In case of
ose of sale of units of equity-oriented mutual fund, tax shall be payable @ 0.25% by the
course seller.The tax shall be collected by the mutual fund and deposited into Govt, treasury.
inomic The tax shall come into force from a date to be notified.
to the In respect of such transactions entered into on or after the notified date, while
fore or the long-term capital gains shall be fully exempt u/s 10 (38), short-term capital gains
shall be subject to a concessional rate of 10% u/s 111 A.
;ees in Long-term capital gains arising on transfer on or after October 1,2004 are also
ire and exempt from tax [Sec. 10 (38)].
TaxComputation
ty and
cgment If the capital asset transferred is equity shares or units of equity oriented mutual
nserted hinds and the transaction is subject to securities transaction tax, the long-term
■plot of capital gain is not chargeable to tax. In other cases the tax shall be computed under
of sale 2options (whichever less shall be adopted for the benefit of assessee).
porated
Option- 1 Option-2
w Plant
1. Find out sale consideration. 1. Find sale consideration.
Met sale 2. Deduct cost of a acquisition
2. Deduct indexed cost of acquisition.
Net Sale (No indextion).
3. The balancing amount is long-term
capital gain. 3. The balancing amount is long-term
4.20% (plus education cess is the Capital gain.
4. 10 per cent (plus education cess) is
amount of tax liability.
the amount of tax liability.

Illustration : 10
iw, if the Mr. Raghuveer sold 1,000 shares of Andhra Bank on 22-7-2016 @ Rs. 550. The shares were
iew asset acquired by him in 1994-95 @ Rs. 100. Compute the long-term capital gain and the tax
eceipt o f payable thereon forA.Y. 2017-18 (ClI fortheyear2016-17 is 1125 and for 1994-95 it was 259).

ong-term
quired on
ill be fully
1.48 In co m e Tax— 11(2017-18)5

Solution
Computation of Long-term Capital Gain of Mr. Raghuveer
for the Assessment Year 2017-18

Option-1 Option-2
Rs. Rs.
Sales consideration 5,50,000 5,50,000
Rs 1 ,0 0 0 x 1 OOxi 125
Less : Index cost of Acquisition = 259 434363 1,00,000
Long Term Capital Gain 1,15,637 450,000
-Tax Payable = 1,15,637 x 20% 23,127 45,000

Thus, tax Rs. 23,127 is payable on long-term capital gain. Option-1 shall be considered
as it is beneficial to the assessee (Education cess of 3% is not included in the above
calculation and it is to be added later).
Problems on Computation of Capital Gains
Problem : 1
From the below given information compute taxable capital gain.
Asset Date of Cost of Date of Transfer transfer
acquisition acquisition transfer consideration expenses
Residential 1-1-1979 1,00,000 31-12-2016 20,00,000 10,000
House CII = 100 (FMV 1,50,000)
Urban Agricultural
lands 30-6-1992 1,80,000 1-2-2017 13,10,724 40,000
CII =223
Gold and
Jewellery 1-7-1988 2,40,000 1-9-2016 23,29,690 44000
CII = 161
Plant and 1-8-1996 10,00,000 1-6-2016 3,50,000
Machinery CII =305 (WDV 4,00,000;

Note : F rom th e tra n sfe r c o n sid e ra tio n o f each asset 5 0 % o f th e a m o u n ts is re-in v ested on the sam
asset. C II fo r th e year 2 0 1 6 -1 7 = 1125
 1. Residential house
Transfer consideration
Less : Transfer expenses
Net Consideration
Less : Indexed Actual Cost
FMV or actual cost w .e.h * 1125
Rs 1,50,000* 1125
100
Less: Exemption u/s 54 restricted to LTCG
iered
bove Urban Agricultural Lands
Transfer consideration
Less: Transfer expenses
Net consideration
Less : Indexed actual cost
Rs 1,80,000* 1125
---------- m --------
Less : Exemption u/s 54B (50% of Transfer Consideration
is Rs. 6,55,362 that restricted to the extent of LTCG
i.e. Rs. 398168
Gold and Jewellery
Transfer Consideration
Less: Transfer Expenses
Net Consideration
Less : Indexed actual cost
1125
2,40,000 *
LTCG
Plant and {Machinerv
Transfer Consideration
esame
Less: Transfer expenses
Net Consideration
Less : W.D.V. (Being depreciable asset)
Short Term Capital Loss
Taxable Capital gain
Residential house Nil
Urban agricultural lands Nil
Gold and Jewellery 608671
Plant & Machinery (loss) (-) 50,000 558671
1.50 Income Tax—11(2017-18) Procedun
Problem : 2 Solution
From the following particulars compute taxable capital gains for the A. Y. 2017-18

Open plot Shares o f Shares o f Compulsory House

X Ltd. Y Ltd. acquisition hold O p e n p lo
o f urban land furniture transfer a
Date of Less : Trai
acquisition 1-4-1976 31-12-05 30-8-13 30-9-1991 1-6-97 Net consic
Cost of 60,000 80,000 1,00,000 1,60,000 80,000
acquisition FMV Less: Inde
75,000 Less: Exer
Date of 1-8-16 31-12-2016 30-5-2016 31-8-2016 1-9-2016
Transfer LTCGx -
Transfer 10,00,000 4,20,000 85,000 10,00,000 60,000
Consideration
Transfer
expenses 20,000 10% 5% 20,000 - Shares of!
Cost inflation
Transfer Ci
index 100 497 632 199 331
Less: Tran
Note : Out of the transfer consideration of open plots Rs. 5,00,000 invested in the Less : Inde>
construction of residential house property and from that of shares of X Ltd. Rs. 60,000
invested in specified bonds. Rs. 39,804 reinvested in urban lands. CI1 for 2016-17= 1125

Less: Exem]
Shares of V
Transfer Co
Less : Trans

Less : Actua

Compulsorj
Transfer Coi
Less : Transl
Procedure fo r C o m p u ta tio n o f C a pita l G ains 1.51
Solution
Computation of Taxable Capital Gains
for the Assessment Year 2017-18

Open plot Rs. Rs.

transfer consideration 10, 00,000
Less: Transfer expenses 20,000
Net consideration 9,80,000
1125
Less: Indexed Actual Cost 75,000 * ioo 843750
L ie u 136250
Less: Exemption u/s 54 F
Amount invested in house property
LTCG x
Net Consideration
5.00,000
136250 x 69515
9,80,000
66735
Shares of X Ltd
Transfer Consideration 4.20.000
Less: Transfer expenses 42,000
Net Consideration 3.78.000
Less: Indexed Actual Cost Rs.
1125
80,000 x 497 181087
LTCG 196913
Less: Exemption u/s 54EC 60,000 136913
Shares of Y L td.:
Transfer Consideration 85,000
Less: Transfer expenses 5% 4,250
Net consideration 80,750
Less: Actual Cost (Short term asset) 1,00,000
(—)19,25 0
Shortterm Capital Loss
Compulsory acquisition of Urban lands :
Transfer Consideration 10,00,000
Less: Transfer Expenses 20,000
Net Consideration 980000
Less : Indexed actual cost 904523
160,000x 1125 -------------
199

LTCG 75477
Less : Exemption u/s 54 D 39804 35673
Taxable Capital gain ------------- 2,20,071
1 .5 2
Let us now recapitulate the provision of Capital gains. Summary of keys points is
given below :
Particulars
1. Basis o f charge
2. Capital assets
3. Transfer of capital asset
4. Capital gain :
How to ascertain?
5. Cost o f acquisition
Inco m e Tax— II (2017- Proc
Summary of Key Points
T rea tm en t f o r th e a ssessm en t y e a r 2 0 1 5 -1 6
Gain on transfer o f capital asset is known as capital gain u/s 45.1
Property of any kind held by the assessee: Whether or not connect#
with his business or profession or it includes movable or immovabll
fixed or circulating; tangible or intangible, but does not include (if 6. Co
stock-in-trade; (b) personnel effects (excluding jewellery); (c) rui
agricultural land; (e) gold bonds, special bearer bonds 1991, got
deposit bonds, 1990. 7. Ind
It includes any sale, exchange or relinquishment o f the asset and
must be effected during the previous year. But the following transft Fin
are not regarded as transfers (Sec. 47); 198
1. Transfer o f assets on partition o f HUF 198
2. Transfer of assets to shareholders on liquidation o f a compai 198
3. Transfer o f assets under gift, will or irrevocable trust 198
4. Transfer o f assets by a parent company to subsidiary compair 198
5. Transfer o f assets by a subsidiary to a parent company. 198
6. Transfer of assets on amalgamation of company. 198
7. Transfer of agricultural land before 1st March, 1970. 198:
8. Transfer o f assets o f historical importance to a Museum 198'
Archives or National Gallery of Art. 1991
9. Conversion of debentures or bonds into shares or debentures 199
From the full sale consideration, deduct: 1991
(a) expenditure incurred on conversion with the transfer-result
figure is known as net consideration.
1995
(b) cost of acquisition in case o f short-term capital assets or inde*
cost of acquisition in case of long-term capital asset. 1994
(c) cost o f improvement or indexed cost of improvement. 1995
It is the value for which property was acquired by the assessee, 1996
in the following cases, cost shall be treated in a different manm
1. Assets acquired w ithout paying any price : In case assi
1997
received by way of transfer under participation of HUF ui
gift or will, under succession or inheritance or on liquidatioi 1998
company under revocable or irrevocable trust or by a pan 1999
company from subsidiary company the cost will be the cos Index
which assets were acquired by the previous owner (Sec.49(
2. S hares of am algam ated com pany : The cost o f shares
2000 -
amalgamated company shall be the cost o f acquisition of shi
of amalgamating company [Sec. 49(2)].] 2001-
3. Depreciable assets : Only short-term capital gain (Sec. 50).
2002-
4. Advance money : Deduct out of cost of acquisition Sec. 51) |
2003-
5. Cost is unascertainable : FMV as on the date o f acquisition
Option of FMV as on 1-4-1981 2004-
(a) If the assets were acquired before 1-4-1981:
Cost o f acquisition = original cost or FMV as on 2005-
1-4-81, whichever is higher
(b) If the assets were acquired after 1-4-1981
Cost of acquisition = the price paid for the asset (+) the improves 2006-1
made. 2007-1
-18) Procedure fo r C o m p u ta tio n o f C a pita l G ains 1.53
Cost of shares : Cost of new shares received on amalgamation of
companies transfer of shares into stock or vice versa or transfer of
lower denomination shares into higher denomination shares or vice
V versa, the cost of acquisition will be the cost at which original
shares were acquired [Sec. 56(2)(C)].
15. Cost of Bonus shares: With effect from 1-4-1995 cost of bonus
ected shares shall be taken as nil. But if bonus shares were allotted before
'able; 1-4-81, FMV on 1-4-1981 is their cost.
ie(a) 6. Cost of improvement An expenditure of capital nature incurred by assessee after acquiring
rural an asset shall be added to the cost of acquisition.
, gold Improvement made before 1-4-81 should be ignored.
7. Indexing: Actual jost and cost of improvement is to be inflated by
and it
nsfers Financial year CII Indexing at a glance [Section 49(iii)]
1981- 82— 100
1982- 83— 109 Situation Indexing
ipany. 1983-84— 116 1. Short-term capital assets No indexing
1984-85— 125 2. Repurchase of units u/s 80CCB No indexing
ipany. 1985-86— 133 3. Bonds and debentures except No indexing
1986-87— 140 capital indexed bonds
1987-88— 150 4. Long-term capital assets acquired Actual
1988-89— 161 before 1-4-81 under gift, w ill, cost or
:eums, 1989-90— 172 partition ofH U F of inheritance FMV
1990-91 — 182 > u/s 49 (c) whichever
lures. 1991-92— 199 is more
1992-93 — 223 Indexed cost o f acquisition
;sulted
FMV x CII of the year of sale
1993-94 — 244
ndexed Cll of 1981-82 (100)
1994-95 — 259 CII of 1981-82 (100)
1995- 96 — 281
ee. But 1996- 97 — 305 5. Long-term capital assets acquired on or after 1-4-81
inner:
asset is Actual cost x CII of the year of sale
1997-98 — 331
: under CII of the year of acquisition
ation of 1998-99 — 351 6. Cost of improvement before 1-4-1981 Nil
i parent 1999- 00 — 3 89
: cost at Indexed cost of acquisition 7. Cost of improvement after 1-4-81
49(1)].
lares of Cost of improvement x CII of the year of sale
2000- 01 — 406
if shares CII of the year of improvement.
2001- 02 — 426
50). 2002- 03 — 447 8. Long-term asset acquired by present seller under gift or will
:.51)
2003- 04 — 463 after 1-4-81 but was acquired before 1-4-81.
sition.
2004- 05 — 480 (a) Actual cost or FMV on 1-4-81 whichever is more.
FM V or cost x CII of the year of sale
2005-06 — 497
^ CII of the year of in which the present
seller become its owner

Dvements 2006- 07 — 519

2007- 08 — 551
1.54 In co m e Tax— II (2017-18) Prc

2008- 09 — 582 Ext

2009- 10 — 632
(a)
2010- 11— 711
2011- 12 — 785
2012- 13 — 852
2013- 14 — 939
2014- 15 — 1024
(b )
2015- 16— 1081
2016- 17— 1125
(c) (

Types of Capital Gains Exemption

1
8. Short-term capital gain Short-term capital gain means capital gain arising on the
transfer of short-term capital asset.
Short-term capital asset: Short-term capital asset means a
(d)
capital asset held by an assessee for less than 36 months.
a
In case of shares, securities, units & UT1 and units o f MF,
s
it is less than 12 months.
E
9. Long-term capital gain Long-term capital gain means capital gain arising on the
(e) S
transfer of a long-term capital asset.
a
Long-term capital asset: It means a capital asset which is
not a short term capital asset. In other words, if the asset is
held by the assessee for more than 36 months or more than
(0 T
12 months in the case o f share^and securities.
0
10. Capital gain tax normally (1) Insurance com pensation
n*
chargeable in the year of tran- (2) Compulsory acquisition
E
sfer but in the following cases In case of conversion o f capital asset into stock
(g) T
year o f receipt shall be taken year of sale of such stock-in trade should be
01
into consideration. considered.
U
11. Consideration to be adopted (1) Conversion o f capital asset into stock-in trade
SI
for computation of capital gains - FMV on the determination
(h) Sj
(2) Partner or member injroducing asset into firm or
Pi
AOP-Book value recorded in the firm
equit)
(3) Dissolution o f firm— FMV on the date o f dissolution.
mi
12. Benefit of indexation is not In case o f : (a) short capital assets
mi
Available (6) bonds and debentures
(c) where option o f 10% tax rate is available
u/s 112.
(d) slump sale u/s 50B 1. R
b
13. Assets for which cost o f There are 9 assets in respect o f which th^ cost o f acquisition
1
acquisition is NIL. shall be adopted as n i l :
ai
(1) Self generated goodwill; (2) tenancy right; (3) route permil; C
(4) Bloom houses; (5) right to manufacture, produce or procesi 1
any article or thing; (6) bonus shares acquired after 1-4-81; I
(7) right to subscribe to financial assets; 8) trade mark or brani 2. M
name; (9) right to carry on business. M
It is exempt from Tax if the assessee A
has within the stipulated period Hi
purchased or reinvested in shares fr<
o f SME Company engaged in C(
manufacturing sector [A
Sb
Procedure for C o m pu ta tion o f C a pita l G ains
Exemptions under capital gains :
(a) Capital gain arising on sale of
residential house Exemption u/s 54.
(b) Capital gain arising on sale of
agricultural land Exemption u/s 54B
(c) Compulsory acquisition of
capital assets
Exemption u/s 54D
(d) Sale of any long-term capital
asset and purchasing the
spe-cified bonds
Exemption u/s 54EC
(e) Sale of any long-term capital asset
aitd purchase of residen-tial house
- Exemption u/s 54 F
(f) Transfer of asset due to shift-ing
of factory from urban to
non-urban area
Exemption u/s 54G
(g) Transfer o f asset due to shift-ing
of industrial undertaking from
Urban Area to any
SES (Sec. 54 GA)
(h) Sale of Residential House
Property and Reinvestment in
equity share o f small and
medium enterprises engaged in
manufacturing sector -
I EXERCISES
1.55
It is exempt from tax if the property purchased is a
residential house within one year or two years after
sale or constructed with in 3 years after sale and the
property so purchased/constructed is not sold within 3
years.
It is exempt from tax if agricultural land was being
used by the assessee for purchasing another agricultural
land within two years after sale.
It is exempt from tax if capital gains are used for the
purpose of purchasing new industrial undertakings
within a period of 3 years. The new asset so acquired
cannot be sold for a period of 3 years otherwise gain
exempted earlier will be put to tax.
It is exempt from tax if capital gain is invested in
specified assets within 6 months.
Where a long-term asset (other than residential house)
is transferred and net consideration is re-investment in
construction or purchase of residential house within
the specified period.
It is exempt from tax if the assessee has within the
stipulated period purchased a new machinery/ plant for
the purchase o f industrial undertaking in an area to
which the said undertaking is shifted.
It is exempt from tax if the assessee has within the
stipulated period purchased a new machinery/ plant for
the purchase of industrial undertaking in an area to
which the said undertaking is shifted.
Exemption U/S 54GB

1. Raja sold his residential house on 14thJanuary, 2017forR s. 14,84,700 and paid Rs. 10,000 on
brokerage. He had purchased the house in November, 1985 for Rs. 1,00,000 and spent Rs.
14,000 on its registration and 38,500 on its improvement. Out o f the sale proceeds, he purchased
another house for his own residence for Rs. 1,50,000 on 20th March, 2017 and National Saving
Certificates VI11 th issue for Rs. 50,000 on 31st March, 2017 (1985-86 C l 1 = 133; 2016-17 =
1125). Compute taxable capital gain for the relevant Assessment Year.
[Ans. : Taxable capital gain Rs. 34,756]
2. Mr. Ramesh sells agricultural land situated within municipal limits for Rs. 33,11,600 on 1st
May, 2016, which was purchased by him on 1st October. 1987 for Rs. 2,50,880 On 15th
August, 2016. he deposits Rs. 10,00,000 in a bank under capital gains Accounts Scheme 1988.
He purchases another agricultural land on 31st March, 2017 for Rs. 7,00,000 by withdrawing
from the deposit account. Amount left in the deposit account is withdrawn on the same day.
Compute the amount o f capital gain (Cll for 1987-88 = 150, 2016-17 = 1125).
[A n s.: Long term capital gain = Rs. 14,30,000; Taxable long-term capital gain Rs. 4,30,000;
Short term capital gain Rs. 3,00,000]
1.56 In c o m e T ax— 11(2017-18)

3. On 31st December, 2016, Bhargav sells gold for Rs. 12,34,865 (Cost o f acquisition on 1st
March, 1993 for Rs. 83,156. Expenses on sale are Rs. 2000. On 1st March, 2017, he acquires
bonds of NABARD (Investment being Rs. 7,00,000). These bonds are redeemable after 60
months. Find out the amount of exemption under section 54EC (CII for 1992-93 is 223, 2016-
17 = Rs. 1125).
[Ans. : Exemption u/s 54EC Rs. 7,00,000, Taxable LTCG Rs. 1,13,386]
4. Mr. Ramesh purchased land and building for the purpose of carrying his profession as a doctor for
Rs.83,733 on 30-6-1992. These lands were compulsorily acquired by the Govt, of A.P. on 31-12-
15 in consequence of widening roads, and paid a compensation of Rs. 8,60,000: From the transfer
consideration Rs. 2,60,000 were invested in similar asset before 31-3-17. Compute taxable capital
gain for the A.Y. 2017-18 (CII for the year 1992-93 = 223, 2016-17 =1125).
[Ans. : Rs. 1,77,580] :

5. Mr. ‘X ’ purchased shares of A Ltd. on 30-6-2005 for Rs. 4,25,644 and that o f ‘B ’ on 31-12- I
2014 for Rs. 1,60,000. Shares of A Ltd. and B Ltd. were sold on 30-6-2016 for Rs. 12.50,000 I
and Rs. 1,20,000 respectively. Transfer expenses were at 2%; Compute taxable capital gain for
the A. Y. 2017-18 (CII for the year, 2016-17 = 1125, CII 2005-06 = 497).
[Ans. : LTCG on Shares o f A Ltd. Rs. 2,61,520; short
term capital loss on shares o f B Ltd. Rs. 42,400] 1
6. Mr. A was allotted 1,000 shares o f Rs. 8 each of ‘X ’ Ltd. on 1-8-1980 at Rs. 10. In the year
1992-93 he was allotted 100 rights shares at Rs. 8 each at par. During the year 2016 he was I
offered 300 rights shares at Rs. 12 by the company. He subscribed for 150 shares and the
balance he renounced in favour of Mr. B for Rs. 5,000. On 15th March, 2017. He sold all the
shares at Rs. 145 per share and transfer expenses amounted at Rs. 500 on 1st sale o f 1000
shares, Rs. 50 on 100 right shares and Rs. 75 on 150 right shares. Compute taxable capital gain
for the current assessment year assuming the FMV o f the shares on 1-4-81. was Rs. 12 per
share : (ClI for the year 1981 -82 = 100, 1992-93 = 223; 2016-17 = 1125).
[Ans. : LTCG Rs. (-)9500, LTCG Rs. 10414 STCG Rs.
19,875 STCG Rs. 5,000]
7. X Ltd. has plant and Machinery whose W.D.V. on 1-4-2016 i^Rs. 10,00,000. During, the year
additional Machinery was purchased on 31-12-2016 for Rs. 6,00,000. On 10-2-17 a fire had
broken in the premises o f the factory destroying a considerable part of plant and machinery.
Insurance company paid a compensation of Rs. 8.00,000. Calculate Capital gain or otherwise I
when (a) plant and machinery is completely destroyed (b) plant and machinery is partly I
destroyed.
[Ans. (a) Short term Capital loss Rs. 8,00,000; (b) Depreciation on 2.00,000 @ 15% I
30,000 plus depreciation 6,00.000 @ 15% for half period Rs. 45,000 : Total
depreciation Rs. 75,000, WDV 7,25,000.]
8. Dr. Ragu purchased 1,000 shares of X Ltd. on 30-6-1994 for Rs. 83733. These shares were sold
on 30-9-2016 for Rs. 6,40,000. Out o f the transfer consideration he deposits Rs. 2,00.000 for
the purpose construction o f a residential house. Compute taxable capital gain for the A. Y. year
2017-18.
(CII for the yegr 1994-95 = 259; 2016-17 : 1125).
/
[Ans. : LTCCj Rs. 2,76295; Exemption u/s 54 F Rs. 86,342; Taxable capital gain Rs. 189,953]
9. Mr. Laxman purchased 1,000 equity shares o f ‘X ’ Ltd. at Rs. 100 per share on 1st Nov. 1979.
He received 800 bonus shares on 31-12-1980. He sold 400 equity shares and 300 Bonus Shares
on 30-9-2016 at Rs. 1,500 per share F.M.V. of each share is Rs. 125 on 1-4-1981. Calculate
Capital gains (CII for 2016-17 : 1125).
 Procedure for Computation o f C apital G ains 1.57
[Ans. : Capital gain on original shares Rs. 37,500 on
Bonus shares Rs. 28,125]
10. Mr. ‘X’ inherited a house property from his father on 30-06-1992. His father purchased such
property on 1-7-1980 for Rs. 1,00,000. Mr. X Spent Rs. 80,000 for the construction of
additional room in the year 1998-1999. This property is sold during the current previous year
for Rs. 12,00,000. Transfer expenses Rs. 50,000. Compute taxable capital gain assuming the
FMV of the property as Rs. 1,50,000.
(CI1 for the years 1981-82= 100, 1992-93 = 223 1998-99 = 351 and 2016-17 = 1125)
[Ans, : LTCG Rs. 136864
11. Mr. Aditya transferred the following assets during the year 2016-17 :
(a) Residential house property purchased in the year 2001-02 for Rs. 1,20,000 sold for
8,50,000. Transfer expenses Rs. 10,000.
(i) Shares of X Ltd. purchased on 30-6-2005 for Rs. 80,000. on 30-7-15 they were sold for
Rs. 4,20,000. Transfer expenses @ 2%.
(c) Plant and Machinery purchased in 1996-97 for Rs. 8,00,000, having a W.D.V. of 2,40,000
sold for Rs. 1,80,000. Compute taxable capital gain.
(CII for the year 2001 -02 = 426, 2004-05 = 480, 2016-17 = 1125)
[Ans. (a) Rs.5,23,099 (b) Rs. 224100 (c) short term capital loss Rs. 60,000.]
12. From the information given below compute taxable capital gains.

Asset D ate o f C o st o f D a te o f T ransfer T ra n sfer

acquisition acquisition transfer C onsideration e x p e n se s

Residential
house property 1-4-1979 1,25,000 30-06-16 20,40,000 40,000
FMV
Rs. 1,60,000
UrbanAgricul- 30-9-96 1,84,567 1-2-17 18,20,000 20,000
tural lands
Shares of 31-12-14 1,20,000 1-7-16 4,80,000 5%
X Ltd.
House hold
Furniture 30-9-92 2,40,000 1-6-16 60,000 _

Note : From the transfer consideration received on residential house property of Rs. 10,00,000
reinvested on another house property. Similarly Rs. 4,00,000 re-invested on the purchase
of agricultural lands in urban areas from the consideration of Urban agricultural lands.
CII foi me years 1981-82 = 100; 1996-97 = 305; 2016-17 = 1125.
[Ans. : Nil; LTCG Rs. 7,19,220 STCG Rs. 3,36,000; household furniture not taxable]
1.58 Incom e Tax— II (2017-18)
Proc
13. From the information given below compute taxable capital gains. 16. I
Particular Compulsory Plant & Gold and Shares of
acquisition of Machinery Jewellery Partn
X Ltd.
land and buildings
Date i
Date of
Cost (
acquisition 1-6-1988 30-6-1992 1-4-79 31-12-2005
Cost o f acqui- Cl
sition 167466 10,00,000 80,000 83,733 Ti
(W.D.V. (FMV Tr
6,00,000) 83733 c<
Date of Br
30-6-2016 1-2-2017 30-9-2016 31-12-2016
transfer
Transfer 12,60,000 4,50,000 10,43,600 5,18,250
Consideration
Transfer 60,000 Nil 10,000 5,000
expenses
Reinvestment 8,00,000 Nil 2,40,000 2,00,000
same in the asset
CII 161 — 100 480

Note: Current year C11 = 1125

[Aits. : Nil + Short term Capital Loss Rs. 1,50,000 +
LTCG Rs. 91,606 + Rs. 3,17,000 = Rs. 2,58,606]
14. Mr. Ravi purchased an open plot o f 1,000 square metres for Rs. 1,04,667 on 30 Sept. 1987. On
30-9-2016 he sold this plot for 18,80,000 and purchased a residential flat for Rs. 10,00,000.
17. K<
Selling expenses Rs. 80,000. Compute taxable capital gain.
3C
(CII for the year 1987-88 = 150; 2016-17 = 1125). Ri
[Aits.: LTCG Rs. 10,15,000; Exemption u/s 54 F Rs. M
du
5,63,889; Taxable capital gain Rs. 4,51,111]
pn
i
25
15. Nataraj purchased agricultural lands during the year 1987-88 for Rs.48,844 He spent Rs. 58091
an
during July, 1988 for the construction o f fencing around the area and also towards borewell. On
19
May, 2016 this land is sold for Rs. 12,10,000 and paid Rs. 60,000 towards transfer expenses
On 1st Jan, 2017 he has purchased a residential flajt at Hyderabad for Rs. 5 lakhs. Compute
taxable capital gain for the A.Y. 2017-18, (CII for the years 1987-88 = 150, 1988-89 = 161,
2016-17= 1125). 18. Av
on
[Ans. : LTCG: Rs. 3,93,609-Exemption U/s 54 F Rs. 1,71,134; | ass
Taxable Long-Term Capital gain Rs. 2,22,475] as i
B) W1
7-1
46

55(
 Procedure for C o m pu ta tion o f C apital G ain s 1.59
16. Following are the particulars of capital assets transferred during the year by Mr. ‘X ’.

Particulars S h a res o f Shares o f G o ld a n d R e sid en tia l H o u se h o ld

D L td E L td J e w e lle ry fl a t fu r n itu r e

Date of purchase 1.8.89 31.12.2016 1.8.1980 1.6.1992 30.6.2001

Cost of acquisition 13,956 30,000 50,000 1,04,668 50,000
C II 172 1024 100 223 426
Transfer Date 30.6.2016 1.2.2017 30.9.2016 31.7.2016 1.3.2017
Transfer
Consideration 2,40,000 1,80,000 11,40,000 i 6,00,000 30,000
Brokerage 2% 3% 5% 2%

Notes : l.C II for the year 2016-17= 1125

2. FMV of the Gold and Jewellery is Rs. 87,223

3. He has purchased a residential flat out of the transfer consideration o f old flat for Rs.
16,00,000
4. From the transfer consideration of shares ofD Ltd. Rs. 50,000 invested in specified
bonds
Compute taxable capital gain
[A its.: LTCG on D Ltd shares Rs. 93,918 (after exemption
u/s 54 EC Rs. 50,000; STCG on E Ltd. shares
1,44,600; LTCG on Gold and jewellery Rs. 1,01,742
LTCG on residential flat NIL.]
17. Kodand Ram inherited house property from his father on 30.6.1991, which was purchased on
30.6.1978 for Rs. 80,000. His father spent Rs. 40.000 on 1.4.1980 to repair the house. Kodand
Ram took an advance of Rs. 50,000 from Mr. ‘X’ on 1.6.1995 towards transfer consideration. But
Mr. ‘X’ could not pay the balance in time and the advance was forfeited by Kodand Ram. Later
during 1996-97 he spent Rs. 1,00,000 to add another floor to the building. On 30.9.2016 the above
property was finally sold for Rs. 18,60,000. Transfer expenses Rs. 60,000, FMV as on 1.4.1981 Rs.
250,000. Kodand deposits Rs. 400,000 in a public sector bank to acquire
another residential house. Compute taxable capital gain for the A.Y. 2017-18 (C1I for the year
1981-82= 100, 1991-92= 199, 1996-97 = 305,2016-17= 1125).
[Ans.: LTCG Rs. 300495 less exemption u/s 54 Rs.
359142; Taxable Capital gain RsNIL]
18. Avinash acquired a house property in Delhi on 4-1-1979 for Rs. 240,000. He forfeited Rs. 15,000
on the said asset on 21-10-1980. Avinash again forfeited Rs. 25,000 on the said asset on 16-7-1998. The
asset is finally sold by Avinash on 15-5-2015 for Rs.55,00,000. The Fair Market Value of the asset
as on 1-4-1981 is Rs. 5,00,000 compete the Capital Gain for the A.Y. 2016-2017.
B) What will be your answer if Rs. 25,000 is forfeited by the Avinash on 16-7-2016 instead o f 16-
7-1998 and the house property is sold on 12-8-2016 instead of 15-5-2015.
460000x1081 485000x1125
= 4972600 = 5456250
100 100
5500000 - 4972600 = 527400 5 5 0 0 0 0 0 - 5 4 5 6 2 5 0 = 43750

[A n s.: C1I of 2015-16 =1081; CII o f 2016-17= 1125]

(a) 527400, (b) 43750 (-)]
Forfeited amount on 16/07/2016 Rs. 25000 will be treated as income from other sources.
Income From Other
Sou rces
 General and Specific Incomes

‘Income from other sources’ is the fifth and last head of income under the Income Tax
Act, 1961. An income which does not specifically fall under the preceding first four
heads of income (viz. Income from salaries, Income from house property, profits and
gains of business or profession and capital gains) is to be included under this head. An
income may be charged under this head only as a matter of last resort i.e., after it has
been tested at each and found inappropriate for inclusion there under. In other words,
it is a residuary head.
The following are the tests to be applied for each head of income.

1. Income from Salary

An income that must be treated as income from salary should satisfy the master and
servant relationship between the employer and employee. For example, Mr. X is
working as a lecturer in a college. Income received from the college is included under
thehead—‘Income from salary’.
If Mr. X also works in another college as a part-time lecturer, remuneration
received by him is not a salary income. It is income from other sources as the master
and servant relationship is missing. In fact, it is a contractor and contractee relationship
that exists between the payer and receiver. Other examples of remuneration are given
hereunder and must be treated as income from other sources:
‘ 1. Income received by teachers / lecturers / professors for doing examination
related work i.e., paper setting, valuation.
2. Salary received by MPs, MLAs and opposition party leaders.

2. Income from House Property

Ifthe assessee is owner of a house property and lets out for rent, income earned by him
is income from House property. In this case the test is ownership of the house. On the
contrary, rent received by subletting the house to the sub-tenant is not an income from
House property but income from other sources.

3. Income from Business or Profession

Ifthe income is derived by an undertaking through any business activity, it is categorised
as business income. If income is derived by a doctor by running aclinic, it is an income
\
2.4 Income Tax—II (2017-18) Gener;

from profession. But if the doctor is employed in a hospital, then the income will to 5.
treated as salary income. 6.
7.
4. Income from Capital Gains
8.
Income derived by the sale or transfer of capital asset is included under the head capita 9.
gains. However, the following are not regarded as income from capital gains: 10.
1. Distribution of capital assets in kind of a HUF to its members at the timeo
partition.
11.
2. Distribution of capital assets-in-kind on the dissolution of a firm. 12.
3. Distribution of assets in kind by a company to its members on its liquidatioi 13.
The scheme of taxation of income under the head income from other source 14.
envisages the study of the following sections:
15.
1. Chargeability [Sec. 56]
16.
2. Chargeability of income in general [Sec. 56(1)]
17.
3. Chargeability of income under specific chargeability [Sec. 56(2).]
18.
4. Computation of Income :
19.
(/) Deductions [u/s 57]
(if) Amounts not deductible u/s 58
20. 1
(Hi) Deemed income u/s 59 21. t
(/v) Winning from lotteries u/s 115 BB. 22. I
23. I
CHARGEABILITY (Sec. 56)
24. h
If an income is to be included under income from other .sources, the followiij fi
conditions are to be satisfied: 25. P
1. There is an income. 26. Ir
2. The income is not exempt from tax under sections 10 to 13 A. 27. C
3. The income is neither salary income, nor house property income, nor inconl 28. ur
from business / profession nor capital gains which have already been discussj cc
in earlier chapters.
Howm
If the above three conditions are satisfied, income is taxable under section i
1. Ex
under the head ‘Income from Other Sources.’
Pr<
General Chargeability [56(1)] 2. Re
Income of every kind shall be chargeable to income tax under this head if it is n 3. Gr;
chargeable to income tax under any of the first four heads. The following incomesa thii
generally chargeable under the head, Income from Other Sources: 4. Rei
1. Royalties received.
Specific Ch
2. Director’s sitting fee for attending board meetings.
3. Salary or pension received from a foreign Government. Section 56(
imposes tax
4. Income from subletting of the premises taken on le^se
-II (2 0 1 7 - 1 8 ) General and S pe cific Inco m e s 2 .5

Dome w ill b e 5.Salary received by MPs, MLAs.

6.Examination remuneration received by teachers/lecturers/professors.
7.Ground rent received.
8.Interest on loan, saving banks or fixed deposits.
: head c a p it a l 9.Agricultural income received from Outside India.
tins:
10.Gratuitous payments received by a member of the family from a company in
it th e t i m e o f which the family had substantial interest.
11. Income from subletting the house property.
12. Director’s commission for underwriting shares of a new company.
s liq u id a tio n ,
13. Rent from a vacant piece of plot (land).
th er s o u r c e s ,
14. Insurance commission.
15. Casual incomes.
16. Annuity payable under a will, contract, trust deed.
17. Interest on securities issued by a foreign government.
•] 18. Family pension received by family members of a deceased employee.
19. In case of retirement, interest on employee’s contribution if provident fund is
unrecognised.
20. Income from undisclosed sources.
21. Annuity payable to the lender of a trade mark.
22. Income from markets, fisheries, rights of ferry.
23. Income received after discontinuance of business.
24. Income of a minor clubbed with income of parents (exemption upto Rs. 1,500
le f o llo w in g for each child).
25. Pension received from the government as freedom fighters.
26. Income from racing establishments.
27. Commission received (eg. Chit fund commission).
nor in c o m e 28. unexplained cash credit on the very first day of incorporation of the assessee
:en d is c u s s e d
company
However, the following incomes are not taxable under this head :
:r s e c tio n 5 6
1. Excess profits tax refunded by the Income Tax department was held to be
profit from business.
2. Remuneration received by a director in the capacity of an employee.
id i f it is n o t
3. Gratuity received by an employee not from the regular employer but from a
i in c o m e s a re
third party.
4. Remuneration received by a lawyer in the capacity of an official receiver.

Specific Chargeability [56(2)]

Section 56(1) as described above takes care of the incomes of residuary nature and
imposes tax on a variety of items as those amounts cpuld not be charged under the first
2.6 Inco m e Tax— II (2017-18) Gener

four specific heads. On the other hand, section 56(2) charges specified incomes only. | Excep
The following incomes are included under specific chargeabilty category.
Gift o
1. Income by way of interest on securities. cases
2. Deemed dividends under section 2 (22) (e) is taxable in the hands o 1.
shareholders. From the Assessment Year 2017-18 Section 115 BBDA has
2 .
been inserted. According to this section dividends from one or more domestic
com)ranies in excess of Rs. 10,00,000 is taxable at 10% (+ SC + EC+ SHEC) 3.
4.
3. Casual incomes like any winnings from lotteries, crossword puzzles, race;
including horse races, card games and other games of any sort or fron Mean
gambling or betting of any form or nature whatsoever.
1.
4. Income from machinery, plant or furniture let on hire if not charged to tas
2.
under the head ‘profits and gains of business of profession’.
3.
5. Any sum received by the assessee from his employees as contributions t«
4,
any Provident Fund or super annuation fund or any fund set up under the
provisions of the Employees’ State Insurance Act 1948 or any other fund fa 5
the welfare of such employees. 6
6. Any sum received under a keyman insurance policy including bonus if no 7,
taxable as salary or business income.
INTE
7. Any Gift or money received by an individual or an HUF in excess ol
Rs. 50,000 from unrelated persons is taxable [section 56 (2) (vi)[ w.eJ Incorr
Assessment year 2007-08. sourci
8. Any sum of money, the aggregate value of which exceeds Rs. 50,000 i what
u
received without consideration or property whether movable or immovabl;
by an individual or HUF on or after 1-10-2009,^if the amount of such gift of gener;
inadequate consideration exceeds Rs. 50,000 is taxable as income from other or Ce
sources U/s 56(2) (vii). until i
9. Any proprty being shares of a closely held company received without Cont<
consideration or for inadequaqte consideration by the firm or a closely hell
company if aggregate value of the amount of such gift exceeds Rs., 50,00® It cor
U/s 56(2) (vii). perioc
10. Excess consideration received for issue of shares by a closely held companj Who
to be treated as income of the receipient company U/s 56(2) (viib).
Secur
11. Income by way of interest received on compensation or on enhance*
1
compensation to be taxed in the year in which«uch interest is received (Financi
Act 2009, w.e.f. 1-4-2010). 50% of such interest is allowed as deduction u 2
s57(iv) an dthe remaining 50% is taxable. 3
12. Forfeiture of advance received for transfer of a Capital asset to be taxed und< 4
the head income from other sources w.e.f. A.Y. 2016-2017. 5

Interi
Accoi
 General and S pecific Incom es 2.7

Exceptions

Gift of money received by an individual or an HUF is not taxable in the following

cases :
1. Gift received from any relative.
2. Gift received on the marriage of the individual.
3. Gift received under a will or by inheritance.
4. Gift received in contemplation of death of the donor.

Meaning of ‘Relative’
1. Spouse of the individual.
2. Brother or sister of the individual.
3. Brother or sister of the spouse of the individual.
4. Brother or sister of father / mother of the individual.
5. Any lineal assendent or descendent of the individual.
6. Any lineal assendent or descendent of the spouse of the individual.
7. Spouse of the persons referred to in clause 2 to 6.

INTEREST ON SECURITIES [SEC. 56(2)(1D)]

Income by way of interest on securities is taxable under the head “Income from other
sources”, if the same is not taxable as business income under section 28. But then,
what is a security?
“A security is a document acknowledging the debt by a specific authority from
general public. It may be named as a Debt, Loan, Paper, Debenture, Bond, or Security
or Certificate. It is secured in some manner. A mere debt is not a security unless and
until it is secured.”

Contents o f Security
It contains face value of security, date of maturity rate of interest, date, place and
period of payment of interest.

Who can Issue a Security?

Securities may be issued by the following authorities:
1. The Centre'Government
2. State Government
3. Local Authority
4. Company
5. Statutory Corporation

Interest on Securities
According to Section 2 (28B) Interest on Securities means :
 Gene
2.8 Inco m e Tax— II (2017-18)

1
(a) Interest on security of the Central Government or State Government;
2
(b) Interest on debentures or other securities for money issued by or on behalf of
a local authority or a company or a corporation established by Central or State 3
or Provincial Act. 4
When an investor invests his money in the bonds issued by Government / Local 5
Authority/ Corporations or debentures issued by a Limited Company, the interest 6
received from them is considered as income from interest on securities. 7
8
TYPES OF SECURITIES
9
Securities are issued by Companies, Government—both Central and State. Local 10.
authorities are also eligible to raise funds by issuing securities. Following are the types] 11.
of securities which are currently in operation :
12.
(a) Securities issued by Central Government.
13.
(b) Securities issued by State Governments.
14.
(c) Debentures and bonds issued by local authority.
15.
(d) Debentures and bonds issued by corporations.
16.
. (e) Debentures issued by companies.
17.
From the tax point of view securities are classified into three types. They are:
18.
1. Securities which are exempted from tax,
2. Tax - free securities, and 19.
3. Less - tax securities. 20 .
Securities
21.
22 .
Securities which are Tax-free Less-Tax Securities
23.
Exempted from Tax Securities
24.

Government Commercial Government Commercial

Tax-Fr
r These <
Listed in Unlisted in Listed in Unlisted in
Governi
Stock Exchange Stock Exchange Stock Exchange Stock Exchangetax-free
person \
Securities Exempt from Tax to recei\
According to Section 10(15) interest on these securities is fully exempt from tax and authority
does not form part of total income of an assessee. In other words, it is not taken into interest
account in computing total income. Under section 10(15)(i) the Central Government before d
by notification specifies these securities, bonds etc. The following are the securities grossed
which are exempt from tax:
 1. 12 Year National Savings Annuity Certificates
2. National Defence Gold Bonds 1980
3. Special Bearer Bonds 1991
4. Treasury Savings Deposit Certificates
5. Post Office Cash Certificates (5 Years)
6. National Plan Certificates (10 Years)
7. National Plan Savings Certificates (12 Years)
8. Post Office National Savings Certificates (12 Years / 7 years)
9. Post Office Savings Bank (POSB) Account
10. Public Account of Post Office Savings Account Rules
11. Post Office CTD (Interest upto Rs. 5,000)
12. Fixed Deposit
13. Special Deposit Scheme 1981
14. Non-Resident Rupee Deposit Scheme
15. Interest on 7 per cent Capital Investment Bonds
16. Interest Received by a Non-Resident Indian from Notified Bonds
17. Interest on 9 per cent Relief Bonds
18. Interest Payable to any Foreign Bank Performing Central Bank functions
outside India
19. Interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999
20. Interest on Deposit made by retired Government Employee out of money due
to him on account of retirement for Lock-in period of 3 years.
21. Interest on Securities held by the Welfare Commission, Bhopal Gas Victims
Interest on notified bonds issued by a local authority / public sector enterprises
etc.
23. 10% Secured Redeemable NTPC Bonds 1986
24. 10% Secured Irredeemable Bonds issued by Mahanagar Telephone Nigam
1 Ltd. etc.
:rcial
Tax-Free Securities
"1 These securities are those which are issued by a local authority, corporations.
id in Government or company in the form of Debentures or Bonds. Actually these are not
lange tax-free. But tax is paid by the issuing authority on behalf of security holder. The
person who is holder of such security is liable to pay tax not only on the interest he is
toreceive but also the amount of tax which has been deposited by the security issuing
authority on his behalf. The amount of interest actually received by holder is the net
tax and
interest i.e., after deduction of tax at source. We must find out the Gross Interest, i.e.
ken into
before deduction of tax, to include it in the gross total income of assessee. It can be
ernment
crossed up by using the following formula:
ecurities
2.10 Inco m e Tax— II (2017-18)1 G e n e ra l and

Grossing up = Net interest received x — When fa

100-Rate of Tax (tax free), le;
up is requirec
Tax-free securities are of two types:
But in cat
1. Tax-free Government Securities, and
is given comp
2. Tax-free Commercial Securities.
When intt
Tax-free Government Securities (except tax fret
Grossing u;
These securities are no longer in existence. Even if these are issued, then no tax is
deducted at source. Hence the question of grossing up does not arise. (0 8% Sa\
10,000
Tax-free Commercial Securities (if) Tax free
As mentioned earlier, these securities are not actually tax-free. Tax is paid by the issuing (Hi) Less Tax
authority on behalf of the security holder. Security holder has to pay tax not only on
Grossing up Prot
the interest he receives but also on the amount of tax paid by the issuing authority on
his behalf. Hence, the amount received by the security holder is to be treated as net (a) If the tax free t
interest. It should be grossed up for inclusion in the total income.
The present rate of deduction in case of securities listed in the stock exchanges Gross interest =
is 10% plus education cess at 3% and in case of unlisted securities, also 10% plus
education cess 3%. There is no surcharge. For Government, Corporations and Local (b) If the tax free ct
authorities tax deduction rate is always 10%, plus Education cess of 3% on tax is
included. Rates of TDS are given in the following Table: Gross interest =

TDS Rates for A.Y 2017-18 (Individual, HUF,AOP, BOI (c) Students are alsc
Nature o f Income Rate commercial secui
1. Dividends education cess.
2. Interest on units of UTI
Illustration: 1
3. Bank interest if amount of
Mr. X invested Rs. 1,01
interest exceeds Rs. 5,000 10% (balance 90%)
taxable interest for the
4. Interest on securities issued by
(a) If securities art
(a) Central or State Govt. Nil
(b) If securities are
(b) Local authority or statutory corporation 10% (balance 90%)
(c) Company: Solution:
(i) Listed 10% (balance 90%) Net ini
(if) Unlisted 10% (balance 90%)
5. Winnings from lotteries: races, puzzles, Grossing up
card games 30% (balance 70%)
In case of listed tax-fi
Grossing up • • Gross inte
J
Interest received by the assessee is net interest and '
gross interest. This practice is known as grossing up.
 10 Inco m e Tax— (2017-18 General and Spei

When face v
Grossing up = Net interest received
100-Rate of Tax (tax free), less ta
up is required.
Tax-free securities are of two types:
But in case c
1. Tax-free Government Securities, and is given compuls
2. Tax-free Commercial Securities. When intere
Tax-free Government Securities (except tax free £
Grossing up
These securities are no longer in existence. Even if these are issued, then no tax is
(/) 8% Savi
deducted at source. Hence the question of grossing up does not arise.
10,000
Tax-free Commercial Securities (//) Tax free
As mentioned earlier, these securities are not actually tax-free. Tax is paid by the issuing (Hi) Less Tax
authority on behalf of the security holder. Security holder has to pay tax not only on
Grossing up Pro
the interest he receives but also on the amount of tax paid by the issuing authority on
his behalf. Hence, the amount received by the security holder is to be treated as net (a) If the tax free
interest. It should be grossed up for inclusion in the total income.
The present rate of deduction in case of securities listed in the stock exchanges Gross interesi
is 10% plus education cess at 3% and in case of unlisted securities, also 10% plus
(b) If the tax free
education cess 3%. There is no surcharge. For Government, Corporations and Local
authorities tax deduction rate is always 10%, plus Education cess of 3% on tax is
included. Rates of TDS are given in the following Table: Gross interesi

TDS Rates for A.Y 2017-18 (Individual, HUF, AOP, BOl (c) Students are
Nature o f Income Rate commercial s
1. Dividends education ces
2. Interest on units of UTI Illustration: 1
3. Bank interest if amount of
Mr. X invested Rs
interest exceeds Rs. 5,000 10% (balance 90%)
taxable interest foi
4. Interest on securities issued by
(a) Ifsecuriti
{a) Central or State Govt. Nil
(b) If securiti
(b) Local authority or statutory corporation 10% (balance 90%)
(c) Company: Solution:
(0 Listed 10% (balance 90%)
(it) Unlisted 10% (balance 90%)
5. Winnings from lotteries: races, puzzles,
Grossing up
card games 30% (balance 70%)
In cash of liste
Grossing up 4
.•k
Interest received by the assessee is net interest and the same is to be converted into I 1
gross interest. This practice is known as grossing up.
(2017-18) peneral and S pecific Incom es 2.11

When face value of securities and rate of interest is given for government securities
(tax free), less tax government securities, Less-tax commercial securities no grossing
up is required.
But in case of tax free commercial securities even if face value and rate of interest
isgiven compulsory grossing up shall be done.
When interest amount (net) is given in the problem, interest on all securities
(except tax free government securities) must be grossed up.
Grossing up is required in the case of the following securities:
no tax is
(0 8% Saving (Taxable) Bonds, if the amount of interest payable exceeds Rs.
10,000
(/7) Tax free commercial securities
ie issuing (/;/) Less Tax commercial securities.
t only on
Grossing up Procedure (Tax free Commercial Securities)
hority on
:ed as net (a) If the tax free commercial securities are listed in the stock exchange:(same rate)
100
xchanges Gross interest = Net Interest x -----
| 90
10% plus
(b) If the tax free commercial securities are unlisted in the stock exchange :
ind Local
on tax is 100
Gross interest = Net interest *

(c) Students are also advised to workout the problems using 90 Rate for tax free
commercial securities and 70 Rate for lottery and casual icnomes without using
education cess.

Illustration: 1 "* —
Mr. X invested Rs. 1,00,000 in 8% tax-free debentures of a company. What will be his
taxable interest for the previous year 2016-17:
{a) If securities are listed in the stock exchange.
(b) If securities are not listed in the stock exchange.

Solution:
Net interest = Face value of investment x Interest Rate
= 1,00,000 x 8% = Rs. 8,000.
j \
Grossing up
In cash of listed tax-free commercial securities:
n 100
ti Gross interest = Net interest x •
rted into -i 90
2.12 Inco m e Tax— II (2 0 1 7 -1 8 ) Gen

In case of unlisted Tax-free commercial securities: 4.

100
Gross interest = Net interest x
90
100 5.
= 8000 x ----- = Rs. 8,889
90
Less-Tax Securities
6.
This is the most common form of security. Out of the amount of interest due to security-
holder, tax has to be deducted by the issuing authority before making payment of
interest to the security holder. The interest received by the assessee is net interest and
the same is to be grossed up and is to be included in the total income. These securities | N o te

can be issued both by the Government and Commercial Authorities. (wit!

There can be two types of problems. They are:
DEI
(a) When rate of interest and face value of security is given (both in Government and |
Commercial securities) The
Rate 1.
Gross interest = Face value of the security x ------
100 In r
( b) When interest amount received is given interest received is ‘net’ interest and the by \
same is to be converted into gross interest. of s
invt
(i) For government and listed commercial securities:
100 Inte
Gross Interest = Net Interest x
90 inte
(ii) For unlisted commercial securities:
Gross Interest = Net Interest # - alio
Notes : 1. If the nature of the security is not mentioned in the problem, then the general Dec
assumption is that the security is of less-tax and unlisted nature.
2. 1
2. Grossing up should be done if the net interest is more than Rs. 2,500.
3. In the case of tax free Government security, interest need not be grossed up.
In t
Summary of Grossing up fun
Nature of Security Grossing up and
1. Tax free Govt. Security Interest received is gross interest, no 100 Illu
grossing up.
'X'
2. Tax-free Commercial security (listed) Grossing up should be done.
and
100
Gross interest = Net interest » inst
90
A .\
3. Tax-free Commercial security (unlisted) Grossing up should be done
100
Gross interest = Net interest * ■
"9 0 "
 General and S pecific Incom es 2.13

4. Less-Tax Government Grossing up should be done

Gross interest = Net interest x

90
5. Less-Tax Commercial (listed) Grossing up should be done
100
Gross interest = Net interest * -----
90
6. Less-Tax Commercial (unlisted) Grossing up should be done

Gross interest = Net interest * -----

___________________________ 90_
Sole: Listed and unlisted Tax free commercial securities are to be grossed up at 10.3% or 10%
(without education cess from the A.Y. 2012-13.

DEDUCTIONS (Sec. 57)

The following deductions are allowed in computing the income from other sources:
1. From interest on securities and dividends [ Sec. 57 (i)]
Inrespect of interest on securities and dividends any reasonable expenditure incurred
byway of commission or remuneration to broker or to any other person for realization
of such incomes is deductible and any interest on loan taken for purchase of such
investment is also allowed as deduction.
Broadly the amounts deductible can be classified into (a) Collection charges ( b)
Interest on loan taken to purchase the securities. Not only the interest paid but also
interest due is allowed as deduction.
However, commission paid to purchase or to sell the securities etc., is not
allowed as deduction u/s 57.
Deduction u/s 80L: No deduction u/s 80L is available from the A.Y. 2006-07.

2. Income derived from letting o f Machinery, Plant, Furniture and Buildings etc.
[Sec. 57 (ii)]
In respect of income earned by way of lease rental on letting of machinery, plant,
furniture with or without building, the following expenses are considered as reasonable
and allowed as deduction: (a) Repairs (b) Insurance (c) Depreciation.

Illustration: 2

'X' received rent from letting out plant and machinery amounting to Rs. 1,00,000
and claims the following expenses, depreciation Rs. 7,000; repairs Rs. 3,000; Fire
insurance Rs. 5,000. Compute his income from letting the plant and machinery for the
A.Y. 2017-18.
 -

2.14 Inco m e Tax— II (2017-18)1

Solution:
Computation of Mr. X's Income from Letting out Plant
and Machinery for the A.Y. 2017-18
Rs. Rs.
Rent Received 1,00,000

Less : Permissible deductions u/s 57(ii)

(/) Depreciation 7,000
(if) Repairs 3,000
(Hi) Fire insurance 5,000 15,000

Taxable Rent 85,000 1

Income by Way of Family Pension [57 (iia)]

Family pension means a regular monthly amount payable by the employer to a person]
belonging to the family of a deceased employee. After the death of an employee the
family pension received by the legal heirs of the deceased is treated as income fron
other sources.
Deduction: If the assessee is receiving the family pension, a standard deduction isf
allowed u/s 57(iia) which is least of the following two amounts:
(a) 1/3 of pension received; or
(b) Rs. 15,000.

Illustration: 3 *'
Mr. X is getting Rs. 3,000 p.m. family pension. Compute taxable family pension.

Solution:

Computation of Mr. X’s Income frer.. Family Pension

Rs. Rs. I
Amount of family pension 36,000
Less : Permissible deduction u/s 57(iia)
(0 1/3 of the amount of family pension 12,000
Or
(//) Rs. 15,000 whichever is less 15,000 12,000 I
Taxable amount of family pension 24,000 I

Casual Income: Casual income is any income which is produced by chance i.e,|
there it is a chance and equally not a chance of receiving such income.
 General and S pecific Incom es 2.15

Winning from Lotteries, Crossword puzzles, Horse races and

Card games etc. [Sec 56(2)(lb)]
Winningfrom lotteries, crossword puzzles, races including horse races, card games and
othergames of any sort or from gambling or betting of any form or nature whatsoever
istaxable under section 56 under the head income from other sources’.
Income from lottery winning, crossworld puzzle and horse race winning is subject
todeduction of tax at source. Tax at source is to be deducted when winnings exceed
Rs. 10,000. However, in the case of winnings from horse races, tax deducted at source
when the amount of winning exceeds Rs. 5,000.
In computing the taxable income from winning by way of lottery, crossword
puzzle, races including horse races, card games and other games, gambling and
betting etc., no deduction is allowed in respect of any expenditure incured in earning
such income. However, an assessee is entitled to claim deduction for any revenue
expenditure incurred in owning and maintaining race horses to be run in horse race on
which wagering or betting is lawfully allowed.
Computation of taxable income from different winnings is given below:

Income Winnings from lotteries, horse Winnings from owning and

race cross world puzzle, card maintaining horse races
games or gambling and participating in races.
betting etc.
Gross amount of
winnings XX XX
Less: Any No expenditure like purchase Revenue expenditure incurred
expenditure of lottery tickets etc. is is allowed.
incurred allowed - Nil XX

Taxable income XX XX

Only winning from lotteries, races, gambling etc., is chargeable to tax. If a receipt
is not winning then it is not taxable under section 56(2) (lb). By virtue of section 115
BBgross winnings from lotteries, crossword puzzles, races including horse races, card
games etc. are chargeable to income tax at aflat rate of 30% plus education cess at 3%
incase of individuals / HUF/ BOI / AOR Otherwise it is 30% + 3% Education cess.
Under section 194 B and 194 BB tax is deductible at 30% plus 3% education cess
on payments in respect of winnings from lotteries.
If the net amount received is given, then the net amount shall be grossed up to
find out the amount chargeable to tax. Suppose an assessee derives an amount of Rs.
10,00,000 from winnings from lottery or horse race. He may receive a net income of
Rs. 6,91,000 as shown below:
2.16 Inco m e Tax— II (2017-18) Gene

Rs. Rs.
Winnings from lottery or horse races 10,00,000 10,00,000
Less : Tax deducted at source 30% +
3% of 30 as education cess
Total Tax = 30.9% 3,09,000 3,00,000
6,91,000 7,00,000
If it is given that assessee received Rs. 6,91,000 (net) on account of winnings from
lotteries and horse races, then the net receipt shall be converted into gross amount I
using the following formula:
Solut,
Net
Gross Amount =
(1-0.30 + Education cess)

For the assessment year 2017-18, surcharge rates are given below :
domestic company :
- If net income does not exceed Rs. 1 crore
- If net income exceeds Rs. 1 crore but does not exceed Rs. 10 Crore
- If net income exceeds Rs. 10 Crore
Foreign company : Loss 1
- If net income does not exceeds Rs. 1 Crore
- If net income exceeds Rs. 1 Crore but does not exceeds Rs. 10 crore Incon
- If net income exceeds Rs. 10 Crore
- if an individual or HUF more exceeds Rs. one crore
For the A.Y. 2017-18, education cess 3% of tax and surcharge shall be levied.
Note :
1
Illustration : 4 #'
X received Rs. 1,00,000 from lottery. Calculate net amount.

Solution
Rs.
Lottery amount 1.00,008
TDS at 30 per cent 30.008
Net Amount with educational cess 70.0

If it is given that X receives Rs. 70,000 on account of lottery, then net receipt shal
be converted into gross amount by using the following formula :
100
Net Amount x
70

100
= Rs. 70000 x -----= Rs. 1,00,000
70
 General and S pe cific Incom es 2.17

Illustration : 5
Mr. Pandey submits the following information:
Horse races stake money earned from Hyderabad Rs. 1,00,000
from Bangalore Rs. 5,00,000
Expenses on horses race at Hyderabad Rs. 2,00,000
at Bangalore Rs. 6,00,000
Received Rs. 140000 on betting horse races at Hyderabad. Compute his taxable
income*.

Solution:
Computation of Mr. Pandey’s Income from Other Sources
Rs. Rs.
Income from maintenance of horse races from Hyderabad 1,00,000
from Bangalore 5,00,000 6,00,000
Less: Expenses
At Hyderabad 2,00,000
At Bangalore 6,00,000 8,00,000
Loss from maintenance of horse races to be carried forward 2,00,000
Income from betting from horse races
100.
(Amount received Rs. 140000 * 2,00.000

Note : Loss from maintenance of horse races cannot be set off out of the winnings from races.
However, loss from maintenance of horse races is allowed to carry forward upto 4 years.

Deductions in respect of Other Incomes u/s 57 (ii)

Deductions under this section will be allowed only if the following conditions are
satisfied:
(a) The expenditure is laid out wholly and exclusively for the purpose of earning
such income. If the purpose of earning income is coupled with some other
extraneous purp^se. It will not be possible to say that the deduction u/s 57(iii)
is earneu by the assessee.
(,b) It is not in the nature of capital expenditure.
(c) It is not a personal expenditure.
(id) It is incurred in the accounting year itself and not in any prior or subsequent
year.

Amounts not Deductible u/s 58

The following amounts shall not be deducted in computing income chargeable under
the head ‘income from other sources’:
1. Personal expenses,
2. Wealth tax,
2.18 Income Tax— II (2017-18) General an

3.
which income tax has not been paid or deducted at source, Gro:
4. Any payment which is chargeable under the head salaries if it is pa
4. Intere:
outside India unless tax has been paid thereon or deducted therefrom at source,
5. Intere:
and
6. Intere:
5. 7. 8% sa
exceei

be allowed as deduction. Less :

Deemed Income (Sec 59)

course of assessment and when the accounts are kept on mercantile system the assess©
claims certain expenses and gets them admitted. But at the time of payment if the
assessee is able to get some concession, this implies the negation of certain expenses While
admitted earlier. By deemed provision of section 59, the concession so enjoyed by the points shot
assessee at the time of payment will be treated as income of the year when concession 1. Gr
is enjoyed. The following are treated as incomes under this section : SO'

(a) Under payment of allowed expenditure 2. Ar

( b) Recovery of loss 3. Ini
(c) Remission or cessation of trading liability. 4. Ge
In brief, any amount received or benefit derived in respect of expenditure incurred 5. Ini
or loss or trading liability allowed as deduction shall be deemed as income of the year the
in which the amount is received or the benefit is accrued. 6. Di
Computation of Income from Interest on securities under the head ‘income from other on
sources’ for the assessment year 2017-18 is done as shown below: 7. Int
Rs. the
1. Interest on tax-free Government securities XXX Interes
1. Se
Interest Rate
Face value of security x . 2. Int
100
3. Int
Interest on tax-free commercial securities (listed) 4. Int
Interest Rate 5. Int
Net interest = Face value x ■
100 6. Di
Interesi
100
Gross interest = Net interest x 1. Lo
90 2. An
3. Interest on tax-free commercial securities (unlisted) XX X pui
Interest Rate HI
Net interest = Face value x ■
100 3. Tri
(2017- 18)
General and S pecific Incom es 2.19
a and from
Gross interest = Net interest x 122.
90
is payable
at source. 4. Interest on less-tax Government securities xxx
5. Interest on less-tax Commercial securities (listed) xxx
6. Interest on less-tax Commercial securities (unlisted) xxx
ries, cross 7. 8% saving (Taxable bonds if the amount of interest payable xxx
etting etc. exceeds Rs. 10,000)
trses shall Gross interest xxxx
Less : Deductions u/s 57:
1. Collection charges xxx

They are 2. Interest paid on loan taken to purchase the securities XXX xxx
tiring the Income from interest on securities xxxx
iassessee
:nt if the
expenses While computing the income from interest on securities, the following important
ed by the points should be considered:
ticession 1. Gross interest is included in the computation (Net interest + Tax deduction at
source = Gross interest)
2. Arrears of interest received is taxable in the year of receipt, if not taxed earlier.
3. Interest accrues on the due date but not according to the time.
4. Generally interest is paid half yearly.
incurred 5. Interest is always calculated on the face value and not on the book value or on
the year the market value.
6. During the previous year if any security is sold or purchased, calculate interest
>mother on those securities for half yearly basis only.
7. Interest on loan taken for purchasing the securities must be calculated from
is. the date of taking the loan to 31 st March of the relevant previous year.
XX Interest on the following securities does not come under this head :
1. Securities issued by foreign governments.
2. Interest on Loan.
3. Interest on trade transactions.
4. Interest on Annuity deposits.
5. Interest on deposits issued by Clubs, Trusts and Cooperative societies.
6. Dividends on equity and preference shares.
Interest received by the following persons is not taxable:
1. Local Authorities (Municipal corporations, Panchayats, etc.)
2. Any authority constituted by the Government under statute or law for the
purpose of development of city or for Housing accommodation etc. (e.g.,
HUDA).
3. Trustees of Educational Institutions including Universities.
2.20 Income Tax—11(2017-18) General

4. Statutory provident fund, recognised provident fund and an approved super On

annuation fund. taxable i
5. Members of Schedule Tribes living in tribal area. 64.000 £
6. Registered trade unions.
Solatiai
7. Approved sports associations.
8. Charitable institutions, etc.

Illustration : 6
Sharma held the following investments: 1,00,000
(a) Rs. 90,000 - 10% (Tax-free) debentures of listed company 40.000
( b) Rs. 50,000 - 12% (Tax-free) Punjab Government Loan 25.000
(c) Collection charges Rs. 2,000.
Less : D
Compute his income from interest on securities for the year ending 31-3-2017. |

Solution: A dd : In

Computation of Mr. Sharma’s Income from Interest on

Securities for the Assessment Year 2017-18
Illustra
Rs.
Mr. Bh:
Rs. 90,000 - 10% (Tax free) Debentures (listed) 10.000
Rs. 80.0
Rs. 9,000 x 100
Rs. 90,000 x 10%:
90
Rs. 90,C
(b ) Rs. 50,000 - 12% (Tax free) Punjab Government Loan:
Rs. 50,000 x 12%= Rs. 6,000 * ’’ 6,000
Rs. 85.C
Gross Interest 16.000
Less : Deductions u/s 57 On
Collection charges 2,000 the sale
Income from interest on securities 14,000 he rece
taxable
income
W orking N o tes
1. Tax-free Commercial securities must be grossed up. Rs. 2.0'
2. Tax-free Government securities should not be grossed up because there is no TDS on a securil
issued by Central or State Government securities. Solatia

Illustration : 7
Mr. Anil holds the following securities on April 1,2016 :
Rs. 1,00,000 - 5% Up Government Loan (Date of payment of interest: January 1) j
Rs. 40,000 - 6% Unlisted debentures of ABC Ltd. (Date of payment of interest 80.000
June 1) 90.000
85.000
Rs. 25,000- 8% Debentures of Z Ltd. (Date of payment of interest: June 30, December 31
N et inti
 General and S pe cific Incom es 2.21

On December 1, 2016 he sells 25,000 - 8% debenture of Z Ltd. Calculate the

taxable income of Mr. Anil for the Assessment Year 2017-18. Business Income is Rs.
64,000 and Collection charges Rs. 1,000.

Solution:

Computation of Mr. Anil’s Income from Other

Sources for the Assessment Year 2017-18

Rs.
1,00,000 - 5% Up Government Loan 5,000
40,000 - 6% Debentures of ABC Ltd. 2,400
25,000 - 8% Debentures of Z Ltd. (Rs. 2000 * 1/2) 1,000
Gross Interest 8,400
Less: Deductions : Collection charges 1,000
Interest on securities 7,400
Add: Income from Business 64,000
Net Taxable Income 71,400

Illustration : 8
Mr. Bhargava holds the following securities on 1st of April, 2016:

Rs. 80,000 - 7% Securities of Gujarat Government (Date of payment of interest:

December, 16)

Rs. 90,000 - 9% Securities of MP Government (Date of interest: March 31 st)

Rs. 85.000 - 6% Debentures of ABC Ltd. (Date of interest: July 16)

8 I On August 3, 2016 he sells Rs. 30,000 - 6% debentures of ABC Ltd. and invests
[ the sale proceeds in listed debentures of PQR Ltd. During the previous year 2016-17
he receives Rs.5,760 (net) as interest on listed debentures of PQR Ltd. Calculate the
taxable income of Mr. Bhargava for the Assessment Year 2017-18, assuming that his
! income from salary is Rs. 1,00,000 (after deduction u/s 16) and collection charges are
| Rs. 2,000.

Solution:

Computation of Mr. Bhargava’s Income from Other Sources

for the Assessment Year 2017-18
Rs.
80.000 - 7% Gujarat Government securities 5,600
90.000 - 9% MP Government securities 8,100
85.000 - 6% Debentures of ABC Ltd. 5,100
Net interest from PQR Ltd. (Interest taken for full year)
2.22 Inco m e Tax— II (2017-1!
Genei

100 6,400 N o tes

Rs. 5,760 x -------
90
Gross interest
Less : Deduction u/s 57 : Collection charges 2,00
income from other sources 23,20i
Add : Salary income 1,00,00
Net Taxable Income
1,23,20'
SI
No.
Note : Only part of ABC debentures are sold. Half year interest is not considered.
1.
Illustration : 9
2.
The following are the incomes received by Mr. Sudhakar during the previous year
Compute his total income:
(a) Rs. 4,500 interest on the Government of India Defence Certificates. 3.
Cb) Rs. 6,500 interest on the tax free Indian Government Securities.
(c) R£a3,600 interest Tax free debentures (listed in Hyderabad Stock Exchange)
Ltd. Company. 4.
(d) Rs. 4,500 interest on tax free debentures of a Coal Company (unlisted). 5.
(e) Rs. 900 interest on Bihar Government Loan (less tax).
(/) Rs. 4,500 interest on debentures of a steel company (listed) (less tax)
(g ) Rs. 4,500 interest on debentures of a leasing company (unlisted) (less tax).
The bank realised the interest on all these securities for which it charges 2.5%a
the amount collected. Interest is payable on 31st March and 30th September.

Solution:
N ote: I

Computation of Mr. Sudhakar’s Income from Other

D IV I
Sources for the Assessment Year 2017-18
Any i
Rs.
chargi
1. Interest on tax free Government securities 6,500
2. Interest on tax free deductions of a Ltd. Company (listed) 43 D
3. Interest on tax free debentures of a Coal Company (unlisted) 5.000 to his
4. Interest on Bihar Government Loan 900the pr
currer
5. Interest on debentures of Steel Company (listed) (less tax) 5.000
provu
6. Interest on debentures of Leasing Company (unlisted) (less tax) 53
of gut
Gross Interest 26,400
D
Less : Deductions under Section 57
unless
Collection charges : Rs. 24,500 x 2.5 % 612 fact w
Income from interest on securities 25: tax fre
 General and Specific Incomes _______________ 2.23

Sties: 1. Interest on Government of India Defence Certificate is fully exempted.

2. When interest amounts are given in the problem, net interest and gross interest should
be calculated in separate columns so as to calculate collection charges on net interest
collected by the bank.
3. If interest received is less than Rs. 2,500, grossing up is not required.
4. Collection charges: Net interest x given rate = 24,500 x 2.5% = 612

Computation of Net interest and Gross interest

Name o f the Type o f security N et G rossing up G ross

security Interest interest

Tax free Indian Tax free Govt. Rs. Rs.

security Government 6,500 - 6.500
Tax free debentures Tax free
3,600 x 100
of a Ltd. Company commercial listed 3,600 4,000
90

Tax free debentures Tax free

of Coal Company commercial (unlisted) 4,500 4,500 x 100 5.000
90
Bihar Govt. Loan Less tax Govt. 900 900
Debentures of a Steel Less tax
4,500 x 100

A
t>.
Company

Debentures of a
commercial listed

Less tax
4,500 90 5,000

le a sin g company
4,500 x 100
commercial unlisted 4,500 5,000
90
24,500 26,400

Hat: leasing company unlisted securities are grossing up at 10%.

DIVIDENDS

Rs. ■to) dividend declared, distributed or paid by a company to its shareholders is

b.5W Kchargeable to tax under the head ‘income from other sources’:
4.000 Dividend means the amount paid to or received by a shareholder in proportion
5.000 Ikis shareholding in a company out of the total sum so distributed. According to
900 ■provisions of the Companies Act. 1956, a company can pay dividends out of the
5.000 ■Bent year's profits, undistributed profits of the previous accounting year and money
^Hkled by the Central Govt, or State Govt, for the payment of dividend in pursuance

I
5.000
Hjtointee given by the Government.
>6,400

612
25.788 Dividend income is chargeable to tax under the head ‘income from other sources’
■ b it is exempt from tax. Further, dividend income is taxable irrespective of the
i fetwhether it is paid in cash or kind or in whether it is paid out of taxable income or
B fee income.
2.24 Inco m e Tax— II (2017-18) G en eral a n d S p e c ific Incom es

Deemed Dividends Other Points

Section 2 (22) gives definition of deemed dividend which is chargeable to tax under the I Apart from what is discussed earlier, the fo
head ‘income from other sources’ even if the receipt is not regarded as dividend under ■ while computing the dividends income:
the Companies Act. The following are the deemed dividends under Section 2 (22). 1. Entire dividend income is chargeable
(a) Any distribution entailing the release of company’s assets. dividend out of exempted incomes,
(b) Any distribution of debentures, debentures stock, deposit certificates and bonus ■ 2. Dividend paid by an Indian Company
to preference shareholders. 3. A shareholder does not get any credi
(c) Distribution on liquidation of a company. income, and
(d) Distribution on reduction of capital. 4. Dividend is paid by the company to
(e) Any payment by way of loan or advance by a closely held company to aI register of members. Receipient share
shareholder holding substantial interest. the entire dividend income.
Tax treatment of dividend in the hands of shareholders is described under the!
Bond Washing Transactions (Section 94)
following sub-heads:
(a) Dividends received from a domestic company. A bond washing transaction is one where an z
( b) Dividends received from a non-domestic company. relatives before the due date and buys them b
this transaction is evasion of tax. To check this
(c) Dividends received from Unit Trust of India.
tax authorities to include interest in respect ol
(d) Dividends received from a Foreign company. income of the transferer.
Dividend Received from a Domestic Company is liable to pay devidend distribution I
Illustration : 10
tax at 15% plus surcharge at 10% and education cess at 3%
If dividends are declared, distributed or paid during June 1, 1997 and March 31, 2002B Mr. Mani, a resident individual, submits the fol
or after March 31,2003, then it is not taxable in the hands of shareholders under Section! previous year ending March 31, 2017:
10(34). On such dividends, the company declaring the dividend will pay dividend tax* 1. Dividends Income
under sections 115-0. Tax will not be deducted at source under section 194, 195, 196CB (/') A Ltd. (a Foreign Company) Rs. 1,7(
or 196D. The rate of tax on dividends payable by the domestic company for the A.Y.I the shares in A Ltd. Rs. 10,000.
2013-14 shall be 15.% plus srucharge at 10% plus education cess at 3%. 00 B Ltd. (a Foreign Company) Rs. 1,4:
If a loan or advance is given which is deemed as dividend under Section 2(22)B the shares in B Ltd. Rs. 50,000.
(e) then such loan or advance is taxable under section 56 as dividend in the hands of! (Hi) C Ltd. (an Indian Company) (u/s 2
receipient. Rs. 1,48,000, and interest paid on
2. Rent from letting a factory along wi
Dividend received from a Non-domestic Company
Collection charges in respect of rent 1
The exemption under Section 10(34) is not available if dividend is received from a! 6,000, Repairs Rs. 5,000, Depreciation
company other than a domestic company and consequently, such dividend is chargeable* 3. Winnings from lottery on December 1,
to tax in the hands of recipient.
* 4. Winning from card games Rs. 13,5
Dividends or any other Income Received from Unit Trust of India Government of Japan Gross Rs. 20,90(
Compute the income from other source
With effect from assessment year 2000-2001 any income including dividends!
distributed by UTI shall also be exempt under Sec. 10(23) in the hands of unit holders.!

Dividends Received from a Foreign Company

Dividends of foreign company or deemed dividend mentioned u/s 2(22)(e) shall*
however, be taxable under the head ‘income from other sources’.
a x - l I (2 0 1 7 -1 8 ) General and S p e cific Incom es 2.25

Other Points
to tax under the Apart from what is discussed earlier, the following points require special attention
dividend under while computing the dividends income:
tion 2 (22). 1. Entire dividend income is chargeable to tax even if the company has declared
dividend out of exempted incomes,
ates and bonus 2. Dividend paid by an Indian Company is deemed to accrue or arise in India,
3. A shareholder does not get any credit for the tax paid by the company on its
income, and
4. Dividend is paid by the company to a member whose name appears on the
company to a register of members. Receipient shareholder is, therefore, liable to pay tax on
the entire dividend income.
ted under the
Bond Washing Transactions (Section 94)
Abond washing transaction is one where an assessee sells securities to his friends or
relatives before the due date and buys them back after the due date. The objective of
this transaction is evasion of tax. To check this practice, the Act empowers the income
tax authorities to include interest in respect of bond washing transactions in the total
income of the transferer.
distribution
Illustration : 10

•ch 31, 2002 Mr. Mani, a resident individual, submits the following particulars of his income for the
ider Section previous year ending March 31, 2017:
iividend tax 1. Dividends Income t
,195, 196C (J) ALtd. (a Foreign Company) Rs. 1,70,000; Interest paid on loan for purchasing
for the A.Y. the shares in ALtd. Rs. 10,000.
(») B Ltd. (a Foreign Company) Rs. 1,43,000; Interest paid on loan for purchasing
ction 2(22) the shares in B Ltd. Rs. 50,000.
ie hands of (Hi) C Ltd. (an Indian Company) (u/s 2(22)(e) TDS Rs. 12,000)., net dividends
Rs. 1,48,000, and interest paid on these transactions Rs. 11,000.
2 . Rent from letting a factory along with plant and machinery Rs. 1,30,600.
Collection charges in respect of rent Rs. 4,000; Fire insurance premium Rs.
'ed from a 6,000, Repairs Rs. 5,000, Depreciation Rs. 18,000.
chargeable 3. Winnings from lottery on December 1, 2016 : Net Amount Rs. 70,000.
'4 . Winning from card games Rs. 13,500; Interest on securities issued by
Government of Japan Gross Rs. 20,900.
Compute the income from other sources for the Assessment Year 2017-18.
dividends
it holders.
2.26 Inco m e Tax— II (2017-18)1

Solution:
Computation of Mani’s Income from Other
Sources for the Assessment Year 2017-18

Rs. Rs. Rs.

I. Dividends
1. A Ltd. (Foreign company) 1,70,000
2. B Ltd. (Foreign company) 1,43,000
3. C Ltd. (Rs. 12,000 + Rs. 1,48,000) (Indian company
u/s 2(22) (e) 1,60,000
4,73,000
Less : Interest on Loan (Rs. 10,000 +Rs 50,000 +Rs. 11.000)
71,000 4,02,000
II. Rent Received 1,30,600 Illu
Less : Expenses : Collection charges 4,000
Mr.
Fire insurance premium 6,000
31-3
Repairs 5,000
Depreciation 18,000 33,000 97,600 1
HI. (0 Winning from lottery : Ks- fU,UUUx iuu 1,00,000 2
(/'/) Winning from card games 13,500- 1,13,500 3
IV. Interest on securities of Foreign Government 20,900 4.
5.
Income from Other Sources
6,34,000 6.
7.
8.
( QUESTIONS ) 9.
In July, 1
1. What is meant by income from other sources? Give ten examples o f incomes chargeable to tax
45,000.1
under this head.
his fathei
2. Define dividend. Discuss chargeability of different types of dividend.
Decembei
3. Discuss the provisions relating to taxation of ‘winning from lotteries’.
4. Explain the scope of the term dividend under the Income Tax Act. (a) C
5. Enumerate the deductions allowable in computing income under the head ‘income from other ( b) Pi
sources’. Compute hi
Discuss the chargeability o f income from interest on securities.
List out the different types o f income specifically mentioned as chargeable to tax under the Solution:
head income from other sources.
Give 10 examples o f incomes that are taxable under the head income from other sources.
Discuss the amounts that are not deductible under the head income from other sources.
10. What are the diffemt kinds of securities?
1. Dividen
11. Explain the provisions regarding deduction of tax at source out of winning from cross word
puzzles. 2. Examina
12. What is grossing up of interest? 3. Royalty
13. What are bond washing transactions? 4. Winning
 Problems on Computation of Income
from Other Sources

Illustration : 1
Mr. Saxena has the following investments and incomes for the previous year ended
31-3-2017
1. Dividends from a Company (gross) Rs. 7,800
2. Examination remuneration Rs. 2,000
3. Royalty by publication of a book Rs. 48,000
4. Winning from lottery (net) Rs. 28,000
5. Rs. 40,000 - 10% Debentures of a company (listed)
6. Rs. 40,000 - 12% Tax free Punjab Govt, securities
7. Rs. 50,000 - 13% Less tax commercial securities
8. Rs. 40,000 - 10% Tax free debentures of a company
9. Rs. 3,600 as interest on tax free debentures (not listed)
In July, 2016, he sold the above Rs. 40,000 tax free debentures of a company for Rs.
45,000. In August, 2016, he inherited 60,000 - 15% preference shares of Z Ltd. from
his father. Interest and dividend on the above securities fall due on June 30th and
December 31 st of every year. He claims the following deductions :
{a) Collection charges at 2% of gross income.
(b) Purchase of lottery ticke.ts Rs. 2,000.
Compute his taxable income from other sources.

Solution:
Computation of Mr. Saxena’s Income from Other Sources
for the Assessment Year 2017-18

1. Dividend exempt
2. Examination Remuneration 2,000
3. Royalty 48,000
4. Winning from a lottery
2.28 Inco m e Tax— II (2017-18)

5. 10% Debentures Rs. 40,000 4,000

6. 12% Tax free Punjab Govt, securities of Rs. 40,000 4,800
7. 13% Less tax commercial securities of Rs. 50,000 6,500
8. 10% Tax free debentures of a company Rs. 40,000 x 10% = 4,000
Rs. 4,000 x 100 1
2,222
90 X2
9. Rs. 3,600 as interest on tax free debentures not listed :
Rs. 3,600 x 100
4,000
90
10. 15% Preference shares of Rs. 60,000 exempt
Gross Income 1,11,522
Less : Deduction u/s. 57 - Collection charges 2% of Gross Income 2,230
Income from other Sources 1,09,292
------------
Notes : (i) No deduction is allowed in respect of purchase of lottery tickets,
(ii) Tax free debentures not listed is grossed upto 10%.
Illustration : 2
Compute income from other sources of Mr. Shyam who held the following investments!
during the previous year 2016-17.
(0 Rs. 10,000 - 10% Maharastra Government Loan.
(if) Rs. 36,000 - 10% Tax Free commercial securities
(Hi) Rs. 6,300 received as interest on Tax Free Public Ltd. Company’s securities!
(listed)
(iv) Rs. 4,500 received as interest on Debentures of Nagarjuna Fertilisers (listed)l
(v) Rs. 30,000 - 13.5% securities of Paper Mill Co. (listed).
(vi) Rs. 12,000 - 15% Jaipur Municipal Corporation Bonds.
(vn) Dividend from Carona Ltd. Rs. 4,000.
(viii) During the year he also got a prize of Karnataka State Lottery. The net amountl
received by him was Rs. 42,000. Interest on all securities is payable on 1st July!
and 1st January every year. Bank charged Rs. 1,000 as collection charges, j

Solution:
Computation of Mr. Shyam’s Income from Other Sources
for the Assessment Year 2017-18
Rs. Rs
Interest on securities
Rs. 10,000 - 10% Maharastra Govt. Loan 1,000
Rs. 36,000 - 10% (Tax free) commercial securities
Rs. 36,000 x 10 Rs. 36,000 x 100
4,000
100 90
Income Tax— II (20 17 -18) Problems on C o m p u ta tio n o f Inco m e from O th e r S ou rces 2.29
4,000 Interest received on tax free commercial securities
4,800
... ,, Rs. 6300 x 100 7,000
6,500 (listed)
90
4,000 Interest received on debentures of Nagarjuna
2,222 100
Fertilizers Ltd. (listed) = Rs. 4,500 x ---- 5,000
90
Rs. 30,000 - 13.5% Securities of Paper Mill Co. (listed)
4.000 (no grossing up is needed) 4,050
Rs. 12,000 - 15% Jaipur Municipal Corporation Bonds
exempt (no grossing up is needed) 1,800
1,11,522 22,850
ae 2,230 i 11. Dividends Income
1,09,292 Dividends from Carona Ltd. exempt
1111. Winning from Lotteries
Net prize is given, hence it should be grossed up:
100
43,000 x ---- 60,000
70
>wing investments ’ 82,850
Less : Deduction u/s. 57: Collection charges 1,000
Income from other Sources 81,850

many’s securities Illustration : 3

Mr. Sivalal had the following investments in the pervious year 2016-17:
tilisers (listed) (0 Rs. 11,000 - 10% Karnataka Government Loan
(ii) Rs. 30,000 - 13.5% Debentures ofTISCo. Ltd. (listed)
(iii) Rs. 35,000 - 11% Securities of Andhra Sugars Ltd. (unlisted)
(iv) Rs. 31,600 - 10% Tax free commercial securities
e net amount (v) Rs. 3,580 Received as interest on Tamilnadu Government securities
e on 1st July (vi) Rs. 3,555 Received as interest on the securities of Jute Mills (unlisted)
charges. (vi7) Rs. 4,475 Received as interest on securities of Textiles Ltd. (unlisted).
During the previous year 2016-17, he purchased Rs. 50,000 - 7% Capital Investment
Bonds on 1st October, 2016. For this purpose he borrowed Rs. 30,000 from bank at 15% p.a.
Interest on all securities is payable on 30th June and 31st December. The bank charged 2%
commission on net realisation of interest as collection charges. He was also a Director in a
Rs. company and he received Rs. 3,000 as director’s fee. His other incomes are:
(a) Winning from lottery Rs. 25,000 (Gross)
(b) Income from Agriculture in Srilanka Rs. 10,000
(c) Winning from horse races Rs. 15,000
(d) Interest on Post Office Savings Bank Account Rs. 2,000.
Find out his taxable income from other sources for the assessment year 2017-18.
2.30 Inco m e Tax— II (2017-18)

S o lu tio n :

Computation of Mr. Sivalal’s Income from Interest on Securities for the Assessment
Year 2017-18

Rs. Rs. Rs.

TDS Net Gross
Rs. 11,000 - 10% Karnataka Govt. Loan 1,100 1,100
Rs. 30,000 - 13.5% Listed debentures
of TISCo. 405 3645 4,050
Rs.35,000 - 11% Andhra Sugars (unlisted) 385 3465 3,850
Rs.31,600 - 10% Tax free commercial(unlisted) 316 2,844 3,160
Interest on Govt, securities 3,580 3,580
Interest on unlisted securities of Jute Mills 395 3555 3,950
Interest on unlisted Textile Ltd. 497 4475 4,972
Rs. 50,000 - 7% Capital Investment Bonds

Less: Deduction : Collection charges 2% of Rs. 22664 1998 22664 24,662

453
Total Income from Securities 24,209

Mr. Sivalals’ Income from Other Sources for

the Assessment Year 2017-18

General incomes u/s 56(1): Rs. Rs.

Director’s fee 3,000
Income from Agriculture in Srilanka 10,000
Interest on Post Office Savings Bank Account exempt 13,000
Specific incomes u/s 56(2):
Winning from Horse Races 15,000
Winning from Lottery 25,000 40,000
Interest on securities (as shown above) 24209
Income from other Sources 77,209

Illu s tr a tio n : 4

Mr. Shasanka had the following investments on 1st April 2016:

(i) Rs. 40,000 - 12% Central Govt. Loan
(//) Rs. 30,000 - 10% Government securities
(Hi) Rs. 20,000 - 9% Preference shares of Paper Mill Company
(iv) Rs. 50,000 - 10% Bombay Port Trust Bonds
(I) Rs. 20,000 - 11% Debentures of a Ltd. Company (unlisted)
(v/) Rs. 10,000 - 10% Securities issued by Govt, of England
(vii) Rs. 10,000 - 10% 10-year National Plan Certificates
 Problems on C o m p u ta tio n o f Inco m e from O th e r S ou rces 2.31
’-18)
(viii) Rs. 20,000 - 14% Municipal Debentures
(ix) Interest accrued on NSC VIII issue purchased on 11-3-12 : Rs. 1,130.
T;en! (x) Rs. 15800 - 10% (Tax free) Debentures of a Ltd. Company (unlisted).
On 1st September, 2016, he bought 50,000, 12% Maharastra Government Bonds
for Rs. 60,000, the interest on which is payable on 30th June and 31st December. For
this purpose he took a loan of Rs. 40,000 from his bankers at 15% p.a. and the balance
of Rs. 20,000 were financed out of previous loan taken for purchase of a motor car
at 9% p.a. Bank charged 2% on interest and dividends as collection charges and 3%
commission on purchase of securities. Compute his income from other sources.

Solution:
Computation of Mr. Shasanka’s Income from Other
Sources for the Assessment Year 2017-18

Rs. Rs.
1. Interest on securities
40,000 - 12% Central Government Loan 4,800
30,000 - 10% Government securities 3,000
50,000 - 10% Bombay Port Trust Bonds 5,000
20,000 - 11% Debentures of Ltd. Company (unlisted) 2,200
(No grossing up)
20,000 - 14% Municipal Debentures 2,800
Interest accrued on NSC VIII issue 1,130
15800 - 10% (Tax free) Debentures of Ltd. Company
Rs.
100 1756
unlisted) Rs. 15,800 x 10%= Rs. 1580 x -----
90
13.000
50,000 - 12% Maharastra Government Bonds
1 3,000
40.000 Half yearly) Rs. 50,000 x 12%= Rs. 6,000 x —
24209 11. Dividends
23,686

77,209 20,000 - 9% Preference shares of Paper Mill Company exempt

111. Interest
10,000 - 10% Securities issued by Govt, of England 1,000
Total 24,686
less:Deductions : U/s 57
(a) Collection charges at 2% on interest & dividend
24,686- 1,130 = 23,556 x 2% 471

ih) 15 x —7
w Interest on money borrowed : Rs. 40,000 x -----
100 12 3,500 3,971

| Income from other Sources 20,715

2.32 Incom e Tax— II (2017-18)

Notes: 1. Commission on purchase of securities shall not be allowed as deduction as it is a

capital expenditure.
2. Interest on money borrowed for some other purpose shall not be allowed as deduction
out of interest on securities.
3. No collection charges on interest accrued on NSC VIII issue.
4. Interest on tax free commercial securities only is to be grossed up.
5. Interest on loan taken for purchase of securities shall be calculated from the date of ]
taking loan.
Loan is taken from September 1. hence, interest should be calculated for 7 months.
6. National plan certificates are exempted securities.

Illu s tr a tio n : 5

Mr. Sharat received the following gifts on or after September 1, 2016. Show the tax
treatment.
1. On 15th September, 2016, he gets a gift of Rs. 25,000 from his friend.
2. On 15th October, 2016, he gets another gift of Rs. 10,000 from another friend.
3. On 15th November, 2016, he gets a gift of Rs. 25,001 from his father’s cousin.
4. On 15th January, 2017, he gets a gift of Rs. 40,000 from X who is elder |
brother of his grandfather.
5. A computer received from his employer. It was purchased for Rs. 40,000 by j
his employer on 30th June, 2016 and given as gift on 15th September, 2016.
6. On November 15, 2016, Sharat purchases a house property from Shankar for j
Rs. 50,000 (market value of the property is Rs. 5,00,000)

S o lu tio n
The Tax Treatment

Gift Tax Treatment

Gift of Rs. 25,000
Gift of Rs. 10.000
Gift of Rs. 25,001
Gift of Rs. 40,000
Gift from Employer
Purchase o f house
property Rs. 4,50,000
taxable as the aggrgate of gifts amount exceeds Rs. 50,000
taxable as the aggrgate of gifts amount exceeds Rs. 50,000
taxable as the aggrgate of gifts amount exceeds Rs. 50,000
taxable as the aggrgate of gifts amount exceeds Rs. 50,000
Gift from employer is a taxable gift. Rs. 40,000 under the
head salaries.
Under the newly inserted clause (V) (in section 56(2)
What is chargeable to tax is any sum of money received without consid­
eration in excess of Rs. 50,000.

Rs. 5 ,5 0 ,0 0 1 Taxable under the head— Income from Other Sources.

 Problems on C o m pu ta tion o f Inco m e from O th e r S ources

Illustration : 6
Mr. Raghupathi, who draws a salary of Rs. 20,000 p.m., received the following Gifts
onor after 1-10-2016:
(/) Gift of Rs. 5,00,000 on 16-10-2016 from a friend.
(ii) Gift of a Jewellery fair market value of which is Rs 3,00,000 on 17-10-2016
from his would be wife.
; (iff) Gifts of Rs. 51,000 each received from his 4 friends on the occasion of his
marriage on 21-10-2016
(rv) Gift of Rs. 1,00,000 on 22-11-2016 from his mother’s sister.
(v) Gift of Rs. 60,000 on 25-11-2016 from his father’s brother.
(v j ) Gift of Rs. 50,000 from his wife’s friend on 1-12-2016.
(v/'i) Gift of Rs. 21,000 on 15-12-2016 from his mother’s friend.
(vfff) Gift of Rs. 26,000 on 25-12-2016 from his brother’s father-in-law.
(ix) Gift of Rs 1,21,000 from his wife’s brother.
(x) Gift of Rs 26,000 from his employer.
(xi) Scholarship of Rs 1,20,000 from a charitable institution registered under
section 12AA.
(xii) He has purchased a immovable property from B who is not a relative from a
sum of Rs.24,50,000 the stamp duty value of the property is Rs. 26,00000.
(xiii) He purchased bullion on for Rs. 4,40,000 whose fair market value is Rs.
4,85000.
(xiv) Gift of immovable property from his friend whose stamp duty value is Rs.
5,00,000
Compute his Total income for the A. Y. 2017-18.

Solution.
Computation of Total Income of Mr. Raghupathi
for the A.Y. 2017-18

Income from Salary

Salary Rs. 20.000 * i2
Add: Cash gift from employer

Less : Deduction u/s 16

lut consid-
Income from other sources :
1. (/) Gift from a friend is taxable
(ii) Gifts received from his 4 friends are exempt as they
have been received on the occassion of his marriage
(Hi) Gift from his mother’s sister is exempt as the donor
is covered in the definition of relative
2.34 Inco m e Tax— II (2017-18)

(/v) Gift from his father’s brother is exampt as the

donor is covered in the definition of relative Nil
(v) Gift Rs. 50,000 form his wife’s friend on 1-12-2010
is taxable 50,000
(vi) Gift of Rs. 21,000 from his mother’s friend is
taxable 21,000
(v/0 Gift from his brother’s father-in-law is taxable as
the donor is not covered in the definotion of relative 26,000
(v/'/’O Gift from his wife’s brother in not taxable as the
donor is covered in the definition of relative Nil
(fr) Gift from employer is taxable under income from
salary Nil
(*) Gift in the form of scholorship from charitable
instation U/S 12 AA. exempt
2. Gift of movable property : Jewellery is taxable 300000
3. Movable property accrued for in adequate condition
difference between FMV and purchase price does not
exceed Rs. 50000 not taxable. NT
4. Gift of immovable property - received from his friend 5,00,000
5. Immovableproperty acquired for inadequatge condition
difference between stamp dutyvalue and purchase
price Rs. 1,50,000 1,50,000 15,47.000
Total income 18,13,000
Problems on C o m pu ta tion o f Inco m e from O th e r S ources 2.35

( EXERCISES )
1. Vinayaka held the following investments:
(a) Rs. 81,612 - 10% (Tax free) Debentures o f Lim ited Company,
(b) Rs. 70,000 - 12% (Tax free) Rajasthan Developm ent Loan
(c) Collection charges Rs. 2,000
Compute his income from interest on securities for the year ending 31-3-2017.
[A n s.: Rs. 15,468]
2. Mr. Murali holds the following securities on April 1, 2016 :
Rs. 3,00,000 - 5% tax free A.P. Govt, loan (dates of payment of interest January' 1 and July
1 of every year.
Rs. 40,000 - 6% unlisted debentures of XYZ Ltd. (dates of payment o f interest June 1 and
December 1 of every year.
Rs. 25,000 - 8% debentures of ABC Ltd. (interest dates; June 15 and December 15 of
every year).
On December 1, 2016, Murali sold 25,000 - 8% debentures of ABC Ltd. His income from the
head salaries and house property is Rs. 1,00,000 and Rs. 15,000 respectively. Compute the gross
total income of Mr. Murali for the A.Y. 2017-18. on the assumption that his business income is
Rs. 64,000.
[Ans\ Gross total income Rs. 1,97,400]
3. Mr. Munshi holds the folloiwng securities on 1st April. 2016.
Rs. 80,000 - 6% A.P. Govt. Loan
Rs. 1,00,000 - 10% debentures of Ranbaxy Ltd.
Rs. 50,000 - 13.5% debentures of Reddy Labs.
During the previous year 2016-17, he sells Rs. 50,000 - 13.5% debentures of Reddy labs on
December 31, 2016 for Rs. 70,000 and purchases Rs. 1,00,000 - 15% debentures of Standard
Organic Ltd. on the same date. He borrows Rs. 30,000 at 12.5% interest for investing in these
debentures. Interest is payable on all securities on 30th September and 31st March every year.
Compute income from securities for the A.Y. 2017-18.
[Ans: Incom e fro m interest on se cu ritie s Rs. 24,737-50]
N o te: 1. In case o f sale or purchase, interest should be calculated for 6 months.
2. In case o f borrowing, interest should be calculated from the date o f taking loan to 31st March
o f the year. December 31,2016 to March 31 st 2017 = 3 months.
4. Mr. Naresh has the following investments as on 1st April, 2016: Rs. 10,000 - 10% Municipal
bonds
Rs. 20,000 - 10% National defence certificates
Rs. 30,000 - 15% A.P. Government loan
Rs. 40,000 - 13.5% Tax free govememnt securities
Rs. 56,677 - 12% Tax free debentures of Reliance energy Ltd. (Unlisted)
Rs. 60,200 - 10% Tax free debentures of Nagarjuna Ltd. (Listed)
Rs. 70,000 - 15% Panyam Cements Ltd. debentures
On 1st December, 2016, Mr. Naresh bought Rs. 90,684 - 20% tax free debentures of XYZ Ltd.,
and for this purpose he took a loan of Rs. 80,000 at 15% and paid brokerage Rs. 1,000. The
interest on these investments was realised through bank and the banker charged 5% as collection
charges on gross interest. Compute income from interest on securities.
2.36 Inco m e Tax— II (2017-18)

Note: There is no difference between listed and unlisted tax free securities from the
100
A. Y. 2017-18.Grossing up should be done with----
9

[A/w: Income from interest on securities Rs. 39,43

5. Mr. Krishna Mohan holds the following securities on 1st April, 2016. Rs. 10,000 - 15% bon
o f municipal corporation
Rs. 56,671 - 14% tax free debentures of Cipla Ltd.
Rs. 40,000 - 10% Convertible debentures of TCS Ltd.
Rs. 10,000 - 11% 12 years National Defence Certificates
Rs. 15,000 - 15% Tax free Govt, of A.R Loan.
On 1st November, 2016, the debentures of TCS Ltd. were sold for Rs. 50,000 and on the s
date Rs. 70,000 - 18% debentures of Reliance Ltd. were purchased. The additional money w
financed by borrowings at 15%.
Collection charges Rs. 1,000 Transfer fee Rs. 500 Brokerage fee Rs. 500
The interest paid on 30th September and on 31st March of every year. Compute the taxa
interest from interest on securities.
[Aits: Taxable interest from Securities Rs. 18,616]
6. Mr. Bhargava had the following investments on 1st April, 2016. Compute income from of
sources for the relevant Assessment Year.
Rs. 1,40.000- 12% Central Government Loan
Rs. 1,30,000- 10% Government securities
Rs. 1,20,000 - 9% Preference shares of paper mill company
Rs. 1,50,000 - 10% Bombay Port Trust Bonds
Rs. 1,20,000 - 11% Debentures of Limited Company (unlisted)
Rs. 1,00.000 - 10% Securities issued by Government of England
Rs. 1,00,000 - 10% 10 - year National Plan Certificates
Rs. 2,00,000 - 14% Municipal debentures
Interest accrued on NSC VIII issue purchased on 11-3-12 Rs. 12,000. Rs. 1,31,260 - 10% (Tax
free) Debentures of a Ltd. Company (unlisted).
On 1st September, 2016, he bought Rs. 1,50,000 - 12%. Maharastra Government Bonds tor Rs.
1,60,000 the interest on which is payable on 30th June and 31st December. For this purpose he
took a loan from his bankers for Rs. 1,40,000 at 15% p.a. and the balance of Rs. 20,000 were
financed out of a previous loan taken for purchase of a motor car at 9% p.a.
Bank charged 2% on interest and dividend as collection charges and 3% commission on purchase* j
o f securities.
[Ans : Rs. 1,16,942; Interest on securities ; Rs. 1,31,581;
D ividend: exempt
Interest on Foreign Government; Rs. 10.006
Bank charges 2% u/s 57 : Rs. 2,392;
Interest on loan taken u/s 57 :Rs. 12,256
Note : Interest on money borrowed for some other purpose is not allowed. No collection charges on NS(
interest.
7. Compute income from other sources of Mr. Sailesh who held the following investments durin
the previous year 2016-17 :
(a) Rs. 20,000 - 10% MP Government Development Loan
 Problems on C o m p u ta tio n o f Inco m e from O th e r S ou rces 2.37

(b) Rs. 60,750 - 10% Tax free commercial securities

(c) Rs. 8,100 received as interest on tax free Public Ltd. Company securities (listed)
(d) Rs. 2,700, received as interest on Debentures of Madras Fertilisers Ltd. (listed)
(e) Rs. 30,000 - 14% Securities of Paper Mills Co. (listed)
(/) Rs. 20,000 - 15% Hyderabad Urban Development Authority Bonds
(g) Dividend from Bata Ltd. Rs. 5,000
(h) During the year he also got a prize of a State Government Lottery, the net amount received by
him was Rs. 63,000. Interest on securities is payable on 1st July and 1st January every year.
Bank charged collection charges of Rs. 1,500.
[Ans. : Interest on securities Rs. 27,950, dividends Rs. 5,000
exempted, winning from lottery Rs. 90,000.
Total income from other sources Rs. 1,16,450]
8. Mr. Kartik has the following investments as on 1st April 2016 :
1. Rs. 4,489received as interest on securities of textile company (listed).
2. Rs. 4,029 received as interest on the securities of plastic company (unlisted).
3. Rs. 3,580 received as interest on MP Government securities.
4. Rs. 32,100 - 10% Tax free commercial securities.
5. Rs. 40,000 - 11% Securities of Paper Mill Company (not listed).
6. Rs. 30,000 -13.5% Debentures of Bajaj Ltd. (listed).
7. Rs. 20,000 - 10% Karnataka State Government Loan.
During the previous year 2016-17, he purchased Rs. 50,000 - 7% Capital Investment Bonds on
1st October, 2016. For this purpose he borrowed Rs. 30,000, from bank at 15% p.a. Interest on
all securities payable on 30th June and 31 st December. The bank charged 2% commission on net
realisation of interest as collection charges. Compute interest on securities for the Assessment
Year 2017-18.
[Ans : TDS 2,149; Net interest 24.913; Gross interest 27.062;
Collection charges 2% on net interest Rs. 498. Interest on securities
Rs. 26,564. Interest on loan taken for purchase of
securities is not allowed as deduction as the investment
purchased during the year is an exempted security]
9. Dr. Khandelwal is a professor of Commerce. He submits the following information. Compute
the income under the head income from other sources for the Assessment Year 2017-18.
(a) He is an Author of a text book which fetched him a gross royalty of Rs. 30,000.
He claims the following deductions from the amount of royalty :
(/') Salary to David, a clerk, who collects for him the necessary data and goes through the
final proof reading Rs. 3,000.
(ii) Purchased reference books worth Rs. 500 in connection with the revision of the book.
( hi) Telephone expenses of Rs. 1,000 attributed to the publication and sale of his book.
(b) Income from articles which were published in ‘Economic Times’ and ‘Eastern Economist’
Rs. 5,000.
(c) He lives in a rented house paying a rent of Rs. 900 p.m. The house is too big for his family.
Hence, he has sublet 1/3 portion of the house on a rent of Rs. 600 p.m. He pays municipal
taxes for the whole house Rs. 540 and also on repairs of the whole house amounting to Rs.
600.
(d) He received Rs. 250 per lecture delivered at the St. Francis College. During the previous
year he delivered 24 lectures.
2.38 Inco m e Tax— II (2017-18)

(e) He is an examiner o f a number universities. This source gave him a remuneration of

Rs. 5,000.
His other incomes were -
(i) Winning from card games and betting Rs. 10,000.
(if) Winning from chess Rs. 1,000.
( iii) Received interest on Govt, o f England bonds Rs. 500.
\Ans : Royalty income Rs. 25,500; Subletting Rs. 3,220; Income from
Articles Rs. 5,000; Lectures Rs. 6,000; Examination
remuneration Rs. 5,000; Winnings Rs. 11.000;
Interest on Foreign Bonds Rs. 500; Total Rs.56.220]
10. Mr. Sanmukha furnished the following particulars of his income :

1. Interest on term deposits with bank (net) 10,800

2. Dividends (gross) from tea company (60% of the
income o f the company is agricultural income) 3,000
3. Interim dividend at 10% on shareholding Rs. 15,000 in a
textile mill, it was declared and paid on 25-2-17 1,500
4. Dividends from UTI on unit 1964 scheme 17.000
5. Dividend from a Foreign Company in UK (tax deducted at
source has not been paid by the company to the
Government of India) 4,000 :
6. Director’s fee 2,000
7. Income from letting out o f plant and machinery 30,000
8. Royalty from mining 10,000
9. Monthly rent received by sub-letting a house (The house
was got on rent at 200 p.m., expenses incurred on
house repairs Rs. 3,000 and others 1,000) , 1,000 p.m.
10. Winning from lotteries 25.000
He claims the following expenses :

(a) Collection charges for UTI dividend 300

(b) Interest on money borrowed to purchase shares
of Textile Mill 1,000
(c) Depreciation and other expenses in respect o f
plant & machinery 5,000
Compute Mr. Sanmukha’s income under the head income from other sources.
[Ans. : Rs. 83,600; Dividends are exempted from tax.]
11. Mr. Xavier receives the following gifts during the previous year 2016-17. Show the tax
treatment.

(i) Gift of Rs. 30 lakh received from a friend on August 31, 2016.
( ii ) Gift of Rs. 6 lakh received from another friend on September 1, 2016.
( hi) Gift of Rs. 2 lakh from grandfatehr on account of natural love and affection on September
1,2016.
(iv) Gift of Rs. 35,000 received from brother of grand father on September 15, 2016.
Problems on C o m p u ta tio n o f Inco m e from O th e r S ou rces 2.39

(v) Gift of Rs. 3,00,000 received from friends at the time of Xaviers marriage on October 15,
2016.
[Ans : Rs. 36,35,000 is taxable under the head income from other sources]
12. X furnishes the following particulars of his income for the previous year 2016-17.
Rs.
(/') Winnings from lottery (net) 14,000
(ii) From Cross world puzzle prize (net) 7,00,000
(iii) As an agent he received insurance commission 90,000
(iv) Gets bank interest of 9,00,000
(v) Winnings from Horse races 70,000
(vi) Interest on fixed deposits 18,000
(vii) Mining rent and royalties 50,000
(viii)Cash gift from Y a close freind 20,000
(ix) Getting Rs. 5,000 p.m. family pension.
(x) Interest on securities :
(a) Rs. 90,000 - 10% tax free debentures of a sugar mill, listed in hyderabad stock exchange.
(b) 45,000 - 12% debentures of Z Ltd. She purchased the listed debentures on a recognised
stock exchange on 1-1-2017. Collection charges Rs. 500, brokerage Rs. 500. Borrowed
(c) Rs. 30,000 at 10% to purchase these debentures.
Rs. 52,650 as interest from Central Government Securities.
(d) Rs. 52,650 as interest from tax-free UP Govt, securities.
(e) Rs. 59,679 as interest from debentures of ABC Ltd. (unlisted).
Stake money received from an activity of owning and maintaining
race horses and participated in the races 8,00,000
He incurred a revenue expenditure for maintaining the race horses 2,00,000
Paid for purchasing the lottery tickets 3,000
Collection charges on all incomes amounted to 50,000
Compute his total income for the A.Y. 2017-18.
[A n s : Rs. 30,68,060]
13. Mr. Shasanka, who draws a salary of Rs. 30,000 p.m. received the following gifts on or after
1-10-2016:
(0 Gift of Rs. 7,00,000 on 16-10-2016 from a friend.
(ii) Gift of platinum watch worth Rs. 5,00,000 on 17-10-2016 from his friend.
(iii) Gift of Rs. 1,00,000 each received form his 4 friends on the occasion of his marriage on
21-10-2016.
(iv) Gift of Rs. 50,000 on 22-11 -2016 from his mothers’ sister.
(v) Gift of Rs. 60,000 on 25-11-2016 from his fathers’ brother.
(vi) Gift of Rs. 50,000 from his wife’s friend on 1-12-2016.
(vii) Gift of Rs. 21,000 on 25-11-2016 from his brothers’ father in Law.
(viii) Gift of rs. 24,000 on 25-11-2016 from his mothers Friend.
(ix) Gift of Rs. 2,00,000 From his wife’s Brother
(x) Gift of Rs. 40,000 from his employer
(xi) Scholarship of Rs. 2,00,000 from a charitable Institution registered under section 12AA
Compute Total income for the Assessment year 2017-18.
[A ns: Rs. 16,95,000]
2.40 Inco m e Tax— II (2017-18)

14. From the following particulars submitted by Vjay, compute his income from other sources for
the assessment year 2017-18.
Rs.
Directors meeting fees received 12,000
Agricultural income from land situated in India 40,000
Agricultural income from Pakistan 60,000
Interest :
(0 From HDFC Bank on FDR (net) 10,800
(ii) on post office saving account 8,000
( hi ) on government securities 9000
(iv) on Public Provident Fund A/c 7,000
(v) on National Savings Certificate 6,000
Dividend from Reliance Ltd. 15,000
Lottery prize received after TDS 28,000
Rent from subletting of a flat 24,000
Rent paid to Landlord (Father’s Flat) 12,000
Vijay spent Rs. 1000 for releasing the rent. He had also spent Rs. 10,000 for
the purchase of lottery ticket and recovered the prize on one ticket.
[Ans. : Rs. 1,50.000]
15. From the following particulars, compute the gross total income of Teja :
(;) He is employed in a firm on monthly salary of 12,000.
(ii) He has a house property in Hyderabad, which has been let out on rent of Rs. 8,000 p.m.
(iii) He holds the following shares & securities :
(a) 1,000 equity shares in X Ltd. of Rs. 10 each bought @ Rs. 250 per share.
(b) Rs. 50,000 9% ICICI Bonds
(c) 1000-10% preference shares o f Rs. 100 each in Satyam Ltd. Dividend received on 1st
(d) January 2016.
X Ltd. declared 20% Equity dividend
(e) He had set up a factory with building, plant, Machinery', Furniture etc. He gave it on
hire a t a c o m p o s it e r e n t o f Rs. 2 5 ,0 0 0 p .m .

During the year, he spent Rs. 25,000 for repairs and Rs. 10,700 for insurance of the factory. The
Depreciation allowable is Rs. 40,000.
He had borrowed Rs. 10,00,000 against mortgage of this factory and paid Rs. 1,50,000 interest
thereon. This amount was spent for the marriage o f his daughter. [y\ns : r s 4,40,000]
 1
Income of Other Persons Included in
Total Income

The total income of an individual is subject to tax on a slab system, which indicates
that as the income goes up, the rates of tax also go up. AS higher income leads to higher
tax payment, the tax payers may tend to divert a part of their income to the hands of
their relatives, with a view to reduce their tax burden. For example, if the total income
of a person is Rs. 6,40,000, hb is supposed to actually pay tax as follows :

Rate Amt (Rs.)

On 1st Rs. 2,50,000 Nil Nil
On the next Rs. 2,50,000 (Rs. 2,50,000 to 2,50,000) 10% 25,000
On the next Rs. 1,40,000 (Rs. 5.00000 to 10,00,000) 20% 28,000
Total 53,000
A dd : Education Cess at 3% (2% + 1%) 1590
Total tax 54,590

As the person has to pay a total tax of Rs. 54,590 on his total income of Rs.
6,40,000, he tends to divert his total income to others. Like, if he divides this income
among four members (Rs. 1,60,000 each), his total tax liability would come down to
Nil. Thus, the total tax liability for all the four persons shall be Nil.
By this diversion of the total income, he is able to substantially reduce his total tax
liability, which means that the person is avoiding tax on his income totally. In order to
curb such practices of tax avoidance, the Income Tax Act contains various provisions
under sections 60 to 64, whereby the income of certain other persons is also included
in the income of a person for the purposes of computation of such person’s total tax
liability. These provisions can be classified into two types :
1. Income of other persons to be included in the total income of an assessee
[Sections 60 to 63]
2. Income of other persons to be included only in the total income of an individual
[Section 64]

[3.1]
 3.2 Inco m e Tax— II (20 17 -18)

I. INCOME OF OTHER PERSONS TO BE INCLUDED IN THE TOTAL

INCOME OF AN ASSESSEE

Transfer of Income without transfer of Assets [Section 60]

If any person transfers to another person an income, without transferring the asset from
which such income arises, then such income shall be included in the total income of
the transferring person. This inclusion of income is considered even under conditions
of whether such transfer is revocable or not and whether the transfer is effected before
or after the commencement of the Income Tax Act.
Example : If Mr. X is owning a building and is let out for residential purpose for
Rs. 10.000. The tenant is instructed to pay the rent to his firend Y. In this case, there is
only tranfer of income without the transfer of the property. Therefore, rental income
shall be included in the income of transferer (X) only.

Revocable Transfer of Assets [Section 61] :

If any person makes a revocable transfer of any asset to any other person, then the
income arising or derived from such assets shall be included in the total income of
i the person transferring such asset. The word transfer shall mean and include any
settlement, trust, covenant, agreement, arrangement, etc. of the asset.
Example : If Mr. X transfers shares to Y on the condition that after 10 years the
shares are retransferable without any consideration. This is a revocable transfer. Hence
Mr. X is liable to pay tax.
Section 63 : As per the provisions of section 63 of the Act, a transfer for the
purpose of sections 60,61 and 62, shall be deemed to be revocable if:
(a) It contains any provision for the re-transfer, directly or indirectly of the whole
or any part of the income or assets to the transferor, during the life-time of the
beneficiary or the transferee as the case may be, or
(.b) It gives the transferor a right to re-assume power directly or indirectly over the
whole or any part of the income or assets during the life time of the beneficiary I
or the transferee as the case may be.
In order to treat a transfer to be revocable, there must be an express clause in the I
instrument of transfer regarding the time and conditions for the retransfer and power!
to resume such asset.
Section 62 : As per the provisions of section 62(1), the provisions of revocablel
transfer as per section 61 shall not be applicable in certain situations as follows:
(a) In the case of transfer by way of trust, the transfer is not revocable during the lifeI
time of the beneficiary;
(b) In the case of any other transfer, the transfer is not revocable during the lifeI
time of the transferee; and
(c) In case the transfer is made before 1-4-1961, the transfer is not revocable fori
a period exceeding 6 years.
 Income of Other P ersons Included in Total Incom e 3 .3

These exceptions are applicable to the person only under situations where there is
nodirect or indirect benefit derived by him from such income.

2. INCOME OF OTHER PERSONS TO BE INCLUDED ONLY IN THE

TOTAL INCOME OF AN INDIVIDUAL

Individual’s I n c o m e t o i n c l u d e I n c o m e o f S p o u s e , M i n o r C h i l d , e t c .
[Section 6 4 ]

(a) R e m u n e r a tio n o f s p o u s e f r o m a concern in w h i c h th e o th e r sp o u se h as

: While computing the total income of an
substantial i n t e r e s t [ S e c t io n 6 4 ( l ) ( i i ) [
individual, all sums that arise whether directly or indirectly to the spouse of such
individual by way of salary, commission, fees or any other form of remuneration,
whether in cash or in kind, from a concern in which such individual has a substantial
interest, shall be included in the total income of such individual. Any other income,
except remuneration as specified above, shall not be included in the total income of the
individual even if it accrues to the spouse from a concern in which the individual has
a substantial interest.
The provisions of this section shall not be applicable to the following incomes
derived by the spouse:
i , (a) On account of technical or professional qualifications possessed by the spouse;
and
(b) The income is solely attributable to the application of his/her technical or
' professional knowledge or experience.
If both husband and wife have substantial interest in a concern and both receive
I remuneration from such concern, then the remuneration of both shall be included in
I the hands of that spouse whose total income before including such remuneration is
I greater. In this case, clubbing is done for the first time in the previous year in which the
following conditions are fulfilled:
| (i) Both the husband and wife have a substantial interest in the concern;
I (ii) Both the husband and wife get remuneration from such a concern;
[ (iii) The relationship of husband and wife subsists at the time of accrual of such
income.
An individual is deemed to have a substantial interest in a concern if:
(i) In c a s e t h e c o n c e r n is a c o m p a n y : He alone or along with his relatives at
anytime during the previous year owns beneficially shares (not being shares entitled to
afixed rate of dividend whether with or without a further right to participate in profits)
I carrying not less than 20% of the voting power.
(if) I n a n y o t h e r case^ If he alone or along with his relatives is entitled to at
least 20% of the profits of such concern at any time during the previous year.
Technical or professional qualification as per section 64(1 )(ii) means and
includes:
3.4 Inco m e Tax— II (2017—18)

I. The spouse possesses technical or professional qualifications; and

II. The income is solely attributable to the application of his or her technical or
professional knowledge and experience.
Though there is no conflict between the two requirements of this provision, eaf
of them deals with a different aspect. The fulfillment of both these is a must, thoir
the second comes into operation only on the fulfillment of the first condition, and n
otherwise.
(b) Income from assets transferred to the spouse [Section 64(l)(iv)] : Whi
computing the total income of an individual, all sums that arise whether directly or
indirectly, subject to the provisions of section 27(i), to the spouse of such individual
from assets transferred, directly or indirectly, to the spouse of such indi vidual shall be
included in the total income of such individual. This provision is not applicable to a
house property transferred to spouse. As per the provisions of section 27 of the Act, t'
income derived on the transferred house property shall be included in the total inco
of the individual as he is deemed to be the owner of such house property. But, in t
case of other assets transferred to spouse by an individual, the income on such ass'
shall be included in the total income of the individual u/s 64(l)(iv) of the Act.
The income derived from any asset transferred by an individual to his spouse, sh n
not be clubbed in the total income of the individual :
(0 If the transfer is for adequate consideration
(//) If the transfer is under an agreement to live apart
(Hi) If the relationship of husband and wife does not exist, either at the time o
transfer of such asset or at the time of accrual of the income.
(zv) If wife acquired the property out of an allowance given by her husband for hJ
personal expense.
If an individual transfers any property to his/her spouse for an inadequr!
consideration, then the income derived from such asset would be taken proportionate!
If Mr. X transfers an asset worth Rs. 3 lakhs to his wife for a consideration of Rs.1
lakhs and such asset derives an income of Rs. 12,000, then 1/3 rd of this income shall be
included in the total income of Mr. X as l/3rd consideration was not received by Mr.
for the transfer of such asset.
If an individual transfers an asset to the spouse indirectly, then the inco*
derived out of such an asset will be clubbed in the total income of such individual. A
indirect transfer means two or more inter-connected transfers that are part of the saiJ
transaction whereby the transferor uses this method as a device to evade the effect
this clause.
If the asset transferred has changed the shape and identification, then the inco
derived from such changed asset shall be clubbed into the total income of the transfer
of such asset.
Pin Money : Any income arising out of the pin money to the wife cannot
clubbed with the income of the husband.
 Income of O ther P erso ns Included in Total Incom e 3 .5

Pin money is an allowance made to a women by her husband for meeting her
I personal expenses or for running the household. Such sum and any saving made by the
I wifeout of such sum would be the separate property of wife and cannot be aggregated
I withthe income of the husband.
Income from assets transferred to son’s wife [Section 64(l)(vi)] : If an
individual transfers an asset to his/her son’s wife, directly or indirectly, after 1st June
1973for inadequate or no consideration, then the income arising out of such asset shall
beclubbed with the income of the transferor. If Mr. B transfers 1000 10% bonds of
Rs. 100 each of ICICI to his son’s wife without any consideration and if ICICI pays an
interest of Rs. 10,000 on such bonds, then such income derived out of the asset shall
beclubbed with the income of Mr. B under the head ‘Income from Other Sources’"
though the amount is received by his son’s wife.
Income from assets transferred to any person for the benefit of spouse of the
transferor [Section 64(l)(vii)] : If an individual transfers an asset to any person or
association of persons for inadequate consideration, then the income derived from
such asset shall be included in the income of the transferor to the extent such income
isfor the immediate or deferred benefit of spouse. If Mr. Ram holds shares of X Ltd.
andtransfers them to his friend Mr. Sam with a condition that 70% of the dividend
amount received on such shares shall be handed over to Mrs. Ram, then such amount
asreceived by Mrs. Ram (70% of dividends) shall be included in the total income of
Mr. Ram.
This clause attracts the provisions of tax, if the transferor makes a declaration of
trust and appoints himself as the trustee of such trust.
(e) Income from assets transferred to any person for the benefit of son’s wife
[Section 64(l)(viii)] : If an individual transfers an asset, directly or indirectly, after 1st
June 1973 for inadequate or no consideration, for the immediate or deferred benefit of
hisor her son’s wife, then the income arising out of such asset shall be clubbed with the
! income of the transferor to the extent of the benefit received by his or her son’s wife,
i This clause also attracts the provisions of tax, if the transferor makes a declaration
oftrust and appoints himself as the trustee of such trust.
The above stated provisions in relation to the income of spouse u/s 64(1) shall be
subject to the following conditions:
: (;') If an individual transfers an asset to spouse for inadequate consideration, and
I such spouse sells such asset for profit, then the capital gain arising to the
spouse on the sale of such asset shall be taxable in the hands of the transferor.
However, the capital gain is computed in the hands of the spouse with
eligibility for exemption under the provisions of section 54 of the Income Tax
Act, if the capital gain amount is invested at the stipulated place within the
stipulated time.
I (/;') The income from assets transferred by a non-resident individual to his wife is
subject to the provisions of section 64 only if such income is accrued and
received in India.
3.6 Inco m e Tax— II (2017-1

(///) If the income derived by the spouse or minor child, includied in the to!
income of the individual, is subject to tax deduction at source, then su
advance tax paid on the income is not eligible to be adjusted out of the
liability o f the transferor even with reference to such income clubbed in
his total income. Here, the only remedy is that the spouse or the min
child, as the case may be, would be able to apply for a refund of t
advance tax paid on such income.
(f) Income of a minor child [Section 64(1 A)] : While computing the total inco
of an individual, all such incomes arising or accruing to his / her minor child shall at
be included. The relevant provisions are as follows :
(/) Child, for the purposes of this section, in relation to an individual, includ
step child and an adopted child of that individual.
(») The income shall be irfcluded in the total income of that parent whose to
income, before such clubbing, is greater.
(iii) If the marriage of the individual does not subsist, then the income of the mi
child shall be included in the total income of that parent who maintains
minor child in the previous year.
(/v) If any income of the minor is included in the total income of one of the pare
in any previous year, then such income arising in any of the succeed'
previous years shall not be included in the total income of the other pa
unless the Assessing Officer is satisfied that it is necessary to do so, provide
the Assessing Officer gives that other parent an opportunity of being heard. 1
(v) The parent, in whose total income the income of the minor child is include!
shall be eligible to claim an exemption to the extent of least of such income)
Rs. 1,500, in respect of each minor child whose Income is so included in his tot
income.
(v/) If in any previous year, the total income of the other parent exceeds the tot
income of the parent in whose total income the minor’s income is regular!
included, then also the income of the minor shall be included only in the tot
income of that parent in whose income it has been included since the pa
years unless there is a compelling circumstance (apart from benefits totl
revenue) to include the income in the total income of the other parent.
(vii) If any trust was created for the benefit of minor child or children with conditioi
that the beneficiaries shall have no right to enjoy the income of the trust tillth j
attain majority and such income was to get capitalized from year to year till d
children attain majority, then such income cannot be clubbed in the total income'
either of the parents during the minority of the beneficiary or beneficiaries.
(viii) If any income is derived by a minor child, who is suffering from any disabilij
of the nature specified in section 80U (like physical disablement, blind™
etc.) then such income will not be included in the total income of the parei
but shall be taxable in the hands of the minor child only.
(xi) If any income is derived by a minor child on account of any manual work d<
 Income of O ther P erso ns Included in Total Incom e 3.7

by him / her or on account of any activity involving application of his / her skills
(mental or physical), talent or specialized knowledge and experience, then
such income will also be taxable in the hands of the minor child only and not
included in the total income of either of the parents.
(x) If the minor child is attaining majority during the relevant previous year, then
the income of the child shall be divided into two categories, viz., the income till
the date of his attaining majority and the income after the date of his attaining
majority, of which the income after the date of his attaining majority shall not
be included in the total income of the parent for such previous year, but shall
be taxable in the hands of the child as an individual (major).
(xf) If both the parents of the minor child are not alive, then the income of such
minor child, cannot be clubbed with any other’s income, hence the guardian
of the minor child will have to file the return of such income on behalf of
the minor child. [The income cannot be included in the total income of the
guardian if he / she is not a parent of the minor child.]
(xii) As a minor married daughter is not specifically excluded from the definition
of the word “minor child”, the income arising to a minor married daughter
shall also be included in the total income of the parent. However, where section
27 is applicable, clubbing of income from property gifted by the parent does
not arise.

INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED TO

JOINT FAMILY PROPERTY [SECTION 64(2)]
If any individual, who is also a member of a Hindu Undivided Family, converts his
separate property as the property of the HUF, or throws the property into the common
stock of the family, or otherwise transfers his individual property to the family, then
the income from such property shall be deemed to be the personal income of the
individual and shall be included in the total income of the individual himself. Provided
that the transfer is made after 31-12-1969 and that the transfer is made for inadequate
consideration. The income shall be clubbed in the income of the individual only if
there exists a coparcenary and its property, and there also exists a separate property
of the individual as the coparcener of such coparcenary before such transfer takes
place.
Under situations of partition, the income of the converted self-acquired property
as is to be received by the individual, his spouse and minor child shall all be clubbed
in the total income of the individual and all other parts shall be taxable in the hands of
the respective members of the divided family. For example, if a HUF consists of Mr. A,
Mrs. A, minor child of Mr. A and two major sons of Mr. A all having equal coparcenary
interest in the HUF and Mr. A has converted his self-acquired house property into the
common stock of the family on which an annual income of Rs.60,000 is derived, and
the HUF is now being divided, then income from 3/5,h of the total income derived
from such property shall be included in the total income of Mr. A i.e. l/5th share of Mr.
3.8 Inco m e Tax— II (2017-18)

A, 1/5th share of Mrs. A (to be clubbed with the income of Mr. A) and l/5lh share of
minor child [to be clubbed with income ofAu/s 64(1 A)]. However, Mr. A can claim an
exemption of Rs. 1,500 u/s 10(32) for the inclusion of minor son’s income in his total j
income. The balance of the income derived from the converted property i.e. 2/5,h share,
shall be taxable in the hands of the two major sons respectively.

Special Provisions
As per the above discussion, the total income of any individual can have incomes of
other persons included. Before including such incomes, they will have to be computed
as per the provisions of the Act, as it would have been computed in the hands of
such other person under the relevant heads of income. This computation includes the
provision of exemptions / allowances / deductions / etc., that are permissible under the
relevant head in which it falls. After the computation under the relevant head of such
income of such other person, the computed taxable income of such other person shall be
included in the total income of the individual under the same head of income whereby
it was computed for such other person. Provided such asset of the other person is of
the nature, which is eligible for deduction under any of the sections 80CCC to 80U,i
the same is eligible only to the individual in whose total income such other person’s
income is included.
Section 65 : Although the total income of an individual shall include the income
on the transferred assets on the name of other persons and he himself will be liable to
tax on such total income, section 65 of the Act provides that the transferee (the person
to whom such assets have been transferred and who derives income on the same) can
also be made liable to pay tax levied on the transferor to a maximum extent of the tax
levied on the income so derived from the transferred asset.
r

Illustration : 1
Income of Mr. X and Mrs. X for the previous year 2016-17 is as follows:
Mr. X Mrs. X
Rs. Rs.
Salary from Himalayas Ltd. (after deduction u/s 16) 2,15,000 Nil
Capital gain: Short term 90,000 Nil
Income from other sources: Bank interest 12,000 6,250
Interest on govt, securities 3,600 2,750
Total 2,27,000 9,000

Mr. X has no qualifications or experience and is employed by Himalayas Ltd. Mrs.

X holds 22% equity share capital in Himalayas Ltd. from September 12, 2016. Find
out the gross total income of Mr. X and Mrs. X for the assessment year 2017-18.

Solution:
 Income of O ther P erso ns Included in Total Incom e 3.9

Gross Total Income of Mr. & Mrs.

X for the A.Y. 2017-18
Mr. X Mrs. X
Rs. Rs.
1. Salary received by Mr. X shall be added in the income
of Mrs. X as she holds a minimum of 20% of equity
shares in the company in which her husband is an Nil 2,15,000
employee and also that Mr. X does not possess any
qualification or experience.
2. Capital gain: Short term 90,000 Nil
3. Income from other sources: Bank interest 12,000 6,250
4. Interest on govt, securities 3,600 2,750
Gross Total Income 1,05,600 2,24,000

Illustration : 2
Kumar gives you particulars of different transactions affecting his assessment for the
previous year 2016-17 as below:
(a) In December, 2016 he had settled the income in respect of shares on his son
irrevocable, he himself continuing to be the owner thereof. During the year
dividend income (gross) from such shares accrued to his son amounted to Rs.
35,000. The settlement was done for a period of ten years.
(b) Kumar settles marriage of his son ‘S’ with ‘D’on 10thJuly 2015 and soon after gifted
Rs. 50,000 to D, the would be daughter in law. The marriage was celebrated in
December, 2016. Income from this accruing to D amounted to Rs. 10,000.
(c) Kumar is working as the Managing Director of X Co. Ltd., and received Rs.
50,000 as remuneration. He did not own any shares in the company. However,
his wife holds 30% of shares of the company in her own name bought out of
her own money.
K um ar’s other income is Rs. 1,00,000 and Mrs. K um ar’s other income is Rs. 50,000.
Discuss how the above transactions will be treated in the assessment o f K um ar’s income to tax.

Solution:
(a) Income of Rs. 35,000 by way of dividends accruing to his son is taxable in
the hands of Kumar, as he had retained the ownership of shares with himself.
Settlement for ten years is of no avail in this case.
(b) Income of Rs. 10,000 accruing to ‘D’ is taxable in her hands only because
the gifting was done before she became his daughter in law. Application of
section 64(1 )(vi) is not tenable here.
(c) This is a typical case. It is not clear that Kumar was appointed in the company
because of any technical qualification or experience. Hence, income from the
company will be subject to clubbing provisions of the Act. The clubbing is
3 .1 0 Inco m e Tax— II (2017-18)

done in the hands of that spouse whose income other than the income under j
reference is higher. In this case, Kumar’s income is higher and therefore the i
amount of Rs. 50,000 will be taxed in his hands only because income of his
wife is less than his income. Therefore, clubbing provisions in tnis situation do not
affect the assessment.

Illustration : 3
In the previous year 2016-17, Srinivas, a minor, is in receipt of income as follows: 1
(a) Rs. 20,000 as interest from bank in respect of deposit of a sum of Rs. 2,00,000 j
gifted to him over the years by his father.
(b) Rs. 5,000 as dividend from a foreign company on shares gifted to him by his
mother.
(c) Rs. 5,000 as interest from a firm on a capital contribution of Rs. 25,000 gifted j
to him by his maternal grandfather.
State the tax treatment of his income assuming his father and mother had each a
total income of Rs. 45,000 and Rs. 60,000 respectively in the previous year.
Will it make any difference if his father and mother are a divorced couple and his I
father maintains him in the previous year?

Solution:
According to section 64(1 A), all incomes arising or accruing to a minor child will I
be taxed in the hands of that parent whose total income (excluding the minor child’s I
income) is greater. However, income attributable to manual work done by the minor I
child or to any activity involving application of his skill, talent or specialized knowledge I
and experience will be taxed in the hands of the minor child only and not included in
the total income of his parent. ?
In the present case, Srinivas has a total of Rs. 20,000 arising to him as income in
the previous year. Since the marriage between his parents is subsisting, his income will
be included in the total income of his mother whose total income (excluding income
of Srinivas) is greater than the total income of his father. Accordingly, her total income
is calculated as follows :
Rs. Rs.
Total income excluding income of Srinivas 60,000
Add: Income of Srinivas [Sec. 64(1 A)]
[20,000 + 5,000 + 5,000] 30,000
Less: Exempt u/s 10(32) in respect of each
Minor child whose income is so includible 1,500 28,500
Total Income 88,500
According to the explanation to sec. 64(1 A), if marriage of the parents of the
minor child is subsisting, his income exceeding Rs. 1,500 will be included in the total
income of that parent whose total income, excluding income of the minor child, is
greater. However, if the marriage of his parents is not subsisting, then his income will
 me of Other P ersons Included in Total Incom e 3.11

beincluded in the total income of that parent who maintains him in the previous year.
Thus, if the parents of Srinivas are divorced couple, and if his father maintains him in
theprevious year, then his income will be clubbed with the total income of his father.

ration : 4
'scuss whether section 64 is applicable in the following cases :
(a) X creates a trust for the sole benefit of his friend’s minor child Y and appoints
Z as the trustee. Z as trustee joins a partnership by investing trust funds and
receives Rs. 20,000 as profit.
(b) X, an individual, is engaged in the business of money lending. On April l 2015.
he advances Rs. 10,00,000 to his HUF at the market rate of interest of 12% per
annum. During the previous year 2015-16, the HUF earns Rs. 4,00,000 as
profit on the money advanced by X (before paying interest). Determine:
(/') Is the amount of net income of HUF (i.e., Rs. 4,00,000 minus 12% of Rs.
10,00,000) includible in the income of X under section 64(2)?
(ii) Does it make any difference if X is not engaged in the business of money
lending?
(iii) Does it affect the applicability of section 64(2), if money is advanced at
the rate of 6% where as the market rate of interest is 12%?
(iv) Will the transaction come within the scope of sections 60 to 64, if X
foregoes his right to receive interest on the sum so advanced before the
date of accrual?

Solution:
{a) By virtue of section 64(1A), Rs. 18,500 (i.e., Rs. 20,000 - Rs. 1,500) is taxable
in the hands of the parent of Y during the minority of Y. If however, income
during the minority is accumulated and added to corpus and income from increased
corpus is given to the child after attaining majority, then the provisions of section
64(1 A) are not applicable.
(b) By advancing loan to the HUF, it cannot ordinarily be said that the lender has
transferred any asset to HUF without adequate consideration, if the money
is advanced at the market rate of interest. In the light of this observation, the
specific points raised in the problem can be answered as follows:
(/) Section 64(2) is not applicable, as it is not a case of transfer or conversion
of separate property into HUF property. As such no part of HUF’s income
can be clubbed with X’s income.
(ii) If the money is advanced at the market rate of interest, it does not make
any difference whether X carries on money-lending business or not. In
the given case, section 64(2) is, therefore, not attracted even if X does
not carry on money-lending business.
(iii) If money is advanced at a rate lower than market rate of interest, section
64(2) cannot be invoked, as the advance / loan does not amount to
3.12 Inco m e Tax— II (2017-18)

throwing of assets into common stock of the family or transfer of asset

to the family. Thus, Income tax department may, however, invoke sectic
60, which covers transfer of income without transfer of assets. Transfe
for purpose of section 60, includes any agreement or arrangement
Therefore, giving advance at less than market interest rate will amountl 1
to transfer of income without transferring asset. Accordingly, excess of
2
interest at market rate over 6% per annum is chargeable to tax in the
hands of X under section 60.
3
(z'v) If X forgoes his right to receive interest, the case will be clearly covered
by section 60 of the Act. Income arising from such asset will be included 4
in the total income of X. 5

Illustration : 5
K is the Karta of a HUF whose members derive income as given below:
Rs
(a) K, from business, which is his own 1,00,000 1
(6) K’s wife, a lecturer in a college (income from salaries) 80.000
(c) Minor son ‘S’ (holding shares in foreign company ‘A’,
Which were gifted to him by his grandfather) received
2
W) Dividends (gross) 30,000
Minor daughter ‘D’ acted in a Telugu film and received 2,00,000
(e) ‘S’ received winning from lottery 2,00,000
Explain how these shall be treated to tax.
3

Solution
(a) K’s income will be taxable in his own hands. 4
(b) K’s wife will be assessed to tax in respect of her income from salaries
separately.
(c) The income o f ‘S’, minor son ofK, will be included in the income of K fortax
purposes.
5
(d) Amount received by ‘D’, ‘K’s daughter (though minor) for acting in Telugii
film will be taxed in her hands only because this income is earned through her 6
talent.
(.e) Winning from lotteries received by S, K’s minor son will be taxable in the hards
of K. Therefore, assessment of K’s income shall be done as under:
7
Rs.

Profit from business 1,00,008

Dividends (gross) received by minor son S (Rs. 30,000 - Rs. 1,500) 28,508
Winning from lottery to minor son S (Rs. 2,00,000) 2,00,008
Gross Total Income 3,28,508
 Income of Other P ersons Included in Total Incom e 3.13

( QUESTIONS )

I. “An assessee is not only liable in respect of his own income but his liability to tax extends to
some others’ income also.” Discuss.
% Discuss the circumstances under which a minor’s income is liable to be included in the income
of the parent.
3. What are the provisions of law regarding the clubbing of the share of income o f a partner of an
association of persons?
4. How do you treat income from assets transferred revocable?
5. When is income arising to wife included in the income of her husband?

( EXERCISES )

1. Assessee was engaged to be married to R. The engagement was announced on 30-9-2016 and
marriage took place on 15-10-2016. Assessee transferred to R on 12-10-2016, debentures worth
Rs. 1,00,000. R received Rs. 15,000 as interest on these shares in September 2 015.1.T.O says it
is not R’s income. Is I.T.O. is correct or not.
2. Mr. X gifted gold jewellery worth Rs. 1,00,000 to his wife Mrs. X on 1-1-1998, which was
acquired on the same day. On 1-5-1999 Mrs. X sold this jewellery for Rs. 1,50,000 and invested
the same in a plot for Rs. 3,00,000. She paid the remaining amount out of her own funds. The
plot was sold for Rs. 7,50,000 on 1-11-2016. Compute the income chargeable to tax in the hands
of Mr. X and Mrs. X on the sale of jewellery as well as the plot.
3. X had gifted to his wife 100 shares of a company on which she received 150 bonus shares of the
company. She sold all the shares. Discuss whether the gain on such sale can be included irl the
assessment of X. If so, determine the extent to which such gain can be clubbed with' X ’s income.
4. ‘A’ made a gift of Rs. 50,000 to the wife of his brother ‘B ’ for the purchase of a house by her
and simultaneously B transferred certain shares of the value of Rs. 50,000 owned by him to A’s
minor son. During the year ending on March 31, 2017 the chargeable income from the house
property was Rs. 5,000 while the amount of dividend paid on the shares was Rs. 3,000. State
giving reasons why and in whose hands these two items of income will be taxed.
5. X is a partner o f a partnership firm. For the assessment year 2017-18 his share of loss in the firm
is Rs. 40,000. Can he set it off against his other income? Discuss the relevant provisions.
6. X is a 50% partner in XY and Co. a partnership firm, from which his wife is getting salary of Rs.
30,000. The total income of X (before clubbing) is Rs. 50,000, while the total income of Mrs. X
is Rs. 40,000. Determine total income of X and Mrs. X.
[Aits : Mr. X income Rs. 80,000, Mrs. X income Rs. 40,000]
7. A & Mrs. A , whose other incomes are Rs. 3,60,000 & Rs. 4,80,000 respectively, are both
employed in X Ltd and getting remuneration of Rs. 20,000 p.m. and Rs. 18,000 p.m. respectively.
TGhere share holding in the company along with relatives are Mr A 10% Mrs. A 5% Mr As
brother 6% Mrs As brother 8% determine total income of Mr A and Mrs. A and Mr A income
Rs. 3,60,000, Mrs. A rs. 9,36,000)
 Provisions of Set Off and Carry
Forward of Losses

The incomes under the various heads, after computation, shall be clubbed together and
aggregated as the Gross Total Income. The income of a person earned during a period
of one previous year may consist of different sources of income under the same head
and similarly consist of different incomes from different heads of income. A person
need not have only a positive income from every source of income, and hence may
end up even in a loss from any particular source. This loss can be for only a particular
source of income or can also be for the head of income itself, which will have to be
adjusted against other incomes to arrive at the actual taxable income so that the tax
shall be levied upon it. For such adjustment of losses, the provisions of the Income
Tax Act are categorized into two sets i.e., the provisions for set off of losses and the
provisions for carry forward and set off of losses. These two sets of provisions are
contained in sections 70 to 80 of the Act.
The phrase “set oft” means the adjustment of any negative income from one
source with the positive income of another source, bpth under the same head of
income (or) the negative income from one head of income with the positive income
from any other head of income. For example, if an individual owns a house property
which is occupied by himself on which he pays an interest on borrowed capital for
the construction of such house property, then the head “income from house property’
shall show a negative income to the extent of the interest paid by him on the house for
the previous year. Let us also assume that the individual is a salaried employee and
draws an income under the head salaries, whereby the head “income from salaries’
shall show a positive income. While clubbing these heads of income, we find that the
individual has two heads of income, one having a positive income and the other having
a negative income. Such negative income can be cancelled against the positive income
of the other head to arrive at the net amount of income derived by the person during
that particular previous year. But, as we see later in this chapter, all such negative
incomes cannot be cancelled against the other positive incomes of any other heads ol
income.
The phrase “carry forward and set off’ means the adjustment of any negative
income from one source for a particular previous year, after transferring to the nexi
previous year immediately succeeding the particular previous year, from the positive
 Provisions of S et O ff a nd C a rry F orw ard o f Losses 3.15

income from the same source of income for the succeeding previous year. In other
words, if there is a loss in one source of income or head of income during a particular
previous year, then such amount of loss is first carried forward to the next previous year
without canceling it with any other income of the current year, and then if in that next
previous year there is an amount of income from the same source, the brought forward
loss will be set off i.e. adjusted from such positive income. If in the next previous year
[here is no amount of income from the same source, then the loss amount shall be
carried forward to the next previous year for the second time and shall be adjusted in
that previous year. Like this, any negative amounts in any source of income shall be
eligible to be carried forward till eight years immediately succeeding the previous year
inwhich such loss has been incurred.
It is important to note that for availing set off of any loss pertaining to earlier
years, such loss should be declared in the income-tax return for the relevant year and
carried forward to the next vear(s) as per the applicable provisions. Further for availing
carry forward for any business loss or capital loss, the assessee is required to file a
return of income u/s 139(3). before the due date. However, CB DT may condone delay
infiling of return tor the purpose of allowing carry forward of losses, where the delay
isdue to genuine reasons such as physical inability due to an accident, etc.

SET OFF OF LOSSES

The activity of set off Can be carried out in two phases:
1. Intra-head set off; and
2. Inter-head set off.
An intra-head set off means the adjustment of any negative inc.cn:. ;,Qin one source
with the positive income of another source, both under the same head of income. An
inter-head set off means the adjustment of any negative income one.head of
,.r

income with the positive income from any other head of income.

I. Intra-head Set off of Losses [Section 70]

Any adjustment of loss from one source of income with the profit of any other source
of income, both sources under the same head of income, is kno wn an intra-head set
off of losses. This is eligible for all sources of income and in all heads of income except
in respect of sources falling under the nead “Capital Gains".
If there is income from one source and loss from another source, then the assessee
has no other option but to set off the loss against such income, both under the same
head of income, provided it js permissible under section 70 of the Act,,,
Tire provisions of this section allow' an assessee the benefit of set otf of loss even
from the. others’ income tr ■:>clubbed into the total income of the. assessee. In other
words, if any income of a minor child is included into the total income, of twa individual,
and if the individual has loss from any source of income, then the individual is
eligible to set off such loss from the income of the minor child clubbed into his total
income.
3.16 Inco m e Tax— II (20 17 -18)

There are a few exceptions to this rule that the loss from one source can be adjusted
or set off against the income from any other source of income both falling under the
same head of income. These exceptional cases are as follows:
(/) Loss from a speculation business: As per the provisions of section 73 of the
Act, any loss in respect of a speculation business carried on by an assessee,
can be set off only against an income from another speculation business and
not from any non-speculation business income. Although the head “Profits
and Gains of Business or Profession” includes business incomes, and business
incomes include both speculative and non-speculative business incomes,
these two sources of the same head cannot have an inter-source set off of
losses from the point of speculation business loss, i.e., loss from speculation
business cannot be set off from non-speculation business profit. However, the
non-speculation loss i.e., normal business loss can be set off from any profit
from the source of speculation business for the assessee.
(//) Loss from the activity of owning and maintaining race horses: As per the
provisions of section 74A of the Act, if any loss incurred by an assessee in
relation to the activity of owning and maintaining race horses, then such loss
can only be set off against the income arising out of such an activity and not
any other source under the same head.
(iii) Loss on account of casual incomes cannot be set off against winnings from
casual incomes: Any expenditure or loss on casual incomes like lotteries,
horse races, gambling, card games, betting, crossword puzzles, etc., is not
allowed to be set off against the winnings from such sources.
(/V) Loss from an exempt source : Any loss incurred by an assessee in relation to
a source of income that is exempt as per the provisions of the Act, cannot be
set off against the winnings from any other source of income that is taxable.
In other words, on any income that is exempt from tax, the expenses and loss
cannot be allowed, hence cannot be set off against any other income.
(v) Capital losses : The capital losses can be of two categories, short-term and
long-term. Though these two categories of sources fall under the same head
of income, the losses from long-term capital assets cannot be set off against
short-term capital gains. In other words, the loss on short-term capital asset
can be set off against both short-term and long-term capital gains, but the loss
on long-term capital asset cannot be set off against the short-term capital gain.
It can be set off only against long-term capital gains.
(vi) Loss from purchase and sale of securities.
(v/7) Loss form specified business U/S 35.AD : Loss from specified business can
be set off only from profit from such specified busines only. Other business
profits and other heads should never be used for setting off of the losses (A.Y
2010- 11).
 The cases where intra-head adjustment of losses is not allowed, are also taken here
asthe cases where inter-head adjustment of losses is not allowed. They are:
(/) Loss from a speculation business cannot be set off against any other income.
(//) Loss from the activity of owning and maintaining of racehorses cannot be set off
against any other income.
(Hi) Loss on account of casual incomes cannot be set off from winni ngs from casual
incomes.
(iv) Loss from sources that are exempt cannot be set off from any other income.
(v) Loss under the head “Capital Gains”
(vij Business Loss cannot set off against salary income.
(v/ij Loss from a specified business under section 35AD cannot be set off against
other income.
As per the provisions of section 71 of the Act, the loss from any head of income
ther than “Capital Gains” can be adjusted against the income from another head of
ome including “capital gains” in the same assessment year. As per the provisions of
eAct, there is no specific mode prescribed for set off of losses. Hence, in the absence
fany specific provision, the assessee has the right to choose to set off the losses in the
nerthat is most beneficial to the assessee.
If there is income from one head and loss from another head, then the assessee has
©other option but to set off the loss against such income, provided it is permissible
der section 71 of the Act. For example, the loss incurred by the assessee on the
mature encashment of the fixed deposits with banks, is eligible to be set off under
ction 71 from any other income of the assessee, provided the interest on such deposits
as been taxed on the basis of either receipt or accrual basis in the earlier year(s).

stration : 1
e following particulars are supplied to you for computation of gross total income of
e assessee for the assessment year 2017-18.
3.18 Inco m e Tax— II (2017-18

Rs.
Salary income (computed) 3 5 .0 0 0
Income from house property A 10,500:1

Loss from house property D 13.000 '

Loss from registered firm 20.000

Profit from speculation business 5 6 .0 0 0

Long-term capital gains J

3 5 .0 0 0

Long-term capital loss i. !00 l

Interest on securities 12.100 :i

Solution
Computation of Gross Tota1 Income of the Assessee
for the Assessment Yt; r 2017-18
R s. Rs.i
Salary 3 5 .0 0 0 1
Income from house property:
Income from Property A 3 0 .5 0 0
Less : Loss from Property D ; KU 9

.23 ( - ) 2.500 I
and g a i n s from business and p r o f e s s i o n :
P r o f its
Profit from speculation ' 5 ,000 I
Capital gains:
Long-term c a p i t a l g. iris 5 5 -G rrr
Less : L o n g e r m c u m in ! loss : .1,0 i •
f 25 ,0 0 0

Income from Other S o u r c e s :

Interest o n s 'purities 1 2 .4 0 0

G ro ss Total hue . i 2 5 ,9 0 0 ]
s— - —— -

Illustration : 2

M r . Satyam submits the follovarg parties nr? c ■ a ~C '/ " a e n t \ 6ar 2 0 1 7 -1 ™

Compute his gross total income.
'
Rs.'
S a fe r from Good Luck L td . ( c o m p u t e ' 4 5 ,0 0 0
P r o f it from agency business 3 4 ,0 0 0
L o s s f r o n t cloth business 10.0 0 0
1 o s s f r o n t short-term capital a s s t-. i 0 ,0 0 0
L o s s from speculation in silver 5 6 ,0 0 0
W in n i n g s from lottery 5 0 ,0 0 :
C a s u a l income 5,0Q j*
I n t e r e s t on securities (gross) i 0 ,0 0 0 .
 Provisions o f S et O ff and C a rry F orw ard o f Losses 3.19

Solution:
Computation of Gross Tot'd Income of Mr. Satyam
for the Assessment Year 2017-18
Rs. Rs.
Salary 45,000
Profits and gains from business and profession: iiqno rrri:
Profit from agency business 34.000 : 223,1

Less: Loss from cloth business 10.000

24,000
Income from Other Sources:
Casual income 5,000
Winnings from lottery 50.000
Interest on securities 10.000
65,000
Gross Total Income 1,34,000

■Mote: Loss from speculation can be set-off only against profits from speculation business. Similarly,
loss from capital assets can be set-off only against profits from such assets. As there are no
speculation profits and capital asset profits, these losses should be carried forward to the next
year for set-off.
tins ten 123220! oriT .atusv Jnsopsadyz rioua to smooth to bssd Snusa sdt isbnu omooni
Illustration : 3
The following are the particulars of income and loss of an individual under different
heads of income. Calculate the Gross Total Income of the individual for the assessment
year 2017-18.
Rs.
Income from house property A 5.000
Loss from house property B 8.000
Income from interest on securities 20,000
jfiboqe 323d:
Loss from a cycle business 20,000
Profit from speculation business 20,000
Loss from short-term capital asset 6,000
Long-term capital losses n q sgu o n 25.000
Long-term capital gains on Investments mot 21.000
;022G 3mS2 3flf gfihub
say jn sru
Solution ti nad )22B teril ni
Computation of Gross Total Income of an Individual go Jnuomfi
m o i l 3 f f l0 3 f ll DC
for the Assessment year 2017-18
------------------
—

Biss'/ 8'tl .banuooo atrf 2 2 0 ! douz doirSo Rs. Rs.

Income from house property:
Income from house property A 5,000 T ,boq;:oo -
Loss from house property B onii l:-v . • (-) 8,000 ’•j'i :
(-) 3,000
3.20 Inco m e Tax— II (2017-18)

Profits and gains of business or profession:

Profit from speculation business 20,000
Loss from cycle business ___ 2Q.QQQ___
Nil :
Capital gains:
Long-term capital gains 21,000
Less: Long-term capital loss ___ 25,000___
Long-term capital loss to be C/F (-) 4,000
Short-term capital loss to be C/F (-) 6,000
Nil
Income from Other Sources:
Interest on securities 20,000
Gross Total Income 17,000

CARRY FORWARD AND SET OFF OF LOSSES

If the losses cannot be set off under the same head (intra-head) or under different
heads (inter-head) in the same assessment year, then a few of such losses are allowed
to be carried forward to the subsequent years and can be claimed to be set off from the
income under the same head of income of such subsequent years. The losses that can
be carried forward to the subsequent years are:
(a) House property loss (w.e.f. assessment year 1999-00)
(b) Business loss
(c) Speculation loss r
(d) Capital loss
(e) Loss on account of owning and maintaining racehorses.
The various provisions of the Income Tax Act in relation to the carry forward and
set off of losses in relation to these specified losses are as follows:

1. Carry Forward and Set off of House Property Loss [Section 71B]
Any loss under the head ‘house property’, will be first set off intra-head, then if it is not
adjustable within the head, it is set off from the incomes of any other head of income
during the same assessment year. If still any amount of loss is left over in this head
in that assessment year, then it is carried forward to the subsequent year where such
amount can be set off against any income derived under the head “Income from
House Property” only, This provision of carry forward is allowable only for a period
of 8 years immediately succeeding the year in which such loss has occurred. If 8 years
expires first, then the loss cannot be set off, and it shall become a loss that cannot be
recouped. This provision is available from the assessment year 1999-00 onwards as
this provision of section 71B was inserted into the Act w.e.f. 1.4.1999.
Provisions o, Set Off and Carry Forward of Losses 3.21

2. Carry Forward and Set off of Business Loses [Sec. 72]

Ifany assessee cannot set off his loss under the head ‘profits and gains of business or
profession’ (other than the loss from speculation business) because of either he had
less income than the loss or he had no income under any other head of income, then
suchloss can be carried forward to the following subsequent assessment years to be set
offagainst the profits and gains of business or profession. This carry forward is subject
tothe following conditions:
(0 Business losses can be adjusted only from business income: Any loss
incurred by an assessee in his business in one year can be first set off from
any other source of the same head. If still any amount of loss is left over, it
will have to be set off from any other income derived by the assessee during
the same year, from any other head of income. Even after this, if the assessee
finds that the loss is left over, he can then carry forward such loss to the next
year, whereby he should set off such carried forward loss from income under
the head profits and gains from business or profession (need not be the
same business) only.
Business loss can not be set off against salary income: From the A.Y. 2005-06
loss from the business cannot be set off against income under the head
salaries.
(//) Business in respect of which a loss is incurred major may not be continued
: If an assessee incurs any loss in relation to any business, he can carry forward
such loss to the subsequent years for set off. This provision is available,
subject to the condition that a business should be in existence, with an income
from which the brought forward loss can be adjusted or set off. Such business
need not be the same business in which the loss was brone by the assessee to
claim the set off of such loss.
(iii) Loss can be set off only by the assessee who incurs such loss [Section
78(2)] : If any person is transferring his business to another person, otherwise
than by inheritance, Analgamation, succession of proprietory concern or a
firm by a company and demerger, and If the loss suffered by the first person
is still available to be set off, then the second person who is acquiring the
business of the assessee, will not be eligible to claim such loss suffered by the
first person to be set off from the gains earned by him in the acquired business.
In other words, the assessee, who has suffered the loss and in whose hands the
loss has been assessed, shall be eligible to carry forward the loss and set of the
same against his business income of the subsequent year.
(z'v) Period of carry forward : The loss incurred each year is separate from the
other years’ losses. Each year’s loss can be carried forward for a maximum
period of 8 assessment years immediately succeeding the year in which such
loss was assessed and return filed. This period of 8 assessment years shall
exclude such period during which a company may remain sick or closed
temporarily. There is an exception to this rule, that there is no maximum limit
of time period for carrying forward certain losses, and these losses can be
3.22 Inco m e Tax— II (2017-18)

carried forward indefinitely. These losses are unabsorbed depreciation,

unabsorbed capital expenditure on scientific research and unabsorbed
expenditure on family planning.
(v) O rder of set o ff: As per the provisions of section 72(2), set off of the current
year expenditure and losses and the brought forward expenditure and losses
will have to be done in a sequential manner. The sequence is:
(o) Current year depreciation [Section 32(1)];
(.b) Current year capital expenditure on scientific research and current year |
expenditure on family planning to the extent allowed;
(c) Brought forward business or profession losses [Section 72(1)];
(d) Unabsorbed depreciation brought forward from previous assessment
year(s) to the current assessment year [Section 32(2)];
( e) Unabsorbed capital expenditure on scientific research [Section 35(4)]; 1
(/) Unabsorbed expenditure on family planning [Section 36( 1)(ix)].
(vf) Return of loss : The return relating to the loss must have been furnished I
before the due date prescribed u/s 139(1), failing which the loss cannot be I
carried forward to the next assessment year(s).
(v/7) In case of violation of conditions : If a sole-proprietary concern or a firm b I
converted into a company as per the provisions of section 47(xiii) or (xiv), then I
the unabsorbed depreciation and / or loss of such sole-proprietary concern or firm I
shall be deemed to be the loss sustained by the successor company, which can I
claim to set off and carry forward such loss, as per the provisions of the Act, I
provided the conditions as stated in section 47(xiii) or (xiv) are fulfilled and I
continued to be fulfilled. If in any year, such successor company violates any of I
the provisions and conditions, then the amount of loss and depreciation that I
was allowed to be set off; shall be deemed to be the income of such company I
during the year in which such conditions are violated, and shall be subjected to I
tax.
(viii) In case of reestablishment of a discontinued business : As per the I
provisions of section 72(1) of the Act, if there is any loss from a business,!
which was discontinued due to the circumstances specified in section 33B, I
the assessee can reestablish, revive or reconstruct such business only before the I
expiry of a period of three years from the end of the previous year in which it I
was discontinued, and can set off such loss incurred from the income derived from I
such reestablished business. He shall be entitled to claim the loss completely I
in the first assessment year after reestablishment of the business, and if he I
cannot wholly set off such loss, the balance amount can be carried forward I
to the following assessment year and so on for a period of seven assessment I
years immediately succeeding the first year. The circumstances as specified I
in section 33B are:
(a) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of I
nature;
 Provisions of Set O ff and C a rry F orw ard o f Losses 3.23

(b) Riot or civil disturbance;

r (c) Accidental - fire or explosion;
(d) Action by an enemy or action taken in combating an enemy (whether with
° or without a declaration of war).

3. Carry Forward and Set off of Speculation Loss [Section 73]

Any loss sustained from a speculation business can be set off only against an income
from speculation business. If in any assessment year, there is no speculation profit
but there is only speculation loss, then such loss cannot be set off against any other
income, neither intra-head nor inter-head adjustment is available. In such case, such
loss can be carried forward to the subsequent assessment year to be set off from only a
speculation profit income in such assessment year. If there is no such profit or the profit
available is not sufficient in such next assessment year, then the balance amount of
loss that is unabsorbed or unadjusted shall be carried forward to the second subsequent
assessment year and so on till the loss is fully absorbed or till the expiry of 8 assessment
years immediately succeeding the year in which the loss was first incurred. However,
w.e.f. A.Y. 2006-07 such loss can be carried forward for 4 assessement years, instead
of8 assessment years.
M e: W.e.f. A.Y. 2006-07 loss from derivative trading shall be treated as loss from non-
speculative business.

Just like the provisions for a business, even in the case of speculation income need
not be earned on the same source, which incurred the loss. That is, there should be an
income from any speculation to set off the brought forward loss, but the speculation
need not be on the same area. For example, if an assessee has incurred loss on
speculation of gold in one year, and the next year he has an income on speculation in
shares, the loss of the first year can be set off against the income in the second year as
both are from speculation though the sources differ.

Loss on speculation includes loss due to bad debts, loss due to irrecoverable profits
and also loss due to interest on borrowings. If loss on speculation is brought forward
from the previous assessment year(s), then in the sequence of set off of profits for the
year shall contain set off of brought forward speculation loss before the unabsorbed
depreciation and the unabsorbed capital expenditure on scientific research are allowed
to be set off during the current assessment year. It is important to note that any loss
incurred from illegal business of speculation is not eligible for carry forward and set
off in the subsequent years from profits of any other speculative business.

4. Carry Forward and Set off of Capital Loss [Section 74]

If an assessee faces any capital losses in any year, the short-term capital loss is
adjustable from any capital gain whether short-term or long-term, but the long-term
capital loss is adjustable only from long-term capital gain. If this set off cannot be
3.24 Inco m e Tax— II (2017-18)

made in the year of loss, then such loss shall be carried forward to the subsequent y
to be set off from the respective source of income to a maximum period of 8 years. I
the subsequent year(s) also, a short-term capital loss can be set off from either Ion"
term or short-term capital gain, but a long-term capital loss can be set off only agar
long-term capital gain. Here also it is compulsory that the return for the carry forw-
of loss is filed before the due date, to claim the carry forward and set off of such loss.

5. Carry Forward and Set off of Loss on Account of Owning and

Maintaining Racehorses [Section 74A]
Any loss sustained by an assessee due to owning and maintaining racehorses sh
first be adjusted in the same year from any income from the same activity of ownf
and maintaining racehorses during such year. If there is no such income, or if the
income available from such source is not sufficient to set off the loss, then the to
amount of loss, which is not adjustable, shall be carried forward to the subsequent year
to be set off from the income arising out of the activity of owning and maintaining
racehorses during such subsequent year. This loss can be carried forward to the next
assessment years, upto a maximum of 4 years immediately succeeding the year in
which the loss was incurred. The process of carry forward and set off of the loss in!
the succeeding year(s) can be allowed only if the return for the loss incurred is filed
before the due date as prescribed under section 139(1).

ADDITIONAL POINTS TO BE NOTED

1. Compulsory Filing of Loss Returns [Section 80]

The carry forward of the above stated losses can be allowed provided such loss has
been determined by the Assessing Officer in pursuance of a return of loss submitted by
the assessee on or before the due date for filing of the return as prescribed under section
139(1). The exceptions to this rule are that, the loss under the head Income from House
Property and the unabsorbed depreciation which is covered under section 32(2), can
be carried forward even if the return is not filed within the due date mentioned under
section 139(1).

2. Power to Condone Delay in Filing a Return of Loss

According to the ruling of the Karnataka High Court, the CBDT has power to condo
any delay in cases of claim of carry forward of losses in cases where returned income
is a loss, i.e., if any assessee fails to submit or file a return of loss within the prescribed
time limits and his returned income is a loss, then CBDT has power to condone (acce
or forgive) it, with some monetary limits prescribed for condonation of delay in makf
refund claims. The various monetary limits prescribed for the condonation of delay i
cases of claim of carry forward of losses by different income tax authorities applicab
are :
 2 0 1 7 -1 8) Provisions o f S et O ff and C a rry F orw ard o f Losses 3 .2 5

Jent year (a) Where the loss does not exceed Rs. 10,000 : The Assessing Officer shall
years. In obtain prior approval of Commissioner of Income Tax.
ler long- {b) Where the loss is in between Rs. 10,001 and Rs. 1,00,000 : The Assessing
y against Officer shall obtain prior approval of Chief Commissioner of Income Tax or
forward Director General of Income Tax.
ich loss. (c) Where the loss exceeds Rs. 1,00,000 : The power of condonation as well as
power of rejection in all cases lies with the CBDT.

3. Brought Forward Loss Must be Set off in the Immediate Succeeding Year
>es shall All the losses specified above, that are eligible to be carried forward, shall be set off
"owning in the immediate succeeding year to the year of occurrence of loss. If such loss is not
or if the absorbed completely, the balance shall be adjusted in the second subsequent year and
the total so on. But if an assessee does not set off the loss even if there exists a profit in any
lent year subsequent year, then such amount of loss cannot be allowed in any of the subsequent
ntaining years even though the time limit of 8 years has not expired. In other words, if there is
the next any amount of income available from the relevant source for a brought forward loss
year in during any year, then whether fully or partly, such amount shall be utilized to set off
; loss in the loss brought forward and the balance if any, shall be carried forward to the next
! is filed year. If this is not done, and the whole amount of loss is carried forward to the next
year without adjusting the existing income from such source, then the assessee shall
lose the chance of set off of such loss to the extent of the full amount in any of the
subsequent years.

4. Provisions in case of Amalgamation, Demerger or Reorganization

loss has (Sec. 72A)
itted by Sub-sections 1 to 6 of section 72A of the Income Tax Act lay down the provisions for
section carry' forward and set off of accumulated loss and unabsorbed depreciation in cases
i House of amalgamation, demerger and reorganization of business. These provisions are as
[2), can follows :
d under (a) In case of amalgamation [Section 72A(1), (2) and (3)] : As per the provisions
of these sub-sections, if any company is amalgamated, then the accumulated
loss and unabsorbed depreciation of the amalgamating company(s) shall be
deemed to be the loss of the amalgamated company for the previous year in
ondone which such amalgamation is effected and all the provisions as stated above for
income set off •md carry forward and set off of loss shall be applicable and available
scribed to the amalgamated company.
(accept (b) In case of demerger [Section 72A(4) and (5)] : As per the provisions of
flaking these sub-sections, the carry forward and set off of accumulated loss and
lelay in unabsorbed depreciation shall be allowed only when the demerger is as per
ilicable the provisions of section 2(19AA) of the Income Tax Act. The Central
Government may, for the purposes of this Act, notify such conditions, as it
may consider necessary to ensure the demerger to be for genuine business
operations through the Official Gazette.
3.26 Income Tax— II (2017-18) I

(c) In case of reorganization of business [Section 72A(6)[ : If any partnership

firm is reorganized into a company as per the conditions laid down in section
47(xiii) or if a sole proprietary concern is reorganized into a company as per
the conditions laid down in section 47(xiv), then the accumulated loss and
unabsorbed depreciation of such firm or sole proprietary concern shall be
deemed to be the loss of the company for the previous year in which such
reorganization takes place and all the provisions of set off of loss and carry
forward and set off of loss as stated above shall be applicable accordingly.

5. Carry Forward and Set off of Loss When Business Changes Hands
(Sec. 78(2)
If any person carrying on any business or profession sells off or hands off his business
to some other person otherwise by inheritance, then such other person shall not be
eligible to claim the unabsorbed depreciation or the loss incurred by the transferor of
the business. It is only the transferor who incurred such a loss, and hence only he can
claim such loss against his income from any other business.

6. Carry Forward and Set-off of Loss in Case of Certain Companies

(Sec. 79)
In the case of any company in which public are not substantially interested, the I
unabsorbed loss and unabsorbed depreciation of any assessment year can be carried
forward and set off against the incomes of its subsequent years as applicable to all
other situations as stated above, provided there is no change in the shareholding of
the owners of such company. If any change takes place in the shareholding in any 1
previous year, then to claim the provisions of carry forward and set off of the amount
of loss incurred in any year prior to such previous yeaf, the relevant voting powers
shall be compared. If. as on the last day of the previous year in which the'change in
the shareholding took place, and as on the last day of the previous year in which such j
loss was incurred, the shares of the company carrying not less than 51% of the voting
power are beneficially held by the same persons, then the provisions of carry forward
and set off shall be applicable to the company. If there is any difference in the voting I
power and beneficiaries, then the provisions relating to carry forward and set off shall I
not be applicable to the company.
This provision shall not be applicable to any change in the voting power due to the
following situations :
(a) The death of a shareholder;
(b) On account of transfer of shares by way of gifts to any relative of the
shareholder making such gift;
(c) Any change in the shareholding of an Indian company (which is a subsidiary
of a foreign company), and the change arising due to an amalgamation or
demerger of a foreign company, provided that at least 51 % of the shareholders
of the company shall continue to be the shareholders of the newly amalgamated
foreign company.
 Computation of Taxable Income for the A. Y. 2017-18

Rs. Rs.
Income from house property:
Loss from self occupied house (-) 5,000
Profits and gains of business or profession:
Business profit 20,000
Less: b/f business loss 10,000
10,000
1 ___________ Taxable Income__________________________________ 5,000
Hole: The capital loss on shares shall be carried forward to the next year, as there is no capital gain
in this year.

Computation of Taxable Income if the Brought Forward

Business Loss was Rs. 25,000

Rs.
income from house property:
Loss from self occupied house (-) 5,000
Profits and gains of business or profession:
Business profit 20,000
Balance income available 15,000
Less: b/f business loss of Rs. 25,000 to a maximum of 15,000
Taxable Income Nil

Note: The amounts that shall be carried forward to the next year are Rs. 60,000 loss on shares of
the current year and Rs. 10,000 loss on business that is brought forward from 2014-15.

Illustration : 5
I The following are the particulars of income of an assessee as determined by the 1.T.0
[ for the assessment year 2017-18. Compute his total income.
3.28 Inco m e Tax— II (2017-1

Assessment year 2016-17

Silver speculation loss (discontinued)
Hosiery business loss
Rolling Steel Mill profit (before charging dep. Rs. 10,000)
Profit from another business
Income from house property
Assessment year 2017-18
Gold speculation profit
Hosiery business loss
Rolling Steel Mill profit (before charging dep. Rs. 10,000)
Profit from another business
Income from house property

Solution:
Computation of Total Income for the A.Y. 2017-18
Rs.
For Assessment year 2016-17
Income from house property
Profits and gains of business or profession:
Profit from another business 5.000
Less : Loss from Hosiery business 6.000
(-H

Balance available 1,0(1

Profit from Rolling Steel Mill 8,000
Less: Depreciation 10,000
Unabsorbed depreciation (-) 2,000 (-)!■«
Unabsorbed depreciation C/F to next year (-) 1,000
Silver speculation loss C/F to next year (-) 10.000
Total income N
For Assessment year 2017-18 :
Income from house property 2,01
Profits and gains of business or profession:
Profit from another business 16,000
Less: Loss from Hosiery business 2,000
Add: Profit from Rolling Steel Mill 14,000
6,000
20,000
Less: Depreciation 10,000
10,000
Less: B/F unabsorbed depreciation
1,000
 Provisions of Set O ff and C a rry F orw a rd o f Losses 3.29
f7—18)

Rs. 9,000
iid: Speculation gains 20,000
10,000
. 29,000
1 Less: B/F speculation loss 10,000 19,000
6,000
8,000 T o ta l I n c o m e 21,000
[5,000
I 2,000 I Illustration : 6
Fromthe following particulars, determine the assessable profit or loss to be carried
^0,000 forward as the case may be for the assessment year 2017-18.
2,000
6,000 Rs.
16.000 Loss for 2009-10 B/F 1,00,000
Loss for 2010-11 B/F 15,000
: 2,000
Depreciation allowance for 2010-11 B/F 5,000
Loss for 2011-12 B/F 10,000
Depreciation allowance for 2011-12 B/F 5,000
Loss for 2012-13B/F 5,000
Depreciation allowance for 2012-13 B/F 2,500
Loss for 2013-14 B/F 5,000
Depreciation allowance for 2013-14 B/F 2,500
Profit for 2014-15 15,000
Depreciation due for 2014-15 5,000
1,000 Profit for 2015-16 50,000
Depreciation due for 2015-16 10,000
1,000 Profit for 2016-17 1,20,000
Depreciation due for 2016-17 10,000

1,000 Solution
D e t e r m in a t io n o f A s s e s s a b le P r o fits
F o r th e A s s e s s m e n t Y e a r 2 0 1 7 -1 8
Nil
For previous year 2014-15 (A.Y. 2015-16) Rs. Rs.
Profit 15,000
2,000 Less: current year depreciation 5,000-
10,000
B/F loss from 2009-10, upto max. of 10,000
Taxable income Nil Nil
[Rs. 90,000 losses of 2009-10, and all other losses are
to be carried forward to next year(s)]
For previous year 2015-16 (A.Y. 2016-17)
Profit 50.000
Less: current year depreciation 10.000
40.000
B/F loss from 2009-10, upto max. of 40.000
Taxable income Nil
[Rs. 50,000 losses of 2009-10, and all other losses are to be
carried forward to next year(s)]
For previous year 2016-17 (A.Y. 2017-18) Rs. Rs,
Profit 1,20,000
Less: current year depreciation 10,000

1. 10,000
Less: B/F loss from 2009-10 50,000
60,000
Less: B/F business loss from 2010-11 15.000
B/F business loss from 2011-12 10.000
B/F business loss from 2012-13 5.000
B/F business loss from 2013-14 5.000
B/F unabsorbed dep. from 2010-11 5.000
B/F unabsorbed dep. from 2011-12 5.000
B/F unabsorbed dep. from 2012-13 2.500
B/F unabsorbed dep. from 2013-14 2.500 50.(

Taxable Business Income 10,000

Illustration : 7

Mr. Bhargava furnishes the following perticulars of his income for the previous year
2016-17
House property (/') Delhi (ii) Dubai Rs.
Business Income (Profit) 5.00,000
(Loss) 2,00,000
(z')Jute mill situated in Pakistan
Controlled from Delhi, received in Pakistan (Loss) 15,00,000
(ii) Cotton Mills, Kolkata (Profit) 18,00,000
Speculation
(/) Shares (Profit) 2,00,000
(ii) Silver (Loss) 5,00,000
Capital Gains
(0 Short term (Gain) 3,00,000
(ii) Longterm (Loss) 2,00,000
Income from other sources
(/)Card games (Profit) 2,50,000
(zY)Loss from the activity of owning and
maintaining horse races (Loss) 3,00,000
Compute Gross Total income for the A.Y. 2017- 18 on the assumption that he is
(a) Resident and ordinarily resident, (b) Resident but not ordinarily resident, (c) Non-
resident.
 (visions o f S et O ff and C a rry F orw ard o f Losses 3.31

Solution:

Com putation of Gross Total Income for the A.Y. 2017-18

Case I Case 11 Case HI

Ordinarily Not ordinarily Non­
resident resident resident
Rs. Rs. Rs.
House property - Delhi 5,00,000 5,00,000 5,00,000
Dubai (-) 2,00,000 - -
Total 3,00,000 5,00,000 5,00,000
Business Income
Jute Mills (-) 15,00,000 (-) 15,00,000 -
Cotton Mills 18,00,000 18,00,000 18,00,000
Total 3,00.000 3,00,000 18.00.000
Speculation - Shares 2,00,000 2,00,000 2,00,000
Silver (-) 5,00,000 (-) 5,00.000 (-) 5,00,000

Total M 3.00.000 (-) 3.00.000 M 3.00.000

Capital Gains - STCG 3,00,000 3,00,000 3,00,000
LTCG C/F(-) 2,00,000 C/F(-) 2,00,000 C/F(-) 2,00,000
Total 3.00.000 3.00.000 3 00 000
Income from other sources
Card races 2,50,000 2,50,000 2,50,000
Loss from the activity of
owning and maintenance
horse races C/F (-) 3,00,000 C/F (-) 3,00,000 C/F (-) 3,00,000
Total 2.50.000 2.50.000 2.50.000
Gross Total Income 11,50,000 13,50,000 28,50,000

Illustration : 8
From the following particulars of the income of Mr. Kalyan for the previous year
2016-17.
1. Income from salary (computed)
1, 00,000
2. Income from house property
(a) Hyderabad Property 36,000
(b) Nizamabad Property (-) 60,000
3. Income from Business
(a) Cloth business 1,20.000
3.32 Inco m e Tax— II (2017-18)

(b ) Garments business (-) 1,50,000

Speculation
(a) Silver 1,20,000
( b ) Bullin (-) 30,000
Capital gains
(a) Long-term capital gains 90,000
(b ) Short-term capital loss (-) 30,000

Income from other sources

(a) Card games loss (-) 30,000
( b ) From the activity of owning and
maintaining horse races
(0 Loss at Hyderabad (-) 1,50,000
(//) Profit at Bangalore 1.20,000
(c) Dividend from Indian companies 30,000
(d) Income by letting out plant and machinery 1,83,000
6. The following losses have been caried forrowed.
(a) Long term capital loss from the A.Y.. 2014-15 54.000
(b) Loss from silver speculation from the assessment
year 2014-15 and which was discontinued in the
A.Y. 2014-15 75,000
Compute the Gross Total Income for the A.Y. 2017-18.

Solution
Computation of Mr. Kalyan’s Gross Total Income
for the A.Y. 2017-18

Rs. Rs.
1. Income from salary
2. Income from house property
Hyderabad 36,000
Nizamabad (-) 60.000 (-) 24,000
3. Income from business:
Cloth 1,20,000
Garments (-) 1,50,000 (-) 30,000
Speculations:
Silver 1,20,000 1,20,000
Less : Set of Silver (20014-15) M 75.000
45,000

Less : Bullian Loss M 30.000 15,000

4. Capital gain
Provisions o f S et O ff and C a rry F orw a rd o f Losses 3.33

Long-term capital gain 90,000

Less : Set off of long-term loss of 2014-15 (-) 54,000
36,000
Less : Short-term capital loss
(-) 30,000 6,000
5. Income from other sources
(a) Card games loss C/F c/f 30,000

(b) Activity of owning and maintaining

horse races
Hyderabad (-) 1,50,000
Bangalore 1,20,000 C/F 30,000
(c) Dividend from Indian company Exempt
(d) Income by letting plant and Machinery 1,83.000

Gross Total Income 2,50,000

N otes:
Income from salary 1, 00,000
Income from speculation 15,000
Capital gain • 6,000
Income by letting plant and machinery 1.51.000
Total 3.04.000
Less: Inter-Head Setoff
Loss from house property 24,000
Loss from business 1HQQQ 54,000.
Total _ 7 , 5 0 ,0 0 0

(/) Card games loss carried forward 30,000

(//') Activity of owning and maintaining horse races C/F ---------3Q.Q0Q
3.34 Inco m e Tax— II (2017-18)

( QUESTIONS )
1. How do you set-off speculation loss? What are the provisions of carry forward and set-off of
speculation loss?
2. Briefly explain the provisions relating to set-off of loss from one head against income from j
another head.
3. How do you carry forward and set-off business loss and speculation loss?
4. How do you set-off loss from racehorses?
How will you treat the following?
(a) Unabsorbed depreciation allowance.
(b) Set-off and carry forward of long-term and short-term capital losses.
(c) Carry forward o f business losses.
(d) Loss under the head “Income from house property.

( EXERCISES
Compute the gross total income of an assessee from the following incomes/losses for the
assessment years 2016-17 and 2017-18.

A.Y. Rs. 2016-17 A.Y. Rs. 2017-18

Rs. Rs.
Profit from business 20,000
Loss from business 90.000
Long-term Capital gains on sale o f shares 10,400
Long-term capital loss on sale of shares - 5,600
Interest on Securities (gross) 30,000 36,000
Rent from House Property 30,000 30,000
Income from other sources 6,000 8,000

[Aits.: Business loss Rs. 22,600 c/f; Gross total income Rs.
65,000]
The following particulars relate to Reddy brothers, Mumbai. Compute the gross total income for
the assessment year 2017-18.
Rs.
Losses from business 20,000
Income from house property (computed) 8,000
Interest on securities 20,000
Income from other sources 50,000
Brought forward business losses (A.Y. 2014-15) 20,000
Unabsorbed depreciation (A.Y. 2013-14) 80,000
[Ans.: Gross total income Rs. Nil; Unabsorbed depreciation Rs. 22,000
should be carried forward, 2014-15 Business Loss C/F 20,000]
From the following particulars o f Mr. Zafar, compute the gross total income for the assessment
year 2017-18.
Rs.
Rent received from house property 40,000
Business profits before charging depreciation 30,000
Speculation profits 8,000
Short-term capital gains 9,000
 Provisions o f S et O ff and C a rry F orw ard o f Losses 3 .3 5

Depreciation for the year 9,000

Speculation loss b/f from last year (business discontinued) 6,000
Long-term capital loss b/f 5,000
Business loss b/f 25,000
Unabsorbed depreciation b/f 4,000
[A/is.: Business loss c/f. Rs. 2,000; Long-term capital loss
c/f. 5,000; Gross total income Rs. 33,000]
4. The following particulars are supplied by Mr. Barua enjoying the status of resident in India and
you are required to compute his gross total income for the assessment year 2017-18 keeping in
view the various provisions relating to set-off of losses.
Rs.
Income from let-out house (computed) 8,000
Income from residential house Nil
Profit from T. V. business 19,600
Current year’s depreciation 500
Speculation income 1,900
Short-term capital gains 3,200
Long-term capital gains 8,500
The following items have been brought forward from the preceding assessment
year:
Loss from cycle business - discontinued during the
Previous year 2015-16 3,900
Loss from T. V. business 1,900
Unabsorbed depreciation 1,000
Unabsorbed investment allowance 1,100
Speculation loss 3,200
Short-term capital loss B/F from P.Y. 2015-16 4,100

[Ans. : Gross total income Rs. 26,800]

5. Miss Amita submits the following particulars of her income / loss for the current assessment
year on the basis of which you are required to compute her gross total income.
Rs.
Salary from a firm 24,000
Dividends from foreign company (gross) 3,000
Interest on fixed deposits in a bank 4,000
Profits from agency business 15,000
Profits from speculation in gold 12,000
Loss from speculation in silver 40,000
Profits from speculation in shares 20,000
Short-term capital losses 10,000
Long-term capital loss from sale of machinery 10,000
Prize won in Delhi lottery 1,00,000
Gains from cards play (Rummy) 10,000
Gains from playing bridge 7,000
Expenditure on purchase of lottery t:^kets 40,000
[Ans. : Gross total income Rs. 1,63,000]
3.36 Inco m e Tax— II (20 17 -18)

6. The business income of Mr. S works out to Rs. 60,000 including short-term capital gains Rs.
10,000 for the assessment year 2017-18 before deducting depreciation admissible for the year.
Taking the following facts into consideration, determine the total income of the assessee for the
assessment year 2017-18 including the amount, which may be carried forward for future set-off.

Rs.
Depreciation admissible for A.Y. 2017-18 25,000
Speculation loss brought forward from A.Y. 2015-16 10,000
Loss in respect of long-term capital assets in A.Y. 2016-17 15.000
Unabsorbed depreciation B/Ffrom A.Y. 2015-16 22,500
Business loss B/F (from same business):
From A.Y. 2011-12 15,000
From A.Y. 2012-13 3 0,200
Unabsorbed investment allowance B/F from A.Y. 2012-13 5,200
[Ans. : Gross total income Rs. NIL]
7. From the following particulars, calculate the gross total income in each of the following cases,
for the A.Y. 2017-18.
(a) A’s gross salary Rs. 50,000; interest on securities Rs. 12,000; income from house property
Rs. 10,000; losses from horse races Rs. 6,000; loss from long-term capital assets
Rs. 25,000; won first prize in Haryana state lottery Rs. 50,000; short-term capital gains
' Rs. 2,500.
(b) B’s profits from business Rs. 12,000; loss from another business Rs. 2,000; long-term
capital gains after indexation Rs. 12,000; commission from LIC for doing insurance works
Rs. 4,500.
(c) C’s income from acting Rs. 50,000; remuneration received for the dance performance
Rs. 29,000; gains from long-term capital assets duly indexed Rs. 25,000; loss in races
Rs. 19,000; loss on speculation Rs. 18,000; interest on securities Rs. 10,000.
[Ans. : (a) Rs. 1,24,500; (b) Rs. 26,500; (c) 1,14,000]
8. Xavier submits the following information determine the net income for the A.Y. 2017-18.

Profit Loss
Rs. Rs.
Salary income computed 84,000
Income from House property
House A 30,000
House B 34,000
House C 42,000
Profit & Gains o f business or profession
Business A 16,000
Business B 36,000
Business C (Speculation) 22,000
Business D (Speculation) 46,000
Capital Gains
Short-term capital gains 12,000
Short-term capital loss 56,000
Long-term capital gain 25,000
 towsions of Set Off and Carry Forward of Losses

ital gains Rs. Income from other sources

for the y ear. Income from card games 16,000
lessee for the Loss on maintenance of horse races 12,000
uture set-off. Interest on securities 8,000

[Ans. : Gross total income Rs. 42,000]

Dr. Venkaf submits the following particulars. Compute his total income for the A.Y. 2017-18
Profit Lc

Income from salary (Computed)

Income from house property
Mumbai house
Kolkata house
e Rs. NIL] Chennai house
flowing ca Delhi house
Business income

ouse property
Iassets Wine shop
capital gains Furniture
Speculation Mumbai
Speuclation Hyderabad
long-term
Capital gains
trance works
STCG 6,000
STCL 25,000
perform ance LTCG 30.000
foss in races Income from other sources 15.000
[Arts.: Total income Rs. 65,000;
Specu/ation /oss s> OOOc/f.)
total income for A.Y. 20 17 -1 a.
Mr. Nava Kethan submits the Compute

I fccome from salary

7 Income from house property
f WscskA
I House \ \
Self occupied III Loss
Income from Business
General
Medical stores
Speculation loss
Speculation profit
Capital gains
STCL
STCG
LTCG
Income from other sources
Income from betting
Income from card games
3 .3 8 Inco m e Tax— II (2017-18)

11. Vipul submits the following information for the previous year ending on March 31, 2017.

Profits of business A carried on in India 90,000

Loss of business B carried on in India (-) 30,000
Profits of business C carried on in UK 52,000
(Income is earned and received in UK and business
controlled from UK)
Loss of Business D carried on in UK (though profits are not
received in India, business is controlled from Delhi) (-) 46.000
Unabsorbed depreciation of business D 63,000
Income from house property in India 22,000!
Income from propety situated in UK (Received in UK) 1,92,000

Determine the net income of Vipal for the A. Y. 2017-18 on the assumption that he is (a) ]
Resident, (b) Resident but not ordinarily resident, (c) Non-resident.
[Aits. : (a) Resident Rs. 2,17,000; (b) Resident but not
ordinarily resident Rs.(-) 27,000; (c) Non-resident
Rs. 82,000]
 3
Deductions from Gross Total Income

The fiscal laws are not only used to collect revenues but also to encourage people to
channelize their income in certain directions. If the government is interested in more
savings, it will give some relief by way of deduction in respect of savings. Similarly if it
wants donations for certain causes, it will give deduction in respect of donations made
by the assessee for the specified causes; and the like. Such deductions are specified
under section 80 of this Act. The tax liability of any person is calculated based on his
total income, which is his net income after elimination of such deductions specifically
deductible under the provisions of section 80 of the Act. For this calculation, the gross
total income of the assessee is taken, from which the allowable deductions under
section 80 are made to arrive at the total income or taxable income or the net income.
The gross total income is the total of income that is taxable as per the provisions of
each head of income, after making the relevant adjustments for clubbing of incomes
and set off and carry forward and set off of losses. Out of the gross total income so
arrived at deductions are allowed in respect of savings, donations, specified incomes,
etc. as specified under section 80 of the Act.
These deductions to be allowed under section 80 are to be distinguished from
the deductions, which are allowed while computing the income under different heads
discussed earlier. These deductions to be made from the gross total income are
either incentives to save for future or a kind o f income under different conditions,
etc., whereas the deductions to be made from the income under different heads are
allowed to meet the expenses which are necessary, wholly, totally and exclusively
incurred in earning income under these heads o f income.
The aggregate of income computed under each head after giving effect to the
provisions for clubbing of incomes and set off of losses, is known as “Gross Total
Income”. While computing the total income of an assessee, certain deductions are
allowed under section 80C to 80U from Gross Total Income (GTI).
These deduction are, however, not allowed in case of the following incomes
although these incomes are part of Gross Total Income :
(a) Long-term capital gains,
(b) Short-term capital gains on transfer of equity shares and units of equity
oriented fund on or after 1-10-2004 through a recognised stock exchange
(Sec. I ll A),
[3.39]
 Inco m e T a x - " ( 2 0 2 1 ^

.__ ___________________ _ ' TnftheNational Housing Bank. I

12
finance for construction p time 0f admission or otherwise!
i
n Any sum paid as tuition fee tuW X xm eedu^
' ^ o S ^ o ^ t r S r s d e d u c t M rvoX to t o ^
towards devetopmervt fee / dorvatiorv etc.
14. Amount invested in approved debentures of and equity shares in a public!
company engaged in infrastructure including power sector. ,1
15. Extending benefits of section 80C to fixed deposits for not less than 5 years ini
scheduled banks (w.e.f. assessment year 2007-08).
16. Extending benefits of 80C to certain investments in mutual funds [w.e.f|
assessment year 2007-08] 1
17. Subscription to notified bonds issued by the NABARD.

18. Deposit in an account under the Senior Citizens Savings Scheme rules 2004.|

19. Five year time deposit in an account under Post Office Times Deposit rules
1981.
20. Tax benefit under section 80c for the girl child under the Sukanya Samriddhi
Account Scheme w.e.f. AY 2015-16.

Important Points u/s 80C

1. The amount or amounts for which rebate u/s 88 was allowed shall now be
eligibgle for deduction u/s. 80C.
2. Unlike section 88, there are no sectoral gaps u/s 88C. The following secti
gaps which existed under section 88 have been omitted for the purpose of|
section 80C :
(a) Rs. 12,000 per child in respect of tuition fee of children.
(b) Rs. 20,000 in respect of housing loan.
(c) Rs. 10,000 in respect bTsubscription to notified units of MFs.
3. Deduction is allowed only when the specified amount has been actually paid
during the previous year.
4. Deduction u/s 80C is not available for long-term capital gains and short-term)
capital gains covered under Section 111 A.
5. No deduction is allowed if an assessee terminates ULIP plan before 5 years
period. Surrender value becomes taxable.
6. No deduction is allowed if an assessee terminates Life Insurance Policy befortj
2 (two) years period. Surrender value becomes taxable.
 Deductions from Gross Total Income

ig Bank,
7. If the assessee transfers the house property in respect of which deduction has
lie sector been claimed before the expiry of 5 years, no deduction is allowed.
(operative
The aggregate deduction allowed in the past years shall be deemed to be
long-term
income of the assessee of the previous year in which the house property is
transferred.
lerwise to
8. If any equity shares or debentures for which deduction has ben claimed are
education
sold before the expiry of 3 years, no deduction is allowed.
: payment
9. While an individual can make payment in any of the above referred
investments, an HUF cannot invest in points 2, 3, 4, 10, 12 referred above.
Step 2 : Amount of Deduction
Gross qualifying amount is the aggregate of ail savings, investments, contributions,
deposits mentioned under Step 1. However, amount of deduction under section 80C is
computed as under:
(a) Gross qualifying amount; or
(b) Rs. 1,50,000, whichever is lower.
It may be noted that the aggregate amount of deduction under section 80C, 80CCC
and 80CCD cannot exceed Rs. 1,50,000 (80CCE).

80CCC: CONTRIBUTION TO PENSION FUND

The conditions are:
Samriddhi 1. Any individual (whether resident or non-resident, Indian citizen or foreign
citizen) is eligible to claim this deduction.
2. Payment is to be made under an annuity plan of the Life Insurance Corporation
of India or any other insurer (from assessment year 2002-03) for receiving
pension.
ill now be
3. The amount is paid out of income chargeable to tax (whether of the current
year or of any earlier year).
ng sectoral
purpose of 4. If the assessee or the nominee surrenders such annuity plan before its maturity
date, then the surrender value shall be fully taxable in the hands of the assessee
or the nominee, as the case may be, in the year of its receipt.
5. The amount received by the assessee or his nominee by way of pension shall
be taxable in the hands of the assessee or the nominee, as the case may be, in
the year of receipt.
Quantum of deduction : The whole of the amount paid or deposited (excluding
interest or bonus credited to the assessee’s account, if any) or Rs. 1,50,000 whichever
short-term is less.
Presently , a deduction upto Rs. 1,00,000 is available for contribution to specified
pension funds. This limit is now enhanced to Rs. 1,50,000. However, as per section
80CCE the aggregate deduction under section 80C, 80CCC and 80CCD will be subject
ilicy before to the overall limit of Rs. 1,50,000.
3.44 Inco m e Tax— II (20171

80CCD : CONTRIBUTION TO PENSION SCHEME OF

CENTRAL GOVERNMENT EMPLOYEES
The conditions are :
1. An individual assessee (a) employed by the Central Government onl
after 1-1-2004, (b) employed by any other employer or (c) Self employ|

Eligible Deductions
( i) Amount paid or deposit by the assessee to his account in a notified pensi|
scheme subject to a maximum of 10% salary, or
(if) Amount contributed by the Central Government to assessee’s account I
aforesaid pension scheme subject to a maximum 10% of the salary. Deductid
of Rs. 50,000 U/s 80 CCD (IB) : The employee & the Individual referred!
in section 80 CCD (i). shall be allowed a deduction in computation of his tot|
income to the extent of -
(a) the whole of the amount paid or
(b) Rs. 50000 whichever is less further amount received from pension fundi|
exempted in the year it is received.
Note: Salary includes dearness allowance if in the terms of employment so provided, but exlcudesal|
allowances and perquisities.
80CCE : Employer’s contribution to new Pension Scheme is also deductible,
and shall not exceed in any case Rs. 1,50,000/-

80CCG : DEDUCTION IN RESPECT OF INVESTMENT MADE UNDER

EQUITY SAVING SCHEME W.E.F. A.Y. 2013-14
The individual assessee is allowed a deduction to the extent of 50% of the amount I
invested in equity savings scheme or Rs. 25,000 whichever is less.
Conditions:
(/') The Gross Total Income of the assessee should not exceed Rs. 12,00,000
07) The assessee should be a new Retail investor, equity shares must be specified
under the notified schemes and investment is locked in for a period of 3 years.
The following two illustrations will give us a better understanding about
Section 80C.

Illustration : 1
V
Mr. Saxena furnishes the following particulars for the year ending 31-3-2016.
1. LIC premium paid 60,000, capital sum of the policy assured for Rs. 2,00,000.
Policy taken on 1-4-2012.
2. Contribution to PPF Rs. 50,000.
3. Tuition fee payment Rs. 10,000 each for 3 sons. Tuition fee for his daughter
pursuing MBA in USA Rs. 1,00,000.

■
11(2017-18) D eductions fro m G ro ss Total Incom e

(a) Housing loan principal repayment Rs. 30,000 to HDFC bank. This
property is under construction in Delhi.
( b) Principal repayment of housing loan taken from a friend Rs. 50,000.
Property is self-occupied and is situated in Delhi.
ment on or
5. Investment in National Savings Certificates Rs. 1,00,000.
'employed.
Compute the deduction allowable under section 80C for A.Y. 2017-18

Solution:
led pension Computation of Deduction Allowable u/s 80C
for the Assessment Year 2017-18
account in
r. Deduction 1. Life insurance premium—restricted to the extent
1referred to of 10% of the _
2. Contribution to PPF (applicable to the maximum
i of his total
amount of Rs. 70,000)
3. Tuition fee applicable for two children (Rs. 10,000 x 2)
(Tuition fee paid outside India is not allowed)
ision fund is Housing loan principal amount
(«) When property is under construction, deduction is not allowed
(b) In order to claim dedcution, the loan should have been
ut exlcudes all obtained from specified employer / institutions prescribed
u/s 80C. Loan obtained from a friend is not eligible for
deductible. deduction
Contribution to NSC
Gross Amount Eligible for Deduction
Deduction u/s 80C is restricted to
; UNDER

Illustration : 2
the amount
Mr. Chandra Mohan furnishes the following particulars for the year ending 31 -3-2017:
Investments in NSC Rs. 50,000
1, 00,000
L1C Premium paid Rs. 40,000 (sum assured Rs. 3,00,000) policy taken after
1-4-2013
be specified
id of 3 years, Deferred annuity plan Rs. 30,000
ICICI pension plan Rs. 20,000
tout
Contribution to pension scheme of Govt, (equivalent to 10% salary) Rs.
80,000 and notified U/s 80 CCD (1 B)
Housing loan principal repayment Rs. 20,000 to HDFC Bank
016. 7. Tuition fee payment Rs. 40,000 for one child
is. 2,00,000. Long-term Infrastructure Bonds Rs. 30,000
Investment in equity savings scheme notified by the Government Rs. 60,000
Compute deduction u/s 80C, 80 CCC and 80CCD and 80CCF and 80CCG for
his daughter the A.Y. 2017-18.
3.46 Inco m e Tax— II (2017-1

Solution:
Computation of Allowable Deduction
for the Assessment Year 2017-18
Rs.
A. Deduction u/s 80C
NSC 50,000
LIC (15% of policy or actual premium paid
whichever is less) 40.000
Deferred annuity plan 30.000
Housing loan : principal repayment 20.000
Tuition payment 40,000
Gross Amount Eligible 1,80,000
Deduction under section 80C restricted to 1.50,0
B. Deduction u/s 80CCC
ICICI pension plan 20,000
Deduction under section 80CCC extended to a
maximum Limit of Rs. 1,50,000 20,000
C. Deduction u/s 80CCD (IB)
Central Govt, pension scheme 80,000
Gross amount eligible for deduction 2,50,0

Deduction u/s 80CCE is restricted to and one additional

deduction for notified pension scheme to the extent of
Rs. 50,000 is allowed U/s 80 CCD (IB) w.e.f. 2016-17
D. Deduction u/s 80CCF
Long-term Infrastructure Bonds are allowed as deduction
to the extent of Rs. 20,000. This deduction is over and
above 80C deduction of Rs. 1,50,000. but it is withdrawn
from the A.Y. 2013-14.
E. Deduction for investment in equity savings scheme to the
extent of 50% of the investment or Rs. 25,000
whichever is less w.e.f. AY 2013-14.
Hence, Mr. Chandra Mohan can claim total deduction
of Rs. 1,50,000 + 25,000 + 50,000 = Rs. 2,25,000
The following chart shows the various deductions falling under these two
categories:
A. Deductions in Respect of Payments, etc.

S.N. Section Particulars of Extent of deduction Assessee to

deduction allowed whom allowed
1. 80C Deductions in respect Maximum of Individuals
of LIC premia and Rs. 150,000 or HUFs
other specified savings
2. 80CCC Contribution to Maximum of only individual
Pension Fund_______ Rs. 1.50.000___________
3 .4 6 Inco m e Tax— II (2017-18)

Solution:
Computation of Allowable Deduction
for the Assessment Year 2017-18
Rs.
A. Deduction u/s 80C
NSC 50,000
LIC (15% of policy or actual premium paid
whichever is less) 40.000
Deferred annuity plan 30.000
Housing loan : principal repayment 20.000
Tuition payment 40,000
Gross Amount Eligible 1,80.000
Deduction under section 80C restricted to 1,50,1
B. Deduction u/s 80CCC
ICICI pension plan 20,000
Deduction under section U6Ct3C extended to a
maximum Limit of Rs. 1,50,000
C. Deduction u/s 80CCD (IB)
Central Govt, pension scheme
Gross amount eligible for deduction 2,50,0

Deduction u/s 80CCE is restricted to and one additional

deduction for notified pension scheme to the extent of
Rs. 50,000 is allowed U/s 80 CCD (1B) w.e.f. 2016-17
D. Deduction u/s 80CCF
Long-term Infrastructure Bonds are allowed as deduction
to the extent of Rs. 20,000. This deduction is over and
above 80C deduction of Rs. 1,50,000. but it is withdrawn
from the A.Y. 2013-14.
Deduction for investment in equity savings scheme to the
extent of 50% of the investment or Rs. 25,000
whichever is less w.e.f. AY 2013-14.
Hence, Mr. Chandra Mohan can claim total deduction
of Rs. 1,50,000 + 25,000 + 50,000 = Rs. 2,25,000
The following chart shows the various deductions falling under these two
categories:
A. Deductions in Respect o f Payments, etc.

S.N. Section Particulars of Extent of deduction Assessee to

deduction allowed_____ whom allowed
1. 80C Deductions in respect Maximum of Individuals
of LIC premia and Rs. 150,000 or HUFs
other specified savings
2. 80CCC Contribution to Maximum of only individual
Pension Fund_______ Rs. 1.50.000___________
Deductions fro m G ross Total Incom e 3.47

80 CCD Deduction in It is deductable in the year individual

respect of in which contribution is employed
contribution to made. However, no deduc­ by Central
pension scheme tion is available in respect Govt.
of Central of employee’s contribution
Government employees which is in excess of 10%
of the salary maximumdeduction
to employee orselfemployed person
for his contribution limited to
Rs. 1,50,000
80CCD B An additional deduction of Rs.
50000 is allowed as deduction for
specified pension scheme
w.e.f.2016-1
80CCE Limit on deductions Deduction U/s 80C, CCC
Under sections 80C, 80 CCC and 80CCE
80CCC and 80CCD cannot exceed Rs. 1,50,000
4A. 80CCG Deduction in respect of Deduction u/s 80CCG to Individual
investment in equity saving the extent of Rs. 50% of the
scheme investment orRs. 25,000
whichever is less
80 D Deduction in respect Maximum of Rs. 25,000 + Individual
of medical Maximum of Rs.25,000 HUF Resident
insurance premia and on the health of parents + 5000 Non- resident
preventive health check up preventive health check up
and for Senior Citizens- for
Maximum of Rs. 30.000
80DD Maintenance and Rs. 75,000, and for Individual
Medical treatemnt servere disability or
of dependent with Rs. 1,25,000. Irrespective HUF
disability of actual expenditure.
80DDB Medical treatment Actual expenditure or Individual
for specified Rs. 40,000, (Senior of HUP
diseases Citizens) Rs.60,000
whichever is less and super
senior citizen Rs. 80,000
80E Repayment of loan 1. Entire amount paid by Individual
taken for way of interest is
higher education deductible. This faculty
is extended to relatives,
spouse and children
w.e.f. A.Y. 2008-09.
80G Donations to certain (a) 100/- or 50% eligible
funds, institution, donating without applying
etc. qualifying limit in certain
cases A ll a sse sse e e s
 Inco m e Tax— II (2017-18)

(b) 100/- or 50% of digible

donations after appplying
qualifying limit of 10%
adjusted GTI
80GG Expenditure on house Deduction u/s 80GG: Individual
rent incurred by self- least of the following: only
employed persons 1. Rs. 2,000 per month.
2. 25% of total income.
3. Rent paid (-) 10% of
total income
80GGA Donations for scientific 100% of sum All assessee
research or social or donated not having
statistical research or business
rural development, etc, income
80GGB Contributions by 100% of donations company
companies to made assessee
political parties
800GGC Contributions by 100% of donation Any assesee
any person to made other than local
political parties authority
B. Deductions in respect of Incomes
Section Particulars of Extent o f deduction Assessee to
deduction allowed whom allowed
Profits of undertakings 30% to 100% Industrial
engaged in of profits undertaking
infrastructure engaged in
development infrastructure
development

deduction in respect 100% of profits for special

of profits and gains 10 consecutive assessment economic
by an undertaking or
enterprises engaged in
the development of
special economic zone
Profits of business 25% to 100% for Industrial
engaged in non­ prescribed no. of years undertakings,
80RRB
infrastructure facility Hotel, ships
Profits and gains 25% to 100% of profits Special
from certain cateogory
D e du ctions fro m G ro ss Total Incom e 3.49

undertaking or states
enterprises in the
states of Himachal
Pradesh, Uttaranchal,
Sikkim and North-
Eastern States

5. 80 ID Profits and gains from 100% of the profit for All assessees
business of hotel and 5 consecutive years
convention centres in
specified area

6. 80IE Special provisions in 100% of the profit for All assessees

respect of certain 10 consecutive year
undertakings in North-
Eastern zones
7. 80JJA Profits of bio­ 100% of profits All assessess
degradable waste for 5 years

8. 80JJAA Employment of 30% of additional only Indian

new workmen wages for 3 companies
assessment years
including the A.Y.
relevant to year
of employment
9. 8OLA Certain incomes 100% of specified Only
of Offshore banking income for first Scheduled
units in special 5 years and 50% Banks in
economic zones for next 5 years SEZS

10. 80 P Deduction in respect 100% of profits but in Cooperative

of cooperative society some cases amount is fixed Societies
at Rs. 40,000 / Rs. 20,000
11. 80-QQB Royalty to authors (a) If received in lump-sum Individual
100% of royalty upto Authors
a maximum of
Rs. 3 lakhs
(b) If not received in
lump-sum, 15% of
value of books sold
during previous year
12. 80RRB Royalty on patents 100% of royalty Individual
upto a mamimum
of Rs. 3 lakhs
3.50 In co m e Tax— II (2017-18)

13. 80TTA Deduction in respect of maximum Rs. 10,000 Individual &

interest on deposits in HUF
saving accounts.
14. 80U Blind or handicapped Rs. 75,000 Individual
persons or mentally ( Rs. 1,25,000 in case
retarded persons of severe disability
Let us discuss deductions under section 80 D to 80U in detail.

80D :MEDICAL INSURANCE PREMIA

The conditions are :
1. Any individual or a Hindu Undivided Family is eligible to claim this deduction.
2. Payment is made to an insurance policy by way of premium in accordance
with any scheme framed by the General Insurance Corporation of India and
approved by the Central Government (known as “mediclaim” insurance
policy) or any amount paid under a scheme of any insurer, which is approved
by the Insurance Regulatory and Development Authority.
3. Payment is made by cheques (whether bearer, crossed or account payee
cheques)
4. Payment is made out of income chargeable to tax.
5. Policy may be taken on the health of the taxpayer, spouse, dependent parents
or dependent children of the taxpayer. In case of an individual and HUF the
policy may be on the health of any member of the family.
Eligiblity
The eligible deduction is :
(a) Health insurance premium and preventive health checkup:
1. Health insurance ( Med claim ) Premium
2. Preventive health checkup Rs. 5,000/-
The aggregate deduction of (1) and (2) above shall be restricted to Rs. 25,000/- for
the assessee who is of less than 60 years age.
If the assessee is a senior citizen then the deduction is enhanced to Rs. 30,000/-
including preventive health checkup
Additional Deduction: If med claim premium is paid on the health of the parents
and additional deduction of Rs. 25,000/- is allowed including preventive medical
checkup or Rs. 5,000/-
If the parents are senior citizens then a deduction of Rs. 30,000/- is allowed as
deduction including preventive Health checkup of Rs. 5,000/-
(b) Medical expenditure on the health of a person who is a super senior citizen if
med claim insurance is not paid on the health of such person
1. In case of an assessee Rs. 30,000/- allowed as deduction.
2. In case of an assessee parents Rs. 30,000/- allowed as deduction.
Deductions from Gross Total Income 3.51

Maximum Deduction in Respect of (a) and (b) should not exceed Rs. 30,000/- for
an assessee’s and for parents Rs. 30,000/-
The following table summarizes the deduction allowable U/s 80D :
(a) In respect of med claim premium and preventative health checkup
Description Self/Spouse/ Parents Total
dependent
Children Rs. Rs.
Rs.
No one attain the age of 60 years 25,000/- 25,000/- 50,000/-
Assessee is less than 60 years and parent is a senior 25,000/- 30,000/- 55,000/-
or super senior
Assesse and Parents are Senior Citizens 30,000/- 30,000/- 60,000/-
(b) In respect of Medical expenditure incurred for a very senior citizen
Description Self/Spouse/ Parents Total
dependent
Children Rs. Rs.
Rs.
Assessee is less than 80 years of age and parent is Nil 30,000/- 30.000/-
super senior or very senior citizen
Assessee and parents are of 80 years of age or more 30,000/- 30,000/- 60,000/-
Maximum Cumulative deduction under (a) and 30,000/- 30,000/- 60,000/-
(b) of above
Illustration: 3
Mr. Praveen aged 50 years furnishes the following information relating to premium on
med claim policy paid through cheque for the year ending 31, March, 2017:
(a) For self Rs. 10,000/- (b) for Spouse Rs. 9,000/- (c) for depended mother
aged 70 years Rs. 7,000/- (d) for dependent mother in law aged 62 years Rs. 5,000/-
(e) Cash paid for preventative health check up of self and spouse Rs. 6,000/-
(/) Medical expenditure for dependent father aged 82 years Rs. 30,000/-
Compute deduction U/s 80D

Solution:
Computation of deduction U/s 80D
Particulars Amount Paid Eligibility Deduction
Allowed
(a) for self/ Spouse and dependent children: j
Self Med claim Premium 10,000/- 10,000/- 10,000/-
Spouse Med Claim Premium 9,000/- 9,000/- 9,000/-
Preventive health checkup 6,000/- 5,000/- 5,000/-
Total 25,000/- 24,000/- 24,000/-
3.52 Inco m e Tax— II (2017-181

(b) For parents:

Mother’s medical expenses 7,000/- 7,000/- 7,000/-*
Father’s medical expenses 30,000/- 23,000/- 23,000/1
(Restricted)
Total 37,000/- 30,000/- 30,000-|
Note 1: Rs. 5,000/- Dependent Mother in law is not allowed.
Note 2: Med claim U/s 80D is allowed only when it is paid through cheques. However preventive
health checkup is allowed even it is paid in cash.

Illustration: 4
Suman pay the following medical insurance premium through cheques.
(a ) Rs. 50,000 on his health and on the health o f wife and son.
( b) Rs. 50,000 on the health o f his parents.
Compute deduction n/s 80D.

Solution:
Under the new provision, Suman is allowed a deduction of Rs. 50,000 (Rs. 25,000 +
25,000).

80DD : MAINTENANCE (INCLUDING MEDICAL TREATMENT)

OF A HANDICAPPED DEPENDENT
The conditions are :
1. Any individual (whether ordinarily or not-ordinarily resident of India and!
whether Indian citizen or foreign citizen) or any HUF (whether ordinarily]
resident or not-ordinarily resident) is eligible to claim this deduction.
2. The taxpayer has incurred an expenditure by way of medical treatment
(including nursing), training and rehabilitation of one or more handicapped
dependent persons
And / or
Has paid or deposited under any approved scheme framed in this behalf by
the LIC or any other insurance company or the Unit Trust of India, or the
administrator or specified company and approved by the Board in this behalf,
for the benefit and maintenance of a disabled dependent person.
3. A dependent means the individual, his / her spouse, children, parents, brothers
and sisters in the case of any individual assessee.
4. A dependent means any member of the family who is wholly or mainly
dependent on the assessee and has not claimed any deduction u/s 80 U in
computation of his income in the case of a HUF.
5. A person with disability means a person having any disability over 40%, as
defined under the Persons with Disability (Equal Opportunities, Protection of
 Deductions fro m G ross Total Incom e

Rights and Full Participation) Act, 1995.

7,000/- 7,000/- 6. A person with severe disability means a person having any disability over
23,000/- 23,000/- 80% as defined under the above said Act.
Restricted) 7. The deduction for deposit in approved scheme shall be available if
30,000/- 30,000- (a) The assessee nominates either the handicapped dependent or any other
person or a trust to receive the payment under the scheme for the benefit
of the handicapped dependent, and
ss. However p reventive
(,b) In the event of the death of the subscriber-assessee, the amount of annuity
or lump-sum under the scheme is paid for the benefit of the handicapped
dependent.
8. In case the handicapped dependent predeceases the subscriber-assessee, the
amount for which deduction has been claimed under this section shall be
deemed to be the income of the assessee for the previous year in which such
amount is received.
9. The assessee shall furnish a certificate from the medical authority in the
prescribed form along with his return of income. Where the condition of
disability requires reassessment, a fresh certificate shall have to be obtained
on expiry of the period mentioned in the original certificate.
The eligible deduction is:
(0 In the case of a person with a normal disability-Rs. 75,000 in aggregate
for any of or both the purposes specified i.e., expenditure and deposit in a
specified scheme, irrespective of the actual amount of expenditure incurred.
ii) In the case of a person with severe disability - Rs. 1,25,000 in aggregate
it o f In d ia a n d for any of or both the purposes specified i.e., expenditure and deposit in a
sther o r d i n a r il y specified scheme, irrespective of the actual amount of expenditure incurred.
luction.

[leal t r e a tm e n t Illustration : 5
p h a n d ic a p p e d Mr. A submits the following particulars of his income for the previous year 2016-2017

1. Salary 15,000 p.m.

his b e h a lf b y
[India, o r th e
2. Rent received from house property 36,000 p.a.
[>this b e h a lf ,
3. Profit from business 1,40,000
4. Winnings from betting 1,60,000
Is, b ro th e r s During the previous year he paid Rs. 25,000 as premium on the insurance of the
health of himself and members of his family. During the year assessee claimed Rs.
4.000 for the illness of his wife, which was duly received from the insurance company.
The younger brother of A, who is mentally retarded, is dependent on him and Rs.
10.000 is spent on his treatment during the year. He also paid Rs. 12,000 towards
pension fund of LIC. Compute his total income for the A.Y. 2017-18.
 ■ j

3.54 Income Tax— II (2017-18)

Solution:
Computation of Total Income of Mr.
A for the Assessment Year 2017-18
Rs. Rs.
Income from Salary (Rs. 15,000 x 12) 1,80,000
Less : Deduction u/s 16 Nil 1,80,000
Income from house property (annual value) 36,000
Less : Standard deduction @ 30% of annual value 10,800 25,200
Profits and gains from business 1,40,000
Income from other sources: Winnings from betting 1,60,000
Gross Total Income 5,05,200
Less: Deductions u/s 80 : Rs. Rs.
(i) U/s 80CCC - LIC Pension fund 12,000
(ii) U/s 80D - Medical insurance premium 25,000
(iii) U/s 80DD - Medical treatment of
handicapped dependent brother 75,000 112000
Total Income 3,93,200

80D D B : M E D IC A L T R E A T M E N T O F S P E C IF IE D D IS E A S E S

The conditions are :

1. Any resident individual (whether Indian citizen or foreign citizen) or resident
HUF is eligible to claim this deduction.
2. Deduction is allowed in respect of amount actually paid during a year for the
medical treatment of specified disease or ailment for himself or a dependent
or a member of a HUF as prescribed by the CBDT under rule 11 DD.
3. The prescribed diseases and ailments under rule 11 DD are:
(a) Neurological diseases being dementia, dystonia musculorum deformans,
motor neuron disease, ataxia, cnorea, hemiballismus, aphasia and
parkinsons disease
(b) Cancer
(c) AIDS
(d) Chronic renal failure
(e) Hemophilia; and
(/) Thalassaemia.
4. The deduction allowable shall be reduced by the amount of insurance cover
for medical treatment, if actually received.
5. The assessee shall furnish a certificate in Form 10-1 from a neurologist,
oncologist, urologist, hematologist, immunologist or such other specialist, as
may be prescribed, working in a Government hospital.

'
 D eductions from G ro ss Total Incom e

6. A dependent means a person who is dependent wholly or mainly on such

individual or HUF for support and maintenance, such person being
(a) In case of an individual assessee, his / her spouse, children, parents,
brothers or sisters,
(b) In case of HUF, any member of the family.
The eligible deduction will be as follows :
(0 In case of a general person, the actual amount paid or Rs. 40,000 whichever is
least is allowed as deduction under this section.
ii) In case the amount is paid in respect of the assessee, or a person dependent on
him, who is a senior citizen, an amount of the least of the actual amount paid
or Rs. 60,000 is allowed as deduction under this section.
Hi) If the person for whom such expenditure is incurred happens to be a very
senior citizen, the maximum deduction shall be allowed for a sum of Rs.
80,000 instead of Rs. 40,000/60,000.

80E : R E P A Y M E N T O F L O A N T A K E N F O R H IG H E R E D U C A T IO N

The conditions are :

1. An individual assessee who has taken a loan from any financial institution
or any approved charitable institution for purpose of pursuing his higher
education is eligible to claim this deduction.
2. The higher education shall be full-time studies for any graduate or post­
graduate course in engineering (including architecture), medicine,
in)or resident management or for post-graduate course in applied sciences or pure sciences
including mathematics and statistics.
[ayear for the 3. The deduction will be allowed from the year the assessee starts repaying the
la dependent loan and will be available for a maximum period of 8 years or till the loan
together with interest is liquidated, whichever is earlier.
4. Repayment of loans taken by the parents for the higher education of their
deformans, child is not eligible for deduction.
khasia and 5. The amount shall be paid by the assessee out of his taxable income by way of
repayment c or interest thereon.
The eligible deduction will be as Allows :
(0 The entire amount paid by way of interest is deductibale u/s 80E from the A. Y.
2006-07.
ii) From A.Y. 2006-07 no deduction will be available u/s 80E in respect of
repayment of principal amount.
:e cover in) Deduction for interest on loan for higher education is also be claimed by
parents and spouse etc.
;'v) Deduction U/S 80E for interest on loan for higher education extended to all
post-senior secondary study courses.
 Inco m e Tax— II (2 0 1 7 -1 8 )
/ Dedt

8 0 E E : D E D U C T IO N IN R E S P E C T O F IN T E R E S T O N L O A N T A K E N
F O R R E S ID E N T IA L H O U S E P R O P E R T Y S E C T IO N 80E E

Eligible Assessee: individual.

Conditions:
1. The assessee has taken loan for acquiring residential property from any
financial institution
2. The assest should not own any residential property on the date of loan
3. Value of property should not exceed Rs. 50,00,000/-
4. Amount of loan should not exceed Rs. 35,00,000/-
5. Loan is sanctioned between 1-4-2016 to 31 -03-2017
Eligible deduction will be: Rs. 50,000/- or actual interest whichever is less
Deduction U/s 80EE is in addition to the deduction of interest U/s 24 (b)

Illu s tr a tio n : 6

Mr. Arun purchased a residential house property for self occupation for Rs. 48,00,000/-
on 01/04/2016 in respect of which he took a housing loan of Rs. 34,00,000/- from
HDFC at an interest of 10% p.a.
Compute the eligible deduction in respect of Housing loan for assessment year
2017-18 assuming that no principal repayment was made till 31.3.2017 and he does
not own any other house.

S o lu tio n :

C o m p u t a t i o n o f d e d u c t i o n o f U /s 8 0 E E
Deduction allowable while computing income under the head “Income from house
property”
1. Deduction U/s 24(b) Rs. 34,00,000/- at rate of 10% p.a. = Rs.3,40,000/-
Restricted to Rs. 2,00,000/-
2. Deduction U/s 80 EE Rule = Rs. 50,000 or actual interest W.E.L
Balance of interest (3,40,000-2,00,000) = 1,40,000 or Rs. 50,000/- W.E.L
= Rs. 50,000/-
Donations made
T o t a l D e d u c t i o n = Rs. 2,00,000 + Rs. 50,000 = Rs. 2,50,000/-

8 0 G : D O N A T IO N S T O C E R T A IN F U N D S , IN S T IT U T IO N S A. Donations made to tl
deduction without ai
The conditions are :
1. All assessees can claim this deduction. 1. N ational D efence Fund
2. The donation shall be made during the relevant previous year.
2. Prim e M in ister’s Nation;
3. The donation shall be made to the specified funds or charitable institutions.
4. Proper proof of payment must be submitted to claim the deduction. 3. Prim e M in ister’s Armeni;
 Deductions from G ro ss Total Incom e

IANTAKEN
In a case where an assessee has claimed and has been allowed any deduction
IN80EE
under this section in respect of any amount of donation, the same amount does
not again qualify for deduction under any other provisions of the Act for the
same or any other assessment year.
Donations made in kind are not allowed for deduction.

The E l i g i b l e D e d u c t i o n
pate of loan
It is calculated as per following three steps :
Step 1 : Find out the gross qualifying amount. The gross qualifying amount is
the aggregate of the donations made to any of the institutions / funds
as specified in the table given below. These are the specifically eligible
organizations, the donations to which are eligible for deduction under
this section. The donations made to such institutions or organizations
qualify for the consideration of deduction under this section.
Step 2 : Find out the net qualifying amount. The net qualifying amount is
limited to 10% of the Adjusted Gross Total Income of the assessee. This
limit is applicable to only a few of the organizations to which donation
is made. Other doantions are eligible without any limit. Adjusted gross
jsessment y e a r total income is calculated by deducting the following items from the
7 and h e d o e s gross total income:
(a) The amounts deductible under sections 80C to 80U (excepting
section 80G).
( b) Such sums on which income tax is not payable.
(c) Long-term capital gains.
tom house
(d) Short-term capital gains taxable u/s 111 A.
{e) Income referred to in sections 115A, 115AB, 115AC, 115AD
and 115D.
Step 3 : Find out the amount deductible. The actual amount that is deductible
as per the provision of this section is given in the following table along
with the organizations to which such donations are to be made.
Donations made Qualifying Eligible
deduction Rate
A. Donations made to the following are eligible for 100%
deduction without any qualifying limit

1. N ational D efence Fund set up by C entral G overnm ent 100% 100%

2. Prim e M in ister’s N ational R elief Fund 100% 100%

3. Prim e M in ister’s A rm enia Earthquake R elief Fund 100% 100%

3.58 Income Tax—11 (2017-18)

4. Africa (Public Contributions - India) Fund 100% 100%

5. National Foundation for Communal Harmony 100% 100%

6. A University or other Educational institute of national
eminence as may be approved by the prescribed
authority 100% 100%
7. The Maharashtra Chief Minister’s Relief Fund or
Chief Minister’s Earthquake Relief Fund, Maharashtra 100% 100%
8. Any fund set up by the Government of Gujarat
for providing relief to victims of earthquake in Gujarat 100% 100%

9. Zila Saksharata Samiti constituted for improvement

of primary education and literacy and post-literacy
efforts in villages and towns with population not
exceeding one lakh according to the latest census 100% 100%
10. National Blood Transfusion Council and State
Councils for Blood Transfusion 100% 100%
11. Any Fund set up by a State Government for
providing medical relief to the poor 100% 100%
12. The Army Central Welfare Fund, the Air Force
Central Welfare Fund and the Indian Naval
Benevolent Fund 100% 100%
13. The Andhra Pradesh Chief Minister’s Cyclone
Relief Fund 100% 100%

14. National Illness Assistance Fund 100% 100%

15. The Chief Minister’s Relief Fund or the Lieutenant
Governor’s Relief Fund of any State or Union Territory 100% 100%

16. The National Sports Fund 100% 100%

17. The National Cultural Fund 100% 100%

18. The Fund for Technology Development and
Application set up by the Central Government 100% 100%
19. The National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation and
Multiple Disabilities 100% 100%

20 National Children’s Fund 100% 100%

p c o m e T a x -ll ( 2 0 1 7 - 1 8 ) Deductions fro m G ro ss Total Incom e

21. Donations made by any assessee to the Swachh Bharat

Kosh set up by the Central Government.

22. Donations made by a resident assessee to clean Ganga

Fund setup by the Central Government.
23. The National Fund for Contral of Drug abuse.
B. Donations made to the following are eligible for
50% deduction without any qualifying limit

24. Jawaharlal Nehru Memorial Fund 100% 50%

25. Prime Minister’s Drought Relief Fund 100% 50%

26. Indira Gandhi Memorial Trust 100% 50%

27. Rajiv Gandhi Foundation 100% 50%

C Donations made to the following are eligible for 100%

deduction subject to qualifying limit of 10% of the Gross Total Income (GTI)
28. Donations during 26th January 2001 to 30,h September
2001 for providing relief to earthquake victims in
Gujarat, to any trust, institution or fund established
for a charitable purpose u/s 80G(5C) * 100%
29. The Government or any approved local authority.
institution or association for promoting family planning * 100%
30. Indian Olympic Association or any other notified
association / institution for development of infrastructure
or sponsorship of sports and games in India (deduction
is available only if donation is made by a company) * 100%
D. Donations made to the following are eligible for 50%
deduction subject to qualifying limit of 10% of the Gross Total Income (GTI)

31. Any Fund or Institution established in India for a

charitable purpose as is referred to u/s 80G(5) * 50%
32. Any Fund or institution established in India for
a charitable purpose which incurs expenditure,
maximum 5% of its income, for a religious purpose
u/s 80G(5B) * 50%
33. Government or Local Authority for charitable
purposes (other than for promotion of family planning) ♦ 50%
3.60 Income Tax—II (2017-18)

34. An Authority for town planning and housing, etc. * 50%

35. Any Corporation established by the Central / State
Government for promoting the interest of the members
of a minority community * 50%
36. Any temple, mosque, gurdwara, church or other
place of worship which is of historic, archaeological * 50%
* The total of these nine donations are qualified subject to a maximum of 10% o f the adjusted
Gross Total Income. O f the qualified amount, the items specified in points 31, 32 and 33 above
shall be deducted @ 100% and the balance is deducted @ 50%.

Illustration : 7
X, an Indian citizen, gives the following particulars of his income and expenditure for
the previous year 2016-17.
Rs.
Business Income 3,00,000
Long-term capital gain 1,30,000
Short-term capital gain u/s 111A 30,000
Other short-term capital gain 20,000
Income from other sources (including interest from
a bank deposit Rs. 16,000) 28,700
Donation to the National Defence Fund 24,000
Donation to the Government of India for promotion of
family planning 27,700
Donation to Prime Minister’s National Relief Fund 18,000
Donation to Prime Minister’s Drought Relief Fund 10,000
Donation to National Trust for Welfare of Persons
with Autism 7,000
Donation to Africa fund 5,000
Donation to an approved charitable trust 22,000
Donation in kind to an approved charitable trust 3,000
Donation to an approved university 7,500
Payment of mediclaim insurance premium 6,000
Determine the net income of X for the assessment year 2017-18.
Solution:
Computation of Total Income of Mr. X
for the Assessment Year 2017-18
Rs. Rs.
Business income 3,00,000
Capital gains 1,80,000
Income from other sources 28.700
Gross Total Income 5,08,700
 D eductions from G ro ss Total Incom e 3.61

L e s s : D eductions
U /s 80D 6,000
U /s 80G (See Note 1) 97,485 1,03,485
Net Income 4,05,215
Net Income (rounded off) 4,05,220

Note 1 :
Calculation >f Deductions u/s 80G

m of 10% of the adjusted Gross Net Rate o f Amount

oints 31, 32 and 33 above Institution / Fund qualifying qualifying deduction of
amount amount deduction

Rs. Rs. Rs. Rs.

e and ex p en d itu re fo r National Defence Fund 24,000 24,000 100% 24,000

Prime Minister’s National Relief Fund 18,000 18,000 100% 18,000

Rs. Prime Minister’s Drought Relief Fund 10,000 10,000 50% 5,000
3,00,000 National Trust for Welfare of Persons
1,30,000 with Autism 7,000 7,000 100% 7,000
30.000 Approved University 7,500 7,500 100% 7,500
20.000 Africa Fund 5,000 5,000 100% 5,000
Charitable trust (in kind) Nil Nil NA Nil
Charitable trust (in cash) 22,000 6,570 50% 3,285
28.700
(Note 2)
24.000
Government of India for promoting
family planning 27,700 27,700 100% 27,700
27.700
fNote It
18.000
10,000 Total 1,21,200 1,05,770 97,485

Note 2
7.000
In respect of donation for family planning and approved charitable trust, amount to be included in the
5.000
net qualifying amount is the lower of:
12.000
(a) Rs. 49,700 (actual amount of donation)
3.000
7,500 (b) Rs. 34,270 (10% of adjusted gross total income computed in Note 3)
5.000 Least of the above two amounts is Rs. 34,270, or qualifies deduction the aggregate o f both the
items shall be Rs. 34,270, of which the donation to the Government of India for promoting family
planning is eligible @ 100%. Hence, the net qualifying amount for donation to charitable trust shall
be restricted to the balance amount only (Rs. 34,270 - Rs. 27,700) i.e. Rs. 6,570.

Note 3
Calculation of Adjusted gross total income Rs.
R s. Gross total income 5,08,700
3,00,000 Less : Long-term capital gains 1,60,000
1,80,000 Balance 3.48,700
78.700 Less : Amount o f deduction under sections 80CCC to 80U
5,08,700 (Except u/s 80G) 6,000
Adjusted gross total income 3,42,700
3.62 Income Tax—II (2017-18) Deductio

8 0 G G : D E D U C T IO N IN R E S P E C T O F R E N T P A ID 80G G A :

The conditions are :

1. Any individual can claim this deduction. The condit
2. The assessee should be a self-employed person or an employee who is not in 1. An
receipt of house rent allowance at any time during the previous year from the unc
employer. ded
3. The assessee, his spouse, or minor child, or the HUF of which he is a member, If ar
should not own any residential house at the place of his employment / business proft
undei
or profession.
profes
4. The assessee does not own any residential house at any other place, value of
3. Payme
which is determined as self-occupied property at NIL [under section 23(2)(a)
associa
or 23(4)(a)].
4. The spe
5. The assessee shall file a declaration in Form 10BA [Rule 11B] regarding the
(a) A s
expenditure incurred by him towards payment of rent.
insti
The eligible deduction is the least of the following amounts :
(ib) A Ui
(a) Actual rent paid (-) 10% of assessee’s total income 35(1)
( b) Rs. 5,000 p.m. (c) An as:
(c) 25% of the assessee’s total income trainin
Total income means total income of assessee after excluding long-term capital section
gains and short-term capital gains taxable under section 111 A, after allowing for all (d) A public
deductions under sections 80CCC to 80U except the one provided under section 80GG. approve
scheme.
I llu s tr a tio n : 8
(e) A rural d
Calculate the deduction allowable under section 80GG of the Income Tax Act to an for the pu
assessee having the following income and expenditure: (/) National L
(a) Business income Rs. 55,000 Governme
( b) Interest from bank Rs. 5,000 (g) An associa
(c) Rent paid by him for a house occupied by him for the purpose of his residence programme
Rs. 1,250 p.m. carrying out
35CCB(2) (c
S o lu tio n : (h) An afforestat
C o m p u t a t io n o f D e d u c tio n u /s 8 0 G G
upto 31.3.200
(/) Sum paid to th
Rs. by the Centra
Gross Total Income 60,000 development.
The least of the following shall be allowable as deduction u/s 80GG
(/) Where deductiot
{a) Rent paid (-) 10% of total income
not be allowed in
[(Rs. 1,250 x 12)-(10% of Rs. 60,000)] 9.000
the Act for the sa
(b) Rs. 5,000 p.m. 60,000
(c) 25% of total income [25% of Rs. 60,000] 15.000 T h e e l i g i b l e d e d u c tio n
The actual amount of don;
Least of the above three figures is Rs. 9,000. Hence, Rs. 9,000 will be allowed as during the relevant previous ye<
deduction u/s 80GG.
If

\ "V

3L.~

-1 1 (2 0 1 7 -1 8 ) Deductions from Gross Total Income 3 .6 3

80G G A : D O N A T IO N F O R S C IE N T IF IC R E S E A R C H
OR RURAL DEVELO PM ENT

The conditions are:

Iwho is not in 1. Any assessee whose gross total income does not include income chargeable
wear from the under the head ‘Profits and gains of business or profession’ can claim this
deduction.
fcisamember,
2. If an assessee has income under the head ‘Profits and gains of business or
profession’ included in his gross total income, then he can claim the deduction
lent/business
under the respective sections of the head ‘Profits and gains of business or
profession’ only.
Je, value of
3. Payment of donations should be made to the specified institutions or
|ttion 23(2)(a)
associations during the relevant previous year.
4. The specified institutions or associations are:
igarding the
(a) A scientific research association or University, College or any other
institution approved under section 35(1 )(ii).
(b) A University, College or any other institution approved under section
35(1 )(iii) for research in social science or statistical research.
(c) An association or institution for rural development under section 35C or
training of persons for rural development programme approved under
capital section 35CCA(2).
ng for all (d) A public sector company or a local authority or to an association or institution
on80GG. approved under section 35AC for carrying out any eligible project or
scheme.
(e) A rural development fund set up and notified by the Central Government
lAct to an for the purpose of section 35CCA(l)(c).
( f) National Urban Poverty Eradication Fund set up and notified by the Central
Government for the purposes of section 35CCA(l)(d).
{g) An association or institution, which has its object to undertake any
esidence programme of conservation of natural resources or of afforestation, for
carrying out any such programme approved for the purpose of section
35CCB(2) (donations made upto 31.3.2002 only are deductible).
(h) An afforestation fund specified under section 35CCB (donations made
upto 31.3.2002 only are deductible).
(/) Sum paid to the National Fund for Rural Development set up and notified
Rs. by the Central Government for the purpose of carrying out rural
160,000 development.
(/) Where deduction under this section is claimed and allowed, deduction will
not be allowed in respect of the same payment under any other provision of
9,000
the Act for the same or any other assessment year.
[60,000
B5,000 T h e e lig ib le d e d u c tio n
The actual amount of donation made to the specified institutions or associations
Ived as during the relevant previous year.
3 .6 4 Income Tax— II (2017-18)

8 0 G G B : C O N T R IB U T IO N S G IV E N B Y C O M P A N IE S
T O P O L IT IC A L P A R T IE S

In computing the total income of an Indian company, any sum contributed by it

during the relevant previous year to any political party is fully deductible. The word
“contribute” has the meaning assigned to it under section 293A of the Companies Act
1956. “Political party” means a political party registered under section 29A of the
Representation of the People Act, 1951.

8 0 G G C : C O N T R IB U T IO N S G IV E N B Y C O M P A N IE S
T O P O L IT IC A L P A R T IE S

In computing the total income of an assessee (not being a local authority and
every artificial juridical person wholly or partly funded by the Government), any
amount of contribution made by him in the previous year to a political party is fully
deductible. “Political party” means a political party registered under section 29A of
the Representation of the People Act 1951. The word “contribute” has the meaning
assigned to it under section 293A of the Companies Act, 1956.

80IA : P R O F IT S A N D G A IN S F R O M IN D U S T R IA L
U N D E R T A K IN G S O R E N T E R P R IS E S E N G A G E D IN
IN F R A S T R U C T U R E D E V E L O P M E N T E T C .

The conditions are :

1. Any enterprise can claim this deduction.
2. The enterprise should be carrying on the business of (a) developing, (b)
operating and maintaining, or (c) developing, operating and maintaining,
any infrastructure facility under an agreement with the Central / State
Government or a local authority etc. which starts operating and maintaining
the infrastructure facility on or after 1.4.1995.
OR
The undertaking should develop or develop and operate or maintain and
operate an industrial park or develop, a special economic zone approved by
the Ministry of Commerce & Industry during 1.4.1997 to 31.3.2009.
OR
An undertaking set up in any part of India for generation, or generation and
distribution of power, which begins to generate power during 1.4.1993 to
31.3.2010.
OR
The undertaking should start transmission or distribution by laying a network
of new transmission or distribution lines during 1.4.1999 to 31.3.2010.
3. Where an infrastructure facility developed by an enterprise is transferred
on or after 1.4.1999 to another enterprise for the purpose of operating and
maintaining the same, in terms of an agreement, the transferee enterprise shall
be eligible for a deduction for the balance of ten years period.
 Deductions from Gross Total Income

4. Infrastructure facility means:

(a) A road including toll road, a bridge or a rail system, a port, airport, inland
waterways or inland port.
( b) A highway project including housing or other activities being an integral
part of the highway project.
(c) A water supply project, water treatment system irrigation project,
sanitation and sewerage system or solid waste management system.
5. Where an industrial park developed by an undertaking on or after 1.4.1999
or a Special Economic Zone developed on or after 1.4.2001 is transferred to
another undertaking for operation and maintenance, the transferee undertaking
shall be eligible for deduction for the balance of ten years period.
piority and
pent), any 6. The assessee may opt for any 10 consecutive years out of 15 years beginning
|ty is fully with the year in which the undertaking starts providing telecommunication
service or develops an industrial park or generates power or commences
ton 29A of
transmission or distribution of power.
meaning
7. In case of an enterprise providing an infrastructure facility of a highway
project, or a road including toll road, bridge, rail system or a water supply
project, water treatment system, irrigation project, sanitation and sewerage
system or solid waste management system, the assessee may opt for and 10
consecutive years out of 20 years beginning with the year in which it begins
operating and maintaining such infrastructure facility.
8. The deduction is allowable to eligible entities, which fulfill the specified
conditions.
Png, ( b )
9. Where a deduction is claimed under this provision in respect of profits of
Intaining, an undertaking, deduction to the extent of such profits shall not be allowed
I / State under sections 80H to 80RRA, and the deduction under this provision shall
■intaining not exceed the profits of the undertaking.
10. The accounts of the undertaking / enterprise (other than a company or a
co-operative society) are required to be audited and an audit report is to be
furnished in Form 10CCB.
The deduction is allowable for 10 consecutive assessment years as under:
(a) An undertaking providing telecommunication services
(0 For initial 5 assessment years - 100 % of the profits and gains.
(») For next 5 assessment years - 30% of the profits and gains out of 15
years begining with the year in which enterprise starts providing
telecommunication services.
(b) Other eligible undertakings and enterprises
letwork (0 For 10 consecutive assessment years - 100% of the profits and gains out of
15 years begining with the year in which undertaking develops and begins
to operate any infrastructure facility or develops an industrial park or
speical economic zone oi generates power or commences transmission
or distribution of power.
3.66 Income Tax— II (2017-18)

8 0 IA B : D E D U C T IO N IN R E S P E C T O F P R O F IT S A N D G A IN S
B Y A N U N D E R T A K IN G O R E N T E R P R IS E E N G A G E D
IN D E V E L O P M E N T O F S P E C IA L E C O N O M IC Z O N E

Amount of Deduction : Tax payer can claim 100% deduction in respect of profits and
is available for 10 consecutive assessment years.

80 IB : P R O F IT S A N D G A IN S F R O M C E R T A IN IN D U S T R IA L
U N D E R T A K IN G S O T H E R T H A N IN F R A S T R U C T U R E
D E V E L O P M E N T U N D E R T A K IN G S
The conditions are :
1. The deduction is allowable to eligible entities, which fulfill the specified
conditions.
2. Where deduction is claimed under this provision in respect of profits of an
industrial undertaking or hotel, deduction to the extent of such profits shall
not be allowed under sections 80H to 80RRA, and the declaration under this
provision shall not exceed the profits of the undertaking or hotel.
3. The accounts of the industrial undertaking / hotel / ship, (other than a company
or a co-operative society) are required to be audited and an audit report is to be
furnished in Form 10CCB / Form 10CCBA (for multiplex theatres).
4. Initial year (unless otherwise specified) means the assessment year relevant to
the previous year in which the undertaking begins to manufacture or operate
or starts functioning.

E lig ib le D e d u c tio n

The eligible deduction is as follows :

Available to
1. An industrial undertaking which begins
to manufacture or produce articles or
things or to operate plant, on or after
1.4.1991 to 31.3.1995.
2. A small-scale industrial under-taking,
which begins to manufacture, or produce
articles or things or to operate, V&kftVt
storage w after 1.4.1995 to
3\ . 3.2002.
3. An industrial undertaking located in
an industrially backward State, which
begins to manufacture or operate on or
after 1.4.1993 to 31.3.2004.
Amount of Deduction
25% of the profits and gains (30% in case
of a company) for 10 assessment years (12
assessment years in case of a co-operative
society).
For initial 5 assessment \ ears'. \00% of
the ptoftfs, and gams derived from such
Industrial undertaking,.
For the subsequent 5 assessment years
(7 assessment years in case of a co­
operative society): 25% of the profits and
gains (30% in cqse of a company).
Deductions from Gross Total Income 3.67

4. Notified industries in the North-Eastern 100% of the profits and gains for 10
Region assessment years.
5. An industrial undertaking located in a For initial 5 assessment years (3 years
notified industrially backward district of in case of an undertaking located in an
category A or category B, which begins to industrially backward district of category
manufacture or produce articles or things B): 100% of the profits and gains.
or to operate its cold storage plant on or For subsequent 5 assessment years (7
after 1.10.1994 to 31.3.2004. years in case of a co-operative society):
25% of the profits and gains (30% in case
of a company).
6. A ship that is brought into use on or after 30% of the profits and gains for 10
1.4.1991 to 31.3.1995. assessment years.
7. An approved hotel, owned by a company 50% of the profits and gains for 10
with a minimum paid-up capital of Rs. 5 assessment years.
lakhs, not formed by the splitting up or
reconstruction of an existing business,
which is
(a) Located in a hilly or rural area, or 50% of the profits and gains for 10
a place of pilgrimage or any other assessment years.
specified place, and which starts
operating between 1.4.1990 to
31.3.1994.
(b) Located in a hilly or rural area, 30% of the,profits and gains for 10
or a place of pilgrimage or any assessment years.
other specified place (excluding
hotels located within the municipal
jurisdiction of Calcutta, Chennai,
Delhi or Mumbai), which starts
operating between 1.4.1997 to
31.3.2001.
(c) Located at any other place and which 30% of the profits and gains for 10
starts operating between 1.4.1991 to assessment years.
31.3.1995.
(d) Located at any other place (excluding 30% of the profits and gains for 10
hotels located within the municipal assessment years.
jurisdiction of Calcutta, Chennai,
Delhi or Mumbai), and which starts
operating between 1.4.1997 to
31.3.2001.
8. A multiplex theatre constructed during 50% of profits and gains for 5 initial
1.4.2002 to 31.3.2005, located at a piace consecutive assessment years.
outside the municipal jurisdiction of Note : Initial year means the year in which a
Kolkata, Chennai, Delhi or Mumbai. cinema hall starts operating on a commercial
basis.
3.68 Income Tax— II (2017-18)

9. A convention center constructed during 50% of profits and gains for 5 initial
1.4.2002 to 31.3.2005 consecutive assessment years.
Note : Initial year means the year in which
a convention center starts operating on a
commercial basis.
10. Any Indian company carrying on 100% of profits and gains for initial 5
scientific and industrial research and assessment years.
approved by the prescribed authority at Note : Initial year means the assessment
any time before 1.4.1999. year relevant to the previous year in which
the company is approved by the prescribed
authority.
11. Any Indian company carrying on 100% of profits and gains for initial 10
scientific research and development, assessment years.
approved by the prescribed authority
after 31.3.2000 but before 1.4.2004 and
fulfilling prescribed conditions.
12. Any undertaking, which begins 100% of profits and gains for initial 7
extraction of mineral oil in the North assessment years.
Eastern region before 1.4.1997 or in any Note : Initial year means the assessment
part of India on or after 1.4.1997. year relevant to the previous year in which
the undertaking commences the commercial
production or refining of mineral oil.
13. Any undertaking, which begins refining 100% of profits and gains for initial 7
of mineral oil on or after 1.10.1998. assessment years.
Note : Initial year means the assessment
year relevant to the previous year in which
the undertaking commences the commercial
production or refining of mineral oil.
14. An undertaking engaged in developing 100% of profits and gains.
and building approved housing projects,
which commences development and
construction of the housing project on
or after 1.10.1998.
Note : The minimum size of the plot of land
shall be one acre and the maximum built up
area of residential unit shall be 1000 sq. ft.
in case of Delhi or Mumbai, or within 25 km
o f their municipal limits, and 1500 sq. ft. in
other areas.
The housing project should be approved
before 31.3.2005 by a local authority.
15. An industrial undertaking, which begins (i) For the initial 5 assessment years:
to operate a cold storage facility for 100% of the profits and gains.
agricultural produce, during 1.4.1999 to (ii) For the next 5 assessment years
31.3.2004. (7 years in case of a co-operative
society): 25% of the profits and gains
(30% in case of a company)
Deductions from Gross Total Income 3.69

16. An undertaking engaged in the (i) For the initial 5 assessment years:
integrated business of handling, storage 100% of the profits and gains.
and transportation of food grains, which (ii) For the next 5 assessment years: 25%
begins to operate on or after 1.4.2001. of the profits and gains (30%. in case
of a company).

801C : P R O F IT S A N D G A IN S F R O M C E R T A IN U N D E R T A K IN G O R
E N T E R P R IS E S IN T H E S T A T E S O F H IM A C H A L P R A D E S H ,
U T T A R A N C H A L , S IK K IM A N D N O R T H E A S T E R N S T A T E S

The conditions a re :
1. The deduction is allowable to eligible entities, which fulfill the specified
conditions.
2. No deduction shall be allowed under Chapter VI-A (i.e. sections 80A to 80U)
or section 10A or section 10B in respect of profits and gains of an eligible
undertaking/ enterprise.
3. The total ten years period of deduction shall include the period for which
deduction has been claimed u/s 80IB(4) or section 10C.
4. The accounts of the undertaking / enterprise (other than a company or a co­
operative society) are required to be audited and an audit report furnished in
the prescribed form.
5. Initial year means the assessment year relevant to the previous year in which
the undertaking / enterprise begins to manufacture or produce articles or
things or commences operation or.completes substantial expansion.
6. Substantial expansion means increase in investment, in plant and machinery
by at least 50% of the book value (before taking depreciation in any year),
as on the first day of the previous year in which substantial expansion is
undertaken.
The eligible deduction is as follows :
Available to Amount of Deduction
1. An undertaking or enterprise in any
notified Expert Processing Zone/
Integrated Center for Infrastructure
Development/ Industrial GrowthCenter
/ Industrial Estate / Industrial Park /
Software Technology Park / Industrial
Area / Theme Park, which has begun
or begins to manufacture or produces
any article or thing (not specified in
the Thirteenth Schedule) or undertakes
substantial expansion (when already
engaged ip such goods), during :
(a) 23.12.2002 to 31.3.2012 in the State (a) 100% of the profits and gains for 10
of Sikkim. assessment years.
3.70 Income Tax— II (2017-18)

(A) 24.12.1997 to 31.3.2007 in the North (b) 100% of the profits and gains for 10
Eastern States. assessment years.
(c) 7.1.2003 to 31.3.2012 in the States of (c) For initial 5 assessment years: 100% of
Himachal Pradesh and Uttaranchal. the profits and gains.
For subsequent 5 assessment years:
25% of the profits and gains
2. An undertaking or enterprise which
has begun or begins to manufacture or
produces any article or thing specified in
the Fourteenth Schedule or commences
any operation specified in that Schedule,
or undertakes substantial expansion
(when already engaged in such goods /
operation), during :
(а) 23.12.2002 to 31.3.2012 in the State (a) 100% of the profits and gains for 10
of Sikkim. assessment years.
(б) 24.12.1997 to 31.3.2007 in the North (b) 100% of the profits and gains for 10
Eastern States assessment years.
(c) 7.1.2003 to 31.3.2012 in the States of (c) For initial 5 assessment years: 100% of
Himachal Pradesh and Uttaranchal. the profits and gains.
For subsequent 5 assessment years:
25% of the profits and gains.

80JJA : P R O F IT S A N D G A IN S F R O M B U S IN E S S O F C O L L E C T IN G
A N D P R O C E S S IN G O F B IO -D E G R A D A B L E W A S T E

This section is applicable where the gross total income of an assessee includes any
profits and gains derived from the business of collecting, processing or treating of
bio-degradable waste for generating power or producing bio-fertilizers, bio-pesticides
or other biological agents or for producing bio-gas or making pellets or briquettes for
fuel or organic manure.
The eligible deduction is
100% of profits of such business for a period of 5 consecutive assessment years
beginning with the assessment year relevant to the previous year in which such
business commences.

80JJA A : E M PL O Y M E N T O F N E W R E G U L A R W O R K M E N

The conditions are :

1. Any Indian company can claim this deduction.
2. The Indian company should be engaged in the manufacture or production
of an article or thing and employing at least 100 workmen.
3. Splitting up or reconstruction of an existing undertaking, or amalgamation with
another industrial undertaking does not form the new industrial undertaking.
 Income Tax— II (2017-18) Deductions from Gross Total Income 3.71

the profits and g a in s fo r 10 4. A report o f a chartered accountant in Form 10DA is furnished along with
it years. the return.
5 assessm en t years: 100% of 5. No deduction is allowable if the increase in number of regular workmen
and gains. employed during a year is less than 10% of the existing workmen employed
uent 5 a ss e ssm e n t years: as on the last day of the preceding year.
profits and g a in s The eligible deduction is
30% of the additional wages paid to the new regular workmen employed in the
previous year for three assessment years including the assessment year relevant to the
previous year in which such employment is provided.

80L : IN T E R E S T O N B A N K D E P O S IT S , C E R T A IN S E C U R IT IE S , E T C .

Deduction u/s 80L is not available from the A.Y. 2006-07.

Illustration : 9
'ofits and g a in s fo r 10
R, an individual, submits the following information for the previous year ending 31st
'fits and g a in s fo r 10 March, 2017:
Rs.
ment years: 1 00% o f (a) Business loss 2,000
is. (b) Interest on Saving bank deposits 5.000
a ssessm en t y ea rs: (c) Interest on Government Securities 7.000
nd gains. (cl) Interest on deposits with a company 6.000
(e) Brought forward business loss 20,000
L E C T IN G
Compute the total income of R for the assessment year 2017-18, if
TE
(0 Government securities are held as stock-in-trade.
;see in c lu d e s a n y (if) Government securities are held as investments.
ig or tr e a tin g o f
s, b io - p e s t ic id e s Solution:
ir b r iq u e tte s fo r
(l) W h e r e G o v e r n m e n t s e c u r it ie s a r e h e ld a s s t o c k - in - t r a d e
Rs. Rs
e ss m e n t y e a r s Business loss (-) 2,000
i w h ic h s u c h
Interest on Government securities 7,000
5,000
Less : Brought forward business loss
(-) 5,000 Nil
Interest on bank deposits 5,000
Interest on deposits with a company 6,000 11,000

G r o s s T o ta l I n c o m e 11,000
'reduction Less : Deduction U/S 80TTA on
Saving Bank interest to the maximum extent of Rs. 10000 5,000
ition with T a x a b le I n c o m e 6,000
making.
 Income Tax-

Balance brought forward business loss of Rs. 15,000 can be carried forward
to the subsequent years.
(ii) W h e r e G o v e r n m e n t s e c u r it ie s a r e h e ld a s in v e s tm e n t s Rs. Rs.
Business Loss (-) 2,000
Income from Other sources :
Interest on bank deposits 5,000
Interest on Government securities 7,000
Interest on deposits with a company 6,000 18,000
Aggregation of Income 16,000
Less : Brought forward business loss Nil
G r o s s T o ta l I n c o m e 16,000
Less : Deduction U/S 80TTA on Saving Bank interest
Saving Bank interest to the maximum extent of Rs. 10000 5,000
T a x a b le I n c o m e 11,000

Brought forward business loss of Rs. 20,000 cannot be set-off as there is no business
income. This loss can be carried forward to the subsequent years. pa.
nat
80L A : C E R T A IN IN C O M E S O F O F F S H O R E B A N K IN G U N IT S 3. The
A N D IN T E R N A T IO N A L F IN A N C IA L S E R V IC E C E N T R E S the
alon
The existing sec. 80LA has been substituted by a new section from the A.Y. 2006-07.
4. In ct
The conditions are:
furni;
1. The assessee is that tl
(a) A schedule bank and having an offshore banking unit in a special econmic The eligib
zone; or
1. 100%
(b) A foreing bank and having an offshore banking unit in a special economic
2. In case
zone; or
shall be
(c) A unit of international fainancial services centre.
3. In case
2. The gross total income includes be restri
(a) Any income from the offshore banking unit in a special economic zone. exchange
(b) From any business referred to in Sec. 6(1) of the banking regulation extended
act, with an undertaking located with special economic zone, (c) From
any unit of the international financial serivces centre. 80R R B : ROYAL
3. An audit report in the prescribed form certifying that the deduction has been The conditions are
correctly claimed and is to be furnished along with the return of income.
1. Any reside
4. A copy of permission obtained under section 23(1) (a) of Banking Regulation 1970, on o
Act should be submitted along with the return of income. invention, ii
The eligible deduction is as follows : to assignees
1. If the above conditions are satisfied, then 100% of the income is deductible 2. The assessee
for 5 consecutive assessment years beginning with assessment years in which form duly sig
Deductions from Gross Total Income 3.73

the permission is obtained or permission of SEBI or under any other law is

obtained.
2. For the next 5 years 50% of such income would be deductible.

80P : D E D U C T IO N IN R E S P E C T O F IN C O M E O F C O O P E R A T IV E
S O C IE T IE S

100% of deduction is allowed to the profit of cooperative society.

80Q Q B : R O Y A L T IE S O F A U T H O R S

The conditions are:

1. Any resident individual, being an author / joint author, in respect of any
income by way of lump-sum consideration or royalty or copyright fees for
assignment or grant of any of his interests in the copyright of any book can
claim this deduction.
2. A book means a work of literary, artistic or scientific nature but excludes
brochures, commentaries, diaries, guides, journals, magazines, newspapers,
pamphlets, textbooks for schools, tracts and other publications of similar
nature, by whatever name called.
3. The assessee shall furnish a certificate in the prescribed form duly verified by
the person responsible for paying the income, giving the prescribed details,
along with his return of income.
4. In case of income received from a source outside India, the assessee shall
furnish a certificate in the prescribed form, along with his return, certifying
that the deduction has been correctly claimed in accordance with this section.
The eligible deduction is as follows :
1. 100% of the royalty income etc. subject to a maximum of Rs. 3,00,000.
2. In case of royalty or copyright fees, not in lumpsum consideration, deduction
shall be restricted to 15% of the value of books sold during the previous year.
3. In case of income earned from any source outside India, the deduction shall
be restricted-to an amount as is brought into India in convertible foreign
exchange within six months from the end of the previous year or within such
extended period as RBI (or other competent authority) may allow.

80R R B : R O Y A L T Y O N PA TEN TS

The conditions are •

1. Any resident individual, being a patentee, registered under the Patents Act,
1970, on or after 1.4.2003, as the true and first inventor in respect of an
invention, including a co-owner of the patent. The deduction is not available
to assignees or mortgagees in respect of all or any rights in the patent.
2. The assessee shall furnish along with his return a certificate in the prescribed
form duly signed by the prescribed authority, giving the prescribed details, and
 Income Tax— II (2017-18)

a certificate in the prescribed form in case of income received from abroad,

certifying that the deduction has been correctly claimed in accordance with
this section.
3. The deduction shall be available in respect of any royalty income from
working of or use of the patent, including consideration for the transfer of all
or any rights (including the granting of a licence) in a patent, or for imparting
of any information concerning the working or use thereof in India, or for
rendering of any services in connection with the above.
4. However, any consideration for sale of product manufactured with the use of
patented process or of the patented article per se for commercial use, or any
consideration taxable as ‘capital gains’ shall not be eligible for deduction.
5. In case of income earned from any source outside India, the deduction shall
be restricted to an amount as is brought into India in convertible foreign
exchange within six months from the end of the previous year or within such
extended period as RBI (or other competent authority) may allow. Solutm
The eligible deduction shall be
100% of such income, subject to a maximum of Rs. 3,00,000.

8 0 T T A : D E D U C T IO N IN R E S P E C T O F IN T E R E S T O N D E P O S I T IN
Incom
S A V IN G S A C C O U N T
B asic s
Individuals and HUFs are eligible for deduction any savings bank interest, a cooperative L ess: I
Society or a post office interest is eligible to a maximum extent of Rs. 10,000 for Incom e
foundation. R ent reci
L e s s : Sta
Students may note that interest on Time Deposit Recurring deposit and fixed
deposit shall not be eligible for deduction.
C apital Ga
80U : D E D U C T IO N F O R D IS A B L E D P E R S O N S Long-term t

The conditions are : Incom e fron

D iv id en d fro
1. Any resident individual suffering from any disability can claim this deduction.
Interest on ba
2. Disability means any disability over 40% as defined under the Persons with Interest on Gc
Disability (Equal Opportunities, Protection of Rights and Full Participation) W in n in gs fron.
Act, 1995. Interest earned
3. Severe disability means any disability over 80% as defined under the said Act.
G ro s s To;
4. The assessee shall furnish a certificate from the medical authority in the L e s s : D eduction
prescribed fonn along with his return of income. U /s 80C Rs
5. Where the condition of disability requires reassessment, a fresh certificate U /s 80U

shall have to be obtained on expiry of the period mentioned in the original U /s 80TTA

certificate.
The eligible deduction shall be Note : only Savings
Rs. 75,000 in case of a person with disability. deduction U/s 80 TD
Rs. 1,25,000 in case of a person with severe disability.
 Deductions from Gross Total Income

from abroad, Illustration : 10

fflrdance with
X, a person with disability, submits the following information. Compute (a) taxable
income, (b) the tax payable for the assessment year 2017-18.
income from
transfer of all
rfor imparting Salary (per annum)
(India, or for Rent received (per month)
Dividend from Co-operative Society
Interest on Savings Bank Deposits
P»iththe use of Interest on Government securities
cial use, or any Winnings from Lotteries (gross)
[deduction, NSC (VIII Issue) purchased during the year
■eduction shall Deposit under PPF scheme
rtible foreign He earned a long-term capital gain of Rs. 12,000 on sale of gold
lorwithin such during the year. Interest earned on NSC VIII issue
Solution,
(a ) C o m p u ta tio n o f T otal In co m e o f M r. X
fo r t h e A s s e s s m e n t Y e a r 2 0 1 7 -1 8

Rs. Rs.
Income from Salary
Basic salary 1,94,600
Less : Deduction u/s 16 Nil 1,94,600
^cooperative
| 10,000 for Income from House property
Rent received 42,000
Less : Statutory deduction @ 30% 12,600
29,400
Capital Gains:
Long-term capital gains 12,000
Income from Other Sources
Dividend from co-operative society 1,000
[deduction. Interest on bank deposits 8.000
prsons with Interest on Government securities 1,000
jrticipation) Winnings from lotteries 4,000
Interest earned on NSC 1000 15,000
le said Act. G r o s s T o ta l I n c o m e 2,51,000
Bty in the Less : Deductions u/s 80
U/s 80C Rs. 10,000 + Rs. 15,000 25.000
wrtificate U/s 80U 75.000
U/s 80TTA 8,000 108,000
v original
T o ta l I n c o m e 1,43,000
Note : only Savings Bank interest is eligible for
deduction U/s 80 TTA
 Inco m e Tax— II (2 0 1 7 -1 8 )

(,b) Computation of Tax on Total Income : Assessee’s inocme all put together does
not exceed Rs. 2,50,000, Hence no tax is payable

Illu s tr a tio n : 11

X, who is a resident in India, is a person with disability. He provides the following

particulars of his income for the year ending 31-3-2017.
Salary for working as a telephone operator in a company Rs. 25,000 p.m.
Honorarium from school for blind for giving his service Rs. 47,000
Interest on Government securities (gross) Rs. 44,000
Income from Unit Trust of India (gross) Rs. 5,000
He has contributed Rs. 2,000 to Prime Minister’s National Relief Fund and
donated Rs. 1,000 to the school for blind, which is approved as a charitable institution.
He has also paid Rs. 3,000 by cheque as premium of mediclaim policy. His father
is also a person with disability and is dependant on him for medical treatment and
rehabilitation. X spends Rs. 8,000 during the year on him.
Compute his total income for the assessment year 2017-18, assuming that he has
deposited Rs. 20,000 in Public Provident Fund Account. R’s gr
Providi
Fund ar
S o lu tio n :

Computation of Total Income of Mr. X

Mr. X ha
for the Assessment Year 2017-18 associatio
following
Rs. Rs.
(a) Natioi
Income from Salary
Basic salary 3,00,000 (b) Prime
3,00,000 (c) Family
Less : Deduction u/s 16 -
(d) All Indi,
Income from Other Sources
(e) Notified
Honorarium 47,000
In addition to
Interest on Government securities 44,000
2,00,000. Com,
UTI Dividend Exempt 91,000

Gross Total Income 3,91,000 Mrs. Raman whi

financial year 20
Less: Deductions u/s 80 C to 80 U (a) Prime Mini;
U/s 80 C 20,000 (b) National Defi
U/s 80D 3,000 (c) For constructs
U/s 80DD 75,000 (d) Rs. 2 lakhs for
U/s 80U 75,000 (e) To a poor stude
U/s 80G (/) Rs. 50,000 to th
PMNRF (100% of Rs. 2,000) 2,000 ig) Rs. 2.000 to the i
School for blind (50% of Rs. 1,000) 500 1,75,500 (h) Rs. 5,000 to the /
Total Income 2,15,500 (/) Rs. 2,500 to Natio
Determine his total incc
 D e d u ctio n s from G ro ss Total Incom e

■ether does

( Q U E S T IO N S )
Describe the provisions relating to deduction in respect of rent paid.
following What are the steps involved in allowing deduction for approved donations?
What type of deduction is available for donation for specific research or rural development?
Describe the provisions for deductions in respect of repayment of loan taken for higher
education.
What are the deductions available under section 80HHB?
Discuss the provisions for deductions in respect of interest on securities.
What are the provisions for deduction in relation to incomes in convertible foreign exchange?
tf Fund and What provisions are to be kept in mind, while calculating the total income of a person who is
Kinstitution. disabled?
I. His father
patment and

R’s gross total income is Rs. 50,000. He pays Rs. 2,000 by way o f contribution to Public
Provident Fund, Rs. 3,000 as life insurance premium Rs. 200 to Jawaharla! Nehru Memorial
Fund and Rs. 500 to Prime Minister’s National Relief Fund. Compute his total income.
[Ans. : Rs. 44,400]
Mr. X had a gross total income of Rs. 4 lakhs, which included Rs. 10,000 as share from
association of persons for the assessment year 2017-18. During the year he has made the
following donations:
(a) National Defence Fund Rs. 60,000
(b) Prime Minister’s National Relief Fund Rs. 1,00,000
(c) Family Planning Association o f India Rs. 10,000
(d) All India Congress Committee Rs. 1,00,000
(e) Notified charitable hospital Rs. 50,000
In addition to the above, he paid a life insurance premium of Rs. 15,000 on a policy of Rs.
2,00,000. Compute the relief in respect o f donations and life insurance premium.
[Ans.: Dedutions u/s 80 G Rs. 1,83.750]
Mrs. Raman whose gross total income is Rs. 40 lakhs, made the following donations during the
financial year 2016-17 :
(а) Prime Minister’s National Relief Fund Rs. 1 lakh
(б) National Defence Fund Rs. 2 lakhs
(c) For construction of commerce block in a local college Rs. 1 lakh
(d) Rs. 2 lakhs for repairs of a temple (notified)
(e) To a poor student Rs. 20,000
(/) Rs. 50,000 to the Central Government for the promotion of family planning
(g) Rs. 2,000 to the Chief Minister’s Earthquake Relief Fund, Maharashtra
(h) Rs. 5,000 to the Andhra Pradesh Chief Minister’s cyclone relief fund
(0 Rs. 2,500 to National trust for the welfare of mentally retarded persons.
Determine his total income and Tax Liability for the assessment year 2017-18.
[Ans.: Rs. 35.40,500. Tax liability Rs. 9,13,764]
3.78 In co m e Tax— II (2 0 1 7 -1 8 )

Mr. Mania requests you to compute his total income and Tax Liability for the assessment year
2017-18 from the following :
Rs.
Business profits 1,67,000
Interest on Saving bank deposits 23,000
Interest on company deposits 10,000
Winnings from state lotteries 55,000
Long-term capital gains from sale of jewellery (25 years) 2,00,000
[Ans. : Rs. 4,55,000]
The following are the income particulars of Mr. Lokesh. Compute his total income for the A.Y.:
2017-18. Rs.
Salary (gross) 75,000
Income from house property (computed) 25,000
Interest on Saving bank deposits 12,000
Casual income 16,000
Tamilnadu lottery prize 80,000
His payments are as follows:
Life Insurance premium 10,000
Rs.
Donation to National Defence Fund 3,000
Tax advocate fee 1,000
Interest on money borrowed for payment of tax 500
[Ans.: Rs. 1,85,000: Deduction u/s 80 G Rs. 3,000]

‘X ’ a totally blind person, furnishes the following particulars o f his income for the previous year
2016-17. Compute his total income:

Rs.
Basic salary from a school for the blind 96,000
Special allowance 16,000
Cash award from the government on a book for the blind 25,000
Interest on a fixed deposit in a bank 4,800
Dividend from UTI 4,800
Insurance premium of life of his wife
(capital sum assured Rs. 25,000) 3,000
Contribution to a recognized provident fund 5,000
Sum contributed to provident fund by employer 6,000
Donation to blind relief society approved under section 80G 10,000
Paid health insurance premium
(in cash Rs. 1,000 and balance by cheques) 1,500
Paid for purchase of National Saving Certificate (VIII Issue) 2,000
Compute total income.
[/Ins.: Rs. 26,540]
Note : Fixed Deposit interest is not eligible for 80TTA deduction.
7. Determine the deduction for the previous year 2016-17 in respect of each of the following:
(a) Payment in respect of Life insurance policy Rs. 45,000
(b) Payment in respect of subscription to units o f the UTI Mutual Fund, Rs. 15,000
Deductions from G ross Total Incom e 3.79

(c) Health insurance premium, Rs. 3,500 of which Rs. 1,000 was paid in cash.
(d) Profits of business of export o f computer software Rs. 60,000
(e) Profits of business of poultry farming Rs. 30,000
[Ans. : (a) 80C; (b) 80C; (c) 80D : Rs. 2,500: (d) No
deduction; (e) No deduction]
8. An assessee, who is an individual, received the following incomes during the financial year
2016-17:
(a) Insurance commission received from L1C Rs. 10,692 (TDS 10.0%)
(b) Cloth business profits Rs. 75,000
(c) He paid premium of Rs. 6,000 through cheques under mediclaim policy.
(d) He made the following payments during the year:
(i) Deposit o f Rs. 10,000 in National Savings Scheme, 1992
(h) Payment of Rs. 500 to Jeevan Dhara Policy
(hi) Investment of Rs. 20,000 in units of mutual funds (notified)
(tv) Donations: Rs. 5,000 to the National Defence Fund; Rs. 5,000 to the Prime Minister’s
National Relief Fund; Rs. 2,000 to the Africa Public Contributions Fund; Rs. 2,000 to National
Sports Fund; Rs. 2,000 to Local Authority Promoting Family Planning; Rs. 10,000 to Public
Sports Trust (approved)
Calculate his total income and Deduction u/s 80C.
[Ans. : Total income Rs.32,861; QA Rs.30,500; Donation u/s 80G Rs. 17,519]
9. X has computed his income under various heads for the previous year 2016-17 as under :
Rs. Rs.
(a) Income under the head ’salary’ 2,80,000
(b) Income under the head ‘house property’ (Loss) 19.000
(c) Profits and gains of business or profession 1,00,000
(d) Capital gains:
Long-term 50,000
Short-term 30,000 80,000
(e) Income from other sources
winnings of lotteries 1,00,000
interest on Govt. Securities 20,000 1,20,000
X also submits the following information:
(i) Payment made by cheque 10,000
For medical policy
(ii) Expenses on Medical Treatment of
Dependent Son being a person 20,000
with disability
(i'll) Payment of interest to Andhra Bank
Which was taken for Pursuing
approved higher Education 40,000
(iv) Donations to :
PM’s drought Relief Fund 5,000
National Fund for communal Harmony 6,000
Jawaharlal Nehru Memorial Fund 8,000
PM’s National Relief Fund 4,000
Family Planning 20,000
3.80 Income Tax—II (2017-18)

Approved Charitable institution 10,000

(v) PPF Deposits 20,000
Compute total income and tax liability.
[Ans. : Total Income Rs. 3,74,500; Total Tax Rs. 29767
10. Compute Total income and Tax liability of Mr. Akshay for the A.Y. 2017-18. Rs.
1. Gross Salary 3,00,000
2. Royalty (Gross) 50,000
3. Expenses incurred on Royalty 10,000
4. Interest on Savings Bank Deposit 20,000
5. LIP on his own life (sum assured Rs. 50.000) 12,000
6. LIP on the life o f his wife 5,000
7. LIP on the life o f his major son (not dependent on Mr. Akshay) 4,000
8. LIP on the life of dependent brother 3,000
9. Contribution to a Recognised Provident Fund 30.000
10. Amount deposits in PPF 10,000
11. Contribution to ULIP 8,000
12. Repayment o f housing Loan taken from LIC 90,000
(Principal amount Rs. 50,000 and interest Rs. 40,000)
13. Subscription to units of notified Mutual Fund 32,000
14. Amount incurred on the education of
(a) child Raja Rs. 20,000; (b) child Rani Rs. 25,000; (c) Child Vani Rs. 30.000
15. Term Deposit for 5 years in a schedule Bank 25.000
Akshay uses the house for his own residence.
[Ans. : Total income Rs. 1,60,000; Tax Nil]
 1
Computation of Tax Liability

Every person, who derives an income, is subjected to tax, if it crosses a limit as

prescribed by the Income Tax Act. As seen earlier, a person means and includes an
individual, a HUF, a partnership firm, a company, an association of persons or a body
of individuals, a local authority and any artificial or judicial person. Of these persons,
in this chapter, we shall examine the taxability of an individual. An individual is
a natural person, being a male, a female, a minor child, and a lunatic or an idiot.
Though there are no specific sections in the Income Tax Act for the assessment of
an individual, various relevant sections of the Act give and include the taxability and
assessing procedure of an individual. Accordingly, the sections that are relevant to the
Assessment of Individuals are Sections 5A, 10(2), 10(2A), 28(v), 60 to 65.80C to 80U
and 115ACA.
In the case of a male or a female who is not a minor, the total income derived by
such individual shall be subject to income tax in his or her own capacity. In the case of
a minor child, the total income of such minor shall be included in the income of that
parent whose total income (before such inclusion) is greater as per sections 60 to 64 of
the Act. However, the parent shall claim an exemption of Rs. 1,500 per minor child for
such inclusion. There are certain incomes of a minor which cannot be clubbed into the
parent’s income, like income derived by the minor by using his personal, physical or
mental skills. In such case, the income so derived by the minor cannot be clubbed with
the total income of the parent, and shall be taxed in the capacity of such minor child.
Hence, on behalf of the minor, the representative assessee of such minor child shall be
assessable in respect of the income derived by the minor child. In the case of a lunatic
or an idiot, the income derived on the name of such lunatic or idiot shall be assessable
in the hands of the representative assessee, on behalf of such lunatic or idiot.
The various heads of income for an individual are salary income, rental income
from house property, business profits or professional gains, capital gains and other
sources. The total taxable income is the base for calculating the tax liability of such
individual. The total taxable income of the individual depends on his residential status
in India. An individual need not have income from all the heads at a time, but may
have from one or more heads of income. Whatever head of income the individual has
his income from; the taxable portion of such income shall be calculated according to
the provisions of the sections relating fo the respective heads of income. If there are

[4.3]
4.4 Inco m e Tax— II (2017-18)

two or more sources of income under the same head, the income is first computed
separately for each source and then aggregated under that head. Then the aggregate
of income from all the heads is computed accordingly. To that amount, adjustments in
relation to the provisions of aggregation of income arising to other persons (such as
spouse, minor child, son’s wife, etc.), and liable to be included in the total income of
the assessee should be included under the respective head and the provisions of set off
and carry forward and set off of losses are to be made. The resultant is called as the
Gross Total Income. From this amount, the general deductions as per the provisions
of sections 80CCC to 80U are to be made. The resultant amount is called as the total
income on which the tax liability of the individual is calculated.

G R O S S T O T A L IN C O M E A N D T O T A L IN C O M E

According to the provisions of section 14 of the Income Tax Act, the term Gross Total
Income (GTI) means the aggregate of the incomes computed as per the respective
provisions of the following heads:
(/) Income from Salaries
(//) Income from House Property
(///) Profits and Gains of Business or Profession (iv) Capital Gains
(v) Income from Other Sources
In these heads of income, the incomes arising to other persons, such as wife, minor
child, son’s wife, etc., shall also be included. The aggregate value of all these heads of
income is called as the GTI.
According to the provisions of section 2(45) of the Income Tax Act, the term Total
Income (TI) means the total amount of income specified as per section 5 and calculated
as per the provisions of the Act.

C o m p u ta tio n o f T o ta l I n c o m e a n d T a x L ia b ility

Step 1 : Compute the income of an individual under 5 heads of income on the

basis o f his residential status.
Step 2 : Income of any other person, if includable under sections 60 to 64 will be
included under respective heads.
Step 3 : Set off of the Losses of present and past if permissible, while aggregating
the income under 5 heads of income.
Step 4 : The income computed under steps 1 to 3 is known as Gross Total Income
(GTI) from which deductions under Sections 80C to 80U (Chapter VIA)
will be allowed. However, no deduction under these sections will be
allowed from short-term Capital Gains covered under Section III A,
any long-term capital Gain and winning of betteries etc., though these
incomes are part of Gross total income.
Step 5: The balance income after allowing the deductions is known as total
income which will be rounded off to the nearest Rs. 10.
Computation o f Tax Liability 4.5

Step 6 : Compute tax on such total income at the prescribed rates of tax.
Step 7 : Allow rebate of maximum Rs. 5000 under Section 87A in case of
resident individual having total income upto Rs. 5,00,000
Step 8 : Add Surcharge @ 15% if the total income exceeds Rs. 1 Crore.
Step 9 : Add Education Cess @2% and SHEC @ 1% on the tax.
Step 10: Deduct TDS, advance tax paid, if any, the balance is the net tax payable
which will be rounded to the nearest ten rupees and must be paid as self
assessment tax before submitting the return of income.

Alternate Minimum Tax Section 115JC (AMT)

The concept of Alternate Minimum Tax is introduced in India in the Finance Act,
2011. Finance Act, 2011 introduced a new “Chapter X1IBA” to provide payment of
Alternate Minimum Tax (AMT) by Limited Liability Partnership and after that it has
been amended by Finance Act, 2012 in which it is covered all non-corporate assesses.
However, AMT is not applicable to Individual, HUF, Association of Persons/Body of
Individuals and Artificial judicial person if adjusted total income of such person does
not exceed Rs 20 Lac.
AMT is introduced in the Act, to reach and collect minimum taxes from the
Non Corporate Assessees who are claiming certain profit linked deductions. AMT is
payable when Tax as per normal provisions is less than Alternate Minimum Tax on
Adjusted Total Income.

Applicability:
1. The primary condition for applicability of AMT is that the assessee should be
Non Corporate.
2. Such assessee should have claimed deduction under chapter VI heading C
(Deductions in respect of certain incomes except u/s 80P) or under section
10AA (Profit derived by newly established SEZ Units) or Section 35AD
(Deduction for expenditure on specified business like cold chains facility,
warehousing facility, cross country Natural Gas, two or three start hotels, 100
bed hospice, fertilizer sugar manufacturing units and honey producing units
etc.)

Non Applicability:
AMT is not applicable if:
1. The Assessee is a corporate assessee.
2. The Assessee is an Individual, HUF, AOP, BOI (whether incorporated or
not) Artificial Judicial Person and its Adjusted Total Income does not exceed
Rs. 20 Lakhs.
Hence, it can be said that AMT is applicable to Individual , HUF, AOP, BOI,
Artificial Judicial Person only if two conditions are satisfied:
4.6 Inco m e Tax— II (2017-18)

It has claimed deductions under sections (10AA/ 35AD/ Chapter VI heading C)

And the Adjusted Total Income exceeds Rs 20 Lakhs.
In all other cases, ( LLP, Partnership Firms, other Non Corporate Assesses) the
relief of 20 Lakhs is not available.

Determination of All Alternate Minimum Tax U/s 115JC

Step 1: Calculate regular Income tax of the assessee
Step 2: Calculate adjusted total income
Adjusted total income = Net Income Plus the following
(a) deducation claimed U/s 80H to 80RRB ( excluding Section SOP)
(b) deduction under section 10AA
(c ) deduction under section 35AD
If the individual assessees adjusted total income is Rs 20 Lakhs or less, then
the AMT is not applicable.
Step 3: Calculation of Alternate Minimum Tax as under:
(i) If adjusted total income is less than Rs. 1 Crore
calculate tax @ 18.5% + Education Cess @ 2% + Secondary Higher Education
Tax @ 1 % thus total comes to 19.055%
(ii) If adjusted total income is more than Rs. 1 Crore
Calculate tax @ 18.5% + Surcharge @ 15% + Education Cess @ 2% +
Secondary Higher Education Tax @ 1 % thus total comes to 21.91325%
Step 4: if the tax liability at Step 1 is equal to more than the tax calculated at Step
3, the provision of alternate minimum tax are not applicable. But if the tax
calculated at step 3 is more than the tax liability at step 1 then
(i) Adjusted Total income calculated at step 2 shall be deemed to be the total
income of the individual assessee for the relevant previous year, and
(ii) The tax liability shall be determined at 18.5% (+Surcharge + EC +SHEC).
Step 5: Diffrence of the tax liability Amounts calculated at step 3 and step 1 shall
be available as alternate minimum tax credit which can be set off against the
regular tax liability of the individual assessee not beyond Tenth Assessment
Year i.e., if regular tax liability is more than alternate minimum tax liability.

Illustration 1:
From the following information determine the tax liability of Mr. Naresh for the
Assessment Year 2017-18
R s.
N e t p r o fit a s p e r p r o fit a n d lo s s a c c o u n t 68 , 00,000
D e d u c t io n U /s 1 0 A A 64,00,000
B u s in e s s I n c o m e 4.00. 000
L o n g te r m C a p ita l G a in (o n tr a n s fe r o f o p e n p lo t ) 1.00. 000
Computation o f Tax Liability 4.7

Rs.
Long term Capital Gain ( on transfer of listed shares Not Taxable
Rs. 4,00,000) ____________
Gross Total Income 5,00,000
Less Deduction U/s 80G Rs. 4000
Less Deduction U/s 801B Rs. 51,000 55,000

Net Income / Total Income 4,45,000

Solution:
Tax on Above
On long term capital gain Rs. 1,00,000/- @ 20% 20,000
On Balance (Rs.4,45,000 - 1,00,000 - Basic Exemption
Rs. 2,50,000 = 95,000 @ 10% = 9500

Total Tax 29,500

Less rebate U/s 87A 5,000

24,500
Add EC and SHEC @ 2% + 1% 735

Net Total Tax Liability (a) 25,235/-

Computation of Adjustable Total Income

Net Income 4,45,000/-
Add deduction claimed U/s 80 IB = 51,000
Decuction claimed U/s 10AA = 64,00,000 64,51,000/-

Adjusted Total Income 68,96,000

Calculation of Alternate Minimum Tax

Tax on Rs. 68,96,000 @ 18.5% 12,75,760
EC and SHEC 2+1 (3%) 38,273

Alternate Minimum Tax (b) 13,14,033

Tax liability is (a) or (b) whichever is higher i.e., = 13,14,033/-

Alternate Minimum Tax credit =Rs. 13,14,033- 25,235 = Rs 12,88,798

This can be carried forward to set off in the next succeeding Ten
Assessment years.
4.8 Inco m e Tax— II (2017-18)

Illustration: 2
The Gross total Income of Ravi Shanker for the A.Y. 2017-18 is Rs. 680000 which
includes longterm Capital Gain Rs. 80,000, Short term Capital Gain referred to in
Section 115A Rs. 70,000 and interest on Savings Bank deposit Rs. 12,000, Compete
the tax payable by Ravi Shanker assuming he deposited Rs. 1,50,000 in PPF and paid
premium for health insurance by cheque amounting to Rs. 25,000.

Solution:
Computation of tax payable by Ravi Shanker for the A.Y. 2017-18

Rs. Rs.
Gross Total Income 6,80,000
Less Deductions :
U/s 80 C 150000
U/s 80 D 25000
U/s 80 TTA 10000 185000
Total Income 4,95,000

Tax on Rs 495000:
Long term Capital gain Rs. 80,000 @ 20% 16000
Short term Capital gain Rs. 70.000 @ 15% 10,500
Balance total income Rs. 345000 9,500

36.000
Less: Rebate U/s 87 A 5,000

31.000
Add: Education Cess & SHEC @ 3% 9,30

31,930

Rates of Income Tax for Assessment year 2017-18

Particulars Rate o f Tax

(a) Winnings from Lotteries, Grossword puzzle races 30%

including horse, races, card games,
gambling and bettings
(b) Long term Capital gains 20%
(c) Short term Capital Gains 15%
(d) The balance o f total income incase o f :
Computation o f Tax Liability

individuals Individuals Individuals

aged 60 years or more 80 years or more

on the first Rs. 2,50,000 Nil on the first Rs. 300000 Nil On the first Rs. 500000 NIL
on the next Rs. 250000 10% on next Rs. 200000 10%
on next Rs. 500000 20% on next Rs. 500000 20% on next Rs. 500000 20%
on the balance 30% on the balance 30% on the balance 30%

Surcharge: Upto Rs. 1 crore, no surcharge. If income exceeds Rs. 1 crore. there
is 15% surcharge
M a r g in a l r e lie f : The total amount payable as income tax and surcharge on total
income exceeding Rs. 1 crore shall not exceed the total amount
payable as income tax on a total income of Rs. 1 crore by more than
the amount of income that exceeds Rs. 1 crore
E d u c a tio n C e s s : Education Cess at the rate of 2% on income tax shall be levied in the
case of every individual.
Secondary and Higher Education Cess (SHEC) @ 1% on income tax
shall also be levied.
A specimen proforma for calculation of Total Income and Tax Liability is given
below:
Particulars Rs. Rs. Rs.

1. I n c o m e fr o m S a la r ie s
(a) Basic Salary X X X

( b) Taxable Allowances X X X

(c) Taxable value of Perquisites X X X

{d) Taxable value of Profits in lieu of salary X X X

Gross Salary X X X

Less : Deductions u/s 16

(/) Entertainment allowance X X X

(//') Tax on employment / Professional Tax (+ ) X X X

(-) X X X

Net Taxable Salary X X X

2. I n c o m e fr o m H o u s e P r o p e r ty
( a) Self-occupied Property Nil
Less : Deductions u/s 24 for interest
on loans (-) X X X (-) X X X

Loss from Self-occupied Property

(b) Let out Property
Gross Annual Value X X X
4.10 Inco m e Tax— II (2017-18)

Less : Municipal Taxes X X X

Net Annual Value X X X

Less: Deductions u/s 24 X X X

Income from Let out Property X X X

Net Income from House Property XXX

3 . P r o fits a n d G a in s o f B u s in e s s o r
P r o fe s s io n
Net Profit as per P & L account X X X

Add/Less : Adjustments required to be

made in the profit as per the provisions
of the Act X X X

Net Business Income

X X X
4. C a p it a l G a in s

(a) Short term capital gain

(b) Short term capital loss
(c) Long term capital gain
Sale consideration X X X

Less : Transfer expenses (-) X X X

Net consideration (-) X X X

Indexed Cost of acquisition (-) X X X

Indexed Cost of improvement (-) X X X

Gross LTCG. X X X

Less : Exemptions under sections 54,54B,

54D, 54EC, 54ED, 54F, 54G, 54H (-) X X X

Net Long Term Capital Gains (+) X X X

Total Capital Gain X X X

Less : Carried forward Capital Loss (-) X X X

Taxable Capital Gains X X X

5. I n c o m e fr o m O t h e r S o u r c e s
General incomes u/s 56(1) X X X

Specific incomes u/s 56(2) (+) X X X

X X X

Less : expenses allowed u/s 57 (-) X X X

Income from other sources X X X

Add: Income of other persons X X X

Aggregate of Incomes X X X

Less : Adjustment for set off and carry

Computation o f Tax Liability 4.11

forward of losses and allowances (-) X X X

Gross Total Income X X X

Less : Deductions u/s 80C to 80U X X X

(a) X X X

(b)
(c) X X X (-) X X X

T o ta l T a x a b le I n c o m e X X X

(Rounded off to nearest rupees ten)

C o m p u ta tio n o f T ax L ia b ility

Tax on casual incomes X X X

Tax on long-term capital gains X X X

Tax on regular income X X X

Total Tax X X X

Less : Rebate u/s 87A as the total income

does not exceed Rs. 5,00,000 X X X

to the extent of Rs. 5000 X X X

Add: Education Cess 3% r+i x x x

X X X

Less: Relief u/s 89(1) and rebate u/s 86 (-) X X X

Net Tax Payable x x x

Add: Interest payable, if any, for delay in filing

of return (u/s 234A) or short payment/
deferment of advance tax (u/s 234B & 234C) (+) X X X

x x x

Less : Advance tax paid X X X

Tax Deducted at Source (TDS) (+) X X X

(-) X X X

B a la n c e T a x P a y a b le / B a la n c e R e fu n d a b le (+ /-)x X X

Illustration : 3

Mr. Sriram is a senior citizen gives you the following income particulars. Compute his
Tax liability for theA.Y. 2017-18 :
Rs.
(0 Pension from Government 3,30,000
(/7) Long term capital Gain 50,000
(Hi) Short term capital Gain 30,000
4.12 Inco m e Tax— II (2017-18)

(;'v) Interest on fixed deposit 10,000

(v) Winning from Lottery 1, 00,000
(vi) Deposited in NSC. VIII issue
Rs. 15,000. Pension scheme
u/s 80CCC 30,000.

S o lu tio n

C o m p u t a t io n o f T o ta l in c o m e

Rs.
1. Salary—pension Rs. 3,30,000
2. Capital Gain
(a) LTCG 50,000
(b) STCG 30,000
-------------- 80,000
3. Other sources
(a) Fixed depositinterest 10,000
(b) Winningsfrom lottery 1,00,0001,10,000

Gross total income 5,20,000

Less : Deduction u/s 80C& 80CCC to
the maximum extent of 1,50,000 45,000

T o ta l in c o m e 4 ,7 5 ,0 0 0

C o m p u t a t io n o f T a x lia b ilit y R s.
Tax on total income 4,75,000
Senior citizens basic exemption limit 3,00,000
Taxable income 1,75.000
20% Tax on Long Tam Capital Gain (Rs. 50,000) 10,000
30% Tax on Lottery income (Rs.100000) 30,000
on balance income Rs. 25,000, Normal rate 10% ____ 2,500
42.500
Less : Rebate u/s 87 A 5000
37.500
Add: Education Cess @ 3% 1125
38,625

I llu s tr a tio n : 4
Mr. Rajesh submits4he Following income particulars, Compute the Total income and
Tax liability for the A.Y. 2017-18.
 -a

(2 0 1 7 -1 8 )
Computation of Tax Liability 4.13

10,000
R s.
, 00,000
(/) Short term Capital gain 50,000
(if) Long-term capital gain 1,80,000
He has deposited Rs. 20,000 in PPF.

Solution:
C om putation o f Total Incom e of Mr. Rajesh

Capital gain R s.
Short term capital gain 50,000
Long term capital gain 1,80,000

Gross Total Income 2,30,000

Deduction u/s 80C to 80U Nil
Total income 2,30,000

Tax liability is nil as the assessee’s income does not exceed the prescribed exemption
limit of Rs. 2,50,000

Illustration : 5
From the below given information compute total income of Mr. ‘X’ for the Assessement
Year 2017-18.
(/) Interest on Govt. Securities Rs. 10,000 (gross)
(ii) Interest on Tax-free Govt. Securities Rs. 15,000 (Net)
(Hi) Interest on less-tax debenture of X Ltd.Rs.9,000 (Net)
(z'v) Interest.on tax-free debentures of ‘y’ Ltd. Rs. 9,(000 (net) (un-listed)
(v) Interest on tax-free debentures of ‘Z’ (listed) Rs. 4,500 (Net)
(vz) Lottery winnings received Rs. 70,000 (Net)
(vii) Interest on Savings Bank Deposits Rs. 16,000 (gross)
(viii) Rent from open lands Rs. 46,000
(ix) Medical insurance premium paid Rs.28,000
(,ix) Life insurance premium paid Rs. 28,000

Solution:
C o m p u t a ti o n o f T o ta l In c o m e o f M r. ‘X ’
f o r th e A s s e s s m e n t Y e a r 2 0 1 7 -1 8

income and Rs.

(/) Interest on Govt. Securities 10,000
(if) Interest on Tax-free Govt. Securities 15,000
4.14 Inco m e Tax— II (2017 -18)

(Hi) Interest on Less-tax debentures of

100
‘X’Ltd. Rs. 9,000 x ------- 10,000
90
(;'v) Interest on tax free debentures of Y Ltd.
100
Rs. 9,000 x ------- 10,000
90
(v) Interest on tax-free debentures of
100
Z Ltd. 4,500 x ------- 5,000
90
100
(v/) Lottery winnings Rs. 70,000 x ^ 1,00,000

(vii) Interest on bank deposits 16,000

(viii) Rent from open lands
G ross total incom e 46,000
2,12,000
Less : Deduction u/s 80 ‘D’ (Max) 25,000
Deduction u/s 80 C 28,000
Deduction U/s 80 TTA - Interest on Savings
Bank a/c upto Rs. 10000 10000 63,000

Total Incom e 1,49,000

Note : Interest on tax-free Govt. Securities need not be grossed up.

I llu s tr a tio n : 6

Mr. ‘A’ submits you the following particulars. Compute total income for the Assesment
Year 2017-18.
(a) Salary received Rs. 1,80,000
(b) Rent received Rs. 90,000
(c) Rent from letting of plant & machinery, building etc. Rs. 80,000
(d) Agricultural income from Indian lands Rs. 60,000
(e) Agricultural income from Srilankan lands Rs. 80,000
(/) Business profits Rs. 1,20,000 after charging depreciation Rs. 30,000, income -tax
Rs. 30,000 donation to PM National Relief Fund Rs. 20,000
(g) Share of income from HUF Rs. 81,000
(h) Share of incoming from Association of persons Rs. 70,000
(/') Medical insurance Premium paid Rs. 28,000.
Computation o f Tax Liability 4.15

Solution:
C o m p u tatio n of Total Incom e of Mr. ‘A’
for the A ssessm ent Year 2017-18

Rs. Rs.
Income from S alary
Salary received 1,80,000
L essdeduction u/s 16 Nil 1,80,000
Income from H ouse P ro p erty
Rent received 90,000
L ess : Standard deduction u/s 24 (a) 30% 27,000 63,000
Business Incom e
Profits as per P & L Account 1,20,000
A d d : Inadm issible expenses
Income tax 30,000
Donation 20,000 1,70,000
Share of income from HUF exempt, u/s 10 (2) NT
Share of income from AOP 70,000
2,40,000
Income from O th e r Sources
Rent for letting of plant etc. 80,000
Indian agricultural income NT
exempt u/s 10(1)
Foreign agricultural income 80,000 1,60.000
Gross total incom e
Income from salary 1,80,000
Income from house property 63,000
Business income 2,40,000
Other income 1,60,000 6,43.000
Less : Deduction u/s 80 ‘D’ (Max) 25,000
Deduction u/s 80G (Full) 20,000 45,000

Total Incom e 5,98,000

Illustration : 7
Mr. Raja submits you the following information relating to the Financial Year ending
3\ March 20\7. Compute total Income and tax liability for the A..Y. 2017-18.
Rs.
(/) Income from house property (computead) 1,50,000
(/'/) Salary received 1,20,000
(Hi) Business profits 1,20,000
(iv) Loss from Speculation business 40,000
4.16 Inco m e Tax— II (2017-18)

(v) Share of income from Firm Assessed as Such (FAS) 65,000

(vi) Longterm Capital gain 80,000
(vn) Short term Capital loss 60,000
(viii) Interest on Savings Bank Deposits 28,000
(ix) Interest on Govt. Securities 2,000
(x) Director’s remuneration 46,000
(xi) Donation to an approved institution 65,000

Solution

Com putation of Total Income of Mr. Raja

for the Assessment Year 2017-18

Incom e from S alary Rs. Rs.

Salary received 1,20,000
Less : deduction u/s 16 Nil 1,20,000
Incom e from house p ro p erty (computed) 1,50,000
Incom e from business
Business Profits 1,20,000
Speculation loss (cannot be adjusted) —
Share of income from FAS Exempt u/s 10 (2A) NT 1,20,000
C ap ital gains
Long tenn Capital gain 80,000
Less : Short term Capital loss 60,000 20,000
Incom e from o th e r sources
Interest on bank deposits 28,000
Interest on Govt. Securities 2,000
Director’s remuneraton 46,000 76.000
G ross Total Incom e
Income from Salary 1,20,000
Income from house property 1,50,000
Business income 1,20,000
Capital gains 20,000
Income from other sources 76,000
Less : Deduction u/s 80 ‘G’ 4,86,000
Q ualifying a m o u n t:
Actual donation to approved institution
Rs. 65,000 or 10% Gross Taxable income
i.e. Rs. 4,86,000 less long term capital
gain Rs. 20,000 = Rs.4,66,000
w.e.l i.e. Rs. 46,600 Q.A.
23,300
Rate of deduction 50% of Rs. 46,600
(//) Deduction U/s 80TTA 10,000 33,300
Total Incom e 4,52,700
C om putation o f Tax Liability 4.17

Tax liability : On long-term capital gains-20% on 20000 4000

Rs. 2,50,000 to Rs. 4,32,700 = Rs. 1,82,700 at 10% 18,270
22,270
Less : Rebate u/s 87 A 5000
17,270
Add: Education 8 Additional Cess 3% 518
Total tax payable 17788

N o te s: 1. S pe culation business loss cannot be set o f f fro m reg ular business incom e, h ow e ve r it
can be carrie d forw ard fo r absorbtion in the next 8 years.
2. S hort term capita l losses can be adjusted fro m lo n g term capital gains.
3. D o n a tio n to an approved institution is q u a lifie d w ith in the lim it o f 10%. A djuste d
G ro ss total incom e and deductable at 50%

I llu s tr a tio n : 8

Below given is the Profit and Loss Account of the ‘X’ for the year ended 31 st March
2017, who is a senior citizen above 60 years.
Dr. Cr.

Particulars Rs. Particulars Rs.

To Salaries 80,000 By Gross profit 4,40,000

To Rent 60,000 By Rent from house property 1,60,000
To Advertising 30,000 By Rent from Staff houses 20,000
To General Expenses 40,000 By Interest on bank Deposits 25,000
To Depreciation 50,000 By Profit on Sale of
To Donation 10,000 government securities 80,000
To provision for bad debts 6,000 (Short-term)
To Municipal taxes 4,000 By bad debts recovered 10,000
To loss on sale of long By refund of sales tax 15,000
term asset 20,000
To income tax 10,000
To Interest on capital 12,000
To Interest on bank loan 18,000
To Life Insurance premium paid 15,000
To Medical insurance
premium paid 8,000
To General Reserve 12,000
To Net profit 3,75,000

7,50,000 7,50,000
4.18 Inco m e Tax— II (2 0 1 7 -1 8 )

Further information :
1. Allowable Depreciation on all assets Rs. 62,000.
2. General expenses include Rs. 10,000 as legal expenses paid in relation to the
acquisition of a business asset.
3. Rent paid is towards the godown owned by the proprietor
4. Municipal taxes relate to let out house
5. Advertising expenses were paid in cash.
6. Donations are recognised u/s 80 G.
C o m p u te to ta l in c o m e a n d ta x lia b ility fo r th e A s s e s s m e n t Y ear 2 0 1 7 -1 8 .

Solution
Com putation of Total Income of Mr. ‘X’
for the Assessment Year 2017-18.
Incom e from house pro p erty Rs. Rs.
Rent received 1,40,000
Less : local taxes paid 4,000
NAV 1,36,000
Less : Standard deduction u/s 24 (a) 30% of NAV 40,800 95,200
Incom e from Business
Business Profits 3,75,000
Add : Inadmissible expenses
Depreciation (Seperately treated) 50,000
Donation 10,000
Provision for bad debts 6,000
Municipal taxes 4,000
Long term Capital loss 20,000
Income tax 10,000
Interest on Capital 12,000
Life insurance premium 15,000
Medical Insurance 8,000
General reserve 12,000
Legal charges (Capitalised) 10,000
Rent to self 60,000
Advertising 30,000 paid in cash disallowed
30,000 2,47,000
Less : Expenses not charged to P& L A ccount 6,22,000
Depreciation 62,000
Less : Non - Business incomes
Rent from house property 1,60,000
Interest on bank Deposits 25,000
Com putation o f Tax Liability 4.19

Profit on sale Govt. Securities 80,000 3,27,000

Business income 2,95,000
Capital gains : Short term Capital gain 80,000
Long term Capital loss can not be adjusted - 80,000
O ther incom es
Interest on bank Deposits 25,000
Gross to tal incom e
Income from house property 95,200
Business income 2,95,000
Capital gains (Short-term) 80,000
Income from other sources 25,000 4,95,200

Less : Deduction u/s 80C

LIC 15,000
8,000
Deduction u/s 80G :
QA : Rs. 10,000 being less than 5,000
10% of GTI; Rate 50%
Less : Deduction U/s 80TTA interest on bank deposit 10,000 38,000
Total Incom e 4,57,200

N o te s'. 1. L o n g term C a p ita l loss cannot be adjusted fro m short term capital gains. H o w e v e r v ice
versa is allow ed.
2. D o n a tio n to approved institu tion s is lo w e r than the 10 per cent o f A d ju ste d G ro ss incom e.
H ence Q A is Rs. 10,000.

C alculation of Tax Liability

Rs.
Income upto Rs. 3,00,000 (Senior Citizen) Nil
Balance Rs. 1,57,200 at 10% 15,720

15.720
Less : Rebate u/s87 A 5000
10.720
Add : Education Cess at 2% + 1% Additional Cess 322
Tax P ayable 11,042
Less : Income Tax Paid 10,000
Net Tax P ayable 1042
4.20 Inco m e Tax— II (2017-18)

( E X E R C IS E S )

1. A is the m anager o f X C o . Ltd . H e fu rnishes the fo llo w in g p a rticu lars o f inco m e fo r the previous
yea r 2016-17.
(a) B a s ic salary Rs. 36,000 Dearness allo w a n ce Rs. 6,000 B o n u s Rs. 5,000
(b) H is co n trib u tio n to R P F Rs. 4,000
(c) H is e m p lo y e r’s co n trib u tio n to the fund Rs. 4,000
(c) Interest credited to the accum ulated balance o f the p ro v id e n t fund @ 10% Rs. 3,000
H e w as p ro v id e d w ith a sm a ll car w h ic h is used both fo r o ffic ia l and private purposes
H e incurred expenditure on books and new spapers R s. 400
(d) H e re ceive d interest on liste d c o m m ercial securities (net) Rs. 4,500 H e received dividend
fro m a co-op e ra tive socie ty (gross) Rs. 470
(e) H e p a id life insurance prem ium o f Rs. 1,000 p.m. on his life insurance p o lic y for
R s. 1,50,000
(f) H e donated to an approved in stitu tion Rs. 8,000
C o m p u te h is tax lia b ilit y fo r the assessm ent yea r 2017-18.
[Ans. : N il; T otal Incom e Rs. 34.789]
2. T h e fo llo w in g investm ents w ere h e ld by M r. M d u rin g the p re vio u s ye a r 2016-17. Com pute his
total in co m e and tax lia b ilit y fo r the assessm ent yea r 2017-18.
(a) Rs. 50,000 6% T ax free C e n tra l G ove rn m e n t S e curities
(b ) Rs. 40 .0 00 8% Port Trust B o n d s
(c) Rs. 30,000 15% debentures o f Paper M ills Ltd.
(d) Rs. 20,000 7/4% M u n ic ip a l Debentures
(e) Rs. 25,000 10% post-office cash certificates
(/) Rs. 30,000 15% Preference shares o f A C o . Ltd.
(g) R s. 20,000 9% K a rn a tak a State G ove rn m e n t Loan.
O n 1-5-2016, he so ld the above M u n ic ip a l debentures fo r Rs. 24,000 and on the same day he
purchased fo r Rs. 24,000 10% debentures o f S u rya la k sh m i C o tto n M ills Ltd .
H e paid R s. 150 as co m m issio n fo r c o lle c tin g the interest and R s. 4,000 as interest on loan
taken fo r p urch asing the 6% T ax free C entral G ove rn m e n t Securities. T h e interest on the above
securities is pa yab le h a lf-y e a rly on 1st Ju ly and 1st January each year.
[A//s.: T otal Incom e Rs. 10.300]
3. X su b m its the fo llo w in g pa rticu lars re la tin g to his in co m e fo r the p re vio u s yea r 2016-17.
Compute total income and the tax liability of X for the assessment year 2017-18.
(a) Salary from a public sector company in Delhi after deduction Rs.
of income tax and provident fund contribution 84,000
(b) Income tax deducted at source 6,000
(c) Contribution to recognized provident fund 18,000
(d) Employer’s contribution to provident fund 12,000
(e) House rent allowance at 12% of salary (actual rent paid by X Rs. 3,500 p.m.)
(/) Leave travel allowance from employer of which75% was spent on travel 12,000
(g) Rental income from house 10,500.
(h) Municipal value of house 48,000
(/) Standard rent determinable 24,000
Com putation o f Tax Liability 4.21

(J) M u n ic ip a l taxes 6,000

(k ) Interest on a loan o f Rs. 1.00.000 at the rate o f 15% p.a.
in respect o f purchase o f house 15,000
(/) D e p o sit in C u m u la tiv e T im e D e p o sit o f Post O ffic e 15,000
(m ) Purchase o f N a tio n a l S av in g s C e rtifica tes V III Issue 25,000
(«) Purchase o f units o f C A N B A N K m utual fund 5,000
(o) Paym ent o f m e d icla im prem ium 1,500
(p) D o na tio n to an approved tem ple 11,000
[A/w.: Total Income: G T I Rs. 1,08,600: Total incom e
Rs. 41,895 T ax L ia b ilit y N il]

4. F o llo w in g is the T ra d in g and P ro fit and L o s s A c c o u n t o f M u m b a i Stores fo r the yea r ending 31st
M a rch . 2017.

Rs. Rs
T o O p e n in g sto ck 5,500 B y Sales 1,35,650
T o Purchases 80,640 B y C lo s in g stock 7.700
To Wages 6,700
Rs. Rs.
To G ro ss P ro fit c/d 50.510
1,43,350 1,43,350
T o Salaries 13,500 B y G ro ss p rofit b/d 50,510
T o R ent 800 B y Interest on investm ent
To Interest on capital 1,400 in securities 1.550
To L if e insurance prem ium 900 B y B ad debts recovered 700
T o F ire insurance prem ium 300 B y P ro fit on sale o f shares
To B ad debts 720 (short-term ) 2,000
To P ro v is io n fo r bad debts 1,800 B y D iscou n t 3.000
To D e pre ciatio n 750
To L o s s on theft 6,300
To P ro v is io n fo r taxation 1,000
T o Entertainm ent expenses 2,500
To Investm ent deposit account 4,200
To D o na tio ns 2,000
To N e t profit 21,590

57,760 57,760

A d d itio n a l In fo rm a tio n
(a) Sales in c lu d e Rs. 2,800 cost o f goods w ithdraw n by M r. X fo r h is personal use; the
m arket value on the date o f w ith draw a l Rs. 3,500
(b ) D e p re ciatio n ad m issib le as per Incom e tax R u le s Rs. 7,150
(c) D o n a tio n w as m ade to the G ove rnm e nt o f India fo r F a m ily P la n n in g
(d) Entertainm ent expenses in clu de personal expenses am ounting to Rs. 1,000

C o m pute the total in co m e and the tax lia b ility o f M r. X fo r the assessm ent yea r 2017-18.
[A/is. : G T I Rs. 30,290; 80/G Rs. 2,000; Total incom e Rs. 28,290]
4.22 Inco m e Tax— II (2 0 1 7 -1 8 )

5. T h e fo llo w in g is the R e ce ip ts and Paym ents A c c o u n t o f D r. A n a n d R e d d y :

R eceipts Rs. Paym ents Rs

T o B a la n ce on 1-4-2016 11,640 B y R e n t o f c lin ic 14,000
T o Fees at c lin ic 1,80,430 B y R e p a irs to c lin ic 3,360
To Sala ry re ceive d from B y Purchase o f equipm ents 3,980
M e d ic a l C o lle g e 48,000 B y S a la ry pa id to sta ff 64,000
To L ife p o lic y m atured 25,000 B y Sund ry expenses 4,470
To D iv id e n d fro m units B y Purchase o f m e d icin e 12,700
o fU T I 2,700 B y H o u se h o ld expenses 640
T o Interest (gross) on B y Interest on H o u sin g loan 26,000
D ebentures 4,200 B y Incom e tax 17,900
F D w ith com p anies 2,800 B y H ouse property tax 3,000
F D w ith S B I 3,700 B y Investm ent in M a g n u m
S B w ith S B I 730 C e rtifica tes 30,000
B y C o n trib u tio n to P P F 23,000
B y P re m iu m on life p o lic y 8,510
B y D e p o s it in N a tio n a l
S av in g s Schem e 1992 10,000
B y L o a n to a frie n d 20,000
B y Personal E xpe nse s 37,000
B y B a la n ce on 31-3-20 17 640

2,79,200 2,79,200

D r. R e d d y is re g u la rly fo llo w in g ‘ C a s h ’ system o f accounting. H e stays in a new house,

w h ic h he purchased on 31-3-2016. F o r this purpose he borrow ed Rs. 80,000 fro m H ousing
D e ve lo p m e n t F in a n ce C o rp o ra tio n Ltd . ( H D F C ) . T h e annual le ttin g valu e o f the property is Rs.
24,000. M a g n u m C e rtifica te s (N o tifie d equity sa v in g schem e) have been n o tifie d under section
80 C . S to ck o f m e d icin e on 31 -3-2016 w as Rs. 3,400 and on 31 -3-2017 w as R s. 2,100. Com pute
the total in co m e and tax o f Dr. A n a n d R e d d y fo r the yea r en din g 31 -3-2017.
[A n s .: Profe ssional Incom e Rs. 80,003; S ala ry Rs. 48,000;
O the r sources R s .l 1,430; L o ss fro m H.P. Rs. 26,000;
GT1 Rs. 1,13,433; D e du ction u/ s 8 0 C R s. 71,510,
Total incom e R s. 41,923 T ax N il, R e fu n d Rs. 17,900]
6. C o m p u te total in co m e fro m the fo llo w in g info rm atio n :

Rs.
(0 S ala ry re ceive d 1,60,000
'0 0 R ent re ceive d 1,20,000
m M u n ic ip a l taxes paid on let out house 10,000
(tv) B u sin e ss p ro fits Rs. 2,40,000 after ch arging depreciation Rs. 26,000,
ktqOOft tax R s. 20,000 donation to N a tio n a l D efence Fu nd s
(V ) L o n g term C a p ita l loss 60,000
(V t) S h o rt term capita l gain 40,000
(v;<) Interest on bank D e p osits 16.000
(viii) Interest on G o v t. Secu rities 14,000
(ix) M e d ic a l c la im paid 25,000
to L if e insurance prem ium paid 24,000
C o m pu ta tion o f Tax Liability 4.23

[A n s.: GTI Rs. 5,82,000; Deduction u/s 80C Rs. 24,000,

80D Rs. 25,000, u/s 80 G Rs. 15,000; Long term Loss
Rs. 60,000 c/f to next year to be set off from next year
long term capital gain.]

7. Information relating to ‘X ’ is given below :

(a) Income from house property Rs. 75,000
(b) Salary received Rs. 1,50,000
(c) Interest on Govt. Securities Rs. 40,000
(d) Commission as LIC agents Rs. 50,000
(e) Director’s remuneration Rs. 60,000
(/) Rent from letting of plant, machinery, building etc. Rs. 80,000
(g) Lottery winnings Rs. 70,000 (net)
(h) Longterm capital gains Rs. 80,000
(0 Short-term capital loss Rs. 20,000
(/') Share of income from Hindu Undivided Family Rs. 40,000.
(k) Half share of income from Association of Persons Rs. 48,000.
(/) Dividends from Indian Companies Rs. 60,000
(m) Donation to an approved Institution Rs. 10,000.
Compute total income for the A.Y. 2017-18.
[Ans. : Rs. 6,10,000 [H int: GTI Rs. 6,15,000 deduction
u/s 80 G Rs. 5,000, Dividends from Indian
Companies exempt u/s 10 (34) Share of income
from HUF exempt u/s 10 (2)]. Income from H.U.F.
& AOP is not included in the income o f anindividual]
8. From the following information compute total income of Mr. ‘A’ for the Assessment year
2017-18.
J
Profit & Loss Account for Account For the Year Ending 31 st March, 2017
Particulars Rs. Particulars Rs.
To Salaries 1,20,000 By Gross Profit 8,20.000
To Rent 80,000 By Rent from house property 1,80,000
To General expenses 40,000 By Bad debts received
To Advertising 30,000 (Disallowed earlier) 20,000
To Depreciation 40,000 By Refund of income tax 20,000
To Bad debts 10,000 By Dividends (Indian G(os.) 60,000
To Provision for Bad Debts 15,000 By Interest on Govt. Securities 50,000
To Income tax 12,000
To Sales Tax 18,000
To Municipal taxes of
property (let out) 6,000
To Medical insurance 14,000
To Life Insurance 18,000
To Donations 15,000
To Net Profit 7,32,000
11,50,000
11,50,000
4.24 Inco m e Tax— II (2 0 1 7 -1 8 )

Further information :
1. Advertisement expenses were paid through a bearer cheque.
2. Rent was paid to the premises owned by proprietor.
3. Allowable depreciation u/s 32 is Rs. 78,000.
4. Sales tax paid was for the year 2015-16.
5. Donations are recognised u/s 80 G.
[Ans. : Rs. 6,86,300 :
( Hint :GTI. Rs. 7,25,800 deduction u/s 80 D Rs. 14.000.
u/s 80 C, Rs. 18.000, u/s 80G, Rs. 7,500]
9. Abhishek Submits the following information regarding his income for the previous year 2016-
17:
Rs.
1. Salary p.a. 3,85,000
2. Rent Received from Houseproperty in Delhi (per month) 8,000
3. Winning from Lottery (Gross) 1,00,000
He makes the following deposits during the year:
1. Contribution towards PPF 40,000
2. Premium paid in cash on Mediclaim
Policy for his dependent father 10,000
He has a son being a person with disability, dependent on him, for whom he incurred
expenses for his medical treatment and rehabilitation. He also deposited a sum o f Rs. 25,000
for the benefit o f his son under a scheme framed by the UTI for such a purpose.
Compute Abhishek’s Total income and tax liability for the assessment year 2017-18.
[Ans. : Total Income Rs. 4,37,200; Tax Liability Rs. 34732]
10. Ramanath submits you the following particulars
Rs.
1. Income under head salary (computer) 2,40,000
2. Income from House property (computed) 50,000
3. Long-term capital gain 60,000
4. Short-term Capital Loss (-)30,000
5. Profits and gains from business of poultry farming 60.000
6. Profits and gains from SSI unit established in April 2011 1,20.000
7. Interest on Govt. Securities 35,000
8. Interest on Bank deposits 15,000

Compute his total income and tax payable for the assessment year 2017-18 by taking into
consideration the following payments:
LIP on his own life 15,000
PPF 25,000
Donation to National Children Fund 5,000
Donation to PM Relief Fund 6,000
Donation to approved Charitable institution 20,000
Donation to Family Planning 24,000
Payment by cheque to GIC for medical claim :
(a) health o f house wife 5.000
(b) health o f dependent son 5,000
(c) dependent father aged 66 years 10.000
(d) dependent brother 5,000
C om putation o f Tax Liab ility 4.25

Expenses on Medical treatment o f dependent

mother with a disability 6,000
Amount deposited in UT1 scheme for a handicapped
dependent relative 25,000
Payment of interest on account of Loan 30,000
[Ans: Total Income Rs. 3,18,250;
Tax liability Rs. 4970 u/s 80G Donation Rs. 36.750]
11. Ramu, whose GTI for assessment year 2017-18 is Rs. 4,00,000 (which includes Long-Term
Capital Gains of Rs. 50,000 and short-term capital gains of Rs. 50,000) submits the following
information.
1. Contribution towards PPF
2. LIP paid for married son not dependent on him 3.
Mediclaim premium paid by cheque for
(a) Himself
(b) for married son not dependent on him
4. He has made the following donations :
(a) National defence Fund
(b) PMs National Relief Fund
(c) Indira Gandhi Memorial Trust
(d) Delhi University declared as an institution of national eminence
(e) Zilla Saksharata Samiti
(/) An approved Charitable institution (g) Family planning
(h) Donations of blankets to an Orphanage
(/') Donation to National Blood Transfusion council Compute : (A) Total income (B) Tax
Liability
[Aits. : Total income Rs. 3,07,750; Tax liability Rs. 5948]
 1
Return of Income and Assessment
Procedures

As per the rules of Income Tax Act 1961, it is mandatory for every person to file
a return of income and to pay tax, if his total income exceeds the exempted limit.
Every assessee has to estimate his income from all the sources, compute tax liability,
advance tax to be paid during the previous year and to furnish the particulars of income,
qualified savings etc. in the assessment year in the specified form which is known as
filing of a return.
The word ‘assessment’ means the computation of income, determination of the
amount of tax payable and the procedure laid down in the Act for imposing tax liability
on tax payee. In other words, assessment is an integrated process involving not only
the assessment of the total income but also the determination of tax. The assessment
proceedings commence when a ‘return of income’ is filed within the specified time
and in the prescribed form. The process of assessment is continued until some order of
assessment is made, for which the existence of an assessee is essential. There cannot
be ah assessment of a non-existing person.

RETURN OF INCOME [SECTION 139]

Every person, if his total income or the income of other person for which he is assessable
exceeds the maximum exempted limit, shall on or before the due date furnish a return
of income in the prescribed form and verified in prescribed manner by the officials of
IT department.
W.e.f. A.Y. 2006-07, every person being an individual or a HUF or an associaiton
of persons or a body of individuals whether incorporated or not or an artificial judicial
person, if his total income, during the previous year without giving effect to provisions
of Sec. 10A or Sec. 10B or Sec. 10BA or Chapter VIA (Deductions u/ s 80C to 80U)
exceeds the maximum amount which is not chargeable to income tax shall, on or
before the due date furnish a return of his income or income of other person during the
previous year, in the prescribed from and in the prescribed manner.
Note : Exemption limit for the A.Y. 2013-14 is as follows :
Rs. 2,50,000 in the case of resident senior citizen (60 years or more); Rs. 5,00.000 in the case
o f very senior citizens (80 years of more), Rs. 2,00,000 in the case of any other individual or
every HUF/AOP/BOI.
[5.3]
5.4 Inco m e Tax— II (2017-18)

e-Filling:
The process of electronically filing Income tax returns through the interest is known
as e-Filing. The e-filing facility was introduced by the Income Tax Department for the
first time during assessment year 2007-07. It is mandatory to e-file Income Tax returns
for companies and firms requiring statutory audit under section 44AB. This benefit is
extended to all assesses. They can avail services such as submitting returns/Forms,
Form 26AS (Tax Credit), outstanding Tax demand, 1TR-V receipt status, Rectification
status etc.

Types of e-Filing:
The filing of Income Tax Returns electronically is done in three ways:
1. ITR-V form is generated for e-filing without Digital Signature certificate.
The form should be printed, signed and submitted to CPC, Bangalore using
Ordinary Post or Speed Post ONLY with 120 days from the date of e-Filing. It
does not require any further action.
2. The Income Tax Return e-filed through an e-Retum Intermediary (ERI) with
or without Digital Signature Certificate (DSC).
3. The Income tax return can be e-filed using Digital Signature Certificate
(DSC)/EVC and it does not require any action.

Process of e-Filing:
The procedure for e-filing depends person who is filing the rerturn.
1. Individual/HUF:
(a) Where accounts are required to be audited under section 44AB, 44DA,
50B, 80-IA, 80-IC, 80-ID, 80JJAA, 80LA an assesses is required to
furnish an Audit Report and shall e-File the same. Any person required to
obtain these Audit Reports are required to e-File the return. The returns
e-filed in the above cases require Digital Signature (DSC).
(b) Where sec 44AB is not applicable and
(/) The return is furnished in 1TR-3 or in ITR-4. or
(if) The individual/HUF being a resident (other than not ordinarily
resident) has Assets, including financial interest in any entity,
located outside India, or signing authority in any account located
outside India, or income from any source outside India;
(Hi) Any relief in respect of tax paid outside India.
(iv) Total income exceeds rupees Five Lakh or any refund is claimed
(other than Super Senior Citizen furnishing ITR1 or ITR2)
In the above cases returns are e-Filed using any one of the three ways
namely: (i) Digital Signature Certificate (DSC) or (if) Electronic
Veritifcation Code (EVC), or (Hi) Verification of the return in Form
ITR-V.
Return o f Inco m e and A s s e s s m e n t P roce du re 5 .5

2 . Company: The returns are e-filed with digital signature (DSC) in all cases of
company.
Any who person requires to file ITR-7:
(a) For a political party the return is required to be e-Filed under digital
signature (DSC).
(b) In any other case of ITR 2, the return is required to be e-filed using any
one of the three manners namely: (i) DSC or (ii) EVC or (iii) ITR V.
4. Firm or Limited Liability Partnership or any person (other than a person
mentioned in A, B & C above) who are required to file return in Form ITR-5:
(a) Where accounts are required to be audited under section 44AB, the return
is e-Filed with digital signature (DSC).
(b) In any other case the return is e-Filed using any one of the three ways
namely: (i) DSC or (ii) EVC or (iii) ITR V.
5. A company and an assessee being individual or HUF who is liable to audit u/s
44AB are required to furnish Form BB (Return of Net Wealth) electronically
using DSC.
6 . Information to be furnished for payments, chargeable to tax, to a non-resident
not being a company, or to a foreign company in Form 15CA.
7. Appeal to the Commissioner (Appeals) in Form 15.
The following steps are following for filing income tax returns electronically:
STEP 1. The person registers on the Income Tax Department’s online tax filing
site (incometaxindiaefiling.gov.in), Permanent Account Number (PAN), name and
date of birth are given and a password is set. PAN becomes user ID to login.
f
STEP 2. There are two ways of e-filing income tax return. One is to go to the
download section and select the requisite form, save it on desktop and fill all the
details offline and then upload it back on to the site. Or choose to fill the form
online by selecting the quick e-file option.
STEP 3. Depending on income from sources, assesse selects the requisite income
tax return.
ITR-1: For individuals earning a salary, pension, or income from property or
sources other than lottery.
ITR-2: For those earning capital gains, ITR 2A for those owning more than one
house but no capital gains.
ITR-3, 4 and 4S: Professionals and business owners.
STEP 4. PAN, Form 16, interest statements, TDS certificates, details of investments,
insurance and home loans details are kept ready to give the information wherever
necessary, the Download From 26AS, summarises tax paid against PAN. Then
validate tax return with Form 26AS to check tax liability.
STEP 5. The downloaded form could be filled offline. After giving required
details, click on ‘generate XML’. Then return to website, login and click on the
‘upload XML’ button. The filled in return saved on desktop is upload.
5.6 Inco m e Tax— II (2 0 1 7 -1 8 )

TYPES OF RETURNS

Voluntary Return [Section 139 (1)]

If a person files the income tax return on his own according to the provisions of the
Act before the due date of filing return, it is known as filing of return voluntarily.
Every person is bound to submit a return of his total income or the income of other
persons in respect of which he is assessable (aggregation of income u/s 60 to 65).
For example, minor’s income or spouse’s income shall be included in the parent’s/
guardian’s income.
Section 139(1) further requires every person
(a) being a company; or being a person other than a company, shall furnish a return
of income mandatorily before the due date in the prescribed form.
(b) Resident or non-resident
(c) Political parties
(d) Liquidator
(e) Charitable trusts
(f) Scientific research associations, news agency, development of Khadi and Village
Industries
(g ) Universities / Educational Institutions
(/?) Hosiptals
(0 No need to file return if non-agricultural income is less than the amount
of exemption limit in the case of an individual / HUF: If non-agricultural
income of an individual / HUF is equal to or less than the exemption limit,
then he may not submit his return of income like wise, an individual deriving
income from growing and curing coffee would not be obliged to file his return if
his income from growing and curing of coffee is Rs. 6 lakh or less for the A.Y.
2009-10. In other cases it would be Rs. 3,75,000.
If a person’s income is less than the prescribed limits then he is not liable to pay
tax. But he must furnish the return of income on account of statutory obligation. From
the assessment year 1997-98, it is a mandatory obligation on the part of a person to file
his return of income and satisfies the assessing officer.
However, Income tax department has given an option to individuals to submit or
not to submit return of income if the following conditions are satisfied:
(/) The tax payer is an individual, he may be resident or non-resident.
(//) His taxable income does not exceed Rs. 5,00,000.
(Hi) The individual has reported to his employer his permanent Account Number
(PAN).
0'v) The individual has reported to his employer his savings bank interest for the
' purpose of calculating tax deductible under section 192.
(v) The individual has received a certificate of tax deduction in form No 16 from
 Return of Income and Assessment Procedure

his employer which mentions the PAN, details of income tax deducted at
source by employer and deposited to the credit of the Central Government,
(vr) The individual has no claim of taxes due.to him for the income of the
assessment year.

Due Dates of Filing Income Tax Return

The return of income must be filed in a prescribed form/specified computer readable
media and verified in the prescribed manner on or before the due date. The due dates
for filing income tax returns are as follows:

Situation Due date o f

submission of return
Where the assessee is a company. >
1. Where the assessee is a person other than
a company.
(a) In case where accounts of the assessee
(b) are required to be audited.
September 30 of the
Where the assessee is a ‘working partu“r ’
assessment year
in a firm whose accounts are required to
(c) be audited.
Where the assessee is covered by the
provisidhs of economic indicators
[Section 139(1)]
3. In case of any other assessee 31st July of the
assessment year
4. International transactions :
If an assessee is required to furnish report
November 30 of the
under Section 92 E pertaining to international
Assessment Year
transactions, the due date of submission
of return of income.
N ote: (a) Due date of filing return of income of a non-working partner shall be 31 st July of the
assessment year whether the accounts are required to be audited or not.
(b) Where last day for filing a return is a holiday, the assessee can file the return on the next
working day.
(c) Posting of a valid return within the prescribed date under certificate o f posting is
sufficient evidence of return having been filed within time.
Consequences of Not Filing the ITR (Income Tax Return) within
the Prescribed Date or Not Filing the ITR
(a) If a person fails to file the ITR within the prescribed date, he is liable for simple
interest to the extent of 1% p.m. or part of the month. The simple interest shall be
 5.8 Inco m e Tax— II (2017-18)

payable for the period commencing on the date immediately following the due
date and would end on the date of filing the return and the date of completion of
assessment under section 144 (Best Judgement Assessment).
(b) If a person fails to comply with the provisions of economic indicators u/s 139( 1),
he shall be liable to a penalty of Rs. 5,000.
(c) Willful failure to furnish the return of income may also attract prosecution under
section 276CC.
(d) w.e.f. assessment year 2006-07, the assessee who is liable to fringe benefit
tax shall be required to file consolidated return of income and return of fringe
benefits.

Forms for Filing Returns

For the Assessment year 2010-11, the Central Board of Direct Taxes (CBDT) has
notified the following new forms:

Assessee Form

1. For Indiaivual having income from salary, one house

property and interest________________________________ ITR-1 (Sahaj)_____
2. For Individuals and HUFs not having business
or professional income ITR-2 & ITR 2A
3. For Individuals/HUFs being partners in Firm
and not carrying out business under any
any proprietoryship_________________________________ ITR-3
4. For Individual and HUFs having income from
a proprietory business ITR-4 and 4S(sugam)

5. For Firms, AOPs and BOIs including Fringe

Benefit Tax Return ITR-5

6. For Companies other than companies claiming

exemption under Section 11 (including FBT Return) ITR-6

7. Combined form for return of income and fringe

benefits for companies required to furnish return
under Section 139 4A, 139 4B, 139 4C, 139 4D 1TR-7

8. Where the data of return of income

in fonns ITR 1, 2, 3, 4, 5, 6 transmitted
^ ___electronically without digital signature ITR-V
Return o f Inco m e and A s s e s s m e n t P rocedure 5.9

Note : 1. Return not made in the prescribed form or not signed and verified as required in the law is
void also initio’ and invalid. No assessment can be made on the basis of such return.
2. All corporate tax payers are necessarly required to furnish the return fringe benefits from
A.Y. 2006-07 electrically.
3. New return forms are not to be accompanied by any attachments/annextures/Audit reports
etc.

Mode of Submission
(0 All assessees are required to file a return of Income Electronically under
degital signature and transmitting the data in the return electronically and
there after submitting the verification of the return in form ITR V.
(if) ITR-7 should be submitted in paper format.
(Hi) 1TR-6 should be submitted by a Company under digital signature.
(/v) An Individual & HUF Taxableincome exceeds Rs. 10,00,000 ITR-l/ITR-
2/ITR-3/ITR-4 should be furnished electronically with or without digital
signature.
(v) An individual or HUF having assets located outside India should submit
return of income in ITR-2/ITR3/ITR-4 electronically with or without digital
signature.
(vz) When books of account are required to be audited and the tax payer is a firm,
individual or HUF, return should be submitted electronically with digital
signature. ,
(vii) If return is submitted electronically without digital signature, then after
submissionof return electronically the tax payer will have to submit verification
ofretum in paper format in 1TR-V with in 120 days from the date of uploading
the electronic return.
(vz'z'z) No document, audit report, statement of accounts etc can be attached with
those return forms.
(xi) If return is uploaded with digital signature, date of uploading shall be seen as
the date of furnishing the return.
(x) If return is uploaded without digital signature and ITR-V has been furnished
with in 120 days, the date of uploading shall be taken as the date of furnishing
the return. If return is uploaded without digital signature and ITR-V has not
been furnished within 120 days, then it will be deemed that the assessee has
not subnfitted his return income. In such a case, the assessee will have to re­
submit theTfturn.

Return by Non-Residents
A non-resident is also supposed to file a return of income in the same manner as given
under section 139 (1). However, certain non-residents are not required to file a return
of income, if their total income consists only of income which is subject to special rate
of income tax and on which the tax has been deducted at source.
5.10 Inco m e Tax— II (20 17 -18)

Bulk Filing of Returns of the Employees by the Employer

[Section 139 (1A) & 139 IB]
(a) With effect from assessment year 2002-03, a new amendment i.e., 1A has
been inserted to section 139 to provide that all salaried “eligible employees”
may at their option furnish the return of their income in Form No. 2D/3 together
with necessary documents to the “eligible employer” and such employer shall
file the return received by him on or before the due date on computer readable
media using the authorized Bulk Return Preparation Software (BRPS). The
, BRPS can be collected from the income tax department.
' The Finance Act, 2003 (W.e.f assessment year 2003-04) has inserted a new
sub section i.e., IB so as to provide that any person, who is required to furnish
a return of income may at his option on or before the due date furnish a return
of his income for any previous year in accordance with such scheme as may
be specified by the Board in such form (including on a floppy, diskette, magnetic
cartridge tape, CD-Rom or any other computer readable media) and in the
manner as specified in the scheme. This is an optional scheme. It offers an
additional mode of filing of returns to salaried tax payers. The scheme is
currently introduced in Chennai, Kolkata, Mumbai, New Delhi, Ahmedabad,
Bangalore and Hyderabad.
Under this scheme, an eligible tax payer can furnish his return to one of the
“intermediaries” authorized for this purpose, who will transcribe and transmit the data
to income tax department.

Return of Loss [Section 139 (3)]

it is not mandatory to file a return of loss when there is no taxable income. However,
losses cannot be carried forward unless the return of loss is submitted on or before
the due date and it is duly assessed. As per the Finance Act, 2001, the delay may be
condoned if a few conditions are satisfied, and it is mandatory for company to file a
return even if there is a loss or nil income.

Belated Return [Section 139 (4)]

A return, which is filed after the due date is called as ‘Belated Return’. The assessee
is supposed to file the return on or before the due date. But sometimes he may fail
to do so. Under such circumstances, he can still file the return of income at any time
before the expiry of one year from the end of the relevant assessment year or before
the completion of the assessment, whichever is earlier.
For instance, a corporate assessee is supposed to file return for the Previous year
2006-07 by October 3, 2007. If he does not file return upto October 31, 2007. then
such return, if submitted after the said date, will be called as ‘belated return’. Such
‘belated’ return may be submitted within one year from the end of the assessment
year (upto March 31, 2008). However, if the assessment, which is already completed
R eturn o f Inco m e and A s s e s s m e n t P rocedure 5.11

before March 3 1,2008, then such return should be submitted before the completion of
assessment (Assessment year or Assessment whichever is earlier is the rule).

Return of Income of Charitable Trust and Institutions [Section 139 (4A)]

In case total income of charitable trusts and institutions exceeds the maximum
exempted amount, such trusts and institutions are required to file the return in form
No. 3A and verified in the prescribed manner. If the trust or charitable institution fails
to furnish the return within the stipulated time, the trust or the institution shall be liable
to pay a penalty under section 272 A (2) which shall be Rs. 100 for every day during
which the failure continues. The due date of filing return of charitable trust shall be
31st October of the assessment year. If charitable trust wishes to claim exempted u/s
11 to 12, its accounts are required to be audited. If it does not wish to take exemption
then the due date shall be 31st July of the assessment year.

Return of Income of Political Party [Section 139 (4B)[

The chief executive officer of every political party shall, if the total income of political
party exceeds the maximum amount not chargeable to income tax, furnish a return of
such income. The return must be submitted in the prescribed form and verified in the
prescribed manner. The due date of filing of return is 31st October. If it wishes to seek
exemption under SSc. 13A, audit is compulsory, otherwise the due date is 31st July.

Return of Income of Certain Associations and Institutions

[Section 139 (4C)]
With effect from assessment year 2003-04, the following associations or institutions
are also required to furnish a return of income of the previous year :
(a) Scientific research association,
(b) News agency,
(c) Development of Khadi or Village Industries,
(d) University, Educational Institutions, Hospitals Medical Institutions, and
(e ) Trade unions,
Such assessees shall file the return of income in Form No. 3A and verified in the
r'v ifreturnmay result in levy of penalty of Rs. 100

Revised Return [Section 139 (5)J

If an assessee, after furnishing the return of income, discovers any omission or any
wrong statement in the return filed, he may furnish a revised return. Such revised
return can be filed at any time before the expiry of one year from the end of the relevant
assessment year or the completion of the assessment whichever is earlier. For example,
if a return of income is filed by the assessee for A.Y 2007-08 on 15-10-2007 and he
afterwards discovers some mistake, he can file a revised return at any time upto 31-3-
2009 or before the completion of the assessment, whichever earlier.
5.12 Inco m e Tax— II (2 0 1 7 -1 8 )

Notes: 1. It is to be noted that a belated return cannot be revised.

2. A revised return can again be revised provided it is revised within the prescribed time.
3. Once a revised return is filed, the original return must be taken to have been withdrawn.
4. An application or a letter to the assessing officer cannot constitute Revised Return.

Particulars to be Furnished with Return [Section 139(6) & 139 (6A)]

The following particulars are required to be submitted with the return as per section
139 (6) and section 139 (6A ):

1. Particulars required to be furnished u/s 139(6)

(a) Income exempt from tax.
(.b) Assets of the prescribed nature, value etc.
(c) Bank account and credit card particulars.
(d) Expenditure exceeding the prescribed limits incurred by him under the
prescribed heads.

2. Particulars to be furnished in case of an assessee engaged in any business or

profession [139 (6A)]
(a) Audit report.
( b) The particulars of location, place of business and branches etc.
(c) Names and addresses of partners, if any.
(d) If assessee is a member of an association or body of individuals, the names of
other members.
( e) The extent of assessees share and of other partners.

Filing of Return in Electronic Form [Sec. 139D]

Section 139 D has been inserted from June 1, 2006. It provides that the Board may
make rules providing for the class or classes of persons who shal 1be required to furnish
the return of income in electronic form.
Documents, Receipts, Certificates, Audit Reports need not be attached along with
return of income but shall be produced before the Assessing Officer on demand.
W.e.f. 1-4-2008 all assessees are reqvired to get their accounts audited U/S 44AB
and all Companies are mandatorily required to make electronic payment of taxes
through the internet banking facility or through internet by way of credit or debit cards.

Contents of the Return

1. Acknowledgment slip (in duplicate):
It is a summary of the return containing name, address, status, PAN, a brief
statement of taxable income, deductions and tax paid, verification etc.
2. Return Form Schedule A : Salaries
Return o f Inco m e and A s s e s s m e n t P rocedure 5.13

Schedule B : Income from House Property

Schedule C : Capital Gains
Schedule D : Income from Other Sources
Schedule E : Statement of set off and carry forward losses
Schedule F : Statement of Total Income
Schedule G : Statement of Taxes.

Defective Return [Section 139 (9)]

Where the Assessing Officer considers that the return of income furnished by the
assessee is defective, he may intimate the defect to the assessee and give him an
opportunity to rectify the defect within a period of 15 days from the date of such
intimation. Such time may be extended by the Assessing Officer on an application
made by the assessee. If the defect is not rectified within 15 days Or the extended
time so allowed, as the case may be, the return filed by the assessee shall be treated as
invalid return and the consequences of the same will be as if no return has been filed
by the assessee. However, if the assessee rectifies the defect even after 15 days, or the
extended time but before the completion of assessment, the Assessing Officer may
condone tjie delay and treat the return as valid return.
If any one of the following particulars or any othi. information is not provided
along with the return then it is treated as defective return :
1. Permanent Account Number (PAN).
2. Tax Computation.
3. Proof of qualified savings, exemptions and deduction claimed.
4. A copy of Tax Deducted at source, advance tax and self assessment tax challan.
5. Audited profit and Loss account, Balance sheet and Audit report whenever it
is applicable.
6. List of debtors, creditors, statement of turnover, receipts and payment account,
statement of assets etc.
7. Signature of the assessee on the return.

PERMANENT ACCOUNT NUMBER [SECTION 139 A]

Every person who has not been allotted a Permanent Account Number (PAN) shall
within such time, as may be prescribed, apply to the Assessing Officer in Form No.
49A for the allotment of permanent account number.
Permanent account number means, the number which is allotted by the Assessing
Officer to the assessee for easy identification. In case of need, this number is useful
to trace the previous returns submitted by the assessee and assessment orders passed
on by the department. The assessee has to quote the PAN in all future correspondence
with the income tax department.
5.14 Inco m e Tax— II (2017-18)

Provisions regarding allotment of PAN

The following persons are required to obtain a PAN:
(a) Every person if his total income exceeds maximum exemption limit; or
(b) Any person carrying on business or profession whose total sales or turnover,
or gross receipts are likely to exceed Rs. 5,00,000.
(c) Charitable trusts or religious institutions.
(d) Central government may specify any person under the law to obtain PAN.
E.g., exporters, importers, assessees to whom excise rules are applicable,
persons who are registered under the Central Sales Tax Act.

Quoting of PAN Made Compulsory (Rule 114B) in the following

cases w.e.f. 1-11-1988
(a) Sale/purchase of any immovable property valued at Rs. 5 lakhs or more.
( b) Sale/purchase of motor vehicle (other than two wheeled vehicle) which
requires registration under Motor Vehicle Act, 1988.
(c) Time deposit exceeding Rs. 50,000 with a bank/banking company/banking
institution.
{d) Deposits exceeding Rs. 50,000 in post office savings bank.
(e) Contracts for sale/purchase of securities exceeding Rs. 1,00,000.
(/) If a minor intends to ope'1 an account in a bank, he can mention his father or
mother’s PAN as reference.
(g) Application for installation of a telephone connection including cellular
connection.
(h) Payment of hotel/restaurant bills exceeding Rs. 25,000 at any time during the
previous year.
(/) A person on whose income tax at source is likely to be deducted.
(j) Payment of cash for purchase of bank draft or pay orders or banker’s cheques
from a banking company to which the Banking Regulation Act, 1949 applies
(including any bank or banking institution referred to in section 51 of the Act)
for an amount aggregating Rs. 50,000 or more during any one day.
(k) Deposit in cash aggregating Rs. 50,000 or more, with a banking company to
which the Banking Regulation Act, 1949 applies during any one day.
(/) Payment in cash in connection with travel to any foreign country of an amount
exceeding Rs. 25,000 at any one time.
(m) Making an application to any banking company to which the Banking
Regulation Act, 1949 app,;es or to any other company or institution for issue
of a credit card.
(n) Payment of an amount of Rs. 50,000 or more to a mutual fund for purchase of
its units.
Return o f In co m e a n d A s s e s s m e n t P roce du re 5.15

(o) Payment of an amount of Rs. 50,000 or more to a company for acquiring

shares issued by it.
{p) Payment of an amount of Rs. 50,000 or more to a company or an institution
for acquiring debentures or bonds issued by it.
( q) Payment of an amount of Rs. 50,000 or more to the Reserve Bank of India for
acquiring bonds issued by it.
(r) Payment to a dealer - if purchase of bullions or Jewellery cost exceeds Rs.
5,00,000 or more.

Penalty
If any person fails to comply with the provisions of section 139 A, he has to pay a
penalty of Rs. 10,000.
Quoting of Permanent AccountNumber is not required in the case of non-Residents
and the persons who do not have any taxable incomes, but may have agricultural
incomes (Rule 114C). The assessee is required to intimate the Assessing Officer any
change in his address or in the name and nature of his business.

WHd IS TO SIGN THE RETURN [SECTION 140]

The return under section 139 shall be signed and verified by the following:
1. In the case of individual:
(a) By the individual himself.
([b) Where he is absent from India-by the individual himself or by some other
person duly authorized fiy him on his behalf.
(c) Where he is mentally incapacitated from attending to his affairs-by his
guardian or any other person competent to act on his behalf.
(d) Where, for any other reason, it is not possible for the individual to sign the retum-
by any person duly authorized by him on his behalf.
2. In the case of HUF-only by the Karta. However, in the following two cases, it can
be signed by any other adult member of the family.
(a) Where the Karta is absent from India; or
(b) Where the Karta is mentally incapacitated from attending to his affairs.
3. In case of a company-by the managing director or any director of the company in
the absence of managing director.
4. In the case of a firm-by the managing partner or any other partner in his absence.
5. In the case of local authority-by the principal officer.
6. In the case of a political party-by the chief executive or secretary.
7. In the case of any other association-by any member of the association of the
principal officer.
8. In the case of any other person-by the person or by some other person competent
to act on his behalf.
5.16 Inco m e Tax— II (2 0 1 7 -1 8 )

( q u e s t io n s )

1. What do you mean by income tax return?

2. W hat is th e tim e lim it fo r filing o f return o f incom e under th e Incom e Tax A ct?
3. Who is required to sign a return of income?
4. W rite short notes on:
(0 Return o f loss (ii) PAN
(i/7) Belated return (r'v) Voluntary return
(v) Obligatory filing of return (vr) One by six scheme.
(vh) Revised return
 Types of Assessment

TYPES OF ASSESSMENT
After submission of return of income by the assessee to the income tax department, the
process of assessment commences. The Assessing Officer can make the assessment in
any of the following ways:
(/') Summary Assessment-On the basis of the return of income [u/s 143(1)].
(z7) Scrutiny Assessment-On the basis of return of income and hearing further
additional evidence [u/s 143(3)].
(Hi) Best Judgement Assessment (u/s 144).
For the purpose of making an assessment the Assessing Officer may take any/all
of the following steps:
(a) Enquiry before assessment (Section 142).
(b) Giving notice to the assessee to submit return (if not submitted earlier),
produce accounts, documents etc. [Section 142(1)].
(c) Making enquiry and giving opportunity to the assessee [Section 142 (2), (3)].
(d) Giving direction to get books of account audited [Section 142 (2A) to 2D],

SELF ASSESSMENT [SECTION 140A]

Every person, before submitting a return of (a) fringe benefits us 115 WD or u/s 115
WH, (b) Income under section 139, 142(1), 148, 158 BC, and 153 A, is under an
obligation to make a self assessment of his income and after taking into account the
amount of tax, if any, already paid, pay the self assessment tax, if due. The assessee
shall be liable to pay such tax together with interest payable for any delay in furnishing
the returns.
Procedure for making self assessment and the determination of tax liability is
explained as under:
1. Compute income under each head.
2. Compute the total income.
3. Calculate the tax on the total income at the prescribed rates.

[5.17]
5.18 Inco m e Tax— II (2 0 1 7 -1 8 )

4. Allow relief if any, u/s 89(i), 90, and 91.

5. To the balance of tax payable add educational cess @ 3%.
6. Deduct tax deducted at source and advance tax.
7. Add interest payable for the following to the net-tax calculated:
(a) Interest for late filing of return.
(b) Interest for default in payment of advance tax.
(c) Interest for detriment of advance tax.
8. Pay the balance of tax through challan.
9. Before filing the return of income.
10. Wait for refund o f tax, if any

Summary Assessm ent/Regular Assessment [Section 143]

Regular assessment is done by the AO on the basis of return of income filed by the
assessee and the issue of acknowledgment slip. The AO shall send an intimation where
any tax or interest is found payable by the assessee or the refund is due to the assessee.
In case where no amount is payable by the assessee or refund due to the assessee,
the acknowledgments of the return shall be deemed to be an intimation.
If the Assessing Officer feels that any loss, exemption, deduction, allowance or
relief has been wrongly claimed by the assessee, he can issue notice to the assessee
u/s 143 (2) to substantiate his claim. On the basis of the evidence produced by the
assessee, the AO may either make assessment u/s 143 (3) (1) or issue a fresh notice
initiating comprehensive security.
Finally, any tax or interest found due on the return or any refund found payable
shall be demanded from or granted to the assessee.

SCRUTINY ASSESSMENT
Where an AO considers it necessary to ensure that the assessee has not understated
his income or has not computed excessive loss or has not under paid the tax or he has
reason to believe that any loss, exemption, deduction, allowance or relief claimed in
the return is admissible, then the A.O shall serve a notice on the assessee requiring him
to appear on the specified date or to furnish any document/evidence in support of his
return. However, notice can be served on the assessee within 12 months from the end
of the month in which the return was filed.

Basis for Selection of a Case Under Scrutiny

For selecting a case for scrutiny, the facts relating to each case are analysed. Some of
the factors which guide the selection of a case are:
(0 Income shown in the return.
(») Low profitability disclosed compared to the general profitability in similar line of
business.
Types o f A sse ssm e n t 5.23

submission of return electronically the tax payer willhave to submit verification

of return in paper format in ITR-V with in 120days from the date of uploading
the electronic return.
(vii) No document, audit report, statement of accounts etc’s can be attached with
those return forms.
(viii) If return is uploaded with digital signature, date of uploading shall be
taken as the date of furnishing the return.
(ix) If return is uploaded without digital signature and ITR-V has been furnished
within 120 days, the date of uploading shall be taken as the date of furnishing
the return, if return is uploaded without digital signature, then it will be
deemed that the assessee has not submitted his return of income. In such a
case, the assessee will have to re-submit the return.

Rectification of Mistake
Every Assessing Officer is empowered to:
1. rectify any mistake apparent from record in an order passed by him, or
2. amend any intimation issued u/s 143 (1).
The rectification can be made by the assessing authority within 4 years from
the end of the financial year in which the order sought to be amended was passed.
However, in respect of an application for amendment made on or after 1-6-2001, a
rectification order making the amendment or refusing to allow the claim should be
made by the AO within 6 months from the end of the month in which the application
is received by it. in case credit for TDS could not be allowed in any assessment order
due to absence of TDS certificate and such certificate is produced before AO within 2
years from the end of relevant assessment year then AO shall rectify the assessment
order allowing credit for such TDS.

( QUESTIONS )
1. What do you mean self assessment and regular assessment?
2. Explain the Best Judgement Assessment.
3. Describe the provisions of regular assessment.
4. What is a defective return? How do you remove the defect?
5. What is re-assessment o f income? Under what circumstances is it done?
6. What do you understand by the term ‘income escaping assessment’?
7. What are the circumstances under which an Assessing Officer may make a Best Judgement
Assessment.