To Study Heads Of Income

A project submitted to

University of Mumbai for Partial Completion of the degree of

Master in Commerce

Under the Faculty of Commerce

By

Heet Hitesh Gandhi

Under the Guidance of

Prof. Ismail Shaikh

Prakash Degree College of Commerce

Shantilal Modi Road, kandivali West

Mumbai-400067

January, 2023

Faculty of Commerce, University of Mumbai

1|Page
 To Study Heads of Income

A project submitted to

University of Mumbai for Partial Completion of the degree of

Master in Commerce

Under the Faculty of Commerce

By

Heet Hitesh Gandhi

Under the Guidance of

Prof. Ismail Shaikh

Prakash Degree College of Commerce

Shantilal Modi Road, kandivali West

Mumbai-400067

January, 2023

Faculty of Commerce, University of Mumbai

2|Page
3|Page
 Index

1. Introduction of Process Costing

2. Research and Methodology
3. Literature Review
4. Data Analysis
5. Conclusion and suggestion

4|Page
 Declaration by Learner

I the undersigned Mr. Heet Hitesh Gandhi here by, declare that the work embodied in this
project work titled “To Study of Process Costing of”, forms my own contribution to the
research work carried out under the guidance of Prof. Ismail Sheikh is a result of my own
research work and has not been previously submitted to any other University for any
other Degree/ Diploma to this or any other University.

Wherever refrence has been made to previous work of others, it has been clearly
indicated as such and included in bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Heet Hitesh Gandhi

Certified by

Prof. Ismail Sheikh

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6|Page
 Acknowledgement

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.

I would like to acknowledge the following as being idealistic channel and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, Dhanashree Mota for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator_ Ismail Shaikh, For his/her moral support
and guidance.
I would also like to express my sincere gratitude towards my project guide Prof. Ismail
Sheikh and Prof. Babita whose guidance and care made the project successful.

I would like to thank my college Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
in the completion of the project especially My parents and peers who supported me
throughout my project.

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 Chapter 1
Introduction
Heads of Income

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 Section 14 of the Income Tax Act – Heads of Income

As per Section 14 of the Income Tax Act of 1961, an individual can earn income from
several means. The computation of income tax is important and must be calculated
according to a person's income. For a hassle-free income tax computation, the Act
classifies the income into different categories of heads. The provisions and rules are
mentioned in the Income Tax Act. At the end of each financial year, the taxpayer
must classify their earnings under these heads of income for accurate tax calculation.
Thus, it is essential to know which falls under what category or head. The 5 heads of
income stated in this section as explained in detail in the below article.

It is not necessary that every earning individual will have income from all these 5
heads of income. However, classifying one's income on the basis of these heads of
income would make ITR filing easier to calculate how much income tax will accrue
on them.

Heads of Income Tax

The 5 heads of income are:

 Income from salary

 Income from house property

 Income from profits and gain of business or profession

 Income from capital gains

 Income from other sources

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These above-mentioned heads of income inform when the tax is to be charged and the
requirement to be fulfilled for taxation liabilities. Each of these heads of income has
its separate conditions that are needed to be fulfilled to make the income generated
from these sources taxable. These conditions are mentioned in different Sections of
the Income Tax Act.

Income from Salary

The first head of income is income from salary. If there exists a relationship between
payer and payee in a firm or agreement, and the relationship is between employer and
employee where the employee is being paid a certain amount of remuneration for
their services, then the income can be charged under this head of income. A salary
could be any sort of monetary compensation. This could be any basic and normal
wage, annuity, pension, gratuity, leave encashment, etc.

After making a total aggregate of the total amount of income excluding the
exemptions if, at all present, the total amount of gross salary is then charged under
this head of income. All basic salaries along with commissions and bonuses are
completely liable to taxation.

Under this head of income, some allowances are exempt from tax under some
conditions. Allowances are: As per the Act, a fixed amount of money paid to an
employee concerning the labor and service are made by him. The allowance is
generally included with the salary unless specific exemptions are mentioned. Every
employer must deduct TDS from the salaries of their employees.

An important point to note while calculating taxable salary, the salary is taxable on
the 'due basis' or 'receipt basis,' whichever is earlier. For example, if a person receives
a salary for March 2022 in April 2022, this salary is taxable in the previous year
2021-2022 as this salary was due in March 2022.

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 Likewise, if the employers give an advance salary of April and May 2022 in March
2022, this salary too is taxable in March 2022.

Leave travel allowance: Leave allowance trade, or LTA denotes the expenditure
incurred for travel when you go on a trip for vacation purposes alone or with a group
of friends or family. As this is paid, it is free of tax twice in 4 years.

 Medical allowance: Up to a limit of rupees 15,000 per annum, medical allowance is

tax-free, and you can bear the bill and your family.

 Conveyance allowance: You can get a monthly tax exemption of up to Rs.800.

These are some of the many types of allowances and their clauses for tax deductions.
Other monetary payments made to employees by an employer also have their methods
of taxation.

Tax on Salary Income, TDS on Salary with examples

Any income received by an employee is chargeable under head “Income from
Salaries” and tax on salary is levied in the manner as shown below. Income would be
taxable under head Income from Salaries only when an employer-employee
relationship exists.

The following computation of Tax on Salary Income and TDS on Salary is required to
be shown by a salaried taxpayer at the time of filing his Income Tax Return.

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Computation of Tax on Salary

Basic Salary Xxx

(Add) Dearness Allowance Xxx

(Add) Annuity Xxx

(Add) Bonus Xxx

(Add) Commission Xxx

(Add) Arrears of Salary Xxx

(Add) House Rent Allowance Xxx

(Less)House Rent Allowance exempted (xxx) Xxx

(Add) Leave Travel Allowance received Xxx

(Less) Leave Travel Allowance exempted (xxx) Xxx

(Add) Perquisites Xxx

(Less) Amount exempted (xxx) Xxx

(Add) Other Allowances Xxx

(Less) Allowance exempted (xxx) Xxx

(Add) Retrenchment Compensation/ VRS Xxx

(Less) Amount Exempted (xxx) Xxx

(Add) Gratuity received Xxx

(Less) Gratuity exempted (xxx) Xxx

(Add) Leave Encashment Xxx

(Less) Leave Encashment Exempted (xxx) Xxx

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 (Add) Pension Xxx

(Less) Pension Amount exempted (xxx) Xxx

(Add) Employer‟s Contribution to Salary in excess of Xxx

12% of Salary of employee

(Add) Interest credited to Provident Fund in excess of Xxx

the notified amount

(=) Gross Salary XXX

(Less) Deductions under Section 16Entertainment Xxx (xxx)

Allowance
Xxx
Professional Tax paid
Income chargeable under head Salaries Xxx

Tax on Salary Income computed above would be payable based on the existing
Income Tax Slab Rates of the taxpayer.

 Recommended Read: Latest Income Tax Slab Rates

TDS on Salary
At the time of payment of salary by the employer to the employee, the employer is
also required to mandatorily deduct TDS on Salary under Section 192 and the balance
amount after deduction of TDS is payable to the employee. The TDS on Salary is
required to be deducted on the basis of average rate of income tax of the taxpayer for
that financial year.

The average rate of income tax is to be calculated on the basis of income tax slab
rates in force for that financial year. The average rate of income tax can be calculated
with the help of an example:-

For eg: Mr. M is earning Rs. 70,000 per month. Therefore total estimated income of
Mr. M during the financial year 2013-14 would be Rs. 8,40,000. He has also claimed
deductions of Rs. 1,00,000. Therefore, his income chargeable to tax after deductions
is Rs. 7,40,000. Total Tax on Salary payable for the year computed as per the slab
rates would come out to Rs. 78,000 + Cess @ 3% i.e Rs. 2340. Therefore tax on
salary payable is Rs. 80340

Therefore average rate of Tax on Total Tax Payable = 80340 * 100Total Income = =
Salary = 840000 9.56%

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Therefore, in the case of Mr. M, the average rate of tax would be 9.56% as explained
above. TDS on Salary would be deducted @ 9.56%. Therefore TDS on Salary would
be 9.56% of Rs. 70,000 i.e. Rs. 6695 would be deducted every month as TDS on
Salary.

Average rate of Tax in case of each Individual is different for each financial year and
keeps varying based on the estimated income of the taxpayer and the Income Tax Slab
Rates in force for that assessment year.

The tax deducted as TDS on Salary is reflected in the Form 16 which is issued to the
taxpayer at the end of the financial year. The taxpayer can also check the details of
the TDS deducted and deposited by his employer by verifying these details through
the Form 26AS which can be checked online.

 Recommended Read: How to verify Form 26AS online

In case the employee is not liable to pay any income tax as his income is below the
taxable limits, No TDS would be deducted from his income.
TDS on Salary from more than 1 employer
In case an employee changes his job and joins a new organisation, he may furnish to the
new employer – a statement in Form 12b stating the salary received from the previous
employer and the TDS deducted thereon.

Based on the information furnished by the employer in Form 12b, the new employer will
deduct TDS accordingly keeping in the mind the TDS on salary deducted earlier.

Deposit of TDS on Salary with the Govt.

Tax on Salary deducted by the employer does not go in the pockets of the employer
as he is required to deposit the TDS on Salary deducted with the Govt before the
prescribed due date. At the time of making the payment of TDS with the Govt, the
employer is also required to mention his TAN No. on the deposit challan.

At the time of deposit of TDS on salary, the employer specifically mentions the salary
paid to each employee and the tax deducted thereon. He is also mandatorily required
to quote the PAN No. of each employee while depositing the tds with the govt. If the
employer fails to deduct and/or pay the TDS on Salary on time – interest & penalty
would be levied on the employer

In case an employee does not have a PAN No., the employee would be required
to apply for a PAN Card No.

Revision in deduction of TDS on Salary

In case an employer has deducted a lower amount as TDS on Salary in the initial few
months as compared to what he was required to deduct, he can compensate the same
by deducting a higher amount in remaining months and vice-versa.

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However, the total TDS on Salary deducted during the year should be equal to the tax
on salary payable by the employee as per his Slab Rates.

In case there is excess deduction of TDS on Salary than what was required to be
deducted, a taxpayer can claim income tax refund of excess tax paid.

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 Income from House Property

Another head of the Income Tax Act is income from house property. This part sheds
light and detail about the taxation policy on the house or real estate that you, as a
taxpayer, are residing in. Vacant house property is considered as 'self-occupied' in
regards to the purpose of income tax. In the situation that a taxpayer owns more than
a single self-occupied house, then only one house is treated and considered as a single
self-occupancy house property. Rest is considered to be let out.

The second head of the Income Tax Act is dedicated to sections 22 to 27, which
correspond to the computation and calculation of the total standard amount of income
by a person in the house or property that they rightfully own. The tax amount charged
is not acquired from the amount of rent that is received but rather from the property or
land as a whole. Nonetheless, if the; and or property is being used for a normal course
of business, then the income generated from the rent will also be included to be
charged for tax income. All commercially owned residents or properties owned are
also subjected to taxes.

For income from house property to be taxable, a few conditions must be satisfied and
fulfilled.

 The house property has to consist of a house, building, or any land appurtenant.

 The taxpayer should be the owner of the house property.

 The house property must not be used for any business or professional venture done
and carried out by the taxpayer. It can only be used for residential purposes.

Having these conditions met, the income generated by house property thereby
becomes chargeable and liable to tax deduction as per the Income Tax Act.

Income from House Property is charged to tax on a notional basis. Tax under this
head of income does include income from letting out house property, commercial

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properties, and any other types of properties. Several deductions like standard
deduction, the deduction for interest on home loans (if any), and deduction for
municipal taxes paid are also allowed under this head of income.

TDS on rent also needs to be deducted if the value of rent is more than a specified
limit.

Basics of House Property Tax

A house property could be your home, an office, a shop, a building or some land attached

to the building like a parking lot. The Income Tax Act does not differentiate between a

commercial and residential property. All types of properties are taxed under the head

„income from house property‟ in the income tax return. An owner for the purpose of

income tax is its legal owner, someone who can exercise the rights of the owner in his

own right and not on someone else‟s behalf.

When a property is used for the purpose of business or profession or for carrying out

freelancing work – it is taxed under the „income from business and profession‟ head.

Expenses on its repair and maintenance are allowed as business expenditure.

a. Self-Occupied House Property

A self-occupied house property is used for one‟s own residential purposes. This may be

occupied by the taxpayer‟s family – parents and/or spouse and children. A vacant house

property is considered as self-occupied for the purpose of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the
taxpayer, only one is considered and treated as a self-occupied property and the

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remaining are assumed to be let out. The choice of which property to choose as self-

occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied

has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-

occupied and remaining house as let out for Income tax purposes.

b. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out

house property for income tax purposes

c. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either

be a self occupied one or a let out one based on its usage as discussed above.

How to calculate Income From House Property

Here is how you compute your income from a house property:

a. Determine Gross Annual Value (GAV) of the property: The gross annual value of a

self-occupied house is zero. For a let out property, it is the rent collected for a house on

rent.

b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV

of property.

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c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value –

Property Tax

d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a

deduction from the NAV under Section 24 of the Income Tax Act. No other expenses

such as painting and repairs can be claimed as tax relief beyond the 30% cap under this

section.

e. Reduce home loan interest: Deduction under Section 24 is also available for interest
paid during the year on housing loan availed.

f. Determine Income from house property: The resulting value is your income from

house property. This is taxed at the slab rate applicable to you.

g. Loss from house property: When you own a self occupied house, since its GAV is

Nil, claiming the deduction on home loan interest will result in a loss from house

property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property.

The rental value must be higher than or equal to the reasonable rent of the property

determined by the municipality.

Tax Deduction on Home Loans

a. Tax Deduction on Home Loan Interest: Section 24

Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest, if the
owner or his family resides in the house property. The same treatment applies when the

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house is vacant. If you have rented out the property, the entire home loan interest is

allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if any

of the following conditions are satisfied:

A. Condition I

 The loan is taken on or after 1 April 1999, and

 The purchase or construction is not completed within 5 years from the end of the
FY in which loan was availed.

B. Condition II

 The loan is taken before 1 April 1999.

C. Condition III

 The loan is taken on or after 1 April 1999 for the purpose of repairs or renewal of
the house property.

When is the deduction limited to Rs 30,000?

As already mentioned, if the construction of the property is not completed within 5 years,

the deduction on home loan interest shall be limited to Rs. 30,000. The period of 5 years

is calculated from the end of the financial year in which loan was taken. So, if the loan

was taken on 30th April 2015, the construction of the property should be completed by

31st March 2021. (For years prior to FY 2016-17, the period prescribed was 3 years

which got increased to 5 years in Budget 2016). Note: Interest deduction can only be

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claimed, starting in the financial year in which the construction of the property is

completed.

How do I claim a tax deduction on a loan taken before the construction of the

property is complete?

Deduction on home loan interest cannot be claimed when the house is under construction.

It can be claimed only after the construction is finished. The period from borrowing

money until construction of the house is completed is called pre-construction period.

Interest paid during this time can be claimed as a tax deduction in five equal instalments

starting from the year in which the construction of the property is completed. Understand

pre-construction interest better with this example.

b. Tax Deduction on Principal Repayment

The deduction to claim principal repayment is available for up to Rs. 1,50,000 within the

overall limit of Section 80C. Check the principal repayment amount with your lender or

look at your loan instalment details.

Conditions to claim this deduction -

 The home loan must be for purchase or construction of a new house property.

 The property must not be sold in five years from the time you took possession.
Doing so will add back the deduction to your income again in the year you sell.

Stamp duty and registration charges Stamp duty and registration charges and other

expenses related directly to the transfer are also allowed as a deduction under Section

80C, subject to a maximum deduction amount of Rs 1.5 lakh. Claim these expenses in the
same year you make the payment on them.

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c. Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE recently added to the Income Tax Act provides the homeowners, with only

one house property on the date of sanction of loan, a tax benefit of up to Rs 50,000.

c. Tax Deduction for First-Time Homeowners: Section 80EEA

A new section 80EEA is added to extend the tax benefits of interest deduction for

housing loan taken for affordable housing during the period 1 April 2019 to 31 March

2020. The individual taxpayer should not be entitled to deduction under section 80EE.

Do you own more than one house?

If you own more than one house, you need to file the ITR-2 form.

Claiming Deduction on Home Loan

 The amount of deduction you can claim depends on the ownership share you have
on the property.

 The home loan must also be in your name. A co-borrower can claim these
deductions too.

 The home loan deduction can only be claimed from the financial year in which the
construction is completed.

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 Submit your home loan interest certificate to your employer for him to adjust tax

deductions at source accordingly. This document contains information on your

ownership share, borrower details and EMI payments split into interest and
principal.

 Otherwise, you may have to calculate the taxes on your own and claim the refund,

if any, at the time of tax filing. It‟s also possible that you may have to deposit the
dues on your own if there is a tax payable.

 If you are self-employed or a freelancer, you don‟t have to submit these documents
anywhere, not even to the IT Department. You will need them to calculate
your advance tax liability for every quarter. You must keep them safely to answer

queries that may arise from the IT Department and for your own records.

Tax Benefits on Home Loans for Joint Owners

The joint owners, who are also co-borrowers of a self-occupied house property, can claim

a deduction on interest on the home loan up to Rs 2 lakh each. And deduction on

principal repayments, including a deduction for stamp duty and registration charges under
Section 80C within the overall limit of Rs.1.5 lakh for each of the joint owners. These

deductions are allowed to be claimed in the same ratio as that of the ownership share in

the property.

You may have taken the loan jointly, but unless you are an owner in the property – you

are not entitled to the tax benefits. There have been situations where the property is

owned by a parent and the parent and child together take up a loan which is paid off only

by the child. In such a case the child, who is not a co-owner is devoid of the tax benefits
on the home loan.

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Therefore, to claim the tax benefits on the property:

1. You must be a co-owner in the property

2. You must be a co-borrower for the loan

Each co-owner can claim a deduction of maximum Rs 1.5 lakh towards repayment of

principal under section 80C. This is within the overall limit of Rs 1.5 lakh of Section

80C. Therefore, you can avail a larger tax benefit against the interest paid on home loan

when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.

It‟s important to note that the tax benefit of both the deduction on home loan interest and

principal repayment under section 80C can only be claimed once the construction of the

property is complete.

HRA and Deduction on Home Loan

Scenario 1: You live in a rented accommodation since your house is too small for

your needs Raghav lives in a rented house in Noida since his own office, son‟s school

and his wife‟s office are in Noida, He has his own house on the outskirts of Delhi which

is quite small and also lying vacant. He is paying interest on the loan on his own

house. Raghav can claim:

 HRA for rent he pays for the house in Noida,and

 Deduction on interest up to Rs 2,00,000 on the home loan

Scenario 2: You live in a rented house; your own house is also let out Neha recently
bought a flat in Indore, though she lives and works in Bangalore. She has no plans of

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returning to Indore in the next five years so she gives that flat on rent. She lives on rent in

Bangalore. Neha can claim:

 HRA for the rent she pays for the house in Bangalore and

 Claim the entire interest she pays during the year on the home loan

Case Study

Aditya earns rental income from his house in Vizag.See how his GAV and NAV are

computed and how much he has to pay as taxes here.

Significant Budget Amendment in 2017 – Impact explained with an example

Till FY 2016-17, loss under the head house property could be set off against other heads

of income without any limit. However, form FY 2017-18, such set off of losses has been

restricted to Rs 2 lakhs. This amendment would not really affect taxpayers having a self-

occupied house property. This move will have an impact on taxpayers who have let-out/

rented their properties. Though there is no bar on the amount of home loan interest that

can be claimed as a deduction under Section 24 for a rented house property, the losses

which could arise on account of such interest payment can be set off only to the extent of

Rs 2 lakhs.

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Here is an example to help you comprehend the impact of the amendment:

Particulars AY 2018-19 AY 2018-19

Salary income 10,00,000 10,00,000

Income from other sources (Interest income) 4,00,000 4,00,000

Income from house property (*) (4,40,000) (2,00,000)

Gross Total Income 9,60,000 12,00,000

Deductions 2,00,000 2,00,000

Taxable income 7,60,000 10,00,000

Tax on the above 77,000 1,12,500

Additional tax outgo excluding cess in AY 35,500

2018-19 on account of the amendment

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Workings for Income from House Property

Particulars AY 2017-18 AY 2018-19

Property A

Annual Value Nil Nil

(-) Interest on housing loan restricted to 2,00,000 2,00,000

Loss from House Property(A) (2,00,000) (2,00,000)

Property B

Net income from House Property after 60,000 60,000

all deductions (B)

Property C

Annual Value 5,00,000 5,00,000

Less : Standard Deduction 1,50,000 1,50,000

Less : Interest on loan 6,50,000 6,50,000

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 Loss from House Property (C) (3,00,000) (3,00,000)

Total income from house property (4,40,000) Restricted to

(A+B+C) (2,00,000).

Balance loss of

Rs 2.4 lakhs can

be carried

forward for the

next 8 AYs

Income from Profits and Gain of Business or Profession

This is the third head of income under the Income Tax Act. A business includes any
kind of trade, commerce, manufacturing, or any nature of trade. Profession implies
the acquisition of specific or special knowledge in a particular field after a period of
education and verified examination. Under this head of income, profits and gains
made during the tenure of business are subjected to complete and total taxation.
Profits incurred on the sale of imports, incentives, any interest or form of salary or
bonus, and a commission from a firm are all taxable under this head of income in the
Income Tax Act. For an income to be charged under the head of income from profits
and gains from business or profession, there are some rules and conditions that must
be fulfilled according to Section 28 of the Income Tax Act.

 For income to be charged, a business or profession must exist in the first place.

 The business or profession must be carried out by the taxpayer or assessed by

themself.

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 The profession or business whose income is to be charged must be operational and
be carried on for a greater part of the previous year.

 The tax charge is based on the profits and gains made by the business during its
running and operating time of the previous year.

 The charge made can be extended to any and all business or profession that is
ongoing or being carried on by the assessee.

Only if these conditions are applicable, then the income from profits and gains
generated can be taxed under the Income Tax Act. It is important to note that to be
charged under this head of income, the business or profession need not be operational
throughout the entire previous year. As long as it has been carried on by the assessee
for some time during the previous year, it is chargeable.

There are a few types of income that are chargeable under this head of income are:

 Profits generated from the sale of a certain license

 Gains earned by the business during an assessment year

 The profits that an organization makes on its income

 Cash received on the export of a government scheme

 The benefits that a business receives

 Gains, bonuses, or salary that an individual receives due to a partnership with a

firm.

It referred to any economic activity carried for earning profits. Economic activity refers
to any trade, Commerce, Manufacturing Activity, Trading Activity or any other concern
in nature of all.
It is not compulsory for continuation of similar transaction or a series of transaction or
carried the business permanently.

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 Profession: It refer that a person provides services against their skill & knowledge like
that of CA, Doctor, Engineer, etc. In Profession a person can earn their livelihood
through their intellectual or manual skills.
Basis of Charge of Income Under Business/Profession:
There are some of the income which are taxable under the head “Profit & gains of
Business or Profession”
 The profit & gains earned by the assesses from the business/profession carried at any
time during the previous year.
 If any person had receive/due any compensation or payment managing the whole or
substantially the whole of the affairs of an Indian Company, in connection with the
termination of his management or the modification of the terms & conditions relating
thereto;
 Income derived from performing specific services for its member by trade, profession or
any other similar association.
 Any perquisite or benefit arising from business or profession, whether convertible into
money or not.
 Any Interest income, Commission, Salary or bonus due or received by any partner from
that Company.
 Any amount received under a Key man Insurance Policy including the
amount allocated by way of bonus on such policy.
 Income received from any speculative transaction.
 Any profit received from the transfer of Duty Entitlement Pass book scheme.
 Any Profit Received on the transfer of the Duty Free Replenishment Certificate.
 Any profit received on sale of a license granted under the Imports (Control) Order, 1955,
made under the Imports and Exports (Control) Act, 1947 (18 of 1947)
 Any amount received or receivable,in cash or in kind under such agreements:
If a person not carrying out any activity in relation to any business.
Or
If a person is not sharing any Know-how,patent, copyright, trade-mark, licence, franchise
or any other business or commercial right of similar nature
Method of Accounting
Under Sec.145, income under Business & Profession shall be computed in accordance
with the method of accounting regularly followed by the assesses. The two recognized
methods are Cash system and mercantile system of accounting.
Cash System: In this system, all expenses & income are booked when they receive.
Mercantile System of Accounting : All Income & expenses are booked on accrual basis.
Speculative Business: Speculative business is one which carries speculative transaction.
It is consider to be a separate business.
Speculative Transaction: These are those transactions which in which there is a contract
for sale/purchase of shares, stock.

30 | P a g e
Computation of Income:
Deductions not Admissible:
1. Losses due to illegal trade practices.
2. Expenses not related to the business.
3. Expenses related to Capital Assets
4. Loss on sale of shares.
5. Future Anticipated Losses
6. Advance paid for commencement of new business which is not established
Computation of Business Profits:
Business Profit should be calculated through profit & Loss Account.In Profit & Loss
Account there are some expenses which are partly allowed or disallowed under Income
Tax Act. On the Credit side of Profit & Loss A/c there are some Income which are tax
free or not taxable under the head Business/Profession.
Balance as per P & L A/c (+) Profit
(-) Loss Amount
Add Expenses claimed but not allowed under the Act
1. All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)
2. All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise
3. Duty,& Local Taxes of premises used for business.
4. All Charities & Donations
5. All personal Expenses
6. Any type of Fine / Penalty
7. Speculative Losses
8. All Capital Losses
9. Any Difference in Profit & Loss Account
10. Previous year Expenses
11. Rent paid to self
12. All expenses related to other head of Income
13. Payments made to the partner (in terms of salary,commission or any other way.)
14. All capital expenses except scientific research
15. Loss by theft

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16. Expenses on Illegal Business
17. Rent for Residential portion
18. Interest on Income tax, TDS etc
Total of these Items is added to the profit or adjusted from loss
While calculating the Profit/Loss of Professional all receipt are recorded as their Income
& irrespective of that all the expenses paid in providing the services,office expenses are
deducted from the Income.

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Income from Capital Gains

Being the fourth head of income under the Income Tax Act, income gained from any
capital asset, be it movable or immovable, is deemed taxable. Capital gains are
divided into two parts: long-term capital gains and short-term capital gains. These
gains are taxed under the head of income – income from capital gains.

When a person sells his capital assets after holding them for 36 months or more, they
will fall under long-term capital gain. The applicable tax rate is 20% in the case of
LTCG. Alternatively, if he sells capital assets within 36 months, it will be termed as
short-term capital gain, and the rate of tax will be 15%. In the case of securities, this
is applicable if one sells his holdings within 12 months from the purchase
date. Capital gain is exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54F,
54G, or 54GA.

For Example:-

Capital Gains Tax on Sale of Property in India in 2022

Capital Gains Tax on Sale of Property in India is levied depending on the duration for
which the property was held by the seller. If the property was held for less than 2
years – it would be classified as a Short Term Capital gain and if the property was
held by the Seller for more than 2 years, it would be classified as a Long Term Capital
Gain.

Capital Gain Tax Rate on Sale of Property

Particulars Tax Rate

Short Term Capital Gain Tax Rate As per normal Income Tax Slabs

Long Term Capital Gain Tax Rate 20%

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Computation of Short Term Capital Gains on Sale of Property
Gains arising at the time of sale of Short Term Capital Asset shall be computed in the
following manner:-

Full Value of Consideration Xxx

Expenditure incurred wholly and exclusively in connection with such

(Less) Xxx
Transfer/Sale

(Less) Cost of Acquisition Xxx

(Less) Cost of Improvement Xxx

Gross Short Term Capital Gain Xxx

(Less) Exemption (if any) available u/s 54B/54D/54G/54GA Xxx

Net Short Term Capital Gain on Sale of Property Xxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital
Gain computed above.

Computation of Long Term Capital Gain

In case the property has been held for more than 2 years, it would be classified as a
Long Term Capital Gain. The following are the main benefits of classifying as a Long
Term Capital Gain:-

1. Flat rate of 20% Capital Gains Tax

2. The benefit of Indexation can also be claimed
3. Various tax exemptions under Section 54, Section 54EC, Section 54F can also
be claimed

The manner of computing Taxable Long Term Capital Gains on Sale of Property are
as follows:-

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 Full Value of Consideration xxx

(Less) Expenditure incurred wholly and exclusively in connection with such Transfer/Sale xxx

(Less) Indexed Cost of Acquisition xxx

(Less) Indexed Cost of Improvement xxx

Gross LTCG xxx

(Less) Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G xxx

Net Long Term Capital Gain on Sale of Property xxx

Other Relevant Points regarding Capital Gains

1. Advance Tax is required to be paid during the year on the capital gains arising
on sale of the property irrespective of whether it is Long Term Capital Gain or
Short Term Capital Gain.
2. In case a Short Term Capital Loss arises on the sale of a property, the short
term capital loss can be set-off against both Short Term and Long Term
Capital Gain arising in that year. However, if the loss is Long Term in nature,
it can only be set-off with Long Term Capital Gains of that Financial Year and
not with Short Term Capital Loss.
3. If the Loss cannot be set-off against capital gain in that year, it can be carried
forward for the next 8 years and set-off in the future years.

TDS on Sale of Property

Irrespective of whether it is a Long Term Capital Gain on Short Term Capital Gain,
TDS is applicable. TDS stands for Tax Deducted at source and is a deduction made by
the buyer while making the payment to the seller. After deducting TDS, the balance
payment is made by the buyer to the seller.

TDS is not a new form of tax but a form of tax which is paid in advance and can be
adjusted with the final tax liability computed at the end of the year while filing the
income tax return. The rate of TDS depends on whether the seller is a NRI or a
Resident and is explained below:-

1. Seller is Resident: 1% TDS would be deducted if the Property Value is more

than 50 Lakhs. (Refer: 1% TDS on Sale of Property)
2. Seller is Non-Resident: 20% TDS would be deducted irrespective of property
value. Cess and Surcharge would also be applicable over and above this 20%.
(Refer: TDS on Sale of Property by NRI)

Meaning of Terms mentioned above

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Full Value of Consideration

Full Value of Consideration means what the transferor receives or is entitled to

receive as consideration for the Sale of Property /Asset. This Value may be in cash
or in kind i.e. in exchange for an Asset.

In case of exchange of an asset, the full value for the computation of Capital Gains
shall be the Fair Market Value of the Property (Asset) granted in exchange. Fair
Market Value in relation to Capital Gains means the price which the Property (Asset)
would normally fetch if sold in the open market on the Relevant Date.

In case, the full value of consideration is received in installments in different years,

the entire value of consideration shall be the Market Value of the Property/Asset
granted in exchange.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly,

for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp
Duty, Registration Fees, and Legal Expenses etc. However, any expense which has
been claimed as a deduction under any other provision of the Income Tax Act cannot
be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the
assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the
time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the
manners mentioned below, the cost of acquisition shall be deemed to be the cost for
which the previous owner of the property acquired it:-

1. On the Distribution of Assets/ Total Partition of HUF

2. Under a Gift or Will
3. By Succession, Inheritance or Devolution
4. On Distribution of Assets on Liquidation of a Company

Where the cost for which the previous owner of the capital asset acquired the property
cannot be ascertained, the cost of acquisition to the previous owner shall be the fair
market value of the asset on the date on which the asset became the property of the
previous owner. The Interest on money borrowed for acquiring the capital asset will
also form a part of the cost of Asset provided the deduction for interest has not been
claimed earlier.[CIT v Mithlesh Kumari (1973) 92 ITR 9 (Del)]

Cost of Improvement

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All Capital Expenditures incurred in making any additions or alterations to the Capital
Asset by the Assessee after it became his property or alterations to the capital asset by
the assessee after it became his property shall be deductible as the Cost of
Improvement. If the Asset was transferred to the assessee under the cases specified
immediately above, the capital expenditure incurred by the previous owner shall also
be treated as cost of improvement.

However, the Cost of Improvement does not include any capital asset which is
deductible in computing the chargeable under head- “Income from House Property”,
“Profits or Gains of Business or Profession”, or “Income from Other Sources”. Only
the Capital Expenses are considered as a cost of Improvement and routine expenses
on Repairs and Maintenance do not form part of cost of improvement.

For the purpose of Computation of Long Term Capital Gain, Indexation using th e
Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement
and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of
Improvement for the purpose of computation of LTCG

Indexed Cost = Actual Cost * Cost Inflation Index of the Year of Sale

Cost Inflation Index of the Year of Purchase

Income from Other Sources

The fifth and last head of income under the Income Tax Act is income from other
sources. Any income derived from sources other than the previously mentioned four
heads is considered to be under this category of income. Some examples of income
from other sources include interest gained from bank deposits, winning in the lottery,
or even any sum of money which is more than Rs. 50,000 received from another
individual who does not form a part of the taxpayer relative, spouse or if the money is
acquired via inheritance or will. All these sources, even if it is gambling or even card
games, are chargeable for tax under Section 56(2) of the Act.

Section 145 of the Income Tax Act states the details for the computation and income
tax calculator generated from other sources. As per the Section, income from other

37 | P a g e
 sources shall be computed and calculated by the regular accounting method which is
followed by whoever the assessee is. This can be either in cash or in a mercantile
accounting system.

Which Types of Income Come Under Income from Other Source

Section 56(2) of the Income Tax Act enlists certain incomes which are taxable under
this head of income, that is, Income from Other Sources. Some of these incomes
include:

 Dividend income

 Interest income

 Family pension income

 Gifts received

 Royalty income

Why are there 5 different heads of Income?

Although there is only one tax on the income calculated under various heads, but,
there are different rules of computation of income under each head and income has to
be computed under that head after applying such rules only.

Judicial Pronouncements

1. Income under each head has to be determined in the manner provided by the
appropriate sections mentioned against each head above [CIT v Dr. Ramesh
Lal Pahwa (1980) 123 ITR 86 (Cal)].
2. If there is an income which cannot be brought to tax by computation under the
above heads, it would not be included in the total income for the purpose of
taxability [CIT v Justice R.M. Datta (1989) 180 ITR 86 (Cal)]
3. The computation of income under each of the above 5 heads of income will
have to be made independently and separately. There are specific rules of
deduction and allowance under each head. No deduction or adjustment on
account of any expenditure can be made except as provided by the act.
[Tuticorin Akali Chemical and Fertilizers Ltd v CIT (1997) 227 ITR 172 (SC)]
4. The above mentioned 5 heads of income are mutually exclusive of each other.
Thus, where an item of income falls specifically under one head, it has to be

38 | P a g e
 charged under that head only and not under any other head. [United
Commercial Bank v CIT (1957) 32 ITR 688 (SC)].

39 | P a g e
40 | P a g e
 Chapter 2

Research
methodology

41 | P a g e
Need For Study:
In last same years of any career and education. I have seen my colleagues and faculties
grappling with the taxation issue and complaining against the tax deducted by their
employers from monthly remuneration. Not equipped with proper knowledge of taxation
and tax saving avenues available to them, they were at mercy of the HR/ Admin
departments which never bothered to do even as little as take advise from some good tax
consultant.

Need for computerization

 Reliable & efficient services to student.
 To reduce the paperwork & manual mistakes.
 To reduce the labor cost.
 To manage the tax records efficiently & accurately

MEANING OF RESEARCH:-
Research as "the manipulation of things, concepts of symbols for the purpose of
generalizing to extend, correct or verify knowledge, whether that knowledge aids in
construction of theory or in the practice of an art."

The Research Methodology followed for further work can be primarily classified into two
stages namely Exploratory and Descriptive. The stepwise details of the research are as
follows:

Stage-1

Exploratory Study: Since we always lack a clear idea of the problems one will meet
during the study, carrying out an exploratory study is particularly useful. It helped
develop my concepts more clearly, establish priorities and in improve the final research
design.

Exploratory study will be carried out by con…

Goverment has to play an important role in all round development of Society in the
modern era. It has not only to perform its traditional functions (Defence maintenance of
law and order) but also to undertake welfare and development activities such as health,
education, sanitation, rural developmentwater supply etc. It has also to pay for its own

42 | P a g e
administration. All these functions require huge public finance. Taxes constitute the main
source of public finance whereby govemmentraises revenue for public spending. Taxes
have been broadly categorized into direct and indirect taxes. Direct taxes" include those
taxes

which are paid by the person on whom these are levied like income tax,wealth tax etc. On
the other hand, indirect taxes" are levied on one person but paid by anothere.g. sales tax,
excise duty, custom duty etc. Income tax is the most important of all direct taxes and with
the application of progressive rate schedule, provision of exemption limit and
incorporation of a number of incentive provisions. It can be used not only to satisfy all
the canons of a sound tax system but may also go a long way in realisingg variety of
socio economic objectives set out by the economic system [Gopal, M.H., p. 20]. It also
helps in bringing distributional justice through higher rate of tax on the rich class of the
society. It may also act as a tool for controlling inflation.due to all these factors, income
tax has assumed great importance in the structure of direct taxation. Therefore, all
politically advanced democracies impose some form of personal taxation, generally based
on income.

ORIGIN AND EVOLUTION OF INCOME TAX IN INDIA ANCIENT

PERIOD
There is enough evidence to show that taxes on income in some form or the other were
levied even in primitive and ancient communites. References to taxes in ancient India are
found in Manusmriti" and Kautilya's Arthashastra". Manu the ancient sage and law giver
stated that king should levy taxes according to sastras. He advised that taxes should be
related to income and should not be excessive. He laid down that traders and artisans
should pay 1/5th of their profits in gold and silver, while the agriculturists were to pay
1/6th, 1/8 and 1/10th of their produce depending upon their circumstances. the detailed
analysis given by Manu on the subject clearly shows the existence of a well planned
taxation system, even in ancient times. Kautilya's Arthasasta was the first authoritative
text on public finance, administration and the fiscal laws Collection of income tax was
well organized during Mauryan Empire. Schedule of tax payment, time of payment,
manner and quantity were fixed according to Arthasastra. It is remarkable that the
presentday system of taxation is in many ways similar to the system of taxation given by
Kautilya 2300 years ago.

INITIAL PERIOD (1860-1886) 1860 by the British Government to overcome the

financial crisis following the events of 1857. Inisally Goverment introduced it as a
temporary measure of Income tax in its modem form was introduced in India for first
time in raising revenue under the Income Tax Act 1860 for a period of five years.
Different tax rates were prescribed for different heads of income. In the year 1867, it was
transformed as licence tax on trade and profession. In the year 1869, the licence tax was

43 | P a g e
replaced by Income Tax again. The assessments were made on arbitrary basis leading to
inequality, unpopularity and widespread tax evasion. Income Tax was withdrawn in the
year 1874. After the great famine of 1876-1878 the Governmentintroduced local Acts for
income tax in different provinces with Several amendments these Acts remained in force
till 1886. Thus, the period from1860 to 1886 was a period of experiments in the context
of income tax in india PRE

INDEPENDENCE PERIOD (1886-1947)

In 1886, a new Income Tax Act was passed with great improvements than the previous
Acts. This Act with several amendments in different years continued till 1918. In 1918, a
New Act was passed repealing all the previous Acts. For the first time, this Act
introduced The The concept of aggregating income under different heads for charging
tax. In 1921, the Government constituted All India Income Tax Committee" and on the
basis of recommendation of this committee a new Act. (Act XI of 1922) was enacted.
This Act is a landmark in the history of Indian Income Tax system. This Act made
income tax a central subject by shifting the tax administration from the Provincial
Governments to the Central Government During this period the Board of Revenue
(Central Board of Revenue) and Income Tax Department with defined administrative
structure came into existence. POST INDEPENDENCE PERIOD

The Income Tax Act 1922 continued to be applicable to independent India. During te
early Post independence period, the Income Tax legislation had become very complicated
on account of innumerable changes. During this period tax evasion was wide spread and
tax collection was very expensive. In 1956, the Government of India referred the Act to a
Law Commission to make the Income Tax Act simpler, logical and revenue oriented. The
Law Commission submitted its report in September 1958 and in the meantime the Govt.
also appointed a Direct Taxes Administration Enquiry Committee to suggest the
measures for minimizing the inconvenience to the assessees and prevention of tax
evasion. This committee submitted its report in 1959. The recommendations of the Law
Commission and the Enquiry Committee were examined and extensive tax reform
programme was undertaken by the Government of India under the supervision of Prof.
Nicholas Kaldor. The Income Tax Bill 1961, prepared on the basis of the Committee's
recommendations and suggestions from Chamber of Commerce, was introduced in the
Lok Sabha on 24.4.1961. It was passed in September 1961 by Lok Sabha. The Income
Tax Act 1961 came into force on April 1, 1962. It applies to whole of India including the
state of Jammu and Kashmir. It is a comprehensive piece of legislation having 23
Chapters, 298 Sections, various sub sections and 14 schedules. Since 1962, it has been
subjected to numerous amendments by the Finance Act of each year to cope with
changing scenario of India and its economy. Moreover the Central Board of Direct Taxes

44 | P a g e
is empowered to amend rules to clarify instructions as and when it becomes necessary.
Besides this, amendments have also been made by various Amendment Acts e.g.
Taxation Laws Amendment Act 1984, Direct Taxes Amendment Act 1987, Direct Taxes
Law (Amendment) Acts of 1988 and 1989, Direct Taxes Law (Second Amendment) Act
1989 and at last the Taxation Law (Amendment) Act 1991. As a matter of fact, the
Income Tax Act 1961 has been amended drastically. It has therefore become very
complicated both for administration and taxpayers

RECENT TAX REFORMS

The economic crisis of 1991 led to structural tax reforms in India with main purpose of
correcting the fiscal imbalance. Subsequently, the Tax Reforms committee headed by
Raja Chelliah (Government of India, 1992) and Task force on direct taxes headed by
Vijay Kelkar (Government of India, 2002) made several proposals for improving Income

Tax System.

[6:30 pm, 12/01/2023] shah het Clg: These recommendations have been implemented
by the governmentin phases from time to time. As regarding the personal income tax,
the maximum marginal rate has been drastically reduced, tax slabs have been
restructured with low tax rates and exemption limit has been raised. In addition to
this, governmentrationalized various incentive provisions and widened TDS scope. In
case of corporate tax, the govemment has reduced rates applicable to both domestic
and foreign companies, introduced depreciation on intangible assets and rationalised
various incentive provisions. Some new taxes have been introduced such as Minimum
Alternative Tax and Dividend Distribution Tax, Securities Transaction Tax, Fringe
Benefit Tax and Banking Cash Transaction Tax. However, Fringe Benefit Tax and
Banking Cash Transaction Tax were withdrawn by Finance Act, 2009.

The Income tax administration was restructured with effect from August 1,2001 to
facilitate the introduction of computer technology. Further, keeping in mind the
global developments, the department has made considerable efforts for reforming the
tax administration in recent years. Some important measures in this direction are
introduction of mandatory quoting of Permanent Account Number (PAN), e-filing of
returns, e-TDS,e-payment, tax information network (TIN) annual information Return
(AIR) for high value transaction, Integrated Taxpayer Profiling System (ITPS)

45 | P a g e
 Refund Banker Scheme in certain cities etc. The main objective of these reforms has
been to enhance tax revenue by expanding the taxpayer base, improving operational
efficiency of the tax administration, encouraging voluntary tax compliance, creating a
taxpayer friendly atmosphere and simplifying procedural rules.

SCHEME OF TAXATION OF INCOME IN INDIA

The constitution authorises the Central Government to levy and collect tax on income
[6:32 pm, 12/01/2023] shah het Clg: other than agricultural income under Income Tax
Act 1961 the proceeds of income tax are shared between the Union and the State
Governments as per the recommendations of the Finance Commission. Income tax is
chargeable on the total income of the previous Year of a person at the rates prescribed
by Finance Act every year.income tax can be Classified in two parts viz. Personal
Income Tax and Corporate Tax. Income tax levied on Individuals, hindu undivided
families(HUFs), firms, association of persons (AOPs), body of individuals (BOIs),
local auuthorities and artificial juridicial persons is called Personal Income Tax and
income tax

levied on companies is called Corporate Tax The incidence of tax on any person
depends upon the place of origin of income and the residental status of the taxpayer.
Accord ing to their residential status, persons have been classified into three broad
categories:

1.Resident

2.Residentbut not ordinarily resident

3.Non-Resident

46 | P a g e
 The residential status of an assessee is ascertained with reference to each previous
year. A Non-residentis required to pay tax in respect of income received or deemed to
be received in India and accrued or deemed to accrue to him in India. A resident of
India is charged to tax in respect of all the income i.e. received or deemed to be
received in India or outside India, accrued or deemed to accrue in India or outside
India during the relevant previous year. However,the total income of a resident but
not ordinarily resident is not to include income which accrues to him outside India,
unless it is derived from a business or profession controlled in India. For the purpose
of computing total income and charging tax thereon, income from various sources is
classified under the

following heads:

Income from salary

Income from house property

Profits & Gains of business or profession

Capital gains

Income from other sources

These five heads of income are mutually exclusive. If any income falls under one
head, it cannotbe considered under any other head. Income under

each head has to be computed as per the provisions under that head.
ORGANISATIONAL SET UP OF INCOME TAX DEPARTMENT

The overall responsibility for the administration of Income Tax lies with the
Department of Revenue, Government of India which functions through the

47 | P a g e
 Income Tax Department. The Income Tax Department has a network of 745 offices in
510 cities and staff strength of around 59000. This Department administers direct tax
laws under the control and supervision of Central Board of Direct Taxes (CBDT).
The department is engaged in the tasks of educating and assisting taxpayers in filing
tax returns, assessing tax liability, demanding pending taxes, penalising dishonest
taxpayers and disposing of tax disputes. The the past decade. It has increased to Rs.
314000 crore during the financial year 2007-08 from Rs. 48280 crore during the
financial year 1997-98 It has also for the first time surpassed the collection of indirect
taxes during the same year. The Income Tax

NEED FOR THE STUDY

Income Tax deserves significant attention in a developing economy as it is one of the

major sources of govemment revenue. Tax system of India has come a long way, dating
back to the colonial era till now. A number of committees have been constituted from
time to time to suggest changes in the existing tax structure. Thus, tax policymakers and
tax administrators have been

continuously adapting tax system to reflect changing economic, social and political
Circumstances Moreover, restructuring of tax system has been a major

component of fiscal reforms initiated since 1991 in an effort to keep pace with the
changing global scenario on the basis of recommendations of Raja J. Chelliah
Committee and Kelkar Committee. The main objective of these changes has been to
enhance tax revenue by enlarging tax base, encouraging voluntary

tax compliance and simplifying procedural rules. The review of literature on existing
subject reveals that many researchers have directed their efforts to study

role of this department in tax system of India is rapidly increasing as the share of
direct taxes in the revenue of the country has registered a steady increase over

THE C ENTRAL BOARD OF DIRECT TAXES (CBDT)

48 | P a g e
 The Central Board of Direct Taxes (CBDT) is the apex body in the Direct

Tax set up. It provides essential inputs for policy and planning of direct taxes

NEED FOR THE STUDY

Income Tax deserves significant attention in a developing economy as it is one of the

major sources of govemment revenue. Tax system of India has come a long way, dating
back to the colonial era till now. A number of committees have been constituted from
time to time to suggest changes in the existing tax structure. Thus, tax policymakers and
tax administrators have been

continuously adapting tax system to reflect changing economic, social and political
Circumstances Moreover, restructuring of tax system has been a major

component of fiscal reforms initiated since 1991 in an effort to keep pace with the
changing global scenario on the basis of recommendations of Raja J. Chelliah
Committee and Kelkar Committee. The main objective of these changes has been to
enhance tax revenue by enlarging tax base, encouraging voluntary

tax compliance and simplifying procedural rules. The review of literature on existing
subject reveals that many researchers have directed their efforts to study

49 | P a g e
50 | P a g e
 Chapter 3

literature review

51 | P a g e
Narayanan (1967) highlighted some important aspects of corporate taxation in India
focusing super profit tax, liberalisation of investment allowance etc. Data from 1965 to
19710 are used for the study purpose. The author opined that liberal investment
allowances under corporate tax system along with high marginal tax rates got to subsidise
non profitable investment. The established companies shall get immediate benefit of
investment allowance where a new company shall have to wait for many years. The
author added that investment allowances coupled with high and progressive tax rates
would promote excessive investment and unwarranted mechanism. The paper suggested
that tax holiday can avoid the disadvantages of investment allowances. Leuthold &
N'Guessan (1986) have studied the buoyancies and elasticity of the major taxes of Ivory
Coast. The authors have used Ordinary Least Square (OLS) method for such research
work. GDP has been taken as regressand. Data from 1970 to 1979 is processed in this
literature. The researchers found that the overall elasticity of Ivorian taxes is .961 which
describes that one percentage increase of GDP responds 961 percentage increase of tax.
They concluded that "an elastic tax system is desirable in a developing economy because
it means that lax receipts will grow automatically with growing income without the need
for politically sensitive increases in tax rates". Mansfield (1988) worked out a theoretical
paper on tax administration in selected developing countries focusing tax evasion as a
sole of tax reform. The author added an increase in the tax rate would increase tax
evasion. Though a high penalty rate for evasion is imposed on the evaded tax the offender
tax payer because of higher penalties may be lead to pay tax at higher

rate. The paper suggested tax evasion model as follows:

EU = (1-p)U(y + x)+pUy- Fx), where EU= expected utility of tax evasion U = utility

function p = probability of being audited y = taxpayer's legal after-tax income x =

undeclared

taxes F = the penalty rate on undeclared taxes plus 1.

The tax reform administrators should be cautious that Strict adherence to a cost-benefit,
revenue-maximizing strategy would worsen efficiency distortions in the present tax
structure and would eventually undermine voluntary compliance. The author quoted "tax
reformer should strive to balance immediate revenue objectives with customer (tax payer)
benefit". Dahl & Mitra (1991) described three applications of tax policy models
developed by the World Bank during the course of its economic study in Bangladesh,
China and India. The Bangladesh model narrates upon shifting of tax burdens in
influencing the relative attractions of different options for raising revenue. The Chima
model depicts broad uniformity of tax rates for a large number of sectors with a dual
price system.

The Indian model focussed more upon liberalisation policy for tax reform. It is also
reviewed about the cost of constructing tax policy models. Sury (1993) made an historical
analysis of the various aspects of income tax in India. The author rivets on tax rate
structure, exemptions, concessions and evasion. The author ʙʀᴏᴜɢʜᴛ in, changes the

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Income Tax Act 1886, Income Tax Act 1918, Income Tax Act 1922, Income effects on
tax reform. Tax Act 1939, and Income Tax Act 1961. The specifically analysed the post
globalisation Gupta, Lahiri and Mookharjee (1995) made an empirical analysts on
income tax compliance in India from 1965-55 to 1992-

93. They found that low tax rates, plethora of exemptions significantly affect the revenue
collection. The loop holes of tax structure contributed a lot for slow and low tax
compliance. They have also identified the negative effect of declining assessment
intensity. They have quoted that best practice of enforcement, assessment and tax
structure policy could have yielded at most a 90 percent revenue increase leading India's
income tax performance below the average of countries with similar GDP per capita. This
study has been carried out by taking regression equation on compliance and income tax
revenue with variables like income base, inflation rate, vector of tax structure, vector of
enforcement variable and vector of dummy variable for other policy measures. It is
concluded that contrary to the upward trend in real income tax revenue during the study
period, tax compliance appears to be declined appreciably. In addition empirical results
shows that increased average tax rates and exemption limit appear to have reduced
compliance and revenues of the country.

Pillarisetti (1995) made a comparative study between India and Latin American
countries. The author annotates that prevalence of extreme high rate of tax over several
years resulted in institutionalised corruption and tax evasion in India in 1980s and 1990s.
The author also added Indian direct tax reform failed to neutralise non compliance and
tax evasion. India's approximately 50% legal reportable income is untaxed. This
theoretical paper also glossed up the sectoral equity issues. India's highly progressive tax
structure can extract tax revenue from organised sector leaving informal sector which
becomes more vulnerable widespread tax evasion. This creates inequality in tax system
across the organised and informal sector. It is pointed out that a fundamental issue in a
tax system is "ability to pay." The author surprised the non inclusion of this economic
well being issue of tax payer in direct tax reform measure.

Sarkar (1997) dealt with corporate income and incidence of corporate taxation. The
paper critiqued the responsiveness of corporate tax to corporate income in India with a
view to assess the justification of the imposition of minimum alternative tax.

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 Chapter 4
Data Anaylsis &
Interpretection

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8oo In this chapter, the empirical data collected from our self-completion questionnaire
will be presented. Firstly, we will present the percentage of each answer from the
respondents and summarize the importance of each factor. Then we will examine some
questions with the crosstab and chi square tests. Finally, we will rank the critical success
factors.

5.1 The results of general information

India Personal Income Tax Rate 2004-2015 The Personal Income Tax Rate in India
stands at 33.99 percent. Personal Income Tax Rate in India averaged 30.73 percent from
2004 until 2014, reaching an all time high of 33.99 percent in 2013 and a record low of
30 percent in 2005. Personal Income Tax Rate in India is reported by the Ministry of
Finance, Government of India.

Figure 3: India Personal Income Tax Rate 2004-2015 In India, the Personal Income Tax
Rate is a tax collected from individuals and is imposed on different sources of income
like labour, pensions, interest and dividends. The benchmark we use refers to the Top
Marginal Tax Rate for individuals. Revenues from the Personal Income Tax Rate are an
Income Tax Slabs & Rates for Assessment Year 2015-16

1. Individual resident aged below 60 years (i.e. born on or after 1st April 1955) or any
NRI/ HUF/ AOP/ BOI/ AJP

Table 1: Individual resident aged below 60 years

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Surcharge: 10% of the Income Tax, where taxable income is more than Rs.

1 crore. (Marginal Relief in Surcharge, if applicable)

Education Cess: 3% of the total of Income Tax and Surcharge. Abbreviations used NRI
Non Resident Individual; HUF Hindu Undivided Family; AOP - Association of Persons;
BOI Body of Individuals; AJP - Artificial Judicial Person.

2. Senior Citizen (Individual resident who is of the age of 60 years or more but below the
age of 80 years at any time during the previous year i.e. born on or after 1st April 1934
but before 1st April 1954)

Table 2: Senior Citizen age Above 60 yeard (Income Tax Slab) Surcharge: 10% of the
Income Tax, where taxable income is more than Rs. 1 crore. (Marginal Relief in
Surcharge, if applicable)Education Cess: 3% of the total of Income Tax and Surcharge.

3. Super Senior Citizen (Individual resident who is of the age of 80 years or more at any
time during the previous year i.e. born before 1st April 1934)

Income from salary is the remuneration that is received by an individual who is rendering
services under any contract which is taken by him. The contract should be under
employment. The amount received by an individual shall be considered as income from
salary only if there is an employer employee relationship between those peoples who
entered into the contract. One will be the person who pay the amount and one will be the
person who receive the amount. WHAT IS SALARY? The salary for the purpose of
income tax act includes the following part: Wages; Pension; Annuity; Gratuity; Advance
Salary paid; Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or
Wages; Annual accumulation to the balance of Recognized Provident Fund; Leave

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Encashment; Transferred balance in Recognized Provident Fund; Contribution which is
made under Sec. 80CCD. HOW TO CALCULATE INCOME FROM SALARY
PARTICULARS AMOUNT Basic Salary - Add: - 1. Fees, Commission and Bonus - 2.
Allowances - 3. Perquisites - 4. Retirement Benefits - 5. Fees, Commission and Bonus -
Gross Salary - Less: Deductions from Salary - 1. Entertainment Allowance u/s 16 - 2.
Professional Tax u/s 16 - Net Salary - ALLOWANCES ALLOWANCES WHICH ARE
FULLY TAXABLE Dearness Allowances: Entertainment Allowances: Overtime
Allowances: City Compensatory Allowances: Project Allowances: Tiffin Allowances:
Cash Allowances: ALLOWANCES WHICH ARE PARTLY TAXABLE House rent
Allowances: Entertainment Allowances: Special allowances: Special Allowances (for
meeting personal expenses): ALLOWANCES WHICH ARE NON-TAXABLE
Allowances which are being paid to government: Sumptuary Allowances: Allowances
which are paid by UNO Compensatory Allowances which are being paid to judges: The
person can also save tax by getting the Tax Saving Allowances under Income from
Salary. PERQUISITES Perquisites are the payments which are received by an employees
by the employer above the salary. PERQUISITES WHICH ARE TAXABLE TO ALL
EMPLOYEES Rent free accommodation; Payments for Club fee; Movable assets;
Concession in accommodation rent; Interest-free loans; Expenses for Education;
Insurance premium paid by employer on behalf of employees. PERQUISITES WHICH
ARE TAXABLE TO SPECIFIC EMPLOYEES Domestic purpose Free gas, electricity
etc.; Concessional transport facility; Expenses for Concessional education; Payment
which are made to gardener, sweeper and attendant. PERQUISITES WHICH ARE
EXEMPTED FROM TAX Medical benefits; Health Insurance Premium; Leave travel
concession; Staff Welfare Scheme; Car, laptop etc. (personal use).

FORM 16 is a form where employer gives details about the salary which is being
received by the employee and also the details of tax deducted at source throughout the
year. Form 16 is issued once in a year, it is issued on or before 31st May of the next
financial year. Form 16 contains two parts which is as followed: Part

A: This part of the Form contains all the information about employer and employee. Part
B: This part of the Form contains the information about salary which is paid, tax payable
etc. 5 Days Practical Workshop on ITR U Start Date: 21st February 2023 End Date: 25th
February 2023 Time: 7:00 PM - 8:30 PM Duration: 8 Hours (5 Days) Language: Hinglish
Faculty: CA Manoj Lamba Register Now

FORM 26AS Section 203AA of the Income Tax Act makes required to issue
Form 26AS. This form contains all the information about tax which is paid or
deposited to tax department. This form help an individual to know the tax liability.

As we know our income tax is complicated due to its various overlapping provisions.
For Income Tax purpose income earned by a taxpayer is divided into five heads of

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 income like Income from Salary, Income from House Property, Income from Business
or Profession, Capital Gains and Income from Other Source. Each head of income has
its own limitations.
The Purpose of the present paper is to point out the shortcomings and difficulties
associated with the provisions of salary as a main head of Income. Through this paper
researcher has suggested various proposals for simplification of various provisions
related to salary income.
Key words: Basic Salary, Allowances, Perquisites, Gratuity, Pension

1. Introduction:
Under Income Tax Act, there are five heads of income like salary, House Property,
Business or profession, capital gains and other source. Salary is one of the important
head among them. Basic test for chargeability of Income as salary is employer and
employee that is master and servant relationship among payer and payee. It is very
essential for a payment to fall under the head of 'salaries'. For example Salary of a
Member of Parliament is not chargeable under the head "salaries" as a member of
Parliament is not a Government employee. According to Section 15 of Income Tax Act
the following income shall be chargeable to income tax under the head “ salaries”.
(Singhania, 2015)
 Any salary due from an employer (or former employer) to an assessee in
previous year, whether actuallypaid or not,

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  Any salary paid or allowed to him in the previous year by or on behalf of
an employer (or a formeremployer) though not due or before it became due,
 Any arrears of salary paid or allowed to him in the previous year by or on
behalf of an employer (or aformer employer) if not charged to tax for any
earlier previous year.
Here it should be noted that any advance salary, once included in the total income of
a person on receipt basiswill not be again chargeable to than when the salary becomes
due.

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 2. Meaning of Salary:
For the purpose of income tax the meaning of the term „salary‟ is much wider than what it is normally
understood. Section 17(1) gives an inclusive definition of salary as:
i. Wages
ii. Any annuity or pension
iii. Any gratuity
iv. Any fees, commission, perquisites or profit in lieu of or in addition to salary,
v. Any advance salary
vi. Any payment received by employee in respect of period of leave not availed by him i.e. leave salary

1. Other Important Points about salary:

1. Salary will be deemed to accrue or arise at a place where services are rendered. If the services are
rendered in India and salary on account of such services is received outside India, it will be treated as
anincome, which is deemed to accrue or arise in India.
2. The income from salary is taxable on 'due' or 'receipt' basis whichever is earlier.
3. According to The Income-tax Act, there is no conceptual difference between the wages and salaries.
4. If an employee gets an extra remuneration from his employer for some additional work not related to
hisregular work still that amount is taxable as income from salary.
5. Salaries and professional income must be clearly understood and separated. For e.g. consulting fees
received by a doctor in his dispensary is professional income but if he is employed in hospital then
consulting fees are taxable as income from salary.
6. Remuneration received from person other than the employer would be taxable under the head
"income from other sources".
7. Payment made by an employer to his employee after the cessation of his employment is also taxable
under the head "salaries".
8. Pension received by an employee after his retirement is taxable as salary, but any family pension
received by the spouse is taxable under the head "income from other sources"

4. Computation of Income from Salary :

Salaries ***
Allowances ***
Perquisites ***

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 Gross salary ****
Less: Deductions under Section 16
Entertainment Allowance ***
Profession Tax *** ***
Income From Salaries ***

5. Complications regarding computation of Income from Salary:

The computation of taxable amount of income from salary becomes difficult due
to the complications in theprovisions related to computation of taxable income
from salary due to following complicated provisions:

5.1 Different meanings of 'salary' –

Term 'Salary' has been used with different meanings in computation of
exemptions and taxable value ofperquisites. Following are some examples:

i. For computing exemptions under:

a) leave encashment;
b) gratuity in the case of a non-Government employee who is not covered
under the
c) Payment of Gratuity Act, 1972;
d) house rent allowance u/s 10 (13A)
e) employer's contribution to the recognized provident fund of an employee,
Salary = Basic salary + Dearness Allowance (if the terms of employment so
provide) + commission(if it is payable at a fixed percentage on the turnover
achieved by an employee)
ii. For computing the value of rent free unfurnished house or the value of
concession in the matter of rent in respect of the housing accommodation
provided by a non-Government employer to his employee : Salary = Basic salary
+ dearness allowance( if terms of employment so provide) + Bonus + commission
+ fees
+ taxable amount of the allowances + any other monetary payment which is
chargeable to tax and which is not in the nature of perquisite

iii. For computing deduction of entertainment allowance

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 in the case of Government employee’s u/s 16(2).
Salary = Basic Salary

iv. for computing exempt amount of gratuity in the case

of non-Government employees who are covered under the
Payment of Gratuity Act, 1972.
Salary = Basic salary + Dearness Allowance
v. For calculating the amount of deduction available to
Central Government employee or any other employer who has joined

service on or after January 1, 2004 in respect of contribution to the notified

pension scheme is computed @ 10% of the 'salary' of the employee in
respect of contribution made by both, the employer as also the
employee.
Salary = Basic salary + Dearness Allowance (if the terms of employment so provide)

Suggestion:
To remove the difficulty of different meaning of salary, researcher is suggesting to
include only Basic Salary and Dearness allowance as the components of salary. If
we go through the details of salary then we will observe that basic salary and
dearness allowance components form major part of salary and hence by excluding
other components like commission or taxable other allowance, amount of
exemption or taxable value will not affect considerably. So salary must include
only Basic salary and Dearness allowance.

5.2 Different meanings of "average salary"–

The term 'average salary' has been used in the following two different ways:
i. "Average salary' is computed on the basis of average salary drawn during the
period of 10 months immediately preceding the month of retirement for
computing the exempt amount in the case of non- Government employees as
regards : (a) leave encashment and (b) gratuity when the employee is not covered
under the Payment of Gratuity Act, 1972.
ii. 'Average Salary' is computed on the basis of average of total wages received
for a period of 3 months immediately preceding the month of termination of
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 employment of a piece-rated employee covered under Payment of Gratuity Act,
1972 for computing exempt amount of gratuity.

Suggestion:
Here researcher wants to suggest to consider three months period rather than ten months
period for average salary. As period and date of increment is common and annual in many
organisations for all employees. So it is suggested to consider the period of three months.
Due to uniform policies three or ten months will not affect marginally on amount of
exemption.
5.3 Distinction between "year of service" and
"completed year of service" as regards gratuity:
One of the conditions for computing the exempt amount of gratuity in the case of
employees covered by the Payment of Gratuity Act, 1972, as per section 10(10) (ii)
of the Income-tax Act, 1961 is–"15 days' salary based on salary last drawn for each
year of service". However, in the case of a non-Government employee who is not
covered under the Payment of Gratuity Act, 1972, this condition becomes–"half
month's average salary for eachcompleted year of service".

Suggestion:
In order to make the law uniform on this part without affecting the interest of
revenue on both the parts, simple mathematics rule of round off that is more than
six months of service will be counted as full year of service is suggested
Discrimination between Government employees and non- Government employees:

Discriminatory provisions in computing taxable income of Government employees

and non-Governmentemployees are without any real justification.
It is found that following retirement benefits to Government employees are wholly
exempt from tax
a. amount received as death-cum retirement gratuity by Government
employees under section 10(10)
b. amount of commuted pension under section 10(10A)
c. amount received as cash equivalent of leave salary as per section 10 (10AA)
But the amounts received by a non-Government employee in respect of all the
above three cases are only partlyexempted.

Suggestion:
The above discrimination in favour of the Government employees as compared to

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 non-Government employees would have been justified if government employees
are getting lesser salaries as compare to non-Government employees. Rather than

Accommodation City Accommodation owned by Accommodation not owned by

employer employer
there are various positive factors like job security, better medical facilities,
standard working hours, etc. in Government jobs. So such discrimination is not
advisable.

5.4 Classification of employees as specified and non -

specified
Following are specified employees:
i. An employee who is a director in the employer company.
ii. An employee who has substantial interest in the employer company if he
is beneficial owner of equity shares carrying 20% or more voting power in
Employer Company.
iii. An employee whose income chargeable under the head “Salaries” exceeds
Rs. 50,000/- (For computing the sum of Rs. 50,000 all non-monetary benefits and
all monetary benefits not taxable under section 10 are excluded)
Any employee, other than a specified employee is a “non - specified” employee.

The following perquisites provided to an employee by his employer are taxable

only in the case of 'specified' employees and are exempt in the hands of non-
specified employees:
a) Service of a sweeper, gardener, watchman or personal attendant;
b) Supply of gas, electricity or water for household purposes;
c) Education facility to employee’s family members ;
d) Leave travel concession (other than the case of twice in a block of four
years);
e) Medical facility for treatment in a private hospital for which the expense
of the employer exceeds Rs.15,000 in a year,
f) Car or any other automotive conveyance; and
g) Transport facility by a transport undertaking other than railways and an
airline. Suggestion:
Classification of employees as specified and non - specified employee does not
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1)Having population more 15% of salary Amount of lease rent paid or
than 25 lacs as per 2001 payable or 15% of salary
census whichever is lower

2)Having population below 10% of salary Amount of lease rent paid or

25 lacs but more than 10 lacs payable or 15% of salary
as per 2001 census whichever is lower

3)Any other city 7.5%of salary Same as above

have much practical utility. In current situation large employees are specified
employees as minimum wages paid under Payment of Wage Actare also exceeding

Rs. 50,000 per annum. So it is advisable to remove such differentiation for the
purpose of taxation.

5.5 "population Criteria" for valuation of rent free

house:
Provision of rent free accommodation or accommodation at a concession by an
employer to his employee is aperquisite which is taxable in the hands of all
employees on the basis of following valuation rules.

(A) If accommodation provided is unfurnished:

a. For the Government employees- the actual rent payable as per the Government
rules
b. or Private and other employees -

Step No. 2: Add 10% of original cost of furniture or actual hire charges to the
amount as calculated above

(C) The accommodation at a concessional rate—

Step No. 1: Find out value as stated above as if it
is provided as free of costStep No. 2: Deduct the
rent or charges recovered from employee
For valuation of the perquisite salary includes:
i. Basic Salary, Dearness Allowance (if the terms of the employment so provide)
.Bonus, Commission .Fees, allother taxable allowances

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 ii. But it excludes all other perquisites and non-monetary benefits.

Suggestion:
Population based valuation of accommodation is making provisions more
complicated. In different provisions like House Rent Allowance exemption u/s 10
(13A) governments is assuming that part of rent in total income is approximately
10% of income. Here researcher is requesting government to make valuation based
on simple provision of 10% of basic salary as taxable value of perquisite.

5.6 Monetary limits regarding exempt amount of

medical facility:
The facility of medical treatment provided by an employer to
his employees and their family members are considered as
follows:

Medical Assiatance

Medical Provision of Provision of

Medical Facilities Medical Facilities
Allowance(A) in Indian (B) Outside India
Always Taxable
1. When the hospital, nursing home, dispensary or clinic where the
treatment is done, is maintained by the employer, expenditure incurred by
the employer is exempt in full;
2. When the hospital, etc. is maintained by the Central/State Government, local
authority or any other person approved by the Government for the treatment of
its employees, expenditure incurred or reimbursed by the employer is exempt in
full
3 When medical facility is provided in private hospital then amount reimbursed
exceeding Rs. 15,000 istaxable.
4. When health insurance policy is obtained by the employer and medical
insurance premium is paid or reimbursed by the employer in respect of group

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 medical insurance for employees and/or their family members is not taxable in
the hands of employee
5. When medical treatment of the employee or any member of the family of the
employee is done outside India, any expenditure incurred by the employer or
reimbursement of expenditure incurred by the employee shall be exempt from
tax to the extent permitted by the RBI in the cases of:

(a) medical treatment of employee or any member of his family outside India; and

(a) cost of stay abroad of the employee or any member of the family for medical
treatment and cost of stay of one attendant who accompanies the patient in
connection with such treatment. ere, hospital includes any dispensary, clinic, nursing
home etc. Medical treatment may be provided to the employee himself of any other
member of his family where family means this spouse and children of employee and
dependent parents, brothers and sisters of the employee.

Suggestion:
As we are aware of the increasing cost of medical expenses the current
exemption limit of Rs. 15,000 is notsufficient to cover basic expenses. So
researcher hereby suggests to increase such limit to Rs. 50,000 at least.

Conclusion:
There are many more areas where simplification is required. If government
implement above suggestions then salary as a basic head of income will get
simplified and purpose of simplification of tax will be achieved to some extent.

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Analysis of Income from House Property (Part 1)

Tax Planning Calculator

Income from House Property is one of the five heads of income and is applicable to
taxpayers who have earned an income from any house property during the year under
consideration. Now the moot question is what kind of house property income would
be covered under this head.
Income from House Property is quite vast and hence I have divided the blog into
series. In this series, I have covered the basic aspects of house property income.
Income chargeable to tax under the head “house property”
Rental income from a property being building or land appurtenant thereto of which
the taxpayer is owner is charged to tax under the head “Income from house property”.
So, there are three conditions to be fulfilled for an income to be classifies as a House
Property income. These are as follows:

 The income should be in the form of rent, i.e. it should be let out to derive
rental income therefrom.
 The house property may be used for any purpose, but it should not be used by
the owner for the purpose of any business or profession carried on by him/ her
 Rent should be attributed to a property being a building or land appurtenant
thereto

a. Buildings include residential buildings as well as factory buildings, offices, etc

b. Land appurtenant means land connected with the building
c. Income from letting out of vacant land is, however, taxable under the head
“income from other sources”

 The taxpayer should be the owner of the house property

a. Owner is the person who is entitled to receive income from the property in his
own right
b. The requirement of registration of the sale deed is not warranted
c. Ownership includes both free-hold and lease-hold rights
d. Ownership includes deemed ownership
e. The person who owns the building need not also be the owner of the land upon
which it stands
f. The taxpayer must be the owner of the house property during the year under
consideration. It is not material whether he is the owner in the assessment year.

Financial Year: This is the tax year during which income is earned
Assessment Year: This is the year immediately following the financial
year, in which income is assessed and taxes are paid thereupon. Thus, it

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 can be rightly said that income for a financial year is assessed in its
assessment year
Rental income from sub-letting
Rental income in the hands of owner is charged to tax under the head “Income from
house property”. Rental income of a person other than the owner cannot be charged to
tax under the head “Income from house property”. Hence, rental income received by a
tenant from sub-letting cannot be charged to tax under the head “Income from house
property”. Such income is taxable under the head “Income from other sources” or
profits and gains from business or profession, as the case may be.

Rental income from a shop

To tax the rental income under the head “Income from house property”, the rented
property should be building or land appurtenant thereto. Shop being a building, rental
income will be charged to tax under the head “Income from house property”
What is the meaning of a deemed owner?
Rental income from property is charged to tax under the head “Income from house
property in the hands of the owner of the property”. If a person receiving the rent is
not the owner of the property, then rental income is not charged to tax under the head
“Income from house property” (E.g. Rent received by tenant from sub-letting). As per
Section 27 of the Income Tax Act, in the following cases a person may not be the
registered owner of the property, but he will be treated as the owner (i.e., deemed
owner) of the property and rental income from property will be charged to tax in his
hands:

If an individual transfers his or her house property to his/her spouse or to his/her

minor child without adequate consideration, then the transferor (the individual) will
be deemed as owner of the property.

This is not applicable if the individual transfers his or her property in connection with
an agreement to live apart or if the individual transfers his or her property to his or
her minor married daughter. In these cases, the spouse or the minor married
daughter, as the case may be, would be the owner and the income would be taxable in
their hands and not in the hands of the individual.

Holder of impartible estate is deemed as the owner of the property comprised in the
estate. Thus, the holder of an impartible estate will be the true owner for the purpose
of income tax even though the house is legally owned by some one else. For instance,
in case where a Hindu Undivided Family (HUF) jointly holds property on behalf of all
its members, it will be treated as the owner though legally the property is in the name
of an individual member of the family.

A member of co-operative society, company or other association of persons to whom

a building (or part of it) is allotted or leased under house building scheme of the
society, company or association, as the case may be, is treated as deemed owner of the
property.
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 4. A person acquiring property by satisfying the conditions of section 53A of the
Transfer of Property Act, will be treated as deemed owner (although he may
not be the registered owner). Section 53A of said Act prescribes following
conditions:
a. There must be an agreement in writing
b. The purchase consideration is paid or the purchaser is willing to pay it.
c. Purchaser has taken the possession of the property in pursuance of the
agreement

in case of lease of a property for a period not less than 12 years (whether originally
fixed or provision for extension exists), the lessee is deemed to be the owner of the
property. However, any right by way of lease from month-to-month or for a period
not exceeding one year is not covered by this provision

What is the meaning of composite rent?

When apart from recovering rent of the building, in some cases the owner gets rent of
other assets (like furniture) or he charges for different services provided in the
building (for instance, charges for lifts, security, air conditioning, etc.), the amount so
recovered is known as “composite rent”.
Tax treatment of composite rent of building let out along with other assets
Composite rent includes rent of building and rent towards other assets or facilities.
The tax treatment of composite rent is as follows:

Letting out is inseparable: In a case where letting out of building and letting out of
other assets are inseparable (i.e., both the lettings are composite and not separable,
e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax
under the head “Profits and gains of business and profession” or “Income from other
sources”, as the case may be. Nothing is charged to tax under the head “Income from
house property”

Letting out is separable: In a case where, letting out of building and letting out of
other assets are separable (i.e., both the lettings are separable, e.g., letting out of
refrigerator along with residential bungalow), rent of building will be charged to tax
under the head “Income from house property” and rent of other assets will be charged
to tax under the head “Profits and gains of business and profession” or “Income from
other sources”, as the case may be. This rule is applicable, even if the owner receives
composite rent for both the lettings. In other words, in such a case, the composite rent
is to be allocated for letting out of building and for letting of other assets

People Also Look For Analysis of Income from House Property (Part 3)

Tax treatment of composite rent in a case of letting of building along with

provision of services
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In a case letting of building along with provision of services, composite rent includes
rent of building and charges for different services (like lift, watchman, water supply,
etc.):In this situation, the composite rent is to be bifurcated and the sum attributable to
the use of property will be charged to tax under the head “Income from house
property” and charges for various services will be charged to tax under the head
“Profits and gains of business and profession” or “Income from other sources” (as the
case may be).
Property held as stock-in-trade, etc
Annual value of house property would be chargeable under the head “income from
house property” in the following cases as well:

a. Where it is held by the taxpayer as stock-in-trade of a business

b. Where the taxpayer is engaged in the business of letting out of property on
rent:

Exceptions:

a. If letting out is supplementary to the main business, the income would be

treated as “income from business or profession”
b. If letting out of building alongwith other facilities, like machinery and the two
lettings are inseparable, the income would either be taxable as “income from
business or profession” or “income from other sources”, as the case may be.

Income from House Property situated outside India:

a. In case of Resident and Ordinarily Resident (Individuals and HUF) in

India: Income from House Property situated outside India is taxable, whether
such income is brought into India or not
b. In case of a Non-Resident or Resident but not ordinarily Resident in
India: Income from a House Property situated outside India is taxable only if
it is received in India.

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As per the available data of house property

1. Municipal Value

2. Fair Rental Value

3. Actual Rent

4. Standard Rent

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Chapter 5
Conclusion:-
Recommendations &
Suggestions

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It is essential to classify the taxable income correctly under the prescribed heads to
ensure you calculate tax liability accurately.

This chapter discusses the effects of income testing on stigma, social cohesion, well-
being of the poor, and economic and administrative efficiency. It also presents a
reform agenda to reduce the role of income testing. There are numerous aspects of
income-testing program administration that will affect stigma, including the
intrusiveness of application forms and ongoing relationships, the behavior of
functionaries, the relative emphasis placed upon detecting fraud versus ensuring that
beneficiaries get what they are entitled to, and the extent to which the status of
beneficiaries is known to the public. Income-tested programs create large
bureaucracies that exercise great power over their beneficiaries. The trade-off in
shifting from income-tested to non-income-tested programs would seem to entail a
shift from a situation where the bureaucracy has enormous power over the lives of
poor people to a situation where the bureaucracy has a little power over the lives of
people from all income classes. Both income-tested and non-income-tested
approaches to national health insurance can create incentives for consumers to
conserve through the use of coinsurance, deductibles, and charges.

As per study heads of income is part which helps out in finding out net income or
taxable income.

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Suggession in income tax act as per require point of view of heads of income:-

1. Section 14A: This section was inserted in the Income tax Act by the Finance Act
2001 w.e.f. 01.04.1962. The section has been amended from time to time. The section
provides for disallowance of expenditure incurred by the assessee in relation to
income which does not form part of the total income under the Act. Rule 8D provides
for the method of computation of the expenditure incurred in relation to such exempt
income. It is noticed that during the last two decades since its enactment, a large
number of tax disputes have arisen on various issues relating to this section. Various
Tribunals and High Courts have expressed contradictory views about interpretation of
this section. Rule 8D is so drafted that it seeks to determine expenditure incurred for
earning such exempt income on the basis of investments made by the assessee. Often,
expenses are disallowed even though there is no exempt income in the relevant year.
In order to avoid this litigation and simplify the procedure it is suggested that this
Section should be amended to provide that actual direct expenditure and 5% of the
income which is exempt or the actual indirect expenditure related to that income,
whichever is less, will be disallowed. Further, it should be clearly laid down in the
Rule that in the year in which there is no exempt income, there would be no
disallowance. Also, the disallowance should, in any case, be restricted to the amount
of income claimed to be exempt in a year

2. Section 23: This section deals with the manner in which Annual Value of a House
property owned by the assesse is to be computed. Proviso to section 23(1) provides
for deduction of taxes levied by any local authority. It is common knowledge that in
many cities the buildings are owned by Co-operative Housing Societies. The members
of such societies own flats in such buildings. The society incurs expenditure on
maintenance of the building including security charges lift maintenance, cleaning,
common lighting and upkeep of the society building. The members who own the flats
in the society contribute every month for such expenses. These maintenance charges
are not allowed as deduction u/s 23. It is suggested that these maintenance charges
actually paid to the Housing Society should be allowed for determining the Annual
Value of the Flat owned by the assessee. If this is allowed u/s 23, the standard
deduction of 30% which is allowed u/s 24(a) may not be allowed in such cases. The
assessee should have option to claim 30% of Annual Value or actual maintenance
expenses paid to the society. Further, there is a raging controversy regarding leave
and license income or rental income earned from letting out commercial space by
various companies with the intention to earn rental income and not to carry out
business. In such cases, the law should be amended to clearly lay down that such
income should be taxed under the head „Income from House Property‟ instead of
„Profits and Gains of Business or Profession‟. Such an amendment will reduce
litigation in the matter.

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3. Sections 43CA, 50C, 50CA and 56 (2) (X) 3.1 The combined effect of these 4
sections is as under: (i) If a Real Estate Company sells an immovable property to its
client at a price below the stamp duty valuation, the difference between the stamp
duty valuation and the actual sale price (subject to the margin of 5%) is taxable u/s
43CA in the case of Real Estate Company. The same amount is taxable in the case of
the purchaser of the property u/s 56(2)(x). (ii) Similarly, when a person sells an
immovable property to another person at a price below the Stamp Duty Valuation, the
difference between the Stamp Duty Valuation and actual sale price (subject to the
margin of 5%) is taxable in the case of the seller u/s 50C and in the case of the
purchaser u/s 56(2)(x). (III) If a person sells shares in a company, which are not
quoted on the Stock Exchange, at a price below Fair Value determined in the
prescribed manner, the difference between the such Fair Value and the actual sale
price will be taxable in the hands of the seller u/s 50CA and in the hands of the
purchaser u/s 5 6(2) (x). 3.2 From the above provisions it is evident that the difference
between the Fair Market Value / Stamp Duty Valuation and the actual sale / purchase
price is only a notional income. Further, under the above provisions, such notional
income is taxed in the hands of the seller as well as the purchaser. In other words, in
respect of the same notional amount, arising in one transaction, there is double
taxation – once in the hands of the purchaser and again in the hands of the seller.

3.3 Further, if such transaction is between two relatives, as defined u/s 56(2)(vii), the
seller will have to pay tax u/s 43CA, 50C or 50 CA, whereas the purchaser will be
able to claim exemption u/s 56(2)(x). 3.4 It is, therefore, suggested that, in the interest
of equity, these provisions be modified as under: (i) If the transactions covered u/s
43CA, 50C or 50CA are between relatives, the seller should be granted exemption
which is available to the purchaser u/s 56(2)(x). (ii) If the transactions are between
non-relatives, it should be provided that only 50% of the difference between the stamp
duty valuation / Fair Market Value and the actual sale price (notional income) will be
taxable in the hands of the seller and 50% of the notional income will be taxable in
the hands of the purchaser of the asset.

3.4 It is, therefore, suggested that, in the interest of equity, these provisions be
modified as under: (i) If the transactions covered u/s 43CA, 50C or 50CA are between
relatives, the seller should be granted exemption which is available to the purchaser
u/s 56(2)(x). (ii) If the transactions are between non-relatives, it should be provided
that only 50% of the difference between the stamp duty valuation / Fair Market Value
and the actual sale price (notional income) will be taxable in the hands of the seller
and 50% of the notional income will be taxable in the hands of the purchaser of the
asset.

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4. Sections 234E and 234F: 4.1 The above two sections provide or levy of fee for
delay in submission of statement of TDS and for delay in filing Return of income as
under: (i) Section 234 E: Delay in filing Statement of TDS/TCS u/s 200 (3) or 206C
(3). The Fee is Rs. 200/- per each day of default. (ii) Section 234 F: Delay in filing
Return of Income u/s 139(1). The Fee is Rs. 5,000/- if return is filed before 31st If
filed after that date, the Fee is Rs. 10,000/-. The above Fee is payable over and above
the interest payable u/s 201, 206C, and 234A of the Income-tax Act. 4.2 There is no
provision for filing appeal against the order levying fee u/s 234E or 234F. There may
be a valid reason for delay in filing statement of TDS / Return of Income. It may be
noted that section 246A provides for appeal against levy of interest u/s 201 / 206C.
Therefore, it is suggested that a provision for filing appeal against levy of fee u/s
234E/ 234F should be made u/s 246A. 4.3 Further, it may be noted that section 234F
for levy of fine applies to delay u/s 139(1) in filing return of income. There is no
justification for levy of such fee when the assessee has paid excess tax and is claiming
refund of tax. Therefore, it is suggested that section 234F may be amended to provide
that no fee u/s 234F will be payable if the assessee is claiming refund of excess tax
paid.

5. Section 239: Section 239(2)(c) provides that an assessee can file a claim for refund
of excess tax paid within one year form the last day of the assessment year. As
compared to this, section 139(4) provides that the Return of Income can be filed
before the end of the assessment year. In actual practice it is noticed that return of
income claiming refund as provided u/s 239 is not accepted under the existing E-filing
portal after the end of the assessment year although the time limit u/s 239 is upto the
end of one year after the end of the assessment year. This technical issue requires to
be resolved by modifying the E-filing portal of I.T. Department.

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6. Section 47 Clause (xiiib) Section 47 (xiiib) excludes the conversion of private
limited companies to LLP from the definition of transfer. However, there are certain
conditions prescribed to be complied for being excluded from the definition of
„transfer‟. One of the conditions is that the total sales, turnover or gross receipts in the
business of the company in any of the three preceding previous year should not
exceed Rs. 60 Lakh. Further a new condition was inserted wherein the total assets
during the previous 3 years should not exceed 5 crore. Such small limits are a big
hindrance on the conversion of the company into a LLP. FDI restrictions in LLPs
have also been relaxed by Central Government. Continuing restriction of turnover is
against the concept of ease of doing business in India. It is suggested that the said
limits should be removed or else increased substantially. Turnover limit may be
increased to 10 crores and the total assets limit may be increased to 20 crores.

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Bibliography:-

https://compress-pdf.emapnet.com/#google_vignette

https://pdfcoffee.com/qdownload/company-analysis-report-2018-20-comparative-analysis-
of-fmcg-product-parle-g-pdf-free.html

https://taxguru.in/income-tax/suggestions-amendments-income-tax-act.html

https://www.wishfin.com/tax-planning-calculator/analysis-of-income-from-house-property/

https://www.caclubindia.com/articles/income-from-salary-46068.asp

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